Back to GetFilings.com
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, 2004
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, 2004, there were issued and outstanding 47,970,661 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 and non-voting common equity held
by non-affiliates of the Registrant, computed by reference to the last sale
price on December 31, 2003, as reported by the Nasdaq National Market, was
approximately $1.020 billion.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2004 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 cancelled 7,255,520 shares of the Company's stock
owned by the Mutual Holding 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.
For the past three fiscal years the Mutual Holding Company has received
approval from the Office of Thrift Supervision ("OTS") to waive its right to
receive cash dividends from the Company in the amount of $9,159,000,
$11,317,000 and $8,488,000, respectively. However, as a result of additional
liquidity needs, the Mutual Holding Company will not waive its right to receive
future quarterly dividends until the transfer of both Leeds Federal Savings
Bank ("Leeds") and First Carnegie Deposit ("First Carnegie") to Northwest
Bancorp, Inc. has been completed. After such transfers have occurred, the
Mutual Holding Company will seek regulatory approval to resume waiving
dividends. As of June 30, 2004, 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. On September 10, 2004 the Company received regulatory approval to acquire
Leeds from the Mutual Holding Company in a transaction accounted for as an
exchange of shares between entities under common control. On July 6, 2004 the
Company filed an application with the OTS to transfer ownership of First
Carnegie from the Mutual Holding Company in a manner similar to the Leeds
transaction.
As of June 30, 2004, the Company, through the Bank and Jamestown, operated
147 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 47 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 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.
The Company's website (www.northwestsavingsbank.com) contains a direct
link to the Company's filings with the Securities and Exchange Commission,
including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to these filings. Copies may also be
obtained, without charge, by written request to Shareholder Relations, 301
Second Avenue, Warren, Pennsylvania 16365.
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.
2
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, 2004, Jamestown had ten 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, 2004, the Company operated in Pennsylvania 132 community banking
offices and 47 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 $18,000 and the median
house value is $82,200. Pennsylvania, like most of the nation, is experiencing
an economic slowdown with unemployment rising from 4.6% in July 2001 to 5.3% in
July 2004, which is slightly below the national average of approximately 5.5%.
Most of the communities the Company serves, while showing improvement, are still
dependent on the manufacturing sector, which accounts for approximately 16% of
all Pennsylvania jobs compared to the national average of 18%. This sector has
been hardest hit by the downturn in the economy and has seen an increase in
foreign competition. Bankruptcy filings have also decreased with 5 out of every
1,000 people in Pennsylvania filing for bankruptcy protection, but are still
below the national average of 6 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 ten 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,
--------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- ------------------ ----------------- ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Real estate:
One- to four-family .......... $2,372,352 61.2% $2,112,811 63.6% $2,056,105 66.9% $2,005,020 68.7% $1,836,154 70.9%
Multifamily and commercial.... 440,864 11.4 377,507 11.4 304,456 9.9 249,049 8.5 192,897 7.5
--------- ------ ---------- ----- ---------- ----- ---------- ------ ---------- -----
Total real estate loans....... 2,813,216 72.6 2,490,318 75.0 2,360,561 76.8 2,254,069 77.2 2,029,051 78.4
Consumer:
Automobile.................... 120,887 3.1 118,120 3.6 117,240 3.8 94,475 3.2 72,955 2.8
Home improvement.............. 575,644 14.9 378,341 11.4 293,865 9.6 260,169 8.9 212,049 8.2
Education loans............... 95,599 2.4 90,485 2.7 84,817 2.8 77,753 2.7 70,619 2.7
Loans on savings accounts..... 6,646 0.2 7,132 0.2 7,733 0.2 8,923 0.3 8,052 0.3
Other (1)..................... 111,612 2.9 107,483 3.2 113,570 3.7 134,023 4.6 147,267 5.7
--------- ------ ---------- ----- ---------- ----- ---------- ------ ---------- -----
Total consumer loans ......... 910,388 23.5 701,561 21.1 617,225 20.1 575,343 19.7 510,942 19.7
Commercial business............. 149,509 3.9 130,115 3.9 95,968 3.1 89,784 3.1 49,992 1.9
--------- ------ ---------- ----- ---------- ----- ---------- ------ ---------- -----
Total loans receivable,
gross..................... 3,873,113 100.0% 3,321,994 100.0% 3,073,754 100.0% 2,919,196 100.0% 2,589,985 100.0%
Deferred loan fees.............. (6,805) (7,409) (2,938) (2,517) (1,829)
Undisbursed loan proceeds....... (48,049) (41,221) (36,168) (39,808) (25,266)
Allowance for loan losses
(real estate loans)........... (14,132) (13,087) (11,703) (11,629) (11,334)
Allowance for loan losses
(other loans)................. (15,557) (13,506) (10,339) (8,661) (6,926)
---------- ---------- ---------- ---------- ----------
Total loans receivable,
net....................... $3,788,570 $3,246,771 $3,012,606 $2,856,581 $2,544,630
========== ========== ========== ========== ==========
- ------------------------------------
(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,
--------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- ------------------ ----------------- ---------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
Real estate loans:
Adjustable.................... $ 511,324 13.2% $ 404,164 12.2% $ 229,596 7.5% $ 170,054 5.8% $ 108,628 4.2%
Fixed......................... 2,301,892 59.4 2,086,154 62.8 2,130,965 69.3 2,084,015 71.4 1,920,423 74.2
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total real estate loans...... 2,813,216 72.6 2,490,318 75.0 2,360,561 76.8 2,254,069 77.2 2,029,051 78.4
