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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, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to __________________
Commission File No. 0-23817
NORTHWEST BANCORP, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2900888
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Liberty and Second Streets, Warren, Pennsylvania 16365
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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
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(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, 1998, there were issued and outstanding 14,440,970
shares of the Registrant's Common Stock, not including 32,400,000 shares held by
Northwest Bancorp, M.H.C., the Registrant's mutual holding company.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, which amount includes voting stock held by officers and
directors, computed by reference to the last sale price on June 30, 1998, as
reported by the Nasdaq National Market, was approximately $228.3 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Annual Report to Stockholders for the fiscal year ended June 30, 1998 (Parts
II and IV).
2. Proxy Statement for the November 1998 Annual Meeting of Stockholders (Part
III).
PART I
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ITEM 1. BUSINESS
--------
General
Northwest Bancorp, Inc.
Northwest Bancorp, Inc. (the "Company") is a Pennsylvania corporation
that was formed to become the stock holding company of Northwest Savings Bank
(the "Bank") in a transaction (the "Two-Tier Reorganization") that was approved
by the Bank's stockholders on December 10, 1997, and completed on February 17,
1998. In the Two-Tier Reorganization, each share of the Bank's common stock was
converted into and became a share of common stock of the Company, par value
$0.10 per share (the "Common Stock"), and the Bank became a wholly-owned
subsidiary of the Company. Northwest Bancorp, MHC (the "Mutual Holding
Company"), which owned a majority of the Bank's outstanding shares of common
stock immediately prior to completion of the Two-Tier Reorganization, became the
owner of the same percentage of the outstanding shares of Common Stock of the
Company immediately following the completion of the Two-Tier Reorganization. As
of June 30, 1998, the sole activity of the Company was the ownership of all of
the issued and outstanding common stock of the Bank and the ownership of
approximately 65% of the outstanding shares of common stock of Jamestown Savings
Bank ("Jamestown"). Jamestown was formed in November of 1995 as a de novo New
York-chartered savings bank headquartered in Jamestown, New York. As of June 30,
1998, Jamestown had assets of $60.0 million and deposits of $54.3 million. At
June 30, 1998, the Company has total assets of $2.563 billion and shareholders'
equity of $217.9 million.
As of June 30, 1998, the Company, through the Bank and Jamestown,
operated 71 community banking offices throughout its market area in northwest,
southwest and central Pennsylvania and Jamestown, New York. The Company, through
the Bank and its wholly owned subsidiaries, also operates one mortgage lending
office in Pennsylvania and four in New York, and 33 consumer lending offices
throughout Pennsylvania and one consumer lending office in New York. The Company
has focused its lending activities primarily on the origination of loans secured
by first mortgages on owner-occupied, one- to four-family residences. At June
30, 1998, $1.369 billion, or 69.4%, of the Company's total loans receivable were
collateralized by one- to four-family residential real estate. The Company,
directly or through its subsidiaries, also emphasizes the origination of
consumer loans, including home equity, second mortgage, education and other
consumer loans. At June 30, 1998, such loans totaled $353.1 million, or 17.9%,
of the Company's total loans receivable. To a lesser extent, the Company also
originates multifamily residential and commercial real estate loans, which
totaled $128.8 million, or 6.5%, of the Company's total loans receivable at June
30, 1998, and commercial business loans, which totaled $123.2 million, or 6.2%,
of the Company's total loans receivable.
The Company's principal sources of funds are deposits, borrowed funds
and the principal and interest payments on loans and mortgage-backed securities.
The principal source of income is interest received from loans, mortgage-backed
securities and investment securities. The Company's principal expenses are the
interest paid on deposits and the cost of employee compensation and benefits.
The Company's principal executive office is located at Liberty and
Second Streets, Warren, Pennsylvania, and its telephone number at that address
is (814) 726-2140.
Northwest Savings Bank
The Bank is a Pennsylvania-chartered stock savings bank headquartered
in Warren, which is located in northwestern Pennsylvania. The Bank is a
community-oriented institution offering traditional deposit and loan products,
and through its subsidiaries, consumer finance services. The Bank's mutual
savings bank predecessor was founded in 1896. The Bank in its current stock form
was established on November 2, 1994, as a result of the reorganization (the
"Reorganization") of the Bank's mutual predecessor into a mutual holding company
structure.
2
At the time of the Reorganization, the Bank issued a majority of its to-be
outstanding shares of common stock to the Mutual Holding Company (which was
formed in connection with the Reorganization) and a minority of its to-be
outstanding shares to stockholders other than the Mutual Holding Company.
The Bank's principal executive office is located at Liberty and Second
Streets, Warren, Pennsylvania, and its telephone number at that address is (814)
726-2140.
Jamestown Savings Bank
Jamestown began operations on November 9, 1995 as a de novo New York
state-chartered stock savings bank. The bank was organized to engage in the
retail savings bank business in the area surrounding Jamestown, New York, which
is located in Chautauqua County.
Jamestown was capitalized through an initial public offering of common
stock of $7,259,410 which, net of costs associated with the offering of
$126,662, resulted in net proceeds of $7,132,748. As part of this initial
offering, the Mutual Holding Company purchased 400,000 shares, or 55% of the
common stock sold. The Mutual Holding Company continued to accumulate additional
ownership in Jamestown and in February 1998 sold its entire ownership position
consisting of 490,050 shares to the Company. These shares represented an
ownership interest of approximately 64% of the outstanding shares of Jamestown.
On July 8, 1998 the Company solicited a tender offer to all minority
shareholders of Jamestown at a price of $16 per share. As a result of this
tender offer, the Company owned 100% of the outstanding shares of Jamestown as
of July 31, 1998.
As of June 30, 1998, Jamestown had three offices in Chautauqua County.
Market Area
The Company has been, and intends to continue to be, a
community-oriented financial institution offering a wide variety of financial
services to meet the needs of the communities it serves. The Company is
headquartered in Warren, Pennsylvania which is located in the northwestern
region of Pennsylvania, and the Company has its highest concentration of
deposits and loans in the portion of its office network located in northwestern
Pennsylvania. Over the past eight years the Company has expanded, primarily
through acquisition, into the southwestern and central regions of Pennsylvania.
As of June 30, 1998, the Company operated in Pennsylvania 68 community banking
offices, one mortgage lending office and 33 consumer finance offices, located in
the following counties in Pennsylvania: Allegheny, Armstrong, Bedford, Butler,
Centre, Chester, Clarion, Clearfield, Clinton, Crawford, Cumberland, Dauphin,
Elk, Erie, Fayette, Indiana, Jefferson, Lawrence, Lancaster, Lebanon, Luzerne,
McKean, Mifflin, Schuylkill, Venango, Warren, Washington, Westmoreland and York.
Through Jamestown, the Company operates three community banking offices in
Chautauqua County, New York. The Company, through the Bank and its subsidiaries,
also operates four mortgage lending offices and one consumer finance office in
western New York. The mortgage lending offices are operated to provide an
additional source of mortgage loans as well as to provide additional geographic
diversity to the Company's mortgage loan portfolio. The consumer finance offices
are operated through Northwest Consumer Discount Company, a subsidiary of the
Bank. Northwest Consumer Discount Company provides a source of short-term
consumer loans, which improve the Company's earnings and reduces its sensitivity
to interest rate risk.
The Company has experienced significant geographic and asset expansion
during the past 20 years through internal growth as well as mergers and
acquisitions of financial institutions in existing and nearby market areas. This
expansion has reflected the Company's strategy of growing in order to be more
competitive and to offer a full range of customer services. In 1984, the Company
merged with Mutual Savings and Loan Association, which was headquartered in
Erie, Pennsylvania, and had assets of approximately $241 million at the time of
the merger. As a result of the merger, the Company's total assets increased to
approximately $530 million. In 1985 the Company
3
acquired Bakerstown Savings and Loan Association, which had assets of
approximately $26 million and also acquired a branch office of another financial
institution located in Clarion, Pennsylvania. Branch offices with deposits of
$58 million located in Erie, Meadville and Warren were purchased in 1986. Butler
Consumer Discount Company, with eight consumer finance offices and assets of
approximately $19 million, also was purchased in 1986.
