Northwest Bancshares, Inc. - Quarter Report: 2017 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2017

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 001-34582

NORTHWEST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



Maryland		27-0950358
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 Liberty Street, Warren, Pennsylvania		16365
(Address of principal executive offices)		(Zip Code)

(814) 726-2140

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

x Large accelerated filer o Accelerated filer

o Non-accelerated filer (Do not check if a smaller reporting company) o Smaller reporting company

o Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a Shell Company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock ($0.01 par value) 102,620,425 shares outstanding as of October 31, 2017

Table of Contents

NORTHWEST BANCSHARES, INC.

INDEX



		PAGE
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Financial Condition as of September 30, 2017 and December 31, 2016 (Unaudited)	1

	Consolidated Statements of Income for the quarter and nine months ended September 30, 2017 and 2016 (Unaudited)	2

	Consolidated Statements of Comprehensive Income for the quarter and nine months ended September 30, 2017 and 2016 (Unaudited)	3

	Consolidated Statements of Changes in Shareholders’ Equity for the quarter ended September 30, 2017 and 2016 (Unaudited)	4

	Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2017 and 2016 (Unaudited)	5

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (Unaudited)	6

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61

Item 4.	Controls and Procedures	63

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	63

Item 1A.	Risk Factors	63

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3.	Defaults Upon Senior Securities	64

Item 4.	Mine Safety Disclosures	64

Item 5.	Other information	64

Item 6.	Exhibits	64

	Signature	65

	Certifications

Table of Contents

ITEM 1. FINANCIAL STATEMENTS

NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(in thousands, except share data)



	September 30, 2017			December 31, 2016
Assets
Cash and due from banks	$	104,372		119,403
Interest-earning deposits in other financial institutions	60,662			266,902
Federal funds sold and other short-term investments	642			3,562
Marketable securities available-for-sale (amortized cost of $867,311 and $825,552)	869,481			826,200
Marketable securities held-to-maturity (fair value of $32,282 and $20,426)	31,961			19,978
Total cash and investments	1,067,118			1,236,045

Personal Banking loans:
Residential mortgage loans held-for-sale	1,382			9,625
Residential mortgage loans	2,741,844			2,688,541
Home equity loans	1,313,435			1,345,370
Consumer loans	673,920			642,961
Total Personal Banking loans	4,730,581			4,686,497
Commercial Banking loans:
Commercial real estate loans	2,398,886			2,342,089
Commercial loans	596,671			528,761
Total Commercial Banking loans	2,995,557			2,870,850
Total loans	7,726,138			7,557,347
Allowance for loan losses	(56,927		)	(60,939	)
Total loans, net	7,669,211			7,496,408

Assets held-for-sale	—			152,528
Federal Home Loan Bank stock, at cost	7,984			7,390
Accrued interest receivable	22,802			21,699
Real estate owned, net	5,462			4,889
Premises and equipment, net	152,761			161,185
Bank owned life insurance	173,096			171,449
Goodwill	307,420			307,420
Other intangible assets	27,244			32,433
Other assets	26,716			32,194
Total assets	$	9,459,814		9,623,640

Liabilities and Shareholders’ Equity
Liabilities:
Noninterest-bearing checking deposits	$	1,625,189		1,448,972
Interest-bearing checking deposits	1,451,818			1,428,317
Money market deposit accounts	1,759,395			1,841,567
Savings deposits	1,669,782			1,622,879
Time deposits	1,435,861			1,540,586
Total deposits	7,942,045			7,882,321

Liabilities held-for-sale	—			215,657
Borrowed funds	115,388			142,899
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities	111,213			111,213
Advances by borrowers for taxes and insurance	21,864			36,879
Accrued interest payable	518			635
Other liabilities	62,939			63,373
Total liabilities	8,253,967			8,452,977

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, 102,565,667 and 101,699,406 shares issued, respectively	1,026			1,017
Paid-in capital	728,163			718,834
Retained earnings	502,265			478,803
Accumulated other comprehensive loss	(25,607		)	(27,991	)
Total shareholders’ equity	1,205,847			1,170,663
Total liabilities and shareholders’ equity	$	9,459,814		9,623,640

See accompanying notes to unaudited consolidated financial statements

Table of Contents

NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)



	Quarter ended September 30,					Nine months ended September 30,
	2017			2016		2017		2016
Interest income:
Loans receivable	$	85,373		81,083		252,838		243,370
Mortgage-backed securities	3,118			2,030		8,327		6,374
Taxable investment securities	957			627		2,944		2,421
Tax-free investment securities	476			676		1,574		2,107
FHLB dividends	63			218		172		1,086
Interest-earning deposits	244			114		1,440		243
Total interest income	90,231			84,748		267,295		255,601
Interest expense:
Deposits	5,795			5,653		17,086		17,606
Borrowed funds	1,199			1,801		3,664		13,602
Total interest expense	6,994			7,454		20,750		31,208
Net interest income	83,237			77,294		246,545		224,393
Provision for loan losses	3,027			5,538		13,226		11,397
Net interest income after provision for loan losses	80,210			71,756		233,319		212,996
Noninterest income:
Gain on sale of investments	1,497			58		1,517		412
Service charges and fees	12,724			11,012		37,190		31,707
Trust and other financial services income	4,793			3,434		13,697		9,972
Insurance commission income	1,992			2,541		7,139		8,023
Gain/ (loss) on real estate owned, net	(193		)	(563	)	(490	)	(203	)
Income from bank owned life insurance	1,078			1,380		3,798		4,080
Mortgage banking income	519			1,886		1,193		2,550
Gain on sale of offices	—			—		17,186		—
Other operating income	2,184			1,070		6,345		4,000
Total noninterest income	24,594			20,818		87,575		60,541
Noninterest expense:
Compensation and employee benefits	36,039			38,122		111,452		104,365
Premises and occupancy costs	6,951			6,094		21,570		18,906
Office operations	3,939			3,700		12,331		10,503
Collections expense	568			589		1,670		1,994
Processing expenses	9,650			8,844		29,198		25,430
Marketing expenses	2,488			2,239		7,482		6,671
Federal deposit insurance premiums	771			984		2,794		3,929
Professional services	2,321			1,815		7,348		5,777
Amortization of intangible assets	1,691			1,068		5,189		2,453
Real estate owned expense	310			206		809		812
Restructuring/ acquisition expense	1,398			7,183		4,255		11,204
FHLB prepayment penalty	—			—		—		36,978
Other expenses	2,673			2,836		9,609		10,055
Total noninterest expense	68,799			73,680		213,707		239,077
Income before income taxes	36,005			18,894		107,187		34,460
Federal and state income taxes expense	12,414			4,697		34,868		9,287
Net income	$	23,591		14,197		72,319		25,173
Basic earnings per share	$	0.23		0.14		0.72		0.25
Diluted earnings per share	$	0.23		0.14		0.71		0.25

See accompanying notes to unaudited consolidated financial statements

Table of Contents

NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands)



	Quarter ended September 30,					Nine months ended September 30,
	2017			2016		2017		2016
Net income	$	23,591		14,197		72,319		25,173
Other comprehensive income net of tax:
Net unrealized holding gains/ (losses) on marketable securities:
Unrealized holding gains/ (losses) net of tax of $164, $503, $(995), and $(2,377), respectively	(264		)	(785	)	1,684		3,717
Reclassification adjustment for (gains)/ losses included in net income, net of tax of $369, $23, $416, and $(1), respectively	(674		)	(36	)	(741	)	3
Net unrealized holding gains/ (losses) on marketable securities	(938		)	(821	)	943		3,720

Change in fair value of interest rate swaps, net of tax of $(138), $(253), $(419), and $(267), respectively	258			471		779		497

Defined benefit plan:
Reclassification adjustment for prior period service costs included in net income, net of tax of $(153), $(144), $(460), and $(432), respectively	221			224		662		675

Other comprehensive income/(loss)	(459		)	(126	)	2,384		4,892

Total comprehensive income	$	23,132		14,071		74,703		30,065

See accompanying notes to unaudited consolidated financial statements

Table of Contents

NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(dollars in thousands, expect share data)

Quarter ended September 30, 2016



										Accumulated Other		Unallocated		Total
	Common Stock					Paid-in		Retained		Comprehensive		common stock		Shareholders’
	Shares		Amount			Capital		Earnings		Income/ (Loss)		of ESOP		Equity
Balance at June 30, 2016	102,472,947		$	1,025		722,980		470,337		(19,517	)	(19,370	)	1,155,455

Comprehensive income:
Net income	—		—			—		14,197		—		—		14,197

Other comprehensive loss, net of tax of $129	—		—			—		—		(126	)	—		(126	)

Total comprehensive income/(loss)	—		—			—		14,197		(126	)	—		14,071

ESOP loan payoff	(1,366,574	)	(14		)	(13,896	)	—		—		13,910		—

Exercise of stock options	162,275		2			1,821		—		—		—		1,823

Stock-based compensation expense, including tax benefit of $81	—		—			1,069		—		—		5,460		6,529

Dividends paid ($0.15 per share)	—		—			—		(15,075	)	—		—		(15,075	)

Balance at September 30, 2016	101,268,648		$	1,013		711,974		469,459		(19,643	)	—		1,162,803

Quarter ended September 30, 2017



							Accumulated Other		Total
	Common Stock			Paid-in	Retained		Comprehensive		Shareholders’
	Shares	Amount		Capital	Earnings		Income/ (Loss)		Equity
Balance at June 30, 2017	102,478,146	$	1,025	726,036	495,017		(25,148	)	1,196,930

Comprehensive income:
Net income	—	—		—	23,591		—		23,591

Other comprehensive loss, net of tax of $242	—	—		—	—		(459	)	(459	)

Total comprehensive income/ (loss)	—	—		—	23,591		(459	)	23,132

Exercise of stock options	87,521	1		1,033	—		—		1,034

Stock-based compensation expense	—	—		1,094	—		—		1,094

Dividends paid ($0.16 per share)	—	—		—	(16,343	)	—		(16,343	)

Balance at September 30, 2017	102,565,667	$	1,026	728,163	502,265		(25,607	)	1,205,847

See accompanying notes to unaudited consolidated financial statements

Table of Contents

NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(dollars in thousands, expect share data)

Nine Months Ended September 30, 2016



										Accumulated Other		Unallocated		Total
	Common Stock					Paid-in		Retained		Comprehensive		common stock		Shareholders’
	Shares		Amount			Capital		Earnings		Income/ (Loss)		of ESOP		Equity
Beginning balance at December 31, 2015	101,871,737		$	1,019		717,603		489,292		(24,535	)	(20,216	)	1,163,163

Comprehensive income:
Net income	—		—			—		25,173		—		—		25,173

Other comprehensive income, net of tax of $(3,077)	—		—			—		—		4,892		—		4,892

Total comprehensive income	—		—			—		25,173		4,892		—		30,065

ESOP loan payoff	(1,366,574	)	(14		)	(13,896	)	—		—		13,910		—

Exercise of stock options	585,668		7			6,399		—		—		—		6,406

Stock-based compensation expense, including tax benefit of $287	323,717		3			3,618		—		—		6,306		9,927

Share repurchases	(145,900	)	(2		)	(1,750	)	—		—		—		(1,752	)

Dividends paid ($0.45 per share)	—		—			—		(45,006	)	—		—		(45,006	)

Ending balance at September 30, 2016	101,268,648		$	1,013		711,974		469,459		(19,643	)	—		1,162,803

Nine Months Ended September 30, 2017



							Accumulated Other		Total
	Common Stock			Paid-in	Retained		Comprehensive		Shareholders’
	Shares	Amount		Capital	Earnings		Income/ (Loss)		Equity
Beginning balance at December 31, 2016	101,699,406	$	1,017	718,834	478,803		(27,991	)	1,170,663

Comprehensive income:
Net income	—	—		—	72,319		—		72,319

Other comprehensive income, net of tax of $(1,458)	—	—		—	—		2,384		2,384

Total comprehensive income	—	—		—	72,319		2,384		74,703

Exercise of stock options	488,211	5		5,611	—		—		5,616

Stock-based compensation expense	378,050	4		3,718	—		—		3,722

Dividends paid ($0.48 per share)	—	—		—	(48,857	)	—		(48,857	)

Ending balance at September 30, 2017	102,565,667	$	1,026	728,163	502,265		(25,607	)	1,205,847

See accompanying notes to unaudited consolidated financial statements

Table of Contents

NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)



	Nine months ended September 30,
	2017			2016
OPERATING ACTIVITIES:
Net Income	$	72,319		25,173
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	13,226			11,397
Net gain on sale of assets	(1,443		)	(2,965	)
Net gain on sale of offices	(17,186		)	—
Net depreciation, amortization and accretion	10,951			9,974
Decrease in other assets	22,518			23,588
Increase in other liabilities	1,761			9,003
Net amortization on marketable securities	1,535			1,533
Noncash write-down of real estate owned	980			1,274
FHLB prepayment penalty	—			24,520
Deferred income tax benefit	—			(445	)
Origination of loans held for sale	(59,401		)	(188,474	)
Proceeds from sale of loans held for sale	68,041			158,058
Noncash compensation expense related to stock benefit plans	3,722			9,640
Net cash provided by operating activities	117,023			82,276

INVESTING ACTIVITIES:
Purchase of marketable securities held-to-maturity	(23,621		)	—
Purchase of marketable securities available-for-sale	(210,111		)	(238,673	)
Proceeds from maturities and principal reductions of marketable securities held-to-maturity	11,625			9,097
Proceeds from maturities and principal reductions of marketable securities available-for-sale	144,846			227,283
Proceeds from sale of marketable securities available-for-sale	23,501			91
Loan originations	(2,050,885		)	(1,950,953	)
Proceeds from loan maturities and principal reductions	2,002,816			1,849,593
Net (purchase)/ sale of Federal Home Loan Bank stock	(594		)	33,243
Proceeds from sale of real estate owned	3,687			6,557
Sale of real estate owned for investment, net	456			456
Net purchase of premises and equipment	(1,242		)	(12,485	)
Acquisitions, net of cash received	—			1,118,400
Net cash provided by/ (used in) investing activities	(99,522		)	1,042,609

Table of Contents

NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)

(in thousands)



	Nine months ended September 30,
	2017			2016
FINANCING ACTIVITIES:
Decrease in deposits, net	$	(155,925	)	(52,624	)
Repayments of long-term borrowings, including prepayment penalty	—			(774,863	)
Net increase/ (decrease) in short-term borrowings	(27,511		)	(88,773	)
Decrease in advances by borrowers for taxes and insurance	(15,015		)	(15,402	)
Cash dividends paid	(48,857		)	(45,006	)
Purchase of common stock for retirement	—			(1,752	)
Proceeds from stock options exercised	5,616			6,406
Excess tax benefit from stock-based compensation	—			287
Net cash used in financing activities	(241,692		)	(971,727	)

Net increase/ (decrease) in cash and cash equivalents	$	(224,191	)	153,158

Cash and cash equivalents at beginning of period	$	389,867		167,408
Net increase/ (decrease) in cash and cash equivalents	(224,191		)	153,158
Cash and cash equivalents at end of period	$	165,676		320,566

Cash and cash equivalents:
Cash and due from banks	$	104,372		107,604
Interest-earning deposits in other financial institutions	60,662			210,723
Federal funds sold and other short-term investments	642			2,239
Total cash and cash equivalents	$	165,676		320,566

Cash paid during the period for:
Interest on deposits and borrowings (including interest credited to deposit accounts of $16,644 and $16,556, respectively)	$	20,875		32,519
Income taxes	$	20,705		4,086

Business acquisitions:
Fair value of assets acquired, excluding cash received	$	—		545,796
Cash paid, net	—			1,118,400
Liabilities assumed	$	—		1,664,196

Non-cash activities:
Loan foreclosures and repossessions	$	4,750		2,877
Sale of real estate owned financed by the Company	$	1,810		1,773

See accompanying notes to unaudited consolidated financial statements

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited


(1)	Basis of Presentation and Informational Disclosures

Northwest Bancshares, Inc. (the “Company”) or (“NWBI”), a Maryland corporation headquartered in Warren, Pennsylvania, is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System. The primary activity of the Company is the ownership of all of the issued and outstanding common stock of Northwest Bank, a Pennsylvania-chartered savings bank (“Northwest”). Northwest is regulated by the FDIC and the Pennsylvania Department of Banking. Northwest operates 173 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 Settlement Agency, LLC, Northwest Consumer Discount Company, Northwest Financial Services, Inc., Northwest Advisors, Inc., Northwest Capital Group, Inc., Allegheny Services, Inc., Great Northwest Corporation, Boetger & Associates, Inc. and The Bert Company. The unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or footnotes required for complete annual financial statements. In the opinion of management, all adjustments necessary for the fair presentation of the Company’s financial position and results of operations have been included. The consolidated statements have been prepared using the accounting policies described in the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 updated, as required, for any new pronouncements or changes.

Certain items previously reported have been reclassified to conform to the current year’s reporting format.

The results of operations for the quarter and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, or any other period.

Stock-Based Compensation

On May 17, 2017, the Company granted employees 754,210 stock options and directors 64,800 stock options with an exercise price of $15.57 and grant date fair value of $1.55 per stock option, and the Company granted employees 353,750 restricted common shares and directors 24,300 restricted common shares with a grant date fair value of $15.24. Granted stock options and common shares vest over a ten-year period with the first vesting occurring on the grant date. Stock-based compensation expense of $1.1 million and $6.4 million for the quarters ended September 30, 2017 and 2016, and $3.7 million and $9.6 million for the nine months ended September 30, 2017 and 2016 , respectively, was recognized in compensation expense relating to stock benefit plans. At September 30, 2017 there was compensation expense of $4.4 million to be recognized for awarded but unvested stock options and $17.7 million for unvested common shares.