Other loans:
Adjustable.................... 200,961 5.2 186,561 5.6 225,889 7.3 197,403 6.8 151,177 5.8
Fixed......................... 858,936 22.2 645,115 19.4 487,304 15.9 467,724 16.0 409,757 15.8
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total other loans............ 1,059,897 27.4 831,676 25.0 713,193 23.2 665,127 22.8 560,934 21.6
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
$3,873,113 100.0% $3,321,994 100.0% $3,073,754 100.0% $2,919,196 100.0% $2,589,985 100.0%
========== ====== ========== ====== ========== ===== ========== ====== ========== ======
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,
2004. 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 BEYOND 5
YEAR 1-2 YEARS 2-3 YEARS 3-5 YEARS YEARS TOTAL
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Real estate loans:
One- to four-family residential........ $ 177,599 $ 144,730 $ 113,613 $ 247,811 $1,688,599 $2,372,352
Multifamily and commercial............. 145,174 53,841 47,817 141,404 52,628 440,864
Consumer loans............................ 388,060 98,824 90,769 143,933 188,802 910,388
Commercial business loans................. 49,233 18,259 16,216 47,954 17,847 149,509
---------- ---------- ---------- ---------- ---------- ----------
Total loans............................... $ 760,066 $ 315,654 $ 268,415 $ 581,102 $1,947,876 $3,873,113
========== ========== ========== ========== ========== ==========
FIXED- AND ADJUSTABLE-RATE LOAN SCHEDULE. The following table sets forth
at June 30, 2004, the dollar amount of all fixed-rate and adjustable-rate loans
due after June 30, 2005. 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.......... $ 2,286,517 $ 40,765 $ 2,327,282
Multifamily and commercial............... 92,396 284,960 377,356
Consumer loans.............................. 413,401 201,029 614,430
Commercial business loans................... 39,054 17,271 56,325
----------- ----------- -----------
Total loans................................. $ 2,831,368 $ 544,025 $ 3,375,393
=========== =========== ===========
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 15 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 $42.7 million, or
1.1% of the Company's gross loan portfolio at June 30, 2004.
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,
2004, the Company's portfolio of loans serviced by others totaled $7.3 million.
The Company currently has no formal plans to enter into new loan participations.
Included in the Company's $2.372 billion portfolio of one- to four-family
residential real estate loans are construction loans of $24.2 million, or 0.6%
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, 2004, 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, 2004, had a
principal balance of $6.0 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, 2004. The Company's largest commercial
real estate loan relationship at June 30, 2004, had a principal balance of $12.6
million and was collateralized by nursing homes in northwestern Pennsylvania.
This loan was performing in accordance with its terms as of June 30, 2004.
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, 2004, the
disbursed portion of home equity lines of credit totaled $150.7 million, or
16.6%, of consumer loans, with $205.2 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 $22.0 million,
and was secured by all of the assets of the Mutual Holding Company. The primary
assets of the Mutual Holding Company are its ownership of two subsidiary banks,
Leeds Federal and First Carnegie Deposit.
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. Exceptions to this policy
are permitted with the 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, 2004, the Company had commitments to
originate $144.9 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
A title guaranty, based on a title search of the property, is required on all
loans secured by real property.
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the
Company's originations of loans for the periods indicated.
YEARS ENDED JUNE 30,
------------------------------------
2004 2003 2002
---------- ---------- ----------
(IN THOUSANDS)
Loans receivable, gross, at beginning of period............. $3,321,994 $3,073,754 $2,919,196
Originations................................................ 1,307,118 1,301,263 974,413
Principal repayments........................................ (891,957) (948,781) (697,427)
Loan purchases including acquisitions....................... 224,532 130,631 22,945
Loan sales and change in undisbursed loan proceeds.......... (83,927) (231,820) (140,991)
Transfer to REO............................................. (4,647) (3,053) (4,382)
---------- ---------- ----------
Loans receivable, gross, at end of period................ $3,873,113 $3,321,994 $3,073,754
========== ========== ==========
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 ("SFAS 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, 2004 the Company had $6.8 million of
net deferred loan origination fees. Loan origination fees are volatile sources
of income. Such fees vary with the volume and type of loans and commitments made
and purchased, principal repayments, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, the Company also receives other
fees, service charges, and other income that consist primarily of deposit
transaction account service charges, late charges, credit card fees, and income
from operations of real estate owned ("REO"). The Company recognized fees and
service charges of $13.8 million, $13.4 million and $11.9 million, for the
fiscal years ended June 30, 2004, 2003 and 2002, 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, 2004, the largest aggregate amount loaned by the
Company to one borrower totaled $22.0 million and was secured by
9
all of the assets of the Mutual Holding Company. The Company's second largest
lending relationship totaled $12.6 million and was secured by commercial
property. The Company's third largest lending relationship totaled $8.4 million
and was secured by land and real estate. The Company's fourth largest lending
relationship was for $7.5 million and was secured by commercial real estate. The
Company's fifth largest lending relationship totaled $7.5 million and was
secured by commercial real estate.
