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SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended June 30, 2000
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
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(Address of Principal Executive Offices) Zip Code
(814) 726-2140
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X . NO .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
As of June 30, 2000, there were issued and outstanding 12,136,594 shares of
the Registrant's Common Stock, not including 35,224,175 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, 2000, as
reported by the Nasdaq National Market, was approximately $83.4 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the November 2000 Annual Meeting of Stockholders (Part
III).
PART I
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ITEM 1. BUSINESS
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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, 2000, the sole activity of the Company was the ownership of all of
the issued and outstanding common stock of the Bank and of Jamestown Savings
Bank ("Jamestown"). Jamestown was formed in November of 1995 as a de novo New
York-chartered savings bank headquartered in Jamestown, New York.
As of June 30, 2000, the Company, through the Bank and Jamestown, operated
106 community banking offices throughout its market area in northwest, southwest
and central Pennsylvania, southwestern New York, and eastern Ohio. The Company,
through the Bank and its wholly owned subsidiaries, also operates 42 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. The Company, directly or through its subsidiaries, also
emphasizes the origination of consumer loans, including home equity, second
mortgage, education and other consumer loans. To a lesser extent, the Company
also originates multifamily residential and commercial real estate loans and
commercial business loans.
The Company's principal sources of funds are deposits, borrowed funds and
the principal and interest payments on loans and marketable securities. The
principal source of income is interest received from loans and marketable
securities. The Company's principal expenses are the interest paid on deposits
and the cost of employee compensation and benefits.
The Company's principal executive office is located at 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 a subsidiary, consumer finance services. The Bank's mutual savings
bank predecessor was founded in 1896. The Bank in its current stock form was
established on November 2, 1994, as a result of the reorganization (the
"Reorganization") of the Bank's mutual predecessor into a mutual holding company
structure. At the time of the Reorganization, the Bank issued a majority of its
to-be outstanding shares of common stock to the Mutual Holding Company (which
was formed in connection with the Reorganization) and 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.
2
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 761,866
shares of common stock, 400,000 shares, 52.5% of which were purchased by the
Mutual Holding Company. The Mutual Holding Company continued to accumulate
additional ownership in Jamestown and in February 1998 sold its entire ownership
position consisting of 490,050 shares to the Company. On July 8, 1998 the
Company conducted a tender offer for the remaining shares of Jamestown, and
acquired 100% of the outstanding shares of Jamestown as of July 31, 1998.
As of June 30, 2000, Jamestown had four offices in Southwestern New York.
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 acquisitions, into the
southwestern and central regions of Pennsylvania. As of June 30, 2000, the
Company operated in Pennsylvania 98 community banking offices, 42 consumer
finance offices, located in the following counties: Allegheny, Armstrong,
Bedford, Berks, Blair, Butler, Cambria, Centre, Clarion, Clearfield, Clinton,
Crawford, Cumberland, Dauphin, Elk, Erie, Fayette, Forest, Huntingdon, Indiana,
Jefferson, Lancaster, Lawrence, Lebanon, Luzerne, Lycoming, McKean, Mercer,
Mifflin, Schuylkill, Venango, Warren, Washington, Westmoreland and York. In
addition, the Company operated community banking offices in Ashtabula County,
Ohio, Geauga County, Ohio and Lake County, Ohio. Through Jamestown, the Company
operated three community banking offices in Chautauqua County, New York and one
community banking office in Cattaraugus County, New York. The Company, through
the Bank and its subsidiaries, also operates one consumer finance office in
southwestern New York.
Lending Activities
General. Historically, the principal lending activity of the Company has
been the origination, for retention in its portfolio, of fixed-rate and, to a
lesser extent, adjustable-rate mortgage loans collateralized by one- to four-
family residential real estate located in its market area. To a lesser extent,
the Company also originates loans collateralized by multifamily residential and
commercial real estate, construction loans, commercial business loans and
consumer loans.
In an effort to manage interest rate risk, the Company has sought to make
its interest-earning assets more interest rate sensitive by originating
adjustable-rate loans, such as adjustable-rate mortgage loans, home equity
loans, and education loans, and by originating short-term and medium-term
fixed-rate consumer loans. The Company also purchases mortgage-backed securities
that generally have adjustable interest rates. Because the Company also
originates a substantial amount of long-term fixed-rate mortgage loans
collateralized by one- to four-family residential real estate, when possible,
such loans are originated and underwritten according to standards that allow the
Company to sell them in the secondary mortgage market for purposes of managing
interest-rate risk and liquidity. The Company currently sells in the secondary
market a limited amount of fixed-rate residential mortgage loans with maturities
of more than 15 years, and retains all adjustable-rate mortgage loans and
fixed-rate residential mortgage loans with maturities of 15 years or less. The
Company is primarily a portfolio lender and at any one time the Company holds
only a nominal amount of loans identified as available-for-sale. The Company
retains servicing on the mortgage loans it sells and realizes monthly service
fee income. The Company retains in its portfolio all consumer loans, multifamily
residential and commercial real estate loans, and commercial business loans that
it originates.
3
Analysis of Loan Portfolio. Set forth below are selected data relating to
the composition of the Company's loan portfolio by type of loan as of the dates
indicated.
