Companies: 10,761     total market cap: HK$1018.379 T
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Northwest Bancshares
NWBI
#4795
Rank
HK$14.40 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
HK$98.57
Share price
1.29%
Change (1 day)
8.95%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Northwest Bancshares
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q3

Northwest Bancshares - 10-Q quarterly report FY2019 Q3


Text size:
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
 
☒    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019
 OR
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                   to                   

Commission File 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)

Not Applicable
  (Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock, 0.01 Par Value
 
NWBI
 
The NASDAQ Stock Market, LLC

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 ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
☒    Large accelerated filer     ☐    Accelerated filer
☐    Non-accelerated filer     ☐    Smaller reporting company
☐Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
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), 106,672,637 shares outstanding as of October 31, 2019.

 

NORTHWEST BANCSHARES, INC.
Table of Contents
 
 
 
 
 
 
PART I
 
FINANCIAL INFORMATION
 
 
 
 
 
 
 
Item 1.
 
Financial Statements
 
 
 
 
 
 
 
 
 
Consolidated Statements of Financial Condition as of September 30, 2019 and December 31, 2018 (Unaudited)
 
1
 
 
 
 
 
 
 
Consolidated Statements of Income for the quarter and nine months ended September 30, 2019 and 2018 (Unaudited)
 
2
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income for the quarter and nine months ended September 30, 2019 and 2018 (Unaudited)
 
3
 
 
 
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity for the quarter and nine months ended September 30, 2019 and 2018 (Unaudited)
 
4
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the quarter and nine months ended September 30, 2019 and 2018 (Unaudited)
 
6
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
8
 
 
 
 
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
45
 
 
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
58
 
 
 
 
 
Item 4.
 
Controls and Procedures
 
58
 
 
 
 
 
PART II
 
OTHER INFORMATION
 
 
 
 
 
 
 
Item 1.
 
Legal Proceedings
 
58
 
 
 
 
 
Item 1A.
 
Risk Factors
 
58
 
 
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
59
 
 
 
 
 
Item 3.
 
Defaults Upon Senior Securities
 
59
 
 
 
 
 
Item 4.
 
Mine Safety Disclosures
 
59
 
 
 
 
 
Item 5.
 
Other information
 
59
 
 
 
 
 
Item 6.
 
Exhibits
 
59
 
 
 
 
 
 
 
Signature
 
60
 
 
 
 
 
 
 
 
 
 




Item 1.        FINANCIAL STATEMENTS
 
NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands, except share data)
 
September 30, 2019
 
December 31, 2018
Assets
 

 
 

Cash and cash equivalents
$
107,602

 
68,789

Marketable securities available-for-sale (amortized cost of $801,465 and $811,015, respectively)
 
807,823

 
801,450

Marketable securities held-to-maturity (fair value of $19,237 and $22,446, respectively)
18,958

 
22,765

Total cash and cash equivalents and marketable securities
934,383

 
893,004

 
 
 
 
Personal Banking:
 

 
 

Residential mortgage loans held-for-sale
8,859

 
—

Residential mortgage loans
2,887,274

 
2,864,470

Home equity loans
1,328,173

 
1,258,422

Consumer loans
1,094,293

 
859,713

Total Personal Banking loans
5,318,599

 
4,982,605

Commercial Banking:
 

 
 

Commercial real estate loans
2,812,839

 
2,471,821

Commercial loans
720,579

 
597,013

Total Commercial Banking loans
3,533,418

 
3,068,834

Total loans
8,852,017

 
8,051,439

Allowance for loan losses
(52,859
)
 
(55,214
)
Loans receivable, net
8,799,158

 
7,996,225

 
 
 
 
Federal Home Loan Bank stock, at cost
21,401

 
15,635

Accrued interest receivable
27,069

 
24,490

Real estate owned, net
1,237

 
2,498

Premises and equipment, net
148,796

 
143,390

Bank-owned life insurance
187,971

 
171,079

Goodwill
344,720

 
307,420

Other intangible assets
22,410

 
19,821

Other assets
93,329

 
34,211

Total assets
$
10,580,474

 
9,607,773

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Liabilities:
 

 
 

Noninterest-bearing demand deposits
$
1,905,650

 
1,736,156

Interest-bearing demand deposits
1,678,644

 
1,455,460

Money market deposit accounts
1,828,001

 
1,661,623

Savings deposits
1,635,754

 
1,636,099

Time deposits
1,633,451

 
1,404,841

Total deposits
8,681,500

 
7,894,179

 
 
 
 
Borrowed funds
255,257

 
234,389

Junior subordinated debentures
121,787

 
111,213

Advances by borrowers for taxes and insurance
24,331

 
43,298

Accrued interest payable
1,314

 
744

Other liabilities
144,515

 
66,312

Total liabilities
9,228,704

 
8,350,135

 
 
 
 
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, 106,658,067 and 103,354,030 shares issued and outstanding, respectively
1,067

 
1,034

Paid-in capital
801,382

 
745,926

Retained earnings
577,018

 
550,374

Accumulated other comprehensive loss
(27,697
)
 
(39,696
)
Total shareholders’ equity
1,351,770

 
1,257,638

Total liabilities and shareholders’ equity
$
10,580,474

 
9,607,773

See accompanying notes to unaudited consolidated financial statements.

1

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except share data) 
 
Quarter ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Interest income:
 

 
 

 
 

 
 

Loans receivable
$
101,091

 
90,733

 
296,943

 
264,059

Mortgage-backed securities
4,188

 
3,572

 
12,433

 
9,839

Taxable investment securities
884

 
814

 
2,718

 
2,140

Tax-free investment securities
224

 
205

 
643

 
908

Federal Home Loan Bank stock dividends
307

 
119

 
794

 
301

Interest-earning deposits
172

 
162

 
431

 
766

Total interest income
106,866

 
95,605

 
313,962

 
278,013

Interest expense:
 

 
 

 
 

 
 

Deposits
13,694

 
8,233

 
36,323

 
22,000

Borrowed funds
2,236

 
1,555

 
6,118

 
4,203

Total interest expense
15,930

 
9,788

 
42,441

 
26,203

Net interest income
90,936

 
85,817

 
271,521

 
251,810

Provision for loan losses
3,302

 
6,982

 
14,436

 
16,540

Net interest income after provision for loan losses
87,634

 
78,835

 
257,085

 
235,270

Noninterest income:
 

 
 

 
 

 
 

Gain on sale of loans
826

 
—

 
826

 
—

Gain on sale of investments
—

 
—

 
23

 
153

Service charges and fees
13,558

 
13,158

 
38,940

 
37,965

Trust and other financial services income
4,609

 
4,254

 
13,248

 
12,335

Insurance commission income
1,887

 
2,046

 
6,210

 
6,885

Loss on real estate owned, net
(227
)
 
(247
)
 
(139
)
 
(617
)
Income from bank-owned life insurance
1,095

 
1,460

 
3,297

 
4,783

Mortgage banking income
1,921

 
82

 
2,325

 
383

Other operating income
2,500

 
1,804

 
6,464

 
6,567

Total noninterest income
26,169

 
22,557

 
71,194

 
68,454

Noninterest expense:
 

 
 

 
 

 
 

Compensation and employee benefits
40,816

 
37,535

 
121,012

 
113,076

Premises and occupancy costs
7,061

 
6,821

 
21,666

 
20,952

Office operations
3,197

 
3,508

 
10,036

 
10,684

Collections expense
747

 
483

 
1,994

 
1,429

Processing expenses
11,122

 
9,620

 
32,190

 
28,886

Marketing expenses
1,373

 
1,949

 
5,988

 
6,103

Federal deposit insurance premiums
(702
)
 
721

 
685

 
2,109

Professional services
3,032

 
2,368

 
8,754

 
7,464

Amortization of intangible assets
1,702

 
1,462

 
4,909

 
4,502

Real estate owned expense
119

 
205

 
406

 
630

Restructuring/acquisition expense
23

 
186

 
3,054

 
579

Other expenses
2,106

 
1,759

 
8,838

 
7,411

Total noninterest expense
70,596

 
66,617

 
219,532

 
203,825

Income before income taxes
43,207

 
34,775

 
108,747

 
99,899

Federal and state income taxes expense
9,793

 
7,035

 
23,906

 
20,875

Net income
$
33,414

 
27,740

 
84,841

 
79,024

Basic earnings per share
$
0.32

 
0.27

 
0.81

 
0.78

Diluted earnings per share
$
0.31

 
0.27

 
0.80

 
0.76

See accompanying notes to unaudited consolidated financial statements.

2

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
 
Quarter ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
33,414

 
27,740

 
84,841

 
79,024

Other comprehensive income net of tax:
 

 
 

 
 

 
 

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

 
 

 
 

 
 

Unrealized holding gains/(losses) net of tax of ($525), $788, ($4,549), $2,869, respectively
1,315

 
(1,970
)
 
11,376

 
(7,169
)
Reclassification adjustment for gains included in net income, net of tax of $0, $17, $1 and $54, respectively
(1
)
 
(44
)
 
(3
)
 
(138
)
Net unrealized holding gains/(losses) on marketable securities
1,314

 
(2,014
)
 
11,373

 
(7,307
)
 
 
 
 
 
 
 
 
Change in fair value of interest rate swaps, net of tax of $0, ($51), $0 and ($204), respectively
—

 
192

 
—

 
766

 
 
 
 
 
 
 
 
Defined benefit plan:
 

 
 

 
 

 
 

Reclassification adjustments for prior period service costs and net losses included in net income, net of tax of ($83), ($90), ($250) and ($271), respectively
208

 
226

 
626

 
678

 
 
 
 
 
 
 
 
Other comprehensive income/(loss)
1,522

 
(1,596
)
 
11,999

 
(5,863
)
 
 
 
 
 
 
 
 
Total comprehensive income
$
34,936

 
26,144

 
96,840

 
73,161

See accompanying notes to unaudited consolidated financial statements.


3

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(in thousands, expect share data) 
 
 
 
 
 
Paid-in capital
 
Retained earnings
 
Accumulated
other comprehensive loss
 
Total shareholders’ equity
 
Common stock
 
Quarter ended September 30, 2019
Shares
 
Amount
 
Beginning balance at June 30, 2019
106,614,607

 
$
1,066

 
798,942

 
562,799

 
(29,219
)
 
1,333,588

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net income
—

 
—

 
—

 
33,414

 
—

 
33,414

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax of ($608)
—

 
—

 
—

 
—

 
1,522

 
1,522

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
—

 
—

 
—

 
33,414

 
1,522

 
34,936

 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
61,867

 
1

 
756

 
—

 
—

 
757

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
—

 
—

 
1,684

 
—

 
—

 
1,684

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation forfeited
(18,407
)
 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid ($0.18 per share)
—

 
—

 
—

 
(19,195
)
 
—

 
(19,195
)
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2019
106,658,067

 
$
1,067

 
801,382

 
577,018

 
(27,697
)
 
1,351,770



 
 
 
 
 
Paid-in capital
 
Retained earnings
 
Accumulated
other comprehensive loss
 
Total shareholders’ equity
 
Common stock
 
Quarter ended September 30, 2018
Shares
 
Amount
 
Beginning balance at June 30, 2018
103,122,890

 
$
1,031

 
739,673

 
531,269

 
(43,093
)
 
1,228,880

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net income
—

 
—

 
—

 
27,740

 
—

 
27,740

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax of $664
—

 
—

 
—

 
—

 
(1,596
)
 
(1,596
)
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income/(loss)
—

 
—

 
—

 
27,740

 
(1,596
)
 
26,144

 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
178,109

 
2

 
1,918

 
—

 
—

 
1,920

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
—

 
—

 
1,272

 
—

 
—

 
1,272

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation forfeited
(7,519
)
 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid ($0.17 per share)
—

 
—

 
—

 
(17,540
)
 
—

 
(17,540
)
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2018
103,293,480

 
$
1,033

 
742,863

 
541,469

 
(44,689
)
 
1,240,676

See accompanying notes to unaudited consolidated financial statements.


4

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(in thousands, expect share data)
 
 
 
 
 
Paid-in capital
 
Retained earnings
 
Accumulated
other comprehensive loss
 
Total shareholders’ equity
 
Common stock
 
 
 
 
Nine months ended September 30, 2019
Shares
 
Amount
 
 
 
 
Beginning balance at December 31, 2018
103,354,030

 
$
1,034

 
745,926

 
550,374

 
(39,696
)
 
1,257,638

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net income
—

 
—

 
—

 
84,841

 
—

 
84,841

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax of ($4,799)
—

 
—

 
—

 
—

 
11,999

 
11,999

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
—

 
—

 
—

 
84,841

 
11,999

 
96,840

 
 
 
 
 
 
 
 
 
 
 
 
Acquisition of Union Community Bank ("UCB")
2,462,373

 
24

 
43,264

 
—

 
—

 
43,288

 
 
 
 
 
 
 
 
 
 
 
 
Reclassification due to adoption of ASU No. 2016-02
—

 
—

 
—

 
(1,226
)
 
—

 
(1,226
)
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
609,722

 
6

 
6,777

 
—

 
—

 
6,783

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
281,100

 
3

 
5,415

 
—

 
—

 
5,418

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation forfeited
(49,158
)
 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid ($0.54 per share)
—

 
—

 
—

 
(56,971
)
 
—

 
(56,971
)
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2019
106,658,067

 
$
1,067

 
801,382

 
577,018

 
(27,697
)
 
1,351,770



 
 
 
 
 
Paid-in capital
 
Retained earnings
 
Accumulated
other comprehensive loss
 
Total shareholders’ equity
 
Common stock
 
 
 
 
Nine months ended September 30, 2018
Shares
 
Amount
 
 
 
 
Beginning balance at December 31, 2017
102,394,828

 
$
1,027

 
730,719

 
508,058

 
(32,080
)
 
1,207,724

 
 
 
 
 
 
 
 
 
 
 
 
Reclassification due to adoption of ASU No. 2018-02
—

 
—

 
—

 
6,746

 
(6,746
)
 
—

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net income
—

 
—

 
—

 
79,024

 
—

 
79,024

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax of $2,448
—

 
—

 
—

 
—

 
(5,863
)
 
(5,863
)
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income/(loss)
—

 
—

 
—

 
85,770

 
(12,609
)
 
73,161

 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
674,538

 
7

 
7,595

 
—

 
—

 
7,602

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
414,330

 
4

 
4,544

 
—

 
—

 
4,548

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation forfeited
(190,216
)
 
(5
)
 
5

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid ($0.51 per share)
—

 
—

 
—

 
(52,359
)
 
—

 
(52,359
)
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance at September 30, 2018
103,293,480

 
$
1,033

 
742,863

 
541,469

 
(44,689
)
 
1,240,676

See accompanying notes to unaudited consolidated financial statements.


5

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands) 
 
Nine months ended September 30,
 
2019
 
2018
Operating activities:
 

 
 

Net income
$
84,841

 
79,024

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

 
 

Provision for loan losses
14,436

 
16,540

Net gain/(loss) on sale of assets
(490
)
 
1,758

Net depreciation, amortization and accretion
927

 
7,598

Increase in other assets
(64,306
)
 
(8,952
)
Increase in other liabilities
74,974

 
48

Net amortization on marketable securities
677

 
1,317

Noncash write-down of real estate owned
548

 
1,281

Deferred income tax expense
1,706

 
22

Origination of loans held-for-sale
(31,776
)
 
(1,297
)
Proceeds from sale of loans held-for-sale
23,764

 
4,501

Noncash compensation expense related to stock benefit plans
5,418

 
4,548

Net cash provided by operating activities
110,719

 
106,388

 
 
 
 
Investing activities:
 

 
 

Purchase of marketable securities available-for-sale
(123,655
)
 
(215,242
)
Proceeds from maturities and principal reductions of marketable securities held-to-maturity
3,788

 
5,439

Proceeds from maturities and principal reductions of marketable securities available-for-sale
178,775

 
179,640

Proceeds from sale of marketable securities available-for-sale
32,389

 
5,206

Proceeds from bank-owned life insurance
2,638

 
357

Loan originations
(2,724,061
)
 
(2,256,146
)
Proceeds from loan maturities and principal reductions
2,288,521

 
2,036,656

Proceeds from sale of loans held for investment
46,783

 
—

Net proceeds of Federal Home Loan Bank stock
(5,313
)
 
(3,719
)
Proceeds from sale of real estate owned
3,274

 
5,082

Sale of real estate owned for investment, net
456

 
455

Purchase of premises and equipment
(9,302
)
 
(3,438
)
Acquisitions, net of cash received
(25,834
)
 
—

Net cash used in investing activities
(331,541
)
 
(245,710
)

6

NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
(in thousands) 
 
Nine months ended September 30,
 
2019
 
2018
Financing activities:
 

 
 

Increase in deposits, net
$
307,942

 
126,964

Net increase in short-term borrowings
20,868

 
70,879

Increase in advances by borrowers for taxes and insurance
(18,987
)
 
(17,528
)
Cash dividends paid
(56,971
)
 
(52,359
)
Proceeds from stock options exercised
6,783

 
7,602

Net cash provided by financing activities
259,635

 
135,558

 
 
 
 
Net increase in cash and cash equivalents
$
38,813

 
(3,764
)
 
 
 
 
Cash and cash equivalents at beginning of period
$
68,789

 
77,710

Net increase in cash and cash equivalents
38,813

 
(3,764
)
Cash and cash equivalents at end of period
$
107,602

 
73,946

Cash paid during the period for:
 

 
 

Interest on deposits and borrowings (including interest credited to deposit accounts of $32,893 and $20,927, respectively)
$
39,632

 
26,036

Income taxes
$
15,052

 
19,299

 
 
 
 
Business acquisitions:
 

 
 

Fair value of assets acquired
$
580,407

 
—

Northwest Bancshares, Inc. common stock issued
(43,288
)
 
—

Cash paid
(42,500
)
 
—

Liabilities assumed
$
494,619

 
—

 
 
 
 
Non-cash activities:
 

 
 

Loan foreclosures and repossessions
$
4,349

 
5,034

Sale of real estate owned financed by the Company
44

 
183

See accompanying notes to unaudited consolidated financial statements.


7

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 182 community-banking offices throughout Pennsylvania, Western New York, and eastern Ohio.
 