DELINQUENCIES AND CLASSIFIED ASSETS
COLLECTION PROCEDURES. The Company's collection procedures provide that
when a loan is five days past due, a computer-generated late notice is sent to
the borrower requesting payment. If delinquency continues, at 15 days a
delinquent notice, plus a notice of a late charge, is sent and personal contact
efforts are attempted, either in person or by telephone, to strengthen the
collection process and obtain reasons for the delinquency. Also, plans to
arrange a repayment plan are made. If a loan becomes 60 days past due, a
collection letter is sent, personal contact is attempted, and the loan becomes
subject to possible legal action if suitable arrangements to repay have not been
made. In addition, the borrower is given information which provides access to
consumer counseling services, to the extent required by regulations of the
Department of Housing and Urban Development. When a loan continues in a
delinquent status for 90 days or more, and a repayment schedule has not been
made or kept by the borrower, generally a notice of intent to foreclose is sent
to the borrower, giving 30 days to cure the delinquency. If not cured,
foreclosure proceedings are initiated.
NONPERFORMING ASSETS. Loans are reviewed on a regular basis and are placed
on a nonaccrual status when, in the opinion of management, the collection of
additional interest is doubtful. Loans are automatically placed on nonaccrual
status when either principal or interest is 90 days or more past due. Interest
accrued and unpaid at the time a loan is placed on a nonaccrual status is
charged against interest income.
Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is classified as 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. 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,
---------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------- ------- ------- ------- -------
NUMBER BALANCE
------ -------
(DOLLARS IN THOUSANDS)
Loans past due 30 days to 59 days:
One- to four-family residential loans .......... 74 $ 3,487 $ 2,665 $ 4,068 $ 3,055 $ 2,030
Multifamily and commercial loans ............... 19 2,201 1,291 1,278 1,184 806
Consumer loans ................................. 868 4,778 3,705 3,243 3,439 2,108
Commercial business loans ...................... 9 782 308 165 418 535
----- ------- ------- ------- ------- -------
Total loans past due 30 days to 59 days ....... 970 $11,248 $ 7,969 $ 8,754 $ 8,096 $ 5,479
----- ------- ------- ------- ------- -------
Loans past due 60 days to 89 days:
One- to four-family residential loans .......... 92 $ 4,855 $ 2,890 $ 3,478 $ 3,001 $ 2,205
Multifamily and commercial loans ............... 12 1,023 873 269 248 152
Consumer loans ................................. 440 2,011 1,903 1,604 1,262 777
Commercial business loans ...................... 6 309 159 35 758 47
----- ------- ------- ------- ------- -------
Total loans past due 60 days to 89 days ....... 550 $ 8,198 $ 5,825 $ 5,386 $ 5,269 $ 3,181
----- ------- ------- ------- ------- -------
Loans past due 90 days or more (1):
One- to four-family residential loans .......... 222 $10,880 $11,140 $ 7,278 $ 6,874 $ 5,753
Multifamily and commercial loans ............... 43 13,823 11,975 2,407 2,296 1,923
Consumer loans ................................. 1,055 4,536 4,896 3,991 3,129 2,459
Commercial business loans ...................... 26 2,824 4,602 2,124 5,336 125
----- ------- ------- ------- ------- -------
Total loans past due 90 days or more .......... 1,346 $32,063 $32,613 $15,800 $17,635 $10,260
----- ------- ------- ------- ------- -------
Total loans 30 days or more past due ............. 2,866 $51,509 $46,407 $29,940 $31,000 $18,920
===== ======= ======= ======= ======= =======
Total loans 90 days or more past due (1) ......... 1,346 $32,063 $32,613 $15,800 $17,635 $10,260
Total REO ........................................ 70 3,845 3,664 5,157 3,697 2,144
----- ------- ------- ------- ------- -------
Total loans 90 days or more past due and REO...... 1,416 $35,908 $36,277 $20,957 $21,332 $12,404
===== ======= ======= ======= ======= =======
Total loans 90 days or more past due to
net loans receivable ........................... 0.84% 1.00% 0.52% 0.62% 0.40%
Total loans 90 days or more past due
and REO to total assets ........................ 0.62% 0.69% 0.49% 0.55% 0.36%
- -------------------------------
(1) The Company classifies as nonperforming all loans 90 days or more
delinquent.
During the fiscal year ended June 30, 2004, gross interest income of
approximately $2.5 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, 2004, the Company had 84 loans,
with an aggregate principal balance of $23.0 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,
-------------------------------------
2004 2003 2002
------- -------- --------
(IN THOUSANDS)
Substandard assets........................... $58,402 $ 47,278 $ 38,398
Doubtful assets.............................. 5,055 3,256 1,465
Loss assets.................................. 259 -- --
------- -------- --------
Total classified assets................... $63,716 $ 50,534 $ 39,863
======= ======== ========
ALLOWANCE FOR LOAN LOSSES. Loans that have been classified as substandard
or doubtful are reviewed by the Credit Review and Administration ("Credit
Review") 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 Credit Review
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 Credit Review 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 with consideration given to 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 supporting documentation used to establish
this schedule is presented to the Credit Committee on a quarterly basis by the
Credit Review department. 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 necessary 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 compares the
Company's delinquency trends, nonperforming asset amounts and allowance for loan
losses levels to its peer group and to state and national statistics. A similar
review is also 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. 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
12
and events. There is no assurance that actual portfolio losses will not be
substantially different than those that were estimated.