Income Taxes- Uncertain Tax Positions

Accounting standards prescribe a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. At September 30, 2017 the Company had no liability for unrecognized tax benefits.

The Company recognizes interest accrued related to: (1) unrecognized tax benefits in other expenses and (2) refund claims in other operating income, and 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, 2016, 2015, and 2014.

Impact of New Accounting Standards

In May 2014 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-9, “Revenue from Contracts with Customers (Topic 606)”. This guidance supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of this guidance requires an entity to recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and provides five steps to be analyzed to accomplish the core principle. This guidance is effective retrospectively for annual reporting periods beginning after December 15, 2017, including interim periods within those years and early adoption is not permitted. Our revenue is comprised of net interest income on financial

Table of Contents

assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. With respect to non-interest income we are substantially complete with our overall assessment of revenue streams and reviewing of related contracts potentially affected by the ASU, including service charges and fees, trust and other financial services income, insurance commission income, and other operating income. Our assessment suggests that adoption of this ASU should not materially change the method in which we currently recognize revenue for these revenue streams. We are also substantially complete with our evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). In addition, we are evaluating the ASU’s expanded disclosure requirements. We plan to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be material.

In February 2016 the FASB issued ASU 2016-2, “Leases”. This guidance requires a lessee to recognize in the statement of financial condition a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the term of the lease. Optional periods should only be recognized if the lessee is reasonably certain to exercise the option. For leases with a term of twelve months or less, the lessee is permitted not to recognize lease assets and lease liabilities and should recognize lease expense for such leases generally on a straight-line basis over the term of the lease. This guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those years and early adoption is permitted. We are currently evaluating the impact this standard will have on our results of operations and financial position.

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

In January 2017 the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". This guidance eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under this guidance goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. This guidance is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. We are currently evaluating the impact this standard will have on our results of operations and financial position.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Costs and Net Periodic Postretirement Benefit Costs". This guidance provides financial statement users with clearer and disaggregated information related to the components of net periodic benefit cost and improve transparency of the presentation of net periodic benefit cost in the financial statements. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted and this guidance should be applied retrospectively. We are currently evaluating the impact this standard will have on our results of operations and financial position.

Table of Contents

In March 2017 the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities". This guidance shortens the amortization period for certain callable debt securities held at a premium to the earliest call date from the maturity date. This guidance is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted in any interim period. We are currently evaluating the impact this standard will have on our results of operations and financial position.


(2)	Business Segments

We previously operated in two reportable business segments: Community Banking and Consumer Finance. The Community Banking segment provides services traditionally offered by full-service community banks, including business and personal deposit accounts and business and personal loans, as well as insurance, brokerage and investment management and trust services. The Consumer Finance segment, which was comprised of Northwest Consumer Discount Company ("NCDC"), a subsidiary of Northwest offered personal installment loans for a variety of consumer and real estate products. This activity was funded primarily through an intercompany borrowing relationship with Allegheny Services, Inc., a subsidiary of Northwest. All NCDC offices were closed on July 14, 2017. Net income is the primary measure used by management to measure segment performance. The following tables provide financial information for these reportable segments. The “All Other” column represents the parent company and elimination entries necessary to reconcile to the consolidated amounts presented in the financial statements.

At or for the quarter ended (in thousands):



	Community		Consumer
September 30, 2017	Banking		Finance		All other (1)		Consolidated
External interest income	$	89,711	475		45		90,231
Intersegment interest income/ expense	138		—		(138	)	—
Interest expense	5,871		138		985		6,994
Provision for loan losses	8,693		(5,666	)	—		3,027
Noninterest income	23,922		36		636		24,594
Noninterest expense	67,493		1,941		(635	)	68,799
Income tax expense	10,656		1,700		58		12,414
Net income	$	21,058	2,398		135		23,591
Total assets	$	9,404,881	44,849		10,084		9,459,814

(1) Consists of intercompany elimination entries and holding company income, expense and assets.



	Community		Consumer
September 30, 2016	Banking		Finance		All other (1)		Consolidated
External interest income	$	80,245	4,264		239		84,748
Intersegment interest income/ expense	645		—		(645	)	—
Interest expense	6,338		645		471		7,454
Provision for loan losses	4,276		1,262		—		5,538
Noninterest income	20,424		372		22		20,818
Noninterest expense	70,580		2,908		192		73,680
Income tax expense/ (benefit)	5,147		(74	)	(376	)	4,697
Net income/ (loss)	$	14,973	(105	)	(671	)	14,197
Total assets	$	9,590,487	109,601		14,519		9,714,607


(1)	Consists of intercompany elimination entries and holding company income, expense and assets.

Table of Contents

At or for the nine months ended (in thousands):



	Community		Consumer
September 30, 2017	Banking		Finance		All other (1)		Consolidated
External interest income	$	259,160	8,008		127		267,295
Intersegment interest income	1,473		—		(1,473	)	—
Interest expense	17,344		1,473		1,933		20,750
Provision for loan losses	15,371		(2,145	)	—		13,226
Noninterest income	85,653		357		1,565		87,575
Noninterest expense	203,225		9,458		1,024		213,707
Income tax expense/ (benefit)	36,028		(175	)	(985	)	34,868
Net income/ (loss)	$	74,318	(246	)	(1,753	)	72,319
Total assets	$	9,404,881	44,849		10,084		9,459,814


(1)	Consists of intercompany elimination entries and holding company income, expense and assets.



	Community		Consumer
September 30, 2016	Banking		Finance	All other (1)		Consolidated
External interest income	$	242,081	12,831	689		255,601
Intersegment interest income	1,918		—	(1,918	)	—
Interest expense	27,943		1,918	1,347		31,208
Provision for loan losses	8,854		2,543	—		11,397
Noninterest income	59,278		1,152	111		60,541
Noninterest expense	229,492		8,715	870		239,077
Income tax expense/ (benefit)	10,144		335	(1,192	)	9,287
Net income/ (loss)	$	26,844	472	(2,143	)	25,173
Total assets	$	9,590,487	109,601	14,519		9,714,607


(1)	Consists of intercompany elimination entries and holding company income, expense and assets.

Table of Contents

(3) Investment securities and impairment of investment securities

The following table shows the portfolio of investment securities available-for-sale at September 30, 2017 (in thousands):



	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses		Fair value
Debt issued by the U.S. government and agencies:
Due in one year or less	$	2	—	—		2

Debt issued by government sponsored enterprises:
Due in one year or less	96,608		36	(244	)	96,400
Due in one year through five years	141,476		34	(1,543	)	139,967
Due in five years through ten years	—		—	—		—
Due after ten years	5,304		—	(72	)	5,232

Equity securities	824		131	(6	)	949

Municipal securities:
Due in one year or less	2,312		13	—		2,325
Due in one year through five years	7,472		142	(3	)	7,611
Due in five years through ten years	12,315		165	—		12,480
Due after ten years	30,226		572	—		30,798

Corporate debt issues:
Due after ten years	14,280		4,611	(213	)	18,678

Residential mortgage-backed securities:
Fixed rate pass-through	143,106		1,460	(2,070	)	142,496
Variable rate pass-through	35,140		1,573	(4	)	36,709
Fixed rate non-agency CMOs	41		—	—		41
Fixed rate agency CMOs	300,741		263	(2,855	)	298,149
Variable rate agency CMOs	77,464		274	(94	)	77,644
Total residential mortgage-backed securities	556,492		3,570	(5,023	)	555,039
Total marketable securities available-for-sale	$	867,311	9,274	(7,104	)	869,481

Table of Contents

The following table shows the portfolio of investment securities available-for-sale at December 31, 2016 (in thousands):



	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses		Fair value
Debt issued by the U.S. government and agencies:
Due in one year or less	$	6	—	—		6

Debt issued by government sponsored enterprises:
Due in one year or less	74,980		5	(33	)	74,952
Due after one year through five years	220,937		203	(2,504	)	218,636
Due after five years through ten years	585		—	(3	)	582

Equity securities	3,351		1,095	(6	)	4,440

Municipal securities:
Due in one year or less	2,449		7	—		2,456
Due after one year through five years	9,448		105	(21	)	9,532
Due after five years through ten years	11,794		137	(1	)	11,930
Due after ten years	38,141		1,027	(16	)	39,152

Corporate debt issues:
Due after ten years	14,367		2,935	(322	)	16,980

Residential mortgage-backed securities:
Fixed rate pass-through	175,398		1,849	(2,680	)	174,567
Variable rate pass-through	43,587		2,007	(6	)	45,588
Fixed rate non-agency CMOs	100		1	—		101
Fixed rate agency CMOs	165,535		185	(3,455	)	162,265
Variable rate agency CMOs	64,874		306	(167	)	65,013
Total residential mortgage-backed securities	449,494		4,348	(6,308	)	447,534
Total marketable securities available-for-sale	$	825,552	9,862	(9,214	)	826,200

The following table shows the portfolio of investment securities held-to-maturity at September 30, 2017 (in thousands):



	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses		Fair value
Residential mortgage-backed securities:
Fixed rate pass-through	$	3,971	189	—		4,160
Variable rate pass-through	2,412		57	—		2,469
Fixed rate agency CMOs	24,791		87	(25	)	24,853
Variable rate agency CMOs	787		13	—		800
Total residential mortgage-backed securities	31,961		346	(25	)	32,282
Total marketable securities held-to-maturity	$	31,961	346	(25	)	32,282

Table of Contents

The following table shows the portfolio of investment securities held-to-maturity at December 31, 2016 (in thousands):



	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses	Fair value
Municipal securities:
Due after ten years	$	4,808	65	—	4,873

Residential mortgage-backed securities:
Fixed rate pass-through	4,807		217	—	5,024
Variable rate pass-through	2,848		58	—	2,906
Fixed rate agency CMOs	6,674		94	—	6,768
Variable rate agency CMOs	841		14	—	855
Total residential mortgage-backed securities	15,170		383	—	15,553
Total marketable securities held-to-maturity	$	19,978	448	—	20,426

The following table shows the fair value of and gross unrealized losses on investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at September 30, 2017 (in thousands):



	Less than 12 months				12 months or more			Total
	Fair value		Unrealized loss		Fair value	Unrealized loss		Fair value	Unrealized loss
U.S. government sponsored enterprises	$	55,288	(161	)	174,633	(1,698	)	229,921	(1,859	)
Municipal securities	1,735		(3	)	—	—		1,735	(3	)
Corporate issues	—		—		2,220	(213	)	2,220	(213	)
Equity securities	—		—		544	(6	)	544	(6	)
Residential mortgage-backed securities - agency	195,468		(814	)	177,277	(4,234	)	372,745	(5,048	)

Total temporarily impaired securities	$	252,491	(978	)	354,674	(6,151	)	607,165	(7,129	)



	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	$	238,003	(2,448	)	9,205	(92	)	247,208	(2,540	)
Municipal securities	5,621		(37	)	66	(1	)	5,687	(38	)
Corporate debt issues	—		—		2,107	(322	)	2,107	(322	)
Equity securities	—		—		544	(6	)	544	(6	)
Residential mortgage-backed securities - agency	213,662		(3,837	)	87,723	(2,471	)	301,385	(6,308	)

Total temporarily impaired securities	$	457,286	(6,322	)	99,645	(2,892	)	556,931	(9,214	)

We review our investment portfolio for indications of impairment. This review includes analyzing the length of time and the extent to which amortized costs have exceeded fair values, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer, and the intent and ability to hold the investments for a period of time sufficient to allow for a recovery in value. Certain investments are evaluated using our best estimate of future cash flows. If the estimate of cash flows indicates that an adverse change has occurred, other-than-temporary impairment is recognized for the amount of the unrealized loss that was deemed credit related.

Table of Contents

Credit related impairment on all debt securities is recognized in earnings while noncredit related impairment on available-for-sale debt securities, not expected to be sold, is recognized in other comprehensive income.

The table below shows a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold for the quarter and nine months ended (in thousands):



	2017		2016
Beginning balance at July 1, (1)	$	7,942	8,408
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized	—		—
Reduction for losses realized during the quarter	—		(16	)
Reduction for securities sold/ called realized during the quarter	—		—
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized	—		—
Ending balance at September 30,	$	7,942	8,392

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



	2017		2016
Beginning balance at January 1, (1)	$	7,942	8,436
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized	—		—
Reduction for losses realized during the quarter	—		(44	)
Reduction for securities sold/ called realized during the nine months	—		—
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized	—		—
Ending balance at September 30,	$	7,942	8,392

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

Table of Contents

(4) Loans receivable

The following table shows a summary of our loans receivable at September 30, 2017 and December 31, 2016 (in thousands):



	September 30, 2017							December 31, 2016
	Originated			Acquired		Total		Originated		Acquired		Total
Personal Banking:
Residential mortgage loans (1)	$	2,624,216		119,463		2,743,679		2,565,620		133,511		2,699,131
Home equity loans	1,045,152			268,283		1,313,435		1,042,913		302,457		1,345,370
Consumer finance loans (2)	26,892			—		26,892		48,981		—		48,981
Consumer loans	522,604			110,611		633,215		418,656		163,622		582,278
Total Personal Banking	4,218,864			498,357		4,717,221		4,076,170		599,590		4,675,760

Commercial Banking:
Commercial real estate loans	2,210,699			312,192		2,522,891		2,140,678		372,991		2,513,669
Commercial loans	556,750			69,724		626,474		481,543		75,676		557,219
Total Commercial Banking	2,767,449			381,916		3,149,365		2,622,221		448,667		3,070,888
Total loans receivable, gross	6,986,313			880,273		7,866,586		6,698,391		1,048,257		7,746,648

Deferred loan costs	24,707			1,799		26,506		20,081		2,294		22,375
Allowance for loan losses	(50,845		)	(6,082	)	(56,927	)	(55,293	)	(5,646	)	(60,939	)
Undisbursed loan proceeds:
Residential mortgage loans	(13,146		)	—		(13,146	)	(11,638	)	—		(11,638	)
Commercial real estate loans	(121,316		)	(2,689	)	(124,005	)	(168,595	)	(2,985	)	(171,580	)
Commercial loans	(28,519		)	(1,284	)	(29,803	)	(26,168	)	(2,290	)	(28,458	)
Total loans receivable, net	$	6,797,194		872,017		7,669,211		6,456,778		1,039,630		7,496,408

(1) Includes $1.4 million and $9.6 million of loans held for sale at September 30, 2017 and December 31, 2016, respectively.

(2) Represents consumer loans from our NCDC offices which are no longer being originated.

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



	September 30, 2017		December 31, 2016
Acquired loans evaluated individually for future credit losses:
Outstanding principal balance	$	10,344	16,108
Carrying value	7,393		12,665

Acquired loans evaluated collectively for future credit losses:
Outstanding principal balance	877,022		1,040,378
Carrying value	870,705		1,032,611

Total acquired loans:
Outstanding principal balance	887,366		1,056,486
Carrying value	878,098		1,045,276

Table of Contents

The following table provides information related to the changes in the accretable discount, which includes income recognized from contractual cash flows for the dates indicated (in thousands):



	Total
Balance at December 31, 2015	$	2,019
Accretion	(1,170		)
Net reclassification from nonaccretable yield	1,338
Balance at December 31, 2016	2,187
Accretion	(1,130		)
Net reclassification from nonaccretable yield	498
Balance at September 30, 2017	$	1,555

The following table provides information related to acquired impaired loans by portfolio segment and by class of financing receivable at and for the nine months ended September 30, 2017 (in thousands):



	Carrying value		Outstanding principal balance	Related impairment reserve	Average recorded investment in impaired loans	Interest income recognized
Personal Banking:
Residential mortgage loans	$	1,215	1,931	37	1,267	126
Home equity loans	1,166		2,274	9	1,264	124
Consumer loans	80		198	4	108	43
Total Personal Banking	2,461		4,403	50	2,639	293

Commercial Banking:
Commercial real estate loans	4,828		5,826	67	7,212	823
Commercial loans	104		115	—	178	14
Total Commercial Banking	4,932		5,941	67	7,390	837

Total	$	7,393	10,344	117	10,029	1,130

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, 2016 (in thousands):



	Carrying value		Outstanding principal balance	Related impairment reserve	Average recorded investment in impaired loans	Interest income recognized
Personal Banking:
Residential mortgage loans	$	1,319	2,062	204	1,650	202
Home equity loans	1,363		2,669	8	1,724	185
Consumer loans	136		303	3	201	51
Total Personal Banking	2,818		5,034	215	3,575	438

Commercial Banking:
Commercial real estate loans	9,596		10,809	52	10,942	721
Commercial loans	251		265	—	249	11
Total Commercial Banking	9,847		11,074	52	11,191	732

Total	$	12,665	16,108	267	14,766	1,170

Table of Contents

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



	Balance September 30, 2017		Current period provision		Charge-offs		Recoveries	Balance June 30, 2017
Originated loans:
Personal Banking:
Residential mortgage loans	$	3,986	(462	)	(211	)	24	4,635
Home equity loans	3,295		615		(285	)	8	2,957
Consumer finance loans	4,876		4,220		(3,891	)	80	4,467
Consumer loans	7,383		4,594		(2,844	)	353	5,280
Total Personal Banking	19,540		8,967		(7,231	)	465	17,339

