<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 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 Number 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 No.)
Liberty Street at Second Avenue, Warren Pennsylvania 16365
- ---------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(814) 726-2140
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------------------
(Former name, former address and former fiscal year, if
changed since last report)
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 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock (.10 par value) 47,348,778 shares outstanding as of December 31,
1998.
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements 1 - 7
- Consolidated Statements of Financial Condition
- Consolidated Statements of Income
- Consolidated Statements of Shareholders' Equity
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of 8 - 22
Financial Condition and Results of
Operations
Item 3. Market Risk 23 - 24
PART II OTHER INFORMATION 24 - 28
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30,
ASSETS 1998 1998 1998
- ---------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ 47,161 26,482 16,992
INTEREST-EARNING DEPOSITS IN OTHER FINANCIAL
INSTITUTIONS 53,083 49,612 42,403
MARKETABLE SECURITIES AVAILABLE-FOR-SALE 309,668 305,770 316,715
MARKETABLE SECURITIES HELD-TO-MATURITY (MARKET
VALUE OF $194,861, $186,274 AND $192,817) 194,846 187,294 193,262
----------- ----------- -----------
TOTAL CASH, INTEREST-EARNING DEPOSITS AND
MARKETABLE SECURITIES 604,758 569,158 569,372
LOANS RECEIVABLE, NET OF ALLOWANCE FOR ESTIMATED
LOSSES OF $16,515, $16,092 AND $15,769 2,159,771 2,009,012 1,907,289
ACCRUED INTEREST RECEIVABLE 13,457 13,844 13,254
REAL ESTATE OWNED, NET 3,185 3,471 3,506
FEDERAL HOME LOAN BANK STOCK, AT COST 18,021 14,508 13,444
PREMISES AND EQUIPMENT, NET 31,683 26,750 26,239
GOODWILL AND OTHER INTANGIBLES 38,630 24,474 22,065
OTHER ASSETS 19,914 6,040 7,415
----------- ----------- -----------
TOTAL ASSETS $ 2,889,419 2,667,257 2,562,584
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------
LIABILITIES:
DEPOSITS $ 2,340,568 2,081,885 2,022,503
BORROWED FUNDS 289,337 338,866 289,706
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE 14,934 8,305 15,348
ACCRUED INTEREST PAYABLE 3,239 4,163 2,932
OTHER LIABILITIES 14,531 12,185 12,303
----------- ----------- -----------
TOTAL LIABILITIES 2,662,609 2,445,404 2,342,792
MINORITY INTEREST IN SUBSIDIARY 0 0 1,913
SHAREHOLDERS' EQUITY:
COMMON STOCK, $.10 PAR VALUE: 100,000,000 SHARES
AUTHORIZED, 47,348,778, 46,864,620 AND 46,840,970 ISSUED
AND OUTSTANDING, RESPECTIVELY 4,735 4,686 4,684
PAID-IN CAPITAL 68,573 67,376 67,248
RETAINED EARNINGS 150,758 148,394 145,259
ACCUMULATED OTHER COMPREHENSIVE INCOME:
NET UNREALIZED GAIN ON SECURITIES AVAILABLE-
FOR-SALE, NET OF INCOME TAXES 5,427 4,080 3,371
UNEARNED EMPLOYEE STOCK OWNERSHIP PLAN SHARES (1,412) (1,412) (1,412)
UNEARNED RECOGNITION AND RETENTION PLAN SHARES (1,271) (1,271) (1,271)
----------- ----------- -----------
226,810 221,853 217,879
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,889,419 2,667,257 2,562,584
=========== =========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
1
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
LOANS RECEIVABLE $ 42,481 34,720 83,404 68,625
MORTGAGE-BACKED SECURITIES 4,280 4,742 8,953 9,530
INVESTMENT SECURITIES 3,080 2,234 6,239 4,370
INTEREST-EARNING DEPOSITS 279 207 482 314
-------- -------- -------- --------
TOTAL INTEREST INCOME 50,120 41,903 99,078 82,839
INTEREST EXPENSE:
DEPOSITS 24,447 20,695 47,786 40,499
BORROWED FUNDS 4,382 2,423 8,778 4,783
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 28,829 23,118 56,564 45,282
NET INTEREST INCOME 21,291 18,785 42,514 37,557
PROVISION FOR POSSIBLE LOAN LOSSES 866 611 1,656 1,271
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 20,425 18,174 40,858 36,286
NONINTEREST INCOME:
LOAN SERVICE CHARGES 202 277 496 546
SERVICE FEES ON DEPOSIT ACCOUNTS 766 540 1,480 1,032
GAIN ON SALE OF MARKETABLE SECURITIES, NET 30 0 76 0
LOSS ON SALE OF LOANS, NET (265) (115) (418) (295)
GAIN/(LOSS) ON SALE OF REAL ESTATE OWNED (7) 18 85 (48)
DIVIDENDS ON FHLB STOCK 326 212 566 422
OTHER OPERATING INCOME 666 647 1,449 1,450
-------- -------- -------- --------
TOTAL NONINTEREST INCOME 1,718 1,579 3,734 3,107
NONINTEREST EXPENSE:
COMPENSATION AND EMPLOYEE BENEFITS 8,553 6,688 16,713 13,359
PREMISES AND OCCUPANCY COSTS 1,557 1,258 3,141 2,582
OFFICE OPERATIONS 1,066 984 2,051 1,816
FEDERAL INSURANCE PREMIUMS 278 263 555 517
DATA PROCESSING 640 402 1,070 703
CHECK PROCESSING AND ATM EXPENSE 463 516 998 852
BANK SERVICE CHARGES 330 247 640 488
ADVERTISING 541 304 854 644
LEGAL, AUDIT AND PROFESSIONAL SERVICES 189 228 447 488
REAL ESTATE OWNED EXPENSE 130 181 315 365
AMORTIZATION OF INTANGIBLES 733 373 1,367 645
OTHER EXPENSES 518 488 965 817
-------- -------- -------- --------
TOTAL NONINTEREST EXPENSE 14,998 11,932 29,116 23,276
INCOME BEFORE INCOME TAXES 7,145 7,821 15,476 16,117
STATE AND FEDERAL INCOME TAXES 2,888 2,880 6,212 6,339
MINORITY INTEREST IN NET LOSS OF SUBSIDIARY 0 0 3 0
-------- -------- -------- --------
NET INCOME $ 4,257 4,941 9,267 9,778
======== ======== ======== ========
BASIC AND DILUTED EARNINGS PER SHARE $ 0.09 0.11 0.20 0.21
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accum. Unearned Unearned
Other Employee Recognition
Common Stock Compre- Stock and Total
---------------------- Paid-in Retained hensive Ownership Retention Shareholders'
Shares Amount Capital Earnings Income Plan Shares Plan Shares Equity
---------- ---------- ---------- ---------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balance at 6/30/97 * 46,752,000 $* 4,676 * 65,516 131,423 1,026 (2,358) (1,789) 198,494
Comprehensive income:
Net income -- -- -- 9,778 -- -- -- 9,778
Change in unrealized gain on
securities, net of tax -- -- -- -- 2,893 -- -- 2,893
---------
Total comprehensive income 12,671
Exercise of stock options 45,680 6 161 -- -- -- -- 167
ESOP shares released -- -- -- -- -- -- -- 0
RRP shares released -- -- -- -- -- -- 371 371
Dividends declared -- -- -- (3,741) -- -- -- (3,741)
---------- ---------- ---------- ---------- -------- -------- --------- ---------
Ending balance at 12/31/97 46,797,680 $ 4,682 65,677 137,460 3,919 (2,358) (1,418) 207,962
