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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, 2020

 OR

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

For the transition period from                   to                   

Commission File Number 001-34582

 

NORTHWEST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Maryland

27-0950358

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

100 Liberty Street

Warren,

Pennsylvania

16365

(Address of Principal Executive Offices)

(Zip Code)

 

(814) 726-2140

(Registrant’s telephone number, including area code)

Not applicable

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

 

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ☐ No ☒

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, 0.01 Par Value

NWBI

NASDAQ Stock Market, LLC

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

 

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

 

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

 

        ☒ Large accelerated filer  ☐ Accelerated filer

        ☐ Non-accelerated filer  ☐ Smaller reporting company

          ☐ Emerging growth company

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

 

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

Common Stock ($0.01 par value), 127,805,581 shares outstanding as of July 31, 2020.

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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, 2020 and December 31, 2019 (Unaudited)

1

Consolidated Statements of Income/(Loss) for the quarter and six months ended June 30, 2020 and 2019 (Unaudited)

2

Consolidated Statements of Comprehensive Income/(Loss) for the quarter and six months ended June 30, 2020 and 2019 (Unaudited)

3

Consolidated Statements of Changes in Shareholders’ Equity for the quarter and six months ended June 30, 2020 and 2019 (Unaudited)

4

Consolidated Statements of Cash Flows for the quarter and six months ended June 30, 2020 and 2019 (Unaudited)

6

Notes to Consolidated Financial Statements (Unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

53

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

67

Item 4.

Controls and Procedures

68

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

68

Item 1A.

Risk Factors

68

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

69

Item 3.

Defaults Upon Senior Securities

69

Item 4.

Mine Safety Disclosures

69

Item 5.

Other information

69

Item 6.

Exhibits

70

Signature

71

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Item 1.  FINANCIAL STATEMENTS

 

NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(in thousands, except share data)

			June 30, 2020						December 31, 2019
Assets
Cash and cash equivalents			$	837,227					60,846
Marketable securities available-for-sale (amortized cost of $1,176,258 and $815,495, respectively)			1,198,792						819,901
Marketable securities held-to-maturity (fair value of $17,245 and $18,223, respectively)			16,415						18,036
Total cash and cash equivalents and marketable securities			2,052,434						898,783
Loans held-for-sale			34,118						7,709
Loans held for investment			10,824,669						8,800,965
Allowance for credit losses			(140,586)						(57,941)
Loans receivable, net			10,718,201						8,750,733
Federal Home Loan Bank stock, at cost			25,542						14,740
Accrued interest receivable			40,510						25,755
Real estate owned, net			1,897						950
Premises and equipment, net			166,966						147,409
Bank-owned life insurance			251,897						189,091
Goodwill			386,044						346,103
Other intangible assets, net			23,381						23,076
Other assets			178,212						97,268
Total assets			$	13,845,084					10,493,908
Liabilities and shareholders’ equity
Liabilities:
Noninterest-bearing demand deposits			$	2,686,487					1,609,653
Interest-bearing demand deposits			2,632,310						1,944,108
Money market deposit accounts			2,327,286						1,863,998
Savings deposits			1,993,761						1,604,838
Time deposits			1,823,097						1,569,410
Total deposits			11,462,941						8,592,007
Borrowed funds			440,079						246,336
Junior subordinated debentures			128,630						121,800
Advances by borrowers for taxes and insurance			58,559						44,556
Accrued interest payable			1,389						1,142
Other liabilities			222,637						134,782
Total liabilities			12,314,235						9,140,623
Shareholders’ equity:
Preferred stock, $0.01 par value: 50,000,000 authorized, no shares issued			—						—
Common stock, $0.01 par value: 500,000,000 shares authorized, 127,838,400 and 106,859,088 shares issued and outstanding, respectively			1,278						1,069
Additional paid-in capital			1,023,083						805,750
Retained earnings			530,928						583,407
Accumulated other comprehensive loss			(24,440)						(36,941)
Total shareholders’ equity			1,530,849						1,353,285
Total liabilities and shareholders’ equity			$	13,845,084					10,493,908

See accompanying notes to unaudited Consolidated Financial Statements.

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NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME/(LOSS) (Unaudited)

(in thousands, except share data) 

			Quarter ended June 30,																		Six months ended June 30,
			2020						2019						2020						2019
Interest income:
Loans receivable			$	103,012					100,917						197,985						195,852
Mortgage-backed securities			4,038						4,280						8,213						8,245
Taxable investment securities			439						898						1,087						1,834
Tax-free investment securities			564						237						749						419
Federal Home Loan Bank stock dividends			309						316						571						487
Interest-earning deposits			185						159						320						259
Total interest income			108,547						106,807						208,925						207,096
Interest expense:
Deposits			9,336						12,484						20,739						22,629
Borrowed funds			1,133						1,720						2,880						3,882
Total interest expense			10,469						14,204						23,619						26,511
Net interest income			98,078						92,603						185,306						180,585
Provision for credit losses			51,750						4,667						79,387						11,134
Net interest income after provision for credit losses			46,328						87,936						105,919						169,451
Noninterest income:
Gain on sale of loans			—						—						1,302						—
Gain/(loss) on sale of investments			(8)						29						173						23
Service charges and fees			13,069						13,339						28,185						25,382
Trust and other financial services income			4,823						4,444						9,824						8,639
Insurance commission income			2,395						2,145						4,767						4,323
Gain/(loss) on real estate owned, net			(97)						91						(188)						88
Income from bank-owned life insurance			1,248						1,197						2,284						2,202
Mortgage banking income			12,022						188						13,216						404
Other operating income			2,044						1,930						3,909						3,964
Total noninterest income			35,496						23,363						63,472						45,025
Noninterest expense:
Compensation and employee benefits			40,049						42,008						82,795						80,196
Premises and occupancy costs			7,195						7,387						14,666						14,605
Office operations			3,711						3,708						7,093						6,839
Collections expense			644						939						1,118						1,247
Processing expenses			11,680						10,634						22,822						21,068
Marketing expenses			2,047						2,729						3,554						4,615
Federal deposit insurance premiums			1,618						681						1,618						1,387
Professional services			2,825						3,198						5,637						5,722
Amortization of intangible assets			1,760						1,760						3,411						3,207
Real estate owned expense			89						128						184						287
Restructuring/acquisition expense			9,679						1,105						12,137						3,031
Other expenses			7,866						3,235						12,739						6,732
Total noninterest expense			89,163						77,512						167,774						148,936
Income/(loss) before income taxes			(7,339)						33,787						1,617						65,540
Federal and state income taxes expense/(benefit)			(1,139)						7,404						(122)						14,113
Net income/(loss)			$	(6,200)					26,383						1,739						51,427
Basic earnings/(loss) per share			$	(0.05)					0.25						0.02						0.49
Diluted earnings/(loss) per share			$	(0.05)					0.25						0.02						0.49

See accompanying notes to unaudited Consolidated Financial Statements.

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NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Unaudited)

(in thousands)

			Quarter ended June 30,																		Six months ended June 30,
			2020						2019						2020						2019
Net income			$	(6,200)					26,383						1,739						51,427
Other comprehensive income net of tax:
Net unrealized holding gains on marketable securities:
Unrealized holding gains net of tax of $(1,902), $(2,243), $(5,179), and $(4,024), respectively			4,790						5,608						12,947						10,061
Reclassification adjustment for (gains)/losses included in net income, net of tax of $13, $1, $(1), and $1 respectively			(35)						(1)						2						(2)
Net unrealized holding gains on marketable securities			4,755						5,607						12,949						10,059
Change in fair value of interest rate swaps, net of tax of $47, $0, $209, and $0, respectively			(537)						—						(946)						—
Defined benefit plan:
Actuarial reclassification adjustments for prior period service costs and actuarial losses included in net income, net of tax of $(99), $(82), $(198), and $(164), respectively			249						209						498						418
Other comprehensive income			4,467						5,816						12,501						10,477
Total comprehensive income/(loss)			$	(1,733)					32,199						14,240						61,904

See accompanying notes to unaudited Consolidated Financial Statements.

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NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(in thousands, expect share data) 

															Additional paid-in capital						Retained earnings						Accumulated other comprehensive loss												Total shareholders’ equity
			Common stock
Quarter ended June 30, 2020			Shares						Amount
Beginning balance at March 31, 2020			106,933,483						$	1,069					808,250						561,380						(28,907)												1,341,792
Comprehensive income:
Net income/(loss)			—						—						—						(6,200)						—												(6,200)
Other comprehensive income, net of tax of $(1,992)			—						—						—						—						4,467												4,467
Total comprehensive income/(loss)			—						—						—						(6,200)						4,467												(1,733)
Acquisition of MutualBank			20,658,957						206						213,200						—						—												213,406
Stock-based compensation expense			282,691						3						1,528						—						—												1,531
Stock-based compensation forfeited			(36,731)						—						—						—						—												—
Other			—						—						105						—						—												105
Dividends paid ($0.19 per share)			—						—						—						(24,252)						—												(24,252)
Ending balance at June 30, 2020			127,838,400						$	1,278					1,023,083						530,928						(24,440)												1,530,849

															Additional paid-in capital						Retained earnings						Accumulated other comprehensive loss												Total shareholders’ equity
			Common stock
Quarter ended June 30, 2019			Shares						Amount
Beginning 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 $(2,327)			—						—						—						—						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)
Ending balance at June 30, 2019			106,614,607						$	1,066					798,942						562,799						(29,219)												1,333,588

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)

															Additional paid-in capital						Retained earnings						Accumulated other comprehensive loss												Total shareholders’ equity
			Common stock
Six months ended June 30, 2020			Shares						Amount
Beginning balance at December 31, 2019			106,859,088						$	1,069					805,750						583,407						(36,941)												1,353,285
Comprehensive income:
Net income			—						—						—						1,739						—												1,739
Other comprehensive income, net of tax of $(5,209)			—						—						—						—						12,501												12,501
Total comprehensive income			—						—						—						1,739						12,501												14,240
Acquisition of MutualFirst Financial, Inc.			20,658,957						206						213,200						—						—												213,406
Reclassification due to adoption of ASU No. 2016-13			—						—						—						(9,649)						—												(9,649)
Exercise of stock options			87,305						1						1,005						—						—												1,006
Stock-based compensation expense			282,691						3						3,023						—						—												3,026
Stock-based compensation forfeited			(49,641)						(1)						—						—						—												(1)
Other			—						—						105						—						—												105
Dividends paid ($0.38 per share)			—						—						—						(44,569)						—												(44,569)
Ending balance at June 30, 2020			127,838,400						$	1,278					1,023,083						530,928						(24,440)												1,530,849

															Additional 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)						—						—						—						—												—
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

See accompanying notes to unaudited consolidated financial statements.

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NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands) 

			Six months ended June 30,
			2020						2019
Operating activities:
Net income			$	1,739					51,427
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses			79,387						11,134
Net (gain)/loss on sale of assets			(164)						1,425
Mortgage banking activity			(6,076)						—
Net depreciation and amortization			4,046						1,404
Increase in other assets			(46,883)						(58,103)
Increase in other liabilities			73,401						68,915
Net amortization on marketable securities			977						441
Noncash compensation expense related to stock benefit plans			3,026						3,735
Noncash write-down of real estate owned			220						337
Deferred income tax (benefit)/expense			(3,470)						253
Origination of loans held-for-sale			(183,040)						—
Proceeds from sale of loans held-for-sale			164,202						—
Net cash provided by operating activities			87,365						80,968
Investing activities:
Purchase of marketable securities available-for-sale			(404,310)						(76,022)
Proceeds from maturities and principal reductions of marketable securities held-to-maturity			1,615						2,343
Proceeds from maturities and principal reductions of marketable securities available-for-sale			169,602						82,584
Proceeds from sale of marketable securities available-for-sale			—						32,389
Proceeds from bank-owned life insurance			—						2,207
Loan originations			(2,466,315)						(1,643,950)
Proceeds from loan maturities and principal reductions			1,896,118						1,359,064
Proceeds from sale of loans held for investment			50,791						—
Net proceeds of Federal Home Loan Bank stock			2,313						1,122
Proceeds from sale of real estate owned			594						2,480
Proceeds from sale of real estate owned for investment, net			303						304
Purchase of premises and equipment			(7,815)						(6,518)
Acquisitions, net of cash received			261,712						(25,833)
Net cash used in investing activities			(495,392)						(269,830)

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NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)

(in thousands) 

			Six months ended June 30,
			2020						2019
Financing activities:
Net increase in deposits			$	1,253,895					310,335
Repayments of long-term borrowings			(31,200)						—
Net decrease in short-term borrowings			(6,738)						(62,712)
Increase in advances by borrowers for taxes and insurance			12,014						11,189
Cash dividends paid on common stock			(44,569)						(37,776)
Proceeds from stock options exercised			1,006						6,025
Net cash provided by financing activities			1,184,408						227,061
Net increase in cash and cash equivalents			$	776,381					38,199
Cash and cash equivalents at beginning of period			$	60,846					68,789
Net increase in cash and cash equivalents			776,381						38,199
Cash and cash equivalents at end of period			$	837,227					106,988
Cash paid during the period for:
Interest on deposits and borrowings (including interest credited to deposit accounts of $19,039 and $20,913, respectively)			$	23,373					26,048
Income taxes			$	2,306					10,772
Business acquisitions:
Fair value of assets acquired			$	2,085,970					580,407
Northwest Bancshares, Inc. common stock issued			(213,406)						(43,288)
Net cash paid			—						(42,500)
Liabilities assumed			$	1,872,564					494,619
Non-cash activities:
Loan foreclosures and repossessions			$	2,240					3,338
Sale of real estate owned financed by the Company			—						44

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 Federal Deposit Insurance Corporation ("FDIC") and the Pennsylvania Department of Banking. Northwest operates 213 community-banking offices throughout Pennsylvania, Western New York, Eastern Ohio, and Indiana.

 

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, The Bert Company (doing business as Northwest Insurance Services) and MutualFirst Investment Company, Inc. The unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information or footnotes required for complete annual financial statements.  In the opinion of management, all adjustments necessary for the fair presentation of the Company’s financial position and results of operations have been included.  The consolidated financial statements have been prepared using the accounting policies described in the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 updated, as required, for any new pronouncements or changes.

 

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

        The results of operations for the quarter ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or any other period.

 

Stock-Based Compensation

 

        On May 20, 2020, the Company awarded employees 556,476 stock options and directors 57,600 stock options with an exercise price of $9.71 and grant date fair value of $0.13 per stock option, and the Company awarded employees 261,091 restricted common shares and directors 21,600 restricted common shares with a grant date fair value of $9.71. Awarded stock options and common shares vest over a seven-year period with the first vesting occurring on the grant date. Stock-based compensation expense of $1.5 million and $2.5 million for the quarters ended June 30, 2020 and 2019, and $3.0 million and $3.7 million for the six months ended June 30, 2020 and 2019, respectively, was recognized in compensation expense relating to our stock benefit plans. At June 30, 2020, there was compensation expense of $2.7 million to be recognized for awarded but unvested stock options and $13.2 million for unvested restricted common shares.

