SEC Document
Table of Contents
 

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 March 31, 2016
 
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, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large Accelerated Filer x Accelerated Filer o Non-Accelerated Filer o Smaller reporting company 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) 101,853,959 shares outstanding as of April 29, 2016

 

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)
 
March 31,
2016
 
December 31,
2015
Assets
 

 
 

Cash and due from banks
$
86,151

 
92,263

Interest-earning deposits in other financial institutions
74,850

 
74,510

Federal funds sold and other short-term investments
2,320

 
635

Marketable securities available-for-sale (amortized cost of $772,768 and $868,956)
783,940

 
874,405

Marketable securities held-to-maturity (fair value of $28,611 and $32,552)
27,764

 
31,689

Total cash and investments
975,025

 
1,073,502

 
 
 
 
Personal Banking loans:
 

 
 

Residential mortgage loans held for sale
8,952

 

Residential mortgage loans
2,761,411

 
2,750,564

Home equity loans
1,169,821

 
1,187,106

Consumer loans
525,537

 
510,617

Total Personal Banking loans
4,465,721

 
4,448,287

Business Banking loans:
 

 
 

Commercial real estate loans
2,360,863

 
2,351,434

Commercial loans
467,418

 
422,400

Total Business Banking loans
2,828,281

 
2,773,834

Total loans
7,294,002

 
7,222,121

Allowance for loan losses
(62,278
)
 
(62,672
)
Total loans, net
7,231,724

 
7,159,449

 
 
 
 
Federal Home Loan Bank stock, at cost
35,539

 
40,903

Accrued interest receivable
21,712

 
21,072

Real estate owned, net
6,834

 
8,725

Premises and equipment, net
153,000

 
154,351

Bank owned life insurance
168,511

 
168,509

Goodwill
261,736

 
261,736

Other intangible assets
8,398

 
8,982

Other assets
53,809

 
54,670

Total assets
$
8,916,288

 
8,951,899

 
 
 
 
Liabilities and Shareholders’ equity
 

 
 

Liabilities:
 

 
 

Noninterest-bearing checking deposits
$
1,179,950

 
1,177,256

Interest-bearing checking deposits
1,121,779

 
1,080,086

Money market deposit accounts
1,295,138

 
1,274,504

Savings deposits
1,433,788

 
1,386,017

Time deposits
1,639,406

 
1,694,718

Total deposits
6,670,061

 
6,612,581

 
 
 
 
Borrowed funds
857,754

 
975,007

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
38,719

 
33,735

Accrued interest payable
1,894

 
1,993

Other liabilities
66,059

 
54,207

Total liabilities
7,745,700

 
7,788,736

 
 
 
 
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, 101,848,509 and 101,871,737 shares issued, respectively
1,018

 
1,019

Paid-in capital
718,027

 
717,603

Retained earnings
492,316

 
489,292

Unallocated common stock of employee stock ownership plan
(19,815
)
 
(20,216
)
Accumulated other comprehensive loss
(20,958
)
 
(24,535
)
Total shareholders’ equity
1,170,588

 
1,163,163

Total liabilities and shareholders’ equity
$
8,916,288

 
8,951,899


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
March 31,
 
2016
 
2015
Interest income:
 

 
 

Loans receivable
$
80,781

 
70,711

Mortgage-backed securities
2,229

 
2,234

Taxable investment securities
1,038

 
1,045

Tax-free investment securities
724

 
1,348

FHLB dividends
467

 
1,403

Interest-earning deposits
59

 
139

Total interest income
85,298

 
76,880

 
 
 
 
Interest expense:
 

 
 

Deposits
6,088

 
5,766

Borrowed funds
7,658

 
8,133

Total interest expense
13,746

 
13,899

 
 
 
 
Net interest income
71,552

 
62,981

Provision for loan losses
1,660

 
900

Net interest income after provision for loan losses
69,892

 
62,081

Noninterest income:
 

 
 

Gain on sale of investments
127

 
95

Service charges and fees
10,065

 
8,659

Trust and other financial services income
3,261

 
2,776

Insurance commission income
2,714

 
2,428

Gain/ (loss) on real estate owned, net
249

 
(1,046
)
Income from bank owned life insurance
1,595

 
913

Mortgage banking income
218

 
240

Other operating income
1,219

 
560

Total noninterest income
19,448

 
14,625

 
 
 
 
Noninterest expense:
 

 
 

Compensation and employee benefits
33,033

 
27,895

Premises and occupancy costs
6,537

 
6,267

Office operations
3,460

 
2,912

Collections expense
676

 
768

Processing expenses
8,414

 
7,205

Marketing expenses
1,891

 
1,976

Federal deposit insurance premiums
1,503

 
1,347

Professional services
1,833

 
1,792

Amortization of intangible assets
675

 
268

Real estate owned expense
311

 
692

Restructuring/ acquisition expense
635

 
347

Other expenses
4,307

 
2,242

Total noninterest expense
63,275

 
53,711

Income before income taxes
26,065

 
22,995

 
 
 
 
Federal and state income taxes
8,081

 
6,825

 
 
 
 
Net income
$
17,984

 
16,170

 
 
 
 
Basic earnings per share
$
0.18

 
0.18

 
 
 
 
Diluted earnings per share
$
0.18

 
0.18


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
March 31,
 
2016
 
2015
Net Income
$
17,984

 
16,170

Other comprehensive income net of tax:
 

 
 

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

 
 

Unrealized holding gains net of tax of $(2,220) and $(1,885), respectively
3,464

 
2,952

Reclassification adjustment for (gains)/ losses included in net income, net of tax of $(11) and $43 respectively
28

 
(68
)
Net unrealized holding gains on marketable securities
3,492

 
2,884

 
 
 
 
Change in fair value of interest rate swaps, net of tax of $76 and $(24), respectively
(140
)
 
44

 
 
 
 
Defined benefit plan:
 

 
 

Reclassification adjustment for prior period service costs included in net income, net of tax of $(144) and $(140), respectively
225

 
219

 
 
 
 
Other comprehensive income
3,577

 
3,147

 
 
 
 
Total comprehensive income
$
21,561

 
19,317


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 March 31, 2015
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
 
Unallocated
 
Total
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
common stock
 
Shareholders’
 
Shares
 
Amount
 
Capital
 
Earnings
 
Income/ (loss)
 
of ESOP
 
Equity
Beginning balance at December 31, 2014
94,721,453

 
$
947

 
626,134

 
481,577

 
(24,370
)
 
(21,641
)
 
1,062,647

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 

 
16,170

 

 

 
16,170

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax of $(2,006)

 

 

 

 
3,147

 

 
3,147

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income

 

 

 
16,170

 
3,147

 

 
19,317

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
149,897

 
2

 
1,433

 

 

 

 
1,435

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense, including tax benefit of $17

 

 
804

 

 

 
76

 
880

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share repurchases
(318,000
)
 
(3
)
 
(3,787
)
 

 

 

 
(3,790
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid ($0.14 per share)

 

 

 
(12,973
)
 

 

 
(12,973
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance at March 31, 2015
94,553,350

 
$
946

 
624,584

 
484,774

 
(21,223
)
 
(21,565
)
 
1,067,516

 
Quarter ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
 
Unallocated
 
Total
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
common stock
 
Shareholders’
 
Shares
 
Amount
 
Capital
 
Earnings
 
Income/ (loss)
 
of ESOP
 
Equity
Beginning balance at December 31, 2015
101,871,737

 
$
1,019

 
717,603

 
489,292

 
(24,535
)
 
(20,216
)
 
1,163,163

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 

 
17,984

 

 

 
17,984

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax of $(2,299)

 

 

 

 
3,577

 

 
3,577

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income

 

 

 
17,984

 
3,577

 

 
21,561

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
122,672

 
1

 
1,316

 

 

 

 
1,317

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense, including tax benefit of $19

 

 
858

 

 

 
401

 
1,259

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Share repurchases
(145,900
)
 
(2
)
 
(1,750
)
 

 

 

 
(1,752
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid ($0.15 per share)

 

 

 
(14,960
)
 

 

 
(14,960
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance at March 31, 2016
101,848,509

 
$
1,018

 
718,027

 
492,316

 
(20,958
)
 
(19,815
)
 
1,170,588


See accompanying notes to unaudited consolidated financial statements


4

Table of Contents

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
 
 
Quarter ended
March 31,
 
2016
 
2015
OPERATING ACTIVITIES:
 

 
 

Net Income
$
17,984

 
16,170

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

 
 

Provision for loan losses
1,660

 
900

Net (gain)/ loss on sale of assets
(960
)
 
274

Net depreciation, amortization and accretion
2,857

 
1,549

(Increase)/ decrease in other assets
(1,663
)
 
5,685

Decrease in other liabilities
11,907

 
1,136

Net amortization on marketable securities
544

 
87

Noncash write-down of real estate owned
764

 
1,181

Deferred income tax benefit
(650
)
 

Origination of loans held for sale
(9,373
)
 
(221
)
Proceeds from sale of loans held for sale
432

 
224

Noncash compensation expense related to stock benefit plans
1,240

 
863

Net cash provided by operating activities
24,742

 
27,848

 
 
 
 
INVESTING ACTIVITIES:
 

 
 

Purchase of marketable securities available-for-sale

 
(29,985
)
Proceeds from maturities and principal reductions of marketable securities held-to-maturity
3,926

 
12,914

Proceeds from maturities and principal reductions of marketable securities available-for-sale
95,678

 
30,329

Proceeds from sale of marketable securities available-for-sale
91

 
293

Loan originations
(607,818
)
 
(496,009
)
Proceeds from loan maturities and principal reductions
542,989

 
419,198

(Purchase)/ sale of Federal Home Loan Bank stock
5,364

 
(2,999
)
Proceeds from sale of real estate owned
3,228

 
2,729

Sale of real estate owned for investment, net
152

 
152

Purchase of premises and equipment
(2,274
)
 
(2,075
)
Acquisitions, net of cash received

 
(438
)
Net cash provided by/ (used in) investing activities
41,336

 
(65,891
)

5

Table of Contents

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
(in thousands)
 
 
 
Nine months ended
September 30,
 
2015
 
2014
FINANCING ACTIVITIES:
 

 
 

Increase in deposits, net
$
57,480

 
49,525

Proceeds from long-term borrowings

 
85,000

Repayments of long-term borrowings
(35,013
)
 
(10,013
)
Net decrease in short-term borrowings
(82,240
)
 
(19,254
)
Increase in advances by borrowers for taxes and insurance
4,984

 
4,491

Cash dividends paid
(14,960
)
 
(12,973
)
Purchase of common stock for retirement
(1,752
)
 
(3,790
)
Proceeds from stock options exercised
1,317

 
1,435

Excess tax benefit from stock-based compensation
19

 
17

Net cash provided by/ (used in) financing activities
(70,165
)
 
94,438

 
 
 
 
Net increase/ (decrease) in cash and cash equivalents
$
(4,087
)
 
56,395

 
 
 
 
Cash and cash equivalents at beginning of period
$
167,408

 
240,706

Net increase/ (decrease) in cash and cash equivalents
(4,087
)
 
56,395

Cash and cash equivalents at end of period
$
163,321

 
297,101

 
 
 
 
Cash and cash equivalents:
 

 
 

Cash and due from banks
$
86,151

 
83,970

Interest-earning deposits in other financial institutions
74,850

 
212,496

Federal funds sold and other short-term investments
2,320

 
635

Total cash and cash equivalents
$
163,321

 
297,101

 
 
 
 
Cash paid during the period for:
 

 
 

Interest on deposits and borrowings (including interest credited to deposit accounts of $5,684 and $5,256, respectively)
$
13,845

 
13,499

Income taxes
$
733

 
1,027

 
 
 
 
Business acquisitions:
 

 
 

Fair value of assets acquired
$

 
438

Cash paid, net

 
(438
)
Liabilities assumed
$

 

 
 
 
 
Non-cash activities:
 

 
 

Loans foreclosures and repossessions
$
1,531

 
2,623

Sale of real estate owned financed by the Company
$
359

 
114

 
See accompanying notes to unaudited consolidated financial statements


6

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 157 community-banking offices throughout Pennsylvania, western New York, eastern Ohio and Maryland.
 
The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiary, Northwest, and Northwest’s subsidiaries Northwest Settlement Agency, LLC, Northwest Consumer Discount Company, Northwest Financial Services, Inc., Northwest Advisors, Inc., Northwest Capital Group, Inc., Allegheny Services, Inc., Great Northwest Corporation, Boetger & Associates, Inc. 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, 2015 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 March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016, or any other period.
 
Stock-Based Compensation
 
Stock-based compensation expense of $1.2 million and $880,000 for the quarters ended March 31, 2016 and 2015, respectively, was recognized in compensation expense relating to our stock benefit plans.  At March 31, 2016 there was compensation expense of $3.8 million to be recognized for awarded but unvested stock options and $13.3 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 March 31, 2016 we had no liability for unrecognized tax benefits.
 
We recognize interest accrued related to: (1) unrecognized tax benefits in federal and state income taxes and (2) refund claims in other operating income.  We recognize penalties (if any) in federal and state income taxes.  There is no amount accrued for the payment of interest or penalties at March 31, 2016.  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, 2015, 2014 and 2013.  We are currently under audit by the state of New York for the tax periods ended December 31, 2015, 2014 and 2013.
 