========== ========== ========== ========== ======== ======== ========= =========
<CAPTION>
Accum. Unearned Unearned
Other Employee Recognition
Common Stock Compre- Stock and Total
---------------------- Paid-in Retained hensive Ownership Retention Shareholders'
Shares Amount Capital Earnings Income Plan Shares Plan Shares Equity
---------- ---------- ---------- --------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balance at 6/30/98 46,840,970 $ 4,684 67,248 145,259 3,371 (1,412) (1,271) 217,879
Comprehensive income:
Net income -- -- -- 9,267 -- -- -- 9,267
Change in unrealized gain on
securities, net of tax -- -- -- -- 2,056 -- -- 2,056
----------
Total comprehensive income 11,323
Stock issuance for acquisition ** 475,128 48 1,145 -- -- -- -- 1,193
Exercise of stock options 32,680 3 180 -- -- -- -- 183
ESOP shares released -- -- -- -- -- -- -- 0
RRP shares released -- -- -- -- -- -- -- 0
Dividends declared -- -- -- (3,768) -- -- -- (3,768)
---------- ---------- ---------- --------- --------- --------- ---------- ----------
Ending balance at 12/31/98 47,348,778 $ 4,735 68,573 150,758 5,427 (1,412) (1,271) 226,810
========== ========== ========== ========= ========= ========= ========== ==========
</TABLE>
* Adjusted for stock split effective November 14, 1997
** Represents shares issued for the acquisition of Corry Savings Bank. See
Business Combination Section.
3
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
12/31/98 12/31/97 12/31/98 12/31/97
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 4,257 4,941 9,267 9,778
Adjustments to reconcile net income to net cash
provided by operations:
Provision for possible loan losses 866 611 1,656 1,271
Net loss on sales of assets 242 97 257 343
Purchase of marketable securities, trading -- -- (5,284) --
Proceeds from sale of marketable securities, trading 30 -- 5,360 --
Depreciation and amortization expense 1,267 939 2,352 1,735
Accretion of deferred loan fees (485) (120) (887) (213)
Decrease (increase) in other assets (13,938) 521 (12,842) 1,563
Increase (decrease) in other liabilities (1,202) (9,926) 621 (7,346)
Amortization of premium (discounts) on marketable securities 3 (78) (31) (175)
Noncash compensation expense related to
stock benefit plans 684 789 1,400 1,440
Other -- 111 226 111
--------- --------- --------- ---------
Net cash provided (used) by operating activities (8,276) (2,115) 2,095 8,507
INVESTING ACTIVITIES
Purchase of marketable securities held-to-maturity (30,520) (22,953) (31,520) (28,368)
Purchase of marketable securities available-for-sale (19,776) (27,481) (21,537) (46,103)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 24,883 10,175 31,892 13,333
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 19,333 3,560 32,561 14,015
Proceeds from sales of marketable securities,
available-for-sale -- -- -- --
Loan originations (227,989) (159,251) (450,887) (311,390)
Proceeds from loan maturities and principal reductions 94,115 97,482 210,347 194,978
Proceeds from loan sales 3,389 5,873 7,365 15,733
Purchase of Federal Home Loan Bank Stock (3,311) -- (4,375) --
Proceeds from sale of real estate owned 1,718 1,253 2,271 1,646
Purchase of real estate for investment (21) (187) (364) (448)
Purchase of premises and equipment (2,586) (823) (3,548) (1,762)
Acquisitions, net of cash received 157,964 152,671 152,994 152,671
--------- --------- --------- ---------
Net cash provided (used) by investing activities 17,199 60,319 (74,801) 4,305
</TABLE>
4
<PAGE>
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
12/31/98 12/31/97 12/31/98 12/31/97
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Increase in deposits, net $ 57,641 50,436 117,023 98,583
Proceeds from long-term borrowings 2,782 40,577 88,406 52,346
Repayments of long-term borrowings (18,994) (17,289) (68,306) (33,578)
Net decrease in short-term borrowings (32,001) (93,404) (20,579) (128,469)
Increase (decrease) in advances by borrowers for
taxes and insurance 6,446 4,985 (597) (1,369)
Cash dividends paid (1,893) (1,870) (3,768) (3,740)
Stock issuance for acquisition 1,193 -- 1,193 --
Proceeds from options exercised 53 161 183 161
--------- --------- --------- ---------
Net cash provided (used) by financing activities 15,227 (16,404) 113,555 (16,066)
Net increase (decrease) in cash and cash equivalents $ 24,150 41,800 40,849 (3,254)
========= ========= ========= =========
Cash and cash equivalents at beginning of period $ 76,094 26,458 59,395 71,512
Net increase (decrease) in cash and cash equivalents 24,150 41,800 40,849 (3,254)
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 100,244 68,258 100,244 68,258
========= ========= ========= =========
Cash paid during the period for:
Interest on deposits and borrowings (including interest
credited to deposit accounts of $18,087, $17,742,
$34,434 and $30,875, respectively) $ 29,753 25,778 56,257 45,932
========= ========= ========= =========
Income taxes $ 7,260 5,120 9,158 6,338
========= ========= ========= =========
Business acquisitions:
Fair value of assets acquired $ 43,785 14,084 46,842 14,084
Cash received 157,964 152,671 152,994 152,671
Minority interest -- -- 1,913 --
--------- --------- --------- ---------
Liabilities assumed $ 201,749 166,755 201,749 166,755
========= ========= ========= =========
Non-cash activities:
Loans transferred to real estate owned $ 1,479 1,065 1,905 1,586
========= ========= ========= =========
Sale of real estate owned financed by the Company $ 133 25 222 27
========= ========= ========= =========
</TABLE>
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions for form 10-Q and, accordingly, do not include
information for footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, have been included which are
necessary for a fair presentation of financial position and results of
operations. The consolidated statements have been prepared using the accounting
policies described in the financial statements included in Northwest Bancorp,
Inc.'s Annual Report and Form 10-K for the fiscal year ended June 30, 1998.
Certain items previously reported have been reclassified to conform with the
current period's reporting format. The results of operations for the three
months and the six months ended December 31, 1998 are not necessarily indicative
of the results that may be expected for the entire year.
