NORTHWEST BANCSHARES, INC.
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Fiscal Year Ended December 31, 2009 |
OR
| o | 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. 001-34582
NORTHWEST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
| Maryland | 27-0950358 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
| 100 Liberty Street, 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:
| Title of each class | Name of each exchange on which registered | |
| Common Stock, $0.01 Par Value | NASDAQ Stock Market, LLC |
Securities Registered Pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES
o
NO
þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. YES
o
NO
þ
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
þ
NO
o
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.
o
.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
YES
o
NO
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large Accelerated Filer o | Accelerated Filer þ | Non-Accelerated Filer o | Smaller reporting company o | |||
| Do not check if a smaller reporting Company |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES
o
NO
þ
As of March 10, 2010, there were 110,674,899 shares outstanding of the Registrant’s Common
Stock.
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 June 30, 2009, as reported by
the Nasdaq Global Select Market, was approximately $339.1 million.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Proxy Statement for the 2010 Annual Meeting of Stockholders of the Registrant (Part III).
TABLE OF CONTENTS
Table of Contents
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements, which can be identified by the use of words
such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and
words of similar meaning. These forward-looking statements include, but are not limited to:
| • | statements of our goals, intentions and expectations; |
| • | statements regarding our business plans, prospects, growth and operating strategies; |
| • | statements regarding the asset quality of our loan and investment portfolios; and |
| • | estimates of our risks and future costs and benefits. |
These forward-looking statements are based on current beliefs and expectations of our
management and are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control. In addition, these
forward-looking statements are subject to assumptions with respect to future business strategies
and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the
anticipated results or other expectations expressed in the forward-looking statements:
| • | changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements; |
| • | general economic conditions, either nationally or in our market areas, that are worse than expected; |
| • | competition among depository and other financial institutions; |
| • | inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments; |
| • | adverse changes in the securities markets; |
| • | our ability to enter new markets successfully and capitalize on growth opportunities; |
| • | our ability to successfully integrate acquired entities, if any; |
| • | changes in consumer spending, borrowing and savings habits; |
| • | our ability to continue to increase and manage our commercial and residential real estate, multi-family, and commercial and industrial loans; |
| • | possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises; |
| • | the level of future deposit premium assessments; |
Table of Contents
| • | the impact of the current recession on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities; |
| • | the impact of the current governmental effort to restructure the U.S. financial and regulatory system; |
| • | changes in the financial performance and/or condition of our borrowers; and |
| • | the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters. |
Because of these and other uncertainties, our actual future results may be materially
different from the results indicated by these forward-looking statements. Please see “Item 1.A.
Risk Factors.”
ITEM 1.
BUSINESS
Northwest Bancshares, Inc.
Northwest Bancshares, Inc. is a Maryland corporation that was incorporated in September 2009
to be the successor corporation to Northwest Bancorp, Inc., the former stock holding company for
Northwest Savings Bank, upon completion of the mutual-to-stock conversion of Northwest Bancorp,
MHC, the former mutual holding company for Northwest Savings Bank.
The conversion was completed December 18, 2009. Northwest Bancshares, Inc. sold a total of
68,878,267 shares of common stock at $10.00 per share in the related offering. Concurrent with the
completion of the offering, shares of Northwest Bancorp, Inc. common stock owned by public
stockholders were exchanged for 2.25 shares of Northwest Bancshares, Inc.’s common stock. In lieu
of fractional shares, shareholders were paid in cash. Northwest Bancshares, Inc. also issued
1,277,565 shares of common stock and contributed $1.0 million in cash from the offering proceeds to
Northwest Charitable Foundation, a new charitable foundation that Northwest Bancshares, Inc.
established for the benefit of the communities in which Northwest Savings Bank operates. As a
result of the offering, the exchange, and the contribution to the charitable foundation, as of
December 31, 2009, Northwest Bancshares, Inc. had 110,641,858 shares outstanding and a market
capitalization of approximately $1.1 billion. Net proceeds from the offering were $658.7 million.
Northwest Bancshares, Inc.’s executive offices are located at 100 Liberty Street, Warren,
Pennsylvania 16365. Our telephone number at this address is (814) 726-2140.
Northwest
Bancshares, Inc.’s website (
www.northwestsavingsbank.com
) contains a direct link to
Northwest Bancshares, Inc.’s and its predecessor Northwest Bancorp, Inc.’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, if any. Copies
may also be obtained, without charge, by written request to Shareholder Relations, P.O. Box 128,
100 Liberty Street, Warren, Pennsylvania 16365.
Northwest Savings Bank
Northwest Savings Bank is a Pennsylvania-chartered stock savings bank headquartered in Warren,
Pennsylvania, which is located in northwestern Pennsylvania. Northwest Savings Bank is a
community-oriented financial institution offering traditional deposit and loan products and
investment management and trust services. Through a wholly-owned subsidiary, Northwest Consumer
Discount Company, it also offers consumer finance services. Northwest Savings Bank’s mutual
savings bank predecessor was founded in 1896.
As of December 31, 2009, Northwest Savings Bank operated 171 community-banking offices
throughout its market area in northwest, southwest and central Pennsylvania, western New York,
eastern Ohio, Maryland and southeastern Florida. On October 23, 2009, Northwest Savings Bank
completed the acquisition of Keystone State
2
Table of Contents
Savings
Bank, with one branch and approximately $25.0 million of assets, located in Sharpsburg, Pennsylvania, a suburb of Pittsburgh.
Northwest Savings Bank, through its wholly-owned subsidiary, Northwest Consumer Discount Company,
also operates 51 consumer finance offices throughout Pennsylvania. Northwest Savings Bank also
offers investment management and trust services and, through wholly-owned subsidiaries, actuarial
and benefit plan administration services. Historically, we have focused our lending activities
primarily on the origination of fixed-rate loans secured by first mortgages on owner-occupied, one-
to four-family residences. In an effort to reduce interest rate risk and improve profit margins,
we also offer shorter term consumer and commercial loans.
Our principal sources of funds are deposits, borrowed funds and the principal and interest
payments on loans and marketable securities. Our principal source of income is interest received
on loans and marketable securities. Our principal expenses are the interest paid on deposits and
the cost of employee compensation and benefits.
Northwest Savings Bank’s principal executive office is located at 100 Liberty Street, Warren,
Pennsylvania, and its telephone number at that address is (814) 726-2140.
Market Area and Competition
We are headquartered in Warren, Pennsylvania, which is located in northwestern Pennsylvania,
and have our highest concentration of deposits and loans in this area of Pennsylvania. Since the
early 1990s, we have expanded, primarily through acquisitions, into the southwestern and central
regions of Pennsylvania, as well as western New York, eastern Ohio, Maryland and southeastern
Florida. As of December 31, 2009, we operate 142 community banking offices and 51 consumer finance
offices located in Pennsylvania, four community banking offices located in Ohio, 17 community
banking offices located in New York, five community banking offices in Maryland and three community
banking offices in Florida. All of the aforementioned market areas have a large concentration of
financial institutions. As a result, we encounter strong competition both in attracting deposits
and in originating retail and commercial loans. Our most direct competition for deposits comes
from commercial banks, brokerage houses, other thrift institutions and credit unions in our market
areas. We expect continued competition from these financial institutions in the foreseeable
future. With the continued acceptance of Internet banking by our customers and consumers
generally, competition for deposits has increased from institutions operating outside of our market
area as well as from insurance companies.
Pennsylvania and Western New York Market Area
. Through our acquisitions and
de novo
branching
strategy we have expanded our retail branch footprint throughout 30 counties in Pennsylvania and
four counties in western New York. In addition, through our consumer finance offices we operate in
11 additional counties in Pennsylvania. Our northwestern and southwestern Pennsylvania and western
New York markets are fueled by a diverse economy driven by service businesses, technology companies
and small manufacturing companies. Our southeastern Pennsylvania market is primarily driven by
service businesses and serves as a bedroom community to the cities of Baltimore, Maryland and
Philadelphia. Our primary market area has remained a stable banking market. As of July 2009, the
unemployment rates in Pennsylvania and New York were 8.5% and 8.6% compared to the national average
of 9.7% according to the U.S. Bureau of Labor Statistics.
In Pennsylvania, we ranked 6
th
in terms of deposit market share and total assets
for institutions headquartered in Pennsylvania. Pennsylvania is a stable banking market with a
total population of approximately 12.6 million and total households of approximately 4.9 million.
The Pennsylvania markets in which we operate our retail branch and consumer financial offices
contain more than half of Pennsylvania’s population and a similar percentage of households. Our
western New York market area has a total population of approximately 1.9 million and total
households of approximately 748,000 according to SNL Securities. Since 2000, many of the counties
served in the Pennsylvania and western New York markets have had, and are projected to continue to
have, population declines with population growth rates increasing mainly in the central and
southeastern portion of Pennsylvania. However, median household income has increased in all of the
counties in which we conduct business in Pennsylvania since 2000 and generally decreased in our
western New York markets. The median household income in Pennsylvania was stable at $53,225 as of
June 30, 2009, compared to the nationwide median income level of $54,719 according to estimates
from SNL Securities. The household income growth rate in Pennsylvania and our western New York
market area is expected to increase above the expected national and state average growth rates over
the next five years by approximately 4% according to estimates from SNL Securities.
3
Table of Contents
Maryland, Ohio and Florida Market Areas
. In addition to operating in Pennsylvania and western
New York, we also operate five community banking offices in Ashtabula, Lake and Geauga counties in
Ohio, five community banking offices in Baltimore, Howard and Anne Arundel counties in Maryland and
three community banking offices in Broward county in Florida. Our Maryland regional economy
consists of service businesses, government as well as heath care services while our Florida market
is primarily driven by the real estate sector. The major employment sectors in our Ohio market are
similar to our northwestern Pennsylvania market. With the exception of Ashtabula county in Ohio,
these markets have an expanding population base as well as higher median household income levels
relative to the state and national averages. As of June 30, 2009, the median household income
levels in these markets ranged from $55,150 to $101,954 according to estimates provided by SNL
Securities. Over the next five years, the household income levels in each of these markets are
expected to increase above state and national household income averages.
Lending Activities
General
.
Historically, our principal lending activity has been the origination, for retention
in our loan portfolio, of fixed-rate and, to a lesser extent, adjustable-rate mortgage loans
collateralized by one- to four-family residential real estate located in our market area. We also
originate loans collateralized by multi-family residential and commercial real estate, commercial
business loans and consumer loans. Generally, we focus our lending activities in the geographic
areas where we maintain offices.
In an effort to manage interest rate risk, we have sought to make our interest-earning assets
more interest rate sensitive by originating adjustable-rate loans, such as adjustable-rate
residential mortgage loans and home equity lines-of-credit, and by originating short-term and
medium-term fixed-rate consumer loans. In recent years we have emphasized the origination of
commercial real estate loans and commercial business loans, which generally have adjustable rates
of interest and shorter maturities than one- to four-family residential real estate loans. We also
purchase mortgage-backed securities and other types of investment securities that generally have
short average lives and/or adjustable interest rates. Because we originate a substantial amount of
long-term fixed-rate mortgage loans collateralized by one- to four-family residential real estate,
when possible, we originate and underwrite loans according to standards that allow us to sell them
in the secondary mortgage market for purposes of managing interest-rate risk and liquidity. We
currently sell in the secondary market a limited number of fixed-rate residential mortgage loans
with maturities of more than 15 years, and generally retain all adjustable-rate mortgage loans and
fixed-rate residential mortgage loans with maturities of 15 years or less. Although we have sold
an increased number of the mortgage loans that we originated, we continue to be a portfolio lender
and at any one time we hold few loans identified as held-for-sale. We currently retain servicing
on the mortgage loans we sell which generates monthly service fee income. We generally retain in
our portfolio all consumer loans that we originate while we periodically sell participations in the
multi-family residential, commercial real estate or commercial business loans that we originate in
an effort to reduce the risk of certain individual credits and the risk associated with certain
businesses or industries.
One- to Four-Family Residential Mortgage Loans
.
We currently offer 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 factors as the level
of market interest rates, customer preference, our interest rate sensitivity and liquidity position
as well as loan products offered by our competitors. Therefore, even when management’s strategy is
to increase the origination of adjustable-rate mortgage loans, market conditions may be such that
there is greater demand for fixed-rate mortgage loans.
Our fixed-rate loans, whenever possible, are originated and underwritten according to
standards that permit sale into the secondary mortgage market. Whether we 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 our current liquidity and interest rate
sensitivity position. We historically have been primarily a portfolio lender and at any one time
we have only a nominal amount of loans as held for sale. Our current strategy is to grow the
consumer and commercial loan portfolios by more than we grow our portfolio of long-term fixed-rate
residential mortgage loans. With this in mind, we generally retain in our portfolio fixed-rate
loans with terms of 15 years or less, and sell a portion of fixed-rate loans (servicing retained)
with terms of more than 15 years. Our one- to four-family
4
Table of Contents
residential real estate loans are amortized on a monthly basis with principal and interest
each due monthly. These loans often remain outstanding for significantly shorter periods than
their contractual terms because borrowers may refinance or prepay loans at their option, usually
without a prepayment penalty.
We currently offer adjustable-rate mortgage loans with initial interest rate adjustment
periods of one, three and five years, based on changes in a designated market index. We determine
whether a borrower qualifies for an adjustable-rate mortgage loan based on secondary market
guidelines. One- to four-family adjustable-rate residential mortgage loans totaled $42.0 million,
or 0.77% of our gross loan portfolio at December 31, 2009.
Our one- to four-family residential mortgage loans customarily include due-on-sale clauses,
which are provisions giving us the right to declare a loan immediately due and payable in the
event, among other things, the borrower sells or otherwise disposes of the underlying real property
serving as collateral for the loan. Due-on-sale clauses are an important means of adjusting the
rates on our fixed-rate mortgage loan portfolio.
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 our in-house appraisal staff or by an appraiser who has been
deemed qualified by our chief appraiser. Such regulations permit a maximum loan-to-value ratio of
95% for residential property and 80% for all other real estate loans. We 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. We originate a limited amount of one- to
four-family residential mortgage loans with loan-to-value ratios in excess of 80%. For one- to
four-family residential mortgage loans with loan-to-value ratios in excess of 80%, we generally
require the borrower to obtain private mortgage insurance. We require fire and casualty insurance,
as well as a title guaranty regarding good title, on all properties securing our real estate loans.
Some financial institutions we have acquired have held loans that are serviced by others and
are secured by one- to four-family residences. At December 31, 2009, our portfolio of one- to
four-family loans serviced by others totaled $10.4 million. We currently have no formal plans to
enter into new residential loan participations.
Included in our $2.372 billion portfolio of one- to four-family residential real estate loans
are construction loans of $21.7 million, or 0.91% of our total loan portfolio. We offer fixed-rate
and adjustable-rate residential construction loans primarily for the construction of owner-occupied
one- to four-family residences in our 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.
Advances are made as construction is completed. In addition, we originate loans within our market
area that are secured by individual unimproved or improved lots. Land loans for the construction
of owner-occupied residential real estate properties are currently offered with fixed-rates for
terms of up to 10 years. The maximum loan-to-value ratio for these loans is 80% of the
as-completed appraised value, and the maximum loan-to-value ratio for our construction loans is 95%
of the lower of cost or as-completed appraised value.
Construction lending generally involves a greater degree of credit risk than permanent 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.
Multi-family Residential and Commercial Real Estate Loans
.
Our multi-family residential real
estate loans are secured by multi-family residences, such as rental properties. Our commercial
real estate loans are secured by nonresidential properties such as hotels, church property,
manufacturing facilities and retail establishments. At December 31, 2009, a significant portion of
our multi-family residential and commercial real estate loans were secured by properties located
within our market area. Our largest multi-family residential real estate loan relationship at
December 31, 2009 had a principal balance of $7.6 million, and was collateralized by multiple
residential real estate rental properties. These loans were performing in accordance with their
terms as of December 31, 2009. Our largest commercial real estate loan relationship at December
31, 2009, had a principal balance of $38.4 million and was collateralized by six different mixed
use commercial buildings. These loans were performing in accordance with their terms as of
December 31, 2009. Multi-family residential and commercial real estate loans
5
Table of Contents
are offered with both adjustable interest rates and fixed interest rates. The terms of each
multi-family residential and commercial real estate loan are negotiated on a case-by-case basis.
We generally originate multi-family residential and commercial real estate loans in amounts up to
80% of the appraised value of the property collateralizing the loan.
Loans secured by multi-family 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 multi-family
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.
Home Equity Loans and Lines of Credit
.
Generally, our home equity loans and 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. Home
equity loans are offered on a fixed rate basis with terms of up to 20 years. Home equity lines of
credit are offered on an adjustable-rate basis with terms of up to 25 years. At December 31, 2009,
the disbursed portion of home equity lines of credit totaled $235.3 million, or 4.3% of our total
loans, with $254.5 million remaining undisbursed, and our fixed-rate home equity loans totaled
$844.7 million, or 15.6% of our total loans. We generally underwrite home equity loans and lines
of credit in a manner similar to our underwriting of one- to four-family residential real estate
loans.
Consumer Loans
.
The principal types of consumer loans we offer are automobile loans, sales
finance loans, unsecured personal loans, credit card loans, and loans secured by deposit accounts.
Consumer loans are typically offered with maturities of ten years or less.
The underwriting standards we employ 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.
Consumer loans entail greater credit risk than 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.
Commercial Business Loans
.
We offer commercial business loans to finance various activities
in our market area, some of which are secured in part by additional real estate collateral. At
December 31, 2009 the largest commercial business loan relationship had a principal balance of
$10.8 million, and was secured by all fixed assets of a diagnostic imaging center.
Commercial business loans are offered with both fixed and adjustable interest rates.
Underwriting standards we employ 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. We generally obtain personal guarantees from the
borrower or a third party as a condition to originating commercial business loans.
6
Table of Contents
Loan Originations, Solicitation, Processing and Commitments
.
Loan originations are derived
from a number of sources such as real estate broker referrals, existing customers, borrowers,
builders, attorneys and walk-in customers. Historically all of our loan originators were salaried
employees, and we did not pay commissions in connection with loan originations. Beginning in 2007,
we implemented a program whereby certain commercial lenders were paid commissions based on
predetermined goals. This program was discontinued as of December 31, 2009. Upon receiving a
retail loan application, we obtain 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 we approve appraises the real estate
intended to secure the proposed loan. A loan processor in our loan department checks the loan
documents file for accuracy and completeness, and verifies the information provided.
For our retail loans, including residential mortgage loans, home equity loans and lines of
credit, automobile loans, credit cards, education loans and other unsecured loans, we have
implemented a credit approval process based on a laddered individual loan authority system. Local
loan officers are granted various levels of authority based on their lending experience and
expertise. These authority levels are reviewed by the Credit Committee on at least an annual
basis.
Our commercial loan policy assigns lending limits for our various commercial loan officers.
These individual authorities are established by the Credit Committee. Regional loan committees may
approve extensions of credit above those that may be authorized by individual officers, and the
Senior Loan Committee may approve extensions of credit in excess of those that may be approved by
regional loan committees. The Credit Committee meets quarterly to review the assigned lending
limits and to monitor our lending policies, loan activity, economic conditions and concentrations
of credit.
The Board of Directors must approve all loans where the total debt relationship exceeds $7.5
million ($5.0 million for loans exceeding the maximum loan-to-value ratio or not meeting minimum
debt service coverage), or as may be required by Regulation O. 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. Our general policy is to make no loans either
individually or in the aggregate to one entity in excess of $15.0 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 flood
insurance is required as determined by regulation. After the loan is approved, a loan commitment
letter is promptly issued to the borrower. At December 31, 2009, we had commitments to originate
$134.6 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 period, maturity, a
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. Property searches
are requested, as needed, on all loans secured by real property.
Loan Origination Fees
.
In addition to interest earned on loans, we generally receive loan
origination fees. We 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. Deferred loan fees
are recognized into income immediately upon prepayment or the sale of the related loan. At
December 31, 2009, we had $7.0 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 originated and purchased, principal repayments, and competitive conditions in the
marketplace.
Income from loan origination fees was $7.6 million, $7.4 million and $9.3 million for the
years ended December 31, 2009, 2008 and 2007, respectively.
Sale of Education Loans.
As a service to our customers, we originate education loans in our
Pennsylvania markets. These loans are normally sold to the Pennsylvania Department of Education.
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
7
Table of Contents
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). We have established our own internal
limit of loans to one borrower of $15.0 million, which may be exceeded only with the approval of
the Board of Directors. At December 31, 2009, the largest aggregate amount loaned to one borrower,
or related borrowers, totaled $38.4 million and was secured by six different mixed use commercial
buildings. Our second largest lending relationship totaled $36.5 million and was secured by
nine different properties including multiple hotels and other commercial real estate. Our third largest lending relationship totaled
$16.7 million and was secured by a hotel. Our fourth largest lending relationship totaled $15.7
million and was secured by commercial real estate and a residential land development project. Our
fifth largest lending relationship totaled $15.0 million and was secured by an oil refinery. All
of these loans were performing in accordance with their terms at December 31, 2009.
Investment Activities
Our Board of Directors has primary responsibility for establishing and overseeing our
investment policy. The board of directors has delegated authority to implement the investment
policy to our Chief Financial Officer. The investment policy is reviewed at least annually by the
Chief Financial Officer, and any changes to the policy are subject to approval by the full Board of
Directors. The overall objectives of the Investment Policy are to maintain a portfolio of high
quality and diversified investments to control interest rate risk while providing an acceptable
return. The investment portfolio is also used to provide collateral for borrowings, to provide
additional earnings when loan production is low, and to reduce our tax liability. The policy
dictates that investment decisions give consideration to the safety of principal, liquidity
requirements and potential returns. Either our Chief Financial Officer executes our securities
portfolio transactions or our Treasurer executes transactions as directed by the Chief Financial
Officer. All purchase and sale transactions are reported to the Board of Directors on a monthly
basis.
Our current investment policy does not permit investment in stripped mortgage-backed
securities, complex securities and derivatives as defined in federal banking regulations and other
high-risk securities. As of December 31, 2009, we held no asset-backed securities other than
mortgage-backed securities.
At the time of purchase, we designate a security as either held to maturity,
available-for-sale, or trading, based upon our ability and intent. Securities available-for-sale
and trading securities are reported at market value and securities held to maturity are reported at
amortized cost. A periodic review and evaluation of the available-for-sale and held-to-maturity
securities portfolios is conducted to determine if the fair value of any security has declined
below its carrying value and whether such decline is other-than-temporary. If impairment exists,
credit related impairment losses are recorded in earnings while noncredit related impairment losses
are recorded in accumulated other comprehensive income. The fair values of our securities are
based on published or securities dealers’ market values, when available. See the footnotes to the
audited financial statements for a detailed analysis and description of our investment portfolio
and valuation techniques.
We purchase mortgage-backed securities that generally are issued by Fannie Mae, Freddie Mac or
Ginnie Mae. Historically, we invested in mortgage-backed securities to achieve positive interest
rate spreads with minimal administrative expense and to lower our credit risk as a result of the
guarantees provided by Freddie Mac, Fannie Mae or Ginnie Mae. However, in September 2008, the
Federal Housing Finance Agency placed Freddie Mac and Fannie Mae into conservatorship. The U.S.
Treasury Department has established financing agreements to ensure that Freddie Mac and Fannie Mae
meet their obligations to holders of mortgage-backed securities that they have issued or
guaranteed. These actions have not materially affected the markets for mortgage-backed securities
issued by Freddie Mac or Fannie Mae.
Sources of Funds
General
.
Deposits are the major source of our funds for lending and other investment
purposes. In addition to deposits, we derive funds from the amortization and prepayment of loans
and mortgage-backed securities, the maturity of investment securities, operations and, if needed,
borrowings. 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
8
Table of Contents
basis to compensate for reductions in the availability of funds from other sources or on a longer
term basis for general business purposes, including to manage interest rate risk.
Deposits
.
Consumer and commercial deposits are generated principally from our market area by
offering a broad selection of deposit instruments including checking accounts, savings accounts,
money market deposit accounts, term certificate accounts and individual retirement accounts. While
we accept deposits of $100,000 or more, we do not offer substantial premium rates for such
deposits. We accept brokered deposits through the CDARS program, but generally do not solicit
funds outside our market area. As of December 31, 2009, we had no deposits through the CDARS
program. 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. We
regularly execute changes in our deposit rates based upon cash flow requirements, general market
interest rates, competition, and liquidity requirements.
Borrowings.
Deposits are the primary source of funds for our lending and investment
activities and general business purposes. We also rely upon borrowings to supplement our supply of
lendable funds and to meet deposit withdrawal requirements. Borrowings from the Federal Home Loan
Bank of Pittsburgh typically are collateralized by our stock in the Federal Home Loan Bank of
Pittsburgh and a portion of our real estate loans. In addition to the Federal Home Loan Bank of
Pittsburgh, we have borrowing facilities with the Federal Reserve Bank, a correspondent bank and we
borrow funds, in the form of reverse repurchase agreements, from municipalities and school
districts.
The Federal Home Loan Bank of Pittsburgh functions as a central reserve bank providing credit
for Northwest Savings Bank and other member financial institutions. As a member, Northwest Savings
Bank is required to own capital stock in the Federal Home Loan Bank of Pittsburgh and is authorized
to apply for borrowings on the security of such stock and certain of its real estate loans,
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 Federal Home Loan Bank of
Pittsburgh’s assessment of the institution’s creditworthiness. All of our Federal Home Loan Bank
of Pittsburgh borrowings currently have fixed interest rates and original maturities of between one
day and six years.
Subsidiary Activities
Northwest Bancshares, Inc.’s sole consolidated subsidiary is Northwest Savings Bank.
Northwest Bancshares, Inc. also owns all of the common stock of two statutory business trusts:
Northwest Bancorp Capital Trust III, a Delaware statutory business trust, and Northwest Bancorp
Statutory Trust IV, a Connecticut statutory business trust (the “Trusts”). The Trusts have issued a
total of $100.0 million of trust preferred securities. The Trusts are not consolidated with
Northwest Bancshares, Inc. At December 31, 2009, Northwest Bancshares, Inc.’s investment in the
Trusts totaled $3.1 million, and the Trusts had assets of $103.1 million at that date.
Northwest Savings Bank has seven wholly-owned subsidiaries – Northwest Settlement Agency, LLC,
Great Northwest Corporation, Northwest Financial Services, Inc., Northwest Consumer Discount
Company, Inc., Allegheny Services, Inc., Boetger and Associates, Inc., and Northwest Capital Group,
Inc. For financial reporting purposes all of these companies are included in the consolidated
financial statements of Northwest Bancshares, Inc.
Northwest Settlement Agency, LLC provides title insurance to borrowers of Northwest Savings
Bank and other lenders. At December 31, 2009, Northwest Savings Bank had an equity investment in
Northwest Settlement Agency, LLC of $1.5 million. For the year ended December 31, 2009, Northwest
Settlement Agency, LLC had net income of $592,000.
Great Northwest’s sole activity is holding equity investments in government-assisted
low-income housing projects in various locations in our market area. At December 31, 2009,
Northwest Savings Bank had an equity investment in Great Northwest of $6.3 million. For the year
ended December 31, 2009, Great Northwest had net income of $240,000 generated primarily from
federal low-income housing tax credits.
9
Table of Contents
Northwest Financial Services’ principal activity is the operation of retail brokerage
activities. It also owns the common stock of several financial institutions. In addition,
Northwest Financial Services holds an equity investment in one government assisted low-income
housing project. At December 31, 2009, Northwest Savings Bank had an equity investment in Northwest
Financial Services of $7.0 million, and for the year ended December 31, 2009, Northwest Financial
Services had net income of $61,000.
Northwest Consumer Discount Company operates 51 consumer finance offices throughout
Pennsylvania. At December 31, 2009, Northwest Savings Bank had an equity investment in Northwest
Consumer Discount Company of $29.6 million and the net income of Northwest Consumer Discount
Company for the year ended December 31, 2009 was $2.7 million.
Allegheny Services, Inc. is a Delaware investment company that holds mortgage loans originated
through our wholesale lending operation as well as municipal bonds. In addition, Allegheny
Services, Inc. has loans to both Northwest Savings Bank and Northwest Consumer Discount Company.
At December 31, 2009, Northwest Savings Bank had an equity investment in Allegheny Services, Inc.
of $653.6 million, and for the year ended December 31, 2009, Allegheny Services, Inc. had net
income of $19.0 million.
Boetger and Associates, Inc. is an actuarial and employee benefits consulting firm that
specializes in the design, implementation and administration of qualified retirement plan programs.
At December 31, 2009, Northwest Savings Bank had an equity investment of $1.7 million in Boetger
and Associates and for the year ended December 31, 2009, Boetger and Associates had net income of
$190,000.
Northwest Capital Group’s principal activity is to own, operate and ultimately divest of
properties that were acquired in foreclosure. At December 31, 2009, Northwest Savings Bank had an
equity investment of $3.3 million in Northwest Capital Group and reported no net income for the
year ended December 31, 2009.
Federal regulations require insured institutions to provide 30 days advance notice to the
Federal Deposit Insurance Corporation before establishing or acquiring a subsidiary or conducting a
new activity in a subsidiary. The insured institution must also provide the Federal Deposit
Insurance Corporation such information as may be required by applicable regulations and must
conduct the activity in accordance with the rules and orders of the Federal Deposit Insurance
Corporation. In addition to other enforcement and supervision powers, the Federal Deposit
Insurance Corporation may determine after notice and opportunity for a hearing that the
continuation of a savings bank’s ownership of or relation to a subsidiary constitutes a serious
risk to the safety, soundness or stability of the savings bank, or is inconsistent with the
purposes of federal banking laws. Upon the making of such a determination, the Federal Deposit
Insurance Corporation may order the savings bank to divest the subsidiary or take other actions.
Personnel
As of December 31, 2009, we had 1,711 full-time and 312 part-time employees (including
employees of our wholly-owned subsidiaries). None of our employees is represented by a collective
bargaining group. We believe we have a good working relationship with our employees.
SUPERVISION AND REGULATION
General
Northwest Savings Bank is a Pennsylvania-chartered savings bank and our deposit accounts are
insured up to applicable limits by the Federal Deposit Insurance Corporation under the Deposit
Insurance Fund. Northwest Savings Bank is subject to extensive regulation by the Department of
Banking of the Commonwealth of Pennsylvania (the “Department of Banking”), as its chartering
agency, and by the Federal Deposit Insurance Corporation, as the insurer of its deposit accounts.
Northwest Savings Bank must file reports with the Department of Banking and the Federal Deposit
Insurance Corporation concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions including, acquisitions of other
financial institutions. Northwest Savings Bank is examined periodically by the Department of
Banking and the Federal Deposit Insurance Corporation to test Northwest Savings Bank’s compliance
with various laws and
10
Table of Contents
regulations. This regulation and supervision, as well as federal and state law, establishes a
comprehensive framework of activities in which Northwest Savings Bank may engage and is intended
primarily for the protection of the Federal Deposit Insurance Corporation 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 these laws or regulations, whether by the Department of Banking or the Federal
Deposit Insurance Corporation, could have a material adverse impact on Northwest Bancshares, Inc.,
Northwest Savings Bank and their respective operations.
As a savings and loan holding company, Northwest Bancshares, Inc. is required to comply with
the rules and regulations of the Office of Thrift Supervision, and is required to file certain
reports with and is subject to examination by, the Office of Thrift Supervision. Northwest
Bancshares, Inc. is also subject to the rules and regulations of the Securities and Exchange
Commission under the federal securities laws.
Set forth below is a brief description of certain regulatory requirements that are applicable
to Northwest Savings Bank and Northwest Bancshares, Inc. The description below is limited to
certain material aspects of the statutes and regulations addressed, and is not intended to be a
complete description of such statutes and regulations and their effects on Northwest Savings Bank
and Northwest Bancshares, Inc.
Pennsylvania Savings Bank Law
The Pennsylvania Banking Code of 1965, as amended (the “Banking Code”) contains detailed
provisions governing the organization, operations, corporate powers, savings and investment
authority, branching rights and responsibilities of directors, officers and employees of
Pennsylvania savings banks. A Pennsylvania savings bank may locate or change the location of its
principal place of business and establish an office anywhere in, or adjacent to, Pennsylvania, with
the prior approval of the Department of Banking. The Banking Code delegates extensive rulemaking
power and administrative discretion to the Department of Banking in its supervision and regulation
of state-chartered savings banks.
The Department of Banking generally examines each savings bank not less frequently than once
every two years. Although the Department of Banking may accept the examinations and reports of the
Federal Deposit Insurance Corporation in lieu of its own examination, the current practice is for
the Department of Banking to conduct individual examinations. The Department of Banking 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 of Banking has ordered the activity to be terminated, to show cause
at a hearing before the Department of Banking why such person should not be removed.
Insurance of Deposit Accounts
Our deposit accounts are insured by the FDIC up to applicable legal limits under the FDIC’s
general deposit insurance rules. The FDIC’s deposit insurance fund is funded by assessments on
insured depository institutions, which depend on the risk category of an institution and the amount
of insured deposits that it holds. The FDIC may increase or decrease the assessment rate schedule
on a semi-annual basis. Effective April 2009, assessment rates are subject to adjustments based
upon the insured depository institution’s ratio of (i) long-term unsecured debt to domestic
deposits, (ii) secured liabilities to domestic deposits and (iii) brokered deposits to domestic
deposits (if greater than 10%).
Federal legislation establishes a range of 1.15% to 1.50% for the FDIC’s designated reserve
ratio; and grants the FDIC discretion to set insurance premium rates according to the risk for all
insured banks regardless of the level of the reserve ratio. The legislation also granted a one-time
initial assessment credit to certain banks in recognition of their past contributions to the fund.
During 2008 and 2007, our Bank used $600,000 and $3.2 million in credits, respectively, to offset
insurance premiums assessed by the FDIC. At December 31, 2009, we had no further credits available
to offset assessments by the FDIC.
11
Table of Contents
In conjunction with the October 2008 enactment of the Emergency Economic Stabilization Act of
2008 (“EESA”), the limit on FDIC insurance coverage was increased to $250,000 for all accounts
through December 31, 2009, which Congress has since extended through December 31, 2013.
In addition, in October 2008, the Secretary of the Treasury invoked the systemic risk
exception of the FDIC Improvement Act of 1991, allowing the FDIC to provide a 100% guarantee for
newly issued senior unsecured debt issued before June 30, 2009 and noninterest bearing transaction
deposit accounts through December 31, 2009 at FDIC insured institutions under the Temporary
Liquidity Guarantee Program (“TLGP”). Fees for coverage were waived for the first 30 days of the
program. We elected to participate in the program beyond this time period for coverage of
noninterest bearing transaction deposit accounts not otherwise covered by the existing deposit
insurance limit of $250,000, but not for the guarantee of senior unsecured debt. An annual
surcharge of 10 basis points is applied to noninterest bearing transaction deposit amounts in
excess of $250,000. On August 26, 2009, the FDIC extended this coverage under the TLGP through
June 30, 2010 for noninterest bearing transaction deposit accounts not otherwise covered by the
existing deposit insurance limit of $250,000. We did not elect to participate in this extension of
the TLGP, and accordingly, such coverage ended on December 31, 2009. On May 22, 2009, the FDIC
adopted a rule levying a five basis point special assessment on each insured depository
institution’s assets minus Tier 1 capital as of June 30, 2009. The special assessment was payable
on September 30, 2009. We recorded an expense of $3.3 million during the second quarter of 2009 to
reflect the special assessment. On September 29, 2009 the FDIC increased assessment rates on
deposit insurance premiums by three basis points effective January 1, 2011. In addition, in lieu of
another special assessment, on November 12, 2009, the FDIC board adopted a final rule requiring
insured institutions to prepay their estimated quarterly risk-based assessments for the fourth
quarter of 2009, as well as for all of 2010, 2011, and 2012 on December 30, 2009, which amounted to
$32.8 million for us. The rate increases and special assessment resulted in a significant increase
to our FDIC insurance premiums, to $11.6 million in 2009 from $3.9 million in 2008.
FDIC guidance provides that as of December 31, 2009, and each quarter thereafter, each insured
institution will be required to record an expense for its regular quarterly assessment and an
offsetting credit to the prepaid assessment until the prepaid asset is exhausted. Once the asset is
exhausted, the institution will resume paying and accounting for quarterly deposit insurance
assessments as it currently does. Any further special assessments that the FDIC levies will be
recorded as an expense during the appropriate period.
Capital Requirements
Any savings institution that fails any of the Federal Deposit Insurance Corporation capital
requirements is subject to enforcement action by the Federal Deposit Insurance Corporation. Such
action may include a capital directive, a cease and desist order, civil money penalties,
restrictions on an institution’s operations, termination of federal deposit insurance, and the
appointment of a conservator or receiver. Certain enforcement actions are required by law. The
Federal Deposit Insurance Corporation’s capital regulation provides that such action, through
enforcement proceedings or otherwise, may require a variety of corrective actions.
Northwest Savings Bank is also subject to capital guidelines of the Department of Banking.
Although not adopted in regulation form, the Department of Banking requires 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 Federal Deposit Insurance Corporation.
Prompt Corrective Action
Under federal regulations, a bank is considered to be (i) “well capitalized” if it has total
risk-based capital of 10.0% or more, Tier 1 risk-based capital of 6.0% or more, Tier I leverage
capital of 5.0% or more, and is not subject to any written capital order or directive; (ii)
“adequately capitalized” if it has total risk-based capital of 8.0% or more, Tier I risk-based
capital of 4.0% or more and Tier I leverage capital of 4.0% or more (3.0% under certain
circumstances), and does not meet the definition of “well capitalized”; (iii) “undercapitalized” if
it has total risk-based capital of less than 8.0%, Tier I risk-based capital of less than 4.0% or
Tier I leverage capital of less than 4.0% (3.0% under certain circumstances); (iv) “significantly
undercapitalized” if it has total risk-based capital of less than 6.0%, Tier I risk-based capital
less than 3.0%, or Tier I leverage capital of less than 3.0%; and (v) “critically undercapitalized”
if its ratio of tangible equity to total assets is equal to or less than 2.0%. Federal regulations
also
12
Table of Contents
specify circumstances under which a federal banking agency may reclassify a well capitalized
institution as adequately capitalized, and may require an adequately capitalized institution to
comply with supervisory actions as if it were in the next lower category (except that the Federal
Deposit Insurance Corporation may not reclassify a significantly undercapitalized institution as
critically undercapitalized). As of December 31, 2009, Northwest Savings Bank was
“well-capitalized” for this purpose.
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. Our
internal policy, however, is to make no loans either individually or in the aggregate to one entity
in excess of $15.0 million. This limit may be exceeded subject to the approval of the Board of
Directors.
Activities and Investments of Insured State-Chartered Banks
Federal law generally limits the activities and equity investments of state-chartered banks
insured by the Federal Deposit Insurance Corporation to those that are permissible for national
banks. Under regulations dealing with equity investments, an insured state bank generally may not,
directly or indirectly, acquire or retain any equity investment of a type, or in an amount, that is
not permissible for a national bank. An insured state bank is not prohibited from, among other
things: (i) acquiring or retaining a majority interest in a subsidiary; (ii) investing as a
limited partner in a partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation, or new construction of a qualified housing project, provided that such
limited partnership investments may not exceed 2% of the bank’s total assets; (iii) acquiring up to
10% of the voting stock of a company that solely provides or reinsures liability insurance for
directors, trustees or officers, or blanket bond group insurance coverage for insured depository
institutions; and (iv) acquiring or retaining the voting shares of a depository institution if
certain requirements are met.
The USA PATRIOT Act
The USA Patriot Act gives the federal government powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased information sharing
and broadened anti-money laundering requirements. The USA Patriot Act also requires the federal
banking agencies to take into consideration the effectiveness of controls designed to combat
money-laundering activities in determining whether to approve a merger or other acquisition
application of a member institution. Accordingly, if we engage in a merger or other acquisition,
our controls designed to combat money laundering would be considered as part of the application
process. We have established policies, procedures and systems designed to comply with these
regulations.
Holding Company Regulation
General
.
Federal law allows a state savings bank, such as Northwest Savings Bank, that
qualifies as a “Qualified Thrift Lender,” as discussed below, to elect to be treated as a savings
association for purposes of the savings and loan company provisions of the Home Owners’ Loan Act of
1933, as amended. Such election results in its holding company being regulated as a savings and
loan holding company by the Office of Thrift Supervision rather than as a bank holding company by
the Federal Reserve Board. Northwest Bancshares, Inc. has made such an election. Therefore,
Northwest Bancshares, Inc. is a savings and loan holding company within the meaning of the Home
Owners’ Loan Act of 1933, as amended. As such, Northwest Bancshares, Inc. is registered with the
Office of Thrift Supervision and will be subject to Office of Thrift Supervision regulations,
examinations, supervision and reporting requirements. In addition, the Office of Thrift
Supervision has enforcement authority over Northwest Bancshares, Inc. and any nonsavings
institution subsidiaries of Northwest Bancshares, Inc. Among other things, this authority permits
the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution.
13
Table of Contents
Permissible Activities.
The business activities of Northwest Bancshares, Inc. are generally
limited to those activities permissible for financial holding companies under Section 4(k) of the
Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies.
A financial holding company may engage in activities that are financial in nature, including
underwriting equity securities and insurance as well as activities that are incidental to financial
activities or complementary to financial activities. A multiple savings and loan holding company
is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of
the Bank Holding Company Act, subject to the prior approval of the Office of Thrift Supervision,
and certain additional activities authorized by Office of Thrift Supervision regulations.
Federal law prohibits a savings and loan holding company, including Northwest Bancshares,
Inc., directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of
another savings institution or holding company thereof, without prior written approval of the
Office of Thrift Supervision. It also prohibits the acquisition or retention of, with certain
exceptions, more than 5% of a nonsubsidiary company engaged in activities that are not closely
related to banking or financial in nature, or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to acquire savings
institutions, the Office of Thrift Supervision must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect of the acquisition
on the risk to the federal deposit insurance fund, the convenience and needs of the community and
competitive factors.
The Office of Thrift Supervision is prohibited from approving any acquisition that would
result in a multiple savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions:
| (i) | the approval of interstate supervisory acquisitions by savings and loan holding companies; and |
| (ii) | the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition. |
The states vary in the extent to which they permit interstate savings and loan holding company
acquisitions.
Qualified Thrift Lender Test
.