Commercial Banking:
Commercial real estate loans	20,174		(2,529	)	(163	)	282	22,584
Commercial loans	11,131		(5,445	)	(204	)	76	16,704
Total Commercial Banking	31,305		(7,974	)	(367	)	358	39,288
Total originated loans	50,845		993		(7,598	)	823	56,627

Acquired loans:
Personal Banking:
Residential mortgage loans	77		(11	)	(4	)	7	85
Home equity loans	748		324		(243	)	44	623
Consumer loans	594		106		(158	)	18	628
Total Personal Banking	1,419		419		(405	)	69	1,336

Commercial Banking:
Commercial real estate loans	3,301		2,433		(1,738	)	160	2,446
Commercial loans	1,362		(818	)	(305	)	9	2,476
Total Commercial Banking	4,663		1,615		(2,043	)	169	4,922
Total acquired loans	6,082		2,034		(2,448	)	238	6,258

Total	$	56,927	3,027		(10,046	)	1,061	62,885

Table of Contents

The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the quarter ended September 30, 2016 (in thousands):



	Balance September 30, 2016		Current period provision		Charge-offs		Recoveries	Balance June 30, 2016
Originated loans:
Personal Banking:
Residential mortgage loans	$	4,002	1,109		(268	)	139	3,022
Home equity loans	3,519		296		(161	)	49	3,335
Consumer finance loans	3,429		1,014		(835	)	111	3,139
Consumer loans	5,667		2,331		(1,700	)	251	4,785
Total Personal Banking	16,617		4,750		(2,964	)	550	14,281

Commercial Banking:
Commercial real estate loans	24,530		(1,041	)	(602	)	487	25,686
Commercial loans	16,877		1,668		(708	)	561	15,356
Total Commercial Banking	41,407		627		(1,310	)	1,048	41,042
Total originated loans	58,024		5,377		(4,274	)	1,598	55,323

Acquired loans:
Personal Banking:
Residential mortgage loans	78		45		(86	)	58	61
Home equity loans	1,171		138		(127	)	32	1,128
Consumer loans	644		212		(166	)	46	552
Total Personal Banking	1,893		395		(379	)	136	1,741

Commercial Banking:
Commercial real estate loans	2,422		(588	)	(187	)	32	3,165
Commercial loans	907		354		—		1	552
Total Commercial Banking	3,329		(234	)	(187	)	33	3,717
Total acquired loans	5,222		161		(566	)	169	5,458

Total	$	63,246	5,538		(4,840	)	1,767	60,781

Table of Contents

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



	Balance September 30, 2017		Current period provision		Charge-offs		Recoveries	Balance December 31, 2016
Originated loans:
Personal Banking:
Residential mortgage loans	$	3,986	(278	)	(678	)	286	4,656
Home equity loans	3,295		503		(803	)	109	3,486
Consumer finance loans	4,876		6,610		(5,469	)	290	3,445
Consumer loans	7,383		9,741		(7,912	)	1,025	4,529
Total Personal Banking	19,540		16,576		(14,862	)	1,710	16,116

Commercial Banking:
Commercial real estate loans	20,174		(3,988	)	(498	)	993	23,667
Commercial loans	11,131		(3,517	)	(1,858	)	996	15,510
Total Commercial Banking	31,305		(7,505	)	(2,356	)	1,989	39,177
Total originated loans	50,845		9,071		(17,218	)	3,699	55,293

Acquired loans:
Personal Banking:
Residential mortgage loans	77		130		(199	)	75	71
Home equity loans	748		512		(1,063	)	252	1,047
Consumer loans	594		405		(689	)	225	653
Total Personal Banking	1,419		1,047		(1,951	)	552	1,771

Commercial Banking:
Commercial real estate loans	3,301		1,832		(2,206	)	667	3,008
Commercial loans	1,362		1,276		(847	)	66	867
Total Commercial Banking	4,663		3,108		(3,053	)	733	3,875
Total acquired loans	6,082		4,155		(5,004	)	1,285	5,646

Total	$	56,927	13,226		(22,222	)	4,984	60,939

Table of Contents



	Balance September 30, 2016		Current period provision		Charge-offs		Recoveries	Balance December 31, 2015
Originated loans:
Personal banking:
Residential mortgage loans	$	4,002	1,612		(2,559	)	257	4,692
Home equity loans	3,519		253		(898	)	223	3,941
Consumer finance loans	3,429		2,163		(2,321	)	312	3,275
Consumer loans	5,667		5,205		(4,587	)	836	4,213
Total personal banking	16,617		9,233		(10,365	)	1,628	16,121

Commercial banking:
Commercial real estate loans	24,530		(8,756	)	(2,103	)	3,041	32,348
Commercial loans	16,877		5,008		(1,704	)	1,072	12,501
Total commercial banking	41,407		(3,748	)	(3,807	)	4,113	44,849
Total originated loans	58,024		5,485		(14,172	)	5,741	60,970

Acquired loans:
Personal banking:
Residential mortgage loans	78		118		(211	)	153	18
Home equity loans	1,171		2,093		(1,320	)	297	101
Consumer loans	644		925		(528	)	137	110
Total personal banking	1,893		3,136		(2,059	)	587	229

Commercial banking:
Commercial real estate loans	2,422		1,886		(1,314	)	411	1,439
Commercial loans	907		890		(24	)	7	34
Total commercial banking	3,329		2,776		(1,338	)	418	1,473
Total acquired loans	5,222		5,912		(3,397	)	1,005	1,702

Total	$	63,246	11,397		(17,569	)	6,746	62,672

Table of Contents

At September 30, 2017, we expect to fully collect the carrying value of our purchased credit impaired loans and have determined that we can reasonably estimate their future cash flows including those loans that are 90 days or more delinquent. As a result, we do not consider our purchased credit impaired loans that are 90 days or more delinquent to be nonaccrual or impaired and continue to recognize interest income on these loans, including the loans’ accretable discount.

The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at September 30, 2017 (in thousands):



	Total loans receivable		Allowance for loan losses	Nonaccrual loans (1)	Loans past due 90 days or more and still accruing (2)	TDRs (3)	Allowance related to TDRs	Additional commitments to customers with loans classified as TDRs
Personal Banking:
Residential mortgage loans	$	2,743,226	4,063	13,195	—	7,807	782	—
Home equity loans	1,313,435		4,043	7,699	146	1,781	451	4
Consumer finance loans	26,892		4,876	333	—	—	—	—
Consumer loans	647,028		7,977	4,108	252	—	—	—
Total Personal Banking	4,730,581		20,959	25,335	398	9,588	1,233	4

Commercial Banking:
Commercial real estate loans	2,398,886		23,475	39,721	—	22,173	1,926	252
Commercial loans	596,671		12,493	8,278	—	6,708	1,025	23
Total Commercial Banking	2,995,557		35,968	47,999	—	28,881	2,951	275

Total	$	7,726,138	56,927	73,334	398	38,469	4,184	279


(1)	Includes $17.8 million of nonaccrual TDRs.


(2)	Represents loans 90 days past maturity and still accruing.


(3)	Includes $17.8 million of nonaccrual, and $20.7 million of accruing TDRs.

The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at December 31, 2016 (in thousands):



	Total loans receivable		Allowance for loan losses	Nonaccrual loans (1)	Loans past due 90 days or more and still accruing (2)	TDRs (3)	Allowance related to TDRs	Additional commitments to customers with loans classified as TDRs
Personal Banking:
Residential mortgage loans	$	2,698,166	4,727	18,264	—	7,299	708	—
Home equity loans	1,345,370		4,533	7,865	—	1,813	450	4
Consumer finance loans	48,981		3,445	743	—	—	—	—
Consumer loans	593,980		5,182	4,366	85	—	—	—
Total Personal Banking	4,686,497		17,887	31,238	85	9,112	1,158	4

Commercial Banking:
Commercial real estate loans	2,342,089		26,675	38,724	564	24,483	2,072	417
Commercial loans	528,761		16,377	9,574	—	9,331	1,360	17
Total Commercial Banking	2,870,850		43,052	48,298	564	33,814	3,432	434

Total	$	7,557,347	60,939	79,536	649	42,926	4,590	438


(1)	Includes $16.3 million of nonaccrual TDRs.


(2)	Represents loans 90 days past maturity and still accruing.


(3)	Includes $16.3 million of nonaccrual, and $26.6 million of accruing TDRs.

Table of Contents

The following table provides information related to the composition of originated impaired loans by portfolio segment and by class of financing receivable at and for the nine months ended September 30, 2017 (in thousands):



	Nonaccrual loans 90 or more days delinquent		Nonaccrual loans less than 90 days delinquent	Loans less than 90 days delinquent reviewed for impairment	TDRs less than 90 days delinquent not included elsewhere	Total impaired loans	Average recorded investment in impaired loans	Interest income recognized on impaired loans
Personal Banking:
Residential mortgage loans	$	11,785	1,410	—	6,894	20,089	21,521	706
Home equity loans	6,295		1,404	—	1,436	9,135	8,878	320
Consumer finance loans	332		1	—	—	333	428	15
Consumer loans	3,244		864	—	—	4,108	3,887	132
Total Personal Banking	21,656		3,679	—	8,330	33,665	34,714	1,173

Commercial Banking:
Commercial real estate loans	22,583		17,138	4,707	4,804	49,232	52,813	1,381
Commercial loans	4,177		4,101	943	2,447	11,668	12,402	544
Total Commercial Banking	26,760		21,239	5,650	7,251	60,900	65,215	1,925

Total	$	48,416	24,918	5,650	15,581	94,565	99,929	3,098

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, 2016 (in thousands):



	Nonaccrual loans 90 or more days delinquent		Nonaccrual loans less than 90 days delinquent	Loans less than 90 days delinquent reviewed for impairment	TDRs less than 90 days delinquent not included elsewhere	Total impaired loans	Average recorded investment in impaired loans	Interest income recognized on impaired loans
Personal Banking:
Residential mortgage loans	$	13,169	5,095	—	5,929	24,193	24,483	1,079
Home equity loans	5,552		2,313	—	1,439	9,304	9,234	496
Consumer finance loans	743		—	—	—	743	772	35
Consumer loans	3,080		1,286	—	—	4,366	2,931	131
Total Personal Banking	22,544		8,694	—	7,368	38,606	37,420	1,741

Commercial Banking:
Commercial real estate loans	19,264		19,460	3,622	11,582	53,928	64,350	2,864
Commercial loans	3,373		6,201	2,837	3,116	15,527	16,905	991
Total Commercial Banking	22,637		25,661	6,459	14,698	69,455	81,255	3,855

Total	$	45,181	34,355	6,459	22,066	108,061	118,675	5,596

Table of Contents

The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at September 30, 2017 (in thousands):



	Loans collectively evaluated for impairment		Loans individually evaluated for impairment	Loans individually evaluated for impairment for which there is a related impairment reserve	Related impairment reserve	Loans individually evaluated for impairment for which there is no related reserve
Personal Banking:
Residential mortgage loans	$	2,734,753	8,473	8,473	783	—
Home equity loans	1,311,654		1,781	1,781	451	—
Consumer finance loans	26,892		—	—	—	—
Consumer loans	646,933		95	95	23	—
Total Personal Banking	4,720,232		10,349	10,349	1,257	—

Commercial Banking:
Commercial real estate loans	2,370,814		28,072	25,223	3,028	2,849
Commercial loans	587,013		9,658	9,150	1,530	508
Total Commercial Banking	2,957,827		37,730	34,373	4,558	3,357

Total	$	7,678,059	48,079	44,722	5,815	3,357

The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at December 31, 2016 (in thousands):



	Loans collectively evaluated for impairment		Loans individually evaluated for impairment	Loans individually evaluated for impairment for which there is a related impairment reserve	Related impairment reserve	Loans individually evaluated for impairment for which there is no related reserve
Personal Banking:
Residential mortgage loans	$	2,689,886	8,280	8,280	709	—
Home equity loans	1,343,556		1,814	1,814	450	—
Consumer finance loans	48,981		—	—	—	—
Consumer loans	593,854		126	126	29	—
Total Personal Banking	4,676,277		10,220	10,220	1,188	—

Commercial Banking:
Commercial real estate loans	2,309,186		32,903	27,594	3,545	5,309
Commercial loans	518,449		10,312	10,242	1,390	70
Total Commercial Banking	2,827,635		43,215	37,836	4,935	5,379

Total	$	7,503,912	53,435	48,056	6,123	5,379

Table of Contents

Our loan portfolios include loans that have been modified in a troubled debt restructuring ("TDR"), where concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include: extending the note’s maturity date, permitting interest-only payments, reducing the interest rate to a rate lower than current market rates for new debt with similar risk, reducing the principal payment, principal forbearance or other actions. These concessions are applicable to all loan segments and classes. Certain TDRs are classified as nonperforming at the time of restructuring and may be returned to performing status after considering the borrower’s sustained repayment performance for a period of at least nine months.

When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, the loan’s observable market price or the current fair value of the collateral, less selling costs, for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment, using ASC 310-10. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan.

Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, we evaluate the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, partial charge-offs may be taken to further write-down the carrying value of the loan, or the loan may be charged-off completely.

The following table provides a roll forward of troubled debt restructurings for the periods indicated (dollars in thousands):



	For the quarters ended September 30,
	2017				2016
	Number of contracts	Amount			Number of contracts	Amount
Beginning TDR balance:	203	$	41,860		230	$	49,113
New TDRs	6	546			5	245
Re-modified TDRs	2	265			1	799
Net paydowns		(987		)		(1,781		)
Charge-offs:
Residential mortgage loans	—	—			—	—
Home equity loans	—	—			—	—
Commercial real estate loans	2	(2,498		)	—	—
Commercial loans	—	—			1	(99		)
Paid-off loans:
Residential mortgage loans	—	—			3	(143		)
Home equity loans	3	(30		)	2	(264		)
Commercial real estate loans	1	(564		)	8	(1,022		)
Commercial loans	2	(123		)	3	(253		)
Ending TDR balance:	201	$	38,469		218	$	46,595

Accruing TDRs		$	20,660			$	29,221
Non-accrual TDRs		17,809				17,374

Table of Contents

The following table provides a roll forward of troubled debt restructuring for the periods indicated (dollars in thousands):



	For the nine months ended September 30,
	2017				2016
	Number of contracts	Amount			Number of contracts	Amount
Beginning TDR balance:	225	$	42,926		227	$	51,115
New TDRs	13	4,685			23	5,256
Re-modified TDRs	3	710			5	1,862
Net paydowns		(3,668		)		(4,685		)
Charge-offs:
Residential mortgage loans	—	—			—	—
Home equity loans	—	—			—	—
Commercial real estate loans	2	(2,498		)	—	—
Commercial loans	6	(259		)	2	(142		)
Paid-off loans:
Residential mortgage loans	—	—			3	(143		)
Home equity loans	8	(62		)	5	(496		)
Commercial real estate loans	11	(1,109		)	16	(5,584		)
Commercial loans	10	(2,256		)	6	(588		)
Ending TDR balance:	201	$	38,469		218	$	46,595

Accruing TDRs		$	20,660			$	29,221
Non-accrual TDRs		17,809				17,374

Table of Contents

The following table provides information related to troubled debt restructurings (including re-modified TDRs) by portfolio segment and by class of financing receivable during the periods indicated (dollars in thousands):



	For the quarter ended September 30, 2017					For the nine months ended September 30, 2017
	Number of contracts	Recorded investment at the time of modification		Current recorded investment	Current allowance	Number of contracts	Recorded investment at the time of modification		Current recorded investment	Current allowance
Troubled debt restructurings:
Personal Banking:
Residential mortgage loans	2	$	403	402	40	5	$	1,297	1,276	128
Home equity loans	2	122		119	30	2	122		119	30
Total Personal Banking	4	525		521	70	7	1,419		1,395	158

Commercial Banking:
Commercial real estate loans	2	114		116	13	6	3,600		3,282	285
Commercial loans	2	172		170	71	3	376		352	84
Total Commercial Banking	4	286		286	84	9	3,976		3,634	369

Total	8	$	811	807	154	16	$	5,395	5,029	527

Troubled debt restructurings modified within the previous twelve months that have subsequently defaulted:
Personal Banking:
Residential mortgage loans	—	$	—	—	—	—	$	—	—	—
Home equity loans	—	—		—	—	—	—		—	—
Total Personal Banking	—	—		—	—	—	—		—	—

Commercial Banking
Commercial real estate loans	1	90		90	11	1	90		90	11
Commercial loans	1	150		150	70	1	150		150	70
Total Commercial Banking	2	240		240	81	2	240		240	81

Total	2	$	240	240	81	2	$	240	240	81

Table of Contents



	For the quarter ended September 30, 2016					For the nine months ended September 30, 2016
	Number of contracts	Recorded investment at the time of modification		Current recorded investment	Current allowance	Number of contracts	Recorded investment at the time of modification		Current recorded investment	Current allowance
Troubled debt restructurings:
Personal Banking:
Residential mortgage loans	1	$	9	8	1	6	$	1,041	1,031	105
Home equity loans	1	3		3	1	6	284		281	60
Total Personal Banking	2	12		11	2	12	1,325		1,312	165

Commercial Banking:
Commercial real estate loans	1	154		153	11	5	2,250		2,218	295
Commercial loans	3	878		877	64	11	3,543		2,591	632
Total Commercial Banking	4	1,032		1,030	75	16	5,793		4,809	927