(2) Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Northwest Bancorp, Inc. and its wholly owned subsidiaries, Northwest
Savings Bank, Jamestown Savings Bank, Northwest Consumer Discount Company,
Northwest Finance Company, Northwest Mortgage Corporation, Northwest Financial
Services, Inc., Northwest Capital Group, Inc., Rid Fed, Inc. and Great Northwest
Corporation. All significant intercompany items have been eliminated.
(3) Accounting Developments
-----------------------
In June 1997, the FASB released SFAS 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
for fiscal years beginning after December 15, 1997. As such, the Company adopted
this statement in the current fiscal year by adding the required disclosure in
both the Consolidated Statement of Financial Condition and the Consolidated
Statement of Changes in Shareholders' Equity. The adoption of SFAS 130 had no
effect on the reported earnings or operations of the Company.
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
6
<PAGE>
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 such disclosure is not expected to
have a material impact on the consolidated financial statements of the Company.
Such disclosure will be made in the Company's current year annual report.
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. Accordingly, this disclosure will be presented in the Company's
current year annual report but 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 derivative instruments or hedging activities and, therefore, does
not expect this statement to have a material effect on the financial statements.
In October 1998, the FASB released SFAS 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Entity an amendment of FASB Statement No.65" (SFAS 134). SFAS
134 amends Statement 65 to require that after the securitization of mortgage
loans, a mortgage banking entity classify the resulting mortgage-backed
securities or other retained interests as either held-to-maturity, available for
sale or trading based on its ability and intent to hold those securities. SFAS
134 is effective for the first fiscal quarter beginning after December 15, 1998
and is not expected to have a material impact on the Company's financial
statements.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from June 30, 1998 to December 31,
- ----------------------------------------------------------------------------
1998
- ----
Assets
- ------
At December 31, 1998, the Company had total assets of $2.889 billion, an
increase of approximately $326.8 million, or 12.7%, from $2.563 billion at June
30, 1998. This increase was funded primarily by a $318.1 million increase in
deposits and net income of $9.3 million.
Cash and cash equivalents, interest-earning deposits and marketable securities
totaled $604.8 million at December 31, 1998, an increase of $35.4 million, or
6.2%, from $569.4 million at June 30, 1998. Net loans receivable increased by
$252.5 million, or 13.2%, to $2.160 billion at December 31, 1998 from $1.907
billion at June 30, 1998 as loan demand remained strong in all of the Company's
market areas. Goodwill and other intangibles increased by $16.5 million, or
74.7%, to $38.6 million at December 31, 1998 from $22.1 million at June 30, 1998
as the Company recorded intangible assets in acquiring eight full-service
offices with deposits of $177.0 million and when it used purchase accounting in
the acquisition of Corry Savings Bank and the remaining outstanding shares of
Jamestown Savings Bank.
Liabilities
- -----------
Deposits increased by $318.1 million, or 15.7%, to $2.341 billion at December
31, 1998 from $2.023 billion at June 30, 1998. This increase resulted primarily
from normal internal deposit growth, the purchase of eight offices with deposits
of $177.0 million and the acquisition of Corry Savings Bank with deposits of
$24.4 million. Borrowed funds decreased by $369,000, or 0.1%, to $289.3 million
at December 31, 1998 from $289.7 million at June 30, 1998 as the Company's
growth was funded primarily by the aforementioned acquisitions.
Capital Resources and Liquidity
- -------------------------------
Total capital at December 31, 1998 was $226.8 million, an increase of $8.9
million, or 4.1%, from $217.9 million at June 30, 1998. This increase was
primarily attributable to net income for the six month period of $9.3 million
which was partially offset by the accrual of common stock dividends in the
amount of $3.8 million. Also contributing to this increase in capital was a $2.0
million increase in the net unrealized gain on securities available-for-sale.
The Company and its subsidiaries are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by 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, the
8
<PAGE>
Company must meet specific capital guidelines that involve quantitative measures
of the Company's assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgements by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company 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 December 31, 1998, all regulatory capital requirements were exceeded. The
actual, required, and well capitalized levels as of December 31, 1998 and June
30, 1998 are as follows: (dollars in thousands)
December 31, 1998
<TABLE>
<CAPTION>
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. $198,299 12.55% $126,366 8.00% $157,958 10.00%
Northwest Savings Bank $195,965 12.69% $123,524 8.00% $154,405 10.00%
Jamestown Savings Bank $ 5,401 16.06% $ 2,691 8.00% $ 3,364 10.00%
Tier 1 Capital (to risk weighted
assets):
Northwest Bancorp, Inc. $180,309 11.42% $ 63,183 4.00% $ 94,775 6.00%
Northwest Savings Bank $179,755 11.64% $ 61,762 4.00% $ 92,643 6.00%
Jamestown Savings Bank $ 5,097 15.15% $ 1,345 4.00% $ 2,018 6.00%
Tier 1 Capital (core) (to average
assets):
Northwest Bancorp, Inc. $180,309 6.45% $ 83,851 3.00%* $139,753 5.00%
Northwest Savings Bank $179,755 6.69% $ 80,607 3.00%* $134,345 5.00%
Jamestown Savings Bank $ 5,097 7.64% $ 2,001 3.00%* $ 3,336 5.00%
</TABLE>
9
<PAGE>
June 30, 1998
<TABLE>
<CAPTION>
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 1 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 1 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>
* 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 December 31, 1998, the Company had not been advised
of any additional requirements in this regard.
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 Company's internal liquidity requirement
is based upon liquid assets as a percentage of deposits and borrowings
("liquidity ratio"). The Company has always maintained a level of liquid assets
in excess of regulatory and internal requirements, and the liquidity ratio at
December 31, 1998 was 23.0%. The Company adjusts its liquidity levels in order
to meet funding needs for deposit outflows, payment of real estate taxes and
insurance on mortgage loan escrow accounts, repayment of borrowings, when
applicable, and loan commitments.
10
<PAGE>
Nonperforming Assets
- --------------------
The following table sets forth information with respect to the Company's
nonperforming assets. Nonaccrual loans are those loans on which the accrual of
interest has ceased. Loans are placed on nonaccrual status when they are more
than 90 days contractually delinquent. Other nonperforming assets represent
property acquired by the Company through foreclosure or repossession. Foreclosed
property is carried at the lower of its fair value or the principal balance of
the related loan. Nonperforming assets increased $10.4 million, or 86.1%, to
$22.6 million at December 31, 1998 from $12.1 million at June 30, 1998. This
increase resulted primarily from a change in the Company's policy regarding
delinquency status. In past years, a borrower was not considered delinquent
if they had paid any portion of a payment. Under current Company policy, a loan
is considered delinquent if any part of a contractually-due payment has not been
paid. This change became effective on November 13, 1998 when the Company
converted to a new core application software system and as a result of this
change, the Company recorded a significant increase in the amount of loans which
are ninety days or more past due. Management believes, however, that since the
Company's loan collectors are now aware of these delinquencies they will take
the appropriate action to address those borrowers who have made only partial
payments. Management further believes that the Company's asset quality remains
consistent.