As part of its efforts to expand its market presence outside of
northwestern Pennsylvania, the Company started a de novo office in Hershey,
Pennsylvania in 1988. In March of 1990 the Company acquired Horizon Savings
Association, which had assets of approximately $34 million and offices in
Lewistown and State College. In June 1990 the Company acquired Steitz Savings
and Loan with assets of approximately $58 million and with four offices in
communities surrounding Lebanon. On October 24, 1991, the Company acquired Preis
Consumer Discount Company with six locations in central Pennsylvania and loans
of $8.5 million. In 1991 and 1992 the Company continued to expand by opening
additional offices in Warren and Bradford, Pennsylvania. In March 1992 the
Company acquired American Federal Savings and Loan Association with assets of
$119 million and five offices in northwestern Pennsylvania. In September 1993
the Company purchased three full-service office locations in the greater Erie
area with deposits of $14 million, and in June 1995 the Company purchased four
full-service offices in York and Lancaster counties with deposits of $22
million. During the fiscal year ended June 30, 1995, the Company purchased two
consumer discount companies in Jeannette and Zelienople, Pennsylvania, with
loans of approximately $13.0 million and purchased a mortgage banking company
headquartered in Buffalo, New York, with loan production facilities in Buffalo,
Rochester, and Syracuse. During the fiscal year ended June 30, 1996, the bank
acquired two financial institutions: First Federal Savings Bank of Kane with
assets of $45.6 million and offices in Kane and Clarion, Pennsylvania and First
National Bank of Centre Hall with assets of $39.3 million and offices in Centre
Hall and State College, Pennsylvania. The Company also acquired a full-service
retail facility in Pottsville, Pennsylvania, with deposits of $23.8 million from
another financial institution. In February 1997, the Company acquired
Bridgeville Savings Bank which had one office in Bridgeville, Pennsylvania and
assets of $55.7 million. In March of 1997, the Company acquired St. Marys
Consumers Discount Company in St. Marys, Pennsylvania with assets of
approximately $1.0 million. In April of 1997, the Company opened an office in
Cranberry Township, Venango County, Pennsylvania and in June opened an office in
Hanover, Pennsylvania. In June 1997, the Company announced that it had entered
into a definitive agreement to acquire Corry Savings Bank, a
Pennsylvania-chartered mutual savings bank headquartered in Corry, Pennsylvania
with assets of approximately $29.0 million. During the fiscal year ended June
30, 1998 the Company opened two new offices, one in Lititz, Pennsylvania and the
other in Lock Haven, Pennsylvania. In October, 1997 the Company purchased a
branch office with deposits of $11.8 million from another financial institution.
In December, 1997 the Company completed its acquisition of nine branch offices
with deposits of $154.3 million from another financial institution. In addition,
the Company's consumer discount company subsidiary opened new offices in
Brookville, Dubois, Erie, Hazleton and State College, Pennsylvania.
Lending Activities
General. Historically, the principal lending activity of the Company
has been the origination, for retention in its portfolio, of fixed-rate and, to
a lesser extent, adjustable-rate mortgage loans collateralized by one- to
four-family residential real estate located in its market area. To a lesser
extent, the Company also originates loans collateralized by multifamily
residential and commercial real estate, construction loans, commercial business
loans and consumer loans.
In an effort to manage interest rate risk, the Company has sought to
make its interest-earning assets more interest rate sensitive by originating
adjustable-rate loans, such as adjustable-rate mortgage loans, home equity
loans, and education loans, and by originating short-term and medium-term
fixed-rate consumer loans. The Company also purchases mortgage-backed securities
that generally have adjustable interest rates. At June 30, 1998, approximately
$170.6 million, or 8.6%, of the Company's total loan portfolio, and $290.1
million, or 94.9%, of the Company's mortgage-backed securities portfolio,
consisted of loans or securities with adjustable interest rates. Because the
Company also originates a substantial amount of long-term fixed-rate mortgage
loans collateralized by one- to four-family residential real estate, when
possible, such loans are originated and underwritten according to standards that
allow the Company to sell them in the secondary mortgage market for purposes of
managing interest-rate risk and
4
liquidity. The Company, through the Bank's mortgage banking subsidiaries,
currently sells in the secondary market a limited amount of fixed-rate
residential mortgage loans with maturities of more than 15 years, and retains
all adjustable-rate mortgage loans and fixed-rate residential mortgage loans
with maturities of 15 years or less. The Company is primarily a portfolio lender
and at any one time the Company holds only a nominal amount of loans identified
as available-for-sale. The Company retains servicing on the mortgage loans it
sells and realizes monthly service fee income. The Company retains in its
portfolio all consumer loans, multifamily residential and commercial real estate
loans, and commercial business loans that it originates.
5
6
Analysis of Loan Portfolio. Set forth below are selected data relating
to the composition of the Company's loan portfolio by type of loan as of the
dates indicated.
At June 30,
----------------------------------------------------------------------
1998 1997 1996
------------------ -------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real estate:
One- to four-family (1)........... $ 1,368,736 69.4% $ 1,096,315 68.8% $ 1,008,288 70.8%
Multifamily and commercial........ 128,831 6.5 100,912 6.3 97,612 6.8
----------- ------ ----------- ------ ----------- -------
Total real estate loans......... 1,497,567 75.9 1,197,227 75.1 1,105,900 77.6
Consumer:
Home equity and home improvement.. 33,963 1.7 37,607 2.4 38,146 2.7
Education loans................... 59,791 3.0 53,542 3.3 47,842 3.4
Loans on savings accounts......... 6,898 .4 7,176 .5 6,543 .5
Other (2)......................... 252,443 12.8 212,472 13.3 159,532 11.2
----------- ------ ----------- ------ ----------- -------
Total consumer loans (3)........ 353,095 17.9 310,797 19.5 252,063 17.7
Commercial business................. 123,188 6.2 86,087 5.4 67,045 4.7
----------- ------ ----------- ------ ----------- -------
Total loans receivable, gross... 1,973,850 100.0% 1,594,111 100.0% 1,425,008 100.0%
====== ====== =======
Deferred loan fees.................. (1,357) (2,384) (3,495)
Undisbursed loan proceeds........... (49,435) (41,618) (33,428)
Allowance for loan losses
(real estate loans)............... (8,103) (6,898) (9,133)
Allowance for loan losses
(other loans)..................... (7,666) (6,713) (3,997)
----------- ----------- -----------
Total loans receivable, net..... $ 1,907,289 $ 1,536,498 $ 1,374,955
=========== =========== ===========
1995 1994
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Amount Percent Amount Percent
----------- ------- ----------- -------
Real estate:
One- to four-family (1)........... $ 880,110 73.6% $ 837,896 75.7%
Multifamily and commercial........ 53,022 4.4 65,539 5.9
----------- ------ ----------- ------
Total real estate loans......... 933,132 78.0 903,435 81.6
Consumer:
Home equity and home improvement.. 40,547 3.4 41,053 3.7
Education loans................... 39,315 3.3 31,827 2.9
Loans on savings accounts......... 5,930 .5 5,313 .5
Other (2)......................... 119,611 10.0 103,945 9.4
----------- ------ ----------- ------
Total consumer loans (3)........ 205,403 17.2 182,138 16.5
Commercial business................. 56,788 4.8 20,945 1.9
----------- ------ ----------- ------
Total loans receivable, gross... 1,195,323 100.0% 1,106,518 100.0%
======= =======
Deferred loan fees.................. (3,772) (4,184)
Undisbursed loan proceeds........... (14,982) (28,563)
Allowance for loan losses
(real estate loans)............... (8,102) (8,340)
Allowance for loan losses
(other loans)..................... (3,732) (2,898)
----------- -----------
Total loans receivable, net..... $1,164,735 $1,062,333
=========== ===========
- ---------------------------------------
(1) Includes $46.2 million of loans originated and held by the Bank's
subsidiaries at June 30, 1998.
(2) Consist primarily of automobile loans and secured and unsecured personal
loans.
(3) Includes $65.3 million of consumer loans originated and held by the Bank's
subsidiaries at June 30, 1998.
Fixed- and Adjustable-Rate Loans. Set forth below are selected data
regarding the dollar amounts of the Company's total loans represented by fixed-
and adjustable-rate loans at the dates indicated.
