Northwest Bancshares, Inc. - Quarter Report: 2019 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2019

☐ 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, 0.01 Par Value	NWBI	The NASDAQ Stock Market, LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

☒ Large accelerated filer ☐ Accelerated filer

☐ Non-accelerated filer ☐ Smaller reporting company

☐Emerging growth company

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

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

Common Stock ($0.01 par value), 106,642,928 shares outstanding as of July 31, 2019.

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NORTHWEST BANCSHARES, INC.

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PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Financial Condition as of June 30, 2019 and December 31, 2018 (Unaudited)	1

	Consolidated Statements of Income for the quarter and six months ended June 30, 2019 and 2018 (Unaudited)	2

	Consolidated Statements of Comprehensive Income for the quarter and six months ended June 30, 2019 and 2018 (Unaudited)	3

	Consolidated Statements of Changes in Shareholders’ Equity for the quarter and six months ended June 30, 2019 and 2018 (Unaudited)	4

	Consolidated Statements of Cash Flows for the quarter and six months ended June 30, 2019 and 2018 (Unaudited)	6

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	57

Item 4.	Controls and Procedures	58

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	58

Item 1A.	Risk Factors	58

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59

Item 3.	Defaults Upon Senior Securities	59

Item 4.	Mine Safety Disclosures	59

Item 5.	Other information	59

Item 6.	Exhibits	60

	Signature	61

	Certifications

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Item 1. FINANCIAL STATEMENTS

NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(in thousands, except share data)



	June 30, 2019			December 31, 2018
Assets
Cash and cash equivalents	$	106,988		68,789
Marketable securities available-for-sale (amortized cost of $850,248 and $811,015)	854,765			801,450
Marketable securities held-to-maturity (fair value of $20,676 and $22,446)	20,414			22,765
Total cash and cash equivalents and marketable securities	982,167			893,004

Personal Banking:
Residential mortgage loans	2,899,164			2,864,470
Home equity loans	1,314,947			1,258,422
Consumer loans	1,011,424			859,713
Total Personal Banking loans	5,225,535			4,982,605
Commercial Banking:
Commercial real estate loans	2,808,153			2,471,821
Commercial loans	703,194			597,013
Total Commercial Banking loans	3,511,347			3,068,834
Total loans	8,736,882			8,051,439
Allowance for loan losses	(53,107		)	(55,214	)
Total loans, net	8,683,775			7,996,225

Federal Home Loan Bank stock, at cost	14,966			15,635
Accrued interest receivable	28,742			24,490
Real estate owned, net	2,070			2,498
Premises and equipment, net	148,973			143,390
Bank-owned life insurance	186,870			171,079
Goodwill	344,720			307,420
Other intangible assets	24,112			19,821
Other assets	89,088			34,211
Total assets	$	10,505,483		9,607,773

Liabilities and shareholders’ equity
Liabilities:
Noninterest-bearing demand deposits	$	1,944,550		1,736,156
Interest-bearing demand deposits	1,670,983			1,455,460
Money market deposit accounts	1,784,437			1,661,623
Savings deposits	1,683,551			1,636,099
Time deposits	1,600,372			1,404,841
Total deposits	8,683,893			7,894,179

Borrowed funds	171,677			234,389
Junior subordinated debentures	121,757			111,213
Advances by borrowers for taxes and insurance	54,507			43,298
Accrued interest payable	1,207			744
Other liabilities	138,854			66,312
Total liabilities	9,171,895			8,350,135

Shareholders’ equity:
Preferred stock, $0.01 par value: 50,000,000 authorized, no shares issued	—			—
Common stock, $0.01 par value: 500,000,000 shares authorized, 106,614,607 and 103,354,030 shares issued, respectively	1,066			1,034
Paid-in capital	798,942			745,926
Retained earnings	562,799			550,374
Accumulated other comprehensive loss	(29,219		)	(39,696	)
Total shareholders’ equity	1,333,588			1,257,638
Total liabilities and shareholders’ equity	$	10,505,483		9,607,773

See accompanying notes to unaudited consolidated financial statements.

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except share data)



	Quarter ended June 30,			Six months ended June 30,
	2019		2018	2019	2018
Interest income
Loans receivable	$	100,917	88,106	195,852	173,326
Mortgage-backed securities	4,280		3,254	8,245	6,267
Taxable investment securities	898		648	1,834	1,326
Tax-free investment securities	237		313	419	703
Federal Home Loan Bank stock dividends	316		85	487	182
Interest-earning deposits	159		469	259	604
Total interest income	106,807		92,875	207,096	182,408
Interest expense
Deposits	12,484		7,309	22,629	13,767
Borrowed funds	1,720		1,340	3,882	2,648
Total interest expense	14,204		8,649	26,511	16,415
Net interest income	92,603		84,226	180,585	165,993
Provision for loan losses	4,667		5,349	11,134	9,558
Net interest income after provision for loan losses	87,936		78,877	169,451	156,435
Noninterest income:
Gain on sale of investments	29		—	23	153
Service charges and fees	13,339		12,908	25,382	24,807
Trust and other financial services income	4,444		4,050	8,639	8,081
Insurance commission income	2,145		2,090	4,323	4,839
Gain/(loss) on real estate owned, net	91		176	88	(370	)
Income from bank-owned life insurance	1,197		2,333	2,202	3,323
Mortgage banking income	188		77	404	301
Other operating income	1,930		2,475	3,964	4,763
Total noninterest income	23,363		24,109	45,025	45,897
Noninterest expense
Compensation and employee benefits	42,008		39,031	80,196	75,541
Premises and occupancy costs	7,387		6,824	14,605	14,131
Office operations	3,708		3,768	6,839	7,176
Collections expense	939		434	1,247	946
Processing expenses	10,634		9,560	21,068	19,266
Marketing expenses	2,729		2,014	4,615	4,154
Federal deposit insurance premiums	681		671	1,387	1,388
Professional services	3,198		2,819	5,722	5,096
Amortization of intangible assets	1,760		1,520	3,207	3,040
Real estate owned expense	128		133	287	425
Restructuring/acquisition expense	1,105		393	3,031	393
Other expenses	3,235		2,620	6,732	5,652
Total noninterest expense	77,512		69,787	148,936	137,208
Income before income taxes	33,787		33,199	65,540	65,124
Federal and state income taxes expense	7,404		6,900	14,113	13,840
Net income	$	26,383	26,299	51,427	51,284
Basic earnings per share	$	0.25	0.26	0.49	0.50
Diluted earnings per share	$	0.25	0.25	0.49	0.50

See accompanying notes to unaudited consolidated financial statements.

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands)



	Quarter ended June 30,					Six months ended June 30,
	2019			2018		2019		2018
Net income	$	26,383		26,299		51,427		51,284
Other comprehensive income net of tax:
Net unrealized holding gains/(losses) on marketable securities:
Unrealized holding gains/(losses) net of tax of ($2,243), $494, ($4,024), and $2,081 respectively	5,608			(1,237	)	10,061		(5,199	)
Reclassification adjustment for gains included in net income, net of tax of $1, $30, $1 and $37, respectively	(1		)	(75	)	(2	)	(94	)
Net unrealized holding gains/(losses) on marketable securities	5,607			(1,312	)	10,059		(5,293	)

Change in fair value of interest rate swaps, net of tax of $0, ($58), $0 and ($153), respectively	—			214		—		574

Defined benefit plan:
Reclassification adjustments for prior period service costs and net losses included in net income, net of tax of ($85), ($91), ($167) and ($181), respectively	209			226		418		452

Other comprehensive income/(loss)	5,816			(872	)	10,477		(4,267	)

Total comprehensive income	$	32,199		25,427		61,904		47,017

See accompanying notes to unaudited consolidated financial statements.

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in thousands, expect share data)



					Paid-in capital	Retained earnings		Accumulated other comprehensive loss		Total shareholders’ equity
	Common stock
Quarter ended June 30, 2019	Shares		Amount
Balance at March 31, 2019	106,220,030		$	1,062	795,044	555,205		(35,035	)	1,316,276

Comprehensive income:
Net income	—		—		—	26,383		—		26,383

Other comprehensive income, net of tax of ($2,329)	—		—		—	—		5,816		5,816

Total comprehensive income	—		—		—	26,383		5,816		32,199

Reclassification due to adoption of ASU No. 2016-02	—		—		—	344		—		344

Exercise of stock options	116,073		1		1,366	—		—		1,367

Stock-based compensation expense	281,100		3		2,532	—		—		2,535

Stock-based compensation forfeited	(2,596	)	—		—	—		—		—

Dividends paid ($0.18 per share)	—		—		—	(19,133	)	—		(19,133	)

Balance at June 30, 2019	106,614,607		$	1,066	798,942	562,799		(29,219	)	1,333,588



						Paid-in capital	Retained earnings		Accumulated other comprehensive loss		Total shareholders’ equity
	Common stock
Quarter ended June 30, 2018	Shares		Amount
Balance at March 31, 2018	102,599,662		$	1,026		734,065	522,384		(42,221	)	1,215,254

Comprehensive income:
Net income	—		—			—	26,299		—		26,299

Other comprehensive loss, net of tax of $375	—		—			—	—		(872	)	(872	)

Total comprehensive income/(loss)	—		—			—	26,299		(872	)	25,427

Exercise of stock options	291,595		3			3,312	—		—		3,315

Stock-based compensation expense	414,330		4			2,294	—		—		2,298

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

Dividends paid ($0.17 per share)	—		—			—	(17,414	)	—		(17,414	)

Balance at June 30, 2018	103,122,890		$	1,031		739,673	531,269		(43,093	)	1,228,880

See accompanying notes to unaudited consolidated financial statements.

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in thousands, expect share data)



					Paid-in capital	Retained earnings		Accumulated other comprehensive loss		Total shareholders’ equity
	Common stock
Six months ended June 30, 2019	Shares		Amount
Beginning balance at December 31, 2018	103,354,030		$	1,034	745,926	550,374		(39,696	)	1,257,638

Comprehensive income:
Net income	—		—		—	51,427		—		51,427

Other comprehensive income, net of tax of ($4,190)	—		—		—	—		10,477		10,477

Total comprehensive income	—		—		—	51,427		10,477		61,904

Acquisition of Union Community Bank ("UCB")	2,462,373		24		43,264	—		—		43,288

Reclassification due to adoption of ASU No. 2016-02	—		—		—	(1,226	)	—		(1,226	)

Exercise of stock options	547,855		5		6,020	—		—		6,025

Stock-based compensation expense	281,100		3		3,732	—		—		3,735

Stock-based compensation forfeited	(30,751	)	—		—	—		—		—

Share repurchases	—		—		—	—		—		—

Dividends paid ($0.36 per share)	—		—		—	(37,776	)	—		(37,776	)

Ending balance at June 30, 2019	106,614,607		$	1,066	798,942	562,799		(29,219	)	1,333,588



						Paid-in capital	Retained earnings		Accumulated other comprehensive loss		Total shareholders’ equity
	Common stock
Six months ended June 30, 2018	Shares		Amount
Beginning balance at December 31, 2017	102,394,828		$	1,027		730,719	508,058		(32,080	)	1,207,724

Reclassification due to adoption of ASU No. 2018-02	—		—			—	6,746		(6,746	)	—

Comprehensive income:
Net income	—		—			—	51,284		—		51,284

Other comprehensive loss, net of tax of $1,784	—		—			—	—		(4,267	)	(4,267	)

Total comprehensive income/(loss)	—		—			—	58,030		(11,013	)	47,017

Exercise of stock options	496,429		5			5,677	—		—		5,682

Stock-based compensation expense	414,330		4			3,272	—		—		3,276

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

Dividends paid ($0.34 per share)	—		—			—	(34,819	)	—		(34,819	)

Ending balance at June 30, 2018	103,122,890		$	1,031		739,673	531,269		(43,093	)	1,228,880

See accompanying notes to unaudited consolidated financial statements.

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)



	Six months ended June 30,
	2019			2018
Operating activities:
Net Income	$	51,427		51,284
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	11,134			9,558
Net loss on sale of assets	1,425			1,115
Net depreciation, amortization and accretion	1,404			6,708
Increase in other assets	(58,103		)	(5,987	)
Increase/(decrease) in other liabilities	68,915			(4,276	)
Net amortization on marketable securities	441			898
Noncash write-down of real estate owned	337			940
Deferred income tax expense	253			22
Origination of loans held for sale	—			(1,297	)
Proceeds from sale of loans held for sale	—			4,501
Noncash compensation expense related to stock benefit plans	3,735			3,276
Net cash provided by operating activities	80,968			66,742

Investing activities:
Purchase of marketable securities available-for-sale	(76,022		)	(108,879	)
Proceeds from maturities and principal reductions of marketable securities held-to-maturity	2,343			3,923
Proceeds from maturities and principal reductions of marketable securities available-for-sale	82,584			88,183
Proceeds from sale of marketable securities available-for-sale	32,389			5,206
Proceeds from bank-owned life insurance	2,207			—
Loan originations	(1,643,950		)	(1,483,080	)
Proceeds from loan maturities and principal reductions	1,359,064			1,322,618
Net proceeds of Federal Home Loan Bank stock	1,122			3,846
Proceeds from sale of real estate owned	2,480			4,415
Sale of real estate owned for investment, net	304			304
Purchase of premises and equipment	(6,518		)	(1,661	)
Acquisitions, net of cash received	(25,833		)	—
Net cash used in investing activities	(269,830		)	(165,125	)

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)

(in thousands)



	Six months ended June 30,
	2019			2018
Financing activities:
Increase in deposits, net	$	310,335		180,389
Net decrease in short-term borrowings	(62,712		)	(8,349	)
Increase in advances by borrowers for taxes and insurance	11,189			10,815
Cash dividends paid	(37,776		)	(34,819	)
Proceeds from stock options exercised	6,025			5,682
Net cash provided by financing activities	227,061			153,718

Net increase in cash and cash equivalents	$	38,199		55,335

Cash and cash equivalents at beginning of period	$	68,789		77,710
Net increase in cash and cash equivalents	38,199			55,335
Cash and cash equivalents at end of period	$	106,988		133,045
Cash paid during the period for:
Interest on deposits and borrowings (including interest credited to deposit accounts of $20,913 and $13,115, respectively)	$	26,048		16,307
Income taxes	$	10,772		9,149

Business acquisitions:
Fair value of assets acquired	$	580,407		—
Northwest Bancshares, Inc. common stock issued	(43,288		)	—
Cash paid	(42,500		)	—
Liabilities assumed	$	494,619		—

Non-cash activities:
Loan foreclosures and repossessions	$	3,338		3,599
Sale of real estate owned financed by the Company	44			183

See accompanying notes to unaudited consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(1)	Basis of Presentation and Informational Disclosures

Northwest Bancshares, Inc. (the “Company”) or (“NWBI”), a Maryland corporation headquartered in Warren, Pennsylvania, is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System. The primary activity of the Company is the ownership of all of the issued and outstanding common stock of Northwest Bank, a Pennsylvania-chartered savings bank (“Northwest”). Northwest is regulated by the FDIC and the Pennsylvania Department of Banking. Northwest operates 182 community-banking offices throughout Pennsylvania, Western New York, and eastern Ohio.