Total	6	$	1,044	1,041	77	28	$	7,118	6,121	1,092

Troubled debt restructurings modified within the previous twelve months that have subsequently defaulted:
Personal Banking:
Residential mortgage loans	—	$	—	—	—	—	$	—	—	—
Home equity loans	—	—		—	—	—	—		—	—
Total Personal Banking	—	—		—	—	—	—		—	—

Commercial Banking:
Commercial real estate loans	1	6,256		6,113	893	1	6,256		6,113	893
Commercial loans	—	—		—	—	—	—		—	—
Total Commercial Banking	1	6,256		6,113	893	1	6,256		6,113	893

Total	1	$	6,256	6,113	893	1	$	6,256	6,113	893

The following table provides information as of September 30, 2017 for troubled debt restructuring (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended September 30, 2017 (dollars in thousands):



		Type of modification
	Number of contracts	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	2	$	250	—	—	152	402
Home equity loans	2	119		—	—	—	119
Total Personal Banking	4	369		—	—	152	521

Commercial Banking:
Commercial real estate loans	2	—		—	116	—	116
Commercial loans	2	—		—	170	—	170
Total Commercial Banking	4	—		—	286	—	286

Total	8	$	369	—	286	152	807

Table of Contents

The following table provides information as of September 30, 2016 for troubled debt restructuring (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended September 30, 2016 (dollars in thousands):



		Type of modification
	Number of contracts	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	1	$	—	—	8	—	8
Home equity loans	1	—		—	3	—	3
Total Personal Banking	2	—		—	11	—	11

Commercial Banking:
Commercial real estate loans	1	—		—	153	—	153
Commercial loans	3	—		799	78	—	877
Total Commercial Banking	4	—		799	231	—	1,030

Total	6	$	—	799	242	—	1,041

The following table provides information as of September 30, 2017 for troubled debt restructuring (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the nine months ended September 30, 2017 (dollars in thousands):



		Type of modification
	Number of contracts	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	5	$	360	—	—	916	1,276
Home equity loans	2	119		—	—	—	119
Total Personal Banking	7	479		—	—	916	1,395

Commercial Banking:
Commercial real estate loans	6	—		2,710	572	—	3,282
Commercial loans	3	—		—	352	—	352
Total Commercial Banking	9	—		2,710	924	—	3,634

Total	16	$	479	2,710	924	916	5,029

Table of Contents

The following table provides information as of September 30, 2016 for troubled debt restructurings (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the nine months ended September 30, 2016 (dollars in thousands):



		Type of modification
	Number of contracts	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	6	$	361	—	622	48	1,031
Home equity loans	6	121		—	3	157	281
Total Personal Banking	12	482		—	625	205	1,312

Commercial Banking:
Commercial real estate loans	5	—		429	535	1,254	2,218
Commercial loans	11	—		799	1,042	750	2,591
Total Commercial Banking	16	—		1,228	1,577	2,004	4,809

Total	28	$	482	1,228	2,202	2,209	6,121

The following table provides information related to re-modified troubled debt restructuring by portfolio segment and by class of financing receivable for the quarter ended September 30, 2017 (dollars in thousands):



		Type of re-modification
	Number of re-modified TDRs	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	1	$	250	—	—	—	250
Home equity loans	1	13		—	—	—	13
Total Personal Banking	2	263		—	—	—	263

Commercial Banking:
Commercial real estate loans	—	—		—	—	—	—
Commercial loans	—	—		—	—	—	—
Total Commercial Banking	—	—		—	—	—	—

Total	2	$	263	—	—	—	263

The following table provides information related to re-modified troubled debt restructurings by portfolio segment and by class of financing receivable for the quarter ended September 30, 2016 (dollars in thousands):



		Type of re-modification
	Number of re-modified TDRs	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	—	$	—	—	—	—	—
Home equity loans	—	—		—	—	—	—
Total Personal Banking	—	—		—	—	—	—

Commercial Banking:
Commercial real estate loans	—	—		—	—	—	—
Commercial loans	1	—		799	—	—	799
Total Commercial Banking	1	—		799	—	—	799

Total	1	$	—	799	—	—	799

Table of Contents

The following table provides information related to re-modified troubled debt restructurings by portfolio segment and by class of financing receivable for the nine months ended September 30, 2017 (dollars in thousands):



		Type of re-modification
	Number of re-modified TDRs	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	2	$	250	—	—	430	680
Home equity loans	1	13		—	—	—	13
Total Personal Banking	3	263		—	—	430	693

Commercial Banking:
Commercial real estate loans	—	—		—	—	—	—
Commercial loans	—	—		—	—	—	—
Total Commercial Banking	—	—		—	—	—	—

Total	3	$	263	—	—	430	693



		Type of re-modification
	Number of re-modified TDRs	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	—	$	—	—	—	—	—
Home equity loans	—	—		—	—	—	—
Total Personal Banking	—	—		—	—	—	—

Commercial Banking:
Commercial real estate loans	1	—		—	—	182	182
Commercial loans	4	—		1,662	—	—	1,662
Total Commercial Banking	5	—		1,662	—	182	1,844

Total	5	$	—	1,662	—	182	1,844

Table of Contents

The following table provides information related to loan payment delinquencies at September 30, 2017 (in thousands):



	30-59 Days delinquent		60-89 Days delinquent	90 Days or greater delinquent	Total delinquency	Current	Total loans receivable	90 Days or greater delinquent and accruing (1)
Originated loans:
Personal Banking:
Residential mortgage loans	$	2,771	6,133	11,315	20,219	2,603,544	2,623,763	—
Home equity loans	6,636		2,219	5,158	14,013	1,031,139	1,045,152	—
Consumer finance loans	3,065		2,190	332	5,587	21,305	26,892	—
Consumer loans	8,248		2,963	2,939	14,150	520,468	534,618	—
Total Personal Banking	20,720		13,505	19,744	53,969	4,176,456	4,230,425	—

Commercial Banking:
Commercial real estate loans	3,586		7,290	18,069	28,945	2,060,438	2,089,383	—
Commercial loans	271		2	3,288	3,561	524,670	528,231	—
Total Commercial Banking	3,857		7,292	21,357	32,506	2,585,108	2,617,614	—
Total originated loans	24,577		20,797	41,101	86,475	6,761,564	6,848,039	—

Acquired loans:
Personal Banking:
Residential mortgage loans	—		1,063	875	1,938	117,525	119,463	405
Home equity loans	694		171	1,239	2,104	266,179	268,283	102
Consumer loans	1,262		320	315	1,897	110,513	112,410	10
Total Personal Banking	1,956		1,554	2,429	5,939	494,217	500,156	517

Commercial Banking:
Commercial real estate loans	2,167		376	5,241	7,784	301,719	309,503	727
Commercial loans	475		194	889	1,558	66,882	68,440	—
Total Commercial Banking	2,642		570	6,130	9,342	368,601	377,943	727
Total acquired loans	4,598		2,124	8,559	15,281	862,818	878,099	1,244

Total loans	$	29,175	22,921	49,660	101,756	7,624,382	7,726,138	1,244


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

Table of Contents

The following table provides information related to loan payment delinquencies at December 31, 2016 (in thousands):



	30-59 Days delinquent		60-89 Days delinquent	90 Days or greater delinquent	Total delinquency	Current	Total loans receivable	90 Days or greater delinquent and accruing (1)
Originated loans:
Personal Banking:
Residential mortgage loans	$	26,212	5,806	12,792	44,810	2,536,443	2,564,655	—
Home equity loans	5,785		1,305	4,783	11,873	1,014,442	1,042,913	—
Consumer finance loans	1,255		766	743	2,764	46,217	48,981	—
Consumer loans	7,343		2,438	2,775	12,556	415,508	428,064	—
Total Personal Banking	40,595		10,315	21,093	72,003	4,012,610	4,084,613	—

Commercial Banking:
Commercial real estate loans	7,674		3,674	16,508	27,856	1,944,227	1,972,083	—
Commercial loans	1,067		1,957	3,107	6,131	449,244	455,375	—
Total Commercial Banking	8,741		5,631	19,615	33,987	2,393,471	2,427,458	—
Total originated loan	49,336		15,946	40,708	105,990	6,406,081	6,512,071	—

Acquired loans:
Personal Banking:
Residential mortgage loans	1,174		421	829	2,424	131,087	133,511	452
Home equity loans	1,020		258	973	2,251	300,206	302,457	204
Consumer loans	1,270		405	320	1,995	163,921	165,916	15
Total Personal Banking	3,464		1,084	2,122	6,670	595,214	601,884	671

Commercial Banking:
Commercial real estate loans	2,703		821	4,762	8,286	361,720	370,006	2,006
Commercial loans	111		124	413	648	72,738	73,386	147
Total Commercial Banking	2,814		945	5,175	8,934	434,458	443,392	2,153
Total acquired loan	6,278		2,029	7,297	15,604	1,029,672	1,045,276	2,824

Total	$	55,614	17,975	48,005	121,594	7,435,753	7,557,347	2,824

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

Credit quality indicators: We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans by credit risk. Credit relationships greater than or equal to $1.0 million classified as special mention or substandard are reviewed quarterly for deterioration or improvement to determine if the loan is appropriately classified. We use the following definitions for risk ratings other than pass:

Special mention — Loans designated as special mention have specific, well-defined risk issues, which create a high level of uncertainty regarding the long-term viability of the business. Loans in this class are considered to have high-risk characteristics. A special mention loan exhibits material negative financial trends due to company-specific or systemic conditions. If these potential weaknesses are not mitigated, they threaten the borrower’s capacity to meet its debt obligations. Special mention loans still demonstrate sufficient financial flexibility to react to and positively address the root cause of the adverse financial trends without significant deviations from their current business strategy. Their potential weaknesses deserve our close attention and warrant enhanced monitoring.

Table of Contents

Substandard — Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.

Doubtful — Loans classified as doubtful have all the weaknesses inherent in those classified as substandard. In addition, those weaknesses make collection or liquidation in full highly questionable and improbable. A loan classified as doubtful exhibits discernible loss potential, but a complete loss seems very unlikely. The possibility of a loss on a doubtful loan is high, but because of certain important and reasonably specific pending factors that may strengthen the loan, its classification as an estimated loss is deferred until a more exact status can be determined.

Loss — Loans classified as loss are considered uncollectible and of such value that the continuance as a loan is not warranted. A loss classification does not mean that the loan has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off all or a portion of a basically worthless loan even though partial recovery may be possible in the future.

The following table sets forth information about credit quality indicators updated during the quarter ended September 30, 2017 (in thousands):



	Pass		Special mention	Substandard	Doubtful	Loss	Total loans receivable
Originated loans:
Personal Banking:
Residential mortgage loans	$	2,607,925	—	15,838	—	—	2,623,763
Home equity loans	1,037,567		—	7,585	—	—	1,045,152
Consumer finance loans	26,560		—	332	—	—	26,892
Consumer loans	531,310		—	3,308	—	—	534,618
Total Personal Banking	4,203,362		—	27,063	—	—	4,230,425

Commercial Banking:
Commercial real estate loans	1,927,940		50,962	110,481	—	—	2,089,383
Commercial loans	467,664		15,204	45,363	—	—	528,231
Total Commercial Banking	2,395,604		66,166	155,844	—	—	2,617,614
Total originated loans	6,598,966		66,166	182,907	—	—	6,848,039

Acquired loans:
Personal Banking:
Residential mortgage loans	117,135		—	2,328	—	—	119,463
Home equity loans	264,469		—	3,814	—	—	268,283
Consumer loans	111,662		—	748	—	—	112,410
Total Personal Banking	493,266		—	6,890	—	—	500,156

Commercial Banking:
Commercial real estate loans	268,570		5,156	35,777	—	—	309,503
Commercial loans	59,160		3,720	5,560	—	—	68,440
Total Commercial Banking	327,730		8,876	41,337	—	—	377,943
Total acquired loans	820,996		8,876	48,227	—	—	878,099

Total loans	$	7,419,962	75,042	231,134	—	—	7,726,138

Table of Contents

The following table sets forth information about credit quality indicators, which were updated during the year ended December 31, 2016 (in thousands):



	Pass		Special mention	Substandard	Doubtful	Loss	Total loans receivable
Originated loans:
Personal Banking:
Residential mortgage loans	$	2,548,390	—	16,265	—	—	2,564,655
Home equity loans	1,035,496		—	7,417	—	—	1,042,913
Consumer finance loans	48,238		—	743	—	—	48,981
Consumer loans	425,712		—	2,352	—	—	428,064
Total Personal Banking	4,057,836		—	26,777	—	—	4,084,613

Commercial Banking:
Commercial real estate loans	1,821,548		36,321	114,214	—	—	1,972,083
Commercial loans	401,866		15,203	38,306	—	—	455,375
Total Commercial Banking	2,223,414		51,524	152,520	—	—	2,427,458
Total originated loans	6,281,250		51,524	179,297	—	—	6,512,071

Acquired loans:
Personal Banking:
Residential mortgage loans	131,717		—	1,794	—	—	133,511
Home equity loans	300,100		—	2,357	—	—	302,457
Consumer loans	165,094		—	822	—	—	165,916
Total Personal Banking	596,911		—	4,973	—	—	601,884

Commercial Banking:
Commercial real estate loans	331,780		7,403	30,823	—	—	370,006
Commercial loans	68,127		1,989	3,270	—	—	73,386
Total Commercial Banking	399,907		9,392	34,093	—	—	443,392
Total acquired loans	996,818		9,392	39,066	—	—	1,045,276

Total	$	7,278,068	60,916	218,363	—	—	7,557,347


(5)	Goodwill and Other Intangible Assets

The following table provides information for intangible assets subject to amortization as of the dates indicated (in thousands):



	September 30, 2017			December 31, 2016
Amortizable intangible assets:
Core deposit intangibles — gross	$	63,685		37,953
Acquisitions	—			25,732
Less: accumulated amortization	(38,725		)	(34,378	)
Core deposit intangibles — net	24,960			29,307
Customer and Contract intangible assets — gross	10,474			8,496
Acquisitions	—			1,978
Less: accumulated amortization	(8,190		)	(7,348	)
Customer and Contract intangible assets — net	$	2,284		3,126

Table of Contents

The following table shows the actual aggregate amortization expense for the quarters and nine months ended September 30, 2017 and 2016, as well as the estimated aggregate amortization expense, based upon current levels of intangible assets, for the current fiscal year and each of the five succeeding fiscal years (in thousands):



For the quarter ended September 30, 2017	$	1,691
For the quarter ended September 30, 2016	1,068
For the nine months ended September 30, 2017	5,189
For the nine months ended September 30, 2016	2,453
For the year ending December 31, 2017	6,764
For the year ending December 31, 2018	5,848
For the year ending December 31, 2019	4,933
For the year ending December 31, 2020	4,017
For the year ending December 31, 2021	3,188
For the year ending December 31, 2022	2,456

The following table provides information for the changes in the carrying amount of goodwill (in thousands):



		Total
Balance at December 31, 2015		261,736
Goodwill acquired		45,684
Balance at December 31, 2016		307,420
Goodwill acquired		—
Impairment losses		—
Balance at September 30, 2017		307,420

We performed our annual goodwill impairment test as of June 30, 2017 using ASU 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment ("Step 0") and concluded that goodwill was not impaired.


(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 September 30, 2017, the maximum potential amount of future payments we could be required to make under these non-recourse standby letters of credit was $17.7 million, of which $17.2 million is fully collateralized. At September 30, 2017, we had a liability, which represents deferred income, of $137,000 related to the standby letters of credit.


(7)	Earnings Per Share

Basic earnings per common share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period, without considering any dilutive items. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. All stock options outstanding during the quarter ended September 30, 2017 and 2016, were included in the computation of diluted earnings per share because the options’ exercise price was less than the average market price of the common shares of $16.26 and $15.19, respectively. All stock options outstanding during the nine months ended September 30, 2017 were included in the computation of diluted earnings per share because the options’ exercise price was less than the average market price of the common shares of $16.58. Stock options to purchase 710,423 shares of common stock with a weighted average exercise price of $14.15 per share were outstanding during the nine months ended September 30, 2016 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares of $14.02.

Table of Contents

The computation of basic and diluted earnings per share follows (in thousands, except share data and per share amounts):



	Quarter ended September 30,			Nine months ended September 30, 2017
	2017		2016	2017	2016
Reported net income	$	23,591	14,197	72,319	25,173

Weighted average common shares outstanding	101,163,534		99,602,535	100,921,322	99,224,565
Dilutive potential shares due to effect of stock options	1,400,942		1,465,710	1,617,020	1,008,942
Total weighted average common shares and dilutive potential shares	102,564,476		101,068,245	102,538,342	100,233,507

Basic earnings per share:	$	0.23	0.14	0.72	0.25

Diluted earnings per share:	$	0.23	0.14	0.71	0.25

(8) Pension and Other Post-retirement Benefits

The following table sets forth the net periodic costs for the defined benefit pension plans and post retirement healthcare plans for the periods indicated (in thousands):

Components of net periodic benefit cost



	Quarter ended September 30,
	Pension benefits					Other post-retirement benefits
	2017			2016		2017	2016
Service cost	$	1,537		1,374		—	—
Interest cost	1,719			1,695		17	18
Expected return on plan assets	(2,628		)	(2,474	)	—	—
Amortization of prior service cost	(580		)	(581	)	—	—
Amortization of the net loss	928			927		27	22
Net periodic cost	$	976		941		44	40



	Nine Months Ended September 30, 2016
	Pension benefits					Other post-retirement benefits
	2017			2016		2017	2016
Service cost	$	4,612		4,122		—	—
Interest cost	5,159			5,087		51	53
Expected return on plan assets	(7,884		)	(7,423	)	—	—
Amortization of prior service cost	(1,742		)	(1,742	)	—	—
Amortization of the net loss	2,783			2,782		81	67
Net periodic cost	$	2,928		2,826		132	120

We anticipate making a contribution to our defined benefit pension plan of $4.0 million to $5.0 million during the year ending December 31, 2017.