At June 30,
-----------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- ------------------------
Amount Percent Amount Percent Amount Percent
----------- --------- ------------ -------- ------------ --------
(Dollars in Thousands)
Mortgage loans:
Adjustable.................... $ 55,493 2.8% $ 78,568 4.9% $ 94,426 6.6%
Fixed......................... 1,442,074 73.1 1,118,659 70.2 1,011,474 71.0
----------- --------- ------------ -------- ------------ --------
Total mortgage loans......... 1,497,567 75.9 1,197,227 75.1 1,105,900 77.6
Other loans:
Adjustable.................... 117,100 5.9 117,301 7.4 114,943 8.1
Fixed......................... 359,183 18.2 279,583 17.5 204,165 14.3
----------- --------- ------------ -------- ------------ --------
Total other loans............ 476,283 24.1 396,884 24.9 319,108 22.4
----------- --------- ------------ -------- ------------ --------
$ 1,973,850 100.0% $ 1,594,111 100.0% $ 1,425,008 100.0%
=========== ========= ============ ======== ============ ========
1995 1993
---------------------------------------------------
Amount Percent Amount Percent
----------- ---------- ------------ ---------
Mortgage loans:
Adjustable.................... $ 111,184 9.3% $ 104,717 9.5%
Fixed......................... 821,948 68.8 798,718 72.1
----------- --------- ------------ --------
Total mortgage loans......... 933,132 78.1 903,435 81.6
Other loans:
Adjustable.................... 117,323 9.8 72,880 6.6
Fixed......................... 144,868 12.1 130,203 11.8
----------- --------- ------------ --------
Total other loans............ 262,191 21.9 203,083 18.4
----------- --------- ------------ --------
$ 1,195,323 100.0% $ 1,106,518 100.0%
=========== ========= ============ ========
6
Loan Maturity and Repricing Schedule. The following table sets forth
the maturity or period of repricing of the Company's loan portfolio at June 30,
1998. Demand loans and loans having no stated schedule of repayments and no
stated maturity are reported as due in one year or less. Adjustable and
floating-rate loans are included in the period in which interest rates are next
scheduled to adjust rather than in which they contractually mature, and
fixed-rate loans are included in the period in which the final contractual
repayment is due.
Beyond
Within 1-2 2-3 3-5 5-15 15
1 Year Years Years Years Years Years Total
--------- ---------- ---------- ---------- ---------- ---------- ----------
(In Thousands)
Real estate loans:
One- to four-family residential $ 59,830 $ 2,839 $ 6,345 $ 41,657 $ 572,871 $ 685,194 $1,368,736
Multifamily and commercial..... 23,754 1,739 2,503 4,083 64,401 32,351 128,831
Consumer loans.................. 143,052 8,288 24,942 100,389 73,783 2,641 353,095
Commercial business loans....... 47,038 6,151 5,013 12,215 49,214 3,557 123,188
--------- ---------- ---------- ---------- ---------- ---------- ----------
Total loans................. $ 273,674 $ 19,017 $ 38,803 $ 158,344 $ 760,269 $ 723,743 $1,973,850
========= ========== ========== ========== ========== ========== ==========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets
forth at June 30, 1998, the dollar amount of all fixed-rate and adjustable-rate
loans due after June 30, 1999. Adjustable- and floating-rate loans are included
in the period in which they are contractually due.
Fixed Adjustable Total
---------- ---------- ----------
(In Thousands)
Real estate loans:
One- to four-family residential................................. $1,311,416 $ 9,708 $1,321,124
Multifamily and commercial...................................... 106,195 1,395 107,590
Consumer.......................................................... 244,327 61,319 305,646
Commercial........................................................ 41,144 57,008 98,152
---------- ---------- ----------
Total........................................................... $1,703,082 $ 129,430 $1,832,512
========== ========== ==========
One- to Four-Family Residential Real Estate Loans. The primary lending
activity of the Company consists of the origination for retention in the
Company's portfolio of owner-occupied one- to four-family residential mortgage
loans secured by properties located in the Company's market area. At June 30,
1998, $1.369 billion, or 69.4%, of the Company's total loan portfolio consisted
of one- to four-family residential mortgage loans, including residential
construction loans.
The Company currently offers one- to four-family residential mortgage
loans with terms typically ranging from 10 to 30 years, with either adjustable
or fixed interest rates. Originations of fixed-rate mortgage loans versus
adjustable-rate mortgage loans are monitored on an ongoing basis and are
affected significantly by such things as the level of market interest rates,
customer preference, the Company's interest rate gap position and loan products
offered by the Company's competitors. Therefore, even when management's strategy
is to increase the originations of adjustable-rate mortgage loans, market
conditions may be such that there is greater demand for fixed-rate mortgage
loans.
The Company's fixed-rate loans, whenever possible, are originated and
underwritten according to standards that permit sale in the secondary mortgage
market. Whether the Company can or will sell fixed-rate loans into the secondary
market, however, depends on a number of factors including the yield and the term
of the loan, market conditions, and the Company's current liquidity and interest
rate sensitivity position. The Company historically has been primarily a
portfolio lender, and at any one time the Company has held only a nominal amount
of loans that may be sold. The Company's current policy is to retain in its
portfolio fixed-rate loans with terms of 15 years or less, and sell a limited
amount of fixed-rate loans (servicing retained) with terms of more than 15
years. Moreover, the Company is more likely to retain fixed-rate loans if its
interest rate sensitivity is within acceptable limits. The Company's mortgage
loans are amortized on a monthly basis with principal and interest due each
month. One- to
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four-family residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms because borrowers may
refinance or prepay loans at their option.
The Company currently offers adjustable-rate mortgage loans with
initial interest rate adjustment periods of one and three years, based on
changes in a designated market index. The Company determines whether a borrower
qualifies for an adjustable-rate mortgage loan based on the fully indexed rate
of the adjustable-rate mortgage loan at the time the loan is originated. One- to
four-family residential adjustable-rate mortgage loans totalled $53.5 million,
or 2.7% of the Company's total loan portfolio at June 30, 1998.
The primary purpose of offering adjustable-rate mortgage loans is to
make the Company's loan portfolio more interest rate sensitive. However, as the
interest income earned on adjustable-rate mortgage loans varies with prevailing
interest rates, such loans may not offer the Company as predictable cash flows
as long-term, fixed-rate loans. Adjustable-rate mortgage loans carry increased
credit risk associated with potentially higher monthly payments by borrowers as
general market interest rates increase. It is possible, therefore, that during
periods of rising interest rates, the risk of default on adjustable-rate
mortgage loans may increase due to the upward adjustment of interest costs to
the borrower.
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed-rate mortgage loan
portfolio, and the Company has generally exercised its rights under these
clauses.
Regulations limit the amount that a savings bank may lend relative to
the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Appraisals are generally performed by
the Company's in-house appraisal staff. Such regulations permit a maximum
loan-to-value ratio of 90% for residential property and 80% for all other real
estate loans. The Company's lending policies generally limit the maximum
loan-to-value ratio on both fixed-rate and adjustable-rate mortgage loans
without private mortgage insurance to 80% of the lesser of the appraised value
or the purchase price of the real estate that serves as collateral for the loan.
The Company makes a limited amount of one- to four-family real estate loans with
loan-to-value ratios in excess of 80%. For one- to four-family real estate loans
with loan-to-value ratios in excess of 80%, the Company generally requires the
borrower to obtain private mortgage insurance on the entire amount of the loan.
The Company requires fire and casualty insurance, as well as a title guaranty
regarding good title, on all properties securing real estate loans made by the
Company.
In the past, the Company purchased loans that are serviced by other
institutions and that are secured by one- to four-family residences. At June 30,
1998, the Company's portfolio of loans serviced by others totaled $3.5 million.
The Company currently has no formal plans to enter into new loan participations.
Included in the Company's $1.369 billion of one- to four-family
residential real estate loans are $43.3 million, or 2.2% of the Company's total
loan portfolio, of construction loans and land loans. The Company offers fixed-
and adjustable-rate residential construction loans primarily for the
construction of owner-occupied one- to four-family residences in the Company's
market area to builders or to owners who have a contract for construction.