Impact of New Accounting Standards
 
In May 2014 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-9, “Revenue from Contracts with Customers (Topic 606)”. This guidance supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of this guidance requires an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and provides five steps to be analyzed to accomplish the core principle. This guidance is effective retrospectively for annual reporting periods beginning after December 15, 2017, including interim periods within those years and early adoption is not permitted.  We are currently evaluating the impact this standard will have on our results of operations and financial position.

7

Table of Contents

 
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 are currently evaluating the impact this standard will have on our results of operations and financial position.
 
In March 2016 the FASB issued ASU 2016-08, “Principal Versus Agent Considerations”. This guidance clarifies the implementation guidance on principal versus agent considerations of ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)". When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). When (or as) an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. This guidance is effective retrospectively for annual reporting periods beginning after December 15, 2017, including interim periods within those years and early adoption is not permitted.  We are currently evaluating the impact this standard will have on our results of operations and financial position.

In March 2016 the FASB issued ASU 2016-09, “Improvements to Employee Share-based Payment Accounting”. This guidance is part of the FASB's Simplification Initiative and simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those years and early adoption is permitted. We do not expect that this standard will have a material impact on our results of operations or financial position.
 
(2)
Business Segments
 
We operate in two reportable business segments: Community Banking and Consumer Finance.  The Community Banking segment provides services traditionally offered by full-service community banks, including business and personal deposit accounts and business and personal loans, as well as insurance, brokerage and investment management and trust services.  The Consumer Finance segment, which is comprised of Northwest Consumer Discount Company, a subsidiary of Northwest, operates 51 offices in Pennsylvania and offers personal installment loans for a variety of consumer and real estate products.  This activity is funded primarily through an intercompany borrowing relationship with Allegheny Services, Inc., a subsidiary of Northwest.  Net income is the primary measure used by management to measure segment performance.  The following tables provide financial information for these reportable segments.  The “All Other” column represents the parent company and elimination entries necessary to reconcile to the consolidated amounts presented in the financial statements.

At or for the quarter ended (in thousands): 
 
 
Community
 
Consumer
 
 
 
 
March 31, 2016
 
Banking
 
Finance
 
All other (1)
 
Consolidated
External interest income
 
$
80,838

 
4,243

 
217

 
85,298

Intersegment interest income/ expense
 
642

 

 
(642
)
 

Interest expense
 
12,681

 
642

 
423

 
13,746

Provision for loan losses
 
1,213

 
447

 

 
1,660

Noninterest income
 
19,006

 
380

 
62

 
19,448

Noninterest expense
 
59,972

 
2,929

 
374

 
63,275

Income tax expense (benefit)
 
8,242

 
251

 
(412
)
 
8,081

Net income
 
$
18,378

 
354

 
(748
)
 
17,984

Total assets
 
$
8,795,000

 
106,784

 
14,504

 
8,916,288

 

8

Table of Contents

 
 
Community
 
Consumer
 
 
 
 
March 31, 2015
 
Banking
 
Finance
 
All other (1)
 
Consolidated
External interest income
 
$
72,331

 
4,330

 
219

 
76,880

Intersegment interest income/ expense
 
575

 

 
(575
)
 

Interest expense
 
12,888

 
575

 
436

 
13,899

Provision for loan losses
 
250

 
650

 

 
900

Noninterest income
 
14,326

 
270

 
29

 
14,625

Noninterest expense
 
50,440

 
2,953

 
318

 
53,711

Income tax expense (benefit)
 
7,035

 
175

 
(385
)
 
6,825

Net income
 
$
16,619

 
247

 
(696
)
 
16,170

Total assets
 
$
7,769,901

 
102,913

 
17,545

 
7,890,359

(1)
Eliminations consist of intercompany loans, interest income and interest expense.
 
 
 

(3)
Investment securities and impairment of investment securities
 
The following table shows the portfolio of investment securities available-for-sale at March 31, 2016 (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
$
10

 

 

 
10

 
 
 
 
 
 
 
 
Debt issued by government sponsored enterprises:
 

 
 

 
 

 
 

Due in one year or less
15,500

 

 
(16
)
 
15,484

Due after one year through five years
210,657

 
747

 
(159
)
 
211,245

Due after five years through ten years
717

 
8

 

 
725

Due after ten years
4,819

 
175

 

 
4,994

 
 
 
 
 
 
 
 
Equity securities
1,351

 
511

 
(6
)
 
1,856

 
 
 
 
 
 
 
 
Municipal securities:
 

 
 

 
 

 
 

Due in one year or less
1,334

 
8

 

 
1,342

Due after one year through five years
13,998

 
173

 
(2
)
 
14,169

Due after five years through ten years
11,648

 
362

 

 
12,010

Due after ten years
49,575

 
1,839

 

 
51,414

 
 
 
 
 
 
 
 
Corporate debt issues:
 

 
 

 
 

 
 

Due after ten years
14,491

 
2,361

 
(511
)
 
16,341

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
110,966

 
3,231

 
(58
)
 
114,139

Variable rate pass-through
51,172

 
2,431

 
(7
)
 
53,596

Fixed rate non-agency CMOs
2,313

 
191

 

 
2,504

Fixed rate agency CMOs
203,585

 
930

 
(1,369
)
 
203,146

Variable rate agency CMOs
80,632

 
400

 
(67
)
 
80,965

Total residential mortgage-backed securities
448,668

 
7,183

 
(1,501
)
 
454,350

Total marketable securities available-for-sale
$
772,768

 
13,367

 
(2,195
)
 
783,940



9

Table of Contents


The following table shows the portfolio of investment securities available-for-sale at December 31, 2015 (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
$
11

 

 

 
11

 
 
 
 
 
 
 
 
Debt issued by government sponsored enterprises:
 

 
 

 
 

 
 

Due in one year or less
15,500

 
3

 
(48
)
 
15,455

Due after one year through five years
257,463

 
298

 
(1,395
)
 
256,366

Due after five years through ten years
12,721

 
14

 
(23
)
 
12,712

Due after ten years
9,815

 
135

 
(43
)
 
9,907

 
 
 
 
 
 
 
 
Equity securities
1,400

 
500

 
(6
)
 
1,894

 
 
 
 
 
 
 
 
Municipal securities:
 

 
 

 
 

 
 

Due in one year or less
1,684

 
8

 

 
1,692

Due after one year through five years
14,327

 
117

 
(4
)
 
14,440

Due after five years through ten years
12,400

 
323

 

 
12,723

Due after ten years
52,286

 
1,727

 

 
54,013

 
 
 
 
 
 
 
 
Corporate debt issues:
 

 
 

 
 

 
 

Due after ten years
14,463

 
2,417

 
(405
)
 
16,475

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
118,266

 
2,480

 
(420
)
 
120,326

Variable rate pass-through
54,292

 
2,616

 
(7
)
 
56,901

Fixed rate non-agency CMOs
2,519

 
230

 

 
2,749

Fixed rate agency CMOs
215,719

 
389

 
(3,881
)
 
212,227

Variable rate agency CMOs
86,090

 
476

 
(52
)
 
86,514

Total residential mortgage-backed securities
476,886

 
6,191

 
(4,360
)
 
478,717

Total marketable securities available-for-sale
$
868,956

 
11,733

 
(6,284
)
 
874,405

 
The following table shows the portfolio of investment securities held-to-maturity at March 31, 2016 (in thousands):
 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
Municipal securities:
 

 
 

 
 

 
 

Due after five years through ten years
$
274

 
2

 

 
276

Due after ten years
4,804

 
192

 

 
4,996

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
6,099

 
353

 

 
6,452

Variable rate pass-through
3,449

 
54

 

 
3,503

Fixed rate agency CMOs
12,223

 
237

 

 
12,460

Variable rate agency CMOs
915

 
9

 

 
924

Total residential mortgage-backed securities
22,686

 
653

 

 
23,339

Total marketable securities held-to-maturity
$
27,764

 
847

 

 
28,611



10

Table of Contents

The following table shows the portfolio of investment securities held-to-maturity at December 31, 2015 (in thousands): 
 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
Municipal securities:
 

 
 

 
 

 
 

Due after five years through ten years
$
274

 
1

 

 
275

Due after ten years
6,336

 
239

 

 
6,575

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
6,458

 
351

 

 
6,809

Variable rate pass-through
3,618

 
41

 

 
3,659

Fixed rate agency CMOs
14,033

 
219

 

 
14,252

Variable rate agency CMOs
970

 
12

 

 
982

Total residential mortgage-backed securities
25,079

 
623

 

 
25,702

Total marketable securities held-to-maturity
$
31,689

 
863

 

 
32,552

 
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 March 31, 2016 (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
$
41,858

 
(168
)
 
30,002

 
(7
)
 
71,860

 
(175
)
Municipal securities
3,812

 
(2
)
 

 

 
3,812

 
(2
)
Corporate issues

 

 
1,915

 
(511
)
 
1,915

 
(511
)
Equity securities
545

 
(6
)
 

 

 
545

 
(6
)
Residential mortgage-backed securities - agency
17,714

 
(35
)
 
112,091

 
(1,466
)
 
129,805

 
(1,501
)
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
$
63,929

 
(211
)
 
144,008

 
(1,984
)
 
207,937

 
(2,195
)

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, 2015 (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
$
143,751

 
(723
)
 
92,961

 
(786
)
 
236,712

 
(1,509
)
Municipal securities
7,505

 
(4
)
 

 

 
7,505

 
(4
)
Corporate debt issues

 

 
2,021

 
(405
)
 
2,021

 
(405
)
Equity securities
544

 
(6
)
 

 

 
544

 
(6
)
Residential mortgage-backed securities - agency
122,109

 
(598
)
 
149,889

 
(3,762
)
 
271,998

 
(4,360
)
 
 
 
 
 
 
 
 
 
 
 
 
Total temporarily impaired securities
$
273,909

 
(1,331
)
 
244,871

 
(4,953
)
 
518,780

 
(6,284
)
 
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 to hold the investments for a period of time sufficient to allow for a recovery in value.  Certain investments are evaluated using our best estimate of future cash flows.

11

Table of Contents

If the estimate of cash flows indicates that an adverse change has occurred, other-than-temporary impairment is recognized for the amount of the unrealized loss that was deemed credit related.
 
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.
 
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 ended (in thousands):
 
2016
 
2015
Beginning balance at January 1, (1)
$
8,436

 
8,894

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

 

Reduction for losses realized during the quarter
(12
)
 
(29
)
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized

 

Ending balance at March 31,
$
8,424

 
$
8,865

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

(4)
Loans receivable
 
The following table shows a summary of our loans receivable at March 31, 2016 and December 31, 2015 (in thousands): 
 
March 31, 2016
 
December 31,
 2015
 
Originated
 
Acquired
 
Total
 
Originated
 
Acquired
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 
 
 
Residential mortgage loans (1)
2,724,630

 
44,303

 
2,768,933

 
2,695,561

 
45,716

 
2,741,277

Home equity loans
1,041,789

 
128,032

 
1,169,821

 
1,055,907

 
131,199

 
1,187,106

Consumer loans
340,463

 
174,993

 
515,456

 
307,961

 
202,656

 
510,617

Total Personal Banking
4,106,882

 
347,328

 
4,454,210

 
4,059,429

 
379,571

 
4,439,000

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,155,242

 
406,389

 
2,561,631

 
2,094,710

 
429,564

 
2,524,274

Commercial loans
424,009

 
62,931

 
486,940

 
372,540

 
65,175

 
437,715

Total Business Banking
2,579,251

 
469,320

 
3,048,571

 
2,467,250

 
494,739

 
2,961,989

Total loans receivable, gross
6,686,133

 
816,648

 
7,502,781

 
6,526,679

 
874,310

 
7,400,989

 
 
 
 
 
 
 
 
 
 
 
 
Deferred loan costs
16,305

 
4,803

 
21,108

 
14,806

 
5,259

 
20,065

Allowance for loan losses
(59,750
)
 
(2,528
)
 
(62,278
)
 
(60,970
)
 
(1,702
)
 
(62,672
)
Undisbursed loan proceeds:
 

 
 

 
 

 
 

 
 

 
 
Residential mortgage loans
(9,597
)
 

 
(9,597
)
 
(10,778
)
 

 
(10,778
)
Commercial real estate loans
(193,111
)
 
(7,657
)
 
(200,768
)
 
(159,553
)
 
(13,287
)
 
(172,840
)
Commercial loans
(16,409
)
 
(3,113
)
 
(19,522
)
 
(11,132
)
 
(4,183
)
 
(15,315
)
Total loans receivable, net
$
6,423,571

 
808,153

 
7,231,724

 
6,299,052

 
860,397

 
7,159,449

(1) Includes $9.0 million of loans held for sale at March 31, 2016.

