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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2018
 
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 Number 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 No.)
 
 
 
100 Liberty Street, Warren, Pennsylvania
 
16365
(Address of principal executive offices)
 
(Zip Code)
 
(814) 726-2140
(Registrant’s telephone number, including area code)
  
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
x    Large accelerated filer     o    Accelerated filer
o    Non-accelerated filer (Do not check if a smaller reporting company)                                 o    Smaller reporting company
o    Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Common Stock ($0.01 par value), 103,161,338 shares outstanding as of July 31, 2018

 

Table of Contents

NORTHWEST BANCSHARES, INC.
INDEX
 
 
 
 
 
PAGE
PART I
 
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Certifications
 
 




Table of Contents

ITEM 1. FINANCIAL STATEMENTS
 
NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands, except share data)
 
June 30,
2018
 
December 31,
2017
Assets
 

 
 

Cash and due from banks
$
133,045

 
77,710

Marketable securities available-for-sale (amortized cost of $814,848 and $800,094)
799,878

 
792,535

Marketable securities held-to-maturity (fair value of $25,212 and $29,667)
25,747

 
29,678

Total cash and cash equivalents and marketable securities
958,670

 
899,923

 
 
 
 
Personal Banking loans:
 

 
 

Residential mortgage loans held-for-sale

 
3,128

Residential mortgage loans
2,800,668

 
2,773,075

Home equity loans
1,276,181

 
1,310,355

Consumer loans
700,925

 
671,389

Total Personal Banking loans
4,777,774

 
4,757,947

Commercial Banking loans:
 

 
 

Commercial real estate loans
2,553,223

 
2,454,726

Commercial loans
611,373

 
580,736

Total Commercial Banking loans
3,164,596

 
3,035,462

Total loans
7,942,370

 
7,793,409

Allowance for loan losses
(57,332
)
 
(56,795
)
Total loans, net
7,885,038

 
7,736,614

 
 
 
 
Federal Home Loan Bank stock, at cost
7,887

 
11,733

Accrued interest receivable
24,959

 
23,352

Real estate owned, net
2,722

 
5,666

Premises and equipment, net
146,276

 
151,944

Bank owned life insurance
170,791

 
171,547

Goodwill
307,420

 
307,420

Other intangible assets
22,629

 
25,669

Other assets
35,917

 
30,066

Total assets
$
9,562,309

 
9,363,934

 
 
 
 
Liabilities and Shareholders’ Equity
 

 
 

Liabilities:
 

 
 

Noninterest-bearing checking deposits
$
1,732,664

 
1,610,409

Interest-bearing checking deposits
1,485,938

 
1,442,928

Money market deposit accounts
1,686,052

 
1,707,450

Savings deposits
1,697,396

 
1,653,579

Time deposits
1,405,328

 
1,412,623

Total deposits
8,007,378

 
7,826,989

 
 
 
 
Borrowed funds
99,889

 
108,238

Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities
111,213

 
111,213

Advances by borrowers for taxes and insurance
51,640

 
40,825

Accrued interest payable
568

 
460

Other liabilities
62,741

 
68,485

Total liabilities
8,333,429

 
8,156,210

 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock, $0.01 par value: 50,000,000 authorized, no shares issued

 

Common stock, $0.01 par value: 500,000,000 shares authorized, 103,122,890 and 102,394,828 shares issued, respectively
1,031

 
1,027

Paid-in capital
739,673

 
730,719

Retained earnings
531,269

 
508,058

Accumulated other comprehensive loss
(43,093
)
 
(32,080
)
Total shareholders’ equity
1,228,880

 
1,207,724

Total liabilities and shareholders’ equity
$
9,562,309

 
9,363,934

See accompanying notes to unaudited consolidated financial statements


1

Table of Contents

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except per share data) 
 
Quarter ended
June 30,
 
Six months ended
June 30,
 
2018
 
2017
 
2018
 
2017
Interest income:
 

 
 

 
 

 
 

Loans receivable
$
88,106

 
84,714

 
173,326

 
167,465

Mortgage-backed securities
3,254

 
2,987

 
6,267

 
5,209

Taxable investment securities
648

 
981

 
1,326

 
1,987

Tax-free investment securities
313

 
529

 
703

 
1,098

FHLB dividends
85

 
50

 
182

 
109

Interest-earning deposits
469

 
536

 
604

 
1,196

Total interest income
92,875

 
89,797

 
182,408

 
177,064

Interest expense:
 

 
 

 
 

 
 

Deposits
7,309

 
5,826

 
13,767

 
11,291

Borrowed funds
1,340

 
1,240

 
2,648

 
2,465

Total interest expense
8,649

 
7,066

 
16,415

 
13,756

Net interest income
84,226

 
82,731

 
165,993

 
163,308

Provision for loan losses
5,349

 
5,562

 
9,558

 
10,199

Net interest income after provision for loan losses
78,877

 
77,169

 
156,435

 
153,109

Noninterest income:
 

 
 

 
 

 
 

Gain on sale of investments

 
3

 
153

 
20

Service charges and fees
12,908

 
12,749

 
24,807

 
24,466

Trust and other financial services income
4,050

 
4,600

 
8,081

 
8,904

Insurance commission income
2,090

 
2,353

 
4,839

 
5,147

Gain/ (loss) on real estate owned, net
176

 
(230
)
 
(370
)
 
(297
)
Income from bank owned life insurance
2,333

 
1,652

 
3,323

 
2,720

Mortgage banking income
77

 
434

 
301

 
674

Gain on sale of offices

 
17,186

 

 
17,186

Other operating income
2,475

 
2,730

 
4,763

 
4,161

Total noninterest income
24,109

 
41,477

 
45,897

 
62,981

Noninterest expense:
 

 
 

 
 

 
 

Compensation and employee benefits
39,031

 
38,175

 
75,541

 
76,447

Premises and occupancy costs
6,824

 
7,103

 
14,131

 
14,619

Office operations
3,768

 
4,170

 
7,176

 
8,392

Collections expense
434

 
553

 
946

 
1,102

Processing expenses
9,560

 
9,639

 
19,266

 
19,548

Marketing expenses
2,014

 
2,846

 
4,154

 
4,994

Federal deposit insurance premiums
671

 
856

 
1,388

 
2,023

Professional services
2,819

 
2,452

 
5,096

 
5,027

Amortization of intangible assets
1,520

 
1,749

 
3,040

 
3,498

Real estate owned expense
133

 
217

 
425

 
499

Restructuring/ acquisition expense
393

 
2,634

 
393

 
2,857

Other expenses
2,620

 
2,868

 
5,652

 
5,902

Total noninterest expense
69,787

 
73,262

 
137,208

 
144,908

Income before income taxes
33,199

 
45,384

 
65,124

 
71,182

Federal and state income taxes expense
6,900

 
14,402

 
13,840

 
22,454

Net income
$
26,299

 
30,982

 
51,284

 
48,728

Basic earnings per share
$
0.26

 
0.31

 
0.50

 
0.48

Diluted earnings per share
$
0.25

 
0.30

 
0.50

 
0.48


See accompanying notes to unaudited consolidated financial statements


2

Table of Contents

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
 
 
Quarter ended
June 30,
 
Six months ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
26,299

 
30,982

 
51,284

 
48,728

Other comprehensive income net of tax:
 

 
 

 
 

 
 

Net unrealized holding gains/ (losses) on marketable securities:
 

 
 

 
 

 
 

Unrealized holding gains/ (losses) net of tax of $494, $(845), $2,081, and $(1,159), respectively
(1,237
)
 
1,290

 
(5,199
)
 
1,948

Reclassification adjustment for gains included in net income, net of tax of $30, $39, $37 and $47, respectively
(75
)
 
(56
)
 
(94
)
 
(67
)
Net unrealized holding gains/ (losses) on marketable securities
(1,312
)
 
1,234

 
(5,293
)
 
1,881

 
 
 
 
 
 
 
 
Change in fair value of interest rate swaps, net of tax of $(58), $(118), $(153), and $(281), respectively
214

 
218

 
574

 
521

 
 
 
 
 
 
 
 
Defined benefit plan:
 

 
 

 
 

 
 

Reclassification adjustments for prior period service costs and net losses included in net income, net of tax of $(91), $(154), $(181) and $(307), respectively
226

 
221

 
452

 
441

 
 
 
 
 
 
 
 
Other comprehensive income/ (loss)
(872
)
 
1,673

 
(4,267
)
 
2,843

 
 
 
 
 
 
 
 
Total comprehensive income
$
25,427

 
32,655

 
47,017

 
51,571


See accompanying notes to unaudited consolidated financial statements



3

Table of Contents

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(dollars in thousands, expect share data)
 
Quarter ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
 
Total
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Shareholders’
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Equity
Balance at March 31, 2017
101,987,942

 
$
1,020

 
723,055

 
480,309

 
(26,821
)
 
1,177,563

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 

 
30,982

 

 
30,982

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax of $(1,078)

 

 

 

 
1,673

 
1,673

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income

 

 

 
30,982

 
1,673

 
32,655

 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
112,154

 
1

 
1,275

 

 

 
1,276

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
378,050

 
4

 
1,706

 

 

 
1,710

 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid ($0.16 per share)

 

 

 
(16,274
)
 

 
(16,274
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2017
102,478,146

 
$
1,025

 
726,036

 
495,017

 
(25,148
)
 
1,196,930

 

Quarter ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
 
Total
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Shareholders’
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Equity
Balance at March 31, 2018
102,599,662

 
$
1,026

 
734,065

 
522,384

 
(42,221
)
 
1,215,254

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 

 
26,299

 

 
26,299

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax of $375

 

 

 

 
(872
)
 
(872
)
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income/ (loss)

 

 

 
26,299

 
(872
)
 
25,427

 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
291,595

 
3

 
3,312

 

 

 
3,315

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
414,330

 
4

 
2,294

 

 

 
2,298

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation forfeited
(182,697
)
 
(2
)
 
2

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid ($0.17 per share)

 

 

 
(17,414
)
 

 
(17,414
)
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2018
103,122,890

 
$
1,031

 
739,673

 
531,269

 
(43,093
)
 
1,228,880


See accompanying notes to unaudited consolidated financial statements


4

Table of Contents

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(dollars in thousands, expect share data)
 
Six months ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
 
Total
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Shareholders’
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Equity
Beginning balance at December 31, 2016
101,699,406

 
$
1,017

 
718,834

 
478,803

 
(27,991
)
 
1,170,663

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 

 
48,728

 

 
48,728

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax of $(1,700)

 

 

 

 
2,843

 
2,843

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income

 

 

 
48,728

 
2,843

 
51,571

 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
400,690

 
4

 
4,578

 

 

 
4,582

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
378,050

 
4

 
2,624

 

 

 
2,628

 
 
 
 
 
 
 
 
 
 
 
 
Share repurchases

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid ($0.32 per share)

 

 

 
(32,514
)
 

 
(32,514
)
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance at June 30, 2017
102,478,146

 
$
1,025

 
726,036

 
495,017

 
(25,148
)
 
1,196,930

 
Six months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
 
Total
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Shareholders’
 
Shares
 
Amount
 
Capital
 
Earnings
 
Loss
 
Equity
Beginning balance at December 31, 2017
102,394,828

 
$
1,027

 
730,719

 
508,058

 
(32,080
)
 
1,207,724

 
 
 
 
 
 
 
 
 
 
 
 
Reclassification due to adoption of ASU No. 2018-02

 

 

 
6,746

 
(6,746
)
 

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 

 
51,284

 

 
51,284

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax of $1,784

 

 

 

 
(4,267
)
 
(4,267
)
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income/ (loss)

 

 

 
58,030

 
(11,013
)
 
47,017

 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
496,429

 
5

 
5,677

 

 

 
5,682

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
414,330

 
4

 
3,272

 

 

 
3,276

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation forfeited
(182,697
)
 
(5
)
 
5

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid ($0.34 per share)

 

 


 
(34,819
)
 

 
(34,819
)
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance at June 30, 2018
103,122,890

 
$
1,031

 
739,673

 
531,269

 
(43,093
)
 
1,228,880

 
See accompanying notes to unaudited consolidated financial statements


5

Table of Contents

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 
 
Six months ended June 30,
 
2018
 
2017
OPERATING ACTIVITIES:
 

 
 

Net Income
$
51,284

 
48,728

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Provision for loan losses
9,558

 
10,199

Net (gain)/ loss on sale of assets
1,115

 
(361
)
Net gain on sale of offices

 
(17,186
)
Net depreciation, amortization and accretion
6,708

 
8,115

(Increase)/ decrease in other assets
(5,987
)
 
19,372

Decrease in other liabilities
(4,276
)
 
(1,734
)
Net amortization on marketable securities
898

 
1,050

Noncash write-down of real estate owned
940

 
719

Deferred income tax expense
22

 

Origination of loans held for sale
(1,297
)
 
(37,613
)
Proceeds from sale of loans held for sale
4,501

 
37,199

Noncash compensation expense related to stock benefit plans
3,276

 
2,628

Net cash provided by operating activities
66,742

 
71,116

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Purchase of marketable securities held-to-maturity

 
(23,621
)
Purchase of marketable securities available-for-sale
(108,879
)
 
(208,850
)
Proceeds from maturities and principal reductions of marketable securities held-to-maturity
3,923

 
7,385

Proceeds from maturities and principal reductions of marketable securities available-for-sale
88,183

 
64,741

Proceeds from sale of marketable securities available-for-sale
5,206

 
19,478

Proceeds from bank-owed life insurance

 
1,550

Loan originations
(1,483,080
)
 
(1,337,829
)
Proceeds from loan maturities and principal reductions
1,322,618

 
1,346,050

Net (purchase)/ sale of Federal Home Loan Bank stock
3,846

 
(752
)
Proceeds from sale of real estate owned
4,415

 
2,372

Sale of real estate owned for investment, net
304

 
304

(Purchase)/ sale of premises and equipment
(1,661
)
 
502

Net cash used in investing activities
(165,125
)
 
(128,670
)


6

Table of Contents

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
(in thousands)
 
 
 
Six months ended June 30,
 
2018
 
2017
FINANCING ACTIVITIES:
 

 
 

Increase/ (decrease) in deposits, net
$
180,389

 
(126,723
)
Net decrease in short-term borrowings
(8,349
)
 
(32,458
)
Increase in advances by borrowers for taxes and insurance
10,815

 
11,567

Cash dividends paid
(34,819
)
 
(32,514
)
Proceeds from stock options exercised
5,682

 
4,582

Net cash provided by/ (used in) financing activities
153,718

 
(175,546
)
 
 
 
 
Net increase/ (decrease) in cash and cash equivalents
$
55,335

 
(233,100
)
 
 
 
 
Cash and cash equivalents at beginning of period
$
77,710

 
389,867

Net increase/ (decrease) in cash and cash equivalents
55,335

 
(233,100
)
Cash and cash equivalents at end of period
$
133,045

 
156,767

 
 
 
 
Cash paid during the period for:
 

 
 

Interest on deposits and borrowings (including interest credited to deposit accounts of $13,115 and $11,028, respectively)
$
16,307

 
13,869

Income taxes
$
9,149

 
9,805

 
 
 
 
Non-cash activities:
 

 
 

Loans foreclosures and repossessions
$
3,599

 
5,062

Sale of real estate owned financed by the Company
$
183

 
168

 
See accompanying notes to unaudited consolidated financial statements



7

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
 
(1)
Basis of Presentation and Informational Disclosures
 
Northwest Bancshares, Inc. (the “Company”) or (“NWBI”), a Maryland corporation headquartered in Warren, Pennsylvania, is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System. The primary activity of the Company is the ownership of all of the issued and outstanding common stock of Northwest Bank, a Pennsylvania-chartered savings bank (“Northwest”).  Northwest is regulated by the FDIC and the Pennsylvania Department of Banking. Northwest operates 172 community-banking offices throughout Pennsylvania, western New York, and eastern Ohio.
 
The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiary, Northwest, and Northwest’s subsidiaries Northwest Capital Group, Inc., Allegheny Services, Inc., Great Northwest Corporation, and The Bert Company. The unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information or footnotes required for complete annual financial statements.  In the opinion of management, all adjustments necessary for the fair presentation of the Company’s financial position and results of operations have been included.  The consolidated statements have been prepared using the accounting policies described in the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 updated, as required, for any new pronouncements or changes.
 
Certain items previously reported have been reclassified to conform to the current year's reporting format.

The results of operations for the quarter and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, or any other period.
 
Stock-Based Compensation
 
On May 14, 2018, the Company awarded employees 831,160 stock options and directors 64,800 stock options with an exercise price of $16.59 and grant date fair value of $1.49 per stock option, and the Company awarded employees 390,030 restricted common shares and directors 24,300 restricted common shares with a grant date fair value of $16.59. Awarded stock options and common shares vest over a seven-year period with the first vesting occurring on the grant date. Stock-based compensation expense of $2.3 million and $1.7 million for the quarters ended June 30, 2018 and 2017, and $3.3 million million and $2.6 million for the six months ended June 30, 2018 and 2017, respectively, was recognized in compensation expense relating to our stock benefit plans. At June 30, 2018 there was compensation expense of $4.6 million to be recognized for awarded but unvested stock options and $19.6 million for unvested common shares.

 Income Taxes- Uncertain Tax Positions
 
Accounting standards prescribe a comprehensive model for how a company should 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.  A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits.  The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.  At June 30, 2018 we had no liability for unrecognized tax benefits.
 
We recognize interest accrued related to: (1) unrecognized tax benefits in other expenses and (2) refund claims in other operating income.  We recognize penalties (if any) in other expenses. We are subject to audit by the Internal Revenue Service and any state in which we conduct business for the tax periods ended December 31, 2017, 2016, 2015 and 2014. 



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Recently Adopted Accounting Standards

In May 2014 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Effective January 1, 2018, we adopted the ASU and all related amendments to all contracts using the modified retrospective approach, with the cumulative effect recorded as an adjustment to opening retained earnings. Due to immateriality, we had no cumulative effect to record. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of the adoption of the new standard to be immaterial to our net income on an ongoing basis.     

Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The services that fall within the scope of ASC 606 include service charges and fees, trust and other financial services income, insurance commission income, sale of OREO and other operating income.

Revenue is recognized when performance obligations under the terms of a contract with our customers are satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The majority of our revenue continues to be recognized at the point in time when the services are provided to our customers.

Service charges and fees represents income earned on both loan and deposit accounts as well as interchange income. Service charges on deposit accounts primarily consist of overdraft, non-sufficient funds, ATM transaction fees and account management fees. Revenue is recognized at the point in time the transaction occurs or the service is provided to the customer. We earn interchange income from debit and credit cardholder transactions processed through payment networks. Interchange fees represent a percentage of the underlying transaction value and are generally set by the credit card associations. Interchange fees are recognized as transactions occur.

We provide trust management services and investment management services to our customers and recognize revenue as these management services are provided. Trust and investment management services are billed and paid on a monthly or quarterly basis. Additionally, we earn commissions on investment products that are sold to our customers. These commissions are recognized at the time of the sale of the third party’s product or services to our customers.