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,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
Net loans receivable ................................... $ 3,788,570 $ 3,246,771 $ 3,012,606 $ 2,856,581 $ 2,544,630
Average loans outstanding .............................. 3,621,858 3,169,180 2,935,629 2,715,012 2,436,260
Allowance for loan losses balance at beginning of
period ............................................... 26,593 22,042 20,290 18,260 16,773
Provision for loan losses .............................. 6,842 8,431 6,360 5,347 4,149
Charge-offs:
Real estate loans .................................... (176) (239) (292) (176) (289)
Consumer loans ....................................... (5,097) (4,281) (4,452) (3,528) (2,987)
Commercial loans ..................................... (461) (1,258) (569) (158) --
----------- ----------- ----------- ----------- -----------
Total charge-offs ................................... (5,734) (5,778) (5,313) (3,862) (3,276)
----------- ----------- ----------- ----------- -----------
Recoveries:
Real estate loans .................................... -- 47 63 32 75
Consumer loans ....................................... 561 527 382 453 481
Commercial loans ..................................... 502 123 23 60 33
----------- ----------- ----------- ----------- -----------
Total recoveries .................................... 1,063 697 468 545 589
Acquired through acquisition ........................... 925 1,201 237 -- 25
----------- ----------- ----------- ----------- -----------
Allowance for loan losses balance at end of period ... $ 29,689 $ 26,593 $ 22,042 $ 20,290 $ 18,260
=========== =========== =========== =========== ===========
Allowance for loan losses as a percentage of net
loans receivable ..................................... 0.78% 0.82% 0.73% 0.71% 0.72%
Net charge-offs as a percentage of average
loans outstanding .................................... 0.13% 0.16% 0.17% 0.12% 0.11%
Allowance for loan losses as a percentage of
nonperforming loans .................................. 92.60% 81.54% 139.51% 115.06% 177.97%
Allowance for loan losses as a percentage
of nonperforming loans and REO ....................... 82.68% 73.31% 105.18% 95.12% 147.21%
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,
---------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------ ------------------ ------------------ ------------------ --------------------
% OF % OF % OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1) AMOUNT LOANS (1)
--------- -------- --------- -------- -------- -------- --------- -------- --------- --------
Balance at end of period
applicable to:
Real estate loans........... $ 14,132 72.6% $ 13,087 75.0% $ 11,703 76.8% $ 11,629 77.2% $ 11,334 78.4%
Consumer loans.............. 11,790 23.5 10,965 21.1 8,855 20.1 6,682 19.7 5,976 19.7
Commercial business loans... 3,767 3.9 2,541 3.9 1,484 3.1 1,979 3.1 950 1.9
--------- ----- --------- ----- --------- ----- --------- ------ --------- -----
Total allowance for loan
loss...................... $ 29,689 100.0% $ 26,593 100.0% $ 22,042 100.0% $ 20,290 100.0% $ 18,260 100.0%
========= ===== ========= ===== ========= ===== ========= ====== ========= =====
- ----------
(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.
13
The Company is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. The Company generally has maintained a portfolio
of liquid assets that exceeds regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short-term demand for funds to be used in the Company's loan origination and
other activities.
PURCHASES, SALES, AND REPAYMENTS OF INVESTMENT AND MORTGAGE-BACKED
SECURITIES. Set forth below is information relating to the Company's purchases,
sales and repayments of investment securities and mortgage-backed securities for
the periods indicated.
YEARS ENDED JUNE 30,
-------------------------------------------
2004 2003 2002
----------- ----------- -----------
(IN THOUSANDS)
Mortgage-backed securities balance at beginning of period (1).......... $ 907,035 $ 524,601 $ 504,274
Purchases.............................................................. 374,637 947,546 160,665
Sales.................................................................. (5,484) (2,879) --
Securities acquired by business combination............................ 298,920 15,632 --
Increase (decrease) in market value of securities available
for sale............................................................. (6,036) (2,863) 4,519
Principal payments and amortization of premiums and discounts.......... (781,989) (575,002) (144,857)
----------- ----------- -----------
Mortgage-backed securities balance at end of period (1)................ $ 787,083 $ 907,035 $ 524,601
=========== =========== ===========
Investment securities balance at beginning of period (2)............... $ 467,417 $ 307,625 $ 226,636
Purchases.............................................................. 517,777 278,406 177,778
Sales.................................................................. (275,900) (79,991) (50,647)
Securities acquired by business combination............................ 219,029 12,390 --
Increase (decrease) in market value of securities available
for sale............................................................. (12,709) 5,264 154
Writedowns............................................................. -- -- (400)
Maturities and amortization of premiums and discounts.................. (315,564) (56,277) (45,896)
----------- ----------- -----------
Investment securities balance at end of period (2)..................... $ 630,050 $ 467,417 $ 307,625