12

Table of Contents

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): 
 
March 31,
2016
 
December 31,
2015
Acquired loans evaluated individually for future credit losses:
 

 
 
Outstanding principal balance
$
18,474

 
$
21,069

Carrying value
14,502

 
16,867

 
 

 
 
Acquired loans evaluated collectively for future credit losses:
 

 
 
Outstanding principal balance
804,018

 
848,194

Carrying value
796,179

 
839,973

 
 

 
 
Total acquired loans:
 

 
 
Outstanding principal balance
822,492

 
869,263

Carrying value
810,681

 
856,840

 
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, 2014
$

LNB Bancorp, Inc. acquisition
1,672

Accretion
(377
)
Net reclassification from nonaccretable yield
724

Balance at December 31, 2015
$
2,019

Accretion
(373
)
Net reclassification from nonaccretable yield
318

Balance at March 31, 2016
1,964

 
The following table provides information related to acquired impaired loans by portfolio segment and by class of financing receivable at and for the three months ended March 31, 2016 (in thousands):
 
Carrying
value
 
Outstanding
principal
balance
 
Related
impairment
reserve
 
Average
recorded
investment
in impaired
loans
 
Interest
income
recognized
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
1,647

 
2,462

 
16

 
1,814

 
61

Home equity loans
1,657

 
3,064

 
6

 
1,870

 
58

Consumer loans
231

 
443

 
2

 
249

 
9

Total Personal Banking
3,535

 
5,969

 
24

 
3,933

 
128

 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
10,720

 
12,239

 
310

 
11,504

 
242

Commercial loans
247

 
266

 

 
247

 
3

Total Business Banking
10,967

 
12,505

 
310

 
11,751

 
245

 
 
 
 
 
 
 
 
 
 
Total
$
14,502

 
18,474

 
334

 
15,684

 
373


     

13

Table of Contents

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, 2015 (in thousands):

 
Carrying
value
 
Outstanding
principal
balance
 
Related
impairment
reserve
 
Average
recorded
investment
in impaired
loans
 
Interest
income
recognized
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
$
1,981

 
2,910

 
14

 
2,083

 
41

Home equity loans
2,084

 
3,455

 
6

 
2,222

 
51

Consumer loans
267

 
492

 
2

 
305

 
18

Total Personal Banking
4,332

 
6,857

 
22

 
4,610

 
110

 
 
 
 
 
 
 
 
 
 
Business Banking:
 
 
 
 
 
 
 
 
 
Commercial real estate loans
12,288

 
13,946

 
353

 
12,867

 
249

Commercial loans
247

 
266

 

 
335

 
18

Total Business Banking
12,535

 
14,212

 
353

 
13,202

 
267

 
 
 
 
 
 
 
 
 
 
Total
$
16,867

 
21,069

 
375

 
17,812

 
377


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 March 31, 2016 (in thousands):               
 
Balance
March 31,
2016
 
Current
period
provision
 
Charge-offs
 
Recoveries
 
Balance
December 31, 2015
Originated loans:
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
4,257

 
3

 
(489
)
 
51

 
4,692

Home equity loans
3,409

 
(273
)
 
(298
)
 
39

 
3,941

Consumer loans
7,294

 
1,639

 
(2,226
)
 
393

 
7,488

Total Personal Banking
14,960

 
1,369

 
(3,013
)
 
483

 
16,121

 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
29,867

 
(4,205
)
 
(184
)
 
1,908

 
32,348

Commercial loans
14,923

 
2,440

 
(112
)
 
94

 
12,501

Total Business Banking
44,790

 
(1,765
)
 
(296
)
 
2,002

 
44,849

Total originated loans
59,750

 
(396
)
 
(3,309
)
 
2,485

 
60,970

 
 
 
 
 
 
 
 
 
 
Acquired loans:
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
8

 
37

 
(75
)
 
28

 
18

Home equity loans
298

 
738

 
(686
)
 
145

 
101

Consumer loans
199

 
214

 
(177
)
 
52

 
110

Total Personal Banking
505

 
989

 
(938
)
 
225

 
229

 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
1,735

 
813

 
(713
)
 
196

 
1,439

Commercial loans
288

 
254

 
(5
)
 
5

 
34

Total Business Banking
2,023

 
1,067

 
(718
)
 
201

 
1,473

Total acquired loans
2,528

 
2,056

 
(1,656
)
 
426

 
1,702

 
 
 
 
 
 
 
 
 
 
Total
$
62,278

 
1,660

 
(4,965
)
 
2,911

 
62,672


14

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 March 31, 2015 (in thousands):
 
Balance
March 31,
2015
 
Current
period
provision
 
Charge-offs
 
Recoveries
 
Balance
December 31, 2014
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
5,077

 
(282
)
 
(335
)
 
113

 
5,581

Home equity loans
4,043

 
(213
)
 
(342
)
 
48

 
4,550

Consumer loans
5,835

 
1,270

 
(1,940
)
 
387

 
6,118

Total Personal Banking
14,955

 
775

 
(2,617
)
 
548

 
16,249

 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
33,252

 
242

 
(1,113
)
 
734

 
33,389

Commercial loans
15,113

 
270

 
(724
)
 
2,052

 
13,515

Total Business Banking
48,365

 
512

 
(1,837
)
 
2,786

 
46,904

 
 
 
 
 
 
 
 
 
 
Unallocated
3,978

 
(387
)
 

 

 
4,365

Total
$
67,298

 
900

 
(4,454
)
 
3,334

 
67,518

 
 
At March 31, 2016, we expect to fully collect the carrying value of our acquired 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 acquired 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.
 
The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at March 31, 2016 (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
$
2,770,363

 
4,265

 
18,300

 
4

 
6,842

 
1,185

 

Home equity loans
1,169,821

 
3,707

 
7,663

 

 
2,048

 
501

 

Consumer loans
525,537

 
7,493

 
2,896

 
766

 

 

 

Total Personal Banking
4,465,721

 
15,465

 
28,859

 
770

 
8,890

 
1,686

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,360,863

 
31,602

 
35,995

 
124

 
27,630

 
2,180

 
384

Commercial loans
467,418

 
15,211

 
9,298

 

 
11,728

 
2,054

 
81

Total Business Banking
2,828,281

 
46,813

 
45,293

 
124

 
39,358

 
4,234

 
465

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
7,294,002

 
62,278

 
74,152

 
894

 
48,248

 
5,920

 
465

(1)
Includes $17.7 million of nonaccrual TDRs.
(2)
Represents loans 90 days past maturity and still accruing.











15

Table of Contents

The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at December 31, 2015 (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
$
2,740,892

 
4,710

 
19,772

 
4

 
6,360

 
1,189

 

Home equity loans
1,187,106

 
4,042

 
7,522

 

 
2,298

 
605

 

Consumer loans
520,289

 
7,598

 
3,452

 
976

 

 

 

Total Personal Banking
4,448,287

 
16,350

 
30,746

 
980

 
8,658

 
1,794

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,351,434

 
33,787

 
33,421

 
206

 
31,970

 
2,257

 
241

Commercial loans
422,400

 
12,535

 
7,495

 
148

 
10,487

 
631

 
79

Total Business Banking
2,773,834

 
46,322

 
40,916

 
354

 
42,457

 
2,888

 
320

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
7,222,121

 
62,672

 
71,662

 
1,334

 
51,115

 
4,682

 
320

(1)
Includes $21.1 million of nonaccrual TDRs.
(2)
Represents loans 90 days past maturity and still accruing.

The following table provides geographical information related to the loan portfolio by portfolio segment and class of financing receivable at March 31, 2016 (in thousands): 
 
Pennsylvania
 
New York
 
Ohio
 
Maryland
 
Other
 
Total
Loans receivable:
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,334,241

 
177,196

 
71,832

 
127,886

 
59,208

 
2,770,363

Home equity loans
865,855

 
123,215

 
151,288

 
24,550

 
4,913

 
1,169,821

Consumer loans
256,254

 
11,997

 
107,090

 
1,798

 
148,398

 
525,537

Total Personal Banking
3,456,350

 
312,408

 
330,210

 
154,234

 
212,519

 
4,465,721

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
962,835

 
775,578

 
440,982

 
120,771

 
60,697

 
2,360,863

Commercial loans
321,533

 
54,186

 
74,000

 
6,888

 
10,811

 
467,418

Total Business Banking
1,284,368

 
829,764

 
514,982

 
127,659

 
71,508

 
2,828,281

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
4,740,718

 
1,142,172

 
845,192

 
281,893

 
284,027

 
7,294,002

 
 
 
 
 
 
 
 
 
 
 
 
Percentage of total loans receivable
65.0
%
 
15.6
%
 
11.6
%
 
3.9
%
 
3.9
%
 
100.0
%
 

16

Table of Contents

The following table provides delinquency information related to the loan portfolio by portfolio segment and class of financing receivable at March 31, 2016 (in thousands): 
 
Pennsylvania
 
New York
 
Ohio
 
Maryland
 
Other
 
Total
Loans 90 or more days delinquent: (1)
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
9,580

 
1,501

 
983

 
1,578

 
1,031

 
14,673

Home equity loans
3,167

 
738

 
1,362

 
933

 

 
6,200

Consumer loans
2,158

 
101

 
17

 

 
110

 
2,386

Total Personal Banking
14,905

 
2,340

 
2,362

 
2,511

 
1,141

 
23,259

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
7,900

 
2,379

 
4,535

 
122

 
506

 
15,442

Commercial loans
2,154

 
749

 
392

 
161

 

 
3,456

Total Business Banking
10,054

 
3,128

 
4,927

 
283

 
506

 
18,898

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
24,959

 
5,468

 
7,289

 
2,794

 
1,647

 
42,157

 
 
 
 
 
 
 
 
 
 
 
 
Percentage of total loans 90 or more days delinquent
59.2
%
 
13.0
%
 
17.3
%
 
6.6
%
 
3.9
%
 
100.0
%
(1)
 Includes $3.1 million of acquired loans considered accruing.

The following table provides geographical information related to the loan portfolio by portfolio segment and class of financing receivable at December 31, 2015 (in thousands):
 
Pennsylvania
 
New York
 
Ohio
 
Maryland
 
Other
 
Total
Loans receivable:
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,310,860

 
171,790

 
70,209

 
129,129

 
58,904

 
2,740,892

Home equity loans
879,447

 
124,291

 
154,003

 
24,458

 
4,907

 
1,187,106

Consumer loans
260,170

 
12,244

 
102,034

 
1,870

 
143,971

 
520,289

Total Personal Banking
3,450,477

 
308,325

 
326,246

 
155,457

 
207,782

 
4,448,287

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
965,090

 
749,435

 
453,180

 
122,775

 
60,954

 
2,351,434

Commercial loans
284,611

 
53,420

 
68,327

 
5,662

 
10,380

 
422,400

Total Business Banking
1,249,701

 
802,855

 
521,507

 
128,437

 
71,334

 
2,773,834

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
4,700,178

 
1,111,180

 
847,753

 
283,894

 
279,116

 
7,222,121

 
 
 
 
 
 
 
 
 
 
 
 
Percentage of total loans receivable
65.1
%
 
15.4
%
 
11.7
%
 
3.9
%
 
3.9
%
 
100.0
%
 

17

Table of Contents

The following table provides delinquency information related to the loan portfolio by portfolio segment and class of financing receivable at December 31, 2015 (in thousands):
 
Pennsylvania
 
New York
 
Ohio
 
Maryland
 
Other
 
Total
Loans 90 or more days delinquent: (1)
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
10,998

 
1,801

 
1,308

 
1,341

 
902

 
16,350

Home equity loans
3,204

 
639

 
1,294

 
975

 

 
6,112

Consumer loans
2,780

 
90

 
24

 

 
32

 
2,926

Total Personal Banking
16,982

 
2,530

 
2,626

 
2,316

 
934

 
25,388

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
10,439

 
3,012

 
4,823

 
251

 
506

 
19,031

Commercial loans
1,582

 
859

 
158

 

 

 
2,599

Total Business Banking
12,021

 
3,871

 
4,981

 
251

 
506

 
21,630

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
29,003

 
6,401

 
7,607

 
2,567

 
1,440

 
47,018

 
 
 
 
 
 
 
 
 
 
 
 
Percentage of total loans 90 or more days delinquent
61.6
%
 
13.6
%
 
16.2
%
 
5.5
%
 
3.1
%
 
100.0
%
(1)
 Includes $3.8 million of acquired loans considered accruing.