Our insurance subsidiary is an employee benefits and property and casualty insurance agency specializing in commercial and personal insurance as well as retirement benefit plans. Insurance commission income is earned at the time of sale of the third party’s product or service to our customers.

Loss on real estate owned represents gains and losses on real estate acquired by Northwest through the foreclosure process. Proceeds from the sale of these properties are recognized when control of the property transfers to the buyer. In certain instances the Bank may finance a portion of the purchase price paid by the buyer and an additional evaluation of whether all of the contract criteria are met is required. If it is not probable that we will collect substantially all of the consideration expected, the transaction would not be accounted for as a sale until the concerns about collectability are resolved.
       
Other operating income consists primarily of revenues earned for providing transaction services to our deposit customers. The revenue is earned at the point in time the transaction occurs.

We have evaluated the nature of our contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not necessary.    

In January 2016 the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10)”. This guidance requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted this guidance as of January 1, 2018 which did not have a material impact on our results of operations and financial position. Additionally, this guidance requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. Accordingly, we refined the calculation used to determine the disclosed fair value of our loans held for investment portfolio as part of adopting this standard. The refined calculation did not have a significant impact on our fair value disclosures. Refer to note 9, "Disclosures About Fair Value of Financial Instruments".



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In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments”. The main objective of this ASU is to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in this Update provide guidance on the following eight specific cash flow issues: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance (BOLI) policies, distributions received from equity method investments, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. This guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We adopted this guidance on January 1, 2018 and applied it on a retrospective basis. No material reclassifications were made for the six months ended and we do not expect the reclassifications to be material for the full year.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". This guidance eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under this guidance goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. This guidance is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.We have elected to early adopt this standard as of January 1, 2018 and the amendments were applied on a prospective basis. The adoption did not have a material impact on the consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. This guidance provides a more robust framework to use in determining when a set of assets and activities (“set”) is a business and to address stakeholder feedback that the definition of a business in current GAAP is applied too broadly. The primary amendments in the ASU provide a screen to exclude transactions where substantially all of the fair value of the transferred set is concentrated in a single asset, or group of similar assets, from being evaluated as a business. We adopted this standard on January 1, 2018 and will apply the guidance to future transactions.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Costs and Net Periodic Postretirement Benefit Costs". This guidance provides financial statement users with clearer and disaggregated information related to the components of net periodic benefit cost and improve transparency of the presentation of net periodic benefit cost in the financial statements. Employers will present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Employers will present the other components of the net periodic benefit cost separately from the line items that includes the service cost outside of any subtotal of operating income, if one is presented. This guidance is effective for annual and interim periods beginning after December 15, 2017 and should be applied retrospectively. We adopted this standard as of January 1, 2018. The other components of the net periodic benefit cost for the quarter and six months ended June 30, 2017 totaled $517,000 and $1.0 million, respectivey, and were reclassified from compensation and employee benefits to other expense.

 In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities". This guidance shortens the amortization period for certain callable debt securities held at a premium to the earliest call date from the maturity date. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted in any interim period. We have elected to early adopt this standard as of January 1, 2018. The adoption did not have a material impact on our results of operations or financial position.

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting”. This guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as a modification. Under ASU 2017-09, an entity will not apply modification accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award's fair value, (ii) the award's vesting conditions and (iii) the award's classification as an equity or liability instrument. This guidance is effective for annual and interim periods beginning after December 15, 2017 and should be applied on a prospective basis to an award modified on or after the adoption date. We adopted this standard as of January 1, 2018 and will apply the guidance to future modifications.



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In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This guidance permits a reclassification from accumulated other comprehensive income to retained earnings of the stranded tax effects resulting from the Tax Cuts and Jobs Act. This guidance is effective for annual or interim reporting periods beginning after December 15, 2018 but permits early adoption in a period for which financial statements have not been issued. We have elected to early adopt the ASU as of January 1, 2018. The reclassification from accumulated other comprehensive income to retained earnings was $6.7 million for the release of stranded income tax benefits relating to the unrealized net gains and losses on available for sale securities and the change in fair value of our interest rate swaps and our pension plan. Our policy for releasing income tax effects from accumulated other comprehensive income is to release them when investments are sold or matured and liabilities are extinguished.

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-2, “Leases”. This guidance requires a lessee to recognize in the statement of financial condition a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the term of the lease. Optional periods should only be recognized if the lessee is reasonably certain to exercise the option. For leases with a term of twelve months or less, the lessee is permitted not to recognize lease assets and lease liabilities and should recognize lease expense for such leases generally on a straight-line basis over the term of the lease. This guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those years and early adoption is permitted. We lease certain branch and office facilities or land under operating leases. While we are currently evaluating the impact this guidance will have on our results of operations and financial position, we expect the primary impact on the consolidated statement of financial position will be the recognition of right-of-use assets and lease obligations under the ASU as a result of our minimum commitments under non-cancellable operating lease. Our current minimum commitments under non-cancellable operating leases are disclosed in Note 7, “Premises and Equipment” in our Annual Report on Form 10-K for the year ended December 31, 2017.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments", which eliminates the probable initial recognition threshold for credit losses requiring, instead, that all financial assets (or group of financial assets) measured at amortized cost be presented at the net amount expected to be collected inclusive of the entity’s current estimate of all lifetime expected credit losses. This guidance also applies to certain off-balance-sheet credit exposures such as unfunded commitments and non-derivative financial guarantees. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) in order to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The income statement under this guidance will reflect the initial recognition of current expected credit losses for newly recognized assets, as well as any increases or decreases of expected credit losses that have occurred during the period. This guidance retains many currently-existing disclosures related to the credit quality of an entity’s assets and the related allowance for credit losses amended to reflect the change to an expected credit loss methodology, as well as enhanced disclosures to provide information to users at a more disaggregated level. Upon adoption, ASU 2016-13 provides for a modified retrospective transition by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective, except for debt securities for which other-than-temporary impairment has previously been recognized. For these debt securities, a prospective transition is provided in order to maintain the same amortized cost prior to and subsequent to the effective date of the ASU. This guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annual periods with early adoption permitted for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. Management created a formal working group to govern the implementation of these amendments consisting of key stakeholders from finance, risk, credit and accounting. We are currently in the process of designing current expected credit loss estimation methodologies and systems, and collecting data to be able to comply with the standard. We are also evaluating the effect this guidance will have on our results of operations, financial position and related disclosures. The impact of the ASU will depend upon the state of the economy and the nature of our portfolios, among other items, at the date of adoption.




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(2)    Investment securities and impairment of investment securities
 
The following table shows the portfolio of investment securities available-for-sale at June 30, 2018 (in thousands):
 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
Debt issued by the U.S. government and agencies:
 

 
 

 
 

 
 

Due in one year or less
$
1

 

 

 
1

 
 
 
 
 
 
 
 
Debt issued by government sponsored enterprises:
 

 
 

 
 

 
 

Due in one year or less
71,103

 

 
(238
)
 
70,865

Due after one year through five years
130,850

 
6

 
(3,136
)
 
127,720

Due after ten years
4,119

 

 
(75
)
 
4,044

 
 
 
 
 
 
 
 
Municipal securities:
 

 
 

 
 

 
 

Due in one year or less
1,809

 
5

 

 
1,814

Due after one year through five years
4,620

 
57

 
(8
)
 
4,669

Due after five years through ten years
12,604

 
75

 
(14
)
 
12,665

Due after ten years
10,650

 
51

 
(12
)
 
10,689

 
 
 
 
 
 
 
 
Corporate debt issues:
 

 
 

 
 

 
 

Due after ten years
911

 

 

 
911

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
136,114

 
663

 
(5,162
)
 
131,615

Variable rate pass-through
28,640

 
1,175

 
(7
)
 
29,808

Fixed rate non-agency CMOs
1

 

 

 
1

Fixed rate agency CMOs
344,427

 
14

 
(8,917
)
 
335,524

Variable rate agency CMOs
68,999

 
578

 
(25
)
 
69,552

Total residential mortgage-backed securities
578,181

 
2,430

 
(14,111
)
 
566,500

Total marketable securities available-for-sale
$
814,848

 
2,624

 
(17,594
)
 
799,878





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The following table shows the portfolio of investment securities available-for-sale at December 31, 2017 (in thousands): 
 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
Debt issued by the U.S. government and agencies:
 

 
 

 
 

 
 

Due in one year or less
$
1

 

 

 
1

 
 
 
 
 
 
 
 
Debt issued by government sponsored enterprises:
 

 
 

 
 

 
 

Due in one year or less
66,566

 
14

 
(289
)
 
66,291

Due after one year through five years
140,624

 

 
(2,402
)
 
138,222

Due after ten years
4,833

 

 
(77
)
 
4,756

 
 
 
 
 
 
 
 
Equity securities
551

 
29

 
(6
)
 
574

 
 
 
 
 
 
 
 
Municipal securities:
 

 
 

 
 

 
 

Due in one year or less
2,492

 
7

 
(1
)
 
2,498

Due after one year through five years
7,072

 
82

 
(6
)
 
7,148

Due after five years through ten years
14,576

 
171

 

 
14,747

Due after ten years
26,371

 
292

 

 
26,663

 
 
 
 
 
 
 
 
Corporate debt issues:
 

 
 

 
 

 
 

Due after ten years
909

 

 

 
909

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
144,411

 
1,108

 
(2,817
)
 
142,702

Variable rate pass-through
33,079

 
1,464

 
(6
)
 
34,537

Fixed rate non-agency CMOs
15

 

 

 
15

Fixed rate agency CMOs
284,320

 
37

 
(5,271
)
 
279,086

Variable rate agency CMOs
74,274

 
249

 
(137
)
 
74,386

Total residential mortgage-backed securities
536,099

 
2,858

 
(8,231
)
 
530,726

Total marketable securities available-for-sale
$
800,094

 
3,453

 
(11,012
)
 
792,535

 
The following table shows the portfolio of investment securities held-to-maturity at June 30, 2018 (in thousands):
 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
$
3,278

 
71

 

 
3,349

Variable rate pass-through
1,970

 
45

 

 
2,015

Fixed rate agency CMOs
19,828

 
1

 
(663
)
 
19,166

Variable rate agency CMOs
671

 
11

 

 
682

Total residential mortgage-backed securities
25,747

 
128

 
(663
)
 
25,212

Total marketable securities held-to-maturity
$
25,747

 
128

 
(663
)
 
25,212




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Table of Contents

The following table shows the portfolio of investment securities held-to-maturity at December 31, 2017 (in thousands): 
 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
$
3,760

 
140

 

 
3,900

Variable rate pass-through
2,283

 
64

 

 
2,347

Fixed rate agency CMOs
22,906

 
20

 
(248
)
 
22,678

Variable rate agency CMOs
729

 
13

 

 
742

Total residential mortgage-backed securities
29,678

 
237

 
(248
)
 
29,667

Total marketable securities held-to-maturity
$
29,678

 
237

 
(248
)
 
29,667

 
The following table shows the fair value of 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 June 30, 2018 (in thousands):
 
Less than 12 months
 
12 months or more
 
Total
 
Fair value
 
Unrealized
loss
 
Fair value
 
Unrealized
loss
 
Fair value
 
Unrealized
loss
U.S. government sponsored enterprises
$
10,972

 
(36
)
 
181,046

 
(3,413
)
 
192,018

 
(3,449
)
Municipal securities
6,251

 
(34
)
 

 

 
6,251

 
(34
)
Residential mortgage-backed securities - agency
262,539

 
(5,540
)
 
208,728

 
(9,234
)
 
471,267

 
(14,774
)
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
$
279,762

 
(5,610
)
 
389,774

 
(12,647
)
 
669,536

 
(18,257
)

The following table shows the fair value of 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, 2017 (in thousands):
 
Less than 12 months
 
12 months or more
 
Total
 
Fair value
 
Unrealized
loss
 
Fair value
 
Unrealized
loss
 
Fair value
 
Unrealized
loss
U.S. government sponsored enterprises
$
5,006

 
(7
)
 
197,695

 
(2,761
)
 
202,701

 
(2,768
)
Equity Securities

 

 
544

 
(6
)
 
544

 
(6
)
Municipal Securities
4,563

 
(7
)
 

 

 
4,563

 
(7
)
Residential mortgage-backed securities - agency
239,703

 
(2,522
)
 
202,344

 
(5,957
)
 
442,047

 
(8,479
)
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
$
249,272

 
(2,536
)
 
400,583

 
(8,724
)
 
649,855

 
(11,260
)
 
We review our investment portfolio for indications of impairment. This review includes analyzing the length of time and the extent to which amortized costs have exceeded fair values, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer, and the intent and ability to hold the investments for a period of time sufficient to allow for a recovery in value. We do not have the intent to sell these securities and it is more likely than not that we will not have to sell these securities before a recovery of our cost basis.  For these reasons, we consider the unrealized losses to be temporary impairment losses.
 
Credit related impairment on all debt securities is recognized in earnings while noncredit related impairment on available-for-sale debt securities, not expected to be sold, is recognized in other comprehensive income.
 


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The table below shows a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold for the quarter and six months ended June 30,:
 
2018
 
2017
Beginning balance at April 1, (1)
$

 
7,942

Credit losses on debt securities for which other-than-temporary impairment was not previously recognized

 

Reduction for securities sold/ called realized during the quarter

 

Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized

 

Ending balance at June 30,
$

 
7,942

(1) The beginning balance represents credit losses included in other-than-temporary impairment charges recognized on debt securities in prior periods.
 
2018
 
2017
Beginning balance at January 1, (1)
$
352

 
7,942

Credit losses on debt securities for which other-than-temporary impairment was not previously recognized

 

Reduction for losses realized during the quarter
(352
)
 

Reduction for securities sold/ called realized during the six months

 

Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized

 

Ending balance at June 30,
$

 
7,942

(1) The beginning balance represents credit losses included in other-than-temporary impairment charges recognized on debt
securities in prior periods.




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(3)    Loans receivable

 The following table shows a summary of our loans receivable at June 30, 2018 and December 31, 2017 (in thousands): 
 
June 30, 2018
 
December 31,
2017
 
Originated
 
Acquired
 
Total
 
Originated
 
Acquired
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 
 
 
Residential mortgage loans (1)
$
2,690,904

 
104,008

 
2,794,912

 
2,658,726

 
113,823

 
2,772,549

Home equity loans
1,040,988

 
235,193

 
1,276,181

 
1,051,558

 
258,797

 
1,310,355

Consumer finance loans (2)
8,724

 

 
8,724

 
18,619

 

 
18,619

Consumer loans
602,021

 
74,037

 
676,058

 
540,832

 
97,877

 
638,709

Total Personal Banking
4,342,637

 
413,238

 
4,755,875

 
4,269,735

 
470,497

 
4,740,232

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,490,263

 
263,515

 
2,753,778

 
2,303,179

 
296,161

 
2,599,340

Commercial loans
617,377

 
56,906

 
674,283

 
572,341

 
60,822

 
633,163

Total Commercial Banking
3,107,640

 
320,421

 
3,428,061

 
2,875,520

 
356,983

 
3,232,503

Total loans receivable, gross
7,450,277

 
733,659

 
8,183,936

 
7,145,255

 
827,480

 
7,972,735

 
 
 
 
 
 
 
 
 
 
 
 
Deferred loan costs
29,097

 
1,090

 
30,187

 
26,255

 
1,527

 
27,782

Allowance for loan losses
(51,138
)
 
(6,194
)
 
(57,332
)
 
(50,572
)
 
(6,223
)
 
(56,795
)
Undisbursed loan proceeds:
 

 
 

 
 

 
 

 
 

 
 
Residential mortgage loans
(8,288
)
 

 
(8,288
)
 
(10,067
)
 

 
(10,067
)
Commercial real estate loans
(199,236
)
 
(1,319
)
 
(200,555
)
 
(141,967
)
 
(2,647
)
 
(144,614
)
Commercial loans
(61,750
)
 
(1,160
)
 
(62,910
)
 
(51,143
)
 
(1,284
)
 
(52,427
)
Total loans receivable, net
$
7,158,962

 
726,076

 
7,885,038

 
6,917,761

 
818,853

 
7,736,614

(1) Includes $0 and $3.1 million of loans held for sale at June 30, 2018 and December 31, 2017, respectively.
(2) Represents loans from our consumer finance subsidiary that was closed in 2017, which are no longer being originated.

