July 16, 1998
The Board of Trustees
Corry Savings Bank
150 North Centre
Corry, Pennsylvania 16407
Dear Board Members:
The notice of intent to convert from mutual to stock form filed on behalf of Corry
Savings Bank,Corry, Pennsylvania ("CSB" or "Bank"), and subsequent
amendments thereto, have been reviewed by the Federal Deposit Insurance Corporation
("FDIC") pursuant to 12 C.F.R. section 30315. Included in the review were the
Bank's basis for its proposed merger/conversion, the manner in which the Bank's value was
determined, the distribution of value, the reasonableness of insider remuneration,
conformance to applicable law and regulations, and general safety and soundness issues.
Based on the information and representations presented, the FDIC plans to issue a letter
of nonobjection to the proposed transaction provided certain conditions are met.
The proposed transaction is a combination of a conversion of CSB to stock form and a
merger of CSB with Northwest Savings Bank, Warren, Pennsylvania ("Northwest").
CSB proposes to convert from a Pennsylvania-chartered mutual savings bank to a
Pennsylvania-chartered stock savings bank-, with a simultaneous merger with and into
Northwest. The parent holding company of Northwest, Northwest Bancorp, Inc.
("Northwest Bancorp"), will offer shares of its common stock approximating 30%
of the valuation of CSB to qualifying depositors of CSB, and potentially others, in
accordance with the Agreement and Plan of Merger between Northwest and CSB ("the
Agreement"). Northwest will offer these shares of Northwest Bancorp common stock on a
first priority basis to CSB depositors as of March 31, 1996 ("Eligible Account
Holders") at a 10% discount to the price paid by any other purchasers in the
offering. The number of shares to be issued will depend on the updated valuation of CSB to
be provided at the conclusion of the offering and the market price of Northwest Bancorp
stock at that time. Northwest Bancorp, MHC will acquire approximately 70% of the number of
shares issued in connection with the proposal, and CSB depositors will continue to retain
a mutual interest (transferring from CSB to the MHC parent of Northwest Bancorp) if a
deposit relationship is maintained with Northwest. As part of the proposal, a charitable
foundation ("Foundation") will be established and $500,000 will be contributed
to the Foundation to be used exclusively for the benefit of charitable activities In the
Corry community. This proposed transaction differs from previous merger/conversions
approved by the FDIC Board, since the mutual interests of the depositors of the Bank are
not being extinguished, but will continue in the form of the Northwest Bancorp, MHC, which
will maintain its 70% ownership of Northwest Bancorp after the merger with CSB.
Historically, merger/conversion transactions raise a number of regulatory concerns,
including proper determination of the value of the converting institution, distribution of
value to rightful recipients, and conflicts of interest stemming from insider benefits.
One possible manner of addressing these concerns is for merger/conversions to be effected
in a two step process: an initial mutual to stock conversion which allows existing deposit
account holders to purchase stock in the converting institution; followed at a discrete
interval by a separate stockholder vote on whether to subsequently merge with another
institution.
In reviewing this proposal, the FDIC has placed great emphasis on the conclusion that
CSB's small size and its limited product offerings detract significantly from the economic
feasibility and marketability of a standard conversion. While a standard conversion may be
possible, the expense of an unsuccessful offering would result in a substantial charge
against earnings. The costs of the proposal at hand are being divided between the two
institutions, and an offering of Northwest stock is considered to have much greater
marketability compared to an offering of CSB stock. In addition, the insider benefits
inherent in the proposal appear reasonable. Another important factor that was considered
in the review of this proposal is that the Board of Trustees of CSB has indicated that it
no longer desires to remain as an independent institution, either in mutual or stock form.