At June 30,
------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ---------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate:
One- to four-family (1) $ 1,836,154 70.9% $ 1,718,002 73.8% $ 1,368,736 69.4% $ 1,096,315 68.8% $ 1,008,288 70.8%
Multifamily and
commercial ......... 192,897 7.5% 152,466 6.6 128,831 6.5 100,912 6.3 97,612 6.8
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total real estate
loans ............ 2,029,051 78.4% 1,870,468 80.4 1,497,567 75.9 1,197,227 75.1 1,105,900 77.6
Consumer:
Home equity and home
improvement ........ 44,848 1.7% 39,067 1.7 33,963 1.7 37,607 2.4 38,146 2.7
Education loans ....... 70,619 2.7% 64,341 2.8 59,791 3.0 53,542 3.3 47,842 3.4
Loans on savings
accounts ........... 8,052 0.3% 6,263 0.3 6,898 0.4 7,176 0.5 6,543 0.5
Other (2) ............. 387,423 15.0% 305,812 13.1 252,443 12.8 212,472 13.3 159,532 11.2
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total consumer loans
(3) .............. 510,942 19.7% 415,483 17.9 353,095 17.9 310,797 19.5 252,063 17.7
Commercial business ..... 49,992 1.9% 40,039 1.7 123,188 6.2 86,087 5.4 67,045 4.7
----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total loans
receivable, gross 2,589,985 100.0% 2,325,990 100.0% 1,973,850 100.0% 1,594,111 100.0% 1,425,008 100.0%
===== ===== ===== ===== =====
Deferred loan fees ...... (1,829) (923) (1,357) (2,384) (3,495)
Undisbursed loan proceeds (25,266) (23,056) (49,435) (41,618) (33,428)
Allowance for loan losses
(real estate loans) ... (11,334) (10,619) (8,103) (6,898) (9,133)
Allowance for loan losses
(other loans) ......... (6,926) (6,154) (7,666) (6,713) (3,997)
----------- ----------- ----------- ----------- -----------
Total loans
receivable, net .. $ 2,544,630 $ 2,285,238 $ 1,907,289 $ 1,536,498 $ 1,374,955
=========== =========== =========== =========== ===========
- ---------------------------------------
(1) Includes $56.8 million of loans originated and held by the Bank's
subsidiaries at June 30, 2000.
(2) Consist primarily of automobile loans and secured and unsecured personal
loans.
(3) Includes $75.4 million of consumer loans originated and held by the Bank's
subsidiaries at June 30, 2000.
Fixed- and Adjustable-Rate Loans. Set forth below are selected data
regarding the dollar amounts of the Company's total loans represented by fixed
and adjustable-rate loans at the dates indicated.
At June 30,
--------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ---------------- ----------------- ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
Adjustable............... $ 108,628 4.2% $ 99,029 4.3% $ 55,493 2.8% $ 78,568 4.9% $ 94,426 6.6%
Fixed.................... 1,920,423 74.2 1,771,439 76.1 1,442,074 73.1 1,118,659 70.2 1,011,474 71.0
--------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total real estate loans. 2,029,051 78.4 1,870,468 80.4 1,497,567 75.9 1,197,227 75.1 1,105,900 77.6
Other loans:
Adjustable............... 151,177 5.8 132,873 5.7 117,100 5.9 117,301 7.4 114,943 8.1
Fixed.................... 409,757 15.8 322,649 13.9 359,183 18.2 279,583 17.5 204,165 14.3
--------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total other loans....... 560,934 21.6 455,522 19.6 476,283 24.1 396,884 24.9 319,108 22.4
--------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
$2,589,985 100.0% $2,325,990 100.0% $1,973,850 100.0% $1,594,111 100.0% $1,425,008 100.0%
========== ====== ========== ====== ========== ====== ========== ====== ========== ======
4
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,
2000. 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.
Beyond
Within 1-2 2-3 3-5 5
1 Year Years Years Years Years Total
---------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
Real estate loans:
One- to four-family residential ......... $ 121,520 $ 77,842 $ 84,113 $ 171,500 $1,381,179 $1,836,154
Multifamily and commercial .............. 43,149 17,354 23,111 39,024 70,259 192,897
Consumer loans ........................... 192,782 65,184 53,522 122,650 76,804 510,942
Commercial business loans ................ 26,708 7,073 4,003 8,354 3,854 49,992
---------- ---------- ---------- ---------- ---------- ----------
Total loans .......................... $ 384,159 $ 167,453 $ 164,749 $ 341,528 $1,532,096 $2,589,985
========== ========== ========== ========== ========== ==========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
June 30, 2000, the dollar amount of all fixed-rate and adjustable-rate loans due
after June 30, 2001. Adjustable- and floating-rate loans are included in the
period in which they are contractually due.
Fixed Adjustable Total
---------- ---------- ----------
(In Thousands)
Real estate loans:
One- to four-family residential .......................... $1,703,968 $ 37,475 $1,741,443
Multifamily and commercial ............................... 109,236 69,128 178,364
Consumer ................................................... 318,133 22,583 340,716
Commercial ................................................. 21,222 106,853 128,075
---------- ---------- ----------
Total .................................................... $2,152,559 $ 236,039 $2,388,598
========== ========== ==========
One- to Four-Family Residential Real Estate Loans. The primary lending
activity of the Company consists of the origination for retention in the
Company's portfolio of owner-occupied one- to four-family residential mortgage
loans secured by properties located in the Company's market area.
The Company currently offers one- to four-family residential mortgage loans
with terms typically ranging from 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 sensitivity position and loan
products offered by the Company's competitors. Therefore, even when management's
strategy is to increase the originations of adjustable-rate mortgage loans,
market conditions may be such that there is greater demand for fixed-rate
mortgage loans.
The Company's fixed-rate loans, whenever possible, are originated and
underwritten according to standards that permit sale in the secondary mortgage
market. Whether the Company can or will sell fixed-rate loans into the secondary
market, however, depends on a number of factors including the yield and the term
of the loan, market conditions, and the Company's current liquidity and interest
rate sensitivity position. The Company historically has been primarily a
portfolio lender, and at any one time the Company has held only a nominal amount
of loans that may be sold. The Company's current policy is to retain in its
portfolio fixed-rate loans with terms of 15 years or less, and sell a limited
amount of fixed-rate loans (servicing retained) with terms of more than 15
years. Moreover, the Company is more likely to retain fixed-rate loans if its
interest rate sensitivity is within acceptable limits. The Company's mortgage
loans are amortized on a monthly basis with principal and interest due each
month. One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option.
5
The Company currently offers adjustable-rate mortgage loans with initial
interest rate adjustment periods of one, three and five years, based on changes
in a designated market index. The Company determines whether a borrower
qualifies for an adjustable-rate mortgage loan based on the fully indexed rate
of the adjustable-rate mortgage loan at the time the loan is originated. One- to
four-family residential adjustable-rate mortgage loans totalled $38.3 million,
or 1.5% of the Company's gross loan portfolio at June 30, 2000.
