<PAGE>
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended June 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to __________________
Commission File No. 0-23817
NORTHWEST BANCORP, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2900888
------------------------------- ---------------------
(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
<TABLE>
<S> <C>
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share
--------------------------------------
(Title of Class)
</TABLE>
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, 1998, there were issued and outstanding 14,440,970
shares of the Registrant's Common Stock, not including 32,400,000 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, 1998, as
reported by the Nasdaq National Market, was approximately $228.3 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Stockholders for the fiscal year ended June 30, 1998 (Parts
II and IV).
2. Proxy Statement for the November 1998 Annual Meeting of Stockholders (Part
III).
<PAGE>
PART I
------
ITEM 1. BUSINESS
--------
General
Northwest Bancorp, Inc.
Northwest Bancorp, Inc. (the "Company") is a Pennsylvania corporation
that was formed to become the stock holding company of Northwest Savings Bank
(the "Bank") in a transaction (the "Two-Tier Reorganization") that was approved
by the Bank's stockholders on December 10, 1997, and completed on February 17,
1998. In the Two-Tier Reorganization, each share of the Bank's common stock was
converted into and became a share of common stock of the Company, par value
$0.10 per share (the "Common Stock"), and the Bank became a wholly-owned
subsidiary of the Company. Northwest Bancorp, MHC (the "Mutual Holding
Company"), which owned a majority of the Bank's outstanding shares of common
stock immediately prior to completion of the Two-Tier Reorganization, became the
owner of the same percentage of the outstanding shares of Common Stock of the
Company immediately following the completion of the Two-Tier Reorganization. As
of June 30, 1998, the sole activity of the Company was the ownership of all of
the issued and outstanding common stock of the Bank and the ownership of
approximately 65% of the outstanding shares of common stock of Jamestown Savings
Bank ("Jamestown"). Jamestown was formed in November of 1995 as a de novo New
York-chartered savings bank headquartered in Jamestown, New York. As of June 30,
1998, Jamestown had assets of $60.0 million and deposits of $54.3 million. At
June 30, 1998, the Company has total assets of $2.563 billion and shareholders'
equity of $217.9 million.
As of June 30, 1998, the Company, through the Bank and Jamestown,
operated 71 community banking offices throughout its market area in northwest,
southwest and central Pennsylvania and Jamestown, New York. The Company, through
the Bank and its wholly owned subsidiaries, also operates one mortgage lending
office in Pennsylvania and four in New York, and 33 consumer lending offices
throughout Pennsylvania and one consumer lending office in New York. The Company
has focused its lending activities primarily on the origination of loans secured
by first mortgages on owner-occupied, one- to four-family residences. At June
30, 1998, $1.369 billion, or 69.4%, of the Company's total loans receivable were
collateralized by one- to four-family residential real estate. The Company,
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, 1998, such loans totaled $353.1 million, or 17.9%,
of the Company's total loans receivable. To a lesser extent, the Company also
originates multifamily residential and commercial real estate loans, which
totaled $128.8 million, or 6.5%, of the Company's total loans receivable at June
30, 1998, and commercial business loans, which totaled $123.2 million, or 6.2%,
of the Company's total loans receivable.
The Company'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 Company's principal expenses are the
interest paid on deposits and the cost of employee compensation and benefits.
The Company's principal executive office is located at Liberty and
Second Streets, Warren, Pennsylvania, and its telephone number at that address
is (814) 726-2140.
Northwest Savings Bank
The Bank is a Pennsylvania-chartered stock savings bank headquartered
in Warren, which is located in northwestern Pennsylvania. The Bank is a
community-oriented institution offering traditional deposit and loan products,
and through its subsidiaries, consumer finance services. The Bank's mutual
savings bank predecessor was founded in 1896. The Bank in its current stock form
was established on November 2, 1994, as a result of the reorganization (the
"Reorganization") of the Bank's mutual predecessor into a mutual holding company
structure.
2
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At the time of the Reorganization, the Bank issued a majority of its to-be
outstanding shares of common stock to the Mutual Holding Company (which was
formed in connection with the Reorganization) and a minority of its to-be
outstanding shares to stockholders other than the Mutual Holding Company.
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.
Jamestown Savings Bank
Jamestown began operations on November 9, 1995 as a de novo New York
state-chartered stock savings bank. The bank was organized to engage in the
retail savings bank business in the area surrounding Jamestown, New York, which
is located in Chautauqua County.
Jamestown was capitalized through an initial public offering of common
stock of $7,259,410 which, net of costs associated with the offering of
$126,662, resulted in net proceeds of $7,132,748. As part of this initial
offering, the Mutual Holding Company purchased 400,000 shares, or 55% of the
common stock sold. The Mutual Holding Company continued to accumulate additional
ownership in Jamestown and in February 1998 sold its entire ownership position
consisting of 490,050 shares to the Company. These shares represented an
ownership interest of approximately 64% of the outstanding shares of Jamestown.
On July 8, 1998 the Company solicited a tender offer to all minority
shareholders of Jamestown at a price of $16 per share. As a result of this
tender offer, the Company owned 100% of the outstanding shares of Jamestown as
of July 31, 1998.
As of June 30, 1998, Jamestown had three offices in Chautauqua County.
Market Area
The Company 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 Company is
headquartered in Warren, Pennsylvania which is located in the northwestern
region of Pennsylvania, and the Company has its highest concentration of
deposits and loans in the portion of its office network located in northwestern
Pennsylvania. Over the past eight years the Company has expanded, primarily
through acquisition, into the southwestern and central regions of Pennsylvania.
As of June 30, 1998, the Company operated in Pennsylvania 68 community banking
offices, one mortgage lending office and 33 consumer finance offices, located in
the following counties in Pennsylvania: Allegheny, Armstrong, Bedford, Butler,
Centre, Chester, Clarion, Clearfield, Clinton, Crawford, Cumberland, Dauphin,
Elk, Erie, Fayette, Indiana, Jefferson, Lawrence, Lancaster, Lebanon, Luzerne,
McKean, Mifflin, Schuylkill, Venango, Warren, Washington, Westmoreland and York.
Through Jamestown, the Company operates three community banking offices in
Chautauqua County, New York. The Company, through the Bank and its subsidiaries,
also operates four mortgage lending offices and one consumer finance office in
western New York. The mortgage lending offices are operated to provide an
additional source of mortgage loans as well as to provide additional geographic
diversity to the Company'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 Company's earnings and reduces its sensitivity
to interest rate risk.
The Company 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 Company's strategy of growing in order to be more
competitive and to offer a full range of customer services. In 1984, the Company
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 Company's total assets increased to
approximately $530 million. In 1985 the Company
3
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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 Company started a de novo office in Hershey,
Pennsylvania in 1988. In March of 1990 the Company acquired Horizon Savings
Association, which had assets of approximately $34 million and offices in
Lewistown and State College. In June 1990 the Company acquired Steitz Savings
and Loan with assets of approximately $58 million and with four offices in
communities surrounding Lebanon. On October 24, 1991, the Company acquired Preis
Consumer Discount Company with six locations in central Pennsylvania and loans
of $8.5 million. In 1991 and 1992 the Company continued to expand by opening
additional offices in Warren and Bradford, Pennsylvania. In March 1992 the
Company acquired American Federal Savings and Loan Association with assets of
$119 million and five offices in northwestern Pennsylvania. In September 1993
the Company purchased three full-service office locations in the greater Erie
area with deposits of $14 million, and in June 1995 the Company purchased four
full-service offices in York and Lancaster counties with deposits of $22
million. During the fiscal year ended June 30, 1995, the Company 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 Company also acquired a full-service
retail facility in Pottsville, Pennsylvania, with deposits of $23.8 million from
another financial institution. In February 1997, the Company acquired
Bridgeville Savings Bank which had one office in Bridgeville, Pennsylvania and
assets of $55.7 million. In March of 1997, the Company acquired St. Marys
Consumers Discount Company in St. Marys, Pennsylvania with assets of
approximately $1.0 million. In April of 1997, the Company opened an office in
Cranberry Township, Venango County, Pennsylvania and in June opened an office in
Hanover, Pennsylvania. In June 1997, the Company 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. During the fiscal year ended June
30, 1998 the Company opened two new offices, one in Lititz, Pennsylvania and the
other in Lock Haven, Pennsylvania. In October, 1997 the Company purchased a
branch office with deposits of $11.8 million from another financial institution.
In December, 1997 the Company completed its acquisition of nine branch offices
with deposits of $154.3 million from another financial institution. In addition,
the Company's consumer discount company subsidiary opened new offices in
Brookville, Dubois, Erie, Hazleton and State College, Pennsylvania.
Lending Activities
General. Historically, the principal lending activity of the Company
has been the origination, for retention in its portfolio, of fixed-rate and, to
a lesser extent, adjustable-rate mortgage loans collateralized by one- to
four-family residential real estate located in its market area. To a lesser
extent, the Company also originates loans collateralized by multifamily
residential and commercial real estate, construction loans, commercial business
loans and consumer loans.
In an effort to manage interest rate risk, the Company has sought to
make its interest-earning assets more interest rate sensitive by originating
adjustable-rate loans, such as adjustable-rate mortgage loans, home equity
loans, and education loans, and by originating short-term and medium-term
fixed-rate consumer loans. The Company also purchases mortgage-backed securities
that generally have adjustable interest rates. At June 30, 1998, approximately
$170.6 million, or 8.6%, of the Company's total loan portfolio, and $290.1
million, or 94.9%, of the Company's mortgage-backed securities portfolio,
consisted of loans or securities with adjustable interest rates. Because the
Company also originates a substantial amount of long-term fixed-rate mortgage
loans collateralized by one- to four-family residential real estate, when
possible, such loans are originated and underwritten according to standards that
allow the Company to sell them in the secondary mortgage market for purposes of
managing interest-rate risk and
4
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liquidity. The Company, through the Bank's 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 Company is primarily a portfolio lender
and at any one time the Company holds only a nominal amount of loans identified
as available-for-sale. The Company retains servicing on the mortgage loans it
sells and realizes monthly service fee income. The Company retains in its
portfolio all consumer loans, multifamily residential and commercial real estate
loans, and commercial business loans that it originates.
5
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6
Analysis of Loan Portfolio. Set forth below are selected data relating
to the composition of the Company's loan portfolio by type of loan as of the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------
1998 1997 1996
------------------ -------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family (1)........... $ 1,368,736 69.4% $ 1,096,315 68.8% $ 1,008,288 70.8%
Multifamily and commercial........ 128,831 6.5 100,912 6.3 97,612 6.8
----------- ------ ----------- ------ ----------- -------
Total real estate loans......... 1,497,567 75.9 1,197,227 75.1 1,105,900 77.6
Consumer:
Home equity and home improvement.. 33,963 1.7 37,607 2.4 38,146 2.7
Education loans................... 59,791 3.0 53,542 3.3 47,842 3.4
Loans on savings accounts......... 6,898 .4 7,176 .5 6,543 .5
Other (2)......................... 252,443 12.8 212,472 13.3 159,532 11.2
----------- ------ ----------- ------ ----------- -------
Total consumer loans (3)........ 353,095 17.9 310,797 19.5 252,063 17.7
Commercial business................. 123,188 6.2 86,087 5.4 67,045 4.7
----------- ------ ----------- ------ ----------- -------
Total loans receivable, gross... 1,973,850 100.0% 1,594,111 100.0% 1,425,008 100.0%
====== ====== =======
Deferred loan fees.................. (1,357) (2,384) (3,495)
Undisbursed loan proceeds........... (49,435) (41,618) (33,428)
Allowance for loan losses
(real estate loans)............... (8,103) (6,898) (9,133)
Allowance for loan losses
(other loans)..................... (7,666) (6,713) (3,997)
----------- ----------- -----------
Total loans receivable, net..... $ 1,907,289 $ 1,536,498 $ 1,374,955
=========== =========== ===========
<CAPTION>
1995 1994
------------------------------------------------
Amount Percent Amount Percent
----------- ------- ----------- -------
Real estate:
One- to four-family (1)........... $ 880,110 73.6% $ 837,896 75.7%
Multifamily and commercial........ 53,022 4.4 65,539 5.9
----------- ------ ----------- ------
Total real estate loans......... 933,132 78.0 903,435 81.6
Consumer:
Home equity and home improvement.. 40,547 3.4 41,053 3.7
Education loans................... 39,315 3.3 31,827 2.9
Loans on savings accounts......... 5,930 .5 5,313 .5
Other (2)......................... 119,611 10.0 103,945 9.4
----------- ------ ----------- ------
Total consumer loans (3)........ 205,403 17.2 182,138 16.5
Commercial business................. 56,788 4.8 20,945 1.9
----------- ------ ----------- ------
Total loans receivable, gross... 1,195,323 100.0% 1,106,518 100.0%
======= =======
Deferred loan fees.................. (3,772) (4,184)
Undisbursed loan proceeds........... (14,982) (28,563)
Allowance for loan losses
(real estate loans)............... (8,102) (8,340)
Allowance for loan losses
(other loans)..................... (3,732) (2,898)
----------- -----------
Total loans receivable, net..... $1,164,735 $1,062,333
=========== ===========
</TABLE>
- ---------------------------------------
(1) Includes $46.2 million of loans originated and held by the Bank's
subsidiaries at June 30, 1998.
(2) Consist primarily of automobile loans and secured and unsecured personal
loans.
(3) Includes $65.3 million of consumer loans originated and held by the Bank's
subsidiaries at June 30, 1998.
Fixed- and Adjustable-Rate Loans. Set forth below are selected data
regarding the dollar amounts of the Company's total loans represented by fixed-
and adjustable-rate loans at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- ------------------------
Amount Percent Amount Percent Amount Percent
----------- --------- ------------ -------- ------------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Adjustable.................... $ 55,493 2.8% $ 78,568 4.9% $ 94,426 6.6%
Fixed......................... 1,442,074 73.1 1,118,659 70.2 1,011,474 71.0
----------- --------- ------------ -------- ------------ --------
Total mortgage loans......... 1,497,567 75.9 1,197,227 75.1 1,105,900 77.6
Other loans:
Adjustable.................... 117,100 5.9 117,301 7.4 114,943 8.1
Fixed......................... 359,183 18.2 279,583 17.5 204,165 14.3
----------- --------- ------------ -------- ------------ --------
Total other loans............ 476,283 24.1 396,884 24.9 319,108 22.4
----------- --------- ------------ -------- ------------ --------
$ 1,973,850 100.0% $ 1,594,111 100.0% $ 1,425,008 100.0%
=========== ========= ============ ======== ============ ========
<CAPTION>
1995 1993
---------------------------------------------------
Amount Percent Amount Percent
----------- ---------- ------------ ---------
Mortgage loans:
Adjustable.................... $ 111,184 9.3% $ 104,717 9.5%
Fixed......................... 821,948 68.8 798,718 72.1
----------- --------- ------------ --------
Total mortgage loans......... 933,132 78.1 903,435 81.6
Other loans:
Adjustable.................... 117,323 9.8 72,880 6.6
Fixed......................... 144,868 12.1 130,203 11.8
----------- --------- ------------ --------
Total other loans............ 262,191 21.9 203,083 18.4
----------- --------- ------------ --------
$ 1,195,323 100.0% $ 1,106,518 100.0%
=========== ========= ============ ========
</TABLE>
6
<PAGE>
Loan Maturity and Repricing Schedule. The following table sets forth
the maturity or period of repricing of the Company's loan portfolio at June 30,
1998. 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 1-2 2-3 3-5 5-15 15
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 $ 59,830 $ 2,839 $ 6,345 $ 41,657 $ 572,871 $ 685,194 $1,368,736
Multifamily and commercial..... 23,754 1,739 2,503 4,083 64,401 32,351 128,831
Consumer loans.................. 143,052 8,288 24,942 100,389 73,783 2,641 353,095
Commercial business loans....... 47,038 6,151 5,013 12,215 49,214 3,557 123,188
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total loans................. $ 273,674 $ 19,017 $ 38,803 $ 158,344 $ 760,269 $ 723,743 $1,973,850
========= ========== ========== ========== ========== ========== ==========
</TABLE>
Fixed- and Adjustable-Rate Loan Schedule. The following table sets
forth at June 30, 1998, the dollar amount of all fixed-rate and adjustable-rate
loans due after June 30, 1999. 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................................. $1,311,416 $ 9,708 $1,321,124
Multifamily and commercial...................................... 106,195 1,395 107,590
Consumer.......................................................... 244,327 61,319 305,646
Commercial........................................................ 41,144 57,008 98,152
---------- ---------- ----------
Total........................................................... $1,703,082 $ 129,430 $1,832,512
========== ========== ==========
</TABLE>
One- to Four-Family Residential Real Estate Loans. The primary lending
activity of the Company consists of the origination for retention in the
Company's portfolio of owner-occupied one- to four-family residential mortgage
loans secured by properties located in the Company's market area. At June 30,
1998, $1.369 billion, or 69.4%, of the Company's total loan portfolio consisted
of one- to four-family residential mortgage loans, including residential
construction loans.
The Company currently offers one- to four-family residential mortgage
loans with terms typically ranging from 10 to 30 years, with either adjustable
or fixed interest rates. Originations of fixed-rate mortgage loans versus
adjustable-rate mortgage loans are monitored on an ongoing basis and are
affected significantly by such things as the level of market interest rates,
customer preference, the Company's interest rate gap position and loan products
offered by the Company's competitors. Therefore, even when management's strategy
is to increase the originations of adjustable-rate mortgage loans, market
conditions may be such that there is greater demand for fixed-rate mortgage
loans.
The Company's fixed-rate loans, whenever possible, are originated and
underwritten according to standards that permit sale in the secondary mortgage
market. Whether the Company can or will sell fixed-rate loans into the secondary
market, however, depends on a number of factors including the yield and the term
of the loan, market conditions, and the Company's current liquidity and interest
rate sensitivity position. The Company historically has been primarily a
portfolio lender, and at any one time the Company has held only a nominal amount
of loans that may be sold. The Company's current policy is to retain in its
portfolio fixed-rate loans with terms of 15 years or less, and sell a limited
amount of fixed-rate loans (servicing retained) with terms of more than 15
years. Moreover, the Company is more likely to retain fixed-rate loans if its
interest rate sensitivity is within acceptable limits. The Company's mortgage
loans are amortized on a monthly basis with principal and interest due each
month. One- to
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four-family residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms because borrowers may
refinance or prepay loans at their option.
The Company currently offers adjustable-rate mortgage loans with
initial interest rate adjustment periods of one and three years, based on
changes in a designated market index. The Company determines whether a borrower
qualifies for an adjustable-rate mortgage loan based on the fully indexed rate
of the adjustable-rate mortgage loan at the time the loan is originated. One- to
four-family residential adjustable-rate mortgage loans totalled $53.5 million,
or 2.7% of the Company's total loan portfolio at June 30, 1998.
The primary purpose of offering adjustable-rate mortgage loans is to
make the Company's loan portfolio more interest rate sensitive. However, as the
interest income earned on adjustable-rate mortgage loans varies with prevailing
interest rates, such loans may not offer the Company as predictable cash flows
as long-term, fixed-rate loans. Adjustable-rate mortgage loans carry increased
credit risk associated with potentially higher monthly payments by borrowers as
general market interest rates increase. It is possible, therefore, that during
periods of rising interest rates, the risk of default on adjustable-rate
mortgage loans may increase due to the upward adjustment of interest costs to
the borrower.
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed-rate mortgage loan
portfolio, and the Company has generally exercised its rights under these
clauses.
Regulations limit the amount that a savings bank may lend relative to
the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Appraisals are generally performed by
the Company'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 Company's lending policies generally limit the maximum
loan-to-value ratio on both fixed-rate and adjustable-rate mortgage loans
without private mortgage insurance to 80% of the lesser of the appraised value
or the purchase price of the real estate that serves as collateral for the loan.
The Company makes a limited amount of one- to four-family real estate loans with
loan-to-value ratios in excess of 80%. For one- to four-family real estate loans
with loan-to-value ratios in excess of 80%, the Company generally requires the
borrower to obtain private mortgage insurance on the entire amount of the loan.
The Company requires fire and casualty insurance, as well as a title guaranty
regarding good title, on all properties securing real estate loans made by the
Company.
In the past, the Company purchased loans that are serviced by other
institutions and that are secured by one- to four-family residences. At June 30,
1998, the Company's portfolio of loans serviced by others totaled $3.5 million.
The Company currently has no formal plans to enter into new loan participations.
Included in the Company's $1.369 billion of one- to four-family
residential real estate loans are $43.3 million, or 2.2% of the Company's total
loan portfolio, of construction loans and land loans. The Company offers fixed-
and adjustable-rate residential construction loans primarily for the
construction of owner-occupied one- to four-family residences in the Company's
market area to builders or to owners who have a contract for construction.
Construction loans are generally structured to become permanent loans, and are
originated with terms of up to 30 years with an allowance of up to one year for
construction. During the construction phase the loans have 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
Company originates loans within its market area that are secured by individual
unimproved or improved lots. Land loans are currently offered with fixed-rates
for terms of up to 5 years. The maximum loan-to-value ratio for the Company's
land loans is 75% of the appraised value, and the maximum loan-to-value ratio
for the Company's construction loans is 80% of the lower of cost or appraised
value.
8
<PAGE>
Construction lending generally involves a greater degree of credit risk
than other one- to four-family residential mortgage lending. The repayment of
the construction loan is often dependent upon the successful completion of the
construction project. Construction delays or the inability of the borrower to
sell the property once construction is completed may impair the borrower's
ability to repay the loan.