The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiary, Northwest, and Northwest’s subsidiaries Northwest Capital Group, Inc., Allegheny Services, Inc., Great Northwest Corporation, and The Bert Company (doing business as Northwest Insurance Services). 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, 2018 updated, as required, for any new pronouncements or changes.
 
Certain items previously reported have been reclassified to conform to the current year's reporting format.

The results of operations for the quarter and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or any other period.
 
Stock-Based Compensation
 
On May 22, 2019, the Company awarded employees 547,410 stock options and directors 64,800 stock options with an exercise price of $17.27 and grant date fair value of $1.14 per stock option, and the Company awarded employees 256,800 restricted common shares and directors 24,300 restricted common shares with a grant date fair value of $17.27. Awarded stock options and common shares vest over a seven-year period with the first vesting occurring on the grant date. Stock-based compensation expense of $1.7 million and $1.3 million for the quarters ended September 30, 2019 and 2018, and $5.4 million and $4.5 million for the nine months ended September 30, 2019 and 2018, respectively, was recognized in compensation expense relating to our stock benefit plans. At September 30, 2019, there was compensation expense of $3.8 million to be recognized for awarded but unvested stock options and $18.5 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 September 30, 2019 we had no liability for unrecognized tax benefits.
 
We recognize interest accrued related to: (1) unrecognized tax benefits in other expenses and (2) refund claims in other operating income.  We recognize penalties (if any) in other expenses. We are subject to audit by the Internal Revenue Service and any state in which we conduct business for the tax periods ended December 31, 2018, 2017 and 2016.


8

Recent Accounting Pronouncements

(a)    Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases (Topic 842), which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Accounting Standards Codification ("ASC") Topic 842 establishes a right of use ("ROU") model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The Company has elected not to recognize ROU assets and lease liabilities for short-term leases of all classes of underlying assets that have a lease term of 12 months or less and recognizes lease expense for these leases on a straight-line basis over the term of the lease.

On January 1, 2019, the Company adopted ASU 2016-02 using a modified retrospective transition approach as of the effective date, January 1, 2019. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (i.e. January 1, 2017). The Company has elected to adopt the package of transition practical expedients and, therefore, has not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. The Company also elected the practical expedient to use hindsight for leases existing at the adoption date.

As a result of the adoption of ASU 2016-02, we recognized an operating lease ROU asset of approximately $40.2 million, an operating lease liability of approximately $42.2 million and a cumulative-effect adjustment on retained earnings of $1.2 million on the consolidated statements of financial condition as of January 1, 2019, with no impact on our consolidated statement of income or consolidated statement of cash flows compared to the prior lease accounting model.

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

Management has created a formal working group to govern the implementation of these amendments, consisting of key stakeholders from finance, risk, credit and accounting. The working group meets periodically to discuss the progress of implementations, monitor the established timeline and discuss latest hot topics and industry trends. We have engaged with a third party to assist in the development of certain portfolio-level estimation methodologies and have chosen, and are in the process of implementing, a third-party software platform provider. We have finalized and documented the portfolio segmentation and methodologies that will be utilized. The model validation process has begun. Management has made decisions on reasonable and supportable forecast period and reversion method. Management is currently developing controls, processes, policies and disclosures in preparation for performing a full end to end parallel run. We are also evaluating the effect this guidance will have on our results of operations, financial position and related disclosures. The impact of the ASU will depend upon the state of the economy and the nature of our portfolios, among other items, at the date of adoption.


9

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance removes, modifies and adds disclosure requirements for fair value measurements. This guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those years, with early adoption permitted for any removed or modified disclosure requirements. Transition is on a prospective basis for the new and modified disclosures, and on a retrospective basis for disclosures that have been eliminated. We do not expect this guidance to have a material impact on our financial statements.

In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans.” This guidance removes and adds disclosure requirements for defined benefit pension or other post-retirement plans. This guidance is effective for annual periods beginning after December 15, 2020, with early adoption permitted, and requires retrospective adoption for all periods presented. We do not expect this guidance to have a material impact on our financial statements.

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This guidance aligns the requirements for capitalization of implementation costs incurred in a hosting arrangement that is a service contract with the existing guidance for internal-use software. This guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those years, with early adoption permitted. Transition can either be on a retrospective basis or a prospective basis on all implementation costs incurred after the date of adoption. We will apply this guidance on a prospective basis upon adoption and do not expect it to have a material impact on our financial statements.

(2)    Acquisition
     
On March 8, 2019, the Company completed the merger with Donegal Financial Services Corporation ("DFSC"), the holding company for Union Community Bank ("UCB"), for total consideration of $85.8 million. The transaction has expanded Northwest’s franchise by 12 offices in Lancaster County in eastern Pennsylvania. The result of UCB's operations are included in the Consolidated Statements of Income from the date of acquisition.

Under the terms of the merger agreement, the two shareholders of DFSC, Donegal Mutual Insurance Company and Donegal Group Inc., received payment in the form of 50% cash and 50% stock, or a total of $42.5 million and 2,462,373 shares of common stock of the Company, valued at $43.3 million, based on the $17.58 closing price of the Company's stock on March 8, 2019.
 
The following table shows the assets acquired and the liabilities assumed that were recorded at fair value on the date of acquisition (in thousands): 
Consideration paid:
 
Northwest Bancshares, Inc. common stock issued
$
43,288

Cash paid to DFSC
42,500

Total consideration paid
85,788

Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value (1)
 
Cash and cash equivalents
$
16,667

Investment securities available-for-sale
78,594

Loans
407,840

Federal Home Loan Bank stock
453

Premises and equipment
6,520

Core deposit intangible
7,498

Other assets
25,535

Deposits
(479,379
)
Other liabilities
(15,240
)
Total identifiable net assets
$
48,488

Goodwill
$
37,300

(1) Amounts are estimates and subject to adjustment. Actual amounts are not expected to differ materially from the amounts shown.
    
We estimated the fair value of loans acquired from UCB by utilizing a methodology wherein similar loans were aggregated into pools. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a market rate for similar loans. There was no carryover of UCB’s allowance for

10

loan losses associated with the loans we acquired as the loans were initially recorded at fair value. Loans acquired with evidence of credit quality deterioration were evaluated and not considered to be significant.

The core deposit intangible asset recognized as part of the UCB merger is being amortized over its estimated useful life of seven years utilizing an accelerated method. The goodwill, which is not amortized for book purposes, was assigned to our Community Banking segment and is not deductible for tax purposes. The fair values of savings and transaction deposit accounts acquired from UCB were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by projecting out the expected cash flows based on the contractual terms of the certificates of deposit. These cash flows were discounted based on a market rate for a certificate of deposit with a corresponding maturity.

Direct costs related to the UCB merger were expensed as incurred and were $3.1 million during the nine months ended September 30, 2019, which includes technology and communications costs, professional services, marketing and advertising, and other noninterest expenses.

(3)    Leases

At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification of a finance or operating lease. Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments. ROU assets are further adjusted for lease incentives and initial direct costs.

The Company has operating leases for certain branch and office facilities or land with lease terms up to 35 years. These leases generally contain renewal options for periods ranging from one to ten years. These options are included in the lease term when it is reasonably certain that the options will be exercised.

Some of the Company’s lease arrangements contain lease components (e.g., minimum rent payments) and non-lease components (e.g., common area maintenance, taxes, etc.). The Company elected the option of not separating lease and non-lease components and instead we account for them as a single lease component.
 
Certain lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected adjustment for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Generally, the Company cannot practically determine the interest rate implicit in the lease. Therefore, the Company uses its incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. The components of lease cost recognized within our consolidated statements of income were as follows (in thousands):
 
 
For the quarter ended
September 30, 2019
 
For the nine months ended September 30, 2019
Operating lease costs (office operations)
 
$
1,443

 
4,124

Variable lease costs (office operations)
 
264

 
455

Total operating lease costs
 
$
1,707

 
4,579


    
Amounts reported in the consolidated statements of financial condition were as follows (in thousands):
Operating leases:
 
As of September 30, 2019
Operating lease ROU assets (other assets)
 
$
48,857

Operating lease liabilities (other liabilities)
 
51,531


    
    

11

Other information related to leases as of September 30, 2019 were as follows (in thousands):
Supplemental cash flow information
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flow from operating leases
 
$
4,132

ROU assets obtained in exchange for lease obligations
 
$
11,518

Weighted average remaining lease term
 
15.7 years

Weighted average discount rate
 
3.7
%


Amounts disclosed for ROU assets obtained in exchange for lease obligations include amounts added to the carrying amount of ROU assets resulting from lease modifications and reassessments.

Maturities of lease liabilities by fiscal year for our operating leases are as follows (in thousands):
 
 
As of September 30, 2019
2019
 
$
1,444

2020
 
5,447

2021
 
5,115

2022
 
4,814

2023
 
4,559

Thereafter
 
49,087

Total lease payments
 
70,466

Less amount of lease payments representing interest
 
18,935

Total present value of lease payments
 
$
51,531



 
 
As of December 31, 2018
2019
 
$
4,677

2020
 
3,884

2021
 
3,179

2022
 
2,465

2023
 
2,040

Thereafter
 
7,784

Total lease payments
 
$
24,029


12

(4)    Investment securities and impairment of investment securities
 
The following table shows the portfolio of investment securities available-for-sale at September 30, 2019 (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 less than one year
$
14,902

 
63

 
—

 
14,965

 
 
 
 
 
 
 
 
Debt issued by government sponsored enterprises:
 
 
 
 
 
 
 
Due in less than one year
55,099

 
260

 
(6
)
 
55,353

Due in one year through five years
60,922

 
116

 
(340
)
 
60,698

Due in five years through ten years
3,830

 
66

 
(114
)
 
3,782

 
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Due in less than one year
245

 
1

 
—

 
246

Due in one year through five years
3,799

 
81

 
—

 
3,880

Due in five years through ten years
11,052

 
154

 
—

 
11,206

Due after ten years
13,741

 
317

 
—

 
14,058

 
 
 
 
 
 
 
 
Corporate debt issues:
 
 
 
 
 
 
 
Due in five years through ten years
918

 
—

 
—

 
918

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
Fixed rate pass-through
143,419

 
2,041

 
(1,065
)
 
144,395

Variable rate pass-through
20,063

 
834

 
(4
)
 
20,893

Fixed rate agency CMOs
415,760

 
5,026

 
(1,190
)
 
419,596

Variable rate agency CMOs
57,715

 
236

 
(118
)
 
57,833

Total residential mortgage-backed securities
636,957

 
8,137

 
(2,377
)
 
642,717

Total marketable securities available-for-sale
$
801,465

 
9,195

 
(2,837
)
 
807,823




13

The following table shows the portfolio of investment securities available-for-sale at December 31, 2018 (in thousands): 
 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
Debt issued by the U.S. government and agencies:
 

 
 

 
 

 
 

Due in one year through five years
$
14,756

 
24

 
—

 
14,780

 
 
 
 
 
 
 
 
Debt issued by government sponsored enterprises:
 

 
 

 
 

 
 

Due in less than one year
85,089

 
—

 
(795
)
 
84,294

Due in one year through five years
101,078

 
71

 
(1,512
)
 
99,637

Due after ten years
3,546

 
—

 
(142
)
 
3,404

 
 
 
 
 
 
 
 
Municipal securities:
 

 
 

 
 

 
 

Due in less than one year
1,333

 
2

 
(6
)
 
1,329

Due in one year through five years
3,985

 
54

 
(4
)
 
4,035

Due in five years through ten years
10,603

 
60

 
—

 
10,663

Due after ten years
5,105

 
31

 
—

 
5,136

 
 
 
 
 
 
 
 
Corporate debt issues:
 

 
 

 
 

 
 

Due in five years through ten years
914

 
—

 
—

 
914

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
130,172

 
568

 
(4,113
)
 
126,627

Variable rate pass-through
24,761

 
1,003

 
(5
)
 
25,759

Fixed rate agency CMOs
365,427

 
865

 
(5,921
)
 
360,371

Variable rate agency CMOs
64,246

 
280

 
(25
)
 
64,501

Total residential mortgage-backed securities
584,606

 
2,716

 
(10,064
)
 
577,258

Total marketable securities available-for-sale
$
811,015

 
2,958

 
(12,523
)
 
801,450


 
The following table shows the portfolio of investment securities held-to-maturity at September 30, 2019 (in thousands):
 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
$
2,317

 
86

 
—

 
2,403

Variable rate pass-through
1,317

 
36

 
—

 
1,353

Fixed rate agency CMOs
14,711

 
148

 
—

 
14,859

Variable rate agency CMOs
613

 
9

 
—

 
622

Total residential mortgage-backed securities
18,958

 
279

 
—

 
19,237

Total marketable securities held-to-maturity
$
18,958

 
279

 
—

 
19,237



14

The following table shows the portfolio of investment securities held-to-maturity at December 31, 2018 (in thousands): 
 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
$
2,896

 
53

 
—

 
2,949

Variable rate pass-through
1,666

 
39

 
—

 
1,705

Fixed rate agency CMOs
17,552

 
—

 
(422
)
 
17,130

Variable rate agency CMOs
651

 
11

 
—

 
662

Total residential mortgage-backed securities
22,765

 
103

 
(422
)
 
22,446

Total marketable securities held-to-maturity
$
22,765

 
103

 
(422
)
 
22,446


 
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 September 30, 2019 (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
$
—

 
—

 
67,610

 
(460
)
 
67,610

 
(460
)
Municipal securities
—

 
—

 
—

 
—

 
—

 
—

Residential mortgage-backed securities - agency
79,196

 
(287
)
 
123,883

 
(2,090
)
 
203,079

 
(2,377
)
Total temporarily impaired securities
$
79,196

 
(287
)
 
191,493

 
(2,550
)
 
270,689

 
(2,837
)

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, 2018 (in thousands):
 
Less than 12 months
 
12 months or more
 
Total
 
Fair value
 
Unrealized
loss
 
Fair value
 
Unrealized
loss
 
Fair value
 
Unrealized
loss
U.S. government sponsored enterprises
$
—

 
—

 
136,425

 
(2,449
)
 
136,425

 
(2,449
)
Municipal securities
929

 
(1
)
 
1,709

 
(10
)
 
2,638

 
(11
)
Residential mortgage-backed securities - agency
34,031

 
(30
)
 
346,675

 
(10,456
)
 
380,706

 
(10,486
)
Total temporarily impaired securities
$
34,960

 
(31
)
 
484,809

 
(12,915
)
 
519,769

 
(12,946
)

 
We review our investment portfolio for indications of impairment. This review includes analyzing the length of time and the extent to which amortized costs have exceeded fair values, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer, and the intent and ability to hold the investments for a period of time sufficient to allow for a recovery in value. We do not have the intent to sell these securities and it is more likely than not that we will not have to sell these securities before a recovery of our cost basis.  For these reasons, we consider the unrealized losses to be temporary impairment losses.
 
Credit related impairment on all debt securities is recognized in earnings while noncredit related impairment on available-for-sale debt securities, not expected to be sold, is recognized in other comprehensive income.
 
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 quarters ended September 30, (in thousands):
 
 
2019
 
2018
Beginning balance at January 1, (1)
$
—

 
352

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

 
—

Reduction for losses realized during the quarter
—

 
—

Reduction for securities sold/called realized during the quarter
—

 
(352
)
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized
—

 
—

Ending balance at September 30,
$
—

 
—


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

15

(5)    Loans receivable

The following table shows a summary of our loans receivable at September 30, 2019 and December 31, 2018 (in thousands): 
 
September 30, 2019
 
December 31, 2018
 
Originated
 
Acquired
 
Total
 
Originated
 
Acquired
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 
 
 
Residential mortgage loans (1)
$
2,804,792

 
87,176

 
2,891,968

 
2,766,430

 
93,782

 
2,860,212

Home equity loans
1,069,906

 
258,267

 
1,328,173

 
1,043,878

 
214,544

 
1,258,422

Consumer finance loans (2)
872

 
—

 
872

 
3,817

 
—

 
3,817

Consumer loans
1,022,976

 
39,731

 
1,062,707

 
775,378

 
58,671

 
834,049

Total Personal Banking
4,898,546

 
385,174

 
5,283,720

 
4,589,503

 
366,997

 
4,956,500

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,558,688

 
443,075

 
3,001,763

 
2,416,047

 
223,327

 
2,639,374

Commercial loans
717,644

 
60,438

 
778,082

 
612,962

 
48,816

 
661,778

Total Commercial Banking
3,276,332

 
503,513

 
3,779,845

 
3,029,009

 
272,143

 
3,301,152

Total loans receivable, gross
8,174,878

 
888,687

 
9,063,565

 
7,618,512

 
639,140

 
8,257,652

 
 
 
 
 
 
 
 
 
 
 
 
Deferred loan costs
49,921

 
534

 
50,455

 
36,820

 
798

 
37,618

Allowance for loan losses
(47,417
)
 
(5,442
)
 
(52,859
)
 
(51,751
)
 
(3,463
)
 
(55,214
)
Undisbursed loan proceeds:
 

 
 

 
 

 
 

 
 

 
 
Residential mortgage loans
(15,576
)
 
—

 
(15,576
)
 
(11,513
)
 
—

 
(11,513
)
Commercial real estate loans
(184,634
)
 
(4,290
)
 
(188,924
)
 
(167,029
)
 
(524
)
 
(167,553
)
Commercial loans
(56,357
)
 
(1,146
)
 
(57,503
)
 
(63,605
)
 
(1,160
)
 
(64,765
)
Total loans receivable, net
$
7,920,815

 
878,343

 
8,799,158

 
7,361,434

 
634,791

 
7,996,225


(1) Includes $8.9 million and $0 of loans held-for-sale at September 30, 2019 and December 31, 2018, respectively.
(2) Represents loans from our consumer finance subsidiary that was closed in 2017. Such loans are no longer being originated.