 Income Taxes-Uncertain Tax Positions

 

Accounting standards prescribe a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return.  A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits.  The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.  At June 30, 2020, we had no liability for unrecognized tax benefits.

 

We recognize interest accrued related to: (1) unrecognized tax benefits in other expenses and (2) refund claims in other operating income.  We recognize penalties (if any) in other expenses. We are subject to audit by the Internal Revenue Service and any state in which we conduct business for the tax periods ended December 31, 2019, 2018, 2017 and 2016.

Recently Adopted Accounting Standards

        On January 1, 2020, the Company adopted Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, which eliminated the probable initial recognition threshold for credit losses and instead requires that all financial assets (or group of financial assets) measured at amortized cost be presented at the net amount expected to be collected inclusive of the entity’s current estimate of all lifetime expected credit losses. This guidance also applies to certain off-balance sheet credit exposures such as unfunded commitments and non-derivative financial guarantees. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. ASC 326 requires credit

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losses to be presented as an allowance, rather than a write-down, on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.

        We adopted ASC 326 using the modified retrospective transition approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required ASC 326 disclosures for periods before the date of adoption (i.e., January 1, 2020).

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

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

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

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

Investment Securities

 

We classify marketable securities at the time of purchase as held-to-maturity, available-for-sale, or trading. Securities for which management has the intent and ability to hold until maturity are classified as held-to-maturity and are carried at cost, adjusted for amortization of premiums and accretion of discounts on a level yield basis (amortized cost).  If it is management’s intent at the time of purchase to hold securities for an indefinite period of time and/or to use such securities as part of its asset/ liability management strategy, the securities are classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported as accumulated other comprehensive income/(loss), a separate component of shareholders’ equity, net of tax. Securities classified as available-for-sale include securities that may be sold in response to changes in interest rates, resultant prepayment risk, or other market factors. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and are reported at fair value, with changes in fair value included in earnings. The cost of securities sold is determined on a specific identification basis. We held no securities classified as trading at or during the quarter ended June 30, 2020.

 

On a quarterly basis, we measure expected credit losses on held-to-maturity debt securities on a collective basis by major security type and all of our held-to-maturity debt securities are residential mortgage-backed securities. Accrued interest receivable on held-to-maturity debt securities totaled $1.5 million and $1.5 million at June 30, 2020 and December 31, 2019, respectively, and is excluded from estimated credit losses. All of our residential mortgage-backed securities are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses.

For available-for-sale debt securities in an unrealized loss position, on at least a quarterly basis, we review our investments for impairment.  An investment security is deemed impaired if the fair value of the investment is less than its amortized cost.  We consider both our intent to sell and the likelihood that we will not have to sell the investment securities before recovery of their amortized cost basis during our evaluation. If we intend to sell the investment security or if it is more likely than not that we will be

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required to sell the investment security, the entire impairment is recorded in earnings. For available-for-sale debt securities that do not meet this criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment we consider the issuer of the securities and their creditworthiness, any changes to the rating of the security and any adverse conditions specifically related to the security, among other factors. Also, we may evaluate the business and financial outlook of the issuer, as well as broader economic performance indicators.  If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than amortized cost. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

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

Accrued interest receivable on available-for-sale debt securities totaled $1.8 million and $900,000 at June 30, 2020 and December 31, 2019, respectively, and is excluded from the estimate of credit losses.

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

Loans Receivable

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

•Personal Banking loans consist of the following classes of financing receivables:

◦Residential mortgage loans - fixed and adjustable rate mortgage loans

◦Home equity loans - first and second mortgage loans and home equity lines of credit

◦Vehicle loans - direct and indirect automobile and motorcycle loans

◦Consumer loans - unsecured lines of credit, credit card loans, and other consumer loans

•Business Banking loans consist of the following classes of financing receivables:

◦Commercial real estate - multi-family commercial real estate loans are secured by multi-family residences, such as rental properties and loans secured by nonresidential properties such as hotels, commercial offices, medical buildings, manufacturing facilities and retail establishments, excluding owner-occupied loans, and including small business commercial real estate loans.

◦Commercial real estate - owner-occupied loans - commercial real estate loans secured by residential or nonresidential properties

◦Commercial loans - other commercial loans, including small business commercial loans.

Loans are reported at amortized cost. Amortized cost is the principal balance outstanding, net of any deferred purchased premiums and discounts, deferred origination fees or costs and the allowance for credit losses. Accrued interest receivable totaled $36.9 million and $23.3 million at June 30, 2020 and December 31, 2019, respectively, and was reported in accrued interest receivable on the Consolidated Statements of Financial Position. Accrued interest receivable is excluded from the amortized cost basis of loans and from the estimate of allowance for credit losses. Interest income on loans is credited to income as earned. Interest earned on loans for which no payments were received during the month is accrued at month end.

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

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

 

Loan delinquency is measured based on the number of days since the payment due date.  Past due status is measured using the loan’s contractual maturity date.

Personal Banking loans are charged-off or charged down when they become 180 days delinquent, unless the borrower has filed for bankruptcy.  Business Banking loans are charged-off or charged down when, in our opinion, they are no longer collectible or when it has been determined that the collateral value no longer supports the carrying value of the loan for loans that are collateral dependent.

 

Loan fees and certain direct loan origination costs are deferred and the net deferred fee or cost is then recognized using the level-yield method over the contractual life of the loan as an adjustment to interest income.

 

We identify certain residential mortgage loans which will be sold prior to maturity as loans held-for-sale. These loans are recorded at fair value. At June 30, 2020 and 2019, there were $34.1 million and no residential mortgage loans classified as held-for-sale, respectively.

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

Acquired loans may be classified as PCD loans upon acquisition if they have experienced more than insignificant credit deterioration since origination. Loans are considered to have experienced more than insignificant credit deterioration if they are greater than 30 days past due, classified special mention or worse or on non-accrual status. An allowance for credit losses on day 1 is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The allowance is recognized on day 1 by adding it to the fair value of the loan, which is the “Day 1 amortized cost”. There is no credit loss expense recognized on PCD loans because the initial allowance is established by grossing-up the amortized cost of the PCD loan. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.

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

 Allowance for Credit Losses and Provision for Credit Losses

 

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

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

Credit card receivables do not have stated maturities. In determining the estimated life of a credit card receivable, we first estimate the future cash flows expected to be received and then apply those expected future cash flows to the credit card balance. Expected credit losses for credit cards are determined by estimating the amount and timing of principal payments expected to be

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received as payment for the balance outstanding as of the reporting date and applying those principal payments against the balance outstanding as of the reporting period until the expected payments have been fully allocated. The allowance for credit losses is recorded for the excess of the balance outstanding as of the reporting period over the expected principal payments.

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

        

        Mortgage and Home Equity Loans

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

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

        Vehicle Loans

        

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

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

        Consumer Loans

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

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

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

        Commercial Real Estate Loans

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

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

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

        Commercial Loans and Commercial Real Estate - Owner Occupied Loans

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

The commercial loan portfolio and the commercial real estate owner occupied loan portfolio the models project default and severity rates. The model accepts as inputs key risk drivers such as the obligor financial statement information, collateral type, the obligor’s primary industry, expected prepayment rates, among other characteristics. It also utilizes macroeconomic forecasts of unemployment rates, gross domestic product, corporate bond spreads, and others.

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

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

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

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

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

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This guidance removes, modifies and adds disclosure requirements for fair value measurements. On January 1, 2020, the Company adopted ASU 2018-13 on a prospective basis for the new and modified disclosures, and on a retrospective basis for disclosures that have been eliminated. The adoption of this standard did not have any effect on our results of operations or financial position. Refer to Note 9, "Disclosures About Fair Value of Financial Instruments".

In August 2018, the FASB issued ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This guidance aligns the requirements for capitalization of implementation costs incurred in a hosting arrangement that is a service contract with the existing guidance for internal-use software. On January 1, 2020, the Company adopted ASU 2018-15 on a prospective basis which will be applied to relevant implementation costs incurred after the date of adoption. The adoption of this standard is not expected to have a material prospective impact on our financial statements.

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(2) Acquisition

  

        On April 24, 2020, the Company completed the merger with MutualFirst Financial, Inc., the holding company for MutualBank (collectively referred to as "MutualBank"), for total consideration of $213.4 million. The transaction has expanded Northwest’s franchise by 36 offices in Indiana. The result of MutualBank's operations are included in the Consolidated Statements of Income from the date of acquisition.

        Under the terms of the merger agreement, each share of MutualBank's common stock was converted into 2.4 shares of the Company's common stock, or a total of 20,658,957 shares of common stock of the Company, valued at $213.4 million, based on the $10.33 per share closing price of the Company's stock on April 24, 2020 with cash in lieu of fractional shares paid at a rate of $10.71 per whole share of Northwest Bancshares, Inc. common stock.

        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			$	213,406
Total consideration paid			213,406
Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value (1)
Cash and cash equivalents			$	261,712
Investment securities available-for-sale			126,854
Loans, net			1,508,141
Federal Home Loan Bank stock			13,115
Premises and equipment			19,094
Core deposit intangible			3,717
Other assets			113,396
Deposits			(1,617,039)
Borrowings			(232,200)
Junior subordinated debentures			(6,804)
Other liabilities			(16,521)
Total identifiable net assets			$	173,465
Goodwill			$	39,941

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

        

        We estimated the fair value of loans acquired from MutualBank 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 MutualBank’s allowance for credit losses associated with the loans we acquired as the loans were initially recorded at fair value. The fair value of loans acquired was $1.508 billion, net of a $14.7 million discount.

        The core deposit intangible asset recognized as part of the MutualBank merger is being amortized over its estimated useful life of seven years utilizing an accelerated method. The goodwill, which is not amortized for book purposes, was assigned to our Community Banking segment and is not deductible for tax purposes. The fair values of savings and transaction deposit accounts acquired from MutualBank 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 MutualBank merger were expensed as incurred and were $12.1 million during the six months ended June 30, 2020, which included technology and communications costs, professional services, marketing and advertising, and other noninterest expenses.

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(3) Marketable Securities

 

The following table shows the portfolio of marketable securities available-for-sale at June 30, 2020 (in thousands):

			Amortized cost						Gross unrealized holding gains						Gross unrealized holding losses						Fair value
Debt issued by the U.S government and agencies:
Due after ten years			$	10,000					112						—						10,112
Debt issued by government sponsored enterprises:
Due in less than one year			35,751						228						—						35,979
Due in one year through five years			25,225						292						—						25,517
Due in five years through ten years			13,302						134						(93)						13,343
Municipal securities:
Due in less than one year			3,634						5						—						3,639
Due in one year through five years			4,005						95						(3)						4,097
Due in five years through ten years			8,489						228						—						8,717
Due after ten years			96,640						2,785						(7)						99,418
Residential mortgage-backed securities:
Fixed rate pass-through			324,026						5,782						(230)						329,578
Variable rate pass-through			17,190						585						(14)						17,761
Fixed rate agency CMOs			586,290						13,320						(788)						598,822
Variable rate agency CMOs			51,706						165						(62)						51,809
Total residential mortgage-backed securities			979,212						19,852						(1,094)						997,970
Total marketable securities available-for-sale			$	1,176,258					23,731						(1,197)						1,198,792

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The following table shows the portfolio of marketable securities available-for-sale at December 31, 2019 (in thousands): 

			Amortized cost						Gross unrealized holding gains						Gross unrealized holding losses						Fair value
Debt issued by the U.S. government and agencies:
Due in less than one year			$	14,951					40						—						14,991
Debt issued by government sponsored enterprises:
Due in less than one year			50,777						345						—						51,122
Due in one year through five years			50,229						—						(227)						50,002
Due after ten years			3,716						53						(109)						3,660
Municipal securities:
Due in less than one year			809						4						—						813
Due in one year through five years			2,891						79						—						2,970
Due in five years through ten years			10,155						148						—						10,303
Due after ten years			11,695						267						—						11,962
Corporate debt issues:
Due in five years through ten years			919						—						—						919
Residential mortgage-backed securities:
Fixed rate pass-through			142,421						1,941						(881)						143,481
Variable rate pass-through			18,933						749						(4)						19,678
Fixed rate agency CMOs			452,256						3,518						(1,606)						454,168
Variable rate agency CMOs			55,743						207						(118)						55,832
Total residential mortgage-backed securities			669,353						6,415						(2,609)						673,159
Total marketable securities available-for-sale			$	815,495					7,351						(2,945)						819,901

 

The following table shows the portfolio of marketable securities held-to-maturity at June 30, 2020 (in thousands):

			Amortized cost						Gross unrealized holding gains						Gross unrealized holding losses						Fair value
Residential mortgage-backed securities:
Fixed rate pass-through			$	1,969					126						—						2,095
Variable rate pass-through			1,058						38						—						1,096
Fixed rate agency CMOs			12,784						658						—						13,442
Variable rate agency CMOs			604						8						—						612
Total residential mortgage-backed securities			16,415						830						—						17,245
Total marketable securities held-to-maturity			$	16,415					830						—						17,245

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The following table shows the portfolio of marketable securities held-to-maturity at December 31, 2019 (in thousands): 

			Amortized cost						Gross unrealized holding gains						Gross unrealized holding losses						Fair value
Residential mortgage-backed securities:
Fixed rate pass-through			$	2,197					83						—						2,280
Variable rate pass-through			1,210						28						—						1,238
Fixed rate agency CMOs			14,016						68						—						14,084
Variable rate agency CMOs			613						8						—						621
Total residential mortgage-backed securities			18,036						187						—						18,223
Total marketable securities held-to-maturity			$	18,036					187						—						18,223

The following table shows the contractual maturity of our marketable securities held-to-maturity at June 30, 2020 (in thousands):

			Amortized cost						Fair value
Residential mortgage-backed securities:
Due in one year through five years			10						10
Due after five years through ten years			1,390						1,465
Due after ten years			15,015						15,770
Total residential mortgage-backed securities			16,415						17,245
Total marketable securities held-to-maturity			$	16,415					17,245

The following table shows the fair value of and gross unrealized losses on available-for-sale marketable securities, for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2020 (in thousands):

			Less than 12 months																		12 months or more																		Total
			Fair value						Unrealized loss						Fair value						Unrealized loss						Fair value						Unrealized loss
U.S. government sponsored enterprises			$	—					—						2,221						(93)						2,221						(93)
Municipal securities			555						(10)						—						—						555						(10)
Residential mortgage-backed securities - agency			180,715						(1,043)						6,722						(51)						187,437						(1,094)
Total temporarily impaired securities			$	181,270					(1,053)						8,943						(144)						190,213						(1,197)

The following table shows the fair value of and gross unrealized losses on marketable securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2019 (in thousands):

			Less than 12 months																		12 months or more																		Total
			Fair value						Unrealized loss						Fair value						Unrealized loss						Fair value						Unrealized loss
U.S. government sponsored enterprises			$	—					—						52,620						(336)						52,620						(336)
Residential mortgage-backed securities - agency			173,112						(858)						109,324						(1,751)						282,436						(2,609)
Total temporarily impaired securities			$	173,112					(858)						161,944						(2,087)						335,056						(2,945)

 

The Company does not believe that the available-for-sale debt securities that were in an unrealized loss position as of June 30, 2020, which comprised of 111 individual securities, represents a credit loss impairment. All of these securities were issued by U.S. government agencies or U.S. government-sponsored agencies. There securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The unrealized losses were primarily attributable to changes in the interest rate environment and not due to the credit quality of these investment securities. The Company does not have the intent to sell these investment securities and it is likely that we will not be required to sell these securities before their anticipated recovery, which may be at maturity.

