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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, 2003
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)
UNITED STATES 23-2900888
------------------------------------ --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
301 SECOND AVENUE, WARREN, PENNSYLVANIA 16365
--------------------------------------- -----
(Address of Principal Executive Offices) Zip Code
(814) 726-2140
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.10 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO
---- ----.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES X NO
---- ----.
As of August 31, 2003, there were issued and outstanding 47,718,854
shares of the Registrant's Common Stock, including 28,110,698 shares held by
Northwest Bancorp, MHC, the Registrant's mutual holding company.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the last sale price on December 31,
2002, as reported by the Nasdaq National Market, was approximately $163.5
million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2003 Annual Meeting of Stockholders of the
Registrant (Part III).
PART I
ITEM 1. BUSINESS
GENERAL
NORTHWEST BANCORP, INC.
Northwest Bancorp, Inc. is a Federal corporation formed on June 29,
2001, as the successor to a Pennsylvania corporation of the same name. Both the
Federal corporation and its Pennsylvania predecessor are referred to as the
"Company." The Company became 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 in December of 1997, and completed in
February of 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. On August 25, 2003, the Company completed an incremental stock
offering whereby the Company's parent contributed 7,255,500 shares of the
Company's stock to the Company and the Company sold the same number of shares in
a subscription offering. After the subscription offering, the Mutual Holding
Company owned approximately 59% of the Company's outstanding shares. As of June
30, 2003, the primary activity of the Company was the ownership of all of the
issued and outstanding common stock of the Bank and of Jamestown Savings Bank
("Jamestown"). Jamestown was formed in November of 1995 as a de novo New
York-chartered savings bank headquartered in Jamestown, New York.
As of June 30, 2003, the Company, through the Bank and Jamestown,
operated 137 community banking offices throughout its market area in northwest,
southwest and central Pennsylvania, western New York, and eastern Ohio. The
Company, through the Bank and its wholly owned subsidiaries, also operates 45
consumer lending offices throughout Pennsylvania and two consumer lending
offices in New York. The Company has focused its lending activities primarily on
the origination of loans secured by first mortgages on owner-occupied, one- to
four-family residences. The Company, directly or through its subsidiaries, also
emphasizes the origination of consumer loans, including home equity, second
mortgage, education and other consumer loans. To a lesser extent, the Company
also originates multifamily residential and commercial real estate loans and
commercial business loans.
The Company's principal sources of funds are deposits, borrowed funds
and the principal and interest payments on loans and marketable securities. The
principal source of income is interest received from loans and marketable
securities. The Company's principal expenses are the interest paid on deposits
and borrowings and the cost of employee compensation and benefits.
The Company's principal executive office is located at 301 Second
Avenue, Warren, Pennsylvania, and its telephone number at that address is (814)
726-2140.
NORTHWEST SAVINGS BANK
The Bank is a Pennsylvania-chartered stock savings bank headquartered in
Warren, which is located in northwestern Pennsylvania. The Bank is a
community-oriented institution offering traditional deposit and loan products,
and through a subsidiary, consumer finance services. The Bank's mutual savings
bank predecessor was founded in 1896. The Bank in its current stock form was
established on November 2, 1994, as a result of the reorganization (the
"Reorganization") of the Bank's mutual predecessor into a mutual holding company
structure. At the time of the Reorganization, the Bank issued a majority of its
to-be outstanding shares of common stock to the Mutual Holding Company (which
was formed in connection with the Reorganization) and sold a minority of its
to-be outstanding shares to stockholders other than the Mutual Holding Company
in a stock offering conducted as part of the Reorganization.
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The Bank's principal executive office is located at 301 Second Avenue,
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-chartered stock savings bank. The bank was organized to engage in the
retail savings bank business in the area surrounding Jamestown, New York, which
is located in Chautauqua County.
Jamestown was capitalized through an initial public offering of 761,866
shares of common stock, including 400,000 shares that were purchased by the
Mutual Holding Company. The Mutual Holding Company continued to accumulate
additional ownership in Jamestown and in February 1998 sold its entire ownership
position, consisting of 490,050 shares, to the Company. On July 8, 1998 the
Company conducted a tender offer for the remaining shares of Jamestown, and
acquired 100% of the outstanding shares of Jamestown as of July 31, 1998.
As of June 30, 2003, Jamestown had eight offices in western New York.
MARKET AREA
The Company has been, and intends to continue to be, an independent
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. Since the early 1990s, the Company has expanded, primarily through
acquisitions, into the southwestern and central regions of Pennsylvania. As of
June 30, 2003, the Company operated in Pennsylvania 124 community banking
offices and 45 consumer finance offices located in the counties of Allegheny,
Armstrong, Bedford, Berks, Blair, Butler, Cambria, Cameron, Centre, Chester,
Clarion, Clearfield, Clinton, Columbia, Crawford, Cumberland, Dauphin, Elk,
Erie, Fayette, Forest, Huntingdon, Indiana, Jefferson, Lancaster, Lawrence,
Lebanon, Luzerne, Lycoming, McKean, Mercer, Mifflin, Northumberland, Potter,
Schuylkill, Tioga, Venango, Warren, Washington, Westmoreland and York. These 41
counties, which comprise 66% of the counties in Pennsylvania, are primarily
experiencing a flat to declining growth rate in total population. In addition,
like most of Pennsylvania, approximately 40% of the total population is 45 years
old or older with approximately 25% of the population under the age of 18. Per
capita income in these counties averages approximately $17,942 and the median
house value is $82,700. Pennsylvania, like most of the nation, is experiencing
an economic slowdown with unemployment rising from 4.6% in July 2001 to 5.6% in
July 2003, which is slightly below the national average of approximately 6.2%.
Most of the communities the Company serves, while showing improvement, are still
dependent on the manufacturing sector, which accounts for approximately 16.0% of
all Pennsylvania jobs compared to the national average of 12.2%. This sector has
been hardest hit by the downturn in the economy and has seen an increase in
foreign competition. Bankruptcy filings have been 4.2 out of every 1,000 people
in Pennsylvania filing for bankruptcy protection, which is below the national
average of 5.3 out of every 1,000 people. In addition, the Company operated in
Ohio five community banking offices located in the counties of Ashtabula, Geauga
and Lake. Through Jamestown, the Company operated in New York eight community
banking offices located in the counties of Chautauqua, Erie and Cattaraugus. The
Company, through the Bank and its subsidiaries, also operates two consumer
finance offices in southwestern New York.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the Company has
been the origination, for retention in its portfolio, of fixed-rate and, to a
lesser extent, adjustable-rate mortgage loans collateralized by one- to
four-family residential real estate located in its market area. To a lesser
extent, the Company also originates loans collateralized by multifamily
residential and commercial real estate, construction loans, commercial business
loans and consumer loans.