December 31, 1998 June 30, 1998
----------------- -------------
Loans accounted for on a nonaccrual basis:
One-to four family residential loans $12,710 $ 6,013
Multifamily and commercial loans 2,424 929
Consumer loans 3,969 1,631
Commercial business loans 267 39
------- -------
Total $19,370 $ 8,612
======= =======
Total nonperforming loans as a
percentage of net loans receivable .90% .45%
======= =======
Total real estate acquired through
foreclosure and other real estate owned $ 3,185 $ 3,506
------- -------
Total nonperforming assets $22,555 $12,118
======= =======
Total nonperforming assets as a
percentage of total assets .78% .47%
======= =======
11
<PAGE>
Comparison of Operating Results for the Three Months and Six Months Ended
- -------------------------------------------------------------------------
December 31, 1998 and 1997
- --------------------------
General
- -------
Northwest Bancorp, Inc.'s net income for the three months ended December 31,
1998 was $4.3 million, or $.09 per share, a decrease of $648,000, or 13.8%, from
$4.9 million, or $.11 per share, during the same period last year. The decline
in earnings resulted primarily from recording significant expenses in the
quarter relating to the Company's conversion to a new core application data
processing system. The data processing conversion, which was completed to
accomplish the Company's major Year 2000 readiness initiatives, resulted in
additional expenses of approximately $600,000, or $.01 per share, after tax.
For the six months ended December 31, 1998, the Company's earnings were $9.3
million, or $.20 per share, a decrease of $511,000, or 5.2%, from $9.8 million,
or $.21 per share, for the same period last year. This decrease in earnings also
resulted primarily from the aforementioned data processing conversion expenses.
Net Interest Income
- -------------------
For the three months ended December 31, 1998, total interest income increased by
$8.2 million, or 19.6%, to $50.1 million compared to $41.9 million for the three
months ended December 31, 1997. This increase resulted primarily from a $562.9
million, or 27.2%, increase in average interest earning assets to $2.636 billion
for the three months ended December 31, 1998 from $2.073 billion for the three
months ended December 31, 1997. Partially offsetting this increase in average
balance was a decrease in the yield on average interest earning assets to 7.61%
for the three months ended December 31, 1998 from 8.08% for the same period last
year. The substantial growth in average interest earnings assets was primarily
due to the investment of funds received from the acquisition of offices with
deposits of approximately $255.0 million combined with continued strong internal
growth in the Company's existing franchise. The decrease in the overall yield on
interest earning assets resulted primarily from a substantial percentage of the
Company's loan portfolio being refinanced or restructured in an effort by
borrowers to reduce their interest rates. Also contributing to this decrease was
a substantial decrease in the yield on the Company's portfolio of mortgage-
backed securities as a large percentage of these securities are variable rate
and the rates adjusted downward during a period of generally decreasing interest
rates.
Interest income on loans receivable increased by $7.8 million, or 22.5%, to
$42.5 million for the quarter ended December 31, 1998 compared to $34.7 million
during the same quarter last year. This increase resulted primarily from a
$481.4 million, or 30.0%, increase in average loans outstanding to $2.088
billion for the quarter ended December 31, 1998 from $1.606 billion for the same
quarter last year. Loan balances increased because of strong loan demand
throughout the Company's market area. Partially offsetting this increase in
loans receivable was a decrease in the yield on average loans to 8.14% for the
quarter ended December 31, 1998 from 8.65% for
12
<PAGE>
the comparable period last year. This decrease in average yield resulted
primarily from a substantial percentage of the Company's loans refinancing or
restructuring in an effort by borrowers to lower their interest rates. Also
contributing to this decline was the substantial growth of the portfolio during
a period of relatively low interest rates.
Interest income on mortgage-backed securities declined by $462,000, or 9.7%, to
$4.3 million for the three months ended December 31,1998 from $4.7 million for
the same period last year. An increase in the average balance of mortgage-backed
securities of $10.9 million, or 3.7%, to $303.1 million for the three months
ended December 31, 1998 from $292.2 million for the three months ended December
31, 1997 was offset by a decrease in the average yield to 5.65% from 6.49% for
the same quarter last year. The average balance increased primarily because of
the purchase of mortgage-backed securities in an effort to deploy some of the
funds received from the previously mentioned acquisitions of deposits. 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 $846,000, or 37.9%, to
$3.1 million for the three months ended December 31, 1998 from $2.2 million for
the three months ended December 31, 1997. The increase resulted primarily from a
$52.7 million, or 36.4%, increase in the average balance of investment
securities to $197.3 million for the three months ended December 31, 1998 from
$144.6 million for the three months ended December 31, 1997. The increase in
average balance was primarily due to the investment of deposits assumed as a
result of the acquisition of eight banking offices. Augmenting this increase was
an increase in the average yield to 6.24% for the quarter ended December 31,
1998 from 6.18% for the same quarter last year. This increase in average yield
resulted primarily from the purchase of approximately $30 million of fixed-rate
trust preferred securities from other financial institutions which had higher
yields than the securities in the Company's portfolio at the time of the
purchase. Partially offsetting the higher yields on the trust preferred
securities was the lower nominal interest rates received on approximately $40
million of tax exempt securities that the Company purchased during the last
twelve months.
Interest income on interest-earning deposits increased by $72,000, or 34.8%, to
$279,000 for the three months ended December 31, 1998 from $207,000 for the
three months ended December 31, 1997. This increase resulted primarily from an
increase in the average balance of $17.9 million, or 59.1%, to $48.2 million for
the three months ended December 31, 1998 from $30.3 million for the three months
ended December 31, 1997. This increase was funded primarily by the proceeds of
the various office acquisitions. Partially offsetting this increase was a
decrease in the average yield to 2.32% for the quarter ended December 31, 1998
from 2.73% for the same period last year. This decrease in average yield
reflected the decrease in market interest rates in general.