Multifamily Residential and Commercial Real Estate Loans. Loans
collateralized by multifamily residential and commercial real estate constituted
approximately $128.8 million, or 6.5%, of the Company's total loan portfolio at
June 30, 1998. The Company's multifamily residential real estate loans are
secured by multifamily residences, such as rental properties. The Company's
commercial real estate loans are secured by nonresidential properties such as
hotels, church property, and retail establishments. At June 30, 1998, a
significant portion of the Company's multifamily residential and commercial real
estate loans were secured by properties located within the Company's market
area. The Company's largest multifamily residential real estate loan
relationship at June 30, 1998, had a principal balance of $4.5 million, and was
collateralized by a personal care facility in Erie County, Pennsylvania. The
Company's largest commercial real estate loan at June 30, 1998, had a principal
balance of $3.5 million and was collateralized by land in Central Pennsylvania.
Multifamily residential and commercial real estate loans are offered with both
adjustable interest rates and fixed interest rates. The terms of each
multifamily residential and commercial real estate loan are negotiated on a
case-by-case basis. The Company generally makes multifamily residential and
commercial real estate loans up to 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, 1998, consumer loans totaled $353.1
million, or 17.9%, of the Company's total loan portfolio. The principal types of
consumer loans offered by the Company are adjustable-rate home equity lines of
credit and variable-rate education loans, and fixed-rate consumer loans such as
second mortgage loans, automobile loans, sales finance loans, unsecured personal
loans, credit card loans, and loans secured by deposit accounts. Consumer loans
are offered with maturities generally of less than ten years. The Company's home
equity lines of credit are secured by the borrower's principal residence with a
maximum loan-to-value ratio, including the principal balances of both the first
and second mortgage loans, of 75% or less. Such loans are offered on an
adjustable-rate basis with terms of up to ten years. At June 30, 1998, the
disbursed portion of home equity lines of credit totalled $34.0 million, or
9.6%, of consumer loans, with $60.7 million remaining undisbursed.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount, and in the
case of home equity lines of credit, the Company obtains a title guarantee or an
opinion as to the validity of title.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats,
recreation vehicles, appliances, and furniture. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
particular, amounts realizable on the sale of repossessed automobiles may be
significantly reduced based upon the condition of the automobiles and the lack
9
<PAGE>
of demand for used automobiles. The Company adds a general provision on a
regular basis to its consumer loan loss allowance, based on general economic
conditions and prior loss experience.
Commercial Business Loans. The Company currently offers commercial
business loans to existing customers to finance various activities in the
Company's market area, some of which are secured in part by additional real
estate collateral. At June 30, 1998, the Company had 957 commercial business
loans outstanding with an aggregate balance of $123.2 million, or 6.2% of the
Company's total loan portfolio. As of June 30, 1998, the average commercial
business loan balance was approximately $129,000. On June 11, 1995, the Company
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 treasury securities or cash deposits. The largest ESOP loan had a
balance as of June 30, 1998 of $3.7 million and the borrower is the ESOP of a
bank in New Jersey. The average balance of the loans in the portfolio was
approximately $1.2 million with only 5 loans having a balance in excess of $1.0
million.
Other than the aforementioned ESOP loans, the largest commercial
business loan had a principal balance of $4.4 million, was to a Pennsylvania
municipality and was secured by anticipated state grants and local tax revenue.
Commercial business loans are offered with both fixed and adjustable
interest rates and with terms of up to 15 years. Underwriting standards employed
by the Company for commercial business loans include a determination of the
applicant's ability to meet existing obligations and payments on the proposed
loan from normal cash flows generated by the applicant's business. The financial
strength of each applicant also is assessed through a review of financial
statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Company generally obtains personal guarantees from the
borrower or a third party as a condition to originating its commercial business
loans.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. All of the Company's loan originators, except the originators for the
Bank's New York-based mortgage banking subsidiary, are salaried employees, and
the Company 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 Company obtains a credit report and employment
verification to verify specific information relating to the applicant's
employment, income, and credit standing. In the case of a real estate loan, an
in-house appraiser or an appraiser approved by the Company appraises the real
estate intended to secure the proposed loan. A loan processor in the Company's
loan department checks the loan application file for accuracy and completeness,
and verifies the information provided. The Company has a formal loan policy
which assigns lending limits to the Company's various loan officers. Also, the
Company has a Senior Loan Committee which meets as needed to review and verify
that the assigned lending limits are being followed and to monitor the Company's
lending policies and the Company's loan activity. The Senior Loan Committee also
has lending authority as designated in the Company'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 Company'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 Company, flood
insurance may be required. After the loan is approved, a loan commitment letter
is promptly issued to the borrower. At June 30, 1998, the Company had
commitments to originate $118.3 million of loans.
10
<PAGE>
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
A title guaranty, based on a title search of the property, is required on all
loans secured by real property.
Origination, Purchase and Sale of Loans. The table below shows the
Company's originations of loans for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(In Thousands)
Loans receivable, net, at beginning of period..................... $1,536,498 $1,374,955 $1,164,735
Originations:
Real estate loans.............................................. 537,203 290,778 351,146
Consumer and commercial business loans......................... 264,942 272,410 213,234
---------- ---------- ----------
Total loan originations....................................... 802,145 563,188 564,380
Principal repayments:
Real estate loans.............................................. (254,544) (172,847) (144,680)
Consumer and commercial business loans......................... (170,781) (198,448) (171,894)
---------- ---------- ----------
Total repayments.............................................. (425,325) (371,295) (316,574)
Loan purchases including acquisitions............................. 26,904 19,289 63,548
Loan sales........................................................ (30,094) (47,985) (99,062)
Transfer to REO................................................... (2,839) (1,654) (2,072)
---------- ---------- ----------
Loans receivable, net, at end of period....................... $1,907,289 $1,536,498 $1,374,955
========== ========== ==========
</TABLE>
Loan Origination Fees and Other Income. In addition to interest earned
on loans, the Company generally receives loan origination fees. To the extent
that loans are originated or acquired for the Company's portfolio, Statement of
Financial Accounting Standards No. 91 requires that the Company defer loan
origination fees and costs and amortize such amounts as an adjustment of yield
over the life of the loan by use of the level yield method. Fees deferred under
SFAS 91 are recognized into income immediately upon prepayment or the sale of
the related loan. At June 30, 1998, the Company had $1.4 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 Company also receives other
fees, service charges, and other income that consist primarily of deposit
transaction account service charges, late charges, credit card fees, and income
from REO operations. The Company recognized fees and service charges of $3.3
million, $2.4 million and $2.0 million, for the fiscal years ended June 30,
1998, 1997 and 1996, 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, 1998, the largest
aggregate amount loaned by the Company to one borrower totaled $4.8 million and
was secured by commercial real estate. The Company's second largest lending
relationship totaled $4.5 million and was secured by a personal care facility in
Erie County, Pennsylvania. The Company's third largest lending relationship was
for a Pennsylvania municipality's sewer project which totaled $4.4 million and
was secured by state grant money and local tax revenue. The Company's fourth
largest lending relationship totaled $3.9 million and was secured by a limited
care apartment facility in Warren County, Pennsylvania. The Company's fifth
largest lending relationship totaled $3.7 million and was made to the ESOP of a
financial
11
<PAGE>
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.
Delinquencies and Classified Assets
Collection Procedures. The Company's collection procedures provide that
when a loan is five days past due, a computer-generated late notice is sent to
the borrower requesting payment. If delinquency continues, at 15 days a
delinquent notice, plus a notice of a late charge, is sent and personal contact
efforts are attempted, either in person or by telephone, to strengthen the
collection process and obtain reasons for the delinquency. Also, plans to
arrange a repayment plan are made. If a loan becomes 60 days past due, a
collection letter is sent, personal contact is attempted, and the loan becomes
subject to possible legal action if suitable arrangements to repay have not been
made. In addition, the borrower is given information which provides access to
consumer counseling services, to the extent required by regulations of the
Department of Housing and Urban Development. When a loan continues in a
delinquent status for 90 days or more, and a repayment schedule has not been
made or kept by the borrower, generally a notice of intent to foreclose is sent
to the borrower, giving 30 days to cure the delinquency. If not cured,
foreclosure proceedings are initiated.
Nonperforming Assets. Loans are reviewed on a regular basis and are
placed on a nonaccrual status when, in the opinion of management, the collection
of additional interest is doubtful. Loans are automatically placed on nonaccrual
status when either principal or interest is 90 days or more past due. Interest
accrued and unpaid at the time a loan is placed on a nonaccrual status is
charged against interest income. At June 30, 1998, the Company had nonperforming
loans of $8.6 million, and a ratio of nonperforming loans to net loans
receivable of .45%.
Real estate acquired by the Company 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, 1998, the Company had approximately $3.5 million of
property acquired as the result of foreclosure, and classified as REO. At June
30, 1998, the Company had non-performing assets of $12.1 million and a ratio of
nonperforming assets to total assets of .47%.
12
<PAGE>
Loans Past Due and Nonperforming Assets. The following table sets forth
information regarding the Company's loans 30 days or more past due, nonaccrual
loans 90 days or more past due, and real estate acquired or deemed acquired by
foreclosure at the dates indicated. When a loan is delinquent 90 days or more,
the Company fully reserves all accrued interest thereon and ceases to accrue
interest thereafter. For all the dates indicated, the Company did not have any
material restructured loans within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At June 30,
1998 1997 1996 1995 1994
------------------ --------- -------- -------- --------
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...... 112 $ 4,842 $ 3,224 $ 3,031 $ 2,140 $ 4,354
Multifamily and commercial loans........... 1 79 -- 423 281 --
Consumer loans............................. 917 3,632 2,477 2,178 1,135 1,111
Commercial business loans.................. 4 458 183 240 -- 76
------- ------- ------- ------- ------- -------
Total loans past due 30 days to 59 days... 1,034 $ 9,011 $ 5,884 $ 5,872 $ 3,556 $ 5,541
------- ------- ------- ------- ------- -------
Loans past due 60 days to 89 days:
One- to four-family residential loans...... 61 $ 2,386 $ 1,491 $ 1,153 $ 1,165 $ 1,065
Multifamily and commercial loans........... 1 219 -- 21 139 --
Consumer loans............................. 277 954 908 1,143 443 398
Commercial business loans.................. 2 841 180 148 45 4
------- ------- ------- ------- ------- -------
Total loans past due 60 days to 89 days... 341 $ 4,400 $ 2,579 $ 2,465 $ 1,792 $ 1,467
------- ------- ------- ------- ------- -------
Loans past due 90 days or more (1):
One- to four-family residential loans...... 135 $ 6,013 $ 6,229 $ 4,913 $ 6,473 $ 6,432
Multifamily and commercial loans........... 1 390 2,585 2,704 3,262 6,797
Consumer loans............................. 379 1,631 1,161 772 539 652
Commercial business loans.................. 6 578 455 1,092 150 273
------- ------- ------- ------- ------- -------
Total loans past due 90 days or more...... 521 $ 8,612 $10,430 $ 9,481 $10,424 $14,154
------- ------- ------- ------- ------- -------
Total loans 30 days or more past due......... 1,896 $22,023 $18,893 $17,818 $15,772 $21,162
======= ======= ======= ======= ======= =======
Total loans 90 days or more past due (1)..... 521 $ 8,612 $10,430 $ 9,481 $10,424 $14,154
Total REO.................................... 42 3,506 4,549 5,771 5,895 7,701
------- ------- ------- ------- ------- -------
Total loans 90 days or more past due and REO. 563 $12,118 $14,979 $15,252 $16,319 $21,855
======= ======= ======= ======= ======= =======
Total loans 90 days or more past due to
net loans receivable....................... .45% .68% .69% .89% 1.33%
Total loans 90 days or more past due
and REO to total assets.................... .47% .72% .81% 1.03% 1.53%
</TABLE>
- ------------------------------------
(1) The Company classifies as nonperforming all loans 90 days or more
delinquent.
During the fiscal year ended June 30, 1998, gross interest income of
approximately $250,000 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 period
except for $230,000 of cash interest payments received.
The Company had one nonperforming asset with a carrying value exceeding
$1.0 million at June 30, 1998. This asset consisted of an apartment complex and
adjacent vacant land in New York State located approximately 25 miles from the
Company's corporate headquarters. The loan on this property was originated in
1978, and the Company 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, 1998.
13
<PAGE>
Classification of Assets. The Company's policies, consistent with
regulatory guidelines, provide for the classification of loans and other assets
such as debt and equity securities, considered to be of lesser quality as
"substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
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, 1998, the
Company had seven loans, with an aggregate principal balance of $7.8 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 Company regularly reviews
its asset portfolio to determine whether any assets require classification in
accordance with applicable regulations. The Company's largest classified assets
are also the Company's largest nonperforming assets and are discussed above.
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Substandard assets............................................ $ 20,138 $ 24,242 $ 19,594
Doubtful assets............................................... -- 260 95
Loss assets................................................... -- 133 --
-------- -------- --------
Total classified assets.................................... $ 20,138 $ 24,635 $ 19,689
======== ======== ========
</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 Company's allowance for loan losses and valuation of foreclosed real estate.
Such agencies may require the Company to recognize additions to the allowance
based on their judgment about information available to them at the time of their
examination.
The Company provided $4.1 million, $2.5 million and $1.5 million, to
its allowance for loan losses for the fiscal years ended June 30, 1998, 1997 and
1996, respectively. At June 30, 1998, the total allowance was $15.8 million,
which amounted to .83% of total net loans and 183.1% of nonperforming loans. The
allowance is established based upon the Company's evaluation of the risks
inherent in its loan portfolio. The Company will continue to monitor and modify
the level of its allowance for loan losses in order to maintain it at a level
which management
14
<PAGE>
considers adequate to provide for potential loan losses. For the fiscal years
ended June 30, 1998, 1997 and 1996, the Company had charge-offs of $2.5 million,
$2.5 million and $1.3 million, respectively, against this allowance.
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,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- ----------- ---------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net loans receivable............................. $1,907,289 $1,536,498 $1,374,955 $1,164,735 $1,062,533
Average loans outstanding........................ 1,673,599 1,449,807 1,243,758 1,093,602 1,036,819
Allowance for loan losses balance at
beginning of period............................ 13,611 13,130 11,833 11,238 10,999
Provision for loan losses........................ 4,072 2,491 1,502 1,098 1,728
Charge-offs:
Real estate loans:............................. (132) (383) (141) (53) (587)
Consumer loans................................. (2,384) (2,004) (1,192) (830) (873)
Commercial loans............................... -- (150) -- (188) (160)
---------- ----------- --------- ----------- ----------
Total charge-offs............................. (2,516) (2,537) (1,333) (1,071) (1,620)
---------- ---------- --------- ---------- ---------
Recoveries:
Real estate loans.............................. -- 10 176 -- --
Consumer loans................................. 393 363 250 332 90
Commercial loans............................... -- 1 2 1 41
---------- ---------- --------- ---------- ---------
Total recoveries.............................. 393 374 428 333 131
Acquired through acquisition..................... 209 153 700 235 --
---------- ---------- --------- ---------- ---------
Allowance for loan losses balance
at end of period............................ $ 15,769 $ 13,611 $ 13,130 $ 11,833 $ 11,238
========== ========== ========= ========== =========
Allowance for loan losses as a percentage of net
loans receivable............................... .83% .89% .95% 1.02% 1.06%
Net loans charged-off as a percentage of average
loans outstanding(1)........................... .15% .17% .11% .10% .16%
Allowance for loan losses as a percentage of
nonperforming loans............................ 183.10% 130.50% 138.49% 113.52% 79.40%
Allowance for loan losses as a percentage
of nonperforming loans and REO................. 130.13% 90.87% 86.09% 72.51% 51.42%
</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,
----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
% 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.. $ 8,103 75.9% $ 6,898 75.1% $ 9,133 77.6% $ 8,101 78.0% $ 8,475 81.6%
Consumer loans..... 4,957 17.9 4,499 19.5 3,009 17.7 2,773 17.2 2,350 16.5
Commercial business
loans............. 2,709 6.2 2,214 5.4 988 4.7 959 4.8 413 1.9
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total allowance for
loan losses...... $ 15,769 100.0% $ 13,611 100.0% $ 13,130 100.0% $ 11,833 100.0% $ 11,238 100.0%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
- -------------------------------------
(1) Represents percentage of loans in each category to total loans.
15
<PAGE>
Investment Activities
The Company's investment portfolio comprises mortgage-backed
securities, investment securities, and cash and cash equivalents. In recent
years, the Company generally has increased both the percentage of its assets
held in its investment securities portfolio, and the percentage of assets held
in the mortgage-backed securities portfolio. This increase in investment
securities and mortgage-backed securities resulted from the Company leveraging
its capital by borrowing funds and investing the proceeds in marketable
securities in order to improve net interest income. In addition, any excess
funds resulting from the acquisition of branch offices, and the related
deposits, from other financial institutions is invested by the Company. Also,
the Company maintains a high percentage of its assets in marketable securities
and cash equivalents to assist in asset/liability management.
The majority of the Company's mortgage-backed securities are issued or
guaranteed by the United States Government or agencies thereof. At June 30,
1998, the carrying value of mortgage-backed securities totaled $305.8 million
compared to $291.6 million at June 30, 1997. Of this $305.8 million, $290.1
million had adjustable-rates and $15.7 million had fixed-rates and $295.4
million were either issued by or collateralized by GNMA, FNMA or FHLMC.
The carrying value of the Company's investment securities totaled
$204.2 million at June 30, 1998, compared to $122.1 million at June 30, 1997.
This 67.2% increase in investment securities resulted from the purchase of $30.0
million of trust preferred securities and $30.0 million of municipal bonds.
These securities offer attractive yields compared to other investments typically
purchased by the Company and were purchased in an effort to enhance interest
income. The Company's cash and cash equivalents, consisting of cash and due from
banks, and interest-earning deposits with other financial institutions, totaled
$59.4 million at June 30, 1998, compared to $71.5 million at June 30, 1997. The
Company reduced its investment in such assets because the yield of such
investments are generally lower than yields offered on other types of investment
securities.
The Company is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. The Company generally has maintained a portfolio
of liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short-term demand for funds to be used in the Company's loan origination and
other activities.
16
<PAGE>
Purchases, Sales, and Repayments of Investment and Mortgage-Backed
Securities. Set forth below is information relating to the Company's purchases,
sales and repayments of investment securities and mortgage-backed securities for
the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities balance at beginning of period (1). $ 291,597 $ 291,446 $ 243,184
Purchases..................................................... 62,366 10,892 59,453
Sales......................................................... (27,618) (14,554) --
Securities acquired by business combination................... 5,391 18,788 4,854
Increase (decrease) in market value of securities available
for sale.................................................... 845 (1,532) (519)
Principal payments and amortization of premiums and discounts. (26,817) (13,443) (15,526)
--------- --------- ---------
Mortgage-backed securities balance at end of period (1)....... $ 305,764 $ 291,597 $ 291,446
========= ========= =========
Investment securities balance at beginning of period (2)...... $ 122,103 $ 106,047 $ 66,884
Purchases..................................................... 141,094 19,100 40,120
Sales......................................................... (46,471) -- --
Securities acquired by business combination................... 17,076 9,120 8,834
Increase in market value of securities available for sale..... 2,901 969 208
Maturities and amortization of premiums and discounts......... (32,490) (13,133) (9,999)
--------- --------- ---------
Investment securities balance at end of period (2)............ $ 204,213 $ 122,103 $ 106,047
========= ========= =========
</TABLE>
- -------------------------------------
(1) Includes mortgage-backed securities available for sale and held to maturity.
(2) Includes investment securities available for sale and held to maturity.
17
<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 Company's investment securities
portfolio and mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
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.............. $ 5,663 $ 5,745 $ 10,853 $ 10,771 $ 11,063 $ 10,863
Variable-rate pass through certificates........... 9,936 10,059 13,397 13,690 2,998 3,151
Fixed-rate collateralized mortgage obligations
("CMOs")........................................ 4,578 4,571 1,400 1,399 761 736
Variable-rate CMOs................................ 90,064 88,520 84,911 82,999 87,110 85,446
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities held to
maturity...................................... 110,241 108,895 110,561 108,859 101,932 100,196
------- -------- -------- -------- -------- --------
Mortgage-backed securities available for sale:
Fixed-rate pass through certificates.............. $ 5,396 $ 5,391 $ 36,782 $ 37,896 $ 51,328 $ 52,655
Variable-rate pass through certificates........... 11,523 11,579 770 784 1,041 1,047
Fixed-rate collateralized mortgage obligations
("CMOs")........................................ 37 35 99 107 1,854 1,854
Variable-rate CMOs................................ 178,000 178,518 143,658 142,249 134,032 133,958
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities available
for sale...................................... 194,956 195,523 181,309 181,036 188,255 189,514
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities................ $305,197 $304,418 $291,870 $289,895 $290,187 $289,710
======== ======== ======== ======== ======== ========
Investment securities held to maturity:
U.S. Government and agency........................ $ 51,358 $ 51,982 $ 42,868 $ 43,334 $ 53,836 $ 54,260
Municipal securities.............................. 3,811 3,947 -- -- -- --
Corporate debt issues............................. 27,852 27,993 551 551 250 281
Equity securities................................. -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total investment securities held to maturity.... $ 83,021 $ 83,922 $ 43,419 $ 43,885 $ 54,086 $ 54,541
======== ======== ======== ======== ======== ========
Investment securities available for sale:
U.S. Government and agency ....................... $ 75,826 $ 76,995 $ 63,290 $ 63,272 $ 47,083 $ 46,998
Municipal securities.............................. 37,307 38,289 11,322 11,489 1,430 1,422
Corporate debt issues............................. 985 985 -- -- 1,401 1,400
Equity securities................................. 2,229 4,923 2,169 3,923 1,113 2,141
-------- -------- -------- -------- -------- --------
Total investment securities available for sale.. $116,347 $121,192 $ 76,781 $ 78,684 $ 51,027 $ 51,961
======== ======== ======== ======== ======== ========
</TABLE>
Issuers of Mortgage-Backed Securities. The following table sets forth
information regarding the issuers and the carrying value of the Company's
mortgage-backed securities held to maturity and mortgage-backed securities
available for sale.