Acquired loans were initially measured at fair value and subsequently accounted for under either 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):
 
September 30, 2019
 
December 31, 2018
Acquired loans evaluated individually for future credit losses:
 

 
 
Outstanding principal balance
$
7,616

 
8,189

Carrying value
5,150

 
5,690

 
 

 
 
Acquired loans evaluated collectively for future credit losses:
 

 
 
Outstanding principal balance
889,065

 
637,170

Carrying value
878,635

 
632,564

 
 

 
 
Total acquired loans:
 

 
 
Outstanding principal balance
896,681

 
645,359

Carrying value
883,785

 
638,254


 

16

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, 2017
$
1,540

Accretion
(785
)
Net reclassification from nonaccretable yield
—

Balance at December 31, 2018
755

Accretion
(382
)
Net reclassification from nonaccretable yield
938

Balance at September 30, 2019
$
1,311



The following table provides information related to acquired impaired loans by portfolio segment and by class of financing receivable at and for the nine months ended September 30, 2019 (in thousands):
 
Carrying
value
 
Outstanding
principal
balance
 
Related
impairment
reserve
 
Average
recorded
investment
in impaired
loans
 
Interest
income
recognized
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
908

 
1,516

 
3

 
949

 
78

Home equity loans
739

 
1,651

 
16

 
874

 
89

Consumer loans
10

 
40

 
1

 
19

 
11

Total Personal Banking
1,657

 
3,207

 
20

 
1,842

 
178

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 
 
 
 
 
 
 
Commercial real estate loans
3,415

 
4,324

 
2

 
3,500

 
201

Commercial loans
78

 
85

 
—

 
78

 
3

Total Commercial Banking
3,493

 
4,409

 
2

 
3,578

 
204

 
 
 
 
 
 
 
 
 
 
Total
$
5,150

 
7,616

 
22

 
5,420

 
382


    
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, 2018 (in thousands):
 
Carrying
value
 
Outstanding
principal
balance
 
Related
impairment
reserve
 
Average
recorded
investment
in impaired
loans
 
Interest
income
recognized
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
$
990

 
1,598

 
6

 
1,294

 
226

Home equity loans
1,008

 
1,959

 
7

 
1,483

 
157

Consumer loans
29

 
76

 
4

 
53

 
35

Total Personal Banking
2,027

 
3,633

 
17

 
2,830

 
418

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 
 
 
 
 
 
 
 
 
Commercial real estate loans
3,584

 
4,471

 
1

 
4,028

 
358

Commercial loans
79

 
85

 
—

 
82

 
9

Total Commercial Banking
3,663

 
4,556

 
1

 
4,110

 
367

 
 
 

 

 

 

Total
$
5,690

 
8,189

 
18

 
6,940

 
785




17

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 September 30, 2019 (in thousands):
 
Balance as of September 30, 2019
 
Current
period provision
 
Charge-offs
 
Recoveries
 
Balance as of
June 30, 2019
Originated loans
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,507

 
(1,361
)
 
(109
)
 
68

 
3,909

Home equity loans
2,791

 
(81
)
 
(176
)
 
58

 
2,990

Consumer finance loans
140

 
(141
)
 
(59
)
 
74

 
266

Consumer loans
12,035

 
3,920

 
(2,916
)
 
531

 
10,500

Total Personal Banking
17,473

 
2,337

 
(3,260
)
 
731

 
17,665

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
20,215

 
(1,206
)
 
(261
)
 
720

 
20,962

Commercial loans
9,729

 
958

 
(1,118
)
 
87

 
9,802

Total Commercial Banking
29,944

 
(248
)
 
(1,379
)
 
807

 
30,764

Total originated loans
47,417

 
2,089

 
(4,639
)
 
1,538

 
48,429

 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
92

 
41

 
(81
)
 
28

 
104

Home equity loans
295

 
220

 
(290
)
 
21

 
344

Consumer loans
554

 
63

 
(103
)
 
83

 
511

Total Personal Banking
941

 
324

 
(474
)
 
132

 
959

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
3,622

 
1,155

 
(128
)
 
24

 
2,571

Commercial loans
879

 
(266
)
 
(33
)
 
30

 
1,148

Total Commercial Banking
4,501

 
889

 
(161
)
 
54

 
3,719

Total acquired loans
5,442

 
1,213

 
(635
)
 
186

 
4,678

 
 
 
 
 
 
 
 
 
 
Total
$
52,859

 
3,302

 
(5,274
)
 
1,724

 
53,107


18

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 September 30, 2018 (in thousands):
 
Balance as of September 30, 2018
 
Current
period provision
 
Charge-offs
 
Recoveries
 
Balance as of
June 30, 2018
Originated loans
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
4,144

 
491

 
(204
)
 
200

 
3,657

Home equity loans
3,234

 
(351
)
 
(323
)
 
69

 
3,839

Consumer finance loans
1,650

 
(437
)
 
(445
)
 
178

 
2,354

Consumer loans
11,021

 
4,023

 
(3,392
)
 
630

 
9,760

Total Personal Banking
20,049

 
3,726

 
(4,364
)
 
1,077

 
19,610

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
25,694

 
8,723

 
(4,820
)
 
772

 
21,019

Commercial loans
5,730

 
(3,945
)
 
(914
)
 
80

 
10,509

Total Commercial Banking
31,424

 
4,778

 
(5,734
)
 
852

 
31,528

Total originated loans
51,473

 
8,504

 
(10,098
)
 
1,929

 
51,138

 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
102

 
(70
)
 
(10
)
 
12

 
170

Home equity loans
408

 
(173
)
 
(103
)
 
22

 
662

Consumer loans
444

 
(448
)
 
(78
)
 
55

 
915

Total Personal Banking
954

 
(691
)
 
(191
)
 
89

 
1,747

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 
 
 
 
 
 
 
 
 
Commercial real estate loans
2,876

 
(532
)
 
(39
)
 
25

 
3,422

Commercial loans
672

 
(299
)
 
(71
)
 
17

 
1,025

Total Commercial Banking
3,548

 
(831
)
 
(110
)
 
42

 
4,447

Total acquired loans
4,502

 
(1,522
)
 
(301
)
 
131

 
6,194

 
 
 
 
 
 
 
 
 
 
Total
$
55,975

 
6,982

 
(10,399
)
 
2,060

 
57,332



19

The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the nine months ended September 30, 2019 (in thousands):
 
Balance as of September 30, 2019
 
Current
period provision
 
Charge-offs
 
Recoveries
 
Balance as of December 31, 2018
Originated loans
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,507

 
(991
)
 
(847
)
 
291

 
4,054

Home equity loans
2,791

 
36

 
(536
)
 
107

 
3,184

Consumer finance loans
140

 
(561
)
 
(296
)
 
321

 
676

Other consumer loans
12,035

 
8,298

 
(8,196
)
 
1,529

 
10,404

Total Personal Banking
17,473

 
6,782

 
(9,875
)
 
2,248

 
18,318

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
20,215

 
(2,177
)
 
(4,978
)
 
991

 
26,379

Commercial loans
9,729

 
4,769

 
(2,449
)
 
355

 
7,054

Total Commercial Banking
29,944

 
2,592

 
(7,427
)
 
1,346

 
33,433

Total originated loans
47,417

 
9,374

 
(17,302
)
 
3,594

 
51,751

 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
92

 
50

 
(97
)
 
56

 
83

Home equity loans
295

 
249

 
(472
)
 
170

 
348

Other consumer loans
554

 
131

 
(173
)
 
177

 
419

Total Personal Banking
941

 
430

 
(742
)
 
403

 
850

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 
 
 
 
 
 
 
 
 
Commercial real estate loans
3,622

 
1,432

 
(382
)
 
576

 
1,996

Commercial loans
879

 
3,200

 
(3,059
)
 
121

 
617

Total Commercial Banking
4,501

 
4,632

 
(3,441
)
 
697

 
2,613

Total acquired loans
5,442

 
5,062

 
(4,183
)
 
1,100

 
3,463

 
 
 
 
 
 
 
 
 
 
Total
$
52,859

 
14,436

 
(21,485
)
 
4,694

 
55,214


20

The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the nine months ended September 30, 2018 (in thousands):
 
Balance as of September 30, 2018
 
Current
period provision
 
Charge-offs
 
Recoveries
 
Balance as of December 31, 2017
Originated loans
 
 
 
 
 
 
 
 
 
 Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
4,144

 
678

 
(710
)
 
352

 
3,824

Home equity loans
3,234

 
(164
)
 
(866
)
 
192

 
4,072

Consumer finance loans
1,650

 
(469
)
 
(2,484
)
 
635

 
3,968

Other consumer loans
11,021

 
9,845

 
(9,192
)
 
1,893

 
8,475

Total Personal Banking
20,049

 
9,890

 
(13,252
)
 
3,072

 
20,339

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
25,694

 
10,417

 
(5,702
)
 
1,068

 
19,911

Commercial loans
5,730

 
(2,912
)
 
(2,053
)
 
373

 
10,322

Total Commercial Banking
31,424

 
7,505

 
(7,755
)
 
1,441

 
30,233

Total originated loans
51,473

 
17,395

 
(21,007
)
 
4,513

 
50,572

 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
102

 
(38
)
 
(94
)
 
103

 
131

Home equity loans
408

 
85

 
(578
)
 
139

 
762

Other consumer loans
444

 
(363
)
 
(209
)
 
126

 
890

Total Personal Banking
954

 
(316
)
 
(881
)
 
368

 
1,783

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 
 
 
 
 
 
 
 
 
Commercial real estate loans
2,876

 
(688
)
 
(147
)
 
162

 
3,549

Commercial loans
672

 
149

 
(448
)
 
80

 
891

Total Commercial Banking
3,548

 
(539
)
 
(595
)
 
242

 
4,440

Total acquired loans
4,502

 
(855
)
 
(1,476
)
 
610

 
6,223

 
 
 
 
 
 
 
 
 
 
Total
$
55,975

 
16,540

 
(22,483
)
 
5,123

 
56,795

    

21

The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at September 30, 2019 (in thousands):
 
Total loans
receivable
 
Allowance for
loan losses
 
Nonaccrual
loans (1)
 
Loans 90 days past maturity and accruing
 
TDRs
 
Allowance
related to
TDRs
 
Additional
commitments
to customers
with loans
classified as
TDRs
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,896,133

 
2,599

 
13,417

 
—

 
7,453

 
565

 
—

Home equity loans
1,328,173

 
3,086

 
7,111

 
—

 
1,929

 
394

 
26

Consumer finance loans
872

 
140

 
1

 
35

 
—

 
—

 
—

Consumer loans
1,093,421

 
12,589

 
4,139

 
50

 
—

 
—

 
—

Total Personal Banking
5,318,599

 
18,414

 
24,668

 
85

 
9,382

 
959

 
26

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,812,839

 
23,837

 
31,427

 
—

 
17,840

 
1,398

 
475

Commercial loans
720,579

 
10,608

 
9,562

 
—

 
3,078

 
650

 
170

Total Commercial Banking
3,533,418

 
34,445

 
40,989

 
—

 
20,918

 
2,048

 
645

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
8,852,017

 
52,859

 
65,657

 
85

 
30,300

 
3,007

 
671

(1)
Includes $9.1 million of nonaccrual TDRs.

The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at December 31, 2018 (in thousands): 
 
Total loans
receivable
 
Allowance for
loan losses
 
Nonaccrual
loans (1)
 
Loans 90 days past maturity and accruing
 
TDRs
 
Allowance
related to
TDRs
 
Additional
commitments
to customers
with loans
classified as
TDRs
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,864,470

 
4,137

 
15,848

 
—

 
5,382

 
993

 
—

Home equity loans
1,258,422

 
3,532

 
7,075

 
136

 
4,502

 
1,520

 
4

Consumer finance loans
3,817

 
676

 
22

 
3

 
—

 
—

 
—

Consumer loans
855,896

 
10,823

 
4,300

 
27

 
—

 
—

 
—

Total Personal Banking
4,982,605

 
19,168

 
27,245

 
166

 
9,884

 
2,513

 
4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,471,821

 
28,375

 
36,935

 
—

 
19,859

 
313

 
310

Commercial loans
597,013

 
7,671

 
8,101

 
—

 
3,865

 
263

 
74

Total Commercial Banking
3,068,834

 
36,046

 
45,036

 
—

 
23,724

 
576

 
384

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
8,051,439

 
55,214

 
72,281

 
166

 
33,608

 
3,089

 
388

(1)
Includes $15.3 million of nonaccrual TDRs.


22

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 nine months ended September 30, 2019 (in thousands): 
 
Nonaccrual
loans 90 or
more days
delinquent
 
Nonaccrual
loans less
than 90
days
delinquent
 
Loans less
than 90
days
delinquent
reviewed for
impairment
 
TDRs less
than 90
days
delinquent
not included
elsewhere
 
Total
impaired
loans
 
Average
recorded
investment
in impaired
loans
 
Interest
income
recognized
on impaired
loans
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
11,722

 
1,695

 
505

 
6,048

 
19,970

 
19,522

 
608

Home equity loans
5,966

 
1,145

 
—

 
1,595

 
8,706

 
8,709

 
348

Consumer finance loan
1

 
—

 
—

 
—

 
1

 
—

 
—

Consumer loans
3,399

 
740

 
—

 
—

 
4,139

 
3,744

 
180

Total Personal Banking
21,088

 
3,580

 
505

 
7,643

 
32,816

 
31,975

 
1,136

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
22,292

 
9,135

 
4,897

 
8,198

 
44,522

 
45,828

 
1,295

Commercial loans
5,741

 
3,821

 
397

 
1,508

 
11,467

 
10,099

 
319

Total Commercial Banking
28,033

 
12,956

 
5,294

 
9,706

 
55,989

 
55,927

 
1,614

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
49,121

 
16,536

 
5,799

 
17,349

 
88,805

 
87,902

 
2,750

 
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, 2018 (in thousands):
 
Nonaccrual
loans 90 or
more days
delinquent
 
Nonaccrual
loans less
than 90
days
delinquent
 
Loans less
than 90
days
delinquent
reviewed for
impairment
 
TDRs less
than 90
days
delinquent
not included
elsewhere
 
Total
impaired
loans
 
Average
recorded
investment
in impaired
loans
 
Interest
income
recognized
on impaired
loans
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
12,965

 
2,883

 
—

 
6,660

 
22,508

 
20,733

 
910

Home equity loans
5,996

 
1,079

 
—

 
1,818

 
8,893

 
9,075

 
511

Consumer finance loans
22

 
—

 
—

 
—

 
22

 
24

 
—

Consumer loans
3,228

 
1,072

 
—

 
—

 
4,300

 
3,992

 
235

Total Personal Banking
22,211

 
5,034

 
—

 
8,478

 
35,723

 
33,824

 
1,656

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
25,509

 
11,426

 
8,549

 
4,435

 
49,919

 
41,328

 
1,599

Commercial loans
3,010

 
5,091

 
2,453

 
2,087

 
12,641

 
9,186

 
507

Total Commercial Banking
28,519

 
16,517

 
11,002

 
6,522

 
62,560

 
50,514

 
2,106

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
50,730

 
21,551

 
11,002

 
15,000

 
98,283

 
84,338

 
3,762



At September 30, 2019, we expect to fully collect the carrying value of our purchased credit impaired loans and have determined that we can reasonably estimate their future cash flows including those loans that are 90 days or more delinquent. As a result, we do not consider our purchased credit impaired loans that are 90 days or more delinquent to be nonaccrual or impaired and continue to recognize interest income on these loans, including the loans’ accretable discount.


23

The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at September 30, 2019 (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
$
2,888,290

 
7,843

 
7,843

 
566

 
—

Home equity loans
1,326,245

 
1,928

 
1,928

 
394

 
—

Consumer finance loans
872

 
—

 
—

 
—

 
—

Consumer loans
1,093,408

 
13

 
13

 
3

 
—

Total Personal Banking
5,308,815

 
9,784

 
9,784

 
963

 
—

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,780,752

 
32,087

 
28,375

 
3,142

 
3,712

Commercial loans
711,670

 
8,909

 
7,453

 
905

 
1,456

Total Commercial Banking
3,492,422

 
40,996

 
35,828

 
4,047

 
5,168

 
 
 
 
 
 
 
 
 
 
Total
$
8,801,237

 
50,780

 
45,612

 
5,010

 
5,168

 
The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at December 31, 2018 (in thousands): 
 
Loans collectively evaluated for impairment
 
Loans individually evaluated for impairment
 
Loans individually evaluated for impairment for which there is a related impairment reserve
 
Related
impairment
reserve
 
Loans individually evaluated for impairment for which there is no related reserve
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,856,359

 
8,111

 
8,111

 
747

 
—

Home equity loans
1,256,255

 
2,167

 
2,167

 
523

 
—

Consumer finance loans
3,817

 
—

 
—

 
—

 
—

Consumer loans
855,867

 
29

 
29

 
6

 
—

Total Personal Banking
4,972,298

 
10,307

 
10,307

 
1,276

 
—

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,436,605

 
35,216

 
31,830

 
6,499

 
3,386

Commercial loans
588,932

 
8,081

 
6,738

 
767

 
1,343

Total Commercial Banking
3,025,537

 
43,297

 
38,568

 
7,266

 
4,729

 
 
 
 
 
 
 
 
 
 
Total
$
7,997,835

 
53,604

 
48,875

 
8,542

 
4,729



24

Our loan portfolios include loans that have been modified in a troubled debt restructuring ("TDR"), where concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include: extending the note’s maturity date, permitting interest only payments, reducing the interest rate to a rate lower than current market rates for new debt with similar risk, reducing the principal payment, principal forbearance or other actions.  These concessions are applicable to all loan segments and classes. Certain TDRs are classified as nonperforming at the time of restructuring and may be returned to performing status after considering the borrower’s sustained repayment performance for a period of at least nine 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 premiums or discounts), 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 in accordance with ASC 310-10. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan.
 
Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a TDR subsequently default, we evaluate the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, partial charge-offs may be taken to further write-down the carrying value of the loan, or the loan may be charged-off completely.

