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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to _________________
Commission File Number 0-23817
Northwest Bancorp, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
United States of America 23-2900888
- ------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
Liberty Street at Second Avenue, Warren, Pennsylvania 16365
- ----------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(814) 726-2140
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock ($.10 par value) 47,571,103 shares outstanding as of
September 30, 2002.
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of
September 30, 2002 (unaudited) and June 30, 2002 1
Consolidated Statements of Income for the three months
ended September 30, 2002 and 2001 (unaudited) 2
Consolidated Statements of Changes in Shareholders' Equity for
the three months ended September 30, 2002 and 2001 (unaudited) 3
Consolidated Statements of Cash Flows for the three
months ended September 30, 2002 and 2001 (unaudited) 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 28
Certifications 29
ITEM 1. FINANCIAL STATEMENTS
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, JUNE 30,
ASSETS 2002 (unaudited) 2002
- ------------------------------------------------------------------------- ---------------- -------------
CASH AND CASH EQUIVALENTS $ 57,561 64,687
INTEREST-EARNING DEPOSITS IN OTHER FINANCIAL
INSTITUTIONS 326,287 153,067
MARKETABLE SECURITIES AVAILABLE-FOR-SALE (AMORTIZED
COST OF $444,065 AND $426,160) 456,853 435,723
MARKETABLE SECURITIES HELD-TO-MATURITY (MARKET
VALUE OF $512,972 AND $398,891) 506,751 396,503
----------------- -------------
TOTAL CASH, INTEREST-EARNING DEPOSITS AND
MARKETABLE SECURITIES 1,347,452 1,049,980
MORTGAGE LOANS - 1 TO 4 FAMILY 2,138,904 2,016,999
COMMERCIAL REAL ESTATE LOANS 331,292 304,456
CONSUMER LOANS 652,305 617,225
COMMERCIAL BUSINESS LOANS 102,411 95,968
----------------- -------------
TOTAL LOANS RECEIVABLE 3,224,912 3,034,648
ALLOWANCE FOR LOAN LOSSES (23,828) (22,042)
----------------- -------------
LOANS RECEIVABLE, NET 3,201,084 3,012,606
FEDERAL HOME LOAN BANK STOCK, AT COST 26,342 23,702
ACCRUED INTEREST RECEIVABLE 19,960 19,738
REAL ESTATE OWNED, NET 5,041 5,157
PREMISES AND EQUIPMENT, NET 58,731 55,374
OTHER INTANGIBLE ASSETS 54,915 55,424
GOODWILL 16,801 11,268
OTHER ASSETS 79,607 67,997
----------------- -------------
TOTAL ASSETS $ 4,809,933 4,301,246
================= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------
LIABILITIES:
NONINTEREST-BEARING DEMAND DEPOSITS $ 187,920 176,243
INTEREST-BEARING DEMAND DEPOSITS 482,973 429,339
SAVINGS DEPOSITS 1,219,284 1,106,310
TIME DEPOSITS 1,976,401 1,881,230
----------------- -------------
TOTAL DEPOSITS 3,866,578 3,593,122
BORROWED FUNDS 496,026 259,260
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE 9,526 21,065
ACCRUED INTEREST PAYABLE 4,741 5,169
OTHER LIABILITIES 10,126 11,279
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S
JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES 99,000 99,000
----------------- -------------
TOTAL LIABILITIES 4,485,997 3,988,895
SHAREHOLDERS' EQUITY:
COMMON STOCK, $.10 PAR VALUE: 100,000,000 SHARES
AUTHORIZED, 47,571,103, AND 47,549,659 ISSUED
AND OUTSTANDING, RESPECTIVELY 4,757 4,755
PAID-IN CAPITAL 71,967 71,838
RETAINED EARNINGS 238,900 229,542
ACCUMULATED OTHER COMPREHENSIVE INCOME:
NET UNREALIZED GAIN/(LOSS) ON SECURITIES AVAILABLE-
FOR-SALE, NET OF INCOME TAXES 8,312 6,216
----------------- -------------
323,936 312,351
----------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,809,933 4,301,246
================= =============
See accompanying notes to unaudited consolidated financial statements
1
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------------- --------------
INTEREST INCOME:
LOANS RECEIVABLE $ 57,554 57,273
MORTGAGE-BACKED SECURITIES 6,355 7,367
TAXABLE INVESTMENT SECURITIES 2,359 2,983
TAX-FREE INVESTMENT SECURITIES 1,873 1,416
INTEREST-EARNING DEPOSITS 870 618
------------- --------------
TOTAL INTEREST INCOME 69,011 69,657
INTEREST EXPENSE:
DEPOSITS 28,603 37,539
BORROWED FUNDS 6,017 3,663
------------- --------------
TOTAL INTEREST EXPENSE 34,620 41,202
NET INTEREST INCOME 34,391 28,455
PROVISION FOR LOAN LOSSES 1,667 1,418
------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 32,724 27,037
NONINTEREST INCOME:
SERVICE CHARGES AND FEES 3,406 2,886
TRUST AND OTHER FINANCIAL SERVICES INCOME 853 530
INSURANCE COMMISSION INCOME 385 464
GAIN ON SALE OF MARKETABLE SECURITIES, NET 287 30
GAIN ON SALE OF LOANS, NET 509 103
GAIN ON SALE OF REAL ESTATE OWNED, NET 47 328
INCREASE IN CASH SURRENDER VALUE OF BANK
OWNED LIFE INSURANCE 752 0
OTHER OPERATING INCOME 433 322
------------- --------------
TOTAL NONINTEREST INCOME 6,672 4,663
NONINTEREST EXPENSE:
COMPENSATION AND EMPLOYEE BENEFITS 13,050 11,330
PREMISES AND OCCUPANCY COSTS 3,176 2,788
OFFICE OPERATIONS 1,878 1,643
PROCESSING EXPENSES 1,933 1,688
AMORTIZATION OF INTANGIBLES 1,963 1,706
OTHER EXPENSES 2,607 2,341
------------- --------------
TOTAL NONINTEREST EXPENSE 24,607 21,496
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 14,789 10,204
FEDERAL AND STATE INCOME TAXES 4,455 3,026
------------- --------------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 10,334 7,178
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 0 2,237
------------- --------------
NET INCOME $ 10,334 9,415
============== ==============
BASIC AND DILUTED PER SHARE AMOUNTS:
INCOME BEFORE CUMULATIVE EFFECT OF $0.22 $0.15
ACCOUNTING CHANGE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE $0.00 $0.05
------------- --------------
NET INCOME $0.22 $0.20
See accompanying notes to unaudited consolidated financial statements
2
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
Accum. Unearned
Other Recognition
Common Stock Compre- and Total
------------------------ Paid-in Retained hensive Retention Shareholders'
Shares Amount Capital Earnings Income Plan Shares Equity
----------- --------- --------- --------- ------- ------------ -----------
Beginning balance at June 30, 2001 47,426,755 $4,743 71,283 196,566 3,178 (57) 275,713
Comprehensive income:
Net income - - - 9,415 - - 9,415
Change in unrealized gain on securities,
net of tax and reclassification adjustment - - - - 2,204 - 2,204
----------- --------- ------- --------- ------- ------- ---------
Total comprehensive income - - - 9,415 2,204 - 11,619
Exercise of stock options 7,647 - 38 - - - 38
RRP shares released - - - - - - 0
Dividends declared - - - (725) - - (725)
----------- --------- ------- --------- ------- ------- ---------
Ending balance at September 30, 2001 47,434,402 $4,743 71,321 205,256 5,382 (57) 286,645
=========== ========= ======= ========= ======= ======= =========
Accum. Unearned
Other Recognition
Common Stock Compre- and Total
------------------------ Paid-in Retained hensive Retention Shareholders'
Shares Amount Capital Earnings Income Plan Shares Equity
----------- --------- --------- --------- ------- ------------ -----------
Beginning balance at June 30, 2002 47,549,659 $4,755 71,838 229,542 6,216 - 312,351
Comprehensive income:
Net income - - - 10,334 - - 10,334
Change in unrealized gain on securities,
net of tax and reclassification adjustment - - - - 2,096 - 2,096