Acquired loans were initially measured at fair value and subsequently accounted for under either Accounting Standards Codification (“ASC”) Topic 310-30 or ASC Topic 310-20. The following table provides information related to the outstanding principal balance and related carrying value of acquired loans for the dates indicated (in thousands): 
 
June 30,
2018
 
December 31,
2017
Acquired loans evaluated individually for future credit losses:
 

 
 
Outstanding principal balance
$
8,674

 
9,735

Carrying value
6,050

 
6,875

 
 

 
 
Acquired loans evaluated collectively for future credit losses:
 

 
 
Outstanding principal balance
731,270

 
824,205

Carrying value
726,220

 
818,201

 
 

 
 
Total acquired loans:
 

 
 
Outstanding principal balance
739,944

 
833,940

Carrying value
732,270

 
825,076

 


16

Table of Contents

The following table provides information related to the changes in the accretable discount, which includes income recognized from contractual cash flows for the dates indicated (in thousands): 
 
Total
Balance at December 31, 2016
$
2,187

Accretion
(1,318
)
Net reclassification from nonaccretable yield
671

Balance at December 31, 2017
1,540

Accretion
(423
)
Net reclassification from nonaccretable yield

Balance at June 30, 2018
$
1,117

 
The following table provides information related to acquired impaired loans by portfolio segment and by class of financing receivable at and for the six months ended June 30, 2018 (in thousands):
 
Carrying
value
 
Outstanding
principal
balance
 
Related
impairment
reserve
 
Average
recorded
investment
in impaired
loans
 
Interest
income
recognized
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
1,112

 
1,765

 
13

 
1,147

 
91

Home equity loans
1,031

 
1,994

 
8

 
1,087

 
98

Consumer loans
37

 
109

 
4

 
48

 
24

Total Personal Banking
2,180

 
3,868

 
25

 
2,282

 
213

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 
 
 
 
 
 
 
Commercial real estate loans
3,792

 
4,721

 
1

 
4,090

 
204

Commercial loans
78

 
85

 

 
90

 
6

Total Commercial Banking
3,870

 
4,806

 
1

 
4,180

 
210

 
 
 
 
 
 
 
 
 
 
Total
$
6,050

 
8,674

 
26

 
6,462

 
423

     
The following table provides information related to acquired impaired loans by portfolio segment and by class of financing receivable at and for the year ended December 31, 2017 (in thousands):
 
Carrying
value
 
Outstanding
principal
balance
 
Related
impairment
reserve
 
Average
recorded
investment
in impaired
loans
 
Interest
income
recognized
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
$
1,182

 
1,880

 
24

 
1,251

 
181

Home equity loans
1,143

 
2,219

 
21

 
1,253

 
157

Consumer loans
59

 
160

 
4

 
97

 
51

Total Personal Banking
2,384

 
4,259

 
49

 
2,601

 
389

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 
 
 
 
 
 
 
 
 
Commercial real estate loans
4,388

 
5,363

 
39

 
6,992

 
914

Commercial loans
103

 
113

 

 
177

 
15

Total Commercial Banking
4,491

 
5,476

 
39

 
7,169

 
929

 
 
 

 

 

 

Total
$
6,875

 
9,735

 
88

 
9,770

 
1,318




17

Table of Contents

The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the quarter ended June 30, 2018 (in thousands):               
 
Balance
June 30,
2018
 
Current
period
provision
 
Charge-offs
 
Recoveries
 
Balance
March 31, 2018
Originated loans:
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
3,657

 
157

 
(310
)
 
86

 
3,724

Home equity loans
3,839

 
272

 
(241
)
 
91

 
3,717

Consumer finance loans
2,354

 
(370
)
 
(486
)
 
179

 
3,031

Consumer loans
9,760

 
2,543

 
(2,623
)
 
700

 
9,140

Total Personal Banking
19,610

 
2,602

 
(3,660
)
 
1,056

 
19,612

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
21,019

 
991

 
(343
)
 
153

 
20,218

Commercial loans
10,509

 
1,373

 
(311
)
 
154

 
9,293

Total Commercial Banking
31,528

 
2,364

 
(654
)
 
307

 
29,511

Total originated loans
51,138

 
4,966

 
(4,314
)
 
1,363

 
49,123

 
 
 
 
 
 
 
 
 
 
Acquired loans:
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
170

 
74

 
(79
)
 
86

 
89

Home equity loans
662

 
56

 
(165
)
 
43

 
728

Consumer loans
915

 
139

 
(59
)
 
28

 
807

Total Personal Banking
1,747

 
269

 
(303
)
 
157

 
1,624

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
3,422

 
(27
)
 
(96
)
 
115

 
3,430

Commercial loans
1,025

 
141

 
(180
)
 
30

 
1,034

Total Commercial Banking
4,447

 
114

 
(276
)
 
145

 
4,464

Total acquired loans
6,194

 
383

 
(579
)
 
302

 
6,088

 
 
 
 
 
 
 
 
 
 
Total
$
57,332

 
5,349

 
(4,893
)
 
1,665

 
55,211



18

Table of Contents


The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the quarter ended June 30, 2017 (in thousands):
 
Balance
June 30,
2017
 
Current period provision
 
Charge-offs
 
Recoveries
 
Balance
March 31, 2017
Originated loans:
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
4,635

 
217

 
(314
)
 
94

 
4,638

Home equity loans
2,957

 
295

 
(343
)
 
16

 
2,989

Consumer finance loans
3,957

 
679

 
(782
)
 
103

 
3,957

Consumer loans
5,790

 
1,508

 
(2,611
)
 
421

 
6,472

Total Personal Banking
17,339

 
2,699

 
(4,050
)
 
634

 
18,056

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
22,584

 
1,488

 
(72
)
 
533

 
20,635

Commercial loans
16,704

 
1,519

 
(708
)
 
494

 
15,399

Total Commercial Banking
39,288

 
3,007

 
(780
)
 
1,027

 
36,034

Total originated loans
56,627

 
5,706

 
(4,830
)
 
1,661

 
54,090

 
 
 
 
 
 
 
 
 
 
Acquired loans:
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
85

 
26

 
(58
)
 
39

 
78

Home equity loans
623

 
7

 
(346
)
 
30

 
932

Consumer loans
628

 
(103
)
 
(124
)
 
24

 
831

Total Personal Banking
1,336

 
(70
)
 
(528
)
 
93

 
1,841

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 
 
 
 
 
 
 
 
 
Commercial real estate loans
2,446

 
(1,266
)
 
(257
)
 
256

 
3,713

Commercial loans
2,476

 
1,192

 
(221
)
 
45

 
1,460

Total Commercial Banking
4,922

 
(74
)
 
(478
)
 
301

 
5,173

Total acquired loans
6,258

 
(144
)
 
(1,006
)
 
394

 
7,014

 
 
 
 
 
 
 
 
 
 
Total
$
62,885

 
5,562

 
(5,836
)
 
2,055

 
61,104























19

Table of Contents

The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the six months ended June 30, 2018 (in thousands):

 
Balance
June 30, 2018
 
Current
period
provision
 
Charge-offs
 
Recoveries
 
Balance
December 31, 2017
Originated loans:
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
3,657

 
187

 
(506
)
 
152

 
3,824

Home equity loans
3,839

 
187

 
(542
)
 
122

 
4,072

Consumer finance loans
2,354

 
(32
)
 
(2,039
)
 
457

 
3,968

Other consumer loans
9,760

 
5,822

 
(5,799
)
 
1,262

 
8,475

Total Personal Banking
19,610

 
6,164

 
(8,886
)
 
1,993

 
20,339

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
21,019

 
1,694

 
(883
)
 
297

 
19,911

Commercial loans
10,509

 
1,035

 
(1,140
)
 
292

 
10,322

Total Commercial Banking
31,528

 
2,729

 
(2,023
)
 
589

 
30,233

Total originated loans
51,138

 
8,893

 
(10,909
)
 
2,582

 
50,572

 
 
 
 
 
 
 
 
 
 
Acquired loans:
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
170

 
32

 
(84
)
 
91

 
131

Home equity loans
662

 
258

 
(475
)
 
117

 
762

Other consumer loans
915

 
85

 
(132
)
 
72

 
890

Total Personal Banking
1,747

 
375

 
(691
)
 
280

 
1,783

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 
 
 
 
 
 
 
 
 
Commercial real estate loans
3,422

 
(157
)
 
(107
)
 
137

 
3,549

Commercial loans
1,025

 
447

 
(376
)
 
63

 
891

Total Commercial Banking
4,447

 
290

 
(483
)
 
200

 
4,440

Total acquired loans
6,194

 
665

 
(1,174
)
 
480

 
6,223

 
 
 
 
 
 
 
 
 
 
Total
$
57,332

 
9,558

 
(12,083
)
 
3,062

 
56,795























20

Table of Contents


The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the six months ended June 30, 2017 (in thousands):

 
Balance
June 30, 2017
 
Current
period
provision
 
Charge-offs
 
Recoveries
 
Balance
December 31, 2016
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
4,635

 
184

 
(467
)
 
262

 
4,656

Home equity loans
2,957

 
(112
)
 
(518
)
 
101

 
3,486

Consumer finance loans
3,957

 
1,369

 
(1,578
)
 
209

 
3,445

Other consumer loans
5,790

 
6,168

 
(5,068
)
 
673

 
4,529

Total Personal Banking
17,339

 
7,609

 
(7,631
)
 
1,245

 
16,116

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
22,584

 
(1,459
)
 
(335
)
 
711

 
23,667

Commercial loans
16,704

 
1,928

 
(1,654
)
 
920

 
15,510

Total Commercial Banking
39,288

 
469

 
(1,989
)
 
1,631

 
39,177

Total
$
56,627

 
8,078

 
(9,620
)
 
2,876

 
55,293

 
 
 
 
 
 
 
 
 
 
Acquired loans:
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
$
85

 
141

 
(195
)
 
68

 
71

Home equity loans
623

 
188

 
(820
)
 
208

 
1,047

Other consumer loans
628

 
299

 
(531
)
 
207

 
653

Total Personal Banking
1,336

 
628

 
(1,546
)
 
483

 
1,771

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 
 
 
 
 
 
 
 
 
Commercial real estate loans
2,446

 
(601
)
 
(468
)
 
507

 
3,008

Commercial loans
2,476

 
2,094

 
(542
)
 
57

 
867

Total Commercial Banking
4,922

 
1,493

 
(1,010
)
 
564

 
3,875

Total acquired loans
6,258

 
2,121

 
(2,556
)
 
1,047

 
5,646

 
 
 
 
 
 
 
 
 
 
Total
$
62,885

 
10,199

 
(12,176
)
 
3,923

 
60,939


 


21

Table of Contents

The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at June 30, 2018 (in thousands):
 
Total loans
receivable
 
Allowance for
loan losses
 
Nonaccrual
loans (1)
 
Loans past
due 90 days
or more and
still accruing
(2)
 
TDRs
 
Allowance
related to
TDRs
 
Additional
commitments
to customers
with loans
classified as
TDRs
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,800,668

 
3,827

 
13,248

 

 
7,595

 
743

 

Home equity loans
1,276,181

 
4,501

 
7,670

 
59

 
1,901

 
501

 
6

Consumer finance loans
8,724

 
2,354

 
15

 

 

 

 

Consumer loans
692,201

 
10,675

 
3,230

 
35

 

 

 

Total Personal Banking
4,777,774

 
21,357

 
24,163

 
94

 
9,496

 
1,244

 
6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,553,223

 
24,441

 
32,635

 

 
16,251

 
1,066

 
180

Commercial loans
611,373

 
11,534

 
5,915

 

 
4,915

 
569

 
19

Total Commercial Banking
3,164,596

 
35,975

 
38,550

 

 
21,166

 
1,635

 
199

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
7,942,370

 
57,332

 
62,713

 
94

 
30,662

 
2,879

 
205

(1)
Includes $10.9 million of nonaccrual TDRs.
(2)
Represents loans 90 days or more past maturity and still accruing.

The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at December 31, 2017 (in thousands): 
 
Total loans
receivable
 
Allowance for
loan losses
 
Nonaccrual
loans (1)
 
Loans past
due 90 days
or more and
still accruing
(2)
 
TDRs
 
Allowance
related to
TDRs
 
Additional
commitments
to customers
with loans
classified as
TDRs
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,776,203

 
3,955

 
14,791

 

 
8,000

 
815

 

Home equity loans
1,310,355

 
4,834

 
8,907

 
120

 
1,716

 
462

 
4

Consumer finance loans
18,619

 
3,968

 
199

 
3

 

 

 

Consumer loans
652,770

 
9,365

 
4,673

 
379

 

 

 

Total Personal Banking
4,757,947

 
22,122

 
28,570

 
502

 
9,716

 
1,277

 
4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,454,726

 
23,460

 
28,473

 

 
15,691

 
1,125

 
235

Commercial loans
580,736

 
11,213

 
7,412

 

 
6,697

 
742

 
8

Total Commercial Banking
3,035,462

 
34,673

 
35,885

 

 
22,388

 
1,867

 
243

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
7,793,409

 
56,795

 
64,455

 
502

 
32,104

 
3,144

 
247

(1)
Includes $12.3 million of nonaccrual TDRs.
(2)
Represents loans 90 days or more past maturity and still accruing.




22

Table of Contents

The following table provides information related to the composition of originated impaired loans by portfolio segment and by class of financing receivable at and for the six months ended June 30, 2018 (in thousands): 
 
Nonaccrual
loans 90 or
more days
delinquent
 
Nonaccrual
loans less
than 90
days
delinquent
 
Loans less
than 90
days
delinquent
reviewed for
impairment
 
TDRs less
than 90
days
delinquent
not included
elsewhere
 
Total
impaired
loans
 
Average
recorded
investment
in impaired
loans
 
Interest
income
recognized
on impaired
loans
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
11,822

 
1,426

 
505

 
6,482

 
20,235

 
19,964

 
442

Home equity loans
6,729

 
941

 

 
1,538

 
9,208

 
9,558

 
257

Consumer finance loan
15

 

 

 

 
15

 
28

 
3

Consumer loans
2,626

 
604

 

 

 
3,230

 
3,729

 
103

Total Personal Banking
21,192

 
2,971

 
505

 
8,020

 
32,688

 
33,279

 
805

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
15,617

 
17,018

 
3,331

 
5,191

 
41,157

 
38,348

 
756

Commercial loans
2,925

 
2,990

 
200

 
2,775

 
8,890

 
9,233

 
236

Total Commercial Banking
18,542

 
20,008

 
3,531

 
7,966

 
50,047

 
47,581

 
992

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
39,734

 
22,979

 
4,036

 
15,986

 
82,735

 
80,860

 
1,797

 
The following table provides information related to the composition of originated impaired loans by portfolio segment and by class of financing receivable at and for the year ended December 31, 2017 (in thousands):
 
Nonaccrual
loans 90 or
more days
delinquent
 
Nonaccrual
loans less
than 90
days
delinquent
 
Loans less
than 90
days
delinquent
reviewed for
impairment
 
TDRs less
than 90
days
delinquent
not included
elsewhere
 
Total
impaired
loans
 
Average
recorded
investment
in impaired
loans
 
Interest
income
recognized
on impaired
loans
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
13,509

 
1,282

 

 
6,814

 
21,605

 
21,531

 
892

Home equity loans
7,251

 
1,656

 

 
1,449

 
10,356

 
9,150

 
452

Consumer finance loans
199

 

 

 

 
199

 
379

 
20

Consumer loans
3,617

 
1,056

 

 

 
4,673

 
4,042

 
188

Total Personal Banking
24,576

 
3,994

 

 
8,263

 
36,833

 
35,102

 
1,552

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
15,361

 
13,112

 
4,431

 
4,123

 
37,027

 
49,981

 
1,758

Commercial loans
3,140

 
4,272

 
906

 
2,447

 
10,765

 
12,110

 
672

Total Commercial Banking
18,501

 
17,384

 
5,337

 
6,570

 
47,792

 
62,091

 
2,430

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
43,077

 
21,378

 
5,337

 
14,833

 
84,625

 
97,193

 
3,982


At June 30, 2018, we expect to fully collect the carrying value of our purchased credit impaired loans and have determined that we can reasonably estimate their future cash flows including those loans that are 90 days or more delinquent. As a result, we do not consider our purchased credit impaired loans that are 90 days or more delinquent to be nonaccrual or impaired and continue to recognize interest income on these loans, including the loans’ accretable discount.



23

Table of Contents

The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at June 30, 2018 (in thousands): 
 
Loans
collectively
evaluated for
impairment
 
Loans
individually
evaluated for
impairment
 
Loans
individually
evaluated for
impairment
for which
there is a
related
impairment
reserve
 
Related
impairment
reserve
 
Loans
individually
evaluated for
impairment
for which
there is no
related
reserve
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,792,506

 
8,162

 
8,162

 
760

 

Home equity loans
1,274,280

 
1,901

 
1,901

 
502

 

Consumer finance loans
8,724

 

 

 

 

Consumer loans
692,157

 
44

 
44

 
8

 

Total Personal Banking
4,767,667

 
10,107

 
10,107

 
1,270

 

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,531,376

 
21,847

 
18,807

 
1,799

 
3,040

Commercial loans
604,769

 
6,604

 
4,982

 
587

 
1,622

Total Commercial Banking
3,136,145

 
28,451

 
23,789

 
2,386

 
4,662

 
 
 
 
 
 
 
 
 
 
Total
$
7,903,812

 
38,558

 
33,896

 
3,656

 
4,662

 
The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at December 31, 2017 (in thousands): 
 
Loans
collectively
evaluated for
impairment
 
Loans
individually
evaluated for
impairment
 
Loans
individually
evaluated for
impairment
for which
there is a
related
impairment
reserve
 
Related
impairment
reserve
 
Loans
individually
evaluated for
impairment
for which
there is no
related
reserve
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,767,635

 
8,568

 
8,568

 
816

 

Home equity loans
1,308,639

 
1,716

 
1,716

 
461

 

Consumer finance loans
18,619

 

 

 

 

Consumer loans
652,685

 
85

 
85

 
25

 

Total Personal Banking
4,747,578

 
10,369

 
10,369

 
1,302

 

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,433,755

 
20,971

 
18,470

 
1,859

 
2,501

Commercial loans
571,412

 
9,324

 
8,572

 
829

 
752

Total Commercial Banking
3,005,167

 
30,295

 
27,042

 
2,688

 
3,253

 
 
 
 
 
 
 
 
 
 
Total
$
7,752,745

 
40,664

 
37,411

 
3,990

 
3,253




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Table of Contents

Our loan portfolios include loans that have been modified in a troubled debt restructuring ("TDR"), where concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include: extending the note’s maturity date, permitting interest only payments, reducing the interest rate to a rate lower than current market rates for new debt with similar risk, reducing the principal payment, principal forbearance or other actions.  These concessions are applicable to all loan segments and classes. Certain TDRs are classified as nonperforming at the time of restructuring and may be returned to performing status after considering the borrower’s sustained repayment performance for a period of at least six months.
 
When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, the loan’s observable market price or the current fair value of the collateral, less selling costs, for collateral dependent loans.  If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.  In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment, using ASC 310-10. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan.
 
Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a TDR subsequently default, we evaluate the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, partial charge-offs may be taken to further write-down the carrying value of the loan, or the loan may be charged-off completely.