=========== =========== ===========
- ----------------------------------
(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,
-------------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
Mortgage-backed securities held to maturity:
Fixed-rate pass through certificates ...................... $ 5,080 $ 5,079 $ 8,297 $ 8,417 $ 3,663 $ 3,713
Variable-rate pass through certificates ................... 197,511 195,967 57,988 58,162 52,278 52,426
Fixed-rate collateralized mortgage obligations ("CMOs") ... 7,519 7,444 24,651 24,596 8,318 8,494
Variable-rate CMOs ........................................ 169,667 170,753 258,466 259,966 199,601 200,179
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities held to maturity........ 379,777 379,243 349,402 351,141 263,860 264,812
-------- -------- -------- -------- -------- --------
Mortgage-backed securities available for sale:
Fixed-rate pass through certificates ...................... $ 89,141 $ 88,659 $ 43,449 $ 45,461 $ 61,502 $ 63,974
Variable-rate pass through certificates ................... 87,237 86,502 128,528 129,486 12,958 13,040
Fixed-rate CMOs ........................................... 141,485 137,866 191,911 190,167 35,315 35,685
Variable-rate CMOs ........................................ 92,710 94,279 190,978 192,519 145,335 148,042
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities available for sale...... 410,573 407,306 554,866 557,633 255,110 260,741
-------- -------- -------- -------- -------- --------
Total mortgage-backed securities ........................ 790,350 786,549 904,268 908,774 518,970 525,553
-------- -------- -------- -------- -------- --------
Investment securities held to maturity:
U.S. Government and agency ................................ $ 52,500 $ 52,871 $ 17,032 $ 19,209 $ 18,040 $ 20,156
Municipal securities ...................................... 114,849 113,755 65,556 68,905 65,274 65,759
Corporate debt issues ..................................... 41,178 42,497 45,831 47,667 49,329 48,164
-------- -------- -------- -------- -------- --------
Total investment securities held to maturity ............ $208,527 $209,123 $128,419 $135,781 $132,643 $134,079
======== ======== ======== ======== ======== ========
Investment securities available for sale:
U.S. Government and agency ................................ $165,752 $162,679 $ 41,900 $ 43,703 $ 23,604 $ 23,952
Municipal securities ...................................... 144,802 142,469 119,796 123,654 77,742 78,011
Corporate debt issues ..................................... 27,441 27,438 27,502 27,581 1,476 1,333
Equity securities and mutual funds ........................ 87,042 88,937 140,603 144,060 68,228 71,686
-------- -------- -------- -------- -------- --------
Total investment securities available for sale........... $425,037 $421,523 $329,801 $388,998 $171,050 $174,982
======== ======== ======== ======== ======== ========
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,
------------------------------------------
2004 2003 2002
----------- ----------- -----------
(IN THOUSANDS)
Mortgage-backed securities:
FNMA..................................... $ 388,195 $ 355,722 $ 193,814
GNMA..................................... 177,490 58,834 76,412
FHLMC.................................... 179,166 426,753 235,344
Other (non-agency)....................... 42,232 65,726 19,031
----------- ----------- -----------
Total mortgage-backed securities....... $ 787,083 $ 907,035 $ 524,601
=========== =========== ===========
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, 2004. Adjustable-rate
mortgage-backed securities are included in the period in which interest rates
are next scheduled to adjust.
AT JUNE 30, 2004
---------------------------------------------------------------------
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 ...... $ -- --% $ 12,518 3.03% $ 39,982 5.07%
Municipal securities ........................ -- -- -- -- 2,568 3.75
Corporate debt issues ....................... -- -- -- -- -- --
---------- ----- ---------- ---- ---------- ----
Total investment securities held to
maturity ................................ $ -- --% $ 12,518 3.03% $ 42,550 4.99%
Investment securities available for sale:
U.S. Government and agency obligations ...... $ -- --% $ 18,290 3.00% $ 37,490 3.62%
Equity securities and mutual funds .......... -- -- -- -- -- --
Municipal securities ........................ -- -- -- -- 915 4.03
Corporate debt issues ....................... 3,018 4.58 -- -- 15,000 2.22
---------- ----- ---------- ---- ---------- ----
Total investment securities available
for sale ................................ $ 3,018 4.58% $ 18,290 3.00% $ 53,405 3.24%
Mortgage-backed securities held to maturity:
Pass-through certificates ................... $ 197,511 3.16% $ 397 3.08% $ 917 4.47%
CMOs ........................................ 169,667 2.77 -- -- 7,132 2.41
---------- ----- ---------- ---- ---------- ----
Total mortgage-backed securities held
to maturity ............................. $ 367,178 2.98% $ 397 3.08% $ 8,049 2.64%
Mortgage-backed securities available for sale:
Pass through certificates ................... $ 87,237 2.31% $ 2,583 4.10% $ 41,819 4.48%
CMOs ........................................ 92,710 2.75 -- -- 24,205 2.58
---------- ----- ---------- ---- ---------- ----
Total mortgage-backed securities
available for sale ...................... $ 179,947 2.54% $ 2,583 4.10% $ 66,024 3.78%
---------- ----- ---------- ---- ---------- ----
Total investment securities and
mortgage-backed securities .................. $ 550,143 2.84% $ 33,788 3.10% $ 170,028 3.86%
========== ===== ========== ==== ========== ====