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 95% for residential property and 80% for all other real
estate loans. The Company's lending policies generally limit the maximum
loan-to-value ratio on both fixed-rate and adjustable-rate mortgage loans
without private mortgage insurance to 80% of the lesser of the appraised value
or the purchase price of the real estate that serves as collateral for the loan.
The Company makes a limited amount of one- to four-family real estate loans with
loan-to-value ratios in excess of 80%. For one- to four-family real estate loans
with loan-to-value ratios in excess of 80%, the Company generally requires the
borrower to obtain private mortgage insurance on the entire amount of the loan.
The Company requires fire and casualty insurance, as well as a title guaranty
regarding good title, on all properties securing real estate loans made by the
Company.
In the past, the Company purchased loans that are serviced by other
institutions and that are secured by one- to four-family residences. At June 30,
2000, the Company's portfolio of loans serviced by others totaled $2.0 million.
The Company currently has no formal plans to enter into new loan participations.
Included in the Company's $1.836 billion of one- to four-family residential
real estate loans are $13.3 million, or 0.51% 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 a fixed interest rate and convert
into either a fixed-rate or an adjustable-rate mortgage loan at the end of the
construction period. Advances are made as construction is completed. In
addition, the Company originates loans within its market area that are secured
by individual unimproved or improved lots. Land loans are currently offered with
fixed- rates for terms of up to 10 years. The maximum loan-to-value ratio for
the Company's land loans is 75% of the appraised value, and the maximum
loan-to-value ratio for the Company's construction loans is 95% of the lower of
cost or appraised value.
Construction lending generally involves a greater degree of credit risk
than other one- to four-family residential mortgage lending. The repayment of
the construction loan is often dependent upon the successful completion of the
construction project. Construction delays or the inability of the borrower to
sell the property once construction is completed may impair the borrower's
ability to repay the loan.
6
Multifamily Residential and Commercial Real Estate Loans. The Company's
multifamily residential real estate loans are secured by multifamily residences,
such as rental properties. The Company's commercial real estate loans are
secured by nonresidential properties such as hotels, church property, and retail
establishments. At June 30, 2000, 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, 2000, had a
principal balance of $4.6 million, and was collateralized by a condominium
project in Allegheny County, Pennsylvania. The Company's largest commercial real
estate loan at June 30, 2000, had a principal balance of $6.9 million and was
collateralized by land and real estate in St. George, Utah. 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 75% of the appraised value of the property collateralizing
the loan.
Loans secured by multifamily residential and commercial real estate
generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multifamily residential and commercial real estate is typically
dependent upon the successful operation of the related real estate property. If
the cash flow from the project is reduced, the borrower's ability to repay the
loan may be impaired.
Consumer Loans. The principal types of consumer loans offered by the
Company are adjustable-rate home equity lines of credit and variable-rate
education loans, and fixed-rate consumer loans such as second mortgage loans,
automobile loans, sales finance loans, unsecured personal loans, credit card
loans, and loans secured by deposit accounts. Consumer loans are offered with
maturities generally of less than ten years. The Company's home equity lines of
credit are secured by the borrower's principal residence with a maximum
loan-to-value ratio, including the principal balances of both the first and
second mortgage loans, of 90% or less. Such loans are offered on an
adjustable-rate basis with terms of up to ten years. At June 30, 2000, the
disbursed portion of home equity lines of credit totalled $44.8 million, or
8.8%, of consumer loans, with $84.1 million remaining undisbursed.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount, and in the
case of home equity lines of credit, the Company obtains a title guarantee or an
opinion as to the validity of title.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats,
recreation vehicles, appliances, and furniture. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
particular, amounts realizable on the sale of repossessed automobiles may be
significantly reduced based upon the condition of the automobiles and the lack
of demand for used automobiles. The Company adds a general provision on a
regular basis to its consumer loan loss allowance, based on general economic
conditions and prior loss experience.
Commercial Business Loans. The Company currently offers commercial business
loans to existing customers to finance various activities in the Company's
market area, some of which are secured in part by additional real estate
collateral.
The largest commercial business loan had a principal balance of $3.7
million, and was secured by convenience stores and marketable securities.
7
Commercial business loans are offered with both fixed and adjustable
interest rates and with terms of up to 15 years. Underwriting standards employed
by the Company for commercial business loans include a determination of the
applicant's ability to meet existing obligations and payments on the proposed
loan from normal cash flows generated by the applicant's business. The financial
strength of each applicant also is assessed through a review of financial
statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Company generally obtains personal guarantees from the
borrower or a third party as a condition to originating its commercial business
loans.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, mortgage brokers
and walk-in customers. All of the Company's loan originators are salaried
employees, and the Company does not pay commissions in connection with loan
originations. Upon receiving a loan application, the Company obtains a credit
report and employment verification to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an in-house appraiser or an appraiser approved by the Company
appraises the real estate intended to secure the proposed loan. A loan processor
in the Company's loan department checks the loan application file for accuracy
and completeness, and verifies the information provided. The Company has a
formal loan policy which assigns lending limits to the Company's various loan
officers. Also, the Company has a 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, 2000, the Company had commitments to originate $29.9
million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
A title guaranty, based on a title search of the property, is required on all
loans secured by real property.
Origination, Purchase and Sale of Loans. The table below shows the
Company's originations of loans for the periods indicated.