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All of the Company's held-to-maturity debt securities are issued by by U.S. government agencies or U.S. government-sponsored agencies. There securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. Additionally, all held-to-maturity debt securities were in an unrealized gain position as of June 30, 2020. Therefore, the Company did not record an allowance for credit losses for these securities as of June 30, 2020.

The following table presents the credit quality of our held-to-maturity securities, based on latest information available as of June 30, 2020. The credit ratings are sourced from nationally recognized rating agencies, which include Moody's and S&P, or when credit ratings cannot be sourced from the agencies, they are presented based on asset type. All of our held-to-maturity securities were current in their payment of principal and interest as of June 30, 2020.

			AA+						Total
Held-to-maturity securities:
Residential mortgage-backed securities			$	16,415					16,415
Total marketable securities held-to-maturity			$	16,415					16,415

(4) Loans Receivable

        The following table shows a summary of our loans receivable at amortized cost basis at June 30, 2020 and December 31, 2019 (in thousands): 

			June 30, 2020																														December 31, 2019
			Originated						Acquired						Total						Originated						Acquired						Total
Personal Banking:
Residential mortgage loans (1)			$	2,840,430					382,325						3,222,755						2,785,189						82,938						2,868,127
Home equity loans			1,153,969						296,401						1,450,370						1,099,514						243,404						1,342,918
Vehicle loans			940,493						190,836						1,131,329						850,804						10,388						861,192
Consumer loans			266,557						120,233						386,790						238,343						25,597						263,940
Total Personal Banking			5,201,449						989,795						6,191,244						4,973,850						362,327						5,336,177
Commercial Banking:
Commercial real estate loans			2,011,069						683,734						2,694,803						1,915,949						312,160						2,228,109
Commercial real estate loans - owner occupied			411,536						202,485						614,021						433,099						93,182						526,281
Commercial loans			1,140,714						218,005						1,358,719						664,159						53,948						718,107
Total Commercial Banking			3,563,319						1,104,224						4,667,543						3,013,207						459,290						3,472,497
Total loans receivable, gross			8,764,768						2,094,019						10,858,787						7,987,057						821,617						8,808,674
Allowance for credit losses			(106,063)						(34,523)						(140,586)						(51,439)						(6,502)						(57,941)
Total loans receivable, net (2)			$	8,658,705					2,059,496						10,718,201						7,935,618						815,115						8,750,733

(1) Includes $34.1 million and $7.7 million of loans held-for-sale at June 30, 2020 and December 31, 2019, respectively.

(2) Includes $30.9 million and $40.2 million of net unearned income, unamortized premiums and discounts and deferred fees and costs at June 30, 2020 and December 31, 2019, respectively.

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        The following table provides information related to the allowance for credit losses by portfolio segment and by class of financing receivable for the quarter ended June 30, 2020 and includes the cumulative effect of adopting ASU 2016-13 (in thousands):

			Balance as of June 30, 2020						Current period provision						Charge-offs						Recoveries						Initial ACL on loans purchased with credit deterioration						Balance as of March 31, 2020
Allowance for Credit Losses
Personal Banking:
Residential mortgage loans			$	11,708					(30)						(38)						8						1,095						10,673
Home equity loans			9,363						(542)						(173)						76						216						9,786
Vehicle loans			13,835						2,949						(1,763)						420						235						11,994
Consumer loans			2,506						(1,789)						(1,428)						400						157						5,166
Total Personal Banking			37,412						588						(3,402)						904						1,703						37,619
Commercial Banking:
Commercial real estate loans			72,833						37,969						(690)						454						5,720						29,380
Commercial real estate loans - owner occupied			14,827						5,482						—						8						963						8,374
Commercial loans			15,514						7,711						(10,349)						169						459						17,524
Total Commercial Banking			103,174						51,162						(11,039)						631						7,142						55,278
Total			$	140,586					51,750						(14,441)						1,535						8,845						92,897
Allowance for Credit Losses - off-balance sheet exposure
Personal Banking:
Home equity loans			$	38					4						—						—						—						34
Total Personal Banking			38						4						—						—						—						34
Commercial Banking:
Commercial real estate loans			5,135						1,841						—						—						—						3,294
Commercial real estate loans - owner occupied			626						531						—						—						—						95
Commercial loans			4,384						3,103						—						—						—						1,281
Total Commercial Banking			10,145						5,475						—						—						—						4,670
Total off-balance sheet exposure			$	10,183					5,479						—						—						—						4,704

.

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The following table provides information related to the allowance for credit losses by portfolio segment and by class of financing receivable for the quarter ended June 30, 2019, prior to the adoption of ASU 2016-13 (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 loans			10,766						1,137						(2,530)						624						11,535
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 credit losses by portfolio segment and by class of financing receivable for the six months ended June 30, 2020 and includes the cumulative effect of adopting ASU 2016-13 (in thousands): 

			Balance as of June 30, 2020						Current period provision						Charge-offs						Recoveries						Initial ACL on loans purchased with credit deterioration						Cumulative effect of ASU 2016-13*						Balance as of December 31, 2019
Allowance for Credit Losses
Personal Banking:
Residential mortgage loans			$	11,708					864						(381)						115						1,095						7,441						2,574
Home equity loans			9,363						353						(462)						281						216						5,786						3,189
Vehicle loans			13,835						8,308						(3,606)						764						235						842						7,292
Consumer loans			2,506						1,729						(3,073)						816						157						(2,424)						5,301
Total Personal Banking			37,412						11,254						(7,522)						1,976						1,703						11,645						18,356
Commercial Banking:
Commercial real estate loans			72,833						49,238						(1,000)						744						5,720						2,288						15,843
Commercial real estate loans - owner occupied			14,827						6,847						(21)						15						963						1,278						5,745
Commercial loans			15,514						12,048						(11,164)						593						459						(4,419)						17,997
Total Commercial Banking			103,174						68,133						(12,185)						1,352						7,142						(853)						39,585
Total			$	140,586					79,387						(19,707)						3,328						8,845						10,792						57,941
Allowance for Credit Losses - off-balance sheet exposure
Personal Banking:
Home equity loans			$	38					8						—						—						—						(293)						323
Consumer loans			—						—						—						—						—						(402)						402
Total Personal Banking			38						8						—						—						—						(695)						725
Commercial Banking:
Commercial real estate loans			5,135						3,124						—						—						—						1,934						77
Commercial real estate loans - owner occupied			626						535						—						—						—						88						3
Commercial loans			4,384						3,292						—						—						—						923						169
Total Commercial Banking			10,145						6,951						—						—						—						2,945						249
Total off-balance sheet exposure			$	10,183					6,959						—						—						—						2,250						974

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

During the six months ended June 30, 2020, we sold $50 million of loans that were classified as held-for-investment, for a gain of $1.3 million which is reported in gain on sale of loans on the Consolidated Statements of Income. No loans were sold during the three months ended June 30, 2020.

        

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        The following table provides information related to the allowance for credit losses by portfolio segment and by class of financing receivable for the six months ended June 30, 2019, prior to the adoption of ASU 2016-13 (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 loans			10,766						3,958						(5,517)						1,245						11,080
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
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 loan portfolio by portfolio segment and by class of financing receivable at June 30, 2020 (in thousands):

			Total loans receivable						Allowance for credit losses						Nonaccrual loans (1)						Loans 90 days past due and accruing						TDRs						Allowance related to TDRs						Additional commitments to customers with loans classified as TDRs
Personal Banking:
Residential mortgage loans			$	3,222,755					11,708						16,856						28						8,411						980						—
Home equity loans			1,450,370						9,363						8,748						48						2,121						612						26
Vehicle loans			1,131,329						13,835						6,134						—						—						—						—
Consumer loans			386,790						2,506						1,977						1						1						—						—
Total Personal Banking			6,191,244						37,412						33,715						77						10,533						1,592						26
Commercial Banking:
Commercial real estate loans			2,694,803						72,833						43,884						—						12,763						1,141						71
Commercial real estate loans - owner occupied			614,021						14,827						19,057						—						6,650						603						285
Commercial loans			1,358,719						15,514						18,854						—						5,504						308						228
Total Commercial Banking			4,667,543						103,174						81,795						—						24,917						2,052						584
Total			$	10,858,787					140,586						115,510						77						35,450						3,644						610

(1)Includes $17.6 million of nonaccrual TDRs.

        The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at December 31, 2019, prior to the adoption of ASU 2016-13 (in thousands): 

			Total loans receivable						Allowance for credit losses						Nonaccrual loans (1)						Loans 90 days past due and accruing						TDRs						Allowance related to TDRs						Additional commitments to customers with loans classified as TDRs
Personal Banking:
Residential mortgage loans			$	2,868,127					2,574						14,476						—						7,550						560						—
Home equity loans			1,342,918						3,189						6,745						32						1,973						393						26
Consumer loans			1,125,132						12,593						4,226						—						—						—						—
Total Personal Banking			5,336,177						18,356						25,447						32						9,523						953						26
Commercial Banking:
Commercial real estate loans			2,754,390						21,588						34,864						—						19,358						1,384						476
Commercial loans			718,107						17,997						8,559						—						3,118						665						64
Total Commercial Banking			3,472,497						39,585						43,423						—						22,476						2,049						540
Total			$	8,808,674					57,941						68,870						32						31,999						3,002						566

(1)Includes $9.0 million of nonaccrual TDRs.

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Following the adoption of CECL as of January 1, 2020, the definitions of impairment and related impaired loan disclosures were removed. Under CECL, we present the amortized cost of our loans on nonaccrual status including such loans with no allowance. The following table presents the amortized cost of our loans on nonaccrual status as of the beginning and end of the quarter ended June 30, 2020 (in thousands): 

			Nonaccrual loans at January 1, 2020						Nonaccrual loans at June 30, 2020 with an allowance						Nonaccrual loans with no allowance						Loans 90 days past due and accruing
Personal Banking:
Residential mortgage loans			$	14,476					16,856						—						28
Home equity loans			6,745						8,748						—						48
Vehicle loans			3,147						6,059						75						—
Consumer loans			1,079						1,957						20						1
Total Personal Banking			25,447						33,620						95						77
Commercial Banking:
Commercial real estate loans			18,832						31,061						12,823						—
Commercial real estate loans - owner occupied			16,032						14,359						4,698						—
Commercial loans			8,559						14,266						4,588						—
Total Commercial Banking			43,423						59,686						22,109						—
Total			$	68,870					93,306						22,204						77

 

During the three and six months ended June 30, 2020, we recognized $171,000 and $388,000 of interest income on nonaccrual loans.

The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2020 (in thousands):

			Real estate						Equipment						Other						Total
Personal Banking:
Residential mortgage loans			$	589					—						—						589
Home equity loans			99						—						—						99
Vehicle loans			—						—						—						—
Total Personal Banking			688						—						—						688
Commercial Banking:
Commercial real estate loans			25,801						—						1,092						26,893
Commercial real estate loans - owner occupied			8,204						—						997						9,201
Commercial loans			5,326						2,983						4,290						12,599
Total Commercial Banking			39,331						2,983						6,379						48,693
Total			$	40,019					2,983						6,379						49,381

 

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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 year ended December 31, 2019, prior to the adoption of ASU 2016-13 (in thousands):

			Nonaccrual loans 90 or more days delinquent						Nonaccrual loans less than 90 days delinquent						Loans less than 90 days delinquent reviewed for impairment						TDRs less than 90 days delinquent not included elsewhere						Total impaired loans						Average recorded investment in impaired loans						Interest income recognized on impaired loans
Personal Banking:
Residential mortgage loans			$	12,682					1,794						—						6,817						21,293						19,767						688
Home equity loans			5,635						1,110						—						1,654						8,399						8,571						368
Consumer loans			3,610						616						—						—						4,226						3,842						179
Total Personal Banking			21,927						3,520						—						8,471						33,918						32,180						1,235
Commercial Banking:
Commercial real estate loans			25,014						9,850						933						10,329						46,126						46,284						1,490
Commercial loans			4,739						3,820						15,916						1,474						25,949						10,179						345
Total Commercial Banking			29,753						13,670						16,849						11,803						72,075						56,463						1,835
Total			$	51,680					17,190						16,849						20,274						105,993						88,643						3,070

 

The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at December 31, 2019 prior to the adoption of ASU 2016-13 (in thousands): 

			Loans collectively evaluated for impairment						Loans individually evaluated for impairment						Loans individually evaluated for impairment for which there is a related impairment reserve						Related impairment reserve						Loans individually evaluated for impairment for which there is no related reserve
Personal Banking:
Residential mortgage loans			$	2,860,026					8,101						8,101						560						—
Home equity loans			1,340,944						1,974						1,974						393						—
Consumer loans			1,125,123						9						9						3						—
Total Personal Banking			5,326,093						10,084						10,084						956						—
Commercial Banking:
Commercial real estate loans			2,718,855						35,535						29,578						2,679						5,957
Commercial loans			694,424						23,683						18,337						8,127						5,346
Total Commercial Banking			3,413,279						59,218						47,915						10,806						11,303
Total			$	8,739,372					69,302						57,999						11,762						11,303

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

 

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

 

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

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

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

			For the quarter ended June 30,
			2020																		2019
			Number of contracts						Amount						Number of contracts						Amount
Beginning TDR balance:			171						$	33,352					195						$	32,812
New TDRs			1						67						2						306
Re-modified TDRs			2						3,436						—						—
Net paydowns			—						(1,194)						—						—
Charge-offs:
Residential mortgage loans			—						—						—						—
Home equity loans			—						—						—						—
Vehicle loans			—						—						—						—
Commercial real estate loans			—						—						—						—
Commercial real estate loans - owner occupied			—						—						—						—
Commercial loans			—						—						—						—
Paid-off loans:
Residential mortgage loans			—						—						4						(180)
Home equity loans			2						(3)						4						(75)
Vehicle loans			—						—						—						—
Commercial real estate loans			—						—						6						(1,594)
Commercial real estate loans - owner occupied			1						(25)						—						—
Commercial loans			2						(183)						—						—
Ending TDR balance:			167						$	35,450					183						$	31,269
Accruing TDRs									$	17,888											$	17,894
Non-accrual TDRs									17,562												13,375