Construction loans are generally structured to become permanent loans, and are
originated with terms of up to 30 years with an allowance of up to one year for
construction. During the construction phase the loans have either a fixed-rate
or an adjustable interest rate that adjusts monthly and convert into either a
fixed-rate or an adjustable-rate mortgage loan at the end of the construction
period. Upon completion of the construction, the permanent loan is priced to
reflect a rate no lower than current interest rates on one- to four-family
mortgage loans. Advances are made as construction is completed. In addition, the
Company originates loans within its market area that are secured by individual
unimproved or improved lots. Land loans are currently offered with fixed-rates
for terms of up to 5 years. The maximum loan-to-value ratio for the Company's
land loans is 75% of the appraised value, and the maximum loan-to-value ratio
for the Company's construction loans is 80% of the lower of cost or appraised
value.
8
Construction lending generally involves a greater degree of credit risk
than other one- to four-family residential mortgage lending. The repayment of
the construction loan is often dependent upon the successful completion of the
construction project. Construction delays or the inability of the borrower to
sell the property once construction is completed may impair the borrower's
ability to repay the loan.
Multifamily Residential and Commercial Real Estate Loans. Loans
collateralized by multifamily residential and commercial real estate constituted
approximately $128.8 million, or 6.5%, of the Company's total loan portfolio at
June 30, 1998. The Company's multifamily residential real estate loans are
secured by multifamily residences, such as rental properties. The Company's
commercial real estate loans are secured by nonresidential properties such as
hotels, church property, and retail establishments. At June 30, 1998, a
significant portion of the Company's multifamily residential and commercial real
estate loans were secured by properties located within the Company's market
area. The Company's largest multifamily residential real estate loan
relationship at June 30, 1998, had a principal balance of $4.5 million, and was
collateralized by a personal care facility in Erie County, Pennsylvania. The
Company's largest commercial real estate loan at June 30, 1998, had a principal
balance of $3.5 million and was collateralized by land in Central Pennsylvania.
Multifamily residential and commercial real estate loans are offered with both
adjustable interest rates and fixed interest rates. The terms of each
multifamily residential and commercial real estate loan are negotiated on a
case-by-case basis. The Company generally makes multifamily residential and
commercial real estate loans up to 70% of the appraised value of the property
collateralizing the loan.
Loans secured by multifamily residential and commercial real estate
generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multifamily residential and commercial real estate is typically
dependent upon the successful operation of the related real estate property. If
the cash flow from the project is reduced, the borrower's ability to repay the
loan may be impaired.
Consumer Loans. As of June 30, 1998, consumer loans totaled $353.1
million, or 17.9%, of the Company's total loan portfolio. The principal types of
consumer loans offered by the Company are adjustable-rate home equity lines of
credit and variable-rate education loans, and fixed-rate consumer loans such as
second mortgage loans, automobile loans, sales finance loans, unsecured personal
loans, credit card loans, and loans secured by deposit accounts. Consumer loans
are offered with maturities generally of less than ten years. The Company's home
equity lines of credit are secured by the borrower's principal residence with a
maximum loan-to-value ratio, including the principal balances of both the first
and second mortgage loans, of 75% or less. Such loans are offered on an
adjustable-rate basis with terms of up to ten years. At June 30, 1998, the
disbursed portion of home equity lines of credit totalled $34.0 million, or
9.6%, of consumer loans, with $60.7 million remaining undisbursed.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount, and in the
case of home equity lines of credit, the Company obtains a title guarantee or an
opinion as to the validity of title.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats,
recreation vehicles, appliances, and furniture. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
particular, amounts realizable on the sale of repossessed automobiles may be
significantly reduced based upon the condition of the automobiles and the lack
9
of demand for used automobiles. The Company adds a general provision on a
regular basis to its consumer loan loss allowance, based on general economic
conditions and prior loss experience.
Commercial Business Loans. The Company currently offers commercial
business loans to existing customers to finance various activities in the
Company's market area, some of which are secured in part by additional real
estate collateral. At June 30, 1998, the Company had 957 commercial business
loans outstanding with an aggregate balance of $123.2 million, or 6.2% of the
Company's total loan portfolio. As of June 30, 1998, the average commercial
business loan balance was approximately $129,000. On June 11, 1995, the Company
purchased a portfolio of 26 loans, with an aggregate balance of $35.0 million,
made to the employee stock ownership plans ("ESOPs") of 25 different financial
institutions and one investment banking company. The portfolio was purchased
from the Superintendent of Banking for the State of New York, who was acting as
the receiver for a New York- chartered trust company. The interest rates on
these loans adjust each quarter based upon changes to either the prime rate or
federal funds rate. The loans are collateralized by the stock of the financial
institution which formed the ESOP, and in some cases have additional collateral
in the form of treasury securities or cash deposits. The largest ESOP loan had a
balance as of June 30, 1998 of $3.7 million and the borrower is the ESOP of a
bank in New Jersey. The average balance of the loans in the portfolio was
approximately $1.2 million with only 5 loans having a balance in excess of $1.0
million.
Other than the aforementioned ESOP loans, the largest commercial
business loan had a principal balance of $4.4 million, was to a Pennsylvania
municipality and was secured by anticipated state grants and local tax revenue.
Commercial business loans are offered with both fixed and adjustable
interest rates and with terms of up to 15 years. Underwriting standards employed
by the Company for commercial business loans include a determination of the
applicant's ability to meet existing obligations and payments on the proposed
loan from normal cash flows generated by the applicant's business. The financial
strength of each applicant also is assessed through a review of financial
statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Company generally obtains personal guarantees from the
borrower or a third party as a condition to originating its commercial business
loans.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. All of the Company's loan originators, except the originators for the
Bank's New York-based mortgage banking subsidiary, are salaried employees, and
the Company does not pay commissions in connection with loan originations. The
loan originators employed by the Bank's New York-based mortgage banking
subsidiary are paid a commission based upon the loans they originate. Upon
receiving a loan application, the Company obtains a credit report and employment
verification to verify specific information relating to the applicant's
employment, income, and credit standing. In the case of a real estate loan, an
in-house appraiser or an appraiser approved by the Company appraises the real
estate intended to secure the proposed loan. A loan processor in the Company's
loan department checks the loan application file for accuracy and completeness,
and verifies the information provided. The Company has a formal loan policy
which assigns lending limits to the Company's various loan officers. Also, the
Company has a Senior Loan Committee which meets as needed to review and verify
that the assigned lending limits are being followed and to monitor the Company's
lending policies and the Company's loan activity. The Senior Loan Committee also
has lending authority as designated in the Company's loan policy which is
approved by the Board of Directors. Loans exceeding the limits established for
the Senior Loan Committee must be approved by the Executive Committee of the
Board of Directors or by the entire Board of Directors. The Company's policy is
to make no loans either individually or in the aggregate to one entity in excess
of $7.5 million. Fire and casualty insurance is required at the time the loan is
made and throughout the term of the loan, and upon request of the Company, flood
insurance may be required. After the loan is approved, a loan commitment letter
is promptly issued to the borrower. At June 30, 1998, the Company had
commitments to originate $118.3 million of loans.
10
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,
------------------------------------
1998 1997 1996
---------- ---------- ----------
(In Thousands)
Loans receivable, net, at beginning of period..................... $1,536,498 $1,374,955 $1,164,735
Originations:
Real estate loans.............................................. 537,203 290,778 351,146
Consumer and commercial business loans......................... 264,942 272,410 213,234
---------- ---------- ----------
Total loan originations....................................... 802,145 563,188 564,380
Principal repayments:
Real estate loans.............................................. (254,544) (172,847) (144,680)
Consumer and commercial business loans......................... (170,781) (198,448) (171,894)
---------- ---------- ----------
Total repayments.............................................. (425,325) (371,295) (316,574)
Loan purchases including acquisitions............................. 26,904 19,289 63,548
Loan sales........................................................ (30,094) (47,985) (99,062)
Transfer to REO................................................... (2,839) (1,654) (2,072)
---------- ---------- ----------
Loans receivable, net, at end of period....................... $1,907,289 $1,536,498 $1,374,955
========== ========== ==========
Loan Origination Fees and Other Income. In addition to interest earned
on loans, the Company generally receives loan origination fees. To the extent
that loans are originated or acquired for the Company's portfolio, Statement of
Financial Accounting Standards No. 91 requires that the Company defer loan
origination fees and costs and amortize such amounts as an adjustment of yield
over the life of the loan by use of the level yield method. Fees deferred under
SFAS 91 are recognized into income immediately upon prepayment or the sale of
the related loan. At June 30, 1998, the Company had $1.4 million of deferred
loan origination fees. Loan origination fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased, principal repayments, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, the Company also receives other
fees, service charges, and other income that consist primarily of deposit
transaction account service charges, late charges, credit card fees, and income
from REO operations. The Company recognized fees and service charges of $3.3
million, $2.4 million and $2.0 million, for the fiscal years ended June 30,
1998, 1997 and 1996, respectively.