Years Ended June 30,
-------------------------------------------
2000 1999 1998
----------- ------------ -----------
(In Thousands)
Loans receivable, gross, at beginning of period ..................... $ 2,325,990 $ 1,973,850 $ 1,594,111
Originations ........................................................ 629,104 881,861 802,145
Principal repayments ................................................ (408,837) (512,069) (425,325)
Loan purchases including acquisitions ............................... 46,933 22,558 28,925
Loan sales .......................................................... (1,580) (36,832) (23,167)
Transfer to REO ..................................................... (1,625) (3,378) (2,839)
----------- ----------- -----------
Loans receivable, gross, at end of period ....................... $ 2,589,985 $ 2,325,990 $ 1,973,850
=========== =========== ===========
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,
8
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, 2000 the Company had $1.8 million of
net deferred loan origination fees. Loan origination fees are volatile sources
of income. Such fees vary with the volume and type of loans and commitments made
and purchased, principal repayments, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, the Company also receives other fees,
service charges, and other income that consist primarily of deposit transaction
account service charges, late charges, credit card fees, and income from REO
operations. The Company recognized fees and service charges of $7.0 million,
$4.5 million and $3.3 million, for the fiscal years ended June 30, 2000, 1999
and 1998, 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, 2000, the largest
aggregate amount loaned by the Company to one borrower totaled $6.9 million and
was secured by land and real estate. The Company's second largest lending
relationship totaled $5.1 million and was secured by a personal care facility in
McKean County, Pennsylvania. The Company's third largest lending relationship
totaled $4.6 million and was secured by residential real estate in Allegheny
County, Pennsylvania. The Company's fourth largest lending relationship was for
$4.2 million and was secured by a personal care facility in Erie County,
Pennsylvania. The Company's fifth largest lending relationship totaled $4.1
million and was secured by a real estate and business personal property.
Delinquencies and Classified Assets
Collection Procedures. The Company's collection procedures provide that
when a loan is five days past due, a computer-generated late notice is sent to
the borrower requesting payment. If delinquency continues, at 15 days a
delinquent notice, plus a notice of a late charge, is sent and personal contact
efforts are attempted, either in person or by telephone, to strengthen the
collection process and obtain reasons for the delinquency. Also, plans to
arrange a repayment plan are made. If a loan becomes 60 days past due, a
collection letter is sent, personal contact is attempted, and the loan becomes
subject to possible legal action if suitable arrangements to repay have not been
made. In addition, the borrower is given information which provides access to
consumer counseling services, to the extent required by regulations of the
Department of Housing and Urban Development. When a loan continues in a
delinquent status for 90 days or more, and a repayment schedule has not been
made or kept by the borrower, generally a notice of intent to foreclose is sent
to the borrower, giving 30 days to cure the delinquency. If not cured,
foreclosure proceedings are initiated.
Nonperforming Assets. Loans are reviewed on a regular basis and are placed
on a nonaccrual status when, in the opinion of management, the collection of
additional interest is doubtful. Loans are automatically placed on nonaccrual
status when either principal or interest is 90 days or more past due. Interest
accrued and unpaid at the time a loan is placed on a nonaccrual status is
charged against interest income.
Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is classified as 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 reserve allocations, the difference is charged
against the allowance for loan losses. Any subsequent write-down of REO is
charged against earnings.
9
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. Effective November 1998, a loan is
considered past due if less than 90% of a contractually-due payment has been
paid. As a result of this change, the Company recorded a significant increase in
the amount of loans which were 90 days or more past due as of June 30, 1999.
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.
At June 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ --------- -------- -------- -------
Number Balance
------ -------
(Dollars in Thousands)
Loans past due 30 days to 59 days:
One- to four-family residential loans ............... 59 $ 2,030 $ 3,632 $ 4,842 $ 3,224 $ 3,031
Multifamily and commercial loans .................... 9 806 320 79 -- 423
Consumer loans ...................................... 584 2,108 3,491 3,632 2,477 2,178
Commercial business loans ........................... 6 535 -- 458 183 240
------- ------- ------- ------- ------- -------
Total loans past due 30 days to 59 days ............ 658 $ 5,479 $ 7,443 $ 9,011 $ 5,884 $ 5,872
------- ------- ------- ------- ------- -------
Loans past due 60 days to 89 days:
One- to four-family residential loans ............... 60 2,205 $ 4,895 $ 2,386 $ 1,491 $ 1,153
Multifamily and commercial loans .................... 3 152 314 219 -- 21
Consumer loans ...................................... 213 777 957 954 908 1,143
Commercial business loans ........................... 2 47 -- 841 180 148
------- ------- ------- ------- ------- -------
Total loans past due 60 days to 89 days ............ 278 $ 3,181 $ 6,166 $ 4,400 $ 2,579 $ 2,465
------- ------- ------- ------- ------- -------
Loans past due 90 days or more (1):
One- to four-family residential loans ............... 120 $ 5,753 $ 8,623 $ 6,013 $ 6,229 $ 4,913
Multifamily and commercial loans .................... 11 1,923 2,141 390 2,585 2,704
Consumer loans ...................................... 691 2,459 2,202 1,631 1,161 772
Commercial business loans ........................... 3 125 3,150 578 455 1,092
------- ------- ------- ------- ------- -------
Total loans past due 90 days or more ............... 825 $10,260 $16,116 $ 8,612 $10,430 $ 9,481
------- ------- ------- ------- ------- -------
Total loans 30 days or more past due .................. 1,761 $18,920 $29,725 $22,023 $18,893 $17,818
======= ======= ======= ======= ======= =======
Total loans 90 days or more past due (1) .............. $10,260 $16,116 $ 8,612 $10,430 $ 9,481
Total REO ............................................. 39 2,144 3,383 3,506 4,549 5,771
------- ------- ------- ------- ------- -------
Total loans 90 days or more past due and REO .......... 864 $12,404 $19,499 $12,118 $14,979 $15,252
======= ======= ======= ======= ======= =======
Total loans 90 days or more past due to
net loans receivable ................................ .40% .71% .45% .68% .69%
Total loans 90 days or more past due
and REO to total assets ............................. .36% .63% .47% .72% .81%
- ------------------------------------
(1) The Company classifies as nonperforming all loans 90 days or more
delinquent.
At June 30, 2000, gross interest income of approximately $1.2 million would
have been recorded on loans accounted for on a nonaccrual basis if the loans had
been current throughout the period. No interest income on nonaccrual loans was
included in income during such period.