			For the six months ended June 30,
			2020																		2019
			Number of contracts						Amount						Number of contracts						Amount
Beginning TDR balance:			176						$	31,999					195						$	33,608
New TDRs			3						84						2						306
Re-modified TDRs			3						5,487						—						—
Net paydowns			—						(1,509)						—						(786)
Charge-offs:
Residential mortgage loans			—						—						—						—
Home equity loans			1						(10)						—						—
Vehicle loans			—						—						—						—
Commercial real estate loans			—						—						—						—
Commercial real estate loans - owner occupied			—						—						—						—
Commercial loans			—						—						—						—
Paid-off loans:
Residential mortgage loans			2						(330)						4						(180)
Home equity loans			2						(3)						4						(75)
Vehicle loans			—						—						—						—
Commercial real estate loans			1						(26)						6						(1,604)
Commercial real estate loans - owner occupied			1						(25)						—						—
Commercial loans			5						(217)						—						—
Ending TDR balance:			167						$	35,450					183						$	31,269
Accruing TDRs									$	17,888											$	17,894
Non-accrual TDRs									17,562												13,375

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

			For the quarter ended June 30, 2020																																										For the six months ended June 30, 2020
			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			1						67						67						12						2						86						84						15
Vehicle loans			—						—						—						—						—						—						—						—
Consumer loans			—						—						—						—						—						—						—						—
Total Personal Banking			1						67						67						12						2						86						84						15
Commercial Banking:
Commercial real estate loans			1						454						454						58						1						454						454						58
Commercial real estate loans - owner occupied			—						—						—						—						2						2,077						2,051						131
Commercial loans			1						2,500						2,982						—						1						2,500						2,982						—
Total Commercial Banking			2						2,954						3,436						58						4						5,031						5,487						189
Total			3						$	3,021					3,503						70						6						$	5,117					5,571						204

			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			—						—						—						—						—						—						—						—
Vehicle loans			—						—						—						—						—						—						—						—
Consumer loans			—						—						—						—						—						—						—						—
Total Personal Banking			—						—						—						—						—						—						—						—
Commercial Banking:
Commercial real estate loans			1						300						297						32						1						300						297						32
Commercial real estate loans - owner occupied			—						—						—						—						—						—						—						—
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

        

        

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The following table provides information as of June 30, 2020 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended June 30, 2020 (in thousands):

									Type of modification
			Number of contracts						Rate						Payment						Maturity date						Other						Total
Personal Banking:
Residential mortgage loans			—						$	—					—						—						—						—
Home equity loans			1						67						—						—						—						67
Vehicle loans			—						—						—						—						—						—
Consumer loans			—						—						—						—						—						—
Total Personal Banking			1						67						—						—						—						67
Commercial Banking:
Commercial real estate loans			1						—						454						—						—						454
Commercial real estate loans - owner occupied			—						—						—						—						—						—
Commercial loans			1						—						—						—						2,982						2,982
Total Commercial Banking			2						—						454						—						2,982						3,436
Total			3						$	67					454						—						2,982						3,503

 

The following table provides information as of June 30, 2019 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended 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			—						—						—						—						—						—
Vehicle loans			—						—						—						—						—						—
Consumer loans			—						—						—						—						—						—
Total Personal Banking			—						—						—						—						—						—
Commercial Banking:
Commercial real estate loans			1						—						297						—						—						297
Commercial real estate loans - owner occupied			—						—						—						—						—						—
Commercial loans			1						—						—						9						—						9
Total Commercial Banking			2						—						297						9						—						306
Total			2						$	—					297						9						—						306

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The following table provides information as of June 30, 2020 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the six months ended June 30, 2020 (in thousands):

									Type of modification
			Number of contracts						Rate						Payment						Maturity date						Other						Total
Personal Banking:
Residential mortgage loans			—						$	—					—						—						—						—
Home equity loans			2						67						—						17						—						84
Vehicle loans			—						—						—						—						—						—
Consumer loans			—						—						—						—						—						—
Total Personal Banking			2						67						—						17						—						84
Commercial Banking:
Commercial real estate loans			1						—						454						—						—						454
Commercial real estate loans - owner occupied			2						—						—						2,051						—						2,051
Commercial loans			1						—						—						—						2,982						2,982
Total Commercial Banking			4						—						454						2,051						2,982						5,487
Total			6						$	67					454						2,068						2,982						5,571

The following table provides information as of June 30, 2019 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the six months 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			—						—						—						—						—						—
Vehicle loans			—						—						—						—						—						—
Consumer loans			—						—						—						—						—						—
Total Personal Banking			—						—						—						—						—						—
Commercial Banking:
Commercial real estate loans			1						—						297						—						—						297
Commercial real estate loans - owner occupied			—						—						—						—						—						—
Commercial loans			1						—						—						9						—						9
Total Commercial Banking			2						—						297						9						—						306
Total			2						$	—					297						9						—						306

No TDR's modified within the previous 12 months of June 30, 2019 or June 30, 2020 subsequently defaulted.

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The following table provides information related to the amortized cost basis of loan payment delinquencies at June 30, 2020 (in thousands):

			30-59 days delinquent						60-89 days delinquent						90 days or greater delinquent						Total delinquency						Current						Total loans receivable						90 days or greater delinquent and accruing
Personal Banking:
Residential mortgage loans			$	629					5,364						15,369						21,362						3,201,393						3,222,755						28
Home equity loans			4,569						2,326						7,060						13,955						1,436,415						1,450,370						48
Vehicle loans			5,883						2,405						5,002						13,290						1,118,039						1,131,329						—
Consumer loans			1,316						511						1,894						3,721						383,069						386,790						1
Total Personal Banking			12,397						10,606						29,325						52,328						6,138,916						6,191,244						77
Commercial Banking:
Commercial real estate loans			8,503						3,878						20,240						32,621						2,662,182						2,694,803						—
Commercial real estate loans - owner occupied			5,674						35						9,489						15,198						598,823						614,021						—
Commercial loans			1,242						1,151						11,535						13,928						1,344,791						1,358,719						—
Total Commercial Banking			15,419						5,064						41,264						61,747						4,605,796						4,667,543						—
Total loans			$	27,816					15,670						70,589						114,075						10,744,712						10,858,787						77

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The following table provides information related to loan payment delinquencies at December 31, 2019 (in thousands): 

			30-59 days delinquent						60-89 days delinquent						90 days or greater delinquent						Total delinquency						Current						Total loans receivable						90 days or greater delinquent and accruing (1)
Originated loans
Personal Banking:
Residential mortgage loans			$	20,447					5,572						11,080						37,099						2,748,090						2,785,189						—
Home equity loans			5,119						2,096						4,573						11,788						1,088,136						1,100,023						—
Consumer loans			8,969						3,198						3,467						15,634						1,073,103						1,088,638						—
Total Personal Banking			34,535						10,866						19,120						64,521						4,909,329						4,973,850						—
Commercial Banking:
Commercial real estate loans			5,598						1,387						17,959						24,944						2,324,104						2,349,048						—
Commercial loans			987						6,360						4,296						11,643						652,516						664,159						—
Total Commercial Banking			6,585						7,747						22,255						36,587						2,976,620						3,013,207						—
Total originated loans			41,120						18,613						41,375						101,108						7,885,949						7,987,057						—
Acquired loans
Personal Banking:
Residential mortgage loans			2,849						121						1,695						4,665						78,273						82,938						93
Home equity loans			1,350						309						1,115						2,774						240,630						243,404						53
Consumer loans			239						104						144						487						35,498						35,985						1
Total Personal Banking			4,438						534						2,954						7,926						354,401						362,327						147
Commercial Banking:
Commercial real estate loans			2,323						303						7,055						9,681						395,661						405,342						—
Commercial loans			200						43						443						686						53,262						53,948						—
Total Commercial Banking			2,523						346						7,498						10,367						448,923						459,290						—
Total acquired loans			6,961						880						10,452						18,293						803,324						821,617						147
Total			$	48,081					19,493						51,827						119,401						8,689,273						8,808,674						147

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

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

 

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

 

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

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

 

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

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

Pass — Loans classified as pass are homogeneous loans that are less than 90 days past due from the required payment date at month-end.

Substandard — Loans classified as substandard are homogeneous loans that are greater than 90 days past due from the required payment date at month-end, loans classified as TDRs, PCD loans, or homogenous retail loans that are greater than 180 days past due from the requirement payment date at month-end that has been written down to the value of underlying collateral, less costs to sell.

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

 

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         Based on the most recent analysis performed, the amortized cost basis by risk category of loans by class of loans by origination year is as follows as of June 30, 2020 (in thousands): 

			Year to date June 30, 2020						2019						2018						2017						2016						Prior						Revolving loans						Revolving loans converted to term loans						Total loans receivable
Personal Banking:
Residential mortgage loans
Pass			$	389,927					496,649						290,797						303,853						251,934						1,463,144						—						—						3,196,304
Substandard			—						—						500						1,144						569						24,238						—						—						26,451
Total residential mortgage loans			389,927						496,649						291,297						304,997						252,503						1,487,382						—						—						3,222,755
Home equity loans
Pass			141,263						228,044						114,221						104,349						96,068						264,196						449,857						40,341						1,438,339
Substandard			—						88						452						412						929						5,341						2,312						2,497						12,031
Total home equity loans			141,263						228,132						114,673						104,761						96,997						269,537						452,169						42,838						1,450,370
Vehicle loans
Pass			235,399						437,372						278,420						94,174						45,254						33,270						—						—						1,123,889
Substandard			89						2,163						2,181						1,518						791						698						—						—						7,440
Total vehicle loans			235,488						439,535						280,601						95,692						46,045						33,968						—						—						1,131,329
Consumer loans
Pass			77,468						104,217						44,524						22,924						10,836						13,890						107,540						2,841						384,240
Substandard			69						428						189						138						51						658						954						63						2,550
Total consumer loans			77,537						104,645						44,713						23,062						10,887						14,548						108,494						2,904						386,790
Total Personal Banking			844,215						1,268,961						731,284						528,512						406,432						1,805,435						560,663						45,742						6,191,244
Business Banking:
Commercial real estate loans
Pass			209,744						465,195						364,344						327,183						228,607						863,480						47,365						11,020						2,516,938
Special Mention			715						3,732						8,990						4,665						15,382						10,942						1,419						148						45,993
Substandard			—						566						13,696						42,191						6,363						61,829						2,600						3,535						130,780
Doubtful			—						—						—						—						—						1,092						—						—						1,092
Loss			—						—						—						—						—						—						—						—						—
Total commercial real estate loans			210,459						469,493						387,030						374,039						250,352						937,343						51,384						14,703						2,694,803
Commercial real estate loans - owner occupied
Pass			9,607						85,954						115,787						87,400						60,967						139,173						11,879						7,279						518,046
Special Mention			—						5,838						7,912						1,584						32						8,073						3,323						—						26,762
Substandard			—						2,932						4,530						15,035						12,962						29,110						1,339						3,305						69,213
Doubtful			—						—						—						—						—						—						—						—						—
Loss			—						—						—						—						—						—						—						—						—
Total commercial real estate loans - owner occupied			9,607						94,724						128,229						104,019						73,961						176,356						16,541						10,584						614,021
Commercial loans
Pass			589,317						115,857						69,220						64,767						57,683						64,311						282,185						26,939						1,270,279
Special Mention			104						1,855						2,121						1,352						6,737						684						27,964						641						41,458
Substandard			1,063						331						2,382						1,213						1,384						3,699						22,091						10,529						42,692
Doubtful			—						—						—						267						—						—						4,023						—						4,290
Loss			—						—						—						—						—						—						—						—						—
Total commercial loans			590,484						118,043						73,723						67,599						65,804						68,694						336,263						38,109						1,358,719
Total Business Banking			810,550						682,260						588,982						545,657						390,117						1,182,393						404,188						63,396						4,667,543
Total loans			$	1,654,765					1,951,221						1,320,266						1,074,169						796,549						2,987,828						964,851						109,138						10,858,787

        For the six months ended June 30, 2020, $10.0 million of revolving loans were converted to term loans.

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The following table sets forth information about credit quality indicators as of December 31, 2019, prior to the adoption of ASU 2016-13 (in thousands):

			Pass						Special mention						Substandard						Doubtful						Loss						Total loans receivable
Originated loans
Personal Banking:
Residential mortgage loans			$	2,776,971					—						8,218						—						—						2,785,189
Home equity loans			1,093,874						—						5,640						—						—						1,099,514
Consumer loans			1,084,986						—						4,161						—						—						1,089,147
Total Personal Banking			4,955,831						—						18,019						—						—						4,973,850
Commercial Banking:
Commercial real estate loans			2,188,823						70,327						89,898						—						—						2,349,048
Commercial loans			571,011						42,352						50,796						—						—						664,159
Total Commercial Banking			2,759,834						112,679						140,694						—						—						3,013,207
Total originated loans			7,715,665						112,679						158,713						—						—						7,987,057
Acquired loans
Personal Banking:
Residential mortgage loans			81,611						—						1,327						—						—						82,938
Home equity loans			242,237						—						1,167						—						—						243,404
Consumer loans			35,746						—						239						—						—						35,985
Total Personal Banking			359,594						—						2,733						—						—						362,327
Commercial Banking:
Commercial real estate loans			349,993						10,243						45,106						—						—						405,342
Commercial loans			45,972						28						7,948						—						—						53,948
Total Commercial Banking			395,965						10,271						53,054						—						—						459,290
Total acquired loans			755,559						10,271						55,787						—						—						821,617
Total loans			$	8,471,224					122,950						214,500						—						—						8,808,674

 

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        During the quarter ending June 30, 2020 we purchased loans for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of these loans is as follows (in thousands):

			Total
Purchase price of loans at acquisition			$	244,546
Allowance for credit losses at acquisition			8,845
Non-credit discount/(premium) at acquisition			(4,154)
Par value of acquired loans at acquisition			$	239,855

Prior to the adoption of ASU 2016-13, acquired loans were initially measured at fair value and subsequently accounted for under either ASC Topic 310-30 or ASC Topic 310-20. The following table provides information related to the outstanding principal balance and related carrying value of acquired loans for the dates indicated (in thousands):

									December 31, 2019
Acquired loans evaluated individually for future credit losses:
Outstanding principal balance									$	7,187
Carrying value									4,975
Acquired loans evaluated collectively for future credit losses:
Outstanding principal balance									826,412
Carrying value									816,642
Total acquired loans:
Outstanding principal balance									833,599
Carrying value									821,617

 

The following table provides information related to the changes in the accretable discount, which includes income recognized from contractual cash flows for the dates indicated prior to the adoption of ASU 2016-13 (in thousands):