To be regulated as a savings and loan holding company by the
Office of Thrift Supervision (rather than as a bank holding company by the Federal Reserve Board),
Northwest Savings Bank must qualify as a Qualified Thrift Lender. To qualify as a Qualified Thrift
Lender, Northwest Savings Bank must be a “domestic building and loan association,” as defined in
the Internal Revenue Code, or comply with the Qualified Thrift Lender test. Under the Qualified
Thrift Lender test, a savings institution is required to maintain at least 65% of its “portfolio
assets” (total assets less: (1) specified liquid assets up to 20% of total assets; (2) intangibles,
including goodwill; and (3) the value of property used to conduct business) in certain “qualified
thrift investments” (primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least nine months out of each 12-month period. As of
December 31, 2009 Northwest Savings Bank met the Qualified Thrift Lender test.
Federal Securities Laws
Shares of our common stock are registered with the SEC under Section 12(b) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). We are also subject to the proxy rules,
tender offer rules, insider trading restrictions, annual and periodic reporting, and other
requirements of the Exchange Act.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 was enacted to increase corporate responsibility, to provide
for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and
to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to
the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are
required to file periodic reports with the Securities and Exchange Commission, under the Securities
Exchange Act of 1934.
14
Table of Contents
The Sarbanes-Oxley Act includes specific additional disclosure requirements, requires the
Securities and Exchange Commission and national securities exchanges to adopt extensive additional
disclosure, corporate governance and other related rules, and mandates further studies of certain
issues by the Securities and Exchange Commission. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems, such as the
regulation of the accounting profession, and to corporate law, such as the relationship between a
board of directors and management and between a board of directors and its committees.
FEDERAL AND STATE TAXATION
Federal Taxation
.
For federal income tax purposes, Northwest Bancshares, Inc. files a
consolidated federal income tax return with its wholly-owned subsidiaries on a calendar year basis.
The applicable federal income tax expense or benefit will be properly allocated to each subsidiary
based upon taxable income or loss calculated on a separate company basis.
We account for income taxes using the asset and liability method which accounts for deferred
income taxes by applying the enacted statutory rates in effect at the balance sheet date to
differences between the book basis and the tax basis of assets and liabilities. The resulting
deferred tax liabilities and assets are adjusted to reflect changes in tax laws.
State Taxation
.
As a Maryland business corporation, Northwest Bancshares, Inc. is required to
file annual tax returns with the State of Maryland. Northwest Bancshares, Inc. is subject to
Pennsylvania’s corporate net income tax and capital stock tax. Dividends received from Northwest
Savings Bank qualify for a 100% dividends received deduction and are not subject to corporate net
income tax.
Northwest Savings Bank is subject to a Pennsylvania mutual thrift institutions tax based on
Northwest Savings Bank’s net income determined in accordance with generally accepted accounting
principles, with certain adjustments. The tax rate under the mutual thrift institutions tax is
11.5%. Interest on Pennsylvania and federal obligations is excluded from net income. An allocable
portion of interest expense incurred to carry the obligations is disallowed as a deduction.
Northwest Savings Bank is also subject to taxes in the other states in which it conducts business.
These taxes are apportioned based upon the volume of business conducted in those states as a
percentage of the whole. Because a majority of Northwest Savings Bank’s affairs are conducted in,
or adjacent to, Pennsylvania, taxes paid to other states are not material.
The subsidiaries of Northwest Savings Bank are subject to a Pennsylvania corporate net income
tax and a capital stock tax, and are also subject to other applicable taxes in the states where
they conduct business.
| ITEM 1A. RISK FACTORS | ||
In addition to factors discussed in the description of our business and elsewhere in this
report, the following are factors that could adversely affect our future results of operations and
financial condition.
Changes in interest rates could adversely affect our results of operations and financial condition.
While we strive to control the impact of changes in interest rates on our net income, our
results of operations and financial condition could be significantly affected by changes in
interest rates. Our results of operations depend substantially on our net interest income, which
is the difference between the interest income we earn on our interest-earning assets, such as loans
and securities, and the interest expense we pay on our interest-bearing liabilities, such as
deposits, borrowings and trust preferred securities. Because it is difficult to perfectly match
the maturities and cash flows from our financial assets and liabilities our net income could be
adversely impacted by changes in the level of interest rates or the slope of the Treasury yield
curve.
Changes in interest rates may also affect the average life of loans and mortgage-related
securities. Decreases in interest rates can result in increased prepayments of loans and
mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these
circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the
cash received from such prepayments at rates that are comparable to
15
Table of Contents
the rates on existing loans and securities. Additionally, increases in interest rates may decrease
loan demand and make it more difficult for borrowers to repay adjustable rate loans. Also,
increases in interest rates may extend the life of fixed rate assets, which would restrict our
ability to reinvest in higher yielding alternatives, and may result in customers withdrawing
certificates of deposit early so long as the early withdrawal penalty is less than the interest
they could receive as a result of the higher interest rates.
Changes in interest rates also affect the current fair value of our interest-earning
securities portfolio. Generally, the value of securities moves inversely with changes in interest
rates. At December 31, 2009, the fair value of our investment and mortgage-backed securities
portfolio totaled $1.067 billion. Net unrealized gains on these securities totaled $7.9 million at
December 31, 2009.
At December 31, 2009, our interest rate risk analysis indicated that the market value of our
equity would decrease by 7.1% if there was an instantaneous parallel 200 basis point increase in
market interest rates. See “Item 6. Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Management of Market Risk.”
If the allowance for credit losses is not sufficient to cover actual loan losses, our earnings
could decrease.
Our customers may not repay their loans according to the original terms, and the collateral,
if any, securing the payment of these loans may be insufficient to pay any remaining loan balance.
We may experience significant loan losses, which may have a material adverse effect on operating
results. We make various assumptions and judgments about the collectability of the loan portfolio,
including the creditworthiness of borrowers and the value of the real estate and other assets
serving as collateral for the repayment of loans. If the assumptions prove to be incorrect, the
allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio,
resulting in additions to the allowance. Material additions to the allowance would materially
decrease net income.
Our emphasis on originating commercial real estate and commercial loans is one of the more
significant factors in evaluating the allowance for loan losses. As we continue to increase the
amount of such loans, increased provisions for loan losses may be necessary which would decrease
our earnings.
Bank regulators periodically review our allowance for loan losses and may require an increase
to the provision for loan losses or further loan charge-offs. Any increase in our allowance for
loan losses or loan charge-offs as required by these regulatory authorities may have a material
adverse effect on our results of operations or financial condition.
We could record future losses on our securities portfolio.
During the year ended December 31, 2009, we recognized $12.4 million of impairment losses on
securities, of which $6.3 million was recognized as other comprehensive loss in the equity section
of our balance sheet, and $6.1 million was recognized as noninterest expense in our income
statement. At December 31, 2009, we held corporate debt securities and non-government agency
collateralized mortgage obligations with unrealized holding losses of $10.4 million and $2.9
million, respectively.
A number of factors or combinations of factors could require us to conclude in one or more
future reporting periods that an unrealized loss that exists with respect to these securities
constitutes an impairment that is other than temporary, which could result in material losses to
us. These factors include, but are not limited to, continued failure by the issuer to make
scheduled interest payments, an increase in the severity of the unrealized loss on a particular
security, an increase in the continuous duration of the unrealized loss without an improvement in
value or changes in market conditions and/or industry or issuer specific factors that would render
us unable to forecast a full recovery in value. In addition, the fair values of securities could
decline if the overall economy and the financial condition of some of the issuers continues to
deteriorate and there remains limited liquidity for these securities.
See “Item 7 Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Balance Sheet Analysis—Securities” for a discussion of our securities portfolio and the
unrealized losses related to the portfolio, as well as the “Marketable Securities” and “Disclosures
about Fair Value of Financial Instruments” footnotes to the audited financial statements.
16
Table of Contents
Our contribution to the charitable foundation may not be tax deductible, which could reduce our
profits.
The Internal Revenue Service may not grant tax-exempt status to the charitable foundation. If
the contribution is not deductible, we would not receive any tax benefit from the contribution.
The total value of the contribution was $13.8 million, which resulted in recording an after-tax
expense of $8.3 million. In the event that the Internal Revenue Service does not grant tax-exempt
status to the charitable foundation or the contribution to the charitable foundation is otherwise
not tax deductible, we would have to recognize additional after-tax expense of up to $5.5 million.
In addition, even if the contribution is tax deductible, we may not have sufficient taxable
income to be able to use the deduction fully. Under the Internal Revenue Code, a corporate entity
is generally permitted to deduct charitable contributions in an amount of up to 10% of its taxable
income (taxable income before the charitable contributions deduction) in any one year for
charitable contributions. Any contribution in excess of the 10% limit may be deducted for federal
income tax purposes over the five years following the year in which the charitable contribution was
made. Accordingly, a charitable contribution by a corporate entity could, if necessary, be
deducted for federal income tax purposes over a six-year period. Our taxable income over this
period may not be sufficient to fully use this deduction. If the deduction is not able to be used
we would have to recognize up to $5.5 million of additional after tax expense.
Any future Federal Deposit Insurance Corporation special assessments or increases in insurance
premiums will adversely impact our earnings.
On May 22, 2009, the Federal Deposit Insurance Corporation adopted a final rule levying a five
basis point special assessment on each insured depository institution’s assets minus Tier 1 capital
as of June 30, 2009. We recorded an expense of $3.3 million during the quarter ended June 30,
2009, to reflect the special assessment. Any further special assessments that the Federal Deposit
Insurance Corporation levies will be recorded as an expense during the appropriate period. In
addition, the Federal Deposit Insurance Corporation increased the general assessment rate and,
therefore, our Federal Deposit Insurance Corporation general insurance premium expense will
increase compared to prior periods.
On November 12, 2009, the Federal Deposit Insurance Corporation adopted a final rule pursuant
to which on December 30, 2009 all insured depository institutions were required to prepay their
estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. The
assessment rate for the fourth quarter of 2009 and for 2010 was based on each institution’s total
base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in
effect on September 30, 2009 had been in effect for the entire third quarter, and the assessment
rate for 2011 and 2012 would be equal to the modified third quarter assessment rate plus an
additional three basis points. In addition, each institution’s base assessment rate for each
period was calculated using its third quarter assessment base, adjusted quarterly for an estimated
5% annual growth rate in the assessment base through the end of 2012. We made a payment of $32.8
million to the Federal Deposit Insurance Corporation on December 30, 2009, and recorded the payment
as a prepaid expense, which will be amortized to expense over three years.
We hold certain intangible assets that could be classified as impaired in the future. If these
assets are considered to be either partially or fully impaired in the future, the book values of
these assets would have to be written-down and the amount of the write-down would decrease
earnings.
We are required to test our goodwill and core deposit intangible assets for impairment on a
periodic basis. The impairment testing process considers a variety of factors, including the
current market price of our common shares, the estimated net present value of our assets and
liabilities and information concerning the terminal valuation of similarly situated insured
depository institutions. Future impairment testing may result in a partial or full impairment of
the value of our goodwill or core deposit intangible assets, or both. If an impairment
determination is made in a future reporting period, our earnings and the book value of these
intangible assets will be reduced by the amount of the impairment. However, the recording of such
an impairment loss would have no impact on the tangible book value of our shares of common stock or
our regulatory capital levels.
17
Table of Contents
Strong competition may limit growth and profitability.
Competition in the banking and financial services industry is intense. We compete with
commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies,
mutual funds, insurance companies, and brokerage and investment banking firms operating locally and
elsewhere. Many of these competitors (whether regional or national institutions) have
substantially greater resources and lending limits than we have and may offer certain services that
we do not or cannot provide. Our profitability depends upon our ability to successfully compete in
our market areas.
We operate in a highly regulated environment and may be adversely affected by changes in laws and
regulations.
We are subject to extensive regulation, supervision and examination by the Federal Deposit
Insurance Corporation, the Pennsylvania Department of Banking and the Office of Thrift Supervision.
Laws and regulations govern the activities in which we may engage, primarily for the protection of
depositors and the Deposit Insurance Fund at the Federal Deposit Insurance Corporation. These
regulatory authorities have extensive discretion in connection with their supervisory and
enforcement activities, including the ability to impose restrictions on a bank’s operations,
reclassify assets, determine the adequacy of a bank’s allowance for loan losses and determine the
level of deposit insurance premiums assessed, and capital levels to be maintained. Any change in
such regulation and oversight, whether in the form of regulatory policy, new regulations or
legislation or additional deposit insurance premiums could have a material impact on our
operations. Because our business is highly regulated, the laws and applicable regulations are
subject to frequent change. Any new laws, rules and regulations could make compliance more
difficult or expensive or otherwise adversely affect our business, financial condition or
prospects.
A legislative proposal has been introduced that would eliminate the Office of Thrift Supervision,
Northwest Bancshares, Inc.’s primary federal regulator, which would require Northwest Bancshares,
Inc. to become a bank holding company.
Legislation has been proposed that would implement sweeping changes to the current bank
regulatory structure. The proposal would, among other things, merge the Office of Thrift
Supervision into the Office of the Comptroller of the Currency. As discussed further under
“Supervision and Regulation—Holding Company Regulation,” federal law allows a state savings bank
that qualifies as a Qualified Thrift Lender, such as Northwest Savings Bank, to elect to be treated
as a savings association for purposes of the savings and loan holding company provisions of the
Home Owners’ Loan Act of 1933, as amended. Such election results in the state savings bank’s
holding company being regulated as a savings and loan holding company by the Office of Thrift
Supervision rather than as a bank holding company regulated by the Board of Governors of the
Federal Reserve System. If the Office of Thrift Supervision is eliminated, Northwest Bancshares,
Inc. would become a bank holding company subject to regulation and supervision under the Bank
Holding Company Act of 1956, and the supervision and regulation of the Board of Governors of the
Federal Reserve System, including holding company regulatory capital requirements to which
Northwest Bancshares, Inc. is not currently subject.
Continued government action in response to the economic downturn may negatively affect our
operations.
In response to the severe economic recession, Congress adopted the Emergency Economic
Stabilization Act of 2008, under which the U.S. Department of the Treasury has the authority to
expend up to $700 billion to assist in stabilizing and providing liquidity to the U.S. financial
system. Although it was originally contemplated that these funds would be used primarily to
purchase troubled assets under the Troubled Asset Relief Program, in October 2008 the U.S.
Department of the Treasury announced the Capital Purchase Program, pursuant to which it intended to
purchase up to $250 billion of non-voting senior preferred shares of qualifying financial
institutions to encourage financial institutions to build capital to increase the flow of financing
to businesses and consumers and to support the economy. In addition, Congress temporarily increased
Federal Deposit Insurance Corporation deposit insurance from $100,000 to $250,000 per depositor
through December 31, 2013. The Federal Deposit Insurance Corporation also announced the creation of
the Temporary Liquidity Guarantee Program which is intended to strengthen confidence and encourage
liquidity in financial institutions by temporarily guaranteeing newly issued senior unsecured debt
of participating organizations and providing full insurance coverage for noninterest-bearing
18
Table of Contents
transaction deposit accounts (such as business checking accounts, interest-bearing transaction
accounts paying 50 basis points or less and lawyers’ trust accounts), regardless of dollar amount
until June 30, 2010.
The potential exists for additional federal or state laws and regulations regarding lending
and funding practices and liquidity standards, and bank regulatory agencies have responded
aggressively in responding to concerns and trends identified in examinations, and have issued many
formal enforcement orders. Current legislative and regulatory proposals include the following:
limiting the size and activities of financial institutions; including regulatory capital
requirements; establishing a new financial services oversight council; establishing greater
government powers to regulate risk across the financial system; and establishing greater standards
for and scrutiny of compensation policies at financial institutions. Actions taken to date, as
well as potential actions, may not have the beneficial effects that are intended. In addition, new
laws, regulations, and other regulatory changes may increase our Federal Deposit Insurance
Corporation insurance premiums and may also increase our costs of regulatory compliance and of
doing business, and otherwise adversely affect our operations. New laws, regulations, and other
regulatory changes may significantly affect the markets in which we do business, the markets for
and value of our loans and investments, and our ongoing operations, costs and profitability.
Future legislative or regulatory actions responding to perceived financial and market problems
could impair our ability to foreclose on collateral.
There have been proposals made by members of Congress and others that would reduce the amount
distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and
limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these,
or other proposals limiting our rights as a creditor, to be implemented, we could experience
increased credit losses or increased expense in pursuing our remedies as a creditor. In addition,
there have been legislative proposals to create a federal consumer protection agency that may,
among other powers, have the ability to limit our rights as a creditor.
If our investment in the Federal Home Loan Bank of Pittsburgh becomes impaired, our earnings and
stockholders’ equity could decrease.
We are required to own common stock of the Federal Home Loan Bank of Pittsburgh to qualify for
membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the
Federal Home Loan Bank’s advance program. The aggregate cost of our Federal Home Loan Bank common
stock as of December 31, 2009 was $63.2 million. Federal Home Loan Bank common stock is not a
marketable security and can only be redeemed by the Federal Home Loan Bank.
Federal Home Loan Banks may be subject to accounting rules and asset quality risks that could
materially lower their regulatory capital. In an extreme situation, it is possible that the
capitalization of a Federal Home Loan Bank, including the Federal Home Loan Bank of Pittsburgh,
could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk
that our investment in Federal Home Loan Bank of Pittsburgh common stock could be deemed impaired
at some time in the future, and if this occurs, it would cause our earnings and stockholders’
equity to decrease by the amount of the impairment charge.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
As of December 31, 2009, we conducted our business through our main office located in Warren,
Pennsylvania, 133 other full-service offices and eight free-standing drive-up locations throughout
our market area in northwest, southwest and central Pennsylvania, 17 offices in western New York,
four offices in eastern Ohio, five offices in Maryland and three offices in south Florida.
Northwest Bancshares, Inc. and its wholly-owned subsidiaries also operated 51 consumer finance
offices located throughout Pennsylvania. At December 31, 2009, our premises and equipment had an
aggregate net book value of approximately $124.3 million.
19
Table of Contents
ITEM 3.
LEGAL PROCEEDINGS
Northwest Bancshares, Inc. and its subsidiaries are subject to various legal actions arising
in the normal course of business. In the opinion of management, the resolution of these legal
actions is not expected to have a material adverse effect on our results of operations.
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is listed on the Nasdaq Global Select Market under the symbol “NWBI.” As of
December 31, 2009, we had 29 registered market makers, 19,892 stockholders of record (excluding the
number of persons or entities holding stock in street name through various brokerage firms), and
110,641,858 shares outstanding. The following table sets forth market price and dividend
information for our common stock, adjusted to reflect the 2.25-for-one stock split in connection
with the mutual-to-stock conversion.
| Year Ended | Cash Dividends | |||||||||||
| December 31, 2009 | High | Low | Declared | |||||||||
|
First Quarter
|
$ | 9.60 | $ | 5.81 | $ | 0.10 | ||||||
|
Second Quarter
|
$ | 9.15 | $ | 7.12 | $ | 0.10 | ||||||
|
Third Quarter
|
$ | 10.98 | $ | 8.09 | $ | 0.10 | ||||||
|
Fourth Quarter
|
$ | 11.48 | $ | 9.39 | $ | 0.10 | ||||||
| Year Ended | Cash Dividends | |||||||||||
| December 31, 2008 | High | Low | Declared | |||||||||
|
First Quarter
|
$ | 13.40 | $ | 10.44 | $ | 0.10 | ||||||
|
Second Quarter
|
$ | 12.49 | $ | 9.68 | $ | 0.10 | ||||||
|
Third Quarter
|
$ | 15.26 | $ | 8.91 | $ | 0.10 | ||||||
|
Fourth Quarter
|
$ | 13.27 | $ | 8.38 | $ | 0.10 | ||||||
Payment of dividends on our shares of common stock is subject to determination and declaration
by the Board of Directors and will depend upon a number of factors, including capital requirements,
regulatory limitations on the payment of dividends, our results of operations and financial
condition, tax considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will be, or whether such
dividends, once declared, will continue.
There were no sales of unregistered securities during the quarter ended December 31, 2009.
Pursuant to Office of Thrift Supervision regulations, we may not repurchase our shares during
the first year following the mutual-to-stock conversion.
There were no repurchases of shares of common stock during the quarter ended December 31,
2009, and we did not have any existing repurchase plans outstanding at December 31, 2009.
Stock Performance Graph
Set forth hereunder is a stock performance graph comparing (a) the cumulative total return on
our Common Stock between June 30, 2004 and December 31, 2009, adjusted to reflect the 2.25-for-one
stock split in connection with the mutual-to-stock conversion, (b) the cumulative total return on
stocks included in the Total Return Index for the Nasdaq Stock Market (US) over such period, and
(c) the cumulative total return on stocks included in the Nasdaq Bank Index over such period.
Cumulative return assumes the reinvestment of dividends, and is expressed in dollars based on an
assumed investment of $100.
20
Table of Contents
There can be no assurance that the Company’s stock performance will continue in the future
with the same or similar trend depicted in the graph. The Company will not make or endorse any
predictions as to future stock performance.
COMPARISON OF 66 MONTH CUMULATIVE TOTAL RETURN*
Among Northwest Bancshares, Inc., The NASDAQ Composite Index
And The NASDAQ Bank Index
Among Northwest Bancshares, Inc., The NASDAQ Composite Index
And The NASDAQ Bank Index
| *$100 invested on 6/30/04 in stock or index. including reinvestment of dividends. Fiscal year ending december 31. |
| 6/04 | 6/05 | 12/05 | 12/06 | 12/07 | 12/08 | 12/09 | ||||||||||||||||||||||
|
Northwest Bancshares, Inc.
|
100.00 | 94.89 | 96.18 | 127.78 | 127.47 | 106.11 | 131.59 | |||||||||||||||||||||
|
NASDAQ Composite
|
100.00 | 101.46 | 108.92 | 122.55 | 132.97 | 78.59 | 113.52 | |||||||||||||||||||||
|
NASDAQ Bank
|
100.00 | 106.25 | 108.70 | 123.43 | 98.52 | 78.73 | 66.69 | |||||||||||||||||||||
21
Table of Contents
ITEM 6.
SELECTED FINANCIAL DATA
Selected Financial and Other Data
The summary financial information presented below is derived in part from the consolidated
financial statements of Northwest Bancshares, Inc. and subsidiaries after December 18, 2009, and
from the consolidated financial statements of Northwest Bancorp, Inc. and subsidiaries prior to
December 18, 2009. The following is only a summary and you should read it in conjunction with the
consolidated financial statements and notes included elsewhere in this document. The information
at December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and 2007 is derived
in part from the audited consolidated financial statements that appear in this document. The
information at December 31, 2007, 2006 and 2005, at June 30, 2005, for the year ended December 31,
2006, for the six months ended December 31, 2005 and for the year ended June 30, 2005, is derived
in part from audited consolidated financial statements that do not appear in this document. We
changed our fiscal year end from June 30 to December 31, effective December 31, 2005.
| At December 31, | At June 30, | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | 2005 | |||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
|
Selected Consolidated Financial Data:
|
||||||||||||||||||||||||
|
Total assets
|
$ | 8,025,298 | $ | 6,930,241 | $ | 6,663,516 | $ | 6,527,815 | $ | 6,447,307 | $ | 6,330,482 | ||||||||||||
|
Investment securities held-to-maturity (1)
|
— | — | — | 465,312 | 444,407 | 467,303 | ||||||||||||||||||
|
Investment securities available-for-sale
|
333,522 | 393,531 | 601,620 | 388,546 | 289,871 | 290,702 | ||||||||||||||||||
|
Mortgage-backed securities held-to-maturity
(1)
|
— | — | — | 251,655 | 189,851 | 235,676 | ||||||||||||||||||
|
Mortgage-backed securities available-for-sale
|
733,567 | 745,639 | 531,747 | 378,968 | 323,965 | 384,481 | ||||||||||||||||||
|
Loans receivable net:
|
||||||||||||||||||||||||
|
Real estate (2)
|
4,578,235 | 4,508,393 | 4,172,850 | 3,926,859 | 4,100,754 | 3,888,287 | ||||||||||||||||||
|
Consumer
|
267,311 | 261,398 | 261,598 | 253,490 | 366,488 | 348,672 | ||||||||||||||||||
|
Commercial
|
383,516 | 372,101 | 361,174 | 232,092 | 155,027 | 139,925 | ||||||||||||||||||
|
Total loans receivable, net
|
5,229,062 | 5,141,892 | 4,795,622 | 4,412,441 | 4,622,269 | 4,376,884 | ||||||||||||||||||
|
Deposits
|
5,624,424 | 5,038,211 | 5,542,334 | 5,366,750 | 5,228,479 | 5,187,946 | ||||||||||||||||||
|
Advances from Federal Home Loan Bank and
other borrowed funds
|
897,326 | 1,067,945 | 339,115 | 392,814 | 417,356 | 410,344 | ||||||||||||||||||
|
Shareholders’ equity
|
1,316,515 | 613,784 | 612,878 | 604,561 | 585,658 | 582,190 | ||||||||||||||||||
| (1) | In 2007 we divested investment securities that we deemed to have a deteriorating risk profile, including several classified as held-to-maturity, which required us to reclassify all investment securities as available-for-sale. | |
| (2) | Includes one- to four-family residential mortgage loans, home equity loans and commercial real estate loans. |
22
Table of Contents
| For the Six | ||||||||||||||||||||||||
| Months | For the | |||||||||||||||||||||||
| Ended | Year Ended | |||||||||||||||||||||||
| For the Year Ended December 31, | December 31, | June 30, | ||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | 2005 | |||||||||||||||||||
| (Dollars in Thousands, except per share amounts) | ||||||||||||||||||||||||
|
Selected Consolidated Operating Data:
|
||||||||||||||||||||||||
|
Total interest income
|
$ | 364,463 | $ | 388,659 | $ | 396,031 | $ | 368,573 | $ | 170,449 | $ | 321,824 | ||||||||||||
|
Total interest expense
|
135,806 | 169,293 | 211,015 | 191,109 | 79,414 | 138,047 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest income
|
228,657 | 219,366 | 185,016 | 177,464 | 91,035 | 183,777 | ||||||||||||||||||
|
Provision for loan losses
|
41,847 | 22,851 | 8,743 | 8,480 | 4,722 | 9,566 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net interest income after
provision for loan losses
|
186,810 | 196,515 | 176,273 | 168,984 | 86,313 | 174,211 | ||||||||||||||||||
|
Noninterest income
|
53,337 | 38,752 | 43,022 | 46,026 | 19,851 | 32,004 | ||||||||||||||||||
|
Noninterest expense
|
200,494 | 170,128 | 152,742 | 143,682 | 66,317 | 128,659 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Income before income tax expense
|
39,653 | 65,139 | 66,553 | 71,328 | 39,847 | 77,556 | ||||||||||||||||||
|
Income tax expense
|
7,000 | 16,968 | 17,456 | 19,792 | 10,998 | 22,741 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net income
|
$ | 32,653 | $ | 48,171 | $ | 49,097 | $ | 51,536 | $ | 28,849 | $ | 54,815 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Earnings per share:
|
||||||||||||||||||||||||
|
Basic
|
$ | 0.30 | $ | 0.44 | $ | 0.44 | $ | 0.46 | $ | 0.25 | $ | 0.49 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Diluted
|
$ | 0.30 | $ | 0.44 | $ | 0.44 | $ | 0.46 | $ | 0.25 | $ | 0.48 | ||||||||||||
|
|
||||||||||||||||||||||||
| At or for | ||||||||||||||||||||||||
| the Six | ||||||||||||||||||||||||
| Months | At or for | |||||||||||||||||||||||
| Ended | the Year | |||||||||||||||||||||||
| December | Ended | |||||||||||||||||||||||
| At or For the Year Ended December 31, | 31, | June 30, | ||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 (1) | 2005 | |||||||||||||||||||
|
Selected Financial Ratios and Other Data:
|
||||||||||||||||||||||||
|
Return on average assets (2)
|
0.46 | % | 0.70 | % | 0.73 | % | 0.79 | % | 0.91 | % | 0.86 | % | ||||||||||||
|
Return on average equity (3)
|
4.71 | % | 7.75 | % | 8.18 | % | 8.60 | % | 9.81 | % | 9.74 | % | ||||||||||||
|
Average capital to average assets
|
9.67 | % | 9.04 | % | 8.96 | % | 9.19 | % | 9.23 | % | 8.87 | % | ||||||||||||
|
Capital to total assets
|
16.40 | % | 8.86 | % | 9.20 | % | 9.26 | % | 9.04 | % | 9.20 | % | ||||||||||||
|
Tangible common equity to tangible assets
|
14.53 | % | 6.36 | % | 6.50 | % | 6.79 | % | 6.66 | % | 6.93 | % | ||||||||||||
|
Net interest rate spread (4)
|
3.30 | % | 3.25 | % | 2.74 | % | 2.77 | % | 2.99 | % | 3.07 | % | ||||||||||||
|
Net interest margin (5)
|
3.56 | % | 3.57 | % | 3.10 | % | 3.06 | % | 3.21 | % | 3.24 | % | ||||||||||||
|
Noninterest expense to average assets
|
2.80 | % | 2.48 | % | 2.28 | % | 2.20 | % | 2.08 | % | 2.03 | % | ||||||||||||
|
Efficiency ratio
|
71.10 | % | 65.91 | % | 66.98 | % | 64.29 | % | 59.81 | % | 59.62 | % | ||||||||||||
|
Noninterest income to average assets
|
0.74 | % | 0.56 | % | 0.64 | % | 0.71 | % | 0.63 | % | 0.50 | % | ||||||||||||
|
Net interest income to noninterest expense
|
1.14x | 1.29x | 1.21x | 1.24x | 1.37x | 1.43x | ||||||||||||||||||
|
Dividend payout ratio (6)
|
130.37 | % | 88.89 | % | 84.85 | % | 67.96 | % | 53.57 | % | 44.04 | % | ||||||||||||
|
Nonperforming loans to net loans receivable
|
2.38 | % | 1.93 | % | 1.03 | % | 0.92 | % | 0.93 | % | 0.77 | % | ||||||||||||
|
Nonperforming assets to total assets
|
1.81 | % | 1.67 | % | 0.87 | % | 0.72 | % | 0.74 | % | 0.64 | % | ||||||||||||
|
Allowance for loan losses to nonperforming loans
|
56.49 | % | 55.37 | % | 84.22 | % | 92.92 | % | 77.67 | % | 93.91 | % | ||||||||||||
|
Allowance for loan losses to net loans receivable
|
1.35 | % | 1.07 | % | 0.87 | % | 0.85 | % | 0.72 | % | 0.72 | % | ||||||||||||
|
Average interest-earning assets to average
interest-bearing liabilities
|
1.12x | 1.10x | 1.10x | 1.09x | 1.09x | 1.08x | ||||||||||||||||||
|
Number of full-service offices
|
171 | 167 | 166 | 160 | 153 | 153 | ||||||||||||||||||
|
Number of consumer finance offices
|
51 | 51 | 51 | 51 | 50 | 49 | ||||||||||||||||||
| (1) | Ratios are annualized where appropriate. | |
| (2) | Represents net income divided by average total assets. | |
| (3) | Represents net income divided by average equity. | |
| (4) | Represents average yield on interest-earning assets less average cost of interest-bearing liabilities. | |
| (5) | Represents net interest income as a percentage of average interest-earning assets. | |
| (6) | The dividend payout ratio represents dividends declared per share divided by net income per share. |
23
Table of Contents
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
Historically, our principal business has consisted of attracting deposits from the general
public and the business community and making loans secured by various types of collateral,
including real estate and other consumer assets. Attracting and maintaining deposits is affected
by a number of factors, including interest rates paid on competing investments offered by other
financial and non-financial institutions, account maturities, fee structures, and levels of
personal income and savings. Lending activities are affected by the demand for funds and thus are
influenced by interest rates, the number and quality of lenders and regional economic conditions.
Sources of funds for lending activities include deposits, borrowings, repayments on loans, cash
flows from investment securities and income provided from operations.
Our earnings depend primarily on our level of net interest income, which is the difference
between interest earned on our interest-earning assets, consisting primarily of loans,
mortgage-backed securities and other investment securities, and the interest paid on
interest-bearing liabilities, consisting primarily of deposits, borrowed funds, and trust-preferred
securities. Net interest income is a function of our interest rate spread, which is the difference
between the average yield earned on our interest-earning assets and the average rate paid on our
interest-bearing liabilities, as well as a function of the average balance of interest-earning
assets compared to the average balance of interest-bearing liabilities. Also contributing to our
earnings is noninterest income, which consists primarily of service charges and fees on loan and
deposit products and services, fees related to insurance and investment management and trust
services, and net gains and losses on the sale of assets. Interest income and noninterest income
are offset by provisions for loan losses, general administrative and other expenses, including
employee compensation and benefits and occupancy and equipment costs, as well as by state and
federal income tax expense.
Our net income has decreased over the past few years, totaling $32.7 for the year ended
December 31, 2009 compared to $48.2 million for the year ended December 31, 2008 and $49.1 million
for the year ended December 31, 2007. Much of the reduction in our net income has resulted from
increased loan loss reserves and impairment charges on securities caused by deteriorating asset
quality, which has affected much of the financial institution industry in recent years. Our
provision for loan losses was $41.8 million for the year ended December 31, 2009 compared to $22.9
million for the year ended December 31, 2008 and $8.7 million for the year ended December 31, 2007.
In addition, we experienced other-than-temporary impairment charges for securities, which were
reflected as a reduction of noninterest income, of $6.1 million, $16.0 million and $8.4 million
during the years ended December 31, 2009, 2008 and 2007, respectively. In addition, FDIC premiums
and special assessments continue to increase because of the growing number of failed financial
institutions. Amounts paid to the FDIC in the years ended December 31, 2009, 2008 and 2007 were
$11.6 million, $3.9 million and $663,000, respectively. Lastly, as part of our “second-step”
common stock offering in 2009, we established the Northwest Charitable Foundation for the benefit
of the communities where we do business. This contribution of cash and stock resulted in a current
year expense of $13.8 million.
We did not significantly change our underwriting standards in the past several years nor did
we add controversial residential loan products. Other than our loans for the construction of one-
to four-family residential mortgage loans, we do not offer “interest only” mortgage loans on one-
to four-family residential properties (where the borrower pays interest for an initial period,
after which the loan converts to a fully amortizing loan). We also do not offer loans that provide
for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less
than the interest owed on the loan, resulting in an increased principal balance during the life of
the loan. We do not directly offer “subprime loans” (loans that generally target borrowers with
FICO scores of less than 660) or Alt-A loans (traditionally defined as loans having less than full
documentation). However, a portion of the loans originated by one of our subsidiaries, Northwest
Consumer Discount Company (“NCDC”), consists of loans to persons with credit scores that would
cause such loans to be considered subprime. NCDC has been in operation for over 25 years and has
51 offices throughout Pennsylvania. NCDC offers a variety of consumer loans for automobiles,
appliances and furniture as well as one- to four-family residential real estate loans. At December
31, 2009, NCDC’s total loan portfolio was approximately $114.5 million with an average loan size of
$3,800, an average FICO score of 616 and an average yield of approximately 16.9%. NCDC’s total
delinquency has remained steady at approximately 4.25% of outstanding loans, with loans
nonperforming for 90 days or more at 2.12% of loans outstanding. Annual net charge-offs average
approximately $3.0 million, or 2.6% of outstanding loans, and it
24
Table of Contents
maintains an allowance for loan losses of $4.9 million, or 4.3% of loans. Although loans
originated through NCDC have higher average rates of delinquency and charge-offs than similar loans
originated directly by Northwest Savings Bank, management believes that the higher yields on loans
originated through NCDC compensate for the incremental credit risk exposure.
As of December 31, 2009, we held $252,000 of preferred stock issued by Freddie Mac, and $11.0
million of private label collateralized mortgage obligations, some of which are collateralized by
ALT-A mortgage loans. As of December 31, 2009, our available credit lines and other sources of
liquidity had not been reduced compared to levels from December 31, 2008 or 2007.
Critical Accounting Policies
Certain accounting policies are important to the understanding of our financial condition,
since they require management to make difficult, complex or subjective judgments, some of which may
relate to matters that are inherently uncertain. Estimates associated with these policies are
susceptible to material changes as a result of changes in facts and circumstances, including, but
without limitation, changes in interest rates, performance of the economy, financial condition of
borrowers and laws and regulations. The following are the accounting policies we believe are
critical.
Allowance for Loan Losses.
We recognize that losses will be experienced on loans and that the
risk of loss will vary with, among other things, the type of loan, the creditworthiness of the
borrower, general economic conditions and the quality of the collateral for the loan. We maintain
an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for
loan losses represents management’s estimate of probable losses based on all available information.
The allowance for loan losses is based on management’s evaluation of the collectibility of the loan
portfolio, including past loan loss experience, known and inherent losses, information about
specific borrower situations and estimated collateral values, and current economic conditions. The
loan portfolio and other credit exposures are regularly reviewed by management in its determination
of the allowance for loan losses. The methodology for assessing the appropriateness of the
allowance includes a review of historical losses, peer group comparisons, industry data and
economic conditions. As an integral part of their examination process, regulatory agencies
periodically review our allowance for loan losses and may require us to make additional provisions
for estimated losses based upon judgments different from those of management. In establishing the
allowance for loan losses, loss factors are applied to various pools of outstanding loans. Loss
factors are derived using our historical loss experience and may be adjusted for factors that
affect the collectibility of the portfolio as of the evaluation date. Commercial loans that are
criticized are evaluated individually to determine the required allowance for loan losses and to
evaluate the potential impairment. Although management believes that it uses the best information
available to establish the allowance for loan losses, future adjustments to the allowance for loan
losses may be necessary and results of operations could be adversely affected if circumstances
differ substantially from the assumptions used in making the determinations. Because future events
affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance
that the existing allowance for loan losses is adequate or that increases will not be necessary
should the quality of loans deteriorate as a result of the factors discussed previously. Any
material increase in the allowance for loan losses may adversely affect our financial condition and
results of operations. The allowance is based on information known at the time of the review.
Changes in factors underlying the assessment could have a material impact on the amount of the
allowance that is necessary and the amount of provision to be charged against earnings. Such
changes could impact future results. Management believes that all known losses as of December 31,
2009 and 2008 have been recorded as of those dates.
Valuation of Investment Securities.
All of our investment securities are classified as
available for sale and recorded at current fair value. Unrealized gains or losses, net of deferred
taxes, are reported in other comprehensive income as a separate component of shareholders’ equity.
In general, fair value is based upon quoted market prices of identical assets, when available. If
quoted market prices are not available, fair value is based upon valuation models that use cash
flow, security structure and other observable information. Where sufficient data is not available
to produce a fair valuation, fair value is based on broker quotes for similar assets. Broker quotes
may be adjusted to ensure that financial instruments are recorded at fair value. Adjustments may
include unobservable parameters, among other things. No adjustments were made to any broker quotes
received by us.
We conduct a quarterly review and evaluation of our investment securities to determine if any
declines in fair value are other than temporary. In making this determination, we consider the
period of time the securities were
25
Table of Contents
in a loss position, the percentage decline in comparison to the securities’ amortized cost,
the financial condition of the issuer, if applicable, and the delinquency or default rates of
underlying collateral. We consider our intent to sell the investment securities evaluated and the
likelihood that we will not have to sell the investment securities before recovery of their cost
basis. If impairment exists, credit related impairment losses are recorded in earnings while
noncredit related impairment losses are recorded in accumulated other comprehensive income. Any
future deterioration in the fair value of an investment security, or the determination that the
existing unrealized loss of an investment security is other-than-temporary, may have a material
adverse affect on future earnings.
Goodwill
.
Goodwill is not subject to amortization but must be tested for impairment at least
annually, and possibly more frequently if certain events or changes in circumstances arise.
Impairment testing requires that the fair value of each reporting unit be compared to its carrying
amount, including goodwill. Reporting units are identified based upon analyzing each of our
individual operating segments. A reporting unit is defined as any distinct, separately
identifiable component of an operating segment for which complete, discrete financial information
is available that management regularly reviews. Goodwill is allocated to the carrying value of
each reporting unit based on its relative fair value at the time it is acquired. Determining the
fair value of a reporting unit requires a high degree of subjective management judgment. We,
through the use of an independent third party, evaluate goodwill for possible impairment using four
valuation methodologies including a public market peers approach, a comparable transactions
approach, a control premium approach and a discounted cash flow approach. Future changes in the
economic environment or the operations of the reporting units could cause changes to these
variables, which could give rise to declines in the estimated fair value of the reporting unit.
Declines in fair value could result in impairment being identified. We have established June 30 of
each year as the date for conducting our annual goodwill impairment assessment. Quarterly, we
evaluate if there are any triggering events that would require an update to our previous
assessment. The variables are selected as of that date and the valuation model is run to determine
the fair value of each reporting unit. We did not identify any individual reporting unit where the
fair value was less than the carrying value.
Deferred Income Taxes
.
We use the asset and liability method of accounting for income taxes.
Using this method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. If current available information
raises doubt as to the realization of the deferred tax assets, a valuation allowance is
established. Deferred tax assets and liabilities are measured using enacted tax rates expected to
be applied to taxable income in the years in which those temporary differences are expected to be
recovered or settled. We exercise significant judgment in evaluating the amount and timing of
recognition of the resulting tax liabilities and assets. These judgments require us to make
projections of future taxable income. The judgments and estimates we make in determining our
deferred tax assets, which are inherently subjective, are reviewed on an ongoing basis as
regulatory and business factors change. A reduction in estimated future taxable income could
require us to record a valuation allowance. Changes in levels of valuation allowances could result
in increased income tax expense, and could negatively affect earnings.
Other Intangible Assets
.
Using the purchase method of accounting for acquisitions, we are
required to record the assets acquired, including identified intangible assets, and liabilities
assumed at their fair values. These fair values often involve estimates based on third-party
valuations, including appraisals, or internal valuations based on discounted cash flow analyses or
other valuation techniques, which are inherently subjective. Core deposit and other intangible
assets are recorded in purchase accounting when a premium is paid to acquire other entities or
deposits. Other intangible assets, which are determined to have finite lives, are amortized based
on the period of estimated economic benefits received, primarily on an accelerated basis. If it is
determined that the value of these intangible assets has deteriorated, amortization expense may be
accelerated which could have a negative effect on earnings.
Pension Benefits
.
Pension expense and obligations are dependent on assumptions used in
calculating such amounts. These assumptions include discount rates, anticipated salary increases,
interest costs, expected return on plan assets, mortality rates, and other factors. In accordance
with U.S. generally accepted accounting principles, actual results that differ from the assumptions
are amortized over average future service and, therefore, generally affect recognized expense.