Classification of Assets. The Company's policies, consistent with
regulatory guidelines, provide for the classification of loans and other assets
such as debt and equity securities, considered to be of lesser quality as
"substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the
10
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" so that their continuance as assets without the establishment of
a specific loss reserve is not warranted. Assets that do not expose the savings
institution to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess some weaknesses, are required to be
designated "special mention" by management. At June 30, 2000, the Company had 10
loans, with an aggregate principal balance of $10.2 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 valuation
represents 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.
At June 30,
------------------------------
2000 1999 1998
------ ------ ------
(In Thousands)
Substandard assets ........................ $21,448 $30,852 $20,138
Doubtful assets ........................... 35 99 --
Loss assets ............................... 20 20 --
------- ------- -------
Total classified assets ................ $21,503 $30,971 $20,138
======= ======= =======
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 appropriate 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 will continue to monitor
and modify the level of its allowance for loan losses in order to maintain it at
a level which management considers appropriate to provide for probable loan
losses.
11
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
Years Ended June 30,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ----------- ----------- ----------- -----------
(In Thousands)
Net loans receivable .................................... $ 2,544,630 $ 2,285,238 $ 1,907,289 $ 1,536,498 $ 1,374,955
Average loans outstanding ............................... 2,436,260 2,128,480 1,690,412 1,449,807 1,243,758
Allowance for loan losses balance at beginning of period 16,773 15,769 13,611 13,130 11,833
Provision for loan losses ............................... 4,149 3,629 4,072 2,491 1,502
Charge-offs:
Real estate loans: .................................... (289) (514) (132) (383) (141)
Consumer loans ........................................ (2,987) (3,049) (2,384) (2,004) (1,192)
Commercial loans ...................................... -- (101) -- (150) --
----------- ----------- ----------- ----------- -----------
Total charge-offs .................................... (3,276) (3,664) (2,516) (2,537) (1,333)
----------- ----------- ----------- ----------- -----------
Recoveries:
Real estate loans ..................................... 75 367 -- 10 176
Consumer loans ........................................ 481 470 393 363 250
Commercial loans ...................................... 33 61 -- 1 2
----------- ----------- ----------- ----------- -----------
Total recoveries ..................................... 589 898 393 374 428
Acquired through acquisition ............................ 25 141 209 153 700
----------- ----------- ----------- ----------- -----------
Allowance for loan losses balance at end of period .... $ 18,260 $ 16,773 $ 15,769 $ 13,611 $ 13,130
=========== =========== =========== =========== ===========
Allowance for loan losses as a percentage of net
loans receivable ...................................... 0.72% 0.73% 0.83% 0.89% 0.95%
Net loans charged-off as a percentage of average
loans outstanding ..................................... 0.13% 0.17% 0.15% 0.17% 0.11%
Allowance for loan losses as a percentage of
nonperforming loans ................................... 177.97% 104.08% 183.10% 130.50% 138.49%
Allowance for loan losses as a percentage
of nonperforming loans and REO ........................ 147.21% 86.02% 130.13% 90.87% 86.09%
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.
At June 30,
----------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ---------------- ----------------- ----------------- -----------------
% 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)
Balance at end of period
applicable to:
Real estate loans .............. $11,334 78.4% $10,619 80.4% $ 8,103 75.9% $ 6,898 75.1% $ 9,133 77.6%
Consumer loans ................. 5,976 19.7 5,318 17.9 4,957 17.9 4,499 19.5 3,009 17.7
Commercial business loans ...... 950 1.9 836 1.7 2,709 6.2 2,214 5.4 988 4.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total allowance for
loan losses .................... $18,260 100.0% $16,773 100.0% $15,769 100.0% $13,611 100.0% $13,130 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- -------------------------------------
(1) Represents percentage of loans in each category to total loans.
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
12
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 Company is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. The Company generally has maintained a portfolio
of liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short-term demand for funds to be used in the Company's loan origination and
other activities.
Purchases, Sales, and Repayments of Investment and Mortgage-Backed
Securities. Set forth below is information relating to the Company's purchases,
sales and repayments of investment securities and mortgage-backed securities for
the periods indicated.
Years Ended June 30,
-------------------------------------------
2000 1999 1998
--------- --------- ---------
(In Thousands)
Mortgage-backed securities balance at beginning of period (1) ............. $ 348,257 $ 305,764 $ 291,597
Purchases ................................................................. 96,320 118,514 62,366
Sales ..................................................................... -- (772) (27,618)
Securities acquired by business combination ............................... -- 351 5,391
Increase (decrease) in market value of securities available for sale ...... (5,308) 128 840
Principal payments and amortization of premiums and discounts ............. (19,092) (75,728) (26,812)
--------- --------- ---------
Mortgage-backed securities balance at end of period (1) ................... $ 420,177 $ 348,257 $ 305,764
========= ========= =========
Investment securities balance at beginning of period (2) .................. $ 240,230 $ 204,213 $ 122,103
Purchases ................................................................. 26,108 108,474 141,094
Sales ..................................................................... (29,934) (26,544) (46,471)
Securities acquired by business combination ............................... -- 2,771 17,076
Increase (decrease) in market value of securities available for sale ...... (6,075) (2,095) 2,901
Maturities and amortization of premiums and discounts ..................... (24,767) (46,589) (32,490)
--------- --------- ---------
Investment securities balance at end of period (2) ........................ $ 205,562 $ 240,230 $ 204,213
========= ========= =========
- -------------------------------------
(1) Includes mortgage-backed securities available for sale and held to maturity.
(2) Includes investment securities available for sale and held to maturity.
13
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.