The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiary, Northwest, and Northwest’s subsidiaries Northwest Capital Group, Inc., Allegheny Services, Inc., Great Northwest Corporation, and The Bert Company (doing business as Northwest Insurance Services). The unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or footnotes required for complete annual financial statements. In the opinion of management, all adjustments necessary for the fair presentation of the Company’s financial position and results of operations have been included. The consolidated statements have been prepared using the accounting policies described in the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 updated, as required, for any new pronouncements or changes.

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

The results of operations for the quarter and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or any other period.

Stock-Based Compensation

On May 22, 2019, the Company awarded employees 547,410 stock options and directors 64,800 stock options with an exercise price of $17.27 and grant date fair value of $1.14 per stock option, and the Company awarded employees 256,800 restricted common shares and directors 24,300 restricted common shares with a grant date fair value of $17.27. Awarded stock options and common shares vest over a seven-year period with the first vesting occurring on the grant date. Stock-based compensation expense of $2.5 million and $2.3 million for the quarters ended June 30, 2019 and 2018, and $3.7 million and $3.3 million for the six months ended June 30, 2019 and 2018, respectively, was recognized in compensation expense relating to our stock benefit plans. At June 30, 2019, there was compensation expense of $4.1 million to be recognized for awarded but unvested stock options and $19.7 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 June 30, 2019 we had no liability for unrecognized tax benefits.

We recognize interest accrued related to: (1) unrecognized tax benefits in other expenses and (2) refund claims in other operating income. We recognize penalties (if any) in other expenses. We are subject to audit by the Internal Revenue Service and any state in which we conduct business for the tax periods ended December 31, 2018, 2017, 2016 and 2015.

Recent Accounting Pronouncements

(a) Recently Adopted Accounting Standards

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

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

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

(b) Recently Issued Accounting Standards

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

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

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

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This guidance aligns the requirements for capitalization of implementation costs incurred in a hosting arrangement that is a service contract with the existing guidance for internal-use software. This guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those years, with early adoption permitted. Transition can either be on a retrospective basis or a prospective basis on all implementation costs incurred after the date of adoption. We are evaluating the impact this new accounting guidance will have on our financial statements.

(2) Acquisition

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

Under the terms of the merger agreement, the two shareholders of DFSC, Donegal Mutual Insurance Company and Donegal Group Inc., received payment in the form of 50% cash and 50% stock, or a total of $42.5 million and 2,462,373 shares of common stock of the Company, valued at $43.3 million, based on the $17.58 closing price of the Company's stock on March 8, 2019.

The following table shows the assets acquired and the liabilities assumed that were recorded at fair value on the date of acquisition (in thousands):



Consideration paid:
Northwest Bancshares, Inc. common stock issued	$	43,288
Cash paid to DFSC	42,500
Total consideration paid	85,788

Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value (1)
Cash and cash equivalents	$	16,667
Investment securities available-for-sale	78,594
Loans	407,840
Federal Home Loan Bank stock	453
Premises and equipment	6,520
Core deposit intangible	7,498
Other assets	25,535
Deposits	(479,379		)
Other liabilities	(15,240		)
Total identifiable net assets	$	48,488

Goodwill	$	37,300

(1) Amounts are estimates and subject to adjustment. Actual amounts are not expected to differ materially from the amounts shown.

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We estimated the fair value of loans acquired from UCB by utilizing a methodology wherein similar loans were aggregated into pools. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a market rate for similar loans. There was no carryover of UCB’s allowance for loan losses associated with the loans we acquired as the loans were initially recorded at fair value. Loans acquired with evidence of credit quality deterioration were evaluated and not considered to be significant.

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

Direct costs related to the UCB merger were expensed as incurred and were $3.0 million during the six months ended June 30, 2019, which includes technology and communications costs, professional services, marketing and advertising, and other noninterest expenses.

(3) Leases

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

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

Some of the Company’s lease arrangements contain lease components (e.g., minimum rent payments) and non-lease components (e.g., common area maintenance, taxes, etc.). The Company elected the option of not separating lease and non-lease

components and instead we account for them as a single lease component.

Certain lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected adjustment for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

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

Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. The components of lease cost recognized within our consolidated statements of income were as follows (in thousands):



	For the quarter ended June 30, 2019		For the six months ended June 30, 2019
Operating lease costs (office operations)	$	1,382	2,681
Variable lease costs (office operations)	56		190
Total operating lease costs	$	1,438	2,871

Amounts reported in the consolidated statements of financial condition were as follows (in thousands):



Operating leases:	As of June 30, 2019
Operating lease ROU assets (other assets)	$	45,944
Operating lease liabilities (other liabilities)	48,593

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Other information related to leases as of June 30, 2019 was as follows (in thousands):



Supplemental cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow from operating leases	$	2,692
ROU assets obtained in exchange for lease obligations	$	7,630
Weighted average remaining lease term	15.7 years
Weighted average discount rate	3.8		%

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

Maturities of lease liabilities by fiscal year for our operating leases are as follows (in thousands):



	As of June 30, 2019
2019	$	2,832
2020	5,173
2021	4,841
2022	4,536
2023	4,277
Thereafter	44,878
Total lease payments	66,537
Less amount of lease payments representing interest	17,944
Total present value of lease payments	$	48,593



	As of December 31, 2018
2019	$	4,677
2020	3,884
2021	3,179
2022	2,465
2023	2,040
Thereafter	7,784
Total lease payments	$	24,029

The Company has an additional operating lease with undiscounted total payments of $3.4 million which has not commenced as of June 30, 2019, and as such, has not been recognized in the Company’s consolidated statement of financial condition. We anticipate this lease to commence during 2019.

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(4) Investment securities and impairment of investment securities

The following table shows the portfolio of investment securities available-for-sale at June 30, 2019 (in thousands):



	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses		Fair value
Debt issued by the U.S. government and agencies:
Due in one year or less	$	14,852	75	—		14,927

Debt issued by government sponsored enterprises:
Due in one year or less	85,097		92	(165	)	85,024
Due in one year through five years	85,941		344	(511	)	85,774
Due in five years through ten years	4,061		44	(123	)	3,982

Municipal securities:
Due in one year or less	1,171		3	—		1,174
Due in one year through five years	3,794		84	—		3,878
Due in five years through ten years	12,597		150	(1	)	12,746
Due after ten years	13,748		263	—		14,011

Corporate debt issues:
Due in five years through ten years	917		—	—		917

Residential mortgage-backed securities:
Fixed rate pass-through	147,141		1,747	(1,320	)	147,568
Variable rate pass-through	21,577		896	(4	)	22,469
Fixed rate agency CMOs	399,260		4,512	(1,583	)	402,189
Variable rate agency CMOs	60,092		198	(184	)	60,106
Total residential mortgage-backed securities	628,070		7,353	(3,091	)	632,332
Total marketable securities available-for-sale	$	850,248	8,408	(3,891	)	854,765

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The following table shows the portfolio of investment securities available-for-sale at December 31, 2018 (in thousands):



	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses		Fair value
Debt issued by the U.S. government and agencies:
Due in one year through five years	$	14,756	24	—		14,780

Debt issued by government sponsored enterprises:
Due in one year or less	85,089		—	(795	)	84,294
Due in one year through five years	101,078		71	(1,512	)	99,637
Due after ten years	3,546		—	(142	)	3,404

Municipal securities:
Due in one year or less	1,333		2	(6	)	1,329
Due in one year through five years	3,985		54	(4	)	4,035
Due in five years through ten years	10,603		60	—		10,663
Due after ten years	5,105		31	—		5,136

Corporate debt issues:
Due in five years through ten years	914		—	—		914

Residential mortgage-backed securities:
Fixed rate pass-through	130,172		568	(4,113	)	126,627
Variable rate pass-through	24,761		1,003	(5	)	25,759
Fixed rate agency CMOs	365,427		865	(5,921	)	360,371
Variable rate agency CMOs	64,246		280	(25	)	64,501
Total residential mortgage-backed securities	584,606		2,716	(10,064	)	577,258
Total marketable securities available-for-sale	$	811,015	2,958	(12,523	)	801,450

The following table shows the portfolio of investment securities held-to-maturity at June 30, 2019 (in thousands):



	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses	Fair value
Residential mortgage-backed securities:
Fixed rate pass-through	$	2,609	98	—	2,707
Variable rate pass-through	1,469		41	—	1,510
Fixed rate agency CMOs	15,718		114	—	15,832
Variable rate agency CMOs	618		9	—	627
Total residential mortgage-backed securities	20,414		262	—	20,676
Total marketable securities held-to-maturity	$	20,414	262	—	20,676

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The following table shows the portfolio of investment securities held-to-maturity at December 31, 2018 (in thousands):



	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses		Fair value
Residential mortgage-backed securities:
Fixed rate pass-through	$	2,896	53	—		2,949
Variable rate pass-through	1,666		39	—		1,705
Fixed rate agency CMOs	17,552		—	(422	)	17,130
Variable rate agency CMOs	651		11	—		662
Total residential mortgage-backed securities	22,765		103	(422	)	22,446
Total marketable securities held-to-maturity	$	22,765	103	(422	)	22,446

The following table shows the fair value of and gross unrealized losses on investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2019 (in thousands):



	Less than 12 months				12 months or more			Total
	Fair value		Unrealized loss		Fair value	Unrealized loss		Fair value	Unrealized loss
U.S. government sponsored enterprises	$	—	—		122,504	(799	)	122,504	(799	)
Municipal securities	502		(2	)	—	—		502	(2	)
Residential mortgage-backed securities - agency	41,395		(381	)	196,183	(2,711	)	237,578	(3,092	)
Total temporarily impaired securities	$	41,897	(383	)	318,687	(3,510	)	360,584	(3,893	)



	Less than 12 months				12 months or more			Total
	Fair value		Unrealized loss		Fair value	Unrealized loss		Fair value	Unrealized loss
U.S. government sponsored enterprises	$	—	—		136,425	(2,449	)	136,425	(2,449	)
Municipal securities	929		(1	)	1,709	(10	)	2,638	(11	)
Residential mortgage-backed securities - agency	34,031		(30	)	346,675	(10,456	)	380,706	(10,486	)
Total temporarily impaired securities	$	34,960	(31	)	484,809	(12,915	)	519,769	(12,946	)

We review our investment portfolio for indications of impairment. This review includes analyzing the length of time and the extent to which amortized costs have exceeded fair values, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer, and the intent and ability to hold the investments for a period of time sufficient to allow for a recovery in value. We do not have the intent to sell these securities and it is more likely than not that we will not have to sell these securities before a recovery of our cost basis. For these reasons, we consider the unrealized losses to be temporary impairment losses.

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

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The table below shows a cumulative roll forward of credit losses recognized in earnings for debt securities held and not intended to be sold for the quarter ended June 30, (in thousands):



	2019		2018
Beginning balance at January 1, (1)	$	—	352
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized	—		—
Reduction for losses realized during the quarter	—		—
Reduction for securities sold/called realized during the quarter	—		(352	)
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized	—		—
Ending balance at June 30,	$	—	—

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

(5) Loans receivable

The following table shows a summary of our loans receivable at June 30, 2019 and December 31, 2018 (in thousands):



	June 30, 2019							December 31, 2018
	Originated			Acquired		Total		Originated		Acquired		Total
Personal Banking:
Residential mortgage loans (1)	$	2,799,400		92,372		2,891,772		2,766,430		93,782		2,860,212
Home equity loans	1,041,302			273,645		1,314,947		1,043,878		214,544		1,258,422
Consumer finance loans (2)	1,449			—		1,449		3,817		—		3,817
Consumer loans	938,052			45,217		983,269		775,378		58,671		834,049
Total Personal Banking	4,780,203			411,234		5,191,437		4,589,503		366,997		4,956,500

Commercial Banking:
Commercial real estate loans	2,551,548			479,063		3,030,611		2,416,047		223,327		2,639,374
Commercial loans	695,672			64,454		760,126		612,962		48,816		661,778
Total Commercial Banking	3,247,220			543,517		3,790,737		3,029,009		272,143		3,301,152
Total loans receivable, gross	8,027,423			954,751		8,982,174		7,618,512		639,140		8,257,652

Deferred loan costs	44,676			609		45,285		36,820		798		37,618
Allowance for loan losses	(48,429		)	(4,678	)	(53,107	)	(51,751	)	(3,463	)	(55,214	)
Undisbursed loan proceeds:
Residential mortgage loans	(11,187		)	—		(11,187	)	(11,513	)	—		(11,513	)
Commercial real estate loans	(215,132		)	(7,326	)	(222,458	)	(167,029	)	(524	)	(167,553	)
Commercial loans	(55,786		)	(1,146	)	(56,932	)	(63,605	)	(1,160	)	(64,765	)
Total loans receivable, net	$	7,741,565		942,210		8,683,775		7,361,434		634,791		7,996,225

(1) There were no loans held for sale at June 30, 2019 and December 31, 2018.

(2) Represents loans from our consumer finance subsidiary that was closed in 2017. Such loans are no longer being originated.

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



	June 30, 2019		December 31, 2018
Acquired loans evaluated individually for future credit losses:
Outstanding principal balance	$	7,844	8,189
Carrying value	5,324		5,690

Acquired loans evaluated collectively for future credit losses:
Outstanding principal balance	952,597		637,170
Carrying value	941,564		632,564

Total acquired loans:
Outstanding principal balance	960,441		645,359
Carrying value	946,888		638,254

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



	Total
Balance at December 31, 2017	$	1,540
Accretion	(785		)
Net reclassification from nonaccretable yield	—
Balance at December 31, 2018	755
Accretion	(267		)
Net reclassification from nonaccretable yield	—
Balance at June 30, 2019	$	488

The following table provides information related to acquired impaired loans by portfolio segment and by class of financing receivable at and for the six months ended June 30, 2019 (in thousands):



	Carrying value		Outstanding principal balance	Related impairment reserve	Average recorded investment in impaired loans	Interest income recognized
Personal Banking:
Residential mortgage loans	$	950	1,559	3	970	55
Home equity loans	839		1,781	7	923	70
Consumer loans	18		53	4	24	7
Total Personal Banking	1,807		3,393	14	1,917	132

Commercial Banking:
Commercial real estate loans	3,439		4,366	4	3,512	133
Commercial loans	78		85	—	78	2
Total Commercial Banking	3,517		4,451	4	3,590	135

Total	$	5,324	7,844	18	5,507	267

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The following table provides information related to acquired impaired loans by portfolio segment and by class of financing receivable at and for the year ended December 31, 2018 (in thousands):



	Carrying value		Outstanding principal balance	Related impairment reserve	Average recorded investment in impaired loans	Interest income recognized
Personal Banking:
Residential mortgage loans	$	990	1,598	6	1,294	226
Home equity loans	1,008		1,959	7	1,483	157
Consumer loans	29		76	4	53	35
Total Personal Banking	2,027		3,633	17	2,830	418

Commercial Banking:
Commercial real estate loans	3,584		4,471	1	4,028	358
Commercial loans	79		85	—	82	9
Total Commercial Banking	3,663		4,556	1	4,110	367

Total	$	5,690	8,189	18	6,940	785

The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the quarter ended June 30, 2019 (in thousands):



	Balance as of June 30, 2019		Current period provision		Charge-offs		Recoveries	Balance as of March 31, 2019
Originated loans
Personal Banking:
Residential mortgage loans	$	3,909	185		(390	)	109	4,005
Home equity loans	2,990		153		(249	)	24	3,062
Consumer finance loans	266		(191	)	(58	)	110	405
Consumer loans	10,500		1,328		(2,472	)	514	11,130
Total Personal Banking	17,665		1,475		(3,169	)	757	18,602

Commercial Banking:
Commercial real estate loans	20,962		(508	)	(4,147	)	147	25,470
Commercial loans	9,802		2,937		(874	)	100	7,639
Total Commercial Banking	30,764		2,429		(5,021	)	247	33,109
Total originated loans	48,429		3,904		(8,190	)	1,004	51,711

Acquired loans
Personal Banking:
Residential mortgage loans	104		—		(7	)	19	92
Home equity loans	344		(16	)	(140	)	101	399
Consumer loans	511		32		(36	)	61	454
Total Personal Banking	959		16		(183	)	181	945

Commercial Banking:
Commercial real estate loans	2,571		23		(220	)	301	2,467
Commercial loans	1,148		724		(213	)	39	598
Total Commercial Banking	3,719		747		(433	)	340	3,065
Total acquired loans	4,678		763		(616	)	521	4,010

Total	$	53,107	4,667		(8,806	)	1,525	55,721

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



	Balance as of June 30, 2018		Current period provision		Charge-offs		Recoveries	Balance as of March 31, 2018
Originated loans
Personal Banking:
Residential mortgage loans	$	3,657	157		(310	)	86	3,724
Home equity loans	3,839		272		(241	)	91	3,717
Consumer finance loans	2,354		(370	)	(486	)	179	3,031
Consumer loans	9,760		2,543		(2,623	)	700	9,140
Total Personal Banking	19,610		2,602		(3,660	)	1,056	19,612

Commercial Banking:
Commercial real estate loans	21,019		991		(343	)	153	20,218
Commercial loans	10,509		1,373		(311	)	154	9,293
Total Commercial Banking	31,528		2,364		(654	)	307	29,511
Total originated loans	51,138		4,966		(4,314	)	1,363	49,123

Acquired loans
Personal Banking:
Residential mortgage loans	170		74		(79	)	86	89
Home equity loans	662		56		(165	)	43	728
Consumer loans	915		139		(59	)	28	807
Total Personal Banking	1,747		269		(303	)	157	1,624

Commercial Banking:
Commercial real estate loans	3,422		(27	)	(96	)	115	3,430
Commercial loans	1,025		141		(180	)	30	1,034
Total Commercial Banking	4,447		114		(276	)	145	4,464
Total acquired loans	6,194		383		(579	)	302	6,088

Total	$	57,332	5,349		(4,893	)	1,665	55,211

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The following table provides information related to the allowance for loan losses by portfolio segment and by class of

financing receivable for the six months ended June 30, 2019 (in thousands):



	Balance as of June 30, 2019		Current period provision		Charge-offs		Recoveries	Balance as of December 31, 2018
Originated loans
Personal Banking:
Residential mortgage loans	$	3,909	372		(739	)	222	4,054
Home equity loans	2,990		117		(360	)	49	3,184
Consumer finance loans	266		(419	)	(237	)	246	676
Other consumer loans	10,500		4,377		(5,280	)	999	10,404
Total Personal Banking	17,665		4,447		(6,616	)	1,516	18,318

Commercial Banking:
Commercial real estate loans	20,962		(972	)	(4,716	)	271	26,379
Commercial loans	9,802		3,811		(1,331	)	268	7,054
Total Commercial Banking	30,764		2,839		(6,047	)	539	33,433
Total originated loans	48,429		7,286		(12,663	)	2,055	51,751

Acquired loans
Personal Banking:
Residential mortgage loans	104		8		(15	)	28	83
Home equity loans	344		28		(182	)	150	348
Other consumer loans	511		68		(70	)	94	419
Total Personal Banking	959		104		(267	)	272	850

Commercial Banking:
Commercial real estate loans	2,571		278		(255	)	552	1,996
Commercial loans	1,148		3,466		(3,026	)	91	617
Total Commercial Banking	3,719		3,744		(3,281	)	643	2,613
Total acquired loans	4,678		3,848		(3,548	)	915	3,463

Total	$	53,107	11,134		(16,211	)	2,970	55,214

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The following table provides information related to the allowance for loan losses by portfolio segment and by class of

financing receivable for the six months ended June 30, 2018 (in thousands):



	Balance as of June 30, 2018		Current period provision		Charge-offs		Recoveries	Balance as of December 31, 2017
Originated loans
Personal Banking:
Residential mortgage loans	$	3,657	187		(506	)	152	3,824
Home equity loans	3,839		187		(542	)	122	4,072
Consumer finance loans	2,354		(32	)	(2,039	)	457	3,968
Other consumer loans	9,760		5,822		(5,799	)	1,262	8,475
Total Personal Banking	19,610		6,164		(8,886	)	1,993	20,339

Commercial Banking:
Commercial real estate loans	21,019		1,694		(883	)	297	19,911
Commercial loans	10,509		1,035		(1,140	)	292	10,322
Total Commercial Banking	31,528		2,729		(2,023	)	589	30,233
Total originated loans	51,138		8,893		(10,909	)	2,582	50,572

Acquired loans
Personal Banking:
Residential mortgage loans	170		32		(84	)	91	131
Home equity loans	662		258		(475	)	117	762
Other consumer loans	915		85		(132	)	72	890
Total Personal Banking	1,747		375		(691	)	280	1,783

Commercial Banking:
Commercial real estate loans	3,422		(157	)	(107	)	137	3,549
Commercial loans	1,025		447		(376	)	63	891
Total Commercial Banking	4,447		290		(483	)	200	4,440
Total acquired loans	6,194		665		(1,174	)	480	6,223

Total	$	57,332	9,558		(12,083	)	3,062	56,795

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The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at June 30, 2019 (in thousands):



	Total loans receivable		Allowance for loan losses	Nonaccrual loans (1)	Loans past due 90 days or more and still accruing (2)	TDRs	Allowance related to TDRs	Additional commitments to customers with loans classified as TDRs
Personal Banking:
Residential mortgage loans	$	2,899,164	4,013	11,972	—	7,369	776	—
Home equity loans	1,314,947		3,334	7,201	55	2,018	459	32
Consumer finance loans	1,449		266	10	—	—	—	—
Consumer loans	1,009,975		11,011	3,480	—	—	—	—
Total Personal Banking	5,225,535		18,624	22,663	55	9,387	1,235	32

Commercial Banking:
Commercial real estate loans	2,808,153		23,533	35,623	—	18,256	1,479	404
Commercial loans	703,194		10,950	9,411	—	3,626	486	25
Total Commercial Banking	3,511,347		34,483	45,034	—	21,882	1,965	429

Total	$	8,736,882	53,107	67,697	55	31,269	3,200	461


(1)	Includes $13.4 million of nonaccrual TDRs.


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

The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at December 31, 2018 (in thousands):



	Total loans receivable		Allowance for loan losses	Nonaccrual loans (1)	Loans past due 90 days or more and still accruing (2)	TDRs	Allowance related to TDRs	Additional commitments to customers with loans classified as TDRs
Personal Banking:
Residential mortgage loans	$	2,864,470	4,137	15,848	—	5,382	993	—
Home equity loans	1,258,422		3,532	7,075	136	4,502	1,520	4
Consumer finance loans	3,817		676	22	3	—	—	—
Consumer loans	855,896		10,823	4,300	27	—	—	—
Total Personal Banking	4,982,605		19,168	27,245	166	9,884	2,513	4

Commercial Banking:
Commercial real estate loans	2,471,821		28,375	36,935	—	19,859	313	310
Commercial loans	597,013		7,671	8,101	—	3,865	263	74
Total Commercial Banking	3,068,834		36,046	45,036	—	23,724	576	384

Total	$	8,051,439	55,214	72,281	166	33,608	3,089	388


(1)	Includes $15.3 million of nonaccrual TDRs.


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

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The following table provides information related to the composition of originated impaired loans by portfolio segment and by class of financing receivable at and for the six months ended June 30, 2019 (in thousands):



	Nonaccrual loans 90 or more days delinquent		Nonaccrual loans less than 90 days delinquent	Loans less than 90 days delinquent reviewed for impairment	TDRs less than 90 days delinquent not included elsewhere	Total impaired loans	Average recorded investment in impaired loans	Interest income recognized on impaired loans
Personal Banking:
Residential mortgage loans	$	10,617	1,355	505	6,034	18,511	19,486	472
Home equity loans	5,591		1,610	—	1,683	8,884	8,738	286
Consumer finance loan	10		—	—	—	10	—	—
Consumer loans	2,892		588	—	—	3,480	3,705	152
Total Personal Banking	19,110		3,553	505	7,717	30,885	31,929	910

Commercial Banking:
Commercial real estate loans	21,123		14,500	3,361	4,189	43,173	47,684	1,004
Commercial loans	2,920		6,491	222	2,280	11,913	9,765	241
Total Commercial Banking	24,043		20,991	3,583	6,469	55,086	57,449	1,245

Total	$	43,153	24,544	4,088	14,186	85,971	89,378	2,155

The following table provides information related to the composition of originated impaired loans by portfolio segment and by class of financing receivable at and for the year ended December 31, 2018 (in thousands):



	Nonaccrual loans 90 or more days delinquent		Nonaccrual loans less than 90 days delinquent	Loans less than 90 days delinquent reviewed for impairment	TDRs less than 90 days delinquent not included elsewhere	Total impaired loans	Average recorded investment in impaired loans	Interest income recognized on impaired loans
Personal Banking:
Residential mortgage loans	$	12,965	2,883	—	6,660	22,508	20,733	910
Home equity loans	5,996		1,079	—	1,818	8,893	9,075	511
Consumer finance loans	22		—	—	—	22	24	—
Consumer loans	3,228		1,072	—	—	4,300	3,992	235
Total Personal Banking	22,211		5,034	—	8,478	35,723	33,824	1,656

Commercial Banking:
Commercial real estate loans	25,509		11,426	8,549	4,435	49,919	41,328	1,599
Commercial loans	3,010		5,091	2,453	2,087	12,641	9,186	507
Total Commercial Banking	28,519		16,517	11,002	6,522	62,560	50,514	2,106

Total	$	50,730	21,551	11,002	15,000	98,283	84,338	3,762

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

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The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at June 30, 2019 (in thousands):



	Loans collectively evaluated for impairment		Loans individually evaluated for impairment	Loans individually evaluated for impairment for which there is a related impairment reserve	Related impairment reserve	Loans individually evaluated for impairment for which there is no related reserve
Personal Banking:
Residential mortgage loans	$	2,891,404	7,760	7,760	777	—
Home equity loans	1,312,929		2,018	2,018	459	—
Consumer finance loans	1,449		—	—	—	—
Consumer loans	1,009,956		19	19	5	—
Total Personal Banking	5,215,738		9,797	9,797	1,241	—

Commercial Banking:
Commercial real estate loans	2,778,298		29,855	26,741	2,921	3,114
Commercial loans	693,086		10,108	8,901	1,636	1,207
Total Commercial Banking	3,471,384		39,963	35,642	4,557	4,321

Total	$	8,687,122	49,760	45,439	5,798	4,321

The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at December 31, 2018 (in thousands):



	Loans collectively evaluated for impairment		Loans individually evaluated for impairment	Loans individually evaluated for impairment for which there is a related impairment reserve	Related impairment reserve	Loans individually evaluated for impairment for which there is no related reserve
Personal Banking:
Residential mortgage loans	$	2,856,359	8,111	8,111	747	—
Home equity loans	1,256,255		2,167	2,167	523	—
Consumer finance loans	3,817		—	—	—	—
Consumer loans	855,867		29	29	6	—
Total Personal Banking	4,972,298		10,307	10,307	1,276	—

Commercial Banking:
Commercial real estate loans	2,436,605		35,216	31,830	6,499	3,386
Commercial loans	588,932		8,081	6,738	767	1,343
Total Commercial Banking	3,025,537		43,297	38,568	7,266	4,729

Total	$	7,997,835	53,604	48,875	8,542	4,729

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

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

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

The following tables provide a roll forward of troubled debt restructurings for the periods indicated (in thousands):



	For the quarter ended June 30,
	2019				2018
	Number of contracts	Amount			Number of contracts	Amount
Beginning TDR balance:	195	$	32,812		200	$	30,966
New TDRs	2	306			10	861
Re-modified TDRs	—	—			—	—
Net paydowns	—	—			—	(875		)
Charge-offs:
Residential mortgage loans	—	—			—	—
Home equity loans	—	—			—	—
Commercial real estate loans	—	—			—	—
Commercial loans	—	—			—	—
Paid-off loans:
Residential mortgage loans	4	(180		)	1	(6		)
Home equity loans	4	(75		)	1	(35		)
Commercial real estate loans	6	(1,594		)	3	(249		)
Commercial loans	—	—			—	—
Ending TDR balance:	183	$	31,269		205	$	30,662

Accruing TDRs		$	17,894			$	19,802
Non-accrual TDRs		13,375				10,860

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	For the six months ended June 30,
	2019				2018
	Number of contracts	Amount			Number of contracts	Amount
Beginning TDR balance:	195	$	33,608		205	$	32,104
New TDRs	2	306			19	5,796
Re-modified TDRs	—	—			—	—
Net paydowns	—	(786		)	—	(1,822		)
Charge-offs:
Residential mortgage loans	—	—			1	(135		)
Home equity loans	—	—			—	—
Commercial real estate loans	—	—			1	(203		)
Commercial loans	—	—			1	(721		)
Paid-off loans:
Residential mortgage loans	4	(180		)	2	(255		)
Home equity loans	4	(75		)	2	(47		)
Commercial real estate loans	6	(1,604		)	7	(1,823		)
Commercial loans	—	—			5	(2,232		)
Ending TDR balance:	183	$	31,269		205	$	30,662

Accruing TDRs		$	17,894			$	19,802
Non-accrual TDRs		13,375				10,860

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



	For the quarter ended June 30, 2019					For the six months ended June 30, 2019
	Number of contracts	Recorded investment at the time of modification		Current recorded investment	Current allowance	Number of contracts	Recorded investment at the time of modification		Current recorded investment	Current allowance
Personal Banking:
Residential mortgage loans	—	$	—	—	—	—	$	—	—	—
Home equity loans	—	—		—	—	—	—		—	—
Consumer loans	—	—		—	—	—	—		—	—
Total Personal Banking	—	—		—	—	—	—		—	—

Commercial Banking:
Commercial real estate loans	1	300		297	32	1	300		297	32
Commercial loans	1	10		9	1	1	10		9	1
Total Commercial Banking	2	310		306	33	2	310		306	33

Total	2	$	310	306	33	2	$	310	306	33

No TDRs modified within the previous twelve months have subsequently defaulted.