In an effort to manage interest rate risk, the Company has sought to
make its interest-earning assets more interest rate sensitive by originating
adjustable-rate loans, such as adjustable-rate mortgage loans, home equity
loans, and education loans, and by originating short-term and medium-term
fixed-rate consumer loans. The
3
Company also purchases mortgage-backed securities that generally have
adjustable interest rates. Because the Company also originates a substantial
amount of long-term fixed-rate mortgage loans collateralized by one- to
four-family residential real estate, when possible, such loans are originated
and underwritten according to standards that allow the Company to sell them in
the secondary mortgage market for purposes of managing interest-rate risk and
liquidity. The Company currently sells in the secondary market a limited amount
of fixed-rate residential mortgage loans with maturities of more than 15 years,
and retains all adjustable-rate mortgage loans and fixed-rate residential
mortgage loans with maturities of 15 years or less. The Company is primarily a
portfolio lender and at any one time the Company holds only a nominal amount of
loans identified as available-for-sale. The Company retains servicing on the
mortgage loans it sells and realizes monthly service fee income. The Company
generally retains in its portfolio all consumer loans, multifamily residential
and commercial real estate loans, and commercial business loans that it
originates.
4
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,
-------------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Real estate:
One- to four-family ................ $ 2,112,811 63.6% $ 2,056,105 66.9% $ 2,005,020 68.7%
Multifamily and commercial.......... 377,507 11.4 304,456 9.9 249,049 8.5
------------ -------- ------------ ------- ----------- -------
Total real estate loans............. 2,490,318 75.0 2,360,561 76.8 2,254,069 77.2
Consumer:
Automobile.......................... 118,120 3.6 117,240 3.8 94,475 3.2
Home improvement.................... 378,341 11.4 293,865 9.6 260,169 8.9
Education loans..................... 90,485 2.7 84,817 2.8 77,753 2.7
Loans on savings accounts........... 7,132 0.2 7,733 0.2 8,923 0.3
Other (1)........................... 107,483 3.2 113,570 3.7 134,023 4.6
------------ -------- ------------ ------- ----------- -------
Total consumer loans ............... 701,561 21.1 617,225 20.1 575,343 19.7
Commercial business................... 130,115 3.9 95,968 3.1 89,784 3.1
------------ -------- ------------ ------- ----------- -------
Total loans receivable, gross..... 3,321,994 100.0% 3,073,754 100.0% 2,919,196 100.0%
-------- ------- -------
Deferred loan fees.................... (7,409) (2,938) (2,517)
Undisbursed loan proceeds............. (41,221) (36,168) (39,808)
Allowance for loan losses
(real estate loans)................. (13,087) (11,703) (11,629)
Allowance for loan losses
(other loans)....................... (13,506) (10,339) (8,661)
------------ ------------ ------------
Total loans receivable, net....... $ 3,246,771 $ 3,012,606 $ 2,856,581
============ ============ ===========
AT JUNE 30,
------------------------------------------------
2000 1999
--------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
------------ ------- ------------ --------
(DOLLARS IN THOUSANDS)
Real estate:
One- to four-family ................ $ 1,836,154 70.9% $ 1,718,002 73.8%
Multifamily and commercial.......... 192,897 7.5 152,466 6.6
------------ ------- ------------ -------
Total real estate loans............. 2,029,051 78.4 1,870,468 80.4
Consumer:
Automobile.......................... 72,955 2.8 58,885 2.5
Home improvement.................... 212,049 8.2 129,960 5.6
Education loans..................... 70,619 2.7 64,341 2.8
Loans on savings accounts........... 8,052 0.3 6,263 0.3
Other (1)........................... 147,267 5.7 156,034 6.7
------------ ------- ------------ -------
Total consumer loans ............... 510,942 19.7 415,483 17.9
Commercial business................... 49,992 1.9 40,039 1.7
------------ ------- ------------ -------
Total loans receivable, gross..... 2,589,985 100.0% 2,325,990 100.0%
======= =======
Deferred loan fees.................... (1,829) (923)
Undisbursed loan proceeds............. (25,266) (23,056)
Allowance for loan losses
(real estate loans)................. (11,334) (10,619)
Allowance for loan losses
(other loans)....................... (6,926) (6,154)
------------ ------------
Total loans receivable, net....... $ 2,544,630 $ 2,285,238
============ ============
- ---------------------------------------
(1) Consist primarily of secured and unsecured personal loans.
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,
---------------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans:
Adjustable.......................... $ 404,164 12.2% $ 229,596 7.5% $ 170,054 5.8%
Fixed............................... 2,086,154 62.8 2,130,965 69.3 2,084,015 71.4
------------ ------ ------------ ------- ----------- -------
Total real estate loans............ 2,490,318 75.0 2,360,561 76.8 2,254,069 77.2
Other loans:
Adjustable.......................... 186,561 5.6 225,889 7.3 197,403 6.8
Fixed............................... 645,115 19.4 487,304 15.9 467,724 16.0
------------ ------ ------------ ------- ----------- -------
Total other loans.................. 831,676 25.0 713,193 23.2 665,127 22.8
------------ ------ ------------ ------- ----------- -------
$ 3,321,994 100.0% $ 3,073,754 100.0% $2,919,196 100.0%
============ ====== ============ ======= =========== =======
AT JUNE 30,
---------------------------------------------------
2000 1999
----------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT
------------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
Real estate loans:
Adjustable.......................... $ 108,628 4.2% $ 99,029 4.3%
Fixed............................... 1,920,423 74.2 1,771,439 76.1
------------ ------- ------------ -------
Total real estate loans............ 2,029,051 78.4 1,870,468 80.4
Other loans:
Adjustable.......................... 151,177 5.8 132,873 5.7
Fixed............................... 409,757 15.8 322,649 13.9
------------ ------- ------------ -------
Total other loans.................. 560,934 21.6 455,522 19.6
------------ ------- ------------ -------
$ 2,589,985 100.0% $ 2,325,990 100.0%
============ ======= ============ =======
5
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,
2003. 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.
WITHIN 1 YEAR 1-2 YEARS 2-3 YEARS 3-5 YEARS BEYOND 5 YEARS TOTAL
------------- --------- --------- --------- -------------- -----
(IN THOUSANDS)
Real estate loans:
One- to four-family residential.. $ 137,763 $ 129,588 $ 83,621 $ 207,224 $ 1,513,194 $ 2,071,590
Multifamily and commercial....... 140,584 36,577 53,194 111,169 35,983 377,507
Consumer loans...................... 282,881 85,294 77,516 118,437 137,433 701,561
Commercial business loans........... 45,892 11,940 17,364 36,290 18,629 130,115
------------ ------------ ------------ ------------ ------------ ------------
Total loans......................... $ 607,320 $ 263,399 $ 231,695 $ 473,120 $ 1,705,239 $ 3,280,773
============ ============ ============ ============ ============ ============
FIXED- AND ADJUSTABLE-RATE LOAN SCHEDULE. The following table sets forth
at June 30, 2003, the dollar amount of all fixed-rate and adjustable-rate loans
due after June 30, 2004. Adjustable- and floating-rate loans are included in the
table based on the contractual due date of the loan.
FIXED ADJUSTABLE TOTAL
------------ ------------ ------------
(IN THOUSANDS)
Real estate loans:
One- to four-family residential......................................... $ 1,952,446 $ 39,270 $ 1,991,716
Multifamily and commercial.............................................. 99,026 228,814 327,840
Consumer loans............................................................. 331,931 123,142 455,073
Commercial business loans.................................................. 41,039 20,267 61,306
------------- ------------ ------------
Total loans................................................................ $ 2,424,442 $ 411,493 $ 2,835,935
============= ============ ============
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The primary lending
activity of the Company consists of the origination for retention in the
Company's portfolio of owner-occupied one- to four-family residential mortgage
loans secured by properties located in the Company's market area.