Table of Contents


(9)	Disclosures About Fair Value of Financial Instruments

Fair value information about financial instruments, whether or not recognized in the consolidated statement of financial condition, is required to be disclosed. These requirements exclude certain financial instruments and all nonfinancial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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

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


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


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


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


•	Quotes from brokers or other external sources that are not considered binding;


•	Quotes from brokers or other external sources where it cannot be determined that market participants would in fact transact for the asset or liability at the quoted price;


•	Quotes and other information from brokers or other external sources where the inputs are not deemed observable.

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

The carrying amounts reported in the consolidated statement of financial condition approximate fair value for the following financial instruments: cash on hand, interest-earning deposits in other institutions, federal funds sold and other short-term investments, accrued interest receivable, accrued interest payable, and marketable securities available-for-sale.

Marketable Securities

Where available, market values are based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.

Debt securities - available for sale - Generally, debt securities are valued using pricing for similar securities, recently executed transactions and other pricing models utilizing observable inputs. The valuation for most debt securities is classified as Level 2. Securities within Level 2 include corporate bonds, municipal bonds, mortgage-backed securities and US government obligations. Certain corporate debt securities do not have an active market and as such the broker pricing received uses alternative methods. The fair value of these corporate debt securities is determined by using a discounted cash flow model using market assumptions, which generally include cash flow, collateral and other market assumptions. As such, these securities are included herein as Level 3 assets.

Equity securities - available for sale - Level 1 securities include publicly traded securities valued using quoted market prices. We consider the financial condition of the issuer to determine if the securities have indicators of impairment.

Table of Contents

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

Loans Held for Sale

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

Loans Held for Investment

Loans with comparable characteristics including collateral and re-pricing structures are segregated for valuation purposes. Characteristics include remaining term, coupon interest, and estimated prepayment speeds. Delinquent loans are separately evaluated given the impact delinquency has on the projected future cash flow of the loan and the approximate discount or market rate. Each loan pool is separately valued utilizing a discounted cash flow analysis. Projected monthly cash flows are discounted to present value using a market rate for comparable loans, which is not considered an exit price.

Federal Home Loan Bank (“FHLB”) Stock

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

Deposit Liabilities

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

Borrowed Funds

Fixed rate advances are valued by comparing their contractual cost to the prevailing market cost. The carrying amount of collateralized borrowings approximates the fair value.

Junior Subordinated Debentures

The fair value of junior subordinated debentures is calculated using the discounted cash flows at the prevailing rate of interest.

Cash flow hedges — Interest rate swap agreements (“swaps”)

The fair value of the swaps is the amount we would expect to pay to terminate the agreements and is based upon the present value of the expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate.

Off-Balance Sheet Financial Instruments

These financial instruments generally are not sold or traded, and estimated fair values are not readily available. However, the fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. Commitments to extend credit are generally short-term in nature and, if drawn upon, are issued under current market terms. At September 30, 2017 and December 31, 2016, there was no significant unrealized appreciation or depreciation on these financial instruments.

Table of Contents

The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the consolidated statement of financial condition at September 30, 2017 (in thousands):



	Carrying amount		Estimated fair value	Level 1	Level 2	Level 3
Financial assets:
Cash and cash equivalents	$	165,676	165,676	165,676	—	—
Securities available-for-sale	869,481		869,481	949	857,873	10,659
Securities held-to-maturity	31,961		32,282	—	32,282	—
Loans receivable, net	7,669,211		7,746,906	1,382	—	7,745,524
Accrued interest receivable	22,802		22,802	22,802	—	—
FHLB Stock	7,984		7,984	—	—	—
Total financial assets	$	8,767,115	8,845,131	190,809	890,155	7,756,183

Financial liabilities:
Savings and checking deposits	$	6,506,184	6,506,184	6,506,184	—	—
Time deposits	1,435,861		1,455,485	—	—	1,455,485
Borrowed funds	115,388		115,388	115,388	—	—
Junior subordinated debentures	111,213		112,954	—	—	112,954
Cash flow hedges - swaps	1,538		1,538	—	1,538	—
Accrued interest payable	518		518	518	—	—
Total financial liabilities	$	8,170,702	8,192,067	6,622,090	1,538	1,568,439

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, 2016 (in thousands):



	Carrying amount		Estimated fair value	Level 1	Level 2	Level 3
Financial assets:
Cash and cash equivalents	$	389,867	389,867	389,867	—	—
Securities available-for-sale	826,200		826,200	4,440	812,394	9,366
Securities held-to-maturity	19,978		20,426	—	20,426	—
Loans receivable, net	7,496,408		7,878,815	9,625	—	7,869,190
Assets held-for-sale	146,660		146,660	146,660	—	—
Accrued interest receivable	21,699		21,699	21,699	—	—
FHLB Stock	7,390		7,390	—	—	—
Total financial assets	$	8,908,202	9,291,057	572,291	832,820	7,878,556

Financial liabilities:
Savings and checking accounts	$	6,341,735	6,341,735	6,341,735	—	—
Time deposits	1,540,586		1,626,434	—	—	1,626,434
Liabilities held-for-sale	215,649		215,649	215,649	—	—
Borrowed funds	142,899		142,899	142,899	—	—
Junior subordinated debentures	111,213		113,313	—	—	113,313
Cash flow hedges - swaps	2,736		2,736	—	2,736	—
Accrued interest payable	643		643	643	—	—
Total financial liabilities	$	8,355,461	8,443,409	6,700,926	2,736	1,739,747

Fair value estimates are made at a point-in-time, based on relevant market data and information about the instrument. The methods and assumptions detailed above were used in estimating the fair value of financial instruments at both September 30, 2017 and December 31, 2016. There were no transfers of financial instruments between Level 1 and Level 2 during the nine months ended September 30, 2017.

Table of Contents

The following table represents assets and liabilities measured at fair value on a recurring basis at September 30, 2017 (in thousands):



	Level 1		Level 2		Level 3	Total assets at fair value
Equity securities	$	949	—		—	949

Debt securities:
U.S. government and agencies	—		2		—	2
Government sponsored enterprises	—		241,599		—	241,599
States and political subdivisions	—		53,214		—	53,214
Corporate	—		8,019		10,659	18,678
Total debt securities	—		302,834		10,659	313,493

Residential mortgage-backed securities:
GNMA	—		28,388		—	28,388
FNMA	—		82,023		—	82,023
FHLMC	—		68,234		—	68,234
Non-agency	—		560		—	560
Collateralized mortgage obligations:
GNMA	—		5,152		—	5,152
FNMA	—		202,459		—	202,459
FHLMC	—		168,182		—	168,182
SBA	—		—		—	—
Non-agency	—		41		—	41
Total mortgage-backed securities	—		555,039		—	555,039

Interest rate swaps	—		(1,538	)	—	(1,538	)

Total assets and liabilities	$	949	856,335		10,659	867,943

Table of Contents

The following table represents assets and liabilities measured at fair value on a recurring basis at December 31, 2016 (in thousands):



	Level 1		Level 2		Level 3	Total assets at fair value
Equity securities	$	4,440	—		—	4,440

Debt securities:
U.S. government and agencies	—		6		—	6
Government sponsored enterprises	—		294,170		—	294,170
States and political subdivisions	—		63,070		—	63,070
Corporate	—		7,614		9,366	16,980
Total debt securities	—		364,860		9,366	374,226

Residential mortgage-backed securities:
GNMA	—		30,883		—	30,883
FNMA	—		106,578		—	106,578
FHLMC	—		82,115		—	82,115
Non-agency	—		579		—	579
Collateralized mortgage obligations:
GNMA	—		6,287		—	6,287
FNMA	—		95,186		—	95,186
FHLMC	—		119,197		—	119,197
SBA	—		6,608		—	6,608
Non-agency	—		101		—	101
Total mortgage-backed securities	—		447,534		—	447,534

Interest rate swaps	—		(2,736	)	—	(2,736	)

Total assets and liabilities	$	4,440	809,658		9,366	823,464

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods indicated (in thousands):



	Quarter ended			Nine Months Ended
	September 30, 2017		September 30, 2016	September 30, 2017	September 30, 2016
Beginning balance	$	10,638	8,719	9,366	8,955

Net change in unrealized appreciation:
Included in net income as OTTI	—		—		—
Included in other comprehensive income	21		510	1,293	274

Purchases	—		—	—	—
Sales	—		—	—	—
Transfers in to Level 3	—		—	—	—
Transfers out of Level 3	—		—	—	—

Ending balance	$	10,659	9,229	10,659	9,229

Table of Contents

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and real estate owned. The following table represents the fair value measurement for nonrecurring assets at September 30, 2017 (in thousands):



	Level 1		Level 2	Level 3	Total assets at fair value
Loans measured for impairment	$	—	—	38,907	38,907
Real estate owned	—		—	5,462	5,462

Total assets	$	—	—	44,369	44,369

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment, mortgage servicing rights, and real estate owned. The following table represents the fair value measurement for nonrecurring assets at December 31, 2016 (in thousands):



	Level 1		Level 2	Level 3	Total assets at fair value
Loans measured for impairment	$	—	—	41,933	41,933
Mortgage loan servicing	—		—	246	246
Real estate owned	—		—	4,889	4,889

Total assets	$	—	—	47,068	47,068

Impaired loans — A loan is considered to be impaired as described in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2016 Annual Report on Form 10-K. We classify loans individually evaluated for impairment that require a specific reserve as nonrecurring Level 3.

Mortgage servicing rights - Mortgage servicing rights represent the value of servicing residential mortgage loans, when the mortgage loans have been sold into the secondary market and the associated servicing has been retained. The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. Servicing rights and the related mortgage loans are segregated into categories or homogeneous pools based upon common characteristics. Adjustments are only made when the estimated discounted future cash flows are less than the carrying value, as determined by individual pool. As such, mortgage servicing rights are classified as nonrecurring Level 3.

Real Estate Owned — Real estate owned is comprised of property acquired through foreclosure or voluntarily conveyed by delinquent borrowers. These assets are recorded on the date acquired at the lower of the related loan balance or fair value, less estimated disposition costs, with the fair value being determined by appraisal. Subsequently, foreclosed assets are valued at the lower of the amount recorded at acquisition date or fair value, less estimated disposition costs. We classify all real estate owned as nonrecurring Level 3.

The table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at September 30, 2017 (dollar amounts in thousands):



	Fair value		Valuation techniques	Significant unobservable inputs	Range (weighted average)
Debt securities	$	10,659	Discounted cash	Discount margin	0.4% to 2.1% (0.7%)
			flow	Default rates	1.0%
				Prepayment speeds	1.0 annually

Loans measured for impairment	38,907		Appraisal value (1)	Estimated cost to sell	10.0%
			Discounted cash flow	Discount rate	4.25% to 10.0% (7.50%)

Real estate owned	5,462		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.

The significant unobservable inputs used in the fair value measurement of our debt securities are discount margins, default rates and prepayment speeds. Significant increases in any of those rates would result in a significantly lower fair value measurement.

Table of Contents


(10)	Guaranteed Preferred Beneficial Interests in the Company’s Junior Subordinated Deferrable Interest Debentures (Trust Preferred Securities) and Derivatives

We have two legacy statutory business trusts: Northwest Bancorp Capital Trust III, a Delaware statutory business trust and Northwest Bancorp Statutory Trust IV, a Connecticut statutory business trust (“Trusts”). These trusts exist solely to issue preferred securities to third parties for cash, issue common securities to the Company in exchange for capitalization of the Trusts, invest the proceeds from the sale of the trust securities in an equivalent amount of debentures of the Company, and engage in other activities that are incidental to those previously listed.

Northwest Bancorp Capital Trust III (Trust III) issued 50,000 cumulative trust preferred securities in a private transaction to a pooled investment vehicle on December 5, 2006 (liquidation value of $1,000 per preferred security or $50,000,000) with a stated maturity of December 30, 2035. These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 1.38%. Northwest Bancorp Statutory Trust IV (Trust IV) issued 50,000 cumulative trust preferred securities in a private transaction to a pooled investment vehicle on December 15, 2006 (liquidation value of $1,000 per preferred security or $50,000,000) with a stated maturity of December 15, 2035. These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 1.38%. The Trusts have invested the proceeds of the offerings in junior subordinated deferrable interest debentures issued by the Company. The structure of these debentures mirrors the structure of the trust-preferred securities. Trust III holds $51,547,000 of the Company’s junior subordinated debentures and Trust IV holds $51,547,000 of the Company’s junior subordinated debentures. These subordinated debentures are the sole assets of the Trusts. Cash distributions on the trust securities are made on a quarterly basis to the extent interest on the debentures is received by the Trusts. We have the right to defer payment of interest on the subordinated debentures at any time, or from time-to-time, for periods not exceeding five years. If interest payments on the subordinated debentures are deferred, the distributions on the trust preferred securities are also deferred. Interest on the subordinated debentures and distributions on the trust securities is cumulative. To date, there have been no interest deferrals. Our obligation constitutes a full, irrevocable, and unconditional guarantee on a subordinated basis of the obligations of the trust under the preferred securities.

As a result of the LNB acquisition we acquired two statutory business trusts: LNB Trust I and LNB Trust II; both are Delaware statutory business trusts. The outstanding stock issued by LNB Trust I was redeemed on December 15, 2015. At September 30, 2017, LNB Trust II had 7,875 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $7,875,000) with a stated maturity of June 15, 2037. These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 1.48%. LNB Trust II invested the proceeds of the offerings in junior subordinated deferrable interest debentures acquired by the Company. The structure of these debentures mirrors the structure of the trust-preferred securities. LNB Trust II holds $8,119,000 of junior subordinated debentures. The subordinated debentures are the sole assets of the Trusts. Cash distributions on the trust securities are made on a quarterly basis to the extent interest on the debentures is received by the Trusts.

Derivatives Designated as Hedging Instruments

We are currently a counterparty to two interest rate swap agreements (swaps), designating the swaps as cash flow hedges. The swaps are intended to protect against the variability of cash flows associated with Trust III and Trust IV. The first swap modifies the re-pricing characteristics of Trust III, wherein for a ten year period expiring in September 2018, the Company receives interest of three-month LIBOR from a counterparty and pays a fixed rate of 4.61% to the same counterparty calculated on a notional amount of $25.0 million. The other swap modifies the re-pricing characteristics of Trust IV, wherein for a ten year period expiring in December 2018, the Company receives interest of three-month LIBOR from a counterparty and pays a fixed rate of 4.09% to the same counterparty calculated on a notional amount of $25.0 million. The swap agreements were entered into with a counterparty that met our credit standards and the agreements contain collateral provisions protecting the at-risk party. We believe that the credit risk inherent in the contracts is not significant. At September 30, 2017, $2.1 million of cash was pledged as collateral to the counterparty.

At September 30, 2017, the fair value of the swap agreements was $(1.5) million and was the amount we would have expected to pay if the contracts were terminated. There was no material hedge ineffectiveness for these swaps.

Table of Contents

Derivatives Not Designated as Hedging Instruments

We are currently a counterparty to foreign exchange contracts, which include spot and forward contracts, which are commitments to buy or sell foreign currency at an agreed-upon price on an agreed-upon settlement date. We use these instruments on a limited basis to eliminate exposure to fluctuations in currency exchange rates on certain commercial loans that are denominated in foreign currencies. As a result of fluctuations in foreign currencies, the U.S. dollar-equivalent value of the foreign currency denominated loans increase or decrease. Gains or losses on the foreign exchange contracts substantially offset the translation gains and losses on the related foreign currency denominated loans.

The following table sets forth information related to derivatives at September 30, 2017 and December 31, 2016 (in thousands):



	September 30, 2017		December 31, 2016
Derivatives designed as hedging instruments:
Fair value (1)	$	1,538	2,736
Notional amount	50,000		50,000
Collateral posted	2,055		3,005

Derivatives not designed as hedging instruments:
Foreign exchange fair value (2)	44		—
Notional amount	4,578		—

(1) Included in other liabilities.

(2) Included in other assets.

(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 September 30, 2017 we have not accrued for any legal proceedings based on our analysis of currently available information which is subject to significant judgment and a variety of assumptions and uncertainties. Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances. Due to the inherent subjectivity of assessments and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate loss to us from legal proceedings.