While management believes that the assumptions used are appropriate, differences in actual
experience or changes in assumptions may affect our pension obligations and future expense.
26
Table of Contents
In determining the projected benefit obligations for pension benefits at December 31, 2009 and
2008, we used a discount rate of 6.00%. We use the Citigroup Pension Liability Index rates
matching the duration of our benefit payments as of the measurement date to determine the discount
rate. Our measurement date is December 31. Our pre-tax pension expense is forecasted to decrease
from $7.9 million for the year ended December 31, 2009 to $6.1 million for the year ending December
31, 2010 due primarily to the increase in the value of plan assets.
Assets.
Our total assets at December 31, 2009 were $8.025 billion, an increase of $1.095
billion, or 15.8%, from $6.930 billion at December 31, 2008. This increase in assets was primarily
attributed to an increase in cash and cash equivalents of $1.028 billion and an increase in net
loans of $87.2 million, which were partially offset by a decrease in securities of $72.1 million.
The net increase in total assets was funded by the proceeds of our second-step stock offering of
$658.7 million and an increase in deposits of $586.2 million, partially offset by a decrease in
borrowed funds of $170.6 million.
Cash and Investments
.
Total cash and investments increased by $955.8 million, or 78.4%, to
$2.175 billion at December 31, 2009, from $1.219 billion at December 31, 2008. This increase was a
result of the proceeds of our second-step stock offering that closed in December 2009 and deposit
growth throughout the year. Management intends to deploy approximately $900 million of cash and
investments into loans over a period of time in an effort to improve operating profits. The length
of time it will take to accomplish this deployment will depend on a number of factors including
loan demand, economic conditions and the general level of interest rates.
Loans receivable
.
Net loans receivable increased by $87.2 million, or 1.7%, to $5.229 billion
at December 31, 2009, from $5.142 billion at December 31, 2008. Loan demand was strong, with
originations of $1.811 billion for the year ended December 31, 2009. We sold $595.3 million of
one- to four-family residential mortgage loans originated during the year to assist with our
interest-rate risk management. As of December 31, 2009, we have substantially reduced selling one-
to four-family mortgage loans due to our strong liquidity position. During the year ended December
31, 2009 gross commercial loans increased by $208.4 million, or 14.0%, gross consumer and home
equity loans increased by $49.5 million, or 3.8% and gross mortgage loans decreased by
$120.9 million, or 4.9%.
Total loans 30 days or more past due decreased by $6.3 million, or 3.2%, to
$186.5 million at December 31, 2009 from $192.8 million at December 31, 2008. The
December 31, 2009 amount consisted of 3,450 loans, while the December 31, 2008
amount consisted of 3,492 loans. Delinquencies on one- to four-family mortgage
loans increased by $3.1 million, or 5.1%, delinquencies on consumer and home equity
loans increased by $2.9 million, or 12.2% and delinquencies on commercial real
estate and commercial business loans decreased by $12.3 million, or 11.4%. Like
most financial institutions, we experienced an increase in the amount of
delinquencies during the past 24 months due to deteriorating economic conditions.
The largest increases in commercial loan delinquencies have occurred in Florida and
Maryland, where real estate values for our loans have suffered the biggest losses in
value.
27
Table of Contents
Set forth below are selected data relating to the composition of our loan portfolio by
type of loan as of the dates included.
| At December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||
|
Real estate:
|
||||||||||||||||||||||||||||||||||||||||
|
One- to four-family
|
$ | 2,371,996 | 43.8 | % | $ | 2,492,940 | 47.2 | % | $ | 2,430,117 | 48.9 | % | $ | 2,411,024 | 53.5 | % | $ | 2,805,900 | 59.5 | % | ||||||||||||||||||||
|
Home equity
|
1,080,011 | 19.9 | 1,035,954 | 19.6 | 992,335 | 20.0 | 887,352 | 19.7 | 780,451 | 16.5 | ||||||||||||||||||||||||||||||
|
Multi-family and commercial
|
1,292,145 | 23.8 | 1,100,218 | 20.8 | 906,594 | 18.3 | 701,951 | 15.6 | 594,503 | 12.6 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total real estate loans
|
4,744,152 | 87.5 | 4,629,112 | 87.6 | 4,329,046 | 87.2 | 4,000,327 | 88.8 | 4,180,854 | 88.6 | ||||||||||||||||||||||||||||||
|
Consumer:
|
||||||||||||||||||||||||||||||||||||||||
|
Automobile
|
101,046 | 1.9 | 102,267 | 2.0 | 125,298 | 2.5 | 138,401 | 3.1 | 144,519 | 3.1 | ||||||||||||||||||||||||||||||
|
Education loans
|
32,860 | 0.6 | 38,152 | 0.7 | 14,551 | 0.3 | 11,973 | 0.3 | 120,504 | 2.5 | ||||||||||||||||||||||||||||||
|
Loans on savings accounts
|
12,209 | 0.2 | 11,191 | 0.2 | 10,563 | 0.2 | 10,313 | 0.2 | 9,066 | 0.2 | ||||||||||||||||||||||||||||||
|
Other (1)
|
127,750 | 2.4 | 115,913 | 2.2 | 117,831 | 2.4 | 109,303 | 2.4 | 106,390 | 2.3 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total consumer loans
|
273,865 | 5.1 | 267,523 | 5.1 | 268,243 | 5.4 | 269,990 | 6.0 | 380,479 | 8.1 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Commercial business
|
403,589 | 7.4 | 387,145 | 7.3 | 367,459 | 7.4 | 235,311 | 5.2 | 157,572 | 3.3 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total loans receivable,
gross
|
5,421,606 | 100.0 | % | 5,283,780 | 100.0 | % | 4,964,748 | 100.0 | % | 4,505,628 | 100.0 | % | 4,718,905 | 100.0 | % | |||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Deferred loan fees
|
(7,030 | ) | (5,041 | ) | (4,179 | ) | (3,027 | ) | (3,877 | ) | ||||||||||||||||||||||||||||||
|
Undisbursed loan proceeds
|
(115,111 | ) | (81,918 | ) | (123,163 | ) | (52,505 | ) | (59,348 | ) | ||||||||||||||||||||||||||||||
|
Allowance
for loan losses (real estate loans)
|
(43,776 | ) | (33,760 | ) | (28,854 | ) | (17,936 | ) | (16,875 | ) | ||||||||||||||||||||||||||||||
|
Allowance
for loan losses (other loans)
|
(26,627 | ) | (21,169 | ) | (12,930 | ) | (19,719 | ) | (16,536 | ) | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
|
Total loans receivable net
|
$ | 5,229,062 | $ | 5,141,892 | $ | 4,795,622 | $ | 4,412,441 | $ | 4,622,269 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||
| (1) | Consists primarily of secured and unsecured personal loans. |
28
Table of Contents
The following table sets forth loans by state (based on borrowers’ residence) at December
31, 2009.
| One- to | Commercial business | |||||||||||||||||||||||||||||||
| four-family | Consumer and home | and commercial real | ||||||||||||||||||||||||||||||
| mortgage | Percentage (1) | equity | Percentage (2) | estate | Percentage (3) | Total | Percentage (4) | |||||||||||||||||||||||||
| State | (Dollars in thousands) | |||||||||||||||||||||||||||||||
|
Pennsylvania
|
$ | 1,913,127 | 81.9 | % | 1,189,667 | 87.9 | % | 1,057,995 | 65.7 | % | 4,160,789 | 78.4 | % | |||||||||||||||||||
|
New York
|
136,729 | 5.9 | 98,870 | 7.3 | 302,145 | 18.8 | 537,744 | 10.1 | ||||||||||||||||||||||||
|
Ohio
|
24,973 | 1.1 | 17,048 | 1.3 | 43,338 | 2.7 | 85,359 | 1.6 | ||||||||||||||||||||||||
|
Maryland
|
232,146 | 9.9 | 39,227 | 2.9 | 157,262 | 9.8 | 428,635 | 8.1 | ||||||||||||||||||||||||
|
Florida
|
28,727 | 1.2 | 9,064 | 0.7 | 49,147 | 3.1 | 86,938 | 1.6 | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 2,335,702 | 100.0 | % | 1,353,876 | 100.0 | % | 1,609,887 | 100.0 | % | 5,299,465 | 100.0 | % | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| (1) | Percentage of total mortgage loans. | |
| (2) | Percentage of total consumer loans. | |
| (3) | Percentage of total commercial loans. | |
| (4) | Percentage of total loans. |
The following table sets forth the maturity or period of repricing of our loan portfolio
at December 31, 2009. 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.
| Due after three | ||||||||||||||||||||||||
| Due in one year or | Due after one year | Due after two years | years through five | |||||||||||||||||||||
| At December 31, 2009: | less | through two years | through three years | years | Due after five years | Total | ||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||
|
One-to four-family residential
|
$ | 187,169 | $ | 123,594 | $ | 113,967 | $ | 225,837 | $ | 1,721,429 | $ | 2,371,996 | ||||||||||||
|
Multi-family and commercial
|
434,937 | 150,931 | 165,042 | 435,423 | 105,812 | 1,292,145 | ||||||||||||||||||
|
Consumer loans
|
380,320 | 122,728 | 114,279 | 208,796 | 527,753 | 1,353,876 | ||||||||||||||||||
|
Commercial business loans
|
135,849 | 47,142 | 51,549 | 136,000 | 33,049 | 403,589 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total loans
|
$ | 1,138,275 | $ | 444,395 | $ | 444,837 | $ | 1,006,056 | $ | 2,388,043 | $ | 5,421,606 | ||||||||||||
|
|
||||||||||||||||||||||||
29
Table of Contents
The following table sets forth at December 31, 2009, the dollar amount of all fixed-rate
and adjustable-rate loans due one year or more after the date indicated. Adjustable- and
floating-rate loans are included in the table based on the contractual due date of the loan.
| At December 31, 2009: | Fixed | Adjustable | Total | |||||||||
| (In Thousands) | ||||||||||||
|
Real estate loans:
|
||||||||||||
|
One-to four-family residential
|
$ | 2,184,456 | $ | 50,462 | $ | 2,234,918 | ||||||
|
Multi-family and commercial
|
474,070 | 646,214 | 1,120,284 | |||||||||
|
Consumer loans
|
935,009 | 163,326 | 1,098,335 | |||||||||
|
Commercial business loans
|
160,408 | 189,502 | 349,910 | |||||||||
|
|
||||||||||||
|
Total loans
|
$ | 3,753,943 | $ | 1,049,504 | $ | 4,803,447 | ||||||
|
|
||||||||||||
Securities
.
Securities decreased by $72.1 million, or 6.3%, to $1.067 billion at
December 31, 2009 from $1.139 billion at December 31, 2008. This decrease was the result of the
normal pay-down of mortgage-backed securities and the regular call or maturity of other
investments. These proceeds have been accumulated in interest-earning deposits while we continue
to evaluate investment alternatives. During the year ended December 31, 2009, we recognized
other-than-temporary credit related impairment charges of $6.1 million on three private label
collateralized mortgage obligations and two pooled trust-preferred investments due to deterioration
in the credit of the underlying collateral.
The following table sets forth certain information regarding the amortized cost and fair value
of our investment securities portfolio and mortgage-backed securities portfolio at the dates
indicated.
| At December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
|
Mortgage-backed securities available for sale:
|
||||||||||||||||||||||||
|
Fixed-rate pass through certificates
|
$ | 145,363 | $ | 151,756 | $ | 186,659 | $ | 193,099 | $ | 73,284 | $ | 73,992 | ||||||||||||
|
Variable-rate pass through certificates
|
231,232 | 239,041 | 276,121 | 277,183 | 306,885 | 309,054 | ||||||||||||||||||
|
Fixed-rate CMOs
|
38,913 | 38,156 | 60,119 | 57,480 | 73,514 | 71,793 | ||||||||||||||||||
|
Variable-rate CMOs
|
303,473 | 304,614 | 228,917 | 217,877 | 76,886 | 76,908 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total mortgage-backed securities available
for sale
|
$ | 718,981 | $ | 733,567 | $ | 751,816 | $ | 745,639 | $ | 530,569 | $ | 531,747 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Investment securities available for sale:
|
||||||||||||||||||||||||
|
U.S. Government, agency and GSEs
|
$ | 76,632 | $ | 77,938 | $ | 97,884 | $ | 108,908 | $ | 286,359 | $ | 292,546 | ||||||||||||
|
Municipal securities
|
235,128 | 237,456 | 268,616 | 267,548 | 262,895 | 267,120 | ||||||||||||||||||
|
Corporate debt issues
|
27,382 | 17,001 | 25,165 | 15,961 | 37,225 | 35,075 | ||||||||||||||||||
|
Equity securities and mutual funds
|
1,054 | 1,127 | 954 | 1,114 | 6,478 | 6,879 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total investment securities available
for sale
|
$ | 340,196 | $ | 333,522 | $ | 392,619 | $ | 393,531 | $ | 592,957 | $ | 601,620 | ||||||||||||
|
|
||||||||||||||||||||||||
The following table sets forth information regarding the issuers and the carrying value
of our mortgage-backed securities.
| At December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In Thousands) | ||||||||||||
|
Mortgage-backed securities:
|
||||||||||||
|
Fannie Mae
|
$ | 256,981 | $ | 288,082 | $ | 165,391 | ||||||
|
Ginnie Mae
|
126,164 | 99,354 | 88,428 | |||||||||
|
Freddie Mac
|
324,562 | 320,297 | 229,960 | |||||||||
|
Other (non-agency)
|
25,860 | 37,906 | 47,968 | |||||||||
|
|
||||||||||||
|
Total mortgage-backed
securities
|
$ | 733,567 | $ | 745,639 | $ | 531,747 | ||||||
|
|
||||||||||||
30
Table of Contents
Investment Portfolio Maturities and Yields
.
The following table sets forth the scheduled
maturities, carrying values, amortized cost, market values and weighted average yields for our
investment securities and mortgage-backed securities portfolios at December 31, 2009.
Adjustable-rate mortgage-backed securities are included in the period in which interest rates are
next scheduled to adjust.
| At December 31, 2009 | ||||||||||||||||||||||||||||||||||||||||||||
| One Year or Less | One Year to Five Years | Five to Ten Years | More than Ten Years | Total | ||||||||||||||||||||||||||||||||||||||||
| Annualized | Annualized | Annualized | Annualized | Annualized | ||||||||||||||||||||||||||||||||||||||||
| Weighted | Weighted | Weighted | Weighted | Weighted | ||||||||||||||||||||||||||||||||||||||||
| Amortized | Average | Amortized | Average | Amortized | Average | Amortized | Average | Amortized | Fair | Average | ||||||||||||||||||||||||||||||||||
| Cost | Yield | Cost | Yield | Cost | Yield | Cost | Yield | Cost | Value | Yield | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
|
Investment securities available for sale
|
||||||||||||||||||||||||||||||||||||||||||||
|
Government sponsored entities
|
$ | — | $ | 1,977 | 5.37 | % | $ | 21,912 | 5.34 | % | $ | 52,667 | 5.26 | % | $ | 76,556 | $ | 77,863 | 5.28 | % | ||||||||||||||||||||||||
|
U.S. Government and agency
obligations
|
76 | 1.20 | % | — | — | — | 76 | 75 | 1.20 | % | ||||||||||||||||||||||||||||||||||
|
Municipal securities
|
— | 3,146 | 4.15 | % | 41,170 | 4.22 | % | 190,812 | 4.42 | % | 235,128 | 237,456 | 4.38 | % | ||||||||||||||||||||||||||||||
|
Corporate debt issues
|
— | 500 | 2.91 | % | — | 26,882 | 3.15 | % | 27,382 | 17,001 | 3.14 | % | ||||||||||||||||||||||||||||||||
|
Equity securities and mutual funds
|
— | — | — | 1,054 | 4.36 | % | 1,054 | 1,127 | 4.36 | % | ||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Total investment securities
available for sale
|
76 | 1.20 | % | 5,623 | 4.47 | % | 63,082 | 4.61 | % | 271,415 | 4.45 | % | 340,196 | 333,522 | 4.48 | % | ||||||||||||||||||||||||||||
|
Mortgage-backed securities available
for sale:
|
||||||||||||||||||||||||||||||||||||||||||||
|
Pass through certificates
|
231,921 | 4.44 | % | 8,705 | 4.41 | % | 7,587 | 4.86 | % | 128,382 | 5.35 | % | 376,595 | 390,797 | 4.76 | % | ||||||||||||||||||||||||||||
|
CMOs
|
303,473 | 1.51 | % | — | 15,531 | 4.85 | % | 23,382 | 4.48 | % | 342,386 | 342,770 | 1.87 | % | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Total mortgage-backed securities
available for sale
|
535,394 | 2.78 | % | 8,705 | 4.41 | % | 23,118 | 4.85 | % | 151,764 | 5.22 | % | 718,981 | 733,567 | 3.38 | % | ||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
Total investment securities and
mortgage-backed securities
|
$ | 535,470 | 2.78 | % | $ | 14,328 | 4.44 | % | $ | 86,200 | 4.67 | % | $ | 423,179 | 4.73 | % | $ | 1,059,177 | $ | 1,067,089 | 3.74 | % | ||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||
31
Table of Contents
The following table sets forth information with respect to gross unrealized holding gains
and losses on our portfolio of investment securities as of December 31, 2009.
| Gross Unrealized | Gross Unrealized | |||||||||||||||
| Amortized Cost | Holding Gains | Holding Losses | Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
|
Debt issued by the U.S.
Government and agencies:
|
||||||||||||||||
|
Due in one year or less
|
$ | 76 | $ | — | $ | (1 | ) | $ | 75 | |||||||
|
|
||||||||||||||||
|
Debt issued by
government-sponsored
enterprises:
|
||||||||||||||||
|
Due in greater than one
year to five years
|
1,977 | 153 | — | 2,130 | ||||||||||||
|
Due in greater than five
years to ten years
|
21,912 | 524 | — | 22,436 | ||||||||||||
|
Due after ten years
|
52,667 | 1,128 | (498 | ) | 53,297 | |||||||||||
|
|
||||||||||||||||
|
Equity securities
|
1,054 | 191 | (118 | ) | 1,127 | |||||||||||
|
|
||||||||||||||||
|
Municipal securities:
|
||||||||||||||||
|
Due in greater than one
year to five years
|
3,146 | 68 | — | 3,214 | ||||||||||||
|
Due in greater than five
years to ten years
|
41,170 | 1,163 | — | 42,333 | ||||||||||||
|
Due after ten years
|
190,812 | 2,774 | (1,677 | ) | 191,909 | |||||||||||
|
|
||||||||||||||||
|
Corporate debt issues:
|
||||||||||||||||
|
Due in greater than one
year to five years
|
500 | — | — | 500 | ||||||||||||
|
Due after ten years
|
26,882 | 168 | (10,549 | ) | 16,501 | |||||||||||
|
|
||||||||||||||||
|
Residential mortgage-backed
securities:
|
||||||||||||||||
|
Fixed-rate pass-through
|
145,363 | 6,440 | (47 | ) | 151,756 | |||||||||||
|
Variable-rate pass-through
|
231,232 | 7,894 | (85 | ) | 239,041 | |||||||||||
|
Fixed-rate non-agency CMO
|
18,919 | 48 | (1,788 | ) | 17,179 | |||||||||||
|
Fixed-rate agency CMO
|
19,994 | 982 | — | 20,976 | ||||||||||||
|
Variable-rate non-agency CMO
|
9,075 | — | (1,170 | ) | 7,905 | |||||||||||
|
Variable-rate agency CMO
|
294,398 | 2,642 | (330 | ) | 296,710 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total residential
mortgage-backed securities
|
718,981 | 18,006 | (3,420 | ) | 733,567 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total marketable securities
available for sale
|
$ | 1,059,177 | $ | 24,175 | $ | (16,263 | ) | $ | 1,067,089 | |||||||
|
|
||||||||||||||||
We review our investment portfolio on a quarterly basis for indications of impairment.
This review includes analyzing the length of time and the extent to which the fair value has been
lower than the cost, the financial condition and near-term prospects of the issuer, including any
specific events which may influence the operations of the issuer. In addition, management must
assert that it does not have the intent to sell the security and that it is more likely than not we
will not have to sell the security before recovery of its cost basis. Other investments are
evaluated using our best estimate of future cash flows. If our estimate of cash flow determines
that it is expected an adverse change has occurred, other-than-temporary impairment would be
recognized for the credit loss.
32
Table of Contents
The following table shows the fair value and gross unrealized losses on our investment
securities, aggregated by investment category and length of time that the individual securities had
been in a continuous unrealized loss position at December 31, 2009.
| Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
| Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
|
U.S. Government and agencies
|
$ | 17,051 | $ | (490 | ) | $ | 266 | $ | (8 | ) | $ | 17,317 | $ | (498 | ) | |||||||||
|
Municipal securities
|
43,897 | (598 | ) | 10,505 | (1,079 | ) | 54,402 | (1,677 | ) | |||||||||||||||
|
Corporate issuer
|
— | — | 12,058 | (10,549 | ) | 12,058 | (10,549 | ) | ||||||||||||||||
|
Equities
|
452 | (118 | ) | — | — | 452 | (118 | ) | ||||||||||||||||
|
Residential mortgage-backed
securities – non-agency
|
1,194 | (2 | ) | 19,451 | (2,957 | ) | 20,645 | (2,959 | ) | |||||||||||||||
|
Residential mortgage-backed
securities – agency
|
25,752 | (181 | ) | 43,067 | (281 | ) | 68,819 | (462 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total temporarily impaired
securities
|
$ | 88,346 | $ | (1,389 | ) | $ | 85,347 | $ | (14,874 | ) | $ | 173,693 | $ | (16,263 | ) | |||||||||
|
|
||||||||||||||||||||||||
As of December 31, 2009, we had 10 investments in corporate issues with total book value
of $22.6 million and total fair value of $12.1 million, where book value exceeded carrying value
for more than 12 months. These investments were four single issuer trust preferred investments and
six pooled trust preferred investments. The single issuer trust preferred investments were
evaluated for other-than-temporary impairment by determining the strength of the underlying issuer.
In each case, the underlying issuer was “well-capitalized” for regulatory purposes. None of the
issuers have deferred interest payments or announced the intention to defer interest payments. We
believe the decline in fair value is related to the spread over three-month LIBOR, on which the
quarterly interest payments are based, as the spread over LIBOR is significantly lower than current
market spreads. We concluded the impairment of these investments was considered temporary. In
making that determination, we also considered the duration and the severity of the losses. The
pooled trust preferred investments were evaluated for other-than-temporary impairment considering
duration and severity of losses, actual cash flows, projected cash flows, performing collateral,
the class of securities we owned and the amount of additional defaults the structure could
withstand prior to the security experiencing a disruption in cash flows. None of these investments
have experienced a disruption in cash flows nor are we projecting near-term cash flow disruptions.
We concluded, based on all facts evaluated, the remaining impairment of these investments, other
than the credit related impairment recognized, was considered temporary and management asserts that
we do not have the intent to sell these investments and that it is more likely than not we will not
have to sell the investments before recovery of their cost basis.
The following table provides class, book value, fair value and ratings information for our
portfolio of corporate securities that had an unrealized loss as of December 31, 2009.
| Total | ||||||||||||||||||||
| Moody’s/Fitch | ||||||||||||||||||||
| Description | Class | Book Value | Fair Value | Unrealized Losses | Ratings | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
|
North Fork Capital
(1)
|
N/A | $ | 1,009 | $ | 892 | $ | (117 | ) | Baa2/BBB | |||||||||||
|
Bank Boston
Capital Trust
(2)
|
N/A | 988 | 670 | (318 | ) | Baa3/BB | ||||||||||||||
|
Reliance Capital Trust
|
N/A | 1,000 | 814 | (186 | ) | Not rated | ||||||||||||||
|
Huntington Capital Trust
|
N/A | 1,420 | 586 | (834 | ) | Baa3/BB+ | ||||||||||||||
|
MM Community Funding I
|
Mezzanine | 467 | 30 | (437 | ) | Ca/CCC | ||||||||||||||
|
MM Community Funding II
|
Mezzanine | 385 | 40 | (345 | ) | BBB/BBB | ||||||||||||||
|
I-PreTSL I
|
Mezzanine | 1,500 | 225 | (1,275 | ) | Not rated/BB | ||||||||||||||
|
I-PreTSL II
|
Mezzanine | 1,500 | 225 | (1,275 | ) | Not rated/BB | ||||||||||||||
|
PreTSL XIX
|
Senior A-1 | 8,853 | 5,125 | (3,728 | ) | A3/AA | ||||||||||||||
|
PreTSL XX
|
Senior A-1 | 5,485 | 3,451 | (2,034 | ) | Baa1/A | ||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 22,607 | $ | 12,058 | $ | (10,549 | ) | |||||||||||||
|
|
||||||||||||||||||||
| (1) | North Fork Bank was acquired by Capital One Financial Corporation | |
| (2) | Bank Boston was acquired by Bank of America |
33
Table of Contents
The following table provides collateral information on pooled trust preferred securities
included in the previous table as of December 31, 2009.
| Additional | ||||||||||||||||
| Immediate | ||||||||||||||||
| Defaults Before | ||||||||||||||||
| Current | Causing an | |||||||||||||||
| Deferrals and | Performing | Interest | ||||||||||||||
| Description | Total collateral | Defaults | Collateral | Shortfall | ||||||||||||
| (In thousands) | ||||||||||||||||
|
I-PreTSL I
|
$ | 193,500 | $ | 17,500 | $ | 176,000 | $ | 97,500 | ||||||||
|
I-PreTSL II
|
378,000 | — | 378,000 | 153,000 | ||||||||||||
|
PreTSL XIX
|
700,535 | 115,000 | 585,535 | 234,000 | ||||||||||||
|
PreTSL XX
|
580,154 | 139,000 | 411,154 | 141,500 | ||||||||||||
Mortgage-backed securities include agency (Fannie Mae, Freddie Mac and Ginnie Mae)
mortgage-backed securities and non-agency collateralized mortgage obligations. We review our
portfolio of agency backed mortgage-backed securities quarterly for impairment. As of December 31,
2009, we believe that the impairment within our portfolio of agency mortgage-backed securities is
temporary. As of December 31, 2009, we had 12 non-agency collateralized mortgage obligations with
total book value of $28.0 million and total fair value of $25.1 million. During the year ended
December 31, 2009, we recognized other-than-temporary credit related impairment of $5.5 million
related to three of these investments. After recognizing the other-than-temporary impairment, our
book value on these three investments was $10.1 million, with a fair value of $8.0 million. We
determined how much of the impairment was credit related and noncredit related by analyzing cash
flow estimates, estimated prepayment speeds, loss severity and conditional default rates. We
consider the discounted cash flow analysis to be our primary evidence when determining whether
credit related other-than-temporary impairment exists. The impairment on the other nine
collateralized mortgage obligations, with book value of $17.9 million and fair value of $17.1
million, were also reviewed considering the severity and length of impairment. After this review,
we determined that the impairment on these nine securities was temporary.
The following table shows issuer specific information, book value, fair value, unrealized
losses and other-than-temporary impairment recorded in earnings for our portfolio of non-agency
collateralized mortgage obligations as of December 31, 2009.
| Total | Impairment | |||||||||||||||
| Unrealized | Recorded in | |||||||||||||||
| Description | Book Value | Fair Value | Losses | Earnings | ||||||||||||
| (In thousands) | ||||||||||||||||
|
AMAC 2003-6 2A2
|
$ | 995 | $ | 1,002 | $ | — | $ | — | ||||||||
|
AMAC 2003-6 2A8
|
2,058 | 2,083 | — | — | ||||||||||||
|
AMAC 2003-7 A3
|
1,196 | 1,194 | (2 | ) | — | |||||||||||
|
BOAMS 2005-11 1A8
|
5,276 | 4,809 | (467 | ) | — | |||||||||||
|
CWALT 2005-J14 A3
|
6,460 | 5,144 | (1,316 | ) | (348 | ) | ||||||||||
|
CFSB 2003-17 2A2
|
1,596 | 1,593 | (3 | ) | — | |||||||||||
|
WAMU 2003-S2 A4
|
1,338 | 1,354 | — | — | ||||||||||||
|
CMLTI 2005-10 1A5B
|
1,588 | 1,112 | (476 | ) | (2,724 | ) | ||||||||||
|
CSFB 2003-21 1A13
|
250 | 244 | (6 | ) | — | |||||||||||
|
FHASI 2003-8 1A24
|
3,753 | 3,541 | (212 | ) | — | |||||||||||
|
SARM 2005-21 4A2
|
2,080 | 1,717 | (363 | ) | (2,451 | ) | ||||||||||
|
WFMBS 2003-B A2
|
1,404 | 1,291 | (113 | ) | — | |||||||||||
|
|
||||||||||||||||
|
|
$ | 27,994 | $ | 25,084 | $ | (2,958 | ) | $ | (5,523 | ) | ||||||
|
|
||||||||||||||||
Deposits
.
Deposits increased by $586.2 million, or 11.6%, to $5.624 billion at
December 31, 2009 from $5.038 billion at December 31, 2008. Deposit balances increased across all
of our products and all of our regions as the rate of consumer savings generally increased on a
national basis. In addition, we have continued our focus on generating checking accounts and other
low cost business deposits. The increases were in savings deposits and IMF accounts, which
increased by $263.9 million, or 17.8%, to $1.745 billion at December 31, 2009 from $1.481 billion
at December 31, 2008, time deposits which increased by $167.3 million, or 6.8%, to $2.625 billion
at December 31,
34
Table of Contents
2009 from $2.457 billion at December 31, 2008 and checking accounts which increased by $155.0
million, or 14.1%, to $1.255 billion at December 31, 2009 from $1.100 billion at December 31, 2008.
The following table sets forth the dollar amount of deposits in each state indicated as of December
31, 2009.
| State | Balance | Percent | ||||||
| (Dollars in thousands) | ||||||||
|
Pennsylvania
|
$ | 4,602,944 | 81.8 | % | ||||
|
New York
|
590,895 | 10.5 | ||||||
|
Ohio
|
66,056 | 1.2 | ||||||
|
Maryland
|
315,072 | 5.6 | ||||||
|
Florida
|
49,457 | 0.9 | ||||||
|
|
||||||||
|
Total
|
$ | 5,624,424 | 100.0 | % | ||||
|
|
||||||||
The following table indicates the amount of our certificates of deposit of $100,000 or
more by time remaining until maturity at December 31, 2009.
| Maturity Period | Certificates of Deposit | |||
| (In thousands) | ||||
|
Three months or less
|
$ | 139,047 | ||
|
Over three months through six months
|
109,908 | |||
|
Over six months through twelve months
|
93,266 | |||
|
Over twelve months
|
286,660 | |||
|
|
||||
|
Total
|
$ | 628,881 | ||
|
|
||||
35
Table of Contents
The following table sets forth the dollar amount of deposits in the various types of
accounts we offered at the dates indicated.
| At December 31, 2009 | ||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| Balance | Percent (1) | Rate (2) | Balance | Percent (1) | Rate (2) | Balance | Percent (1) | Rate (2) | ||||||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
|
Savings accounts
|
$ | 924,461 | 16.4 | % | 0.85 | % | $ | 760,245 | 15.1 | % | 1.14 | % | $ | 745,430 | 13.4 | % | 1.20 | % | ||||||||||||||||||
|
Checking accounts
|
1,255,146 | 22.3 | 0.13 | % | 1,100,131 | 21.8 | 0.37 | % | 1,079,093 | 19.5 | 0.85 | % | ||||||||||||||||||||||||
|
Money market accounts
|
820,076 | 14.6 | 0.91 | % | 720,375 | 14.3 | 1.58 | % | 681,115 | 12.3 | 3.63 | % | ||||||||||||||||||||||||
|
Certificates of deposit:
|
||||||||||||||||||||||||||||||||||||
|
Maturing within 1 year
|
1,545,784 | 27.5 | 2.43 | % | 1,285,695 | 25.5 | 2.88 | % | 2,541,053 | 45.9 | 4.70 | % | ||||||||||||||||||||||||
|
Maturing 1 to 3 years
|
958,027 | 17.0 | 3.46 | % | 829,776 | 16.5 | 3.74 | % | 379,183 | 6.8 | 4.31 | % | ||||||||||||||||||||||||
|
Maturing more than 3 years
|
120,930 | 2.2 | 3.44 | % | 341,989 | 6.8 | 4.11 | % | 116,460 | 2.1 | 4.62 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total certificates
|
2,624,741 | 46.7 | 2.85 | % | 2,457,460 | 48.8 | 3.34 | % | 3,036,696 | 54.8 | 4.65 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total deposits
|
$ | 5,624,424 | 100.0 | % | 1.58 | % | $ | 5,038,211 | 100.0 | % | 2.08 | % | $ | 5,542,334 | 100.0 | % | 3.29 | % | ||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| (1) | Represents percentage of total deposits. | |
| (2) | Represents weighted average nominal rate at fiscal year end. |
36
Table of Contents
Borrowings.
Borrowings decreased by $170.6 million, or 16.0%, to $897.3 million at
December 31, 2009 from $1.068 billion at December 31, 2008. This decrease resulted from using our
deposit growth to repay short-term borrowings.
The following table sets forth information concerning our borrowings at the dates and for the
periods indicated.
| During the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (Dollars in Thousands) | ||||||||||||
|
Federal Home Loan Bank of Pittsburgh borrowings:
|
||||||||||||
|
Average balance outstanding
|
$ | 844,483 | $ | 625,707 | $ | 305,597 | ||||||
|
Maximum outstanding at end of any month during
year
|
$ | 917,478 | $ | 972,018 | $ | 332,160 | ||||||
|
Balance outstanding at end of year
|
$ | 782,221 | $ | 972,018 | $ | 257,025 | ||||||
|
Weighted average interest rate during year
|
3.96 | % | 3.89 | % | 4.59 | % | ||||||
|
Weighted average interest rate at end of year
|
4.04 | % | 3.49 | % | 4.64 | % | ||||||
|
|
||||||||||||
|
Reverse repurchase agreements:
|
||||||||||||
|
Average balance outstanding
|
$ | 90,706 | $ | 88,349 | $ | 70,875 | ||||||
|
Maximum outstanding at end of any month during
year
|
$ | 115,342 | $ | 98,108 | $ | 83,432 | ||||||
|
Balance outstanding at end of year
|
$ | 115,105 | $ | 91,436 | $ | 77,452 | ||||||
|
Weighted average interest rate during year
|
1.35 | % | 1.75 | % | 4.01 | % | ||||||
|
Weighted average interest rate at end of year
|
1.55 | % | 1.02 | % | 3.25 | % | ||||||
|
|
||||||||||||
|
Other borrowings:
|
||||||||||||
|
Average balance outstanding
|
$ | 1,382 | $ | 4,602 | $ | 4,790 | ||||||
|
Maximum outstanding at end of any month during
year
|
$ | 4,496 | $ | 4,652 | $ | 4,923 | ||||||
|
Balance outstanding at end of year
|
$ | — | $ | 4,491 | $ | 4,638 | ||||||
|
Weighted average interest rate during year
|
4.99 | % | 4.99 | % | 4.99 | % | ||||||
|
Weighted average interest rate at end of year
|
— | 4.99 | % | 4.99 | % | |||||||
|
|
||||||||||||
|
Total borrowings:
|
||||||||||||
|
Average balance outstanding
|
$ | 936,571 | $ | 718,657 | $ | 381,262 | ||||||
|
Maximum outstanding at end of any month during
year
|
$ | 1,009,586 | $ | 1,067,945 | $ | 408,596 | ||||||
|
Balance outstanding at end of year
|
$ | 897,326 | $ | 1,067,945 | $ | 339,115 | ||||||
|
Weighted average interest rate during year
|
3.69 | % | 3.74 | % | 4.52 | % | ||||||
|
Weighted average interest rate at end of year
|
3.72 | % | 3.29 | % | 4.33 | % | ||||||
Shareholders’ equity
.
Total shareholders’ equity at December 31, 2009 was $1.317
billion, an increase of $702.7 million, or 114.5%, from $613.8 million, at December 31, 2008. This
increase was primarily attributable to the second-step stock offering which increased equity by
$658.7 million. The increase was also attributed to net income of $32.7 million and an increase in
accumulated other comprehensive income of $20.6 million which was primarily due to the change in
fair value of marketable securities, interest rate swaps and change in defined benefit pension plan
valuation for the year ended December 31, 2009. Offsetting these increases was the payment of cash
dividends in the amount of $15.8 million.
Average Balance Sheets
The following tables set forth average balance sheets, average yields and costs, and certain
other information at and for the periods indicated. All average balances are daily average
balances. Non-accrual loans were included in the computation of average balances, but have been
reflected in the table as loans carrying a zero yield. The yields set forth below include the
effect of deferred fees, discounts and premiums that are amortized or accreted to interest income
or expense. The average yield for loans receivable and investment securities are calculated on a
fully-taxable equivalent basis.
37
Table of Contents
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||
| Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||
| Outstanding | Yield/ Cost | Outstanding | Yield/ Cost | Outstanding | Yield/ Cost | |||||||||||||||||||||||||||||||
| Balance | Interest | (12) | Balance | Interest | (12) | Balance | Interest | (12) | ||||||||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||||||||||||||
|
Loans receivable (includes FTE adjustments of
$1,643, $1,559 and $1,751, respectively)
(1)(2)(3)
|
$ | 5,199,829 | $ | 321,764 | 6.17 | % | $ | 5,016,694 | $ | 328,687 | 6.50 | % | $ | 4,660,693 | $ | 317,321 | 6.78 | % | ||||||||||||||||||
|
Mortgage-backed securities (5)
|
720,683 | 27,263 | 3.78 | % | 732,281 | 34,694 | 4.74 | % | 584,053 | 29,385 | 5.03 | % | ||||||||||||||||||||||||
|
Investment securities (includes FTE adjustments
of $5,952, $6,597 and $6,798, respectively)
(4)(5)(6)
|
360,620 | 22,390 | 6.21 | % | 478,933 | 29,250 | 6.11 | % | 820,337 | 47,990 | 5.85 | % | ||||||||||||||||||||||||
|
Federal Home Loan Bank stock (7)
|
63,162 | — | — | 48,167 | 1,428 | 2.96 | % | 33,348 | 2,017 | 6.05 | % | |||||||||||||||||||||||||
|
Interest-earning deposits
|
297,228 | 641 | 0.21 | % | 104,895 | 2,756 | 2.59 | % | 150,665 | 7,867 | 5.15 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest-earning assets (includes FTE
adjustments of $7,595, $8,156 and $8,549,
respectively)
|
6,641,522 | 372,058 | 5.59 | % | 6,380,970 | 396,815 | 6.18 | % | 6,249,096 | 404,580 | 6.45 | % | ||||||||||||||||||||||||
|
Non-interest-earning assets (8)
|
523,038 | 488,579 | 453,922 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total assets
|
$ | 7,164,560 | $ | 6,869,549 | $ | 6,703,018 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Savings
|
$ | 850,707 | 6,501 | 0.76 | % | $ | 778,341 | 9,159 | 1.18 | % | $ | 793,172 | 10,909 | 1.38 | % | |||||||||||||||||||||
|
Interest-bearing demand
|
739,102 | 2,536 | 0.34 | % | 732,097 | 6,434 | 0.88 | % | 698,585 | 11,038 | 1.58 | % | ||||||||||||||||||||||||
|
Money market
|
752,166 | 8,471 | 1.13 | % | 720,713 | 14,726 | 2.04 | % | 637,983 | 23,551 | 3.69 | % | ||||||||||||||||||||||||
|
Certificates
|
2,546,867 | 77,886 | 3.06 | % | 2,716,815 | 106,742 | 3.93 | % | 3,076,693 | 141,042 | 4.58 | % | ||||||||||||||||||||||||
|
Borrowed funds (9)
|
936,571 | 34,579 | 3.69 | % | 718,657 | 26,893 | 3.74 | % | 381,262 | 17,225 | 4.52 | % | ||||||||||||||||||||||||
|
Junior subordinated deferrable interest debentures
|
105,672 | 5,834 | 5.45 | % | 108,287 | 5,339 | 4.86 | % | 105,850 | 7,250 | 6.76 | % | ||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
5,931,085 | 135,806 | 2.29 | % | 5,774,910 | 169,293 | 2.93 | % | 5,693,545 | 211,015 | 3.71 | % | ||||||||||||||||||||||||
|
Non-interest-bearing liabilities
|
540,536 | 473,410 | 409,096 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total liabilities
|
6,471,621 | 6,248,320 | 6,102,641 | |||||||||||||||||||||||||||||||||
|
Shareholders’ equity
|
692,939 | 621,229 | 600,377 | |||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Total liabilities and stockholders’ equity
|
$ | 7,164,560 | $ | 6,869,549 | $ | 6,703,018 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest income
|
$ | 236,252 | $ | 227,522 | $ | 193,565 | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest rate spread (10)
|
3.30 | % | 3.25 | % | 2.74 | % | ||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest earning assets (6)
|
$ | 555,551 | ||||||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Net interest margin (11)
|
$ | 710,437 | 3.56 | % | $ | 606,060 | 3.57 | % | 3.10 | % | ||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
|
Ratio of average interest-earning assets to
average interest-bearing liabilities
|
1.12 | x | 1.10 | x | 1.10x | |||||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||||||
| (1) | Average gross loans receivable includes loans held as available-for-sale and loans placed on nonaccrual status. | |
| (2) | Interest income includes accretion/amortization of deferred loan fees/expenses, which were not material. | |
| (3) | Interest income on tax-free loans is presented on a taxable equivalent basis including adjustments as indicated. | |
| (4) | Interest income on tax-free investment securities is presented on a taxable equivalent basis including adjustments as indicated. | |
| (5) | Average balances do not include the effect of unrealized gains or losses on securities held as available-for-sale. |
(Footnotes continue on next page)
Table of Contents
| (6) | Average balances include Freddie Mac stock. | |
| (7) | During the quarter ended December 31, 2008, the Federal Home Loan Bank of Pittsburgh suspended dividends until further notice. | |
| (8) | Average balances include the effect of unrealized gains or losses on securities held as available-for-sale. | |
| (9) | Average balances include Federal Home Loan Bank advances, securities sold under agreements to repurchase and other borrowings. | |
| (10) | Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. | |
| (11) | Net interest margin represents net interest income as a percentage of average interest-earning assets. | |
| (12) | Shown on a FTE basis. GAAP basis yields were: Loans — 6.14%, 6.47% and 6.75%, respectively, Investment securities — 4.56%, 4.73% and 5.02%, respectively, interest-earning assets — 5.48%, 6.05% and 6.32%, respectively, GAAP basis net interest rate spreads were 3.19%, 3.12% and 2.61%, respectively, and GAAP basis net interest margins were 3.44%, 3.43% and 2.97%, respectively. |
Table of Contents
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest
expense for major components of interest-earning assets and interest-bearing liabilities for the
year ended December 31, 2009 as compared to 2008 and for the year ended December 31, 2008 as
compared to 2007. For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (1) changes in volume multiplied by the old
rate; (2) changes in rate, which are changes in rate multiplied by the old volume; and (3) changes
not solely attributable to rate or volume, which have been allocated proportionately to the change
due to volume and the change due to rate.