The following table provides a roll forward of troubled debt restructurings for the periods indicated (dollars in thousands):
 
For the quarter ended June 30,
 
2018
 
2017
 
Number of
contracts
 
Amount
 
Number of
contracts
 
Amount
Beginning TDR balance:
200

 
$
30,966

 
224

 
$
43,578

New TDRs
10

 
861

 
1

 
348

Re-modified TDRs

 

 
1

 
445

Net paydowns
 

 
(875
)
 
 

 
(1,458
)
Charge-offs:
 

 
 

 
 

 
 

Residential mortgage loans

 

 

 

Home equity loans

 

 

 

Commercial real estate loans

 

 

 

Commercial loans

 

 
5

 
(158
)
Paid-off loans:
 

 
 

 
 

 
 

Residential mortgage loans
1

 
(6
)
 

 

Home equity loans
1

 
(35
)
 
4

 
(32
)
Commercial real estate loans
3

 
(249
)
 
8

 
(480
)
Commercial loans

 

 
5

 
(383
)
Ending TDR balance:
205

 
$
30,662

 
203

 
$
41,860

 
 
 
 
 
 
 
 
Accruing TDRs
 

 
$
19,802

 
 

 
$
23,987

Non-accrual TDRs
 

 
10,860

 
 

 
17,873













25

Table of Contents






The following table provides a roll forward of troubled debt restructurings for the periods indicated (dollars in thousands):
 
For the six months ended June 30,
 
2018
 
2017
 
Number of
contracts
 
Amount
 
Number of
contracts
 
Amount
Beginning TDR balance:
205

 
$
32,104

 
225

 
$
42,926

New TDRs
19

 
5,796

 
7

 
4,139

Re-modified TDRs

 

 
1

 
445

Net paydowns
 

 
(1,822
)
 
 

 
(2,681
)
Charge-offs:
 

 
 

 
 

 
 

Residential mortgage loans
1

 
(135
)
 

 

Home equity loans

 

 

 

Commercial real estate loans
1

 
(203
)
 

 

Commercial loans
1

 
(721
)
 
6

 
(259
)
Paid-off loans:
 

 
 

 
 

 
 

Residential mortgage loans
2

 
(255
)
 

 

Home equity loans
2

 
(47
)
 
5

 
(32
)
Commercial real estate loans
7

 
(1,823
)
 
10

 
(545
)
Commercial loans
5

 
(2,232
)
 
8

 
(2,133
)
Ending TDR balance:
205

 
$
30,662

 
203

 
$
41,860

 
 
 
 
 
 
 
 
Accruing TDRs
 

 
$
19,802

 
 

 
$
23,987

Non-accrual TDRs
 

 
10,860

 
 

 
17,873


The following tables provide information related to troubled debt restructurings (including re-modified TDRs) by portfolio segment and by class of financing receivable during the periods indicated (dollars in thousands):
 
For the quarter ended
June 30, 2018
 
For the six months ended June 30, 2018
 
Number
of
contracts
 
Recorded
investment
at the time of
modification
 
Current
recorded
investment
 
Current
allowance
 
Number
of
contracts
 
Recorded
investment
at the time of
modification
 
Current
recorded
investment
 
Current
allowance
Troubled debt restructurings:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
2

 
$
60

 
59

 
6

 
4

 
$
273

 
272

 
27

Home equity loans
5

 
177

 
137

 
37

 
8

 
317

 
275

 
74

Total Personal Banking
7

 
237

 
196

 
43

 
12

 
590

 
547

 
101

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
1

 
481

 
481

 
33

 
2

 
2,883

 
2,852

 
33

Commercial loans
2

 
143

 
142

 
10

 
5

 
2,323

 
1,508

 
10

Total Commercial Banking
3

 
624

 
623

 
43

 
7

 
5,206

 
4,360

 
43

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
10

 
$
861

 
819

 
86

 
19

 
$
5,796

 
4,907

 
144




26

Table of Contents

 
For the quarter ended
June 30, 2017
 
For the six months ended June 30, 2017
 
Number
of
contracts
 
Recorded
investment
at the time of
modification
 
Current
recorded
investment
 
Current
allowance
 
Number
of
contracts
 
Recorded
investment
at the time of
modification
 
Current
recorded
investment
 
Current
allowance
Troubled debt restructurings:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
1

 
$
445

 
431

 
45

 
3

 
$
894

 
877

 
92

Home equity loans

 

 

 

 

 

 

 

Total Personal Banking
1

 
445

 
431

 
45

 
3

 
894

 
877

 
92

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
1

 
348

 
343

 
25

 
4

 
3,486

 
3,198

 
294

Commercial loans

 

 

 

 
1

 
204

 
192

 
14

Total Commercial Banking
1

 
348

 
343

 
25

 
5

 
3,690

 
3,390

 
308

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
2

 
$
793

 
774

 
70

 
8

 
$
4,584

 
4,267

 
400


During the quarter and six months ended June 30, 2018 and 2017, no TDRs modified within the previous twelve months have subsequently defaulted.

The following table provides information as of June 30, 2018 for troubled debt restructurings (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended June 30, 2018 (dollars in thousands):
 
 
 
Type of modification
 
 
 
Number of
contracts
 
Rate
 
Payment
 
Maturity
date
 
Other
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
2

 
$
7

 

 

 
52

 
59

Home equity loans
5

 

 

 
51

 
86

 
137

Total Personal Banking
7

 
7

 

 
51

 
138

 
196

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
1

 

 
481

 

 

 
481

Commercial loans
2

 

 

 
142

 

 
142

Total Commercial Banking
3

 

 
481

 
142

 

 
623

 
 
 
 
 
 
 
 
 
 
 
 
Total
10

 
$
7

 
481

 
193

 
138

 
819

 
The following table provides information as of June 30, 2017 for troubled debt restructurings (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended June 30, 2017 (dollars in thousands): 
 
 
 
Type of modification
 
 
 
Number of
contracts
 
Rate
 
Payment
 
Maturity
date
 
Other
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
1

 
$

 

 

 
431

 
431

Home equity loans

 

 

 

 

 

Total Personal Banking
1

 

 

 

 
431

 
431

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
1

 

 

 
343

 

 
343

Commercial loans

 

 

 

 

 

Total Commercial Banking
1

 

 

 
343

 

 
343

 
 
 
 
 
 
 
 
 
 
 
 
Total
2

 
$

 

 
343

 
431

 
774




27

Table of Contents

The following table provides information as of June 30, 2018 for troubled debt restructurings (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the six months ended June 30, 2018 (dollars in thousands):
 
 
 
Type of modification
 
 
 
Number of
contracts
 
Rate
 
Payment
 
Maturity
date
 
Other
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
4

 
$
7

 

 
178

 
87

 
272

Home equity loans
8

 
29

 

 
51

 
195

 
275

Total Personal Banking
12

 
36

 

 
229

 
282

 
547

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2

 

 
481

 

 
2,371

 
2,852

Commercial loans
5

 

 

 
142

 
1,366

 
1,508

Total Commercial Banking
7

 

 
481

 
142

 
3,737

 
4,360

 
 
 
 
 
 
 
 
 
 
 
 
Total
19

 
$
36

 
481

 
371

 
4,019

 
4,907

    
The following table provides information as of June 30, 2017 for troubled debt restructurings (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the six months ended June 30, 2017 (dollars in thousands):
 
 
 
Type of modification
 
 
 
Number of
contracts
 
Rate
 
Payment
 
Maturity
date
 
Other
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
3

 
$
111

 

 

 
766

 
877

Home equity loans

 

 

 

 

 

Total Personal Banking
3

 
111

 

 

 
766

 
877

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
4

 

 
2,732

 
466

 

 
3,198

Commercial loans
1

 

 

 
192

 

 
192

Total Commercial Banking
5

 

 
2,732

 
658

 

 
3,390

 
 
 
 
 
 
 
 
 
 
 
 
Total
8

 
$
111

 
2,732

 
658

 
766

 
4,267


During the six month ended ended June 30, 2018, no TDRs were re-modified. During the six months ended June 30, 2017, one residential mortgage TDR was re-modified.
















28

Table of Contents

The following table provides information related to loan payment delinquencies at June 30, 2018 (in thousands):
 
30-59 Days
delinquent
 
60-89 Days
delinquent
 
90 Days or
greater
delinquent
 
Total
delinquency
 
Current
 
Total loans
receivable
 
90 Days or
greater
delinquent
and accruing
(1)
Originated loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
1,519

 
5,539

 
10,544

 
17,602

 
2,679,058

 
2,696,660

 

Home equity loans
5,223

 
1,757

 
5,890

 
12,870

 
1,028,118

 
1,040,988

 

Consumer finance loans
711

 
277

 
15

 
1,003

 
7,721

 
8,724

 

Consumer loans
8,117

 
2,421

 
2,287

 
12,825

 
604,249

 
617,074

 

Total Personal Banking
15,570

 
9,994

 
18,736

 
44,300

 
4,319,146

 
4,363,446

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,854

 
2,318

 
12,550

 
17,722

 
2,273,305

 
2,291,027

 

Commercial loans
892

 
337

 
2,734

 
3,963

 
551,664

 
555,627

 

Total Commercial Banking
3,746

 
2,655

 
15,284

 
21,685

 
2,824,969

 
2,846,654

 

Total originated loans
19,316

 
12,649

 
34,020

 
65,985

 
7,144,115

 
7,210,100

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
42

 
308

 
1,749

 
2,099

 
101,909

 
104,008

 
471

Home equity loans
1,160

 
738

 
878

 
2,776

 
232,417

 
235,193

 
39

Consumer loans
738

 
233

 
346

 
1,317

 
73,810

 
75,127

 
7

Total Personal Banking
1,940

 
1,279

 
2,973

 
6,192

 
408,136

 
414,328

 
517

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
3,044

 
1,371

 
3,222

 
7,637

 
254,559

 
262,196

 
155

Commercial loans
108

 
589

 
191

 
888

 
54,858

 
55,746

 

Total Commercial Banking
3,152

 
1,960

 
3,413

 
8,525

 
309,417

 
317,942

 
155

Total acquired loans
5,092

 
3,239

 
6,386

 
14,717

 
717,553

 
732,270

 
672

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
24,408

 
15,888

 
40,406

 
80,702

 
7,861,668

 
7,942,370

 
672

(1)
Represents acquired loans that were originally recorded at fair value upon acquisition. These loans are considered to be accruing because we can reasonably estimate future cash flows on and expect to fully collect the carrying value of these loans. Therefore, we are accreting the difference between the carrying value and their expected cash flows into interest income.



29

Table of Contents

The following table provides information related to loan payment delinquencies at December 31, 2017 (in thousands): 
 
30-59 Days
delinquent
 
60-89 Days
delinquent
 
90 Days or
greater
delinquent
 
Total
delinquency
 
Current
 
Total loans
receivable
 
90 Days or
greater
delinquent
and accruing
(1)
Originated loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 
Residential mortgage loans
$
23,786

 
6,030

 
12,613

 
42,429

 
2,619,951

 
2,662,380

 

Home equity loans
6,094

 
2,333

 
6,043

 
14,470

 
1,037,088

 
1,051,558

 

Consumer finance loans
2,128

 
1,113

 
199

 
3,440

 
15,179

 
18,619

 

Consumer loans
9,762

 
2,834

 
3,274

 
15,870

 
537,496

 
553,366

 

Total Personal Banking
41,770

 
12,310

 
22,129

 
76,209

 
4,209,714

 
4,285,923

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
5,520

 
2,133

 
10,629

 
18,282

 
2,142,930

 
2,161,212

 

Commercial loans
1,469

 
204

 
2,806

 
4,479

 
516,719

 
521,198

 

Total Commercial Banking
6,989

 
2,337

 
13,435

 
22,761

 
2,659,649

 
2,682,410

 

Total originated loan
48,759

 
14,647

 
35,564

 
98,970

 
6,869,363

 
6,968,333

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
1,998

 
205

 
1,277

 
3,480

 
110,343

 
113,823

 
381

Home equity loans
1,367

 
538

 
1,306

 
3,211

 
255,586

 
258,797

 
98

Consumer loans
1,150

 
517

 
353

 
2,020

 
97,384

 
99,404

 
10

Total Personal Banking
4,515

 
1,260

 
2,936

 
8,711

 
463,313

 
472,024

 
489

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,795

 
406

 
5,655

 
8,856

 
284,658

 
293,514

 
923

Commercial loans
396

 
237

 
334

 
967

 
58,571

 
59,538

 

Total Commercial Banking
3,191

 
643

 
5,989

 
9,823

 
343,229

 
353,052

 
923

Total acquired loan
7,706

 
1,903

 
8,925

 
18,534

 
806,542

 
825,076

 
1,412

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
56,465

 
16,550

 
44,489

 
117,504

 
7,675,905

 
7,793,409

 
1,412

(1) Represents acquired loans that were originally recorded at fair value upon acquisition. These loans are considered to be accruing because we can reasonably estimate future cash flows and expect to fully collect the carrying value of these loans. Therefore, we are accreting the difference between the carrying value and their expected cash flows into interest income.

Credit quality indicators:  We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans by credit risk.  Credit relationships greater than or equal to $1.0 million classified as special mention or substandard are reviewed quarterly for deterioration or improvement to determine if the loan is appropriately classified. We use the following definitions for risk ratings other than pass:
 
Special mention — Loans designated as special mention have specific, well-defined risk issues, which create a high level of uncertainty regarding the long-term viability of the business. Loans in this class are considered to have high-risk characteristics.  A special mention loan exhibits material negative financial trends due to company-specific or systemic conditions.  If these potential weaknesses are not mitigated, they threaten the borrower’s capacity to meet its debt obligations.  Special mention loans still demonstrate sufficient financial flexibility to react to and positively address the root cause of the adverse financial trends without significant deviations from their current business strategy. Their potential weaknesses deserve our close attention and warrant enhanced monitoring.
 


30

Table of Contents

Substandard — Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.
 
Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified as substandard.   In addition, those weaknesses make collection or liquidation in full highly questionable and improbable.   A loan classified as doubtful exhibits discernible loss potential, but a complete loss seems very unlikely.  The possibility of a loss on a doubtful loan is high, but because of certain important and reasonably specific pending factors that may strengthen the loan, its classification as an estimated loss is deferred until a more exact status can be determined.
 
Loss Loans classified as loss are considered uncollectible and of such value that the continuance as a loan is not warranted.  A loss classification does not mean that the loan has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off all or a portion of a basically worthless loan even though partial recovery may be possible in the future.
 
The following table sets forth information about credit quality indicators updated during the quarter ended June 30, 2018 (in thousands): 
 
Pass
 
Special
mention
 
Substandard
 
Doubtful
 
Loss
 
Total loans
receivable
Originated loans:
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,688,199

 

 
8,461

 

 

 
2,696,660

Home equity loans
1,034,815

 

 
6,173

 

 

 
1,040,988

Consumer finance loans
8,709

 

 
15

 

 

 
8,724

Consumer loans
614,373

 

 
2,701

 

 

 
617,074

Total Personal Banking
4,346,096

 

 
17,350

 

 

 
4,363,446

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,071,907

 
59,944

 
159,176

 

 

 
2,291,027

Commercial loans
509,937

 
14,352

 
31,338

 

 

 
555,627

Total Commercial Banking
2,581,844

 
74,296

 
190,514

 

 

 
2,846,654

Total originated loans
6,927,940

 
74,296

 
207,864

 

 

 
7,210,100

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans:
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
102,707

 

 
1,301

 

 

 
104,008

Home equity loans
234,069

 

 
1,124

 

 

 
235,193

Consumer loans
74,479

 

 
648

 

 

 
75,127

Total Personal Banking
411,255

 

 
3,073

 

 

 
414,328

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
222,420

 
5,754

 
34,022

 

 

 
262,196

Commercial loans
44,558

 
3,788

 
7,400

 

 

 
55,746

Total Commercial Banking
266,978

 
9,542

 
41,422

 

 

 
317,942

Total acquired loans
678,233

 
9,542

 
44,495

 

 

 
732,270

 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
7,606,173

 
83,838

 
252,359

 

 

 
7,942,370




31

Table of Contents

The following table sets forth information about credit quality indicators, which were updated during the year ended December 31, 2017 (in thousands):
 
Pass
 
Special
mention
 
Substandard
 
Doubtful
 
Loss
 
Total loans
receivable
Originated loans:
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,645,475

 

 
16,905

 

 

 
2,662,380

Home equity loans
1,042,965

 

 
8,593

 

 

 
1,051,558

Consumer finance loans
18,420

 

 
199

 

 

 
18,619

Consumer loans
549,550

 

 
3,816

 

 

 
553,366

Total Personal Banking
4,256,410

 

 
29,513

 

 

 
4,285,923

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
1,964,565

 
78,699

 
117,948

 

 

 
2,161,212

Commercial loans
461,962

 
15,510

 
43,726

 

 

 
521,198

Total Commercial Banking
2,426,527

 
94,209

 
161,674

 

 

 
2,682,410

Total originated loans
6,682,937

 
94,209

 
191,187

 

 

 
6,968,333

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans:
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
112,990

 

 
833

 

 

 
113,823

Home equity loans
257,312

 

 
1,485

 

 

 
258,797

Consumer loans
98,659

 

 
745

 

 

 
99,404

Total Personal Banking
468,961

 

 
3,063

 

 

 
472,024

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
251,761

 
4,838

 
36,915

 

 

 
293,514

Commercial loans
49,073

 
3,787

 
6,678

 

 

 
59,538

Total Commercial Banking
300,834

 
8,625

 
43,593

 

 

 
353,052

Total acquired loans
769,795

 
8,625

 
46,656

 

 

 
825,076

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
7,452,732

 
102,834

 
237,843

 

 

 
7,793,409

 
(4)
Goodwill and Other Intangible Assets
 
The following table provides information for intangible assets subject to amortization at the dates indicated (in thousands):
 
June 30,
2018
 
December 31,
2017
Amortizable intangible assets:
 

 
 

Core deposit intangibles — gross
$
63,685

 
63,685

Less: accumulated amortization
(42,637
)
 
(40,029
)
Core deposit intangibles — net
21,048

 
23,656

Customer and Contract intangible assets — gross
10,474

 
10,474

Less: accumulated amortization
(8,893
)
 
(8,461
)
Customer and Contract intangible assets — net
$
1,581

 
2,013




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Table of Contents

The following table shows the actual aggregate amortization expense for the quarters ended June 30, 2018 and 2017, as well as the estimated aggregate amortization expense, based upon current levels of intangible assets, for the current fiscal year and each of the five succeeding fiscal years (in thousands): 
For the quarter ended June 30, 2018
$
1,520

For the quarter ended June 30, 2017
1,749

For the six months ended June 30, 2018
3,040

For the six months ended June 30, 2017
3,498

For the year ending December 31, 2018
5,848

For the year ending December 31, 2019
4,933

For the year ending December 31, 2020
4,017

For the year ending December 31, 2021
3,188

For the year ending December 31, 2022
2,456

For the year ending December 31, 2023
1,847

 
The following table provides information for the changes in the carrying amount of goodwill (in thousands):
 
Total
Balance at December 31, 2016
$
307,420

Goodwill from acquisition

Balance at December 31, 2017
307,420

Goodwill from acquisition

Balance at June 30, 2018
$
307,420

 
We performed our annual goodwill impairment test as of June 30, 2018 using Accounting Standard Codification 350, ("Step 0"), as updated by ASU 2017-04 and concluded that goodwill was not impaired.

 
(5)    Borrowed Funds

Borrowings

Borrowings from the Federal Home Loan Bank of Pittsburgh ("FHLB"), if any, are secured by our residential first mortgage 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 FHLB carries a commitment of $150.0 million. The rate is adjusted daily by the FHLB, and any borrowings on this line may be repaid at any time without penalty. At June 30, 2018 and December 31, 2017 the revolving line of credit was undrawn.

At June 30, 2018 and December 31, 2017 collateralized borrowings, due within one year, were $99.9 million, and $108.2 million, respectively. These borrowings are collateralized by cash or various securities held in safekeeping by the FHLB.

Trust Preferred Securities

We have 3 statutory business trusts: Northwest Bancorp Capital Trust III, a Delaware statutory business trust, Northwest Bancorp Statutory Trust IV, a Connecticut statutory business trust and LNB Trust II, a Delaware statutory business trust (the Trusts). The 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. Northwest Bancorp Capital Trust III issued 50,000 cumulative trust preferred securities in a private transaction to a pooled investment vehicle on December 5, 2005 (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, 2005 (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%. LNB Trust II has 7,875 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $7,875,000) with a stated maturity of June 15, 2037


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Table of Contents

and a floating rate of interest, which resets quarterly, equal to three-month LIBOR plus 1.48%. As the shareholders of the trust preferred securities are the primary beneficiaries of the Trusts, the Trusts are not consolidated in our financial statements.
 
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 June 30, 2018 was 3.72%. 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 June 30, 2018 was 3.72%. LNB Trust II holds $8,119,000 of the Company's junior subordinated debentures due June 15, 2037, with a floating rate of interest, reset quarterly, of three-month LIBOR plus 1.48%. The rate in effect at June 30, 2018 was 3.82%.
 
Cash distributions on the trust securities are made on a quarterly basis to the extent interest on the debentures is received by the Trusts.  We have the right to defer payment of interest on the subordinated debentures at any time, or from time-to-time, for periods not exceeding 5 years. If interest payments on the subordinated debentures are deferred, the distributions on the trust securities also are deferred. To date there have been no interest deferrals. Interest on the subordinated debentures and distributions on the trust securities is cumulative. Our 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. 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; or
the preferred securities do not qualify as Tier I capital. 