The following tables provide a roll forward of TDRs for the periods indicated (in thousands):
 
For the quarter ended September 30,
 
2019
 
2018
 
Number of contracts
 
Amount
 
Number of contracts
 
Amount
Beginning TDR balance:
183

 
$
31,269

 
205

 
$
30,662

New TDRs
3

 
520

 
7

 
647

Re-modified TDRs
8

 
4,773

 
3

 
306

Net paydowns
—

 
(5,668
)
 
—

 
(1,215
)
Charge-offs:
 
 
 

 
 

 
 

Residential mortgage loans
—

 
—

 
—

 
—

Home equity loans
—

 
—

 
—

 
—

Commercial real estate loans
—

 
—

 
1

 
(91
)
Commercial loans
2

 
(235
)
 
5

 
(619
)
Paid-off loans:
 

 
 

 
 

 
 

Residential mortgage loans
—

 
—

 
2

 
(2
)
Home equity loans
3

 
(68
)
 
2

 
(12
)
Commercial real estate loans
3

 
(289
)
 
2

 
(360
)
Commercial loans
1

 
(2
)
 
3

 
(169
)
Ending TDR balance:
177

 
$
30,300

 
197

 
$
29,147

Accruing TDRs
 

 
$
21,162

 
 

 
$
19,370

Non-accrual TDRs
 

 
9,138

 
 

 
9,777


25

 
For the nine months ended September 30,
 
2019
 
2018
 
Number of contracts
 
Amount
 
Number of contracts
 
Amount
Beginning TDR balance:
195

 
$
33,608

 
205

 
$
32,104

New TDRs
5

 
826

 
26

 
6,443

Re-modified TDRs
8

 
4,773

 
3

 
306

Net paydowns
—

 
(6,454
)
 
—

 
(3,037
)
Charge-offs:
 

 
 

 
 

 
 

Residential mortgage loans
—

 
—

 
1

 
(135
)
Home equity loans
—

 
—

 
—

 
—

Commercial real estate loans
—

 
—

 
2

 
(294
)
Commercial loans
2

 
(235
)
 
6

 
(1,340
)
Paid-off loans:
 

 
 

 
 

 
 

Residential mortgage loans
4

 
(180
)
 
4

 
(257
)
Home equity loans
7

 
(143
)
 
4

 
(59
)
Commercial real estate loans
9

 
(1,893
)
 
9

 
(2,183
)
Commercial loans
1

 
(2
)
 
8

 
(2,401
)
Ending TDR balance:
177

 
$
30,300

 
197

 
$
29,147

Accruing TDRs
 

 
$
21,162

 
 

 
$
19,370

Non-accrual TDRs
 

 
9,138

 
 

 
9,777

    
The following tables provide information related to TDRs (including re-modified TDRs) by portfolio segment and by class of financing receivable during the periods indicated (in thousands):
 
For the quarter ended September 30, 2019
 
For the nine months ended September 30, 2019
 
Number of contracts
 
Recorded
investment
at the time of
modification
 
Current
recorded
investment
 
Current
allowance
 
Number of
contracts
 
Recorded
investment
at the time of
modification
 
Current
recorded
investment
 
Current
allowance
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
1

 
$
121

 
121

 
8

 
1

 
$
121

 
121

 
8

Home equity loans
1

 
12

 
11

 
2

 
1

 
12

 
11

 
2

Total Personal Banking
2

 
133

 
132

 
10

 
2

 
133

 
132

 
10

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
8

 
6,014

 
5,120

 
549

 
9

 
6,314

 
5,417

 
581

Commercial loans
1

 
55

 
41

 
4

 
2

 
65

 
50

 
5

Total Commercial Banking
9

 
6,069

 
5,161

 
553

 
11

 
6,379

 
5,467

 
586

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
11

 
$
6,202

 
5,293

 
563

 
13

 
$
6,512

 
5,599

 
596

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
TDRs modified within the previous twelve months that have subsequently defaulted:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
—

 
$
—

 
—

 
—

 
—

 
$
—

 
—

 
—

Home equity loans
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total Personal Banking
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
—

 
—

 
—

 
—

 
2

 
2,785

 
2,775

 
5

Commercial loans
1

 
134

 
126

 
104

 
2

 
284

 
276

 
104

Total Commercial Banking
1

 
134

 
126

 
104

 
4

 
3,069

 
3,051

 
109

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
1

 
$
134

 
126

 
104

 
4

 
$
3,069

 
3,051

 
109



A TDR is considered to be in default when a restructured loan is 90 days or more past due.

26

 
For the quarter ended September 30, 2018
 
For the nine months ended September 30, 2018
 
Number of
contracts
 
Recorded
investment
at the time of
modification
 
Current
recorded
investment
 
Current
allowance
 
Number of
contracts
 
Recorded
investment
at the time of
modification
 
Current
recorded
investment
 
Current
allowance
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
2

 
$
342

 
342

 
35

 
6

 
$
616

 
612

 
62

Home equity loans
4

 
194

 
193

 
47

 
12

 
511

 
462

 
113

Total Personal Banking
6

 
536

 
535

 
82

 
18

 
1,127

 
1,074

 
175

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
3

 
372

 
361

 
42

 
5

 
3,255

 
3,198

 
97

Commercial loans
1

 
45

 
45

 
5

 
6

 
2,367

 
1,484

 
21

Total Commercial Banking
4

 
417

 
406

 
47

 
11

 
5,622

 
4,682

 
118

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
10

 
$
953

 
941

 
129

 
29

 
$
6,749

 
5,756

 
293


    
During the quarter and nine months ended September 30, 2018, no TDRs modified within the previous twelve months of September 30, 2018, subsequently defaulted.

The following table provides information as of September 30, 2019 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended September 30, 2019 (in thousands):
 
 
 
Type of modification
 
 
 
Number of contracts
 
Rate
 
Payment
 
Maturity date
 
Other
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
1

 
$
—

 
—

 
121

 
—

 
121

Home equity loans
1

 
—

 
—

 
11

 
—

 
11

Total Personal Banking
2

 
—

 
—

 
132

 
—

 
132

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
8

 
—

 
222

 
4,898

 
—

 
5,120

Commercial loans
1

 
—

 
—

 
41

 
—

 
41

Total Commercial Banking
9

 
—

 
222

 
4,939

 
—

 
5,161

 
 
 
 
 
 
 
 
 
 
 
 
Total
11

 
$
—

 
222

 
5,071

 
—

 
5,293

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

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
2

 
$
—

 
—

 
342

 
—

 
342

Home equity loans
4

 
193

 
—

 
—

 
—

 
193

Total Personal Banking
6

 
193

 
—

 
342

 
—

 
535

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
3

 
—

 
—

 
361

 
—

 
361

Commercial loans
1

 
—

 
—

 
45

 
—

 
45

Total Commercial Banking
4

 
—

 
—

 
406

 
—

 
406

 
 
 
 
 
 
 
 
 
 
 
 
Total
10

 
$
193

 
—

 
748

 
—

 
941



27

The following table provides information as of September 30, 2019 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the nine months ended September 30, 2019 (in thousands):
 
 
 
Type of modification
 
 
 
Number of
contracts
 
Rate
 
Payment
 
Maturity date
 
Other
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
1

 
$
—

 
—

 
121

 
—

 
121

Home equity loans
1

 
—

 
—

 
11

 
—

 
11

Total Personal Banking
2

 
—

 
—

 
132

 
—

 
132

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
9

 
—

 
519

 
4,898

 
—

 
5,417

Commercial loans
2

 
—

 
—

 
50

 
—

 
50

Total Commercial Banking
11

 
—

 
519

 
4,948

 
—

 
5,467

 
 
 
 
 
 
 
 
 
 
 
 
Total
13

 
$
—

 
519

 
5,080

 
—

 
5,599


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

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
6

 
$
7

 
—

 
519

 
86

 
612

Home equity loans
12

 
222

 
—

 
47

 
193

 
462

Total Personal Banking
18

 
229

 
—

 
566

 
279

 
1,074

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
5

 
—

 
482

 
361

 
2,355

 
3,198

Commercial loans
6

 
—

 
—

 
183

 
1,301

 
1,484

Total Commercial Banking
11

 
—

 
482

 
544

 
3,656

 
4,682

 
 
 
 
 
 
 
 
 
 
 
 
Total
29

 
$
229

 
482

 
1,110

 
3,935

 
5,756

     
During the nine months ended September 30, 2019, eight commercial banking TDRs were re-modified. During the nine months ended September 30, 2018, three commercial banking TDRs were re-modified.

28

The following table provides information related to loan payment delinquencies at September 30, 2019 (in thousands):
 
30-59 Days
delinquent
 
60-89 Days
delinquent
 
90 Days or
greater
delinquent
 
Total
delinquency
 
Current
 
Total loans
receivable
 
90 Days or
greater
delinquent
and accruing
(1)
Originated loans
 

 
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
1,171

 
5,185

 
10,116

 
16,472

 
2,792,485

 
2,808,957

 
—

Home equity loans
3,407

 
1,724

 
4,875

 
10,006

 
1,059,900

 
1,069,906

 
—

Consumer finance loans
98

 
43

 
1

 
142

 
730

 
872

 
—

Consumer loans
7,221

 
2,557

 
3,190

 
12,968

 
1,040,188

 
1,053,156

 
—

Total Personal Banking
11,897

 
9,509

 
18,182

 
39,588

 
4,893,303

 
4,932,891

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
3,745

 
835

 
15,534

 
20,114

 
2,353,940

 
2,374,054

 
—

Commercial loans
182

 
519

 
4,658

 
5,359

 
655,928

 
661,287

 
—

Total Commercial Banking
3,927

 
1,354

 
20,192

 
25,473

 
3,009,868

 
3,035,341

 
—

Total originated loans
15,824

 
10,863

 
38,374

 
65,061

 
7,903,171

 
7,968,232

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 

 
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
65

 
135

 
1,700

 
1,900

 
85,276

 
87,176

 
94

Home equity loans
1,367

 
379

 
1,091

 
2,837

 
255,430

 
258,267

 
—

Consumer loans
278

 
32

 
210

 
520

 
39,745

 
40,265

 
1

Total Personal Banking
1,710

 
546

 
3,001

 
5,257

 
380,451

 
385,708

 
95

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
1,563

 
1,058

 
6,758

 
9,379

 
429,406

 
438,785

 
—

Commercial loans
180

 
70

 
1,083

 
1,333

 
57,959

 
59,292

 
—

Total Commercial Banking
1,743

 
1,128

 
7,841

 
10,712

 
487,365

 
498,077

 
—

Total acquired loans
3,453

 
1,674

 
10,842

 
15,969

 
867,816

 
883,785

 
95

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
19,277

 
12,537

 
49,216

 
81,030

 
8,770,987

 
8,852,017

 
95

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


29

The following table provides information related to loan payment delinquencies at December 31, 2018 (in thousands): 
 
30-59 Days
delinquent
 
60-89 Days
delinquent
 
90 Days or
greater
delinquent
 
Total
delinquency
 
Current
 
Total loans
receivable
 
90 Days or
greater
delinquent
and accruing
(1)
Originated loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 
Residential mortgage loans
$
27,245

 
5,732

 
11,668

 
44,645

 
2,714,474

 
2,759,119

 
—

Home equity loans
6,810

 
1,771

 
4,825

 
13,406

 
1,030,472

 
1,043,878

 
—

Consumer finance loans
661

 
172

 
21

 
854

 
2,963

 
3,817

 
—

Consumer loans
9,000

 
2,867

 
3,037

 
14,904

 
793,092

 
807,996

 
—

Total Personal Banking
43,716

 
10,542

 
19,551

 
73,809

 
4,541,001

 
4,614,810

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
5,391

 
4,801

 
21,721

 
31,913

 
2,217,105

 
2,249,018

 
—

Commercial loans
609

 
560

 
2,714

 
3,883

 
545,474

 
549,357

 
—

Total Commercial Banking
6,000

 
5,361

 
24,435

 
35,796

 
2,762,579

 
2,798,375

 
—

Total originated loan
49,716

 
15,903

 
43,986

 
109,605

 
7,303,580

 
7,413,185

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
532

 
693

 
1,317

 
2,542

 
91,240

 
93,782

 
19

Home equity loans
1,839

 
294

 
1,212

 
3,345

 
211,199

 
214,544

 
40

Consumer loans
447

 
175

 
196

 
818

 
58,651

 
59,469

 
6

Total Personal Banking
2,818

 
1,162

 
2,725

 
6,705

 
361,090

 
367,795

 
65

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
112

 
586

 
3,866

 
4,564

 
218,239

 
222,803

 
78

Commercial loans
364

 
—

 
296

 
660

 
46,996

 
47,656

 
—

Total Commercial Banking
476

 
586

 
4,162

 
5,224

 
265,235

 
270,459

 
78

Total acquired loan
3,294

 
1,748

 
6,887

 
11,929

 
626,325

 
638,254

 
143

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
53,010

 
17,651

 
50,873

 
121,534

 
7,929,905

 
8,051,439

 
143


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

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

30

 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 as of September 30, 2019 (in thousands): 
 
Pass
 
Special
mention
 
Substandard
 
Doubtful
 
Loss
 
Total loans
receivable
Originated loans
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,801,228

 
—

 
7,729

 
—

 
—

 
2,808,957

Home equity loans
1,064,182

 
—

 
5,724

 
—

 
—

 
1,069,906

Consumer finance loans
872

 
—

 
—

 
—

 
—

 
872

Consumer loans
1,049,270

 
—

 
3,886

 
—

 
—

 
1,053,156

Total Personal Banking
4,915,552

 
—

 
17,339

 
—

 
—

 
4,932,891

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,209,327

 
63,051

 
101,495

 
181

 
—

 
2,374,054

Commercial loans
588,924

 
35,299

 
36,949

 
115

 
—

 
661,287

Total Commercial Banking
2,798,251

 
98,350

 
138,444

 
296

 
—

 
3,035,341

Total originated loans
7,713,803

 
98,350

 
155,783

 
296

 
—

 
7,968,232

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 

 
 

 
 

 
 

 
 

 
 

Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
85,849

 
—

 
1,327

 
—

 
—

 
87,176

Home equity loans
256,748

 
—

 
1,519

 
—

 
—

 
258,267

Consumer loans
39,888

 
—

 
377

 
—

 
—

 
40,265

Total Personal Banking
382,485

 
—

 
3,223

 
—

 
—

 
385,708

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
391,698

 
6,329

 
40,758

 
—

 
—

 
438,785

Commercial loans
51,074

 
2,367

 
5,851

 
—

 
—

 
59,292

Total Commercial Banking
442,772

 
8,696

 
46,609

 
—

 
—

 
498,077

Total acquired loans
825,257

 
8,696

 
49,832

 
—

 
—

 
883,785

 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
8,539,060

 
107,046

 
205,615

 
296

 
—

 
8,852,017



31

The following table sets forth information about credit quality indicators as of December 31, 2018 (in thousands):
 
Pass
 
Special
mention
 
Substandard
 
Doubtful
 
Loss
 
Total loans
receivable
Originated loans
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,749,266

 
—

 
9,853

 
—

 
—

 
2,759,119

Home equity loans
1,038,245

 
—

 
5,633

 
—

 
—

 
1,043,878

Consumer finance loans
3,817

 
—

 
—

 
—

 
—

 
3,817

Consumer loans
804,075

 
—

 
3,921

 
—

 
—

 
807,996

Total Personal Banking
4,595,403

 
—

 
19,407

 
—

 
—

 
4,614,810

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,062,728

 
91,142

 
95,148

 
—

 
—

 
2,249,018

Commercial loans
503,665

 
15,760

 
29,932

 
—

 
—

 
549,357

Total Commercial Banking
2,566,393

 
106,902

 
125,080

 
—

 
—

 
2,798,375

Total originated loans
7,161,796

 
106,902

 
144,487

 
—

 
—

 
7,413,185

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
92,625

 
—

 
1,157

 
—

 
—

 
93,782

Home equity loans
213,273

 
—

 
1,271

 
—

 
—

 
214,544

Consumer loans
58,954

 
—

 
515

 
—

 
—

 
59,469

Total Personal Banking
364,852

 
—

 
2,943

 
—

 
—

 
367,795

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
191,622

 
3,546

 
27,635

 
—

 
—

 
222,803

Commercial loans
35,397

 
3,521

 
8,738

 
—

 
—

 
47,656

Total Commercial Banking
227,019

 
7,067

 
36,373

 
—

 
—

 
270,459

Total acquired loans
591,871

 
7,067

 
39,316

 
—

 
—

 
638,254

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
7,753,667

 
113,969

 
183,803

 
—

 
—

 
8,051,439


 
(6)
Goodwill and Other Intangible Assets
 
The following table provides information for intangible assets subject to amortization at the dates indicated (in thousands):
 
September 30, 2019
 
December 31, 2018
Amortizable intangible assets:
 

 
 

Core deposit intangibles - gross
$
63,685

 
63,685

Acquisitions
7,498

 
—

Less: accumulated amortization
(49,487
)
 
(45,027
)
Core deposit intangibles - net
21,696

 
18,658

Customer and Contract intangible assets - gross
10,474

 
10,474

Less: accumulated amortization
(9,760
)
 
(9,311
)
Customer and Contract intangible assets - net
714

 
1,163

Total intangible assets - net
$
22,410

 
19,821




32

The following table shows the actual aggregate amortization expense for the quarters ended September 30, 2019 and 2018, 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 September 30, 2019
$
1,702

For the quarter ended September 30, 2018
1,462

For the nine months ended September 30, 2019
4,909

For the nine months ended September 30, 2018
4,502

For the year ending December 31, 2019
6,495

For the year ending December 31, 2020
5,669

For the year ending December 31, 2021
4,572

For the year ending December 31, 2022
3,572

For the year ending December 31, 2023
2,695

For the year ending December 31, 2024
2,010


 
The following table provides information for the changes in the carrying amount of goodwill (in thousands):
 
Total
Balance at December 31, 2017
$
307,420

Goodwill from acquisition
—

Balance at December 31, 2018
307,420

Goodwill from acquisition
37,300

Balance at September 30, 2019
$
344,720


 
We performed our annual goodwill impairment test as of June 30, 2019 in accordance with ASC 350, as updated by ASU 2017-04, ("Step 0") and concluded that goodwill was not impaired. As of September 30, 2019, there were no events or changes in circumstances that would cause us to update that goodwill impairment test.

(7)    Borrowed Funds

(a)    Borrowings

Borrowings from the Federal Home Loan Bank of Pittsburgh ("FHLB"), are secured by our residential first mortgage and other qualifying loans. Certain of these borrowings are subject to restrictions or penalties in the event of prepayment.

The revolving line of credit with the FHLB carries a commitment of $250.0 million. The rate is adjusted daily by the FHLB, and any borrowings on this line may be repaid at any time without penalty. At September 30, 2019 and December 31, 2018, the balance of the revolving line of credit was $172.2 million and $128.6 million, respectively.