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||
| 2009 vs. 2008 | 2008 vs. 2007 | |||||||||||||||||||||||
| Increase (Decrease) | Total | Increase (Decrease) | Total | |||||||||||||||||||||
| Due to | Increase | Due to | Increase | |||||||||||||||||||||
| Rate | Volume | (Decrease) | Rate | Volume | (Decrease) | |||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
|
Interest-earning assets:
|
||||||||||||||||||||||||
|
Loans receivable
|
$ | (18,826 | ) | $ | 11,903 | $ | (6,923 | ) | $ | (12,864 | ) | $ | 24,230 | $ | 11,366 | |||||||||
|
Mortgage-backed securities
|
(6,937 | ) | (494 | ) | (7,431 | ) | (2,149 | ) | 7,458 | 5,309 | ||||||||||||||
|
Investment securities
|
486 | (7,346 | ) | (6,860 | ) | 2,110 | (20,850 | ) | (18,740 | ) | ||||||||||||||
|
Federal Home Loan Bank stock
|
(1,873 | ) | 445 | (1,428 | ) | (1,485 | ) | 896 | (589 | ) | ||||||||||||||
|
Interest-earning deposits
|
(7,168 | ) | 5,053 | (2,115 | ) | (3,314 | ) | (1,797 | ) | (5,111 | ) | |||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest-earning assets
|
(34,318 | ) | 9,561 | (24,757 | ) | (17,702 | ) | 9,937 | (7,765 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Interest-bearing liabilities:
|
||||||||||||||||||||||||
|
Savings accounts
|
(3,510 | ) | 852 | (2,658 | ) | (1,560 | ) | (190 | ) | (1,750 | ) | |||||||||||||
|
Interest-bearing demand accounts
|
(3,960 | ) | 62 | (3,898 | ) | (5,134 | ) | 530 | (4,604 | ) | ||||||||||||||
|
Money market demand accounts
|
(6,897 | ) | 642 | (6,255 | ) | (11,879 | ) | 3,054 | (8,825 | ) | ||||||||||||||
|
Certificate accounts
|
(22,919 | ) | (5,937 | ) | (28,856 | ) | (18,981 | ) | (15,319 | ) | (34,300 | ) | ||||||||||||
|
Borrowed funds
|
(470 | ) | 8,155 | 7,685 | (5,575 | ) | 15,243 | 9,668 | ||||||||||||||||
|
Junior subordinated deferrable interest
debentures
|
639 | (144 | ) | 495 | (2,078 | ) | 167 | (1,911 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total interest-bearing liabilities
|
(37,117 | ) | 3,630 | (33,487 | ) | (45,207 | ) | 3,485 | (41,722 | ) | ||||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Net change in net interest income
|
$ | 2,799 | $ | 5,931 | $ | 8,730 | $ | 27,505 | $ | 6,452 | $ | 33,957 | ||||||||||||
|
|
||||||||||||||||||||||||
Comparison of Results of Operations for the Years Ended December 31, 2009 and 2008
General.
Net income for the year ended December 31, 2009 was $32.7 million, or $0.30 per
diluted share, a decrease of $15.5 million, or 32.2%, from $48.2 million, or $0.44 per diluted
share, for the year ended December 31, 2008. The decrease in net income resulted primarily from an
increase in the provision for loan losses of $19.0 million and an increase in noninterest expense
of $30.4 million. These items were partially offset by an increase in net interest income of $9.3
million and an increase in noninterest income of $14.6 million. A discussion of each significant
change follows.
Net income for the year ended December 31, 2009 represents a 4.71% and 0.46% return on average
equity and return on average assets, respectively, compared to 7.75% and 0.70% for the year ended
December 31, 2008.
Interest income
.
Interest income decreased by $24.2 million, or 6.2%, to $364.5 million for
the year ended December 31, 2009 from $388.7 million for the year ended December 31, 2008. The
decrease in interest income was due to a decrease in the average yield on interest-earning assets,
which was partially offset by an increase in the average balance of interest-earning assets. The
average rate earned on interest-earnings assets decreased by 0.57%, to 5.48% for the year ended
December 31, 2009 from 6.05% for the year ended December 31, 2008. The average balance of
interest-earning assets increased by $260.6 million, or 4.1%, to $6.642 billion for the year ended
December 31, 2009 from $6.381 billion for the year ended December 31, 2008. An explanation of the
changes in the balances of interest-earnings assets and changes in the yield is discussed in each
category below.
40
Table of Contents
Interest income on loans receivable decreased by $7.0 million, or 2.1%, to $320.1 million for
the year ended December 31, 2009 from $327.1 million for the year ended December 31, 2008. This
decrease was attributable to a decrease in the average yield, which was partially offset by an
increase in the average balance of loans receivable. The average yield on loans receivable decreased by 33 basis points, to 6.14%
for the year ended December 31, 2009, from 6.47% for the year ended December 31, 2008. This
decrease is primarily due to the repricing of variable rate loans and the origination of new loans
in a lower interest rate environment. Average loans receivable increased by $183.1 million, or
3.7%, to $5.200 billion for the year ended December 31, 2009 from $5.017 billion for the year ended
December 31, 2008. This increase was attributable both to our efforts in attracting and
maintaining quality consumer and commercial loan relationships as well as continued strong loan
demand throughout our market area.
Interest income on mortgage-backed securities decreased by $7.4 million, or 21.4%, to $27.3
million for the year ended December 31, 2009 from $34.7 million for the year ended December 31,
2008. This decrease was attributable to decreases in both the yield earned on mortgage-backed
securities and the average balance of mortgage-backed securities. The average yield on
mortgage-backed securities decreased by 96 basis points, to 3.78% for the year ended December 31,
2009, from 4.74% for the year ended December 31, 2008. This decrease in yield is primarily the
result of the generally low interest rate environment throughout 2009. The average mortgage-backed
securities balance decreased by $11.6 million, or 1.6%, to $720.7 million for the year ended
December 31, 2009 from $732.3 million for the year ended December 31, 2008. The decrease in the
average balance was primarily the result of the repayments on mortgage-backed securities exceeding
the purchases of new securities in a market where we found our own loan originations to be more
attractive than the yield offered on these securities.
Interest income on investment securities decreased by $6.3 million, or 27.8%, to $16.4 million
for the year ended December 31, 2009 from $22.7 million for the year ended December 31, 2008. This
decrease was attributable to a decrease in the average balance of investment securities and a
decrease in the yield on investment securities. The average balance of investment securities
decreased by $118.3 million, or 24.7%, to $360.6 million for the year ended December 31, 2009 from
$478.9 million for the year ended December 31, 2008. The decrease in the average balance of
investment securities is primarily attributable to investing cash flows from these securities into
loans and interest-earning deposits. The average yield decreased by 17 basis points, to 4.56% for
the year ended December 31, 2009, from 4.73% for the year ended December 31, 2008. This decrease
in yield resulted from the general decline in market interest rates.
Interest income on interest-earning deposits decreased by $2.1 million, or 76.7%, to $641,000
for the year ended December 31, 2009 from $2.8 million for the year ended December 31, 2008. This
decrease is the result of a decrease in average yield earned on interest-earning deposits, which
was partially offset by an increase in the average balance of interest-earning deposits. The
average yield decreased by 2.38%, to 0.21% for the year ended December 31, 2009, from 2.59% for the
year ended December 31, 2008. This decrease is a result of the rate of overnight deposits being
decreased to the Federal Reserve’s target rate of between 0% and 25 basis points. The
interest-earning deposit balance increased by $192.3 million, or 183.4%, to $297.2 million for the
year ended December 31, 2009 from $104.9 million for the year ended December 31, 2008. This
increase in average balance was due to substantial deposit growth during the entire year and was
also due to the proceeds of our second-step stock offering being held in overnights funds during
the month of December.
Interest expense
.
Interest expense decreased by $33.5 million, or 19.8%, to $135.8 million
for the year ended December 31, 2009 from $169.3 million for the year ended December 31, 2008.
This decrease was attributed to a decrease in the interest rate paid on all deposits and
borrowings, which was partially offset by an increase in the average balance of interest-bearing
liabilities. The average rate paid on all deposit accounts decreased during the year ending
December 31, 2009 with savings accounts decreasing from 1.18% for the year ended December 31, 2008
to 0.76% for the year ended December 31, 2009; interest-bearing demand deposits decreasing from
0.88% for the year ended December 31, 2008 to 0.34% for the year ended December 31, 2009; money
market demand accounts decreasing from 2.04% for the year ended December 31, 2008 to 1.13% for the
year ended December 31, 2009 and certificate accounts decreasing from 3.93% for the year ended
December 31, 2008 to 3.06% for the year ended December 31, 2009. In addition to the decrease in
the rates paid on deposit accounts there was an overall decrease in the average balance of deposit
accounts, which decreased by $59.1 million, or 1.2%, to $4.889 billion for the year ended December
31, 2009 from $4.948 billion for the year ended December 31, 2008. Also contributing to the
decrease in interest expense was a shift in the mix of our deposits where we increased the balances
of savings,
41
Table of Contents
interest-bearing checking and money market demand accounts, while decreasing the
balance of certificates. The average rate paid on borrowed funds also decreased by 0.05% to 3.69%
for the year ended December 31, 2009, from 3.74% for the year ended December 31, 2008. Throughout
2008, we utilized alternative funding sources, including borrowings from the Federal Home Loan Bank of Pittsburgh, to extend the maturities of our
interest-bearing liabilities while continuing our efforts to control our cost of funds. During
2009, we repaid $43.8 million of term borrowings with the Federal Home Loan Bank and $146.0 million
of short-term advances from the Federal Reserve Bank.
Net interest income
.
Net interest income increased by $9.3 million, or 4.2%, to $228.7
million for the year ended December 31, 2009 from $219.4 million for the year ended December 31,
2008. This increase was a result of the factors previously discussed, primarily due to the cost of
funds decreasing more than the asset yield, contributing to a 0.01% increase in net interest margin
to 3.44% for the year ended December 31, 2009 from 3.43% for the year ended December 31, 2008 and a
0.07% increase in net interest rate spread to 3.19% for the year ended December 31, 2009 from 3.12%
for the year ended December 31, 2008.
Provision for loan losses
.
Management analyzes the allowance for loan losses as described in
the section “Allowance for Loan Losses.” The provision for loan losses increased by $18.9 million,
or 83.1%, to $41.8 million for year ended December 31, 2009 from $22.9 million for the year ended
December 31, 2008. The increase in the provision over the previous year is primarily attributed to
increasing the reserve percentages used to calculate the provision for losses due to deteriorating
economic factors, increased historical losses, the specific reserves on eight loans to different
borrowers and an increase in troubled loans. Increasing the reserve percentages resulted in an
increase in the provision for loan losses of $5.2 million. The increases were made based on
historical loss history, delinquency trends and geographical loan stratification. A specific
reserve was increased by $764,000, resulting in reserves of $951,000 for a loan secured by a strip
mall in the state of Indiana. A specific reserve was increased by $855,000, resulting in reserves
of $1.8 million for a loan secured by a housing development in Delaware. A specific reserve was
increased by $1.8 million, resulting in reserves of $2.4 million to a moving, storage and
automobile sales company in central Pennsylvania. A specific reserve of $1.1 million was
established for a loan to a recycling company in northwestern Pennsylvania. A specific reserve was
increased by $317,000 resulting in a specific reserve of $477,000 for a property eventually taken
into REO located in northern Virginia. A specific reserve of $393,000 was established for a
property located in northern Florida. A specific reserve was established for a condominium project
in Gainesville, Florida of $2.0 million. A specific reserve was established for a hotel in
Jacksonville, Florida of $2.0 million. Loans with payments 90 days or more delinquent and other
nonaccrual loans have increased to $124.6 million at December 31, 2009 from $99.2 million at
December 31, 2008.
In determining the amount of the current period provision, the Company considered the
deteriorating economic conditions in our markets, including increases in unemployment and
bankruptcy filings, and declines in real estate values. Net loan charge-offs increased by $16.7
million, or 171.7%, to $26.4 million for the year ended December 31, 2009 from $9.7 million for the
year ended December 31, 2008. Annual net charge-offs to average loans increased to 0.51% for the
year ended December 31, 2009 from 0.19% for the year ended December 31, 2008. The provision that
is recorded is sufficient, in management’s judgment, to bring the allowance for loan losses to a
level that reflects the losses inherent in the Company’s loan portfolio relative to loan mix,
economic conditions and historical loss experience. Management believes, to the best of their
knowledge, that all known losses as of the balance sheet dates have been recorded.
Noninterest income
.
Noninterest income increased by $14.5 million, or 37.6%, to $53.3 million
for the year ended December 31, 2009 from $38.8 million for the year ended December 31, 2008. This
increase in noninterest income was primarily due to a decrease in the noncash net impairment losses
of investment securities, which decreased by $9.9 million, or 61.9%, to $6.1 million for the year
ended December 31, 2009, from $16.0 million for the year ended December 31, 2008 and a recovery of
noncash impairment of mortgage servicing assets of $1.8 million for the year ended December 31,
2009 compared to a noncash impairment reserve of mortgage servicing assets of $2.2 million for the
year ended December 31, 2008. In addition, service charges and fees increased by $2.4 million, or
7.3%, to $34.8 million for the year ended December 31, 2009, from $32.4 million for the year ended
December 31, 2008 primarily due to the increase in deposits and deposit related fees; insurance
commission income increased by $282,000, or 11.9%, to $2.7 million for the year ended December 31,
2009, from $2.4 million for the year ended December 31, 2008; mortgage banking income increased by
$4.9 million to $5.6 million for the year ended December 31, 2009, from $665,000 for the year ended
December 31, 2008, due to the sale
42
Table of Contents
of a majority of our one- to four-family mortgage originations during the current year and we recorded a gain on the purchase of Keystone State Savings Bank of
$3.5 million. Partially offsetting these increases were decreases in trust and other financial
services income, which decreased by $411,000, or 6.1%, to $6.3 million for the year ended December 31, 2009, from $6.7 million for the year ended December 31, 2008 and other operating
income, which decreased by $743,000, or 17.2%, to $3.6 million for the year ended December 31,
2009, from $4.3 million for the year ended December 31, 2008 and an increase in the loss on real
estate owned, which increased by $3.6 million to $4.1 million for the year ended December 31, 2009
from $428,000 for the year ended December 31, 2008. This increase in the loss of real estate owned
was primarily attributable to a $3.9 million write down of vacant land in Florida.
Noninterest expense
.
Noninterest expense increased by $30.4 million, or 17.8%, to $200.5
million for the year ended December 31, 2009 from $170.1 million for the year ended December 31,
2008. This increase was primarily due to a special assessment from the FDIC of $3.3 million, a
contribution to our charitable foundation established in connection with our conversion of $13.8
million, an increase in compensation and employee benefits of $4.5 million, an increase in
processing expenses of $2.7 million, an increase in marketing expenses of $3.7 million and an
increase in federal deposit insurance premiums of $4.4 million. These increases were partially
offset by a decrease in amortization of intangible assets of $1.4 million and the prior year
penalty on early extinguishment of debt of $705,000. The increases in operating expenses were a
result of our continued upgrading of personnel and systems to build customer loyalty, improve loan
and deposit mix, establish brand loyalty and build our infrastructure to support additional growth.
Income taxes
.
Income tax expense decreased by $10.0 million, or 58.7%, to $7.0 million for
the year ended December 31, 2009 from $17.0 million for the year ended December 31, 2008. This
decrease is due to a decrease in income before income taxes of $25.5 million and a decrease in the
effective tax rate from 26.0% to 17.7%. The decrease in the effective tax rate was primarily due
to a higher percentage of tax exempt income to pretax income.
Comparison of Results of Operations for the Years Ended December 31, 2008 and 2007
General.
Net income for the year ended December 31, 2008 was $48.2 million, or $0.44 per
diluted share, a decrease of $926,000, or 1.9%, from $49.1 million, or $0.44 per diluted share, for
the year ended December 31, 2007. The decrease in net income resulted primarily from an increase in
the provision for loan losses of $14.1 million, an increase in noninterest expense of $17.4 million
and a decrease of $4.3 million in noninterest income. These items were partially offset by an
increase in net interest income of $34.3 million. A discussion of each significant change follows.
Net income for the year ended December 31, 2008 represents a 7.75% and 0.70% return on average
equity and return on average assets, respectively, compared to 8.18% and 0.73% for the year ended
December 31, 2007.
Interest income
.
Interest income decreased by $7.3 million, or 1.9%, to $388.7 million for
the year ended December 31, 2008 from $396.0 million for the year ended December 31, 2007. The
decrease in interest income was due to a decrease in the average yield on interest-earning assets,
which was partially offset by an increase in the average balance of interest-earning assets. The
average rate earned on interest-earnings assets decreased by 0.27%, to 6.05% for the year ended
December 31, 2008 from 6.32% for the year ended December 31, 2007. The average balance of
interest-earning assets increased by $131.9 million, or 2.1%, to $6.381 billion for the year ended
December 31, 2008 from $6.249 billion for the year ended December 31, 2007. An explanation of the
growth in interest-earnings assets is discussed in each category below.
Interest income on loans receivable increased by $11.5 million, or 3.7%, to $327.1 million for
the year ended December 31, 2008 from $315.6 million for the year ended December 31, 2007. This
increase was attributable to an increase in the average balance of loans receivable, which was
partially offset by a decrease in the average yield on loans receivable. Average loans receivable
increased by $356.0 million, or 7.6%, to $5.017 billion for the year ended December 31, 2008 from
$4.661 billion for the year ended December 31, 2007. This increase was attributable both to our
efforts in attracting and maintaining quality consumer and commercial loan relationships as well as
continued strong loan demand throughout our market area. During the year we increased commercial
loan balances by $213.3 million, or 16.7%, and consumer home equity loans by $43.6 million, or
4.4%. The average
43
Table of Contents
yield on loans receivable decreased by 0.28%, to 6.47% for the year ended
December 31, 2008, from 6.75% for the year ended December 31, 2007. This decrease is primarily due
to our variable rate loans repricing in a generally lower interest rate environment.
Interest income on mortgage-backed securities increased $5.3 million, or 18.1%, to $34.7
million for the year ended December 31, 2008 from $29.4 million for the year ended December 31,
2007. This increase was attributable to an increase in the average balance of mortgage-backed
securities, which was partially offset by a decrease in the mortgage-backed securities average
yield. The average mortgage-backed securities balance increased by $148.2 million, or 25.4%, to
$732.3 million for the year ended December 31, 2008 from $584.1 million for the year ended December
31, 2007. The increase in the average balance was primarily the result of our investing cash flows
during the first six months of the year from calls and maturities in the investment portfolio into
mortgage-backed securities, many of which were variable rate, in anticipation of interest rates
moving higher. The average yield on mortgage-backed securities decreased by 0.29%, to 4.74% for
the year ended December 31, 2008, from 5.03% for the year ended December 31, 2007. This decrease
in yield is primarily the result of the generally low interest rate environment throughout 2008.
Interest income on investment securities decreased by $18.5 million, or 45.0%, to $22.7
million for the year ended December 31, 2008 from $41.2 million for the year ended December 31,
2007. This decrease was attributable to a decrease in the average balance of investment
securities, as well as a decrease in the yield on investment securities. The average investment
securities balance decreased by $341.4 million, or 41.6%, to $478.9 million for the year ended
December 31, 2008 from $820.3 million for the year ended December 31, 2007. This decrease was
primarily from the November 2007 sale of $120.0 million of investment securities as well as the
ongoing sale of zero coupon treasury strips throughout 2008. The average yield decreased by 0.29%,
to 4.73% for the year ended December 31, 2008, from 5.02% for the year ended December 31, 2007.
This decrease in yield is primarily due to the general decline in market interest rates.
Interest income on interest-earning deposits decreased by $5.1 million or 65.0%, to $2.8
million for the year ended December 31, 2008 from $7.9 million for the year ended December 31,
2007. This decrease is the result of a decrease in both the average yield and average balance of
interest-earning deposits. The average yield decreased by 2.56% to 2.59% from 5.15% as the Federal
Reserve continued their campaign for lower targeted federal funds interest rates. The average
balance decreased by $45.8 million, or 30.4%, to $104.9 million for the year ended December 31,
2008 from $150.7 million for the year ended December 31, 2007.
Interest expense
.
Interest expense decreased by $41.7 million, or 19.8%, to $169.3 million
for the year ended December 31, 2008 from $211.0 million for the year ended December 31, 2007.
This decrease was attributed to a decrease in the interest rate paid on all funding sources, which
was partially offset by an increase in the average balance of interest-bearing liabilities. The
average rate paid on all deposit accounts decreased during the year ending December 31, 2008 with
savings accounts decreasing from 1.38% for the year ended December 31, 2007 to 1.18% for the year
ended December 31, 2008; interest-bearing demand deposits decreasing from 1.58% for the year ended
December 31, 2007 to 0.88% for the year ended December 31, 2008; money market demand accounts
decreasing from 3.69% for the year ended December 31, 2007 to 2.04% for the year ended December 31,
2008 and certificate accounts decreasing from 4.58% for the year ended December 31, 2007 to 3.93%
for the year ended December 31, 2008. In addition to the decrease in the rates paid on deposit
accounts there was an overall decrease in the average balance of deposit accounts, which decreased
by $258.5 million, or 5.0%, to $4.948 billion for the year ended December 31, 2008 from $5.206
billion for the year ended December 31, 2007. The strategic reduction of certificate accounts was
offset by an increase in the average balance of borrowed funds, which increased by $337.4 million,
or 88.5%, to $718.7 million for the year ended December 31, 2008, from $381.3 million for the year
ended December 31, 2007. The average rate paid on borrowed funds also decreased 78 basis points to
3.74% for the year ended December 31, 2008, from 4.52% for the year ended December 31, 2007.
Throughout the year, we utilized alternative funding sources, including borrowings from the Federal
Home Loan Bank of Pittsburgh, to extend the maturities of our interest-bearing liabilities while
continuing our efforts to control our cost of funds. Interest expense on junior subordinated
deferrable interest debentures decreased by $1.9 million, or 26.4%, as the interest rate on the
floating rate instruments decreased with a reduction of the three month LIBOR.
Net interest income
.
Net interest income increased $34.4 million, or 18.6%, to $219.4 million
for the year ended December 31, 2008 from $185.0 million for the year ended December 31, 2007.
This increase was a result of
44
Table of Contents
the factors previously discussed, primarily due to the cost of funds decreasing more than the asset yield, contributing to a 0.46% increase in net interest margin to
3.43% for the year ended December 31, 2008 from 2.97% for the year ended December 31, 2007.
Provision for loan losses
.
Management analyzes the allowance for loan losses as described in
the section “Allowance for Loan Losses.” The provision for loan losses increased $14.2 million, or
161.4%, to $22.9 million for the year ended December 31, 2008 from $8.7 million for the year ended
December 31, 2007. During the year ended December 31, 2008, we made specific provisions for two
large commercial loans located in the Florida region and one large commercial loan located in the
Maryland region as well as increasing our provision to reflect deteriorating general economic
factors. To the best of management’s knowledge, all known losses as of December 31, 2008 have been
recorded.
Noninterest income
.
Noninterest income decreased by $4.2 million, or 9.9%, to $38.8 million
for the year ended December 31, 2008 from $43.0 million for the year ended December 31, 2007. This
decrease in noninterest income was primarily due to an increase in the noncash other-than-temporary
impairment of investment securities, which increased by $7.6 million, or 90.3%, to $16.0 million
for the year ended December 31, 2008, from $8.4 million for the year ended December 31, 2007 and a
noncash impairment of mortgage servicing assets of $2.2 million for the year ended December 31,
2008 compared to a recovery of previous noncash impairment of mortgage servicing assets of $65,000
in the year ended December 31, 2007. In addition, insurance commission income decreased $329,000,
or 12.2%, and mortgage banking income decreased $913,000, or 57.9%. Partially offsetting these
decreases were increases in service charges and fees, which increased by $4.7 million, or 16.9%, to
$32.4 million for the year ended December 31, 2008, from $27.8 million for the year ended December
31, 2007; increases in trust and other financial services income of $495,000, or 8.0%; income from
bank owned life insurance of $337,000, or 7.6%; and other operating income of $1.3 million, or
42.0%.
Noninterest expense
.
Noninterest expense increased by $17.4 million, or 11.4%, to $170.1
million for the year ended December 31, 2008 from $152.7 million for the year ended December 31,
2007. This increase was primarily due to an increase in compensation and employee benefits of $6.9
million, an increase in processing expenses of $3.6 million, an increase in advertising of $1.8
million, an increase in federal deposit insurance premiums of $3.2 million, an increase in the
penalty for early repayment of debt of $705,000 and an increase in other expenses of $467,000. The
increases in operating expenses were a result of our continued upgrading of personnel and systems
to build customer loyalty and improve our loan mix.
Income taxes
.
Income tax expense decreased $488,000, or 2.8%, to $17.0 million for the year
ended December 31, 2008 from $17.5 million for the year ended December 31, 2007. This decrease is
due to a decrease in income before income taxes of $1.4 million and a decrease in the effective tax
rate from 26.2% to 26.0%. The decrease in the effective tax rate was primarily due to a higher
percentage of earnings on tax-free assets during the current year.
Asset Quality
We actively manage asset quality through our underwriting practices and collection procedures.
Our underwriting practices tend to focus on optimizing the return of a greater risk classification
while collection operatives focus on minimizing losses in the event an account becomes delinquent.
Collection procedures
.
Our collection procedures generally 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. Personal contact efforts are continued throughout the collection process, as necessary.
Generally, if a loan becomes 60 days past due, a collection letter is sent and the loan becomes
subject to possible legal action if suitable arrangements to repay have not been made. In
addition, the borrower is given information, which provides access to consumer counseling services,
to the extent required by regulations of the Department of Housing and Urban Development. When a
loan continues in a delinquent status for 90 days or more, and a repayment schedule has not been
made or kept by the borrower, we may send to the borrower a notice of intent to foreclose, giving
30 days to cure the delinquency. If not cured, foreclosure proceedings are initiated.
45
Table of Contents
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 principal and/or 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 reversed
and charged against interest income.
Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is
classified as real estate owned 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 the lower of the related
loan balance or its fair value as determined by an appraisal, 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 real estate owned or loss at the time of disposition is charged against earnings.
Loans Past Due and Nonperforming Assets
.
The following table sets forth information regarding
our 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, we fully reserve all accrued interest thereon and cease to accrue interest
thereafter. As of December 31, 2009, we had two loans that were restructured as a troubled debt
restructures that were accruing interest. A large number of one- to four-family residential real
estate loans are due on the first day of the month.
| At December 31 | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
Loans past due 30 days to 59 days:
|
||||||||||||||||||||
|
One- to four-family residential loans
|
$ | 27,998 | $ | 32,988 | $ | 27,270 | $ | 24,078 | $ | 26,290 | ||||||||||
|
Multi-family and commercial real estate loans
|
16,152 | 18,901 | 11,331 | 7,975 | 4,924 | |||||||||||||||
|
Consumer loans
|
11,226 | 11,295 | 10,550 | 9,096 | 12,053 | |||||||||||||||
|
Commercial business loans
|
3,293 | 7,700 | 9,947 | 4,325 | 2,450 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total loans past due 30 days to 59 days
|
58,669 | 70,884 | 59,098 | 45,474 | 45,717 | |||||||||||||||
|
|
||||||||||||||||||||
|
Loans past due 60 days to 89 days:
|
||||||||||||||||||||
|
One- to four-family residential loans
|
6,772 | 7,599 | 6,077 | 5,970 | 9,156 | |||||||||||||||
|
Multi-family and commercial real estate loans
|
5,811 | 8,432 | 4,984 | 3,846 | 3,399 | |||||||||||||||
|
Consumer loans
|
3,029 | 2,836 | 2,676 | 2,833 | 3,773 | |||||||||||||||
|
Commercial business loans
|
2,474 | 3,801 | 2,550 | 501 | 263 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total loans past due 60 days to 89 days
|
18,086 | 22,668 | 16,287 | 13,150 | 16,591 | |||||||||||||||
|
|
||||||||||||||||||||
|
Loans past due 90 days or more: (1)
|
||||||||||||||||||||
|
One- to four-family residential loans
|
29,373 | 20,435 | 12,542 | 10,334 | 12,179 | |||||||||||||||
|
Multi-family and commercial real estate loans
|
49,594 | 43,828 | 24,323 | 18,982 | 21,013 | |||||||||||||||
|
Consumer loans
|
12,544 | 9,756 | 7,582 | 4,578 | 8,322 | |||||||||||||||
|
Commercial business loans
|
18,269 | 25,184 | 5,163 | 6,631 | 1,502 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total loans past due 90 days or more
|
109,780 | 99,203 | 49,610 | 40,525 | 43,016 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Total loans 30 days or more past due
|
$ | 186,535 | $ | 192,755 | $ | 124,995 | $ | 99,149 | $ | 105,324 | ||||||||||
|
|
||||||||||||||||||||
|
Total real estate owned
|
$ | 20,257 | $ | 16,844 | $ | 8,667 | $ | 6,653 | $ | 4,872 | ||||||||||
|
Total loans 90 days or more past due and
real estate owned
|
$ | 130,037 | $ | 116,047 | $ | 58,277 | $ | 47,178 | 47,888 | |||||||||||
|
Total loans 90 days or more past due to net
loans receivable
|
2.10 | % | 1.93 | % | 1.03 | % | 0.92 | % | 0.93 | % | ||||||||||
|
Total loans 90 days or more past due and
real estate owned to total assets
|
1.63 | % | 1.67 | % | 0.87 | % | 0.72 | % | 0.74 | % | ||||||||||
| (1) | We classify as nonperforming all loans 90 days or more delinquent. |
46
Table of Contents
During the year ended December 31, 2009, gross interest income of approximately $12.5
million would have been recorded on loans accounted for on a nonaccrual basis if the loans had been
current during the year. No interest income on nonaccrual loans was included in income during the
year.
The following table sets forth loans 90 or more days past due by state (based on borrowers’
residence) at December 31, 2009.
| Commercial | ||||||||||||||||||||||||||||||||
| Consumer | business and | |||||||||||||||||||||||||||||||
| One- to four- | Percentage | and home | Percentage | commercial real | Percentage | Percentage | ||||||||||||||||||||||||||
| family | (1) | equity | (2) | estate | (3) | Total | (4) | |||||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||||||
|
State
|
||||||||||||||||||||||||||||||||
|
Pennsylvania
|
$ | 21,683 | 1.1 | % | $ | 9,571 | 0.8 | % | $ | 46,649 | 4.4 | % | $ | 77,903 | 1.9 | % | ||||||||||||||||
|
New York
|
386 | 0.3 | % | 230 | 0.2 | % | 1,040 | 0.3 | % | 1,656 | 0.3 | % | ||||||||||||||||||||
|
Ohio
|
196 | 0.8 | % | 78 | 0.5 | % | 496 | 1.1 | % | 770 | 0.9 | % | ||||||||||||||||||||
|
Maryland
|
702 | 0.3 | % | 1,000 | 2.5 | % | 11,942 | 7.6 | % | 13,644 | 3.2 | % | ||||||||||||||||||||
|
Florida
|
6,406 | 22.3 | % | 1,665 | 18.4 | % | 7,736 | 15.7 | % | 15,807 | 18.2 | % | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
|
Total
|
$ | 29,373 | 1.3 | % | $ | 12,544 | 0.9 | % | $ | 67,863 | 4.2 | % | $ | 109,780 | 2.1 | % | ||||||||||||||||
|
|
||||||||||||||||||||||||||||||||
| (1) | Percentage of mortgage loans in specified geographic area. | |
| (2) | Percentage of consumer loans in specified geographic area. | |
| (3) | Percentage of commercial loans in specified geographic area. | |
| (4) | Percentage of total loans in specified geographic area. |
Classification of Assets
.
Our policies, consistent with regulatory guidelines, provide
for the classification of loans 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.” At December 31, 2009, we
had 237 loans, with an aggregate principal balance of $62.1 million, designated as special mention.
We regularly review our asset portfolio to determine whether any assets require classification
in accordance with applicable regulations. Our largest classified assets generally are also our
largest nonperforming assets.
The following table sets forth the aggregate amount of our classified assets at the dates
indicated.
| At December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In Thousands) | ||||||||||||
|
Substandard assets
|
$ | 206,629 | $ | 155,245 | $ | 85,526 | ||||||
|
Doubtful assets
|
2,258 | 3,596 | 4,374 | |||||||||
|
Loss assets
|
473 | 64 | 388 | |||||||||
|
|
||||||||||||
|
Total classified assets
|
$ | 209,360 | $ | 158,905 | $ | 90,288 | ||||||
|
|
||||||||||||
Allowance for Loan Losses
.
Our board of directors has adopted an Allowance for Loan
Losses Policy designed to provide management with a systematic methodology for determining and
documenting the allowance for loan losses each reporting period. This methodology was developed to
provide a consistent process and review procedure to ensure that the allowance for loan losses is
in conformity with GAAP, our policies and procedures and other supervisory and regulatory
guidelines.
47
Table of Contents
On an ongoing basis, the Credit Administration department, as well as loan officers, branch
managers and department heads, review and monitor the loan portfolio for problem loans. This
portfolio monitoring includes a review of the monthly delinquency reports as well as historical
comparisons and trend analysis. On an on-going basis the loan officer along with the Credit
Administration department grades or classifies problem loans or potential problem loans based upon
their knowledge of the lending relationship and other information previously accumulated. Loans that have been classified as substandard or doubtful are reviewed by the
Credit Administration department for possible impairment. A loan is considered impaired when, based on
current information and events, it is probable that we will be unable to collect all amounts due
according to the contractual terms of the loan agreement including both contractual principal and
interest payments. Our loan grading system for problem loans is described above in
“—Classification of Assets.”
If an individual loan is deemed to be impaired, we determine the proper measurement of
impairment for each loan based on one of three methods: (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, we adjust the
specific allowance associated with that individual loan accordingly.
If a substandard or doubtful loan is not considered individually for impairment, it is grouped
with other loans that possess common characteristics for impairment evaluation and analysis. 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 the historical
delinquency, charge-off and recovery trends over the past three years which are then extended to
include the loss realization period during which the event of default occurs, additional
consideration is also given to the current economic, political, regulatory and interest rate
environment. This adjusted 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 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 prepared monthly and presented to the Credit
Committee on a quarterly basis. The Credit Committee is comprised of members of Senior Management
from our various departments, including mortgage, consumer and commercial lending, appraising,
administration and finance as well as our President and Chief Executive Officer. 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 of our market areas. Based on this review and
discussion, the appropriate allowance for loan losses is estimated and any adjustments necessary to
reconcile the actual allowance for loan losses with this estimate are determined. In addition, the
Credit Committee considers whether any changes to the methodology are needed. The Credit Committee
also compares our delinquency trends, nonperforming asset amounts and allowance for loan loss
levels to its peer group and to state and national statistics. A similar review is also performed
by the Risk Management Committee of the board of directors.
In addition to the reviews by the Credit Committee and the Risk Management Committee,
regulators from either the Federal Deposit Insurance Corporation or Pennsylvania State Department
of Banking perform a review on an annual basis of 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 beyond management’s control, which 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 and events. There is no assurance that actual portfolio losses
will not be substantially different than those that were estimated. Management believes that all
known losses as of December 31, 2009 and 2008 have been recorded.
Management utilizes a consistent methodology each period when analyzing the adequacy of the
allowance for loan losses and the related provision for loan losses. As part of the analysis,
management considered the
48
Table of Contents
deteriorating economic data in our markets such as the continued increases in unemployment and bankruptcies as well as the declines in real estate collateral
values. In addition, management considered the negative trend in asset quality, loan charge-offs
and the allowance for loan losses as a percentage of nonperforming loans. As a result, we increased
the allowance for loan losses during the year by $15.5 million, or 28.2%, to $70.4 million, or
1.35% of total loans, at December 31, 2009 from $54.9 million, or 1.06% of total loans, at December 31, 2008. The increase in the allowance for loan losses and the related provision for loan losses is discussed above in
the section “Provision for loan losses.”
Analysis of the Allowance For Loan Losses
.
The following table sets forth the analysis of the
allowance for loan losses for the periods indicated. Ratios for the six months ended December 31,
2005 have been annualized.
| Six Months | ||||||||||||||||||||||||
| Ended | Year Ended | |||||||||||||||||||||||
| Years Ended December 31, | December 31, | June 30, | ||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | 2005 | |||||||||||||||||||
| (In Thousands) | ||||||||||||||||||||||||
|
Net loans receivable
|
$ | 5,229,062 | $ | 5,141,892 | $ | 4,795,622 | $ | 4,412,441 | $ | 4,622,269 | $ | 4,376,884 | ||||||||||||
|
Average loans outstanding
|
$ | 5,199,829 | $ | 5,016,694 | $ | 4,660,693 | $ | 4,395,274 | $ | 4,532,523 | $ | 4,234,241 | ||||||||||||
|
|
||||||||||||||||||||||||
|
Allowance for loan losses
|
||||||||||||||||||||||||
|
Balance at beginning of period
|
$ | 54,929 | $ | 41,784 | $ | 37,655 | $ | 33,411 | $ | 31,563 | $ | 30,670 | ||||||||||||
|
Provision for loan losses
|
41,847 | 22,851 | 8,743 | 8,480 | 4,722 | 9,566 | ||||||||||||||||||
|
Charge offs:
|
||||||||||||||||||||||||
|
Real estate loans
|
(6,293 | ) | (3,962 | ) | (2,042 | ) | (1,148 | ) | (282 | ) | (676 | ) | ||||||||||||
|
Consumer loans
|
(5,912 | ) | (6,290 | ) | (5,175 | ) | (5,543 | ) | (3,314 | ) | (5,726 | ) | ||||||||||||
|
Commercial loans
|
(15,611 | ) | (1,358 | ) | (973 | ) | (926 | ) | (43 | ) | (3,071 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
Total charge-offs
|
(27,816 | ) | (11,610 | ) | (8,190 | ) | (7,617 | ) | (3,639 | ) | (9,473 | ) | ||||||||||||
|
Recoveries:
|
||||||||||||||||||||||||
|
Real estate loans
|
155 | 140 | 250 | 123 | 4 | 1 | ||||||||||||||||||
|
Consumer loans
|
1,093 | 1,060 | 1,073 | 1,214 | 455 | 750 | ||||||||||||||||||
|
Commercial loans
|
195 | 704 | 134 | 62 | 51 | 49 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total recoveries
|
1,443 | 1,904 | 1,457 | 1,399 | 510 | 800 | ||||||||||||||||||
|
Acquired through acquisitions
|
— | — | 2,119 | 1,982 | 255 | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at end of period
|
$ | 70,403 | $ | 54,929 | $ | 41,784 | $ | 37,655 | $ | 33,411 | $ | 31,563 | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Allowance for loan losses as a
percentage of net loans
receivable
|
1.35 | % | 1.07 | % | 0.87 | % | 0.85 | % | 0.72 | % | 0.72 | % | ||||||||||||
|
Net charge-offs as a percentage
of average loans outstanding
|
0.51 | % | 0.19 | % | 0.14 | % | 0.14 | % | 0.14 | % | 0.20 | % | ||||||||||||
|
Allowance for loan losses as a
percentage of nonperforming
loans
|
56.49 | % | 55.37 | % | 84.22 | % | 92.92 | % | 77.67 | % | 93.91 | % | ||||||||||||
|
Allowance for loan losses as a
percentage of nonperforming
loans and real estate owned
|
54.14 | % | 47.33 | % | 71.70 | % | 79.81 | % | 69.77 | % | 78.33 | % | ||||||||||||
49
Table of Contents
Allocation of Allowance for Loan Losses
.
The following tables set forth the allocation
of allowance for loan losses by loan category at the dates indicated. The allowance for loan
losses allocated to each category is not necessarily indicative of future losses in any particular
category. Effective January 1, 2008, we revised our methodology for calculating the allowance for
loan losses. Prior to that date, we established the allowance for loan losses based on ranges
applicable to various loan categories (as opposed to single amounts applicable to the loan
categories), which resulted in our not having an unallocated component of the allowance prior to
that date.
| At December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| % of Total | % of Total | % of Total | ||||||||||||||||||||||
| Amount | Loans (1) | Amount | Loans (1) | Amount | Loans (1) | |||||||||||||||||||
|
Balance at end of year applicable to:
|
||||||||||||||||||||||||
|
Real estate loans
|
$ | 39,584 | 87.5 | % | $ | 29,115 | 87.6 | % | $ | 28,854 | 87.2 | % | ||||||||||||
|
Consumer loans
|
6,554 | 5.1 | 6,125 | 5.1 | 6,645 | 5.4 | ||||||||||||||||||
|
Commercial business loans
|
20,073 | 7.4 | 15,044 | 7.3 | 6,285 | 7.4 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total allocated allowance
|
66,211 | 50,284 | 41,784 | |||||||||||||||||||||
|
Unallocated
|
4,192 | — | 4,645 | — | — | — | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
|
$ | 70,403 | 100.0 | % | $ | 54,929 | 100.0 | % | $ | 41,784 | 100.0 | % | ||||||||||||
|
|
||||||||||||||||||||||||
| At December 31, | ||||||||||||||||
| 2006 | 2005 | |||||||||||||||
| % of Total | % of Total | |||||||||||||||
| Amount | Loans (1) | Amount | Loans (1) | |||||||||||||
| (Dollars in Thousands) | ||||||||||||||||
|
Balance at end of year applicable to:
|
||||||||||||||||
|
Real estate loans
|
$ | 17,936 | 88.8 | % | $ | 16,875 | 88.6 | % | ||||||||
|
Consumer loans
|
16,500 | 6.0 | 13,991 | 8.1 | ||||||||||||
|
Commercial business loans
|
3,219 | 5.2 | 2,545 | 3.3 | ||||||||||||
|
|
||||||||||||||||
|
Total allocated allowance
|
37,655 | 33,411 | ||||||||||||||
|
Unallocated
|
— | — | — | — | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 37,655 | 100.0 | % | $ | 33,411 | 100.0 | % | ||||||||
|
|
||||||||||||||||
| (1) | Represents percentage of loans in each category to total loans. |
Liquidity and Capital Resources
Northwest Savings Bank is required to maintain a sufficient level of liquid assets, as
determined by management and defined and reviewed for adequacy by the Federal Deposit Insurance
Corporation during their regular examinations. The Federal Deposit Insurance Corporation, however,
does not prescribe by regulation a minimum amount or percentage of liquid assets. The Federal
Deposit Insurance Corporation allows us to consider any marketable security, whose sale would not
impair our capital adequacy, to be eligible for liquidity. Liquidity is monitored through the use
of a standard liquidity ratio of liquid assets to borrowings plus deposits. Using this formula,
Northwest Savings Bank’s liquidity ratio was 28.9% as of December 31, 2009. We adjust our
liquidity level in order to meet funding needs of deposit outflows, repayment of borrowings and
loan commitments. We also adjust liquidity as appropriate to meet our asset and liability
management objectives. Liquidity needs can also be met by temporarily drawing upon lines-of-credit
established for such reasons. As of December 31, 2009, Northwest Savings Bank had $1.826 billion
of additional borrowing capacity available with the Federal Home Loan Bank of Pittsburgh, including
a $150.0 million overnight line of credit, as well as a $141.3 million borrowing capacity available
with the Federal Reserve Bank and $75.0 million with a correspondent bank.