Table of Contents


(12)	Changes in Accumulated Other Comprehensive Income/ (Loss)

The following table shows the changes in accumulated other comprehensive income by component for the periods indicated (in thousands):



	For the quarter ended September 30, 2017
	Unrealized gains and (losses) on securities available- for-sale			Change in fair value of interest rate swaps		Change in defined benefit pension plans		Total
Balance as of June 30, 2017	$	2,276		(1,257	)	(26,167	)	(25,148	)
Other comprehensive income before reclassification adjustments	(264		)	258		—		(6	)
Amounts reclassified from accumulated other comprehensive income (1), (2)	(674		)	—		221		(453	)
Net other comprehensive income	(938		)	258		221		(459	)
Balance as of September 30, 2017	$	1,338		(999	)	(25,946	)	(25,607	)



	For the quarter ended September 30, 2016
	Unrealized gains and (losses) on securities available- for-sale			Change in fair value of interest rate swaps		Change in defined benefit pension plans		Total
Balance as of June 30, 2016	$	7,866		(2,753	)	(24,630	)	(19,517	)
Other comprehensive income before reclassification adjustments	(785		)	471		—		(314	)
Amounts reclassified from accumulated other comprehensive income (3), (4)	(36		)	—		224		188
Net other comprehensive income	(821		)	471		224		(126	)
Balance as of September 30, 2016	$	7,045		(2,282	)	(24,406	)	(19,643	)


(1)	Consists of realized gain on securities (gain on sales of investments, net) of $1,043, net of tax (income tax expense) of $(369).


(2)	Consists of amortization of prior service cost (compensation and employee benefits) of $580 and amortization of net loss (compensation and employee benefits) of $(954), net of tax (income tax expense) of $153. See note 9.


(3)	Consists of realized loss on securities (gain on sales of investments, net) of $59, net of tax (income tax expense) of $(23).


(4)	Consists of amortization of prior service cost (compensation and employee benefits) of $581 and amortization of net loss (compensation and employee benefits) of $(949), net of tax (income tax expense) of $144. See note 9.

Table of Contents

The following table shows the changes in accumulated other comprehensive income by component for the periods indicated (in thousands):



	For the nine months ended September 30, 2017
	Unrealized gains and (losses) on securities available- for-sale			Change in fair value of interest rate swaps		Change in defined benefit pension plans		Total
Balance as of December 31, 2016	$	395		(1,778	)	(26,608	)	(27,991	)
Other comprehensive income before reclassification adjustments	1,684			779		—		2,463
Amounts reclassified from accumulated other comprehensive income (1), (2)	(741		)	—		662		(79	)
Net other comprehensive income	943			779		662		2,384
Balance as of September 30, 2017	$	1,338		(999	)	(25,946	)	(25,607	)



	For the nine months ended September 30, 2016
	Unrealized gains and (losses) on securities available- for-sale		Change in fair value of interest rate swaps		Change in defined benefit pension plans		Total
Balance as of December 31, 2015	$	3,325	(2,779	)	(25,081	)	(24,535	)
Other comprehensive income before reclassification adjustments	3,717		497		—		4,214
Amounts reclassified from accumulated other comprehensive income (3), (4)	3		—		675		678
Net other comprehensive income	3,720		497		675		4,892
Balance as of September 30, 2016	$	7,045	(2,282	)	(24,406	)	(19,643	)


(1)	Consists of realized gains on securities (gain on sales of investments, net) of $1,157, net of tax (income tax expense) of $(416).


(2)	Consists of amortization of prior service cost (compensation and employee benefits) of $1,742 and amortization of net loss (compensation and employee benefits) of $(2,864), net of tax (income tax expense) of $460. See note 9.


(3)	Consists of realized gains on securities (gain on sales of investments, net) of $(4), net of tax (income tax expense) of $1.


(4)	Consists of amortization of prior service cost (compensation and employee benefits) of $1,742 and amortization of net loss (compensation and employee benefits) of $(2,849), net of tax (income tax expense) of $432. See note 9.

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.

Table of Contents

Important factors that might cause such a difference include, but are not limited to:


•	changes in laws, government regulations or policies affecting financial institutions, including regulatory fees and capital requirements;


•	general economic conditions, either nationally or in our market areas, that are different than expected;


•	competition among other financial institutions and non-depository entities;


•	inflation and changes in the interest rate environment that impact our margins or the fair value of financial instruments;


•	adverse changes in the securities markets;


•	cyber security concerns, including an interruption or breach in the security of our information systems;


•	our ability to enter new markets successfully and/or capitalize on growth opportunities;


•	managing our internal growth and our ability to successfully integrate acquired entities, businesses and branch offices;


•	changes in consumer spending, borrowing and savings habits;


•	our ability to continue to increase and manage our business and personal loans;


•	possible impairments of securities held by us, including those issued by government entities and government sponsored enterprises;


•	the impact of the economy on our loan portfolio (including cash flow and collateral values), investment portfolio, customers and capital market activities;


•	our ability to receive regulatory approvals for proposed transactions or new lines of business:


•	the impact of the current governmental effort to restructure the U.S. financial and regulatory system;


•	changes in the financial performance and/or condition of our borrowers; and


•	the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Securities and Exchange Commission, the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

Overview of Critical Accounting Policies Involving Estimates

Please refer to Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2016 Annual Report on Form 10-K.

Executive Summary and Comparison of Financial Condition

Total assets at September 30, 2017 were $9.460 billion, a decrease of $163.8 million, or 1.7%, from $9.624 billion at December 31, 2016. This decrease in assets was due primarily to $152.5 million of assets sold to Shore United Bank on May 19, 2017, in connection with the sale of three Maryland branch offices.

Total loans receivable increased by $168.8 million, or 2.2%, to $7.726 billion at September 30, 2017, from $7.557 billion at December 31, 2016 due primarily to an increase in our commercial banking loan portfolio of $124.7 million, or 4.3%, to $2.996 billion at September 30, 2017 from $2.871 billion at December 31, 2016. Additionally, our personal banking loan portfolio increased by $44.1 million, or 0.9%, to $4.731 billion at September 30, 2017 from $4.686 billion at December 31, 2016, due primarily to the growth of the indirect automobile portfolio.

Total deposits increased by $59.7 million, or 0.8%, to $7.942 billion at September 30, 2017 from $7.882 billion at December 31, 2016. Noninterest-bearing checking deposits increased by $176.2 million, or 12.2%, to $1.625 billion at September 30, 2017 from $1.449 billion at December 31, 2016, interest-bearing checking deposits increased by $23.5 million, or 1.6%, to $1.452 billion at September 30, 2017 from $1.428 billion at December 31, 2016 and savings deposits increased by $46.9 million, or 2.9%, to $1.670 billion at September 30, 2017 from $1.623 billion at December 31, 2016. Partially offsetting these increases were decreases in time deposits of $104.7 million, or 6.8%, to $1.436 billion at September 30, 2017 from $1.541 billion at December 31, 2016, and money market demand accounts decreased by $82.2 million, or 4.5%, to $1.759 billion at September 30, 2017 from $1.842 billion at December 31, 2016. Despite modest increases in interest rates, these changes reflect our customers' preference for more liquid deposit products.

Total shareholders’ equity at September 30, 2017 was $1.206 billion, or $11.76 per share, an increase of $35.2 million, or 3.0%, from $1.171 billion, or $11.51 per share, at December 31, 2016. This increase in equity was primarily the result of net income of $72.3 million for the nine months ended September 30, 2017, which was partially offset by the payment of cash dividends of $48.9 million during the nine months ended September 30, 2017.

Table of Contents

As previously announced in April, we closed the remaining offices of our consumer finance subsidiary, Northwest Consumer Discount Company, Inc. ("NCDC"), on July 14, 2017. All NCDC loans were transferred to Northwest for servicing and collections. Northwest continues to make direct consumer loans to qualified customers as well as indirect sales finance loans through various dealers and retailers.

Regulatory Capital

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

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

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

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



	At September 30, 2017
					Minimum capital			Well capitalized
	Actual				requirements (1)			requirements
	Amount		Ratio		Amount	Ratio		Amount	Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc.	$	1,077,603	15.152	%	657,874	9.250	%	711,216	10.00	%
Northwest Bank	1,032,725		14.538	%	657,102	9.250	%	710,381	10.00	%

Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc.	1,020,620		14.350	%	515,631	7.250	%	568,972	8.00	%
Northwest Bank	975,788		13.736	%	515,026	7.250	%	568,304	8.00	%

CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc.	912,745		12.834	%	408,949	5.750	%	462,290	6.50	%
Northwest Bank	975,788		13.736	%	408,469	5.750	%	461,747	6.50	%

Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc.	1,020,620		10.994	%	371,341	4.000	%	464,176	5.000	%
Northwest Bank	975,788		10.521	%	370,992	4.000	%	463,740	5.000	%

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

Table of Contents



	At December 31, 2016
					Minimum capital			Well capitalized
	Actual				requirements (1)			requirements
	Amount		Ratio		Amount	Ratio		Amount	Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc.	$	1,051,582	14.873	%	609,835	8.625	%	751,246	10.00	%
Northwest Bank	961,279		13.609	%	609,248	8.625	%	750,523	10.00	%

Tier I capital (to risk weighted assets)
Northwest Bancshares, Inc.	990,153		14.004	%	468,424	6.625	%	609,835	8.00	%
Northwest Bank	900,328		12.746	%	467,973	6.625	%	609,248	8.00	%

CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc.	882,278		12.478	%	362,366	5.125	%	503,777	6.50	%
Northwest Bank	900,328		12.746	%	362,017	5.125	%	503,292	6.50	%

Tier I capital (leverage) (to average assets)
Northwest Bancshares, Inc.	990,153		10.530	%	376,116	4.000	%	470,145	5.000	%
Northwest Bank	900,328		9.585	%	375,735	4.000	%	469,669	5.000	%

(1) Amounts and ratios include the 2016 capital conservation buffer of 0.625%, with the exception of Tier 1 capital to average assets (leverage ratio).

Liquidity

We are required to maintain a sufficient level of liquid assets, as determined by management and reviewed for adequacy by the FDIC and the Pennsylvania Department of Banking and Securities during their regular examinations. Northwest monitors its liquidity position primarily using the ratio of unencumbered available-for-sale liquid assets as a percentage of deposits and borrowings (“liquidity ratio”). Northwest’s liquidity ratio at September 30, 2017 was 11.2%. We adjust liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes and insurance on mortgage loan escrow accounts, repayment of borrowings and loan commitments. At September 30, 2017 Northwest had $3.248 billion of borrowing capacity available with the FHLB, including $150.0 million on an overnight line of credit, as well as $70.4 million of borrowing capacity available with the Federal Reserve Bank and $80.0 million with two correspondent banks.

Dividends

We paid $16.3 million, or $0.16 per share, and $15.1 million, or $0.15 per share, in cash dividends during the quarters ended September 30, 2017 and 2016, respectively. The common stock dividend payout ratio (dividends declared per share divided by net income per share) was 69.6% and 107.1% for the quarters ended September 30, 2017 and 2016, respectively. We paid $48.9 million, or $0.48 per share, and $45.0 million, or $0.45 per share in cash dividends during the nine months ended September 30, 2017 and 2016, respectively. The common stock dividend payout ratio (dividends declared per share divided by net income per share) was 67.6% and 180.0% for the nine months ended September 30, 2017 and 2016, respectively. On October 17, 2017, the Board of Directors declared a cash dividend of $0.16 per share payable on November 16, 2017 to shareholders of record as of November 2, 2017. This represents the 92nd consecutive quarter we have paid a cash dividend.

Nonperforming Assets

The following table sets forth information with respect to nonperforming assets. Nonaccrual loans are those loans on which the accrual of interest has ceased. Generally, when a loan is 90 days past due, we fully reverse all accrued interest thereon and cease to accrue interest thereafter. Exceptions are made for loans that have contractually matured, are in the process of being modified to extend the maturity date and are otherwise current as to principal and interest, and well secured loans that are in process

Table of Contents

of collection. Loans may also be placed on nonaccrual before they reach 90 days past due if conditions exist that call into question our ability to collect all contractual interest. Other nonperforming assets represent property acquired through foreclosure or repossession. Foreclosed property is carried at the lower of its fair value less estimated costs to sell, or the principal balance of the related loan.



	September 30, 2017			December 31, 2016
	(Dollars in thousands)
Loans 90 days or more past due
Residential mortgage loans	$	12,190		13,621
Home equity loans	6,543			5,756
Consumer legacy finance loans	332			743
Consumer loans	3,506			3,180
Commercial real estate loans	23,310			21,834
Commercial loans	4,177			3,520
Total loans 90 days or more past due	$	50,058		48,654
Total real estate owned (REO)	5,462			4,889
Total loans 90 days or more past due and REO	55,520			53,543
Total loans 90 days or more past due to net loans receivable	0.65		%	0.65	%
Total loans 90 days or more past due and REO to total assets	0.59		%	0.56	%
Nonperforming loans:
Nonaccrual loans - loans 90 days or more delinquent	$	48,416		45,181
Nonaccrual loans - loans less than 90 days delinquent	24,918			34,355
Loans 90 days or more past maturity and still accruing	398			649
Total nonperforming loans	73,732			80,185
Total nonperforming assets	$	79,194		85,074
Nonaccrual troubled debt restructured loans (1)	$	17,809		16,346
Accruing troubled debt restructured loans	20,660			26,580
Total troubled debt restructured loans	$	38,469		42,926


(1)	Included in nonaccurual loans above.

At September 30, 2017, we expect to fully collect the carrying value of our purchased credit impaired loans and have determined that we can reasonably estimate their future cash flows including those loans that are 90 days or more delinquent. As a result, we do not consider these loans that are 90 days or more delinquent, which total $1.2 million, to be nonaccrual or impaired and continue to recognize interest income on these loans, including the loans’ accretable discount.

A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement including both contractual principal and interest payments. The amount of impairment is required to be measured using one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, a specific allowance is allocated for the impairment. Impaired loans at September 30, 2017 and December 31, 2016 were $94.6 million and $108.1 million, respectively.

Allowance for Loan Losses

Our Board of Directors has adopted an “Allowance for Loan and Lease Losses” (“ALL”) policy designed to provide management with a systematic methodology for determining and documenting the ALL each reporting period. This methodology was developed to provide a consistent process and review procedure to ensure that the ALL is in conformity with GAAP, our policies and procedures and other supervisory and regulatory guidelines.

On an ongoing basis, the Credit Administration department, as well as loan officers, branch managers and department heads, review and monitor the loan portfolio for problem loans. This portfolio monitoring includes a review of the monthly delinquency reports as well as historical comparisons and trend analysis. In addition, a meeting is held every quarter with each region to monitor the performance and status of loans on an internal watch list. On an on-going basis the loan officer, in conjunction with a portfolio manager, grades or classifies problem loans or potential problem loans based upon their knowledge of the lending relationship and other information previously accumulated. This rating is also reviewed independently by our Loan Review department on a periodic basis. Our loan grading system for problem loans is consistent with industry regulatory guidelines which classify loans as “substandard”, “doubtful” or “loss.” Loans that do not expose us to risk sufficient to warrant classification in

Table of Contents

one of the previous categories, but which possess some weaknesses, are designated as “special mention”. A “substandard” loan is any loan that is 90 days or more contractually delinquent or is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as “doubtful” have all the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions or values, highly questionable and improbable. Loans classified as “loss” are considered uncollectible so that their continuance as assets without the establishment of a specific loss allowance is not warranted.

Credit relationships that have been classified as substandard or doubtful and are greater than or equal to $1.0 million are reviewed by the Credit Administration department for possible impairment. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement, including both contractual principal and interest payments.

If such an individual loan is deemed to be impaired, the Credit Administration department determines the proper measure of impairment for each loan based on one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent, less costs of sale or disposal. If the measurement of the impaired loan is more or less than the recorded investment in the loan, the Credit Administration department adjusts the specific allowance associated with that individual loan accordingly.

If a substandard or doubtful loan is not considered individually for impairment, it is grouped with other loans that possess common characteristics for impairment evaluation and analysis. This segmentation is accomplished by grouping loans of similar product types, risk characteristics and industry concentration into homogeneous pools. Historical loss ratios are analyzed and adjusted based on delinquency trends as well as the current economic, political, regulatory, and interest rate environment and used to estimate the current measure of impairment.

The individual impairment measures along with the estimated loss for each homogeneous pool are consolidated into one summary document. This summary schedule along with the support documentation used to establish this schedule is presented to management’s Allowances for Loan Losses Committee monthly. The Allowances for Loan Losses Committee reviews the processes and documentation presented. Quarterly management's Credit Committee reviews the allowance for loan loss committee's report, reviews the concentration of credit by industry and customer, lending products and activity, competition and collateral values, as well as economic conditions in general and in each of our market areas. Based on this review and discussion, the appropriate amount of ALL is estimated and any adjustments to reconcile the actual ALL with this estimate are determined. In addition, the Credit Committee considers if any changes to the methodology are needed. The Credit Committee also reviews and discusses delinquency trends, nonperforming asset amounts and ALL levels and ratios compared to our peer group as well as state and national statistics. Similarly, following the Credit Committee’s review and approval, a review is performed by the Risk Management Committee of the Board of Directors on a quarterly basis.

In addition to the reviews by management’s Credit Committee and the Board of Directors’ Risk Management Committee, regulators from either the FDIC or the Pennsylvania Department of Banking and Securities perform an extensive review on an annual basis for the adequacy of the ALL and its conformity with regulatory guidelines and pronouncements. Any recommendations or enhancements from these independent parties are considered by management and the Credit Committee and implemented accordingly.

We acknowledge that this is a dynamic process and consists of factors, many of which are external and out of our control that can change often, rapidly and substantially. The adequacy of the ALL is based upon estimates using all the information previously discussed as well as current and known circumstances and events. There is no assurance that actual portfolio losses will not be substantially different than those that were estimated.