			Total
Balance at December 31, 2018			$	755
Accretion			(551)
Net reclassification from nonaccretable yield			966
Balance at December 31, 2019			$	1,170

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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, 2019 prior to the adoption of ASU 2016-13 (in thousands):

			Carrying value						Outstanding principal balance						Related impairment reserve						Average recorded investment in impaired loans						Interest income recognized
Personal Banking:
Residential mortgage loans			$	742					1,232						7						866						147
Home equity loans			715						1,569						25						861						114
Consumer loans			7						34						1						18						12
Total Personal Banking			1,464						2,835						33						1,745						273
Commercial Banking:
Commercial real estate loans			3,433						4,268						6						3,509						273
Commercial loans			78						84						1						78						5
Total Commercial Banking			3,511						4,352						7						3,587						278
Total loans			$	4,975					7,187						40						5,332						551

(5) Goodwill and Other Intangible Assets

 

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

			June 30, 2020						December 31, 2019
Amortizable intangible assets:
Core deposit intangibles - gross			$	71,183					71,183
Acquisitions			3,717						—
Less: accumulated amortization			(53,892)						(50,934)
Core deposit intangibles - net			21,008						20,249
Customer and Contract intangible assets - gross			12,775						12,775
Less: accumulated amortization			(10,402)						(9,948)
Customer and Contract intangible assets - net			2,373						2,827
Total intangible assets - net			$	23,381					23,076

The following table shows the actual aggregate amortization expense for the quarters ended June 30, 2020 and 2019, as well as the estimated aggregate amortization expense, based upon current levels of intangible assets, for the current fiscal year and each of the five succeeding fiscal years (in thousands):

For the quarter ended June 30, 2020			$	1,760
For the quarter ended June 30, 2019			1,760
For the six months ended June 30, 2020			3,411
For the six months ended June 30, 2019			3,207
For the year ending December 31, 2020			6,856
For the year ending December 31, 2021			5,899
For the year ending December 31, 2022			4,684
For the year ending December 31, 2023			3,592
For the year ending December 31, 2024			2,692
For the year ending December 31, 2025			1,819

 

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

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															Total
Balance at December 31, 2018															$	307,420
Goodwill acquired															38,683
Balance at December 31, 2019															346,103
Goodwill acquired															39,941
Balance at June 30, 2020															$	386,044

 

        Quarterly, the Company evaluates whether there are any triggering events that would require an update to our previous goodwill assessment. During the first quarter of 2020, the Company determined the COVID-19 pandemic and its negative effect on the global economy to be a triggering event.  As a result, the Company, with the assistance of a third-party specialist, performed a quantitative impairment analysis in accordance with ASU 2017-04 as of March 31, 2020.  This analysis indicated the aggregate fair value of Northwest Bank, the sole reporting unit of Northwest Bancshares, Inc., exceeded the carrying value and therefore goodwill was not impaired. Given the results of the quantitative goodwill analysis performed during the first quarter and the absence of any significant changes in the economic environment that would indicate a change in the conclusion of the quantitative analysis performed, the Company elected to perform a qualitative goodwill impairment test as of June 30, 2020 in accordance with ASC 350, as updated by ASU 2017-04, and concluded that goodwill was not impaired as of June 30, 2020.

(6) Borrowed Funds

        (a) Borrowings

			June 30, 2020
			Amount						Average rate
Term notes payable to the Federal Home Loan Bank (FHLB):
Payable to FHLB of Pittsburgh			$	100,000					0.48		%
Payable to the FHLB of Indianapolis acquired from MutualFirst			200,481						1.65		%
Total term notes payable to the FHLB			300,481
Collateralized borrowings, due within one year			139,598						0.29		%
Total borrowed funds			$	440,079

        Borrowings from the FHLB of Pittsburgh 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 of Pittsburgh carries a commitment of $250.0 million. The rate is adjusted daily by the FHLB of Pittsburgh, and any borrowings on this line may be repaid at any time without penalty. The revolving line of credit has no balance as of June 30, 2020 and $153.6 million at December 31, 2019.

        At June 30, 2020 and December 31, 2019, collateralized borrowings due within one year were $139.6 million and $92.7 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 MutualBank, the Company had five statutory business trusts: Northwest Bancorp Capital Trust III, a Delaware statutory business trust, Northwest Bancorp Statutory Trust IV, a Connecticut statutory business trust, LNB Trust II, a Delaware statutory business trust, Union National Capital Trust I ("UNCT I"), a Delaware statutory business trust, and Union National Capital Trust II ("UNCT II"); a Delaware statutory business trust (the Trusts). The Trusts exist solely to issue preferred securities to third parties for cash, issue common securities to the Company in exchange for capitalization of the Trusts, invest the proceeds from the sale of trust securities in an equivalent amount of debentures of the Company, and engage in other activities that are incidental to those previously listed. Northwest Bancorp Capital Trust III issued 50,000 cumulative trust preferred securities in a private transaction to a pooled investment vehicle on December 5, 2005 (liquidation value of $1,000 per preferred security or $50,000,000) with a stated maturity of December 30, 2035 and a floating rate of interest, which is reset quarterly, equal to three-month LIBOR plus 1.38%. Northwest Bancorp Statutory Trust IV issued 50,000 cumulative trust preferred securities in a private transaction to a pooled investment vehicle on December 15, 2005 (liquidation value of $1,000 per preferred security or $50,000,000) with a stated maturity of December 15, 2035 and a floating rate of interest, which is reset quarterly, equal to three-month LIBOR plus 1.38%. LNB Trust II has 7,875 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $7,875,000) with a stated maturity of June 15, 2037 and a floating rate of interest, which resets quarterly, equal to three-month LIBOR plus 1.48%. UNCT I has 8,000 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $8,000,000) with a stated

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maturity of January 23, 2034 and a floating interest rate, which resets quarterly, equal to three-month LIBOR plus 2.85%. UNCT II has 3,000 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $3,000,000) with a stated maturity of November 23, 2034 and a floating interest rate, which resets quarterly, equal to three-month LIBOR plus 2.00%. As the shareholders of the trust preferred securities are the primary beneficiaries of the Trusts, the Trusts are not consolidated in our financial statements.

 

The Trusts have invested the proceeds of the offerings in junior subordinated deferrable interest debentures issued by the Company. The structure of these debentures mirrors the structure of the trust-preferred securities.  Northwest Bancorp Capital Trust III holds $51,547,000 of the Company’s junior subordinated debentures due December 30, 2035 with a floating rate of interest, reset quarterly, of three-month LIBOR plus 1.38%. The rate in effect at June 30, 2020 was 1.69%. 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, 2020 was 1.69%. 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, 2020 was 1.79%. UNCT I holds $8,248,000 of junior subordinated debentures due January 23, 2034 with a floating rate of interest, reset quarterly, of three-month LIBOR plus 2.85%. The rate effect at June 30, 2020 was 3.61%. UNCT II holds $3,093,000 of junior subordinated debentures due November 23, 2034 with a floating rate of interest, reset quarterly, of three-month LIBOR plus 2.00%. The rate effect at June 30, 2020 was 2.36%. These subordinated debentures are the sole assets of the Trusts.

As a result of the merger with MutualBank, we acquired two additional statutory business trusts: MFBC Statutory Trust I and Universal Preferred Trust; both are Delaware statutory trusts. At June 30, 2020, MFBC Statutory Trust I had 5,000 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $5,000,000) with a stated maturity of September 15, 2035. These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 1.70%. The rate in effect at June 30, 2020 was 2.01%. At June 30, 2020, Universal Preferred Trust had 5,000 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $5,000,000) with a stated maturity of October 7, 2035. These securities carry a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 1.69%. The rate in effect at June 30, 2020 was 2.91%. 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. MFBC Statutory Trust I holds $5,155,000 of junior subordinated debentures and Universal Preferred Trust holds $5,155,000 of junior subordinated debentures. These subordinated debentures are the sole assets of the Trusts. As the shareholders of the trust preferred securities are the primary beneficiaries of the Trusts, the Trusts are not consolidated in our financial statements.

 

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

 

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

 

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

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

•the trust to register as an investment company; or

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

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

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(7) 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, 2020, the maximum potential amount of future payments we could be required to make under these non-recourse standby letters of credit was $42.1 million, of which $37.7 million is fully collateralized. At June 30, 2020, we had a liability which represents deferred income of $435,000 related to the standby letters of credit. 

(8) Earnings Per Share

         Basic earnings per common share ("EPS") is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period, without considering any dilutive items. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. During the quarter ended June 30, 2020, 4,896,026 stock options were not included in the computation of diluted earnings per share because the stock options’ exercise price was more than the average market price of the common shares of $10.30. All stock options outstanding during the quarter ended June 30, 2019 were included in the computation of diluted earnings per share because the stock options’ exercise price was less than the average market price of the common shares of $17.16. For the six months ended June 30, 2020, 2,852,903 stock options were not included in the computation of diluted earnings per share because the stock options’ exercise price was more than the average market price of the common shares of $12.46. All stock options outstanding during the six months ended June 30, 2019 were included in the computation of diluted earnings per share because the stock options’ exercise price was less than the average market price of the common shares of $17.45.

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

			Quarter ended June 30,																		Six months ended June 30,
			2020						2019						2020						2019
Net income/(loss) available to common shareholders			$	(6,200)					26,383						1,739						51,427
Weighted average common shares outstanding			121,480,563						105,233,635						113,672,131						104,173,601
Dilutive potential shares due to effect of stock options			—						1,024,580						102,208						1,208,669
Total weighted average common shares and dilutive potential shares			$	121,480,563					106,258,215						113,774,339						105,382,270
Basic earnings/(loss) per share			$	(0.05)					0.25						0.02						0.49
Diluted earnings/(loss) per share			$	(0.05)					0.25						0.02						0.49

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(9) 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
			2020						2019						2020						2019
Service cost			$	2,098					1,274						—						—
Interest cost			1,714						1,851						6						13
Expected return on plan assets			(3,091)						(2,759)						—						—
Amortization of prior service cost			(581)						(580)						—						—
Amortization of the net loss			924						873						4						17
Net periodic cost			$	1,064					659						10						30

			Six months ended June 30,
			Pension benefits																		Other post-retirement benefits
			2020						2019						2020						2019
Service cost			$	4,196					2,549						—						—
Interest cost			3,427						3,703						13						26
Expected return on plan assets			(6,182)						(5,519)						—						—
Amortization of prior service cost			(1,161)						(1,161)						—						—
Amortization of the net loss			1,848						1,746						9						34
Net periodic cost			$	2,128					1,318						22						60

        

We anticipate making a contribution to our defined benefit pension plan of $2.0 million to $4.0 million during the year ending December 31, 2020.

(10) 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;

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

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

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

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

Marketable Securities

 

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

 

Debt Securities — available-for-sale - Generally, debt securities are valued using pricing for similar securities, recently executed transactions and other pricing models utilizing observable inputs. The valuation for most debt securities is classified as Level 2. Securities within Level 2 include corporate bonds, municipal bonds, mortgage-backed securities and U.S. government obligations. Certain debt securities which were AAA rated at purchase do not have an active market and as such we have used an alternative method to determine the fair value of these securities. The fair value has been determined using a discounted cash flow model using market assumptions, which generally include cash flow, collateral and other market assumptions. As such, securities which otherwise would have been classified as Level 2 securities if an active market for those assets or similar assets existed are included herein as Level 3 assets.

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

 

Loans Receivable

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

Loans Held-for-Sale

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

Loans Held for Investment

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

        

FHLB Stock

 

Due to the restrictions placed on transferability of FHLB stock, it is not practical to determine the fair value. The fair value presented, therefore, is equal to the carrying amount.

Deposit Liabilities

        The estimated fair value of deposits with no stated maturity, which includes demand deposits, money market, and other savings accounts, is the amount payable on demand. Although market premiums paid for depository institutions reflect an additional value for these low-cost deposits, adjusting fair value for any value expected to be derived from retaining those deposits for a future period of time or from the benefit that results from the ability to fund interest-earning assets with these deposit liabilities is prohibited. The fair value estimates of deposit liabilities do not include the benefit that results from the low-cost funding provided by these

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deposits compared to the cost of borrowing funds in the market. Fair values for time deposits are estimated using a discounted cash flow calculation that applies contractual cost currently being offered in the existing portfolio to current market rates being offered locally for deposits of similar remaining maturities. The valuation adjustment for the portfolio consists of the present value of the difference of these two cash flows, discounted at the assumed market rate of the corresponding maturity.

 Borrowed Funds

 

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

 

Junior Subordinated Debentures

 

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

 

Interest Rate Lock Commitments and Forward Commitments

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

Cash Flow Hedges, Interest Rate and Foreign Exchange Swap Agreements

 

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

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, 2020 and December 31, 2019, 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, 2020 (in thousands): 

			Carrying amount						Estimated fair value						Level 1						Level 2						Level 3
Financial assets:
Cash and cash equivalents			$	837,227					837,227						837,227						—						—
Securities available-for-sale			1,198,792						1,198,792						—						1,198,792						—
Securities held-to-maturity			16,415						17,245						—						17,245						—
Loans receivable, net			10,684,083						10,660,879						—						—						10,660,879
Residential mortgage loans held-for-sale			34,118						34,118						—						—						34,118
Accrued interest receivable			40,510						40,510						40,510						—						—
Interest rate lock commitments			7,416						7,416						—						—						7,416
Forward commitments			1,495						1,495						—						1,495						—
Interest rate swaps not designated as hedging instruments			63,781						63,781						—						63,781						—
FHLB stock			25,542						25,542						—						—						—
Total financial assets			$	12,909,379					12,887,005						877,737						1,281,313						10,702,413
Financial liabilities:
Savings and checking deposits			$	9,639,844					9,639,844						9,639,844						—						—
Time deposits			1,823,097						1,854,824						—						—						1,854,824
Borrowed funds			440,079						442,215						442,215						—						—
Junior subordinated debentures			128,630						129,233						—						—						129,233
Interest rate swaps designated as hedging instruments			1,330						1,330						—						1,330						—
Interest rate swaps not designated as hedging instruments			64,119						64,119						—						64,119						—
Risk participation agreements			286						286						—						286						—
Accrued interest payable			1,389						1,389						1,389						—						—
Total financial liabilities			$	12,098,774					12,133,240						10,083,448						65,735						1,984,057

 

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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 December 31, 2019 (in thousands): 

			Carrying amount						Estimated fair value						Level 1						Level 2						Level 3
Financial assets:
Cash and cash equivalents			$	60,846					60,846						60,846						—						—
Securities available-for-sale			819,901						819,901						—						819,901						—
Securities held-to-maturity			18,036						18,223						—						18,223						—
Loans receivable, net			8,743,024						8,666,149						—						—						8,666,149
Residential mortgage loans held-for-sale			7,709						7,709						—						—						7,709
Accrued interest receivable			25,755						25,755						25,755						—						—
Interest rate lock commitments			559						559						—						—						559
Forward commitments			145						145						—						145						—
Interest rate swaps			20,889						20,889						—						20,889						—
FHLB stock			14,740						14,740						—						—						—
Total financial assets			$	9,711,604					9,634,916						86,601						859,158						8,674,417
Financial liabilities:
Savings and checking accounts			$	7,022,597					7,022,597						7,022,597						—						—
Time deposits			1,569,410						1,574,063						—						—						1,574,063
Borrowed funds			246,336						246,341						246,341						—						—
Junior subordinated debentures			121,800						115,518						—						—						115,518
Interest rate swaps			20,952						20,952						—						20,952						—
Risk participation agreements			39						39						—						39						—
Accrued interest payable			1,142						1,142						1,142						—						—
Total financial liabilities			$	8,982,276					8,980,652						7,270,080						20,991						1,689,581

Fair value estimates are made at a point-in-time, based on relevant market data and information about the instrument. The methods and assumptions detailed above were used in estimating the fair value of financial instruments at both June 30, 2020 and December 31, 2019. 