In addition to deposits, our primary sources of funds are the amortization and repayment of
loans and mortgage-backed securities, maturities of investment securities and other short-term
investments, and earnings and funds provided from operations. While scheduled principal repayments
on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by general interest rate levels, economic conditions,
and competition. We manage the pricing of our deposits to maintain a desired deposit balance. In
addition, we invest excess funds in short-term interest earning and other assets, which provide
liquidity to meet lending requirements. Short-term interest-earning deposits amounted to $1.108
million at
50
Table of Contents
December 31, 2009. For additional information about our cash flows from operating,
financing, and investing activities, see the Statements of Cash Flows included in the Consolidated
Financial Statements.
A portion of our liquidity consists of cash and cash equivalents, which are a product of our
operating, investing, and financing activities. The primary sources of cash during the current
year were net income, principal repayments on loans and mortgage-backed securities, increases in
deposit accounts, and the funds received from our common stock offering.
Liquidity management is both a daily and long-term function of business management. If we
require funds beyond our ability to generate them internally, borrowing agreements exist with the
Federal Home Loan Bank of Pittsburgh, which provide an additional source of funds. At December 31,
2009 Northwest Savings Bank had advances of $782.2 million from the Federal Home Loan Bank of
Pittsburgh. We borrow from the Federal Home Loan Bank of Pittsburgh to reduce interest rate risk
and to provide liquidity when necessary.
At December 31, 2009, our customers had $345.1 million of unused lines of credit available and
$134.6 million in loan commitments. This amount does not include the unfunded portion of loans in
process. Certificates of deposit scheduled to mature in less than one year at December 31, 2009,
totaled $1.546 billion. Management believes that a significant portion of such deposits will
remain with us.
The major sources of our cash flows are in the areas of loans, marketable securities, deposits
and borrowed funds.
Deposits are our primary source of externally generated funds. The level of deposit inflows
during any given period is heavily influenced by factors outside of management’s control, such as
the general level of short-term and long-term market interest rates, as well as higher alternative
yields that investors may obtain on competing investments such as money market mutual funds.
Financial institutions, such as Northwest Savings Bank, are also subject to deposit outflows. Our
net deposits increased/(decreased) by $586.2 million, $(504.1) million and $9.7 million for the
years ended December 31, 2009, 2008 and 2007, respectively.
Similarly, the amount of principal repayments on loans and the amount of new loan originations
is heavily influenced by the general level of market interest rates. Funds received from loan
maturities and principal payments on loans for the years ended December 31, 2009, 2008 and 2007
were $1.650 billion, $1.284 billion and $1.235 billion, respectively. Loan originations for the
years ended December 31, 2009, 2008 and 2007 were $2.386 billion, $1.885 billion and $1.742
billion, respectively. We also sell a portion of the loans we originate, and the cash flows from
such sales for the years ended December 31, 2009, 2008 and 2007 were $595.3 million, $212.5 million
and $250.3 million, respectively.
We experience significant cash flows from our portfolio of marketable securities as principal
payments are received on mortgage-backed securities and as investment securities mature. Cash flow
from the repayment of principal and the maturity of marketable securities for the years ended
December 31, 2009, 2008 and 2007 were $297.8 million, $319.1 million and $333.8 million,
respectively.
When necessary, we utilize borrowings as a source of liquidity and as a source of funds for
long-term investment when market conditions permit. The net cash flow from the receipt and
repayment of borrowings was a net increase/(decrease) of $(170.4) million, $729.2 million and
$(65.8) million for the years ended December 31, 2009, 2008 and 2007, respectively.
Other activity with respect to cash flow was the payment of cash dividends on common stock in
the amount of $15.8 million, $15.8 million and $15.7 million for the ended December 31, 2009, 2008
and 2007, respectively.
At December 31, 2009, stockholders’ equity totaled $1.317 billion. During 2009 our Board of
Directors declared regular quarterly dividends totaling $0.40 per share of common stock.
Management monitors the capital levels of Northwest Savings Bank to provide for current and
future business opportunities and to meet regulatory guidelines for “well capitalized”
institutions. Northwest Savings Bank is required by the Pennsylvania State Department of Banking
and the Office of Thrift Supervision to meet minimum
51
Table of Contents
capital adequacy requirements. At December 31, 2009, Northwest Savings Bank exceeded all regulatory minimum capital requirements and is
considered to be “well capitalized.” In addition, as of December 31, 2009, management
was not aware of any recommendation by a regulatory authority that, if it were implemented,
would have a material effect on liquidity, capital resources or operations.
Regulatory Capital Requirements.
Northwest Savings Bank is subject to minimum capital requirements established by the Federal
Deposit Insurance Corporation. See “Supervision and Regulation—Capital Requirements” and
“—Prompt Corrective Action”. The following table summarizes Northwest Savings Bank’s total
shareholder’s equity, regulatory capital, total risk-based assets, and leverage and risk-based
regulatory ratios at the dates indicated.
| At December 31, | ||||||||
| 2009 | 2008 | |||||||
| (Dollars in Thousands | ||||||||
|
Total shareholder’s equity (GAAP capital)
|
$ | 1,086,145 | $ | 706,610 | ||||
|
Add: accumulated other comprehensive (income)/loss
|
6,509 | 22,017 | ||||||
|
Less: nonqualifying intangible assets
|
(176,041 | ) | (178,758 | ) | ||||
|
|
||||||||
|
Leverage or Tier 1 capital
|
$ | 916,613 | $ | 549,869 | ||||
|
Plus: Tier 2 capital (1)
|
58,354 | 54,198 | ||||||
|
|
||||||||
|
Total risk-based capital
|
$ | 974,967 | $ | 604,067 | ||||
|
|
||||||||
|
Average total assets for leverage ratio
|
$ | 7,246,741 | $ | 6,829,557 | ||||
|
|
||||||||
|
Net risk-weighted assets including off-balance sheet items
|
$ | 4,654,570 | $ | 4,329,431 | ||||
|
|
||||||||
|
|
||||||||
|
Leverage capital ratio
|
12.65 | % | 8.05 | % | ||||
|
Minimum requirement (2)
|
3.00% to 5.00% | 3.00% to 5.00% | ||||||
|
|
||||||||
|
Risk-based capital ratio
|
20.95 | % | 13.95 | % | ||||
|
Minimum requirement
|
8.00 | % | 8.00 | % | ||||
(Footnotes on following page)
| (1) | Tier 2 capital consist of the allowance for loan losses, which is limited to 1.25% of total risk-weighted assets as detailed under regulations of the FDIC, and 45% of pre-tax net unrealized gains on securities available-for-sale. | |
| (2) | The FDIC has indicated that the most highly rated institutions which meet certain criteria will be required to maintain a ratio of 3.00%, and all other institutions will be required to maintain an additional cushion of 100 to 200 basis points. |
Northwest Savings Bank is also subject to capital guidelines of the Pennsylvania
Department of Banking. Although not adopted in regulation form, the Department of Banking requires
6% leverage capital and 10% risk-based capital. See “Item 1. Business—Supervision and
Regulation—Capital Requirements” and “—Prompt Corrective Action”.
52
Table of Contents
Contractual Obligations
We are obligated to make future payments according to various contracts. The following table
presents the expected future payments of the contractual obligations aggregated by obligation type
at December 31, 2009.
| Payments Due | ||||||||||||||||||||
| One year to less | Three years to less | Five years or | ||||||||||||||||||
| Less than one year | than three years | than five years | greater | Total | ||||||||||||||||
| (In Thousands) | ||||||||||||||||||||
|
Contractual Obligations at
December 31, 2009
|
||||||||||||||||||||
|
Long-term debt (1)
|
$ | 151,611 | $ | 305,000 | $ | 250,085 | $ | 190,630 | $ | 897,326 | ||||||||||
|
Junior subordinated debentures (2)
|
— | — | — | 103,094 | 103,094 | |||||||||||||||
|
Operating leases (3)
|
4,063 | 6,279 | 4,034 | 9,327 | 23,703 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total
|
$ | 155,674 | $ | 311,279 | $ | 254,119 | $ | 303,051 | $ | 1,024,123 | ||||||||||
|
|
||||||||||||||||||||
|
Commitments to extend credit
|
$ | 134,620 | $ | — | $ | — | $ | — | $ | 134,620 | ||||||||||
|
|
||||||||||||||||||||
| (1) | See Note 11 to the consolidated financial statements, Borrowed Funds, for additional information. | |
| (2) | See Note 22 to the consolidated financial statements, Junior Subordinated Debentures/Trust Preferred Securities, for additional information. | |
| (3) | See Note 8 to the consolidated financial statements, Premises and Equipment, for additional information. |
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and notes thereto, presented elsewhere herein, have been
prepared in accordance with generally accepted accounting principles, which require the measurement
of financial position and operating results in terms of historical dollars without considering the
change in the relative purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of our operations. Unlike most industrial companies,
nearly all of our assets and liabilities are monetary. As a result, interest rates have a greater
impact on our performance than do the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the price of goods and
services.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk Management
The matching of assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest
rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a
specific time period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing liabilities maturing
or repricing within that same time period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a negative gap would
tend to adversely affect net interest income while a positive gap would tend to positively affect
net interest income. Similarly, during a period of falling interest rates, a negative gap would
tend to positively affect net interest income while a positive gap would tend to adversely affect
net interest income.
Our policy in recent years has been to reduce our exposure to interest rate risk generally by
better matching the maturities of our interest rate sensitive assets and liabilities and by
increasing the interest rate sensitivity of our interest-earning assets. We (i) purchase
adjustable-rate investment securities and mortgage-backed securities which at December 31, 2009
totaled $575.8 million; and (ii) originate adjustable-rate mortgage loans, adjustable-rate
consumer loans, and adjustable-rate commercial loans, which at December 31, 2009, totaled
$1.062 billion or 20.0% of our total loan portfolio. Of our
$7.412 billion of
interest-earning assets at December 31, 2009,
$2,858 billion, or 38.6%, consisted of
assets with adjustable rates of interest. When market
53
Table of Contents
conditions are favorable, we also attempt to
reduce interest rate risk by lengthening the maturities of our interest-bearing liabilities by
using FHLB advances as a source of long-term fixed-rate funds, and by promoting longer-term
certificates of deposit.
At December 31, 2009, total interest-bearing liabilities maturing or repricing within one year
exceeded total interest-earning assets maturing or repricing in the
same period by $469.4 million, representing a cumulative
negative one-year gap ratio of 115.32%. We have an
Asset/Liability Committee with members consisting of various individuals from Senior Management.
This committee meets monthly in an effort to effectively manage our
balance sheet and to monitor activity and set pricing. We also have a Risk Management Committee
comprised of certain members of the Board of Directors, which among other things, is responsible
for reviewing our level of interest rate risk. The Committee meets quarterly and, as part of their
risk management assessment, reviews interest rate risks and trends, our interest sensitivity
position and the liquidity and market value of our investment portfolio.
The following table sets forth, on an amortized cost basis, the amounts of interest-earning
assets and interest-bearing liabilities outstanding at December 31, 2009, which are expected to
reprice or mature, based upon certain assumptions, in each of the future time periods shown.
Except as stated below, the amounts of assets and liabilities shown that reprice or mature during a
particular period were determined in accordance with the earlier of the term of repricing or the
contractual term of the asset or liability. Management believes that these assumptions approximate
the standards used in the savings industry and considers them appropriate and reasonable.
| Amounts Maturing or Repricing | ||||||||||||||||||||||||||||
| Within 1 | Over 1-3 | Over 3-5 | Over 5-10 | Over 10- | Over 20 | |||||||||||||||||||||||
| Year | Year | Year | Year | 20 Years | Years | Total | ||||||||||||||||||||||
| (Dollars in Thousands) | ||||||||||||||||||||||||||||
|
Rate-sensitive assets:
|
||||||||||||||||||||||||||||
|
Interest earning demand
|
$ | 1,038,525 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,038,525 | ||||||||||||||
|
Mortgage-backed securities:
|
||||||||||||||||||||||||||||
|
Fixed rate
|
47,764 | 60,206 | 33,771 | 48,260 | — | — | 190,001 | |||||||||||||||||||||
|
Variable-rate
|
447,790 | 42,294 | 53,572 | — | — | — | 543,656 | |||||||||||||||||||||
|
Investment securities
|
75,829 | 123,146 | 37,856 | 96,601 | — | — | 333,432 | |||||||||||||||||||||
|
Real estate loans:
|
||||||||||||||||||||||||||||
|
Adjustable rate
|
57,775 | 781 | — | — | — | — | 58,556 | |||||||||||||||||||||
|
Fixed-rate
|
367,150 | 592,299 | 471,859 | 692,864 | 160,004 | — | 2,284,176 | |||||||||||||||||||||
|
Home equity lines of credit
|
235,902 | — | — | — | — | — | 235,902 | |||||||||||||||||||||
|
Education loans
|
32,860 | — | — | — | — | — | 32,860 | |||||||||||||||||||||
|
Other consumer loans
|
352,223 | 443,104 | 223,406 | 66,381 | — | — | 1,085,114 | |||||||||||||||||||||
|
Commercial loans
|
877,589 | 517,418 | 209,734 | 5,146 | — | — | 1,609,887 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total rate-sensitive assets
|
$ | 3,533,407 | $ | 1,779,248 | $ | 1,030,198 | $ | 909,252 | $ | 160,004 | $ | — | $ | 7,412,109 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Rate-sensitive liabilities:
|
||||||||||||||||||||||||||||
|
Fixed maturity deposits
|
$ | 1,547,715 | $ | 956,987 | $ | 106,152 | $ | 13,772 | $ | 115 | $ | — | $ | 2,624,741 | ||||||||||||||
|
Money market
deposit accounts
|
783,426 | — | — | — | 36,650 | — | 820,076 | |||||||||||||||||||||
|
Savings Accounts
|
279,000 | 392,000 | — | — | 253,461 | — | 924,461 | |||||||||||||||||||||
|
Checking Accounts
|
299,000 | 304,000 | — | — | — | 652,146 | 1,255,146 | |||||||||||||||||||||
|
FHLB advances
|
36,620 | 305,228 | 250,207 | 190,166 | — | — | 782,221 | |||||||||||||||||||||
|
Other Borrowings
|
115,105 | — | — | — | — | — | 115,105 | |||||||||||||||||||||
|
Trust Preferred Debentures
|
3,094 | — | 25,000 | 75,000 | — | — | 103,094 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total rate-sensitive liabilities
|
$ | 3,063,960 | $ | 1,958,215 | $ | 381,359 | $ | 278,938 | $ | 290,226 | $ | 652,146 | $ | 6,624,844 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Interest sensitivity gap per period
|
$ | 469,447 | $ | (178,967 | ) | $ | 648,839 | $ | 630,314 | $ | (130,222 | ) | $ | (652,146 | ) | $ | 787,265 | |||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Cumulative interest sensitivity gap
|
$ | 469,447 | $ | 290,480 | $ | 939,319 | $ | 1,569,633 | $ | 1,439,411 | $ | 787,265 | $ | 787,265 | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Cumulative interest sensitivity gap as a
percentage of total assets
|
5.85 | % | 3.62 | % | 11.70 | % | 19.56 | % | 17.94 | % | 9.81 | % | 9.81 | % | ||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Cumulative interest-earning assets as a
percent of cumulative interest-bearing
liabilities
|
115.32 | % | 105.78 | % | 117.38 | % | 127.62 | % | 124.10 | % | 111.88 | % | 111.88 | % | ||||||||||||||
54
Table of Contents
We have an Asset/Liability Committee, consisting of several members of management, which
meets monthly to review market interest rates, economic conditions, the pricing of interest earning
assets and interest bearing liabilities and our balance sheet structure. On a quarterly basis,
this committee also reviews our interest rate risk position and our cash flow projections.
Our Board of Directors has a Risk Management Committee, which meets quarterly and reviews
interest rate risks and trends, our interest sensitivity position, our liquidity position and the
market risk inherent in our investment portfolio.
In an effort to assess market risk, we use a simulation model to determine the effect of
immediate incremental increases and decreases in interest rates on net income and the market value
of our equity. Certain assumptions are made regarding loan prepayments and decay rates of passbook
and NOW accounts. Because it is difficult to accurately project the market reaction of depositors
and borrowers, the effect of actual changes in interest on these assumptions may differ from
simulated results. We have established the following guidelines for assessing interest rate risk:
Net income simulation
. Given a non-parallel shift of 200 basis points in interest rates (a
basis point equals one hundreds of one percent), the estimated net income may not decrease by more
than 20% within a one-year period.
Market value of equity simulation
. The market value of our equity is the present value of our
assets and liabilities. Given a non-parallel shift of 200 basis points in interest rates, the
market value of equity may not decrease by more than 30% from the computed economic value of
current interest rate levels.
The following table illustrates the simulated impact of a non-parallel 1% or 2% upward or 1%
or 2% downward movement in interest rates on net income, return on average equity, earnings per
share and market value of equity. These analyses were prepared assuming that total
interest-earning asset levels at December 31, 2009 remain constant, while $825.0 million of
interest-earning deposits will be deployed to other interest-earning assets over the next 12
months. The impact of the rate movements was computed by simulating the effect of an immediate and
sustained shift in interest rates over a twelve-month period from December 31, 2009 levels.
| Non-Parallel Shift in Interest Rates | ||||||||||||||||
| Increase | Decrease | |||||||||||||||
|
Shift in interest rates over the next 12 months
|
1.0 | % | 2.0 | % | 1.0 | % | 2.0 | % | ||||||||
|
Projected percentage increase/(decrease) in net income
|
6.9 | % | 10.7 | % | (8.5 | )% | (18.0 | )% | ||||||||
|
Projected increase/(decrease) in return on average equity
|
0.3 | % | 0.5 | % | (0.4 | )% | (0.9 | )% | ||||||||
|
Projected increase/(decrease) in earnings per share
|
$ | 0.04 | $ | 0.06 | $ | (0.05 | ) | $ | (0.11 | ) | ||||||
|
Projected percentage increase/(decrease) in market value of equity
|
(2.4 | )% | (7.1 | )% | (2.5 | )% | (7.4 | )% | ||||||||
The figures included in the tables above represent projections that were computed based
upon certain assumptions including prepayment rates and decay rates. These assumptions are
inherently uncertain and, as a result, we cannot precisely predict the impact of changes in
interest rates. Actual results may differ significantly due to timing, magnitude and frequency of
interest rate changes and changes in market conditions.
When assessing our interest rate sensitivity, analysis of historical trends indicates that
loans will prepay at various speeds (or annual rates) depending on the variance between the
weighted average portfolio rates and the current market rates. In preparing the table above, the
following assumptions were used: (i) adjustable-rate mortgage loans will prepay at an annual rate
of 5% to 10%; (ii) fixed-rate mortgage loans will prepay at an annual rate of 7% to 12%, depending
on the type of loan; (iii) commercial loans will prepay at an annual rate of 10% to 18%; (iv)
consumer loans held by Northwest Savings Bank will prepay at an annual rate of 18% to 20%; and (v)
consumer loans held by NCDC will prepay at an annual rate of 60% to 65%. In regards to our
deposits, it has been assumed that (i) fixed maturity deposits will not be withdrawn prior to
maturity; (ii) the significant majority of money market accounts will reprice immediately; (iii)
savings accounts will gradually reprice over three years; and (iv) and checking accounts will
reprice either when the rates on such accounts reprice as interest rate levels change,
55
Table of Contents
or when
deposit holders withdraw funds from such accounts and select other types of deposit accounts, such
as certificate accounts, which may have higher interest rates. For purposes of this analysis,
management has estimated, based on historical trends, that $299.0 million of our checking accounts
and $279.0 million of our savings accounts are interest sensitive and may reprice in one year or
less, and that the remainder may reprice over longer time periods.
The above assumptions used by management are annual percentages based on remaining balances
and should not be regarded as indicative of the actual prepayments and withdrawals that we may
experience. Moreover, certain shortcomings are inherent in the analysis presented by the foregoing
table. For example, although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest rates. Also,
interest rates on certain types of assets and liabilities may fluctuate in advance of or lag behind
changes in market interest rates. Additionally, certain assets, such as some adjustable-rate
loans, have features that restrict changes in interest rates on a short-term basis and over the
life of the asset. Moreover, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in calculating the table.
In addition, we regularly measure and monitor the market value of our net assets and the
changes therein. While fluctuations are expected because of changes in interest rates, we have
established policy limits for various interest rate scenarios. Given interest rate shocks of
+/-100 to +/-300 basis points the market value of net assets is not expected to decrease by more
than -15% to -30%.
Off-Balance Sheet Arrangements
As a financial services provider, we routinely are a party to various financial instruments
with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit.
While these contractual obligations represent our future cash requirements, a significant portion
of commitments to extend credit may expire without being drawn upon. Such commitments are subject
to the same credit policies and approval process accorded to loans we make. In addition, we
routinely enter into commitments to purchase and sell mortgage loans.
56
Table of Contents
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
Management, including the principal executive officer and principal financial officer, has assessed
the effectiveness of the Company’s internal control over financial reporting as of December 31,
2009. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in
Internal control – Integrated Framework
.
Based on such assessment, management concluded that, as of December 31, 2009, the Company’s
internal control over financial reporting is effective based upon those criteria.
KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial
statements included in this Report and has issued a report with respect to the effectiveness of the
Company’s internal control over financial reporting.
|
/s/ William J. Wagner
|
/s/ William W. Harvey, Jr. | |
|
|
||
|
William J. Wagner
|
William W. Harvey, Jr. | |
|
Chief Executive Officer
|
Chief Financial Officer |
57
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Northwest Bancshares, Inc.:
Northwest Bancshares, Inc.:
We have audited Northwest Bancshares, Inc.’s (the Company) internal control over financial
reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control –
Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated statements of financial condition of Northwest Bancshares,
Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
income, changes in shareholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2009, and our report dated March 16, 2010 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
KPMG LLP
KPMG LLP
Pittsburgh, Pennsylvania
March 16, 2010
March 16, 2010
58
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Northwest Bancshares, Inc.:
Northwest Bancshares, Inc.:
We have audited the accompanying consolidated statements of financial condition of Northwest
Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of income, changes in shareholders’ equity and cash flows for each of the
years in the three-year period ended December 31, 2009. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Northwest Bancshares, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of its operations and their cash flows for each of the
years in the three-year period then ended in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 3 to the financial statements, the Company has changed its method of
accounting for other-than-temporary impairment for debt securities in 2009, due to the adoption of
FASB Staff Position No. 115-2 and 124-2, “Recognition and Presentation of Other-than-Temporary
Impairments”, codified within FASB ASC Subtopic 320-10.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Northwest Bancshares, Inc.’s internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control—Integrated Framework
issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 16, 2010 expressed an unqualified opinion on the effectiveness of Northwest Bancshares,
Inc.’s internal control over financial reporting.
/s/ KPMG LLP
KPMG LLP
KPMG LLP
March 16, 2010
59
Table of Contents
NORTHWEST
BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Amounts in thousands, excluding share data)
(Amounts in thousands, excluding share data)
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Assets
|
||||||||
|
Cash
|
$ | 69,265 | $ | 55,815 | ||||
|
Interest earning deposits in other financial institutions
|
1,037,893 | 16,795 | ||||||
|
Federal funds sold and other short-term investments
|
632 | 7,312 | ||||||
|
Marketable securities available-for-sale (amortized cost
of $1,059,177 and $1,144,435)
|
1,067,089 | 1,139,170 | ||||||
|
Loans receivable, net of allowance for loan losses of
$70,403 and $54,929
|
5,229,062 | 5,141,892 | ||||||
|
Accrued interest receivable
|
25,780 | 27,252 | ||||||
|
Real estate owned, net
|
20,257 | 16,844 | ||||||
|
Federal Home Loan Bank stock at cost
|
63,242 | 63,143 | ||||||
|
Premises and equipment, net
|
124,316 | 115,842 | ||||||
|
Bank-owned life insurance
|
128,270 | 123,479 | ||||||
|
Goodwill
|
171,363 | 171,363 | ||||||
|
Other intangible assets
|
4,678 | 7,395 | ||||||
|
Other assets
|
83,451 | 43,939 | ||||||
|
|
||||||||
|
Total assets
|
$ | 8,025,298 | $ | 6,930,241 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Shareholders’ Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Deposits
|
$ | 5,624,424 | $ | 5,038,211 | ||||
|
Borrowed funds
|
897,326 | 1,067,945 | ||||||
|
Advances by borrowers for taxes and insurance
|
22,034 | 26,190 | ||||||
|
Accrued interest payable
|
4,493 | 5,194 | ||||||
|
Other liabilities
|
57,412 | 70,663 | ||||||
|
Junior subordinated deferrable interest debentures
held by trusts that issued guaranteed capital debt
securities
|
103,094 | 108,254 | ||||||
|
|
||||||||
|
Total liabilities
|
6,708,783 | 6,316,457 | ||||||
|
|
||||||||
|
Commitments and contingent liabilities:
|
||||||||
|
Shareholders’ equity:
|
||||||||
|
Preferred stock, $0.01 and $0.10 par value;
50,000,000 shares authorized; no shares issued
|
— | — | ||||||
|
Common stock, $0.01 and $0.10 par value; 500,000,000
shares authorized; 110,641,858 and 51,244,974, shares
issued, respectively
|
1,106 | 5,124 | ||||||
|
Paid-in capital
|
828,195 | 218,332 | ||||||
|
Retained earnings, substantially restricted
|
508,842 | 490,326 | ||||||
|
Accumulated other comprehensive loss, net
|
(9,977 | ) | (30,575 | ) | ||||
|
Unallocated common stock of Employee Stock
|
||||||||
|
Ownership Plan
|
(11,651 | ) | — | |||||
|
Treasury stock of 0 and 2,742,800 shares,
respectively, at cost
|
— | (69,423 | ) | |||||
|
|
||||||||
|
Total shareholders’ equity
|
1,316,515 | 613,784 | ||||||
|
|
||||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$ | 8,025,298 | $ | 6,930,241 | ||||
|
|
||||||||
See accompanying notes to consolidated financial statements.
60
Table of Contents
Consolidated Statements of Income
(Amounts in thousands, excluding share data)
| Years ended December 31 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Interest income:
|
||||||||||||
|
Loans receivable
|
$ | 320,121 | $ | 327,128 | $ | 315,570 | ||||||
|
Mortgage-backed securities
|
27,263 | 34,694 | 29,385 | |||||||||
|
Taxable investment securities
|
5,384 | 11,828 | 30,583 | |||||||||
|
Tax-free investment securities
|
11,054 | 12,253 | 12,626 | |||||||||
|
Interest-earning deposits
|
641 | 2,756 | 7,867 | |||||||||
|
|
||||||||||||
|
Total interest income
|
364,463 | 388,659 | 396,031 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Interest expense:
|
||||||||||||
|
Deposits
|
$ | 95,394 | $ | 137,061 | $ | 186,540 | ||||||
|
Borrowed funds
|
40,412 | 32,232 | 24,475 | |||||||||
|
|
||||||||||||
|
Total interest expense
|
135,806 | 169,293 | 211,015 | |||||||||
|
|
||||||||||||
|
Net interest income
|
228,657 | 219,366 | 185,016 | |||||||||
|
Provision for loan losses
|
41,847 | 22,851 | 8,743 | |||||||||
|
|
||||||||||||
|
Net interest income after provision for loan losses
|
186,810 | 196,515 | 176,273 | |||||||||
|
|
||||||||||||
|
Noninterest income:
|
||||||||||||
|
Impairment losses on securities
|
(12,408 | ) | (16,004 | ) | (8,412 | ) | ||||||
|
Noncredit related losses on securities not expected to be
sold (recognized in other comprehensive income)
|
6,311 | — | — | |||||||||
|
|
||||||||||||
|
Net impairment losses
|
(6,097 | ) | (16,004 | ) | (8,412 | ) | ||||||
|
Gain on sale of investments, net
|
403 | 6,037 | 4,958 | |||||||||
|
Service charges and fees
|
34,811 | 32,432 | 27,754 | |||||||||
|
Trust and other financial services income
|
6,307 | 6,718 | 6,223 | |||||||||
|
Insurance commission income
|
2,658 | 2,376 | 2,705 | |||||||||
|
Gain on sale of loans, net
|
— | — | 728 | |||||||||
|
Loss on real estate owned, net
|
(4,054 | ) | (428 | ) | (83 | ) | ||||||
|
Income from bank owned life insurance
|
4,791 | 4,797 | 4,460 | |||||||||
|
Mortgage banking income
|
5,594 | 665 | 1,578 | |||||||||
|
Non-cash (impairment)/recovery of servicing assets
|
1,840 | (2,165 | ) | 65 | ||||||||
|
Gain on bargain purchase
of Keystone State Savings Bank
|
3,503 | — | — | |||||||||
|
Other operating income
|
3,581 | 4,324 | 3,046 | |||||||||
|
|
||||||||||||
|
Total noninterest income
|
53,337 | 38,752 | 43,022 | |||||||||
|
|
||||||||||||
|
Noninterest expense:
|
||||||||||||
|
Compensation and employee benefits
|
95,594 | 91,129 | 84,217 | |||||||||
|
Premises and occupancy costs
|
21,963 | 21,924 | 21,375 | |||||||||
|
Office operations
|
12,947 | 13,237 | 12,788 | |||||||||
|
Processing expenses
|
21,312 | 18,652 | 15,019 | |||||||||
|
Professional services
|
2,590 | 2,582 | 2,778 | |||||||||
|
Amortization of intangible assets
|
3,020 | 4,387 | 4,499 | |||||||||
|
Marketing expenses
|
9,152 | 5,500 | 3,742 | |||||||||
|
Federal deposit insurance premiums
|
8,309 | 3,884 | 663 | |||||||||
|
FDIC special assessment
|
3,288 | — | — | |||||||||
|
Loss on early extinguishment of debt
|
— | 705 | — | |||||||||
|
Contribution to charitable foundation
|
13,822 | — | — | |||||||||
|
Other expenses
|
8,497 | 8,128 | 7,661 | |||||||||
|
|
||||||||||||
|
Total noninterest expense
|
200,494 | 170,128 | 152,742 | |||||||||
|
|
||||||||||||
|
Income before income taxes
|
39,653 | 65,139 | 66,553 | |||||||||
|
Provision for income taxes:
|
||||||||||||
|
Federal
|
5,468 | 14,739 | 15,597 | |||||||||
|
State
|
1,532 | 2,229 | 1,859 | |||||||||
|
|
||||||||||||
|
Total provision for income taxes
|
7,000 | 16,968 | 17,456 | |||||||||
|
|
||||||||||||
|
Net income
|
$ | 32,653 | $ | 48,171 | $ | 49,097 | ||||||
|
|
||||||||||||
|
Basic earnings per share
|
$ | 0.30 | $ | 0.44 | $ | 0.44 | ||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | 0.30 | $ | 0.44 | $ | 0.44 | ||||||
|
|
||||||||||||
See accompanying notes to consolidated financial statements.
61
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2009, 2008 and 2007
(Amounts in thousands, excluding share data)
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2009, 2008 and 2007
(Amounts in thousands, excluding share data)
| Accumulated | ||||||||||||||||||||||||||||
| other | ||||||||||||||||||||||||||||
| comprehensive | Employee Stock | Total Stockholders’ | ||||||||||||||||||||||||||
| Common Stock | Paid-in capital | Retained earnings | income (loss), net | Ownership Plan | Treasury stock | Equity | ||||||||||||||||||||||
|
Balance at December 31, 2006
|
$ | 5,114 | $ | 211,295 | $ | 425,024 | $ | (11,609 | ) | $ | — | $ | (25,263 | ) | $ | 604,561 | ||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
— | — | 49,097 | — | — | — | 49,097 | |||||||||||||||||||||
|
Other comprehensive income, net of tax of ($7,915)
|
— | — | — | 12,425 | — | — | 12,425 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
— | — | 49,097 | 12,425 | — | — | 61,522 | |||||||||||||||||||||
|
Treasury stock repurchases
|
— | — | — | — | — | (40,825 | ) | (40,825 | ) | |||||||||||||||||||
|
Exercise of stock options
|
5 | 857 | — | — | — | — | 862 | |||||||||||||||||||||
|
Stock compensation
|
— | 2,454 | — | — | — | — | 2,454 | |||||||||||||||||||||
|
Dividends paid ($0.37 per share)
|
— | — | (15,696 | ) | — | — | — | (15,696 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance at December 31, 2007
|
5,119 | 214,606 | 458,425 | 816 | — | (66,088 | ) | 612,878 | ||||||||||||||||||||
|
Effect of adoption of pension accounting rules, net of
tax of ($319) and $361, respectively
|
— | — | (499 | ) | 572 | — | — | 73 | ||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Beginning balance as adjusted
|
5,119 | 214,606 | 457,926 | 1,388 | — | (66,088 | ) | 612,951 | ||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
— | — | 48,171 | — | — | — | 48,171 | |||||||||||||||||||||
|
Other comprehensive loss, net of tax of $19,575
|
— | — | — | (31,963 | ) | — | — | (31,963 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
— | — | 48,171 | (31,963 | ) | — | — | 16,208 | ||||||||||||||||||||
|
Treasury stock repurchases
|
— | — | — | — | — | (3,335 | ) | (3,335 | ) | |||||||||||||||||||
|
Exercise of stock options
|
5 | 995 | — | — | — | — | 1,000 | |||||||||||||||||||||
|
Stock compensation
|
— | 2,731 | — | — | — | — | 2,731 | |||||||||||||||||||||
|
Dividends paid ($0.40 per share)
|
— | — | (15,771 | ) | — | — | — | (15,771 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance at December 31, 2008
|
5,124 | 218,332 | 490,326 | (30,575 | ) | — | (69,423 | ) | 613,784 | |||||||||||||||||||
|
Effect of adoption of investment impairment accounting
rules, net of tax of $903
|
— | — | 1,676 | (1,676 | ) | — | — | — | ||||||||||||||||||||
|
Comprehensive income:
|
||||||||||||||||||||||||||||
|
Net income
|
— | — | 32,653 | — | — | — | 32,653 | |||||||||||||||||||||
|
Other comprehensive income, net of tax of ($11,696)
|
— | — | — | 22,274 | — | — | 22,274 | |||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Total comprehensive income
|
— | — | 32,653 | 22,274 | — | — | 54,927 | |||||||||||||||||||||
|
Exercise of stock options
|
3 | 210 | — | — | — | — | 213 | |||||||||||||||||||||
|
Corporate Reorganization:
|
||||||||||||||||||||||||||||
|
Merger of Northwest Bancorp, MHC
|
(3,054 | ) | 3,126 | — | — | — | — | 72 | ||||||||||||||||||||
|
Treasury stock retired
|
(275 | ) | (69,148 | ) | — | — | — | 69,423 | — | |||||||||||||||||||
|
Exchange of common stock
|
(1,798 | ) | 1,798 | — | — | — | — | — | ||||||||||||||||||||
|
Proceeds from stock offering, net of offering expenses
|
1,106 | 671,737 | — | — | — | — | 672,843 | |||||||||||||||||||||
|
Stock compensation
|
— | 2,140 | — | — | — | — | 2,140 | |||||||||||||||||||||
|
Purchase of common stock by ESOP
|
— | — | — | — | (11,651 | ) | — | (11,651 | ) | |||||||||||||||||||
|
Dividends paid ($0.40 per share)
|
— | — | (15,813 | ) | — | — | — | (15,813 | ) | |||||||||||||||||||
|
|
||||||||||||||||||||||||||||
|
Balance at December 31, 2009
|
$ | 1,106 | $ | 828,195 | $ | 508,842 | $ | (9,977 | ) | $ | (11,651 | ) | $ | — | $ | 1,316,515 | ||||||||||||
|
|
||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
62
Table of Contents
Consolidated Statements Of Cash Flows
(Amounts in thousands)
| Years ended December 31 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Operating activities:
|
||||||||||||
|
Net income
|
$ | 32,653 | $ | 48,171 | $ | 49,097 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Provision for loan losses
|
41,847 | 22,851 | 8,743 | |||||||||
|
Net gain on sales of assets
|
(2,840 | ) | (3,468 | ) | (4,638 | ) | ||||||
|
Net depreciation, amortization, and accretion
|
17,188 | 16,222 | 14,572 | |||||||||
|
Increase in other assets
|
(43,483 | ) | (2,007 | ) | (11,119 | ) | ||||||
|
Increase in other liabilities
|
5,795 | 3,997 | 3,799 | |||||||||
|
Net amortization of discounts on marketable securities
|
(3,854 | ) | (6,382 | ) | (4,396 | ) | ||||||
|
Noncash compensation expense related to stock benefit
plans
|
2,140 | 2,731 | 2,454 | |||||||||
|
Noncash other-than-temporary impairment of investment
securities
|
6,097 | 16,004 | 8,412 | |||||||||
|
Noncash impairment of real estate owned
|
3,862 | — | — | |||||||||
|
Noncash charitable contribution
|
12,822 | — | — | |||||||||
|
Noncash impairment/(recovery) of mortgage servicing
rights
|
(1,840 | ) | 2,165 | (65 | ) | |||||||
|
Deferred income tax expense/(benefit)
|
(8,763 | ) | (6,480 | ) | (750 | ) | ||||||
|
Gain on bargain purchase
|
(3,503 | ) | — | — | ||||||||
|
Origination of loans held for sale
|
(574,789 | ) | (234,973 | ) | (252,810 | ) | ||||||
|
Proceeds from sales of loans held for sale
|
595,283 | 212,535 | 250,295 | |||||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
78,615 | 71,366 | 63,594 | |||||||||
|
|
||||||||||||
|
Investing activities:
|
||||||||||||
|
Purchase of marketable securities available-for-sale
|
(222,905 | ) | (457,776 | ) | (49,102 | ) | ||||||
|
Proceeds from maturities and principal reductions of
marketable securities held-to-maturity
|
— | — | 151,374 | |||||||||
|
Proceeds from maturities and principal reductions of
marketable securities available-for-sale
|
297,807 | 319,051 | 182,454 | |||||||||
|
Proceeds from sales of marketable securities
available-for-sale
|
22,346 | 113,484 | 105,361 | |||||||||
|
Proceeds from sales of marketable securities
held-to-maturity
|
— | — | 15,652 | |||||||||
|
Loan originations
|
(1,811,403 | ) | (1,649,652 | ) | (1,489,646 | ) | ||||||
|
Proceeds from loan maturities and principal reductions
|
1,650,273 | 1,283,980 | 1,234,511 | |||||||||
|
Redemption/(purchase) of Federal Home Loan Bank stock
|
— | (31,839 | ) | 3,715 | ||||||||
|
Proceeds from sale of real estate owned
|
8,044 | 7,176 | 5,316 | |||||||||
|
Sale/(purchase) of real estate owned for investment
|
(208 | ) | 155 | (101 | ) | |||||||
|
Purchase of premises and equipment
|
(20,421 | ) | (15,655 | ) | (11,411 | ) | ||||||
|
Acquisitions, net of cash received
|
8,668 | — | (25,150 | ) | ||||||||
|
|
||||||||||||
|
Net cash (used in)/provided by investing activities
|
(67,799 | ) | (431,076 | ) | 122,973 | |||||||
(Continued)
63
Table of Contents
NORTHWEST BANCSHARES, INC AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
(Amounts in thousands)
Consolidated Statements Of Cash Flows
(Amounts in thousands)
| Years ended December 31 | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Financing activities:
|
||||||||||||
|
(Decrease)/increase in deposits, net
|
$ | 565,388 | $ | (504,123 | ) | $ | 9,737 | |||||
|
Proceeds from long-term borrowings
|
— | 645,000 | — | |||||||||
|
Repayments of long-term borrowings
|
(39,598 | ) | (84,270 | ) | (75,180 | ) | ||||||
|
Net (decrease)/ increase in short-term borrowings
|
(130,831 | ) | 168,484 | 9,342 | ||||||||
|
Increase/(decrease) in advances by borrowers for taxes and
insurance
|
(4,161 | ) | 2,031 | 1,476 | ||||||||
|
Treasury stock repurchases
|
— | (3,335 | ) | (40,825 | ) | |||||||
|
Repayment of junior subordinated debentures
|
(5,155 | ) | — | — | ||||||||
|
Cash dividends paid
|
(15,813 | ) | (15,771 | ) | (15,696 | ) | ||||||
|
Net proceeds from common stock offering
|
658,660 | — | — | |||||||||
|
Purchase of common shares for ESOP
|
(11,651 | ) | — | — | ||||||||
|
Proceeds from options exercised, including tax benefit
realized
|
213 | 1,000 | 862 | |||||||||
|
|
||||||||||||
|
Net cash provided by/(used in) financing activities
|
1,017,052 | 209,016 | (110,284 | ) | ||||||||
|
|
||||||||||||
|
Net (decrease)/increase in cash and cash
equivalents
|
$ | 1,027,868 | $ | (150,694 | ) | $ | 76,283 | |||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash and cash equivalents at beginning of period
|
$ | 79,922 | $ | 230,616 | $ | 154,333 | ||||||
|
Net (decrease)/increase in cash and cash equivalents
|
1,027,868 | (150,694 | ) | 76,283 | ||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 1,107,790 | $ | 79,922 | $ | 230,616 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest on deposits and borrowings (including interest
credited to deposit accounts of $80,648, $129,275, and
$160,291, respectively)
|
$ | 136,507 | $ | 168,455 | $ | 210,697 | ||||||
|
Income taxes
|
20,833 | 22,541 | 16,684 | |||||||||
|
|
||||||||||||
|
Noncash activities:
|
||||||||||||
|
Business acquisitions:
|
||||||||||||
|
Fair value of assets acquired
|
$ | 12,433 | $ | — | $ | 211,846 | ||||||
|
Net cash received/ (paid)
|
8,668 | — | (25,150 | ) | ||||||||
|
|
||||||||||||
|
Liabilities assumed
|
$ | 21,101 | $ | — | $ | 186,696 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Loan foreclosures and repossessions
|
$ | 15,511 | $ | 15,780 | $ | 6,975 | ||||||
|
Loans transferred to held for investment from held for sale
|
— | 24,827 | — | |||||||||
|
Sale of real estate owned financed by the Company
|
3,116 | 614 | 1,013 | |||||||||
See accompanying notes to consolidated financial statements.