<TABLE>
<CAPTION>
At June 30,
---------------------------------------------
1998 1997 1996
--------- --------- ----------
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
FNMA............................................................ $ 143,992 $ 140,775 $ 142,757
GNMA............................................................ 12,457 29,338 39,513
FHLMC........................................................... 138,962 120,400 107,463
Other (non-agency).............................................. 10,353 1,084 1,713
--------- --------- ---------
Total mortgage-backed securities.......................... $ 305,764 $ 291,597 $ 291,446
========= ========= =========
</TABLE>
18
<PAGE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, amortized cost, market values and
weighted average yields for the Company's investment securities and
mortgage-backed securities portfolios at June 30, 1998. Adjustable-rate
mortgage-backed securities are included in the period in which interest rates
are next scheduled to adjust.
<TABLE>
<CAPTION>
At June 30, 1998
--------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
-------------------- -------------------- ------------------- --------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ---------- --------- ---------- --------- ---------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Government and agency obligations $ 9,978 6.22% $ 26,380 6.87% $ -- --% $ 15,000 7.30%
Municipal securities................... -- -- -- -- -- -- 3,811 5.15
Corporate debt issues.................. 100 5.30 -- -- 2,305 8.08 25,447 7.80
-------- ------ -------- ----- -------- ----- -------- -----
Total investment securities held to
maturity............................. 10,078 6.21 26,380 6.87 2,305 8.08 44,258 7.40
Investment securities available for sale:
U.S. Government and agency obligations 4,587 6.26 53,015 6.44 5,991 6.40 12,233 6.99
Equity securities...................... -- -- -- -- -- -- -- --
Municipal securities................... -- -- 2,158 5.30 5,304 5.58 29,845 5.20
Corporate debt issues.................. -- -- -- -- -- -- 985 6.46
-------- ------ -------- ----- -------- ----- -------- -----
Total investment securities available
for sale............................. 4,587 6.26 55,173 6.40 11,295 6.02 43,063 5.74
Mortgage-backed securities held to
maturity:
Pass-through certificates............. 14,282 6.67 -- -- -- -- 1,317 8.67
CMOs.................................. 90,064 6.02 -- -- 452 9.82 4,126 6.04
-------- ------ -------- ----- -------- ----- -------- -----
Total mortgage-backed securities held
to maturity......................... 104,346 6.11 -- -- 452 9.82 5,443 6.68
Mortgage-backed securities available for
sale:
Pass through certificates............. 11,523 5.88 303 5.86 1,657 6.40 3,436 6.26
CMOs.................................. 178,000 6.34 -- -- 37 10.21 -- --
-------- ------ -------- ----- -------- ----- -------- -----
Total mortgage-backed securities
available for sale.................. 189,523 6.32 303 5.86 1,694 6.48 3,436 6.26
------- ------ -------- ----- -------- ----- -------- -----
Total investment securities and
mortgage-backed securities............ $308,534 6.24% $ 81,856 6.55% $ 15,746 6.48% $ 96,200 6.58%
======== ====== ======== ===== ======== ===== ======== =====
<CAPTION>
At June 30, 1998
-------------------------------
Total
-------------------------------
Annualized
Weighted
Amortized Market Average
Cost Value Yield
-------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Investment securities held to maturity:
U.S. Government and agency obligations $ 51,358 $ 51,982 6.87%
Municipal securities................... 3,811 3,947 5.15
Corporate debt issues.................. 27,852 27,993 7.82
-------- -------- -----
Total investment securities held to
maturity............................. 83,021 83,922 7.11
Investment securities available for sale:
U.S. Government and agency obligations 75,826 76,995 6.52
Equity securities...................... 2,229 4,923 4.13
Municipal securities................... 37,307 38,289 5.26
Corporate debt issues.................. 985 985 6.46
-------- -------- -----
Total investment securities available
for sale............................. 116,347 121,192 6.07
Mortgage-backed securities held to
maturity:
Pass-through certificates............. 15,599 15,804 6.84
CMOs.................................. 94,642 93,091 6.04
-------- -------- -----
Total mortgage-backed securities held
to maturity......................... 110,241 108,895 6.15
Mortgage-backed securities available for
sale:
Pass through certificates............. 16,919 16,970 6.01
CMOs.................................. 178,037 178,553 6.34
-------- -------- -----
Total mortgage-backed securities
available for sale.................. 194,956 195,523 6.32
-------- -------- -----
Total investment securities and
mortgage-backed securities............ $504,565 $509,532 6.35%
======== ======== =====
</TABLE>
19
<PAGE>
Sources of Funds
General. Deposits are the major source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from the amortization and prepayment of loans and mortgage-backed
securities, the maturity of investment securities, operations and, if needed,
borrowings from the FHLB. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are influenced significantly by general interest rates and market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources or on a longer term basis for general
business purposes.
Deposits. Consumer and commercial deposits are attracted principally
from within the Company's market area through the offering of a broad selection
of deposit instruments including checking accounts, passbook savings accounts,
money market deposit accounts, term certificate accounts and individual
retirement accounts. While the Company accepts deposits of $100,000 or more, it
does not offer substantial premium rates for such deposits. Deposit account
terms vary according to the minimum balance required, the period of time during
which the funds must remain on deposit, and the interest rate, among other
factors. The Company regularly evaluates its internal cost of funds, surveys
rates offered by competing institutions, reviews the Company's cash flow
requirements for lending and liquidity, and executes rate changes when deemed
appropriate. The Company does not obtain funds through brokers, nor does it
solicit funds outside its market area.
The following table sets forth the savings activities of the Company
for the periods indicated.
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------
1998 1997 1996
----------- ----------- ----------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of period.................................... $ 1,640,815 $ 1,450,047 $1,283,935
Savings deposits.................................................. 1,136,796 993,411 660,132
Savings withdrawals............................................... (1,119,518) (913,573) (648,646)
Net checking activity............................................. 79,691 23,671 14,616
Deposits acquired................................................. 220,243 34,594 95,994
----------- ----------- ----------
Net increase before interest credited........................... 317,212 138,103 122,096
Interest credited................................................. 64,476 52,665 44,016
----------- ----------- ----------
Net increase in deposits...................................... 381,688 190,768 166,112
----------- ----------- ----------
Balance at end of period.................................. $ 2,022,503 $ 1,640,815 $1,450,047
=========== =========== ==========
</TABLE>
The following table sets forth the dollar amount of savings deposits in
the various types of savings accounts/offered by the Company between the dates
indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
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......... $ 340,377 16.83% 3.30% $ 299,365 18.24% 3.30% $ 296,099 20.42% 3.30%
Checking accounts........ 315,755 15.61 1.61 222,845 13.58 2.12 195,019 13.45 2.12
Money market accounts.... 114,187 5.65 3.68 83,609 5.10 3.37 82,552 5.69 3.37
Certificates of deposit:
Maturing within 1 year. 771,665 38.15 5.57 607,421 37.02 5.61 512,392 35.34 5.36
Maturing 1 to 3 years.. 404,175 19.98 5.90 357,070 21.76 6.01 259,539 17.90 5.78
Maturing more than
3 years............... 76,344 3.78 6.00 70,505 4.30 6.03 104,446 7.20 6.44
--------- ------ ------- --------- ------ ------- --------- ------ -------
Total certificates.... 1,252,184 61.91 5.70 1,034,996 63.08 5.78 876,377 60.44 5.61
--------- ------ ------- --------- ------ ------- --------- ------ -------
Total deposits........... $2,022,503 100.0% 4.55% $1,640,815 100.00% 4.71% $1,450,047 100.0% 4.21%
========== ====== ======= ========== ====== ======= ========== ====== =======
</TABLE>
- ---------------------------------------
(1) Represents percentage of total deposits.
(2) Represents weighted average nominal rate.
20
<PAGE>
Time Deposit Rates. The following table sets forth the time deposits in
the Company classified by rates as of the dates indicated:
At June 30,
------------------------------------
1998 1997 1996
---------- ----------- -----------
Rate (In Thousands)
- -----
2.00 - 2.99%........................... $ 88 $ 37 $ 36
3.00 - 3.99%........................... 2,956 1,234 7,812
4.00 - 4.99%........................... 121,533 63,668 138,758
5.00 - 5.99%........................... 760,738 576,850 409,023
6.00 - 6.99%........................... 312,693 329,083 242,428
7.00 - 7.99%........................... 47,959 55,170 69,629
8.00% or greater....................... 6,217 8,954 8,691
---------- ----------- -----------
$1,252,184 $ 1,034,996 $ 876,377
========== =========== ===========
Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposits at June 30, 1998.
<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%.................. $ 42 $ -- $ 46 $ -- $ 88
3.00 - 3.99%.................. 1,876 132 89 859 2,956
4.00 - 4.99%.................. 118,702 2,536 182 113 121,533
5.00 - 5.99%.................. 476,309 202,982 45,236 36,211 760,738
6.00 - 6.99%.................. 170,376 103,693 8,196 30,428 312,693
7.00 - 7.99%.................. 1,625 35,860 1,825 8,649 47,959
8.00% or greater.............. 2,735 2,253 1,145 84 6,217
--------- --------- --------- -------- ----------
Total......................... $ 771,665 $ 347,456 $ 56,719 $ 76,344 $1,252,184
========= ========= ========= ======== ==========
</TABLE>
Large Certificates of Deposit Maturities. The following table indicates
the amount of the Company's certificates of deposit of $100,000 or more by time
remaining until maturity at June 30, 1998.
Certificates
Maturity Period of Deposit
--------------- ----------
(In Thousands)
Three months or less............................. $ 30,738
Three through six months......................... 22,525
Six through twelve months........................ 46,234
Over twelve months............................... 51,771
-----------
Total....................................... $ 151,268
===========
21
<PAGE>
Borrowings
Savings deposits are the primary source of funds for the Company's
lending and investment activities and for its general business purposes. The
Company also relies upon borrowings from the FHLB to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. Borrowings from the
FHLB typically are collateralized by the Company's stock in the FHLB and a
portion of the Company's first mortgage loans. At June 30, 1998, the Company had
$232.1 million of borrowings outstanding from the FHLB.
The FHLB functions as a central reserve bank providing credit for the
Company and other member financial institutions. As a member, the Company 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,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB Pittsburgh borrowings:
Average balance outstanding (1) ................................ $ 144,798 $ 141,108 $ 117,919
Maximum outstanding at end of any month during period........... 237,161 $ 164,212 $ 200,603
Balance outstanding at end of period............................ 232,161 $ 164,212 $ 200,603
Weighted average interest rate during period.................... 5.20% 5.73% 5.30%
Weighted average interest rate at end of period................. 5.86% 6.12% 5.67%
Reverse repurchase agreements:
Average balance outstanding (1) ................................ $ 41,220 $ 16,578 $ 267
Maximum outstanding at end of any month during period........... 50,028 $ 50,116 $ 800
Balance outstanding at end of period............................ 50,028 $ 50,116 $ --
Weighted average interest rate during period.................... 5.31% 5.86% 3.40%
Weighted average interest rate at end of period................. 5.48% 5.60% --%
Other borrowings:
Average balance outstanding (1) ................................ $ 8,264 $ 10,075 $ 12,151
Maximum outstanding at end of any month during period........... 9,056 $ 11,462 $ 13,368
Balance outstanding at end of period............................ 7,517 $ 9,130 $ 11,158
Weighted average interest rate during period.................... 5.36% 6.95% 7.59%
Weighted average interest rate at end of period................. 6.84% 6.96% 7.52%
Total borrowings:
Average balance outstanding (1) ................................ $ 194,282 $ 167,761 $ 130,337
Maximum outstanding at end of any month during period........... 289,706 $ 223,458 $ 211,761
Balance outstanding at end of period............................ 289,706 $ 223,458 $ 211,761
Weighted average interest rate during period.................... 5.23% 5.24% 5.35%
Weighted average interest rate at end of period................. 5.82% 6.04% 5.77%
</TABLE>
- -------------------------------------
(1) Computed on the basis of month-end balances.
Competition
The Company's market area in Pennsylvania and New York has a large
concentration of financial institutions, some of which are significantly larger
and have greater financial resources than the Company, and all of which are
competitors of the Company to varying degrees. As a result, the Company
encounters strong competition both in attracting deposits and in originating
real estate and other loans. Its most direct competition for deposits has come
historically from commercial banks, brokerage houses, other savings
associations, and credit unions in its market area, and the Company expects
continued strong competition from such financial institutions in the foreseeable
future. The Company's market area includes offices of several commercial banks
that are substantially larger than the Company
22
<PAGE>
in terms of state-wide deposits. The Company competes for savings by offering
depositors a high level of personal service and expertise together with a wide
range of financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings institutions.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Company's market
area as well as the increased efforts by commercial banks to expand mortgage
loan originations.
The Company competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
Subsidiary Activities
Northwest Bancorp Inc., through Northwest Savings Bank, has five wholly
owned subsidiaries, Great Northwest Corporation, Northwest Financial Services,
Inc., Northwest Consumer Discount Company, Inc., Northwest Mortgage Corporation
and Northwest Capital Group, Inc. Jamestown has no subsidiaries. Great
Northwest's sole activity is holding equity investments in government-assisted
low-income housing projects in various locations in the Company's market area.
At June 30, 1998, the Bank had an equity investment in Great Northwest of $1.7
million. For the fiscal year ended June 30, 1998, Great Northwest had an
operating profit of $455,000 generated primarily from federal low-income housing
tax credits.
Northwest Financial Services' principal activity is the operation of
several of the Company'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, 1998, the Bank had an
equity investment in Northwest Financial Services of $5.0 million, and for the
fiscal year ended June 30, 1998, Northwest Financial Services had income of
$239,000, which included equity income from Rid-Fed, Inc. of $44,000.
Northwest Consumer Discount Company operates 33 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, 1998, the Bank had an equity investment in Northwest
Consumer Discount Company of $9.3 million and the income of Northwest Consumer
Discount Company for the fiscal year ended June 30, 1998 was $1.5 million.
Consumer loans entail greater credit risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreation vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Company adds a general provision on a regular basis to its
consumer loan loss allowance, based on general economic conditions and prior
loss experience.
Northwest Mortgage Corporation operates four mortgage loan production
offices in New York and one in Pennsylvania. At June 30, 1998, the Bank had an
equity investment of $646,000 in Northwest Mortgage Corporation and for the
fiscal year ended June 30, 1998 Northwest Mortgage Corporation had a net loss of
$33,000.
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, 1998 the Bank had an equity investment
of $25,000 in Northwest Capital Group and for the fiscal year ended June 30,
1998 Northwest Capital Group reported no income.
23
<PAGE>
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
Northwest Capital. At June 30, 1998 Northwest Financial Services had an equity
investment of $1.0 million in Rid-Fed, Inc. and for the fiscal year ended June
30, 1998 Rid-Fed, Inc. had net income of $44,000.
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, 1998, Northwest
Consumer Discount Company's equity investment in Northwest Finance Company was
$(98,000). For the year ended June 30, 1998, Northwest Finance Company had a net
operating loss of $9,000.
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, 1998, the Company and its wholly owned subsidiaries had
775 full-time and 170 part-time employees. In addition, Jamestown had 32
full-time and 3 part-time employees None of the Company's employees is
represented by a collective bargaining group. The Company believes its
relationship with its employees to be good.
REGULATION
General
The Bank is a Pennsylvania-chartered savings bank and its deposit
accounts are insured up to applicable limits by the FDIC under the SAIF. The
Bank is subject to extensive regulation by the Department of Banking of the
Commonwealth of Pennsylvania (the "Department"), as its chartering agency, and
by the FDIC, as the deposit insurer. The Bank must file reports with the
Department and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions including, but not limited to, mergers with or acquisitions of
other savings institutions. There are periodic examinations by the Department
and the FDIC to test the Bank's compliance with various regulatory requirements.
This regulation and supervision establishes a comprehensive framework of
activities in which an institution can engage and is intended primarily for the
protection of the FDIC insurance fund and depositors. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and with their examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department or the FDIC could have a
material adverse impact on the Company, the Mutual Holding Company, the Bank and
their operations. The Company and the Mutual Holding Company, as mutual savings
bank holding company, are 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, the Company and the Mutual Holding Company
are referred to below or elsewhere herein.
Pennsylvania Savings Bank Law
The Pennsylvania Banking Code of 1965, as amended (the "Banking Code")
contains detailed provisions governing the organization, location of offices,
rights and responsibilities of directors, officers, employees, and depositors,
as well as corporate powers, savings and investment operations and other aspects
of the Bank and its
24
<PAGE>
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 Banking
Prior to 1994 a bank holding company located in one state was
prohibited from acquiring a bank or all of its assets located in another state
unless the acquisition was specifically authorized by a reciprocal interstate
banking statute, such as the statute adopted in Pennsylvania in 1990,
specifically permitting interstate acquisitions. Similarly, interstate branching
was prohibited for national banks and state-chartered member banks, although
some states, not including Pennsylvania, had passed laws permitting limited
interstate branching by non-Federal Reserve member state banks. The Interstate
Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits an
adequately capitalized, adequately managed bank holding company to acquire a
bank in another state, whether or not the state permits the acquisition, subject
to certain deposit concentration caps and the FRB's approval. A state may not
impose discriminatory requirements on acquisitions by out-of-state holding
companies. In addition, under the Riegle-Neal Act, a bank may expand interstate
by merging with a bank in another state and also may consolidate the acquired
bank into new branch offices of the acquiring bank, unless the other state
affirmatively opts out of the legislation before that date. The Riegle-Neal Act
also permits de novo interstate branching, but only if a state affirmatively
opted in by appropriate legislature. Once a state opted into interstate
branching, it could not opt out at a later date. The Riegle-Neal Act also allows
foreign banks to branch by merger or de novo branch to the same extent as banks
from the foreign bank's home state. In 1995, the Pennsylvania Legislature
amended the Banking Code to opt in to all of the provisions of the Riegle-Neal
Act, including interstate bank mergers and de novo interstate branching.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from 0% to .27% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium
25
<PAGE>
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,
interest payments on FICO bonds issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation are paid jointly by Bank Insurance Fund ("BIF") insured institutions
and SAIF-insured institutions. The FICO 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 Company met the minimum level of mortgage lending test
(i.e., the Company's level of mortgage lending activity (re-financings and home
equity loans excluded) exceeded its average mortgage lending activity for the
six years preceding fiscal 1997 and 1998, adjusted for inflation), the Company
was able to suspend its tax bad debt recapture for the 1997 and 1998 tax years.
At June 30, 1998, the Company 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.
The Bank is also subject to more stringent 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.
At June 30, 1998, the Bank exceeded the Department's capital guidelines.
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
26
<PAGE>
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.
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,
1998, 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.
Holding Company Regulation
Under the Bank Holding Company Act of 1956 (the "BHCA"), a bank holding
company must obtain FRB approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling
27
<PAGE>
banks, or providing services for its subsidiaries. The principal exceptions to
these prohibitions involve certain non-bank activities which, by statute or FRB
regulation or order, have been identified as activities closely related to the
business of banking or managing or controlling banks. The list of activities
permitted by the FRB includes, among other things, operating a savings
association, mortgage company, finance company, credit card company or factoring
company; performing certain data processing operations; providing certain
investment and financial advice; underwriting and acting as an insurance agent
for certain types of credit-related insurance; leasing property on a full-
payout, non-operating basis; selling money orders, traveler's checks and United
States Savings Bonds; real estate and personal property appraising; providing
tax planning and preparation services; and, subject to certain limitations,
providing securities brokerage services for customers.
The Company and the Mutual Holding Compnany are also subject to capital
adequacy guidelines for bank holding companies (on a consolidated basis) which
are substantially similar to those of the FDIC for the Bank.
The FRB has issued a policy statement on the payment of cash dividends
by bank holding companies, which expresses the FRB's view that a bank holding
company should pay cash dividends only to the extent that the holding company's
net income for the past year is sufficient to cover both the cash dividends and
a rate of earnings retention that is consistent with the holding company's
capital needs, asset quality and overall financial condition. The FRB also
indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the FRB, the FRB may prohibit a
bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized."
Conditions to Certain Regulatory Approvals
The Bank's Reorganization. The FRB approved the Bank's reorganization
into the Mutual Holding Company structure and the mutual holding company's
acquisition of the majority of the Bank's common stock subject to the following
conditions, which apply to the Company as a result of the Two-Tier
Reorganization:
1. The Mutual 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 Company 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
Mutual Holding Company intends to waive such dividends;
2. If a waiver is granted, dividends waived by the Mutual Holding
Company will not be available for payment to minority
shareholders (i.e., shareholders other than the Mutual Holding
Company), and will be excluded from the capital accounts of
the Company for purposes of calculating any dividend payments
to minority shareholders;
3. If a waiver is granted, the Company will, so long as the
Mutual Holding Company remains a mutual Mutual Holding
Company, establish a restricted capital account in the
cumulative amount of any dividends waived by the Mutual
Holding Company for the benefit of the mutual members of the
Mutual Holding Company. The restricted capital account would
be senior to the claims of minority stockholders of the
Company and would not decrease notwithstanding changes in
depositors of the Company. This restricted capital account
would be added to any liquidation account in the Company
established in connection with a conversion of the Mutual
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 Mutual Holding Company;
28
<PAGE>
4. In any conversion of the mutual Mutual Holding Company from
mutual to stock form, the Mutual Holding Company will comply
with the rules and regulations of the Office of Thrift
Supervision, as if the Company and the Mutual Holding Company
were a savings association and a savings and loan Mutual
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 Mutual
Holding Company will comply with the applicable requirements
of such regulations.