Interest expense increased by $5.7 million, or 24.7%, to $28.8 million for the
three months ended December 31, 1998 from $23.1 million for the three months
ended December 31, 1997. This increase resulted primarily from an increase of
$585.3 million, or 30.3%, in the average balance
13
<PAGE>
of interest-bearing liabilities to $2.515 billion for the quarter ended December
31, 1998 from $1.930 billion for the quarter ended December 31, 1997. Partially
offsetting this increase in balance was a decrease in the average cost of funds
to 4.59% for the quarter ended December 31, 1998 from 4.79% for the comparable
period last year. The increase in average interest-bearing liabilities resulted
primarily from an increase of $421.6 million, or 24.0%, in the average balance
of deposits attributed primarily to the office acquisitions throughout the year
which contributed deposits of approximately $177.0 million. In addition, strong
internal growth and the acquisitions of Jamestown Savings Bank and Corry Savings
Bank with deposits of $54.3 million and $24.4 million, respectively, accounted
for the remaining increase in deposits. Also contributing to the growth of
interest-bearing liabilities was an increase of $163.7 million, or 95.8%, in
average borrowed funds to $334.5 million for the quarter ended December 31, 1998
from $170.8 million for the quarter ended December 31, 1997. The increase in
borrowed funds consisted primarily of borrowings from the Federal Home Loan Bank
which were used to fund increases in the loan and investment security portfolios
in an effort to enhance net interest income. The decrease in the average cost of
funds resulted primarily from a decrease in market rates in general which
effectively lowered the interest rates paid for certificates of deposits,
checking accounts and borrowed money.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $2.5 million, or 13.3%, to $21.3 million for
the three months ended December 31, 1998 compared to $18.8 million for the three
months ended December 31, 1997.
For the six months ended December 31,1998, total interest income increased by
$16.3 million, or 19.7%, to $99.1 million compared to $82.8 million for the six
months ended December 31, 1997. This increase primarily resulted from a $534.2
million, or 26.1%, increase in average interest earning assets to $2.578 billion
for the six months ended December 31, 1998 from $2.044 billion for the six
months ended December 31, 1997. The yield on average interest earning assets
decreased to 7.69% for the six months ended December 31, 1998 from 8.11% for the
same period last year. The increase in average interest earning assets was
primarily a result of the deployment of deposits received from the acquisition
of offices combined with continued strong internal growth. The yield on average
interest earning assets declined as the result of significant loan refinancings
and substantial growth during a period of generally lower interest rates.
Interest income on loans receivable increased by $14.8 million, or 21.6%, to
$83.4 million for the six months ended December 31, 1998 from $68.6 million for
the six months ended December 31, 1997. This increase resulted primarily from a
$442.9 million, or 28.0%, increase in average loans outstanding to $2.024
billion for the six months ended December 31, 1998 from $1.582 billion for the
same period last year. Partially offsetting the increase in average loans
outstanding was a decrease in the average yield on loans to 8.24% for the six
months ended December 31, 1998 from 8.68% for the six months ended December 31,
1997. Interest income on mortgage-backed securities decreased by $577,000, or
6.1%, to $9.0 million for the six months ended December 31, 1998 from $9.5
million during the same period last year. The average balance of mortgage-backed
securities increased by $11.5 million, or 3.9%, to $302.8 million for the six
14
<PAGE>
months ended December 31, 1998 from $291.3 million for the six months ended
December 31, 1997. Partially offsetting this increase was a decrease in the
average yield to 5.91% for the six months ended December 31, 1998 from 6.54% for
the same period last year. Interest income on investment securities increased by
$1.8 million, or 40.9%, to $6.2 million for the six months ended December 31,
1998 from $4.4 million for the six months ended December 31, 1997. This increase
resulted primarily from a $60.9 million, or 44.2%, increase in the average
balance of investment securities to $198.7 million for the six months ended
December 31, 1998 from $137.8 million for the six months ended December 31,
1997. Partially offsetting the increase in the average balance of investment
securities was a slight decline in the average yield to 6.28% for the six months
ended December 31, 1998 from 6.34% for the same period last year. Interest
income on interest-earning deposits increased by $168,000, or 53.5%, to $482,000
for the six months ended December 31, 1998 from $314,000 for the six months
ended December 31, 1997. This increase resulted primarily from an $18.9 million,
or 57.4%, increase in the average balance of interest-earning deposits to $51.8
million for the six months ended December 31, 1998 from $32.9 million for the
six months ended December 31,1997. Partially offsetting the increase in the
average balance of interest-earning deposits was a decline in the average yield
to 1.86% for the six months ended December 31, 1998 from 1.91% for the same
period last year.
For the six months ended December 31, 1998 interest expense increased by $11.3
million, or 24.9%, to $56.6 million compared to $45.3 million for the six months
ended December 31, 1997. This increase resulted primarily from a $547.6 million,
or 28.8%, increase in the average balance of interest-bearing liabilities to
$2.446 billion for the six months ended December 31, 1998 from $1.899 billion
for the six months ended December 31, 1997. Partially offsetting this increase
in balance was a decrease in the average cost of funds to 4.62% for the six
months ended December 31, 1998 compared to 4.77% for the six months ended
December 31, 1997. The increase in average interest-bearing liabilities resulted
primarily from a $407.4 million, or 23.7%, increase in the average balance of
deposits attributed primarily to the aforementioned branch acquisitions. Also
contributing to the increase in deposits was continued strong internal deposit
growth. Interest-bearing liabilities also increased due to a $140.2 million, or
77.6%, increase in average borrowed funds to $320.9 million for the six months
ended December 31, 1998 from $180.7 million for the six months ended December
31, 1997. The increase in borrowed funds consisted primarily of funds borrowed
from the Federal Home Loan Bank which were used to fund increases in the
Company's portfolio of loans and investment securities in an effort to enhance
the net interest income. The decrease in the average cost of funds resulted
primarily from decreases in market interest rates in general which resulted in a
corresponding decrease in the cost of checking accounts and certificates of
deposit.
Provision for Loan Losses
- -------------------------
The provision for possible loan losses increased by $255,000, or 41.7%, to
$866,000 for the three months ended December 31, 1998 from $611,000 for the
three months ended December 31,1997. The Company has increased its provision for
possible loan losses in response to the significant
15
<PAGE>
growth in its loan portfolio over the past twelve months as credit quality has
remained consistent.
The provision for possible loan losses increased by $385,000, or 30.3%, to $1.7
million for the six months ended December 31, 1998 from $1.3 million for the six
months ended December 31, 1997. This increase also resulted from the significant
growth in the Company's loan portfolio.
Noninterest Income
- ------------------
Noninterest income increased by $139,000, or 8.8%, to $1.7 million for the three
months ended December 31, 1998 from $1.6 million for the three months ended
December 31, 1997. This increase was due primarily to a $151,000 increase in
loan fees and service charges resulting from the successful introduction of a
debit card program which provided transaction fee income. Partially offsetting
this increase in fee income was an increase of $150,000 in the loss on the sale
of loans. This increase in the loss on sale of loans resulted primarily from the
discontinuance of the Company's New York mortgage banking subsidiary on December
31, 1998. This business operation was discontinued due to losses experienced
during the last several years. It is anticipated that the Company will incur
additional expenses to liquidate this operation during the quarter ended March
31, 1999, but such expenses will not have a material impact on the Company's
earnings.
For the six months ended December 31, 1998 noninterest income increased by
$627,000, or 20.2%, to $3.7 million compared to $3.1 million for the six months
ended December 31, 1997. This increase was also primarily attributable to the
introduction of a debit card with related transaction fee income.