We utilize a structured methodology each period when analyzing the adequacy of the allowance for loan losses and the related provision for loan losses, which the Credit Committee assesses regularly for appropriateness. As part of the analysis as of September 30, 2017, we considered the economic conditions in our markets, such as unemployment and bankruptcy levels as well as changes in estimates of real estate collateral values; and no changes in methodology was determined necessary. In addition, we considered the overall trends in asset quality, specific reserves already established for criticized loans, historical loss rates and collateral valuations. The allowance for loan losses decreased by $4.0 million, or 6.6%, to $56.9 million, or 0.74% of total loans at September 30, 2017 from $60.9 million, or 0.81% of total loans, at December 31, 2016. This decrease is due primarily to improvements in the historical loss rates used to calculated the ALL for commercial banking loans .

We also consider how the levels of non-accrual loans and historical charge-offs have influenced the required amount of allowance for loan losses. Nonaccrual loans of $73.3 million or 0.95% of total loans receivable at September 30, 2017 decreased by $6.2 million, or 7.8%, from $79.5 million, or 1.05% of total loans receivable, at December 31, 2016. As a percentage of average

Table of Contents

loans, annualized net charge-offs increased to 0.30% for the nine months ended September 30, 2017 compared to 0.21% for the year ended December 31, 2016. However, this increase was concentrated primarily in the discontinued consumer finance company business line.

Comparison of Operating Results for the Quarters Ended September 30, 2017 and 2016

Net income for the quarter ended September 30, 2017 was $23.6 million, or $0.23 per diluted share, an increase of $9.4 million, or 66.2%, from net income of $14.2 million, or $0.14 per diluted share, for the quarter ended September 30, 2016. The increase in net income resulted from increases in net interest income of $5.9 million, or 7.7% and noninterest income of $3.8 million, or 18.1% and decreases in noninterest expense of $4.9 million, or 6.6% and provision for loan losses of $2.5 million, or 45.3%. Partially offsetting these factors was an increase in income tax expense of $7.7 million, or 164.3%. Net income for the quarter ended September 30, 2017 represents annualized returns on average equity and average assets of 7.81% and 0.99%, respectively, compared to 4.89% and 0.63% for the same quarter last year. A further discussion of significant changes follows.

Interest Income

Total interest income increased by $5.5 million, or 6.5%, to $90.2 million for the quarter ended September 30, 2017 from $84.7 million for the quarter ended September 30, 2016, This increase is due to an increase in the average balance of interest earning assets of $512.5 million, or 6.3%, to $8.706 billion for the quarter ended September 30, 2017 from $8.193 billion for the quarter ended September 30, 2016, resulting from the western New York office acquisition which closed in September 2016. The average yield earned on interest earning assets was 4.11% for the both quarters ended September 30, 2017 and 2016.

Interest income on loans receivable increased by $4.3 million, or 5.3%, to $85.4 million for the quarter ended September 30, 2017 from $81.1 million for the quarter ended September 30, 2016. This increase is attributable to increases in both the average balance and average yield. The average balance of loans receivable increased by $308.7 million, or 4.2%, to $7.666 billion for the quarter ended September 30, 2017 from $7.358 billion for the quarter ended September 30, 2016. This increase is due to the addition of $455.9 million of loans acquired, at fair value, in the third quarter of 2016 in the western New York office acquisition and $168.8 million of loan growth during 2017. The average yield on loans receivable increased to 4.42% for the quarter ended September 30, 2017 from 4.38% for the quarter ended September 30, 2016. The average loan yield was positively impacted by an increase in rates on adjustable rate loans in response to increases in short-term rates by the Federal Reserve.

Interest income on mortgage-backed securities increased by $1.1 million, or 53.6%, to $3.1 million for the quarter ended September 30, 2017 from $2.0 million for the quarter ended September 30, 2016. This increase is attributable to increases in both the average balance and average yield. The average balance of mortgage-backed securities increased by $166.5 million, or 37.8%, to $607.5 million for the quarter ended September 30, 2017 from $441.0 million for the quarter ended September 30, 2016. The increase in the average balance was due to the investment of excess cash resulting from deposit growth and the September 2016 office purchases. Additionally, the average yield on mortgage-backed securities increased to 2.05% for the quarter ended September 30, 2017 from 1.84% for the quarter ended September 30, 2016 due to both an increase in short-term market interest rates that positively impacted our adjustable rate mortgage-backed securities and the purchase of fixed rate mortgage-backed securities with yields higher than those on the existing portfolio.

Interest income on investment securities increased by $130,000, or 10.0%, to $1.4 million or the quarter ended September 30, 2017 from $1.3 million for the quarter ended September 30, 2016. The increase is attributable to an increase in the average balance of investment securities of $77.1 million, or 28.0%, to $352.8 million for the quarter ended September 30, 2017 from $275.7 million for the quarter ended September 30, 2016. This increase is due primarily to the investment of excess cash. Partially offsetting this increase was a decrease in the average yield on investment securities to 1.62% for the quarter ended September 30, 2017 from 1.89% for the quarter ended September 30, 2016 due to higher yielding municipal securities being called and replaced with lower yielding, shorter-term government agency securities.

Dividends on FHLB stock decreased by $155,000, or 71.1%, to $63,000 for the quarter ended September 30, 2017 from $218,000 for the quarter ended September 30, 2016. This decrease is attributable to a decrease in the average balance of FHLB stock of $20.1 million, or 72.1%, to $7.7 million for the quarter ended September 30, 2017 from $27.8 million for the quarter ended September 30, 2016. Partially offsetting this decrease was an increase in the average yield on FHLB stock to 3.23% for the quarter ended September 30, 2017 from 3.12% for the quarter ended September 30, 2016. 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 increased by $130,000, or 114.0% to $244,000 for the quarter ended September 30, 2017 from $114,000 for the quarter ended September 30, 2016. This increase is attributable to an increase in the

Table of Contents

average yield on interest-earning deposits to 1.33% for the quarter ended September 30, 2017 from 0.49% for the quarter ended September 30, 2016, as a result of the recent increases in the targeted Federal Funds rate by the Federal Reserve Board. Partially offsetting this increase was a decrease in the average balance of interest-earning deposits of $19.7 million, or 21.7%, to $71.5 million for the quarter ended September 30, 2017 from $91.2 million for the quarter ended September 30, 2016, due to utilizing excess cash to fund loan growth.

Interest Expense

Interest expense decreased by $460,000, or 6.2%, to $7.0 million for the quarter ended September 30, 2017 from $7.5 million for the quarter ended September 30, 2016. This decrease in interest expense was due to a decrease in the average cost of interest-bearing liabilities to 0.42% for the quarter ended September 30, 2017 from 0.47% for the quarter ended September 30, 2016. This decrease resulted from the replacement of short-term FHLB advances with lower-cost deposits received as part of the September 2016 office acquisition. Partially offsetting the decrease in cost was an increase in the average balance of interest-bearing liabilities of $220.1 million, or 3.5%, to $6.573 billion for the quarter ended September 30, 2017 from $6.353 billion for the quarter ended September 30, 2016. This increase is due primarily to the addition of $1.643 billion of deposit balances, at fair value, from the aforementioned office acquisition in the third quarter of 2016.

Net Interest Income

Net interest income increased by $5.9 million, or 7.7%, to $83.2 million for the quarter ended September 30, 2017 from $77.3 million for the quarter ended September 30, 2016. This increase is attributable to the factors discussed above. The repayment of all FHLB advances with deposits from the aforementioned acquisition improved our net interest spread and margin. Net interest rate spread increased to 3.69% for the quarter ended September 30, 2017 from 3.65% for the quarter ended September 30, 2016 while interest margin increased to 3.82% for the quarter ended September 30, 2017 from 3.77% for the quarter ended September 30, 2016.

Provision for Loan Losses

Despite the increase in consumer loan charge-offs for the current quarter, which was directly related to the closure of our consumer finance subsidiary, the provision for loan losses decreased by $2.5 million, or 45.3%, to $3.0 million for the quarter ended September 30, 2017 from $5.5 million for the quarter ended September 30, 2016. This decrease is due primarily to a decrease in total nonaccrual loans of $13.0 million, or 15.0%, to $73.3 million at September 30, 2017 from $86.3 million at September 30, 2016.

In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels and bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss factors. We analyze the allowance for loan losses as described in the section entitled “Allowance for Loan Losses.” The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the losses inherent in our loan portfolio relative to loan mix, economic conditions and historical loss experience.

Noninterest Income

Noninterest income increased by $3.8 million, or 18.1%, to $24.6 million for the quarter ended September 30, 2017 from $20.8 million for the quarter ended September 30, 2016. The increase is primarily attributable to the increase in service charges and fees of $1.7 million, or 15.5%, to $12.7 million for the quarter ended September 30, 2017 from $11.0 million for the quarter ended September 30, 2016, due to the aforementioned growth and acquisition of checking accounts. Trust and other financial services income increased by $1.4 million, or 39.6%, to $4.8 million for the quarter ended September 30, 2017 from $3.4 million for the quarter ended September 30, 2016, due primarily to the acquisition of assets under management related to the offices acquired in September 2016. Additionally, investment securities sold during the current quarter resulted in profits of $1.5 million compared to $58,000 during the same quarter last year. Partially offsetting these improvements was a decrease in mortgage banking income of $1.4 million, or 72.5%, as a result of fewer residential mortgage loans being sold into the secondary market.

Noninterest Expense

Noninterest expense decreased by $4.9 million, or 6.6%, to $68.8 million for the quarter ended September 30, 2017 from $73.7 million for the quarter ended September 30, 2016. This decrease is primarily the result of a $5.8 million, or 80.5%, decrease in restructuring and acquisition expense due to the September 2016 acquisition of 18 offices in western New York. Additionally, compensation and employee benefits decreased by $2.1 million, 5.5%, to $36.0 million for the quarter ended September 30, 2017 from $38.1 million for the quarter ended September 30, 2016. This decrease is due primarily to the closure of our consumer finance

Table of Contents

subsidiary, as well as $5.1 million of expense in the prior year quarter related to the termination of Northwest's Employee Stock Ownership Plan ("ESOP"). Partially offsetting these factors were increases in premises and occupancy costs of $857,000, processing expenses of $806,000 and amortization of intangible assets of $623,000, due primarily to the incremental costs associated with the aforementioned acquisition.

Income Taxes

The provision for income tax expense increased by $7.7 million to $12.4 million for the quarter ended September 30, 2017 from $4.7 million for the quarter ended September 30, 2016. This increase in income tax expense is primarily the result of an increase in income before income taxes of $17.1 million. The effective tax rate for the quarter ended September 30, 2017 was 34.5% compared to 24.9% for the quarter ended September 30, 2016. This increase is due to reduced tax-free income as a percentage of income before income taxes in the current quarter compared to the same quarter last year. We anticipate our effective tax rate will be between 32.0% and 34.0% for all of 2017.

Comparison of Operating Results for the Nine Months Ended September 30, 2017and 2016

Net income for the nine months ended September 30, 2017 was $72.3 million, or $0.71 per diluted share, an increase of $47.1 million from $25.2 million, or $0.25 per diluted share, for the nine months ended September 30, 2016. The increase in net income resulted from increases in noninterest income of $27.1 million, or 44.7%, and net interest income of $22.1 million, or 9.9%, and a decrease in noninterest expense of $25.4 million, or 10.6%. Partially offsetting these factors were increases in income tax expense of $25.6 million, or 275.4%, and provision for loan losses of $1.8 million, or 16.0%. Net income for the nine months ended September 30, 2017 represents annualized returns on average equity and average assets of 8.16% and 1.01%, respectively, compared to 2.90% and 0.38% for the nine months ended September 30, 2016. A discussion of significant changes follows.

Interest Income

Total interest income increased by $11.7 million, or 4.6%, to $267.3 million for the nine months ended September 30, 2017 from $255.6 million for the nine months ended September 30, 2016. This increase is the result of an increase in the average balance of interest earning assets of $640.8 million, or 7.9%, to $8.798 billion for the nine months ended September 30, 2017 from $8.157 billion for the nine months ended September 30, 2016. Partially offsetting this increase was a decrease in the average yield on interest-earning assets to 4.06% for the nine months ended September 30, 2017 from 4.19% for the nine months ended September 30, 2016.

Interest income on loans receivable increased by $9.4 million, or 3.9%, to $252.8 million for the nine months ended September 30, 2017 from $243.4 million for the nine months ended September 30, 2016. This increase in interest income on loans receivable is attributed to an increase in the average balance of loans receivable of $384.8 million, or 5.3%, to $7.663 billion for the nine months ended September 30, 2017 from $7.278 billion for the nine months ended September 30, 2016. This increase is due primarily to the addition of $455.9 million of loans acquired, at fair value, in the third quarter of 2016, and $168.8 million of organic loan growth during 2017. Partially offsetting this increase was a decrease in the average yield on loans receivable to 4.41% for the nine months ended September 30, 2017 from 4.47% for the nine months ended September 30, 2016. The average loan yield was negatively affected by the origination of fixed rate residential mortgage loans at lower rates than the existing portfolio yield as well as the runoff of higher rate consumer loans at our consumer discount subsidiary. Partially offsetting these declines was the increase in rates on adjustable rate loans in response to increases in short-term rates by the Federal Reserve.

Interest income on mortgage-backed securities increased by $1.9 million, or 30.6%, to $8.3 million for the nine months ended September 30, 2017 from $6.4 million for the nine months ended September 30, 2016. This increase is the result of increases in both the average balance and average yield. The average balance of mortgage-backed securities increased by $95.3 million, or 20.6%, to $557.8 million for the nine months ended September 30, 2017 from $462.5 million for the nine months ended September 30, 2016. The increase in the average balance was due to the investment of excess cash resulting from deposit growth and office purchases. The average yield on mortgage-backed securities increased to 1.99% for the nine months ended September 30, 2017 from 1.84% for the nine months ended September 30, 2016 due to both an increase in short-term market interest rates that positively impacted the yield of adjustable rate mortgage-backed securities and the purchase of fixed rate mortgage-backed securities with yields higher than the existing portfolio.

Interest income on investment securities remained flat at $4.5 million for both the nine months ended September 30, 2017 and 2016. The modest decrease of $10,000, or 0.2%, is the result of a decrease in the average yield on investment securities to 1.64% for the nine months ended September 30, 2017 from 1.86% for the nine months ended September 30, 2016. This decrease is primarily the result of higher rate, tax-free, municipal securities maturing or being called and replaced by lower yielding, shorter duration government agency securities. Partially offsetting this decrease was an increase in the average balance of investment

Table of Contents

securities of $42.2 million, or 13.0%, to $367.6 million for the nine months ended September 30, 2017 from $325.4 million for the nine months ended September 30, 2016. This increase is due primarily to the investment of excess cash.

Dividends on FHLB stock decreased by $914,000, or 84.2%, to $172,000 for the nine months ended September 30, 2017 from $1.1 million for the nine months ended September 30, 2016. This decrease is the result of decreases in both the average balance and average yield. The average balance on FHLB stock decreased by $25.1 million, or 76.9%, to $7.6 million for the nine months ended September 30, 2017 from $32.7 million for the nine months ended September 30, 2016. Additionally, the average yield on FHLB stock decreased to 3.04% for the nine months ended September 30, 2017 from 4.44% for the nine months ended September 30, 2016. 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 increased by $1.2 million to $1.4 million for the nine months ended September 30, 2017 from $243,000 for the nine months ended September 30, 2016. This increase is the result of increases in both the average balance of and average yield earned on interest-earning deposits. The average balance increased by $143.6 million to $201.6 million for the nine months ended September 30, 2017 from $58.0 million for the nine months ended September 30, 2016, due to increased customer deposits and the excess cash received from the September 2016 office acquisition. Additionally, the average yield on interest-earning deposits increased to 0.94% for the nine months ended September 30, 2017 from 0.55% for the nine months ended September 30, 2016, as a result of recent increases in the targeted Federal Funds rate by the Federal Reserve Board.

Interest Expense

Interest expense decreased by $10.4 million, or 33.5%, to $20.8 million for the nine months ended September 30, 2017 from $31.2 million for the nine months ended September 30, 2016. This decrease in interest expense was due to a decrease in the average cost of interest-bearing liabilities, to 0.41% for the nine months ended September 30, 2017 from 0.65% for the nine months ended September 30, 2016, and a decrease in the average balance of borrowed funds of $620.2 million, or 83.4%. The decrease in both the average cost of interest-bearing liabilities and the average balance of borrowed funds is due primarily to the payoff of all FHLB advances in the third quarter of 2016. Additionally, the average cost of each deposit type declined from the prior year with the exception of interest-bearing demand deposits. Partially offsetting the decrease in cost was an increase in the average balance of interest-bearing deposits of $325.9 million, or 5.1%, to $6.719 billion for the nine months ended September 30, 2017 from $6.394 billion for the nine months ended September 30, 2016. This increase is due primarily to the addition of $1.643 billion, at fair value, of deposit balances from the office acquisition in the third quarter of 2016, which was augmented by the success in our efforts to procure new checking relationships.

Net Interest Income

Net interest income increased by $22.1 million, or 9.9%, to $246.5 million for the nine months ended September 30, 2017 from $224.4 million for the nine months ended September 30, 2016. This increase is attributable to the factors discussed above. The repayment of all FHLB advances with deposits from the aforementioned office acquisition improved net interest spread and margin. Net interest rate spread increased to 3.65% for the nine months ended September 30, 2017 from 3.53% for the nine months ended September 30, 2016 while net interest margin increased to 3.74% for the nine months ended September 30, 2017 from 3.67% for the nine months ended September 30, 2016.