The Company currently offers one- to four-family residential mortgage
loans with terms typically ranging from 10 to 30 years, with either adjustable
or fixed interest rates. Originations of fixed-rate mortgage loans versus
adjustable-rate mortgage loans are monitored on an ongoing basis and are
affected significantly by such things as the level of market interest rates,
customer preference, the Company's interest rate sensitivity position and loan
products offered by the Company's competitors. Therefore, even when management's
strategy is to increase the originations of adjustable-rate mortgage loans,
market conditions may be such that there is greater demand for fixed-rate
mortgage loans.
The Company's fixed-rate loans, whenever possible, are originated and
underwritten according to standards that permit sale in the secondary mortgage
market. Whether the Company can or will sell fixed-rate loans into the secondary
market, however, depends on a number of factors including the yield and the term
of the loan, market conditions, and the Company's current liquidity and interest
rate sensitivity position. The Company historically has been primarily a
portfolio lender, and at any one time the Company has held only a nominal amount
of loans that may be sold. The Company's current policy is to retain in its
portfolio fixed-rate loans with terms of 15 years or less, and sell a limited
amount of fixed-rate loans (servicing retained) with terms of more than 15
years. Moreover, the Company is more likely to retain fixed-rate loans if its
interest rate sensitivity is within acceptable limits. The Company's mortgage
loans are amortized on a monthly basis with principal and interest due each
month. One- to four-family residential real estate loans often remain
outstanding for significantly shorter periods than their contractual terms
because borrowers may refinance or prepay loans at their option.
The Company currently offers adjustable-rate mortgage loans with initial
interest rate adjustment periods of one, three and five years, based on changes
in a designated market index. The Company determines whether a borrower
qualifies for an adjustable-rate mortgage loan based on the fully indexed rate
of the adjustable-rate mortgage loan at the time the loan is originated. One- to
four-family residential adjustable-rate mortgage loans totaled $41.3 million, or
1.3% of the Company's gross loan portfolio at June 30, 2003.
6
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 either performed by
the Company's in-house appraisal staff or by an appraiser who has been deemed
qualified by the Company's chief appraiser. Such regulations permit a maximum
loan-to-value ratio of 95% for residential property and 80% for all other real
estate loans. The Company's lending policies generally limit the maximum
loan-to-value ratio on both fixed-rate and adjustable-rate mortgage loans
without private mortgage insurance to 80% of the lesser of the appraised value
or the purchase price of the real estate that serves as collateral for the loan.
The Company makes a limited amount of one- to four-family real estate loans with
loan-to-value ratios in excess of 80%. For one- to four-family real estate loans
with loan-to-value ratios in excess of 80%, the Company generally requires the
borrower to obtain private mortgage insurance on the entire amount of the loan.
The Company requires fire and casualty insurance, as well as a title guaranty
regarding good title, on all properties securing real estate loans made by the
Company.
In the past, the Company purchased loans that are serviced by other
institutions and that are secured by one- to four-family residences. At June 30,
2003, the Company's portfolio of loans serviced by others totaled $ 946,000. The
Company currently has no formal plans to enter into new loan participations.
Included in the Company's $ 2.113 billion of one- to four-family
residential real estate loans are construction loans of $25.3 million, or 0.8%
of the Company's total loan portfolio. The Company offers fixed-rate and
adjustable-rate residential construction loans primarily for the construction of
owner-occupied one- to four-family residences in the Company's market area to
builders or to owners who have a contract for construction. Construction loans
are generally structured to become permanent loans, and are originated with
terms of up to 30 years with an allowance of up to one year for construction.
During the construction phase the loans have a fixed interest rate and convert
into either a fixed-rate or an adjustable-rate mortgage loan at the end of the
construction period. Advances are made as construction is completed. In
addition, the Company originates loans within its market area that are secured
by individual unimproved or improved lots. Land loans are currently offered with
fixed-rates for terms of up to 10 years. The maximum loan-to-value ratio for the
Company's land loans is 75% of the appraised value, and the maximum
loan-to-value ratio for the Company's construction loans is 95% of the lower of
cost or appraised value.
Construction lending generally involves a greater degree of credit risk
than other one- to four-family residential mortgage lending. The repayment of
the construction loan is often dependent upon the successful completion of the
construction project. Construction delays or the inability of the borrower to
sell the property once construction is completed may impair the borrower's
ability to repay the loan.
MULTIFAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS. The Company's
multifamily residential real estate loans are secured by multifamily residences,
such as rental properties. The Company's commercial real estate loans are
secured by nonresidential properties such as hotels, church property, and retail
establishments. At June 30, 2003, 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, 2003, had a
principal balance of $5.0 million, and was collateralized by a condominium
project in Allegheny County, Pennsylvania. This loan was performing in
accordance with its terms as of June 30, 2003. The Company's largest commercial
real estate loan relationship at June 30, 2003, had a principal balance of $8.9
million and was collateralized by nursing home facilities in northwestern,
Pennsylvania. This loan was performing in accordance with its terms as of June
30, 2003. Multifamily residential and commercial real estate loans are offered
with both adjustable interest rates and fixed
7
interest rates. The terms of each multifamily residential and commercial real
estate loan are negotiated on a case-by-case basis. The Company generally makes
multifamily residential and commercial real estate loans up to 75% of the
appraised value of the property collateralizing the loan.
Loans secured by multifamily residential and commercial real estate
generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the concentration of principal in
a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multifamily residential and commercial real estate is typically
dependent upon the successful operation of the related real estate property. If
the cash flow from the project is reduced, the borrower's ability to repay the
loan may be impaired.
CONSUMER LOANS. The principal types of consumer loans offered by the
Company are adjustable-rate home equity lines of credit and variable-rate
education loans, and fixed-rate consumer loans such as second mortgage loans,
home equity loans, automobile loans, sales finance loans, unsecured personal
loans, credit card loans, and loans secured by deposit accounts. Consumer loans
are offered with maturities generally of less than ten years. The Company's home
equity lines of credit are secured by the borrower's principal residence with a
maximum loan-to-value ratio, including the principal balances of both the first
and second mortgage loans, of 90% or less. Such loans are offered on an
adjustable-rate basis with terms of up to ten years. At June 30, 2003, the
disbursed portion of home equity lines of credit totaled $ 106.0 million, or
15.1%, of consumer loans, with $163.2 million remaining undisbursed.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is of primary
consideration; however, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount, and in the
case of home equity lines of credit, the Company obtains a title guarantee or an
opinion as to the validity of title.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats,
recreation vehicles, appliances, and furniture. In such cases, repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan and the remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
particular, amounts realizable on the sale of repossessed automobiles may be
significantly reduced based upon the condition of the automobiles and the lack
of demand for used automobiles. The Company adds a general provision on a
regular basis to its consumer loan loss allowance, based on general economic
conditions and prior loss experience.
COMMERCIAL BUSINESS LOANS. The Company currently offers commercial
business loans to existing customers to finance various activities in the
Company's market area, some of which are secured in part by additional real
estate collateral. The largest commercial business loan relationship was a loan
to the Mutual Holding Company which had a principal balance of $12.0 million,
and was secured by all of the assets of the Mutual Holding Company.