64
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
| (1) | Summary of Significant Accounting Policies |
(a) Nature of Operations
Northwest Bancshares, Inc. (Company) is a Maryland corporation that was incorporated in
September 2009 to be the successor to Northwest Bancorp, Inc. upon completion of the
mutual-to-stock conversion of Northwest Bancorp, MHC, its mutual holding Company parent. As a result of the conversion, all share
information has been revised to reflect the 2.25 – one conversion rate. Northwest Bancshares,
Inc., which is headquartered in Warren, Pennsylvania, is a federal savings and loan holding company
for its wholly owned subsidiary, Northwest Savings Bank (Northwest). Northwest offers traditional
deposit and loan products through its 171 banking locations in Pennsylvania, New York, Ohio,
Maryland, and Florida. Northwest, through its subsidiary Northwest Consumer Discount Company, also
offers loan products through 51 consumer finance offices in Pennsylvania.
Financial information presented is derived in part from the consolidated financial statements
of Northwest Bancshares, Inc. and subsidiaries after December 18, 2009, and from the consolidated
financial statements of Northwest Bancorp, Inc. and subsidiaries prior to December 18, 2009.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries after elimination of all intercompany accounts and transactions.
(c) Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents include cash and
amounts due from depository institutions, interest-bearing deposits in other financial
institutions, federal funds sold, and other short-term investments.
(d) Investment Securities
The Company classifies marketable securities at the time of purchase as available-for-sale, or
trading securities. If it is management’s intent at the time of purchase to hold securities for an
indefinite period of time and/or to use such securities as part of its asset/liability management
strategy, the securities are classified as available-for-sale and are carried at fair value, with
unrealized gains and losses excluded from net earnings and reported as accumulated other
comprehensive income, a separate component of shareholders’ equity, net of tax. Securities
classified as available-for-sale include securities that may be sold in response to changes in
interest rates, resultant prepayment risk, or other market factors. Securities that are bought and
held principally for the purpose of selling them in the near term are classified as trading and are
reported at fair value, with unrealized gains and losses included in earnings. The cost of
securities sold is determined on a specific identification basis. The Company held no securities
classified as trading at or for the years ended December 31, 2009 and 2008.
The Company regularly reviews its investment securities for declines in value below amortized
cost that might be considered “other than temporary.” We consider our intent to sell the
investment securities evaluated and the likelihood that we will not have to sell the investment
securities before recovery of their cost basis. If impairment exists, credit related impairment
losses are recorded in earnings while noncredit related impairment losses are recorded in
accumulated other comprehensive income.
Federal law requires a member institution of the Federal Home Loan Bank (FHLB) system to hold
stock of its district FHLB according to a predetermined formula. This stock is recorded at cost and
may be pledged to secure FHLB advances.
65
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
(e) Loans Receivable
Loans are stated at their unpaid principal balance net of any deferred origination fees or
costs and the allowance for estimated loan losses. Interest income on loans is credited to income
as earned. Interest earned on loans for which no payments were received during the month is accrued
at month end. Accrued interest on loans more than 90 days delinquent is reversed, and such loans
are placed on nonaccrual status.
The Company has identified certain residential loans, which will be sold prior to maturity, as
loans held for sale. These loans are recorded at the lower of amortized cost or fair value less
estimated cost to sell and at December 31, 2009 and 2008 were $1,164,000 and $18,738,000,
respectively.
Loan fees and certain direct loan origination costs are deferred, and the net deferred fee or
cost is then recognized using the level-yield method over the contractual life of the loan as an
adjustment to interest income.
(f) Allowance for Loan Losses and Provision for Loan Losses
Provisions for estimated loan losses and the amount of the allowance for loan losses are based
on losses inherent in the loan portfolio that are both probable and reasonably estimable at the
date of the financial statements. Management believes, to the best of their knowledge, that all
known losses as of the statement of condition dates have been recorded.
Management considers a loan to be impaired when it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan agreement. Nonaccrual
loans are deemed to be impaired unless fully secured with liquid collateral. In evaluating whether
a loan is impaired, management considers not only the amount that the Company expects to collect
but also the timing of collection. Generally, if a delay in payment is insignificant (e.g., less
than 30 days), a loan is not deemed to be impaired.
When a loan is considered to be impaired, the amount of impairment is measured based on the
present value of expected future cash flows discounted at the loan’s effective interest rate or at
the loan’s market price or fair value of the collateral if the loan is collateral dependent. Larger
loans are evaluated individually for impairment. Smaller balance, homogeneous loans (e.g.,
primarily consumer and residential mortgages) are evaluated collectively for impairment. Impairment
losses are included in the allowance for loan
losses. Impaired loans are charged off when management believes that the ultimate
collectability of a loan is not likely.
Interest income on impaired loans is recognized using the cash basis method. Such interest
ultimately collected is credited to income in the period of recovery or applied to reduce principal
if there is sufficient doubt about the collectability of principal.
(g) Real Estate Owned
Real estate owned is comprised of property acquired through foreclosure or voluntarily
conveyed by delinquent borrowers. These assets are recorded on the date acquired at the lower of
the related loan balance or fair value of the collateral less disposition cost with the fair value
being determined by an appraisal. Subsequently, foreclosed assets are valued at the lower of the
amount recorded at acquisition date or the current fair value, less estimated disposition costs.
Gains or losses realized from the disposition of such property are credited or charged to
noninterest income.
(h) Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation is accumulated on a straight-line basis over the estimated useful lives of the related
assets. Estimated lives range from
66
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
three to thirty years. Amortization of leasehold improvements is accumulated on a
straight-line basis over the terms of the related leases or the useful lives of the related assets,
whichever is shorter.
(i) Goodwill
Goodwill is allocated to reporting units, which are either the Company’s reportable segments
or one level below. Goodwill is tested for impairment on an annual basis and between annual tests
if events occur, or if circumstances change, that would more likely than not reduce the fair value
below its carrying amount. The annual impairment test is based on discounted cash flow models that
incorporate variables including growth in net income, discount rates, and terminal values. If the
carrying amount of goodwill exceeds its fair value, an impairment loss is recognized as a non-cash
charge. During the current year, the Company also performed additional impairment tests using the
market, income and control premium approaches, none of which indicated impairment. We have
performed the required goodwill impairment tests and have determined that goodwill is not impaired
as of December 31, 2009.
(j) Core Deposit Intangibles
The Company engages an independent third party expert to analyze and prepare a core deposit
study for all acquisitions. This study reflects the cumulative present value benefit of acquiring
deposits versus an alternative source of funding. Based upon this analysis, the amount of the
premium related to the core deposits of the business purchased is calculated along with the
estimated life of the acquired deposits. The core deposit intangible, which is recorded in other
intangible assets, is then amortized to expense on an accelerated basis over an approximate life of
seven years.
(k) Bank-Owned Life Insurance
The Company owns insurance on the lives of a certain group of key employees and directors. The
policies were purchased to help offset the increase in the costs of various fringe benefit plans, including healthcare, as well as the directors deferred compensation plan. The cash surrender value
of these policies is included as an asset on the consolidated statements of financial condition,
and any increases in the cash surrender value are recorded as noninterest income on the
consolidated statements of income. In the event of the death of an insured individual under these
policies, after distribution to the insured’s beneficiaries, the Company would receive a death
benefit, which would be recorded as noninterest income.
(l) Deposits
Interest on deposits is accrued and charged to expense monthly and is paid or credited in
accordance with the terms of the accounts.
(m) Pension Plans
The Company maintains multiple noncontributory defined benefit pension plans for substantially all of its employees and directors. The net periodic
pension cost has been calculated using service cost, interest cost, expected returns on plan assets
and net amortization. The Company changed its measurement date to December 31 from October 31 for
its defined benefit pension plans effective December 31, 2008 as required by a change in accounting
standards.
(n) Income Taxes
The Company joins with its wholly owned subsidiaries in filing a consolidated federal income tax
return. In accordance with an intercompany tax allocation agreement, the applicable federal income
tax expense or benefit is allocated to each subsidiary based upon taxable income or loss calculated
on a separate company basis. Each
67
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
subsidiary is responsible for payment of its own federal income tax liability or receives
reimbursement of federal income tax benefit. In addition, deferred taxes are calculated and
maintained on a separate company basis.
The Company accounts for income taxes using the asset and liability method. The objective of
the asset and liability method is to establish deferred tax assets and liabilities for temporary
differences between the financial reporting and tax basis of the Company’s assets and liabilities
based on the tax rates expected to be in effect when such amounts are realized or settled.
(o) Stock Related Compensation
The Company determines the fair value of each option award, estimated on the grant date, using
the Black-Scholes-Merton option-pricing model. During the year ended December 31, 2009 the Company
awarded 440,458 stock options to employees and 54,000 stock options to directors. Option awards
are generally granted with an exercise price equal to the market price of the Company’s stock at
the grant date and options generally vest over a five-year to seven-year period from the grant
date. Expected volatilities are based on historical volatility of the Company’s stock. The expected
term of options is based upon previous option grants. The risk-free rate is based on yields on U.S.
Treasury securities of a similar maturity to the expected term of the options. New shares are
issued when options granted.
Stock-based employee compensation expense related to the Company’s recognition and retention
plan of $911,000, $1,092,000 and $1,251,000 was included in income before income taxes during the
years ended December 31, 2009, 2008 and 2007, respectively. The effect on net income for the years
ended December 31, 2009, 2008 and 2007 was a reduction of $592,000, $710,000 and $813,000,
respectively. The Company will recognize the remaining expense of $237,000 next year. Total
compensation expense for unvested stock options of $1,209,000 has yet to be recognized as of
December 31, 2009. The weighted average period over which this remaining stock option expense will
be recognized is approximately 2.25 years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes-Merton option-pricing model with the following weighted average assumptions: (1)
dividend yields ranging from 1.6% to 5.1% based on historical dividends and market prices; (2)
expected volatility of 17% to 33% based on historical volatility; (3) risk-free interest rates
ranging from 2.2% to 6.5%; and (4) expected lives of seven to eight years based on previous grants.
(p) Segment Reporting
The Company has two reportable segments, Community Banking and Consumer Finance. See note 21
for related disclosures.
(q) Derivative financial instruments – interest rate swaps
The Company recognizes all derivative financial instruments as either assets or liabilities in
the balance sheet and measures those instruments at fair value. The accounting for changes in the
fair value of a derivative depends on the intended use of the derivative and the resulting
designation. An entity that elects to use hedge accounting is required, at inception, to establish
the method it will use for assessing the effectiveness of hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods must be consistent
with the Company’s approach to managing risk.
The Company utilizes interest rate swap agreements as part of the management of interest rate risk
to hedge the interest rate risk on the Company’s trust preferred debentures. Amounts receivable or
payable are recognized as accrued under the terms of the agreements and the differential is
recorded as an adjustment to interest expense. The interest rate swaps are designated as cash flow
hedges, with the effective portion of the derivative’s unrealized gain
68
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
or loss is recorded as a component of other comprehensive income. The ineffective portion of
the unrealized gain or loss, if any, would be recorded in other expense. See note 22 for related
disclosures.
(r) Off-Balance-Sheet Instruments
In the normal course of business, the Company extends credit in the form of loan commitments,
undisbursed lines of credit, and standby letters of credit. These off-balance-sheet instruments
involve, to various degrees, elements of credit and interest rate risk not reported in the
consolidated statement of financial condition. We utilize the same underwriting standards for these instruments as other extensions of credit.
(s) Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amount of revenues and
expenses during the reporting period. The estimates and assumptions that we deem important to our
financial statements relate to the allowance for loan losses, the accounting treatment and
valuation of our investment securities
portfolio, the analysis of the carrying value of goodwill and income taxes. These estimates
and assumptions are based on management’s best estimates and judgment and we evaluate them using
historical experience and other factors, including the current economic environment. We adjust our
estimates and assumptions when facts and circumstances dictate. Illiquid credit markets and
current economic conditions have increased the uncertainty inherent in our estimates and
assumptions. As future events cannot be determined, actual results could differ significantly from
our estimates.
(t) Reclassification of Prior Years’ Statements
Certain items previously reported have been reclassified to conform with the current year’s
reporting format.
| (2) | Recent Accounting Pronouncements |
New authoritative accounting guidance, FASB ASU No. 2009-17, “Consolidations (Topic 810)
Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities”
requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of
a variable interest entity (“VIE”) for consolidation purposes. The primary beneficiary of a VIE is
the enterprise that has: (1) the power to direct the activities of the VIE that most significantly
impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that
could potentially be significant to the VIE or the right to receive benefits of the VIE that could
potentially be significant to the VIE. The new guidance is effective for fiscal years beginning
after November 15, 2009. The adoption of FASB ASU No. 2009-17 is not expected to have a material
impact on our financial condition or results of operations.
New authoritative accounting guidance, FASB ASU No. 2009-16, “Transfers and Servicing (Topic
860) Accounting for Transfers of Financial Assets” makes several significant amendments to FASB ASC
Topic 860, “Transfers and Servicing” including the removal of the concept of a qualifying
special-purpose entity. The new guidance also clarifies that a transferor must evaluate whether it
has maintained effective control of a financial asset by considering its continuing direct or
indirect involvement with the transferred financial asset. The new authoritative accounting
guidance is effective for fiscal years beginning after November 15, 2009. We do not expect the
adoption of FASB ASU No. 2009-16 to have a material impact on our financial condition or results of
operations.
69
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
(3) Marketable Securities
Marketable securities at December 31, 2009 are as follows:
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | |||||||||||||||
| Amortized | Holding | Holding | ||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
U.S. government and agencies:
|
||||||||||||||||
|
Due in one year or less
|
$ | 76 | $ | — | $ | (1 | ) | $ | 75 | |||||||
|
Government sponsored enterprises:
|
||||||||||||||||
|
Due in one year – five years
|
1,977 | 153 | — | 2,130 | ||||||||||||
|
Due in five years – ten years
|
21,912 | 524 | — | 22,436 | ||||||||||||
|
Due after ten years
|
52,667 | 1,128 | (498 | ) | 53,297 | |||||||||||
|
Equity securities
|
1,054 | 191 | (118 | ) | 1,127 | |||||||||||
|
Municipal securities:
|
||||||||||||||||
|
Due in one year – five years
|
3,146 | 68 | — | 3,214 | ||||||||||||
|
Due in five years – ten years
|
41,170 | 1,163 | — | 42,333 | ||||||||||||
|
Due after ten years
|
190,812 | 2,774 | (1,677 | ) | 191,909 | |||||||||||
|
Corporate debt issues:
|
||||||||||||||||
|
Due in one year – five years
|
500 | — | — | 500 | ||||||||||||
|
Due after ten years
|
26,882 | 168 | (10,549 | ) | 16,501 | |||||||||||
|
Residential mortgage-backed securities:
|
||||||||||||||||
|
Fixed rate pass-through
|
145,363 | 6,440 | (47 | ) | 151,756 | |||||||||||
|
Variable rate pass-through
|
231,232 | 7,894 | (85 | ) | 239,041 | |||||||||||
|
Fixed rate non-agency CMO
|
18,919 | 48 | (1,788 | ) | 17,179 | |||||||||||
|
Fixed rate agency CMO
|
19,994 | 982 | — | 20,976 | ||||||||||||
|
Variable rate non-agency CMO
|
9,075 | — | (1,170 | ) | 7,905 | |||||||||||
|
Variable rate agency CMO
|
294,398 | 2,642 | (330 | ) | 296,710 | |||||||||||
|
|
||||||||||||||||
|
Total mortgage-backed
securities
|
718,981 | 18,006 | (3,420 | ) | 733,567 | |||||||||||
|
|
||||||||||||||||
|
Total securities
available-for-sale
|
$ | 1,059,177 | $ | 24,175 | $ | (16,263 | ) | $ | 1,067,089 | |||||||
|
|
||||||||||||||||
70
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
Marketable securities at December 31, 2008 are as follows:
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | |||||||||||||||
| Amortized | Holding | Holding | ||||||||||||||
| Cost | Gains | Losses | Fair Value | |||||||||||||
|
Available-for-sale:
|
||||||||||||||||
|
U.S. government and agencies:
|
||||||||||||||||
|
Due in one year or less
|
$ | 91 | $ | — | $ | (3 | ) | $ | 88 | |||||||
|
Government sponsored enterprises:
|
||||||||||||||||
|
Due in one year or less
|
2,985 | 50 | — | 3,035 | ||||||||||||
|
Due in one year – five years
|
2,962 | 208 | — | 3,170 | ||||||||||||
|
Due in five years – ten years
|
30,352 | 2,066 | — | 32,418 | ||||||||||||
|
Due after ten years
|
61,494 | 8,712 | (9 | ) | 70,197 | |||||||||||
|
Equity securities
|
954 | 160 | — | 1,114 | ||||||||||||
|
Municipal securities:
|
||||||||||||||||
|
Due in one year – five years
|
460 | 1 | — | 461 | ||||||||||||
|
Due in five years – ten years
|
43,160 | 822 | (86 | ) | 43,896 | |||||||||||
|
Due after ten years
|
224,996 | 2,707 | (4,512 | ) | 223,191 | |||||||||||
|
Corporate debt issues:
|
||||||||||||||||
|
Due after ten years
|
25,165 | 214 | (9,418 | ) | 15,961 | |||||||||||
|
Residential mortgage-backed securities:
|
||||||||||||||||
|
Fixed rate pass-through
|
186,659 | 6,447 | (7 | ) | 193,099 | |||||||||||
|
Variable rate pass-through
|
276,121 | 3,136 | (2,074 | ) | 277,183 | |||||||||||
|
Fixed rate CMO
|
60,119 | 445 | (3,084 | ) | 57,480 | |||||||||||
|
Variable rate CMO
|
228,917 | 48 | (11,088 | ) | 217,877 | |||||||||||
|
|
||||||||||||||||
|
Total mortgage-backed
securities
|
751,816 | 10,076 | (16,253 | ) | 745,639 | |||||||||||
|
|
||||||||||||||||
|
Total securities
available-for-sale
|
$ | 1,144,435 | $ | 25,016 | $ | (30,281 | ) | $ | 1,139,170 | |||||||
|
|
||||||||||||||||
The following table presents information regarding the issuers and the carrying value of the
Company’s mortgage-backed securities at December 31, 2009 and 2008:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Residential mortgage backed securities:
|
||||||||
|
FNMA
|
$ | 256,981 | $ | 288,082 | ||||
|
GNMA
|
126,164 | 99,354 | ||||||
|
FHLMC
|
324,562 | 320,297 | ||||||
|
Other (including non-agency)
|
25,860 | 37,906 | ||||||
|
|
||||||||
|
Total residential mortgage-backed
securities
|
$ | 733,567 | $ | 745,639 | ||||
|
|
||||||||
Marketable securities having a carrying value of $608,459,000 at December 31, 2009, were
pledged under collateral agreements. During the years ended December 31, 2009, 2008 and 2007 the
Company sold marketable securities classified as available-for-sale for $22,346,000, $113,484,000
and $105,361,000, respectively. The gross realized gains on these sales were $403,000, $6,037,000
and $7,397,000, respectively. The gross realized losses on the sales for the years ended December
31, 2009, 2008 and 2007 were $0, $0 and $2,439,000, respectively. During 2007, due to
deterioration in the credit markets, the Company sold the majority of its non-agency corporate debt
71
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
portfolio. Included therein was $15,277,000 of securities classified as held-to-maturity. The
held-to-maturity securities were sold for a net gain of $375,000. In conjunction with the sale of
held-to-maturity securities, the Company was required under generally accepted accounting
principles to transfer the remaining held-to-maturity portfolio of $649,658,000 to
available-for-sale. At the time of transfer, the transferred securities had an unrealized gain of
$4,690,000. During the years ended December 31, 2009, 2008 and 2007 the Company recognized non-cash
other-than-temporary credit related impairment in its investment portfolio resulting in write-downs
of $6,097,000, $16,004,000 and $8,412,000, respectively.
The following table shows the fair value and gross unrealized losses on investment securities,
aggregated by investment category and length of time that the individual securities have been in a
continuous unrealized loss position at December 31, 2009:
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
|
U.S. government and
agencies
|
$ | 17,051 | $ | (490 | ) | $ | 266 | $ | (8 | ) | $ | 17,317 | $ | (498 | ) | |||||||||
|
Municipal securities
|
43,897 | (598 | ) | 10,505 | (1,079 | ) | 54,402 | (1,677 | ) | |||||||||||||||
|
Corporate issues
|
— | — | 12,058 | (10,549 | ) | 12,058 | (10,549 | ) | ||||||||||||||||
|
Equities
|
452 | (118 | ) | — | — | 452 | (118 | ) | ||||||||||||||||
|
Residential
mortgage-backed
securities –
non-agency
|
1,194 | (2 | ) | 19,451 | (2,957 | ) | 20,645 | (2,959 | ) | |||||||||||||||
|
Residential
mortgage-backed
securities – agency
|
25,752 | (181 | ) | 43,067 | (281 | ) | 68,819 | (462 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
temporarily
impaired
securities
|
$ | 88,346 | $ | (1,389 | ) | $ | 85,347 | $ | (14,874 | ) | $ | 173,693 | $ | (16,263 | ) | |||||||||
|
|
||||||||||||||||||||||||
The decline in the fair value of securities primarily resulted from changes in interest
rates and the illiquidity in the marketplace. Regularly, the Company performs an assessment to
determine whether there have been any
events or economic circumstances to indicate that a security which has an unrealized loss is
impaired other-than-temporarily. The assessment considers many factors including the severity and
duration of the impairment; recent events specific to the issuer or industry; and for debt
securities, external credit ratings, underlying collateral position and recent downgrades. For
asset backed securities, the Company evaluates current characteristics of each security such as
delinquency and foreclosure levels, credit enhancement and projected losses and coverage. It is
possible that the underlying collateral of these securities will perform worse than current
expectations, which may lead to adverse changes in cash flows on these securities and potential
future other-than-temporary impairment losses. Events that may trigger material declines in fair
values for these securities in the future would be, but are not limited to; deterioration of credit
metrics, significantly higher levels of default and severity of loss on the underlying collateral,
deteriorating credit enhancement and loss coverage ratios, or further illiquidity. For debt
securities, credit related other-than-temporary impairment is recognized in earnings, while
noncredit related other-than-temporary impairment on securities not expected to be sold is
recognized in other comprehensive income. The Company asserts that it does not have the intent to
sell these securities and it is more likely than not that it will not have to sell these securities
before a recovery of its cost basis. For these reasons, the Company considers the unrealized
losses to be temporary impairment losses. There are approximately 220 positions that are
temporarily impaired at December 31, 2009. The aggregate carrying amount of cost-method
investments, included in available-for-sale, at December 31, 2009 was $1,067,089,000 of which all
were evaluated for impairment.
As of December 31, 2009, we had 10 investments in corporate issues with total book value of
$22,607,000 and total fair value of $12,058,000, where book value exceeded carrying value for more
than 12 months. These investments were four single issuer trust preferred investments and six
pooled trust preferred investments. The single issuer trust preferred investments were evaluated
for other-than-temporary impairment by determining the
72
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
strength of the underlying issuer. In each case, the underlying issuer was “well-capitalized”
for regulatory purposes. None of the issuers have deferred interest payments or announced the
intention to defer interest payments. We believe the decline in fair value is related to the
spread over three-month LIBOR, on which the quarterly interest payments are based, as the spread
over LIBOR is significantly lower than current market spreads. We concluded the impairment of
these investments was considered temporary. In making that determination, we also considered the
duration and the severity of the losses. The pooled trust preferred investments were evaluated for
other-than-temporary impairment considering duration and severity of losses, actual cash flows,
projected cash flows, performing collateral, the class of securities we owned and the amount of
additional defaults the structure could withstand prior to the security experiencing a disruption
in cash flows. None of these investments are projecting near-term cash flow disruptions, nor have
any of the investments experienced a cash flow disruption.
We concluded, based on all facts evaluated, the remaining impairment of these investments,
other than the credit related impairment recognized, was considered temporary and management
asserts that we do not have the intent to sell these investments and that it is more likely than
not we will not have to sell the investments before recovery of their cost basis.
The following table provides class, book value and ratings information for our portfolio of
corporate investments that had an unrealized loss as of December 31, 2009:
| Total | ||||||||||||||||
| Book | Fair | Unrealized | Moody’s/ | |||||||||||||
| Description | Class | Value | Value | Losses | Fitch Ratings | |||||||||||
|
North Fork Capital (1)
|
N/A | $ | 1,009 | $ | 892 | $ | (117 | ) | Baa2/ BBB | |||||||
|
Bank Boston Capital Trust (2)
|
N/A | 988 | 670 | (318 | ) | Baa3/ BB | ||||||||||
|
Reliance Capital Trust
|
N/A | 1,000 | 814 | (186 | ) | Not rated | ||||||||||
|
Huntington Capital Trust
|
N/A | 1,420 | 586 | (834 | ) | Baa3/ BB+ | ||||||||||
|
MM Community Funding I
|
Mezzanine | 467 | 30 | (437 | ) | Ca/ CCC | ||||||||||
|
MM Community Funding II
|
Mezzanine | 385 | 40 | (345 | ) | BBB/ BBB | ||||||||||
|
I-Pre TSL I
|
Mezzanine | 1,500 | 225 | (1,275 | ) | Not rated/ BB | ||||||||||
|
I-Pre TSL II
|
Mezzanine | 1,500 | 225 | (1,275 | ) | Not rated/ BB | ||||||||||
|
Pre TSL XIX
|
Senior A-1 | 8,853 | 5,125 | (3,728 | ) | A3/ AA | ||||||||||
|
Pre TSL XX
|
Senior A-1 | 5,485 | 3,451 | (2,034 | ) | Baa1/ A | ||||||||||
|
|
||||||||||||||||
|
|
$ | 22,607 | $ | 12,058 | $ | (10,549 | ) | |||||||||
|
|
||||||||||||||||
| (1) | North Fork Bank was acquired by Capital One Financial Corporation | |
| (2) | Bank Boston was acquired by Bank of America |
The following table provides collateral information on pooled trust preferred investments
included in the previous table as of December 31, 2009:
| Additional | ||||||||||||||||
| Immediate | ||||||||||||||||
| Defaults before | ||||||||||||||||
| Current | Causing an | |||||||||||||||
| Total | Deferrals | Performing | Interest | |||||||||||||
| Collateral | and Defaults | Collateral | Shortfall | |||||||||||||
|
I-Pre TSL I.
|
$ | 193,500 | $ | 17,500 | $ | 176,000 | $ | 97,500 | ||||||||
|
I-Pre TSL II
|
378,000 | — | 378,000 | 153,000 | ||||||||||||
|
Pre TSL XIX.
|
700,535 | 115,000 | 585,535 | 234,000 | ||||||||||||
|
Pre TSL XX
|
580,154 | 139,000 | 411,154 | 141,500 | ||||||||||||
73
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
Mortgage-backed securities include agency (Fannie Mae, Freddie Mac and Ginnie Mae)
mortgage-backed securities and non-agency collateralized mortgage obligations. We review our
portfolio of agency backed mortgage-backed securities quarterly for impairment. As of December 31,
2009, we believe that the impairment within our portfolio of agency mortgage-backed securities is
temporary. As of December 31, 2009, we had 12 non-agency collateralized mortgage obligations with
total book value of $27,994,000 and total fair value of $25,084,000. During the year ended
December 31, 2009, we recognized other-than-temporary credit related impairment of $5,523,000
related to three of these investments. After recognizing the other-than-temporary impairment, our
book
value on these three investments was $10,128,000, with a fair value of $7,973,000. We
determined how much of the impairment was credit related and noncredit related by analyzing cash
flow estimates, estimated prepayment speeds, loss severity and conditional default rates. We
consider the discounted cash flow analysis to be our primary evidence when determining whether
credit related other-than-temporary impairment exists. The impairment on the other nine
collateralized mortgage obligations, with book value of $17,866,000 and fair value of $17,111,000,
were also reviewed considering the severity and length of impairment. After this review, we
determined that the impairment on these nine securities was temporary.
The following table shows issuer specific information, book value, fair value, unrealized
losses and other-than-temporary impairment recorded in earnings for our portfolio on non-agency
collateralized mortgage obligations as of December 31, 2009:
| Total | Impairment | |||||||||||||||
| Unrealized | Recorded in | |||||||||||||||
| Description | Book Value | Fair Value | Losses | Earnings | ||||||||||||
|
AMAC 2003-6 2A2
|
$ | 995 | $ | 1,002 | $ | — | $ | — | ||||||||
|
AMAC 2003-6 2A8
|
2,058 | 2,083 | — | — | ||||||||||||
|
AMAC 2003-7 A3
|
1,196 | 1,194 | (2 | ) | — | |||||||||||
|
BOAMS 2005-11 1A8
|
5,276 | 4,809 | (467 | ) | — | |||||||||||
|
CWALT 2005-J14 A3
|
6,460 | 5,144 | (1,316 | ) | (348 | ) | ||||||||||
|
CFSB 2003-17 2A2
|
1,596 | 1,593 | (3 | ) | — | |||||||||||
|
WAMU 2003-S2 A4
|
1,338 | 1,354 | — | — | ||||||||||||
|
CMLTI 2005-10 1A5B
|
1,588 | 1,112 | (476 | ) | (2,724 | ) | ||||||||||
|
CSFB 2003-21 1A13
|
250 | 244 | (6 | ) | — | |||||||||||
|
FHASI 2003-8 1A24
|
3,753 | 3,541 | (212 | ) | — | |||||||||||
|
SARM 2005-21 4A2
|
2,080 | 1,717 | (363 | ) | (2,451 | ) | ||||||||||
|
WFMBS 2003-B A2
|
1,404 | 1,291 | (113 | ) | — | |||||||||||
|
|
||||||||||||||||
|
|
$ | 27,994 | $ | 25,084 | $ | (2,958 | ) | $ | (5,523 | ) | ||||||
|
|
||||||||||||||||
The follow table sets forth the categories of investment securities held by the Company at
December 31, 2009 on which other-than-temporary impairment charges have been recorded in earnings:
| Total | Accumulated | |||||||||||||||
| Unrealized | Impairment | |||||||||||||||
| Category | Book Value | Fair Value | Gain/ (Loss) | Charges | ||||||||||||
|
Freddie Mac preferred shares
|
$ | 76 | $ | 252 | $ | 176 | $ | (7,424 | ) | |||||||
|
Trust preferred investments.
|
16,340 | 10,266 | (6,074 | ) | (8,475 | ) | ||||||||||
|
Non-agency CMOs
|
10,128 | 7,973 | (2,155 | ) | (5,523 | ) | ||||||||||
|
|
||||||||||||||||
|
|
$ | 26,544 | $ | 18,491 | $ | (8,053 | ) | $ | (21,422 | ) | ||||||
|
|
||||||||||||||||
Effective April 1, 2009, we adopted recently issued accounting standards which requires that
credit related other-than-temporary impairment on debt securities be recognized in earnings while
noncredit related other-than-temporary impairment on debt securities, not expected to be sold, be
recognized in other comprehensive income.
74
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
Noncredit related other-than-temporary impairment losses recognized in prior periods have been
reclassified as a cumulative effect adjustment that increased retained earnings and increased
accumulated other comprehensive loss as of April 1, 2009. In 2008, $16,004,000 of
other-than-temporary impairment charges was recognized, of which $2,579,000 related to noncredit
impairment on debt securities. Therefore, the cumulative effect adjustment to retained earnings
recorded April 1, 2009 totaled $1,676,000, after tax.
The table below shows a cumulative roll forward of credit losses recognized in earnings for
debt securities held as of December 31, 2009 and not intended to be sold:
|
Beginning balance as of January 1, 2009 (a)
|
$ | 7,901 | ||
|
Credit losses on debt securities for which
other-than-temporary impairment was not previously
recognized
|
6,057 | |||
|
Additional credit losses on debt securities for which
other-than-temporary impairment was previously
recognized
|
40 | |||
|
|
||||
|
Ending balance as of December 31, 2009
|
$ | 13,998 | ||
|
|
||||
| (a) | The beginning balance represents credit losses included in other-than temporary impairment charges recognized on debt securities in prior periods. |
The following table shows the fair value and gross unrealized losses on investment securities,
aggregated by investment category and length of time that the individual securities have been in a
continuous unrealized loss position at December 31, 2008:
| Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
|
U.S. government and agencies
|
$ | — | $ | — | $ | 1,094 | $ | (12 | ) | $ | 1,094 | $ | (12 | ) | ||||||||||
|
Municipal securities
|
109,255 | (4,598 | ) | — | — | 109,255 | (4,598 | ) | ||||||||||||||||
|
Corporate issues
|
8,618 | (7,055 | ) | 2,573 | (2,363 | ) | 11,191 | (9,418 | ) | |||||||||||||||
|
Mortgage-backed securities
|
285,087 | (11,625 | ) | 80,104 | (4,628 | ) | 365,191 | (16,253 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Total
temporarily
impaired
securities
|
$ | 402,960 | $ | (23,278 | ) | $ | 83,771 | $ | (7,003 | ) | $ | 486,731 | $ | (30,281 | ) | |||||||||
|
|
||||||||||||||||||||||||
75
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
(4) Loans Receivable
Loans receivable at December 31, 2009 and 2008 are summarized in the table below:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Real estate loans:
|
||||||||
|
One-to-four family
|
$ | 2,371,996 | $ | 2,492,940 | ||||
|
Home equity
|
1,080,011 | 1,035,954 | ||||||
|
Multi-family and commercial
|
1,292,145 | 1,100,218 | ||||||
|
|
||||||||
|
Total real estate loans
|
4,744,152 | 4,629,112 | ||||||
|
Consumer loans:
|
||||||||
|
Automobile
|
101,046 | 102,267 | ||||||
|
Education
|
32,860 | 38,152 | ||||||
|
Loans on savings accounts
|
12,209 | 11,191 | ||||||
|
Other
|
127,750 | 115,913 | ||||||
|
|
||||||||
|
Total consumer loans
|
273,865 | 267,523 | ||||||
|
Commercial loans
|
403,589 | 387,145 | ||||||
|
|
||||||||
|
Total loans receivable, gross
|
5,421,606 | 5,283,780 | ||||||
|
Deferred loan fees
|
(7,030 | ) | (5,041 | ) | ||||
|
Allowance for loan losses
|
(70,403 | ) | (54,929 | ) | ||||
|
Undisbursed loan proceeds (real estate loans)
|
(115,111 | ) | (81,918 | ) | ||||
|
|
||||||||
|
Total Loan receivable, net
|
$ | 5,229,062 | $ | 5,141,892 | ||||
|
|
||||||||
At December 31, 2009, 2008 and 2007, the Company serviced loans for others approximating
$1,400,802,000, $1,099,949,000 and $998,285,000, respectively. These loans serviced for others are
not assets of the Company and are excluded from the Company’s financial statements.
At December 31, 2009 and 2008, approximately 78% and 79%, respectively, of the Company’s loan
portfolio was secured by properties located in Pennsylvania. The Company does not believe it has
significant concentrations of credit risk to any one group of borrowers given its underwriting and
collateral requirements.
Loans receivable at December 31, 2009 and 2008 include $1,611,566,000 and $1,300,990,000 of
adjustable rate loans and $3,810,040,000 and $3,982,790,000, respectively, of fixed rate loans.
The Company’s exposure to credit loss in the event of nonperformance by the other party to
off-balance-sheet financial instruments is represented by the contract amount of the financial
instrument. The Company uses the same credit policies in making commitments for off-balance-sheet
financial instruments as it does for on-balance-sheet instruments. Financial instruments with
off-balance-sheet risk as of December 31, 2009 and 2008 are presented in the following table:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Loan commitments
|
$ | 134,620 | $ | 116,330 | ||||
|
Undisbursed lines of credit
|
298,459 | 273,670 | ||||||
|
Standby letters of credit
|
44,283 | 15,821 | ||||||
|
|
||||||||
|
|
$ | 477,362 | $ | 405,821 | ||||
|
|
||||||||
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. The Company evaluates each
customer’s creditworthiness on a case-by-
76
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
case basis. The amount of collateral obtained by the Company upon extension of credit is based
on management’s credit evaluation of the counterparty. Collateral held varies but generally may
include cash, marketable securities, real estate and other property.
Outstanding loan commitments at December 31, 2009, for fixed rate loans, were $82,377,000. The
interest rates on these commitments approximate market rates at December 31, 2009. Outstanding loan
commitments at December 31, 2009 for adjustable rate loans were $52,243,000. The fair values of
these commitments are affected by fluctuations in market rates of interest.
The Company issues standby letters of credit in the normal course of business. Standby letters
of credit are conditional commitments issued to guarantee the performance of a customer to a third
party. Standby letters of credit generally are contingent upon the failure of the customer to
perform according to the terms of the underlying contract with the third party. The Company is
required to perform under a standby letter of credit when drawn upon by the guaranteed third party
in the case of nonperformance by the Company’s customer. The credit risk associated with standby
letters of credit is essentially the same as that involved in extending loans to customers and is
subject to normal credit policies. Collateral may be obtained based on management’s credit
assessment of the customer. As of December 31, 2009, the maximum potential amount of future
payments the Company could be required to make under these standby letters of credit is
$44,283,000, of which $41,918,000 is fully collateralized. A liability (which represents deferred
income) of $355,000 and $162,000 has been recognized by the Company for the obligations as of
December 31, 2009 and 2008, respectively, and there are no recourse provisions that would enable
the Company to recover any amounts from third parties.
The Company automatically places loans on nonaccrual status when they become more than 90 days
contractually delinquent or when the paying capacity of the obligor becomes inadequate to meet the
requirements of the contract. When a loan is placed on nonaccrual, all previously accrued and
uncollected interest is reversed against current period interest income. Nonaccrual loans at
December 31, 2009, 2008 and 2007 were $124,626,000, $99,203,000 and $49,610,000, respectively.
A loan is considered to be 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. The amount
of impairment is required to be measured using one of the three methods: (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 collateral if the loan is collateral dependent.
If the measure of the impaired loan is less than the recorded investment in the loan, a specific
allowance is allocated for the impairment. Impaired loans at December 31, 2009, 2008 and 2007 were
$124,626,000, $99,203,000 and $49,610,000, respectively. Average impaired loans during the years
ended December 31, 2009, 2008 and 2007 were $115,430,000, $72,434,000 and $41,179,000,
respectively. Specific allowances allocated to impaired loans were $19,092,000 at December 31,
2009.
During the year ended December 31, 2009, the Company modified four loans that would be
considered troubled debt restructures. The first, $5,976,000 with a $598,000 specific reserve, was
a participation loan for a hotel in Maryland where the Company was not the lead lender and had no
commitments to lend additional funds. The second, $3,655,000 with a $313,000 specific reserve, was
a land development loan in southwestern Pennsylvania
where the Company has commitments to lend an additional $2,495,000. The third, $3,154,000
with a $2,009,000 specific reserve, was a condominium project in Gainesville, Florida with no
commitments to lend additional funds. The fourth, $708,000 with no specific reserve, was a
commercial loan to an entity located in northwestern Pennsylvania with no commitments to lend
additional funds. There were no other commitments to lend additional funds to borrowers on
nonaccrual status.
Mortgage servicing assets are recorded when the underlying loan is sold. Upon sale, the
mortgage servicing right (“MSR”) is established, which represents the then fair value of future net
cash flows expected to be
77
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
realized for performing the servicing activities. The fair value of the MSRs are estimated by
calculating the present value of estimated future net servicing cash flows, taking into
consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs
and other economic factors , which are determined based on current market conditions. In
determining the fair value of the MSRs, mortgage interest rates, which are used to determine
prepayment rates and discount rates, are held constant over the estimated life of the portfolio.
MSRs are amortized against mortgage banking income in proportion to, and over the period of, the
estimated future net servicing income of the underlying mortgage loans.
Capitalized MSRs are evaluated for impairment based on the estimated fair value of those
rights. The MSRs are stratified by certain risk characteristics, primarily loan term and note
rate. If temporary impairment exists within a risk stratification tranche, a valuation allowance
is established through a charge to income equal to the amount by which the carrying value exceeds
the fair value. If it is later determined all or a portion of the temporary impairment no longer
exists for a particular tranche, the valuation allowance is reduced.
The following table shows changes in MSRs as of and for the year ended December 31, 2009:
| Net Carrying | ||||||||||||
| Servicing | Valuation | Value and | ||||||||||
| Rights | Allowance | Fair Value | ||||||||||
|
Balance at December 31, 2008
|
$ | 8,660 | $ | (2,380 | ) | $ | 6,280 | |||||
|
Additions/ (reductions)
|
4,912 | 1,840 | 6,752 | |||||||||
|
Amortization
|
(5,002 | ) | — | (5,002 | ) | |||||||
|
|
||||||||||||
|
Balance at December 31, 2009
|
$ | 8,570 | $ | (540 | ) | $ | 8,030 | |||||
|
|
||||||||||||
(5) Accrued Interest Receivable
Accrued interest receivable as of December 31, 2009 and 2008 is presented in the following
table:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Investment securities
|
$ | 2,815 | $ | 3,672 | ||||
|
Mortgage-backed securities
|
2,362 | 2,997 | ||||||
|
Loans receivable
|
20,603 | 20,583 | ||||||
|
|
||||||||
|
|
$ | 25,780 | $ | 27,252 | ||||
|
|
||||||||
(6) Allowance for Loan Losses
Changes in the allowance for losses on loans receivable for the years ended December 31, 2009,
2008 and 2007 are presented in the following table:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Balance, beginning of year
|
$ | 54,929 | $ | 41,784 | $ | 37,655 | ||||||
|
Provision
|
41,847 | 22,851 | 8,743 | |||||||||
|
Charge-offs
|
(27,816 | ) | (11,610 | ) | (8,190 | ) | ||||||
|
Acquisitions
|
— | — | 2,119 | |||||||||
|
Recoveries
|
1,443 | 1,904 | 1,457 | |||||||||
|
|
||||||||||||
|
Balance, end of year
|
$ | 70,403 | $ | 54,929 | $ | 41,784 | ||||||
|
|
||||||||||||
78
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
While management uses available information to provide for losses, future additions to the
allowance may be necessary based on changes in economic conditions. Current economic conditions
have increased the uncertainty inherent in our estimates and assumptions. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review the
Company’s allowance for loan losses. Such agencies may require the Company to recognize additions
to the allowance based on their judgments about information available to them at the time of their
examination. Management believes, to the best of their knowledge, that all known losses as of the
balance sheet dates have been recorded.