Loans-to-One Borrower. Savings banks are subject to the same
loans-to-one borrower limits as those applicable to national banks, which under
current regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired capital and unimpaired surplus on an unsecured basis, and an
additional amount equal to 10% of unimpaired capital and unimpaired surplus if
the loan is secured by readily marketable collateral (generally, financial
instruments and bullion, but not real estate). At June 30, 1998, the largest
aggregate amount loaned by the Company to one borrower totaled $4.8 million and
was secured by commercial real estate. The Company's second largest lending
relationship totaled $4.5 million and was secured by a personal care facility in
Erie County, Pennsylvania. The Company's third largest lending relationship was
for a Pennsylvania municipality's sewer project which totaled $4.4 million and
was secured by state grant money and local tax revenue. The Company's fourth
largest lending relationship totaled $3.9 million and was secured by a limited
care apartment facility in Warren County, Pennsylvania. The Company's fifth
largest lending relationship totaled $3.7 million and was made to the ESOP of a
financial
11
institution located in New Jersey. The loan is secured by the undistributed
shares of the common stock of the financial institution that are owned by the
ESOP.
Delinquencies and Classified Assets
Collection Procedures. The Company's collection procedures provide that
when a loan is five days past due, a computer-generated late notice is sent to
the borrower requesting payment. If delinquency continues, at 15 days a
delinquent notice, plus a notice of a late charge, is sent and personal contact
efforts are attempted, either in person or by telephone, to strengthen the
collection process and obtain reasons for the delinquency. Also, plans to
arrange a repayment plan are made. If a loan becomes 60 days past due, a
collection letter is sent, personal contact is attempted, and the loan becomes
subject to possible legal action if suitable arrangements to repay have not been
made. In addition, the borrower is given information which provides access to
consumer counseling services, to the extent required by regulations of the
Department of Housing and Urban Development. When a loan continues in a
delinquent status for 90 days or more, and a repayment schedule has not been
made or kept by the borrower, generally a notice of intent to foreclose is sent
to the borrower, giving 30 days to cure the delinquency. If not cured,
foreclosure proceedings are initiated.
Nonperforming Assets. Loans are reviewed on a regular basis and are
placed on a nonaccrual status when, in the opinion of management, the collection
of additional interest is doubtful. Loans are automatically placed on nonaccrual
status when either principal or interest is 90 days or more past due. Interest
accrued and unpaid at the time a loan is placed on a nonaccrual status is
charged against interest income. At June 30, 1998, the Company had nonperforming
loans of $8.6 million, and a ratio of nonperforming loans to net loans
receivable of .45%.
Real estate acquired by the Company as a result of foreclosure or by
deed in lieu of foreclosure is classified as Real Estate Owned ("REO") until
such time as it is sold. When real estate is acquired through foreclosure or by
deed in lieu of foreclosure, it is recorded at its fair value, less estimated
costs of disposal. If the value of the property is less than the loan, less any
related specific loan loss provisions, the difference is charged against the
allowance for loan losses. Any subsequent write-down of REO is charged against
earnings. At June 30, 1998, the Company had approximately $3.5 million of
property acquired as the result of foreclosure, and classified as REO. At June
30, 1998, the Company had non-performing assets of $12.1 million and a ratio of
nonperforming assets to total assets of .47%.
12
Loans Past Due and Nonperforming Assets. The following table sets forth
information regarding the Company's loans 30 days or more past due, nonaccrual
loans 90 days or more past due, and real estate acquired or deemed acquired by
foreclosure at the dates indicated. When a loan is delinquent 90 days or more,
the Company fully reserves all accrued interest thereon and ceases to accrue
interest thereafter. For all the dates indicated, the Company did not have any
material restructured loans within the meaning of SFAS 15.
At June 30,
1998 1997 1996 1995 1994
------------------ --------- -------- -------- --------
Number Balance
(Dollars in Thousands)
Loans past due 30 days to 59 days:
One- to four-family residential loans...... 112 $ 4,842 $ 3,224 $ 3,031 $ 2,140 $ 4,354
Multifamily and commercial loans........... 1 79 -- 423 281 --
Consumer loans............................. 917 3,632 2,477 2,178 1,135 1,111
Commercial business loans.................. 4 458 183 240 -- 76
------- ------- ------- ------- ------- -------
Total loans past due 30 days to 59 days... 1,034 $ 9,011 $ 5,884 $ 5,872 $ 3,556 $ 5,541
------- ------- ------- ------- ------- -------
Loans past due 60 days to 89 days:
One- to four-family residential loans...... 61 $ 2,386 $ 1,491 $ 1,153 $ 1,165 $ 1,065
Multifamily and commercial loans........... 1 219 -- 21 139 --
Consumer loans............................. 277 954 908 1,143 443 398
Commercial business loans.................. 2 841 180 148 45 4
------- ------- ------- ------- ------- -------
Total loans past due 60 days to 89 days... 341 $ 4,400 $ 2,579 $ 2,465 $ 1,792 $ 1,467
------- ------- ------- ------- ------- -------
Loans past due 90 days or more (1):
One- to four-family residential loans...... 135 $ 6,013 $ 6,229 $ 4,913 $ 6,473 $ 6,432
Multifamily and commercial loans........... 1 390 2,585 2,704 3,262 6,797
Consumer loans............................. 379 1,631 1,161 772 539 652
Commercial business loans.................. 6 578 455 1,092 150 273
------- ------- ------- ------- ------- -------
Total loans past due 90 days or more...... 521 $ 8,612 $10,430 $ 9,481 $10,424 $14,154
------- ------- ------- ------- ------- -------
Total loans 30 days or more past due......... 1,896 $22,023 $18,893 $17,818 $15,772 $21,162
======= ======= ======= ======= ======= =======
Total loans 90 days or more past due (1)..... 521 $ 8,612 $10,430 $ 9,481 $10,424 $14,154
Total REO.................................... 42 3,506 4,549 5,771 5,895 7,701
------- ------- ------- ------- ------- -------
Total loans 90 days or more past due and REO. 563 $12,118 $14,979 $15,252 $16,319 $21,855
======= ======= ======= ======= ======= =======
Total loans 90 days or more past due to
net loans receivable....................... .45% .68% .69% .89% 1.33%
Total loans 90 days or more past due
and REO to total assets.................... .47% .72% .81% 1.03% 1.53%
- ------------------------------------
(1) The Company classifies as nonperforming all loans 90 days or more
delinquent.
During the fiscal year ended June 30, 1998, gross interest income of
approximately $250,000 would have been recorded on loans accounted for on a
nonaccrual basis if the loans had been current throughout the period. No
interest income on nonaccrual loans was included in income during such period
except for $230,000 of cash interest payments received.
The Company had one nonperforming asset with a carrying value exceeding
$1.0 million at June 30, 1998. This asset consisted of an apartment complex and
adjacent vacant land in New York State located approximately 25 miles from the
Company's corporate headquarters. The loan on this property was originated in
1978, and the Company foreclosed on the property in 1987. The asset is held for
sale and had a carrying value of $1.4 million as of June 30, 1998.
13
Classification of Assets. The Company's policies, consistent with
regulatory guidelines, provide for the classification of loans and other assets
such as debt and equity securities, considered to be of lesser quality as
"substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets that do not
expose the savings institution to risk sufficient to warrant classification in
one of the aforementioned categories, but which possess some weaknesses, are
required to be designated "special mention" by management. At June 30, 1998, the
Company had seven loans, with an aggregate principal balance of $7.8 million,
designated as special mention.