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 three months ended March 31, 2016 (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
$
14,301

 
3,999

 

 
5,759

 
24,059

 
24,770

 
278

Home equity loans
5,922

 
1,741

 

 
1,651

 
9,314

 
9,748

 
122

Consumer loans
2,360

 
536

 

 

 
2,896

 
3,333

 
38

Total Personal Banking
22,583

 
6,276

 

 
7,410

 
36,269

 
37,851

 
438

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
13,165

 
22,830

 
19,487

 
14,983

 
70,465

 
76,887

 
839

Commercial loans
3,314

 
5,984

 
2,421

 
4,055

 
15,774

 
14,891

 
251

Total Business Banking
16,479

 
28,814

 
21,908

 
19,038

 
86,239

 
91,778

 
1,090

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
39,062

 
35,090

 
21,908

 
26,448

 
122,508

 
129,629

 
1,528

 

18

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 year ended December 31, 2015 (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
$
15,810

 
3,962

 

 
5,086

 
24,858

 
24,554

 
944

Home equity loans
5,650

 
1,872

 

 
1,847

 
9,369

 
9,644

 
497

Consumer loans
2,900

 
552

 

 

 
3,452

 
2,977

 
101

Total Personal Banking
24,360

 
6,386

 

 
6,933

 
37,679

 
37,175

 
1,542

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
16,449

 
16,972

 
16,121

 
16,467

 
66,009

 
77,166

 
3,226

Commercial loans
2,459

 
5,036

 
2,014

 
4,654

 
14,163

 
16,187

 
694

Total Business Banking
18,908

 
22,008

 
18,135

 
21,121

 
80,172

 
93,353

 
3,920

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
43,268

 
28,394

 
18,135

 
28,054

 
117,851

 
130,528

 
5,462


The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at March 31, 2016 (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
$
2,762,834

 
7,529

 
7,529

 
1,203

 

Home equity loans
1,167,773

 
2,048

 
2,048

 
601

 

Consumer loans
525,441

 
96

 
96

 
22

 

Total Personal Banking
4,456,048

 
9,673

 
9,673

 
1,826

 

 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,311,452

 
49,411

 
31,968

 
2,674

 
17,443

Commercial loans
455,146

 
12,272

 
8,922

 
973

 
3,350

Total Business Banking
2,766,598

 
61,683

 
40,890

 
3,647

 
20,793

 
 
 
 
 
 
 
 
 
 
Total
$
7,222,646

 
71,356

 
50,563

 
5,473

 
20,793

 

19

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 December 31, 2015 (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
$
2,733,741

 
7,151

 
7,151

 
1,189

 

Home equity loans
1,184,808

 
2,298

 
2,298

 
605

 

Consumer loans
520,159

 
130

 
130

 
50

 

Total Personal Banking
4,438,708

 
9,579

 
9,579

 
1,844

 

 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,297,599

 
53,835

 
35,937

 
2,675

 
17,898

Commercial loans
411,342

 
11,058

 
7,673

 
489

 
3,385

Total Business Banking
2,708,941

 
64,893

 
43,610

 
3,164

 
21,283

 
 
 
 
 
 
 
 
 
 
Total
$
7,147,649

 
74,472

 
53,189

 
5,008

 
21,283


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 reasonable 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.


20

Table of Contents

The following table provides a roll forward of troubled debt restructurings for the periods indicated (in thousands):
 
For the quarters ended March 31,
 
2016
 
2015
 
Number of
contracts
 
Amount
 
Number of
contracts
 
Amount
Beginning TDR balance:
227

 
$
51,115

 
248

 
$
61,788

New TDRs
9

 
3,349

 
2

 
112

Re-modified TDRs
1

 
200

 
1

 
85

Net paydowns
 

 
(1,483
)
 
 

 
(823
)
Charge-offs:
 

 
 

 
 

 
 

Residential mortgage loans

 

 

 

Home equity loans

 

 
2

 
(31
)
Commercial real estate loans

 

 
1

 
(14
)
Commercial loans
1

 
(43
)
 
2

 
(387
)
Paid-off loans:
 

 
 

 
 

 
 

Residential mortgage loans

 

 

 

Home equity loans
2

 
(231
)
 
1

 
(6
)
Commercial real estate loans
4

 
(4,521
)
 
2

 
(79
)
Commercial loans
2

 
(138
)
 

 

Ending TDR balance:
227

 
$
48,248

 
242

 
$
60,645

 
 
 
 
 
 
 
 
Accruing TDRs
 

 
$
30,549

 
 

 
$
40,802

Non-accrual TDRs
 

 
17,699

 
 

 
19,843

 
 




The following table provides 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
March 31, 2016
 
Number
of
contracts
 
Recorded
investment
at the time of
modification
 
Current
recorded
investment
 
Current
allowance
Troubled debt restructurings:
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

Residential mortgage loans
3

 
$
507

 
505

 
46

Home equity loans
1

 
56

 
55

 
13

Consumer loans

 

 

 

Total Personal Banking
4

 
563

 
560

 
59

 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

Commercial real estate loans
2

 
1,284

 
1,284

 
269

Commercial loans
4

 
1,702

 
1,689

 
538

Total Business Banking
6

 
2,986

 
2,973

 
807

 
 
 
 
 
 
 
 
Total
10

 
$
3,549

 
3,533

 
866


At March 31, 2016, no TDRs modified within the previous twelve months have subsequently defaulted.

21

Table of Contents

The following table provides 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
March 31, 2015
 
Number
of
contracts
 
Recorded
investment
at the time of
modification
 
Current
recorded
investment
 
Current
allowance
Troubled debt restructurings:
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

Residential mortgage loans
2

 
$
112

 
112

 
1

Home equity loans
1

 
85

 
84

 
17

Consumer loans

 

 

 

Total Personal Banking
3

 
197

 
196

 
18

 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

Commercial real estate loans

 

 

 

Commercial loans

 

 

 

Total Business Banking

 

 

 

 
 
 
 
 
 
 
 
Total
3

 
$
197

 
196

 
18

 
 
 
 
 
 
 
 
Troubled debt restructurings modified within the previous twelve months that have subsequently defaulted:
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

Residential mortgage loans

 
$

 

 

Home equity loans

 

 

 

Consumer loans

 

 

 

Total Personal Banking

 

 

 

 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

Commercial real estate loans

 

 

 

Commercial loans
1

 
50

 

 

Total Business Banking
1

 
50

 

 

 
 
 
 
 
 
 
 
Total
1

 
$
50

 

 


The following table provides information as of March 31, 2016 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 March 31, 2016 (dollars in thousands):
 
 
 
Type of modification
 
 
 
Number of
contracts
 
Rate
 
Payment
 
Maturity
date
 
Other
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
3

 
$
364

 

 
93

 
48

 
505

Home equity loans
1

 
55

 

 

 

 
55

Consumer loans

 

 

 

 

 

Total Personal Banking
4

 
419

 

 
93

 
48

 
560

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2

 

 

 

 
1,284

 
1,284

Commercial loans
4

 

 
863

 

 
826

 
1,689

Total Business Banking
6

 

 
863

 

 
2,110

 
2,973

 
 
 
 
 
 
 
 
 
 
 
 
Total
10

 
$
419

 
863

 
93

 
2,158

 
3,533

 

22

Table of Contents

The following table provides information as of March 31, 2015 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 March 31, 2015 (dollars in thousands): 
 
 
 
Type of modification
 
 
 
Number of
contracts
 
Rate
 
Payment
 
Maturity
date
 
Other
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
2

 
$

 

 
112

 

 
112

Home equity loans
1

 
84

 

 

 

 
84

Consumer loans

 

 

 

 

 

Total Personal Banking
3

 
84

 

 
112

 

 
196

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans

 

 

 

 

 

Commercial loans

 

 

 

 

 

Total Business Banking

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Total
3

 
$
84

 

 
112

 

 
196

 
 
The following table provides information related to re-modified troubled debt restructurings by portfolio segment and by class of financing receivable for the quarter ended March 31, 2016 (dollars in thousands): 
 
Number of
 
Type of re-modification
 
 
 
re-modified
TDRs
 
Rate
 
Payment
 
Maturity
date
 
Other
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans

 
$

 

 

 

 

Home equity loans

 

 

 

 

 

Consumer loans

 

 

 

 

 

Total Personal Banking

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
1

 

 

 

 
200

 
200

Commercial loans

 

 

 

 

 

Total Business Banking
1

 

 

 

 
200

 
200

 
 
 
 
 
 
 
 
 
 
 
 
Total
1

 
$

 

 

 
200

 
200

 
The following table provides information related to re-modified troubled debt restructurings by portfolio segment and by class of financing receivable for the quarter ended March 31, 2015 (dollars in thousands): 
 
Number of
 
Type of re-modification
 
 
 
re-modified
TDRs
 
Rate
 
Payment
 
Maturity
date
 
Other
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans

 
$

 

 

 

 

Home equity loans
1

 
84

 

 

 

 
84

Consumer loans

 

 

 

 

 

Total Personal Banking
1

 
84

 

 

 

 
84

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans

 

 

 

 

 

Commercial loans

 

 

 

 

 

Total Business Banking

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
Total
1

 
$
84

 

 

 

 
84

 

23

Table of Contents

 
The following table provides information related to loan payment delinquencies at March 31, 2016 (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
$
23,633

 
1,308

 
14,213

 
39,154

 
2,686,906

 
2,726,060

 

Home equity loans
4,339

 
1,058

 
5,111

 
10,508

 
1,031,281

 
1,041,789

 

Consumer loans
4,761

 
1,652

 
2,251

 
8,664

 
337,077

 
345,741

 

Total Personal Banking
32,733

 
4,018

 
21,575

 
58,326

 
4,055,264

 
4,113,590

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
23,102

 
1,081

 
11,597

 
35,780

 
1,926,351

 
1,962,131

 

Commercial loans
3,133

 
375

 
3,069

 
6,577

 
401,023

 
407,600

 

Total Business Banking
26,235

 
1,456

 
14,666

 
42,357

 
2,327,374

 
2,369,731

 

Total originated loans
58,968

 
5,474

 
36,241

 
100,683

 
6,382,638

 
6,483,321

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
861

 
50

 
460

 
1,371

 
42,932

 
44,303

 
372

Home equity loans
1,012

 
198

 
1,089

 
2,299

 
125,733

 
128,032

 
278

Consumer loans
750

 
151

 
135

 
1,036

 
178,760

 
179,796

 
26

Total Personal Banking
2,623

 
399

 
1,684

 
4,706

 
347,425

 
352,131

 
676

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
4,372

 

 
3,845

 
8,217

 
390,515

 
398,732

 
2,277

Commercial loans

 

 
387

 
387

 
59,431

 
59,818

 
142

Total Business Banking
4,372

 

 
4,232

 
8,604

 
449,946

 
458,550

 
2,419

Total acquired loans
6,995

 
399

 
5,916

 
13,310

 
797,371

 
810,681

 
3,095

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
65,963

 
5,873

 
42,157

 
113,993

 
7,180,009

 
7,294,002

 
3,095

(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.


24

Table of Contents

The following table provides information related to loan payment delinquencies at December 31, 2015 (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
$
25,503

 
7,541

 
15,564

 
48,608

 
2,646,568

 
2,695,176

 

Home equity loans
4,870

 
1,836

 
5,251

 
11,957

 
1,043,950

 
1,055,907

 

Consumer loans
6,092

 
2,340

 
2,857

 
11,289

 
301,085

 
312,374

 

Total Personal Banking
36,465

 
11,717

 
23,672

 
71,854

 
3,991,603

 
4,063,457

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
22,212

 
6,875

 
14,942

 
44,029

 
1,891,128

 
1,935,157

 

Commercial loans
1,703

 
598

 
2,449

 
4,750

 
356,658

 
361,408

 

Total Business Banking
23,915

 
7,473

 
17,391

 
48,779

 
2,247,786

 
2,296,565

 

Total originated loan
60,380

 
19,190

 
41,063

 
120,633

 
6,239,389

 
6,360,022

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
$
440

 
249

 
786

 
1,475

 
44,241

 
45,716

 
540

Home equity loans
936

 
642

 
861

 
2,439

 
128,760

 
131,199

 
462

Consumer loans
1,009

 
181

 
69

 
1,259

 
206,656

 
207,915

 
26

Total Personal Banking
2,385

 
1,072

 
1,716

 
5,173

 
379,657

 
384,830

 
1,028

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,665

 
1,353

 
4,089

 
8,107

 
408,170

 
416,277

 
2,582

Commercial loans
1,165

 

 
150

 
1,315

 
59,677

 
60,992

 
140

Total Business Banking
3,830

 
1,353

 
4,239

 
9,422

 
467,847

 
477,269

 
2,722

Total acquired loan
6,215

 
2,425

 
5,955

 
14,595

 
847,504

 
862,099

 
3,750

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
66,595

 
21,615

 
47,018

 
135,228

 
7,086,893

 
7,222,121

 
3,750

(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.

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.
 