----------- --------- ------- --------- ------- ------- ---------
Total comprehensive income - - - 10,334 2,096 - 12,430
Exercise of stock options 21,444 2 129 - - - 131
Dividends declared - - - (976) - - (976)
----------- --------- ------- --------- ------- ------- ---------
Ending balance at September 30, 2002 47,571,103 $4,757 71,967 238,900 8,312 - 323,936
=========== ========= ======== ========= ======= ======= ========
See accompanying notes to unaudited consolidated financial statements
3
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(DOLLARS IN THOUSANDS)
Three Months Three Months
Ended Ended
9/30/02 9/30/01
-------------- ------------
OPERATING ACTIVITIES:
Net Income $ 10,334 9,415
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,667 1,418
Net loss (gain) on sale of assets (843) (461)
Amortization of intangible assets 1,963 1,706
Net depreciation, amortization and accretion 2,290 1,263
Decrease (increase) in other assets (5,939) 1,894
Increase (decrease) in other liabilities (2,624) 112
Net accretion of discount on marketable securities (279) (1,009)
Noncash cumulative change in accounting principle - (2,237)
-------------- ------------
Net cash provided by operating activities 6,569 12,101
INVESTING ACTIVITIES:
Purchase of marketable securities held-to-maturity (125,407) (18,098)
Purchase of marketable securities available-for-sale (73,262) (43,236)
Proceeds from maturities and principal reductions
of marketable securities held-to-maturity 31,435 21,709
Proceeds from maturities and principal reductions
of marketable securities available-for-sale 42,658 16,625
Proceeds from sales of marketable securities,
available-for-sale 25,008 530
Loan originations (254,898) (211,831)
Proceeds from loan maturities and principal reductions 151,453 145,251
Proceeds from loan sales 42,178 29,794
Proceeds from sale of real estate owned 1,443 942
Net (purchase) sale of real estate owned for investment (172) (171)
Purchase of premises and equipment (2,907) (3,223)
Acquisitions, net of cash received 2,619 -
-------------- ------------
Net cash used by investing activities $ (159,852) (61,708)
See accompanying notes to unaudited consolidated financial statements
4
NORTHWEST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
Three Months Three Months
Ended Ended
9/30/02 9/30/01
------------- ------------
FINANCING ACTIVITIES:
Increase (decrease) in deposits, net $ 151,198 129,352
Proceeds from long-term borrowings 180,000 541
Repayments of long-term borrowings (3) (8,607)
Net increase (decrease) in short-term borrowings 840 (1,731)
Increase (decrease) in advances by borrowers for
taxes and insurance (11,813) (12,029)
Cash dividends paid (976) (725)
Proceeds from stock options exercised 131 38
-------------- ------------
Net cash provided by financing activities 319,377 106,839
Net increase (decrease) in cash and cash equivalents $ 166,094 57,232
============== ============
Cash and cash equivalents at beginning of period $ 217,754 95,966
Net increase (decrease) in cash and cash equivalents 166,094 57,232
-------------- ------------
Cash and cash equivalents at end of period $ 383,848 153,198
============== ============
Cash paid during the period for:
Interest on deposits and borrowings (including interest
credited to deposit accounts of $23,739 and
$28,303, respectively) $ 35,373 41,132
============= ===========
Income taxes $ 552 400
============= ===========
Business acquisitions:
Fair value of assets acquired $ 176,885 -
Cash received (paid) 2,619 -
------------- -----------
Liabilities assumed $ 179,504 -
============= ===========
Non-cash activities:
Loans transferred to real estate owned $ 1,014 467
============= ===========
Sale of real estate owned financed by the Company $ 206 334
============= ===========
See accompanying notes to unaudited consolidated financial statements
5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The Northwest group of companies is organized in a two-tier holding company
structure. Northwest Bancorp, MHC is a federal mutual holding company which
owns approximately 74% of the outstanding shares of common stock of Northwest
Bancorp, Inc. (the "Company"). For the second consecutive fiscal year the
mutual holding company has applied for, and received, approval from the
Office of Thrift Supervision (OTS), its primary regulator, to waive its
right to receive cash dividends from the Company.
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with instructions for Form 10-Q and,
accordingly, do not include information for footnotes necessary for a complete
presentation of financial position, results of operations and cash flows in
conformity with accounting principles generally accepted in the United States of
America. In the opinion of management, all adjustments have been included which
are necessary for a fair presentation of financial position and results of
operations. The consolidated statements have been prepared using the accounting
policies described in the financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2002. Certain items
previously reported have been reclassified to conform with the current period's
reporting format. The results of operations for the three months ended September
30, 2002 are not necessarily indicative of the results that may be expected for
the entire fiscal year.
(2) PRINCIPLES OF CONSOLIDATION
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, Northwest Savings
Bank ("Northwest"), Jamestown Savings Bank ("Jamestown"), Northwest Capital
Trust I, Northwest Bancorp Statutory Trust I, Northwest Consumer Discount
Company, Northwest Finance Company, Northwest Financial Services, Inc.,
Northwest Capital Group, Inc., Boetger and Associates, Inc., Rid Fed, Inc.,
Allegheny Services, Inc. and Great Northwest Corporation. All significant
intercompany items have been eliminated.
6
(3) BUSINESS SEGMENTS
The Company has identified two reportable business segments based upon the
operating approach currently used by management. The Community Banks segment
includes the two savings bank subsidiaries of the Company, Northwest Savings
Bank and Jamestown Savings Bank, as well as the subsidiaries of the savings
banks that provide similar products and services. The savings banks are
community-oriented institutions that offer a full array of traditional deposit
and loan products, including mortgage, consumer and commercial loans, as well as
trust, investment management and brokerage services typically offered by a
full-service financial institution. The Consumer Finance segment is comprised of
Northwest Consumer Discount Company, a subsidiary of Northwest Savings Bank,
that operates forty-seven offices in Pennsylvania and two in southwestern New
York. This subsidiary compliments the services of the banks by offering personal
installment loans for a variety of consumer and real estate products. This
activity is funded primarily through its intercompany borrowing relationship
with Northwest Savings Bank. Net income is primarily used by management to
measure segment performance. The following tables provide financial information
for these segments. The All Other column represents the parent company, other
nonbank subsidiaries and elimination entries necessary to reconcile to the
consolidated amounts presented in the financial statements.