When a savings bank classifies problem assets as either substandard or
doubtful, it is required to establish general valuation allowances or "loss
reserves" in an amount deemed prudent by management. General allowances
represent loss allowances that have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When a savings bank
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified, or to charge off such amount. A savings bank's determination as to
the classification of its assets and the amount of its valuation allowance is
subject to review by its regulatory agencies, which can order the establishment
of additional general or specific loss allowances. The Company regularly reviews
its asset portfolio to determine whether any assets require classification in
accordance with applicable regulations. The Company's largest classified assets
are also the Company's largest nonperforming assets and are discussed above.
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
At June 30,
--------------------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
Substandard assets............................................ $ 20,138 $ 24,242 $ 19,594
Doubtful assets............................................... -- 260 95
Loss assets................................................... -- 133 --
-------- -------- --------
Total classified assets.................................... $ 20,138 $ 24,635 $ 19,689
======== ======== ========
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and current economic conditions. Such evaluation,
which includes a review of all loans on which full collectibility may not be
reasonably assured, considers among other matters, the estimated net realizable
value or the fair value of the underlying collateral, economic conditions,
historical loan loss experience and other factors that warrant recognition in
providing for an adequate loan loss allowance. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses and valuation of foreclosed real estate.
Such agencies may require the Company to recognize additions to the allowance
based on their judgment about information available to them at the time of their
examination.
The Company provided $4.1 million, $2.5 million and $1.5 million, to
its allowance for loan losses for the fiscal years ended June 30, 1998, 1997 and
1996, respectively. At June 30, 1998, the total allowance was $15.8 million,
which amounted to .83% of total net loans and 183.1% of nonperforming loans. The
allowance is established based upon the Company's evaluation of the risks
inherent in its loan portfolio. The Company will continue to monitor and modify
the level of its allowance for loan losses in order to maintain it at a level
which management
14
considers adequate to provide for potential loan losses. For the fiscal years
ended June 30, 1998, 1997 and 1996, the Company had charge-offs of $2.5 million,
$2.5 million and $1.3 million, respectively, against this allowance.
Analysis of the Allowance For Loan Losses. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
Years Ended June 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- ----------- ---------- -----------
(In Thousands)
Net loans receivable............................. $1,907,289 $1,536,498 $1,374,955 $1,164,735 $1,062,533
Average loans outstanding........................ 1,673,599 1,449,807 1,243,758 1,093,602 1,036,819
Allowance for loan losses balance at
beginning of period............................ 13,611 13,130 11,833 11,238 10,999
Provision for loan losses........................ 4,072 2,491 1,502 1,098 1,728
Charge-offs:
Real estate loans:............................. (132) (383) (141) (53) (587)
Consumer loans................................. (2,384) (2,004) (1,192) (830) (873)
Commercial loans............................... -- (150) -- (188) (160)
---------- ----------- --------- ----------- ----------
Total charge-offs............................. (2,516) (2,537) (1,333) (1,071) (1,620)
---------- ---------- --------- ---------- ---------
Recoveries:
Real estate loans.............................. -- 10 176 -- --
Consumer loans................................. 393 363 250 332 90
Commercial loans............................... -- 1 2 1 41
---------- ---------- --------- ---------- ---------
Total recoveries.............................. 393 374 428 333 131
Acquired through acquisition..................... 209 153 700 235 --
---------- ---------- --------- ---------- ---------
Allowance for loan losses balance
at end of period............................ $ 15,769 $ 13,611 $ 13,130 $ 11,833 $ 11,238
========== ========== ========= ========== =========
Allowance for loan losses as a percentage of net
loans receivable............................... .83% .89% .95% 1.02% 1.06%
Net loans charged-off as a percentage of average
loans outstanding(1)........................... .15% .17% .11% .10% .16%
Allowance for loan losses as a percentage of
nonperforming loans............................ 183.10% 130.50% 138.49% 113.52% 79.40%
Allowance for loan losses as a percentage
of nonperforming loans and REO................. 130.13% 90.87% 86.09% 72.51% 51.42%
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,
----------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
% of % of % of % of % of
Total Total Total Total Total
Amount Loans (1) Amount Loans (1) Amount Loans (1) Amount Loans (1) Amount Loans (1)
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in Thousands)
Balance at end of
period applicable to:
Real estate loans.. $ 8,103 75.9% $ 6,898 75.1% $ 9,133 77.6% $ 8,101 78.0% $ 8,475 81.6%
Consumer loans..... 4,957 17.9 4,499 19.5 3,009 17.7 2,773 17.2 2,350 16.5
Commercial business
loans............. 2,709 6.2 2,214 5.4 988 4.7 959 4.8 413 1.9
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
Total allowance for
loan losses...... $ 15,769 100.0% $ 13,611 100.0% $ 13,130 100.0% $ 11,833 100.0% $ 11,238 100.0%
======== ======= ======== ======= ======== ======= ======== ======= ======== =======
- -------------------------------------
(1) Represents percentage of loans in each category to total loans.
15
Investment Activities
The Company's investment portfolio comprises mortgage-backed
securities, investment securities, and cash and cash equivalents. In recent
years, the Company generally has increased both the percentage of its assets
held in its investment securities portfolio, and the percentage of assets held
in the mortgage-backed securities portfolio. This increase in investment
securities and mortgage-backed securities resulted from the Company leveraging
its capital by borrowing funds and investing the proceeds in marketable
securities in order to improve net interest income. In addition, any excess
funds resulting from the acquisition of branch offices, and the related
deposits, from other financial institutions is invested by the Company. Also,
the Company maintains a high percentage of its assets in marketable securities
and cash equivalents to assist in asset/liability management.
The majority of the Company's mortgage-backed securities are issued or
guaranteed by the United States Government or agencies thereof. At June 30,
1998, the carrying value of mortgage-backed securities totaled $305.8 million
compared to $291.6 million at June 30, 1997. Of this $305.8 million, $290.1
million had adjustable-rates and $15.7 million had fixed-rates and $295.4
million were either issued by or collateralized by GNMA, FNMA or FHLMC.
The carrying value of the Company's investment securities totaled
$204.2 million at June 30, 1998, compared to $122.1 million at June 30, 1997.
This 67.2% increase in investment securities resulted from the purchase of $30.0
million of trust preferred securities and $30.0 million of municipal bonds.
These securities offer attractive yields compared to other investments typically
purchased by the Company and were purchased in an effort to enhance interest
income. The Company's cash and cash equivalents, consisting of cash and due from
banks, and interest-earning deposits with other financial institutions, totaled
$59.4 million at June 30, 1998, compared to $71.5 million at June 30, 1997. The
Company reduced its investment in such assets because the yield of such
investments are generally lower than yields offered on other types of investment
securities.
The Company is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. The Company generally has maintained a portfolio
of liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short-term demand for funds to be used in the Company's loan origination and
other activities.
16
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,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
(In Thousands)
Mortgage-backed securities balance at beginning of period (1). $ 291,597 $ 291,446 $ 243,184
Purchases..................................................... 62,366 10,892 59,453
Sales......................................................... (27,618) (14,554) --
Securities acquired by business combination................... 5,391 18,788 4,854
Increase (decrease) in market value of securities available
for sale.................................................... 845 (1,532) (519)
Principal payments and amortization of premiums and discounts. (26,817) (13,443) (15,526)
--------- --------- ---------
Mortgage-backed securities balance at end of period (1)....... $ 305,764 $ 291,597 $ 291,446
========= ========= =========
Investment securities balance at beginning of period (2)...... $ 122,103 $ 106,047 $ 66,884
Purchases..................................................... 141,094 19,100 40,120
Sales......................................................... (46,471) -- --
Securities acquired by business combination................... 17,076 9,120 8,834
Increase in market value of securities available for sale..... 2,901 969 208
Maturities and amortization of premiums and discounts......... (32,490) (13,133) (9,999)
--------- --------- ---------
Investment securities balance at end of period (2)............ $ 204,213 $ 122,103 $ 106,047
========= ========= =========
- -------------------------------------
(1) Includes mortgage-backed securities available for sale and held to maturity.
(2) Includes investment securities available for sale and held to maturity.