(7) Federal Home Loan Bank Stock
The Company’s banking subsidiary is a member of the Federal Home Loan Bank system. As a
member, we are required to maintain an investment in the capital stock of the FHLB, at cost, in an
amount not less than 4.75% of borrowings outstanding plus 0.75% of unused FHLB borrowing capacity.
During the quarter ended December 31, 2008, the FHLB suspended paying dividends on its capital
stock as well as the repurchase of excess stock owned by its members. Published reports indicate
that the FHLB may be subject to accounting rules and asset quality risks that could result in
materially lower regulatory capital levels. In an extreme situation, it is possible that the
capitalization of the FHLB could be substantially diminished or reduced to zero. Consequently,
there is a risk that the capital requirements for its members could be increased and that our
investment in the FHLB common stock could be deemed other-than-temporarily impaired in the future.
(8) Premises and Equipment
Premises and equipment at December 31, 2009 and 2008 are summarized by major classification in
the following table:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Land and land improvements
|
$ | 16,382 | $ | 14,292 | ||||
|
Office buildings and improvements
|
116,439 | 106,561 | ||||||
|
Furniture, fixtures and equipment
|
91,626 | 82,574 | ||||||
|
Leasehold improvements
|
10,920 | 10,990 | ||||||
|
|
||||||||
|
Total, at cost
|
235,367 | 214,417 | ||||||
|
Less accumulated depreciation and amortization
|
(111,051 | ) | (98,575 | ) | ||||
|
|
||||||||
|
Premises and equipment, net
|
$ | 124,316 | $ | 115,842 | ||||
|
|
||||||||
Depreciation and amortization expense for the years ended December 31, 2009, 2008 and 2007 was
$12,106,000, $11,984,000 and $9,264,000, respectively.
Premises used by certain of the Company’s branches and offices are occupied under formal
operating lease arrangements. The leases expire on various dates through 2027. Minimum annual
rentals by fiscal year are summarized in the following table:
|
2010
|
$ | 4,063 | ||
|
2011
|
3,570 | |||
|
2012
|
2,709 | |||
|
2013
|
2,242 | |||
|
2014
|
1,792 | |||
|
Thereafter
|
9,327 | |||
|
|
||||
|
|
$ | 23,703 | ||
|
|
||||
79
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
Rental expense for the years ended December 31, 2009, 2008 and 2007 was $4,901,000, $5,017,000
and $4,555,000, respectively.
(9) Goodwill and Other Intangible Assets
The following table provides information for intangible assets subject to amortization for the
years ended December 31, 2009 and 2008:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Amortized intangible assets:
|
||||||||
|
Core deposit intangibles — gross
|
$ | 30,275 | $ | 30,275 | ||||
|
Acquisitions
|
303 | — | ||||||
|
Less accumulated amortization
|
(26,108 | ) | (23,172 | ) | ||||
|
|
||||||||
|
Core deposit intangibles — net
|
$ | 4,470 | $ | 7,103 | ||||
|
|
||||||||
|
|
||||||||
|
Customer contract intangible assets — gross
|
$ | 1,731 | $ | 1,731 | ||||
|
Acquisitions
|
— | — | ||||||
|
Less accumulated amortization
|
(1,523 | ) | (1,439 | ) | ||||
|
|
||||||||
|
Customer contract intangible assets, net
|
$ | 208 | $ | 292 | ||||
|
|
||||||||
The following information shows the actual aggregate amortization expense for the years ended
December 31, 2009, 2008 and 2007 as well as the estimated aggregate amortization expense, based
upon current levels of intangible assets, for each of the five succeeding fiscal years:
|
For the year ended 12/31/07
|
$ | 4,499 | ||
|
For the year ended 12/31/08
|
4,387 | |||
|
For the year ended 12/31/09
|
3,020 | |||
|
For the year ended 12/31/10
|
2,270 | |||
|
For the year ended 12/31/11
|
1,256 | |||
|
For the year ended 12/31/12
|
693 | |||
|
For the year ended 12/31/13
|
355 | |||
|
For the year ended 12/31/14
|
104 |
The following table provides information for the changes in the carrying amount of goodwill:
| Community Banks | Consumer Finance | Total | ||||||||||
|
Balance at December 31, 2007
|
$ | 170,301 | $ | 1,313 | $ | 171,614 | ||||||
|
Goodwill acquired
|
— | — | — | |||||||||
|
Tax adjustment
|
(251 | ) | — | (251 | ) | |||||||
|
Impairment losses
|
— | — | — | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2008
|
170,050 | 1,313 | 171,363 | |||||||||
|
Goodwill acquired
|
— | — | — | |||||||||
|
Impairment losses
|
— | — | — | |||||||||
|
|
||||||||||||
|
Balance at December 31, 2009
|
$ | 170,050 | $ | 1,313 | $ | 171,363 | ||||||
|
|
||||||||||||
We have performed the required goodwill impairment tests and have determined that goodwill is
not impaired as of December 31, 2009 and 2008.
80
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
(10) Deposits
Deposit balances at December 31, 2009 and 2008 are shown in the table below:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Savings accounts
|
$ | 924,461 | $ | 760,245 | ||||
|
Interest-bearing checking accounts
|
768,110 | 706,120 | ||||||
|
Noninterest-bearing checking accounts
|
487,036 | 394,011 | ||||||
|
Money market deposit accounts
|
820,076 | 720,375 | ||||||
|
Certificates of deposit
|
2,624,741 | 2,457,460 | ||||||
|
|
||||||||
|
|
$ | 5,624,424 | $ | 5,038,211 | ||||
|
|
||||||||
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 at
December 31, 2009 and 2008 was $628,881,000 and $533,404,000, respectively. Generally, deposits in
excess of $250,000 are not federally insured.
The Company has a minimal amount of brokered deposit obtained from acquisitions in prior
years. It is not a practice of the Company to solicit brokered deposits. The Company is a
registered participant in the CDARS program and has no customers currently participating.
The following table summarizes the contractual maturity of the certificate accounts at
December 31, 2009 and 2008:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Due within 12 months
|
$ | 1,545,784 | $ | 1,285,695 | ||||
|
Due between 12 and 24 months
|
365,729 | 590,849 | ||||||
|
Due between 24 and 36 months
|
592,298 | 238,927 | ||||||
|
Due between 36 and 48 months
|
58,821 | 289,001 | ||||||
|
Due between 48 and 60 months
|
47,323 | 37,905 | ||||||
|
After 60 months
|
14,786 | 15,083 | ||||||
|
|
||||||||
|
|
$ | 2,624,741 | $ | 2,457,460 | ||||
|
|
||||||||
The following table summarizes the interest expense incurred on the respective deposits for
the years ended December 31, 2009, 2008 and 2007:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Savings accounts
|
$ | 6,501 | $ | 9,159 | $ | 10,908 | ||||||
|
Interest-bearing checking accounts
|
2,536 | 6,434 | 11,038 | |||||||||
|
Money market deposit accounts
|
8,471 | 14,726 | 23,551 | |||||||||
|
|
||||||||||||
|
Certificate accounts
|
77,886 | 106,742 | 141,043 | |||||||||
|
|
||||||||||||
|
|
$ | 95,394 | $ | 137,061 | $ | 186,540 | ||||||
|
|
||||||||||||
81
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
(11) Borrowed Funds
Borrowed funds at December 31, 2009 and 2008 are presented in the following table:
| December 31 | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Amount | Avg. Rate | Amount | Avg. Rate | |||||||||||||
|
Term notes payable to the FHLB of
Pittsburgh:
|
||||||||||||||||
|
Due within one year
|
$ | 36,506 | 4.35 | % | $ | 43,708 | 3.87 | % | ||||||||
|
Due between one and two years
|
160,000 | 4.11 | % | 36,532 | 4.36 | % | ||||||||||
|
Due between two and three years
|
145,000 | 3.90 | % | 160,000 | 4.11 | % | ||||||||||
|
Due between three and four years
|
125,000 | 3.85 | % | 145,000 | 3.90 | % | ||||||||||
|
Due between four and five years
|
125,085 | 4.03 | % | 125,000 | 3.85 | % | ||||||||||
|
Due between five and ten years
|
190,630 | 4.17 | % | 315,778 | 4.11 | % | ||||||||||
|
|
||||||||||||||||
|
|
782,221 | 826,018 | ||||||||||||||
|
Revolving line of credit, Federal
Home Loan Bank of Pittsburgh
|
— | — | 146,000 | 0.59 | % | |||||||||||
|
Investor notes payable, due
various dates in 2009
|
— | — | 4,491 | 4.99 | % | |||||||||||
|
Securities sold under agreement to
repurchase, due within one year
|
115,105 | 1.55 | % | 91,436 | 1.02 | % | ||||||||||
|
|
||||||||||||||||
|
Total borrowed funds
|
$ | 897,326 | $ | 1,067,945 | ||||||||||||
|
|
||||||||||||||||
Borrowings from the Federal Home Loan Bank of Pittsburgh are secured by the Company’s
residential first mortgage loans and other qualifying loans. Certain of these borrowings are
subject to restrictions or penalties in the event of prepayment.
The revolving line of credit with the Federal Home Loan Bank of Pittsburgh carries a
commitment of $150,000,000 maturing on December 7, 2011. The rate is adjusted daily by the Federal
Home Loan Bank, and any borrowings on this line may be repaid at any time without penalty.
The securities sold under agreements to repurchase are collateralized by various securities
held in safekeeping by the Federal Home Loan Bank of Pittsburgh. The market value of such
securities exceeds the value of the securities sold under agreements to repurchase. The average
amount of agreements outstanding in the years ended December 31, 2009, 2008 and 2007 was
$90,706,000, $88,349,000 and $70,875,000, respectively. The maximum amount of security repurchase
agreements outstanding during the years ended December 31, 2009, 2008 and 2007 was $115,342,000,
$98,108,000 and $83,432,000, respectively.
82
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
(12) Income Taxes
Total income tax was allocated for the years ended December 31, 2009, 2008 and 2007 as
follows:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Income before income taxes
|
$ | 7,000 | $ | 16,968 | $ | 17,456 | ||||||
|
Goodwill for prior acquisition
|
— | (251 | ) | — | ||||||||
|
Shareholders’ equity for unrealized (loss)/ gain
on securities available-for-sale
|
5,116 | (5,916 | ) | 4,672 | ||||||||
|
Shareholders’ equity for tax benefit for excess of
fair value above cost of stock benefit plans
|
(17 | ) | (349 | ) | (300 | ) | ||||||
|
Shareholders’ equity for pension adjustment
|
4,626 | (9,099 | ) | 3,311 | ||||||||
|
Shareholders’ equity for swap fair value adjustment
|
2,857 | (4,590 | ) | — | ||||||||
|
|
||||||||||||
|
|
$ | 19,582 | $ | (3,237 | ) | $ | 25,139 | |||||
|
|
||||||||||||
Income tax expense (benefit) applicable to income before taxes for the years ended December
31, 2009, 2008 and 2007 consists of:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Current
|
$ | 15,763 | $ | 23,448 | $ | 18,206 | ||||||
|
Deferred
|
(8,763 | ) | (6,480 | ) | (750 | ) | ||||||
|
|
||||||||||||
|
|
$ | 7,000 | $ | 16,968 | $ | 17,456 | ||||||
|
|
||||||||||||
A reconciliation from the expected federal statutory income tax rate to the effective rate,
expressed as a percentage of pretax income for the years ended December 31, 2009, 2008 and 2007, is
as follows:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Expected tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
|
Tax-exempt interest income
|
(11.6 | )% | (7.4 | )% | (7.3 | )% | ||||||
|
State income tax, net of federal benefit
|
2.5 | % | 2.2 | % | 1.9 | % | ||||||
|
Bank-owned life insurance
|
(4.2 | )% | (2.6 | )% | (2.3 | )% | ||||||
|
Non-taxable gain on bargain purchase
|
(3.1 | )% | — | — | ||||||||
|
Other
|
(0.9 | )% | (1.2 | )% | (1.1 | )% | ||||||
|
|
||||||||||||
|
Effective tax rate
|
17.7 | % | 26.0 | % | 26.2 | % | ||||||
|
|
||||||||||||
83
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 are presented below:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Deferred tax assets:
|
||||||||
|
Deferred fee income
|
$ | 538 | $ | 527 | ||||
|
Deferred compensation expense
|
2,072 | 2,980 | ||||||
|
Net operating loss carryforwards
|
1,284 | 1,352 | ||||||
|
Bad debts
|
19,466 | 14,002 | ||||||
|
Accrued postretirement benefit cost
|
688 | 682 | ||||||
|
Stock benefit plans
|
292 | 375 | ||||||
|
Marketable securities available for sale
|
— | 2,078 | ||||||
|
Writedown of investment securities
|
7,498 | 6,243 | ||||||
|
Reserve for uncollected interest
|
3,591 | 1,894 | ||||||
|
Pension expense
|
587 | 559 | ||||||
|
Pension and postretirement benefits
|
7,434 | 12,060 | ||||||
|
Alternative minimum tax credit carryforwards
|
— | 371 | ||||||
|
Unrealized loss on the fair value of derivatives
|
1,733 | 4,590 | ||||||
|
Charitable contribution carryforward
|
3,965 | — | ||||||
|
Other
|
376 | 379 | ||||||
|
|
||||||||
|
|
49,524 | 48,092 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Marketable securities available for sale
|
3,038 | — | ||||||
|
Purchase accounting
|
1,659 | 2,487 | ||||||
|
Intangible asset
|
12,760 | 10,952 | ||||||
|
Mortgage servicing rights
|
2,811 | 2,198 | ||||||
|
Fixed assets
|
6,828 | 6,630 | ||||||
|
Other
|
671 | 621 | ||||||
|
|
||||||||
|
|
27,767 | 22,888 | ||||||
|
|
||||||||
|
Net deferred tax asset/ (liability)
|
$ | 21,757 | $ | 25,204 | ||||
|
|
||||||||
The Company has determined that no valuation allowance is necessary for the deferred tax
assets because it is more likely than not that these assets will be realized through carryback to
taxable income in prior years, future reversals of existing temporary differences, and through
future taxable income. Net deferred tax assets of $389,000 were recorded in 2009 related to the
acquisition of Keystone State Savings Bank. The Company will continue to review the criteria
related to the recognition of deferred tax assets on a regular basis.
Under provisions of the Internal Revenue Code (“IRC”), Northwest has approximately $3,612,000
of federal net operating losses, which expire in years 2026 through 2029. These net operating
losses, which were acquired as part of the Maryland Permanent and Keystone State Savings Bank
acquisitions, are subject to annual carryforward limitations imposed
by IRC code section 382. We also have $3,965,000 of charitable
contribution carryforwards, which expire in 2014. The
Company believes the limitations will not prevent the carryforward benefits from being utilized.
84
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
The Company utilizes a comprehensive model to recognize, measure, present and disclose in its
financial statements uncertain tax positions that the company has taken or expects to take on a tax
return. At December 31, 2009 there were no unrecognized tax benefits that, if recognized, would
favorably affect the effective income tax rate. The Company recognizes interest accrued and
penalties (if any) related to unrecognized tax benefits in income tax expense. During the year
ended December 31, 2009, the Company did not accrue any interest. At December 31, 2009, the
Company had no amount accrued for interest or the payment of penalties.
The Company is subject to routine audits of our tax returns by the Internal Revenue Service as
well as all states in which the Company conducts business. The Internal Revenue Service commenced
an examination of our federal income tax returns for the year ended June 30, 2005, the six-month
period ended December 31, 2005 and the years ended December 31, 2006 and 2007 in January of 2008
that was completed during 2009. There was no material change to our financial position due to the
settlement of this audit. The Company is subject to audit by any state in which we conduct
business for the tax periods ended December 31, 2008, 2007 and 2006.
(13) Shareholders’ Equity
Retained earnings are partially restricted in connection with regulations related to the
insurance of savings accounts, which requires Northwest to maintain certain statutory reserves.
Northwest may not pay dividends on or repurchase any of its common stock if the effect thereof
would reduce retained earnings below the level of adequate capitalization as defined by federal and
state regulators.
In tax years prior to fiscal 1997, Northwest was permitted, under the Internal Revenue Code
(the Code), to deduct an annual addition to a reserve for bad debts in determining taxable income,
subject to certain limitations. Bad debt deductions for income tax purposes are included in taxable
income of later years only if the bad debt reserve is used subsequently for purposes other than to
absorb bad debt losses. Because Northwest does not intend to use the reserve for purposes other
than to absorb losses, no deferred income taxes have been provided prior to fiscal 1987. Retained
earnings at December 31, 2009 and 2008 include approximately $39,107,000 representing such bad debt
deductions for which no deferred income taxes have been provided.
(14) Earnings Per Share
Basic earnings per common share (“EPS”) is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding for the period, without
considering any dilutive items. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings of the Company. For
the year ended December 31, 2009, 1,321,203 options with a weighted average strike price of $11.32
per share were outstanding, but were excluded from the calculation of earnings per share because
they were anti-dilutive. For the year ended December 31, 2008, 1,321,203 options with a weighted
average strike price of $11.32 per share were outstanding, but were excluded from the calculation
of earnings per share because they were anti-dilutive. There were no anti-dilutive options during
2007. The computation of basic and diluted earnings per share for the years ended December 31,
2009, 2008 and 2007 follows:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net income available to common shareholders
|
$ | 32,653 | $ | 48,171 | $ | 49,097 | ||||||
|
|
||||||||||||
|
Weighted average common shares outstanding
|
109,078 | 108,817 | 110,342 | |||||||||
|
Dilutive potential shares due to effect of stock options
|
382 | 529 | 704 | |||||||||
|
|
||||||||||||
|
Total weighted average common shares and
dilutive potential shares
|
109,460 | 109,346 | 111,046 | |||||||||
|
|
||||||||||||
|
Basic earnings per share
|
$ | 0.30 | $ | 0.44 | $ | 0.44 | ||||||
|
|
||||||||||||
|
Diluted earnings per share
|
$ | 0.30 | $ | 0.44 | $ | 0.44 | ||||||
|
|
||||||||||||
85
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
(15) Employee Benefit Plans
(a) Pension Plans
The Company maintains noncontributory defined benefit pension plans covering substantially all
employees and the members of its board of directors. Retirement benefits are based on certain
compensation levels, age, and length of service. Contributions by the Company are based on an
actuarially determined amount to fund not only benefits attributed to service to date but also for
those expected to be earned in the future. In addition, the Company has an unfunded Supplemental
Executive Retirement Plan (“SERP”) to compensate those executive participants eligible for the
Company’s defined benefit pension plan whose benefits are limited by Section 415 of the Internal
Revenue Code.
The Company also sponsors a retirement savings plan in which substantially all employees
participate. The Company provides a matching contribution of 50% of each employee’s contribution to
a maximum of 6% of the employee’s compensation.
Total expense for all retirement plans, including defined benefit pension plans, was
approximately $9,148,000, $5,957,000 and $6,639,000, for the years ended December 31, 2009, 2008
and 2007, respectively.
Components of net periodic pension cost and other amounts recognized in other comprehensive
income:
The following tables set forth the net periodic pension cost for the Company’s defined benefit
pension plans for the years ended December 31, 2009, 2008 and 2007:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Service cost
|
$ | 5,292 | $ | 5,022 | $ | 4,958 | ||||||
|
Interest cost
|
4,794 | 4,559 | 4,094 | |||||||||
|
Expected return on plan assets
|
(3,866 | ) | (4,988 | ) | (4,409 | ) | ||||||
|
Net amortization and deferral
|
1,677 | 175 | 825 | |||||||||
|
|
||||||||||||
|
Net periodic pension cost
|
$ | 7,897 | $ | 4,768 | $ | 5,468 | ||||||
|
|
||||||||||||
The following table sets forth other changes in the Company’s defined benefit pension plans’
plan assets and benefit obligations recognized in other comprehensive income:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net loss (gain)
|
$ | (11,922 | ) | $ | 25,675 | $ | (8,391 | ) | ||||
|
Prior service cost (credit)
|
— | (2,184 | ) | — | ||||||||
|
Amortization of prior service cost
|
154 | (51 | ) | (77 | ) | |||||||
|
|
||||||||||||
|
Total recognized in other comprehensive income
|
$ | (11,768 | ) | $ | 23,440 | $ | (8,468 | ) | ||||
|
|
||||||||||||
|
Total recognized in net periodic pension cost
and other comprehensive income/ (loss)
|
$ | (3,871 | ) | $ | 28,208 | $ | (3,000 | ) | ||||
|
|
||||||||||||
The estimated net loss and prior service cost for the Company’s defined benefit pension plan
that will be amortized from accumulated other comprehensive income into net periodic cost over the
next year are $872,000 and $160,000, respectively.
86
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
The following table sets forth information for the Company’s defined benefit pension plans’
funded status at December 31, 2009 and 2008:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Change in benefit obligation:
|
||||||||
|
Benefit obligation at beginning of year
|
$ | 80,769 | $ | 73,708 | ||||
|
Service cost
|
5,292 | 5,022 | ||||||
|
Interest cost
|
4,794 | 4,559 | ||||||
|
Actuarial (gain) loss
|
1,264 | (675 | ) | |||||
|
Benefits paid
|
(2,303 | ) | (1,845 | ) | ||||
|
|
||||||||
|
Benefit obligation at end of year
|
$ | 89,816 | $ | 80,769 | ||||
|
|
||||||||
|
|
||||||||
|
Change in plan assets:
|
||||||||
|
Fair value of plan assets at beginning of year
|
$ | 49,036 | $ | 62,943 | ||||
|
Actual return on plan assets
|
15,221 | (18,394 | ) | |||||
|
Employer contributions
|
7,815 | 6,332 | ||||||
|
Benefits paid
|
(2,303 | ) | (1,845 | ) | ||||
|
|
||||||||
|
Fair value of plan assets at end of period
|
$ | 69,769 | $ | 49,036 | ||||
|
|
||||||||
|
Funded status at end of year
|
$ | (20,047 | ) | $ | (31,733 | ) | ||
|
|
||||||||
The following table sets forth the assumptions used to develop the net periodic pension cost:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Discount rate
|
6.00 | % | 6.25 | % | 5.75 | % | ||||||
|
Expected long-term rate of return on assets
|
8.00 | % | 8.00 | % | 8.00 | % | ||||||
|
Rate of increase in compensation levels
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
The following table sets forth the assumptions used to determine benefit obligations at the
end of each period:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Discount rate
|
6.00 | % | 6.00 | % | 6.25 | % | ||||||
|
Expected long-term rate of return on assets
|
8.00 | % | 8.00 | % | 8.00 | % | ||||||
|
Rate of increase in compensation levels
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
The expected long-term rate of return on assets is based on the expected return of each of the
asset categories, weighted based on the median of the target allocation for each category. We use
the Citigroup Pension Liability Index rates matching the duration of our benefit payments as of the
measurement date to determine the discount rate.
The accumulated benefit obligation for the funded defined benefit pension plan was
$64,293,000, $57,146,000 and $51,010,000 at December 31, 2009, 2008 and 2007, respectively. The
accumulated benefit obligation for all unfunded defined benefit plans was $3,950,000, $3,844,000
and $3,659,000 at December 31, 2009, 2008 and 2007, respectively.
87
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
The following table sets forth information for pension plans with an accumulated benefit
obligation in excess of plan assets:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Projected benefit obligation
|
$ | 89,816 | $ | 80,769 | ||||
|
Accumulated benefit obligation
|
$ | 68,242 | $ | 60,990 | ||||
|
Fair value of plan assets
|
$ | 69,769 | $ | 49,036 | ||||
The Company anticipates making contributions to its defined benefit pension plan between
$4,000,000 and $8,000,000 during the fiscal year ending December 31, 2010.
The investment policy as established by the Plan Administrative Committee, to be followed by
the Trustee, is to invest assets based on the target allocations shown in the table below. To meet
target allocation ranges set forth by the Plan Administrative Committee, periodically, the assets
are reallocated by the Trustee. The investment policy is reviewed periodically to determine if the
policy should be changed. Pension assets are conservatively invested with the goal of providing
market or better returns with below market risks. Assets are invested in a balanced portfolio
composed primarily of equities, fixed income, and cash or cash equivalent investments. The Trustee
tries to maintain an approximate asset mix position of 30% to 60% equities and 20% to 50% bonds.
A maximum of 10% may be invested in any one stock, including the stock of Northwest
Bancshares, Inc. The objective of holding equity securities is to provide capital appreciation
consistent with the ownership of the common stocks of medium to large companies. Acceptable bond
investments are direct or agency obligations of the U.S. Government or investment grade corporate
bonds. The average maturity of the bond portfolio shall not exceed 10 years.
The following table sets forth the weighted average asset allocation of defined benefit plans:
| December 31 | ||||||||||||
| Target Allocation | 2009 | 2008 | ||||||||||
|
Debt securities
|
20 — 50 | % | 26 | % | 38 | % | ||||||
|
Equity securities
|
30 — 60 | % | 62 | % | 60 | % | ||||||
|
Other
|
5 — 50 | % | 12 | % | 2 | % | ||||||
|
|
||||||||||||
|
Total
|
100 | % | 100 | % | ||||||||
|
|
||||||||||||
All of the assets held by the defined benefit pension plan are measured and recorded at
estimated fair value on the Company’s balance sheet on a recurring basis as level 1 assets, as
defined by the fair value hierarchy defined in Footnote 16.
The following table sets forth the pension plan assets as of December 31, 2009:
|
Mutual funds — debt
|
$ | 18,277 | ||
|
Mutual funds — equity
|
$ | 43,370 | ||
|
Cash
|
$ | 8,122 |
The benefits expected to be paid in each year from 2010 to 2014 are $2,339,000, $2,431,000,
$2,655,000, $3,074,000 and $3,410,000, respectively. The aggregate benefits expected to be paid in
the five years from 2015 to 2019 are $22,537,000. The expected benefits to be paid are based on the
same assumptions used to measure the Company’s benefit obligations at December 31, 2009 and include
estimated future employee service.
88
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
(b) Postretirement Healthcare Plan
In addition to pension benefits, the Company provides postretirement healthcare benefits for
certain employees who were employed by the Company as of October 1, 1993 and were at least 55 years
of age on that date. The Company uses the accrual method of accounting for postretirement benefits
other than pensions.
Components of net periodic benefit cost and other amounts recognized in other comprehensive
income:
The following tables set forth the net periodic benefit cost for the Company’s postretirement
healthcare benefits plan for the years ended December 31, 2009, 2008 and 2007:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Service cost
|
$ | — | $ | — | $ | — | ||||||
|
Interest cost
|
101 | 98 | 93 | |||||||||
|
Amortization of net loss
|
58 | 43 | 42 | |||||||||
|
|
||||||||||||
|
Net period benefit cost
|
$ | 159 | $ | 141 | $ | 135 | ||||||
|
|
||||||||||||
The following table sets forth other changes in the Company’s postretirement healthcare plan’s
plan assets and benefit obligations recognized in other comprehensive income:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net loss (gain)
|
$ | (94 | ) | $ | 204 | $ | (22 | ) | ||||
|
|
||||||||||||
|
Total recognized in other comprehensive income
|
$ | (94 | ) | $ | 204 | $ | (22 | ) | ||||
|
|
||||||||||||
|
Total recognized in net periodic benefit cost
and other comprehensive income
|
$ | 65 | $ | 345 | $ | 113 | ||||||
|
|
||||||||||||
The estimated net loss for the postretirement healthcare benefit plan that will be amortized
from accumulated other comprehensive income into net periodic benefit cost over the next year is
$52,000.
The following table sets forth the funded status of the Company’s postretirement healthcare
benefit plan at December 31, 2009 and 2008:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Change in benefit obligation:
|
||||||||
|
Benefit obligation at beginning of year
|
$ | 1,767 | $ | 1,637 | ||||
|
Service cost
|
— | — | ||||||
|
Interest cost
|
101 | 98 | ||||||
|
Actuarial (gain) loss
|
(37 | ) | 218 | |||||
|
Benefits paid
|
(154 | ) | (186 | ) | ||||
|
|
||||||||
|
Benefit obligation at end of year
|
1,677 | 1,767 | ||||||
|
|
||||||||
|
|
||||||||
|
Change in plan assets:
|
||||||||
|
Fair value of plan assets at beginning of year
|
$ | — | $ | — | ||||
|
Employer contributions
|
154 | 186 | ||||||
|
Benefits paid
|
(154 | ) | (186 | ) | ||||
|
|
||||||||
|
Fair value of plan assets at end of year
|
$ | — | $ | — | ||||
|
|
||||||||
|
Funded status at year end
|
$ | 1,677 | $ | 1,767 | ||||
|
|
||||||||
89
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
The assumptions used to develop the preceding information for postretirement healthcare
benefits are as follows:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Discount rate
|
6.00 | % | 6.00 | % | 5.75 | % | ||||||
|
Monthly cost of healthcare insurance per beneficiary (1)
|
322 | 305 | 274 | |||||||||
|
Annual rate of increase in healthcare costs
|
4.00 | % | 4.00 | % | 4.00 | % | ||||||
| (1) | Not in thousands |
If the assumed rate of increase in healthcare costs was increased by one percentage point to
5% from the level of 4% presented above, the service and interest cost components of net periodic
postretirement healthcare benefit cost would increase by $12,000, in the aggregate, and the
accumulated postretirement benefit obligation for healthcare benefits would increase by $81,000.
The following table sets forth amounts recognized in accumulated other comprehensive income:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net loss/ (gain)
|
$ | (94 | ) | $ | 204 | $ | 634 | |||||
|
|
||||||||||||
The accumulated benefit obligation for the Company’s postretirement healthcare benefit plan at
December 31, 2009 and 2008 was $1,677,000 and $1,767,000, respectively.
The following table sets forth information for plans with an accumulated benefit obligation in
excess of plan assets:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Projected benefit obligation
|
$ | 1,677 | $ | 1,767 | ||||
|
Accumulated benefit obligation
|
$ | 1,677 | $ | 1,767 | ||||
|
Fair value of plan assets
|
$ | — | $ | — | ||||
(c) Employee Stock Ownership Plan
The Company has an employee stock ownership plan (ESOP) for employees who have attained age 21
and who have completed a 12-month period of employment with the Company during which they worked at
least 1,000 hours. The Company can make contributions to the ESOP at the board’s discretion.
Company shares would then be purchased periodically in the open market and allocated to employee
accounts based on each employee’s relative portion of the Company’s total eligible compensation
recorded during the year.
The Company made a contribution of $3,149,000 to purchase 280,623 shares during the year ended
December 31, 2009. No contributions were made and no expense was recognized during the years ended
December 31, 2008 and 2007.
In addition to the aforementioned contribution, the Company loaned the ESOP $11,651,000 to
purchase 1,034,377 shares of the Company’s common stock in the open market during December 2009 and
$17,200,000 to
90
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
purchase 1,491,233 shares of the Company’s common stock in the open market during 2010. In
order for the ESOP to repay the loan, the Company is expected to make annual cash contributions of
approximately $1,500,000 until 2029. Such cash contributions may be reduced by the cash dividends
paid on unallocated shares. At December 31, 2009, the loan balances was $11,651,000.
Shares of the Company’s common stock are held by the ESOP and will be allocated to eligible
participants annually based upon a percentage of each participant’s eligible compensation. At
December 31, 2009, 1,034,377 shares of the Company’s common stock remained unallocated. The fair
value of unallocated common stock held by the ESOP at December 31, 2009 was $11,657,000.
Compensation expense related to the ESOP will be recognized at an amount equal to the number
of common shares committed to be allocated by the ESOP to participant’s accounts multiplied by the
average fair value of the Company’s common stock during the reporting period. The difference
between the fair value of the shares of the Company’s common stock committed to be allocated by the
ESOP to participants’ accounts for the period and the average cost of those common shares is
recorded as an adjustment to either additional paid-in capital or retained earnings.
(d) Recognition and Retention Plan
On November 17, 2004, the Company established a Recognition and Retention Plan for Employees
and Outside Directors (RRP) with 652,995 shares authorized. The objective of the RRP is to enable
the Company to provide directors, officers, and employees with a proprietary interest in the
Company. On March 16, 2005, 626,020 shares were issued with a weighted average grant date fair
value per share of $9.52 (total market value of $5,959,000 at issuance). Total common shares
forfeited were 20,097, of which, 1,373, 1,541 and 6,881 shares were forfeited during the years
ended December 31, 2009, 2008, and 2007, respectively. During 2007, 9,675 shares were issued with a
weighted average grant date fair value per share of $12.02 (total market value of $116,000 at
issuance). Shares of common stock granted pursuant to the RRP were in the form of restricted stock
and generally vest over a five-year period at the rate of 20% per year, commencing one year after
the award date. As of December 31, 2009, 80% of the March 16, 2005 issuance vested and 40% of the
2007 issuances have vested. Once shares have vested, they are no longer restricted. Compensation
expense, in the amount of the fair market value of the common stock at the date of the grant, will
be recognized pro rata over the five years during which the shares are payable. While restricted,
the recipients are entitled to all voting and other shareholder rights, except that the shares may
not be sold, pledged, or otherwise disposed of and are required to be held in a trust.
(e) Stock Option Plans
On May 21, 2008, the Company adopted the 2008 Stock Option Plan. This Plan authorized the
grant of stock options and limited stock rights for 3,937,500 shares of the Company’s common stock.
On November 19, 2008 the Company granted 54,000 nonstatutory stock options to its outside directors
and 454,653 incentive stock options to employees at an exercise price of $9.79 per share. On
February 19, 2009 the Company granted 54,000 nonstatutory stock options to its outside directors
and 440,458 incentive stock options to employees at an exercise price of $7.48 per share. These
options are exercisable for a period of ten years from the grant date with each recipient vesting
over a seven year period commencing one year from the grant date.
91
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
The following table summarizes the activity in the Company’s option plans during the years
ended December 31, 2009, 2008 and 2007:
| Years ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Weighted Average | Weighted Average | Weighted Average | ||||||||||||||||||||||
| Number | Exercise Price | Number | Exercise Price | Number | Exercise Price | |||||||||||||||||||
|
Balance at beginning of year
|
3,599,478 | $ | 9.39 | 2,781,806 | $ | 8.87 | 2,503,931 | $ | 8.29 | |||||||||||||||
|
Granted
|
494,458 | 7.48 | (a) | 939,998 | 10.40 | (a) | 409,064 | 11.52 | (a) | |||||||||||||||
|
Exercised
|
(74,374 | ) | 4.14 | (b) | (122,326 | ) | 5.42 | (b) | (118,287 | ) | 5.63 | (b) | ||||||||||||
|
Forfeited
|
— | — | — | — | (12,902 | ) | 9.84 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance at end of year
|
4,019,562 | 9.25 | 3,599,478 | 9.39 | 2,781,806 | 8.87 | ||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Exercisable at end of year
|
2,538,007 | 9.08 | 1,919,626 | 8.39 | 1,791,608 | 7.83 | ||||||||||||||||||
| (a) | Weighted average fair value of options at grant date: $0.65, $1.36 and $2.28, respectively. | |
| (b) | The total intrinsic value of options exercised was $324,000, $692,000 and $773,000, respectively. |
The aggregate intrinsic value of all options expected to vest and fully vested options at
December 31, 2009 is $2,623,000 and $5,623,000, respectively. The following table summarizes the
number of options outstanding, number of options exercisable, and weighted average remaining life
of all option grants as of December 31, 2009:
|
Exercise Price
$3.06 |
Exercise Price
$4.35 |
Exercise Price
$5.91 |
Exercise Price
$7.37 |
Exercise Price
$7.48 |
Exercise Price
$9.79 |
|||||||||||||||||||
|
Options outstanding:
|
||||||||||||||||||||||||
|
Number of options
|
9,450 | 277,506 | 235,944 | 324,707 | 494,458 | 508,653 | ||||||||||||||||||
|
Weighted average
remaining
contract life
(years)
|
0.50 | 1.75 | 3.00 | 4.00 | 9.25 | 9.00 | ||||||||||||||||||
|
Options exercisable:
|
||||||||||||||||||||||||
|
Number of options
|
9,450 | 277,506 | 235,944 | 324,707 | — | 101,731 | ||||||||||||||||||
|
Weighted average
remaining
contract life
(years)
|
0.50 | 1.75 | 3.00 | 4.00 | 9.25 | 9.00 | ||||||||||||||||||
| Exercise Price | Exercise Price | Exercise Price | Exercise Price | Exercise Price | Exercise Price | Exercise Price | ||||||||||||||||||||||
| $9.86 | $10.19 | $11.12 | $11.33 | $11.51 | $12.48 | $9.25 | ||||||||||||||||||||||
|
Options outstanding:
|
||||||||||||||||||||||||||||
|
Number of options
|
350,552 | 497,090 | 431,345 | 480,794 | 404,564 | 4,500 | 4,019,562 | |||||||||||||||||||||
|
Weighted average
remaining
contract life
(years)
|
6.00 | 5.00 | 8.00 | 5.00 | 7.00 | 7.50 | 6.21 | |||||||||||||||||||||
|
Options exercisable:
|
||||||||||||||||||||||||||||
|
Number of options
|
279,979 | 497,090 | 86,269 | 480,794 | 242,738 | 1,800 | 2,538,007 | |||||||||||||||||||||
|
Weighted average
remaining
contract life
(years)
|
6.00 | 5.00 | 8.00 | 5.00 | 7.00 | 7.50 | 3.07 | |||||||||||||||||||||
(16) Disclosures About Fair Value of Financial Instruments
The Company is required to disclosure fair value information about financial instruments whether or
not recognized in the consolidated statement of financial condition. Fair value information of
certain financial instruments and all nonfinancial instruments is not required to be disclosed.
Accordingly, the aggregate fair value amounts presented do not represent the underlying value of
the Company. The carrying amounts reported in the consolidated statement of financial condition
approximate fair value for the following financial instruments: cash on
92
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
hand, interest-earning deposits in other institutions, federal funds sold and other short-term
investments, accrued interest receivable, accrued interest payable, and marketable securities
available-for-sale.
The following table sets forth the carrying amount and estimated fair value of the Company’s
financial instruments included in the consolidated statement of financial condition as of December
31, 2009 and 2008:
| December 31 | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
|
Financial assets:
|
||||||||||||||||
|
Cash and equivalents
|
$ | 1,107,790 | $ | 1,107,790 | $ | 79,922 | $ | 79,922 | ||||||||
|
Securities available-for-sale
|
1,067,089 | 1,067,089 | 1,139,170 | 1,139,170 | ||||||||||||
|
Loans receivable, net
|
5,229,062 | 5,509,279 | 5,141,892 | 5,446,835 | ||||||||||||
|
Accrued interest receivable
|
25,780 | 25,780 | 27,252 | 27,252 | ||||||||||||
|
FHLB stock
|
63,242 | 63,242 | 63,143 | 63,143 | ||||||||||||
|
|
||||||||||||||||
|
Total financial assets
|
$ | 7,492,963 | $ | 7,773,180 | $ | 6,451,379 | $ | 6,756,322 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Financial liabilities:
|
||||||||||||||||
|
Savings and checking
|
$ | 2,999,683 | $ | 2,999,683 | $ | 2,580,751 | $ | 2,580,751 | ||||||||
|
Time deposits
|
2,624,741 | 2,689,898 | 2,457,460 | 2,500,410 | ||||||||||||
|
Borrowed funds
|
897,326 | 893,749 | 1,067,945 | 1,049,399 | ||||||||||||
|
Trust-preferred securities
|
103,094 | 108,051 | 108,254 | 116,783 | ||||||||||||
|
Cash flow hedges – swaps
|
4,957 | 4,957 | 13,114 | 13,114 | ||||||||||||
|
Accrued interest payable
|
4,493 | 4,493 | 5,194 | 5,194 | ||||||||||||
|
|
||||||||||||||||
|
Total financial liabilities
|
$ | 6,634,294 | $ | 6,700,831 | $ | 6,232,718 | $ | 6,265,651 | ||||||||
|
|
||||||||||||||||
Fair value estimates are made at a point-in-time, based on relevant market data and
information about the instrument. The following methods and assumptions were used in estimating the
fair value of financial instruments at December 31, 2009 and 2008.
Marketable Securities
Where available, market values are based on quoted market prices, dealer quotes, and prices
obtained from independent pricing services. See the
Fair Value Measurements
section of this
footnote for further detail on how fair values of marketable securities are determined. Refer to
note 3 for the detail of the types of investment securities.
Loans Receivable
Loans with comparable characteristics including collateral and repricing structures were
segregated for valuation purposes. Each loan pool was separately valued utilizing a discounted cash
flow analysis. Projected monthly cash flows were discounted to present value using a market rate
for comparable loans, which is not considered an exit price. Characteristics of comparable loans included remaining term, coupon interest,
and estimated prepayment speeds. Delinquent loans were evaluated separately, given the impact
delinquency has on the projected future cash flow of the loan and the approximate discount or
market rate.
Deposit Liabilities
The estimated fair value of deposits with no stated maturity, which includes demand deposits,
money market, and other savings accounts, is the amount payable on demand. Although market premiums
paid for
93
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
depository institutions reflect an additional value for these low-cost deposits, accounting
standards prohibit adjusting fair value for any value expected to be derived from retaining those
deposits for a future period of time or from the benefit that results from the ability to fund
interest-earning assets with these deposit liabilities. The fair value estimates of deposit
liabilities do not include the benefit that results from the low-cost funding provided by these
deposits compared to the cost of borrowing funds in the market. Fair values for time deposits are
estimated using a discounted cash flow calculation that applies contractual cost currently being
offered in the existing portfolio to current market rates being offered locally for deposits of
similar remaining maturities. The valuation adjustment for the portfolio consists of the present
value of the difference of these two cash flows, discounted at the assumed market rate of the
corresponding maturity.