At September 30, 2019 and December 31, 2018, collateralized borrowings due within one year were $83.1 million and $105.8 million, respectively. These borrowings are collateralized by cash or various securities held in safekeeping by the FHLB.

(b)    Trust Preferred Securities

Prior to our merger with DFSC, we owned three statutory business trusts: Northwest Bancorp Capital Trust III, a Delaware statutory business trust, Northwest Bancorp Statutory Trust IV, a Connecticut statutory business trust and LNB Trust II, a Delaware statutory business trust (the Trusts). The Trusts exist solely to issue preferred securities to third parties for cash, issue common securities to the Company in exchange for capitalization of the Trusts, invest the proceeds from the sale of trust securities in an equivalent amount of debentures of the Company, and engage in other activities that are incidental to those previously listed. Northwest Bancorp Capital Trust III issued 50,000 cumulative trust preferred securities in a private transaction to a pooled investment vehicle on December 5, 2005 (liquidation value of $1,000 per preferred security or $50,000,000) with a stated maturity of December 30, 2035 and a floating rate of interest, which is reset quarterly, equal to three-month LIBOR plus 1.38%. Northwest Bancorp Statutory Trust IV issued 50,000 cumulative trust preferred securities in a private transaction to a pooled investment vehicle on December 15, 2005 (liquidation value of $1,000 per preferred security or $50,000,000) with a stated maturity of December 15, 2035 and a floating rate of interest, which is reset quarterly, equal to three-month LIBOR plus 1.38%. LNB Trust II has 7,875 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $7,875,000) with a stated maturity of June 15, 2037 and a floating rate of interest, which resets quarterly,

33

equal to three-month LIBOR plus 1.48%. As the shareholders of the trust preferred securities are the primary beneficiaries of the Trusts, the Trusts are not consolidated in our financial statements.
 
The Trusts have invested the proceeds of the offerings in junior subordinated deferrable interest debentures issued by the Company. The structure of these debentures mirrors the structure of the trust-preferred securities.  Northwest Bancorp Capital Trust III holds $51,547,000 of the Company’s junior subordinated debentures due December 30, 2035 with a floating rate of interest, reset quarterly, of three-month LIBOR plus 1.38%. The rate in effect at September 30, 2019 was 3.48%. Northwest Bancorp Statutory Trust IV holds $51,547,000 of the Company’s junior subordinated debentures due December 15, 2035 with a floating rate of interest, reset quarterly, of three-month LIBOR plus 1.38%. The rate in effect at September 30, 2019 was 3.50%. LNB Trust II holds $8,119,000 of the Company's junior subordinated debentures due June 15, 2037, with a floating rate of interest, reset quarterly, of three-month LIBOR plus 1.48%. The rate in effect at September 30, 2019 was 3.60%.

As a result of the merger with DFSC, we acquired two additional statutory business trusts: Union National Capital Trust I ("UNCT I") and Union National Capital Trust II ("UNCT II"); both are Delaware statutory business trusts. At September 30, 2019, UNCT I had 8,000 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $8,000,000) with a stated maturity of December 19, 2034. These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 2.85%. At September 30, 2019, UNCT II had 3,000 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $3,000,000) with a stated maturity of October 14, 2034. These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 2.00%. The Trusts have invested the proceeds of the offerings in junior subordinated deferrable interest debentures held by the Company. The structure of these debentures mirrors the structure of the trust-preferred securities. UNCT I holds $8,248,000 of junior subordinated debentures and UNCT II holds $3,093,000 of junior subordinated debentures. These subordinated debentures are the sole assets of the Trusts. As the shareholders of the trust preferred securities are the primary beneficiaries of the Trusts, the Trusts are not consolidated in our financial statements.
 
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 securities also are deferred. To date there have been no interest deferrals. Interest on the subordinated debentures and distributions on the trust securities is cumulative. Our obligation constitutes a full, irrevocable, and unconditional guarantee on a subordinated basis of the obligations of the trust under the preferred securities.
 
The Trusts must redeem the preferred securities when the debentures are paid at maturity or upon an earlier redemption of the debentures to the extent the debentures are redeemed. All or part of the debentures may be redeemed at any time. Also, the debentures may be redeemed at any time if existing laws or regulations, or the interpretation or application of these laws or regulations, change causing:
 
•
the interest on the debentures to no longer be deductible by the Company for federal income tax purposes;
•
the trust to become subject to federal income tax or to certain other taxes or governmental charges;
•
the trust to register as an investment company; or
•
the preferred securities do not qualify as Tier I capital. 

We may, at any time, dissolve any of the Trusts and distribute the debentures to the trust security holders, subject to receipt of any required regulatory approval.

(8)
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 September 30, 2019, the maximum potential amount of future payments we could be required to make under these non-recourse standby letters of credit was $39.6 million, of which $32.8 million is fully collateralized. At September 30, 2019, we had a liability, which represents deferred income, of $331,000 related to the standby letters of credit. 


34

(9)    Earnings Per Share

 Basic earnings per common share ("EPS") is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period, without considering any dilutive items. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. All stock options outstanding during the quarter ended September 30, 2019 and 2018 were included in the computation of diluted earnings per share because the stock options’ exercise price was less than the average market price of the common shares of $16.69 and $18.01, respectively. All stock options outstanding during the nine months ended September 30, 2019 and 2018 were included in the computation of diluted earnings per share because the stock options' exercise price was less than the average market price of the common shares of $17.19 and $17.30, respectively.

The following table sets forth the computation of basic and diluted EPS (in thousands, except share data and per share amounts): 
 
Quarter ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income available to common shareholders
$
33,414

 
27,740

 
84,841

 
79,024

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
105,517,707

 
102,334,954

 
104,626,560

 
101,937,338

Dilutive potential shares due to effect of stock options
752,837

 
1,607,741

 
1,055,055

 
1,566,731

Total weighted average common shares and dilutive potential shares
106,270,544

 
103,942,695

 
105,681,615

 
103,504,069

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.32

 
0.27

 
0.81

 
0.78

 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.31

 
0.27

 
0.80

 
0.76



(10)    Pension and Other Post-retirement Benefits
 
The following table sets forth the net periodic costs for the defined benefit pension plans and post retirement healthcare plans for the periods indicated (in thousands):
 
Quarter ended September 30,
 
Pension benefits
 
Other post-retirement benefits
 
2019
 
2018
 
2019
 
2018
Service cost
$
1,487

 
1,716

 
—

 
—

Interest cost
1,839

 
1,678

 
13

 
14

Expected return on plan assets
(2,759
)
 
(2,992
)
 
—

 
—

Amortization of prior service cost
(581
)
 
(581
)
 
—

 
—

Amortization of the net loss
856

 
872

 
17

 
24

Net periodic cost
$
842

 
693

 
30

 
38



 
Nine months ended September 30,
 
Pension benefits
 
Other post-retirement benefits
 
2019
 
2018
 
2019
 
2018
Service cost
$
4,462

 
5,148

 
—

 
—

Interest cost
5,515

 
5,034

 
39

 
41

Expected return on plan assets
(8,278
)
 
(8,976
)
 
—

 
—

Amortization of prior service cost
(1,742
)
 
(1,742
)
 
—

 
—

Amortization of the net loss
2,568

 
2,617

 
51

 
73

Net periodic cost
$
2,525

 
2,081

 
90

 
114


    
We anticipate making a contribution to our defined benefit pension plan of $2.0 million to $4.0 million during the year ending December 31, 2019.

35

(11)
Disclosures About Fair Value of Financial Instruments
 
We are required to disclose fair value information about financial instruments whether or not recognized in the consolidated statement of financial condition. Fair value information of certain financial instruments and all nonfinancial instruments is not required to be disclosed. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Financial assets and liabilities recognized or disclosed at fair value on a recurring basis and certain financial assets and liabilities on a non-recurring basis are accounted for using a three-level hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. This hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest level input that has a significant impact on fair value measurement is used.

Financial assets and liabilities are categorized based upon the following characteristics or inputs to the valuation techniques:

•
Level 1 - Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in actively traded markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.

•
Level 2 - Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets or liabilities that are actively traded. Level 2 also includes pricing models in which the inputs are corroborated by market data, for example, matrix pricing.

•
Level 3 - Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following:

•
Quotes from brokers or other external sources that are not considered binding;
•
Quotes from brokers or other external sources where it cannot be determined that market participants would in fact transact for the asset or liability at the quoted price;
•
Quotes and other information from brokers or other external sources where the inputs are not deemed observable.

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

The carrying amounts reported in the consolidated statement of financial condition approximate fair value for the following financial instruments: cash and cash equivalents, marketable securities available-for-sale, accrued interest receivable, interest rate lock commitments, forward commitments, interest rate swaps, savings and checking deposits and accrued interest payable.

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

Loans held for investment

The fair value of the loans held of investment is estimated using a discounted cash flow analysis that utilizes interest rates currently being offered for similar loans adjusted for liquidity and credit risk.
    

36

FHLB stock
 
Due to the restrictions placed on transferability of FHLB stock, it is not practical to determine the fair value.

 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.
 
Interest rate lock commitments and forward commitments

The fair value of interest rate lock commitments is based on the value of underlying loans held-for-sale which is based on quoted prices for similar loans in the secondary market.  This value is then adjusted based on the probability of the loan closing (i.e. the “pull-through” amount, a significant unobservable input).  The fair value of forward sale commitments is based on quoted prices from the secondary market based on the settlement date of the contracts.  

Cash flow hedges, interest rate and foreign exchange swap agreements
 
The fair value of the interest rate swaps is based upon the present value of the expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate. To price interest rate swaps, cash flows are first projected for each payment date using the fixed rate for the fixed side of the swap and the forward rates for the floating side of the swap. These swap cash flows are then discounted to time zero using LIBOR zero-coupon interest rates. The sum of the present value of both legs is the fair market value of the interest rate swap. These valuations have been derived from our third party vendor’s proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions that we believe to be reasonable. The fair value of the foreign exchange swap is derived from proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions we believe to be reasonable.

Off-balance sheet financial instruments
 
These financial instruments generally are not sold or traded and estimated fair values are not readily available. However, the fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. Commitments to extend credit are generally short-term in nature and, if drawn upon, are issued under current market terms. At September 30, 2019 and December 31, 2018, there was no significant unrealized appreciation or depreciation on these financial instruments.


37

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 September 30, 2019 (in thousands): 
 
Carrying
amount
 
Estimated
fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
107,602

 
107,602

 
107,602

 
—

 
—

Securities available-for-sale
807,823

 
807,823

 
—

 
807,823

 
—

Securities held-to-maturity
18,958

 
19,237

 
—

 
19,237

 
—

Loans receivable, net
8,790,299

 
8,693,690

 
—

 
—

 
8,693,690

Residential mortgage loans held-for-sale
8,859

 
8,859

 
—

 
—

 
8,859

Accrued interest receivable
27,069

 
27,069

 
27,069

 
—

 
—

Interest rate lock commitments
505

 
505

 
—

 
—

 
505

Forward commitments
215

 
215

 
—

 
215

 
—

Interest rate swaps
26,181

 
26,181

 
—

 
26,181

 
—

FHLB stock
21,401

 
21,401

 
—

 
—

 
—

Total financial assets
$
9,808,912

 
9,712,582

 
134,671

 
853,456

 
8,703,054

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Savings and checking deposits
$
7,048,049

 
7,048,049

 
7,048,049

 
—

 
—

Time deposits
1,633,451

 
1,644,309

 
—

 
—

 
1,644,309

Borrowed funds
255,257

 
255,260

 
255,260

 
—

 
—

Junior subordinated debentures
121,787

 
116,872

 
—

 
—

 
116,872

Interest rate swaps
26,257

 
26,257

 
—

 
26,257

 
—

Accrued interest payable
1,314

 
1,314

 
1,314

 
—

 
—

Total financial liabilities
$
9,086,115

 
9,092,061

 
7,304,623

 
26,257

 
1,761,181

 
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, 2018 (in thousands): 
 
Carrying
amount
 
Estimated
fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
68,789

 
68,789

 
68,789

 
—

 
—

Securities available-for-sale
801,450

 
801,450

 
—

 
801,450

 
—

Securities held-to-maturity
22,765

 
22,446

 
—

 
22,446

 
—

Loans receivable, net
7,996,225

 
7,845,313

 
—

 
—

 
7,845,313

Residential mortgage loans held-for-sale
—

 
—

 
—

 
—

 
—

Accrued interest receivable
24,490

 
24,490

 
24,490

 
—

 
—

Interest rate swaps
6,445

 
6,445

 
—

 
6,445

 
—

FHLB stock
15,635

 
15,635

 
—

 
—

 
—

Total financial assets
$
8,935,799

 
8,784,568

 
93,279

 
830,341

 
7,845,313

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Savings and checking accounts
$
6,489,338

 
6,489,338

 
6,489,338

 
—

 
—

Time deposits
1,404,841

 
1,434,410

 
—

 
—

 
1,434,410

Borrowed funds
234,389

 
234,389

 
234,389

 
—

 
—

Junior subordinated debentures
111,213

 
102,572

 
—

 
—

 
102,572

Interest rate swaps
6,445

 
6,445

 
—

 
6,445

 
—

Accrued interest payable
744

 
744

 
744

 
—

 
—

Total financial liabilities
$
8,246,970

 
8,267,898

 
6,724,471

 
6,445

 
1,536,982




38

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 September 30, 2019 and December 31, 2018.  There were no transfers of financial instruments between Level 1 and Level 2 during the quarter ended September 30, 2019.
     The following table represents assets and liabilities measured at fair value on a recurring basis at September 30, 2019 (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Debt securities:
 

 
 

 
 

 
 

U.S. government and agencies
$
—

 
14,965

 
—

 
14,965

Government sponsored enterprises
—

 
119,833

 
—

 
119,833

States and political subdivisions
—

 
29,390

 
—

 
29,390

Corporate
—

 
918

 
—

 
918

Total debt securities
—

 
165,106

 
—

 
165,106

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

GNMA
—

 
24,715

 
—

 
24,715

FNMA
—

 
86,858

 
—

 
86,858

FHLMC
—

 
53,209

 
—

 
53,209

Non-agency
—

 
506

 
—

 
506

Collateralized mortgage obligations:
 

 
 

 
 

 
 

GNMA
—

 
144,829

 
—

 
144,829

FNMA
—

 
200,873

 
—

 
200,873

FHLMC
—

 
131,727

 
—

 
131,727

Total mortgage-backed securities
—

 
642,717

 
—

 
642,717

 
 
 
 
 
 
 
 
Interest rate lock commitments
—

 
—

 
505

 
505

Forward commitments
—

 
215

 
—

 
215

Interest rate swaps
—

 
26,181

 
—

 
26,181

Total assets
$
—

 
834,219

 
505

 
834,724

 
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
26,257

 
—

 
26,257

Total liabilities
$
—

 
26,257

 
—

 
26,257


39

The following table represents assets and liabilities measured at fair value on a recurring basis at December 31, 2018 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Debt securities:
 

 
 

 
 

 
 

U.S. government and agencies
$
—

 
14,780

 
—

 
14,780

Government sponsored enterprises
—

 
187,335

 
—

 
187,335

States and political subdivisions
—

 
21,163

 
—

 
21,163

Corporate
—

 
914

 
—

 
914

Total debt securities
—

 
224,192

 
—

 
224,192

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

GNMA
—

 
27,041

 
—

 
27,041

FNMA
—

 
73,196

 
—

 
73,196

FHLMC
—

 
51,621

 
—

 
51,621

Non-agency
—

 
528

 
—

 
528

Collateralized mortgage obligations:
 

 
 

 
 

 
 

GNMA
—

 
52,331

 
—

 
52,331

FNMA
—

 
207,033

 
—

 
207,033

FHLMC
—

 
165,508

 
—

 
165,508

Total mortgage-backed securities
—

 
577,258

 
—

 
577,258

 
 
 
 
 
 
 
 
Interest rate swaps
—

 
6,445

 
—

 
6,445

Total assets
$
—

 
807,895

 
—

 
807,895

 
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
6,445

 
—

 
6,445

Total liabilities
$
—

 
6,445

 
—

 
6,445



The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis (in thousands):
 
For the quarter ended September 30,
 
For the nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Beginning balance
$
—

 
—

 
—

 
—

Total gains or losses
 
 
 
 
 
 
 
Included in earnings
—

 
—

 
—

 
—

Purchases
505

 
—

 
505

 
—

Sales
—

 
—

 
—

 
—

Transfers from Level 3
—

 
—

 
—

 
—

Transfers into Level 3
—

 
—

 
—

 
—

Ending balance
$
505

 
—

 
505

 
—



Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment, real estate owned, and mortgage servicing rights. 

    

40

The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of September 30, 2019 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Loans measured for impairment
$
—

 
—

 
40,603

 
40,603

Real estate owned
—

 
—

 
1,237

 
1,237

Total assets
$
—

 
—

 
41,840

 
41,840



The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of December 31, 2018 (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total
assets at
fair value
Loans measured for impairment
$
—

 
—

 
40,333

 
40,333

Real estate owned, net
—

 
—

 
2,498

 
2,498

Total assets
$
—

 
—

 
42,831

 
42,831



 Impaired loans - A loan is considered to be impaired as described in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2018 Annual Report on Form 10-K. We classify loans individually evaluated for impairment that require a specific reserve as nonrecurring Level 3.

Real estate owned - Real estate owned is comprised of property acquired through foreclosure or voluntarily conveyed by borrowers. These assets are recorded on the date acquired at the lower of the related loan balance or fair value, less estimated disposition costs, with the fair value being determined by appraisal. Subsequently, foreclosed assets are valued at the lower of the amount recorded at acquisition date or fair value, less estimated disposition costs. We classify real estate owned as nonrecurring Level 3.
 
The following 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 September 30, 2019 (in thousands): 
 
Fair value
 
Valuation
techniques
 
Significant
unobservable inputs
 
Range 
(weighted average)
Loans measured for impairment
$
40,603

 
Appraisal value (1)
 
Estimated cost to sell
 
10.0%
 
 

 
Discounted cash flow
 
Discount rate
 
4.25% to 11.0% (7.50%)
 
 
 
 
 
 
 
 
Real estate owned
$
1,237

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

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

Derivatives Designated as Hedging Instruments

With the expiration of the $50.0 million in notional of interest rate swap agreements (swaps) previously designated in hedging relationships, we are no longer a counterparty to any interest rate swap agreements designated as cash flow hedges. Previously, the swaps were intended to protect against the variability of cash flows associated with Northwest Bancorp Capital Trust III and Northwest Bancorp Capital Trust IV. In 2018, the swaps matured without replacement.

41

Derivatives Not Designated as Hedging Instruments

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

We enter into interest rate lock commitments for residential mortgage loans which commit us to lend funds to a potential borrower at a specific interest rate within a specified period of time.  Interest rate lock commitments that relate to the origination of mortgage loans that will be held-for-sale are considered derivative financial instruments under applicable accounting guidance.  Interest rate lock commitments on loans held-for-sale are carried at fair value in other assets on the consolidated statement of financial condition. Northwest sells loans to the secondary market on a mandatory or best efforts basis.  The loans sold on a mandatory basis commit us to deliver a specific principal amount of mortgage loans to an investor at a specified price, by a specified date, or the commitment must be paired off. These forward commitments entered into on a mandatory delivery basis meet the definition of a derivative financial instrument. All closed loans to be sold on a mandatory delivery basis are classified as held-for-sale on the consolidated statement of financial condition. Changes to the fair value of the interest rate lock commitments and the forward commitments are recorded in mortgage banking income in the consolidated statements of income.

The following table presents information regarding our derivative financial instruments for the periods indicated (in thousands):
 
Asset derivatives
 
Liability derivatives
 
Notional amount
 
Fair value
 
Notional amount
 
Fair value
At September 30, 2019
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap agreements
$
317,086

 
26,181

 
317,086

 
26,257

Interest rate lock commitments
25,331

 
505

 
—

 
—

Forward commitments
7,907

 
215

 
—

 
—

Total derivatives
$
350,324

 
26,901

 
317,086

 
26,257

 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap agreements
$
221,919

 
6,445

 
221,919

 
6,445

Total derivatives
$
221,919

 
6,445

 
221,919

 
6,445



The following table presents income or expense recognized on derivatives for the periods indicated (in thousands):
 
For the quarter ended September 30,
 
For the nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Hedging derivatives:
 
 
 
 
 
 
 
Increase in interest expense
$
—

 
257

 
—

 
857

 
 
 
 
 
 
 
 
Non-hedging swap derivatives:
 
 
 
 
 
 
 
Decrease in other income
(125
)
 
—

 
(195
)
 
(288
)
Increase in mortgage banking income
720

 
—

 
720

 
—




42

(13)    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 September 30, 2019, 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.

During the year-ended December 31, 2018, Northwest and our subsidiary, Northwest Insurance Services (“NWIS”), were involved in a lawsuit against, among others, First National Bank of Pennsylvania (“FNB”) and their insurance subsidiary, First National Insurance Agency, LLC (“FNIA”). All counterclaims against Northwest were discontinued and, on December 21, 2018, a verdict was rendered in favor of NWIS on several of its claims. Post-trial proceedings have concluded with the verdict affirmed and attorneys’ fees awarded.  An appeal has been filed with the Pennsylvania Superior Court.  Due to the inherent uncertainties with respect to these proceedings, we have not accrued any awards associated with this verdict within our consolidated financial statements as of September 30, 2019.

(14)    Changes in Accumulated Other Comprehensive Income
 
The following tables show the changes in accumulated other comprehensive income/(loss) by component for the periods indicated (in thousands): 
 
For the quarter ended September 30, 2019
 
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 June 30, 2019
$
3,227

 
—

 
(32,446
)
 
(29,219
)
 
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments (1)
1,315

 
—

 
—

 
1,315

Amounts reclassified from accumulated other comprehensive income (2), (3)
(1
)
 
—

 
208

 
207

 
 
 
 
 
 
 
 
Net other comprehensive income
1,314

 
—

 
208

 
1,522

 
 
 
 
 
 
 
 
Balance as of September 30, 2019
$
4,541

 
—

 
(32,238
)
 
(27,697
)
 
 
For the quarter ended September 30, 2018
 
Unrealized 
gains and 
(losses) on 
securities 
available-
for-sale
 
Change in 
fair value 
of interest 
rate swaps
 
Change in 
defined 
benefit 
pension 
plans
 
Total
Balance as of June 30, 2018
$
(10,693
)
 
(266
)
 
(32,134
)
 
(43,093
)
 
 
 
 
 
 
 
 
Other comprehensive income/(loss) before reclassification adjustments (4), (5)
(1,970
)
 
192

 
—

 
(1,778
)
Amounts reclassified from accumulated other comprehensive income (6), (7)
(44
)
 
—

 
226

 
182

 
 
 
 
 
 
 
 
Net other comprehensive income/(loss)
(2,014
)
 
192

 
226

 
(1,596
)
 
 
 
 
 
 
 
 
Balance as of September 30, 2018
$
(12,707
)
 
(74
)
 
(31,908
)
 
(44,689
)
(1)
Consists of unrealized holding loss, net of tax of $(525).
(2)
Consists of realized gain on securities (gain on sales of investments, net) of $(1), net of tax (income tax expense) of $0.
(3)
Consists of amortization of prior service cost (compensation and employee benefits) of $(581) and amortization of net loss (compensation and employee benefits) of $890, net of tax (income tax expense) of $(83).
(4)
Consists of unrealized holding gain, net of tax $788.
(5)
Change in fair value of interest rate swaps, net of tax $(51).
(6)
Consists of realized gains on securities (gain on sales of investments, net) of $61, net of tax (income tax expense) of $17.
(7)
Consists of amortization of prior service cost (compensation and employee benefits) of $581 and amortization of net loss (compensation and employee benefits) of $(897), net of tax (income tax expense) of $(90). 

43

 
For the nine months ended September 30, 2019
 
Unrealized 
gains 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, 2018
$
(6,832
)
 
—

 
(32,864
)
 
(39,696
)
 
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments (1)
11,376

 
—

 
—

 
11,376

Amounts reclassified from accumulated other comprehensive income (2), (3)
(3
)
 
—

 
626

 
623

 
 
 
 
 
 
 
 
Net other comprehensive income
11,373

 
—

 
626

 
11,999

 
 
 
 
 
 
 
 
Balance as of September 30, 2019
$
4,541

 
—

 
(32,238
)
 
(27,697
)


 
For the nine months ended September 30, 2018
 
Unrealized 
gains and 
(losses) on 
securities 
available-
for-sale
 
Change in 
fair value 
of interest 
rate swaps
 
Change in 
defined 
benefit 
pension 
plans
 
Total
Balance as of December 31, 2017
$
(4,409
)
 
(691
)
 
(26,980
)
 
(32,080
)
 
 
 
 
 
 
 
 
Reclassification due to adoption of ASU No. 2018-02
(991
)
 
(149
)
 
(5,606
)
 
(6,746
)
 
 
 
 
 
 
 
 
Other comprehensive income/(loss) before reclassification adjustments (4), (5)
(7,169
)
 
766

 
—

 
(6,403
)
Amounts reclassified from accumulated other comprehensive income (6), (7)
(138
)
 
—

 
678

 
540

 
 
 
 
 
 
 
 
Net other comprehensive income/(loss)
(7,307
)
 
766

 
678

 
(5,863
)
 
 
 
 
 
 
 
 
Balance as of September 30, 2018
$
(12,707
)
 
(74
)
 
(31,908
)
 
(44,689
)
(1)
Consists of unrealized holding loss, net of tax of $(4,549).
(2)
Consists of realized gain on securities (gain on sales of investments, net) of $(1), net of tax (income tax expense) of $1.
(3)
Consists of amortization of prior service cost (compensation and employee benefits) of $(1,742), and amortization of net loss (compensation and employee benefits) of $2,669, net of tax (income tax expense) of $(250).
(4)
Consists of unrealized holding gain, net of tax of $2,869.
(5)
Change in fair value of interest rate swaps, net of tax of $(204).
(6)
Consists of realized gains on securities (gain on sales of investments, net) of $192, net of tax (income tax expense) of $54.
(7)
Consists of amortization of prior service cost (compensation and employee benefits) of $1,742 and amortization of net loss (compensation and employee benefits) of $(2,691), net of tax (income tax expense) of $(271).

(15)    Subsequent events

The Company previously announced that it has entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and between the Company and MutualFirst Financial, Inc. (“MutualFirst Financial”). Pursuant to the Merger Agreement, MutualFirst Financial will merge with and into the Company, with the Company as the surviving entity. Immediately thereafter, MutualBank, the wholly owned subsidiary of MutualFirst Financial, will merge with and into Northwest Bank, the wholly owned subsidiary of the Company, with Northwest Bank as the surviving entity.

Under the terms of the Merger Agreement, each share of common stock of MutualFirst Financial will be converted into the right to receive 2.4 shares of the Company’s common stock, for total consideration valued at approximately $346 million, or $39.89 per share based on the Company's 15-day volume weighted average closing stock pricing ending on October 23, 2019.

The transaction has been approved by the Boards of Directors of the Company and MutualFirst Financial. Completion of the transaction is subject to customary closing conditions, including the receipt of required regulatory approvals and the approval of stockholders of MutualFirst Financial.

As of September 30, 2019, MutualFirst Financial has total assets of $2.074 billion (unaudited) and net income of $17.1 million (unaudited) for the nine months ended September 30, 2019.


44

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

Overview of Critical Accounting Policies Involving Estimates
 
Please refer to Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2018 Annual Report on Form 10-K.
 
Comparison of Financial Condition
 
On March 8, 2019, we acquired all of the outstanding common shares of Donegal Financial Services Corporation ("DFSC"), the holding company for Union Community Bank ("UCB"), for total consideration of $85.8 million, and thereby acquired UCB's 12 branch locations in Lancaster County in eastern Pennsylvania. As a result, we acquired assets with a fair value of $537.9 million, including loans with a fair value of $407.8 million, and we assumed deposits of $479.4 million. Under the terms of the merger agreement, the two shareholders of DFSC, Donegal Mutual Insurance Company and Donegal Group Inc., received payment in the form of 50% cash and 50% stock, or a total of $42.5 million and 2,462,373 shares of NWBI common stock.

Total assets at September 30, 2019 were $10.580 billion, an increase of $972.7 million, or 10.1%, from $9.608 billion at December 31, 2018.  This increase in assets was due primarily to the addition of $627.4 million, at fair value, of assets related to the UCB acquisition and organic loan growth of $392.7 million.
 

45

Total loans receivable increased by $800.6 million, or 9.9%, to $8.852 billion at September 30, 2019, from $8.051 billion at December 31, 2018. This increase was due primarily to the addition of $407.8 million, at fair value, of loans related to the UCB acquisition. Additionally, originated loans receivable increased by $392.7 million, or 4.9% .

     Total deposits increased by $787.3 million, or 10.0%, to $8.682 billion at September 30, 2019 from $7.894 billion at December 31, 2018 primarily due to the addition of $479.4 million of deposits, at fair value, related to the UCB acquisition. In addition, legacy total deposits increased by $307.9 million, or 3.9%, with increases across all deposit products except for a slight decrease in savings deposits. Legacy interest-bearing demand deposits increased by $132.9 million, or 9.1%, to $1.588 billion at September 30, 2019 from $1.455 billion at December 31, 2018. These increases are due primarily to our continued efforts to attract low cost accounts to whom we can also cross-sell other products and services. Legacy money market deposits also increased $166.4 million, or 10.0%, to $1.828 billion at September 30, 2019 from $1.662 billion at December 31, 2018, and legacy time deposits grew $108.1 million, or 7.7%, to $1.513 billion at September 30, 2019 from $1.405 billion at December 31, 2018.
     
Total shareholders’ equity at September 30, 2019 was $1.352 billion, or $12.67 per share, an increase of $94.1 million, or 7.5%, from $1.258 billion, or $12.17 per share, at December 31, 2018.  This increase in equity was primarily the result of the issuance of 2,462,373 shares of our common stock at $17.58 per share for the UCB acquisition as well as the result of net income of $84.8 million for the nine months ended September 30, 2019. Partially offsetting this increase was the payment of cash dividends of $57.0 million for the nine months ended September 30, 2019.

Regulatory Capital
 
Financial institutions and their holding companies are subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by the regulators that, if undertaken, could have a direct, material effect on a company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting guidelines. Capital amounts and classifications are also subject to qualitative judgments made by the regulators about components, risk-weighting and other factors.

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

The capital conservation buffer requirement was phased in, which began on January 1, 2016 and ended on January 1, 2019, when the full capital conservation buffer requirement was implemented.


46

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 (in thousands).
 
At September 30, 2019
 
 
 
 
 
Minimum capital
 
Well capitalized
 
Actual
 
requirements (1)
 
requirements
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Total capital (to risk weighted assets)
 

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
$
1,286,503

 
15.399
%
 
$
877,231

 
10.500
%
 
$
835,458

 
10.000
%
Northwest Bank
1,225,458

 
14.678
%
 
876,646

 
10.500
%
 
834,901

 
10.000
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to risk weighted assets)
 
 
 
 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,233,644

 
14.766
%
 
710,140

 
8.500
%
 
668,367

 
8.000
%
Northwest Bank
1,171,628

 
14.033
%
 
709,666

 
8.500
%
 
667,921

 
8.000
%
 
 
 
 
 
 
 
 
 
 
 
 
CET1 capital (to risk weighted assets)
 
 
 
 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,115,536

 
13.352
%
 
584,821

 
7.000
%
 
543,048

 
6.500
%
Northwest Bank
1,171,628

 
14.033
%
 
584,431

 
7.000
%
 
542,686

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

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,233,644

 
11.793
%
 
418,433

 
4.000
%
 
523,041

 
5.000
%
Northwest Bank
1,171,628

 
11.270
%
 
415,849

 
4.000
%
 
519,812

 
5.000
%
(1) Amounts and ratios include the 2019 capital conservation buffer of 2.5%, which does not apply to Tier 1 capital to average assets (leverage ratio).
 
 
At December 31, 2018
 
 
 
 
 
Minimum capital
 
Well capitalized
 
Actual
 
requirements (1)
 
requirements
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Total capital (to risk weighted assets)
 

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
$
1,183,619

 
15.833
%
 
$
738,212

 
9.875
%
 
$
747,557

 
10.000
%
Northwest Bank
1,026,027

 
13.736
%
 
737,647

 
9.875
%
 
746,984

 
10.000
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier I capital (to risk weighted assets)
 
 
 
 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,128,405

 
15.095
%
 
588,701

 
7.875
%
 
598,045

 
8.000
%
Northwest Bank
970,813

 
12.996
%
 
588,250

 
7.875
%
 
597,587

 
8.000
%
 
 
 
 
 
 
 
 
 
 
 
 
CET1 capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Northwest Bancshares, Inc.
1,020,530

 
13.652
%
 
476,567

 
6.375
%
 
485,912

 
6.500
%
Northwest Bank
970,813

 
12.996
%
 
776,202

 
6.375
%
 
448,190

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

 
 
 
 
 
 
 
 
 
 
Northwest Bancshares, Inc.
1,128,405

 
11.899
%
 
379,342

 
4.000
%
 
474,177

 
5.000
%
Northwest Bank
970,813

 
10.240
%
 
379,236

 
4.000
%
 
474,045

 
5.000
%
(1) Amounts and ratios include the 2018 capital conservation buffer of 1.875%, which does not apply to Tier 1 capital to average assets (leverage ratio).


47

Liquidity
 
We are required to maintain a sufficient level of liquid assets, as determined by management and reviewed for adequacy by the FDIC and the Pennsylvania Department of Banking and Securities during their regular examinations. Northwest monitors its liquidity position primarily using the ratio of unencumbered available-for-sale liquid assets as a percentage of deposits and borrowings (“liquidity ratio”).  Northwest’s liquidity ratio at September 30, 2019 was 9.2%. 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 September 30, 2019, Northwest had $3.190 billion of additional borrowing capacity available with the FHLB, including $250.0 million on an overnight line of credit, which had a balance of $172.2 million, as well as $43.9 million of borrowing capacity available with the Federal Reserve Bank and $80.0 million with two correspondent banks.
 
Dividends
 
We paid $19.2 million and $17.5 million in cash dividends during the quarters ended September 30, 2019 and 2018, respectively.  The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 58.1% and 63.0% for the quarters ended September 30, 2019 and 2018, respectively, on dividends of $0.18 per share for the quarter ended September 30, 2019 and on dividends of $0.17 per share for the quarter ended September 30, 2018. We paid $57.0 million and $52.4 million in cash dividends during the nine months ended September 30, 2019 and 2018, respectively. The common stock dividend payout ratio was 67.5% and 67.1% for the nine months ended September 30, 2019 and 2018, respectively, on dividends of $0.54 per share for the nine months ended September 30, 2019 and on dividends of $0.51 per share for the nine months ended September 30, 2018. On October 21, 2019, the Board of Directors declared a cash dividend of $0.18 per share payable on November 15, 2019 to shareholders of record as of November 1, 2019. This represents the 100th 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 the 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.
 
September 30, 2019
 
December 31, 2018
 
(in thousands)
Loans 90 days or more delinquent
 

 
 

Residential mortgage loans
$
11,816

 
12,985

Home equity loans
5,966

 
6,037

Consumer finance loans
1

 
—

Consumer loans
3,400

 
3,254

Commercial real estate loans
22,292

 
25,587

Commercial loans
5,741

 
3,010

Total loans 90 days or more delinquent
$
49,216

 
50,873

Total real estate owned, net (REO)
1,237

 
2,498

Total loans 90 days or more delinquent and REO
50,453

 
53,371

Total loans 90 days or more delinquent to net loans receivable
0.56
%
 
0.64
%
Total loans 90 days or delinquent and REO to total assets
0.48
%
 
0.56
%
Nonperforming loans:
 
 
 
Nonaccrual loans - loans 90 days or more delinquent
49,121

 
50,730

Nonaccrual loans - loans less than 90 days delinquent
16,536

 
21,552

Loans 90 days or more past maturity and still accruing
85

 
166

Total nonperforming loans
65,742

 
72,448

Total nonperforming assets
$
66,979

 
74,946

Nonaccrual TDR loans (1)
9,138

 
15,306

Accruing TDR loans
21,162

 
18,302

Total TDR loans
$
30,300

 
33,608

(1)
Included in nonaccurual loans above.
 