MORE THAN TEN YEARS TOTAL
---------------------- ------------------------------------
ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED MARKET AVERAGE
COST YIELD COST VALUE YIELD
---------- ---------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Investment securities held to maturity:
U.S. Government and agency obligations ...... $ -- --% $ 52,500 $ 52,871 4.58%
Municipal securities ........................ 112,281 4.71 114,849 113,755 4.69
Corporate debt issues ....................... 41,178 8.00 41,178 42,497 8.00
---------- ---- ---------- ---------- ----
Total investment securities held to
maturity ................................ $ 153,459 5.59% $ 208,527 $ 209,123 5.31%
Investment securities available for sale:
U.S. Government and agency obligations ...... $ 109,972 2.76% $ 165,752 $ 162,679 2.98%
Equity securities and mutual funds .......... 87,042 2.98 87,042 88,937 2.98
Municipal securities ........................ 143,887 4.65 144,802 142,469 4.65
Corporate debt issues ....................... 9,423 3.49 27,441 27,438 2.92
---------- ---- ---------- ---------- ----
Total investment securities available
for sale ................................ $ 350,324 3.61% $ 425,037 $ 421,523 3.54%
Mortgage-backed securities held to maturity:
Pass-through certificates ................... $ 3,766 5.10% $ 202,591 $ 201,046 3.20%
CMOs ........................................ 387 5.99 177,186 178,197 2.76
---------- ---- ---------- ---------- ----
Total mortgage-backed securities held
to maturity ............................. $ 4,153 5.19% $ 379,777 $ 379,243 3.00%
Mortgage-backed securities available for sale:
Pass through certificates ................... $ 44,739 5.04% $ 176,378 $ 175,161 3.55%
CMOs ........................................ 117,280 3.70 234,195 232,145 3.21
---------- ---- ---------- ---------- ----
Total mortgage-backed securities
available for sale ...................... $ 162,019 4.07% $ 410,573 $ 407,306 3.35%
---------- ---- ---------- ---------- ----
Total investment securities and
mortgage-backed securities .................. $ 669,955 4.18% $1,423,914 $1,417,195 3.60%
========== ==== ========== ========== ====
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 executes changes in its deposit rates based upon its internal
cost of funds, cash flow requirements, general market interest rates,
competition and liquidity requirements. 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,
---------------------------------------------
2004 2003 2002
------------ ------------ ------------
(IN THOUSANDS)
Balance at beginning of period....................... $ 4,263,556 $ 3,593,122 $ 3,264,940
Net savings activity................................. (196,427) 226,656 88,883
Net checking activity................................ (75,201) 227,648 49,913
Deposits acquired.................................... 609,387 121,754 84,960
------------ ------------ ------------
Net increase before interest credited............. 337,759 576,058 223,756
Interest credited.................................... 84,337 94,376 104,426
------------ ------------ ------------
Net increase in deposits.......................... 422,095 670,434 328,182
------------ ------------ ------------
Balance at end of period........................ $ 4,685,652 $ 4,263,556 $ 3,593,122
============ ============ ============
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,
-------------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------- -------------------------------- ------------------------------
PERCENT PERCENT PERCENT
BALANCE (1) RATE (2) BALANCE (1) RATE (2) BALANCE (1) RATE (2)
---------- ------- -------- ------- -------- -------- ------- ------- --------
(DOLLARS IN THOUSANDS)
Savings accounts............... $1,024,244 21.9% 1.38% $ 920,721 21.60% 1.67% $ 698,336 19.44% 2.62%
Checking accounts.............. 862,724 18.4 0.49 861,922 20.21 0.86 605,582 16.85 0.86
Money market accounts.......... 751,355 16.0 1.60 568,164 13.33 2.06 407,974 11.35 2.71
Certificates of deposit:
Maturing within 1 year...... 977,019 20.9 2.61 845,985 19.84 2.93 1,046,783 29.14 3.80
Maturing 1 to 3 years....... 812,784 17.3 3.69 719,909 16.88 4.01 542,222 15.09 4.39
Maturing more than 3 years.. 257,526 5.5 4.19 346,855 8.14 4.55 292,225 8.13 5.02
---------- ------ ---- ---------- ------ ---- ---------- ------ ----
Total certificates.......... 2,047,329 43.7 3.24 1,912,749 44.86 3.63 1,881,230 52.36 4.16
---------- ------ ---- ---------- ------ ---- ---------- ------ ----
Total deposits................. $4,685,652 100.00% 2.05% $4,263,556 100.00% 2.44% $3,593,122 100.00% 3.14%
========== ====== ==== ========== ====== ==== ========== ====== ====
- -------------------------------
(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,
------------------------------------------
2004 2003 2002
------------ ------------ ------------
RATE (IN THOUSANDS)
Less than 2.00%.................... $ 604,565 $ 317,502 $ 24,433
2.00 - 2.99%....................... 365,811 354,304 431,963
3.00 - 3.99%....................... 406,926 421,431 410,835
4.00 - 4.99%....................... 436,243 559,407 579,715
5.00 - 5.99%....................... 171,507 211,408 233,925
6.00 - 6.99%....................... 40,005 32,140 171,642
7.00 - 7.99%....................... 22,203 16,487 28,653
8.00% or greater................... 69 70 64
------------ ------------ ------------
Total........................... $ 2,047,329 $ 1,912,749 $ 1,881,230
============ ============ ============
TIME DEPOSIT MATURITIES. The following table sets forth the amount and
maturities of time deposits at June 30, 2004.