- ----------------------------------------- ---------------- ------------- ------------- -----------------
At or for the three months ended Community Consumer
September 30, 2002 ($ in 000's) Banks Finance All Other * Consolidated
- ----------------------------------------- ---------------- ------------- ------------- -----------------
External interest income $ 64,351 4,606 54 69,011
- ----------------------------------------- ---------------- ------------- ------------- -----------------
Intersegment interest income 1,486 - (1,486) -
- ----------------------------------------- ---------------- ------------- ------------- -----------------
Interest expense 33,042 1,595 (17) 34,620
- ----------------------------------------- ---------------- ------------- ------------- -----------------
Provision for loan losses 893 774 - 1,667
- ----------------------------------------- ---------------- ------------- ------------- -----------------
Noninterest income 6,409 263 - 6,672
- ----------------------------------------- ---------------- ------------- ------------- -----------------
Noninterest expense 22,712 1,803 92 24,607
- ----------------------------------------- ---------------- ------------- ------------- -----------------
Income tax expense (benefit) 4,712 289 (546) 4,455
- ----------------------------------------- ---------------- ------------- ------------- -----------------
Net income 10,887 408 (961) 10,334
- ----------------------------------------- ---------------- ------------- ------------- -----------------
Total assets $ 4,673,724 127,170 9,039 4,809,933
- ----------------------------------------- ---------------- ------------- ------------- -----------------
7
- ----------------------------------------- --------------- ------------- ------------- -----------------
At or for the three months ended Community Consumer
September 30, 2001 ($ in 000's) Banks Finance All Other * Consolidated
- ----------------------------------------- --------------- ------------- ------------- -----------------
External interest income $ 64,660 4,943 54 69,657
- ----------------------------------------- --------------- ------------- ------------- -----------------
Intersegment interest income 2,087 - (2,087) -
- ----------------------------------------- --------------- ------------- ------------- -----------------
Interest expense 41,073 2,218 (2,089) 41,202
- ----------------------------------------- --------------- ------------- ------------- -----------------
Provision for loan losses 660 758 - 1,418
- ----------------------------------------- --------------- ------------- ------------- -----------------
Noninterest income 4,276 387 - 4,663
- ----------------------------------------- --------------- ------------- ------------- -----------------
Noninterest expense 19,645 1,704 147 21,496
- ----------------------------------------- --------------- ------------- ------------- -----------------
Income tax expense (benefit) 2,807 270 (51) 3,026
- ----------------------------------------- --------------- ------------- ------------- -----------------
Cumulative effect of accounting change 2,237 - - 2,237
- ----------------------------------------- --------------- ------------- ------------- -----------------
Net income 9,075 380 (40) 9,415
- ----------------------------------------- --------------- ------------- ------------- -----------------
Total assets $ 3,829,105 137,100 5,196 3,971,401
- ----------------------------------------- --------------- ------------- ------------- -----------------
* Eliminations consist of intercompany interest income and interest expense
(4) BUSINESS COMBINATIONS
On September 13, 2002, the Company completed the previously announced
acquisition of Prestige Bancorp, Inc., and its subsidiary Prestige Bank, both
headquartered in Pleasant Hills, Pennsylvania. The acquisition included the four
offices of Prestige Bank, assets of approximately $180 million, deposits of
approximately $122 million and shareholders' equity of approximately $10
million. Under terms of the agreement, shareholders received $13.75 in cash for
each share of Prestige Bancorp, resulting in a cash payment of approximately
$14.6 million and intangible assets of approximately $6 million.
Also, as previously announced on August 16, 2001 and reported on Form 8-K, the
Company, its mutual holding company, Northwest Bancorp, MHC and its subsidiary
savings bank, Northwest Savings Bank, entered into an agreement to acquire Leeds
Federal Bankshares, Inc. of Baltimore, Maryland, its mutual holding company,
Leeds Federal Bankshares, MHC, and its subsidiary Leeds Federal Savings Bank.
The transaction is subject to the approval of the Office of Thrift Supervision
(OTS) and the application is currently on file with the OTS pending approval.
The parties have
8
twice agreed to extend the date upon which the transaction must
be completed and on August 28, 2002 the parties agreed to further extend the
date for completion of the merger to December 31, 2002. The parties also
agreed to amend the merger agreement to modify the structure of the transaction
so that Leeds Federal Savings Bank will become a wholly-owned subsidiary of
Northwest Bancorp, MHC and will not be part of the Northwest Bancorp, Inc.
consolidated group immediately after the merger as previously proposed. The
$32.00 per share cash consideration to be paid to public stockholders of Leeds
Federal Bankshares, Inc. and all other terms and conditions of the merger remain
generally unchanged.
(5) ACCOUNTING DEVELOPMENTS--SUBSEQUENT EVENT
On October 1, 2002 the Financial Accounting Standards Board (FASB) issued, and
the Company adopted, Statement of Financial Accounting Standards (SFAS) No. 147
"Acquisitions of Certain Financial Institutions - an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9." This statement
addresses the financial accounting and reporting for the acquisition of all or
part of a financial institution, except for transactions between two or more
mutual enterprises. This statement removes the acquisitions of financial
institutions from the scope of FASB Statement No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions" and FASB Interpretation No. 9,
"Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by the
Purchase Method." The acquisition of all or part of a financial institution that
meets the definition of a business combination shall now be accounted for by the
purchase method in accordance with FASB Statement No. 141, "Business
Combinations." The effective date of this pronouncement is October 1, 2002 and
on that date the Company reclassified approximately $51 million of other
unidentifiable intangible assets to goodwill. In addition, the Company ceased
the regularly scheduled amortization expense of these intangible assets of
approximately $7.2 million annually which equates to approximately $4.3 million,
or $.09 per share, after tax. The transition provisions of this pronouncement
require that any previously issued interim or annual financial statements that
reflect amortization of the unidentified intangible asset shall be restated to
remove the amortization expense. Amortization expense of these unidentifiable
intangible assets in the current three month period ended September 30, 2002 and
the same period in the prior year amounted to approximately $1.8 million and
$1.7 million, respectively. Net of income tax, these figures were approximately
$1.1 million, or $.02 per share, and $1.0 million, or $.02 per share,
respectively.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this document may contain certain
forward-looking statements, as defined in the Securities Exchange Act of 1934,
as amended, and the regulations thereunder. These forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those expressed or implied in the
forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, economic, regulatory and other factors as
discussed herein. Readers are cautioned not to place undue reliance on these
forward-looking statements, as they reflect management's analysis only as of the
date of this report. The Company has no obligation to revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report.
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM JUNE 30, 2002 TO
SEPTEMBER 30, 2002
ASSETS
At September 30, 2002 the Company had total assets of $4.810 billion, an
increase of $508.7 million, or 11.8%, from $4.301 billion at June 30, 2002. This
increase was funded primarily by an increase in deposits of $273.5 million, an
increase in borrowed funds of $236.8 million, and net income of $10.3 million.