Borrowed Funds
The fixed rate advances were valued by comparing their contractual cost to the prevailing
market cost.
Trust-Preferred Securities
The fair value of the trust-preferred securities is calculated using the discounted cash flows
at the prevailing rate of interest as affected by the interest rate swap.
Cash flow hedges – Interest rate swap agreements (“swaps”)
The fair values of the swaps is the amount the Company would have expected to pay to terminate
the agreements and is based upon the present value of the expected future cash flows using the
LIBOR swap curve, the basis for the underlying interest rate.
Off-Balance Sheet Financial Instruments
These financial instruments generally are not sold or traded, and estimated fair values are
not readily available. However, the fair value of commitments to extend credit and standby letters
of credit is estimated using the fees currently charged to enter into similar agreements.
Commitments to extend credit issued by the Company are generally short-term in nature and, if drawn
upon, are issued under current market terms. At December 31, 2009 and 2008, there was no
significant unrealized appreciation or depreciation on these financial instruments.
Fair Value Measurements
To determine the fair value of financial assets and liabilities recognized or disclosed at
fair value on a recurring basis and certain financial assets and liabilities on a non-recurring
basis the Company utilizes a three-level hierarchy of valuation techniques based on whether the
inputs to those valuation techniques are observable or unobservable. The fair value hierarchy gives
the highest priority to quoted prices with readily available independent data in active markets for
identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs
(Level 3). When various inputs for measurement fall within different levels of the fair value
hierarchy, the lowest level input that has a significant impact on fair value measurement is used.
Financial assets and liabilities are categorized based upon the following characteristics or
inputs to the valuation techniques:
| • | Level 1 – Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in actively traded markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities. |
94
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
| • | Level 2 – Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets or liabilities that are actively traded. Level 2 also includes pricing models in which the inputs are corroborated by market data, for example, matrix pricing. |
| • | Level 3 – Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following: |
| • | Quotes from brokers or other external sources that are not considered binding; |
| • | Quotes from brokers or other external sources where it can not be determined that market participants would in fact transact for the asset or liability at the quoted price; |
| • | Quotes and other information from brokers or other external sources where the inputs are not deemed observable. |
The Company is responsible for the valuation process and as part of this process may use data
from outside sources in establishing fair value. The Company performs due diligence to understand
the inputs used or how the data was calculated or derived. The Company corroborates the
reasonableness of external inputs in the valuation process.
The following table represents assets measured at fair value on a recurring basis as of
December 31, 2009:
| Total Assets at Fair | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Value | |||||||||||||
|
Equity securities – available for sale
|
$ | 907 | $ | — | $ | 220 | $ | 1,127 | ||||||||
|
Debt securities – available for sale
|
— | 1,058,577 | 7,385 | 1,065,962 | ||||||||||||
|
Derivative fair value interest rate swap
|
— | (4,957 | ) | — | (4,957 | ) | ||||||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 907 | $ | 1,053,620 | $ | 7,605 | $ | 1,062,132 | ||||||||
|
|
||||||||||||||||
The following table represents assets measured at fair value on a recurring basis as of
December 31, 2008:
| Total Assets at Fair | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Value | |||||||||||||
|
Equity securities – available for sale
|
$ | 894 | $ | — | $ | 220 | $ | 1,114 | ||||||||
|
Debt securities – available for sale
|
— | 1,132,119 | 5,937 | 1,138,056 | ||||||||||||
|
Derivative fair value interest rate swap
|
— | (13,114 | ) | — | (13,114 | ) | ||||||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 894 | $ | 1,119,005 | $ | 6,157 | $ | 1,126,056 | ||||||||
|
|
||||||||||||||||
95
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
Equity securities – available for sale
– Level 1 securities include publicly traded securities
valued using quoted market prices. Level 3 securities include investments in two financial
institutions that provide financial services only to investor banks received as part of previous
acquisitions without observable market data to determine the investment’s fair values. These
securities can only be sold back to the issuing financial institution at cost.
Interest rate swap agreements (Swaps)
– The fair value of the swaps was the amount the Company
would have expected to pay to terminate the agreements and is based upon the present value of the
expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate.
The table below presents a reconciliation of all assets and liabilities measured at fair value
on a recurring basis using significant unobservable inputs (Level 3) for the year ended December
31, 2009:
| Equity Securities | Debt Securities | |||||||
|
Balance at January 1, 2009
|
$ | 220 | $ | 5,937 | ||||
|
Total net realized investment gains/
(losses) and net change in unrealized
appreciation/ (depreciation):
|
||||||||
|
Included in net income as OTTI
|
— | (573 | ) | |||||
|
Included in other comprehensive income
|
— | 2,021 | ||||||
|
Purchases and sales
|
— | — | ||||||
|
Net transfers in (out) of Level 3
|
— | — | ||||||
|
|
||||||||
|
Balance at December 31, 2009
|
$ | 220 | $ | 7,385 | ||||
|
|
||||||||
The table below presents a reconciliation of all assets and liabilities measured at fair value
on a recurring basis using significant unobservable inputs (Level 3) for the year ended December
31, 2008:
| Equity Securities | Debt Securities | |||||||
|
Balance at January 1, 2008
|
$ | 220 | $ | 22,369 | ||||
|
Total net realized investment gains/
(losses) and net change in unrealized
appreciation/ (depreciation):
|
||||||||
|
Included in net income as OTTI
|
— | (9,522 | ) | |||||
|
Included in other comprehensive income
|
— | (1,234 | ) | |||||
|
Purchases and sales
|
— | — | ||||||
|
Net transfers in (out) of Level 3
|
— | (5,676 | ) | |||||
|
|
||||||||
|
Balance at December 31, 2008
|
$ | 220 | $ | 5,937 | ||||
|
|
||||||||
Certain assets and liabilities are measured at fair value on a nonrecurring basis after
initial recognition such as loans held for sale, loans measured for impairment and mortgage
servicing rights. The following table represents the fair market measurement for only those
nonrecurring assets that had a fair market value below the carrying amount as of December 31, 2009:
| Total Assets at | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
|
Loans measured for impairment
|
$ | — | $ | — | $ | 75,933 | $ | 75,933 | ||||||||
|
Real estate owned
|
— | — | 20,257 | 20,257 | ||||||||||||
|
Mortgage servicing rights
|
— | — | 2,650 | 2,650 | ||||||||||||
|
|
||||||||||||||||
|
Total assets
|
$ | — | $ | — | $ | 98,840 | $ | 98,840 | ||||||||
|
|
||||||||||||||||
96
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
The following table represents the fair market measurement for only those nonrecurring assets
that had a fair market value below the carrying amount as of December 31, 2008:
| Total Assets at | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Fair Value | |||||||||||||
|
Loans held for sale
|
$ | 18,738 | $ | — | $ | — | $ | 18,738 | ||||||||
|
Loans measured for impairment
|
— | — | 9,130 | 9,130 | ||||||||||||
|
Mortgage servicing rights
|
— | — | 5,481 | 5,481 | ||||||||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 18,738 | $ | — | $ | 14,611 | $ | 33,349 | ||||||||
|
|
||||||||||||||||
Loans measured for impairment
– A loan is considered to be impaired when it is probable that
all of the principle and interest due under the original terms of the loan may not be collected.
Impairment is measured based on the fair value of the underlying collateral or discounted cash
flows when collateral does not exist. The Company measures impairment on all nonaccrual commercial
and commercial real estate loans for which it has established specific reserves as part of the
specific allocated allowance component of the allowance for loan losses. The Company classifies
impaired loans as nonrecurring Level 3.
Real estate owned
– Real estate owned is comprised of property acquired through foreclosure or
voluntarily conveyed by delinquent borrowers. These assets are recorded on the date acquired at
the lower of the related loan balance or fair value, less estimated disposition costs, with the
fair value being determined by appraisal. Subsequently, foreclosed assets are valued at the lower
of the amount recorded at acquisition date or fair value, less estimated disposition costs. The
Company classifies Real estate owned as nonrecurring Level 3.
Mortgage servicing rights
– Mortgage servicing rights represent the value associated with
servicing residential mortgage loans, when the mortgage loans have been sold into the secondary
market and the related servicing has been retained by the Company. The value is determined through
a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate
assumptions as inputs. All of these assumptions require a significant degree of management
judgment. Servicing rights and the related mortgage loans are segregated into categories or
homogeneous pools based upon common characteristics. Adjustments are made when the estimated
discounted future cash flows are less than the carrying value, as determined by individual pool. As
such, mortgage servicing rights are classified as nonrecurring Level 3.
Loans held for sale
– Mortgage loans held for sale are recorded at the lower of carrying value
or market value. The fair value of mortgage loans held for sale is based on what secondary markets
are currently offering. As the fair value is determined by a quoted price from Freddie Mac, and
the Company has open delivery contracts with Freddie Mac, the Company classifies loans held for
sale as nonrecurring Level 1.
(17) Regulatory Capital Requirements
The Company’s banking subsidiary is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory – and possibly additional discretionary – actions by
the regulators that, if undertaken, could have a direct material effect on the Company’s financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective
action, specific capital guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices must be met.
The capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the
Company’s banking subsidiary to maintain minimum amounts and ratios (set forth in the table below)
of total and Tier I capital (as
97
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital to
average assets (as defined). At December 31, 2009 and 2008, the Company’s banking subsidiary
exceeded all capital adequacy requirements to which they were subject. At December 31, 2009, the
maximum amount available for dividend payments by Northwest to the Company, while maintaining its
“well capitalized” status, was approximately $109,871,000.
As of December 15, 2009, the most recent notification from the FDIC categorized Northwest as
“well capitalized” under the regulatory framework for prompt corrective action. To be categorized
as “well capitalized,” the bank must maintain total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed the bank’s categories.
The actual, required, and well capitalized levels as of December 31, 2009 and 2008 were as
follows:
| December 31, 2009 | ||||||||||||||||||||||||
| Minimum Capital | Well Capitalized | |||||||||||||||||||||||
| Actual | Requirements | Requirements | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
|
Total capital (to risk weighted assets)
|
$ | 974,967 | 20.95 | % | $ | 372,366 | 8.00 | % | $ | 465,457 | 10.00 | % | ||||||||||||
|
Tier I capital (to risk weighted assets)
|
916,613 | 19.69 | % | 186,183 | 4.00 | % | 279,274 | 6.00 | % | |||||||||||||||
|
Tier I capital (leverage) (to average
assets)
|
916,613 | 12.65 | % | 217,402 | 3.00 | %* | 362,337 | 5.00 | % | |||||||||||||||
| December 31, 2008 | ||||||||||||||||||||||||
| Minimum Capital | Well Capitalized | |||||||||||||||||||||||
| Actual | Requirements | Requirements | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
|
Total capital (to risk weighted assets)
|
$ | 604,067 | 13.95 | % | $ | 346,354 | 8.00 | % | $ | 432,943 | 10.00 | % | ||||||||||||
|
Tier I capital (to risk weighted assets)
|
549,869 | 12.70 | % | 173,177 | 4.00 | % | 259,766 | 6.00 | % | |||||||||||||||
|
Tier I capital (leverage) (to average
assets)
|
549,869 | 8.05 | % | 204,887 | 3.00 | %* | 341,478 | 5.00 | % | |||||||||||||||
| * | The FDIC has indicated that the most highly rated institutions, which meet certain criteria, will be required to maintain a ratio of 3%, and all other institutions will be required to maintain an additional capital cushion of 100 to 200 basis points. As of December 31, 2009 and December 31, 2008, the Company had not been advised of any additional requirements in this regard. |
(18) Contingent Liabilities
The Company and its subsidiaries are subject to a number of asserted and unasserted claims
encountered in the normal course of business. Management believes that the aggregate liability, if
any, that may result from such potential litigation will not have a material adverse effect on the
Company’s financial statements.
98
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
(19) Components of Comprehensive Income
The following table sets forth changes in the components of comprehensive income for the years
ended December 31, 2009, 2008 and 2007:
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Unrealized (loss) gain on marketable
securities available-for-sale, net
of tax of $(1,205), $3,809 and
$(6,511), respectively
|
$ | 2,239 | $ | (5,957 | ) | $ | 10,184 | |||||
|
Reclassification adjustment for
gains included in net income, net of
tax of $238, $2,035 and $1,877,
respectively
|
(443 | ) | (3,183 | ) | (2,938 | ) | ||||||
|
Change in fair value of interest
rate swaps, net of tax of $(2,857),
$4,590 and $0, respectively
|
5,302 | (8,524 | ) | — | ||||||||
|
Other-than-temporary impairment on
securities recorded in other
comprehensive income, net of tax of
$(3,246), $0 and $0, respectively
|
6,265 | — | — | |||||||||
|
Defined benefit plans:
|
||||||||||||
|
Net (loss)/ gain, net of tax of
$(4,680), $9,161 and $(3,281),
respectively
|
9,011 | (14,330 | ) | 5,132 | ||||||||
|
Amortization of prior service
costs, net of tax of $54, $(20)
and $(30), respectively
|
(100 | ) | 31 | 47 | ||||||||
|
|
||||||||||||
|
Other comprehensive income
|
$ | 22,274 | $ | (31,963 | ) | $ | 12,425 | |||||
|
|
||||||||||||
The following table sets forth the components of accumulated other comprehensive income as of
December 31, 2009 and 2008:
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Unrealized (loss) gain on marketable securities
available-for-sale
|
$ | 3,196 | $ | (3,189 | ) | |||
|
Fair value of interest rate swaps
|
(3,222 | ) | (8,524 | ) | ||||
|
Defined benefit pension plans
|
(9,951 | ) | (18,862 | ) | ||||
|
|
||||||||
|
Other comprehensive income
|
$ | (9,977 | ) | $ | (30,575 | ) | ||
|
|
||||||||
99
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
(20) Parent Company Only Financial Statements — Condensed
Statements of Financial Condition
| December 31 | ||||||||
| 2009 | 2008 | |||||||
|
Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 334,984 | $ | 20,695 | ||||
|
Marketable securities available-for-sale
|
75 | 73 | ||||||
|
Investment in bank subsidiary
|
1,082,197 | 706,610 | ||||||
|
Other assets
|
7,704 | 8,021 | ||||||
|
|
||||||||
|
Total assets
|
$ | 1,424,960 | $ | 735,399 | ||||
|
|
||||||||
|
|
||||||||
|
Liabilities and Shareholders’ Equity
|
||||||||
|
Liabilities:
|
||||||||
|
Debentures payable
|
$ | 103,094 | $ | 108,249 | ||||
|
Other liabilities
|
5,351 | 13,366 | ||||||
|
|
||||||||
|
Total liabilities
|
108,445 | 121,615 | ||||||
|
Shareholders’ equity
|
1,316,515 | 613,784 | ||||||
|
|
||||||||
|
Total liabilities and shareholders’ equity
|
$ | 1,424,960 | $ | 735,399 | ||||
|
|
||||||||
Statements of Income
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Income:
|
||||||||||||
|
Interest income
|
$ | 285 | 359 | 480 | ||||||||
|
Other income
|
89 | — | — | |||||||||
|
Dividends from bank subsidiary
|
16,000 | 39,000 | 49,000 | |||||||||
|
Undistributed earnings from equity
investment in bank subsidiary
|
29,471 | 12,722 | 4,838 | |||||||||
|
|
||||||||||||
|
Total income
|
45,845 | 52,081 | 54,318 | |||||||||
|
Expense:
|
||||||||||||
|
Compensation and benefits
|
439 | 380 | 366 | |||||||||
|
Other expense
|
13,822 | 105 | 159 | |||||||||
|
Interest expense
|
5,834 | 5,339 | 7,250 | |||||||||
|
|
||||||||||||
|
Total expense
|
20,095 | 5,824 | 7,775 | |||||||||
|
|
||||||||||||
|
Income before income taxes
|
25,750 | 46,257 | 46,543 | |||||||||
|
Federal and state income taxes
|
(6,903 | ) | (1,914 | ) | (2,554 | ) | ||||||
|
|
||||||||||||
|
Net income
|
$ | 32,653 | 48,171 | 49,097 | ||||||||
|
|
||||||||||||
100
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
Statements of Cash Flows
| Years ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Operating activities:
|
||||||||||||
|
Net income
|
$ | 32,653 | 48,171 | 49,097 | ||||||||
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
||||||||||||
|
Undistributed earnings of subsidiary
|
(29,471 | ) | (12,722 | ) | (4,838 | ) | ||||||
|
Noncash stock benefit plan compensation expense
|
2,140 | 2,731 | 2,454 | |||||||||
|
Noncash
charitable contribution
|
12,822 | — | — | |||||||||
|
Net change in other assets and liabilities
|
(13,024 | ) | (2,997 | ) | 1,636 | |||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
5,120 | 35,183 | 48,349 | |||||||||
|
Investing activities:
|
||||||||||||
|
Investment in subsidiary
|
(329,000 | ) | — | — | ||||||||
|
Acquisition/ purchase of land
|
(1,908 | ) | — | — | ||||||||
|
Acquisitions, net of cash received
|
8,668 | — | 5,048 | |||||||||
|
|
||||||||||||
|
Net cash provided by investing activities
|
(322,240 | ) | — | 5,048 | ||||||||
|
Financing activities:
|
||||||||||||
|
Cash dividends paid
|
$ | (15,813 | ) | (15,771 | ) | (15,696 | ) | |||||
|
Treasury stock repurchases
|
— | (3,335 | ) | (40,825 | ) | |||||||
|
Proceeds from common stock offering
|
658,660 | — | — | |||||||||
|
Purchase of ESOP shares
|
(11,651 | ) | — | — | ||||||||
|
Proceeds from options exercised
|
213 | 1,000 | 862 | |||||||||
|
|
||||||||||||
|
Net cash used in financing activities
|
631,409 | (18,106 | ) | (55,659 | ) | |||||||
|
|
||||||||||||
|
Net increase/ (decrease) in cash and cash equivalents
|
$ | 314,289 | 17,077 | (2,262 | ) | |||||||
|
|
||||||||||||
|
Cash and cash equivalents at beginning of year
|
20,695 | 3,618 | 5,880 | |||||||||
|
Net increase/ (decrease) in cash and cash equivalents
|
$ | 314,289 | 17,077 | (2,262 | ) | |||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of year
|
$ | 334,984 | 20,695 | 3,618 | ||||||||
|
|
||||||||||||
(21) Business Segments
The Company has identified two reportable business segments based upon the operating approach
currently used by management. The Community Banking segment includes the savings bank subsidiary of
the Company, Northwest Savings Bank, as well as the subsidiaries of the savings bank that provide
similar products and services. The savings bank is a community-oriented institution that offers a
full array of traditional deposit and loan products, including mortgage, consumer, and commercial
loans as well as trust, investment management, actuarial and benefit plan administration, and
brokerage services typically offered by a full service financial institution. The Consumer Finance
segment is comprised of Northwest Consumer Discount Company, a subsidiary of Northwest Savings
Bank. This subsidiary compliments the services of the bank by offering personal installment loans
for a variety of consumer and real estate products. This activity is funded primarily through its
intercompany borrowing relationship with Allegheny Services, Inc. Net income is primarily used by
management to measure segment performance. The following tables provide financial information for
these segments. The All Other column represents the parent company, other nonbank subsidiaries, and
elimination entries necessary to reconcile to the consolidated amounts presented in the financial
statements.
101
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
| At or for the year ended | ||||||||||||||||
| December 31, 2009 | Community Banking | Consumer Finance | All Other* | Consolidated | ||||||||||||
|
External interest income
|
$ | 343,717 | $ | 20,728 | $ | 18 | $ | 364,463 | ||||||||
|
Intersegment interest income
|
3,188 | — | (3,188 | ) | — | |||||||||||
|
Interest expense
|
130,087 | 3,264 | 2,455 | 135,806 | ||||||||||||
|
Provision for loan losses
|
38,600 | 3,247 | — | 41,847 | ||||||||||||
|
Noninterest income
|
51,088 | 2,173 | 76 | 53,337 | ||||||||||||
|
Noninterest expense
|
174,466 | 11,855 | 14,173 | 200,494 | ||||||||||||
|
Income tax expense (benefit)
|
12,022 | 1,882 | (6,904 | ) | 7,000 | |||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 42,818 | $ | 2,653 | $ | (12,818 | ) | $ | 32,653 | |||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 7,895,854 | $ | 116,250 | $ | 13,194 | $ | 8,025,298 | ||||||||
|
|
||||||||||||||||
| At or for the year ended | ||||||||||||||||
| December 31, 2008 | Community Banking | Consumer Finance | All Other* | Consolidated | ||||||||||||
|
External interest income
|
$ | 368,201 | $ | 20,452 | $ | 6 | $ | 388,659 | ||||||||
|
Intersegment interest income
|
4,959 | — | (4,959 | ) | — | |||||||||||
|
Interest expense
|
163,922 | 5,186 | 185 | 169,293 | ||||||||||||
|
Provision for loan losses
|
19,500 | 3,351 | — | 22,851 | ||||||||||||
|
Noninterest income
|
36,324 | 2,269 | 159 | 38,752 | ||||||||||||
|
Noninterest expense
|
158,652 | 10,990 | 486 | 170,128 | ||||||||||||
|
Income tax expense (benefit)
|
17,646 | 1,236 | (1,914 | ) | 16,968 | |||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 49,764 | $ | 1,958 | $ | (3,551 | ) | $ | 48,171 | |||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 6,792,735 | $ | 115,463 | $ | 22,043 | $ | 6,930,241 | ||||||||
|
|
||||||||||||||||
| At or for the year ended | ||||||||||||||||
| December 31, 2007 | Community Banking | Consumer Finance | All Other* | Consolidated | ||||||||||||
|
External interest income
|
$ | 375,761 | $ | 20,266 | $ | 4 | $ | 396,031 | ||||||||
|
Intersegment interest income
|
7,991 | — | (7,991 | ) | — | |||||||||||
|
Interest expense
|
195,533 | 8,232 | 7,250 | 211,015 | ||||||||||||
|
Provision for loan losses
|
6,000 | 2,743 | — | 8,743 | ||||||||||||
|
Noninterest income
|
40,250 | 2,552 | 220 | 43,022 | ||||||||||||
|
Noninterest expense
|
143,878 | 8,339 | 525 | 152,742 | ||||||||||||
|
Income tax expense (benefit)
|
18,607 | 1,403 | (2,554 | ) | 17,456 | |||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 59,984 | $ | 2,101 | $ | (12,988 | ) | $ | 49,097 | |||||||
|
|
||||||||||||||||
|
Total assets
|
$ | 6,629,725 | $ | 122,657 | $ | (88,866 | ) | $ | 6,663,516 | |||||||
|
|
||||||||||||||||
| * | Eliminations consist of intercompany interest income and interest expense. |
(22) Guaranteed Preferred Beneficial Interests in Company’s Junior Subordinated Deferrable Interest Debentures (Trust-Preferred Securities) and Interest Rate Swap Agreements
The Company had three statutory business trusts: Northwest Bancorp Capital Trust III, a
Delaware statutory business trust, Northwest Bancorp Statutory Trust IV, a Connecticut statutory
business trust and Penn Laurel Financial Corp. Trust I, a Delaware statutory business trust (the
Trusts). The Penn Laurel Financial Corp, Trust I was assumed with the acquisition of Penn Laurel
Financial Corporation in June 2007 and was redeemed at par on July 23, 2009. These trusts exist
solely to issue preferred securities to third parties for cash, issue common securities to the
Company in exchange for capitalization of the Trusts, invest the proceeds from the sale of trust
securities in an equivalent amount of debentures of the Company, and engage in other activities
that are incidental to those previously listed. The aforementioned trusts are not consolidated.
Northwest Bancorp Capital Trust III issued
102
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
50,000 cumulative trust preferred securities in a private transaction to a pooled investment
vehicle on December 5, 2006 (liquidation value of $1,000 per preferred security or $50,000,000)
with a stated maturity of December 30, 2035 and a floating rate of interest, which is reset
quarterly, equal to three-month LIBOR plus 1.38%. Northwest Bancorp Statutory Trust IV issued
50,000 cumulative trust preferred securities in a private transaction to a pooled investment
vehicle on December 15, 2006 (liquidation value of $1,000 per preferred security or $50,000,000)
with a stated maturity of December 15, 2035 and a floating rate of interest, which is reset
quarterly, equal to three-month LIBOR plus 1.38%. Penn Laurel Financial Corp. Trust I issued 5,000
cumulative trust preferred securities in a private transaction to a pooled investment vehicle on
January 23, 2004 (liquidation value of $1,000 per preferred security or $5,000,000) with a stated
maturity of January 23, 2034 and floating rate of interest, which is reset quarterly, equal to
three-month LIBOR plus 2.80%.
The Trusts have invested the proceeds of the offerings in junior subordinated deferrable
interest debentures issued by the Company. The structure of these debentures mirrors the structure
of the trust-preferred securities. Northwest Bancorp Capital Trust III holds $51,547,000 of the
Company’s junior subordinated debentures due December 30, 2035 with a floating rate of interest,
reset quarterly, of three-month LIBOR plus 1.38%. The rate in effect at December 31, 2009 was
1.63%. Northwest Bancorp Statutory Trust IV holds $51,547,000 of the Company’s junior subordinated
debentures due December 15, 2035 with a floating rate of interest, reset quarterly, of three-month
LIBOR plus 1.38%. The rate in effect at December 31, 2009 was 2.63%.
Cash distributions on the trust securities are made on a quarterly basis to the extent
interest on the debentures is received by the Trusts. The Company has the right to defer payment
of interest on the subordinated debentures at any time, or from time-to-time, for periods not
exceeding five years. If interest payments on the subordinated debentures are deferred, the
distributions on the trust securities also are deferred. Interest on the subordinated debentures
and distributions on the trust securities is cumulative. The Company obligation constitutes a full,
irrevocable, and unconditional guarantee on a subordinated basis of the obligations of the trust
under the preferred securities.
The Trusts must redeem the preferred securities when the debentures are paid at maturity or
upon an earlier redemption of the debentures to the extent the debentures are redeemed. All or part
of the debentures may be redeemed at any time on or after December 31, 2010. Also, the debentures
may be redeemed at any time if existing laws or regulations, or the interpretation or application
of these laws or regulations, change causing:
| • | the interest on the debentures to no longer be deductible by the Company for federal income tax purposes; |
| • | the trust to become subject to federal income tax or to certain other taxes or governmental charges; |
| • | the trust to register as an investment company; and |
| • | the Company to become subject to capital requirements and the preferred securities do not qualify as Tier I capital. |
The Company may, at any time, dissolve any of the Trusts and distribute the debentures to the
trust security holders, subject to receipt of any required regulatory approval(s).
During the quarter ended September 30, 2008, the Company entered into four interest rate swap
agreements (swaps). The Company designated each swap as a cash flow hedge and they are intended to
protect against the variability of cash flows associated with Trust III and Trust IV. The first two
swaps hedge the interest rate risk of Trust III, wherein the Company receives interest of LIBOR
from a counterparty and pays a fixed rate of 4.20% to the same counterparty calculated on a
notional amount of $25.0 million and the Company receives interest of LIBOR from a counterparty and
pays a fixed rate of 4.61% to the same counterparty calculated on a notional amount
103
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
of $25.0 million. The terms of these two swaps are five years and ten years, respectively. The
second two swaps hedge the interest rate risk of Trust IV, wherein the Company receives interest of
LIBOR from a counterparty and pays a fixed rate of 3.85% to the same counterparty calculated on a
notional amount of $25.0 million and the Company receives interest of LIBOR from a counterparty and
pays a fixed rate of 4.09% to the same counterparty calculated on a notional amount of $25.0
million. The terms of these two swaps are seven years and ten years, respectively. The swap
agreements were entered into with a counterparty that met the Company’s credit standards and the
agreements contain collateral provisions protecting the at-risk party. The Company believes that
the credit risk inherent in the contracts is not significant.
At December 31, 2009, the fair value of the swap agreements was $(4,957,000) and was the
amount the Company would have expected to pay if the contracts were terminated. There was no
material hedge ineffectiveness for this swap.
| December 31, | ||||||||
| Liability Derivatives (Included in Other Liabilities) | 2009 | 2008 | ||||||
|
Cash flow hedges — swaps:
|
||||||||
|
Fair value
|
$ | 4,957 | $ | 13,114 | ||||
|
Notional amount
|
100,000 | 100,000 | ||||||
|
Collateral posted
|
4,957 | 13,114 | ||||||
The following table sets forth a summary of guaranteed capital debt securities and junior
subordinated deferrable interest debentures held by the trusts as of December 31, 2009 and 2008.
| Capital Debt | December 31, | |||||||||||
| Securities | 2009 | 2008 | ||||||||||
|
Northwest Bancorp Capital Trust III
|
$ | 50,000 | $ | 51,547 | $ | 51,547 | ||||||
|
Northwest Bancorp Statutory Trust IV
|
50,000 | 51,547 | 51,547 | |||||||||
|
Penn Laurel Financial Corp. Trust I
|
— | — | 5,160 | |||||||||
|
|
||||||||||||
|
Total
|
$ | 100,000 | $ | 103,094 | $ | 108,254 | ||||||
|
|
||||||||||||
(23) Selected Quarterly Financial Data — Unaudited
| Three months ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
|
2009:
|
||||||||||||||||
|
Interest income
|
$ | 92,192 | $ | 90,966 | $ | 90,428 | $ | 90,877 | ||||||||
|
Interest expense
|
34,826 | 34,561 | 33,586 | 32,833 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income
|
57,366 | 56,405 | 56,842 | 58,044 | ||||||||||||
|
Provision for loan losses
|
5,781 | 11,736 | 9,830 | 14,500 | ||||||||||||
|
Noninterest income
|
10,075 | 11,982 | 13,985 | 17,295 | ||||||||||||
|
Noninterest expenses
|
44,266 | 47,004 | 44,987 | 64,237 | ||||||||||||
|
|
||||||||||||||||
|
Income/ (loss)
before income
taxes
|
17,394 | 9,647 | 16,010 | (3,398 | ) | |||||||||||
|
Income taxes/ (benefit)
|
5,092 | 2,356 | 3,956 | (4,404 | ) | |||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 12,302 | $ | 7,291 | $ | 12,054 | $ | 1,006 | ||||||||
|
|
||||||||||||||||
|
Basic earnings per share
|
$ | 0.11 | $ | 0.07 | $ | 0.11 | $ | 0.01 | ||||||||
|
Diluted earnings per share
|
$ | 0.11 | $ | 0.07 | $ | 0.11 | $ | 0.01 | ||||||||
104
Table of Contents
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(All dollar amounts presented in tables are in thousands)
| Three months ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
|
2008:
|
||||||||||||||||
|
Interest income
|
$ | 96,821 | $ | 97,152 | $ | 97,519 | $ | 97,167 | ||||||||
|
Interest expense
|
48,387 | 43,423 | 39,819 | 37,664 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income
|
48,434 | 53,729 | 57,700 | 59,503 | ||||||||||||
|
Provision for loan losses
|
2,294 | 3,395 | 6,950 | 10,212 | ||||||||||||
|
Noninterest income
|
12,891 | 11,644 | 4,952 | 9,265 | ||||||||||||
|
Noninterest expenses
|
42,427 | 41,488 | 42,739 | 43,474 | ||||||||||||
|
|
||||||||||||||||
|
Income before income taxes
|
16,604 | 20,490 | 12,963 | 15,082 | ||||||||||||
|
Income taxes
|
3,982 | 6,048 | 3,140 | 3,798 | ||||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 12,622 | $ | 14,442 | $ | 9,823 | $ | 11,284 | ||||||||
|
|
||||||||||||||||
|
Basic earnings per share
|
$ | 0.12 | $ | 0.13 | $ | 0.09 | $ | 0.10 | ||||||||
|
Diluted earnings per share
|
$ | 0.12 | $ | 0.13 | $ | 0.09 | $ | 0.10 | ||||||||
| Three months ended | ||||||||||||||||
| March 31 | June 30 | September 30 | December 31 | |||||||||||||
| (In thousands, except per share data) | ||||||||||||||||
|
2007:
|
||||||||||||||||
|
Interest income
|
$ | 95,592 | $ | 98,827 | $ | 101,558 | $ | 100,054 | ||||||||
|
Interest expense
|
50,857 | 53,458 | 54,468 | 52,232 | ||||||||||||
|
|
||||||||||||||||
|
Net interest income
|
44,735 | 45,369 | 47,090 | 47,822 | ||||||||||||
|
Provision for loan losses
|
2,006 | 2,066 | 2,149 | 2,522 | ||||||||||||
|
Noninterest income
|
10,489 | 11,366 | 5,247 | 15,920 | ||||||||||||
|
Noninterest expenses
|
37,876 | 37,777 | 38,481 | 38,608 | ||||||||||||
|
|
||||||||||||||||
|
Income before income taxes
|
15,342 | 16,892 | 11,707 | 22,612 | ||||||||||||
|
Income taxes
|
4,045 | 4,592 | 2,121 | 6,698 | ||||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 11,297 | $ | 12,300 | $ | 9,586 | $ | 15,914 | ||||||||
|
|
||||||||||||||||
|
Basic earnings per share
|
$ | 0.10 | $ | 0.11 | $ | 0.09 | $ | 0.15 | ||||||||
|
Diluted earnings per share
|
$ | 0.10 | $ | 0.11 | $ | 0.09 | $ | 0.15 | ||||||||
105
Table of Contents
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not Applicable
| ITEM 9A. | CONTROLS AND PROCEDURES |
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this report. Based upon that
evaluation, the principal executive officer and principal financial officer concluded that, as of
the end of the period covered by this report, our disclosure controls and procedures were effective
to ensure that information required to be disclosed in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms.
There were no significant changes made in our internal controls during the quarter ended
December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
See Management’s Report On Internal Control Over Financial Reporting — filed herewith under
Part II, Item 8, “Financial Statements and Supplementary Data.”
| ITEM 9B. | OTHER INFORMATION |
Not Applicable.
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The “Proposal I—Election of Directors” section of the Company’s definitive proxy statement for
the Company’s 2010 Annual Meeting of Stockholders (the “2010 Proxy Statement”) is incorporated
herein by reference.
| ITEM 11. | EXECUTIVE COMPENSATION |
The “Proposal I—Election of Directors” section of the Company’s 2010 Proxy Statement is
incorporated herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The “Proposal I—Election of Directors” section of the Company’s 2010 Proxy Statement is
incorporated herein by reference.
The Company does not have any equity compensation program that was not approved by
stockholders, other than its employee stock ownership plan.
106
Table of Contents
Set forth below is certain information as of December 31, 2009 regarding equity compensation
plans that have been approved by stockholders.
| Number of securities to | ||||||||||||
| be issued upon exercise | Number of securities | |||||||||||
| Equity compensation plans | of outstanding options | weighted average | remaining available for | |||||||||
| approved by stockholders | and rights | exercise price | issuance under plan | |||||||||
|
1995 Stock Option Plan
|
9,450 | $ | 3.06 | — | ||||||||
|
2000 Stock Option Plan
|
1,318,951 | 7.92 | — | |||||||||
|
2004 Stock Option Plan
|
1,688,051 | 10.68 | — | |||||||||
|
2008 Stock Option Plan
|
1,003,110 | 8.65 | 2,934,390 | |||||||||
|
|
||||||||||||
|
Total
|
4,019,562 | $ | 9.25 | 2,934,390 | ||||||||
|
|
||||||||||||
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The “Transactions with Certain Related Persons” section of the Company’s 2010 Proxy Statement
is incorporated herein by reference.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The
“Proposal II — Ratification of Appointment of Independent Registered Public Accounting
Firm” Section of the Company’s 2010 Proxy Statement is incorporated herein by reference.
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1)
Financial Statements
The following documents are filed as part of this Form 10-K.
| (A) | Management’s Report on Internal Control Over Financial Reporting | ||
| (B) | Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting | ||
| (C) | Report of Independent Registered Public Accounting Firm | ||
| (D) | Consolidated Statements of Financial Condition — at December 31, 2009 and 2008 | ||
| (E) | Consolidated Statements of Income – Years ended December 31, 2009, 2008 and 2007 | ||
| (F) | Consolidated Statements of Changes in Shareholders’ Equity – Years ended December 31, 2009, 2008 and 2007 | ||
| (G) | Consolidated Statements of Cash Flows – Years ended December 31, 2009, 2008 and 2007 | ||
| (H) | Notes to Consolidated Financial Statements. |
(a)(2)
Financial Statement Schedules
None.
107
Table of Contents
(a)(3)
Exhibits
| Reference to Prior | ||||
| Regulation | Filing or Exhibit | |||
| S-K Exhibit | Number Attached | |||
| Number | Document | Herto | ||
|
2
|
Plan of acquisition, reorganization, arrangement, liquidation or succession | None | ||
|
|
||||
|
3
|
Articles of Incorporation and Bylaws | ** | ||
|
|
||||
|
4
|
Instruments defining the rights of security holders, including indentures | ** | ||
|
|
||||
|
9
|
Voting trust agreement | None | ||
|
|
||||
|
10.1
|
Amendment and Restatement of Deferred Compensation Plan for Outside Directors Of Northwest Savings Bank and Eligible Affiliates | *** | ||
|
|
||||
|
10.2
|
Retirement Plan for Outside Directors of Northwest Savings Bank and Eligible Affiliates | *** | ||
|
|
||||
|
10.3
|
Amended and Restated Northwest Savings Bank Nonqualified Supplemental Retirement Plan | *** | ||
|
|
||||
|
10.4
|
Employee Stock Ownership Plan | * | ||
|
|
||||
|
10.5
|
Northwest Bancorp, Inc. 2004 Stock Option Plan | **** | ||
|
|
||||
|
10.6
|
Northwest Bancorp, Inc. 2004 Recognition and Retention Plan | **** | ||
|
|
||||
|
10.7
|
Management Bonus Plan | *** | ||
|
|
||||
|
10.8
|
Northwest Bancorp, Inc. 2008 Stock Option Plan | ***** | ||
|
|
||||
|
10.9
|
Amended and Restated Northwest Savings Bank and Affiliates Upper Managers Bonus Deferred Compensation Plan | *** | ||
|
|
||||
|
10.10
|
Employment Agreement for William J. Wagner | ****** | ||
|
|
||||
|
10.11
|
Employment Agreement for William W. Harvey, Jr. | ****** | ||
|
|
||||
|
10.12
|
Employment Agreement for Steven G. Fisher | ****** | ||
|
|
||||
|
10.13
|
Employment Agreement for Gregory C. LaRocca | ****** |
108
Table of Contents
| Reference to Prior | ||||
| Regulation | Filing or Exhibit | |||
| S-K Exhibit | Number Attached | |||
| Number | Document | Herto | ||
|
10.15
|
Employment Agreement for Timothy A. Huber | 10.15 | ||
|
|
||||
|
11
|
Statement re: computation of per share earnings | None | ||
|
|
||||
|
12
|
Statement re: computation of ratios | Not required | ||
|
|
||||
|
16
|
Letter re: change in certifying accountant | None | ||
|
|
||||
|
18
|
Letter re: change in accounting principles | None | ||
|
|
||||
|
***
|
Subsidiaries of Registrant | *** | ||
|
|
||||
|
22
|
Published report regarding matters submitted to vote of security holders | None | ||
|
|
||||
|
23
|
Consent of experts and counsel | 23 | ||
|
|
||||
|
24
|
Power of Attorney | Not Required | ||
|
|
||||
|
28
|
Information from reports furnished to State insurance regulatory authorities | None | ||
|
|
||||
|
31.1
|
Certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as Amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 31.1 | ||
|
|
||||
|
31.2
|
Certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as Amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | 31.2 | ||
|
|
||||
|
32
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | 32 |
| * | Incorporated by reference to the Company’s Registration Statement on Form S-4 (File No. 333-31687), originally filed with the SEC on July 21, 1997, as amended on October 9, 1997 and November 4, 1997. | |
| ** | Incorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-161805), filed with the SEC on September 9, 2009. | |
| *** | Incorporated by reference to the Company’s Annual Report on Form 10-K (File No. 000-23817), filed with the SEC on March 4, 2009. | |
| **** | Incorporated by reference to the Definitive Proxy Statement for the 2004 Annual Meeting of Shareholders (File No. 000-23817), filed with the SEC on October 6, 2004. | |
| ***** | Incorporated by reference to the Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders (File No. 000-23817), filed with the SEC on April 11, 2008. | |
| ****** | Incorporated by reference to the Periodic Report on Form 8-K (File No. 000-23817), filed with the SEC on September 19, 2007. |
109
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
NORTHWEST BANCORP, INC.
|
||||
| Date: March 16, 2010 | By: | /s/ William J. Wagner | ||
| William J. Wagner, Chairman, President and | ||||
| Chief Executive Officer (Principal Executive Officer) | ||||
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below
by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| Date: March 16, 2010 | By: | /s/ William J. Wagner | ||
|
William J. Wagner, Chairman, President, and
Chief Executive Officer and Director |
||||
| Date: March 16, 2010 | By: | /s/ William W. Harvey, Jr. | ||
| William W. Harvey, Jr., Executive Vice | ||||
| President, Finance, Chief Financial Officer (Principal Financial Officer) | ||||
| Date: March 16, 2010 | By: | /s/ Gerald J. Ritzert | ||
| Gerald J. Ritzert, Senior Vice President, | ||||
| Controller (Principal Accounting Officer) | ||||
| Date: March 16, 2010 | By: | /s/ John M. Bauer | ||
| John M. Bauer, Director | ||||
| Date: March 16, 2010 | By: | /s/ Richard L. Carr | ||
| Richard L. Carr, Director | ||||
| Date: March 16, 2010 | By: | /s/ Thomas K. Creal | ||
| Thomas K. Creal, III, Director | ||||
| Date: March 16, 2010 | By: | /s/ Robert G. Ferrier | ||
| Robert G. Ferrier, Director | ||||
| Date: March 16, 2010 | By: | /s/ A. Paul King | ||
| A. Paul King, Director | ||||
| Date: March 16, 2010 | By: | /s/ Joseph F. Long | ||
| Joseph F. Long, Director | ||||
| Date: March 16, 2010 | By: | /s/ Richard E. McDowell | ||
| Richard E. McDowell, Director | ||||
| Date: March 16, 2010 | By: | /s/ Philip M. Tredway | ||
| Philip M. Tredway, Director | ||||
110
TABLE OF CONTENTS
Item 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. [reserved]Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules