Companies: 10,761     total market cap: โ‚น12261.080 T
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Northwest Bancshares
NWBI
#4795
Rank
โ‚น173.42 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
โ‚น1,187
Share price
1.29%
Change (1 day)
19.29%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Northwest Bancshares
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q1

Northwest Bancshares - 10-Q quarterly report FY2020 Q1


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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 March 31, 2020
 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
 
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), 127,573,335 shares outstanding as of April 30, 2020.

 

NORTHWEST BANCSHARES, INC.
Table of Contents
 
 
 
 
 
 
PART I
 
FINANCIAL INFORMATION
 
 
 
 
 
 
 
Item 1.
 
Financial Statements
 
 
 
 
 
 
 
 
 
Consolidated Statements of Financial Condition as of March 31, 2020 and December 31, 2019 (Unaudited)
 
1
 
 
 
 
 
 
 
Consolidated Statements of Income for the quarter and ended March 31, 2020 and 2019 (Unaudited)
 
2
 
 
 
 
 
 
 
Consolidated Statements of Comprehensive Income for the quarter ended March 31, 2020 and 2019 (Unaudited)
 
3
 
 
 
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity for the quarter ended March 31, 2020 and 2019 (Unaudited)
 
4
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows for the quarter ended March 31, 2020 and 2019 (Unaudited)
 
5
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
7
 
 
 
 
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
44
 
 
 
 
 
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
54
 
 
 
 
 
Item 4.
 
Controls and Procedures
 
55
 
 
 
 
 
PART II
 
OTHER INFORMATION
 
 
 
 
 
 
 
Item 1.
 
Legal Proceedings
 
55
 
 
 
 
 
Item 1A.
 
Risk Factors
 
55
 
 
 
 
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
56
 
 
 
 
 
Item 3.
 
Defaults Upon Senior Securities
 
56
 
 
 
 
 
Item 4.
 
Mine Safety Disclosures
 
56
 
 
 
 
 
Item 5.
 
Other information
 
56
 
 
 
 
 
Item 6.
 
Exhibits
 
57
 
 
 
 
 
 
 
Signature
 
58
 
 
 
 
 
 
 
 
 
 




Item 1.        FINANCIAL STATEMENTS
 
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(in thousands, except share data)
 
March 31, 2020
 
December 31, 2019
Assets
 

 
 

Cash and cash equivalents
$
276,454

 
60,846

Marketable securities available-for-sale (amortized cost of $749,703 and $815,495, respectively)
 
765,579

 
819,901

Marketable securities held-to-maturity (fair value of $17,968 and $18,223, respectively)
17,208

 
18,036

Total cash and cash equivalents and marketable securities
1,059,241

 
898,783

 
 
 
 
Loans held-for-sale
6,426

 
7,709

Loans held for investment
8,830,448

 
8,800,965

Allowance for credit losses
(92,897
)
 
(57,941
)
Loans receivable, net
8,743,977

 
8,750,733

 
 
 
 
Federal Home Loan Bank stock, at cost
13,131

 
14,740

Accrued interest receivable
25,531

 
25,755

Real estate owned, net
1,075

 
950

Premises and equipment, net
147,427

 
147,409

Bank-owned life insurance
190,127

 
189,091

Goodwill
346,103

 
346,103

Other intangible assets, net
21,425

 
23,076

Other assets
133,159

 
97,268

Total assets
$
10,681,196

 
10,493,908

 
 
 
 
Liabilities and shareholders’ equity
 

 
 

Liabilities:
 

 
 

Noninterest-bearing demand deposits
$
1,736,622

 
1,609,653

Interest-bearing demand deposits
1,975,830

 
1,944,108

Money market deposit accounts
1,946,113

 
1,863,998

Savings deposits
1,640,414

 
1,604,838

Time deposits
1,493,756

 
1,569,410

Total deposits
8,792,735

 
8,592,007

 
 
 
 
Borrowed funds
191,599

 
246,336

Junior subordinated debentures
121,813

 
121,800

Advances by borrowers for taxes and insurance
47,154

 
44,556

Accrued interest payable
834

 
1,142

Other liabilities
185,269

 
134,782

Total liabilities
9,339,404

 
9,140,623

 
 
 
 
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, 106,933,483 and 106,859,088 shares issued and outstanding, respectively
1,069

 
1,069

Additional paid-in capital
808,250

 
805,750

Retained earnings
561,380

 
583,407

Accumulated other comprehensive loss
(28,907
)
 
(36,941
)
Total shareholders’ equity
1,341,792

 
1,353,285

Total liabilities and shareholders’ equity
$
10,681,196

 
10,493,908

See accompanying notes to unaudited Consolidated Financial Statements.

1

NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands, except share data) 
 
Quarter ended March 31,
 
2020
 
2019
Interest income:
 

 
 

Loans receivable
$
94,973

 
94,935

Mortgage-backed securities
4,175

 
3,965

Taxable investment securities
648

 
936

Tax-free investment securities
185

 
182

Federal Home Loan Bank stock dividends
262

 
171

Interest-earning deposits
135

 
100

Total interest income
100,378

 
100,289

Interest expense:
 

 
 

Deposits
11,403

 
10,145

Borrowed funds
1,747

 
2,162

Total interest expense
13,150

 
12,307

Net interest income
87,228

 
87,982

Provision for credit losses
27,637

 
6,467

Net interest income after provision for credit losses
59,591

 
81,515

Noninterest income:
 

 
 

Gain on sale of loans
1,302

 
—

Gain/(loss) on sale of investments
181

 
(6
)
Service charges and fees
15,116

 
12,043

Trust and other financial services income
5,001

 
4,195

Insurance commission income
2,372

 
2,178

Loss on real estate owned, net
(91
)
 
(3
)
Income from bank-owned life insurance
1,036

 
1,005

Mortgage banking income
1,194

 
216

Other operating income
1,865

 
2,034

Total noninterest income
27,976

 
21,662

Noninterest expense:
 

 
 

Compensation and employee benefits
42,746

 
38,188

Premises and occupancy costs
7,471

 
7,218

Office operations
3,382

 
3,131

Collections expense
474

 
308

Processing expenses
11,142

 
10,434

Marketing expenses
1,507

 
1,886

Federal deposit insurance premiums
—

 
706

Professional services
2,812

 
2,524

Amortization of intangible assets
1,651

 
1,447

Real estate owned expense
95

 
159

Restructuring/acquisition expense
2,458

 
1,926

Other expenses
4,873

 
3,497

Total noninterest expense
78,611

 
71,424

Income before income taxes
8,956

 
31,753

Federal and state income taxes expense
1,017

 
6,709

Net income
$
7,939

 
25,044

Basic earnings per share
$
0.08

 
0.24

Diluted earnings per share
$
0.07

 
0.24

See accompanying notes to unaudited Consolidated Financial Statements.

2

NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(in thousands)
 
Quarter ended March 31,
 
2020
 
2019
Net income
$
7,939

 
25,044

Other comprehensive income net of tax:
 

 
 

Net unrealized holding gains on marketable securities:
 

 
 

Unrealized holding gains net of tax of ($3,277) and ($1,781), respectively
8,157

 
4,452

Reclassification adjustment for gains included in net income, net of tax of ($14) and $0 respectively
37

 
—

Net unrealized holding gains on marketable securities
8,194

 
4,452

 
 
 
 
Change in fair value of interest rate swaps, net of tax of $162 and $0, respectively
(409
)
 
—

 
 
 
 
Defined benefit plan:
 

 
 

Actuarial reclassification adjustments for prior period service costs and actuarial losses included in net income, net of tax of ($99) and ($82), respectively
249

 
209

 
 
 
 
Other comprehensive income
8,034

 
4,661

 
 
 
 
Total comprehensive income
$
15,973

 
29,705

See accompanying notes to unaudited Consolidated Financial Statements.


3

NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(in thousands, expect share data) 
 
 
 
 
 
Additional Paid-in capital
 
Retained earnings
 
Accumulated
other comprehensive loss
 
Total shareholders’ equity
 
Common stock
 
Quarter ended March 31, 2020
Shares
 
Amount
 
Beginning balance at December 31, 2019
106,859,088

 
$
1,069

 
805,750

 
583,407

 
(36,941
)
 
1,353,285

 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

Net income
—

 
—

 
—

 
7,939

 
—

 
7,939

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax of ($3,228)
—

 
—

 
—

 
—

 
8,034

 
8,034

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
—

 
—

 
—

 
7,939

 
8,034

 
15,973

 
 
 
 
 
 
 
 
 
 
 
 
Adoption of ASU No. 2016-13
—

 
—

 
—

 
(9,649
)
 
—

 
(9,649
)
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
87,305

 
—

 
1,005

 
—

 
—

 
1,005

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
—

 
—

 
1,495

 
—

 
—

 
1,495

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation forfeited
(12,910
)
 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid ($0.19 per share)
—

 
—

 
—

 
(20,317
)
 
—

 
(20,317
)
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance at March 31, 2020
106,933,483

 
$
1,069

 
808,250

 
561,380

 
(28,907
)
 
1,341,792



 
 
 
 
 
Additional Paid-in capital
 
Retained earnings
 
Accumulated
other comprehensive loss
 
Total shareholders’ equity
 
Common stock
 
Quarter ended March 31, 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
—

 
—

 
—

 
25,044

 
—

 
25,044

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive loss, net of tax of ($1,863)
—

 
—

 
—

 
—

 
4,661

 
4,661

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
—

 
—

 
—

 
25,044

 
4,661

 
29,705

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

 
24

 
43,264

 
—

 
—

 
43,288

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

 
—

 
—

 
(1,570
)
 
—

 
(1,570
)
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options
431,782

 
4

 
4,654

 
—

 
—

 
4,658

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
—

 
—

 
1,200

 
—

 
—

 
1,200

 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation forfeited
(28,155
)
 
—

 
—

 
—

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Dividends paid ($0.18 per share)
—

 
—

 
—

 
(18,643
)
 
—

 
(18,643
)
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance at March 31, 2019
106,220,030

 
$
1,062

 
795,044

 
555,205

 
(35,035
)
 
1,316,276

See accompanying notes to unaudited Consolidated Financial Statements.


4

NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands) 
 
Quarter ended March 31,
 
2020
 
2019
Operating activities:
 

 
 

Net income
$
7,939

 
25,044

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

 
 

Provision for credit losses
27,637

 
6,467

Net (gain)/loss on sale of assets
(1,918
)
 
810

Net depreciation, amortization and accretion
1,413

 
1,285

Increase in other assets
(38,950
)
 
(41,336
)
Increase in other liabilities
49,956

 
36,106

Net amortization on marketable securities
233

 
236

Noncash compensation expense related to stock benefit plans
1,495

 
1,200

Noncash write-down of real estate owned
100

 
160

Origination of loans held-for-sale
(29,912
)
 
—

Proceeds from sale of loans held-for-sale
32,309

 
—

Net cash provided by operating activities
50,302

 
29,972

 
 
 
 
Investing activities:
 

 
 

Purchase of marketable securities available-for-sale
(20,610
)
 
(20,219
)
Proceeds from maturities and principal reductions of marketable securities held-to-maturity
825

 
1,090

Proceeds from maturities and principal reductions of marketable securities available-for-sale
86,354

 
31,282

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

 
32,319

Proceeds from bank-owned life insurance
—

 
2,207

Loan originations
(866,950
)
 
(763,848
)
Proceeds from loan maturities and principal reductions
787,243

 
649,597

Proceeds from sale of loans held for investment
50,791

 
—

Net proceeds of Federal Home Loan Bank stock
1,609

 
3,555

Proceeds from sale of real estate owned
168

 
1,078

Proceeds from sale of real estate owned for investment, net
152

 
152

Purchase of premises and equipment
(3,553
)
 
(3,478
)
Acquisitions, net of cash received
—

 
(25,833
)
Net cash provided/(used) in investing activities
36,029

 
(92,098
)

5

NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
(in thousands) 
 
Quarter ended March 31,
 
2020
 
2019
Financing activities:
 

 
 

Net increase in deposits
$
200,728

 
218,966

Net decrease in short-term borrowings
(54,737
)
 
(120,308
)
Increase in advances by borrowers for taxes and insurance
2,598

 
1,587

Cash dividends paid on common stock
(20,317
)
 
(18,643
)
Proceeds from stock options exercised
1,005

 
4,658

Net cash provided by financing activities
129,277

 
86,260

Net increase in cash and cash equivalents
$
215,608

 
24,134

 
 
 
 
Cash and cash equivalents at beginning of period
$
60,846

 
68,789

Net increase in cash and cash equivalents
215,608

 
24,134

Cash and cash equivalents at end of period
$
276,454

 
92,923

 
 
 
 
Cash paid during the period for:
 

 
 

Interest on deposits and borrowings (including interest credited to deposit accounts of $9,907 and $9,364, respectively)
$
13,458

 
11,940

Income taxes
$
556

 
1,747

 
 
 
 
Business acquisitions:
 

 
 

Fair value of assets acquired
$
—

 
580,407

Northwest Bancshares, Inc. common stock issued
—

 
(43,288
)
Net cash paid
—

 
(42,500
)
Liabilities assumed
$
—

 
494,619

 
 
 
 
Non-cash activities:
 

 
 

Loan foreclosures and repossessions
$
1,351

 
1,492

See accompanying notes to unaudited Consolidated Financial Statements.


6

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 Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania Department of Banking.  Northwest operates 178 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 financial 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, 2019 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 ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or any other period.
 
Stock-Based Compensation
 
Stock-based compensation expense of $1.5 million and $1.2 million for the quarters ended March 31, 2020 and 2019, respectively, was recognized in compensation expense relating to our stock benefit plans. At March 31, 2020, there was compensation expense of $3.3 million to be recognized for awarded but unvested stock options and $16.3 million for unvested restricted common shares.

 Income Taxes-Uncertain Tax Positions
 
Accounting standards prescribe a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return.  A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits.  The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.  At March 31, 2020, 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, 2019, 2018, 2017 and 2016.

Recently Adopted Accounting Standards

On January 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, which eliminated 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. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. ASC 326 requires credit losses to be presented as an allowance, rather than a write-down, on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

We adopted ASC 326 using the modified retrospective transition approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. 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 ASC 326 disclosures for periods before the date of adoption (i.e., January 1, 2020).


7

As a result of the adoption of ASU 2016-13, we recognized an increase to the allowance for credit losses of $10.8 million, an increase to our reserve for off-balance sheet exposures of $2.3 million, an increase in deferred tax assets of $2.9 million and a cumulative-effect adjustment to retained earnings of $9.6 million, net of taxes, on the Consolidated Statements of Financial Condition as of January 1, 2020, with no impact on our Consolidated Statement of Income or Consolidated Statement of Cash Flows. Additionally, the adoption of CECL did not impact our held-to-maturity or our available-for-sale securities portfolio, which are primarily comprised of agency-backed mortgage securities. 

We also adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30. In accordance with ASC 326, we did not reassess whether PCI assets met the criteria for PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $517,000 of allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2020.

We have elected to phase the estimated impact of CECL into regulatory capital in accordance with the interim final rule of the FRB and other U.S. banking agencies that became effective on March 31, 2020. As a result, we will delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extends through December 31, 2021. Beginning on January 1, 2022, we will be required to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025. Under the interim final rule, the estimated impact of CECL on regulatory capital that we will defer and later phase in is calculated as the entire day-one impact at adoption plus 25% of the subsequent change in allowance during the two-year deferral period.

Adoption of this standard resulted to changes in our Investment Securities, Loans Receivable and Allowance for Credit Loss and Provision for Credit Losses accounting policies as presented below. Refer to Note 1 to the Consolidated Financial Statements in our 2019 Annual Report on Form 10-K regarding additional significant accounting policies, including policies in effect prior to the adoption of the CECL standard.

Investment Securities
 
We classify marketable securities at the time of purchase as held-to-maturity, available-for-sale, or trading. Securities for which management has the intent and ability to hold until maturity are classified as held-to-maturity and are carried at cost, adjusted for amortization of premiums and accretion of discounts on a level yield basis (amortized cost).  If it is management’s intent at the time of purchase to hold securities for an indefinite period of time and/or to use such securities as part of its asset/ liability management strategy, the securities are classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported as accumulated other comprehensive income/(loss), a separate component of shareholders’ equity, net of tax. Securities classified as available-for-sale include securities that may be sold in response to changes in interest rates, resultant prepayment risk, or other market factors. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and are reported at fair value, with changes in fair value included in earnings. The cost of securities sold is determined on a specific identification basis. We held no securities classified as trading at or during the quarter ended March 31, 2020.
 
On a quarterly basis, we measure expected credit losses on held-to-maturity debt securities on a collective basis by major security type and all of our held-to-maturity debt securities are residential mortgage-backed securities. Accrued interest receivable on held-to-maturity debt securities totaled $1.3 million and $1.5 million at March 31, 2020 and December 31, 2019, respectively, and is excluded from estimated credit losses. All of our residential mortgage-backed securities are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses.

For available-for-sale debt securities in an unrealized loss position, on at least a quarterly basis, we review our investments for impairment.  An investment security is deemed impaired if the fair value of the investment is less than its amortized cost.  We consider both our intent to sell and the likelihood that we will not have to sell the investment securities before recovery of their amortized cost basis during our evaluation. If we intend to sell the investment security or if it is more likely than not that we will be required to sell the investment security, the entire impairment is recorded in earnings. For available-for-sale debt securities that do not meet this criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment we consider the issuer of the securities and their creditworthiness, any changes to the rating of the security and any adverse conditions specifically related to the security, among other factors. Also, we may evaluate the business and financial outlook of the issuer, as well as broader economic performance indicators.  If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than amortized cost. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

8

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when we believe the uncollectibility of an available-for-sale security is confirmed or when there is an intent or requirement to sell the security.

Accrued interest receivable on available-for-sale debt securities totaled $1.0 million and $900,000 at March 31, 2020 and December 31, 2019, respectively, and is excluded from the estimate of credit losses.

A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days past due. The receivable for interest income that is accrued but not collected is reversed against interest income when the debt security is placed on nonaccrual status.

Loans Receivable

Our portfolio segments are based on the class of financing receivable. Additionally, the class of financing receivables are based on several factors including the method for monitoring and assessing credit risk and the risk characteristics of the financing receivables. Based on evaluation of the nature of our financing receivables, along with the nature and extent of exposure to credit risk arising from these receivables, our portfolio segments were determined to be Personal Banking and Business Banking loans. 

•
Personal Banking loans consist of the following classes of financing receivables:
◦
Residential mortgage loans - fixed and adjustable rate mortgage loans
◦
Home equity loans - first and second mortgage loans and home equity lines of credit
◦
Vehicle loans - direct and indirect automobile and motorcycle loans
◦
Consumer loans - unsecured lines of credit, credit card loans, and other consumer loans
•
Business Banking loans consist of the following classes of financing receivables:
◦
Commercial real estate - multi-family commercial real estate loans are secured by multi-family residences, such as rental properties and loans secured by nonresidential properties such as hotels, commercial offices, medical buildings, manufacturing facilities and retail establishments, excluding owner-occupied loans, and including small business commercial real estate loans.
◦
Commercial real estate - owner-occupied loans - commercial real estate loans secured by residential or nonresidential properties
◦
Commercial loans - other commercial loans, including small business commercial loans.

Loans are reported at amortized cost. Amortized cost is the principal balance outstanding, net of any deferred purchased premiums and discounts, deferred origination fees or costs and the allowance for credit losses. Accrued interest receivable totaled $23.2 million and $23.3 million at March 31, 2020 and December 31, 2019, respectively, and was reported in accrued interest receivable on the Consolidated Statements of Financial Position. Accrued interest receivable is excluded from the amortized cost basis of loans and from the estimate of allowance for credit losses. Interest income on loans is credited to income as earned. Interest earned on loans for which no payments were received during the month is accrued at month end.

Accrued interest on loans more than 90 days delinquent is reversed and such loans are placed on nonaccrual status. All loans are placed on nonaccrual status when principal or interest is 90 days or more delinquent or when there is reasonable doubt that interest or principal will not be collected in accordance with the contractual terms. Interest receipts on all nonaccrual loans are recognized as interest income when it has been determined that all principal and interest will be collected or are applied to principal when collectability of contractual principal is in doubt.  Nonaccrual loans generally are restored to an accrual basis when principal and interest become current and a period of performance has been established in accordance with the contractual terms, typically six months.

A loan is considered to be a troubled debt restructuring loan ("TDR") when the borrower is experiencing financial difficulties and the restructuring constitutes a concession. TDRs may include modifications of terms of loans, receipts of assets from borrowers in partial or full satisfaction of loans, or a combination thereof. A modified loan is determined to be a TDR based on the contractual terms as specified by the original loan agreement or the most recent modification. Once classified as a TDR, a loan is removed from such classification under three circumstances: (1) the loan is paid off, (2) the loan is charged off, or (3) if, at the beginning of the current fiscal year, the loan has performed in accordance with the modified terms for a minimum of six consecutive months and at the time of modification the loan’s interest rate represented a then current market interest rate for a loan of similar risk.
 
Loan delinquency is measured based on the number of days since the payment due date.  Past due status is measured using the loan’s contractual maturity date.


9

Personal Banking loans are charged-off or charged down when they become 180 days delinquent, unless the borrower has filed for bankruptcy.  Business Banking loans are charged-off or charged down when, in our opinion, they are no longer collectible or when it has been determined that the collateral value no longer supports the carrying value of the loan for loans that are collateral dependent.
 
Loan fees and certain direct loan origination costs are deferred and the net deferred fee or cost is then recognized using the level-yield method over the contractual life of the loan as an adjustment to interest income.
 
We identify certain residential mortgage loans which will be sold prior to maturity as loans held-for-sale. These loans are recorded at the lower of amortized cost or fair value less estimated cost to sell. At March 31, 2020 and 2019, there were $6.4 million and no residential mortgage loans classified as held-for-sale, respectively.

Acquired loans that are not considered PCD are initially measured at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

Acquired loans may be classified as PCD loans upon acquisition if they have experienced more than insignificant credit deterioration since origination. Loans are considered to have experienced more than insignificant credit deterioration if they are greater than 30 days past due, classified special mention or worse or on non-accrual status. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The sum of the loans, purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.

Upon adoption of ASC 326, we assessed our legacy loans that were previously accounted for under ASC 310-30 to determine whether they share similar risk characteristics and whether some or all of the assets should be assessed collectively with other loans that share similar risk characteristics. Upon adoption, an allowance for credit losses was determined for each loan and added to the loan's carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the loan and the new amortized cost is the noncredit premium or discount which will be amortized into interest income over the remaining life of the loan. Changes to the allowance for credit losses after adoption are recorded through provision expense.

 Allowance for Credit Losses and Provision for Credit Losses
 
The allowance for credit losses is deducted from, or added to, the loan’s amortized cost basis to present the net amount expected to be collected on our lending portfolios. We estimate the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Loans are charged off against the allowance when we believe the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Expected credit losses are estimated over the contractual term of the loans, adjusted for prepayments. The contractual term excludes expected extensions, renewals and modifications unless we had a reasonable expectation at the reporting date that a TDR will be executed for an individual borrower or the extension or renewal option is included in the contract and is not unconditionally cancellable by the Company.

Credit card receivables do not have stated maturities. In determining the estimated life of a credit card receivable, we first estimate the future cash flows expected to be received and then apply those expected future cash flows to the credit card balance. Expected credit losses for credit cards are determined by estimating the amount and timing of principal payments expected to be received as payment for the balance outstanding as of the reporting date and applying those principal payments against the balance outstanding as of the reporting period until the expected payments have been fully allocated. The allowance for credit losses is recorded for the excess of the balance outstanding as of the reporting period over the expected principal payments.

The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. For the purpose of calculating portfolio-level reserves, we have grouped our loans into seven segments: residential mortgage loans, home equity loans, vehicle loans, consumer loans, commercial real estate loans, commercial real estate owner-occupied and commercial loans. The allowance for credit losses is measured at the loan-level wherever possible, but it is sometimes measured at the portfolio level when there is no added benefit to being measured at the loan-level. We use a twenty four month forecasting period and revert to historical average loss rates thereafter. Reversion to the mean takes place over a twelve month period. Historical average loss rates are calculated using historical data beginning in October 2009 through the current period.

    

10

Mortgage and Home Equity Loans

The allowance for credit losses within the mortgage and home equity loan classes is calculated at the loan-level using a proprietary statistical model developed by an external third-party. These classes are further divided into smaller pools of loans with similar risk characteristics such as: lines versus loans, fixed versus variable, senior lien position versus junior lien position, among other things.

For each pool, the models project default rates, prepayment rates, and severity rates. The models accept as inputs key risk drivers such as: current balance, original credit bureau score, original loan-to-value ratio, type of collateral, location of collateral, delinquency status, loan age, among other characteristics. They also utilize macroeconomic forecasts of home price indices, unemployment rates, gross domestic product, and others.

Vehicle Loans
    
The allowance for credit losses within the vehicle loan portfolio is calculated at the portfolio-level using a proprietary statistical model developed internally with the assistance of an external third-party. The allowance for vehicle loans utilizes a vintage analysis to project portfolio-level net charge-off rates. The class is further divided into short term versus long term loans, prime versus subprime borrowers, and origination vintage. This model uses current balance, original credit bureau score, original debt-to-income ratio, loan term, loan age, and other product characteristics as key risk drivers.

The model used for vehicle loans is not natively sensitive to macroeconomic conditions. The necessary adjustments to account for current and expected macroeconomic conditions is captured via our qualitative adjustment framework.

Consumer Loans

The allowance for losses within the consumer loan portfolio is calculated at the portfolio-level using a suite of proprietary statistical models developed internally with the assistance of an external third-party. This class of financing receivables is further divided into credit cards, unsecured lines of credit and other consumer loans.

The allowance for credit cards and unsecured lines of credit is calculated using two transition matrix models to project portfolio-level net charge-off rates. Both models use current balance and delinquency status as key risk drivers. These models are not natively sensitive to macroeconomic conditions. The necessary adjustments to account for current and expected macroeconomic conditions is captured via our qualitative adjustment framework.

For other consumer loans, a regression model is used to project portfolio-level net charge-off rates. This model uses borrower information and macroeconomic forecasts as key inputs.

Commercial Real Estate Loans

The commercial real estate loan class is further segmented into smaller pools of loans with similar risk characteristics, commercial real estate loans and small business commercial real estate loans.

The allowance for credit losses for the commercial real estate loan portfolio is calculated at loan-level using a proprietary statistical model developed by an external third-party. This model projects default and severity rates. The model accepts as inputs key risk drivers such as: current balance, original loan-to-value-ratio, type of collateral, location of collateral, delinquency status, loan age, obligor financial statement information, and expected prepayment rates, among other characteristics. It also utilizes macroeconomic forecasts of commercial real estate price indices, unemployment rates, gross domestic product and others.

The allowance for credit losses is calculated for commercial real estate small business loans at the portfolio-level using a proprietary statistical model. A regression model is used to project portfolio-level net charge-off rates. This model uses loan characteristics and macroeconomic forecasts as key inputs.

Commercial Loans and Commercial Real Estate - Owner Occupied Loans

The allowance for credit losses for the commercial loan portfolio and the commercial real estate - owner occupied loan portfolio is calculated at loan-level using a proprietary statistical model developed by an external third-party. The commercial loan class is further segmented into smaller pools of loans with similar risk characteristics, commercial loans and commercial small business loans.

The commercial loan portfolio and the commercial real estate owner occupied loan portfolio the models project default and severity rates. The model accepts as inputs key risk drivers such as the obligor financial statement information, collateral type, the

11

obligor’s primary industry, expected prepayment rates, among other characteristics. It also utilizes macroeconomic forecasts of unemployment rates, gross domestic product, corporate bond spreads, and others.

The allowance for credit losses for commercial small business loans is calculated at the portfolio-level using a proprietary statistical model. A regression model is used to project portfolio-level net charge-off rates. This model uses loan characteristics and macroeconomic forecasts as key inputs.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When we determine that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs. If this criteria is not met, a discounted cash flow method is used to determine the allowance for credit losses. All changes in the discounted cash flow method over time are reported in the allowance for credit losses.

The allowance calculation is also supplemented with qualitative reserves that takes into consideration current portfolio and specific risk characteristics, such as changes in underwriting standards, portfolio mix, delinquency level, or term, as well as changes in environmental conditions, among other factors, that have occurred but are not yet reflected in the quantitative model component.

The allowance for credit losses on a TDR is measured using the same method as all other loans held for investment, except when the value of the concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit losses is determined by discounting the expected future cash flows at the original interest rate of the loan.

For off-balance sheet credit exposures, we estimate expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable. The liability for credit losses on off-balance sheet credit exposures is adjusted through a provision for credit loss expense and is included within "other expenses". We estimate the liability balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The estimate includes a consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Off-balance-sheet exposures that are not unconditionally cancellable have been identified for the home equity, commercial real estate, and commercial loan portfolios.

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. On January 1, 2020, the Company adopted ASU 2018-13 on a prospective basis for the new and modified disclosures, and on a retrospective basis for disclosures that have been eliminated. The adoption of this standard did not have any effect on our results of operations or financial position. Refer to Note 9, "Disclosures About Fair Value of Financial Instruments".

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. On January 1, 2020, the Company adopted ASU 2018-15 on a prospective basis which will be applied to relevant implementation costs incurred after the date of adoption. The adoption of this standard is not expected to have a material prospective impact on our financial statements.


12

(2)    Marketable Securities
 
The following table shows the portfolio of marketable securities available-for-sale at March 31, 2020 (in thousands):
 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
Debt issued by government sponsored enterprises:
 
 
 
 
 
 
 
Due in less than one year
$
50,761

 
475

 
—

 
51,236

Due in one year through five years
25,227

 
284

 
—

 
25,511

Due in five years through ten years
3,411

 
114

 
(103
)
 
3,422

 
 
 
 
 
 
 
 
Municipal securities:
 
 
 
 
 
 
 
Due in less than one year
812

 
3

 
—

 
815

Due in one year through five years
2,897

 
68

 
—

 
2,965

Due in five years through ten years
8,903

 
178

 
—

 
9,081

Due after ten years
31,400

 
436

 
—

 
31,836

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
Fixed rate pass-through
130,729

 
4,453

 
(10
)
 
135,172

Variable rate pass-through
18,025

 
403

 
(8
)
 
18,420

Fixed rate agency CMOs
423,625

 
10,447

 
(60
)
 
434,012

Variable rate agency CMOs
53,913

 
62

 
(866
)
 
53,109

Total residential mortgage-backed securities
626,292

 
15,365

 
(944
)
 
640,713

Total marketable securities available-for-sale
$
749,703

 
16,923

 
(1,047
)
 
765,579




13

The following table shows the portfolio of marketable securities available-for-sale at December 31, 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
$
14,951

 
40

 
—

 
14,991

 
 
 
 
 
 
 
 
Debt issued by government sponsored enterprises:
 

 
 

 
 

 
 

Due in less than one year
50,777

 
345

 
—

 
51,122

Due in one year through five years
50,229

 
—

 
(227
)
 
50,002

Due after ten years
3,716

 
53

 
(109
)
 
3,660

 
 
 
 
 
 
 
 
Municipal securities:
 

 
 

 
 

 
 

Due in less than one year
809

 
4

 
—

 
813

Due in one year through five years
2,891

 
79

 
—

 
2,970

Due in five years through ten years
10,155

 
148

 
—

 
10,303

Due after ten years
11,695

 
267

 
—

 
11,962

 
 
 
 
 
 
 
 
Corporate debt issues:
 

 
 

 
 

 
 

Due in five years through ten years
919

 
—

 
—

 
919

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
142,421

 
1,941

 
(881
)
 
143,481

Variable rate pass-through
18,933

 
749

 
(4
)
 
19,678

Fixed rate agency CMOs
452,256

 
3,518

 
(1,606
)
 
454,168

Variable rate agency CMOs
55,743

 
207

 
(118
)
 
55,832

Total residential mortgage-backed securities
669,353

 
6,415

 
(2,609
)
 
673,159

Total marketable securities available-for-sale
$
815,495

 
7,351

 
(2,945
)
 
819,901


 
The following table shows the portfolio of marketable securities held-to-maturity at March 31, 2020 (in thousands):

 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
$
2,096

 
113

 
—

 
2,209

Variable rate pass-through
1,119

 
15

 
—

 
1,134

Fixed rate agency CMOs
13,389

 
639

 
—

 
14,028

Variable rate agency CMOs
604

 
1

 
(8
)
 
597

Total residential mortgage-backed securities
17,208

 
768

 
(8
)
 
17,968

Total marketable securities held-to-maturity
$
17,208

 
768

 
(8
)
 
17,968


 


14

The following table shows the portfolio of marketable securities held-to-maturity at December 31, 2019 (in thousands): 
 
Amortized
cost
 
Gross
unrealized
holding
gains
 
Gross
unrealized
holding
losses
 
Fair
value
Residential mortgage-backed securities:
 

 
 

 
 

 
 

Fixed rate pass-through
$
2,197

 
83

 
—

 
2,280

Variable rate pass-through
1,210

 
28

 
—

 
1,238

Fixed rate agency CMOs
14,016

 
68

 
—

 
14,084

Variable rate agency CMOs
613

 
8

 
—

 
621

Total residential mortgage-backed securities
18,036

 
187

 
—

 
18,223

Total marketable securities held-to-maturity
$
18,036

 
187

 
—

 
18,223



The following table shows the contractual maturity of our marketable securities held-to-maturity at March 31, 2020 (in thousands):
 
Amortized
cost
 
Fair
value
Residential mortgage-backed securities:
 

 
 

Due in less than one year
$
1

 
1

Due in one year through five years
599

 
626

Due after five years through ten years
929

 
981

Due after ten years
15,679

 
16,360

Total residential mortgage-backed securities
17,208

 
17,968

Total marketable securities held-to-maturity
$
17,208

 
17,968



The following table shows the fair value of and gross unrealized losses on available-for-sale marketable securities, for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at March 31, 2020 (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
$
—

 
—

 
2,320

 
(103
)
 
2,320

 
(103
)
Residential mortgage-backed securities - agency
46,190

 
(847
)
 
9,167

 
(97
)
 
55,357

 
(944
)
Total temporarily impaired securities
$
46,190

 
(847
)
 
11,487

 
(200
)
 
57,677

 
(1,047
)

The following table shows the fair value of and gross unrealized losses on marketable securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 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
$
—

 
—

 
52,620

 
(336
)
 
52,620

 
(336
)
Residential mortgage-backed securities - agency
173,112

 
(858
)
 
109,324

 
(1,751
)
 
282,436

 
(2,609
)
Total temporarily impaired securities
$
173,112

 
(858
)
 
161,944

 
(2,087
)
 
335,056

 
(2,945
)

 
The Company does not believe that the available-for-sale debt securities that were in an unrealized loss position as of March 31, 2020, which comprised of 83 individual securities, represents a credit loss impairment. All of these securities were issued by U.S. government agencies or U.S. government-sponsored agencies. There securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The unrealized losses were primarily attributable to changes in the interest rate environment and not due to the credit quality of these investment securities. The Company doe not have the intent to sell these investment securities and it is likely that we will not be required to sell these securities before their anticipated recovery, which may be at maturity.


15

All of the Company's held-to-maturity debt securities are issued by by U.S. government agencies or U.S. government-sponsored agencies. There securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. Therefore, the Company did not record an allowance for credit losses for these securities as of March 31, 2020.

The following table presents the credit quality of our held-to-maturity securities, based on latest information available as of March 31, 2020. The credit ratings are sourced from nationally recognized rating agencies, which include Moody's and S&P, or when credit ratings cannot be sourced from the agencies, they are presented based on asset type. All of our held-to-maturity securities were current in their payment of principal and interest as of March 31, 2020.
 
AA+
 
Total
Held-to-maturity securities:
 
 
 
  Residential mortgage-backed securities
$
17,208

 
17,208

Total marketable securities held-to-maturity
$
17,208

 
17,208



(3)    Loans Receivable

The following table shows a summary of our loans receivable at amortized cost basis at March 31, 2020 and December 31, 2019 (in thousands): 
 
March 31, 2020
 
December 31, 2019
 
Originated
 
Acquired
 
Total
 
Originated
 
Acquired
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 
 
 
Residential mortgage loans (1)
$
2,758,695

 
76,038

 
2,834,733

 
2,785,189

 
82,938

 
2,868,127

Home equity loans
1,129,370

 
231,284

 
1,360,654

 
1,100,023

 
243,404

 
1,343,427

Vehicle loans
929,204

 
7,623

 
936,827

 
850,804

 
10,388

 
861,192

Consumer loans
243,169

 
6,743

 
249,912

 
237,834

 
25,597

 
263,431

Total Personal Banking
5,060,438

 
321,688

 
5,382,126

 
4,973,850

 
362,327

 
5,336,177

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
1,953,458

 
309,540

 
2,262,998

 
1,915,949

 
312,160

 
2,228,109

Commercial real estate loans - owner occupied
416,283

 
71,477

 
487,760

 
433,099

 
93,182

 
526,281

Commercial loans
650,349

 
53,641

 
703,990

 
664,159

 
53,948

 
718,107

Total Commercial Banking
3,020,090

 
434,658

 
3,454,748

 
3,013,207

 
459,290

 
3,472,497

Total loans receivable, gross
8,080,528

 
756,346

 
8,836,874

 
7,987,057

 
821,617

 
8,808,674

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for credit losses
(82,431
)
 
(10,466
)
 
(92,897
)
 
(51,439
)
 
(6,502
)
 
(57,941
)
Total loans receivable, net (2)
$
7,998,097

 
745,880

 
8,743,977

 
7,935,618

 
815,115

 
8,750,733


(1)
Includes $6.4 million and $7.7 million of loans held-for-sale at March 31, 2020 and December 31, 2019, respectively.
(2)
Includes $44.7 million and $40.2 million of net unearned income, unamortized premiums and discounts and deferred fees and costs at March 31, 2020 and December 31, 2019, respectively.

16

The following table provides information related to the allowance for credit losses by portfolio segment and by class of financing receivable for the quarter ended March 31, 2020 and includes the cumulative effect of adopting ASU 2016-13 (in thousands):
 
Balance as of March 31, 2020
 
Current
period provision
 
Charge-offs
 
Recoveries
 
Cumulative effect of ASU 2016-13*
 
Balance as of
December 31, 2019
Allowance for Credit Losses
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 
 
 

Residential mortgage loans
$
10,673

 
894

 
(343
)
 
107

 
7,441

 
2,574

Home equity loans
9,786

 
895

 
(289
)
 
205

 
5,786

 
3,189

Vehicle loans
11,994

 
5,359

 
(1,843
)
 
344

 
842

 
7,292

Consumer loans
5,166

 
3,518

 
(1,645
)
 
416

 
(2,424
)
 
5,301

Total Personal Banking
37,619

 
10,666

 
(4,120
)
 
1,072

 
11,645

 
18,356

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 
 
 

Commercial real estate loans
29,380

 
11,269

 
(310
)
 
290

 
2,288

 
15,843

Commercial real estate loans - owner occupied
8,374

 
1,365

 
(21
)
 
7

 
1,278

 
5,745

Commercial loans
17,524

 
4,337

 
(815
)
 
424

 
(4,419
)
 
17,997

Total Commercial Banking
55,278

 
16,971

 
(1,146
)
 
721

 
(853
)
 
39,585

Total
$
92,897

 
27,637

 
(5,266
)
 
1,793

 
10,792

 
57,941

 
 
 
 
 
 
 
 
 
 
 
 
Allowance for Credit Losses -
off-balance sheet exposure
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
 
 
Home equity loans
34

 
4

 
—

 
—

 
(293
)
 
323

Consumer loans
—

 
—

 
—

 
—

 
(402
)
 
402

Total Personal Banking
34

 
4

 
—

 
—

 
(695
)
 
725

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 
 
 

Commercial real estate loans
3,294

 
1,283

 
—

 
—

 
1,934

 
77

Commercial real estate loans - owner occupied
95

 
4

 
—

 
—

 
88

 
3

Commercial loans
1,281

 
189

 
—

 
—

 
923

 
169

Total Commercial Banking
4,670

 
1,476

 
—

 
—

 
2,945

 
249

Total off-balance sheet exposure
$
4,704

 
1,480

 
—

 
—

 
2,250

 
974

* Includes the impact of the initial allowance on PCD loans of $517,000.

    
















    


17

The following table provides information related to the allowance for credit losses by portfolio segment and by class of financing receivable for the quarter ended March 31, 2019, prior to the adoption of ASU 2016-13 (in thousands):
 
Balance as of March 31, 2019
 
Current
period provision
 
Charge-offs
 
Recoveries
 
Balance as of
December 31, 2018
Originated loans
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
4,005

 
186

 
(349
)
 
114

 
4,054

Home equity loans
3,062

 
(35
)
 
(112
)
 
25

 
3,184

Consumer loans
11,535

 
2,822

 
(2,988
)
 
621

 
11,080

Total Personal Banking
18,602

 
2,973

 
(3,449
)
 
760

 
18,318

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
25,470

 
(464
)
 
(569
)
 
124

 
26,379

Commercial loans
7,639

 
874

 
(457
)
 
168

 
7,054

Total Commercial Banking
33,109

 
410

 
(1,026
)
 
292

 
33,433

Total originated loans
51,711

 
3,383

 
(4,475
)
 
1,052

 
51,751

 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
92

 
8

 
(8
)
 
9

 
83

Home equity loans
399

 
45

 
(42
)
 
48

 
348

Consumer loans
454

 
34

 
(32
)
 
33

 
419

Total Personal Banking
945

 
87

 
(82
)
 
90

 
850

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 
 
 
 
 
 
 
 
 
Commercial real estate loans
2,467

 
255

 
(35
)
 
251

 
1,996

Commercial loans
598

 
2,742

 
(2,813
)
 
52

 
617

Total Commercial Banking
3,065

 
2,997

 
(2,848
)
 
303

 
2,613

Total acquired loans
4,010

 
3,084

 
(2,930
)
 
393

 
3,463

 
 
 
 
 
 
 
 
 
 
Total
$
55,721

 
6,467

 
(7,405
)
 
1,445

 
55,214


During the quarter ended March 31, 2020, we sold $50 million of loans that were classified as held-for-investment, for a gain of $1.3 million, which is reported in gain on sale of loans on the Consolidated Statements of Income.

18

The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at March 31, 2020 (in thousands):
 
Total loans
receivable
 
Allowance for
credit losses
 
Nonaccrual
loans (1)
 
Loans 90 days past due and accruing
 
TDRs
 
Allowance
related to
TDRs
 
Additional
commitments
to customers
with loans
classified as
TDRs
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,834,733

 
10,673

 
11,651

 
—

 
7,183

 
865

 
—

Home equity loans
1,360,654

 
9,786

 
7,106

 
31

 
1,906

 
467

 
26

Vehicle loans
936,827

 
11,994

 
3,231

 
—

 
—

 
—

 
—

Consumer loans
249,912

 
5,166

 
936

 
—

 
—

 
—

 
—

Total Personal Banking
5,382,126

 
37,619

 
22,924

 
31

 
9,089

 
1,332

 
26

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,262,998

 
29,380

 
26,384

 
—

 
12,460

 
1,010

 
71

Commercial real estate loans - owner occupied
487,760

 
8,374

 
15,887

 
—

 
6,511

 
625

 
5

Commercial loans
703,990

 
17,524

 
20,236

 
—

 
5,292

 
1,981

 
559

Total Commercial Banking
3,454,748

 
55,278

 
62,507

 
—

 
24,263

 
3,616

 
635

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
8,836,874

 
92,897

 
85,431

 
31

 
33,352

 
4,948

 
661

(1)
Includes $17.4 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, 2019, prior to the adoption of ASU 2016-13 (in thousands): 
 
Total loans
receivable
 
Allowance for
credit losses
 
Nonaccrual
loans (1)
 
Loans 90 days past due and accruing
 
TDRs
 
Allowance
related to
TDRs
 
Additional
commitments
to customers
with loans
classified as
TDRs
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,868,127

 
2,574

 
14,476

 
—

 
7,550

 
560

 
—

Home equity loans
1,342,918

 
3,189

 
6,745

 
32

 
1,973

 
393

 
26

Consumer loans
1,125,132

 
12,593

 
4,226

 
—

 
—

 
—

 
—

Total Personal Banking
5,336,177

 
18,356

 
25,447

 
32

 
9,523

 
953

 
26

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,754,390

 
21,588

 
34,864

 
—

 
19,358

 
1,384

 
476

Commercial loans
718,107

 
17,997

 
8,559

 
—

 
3,118

 
665

 
64

Total Commercial Banking
3,472,497

 
39,585

 
43,423

 
—

 
22,476

 
2,049

 
540

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
8,808,674

 
57,941

 
68,870

 
32

 
31,999

 
3,002

 
566

(1)
Includes $9.0 million of nonaccrual TDRs.

19

Following the adoption of CECL as of January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed. Under CECL, we present the amortized cost of our loans on nonaccrual status including such loans with no allowance. The following table presents the amortized cost of our loans on nonaccrual status as of the beginning and end of the quarter ended March 31, 2020 (in thousands): 
 
Nonaccrual loans at January 1, 2020
 
Nonaccrual loans at March 31, 2020 with an allowance
 
Nonaccrual loans with no allowance
 
Loans 90 days past due and accruing
Personal Banking:
 

 
 

 
 

 
 

Residential mortgage loans
$
14,476

 
11,651

 
—

 
—

Home equity loans
6,745

 
7,106

 
—

 
31

Vehicle loans
3,147

 
3,231

 
—

 
—

Consumer loans
1,079

 
936

 
—

 
—

Total Personal Banking
25,447

 
22,924

 
—

 
31

 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

Commercial real estate loans
18,832

 
22,730

 
3,654

 
—

Commercial real estate loans - owner occupied
16,032

 
12,136

 
3,751

 
—

Commercial loans
8,559

 
18,838

 
1,398

 
—

Total Commercial Banking
43,423

 
53,704

 
8,803

 
—

 
 
 
 
 
 
 
 
Total
$
68,870

 
76,628

 
8,803

 
31

 
During the three months ended March 31, 2020, we recognized $217,000 of interest income on nonaccrual loans.

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of March 31, 2020 (in thousands):
 
Real estate
 
Equipment
 
Other
 
Total
Personal Banking:
 

 
 

 
 

 
 

Residential mortgage loans
$
6,677

 
—

 
—

 
6,677

Home equity loans
99

 
—

 
—

 
99

Vehicle loans
—

 
—

 
1,569

 
1,569

Consumer loans
—

 
—

 
—

 
—

Total Personal Banking
6,776

 
—

 
1,569

 
8,345

 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

Commercial real estate loans
13,922

 
—

 
—

 
13,922

Commercial real estate loans - owner occupied
5,841

 
—

 
—

 
5,841

Commercial loans
3,927

 
11,717

 
—

 
15,644

Total Commercial Banking
23,690

 
11,717

 
—

 
35,407

 
 
 
 
 
 
 
 
Total
$
30,466

 
11,717

 
1,569

 
43,752

 

20

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, 2019, prior to the adoption of ASU 2016-13 (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
$
12,682

 
1,794

 
—

 
6,817

 
21,293

 
19,767

 
688

Home equity loans
5,635

 
1,110

 
—

 
1,654

 
8,399

 
8,571

 
368

Consumer loans
3,610

 
616

 
—

 
—

 
4,226

 
3,842

 
179

Total Personal Banking
21,927

 
3,520

 
—

 
8,471

 
33,918

 
32,180

 
1,235

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
25,014

 
9,850

 
933

 
10,329

 
46,126

 
46,284

 
1,490

Commercial loans
4,739

 
3,820

 
15,916

 
1,474

 
25,949

 
10,179

 
345

Total Commercial Banking
29,753

 
13,670

 
16,849

 
11,803

 
72,075

 
56,463

 
1,835

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
51,680

 
17,190

 
16,849

 
20,274

 
105,993

 
88,643

 
3,070


 
The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at December 31, 2019 prior to the adoption of ASU 2016-13 (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
$
2,860,026

 
8,101

 
8,101

 
560

 
—

Home equity loans
1,340,944

 
1,974

 
1,974

 
393

 
—

Consumer loans
1,125,123

 
9

 
9

 
3

 
—

Total Personal Banking
5,326,093

 
10,084

 
10,084

 
956

 
—

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,718,855

 
35,535

 
29,578

 
2,679

 
5,957

Commercial loans
694,424

 
23,683

 
18,337

 
8,127

 
5,346

Total Commercial Banking
3,413,279

 
59,218

 
47,915

 
10,806

 
11,303

 
 
 
 
 
 
 
 
 
 
Total
$
8,739,372

 
69,302

 
57,999

 
11,762

 
11,303



21

Our loan portfolios include loans that have been modified in a TDR, where concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include: extending the note’s maturity date, permitting interest only payments, reducing the interest rate to a rate lower than current market rates for new debt with similar risk, reducing the principal payment, principal forbearance or other actions.  These concessions are applicable to all loan segments and classes. Certain TDRs are classified as nonperforming at the time of restructuring and may be returned to performing status after considering the borrower’s sustained repayment performance for a period of at least six months.
 
When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, the loan’s observable market price or the current fair value of the collateral, less selling costs, for collateral dependent loans.  If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized 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.

In March 2020, a joint statement was issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented. The guidance also provides that these modified loans generally will not be classified as nonaccrual during the term of the modification. For borrowers who are 30 days or more past due when enrolling in a loan modification program related to the COVID-19 pandemic, we evaluate the loan modifications under our existing TDR framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest.

The following table provides a roll forward of troubled debt restructurings for the periods indicated (dollars in thousands):
 
For the quarter ended March 31,
 
2020
 
2019
 
Number of
contracts
 
Amount
 
Number of
contracts
 
Amount
Beginning TDR balance:
176

 
$
31,999

 
195

 
$
33,608

New TDRs
2

 
2,518

 
—

 
—

Re-modified TDRs
2

 
2,076

 
—

 
—

Net paydowns
—

 
(2,841
)
 
—

 
(796
)
Charge-offs:
 
 
 

 
 
 
 

Residential mortgage loans
—

 
—

 
—

 
—

Home equity loans
1

 
(10
)
 
—

 
—

Vehicle loans
—

 
—

 
—

 
—

Commercial real estate loans
—

 
—

 
—

 
—

Commercial real estate loans - owner occupied
—

 
—

 
—

 
—

Commercial loans
—

 
—

 
—

 
—

Paid-off loans:
 
 
 
 
 
 
 
Residential mortgage loans
2

 
(330
)
 
—

 
—

Home equity loans
—

 
—

 
—

 
—

Vehicle loans
—

 
—

 
—

 
—

Commercial real estate loans
1

 
(26
)
 
—

 
—

Commercial real estate loans - owner occupied
—

 
—

 
—

 
—

Commercial loans
3

 
(34
)
 
—

 
—

Ending TDR balance:
171

 
$
33,352

 
195

 
$
32,812

 
 
 
 
 
 
 
 
Accruing TDRs
 

 
$
15,977

 
 
 
$
17,861

Non-accrual TDRs
 

 
17,375

 
 
 
14,951


22

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 March 31, 2020
 
Number of contracts
 
Recorded
investment
at the time of
modification
 
Current
recorded
investment
 
Current
allowance
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

Residential mortgage loans
—

 
$
—

 
—

 
—

Home equity loans
1

 
19

 
18

 
—

Vehicle loans
—

 
—

 
—

 
—

Consumer loans
—

 
—

 
—

 
—

Total Personal Banking
1

 
19

 
18

 
—

 
 
 
 
 
 
 
 
Commercial Banking:
 
 
 
 
 
 
 
Commercial real estate loans
—

 
—

 
—

 
—

Commercial real estate loans - owner occupied
2

 
2,077

 
2,076

 
176

Commercial loans
1

 
2,500

 
2,500

 
1,628

Total Commercial Banking
3

 
4,577

 
4,576

 
1,804

 
 
 
 
 
 
 
 
Total
4

 
$
4,596

 
4,594

 
1,804

    
The following table provides information as of March 31, 2020 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended March 31, 2020 (in thousands):
 
 
 
Type of modification
 
 
 
Number of contracts
 
Rate
 
Payment
 
Maturity date
 
Other
 
Total
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
—

 
$
—

 
—

 
—

 
—

 
—

Home equity loans
1

 
—

 
—

 
18

 
—

 
18

Vehicle loans
—

 
—

 
—

 
—

 
—

 
—

Consumer loans
—

 
—

 
—

 
—

 
—

 
—

Total Personal Banking
1

 
—

 
—

 
18

 
—

 
18

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate loans
—

 
—

 
—

 
—

 
—

 
—

Commercial real estate loans - owner occupied
2

 
—

 
—

 
2,076

 
—

 
2,076

Commercial loans
1

 
—

 
—

 
—

 
2,500

 
2,500

Total Commercial Banking
3

 
—

 
—

 
2,076

 
2,500

 
4,576

 
 
 
 
 
 
 
 
 
 
 
 
Total
4

 
$
—

 
—

 
2,094

 
2,500

 
4,594


 
During the quarter-ended March 31, 2019 there were no new TDRs. Additionally, no TDR's modified within the previous 12 months of March 31, 2019 or March 31, 2020 subsequently defaulted.










    

23

The following table provides information related to the amortized cost basis of loan payment delinquencies at March 31, 2020 (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)
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
35,322

 
522

 
10,538

 
46,382

 
2,788,351

 
2,834,733

 
—

Home equity loans
7,064

 
2,682

 
5,960

 
15,706

 
1,344,948

 
1,360,654

 
31

Vehicle loans
6,896

 
2,254

 
2,787

 
11,937

 
924,890

 
936,827

 
—

Consumer loans
3,251

 
809

 
960

 
5,020

 
244,892

 
249,912

 
—

Total Personal Banking
52,533

 
6,267

 
20,245

 
79,045

 
5,303,081

 
5,382,126

 
31

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
10,829

 
2,426

 
17,919

 
31,175

 
2,231,823

 
2,262,998

 
—

Commercial real estate loans - owner occupied
2,094

 
568

 
7,597

 
10,259

 
477,501

 
487,760

 
—

Commercial loans
7,548

 
315

 
16,860

 
24,723

 
679,267

 
703,990

 
—

Total Commercial Banking
20,471

 
3,309

 
42,376

 
66,157

 
3,388,591

 
3,454,748

 
—

Total loans
$
73,004

 
9,576

 
62,621

 
145,202

 
8,691,672

 
8,836,874

 
31




24

The following table provides information related to loan payment delinquencies at December 31, 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
$
20,447

 
5,572

 
11,080

 
37,099

 
2,748,090

 
2,785,189

 
—

Home equity loans
5,119

 
2,096

 
4,573

 
11,788

 
1,088,136

 
1,100,023

 
—

Consumer loans
8,969

 
3,198

 
3,467

 
15,634

 
1,073,103

 
1,088,638

 
—

Total Personal Banking
34,535

 
10,866

 
19,120

 
64,521

 
4,909,329

 
4,973,850

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
5,598

 
1,387

 
17,959

 
24,944

 
2,324,104

 
2,349,048

 
—

Commercial loans
987

 
6,360

 
4,296

 
11,643

 
652,516

 
664,159

 
—

Total Commercial Banking
6,585

 
7,747

 
22,255

 
36,587

 
2,976,620

 
3,013,207

 
—

Total originated loans
41,120

 
18,613

 
41,375

 
101,108

 
7,885,949

 
7,987,057

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
2,849

 
121

 
1,695

 
4,665

 
78,273

 
82,938

 
93

Home equity loans
1,350

 
309

 
1,115

 
2,774

 
240,630

 
243,404

 
53

Consumer loans
239

 
104

 
144

 
487

 
35,498

 
35,985

 
1

Total Personal Banking
4,438

 
534

 
2,954

 
7,926

 
354,401

 
362,327

 
147

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,323

 
303

 
7,055

 
9,681

 
395,661

 
405,342

 
—

Commercial loans
200

 
43

 
443

 
686

 
53,262

 
53,948

 
—

Total Commercial Banking
2,523

 
346

 
7,498

 
10,367

 
448,923

 
459,290

 
—

Total acquired loans
6,961

 
880

 
10,452

 
18,293

 
803,324

 
821,617

 
147

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
48,081

 
19,493

 
51,827

 
119,401

 
8,689,273

 
8,808,674

 
147


(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:  For Commercial Banking loans 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.

25

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.

For Personal Banking loans a pass risk rating is maintained until they are greater than 90 days past due, and risk rating reclassification is based primarily on past due status of the loan. The risk rating categories can generally be described by the following groupings:

Pass — A homogeneous loan that is less than 90 days past due from the required payment date at month-end.

Substandard — A homogeneous loan that is greater than 90 days past due from the required payment date at month-end, is a TDR or is a PCD loan. A homogenous retail loan that is greater than 180 days past due from the requirement payment date at month-end that has been written down to the value of underlying collateral, less costs to sell.

Doubtful — A homogeneous loan that is greater than 180 days past due from the required payment date at month-end and not written down to the value of underlying collateral. These loans are generally charged-off in the month in which the 180 day period elapses.


 

26

Based on the most recent analysis performed, the amortized cost basis by risk category of loans by class of loans by origination year is as follows as of March 31, 2020 (in thousands): 
 
YTD March 31, 2020
 
2019
 
2018
 
2017
 
2016
 
Prior
 
Revolving Loans
 
Revolving loans converted to term loans
 
Total loans
receivable
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 

Residential mortgage loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
$
123,025

 
475,573

 
288,056

 
293,228

 
229,808

 
1,405,981

 
—

 
—

 
2,815,671

Substandard
—

 
—

 
108

 
564

 
216

 
18,174

 
—

 
—

 
19,062

Total residential mortgage loans
123,025

 
475,573

 
288,163

 
293,792

 
230,024

 
1,424,155

 
—

 
—

 
2,834,733

Home equity loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
62,841

 
221,783

 
111,767

 
103,107

 
97,444

 
262,224

 
456,600

 
36,305

 
1,352,071

Substandard
—

 
25

 
112

 
185

 
764

 
4,300

 
1,532

 
1,666

 
8,583

Total home equity loans
62,841

 
221,808

 
111,879

 
103,292

 
98,207

 
266,524

 
458,132

 
37,971

 
1,360,654

Vehicle loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
126,861

 
428,865

 
246,493

 
80,750

 
36,919

 
14,147

 
—

 
—

 
934,035

Substandard
—

 
783

 
702

 
723

 
318

 
266

 
—

 
—

 
2,792

Total vehicle loans
126,861

 
429,648

 
247,195

 
81,473

 
37,237

 
14,413

 
—

 
—

 
936,827

Consumer loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
25,967

 
96,581

 
29,891

 
13,869

 
5,552

 
5,559

 
68,590

 
2,942

 
248,951

Substandard
—

 
252

 
61

 
79

 
19

 
28

 
430

 
92

 
961

Total consumer loans
25,967

 
96,833

 
29,952

 
13,948

 
5,571

 
5,587

 
69,020

 
3,034

 
249,912

Total Personal Banking
338,694

 
1,223,862

 
677,189

 
492,505

 
371,039

 
1,710,679

 
527,152

 
41,005

 
5,382,126

Business Banking:
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 

Commercial real estate loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
72,226

 
303,571

 
260,769

 
276,681

 
197,330

 
767,889

 
228,723

 
5,952

 
2,113,142

Special Mention
105

 
2,063

 
7,209

 
35,698

 
6,297

 
8,888

 
4,989

 
801

 
66,051

Substandard
349

 
336

 
3,696

 
11,695

 
6,629

 
52,992

 
4,091

 
4,017

 
83,805

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate loans
72,680

 
305,971

 
271,674

 
324,074

 
210,256

 
829,769

 
237,803

 
10,770

 
2,262,998

Commercial real estate loans - owner occupied
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
2,615

 
65,489

 
93,389

 
79,888

 
45,873

 
121,067

 
11,180

 
3,440

 
422,940

Special Mention
—

 
1,337

 
1,230

 
2,682

 
1,417

 
3,535

 
26

 
30

 
10,258

Substandard
—

 
2,709

 
3,914

 
12,117

 
7,711

 
23,734

 
1,094

 
3,284

 
54,562

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial real estate loans - owner occupied
2,615

 
69,535

 
98,533

 
94,686

 
55,001

 
148,336

 
12,300

 
6,754

 
487,760

Commercial loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass
18,210

 
93,726

 
61,621

 
59,597

 
53,671

 
39,638

 
273,335

 
9,735

 
609,533

Special Mention
—

 
5,811

 
1,922

 
551

 
6,981

 
717

 
26,634

 
418

 
43,034

Substandard
373

 
1,174

 
7,216

 
1,573

 
795

 
2,734

 
27,552

 
10,006

 
51,423

Doubtful
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Loss
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total commercial loans
18,583

 
100,711

 
70,759

 
61,721

 
61,446

 
43,089

 
327,521

 
20,159

 
703,990

Total Business Banking
93,878

 
476,217

 
440,965

 
480,482

 
326,703

 
1,021,194

 
577,624

 
37,683

 
3,454,748

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
432,572

 
1,700,079

 
1,118,154

 
972,987

 
697,742

 
2,731,873

 
1,104,776

 
78,688

 
8,836,874

For the three months ended March 31, 2020, $4.7 million of revolving loans were converted to term loans.

27

The following table sets forth information about credit quality indicators as of December 31, 2019, prior to the adoption of ASU 2016-13 (in thousands):
 
Pass
 
Special
mention
 
Substandard
 
Doubtful
 
Loss
 
Total loans
receivable
Originated loans
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage loans
$
2,776,971

 
—

 
8,218

 
—

 
—

 
2,785,189

Home equity loans
1,093,874

 
—

 
5,640

 
—

 
—

 
1,099,514

Consumer loans
1,084,986

 
—

 
4,161

 
—

 
—

 
1,089,147

Total Personal Banking
4,955,831

 
—

 
18,019

 
—

 
—

 
4,973,850

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
2,188,823

 
70,327

 
89,898

 
—

 
—

 
2,349,048

Commercial loans
571,011

 
42,352

 
50,796

 
—

 
—

 
664,159

Total Commercial Banking
2,759,834

 
112,679

 
140,694

 
—

 
—

 
3,013,207

Total originated loans
7,715,665

 
112,679

 
158,713

 
—

 
—

 
7,987,057

 
 
 
 
 
 
 
 
 
 
 
 
Acquired loans
 
 
 
 
 
 
 
 
 
 
 
Personal Banking:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage loans
81,611

 
—

 
1,327

 
—

 
—

 
82,938

Home equity loans
242,237

 
—

 
1,167

 
—

 
—

 
243,404

Consumer loans
35,746

 
—

 
239

 
—

 
—

 
35,985

Total Personal Banking
359,594

 
—

 
2,733

 
—

 
—

 
362,327

 
 
 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 

 
 

 
 

 
 

 
 

 
 

Commercial real estate loans
349,993

 
10,243

 
45,106

 
—

 
—

 
405,342

Commercial loans
45,972

 
28

 
7,948

 
—

 
—

 
53,948

Total Commercial Banking
395,965

 
10,271

 
53,054

 
—

 
—

 
459,290

Total acquired loans
755,559

 
10,271

 
55,787

 
—

 
—

 
821,617

 
 
 
 
 
 
 
 
 
 
 
 
Total loans
$
8,471,224

 
122,950

 
214,500

 
—

 
—

 
8,808,674


 
Prior to the adoption of ASU 2016-13, 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):
 
 
December 31, 2019
Acquired loans evaluated individually for future credit losses:
 
 
Outstanding principal balance
 
$
7,187

Carrying value
 
4,975

 
 
 
Acquired loans evaluated collectively for future credit losses:
 
 
Outstanding principal balance
 
826,412

Carrying value
 
816,642

 
 
 
Total acquired loans:
 
 
Outstanding principal balance
 
833,599

Carrying value
 
821,617


 

28

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 prior to the adoption of ASU 2016-13 (in thousands):
 
Total
Balance at December 31, 2018
$
755

Accretion
(551
)
Net reclassification from nonaccretable yield
966

Balance at December 31, 2019
$
1,170


    
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, 2019 prior to the adoption of ASU 2016-13 (in thousands):
 
Carrying
value
 
Outstanding
principal
balance
 
Related
impairment
reserve
 
Average
recorded
investment
in impaired
loans
 
Interest
income
recognized
Personal Banking:
 
 
 
 
 
 
 
 
 
Residential mortgage loans
$
742

 
1,232

 
7

 
866

 
147

Home equity loans
715

 
1,569

 
25

 
861

 
114

Consumer loans
7

 
34

 
1

 
18

 
12

Total Personal Banking
1,464

 
2,835

 
33

 
1,745

 
273

 
 
 
 
 
 
 
 
 
 
Commercial Banking:
 
 
 
 
 
 
 
 
 
Commercial real estate loans
3,433

 
4,268

 
6

 
3,509

 
273

Commercial loans
78

 
84

 
1

 
78

 
5

Total Commercial Banking
3,511

 
4,352

 
7

 
3,587

 
278

 
 
 

 

 

 

Total loans
$
4,975

 
7,187

 
40

 
5,332

 
551



(4)
Goodwill and Other Intangible Assets
 
The following table provides information for intangible assets subject to amortization at the dates indicated (in thousands):
 
March 31, 2020
 
December 31, 2019
Amortizable intangible assets:
 

 
 

Core deposit intangibles - gross
$
71,183

 
71,183

Less: accumulated amortization
(52,357
)
 
(50,934
)
Core deposit intangibles - net
18,826

 
20,249

Customer and Contract intangible assets - gross
12,775

 
12,775

Less: accumulated amortization
(10,176
)
 
(9,948
)
Customer and Contract intangible assets - net
2,599

 
2,827

Total intangible assets - net
$
21,425

 
23,076




29

The following table shows the actual aggregate amortization expense for the quarters ended March 31, 2020 and 2019, as well as the estimated aggregate amortization expense, based upon current levels of intangible assets, for the current fiscal year and each of the five succeeding fiscal years (in thousands):
For the quarter ended March 31, 2020
$
1,651

For the quarter ended March 31, 2019
1,447

For the year ending December 31, 2020
6,237

For the year ending December 31, 2021
5,058

For the year ending December 31, 2022
3,976

For the year ending December 31, 2023
3,016

For the year ending December 31, 2024
2,249

For the year ending December 31, 2025
1,510


 
The following table provides information for the changes in the carrying amount of goodwill (in thousands):
 
Total
Balance at December 31, 2018
$
307,420

Goodwill acquired
38,683

Balance at December 31, 2019
346,103

Goodwill acquired
—

Balance at March 31, 2020
$
346,103


 
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. Quarterly, the Company evaluates whether there are any triggering events that would require an update to our previous goodwill assessment. During the current quarter, the Company determined the COVID-19 pandemic and its negative effect on the global economy to be a triggering event.  As a result, the Company, with the assistance of a third-party specialist, performed a “Step 1” quantitative impairment analysis in accordance with ASU 2017-04 as of March 31, 2020.  This analysis indicated the aggregate fair value of Northwest Bank, the sole reporting unit of Northwest Bancshares, Inc., exceeded the carrying value and therefore goodwill was not impaired.

(5)    Borrowed Funds

(a)    Borrowings
 
March 31, 2020
 
Amount
 
Average rate
Term notes payable to the FHLB of Pittsburgh:
 

 
 

Due within one year
$
100,000

 
0.74
%
Total term notes payable to FHLB of Pittsburgh
100,000

 
 

Collateralized borrowings, due within one year
91,599

 
0.30
%
Total borrowed funds
$
191,599

 
 



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. The revolving line of credit has no balance as of March 31, 2020 and $153.6 million at December 31, 2019.

At March 31, 2020 and December 31, 2019, collateralized borrowings due within one year were $91.6 million and $92.7 million, respectively. These borrowings are collateralized by cash or various securities held in safekeeping by the FHLB.

Term notes payable to the FHLB of Pittsburgh at March 31, 2020 totaled $100.0 million. This total is made up of four fixed rate advances: $30.0 million at 0.91% maturing June 16, 2020; $25.0 million at 0.70% maturing June 22, 2020; $25.0 million at 0.70% maturing June 22, 2020; and $20.0 million at 0.59% maturing June 26, 2020.

    

30

(b)    Trust Preferred Securities

The Company has five statutory business trusts: Northwest Bancorp Capital Trust III, a Delaware statutory business trust, Northwest Bancorp Statutory Trust IV, a Connecticut statutory business trust, LNB Trust II, a Delaware statutory business trust, Union National Capital Trust I ("UNCT I"), a Delaware statutory business trust, and Union National Capital Trust II ("UNCT 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, equal to three-month LIBOR plus 1.48%. UNCT I has 8,000 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $8,000,000) with a stated maturity of January 23, 2034 and a floating interest rate, which resets quarterly, equal to three-month LIBOR plus 2.85%. UNCT II has 3,000 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $3,000,000) with a stated maturity of November 23, 2034 and a floating interest rate, which resets quarterly, equal to three-month LIBOR plus 2.00%. 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 March 31, 2020 was 2.75%. 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 March 31, 2020 was 2.12%. 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 March 31, 2020 was 2.22%. UNCT I holds $8,248,000 of junior subordinated debentures due January 23, 2034 with a floating rate of interest, reset quarterly, of three-month LIBOR plus 2.85%. The rate effect at March 31, 2020 was 4.62%. UNCT II holds $3,093,000 of junior subordinated debentures due November 23, 2034 with a floating rate of interest, reset quarterly, of three-month LIBOR plus 2.00%. The rate effect at March 31, 2020 was 3.68%. These subordinated debentures are the sole assets of the Trusts.
 
Cash distributions on the trust securities are made on a quarterly basis to the extent interest on the debentures is received by the Trusts.  We have the right to defer payment of interest on the subordinated debentures at any time, or from time-to-time, for periods not exceeding five years. If interest payments on the subordinated debentures are deferred, the distributions on the trust 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.


31

(6)
Guarantees
 
We issue standby letters of credit in the normal course of business.  Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party.  We are required to perform under a standby letter of credit when drawn upon by the guaranteed third party in the case of nonperformance by our customer.  The credit risk associated with standby letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal loan underwriting procedures. Collateral may be obtained based on management’s credit assessment of the customer. At March 31, 2020, the maximum potential amount of future payments we could be required to make under these non-recourse standby letters of credit was $37.9 million, of which $33.7 million is fully collateralized. At March 31, 2020, we had a liability which represents deferred income of $449,000 related to the standby letters of credit. 

(7)    Earnings Per Share

 Basic earnings per common share ("EPS") is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period, without considering any dilutive items. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. During the quarter ended March 31, 2020, 2,033,345 stock options were not 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 $14.62. All stock options outstanding during the quarter ended March 31, 2019 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 $17.74.

The following table sets forth the computation of basic and diluted EPS (in thousands, except share data and per share amounts): 
 
Quarter ended March 31,
 
2020
 
2019
Net income available to common shareholders
$
7,939

 
25,044

 
 
 
 
Weighted average common shares outstanding
105,882,553

 
103,101,789

Dilutive potential shares due to effect of stock options
265,694

 
1,394,803

Total weighted average common shares and dilutive potential shares
$
106,148,247

 
104,496,592

 
 
 
 
Basic earnings per share
$
0.08

 
0.24

 
 
 
 
Diluted earnings per share
$
0.07

 
0.24



(8)    Pension and Other Post-Retirement Benefits
 
The following table sets forth the net periodic costs for the defined benefit pension plans and post-retirement healthcare plans for the periods indicated (in thousands):
 
Quarter ended March 31,
 
Pension benefits
 
Other post-retirement benefits
 
2020
 
2019
 
2020
 
2019
Service cost
$
2,098

 
1,274

 
—

 
—

Interest cost
1,714

 
1,827

 
7

 
11

Expected return on plan assets
(3,091
)
 
(2,759
)
 
—

 
—

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

 
—

Amortization of the net loss
924

 
855

 
5

 
17

Net periodic cost
$
1,064

 
616

 
12

 
28



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, 2020.

32

(9)
Disclosures About Fair Value of Financial Instruments
 
We are required to disclose fair value information about financial instruments whether or not recognized in the consolidated statement of financial condition. Fair value information of certain financial instruments and all nonfinancial instruments is not required to be disclosed. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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

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

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

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

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

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

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

The carrying amounts reported in the Consolidated Statement of Financial Condition approximate fair value for the following financial instruments: cash 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 U.S. government obligations. Certain debt securities which were AAA rated at purchase do not have an active market and as such we have used an alternative method to determine the fair value of these securities. The fair value has been determined using a discounted cash flow model using market assumptions, which generally include cash flow, collateral and other market assumptions. As such, securities which otherwise would have been classified as Level 2 securities if an active market for those assets or similar assets existed are included herein as Level 3 assets.

Debt Securities — held-to-maturity - The fair value of debt securities held-to-maturity is determined in the same manner as debt securities available-for-sale.
 
Loans Receivable

Loans with comparable characteristics including collateral and re-pricing structures are segregated for valuation purposes. Each loan pool is separately valued utilizing a discounted cash flow analysis. Projected monthly cash flows are discounted to present value using a market rate for comparable loans, which is not considered an exit price. Characteristics of comparable loans include remaining

33

term, coupon interest, and estimated prepayment speeds. Delinquent loans are separately evaluated given the impact delinquency has on the projected future cash flow of the loan including the approximate discount or market rate, which is not considered an exit price.

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

Deposit Liabilities

The estimated fair value of deposits with no stated maturity, which includes demand deposits, money market, and other savings accounts, is the amount payable on demand. Although market premiums paid for depository institutions reflect an additional value for these low-cost deposits, adjusting fair value for any value expected to be derived from retaining those deposits for a future period of time or from the benefit that results from the ability to fund interest-earning assets with these deposit liabilities is prohibited. The fair value estimates of deposit liabilities do not include the benefit that results from the low-cost funding provided by these deposits compared to the cost of borrowing funds in the market. Fair values for time deposits are estimated using a discounted cash flow calculation that applies contractual cost currently being offered in the existing portfolio to current market rates being offered locally for deposits of similar remaining maturities. The valuation adjustment for the portfolio consists of the present value of the difference of these two cash flows, discounted at the assumed market rate of the corresponding maturity.

 Borrowed Funds
 
Fixed rate advances are valued by comparing their contractual cost to the prevailing market cost.  The carrying amount of collateralized borrowings approximates the fair value.
 
Junior Subordinated Debentures
 
The fair value of junior subordinated debentures is calculated using the discounted cash flows at the prevailing rate of interest.
 
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 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.


34

Off-Balance Sheet Financial Instruments
 
These financial instruments generally are not sold or traded and estimated fair values are not readily available. However, the fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. Commitments to extend credit are generally short-term in nature and, if drawn upon, are issued under current market terms. At March 31, 2020 and December 31, 2019, there was no significant unrealized appreciation or depreciation on these financial instruments.

The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the Consolidated Statement of Financial Condition at March 31, 2020 (in thousands): 
 
Carrying
amount
 
Estimated
fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
276,454

 
276,454

 
276,454

 
—

 
—

Securities available-for-sale
765,579

 
765,579

 
—

 
765,579

 
—

Securities held-to-maturity
17,208

 
17,968

 
—

 
17,968

 
—

Loans receivable, net
8,737,551

 
8,751,479

 
—

 
—

 
8,751,479

Residential mortgage loans held-for-sale
6,426

 
6,426

 
—

 
—

 
6,426

Accrued interest receivable
25,531

 
25,531

 
25,531

 
—

 
—

Interest rate lock commitments
507

 
507

 
—

 
—

 
507

Forward commitments
197

 
197

 
—

 
197

 
—

Interest rate swaps
54,656

 
54,656

 
—

 
54,656

 
—

FHLB stock
13,131

 
13,131

 
—

 
—

 
—

Total financial assets
$
9,897,240

 
9,911,928

 
301,985

 
838,400

 
8,758,412

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Savings and checking deposits
$
7,298,979

 
7,298,979

 
7,298,979

 
—

 
—

Time deposits
1,493,756

 
1,514,631

 
—

 
—

 
1,514,631

Borrowed funds
191,599

 
194,224

 
194,224

 
—

 
—

Junior subordinated debentures
121,813

 
117,557

 
—

 
—

 
117,557

Interest rate swaps
55,376

 
55,376

 
—

 
55,376

 
—

Risk participation agreements
120

 
120

 
—

 
120

 
—

Accrued interest payable
834

 
834

 
834

 
—

 
—

Total financial liabilities
$
9,162,477

 
9,181,721

 
7,494,037

 
55,496

 
1,632,188

 

35

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

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
60,846

 
60,846

 
60,846

 
—

 
—

Securities available-for-sale
819,901

 
819,901

 
—

 
819,901

 
—

Securities held-to-maturity
18,036

 
18,223

 
—

 
18,223

 
—

Loans receivable, net
8,743,024

 
8,666,149

 
—

 
—

 
8,666,149

Residential mortgage loans held-for-sale
7,709

 
7,709

 
—

 
—

 
7,709

Accrued interest receivable
25,755

 
25,755

 
25,755

 
—

 
—

Interest rate lock commitments
559

 
559

 
—

 
—

 
559

Forward commitments
145

 
145

 
—

 
145

 
—

Interest rate swaps
20,889

 
20,889

 
—

 
20,889

 
—

FHLB stock
14,740

 
14,740

 
—

 
—

 
—

Total financial assets
$
9,711,604

 
9,634,916

 
86,601

 
859,158

 
8,674,417

 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 

 
 

 
 

 
 

 
 

Savings and checking accounts
$
7,022,597

 
7,022,597

 
7,022,597

 
—

 
—

Time deposits
1,569,410

 
1,574,063

 
—

 
—

 
1,574,063

Borrowed funds
246,336

 
246,341

 
246,341

 
—

 
—

Junior subordinated debentures
121,800

 
115,518

 
—

 
—

 
115,518

Interest rate swaps
20,952

 
20,952

 
—

 
20,952

 
—

Risk participation agreements
39

 
39

 
—

 
39

 
—

Accrued interest payable
1,142

 
1,142

 
1,142

 
—

 
—

Total financial liabilities
$
8,982,276

 
8,980,652

 
7,270,080

 
20,991

 
1,689,581



Fair value estimates are made at a point-in-time, based on relevant market data and information about the instrument. The methods and assumptions detailed above were used in estimating the fair value of financial instruments at both March 31, 2020 and December 31, 2019. 
     

36

The following table represents assets and liabilities measured at fair value on a recurring basis at March 31, 2020 (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total assets at
fair value
Debt securities:
 

 
 

 
 

 
 

Government sponsored enterprises
$
—

 
80,169

 
—

 
80,169

States and political subdivisions
—

 
44,697

 
—

 
44,697

Total debt securities
—

 
124,866

 
—

 
124,866

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

GNMA
—

 
23,167

 
—

 
23,167

FNMA
—

 
81,823

 
—

 
81,823

FHLMC
—

 
48,113

 
—

 
48,113

Non-agency
—

 
489

 
—

 
489

Collateralized mortgage obligations:
 

 
 

 
 

 
 

GNMA
—

 
202,997

 
—

 
202,997

FNMA
—

 
175,080

 
—

 
175,080

FHLMC
—

 
109,044

 
—

 
109,044

Total mortgage-backed securities
—

 
640,713

 
—

 
640,713

 
 
 
 
 
 
 
 
Interest rate lock commitments
—

 
—

 
507

 
507

Forward commitments
—

 
197

 
—

 
197

Interest rate swaps
—

 
54,656

 
—

 
54,656

Total assets
$
—

 
820,432

 
507

 
820,939

 
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
55,376

 
—

 
55,376

Risk participation agreements
—

 
120

 
—

 
120

Total liabilities
$
—

 
55,496

 
—

 
55,496


37

The following table represents assets and liabilities measured at fair value on a recurring basis at December 31, 2019 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total assets at
fair value
Debt securities:
 

 
 

 
 

 
 

U.S. government and agencies
$
—

 
14,991

 
—

 
14,991

Government sponsored enterprises
—

 
104,784

 
—

 
104,784

States and political subdivisions
—

 
26,048

 
—

 
26,048

Corporate
—

 
919

 
—

 
919

Total debt securities
—

 
146,742

 
—

 
146,742

 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 

 
 

 
 

 
 

GNMA
—

 
23,264

 
—

 
23,264

FNMA
—

 
89,259

 
—

 
89,259

FHLMC
—

 
50,139

 
—

 
50,139

Non-agency
—

 
497

 
—

 
497

Collateralized mortgage obligations:
 

 
 

 
 

 
 

GNMA
—

 
207,016

 
—

 
207,016

FNMA
—

 
184,682

 
—

 
184,682

FHLMC
—

 
118,302

 
—

 
118,302

Total mortgage-backed securities
—

 
673,159

 
—

 
673,159

 
 
 
 
 
 
 
 
Interest rate lock commitments
—

 
—

 
559

 
559

Forward commitments
—

 
145

 
—

 
145

Interest rate swaps
—

 
20,889

 
—

 
20,889

Total assets
$
—

 
840,935

 
559

 
841,494

 
 
 
 
 
 
 
 
Interest rate swaps
$
—

 
20,952

 
—

 
20,952

Risk participation agreements
—

 
39

 
—

 
39

Total liabilities
$
—

 
20,991

 
—

 
20,991



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 March 31,
 
2020
 
2019
Beginning balance January 1,
$
559

 
—

 
 
 
 
Total gains or losses:
 
 
 
Included in net income
—

 
—

Included in other comprehensive income
—

 
—

 
 
 
 
Purchases
—

 
—

Sales
52

 
—

Transfers from Level 3
—

 
—

Transfers into Level 3
—

 
—

 
 
 
 
Ending balance March 31,
$
507

 
—



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

    

38

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 March 31, 2020 (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total assets at
fair value
Loans individually assessed
$
—

 
—

 
47,240

 
47,240

Real estate owned, net
—

 
—

 
1,075

 
1,075

Total assets
$
—

 
—

 
48,315

 
48,315



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, 2019 (in thousands): 
 
Level 1
 
Level 2
 
Level 3
 
Total assets at
fair value
Loans individually assessed
$
—

 
—

 
46,238

 
46,238

Real estate owned, net
—

 
—

 
950

 
950

Total assets
$
—

 
—

 
47,188

 
47,188



 Individually Assessed Loans - A loan is considered to be individually assessed as described in Note 1 as part of the adoption of ASU 2016-13 . We classify loans individually assessed 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 March 31, 2020 (in thousands): 
 
Fair value
 
Valuation
techniques
 
Significant
unobservable inputs
 
Range 
(weighted average)
Loans individually assessed
$
47,240

 
Appraisal value (1)
 
Estimated cost to sell
 
10.0%
 
 

 
Discounted cash flow
 
Discount rate
 
4.25% to 11.0% (7.50%)
 
 
 
 
 
 
 
 
Real estate owned, net
$
1,075

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

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

Derivatives Designated as Hedging Instruments

During March 2020, the Company entered into four separate pay-fixed interest rate swaps in order to synthetically convert short-term three month FHLB advances to fixed-rate term funding with an aggregate value of $100 million with maturities ranging from three to five years.  Our risk management objective and strategy for these interest rate swaps is to reduce our exposure to variability in interest-related cash outflows attributable to changes in the USD-LIBOR swap rate, or its commercially accepted replacement, the designated benchmark interest rate being hedged.  Based upon our contemporaneous quantitative analysis at the inception of each interest rate swap, we have determined these interest rate swaps qualify for hedge accounting in accordance with ASC 815, Derivatives and Hedging.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.



39

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.

We enter into risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution.

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 March 31, 2020
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap agreements
$
—

 
—

 
100,000

 
558

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swap agreements
446,598

 
54,656

 
446,598

 
54,818

Interest rate lock commitments
80,158

 
507

 
—

 
—

Forward commitments
5,465

 
197

 
—

 
—

Risk participation agreements
—

 
—

 
41,123

 
120

Total Derivatives
$
532,221

 
55,360

 
587,721

 
55,496

 
 
 
 
 
 
 
 
At December 31, 2019
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
   Interest rate swap agreements
$
391,502

 
20,889

 
391,502

 
20,952

   Interest rate lock commitments
24,373

 
559

 
—

 
—

   Forward commitments
5,151

 
145

 
—

 
—

Risk participation agreements
—

 
—

 
41,164

 
39

Total derivatives
$
421,026

 
21,593

 
432,666

 
20,991



    










40

The following table presents income or expense recognized on derivatives for the periods indicated (in thousands):
 
For the quarter ended March 31,
 
2020
 
2019
Hedging derivatives:
 
 
 
Decrease in interest expense
$
(12
)
 
—

 
 
 
 
Non-hedging swap derivatives:
 
 
 
Decrease in other income
(177
)
 
—

Increase in mortgage banking income
1

 
—



The following table presents the key characteristics of the Company's interest rate derivative transactions designated as cash flow hedges of interest rate risk as of March 31, 2020 (in thousands):
 
Notional amount
 
Effective rate
 
Estimated increase/(decrease) to interest expense in the next twelve months
 
Maturity Date
 
Remaining term
(in months)
Interest rate products:
 
 
 
 
 
 
 
 
 
Issued March 16, 2020
$
30,000

 
0.81
 %
 
200

 
3/17/2025
 
60
Issued March 20, 2020
25,000

 
0.15
 %
 
205

 
3/20/2023
 
36
Issued March 20, 2020
25,000

 
0.18
 %
 
197

 
3/20/2024
 
48
Issued March 26, 2020
20,000

 
(0.07
)%
 
166

 
9/26/2024
 
54
Total
$
100,000

 
 
 
768

 
 
 
 


(11)    Legal Proceedings
 
We establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated. As of March 31, 2020, we do not anticipate that the aggregate ultimate liability arising out of any pending or threatened legal proceedings will be material to our Consolidated Financial Statements.  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, in December 2018, a verdict was rendered in favor of NWIS on several of its claims. Post-trial proceedings have continued throughout the current year and, 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 March 31, 2020.


41

(12)    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 March 31, 2020
 
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, 2019
$
3,147

 
—

 
(40,088
)
 
(36,941
)
 
 
 
 
 
 
 
 
Other comprehensive income/(loss) before reclassification adjustments (1) (2)
8,157

 
(409
)
 
—

 
7,748

Amounts reclassified from accumulated other comprehensive income (3), (4)
37

 
—

 
249

 
286

 
 
 
 
 
 
 
 
Net other comprehensive income/(loss)
8,194

 
(409
)
 
249

 
8,034

 
 
 
 
 
 
 
 
Balance as of March 31, 2020
$
11,341

 
(409
)
 
(39,839
)
 
(28,907
)
 
 
For the quarter ended March 31, 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 December 31, 2018
$
(6,832
)
 
—

 
(32,864
)
 
(39,696
)
 
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments (5)
4,452

 
—

 
—

 
4,452

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

 
—

 
209

 
209

 
 
 
 
 
 
 
 
Net other comprehensive income
4,452

 
—

 
209

 
4,661

 
 
 
 
 
 
 
 
Balance as of March 31, 2019
$
(2,380
)
 
—

 
(32,655
)
 
(35,035
)
(1)
Consists of unrealized holding loss, net of tax of $3,277.
(2)
Change in fair value of interest rate swaps, net of tax $(162).
(3)
Consists of realized gain on securities (gain on sales of investments, net) of $(51), net of tax (income tax expense) of $14.
(4)
Consists of amortization of prior service cost (compensation and employee benefits) of $581 and amortization of net actuarial loss (compensation and employee benefits) of $(929), net of tax (income tax expense) of $99.
(5)
Consists of unrealized holding loss, net of tax $1,781.
(6)
There were no realized gains on securities reclassified from accumulated other comprehensive income.
(7)
Consists of amortization of prior service cost (compensation and employee benefits) of $581 and amortization of net actuarial loss (compensation and employee benefits) of $(872), net of tax (income tax expense) of $82. 


42

(13)    Subsequent Events

On April 24, 2020, the Company completed the merger with MutualFirst Financial, Inc. (“MutualFirst Financial”), the holding company for MutualBank for total consideration of $213.4 million. The Company is currently in the process of finalizing the purchase accounting of this transaction.

Under the terms of the Merger Agreement, each share of common stock of MutualFirst Financial converted into the right to receive 2.4 shares of the Company’s common stock or a total of 20,659,087 shares of common stock of the Company valued at $213.4 million, based on the $10.33 per share closing price of the Company's stock on April 24, 2020. Cash was paid in lieu of fractional shares at a rate of $10.71 per whole share of the Company's common stock.

The transaction has resulted in a bank with approximately $12.8 billion in total assets, providing banking services through 214 branch locations and 273 ATMs in four states. The transaction expanded the Company's franchise by 36 full-service offices located in Indiana.



43

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:
 
•
the disruption to local, regional, national and global economic activity caused by infectious disease outbreaks, including the recent outbreak of coronavirus, or COVID-19, and the significant impact that such outbreak has had and may have on our growth, operations and earnings;
•
changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and loan charge-offs generally, and specifically resulting from the economic dislocation caused by the COVID-19 pandemic;
•
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 2019 Annual Report on Form 10-K.

Recently Issued Accounting Standards
    
The following accounting standard updates issued by the Financial Accounting Standards Board have not yet been adopted.

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

44

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 December 2019, the FASB issued ASU 2019-12, "Income Taxes - Simplifying the Accounting for Income Taxes." This guidance simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This guidance is effective for annual periods beginning after December 15, 2020, including interim periods within those years, with early adoption permitted. We do not expect this guidance to have a material impact on our financial statements.

In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides temporary optional guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The guidance provides expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily includes contract modifications and hedge accounting, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective March 12, 2020 through December 31, 2022. We are currently in the process of evaluating the amendments and determining the impact on our financial statements.
 
Comparison of Financial Condition

Total assets at March 31, 2020 were $10.681 billion, an increase of $187.3 million, or 1.8%, from $10.494 billion at December 31, 2019.  This increase in assets was largely due to a $160.5 million increase in cash and marketable securities. This increase was funded by a $200.7 million, or 2.3%, increase in deposits.
 
Total loans receivable increased by $28.2 million, or 0.3%, to $8.837 billion at March 31, 2020, from $8.809 billion at December 31, 2019. This increase was attributed to an increase in our vehicle loan portfolio by $75.6 million, or 8.8%, to $936.8 million as of March 31, 2020 from $861.2 million as of December 31, 2019. Partially offsetting this increase was a decrease in our held for investment mortgage loan portfolio of $28.6 million, or 1.0%, to $2.832 billion at March 31, 2020 from $2.860 billion at December 31, 2019 primarily due to the sale of $49.5 million of one- to four-family mortgage loans from our portfolio.

     Total deposits increased by $200.7 million, or 2.3%, to $8.793 billion at March 31, 2020 from $8.592 billion at December 31, 2019 with increases across all deposit products except for time deposits. Noninterest-bearing demand deposits increased by $127.0 million, or 7.9%, to $1.737 billion at March 31, 2020 from $1.610 billion at December 31, 2019. Money market deposits also increased $82.1 million, or 4.4%, to $1.946 billion at March 31, 2020 from $1.864 billion at December 31, 2019. These increases are due primarily to a reduction in consumer spending and an increase in consumer savings.
    
Total shareholders’ equity at March 31, 2020 was $1.342 billion, or $12.55 per share, a decrease of $11.5 million, or 0.8%, from $1.353 billion, or $12.66 per share, at December 31, 2019.  This decrease was primarily the result of cash dividends paid of $20.3 million, partially offset by net income of $7.9 million.

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.

Applicable rules limit 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.


45

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 requirements are presented in the tables below (in thousands).
 
At March 31, 2020
 
 
 
 
 
Minimum capital
 
Well capitalized
 
Actual
 
requirements (1)
 
requirements
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Total capital (to risk weighted assets)
 

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
$
1,319,243

 
15.733
%
 
$
880,473

 
10.500
%
 
$
838,545

 
10.000
%
Northwest Bank
1,184,900

 
14.144
%
 
879,618

 
10.500
%
 
837,732

 
10.000
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to risk weighted assets)
 
 
 
 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,234,166

 
14.718
%
 
712,764

 
8.500
%
 
670,836

 
8.000
%
Northwest Bank
1,099,823

 
13.129
%
 
712,072

 
8.500
%
 
670,185

 
8.000
%
 
 
 
 
 
 
 
 
 
 
 
 
CET1 capital (to risk weighted assets)
 
 
 
 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,116,032

 
13.309
%
 
586,982

 
7.000
%
 
545,055

 
6.500
%
Northwest Bank
1,099,823

 
13.129
%
 
586,412

 
7.000
%
 
544,525

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

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,234,166

 
11.699
%
 
421,967

 
4.000
%
 
527,459

 
5.000
%
Northwest Bank
1,099,823

 
10.575
%
 
416,016

 
4.000
%
 
520,020

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

 
 

 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
$
1,300,321

 
15.701
%
 
$
869,585

 
10.500
%
 
$
828,176

 
10.000
%
Northwest Bank
1,146,641

 
13.858
%
 
868,768

 
10.500
%
 
827,398

 
10.000
%
 
 
 
 
 
 
 
 
 
 
 
 
Tier I capital (to risk weighted assets)
 
 
 
 
 

 
 

 
 

 
 

Northwest Bancshares, Inc.
1,242,380

 
15.001
%
 
703,950

 
8.500
%
 
662,541

 
8.000
%
Northwest Bank
1,087,727

 
13.146
%
 
703,288

 
8.500
%
 
661,918

 
8.000
%
 
 
 
 
 
 
 
 
 
 
 
 
CET1 capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Northwest Bancshares, Inc.
1,124,259

 
13.575
%
 
579,723

 
7.000
%
 
538,314

 
6.500
%
Northwest Bank
1,087,727

 
13.146
%
 
879,178

 
7.000
%
 
537,809

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

 
 
 
 
 
 
 
 
 
 
Northwest Bancshares, Inc.
1,242,380

 
11.913
%
 
417,143

 
4.000
%
 
521,428

 
5.000
%
Northwest Bank
1,087,727

 
10.515
%
 
413,772

 
4.000
%
 
517,216

 
5.000
%
(1) Amounts and ratios include the capital conservation buffer of 2.5%, which does not apply to Tier 1 capital to average assets (leverage ratio).


46

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 March 31, 2020 was 10.4%. We adjust liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes and insurance on mortgage loan escrow accounts, repayment of borrowings and loan commitments. At March 31, 2020, Northwest had $3.277 billion of additional borrowing capacity available with the FHLB, including $250.0 million on an overnight line of credit, as well as $36.6 million of borrowing capacity available with the Federal Reserve Bank and $110.0 million with three correspondent banks.
 
Dividends
 
We paid $20.3 million and $18.6 million in cash dividends during the quarters ended March 31, 2020 and 2019, respectively.  The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 271.4% and 75.0% for the quarters ended March 31, 2020 and 2019, respectively, on dividends of $0.19 per share for the quarter ended March 31, 2020 and on dividends of $0.18 per share for the quarter ended March 31, 2019. On April 22, 2020, the Board of Directors declared a cash dividend of $0.19 per share payable on May 15, 2020 to shareholders of record as of May 7, 2020. This represents the 102nd 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.
 
March 31, 2020
 
December 31, 2019
 
(in thousands)
Loans 90 days or more delinquent
 

 
 

Residential mortgage loans
$
10,457

 
12,775

Home equity loans
5,816

 
5,688

Consumer loans
3,459

 
3,611

Commercial real estate loans
25,342

 
25,014

Commercial loans
16,685

 
4,739

Total loans 90 days or more delinquent
$
61,759

 
51,827

Total real estate owned, net (REO)
$
1,075

 
950

Total loans 90 days or more delinquent and REO
62,834

 
52,777

Total loans 90 days or more delinquent to net loans receivable
0.71
%
 
0.59
%
Total loans 90 days or delinquent and REO to total assets
0.59
%
 
0.50
%
Nonperforming loans:
 
 
 
Nonaccrual loans - loans 90 days or more delinquent
61,759

 
51,680

Nonaccrual loans - loans less than 90 days delinquent
23,672

 
17,190

Loans 90 days or more past maturity and still accruing
31

 
32

Total nonperforming loans
85,462

 
68,902

Total nonperforming assets
$
86,537

 
69,852

Nonaccrual TDR loans (1)
$
17,375

 
9,043

Accruing TDR loans
15,977

 
22,956

Total TDR loans
$
33,352

 
31,999

(1)
Included in nonaccurual loans above.
 
    


 

47

Allowance for Credit Losses
 
We adopted CECL on January 1, 2020, a further described in Note 1. 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” have all the weakness inherent in those classified as "doubtful" and considered uncollectible.
 
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 to determine if they no longer continue to demonstrate similar risk characteristics to their loan pool. If a loan no longer demonstrates similar risk characteristics to their loan pool they are removed from the pool and an individual assessment will be performed.
 
If it is determined that a loan needs to be individually assessed, the Credit Administration department determines the proper measure of fair value 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 fair value of the loan is more or less than the amortized cost basis of 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.  For the purpose of calculating reserves, we have grouped our loans into seven segments: residential mortgage loans, home equity loans, vehicle loans, consumer loans, commercial real estate loans, commercial real estate loans - owner occupied and commercial loans. The allowance for credit losses is measured using a combination of statistical models. We use a twenty four month forecasting period and revert to historical average loss rates thereafter. Reversion to the mean takes place over twelve months. Historical average loss rates are calculated using historical data beginning in October 2009 through the current period.

The the credit losses for individually assessed loans 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.
 
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.
 

48

We utilize a structured methodology each period when analyzing the adequacy of the allowance for credit losses and the related provision for credit losses, which the ALL Committee assesses regularly for appropriateness.  As part of the analysis as of March 31, 2020, we considered the most recent economic conditions and forecasts available which incorporated the impact of COVID-19. In addition, we considered the overall trends in asset quality, reserves on individually assessed loans, historical loss rates and collateral valuations. The ALL increased by $35.0 million, or 60.3%, to $92.9 million, or 1.05% of total loans at March 31, 2020 from $57.9 million, or 0.66% of total loans, at December 31, 2019. Due to the adoption of CECL, our allowance increased $10.8 million. In addition, the estimated economic impact of COVID-19 caused us to increase our provision for loan loss expense by approximately $23 million. Loans classified as substandard decreased $382,000 to $214.1 million at March 31, 2020 from $214.5 million at December 31, 2019. Loans classified as special mention decreased $5.9 million to $117.0 million at March 31, 2020 from $124.6 million at December 31, 2019.
 
We also consider how the levels of non-accrual loans and historical charge-offs have influenced the required amount of allowance for credit losses. Nonaccrual loans of $85.4 million, or 0.97% of total loans receivable at March 31, 2020, increased by $16.6 million, or 24.0%, from $68.9 million, or 0.78% of total loans receivable, at December 31, 2019. As a percentage of average loans, annualized net charge-offs decreased to 0.16% for the three months ended March 31, 2020 compared to 0.23% for the year ended December 31, 2019.

Comparison of Operating Results for the Quarters Ended March 31, 2020 and 2019
 
Net income for the quarter ended March 31, 2020 was $7.9 million, or $0.07 per diluted share, a decrease of $17.1 million, or 68.3%, from net income of $25.0 million, or $0.24 per diluted share, for the quarter ended March 31, 2019. The decrease in net income resulted from an increase in the provision for credit losses of $21.2 million, or 327.4%, an increase in noninterest expense of $7.2 million, or 10.1%, and a decrease in net interest income of $754,000, or 0.9%. Partially offsetting these decreases was an increase in noninterest income of $6.3 million, or 29.1% and a decrease in income tax expense of $5.7 million, or 84.8%. Net income for the quarter ended March 31, 2020 represents annualized returns on average equity and average assets of 2.37% and 0.30%, respectively, compared to 7.96% and 1.03% for the same quarter last year. A further discussion of notable changes follows.

Interest Income
 
Total interest income remained relatively flat, increasing by $89,000, or 0.1%, to $100.4 million for the quarter ended March 31, 2020 from $100.3 million for the quarter ended March 31, 2019. The average balance of interest-earning assets increased by $618.6 million, or 6.9%, to $9.637 billion for the quarter ended March 31, 2020 from $9.019 billion for the quarter ended March 31, 2019 due primarily to internal loan growth as well as the acquisition of UCB in March 2019. Offsetting this increase was a decrease in the average yield earned on interest earning assets to 4.19% for the quarter ended March 31, 2020 from 4.51% for the quarter ended March 31, 2019 due to decreases in market interest rates over the past year.

Interest income on loans receivable remained relatively flat at $95.0 million for the quarter ended March 31, 2020 compared to $94.9 million for the quarter ended March 31, 2019. The average balance increased by $617.4 million, or 7.6%, to $8.774 billion for the quarter ended March 31, 2020 from $8.157 billion for the quarter ended March 31, 2019 while the average yield on loans receivable decreased to 4.35% for the quarter ended March 31, 2020 from 4.72% for the quarter ended March 31, 2019, again due to the decrease in market interest rates.