AMOUNT DUE
--------------------------------------------------------------------
LESS THAN AFTER 3
RATE ONE YEAR 1-2 YEARS 2-3 YEARS YEARS TOTAL
---- ---------- ---------- --------- ---------- ----------
(IN THOUSANDS)
Less than 2.00%........................... $ 494,781 $ 104,894 $ 4,676 $ 214 $ 604,565
2.00 - 2.99%.............................. 149,663 122,177 82,705 11,266 365,811
3.00 - 3.99%.............................. 164,804 59,502 67,662 114,958 406,926
4.00 - 4.99%.............................. 87,587 145,165 102,767 100,724 436,243
5.00 - 5.99%.............................. 39,214 50,894 58,939 22,460 171,507
6.00 - 6.99%.............................. 19,898 9,120 3,147 7,840 40,005
7.00 - 7.99%.............................. 21,003 1,063 73 64 22,203
8.00% or greater.......................... 69 -- -- -- 69
---------- ---------- ---------- ---------- ----------
Total.................................. $ 977,019 $ 492,815 $ 319,969 $ 257,526 $2,047,329
========== ========== ========== ========== ==========
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, 2004.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
- --------------- --------------
(IN THOUSANDS)
Three months or less........................ $ 45,205
Three through six months.................... 38,012
Six through twelve months................... 55,097
Over twelve months.......................... 185,597
-----------
Total..................................... $ 323,911
===========
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 of the Company's current FHLB borrowings
have fixed interest rates and original maturities of between one day and twelve
years.
18
DURING THE YEAR ENDED JUNE 30,
----------------------------------------
2004 2003 2002
-------- -------- --------
(DOLLARS IN THOUSANDS)
FHLB-Pittsburgh borrowings:
Average balance outstanding $428,591 $412,817 $237,907
Maximum outstanding at end of any month during
period 519,631 471,416 243,547
Balance outstanding at end of period 412,981 430,014 235,500
Weighted average interest rate during period 4.62% 4.78% 5.47%
Weighted average interest rate at end of period 4.65% 4.89% 5.35%
Reverse repurchase agreements:
Average balance outstanding $ 29,364 $ 20,791 $ 12,798
Maximum outstanding at end of any month during
period 32,097 29,226 19,568
Balance outstanding at end of period 29,902 29,226 17,166
Weighted average interest rate during period 1.27% 1.80% 2.82%
Weighted average interest rate at end of period 1.29% 1.27% 1.98%
Other borrowings:
Average balance outstanding $ 6,253 $ 6,603 $ 6,571
Maximum outstanding at end of any month during 6,322 6,696 6,647
period
Balance outstanding at end of period 6,264 6,510 6,594
Weighted average interest rate during period 5.10% 6.50% 6.63%
Weighted average interest rate at end of period 4.99% 5.12% 6.63%
Total borrowings:
Average balance outstanding $464,208 $440,211 $257,276
Maximum outstanding at end of any month during 554,257 496,026 269,603
period
Balance outstanding at end of period 449,147 465,750 259,260
Weighted average interest rate during period 4.41% 4.66% 5.37%
Weighted average interest rate at end of period 4.43% 4.66% 5.16%
COMPETITION
The Company's market area in Pennsylvania, western New York and eastern
Ohio has a large concentration of financial institutions. 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 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. The Bank has
six wholly owned subsidiaries, Great Northwest Corporation, Northwest Financial
Services, Inc., Northwest Consumer Discount Company, Inc., Allegheny Services,
Inc., Boetger and Associates, 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, except for the
two Delaware statutory trusts which have been deconsolidated according to
Fin-46R.
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, 2004, the Company had an
equity investment in Northwest Capital Trust I of $2.1 million. For the fiscal
year ended June 30, 2004 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, 2004,
the Company had an equity investment in Northwest Bancorp Statutory Trust I of
$928,000, and for the fiscal year ended June 30, 2004, 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, 2004, the Bank had an equity investment in
Great Northwest of $4.7 million. For the fiscal year ended June 30, 2004, Great
Northwest had net income of $501,000 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 the ownership of
the common stock of several financial institutions. In addition, Northwest
Financial Services also holds an equity investment in one government assisted
low-income housing project and owns 100% of the stock in Rid-Fed, Inc. At June
30, 2004, the Bank had an equity investment in Northwest Financial Services of
$6.8 million, and for the fiscal year ended June 30, 2004, Northwest Financial
Services had net income of $108,000.
Northwest Consumer Discount Company operates 47 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, 2004, the Bank had an equity investment in Northwest
Consumer Discount Company of $18.9 million and the net income of Northwest
Consumer Discount Company for the fiscal year ended June 30, 2004 was $1.9
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.
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, 2004 the Bank had an equity investment in
Allegheny Services, Inc. of $499.0 million, and for the fiscal year ended June
30, 2004, Allegheny Services, Inc. had net income of $15.3 million.
Boetger and Associates, Inc. is an actuarial services firm that was
acquired on July 1, 2002. At June 30, 2004 the Bank had an equity investment of
$1.1 million in Boetger and Associates and for the fiscal year ended June 30,
2004 Boetger and Associates had net income of $21,000.
Northwest Capital Group's principal activity is to own, operate and
ultimately divest of properties that were acquired in foreclosure. At June 30,
2004 the Bank had an equity investment of $383,000 in Northwest Capital Group
and for the fiscal year ended June 30, 2004 Northwest Capital Group reported net
income of $357,000.
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, 2004 Northwest Financial Services had an equity investment of
$1.1 million in Rid-Fed, Inc. and for the fiscal year ended June 30, 2004
Rid-Fed, Inc. reported no net income.
20
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, 2004,
Northwest Consumer Discount Company's equity investment in Northwest Finance
Company was $(104,000). For the year ended June 30, 2004, Northwest Finance
Company had net income of $8,000.