17
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,
--------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
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.............. $ 5,663 $ 5,745 $ 10,853 $ 10,771 $ 11,063 $ 10,863
Variable-rate pass through certificates........... 9,936 10,059 13,397 13,690 2,998 3,151
Fixed-rate collateralized mortgage obligations
("CMOs")........................................ 4,578 4,571 1,400 1,399 761 736
Variable-rate CMOs................................ 90,064 88,520 84,911 82,999 87,110 85,446
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities held to
maturity...................................... 110,241 108,895 110,561 108,859 101,932 100,196
------- -------- -------- -------- -------- --------
Mortgage-backed securities available for sale:
Fixed-rate pass through certificates.............. $ 5,396 $ 5,391 $ 36,782 $ 37,896 $ 51,328 $ 52,655
Variable-rate pass through certificates........... 11,523 11,579 770 784 1,041 1,047
Fixed-rate collateralized mortgage obligations
("CMOs")........................................ 37 35 99 107 1,854 1,854
Variable-rate CMOs................................ 178,000 178,518 143,658 142,249 134,032 133,958
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities available
for sale...................................... 194,956 195,523 181,309 181,036 188,255 189,514
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities................ $305,197 $304,418 $291,870 $289,895 $290,187 $289,710
======== ======== ======== ======== ======== ========
Investment securities held to maturity:
U.S. Government and agency........................ $ 51,358 $ 51,982 $ 42,868 $ 43,334 $ 53,836 $ 54,260
Municipal securities.............................. 3,811 3,947 -- -- -- --
Corporate debt issues............................. 27,852 27,993 551 551 250 281
Equity securities................................. -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total investment securities held to maturity.... $ 83,021 $ 83,922 $ 43,419 $ 43,885 $ 54,086 $ 54,541
======== ======== ======== ======== ======== ========
Investment securities available for sale:
U.S. Government and agency ....................... $ 75,826 $ 76,995 $ 63,290 $ 63,272 $ 47,083 $ 46,998
Municipal securities.............................. 37,307 38,289 11,322 11,489 1,430 1,422
Corporate debt issues............................. 985 985 -- -- 1,401 1,400
Equity securities................................. 2,229 4,923 2,169 3,923 1,113 2,141
-------- -------- -------- -------- -------- --------
Total investment securities available for sale.. $116,347 $121,192 $ 76,781 $ 78,684 $ 51,027 $ 51,961
======== ======== ======== ======== ======== ========
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,
---------------------------------------------
1998 1997 1996
--------- --------- ----------
(In Thousands)
Mortgage-backed securities:
FNMA............................................................ $ 143,992 $ 140,775 $ 142,757
GNMA............................................................ 12,457 29,338 39,513
FHLMC........................................................... 138,962 120,400 107,463
Other (non-agency).............................................. 10,353 1,084 1,713
--------- --------- ---------
Total mortgage-backed securities.......................... $ 305,764 $ 291,597 $ 291,446
========= ========= =========
18
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, amortized cost, market values and
weighted average yields for the Company's investment securities and
mortgage-backed securities portfolios at June 30, 1998. Adjustable-rate
mortgage-backed securities are included in the period in which interest rates
are next scheduled to adjust.
At June 30, 1998
--------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
-------------------- -------------------- ------------------- --------------------
Annualized Annualized Annualized Annualized
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ---------- --------- ---------- --------- ---------- --------- ---------
(Dollars in Thousands)
Investment securities held to maturity:
U.S. Government and agency obligations $ 9,978 6.22% $ 26,380 6.87% $ -- --% $ 15,000 7.30%
Municipal securities................... -- -- -- -- -- -- 3,811 5.15
Corporate debt issues.................. 100 5.30 -- -- 2,305 8.08 25,447 7.80
-------- ------ -------- ----- -------- ----- -------- -----
Total investment securities held to
maturity............................. 10,078 6.21 26,380 6.87 2,305 8.08 44,258 7.40
Investment securities available for sale:
U.S. Government and agency obligations 4,587 6.26 53,015 6.44 5,991 6.40 12,233 6.99
Equity securities...................... -- -- -- -- -- -- -- --
Municipal securities................... -- -- 2,158 5.30 5,304 5.58 29,845 5.20
Corporate debt issues.................. -- -- -- -- -- -- 985 6.46
-------- ------ -------- ----- -------- ----- -------- -----
Total investment securities available
for sale............................. 4,587 6.26 55,173 6.40 11,295 6.02 43,063 5.74
Mortgage-backed securities held to
maturity:
Pass-through certificates............. 14,282 6.67 -- -- -- -- 1,317 8.67
CMOs.................................. 90,064 6.02 -- -- 452 9.82 4,126 6.04
-------- ------ -------- ----- -------- ----- -------- -----
Total mortgage-backed securities held
to maturity......................... 104,346 6.11 -- -- 452 9.82 5,443 6.68
Mortgage-backed securities available for
sale:
Pass through certificates............. 11,523 5.88 303 5.86 1,657 6.40 3,436 6.26
CMOs.................................. 178,000 6.34 -- -- 37 10.21 -- --
-------- ------ -------- ----- -------- ----- -------- -----
Total mortgage-backed securities
available for sale.................. 189,523 6.32 303 5.86 1,694 6.48 3,436 6.26
------- ------ -------- ----- -------- ----- -------- -----
Total investment securities and
mortgage-backed securities............ $308,534 6.24% $ 81,856 6.55% $ 15,746 6.48% $ 96,200 6.58%
======== ====== ======== ===== ======== ===== ======== =====
At June 30, 1998
-------------------------------
Total
-------------------------------
Annualized
Weighted
Amortized Market Average
Cost Value Yield
-------- -------- ----------
(Dollars in Thousands)
Investment securities held to maturity:
U.S. Government and agency obligations $ 51,358 $ 51,982 6.87%
Municipal securities................... 3,811 3,947 5.15
Corporate debt issues.................. 27,852 27,993 7.82
-------- -------- -----
Total investment securities held to
maturity............................. 83,021 83,922 7.11
Investment securities available for sale:
U.S. Government and agency obligations 75,826 76,995 6.52
Equity securities...................... 2,229 4,923 4.13
Municipal securities................... 37,307 38,289 5.26
Corporate debt issues.................. 985 985 6.46
-------- -------- -----
Total investment securities available
for sale............................. 116,347 121,192 6.07
Mortgage-backed securities held to
maturity:
Pass-through certificates............. 15,599 15,804 6.84
CMOs.................................. 94,642 93,091 6.04
-------- -------- -----
Total mortgage-backed securities held
to maturity......................... 110,241 108,895 6.15
Mortgage-backed securities available for
sale:
Pass through certificates............. 16,919 16,970 6.01
CMOs.................................. 178,037 178,553 6.34
-------- -------- -----
Total mortgage-backed securities
available for sale.................. 194,956 195,523 6.32
-------- -------- -----
Total investment securities and
mortgage-backed securities............ $504,565 $509,532 6.35%
======== ======== =====
19
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,
---------------------------------------------
1998 1997 1996
----------- ----------- ----------
(In Thousands)
Balance at beginning of period.................................... $ 1,640,815 $ 1,450,047 $1,283,935
Savings deposits.................................................. 1,136,796 993,411 660,132
Savings withdrawals............................................... (1,119,518) (913,573) (648,646)
Net checking activity............................................. 79,691 23,671 14,616
Deposits acquired................................................. 220,243 34,594 95,994
----------- ----------- ----------
Net increase before interest credited........................... 317,212 138,103 122,096
Interest credited................................................. 64,476 52,665 44,016
----------- ----------- ----------
Net increase in deposits...................................... 381,688 190,768 166,112
----------- ----------- ----------
Balance at end of period.................................. $ 2,022,503 $ 1,640,815 $1,450,047
=========== =========== ==========
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,
------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- --------------------------------
Balance Percent (1) Rate (2) Balance Percent (1) Rate (2) Balance Percent (1) Rate (2)
--------- ----------- -------- --------- ----------- -------- --------- ----------- --------
(Dollars in Thousands)
Savings accounts......... $ 340,377 16.83% 3.30% $ 299,365 18.24% 3.30% $ 296,099 20.42% 3.30%
Checking accounts........ 315,755 15.61 1.61 222,845 13.58 2.12 195,019 13.45 2.12
Money market accounts.... 114,187 5.65 3.68 83,609 5.10 3.37 82,552 5.69 3.37
Certificates of deposit:
Maturing within 1 year. 771,665 38.15 5.57 607,421 37.02 5.61 512,392 35.34 5.36
Maturing 1 to 3 years.. 404,175 19.98 5.90 357,070 21.76 6.01 259,539 17.90 5.78
Maturing more than
3 years............... 76,344 3.78 6.00 70,505 4.30 6.03 104,446 7.20 6.44
--------- ------ ------- --------- ------ ------- --------- ------ -------
Total certificates.... 1,252,184 61.91 5.70 1,034,996 63.08 5.78 876,377 60.44 5.61
--------- ------ ------- --------- ------ ------- --------- ------ -------
Total deposits........... $2,022,503 100.0% 4.55% $1,640,815 100.00% 4.71% $1,450,047 100.0% 4.21%
========== ====== ======= ========== ====== ======= ========== ====== =======
- ---------------------------------------
(1) Represents percentage of total deposits.