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	For the quarter ended June 30, 2018					For the six months ended June 30, 2018
	Number of contracts	Recorded investment at the time of modification		Current recorded investment	Current allowance	Number of contracts	Recorded investment at the time of modification		Current recorded investment	Current allowance
Personal Banking:
Residential mortgage loans	2	$	60	59	6	4	$	273	272	27
Home equity loans	5	177		137	37	8	317		275	74
Total Personal Banking	7	237		196	43	12	590		547	101

Commercial Banking:
Commercial real estate loans	1	481		481	33	2	2,883		2,852	33
Commercial loans	2	143		142	10	5	2,323		1,508	10
Total Commercial Banking	3	624		623	43	7	5,206		4,360	43

Total	10	$	861	819	86	19	$	5,796	4,907	144

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

The following table provides information as of June 30, 2019 for troubled debt restructurings (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended June 30, 2019 (in thousands):



		Type of modification
	Number of contracts	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	—	$	—	—	—	—	—
Home equity loans	—	—		—	—	—	—
Consumer loans	—	—		—	—	—	—
Total Personal Banking	—	—		—	—	—	—

Commercial Banking:
Commercial real estate loans	1	—		297	—	—	297
Commercial loans	1	—		—	9	—	9
Total Commercial Banking	2	—		297	9	—	306

Total	2	$	—	297	9	—	306

The following table provides information as of June 30, 2018 for troubled debt restructurings (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended June 30, 2018 (in thousands):



		Type of modification
	Number of contracts	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	2	$	7	—	—	52	59
Home equity loans	5	—		—	51	86	137
Total Personal Banking	7	7		—	51	138	196

Commercial Banking:
Commercial real estate loans	1	—		481	—	—	481
Commercial loans	2	—		—	142	—	142
Total Commercial Banking	3	—		481	142	—	623

Total	10	$	7	481	193	138	819

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		Type of modification
	Number of contracts	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	—	$	—	—	—	—	—
Home equity loans	—	—		—	—	—	—
Consumer loans	—	—		—	—	—	—
Total Personal Banking	—	—		—	—	—	—

Commercial Banking:
Commercial real estate loans	1	—		297	—	—	297
Commercial loans	1	—		—	9	—	9
Total Commercial Banking	2	—		297	9	—	306

Total	2	$	—	297	9	—	306



		Type of modification
	Number of contracts	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	4	$	7	—	178	87	272
Home equity loans	8	29		—	51	195	275
Consumer loans	—	—		—	—	—	—
Total Personal Banking	12	36		—	229	282	547

Commercial Banking:
Commercial real estate loans	2	—		481	—	2,371	2,852
Commercial loans	5	—		—	142	1,366	1,508
Total Commercial Banking	7	—		481	142	3,737	4,360

Total	19	$	36	481	371	4,019	4,907

No TDRs were re-modified during the quarters ended June 30, 2018 and June 30, 2019.

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The following table provides information related to loan payment delinquencies at June 30, 2019 (in thousands):



	30-59 Days delinquent		60-89 Days delinquent	90 Days or greater delinquent	Total delinquency	Current	Total loans receivable	90 Days or greater delinquent and accruing (1)
Originated loans
Personal Banking:
Residential mortgage loans	$	1,562	5,806	9,226	16,594	2,790,198	2,806,792	—
Home equity loans	3,327		1,942	4,463	9,732	1,031,570	1,041,302	—
Consumer finance loans	130		44	10	184	1,265	1,449	—
Consumer loans	7,275		2,702	2,683	12,660	951,489	964,149	—
Total Personal Banking	12,294		10,494	16,382	39,170	4,774,522	4,813,692	—

Commercial Banking:
Commercial real estate loans	2,286		2,551	15,256	20,093	2,316,323	2,336,416	—
Commercial loans	559		1,717	2,288	4,564	635,322	639,886	—
Total Commercial Banking	2,845		4,268	17,544	24,657	2,951,645	2,976,302	—
Total originated loans	15,139		14,762	33,926	63,827	7,726,167	7,789,994	—

Acquired loans
Personal Banking:
Residential mortgage loans	67		458	1,574	2,099	90,273	92,372	183
Home equity loans	1,246		377	1,128	2,751	270,894	273,645	—
Consumer loans	225		151	215	591	45,235	45,826	6
Total Personal Banking	1,538		986	2,917	5,441	406,402	411,843	189

Commercial Banking:
Commercial real estate loans	132		66	5,867	6,065	465,672	471,737	—
Commercial loans	107		8	632	747	62,561	63,308	—
Total Commercial Banking	239		74	6,499	6,812	528,233	535,045	—
Total acquired loans	1,777		1,060	9,416	12,253	934,635	946,888	189

Total loans	$	16,916	15,822	43,342	76,080	8,660,802	8,736,882	189


(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.

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The following table provides information related to loan payment delinquencies at December 31, 2018 (in thousands):



	30-59 Days delinquent		60-89 Days delinquent	90 Days or greater delinquent	Total delinquency	Current	Total loans receivable	90 Days or greater delinquent and accruing (1)
Originated loans
Personal Banking:
Residential mortgage loans	$	27,245	5,732	11,668	44,645	2,714,474	2,759,119	—
Home equity loans	6,810		1,771	4,825	13,406	1,030,472	1,043,878	—
Consumer finance loans	661		172	21	854	2,963	3,817	—
Consumer loans	9,000		2,867	3,037	14,904	793,092	807,996	—
Total Personal Banking	43,716		10,542	19,551	73,809	4,541,001	4,614,810	—

Commercial Banking:
Commercial real estate loans	5,391		4,801	21,721	31,913	2,217,105	2,249,018	—
Commercial loans	609		560	2,714	3,883	545,474	549,357	—
Total Commercial Banking	6,000		5,361	24,435	35,796	2,762,579	2,798,375	—
Total originated loan	49,716		15,903	43,986	109,605	7,303,580	7,413,185	—

Acquired loans
Personal Banking:
Residential mortgage loans	532		693	1,317	2,542	91,240	93,782	19
Home equity loans	1,839		294	1,212	3,345	211,199	214,544	40
Consumer loans	447		175	196	818	58,651	59,469	6
Total Personal Banking	2,818		1,162	2,725	6,705	361,090	367,795	65

Commercial Banking:
Commercial real estate loans	112		586	3,866	4,564	218,239	222,803	78
Commercial loans	364		—	296	660	46,996	47,656	—
Total Commercial Banking	476		586	4,162	5,224	265,235	270,459	78
Total acquired loan	3,294		1,748	6,887	11,929	626,325	638,254	143

Total	$	53,010	17,651	50,873	121,534	7,929,905	8,051,439	143

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

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

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

Substandard — Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that

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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 six months ended June 30, 2019 (in thousands):



	Pass		Special mention	Substandard	Doubtful	Loss	Total loans receivable
Originated loans
Personal Banking:
Residential mortgage loans	$	2,799,431	—	7,361	—	—	2,806,792
Home equity loans	1,035,922		—	5,380	—	—	1,041,302
Consumer finance loans	1,449		—	—	—	—	1,449
Consumer loans	960,968		—	3,181	—	—	964,149
Total Personal Banking	4,797,770		—	15,922	—	—	4,813,692

Commercial Banking:
Commercial real estate loans	2,152,525		80,607	103,103	181	—	2,336,416
Commercial loans	567,069		35,914	35,921	982	—	639,886
Total Commercial Banking	2,719,594		116,521	139,024	1,163	—	2,976,302
Total originated loans	7,517,364		116,521	154,946	1,163	—	7,789,994

Acquired loans
Personal Banking:
Residential mortgage loans	91,041		—	1,331	—	—	92,372
Home equity loans	271,965		—	1,680	—	—	273,645
Consumer loans	45,396		—	430	—	—	45,826
Total Personal Banking	408,402		—	3,441	—	—	411,843

Commercial Banking:
Commercial real estate loans	433,487		5,828	32,422	—	—	471,737
Commercial loans	54,821		2,267	6,220	—	—	63,308
Total Commercial Banking	488,308		8,095	38,642	—	—	535,045
Total acquired loans	896,710		8,095	42,083	—	—	946,888

Total loans	$	8,414,074	124,616	197,029	1,163	—	8,736,882

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The following table sets forth information about credit quality indicators, which were updated during the year ended December 31, 2018 (in thousands):



	Pass		Special mention	Substandard	Doubtful	Loss	Total loans receivable
Originated loans
Personal Banking:
Residential mortgage loans	$	2,749,266	—	9,853	—	—	2,759,119
Home equity loans	1,038,245		—	5,633	—	—	1,043,878
Consumer finance loans	3,817		—	—	—	—	3,817
Consumer loans	804,075		—	3,921	—	—	807,996
Total Personal Banking	4,595,403		—	19,407	—	—	4,614,810

Commercial Banking:
Commercial real estate loans	2,062,728		91,142	95,148	—	—	2,249,018
Commercial loans	503,665		15,760	29,932	—	—	549,357
Total Commercial Banking	2,566,393		106,902	125,080	—	—	2,798,375
Total originated loans	7,161,796		106,902	144,487	—	—	7,413,185

Acquired loans
Personal Banking:
Residential mortgage loans	92,625		—	1,157	—	—	93,782
Home equity loans	213,273		—	1,271	—	—	214,544
Consumer loans	58,954		—	515	—	—	59,469
Total Personal Banking	364,852		—	2,943	—	—	367,795

Commercial Banking:
Commercial real estate loans	191,622		3,546	27,635	—	—	222,803
Commercial loans	35,397		3,521	8,738	—	—	47,656
Total Commercial Banking	227,019		7,067	36,373	—	—	270,459
Total acquired loans	591,871		7,067	39,316	—	—	638,254

Total	$	7,753,667	113,969	183,803	—	—	8,051,439


(6)	Goodwill and Other Intangible Assets

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



	June 30, 2019			December 31, 2018
Amortizable intangible assets:
Core deposit intangibles - gross	$	63,685		63,685
Acquisitions	7,498			—
Less: accumulated amortization	(47,934		)	(45,027	)
Core deposit intangibles - net	23,249			18,658
Customer and Contract intangible assets - gross	10,474			10,474
Less: accumulated amortization	(9,611		)	(9,311	)
Customer and Contract intangible assets - net	863			1,163
Total intangible assets - net	$	24,112		19,821

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The following table shows the actual aggregate amortization expense for the quarters ended June 30, 2019 and 2018, as well as the estimated aggregate amortization expense, based upon current levels of intangible assets, for the current fiscal year and each of the five succeeding fiscal years (in thousands):



For the quarter ended June 30, 2019	$	1,760
For the quarter ended June 30, 2018	1,520
For the six months ended June 30, 2019	3,207
For the six months ended June 30, 2018	3,040
For the year ending December 31, 2019	6,718
For the year ending December 31, 2020	5,535
For the year ending December 31, 2021	4,438
For the year ending December 31, 2022	3,438
For the year ending December 31, 2023	2,561
For the year ending December 31, 2024	1,876

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



	Total
Balance at December 31, 2017	$	307,420
Goodwill from acquisition	—
Balance at December 31, 2018	307,420
Goodwill from acquisition	37,300
Balance at June 30, 2019	$	344,720

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

(7) Borrowed Funds

(a) Borrowings

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

The revolving line of credit with the FHLB carries a commitment of $250.0 million. The rate is adjusted daily by the FHLB, and any borrowings on this line may be repaid at any time without penalty. At June 30, 2019 and December 31, 2018 the balance of the revolving line of credit was $87.3 million and $128.6 million, respectively.

At June 30, 2019 and December 31, 2018, collateralized borrowings due within one year were $84.4 million and $105.8 million, respectively. These borrowings are collateralized by cash or various securities held in safekeeping by the FHLB.

(b) Trust Preferred Securities

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

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II has 7,875 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $7,875,000) with a stated maturity of June 15, 2037 and a floating rate of interest, which resets quarterly, equal to three-month LIBOR plus 1.48%. As the shareholders of the trust preferred securities are the primary beneficiaries of the Trusts, the Trusts are not consolidated in our financial statements.

The Trusts have invested the proceeds of the offerings in junior subordinated deferrable interest debentures issued by the Company. The structure of these debentures mirrors the structure of the trust-preferred securities. Northwest Bancorp Capital Trust III holds $51,547,000 of the Company’s junior subordinated debentures due December 30, 2035 with a floating rate of interest, reset quarterly, of three-month LIBOR plus 1.38%. The rate in effect at June 30, 2019 was 3.69%. Northwest Bancorp Statutory Trust IV holds $51,547,000 of the Company’s junior subordinated debentures due December 15, 2035 with a floating rate of interest, reset quarterly, of three-month LIBOR plus 1.38%. The rate in effect at June 30, 2019 was 3.79%. LNB Trust II holds $8,119,000 of the Company's junior subordinated debentures due June 15, 2037, with a floating rate of interest, reset quarterly, of three-month LIBOR plus 1.48%. The rate in effect at June 30, 2019 was 3.89%.