Provision for Loan Losses

The provision for loan losses increased by $1.8 million, or 16.0%, to $13.2 million for the nine months ended September 30, 2017 from $11.4 million for the nine months ended September 30, 2016. This increase is due primarily to reserves related to growth in our indirect automobile and commercial loan portfolios, as well as for the closure of our consumer finance subsidiary. Additionally, annualized net charge-offs increased to 0.30% of total loans for the nine months ended September 30, 2017 compared to 0.20% for the nine months ended September 30, 2016. Partially offsetting these factors was a decrease in total nonaccrual loans of $13.0 million to $73.0 million, or 0.95% of total loans, at September 30, 2017 from $86.3 million, or 1.11% of total loans, at September 30, 2016.

In determining the amount of the current period provision, we considered current economic conditions, including unemployment levels and bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss factors. We analyze the allowance for loan losses as described in the section entitled “Allowance for Loan Losses.” The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the losses inherent in our loan portfolio relative to loan mix, economic conditions and historical loss experience.

Table of Contents

Noninterest Income

Noninterest income increased by $27.1 million, or 44.7%, to $87.6 million for the nine months ended September 30, 2017 from $60.5 million for the nine months ended September 30, 2016. The increase is primarily attributable to the $17.2 million gain on the sale of our three Maryland offices in May 2017. Additionally, service charges and fees increased by $5.5 million, or 17.3%, to $37.2 million for the nine months ended September 30, 2017 from $31.7 million for the nine months ended September 30, 2016, due primarily to the growth in checking accounts from the September 2016 office acquisition and the successful execution of organic checking account growth initiatives. Trust and other financial services income increased by $3.7 million, or 37.4%, to $13.7 million for the nine months ended September 30, 2017 from $10.0 million for the nine months ended September 30, 2016, due to an increase in assets under management. Additionally, the gain on sale of investments was $1.1 million higher in the current year and other operating income increased by $2.3 million, or 58.6%. Partially offsetting these increases in non-interest income, was a decrease in insurance commission income of $884,000, or 11.0%, primarily related to the closure of our consumer finance subsidiary and the discontinuation of consumer loan originating with related insurance fee income.

Noninterest Expense

Noninterest expense decreased by $25.4 million, or 10.6%, to $213.7 million for the nine months ended September 30, 2017 from $239.1 million for the nine months ended September 30, 2016. This decrease is primarily the result of the $37.0 million prepayment penalty incurred as a result of paying off $715.0 million of FHLB long-term advances during the second quarter of 2016. In addition, acquisition and restructuring costs of $4.3 million in the current year related to the sale of our Maryland region and the closure of our consumer finance subsidiary, was $6.9 million, or 62.0% less than the prior year, which included costs associated with the consolidation of 24 legacy Northwest offices, as well as the expense with the purchase of 18 western New York offices. Partially offsetting this decrease was an increase in compensation and employee benefits of $7.1 million, or 6.8%, to $111.5 million for the nine months ended September 30, 2017 from $104.4 million for the nine months ended September 30, 2016. This increase is due primarily to the employees added from the aforementioned acquisition, an increase in health-care costs, and normal annual merit increases. Additionally, processing expenses increased by $3.8 million, amortization of intangible assets increased by $2.7 million, premises and occupancy costs increased by $2.7 million, and office operations increased by $1.8 million, due primarily to the incremental costs associated with the 18 offices acquired in the third quarter of 2016.

Income Taxes

The provision for income taxes increased by $25.6 million to $34.9 million for the nine months ended September 30, 2017 from $9.3 million for the nine months ended September 30, 2016. This increase in income tax expense is primarily the result of an increase in pretax income of $72.7 million. Our effective tax rate for the nine months ended September 30, 2017 was 32.5% compared to 27.0% for the nine months ended September 30, 2016, due to the factors previously discussed in the Comparison of Operating Results for the Quarters Ended September 30, 2017 and 2016. We anticipate our effective tax rate will be between 32.0% and 34.0% for all of 2017.

Table of Contents

Average Balance Sheet

(Dollars in thousands)

The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are calculated using daily averages.



	Quarter ended September 30,
	2017					2016
	Average balance		Interest	Avg. yield/ cost (g)		Average balance			Interest	Avg. yield/ cost (g)
Assets:
Interest-earning assets:
Residential mortgage loans	$	2,732,546	28,279	4.14	%	$	2,739,099		27,952	4.08	%
Home equity loans	1,299,473		14,694	4.49	%	1,192,929			12,884	4.30	%
Consumer loans	617,754		7,627	4.90	%	504,376			6,267	4.94	%
Legacy consumer finance loans	33,469		1,433	17.13	%	50,578			2,664	21.07	%
Commercial real estate loans	2,389,969		27,234	4.46	%	2,394,001			26,683	4.36	%
Commercial loans	593,143		6,659	4.39	%	476,715			5,193	4.26	%
Loans receivable (a) (b) (includes FTE adjustments of $553 and $560, respectively)	7,666,354		85,926	4.45	%	7,357,698			81,643	4.41	%
Mortgage-backed securities (c)	607,454		3,118	2.05	%	440,966			2,030	1.84	%
Investment securities (c) (includes FTE adjustments of $257 and $364, respectively)	352,813		1,690	1.92	%	275,718			1,667	2.42	%
FHLB stock	7,748		63	3.23	%	27,761			218	3.12	%
Other interest-earning deposits	71,482		243	1.33	%	91,243			114	0.49	%
Total interest-earning assets (includes FTE adjustments of $809 and $924, respectively)	8,705,851		91,040	4.15	%	8,193,386			85,672	4.16	%
Noninterest earning assets (d)	755,026					835,500

Total assets	$	9,460,877				$	9,028,886

Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Savings deposits	$	1,681,777	776	0.18	%	$	1,485,763		744	0.20	%
Interest-bearing checking deposits	1,435,143		297	0.08	%	1,179,557			78	0.03	%
Money market deposit accounts	1,789,082		1,048	0.23	%	1,418,779			826	0.23	%
Time deposits	1,449,830		3,674	1.01	%	1,597,542			4,005	1.00	%
Borrowed funds (e)	106,282		49	0.18	%	560,407			657	0.47	%
Junior subordinated debentures	111,213		1,150	4.05	%	111,213			1,144	4.03	%
Total interest-bearing liabilities	6,573,327		6,994	0.42	%	6,353,261			7,454	0.47	%
Noninterest-bearing checking deposits (f)	1,573,112					1,243,474
Noninterest-bearing liabilities	116,021					276,014

Total liabilities	8,262,460					7,872,749

Shareholders’ equity	1,198,417					1,156,137

Total liabilities and shareholders’ equity	$	9,460,877				$	9,028,886

Net interest income/ Interest rate spread			84,046	3.73	%				78,218	3.69	%

Net interest-earning assets/ Net interest margin	$	2,132,524		3.86	%	$	1,840,125			3.82	%

Ratio of interest-earning assets to interest-bearing liabilities	1.32X					1.29		X


(a)	Average gross loans includes loans held as available-for-sale and loans placed on nonaccrual status.


(b)	Interest income includes accretion/ amortization of deferred loan fees/ expenses, which were not material.


(c)	Average balances do not include the effect of unrealized gains or losses on securities held as available-for-sale.


(d)	Average balances include the effect of unrealized gains or losses on securities held as available-for-sale.


(e)	Average balances include FHLB borrowings and collateralized borrowings.


(f)	Average cost of total deposits including noninterest-bearing checking was 0.29% and 0.35%, respectively.

(g)

Annualized. Shown on a fully tax-equivalent basis (“FTE”). The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate of 35% for each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: Loans — 4.42% and 4.38%, respectively; Investment securities — 1.62% and 1.89%, respectively; interest-earning assets — 4.11% and 4.11%, respectively. GAAP basis net interest rate spreads were 3.69% and 3.65%, respectively; and GAAP basis net interest margins were 3.82% and 3.77%, respectively.

Table of Contents

Rate/ Volume Analysis

(Dollars in Thousands)

The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume.

Quarters ended September 30, 2017 and 2016



	Rate			Volume		Net Change
Interest earning assets:
Loans receivable	$	1,145		3,138		4,283
Mortgage-backed securities	321			767		1,088
Investment securities	(443		)	466		23
FHLB stock	4			(159	)	(155	)
Other interest-earning deposits	196			(67	)	129
Total interest-earning assets	1,223			4,145		5,368

Interest-bearing liabilities:
Savings deposits	(60		)	92		32
Interest-bearing checking deposits	166			53		219
Money market deposit accounts	3			219		222
Time deposits	32			(363	)	(331	)
Borrowed funds	(100		)	(508	)	(608	)
Junior subordinated debentures	6			—		6
Total interest-bearing liabilities	47			(507	)	(460	)

Net change in net interest income	$	1,176		4,652		5,828

Table of Contents

Average Balance Sheet

(Dollars in thousands)



	Nine Months Ended September 30,
	2017						2016
	Average balance			Interest	Avg. yield/ cost (g)		Average balance			Interest	Avg. yield/ cost (g)
Assets:
Interest-earning assets:
Residential mortgage loans	$	2,724,348		83,833	4.10	%	$	2,743,480		86,826	4.22	%
Home equity loans	1,314,344			43,239	4.40	%	1,178,133			38,229	4.33	%
Consumer loans	598,056			22,251	4.97	%	477,814			17,768	4.97	%
Legacy consumer finance loans	40,241			6,025	19.96	%	51,542			8,080	20.90	%
Commercial real estate loans	2,425,302			80,867	4.40	%	2,367,014			79,367	4.41	%
Commercial loans	560,677			18,260	4.29	%	460,228			14,817	4.23	%
Loans receivable (a) (b) (includes FTE adjustments of $1,637 and $1,717, respectively)	7,662,968			254,475	4.44	%	7,278,211			245,087	4.50	%
Mortgage-backed securities (c)	557,846			8,327	1.99	%	462,474			6,374	1.84	%
Investment securities (c) (includes FTE adjustments of $848 and $1,134, respectively)	367,585			5,366	1.95	%	325,427			5,662	2.32	%
FHLB stock	7,553			172	3.04	%	32,702			1,086	4.44	%
Other interest-earning deposits	201,643			1,440	0.94	%	57,996			243	0.55	%

Total interest-earning assets (includes FTE adjustments of $2,485 and $2,851, respectively)	8,797,595			269,780	4.10	%	8,156,810			258,452	4.23	%

Noninterest earning assets (d)	742,837						783,838

Total assets	$	9,540,432					$	8,940,648

Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Savings deposits	$	1,699,455		2,300	0.18	%	$	1,444,302		2,446	0.23	%
Interest-bearing checking deposits	1,436,442			696	0.06	%	1,134,669			378	0.04	%
Money market deposit accounts	1,835,638			3,186	0.23	%	1,334,158			2,520	0.25	%
Time deposits	1,513,565			10,904	0.96	%	1,625,936			12,262	1.01	%
Borrowed funds (e)	123,168			161	0.17	%	743,353			10,213	1.84	%
Junior subordinated debentures	111,213			3,503	4.15	%	111,213			3,389	4.00	%

Total interest-bearing liabilities	6,719,481			20,750	0.41	%	6,393,631			31,208	0.65	%

Noninterest-bearing checking deposits (f)	1,541,845						1,196,737
Noninterest-bearing liabilities	94,546						191,934

Total liabilities	8,355,872						7,782,302

Shareholders’ equity	1,184,560						1,158,346

Total liabilities and shareholders’ equity	$	9,540,432					$	8,940,648

Net interest income/ Interest rate spread				249,030	3.69	%				227,244	3.58	%

Net interest-earning assets/ Net interest margin	$	2,078,114			3.77	%	$	1,763,179			3.71	%

Ratio of interest-earning assets to interest-bearing liabilities	1.31		X				1.28		X


(a)	Average gross loans includes loans held as available-for-sale and loans placed on nonaccrual status.


(b)	Interest income includes accretion/ amortization of deferred loan fees/ expenses, which were not material.


(c)	Average balances do not include the effect of unrealized gains or losses on securities held as available-for-sale.


(d)	Average balances include the effect of unrealized gains or losses on securities held as available-for-sale.


(e)	Average balances include FHLB borrowings and collateralized borrowings.


(f)	Average cost of total deposits including noninterest-bearing checking was 0.28% and 0.35%, respectively.

(g)

Annualized. Shown on a fully tax-equivalent basis (“FTE”). The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate of 35% for each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: Loans – 4.41% and 4.47%, respectively; Investment securities – 1.64% and 1.86%, respectively; interest-earning assets – 4.06% and 4.19%, respectively. GAAP basis net interest rate spreads were 3.65% and 3.53%, respectively; and GAAP basis net interest margins were 3.74% and 3.67%, respectively.

Table of Contents

Rate/ Volume Analysis

(Dollars in Thousands)

Nine Months Ended September 30, 2017 and 2016



	Rate			Volume		Net Change
Interest earning assets:
Loans receivable	$	(2,256	)	11,643		9,387
Mortgage-backed securities	639			1,314		1,953
Investment securities	(1,029		)	733		(296	)
FHLB stock	(209		)	(705	)	(914	)
Other interest-earning deposits	373			825		1,198
Total interest-earning assets	(2,482		)	13,810		11,328

Interest-bearing liabilities:
Savings deposits	(489		)	343		(146	)
Interest-bearing checking deposits	172			146		318
Money market deposit accounts	(202		)	868		666
Time deposits	(511		)	(847	)	(1,358	)
Borrowed funds	(4,232		)	(5,820	)	(10,052	)
Junior subordinated debentures	114			—		114
Total interest-bearing liabilities	(5,148		)	(5,310	)	(10,458	)

Net change in net interest income	$	2,666		19,120		21,786

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We have an Asset/Liability Committee consisting of members of management which meets monthly to review market interest rates, economic conditions, the pricing of interest-earning assets and interest-bearing liabilities and the balance sheet structure. On a quarterly basis, this Committee also reviews the interest rate risk position and cash flow projections.

The Board of Directors has a Risk Management Committee which meets quarterly and reviews interest rate risk and trends, our interest sensitivity position, the liquidity position and the market risk inherent in the investment portfolio.

In an effort to assess interest rate risk and market risk, we utilize a simulation model to determine the effect of immediate incremental increases and decreases in interest rates on net income and the market value of equity. Certain assumptions are made regarding loan prepayments and decay rates of savings and interest-bearing demand accounts. Because it is difficult to accurately

Table of Contents

project the market reaction of depositors and borrowers, the effect of actual changes in interest rates on these assumptions may differ from simulated results. We have established the following guidelines for assessing interest rate risk:

Net interest income simulation. Given a non-parallel shift of 100 basis points (“bps”), 200 bps and 300 bps in interest rates, the estimated net income may not decrease by more than 5%, 10% and 15%, respectively, within a one-year period.

Net income simulation. Given a non-parallel shift of 100 basis points (“bps”), 200 bps and 300 bps in interest rates, the estimated net income may not decrease by more than 10%, 20% and 30%, respectively, within a one-year period.

Market value of equity simulation. The market value of equity is the present value of assets and liabilities. Given a non-parallel shift of 100 bps, 200 bps and 300 bps in interest rates, the market value of equity may not decrease by more than 15%, 30% and 35%, respectively, from the computed economic value at current interest rate levels.

The following table illustrates the simulated impact of a 100 bps, 200 bps or 300 bps upward or a 100 bps downward movement in interest rates on net income, return on average equity, earnings per share and market value of equity. This analysis was prepared assuming that interest-earning asset and interest-bearing liability levels at September 30, 2017 remain constant. The impact of the rate movements was computed by simulating the effect of an immediate and sustained shift in interest rates over a twelve-month period from September 30, 2017 levels.



	Increase									Decrease
Non-parallel shift in interest rates over the next 12 months	100 bps			200 bps			300 bps			100 bps
Projected percentage increase/ (decrease) in net interest income	(0.2		)%	(0.2		)%	(0.1		)%	(4.6		)%
Projected percentage increase/ (decrease) in net income	0.5		%	1.2		%	2.6		%	(11.0		)%
Projected increase/ (decrease) in return on average equity	0.6		%	1.1		%	2.5		%	(10.5		)%
Projected increase/ (decrease) in earnings per share	$	0.01		$	0.01		$	0.03		$	(0.12	)
Projected percentage increase/ (decrease) in market value of equity	(4.6		)%	(9.6		)%	(13.2		)%	(1.8		)%

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.

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision of and with the participation of management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the Evaluation Date, these disclosure controls and procedures were effective.

There were no changes in the internal controls over financial reporting during the period covered by this report or in other factors that have materially affected, or are reasonably likely to materially affect the internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Except as previously disclosed, there have been no material updates or additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

a.) Not applicable.

b.) Not applicable.

c.) The following table discloses information regarding the repurchase of shares of common stock during the quarter ending September 30, 2017:



Month	Number of shares purchased	Average price paid per share		Total number of shares purchased as part of a publicly announced repurchase plan (1)	Maximum number of shares yet to be purchased under the plan (1)
July	—	$	—	—	4,834,089
August	—	—		—	4,834,089
September	—	—		—	4,834,089
	—	$	—


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

Table of Contents

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits



31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-15 or 15d-15 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

Table of Contents

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.



NORTHWEST BANCSHARES, INC.
(Registrant)


Date:	November 9, 2017	By:	/s/ William J. Wagner
			William J. Wagner
			President and Chief Executive Officer
			(Duly Authorized Officer)


Date:	November 9, 2017	By:	/s/ Gerald J. Ritzert
			Gerald J. Ritzert
			Controller
			(Principal Accounting Officer)