The Two-Tier Reorganization The activities of the Company and the
Mutual Holding Company are also restricted pursuant the conditions imposed by
the FRB and FDIC as part of their approval of the Two-Tier Reorganization. Such
conditions include restrictions on the sale of Common Stock by the Mutual
Holding Company, the conversion of the Mutual Holding Company to the stock form
of ownership, and the pledging of Common Stock in support of any borrowing by
the Company or the Bank.
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 Company's common stock are registered with the SEC under
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company is also subject to the proxy rules, tender offer rules,
insider trading restrictions, annual and periodic reporting, and other
requirements of the Exchange Act.
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 Company's ability to pay dividends depends, to large extent, upon
the Bank's ability to pay dividends to the Company. The Banking Code of the
Commonwealth of Pennsylvania states, in part, that dividends may be declared and
paid by the Bank only out of accumulated net earnings and may not be declared or
paid unless surplus (retained earnings) is at least equal to capital. The Bank
has not declared or paid any dividends which caused the Bank's retained earnings
to be reduced below the amount required. Finally, dividends may not be declared
or paid
29
<PAGE>
if the Bank is in default in payment of any assessment due to the FDIC. At June
30, 1998, the Bank's retained earnings exceeded required capital by $85.7
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 Company files a
consolidated federal income tax return with its wholly owned subsidiaries on a
fiscal year basis. The Mutual Holding Company is not permitted to file a
consolidated federal income tax return with the Company, and must pay Federal
income tax on 20% of the dividends received from the Company. Because the Mutual
Holding Company has nominal assets other than the stock of the Company, it does
not have material federal income tax liability other than the tax due on the
dividends received from the Company.
In April 1992, the FASB issued SFAS 109. The Company currently is
accounting for income taxes in accordance with SFAS 109. The liability method
accounts for deferred income taxes by applying the enacted statutory rates in
effect at the balance sheet date to differences between the book cost and the
tax cost of assets and liabilities. The resulting deferred tax liabilities and
assets are adjusted to reflect changes in tax laws. SFAS 109 was implemented by
the Bank effective July 1, 1993.
The 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 Company is subject to the Corporate Net Income Tax
and the Capital Stock Tax of the Commonwealth of Pennsylvania. Dividends
received from the Bank qualify for a 100% dividends received deduction and are
not subject to Corporate Net Income Tax. In addition, the Company's investments
in its subsidiaries qualify as exempt intangible assets and greatly reduced the
amount of Capital Stock Tax assessed.
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 Company conducts its business through its main office located in
Warren, Pennsylvania, 71 other full-service offices throughout its market area
in northwest, southwest and central Pennsylvania and three offices in Chautuaqau
County, New York. The Company and its wholly owned subsidiaries also operate one
mortgage lending office in Pennsylvania and four in New York, as well as 33
consumer finance offices located throughout Pennsylvania and one consumer
lending office in New York. At June 30, 1998, the Company's premises and
equipment had an aggregate net book value of approximately $26.2 million. The
Company believes that its current facilities are adequate to meet the present
and immediately foreseeable needs of the Company and Holding Company.
30
<PAGE>
Listed below is the location of each of the Company's community banking
offices.
Bradford (3), McKean Co.
-- Bradford Mall
-- 33 Main Street
-- 85 West Washington Street
Bellefonte, Centre Co.
-- 117 North Allegheny Street
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 Road
-- Millcreek Mall
3805 Peach Street
-- 3805 Peach Street
-- 5624 Peach Street
-- 401 State Street
-- 121 West 26th Street
-- K-Mart Plaza South
1328 East Grandview Blvd.
Franklin, Venango Co.
-- 1301 Liberty Street.
Gibsonia, Allegheny Co.
-- 5850 Meridian Road
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
Kittanning (2), Armstrong Co.
-- Franklin Village Mall
-- 165 Butler Road
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
Lititz, Lancaster Co.
-- 744 South Broad Street
Lock Haven, Clinton Co.
-- 104 East Main Street
Marianna, Washington Co.
-- 1784 Main 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
31
<PAGE>
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
Rimersburg, Carion Co.
-- 211 North Main Street
Sarver, Butler Co.
-- 737 South Pike Road
Sligo, Clairon Co.
-- 1613 Bald Eagle Street
Springboro, Crawford Co.
-- 105 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
Sykesville, Jefferson Co.
-- Main and Park Street
Titusville, Crawford Co.
-- Spring & Franklin Street
Valencia, Butler Co.
-- 1421 Pittsburgh Road
Volant, Lawrence Co.
-- Main Street
Warren (3), Warren Co.
-- Warren Mall
1666 Market Street Ext.
-- 125 Ludlow Street
-- 301 Second Avenue
Wattsburg, Erie Co.
-- 14457 Main Street
Weedville, Elk Co.
-- Rt. 555
Wrightsville, York Co.
-- 120 North 4th Street
York, York Co.
-- Queensgate Shopping Center
Jamestown (3) Chautauqua Co. NY
-- 311 East Fairmount Avenue
-- 23 West Third Street
-- 768 Foote Avenue
32
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is involved 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 Company's
results of operations.
The Bank and the Mutual Holding Company, along with unrelated parties,
were named as defendants in a class action lawsuit filed in the Allegheny County
Court of Common Pleas. The lawsuit was brought on behalf of purchasers of common
stock in the Bank's initial public offering in November 1994. The Complaint
alleges that the Bank breached its contractual obligations and fiduciary duties
by carrying out the offering at a price that allegedly was not justified by
market and financial conditions. The Bank previously obtained the dismissal of a
lawsuit brought by the same counsel in federal court making similar allegations
under federal law. 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 Company did not submit any matters to the vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS
-------
The "Market for Common Stock and Related Matters" and "Stockholder
Information" sections of the Company's annual report to stockholders for the
fiscal year ended June 30, 1998 (the "1998 Annual Report to Stockholders") are
incorporated herein by reference. No other sections of the 1998 Annual Report to
Stockholders are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The Selected Financial Data section of the 1998 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1998
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 1998 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1998
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 1998 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1998
Annual Report to Stockholders are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The material identified in Item 11(a)(1) hereof is incorporated herein
by reference.
33
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
The "Proposal I--Election of Directors" section of the Company's
definitive proxy statement for the Company's 1998 Annual Meeting of Stockholders
(the "1998 Proxy Statement") is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The "Proposal I--Election of Directors" section of the Company's 1998
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 Company's 1998
Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The "Transactions with Certain Related Persons" section of the
Company's 1998 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 1998 Annual Report to
Stockholders under the same captions, and are incorporated herein by reference.
No other sections of the 1998 Annual Report to Stockholders are incorporated
herein by reference.
(A) Independent Auditors' Report
(B) Consolidated Statements of Condition - at June 30,
1998 and 1997
(C) Consolidated Statements of Income - Years ended June
30, 1998, 1997 and 1996
(D) Consolidated Statements of Changes in Shareholders'
Equity - Years ended June 30, 1998, 1997 and 1996
(E) Consolidated Statements of Cash Flows - Years ended
June 30, 1998, 1997 and 1996
(F) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
-----------------------------
(b) Reports on Form 8-K
--------------------
34
<PAGE>
The Company has not filed a Current Report on Form 8-K during the
quarter ended June 30, 1998.
(c) Exhibits
--------
(a) (3) Exhibits:
- -----------------
<TABLE>
<CAPTION>
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
- ----------- -------------------------------------------- ---------------
<C> <S> <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 Nonqualified *
Supplemental Retirement Plan
10.4 Employee Stock Ownership Plan *
10.5 Employment Agreement between the Bank *
and John O. Hanna, President and Chief
Executive Officer
10.6 Employee Severance Compensation Plan *
11 Statement re: computation of per share None
earnings
12 Statement re: computation or ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying None
accountant
18 Letter re: change in accounting None
principles
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
- ----------- -------------------------------------------- ---------------
<C> <S> <C>
21 Subsidiaries of Registrant 21
22 Published report regarding matters None
submitted to vote of security holders
23 Consent of experts and counsel 23
24 Power of Attorney Not Required
28 Information from reports furnished to None
State insurance regulatory authorities
99 Additional exhibits None
</TABLE>
- ------------
* Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-31687), originally filed with the SEC on
July 21, 1997, as amended on October 9, 1997 and November 4, 1997.
36
<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
<TABLE>
<CAPTION>
<S> <C>
Date: September 25, 1998 By: /s/ John O. Hanna
-----------------
John O. Hanna, President and
Chief Executive Officer
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ John O. Hanna By: /s/ William J. Wagner
----------------- ---------------------
John O. Hanna, President William J. Wagner, Executive Vice President
Chief Executive Officer and Director and Director (Principal Financial/Accounting Officer
(Principal Executive Officer)
Date: September 25, 1998 Date: September 25, 1998
By: /s/ Richard L. Carr By: /s/ Richard E. McDowell
----------------- -----------------------
Richard L. Carr, Director Richard E. McDowell, Director
Date: September 25, 1998 Date: September 25, 1998
By: /s/ Thomas K. Creal, III By: /s/ Joseph T. Stadler
------------------------ ---------------------
Thomas K. Creal, III, Director Joseph T. Stadler, Director
Date: September 25, 1998 Date: September 25, 1998
By: /s/ John J. Doyle By: /s/ Walter J. Yahn
----------------- ------------------
John J. Doyle, Director Walter J. Yahn, Director
Date: September 25, 1998 Date: September 25, 1998
By: /s/ Robert G. Ferrier By: /s/ John S. Young
--------------------- -----------------
Robert G. Ferrier, Director John S. Young, Director
Date: September 25, 1998 Date: September 25, 1998
</TABLE>
<PAGE>
1998
ANNUAL REPORT
TO STOCKHOLDERS
[LOGO OF NORTHWEST APPEARS HERE]
NORTHWEST
BANCORP, INC.
<PAGE>
Selected Financial and Other Data
Set forth below are selected consolidated financial and other data of
Northwest Bancorp, Inc. (the "Company"), or, prior to February 17, 1998,
Northwest Savings Bank (the "Bank"). For additional information about the
Company, please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and related notes included elsewhere herein.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ----------- ----------- ------------
Selected Consolidated Financial Condition Data: (In Thousands)
<S> <C> <C> <C> <C> <C>
Total assets.................................................. $ 2,562,584 $ 2,091,363 $ 1,877,925 $ 1,591,894 $ 1,430,284
Interest-bearing deposits at other financial institutions..... 42,403 57,765 30,498 59,930 85,705
Investment securities held-to-maturity........................ 83,021 43,419 54,086 65,470 33,180
Investment securities available for sale...................... 121,192 78,684 51,961 1,414 --
Mortgage-backed securities held-to-maturity................... 110,241 110,561 101,932 204,841 199,165
Mortgage-backed securities available for sale................. 195,523 181,036 189,514 38,343 200
Loans receivable net:
Real estate................................................ 1,449,428 1,156,160 1,066,887 906,276 864,448
Consumer................................................... 348,096 306,228 249,051 202,630 179,765
Commercial................................................. 109,765 74,110 59,017 55,829 18,320
Total loans receivable, net.............................. 1,907,289 1,536,498 1,374,955 1,164,735 1,062,533
Deposits...................................................... 2,022,503 1,640,815 1,450,047 1,283,935 1,235,401
Advances from FHLB and other borrowed funds................... 289,706 223,458 211,761 103,439 71,203
Shareholders' equity and retained earnings.................... 217,879 198,494 190,651 178,690 (1) 102,319
<CAPTION>
- ------------------------------------
footnote below
Years Ended June 30,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ----------- ----------- ------------
Selected Consolidated Operating Data: (In Thousands)
<S> <C> <C> <C> <C> <C>
Total interest income......................................... $ 174,892 $ 153,518 $ 135,130 $ 118,158 $ 106,492
Total interest expense........................................ 95,203 81,424 68,637 58,126 51,256
------------ ----------- ----------- ----------- ------------
Net interest income........................................ 79,689 72,094 66,493 60,032 55,236
Provision for loan losses..................................... 4,072 2,491 1,502 1,098 1,728
------------ ----------- ----------- ----------- ------------
Net interest income after provision for loan losses........ 75,617 69,603 64,991 58,934 53,508
------------ ----------- ----------- ----------- ------------
Noninterest income............................................ 8,817 6,736 4,125 4,512 7,811
Noninterest expense........................................... 50,318 54,203 40,827 36,971 34,130
------------ ----------- ----------- ----------- ------------
Income before income tax expense and cumulative effect
of accounting change....................................... 34,116 22,136 28,289 26,475 27,189
Income tax expense............................................ 12,995 8,472 10,803 10,181 11,191
------------ ----------- ----------- ----------- ------------
Income before cumulative effect of accounting change.......... 21,121 13,664 17,486 16,294 15,998
Minority interest in net loss of subsidiary................... 201 -- -- -- --
Cumulative effect of change in accounting
for income taxes........................................... -- -- -- -- 2,070
------------ ----------- ----------- ----------- ------------
Net income............................................... $ 21,322 $ 13,664 $ 17,486 $ 16,294 $ 18,068
============ =========== =========== =========== ============
Basic earnings per share...................................... $ 0.46 $ 0.30 $ 0.38 $ 0.23 N/A
Diluted earnings per share.................................... $ 0.45 $ 0.30 $ 0.38 $ 0.23 N/A
</TABLE>
- ----------------------------------------------
(1) Reflects net proceeds of $67 million from the Bank's public offering which
was completed on November 4, 1994.
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended June 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ------
<S> <C> <C> <C> <C> <C>
Key Financial Ratios and Other Data:
Return on average assets (net income divided
by average total assets)(1)........................... 0.94% 0.70% 1.05% 1.09% 1.33%
Return on average equity (net income divided by
average equity)(1).................................... 10.29 7.12 9.48 11.00 19.25
Average capital to average assets........................ 9.14 9.84 11.03 9.87 6.93
Capital to total assets.................................. 8.50 9.49 10.15 11.22 7.15
Net interest rate spread (average yield on
interest-earning assets less average cost
of interest-bearing liabilities) ...................... 3.37 3.53 3.72 3.81 4.00
Net interest margin (net interest income as a
percentage of average interest-earning assets)........ 3.67 3.87 4.15 4.15 4.22
Noninterest expense to average assets ................... 2.22 2.78 2.44 2.46 2.52
Net interest income to noninterest expenses(1)........... 1.58x 1.33x 1.63x 1.62x 1.62x
Nonperforming loans to net loans receivable.............. 0.45 0.68 0.69 0.89 1.33
Nonperforming assets to total assets..................... 0.47 0.72 0.81 1.03 1.53
Allowance for loan losses to nonperforming loans......... 183.10 130.50 138.49 113.52 79.40
Allowance for loan losses to net loans receivable........ 0.83 0.89 0.95 1.02 1.06
Average interest-bearing assets to average
interest-bearing liabilities.......................... 1.07x 1.08x 1.10x 1.08x 1.06x
Number of:
Full-service offices.................................. 71 57 54 45 45
Consumer finance offices.............................. 34 30 29 28 26
Mortgage loan production offices...................... 5 7 8 8 6
</TABLE>
- -------------------------
(1) For the year ended June 30, 1997, return on average assets, return on
average equity, and net interest income to noninterest expense would have
been .96%, 9.80%, and 1.58x 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."
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Forward-Looking Statements
In addition to historical information, this document contains
forward-looking statements. The forward looking statements contained in the
following sections are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected in the
forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, those discussed. Readers should not place undue
reliance on these forward-looking statements, as they reflect management's
analysis as of the date of this report. The Company has no obligation to update
or revise these forward-looking statements to reflect events or circumstances
that occur after the date of this report. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission, including quarterly reports on Form
10-Q and current reports filed on Form 8-K.
Financial Condition
General. Total assets increased by $471.2 million, or 22.5%, to $2.563
billion at June 30, 1998 from $2.091 billion at June 30, 1997. This increase was
funded primarily by a $381.7 million increase in deposits, a $66.2 million
increase in borrowed funds and net income of $21.3 million. The Company's 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 additional funds received in both fiscal years
1998 and 1997 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 decreased by $15.4
million, or 26.6%, to $42.4 million at June 30, 1998 from $57.8 million at June
30, 1997 primarily as a result of the Company receiving a large governmental
deposit on the last day of the prior fiscal year which temporarily inflated the
ending balance at June 30, 1997. 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
aforementioned governmental deposit.
Investment securities. Investment securities increased by $82.1
million, or 67.2%, to $204.2 million at June 30, 1998 from $122.1 million at
June 30, 1997. 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. In
addition to receiving approximately $17.1 million from the acquisition of 64.3%
of Jamestown Savings Bank ("Jamestown") from Northwest Bancorp, M.H.C. on March
24, 1998, the Company continued to increase its portfolio of long-term municipal
securities and high-yielding debt obligations in an effort to improve net
interest income.
Mortgage-backed securities. Mortgage-backed securities increased by
$14.2 million, or 4.9%, to $305.8 million at June 30, 1998 from $291.6 million
at June 30, 1997. This increase resulted from the purchase of approximately
$62.4 million of mortgage-backed securities during the fiscal year which was
offset by the sale of approximately $28.0 million of mortgage-backed securities
and the accelerated receipt of principal payments due to an interest rate
environment that promoted the refinancing of mortgage loans. 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 from June 30, 1996 to June 30, 1997 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.
<PAGE>
Loans receivable. Net loans receivable increased by $370.8 million, or
24.1%, to $1.907 billion at June 30, 1998 from $1.536 billion at June 30, 1997.
This increase resulted primarily from strong loan demand in all of the Company's
market areas and was assisted in part by the receipt of $30.8 million of net
loans receivable from the Jamestown acquisition. 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 Company's market areas and was assisted in part by the
receipt of $20.0 of mortgage loans from the Bridgeville acquisition.
Deposits. Deposits increased by $381.7 million, or 23.3%, to $2.023
billion at June 30, 1998 from $1.641 billion at June 30, 1997. This increase
resulted primarily from the acquisition of ten branch offices located in
northwestern Pennsylvania with deposits of $166.1 million. In addition, the
acquisition of Jamestown accounted for approximately $54.3 million of the
increase in deposits. Normal deposit growth in existing offices as well as the
successful integration and growth of new offices accounted for the remaining
increase of $161.3 million. 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
increase in deposits was primarily the result of the Company's promotion of
certificates of deposit in an effort to increase market share. In addition, the
Bridgeville acquisition contributed deposits of $34.6 million.
Borrowings. Borrowings increased by $66.2 million, or 29.6%, to $289.7
million from $223.5 million at June 30, 1997. 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. In both years the Company 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. Shareholders' equity increased by $19.4 million,
or 9.8%, to $217.9 million at June 30, 1998 from $198.5 million at June 30,
1997. This increase was primarily due to net income of $21.3 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 Jamestown
acquisition, the release of earned shares of common stock by the Company's
employee stock benefit plans and an increase in the unrealized gain on
investment securities available for sale. Shareholders' 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 Company's employee stock benefit plans.
Results of Operations
General. The earnings of the Company depend primarily on its level of
net interest income, which is the difference between interest earned on the
Company's interest-earning assets, consisting primarily of loans,
mortgage-backed securities and other investment securities, and the interest
paid on interest-bearing liabilities, consisting primarily of deposits and
borrowed funds. Net interest income is a function of the Company's interest rate
spread, which is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as a function of the average balance of interest-earning
assets as compared to interest-bearing liabilities. The Company'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 $21.3 million, $13.7 million and $17.5
million for fiscal years ended June 30, 1998, 1997 and 1996, respectively. The
$7.6 million, or 55.5% increase in net income for the fiscal year ended June 30,
1998 as compared to the fiscal year ended June 30, 1997 resulted primarily from
a one-time special assessment of $8.6 million ($5.1 million, after tax) in the
prior year 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 increase in net income was a $7.6
million increase in net interest income and a $2.1 million increase in
noninterest income. Offsetting these increases in net income was a $1.6 million
increase in the provision for loan losses and a $4.7 million increase in
noninterest expense, excluding the effect of the prior year SAIF assessment. The
<PAGE>
$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 the special SAIF assessment mentioned above. Also contributing to the
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.
Interest Income. Interest income increased by $21.4 million, or 13.9%,
to $174.9 million for the fiscal year ended June 30, 1998 from $153.5 million
for the fiscal year ended June 30, 1997. The increase in interest income was
primarily attributable to a $307.2 million, or 16.5%, increase in the balance of
average interest-earning assets to $2.170 billion from $1.863 billion. Partially
offsetting this increase was a decrease in the yield on average interest-earning
assets to 8.06% from 8.24%. The increase in the balance of average
interest-earning assets was primarily the result of growth in the Company's loan
portfolio due to strong loan demand and the Company's attempt to deploy funds
received from deposit growth. The decrease in the yield on average
interest-earning assets is reflective of market interest rates generally being
lower.
Interest income on loans receivable increased by $17.4 million, or
13.7%, to $144.4 million for the year ended June 30, 1998 from $127.0 million
for the year ended June 30, 1997. This increase primarily resulted from a $223.8
million, or 15.4%, increase in average loans receivable to $1.674 billion for
the year ended June 30, 1998 compared to $1.450 billion for the year ended June
30, 1997. Partially offsetting this increase was a decrease in the yield on
average loans receivable to 8.63% from 8.76%. The increase in average loans
receivable primarily resulted from strong loan demand throughout the Company's
market areas and the acquisition of Jamestown which contributed net loans of
approximately $30.8 million. The decrease in the yield on average loans
receivable for the fiscal year ended June 30, 1998 compared to the fiscal year
ended June 30, 1997 was primarily a result of mortgage loan prepayments, the
proceeds from which were used to fund additional loans at lower rates of
interest.