As a result of the merger with DFSC, we acquired two additional statutory business trusts: Union National Capital Trust I ("UNCT I") and Union National Capital Trust II ("UNCT II"); both are Delaware statutory business trusts. At June 30, 2019, UNCT I had 8,000 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $8,000,000) with a stated maturity of December 19, 2034. These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 2.85%. At June 30, 2019, UNCT II had 3,000 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $3,000,000) with a stated maturity of October 14, 2034. These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 2.0%. The Trusts have invested the proceeds of the offerings in junior subordinated deferrable interest debentures held by the Company. The structure of these debentures mirrors the structure of the trust-preferred securities. UNCT I holds $8,248,000 of junior subordinated debentures and UNCT II holds $3,093,000 of junior subordinated debentures. These subordinated debentures are the sole assets of the Trusts.

Cash distributions on the trust securities are made on a quarterly basis to the extent interest on the debentures is received by the Trusts. We have the right to defer payment of interest on the subordinated debentures at any time, or from time-to-time, for periods not exceeding five years. If interest payments on the subordinated debentures are deferred, the distributions on the trust securities also are deferred. To date there have been no interest deferrals. Interest on the subordinated debentures and distributions on the trust securities is cumulative. Our obligation constitutes a full, irrevocable, and unconditional guarantee on a subordinated basis of the obligations of the trust under the preferred securities.

The Trusts must redeem the preferred securities when the debentures are paid at maturity or upon an earlier redemption of the debentures to the extent the debentures are redeemed. All or part of the debentures may be redeemed at any time. Also, the debentures may be redeemed at any time if existing laws or regulations, or the interpretation or application of these laws or regulations, change causing:


•	the interest on the debentures to no longer be deductible by the Company for federal income tax purposes;


•	the trust to become subject to federal income tax or to certain other taxes or governmental charges;


•	the trust to register as an investment company; or


•	the preferred securities do not qualify as Tier I capital.

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


(8)	Guarantees

We issue standby letters of credit in the normal course of business. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. We are required to perform under a standby letter of credit when drawn upon by the guaranteed third party in the case of nonperformance by our customer. The credit risk associated with standby letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal loan underwriting procedures. Collateral may be obtained based on management’s credit assessment of the customer. At June 30, 2019, the maximum potential amount of future payments we could be required to make under these non-recourse standby letters of credit was $40.9 million, of which $34.0 million is fully collateralized. At June 30, 2019, we had a liability, which represents deferred income, of $322,000 related to the standby letters of credit.

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(9) Earnings Per Share

Basic earnings per common share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period, without considering any dilutive items. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. All stock options outstanding, during the quarter ended June 30, 2019 and 2018, were included in the computation of diluted earnings per share because the options’ exercise price was less than the average market price of the common shares of $17.16 and $17.07, respectively. All stock options outstanding during the six months ended June 30, 2019 and 2018, were included in the computation of diluted earnings per share because the options' exercise price was less than the average market price of the common shares of $17.45 and $16.95, respectively.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except share data and per share amounts):



	Quarter ended June 30,			Six months ended June 30,
	2019		2018	2019	2018
Reported net income	$	26,383	26,299	51,427	51,284

Weighted average common shares outstanding	105,233,635		101,870,043	104,173,601	101,735,235
Dilutive potential shares due to effect of stock options	1,024,580		1,554,111	1,208,669	1,545,885
Total weighted average common shares and dilutive potential shares	106,258,215		103,424,154	105,382,270	103,281,120

Basic earnings per share:	$	0.25	0.26	0.49	0.50

Diluted earnings per share:	$	0.25	0.25	0.49	0.50

(10) Pension and Other Post-retirement Benefits

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



	Quarter ended June 30,
	Pension benefits					Other post-retirement benefits
	2019			2018		2019	2018
Service cost	$	1,274		1,716		—	—
Interest cost	1,851			1,678		13	13
Expected return on plan assets	(2,759		)	(2,992	)	—	—
Amortization of prior service cost	(580		)	(580	)	—	—
Amortization of the net loss	873			872		17	25
Net periodic cost	$	659		694		30	38



	Six months ended June 30,
	Pension benefits					Other post-retirement benefits
	2019			2018		2019	2018
Service cost	$	2,549		3,432		—	—
Interest cost	3,703			3,356		26	27
Expected return on plan assets	(5,519		)	(5,984	)	—	—
Amortization of prior service cost	(1,161		)	(1,161	)	—	—
Amortization of the net loss	1,746			1,745		34	49
Net periodic cost	$	1,318		1,388		60	76

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

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(11)	Disclosures About Fair Value of Financial Instruments

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

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

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


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


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


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


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


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


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

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

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

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.

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Loans Held for Investment

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

FHLB Stock

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

Borrowed Funds

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

Junior Subordinated Debentures

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

Cash Flow Hedges - Interest Rate and Foreign Exchange Swap Agreements

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

Off-Balance Sheet Financial Instruments

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

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The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the consolidated statement of financial condition at June 30, 2019 (in thousands):



	Carrying amount		Estimated fair value	Level 1	Level 2	Level 3
Financial assets:
Cash and cash equivalents	$	106,988	106,988	106,988	—	—
Securities available-for-sale	854,765		854,765	—	854,765	—
Securities held-to-maturity	20,414		20,676	—	20,676	—
Loans receivable, net	8,683,775		8,627,759	—	—	8,627,759
Accrued interest receivable	28,742		28,742	28,742	—	—
Interest rate swaps	18,420		18,420	—	18,420	—
FHLB stock	14,966		14,966	—	—	—
Total financial assets	$	9,728,070	9,672,316	135,730	893,861	8,627,759

Financial liabilities:
Savings and checking deposits	$	7,083,521	7,083,521	7,083,521	—	—
Time deposits	1,600,372		1,599,989	—	—	1,599,989
Borrowed funds	171,677		171,677	171,677	—	—
Junior subordinated debentures	121,757		115,124	—	—	115,124
Interest rate swaps	18,472		18,472	—	18,472	—
Accrued interest payable	1,207		1,207	1,207	—	—
Total financial liabilities	$	8,997,006	8,989,990	7,256,405	18,472	1,715,113

The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the consolidated statement of financial condition at December 31, 2018 (in thousands):



	Carrying amount		Estimated fair value	Level 1	Level 2	Level 3
Financial assets:
Cash and cash equivalents	$	68,789	68,789	68,789	—	—
Securities available-for-sale	801,450		801,450	—	801,450	—
Securities held-to-maturity	22,765		22,446	—	22,446	—
Loans receivable, net	7,996,225		7,845,313	—	—	7,845,313
Accrued interest receivable	24,490		24,490	24,490	—	—
Interest rate swaps	6,445		6,445	—	6,445	—
FHLB stock	15,635		15,635	—	—	—
Total financial assets	$	8,935,799	8,784,568	93,279	830,341	7,845,313

Financial liabilities:
Savings and checking accounts	$	6,489,338	6,489,338	6,489,338	—	—
Time deposits	1,404,841		1,434,410	—	—	1,434,410
Borrowed funds	234,389		234,389	234,389	—	—
Junior subordinated debentures	111,213		102,572	—	—	102,572
Interest rate swaps	6,445		6,445	—	6,445	—
Accrued interest payable	744		744	744	—	—
Total financial liabilities	$	8,246,970	8,267,898	6,724,471	6,445	1,536,982

Fair value estimates are made at a point-in-time, based on relevant market data and information about the instrument. The methods and assumptions detailed above were used in estimating the fair value of financial instruments at both June 30, 2019 and December 31, 2018. There were no transfers of financial instruments between Level 1 and Level 2 during the quarter ended June 30, 2019.

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The following table represents assets and liabilities measured at fair value on a recurring basis at June 30, 2019 (in thousands):



	Level 1		Level 2	Level 3	Total assets at fair value
Debt securities:
U.S. government and agencies	$	—	14,927	—	14,927
Government sponsored enterprises	—		174,780	—	174,780
States and political subdivisions	—		31,809	—	31,809
Corporate	—		917	—	917
Total debt securities	—		222,433	—	222,433

Residential mortgage-backed securities:
GNMA	—		26,009	—	26,009
FNMA	—		87,434	—	87,434
FHLMC	—		56,583	—	56,583
Non-agency	—		11	—	11
Collateralized mortgage obligations:
GNMA	—		104,153	—	104,153
FNMA	—		214,388	—	214,388
FHLMC	—		143,754	—	143,754
Total mortgage-backed securities	—		632,332	—	632,332
Interest rate swaps	—		18,420	—	18,420
Total assets	$	—	873,185	—	873,185

Interest rate swaps	$	—	18,472	—	18,472
Total liabilities	$	—	18,472	—	18,472

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The following table represents assets and liabilities measured at fair value on a recurring basis at December 31, 2018 (in thousands):



	Level 1		Level 2	Level 3	Total assets at fair value
Debt securities:
U.S. government and agencies	$	—	14,780	—	14,780
Government sponsored enterprises	—		187,335	—	187,335
States and political subdivisions	—		21,163	—	21,163
Corporate	—		914	—	914
Total debt securities	—		224,192	—	224,192

Residential mortgage-backed securities:
GNMA	—		27,041	—	27,041
FNMA	—		73,196	—	73,196
FHLMC	—		51,621	—	51,621
Non-agency	—		528	—	528
Collateralized mortgage obligations:
GNMA	—		52,331	—	52,331
FNMA	—		207,033	—	207,033
FHLMC	—		165,508	—	165,508
Total mortgage-backed securities	—		577,258	—	577,258
Interest rate swaps	—		6,445	—	6,445
Total assets	$	—	807,895	—	807,895

Interest rate swaps	$	—	6,445	—	6,445
Total liabilities	$	—	6,445	—	6,445

There were no assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the quarters ended June 30, 2019 and June 30, 2018.

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

The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of June 30, 2019 (in thousands):



	Level 1		Level 2	Level 3	Total assets at fair value
Loans measured for impairment	$	—	—	39,642	39,642
Real estate owned	—		—	2,070	2,070

Total assets	$	—	—	41,712	41,712

The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of December 31, 2018 (in thousands):



	Level 1		Level 2	Level 3	Total assets at fair value
Loans measured for impairment	$	—	—	40,333	40,333
Real estate owned	—		—	2,498	2,498

Total assets	$	—	—	42,831	42,831

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

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

The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at June 30, 2019 (in thousands):



	Fair value		Valuation techniques	Significant unobservable inputs	Range (weighted average)
Loans measured for impairment	$	39,642	Appraisal value (1)	Estimated cost to sell	10.0%
			Discounted cash flow	Discount rate	4.25% to 11.0% (7.50%)

Real estate owned	$	2,070	Appraisal value (1)	Estimated cost to sell	10.0%


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

(12) Derivative Financial Instruments

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

Derivatives Designated as Hedging Instruments

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

Derivatives Not Designated as Hedging Instruments

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

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The following table presents information regarding our derivative financial instruments for the periods indicated (in thousands):



	Asset derivatives			Liability derivatives
	Notional amount		Fair value	Notional amount	Fair value
At June 30, 2019
Derivatives not designated as hedging instruments:
Interest rate swap agreements	$	281,602	18,507	281,602	18,559
Total derivatives	$	281,602	18,507	281,602	18,559

At December 31, 2018
Derivatives not designated as hedging instruments:
Interest rate swap agreements	$	221,919	6,445	221,919	6,445
Total derivatives	$	221,919	6,445	221,919	6,445

The following table presents income or expense recognized on derivatives for the periods indicated (in thousands):



	For the quarter ended June 30,				For the six months ended June 30,
	2019		2018		2019	2018
Hedging interest rate derivatives:
Increase in interest expense	$	—	267		—	600

Non-hedging swap derivatives:
Increase in other income	—		(417	)	—	(288	)

(13) Legal Proceedings

We establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated. As of June 30, 2019 we have not accrued for any legal proceedings based on our analysis of currently available information which is subject to significant judgment and a variety of assumptions and uncertainties. Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances. Due to the inherent subjectivity of assessments and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate loss to us from legal proceedings.

During the year-ended December 31, 2018, Northwest and our subsidiary, Northwest Insurance Services (“NWIS”), were

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

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(14) Changes in Accumulated Other Comprehensive Income

The following tables show the changes in accumulated other comprehensive income/(loss) by component for the periods indicated (in thousands):



	For the quarter ended June 30, 2019
	Unrealized gains and (losses) on securities available- for-sale			Change in fair value of interest rate swaps	Change in defined benefit pension plans		Total
Balance as of March 31, 2019	$	(2,380	)	—	(32,655	)	(35,035	)

Other comprehensive income before reclassification adjustments	5,608			—	—		5,608
Amounts reclassified from accumulated other comprehensive income (1), (2)	(1		)	—	209		208

Net other comprehensive income	5,607			—	209		5,816

Balance as of June 30, 2019	$	3,227		—	(32,446	)	(29,219	)



	For the quarter ended June 30, 2018
	Unrealized gains and (losses) on securities available- for-sale			Change in fair value of interest rate swaps		Change in defined benefit pension plans		Total
Balance as of March 31, 2018	$	(9,381	)	(480	)	(32,360	)	(42,221	)

Other comprehensive income/(loss) before reclassification adjustments	(1,237		)	214		—		(1,023	)
Amounts reclassified from accumulated other comprehensive income (3), (4)	(75		)	—		226		151

Net other comprehensive income/(loss)	(1,312		)	214		226		(872	)

Balance as of June 30, 2018	$	(10,693	)	(266	)	(32,134	)	(43,093	)


(1)	Consists of realized gain on securities (gain on sales of investments, net) of $2, net of tax (income tax expense) of $(1).


(2)	Consists of amortization of prior service cost (compensation and employee benefits) of $580 and amortization of net loss (compensation and employee benefits) of $(890), net of tax (income tax expense) of $85.


(3)	Consists of realized gains on securities (gain on sales of investments, net) of $105, net of tax (income tax expense) of $(30).


(4)	Consists of amortization of prior service cost (compensation and employee benefits) of $580 and amortization of net loss (compensation and employee benefits) of $(897), net of tax (income tax expense) of $91.