  

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        The following table represents assets and liabilities measured at fair value on a recurring basis at June 30, 2020 (in thousands): 

			Level 1						Level 2						Level 3						Total assets  at fair value
Debt securities:
U.S. government and agencies			$	—					10,112						—						10,112
Government sponsored enterprises			—						74,839						—						74,839
States and political subdivisions			—						115,871						—						115,871
Total debt securities			—						200,822						—						200,822
Residential mortgage-backed securities:
GNMA			—						28,299						—						28,299
FNMA			—						170,469						—						170,469
FHLMC			—						151,280						—						151,280
Non-agency			—						482						—						482
Collateralized mortgage obligations:
GNMA			—						259,032						—						259,032
FNMA			—						273,747						—						273,747
FHLMC			—						131,906						—						131,906
SBA			—												—						—
Non-agency			—						—						—						—
Total mortgage-backed securities			—						1,015,215						—						1,015,215
Interest rate lock commitments			—						—						7,416						7,416
Forward commitments			—						1,495						—						1,495
Interest rate swaps not designated as hedging instruments			—						63,781						—						63,781
Total assets			$	—					1,281,313						7,416						1,288,729
Interest rate swaps designated as hedging instruments			$	—					1,330						—						1,330
Interest rate swaps not designated as hedging instruments			—						64,119						—						64,119
Risk participation agreements			—						286						—						286
Foreign exchange swaps			—						—						—						—
Total liabilities			$	—					65,735						—						65,735

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        The following table represents assets and liabilities measured at fair value on a recurring basis at December 31, 2019 (in thousands):

			Level 1						Level 2						Level 3						Total assets  at fair value
Debt securities:
U.S. government and agencies			$	—					14,991						—						14,991
Government sponsored enterprises			—						104,784						—						104,784
States and political subdivisions			—						26,048						—						26,048
Corporate			—						919						—						919
Total debt securities			—						146,742						—						146,742
Residential mortgage-backed securities:
GNMA			—						23,264						—						23,264
FNMA			—						89,259						—						89,259
FHLMC			—						50,139						—						50,139
Non-agency			—						497						—						497
Collateralized mortgage obligations:
GNMA			—						207,016						—						207,016
FNMA			—						184,682						—						184,682
FHLMC			—						118,302						—						118,302
Total mortgage-backed securities			—						673,159						—						673,159
Interest rate lock commitments			—						—						559						559
Forward commitments			—						145						—						145
Interest rate swaps			—						20,889						—						20,889
Total assets			$	—					840,935						559						841,494
Interest rate swaps			$	—					20,952						—						20,952
Risk participation agreements			—						39						—						39
Total liabilities			$	—					20,991						—						20,991

        The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis (in thousands):

			For the quarter ended June 30,																		For the six months ended June 30,
			2020						2019						2020						2019
Beginning balance			$	507					—						559						—
Total gains or losses:
Included in net income			—						—						—						—
Included in other comprehensive income			—						—						—						—
Interest rate lock commitments:
Purchases			6,909						—						6,857						—
Sales			—						—						—						—
Transfers from Level 3			—						—						—						—
Transfers into Level 3			—						—						—						—
Ending balance			$	7,416					—						7,416						—

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

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        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, 2020 (in thousands):

			Level 1						Level 2						Level 3						Total assets  at fair value
Loans individually assessed			$	—					—						57,661						57,661
Real estate owned, net			—						—						1,897						1,897
Total assets			$	—					—						59,558						59,558

        The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of December 31, 2019 (in thousands): 

			Level 1						Level 2						Level 3						Total assets  at fair value
Loans individually assessed			$	—					—						46,238						46,238
Real estate owned, net			—						—						950						950
Total assets			$	—					—						47,188						47,188

         Individually Assessed Loans - A loan is considered to be individually assessed as described in Note 1 as part of the adoption of ASU 2016-13 . We classify loans individually assessed as nonrecurring Level 3.

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

The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at June 30, 2020 (in thousands): 

Fair value

Valuation techniques

Significant unobservable inputs

Range  (weighted average)

Loans individually assessed

$

57,661

Appraisal value (1)

Estimated cost to sell

10.0%

Discounted cash flow

Discount rate

12.75% to 19.8% (16.25%)

Real estate owned, net

$

1,897

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.

(11) Derivative Financial Instruments

 

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

Derivatives Designated as Hedging Instruments

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

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

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Derivatives Not Designated as Hedging Instruments

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

        

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

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

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

			Asset derivatives																		Liability derivatives
			Notional amount						Fair value						Notional amount						Fair value
At June 30, 2020
Derivatives designated as hedging instruments:
Interest rate swap agreements			$	—					—						100,000						1,330
Derivatives not designated as hedging instruments:
Interest rate swap agreements			524,384						63,781						524,384						64,119
Interest rate lock commitments			226,672						7,416						—						—
Forward commitments			32,623						1,495						—						—
Risk participation agreements			—						—						77,532						286
Total Derivatives			$	783,679					72,692						701,916						65,735
At December 31, 2019
Derivatives not designated as hedging instruments:
Interest rate swap agreements			$	391,502					20,889						391,502						20,952
Interest rate lock commitments			24,373						559						—						—
Forward commitments			5,151						145						—						—
Risk participation agreements			—						—						41,164						39
Total derivatives			$	421,026					21,593						432,666						20,991

        

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        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,
			2020						2019						2020						2019
Hedging derivatives:
Decrease in interest expense			$	(90)					—						(102)						—
Non-hedging swap derivatives:
Decrease in other income			(345)						—						(522)						—
Increase in mortgage banking income			8,247						—						8,248						—

        The following table presents the key characteristics of the Company's interest rate derivative transactions designated as cash flow hedges of interest rate risk as of June 30, 2020 (in thousands):

			Notional amount						Effective rate						Estimated increase/(decrease) to interest expense in the next twelve months						Maturity date						Remaining term (in months)
Interest rate products:
Issued March 16, 2020			$	30,000					0.32		%				103						3/17/2025						57
Issued March 20, 2020			25,000						0.26		%				67						3/20/2023						33
Issued March 20, 2020			25,000						0.29		%				75						3/20/2024						45
Issued March 26, 2020			20,000						0.29		%				58						9/26/2024						51
Total			$	100,000											303

(12) 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, 2020, we do not anticipate that the aggregate ultimate liability arising out of any pending or threatened legal proceedings will be material to our Consolidated Financial Statements.  Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances. Due to the inherent subjectivity of assessments and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate loss to us from legal proceedings.

        During the year-ended December 31, 2018, Northwest and our subsidiary, Northwest Insurance Services (“NWIS”), were involved in a lawsuit against, among others, First National Bank of Pennsylvania (“FNB”) and their insurance subsidiary, First National Insurance Agency, LLC (“FNIA”). All counterclaims against Northwest were discontinued and, in December 2018, a verdict was rendered in favor of NWIS on several of its claims. Post-trial proceedings have continued throughout the current year and, due to the inherent uncertainties with respect to these proceedings, we have not accrued any awards associated with this verdict within our Consolidated Financial Statements as of June 30, 2020.

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

 

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, 2020
			Unrealized  gains/(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, 2020			$	11,341					(409)						(39,839)						(28,907)
Other comprehensive income/(loss) before reclassification adjustments (1) (2)			4,790						(537)						—						4,253
Amounts reclassified from accumulated other comprehensive income (3) (4)			(35)						—						249						214
Net other comprehensive income/(loss)			4,755						(537)						249						4,467
Balance as of June 30, 2020			$	16,096					(946)						(39,590)						(24,440)

 

			For the quarter ended June 30, 2019
			Unrealized  gains/(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)			5,608						—						—						5,608
Amounts reclassified from accumulated other comprehensive income (6) (7)			(1)						—						209						208
Net other comprehensive income			5,607						—						209						5,816
Balance as of June 30, 2019			$	3,227					—						(32,446)						(29,219)

(1)Consists of unrealized holding loss, net of tax of $1,902.

(2)Change in fair value of interest rate swaps, net of tax $(47).

(3)Consists of realized gains on securities (gain on sales of investments, net) of $48, net of tax (income tax expense) of $(13).

(4)Consists of amortization of prior service cost (compensation and employee benefits) of $580 and amortization of net actuarial loss (compensation and employee benefits) of $(928), net of tax (income tax expense) of $99.

(5)Consists of unrealized holding loss, net of tax $2,243.

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

(7)Consists of amortization of prior service cost (compensation and employee benefits) of $580 and amortization of net actuarial loss (compensation and employee benefits) of $(871), net of tax (income tax expense) of $82. 

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			For the six months ended June 30, 2020
			Unrealized gains/(losses) on securities available-for-sale						Change in fair value of interest rate swaps						Change in defined benefit pension plans						Total
Balance as of December 31, 2019			$	3,147					—						(40,088)						(36,941)
Other comprehensive income/(loss) before reclassification adjustments (1) (2)			12,947						(946)						—						12,001
Amounts reclassified from accumulated other comprehensive income (3) (4)			2						—						498						500
Net other comprehensive income/(loss)			12,949						(946)						498						12,501
Balance as of June 30, 2020			$	16,096					(946)						(39,590)						(24,440)

			For the six months ended June 30, 2019
			Unrealized gains/(losses) on securities available-for-sale						Change in fair value of interest rate swaps						Change in defined benefit pension plans						Total
Balance as of December 31, 2018			$	(6,832)					—						(32,864)						(39,696)
Other comprehensive income before reclassification adjustments (5)			10,061						—						—						10,061
Amounts reclassified from accumulated other comprehensive income (6) (7)			(2)						—						418						416
Net other comprehensive income			10,059						—						418						10,477
Balance as of June 30, 2019			$	3,227					—						(32,446)						(29,219)

(1)Consists of unrealized holding loss, net of tax of $5,179.

(2)Change in fair value of interest rate swaps, net of tax $(209).

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

(4)Consists of amortization of prior service cost (compensation and employee benefits) of $1,161 and amortization of net actuarial loss (compensation and employee benefits) of $(1,857), net of tax (income tax expense) of $198.

(5)Consists of unrealized holding loss, net of tax $4,024.

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

(7)Consists of amortization of prior service cost (compensation and employee benefits) of $1,161 and amortization of net actuarial loss (compensation and employee benefits) of $(1,743), net of tax (income tax expense) of $164. 

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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:

 

•  the disruption to local, regional, national and global economic activity caused by infectious disease outbreaks, including the recent outbreak of coronavirus, or COVID-19, and the significant impact that such outbreak has had and may have on our growth, operations and earnings;

•changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and loan charge-offs generally, and specifically resulting from the economic dislocation caused by the COVID-19 pandemic;

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

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

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

•  adverse changes in the securities and credit markets;

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

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

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

•  competition among depository and other financial institutions;

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

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

•  changes in consumer spending, borrowing and savings habits;

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

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

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

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

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

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

Overview of Critical Accounting Policies Involving Estimates

 

Please refer to Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2019 Annual Report on Form 10-K.

Recently Issued Accounting Standards

        

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

        In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans.” This guidance removes and adds disclosure requirements for defined benefit pension or other post-retirement plans. This guidance is effective for

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

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

 

Comparison of Financial Condition

On April 24, 2020, we acquired all of the outstanding common shares of MutualFirst Financial, Inc., the holding company for MutualBank, for total consideration of $213.4 million, and thereby acquired MutualBank's 36 branch locations throughout the state of Indiana. As a result, we acquired assets with a fair value of $2.086 billion, including loans with a fair value of $1.517 billion, and we assumed deposits of $1.617 billion. Under the terms of the Merger Agreement, each share of common stock of MutualBank converted into the right to receive 2.4 shares of the Company's common stock.

Total assets at June 30, 2020 were $13.845 billion, an increase of $3.351 billion, or 31.9%, from $10.494 billion at December 31, 2019.  This increase in assets was largely due to the addition of $2.086 billion, at fair value of assets related to the acquisition of MutualBank.

 

Total cash and cash equivalents increased by $776.4 million to $837.2 million at June 30, 2020 from $60.8 million at December 31, 2019. This increase was primarily due to the increase in customer deposit balances associated with the Payroll Protection Program ("PPP") loan funds and consumer stimulus checks as well as an increase of $261.7 million from the acquisition of MutualBank.

Total loans receivable increased by $2.050 billion, or 23.3%, to $10.859 billion at June 30, 2020, from $8.809 billion at December 31, 2019. This increase was primarily due to the addition of $1.517 billion of loans acquired from MutualBank, at fair value. Additionally, our legacy commercial loan portfolio increased $431.9 million, or 60.1%, primarily due to the addition of approximately $450.0 million of PPP loans during the current quarter.

  Total deposits increased by $2.871 billion, or 33.4%, to $11.463 billion at June 30, 2020 from $8.592 billion at December 31, 2019 due to both the MutualBank acquisition, which added $1.617 billion in total deposits, as well as from organic deposit growth of $1.254 billion. The organic deposit growth was associated with the PPP loan funds and consumer stimulus checks and primarily impacted our noninterest-bearing demand deposits which increased by $743.5 million, or 46.2%, to $2.353 billion at June 30, 2020 from $1.610 billion at December 31, 2019.

        

Total shareholders’ equity at June 30, 2020 was $1.531 billion, or $11.97 per share, an increase of $177.6 million, or 13.1%, from $1.353 billion, or $12.66 per share, at December 31, 2019.  This increase was primarily the result of the issuance of 20,658,957 shares of our common stock at $10.33 per share for the MutualBank acquisition. Partially offsetting this increase was the payment of cash dividends of $44.6 million for the six months ended June 30, 2020.

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

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amounts and classifications are also subject to qualitative judgments made by the regulators about components, risk-weighting and other factors.