Commercial business loans are offered with both fixed and adjustable
interest rates and with terms of up to 15 years. Underwriting standards employed
by the Company for commercial business loans include a determination of the
applicant's ability to meet existing obligations and payments on the proposed
loan from normal cash flows generated by the applicant's business. The financial
strength of each applicant also is assessed through a review of financial
statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Company generally obtains personal guarantees from the
borrower or a third party as a condition to originating its commercial business
loans.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, AND COMMITMENTS. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, mortgage brokers
and
8
walk-in customers. All of the Company's loan originators are salaried employees,
and the Company does not pay commissions in connection with loan originations.
Upon receiving a loan application, the Company obtains a credit report and
employment verification to verify specific information relating to the
applicant's employment, income, and credit standing. In the case of a real
estate loan, an in-house appraiser or an appraiser approved by the Company
appraises the real estate intended to secure the proposed loan. A loan processor
in the Company's loan department checks the loan application file for accuracy
and completeness, and verifies the information provided. The Company has a
formal loan policy which assigns lending limits to the Company's various loan
officers. Also, the Company has a Credit 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
Company has a Senior Loan Committee which has lending authority as designated in
the Company's loan policy that 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 without prior approval
from the Board of Directors. 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, 2003, the
Company had commitments to originate $118.5 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
A title guaranty, based on a title search of the property, is required on all
loans secured by real property.
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the
Company's originations of loans for the periods indicated.
YEARS ENDED JUNE 30,
-------------------------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Loans receivable, gross, at beginning of period............................. $ 3,073,754 $ 2,919,196 $ 2,589,985
Originations................................................................ 1,301,263 974,413 776,001
Principal repayments........................................................ (948,781) (697,427) (450,120)
Loan purchases including acquisitions....................................... 130,631 22,945 57,213
Loan sales and change in undisbursed loan proceeds.......................... (231,820) (140,991) (50,503)
Transfer to REO............................................................. (3,053) (4,382) (3,380)
------------ ------------ ------------
Loans receivable, gross, at end of period................................ $ 3,321,994 $ 3,073,754 $ 2,919,196
============ ============ ============
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, 2003 the Company had $7.4 million of net deferred
loan origination fees. Loan origination fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased, principal repayments, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, the Company also receives other
fees, service charges, and other income that consist primarily of deposit
transaction account service charges, late charges, credit card fees, and income
from operations of real estate owned ("REO"). The Company recognized fees and
service charges of $13.4 million, $11.9 million and $10.0 million, for the
fiscal years ended June 30, 2003, 2002 and 2001, respectively.
LOANS-TO-ONE BORROWER. Savings banks are subject to the same
loans-to-one borrower limits as those applicable to national banks, which
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, 2003, the largest aggregate amount loaned by the
Company to one borrower totaled $12.0 million and was secured by
9
all of the assets of the Mutual Holding Company. The Company's second largest
lending relationship totaled $8.9 million and was secured by commercial real
estate. The Company's third largest lending relationship totaled $7.9 million
and was secured by land and real estate. The Company's fourth largest lending
relationship was for $7.9 million and was secured by commercial real estate. The
Company's fifth largest lending relationship totaled $5.7 million and was
secured by real estate and business personal property.
DELINQUENCIES AND CLASSIFIED ASSETS
COLLECTION PROCEDURES. The Company's collection procedures provide that
when a loan is 10 days delinquent and a mortgage loan is 15 days delinquent, 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, personal Contact is attempted, a collection letter is sent,
and the loan becomes subject to possible legal action if suitable arrangements
to repay have not been made. In addition, the borrower is given information
which provides access to consumer counseling services, to the extent required by
regulations of the Department of Housing and Urban Development. When a loan
continues in a delinquent status for 90 days or more, and a repayment schedule
has not been made or kept by the borrower, generally a notice of intent to
foreclose is sent to the borrower, giving 30 days to cure the delinquency. If
not cured, foreclosure proceedings are initiated.
NONPERFORMING ASSETS. Loans are reviewed on a regular basis and are
placed on a nonaccrual status when, in the opinion of management, the collection
of additional interest is doubtful. Loans are automatically placed on nonaccrual
status when either principal or interest is 90 days or more past due. Interest
accrued and unpaid at the time a loan is placed on a nonaccrual status is
charged against interest income.
Real estate acquired by the Company as a result of foreclosure or by
deed in lieu of foreclosure is classified as REO until such time as it is sold.
When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the value of the property is less than the loan, less any related specific
loan loss reserve allocations, the difference is charged against the allowance
for loan losses. Any subsequent write-down of REO is charged against earnings.
LOANS PAST DUE AND NONPERFORMING ASSETS. The following table sets forth
information regarding the Company's loans 30 days or more past due, nonaccrual
loans 90 days or more past due, and real estate acquired or deemed acquired by
foreclosure at the dates indicated. Effective November 1998, the Company changed
its policy so that a loan is considered past due if less than 90% of a
contractually due payment has been paid. Prior to this change, a loan was
considered past due only if no amount had been paid. As a result of this change,
the Company recorded a significant increase in the amount of loans which were 90
days or more past due as of June 30, 1999. When a loan is delinquent 90 days or
more, the Company fully reserves all accrued interest thereon and ceases to
accrue interest thereafter. For all the dates indicated, the Company did not
have any material restructured loans within the meaning of SFAS 15.
10
AT JUNE 30,
--------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------------- ---------- ---------- ----------- ----------
NUMBER BALANCE
(DOLLARS IN THOUSANDS)
Loans past due 30 days to 59 days:
One- to four-family residential loans........ 78 $ 2,665 $ 4,068 $ 3,055 $ 2,030 $ 3,632
Multifamily and commercial loans............. 11 1,291 1,278 1,184 806 320
Consumer loans............................... 868 3,705 3,243 3,439 2,108 3,491
Commercial business loans.................... 10 308 165 418 535 --
-------- ------- ------- -------- -------- --------
Total loans past due 30 days to 59 days..... 967 $ 7,969 $ 8,754 $ 8,096 $ 5,479 $ 7,443
-------- ------- ------- -------- -------- --------
Loans past due 60 days to 89 days:
One- to four-family residential loans........ 66 $ 2,890 $ 3,478 $ 3,001 $ 2,205 $ 4,895
Multifamily and commercial loans............. 9 873 269 248 152 314
Consumer loans............................... 477 1,903 1,604 1,262 777 957
Commercial business loans.................... 4 159 35 758 47 --
-------- ------- ------- -------- -------- --------
Total loans past due 60 days to 89 days..... 556 $ 5,825 $ 5,386 $ 5,269 $ 3,181 $ 6,166
-------- ------- ------- -------- -------- --------
Loans past due 90 days or more (1):
One- to four-family residential loans........ 219 $11,140 $ 7,278 $ 6,874 $ 5,753 $ 8,623
Multifamily and commercial loans............. 32 11,975 2,407 2,296 1,923 2,141
Consumer loans............................... 1,235 4,896 3,991 3,129 2,459 2,202
Commercial business loans.................... 29 4,602 2,124 5,336 125 3,150
-------- ------- ------- -------- -------- --------
Total loans past due 90 days or more........ 1,515 $32,613 $15,800 $ 17,635 $ 10,260 $ 16,116
-------- ------- ------- -------- -------- --------
Total loans 30 days or more past due........... 3,038 $46,407 $29,940 $ 31,000 $ 18,920 $ 29,725
======== ======= ======= ======== ======== ========
Total loans 90 days or more past due (1).... 1,515 $32,613 $15,800 $17,635 $ 10,260 $ 16,116
Total REO...................................... 59 3,664 5,157 3,697 2,144 3,383
-------- ------- ------- -------- -------- --------
Total loans 90 days or more past due and REO... 1,574 $36,277 $20,957 $ 21,332 $ 12,404 $ 19,499
======== ======= ======= ======== ======== ========
Total loans 90 days or more past due to
net loans receivable......................... 1.00% 0.52% 0.62% 0.40% 0.71%
Total loans 90 days or more past due
and REO to total assets...................... 0.69% 0.49% 0.55% 0.36% 0.63%
- -------------------------------
(1) The Company classifies as nonperforming all loans 90 days or more
delinquent.