Noninterest Expense
- -------------------
Noninterest expense increased by $3.1 million, or 26.1%, to $15.0 million for
the three months ended December 31, 1998 from $11.9 million for the three months
ended December 31, 1997. This increase resulted primarily from the substantial
growth in the Company's retail network over the past twelve months. Since
December 31, 1997, the Company purchased twelve full service banking facilities
and opened four de-novo banking offices. This represents a 25% increase in the
Company's branch office network. During the same period, the Company opened four
de-novo consumer finance offices which represents a 13.3% increase in the
Company's consumer finance network. Also contributing to the substantial
increase in noninterest expense were expenses of approximately $900,000 relating
to the Company's conversion to a new mainframe core application data processing
system. This conversion was completed to enable the Company to become more
competitive into the next century and to accomplish most of the Company's Year
2000 initiatives.
As a result of the Company's strategic growth and data processing conversion,
along with normal inflationary increases in costs, all expense categories
increase significantly for the three months
16
<PAGE>
ended December 31, 1998 when compared to the previous year. Compensation and
employee benefit expense increased by $1.9 million, or 28.4%, to $8.6 million;
premises and occupancy costs increased by $300,000, or 23.8%, to $1.6 million;
and other expenses increased by $542,000, or 15.0%, to $4.2 million. In
addition, as a result of recording intangibles of approximately $18.0 million
relating to the acquisitions of Jamestown Savings Bank, Corry Savings Bank and
eight branch offices with deposits, the expense for amortization of intangibles
increased by $360,000, or 96.5%, to $733,000 for the quarter ended December 31,
1998 from $373,000 in the previous year.
For the six months ended December 31, 1998, noninterest expenses increased by
$5.8 million, or 24.9%, to $29.1 million from $23.3 million during the same
period last year. This increase also related primarily to the aforementioned
growth in the Company's retail network and the core application data processing
conversion.
Income Taxes
- ------------
The provision for income taxes for the three months ended December 31, 1998 was
unchanged at $2.9 million when compared to the same period last year. Although
the Company's taxable income decreased by $676,000, the expected decrease in
income tax was offset by the recognition in the previous year of significant tax
credits received from the Company's participation in low-income housing
projects.
For the six months ended December 31, 1998 the provision for income taxes
decreased by $100,000 to $6.2 million when compared to $6.3 million for the same
period last year. This decrease resulted primarily from a $641,000 decrease in
taxable income which was offset by the aforementioned low-income housing tax
credits.
Year 2000
- ---------
The Company has devoted substantial resources to address the possible impact of
issues relating to the year 2000 ("Y2K") on the Company and its operations.
After several years of assessing the potential problems, the Company adopted a
formal plan addressing the Y2K issue in 1997.
The Company's most critical operating system is its core application processing
and the Company addressed this mission critical area by converting to a new core
application processing system in the fourth quarter of 1998. Although the
system's Y2K capabilities have already been tested by other users, on-site
testing of the computer system's Y2K readiness, as well as all mission critical
processes, is expected to be completed by the Company by June 30, 1999. The
approximate all-inclusive cost of this conversion was $3,000,000. Approximately
$900,000 of these costs were expenses recorded in the quarter ended December 31,
1998. The remaining costs have been capitalized and will be expensed over
various periods ranging from five to ten years.
17
<PAGE>
Other than the core application conversion, costs relating to Y2K 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 assess the progress of
their Y2K efforts. It is possible that the Company could be negatively impacted
in the year 2000 because external parties have not successfully addressed their
Y2K 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.
18
<PAGE>
Average Balance Sheet
(Dollars in Thousands)
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances.
Three Months Ended December 31,
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------------------
AVERAGE. INTEREST AVG AVERAGE INTEREST AVG.
BALANCE YIELD/ BALANCE YIELD
COST /COST
---------- ---------- ---- ---------- ---------- ----
ASSETS:
- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans Receivable (a) (b) $2,087,532 $ 42,481 8.14% $1,606,125 $ 34,720 8.65%
Mortgage-Backed Securities (c) (d) $ 303,055 $ 4,280 5.65% $ 292,189 $ 4,742 6.49%
Investment Securities (b) (c) (d) (e) $ 197,292 $ 3,080 6.24% $ 144,854 $ 2,234 6.18%
Other Interest Earning Deposits $ 48,170 $ 279 2.32% $ 30,279 $ 207 2.73%
---------- ---------- ---- ---------- ---------- ----
Total Interest Earning Assets $2,636,049 $ 50,120 7.61% $2,073,177 $ 41,903 8.08%
Noninterest Earning Assets $ 133,929 $ 89,692
---------- ----------
TOTAL ASSETS $2,769,978 $2,162,869
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
- -------------------------------------
Interest Bearing Liabilities:
Passbook and Statement Savings $ 340,359 $ 2,791 3.28% $ 291,118 $ 2,434 3.34%
Now Accounts $ 341,310 $ 1,191 1.40% $ 245,458 $ 1,170 1.91%
Money Market Demand Accounts $ 125,564 $ 1,030 3.28% $ 87,213 $ 745 3.42%
Certificate Accounts $1,373,257 $ 19,435 5.66% $1,135,100 $ 16,346 5.76%
Borrowed Funds (f) $ 334,498 $ 4,382 5.24% $ 170,765 $ 2,423 5.68%
---------- ---------- ---- ---------- ---------- ----
Total Interest Bearing Liabilities $2,514,988 $ 28,829 4.59% $1,929,654 $ 23,118 4.79%
NonInterest Bearing Liabilities $ 31,091 $ 29,014
---------- ----------
Total Liabilities $2,546,079 $1,958,668
Shareholders' Equity $ 223,899 $ 204,201
---------- ----------
TOTAL LIABILITIES AND EQUITY $2,769,978 $2,162,869
========== ==========
Net Interest Income/Interest Rate Spread $ 21,291 3.02% $ 18,785 3.29%
Net Interest Earning Assets/Net Interest Margin $ 121,061 3.23% $ 143,523 3.62%
Ratio of Interest Earning Assets to
Interest Bearing Liabilities 1.05 X 1.07 X
</TABLE>
(a) Average loans receivable includes loans held as available-for-sale and loans
placed on nonaccrual status.
(b) Interest income on tax-free loans and investment securities is not presented
on a taxable equivalent basis.
(c) Average balances include the effect of unrealized gains or losses on
securities held as available-for-sale.
(d) Interest income on marketable securities does not include market value
adjustments for securities available-for-sale.
(e) Average balances include FNMA and FHLMC stock but do not include FHLB stock.
(f) Average balances include FHLB borrowings, securities sold under agreements
to repurchase and other borrowings.
19
<PAGE>
Average Balance Sheet
(Dollars in Thousands)
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances.
Six Months Ended December 31,
<TABLE>
<CAPTION>
1998 1997
------------------------------------ ----------------------------------------
AVERAGE. INTEREST AVG AVERAGE BALANCE INTEREST AVG.