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	For the six months ended June 30, 2019
	Unrealized gains on securities available- for-sale			Change in fair value of interest rate swaps	Change in defined benefit pension plans		Total
Balance as of December 31, 2018	$	(6,832	)	—	(32,864	)	(39,696	)

Other comprehensive income before reclassification adjustments	10,061			—	—		10,061
Amounts reclassified from accumulated other comprehensive income (1), (2)	(2		)	—	418		416

Net other comprehensive income	10,059			—	418		10,477

Balance as of June 30, 2019	$	3,227		—	(32,446	)	(29,219	)



	For the six months ended June 30, 2018
	Unrealized gains and (losses) on securities available- for-sale			Change in fair value of interest rate swaps		Change in defined benefit pension plans		Total
Balance as of December 31, 2017	$	(4,409	)	(691	)	(26,980	)	(32,080	)

Reclassification due to adoption of ASU No. 2018-02	(991		)	(149	)	(5,606	)	(6,746	)

Other comprehensive income/(loss) before reclassification adjustments	(5,199		)	574		—		(4,625	)
Amounts reclassified from accumulated other comprehensive income (3), (4)	(94		)	—		452		358

Net other comprehensive income/(loss)	(5,293		)	574		452		(4,267	)

Balance as of June 30, 2018	$	(10,693	)	(266	)	(32,134	)	(43,093	)

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


(2)	Consists of amortization of prior service cost (compensation and employee benefits) of $1,161, and amortization of net loss (compensation and employee benefits) of $1,780, net of tax (income tax expense) of $167.


(3)	Consists of realized gains on securities (gain on sales of investments, net) of $131, net of tax (income tax expense) of $(37).


(4)	Consists of amortization of prior service cost (compensation and employee benefits) of $1,161 and amortization of net loss (compensation and employee benefits) of $(1,794), net of tax (income tax expense) of $181.

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Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

In addition to historical information, this document may contain certain forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, as they reflect management’s analysis only as of the date of this report. We have no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report.

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


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


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


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


•	adverse changes in the securities and credit markets;


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


•	technological changes that may be more difficult or expensive than expected;


•	the ability of third-party providers to perform their obligations to us;

• competition among depository and other financial institutions;


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


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


•	changes in consumer spending, borrowing and savings habits;


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


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


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


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


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


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

Overview of Critical Accounting Policies Involving Estimates

Please refer to Note 1 of the notes to consolidated financial statements in Item 8 of Part II of our 2018 Annual Report on Form 10-K.

Comparison of Financial Condition

On March 8, 2019, we acquired all of the outstanding common shares of Donegal Financial Services Corporation ("DFSC"), the holding company for Union Community Bank ("UCB"), for total consideration of $85.8 million, and thereby acquired UCB's 12 branch locations in Lancaster County in eastern Pennsylvania. As a result, we acquired assets with a fair value of $537.9 million, including loans with a fair value of $407.8 million, and we assumed deposits of $479.4 million. Under the terms of the merger agreement, the two shareholders of DFSC, Donegal Mutual Insurance Company and Donegal Group Inc., received payment in the form of 50% cash and 50% stock, or a total of $42.5 million and 2,462,373 shares of NWBI common stock.

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Total assets at June 30, 2019 were $10.505 billion, an increase of $897.7 million, or 9.3%, from $9.608 billion at December 31, 2018. This increase in assets was due primarily to the addition of $537.9 million, at fair value, of assets related to the UCB acquisition and organic loan growth of $277.6 million.

Total loans receivable increased by $685.4 million, or 8.5%, to $8.737 billion at June 30, 2019, from $8.051 billion at December 31, 2018. This increase was due primarily to the addition of $407.8 million, at fair value, of loans related to the UCB acquisition. Additionally, originated loans receivable increased by $277.6 million, or 3.5%.

Total deposits increased by $789.7 million, or 10.0%, to $8.684 billion at June 30, 2019 from $7.894 billion at December 31, 2018 primarily due to the addition of $479.4 million of deposits, at fair value, related to the UCB acquisition. In addition, legacy total deposits increased by $310.3 million, or 3.9%, with increases across all deposit products except for a slight decrease in savings deposits. Legacy noninterest-bearing demand deposits increased by $71.1 million, or 4.1%, to $1.807 billion at June 30, 2019 from $1.736 billion at December 31, 2018. In addition, legacy interest-bearing demand deposits increased by $125.2 million, or 8.6%, to $1.581 billion at June 30, 2019 from $1.455 billion at December 31, 2018. These increases are due primarily to our continued efforts to attract low cost accounts to whom we can also cross-sell other products and services. Legacy money market deposits also increased $41.0 million, or 2.5%, to $1.703 billion at June 30, 2019 from $1.662 billion at December 31, 2018, and legacy time deposits grew $75.0 million, or 5.3%, to $1.480 billion at June 30, 2019 from $1.405 billion at December 31, 2018.

Total shareholders’ equity at June 30, 2019 was $1.334 billion, or $12.51 per share, an increase of $76.0 million, or 6.0%, from $1.258 billion, or $12.17 per share, at December 31, 2018. This increase in equity was primarily the result of the issuance of 2,462,373 shares of our common stock at $17.58 per share for the UCB acquisition as well as the result of net income of $51.4 million for the six months ended June 30, 2019. Partially offsetting this increase was the payment of cash dividends of $37.8 million for the six months ended June 30, 2019.

Regulatory Capital

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

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

The capital conservation buffer requirement was phased in, which began on January 1, 2016 and ended on January 1,

2019, when the full capital conservation buffer requirement was implemented.

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



	At June 30, 2019
					Minimum capital				Well capitalized
	Actual				requirements (1)				requirements
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc.	$	1,268,359	15.258	%	$	872,837	10.500	%	$	831,274	10.000	%
Northwest Bank	1,187,771		14.298	%	872,279		10.500	%	830,742		10.000	%

Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc.	1,215,252		14.619	%	706,583		8.500	%	665,019		8.000	%
Northwest Bank	1,133,675		13.647	%	706,131		8.500	%	664,594		8.000	%

CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc.	1,097,174		13.199	%	581,892		7.000	%	540,328		6.500	%
Northwest Bank	1,133,675		13.647	%	581,520		7.000	%	539,982		6.500	%

Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc.	1,215,252		11.733	%	414,290		4.000	%	517,863		5.000	%
Northwest Bank	1,133,675		11.006	%	412,024		4.000	%	515,030		5.000	%

(1) Amounts and ratios include the 2019 capital conservation buffer of 2.5%, which does not apply to Tier 1 capital to average assets (leverage ratio).



	At December 31, 2018
					Minimum capital				Well capitalized
	Actual				requirements (1)				requirements
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc.	$	1,183,619	15.833	%	$	738,212	9.875	%	$	747,557	10.000	%
Northwest Bank	1,026,027		13.736	%	737,647		9.875	%	746,984		10.000	%

Tier I capital (to risk weighted assets)
Northwest Bancshares, Inc.	1,128,405		15.095	%	588,701		7.875	%	598,045		8.000	%
Northwest Bank	970,813		12.996	%	588,250		7.875	%	597,587		8.000	%

CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc.	1,020,530		13.652	%	476,567		6.375	%	485,912		6.500	%
Northwest Bank	970,813		12.996	%	776,202		6.375	%	448,190		6.000	%

Tier I capital (leverage) (to average assets)
Northwest Bancshares, Inc.	1,128,405		11.899	%	379,342		4.000	%	474,177		5.000	%
Northwest Bank	970,813		10.240	%	379,236		4.000	%	474,045		5.000	%

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

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Liquidity

We are required to maintain a sufficient level of liquid assets, as determined by management and reviewed for adequacy by the FDIC and the Pennsylvania Department of Banking and Securities during their regular examinations. Northwest monitors its liquidity position primarily using the ratio of unencumbered available-for-sale liquid assets as a percentage of deposits and borrowings (“liquidity ratio”). Northwest’s liquidity ratio at June 30, 2019 was 9.7%. We adjust liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes and insurance on mortgage loan escrow accounts, repayment of borrowings and loan commitments. At June 30, 2019, Northwest had $3.276 billion of additional borrowing capacity available with the FHLB, including $250.0 million on an overnight line of credit, which had a balance of $87.3 million, as well as $46.7 million of borrowing capacity available with the Federal Reserve Bank and $80.0 million with two correspondent banks.

Dividends

We paid $19.1 million and $17.4 million in cash dividends during the quarters ended June 30, 2019 and 2018, respectively. The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 72.0% and 68.0% for the quarters ended June 30, 2019 and 2018, respectively, on dividends of $0.18 per share for the quarter ended June 30, 2019 and on dividends of $0.17 per share for the quarter ended June 30, 2018. We paid $37.8 million and $34.8 million in cash dividends during the six months ended June 30, 2019 and 2018, respectively. The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was 73.5% and 68.0% for the six months ended June 30, 2019 and 2018, respectively, on dividends of $0.36 per share for the six months ended June 30, 2019 and on dividends of $0.34 per share for the six months ended June 30, 2018. On July 22, 2019, the Board of Directors declared a cash dividend of $0.18 per share payable on August 15, 2019 to shareholders of record as of August 1, 2019. This represents the 99th consecutive quarter we have paid a cash dividend.

Nonperforming Assets

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



	June 30, 2019			December 31, 2018
	(in thousands)
Loans 90 days or more past due
Residential mortgage loans	$	10,800		12,985
Home equity loans	5,591			6,037
Consumer finance loans	10			—
Consumer loans	2,898			3,254
Commercial real estate loans	21,123			25,587
Commercial loans	2,920			3,010
Total loans 90 days or more past due	$	43,342		50,873
Total real estate owned (REO)	2,070			2,498
Total loans 90 days or more past due and REO	45,412			53,371
Total loans 90 days or more past due to net loans receivable	0.50		%	0.64	%
Total loans 90 days or more past due and REO to total assets	0.43		%	0.56	%
Nonperforming loans:
Nonaccrual loans - loans 90 days or more delinquent	43,153			50,730
Nonaccrual loans - loans less than 90 days delinquent	24,544			21,552
Loans 90 days or more past maturity and still accruing	55			166
Total nonperforming loans	67,752			72,448
Total nonperforming assets	$	69,822		74,946
Nonaccrual troubled debt restructured loans (1)	13,375			15,306
Accruing troubled debt restructured loans	17,894			18,302
Total troubled debt restructured loans	$	31,269		33,608


(1)	Included in nonaccurual loans above.

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At June 30, 2019, we expect to fully collect the carrying value of our purchased credit impaired loans and have determined that we can reasonably estimate their future cash flows including those loans that are 90 days or more delinquent. As a result, we do not consider these loans that are 90 days or more delinquent, which total $189,000, to be nonaccrual or impaired and continue to recognize interest income on these loans, including the loans’ accretable discount.

A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement including both contractual principal and interest payments. The amount of impairment is required to be measured using one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, a specific allowance is allocated for the impairment. Impaired loans at June 30, 2019 and December 31, 2018 were $86.0 million million and $98.3 million, respectively.

Allowance for Loan Losses

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

On an ongoing basis, the Credit Administration department, as well as loan officers, branch managers and department heads, review and monitor the loan portfolio for problem loans. This portfolio monitoring includes a review of the monthly delinquency reports as well as historical comparisons and trend analysis. Personal and small business commercial loans are classified primarily by delinquency status. In addition, a meeting is held every quarter with each region to monitor the performance and status of commercial loans on an internal watch list. On an on-going basis, the loan officer, in conjunction with a portfolio manager, grades or classifies problem commercial loans or potential problem commercial loans based upon their knowledge of the lending relationship and other information previously accumulated. This rating is also reviewed independently by our Loan Review department on a periodic basis. Our loan grading system for problem commercial loans is consistent with industry regulatory guidelines which classifies loans as “substandard”, “doubtful” or “loss.” Loans that do not expose us to risk sufficient to warrant classification in one of the previous categories, but which possess some weaknesses, are designated as “special mention”. A “substandard” loan is any loan that is 90 days or more contractually delinquent or is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as “doubtful” have all the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions or values, highly questionable and improbable. Loans classified as “loss” are considered uncollectible so that their continuance as assets without the establishment of a specific loss allowance is not warranted.

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

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

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

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The individual impairment measures along with the estimated loss for each homogeneous pool are consolidated into one summary document. This summary schedule along with the support documentation used to establish this schedule is presented to management’s Allowance for Loan Loss Committee ("ALL Committee") monthly. The ALL Committee reviews and approves the processes and ALL documentation presented. Based on this review and discussion, the appropriate amount of ALL is estimated and any adjustments to reconcile the actual ALL with this estimate are determined. The ALL Committee also considers if any changes to the methodology are needed. In addition to the ALL Committee's review and approval, a review is performed by the Risk Management Committee of the Board of Directors on a quarterly basis and annually by internal audit.

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

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

We utilize a structured methodology each period when analyzing the adequacy of the allowance for loan losses and the related provision for loan losses, which the ALL Committee assesses regularly for appropriateness. As part of the analysis as of June 30, 2019, we considered the economic conditions in our markets, such as unemployment and bankruptcy levels as well as changes in estimates of real estate collateral values, and no material changes in methodology were determined to be necessary. In addition, we considered the overall trends in asset quality, specific reserves needed and/or already established for criticized loans, historical loss rates and collateral valuations. The ALL decreased by $2.1 million, or 3.8%, to $53.1 million, or 0.61% of total loans at June 30, 2019 from $55.2 million, or 0.69% of total loans, at December 31, 2018. This decrease is due primarily to the write down of $4.0 million on a residential land development loan in our Western New York region which was previously fully reserved. Partially offsetting this decrease was an increase in loans classified as both special mention and substandard. Loans classified as special mention increased to $124.6 million at June 30, 2019 from $114.0 million at December 31, 2018. Loans classified as substandard increased to $197.0 million at June 30, 2019 from $183.8 million at December 31, 2018.

We also consider how the levels of non-accrual loans and historical charge-offs have influenced the required amount of allowance for loan losses. Nonaccrual loans of $67.7 million, or 0.78% of total loans receivable at June 30, 2019, decreased by $4.6 million, or 6.36%, from $72.3 million, or 0.90% of total loans receivable, at December 31, 2018. As a percentage of average loans, annualized net charge-offs increased to 0.32% for the six months ended June 30, 2019 compared to 0.23% for the year ended December 31, 2018.

Comparison of Operating Results for the Quarters Ended June 30, 2019 and 2018

Net income for the quarter ended June 30, 2019 was $26.4 million, or $0.25 per diluted share, an increase of $84,000, or 0.3%, from net income of $26.3 million, or $0.25 per diluted share, for the quarter ended June 30, 2018. The increase in net income resulted from an increase in net interest income of $8.4 million, or 10.0%, as well as a decrease in the provision for loan losses of $682,000 or 12.8%. Partially offsetting these improvements was a decrease in noninterest income of $746,000, or 3.1%, and increases in noninterest expense of $7.7 million, or 11.1%, and income tax expense of $504,000, or 7.3%. Net income for the quarter ended June 30, 2019 represents annualized returns on average equity and average assets of 8.01% and 1.02%, respectively, compared to 8.67% and 1.11% for the same quarter last year. A further discussion of significant changes follows.