        Applicable rules limit an organization’s capital distributions and certain discretionary bonus payments if the organization does not hold a "capital conservation buffer" consisting of 2.5% of Total, Tier 1 and Common Equity Tier 1 ("CET1") capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

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

			At June 30, 2020
															Minimum capital																		Well capitalized
			Actual																		requirements (1)																		requirements
			Amount						Ratio						Amount						Ratio						Amount						Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc.			$	1,521,506					14.454		%				$	1,105,299					10.500		%				$	1,052,666					10.000		%
Northwest Bank			1,409,018						13.397		%				1,104,346						10.500		%				1,051,759						10.000		%
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc.			1,383,261						13.141		%				894,766						8.500		%				842,133						8.000		%
Northwest Bank			1,270,773						12.082		%				893,995						8.500		%				841,407						8.000		%
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc.			1,258,620						11.957		%				736,866						7.000		%				684,233						6.500		%
Northwest Bank			1,270,773						12.082		%				736,231						7.000		%				683,643						6.500		%
Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc.			1,383,261						10.488		%				527,571						4.000		%				659,464						5.000		%
Northwest Bank			1,270,773						9.680		%				525,093						4.000		%				656,366						5.000		%

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

 

			At December 31, 2019
															Minimum capital																		Well capitalized
			Actual																		requirements (1)																		requirements
			Amount						Ratio						Amount						Ratio						Amount						Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc.			$	1,300,321					15.701		%				$	869,585					10.500		%				$	828,176					10.000		%
Northwest Bank			1,146,641						13.858		%				868,768						10.500		%				827,398						10.000		%
Tier I capital (to risk weighted assets)
Northwest Bancshares, Inc.			1,242,380						15.001		%				703,950						8.500		%				662,541						8.000		%
Northwest Bank			1,087,727						13.146		%				703,288						8.500		%				661,918						8.000		%
CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc.			1,124,259						13.575		%				579,723						7.000		%				538,314						6.500		%
Northwest Bank			1,087,727						13.146		%				879,178						7.000		%				537,809						6.500		%
Tier I capital (leverage) (to average assets)
Northwest Bancshares, Inc.			1,242,380						11.913		%				417,143						4.000		%				521,428						5.000		%
Northwest Bank			1,087,727						10.515		%				413,772						4.000		%				517,216						5.000		%

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

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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, 2020 was 15.9%. 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, 2020, Northwest had $3.079 billion of additional borrowing capacity available with the FHLB, including $250.0 million on an overnight line of credit, as well as $110.1 million of borrowing capacity available with the Federal Reserve Bank and $110.0 million with three correspondent banks.

 

Dividends

 

We paid $24.3 million and $19.1 million in cash dividends during the quarters ended June 30, 2020 and 2019, respectively.  The common stock dividend payout ratio (dividends declared per share divided by net income per diluted share) was (380.0)% and 72.0% for the quarters ended June 30, 2020 and 2019, respectively, on dividends of $0.19 per share f`or the quarter ended June 30, 2020 and $0.18 per share for the quarter ended June 30, 2019. On July 22, 2020, the Board of Directors declared a cash dividend of $0.19 per share payable on August 14, 2020 to shareholders of record as of August 6, 2020. This represents the 103^rd 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, 2020						December 31, 2019
			(in thousands)
Loans 90 days or more delinquent
Residential mortgage loans			$	15,369					12,775
Home equity loans			7,060						5,688
Consumer loans			6,896						3,611
Commercial real estate loans			29,729						25,014
Commercial loans			11,535						4,739
Total loans 90 days or more delinquent			$	70,589					51,827
Total real estate owned, net (REO)			$	1,897					950
Total loans 90 days or more delinquent and REO			72,486						52,777
Total loans 90 days or more delinquent to net loans receivable			0.66		%				0.59		%
Total loans 90 days or delinquent and REO to total assets			0.52		%				0.50		%
Nonperforming loans:
Nonaccrual loans - loans 90 days or more delinquent			70,589						51,680
Nonaccrual loans - loans less than 90 days delinquent			44,921						17,190
Loans 90 days or more past maturity and still accruing			77						32
Total nonperforming loans			115,587						68,902
Total nonperforming assets			$	117,484					69,852
Nonaccrual TDR loans (1)			$	17,562					9,043
Accruing TDR loans			17,888						22,956
Total TDR loans			$	35,450					31,999

(1)Included in nonaccurual loans above.

 

        

 

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Allowance for Credit Losses

 

We adopted CECL on January 1, 2020, a further described in Note 1. Our Board of Directors has adopted an “Allowance for Credit Losses” policy designed to provide management with a systematic methodology for determining and documenting the allowance for credit losses each reporting period.  This methodology was developed to provide a consistent process and review procedure to ensure that the allowance for credit losses is in conformity with GAAP, our policies and procedures and other supervisory and regulatory guidelines.

 

On an ongoing basis, the Credit Administration department, as well as loan officers, branch managers and department heads, review and monitor the loan portfolio for problem loans. This portfolio monitoring includes a review of the monthly delinquency reports as well as historical comparisons and trend analysis. Personal and small business commercial loans are classified primarily by delinquency status. In addition, a meeting is held every quarter with each region to monitor the performance and status of commercial loans on an internal watch list.  On an on-going basis, the loan officer, in conjunction with a portfolio manager, grades or classifies problem commercial loans or potential problem commercial loans based upon their knowledge of the lending relationship and other information previously accumulated.  This rating is also reviewed independently by our Loan Review department on a periodic basis.  Our loan grading system for problem commercial loans is consistent with industry regulatory guidelines which classifies loans as “substandard”, “doubtful” or “loss.”  Loans that do not expose us to risk sufficient to warrant classification in one of the previous categories, but which possess some weaknesses, are designated as “special mention”.  A “substandard” loan is any loan that is 90 days or more contractually delinquent or is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified as “doubtful” have all the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions or values, highly questionable and improbable.  Loans classified as “loss” have all the weakness inherent in those classified as "doubtful" and considered uncollectible.

 

Credit relationships that have been classified as substandard or doubtful and are greater than or equal to $1.0 million are reviewed by the Credit Administration department to determine if they no longer continue to demonstrate similar risk characteristics to their loan pool. If a loan no longer demonstrates similar risk characteristics to their loan pool they are removed from the pool and an individual assessment will be performed.

 

If it is determined that a loan needs to be individually assessed, the Credit Administration department determines the proper measure of fair value for each loan based on one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent, less costs of sale or disposal.  If the measurement of the fair value of the loan is more or less than the amortized cost basis of the loan, the Credit Administration department adjusts the specific allowance associated with that individual loan accordingly.

 

If a substandard or doubtful loan is not considered individually for impairment, it is grouped with other loans that possess common characteristics for impairment evaluation and analysis.  For the purpose of calculating reserves, we have grouped our loans into seven segments: residential mortgage loans, home equity loans, vehicle loans, consumer loans, commercial real estate loans, commercial real estate loans - owner occupied and commercial loans. The allowance for credit losses is measured using a combination of statistical models. We use a twelve month forecasting period and revert to historical average loss rates thereafter. Reversion to average loss rates takes place over twelve months. Historical average loss rates are calculated using historical data beginning in October 2009 through the current period.

The the credit losses for individually assessed loans along with the estimated loss for each homogeneous pool are consolidated into one summary document. This summary schedule along with the support documentation used to establish this schedule is presented to management’s Allowance for Credit Loss Committee ("ACL Committee") monthly.  The ACL Committee reviews and approves the processes and ACL documentation presented.  Based on this review and discussion, the appropriate amount of ACL is estimated and any adjustments to reconcile the actual ACL with this estimate are determined.  The ACL Committee also considers if any changes to the methodology are needed. In addition to the ACL 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 ACL 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 ACL and its conformity with regulatory guidelines and pronouncements.  Any recommendations or enhancements from these independent parties are considered by management and the ACL 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 ACL is based upon estimates using all the information

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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 credit losses and the related provision for credit losses, which the ACL Committee assesses regularly for appropriateness.  As part of the analysis as of June 30, 2020, we considered the most recent economic conditions and forecasts available which incorporated the impact of COVID-19. In addition, we considered the overall trends in asset quality, reserves on individually assessed loans, historical loss rates and collateral valuations. The ACL increased by $82.6 million, or 142.6%, to $140.6 million, or 1.29% of total loans at June 30, 2020 from $57.9 million, or 0.66% of total loans, at December 31, 2019. Due to the adoption of CECL, our allowance increased $10.8 million. In addition, our allowance increased $8.8 million as a result of recording the initial allowance on the purchased credit deteriorated loans acquired from MutualBank. The non-purchased credit deteriorated loans acquired from MutualBank resulted in a credit mark of $28.1 million and an additional allowance of $18.2 million, as required by CECL. The estimated economic impact of COVID-19 caused us to increase our provision for loan loss expense by approximately $45.0 million for the six months ended June 30, 2020. Loans classified as substandard increased $76.7 million to $291.2 million at June 30, 2020 from $214.5 million at December 31, 2019 this increase was primarily due to one large commercial credit being downgraded from pass to substandard and the addition of MutualBank loans. Loans classified as special mention decreased $8.7 million to $114.2 million at June 30, 2020 from $123.0 million at December 31, 2019.

 

We also consider how the levels of non-accrual loans and historical charge-offs have influenced the required amount of allowance for credit losses. Nonaccrual loans of $115.5 million, or 1.06% of total loans receivable at June 30, 2020, increased by $46.6 million, or 67.7%, from $68.9 million, or 0.78% of total loans receivable, at December 31, 2019. As a percentage of average loans, annualized net charge-offs increased to 0.35% for the six months ended June 30, 2020 compared to 0.23% for the year ended December 31, 2019. The increase in net charge-offs was largely impacted by a $9.1 million charge-off on one commercial loan which was previously downgraded and reserved for.

Comparison of Operating Results for the Quarters Ended June 30, 2020 and 2019

 

The Company reported a net loss of $6.2 million, or $(0.05) per diluted share, for the quarter ended June 30, 2020, a decrease of $32.6 million, or 123.5%, from net income of $26.4 million, or $0.25 per diluted share, for the quarter ended June 30, 2019. The decrease in net income resulted from an increase in the provision for credit losses of $47.1 million and an increase in noninterest expense of $11.7 million, or 15.0%. Partially offsetting these changes were an increase in noninterest income of $12.1 million, or 51.9%, a decrease in income tax expense of $8.5 million, or 115.4%, and an increase in net interest income of $5.5 million, or 5.9%. The net loss for the quarter ended June 30, 2020 represents annualized returns on average equity and average assets of (1.63)% and (0.18)%, respectively, compared to 8.01% and 1.02% for the same quarter last year. A further discussion of notable changes follows.

Interest Income

 

        Total interest income increased $1.7 million, or 1.6%, to $108.5 million for the quarter ended June 30, 2020 from $106.8 million for the quarter ended June 30, 2019. This increase is due to an increase in the average balance of interest-earning assets which increased by $2.229 billion, or 23.5%, to $11.732 billion for the quarter ended June 30, 2020 from $9.502 billion for the quarter ended June 30, 2019. This increase is due primarily to internal loan growth as well as the MutualBank acquisition. Offsetting this increase in average balance was a decrease in the average yield earned on interest-earning assets to 3.72% for the quarter ended June 30, 2020 from 4.51% for the quarter ended June 30, 2019 due to a decline in overall market interest rates.

        Interest income on loans receivable increased by $2.1 million, or 2.1%, to $103.0 million for the quarter ended June 30, 2020 compared to $100.9 million for the quarter ended June 30, 2019. This increase is primarily due to the increase in the average balance of loans receivable of $1.606 billion, or 18.7%, to $10.201 billion for the quarter ended June 30, 2020 from $8.594 billion for the quarter ended June 30, 2019. This increase is primarily due to organic loan growth of $533.1 million during the last twelve months as well as loans of $1.517 billion from the MutualBank acquisition. Partially offsetting this increase in average balance was a decrease in the average yield on loans receivable to 4.06% for the quarter ended June 30, 2020 from 4.71% for the quarter ended June 30, 2019, again due to the decrease in market interest rates as well as the addition of approximately $450.0 million of PPP loans with coupon rates of 1.00%.

        Interest income on mortgage-backed securities decreased by $242,000, or 5.7%, to $4.0 million for the quarter ended June 30, 2020 from $4.3 million for the quarter ended June 30, 2019. This decrease was due to a decrease in the average yield on mortgage-backed securities to 2.26% for the quarter ended June 30, 2020 from 2.65% for the quarter ended June 30, 2019. This decrease in yield was primarily due to the assumption of mortgage-backed securities from MutualBank with market yields lower than the existing legacy Northwest portfolio due to purchase accounting adjustments. Partially offsetting this decrease was an increase in the average balance of mortgage-backed securities of $69.8 million, or 10.8%, to $714.7 million for the quarter ended June 30, 2020 from $644.9

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million for the quarter ended June 30, 2019. This increase was primarily a result of investment securities received as part of the MutualBank acquisition.

        Interest income on investment securities decreased by $132,000, or 11.6%, to $1.0 million for the quarter ended June 30, 2020 from $1.1 million for the quarter ended June 30, 2019. This decrease is attributed to a decrease in the average balance of investment securities of $56.0 million, or 24.8% to $170.3 million for the quarter ended June 30, 2020 from $226.3 million for the quarter ended June 30, 2019 primarily due to the maturity or call of government agency securities. Partially offsetting this decrease was an increase in the average yield on investment securities which increased to 2.36% for the quarter ended June 30, 2020 from 2.01% for the quarter ended June 30, 2019.

        Dividends on FHLB stock remained relatively flat, decreasing by $7,000, or 2.2%, to $309,000 for the quarter ended June 30, 2020 from $316,000 for the quarter ended June 30, 2019. The average yield decreased to 5.60% for the quarter ended June 30, 2020 from 7.86% for the quarter ended June 30, 2019. The average balance of FHLB stock increased by $6.1 million, or 37.7%, to $22.2 million for the quarter ended June 30, 2020 from $16.1 million for the quarter ended June 30, 2019. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.

 

        Interest income on interest-earning deposits increased by $26,000, or 16.4%, to $185,000 for the quarter ended June 30, 2020 from $159,000 for the quarter ended June 30, 2019. The average balance of interest-earning deposits increased by $602.9 million to $623.9 million for the quarter ended June 30, 2020 from $21.0 million for the quarter ended June 30, 2019 due to excess liquidity from recent deposit inflows. This increase in average balance was offset by the decrease in the average yield on interest-earning deposits to 0.12% for the quarter ended June 30, 2020 from 3.00% for the quarter ended June 30, 2019 as the Federal Reserve decreased their targeted federal funds rate.

Interest Expense

 

Interest expense decreased by $3.7 million, or 26.3%, to $10.5 million for the quarter ended June 30, 2020 from $14.2 million for the quarter ended June 30, 2019.  This decrease in interest expense was primarily due to the decline in the average cost of interest-bearing liabilities which decreased to 0.48% for the quarter ended June 30, 2020 from 0.82% for the quarter ended June 30, 2019 as the Federal Reserve decreased their targeted Fed Funds rate in March of 2020. Partially offsetting this decrease was an increase in the average balance of interest-bearing liabilities by $1.800 billion, or 25.8%, to $8.778 billion for the quarter ended June 30, 2020 from $6.978 billion for the quarter ended June 30, 2019. This increase in average balance resulted from both internal deposit growth as well as the addition of $1.617 billion of deposits acquired through the MutualBank acquisition.