BALANCE YIELD/ YIELD
COST /COST
------------ ---------- -------- --------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest Earning Assets:
Loans Receivable (a) (b) $2,024,490 $83,404 8.24% $1,581,589 $68,625 8.68%
Mortgage-Backed Securities (c) (d) $ 302,793 $ 8,953 5.91% $ 291,333 $ 9,530 6.54%
Investment Securities (b) (c) (d) (e) $ 198,739 $ 6,239 6.28% $ 137,816 $ 4,370 6.34%
Other Interest Earning Deposits $ 51,806 $ 482 1.86% $ 32,853 $ 314 1.91%
---------- ------- ---- ---------- ------- ----
Total Interest Earning Assets $2,577,828 $99,078 7.69% $2,043,591 $82,839 8.11%
Noninterest Earning Assets $ 123,111 $ 87,471
---------- ----------
TOTAL ASSETS $2,700,939 $2,131,062
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest Bearing Liabilities:
Passbook and Statement Savings $ 335,029 $ 5,622 3.36% $ 288,835 $ 4,917 3.40%
Now Accounts $ 336,071 $ 2,343 1.39% $ 238,387 $ 2,284 1.92%
Money Market Demand Accounts $ 120,916 $ 2,089 3.46% $ 85,608 $ 1,448 3.38%
Certificate Accounts $1,333,459 $37,732 5.66% $1,105,224 $31,850 5.76%
Borrowed Funds (f) $ 320,927 $ 8,778 5.47% $ 180,726 $ 4,783 5.29%
---------- ------- ---- ---------- ------- ----
Total Interest Bearing Liabilities $2,446,402 $56,564 4.62% $1,898,780 $45,282 4.77%
NonInterest Bearing Liabilities $ 32,192 $ 30,349
---------- ----------
Total Liabilities $2,478,594 $1,929,129
Minority Interest in Subsidiary $ 547 $ 0
Shareholders' Equity $ 221,798 $ 201,933
---------- ----------
TOTAL LIABILITIES AND EQUITY $2,700,939 $2,131,062
========== ==========
Net Interest Income/Interest Rate Spread $42,514 3.06% $37,557 3.34%
Net Interest Earning Assets/Net Interest Margin $ 131,426 3.30% $ 144,811 3.68%
Ratio of Interest Earning Assets to
Interest Bearing Liabilities 1.05X 1.08X
</TABLE>
(a) Average loans receivable includes loans held as available-for-sale and loans
placed on nonaccrual status.
(b) Interest income on tax-free loans and investment securities is not presented
on a taxable equivalent basis.
(c) Average balances include the effect of unrealized gains or losses on
securities held as available-for-sale.
(d) Interest income on marketable securities does not include market value
adjustments for securities available-for-sale.
(e) Average balances include FNMA and FHLMC stock but do not include FHLB stock.
(f) Average balances include FHLB borrowings, securities sold under agreements
to repurchase and other borrowings.
20
<PAGE>
Rate/Volume Analysis
(Dollars in Thousands)
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 (changes 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.
Three months ended December 31, 1998 and 1997
Rate/ Net
Rate Volume Volume Change
------- ------- ------- -------
Interest earning assets:
Loans receivable ($2,036) $10,407 ($610) $7,761
Mortgage-backed securities ($615) $176 ($23) ($462)
Investment securities $23 $814 $9 $846
Other interest-earning deposits ($31) $123 ($20) $72
------- ------- ------- -------
Total interest earning assets ($2,659) $11,520 ($644) $8,217
Interest bearing liabilities:
Passbook and statement savings ($47) $412 ($8) $357
Now accounts ($313) $457 ($123) $21
Money market demand accounts ($30) $328 ($13) $285
Certificate accounts ($282) $3,430 ($59) $3,089
Borrowed funds ($185) $2,322 ($178) $1,959
------- ------- ------- -------
Total interest bearing liabilities ($857) $6,949 ($381) $5,711
Net change in interest income ($1,802) $4,571 ($263) $2,506
======= ======= ======= =======
21
<PAGE>
Six months ended December 31, 1998 and 1997
Rate/ Net
Rate Volume Volume Change
------- ------- ------- -------
Interest earning assets:
Loans receivable ($3,467) $19,217 ($971) $14,779
Mortgage-backed securities ($916) $375 ($36) ($577)
Investment securities ($44) $1,932 ($19) $1,869
Other interest-earning deposits ($8) $181 ($5) $168
-------- -------- -------- --------
Total interest earning assets ($4,435) $21,705 ($1,031) $16,239
Interest bearing liabilities:
Passbook and statement savings ($70) $786 ($11) $705
Now accounts ($622) $936 ($255) $59
Money market demand accounts $31 $597 $13 $641
Certificate accounts ($576) $6,577 ($119) $5,882
Borrowed funds $160 $3,711 $124 $3,995
-------- -------- -------- --------
Total interest bearing liabilities ($1,077) $12,607 ($248) $11,282
Net change in interest income ($3,358) $9,098 ($783) $4,957
======== ======== ======== ========
22
<PAGE>
ITEM 3. MARKET RISK
As a bank holding company, the Company's primary market risk is interest rate
risk. Interest rate risk is the sensitivity of net interest income to variations
in interest rates over a specified time period. This sensitivity results from
differences in the time periods in which interest rate sensitive assets and
liabilities mature or reprice. The Company attempts to control interest rate
risk by closely matching, within acceptable limits, the repricing periods of its
assets and liabilities. Because the Company's interest sensitive liabilities
typically have repricing periods or maturities of short duration, the Company
has attempted to shorten the maturities of its assets by emphasizing the
origination of short-term, fixed-rate consumer loans, one-to-four family
residential mortgage loans with terms of fifteen years or less and adjustable
rate mortgage loans, consumer loans and commercial loans. In addition, the
Company has purchased shorter term or adjustable-rate investment securities and
adjustable-rate mortgage-backed securities.
The Company has a Risk Management Committee comprised of certain members of the
Board of Directors which meets quarterly and reviews interest rate risks and
trends, the Company's interest sensitivity position, the Company's liquidity
position and the market value of the Company's investment portfolio.
In an effort to assess market risk, the Company utilizes a simulation model to
determine the effect of immediate incremental increases and 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 assessing 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 present value of the Company's assets and liabilities. Given a parallel
shift of 2% in interest rates, the market value of equity may not decrease by
more than 50% of total shareholders' equity.
The following table illustrates the simulated impact of a 1% or 2% upward or
downward movement in interest rates on net income, return on average equity,
earnings per share and market value of equity. This analysis was prepared
assuming that interest-earning asset levels at December 31, 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 December 31, 1998 levels.