48

At September 30, 2019, we expect to fully collect the carrying value of our purchased credit impaired loans and have determined that we can reasonably estimate their future cash flows including those loans that are 90 days or more delinquent. As a result, we do not consider these loans that are 90 days or more delinquent, which total $95,000, to be nonaccrual or impaired and continue to recognize interest income on these loans, including the loans’ accretable discount.
 
A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement including both contractual principal and interest payments.  The amount of impairment is required to be measured using one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of collateral if the loan is collateral dependent.  If the measure of the impaired loan is less than the recorded investment in the loan, a specific allowance is allocated for the impairment. Impaired loans at September 30, 2019 and December 31, 2018 were $88.8 million and $98.3 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. Personal and small business commercial loans are classified primarily by delinquency status. In addition, a meeting is held every quarter with each region to monitor the performance and status of commercial loans on an internal watch list.  On an on-going basis, the loan officer, in conjunction with a portfolio manager, grades or classifies problem commercial loans or potential problem commercial 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 commercial loans is consistent with industry regulatory guidelines which classifies loans as “substandard”, “doubtful” or “loss.”  Loans that do not expose us to risk sufficient to warrant classification in one of the previous categories, but which possess some weaknesses, are designated as “special mention”.  A “substandard” loan is any loan that is 90 days or more contractually delinquent or is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified as “doubtful” have all the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions or values, highly questionable and improbable.  Loans classified as “loss” are considered uncollectible so that their continuance as assets without the establishment of a specific loss allowance is not warranted.
 
Credit relationships that have been classified as substandard or doubtful and are greater than or equal to $1.0 million are reviewed by the Credit Administration department for possible impairment.  A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including both contractual principal and interest payments.
 
If such an individual loan is deemed to be impaired, the Credit Administration department determines the proper measure of impairment for each loan based on one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent, less costs of sale or disposal.  If the measurement of the impaired loan is more or less than the recorded investment in the loan, the 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 Allowance for Loan Loss Committee ("ALL Committee") monthly.  The ALL Committee reviews and approves the processes and ALL documentation presented.  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.  The ALL Committee also considers if any changes to the methodology are needed. In addition to the ALL Committee's review and approval, a review is performed by the Risk Management Committee of the Board of Directors on a quarterly basis and annually by internal audit.
 

49

In addition to the reviews by management’s ALL Committee and the Board of Directors’ Risk Management Committee, regulators from either the FDIC and/or the Pennsylvania Department of Banking and Securities perform an extensive review on at least 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 ALL 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 frequently, 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 ALL Committee assesses regularly for appropriateness.  As part of the analysis as of September 30, 2019, we considered the economic conditions in our markets, such as unemployment and bankruptcy levels as well as changes in estimates of real estate collateral values, and no material changes in methodology were determined to be necessary. In addition, we considered the overall trends in asset quality, specific reserves needed and/or already established for criticized loans, historical loss rates and collateral valuations. The ALL decreased by $2.4 million, or 4.3%, to $52.9 million, or 0.60% of total loans at September 30, 2019 from $55.2 million, or 0.69% of total loans, at December 31, 2018. This decrease is due primarily to the write down of $4.0 million on a residential land development loan in our Western New York region which was previously fully reserved. Partially offsetting this decrease was an increase in substandard loans of $21.8 million, or 11.9%, slightly offset by the decrease in loans classified as special mention of $6.9 million, or 6.1%. Loans classified as substandard increased to $205.6 million at September 30, 2019 from $183.8 million at December 31, 2018. Loans classified as special mention decreased to $107.0 million at September 30, 2019 from $114.0 million at December 31, 2018.
 
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 $65.7 million, or 0.74% of total loans receivable at September 30, 2019, decreased by $6.624 million, or 9.2%, from $72.3 million, or 0.90% of total loans receivable, at December 31, 2018. As a percentage of average loans, annualized net charge-offs increased to 0.26% for the nine months ended September 30, 2019 compared to 0.28% for the year ended December 31, 2018.

Comparison of Operating Results for the Quarters Ended September 30, 2019 and 2018
 
Net income for the quarter ended September 30, 2019 was $33.4 million, or $0.31 per diluted share, an increase of $5.7 million, or 20.5%, from net income of $27.7 million, or $0.27 per diluted share, for the quarter ended September 30, 2018. The increase in net income resulted from an increase in net interest income of $5.1 million, or 6.0%, a decrease in the provision for loan losses of $3.7 million or 52.7% and an increase in noninterest income of $3.6 million, or 16.0%. Partially offsetting these improvements was an increase in noninterest expense of $4.0 million, or 6.0% and an increase in income tax expense of $2.8 million, or 39.2%. Net income for the quarter ended September 30, 2019 represents annualized returns on average equity and average assets of 9.90% and 1.25%, respectively, compared to 8.93% and 1.15% for the same quarter last year. A further discussion of notable changes follows.

Interest Income
 
Total interest income increased by $11.3 million, or 11.8%, to $106.9 million for the quarter ended September 30, 2019 from $95.6 million for the quarter ended September 30, 2018. This increase is attributed to increases in both the average balance and average yield on interest earning assets. The average yield earned on interest earning assets increased to 4.39% for the quarter ended September 30, 2019 from 4.31% for the quarter ended September 30, 2018 due to increases in market interest rates over the past year before the Federal Reserve started its recent interest rate easing strategy. Additionally, the average balance of interest earning assets increased by $845.3 million, or 9.6%, to $9.651 billion for the quarter ended September 30, 2019 from $8.806 billion for the quarter ended September 30, 2018 due primarily to internal loan growth as well as the acquisition of UCB.

Interest income on loans receivable increased by $10.4 million, or 11.4%, to $101.1 million for the quarter ended September 30, 2019 from $90.7 million for the quarter ended September 30, 2018. This increase is attributed to increases in both the average balance and average yield on loans receivable. The average balance increased by $819.2 million, or 10.3%, to $8.747 billion for the quarter ended September 30, 2019 from $7.927 billion for the quarter ended September 30, 2018. This increase is due to organic loan growth of $451.2 million during the last twelve months as well as loans acquired of $407.8 million from UCB. Additionally, the average yield on loans receivable increased to 4.59% for the quarter ended September 30, 2019 from 4.54% for the quarter ended September 30, 2018 primarily as a result of the increases in market interest rates last year.

Interest income on mortgage-backed securities increased by $616,000, or 17.2%, to $4.2 million for the quarter ended September 30, 2019 from $3.6 million for the quarter ended September 30, 2018. This increase is attributed to increases in both the average balance and the average yield on mortgage-backed securities. The average yield on mortgage-backed securities increased to 2.61% for the quarter ended September 30, 2019 from 2.39% for the quarter ended September 30, 2018 due to the purchase of fixed-rate

50

mortgage-backed securities, including the UCB portfolio, with yields higher than the existing Northwest portfolio. The average balance of mortgage-backed securities increased by $42.5 million, or 7.1%, to $641.1 million for the quarter ended September 30, 2019 from $598.6 million for the quarter ended September 30, 2018 primarily as a result of investment securities received as part of the UCB acquisition.

Interest income on investment securities increased by $89,000, or 8.7%, to $1.1 million for the quarter ended September 30, 2019 from $1.0 million for the quarter ended September 30, 2018. This increase is attributed to an increase in the average yield on investment securities which increased to 2.03% for the quarter ended September 30, 2019 from 1.67% for the quarter ended September 30, 2018 due to the addition of higher yielding investments, including municipal bonds, from the UCB acquisition. Partially offsetting this increase was a decrease in the average balance of investment securities of $25.6 million, or 10.5% to $218.8 million for the quarter ended September 30, 2019 from $244.3 million for the quarter ended September 30, 2018. This decrease is due primarily to the maturity or call of government agency securities.

Dividends on FHLB stock increased by $188,000, or 158.0%, to $307,000 for the quarter ended September 30, 2019 from $119,000 for the quarter ended September 30, 2018. This increase is attributable to increases in both the average balance and average yield on FHLB stock. The average yield increased to 7.47% for the quarter ended September 30, 2019 from 4.81% for the quarter ended September 30, 2018, as the FHLB of Pittsburgh recently increased yields on required stock purchases for active members. Additionally, the average balance increased by $6.5 million, or 66.0%, to $16.3 million for the quarter ended September 30, 2019 from $9.8 million for the quarter ended September 30, 2018. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.
 
Interest income on interest-earning deposits remained relatively flat, increasing by just $10,000, or 6.2%, to $172,000 for the quarter ended September 30, 2019 from $162,000 for the quarter ended September 30, 2018. The average balance of interest-earning deposits increased by $2.8 million, or 10.6%, to $28.8 million for the quarter ended September 30, 2019 from $26.1 million for the quarter ended September 30, 2018, which was offset by the decrease in the average yield on interest-earning deposits to 2.33% for the quarter ended September 30, 2019 from 2.43% for the quarter ended September 30, 2018 as the Federal Reserve recently started decreasing their targeted federal funds rate.

Interest Expense
 
Interest expense increased by $6.1 million, or 62.8%, to $15.9 million for the quarter ended September 30, 2019 from $9.8 million for the quarter ended September 30, 2018. This increase in interest expense was primarily due to an increase in the average cost of interest-bearing liabilities, which increased to 0.89% for the quarter ended September 30, 2019 from 0.60% for the quarter ended September 30, 2018. This increase resulted from increases in the interest rate paid on deposits and borrowed funds in response to increases in market interest rates last year. In addition, the average balance of interest-bearing liabilities increased by $633.5 million, or 9.8%, to $7.097 billion for the quarter ended September 30, 2019 from $6.464 billion for the quarter ended September 30, 2018. This increase was primarily due to the UCB acquisition which included $479.4 million in deposits.
 
Net Interest Income
 
Net interest income increased by $5.1 million, or 6.0%, to $90.9 million for the quarter ended September 30, 2019 from $85.8 million for the quarter ended September 30, 2018.  This increase is attributable to the factors discussed above. Our interest bearing deposit costs rose greater than yields on interest earning assets reducing our interest rate spread and, as a result of the inverted yield curve, we are experiencing net interest margin compression. Our interest rate spread decreased to 3.50% for the quarter ended September 30, 2019 from 3.71% for the quarter ended September 30, 2018 and our net interest margin decreased to 3.77% for the quarter ended September 30, 2019 from 3.90% for the quarter ended September 30, 2018.

Provision for Loan Losses

The provision for loan losses decreased by $3.7 million, or 52.7%, to $3.3 million for the quarter ended September 30, 2019 from $7.0 million for the quarter ended September 30, 2018. The provision was elevated in the prior year due primarily to a $4.6 million write-down of a land development loan in the third quarter of 2018. In addition, total loan delinquency decreased by $12.5 million to $81.0 million, or 0.9% of total loans, at September 30, 2019 from $93.6 million, or 1.2% of total loans at September 30, 2018. Annualized net charge-offs to average loans decreased to 0.16% for the quarter ended September 30, 2019 from 0.42% for the quarter ended September 30, 2018 due primarily to the land development write-down noted above.

51

     In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels, bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss experience.  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 at September 30, 2019.
 
Noninterest Income
 
Noninterest income increased by $3.6 million, or 16.0%, to $26.2 million for the quarter ended September 30, 2019 from $22.6 million for the quarter ended September 30, 2018. This increase was primarily due to a $1.8 million increase in mortgage banking income as a result of expanding our secondary market sales capabilities. In addition, there was a $696,000 increase in other operating income from increases in interest rate swap fees and Visa dividend income, a $400,000 increase in service charges and fees as a result of increased customer activity from the UCB acquisition, and a $355,000 increase in trust and other financial services income due to new brokerage production. In addition, we recognized a gain of $826,000 in the current quarter on the sale of $46.0 million of one-to-four family mortgage loans from our portfolio. We chose to sell these loans as they were identified as most likely to refinance due to declining interest rates and redeploy those proceeds into shorter duration loans at an equivalent yield.
 
Noninterest Expense
 
Noninterest expense increased by $4.0 million, or 6.0%, to $70.6 million for the quarter ended September 30, 2019 from $66.6 million for the quarter ended September 30, 2018.  This increase resulted primarily from a $3.3 million, or 8.7%, increase in compensation and employee benefits due to both internal growth in compensation and staff as well as the addition of UCB employees. In addition, processing expenses increased by $1.5 million, or 15.6%, as we continue to invest in technology and infrastructure and refresh our loan origination platforms. Partially offsetting this increase was a decrease in federal deposit insurance premiums of $1.4 million due to an assessment credit received during the quarter as a result of the deposit insurance fund becoming fully funded.

Income Taxes
 
The provision for income taxes increased by $2.8 million, or 39.2%, to $9.8 million for the quarter ended September 30, 2019 from $7.0 million for the quarter ended September 30, 2018. In addition to the increase in income before tax of $8.4 million, or 24.2%, our effective tax rate for the quarter ended September 30, 2019 was 22.7% compared to 20.2% for the quarter ended September 30, 2018. We anticipate our effective tax rate to be between 21.0% and 23.0% for the year ending December 31, 2019.

Comparison of Operating Results for the Nine Months Ended September 30, 2019 and 2018
 
Net income for the nine months ended September 30, 2019 was $84.8 million, or $0.80 per diluted share, an increase of $5.8 million, or 7.4%, from $79.0 million, or $0.76 per diluted share, for the nine months ended September 30, 2018.  The increase in net income resulted from an increase in interest income of $35.9 million, or 12.9%, and an increase in noninterest income of $2.7 million, or 4.0%. Partially offsetting this improvement were increases in interest expense of $16.2 million, or 62.0%, and noninterest expense of $15.7 million, or 7.7%. Net income for the nine months ended September 30, 2019 represents annualized returns on average equity and average assets of 8.65% and 1.10%, respectively, compared to 8.67% and 1.11% for the nine months ended September 30, 2018.  A discussion of significant changes follows.
 
Interest Income
 
Total interest income increased by $35.9 million, or 12.9%, to $314.0 million for the nine months ended September 30, 2019 from $278.0 million for the nine months ended September 30, 2018. This increase is the result of increases in both the average balance and average yield earned on interest earning assets. The average yield earned on interest earning assets increased to 4.47% for the nine months ended September 30, 2019 from 4.26% for the nine months ended September 30, 2018. This increase in average yield is attributed to increases in market interest rates over the past year. Additionally, the average balance of interest earning assets increased by $656.2 million, or 7.5%, to $9.391 billion for the nine months ended September 30, 2019 from $8.735 billion for the nine months ended September 30, 2018 due primarily to internal loan growth as well as the UCB acquisition.

Interest income on loans receivable increased by $32.9 million, or 12.5%, to $296.9 million for the nine months ended September 30, 2019 from $264.1 million for the nine months ended September 30, 2018.  This increase is attributed to increases in both the average balance and average yield on loans receivable. The average balance increased by $649.8 million, or 8.3%, to $8.501 billion for the nine months ended September 30, 2019 from $7.851 billion for the nine months ended September 30, 2018. This increase is due to organic loan growth of $451.2 million during the last twelve months as well as loans of $407.8 million from the UCB acquisition. Additionally, the average yield on loans receivable increased to 4.67% for the nine months ended September 30, 2019 from 4.50% for the nine months ended September 30, 2018, primarily as a result of the increases in market interest rates over the past year. 

52

Interest income on mortgage-backed securities increased by $2.6 million, or 26.4%, to $12.4 million for the nine months ended September 30, 2019 from $9.8 million for the nine months ended September 30, 2018. This increase is attributed to increases in both the average balance and average yield on mortgage-backed securities. The average balance of mortgage-backed securities increased by $54.6 million, or 9.5%, to $630.3 million for the nine months ended September 30, 2019 from $575.7 million for the nine months ended September 30, 2018. This increase is due primarily to the addition of the UCB portfolio. Additionally, the average yield on mortgage-backed securities increased to 2.63% for the nine months ended September 30, 2019 from 2.28% for the nine months ended September 30, 2018, due to both an increase in short-term market interest rates that positively impacted our adjustable rate mortgage-backed securities and the purchase of fixed-rate mortgage-backed securities with yields higher than the existing portfolio.
 
Interest income on investment securities increased by $313,000, or 10.3%, to $3.4 million for the nine months ended September 30, 2019 from $3.0 million for the nine months ended September 30, 2018. This increase is primarily attributable to an increase in the average yield on investment securities to 2.00% for the nine months ended September 30, 2019 from 1.66% for the nine months ended September 30, 2018.  The increase in yield is due to the addition of higher yielding investments from the UCB acquisition. Partially offsetting this increase was a decrease in the average balance of investment securities of $21.3 million, or 8.7%, to $224.1 million for the nine months ended September 30, 2019 from $245.4 million for the nine months ended September 30, 2018.  This decrease is due primarily to the maturity or call of government agency securities. 
 
Dividends on FHLB stock increased by $493,000, or 163.8%, to $794,000 for the nine months ended September 30, 2019 from $301,000 for the nine months ended September 30, 2018. This increase is attributable to increases in both the average balance and average yield on FHLB stock. The average yield increased to 7.15% for the nine months ended September 30, 2019 from 4.47% for the nine months ended September 30, 2018, and the average balance increased by $5.8 million, or 64.9%, to $14.8 million for the nine months ended September 30, 2019 from $9.0 million for the nine months ended September 30, 2018. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB and dividend yields.
 
Interest income on interest-earning deposits decreased by $335,000, or 43.7%, to $431,000 for the nine months ended September 30, 2019 from $766,000 for the nine months ended September 30, 2018.  This decrease is attributable to a decrease in the average balance of interest-earning deposits, which decreased by $32.7 million, or 61.4%, to $20.5 million for the nine months ended September 30, 2019 from $53.3 million for the nine months ended September 30, 2018, due to the utilization of excess cash to fund loan growth. Partially offsetting this decrease was an increase in the average yield on interest-earning deposits to 2.77% for the nine months ended September 30, 2019 from 1.90% for the nine months ended September 30, 2018, as a result of increases in the targeted Federal Funds rate by the Federal Reserve last year.