At June 30,
--------------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- --------
(In Thousands)
Mortgage-backed securities held to maturity:
Fixed-rate pass through certificates ..................... $ 1,298 $ 1,311 $ 731 $ 772 $ 5,663 $ 5,745
Variable-rate pass through certificates .................. 5,967 5,967 7,212 7,307 9,936 10,059
Fixed-rate collateralized mortgage obligations ("CMOs") .. -- -- -- -- 4,578 4,571
Variable-rate CMOs ....................................... 132,901 128,197 127,614 126,603 90,064 88,520
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities held to maturity ...... 140,166 135,475 135,557 134,682 110,241 108,895
-------- -------- -------- -------- -------- --------
Mortgage-backed securities available for sale:
Fixed-rate pass through certificates ..................... $ 84,487 $ 82,772 $ 53,898 $ 52,814 $ 5,396 $ 5,391
Variable-rate pass through certificates .................. 30,670 29,862 9,342 9,326 11,523 11,579
Fixed-rate collateralized mortgage obligations ("CMOs") .. 8 8 17 17 37 35
Variable-rate CMOs ....................................... 169,459 167,369 148,748 150,543 178,000 178,518
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities available for sale .... 284,624 280,011 212,005 212,700 194,956 195,523
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities ....................... $424,790 $415,486 $347,562 $347,382 $305,197 $304,418
======== ======== ======== ======== ======== ========
Investment securities held to maturity:
U.S. Government and agency ............................... $ 35,993 $ 34,588 $ 56,692 $ 56,614 $ 51,358 $ 51,982
Municipal securities ..................................... 31,848 27,850 31,842 30,422 3,811 3,947
Corporate debt issues .................................... 29,749 24,451 29,773 28,633 27,852 27,993
-------- -------- -------- -------- -------- --------
Total investment securities held to maturity ........... $ 97,590 $ 86,889 $118,307 $115,669 $ 83,021 $ 83,922
======== ======== ======== ======== ======== ========
Investment securities available for sale:
U.S. Government and agency ............................... $ 50,970 $ 50,593 $ 65,597 $ 65,232 $ 75,826 $ 76,995
Municipal securities ..................................... 55,810 51,387 51,440 50,830 37,307 38,289
Corporate debt issues .................................... 985 949 985 955 985 985
Equity securities ........................................ 3,441 5,043 2,155 4,906 2,229 4,923
-------- -------- -------- -------- -------- --------
Total investment securities available for sale ......... $111,206 $107,972 $120,177 $121,923 $116,347 $121,192
======== ======== ======== ======== ======== ========
Issuers of Mortgage-Backed Securities. The following table sets forth
information regarding the issuers and the carrying value of the Company's
mortgage-backed securities held to maturity and mortgage-backed securities
available for sale.
At June 30,
----------------------------
2000 1999 1998
--------- -------- --------
(In Thousands)
Mortgage-backed securities:
FNMA ................................... $149,780 $128,256 $143,992
GNMA ................................... 103,537 57,881 12,457
FHLMC .................................. 146,309 141,017 138,962
Other (non-agency) ..................... 20,551 21,103 10,353
-------- -------- --------
Total mortgage-backed securities ..... $420,177 $348,257 $305,764
======== ======== ========
14
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, 2000. Adjustable-rate
mortgage-backed securities are included in the period in which interest rates
are next scheduled to adjust.
At June 30, 2000
----------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
--------------------- ----------------------- -----------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- --------- ---------- --------- ---------- --------
(Dollars in Thousands)
Investment securities held to maturity:
U.S. Government and agency obligations ........ $ 6,006 6.70% $ -- --% $ 9,987 6.73%
Municipal securities .......................... -- -- -- -- 100 5.25
Corporate debt issues ......................... -- -- -- -- 250 9.00
-------- ------- -------- ------- -------- ------
Total investment securities held to maturity . 6,006 6.70% -- --% 10,337 6.77%
Investment securities available for sale:
U.S. Government and agency obligations ........ 25,506 6.77% 21,973 6.24% 3,491 6.51%
Equity securities ............................. -- -- -- -- -- --
Municipal securities .......................... -- -- 795 5.15 697 5.01
Corporate debt issues ......................... -- -- -- -- -- --
-------- ------- -------- ------- -------- ------
Total investment securities available for sale 25,506 6.77% 22,768 6.21% 4,188 6.26%
Mortgage-backed securities held to maturity:
Pass-through certificates ..................... 5,967 7.12% -- --% -- --%
CMOs .......................................... 132,901 6.64 -- -- -- --
-------- ------- -------- ------- -------- ------
Total mortgage-backed securities held
to maturity ................................. 138,868 6.66% -- --% -- --%
Mortgage-backed securities available for sale:
Pass through certificates ..................... 30,670 5.52% 150 5.90% 6,842 6.96%
CMOs .......................................... 169,459 7.13 -- -- 8 10.16
-------- ------- -------- ------- -------- ------
Total mortgage-backed securities available
for sale ..................................... 200,129 6.88% 150 5.90% 6,850 6.96%
-------- ------- -------- ------- -------- ------
Total investment securities and mortgage-backed
securities .................................. $370,509 6.79% $ 22,918 6.21% $ 21,375 6.73%
======== ======= ======== ======= ======== ======
At June 30, 2000
--------------------------------------------------------------------------
More than Ten Years Total
--------------------------- ----------------------------------------
Annualized Annualized
Weighted Weighted
Amortized Average Amortized Market Average
Cost Yield Cost Value Yield
--------- ---------- --------- -------- ----------
Investment securities held to maturity:
U.S. Government and agency obligations .......... $ 20,000 7.20% $ 35,993 $ 34,588 6.99%
Municipal securities ............................ 31,748 4.81 31,848 27,850 4.81
Corporate debt issues ........................... 29,499 8.14 29,749 24,451 8.14
-------- ------- -------- -------- ------
Total investment securities held to maturity ... 81,247 6.61% 97,590 86,889 6.63%
Investment securities available for sale:
U.S. Government and agency obligations .......... -- --% 50,970 50,593 6.52%
Equity securities ............................... 3,441 4.85 3,441 5,043 4.85
Municipal securities ............................ 54,318 5.20 55,810 51,387 5.20
Corporate debt issues ........................... 985 7.59 985 949 7.59
-------- ------- -------- -------- ------
Total investment securities available for sale . 58,744 5.22% 111,206 107,972 5.82%
Mortgage-backed securities held to maturity:
Pass-through certificates ....................... 1,298 8.08% 7,265 7,278 7.29%
CMOs ............................................ -- -- 132,901 128,197 6.64
-------- ------- -------- -------- ------
Total mortgage-backed securities held
to maturity ................................... 1,298 8.08% 140,166 135,475 6.67%
Mortgage-backed securities available for sale:
Pass through certificates ....................... 77,495 7.08% 115,157 112,634 6.66%
CMOs ............................................ -- -- 169,467 167,377 7.13
-------- ------- -------- -------- ------
Total mortgage-backed securities available
for sale ....................................... 77,495 7.08% 284,624 280,011 6.94%
-------- ------- -------- -------- ------
Total investment securities and mortgage-backed
securities .................................... $218,784 6.41% $633,586 $610,347 6.64%
======== ======= ======== ======== ======
15
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.