Interest Income

Total interest income increased by $13.9 million, or 15.0%, to $106.8 million for the quarter ended June 30, 2019 from $92.9 million for the quarter ended June 30, 2018. This increase is attributed to increases in both the average balance and average yield on interest earning assets. The average yield earned on interest earning assets increased to 4.51% for the quarter ended June 30, 2019 from 4.25% for the quarter ended June 30, 2018 due to increases in market interest rates over the past year. Additionally, the average balance of interest earning assets increased by $734.4 million, or 8.4%, to $9.502 billion for the quarter ended June 30, 2019 from $8.768 billion for the quarter ended June 30, 2018, due primarily to internal loan growth as well as the acquisition of UCB.

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Interest income on loans receivable increased by $12.8 million, or 14.5%, to $100.9 million for the quarter ended June 30, 2019 from $88.1 million for the quarter ended June 30, 2018. This increase is attributed to increases in both the average balance and average yield on loans receivable. The average balance increased by $743.4 million, or 9.5%, to $8.594 billion for the quarter ended June 30, 2019 from $7.851 billion for the quarter ended June 30, 2018. This increase is due to organic loan growth of $269.9 million during the last twelve months as well as loans of $407.8 million from the UCB acquisition. Additionally, the average yield on loans receivable increased to 4.71% for the quarter ended June 30, 2019 from 4.50% for the quarter ended June 30, 2018 primarily as a result of the increases in market interest rates over the past year.

Interest income on mortgage-backed securities increased by $1.0 million, or 31.5%, to $4.3 million for the quarter ended June 30, 2019 from $3.3 million for the quarter ended June 30, 2018. This increase is attributed to increases in both the average balance and the average yield on mortgage-backed securities. The average yield on mortgage-backed securities increased to 2.65% for the quarter ended June 30, 2019 from 2.28% for the quarter ended June 30, 2018 due to both an increase in short-term market interest rates and the purchase of fixed-rate mortgage-backed securities with yields higher than the existing portfolio. The average balance of mortgage-backed securities increased by $75.0 million, or 13.2%, to $644.9 million for the quarter ended June 30, 2019 from $569.9 million for the quarter ended June 30, 2018 primarily as a result of investment securities received as part of the UCB acquisition.

Interest income on investment securities increased by $174,000, or 18.1%, to $1.1 million for the quarter ended June 30, 2019 from $961,000 for the quarter ended June 30, 2018. This increase is attributed to an increase in the average yield on investment securities which increased to 2.01% for the quarter ended June 30, 2019 from 1.63% for the quarter ended June 30, 2018 due to the addition of higher yielding investments, including municipal bonds, from the UCB acquisition. Partially offsetting this increase was a decrease in the average balance of investment securities of $9.5 million, or 4.0% to $226.3 million for the quarter ended June 30, 2019 from $235.8 million for the quarter ended June 30, 2018. This decrease is due primarily to the maturity or call of government agency securities.

Dividends on FHLB stock increased by $231,000, or 271.8%, to $316,000 for the quarter ended June 30, 2019 from $85,000 for the quarter ended June 30, 2018. This increase is attributable to increases in both the average balance and average yield on FHLB stock. The average yield increased to 7.86% for the quarter ended June 30, 2019 from 4.36% for the quarter ended June 30, 2018, as the FHLB of Pittsburgh recently increased yields on required stock purchases for active members. Additionally, the average balance increased by $8.3 million, or 106.1% to $16.1 million for the quarter ended June 30, 2019 from $7.8 million for the quarter ended June 30, 2018. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.

Interest income on interest-earning deposits decreased by $310,000, or 66.1%, to $159,000 for the quarter ended June 30, 2019 from $469,000 for the quarter ended June 30, 2018. This decrease is attributable to a decrease in the average balance of interest-earning deposits which decreased by $82.8 million, or 79.8%, to $21.0 million for the quarter ended June 30, 2019 from $103.7 million for the quarter ended June 30, 2018. Partially offsetting this decrease was an increase in the average yield on interest-earning deposits to 3.00% for the quarter ended June 30, 2019 from 1.79% for the quarter ended June 30, 2018, as a result of recent increases in the targeted Federal Funds rate by the Federal Reserve.

Interest Expense

Interest expense increased by $5.6 million, or 64.2%, to $14.2 million for the quarter ended June 30, 2019 from $8.6 million for the quarter ended June 30, 2018. This increase in interest expense was primarily due to an increase in the average cost of interest-bearing liabilities, which increased to 0.82% for the quarter ended June 30, 2019 from 0.53% for the quarter ended June 30, 2018. This increase resulted from increases in the interest rate paid on deposits and borrowed funds in response to increases in market interest rates. In addition, the average balance of interest-bearing liabilities increased by $462.8 million, or 7.1%, to $6.978 billion for the quarter ended June 30, 2019 from $6.515 billion for the quarter ended June 30, 2018. This increase was primarily due to the UCB acquisition which included $479.4 million in deposits.

Net Interest Income

Net interest income increased by $8.4 million, or 10.0%, to $92.6 million for the quarter ended June 30, 2019 from $84.2 million for the quarter ended June 30, 2018. This increase is attributable to the factors discussed above. Growth in our non-interest bearing checking deposits and other non-interest bearing funding enabled us to increase our net interest margin while interest bearing deposit costs rose greater than yields on interest earning assets reducing our interest rate spread. Our interest rate spread decreased to 3.69% for the quarter ended June 30, 2019 from 3.72% for the quarter ended June 30, 2018 and our net interest margin increased to 3.90% for the quarter ended June 30, 2019 from 3.84% for the quarter ended June 30, 2018.

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Provision for Loan Losses

The provision for loan losses decreased by $682,000, or 12.8%, to $4.7 million for the quarter ended June 30, 2019 from $5.3 million for the quarter ended June 30, 2018. This decrease was primarily due to an elevated provision in the prior year due to the closure of the Company's consumer finance subsidiary and the runoff of the legacy portfolio. During the current quarter net charge-offs were elevated due to an additional write-down of approximately $4.0 million on a residential land development loan in our Western New York region which was previously fully reserved. In addition, total loan delinquency decreased by $4.8 million to $76.1 million, or 0.9% of total loans, at June 30, 2019 from $80.7 million, or 1.0% of total loans at June 30, 2018. Annualized net charge-offs to average loans increased to 0.34% for the quarter ended June 30, 2019 from 0.16% for the quarter ended June 30, 2018 due primarily to the residential land development write-down noted above.

In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels, bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss experience. We analyze the allowance for loan losses as described in the section entitled “Allowance for Loan Losses.” The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the losses inherent in our loan portfolio relative to loan mix, economic conditions and historical loss experience at June 30, 2019.

Noninterest Income

Noninterest income decreased by $746,000, or 3.1%, to $23.4 million for the quarter ended June 30, 2019 from $24.1 million for the quarter ended June 30, 2018. This decrease was primarily due to a $1.1 million, or 48.7%, decline in bank owned life insurance income due to a death benefit received during the prior year. Partially offsetting this decline was an increase in service charges and fees of $431,000, or 3.3%, primarily as a result of increased customer activity from the UCB acquisition. Additionally, there was an increase in trust and other financial services income of $394,000, or 9.7%, due to new brokerage production.

Noninterest Expense

Noninterest expense increased by $7.7 million, or 11.1%, to $77.5 million for the quarter ended June 30, 2019 from $69.8 million for the quarter ended June 30, 2018. This increase resulted primarily from a $3.0 million, or 7.6%, increase in compensation and employee benefits due to both internal growth in compensation and staff as well as the addition of UCB employees. In addition, processing expenses increased by $1.1 million, or 11.2% as we continue to invest in technology and infrastructure to meet the demands of becoming a $10.0 billion asset institution. Also contributing to this increase was an increase in restructuring and acquisition expense of $712,000 due to expenses incurred as part of the acquisition of UCB.

Income Taxes

The provision for income taxes increased by $504,000, or 7.3%, to $7.4 million for the quarter ended June 30, 2019 from $6.9 million for the quarter ended June 30, 2018. In addition to the increase in income before tax of $588,000 or 1.8%, our effective tax rate for the quarter ended June 30, 2019 was 21.9% compared to 20.8% for the quarter ended June 30, 2018. We anticipate our effective tax rate to be between 21.0% and 23.0% for the year ending December 31, 2019.

Comparison of Operating Results for the Six Months Ended June 30, 2019 and 2018

Net income for the six months ended June 30, 2019 was $51.4 million, or $0.49 per diluted share, an increase of $143,000, or 0.3%, from $51.3 million, or $0.50 per diluted share, for the six months ended June 30, 2018. The increase in net income resulted from an increase in interest income of $24.7 million, or 13.5%. Partially offsetting this improvement was a decrease in noninterest income of $872,000, or 1.9%, and increases in the provision for loan losses of $1.6 million, or 16.5%, interest expense of $10.1 million, or 61.5%, and noninterest expense of $11.7 million, or 8.5%. Net income for the six months ended June 30, 2019 represents annualized returns on average equity and average assets of 7.99% and 1.02%, respectively, compared to 8.54% and 1.09% for the six months ended June 30, 2018. A discussion of significant changes follows.

Interest Income

Total interest income increased by $24.7 million, or 13.5%, to $207.1 million for the six months ended June 30, 2019 from $182.4 million for the six months ended June 30, 2018. This increase is the result of increases in both the average balance and average yield earned on interest earning assets. The average yield earned on interest earning assets increased to 4.51% for the six months ended June 30, 2019 from 4.23% for the six months ended June 30, 2018. This increase in average yield is attributed

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to increases in market interest rates over the past year. Additionally, the average balance of interest earning assets increased by $560.2 million, or 6.4%, to $9.261 billion for the six months ended June 30, 2019 from $8.700 billion for the six months ended June 30, 2018 due primarily to internal loan growth as well as the UCB acquisition.

Interest income on loans receivable increased by $22.5 million, or 13.0%, to $195.9 million for the six months ended June 30, 2019 from $173.3 million for the six months ended June 30, 2018. This increase is attributed to increases in both the average balance and average yield on loans receivable. The average balance increased by $563.7 million, or 7.2%, to $8.377 billion for the six months ended June 30, 2019 from $7.813 billion for the six months ended June 30, 2018. This increase is due to organic loan growth of $269.9 million during the last twelve months as well as loans of $407.8 million from the UCB acquisition. Additionally, the average yield on loans receivable increased to 4.71% for the six months ended June 30, 2019 from 4.47% for the six months ended June 30, 2018, primarily as a result of the increases in market interest rates over the past year.

Interest income on mortgage-backed securities increased by $2.0 million, or 31.6%, to $8.2 million for the six months ended June 30, 2019 from $6.3 million for the six months ended June 30, 2018. This increase is attributed to increases in both the average balance and average yield on mortgage-backed securities. The average balance of mortgage-backed securities increased by $60.8 million, or 10.8%, to $624.8 million for the six months ended June 30, 2019 from $564.0 million for the six months ended June 30, 2018. This increase is due primarily to the addition of the UCB portfolio. Additionally, the average yield on mortgage-backed securities increased to 2.64% for the six months ended June 30, 2019 from 2.22% for the six months ended June 30, 2018, due to both an increase in short-term market interest rates that positively impacted our adjustable rate mortgage-backed securities and the purchase of fixed-rate mortgage-backed securities with yields higher than the existing portfolio.

Interest income on investment securities increased by $224,000, or 11.0%, to $2.3 million for the six months ended June 30, 2019 from $2.0 million for the six months ended June 30, 2018. This increase is primarily attributable to an increase in the average yield on investment securities to 1.99% for the six months ended June 30, 2019 from 1.65% for the six months ended June 30, 2018. The increase in yield is due to the addition of higher yielding investments from the UCB acquisition. Partially offsetting this increase was a decrease in the average balance of investment securities of $19.2 million, or 7.8%, to $226.8 million for the six months ended June 30, 2019 from $246.0 million for the six months ended June 30, 2018. This decrease is due primarily to the maturity or call of government agency securities.

Dividends on FHLB stock increased by $305,000, or 167.6%, to $487,000 for the six months ended June 30, 2019 from $182,000 for the six months ended June 30, 2018. This increase is attributable to increases in both the average balance and average yield on FHLB stock. The average yield increased to 6.10% for the six months ended June 30, 2019 from 4.28% for the six months ended June 30, 2018, and the average balance increased by $7.5 million, or 87.6%, to $16.1 million for the six months ended June 30, 2019 from $8.6 million for the six months ended June 30, 2018. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB and dividend yields.

Interest income on interest-earning deposits decreased by $345,000, or 57.1%, to $259,000 for the six months ended June 30, 2019 from $604,000 for the six months ended June 30, 2018. This decrease is attributable to a decrease in the average balance of interest-earning deposits, which decreased by $52.6 million, or 76.2%, to $16.4 million for the six months ended June 30, 2019 from $69.0 million for the six months ended June 30, 2018, due to the utilization of excess cash to fund loan growth. Partially offsetting this decrease was an increase in the average yield on interest-earning deposits to 3.14% for the six months ended June 30, 2019 from 1.74% for the six months ended June 30, 2018, as a result of recent increases in the targeted Federal Funds rate by the Federal Reserve.

Interest Expense

Interest expense increased by $10.1 million, or 61.5%, to $26.5 million for the six months ended June 30, 2019 from $16.4 million for the six months ended June 30, 2018. This increase in interest expense was due to an increase in the average cost of interest-bearing liabilities to 0.78% for the six months ended June 30, 2019 from 0.51% for the six months ended June 30, 2018. This increase resulted from increases in the interest rate paid on deposits and borrowed funds in response to increases in market interest rates. In addition, the average balance of interest-bearing liabilities increased by $329.6 million, or 5.1%, to $6.816 billion for the six months ended June 30, 2019 from $6.486 billion for the six months ended June 30, 2018. This increase was primarily due to the UCB acquisition, which included $479.4 million in deposits, as well as internal growth of funding sources.

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Net Interest Income

Net interest income increased by $14.6 million, or 8.8%, to $180.6 million for the six months ended June 30, 2019 from $166.0 million for the six months ended June 30, 2018. This increase is attributable to the factors discussed above. We have been able to increase our average yield on assets more than the increase in our average cost of funds and we have increased our non-interest bearing funding, including non-interesting bearing checking. As a result, both our interest rate spread and net interest margin increased. Our interest rate spread increased to 3.73% for the six months ended June 30, 2019 from 3.72% for the six months ended June 30, 2018 and our net interest margin increased to 3.90% for the six months ended June 30, 2019 from 3.82% for the six months ended June 30, 2018.