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

25

Table of Contents

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 March 31, 2016 (in thousands): 
 
Pass
 
Special
mention
 
Substandard
 
Doubtful
 
Loss
 
Total loans
receivable
Originated loans:
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,711,482

 

 
13,261

 

 
1,317

 
2,726,060

Home equity loans
1,034,439

 

 
7,350

 

 

 
1,041,789

Consumer loans
343,672

 

 
2,069

 

 

 
345,741

Total Personal Banking
4,089,593

 

 
22,680

 

 
1,317

 
4,113,590

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
1,790,699

 
56,733

 
114,684

 
15

 

 
1,962,131

Commercial loans
351,694

 
15,716

 
39,078

 
1,112

 

 
407,600

Total Business Banking
2,142,393

 
72,449

 
153,762

 
1,127

 

 
2,369,731

Total originated loans
6,231,986

 
72,449

 
176,442

 
1,127

 
1,317

 
6,483,321

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans:
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
43,843

 

 
460

 

 

 
44,303

Home equity loans
126,943

 

 
1,089

 

 

 
128,032

Consumer loans
179,661

 

 
135

 

 

 
179,796

Total Personal Banking
350,447

 

 
1,684

 

 

 
352,131

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
376,411

 
6,962

 
15,359

 

 

 
398,732

Commercial loans
58,300

 
709

 
809

 

 

 
59,818

Total Business Banking
434,711

 
7,671

 
16,168

 

 

 
458,550

Total acquired loans
785,158

 
7,671

 
17,852

 

 

 
810,681

 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
7,017,144

 
80,120

 
194,294

 
1,127

 
1,317

 
7,294,002



26

Table of Contents

The following table sets forth information about credit quality indicators, which were updated during the year ended December 31, 2015 (in thousands):
 
Pass
 
Special
mention
 
Substandard
 
Doubtful
 
Loss
 
Total loans
receivable
Originated loans:
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,680,562

 

 
13,274

 

 
1,340

 
2,695,176

Home equity loans
1,048,397

 

 
7,510

 

 

 
1,055,907

Consumer loans
309,900

 

 
2,474

 

 

 
312,374

Total Personal Banking
4,038,859

 

 
23,258

 

 
1,340

 
4,063,457

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
1,778,140

 
46,518

 
110,384

 
115

 

 
1,935,157

Commercial loans
299,455

 
23,023

 
37,820

 
1,110

 

 
361,408

Total Business Banking
2,077,595

 
69,541

 
148,204

 
1,225

 

 
2,296,565

Total originated loans
6,116,454

 
69,541

 
171,462

 
1,225

 
1,340

 
6,360,022

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans:
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
44,930

 

 
786

 

 

 
45,716

Home equity loans
130,338

 

 
861

 

 

 
131,199

Consumer loans
207,846

 

 
69

 

 

 
207,915

Total Personal Banking
383,114

 

 
1,716

 

 

 
384,830

 
 
 
 
 
 
 
 
 
 
 
 
Business Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
392,811

 
6,872

 
16,594

 

 

 
416,277

Commercial loans
59,948

 
707

 
337

 

 

 
60,992

Total Business Banking
452,759

 
7,579

 
16,931

 

 

 
477,269

Total acquired loans
835,873

 
7,579

 
18,647

 

 

 
862,099

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
6,952,327

 
77,120

 
190,109

 
1,225

 
1,340

 
7,222,121

 
(5)
Goodwill and Other Intangible Assets
 
The following table provides information for intangible assets subject to amortization at the dates indicated (in thousands):
 
March 31,
2016
 
December 31,
2015
Amortizable intangible assets:
 

 
 

Core deposit intangibles — gross
$
37,953

 
30,578

Acquisitions

 
7,375

Less: accumulated amortization
(31,653
)
 
(31,192
)
Core deposit intangibles — net
6,300

 
6,761

Customer and Contract intangible assets — gross
8,496

 
8,234

Acquisitions
91

 
262

Less: accumulated amortization
(6,489
)
 
(6,275
)
Customer and Contract intangible assets — net
$
2,098

 
2,221



27

Table of Contents

The following table shows the actual aggregate amortization expense for the quarters ended March 31, 2016 and 2015, 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 March 31, 2016
$
675

For the quarter ended March 31, 2015
268

For the year ending December 31, 2016
2,614

For the year ending December 31, 2017
2,109

For the year ending December 31, 2018
1,674

For the year ending December 31, 2019
1,239

For the year ending December 31, 2020
804

For the year ending December 31, 2021
455

 
The following table provides information for the changes in the carrying amount of goodwill (in thousands):
 
Community
Banking
 
Consumer
Finance
 
Total
Balance at December 31, 2014
$
173,710

 
1,613

 
175,323

Goodwill acquired
86,413

 

 
86,413

Impairment losses

 

 

Balance at December 31, 2015
260,123

 
1,613

 
261,736

Goodwill acquired

 

 

Impairment losses

 

 

Balance at March 31, 2016
$
260,123

 
1,613

 
261,736

 
We performed our annual goodwill impairment test as of June 30, 2015 and concluded that goodwill was not impaired. At March 31, 2016, there were no changes in our operations or other factors that would cause us to update that test. See Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2015 Annual Report on Form 10-K for a description of our testing procedures.
 
(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 March 31, 2016, the maximum potential amount of future payments we could be required to make under these standby letters of credit was $33.0 million, of which $24.3 million is fully collateralized.  At March 31, 2016, we had a liability, which represents deferred income, of $1.3 million related to the standby letters of credit.  There are no recourse provisions that would enable us to recover any amounts from third parties.

(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. Stock options to purchase 521,786 shares of common stock with a weighted average exercise price of $13.15 per share were outstanding during the quarter ended March 31, 2016 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares of $12.71. Stock options to purchase 3,744,878 shares of common stock with a weighted average exercise price of $12.43 per share were outstanding during the quarter ended March 31, 2015 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares of $11.89.
 

28

Table of Contents

The computation of basic and diluted earnings per share follows (in thousands, except share data and per share amounts): 
 
Quarter ended
March 31,
 
2016
 
2015
Reported net income
$
17,984

 
16,170

 
 
 
 
Weighted average common shares outstanding
98,889,744

 
91,634,064

Dilutive potential shares due to effect of stock options
490,265

 
268,007

Total weighted average common shares and dilutive potential shares
99,380,009

 
91,902,071

 
 
 
 
Basic earnings per share:
$
0.18

 
0.18

 
 
 
 
Diluted earnings per share:
$
0.18

 
0.18


(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):
 
Components of net periodic benefit cost
 
 
Quarter ended March 31,
 
Pension benefits
 
Other post-retirement benefits
 
2016
 
2015
 
2016
 
2015
Service cost
$
1,374

 
1,430

 

 

Interest cost
1,696

 
1,531

 
17

 
15

Expected return on plan assets
(2,474
)
 
(2,593
)
 

 

Amortization of prior service cost
(581
)
 
(581
)
 

 

Amortization of the net loss
927

 
925

 
23

 
15

Net periodic (benefit)/ cost
$
942

 
712

 
40

 
30

 
We anticipate making a contribution to our defined benefit pension plan of $4.0 million to $8.0 million during the year ending December 31, 2016.
 
(9)
Disclosures About Fair Value of Financial Instruments
 
Fair value information about financial instruments, whether or not recognized in the consolidated statement of financial condition, is required to be disclosed. These requirements exclude certain financial instruments and all nonfinancial instruments. 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.

29

Table of Contents

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.  Certain corporate debt securities do not have an active market and as such the broker pricing received uses alternative methods. The fair value of these corporate debt securities is determined by using a discounted cash flow model using market assumptions, which generally include cash flow, collateral and other market assumptions.  As such, these securities are included herein as Level 3 assets.
 
Equity securities — available for sale - Level 1 securities include publicly traded securities valued using quoted market prices.  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.
 
Loans Receivable
 
Loans with comparable characteristics including collateral and re-pricing structures are segregated for valuation purposes. Characteristics include remaining term, coupon interest, and estimated prepayment speeds. Delinquent loans are separately evaluated given the impact delinquency has on the projected future cash flow of the loan and the approximate discount or market rate.  Each loan pool is separately valued utilizing a discounted cash flow analysis. Projected monthly cash flows are discounted to present value using a market rate for comparable loans, which is not considered an exit price.
 
Federal Home Loan Bank (“FHLB”) Stock
 
Due to the restrictions placed on the transferability of FHLB stock it is not practical to determine the fair value.
 
Deposit Liabilities
 
The estimated fair value of deposits with no stated maturity, which includes demand deposits, money market, and other savings accounts, is the amount payable on demand. Although market premiums paid for depository institutions reflect an additional

30

Table of Contents

value for these low-cost deposits, adjusting fair value for any value expected to be derived from retaining those deposits for a future period of time or from the benefit that results from the ability to fund interest-earning assets with these deposit liabilities is prohibited. The fair value estimates of deposit liabilities do not include the benefit that results from the low-cost funding provided by these deposits compared to the cost of borrowing funds in the market. Fair values for time deposits are estimated using a discounted cash flow calculation that applies contractual cost currently being offered in the existing portfolio to current market rates being offered locally for deposits of similar remaining maturities. The valuation adjustment for the portfolio consists of the present value of the difference of these two cash flows, discounted at the assumed market rate of the corresponding maturity.
 
Borrowed Funds
 
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 swap agreements (“swaps”)
 
The fair value of the swaps is the amount we would expect to pay to terminate the agreements and is based upon the present value of the expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate.
 
Off-Balance Sheet Financial Instruments
 
These financial instruments generally are not sold or traded, and estimated fair values are not readily available. However, the fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. Commitments to extend credit are generally short-term in nature and, if drawn upon, are issued under current market terms. At March 31, 2016 and December 31, 2015, there was no significant unrealized appreciation or depreciation on these financial instruments.

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 March 31, 2016 (in thousands): 
 
Carrying
amount
 
Estimated
fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
163,321

 
163,321

 
163,321

 

 

Securities available-for-sale
783,940

 
783,940

 
1,856

 
773,494

 
8,590

Securities held-to-maturity
27,764

 
28,611

 

 
28,611

 

Loans receivable, net
7,231,724

 
7,619,094

 
8,952

 

 
7,610,142

Accrued interest receivable
21,712

 
21,712

 
21,712

 

 

FHLB Stock
35,539

 
35,539

 

 

 

Total financial assets
$
8,264,000

 
8,652,217

 
195,841

 
802,105

 
7,618,732

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Savings and checking deposits
$
5,030,655

 
5,030,655

 
5,030,655

 

 

Time deposits
1,639,406

 
1,655,903

 

 

 
1,655,903

Borrowed funds
857,754

 
877,163

 
142,424

 

 
734,739

Junior subordinated debentures
111,213

 
116,211

 

 

 
116,211

Cash flow hedges - swaps
4,492

 
4,492

 

 
4,492

 

Accrued interest payable
1,894

 
1,894

 
1,894

 

 

Total financial liabilities
$
7,645,414

 
7,686,318

 
5,174,973

 
4,492

 
2,506,853

 

31

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 December 31, 2015 (in thousands): 
 
Carrying
amount
 
Estimated
fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
167,408

 
167,408

 
167,408

 

 

Securities available-for-sale
874,405

 
874,405

 
1,894

 
863,556

 
8,955

Securities held-to-maturity
31,689

 
32,552

 

 
32,552

 

Loans receivable, net
7,159,449

 
7,482,431

 

 

 
7,482,431

Accrued interest receivable
21,072

 
21,072

 
21,072

 

 

FHLB Stock
40,903

 
40,903

 

 

 

Total financial assets
$
8,294,926

 
8,618,771

 
190,374

 
896,108

 
7,491,386

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Savings and checking accounts
$
4,917,863

 
4,917,863

 
4,917,863

 

 

Time deposits
1,694,718

 
1,710,388

 

 

 
1,710,388

Borrowed funds
975,007

 
998,527

 
118,664

 

 
879,863

Junior subordinated debentures
111,213

 
115,268

 

 

 
115,268

Cash flow hedges - swaps
4,276

 
4,276

 

 
4,276

 

Accrued interest payable
1,993

 
1,993

 
1,993

 

 

Total financial liabilities
$
7,705,070

 
7,748,315

 
5,038,520

 
4,276

 
2,705,519


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 March 31, 2016 and December 31, 2015.  There were no transfers of financial instruments between Level 1 and Level 2 during the nine months ended March 31, 2016.
 

32

Table of Contents

The following table represents assets and liabilities measured at fair value on a recurring basis at March 31, 2016 (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Equity securities
$
1,856

 

 

 
1,856

 
 
 
 
 
 
 
 
Debt securities:
 

 
 

 
 

 
 

U.S. government and agencies

 
10

 

 
10

Government sponsored enterprises

 
232,448

 

 
232,448

States and political subdivisions

 
78,935

 

 
78,935

Corporate

 
7,751

 
8,590

 
16,341

Total debt securities

 
319,144

 
8,590

 
327,734

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

GNMA

 
26,008

 

 
26,008

FNMA

 
94,117

 

 
94,117

FHLMC

 
47,010

 

 
47,010

Non-agency

 
600

 

 
600

Collateralized mortgage obligations:
 

 
 

 
 

 
 

GNMA

 
9,872

 

 
9,872

FNMA

 
116,929

 

 
116,929

FHLMC

 
149,619

 

 
149,619

SBA

 
7,691

 

 
7,691

Non-agency

 
2,504

 

 
2,504

Total mortgage-backed securities

 
454,350

 

 
454,350

 
 
 
 
 
 
 
 
Interest rate swaps

 
(4,492
)
 

 
(4,492
)
 
 
 
 
 
 
 
 
Total assets and liabilities
$
1,856

 
769,002

 
8,590

 
779,448



33

Table of Contents


The following table represents assets and liabilities measured at fair value on a recurring basis at December 31, 2015 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Equity securities
$
1,894

 

 

 
1,894

 
 
 
 
 
 
 
 
Debt securities:
 

 
 

 
 

 
 

U.S. government and agencies

 
11

 

 
11

Government sponsored enterprises

 
294,440

 

 
294,440

States and political subdivisions

 
82,868

 

 
82,868

Corporate

 
7,520

 
8,955

 
16,475

Total debt securities

 
384,839

 
8,955

 
393,794

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

GNMA

 
27,082

 

 
27,082

FNMA

 
99,170

 

 
99,170

FHLMC

 
50,369

 

 
50,369

Non-agency

 
606

 