Federal regulations require SAIF-insured institutions to provide 30 days
advance notice to the FDIC before establishing or acquiring a subsidiary or
conducting a new activity in a subsidiary. The insured institution must also
provide the FDIC such information as may be required by applicable regulations
and must conduct the activity in accordance with the rules and orders of the
FDIC. In addition to other enforcement and supervision powers, the FDIC may
determine after notice and opportunity for a hearing that the continuation of a
savings association's ownership of or relation to a subsidiary constitutes a
serious risk to the safety, soundness or stability of the savings association,
or is inconsistent with the purposes of federal banking law. Upon the making of
such a determination, the FDIC may order the savings association to divest the
subsidiary or take other actions.
PERSONNEL
As of June 30, 2004, the Company and its wholly owned subsidiaries had
1,453 full-time and 318 part-time employees. None of the Company's employees is
represented by a collective bargaining group. The Company believes its
relationship with its employees to be good.
REGULATION
GENERAL
The Company is a Federal corporation, and the Mutual Holding Company is a
Federal mutual holding company. The Company and the Mutual Holding Company are
required to file certain reports with, and otherwise comply with the rules and
regulations of the OTS.
The Bank is a Pennsylvania-chartered savings bank and its deposit accounts
are insured up to applicable limits by the FDIC under the SAIF. The Bank is
subject to extensive regulation by the Department of Banking of the Commonwealth
of Pennsylvania (the "Department"), as its chartering agency, and by the FDIC,
as the deposit insurer. The Bank must file reports with the Department and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions including, but
not limited to, mergers with or acquisitions of other savings institutions.
There are periodic examinations by the Department and the FDIC to test the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the FDIC
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and with their examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the Department or the FDIC could have a material adverse
impact on the Company, the Mutual Holding Company, the Bank and their
operations.
PENNSYLVANIA SAVINGS BANK LAW
The Pennsylvania Banking Code of 1965, as amended (the "Banking Code")
contains detailed provisions governing the organization, location of offices,
rights and responsibilities of directors, officers, employees, and depositors,
as well as corporate powers, savings and investment operations and other aspects
of the Bank and its affairs. The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department so that the supervision
and regulation of state-chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks with
the opportunity to be competitive with each other and with other financial
institutions existing under other Pennsylvania laws as well as
21
other state, federal and foreign laws. A Pennsylvania savings bank may locate or
change the location of its principal place of business and establish an office
anywhere in Pennsylvania, with the prior approval of the Department.
The Department generally examines each savings bank not less frequently
than once every two years. Although the Department may accept the examinations
and reports of the FDIC in lieu of the Department's examination, the current
practice is for the Department to conduct individual examinations. The
Department may order any savings bank to discontinue any violation of law or
unsafe or unsound business practice and may direct any trustee, officer,
attorney, or employee of a savings bank engaged in an objectionable activity,
after the Department has ordered the activity to be terminated, to show cause at
a hearing before the Department why such person should not be removed.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from 0% to 0.27% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium while institutions that are less than adequately
capitalized (i.e., a core capital or core capital to risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC. In addition, interest payments on FICO bonds issued in
the late 1980's by the Financing Corporation to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation are paid jointly by Bank
Insurance Fund ("BIF") insured institutions and SAIF-insured institutions. The
FICO interest payments are paid pro rata by banks and thrifts based on
approximately 2.1 basis point of deposits.
As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations are able to convert to a
commercial bank charter, diversify their lending, or merge into a commercial
bank without having to recapture any of their pre-1988 tax bad debt reserve
accumulations. Any post-1987 reserves are subject to recapture, regardless of
whether or not a particular thrift intends to convert its charter, be acquired,
or diversify its activities. The recapture tax on post-1987 reserves is assessed
in equal installments over the six year period beginning in fiscal 1997.
However, because the Company met the minimum level of mortgage lending test
(i.e., the Company's level of mortgage lending activity (re-financings and home
equity loans excluded) exceeded its average mortgage lending activity for the
six years preceding fiscal 1997 and 1998, adjusted for inflation), the Company
was able to suspend its tax bad debt recapture for the 1997 and 1998 tax years.
During each of the fiscal years from 1999 through 2004, the Company
recaptured into taxable income approximately $1.3 million of the post-1987 bad
debt reserves.
CAPITAL REQUIREMENTS
22
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the FDIC. Such actions could include
a capital directive, a cease and desist order, civil money penalties, the
establishment of restrictions on an institution's operations, termination of
federal deposit insurance, and the appointment of a conservator or receiver.
Certain actions are required by law. The FDIC's capital regulation provides that
such actions, through enforcement proceedings or otherwise, could require one or
more of a variety of corrective actions.
The Bank is also subject to more stringent capital guidelines of the
Department. Although not adopted in regulation form, the Department utilizes
capital standards of 6% leverage capital and 10% risk-based capital. The
components of leverage and risk-based capital are substantially the same as
those defined by the FDIC.
LOANS-TO-ONE BORROWER LIMITATION
Under federal regulations, with certain limited exceptions, a Pennsylvania
chartered savings bank may lend to a single or related group of borrowers on an
"unsecured" basis an amount equal to 15% of its unimpaired capital and surplus.
An additional amount may be lent, equal to 10% of unimpaired capital and
surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. The Company's internal policy, however, is to make no loans
either individually or in the aggregate to one entity in excess of $7.5 million.
However, in special circumstances this limit may be exceeded subject to the
approval of the Board of Directors.