We 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.


(6)
Guarantees
 
We issue standby letters of credit in the normal course of business.  Standby letters of credit are conditional commitments issued by the Company 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.  We are required to perform under a standby letter of credit when drawn upon by the guaranteed third party in the case of nonperformance by our 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 loan underwriting procedures. Collateral may be obtained based on management’s credit assessment of the customer.  At June 30, 2018, the maximum potential amount of future payments we could be required to make under these non-recourse standby letters of credit was $30.2 million, of which $15.8 million is fully collateralized.  At June 30, 2018, we had a liability, which represents deferred income, of $99,000 related to the standby letters of credit. 


(7)
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. All stock options outstanding during the quarter ended June 30, 2018 and 2017, were included in the computation of diluted earnings per share because the options’ exercise price was less than the average market price of the common shares of $17.07 and $15.97, respectively. All stock options outstanding during the six months ended June 30, 2018 and 2017, were included in the computation of diluted earnings per share because the options’ exercise price was less than the average market price of the common shares of $16.95 and $16.75, respectively.



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Table of Contents

The computation of basic and diluted earnings per share follows (in thousands, except share data and per share amounts): 
 
Quarter ended
June 30,
 
Six months ended
June 30,
 
2018
 
2017
 
2018
 
2017
Reported net income
$
26,299

 
30,982

 
51,284

 
48,728

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
101,870,043

 
100,950,772

 
101,735,235

 
100,798,209

Dilutive potential shares due to effect of stock options
1,554,111

 
1,498,921

 
1,545,885

 
1,726,849

Total weighted average common shares and dilutive potential shares
103,424,154

 
102,449,693

 
103,281,120

 
102,525,058

 
 
 
 
 
 
 
 
Basic earnings per share:
$
0.26

 
0.31

 
0.50

 
0.48

 
 
 
 
 
 
 
 
Diluted earnings per share:
$
0.25

 
0.30

 
0.50

 
0.48



(8)
Pension and Other Post-retirement Benefits
 
The following table sets forth the net periodic costs for the defined benefit pension plans and post retirement healthcare plans for the periods indicated (in thousands):
 
 
Quarter ended June 30,
 
Pension benefits
 
Other post-retirement benefits
 
2018
 
2017
 
2018
 
2017
Service cost
$
1,716

 
1,537

 

 

Interest cost
1,678

 
1,719

 
13

 
18

Expected return on plan assets
(2,992
)
 
(2,628
)
 

 

Amortization of prior service cost
(580
)
 
(581
)
 

 

Amortization of the net loss
872

 
928

 
25

 
27

Net periodic cost
$
694

 
975

 
38

 
45

 
Six months ended June 30,
 
Pension benefits
 
Other post-retirement benefits
 
2018
 
2017
 
2018
 
2017
Service cost
$
3,432

 
3,075

 

 

Interest cost
3,356

 
3,440

 
27

 
35

Expected return on plan assets
(5,984
)
 
(5,256
)
 

 

Amortization of prior service cost
(1,161
)
 
(1,162
)
 

 

Amortization of the net loss
1,745

 
1,855

 
49

 
54

Net periodic cost
$
1,388

 
1,952

 
76

 
89


We anticipate making a contribution to our defined benefit pension plan of $4.0 million to $6.0 million during the year ending December 31, 2018.
 


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Table of Contents

(9)
Disclosures About Fair Value of Financial Instruments
 
We are required to disclose 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.

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 are accounted for using a three-level hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. This 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.

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 cannot 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.

We are responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value. We perform due diligence to understand the inputs used or how the data was calculated or derived. We also corroborate the reasonableness of external inputs in the valuation process.

The carrying amounts reported in the consolidated statement of financial condition approximate fair value for the following financial instruments: cash on 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.

Marketable Securities
 
Where available, market values are based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.
 
Debt securities - available for sale - Generally, debt securities are valued using pricing for similar securities, recently executed transactions and other pricing models utilizing observable inputs. The valuation for most debt securities is classified as Level 2. Securities within Level 2 include corporate bonds, municipal bonds, mortgage-backed securities and US government obligations.

Equity securities - available for sale - Publicly traded securities valued using quoted market prices are classified as Level 1.  We consider the financial condition of the issuer to determine if the securities have indicators of impairment.
 
Debt securities - held to maturity - The fair value of debt securities held to maturity is determined in the same manner as debt securities available for sale.
 


36

Table of Contents

Loans Held for Sale

The estimated fair value of loans held for sale is based on market bids obtained from potential buyers.

Loans Held for Investment

With the adoption of ASU 2016-01 on January 1, 2018, we refined our methodology to estimate the fair value of our loan portfolio to use the exit price notion as required by the guidance, which was applied on a prospective basis resulting in prior-periods no longer being comparable.
 
The fair value of the loans is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans adjusted for liquidity and credit risk.
    
Federal Home Loan Bank (“FHLB”) Stock
 
Due to the restrictions placed on the transferability of FHLB stock is classified as Level 3.

 Borrowed Funds
 
Fixed rate advances are valued by comparing their contractual cost to the prevailing market cost.  The carrying amount of collateralized borrowings approximates the fair value.
 
Junior Subordinated Debentures
 
The fair value of junior subordinated debentures is calculated using the discounted cash flows at the prevailing rate of interest.
 
Cash Flow Hedges — Interest Rate and Foreign Exchange Swap Agreements ("swaps")
 
The fair value of the interest rate swaps is based upon the present value of the expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate. To price interest rate swaps, cash flows are first projected for each payment date using the fixed rate for the fixed side of the swap and the forward rates for the floating side of the swap. These swap cash flows are then discounted to time zero using LIBOR zero-coupon interest rates. The sum of the present value of both legs is the fair market value of the interest rate swap. These valuations have been derived from our third party vendor’s proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions that we believe to be reasonable. The fair value of the foreign exchange swap is derived from proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions we believe to be reasonable.

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 are generally short-term in nature and, if drawn upon, are issued under current market terms. At June 30, 2018 and December 31, 2017, there was no significant unrealized appreciation or depreciation on these financial instruments.



37

Table of Contents

The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the consolidated statement of financial condition at June 30, 2018 (in thousands): 
 
Carrying
amount
 
Estimated
fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
133,045

 
133,045

 
133,045

 

 

Securities available-for-sale
799,878

 
799,878

 

 
799,878

 

Securities held-to-maturity
25,747

 
25,212

 

 
25,212

 

Loans receivable, net
7,885,038

 
7,699,045

 

 

 
7,699,045

Accrued interest receivable
24,959

 
24,959

 
24,959

 

 

Interest rate swaps
4,249

 
4,249

 

 
4,249

 

FHLB Stock
7,887

 
7,887

 

 

 
7,887

Total financial assets
$
8,880,803

 
8,694,275

 
158,004

 
829,339

 
7,706,932

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Savings and checking deposits
$
6,602,050

 
6,602,050

 
6,602,050

 

 

Time deposits
1,405,328

 
1,432,439

 

 

 
1,432,439

Borrowed funds
99,889

 
99,889

 
99,889

 

 

Junior subordinated debentures
111,213

 
106,746

 

 

 
106,746

Interest rate swaps
4,585

 
4,585

 

 
4,585

 

Accrued interest payable
568

 
568

 
568

 

 

Total financial liabilities
$
8,223,633

 
8,246,277

 
6,702,507

 
4,585

 
1,539,185

 
The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the consolidated statement of financial condition at December 31, 2017 (in thousands): 
 
Carrying
amount
 
Estimated
fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
77,710

 
77,710

 
77,710

 

 

Securities available-for-sale
792,535

 
792,535

 
574

 
791,961

 

Securities held-to-maturity
29,678

 
29,667

 

 
29,667

 

Loans receivable, net
7,736,614

 
7,762,562

 
3,128

 

 
7,759,434

Accrued Interest Receivable
23,352

 
23,352

 
23,352

 

 

Interest rate swaps
214

 
214

 

 
214

 

FHLB Stock
11,733

 
11,733

 

 

 
11,733

Total financial assets
$
8,671,836

 
8,697,773

 
104,764

 
821,842

 
7,771,167

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Savings and checking accounts
$
6,414,366

 
6,414,366

 
6,414,366

 

 

Time deposits
1,412,623

 
1,433,380

 

 

 
1,433,380

Borrowed funds
108,238

 
108,238

 
108,238

 

 

Junior subordinated debentures
111,213

 
110,954

 

 

 
110,954

Interest rate swaps
1,278

 
1,278

 

 
1,278

 

Foreign exchange swaps
61

 
61

 

 
61

 

Accrued interest payable
460

 
460

 
460

 

 

Total financial liabilities
$
8,048,239

 
8,068,737

 
6,523,064

 
1,339

 
1,544,334




38

Table of Contents

Fair value estimates are made at a point-in-time, based on relevant market data and information about the instrument. The methods and assumptions detailed above were used in estimating the fair value of financial instruments at both June 30, 2018 and December 31, 2017.  There were no transfers of financial instruments between Level 1 and Level 2 during the quarter ended June 30, 2018.
 
The following table represents assets and liabilities measured at fair value on a recurring basis at June 30, 2018 (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Equity securities
$

 

 

 

 
 
 
 
 
 
 
 
Debt securities:
 

 
 

 
 

 
 

U.S. government and agencies

 
1

 

 
1

Government sponsored enterprises

 
202,629

 

 
202,629

States and political subdivisions

 
29,837

 

 
29,837

Corporate

 
911

 


 
911

Total debt securities

 
233,378

 

 
233,378

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

GNMA

 
29,144

 

 
29,144

FNMA

 
74,021

 

 
74,021

FHLMC

 
57,717

 

 
57,717

Non-agency

 
541

 

 
541

Collateralized mortgage obligations:
 

 
 

 
 

 
 

GNMA

 
41,727

 

 
41,727

FNMA

 
201,032

 

 
201,032

FHLMC

 
162,317

 

 
162,317

Non-agency

 
1

 

 
1

Total mortgage-backed securities

 
566,500

 

 
566,500

Interest rate swaps

 
4,249

 

 
4,249

Total Assets
$

 
804,127

 

 
804,127

 
 
 
 
 
 
 
 
Interest rate swaps
$

 
4,585

 

 
4,585

Total Liabilities
$

 
4,585

 

 
4,585




39

Table of Contents


The following table represents assets and liabilities measured at fair value on a recurring basis at December 31, 2017 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Equity securities
$
574

 

 

 
574

 
 
 
 
 
 
 
 
Debt securities:
 

 
 

 
 

 
 

U.S. government and agencies

 
1

 

 
1

Government sponsored enterprises

 
209,269

 

 
209,269

States and political subdivisions

 
51,056

 

 
51,056

Corporate

 
909

 

 
909

Total debt securities

 
261,235

 

 
261,235

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

GNMA

 
29,695

 

 
29,695

FNMA

 
82,969

 

 
82,969

FHLMC

 
64,021

 

 
64,021

Non-agency

 
555

 

 
555

Collateralized mortgage obligations:
 

 
 

 
 

 
 

GNMA

 
4,769

 

 
4,769

FNMA

 
191,512

 

 
191,512

FHLMC

 
157,190

 

 
157,190

Non-agency

 
15

 

 
15

Total mortgage-backed securities

 
530,726

 

 
530,726

Interest rate swaps

 
214

 

 
214

Total Assets
$
574

 
792,175

 

 
792,749

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
1,278

 

 
1,278

Foreign exchange swaps

 
61

 

 
61

Total Liabilities
$

 
1,339

 

 
1,339




40

Table of Contents

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 periods indicated (in thousands): 
 
Quarter ended
 
Six months ended
 
June 30,
2018
 
June 30,
2017
 
June 30,
2018
 
June 30,
2017
Beginning balance January 1,
$

 
9,877

 

 
9,366

 
 
 
 
 
 
 
 
Total net realized investment gains/ (losses) and net change in unrealized appreciation/ (depreciation):
 

 
 

 
 

 
 

Included in net income as OTTI

 

 

 

Included in other comprehensive income

 
761

 

 
1,272

 
 
 
 
 
 
 
 
Purchases

 

 

 

Sales

 

 

 

Transfers in to Level 3

 

 

 

Transfers out of Level 3

 

 

 

 
 
 
 
 
 
 
 
Ending balance June 30,
$

 
10,638

 

 
10,638

 
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, real estate owned, 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 June 30, 2018 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Loans measured for impairment
$

 

 
30,240

 
30,240

Real estate owned

 

 
2,722

 
2,722

 
 
 
 
 
 
 
 
Total assets
$

 

 
32,962

 
32,962


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, 2017 (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Loans measured for impairment
$

 

 
33,421

 
33,421

Real estate owned

 

 
5,666

 
5,666

 
 
 
 
 
 
 
 
Total assets
$

 

 
39,087

 
39,087


 Impaired loans — A loan is considered to be impaired as described in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2017 Annual Report on Form 10-K. We classify loans individually evaluated for impairment that require a specific reserve as nonrecurring Level 3.

Real Estate Owned — Real estate owned is comprised of property acquired through foreclosure or voluntarily conveyed by 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. We classify real estate owned as nonrecurring Level 3.


41

Table of Contents

 
The table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at June 30, 2018 (dollar amounts in thousands): 
 
Fair value
 
Valuation
techniques
 
Significant
unobservable inputs
 
Range (weighted
average)
Loans measured for impairment
30,240

 
Appraisal value (1)
 
Estimated cost to sell
 
10.0%
 
 

 
Discounted cash flow
 
Discount rate
 
4.25% to 10.0% (7.50%)
 
 
 
 
 
 
 
 
Real estate owned
2,722

 
Appraisal value (1)
 
Estimated cost to sell
 
10.0%
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow method if the loan is not collateral dependent.
 

(10)
Derivative Financial Instruments
 
We are a party to derivative financial instruments in the normal course of business to manage our own exposure to fluctuations in interest rates and to meet the needs of our customers. The primary derivatives that we use are interest rate swaps and caps and foreign exchange contracts, which are entered into with counterparties that meet established credit standards. We believe that the credit risk inherent in all of our derivative contracts is minimal based on our credit standards and the netting and collateral provisions of the interest rate swap agreements.


 Derivatives Designated as Hedging Instruments

We are currently a counterparty to two interest rate swap agreements (swaps), designating the swaps as cash flow hedges.  The swaps are intended to protect against the variability of cash flows associated with Northwest Bancorp Capital Trust III and Northwest Bancorp Capital Trust IV.  The first swap modifies the re-pricing characteristics of Northwest Bancorp Capital Trust III, wherein for 10 years expiring in September 2018, the Company receives interest of three-month LIBOR from a counterparty and pays a fixed rate of 4.61% to the same counterparty calculated on a notional amount of $25.0 million.  The second swap modifies the re-pricing characteristics of Northwest Bancorp Trust IV, wherein for ten years expiring in December 2018, the Company receives interest of three-month 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 swap agreements were entered into with a counterparty that met our credit standards and the agreements contain collateral provisions protecting the at-risk party.  We believe that the credit risk inherent in the contracts is not significant.  At June 30, 2018, $805,000 of cash was pledged as collateral to the counterparty.

These cash flow hedges are recorded within other liabilities on the consolidated statement of financial condition at their estimated fair value. At June 30, 2018, the fair value of the swap agreements was $336,000. There was no material hedge ineffectiveness for any of the swaps discussed above.

Derivatives Not Designated as Hedging Instruments

In addition to our derivatives designated in hedge relationships, we act as an interest rate or foreign exchange swap counterparty for certain commercial borrowers in the normal course of servicing our customers, which are accounted for at fair value. We manage our exposure to such interest rate or foreign exchange swaps by entering into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the swaps we have with the commercial borrowers. These positions (referred to as “customer swaps”) directly offset each other and our exposure is the fair value of the derivatives due to changes in credit risk of our commercial borrowers and third parties. Customer swaps are recorded within other assets or other liabilities on the consolidated statement of financial condition at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of income.




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The following table presents information regarding our derivative financial instruments for the periods indicated:
 
Asset Derivatives
 
Liability Derivatives
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
At June 30, 2018
 
 
 
 
 
 
 
Derivatives designed as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap agreements
$

 

 
50,000

 
336

Derivatives not designed as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap agreements
175,711

 
4,249

 
175,711

 
4,249

Foreign exchange swap agreements

 

 

 

Total derivatives
$
175,711

 
4,249

 
225,711

 
4,585

 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
Derivatives designed as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap agreements
$

 

 
50,000

 
1,064

Derivatives not designed as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap agreements
92,631

 
214

 
92,631

 
214

Foreign exchange swap agreements

 

 
12,344

 
61

Total derivatives
$
92,631

 
214

 
154,975

 
1,339



The following table presents income or expense recognized on derivatives for the periods indicated:
 
For the quarter ended June 30,
 
For the six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Hedging interest rate derivatives:
 
 
 
 
 
 
 
Increase in interest expense
267

 
404

 
600

 
823

 
 
 
 
 
 
 
 
Non-hedging swap derivatives:
 
 
 
 
 
 
 
Increase/ (decrease) in other income
(417
)
 
268

 
(288
)
 
234




(11)
Legal Proceedings
 
We establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated. As of June 30, 2018 we have not accrued for any legal proceedings based on our analysis of currently available information which is subject to significant judgment and a variety of assumptions and uncertainties.  Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances. Due to the inherent subjectivity of assessments and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate loss to us from legal proceedings.