Interest Expense
 
Interest expense increased by $16.2 million, or 62.0%, to $42.4 million for the nine months ended September 30, 2019 from $26.2 million for the nine months ended September 30, 2018. This increase in interest expense was due to an increase in the average cost of interest-bearing liabilities to 0.82% for the nine months ended September 30, 2019 from 0.54% for the nine months ended September 30, 2018. This increase resulted from increases in the interest rate paid on deposits and borrowed funds in response to increases in market interest rates. In addition, the average balance of interest-bearing liabilities increased by $431.9 million, or 6.7%, to $6.910 billion for the nine months ended September 30, 2019 from $6.478 billion for the nine months ended September 30, 2018. This increase was primarily due to the UCB acquisition, which included $479.4 million in deposits, as well as internal growth of funding sources.
 
Net Interest Income
 
Net interest income increased by $19.7 million, or 7.8%, to $271.5 million for the nine months ended September 30, 2019 from $251.8 million for the nine months ended September 30, 2018.  This increase is attributable to the factors discussed above. Our interest rate spread decreased to 3.65% for the nine months ended September 30, 2019 from 3.71% for the nine months ended September 30, 2018 and our net interest margin increased slightly to 3.86% for the nine months ended September 30, 2019 from 3.84% for the nine months ended September 30, 2018.

Provision for Loan Losses

The provision for loan losses decreased by $2.1 million, or 12.7%, to $14.4 million for the nine months ended September 30, 2019 from $16.5 million for the nine months ended September 30, 2018. Total nonaccrual loans decreased by $8.6 million to $65.7 million, or 0.74% of total loans, at September 30, 2019 from $74.2 million, or 0.93% of total loans at September 30, 2018. Annualized net charge-offs to average loans decreased to 0.26% for the nine months ended September 30, 2019 from 0.29% for the nine months ended September 30, 2018.

53

     In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels, bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss experience.  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 at June 30, 2019.
 
Noninterest Income
 
Noninterest income increased by $2.7 million, or 4.0%, to $71.2 million for the nine months ended September 30, 2019 from $68.5 million for the nine months ended September 30, 2018. This increase was primarily due to a $1.9 million increase in mortgage banking income as a result of expanding our secondary market sales capabilities. Additionally, service charges and fees increased by $1.0 million, or 2.6%, as a result of increased customer activity from the UCB acquisition and trust and other financial services income increased by $913,000, or 7.4%, due to new brokerage production. Offsetting this increase was a decrease in bank owned life insurance income of $1.5 million, or 31.1%, due to a death benefit received during the prior year.

Noninterest Expense
 
Noninterest expense increased by $15.7 million, or 7.7%, to $219.5 million for the nine months ended September 30, 2019, from $203.8 million for the nine months ended September 30, 2018.  This increase resulted primarily from a $7.9 million, or 7.0%, increase in compensation and employee benefits due to both internal growth in compensation and staff as well as the addition of UCB employees. Also contributing to this increase was an increase in processing expense by $3.3 million, or 11.4%, as we continue to invest in technology and infrastructure, an increase in restructuring and acquisition expense of $2.5 million due to expenses incurred as part of the UCB acquisition, an increase in other expenses of $1.4 million, or 19.3%, primarily due to an increase in pension related servicing costs, and an increase in professional services of $1.3 million, or 17.3% due primarily to he engagement of deposit strategy consultants. Partially offsetting this increase was a decrease in federal deposit insurance premiums of $1.4 million due to an assessment credit received during the quarter as a result of the deposit insurance fund becoming fully funded.

Income Taxes
 
The provision for income taxes increased by $3.0 million, or 14.5%, to $23.9 million for the nine months ended September 30, 2019 from $20.9 million for the nine months ended September 30, 2018. In addition to the increase in income before tax of $8.8 million, or 8.9%, our effective tax rate for the nine months ended September 30, 2019 was 22.0% compared to 20.9% for the nine months ended September 30, 2018. We anticipate our effective tax rate to be between 21.0% and 23.0% for the year ending December 31, 2019.


54

Average Balance Sheet
(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 September 30,
 
2019
 
2018
 
Average
balance
 
Interest
 
Avg.
yield/
cost (g)
 
Average
balance
 
Interest
 
Avg.
yield/
cost (g)
Assets
 

 
 

 
 

 
 

 
 

 
 

Interest-earning assets:
 

 
 

 
 

 
 
 
 

 
 

Residential mortgage loans
$
2,894,716

 
28,991

 
4.01
%
 
$
2,804,027

 
28,974

 
4.13
%
Home equity loans
1,316,033

 
16,131

 
4.86
%
 
1,272,847

 
15,248

 
4.75
%
Consumer loans
1,027,451

 
11,861

 
4.58
%
 
704,203

 
8,337

 
4.70
%
Consumer finance loans
1,128

 
55

 
19.50
%
 
7,176

 
343

 
19.12
%
Commercial real estate loans
2,796,351

 
34,441

 
4.82
%
 
2,540,270

 
29,974

 
4.62
%
Commercial loans
710,847

 
9,949

 
5.48
%
 
598,842

 
8,203

 
5.36
%
Loans receivable (a) (b) (d) (includes FTE adjustments of $336 and $346, respectively)
8,746,526

 
101,428

 
4.60
%
 
7,927,365

 
91,079

 
4.56
%
Mortgage-backed securities (c)
641,085

 
4,188

 
2.61
%
 
598,596

 
3,572

 
2.39
%
Investment securities (c) (d) (includes FTE adjustments of $60 and $55, respectively)
218,753

 
1,168

 
2.14
%
 
244,346

 
1,074

 
1.76
%
FHLB stock, at cost
16,302

 
307

 
7.47
%
 
9,819

 
119

 
4.81
%
Other interest-earning deposits
28,832

 
172

 
2.33
%
 
26,057

 
162

 
2.43
%
Total interest-earning assets (includes FTE adjustments of $396 and $401, respectively)
9,651,498

 
107,263

 
4.41
%
 
8,806,183

 
96,006

 
4.33
%
Noninterest earning assets (e)
916,781

 
 
 
 
 
746,077

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
10,568,279

 
 

 
 

 
$
9,552,260

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Savings deposits
$
1,658,670

 
788

 
0.19
%
 
$
1,672,990

 
785

 
0.19
%
Interest-bearing demand deposits
1,655,952

 
1,711

 
0.41
%
 
1,460,556

 
1,064

 
0.29
%
Money market deposit accounts
1,798,175

 
3,772

 
0.83
%
 
1,685,368

 
1,565

 
0.37
%
Time deposits
1,618,591

 
7,423

 
1.82
%
 
1,403,967

 
4,819

 
1.36
%
Borrowed funds (f)
243,960

 
1,002

 
1.63
%
 
129,523

 
239

 
0.73
%
Junior subordinated debentures
121,767

 
1,235

 
3.97
%
 
111,213

 
1,316

 
4.63
%
Total interest-bearing liabilities
7,097,115

 
15,931

 
0.89
%
 
6,463,617

 
9,788

 
0.60
%
Noninterest-bearing demand deposits (g)
1,915,392

 
 
 
 
 
1,724,427

 
 
 
 
Noninterest-bearing liabilities
216,433

 
 
 
 
 
132,062

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
9,228,940

 
 

 
 

 
8,320,106

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
1,339,339

 
 
 
 
 
1,232,154

 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
10,568,279

 
 

 
 

 
$
9,552,260

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income/Interest rate spread
 

 
91,332

 
3.52
%
 
 

 
86,218

 
3.73
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest-earning assets/Net interest margin
$
2,554,383

 
 

 
3.79
%
 
$
2,342,566

 
 

 
3.92
%
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of interest-earning assets to interest-bearing liabilities
1.36
X
 
 

 
 

 
1.36X

 
 

 
 

(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)
Interest income on tax-free investment securities and tax-free loans are presented on a fully taxable equivalent ("FTE") basis.
(e)
Average balances include the effect of unrealized gains or losses on securities held as available-for-sale.
(f)
Average balances include FHLB borrowings and collateralized borrowings.
(g)
Average cost of deposits were 0.63% and 0.41%, respectively.
(h)
Annualized. Shown on a FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate applicable to each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: loans — 4.59% and 4.54%, respectively; investment securities — 2.03% and 1.67%, respectively; interest-earning assets — 4.39% and 4.31%, respectively. GAAP basis net interest rate spreads were 3.50% and 3.71%, respectively; and GAAP basis net interest margins were 3.77% and 3.90%, respectively.


55

Rate/Volume Analysis
(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.
 
For the quarter ended September 30, 2019 vs. 2018
 
Increase/(decrease) due to
 
Total increase/(decrease)
 
Rate
 
Volume
 
Interest-earning assets:
 

 
 

 
 

Loans receivable
$
850

 
9,499

 
10,349

Mortgage-backed securities
338

 
278

 
616

Investment securities
230

 
(136
)
 
94

FHLB stock, at cost
65

 
121

 
186

Other interest-earning deposits
(6
)
 
16

 
10

Total interest-earning assets
1,477

 
9,778

 
11,255

 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

Savings deposits
10

 
(7
)
 
3

Interest-bearing demand deposits
445

 
202

 
647

Money market deposit accounts
1,970

 
237

 
2,207

Time deposits
1,620

 
984

 
2,604

Borrowed funds
293

 
470

 
763

Junior subordinated debentures
(188
)
 
107

 
(81
)
Total interest-bearing liabilities
4,150

 
1,993

 
6,143

 
 
 
 
 
 
Net change in net interest income
$
(2,673
)
 
7,785

 
5,112


56

Average Balance Sheet
(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.
 
Nine months ended September 30,
 
2019
 
2018
 
Average
balance
 
Interest
 
Avg.
yield/
cost (g)
 
Average
balance
 
Interest
 
Avg.
yield/
cost (g)
Assets
 

 
 

 
 

 
 

 
 

 
 

Interest-earning assets:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,865,091

 
87,572

 
4.08
%
 
$
2,774,074

 
84,585

 
4.07
%
Home equity loans
1,300,537

 
48,868

 
5.02
%
 
1,284,114

 
45,617

 
4.75
%
Consumer loans
947,326

 
32,562

 
4.60
%
 
666,055

 
23,788

 
4.78
%
Consumer finance loans
1,977

 
282

 
19.02
%
 
10,923

 
1,627

 
19.86
%
Commercial real estate loans
2,720,435

 
99,930

 
4.84
%
 
2,510,206

 
86,188

 
4.53
%
Commercial loans
665,867

 
28,724

 
5.69
%
 
606,076

 
23,273

 
5.06
%
Loans receivable (a) (b) (d) (includes FTE adjustments of $994 and $1,019, respectively)
8,501,233

 
297,938

 
4.69
%
 
7,851,448

 
265,078

 
4.51
%
Mortgage-backed securities (c)
630,279

 
12,433

 
2.63
%
 
575,663

 
9,839

 
2.28
%
Investment securities (c) (d) (includes FTE adjustments of $171 and $241, respectively)
224,111

 
3,532

 
2.10
%
 
245,429

 
3,289

 
1.79
%
FHLB stock, at cost
14,840

 
794

 
7.15
%
 
8,999

 
301

 
4.47
%
Other interest-earning deposits
20,531

 
431

 
2.77
%
 
53,254

 
766

 
1.90
%
Total interest-earning assets (includes FTE adjustments of $1,165 and $1,260, respectively)
9,390,994

 
315,128

 
4.49
%
 
8,734,793

 
279,273

 
4.27
%
Noninterest earning assets (e)
898,459

 
 
 
 
 
753,403

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
10,289,453

 
 

 
 

 
$
9,488,196

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 
 
 

 
 

Savings deposits
$
1,668,806

 
2,323

 
0.19
%
 
$
1,680,892

 
2,307

 
0.18
%
Interest-bearing demand deposits
1,611,554

 
4,442

 
0.37
%
 
1,449,573

 
2,541

 
0.23
%
Money market deposit accounts
1,756,251

 
9,784

 
0.74
%
 
1,694,519

 
3,830

 
0.30
%
Time deposits
1,538,113

 
19,774

 
1.72
%
 
1,419,849

 
13,322

 
1.25
%
Borrowed funds (f)
216,160

 
2,421

 
1.50
%
 
122,376

 
412

 
0.45
%
Junior subordinated debentures
119,417

 
3,698

 
4.08
%
 
111,213

 
3,791

 
4.50
%
Total interest-bearing liabilities
6,910,301

 
42,442

 
0.82
%
 
6,478,422

 
26,203

 
0.54
%
Noninterest-bearing demand deposits (g)
1,847,344

 
 
 
 
 
1,669,423

 
 
 
 

Noninterest-bearing liabilities
219,806

 
 
 
 
 
122,199

 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
8,977,451

 
 

 
 

 
8,270,044

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
1,312,002

 
 
 
 
 
1,218,152

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
10,289,453

 
 

 
 

 
$
9,488,196

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income/Interest rate spread
 

 
272,686

 
3.67
%
 
 

 
253,070

 
3.73
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest-earning assets/Net interest margin
$
2,480,693

 
 

 
3.87
%
 
$
2,256,371

 
 

 
3.86
%
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of interest-earning assets to interest-bearing liabilities
1.36X

 
 

 
 

 
1.35X

 
 

 
 

(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)
Interest income on tax-free investment securities and tax-free loans are presented on a fully taxable equivalent ("FTE") basis.
(e)
Average balances include the effect of unrealized gains or losses on securities held as available-for-sale.
(f)
Average balances include FHLB borrowings and collateralized borrowings.
(g)
Average cost of deposits were 0.58% and 0.37%, respectively.
(h)
Annualized. Shown on a FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate applicable to each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: loans — 4.67% and 4.50%, respectively; investment securities — 2.00% and 1.66%, respectively; interest-earning assets — 4.47% and 4.26%, respectively. GAAP basis net interest rate spreads were 3.65% and 3.71%, respectively; and GAAP basis net interest margins were 3.86% and 3.84%, respectively.

57

Rate/Volume Analysis
(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. 
 
For the nine months ended September 30, 2019 vs. 2018
 
Increase/(decrease) due to
 
Total increase/(decrease)
 
Rate
 
Volume
 
Interest-earning assets:
 

 
 

 
 

Loans receivable
$
10,087

 
22,773

 
32,860

Mortgage-backed securities
1,517

 
1,077

 
2,594

Investment securities
579

 
(336
)
 
243

FHLB stock, at cost
181

 
313

 
494

Other interest-earning deposits
352

 
(687
)
 
(335
)
Total interest-earning assets
12,716

 
23,140

 
35,856

 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

Savings deposits
33

 
(17
)
 
16

Interest-bearing demand deposits
1,455

 
446

 
1,901

Money market deposit accounts
5,610

 
344

 
5,954

Time deposits
4,932

 
1,520

 
6,452

Borrowed funds
959

 
1,050

 
2,009

Junior subordinated debentures
(347
)
 
254

 
(93
)
Total interest-bearing liabilities
12,642

 
3,597

 
16,239

 
 
 
 
 
 
Net change in net interest income
$
74

 
19,543

 
19,617

 
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 have the ability 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:
 
Net interest income simulation.  Given a parallel shift of 100 basis points (“bps”), 200 bps and 300 bps in interest rates, the estimated net income may not decrease by more than 5%, 10% and 15%, respectively, within a one-year period.
     Net income simulation.  Given a parallel shift of 100 bps, 200 bps and 300 bps in interest rates, the estimated net income may not decrease by more than 10%, 20% and 30%, respectively, within a one-year period.
 
Market value of equity simulation.  The market value of equity is the present value of assets and liabilities.  Given a parallel shift of 100 bps, 200 bps and 300 bps in interest rates, the market value of equity may not decrease by more than 15%, 30% and 35%, respectively, from the computed economic value at current interest rate levels.
 
The following table illustrates the simulated impact of a 100 bps, 200 bps or 300 bps upward or a 100 bps downward movement in interest rates on net income, return on average equity, earnings per share and market value of equity.  This analysis was prepared assuming that interest-earning asset and interest-bearing liability levels at September 30, 2019 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 September 30, 2019 levels.
 
 
Increase
 
Decrease
Parallel shift in interest rates over the next 12 months
 
100 bps
 
200 bps
 
300 bps
 
100 bps
Projected percentage increase/(decrease) in net interest income
 
(1.6
)%
 
(2.7
)%
 
(4.2
)%
 
(4.9
)%
Projected percentage increase/(decrease) in net income
 
(3.6
)%
 
(6.2
)%
 
(9.7
)%
 
(12.0
)%
Projected increase/(decrease) in return on average equity
 
(3.6
)%
 
(6.0
)%
 
(9.4
)%
 
(11.7
)%
Projected increase/(decrease) in earnings per share
 
$
0.04

 
$
(0.07
)
 
$
(0.10
)
 
$
(0.13
)
Projected percentage increase/(decrease) in market value of equity
 
(3.0
)%
 
(5.8
)%
 
(9.2
)%
 
(3.4
)%
 
The figures included in the table above represent projections that were computed based upon certain assumptions including prepayment rates and decay rates. These assumptions are inherently uncertain and, as a result, cannot precisely predict the impact of changes in interest rates. Actual results may differ significantly due to timing, magnitude and frequency of interest rate changes and changes in market conditions, and actions that may be taken by management in response to interest rate changes.

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 controls over financial reporting.

PART II.             OTHER INFORMATION
 
Item 1.        LEGAL PROCEEDINGS
 
We are subject to a number of asserted and unasserted claims encountered in the normal course of business.  We believe that any additional liability, other than that which has already been accrued, that may result from such potential litigation will not have a material adverse effect on the financial statements.  However, we cannot presently determine whether or not any claims against us will have a material adverse effect on our results of operations in any future reporting period. Refer to note 13.
 
Item 1A.    RISK FACTORS

Except as previously disclosed, there have been no material updated or additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.


58

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 September 30, 2019: 
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)
July
 
—

 
$
—

 
—

 
4,834,089

August
 
—

 
—

 
—

 
4,834,089

September
 
—

 
—

 
—

 
4,834,089

 
 
—

 
 
 
 

 
 

(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
The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL 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.
104
The cover page of this Quarterly Report on Form 10-Q, formatted in inline XBRL.

59

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:
November 8, 2019
By:
/s/ Ronald J. Seiffert
 
 
Ronald J. Seiffert
 
 
Chairman, President and Chief Executive Officer
 
 
(Duly Authorized Officer)
 
 
 
 
 
 
Date:
November 8, 2019
By:
/s/ Jeffrey R. White
 
 
 
Jeffrey R. White
 
 
Controller
 
 
(Principal Accounting Officer)
 
 
 


60

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