 
606

Collateralized mortgage obligations:
 

 
 

 
 

 
 

GNMA

 
10,669

 

 
10,669

FNMA

 
122,528

 

 
122,528

FHLMC

 
157,378

 

 
157,378

SBA

 
8,166

 

 
8,166

Non-agency

 
2,749

 

 
2,749

Total mortgage-backed securities

 
478,717

 

 
478,717

 
 
 
 
 
 
 
 
Interest rate swaps

 
(4,276
)
 

 
(4,276
)
 
 
 
 
 
 
 
 
Total assets and liabilities
$
1,894

 
859,280

 
8,955

 
870,129


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
 
March 31,
2016
 
March 31,
2015
Beginning balance
$
8,955

 
10,597

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

 
 

Included in net income as OTTI

 

Included in other comprehensive income
(365
)
 
(291
)
 
 
 
 
Purchases

 

Sales

 

Transfers in to Level 3

 

Transfers out of Level 3

 

 
 
 
 
Ending balance
$
8,590

 
10,306

 

34

Table of Contents

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and real estate owned.  The following table represents the fair value measurement for nonrecurring assets at March 31, 2016 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Loans measured for impairment
$

 

 
45,090

 
45,090

 
 
 
 
 
 
 
 
Real estate owned

 

 
6,834

 
6,834

 
 
 
 
 
 
 
 
Total assets
$

 

 
51,924

 
51,924


Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and real estate owned.  The following table represents the fair value measurement for nonrecurring assets at December 31, 2015 (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Loans measured for impairment
$

 

 
48,181

 
48,181

 
 
 
 
 
 
 
 
Real estate owned

 

 
8,725

 
8,725

 
 
 
 
 
 
 
 
Total assets
$

 

 
56,906

 
56,906

 
Impaired loans — A loan is considered to be impaired as described in the Overview of Critical Accounting Policies Involving Estimates, Allowance for Loan Losses section.  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 delinquent borrowers.  These assets are recorded on the date acquired at the lower of the related loan balance or fair value, less estimated disposition costs, with the fair value being determined by appraisal.  Subsequently, foreclosed assets are valued at the lower of the amount recorded at acquisition date or fair value, less estimated disposition costs.  We classify all real estate owned as nonrecurring Level 3.
 
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 March 31, 2016 (dollar amounts in thousands): 
 
Fair value
 
Valuation
techniques
 
Significant
unobservable inputs
 
Range (weighted
average)
Debt securities
$
8,590

 
Discounted cash
 
Discount margin
 
0.35% to 2.10% (0.69%)
 
 
 
flow
 
Default rates
 
1.00%
 
 
 
 
 
Prepayment speeds
 
1.00 annually
 
 
 
 
 
 
 
 
Loans measured for impairment
45,090

 
Appraisal value (1)
 
Estimated cost to sell
 
10%
 
 

 
Discounted cash flow
 
Discount rate
 
3.75% to 20.00% (10.94%)
 
 
 
 
 
 
 
 
Real estate owned
6,834

 
Appraisal value (1)
 
Estimated cost to sell
 
10%
(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.
 
The significant unobservable inputs used in the fair value measurement of our debt securities are discount margins, default rates and prepayment speeds.  Significant increases in any of those rates would result in a significantly lower fair value measurement.


35

Table of Contents

(10)
Guaranteed Preferred Beneficial Interests in the Company’s Junior Subordinated Deferrable      Interest Debentures (Trust Preferred Securities) and Interest Rate Swaps
 
We have two legacy statutory business trusts: Northwest Bancorp Capital Trust III, a Delaware statutory business trust and Northwest Bancorp Statutory Trust IV, a Connecticut statutory business trust (“Trusts”).  These trusts exist solely to issue preferred securities to third parties for cash, issue common securities to the Company in exchange for capitalization of the Trusts, invest the proceeds from the sale of the 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 (Trust III) issued 50,000 cumulative trust preferred securities in a private transaction to a pooled investment vehicle on December 5, 2006 (liquidation value of $1,000 per preferred security or $50,000,000) with a stated maturity of December 30, 2035.  These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 1.38%.  Northwest Bancorp Statutory Trust IV (Trust IV) issued 50,000 cumulative trust preferred securities in a private transaction to a pooled investment vehicle on December 15, 2006 (liquidation value of $1,000 per preferred security or $50,000,000) with a stated maturity of December 15, 2035.  These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 1.38%.  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.  Trust III holds $51,547,000 of the Company’s junior subordinated debentures and Trust IV holds $51,547,000 of the Company’s junior subordinated debentures. These subordinated debentures are the sole assets of the Trusts. 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 five years.  If interest payments on the subordinated debentures are deferred, the distributions on the trust preferred securities are also deferred.  Interest on the subordinated debentures and distributions on the trust securities is cumulative.  To date, there have been no interest deferrals.  Our obligation constitutes a full, irrevocable, and unconditional guarantee on a subordinated basis of the obligations of the trust under the preferred securities.
 
As a result of the LNB acquisition we acquired two statutory business trusts: LNB Trust I and LNB Trust II; both are Delaware statutory business trusts.  The outstanding stock issued by LNB Trust I was redeemed on December 15, 2015. At March 31, 2016, LNB Trust II had 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. These securities carry a fixed interest rate of 6.64% through June 15, 2017, then becomes a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 1.48%.  LNB Trust II invested the proceeds of the offerings in junior subordinated deferrable interest debentures acquired by the Company.  The structure of these debentures mirrors the structure of the trust-preferred securities. LNB Trust II holds $8,119,000 of junior subordinated debentures. The subordinated debentures are the sole assets of the Trusts. 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 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 Trust III and Trust IV.  The first swap modifies the re-pricing characteristics of Trust III, wherein for a ten year period 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 other swap modifies the re-pricing characteristics of Trust IV, wherein for a ten year period 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 March 31, 2016, $4.7 million of cash was pledged as collateral to the counterparty.
 
At March 31, 2016, the fair value of the swap agreements was $(4.5) million and was the amount we would have expected to pay if the contracts were terminated.  There was no material hedge ineffectiveness for these swaps.
 
The following table shows liability derivatives, included in other liabilities, at March 31, 2016 and December 31, 2015 (in thousands): 
 
March 31,
2016
 
December 31,
2015
Fair value
$
4,492

 
4,276

Notional amount
50,000

 
50,000

Collateral posted
4,705

 
4,705

 

36

Table of Contents

(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 March 31, 2016 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.

(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 March 31, 2016
 
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, 2015
$
3,325

 
(2,779
)
 
(25,081
)
 
(24,535
)
Other comprehensive income before reclassification adjustments
3,464

 
(140
)
 

 
3,324

Amounts reclassified from accumulated other comprehensive income (1), (2)
28

 

 
225

 
253

 
 
 
 
 
 
 
 
Net other comprehensive income/ (loss)
3,492

 
(140
)
 
225

 
3,577

 
 
 
 
 
 
 
 
Balance as of March 31, 2016
$
6,817

 
(2,919
)
 
(24,856
)
 
(20,958
)
 
 
For the quarter ended March 31, 2015
 
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, 2014
$
3,461

 
(4,078
)
 
(23,753
)
 
(24,370
)
 
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments
2,952

 
44

 

 
2,996

Amounts reclassified from accumulated other comprehensive income (3), (4)
(68
)
 

 
219

 
151

 
 
 
 
 
 
 
 
Net other comprehensive income
2,884

 
44

 
219

 
3,147

 
 
 
 
 
 
 
 
Balance as of March 31, 2015
$
6,345

 
(4,034
)
 
(23,534
)
 
(21,223
)
(1)
Consists of realized gains on securities (loss on sales of investments, net) of $(39), net of tax (income tax expense) of $11.
(2)
Consists of amortization of prior service cost (compensation and employee benefits) of $581 and amortization of net loss (compensation and employee benefits) of $(950), net of tax (income tax expense) of $144.  See note 8.
(3)
Consists of realized gains on securities (gain on sales of investments, net) of $111, net of tax (income tax expense) of $(43).
(4)
Consists of amortization of prior service cost (compensation and employee benefits) of $581 and amortization of net loss (compensation and employee benefits) of $(940), net of tax (income tax expense) of $140.  See note 8.
 
 
 


37

Table of Contents

(13)    Subsequent events

On April 26, 2016 we completed the optimization of our office network. In recent years, we have invested heavily in alternative delivery channels such as online and mobile banking, depository ATMs, and automated telephone banking which enables customers to transact business outside of the branch and beyond normal business hours. As a result, the number of transactions conducted in offices has significantly decreased over the past several years and has created an opportunity to improve operating efficiency. Based on these changes in customer preferences, we consolidated 24 of our offices into nearby locations and converted two full-service offices into drive-up only facilities. Expenses associated with these changes are expected to be approximately $5.0 million, which will be incurred during the first half of 2016.
    
As was previously announced on April 28, 2016, Northwest has signed a definitive agreement to acquire 18 Western New York bank branches with deposits of approximately $1.700 billion, subject to the closing of the KeyCorp/First Niagara Financial Group, Inc. merger, from First Niagara Bank N.A., which will be a wholly owned subsidiary of KeyCorp at the time of closing. The premium to be paid on the deposits to be transferred is 4.5%. In addition to receiving approximately $1.000 billion in cash from the transaction, Northwest will acquire approximately $511.0 million of performing business and personal loans.

The First Niagara branches are being sold in connection with its pending acquisition by KeyCorp. The divestitures have been approved by the United States Department of Justice and the Federal Reserve Board following a customary anti-trust review. The transaction has received approvals from each party’s board of directors and remains subject to regulatory approval and other customary closing conditions. Pending such completion, the transaction is expected to close in the third quarter of 2016.

On May 10, 2016 we disclosed our intention to replace $715.0 million of long-term FHLB advances with lower cost deposits as part of the proposed acquisition of 18 branch offices of First Niagara Bank. On May 6, 2016 we completed the replacement of $675.0 million of these long-term advances, with a weighted-average cost of 3.56%, with overnight borrowings at a weighted-average cost of 0.54%. This transaction included a penalty of $37.0 million, which will be expensed during the quarter ending June 30, 2016.

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, government regulations or policies affecting financial institutions, including regulatory fees and capital requirements;
general economic conditions, either nationally or in our market areas, that are different than expected;
competition among other financial institutions and non-depository entities;
inflation and changes in the interest rate environment that impact our margins or the fair value of financial instruments;
adverse changes in the securities markets;
cyber security concerns, including an interruption or breach in the security of our information systems;
our ability to enter new markets successfully, capitalize on growth opportunities;
managing our internal growth and our ability to successfully integrate acquired entities;
changes in consumer spending, borrowing and savings habits;
our ability to continue to increase and manage our business 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;

38

Table of Contents

our ability to receive regulatory approvals for proposed transactions or new lines of business:
the impact of the current governmental effort to restructure the U.S. financial and regulatory system;
changes in the financial performance and/or condition of our borrowers; and
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

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 2015 Annual Report on Form 10-K.
 
Executive Summary and Comparison of Financial Condition
 
Total assets at March 31, 2016 were $8.916 billion, a decrease of $35.6 million, or 0.4%, from $8.952 billion at December 31, 2015.  This decrease in assets was due primarily to a $94.4 million, or 10.4%, decrease in marketable securities. Partially offsetting this decrease was an increases in net loans receivable of $73.7 million, or 1.0%.
 
Total loans receivable increased by $71.9 million, or 1.0%, to $7.294 billion at March 31, 2016, from $7.222 billion at December 31, 2015. Loans funded during the quarter ended March 31, 2016, of $617.2 million exceeded loan maturities, principal repayments and mortgage loan sales of $543.4 million. Our business banking loan portfolio increased by $54.4 million, or 2.0%, to $2.828 billion at March 31, 2016 from $2.774 billion at December 31, 2015, as we continue to emphasize the origination of commercial and commercial real estate loans. Additionally, our personal banking loan portfolio increased by $17.4 million, or 0.4%, to $4.466 billion at March 31, 2016 from $4.448 billion at December 31, 2015.  This increase is primarily attributable to an increase in residential mortgage loans of $29.5 million as a result of the success of our wholesale lending division and improvements made to the retail application and underwriting processes.
 
Total deposits increased by $57.5 million, or 0.9%, to $6.670 billion at March 31, 2016 from $6.613 billion at December 31, 2015. All deposit types increased with the exception of time deposits. Noninterest-bearing demand deposits increased by $2.7 million, or 0.2%, to $1.180 billion at March 31, 2016 from $1.177 billion at December 31, 2015. Interest-bearing demand deposits increased by $41.7 million, or 3.9%, to $1.122 billion at March 31, 2016 from $1.080 billion at December 31, 2015. Savings deposits increased by $47.8 million, or 3.4%, to $1.434 billion at March 31, 2016 from $1.386 billion at December 31, 2015.  Money market demand accounts increased by $20.6 million, or 1.6%, to $1.295 billion at March 31, 2016 from $1.275 billion at December 31, 2015. Partially offsetting these increases was a decrease in time deposits of $55.3 million, or 3.3%, to $1.639 billion at March 31, 2016 from $1.695 billion at December 31, 2015. We believe the increase in more liquid deposit accounts is due primarily to customers’ continued reluctance to lock in time deposits at these historically low rates and our emphasis on attracting low-cost fee based deposits.
 