Interest income on mortgage-backed securities increased by $406,000, or
2.1%, to $19.5 million for the year ended June 30, 1998 from $19.1 million for
the year ended June 30, 1997. This increase resulted primarily from a $23.4
million, or 8.4%, increase in the average balance of mortgage-backed securities
to $302.2 million for the year ended June 30, 1998 from $278.8 million for the
year ended June 30, 1997. Partially offsetting this increase in average balance
was a decrease in the average yield to 6.47% from 6.87%. The average balance
increased primarily because of the purchase of mortgage-backed securities during
the fiscal year, utilizing funds received from the aforementioned branch
acquisitions. In addition, the Jamestown acquisition contributed approximately
$5.4 million of mortgage-backed securities. The average yield on mortgage-backed
securities declined as a result of a large percentage of the portfolio having
variable interest rates which repriced at lower market rates.
Interest income on investment securities increased by $3.4 million, or
49.3%, to $10.3 million for the year ended June 30, 1998 from $6.9 million for
the year ended June 30, 1997. This increase resulted primarily from a $55.0
million, or 51.4%, increase in the average balance of investment securities to
$161.9 million for the year ended June 30, 1998 from $106.9 million for the year
ended June 30, 1997. Partially offsetting the increase in average balance was a
decrease in the average yield to 6.37% from 6.48%. The increase in average
balance was primarily due to the investment of the proceeds received from the
aforementioned branch acquisitions as well as approximately $17.1 million from
the addition of Jamestown's investment portfolio. The decrease in the average
yield was primarily the result of lower nominal interest received on tax exempt
securities, as the Company purchased approximately $30 million of such
securities during the fiscal year. Partially offsetting the lower yields
received from the tax exempt obligations was the higher yields received from the
purchase of approximately $30 million of fixed-rate trust preferred securities.
Interest income on interest-earning deposits increased by $242,000, or
55.9%, to $675,000 for the year ended June 30, 1998 from $433,000 for the year
ended June 30, 1997. This increase resulted primarily from an increase in the
average yield to 2.10% from 1.60%. In addition, the average balance of
interest-earning deposits increased by $5.0 million, or 18.5%, to $32.1 million
for the year ended June 30, 1998 from $27.1 million for the year ended June 30,
<PAGE>
1997. The increase in average yield and average balance is principally the
result of the timing as to when the Company is credited for these deposits and
the period in which they begin to earn interest.
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 Company's loan portfolio due primarily to the
Company'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
Company'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 Company'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
Company 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 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 Company's
deposits begin to earn interest.
Interest Expense. Interest expenses increased by $13.8 million, or
17.0%, to $95.2 million for the year ended June 30, 1998 from $81.4 million for
the year ended June 30, 1997. This increase resulted primarily from a $300.8
million, or 17.4%, increase in average balance of interest-bearing liabilities
to $2.028 billion for the year ended June 30, 1998 from $1.727 billion for the
year ended June 30, 1997. Partially offsetting the increase in deposit balance
was
<PAGE>
a decrease in the average cost of funds to 4.69% from 4.71%. The increase in
average interest-bearing labilities resulted primarily form the increase in
deposits from the aforementioned branch acquisitions with deposits of $166.1
million and the acquisition of Jamestown with deposits of $54.3 million. In
addition, above average internal growth and new office openings accounted for
the remaining increase in deposits. Also contributing to the increase in
interest expense was a $26.5 million, or 15.8%, increase in average borrowed
funds to $194.3 million at June 30, 1998 from $167.8 million at June 30, 1997.
Borrowings increased in order to fund growing loan demand and to fund the
purchase of marketable securities in order to enhance the Company's net interest
income. The decrease in the average cost of funds was primarily the result of
lower market rates on deposit accounts and borrowed funds.
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 Company's portfolio of
loans and marketable securities in an effort to increase the Company's net
interest income.
Net Interest Income. Net interest income increased by $7.6 million, or
10.5%, to $79.7 million for the year ended June 30, 1998 from $72.1 million for
the year ended June 30, 1997. This increase resulted primarily from a $307.2
million, or 16.5%, increase in average interest-earning assets, the effect of
which was partially offset by a $300.8 million, or 17.4%, increase in average
interest-bearing liabilities and a decrease in the Company's net interest spread
to 3.37% for the year ended June 30, 1998 from 3.53% for the year ended June 30,
1997.
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 Company's net interest spread to 3.53% for the year ended June
30, 1997 from 3.72% for the year ended June 30, 1996.
Provision for Loan Losses. The Company establishes general valuation
allowances, which represent possible, but not yet identified losses inherent in
the Company's loan portfolio. In providing such allowances, management of the
Company considers, among other factors, economic trends within its market area,
concentrations of credit risk and trends affecting the valuation of collateral
for the Company's loans. The Company provided $4.1 million, $2.5 million and
$1.5 million in loan loss provisions for the fiscal years ended June 30, 1998,
1997 and 1996 with the annual increases resulting from the significant increase
in the Company's loan portfolio over the past two fiscal years.
The allowance for loan losses is based on management's estimate of the
fair value of collateral, the Company's actual loss experience, as well as
standards applied by the State Department of Banking and the FDIC in their
regulatory examinations of the Company. The Company 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 Company's regulatory capital for purposes of computing the Company's
regulatory risk-based capital. The Company 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 $2.1 million, or
31.3%, to $8.8 million for the year ended June 30, 1998 from $6.7 million for
the year ended June 30, 1997. This increase resulted primarily from a gain of
$1.5
<PAGE>
million, before income tax, from the sale of long-term, fixed-rate
mortgage-backed securities in anticipation of these securities being prepaid in
a falling interest rate environment and a nonrecurring gain of $339,000, before
income tax, from the sale of other property held for investment. In addition,
fee income increased approximately $1.0 million, or 42.4%, primarily as a result
of the introduction of a debit card program with related transaction fee income.
Partially offsetting these increases in noninterest income was a $332,000
decrease in the gain on sale of real estate owned.
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 Company'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 Company's improved efficiencies in its mortgage banking
operation. All other components of the Company's noninterest income also
improved primarily as a result of the expansion of the Company's business
activities.
Noninterest Expense. Excluding the one-time assessment of $8.6 million
in the prior year to recapitalize the SAIF, noninterest expense increased by
$4.7 million, or 10.3%, to $50.3 million for the year ended June 30, 1998 from
$45.6 million for the year ended June 30, 1997. This increase was primarily
attributable to increases in compensation and benefits of $2.3 million, or 8.8%,
primarily as a result of adding employees to support the Company's growth. Also
contributing to the increase in compensation expense was an increase in employee
stock ownership plan ("ESOP") expense resulting from the significant increase in
the average market price of the Company's stock. Other increases related to
inflation and growth were experienced in premises and occupancy costs which
increased $694,000, or 13.4%, check processing expense which increased $483,000,
or 31.3% and other (miscellaneous) operating expenses which increased $1.1
million, or 14.7%. Data processing expense increased $498,000, or 43.9%, which
was primarily attributable to the purchase of new core application hardware and
software with the conversion scheduled for November 1998. In addition,
amortization of intangibles expense increased $427,000, or 30.9%, due to the
aforementioned current year acquisitions. Partially offsetting these increases
in noninterest expense were decreases in federal deposit insurance expense of
$529,000, or 40.6%, due to a decrease in premiums as a result of the SAIF
recapitalization and a decrease in advertising expense of $323,000, or 20.1%, as
the prior year expense included higher advertising costs related to the
Company's centennial anniversary celebration.
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. 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 Company's retail network
and from inflationary increases. Amortization of intangibles expense increased
by $821,000 due to the acquisitions of First Federal Savings Bank of Kane
("Kane"), First National Bank of Centre Hall ("Centre Hall") and Bridgeville. In
addition, a one-time charge of $350,000 was recorded to write-off an intangible
expense relating to the restructuring of the Company'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.
Income Taxes. Income tax expense increased by $4.5 million, or 52.9% to
$13.0 million for the year ended June 30, 1998 from $8.5 million for the year
ended June 30, 1997. This increase was a direct result of the increase in income
subject to tax, as the effective tax rate remained constant at approximately
38%.
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.
<PAGE>
Deposit Insurance Premiums. The deposits of the Company 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
Company, the assessment amounted to $8.6 million (or $5.1 million when adjusted
for taxes), based on the Company'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 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 are now paid jointly by BIF-insured institutions and SAIF-insured
institutions. The FICO assessment is 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.
<PAGE>
Average Balance Sheet. The following table sets forth certain
information relating to the Company's average balance sheet and reflects the
average yield on assets and average cost of liabilities for the periods
indicated 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
1998 1997 1996
-------------------------------- ------------------------------- -------------------------------
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(1)(2).......... $1,673,599 144,354 8.63% $1,449,807 127,019 8.76% $1,243,758 $ 111,957 9.00%
Mortgage-backed securities
(3)(4)......................... 302,220 19,547 6.47 278,801 19,141 6.87 259,090 17,342 6.69
Investment securities(2)(3)(4)
(5)............................ 161,860 10,316 6.37 106,945 6,925 6.48 75,911 5,089 6.70
Interest-earning deposits....... 32,091 675 2.10 27,064 433 1.60 25,220 742 2.94
---------- ---------- ---------- --------- ---- ---------- ---------- ----
Total interest-earning assets. 2,169,770 174,892 8.06 1,862,617 153,518 8.24 1,603,979 135,130 8.42
Noninterest-earning assets....... 96,666 87,740 69,150
---------- ---------- ----------
Total assets................ $2,266,436 $1,950,357 $1,673,129
========== ========== ==========
Interest-bearing liabilities:
Passbook and statement savings.. $ 302,281 10,201 3.37 $ 276,659 9,490 3.43 $ 277,339 9,322 3.36
Checking accounts............... 264,086 4,469 1.69 207,140 3,992 1.93 170,514 3,396 1.99
Money market demand accounts..... 96,558 3,395 3.52 81,902 2,735 3.34 78,024 2,595 3.33
Certificate accounts............. 1,171,009 66,981 5.72 994,028 56,410 5.67 805,558 46,348 5.75
FHLB advances and other
borrowed money(6)............... 194,282 10,157 5.23 167,761 8,797 5.24 130,337 6,976 5.35
---------- ---------- ---------- --------- ---- ---------- ----------
Total interest-bearing
liabilities............... 2,028,316 95,203 4.69 1,727,490 81,424 4.71 1,461,772 68,637 4.70
Noninterest-bearing liabilities.. 30,314 31,046 26,826
---------- ---------- ----------
Total liabilities............. 2,058,630 1,758,536 1,488,598
Minority interest in subsidiary.. 623 -- --
Retained income.................. 207,183 191,821 184,531
---------- ---------- ----------
Total liabilities and
retained income............. $2,266,436 $1,950,357 $1,673,129
========== ========== ==========
Net interest income.............. $ 79,689 $ 72,094 $ 66,493
========== ========= =========
Net interest rate spread (7)..... 3.37% 3.53% 3.72%
==== ==== ====
Net interest earning assets...... $ 141,454 $ 135,127 $ 142,207
========== ========== ==========
Net interest margin (8).......... 3.67% 3.87% 4.15%
==== ==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities.... 1.07x 1.08x 1.10x
========== ========== ==========
</TABLE>
- -----------------------------------------
(1) Average loans receivable includes loans held as available for sale and loans
placed on nonaccrual status. (2) Interest income on tax-free loans and
investment securities is not presented on a taxable equivalent basis. (3)
Average balances include the effect of unrealized gains or losses on securities
held as available for sale. (4) Interest income on marketable securities does
not include market value adjustments for securities available for sale.
(5) Average balances include FNMA and FHLMC stock.
(6) Average balances include FHLB advances, securities sold under agreements to
repurchase and other borrowings.
(7) Net interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing liabilities.
(8) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
<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 Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to (i) changes attributable to changes in volume (change
in volume multiplied by prior rate), (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume), (iii) changes in rate-volume
(changes in rate multiplied by changes in volume), and (iv) the net change.
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------------------ ----------------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Due to
---------------------------------- Total ------------------------------ Total
Rate/ Increase Rate/ Increase
Rate Volume Volume (Decrease) Rate Volume Volume (Decrease)
----- ------- -------- ----------- ----- ------- -------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable....................... $(1,986) $19,607 $ (304) $17,335 $(2,990) $18,548 $ (495) $15,062
Mortgage-backed securities............. (1,109) 1,608 (93) 406 446 1,319 34 1,799
Investment securities.................. (109) 3,556 (56) 3,391 (174) 2,080 (71) 1,836
Interest-earning deposits.............. 136 80 26 242 (339) 54 (25) (309)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets........ (3,050) 24,851 (427) 21,374 (3,056) 22,002 (557) 18,388
Interest-bearing liabilities:
Passbook and statement savings......... (157) 882 (14) 711 191 (23) -- 168
Checking accounts...................... (487) 1,097 (133) 477 (110) 729 (24) 596
Money market demand accounts........... 145 489 26 660 10 129 1 140
Certificate accounts................... 448 10,043 80 10,571 (663) 10,844 (148) 10,062
FHLB advances and other
borrowed money........................ (27) 1,391 (4) 1,360 (141) 2,003 (41) 1,821
------- ------- -------- ------- ------- ------- ------- -------
Total interest-bearing liabilities... (78) 13,902 (45) 13,779 (683) 13,682 (212) 12,787
-------
Net change in net interest income.... $(2,972) $10,949 $ (382) $ 7,595 $(2,374) $ 8,319 $ (345) $ 5,601
======= ======= ======== ======= ======= ======= ======= =======
</TABLE>
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 Company's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities of its interest
rate sensitive assets and liabilities and by increasing the interest rate
sensitivity of its interest-earning assets. The Company (i) emphasizes the
origination of short-term, fixed-rate consumer loans, and at June 30, 1998, such
loans constituted $259.3 million, or 13.20%, of the Company's total loan
portfolio; (ii) emphasizes the origination of one- to four-family residential
mortgage loans with terms of 15 years or less, and purchases shorter term or
adjustable-rate investment securities and mortgage-backed securities; and (iii)
originates adjustable-rate mortgage loans, adjustable-rate consumer loans, and
adjustable-rate commercial loans, which at June 30, 1998, totalled $170.6
million or 8.64% of the Company's total loan portfolio. Of the Company's $2.562
billion of interest-earning assets at June 30, 1998, $503.1 million, or 19.91%,
consisted of assets with adjustable-rates of interest.
<PAGE>
However, because of the general reduction in the level of market interest rates
the origination of adjustable-rate loans was limited during the fiscal year
ended June 30, 1998. The Company also attempts to reduce interest rate risk by
lengthening the maturities of its interest-bearing liabilities by using FHLB
advances as a source of long-term fixed-rate funds, and by promoting longer term
certificates of deposit.
At June 30, 1998, total interest-bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $288.4 million, representing a cumulative
negative one-year gap ratio of`11.25%. The Company has a Risk Management
Committee comprised of certain members of the Board of Directors which is
responsible for reviewing the Company's asset and liability management policies.
The Committee meets quarterly and, as part of their risk management assessment,
reviews interest rate risks and trends, the Company's interest sensitivity
position and the liquidity and market value of the Company's investment
portfolio.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1998, which are
expected to reprice or mature, based upon certain assumptions, in each of the
future time periods shown. Except as stated below, the amounts of assets and
liabilities shown that reprice or mature during a particular period were
determined in accordance with the earlier of the term of repricing or the
contractual term of the asset or liability. Management believes that these
assumptions approximate the standards used in the savings industry and considers
them appropriate and reasonable. For information regarding the contractual
maturities of the Company's loans, investments and deposits, see "Business of
the Company--Lending Activities," "--Investment Activities" and "--Sources of
Funds."
<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.......... $ 42,403 $ -- $ -- $ -- $ -- $ -- $ 42,403
Mortgage-backed securities:
Fixed............................. 3,916 7,832 3,919 -- -- -- 15,667
Variable.......................... 290,097 -- -- -- -- -- 290,097
Investment securities.............. 14,665 81,553 13,600 47,198 47,197 -- 204,213
Real estate loans:
Adjustable-rate................... 47,975 7,518 -- -- -- -- 55,493
Fixed-rate........................ 213,158 345,967 2 48,990 374,881 172,719 86,359 1,442,074
Home equity and home improvement... 33,963 -- -- -- -- -- 33,963
Education loans.................... 59,791 -- -- -- -- -- 59,791
Other consumer loans............... 115,914 107,245 36,182 -- -- -- 259,341
Commercial loans................... 59,985 23,404 12,785 22,004 5,010 -- 123,188
---------- --------- -------- -------- -------- --------- ----------
Total rate-sensitive assets...... $ 881,867 $ 573,519 $315,476 $444,083 $224,926 $ 86,359 $2,526,230
========== ========= ======== ======== ======== ========= ==========
Rate-sensitive liabilities:
Fixed maturity deposits............ $ 771,665 $ 404,175 $ 47,842 $ 28,182 $ 320 $ -- $1,252,184
Money market deposit accounts...... 38,062 38,062 38,063 -- -- -- 114,187
Passbook accounts.................. 130,000 70,125 70,125 70,127 -- -- 340,377
Checking accounts.................. 26,000 -- -- -- -- 295,755 315,755
FHLB advances...................... 153,000 10,000 17,200 50,150 1,811 -- 232,161
Other borrowings................... 57,545 -- -- -- -- -- 57,545
---------- --------- -------- -------- -------- --------- ----------
Total rate-sensitive liabilities. $1,170,272 $ 522,362 $173,230 $148,459 $ 2,131 $ 295,755 $2,312,209
========== ========= ======== ======== ======== ========= ==========
Interest sensitivity gap per period. $ (288,405) $ 51,157 $142,246 $295,624 $222,795 $(209,396) $ 214,021
========== ========= ======== ======== ======== ========= ==========
Cumulative interest sensitivity gap. $ (288,405) $(237,248) $(95,002) $200,622 $423,417 $ 214,021 $ 214,021
========== ========= ======== ======== ======== ========= ==========
Cumulative interest sensitivity
gap as a percentage of total
assets............................ (11.25%) (9.26%) (3.71%) 7.83% 16.53% 8.36% 8.36%
Cumulative interest-earning assets
as a percent of cumulative
interest-bearing liabilities....... 75.36% 85.98% 94.91% 109.96% 121.00% 109.26% 109.26%
</TABLE>
In preparing the table above, it has been assumed, in assessing the
interest rate sensitivity of the Company that: (i) adjustable-rate mortgage
loans will prepay at an annual rate of 10.0%; (ii) fixed-rate mortgage loans
will prepay at
<PAGE>
an annual rate of 20.0%; (iii) commercial loans will prepay at an annual rate of
10.0%; (iv) consumer loans will prepay at an annual rate of 20.0%; (v) fixed
maturity deposits will not be withdrawn prior to maturity; (vi) money market
accounts will gradually reprice over the next five years; and (vii) 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 $26 million of
the Company's checking accounts and $130 million of the Company'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 Company.
Moreover, certain shortcomings are inherent in the analysis presented by the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, interest rates on certain types of
assets and liabilities may fluctuate in advance of or lag behind changes in
market interest rates. Additionally, certain assets, such as some
adjustable-rate loans, have features that restrict changes in interest rates on
a short-term basis and over the life of the asset. Moreover, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table.
In an effort to assess the market risk, the Company utilizes a
simulation model to determine the effect of immediate incremental increases or
decreases in interest rates on net interest income and the market value of the
Company's equity. Certain assumptions are made regarding loan prepayments and
decay rates of passbook and NOW accounts. Because it is difficult to accurately
project the market reaction of depositors and borrowers, the effects of actual
changes in interest on these assumptions may differ from simulated results.
The Company has established the following guidelines for assuming
interest rate risk:
. Net 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 Company's equity is the net present value of
the Company's assets and liabilities. Given a
parallel shift of 2% in interest rates, equity may
not decrease by more than 50% of total shareholder'
equity.
The following table illustrates the simulated impact of a 1% or 2%
upward or downward movement in interest rates on net 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, 1998 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, 1998 levels.
<PAGE>
<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, 1998:...................... 1% 2% 1% 2%
Percentage increase/(decrease) in net income......... (12.90%) (18.70%) (3.87%) --
Increase/(decrease) in return on average equity...... (1.24%) (1.80%) (0.37%) --
Increase/(decrease) in earnings per share............ ($0.06) ($0.09) ($0.02) --
Percentage increase/(decrease) in market value
of equity........................................... (16.22%) (37.24%) 17.32% 20.95%
</TABLE>
Regulatory Capital Requirements. The Company is subject to minimum
capital standards which are similar to those applicable to the Bank. The FDIC
has promulgated regulations and adopted a statement of policy regarding the
capital adequacy of state-chartered banks. The FDIC's capital regulations
establish a minimum 3.0% Tier I leverage capital requirement for the most
highly-rated state-chartered, non-member banks, with an additional cushion of at
least 100 to 200 basis points for all other state-chartered, non-member banks,
which effectively will increase the minimum Tier I leverage ratio for such other
banks to 4.0% to 5.0% or more. Under the FDIC's regulation, highest-rated banks
are those that the FDIC determines are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest
rate risk exposure, excellent asset quality, high liquidity, good earnings and,
in general, which are considered a strong banking organization, rated composite
1 under the Uniform Financial Institutions Rating System. Leverage or core
capital is defined as the sum of common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, and
minority interests in consolidated subsidiaries, minus all intangible assets
other than certain qualifying supervisory goodwill, and certain purchased
mortgage servicing rights and purchased credit card relationships.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital which is defined as Tier I capital and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.
The components of Tier I capital are equivalent to those discussed
above under the 3% leverage standard. The components of supplementary (Tier 2)
capital include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk- weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At June 30, 1998, the
Company 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 provides, among other
<PAGE>
things, for the issuance by the FDIC or its designee(s) of a capital directive,
which is a final order issued to a bank that fails to maintain minimum capital
to restore its capital to the minimum leverage capital requirement within a
specified time period. Such directive is enforceable in the same manner as a
final cease-and-desist order.
The following table summarizes the Company's total stockholders'
equity, regulatory capital, total risk-based assets including off-balance sheet
items, leverage and risk-based regulatory ratios at June 30, 1998.