Cash and cash equivalents, interest-earning deposits and marketable securities
totaled $1.347 billion at September 30, 2002, an increase of $297.5 million, or
28.3%, from $1.050 billion at June 30, 2002. This increase resulted from the
investment of funds received from the growth in deposits and borrowed funds as
well as approximately $30 million of marketable securities received as part of
the acquisition of Prestige Bancorp, Inc. and its subsidiary Prestige Bank,
which occurred during the current fiscal quarter. Net loans receivable increased
by $188.5 million, or 6.3%, to $3.201 billion at September 30, 2002 from $3.013
billion at June 30, 2002. This increase resulted primarily from the purchase of
loans with a market value of approximately $132 million as part of the
acquisition of Prestige Bank mentioned above, as well as loan growth across the
Company's market area.
LIABILITIES
Deposits increased by $273.5 million, or 7.6%, to $3.867 billion at September
30, 2002 from $3.593 billion at June 30, 2002. This increase resulted primarily
from strong internal deposit growth along with the purchase of four retail
offices with deposits of approximately $122 million as part of the Prestige Bank
acquisition. Borrowed funds increased by $236.8 million, or 91.3%, to $496.0
million at September 30, 2002 from $259.3 million at June 30, 2002. This
increase is primarily the result of the Company borrowing long-term funds from
the Federal Home Loan Bank to take advantage
10
of the low interest rates which will be used to purchase floating rate
investment securities. In addition, approximately $55.9 million of FHLB
borrowings were assumed as part of the Prestige acquisition.
CAPITAL RESOURCES AND LIQUIDITY
Total shareholders' equity at September 30, 2002 was $323.9 million, an increase
of $11.5 million, or 3.7%, from $312.4 million at June 30, 2002. This increase
was primarily attributable to net income for the three month period of $10.3
million which was partially offset by the declaration of common stock dividends
of $976,000. Also affecting capital was a $2.1 million increase in the net
market value of securities held as available-for-sale.
The Company's banking subsidiaries, Northwest and Jamestown, are subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions by the regulators
that, if undertaken, could have a direct material effect on the Company's
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the banking subsidiaries must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. Capital amounts and classification are also subject to
qualitative judgements by the regulators about components, risk- weighting and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the banking subsidiaries to maintain minimum amounts and ratios (set
forth in the table below) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined).
11
At September 30, 2002, all regulatory capital requirements were exceeded. The
actual, required, and well capitalized levels at September 30, 2002 and June 30,
2002 are as follows: (dollars in thousands)
September 30, 2002
Minimum Capital Well Capitalized
Actual Requirements Requirements
- -------------------------------------------- ---------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Total Capital (to risk weighted assets):
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Northwest Savings Bank $283,593 11.76% $192,896 8.00% $241,121 10.00%
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Jamestown Savings Bank $ 16,458 11.29% $ 11,661 8.00% $ 14,576 10.00%
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Tier 1 Capital (to risk weighted assets):
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Northwest Savings Bank $259,550 10.76% $ 96,448 4.00% $144,672 6.00%
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Jamestown Savings Bank $ 15,383 10.55% $ 5,830 4.00% $ 8,746 6.00%
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Tier 1 Capital (leverage) (to average assets):
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Northwest Savings Bank $259,550 6.35% $122,576 3.00%* $204,294 5.00%
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Jamestown Savings Bank $ 15,383 5.65% $ 8,163 3.00%* $ 13,605 5.00%
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
12
June 30, 2002
Minimum Capital Well Capitalized
Actual Requirements Requirements
- -------------------------------------------- ---------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Total Capital (to risk weighted assets):
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Northwest Savings Bank $276,565 12.49% $177,174 8.00% $221,467 10.00%
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Jamestown Savings Bank $ 14,727 11.04% $ 10,673 8.00% $ 13,341 10.00%
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Tier 1 Capital (to risk weighted assets):
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Northwest Savings Bank $253,937 11.47% $ 88,587 4.00% $132,880 6.00%
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Jamestown Savings Bank $ 13,765 10.32% $ 5,336 4.00% $ 8,004 6.00%
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Tier 1 Capital (leverage) (to average assets):
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Northwest Savings Bank $253,937 6.47% $117,767 3.00%* $196,279 5.00%
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
Jamestown Savings Bank $ 13,765 5.87% $ 7,035 3.00%* $ 11,725 5.00%
- -------------------------------------------- ----------- ---------- ----------- ----------- ----------- -----------
* The FDIC has indicated that the most highly rated institutions which meet
certain criteria will be required to maintain a ratio of 3%, and all other
institutions will be required to maintain an additional capital cushion of 100
to 200 basis points. As of September 30, 2002, the Company had not been advised
of any additional requirements in this regard.
The Company's banking subsidiaries, Northwest and Jamestown, are required to
maintain a sufficient level of liquid assets, as determined by management and
defined and reviewed for adequacy by the FDIC and the applicable State
Department of Banking during their regular examinations. The Banks' internal
liquidity requirements are based upon liquid assets as a percentage of deposits
and borrowings ("liquidity ratio"). The Banks have always maintained a level of
liquid assets in excess of regulatory and internal requirements, and the
liquidity ratio at September 30, 2002 was 25.2% and 54.8% for Northwest and
Jamestown, respectively. The Company and its subsidiaries adjust liquidity
levels in order to meet funding needs for deposit outflows, payment of real
estate taxes and insurance on mortgage loan escrow accounts, repayment of
borrowings, when applicable, and loan commitments.
13
NONPERFORMING ASSETS
The following table sets forth information with respect to the Company's
nonperforming assets. Nonaccrual loans are those loans on which the accrual of
interest has ceased. Loans are automatically placed on nonaccrual when they are
more than 90 days contractually delinquent and may also be placed on nonaccrual
status even if not more than 90 days delinquent but other conditions exist.
Other nonperforming assets represent property acquired by the Company through
foreclosure or repossession. Foreclosed property is carried at the lower of its
fair value less estimated costs to sell or the principal balance of the related
loan. Nonperforming assets increased by $3.6 million, or 17.1%, to $24.5 million
at September 30, 2002 from $21.0 million at June 30, 2002. This increase is
primarily related to several delinquent loans included as part of the Prestige
acquisition. Management believes that the generally low level of nonperforming
assets is attributable to stringent credit policies and sustained collection
procedures.