Borrowed funds decreased by $117.2 million, or 12.0%, to $857.8 million at March 31, 2016, from $975.0 million at December 31, 2015. This decrease is due primarily to the repayment and maturity of $106.0 million and $35.0 million of FHLB overnight borrowings and term advances, respectively. Partially offsetting this decrease was an increase of $23.7 million in collateralized borrowings.
 
Total shareholders’ equity at March 31, 2016 was $1.171 billion, or $11.49 per share, an increase of $7.4 million, or 0.6%, from $1.163 billion, or $11.42 per share, at December 31, 2015.  This increase in equity was primarily the result of net income during the quarter ended March 31, 2016 of $18.0 million and a decrease in accumulated other comprehensive loss of $3.6 million due to an improvement in the net unrealized gain of the investment securities portfolio. Partially offsetting these increases was the payment of cash dividends of $15.0 million and the repurchase of 145,900 shares of common stock for $1.8 million during the quarter ended March 31, 2016.

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

39

Table of Contents

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.  Among other things, the rule establishes a new Common Equity Tier 1 (“CET1”) minimum capital requirement (4.5% of risk-weighted assets) and increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). 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 CET1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
 
The final rule became effective for Northwest on January 1, 2015.  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.
 
At March 31, 2016
 
 
 
 
 
Minimum capital
 
Well capitalized
 
Actual
 
requirements (1)
 
requirements (1)
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Total capital (to risk weighted assets)
 

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
$
1,104,502

 
16.5499
%
 
575,612

 
8.6250
%
 
709,087

 
10.6250
%
Northwest Bank
1,024,001

 
15.3670
%
 
574,737

 
8.6250
%
 
708,010

 
10.6250
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to risk weighted assets)
 

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,041,997

 
15.6133
%
 
442,137

 
6.6250
%
 
575,612

 
8.6250
%
Northwest Bank
961,720

 
14.4324
%
 
441,465

 
6.6250
%
 
574,737

 
8.6250
%
 
 
 
 
 
 
 
 
 
 
 
 
CET1 capital (to risk weighted assets)
 

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
934,122

 
13.9969
%
 
342,030

 
5.1250
%
 
475,506

 
7.1250
%
Northwest Bank
961,720

 
14.4324
%
 
341,511

 
5.1250
%
 
474,783

 
7.1250
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (leverage) (to average assets)
 

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,041,997

 
11.9879
%
 
347,683

 
4.0000
%
 
434,604

 
5.0000
%
Northwest Bank
961,720

 
11.0806
%
 
347,173

 
4.0000
%
 
433,966

 
5.0000
%
(1) Amounts and ratios include the current capital conservation buffer of 0.6250%, with the exception of Tier 1 capital to average assets.
 

40

Table of Contents

 
At December 31, 2015
 
 
 
 
 
Minimum capital
 
Well capitalized
 
Actual
 
requirements
 
requirements
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Total capital (to risk weighted assets)
 

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
$
1,102,468

 
16.63
%
 
530,257

 
8.00
%
 
662,821

 
10.00
%
Northwest Bank
1,006,230

 
15.20
%
 
529,498

 
8.00
%
 
661,872

 
10.00
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier I capital (to risk weighted assets)
 

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,039,574

 
15.68
%
 
397,693

 
6.00
%
 
530,257

 
8.00
%
Northwest Bank
943,554

 
14.26
%
 
397,123

 
6.00
%
 
529,498

 
8.00
%
 
 
 
 
 
 
 
 
 
 
 
 
CET1 capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Northwest Bancshares, Inc.
931,699

 
14.06
%
 
298,269

 
4.50
%
 
430,834

 
6.50
%
Northwest Bank
943,554

 
14.26
%
 
297,843

 
4.50
%
 
430,217

 
6.50
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier I capital (leverage) (to average assets)
 

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,039,574

 
11.96
%
 
347,582

 
4.00
%
 
434,477

 
5.00
%
Northwest Bank
943,554

 
10.87
%
 
347,063

 
4.00
%
 
433,829

 
5.00
%

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 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 March 31, 2016 was 8.5%. 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 March 31, 2016 Northwest had $2.337 billion of additional borrowing capacity available with the FHLB, including $150.0 million on an overnight line of credit, as well as $134.6 million of borrowing capacity available with the Federal Reserve Bank and $80.0 million with two correspondent banks.
 
Dividends
 
We paid $15.0 million and $13.0 million in cash dividends during the quarters ended March 31, 2016 and 2015, respectively.  The common stock dividend payout ratio (dividends declared per share divided by net income per share) was 83.3% and 77.8% for the quarters ended March 31, 2016 and 2015, respectively, on regular dividends of $0.15 per share for the quarter ended March 31, 2016 and on regular dividends of $0.14 per share for the quarter ended March 31, 2015. On April 20, 2016, the Board of Directors declared a dividend of $0.15 per share payable on May 16, 2016 to shareholders of record as of May 2, 2016.  This represents the 86th 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.
 

41

Table of Contents

 
March 31, 2016
 
December 31, 2015
 
(Dollars in thousands)
Nonaccrual loans 90 days or more delinquent:
 

 
 

Residential mortgage loans
$
14,301

 
$
15,810

Home equity loans
5,922

 
5,650

Consumer loans
2,360

 
2,900

Commercial real estate loans
13,165

 
16,449

Commercial loans
3,314

 
2,459

Total loans 90 days or more delinquent
$
39,062

 
$
43,268

Total real estate owned (REO)
6,834

 
8,725

Total nonaccrual loans 90 days or more delinquent and REO
45,896

 
51,993

Total nonaccrual loans 90 days or more delinquent to net loans receivable
0.54
%
 
0.60
%
Total nonaccrual loans 90 days or more delinquent and REO to total assets
0.51
%
 
0.58
%
Nonperforming assets:
 

 
 

Nonaccrual loans - loans 90 days or more delinquent
$
39,062

 
43,268

Nonaccrual loans - loans less than 90 days delinquent
35,090

 
28,394

Loans 90 days or more past maturity and still accruing
894

 
1,334

Total nonperforming loans
75,046

 
72,996

Total nonperforming assets
$
81,880

 
81,721

Nonaccrual troubled debt restructured loans (1)
$
17,699

 
21,118

Accruing troubled debt restructured loans
30,549

 
29,997

Total troubled debt restructured loans
$
48,248

 
51,115

(1)
Included in nonaccurual loans above.
 
At March 31, 2016, we expect to fully collect the carrying value of our acquired 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 acquired 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.
 
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 March 31, 2016 and December 31, 2015 were $122.5 million and $117.9 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.  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 classify 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

42

Table of Contents

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 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 Credit Administration department adjusts the specific allowance associated with that individual loan accordingly.
 
If a substandard or doubtful loan is not considered individually for impairment, it is grouped with other loans that possess common characteristics for impairment evaluation and analysis.  This segmentation is accomplished by grouping loans of similar product types, risk characteristics and industry concentration into homogeneous pools.  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.

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 Credit Committee on a quarterly basis.  The Credit 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 Credit Committee considers if any changes to the methodology are needed.  The Credit 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 Credit 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 Credit Committee and the Board of Directors’ Risk Management Committee, regulators from either the FDIC or the Pennsylvania Department of Banking 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 Credit 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 Credit Committee assesses regularly for appropriateness.  As part of the analysis as of March 31, 2016, 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.  In addition, we considered the overall trends in asset quality, specific reserves already established for criticized loans, historical loss rates and collateral valuations.  As a result of this analysis, the allowance for loan losses decreased by $394,000, or 0.6%, to $62.3 million, or 0.85% of total loans at March 31, 2016 from $62.7 million, or 0.87% of total loans, at December 31, 2015.  This decrease is primarily attributable to the continued improvement in overall asset quality as classified loans and non-accrual loans delinquent 90 days or more decreased by $4.1 million and $4.2 million, respectively, compared to December 31, 2015. Additionally, total loan delinquency decreased by $21.2 million, or 15.7%, to $114.0 million at March 31, 2016 from $135.2 million at December 31, 2015.
 
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 $74.2 million or 1.03% of total loans receivable at March 31, 2016 increased by $2.5 million, or 3.5%, from $71.7 million, or 1.01% of total loans receivable, at December 31, 2015. As a percentage of average loans, annualized net charge-offs decreased to 0.11% for the quarter ended March 31, 2016 compared to 0.23% for the year ended December 31, 2015.


43

Table of Contents

Comparison of Operating Results for the Quarters Ended March 31, 2016 and 2015
 
Net income for the quarter ended March 31, 2016 was $18.0 million, or $0.18 per diluted share, an increase of $1.8 million, or 11.2%, from $16.2 million, or $0.18 per diluted share, for the quarter ended March 31, 2015.  The increase in net income resulted from an increase in net interest income of $8.6 million, or 13.6% and an increase in noninterest income of $4.8 million or 33.0%. Partially offsetting these improvements were increases in noninterest expense of $9.6 million, or 17.8%, income tax expense of $1.3 million, or 18.4%, and the provision for loan losses of $760,000, or 84.4%.  Annualized, net income for the quarter ended March 31, 2016 represents returns on average equity and average assets of 6.21% and 0.81%, respectively, compared to 6.17% and 0.83% for the same quarter last year.  A discussion of significant changes follows.
 
Interest Income
 
Total interest income increased by $8.4 million, or 10.9%, to $85.3 million for the quarter ended March 31, 2016 from $76.9 million for the quarter ended March 31, 2015. This increase is the result of an increase in the average balance of interest earning assets of $880.9 million, or 12.1%, to $8.175 billion for the quarter ended March 31, 2016 from $7.295 billion for the quarter ended March 31, 2015. Partially offsetting this increase was a decrease in the average yield earned on interest earning assets to 4.20% for the quarter ended March 31, 2016 from 4.21% for the quarter ended March 31, 2015.

Interest income on loans receivable increased by $10.1 million, or 14.2%, to $80.8 million for the quarter ended March 31, 2016 from $70.7 million for the quarter ended March 31, 2015.  This increase in interest income on loans receivable can be attributed to an increase in the average balance of loans receivable of by $1.200 billion, or 19.9%, to $7.219 billion for the quarter ended March 31, 2016 from $6.019 billion for the quarter ended March 31, 2015.  This increase is due primarily to the addition of $928.1 million of loan balances, at fair value, from the LNB acquisition. Also contributing to this increase was internal loan growth of $301.0 million during the past year due to continued success in growing business banking relationships and the retention of of residential mortgage loan originations. Partially offsetting this increase was a decline in the average yield which decreased to 4.50% for the quarter ended March 31, 2016 from 4.76% for the quarter ended March 31, 2015.  The continued decline in average yield is due primarily to the historically low level of market interest rates, as well as the overall lower average yield from the LNB portfolio.
 
Interest income on mortgage-backed securities decreased by $5,000, or 0.2%, to $2.2 million for the quarters ended March 31, 2016 and 2015.  The average balance of mortgage-backed securities decreased by $18.5 million, or 3.6%, to $488.3 million for the quarter ended March 31, 2016 from $506.8 million for the quarter ended March 31, 2015 despite the addition of $109.4 million, at fair value, of mortgage-backed security balances from the LNB acquisition. The cash flows from our existing portfolio were redirected to fund loan growth.  Partially offsetting this decrease was an increase in the average yield on mortgage-backed securities to 1.83% for the quarter ended March 31, 2016 from 1.76% for the quarter ended March 31, 2015 due to the LNB portfolio having higher yields than our existing portfolio.
 
Interest income on investment securities decreased by $631,000, or 26.4%, to $1.8 million for the quarter ended March 31, 2016 from $2.4 million for the quarter ended March 31, 2015. This decrease is the result of decreases in both the average balance and average yield.  The average balance of investment securities decreased by $98.6 million, or 20.3%, to $387.5 million for the quarter ended March 31, 2016 from $486.1 million for the quarter ended March 31, 2015.  This decrease is due primarily to the maturity or call of municipal and government agency securities. The cash flows from our existing portfolio were redirected to fund loan growth and payoff FHLB advances. Partially offsetting this decrease was the addition of $74.7 million, at fair value, of municipal and government agency security balances from the LNB acquisition. The average yield of investment securities decreased to 1.82% for the quarter ended March 31, 2016 from 1.97% for the quarter ended March 31, 2015.  This decrease is primarily the result of higher rate, tax-free, municipal securities maturing or being called over the past twelve months. 
 
Dividends on FHLB stock decreased by $936,000, or 66.7%, to $467,000 for the quarter ended March 31, 2016 from $1.4 million for the quarter ended March 31, 2015. This decrease is attributable to the special $1.0 million dividend paid in February, 2015. Partially offsetting this decrease was an increase in the average balance of FHLB stock of $959,000, or 2.7%, to $37.1 million at March 31, 2016 from $36.1 million at March 31, 2015 and an increase in the average yield (excluding the special dividend) to 5.06% for the quarter ended March 31, 2016 from 4.07% for the quarter ended March 31, 2015.
 