<TABLE>
<CAPTION>
June 30, 1998
---------------
<S> <C>
Total shareholders' equity or GAAP capital.................. $ 217,879
Add: Minority interest in subsidiary........................ 1,913
Less: unrealized gain on securities available for sale...... (3,371)
Less: nonqualifying intangible assets....................... (21,707)
Leverage capital............................................ 194,714
Plus: Tier 2 capital (1).................................... 15,769
------------
Total risk-based capital.................................... $ 210,483
============
Quarterly average total assets for leverage ratio........... $ 2,488,554
============
Net risk-weighted assets including
off-balance sheet items................................... $ 1,355,866
============
Leverage capital ratio...................................... 7.82%
Minimum requirement......................................... 3.00 to 5.00% (2)
Risk-based capital ratio.................................... 15.52%
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, 1998, the Company had
not been advised of any additional requirements in this
regard.
The Company 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 Company 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 Company, to be eligible for liquidity. The
Company'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
Company's liquidity ratio was 23.0% as of June 30, 1998. The Company adjusts its
liquidity levels in order to meet funding needs of deposit outflows, repayment
of borrowings and loan commitments. The Company also adjusts liquidity as
appropriate to meet its asset and liability management objectives.
The Company's primary sources of funds are the amortization and
repayment of loans and mortgage-backed securities, maturities of investment
securities and other short-term investments, and earnings and funds provided
from
<PAGE>
operations. While scheduled principal repayments on loans and mortgage-backed
securities are a relatively predictable source of funds, deposit flows and loan
prepayments are greatly influenced by general interest rate levels, economic
conditions, and competition. The Company manages the pricing of its deposits to
maintain a desired deposit balance. In addition, the Company invests excess
funds in short-term interest-earning and other assets, which provide liquidity
to meet lending requirements. Short-term interest-earning deposits with the FHLB
of Pittsburgh amounted to $42.4 million at June 30, 1998. Other assets
qualifying for liquidity outstanding at June 30, 1998, amounted to $478.2
million. For additional information about cash flows from the Company's
operating, financing, and investing activities, see Statements of Cash Flows
included in the Consolidated Financial Statements.
A major portion of the Company's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash were net income, principal repayments on
loans and mortgage-backed securities, and increases in deposit accounts.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, borrowing agreements exist with the FHLB which provide an additional
source of funds. At June 30, 1998, the Company had $232.2 million in advances
from the FHLB. The Company borrows from the FHLB to reduce interest rate risk
and to provide liquidity when necessary.
At June 30, 1998, the Company's customers had $66.5 million of unused
lines of credit available. This amount does not include the unfunded portion of
loans in process. Certificates of deposit scheduled to mature in less than one
year at June 30, 1998, totaled $771.7 million. Based on prior experience,
management believes that a significant portion of such deposits will remain with
the Company.
The major sources of the Company's cash flows are the areas of loans,
marketable securities, deposits and borrowed funds.
Deposits are the Company's primary source of externally generated
funds. The level of deposit inflows during any given period is heavily
influenced by factors outside of management's control, such as the general level
of short-term and long-term interest rates in the economy, as well as higher
alternative yields that investors may obtain on competing investments such as
money market mutual funds. Financial institutions, such as the Company, are also
subject to deposit outflows. The Company's net deposits excluding interest
credits and acquisitions, increased by $97.0 million, $103.5 million and $26.1
million for the fiscal years ended June 30, 1998, 1997 and 1996, 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, 1998, 1997 and 1996 were $425.3 million, $371.3
million and $316.6 million, respectively. Loan originations for the years ended
June 30, 1998, 1997 and 1996 were $802.1 million, $563.2 million and $564.4
million, respectively. The Company also sells a portion of the loans it
originates and the cash flows from such sales for the fiscal years ended June
30, 1998, 1997 and 1996 were $30.1 million, $47.9 million and $99.1 million,
respectively.
The Company also experiences significant cash flows from its portfolio
of marketable securities as principal payments are received on mortgage-backed
securities and investment securities, which generally are of short duration,
mature. During recent years, the Company 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,
1998, 1997 and 1996 were $59.6 million, $27.0 million and $26.5 million ,
respectively. During the fiscal years ended June 30, 1998, 1997 and 1996, the
bank utilized cash to purchase marketable securities in the amount of $167.4
million, $30.0 million and $99.2 million, respectively.
The Company utilizes borrowings as a source of liquidity, when
necessary, and as a source of funds for long term investment when market
conditions permit. The net cash flow from the receipt and repayment of
borrowings were
<PAGE>
net increases of $66.2 million, $6.6 million and $105.2 million for the fiscal
years ended June 30, 1998, 1997 and 1996, respectively.
Other activity with respect to cash flow was the payment of cash
dividends on common stock in the amount of $7.5 million, $7.5 million and $9.0
million for the fiscal years ended June 30 1998, 1997 and 1996 respectively.
Impact of Inflation and Changing Prices. The Consolidated Financial
Statements of the Company and notes thereto, presented elsewhere herein, have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time and due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Capability of the Company's Data Processing to Accommodate the Year
2000. The Company has devoted substantial resources to address the possible
impact of issues relating to the year 2000 ("Year 2000") on the Company and its
operations. After several years of assessing the potential problems, the Company
adopted a formal plan addressing the Year 2000 issue in 1997.
The Company's biggest area of concern is its core application
processing and the Company plans to eliminate this concern by converting to a
new core application processing system in the fourth quarter of 1998. Although
the system's Year 2000 capabilities have already been tested by other users,
on-site testing of the computer system's Year 2000 readiness as well as all
mission critical processes are expected to be completed by the Company by June
30, 1999. The approximate cost of this conversion is $2,000,000, which will be
capitalized and expensed over various periods ranging from five to ten years.
Other than the core application conversion, costs relating to Year 2000
issues are not expected to be material and are not expected to have a material
effect on the results of operations of the Company.
The Company is continuously monitoring relationships with material
third parties, including large deposit and loan customers, to ensure that their
Year 2000 efforts are progressing appropriately. However, it is possible that
the Company could be negatively impacted in the Year 2000 because external
parties have not successfully addressed their Year 2000 issues. Although the
effects of such third party problems are not known, the Company does not foresee
any problems which will be material in nature. To mitigate its exposure to the
failure of third parties, the Company is actively designing a contingency plan
which will allow it to continue services in the event unforeseeable external
factors disrupt normal operations in the Year 2000. However, there can be no
assurance that any contingency plans will completely mitigate the effects of any
such failure.
Impact of New Accounting Standards. In October 1995, the FASB released
SFAS 123, "Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123
establishes a fair value based method for stock-based compensation plans. SFAS
123 permits entities to expense an estimated fair value of employee stock
options or to continue to measure compensation cost for these plans using the
intrinsic value accounting method contained in APB Opinion No. 25. Entities that
elect to continue to use the intrinsic value method must provide pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting had been applied. For fiscal years 1998, 1997 and 1996 the Company
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" ("SFAS 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
<PAGE>
from transfers that are secured borrowings. Under SFAS 125, an entity recognizes
all financial and servicing assets it controls and liabilities it has incurred
and does not recognize financial assets it no longer controls and liabilities
that have been extinguished. This financial-components approach focuses on the
assets and liabilities that exist after the transfer. SFAS 125 also extends the
"available-for-sale" or "trading" approach in SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," to non-security financial assets
that can contractually be prepaid or otherwise settled in such a way that the
holder of the asset would not recover substantially all of its recorded
investment. Thus, non-security financial assets that are subject to prepayment
risk that could prevent recovery of substantially all of the recorded amount are
to be reported at fair value with the change in fair value 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 Company.
Effective December 31, 1997, the Company adopted SFAS 128 "Earnings Per
Share" ("SFAS 128"). SFAS 128 supercedes APB Opinion No. 15 "Earnings Per Share"
and specifies the computation, presentation and disclosure requirements for
earnings per share (EPS) 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 diluted
EPS presentation. It also requires dual presentation of basic and diluted EPS on
the face of the income statement for all entities with a complex capital
structure and requires a reconciliation of the components of basic and diluted
EPS. Basic EPS excludes common stock equivalents and dilution and is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the company. SFAS 128 also
required restatement of all prior period EPS data presented.
In February 1997, the FASB released SFAS 129 "Disclosure of Information
about Capital Structure" ("SFAS 129") effective for financial statements for
periods ending after December 15, 1997. SFAS 129 summarizes previously issued
disclosure guidance contained within APB Opinion Nos. 10 and 15 as well as SFAS
47, and, as such, there were no material changes to the Company's disclosures
pursuant to the adoption of SFAS 129.
In June 1997, the FASB released SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), 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 Company's income under the requirements of SFAS 130.
This statement is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB released SFAS 131 "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for reporting financial information from operating segments in annual
and interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS 131 uses a "management approach" concept as the basis for identifying
reportable segments which focuses on financial information as used internally by
an enterprise's decision makers. This statement is effective for periods
beginning after December 15, 1997 and will not have a material impact on the
consolidated financial statements of the Company.
<PAGE>
In February 1998, the FASB released SFAS 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits, an amendment of FASB
Statements No. 87, 88, and 106" ("SFAS 132"). SFAS 132 standardizes disclosure
requirements for pensions and postretirement benefits where applicable and
suggests a combined format for presentation purposes, requires additional
information on changes in the benefit obligations and fair values of plan
assets, and eliminates certain disclosures that are no longer useful. This
statement, however, does not change the measurement or recognition requirements
of pension or postretirement benefit plans. SFAS 132 is effective for fiscal
years beginning after December 15, 1997 and requires restatement of earlier
periods if the information is readily available. The impact of this statement is
not expected to have a material effect on the Company's financial statements.
In June 1998, the FASB released SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Earlier
application is encouraged, however, this statement should not be applied
retroactively to financial statements of prior periods. The Company does not
currently participate in any activity that qualifies as derivative or hedging
and, therefore, does not expect this statement to have a material effect on the
financial statements.
MARKET FOR COMMON STOCK AND RELATED MATTERS
The Company's common stock is listed on the Nasdaq National Market
under the symbol "NWSB." As of June 30, 1998, the Company had 16 registered
market makers, 4,468 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
46,840,970 shares outstanding. As of such date, Northwest Bancorp, M.H.C. (the
"Mutual Holding Company"), the Company's mutual holding company, held 32,400,000
shares of common stock and stockholders other than the Mutual Holding Company
held 14,440,970 shares. The following table sets forth market price and dividend
information for the common stock or, prior to the completion of the Bank's
reorganization into the two-tier mutual holding company structure, which was
completed on February 17, 1998, the Bank's common stock. Information is
presented for each quarter of the previous two fiscal years, adjusted for the 2
for 1 stock split completed on November 14, 1997.
<TABLE>
<CAPTION>
Fiscal Year Ended Cash Dividends
June 30, 1997 High Low Declared
------------------ ------------- ------------- ----------
<S> <C> <C> <C>
First quarter $ 6.125 $ 5.375 $ .040
Second quarter 6.875 5.938 .040
Third quarter 7.875 6.563 .040
Fourth quarter 7.875 7.125 .040
<CAPTION>
Fiscal Year Ended Cash Dividends
June 30, 1998 High Low Declared
------------------ ------------- ------------- ----------
<S> <C> <C> <C>
First quarter 13.125 7.813 .040
Second quarter 16.375 13.625 .040
Third quarter 17.188 13.000 .040
Fourth quarter 18.000 14.875 .040
</TABLE>
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
<PAGE>
payment of dividends, the Company's results of operations and financial
condition, tax considerations and general economic conditions. No assurance can
be given that dividends will be declared or, if declared, what the amount of
dividends will be, or whether such dividends, once declared, will continue.
Although mutual holding companies frequently waive dividends declared
by their majority-owned savings institution subsidiaries, the Holding Company
has not waived dividends paid by the Company. The Holding Company has made
certain commitments to the Federal Reserve Board ("FRB") that restrict its
ability to waive dividends and that require it to obtain prior FRB approval of
any waiver of dividends.
There can be no assurance (i) that in the future the Mutual Holding
Company will file applications to the FRB requesting approval to waive dividends
paid by the Company, (ii) that the FRB will approve any dividend waiver
application by the Mutual 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 Mutual Holding Company will waive dividends paid by the Company.
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Northwest Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Northwest Bancorp, Inc. and subsidiaries as of June 30, 1998 and 1997, 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,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with 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 Bancorp,
Inc. and subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Pittsburgh, Pennsylvania
August 14, 1998
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1998 and 1997
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
1998 1997
Assets ---- ----
------
<S> <C> <C>
Cash and cash equivalents $ 16,992 13,747
Interest-bearing deposits in other financial institutions 42,403 57,765
Marketable securities available-for-sale (notes 4 and 11) 316,715 259,720
Marketable securities held-to-maturity (market value of
$192,817 and $152,744) (notes 4 and 11) 193,262 153,980
Loans receivable, net of allowance for estimated
losses of $15,769 and $13,611 (notes 5, 7 and 11) 1,907,289 1,536,498
Accrued interest receivable (note 6) 13,254 11,027
Real estate owned, net 3,506 4,549
Federal Home Loan Bank stock, at cost (notes 8 and 11) 13,444 12,144
Premises and equipment, net (note 9) 26,239 21,481
Goodwill and other intangibles 22,065 11,586
Other assets 7,415 8,866
------------ ------------
Total assets $ 2,562,584 2,091,363
============ ============
<CAPTION>
Liabilities and Shareholders' Equity
------------------------------------
<S> <C> <C>
Liabilities:
Deposits (note 10) 2,022,503 1,640,815
Borrowed funds (note 11) 289,706 223,458
Advances by borrowers for taxes and insurance 15,348 12,985
Accrued interest payable 2,932 4,312
Other liabilities 12,303 11,299
------------ ------------
Total liabilities 2,342,792 1,892,869
Minority interest in subsidiary 1,913 -
Shareholders' equity (notes 13 and 17):
Common stock, $.10 par value, authorized 100,000,000
shares; 46,840,970 and 46,752,000 issued and
outstanding at June 30, 1998 and 1997, respectively 4,684 2,338
Paid-in capital 67,248 67,854
Retained earnings, substantially restricted (note 13) 145,259 131,423
Unrealized gain on securities available-for-sale,
net of income taxes 3,371 1,026
Unearned employee stock ownership plan shares (note 15) (1,412) (2,358)
Unearned recognition and retention plan shares (note 15) (1,271) (1,789)
------------ ------------
Total shareholders' equity 217,879 198,494
------------ ------------
Total liabilities and shareholders' equity $ 2,562,584 2,091,363
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended June 30, 1998, 1997 and 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable $ 144,354 127,019 111,957
Mortgage-backed securities 19,547 19,141 17,342
Investment securities 10,316 6,925 5,089
Interest-bearing deposits 675 433 742
---------- ---------- ----------
Total interest income 174,892 153,518 135,130
---------- ---------- ----------
Interest expense:
Deposits (note 10) 85,046 72,627 61,661
Borrowed funds 10,157 8,797 6,976
---------- ---------- ----------
Total interest expense 95,203 81,424 68,637
---------- ---------- ----------
Net interest income 79,689 72,094 66,493
Provision for possible loan losses (note 7) 4,072 2,491 1,502
---------- ---------- ----------
Net interest income after provision
for possible loan losses 75,617 69,603 64,991
---------- ---------- ----------
Noninterest income:
Loan fees and service charges 3,347 2,351 1,952
Gain on sales of marketable securities, net 1,500 901 -
Loss on sale of loans (369) (420) (1,022)
Gain on sale of real estate owned 164 496 274
Gain on sale of real estate owned for investment 339 - -
Other operating income 3,836 3,408 2,921
---------- ---------- ----------
Total noninterest income 8,817 6,736 4,125
</TABLE>
(Continued)
4
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income, Continued
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Noninterest expense:
Compensation and employee benefits (note 15) $ 28,326 25,990 21,756
Premises and occupancy costs 5,857 5,163 4,536
SAIF recapitalization assessment (note 18) - 8,565 -
Federal insurance premiums 773 1,302 3,019
Data processing 1,633 1,135 1,170
Check processing 2,026 1,543 1,391
Advertising 1,283 1,606 1,197
Amortization of intangibles 1,808 1,381 560
Other expenses 8,612 7,518 7,198
------- ------- -------
Total noninterest expense 50,318 54,203 40,827
------- ------- -------
Income before income taxes 34,116 22,136 28,289
Income taxes (note 12):
Federal 11,232 7,076 8,855
State 1,763 1,396 1,948
------- ------- -------
Total income taxes 12,995 8,472 10,803
Minority interest in net loss of subsidiary 201 - -
------- ------- -------
Net income $ 21,322 13,664 17,486
------- ------- -------
Basic earnings per share (note 14) $ .46 .30 .38
=== === ===
Diluted earnings per share (note 14) $ .45 .30 .38
=== === ===
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended June 30, 1998, 1997 and 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Common stock:
Balance at beginning of fiscal year $ 2,338 2,338 1,155
Exercise of stock options 8 - -
Issuance of recognition and retention plan shares - - 14
Adjustment resulting from two-for-one stock split 2,338 - 1,169
------- ------- -------
Balance at June 30 4,684 2,338 2,338
Paid-in capital:
Balance at beginning of fiscal year 67,854 67,671 65,596
Exercise of stock options 401 - -
Issuance of recognition and retention plan shares - - 3,229
Adjustment resulting from two-for-one stock split (2,338) - (1,169)
Tax benefit for excess of fair value above cost
of stock option and recognition and retention plans 449 - -
Excess of fair value above cost of employee
stock ownership plan (ESOP) shares released 882 183 15
------- ------- -------
Balance at June 30 67,248 67,854 67,671
Retained earnings:
Balance at beginning of fiscal year 131,423 125,239 114,724
Net income 21,322 13,664 17,486
Dividends ($.16 per share in 1998, $.16 per
share in 1997 and $.15 per share in 1996) (7,486) (7,480) (6,971)
------- ------- -------
Balance at June 30 145,259 131,423 125,239
</TABLE>
(Continued)
6
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity, Continued
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Unrealized gain on securities available-for-sale:
Balance at beginning of fiscal year $ 1,026 1,325 1,527
Net change in unrealized gain on securities,
net of deferred taxes 2,345 (299) (202)
--------- --------- ---------
Balance at June 30 3,371 1,026 1,325
Unearned ESOP shares:
Balance at beginning of fiscal year (2,358) (3,328) (4,312)
ESOP shares released 946 970 984
--------- --------- ---------
Balance at June 30 (1,412) (2,358) (3,328)
--------- --------- ---------
Unearned recognition and retention plan (RRP) shares:
Balance at beginning of fiscal year (1,789) (2,594) -
Common shares acquired by RRP - - (3,243)
RRP shares released 518 805 649
--------- --------- ---------
Balance at June 30 (1,271) (1,789) (2,594)
--------- --------- ---------
Total shareholders' equity $ 217,879 198,494 190,651
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1998, 1997 and 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income $ 21,322 13,664 17,486
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 4,072 2,491 1,502
Net loss (gain) on sales of assets (1,634) (977) 748
Purchase of marketable securities, trading (36,061) - -
Proceeds from sale of marketable securities,
trading 36,151 - -
Depreciation and amortization 4,122 3,260 2,205
Accretion of deferred loan fees (725) (715) (1,297)
Increase in other assets (1,373) (897) (1,098)
Increase (decrease) in other liabilities (3,022) 1,625 413
Accretion of discounts on marketable securities (316) (431) (421)
Noncash compensation expense related to
stock benefit plans 3,200 2,212 1,648
Other - - 163
--------- --------- ---------
Net cash provided by operating activities 25,736 20,232 21,349
Investing activities:
Purchase of marketable securities held-to-maturity (66,692) - (18,684)
Purchase of marketable securities available-for-sale (100,707) (29,992) (80,504)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 27,611 18,315 16,663
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 32,012 8,692 9,881
Proceeds from sales of marketable securities available-
for-sale 39,437 15,496 -
Loan originations (802,145) (563,188) (564,380)
Proceeds from loan maturities and principal reductions 425,325 371,295 316,574
Proceeds from loan sales 30,094 47,985 99,062
Purchase of Federal Home Loan Bank stock (1,300) (973) (1,142)
Proceeds from sale of real estate owned 3,196 1,978 2,169
Net (purchase) sale of real estate owned for investment 162 (391) (358)
Purchase of premises and equipment (4,276) (4,153) (3,928)
Acquisitions, net of cash received 151,935 (13,959) 11,182
--------- --------- ---------
Net cash used by investing activities (265,348) (148,895) (213,465)
</TABLE>
(Continued)
8
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Financing activities:
Increase in deposits, net $ 166,024 156,174 70,118
Proceeds from long-term borrowings 136,622 63,136 18,269
Repayments of long-term borrowings (70,544) (75,260) (28,108)
Net increase in short-term borrowings 168 18,821 115,000
Increase in advances by borrowers for
taxes and insurance 2,302 480 76
Cash dividends paid (7,486) (7,480) (8,996)
Proceeds from options exercised 409 - -
--------- --------- ---------
Net cash provided by financing activities 227,495 155,871 166,359
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents $ (12,117) 27,208 (25,757)
========= ========= =========
Cash and cash equivalents at beginning of period 71,512 44,304 70,061
Net increase (decrease) in cash and cash equivalents (12,117) 27,208 (25,757)
--------- --------- ---------
Cash and cash equivalents at end of period $ 59,395 71,512 44,304
========= ========= =========
Cash paid during the year for:
Interest on deposits and borrowings (including
interest credited to deposit accounts of
$64,476, $52,665 and $47,385, respectively) $ 97,425 81,240 68,218
========= ========= =========
Income taxes $ 12,215 8,531 11,408
========= ========= =========
Noncash activities:
Business acquisitions:
Fair value of assets acquired 69,992 59,560 115,220
Cash received (paid) 148,751 (18,772) (15,028)
Minority interest (2,060) - -
--------- --------- ---------
Liabilities assumed $ 216,683 40,788 100,192
========= ========= =========
Loan foreclosures and repossessions $ 2,839 1,654 2,072
========= ========= =========
Sale of real estate owned financed by the Company $ 147 108 700
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997 and 1996
(All dollar amounts presented in tables are in thousands)
(1) Summary of Significant Accounting Policies
------------------------------------------
Nature of Operations
--------------------
Northwest Bancorp, Inc. (the "Company") headquartered in Warren,
Pennsylvania, is a Bank Holding Company for its wholly owned
subsidiary Northwest Savings Bank ("Northwest") and its majority owned
subsidiary Jamestown Savings Bank ("Jamestown"). These retail oriented
financial institutions offer traditional deposit and loan products
through their 68 banking locations in Pennsylvania and three banking
locations in Jamestown, New York. The Company and its subsidiaries
also offer consumer finance products through 33 consumer finance
offices in Pennsylvania and one in New York. The Company maintains
geographic diversification in its real estate loan portfolio by
operating, through a subsidiary, four mortgage production offices in
New York and one in Pennsylvania.