(Dollars in Thousands)
- ------------------------------------------------------ ----------------------- ------------------------
Loans accounted for on a nonaccrual basis: September 30, 2002 June 30, 2002
- ------------------------------------------------------ ----------------------- ------------------------
One-to-four family residential loans $ 8,650 $ 7,278
- ------------------------------------------------------ ----------------------- ------------------------
Multifamily and commercial real estate loans 2,882 2,407
- ------------------------------------------------------ ----------------------- ------------------------
Consumer loans 4,350 3,991
- ------------------------------------------------------ ----------------------- ------------------------
Commercial business loans 3,614 2,124
- ------------------------------------------------------ ----------------------- ------------------------
Total $19,496 $15,800
- ------------------------------------------------------ ----------------------- ------------------------
Total nonperforming loans as a percentage of
loans receivable .61% .52%
- ------------------------------------------------------ ----------------------- ------------------------
Total real estate acquired through foreclosure
and other real estate owned $ 5,041 $ 5,157
- ------------------------------------------------------ ----------------------- ------------------------
Total nonperforming assets $24,537 $20,957
- ------------------------------------------------------ ----------------------- ------------------------
Total nonperforming assets as a percentage of
total assets .51% .49%
- ------------------------------------------------------ ----------------------- ------------------------
14
ALLOWANCE FOR LOAN AND LEASE LOSSES
The Company's Board of Directors has adopted an "Allowance for Loan and Lease
Losses" (ALLL) policy designed to provide management with a systematic
methodology for determining and documenting the ALLL each reporting period. This
methodology was developed to provide a consistent process and review procedure
to ensure that the ALLL is in conformity with the Company's policies and
procedures, generally accepted accounting principles (GAAP) and other
supervisory and regulatory guidelines.
On a monthly basis the Credit Review and Administration department (CRA) as well
as loan officers, branch managers and department heads, review and monitor the
loan portfolio for problem loans. This review includes the monthly delinquency
reports as well as historical comparisons and trend analysis. On a regular basis
the CRA department grades or classifies problem loans or potential problem loans
based upon their knowledge of the lending relationship and other information
previously accumulated. The Company's loan grading system for problem loans is
consistent with industry regulatory guidelines which classify loans as
"substandard", "doubtful", "loss" or "special mention." A "substandard" loan is
any loan that is more than 90 days contractually delinquent or is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Loans classified as "doubtful" have all the
weaknesses inherent in those classified as "substandard" with the added
characteristic that the weaknesses present make a collection or liquidation in
full, on the basis of currently existing facts, conditions or values, highly
questionable and improbable. Loans classified as "loss" are considered
uncollectible so that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Loans that do not expose the Company to
risk sufficient to warrant classification in one of the aforementioned
categories, but which possess some weaknesses, are designated "special mention."
The loans that have been classified as substandard or doubtful are reviewed by
the CRA department for possible impairment under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." A loan is considered impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement
including both contractual principal and interest payments.
If an individual loan is deemed to be impaired the CRA department determines the
proper measurement of impairment for each loan based on one of three methods as
prescribed by SFAS No. 114: (1) the present value of expected future cash flows
discounted at the loan's effective interest rate; (2) the loan's observable
market price; or (3) the fair value of the collateral if the loan is collateral
dependent. If the measure of the impaired loan is more or less than the recorded
investment in the loan, the CRA department adjusts the specific allowance
associated with that individual loan accordingly.
If a substandard or doubtful loan is not considered individually for impairment,
it is grouped with other loans that possess common characteristics for
impairment evaluation and analysis under the provisions of SFAS No. 5,
"Accounting for Contingencies." This segmentation is accomplished by
15
grouping loans of similar product types, risk characteristics and industry
concentration into homogeneous pools. Each pool is then analyzed based on
historical delinquency, charge-off and recovery trends adjusting for the current
economic, political, regulatory and interest rate environment. A range of losses
is then established that reflects the highest and lowest loss ratios in any one
fiscal year. This historical net charge-off amount as a percentage of loans
outstanding for each group is used to estimate the measure of impairment.
The individual impairment measures along with the estimated range of losses for
each homogeneous pool are consolidated into one summary document. This summary
schedule along with the support documentation used to establish this schedule is
presented to the Credit Committee by the Vice President of CRA on a quarterly
basis. The Credit Committee is comprised of members of senior management from
mortgage, consumer and commercial lending, appraising, administration, finance
and the President of the Company. The Credit Committee reviews the processes and
documentation presented, reviews the concentration of credit by industry and
customer, discusses lending products, activity, competition and collateral
values, as well as economic conditions in general and in each market area of the
Company. Based on this review and discussion the appropriate amount of ALLL
is estimated and any adjustments to reconcile the actual ALLL with this estimate
is determined. In addition, the Credit Committee considers if any changes to the
methodology are needed. The Credit Committee also reviews and discusses the
Company's delinquency trends, nonperforming asset amounts and ALLL levels and
ratios with its peer group as well as state and national statistics. Following
the Credit Committee's review and approval, a similar review is performed by the
Board of Director's Risk Management Committee.
In addition to the reviews by the Credit Committee and the Risk Management
Committee, regulators from either the FDIC or State Department of Banking
perform an extensive review on an annual basis for the adequacy of the ALLL and
its conformity with regulatory guidelines and pronouncements. The internal audit
department also performs a regular review of the detailed supporting schedules
for accuracy and reports their findings to the Audit Committee of the Board of
Directors. Any recommendations or enhancements from these independent parties
are considered by management and the Credit Committee and implemented
accordingly.
Management acknowledges that this is a dynamic process and consists of factors,
many of which are external and out of management's control, that can change
often, rapidly and substantially. The adequacy of the ALLL is based upon
estimates using all the information previously discussed as well as current and
known circumstances and events. There is no assurance that actual portfolio
losses will not be substantially different than those that were estimated.
16
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
- -----------------------------------------------------------------------------
VERSUS THE THREE MONTHS ENDED SEPTEMBER 30, 2001
- ------------------------------------------------
GENERAL
Net income for the three months ended September 30, 2002 was $10.3 million, or
$.22 per share, an increase of $3.1 million, or 44.0%, from $7.2 million, or
$.15 per share, for the same quarter last year, exclusive of the cumulative
effect of an accounting change. The accounting change in the prior year was
required when the Company adopted Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets" and recognized as income $2.2
million of negative goodwill that arose from a previous acquisition. Including
the effects of this one-time item, net income for the three months ended
September 30, 2001 was $9.4 million, or $.20 per share. The increase in net
income year-over-year resulted from a $5.9 million, or 20.9%, increase in net
interest income and a $2.0 million, or 43.1%, increase in noninterest income
partially offset by an increase in noninterest expense of $3.1 million, or
14.5%, and an increase in the provision for loan losses of $249,000, or 17.6%.
INTEREST INCOME
Total interest income decreased by $410,000, or 0.6%, on a taxable equivalent
basis, to $70.0 million primarily because of a decrease in the yield on average
interest earning assets to 6.76% from 7.65% which was partially offset by an
increase in average interest earning assets by $460.1 million, or 12.5%, to
$4.143 billion from $3.683 billion. The decrease in the overall yield on
interest earning assets from quarter to quarter resulted primarily from the
repricing of variable rate assets, as well as the growth of interest earning
assets during a period of declining interest rates. The growth in average
interest earning assets was primarily due to the strong internal growth of the
Company's existing franchise and the investment of funds received from the trust
preferred issuance and additional borrowings from the FHLB. In addition,
acquisitions over the past twelve months have contributed approximately $105.0
million to the increase in average interest earning assets.
Interest income on loans receivable increased by $281,000, or 0.5%, to $57.6
million primarily because average loans outstanding increased by $187.5 million,
or 6.5%, to $3.059 billion, which was mostly offset by a decrease in the average
yield on loans to 7.53% from 7.98%. Average loans outstanding increased because
of strong loan demand throughout the Company's market area as well as the
aforementioned acquisitions which contributed, when averaged for the period,
loans of approximately $46.0 million. The decrease in average yield resulted
primarily from the repricing of variable rate loans and the refinancing of fixed
rate loans in a declining interest rate environment along with the growth in the
Company's loan portfolio over the past year at interest rate levels lower than
the existing average portfolio rate.