On balance, regulatory concerns regarding merger/conversions are outweighed in this
specific case by the benefits to be gained by CSB's constituency, including the Corry
community as a whole. as a result of this transaction. These benefits will be derived both
through the terms of the proposal, such as the Foundation, the discounted stock purchase
priority for Eligible Account Holders, the continuation of the mutual interest of CSB's
depositors in Northwest Bancorp, MHC, and through the wider array of products and services
which Northwest will be able to offer CSB's customers and others in the Corry community.
Neither FDIC nor OTS regulations regarding conversions specify a methodology for
determining fair value for an institution in the context of a merger/conversion. In the
preamble to the FDIC Final Rule on conversions, the FDIC indicated that industry
innovation was encouraged. One method of determining value which may have validity would
be to "shop" the institution among prospective acquirers. This methodology would
establish a market-based value, which the converting institution's board could take into
consideration, in the proper exercise of its fiduciary duty, when determining whether a
specific proposal would provide for a distribution of appropriate value to rightful
recipients. The FDIC looks for tangible evidence that the board of an institution
proposing to enter into a merger/conversion marketed the institution widely enough to
ascertain a valid market-based value. While a formal "shopping" of CSB was not
performed, informal discussions with other institutions have not revealed any interest in
CSB other than that shown by Northwest. Considering that in this case the depositors of
CSB are not relinquishing their mutual interests as in a standard conversion, but will
instead have their mutual interests transferred to Northwest Bancorp, MHC, the
distribution of value to CSB depositors immediately resulting from this transaction is not
as critical as in a standard merger/conversion. While the valuation of CSB provided in
connection with the notice is not based upon "shopping" the institution, the
FDIC has determined that the pro forma market valuation of CSB on a fully converted basis,
and the range of values provided in the appraisal report, represent a fair value for CSB
for the purpose of this merger/conversion. However, the FDIC continues to strongly
encourage mutual institutions that are considering any form of a merger/conversion
proposal to demonstrate their best effort to "shop" the institution among
prospective acquirers. Such institutions should not rely on the FDIC's action on CSB's
notice, which was dependent upon a number of factors, as a precedent for their respective
merger/conversion proposal.
Based on the information and representations presented, the FDIC plans to issue a
letter of nonobjection to the proposed conversion transaction provided that CSB:
1. Provides written evidence that its plan of conversion has been approved by the
affirmative vote of a majority of the votes eligible to be cast at a special meeting of
the Bank's depositors.
2. Advises this office of the results of the subscription offering and delivers an
updated appraisal that:
(a) takes the results of the subscription offering into account;
(b) discusses any material occurrences during the subscription period; and
(c) explains any orders that may have been rejected.
3. Receives all necessary and final approvals from the Pennsylvania Department of
Banking officials and from the Federal Reserve Board in connection with the proposed
transaction.
4. Confirms that the Securities and Exchange Commission has declared Northwest
Bancorp's registration statement effective under the Securities Act of 1933, prior to the
distribution of the offering materials.
Provided that the Bank meets the conditions outlined above and that the FDIC is
satisfied with the appraiser's determination in the updated appraisal that the results of
the subscription offering represent fair value for the Bank, and provided further that
there has been no significant alteration of the terms of the conversion transaction (by
action of other regulators or otherwise) subsequent to the date of this letter, the FDIC
will issue a letter of nonobjection to the proposed conversion transaction.
Enclosed is a copy of our Order and Basis regarding the applications filed by Northwest
in connection with the proposed merger/conversion. We have approved as of this date the
related merger application filed by Northwest, conditioned in part upon the issuance of
the final nonobjection letter to the Notice of mutual-to-stock conversion of CSB.
Sincerely,
Mark S. Schmidt
Associate Director
cc: David S. Posner, Esq.
Goldfarb Posner Beck DeHaven & Drewitz
26 South Main Street, Suite 200
Washington, Pennsylvania 15301
Eric Luse, Esq.
Kenneth R. Lehman, Esq.
Luse Lehman Gorman Pomerenk & Schick>
5335 Wisconsin Avenue, N.W., Suite 400
Washington, D.C. 20015