During the fiscal year ended June 30, 2003, gross interest income of
approximately $2.0 million would have been recorded on loans accounted for on a
nonaccrual basis if the loans had been current throughout the period. No
interest income on nonaccrual loans was included in income during such period.
CLASSIFICATION OF ASSETS. The Company's policies, consistent with
regulatory guidelines, provide for the classification of loans and other assets
such as debt and equity securities, considered to be of lesser quality as
"substandard," "doubtful," or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible" so
that their continuance as assets without the establishment of a specific loss
reserve is not warranted. Assets that do not expose the savings institution to
risk sufficient to warrant classification in one of the aforementioned
categories, but which possess some weaknesses, are required to be designated
"special mention" by management. At June 30, 2003, the Company had 41 loans,
with an aggregate principal balance of $18.0 million, designated as special
mention.
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.
11
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
AT JUNE 30,
---------------------------------------------------
2003 2002 2001
---------- ----------- ----------
(IN THOUSANDS)
Substandard assets............................................. $ 47,278 $ 38,398 $ 35,011
Doubtful assets................................................ 3,256 1,465 33
Loss assets.................................................... -- -- 160
--------- --------- ---------
Total classified assets..................................... $ 50,534 $ 39,863 $ 35,204
========= ========= =========
ALLOWANCE FOR LOAN LOSSES. Loans that have been classified as
substandard or doubtful are reviewed by the Credit Review and Administration
("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 measure 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 to be individually
impaired, 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 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 range of the allowance for loan losses is estimated and any
adjustments to reconcile the actual allowance for loan losses 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 allowance for loan
losses 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
allowance for loan losses 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 allowance for loan
losses 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.
12
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,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ----------- ----------
(IN THOUSANDS)
Net loans receivable................................. $ 3,246,771 $ 3,012,606 $ 2,856,581 $ 2,544,630 $2,285,238
Average loans outstanding............................ 3,169,180 2,935,629 2,715,012 2,436,260 2,128,480
Allowance for loan losses balance at beginning of
period............................................. 22,042 20,290 18,260 16,773 15,769
Provision for loan losses............................ 8,431 6,360 5,347 4,149 3,629
Charge-offs:
Real estate loans.................................. (239) (292) (176) (289) (514)
Consumer loans..................................... (4,281) (4,452) (3,528) (2,987) (3,049)
Commercial loans................................... (1,258) (569) (158) -- (101)
------------ ----------- ------------- ------------ -----------
Total charge-offs................................. (5,778) (5,313) (3,862) (3,276) (3,664)
------------ ----------- ------------- ------------ -----------
Recoveries:
Real estate loans.................................. 47 63 32 75 367
Consumer loans..................................... 527 382 453 481 470
Commercial loans................................... 123 23 60 33 61
------------ ----------- ------------ ------------ ----------
Total recoveries.................................. 697 468 545 589 898
Acquired through acquisition......................... 1,201 237 -- 25 141
------------ ----------- ------------ ------------ ----------
Allowance for loan losses balance at end of period. $ 26,593 $ 22,042 $ 20,290 $ 18,260 $ 16,773
============ =========== ============ ============ ==========
Allowance for loan losses as a percentage of net
loans receivable................................... 0.82% 0.73% 0.71% 0.72% 0.73%
Net charge-offs as a percentage of average
loans outstanding.................................. 0.16% 0.17% 0.12% 0.11% 0.13%
Allowance for loan losses as a percentage of
nonperforming loans................................ 81.54% 139.51% 115.06% 177.97% 104.08%
Allowance for loan losses as a percentage
of nonperforming loans and REO..................... 73.31% 105.18% 95.12% 147.21% 86.02%
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of allowance for loan losses by loan category at the dates
indicated.
AT JUNE 30,
----------------------------------------------------------------------------
2003 2002 2001
----------------------- ---------------------- ------------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1)
----------- --------- ----------- --------- ----------- -----------
Balance at end of period
applicable to:
Real estate loans.............. $ 13,087 75.0% $ 11,703 76.8% $ 11,629 77.2%
Consumer loans................. 10,965 21.1 8,855 20.1 6,682 19.7
Commercial business loans...... 2,541 3.9 1,484 3.1 1,979 3.1
----------- --------- ----------- --------- ----------- ---------
Total allowance for loan loss.. $ 26,593 100.0% $ 22,042 100.0% $ 20,290 100.0%
=========== ========= =========== ========= =========== =========
AT JUNE 30,
-------------------------------------------------
2000 1999
----------------------- -----------------------
% OF TOTAL % OF TOTAL
AMOUNT LOANS (1) AMOUNT LOANS (1)
----------- --------- ----------- ----------
Balance at end of period
applicable to:
Real estate loans.............. $ 11,334 78.4% $ 10,619 80.4%
Consumer loans................. 5,976 19.7 5,318 17.9
Commercial business loans...... 950 1.9 836 1.7
----------- --------- ----------- ---------
Total allowance for loan loss.. $ 18,260 100.0% $ 16,773 100.0%
=========== ========= =========== =========
- -----------------------------------
(1) Represents percentage of loans in each category to total loans.
INVESTMENT ACTIVITIES
The Company's investment portfolio is comprised of 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's efforts to
protect its net interest margin in the event that interest rates rise. This was
accomplished by controlling the increase of long-term fixed rate mortgage loans
and by deploying more funds to the investment portfolio. In addition to interest
sensitivity concerns, the Company is maintaining more of its funds in marketable
securities because of concerns that some of the rapid deposit growth over the
last several years could be funds that will eventually leave the Company for
alternative investments.
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
13
upon the yields on investment alternatives and upon management's judgment as to
the attractiveness of the yields then available in relation to other
opportunities and its expectation of the level of yield that will be available
in the future, as well as management's projections as to the short-term demand
for funds to be used in the Company's loan origination and other activities.
PURCHASES, SALES, AND REPAYMENTS OF INVESTMENT AND MORTGAGE-BACKED
SECURITIES. Set forth below is information relating to the Company's purchases,
sales and repayments of investment securities and mortgage-backed securities for
the periods indicated.
YEARS ENDED JUNE 30,
---------------------------------------------------
2003 2002 2001
---------- ----------- ----------
(IN THOUSANDS)
Mortgage-backed securities balance at beginning of period (1)......... $ 524,601 $ 504,274 $ 420,177
Purchases............................................................. 947,546 160,665 114,926
Sales................................................................. (2,879) -- (11,127)
Securities acquired by business combination........................... 15,632 -- --
Increase (decrease) in market value of securities available for sale.. (2,863) 4,519 5,725
Principal payments and amortization of premiums and discounts......... (575,002) (144,857) (25,427)
---------- ----------- ----------
Mortgage-backed securities balance at end of period (1)............... $ 907,035 $ 524,601 $ 504,274
========== =========== ==========
Investment securities balance at beginning of period (2).............. 307,625 $ 226,636 $ 205,562
Purchases............................................................. 278,406 177,778 68,982
Sales................................................................. (79,991) (50,647) (3,985)
Securities acquired by business combination........................... 12,390 -- --
Increase (decrease) in market value of securities available for sale.. 5,264 154 7,012
Writedowns............................................................ -- (400) --
Maturities and amortization of premiums and discounts................. (56,277) (45,896) (50,935)
---------- ----------- ----------
Investment securities balance at end of period (2).................... $ 467,417 $ 307,625 $ 226,636
========== =========== ==========
- -------------------------------------
(1) Includes mortgage-backed securities available for sale and held to
maturity.
(2) Includes investment securities available for sale and held to maturity.
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.
14
AT JUNE 30,
--------------------------------------------------------------------------
2003 2002 2001
----------------------- ----------------------- -----------------------
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................... $ 8,297 $ 8,417 $ 3,663 $ 3,713 $ 3,379 $ 3,387
Variable-rate pass through certificates................ 57,988 58,162 52,278 52,426 4,743 4,834
Fixed-rate collateralized mortgage obligations ("CMOs") 24,651 24,596 8,318 8,494 2,284 2,373
Variable-rate CMOs..................................... 258,466 259,966 199,601 200,179 198,934 194,356
--------- --------- --------- --------- --------- ---------
Total mortgage-backed securities held to maturity.... 349,402 351,141 263,860 264,812 209,340 204,950
--------- --------- --------- --------- --------- ---------
Mortgage-backed securities available for sale:
Fixed-rate pass through certificates................... $ 43,449 $ 45,461 $ 61,502 $ 63,974 $ 72,522 $ 74,038
Variable-rate pass through certificates................ 128,528 129,486 12,958 13,040 15,148 15,252
Fixed-rate CMOs........................................ 191,911 190,167 35,315 35,685 3 3
Variable-rate CMOs..................................... 190,978 192,519 145,335 148,042 206,149 205,641
--------- --------- --------- --------- --------- ---------
Total mortgage-backed securities available for sale.. 554,866 557,633 255,110 260,741 293,822 294,934
--------- --------- --------- --------- --------- ---------
Total mortgage-backed securities..................... 904,268 908,774 518,970 525,553 $ 503,162 $ 499,884
--------- --------- --------- --------- ========= =========
Investment securities held to maturity:
U.S. Government and agency............................. $ 17,032 $ 19,209 $ 18,040 $ 20,156 $ 34,518 $ 35,819
Municipal securities................................... 65,556 68,905 65,274 65,759 50,641 50,388
Corporate debt issues.................................. 45,831 47,667 49,329 48,164 44,832 42,215
--------- --------- --------- --------- --------- ---------
Total investment securities held to maturity......... $ 128,419 $ 135,781 $ 132,643 $ 134,079 $ 129,991 $ 128,422
========= ========= ========= ========= ========= =========
Investment securities available for sale:
U.S. Government and agency ............................ $ 41,900 $ 43,703 $ 23,604 $ 23,952 $ 27,220 $ 27,793
Municipal securities................................... 119,796 123,654 77,742 78,011 57,538 57,588
Corporate debt issues.................................. 27,502 27,581 1,476 1,333 986 905
Equity securities and mutual funds..................... 140,603 144,060 68,228 71,686 7,123 10,359
--------- --------- --------- --------- --------- ---------
Total investment securities available for sale....... $ 329,801 $ 388,998 $ 171,050 $ 174,982 $ 92,867 $ 96,645
========= ========= ========= ========= ========= =========
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,
---------------------------------------------------
2003 2002 2001
-------- - ----------- ----------
(IN THOUSANDS)
Mortgage-backed securities:
FNMA ............................................................. $ 355,722 $193,814 $210,548
GNMA .............................................................. 58,834 76,412 91,535
FHLMC.............................................................. 426,753 235,344 181,500
Other (non-agency)................................................. 65,726 19,031 20,691
------- ---------- ----------
Total mortgage-backed securities................................ $907,035 $ 524,601 $ 504,274
======== =========== ==========
15
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, 2003. Adjustable-rate
mortgage-backed securities are included in the period in which interest rates
are next scheduled to adjust.
AT JUNE 30, 2003
-----------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
------------------------ ------------------------- --------------------------
ANNUALIZED ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Investment securities held to maturity:
U.S. Government and agency obligations.... $ -- --% $ -- --% $ 14,985 7.10%
Municipal securities...................... -- -- 90 5.25 -- --
Corporate debt issues..................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities held to
maturity............................. $ -- --% $ 90 5.25% $ 14,985 7.10%
Investment securities available for sale:
U.S. Government and agency obligations.... $ -- --% $ -- --% $ 11,900 3.77%
Equity securities and mutual funds........ -- -- -- -- -- --
Municipal securities...................... -- -- -- -- 459 4.22
Corporate debt issues..................... 1,006 5.01 7,089 5.29 15,000 1.63
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities
available for sale................... $ 1,006 5.01% $ 7,089 5.29% $ 27,359 2.61%
Mortgage-backed securities held to
maturity:
Pass-through certificates................. $ 57,988 3.20% $ 739 2.90% $ 104 3.53%
CMOs...................................... 258,439 2.08 -- -- 13,470 2.45
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities
held to maturity..................... $ 316,427 2.28% $ 739 2.90% $ 13,574 2.46%
Mortgage-backed securities available for
sale:
Pass through certificates................. $ 128,528 2.61% $ 931 6.94% $ 3,430 3.59%
CMOs...................................... 190,977 2.97 -- -- 60,919 2.64
---------- ---------- ---------- ---------- ---------- ----------
Total mortgage-backed securities
available for sale................... $ 319,505 2.82% $ 931 6.94% $ 64,349 2.69%
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities and mortgage-
backed securities......................... $ 636,938 2.56% $ 8,849 5.26% $ 120,267 3.20
========== ========== ========== ========== ========== ==========
AT JUNE 30, 2003
----------------------------------------------------------------------
MORE THAN TEN YEARS TOTAL
------------------------- ----------------------------------------
ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST MARKET VALUE YIELD
---------- ---------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
Investment securities held to maturity:
U.S. Government and agency obligations.... $ 2,047 8.35% $ 17,032 $ 19,209 7.25%
Municipal securities...................... 65,466 5.04 65,556 68,905 5.04
Corporate debt issues..................... 45,831 8.03 45,831 47,667 8.03
---------- ---------- ------------ ----------- ----------
Total investment securities held to
maturity............................. $ 113,344 6.31% $ 128,419 $ 135,781 6.40%
Investment securities available for sale:
U.S. Government and agency obligations.... $ 30,000 2.24% $ 41,900 $ 43,703 2.68%
Equity securities and mutual funds........ 140,603 2.26 140,603 144,060 2.26
Municipal securities...................... 119,337 4.77 119,796 123,654 4.77
Corporate debt issues..................... 4,407 3.92 27,502 27,581 3.06
---------- ---------- ------------ ----------- ----------
Total investment securities
available for sale................... $ 294,347 3.30% $ 329,801 $ 338,998 3.29%
Mortgage-backed securities held to
maturity:
Pass-through certificates................. $ 7,454 4.67% $ 66,285 $ 66,579 3.36%
CMOs...................................... 11,208 3.31 283,117 284,562 2.15
---------- ---------- ------------ ----------- ----------
Total mortgage-backed securities
held to maturity..................... $ 18,662 3.85% $ 349,402 $ 351,141 2.38%
Mortgage-backed securities available for
sale:
Pass through certificates................. $ 39,088 6.32% $ 171,977 $ 174,947 3.50%
CMOs...................................... 130,993 3.12 382,889 382,686 2.97
---------- ---------- ------------ ----------- ----------
Total mortgage-backed securities
available for sale................... $ 170,081 3.86% $ 554,866 $ 557,633 3.13%
---------- ---------- ------------ ----------- ----------
Total investment securities and mortgage-
backed securities......................... $ 596,434 4.05% $ 1,362,488 $ 1,383,553 3.28%
========== ========== ============ =========== ==========
16
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, 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 deposit activities of the Company for
the periods indicated.
YEARS ENDED JUNE 30,
------------------------------------------------------
2003 2002 2001
------------- ------------- -------------
(IN THOUSANDS)
Balance at beginning of period...................................... $ 3,593,122 $ 3,264,940 $ 2,886,509
Net savings activity................................................ 226,656 88,883 131,763
Net checking activity............................................... 227,648 49,913 2,019
Deposits acquired................................................... 121,754 84,960 137,941
------------- ------------- ------------
Net increase before interest credited............................ 576,058 223,756 271,723
Interest credited................................................... 94,376 104,426 106,708
------------- ------------- ------------
Net increase in deposits......................................... 670,434 328,182 378,431
------------- ------------- ------------
Balance at end of period...................................... $ 4,263,556 $ 3,593,122 $ 3,264,940
============= ============= ============
The following table sets forth the dollar amount of deposits in the
various types of savings accounts offered by the Company between the dates
indicated.
AT JUNE 30,
-----------------------------------------------------------------------------
2003 2002
------------------------------------ ---------------------------------------
BALANCE PERCENT (1) RATE (2) BALANCE PERCENT (1) RATE (2)
---------- ------------ -------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
Savings accounts................. $ 920,721 21.60% 1.67% $ 698,336 19.44% 2.62%
Checking accounts................ 861,922 20.21 0.86 605,582 16.85 0.86
Money market accounts............ 568,164 13.33 2.06 407,974 11.35 2.71
Certificates of deposit:
Maturing within 1 year........ 845,985 19.84 2.93 1,046,783 29.14 3.80
Maturing 1 to 3 years......... 719,909 16.88 4.01 542,222 15.09 4.39
Maturing more than 3 years.... 346,855 8.14 4.55 292,225 8.13 5.02
----------- --------- --------- ----------- --------- ---------
Total certificates............ 1,912,749 44.86 3.63 1,881,230 52.36 4.16
----------- --------- --------- ----------- --------- ---------
Total deposits................... $ 4,263,556 100.00% 2.44% $ 3,593,122 100.00% 3.14%
=========== ========= ========= =========== ========= =========
AT JUNE 30,
-------------------------------------
2001
-------------------------------------
BALANCE PERCENT (1) RATE (2)
--------- ------------- ----------
(DOLLARS IN THOUSANDS)
Savings accounts................. $ 455,031 13.94% 3.17%
Checking accounts................ 522,580 16.00 0.96
Money market accounts............ 208,220 6.38 3.69
Certificates of deposit:
Maturing within 1 year........ 1,691,033 51.79 6.02
Maturing 1 to 3 years......... 313,697 9.61 5.79
Maturing more than 3 years.... 74,379 2.28 6.02
----------- --------- ---------
Total certificates............ 2,079,109 63.68 5.99
----------- --------- ---------
Total deposits................... $ 3,264,940 100.00% 4.65%
=========== ========= =========
- -------------------------------------
(1) Represents percentage of total deposits.
(2) Represents weighted average nominal rate at fiscal year end.
17
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,
----------------------------------------------------
2003 2002 2001
---------------- ------------- ----------------
RATE (IN THOUSANDS)
----
Less than 2.00%............................................................... $ 317,502 $ 24,433 $ --
2.00 - 2.99%.................................................................. 354,304 431,963 301
3.00 - 3.99%.................................................................. 421,431 410,835 79,616
4.00 - 4.99%.................................................................. 559,407 579,715 330,509
5.00 - 5.99%.................................................................. 211,408 233,925 428,362
6.00 - 6.99%.................................................................. 32,140 171,642 1,124,205
7.00 - 7.99%.................................................................. 16,487 28,653 116,052
8.00% or greater.............................................................. 70 64 64
-------------- ------------- ----------------
Total..................................................................... $ 1,912,749 $ 1,881,230 $ 2,079,109
============== ============= ================
TIME DEPOSIT MATURITIES. The following table sets forth the amount and
maturities of time deposits at June 30, 2003.
AMOUNT DUE
--------------------------------------------------------------------------------
LESS THAN ONE
RATE YEAR 1-2 YEARS 2-3 YEARS AFTER 3 YEARS TOTAL
---- --------------- ------------ -------------- --------------- -----------
(IN THOUSANDS)
Less than 2.00%............................... $ 295,995 $ 21,333 $ 42 $ 132 $ 317,502
2.00 - 2.99%.................................. 207,599 110,170 36,109 426 354,304
3.00 - 3.99%.................................. 131,206 151,657 54,554 84,014 421,431
4.00 - 4.99%.................................. 152,116 83,964 142,786 180,541 559,407
5.00 - 5.99%.................................. 46,029 36,413 49,321 79,645 211,408
6.00 - 6.99%.................................. 10,548 16,002 3,576 2,014 32,140
7.00 - 7.99%.................................. 2,422 13,155 827 83 16,487
8.00% or greater.............................. 70 -- -- -- 70
------------ ------------ ------------ ------------ ------------
Total...................................... $ 845,985 $ 432,694 $ 287,215 $ 346,855 $ 1,912,749
============ ============ ============ ============ ============
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, 2003.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- ----------
(IN THOUSANDS)
Three months or less........................................................................... $ 31,527
Three through six months....................................................................... 36,570
Six through twelve months...................................................................... 46,075
Over twelve months............................................................................. 183,342
-------------
Total........................................................................................ $ 297,514
=============
BORROWINGS
Deposits are the primary source of funds for the Company's lending and
investment activities and for its general business purposes. The Company also
relies upon borrowings from the FHLB to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. Borrowings from the FHLB typically
are collateralized by the Bank's stock in the FHLB and a portion of the Bank's
first mortgage loans.
The FHLB functions as a central reserve bank providing credit for the
Bank and other member financial institutions. As a member, the Bank is required
to own capital stock in the FHLB and is authorized to apply for borrowings on
the security of such stock and certain of its first mortgage loans and other
assets (principally, securities that are obligations of, or guaranteed by, the
United States) provided certain standards related to creditworthiness have been
met. Borrowings are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of borrowings are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness. All FHLB borrowings have fixed interest
rates and original maturities of between one day and twenty years.
18
DURING THE YEAR ENDED JUNE 30,
-----------------------------------------------------------------
2002 2001 2000
------------------- ---------------------- ------------------
(DOLLARS IN THOUSANDS)
FHLB-Pittsburgh borrowings:
Average balance outstanding $ 412,817 $ 237,907 $ 247,291
Maximum outstanding at end of any month during period 471,416 243,547 304,583
Balance outstanding at end of period 430,014 235,500 245,552
Weighted average interest rate during period 4.78% 5.47% 5.84%
Weighted average interest rate at end of period 4.89% 5.35% 5.36%
Reverse repurchase agreements:
Average balance outstanding $ 20,791 $ 12,798 $ 24,059
Maximum outstanding at end of any month during period 29,226 19,568 28,997
Balance outstanding at end of period 29,226 17,166 24,165
Weighted average interest rate during period 1.80% 2.82% 6.14%
Weighted average interest rate at end of period 1.27% 1.98% 4.47%
Other borrowings:
Average balance outstanding $ 6,603 $ 6,571 $ 7,208
Maximum outstanding at end of any month during period 6,696 6,647 10,315
Balance outstanding at end of period 6,510 6,594 6,495
Weighted average interest rate during period 6.50% 6.63% 7.03%
Weighted average interest rate at end of period 5.12% 6.63% 6.65%
Total borrowings:
Average balance outstanding $ 440,211 $ 257,276 $ 278,558
Maximum outstanding at end of any month during period 496,026 269,603 339,531
Balance outstanding at end of period 465,750 259,260 276,212
Weighted average interest rate during period 4.66% 5.37% 5.90%
Weighted average interest rate at end of period 4.66% 5.16% 5.31%
COMPETITION
The Company's market area in Pennsylvania, western New York and eastern
Ohio has a large concentration of financial institutions, some of which are
significantly larger and have greater financial resources than the Company, and
all of which are competitors of the Company to varying degrees. As a result, the
Company encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations, and credit unions in its market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future. The Company's market area includes offices of several
commercial banks that are substantially larger than the Company in terms of
state-wide deposits. The Company competes for deposits 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
The Company has four subsidiaries: the Bank and Jamestown, as well as
Northwest Capital Trust I and Northwest Bancorp Statutory Trust I, all of which
are wholly-owned. The Bank has six wholly owned subsidiaries, Great Northwest
Corporation, Northwest Financial Services, Inc., Boetger & Associates, Inc.,
Northwest Consumer Discount Company, Inc., Allegheny Services, Inc., and
Northwest Capital Group, Inc. Jamestown has no subsidiaries. For financial
reporting purposes all of these companies are included in the consolidated
financial statements of the Company.
19
Northwest Capital Trust I is a wholly owned Delaware statutory
business trust. The sole activity of this Trust was the issuance of 2,760,000 of
8.75% Cumulative Trust Preferred Securities through a public offering on
November 30, 2001 (liquidation value of $25 per preferred security or
$69,000,000) with a stated maturity date of December 31, 2031. At June 30, 2003,
the Company had an equity investment in Northwest Capital Trust I of $2.1
million. For the fiscal year ended June 30, 2003 Northwest Capital Trust I
reported no net income.
Northwest Bancorp Statutory Trust I is the second wholly owned Delaware
statutory business trust formed by the Company during the 2002 fiscal year. The
sole activity of this Trust was the issuance of 30,000 Cumulative Trust
Preferred Securities to a pooled vehicle through a private transaction on
December 18, 2001 (liquidation value of $1,000 per preferred security or
$30,000,000) with a stated maturity date of December 23, 2031. At June 30, 2003,
the Company had an equity investment in Northwest Bancorp Statutory Trust I of
$928,000, and for the fiscal year ended June 30, 2003, Northwest Bancorp
Statutory Trust I reported no net income.
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, 2003, the Bank had an equity investment in
Great Northwest of $4.2 million. For the fiscal year ended June 30, 2003, Great
Northwest had net income of $474,000 generated primarily from federal low-income
housing tax credits.
Northwest Financial Services' principal activity is the operation of
retail brokerage activities for the Company. It also maintains ownership
interests in 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, 2003, the Bank had an equity investment in Northwest Financial
Services of $6.9 million, and for the fiscal year ended June 30, 2003, Northwest
Financial Services had net income of $182,000.
Northwest Consumer Discount Company operates 45 consumer finance offices
throughout Pennsylvania and operates two consumer finance offices in New York
State as a separate subsidiary doing business therein as Northwest Finance
Company. At June 30, 2003, the Bank had an equity investment in Northwest
Consumer Discount Company of $16.9 million and the net income of Northwest
Consumer Discount Company for the fiscal year ended June 30, 2003 was $1.8
million. Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreation vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Company adds a general provision on a regular basis to its
consumer loan loss allowance, based on general economic conditions and prior
loss experience.
Allegheny Services, Inc. is a Delaware investment company that holds
mortgage loans originated through the Bank's wholesale lending business. In
addition, this Company has loans to both Northwest Savings Bank and Northwest
Consumer Discount Company. At June 30, 2003 the Bank had an equity investment in
Allegheny Services, Inc. of $483.2 million, and for the fiscal year ended June
30, 2003, Allegheny Services, Inc. had net income of $17.3 million.
Boetger & Associates, Inc. is an actuarial services firm acquired July
1, 2002. At June 30, 2003 the Bank had an equity investment of $1.1 million in
Boetger and Associates and for the fiscal year ended June 30, 2003 Boetger &
Associates had net income of $54,000.
Northwest Capital Group's principal activity is the development and sale
of a timeshare project in Honolulu, Hawaii which was acquired by deed in lieu of
foreclosure in 1997. Northwest Capital Group, Inc. also holds title to several
other properties that were acquired in foreclosure. At June 30, 2003 the Bank
had an equity investment of $26,000 in Northwest Capital Group and for the
fiscal year ended June 30, 2003 Northwest Capital Group reported no net income.
Rid-Fed, Inc., a wholly owned subsidiary of Northwest Financial
Services, has as its sole activity a commercial real estate loan to Northwest
Capital Group. At June 30, 2003 Northwest Financial Services had an
20
equity investment of $1.1 million in Rid-Fed, Inc. and for the fiscal year ended
June 30, 2003 Rid-Fed, Inc. reported no net income.
Northwest Finance Company, Inc. is a wholly owned subsidiary of
Northwest Consumer Discount Company. Northwest Finance Company operates two
consumer finance offices in Jamestown and Fredonia, New York. As of June 30,
2003, Northwest Consumer Discount Company's equity investment in Northwest
Finance Company was $(112,000). For the year ended June 30, 2003, Northwest
Finance Company had net income of $7,000.
Federal regulations require SAIF-insured institutions to provide 30 days
advance notice to the FDIC before establishing or acquiring a subsidiary or
conducting a new activity in a subsidiary. The insured institution must also
provide the FDIC such information as may be required by applicable regulations
and must conduct the activity in accordance with the rules and orders of the
FDIC. In addition to other enforcement and supervision powers, the FDIC may
determine after notice and