Interest income on mortgage-backed securities decreased by $1.0 million, or
13.7%, to $6.4 million primarily because of a decrease in the average yield to
4.63% from 5.81% which was partially offset by an increase in the average
balance of $41.6 million, or 8.2%, to $548.5 million. The average yield on
mortgage-backed securities, approximately 87% of which are variable rate,
decreased in response to the significant reduction in short-term market interest
rates during calendar 2001. The average
17
balance increased primarily as a result of investing the funds from the
aforementioned deposit growth.
Interest income on investment securities increased by $255,000, or 5.4%, on a
taxable equivalent basis, to $5.0 million primarily because the average balance
of investment securities increased by $73.8 million, or 32.4%, to $301.9 million
which was partially offset by a decrease in the taxable equivalent yield to
6.62% from 8.32%. The increase in the average balance of investment securities
was primarily due to the investment of funds generated from the aforementioned
deposit growth. The decrease in the taxable equivalent yield was primarily a
result of purchasing investment securities in a lower interest rate environment.
Interest income on interest-earning deposits increased by $252,000, or 40.8%,
primarily because the average balance of interest-earning deposits increased by
$156.0 million which was partially offset by a decrease in the average yield to
1.66% from 4.62%. The increase in average balance is primarily because the
proceeds from the $99.0 million of Trust Preferred Securities and some of the
funds from FHLB borrowings are currently invested in overnight federal funds.
The decrease in the average yield is a result of the sharp decline in short-term
market interest rates over the last eighteen months.
INTEREST EXPENSE
Total interest expense decreased by $6.6 million, or 16.0%, to $34.6 million
primarily due to a decrease in the average cost of interest-bearing liabilities
to 3.56% from 4.82% which was partially offset by an increase in the average
balance of interest-bearing liabilities of $472.7 million, or 13.8%, to $3.894
billion. The decrease in the cost of funds resulted from the Company's deposit
accounts repricing at much lower rates in response to the significant decreases
in short-term market interest rates during calendar 2001. Partially offsetting
the decrease in short-term interest rates was the effect of the issuance of
Trust Preferred Securities which have a weighted average interest rate of 7.79%.
The increase in the average balance of interest-bearing liabilities resulted
primarily from an increase of $340.7 million, or 10.8%, in the average balance
of deposits, attributed primarily to the growth of existing offices along with
new office openings and acquisitions. Average borrowed funds also increased by
$32.9 million, or 12.1%, as the Company secured long-term fixed-rate borrowings
from the Federal Home Loan Bank to take advantage of low funding rates. In
addition, the Company issued $99.0 million of Trust Preferred Securities in two
separate offerings during the quarter ended December 31, 2001.
NET INTEREST INCOME
Net interest income increased by $6.2 million, or 21.1%, on a taxable equivalent
basis, to $35.4 million for the three months ended September 30, 2002 compared
to $29.2 million for the three months ended September 30, 2001. This increase in
net interest income was attributable to the significant increase in net interest
earning assets over the past twelve months coupled with an increase in the
Company's interest rate spread which grew to 3.20% from 2.83%. The Company was
able to improve its net interest rate spread as the cost of funds on short-term
interest bearing liabilities decreased by more than the yield on interest
earning assets in response to lower market interest rates.
18
PROVISION FOR LOAN LOSSES
The provision for loan losses increased by $249,000, or 17.6%, to $1.7 million
for the quarter ended September 30, 2002 from $1.4 million for the quarter ended
September 30, 2001. Management analyzes the allowance for loan and lease losses
as described in the section entitled "Allowance for Loan and Lease Losses." The
provision that is recorded is sufficient, in management's judgement, to bring
this reserve to a level that reflects the risk inherent in the Company's loan
portfolio relative to loan mix, economic conditions and historical loss
experience. As part of this analysis, management considered the increase in net
charge-offs for the period of $114,000, or 11.8%, to $1.1 million for the three
months ended September 30, 2002 compared to $968,000 for the same period last
year. In addition, management considered the growth in the total loan portfolio
for the current quarter of $190.3 million and the increase in nonperforming
loans of $2.4 million, or 14.1%, to $19.5 million at September 30, 2002 from
$17.1 million at September 30, 2001.
NONINTEREST INCOME
Noninterest income increased by $2.0 million, or 43.1%, to $6.7 million for the
three months ended September 30, 2002 from $4.7 million for the three months
ended September 30, 2000. The Company experienced a favorable increase in the
fee income associated with loans and deposits of $520,000, or 18.0%, to $3.4
million for the quarter related primarily to the growth of those portfolios.
Trust and other financial services income increased by $323,000, or 60.9%, to
$853,000 for the quarter primarily as a result of the additional fee income
contributed by Boetger and Associates, an actuarial and retirement plan services
company acquired on July 1, 2002. The Company's gain on sale of loans increased
by $406,000, or 394.2%, to $509,000 as the Company sold almost all of the
fixed-rate mortgage loans originated through its wholesale brokerage business
and retained the rights to service those loans. Also, in the past four months,
the Company has purchased $60 million of insurance on the lives its directors
and a certain group of key employees. The increase in the cash surrender value
of these polices amounted to $752,000 of noninterest income for the quarter.
These investment returns will be used to help fund the increase in employee
benefit costs such as healthcare. Partially offsetting these increases in
noninterest income was a decrease in insurance commission income of $79,000, or
17.0%, to $385,000 for the current quarter from $464,000 for the same period
last year. The decrease in insurance commissions occurred primarily at Northwest
Consumer Discount Company as a result of a decrease in both loan originations
and outstandings, which is typical in the current loan interest rate
environment. In addition, the gain on sale of REO decreased by $281,000, or
85.7%, to $47,000 during the current quarter as the prior year contained a gain
of approximately $266,000 related to the sale of units from a previously
foreclosed townhouse development project near Atlanta, Georgia.
NONINTEREST EXPENSE
Noninterest expense increased by $3.1 million, or 14.5%, to $24.6 million for
the three months ended September 30, 2002 from $21.5 million for the three
months ended September 30, 2001. All major expense categories increased
primarily as a result of the significant growth of the Company's retail network
over the past twelve months, the expansion of its investment management, trust
and brokerage services, as well as the addition of new products and services.
Management believes, however, that despite these increases in costs due to
expansion, progress has been made in
19
controlling operating expense as the ratio of operating expense to average
assets, exclusive of the amortization of intangibles, remained at a level of
approximately 2.04%.
The Company notes that beginning October 1, 2002, as a result of adopting SFAS
No. 147 "Acquisitions of Certain Financial Institutions - an amendment of FASB
Statement No. 72 and 144 and FASB Interpretation No. 9," it stopped the
amortization of those intangible assets previously classified as "other
unidentifiable intangible assets." Amortization expense of these unidentifiable
intangible assets included in the current three month period ended September 30,
2002 and the same period the prior year amounted to approximately $1.8 million
and $1.7 million, respectively.
INCOME TAXES
The provision for income taxes for the three months ended September 30, 2002
increased by $1.4 million, or 47.2%, compared to the same period last year. This
increase was primarily due to an increase in net income before tax of $4.6
million, or 44.9%.
20
AVERAGE BALANCE SHEET
(Dollars in Thousands)
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. Average balances are calculated using
daily averages.
Three Months Ended September 30,
2002 2001
- ----------------------------------------- ------------- ------------ --------- ---------------- ----------- -----------
AVERAGE. INTEREST AVG AVERAGE INTEREST AVG.
BALANCE YIELD/ BALANCE YIELD
COST /COST
- ----------------------------------------- ------------- ------------ --------- ---------------- ----------- -----------
ASSETS:
Interest earning assets:
Loans receivable (a) (b) $3,059,069 $57,554 7.53% $2,871,596 $57,273 7.98%
Mortgage-backed securities (c) $ 548,464 $ 6,355 4.63% $ 506,901 $ 7,367 5.81%
Investment securities (c) (d) (e) $ 301,937 $ 5,000 6.62% $ 228,104 $ 4,745 8.32%
FHLB stock $ 23,731 $ 197 3.32% $ 22,499 $ 383 6.81%
Other interest earning deposits $ 209,460 $ 870 1.66% $ 53,485 $ 618 4.62%
---------- ------- ----- ---------- ------- -----
Total interest earning assets $4,142,661 $69,976 6.76% $3,682,585 $70,386 7.65%
Noninterest earning assets (f) $ 279,464 $ 207,652
---------- ----------
TOTAL ASSETS $4,422,125 $3,890,237
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
- -------------------------------------
Interest bearing liabilities:
Savings accounts $ 720,518 $ 4,751 2.64% $ 460,269 $ 3,686 3.20%
Now accounts $ 433,313 $ 1,309 1.21% $ 382,760 $ 1,178 1.23%
Money market demand accounts $ 422,424 $ 2,826 2.68% $ 224,305 $ 2,134 3.81%
Certificate accounts $1,912,725 $19,717 4.12% $2,080,908 $30,541 5.87%
Borrowed funds (g) $ 305,791 $ 4,088 5.35% $ 272,842 $ 3,663 5.37%
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures $ 99,000 $ 1,929 7.79% $ 0 $ 0 0.00%
---------- ------- ----- ---------- ------- -----
Total interest bearing liabilities $3,893,771 $34,620 3.56% $3,421,084 $41,202 4.82%
Noninterest bearing liabilities $ 210,822 $ 189,310
---------- ----------
Total liabilities $4,104,593 $3,610,394
Shareholders' equity $ 317,532 $ 279,843
---------- ----------
TOTAL LIABILITIES AND EQUITY $4,422,125 $3,890,237
========== ==========
Net interest income/Interest rate spread $35,356 3.20% $29,184 2.83%
Net interest earning assets/Net $ 248,890 3.41% $ 261,501 3.17%
interest margin
Ratio of interest earning assets to
interest bearing liabilities 1.06 X 1.08 X
- ----------------------------------------- ------------- ------------ --------- ---------------- ----------- -----------
(a) Average gross loans receivable includes loans held as available-for-sale
and loans placed on nonaccrual status.
(b) Interest income includes accretion/amortization of deferred loan
fees/expenses.
(c) Average balances do not include the effect of unrealized gains or losses
on securities held as available-for-sale.
(d) Interest income on tax-free investment securities is presented on a taxable
equivalent basis.
(e) Average balances include FNMA and FHLMC stock.
(f) Average balances include the effect of unrealized gains or losses on
securities held as available-for-sale.
(g) Average balances include FHLB borrowings, securities sold under agreements
to repurchase and other borrowings.
21
RATE/VOLUME ANALYSIS
(Dollars in Thousands)
The following tables represent the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), (iii) changes in rate-volume (changes in
rate multiplied by changes in volume), and (iv) the net change.
Three months ended September 30, 2002 and 2001
- ---------------------------------------------- -------------- ------------- --------------- ------------
RATE/ NET
RATE VOLUME VOLUME CHANGE
- ---------------------------------------------- -------------- ------------- --------------- ------------
Interest earning assets:
Loans receivable $ (3,246) $ 3,739 $ (212) $ 281
Mortgage-backed securities $ (1,494) $ 604 $ (122) $ (1,012)
Investment securities $ (968) $ 1,536 $ (313) $ 255
FHLB stock $ (196) $ 21 $ (11) $ (186)
Other interest earning deposits $ (396) $ 1,802 $(1,154) $ 252
-------- ------- ------- --------
Total interest earning assets $ (6,300) $ 7,702 $(1,812) $ (410)
Interest bearing liabilities:
Savings accounts $ (651) $ 2,084 $ (368) $ 1,065
Now accounts $ (22) $ 156 $ (3) $ 131
Money market demand accounts $ (633) $ 1,885 $ (560) $ 692
Certificate accounts $ (9,090) $(2,468) $ 734 $(10,824)
Borrowed funds $ (15) $ 442 $ (2) $ 425
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures $ 0 $ 0 $ 1,929 $ 1,929
-------- ------- ------- --------
Total interest bearing liabilities $(10,411) $ 2,099 $ 1,730 $ (6,582)
Net change in net interest income $ 4,111 $ 5,603 $(3,542) $ 6,172
======== ====== ======== ========
- ---------------------------------------------- -------------- ------------------------------ ------------
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
As a savings bank holding company, the Company's primary market risk is interest
rate risk. Interest rate risk is the sensitivity of net interest income to
variations in interest rates over a specified time period. This sensitivity
results from differences in the time periods in which interest rate sensitive
assets and liabilities mature or reprice. The Company attempts to control
interest rate risk by matching, within acceptable limits, the repricing periods
of its assets and liabilities. Because the Company's interest sensitive
liabilities typically have repricing periods or maturities of short duration,
the Company has attempted to shorten the maturities of its assets by emphasizing
the origination of short-term, fixed-rate consumer loans, one-to-four family
residential mortgage loans with terms of fifteen years or less and adjustable
rate mortgage loans, consumer loans and commercial loans. In addition, the
Company has purchased shorter term or adjustable-rate investment securities and
adjustable-rate mortgage-backed securities.
The Company has an Asset/Liability Committee consisting of several members of
senior management which meets monthly to review market interest rates, economic
conditions, the pricing of interest earning assets and interest bearing
liabilities and the Company's balance sheet structure. On a quarterly basis,
this Committee also reviews the Company's interest rate risk position.
The Company also has a Risk Management Committee comprised of certain members of
the Board of Directors which meets quarterly and reviews interest rate risks and
trends, the Company's interest sensitivity position, the Company's liquidity
position and the market risk inherent in the Company's investment portfolio.
In an effort to assess market risk, the Company utilizes a simulation model to
determine the effect of immediate incremental increases and decreases in
interest rates on net interest income and the market value of the Company's
equity. Certain assumptions are made regarding loan prepayments and decay rates
of passbook and NOW accounts. Because it is difficult to accurately project the
market reaction of depositors and borrowers, the effects of actual changes in
interest on these assumptions may differ from simulated results. The Company has
established the following guidelines for assessing interest rate risk:
NET INCOME SIMULATION. Given a parallel shift of 2% in interest rates, the
estimated net interest margin may not decrease by more than 20% within a
one-year period.