23
<PAGE>
<TABLE>
<CAPTION>
Increase Decrease
---------------- ---------------
Parallel shift in interest rates over the next 12 months 1.0% 2.0% 1.0% 2.0%
---- ---- ---- ----
<S> <C> <C> <C> <C>
Projected percentage increase/(decrease) in net income (6.8%) (15.4%) 9.4% 17.1%
Projected increase/(decrease) in return on average equity (0.6%) (1.3%) 0.8% 1.5%
Projected increase/(decrease) in earnings per share ($.03) ($.06) $.04 $.07
Projected percentage increase/(decrease) in market value of equity (14.4%) (30.6%) 15.3% 16.7%
</TABLE>
The figures included in the table above represent projections which were
computed based upon certain assumptions including prepayment rates and decay
rates which cannot be accurately predicted. There are no assurances that these
assumptions and the resultant impact on the Company's financial ratios will
approximate the figures presented above.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Northwest Savings Bank 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 Bank's initial public offering in November 1994. It alleges
that the defendants breached their contractual obligations and fiduciary duties
by carrying out the offering at a price that allegedly was not justified by
market and financial conditions. The defendants previously obtained the
dismissal of a lawsuit brought by the same counsel in federal court making
similar allegations under federal law. Management intends to vigorously defend
this lawsuit.
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, that may result from such
potential litigation will not have a material adverse effect on the Company's
financial statements.
Item 2. Changes in Securities
- -----------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
(a) The Company held its Annual Meeting of Shareholders on November 18,
1998
24
<PAGE>
(b) The name of each director elected at the Annual Meeting is as follows:
Robert G. Ferrier
Richard E. McDowell
Joseph T. Stadler
Walter J. Yahn
The name of each director whose term of office continued after the
Annual Meeting is as follows:
Richard L. Carr
Thomas K. Creal, III
John J. Doyle
John O. Hanna
William J. Wagner
John S. Young
(c) The following matters were voted upon at the Annual Meeting:
(i) The election of four directors of the Company:
Withheld For
---------- ------
Robert G. Ferrier 44,103,082 87,154
Richard E. McDowell 44,103,802 86,434
Joseph T. Stadler 44,104,094 86,142
Walter J. Yahn 44,101,362 88,874
(ii) Ratification of the appointment of KPMG, LLP as the Company's
independent auditors for the fiscal year ending June 30, 1999:
For Against Withheld
---------- ------- --------
44,112,898 21,772 55,566
Item 5. Other Information
- -------------------------
Holding Company Reorganization
- ------------------------------
On February 17, 1998 Northwest Savings Bank reorganized into a two-tier holding
company structure. The Bank 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 Savings Bank and owns 100% of the Bank's common stock. The previous
shareholders of Northwest Savings Bank stock received an equivalent number of
shares of the new publicly traded entity, Northwest Bancorp,
25
<PAGE>
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
Northwest Bancorp, Inc. are identical to that of Northwest Savings Bank.
Business Combinations
- ---------------------
On October 21, 1998, the Company acquired Corry Savings Bank, a Pennsylvania
chartered mutual savings bank with assets of approximately $25.0 million and
capital of approximately $2.5 million. In conjunction with this acquisition,
146,815 shares of the common stock of Northwest Bancorp, Inc. were sold in a
stock offering at an average price of $8.13 per share, net of expenses, with
priority given to the depositors of Corry Savings Bank. In addition, Northwest
Bancorp MHC, the mutual holding company for Northwest Bancorp, Inc., received
328,313 shares of the common stock of Northwest Bancorp, Inc. in exchange for
the assets and liabilities of Corry Savings Bank. As a result of this
transaction, Northwest Bancorp MHC continued to own approximately 69.2% of the
outstanding shares of Northwest Bancorp, Inc. The acquisition was accounted for
using the purchase method of accounting.
In December 1998, the Company acquired eight retail office facilities and the
related deposit accounts totaling approximately $177 million from National City
Bank of Pennsylvania. All of the office facilities are located in Northwest
Pennsylvania.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibit No. 11 Statement re: computation of per share earnings
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31,1998 December 31,1997
---------------- ----------------
<S> <C> <C>
Net income applicable to common stock $ 4,257,236 $ 4,940,732
Weighted-average common shares outstanding 46,943,070 46,280,314
----------- ------------
Basic earnings per share $ 0.09 $ 0.11
=========== ============
Weighted-average common shares outstanding 46,943,070 46,280,314
Common stock equivalents due to effect of stock options 496,404 782,046
----------- ------------
Total weighted-average common shares and equivalents 47,439,474 47,062,360
Diluted earnings per share $ 0.09 $ 0.11
=========== ============
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
December 31,1998 December 31,1997
---------------- ----------------
<S> <C> <C>
Net income applicable to common stock $ 9,266,768 $ 9,777,920
Weighted-average common shares outstanding 46,751,394 46,275,715
----------- -----------
Basic earnings per share $ 0.20 $ 0.21
=========== ===========
Weighted-average common shares outstanding 46,751,394 46,275,715
Common stock equivalents due to effect of stock options 554,695 670,868
----------- -----------
Total weighted-average common shares and equivalents 47,306,089 46,946,583
Diluted earnings per share $ 0.20 $ 0.21
=========== ===========
</TABLE>
Exhibit No. 27 Financial Data Schedule attached
(b) No Form 8-K reports were filed during the quarter
27
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
NORTHWEST BANCORP, INC.
Date: February 12, 1999 By: /s/ John O. Hanna
-----------------------------------
John O. Hanna
President and Chief Executive Officer
Date: February 12, 1999 By: /s/ William J. Wagner
-----------------------------------
William J. Wagner
Chief Operating Officer
Chief Financial Officer
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUN-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 47,161
<INT-BEARING-DEPOSITS> 53,083
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 309,668
<INVESTMENTS-CARRYING> 194,846
<INVESTMENTS-MARKET> 194,861
<LOANS> 2,159,771
<ALLOWANCE> 16,515
<TOTAL-ASSETS> 2,889,419
<DEPOSITS> 2,340,568
<SHORT-TERM> 129,840
<LIABILITIES-OTHER> 32,704
<LONG-TERM> 159,497
0
0
<COMMON> 4,735
<OTHER-SE> 222,075
<TOTAL-LIABILITIES-AND-EQUITY> 2,889,419
<INTEREST-LOAN> 83,404
<INTEREST-INVEST> 15,192
<INTEREST-OTHER> 482
<INTEREST-TOTAL> 99,078
<INTEREST-DEPOSIT> 47,786
<INTEREST-EXPENSE> 56,564
<INTEREST-INCOME-NET> 42,514
<LOAN-LOSSES> 1,656
<SECURITIES-GAINS> 76
<EXPENSE-OTHER> 29,116
<INCOME-PRETAX> 15,476
<INCOME-PRE-EXTRAORDINARY> 15,476
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,267
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<YIELD-ACTUAL> 7.69
<LOANS-NON> 19,370
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,769
<CHARGE-OFFS> 1,350
<RECOVERIES> 299
<ALLOWANCE-CLOSE> 16,515
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 16,515
</TABLE>