Provision for Loan Losses

The provision for loan losses increased by $1.6 million, or 16.5%, to $11.1 million for the six months ended June 30, 2019 from $9.6 million for the six months ended June 30, 2018. This increase is due primarily to a $2.6 million write-down on one commercial business loan along with the other factors discussed in the "Comparison of Operating Results for the Quarters Ended June 30, 2019 and 2018" section. In addition, total nonaccrual loans increased by $5.0 million to $67.7 million, or 0.78% of total loans, at June 30, 2019 from $62.7 million, or 0.79% of total loans at June 30, 2018. Annualized net charge-offs to average loans increased to 0.32% for the six months ended June 30, 2019 from 0.23% for the six months ended June 30, 2018.

Noninterest Income

Noninterest income decreased by $872,000, or 1.9%, to $45.0 million for the six months ended June 30, 2019 from $45.9 million for the six months ended June 30, 2018. This decrease was primarily due to a $1.1 million, or 33.7%, decline in bank owned life insurance income due to a death benefit received during the prior year. Additionally, insurance commission income decreased by $516,000, or 10.7% as the result of the loss of certain contingent bonus commissions due to changes in related laws impacting the current year and other operating income decreased by $799,000, or 16.8%, due to a decline in fee income associated with commercial lending activity. Positively impacting noninterest income during the six months ended June 30, 2019 was an increase in service charges and fees of $575,000, or 2.3%, as a result of increased customer activity from the UCB acquisition, a $558,000, or 6.9%, increase in trust and other financial services income due to new brokerage production and a $458,000, or 123.8%, increase in gain on real estate owned, primarily as the result of a write-down and sale of one commercial property in the prior year.

Noninterest Expense

Noninterest expense increased by $11.7 million, or 8.5%, to $148.9 million for the six months ended June 30, 2019, from $137.2 million for the six months ended June 30, 2018. This increase resulted primarily from a $4.7 million, or 6.2%, increase in compensation and employee benefits due to both internal growth in compensation and staff as well as the addition of UCB employees. In addition, processing expense increased by $1.8 million, or 9.4%, as we continue to invest in technology and infrastructure to meet the demands of becoming a $10.0 billion institution. Also contributing to this increase was an increase in restructuring and acquisition expense of $2.6 million due to expenses incurred as part of the UCB acquisition.

Income Taxes

The provision for income taxes increased by $273,000, or 2.0%, to $14.1 million for the six months ended June 30, 2019 from $13.8 million for the six months ended June 30, 2018. In addition to the increase in income before tax of $416,000, or 0.6%, our effective tax rate for the six months ended June 30, 2019 was 21.5% compared to 21.3% for the six months ended June 30, 2018. We anticipate our effective tax rate to be between 21.0% and 23.0% for the year ending December 31, 2019.

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Average Balance Sheet

(in thousands)

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



	Quarter ended June 30,
	2019						2018
	Average balance			Interest	Avg. yield/ cost (g)		Average balance			Interest	Avg. yield/ cost (g)
Assets
Interest-earning assets:
Residential mortgage loans	$	2,857,425		29,300	4.10	%	$	2,761,528		27,893	4.04	%
Home equity loans	1,319,056			17,717	5.39	%	1,281,001			15,384	4.82	%
Consumer loans	943,254			10,649	4.53	%	655,541			7,949	4.86	%
Consumer finance loans	1,826			87	19.06	%	10,428			516	19.79	%
Commercial real estate loans	2,801,953			35,537	5.02	%	2,518,170			29,034	4.56	%
Commercial loans	670,613			7,966	4.70	%	624,087			7,703	4.88	%
Loans receivable (a) (b) (includes FTE adjustments of $339 and $373, respectively)	8,594,127			101,256	4.73	%	7,850,755			88,479	4.52	%
Mortgage-backed securities (c)	644,887			4,280	2.65	%	569,893			3,254	2.28	%
Investment securities (c) (includes FTE adjustments of $63 and $83, respectively)	226,325			1,198	2.12	%	235,784			1,044	1.77	%
FHLB stock	16,117			316	7.86	%	7,819			85	4.36	%
Other interest-earning deposits	20,983			159	3.00	%	103,739			469	1.79	%
Total interest-earning assets (includes FTE adjustments of $402 and $457, respectively)	9,502,439			107,209	4.53	%	8,767,990			93,331	4.27	%
Noninterest earning assets (d)	910,225						732,065

Total assets	$	10,412,664					$	9,500,055

Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits	$	1,696,715		777	0.18	%	$	1,699,168		773	0.18	%
Interest-bearing checking deposits	1,674,779			1,569	0.38	%	1,468,228			875	0.24	%
Money market deposit accounts	1,776,558			3,433	0.78	%	1,691,652			1,211	0.29	%
Time deposits	1,561,034			6,705	1.72	%	1,440,457			4,450	1.24	%
Borrowed funds (e)	147,119			413	1.13	%	104,415			50	0.19	%
Junior subordinated debentures	121,757			1,307	4.25	%	111,213			1,290	4.59	%
Total interest-bearing liabilities	6,977,962			14,204	0.82	%	6,515,133			8,649	0.53	%
Noninterest-bearing checking deposits (f)	1,888,697						1,676,344
Noninterest-bearing liabilities	225,623						92,252

Total liabilities	9,092,282						8,283,729

Shareholders’ equity	1,320,382						1,216,326

Total liabilities and shareholders’ equity	$	10,412,664					$	9,500,055

Net interest income/Interest rate spread				93,005	3.71	%				84,682	3.74	%

Net interest-earning assets/Net interest margin	$	2,524,477			3.91	%	$	2,252,857			3.86	%

Ratio of interest-earning assets to interest-bearing liabilities	1.36		X				1.35		X


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


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


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


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


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


(f)	Average cost of deposits including noninterest-bearing checking was 0.58% and 0.37%, respectively.

(g)

Annualized. Shown on a fully tax-equivalent basis (“FTE”). The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate applicable to each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: loans — 4.71% and 4.50%, respectively; investment securities — 2.01% and 1.63%, respectively; interest-earning assets — 4.51% and 4.25%, respectively. GAAP basis net interest rate spreads were 3.69% and 3.72%, respectively; and GAAP basis net interest margins were 3.90% and 3.84%, respectively.

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Rate/Volume Analysis

(in thousands)

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



	For the quarters ended June 30, 2019 vs. 2018
	Increase/(decrease) due to					Total increase/(decrease)
	Rate			Volume		Total increase/(decrease)
Interest earning assets:
Loans receivable	$	4,019		8,758		12,777
Mortgage-backed securities	527			499		1,026
Investment securities	204			(50	)	154
FHLB stock	68			163		231
Other interest-earning deposits	317			(627	)	(310	)
Total interest-earning assets	5,135			8,743		13,878

Interest-bearing liabilities:
Savings deposits	5			(1	)	4
Interest-bearing checking deposits	500			195		695
Money market deposit accounts	2,058			164		2,222
Time deposits	1,737			519		2,256
Borrowed funds	243			121		364
Junior subordinated debentures	(96		)	113		17
Total interest-bearing liabilities	4,447			1,111		5,558

Net change in net interest income	$	688		7,632		8,320

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Average Balance Sheet

(in thousands)



	Six months ended June 30,
	2019						2018
	Average balance			Interest	Avg. yield/ cost (g)		Average balance			Interest	Avg. yield/ cost (g)
Assets
Interest-earning assets:
Residential mortgage loans	$	2,850,031		58,582	4.11	%	$	2,758,849		55,612	4.03	%
Home equity loans	1,292,662			33,765	5.27	%	1,289,842			30,369	4.75	%
Consumer loans	906,598			20,701	4.60	%	646,666			15,451	4.82	%
Legacy consumer finance loans	2,409			226	18.76	%	12,828			1,284	20.02	%
Commercial real estate loans	2,681,848			66,303	4.92	%	2,494,925			56,214	4.80	%
Commercial loans	643,005			16,933	5.24	%	609,752			15,070	4.92	%
Loans receivable (a) (b) (includes FTE adjustments of $658 and $674, respectively)	8,376,553			196,510	4.73	%	7,812,862			174,000	4.49	%
Mortgage-backed securities (c)	624,786			8,245	2.64	%	564,007			6,267	2.22	%
Investment securities (c) (includes FTE adjustments of $111 and $187, respectively)	226,815			2,364	2.08	%	245,979			2,216	1.80	%
FHLB stock	16,096			487	6.10	%	8,582			182	4.28	%
Other interest-earning deposits	16,381			259	3.14	%	68,970			604	1.74	%

Total interest-earning assets (includes FTE adjustments of $769 and $862, respectively)	9,260,631			207,865	4.53	%	8,700,400			183,269	4.25	%

Noninterest earning assets (d)	889,409						755,764

Total assets	$	10,150,040					$	9,456,164

Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits	$	1,673,957		1,535	0.18	%	$	1,684,909		1,522	0.18	%
Interest-bearing checking deposits	1,588,989			2,732	0.35	%	1,443,981			1,477	0.21	%
Money market deposit accounts	1,735,185			6,011	0.70	%	1,699,222			2,264	0.27	%
Time deposits	1,497,208			12,351	1.66	%	1,427,921			8,504	1.20	%
Borrowed funds (e)	202,029			1,419	1.42	%	118,743			173	0.29	%
Junior subordinated debentures	118,242			2,463	4.14	%	111,213			2,475	4.43	%

Total interest-bearing liabilities	6,815,610			26,511	0.78	%	6,485,989			16,415	0.51	%

Noninterest-bearing checking deposits	1,699,496						1,641,493
Noninterest-bearing liabilities	336,600						117,530

Total liabilities	8,851,706						8,245,012

Shareholders’ equity	1,298,334						1,211,152

Total liabilities and shareholders’ equity	$	10,150,040					$	9,456,164

Net interest income/Interest rate spread				181,354	3.75	%				166,854	3.74	%

Net interest-earning assets/Net interest margin	$	2,445,021			3.92	%	$	2,214,411			3.84	%

Ratio of interest-earning assets to interest-bearing liabilities	1.36		X				1.34		X


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


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


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


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


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


(f)	Average cost of deposits were 0.56% 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 applicable to each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: loans – 4.71% and 4.47%, respectively; investment securities 1.99% and 1.65%, respectively; interest-earning assets – 4.51% and 4.23%, respectively. GAAP basis net interest rate spreads were 3.73% and 3.72%, respectively; and GAAP basis net interest margins were 3.90% and 3.82%, respectively.

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Rate/Volume Analysis

(in thousands)



	For the six months ended June 30, 2019 vs. 2018
	Increase/(decrease) due to					Total increase/(decrease)
	Rate			Volume		Total increase/(decrease)
Interest earning assets:
Loans receivable	$	9,286		13,224		22,510
Mortgage-backed securities	1,175			802		1,977
Investment securities	348			(200	)	148
FHLB stock	78			226		304
Other interest-earning deposits	486			(830	)	(344	)
Total interest-earning assets	11,373			13,222		24,595

Interest-bearing liabilities:
Savings deposits	23			(10	)	13
Interest-bearing checking deposits	1,006			249		1,255
Money market deposit accounts	3,622			125		3,747
Time deposits	3,275			572		3,847
Borrowed funds	661			585		1,246
Junior subordinated debentures	(158		)	146		(12	)
Total interest-bearing liabilities	8,429			1,667		10,096

Net change in net interest income	$	2,944		11,555		14,499

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

In an effort to assess interest rate risk and market risk, we utilize a simulation model to determine the effect of immediate incremental increases and decreases in interest rates on net income and the market value of equity. Certain assumptions are made regarding loan prepayments and decay rates of savings and interest-bearing demand accounts. Because it is difficult to accurately project the market reaction of depositors and borrowers, the effect of actual changes in interest rates on these assumptions may differ from simulated results. We have established the following guidelines for assessing interest rate risk:

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

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

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

The following table illustrates the simulated impact of a 100 bps, 200 bps or 300 bps upward or a 100 bps downward movement in interest rates on net income, return on average equity, earnings per share and market value of equity. This analysis was prepared assuming that interest-earning asset and interest-bearing liability levels at June 30, 2019 remain constant. The impact of the rate movements was computed by simulating the effect of an immediate and sustained shift in interest rates over a twelve-month period from June 30, 2019 levels.



	Increase									Decrease
Parallel shift in interest rates over the next 12 months	100 bps			200 bps			300 bps			100 bps
Projected percentage increase/(decrease) in net interest income	(0.8		)%	(1.0		)%	(1.6		)%	(5.1		)%
Projected percentage increase/(decrease) in net income	(1.7		)%	(2.0		)%	(3.2		)%	(12.4		)%
Projected increase/(decrease) in return on average equity	(1.6		)%	(1.9		)%	(3.1		)%	(12.0		)%
Projected increase/(decrease) in earnings per share	$	(0.02	)	$	(0.03	)	$	(0.04	)	$	(0.14	)
Projected percentage increase/(decrease) in market value of equity	(2.7		)%	(5.2		)%	(8.3		)%	(3.4		)%

The figures included in the table above represent projections that were computed based upon certain assumptions including prepayment rates and decay rates. These assumptions are inherently uncertain and, as a result, cannot precisely predict the impact of changes in interest rates. Actual results may differ significantly due to timing, magnitude and frequency of interest rate changes and changes in market conditions, and actions that may be taken by management in response to interest rate changes.

Item 4. CONTROLS AND PROCEDURES

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

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

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

Item 1A. RISK FACTORS

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents 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, 2018 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

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We may be required to transition from the use of the LIBOR interest rate index in the future.

The phasing out and ultimate replacement of LIBOR with an alternative reference rate and changes in the manner of calculating other reference rates may adversely impact the value of loans and other financial instruments we hold that are linked to LIBOR or other reference rates in ways that are difficult to predict and could adversely impact our financial condition and results of operations.

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

a) Not applicable.

b) Not applicable.

c) The following table discloses information regarding the repurchase of shares of common stock during the quarter ending June 30, 2019:



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


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

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

Not applicable.

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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.



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101.LAB	XBRL Taxonomy Extension Label Linkbase.
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104	The cover page of this Quarterly Report on Form 10-Q, formatted in inline XBRL.

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Signature

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



NORTHWEST BANCSHARES, INC.
(Registrant)


Date:	August 8, 2019	By:	/s/ Ronald J. Seiffert
			Ronald J. Seiffert
			Chairman, President and Chief Executive Officer
			(Duly Authorized Officer)


Date:	August 8, 2019	By:	/s/ Jeffrey R. White
			Jeffrey R. White
			Controller
			(Principal Accounting Officer)