MARKET VALUE OF EQUITY SIMULATION. The market value of the Company's equity is
the present value of the Company's assets and liabilities. Given a parallel
shift of 2% in interest rates, the market value of equity may not decrease by
more than 50% of total shareholders' equity.
23
The following table illustrates the simulated impact of a 1% or 2% upward or
downward movement in interest rates on net income, return on average equity,
earnings per share and market value of equity. This analysis was prepared
assuming that interest-earning asset levels at September 30, 2002 remain
constant. The impact of the rate movements was computed by simulating the effect
of an immediate and sustained shift in interest rates over a twelve month period
from the September 30, 2002 levels.
INCREASE DECREASE
-------------------- --------------------
Parallel shift in interest rates over the next 12 months 1.0% 2.0% 1.0% 2.0%
------------------- --------------------
Projected percentage increase/(decrease) in net income 2.6% 4.6% (9.2)% (11.8)%
Projected increase/(decrease) in return on average equity 0.3% 0.5% (1.2)% (1.5)%
Projected increase/(decrease) in earnings per share $0.02 $0.04 $(0.08) $(0.11)
Projected percentage increase/(decrease) in market value of equity 0.1% (4.9)% (0.9)% (6.7)%
The figures included in the table above represent projections which were
computed based upon certain assumptions including prepayment rates and decay
rates which cannot be accurately predicted. There are no assurances that these
assumptions and the resultant impact on the Company's financial ratios will
approximate the figures presented above.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision of and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, the Company
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as
of a date (the "Evaluation Date") within 90 days prior to the filing date of
this report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, these disclosure
controls and procedures are effective in timely alerting them to the material
information relating to the Company (or the consolidated subsidiaries) required
to be included in the Company's periodic SEC filings.
There were no significant changes in the Company's internal controls during the
period covered by this report or in other factors that could significantly
affect these controls subsequent to the date of the most recent evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to a number of asserted and
unasserted claims encountered in the normal course of business. Management
believes that the aggregate liability, if any, that may result from such
potential litigation will not have a material adverse effect on the Company's
financial statements.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT 11: STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three Months Three Months
Ended Ended
September 30, 2002 September 30,2001
------------------- -----------------
Reported net income $ 10,334,195 $ 9,415,335
Deduct: Cumulative effect of accounting change $ - 2,236,918
--------------- -------------
Net income before cumulative effect of accounting change $ 10,334,195 $ 7,178,417
Weighted-average common shares outstanding 47,563,940 47,432,161
Common stock equivalents due to effect of stock options 494,242 473,150
--------------- -------------
Total weighted-average common shares and equivalents 48,058,182 47,905,311
BASIC AND DILUTED EARNINGS PER SHARE:
Reported net income $ 0.22 $ 0.20
Deduct: Cumulative effect of accounting change $ - $ 0.05
-------------- -------------
Net income before cumulative effect of accounting change $ 0.22 $ 0.15
============== =============
DILUTED EARNINGS PER SHARE:
Reported net income $ 0.22 $ 0.20
Deduct: Cumulative effect of accounting change $ - $ 0.05
-------------- -------------
Adjusted net income $ 0.22 $ 0.15
============== =============
25
(b) EXHIBIT 99.1: CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
The undersigned officers of Northwest Bancorp, Inc. (the "Company") hereby
certify that, to the best of their knowledge:
1. the Company's quarterly report on Form 10-Q for the period ended
September 30, 2002 (the "Report") fully complies with the requirements
of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
2. that,as of the date of this statement, the information contained in the
Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
The purpose of this statement is solely to comply with Title 18, Chapter 63,
Section 1350 of the United States Code, as amended by Section 906 of the
Sarbanes-Oxley Act of 2002.
November 13, 2002 /s/ William J. Wagner
- ---------------------- -------------------------------------
Date William J. Wagner
President and Chief Executive Officer
November 13, 2002 /s/ William W. Harvey, Jr.
- ---------------------- -------------------------------------
Date William W. Harvey, Jr.
Senior Vice President, Finance
(Chief Financial Officer)
26
(c) REPORTS ON FORM 8-K
On September 23, 2002 the Company filed a current report on Form 8-K, which
included as an exhibit, the Company's press release announcing that on September
13, 2002 it completed the acquisition of Prestige Bancorp, Inc., and its
wholly-owned subsidiary, Prestige Bank, a Federal Savings Bank, based in
Pittsburgh, Pennsylvania.
On September 12, 2002 the Company filed a current report on Form 8-K stating
that the Company, its mutual holding company, Northwest Bancorp, MHC and its
subsidiary savings bank, Northwest Savings Bank (collectively "Northwest"),
entered into a Second Amendment to the Agreement and Plan of Merger with Leeds
Federal Bankshares, Inc., its mutual holding company, Leeds Federal Bankshares,
MHC, and its subsidiary savings bank Leeds Federal Savings Bank (collectively
"Leeds") further extending the deadline for Northwest to acquire Leeds until
December 31, 2002. In addition, the parties entered into a Third Amendment to
the Agreement and Plan of Merger to modify the structure of the transaction so
that Leeds Federal Savings Bank will become a wholly-owned subsidiary of
Northwest Bancorp, MHC and will not be part of the Northwest Bancorp, Inc.
consolidated group immediately after the merger as previously proposed. Also,
included as exhibits, were the original Agreement and Plan of Merger dated
August 16, 2001 (incorporated by reference to Exhibit 2.1 to the Registrant's
Form 8-K filed on August 24, 2001), the agreement by Northwest and Leeds dated
April 30, 2002 extending the deadline for closing the acquisition until August
28, 2002 (incorporated by reference to Exhibit 2.2 to the Registrant's Form 8-K
filed on May 10, 2002), the Second Amendment to the Agreement and Plan of Merger
dated August 28, 2002, the Third Amendment to the Agreement and Plan of Merger
dated August 28, 2002 and the joint press release dated August 28, 2002
announcing the amendments.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
NORTHWEST BANCORP, INC.
Date: November 13, 2002 By: /s/ William J. Wagner
--------------------- -----------------------------------------
William J. Wagner
President and Chief Executive Officer
Date: November 13, 2002 By: /s/ William W. Harvey, Jr.
--------------------- -----------------------------------------
William W. Harvey, Jr.
Senior Vice President, Finance
(Chief Financial Officer)
28
CERTIFICATION PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William J. Wagner, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northwest
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
29
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 13, 2002 /s/ William J. Wagner
- ------------------------ -------------------------------------
Date William J. Wagner
President and Chief Executive Officer
30
CERTIFICATION PURSUANT TO RULE 13a-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William W. Harvey, Jr. Senior Vice President, Finance (Chief Financial
Officer), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northwest
Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
31
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
November 13, 2002 /s/ William W. Harvey, Jr.
- ------------------------ ---------------------------------
Date William W. Harvey, Jr.
Senior Vice President, Finance
(Chief Financial Officer)
32