Interest income on mortgage-backed securities increased by $210,000, or 5.3%, to $4.2 million for the quarter ended March 31, 2020 from $4.0 million for the quarter ended March 31, 2019. This increase is attributed to an increase in the average balance of mortgage-backed securities of $64.0 million, or 10.6%, to $668.5 million for the quarter ended March 31, 2020 from $604.5 million for the quarter ended March 31, 2019. This increase was primarily a result of investment securities received as part of the UCB acquisition. The average yield on mortgage-backed securities decreased to 2.50% for the quarter ended March 31, 2020 from 2.62% for the quarter ended March 31, 2019.

Interest income on investment securities decreased by $285,000, or 25.5%, to $833,000 for the quarter ended March 31, 2020 from $1.1 million for the quarter ended March 31, 2019. This decrease is attributed to a decrease in the average balance of investment securities of $83.2 million, or 36.6% to $144.2 million for the quarter ended March 31, 2020 from $227.3 million for the quarter ended March 31, 2019 primarily due to the maturity or call of government agency securities. Partially offsetting this decrease was an increase in the average yield on investment securities which increased to 2.31% for the quarter ended March 31, 2020 from 1.97% for the quarter ended March 31, 2019 due to the addition of higher yielding investments, primarily from the UCB acquisition.

Dividends on FHLB stock increased by $91,000, or 53.2%, to $262,000 for the quarter ended March 31, 2020 from $171,000 for the quarter ended March 31, 2019. This increase is attributable to increases in the average yield on FHLB stock. The average yield increased to 6.61% for the quarter ended March 31, 2020 from 4.31% for the quarter ended March 31, 2019, as the FHLB of Pittsburgh recently increased yields on required stock purchases for active members. Slightly offsetting this increase was a decrease in the average balance by $167,000, or 1.0%, to $15.9 million for the quarter ended March 31, 2020 from $16.1 million for the quarter ended March 31,

49

2019. 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 $35,000, or 35.0%, to $135,000 for the quarter ended March 31, 2020 from $100,000 for the quarter ended March 31, 2019. The average balance of interest-earning deposits increased by $20.6 million, or 145.5%, to $34.7 million for the quarter ended March 31, 2020 from $14.1 million for the quarter ended March 31, 2019, which was offset by the decrease in the average yield on interest-earning deposits to 1.54% for the quarter ended March 31, 2020 from 2.83% for the quarter ended March 31, 2019 as the Federal Reserve decreased their targeted federal funds rate.

Interest Expense
 
Interest expense increased by $843,000, or 6.8%, to $13.2 million for the quarter ended March 31, 2020 from $12.3 million for the quarter ended March 31, 2019.  This increase in interest expense was primarily due to an increase in the average balance of interest-bearing liabilities by $736.6 million, or 11.2%, to $7.339 billion for the quarter ended March 31, 2020 from $6.602 billion for the quarter ended March 31, 2019. This increase in average balance resulted from both internal deposit growth as well as the addition of $479.4 million of deposits acquired through the UCB merger in March of 2019. The average cost of interest-bearing liabilities decreased to 0.72% for the quarter ended March 31, 2020 from 0.76% for the quarter ended March 31, 2019 as the Federal Reserve slashed their targeted Fed Funds rate in March of 2020.
 
Net Interest Income
 
Net interest income decreased by $754,000, or 0.9%, to $87.2 million for the quarter ended March 31, 2020 from $88.0 million for the quarter ended March 31, 2019.  This decrease is attributable to the factors discussed above. Our interest rate spread decreased to 3.47% for the quarter ended March 31, 2020 from 3.75% for the quarter ended March 31, 2019 and our net interest margin decreased to 3.64% for the quarter ended March 31, 2020 from 3.96% for the quarter ended March 31, 2019.

Provision for Credit Losses

The provision for credit losses increased by $21.2 million, or 327.4%, to $27.6 million for the quarter ended March 31, 2020 from $6.5 million for the quarter ended March 31, 2019. This increase was largely driven by the estimated economic impact of COVID-19 of approximately $23 million. This increase was partially offset by the effects of a decrease in annualized net charge-offs to average loans to 0.16% for the quarter ended March 31, 2020 from 0.29% for the quarter ended March 31, 2019.
     
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 credit losses as described in the section entitled “Allowance for Credit Losses.”  The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period and historical loss experience at March 31, 2020.
 
Noninterest Income
 
Noninterest income increased by $6.3 million, or 29.1%, to $28.0 million for the quarter ended March 31, 2020 from $21.7 million for the quarter ended March 31, 2019. This increase was primarily due to a $3.1 million, or 25.5% increase in service charges and fees as a result of a change in fee structure initiated in the fourth quarter of 2019. We also recognized a gain of $1.3 million in the current quarter on the sale of approximately $49.5 million of one- to four-family mortgage loans from our portfolio. Also contributing to this increase was a $1.0 million increase in mortgage banking income due to continued efforts to expand our secondary market sales capabilities. In addition, trust and other financial services income increased by $806,000, or 19.2% due to new brokerage production.
 
Noninterest Expense
 
Noninterest expense increased by $7.2 million, or 10.1%, to $78.6 million for the quarter ended March 31, 2020 from $71.4 million for the quarter ended March 31, 2019.  This increase resulted primarily from a $4.6 million, or 11.9%, increase in compensation and employee benefits due to both internal growth in compensation and staff as well as the addition of UCB in March of 2019. In addition, processing expenses increased by $708,000, or 6.8%, 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 $706,000 due to the usage of the remaining assessment credit received during the quarter as a result of the deposit insurance fund becoming fully funded.


50

Income Taxes
 
The provision for income taxes decreased by $5.7 million, or 84.8%, to $1.0 million for the quarter ended March 31, 2020 from $6.7 million for the quarter ended March 31, 2019. This decrease was primarily due to a decrease of $22.8 million, or 71.8%, in income before taxes. In addition, due to the expansion of net operating loss carryback capabilities as a result of the Coronavirus Aid, Relief and Economic Security (CARES) Act, a $764,000 benefit was recognized in order to increase the deferred tax asset associated with carrying back losses acquired through prior mergers to years with higher statutory income tax rates. We anticipate our effective tax rate to be between 21.0% and 23.0% for the year ending December 31, 2020.

51

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 March 31,
 
2020
 
2019
 
Average
balance
 
Interest
 
Avg.
yield/
cost (g)
 
Average
balance
 
Interest
 
Avg.
yield/
cost (g)
Assets
 

 
 

 
 

 
 

 
 

 
 

Interest-earning assets:
 

 
 

 
 

 
 
 
 

 
 

Residential mortgage loans
$
2,845,483

 
28,062

 
3.94
%
 
$
2,842,556

 
29,282

 
4.12
%
Home equity loans
1,345,059

 
14,801

 
4.43
%
 
1,265,974

 
16,048

 
5.14
%
Consumer loans
1,123,336

 
12,160

 
4.35
%
 
872,535

 
10,191

 
4.74
%
Commercial real estate loans
2,747,419

 
31,437

 
4.53
%
 
2,560,408

 
30,767

 
4.81
%
Commercial loans
712,621

 
8,856

 
4.92
%
 
615,090

 
8,967

 
5.83
%
Loans receivable (a) (b) (d) (includes FTE adjustments of $343 and $320, respectively)
8,773,918

 
95,316

 
4.37
%
 
8,156,563

 
95,255

 
4.74
%
Mortgage-backed securities (c)
668,470

 
4,175

 
2.50
%
 
604,463

 
3,965

 
2.62
%
Investment securities (c) (d) (includes FTE adjustments of $48 and $49, respectively)
144,152

 
881

 
2.44
%
 
227,312

 
1,167

 
2.05
%
FHLB stock, at cost
15,931

 
262

 
6.61
%
 
16,098

 
171

 
4.31
%
Other interest-earning deposits
34,697

 
135

 
1.54
%
 
14,136

 
100

 
2.83
%
Total interest-earning assets (includes FTE adjustments of $391 and $369, respectively)
9,637,168

 
100,769

 
4.21
%
 
9,018,572

 
100,658

 
4.53
%
Noninterest earning assets (e)
960,303

 
 
 
 
 
868,843

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
10,597,471

 
 

 
 

 
$
9,887,415

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and shareholders’ equity
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing liabilities:
 

 
 

 
 

 
 

 
 

 
 

Savings deposits
$
1,611,111

 
727

 
0.18
%
 
$
1,650,947

 
758

 
0.19
%
Interest-bearing demand deposits
1,915,871

 
1,307

 
0.27
%
 
1,452,963

 
1,162

 
0.32
%
Money market deposit accounts
1,921,243

 
3,088

 
0.65
%
 
1,693,626

 
2,579

 
0.62
%
Time deposits
1,528,891

 
6,281

 
1.65
%
 
1,432,679

 
5,646

 
1.60
%
Borrowed funds (f)
240,118

 
709

 
1.19
%
 
257,550

 
1,006

 
1.58
%
Junior subordinated debentures
121,809

 
1,038

 
3.37
%
 
114,727

 
1,156

 
4.03
%
Total interest-bearing liabilities
7,339,043

 
13,150

 
0.72
%
 
6,602,492

 
12,307

 
0.76
%
Noninterest-bearing demand deposits (g)
1,640,180

 
 
 
 
 
1,785,158

 
 
 
 
Noninterest-bearing liabilities
268,139

 
 
 
 
 
223,480

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
9,247,362

 
 

 
 

 
8,611,130

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
1,350,109

 
 
 
 
 
1,276,285

 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders’ equity
$
10,597,471

 
 

 
 

 
$
9,887,415

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
Net interest income/Interest rate spread
 

 
87,619

 
3.48
%
 
 

 
88,351

 
3.77
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest-earning assets/Net interest margin
$
2,298,125

 
 

 
3.66
%
 
$
2,416,080

 
 

 
3.97
%
 
 
 
 
 
 
 
 
 
 
 
 
Ratio of interest-earning assets to interest-bearing liabilities
1.31X

 
 

 
 

 
1.37X

 
 

 
 

(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 0.53% and 0.51%, 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 — 4.35% and 4.72%, respectively; investment securities — 2.31% and 1.97%, respectively; interest-earning assets — 4.19% and 4.51%, respectively. GAAP basis net interest rate spreads were 3.47% and 3.75%, respectively; and GAAP basis net interest margins were 3.64% and 3.96%, respectively.


52

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 March 31, 2020 vs. 2019
 
Increase/(decrease) due to
 
Total increase/(decrease)
 
Rate
 
Volume
 
Interest-earning assets:
 

 
 

 
 

Loans receivable
$
(7,441
)
 
7,502

 
61

Mortgage-backed securities
(190
)
 
400

 
210

Investment securities
222

 
(508
)
 
(286
)
FHLB stock, at cost
93

 
(2
)
 
91

Other interest-earning deposits
(46
)
 
81

 
35

Total interest-earning assets
(7,362
)
 
7,473

 
111

 
 
 
 
 
 
Interest-bearing liabilities:
 

 
 

 
 

Savings deposits
(19
)
 
(12
)
 
(31
)
Interest-bearing demand deposits
(181
)
 
326

 
145

Money market deposit accounts
122

 
387

 
509

Time deposits
193

 
442

 
635

Borrowed funds
(254
)
 
(42
)
 
(296
)
Junior subordinated debentures
(191
)
 
73

 
(118
)
Total interest-bearing liabilities
(330
)
 
1,174

 
844

 
 
 
 
 
 
Net change in net interest income
$
(7,032
)
 
6,299

 
(733
)

53

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 March 31, 2020 remain constant. The impact of the rate movements was computed by simulating the effect of an immediate and sustained shift in interest rates over a twelve-month period from March 31, 2020 levels.
 
 
Increase
 
Decrease
Parallel shift in interest rates over the next 12 months
 
100 bps
 
200 bps
 
300 bps
 
100 bps
Projected percentage increase/(decrease) in net interest income
 
0.5
 %
 
0.6
 %
 
0.6
 %
 
(3.8
)%
Projected percentage increase/(decrease) in net income
 
1.6
 %
 
2.0
 %
 
2.3
 %
 
(10.6
)%
Projected increase/(decrease) in return on average equity
 
1.6
 %
 
2.0
 %
 
2.3
 %
 
(10.2
)%
Projected increase/(decrease) in earnings per share
 
$
0.02

 
$
0.02

 
$
0.02

 
$
(0.09
)
Projected percentage decrease in market value of equity
 
(1.3
)%
 
(4.0
)%
 
(7.0
)%
 
(7.1
)%
 
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.


54

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.
 
Effective January 1, 2020, the Company adopted CECL. The Company designed new controls and modified existing controls as part of this adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2020 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.             OTHER INFORMATION
 
Item 1.        LEGAL PROCEEDINGS
 
We are subject to a number of asserted and unasserted claims encountered in the normal course of business.  We believe that any additional liability, other than that which has already been accrued, that may result from such potential litigation will not have a material adverse effect on the financial statements.  However, we cannot presently determine whether or not any claims against us will have a material adverse effect on our results of operations in any future reporting period. Refer to note 11.
 
Item 1A.    RISK FACTORS

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the SEC. 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. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations.

In December 2019, a coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, millions of individuals have filed claims for unemployment, and stock markets have declined in value and in particular, bank stocks have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the  COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

•
demand for our products and services may decline, making it difficult to grow assets and income;
•
if the economy is unable to substantially reopen and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

55

•
collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
•
our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
•
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
•
as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;
•
a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend,
•
our wealth management revenues may decline with continuing market turmoil;
•
our cyber security risks are increased as the result of an increase in the number of employees working remotely;
•
we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and
•
Federal Deposit Insurance Corporation premiums may increase if the agency experience additional resolution costs;

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

Item 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

a)      Not applicable.
 
b)       Not applicable.

c)    The following table discloses information regarding the repurchase of shares of common stock during the quarter ending March 31, 2020: 
Month
 
Number 
of shares
purchased
 
Average 
price paid
per share
 
Total number of shares
purchased as part of a
publicly announced
repurchase plan (1)
 
Maximum number
of shares yet to be
purchased under
the plan (1)
January
 
—

 
$
—

 
—

 
4,834,089

February
 
—

 
—

 
—

 
4,834,089

March
 
—

 
—

 
—

 
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.
 

56

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.

57

Signature
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.
 
NORTHWEST BANCSHARES, INC.
(Registrant)
 
 
 
 
 
 
Date:
May 11, 2020
By:
/s/ Ronald J. Seiffert
 
 
Ronald J. Seiffert
 
 
Chairman, President and Chief Executive Officer
 
 
(Duly Authorized Officer)
 
 
 
 
 
 
Date:
May 11, 2020
By:
/s/ Jeffrey R. White
 
 
 
Jeffrey R. White
 
 
Controller
 
 
(Principal Accounting Officer)
 
 
 


58

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