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Table of Contents


(12)    Changes in Accumulated Other Comprehensive Income/ (Loss)
 
The following table shows the changes in accumulated other comprehensive income by component for the periods indicated (in thousands): 
 
For the quarter ended June 30, 2018
 
Unrealized 
gains and 
(losses) on 
securities 
available-
for-sale
 
Change in 
fair value of 
interest rate 
swaps
 
Change in 
defined 
benefit 
pension 
plans
 
Total
Balance as of March 31, 2018
$
(9,381
)
 
(480
)
 
(32,360
)
 
(42,221
)
 
 
 
 
 
 
 
 
Other comprehensive income/ (loss) before reclassification adjustments
(1,237
)
 
214

 

 
(1,023
)
Amounts reclassified from accumulated other comprehensive income (1), (2)
(75
)
 

 
226

 
151

 
 
 
 
 
 
 
 
Net other comprehensive income/ (loss)
(1,312
)
 
214

 
226

 
(872
)
 
 
 
 
 
 
 
 
Balance as of June 30, 2018
$
(10,693
)
 
(266
)
 
(32,134
)
 
(43,093
)
 
 
For the quarter ended June 30, 2017
 
Unrealized 
gains and 
(losses) on 
securities 
available-
for-sale
 
Change in 
fair value of 
interest rate 
swaps
 
Change in 
defined 
benefit 
pension 
plans
 
Total
Balance as of March 31, 2017
$
1,042

 
(1,475
)
 
(26,388
)
 
(26,821
)
 
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments
1,290

 
218

 

 
1,508

Amounts reclassified from accumulated other comprehensive income (3), (4)
(56
)
 

 
221

 
165

 
 
 
 
 
 
 
 
Net other comprehensive income
1,234

 
218

 
221

 
1,673

 
 
 
 
 
 
 
 
Balance as of June 30, 2017
$
2,276

 
(1,257
)
 
(26,167
)
 
(25,148
)
(1)
Consists of realized gain on securities (gain on sales of investments, net) of $105, net of tax (income tax expense) of $(30).
(2)
Consists of amortization of prior service cost (compensation and employee benefits) of $580 and amortization of net loss (compensation and employee benefits) of $(897), net of tax (income tax expense) of $91.
(3)
Consists of realized loss on securities (gain on sales of investments, net) of $95, net of tax (income tax expense) of $(39).
(4)
Consists of amortization of prior service cost (compensation and employee benefits) of $581 and amortization of net loss (compensation and employee benefits) of $(956), net of tax (income tax expense) of $154


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Table of Contents

 
For the six months ended June 30, 2018
 
Unrealized 
gains and 
(losses) on 
securities 
available-
for-sale
 
Change in 
fair value of 
interest rate 
swaps
 
Change in 
defined 
benefit 
pension 
plans
 
Total
Balance as of December 31, 2017
$
(4,409
)
 
(691
)
 
(26,980
)
 
(32,080
)
 
 
 
 
 
 
 
 
Reclassification due to adoption of ASU No. 2018-02
(991
)
 
(149
)
 
(5,606
)
 
(6,746
)
 
 
 
 
 
 
 
 
Other comprehensive income/ (loss) before reclassification adjustments
(5,199
)
 
574

 

 
(4,625
)
Amounts reclassified from accumulated other comprehensive income (1), (2)
(94
)
 

 
452

 
358

 
 
 
 
 
 
 
 
Net other comprehensive income/ (loss)
(5,293
)
 
574

 
452

 
(4,267
)
 
 
 
 
 
 
 
 
Balance as of June 30, 2018
$
(10,693
)
 
(266
)
 
(32,134
)
 
(43,093
)
 
 
For the six months ended June 30, 2017
 
Unrealized 
gains and 
(losses) on 
securities 
available-
for-sale
 
Change in 
fair value of 
interest rate 
swaps
 
Change in 
defined 
benefit 
pension 
plans
 
Total
Balance as of December 31, 2016
$
395

 
(1,778
)
 
(26,608
)
 
(27,991
)
 
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments
1,948

 
521

 

 
2,469

Amounts reclassified from accumulated other comprehensive income (3), (4)
(67
)
 

 
441

 
374

 
 
 
 
 
 
 
 
Net other comprehensive income
1,881

 
521

 
441

 
2,843

 
 
 
 
 
 
 
 
Balance as of June 30, 2017
$
2,276

 
(1,257
)
 
(26,167
)
 
(25,148
)
(1)
Consists of realized gains on securities (loss on sales of investments, net) of $131, net of tax (income tax expense) of $(37).
(2)
Consists of amortization of prior service cost (compensation and employee benefits) of $1,161 and amortization of net loss (compensation and employee benefits) of $(1,794), net of tax (income tax expense) of $181.
(3)
Consists of realized gains on securities (gain on sales of investments, net) of $114, net of tax (income tax expense) of $(47).
(4)
Consists of amortization of prior service cost (compensation and employee benefits) of $1,162 and amortization of net loss (compensation and employee benefits) of $(1,910), net of tax (income tax expense) of $307.




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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements:
 
In addition to historical information, this document may contain certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, as they reflect management’s analysis only as of the date of this report. We have no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report.
 
Important factors that might cause such a difference include, but are not limited to:
 
•     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 different than expected;
•     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 and credit markets;
•     cyber-security concerns, including an interruption or breach in the security of our website or other information
systems;
•     technological changes that may be more difficult or expensive than expected;
•     the ability of third-party providers to perform their obligations to us;
•     competition among depository and other financial institutions;
•    our ability to enter new markets successfully and capitalize on growth opportunities;
•     managing our internal growth and our ability to successfully integrate acquired entities, businesses or branch offices;
•     changes in consumer spending, borrowing and savings habits;
•     our ability to continue to increase and manage our commercial and personal loans;
•     possible impairments of securities held by us, including those issued by government entities and government
sponsored enterprises;
•     the impact of the economy on our loan portfolio (including cash flow and collateral values), investment
portfolio, customers and capital market activities;
•    our ability to receive regulatory approvals for proposed transactions or new lines of business;
•     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.

Overview of Critical Accounting Policies Involving Estimates
 
Please refer to Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2017 Annual Report on Form 10-K.
 


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Table of Contents

Executive Summary

Comparison of Financial Condition
 
Total assets at June 30, 2018 were $9.562 billion, an increase of $198.4 million, or 2.1%, from $9.364 billion at December 31, 2017.  This increase in assets was due primarily to a $148.4 million, or 1.9%, increase in net loans receivable and a $58.7 million, or 6.5%, increase in cash and investments. This increase was funded by a $180.4 million, or 2.3%, increase in deposits.
 
Total loans receivable increased by $149.0 million, or 1.9%, to $7.942 billion at June 30, 2018, from $7.793 billion at December 31, 2017 due primarily to increases in our commercial banking loan portfolio of $129.1 million, or 4.3%, to $3.165 billion at June 30, 2018 from $3.035 billion at December 31, 2017, as we continue to emphasize the expansion of commercial relationships. Additionally, our personal banking loan portfolio increased by $19.8 million, or 0.4%, to $4.778 billion at June 30, 2018 from $4.758 billion at December 31, 2017, due to increases in residential mortgage and consumer loans. These increases are due primarily to lower sales of residential mortgage loans into the secondary market and our continued emphasis on indirect retail lending through dealer channels.

     Total deposits increased by $180.4 million, or 2.3%, to $8.007 billion at June 30, 2018 from $7.827 billion at December 31, 2017. Noninterest-bearing demand deposits increased by $122.3 million, or 7.6%, to $1.733 billion at June 30, 2018 from $1.610 billion at December 31, 2017. Interest-bearing demand deposits increased by $43.0 million, or 3.0%, to $1.486 billion at June 30, 2018 from $1.443 billion at December 31, 2017. These increases are due primarily to our continued efforts to attract low cost accounts to whom we can also cross-sell other products and services. Also, savings deposits increased by $43.8 million, or 2.6%, to $1.697 billion at June 30, 2018 from $1.654 billion at December 31, 2017. Partially offsetting these increases was a decrease in money market demand accounts of $21.4 million, or 1.3%, to $1.686 billion at June 30, 2018 from $1.707 billion at December 31, 2017. Additionally, time deposits decreased by $7.3 million, or 0.5%, to $1.405 billion at June 30, 2018 from $1.413 billion at December 31, 2017, as a result of recent increases in market interest rates competition has intensified for interest rate sensitive customers.
     
Total shareholders’ equity at June 30, 2018 was $1.229 billion, or $11.92 per share, an increase of $21.2 million, or 1.8%, from $1.208 billion, or $11.79 per share, at December 31, 2017.  This increase in equity was primarily the result of net income of $51.3 million for the six months ended June 30, 2018. Partially offsetting this increase was the payment of cash dividends of $34.8 million during the six months ended June 30, 2018 and a $5.2 million increase in the unrealized loss of available-for-sale securities.

Regulatory Capital
 
Financial institutions and their holding companies are subject to various regulatory capital requirements. 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 a company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting guidelines. Capital amounts and classifications are also subject to qualitative judgments made by the regulators about components, risk-weighting and other factors.

In July 2013, the FDIC and the other federal regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The rule limits an organization’s capital distributions and certain discretionary bonus payments if the organization does not hold a “capital conservation buffer” consisting of 2.5% of Total, Tier 1 and Common Equity Tier 1 ("CET1") capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

The capital conservation buffer requirement is being phased in beginning on January 1, 2016 and ending on January 1,
2019, when the full capital conservation buffer requirement will be effective.

Quantitative measures, established by regulation to ensure capital adequacy, require financial institutions to maintain minimum amounts and ratios (set forth in the table below) of Total, CET1 and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Capital ratios are presented in the tables below. Dollar amounts in the accompanying tables are in thousands.



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Table of Contents

 
At June 30, 2018
 
 
 
 
 
Minimum capital
 
Well capitalized
 
Actual
 
requirements (1)
 
requirements
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Total capital (to risk weighted assets)
 

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
$
1,166,683

 
15.923
%
 
$
723,467

 
9.875
%
 
$
732,625

 
10.000
%
Northwest Bank
1,079,133

 
14.741
%
 
722,908

 
9.875
%
 
732,059

 
10.000
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to risk weighted assets)
 
 
 
 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,109,351

 
15.142
%
 
576,942

 
7.875
%
 
586,100

 
8.000
%
Northwest Bank
1,021,801

 
13.958
%
 
576,496

 
7.875
%
 
585,647

 
8.000
%
 
 
 
 
 
 
 
 
 
 
 
 
CET1 capital (to risk weighted assets)
 
 
 
 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,001,476

 
13.670
%
 
467,048

 
6.375
%
 
476,206

 
6.500
%
Northwest Bank
1,021,801

 
13.958
%
 
466,687

 
6.375
%
 
475,838

 
6.500
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (leverage) (to average assets)
 
 
 
 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,109,351

 
11.897
%
 
372,986

 
4.000
%
 
466,232

 
5.000
%
Northwest Bank
1,021,801

 
10.962
%
 
372,868

 
4.000
%
 
466,085

 
5.000
%
(1) Amounts and ratios include the 2018 capital conservation buffer of 1.875%, with the exception of Tier 1 capital to average assets (leverage ratio).
 
 
At December 31, 2017
 
 
 
 
 
Minimum capital
 
Well capitalized
 
Actual
 
requirements (1)
 
requirements
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Total capital (to risk weighted assets)
 

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
$
1,136,076

 
15.831
%
 
$
663,823

 
9.250
%
 
$
717,647

 
10.000
%
Northwest Bank
1,017,251

 
14.189
%
 
663,179

 
9.250
%
 
716,951

 
10.000
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier I capital (to risk weighted assets)
 
 
 
 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,079,270

 
15.039
%
 
520,294

 
7.250
%
 
574,117

 
8.000
%
Northwest Bank
960,443

 
13.396
%
 
519,789

 
7.250
%
 
573,560

 
8.000
%
 
 
 
 
 
 
 
 
 
 
 
 
CET1 capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Northwest Bancshares, Inc.
971,395

 
13.536
%
 
412,647

 
5.750
%
 
466,470

 
6.500
%
Northwest Bank
960,443

 
13.396
%
 
412,247

 
5.750
%
 
430,170

 
6.000
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier I capital (leverage) (to average assets)
 

 
 
 
 
 
 
 
 
 
 
Northwest Bancshares, Inc.
1,079,270

 
11.676
%
 
369,735

 
4.000
%
 
462,169

 
5.000
%
Northwest Bank
960,443

 
10.400
%
 
369,482

 
4.000
%
 
461,853

 
5.000
%
(1) Amounts and ratios include the 2017 capital conservation buffer of 1.250%, with the exception of Tier 1 capital to average assets (leverage ratio).



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Table of Contents

Liquidity
 
We are required to maintain a sufficient level of liquid assets, as determined by management and reviewed for adequacy by the FDIC and the Pennsylvania Department of Banking and Securities during their regular examinations. Northwest monitors its liquidity position primarily using the ratio of unencumbered available-for-sale liquid assets as a percentage of deposits and borrowings (“liquidity ratio”).  Northwest’s liquidity ratio at June 30, 2018 was 9.8%. We adjust liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes and insurance on mortgage loan escrow accounts, repayment of borrowings and loan commitments. At June 30, 2018 Northwest had $3.152 billion of additional borrowing capacity available with the FHLB, including $150.0 million on an overnight line of credit, as well as $58.0 million of borrowing capacity available with the Federal Reserve Bank and $80.0 million with two correspondent banks.
 
Dividends
 
We paid $17.4 million and $16.3 million in cash dividends during the quarters ended June 30, 2018 and 2017, respectively.  The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 68.0% and 53.3% for the quarters ended June 30, 2018 and 2017, respectively, on dividends of $0.17 per share for the quarter ended June 30, 2018 and on dividends of $0.16 per share for the quarter ended June 30, 2017. We paid $34.8 million and $32.5 million in cash dividends during the six months ended June 30, 2018 and 2017, respectively.  The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 68.0% and 66.7% for the six months ended June 30, 2018 and 2017, respectively, on dividends of $0.34 per share for the six months ended June 30, 2018 and on dividends of $0.32 per share for the six months ended June 30, 2017. On July 18, 2018, the Board of Directors declared a cash dividend of $0.17 per share payable on August 16, 2018 to shareholders of record as of August 2, 2018.  This represents the 95th consecutive quarter we have paid a cash dividend.

Nonperforming Assets
 
The following table sets forth information with respect to nonperforming assets.  Nonaccrual loans are those loans on which the accrual of interest has ceased.  Generally, when a loan is 90 days past due, we fully reverse all accrued interest thereon and cease to accrue interest thereafter.  Exceptions are made for loans that have contractually matured, are in the process of being modified to extend the maturity date and are otherwise current as to principal and interest, and well secured loans that are in process of collection. Loans may also be placed on nonaccrual before they reach 90 days past due if conditions exist that call into question our ability to collect all contractual interest.  Other nonperforming assets represent property acquired through foreclosure or repossession. Foreclosed property is carried at the lower of its fair value less estimated costs to sell, or the principal balance of the related loan.
 
 
June 30, 2018
 
December 31, 2017
 
(Dollars in thousands)
Loans 90 days or more past due
 

 
 

Residential mortgage loans
$
12,293

 
13,890

Home equity loans
6,827

 
7,469

Consumer legacy finance loans
15

 
202

Consumer loans
2,668

 
4,006

Commercial real estate loans
15,772

 
16,284

Commercial loans
2,925

 
3,140

Total loans 90 days or more past due
$
40,500

 
44,991

Total real estate owned (REO)
2,722

 
5,666

Total loans 90 days or more past due and REO
43,222

 
50,657

Total loans 90 days or more past due to net loans receivable
0.51
%
 
0.58
%
Total loans 90 days or more past due and REO to total assets
0.45
%
 
0.54
%
Nonperforming loans:
 
 
 
Nonaccrual loans - loans 90 days or more delinquent
39,734

 
43,077

Nonaccrual loans - loans less than 90 days delinquent
22,979

 
21,378

Loans 90 days or more past maturity and still accruing
94

 
502

Total nonperforming loans
62,807

 
64,957

Total nonperforming assets
$
65,529

 
70,623

Nonaccrual troubled debt restructured loans (1)
$
10,860

 
12,285

Accruing troubled debt restructured loans
19,802

 
19,819

Total troubled debt restructured loans
$
30,662

 
32,104

(1)
Included in nonaccurual loans above.


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Table of Contents

 
At June 30, 2018, we expect to fully collect the carrying value of our purchased credit impaired loans and have determined that we can reasonably estimate their future cash flows including those loans that are 90 days or more delinquent. As a result, we do not consider these loans that are 90 days or more delinquent, which total $672,000, to be nonaccrual or impaired and continue to recognize interest income on these loans, including the loans’ accretable discount.
 
A loan is considered to be 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.  The amount of impairment is required to be measured using 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 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 June 30, 2018 and December 31, 2017 were $82.7 million and $84.6 million, respectively.
 
Allowance for Loan Losses
 
Our Board of Directors has adopted an “Allowance for Loan and Lease Losses” (“ALL”) policy designed to provide management with a systematic methodology for determining and documenting the ALL each reporting period.  This methodology was developed to provide a consistent process and review procedure to ensure that the ALL is in conformity with GAAP, our policies and procedures and other supervisory and regulatory guidelines.
 
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. Consumer and small business commercial loans are classified primarily by delinquency status. In addition, a meeting is held every quarter with each region to monitor the performance and status of loans on an internal watch list.  On an on-going basis the loan officer in conjunction with a portfolio manager grades or classifies problem loans or potential problem loans based upon their knowledge of the lending relationship and other information previously accumulated.  This rating is also reviewed independently by our Loan Review department on a periodic basis.  Our loan grading system for problem loans is consistent with industry regulatory guidelines which classifies loans as “substandard”, “doubtful” or “loss.”  Loans that do not expose us to risk sufficient to warrant classification in one of the previous categories, but which possess some weaknesses, are designated as “special mention”.  A “substandard” loan is any loan that is 90 days or more contractually delinquent or is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified as “doubtful” have all the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions or values, highly questionable and improbable.  Loans classified as “loss” are considered uncollectible so that their continuance as assets without the establishment of a specific loss allowance is not warranted.
 
Credit relationships that have been classified as substandard or doubtful and are greater than or equal to $1.0 million 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.
 
If such an individual loan is deemed to be impaired, the Credit Administration department determines the proper measure 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, less costs of sale or disposal.  If the measurement of the impaired loan is more or less than the recorded investment in the loan, the specific allowance associated with that individual loan is adjusted 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.  Historical loss ratios are analyzed and adjusted based on delinquency trends as well as the current economic, political, regulatory, and interest rate environment and used to estimate the current measure of impairment.



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The individual impairment measures along with the estimated loss for each homogeneous pool are consolidated into one summary document.   This summary schedule along with the support documentation used to establish this schedule is presented to management’s Allowance Committee on a quarterly basis.  The Allowance Committee reviews the processes and documentation presented, reviews the concentration of credit by industry and customer, lending products and 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 amount of ALL is estimated and any adjustments to reconcile the actual ALL with this estimate are determined.  In addition, the Allowance Committee considers if any changes to the methodology are needed. The Allowance Committee also reviews and discusses delinquency trends, nonperforming asset amounts and ALL levels and ratios compared to our peer group as well as state and national statistics.  Similarly, following the Allowance Committee’s review and approval, a review is performed by the Risk Management Committee of the Board of Directors on a quarterly basis.
 
In addition to the reviews by management’s Allowance Committee and the Board of Directors’ Risk Management Committee, regulators from either the FDIC or the Pennsylvania Department of Banking and Securities perform an extensive review on an annual basis for the adequacy of the ALL and its conformity with regulatory guidelines and pronouncements.  Any recommendations or enhancements from these independent parties are considered by management and the Allowance Committee and implemented accordingly.
 
We acknowledge that this is a dynamic process and consists of factors, many of which are external and out of our control that can change often, rapidly and substantially.  The adequacy of the ALL 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.
 
We utilize a structured methodology each period when analyzing the adequacy of the allowance for loan losses and the related provision for loan losses, which the Allowance Committee assesses regularly for appropriateness.  As part of the analysis as of June 30, 2018, we considered the economic conditions in our markets, such as unemployment and bankruptcy levels as well as changes in estimates of real estate collateral values, and no material changes in methodology was determined necessary. In addition, we considered the overall trends in asset quality, specific reserves needed and/or already established for criticized loans, historical loss rates and collateral valuations. The allowance for loan losses increased by $537,000, or 0.9%, to $57.3 million, or 0.72% of total loans at June 30, 2018 from $56.8 million, or 0.73% of total loans, at December 31, 2017. This increase is due primarily to the increase in loans classified as substandard to $252.4 million, or 3.2% of total loans, at June 30, 2018, which is an increase of $14.5 million, or 6.1%, from $237.8 million, or 3.1% of total loans, at December 31, 2017.
 