Consolidation
-------------
The consolidated financial statements include the accounts of the Company
and its wholly and majority 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.
(Continued)
10
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
Marketable Securities
---------------------
The Company classifies marketable securities at the time of their purchase
as either held-to-maturity, available-for-sale or trading securities.
Securities for which management has the intent and the Company has the
ability to hold until their maturity are classified as
held-to-maturity and are carried on the Company's books at cost,
adjusted for amortization of premium and accretion of discount on a
level yield basis. If it is management's intent at the time of
purchase to hold securities for an indefinite period of time and/or to
use such securities as part of its asset/liability management
strategy, the securities are classified as available-for-sale and are
carried at fair value, with unrealized gains and losses excluded from
net earnings and reported as a separate component of shareholders'
equity, net of tax. Securities available-for-sale include securities
which may be sold in response to changes in interest rates, resultant
prepayment risk or other market factors. Securities that are bought
and held principally for the purpose of selling them in the near term
are classified as trading and are reported at fair value, with
unrealized gains and losses included in earnings. The Company has no
securities classified as trading as of June 30, 1998 or 1997. The cost
of securities sold is determined on a specific identification basis.
Federal law requires a member institution of the Federal Home Loan Bank
("FHLB") system to hold stock of its district FHLB according to a
predetermined formula. This stock is recorded at cost and may be
pledged to secure FHLB advances.
Loans Receivable
----------------
Loans are stated at their unpaid principal balance net of any deferred
origination fees or costs and the allowance for estimated loan losses.
Interest income on loans is credited to income as earned. Interest
earned on loans for which no payments were received during the month
is accrued at month end. Interest accrued on loans more than ninety
days delinquent is offset by a reserve for uncollected interest, and
such loans are placed on nonaccrual status.
The Company has identified certain residential loans which will be sold
prior to maturity. These loans are recorded at the lower of amortized
cost or market value and are not significant as of June 30, 1998 and
1997.
(Continued)
11
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
Loan fees and certain direct loan origination costs are deferred, and the
net deferred fee or cost is then recognized using the level-yield
method over the contractual life of the 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. Gains and losses on
real estate owned are credited or charged to operations.
Provision for Loan Losses
-------------------------
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. 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.
The Company 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. Management considers a loan to be
impaired when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Generally, all nonaccrual loans are deemed to be impaired.
In evaluating whether a loan is impaired, management considers not
only the amount that the Company expects to collect but also the
timing of collection. Generally, if a delay in payment is
insignificant (e.g., less than 30 days), a loan is not deemed to be
impaired.
(Continued)
12
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
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.
(Continued)
13
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
Income Taxes
------------
Income tax expense is recognized after giving effect to special rules
applicable to thrift institutions. The Company joins with its wholly
owned subsidiary, Northwest, in filing a consolidated federal income
tax return. Jamestown files a separate federal income tax return.
The Company accounts for income taxes using the asset and liability
method. The objective of the asset and liability method is to
establish deferred tax assets and liabilities for temporary
differences between the financial reporting and tax basis of the
Company's assets and liabilities based on enacted tax rates expected
to be in effect when such amounts are realized or settled.
Pension Plan
------------
The Company has noncontributory defined benefit pension plans. The net
periodic pension cost has been calculated in accordance with Statement
of Financial Accounting Standards No. 87, "Employers' Accounting for
Pension."
Reclassification of Prior Years' 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 two-for-one stock splits in fiscal years 1998 and 1996 (see
notes 13 and 14).
Derivative Financial Instruments
--------------------------------
The Company has no involvement with financial instruments that meet the
definition of a derivative as defined by SFAS 119, "Disclosures About
Derivative Financial Instruments and Fair Value of Financial
Instruments."
(Continued)
14
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
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
------------------------
On February 17, 1998, Northwest reorganized into a two-tier holding
company structure. Northwest formed a new, state chartered stock
holding company, Northwest Bancorp, Inc., which is 69.2% owned by
Northwest Bancorp MHC. As a result of this reorganization, Northwest
Bancorp, Inc. became the parent company of Northwest and owns 100% of
Northwest's common stock. The previous shareholders of Northwest stock
received an equivalent number of shares of the new publicly traded
entity, Northwest Bancorp, Inc. Aside from this two-tier holding
company structure giving the Company greater flexibility by
maintaining the benefits of the mutual holding company while
capitalizing on the additional opportunities available to stock
holding companies, the operations remain unchanged.
The reorganization was accounted for in a manner similar to a pooling of
interests. Accordingly, the prior years' consolidated financial
statements of the Company are identical to the prior periods'
consolidated financial statements of Northwest.
(3) Business Combinations
---------------------
During fiscal 1998, the Company purchased 10 retail office facilities from
two financial institutions and assumed deposits of $166,000,000. The
resulting intangible asset of approximately $12,125,000 is being
amortized over a 10-year period on a straight-line basis. In addition,
the Company purchased, from Northwest Bancorp MHC, 64.3% of the common
stock of Jamestown, which had assets of approximately $56,000,000, for
cash of $3,920,000.
(Continued)
15
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
During fiscal 1997, Northwest 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 for 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, Northwest 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. Northwest 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
10-year period on a straight-line basis.
(Continued)
16
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
(4) Marketable Securities
---------------------
Marketable securities at June 30, 1998, are as follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Amortized holding holding Market
cost gains losses value
-------- -------- -------- -------
Held-to-maturity
----------------
<S> <C> <C> <C> <C>
U.S. government and agencies:
Due in one year or less $ 9,978 23 - 10,001
Due after one year - five years 26,380 507 - 26,887
Due after ten years 15,000 94 - 15,094
Municipal securities:
Due after ten years 3,811 136 - 3,947
Corporate debt issues:
Due in one year or less 100 - - 100
Due in five years - ten years 2,305 25 - 2,330
Due after ten years 25,447 329 (213) 25,563
Mortgage-backed securities:
Fixed rate pass-through 5,663 82 - 5,745
Variable rate pass-through 9,936 260 (137) 10,059
Fixed rate CMO 4,578 3 (10) 4,571
Variable rate CMO 90,064 692 (2,236) 88,520
-------- -------- -------- -------
Total mortgage-
backed securities 110,241 1,037 (2,383) 108,895
-------- -------- -------- -------
Total securities
held-to-maturity $ 193,262 2,151 (2,596) 192,817
======== ======== ======== =======
</TABLE>
(Continued)
17
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Amortized holding holding Market
cost gains losses value
-------- -------- -------- --------
Available-for-sale:
------------------
<S> <C> <C> <C> <C>
U.S. government and agencies:
Due in one year or less $ 4,587 20 - 4,607
Due after one year - five years 53,015 1,123 (4) 54,134
Due after five - ten years 5,991 9 (5) 5,995
Due after ten years 12,233 30 (4) 12,259
Equity securities 2,229 2,694 - 4,923
Municipal securities:
Due after one year - five years 2,158 70 (2) 2,226
Due after five years - ten years 5,304 219 - 5,523
Due after ten years 29,845 696 (1) 30,540
Corporate debt issues:
Due after ten years 985 - - 985
Mortgage-backed securities:
Fixed rate pass-through 5,396 15 (20) 5,391
Variable rate pass-through 11,523 75 (19) 11,579
Fixed rate CMO 37 - (2) 35
Variable rate CMO 178,000 2,263 (1,745) 178,518
-------- -------- -------- --------
Total mortgage-
backed securities 194,956 2,353 (1,786) 195,523
-------- -------- -------- --------
Total securities
available-for-sale $ 311,303 7,214 (1,802) 316,715
======== ======== ======== ========
</TABLE>
(Continued)
18
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
Marketable securities at June 30, 1997, are as follows:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Amortized holding holding Market
cost gains losses value
---------- -------- -------- ---------
Held-to-maturity:
----------------
<S> <C> <C> <C> <C>
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
========== ======== ======== =========
</TABLE>
(Continued)
19
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Amortized holding holding Market
cost gains losses value
--------- -------- -------- --------
Available-for-sale:
------------------
<S> <C> <C> <C> <C>
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>
Expected maturities for mortgage-backed securities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations.
(Continued)
20
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
The following table presents information regarding the issuers and the carrying
value of the Company's mortgage-backed securities:
June 30,
-----------------------
1998 1997
---------- ---------
Mortgage-backed securities:
FNMA $ 143,992 140,775
GNMA 12,457 29,338
FHLMC 138,962 120,400
Other (nonagency) 10,353 1,084
---------- ---------
Total mortgage-backed
securities $ 305,764 291,597
========== =========
Marketable securities having a carrying value of $60,100,000 at June 30,
1998, were pledged to secure public deposits. During the fiscal years
1998 and 1997, the Company sold marketable securities classified as
either available-for-sale or trading for $75,588,000 and $15,496,000,
respectively, realizing a gross pretax profit of $1,500,000 in fiscal
1998 and $901,000 in fiscal 1997. During fiscal year 1996 the Company
did not sell any marketable securities.
(Continued)
21
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
(5) Loans Receivable
Loans receivable at June 30, 1998 and 1997, are summarized in the table
below:
1998 1997
---- ----
Real estate loans:
One- to four-family $ 1,368,736 1,096,315
Multi-family and commercial 128,831 100,912
---------- ----------
Total real estate loans 1,497,567 1,197,227
Consumer loans:
Home equity and home improvement 33,963 37,607
Education loans 59,791 53,542
Loans on savings accounts 6,898 7,176
Other 252,443 212,472
---------- ----------
Total consumer loans 353,095 310,797
Commercial loans 123,188 86,087
---------- ----------
Total loans receivable, gross 1,973,850 1,594,111
Deferred loan fees (1,357) (2,384)
Undisbursed loan proceeds (real estate loans) (49,435) (41,618)
Allowance for loan losses (real estate loans) (8,103) (6,898)
Allowance for loan losses (other loans) (7,666) (6,713)
---------- ----------
Total loans receivable, net $ 1,907,289 1,536,498
========== ==========
At June 30, 1998 and 1997, the Company serviced loans for others
approximating $90,930,000 and $97,869,000, respectively. These loans
serviced for others are not assets of the Company and are
appropriately excluded from the Company's financial statements.
At June 30, 1998, approximately 90% of the Company's net loan portfolio
was secured by properties located in Pennsylvania. The Company does
not believe it has significant concentrations of credit risk to any
one group of borrowers given its underwriting and collateral
requirements.
(Continued)
22
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
Loans receivable at June 30, 1998, include $170,562,000 of adjustable rate
loans and $1,803,288,000 of fixed rate loans.
In the normal course of business, the Company 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 Company'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 Company uses the same
credit policies in making commitments for off-balance-sheet financial
instruments as it does for on-balance-sheet instruments. Financial
instruments with off-balance-sheet risk as of June 30, 1998 and 1997,
are presented in the following table:
June 30,
-----------------------
1998 1997
----- ------
Mortgage loan commitments $ 51,746 22,434
Undisbursed lines of credit 66,539 57,838
Standby letters of credit 2,259 2,319
------- ------
$ 120,544 82,591
======= ======
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, by the Company upon
extension of credit is based on management's credit evaluation of the
counterparty. Collateral held varies but generally may include cash,
marketable securities and property.
Outstanding mortgage loan commitments at June 30, 1998, for fixed rate
loans, are $51,746,000. The interest rates on these commitments
approximate market rates at June 30, 1998. The fair value of these
commitments are affected by fluctuations in market rates of interest.
There were no outstanding adjustable rate mortgage loan commitments as
of June 30, 1998.
(Continued)
23
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
As discussed in note 1, on July 1, 1995, the Company 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 Company's nonaccrual loans,
which totaled $8,612,000 at June 30, 1998, and $10,430,000 at June 30,
1997, are considered to be impaired loans. Average impaired loans
during 1998 and 1997 were $11,204,000 and $11,818,000, respectively.
All of the Company's impaired loans at June 30, 1998, were collateral
dependent. Since, at June 30, 1998 and 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 1998 and 1997, recognized using a cash
basis method of accounting, was $230,000 and $305,000, respectively.
There was no interest income recognized on impaired loans during
fiscal 1996.
There were no commitments to lend additional funds to debtors on
nonaccrual status.
(6) Accrued Interest Receivable
---------------------------
Accrued interest receivable as of June 30, 1998 and 1997, is presented in
the following table:
June 30,
-----------------------
1998 1997
------ ------
Investment securities $ 2,701 2,072
Mortgage-backed securities 1,588 1,264
Loans receivable 8,965 7,691
------- -------
$ 13,254 11,027
======= =======
(7) Allowance for Estimated Losses
------------------------------
Changes in the allowance for losses on loans receivable for the years
ended June 30, 1998, 1997 and 1996, are presented in the following
table:
1998 1997 1996
---- ---- ----
Balance, beginning of fiscal year $ 13,611 13,130 11,833
Provision 4,072 2,491 1,502
Charge-offs (2,516) (2,537) (1,333)
Acquisitions 209 153 700
Recoveries 393 374 428
------ ------ ------
Balance, end of fiscal year $ 15,769 13,611 13,130
====== ====== ======
(Continued)
24
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
Management believes that the allowance for estimated losses is adequate as
of June 30, 1998. While management uses available information to
provide for losses, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for losses. Such agencies
may require the Company to recognize additions to the allowance based
on their judgments about information available to them at the time of
their examination.
(8) Federal Home Loan Bank Stock
----------------------------
The Company's banking subsidiaries are members of the Federal Home Loan
Bank system. As a member, Northwest maintains an investment in the
capital stock of the Federal Home Loan Bank of Pittsburgh, at cost, in
an amount not less than 1% of its outstanding home loans or 1/20 of
its outstanding notes payable to the Federal Home Loan Bank, whichever
is greater, as calculated at December 31 of each year.
(9) Premises and Equipment
----------------------
Premises and equipment at June 30, 1998 and 1997, are summarized by major
classification in the following table:
1998 1997
---- ----
Land and land improvements $ 2,987 2,413
Office buildings and improvements 25,942 21,636
Furniture, fixtures and equipment 17,088 15,098
Leasehold improvements 3,211 3,023
------- -------
Total, at cost 49,228 42,170
Less accumulated depreciation and
amortization 22,989 20,689
------- -------
Premises and equipment, net $ 26,239 21,481
======= =======
Depreciation and amortization expense for the years ended June 30, 1998,
1997 and 1996, was $2,118,000, $1,879,000, and $1,645,000, respectively.
(Continued)
25
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
Premises used by certain of the Company's branches and offices are
occupied under formal operating lease arrangements. The leases expire
on various dates through 2012. Minimum annual rentals by fiscal year
are summarized in the following table:
1999 $ 1,151
2000 912
2001 611
2002 372
2003 263
Thereafter 699
------
Total $ 4,008
======
Rental expense for the years ended June 30, 1998, 1997 and 1996, was
$1,379,000, $1,362,000 and $1,268,000, respectively.
(10) Savings Deposits
----------------
Savings deposit balances at June 30, 1998 and 1997, are shown in the table
below:
1998 1997
---- ----
Passbook accounts $ 340,377 299,365
Interest-bearing checking accounts 280,958 206,299
Noninterest-bearing checking accounts 34,797 16,546
Money market deposit accounts 114,187 83,609
Certificates of deposit 1,252,184 1,034,996
--------- ---------
$ 2,022,503 1,640,815
========= =========
The aggregate amount of certificates of deposit with a minimum
denomination of $100,000 was approximately $151,268,000 at June 30,
1998.
(Continued)
26
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
The following table summarizes the contractual maturity of the
certificate accounts:
1998 1997
---- ----
Due within 12 months $ 771,665 607,421
Due between 12 and 24 months 347,456 264,117
Due between 24 and 36 months 56,719 92,953
Due between 36 and 48 months 24,836 22,861
After 48 months 51,508 47,644
--------- ---------
$ 1,252,184 1,034,996
========= =========
The following table summarizes the interest expense incurred on the
respective savings deposits:
Year ended June 30,
-----------------------------
1998 1997 1996
---- ---- ----
Passbook accounts $ 10,227 9,490 9,322
Interest-bearing checking accounts 4,469 3,992 3,396
Money market deposit accounts 3,395 2,735 2,595
Certificate accounts 66,955 56,410 46,348
------ ------ ------
$ 85,046 72,627 61,661
====== ====== ======
(Continued)
27
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
(11) Borrowed Funds
--------------
Borrowed funds at June 30, 1998 and 1997, are presented in the following
table:
Term notes payable to the Federal Home Loan Bank of Pittsburgh:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Average Average
Amount rate Amount rate
------ ----- ------ ----
<S> <C> <C> <C> <C>
Due within one year $ 43,000 % 5.86 $ 11,000 % 5.86
Due between one and two years 2,000 7.18 43,000 5.94
Due between two and three years 8,000 6.07 2,000 7.18
Due between three and five years 42,200 6.06 - -
Due between five and ten years 25,150 6.04 350 3.43
Due between ten and twenty years 1,811 3.65 1,862 3.65
--------- ---------
122,161 5.97 58,212 5.88
Revolving line of credit, Federal
Home Loan Bank of Pittsburgh 110,000 5.74 106,000 6.25
ESOP note payable, variable rate
equal to prime, payable in five
annual installments of $862,
excluding interest, beginning
January 1996 (note 14) 1,412 8.50 2,358 8.31
Investor notes payable, due
various dates through 2002 6,105 6.46 6,772 6.42
Securities sold under agreement to
repurchase, due various dates
through fiscal 1999 50,028 5.48 50,116 5.60
-------- --------
Total borrowed funds $ 289,706 $ 223,458
======== ========
</TABLE>
(Continued)
28
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
Borrowings from the Federal Home Loan Bank of Pittsburgh are secured by
the Company's investment securities, mortgage-backed securities and
qualifying residential first mortgage loans, to the extent that the
defined statutory value must be at least 120% of the amount of the
notes 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 $175,000,000 maturing on June 28,
1999. The rate is adjusted daily by the Federal Home Loan Bank and
any borrowings on this line may be repaid at any time without
penalty.
The securities sold under agreements to repurchase are collateralized by
various securities held in safekeeping by the Federal Home Loan Bank
of Pittsburgh. The market value of such securities exceeds the value
of the securities sold under agreements to repurchase. The average
amount of agreements outstanding in fiscal years 1998 and 1997 was
$41,220,000 and $16,578,000, respectively. The maximum amount of
security repurchase agreements outstanding during fiscal years 1998
and 1997 was $50,028,000 and $50,116,000, respectively.
(12) Income Taxes
------------
Total income tax expense (benefit) was allocated for the years ended June
30, 1998, 1997 and 1996, as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income before income taxes $ 12,995 8,472 10,803
Shareholders' equity for unrealized gain
on securities 1,423 (226) (109)
Shareholders' equity for tax benefit for
excess of fair value above cost of
stock option and recognition and
retention plans (449) - -
------ ----- ------
$ 13,969 8,246 10,694
====== ----- ======
</TABLE>
(Continued)
29
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
Income tax expense (benefit) applicable to income before taxes consists
of:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $ 13,455 9,633 10,203
Deferred (460) (1,161) 600
------ ----- ------
$ 12,995 8,472 10,803
====== ===== ======
</TABLE>
The significant components of deferred income tax expense (benefit) are
as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred income tax (benefit) expense $ (609) (1,324) 571
NOL carryforward 149 163 29
--- ----- ---
$ (460) (1,161) 600
=== ===== ===
</TABLE>
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,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected tax rate % 35.0 35.0 35.0
Tax-exempt interest income (1.9) (1.3) (1.9)
State income tax, net of federal and
state taxes 3.4 4.1 4.7
Valuation allowance 0.6 - -
Other differences, net 1.0 .5 .4
---- ---- ----
Effective tax rate % 38.1 38.3 38.2
==== ==== ====
</TABLE>
(Continued)
30
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
June 30, 1998 and 1997, are presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Deferred fee income $ 1,399 1,131
Deferred compensation expense 959 850
Net operating loss carryforwards 797 292
Bad debts 2,396 1,418
Accrued postretirement benefit cost 380 395
Pension expense 241 209
Other 611 1,196
------ -----
6,783 5,491
Valuation allowance (807) -
------ -----
5,976 5,491
Deferred tax liabilities:
Marketable securities 2,027 604
Other 301 276
------ -----
2,328 880
----- -----
Net deferred tax asset $ 3,648 4,611
===== =====
</TABLE>
The Company has recorded a full valuation reserve on the deferred tax
assets related to Jamestown. The Company has determined that no
valuation allowance is necessary for the remaining deferred tax
assets because it is more likely that these assets will be realized
through carryback to taxable income in prior years, future reversals
of existing temporary differences and, to a lesser extent, through
future taxable income. The Company will continue to review the
criteria related to the recognition of deferred tax assets on a
quarterly basis.
Under provisions of the Internal Revenue Code, Northwest has
approximately $408,000 of net operating losses which expire in years
2005 through 2010. Jamestown has net operating losses of
approximately $1,870,000 which expire in years 2011 through 2013.
(Continued)
31
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
(13) Shareholders' Equity
--------------------
The Board of Directors of Northwest authorized two-for-one common stock
splits in the form of stock dividends in October 1997 and April 1996.
The additional shares resulting from the splits were distributed on
November 14, 1997, to shareholders of record on November 1, 1997, and
on May 15, 1996, to shareholders of record on May 8, 1996,
respectively.
Retained earnings are partially restricted in connection with regulations
related to the insurance of savings accounts which require Northwest
to maintain certain statutory reserves. Northwest and Jamestown may
not pay dividends on or repurchase any of their common stock if the
effect thereof would reduce retained earnings below the level of
adequate capitalization as defined by federal and state regulators.
In tax years prior to fiscal 1997, Northwest was permitted, under the
Internal Revenue Code (the Code), to deduct an annual addition to a
reserve for bad debts in determining taxable income, subject to
certain limitations. Bad debt deductions for income tax purposes are
included in taxable income of later years only if the bad debt
reserve is used subsequently for purposes other than to absorb bad
debt losses. Because Northwest does not intend to use the reserve for
purposes other than to absorb losses, no deferred income taxes have
been provided prior to 1987. Retained earnings at June 30, 1998,
includes approximately $27,160,000 representing such bad debt
deductions for which no deferred income taxes have been provided.
(Continued)
32
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
(14) Earnings Per Share
------------------
Effective December 31, 1997, the Company adopted SFAS 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 supersedes APB Opinion No. 15,
"Earnings Per Share," and specifies the computation, presentation and
disclosure requirements for earnings per share ("EPS") 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 diluted
EPS presentation. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
a complex capital structure and requires a reconciliation of the
components of basic and diluted EPS. Basic EPS excludes common stock
equivalents and dilution and is computed by dividing income available
to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the Company. Prior periods' EPS data presented have been
restated. The computation of basic and diluted earnings per share is
shown in the table below:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income applicable to
common stock $ 21,322 13,664 17,486
Weighted-average common
shares outstanding 46,405 46,150 45,708
------ ------ ------
Basic earnings per share $ .46 .30 .38
====== ====== ======
Net income applicable to
common stock $ 21,322 13,664 17,486
====== ====== ======
Weighted-average common
shares outstanding 46,405 46,150 45,708
Common stock equivalents due
to effect of stock options 698 151 5
------ ------ ------
Total weighted-average common
shares and equivalents $ 47,103 46,301 45,713
====== ====== ======
Diluted earnings per
share $ .45 .30 .38
======= ====== ======
</TABLE>
(Continued)
33
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
(15) Employee Benefit Plans
----------------------
Pension Plans
-------------
The Company maintains noncontributory defined benefit pension plans
covering substantially all of the Company's employees and the members
of the Board of Directors. In addition, the Company has an unfunded
Supplemental Executive Retirement Plan (SERP) to compensate those
executive participants eligible for the Company's defined benefit
pension plan whose benefits are limited by section 415 of the Code of
the Internal Revenue Service (which caps annual benefits at $150,000
beginning in 1994).
The Company also sponsors a retirement savings plan in which
substantially all employees participate. The Company 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 $1,872,000, $1,644,000 and $1,762,000 for
the years ended June 30, 1998, 1997 and 1996, respectively. Net
periodic pension cost for the Company's defined benefit pension plans
consist of the following:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 1,066 924 670
Interest cost 1,046 896 775
Actual return on plan assets (2,206) (1,903) (1,291)
Net amortization and deferral 1,346 1,206 1,076
----- ----- -----
Net periodic pension cost $ 1,252 1,123 1,230
===== ===== =====
</TABLE>
(Continued)
34
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
The following table sets forth, for the Company's defined benefit pension
plans, the plans' funded status and amounts recognized in the
Company's consolidated statements of financial condition at June 30,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation,
including vested benefits of $12,716
and $11,034, respectively $ (13,408) (11,538)
------ ------
Projected benefit obligation (17,709) (15,076)
Plan assets at fair value (primarily equity and
fixed-income securities) 15,986 12,911
------ ------
Projected benefit obligation in excess
of plan assets (1,723) (2,165)
Unrecognized transition asset (379) (419)
Unrecognized net loss 331 811
Unrecognized prior service cost 894 988
Adjustment to recognize minimum liability (343) (96)
------ ------
Accrued pension cost $ (1,220) (881)
------ ------
</TABLE>
The following table sets forth the assumptions used to develop the net
pension cost:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1998 1997 1996
---- ---- ----
<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>
(Continued)
35
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
Postretirement Healthcare Plan
------------------------------
In addition to pension benefits, the Company 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 Company 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 Company accounted for these
benefits on a pay-as-you-go (cash) basis.
Net periodic cost for the Company's postretirement healthcare benefits
consist of the following:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 41 71 71
Interest cost 44 88 81
Net amortization and deferral (130) - -
--- --- ---
Net periodic (benefit) cost $ (45) 159 152
--- --- ---
</TABLE>
The following table sets forth the funded status of the Company's
postretirement healthcare benefit plan and the amounts recognized in
the Company's consolidated statements of financial condition at June
30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accumulated benefit obligation $ (837) (639)
Plan assets at fair value - -
----- -----
Accumulated benefit obligation in excess
of plan assets (837) (639)
Unrecognized net gain (194) (478)
----- -----
Accrued postretirement benefit cost $ (1,031) (1,117)
----- -----
</TABLE>
(Continued)
36
<PAGE>
PHIL
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
The assumptions used to develop the preceding information for
postretirement healthcare benefits are as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate % 7 7 7
Monthly cost of healthcare insurance
per beneficiary $ 113.94 92.73 102.74
Annual rate of increase in healthcare costs % 4 4 8
</TABLE>
If the assumed rate of increase in healthcare costs was increased by one
percentage point to 5% from the level of 4% presented above, the
service and interest cost components of net periodic postretirement
healthcare benefit cost would increase by $6,661, in the aggregate,
and the accumulated postretirement benefit obligation for healthcare
benefits would increase by $84,950.
Employee Stock Ownership Plan
-----------------------------
The Company 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 Company during which they
worked at least 1,000 hours. The Company 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 Company's total
eligible compensation recorded during the year shares are earned.
The Company 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 Company's consolidated statement of financial
condition. As shares are earned, the Company 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
$2,668,000, $1,437,000 and $1,359,000 for the fiscal years ended June
30, 1998, 1997 and 1996, respectively.
(Continued)
37
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
The ESOP shares as of June 30, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Allocated shares 818,010 626,564
Unearned shares 285,990 477,436
--------- ----------
1,104,000 1,104,000
--------- ----------
Fair value of unearned shares at June 30 $ 4,522 3,700
----- -----
</TABLE>
Recognition and Retention Plan
------------------------------
On November 21, 1995, the Company established a Recognition and Retention
Plan for Employees and Outside Directors (RRP). The objective of the
RRP is to enable the Company to provide directors, officers and
employees with a proprietary interest in the Company as an incentive
to contribute to its success. The number of common shares issued and
granted under the RRP was 552,000 (total market value of $3,243,000 at
issuance date). Shares of common stock granted pursuant to the RRP
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.
(Continued)
38
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
Stock Option Plan
-----------------
On November 21, 1995, the Company adopted the 1995 Stock Option Plan. The
objective of the Stock Option Plan is to provide an additional
performance incentive to the Company's employees and outside
directors. The Stock Option Plan authorized the grant of stock options
and limited stock appreciation rights for 1,380,000 shares of the
Company's common stock. On December 20, 1995, the Company granted
242,000 nonstatutory stock options to its outside directors at an
exercise price of $5.58 per share (95% of the Company's common stock
fair market value per share at grant date) and 923,200 incentive stock
options to employees at an exercise price of $5.875 per share. On
March 22, 1996, the Company granted 122,800 incentive stock options to
employees at an exercise price of $5.625 per share. 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 92,000 options are to be granted to
employees as incentive stock options at an exercise price equal to the
Company's common stock fair value per share at grant date.
The following table summarizes the activity in the Company's Option Plan
during the periods ending June 30:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
average average average
Number exercise price Number exercise price Number exercise price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of year 1,288,000 $ 5.80 1,288,000 $ 5.80 - $ -
Granted - - - - 1,288,000 (b) 5.80
Exercised (99,520) 5.66 - - - -
Forfeited (2,880) 5.63 - - - -
--------- ---- --------- ---- --------- ----
Balance at end of year 1,185,600 $ 5.81 (a) 1,288,000 $ 5.80 1,288,000 $ 5.80
--------- ---- --------- ---- --------- ----
Exercisable at end
of year 711,360 $ 5.81 515,200 $ 5.80 257,600 $ 5.80
--------- ---- --------- ---- --------- ----
</TABLE>
(a) Exercise price range: $5.58 to $5.88
(b) Weighted average fair value of options at grant date: $1.16
(Continued)
39
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
The average remaining contractual life of the options as of June 30,
1998, is 7.6 years.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. Had compensation costs for the Stock Option
Plan been determined consistent with SFAS 123, "Accounting for
Stock-Based Compensation," which permits entities to expense an
estimated fair value of employee stock options granted, the Company's
net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $ 21,322 13,664 17,486
Pro forma 21,067 13,391 17,350
Basic earnings per share:
As reported .46 .30 .38
Pro forma .45 .29 .38
Diluted earnings per share:
As reported .45 .30 .38
Pro forma .45 .29 .38
</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.
(Continued)
40
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
(16) Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments"
(SFAS 107), requires disclosure of fair value information about
financial instruments whether or not recognized in the consolidated
statement of financial condition. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company. The carrying
amounts reported in the consolidated statement of financial condition
approximate fair value for the following financial instruments: cash
on hand and interest-earning deposits in other institutions, accrued
interest receivable, accrued interest payable and marketable
securities available-for-sale.
The carrying value of marketable securities held-to-maturity exceeded
market value by $445,000 and $1,236,000 at June 30, 1998 and 1997,
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,
1998 and 1997, by approximately $29,016,000 and $1,734,000,
respectively. 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.
(Continued)
41
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
The carrying amounts and estimated fair values of deposits at June 30,
1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- --------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
NOW and MMDA accounts $ 429,941 429,941 306,454 306,454
Passbook accounts 340,378 340,378 299,365 299,365
Time deposits 1,252,184 1,261,350 1,034,996 1,034,712
--------- --------- --------- ---------
Total deposits $ 2,022,503 2,031,669 1,640,815 1,640,531
========= ========= ========= =========
</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 estimated fair value of borrowed funds exceeded the carrying amounts
at June 30, 1998, by $2,109,000 and at June 30, 1997, the carrying
value exceeded the fair value of borrowed funds by $11,000. 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.
(Continued)
42
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
(17) Regulatory Capital Requirements
-------------------------------
The Company and its subsidiaries are subject to various regulatory
capital requirements administered by the federal and state banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory - and possibly additional discretionary - actions
by the regulators that, if undertaken, could have a direct material
effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
specific capital guidelines that involve quantitative measures of
assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices must be met. The capital
amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and its subsidiaries to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital to average assets (as defined). As of
June 30, 1998, the Company and its subsidiaries exceed all capital
adequacy requirements to which they are subject.
As of March 31, 1998, the most recent notification from the FDIC
categorized Northwest and Jamestown as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized
as "well capitalized," the banks must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth
in the table. There are no conditions or events since that
notification that management believes have changed the banks'
categories.
(Continued)
43
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
The actual, required and well capitalized levels as of June 30, 1998 and
June 30, 1997, are as follows: (in thousands)
<TABLE>
<CAPTION>
June 30, 1998
---------------------------------------------------------------------------
To be well
Actual Required capitalized
-------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk
weighted assets):
Northwest Bancorp,
Inc. $ 210,483 % 15.52 $ 108,469 % 8.00 $ 135,587 % 10.00
Northwest Savings
Bank 200,669 15.12 106,182 8.00 132,728 10.00
Jamestown Savings
Bank 5,520 20.70 2,133 8.00 2,667 10.00
Tier I capital (to risk
weighted assets):
Northwest Bancorp,
Inc. 194,714 14.36 54,235 4.00 81,352 6.00
Northwest Savings
Bank 185,131 13.95 53,091 4.00 79,637 6.00
Jamestown Savings
Bank 5,273 19.77 1,067 4.00 1,600 6.00
Tier I capital (core)
(to average assets):
Northwest Bancorp,
Inc. 194,714 7.82 74,657 3.00(*) 124,428 5.00
Northwest Savings
Bank 185,131 7.63 72,763 3.00(*) 121,271 5.00
Jamestown Savings
Bank 5,273 9.12 1,734 3.00(*) 2,890 5.00
</TABLE>
(Continued)
44
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
<TABLE>
<CAPTION>
June 30, 1997 (Northwest Savings Bank Only)
--------------------------------------------------------------------------
To be well
Actual Required capitalized
-------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk
weighted assets):
Northwest Savings Bank $ 199,795 % 18.36 $ 87,071 % 8.00 $ 108,839 % 10.00
Tier I capital (to risk
weighted assets):
Northwest Savings Bank 186,190 17.11 43,536 4.00 65,303 6.00
Tier I capital (core) (to
average assets):
Northwest Savings Bank 186,190 9.11 61,319 3.00(*) 102,199 5.00
</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, 1998, the
Company had not been advised of any additional requirements in this
regard.
(18) 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 Company'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 Company for the
fiscal year ended June 30, 1997, was $5.1 million after tax. As a
result of the recapitalization of the SAIF, the Company 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 Company
pays for deposit insurance fell to .064% of insured deposits from the
previous level of .23%.
(Continued)
45
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
(19) Contingent Liabilities
----------------------
Northwest and Northwest Bancorp MHC, along with unrelated parties, have
been named as defendants in a class action lawsuit filed in the
Allegheny County Court of Common Pleas. This lawsuit is brought on
behalf of purchasers of common stock in the Northwest's initial
public offering in November 1994. It alleges that Northwest breached
its contractual obligations and fiduciary duties by carrying out the
offering at a price that allegedly was not justified by market and
financial conditions. Northwest previously obtained the dismissal of
a lawsuit brought by the same counsel in federal court making similar
allegations under federal law. Management intends to continue to
vigorously defend against any such proceedings. The ultimate outcome
of this litigation cannot presently be determined; accordingly, no
provision for liability, if any, that may result has been recorded in
the consolidated financial statements.
The Company and its subsidiaries are subject to a number of other
asserted and unasserted claims encountered in the normal course of
business. Management believes that the aggregate liability, if any,
resulting from such pending and threatened actions and proceedings
will not have a material adverse effect on the Company's financial
statements.
(Continued)
46
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(All dollar amounts presented in tables are in thousands)
(20) Selected Quarterly Financial Data (Unaudited)
---------------------------------------------
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------------------------
September 30 December 31 March 31 June 30
------------ ----------- -------- -------
(in thousands, except per share data)
-------------------------------------
Fiscal 1998
-----------
<S> <C> <C> <C> <C>
Interest income $ 40,936 41,903 44,368 47,685
Interest expense 22,164 23,118 23,782 26,139
------ ------ ------ ------
Net interest income 18,772 18,785 20,586 21,546
Provision for possible loan losses 660 611 1,111 1,690
Noninterest income 1,528 1,579 2,562 3,148
Noninterest expenses 11,344 11,932 13,089 13,953
------ ------ ------ ------
Income before income taxes 8,296 7,821 8,948 9,051
Provision for income taxes 3,459 2,880 3,231 3,425
Minority interest in net loss - - 2 199
------ ------ ------ ------
Net income $ 4,837 4,941 5,719 5,825
====== ====== ====== ======
Basic earnings per share $ .10 .11 .12 .13
=== === === ===
Diluted earnings per share $ .10 .11 .12 .12
=== === === ===
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
====== ====== ====== ======
Basic earnings (loss) per share $ (.02) .11 .10 .11
=== === === ===
Diluted earnings (loss) per share $ (.02) .11 .10 .11
=== === === ===
</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 18.
47
<PAGE>
CORPORATE INFORMATION
Annual Meeting
November 18, 1998
11:00 A.M.
Knights of Columbus Hall
219 Second Avenue
Warren, Pennsylvania 16365
Stock Listing:
Northwest Bancorp, Inc. common stock is traded in
the NASDAQ National Stock Market under the symbol "NWSB." The stock
is listed as "NWBcp" in the NASDAQ section in the financial pages
of most major newspapers.
Transfer and Dividend Paying Agent/Registrar
Shareholders wishing to change their address, transfer stock,
report lost certificates or dividend checks may contact:
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
(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 Bancorp, Inc.
301 Second Avenue
Warren, Pennsylvania 16365
(814) 726-2140
Request for Financial Information:
A copy of the company's 10-K and 10-Q reports, as filed with the
Securities and Exchange Commission, are available without charge by
writing to:
Northwest Bancorp, Inc.
Shareholder Relations
301 Second Avenue
Warren, Pennsylvania 16365
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
<PAGE>
CORPORATE INFORMATION
MARKET MAKERS
Name of Firm Phone
- ------------ -----
F. J. Morrissey & Co., Inc. (215) 563-8500
Friedman Billings Ramsey & Co. (706) 312-9500
Herzog Heine Geduld, Inc. (800) 221-3600
Instinet Corporation (212) 310-9550
Island System, Inc. (212) 248-3700
Knight Securities, Inc. (800) 222-4910
Legg Mason Wood Walker, Inc. (212) 428-4949
Mayer & Schweitzer, Inc. (800) 631-3094
Parker/Hunter, Inc. (412) 562-8160
Ryan Beck & Co., Inc. (201) 325-3000
Sandler O'Neill & Partners, Inc. (212) 466-7744
Sherwood Securities, Corp. (800) 435-1235
Terra Nova Trading, L.L.C. (312) 849-4868
Troster Singer, Inc. (800) 526-3160
Tucker Anthony, Inc. (800) 548-3759
Wheat First Securities, Inc. (800) 446-1016
DIVIDEND REINVESTMENT PLAN
The Northwest Bancorp, Inc. 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.)
(718) 234-1440 (Fax)
or:
Northwest Bancorp, Inc.
Shareholder Relations Department
(814) 726-2140 (Phone)
(814) 726-1980 (Fax)
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE BANK
<PAGE>
SUBSIDIARIES OF THE BANK
------------------------
As of June 30, 1998, the Company owned a 64.3% interest in Jamestown
Savings Bank. In addition, the Company owns 100% of the outstanding common stock
of Northwest Savings Bank. 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 five 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 one location in Central PA
d/b/a Uniontown Financial Services in Uniontown, PA
d/b/a Erie Consumer Discount in two locations in Erie, PA
d/b/a Franklin Consumer Discount in Franklin, PA d/b/a Corry Consumer
Discount in Corry, PA
d/b/a Community Consumer Discount in Warren, PA
d/b/a Thrift Financial Services in Indiana, PA
d/b/a Clearfield Consumer Discount in Clearfield, PA
d/b/a Titusville Consumer Discount in Titusville, PA
d/b/a Lewistown Consumer Discount in Lewistown, PA
d/b/a Friendly Loan Consumer Discount in Jeannette, PA
d/b/a Zelie Consumer Discount in Zelienople, PA
d/b/a Johnstown Consumer Discount in Johnstown, PA
d/b/a Washington Consumer Discount in Washington, PA
d/b/a St. Mary's Consumer Discount in St. Marys, PA
d/b/a Brookville Financial Services in Brookville, PA
d/b/a Dubois Financial Services in Dubois, PA
d/b/a Hazleton Financial Services in Hazleton, PA
d/b/a State College Financial Services in State College, PA
Northwest Mortgage Corporation, a Delaware corporation
Northwest Capital Group Inc., a Pennsylvania corporation
Rid-Fed Inc., a Pennsylvania corporation
<PAGE>
EXHIBIT 23
CONSENT OF EXPERTS AND COUNSEL
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
Independent Auditors' Consent
-----------------------------
The Board of Directors
Northwest Bancorp, Inc.:
We consent to incorporation by reference in the registration statement (No.
333-46651) on Form S-8 of Northwest Bancorp, Inc. of our report dated
August 14, 1998, relating to the consolidated statements of financial condition
of Northwest Bancorp, Inc. and subsidiaries as of June 30, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended June 30, 1998, which
report appears in the June 30, 1998 Annual Report on Form 10-K of Northwest
Bancorp, Inc.
/s/ KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
September 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 16,992
<INT-BEARING-DEPOSITS> 42,403
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 316,715
<INVESTMENTS-CARRYING> 193,262
<INVESTMENTS-MARKET> 192,817
<LOANS> 1,907,289
<ALLOWANCE> 15,769
<TOTAL-ASSETS> 2,562,584
<DEPOSITS> 2,022,503
<SHORT-TERM> 203,028
<LIABILITIES-OTHER> 32,496
<LONG-TERM> 86,678
0
0
<COMMON> 4,684
<OTHER-SE> 213,195
<TOTAL-LIABILITIES-AND-EQUITY> 2,562,584
<INTEREST-LOAN> 144,354
<INTEREST-INVEST> 29,863
<INTEREST-OTHER> 675
<INTEREST-TOTAL> 174,892
<INTEREST-DEPOSIT> 85,046
<INTEREST-EXPENSE> 95,203
<INTEREST-INCOME-NET> 79,689
<LOAN-LOSSES> 4,072
<SECURITIES-GAINS> 1,500
<EXPENSE-OTHER> 50,318
<INCOME-PRETAX> 34,116
<INCOME-PRE-EXTRAORDINARY> 34,116
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,322
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 8.06
<LOANS-NON> 8,612
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 13,611
<CHARGE-OFFS> 2,516
<RECOVERIES> 393
<ALLOWANCE-CLOSE> 15,769
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 15,769
</TABLE>