(2) Represents weighted average nominal rate.
20
Time Deposit Rates. The following table sets forth the time deposits in
the Company classified by rates as of the dates indicated:
At June 30,
------------------------------------
1998 1997 1996
---------- ----------- -----------
Rate (In Thousands)
- -----
2.00 - 2.99%........................... $ 88 $ 37 $ 36
3.00 - 3.99%........................... 2,956 1,234 7,812
4.00 - 4.99%........................... 121,533 63,668 138,758
5.00 - 5.99%........................... 760,738 576,850 409,023
6.00 - 6.99%........................... 312,693 329,083 242,428
7.00 - 7.99%........................... 47,959 55,170 69,629
8.00% or greater....................... 6,217 8,954 8,691
---------- ----------- -----------
$1,252,184 $ 1,034,996 $ 876,377
========== =========== ===========
Time Deposit Maturities. The following table sets forth the amount and
maturities of time deposits at June 30, 1998.
Amount Due
--------------------------------------------------------------
Less Than 1-2 2-3 After 3
One Year Years Years Years Total
--------- --------- --------- -------- ---------
Rate (In Thousands)
- ----
2.00 - 2.99%.................. $ 42 $ -- $ 46 $ -- $ 88
3.00 - 3.99%.................. 1,876 132 89 859 2,956
4.00 - 4.99%.................. 118,702 2,536 182 113 121,533
5.00 - 5.99%.................. 476,309 202,982 45,236 36,211 760,738
6.00 - 6.99%.................. 170,376 103,693 8,196 30,428 312,693
7.00 - 7.99%.................. 1,625 35,860 1,825 8,649 47,959
8.00% or greater.............. 2,735 2,253 1,145 84 6,217
--------- --------- --------- -------- ----------
Total......................... $ 771,665 $ 347,456 $ 56,719 $ 76,344 $1,252,184
========= ========= ========= ======== ==========
Large Certificates of Deposit Maturities. The following table indicates
the amount of the Company's certificates of deposit of $100,000 or more by time
remaining until maturity at June 30, 1998.
Certificates
Maturity Period of Deposit
--------------- ----------
(In Thousands)
Three months or less............................. $ 30,738
Three through six months......................... 22,525
Six through twelve months........................ 46,234
Over twelve months............................... 51,771
-----------
Total....................................... $ 151,268
===========
21
Borrowings
Savings deposits are the primary source of funds for the Company's
lending and investment activities and for its general business purposes. The
Company also relies upon borrowings from the FHLB to supplement its supply of
lendable funds and to meet deposit withdrawal requirements. Borrowings from the
FHLB typically are collateralized by the Company's stock in the FHLB and a
portion of the Company's first mortgage loans. At June 30, 1998, the Company had
$232.1 million of borrowings outstanding from the FHLB.
The FHLB functions as a central reserve bank providing credit for the
Company and other member financial institutions. As a member, the Company is
required to own capital stock in the FHLB and is authorized to apply for
borrowings on the security of such stock and certain of its first mortgage loans
and other assets (principally, securities that are obligations of, or guaranteed
by, the United States) provided certain standards related to creditworthiness
have been met. Borrowings are made pursuant to several different programs. Each
credit program has its own interest rate and range of maturities. Depending on
the program, limitations on the amount of borrowings are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness. All FHLB borrowings have fixed interest
rates and original maturities of between one day and twenty years.
During the Year Ended June 30,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
FHLB Pittsburgh borrowings:
Average balance outstanding (1) ................................ $ 144,798 $ 141,108 $ 117,919
Maximum outstanding at end of any month during period........... 237,161 $ 164,212 $ 200,603
Balance outstanding at end of period............................ 232,161 $ 164,212 $ 200,603
Weighted average interest rate during period.................... 5.20% 5.73% 5.30%
Weighted average interest rate at end of period................. 5.86% 6.12% 5.67%
Reverse repurchase agreements:
Average balance outstanding (1) ................................ $ 41,220 $ 16,578 $ 267
Maximum outstanding at end of any month during period........... 50,028 $ 50,116 $ 800
Balance outstanding at end of period............................ 50,028 $ 50,116 $ --
Weighted average interest rate during period.................... 5.31% 5.86% 3.40%
Weighted average interest rate at end of period................. 5.48% 5.60% --%
Other borrowings:
Average balance outstanding (1) ................................ $ 8,264 $ 10,075 $ 12,151
Maximum outstanding at end of any month during period........... 9,056 $ 11,462 $ 13,368
Balance outstanding at end of period............................ 7,517 $ 9,130 $ 11,158
Weighted average interest rate during period.................... 5.36% 6.95% 7.59%
Weighted average interest rate at end of period................. 6.84% 6.96% 7.52%
Total borrowings:
Average balance outstanding (1) ................................ $ 194,282 $ 167,761 $ 130,337
Maximum outstanding at end of any month during period........... 289,706 $ 223,458 $ 211,761
Balance outstanding at end of period............................ 289,706 $ 223,458 $ 211,761
Weighted average interest rate during period.................... 5.23% 5.24% 5.35%
Weighted average interest rate at end of period................. 5.82% 6.04% 5.77%
- -------------------------------------
(1) Computed on the basis of month-end balances.
Competition
The Company's market area in Pennsylvania and New York has a large
concentration of financial institutions, some of which are significantly larger
and have greater financial resources than the Company, and all of which are
competitors of the Company to varying degrees. As a result, the Company
encounters strong competition both in attracting deposits and in originating
real estate and other loans. Its most direct competition for deposits has come
historically from commercial banks, brokerage houses, other savings
associations, and credit unions in its market area, and the Company expects
continued strong competition from such financial institutions in the foreseeable
future. The Company's market area includes offices of several commercial banks
that are substantially larger than the Company
22
in terms of state-wide deposits. The Company competes for savings by offering
depositors a high level of personal service and expertise together with a wide
range of financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings institutions.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Company's market
area as well as the increased efforts by commercial banks to expand mortgage
loan originations.
The Company competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
Subsidiary Activities
Northwest Bancorp Inc., through Northwest Savings Bank, has five wholly
owned subsidiaries, Great Northwest Corporation, Northwest Financial Services,
Inc., Northwest Consumer Discount Company, Inc., Northwest Mortgage Corporation
and Northwest Capital Group, Inc. Jamestown has no subsidiaries. Great
Northwest's sole activity is holding equity investments in government-assisted
low-income housing projects in various locations in the Company's market area.
At June 30, 1998, the Bank had an equity investment in Great Northwest of $1.7
million. For the fiscal year ended June 30, 1998, Great Northwest had an
operating profit of $455,000 generated primarily from federal low-income housing
tax credits.
Northwest Financial Services' principal activity is the operation of
several of the Company's REO properties and the ownership of the common stock of
several financial institutions. In addition, Northwest Financial Services also
holds an equity investment in one government assisted low-income housing project
and owns 100% of the stock in Rid-Fed, Inc. At June 30, 1998, the Bank had an
equity investment in Northwest Financial Services of $5.0 million, and for the
fiscal year ended June 30, 1998, Northwest Financial Services had income of
$239,000, which included equity income from Rid-Fed, Inc. of $44,000.
Northwest Consumer Discount Company operates 33 consumer finance
offices throughout Pennsylvania and operates one consumer finance office in New
York State as a separate subsidiary doing business therein as Northwest Finance
Company. At June 30, 1998, the Bank had an equity investment in Northwest
Consumer Discount Company of $9.3 million and the income of Northwest Consumer
Discount Company for the fiscal year ended June 30, 1998 was $1.5 million.
Consumer loans entail greater credit risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly, such