We also consider how the levels of non-accrual loans and historical charge-offs have influenced the required amount of allowance for loan losses.  Nonaccrual loans of $62.7 million or 0.79% of total loans receivable at June 30, 2018 decreased by $1.7 million, or 2.7%, from $64.5 million, or 0.83% of total loans receivable, at December 31, 2017. As a percentage of average loans, annualized net charge-offs decreased to 0.23% for the six months ended June 30, 2018 compared to 0.31% for the year ended December 31, 2017.


Comparison of Operating Results for the Quarters Ended June 30, 2018 and 2017
 
Net income for the quarter ended June 30, 2018 was $26.3 million, or $0.25 per diluted share, a decrease of $4.7 million, or 15.1%, from net income of $31.0 million, or $0.30 per diluted share, for the quarter ended June 30, 2017.  The decrease in net income resulted from a decrease in noninterest income of $17.4 million, or 41.9%. Partially offsetting this decrease was an increase in net interest income of $1.5 million, or 1.8%, as well as decreases in the provision for loan losses of $213,000, or 3.8%, noninterest expense of $3.5 million, or 4.7%, and income tax expense of $7.5 million, or 52.1%. Net income for the quarter ended June 30, 2018 represents annualized returns on average equity and average assets of 8.67% and 1.11%, respectively, compared to 10.48% and 1.30% for the same quarter last year.  A further discussion of significant changes follows.
 
Interest Income
 
Total interest income increased by $3.1 million, or 3.4%, to $92.9 million for the quarter ended June 30, 2018 from $89.8 million for the quarter ended June 30, 2017. This increase is primarily the result of an increase in the average yield earned on interest earning assets to 4.25% for the quarter ended June 30, 2018 from 4.08% for the quarter ended June 30, 2017. Additionally, despite the decrease in the average balance of interest earning assets of $67.0 million, or 0.8%, to $8.768 billion for the quarter ended June 30, 2018 from $8.835 billion for the quarter ended June 30, 2017, the change in asset mix from cash and investments to loans also augmented interest income.



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Interest income on loans receivable increased by $3.4 million, or 4.0%, to $88.1 million for the quarter ended June 30, 2018 from $84.7 million for the quarter ended June 30, 2017.  This increase is attributed to increases in both the average balance and average yield on loans receivable. The average balance increased by $196.8 million, or 2.6%, to $7.851 billion for the quarter ended June 30, 2018 from $7.654 billion for the quarter ended June 30, 2017. This increase is due to organic loan growth of $255.6 million during the last twelve months. Additionally, the average yield on loans receivable increased to 4.50% for the quarter ended June 30, 2018 from 4.44% for the quarter ended June 30, 2017 primarily as a result of the recent increases in market interest rates. 

Interest income on mortgage-backed securities increased by $267,000, or 8.9%, to $3.3 million for the quarter ended June 30, 2018 from $3.0 million for the quarter ended June 30, 2017. This increase is attributed to an increase in average yield on mortgage-backed securities which increased to 2.28% for the quarter ended June 30, 2018 from 2.02% for the quarter ended June 30, 2017 due to both an increase in short-term market interest rates that positively impacted our adjustable rate mortgage-backed securities and the purchase of fixed rate mortgage-backed securities with yields higher than the existing portfolio. Partially offsetting this increase was a decrease in the average balance of mortgage-backed securities of $23.0 million, or 3.9%, to $569.9 million for the quarter ended June 30, 2018 from $592.9 million for the quarter ended June 30, 2017, due primarily to using cash flow to fund loan growth.
 
Interest income on investment securities decreased by $549,000, or 36.4%, to $961,000 for the quarter ended June 30, 2018 from $1.5 million for the quarter ended June 30, 2017. This decrease is primarily attributable to a decrease in the average balance of investment securities of $136.6 million, or 36.7%, to $235.8 million for the quarter ended June 30, 2018 from $372.4 million for the quarter ended June 30, 2017.  This decrease is due primarily to the maturity or call of municipal and government agency securities. Partially offsetting this decrease was an increase in the average yield on investment securities to 1.63% for the quarter ended June 30, 2018 from 1.62% for the quarter ended June 30, 2017
 
Dividends on FHLB stock increased by $35,000, or 70.0%, to $85,000 for the quarter ended June 30, 2018 from $50,000 for the quarter ended June 30, 2017. This increase is attributable to increases in both the average balance and average yield on FHLB stock. The average yield increased to 4.36% for the quarter ended June 30, 2018 from 2.64% for the quarter ended June 30, 2017, as the yield generally tracks short-term interest rates. Additionally, the average balance increased by $217,000, or 2.9% to $7.8 million for the quarter ended June 30, 2018 from $7.6 million for the quarter ended June 30, 2017. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.
 
Interest income on interest-earning deposits decreased by $67,000, or 12.5%, to $469,000 for the quarter ended June 30, 2018 from $536,000 for the quarter ended June 30, 2017.  This decrease is attributable to a decrease in the average balance of interest-earning deposits which decreased by $104.4 million, or 50.2%, to $103.7 million for the quarter ended June 30, 2018 from $208.1 million for the quarter ended June 30, 2017, due to the utilization of excess cash to fund loan growth. Partially offsetting this decrease was an increase in the average yield on interest-earning deposits to 1.79% for the quarter ended June 30, 2018 from 1.02% for the quarter ended June 30, 2017, as a result of recent increases in the targeted Federal Funds rate by the Federal Reserve.

Interest Expense
 
Interest expense increased by $1.5 million, or 22.4%, to $8.6 million for the quarter ended June 30, 2018 from $7.1 million for the quarter ended June 30, 2017. This increase in interest expense was due to an increase in the average cost of interest-bearing liabilities, which increased to 0.53% for the quarter ended June 30, 2018 from 0.42% for the quarter ended June 30, 2017. This increase resulted from increases in the interest rate paid on deposits and borrowed funds in response to increases in market interest rates. Partially offsetting this increase in cost was a decrease in the average balance of interest-bearing liabilities of $247.2 million, or 3.7%, to $6.515 billion for the quarter ended June 30, 2018 from $6.762 billion for the quarter ended June 30, 2017. This decrease is due primarily to the sale of our three Maryland offices in May 2017 with deposits of $211.7 million.
 
Net Interest Income
 
Net interest income increased by $1.5 million, or 1.8%, to $84.2 million for the quarter ended June 30, 2018 from $82.7 million for the quarter ended June 30, 2017.  This increase is attributable to the factors discussed above. Primarily as a result of the change in the mix of our interest-earning assets and interest-bearing liabilities, both our net interest spread and margin increased. Our net interest rate spread increased to 3.72% for the quarter ended June 30, 2018 from 3.66% for the quarter ended June 30, 2017 and our net interest margin increased to 3.84% for the quarter ended June 30, 2018 from 3.75% for the quarter ended June 30, 2017.
 


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Provision for Loan Losses
 
The provision for loan losses decreased by $213,000, or 3.8%, to $5.3 million for the quarter ended June 30, 2018 from $5.6 million for the quarter ended June 30, 2017. This decrease is due primarily to the improvement in the historical loss rates for commercial loans when compared to the same period last year, as well as elevated reserves in the first half of 2017 related to the increased collection risk associated with the closure of our consumer finance subsidiary. Overall credit quality remains strong as total nonaccrual loans decreased to $62.7 million, or 0.79% of total loans at June 30, 2018 from $72.8 million, or 0.95% of total loans, at June 30, 2017, and annualized net charge-offs to average loans decrease to 0.16% for the quarter ended June 30, 2018 from 0.20% for the quarter ended June 30, 2017.
 
In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels and bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss factors.  We analyze the allowance for loan losses as described in the section entitled “Allowance for Loan Losses.”  The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the losses inherent in our loan portfolio relative to loan mix, economic conditions and historical loss experience.
 
Noninterest Income
 
Noninterest income decreased by $17.4 million, or 41.9%, to $24.1 million for the quarter ended June 30, 2018 from $41.5 million for the quarter ended June 30, 2017. This decrease is due primarily to the $17.2 million gain on the sale of the Company's Maryland offices during the second quarter of 2017. Exclusive of this gain, noninterest income decreased by $182,000, or 0.7% from the prior year, primarily as a result of a $550,000, or 12.0%, decrease in trust and other financial services income due to the sale of our retirement services subsidiary in December 2017. Positively impacting noninterest income during the quarter ended June 30, 2018 was a $1.3 million death benefit on bank owned life insurance and a net gain on real estate owned of $176,000 compared to a net loss of $230,000 during the quarter ended June 30, 2017.
 
Noninterest Expense
 
Noninterest expense decreased by $3.5 million, or 4.7%, to $69.8 million for the quarter ended June 30, 2018 from $73.3 million for the quarter ended June 30, 2017.  All noninterest expenses categories, with the exception of compensation and employee benefits and professional services, decreased compared to last year's quarter. Most of these decreases are due primarily to restructuring that occurred during 2017, including the closure of our consumer finance subsidiary and the sale of our three Maryland offices and retirement services business. Also, marketing expenses decreased by $832,000, or 29.2%, to $2.0 million for the quarter ended June 30, 2018 from $2.8 million for the quarter ended June 30, 2017, due primarily to the timing of checking account acquisition campaigns. Partially offsetting these decreases were increases in compensation and employee benefits of $856,000, or 2.2%, due primarily to increases in health insurance costs and other employee benefits, as well as an increase in professional services of $367,000, or 15.0%, due primarily to consulting engagements related to the implementation of ASU 2016-13.

Income Taxes
 
The provision for income taxes decreased by $7.5 million, or 52.1%, to $6.9 million for the quarter ended June 30, 2018 from $14.4 million for the quarter ended June 30, 2017. This decrease is due primarily to a decrease in income before tax of $12.2 million, or 26.8%, to $33.2 million for the quarter ended June 30, 2018 from $45.4 million for the quarter ended June 30, 2017. In addition, as a result of the enactment of the Tax Cuts and Jobs Act in December 2017, the Company's effective tax rate, which includes both federal and state income taxes, decreased to 20.8% for the quarter ended June 30, 2018 from 31.7% for the quarter ended June 30, 2017. We anticipate our effective tax rate to be between 21.0% and 23.0% for the year ending December 31, 2018.



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 Comparison of Operating Results for the Six Months Ended June 30, 2018 and 2017
 
Net income for the six months ended June 30, 2018 was $51.3 million, or $0.50 per diluted share, an increase of $2.6 million, or 5.3%, from $48.7 million, or $0.48 per diluted share, for the six months ended June 30, 2017.  The increase in net income resulted from an increase in net interest income of $2.7 million, or 1.6%, and decreases in the provision for loan losses of $641,000, or 6.3%, noninterest expense of $7.7 million, or 5.3%, and income tax expense of $8.7 million, or 38.4%. Partially offsetting these factors was a decrease in noninterest income of $17.1 million, or 27.1%. Net income for the six months ended June 30, 2018 represents annualized returns on average equity and average assets of 8.54% and 1.09%, respectively, compared to 8.34% and 1.03% for the six months ended June 30, 2017.  A discussion of significant changes follows.
 
Interest Income
 
Total interest income increased by $5.3 million, or 3.0%, to $182.4 million for the six months ended June 30, 2018 from $177.1 million for the six months ended June 30, 2017. This increase is the result of an increase in the average yield earned on interest earning assets to 4.23% for the six months ended June 30, 2018 from 4.04% for the six months ended June 30, 2017. This increase in average yield is related to both the change in interest-earning asset mix as well as the increase in market interest rates. Partially offsetting this increase was a decrease in the average balance of interest earning assets of $128.0 million, or 1.5%, to $8.700 billion for the six months ended June 30, 2018 from $8.828 billion for the six months ended June 30, 2017.

Interest income on loans receivable increased by $5.8 million, or 3.5%, to $173.3 million for the six months ended June 30, 2018 from $167.5 million for the six months ended June 30, 2017.  This increase is attributed to increases in both the average balance and average yield on loans receivable. The average balance increased by $157.0 million, or 2.1%, to $7.813 billion for the six months ended June 30, 2018 from $7.656 billion for the six months ended June 30, 2017. This increase is due to organic loan growth of $255.6 million during the last twelve months. Additionally, the average yield on loans receivable increased to 4.47% for the six months ended June 30, 2018 from 4.41% for the six months ended June 30, 2017, primarily as a result of the recent increases in market interest rates. 

Interest income on mortgage-backed securities increased by $1.1 million, or 20.3%, to $6.3 million for the six months ended June 30, 2018 from $5.2 million for the six months ended June 30, 2017. This increase is attributed to increases in both the average balance and average yield on mortgage-backed securities.The average balance of mortgage-backed securities increased by $31.4 million, or 5.9%, to $564.0 million for the six months ended June 30, 2018 from $532.6 million for the six months ended June 30, 2017. This increase is due primarily to the purchase of higher yielding mortgage-backed securities with the cash flow from our investment securities portfolio. Additionally, the average yield on mortgage-backed securities increased to 2.22% for the six months ended June 30, 2018 from 1.96% for the six months ended June 30, 2017, due to both an increase in short-term market interest rates that positively impacted our adjustable rate mortgage-backed securities and the purchase of fixed-rate mortgage-backed securities with yields higher than the existing portfolio.
 
Interest income on investment securities decreased by $1.1 million, or 34.2%, to $2.0 million for the six months ended June 30, 2018 from $3.1 million for the six months ended June 30, 2017. This decrease is primarily attributable to a decrease in the average balance of investment securities which decreased by $129.1 million, or 34.4%, to $246.0 million for the six months ended June 30, 2018 from $375.1 million for the six months ended June 30, 2017.  This decrease is due primarily to the maturity or call of municipal and government agency securities. Partially offsetting this decrease was an increase in the average yield on investment securities to 1.65% for the six months ended June 30, 2018 from 1.64% for the six months ended June 30, 2017
 
Dividends on FHLB stock increased by $73,000, or 67.0%, to $182,000 for the six months ended June 30, 2018 from $109,000 for the six months ended June 30, 2017. This increase is attributable to increases in both the average balance and average yield on FHLB stock. The average yield increased to 4.28% for the six months ended June 30, 2018 from 2.95% for the six months ended June 30, 2017, as the yield generally tracks short-term interest rates. Additionally, the average balance increased by $1.1 million, or 15.1% to $8.6 million for the six months ended June 30, 2018 from $7.5 million for the six months ended June 30, 2017. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.
 
Interest income on interest-earning deposits decreased by $592,000, or 49.5%, to $604,000 for the six months ended June 30, 2018 from $1.2 million for the six months ended June 30, 2017.  This decrease is attributable to a decrease in the average balance of interest-earning deposits which decreased by $188.4 million, or 73.2%, to $69.0 million for the six months ended June 30, 2018 from $257.4 million for the six months ended June 30, 2017, due to the utilization of excess cash to fund loan growth. Partially offsetting this decrease was an increase in the average yield on interest-earning deposits to 1.74% for the six months ended June 30, 2018 from 0.92% for the six months ended June 30, 2017, as a result of recent increases in the targeted Federal Funds rate by the Federal Reserve.


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Interest Expense
 
Interest expense increased by $2.6 million, or 19.3%, to $16.4 million for the six months ended June 30, 2018 from $13.8 million for the six months ended June 30, 2017. This increase in interest expense was due to an increase in the average cost of interest-bearing liabilities, which increased to 0.51% for the six months ended June 30, 2018 from 0.41% for the six months ended June 30, 2017. This increase resulted from increases in the interest rate paid on deposits and borrowed funds in response to increases in market interest rates. Partially offsetting this increase in cost was a decrease in the average balance of interest-bearing liabilities of $307.9 million, or 4.5%, to $6.486 billion for the six months ended June 30, 2018 from $6.794 billion for the six months ended June 30, 2017. This decrease is due primarily to the sale of our three Maryland offices in May 2017 with deposits of $211.7 million.
 
Net Interest Income
 
Net interest income increased by $2.7 million, or 1.6%, to $166.0 million for the six months ended June 30, 2018 from $163.3 million for the six months ended June 30, 2017.  This increase is attributable to the factors discussed above. As a result of loan growth and the continued change in our deposit mix toward lower cost accounts, both our net interest spread and margin increased. Our net interest rate spread increased to 3.72% for the six months ended June 30, 2018 from 3.64% for the six months ended June 30, 2017 and our net interest margin increased to 3.82% for the six months ended June 30, 2018 from 3.70% for the six months ended June 30, 2017.
 
Provision for Loan Losses
 
The provision for loan losses decreased by $641,000, or 6.3%, to $9.6 million for the six months ended June 30, 2018 from $10.2 million for the six months ended June 30, 2017. This decrease is due primarily to the improvement in the historical loss rates for commercial loans when compared to the same period last year, as well as elevated reserves in the first half of 2017 related to the increased collection risk associated with the closure of our consumer finance subsidiary. Overall credit quality remains strong as total nonaccrual loans decreased to $62.7 million, or 0.79% of total loans at June 30, 2018 from $72.8 million, or 0.95% of total loans, at June 30, 2017, and annualized net charge-offs to average loans decreased to 0.16% for the six months ended June 30, 2018 from 0.20% for the six months ended June 30, 2017.
 
In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels and bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss factors.  We analyze the allowance for loan losses as described in the section entitled “Allowance for Loan Losses.”  The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the losses inherent in our loan portfolio relative to loan mix, economic conditions and historical loss experience.
 
Noninterest Income
 
Noninterest income decreased by $17.1 million, or 27.1%, to $45.9 million for the six months ended June 30, 2018 from $63.0 million for the six months ended June 30, 2017. This decrease is due primarily to the $17.2 million gain on the sale of the Company's Maryland offices during the second quarter of 2017. Additionally, trust and other financial services income decreased by $823,000, or 9.2%, due primarily to the sale of our retirement services subsidiary in December 2017. Exclusive of this gain, noninterest income increased by $102,000, or 0.2% from the prior year. Positively impacting noninterest income during the six months ended June 30, 2018 was a $1.3 million death benefit received on bank owned life insurance and an increase in other operating income as a result of the growth in fee income associated with commercial lending activity.
 
Noninterest Expense
 
Noninterest expense decreased by $7.7 million, or 5.3%, to $137.2 million for the six months ended June 30, 2018 from $144.9 million for the six months ended June 30, 2017.  All noninterest expenses categories, with the exception of professional services, decreased compared to last year's six month period. Most of these decreases are due primarily to restructuring that occurred during 2017, including the closure of our consumer finance subsidiary and the sale of our three Maryland offices and retirement services business. Also, marketing expenses decreased by $840,000, or 16.8%, to $4.2 million for the six months ended June 30, 2018 from $5.0 million for the six months ended June 30, 2017, due primarily to the timing of checking account acquisition campaigns and costs associated with the aforementioned restructuring. Partially offsetting these decreases was an increase in professional services of $69,000, or 1.4%, due primarily to consulting engagements related to the implementation of ASU 2016-13.