Years Ended June 30,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------
(In Thousands)
Balance at beginning of period ................ $2,463,711 $2,022,503 $1,640,815
Net savings activity .......................... 18,222 90,938 17,278
Net checking activity ......................... 43,240 26,186 79,691
Deposits acquired ............................. 270,810 249,987 220,243
---------- ---------- ----------
Net increase before interest credited ...... 332,272 367,111 317,212
Interest credited ............................. 90,526 74,097 64,476
---------- ---------- ----------
Net increase in deposits ................... 422,798 441,208 381,688
---------- ---------- ----------
Balance at end of period ................. $2,886,509 $2,463,711 $2,022,503
========== ========== ==========
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.
At June 30,
-----------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------- --------------------------------- --------------------------------
Balance Percent(1) Rate(2) Balance Percent(1) Rate(2) Balance Percent(1) Rate(2)
---------- ---------- ------- ---------- ---------- ------- ---------- ---------- -------
(Dollars in thousands)
Savings accounts ........... $ 432,908 15.00% 3.22% $ 409,029 16.60% 3.24% $ 340,377 16.83% 3.30%
Checking accounts .......... 470,183 16.29 0.93 389,148 15.80 1.38 315,755 15.61 1.61
Money market accounts 183,257 6.35 3.63 164,484 6.68 3.73 114,187 5.65 3.68
Certificates of deposit:
Maturing within 1 year 1,042,401 36.11 5.24 992,723 40.29 5.22 771,665 38.15 5.57
Maturing 1 to 3 years 660,620 22.89 6.22 417,367 16.94 5.11 404,175 19.98 5.90
Maturing more than
3 years ................. 97,140 3.36 5.93 90,960 3.69 5.65 76,344 3.78 6.00
---------- ---------- ------- ---------- ---------- ------- ---------- ---------- -------
Total certificates ...... 1,800,161 62.36 5.64 1,501,050 60.92 5.22 1,252,184 61.91 5.70
---------- ---------- ------- ---------- ---------- ------- ---------- ---------- -------
Total deposits ............. $2,886,509 100.0% 4.38% $2,463,711 100.0% 4.18% $2,022,503 100.0% 4.55%
========== ========== ======= ========== ========== ======= ========== ========== =======
- ---------------------------------------
(1) Represents percentage of total deposits.
(2) Represents weighted average nominal rate at fiscal year end.
16
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,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Rate (In Thousands)
----
2.00 - 2.99% .................... $ -- $ -- $ 88
3.00 - 3.99% .................... 4,485 4,016 2,956
4.00 - 4.99% .................... 322,494 552,807 121,533
5.00 - 5.99% .................... 911,908 815,790 760,738
6.00 - 6.99% .................... 546,796 120,294 312,693
7.00 - 7.99% .................... 14,417 7,083 47,959
8.00% or greater ................ 61 1,060 6,217
---------- ---------- ----------
Total ....................... $1,800,161 $1,501,050 $1,252,184
========== ========== ==========
Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposits at June 30, 2000.
Amount Due
----------------------------------------------------------------------
Less Than 1-2 2-3 After 3
One Year Years Years Years Total
---------- ---------- ---------- ---------- ----------
Rate (In Thousands)
----
3.00 - 3.99% ......................... $ 3,985 $ 14 $ 15 $ 471 $ 4,485
4.00 - 4.99% ......................... 302,870 15,472 728 3,424 322,494
5.00 - 5.99% ......................... 701,697 101,491 61,805 46,915 911,908
6.00 - 6.99% ......................... 33,238 397,719 69,547 46,292 546,796
7.00 - 7.99% ......................... 550 8,801 5,028 38 14,417
8.00% or greater ..................... 61 -- -- -- 61
---------- ---------- ---------- ---------- ----------
Total ................................ $1,042,401 $ 523,497 $ 137,123 $ 97,140 $1,800,161
========== ========== ========== ========== ==========
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, 2000.
Certificates
Maturity Period of Deposit
--------------- ------------
(In Thousands)
Three months or less................................. $ 62,167
Three through six months............................. 39,295
Six through twelve months............................ 39,495
Over twelve months................................... 100,526
-----------
Total.............................................. $ 241,483
===========
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 Bank's stock in the FHLB and a portion of
the Bank's first mortgage loans.
17
The FHLB functions as a central reserve bank providing credit for the Bank
and other member financial institutions. As a member, the Bank is required to
own capital stock in the FHLB and is authorized to apply for borrowings on the
security of such stock and certain of its first mortgage loans and other assets
(principally, securities that are obligations of, or guaranteed by, the United
States) provided certain standards related to creditworthiness have been met.
Borrowings are made pursuant to several different programs. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of borrowings are based either on a fixed percentage
of a member institution's net worth or on the FHLB's assessment of the
institution's creditworthiness. All FHLB borrowings have fixed interest rates
and original maturities of between one day and twenty years.