Interest income on interest-earning deposits decreased by $80,000, or 57.6%, to $59,000 for the quarter ended March 31, 2016 from $139,000 for the quarter ended March 31, 2015.  This decrease is due to a decrease in the average balance of $202.7 million, or 82.3%, to $43.6 million for the quarter ended March 31, 2016 from $246.3 million for the quarter ended March 31, 2015, due to the utilization of cash to payoff FHLB advances, fund loan growth, and fund the purchase of LNB. Partially offsetting this decrease was an increase in the average yield on interest-earning deposits to 0.54% for the quarter ended March 31, 2016

44

Table of Contents

from 0.23% for the quarter ended March 31, 2015, as a result of the 25 basis point increase in the Federal Funds in December 2015.

Interest Expense
 
Interest expense decreased by $153,000, or 1.1%, to $13.7 million for the quarter ended March 31, 2016 from $13.9 million for the quarter ended March 31, 2015.  This decrease in interest expense was due primarily to a decrease in the average cost of interest-bearing liabilities, which decreased to 0.86% for the quarter ended March 31, 2016 from 0.97% for the quarter ended March 31, 2015. The average cost of each funding source declined from the prior year in this low interest rate environment, excluding interest-bearing demand deposits and money market demand accounts, which remained flat at 0.06% and 0.27%, respectively. Partially offsetting the decrease in cost was an increase in the average balance of $671.6 million, or 11.6%, to $6.463 billion for the quarter ended March 31, 2016 from $5.792 billion for the quarter ended March 31, 2015. This increase was due primarily to the addition of $1.017 billion, at fair value, of deposit balances from the LNB acquisition. Partially offsetting this increase was the maturity of $130.0 million of term FHLB advances during the past year.
 
Net Interest Income
 
Net interest income increased by $8.6 million, or 13.6%, to $71.6 million for the quarter ended March 31, 2016 from $63.0 million for the quarter ended March 31, 2015.  This increase is attributable to the factors discussed above. Redirecting existing funds and cash flow from investment securities to fund the LNB acquisition, which provided $1.140 billion of interest-earning assets, improved our net interest spread and margin.  Our net interest rate spread increased to 3.34% for the quarter ended March 31, 2016 from 3.24% for the quarter ended March 31, 2015 and our net interest margin increased to 3.55% for the quarter ended March 31, 2016 from 3.44% for the quarter ended March 31, 2015.
 
Provision for Loan Losses
 
The provision for loan losses increased by $760,000, or 84.4%, to $1.7 million for the quarter ended March 31, 2016 from $900,000 for the quarter ended March 31, 2015.  The loan loss provision remained at low levels as improvements in overall asset quality continue. Classified loans decreased by $4.6 million, or 2.3%, to $196.7 million at March 31, 2016 from $201.3 million at March 31, 2015.  In addition, the percentage of nonperforming loans to to total loans decreased to 1.03% at March 31, 2016 from 1.21% million at March 31, 2015.  Annualized net charge-offs remained low for the quarter ended March 31, 2016 at 0.11% of total loans compared to 0.07% for the quarter ended March 31, 2015.
 
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 increased by $4.8 million, or 33.0%, to $19.4 million for the quarter ended March 31, 2016 from $14.6 million for the quarter ended March 31, 2015. The increase is primarily attributable to increases in service charges and fees, gain on sale of real estate owned, and income from bank owned life insurance. Service charges and fees increased by $1.4 million, or 16.2%, to $10.1 million for the quarter ended March 31, 2016 from $8.7 million for the quarter ended March 31, 2015 due primarily to the growth in checking accounts from both the LNB acquisition and the successful execution of internal growth initiatives. Also contributing to the increase in noninterest income was an increase in gain on sale of real estate owned of $1.3 million, as we recognized a net gain of $249,000 for the quarter ended March 31, 2016 compared to a net loss of $1.0 million for the same quarter last year. Income from bank owned life insurance increased by $682,000, or 74.7%, to $1.6 million for the quarter ended March 31, 2016 from $913,000 for the quarter ended March 31, 2015 due primarily to death benefits received in January 2016. Additionally, trust and other financial services income and insurance commission income increased by $485,000 and $286,000, respectively, for the quarter ended March 31, 2016 compared to the same quarter last year.
 
Noninterest Expense
 
Noninterest expense increased by $9.6 million, or 17.8%, to $63.3 million for the quarter ended March 31, 2016 from $53.7 million for the quarter ended March 31, 2015.  This increase is primarily the result of increases in compensation and employee benefits, other expense, and processing expenses. Compensation and employee benefits increased by $5.1 million, or 18.4%, to $33.0 million for the quarter ended March 31, 2016 from $27.9 million for the quarter ended March 31, 2015.  This increase is

45

Table of Contents

due primarily to the addition of lending and credit staff and the employees retained from the LNB acquisition. Other expenses increased by $2.1 million, or 92.1%, to $4.3 million for the quarter ended March 31, 2016 from $2.2 million for the quarter ended March 31, 2015 due primarily to an increase in charitable contributions made to utilize Pennsylvania Education Improvement Tax Credits (EITC).  The offsetting tax credit for these contributions will be recognized as part of the annual effective tax rate. Processing expenses increased by $1.2 million, or 16.8%, to $8.4 million for the quarter ended March 31, 2016 from $7.2 million for the quarter ended March 31, 2015, due primarily to the acquisition of LNB, as well as upgrades to technology and the replacement of debit cards in an effort to enhance customer security. Also contributing to the increase in noninterest expense was an increase in office operations of $548,000, or 18.8%, and occupancy costs of $270,000, or 4.3%, for the quarter ended March 31, 2016, due primarily to the acquisition of LNB.
 
Income Taxes
 
The provision for income taxes increased by $1.3 million, or 18.4%, to $8.1 million for the quarter ended March 31, 2016 from $6.8 million for the quarter ended March 31, 2015.  This increase in income tax expense is primarily the result of an increase in pretax income of $3.1 million, or 13.4%, and a reduction in tax-free income from municipal bonds as well as a lower amount of Pennsylvania state tax credits anticipated for 2016. Our effective tax rate for the quarter ended March 31, 2016 increased to 31.0% compared to 29.7% for the quarter ended March 31, 2015.  We anticipate our effective tax rate to be between 30.0% and 32.0% for all of 2016.
 


46

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. 
 
Quarter ended March 31,
 
2016
 
2015
 
Average
balance
 
Interest
 
Avg.
yield/
cost (h)
 
Average
balance
 
Interest
 
Avg.
yield/
cost (h)
Assets:
 

 
 

 
 

 
 

 
 

 
 

Interest-earning assets:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,739,787

 
29,786

 
4.35
%
 
2,512,202

 
28,255

 
4.50
%
Home equity loans
1,177,406

 
12,642

 
4.32
%
 
1,059,128

 
11,473

 
4.39
%
Consumer loans
510,091

 
8,219

 
6.48
%
 
239,927

 
6,290

 
10.63
%
Commercial real estate loans
2,349,748

 
25,993

 
4.38
%
 
1,799,324

 
20,927

 
4.65
%
Commercial loans
441,977

 
4,723

 
4.23
%
 
408,669

 
4,237

 
4.15
%
Loans receivable (a) (b) (includes FTE adjustments of $582 and $471, respectively)
7,219,009

 
81,363

 
4.53
%
 
6,019,250

 
71,182

 
4.80
%
Mortgage-backed securities (c)
488,294

 
2,229

 
1.83
%
 
506,778

 
2,234

 
1.76
%
Investment securities (c) (includes FTE adjustments of $389 and $726, respectively)
387,460

 
2,151

 
2.22
%
 
486,078

 
3,119

 
2.57
%
FHLB stock (f)
37,098

 
467

 
5.06
%
 
36,139

 
363

 
4.07
%
Other interest-earning deposits
43,578

 
59

 
0.54
%
 
246,296

 
139

 
0.23
%
 
 
 
 
 
 
 
 
 
 
 
 
Total interest-earning assets (includes FTE adjustments of $971 and $1,197, respectively)
8,175,439

 
86,269

 
4.24
%
 
7,294,541

 
77,037

 
4.28
%
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest earning assets (d)
735,562

 
 

 
 

 
595,425

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
8,911,001

 
 

 
 

 
7,889,966

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity:
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Savings deposits
$
1,405,800

 
865

 
0.25
%
 
1,231,745

 
813

 
0.27
%
Interest-bearing checking deposits
1,093,839

 
156

 
0.06
%
 
878,230

 
131

 
0.06
%
Money market deposit accounts
1,288,535

 
865

 
0.27
%
 
1,165,159

 
765

 
0.27
%
Time deposits
1,664,322

 
4,202

 
1.02
%
 
1,452,476

 
4,057

 
1.13
%
Borrowed funds (e)
899,439

 
6,539

 
2.92
%
 
960,812

 
6,975

 
2.94
%
Junior subordinated debentures
111,213

 
1,119

 
3.98
%
 
103,094

 
1,158

 
4.49
%
 
 
 
 
 
 
 
 
 
 
 
 
Total interest-bearing liabilities
6,463,148

 
13,746

 
0.86
%
 
5,791,516

 
13,899

 
0.97
%
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing checking deposits (g)
1,161,151

 
 

 
 

 
914,025

 
 

 
 

Noninterest-bearing liabilities
122,667

 
 

 
 

 
121,121

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
7,746,966

 
 

 
 

 
6,826,662

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
1,164,035

 
 

 
 

 
1,063,304

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
8,911,001

 
 

 
 

 
7,889,966

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income/ Interest rate spread
 

 
72,523

 
3.38
%
 
 

 
63,138

 
3.31
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest-earning assets/ Net interest margin
$
1,712,291

 
 

 
3.57
%
 
1,503,025

 
 

 
3.51
%
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of interest-earning assets to interest-bearing liabilities
1.26
X
 
 

 
 

 
1.26
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)
Excludes the $1.0 million special dividend paid in February 2015.
(g)
Average cost of deposits were 0.37% and 0.41%, respectively.
(h)
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 of 35% for 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 4.76%, respectively; Investment securities — 1.82% and 1.97%, respectively; interest-earning assets — 4.20% and 4.21%, respectively. GAAP basis net interest rate spreads were 3.34% and 3.24%, respectively; and GAAP basis net interest margins were 3.55% and 3.44%, respectively.

47

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 March 31, 2016 and 2015
 
 
Rate
 
Volume
 
Net
Change
Interest earning assets:
 

 
 

 
 

Loans receivable
$
(4,204
)
 
14,385

 
10,181

Mortgage-backed securities
79

 
(84
)
 
(5
)
Investment securities
(380
)
 
(588
)
 
(968
)
FHLB stock
93

 
11

 
104

Other interest-earning deposits
191

 
(271
)
 
(80
)
Total interest-earning assets
(4,221
)
 
13,453

 
9,232

 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

Savings deposits
(69
)
 
121

 
52

Interest-bearing checking deposits
(19
)
 
44

 
25

Money market deposit accounts

 
100

 
100

Time deposits
(582
)
 
727

 
145

Borrowed funds
(124
)
 
(312
)
 
(436
)
Junior subordinated debentures
(133
)
 
94

 
(39
)
Total interest-bearing liabilities
(927
)
 
774

 
(153
)
 
 
 
 
 
 
Net change in net interest income
$
(3,294
)
 
12,679

 
9,385


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 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:

48

Table of Contents

 
Net interest income simulation.  Given a non-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 non-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 non-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 March 31, 2016 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 March 31, 2016 levels.
 
 
 
Increase
 
Decrease
Non-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
 
0.1
 %
 
0.4
 %
 
(0.1
)%
 
(3.9
)%
Projected percentage increase/ (decrease) in net income
 
1.8
 %
 
3.7
 %
 
3.5
 %
 
(11.6
)%
Projected increase/ (decrease) in return on average equity
 
1.7
 %
 
3.5
 %
 
3.3
 %
 
(11.4
)%
Projected increase/ (decrease) in earnings per share
 
$
0.02

 
$
0.03

 
$
0.03

 
$
(0.08
)
Projected percentage increase/ (decrease) in market value of equity
 
(3.8
)%
 
(7.4
)%
 
(12.1
)%
 
(0.2
)%
 
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.

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.  See note 11.
 
Item 1A.  Risk Factors

There are no material changes to the risk factors as previously discussed in Item 1A, to Part I of our December 31, 2015 Annual Report on Form 10-K.
 



49

Table of Contents

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 March 31, 2016
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)
January
 
145,900

 
$
12.00

 
145,900

 
4,834,089

February
 

 

 

 
4,834,089

March
 

 

 

 
4,834,089

 
 
145,900

 
$
12.00

 
 

 
 

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


Item 3. Defaults Upon Senior Securities
 
Not applicable.
 
Item 4. Mine Safety Disclosures
 
Not applicable.
 
Item 5. Other Information
 
Not applicable.
 
Item 6. Exhibits
 
31.1

 
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.
 
 
 
31.2

 
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.
 
 
 
32.1

 
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


50

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:
May 10, 2016
By:
/s/ William J. Wagner
 
 
William J. Wagner
 
 
President and Chief Executive Officer
 
 
(Duly Authorized Officer)
 
 
 
 
 
 
Date:
May 10, 2016
By:
/s/ Gerald J. Ritzert
 
 
 
Gerald J. Ritzert
 
 
Controller
 
 
(Principal Accounting Officer)


51