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Income Taxes
 
The provision for income taxes decreased by $8.7 million, or 38.4%, to $13.8 million for the six months ended June 30, 2018 from $22.5 million for the six months ended June 30, 2017. This decrease is due primarily to a decrease in income before tax of $6.1 million, or 8.5%, to $65.1 million for the six months ended June 30, 2018 from $71.2 million for the six months ended June 30, 2017. In addition, primarily as a result of the enactment of the Tax Cuts and Jobs Act in December 2017, the Company's effective tax rate, which includes both federal and state income taxes, decreased to 21.3% for the six months ended June 30, 2018 from 31.5% for last year's six months. We anticipate our effective tax rate to be between 21.0% and 23.0% for the year ending December 31, 2018.


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Average Balance Sheet
(Dollars in thousands)
 
The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated.  Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.  Average balances are calculated using daily averages. 
 
Quarter ended June 30,
 
2018
 
2017
 
Average
balance
 
Interest
 
Avg.
yield/
cost (g)
 
Average
balance
 
Interest
 
Avg.
yield/
cost (g)
Assets:
 

 
 

 
 

 
 

 
 

 
 

Interest-earning assets:
 

 
 

 
 

 
 
 
 

 
 

Residential mortgage loans
$
2,761,528

 
27,893

 
4.04
%
 
$
2,721,445

 
28,245

 
4.15
%
Home equity loans
1,281,001

 
15,384

 
4.82
%
 
1,311,274

 
14,344

 
4.39
%
Consumer loans
655,541

 
7,949

 
4.86
%
 
595,170

 
7,405

 
4.99
%
Legacy consumer finance loans
10,428

 
516

 
19.79
%
 
40,945

 
2,110

 
20.61
%
Commercial real estate loans
2,518,170

 
29,034

 
4.56
%
 
2,430,594

 
27,071

 
4.41
%
Commercial loans
624,087

 
7,703

 
4.88
%
 
554,506

 
6,087

 
4.34
%
Loans receivable (a) (b) (includes FTE adjustments of $373 and $548, respectively)
7,850,755

 
88,479

 
4.52
%
 
7,653,934

 
85,262

 
4.47
%
Mortgage-backed securities (c)
569,893

 
3,254

 
2.28
%
 
592,917

 
2,987

 
2.02
%
Investment securities (c) (includes FTE adjustments of $83 and $286, respectively)
235,784

 
1,044

 
1.77
%
 
372,398

 
1,796

 
1.93
%
FHLB stock
7,819

 
85

 
4.36
%
 
7,602

 
50

 
2.64
%
Other interest-earning deposits
103,739

 
469

 
1.79
%
 
208,141

 
536

 
1.02
%
Total interest-earning assets (includes FTE adjustments of $457 and $834, respectively)
8,767,990

 
93,331

 
4.27
%
 
8,834,992

 
90,631

 
4.11
%
Noninterest earning assets (d)
732,065

 
 
 
 
 
716,913

 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,500,055

 
 

 
 

 
$
9,551,905

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity:
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Savings deposits
$
1,699,168

 
773

 
0.18
%
 
$
1,714,290

 
768

 
0.18
%
Interest-bearing checking deposits
1,468,228

 
875

 
0.24
%
 
1,451,787

 
283

 
0.08
%
Money market deposit accounts
1,691,652

 
1,211

 
0.29
%
 
1,839,693

 
1,064

 
0.23
%
Time deposits
1,440,457

 
4,450

 
1.24
%
 
1,518,650

 
3,711

 
0.98
%
Borrowed funds (e)
104,415

 
50

 
0.19
%
 
126,685

 
55

 
0.17
%
Junior subordinated debentures
111,213

 
1,290

 
4.59
%
 
111,213

 
1,185

 
4.22
%
Total interest-bearing liabilities
6,515,133

 
8,649

 
0.53
%
 
6,762,318

 
7,066

 
0.42
%
Noninterest-bearing checking deposits (f)
1,676,344

 
 
 
 
 
1,544,953

 
 

 
 

Noninterest-bearing liabilities
92,252

 
 
 
 
 
59,277

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
8,283,729

 
 

 
 

 
8,366,548

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
1,216,326

 
 
 
 
 
1,185,357

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
9,500,055

 
 

 
 

 
$
9,551,905

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income/ Interest rate spread
 

 
84,682

 
3.74
%
 
 

 
83,565

 
3.69
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest-earning assets/ Net interest margin
$
2,252,857

 
 

 
3.86
%
 
$
2,072,674

 
 

 
3.78
%
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of interest-earning assets to interest-bearing liabilities
1.35
X
 
 

 
 

 
1.31
X
 
 

 
 

(a)
Average gross loans includes loans held as available-for-sale and loans placed on nonaccrual status.
(b)
Interest income includes accretion/ amortization of deferred loan fees/ expenses, which were not material.
(c)
Average balances do not include the effect of unrealized gains or losses on securities held as available-for-sale.
(d)
Average balances include the effect of unrealized gains or losses on securities held as available-for-sale.
(e)
Average balances include FHLB borrowings and collateralized borrowings.
(f)
Average cost of deposits including noninterest-bearing checking were 0.37% and 0.29%, respectively.
(g)
Annualized. Shown on a fully tax-equivalent basis (“FTE”). The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate applicable to each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: loans — 4.50% and 4.44%, respectively; investment securities — 1.63% and 1.62%, respectively; interest-earning assets — 4.25% and 4.08%, respectively. GAAP basis net interest rate spreads were 3.72% and 3.66%, respectively; and GAAP basis net interest margins were 3.84% and 3.75%, respectively.



57

Table of Contents

Rate/ Volume Analysis
(Dollars in Thousands)
 
The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated.  Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change.  Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume.
 
Quarters ended June 30, 2018 and 2017
 
 
Rate
 
Volume
 
Net
Change
Interest earning assets:
 

 
 

 
 

Loans receivable
$
999

 
2,218

 
3,217

Mortgage-backed securities
383

 
(116
)
 
267

Investment securities
(120
)
 
(632
)
 
(752
)
FHLB stock
34

 
1

 
35

Other interest-earning deposits
202

 
(269
)
 
(67
)
Total interest-earning assets
1,498

 
1,202

 
2,700

 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

Savings deposits
12

 
(7
)
 
5

Interest-bearing checking deposits
589

 
3

 
592

Money market deposit accounts
233

 
(86
)
 
147

Time deposits
930

 
(191
)
 
739

Borrowed funds
5

 
(10
)
 
(5
)
Junior subordinated debentures
105

 

 
105

Total interest-bearing liabilities
1,874

 
(291
)
 
1,583

 
 
 
 
 
 
Net change in net interest income
$
(376
)
 
1,493

 
1,117



58

Table of Contents

Average Balance Sheet
(Dollars in thousands)
 
The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated.  Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.  Average balances are calculated using daily averages.
 
Six months ended June 30,
 
2018
 
2017
 
Average
balance
 
Interest
 
Avg.
yield/
cost (g)
 
Average
balance
 
Interest
 
Avg.
yield/
cost (g)
Assets:
 

 
 

 
 

 
 

 
 

 
 

Interest-earning assets:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,758,849

 
55,612

 
4.03
%
 
$
2,720,180

 
55,554

 
4.08
%
Home equity loans
1,289,842

 
30,369

 
4.75
%
 
1,321,902

 
28,545

 
4.35
%
Consumer loans
646,666

 
15,451

 
4.82
%
 
588,043

 
14,623

 
5.01
%
Legacy consumer finance loans
12,828

 
1,284

 
20.02
%
 
43,683

 
4,593

 
21.03
%
Commercial real estate loans
2,494,925

 
56,214

 
4.48
%
 
2,443,262

 
53,633

 
4.37
%
Commercial loans
609,752

 
15,070

 
4.92
%
 
538,760

 
11,602

 
4.28
%
Loans receivable (a) (b) (includes FTE adjustments of $674 and $1,085, respectively)
7,812,862

 
174,000

 
4.49
%
 
7,655,830

 
168,550

 
4.44
%
Mortgage-backed securities (c)
564,007

 
6,267

 
2.22
%
 
532,631

 
5,209

 
1.96
%
Investment securities (c) (includes FTE adjustments of $187 and $592, respectively)
245,979

 
2,216

 
1.80
%
 
375,093

 
3,677

 
1.96
%
FHLB stock
8,582

 
182

 
4.28
%
 
7,454

 
109

 
2.95
%
Other interest-earning deposits
68,970

 
604

 
1.74
%
 
257,427

 
1,196

 
0.92
%
 
 
 
 
 
 
 
 
 
 
 
 
Total interest-earning assets (includes FTE adjustments of $862 and $1,677, respectively)
8,700,400

 
183,269

 
4.25
%
 
8,828,435

 
178,741

 
4.08
%
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest earning assets (d)
755,764

 
 
 
 
 
751,774

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,456,164

 
 

 
 

 
$
9,580,209

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity:
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Savings deposits
$
1,684,909

 
1,522

 
0.18
%
 
$
1,708,441

 
1,524

 
0.18
%
Interest-bearing checking deposits
1,443,981

 
1,477

 
0.21
%
 
1,437,112

 
399

 
0.06
%
Money market deposit accounts
1,699,222

 
2,264

 
0.27
%
 
1,859,383

 
2,138

 
0.23
%
Time deposits
1,427,921

 
8,504

 
1.20
%
 
1,545,959

 
7,230

 
0.94
%
Borrowed funds (e)
118,743

 
173

 
0.29
%
 
131,750

 
112

 
0.17
%
Junior subordinated debentures
111,213

 
2,475

 
4.43
%
 
111,213

 
2,353

 
4.21
%
 
 
 
 
 
 
 
 
 
 
 
 
Total interest-bearing liabilities
6,485,989

 
16,415

 
0.51
%
 
6,793,858

 
13,756

 
0.41
%
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing checking deposits
1,641,493

 
 
 
 
 
1,525,723

 
 

 
 

Noninterest-bearing liabilities
117,530

 
 
 
 
 
82,997

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
8,245,012

 
 

 
 

 
8,402,578

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
1,211,152

 
 
 
 
 
1,177,631

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
9,456,164

 
 

 
 

 
$
9,580,209

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income/ Interest rate spread
 

 
166,854

 
3.74
%
 
 

 
164,985

 
3.67
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest-earning assets/ Net interest margin
$
2,214,411

 
 

 
3.84
%
 
$
2,034,577

 
 

 
3.74
%
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of interest-earning assets to interest-bearing liabilities
1.34
X
 
 

 
 

 
1.30
X
 
 

 
 

(a)
Average gross loans includes loans held as available-for-sale and loans placed on nonaccrual status.
(b)
Interest income includes accretion/ amortization of deferred loan fees/ expenses, which were not material.
(c)
Average balances do not include the effect of unrealized gains or losses on securities held as available-for-sale.
(d)
Average balances include the effect of unrealized gains or losses on securities held as available-for-sale.
(e)
Average balances include FHLB borrowings and collateralized borrowings.
(f)
Average cost of deposits were 0.35% and 0.28%, respectively.
(g)
 Annualized. Shown on a fully tax-equivalent basis (“FTE”). The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate applicable to each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: loans  – 4.47% and 4.41%, respectively; investment securities  – 1.65% and 1.64%, respectively; interest-earning assets  – 4.23% and 4.04%, respectively. GAAP basis net interest rate spreads were 3.72% and 3.64%, respectively; and GAAP basis net interest margins were 3.82% and 3.70%, respectively.



59

Table of Contents

Rate/ Volume Analysis
(Dollars in Thousands)
 
The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated.  Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change.  Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume. 
 
Six months ended June 30, 2018 and 2017
 
 
Rate
 
Volume
 
Net
Change
Interest earning assets:
 
 
 

 
 

Loans receivable
$
1,953

 
3,497

 
5,450

Mortgage-backed securities
751

 
307

 
1,058

Investment securities
(298
)
 
(1,163
)
 
(1,461
)
FHLB stock
56

 
17

 
73

Other interest-earning deposits
584

 
(1,176
)
 
(592
)
Total interest-earning assets
3,046

 
1,482

 
4,528

 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

Savings deposits
19

 
(21
)
 
(2
)
Interest-bearing checking deposits
1,071

 
7

 
1,078

Money market deposit accounts
310

 
(184
)
 
126

Time deposits
1,826

 
(552
)
 
1,274

Borrowed funds
72

 
(11
)
 
61

Junior subordinated debentures
122

 

 
122

Total interest-bearing liabilities
3,420

 
(761
)
 
2,659

 
 
 
 
 
 
Net change in net interest income
$
(374
)
 
2,243

 
1,869

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
As the holding company for a savings bank, one of our primary market risks is interest rate risk.  Interest rate risk is the sensitivity of net interest income to variations in interest rates over a specified time period.  The sensitivity results from differences in the time periods in which interest rate sensitive assets and liabilities mature or re-price.  We attempt to control interest rate risk by matching, within acceptable limits, the re-pricing periods of assets and liabilities.  We have attempted to limit our exposure to interest sensitivity by increasing core deposits, enticing customers to extend certificates of deposit maturities, borrowing funds with fixed-rates and longer maturities and by shortening the maturities of our assets by emphasizing the origination of more short-term fixed rate loans and adjustable rate loans. We also continue to sell a portion of the long-term, fixed-rate mortgage loans that we originate.  In addition, we purchase shorter term or adjustable-rate investment securities and mortgage-backed securities.

We have an Asset/Liability Committee consisting of members of management which meets monthly to review market interest rates, economic conditions, the pricing of interest-earning assets and interest-bearing liabilities and the balance sheet structure.  On a quarterly basis, this Committee also reviews the interest rate risk position and cash flow projections.
 
The Board of Directors has a Risk Management Committee which meets quarterly and reviews interest rate risk and trends, our interest sensitivity position, the liquidity position and the market risk inherent in the investment portfolio.
 
In an effort to assess interest rate risk and market risk, we utilize a simulation model to determine the effect of immediate incremental increases and decreases in interest rates on net income and the market value of equity.  Certain assumptions are made regarding loan prepayments and decay rates of savings and interest-bearing demand accounts.  Because it is difficult to accurately


60

Table of Contents

project the market reaction of depositors and borrowers, the effect of actual changes in interest rates on these assumptions may differ from simulated results.  We have established the following guidelines for assessing interest rate risk:
 
Net interest income simulation.  Given a parallel shift of 100 basis points (“bps”), 200 bps and 300 bps in interest rates, the estimated net income may not decrease by more than 5%, 10% and 15%, respectively, within a one-year period.
 
Net income simulation.  Given a parallel shift of 100 basis points (“bps”), 200 bps and 300 bps in interest rates, the estimated net income may not decrease by more than 10%, 20% and 30%, respectively, within a one-year period.
 
Market value of equity simulation.  The market value of equity is the present value of assets and liabilities.  Given a parallel shift of 100 bps, 200 bps and 300 bps in interest rates, the market value of equity may not decrease by more than 15%, 30% and 35%, respectively, from the computed economic value at current interest rate levels.
 
The following table illustrates the simulated impact of a 100 bps, 200 bps or 300 bps upward or a 100 bps downward movement in interest rates on net income, return on average equity, earnings per share and market value of equity.  This analysis was prepared assuming that interest-earning asset and interest-bearing liability levels at June 30, 2018 remain constant. The impact of the rate movements was computed by simulating the effect of an immediate and sustained shift in interest rates over a twelve-month period from June 30, 2018 levels.
 
 
 
Increase
 
Decrease
Parallel shift in interest rates over the next 12 months
 
100 bps
 
200 bps
 
300 bps
 
100 bps
Projected percentage increase/ (decrease) in net interest income
 
0.3
 %
 
1.3
 %
 
1.5
 %
 
(5.8
)%
Projected percentage increase/ (decrease) in net income
 
2.2
 %
 
5.9
 %
 
7.7
 %
 
(13.9
)%
Projected increase/ (decrease) in return on average equity
 
2.1
 %
 
5.6
 %
 
7.3
 %
 
(13.3
)%
Projected increase/ (decrease) in earnings per share
 
$
0.03

 
$
0.08

 
$
0.10

 
$
(0.16
)
Projected percentage increase/ (decrease) in market value of equity
 
(3.8
)%
 
(6.7
)%
 
(10.2
)%
 
0.7
 %
 
The figures included in the table 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, 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, and actions that may be taken by management in response to interest rate changes.




61

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES
 
Under the supervision of and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report (the “Evaluation Date”).  Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, these disclosure controls and procedures were effective.
 
There were no changes in the internal controls over financial reporting during the period covered by this report or in other factors that have materially affected, or are reasonably likely to materially affect the internal control over financial reporting.
 
PART II.               OTHER INFORMATION
 
Item 1. Legal Proceedings
 
We are subject to a number of asserted and unasserted claims encountered in the normal course of business.  We believe that any additional liability, other than that which has already been accrued, that may result from such potential litigation will not have a material adverse effect on the financial statements.  However, we cannot presently determine whether or not any claims against us will have a material adverse effect on our results of operations in any future reporting period. Refer to note 11.
 
Item 1A.  Risk Factors

Except as previously disclosed, there have been no material updates or additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
a.)                                  Not applicable.
 
b.)                                  Not applicable.

c.)            The following table discloses information regarding the repurchase of shares of common stock during the quarter ending June 30, 2018
Month
 
Number of
shares
purchased
 
Average price
paid per
share
 
Total number of shares
purchased as part of a
publicly announced
repurchase plan (1)
 
Maximum number of
shares yet to be
purchased under the
plan (1)
April
 

 
$

 

 
4,834,089

May
 

 

 

 
4,834,089

June
 

 

 

 
4,834,089

 
 

 
$

 
 

 
 

(1)
Reflects the program for 5,000,000 shares announced December 13, 2012. This program does not have an expiration date.




62

Table of Contents

Item 3. Defaults Upon Senior Securities
 
Not applicable.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
 
Item 5. Other Information
 
Not applicable.
 
Item 6. Exhibits
 
Employment agreement between Northwest Bank, a wholly-owned subsidiary of Northwest Bancshares, Inc. and Ronald J. Seiffert (incorporated by reference to the 8-K filed with the Securities and Exchange Commission on July18, 2018 (file 001-34582))
 
 
Certification of the Chief Executive Officer pursuant to Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
Certification of the Chief Financial Officer pursuant to Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


63

Table of Contents

Signature
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.
 
NORTHWEST BANCSHARES, INC.
(Registrant)
 
 
 
 
 
 
Date:
August 8, 2018
By:
/s/ Ronald J. Seiffert
 
 
Ronald J. Seiffert
 
 
President and Chief Executive Officer
 
 
(Duly Authorized Officer)
 
 
 
 
 
 
Date:
August 8, 2018
By:
/s/ William W. Harvey, Jr.
 
 
 
William W. Harvey, Jr.
 
 
Senior Executive Vice President, Finance and
 
 
   Chief Financial Officer
 
 
(Principal Accounting Officer)



64