During the Year Ended June 30,
----------------------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in Thousands)
FHLB Pittsburgh borrowings:
Average balance outstanding .............................................. $264,130 $279,410 $144,798
Maximum outstanding at end of any month during period .................... 411,370 359,135 237,161
Balance outstanding at end of period ..................................... 201,602 317,387 232,161
Weighted average interest rate during period ............................. 5.53% 5.28% 5.20%
Weighted average interest rate at end of period .......................... 5.90% 5.59% 5.86%
Reverse repurchase agreements:
Average balance outstanding .............................................. $ 27,627 $ 29,525 $ 41,220
Maximum outstanding at end of any month during period .................... 35,215 43,932 50,028
Balance outstanding at end of period ..................................... 31,463 23,905 50,028
Weighted average interest rate during period ............................. 5.50% 5.20% 5.31%
Weighted average interest rate at end of period .......................... 6.38% 4.91% 5.48%
Other borrowings:
Average balance outstanding .............................................. $ 8,100 $ 7,995 $ 8,264
Maximum outstanding at end of any month during period .................... 10,054 8,682 9,056
Balance outstanding at end of period ..................................... 6,876 7,623 7,517
Weighted average interest rate during period ............................. 6.55% 6.74% 5.36%
Weighted average interest rate at end of period .......................... 6.55% 6.62% 6.84%
Total borrowings:
Average balance outstanding ............................................ $299,857 $316,930 $194,282
Maximum outstanding at end of any month during period .................. 447,281 388,471 289,706
Balance outstanding at end of period ................................... 239,941 348,915 289,706
Weighted average interest rate during period ........................... 5.55% 5.30% 5.23%
Weighted average interest rate at end of period ........................ 5.98% 5.56% 5.82%
Competition
The Company's market area in Pennsylvania, southwestern New York and
eastern Ohio 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 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.
18
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 four wholly
owned subsidiaries, Great Northwest Corporation, Northwest Financial Services,
Inc., Northwest Consumer Discount Company, Inc., 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, 2000, the Bank had an equity
investment in Great Northwest of $2.7 million. For the fiscal year ended June
30, 2000, Great Northwest had net income of $609,000 generated primarily from
federal low-income housing tax credits.
Northwest Financial Services' principal activity is the investment in land
acquired by foreclosure 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, 2000, the Bank had an equity
investment in Northwest Financial Services of $5.4 million, and for the fiscal
year ended June 30, 2000, Northwest Financial Services had net income of
$236,000.
Northwest Consumer Discount Company operates 42 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, 2000, the Bank had an equity investment in Northwest
Consumer Discount Company of $12.5 million and the net income of Northwest
Consumer Discount Company for the fiscal year ended June 30, 2000 was $1.6
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 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, 2000 the Bank had an equity investment of
$26,000 in Northwest Capital Group and for the fiscal year ended June 30, 2000
Northwest Capital Group reported no net income.
Rid-Fed, Inc., a wholly owned subsidiary of Northwest Financial Services,
has as its sole activity a commercial real estate loan to Northwest Capital
Group which was made to finance the sale of real estate from Rid-Fed to
Northwest Capital. At June 30, 2000 Northwest Financial Services had an equity
investment of $1.0 million in Rid-Fed, Inc. and for the fiscal year ended June
30, 2000 Rid-Fed, Inc. had a net loss of $2,600.
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, 2000, Northwest Consumer Discount
Company's equity investment in Northwest Finance Company was $(89,000). For the
year ended June 30, 2000, Northwest Finance Company had a net loss of $2,000.
Federal regulations require SAIF-insured institutions to provide 30 days
advance notice to the FDIC before establishing or acquiring a subsidiary or
conducting a new activity in a subsidiary. The insured institution must also
provide the FDIC such information as may be required by applicable regulations
and must conduct the activity in accordance with the rules and orders of the
FDIC. In addition to other enforcement and supervision powers, the FDIC may
determine after notice and opportunity for a hearing that the continuation of a
savings association's ownership of or relation to a subsidiary constitutes a
serious risk to the safety, soundness or stability of the savings association,
or is inconsistent with the purposes of federal banking law. Upon the making of
such a determination, the FDIC may order
19
the savings association to divest the subsidiary or take other actions.
Personnel
As of June 30, 2000, the Company and its wholly owned subsidiaries had
1,033 full-time and 261 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 a 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 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.
20
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 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 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. Beginning January 1, 2000,
the FICO interest payments are paid pro rata by banks and thrifts based on
approximately 2.1 basis point of deposits.
21
As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations are able to convert to a
commercial bank charter, diversify their lending, or merge into a commercial
bank without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. Any post-1987 reserves are subject to recapture, regardless of
whether or not a particular thrift intends to convert its charter, be acquired,
or diversify its activities. The recapture tax on post-1987 reserves is assessed
in equal installments over the six year period beginning in fiscal 1997.
However, because the Company met the minimum level of mortgage lending test
(i.e., the Company's level of mortgage lending activity (re-financings and home
equity loans excluded) exceeded its average mortgage lending activity for the
six years preceding fiscal 1997 and 1998, adjusted for inflation), the Company
was able to suspend its tax bad debt recapture for the 1997 and 1998 tax years.
During fiscal 2000, the Company recaptured into taxable income approximately
$1.3 million of the post-1987 bad debt reserves. At June 30, 2000, the Company
had a balance of approximately $5.3 million of bad debt reserves in retained
income that is subject to recapture equally over the next four years 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 of 6% leverage capital and 10% risk-based capital. The components of
leverage and risk-based capital are substantially the same as those defined by
the FDIC.
Loans-to-One Borrower Limitation
Under federal regulations, with certain limited exceptions, a Pennsylvania
chartered savings bank may lend to a single or related group of borrowers on an
"unsecured" basis an amount equal to 15% of its unimpaired capital and surplus.
An additional amount may be lent, equal to 10% of unimpaired capital and
surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate.
Prompt Corrective Action
Under federal regulations, a bank shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier 1
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to any written capital order or directive; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Federal regulations also specify circumstances under
which a federal banking agency may reclassify a well capitalized institution as
adequately capitalized and may require an adequately capitalized institution to
comply with supervisory actions as if it were in the next lower category (except
that the FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). As of June 30, 2000, the Bank was a
"well-capitalized institution" for this purpose.
Activities and Investments of Insured State-Chartered Banks
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks. Under regulations dealing with equity investments, an insured state bank
22
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 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 Company are al