 

Net Interest Income

 

Net interest income increased by $5.5 million, or 5.9%, to $98.1 million for the quarter ended June 30, 2020 from $92.6 million for the quarter ended June 30, 2019.  This increase is attributable to the factors discussed above. Despite the overall increase in net interest income due primarily to balance sheet growth, our interest rate spread decreased to 3.24% for the quarter ended June 30, 2020 from 3.69% for the quarter ended June 30, 2019 and our net interest margin decreased to 3.34% for the quarter ended June 30, 2020 from 3.90% for the quarter ended June 30, 2019 primarily due to declining interest-earning asset yields. Contributing to the decline in asset yields was an increase in average cash balances of $602.9 million, earning just 0.12%, due to deposit growth associated with the PPP loan funds and consumer stimulus checks. In addition, PPP loan balances of approximately $450.0 million with coupon rates of 1.00%, have negatively impacted overall interest-earning asset yields.

Provision for Credit Losses

        The provision for credit losses increased by $47.1 million to $51.8 million for the quarter ended June 30, 2020 from $4.7 million for the quarter ended June 30, 2019. This increase was largely driven by the estimated economic impact of COVID-19 of approximately $21.3 million for the second quarter of 2020 and additional provision expense of approximately $18.2 million as a result of the integration of MutualBank loans. Also contributing to this increase were the effects of an increase in annualized net charge-offs to average loans to 0.51% for the quarter ended June 30, 2020 from 0.34% for the quarter ended June 30, 2019 and the increase in classified loans by $98.3 million, or almost 50%, to $296.5 million at June 30, 2020 from $198.2 million at June 30, 2019.

  

        In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels, bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss experience.  We analyze the allowance for credit losses as described in the section entitled "Allowance for Credit Losses."  The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period and historical loss experience at June 30, 2020.

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Noninterest Income

 

Noninterest income increased by $12.1 million, or 51.9%, to $35.5 million for the quarter ended June 30, 2020 from $23.4 million for the quarter ended June 30, 2019. This increase was primarily due to an increase of $11.8 million in mortgage banking income due to continued efforts to expand our secondary market sales capabilities over the last year, as well as an interest rate environment conducive to refinance activity and attractive secondary market pricing. In addition, trust and other financial services income increased by $379,000, or 8.5%, primarily due to additional trust fee income as a result of the MutualBank acquisition.

Noninterest Expense

Noninterest expense increased by $11.7 million, or 15.0%, to $89.2 million for the quarter ended June 30, 2020 from $77.5 million for the quarter ended June 30, 2019.  This increase resulted primarily from an increase in acquisition expense of $8.6 million over the prior year due to expenses incurred as a result of the MutualBank acquisition on April 24, 2020. Also contributing to the increase was a $4.6 million increase in other expenses primarily due to the increase in the reserve for unfunded commitments during the second quarter of 2020 as a result of an increase in unfunded commitments and the estimated economic impact of COVID-19. Partially offsetting this increase was a decrease of $2.0 million, or 4.7%, in compensation and employee benefits primarily due to an increase in deferred loan costs directly related to the origination of PPP loans during the current quarter.

Income Taxes

 

The provision for income taxes decreased by $8.5 million, or 115.4%, to a tax benefit of $1.1 million for the quarter ended June 30, 2020 from a tax expense of $7.4 million for the quarter ended June 30, 2019. This decrease was primarily due to a decrease of $41.1 million, or 121.7%, in income before taxes. We anticipate our effective tax rate to be between 19.0% and 22.0% for the year ending December 31, 2020.

Comparison of Operating Results for the Six Months Ended June 30, 2020 and 2019

 

Net income for the six months ended June 30, 2020 was $1.7 million, or $0.02 per diluted share, a decrease of $49.7 million, or 96.6%, from $51.4 million, or $0.49 per diluted share, for the six months ended June 30, 2019.  The decrease in net income resulted primarily from an increase in provision for credit losses of $68.3 million, or 613.0% as well as an increase of $18.8 million, or 12.6%, in noninterest expense. Partially offsetting these factors were an increase in noninterest income of $18.4 million, or 41.0%, a decrease in income tax expense of $14.2 million, or 100.9%, and an increase in net interest income of $4.7 million, or 2.6%. Net income for the six months ended June 30, 2020 represents annualized returns on average equity and average assets of 0.24% and 0.03%, respectively, compared to 7.99% and 1.02% for the six months ended June 30, 2019.  A further discussion of notable changes follows.

 

Interest Income

 

        Total interest income increased by $1.8 million, or 0.9%, to $208.9 million for the six months ended June 30, 2020 from $207.1 million for the six months ended June 30, 2019. This increase is the result of an increase in the average balance of interest-earning assets of $1.424 billion, or 15.4%, to $10.685 billion for the six months ended June 30, 2020 from $9.261 billion for the six months ended June 30, 2019 due primarily to internal loan growth as well as the MutualBank acquisition. Offsetting this increase was a decrease in the average yield earned on interest-earning assets to 3.93% for the six months ended June 30, 2020 from 4.51% for the six months ended June 30, 2019. This decrease in average yield is attributed to a decline in overall market interest rates.

Interest income on loans receivable increased by $2.1 million, or 1.1%, to $198.0 million for the six months ended June 30, 2020 from $195.9 million for the six months ended June 30, 2019.  This increase is attributed to an increase in the average balance of loans receivable of $1.111 billion, or 13.3%, to $9.487 billion for the six months ended June 30, 2020 from $8.377 billion for the six months ended June 30, 2019. This increase is due to organic loan growth of $533.1 million during the last twelve months as well as loans of $1.517 billion from the MutualBank acquisition. Partially offsetting this increase was a decrease in the average yield on loans receivable to 4.20% for the six months ended June 30, 2020 from 4.71% for the six months ended June 30, 2019 primarily as a result of the decreases in market interest rates as well as the addition of approximately $450.0 million of PPP loans with coupon rates of 1.00%. 

        Interest income on mortgage-backed securities remained flat at $8.2 million for both six month periods ended June 30, 2020 and June 30, 2019. The average balance of mortgage-backed securities increased by $66.8 million, or 10.7%, to $691.6 million for the six months ended June 30, 2020 from $624.8 million for the six months ended June 30, 2019. This increase is due primarily to the addition of the MutualBank portfolio. The average yield on mortgage-backed securities decreased to 2.38% for the six months ended June 30, 2020 from 2.64% for the six months ended June 30, 2019. This decrease in yield was primarily due to the assumption of mortgage-backed securities from MutualBank with market yields lower than the existing legacy Northwest portfolio due to purchase accounting adjustments.

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Interest income on investment securities decreased by $417,000, or 18.5%, to $1.8 million for the six months ended June 30, 2020 from $2.3 million for the six months ended June 30, 2019. This decrease is primarily attributable to a decrease in the average balance of investment securities of $69.6 million, or 30.7%, to $157.2 million for the six months ended June 30, 2020 from $226.8 million for the six months ended June 30, 2019.  This decrease is due primarily to the maturity or call of government agency securities.  Slightly offsetting this decrease was an increase in the average yield on investment securities to 2.34% for the six months ended June 30, 2020 from 1.99% for the six months ended June 30, 2019. 

 

Dividends on FHLB stock increased by $84,000, or 17.2%, to $571,000 for the six months ended June 30, 2020 from $487,000 for the six months ended June 30, 2019. This increase is attributable to a $3.0 million, or 18.4%, increase in the average balance of FHLB stock to $19.1 million for the six months ended June 30, 2020 from $16.1 million for the six months ended June 30, 2019 as average yields remained relatively flat at 6.02% and 6.10%, respectively. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.

 

Interest income on interest-earning deposits increased by $61,000, or 23.6%, to $320,000 for the six months ended June 30, 2020 from $259,000 for the six months ended June 30, 2019.  This increase is attributable to an increase in the average balance of interest-earning deposits, which increased by $312.9 million, to $329.3 million for the six months ended June 30, 2020 from $16.4 million for the six months ended June 30, 2019 due to excess liquidity from recent deposit inflows. Partially offsetting this increase was a decrease in the average yield on interest-earning deposits to 0.19% for the six months ended June 30, 2020 from 3.14% for the six months ended June 30, 2019, as a result of decreases in the targeted Federal Funds rate by the Federal Reserve.

Interest Expense

 

Interest expense decreased by $2.9 million, or 10.9%, to $23.6 million for the six months ended June 30, 2020 from $26.5 million for the six months ended June 30, 2019. This decrease in interest expense was due to a decrease in the average cost of interest-bearing liabilities to 0.59% for the six months ended June 30, 2020 from 0.78% for the six months ended June 30, 2019. This decrease resulted from decreases in the interest rate paid on deposits and borrowed funds in response to decreases in market interest rates. Partially offsetting this decrease was an increase in the average balance of interest-bearing liabilities which increased by $1.241 billion, or 18.2%, to $8.056 billion for the six months ended June 30, 2020 from $6.816 billion for the six months ended June 30, 2019. This increase was primarily due to the MutualBank acquisition, which included $1.617 billion in deposits and $232.2 million in borrowed funds in addition to the internal growth of deposits.

 

Net Interest Income

 

Net interest income increased by $4.7 million, or 2.6%, to $185.3 million for the six months ended June 30, 2020 from $180.6 million for the six months ended June 30, 2019.  This increase is attributable to the factors discussed above. Despite the overall increase in net interest income due primarily to balance sheet growth, our interest rate spread and net interest margin both decreased. Our interest rate spread decreased to 3.34% for the six months ended June 30, 2020 from 3.73% for the six months ended June 30, 2019 and our net interest margin decreased to 3.47% for the six months ended June 30, 2020 from 3.90% for the six months ended June 30, 2019. These decreases were primarily due to declining interest-earning asset yields as a result of increased higher average cash balances of $312.9 million, earning just 0.12% due to deposit growth associated with the PPP loan funds and consumer stimulus checks, as well as the addition of approximately $450.0 million of PPP loan balances with coupon rates of 1.00%.

Provision for Loan Losses

        The provision for loan losses increased by $68.3 million, or 613.0%, to $79.4 million for the six months ended June 30, 2020 from $11.1 million for the six months ended June 30, 2019.  This increase was largely driven by the estimated economic impact of COVID-19 representing approximately $45.0 million of the increase for the six months ended June 30, 2020 and additional provision expense of approximately $18.2 million as a result of the integration of MutualBank loans.

Total nonaccrual loans increased by $46.6 million to $115.5 million, or 1.06% of total loans, at June 30, 2020 from $67.7 million, or 0.77% of total loans at June 30, 2019. Annualized net charge-offs to average loans increased to 0.35% for the six months ended June 30, 2020 from 0.32% for the six months ended June 30, 2019.

  

In determining the amount of the current period provision, we considered current economic conditions, including but not limited to unemployment levels, bankruptcy filings, and changes in real estate values and the impact of these factors on the quality of our loan portfolio and historical loss experience.  We analyze the allowance for credit losses as described in the section entitled "Allowance for Credit Losses."  The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period and historical loss experience at June 30, 2020.

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Noninterest Income

Noninterest income increased by $18.4 million, or 41.0%, to $63.5 million for the six months ended June 30, 2020 from $45.0 million for the six months ended June 30, 2019. This increase was primarily due to a $12.8 million increase in mortgage banking income due to continued efforts to expand our secondary market sales capabilities, as well as an interest rate environment conducive to refinance activity and attractive secondary market pricing. Additionally, service charges and fees increased by $2.8 million, or 11.0%, as a result of recent changes to per item fee structures and increased customer activity from the MutualBank acquisition and trust and other financial services income increased by $1.2 million, or 13.7%, due to the additional trust fee income as a result of the MutualBank acquisition.

Noninterest Expense

 

Noninterest expense increased by $18.8 million, or 12.6%, to $167.8 million for the six months ended June 30, 2020, from $148.9 million for the six months ended June 30, 2019.  This increase resulted primarily from an increase in acquisition expense of $9.1 million due to expenses incurred as part of the MutualBank acquisition on April 24, 2020. Other expenses increased by $6.0 million, or 89.2%, primarily due to the increase in the reserve for unfunded commitments as a result of an increase in unfunded commitments and the estimated economic impact of COVID-19. In addition, compensation and employee benefits expense increased $2.6 million, or 3.2%, primarily due to internal growth in compensation and staff as well as both the addition of MutualBank employees in April of 2020 and the addition of UCB employees in March of 2019 which was offset slightly by an increase in deferred loan costs directly related to the origination of PPP loans during the current quarter.

Income Taxes

 

The provision for income taxes decreased by $14.2 million, or 100.9%, to a tax benefit of $122,000 for the six months ended June 30, 2020 from a tax expense of $14.1 million for the six months ended June 30, 2019. This decrease was primarily due to the decrease in income before tax of $63.9 million, or 97.5%. Our effective tax rate for the six months ended June 30, 2020 was (7.5)% compared to 21.5% for the six months ended June 30, 2019. We anticipate our effective tax rate to be between 19.0% and 22.0% for the year ending December 31, 2020.

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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,
			2020																														2019
			Average balance						Interest						Avg. yield/ cost (g)						Average balance						Interest						Avg. yield/ cost (g)
Assets
Interest-earning assets:
Residential mortgage loans			$	3,092,392					29,019						3.75		%				$	2,857,425					29,300						4.10		%
Home equity loans			1,415,091						13,806						3.92		%				1,319,056						17,717						5.39		%
Consumer loans			1,375,130						14,993						4.39		%				945,080						10,736						4.57		%
Commercial real estate loans			3,156,749						34,595						4.34		%				2,801,953						35,537						5.02		%
Commercial loans			1,161,228						11,269						3.84		%				670,613						7,966						4.70		%
Loans receivable (a) (b) (d) (includes FTE adjustments of $669 and $339, respectively)			10,200,590						103,682						4.09		%				8,594,127						101,256						4.73		%
Mortgage-backed securities (c)			714,657						4,038						2.26		%				644,887						4,280						2.65		%
Investment securities (c) (d) (includes FTE adjustments of $241 and $63, respectively)			170,309						1,244						2.92		%				226,325						1,198						2.12		%
FHLB stock, at cost			22,192						309						5.60		%				16,117						316						7.86		%
Other interest-earning deposits			623,870						185						0.12		%				20,983						159						3.00		%
Total interest-earning assets (includes FTE adjustments of $910 and $402, respectively)			11,731,618						109,458						3.75		%				9,502,439						107,209						4.53		%
Noninterest-earning assets (e)			1,858,513																		910,225
Total assets			$	13,590,131																	$	10,412,664
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits			$	1,884,202					648						0.14		%				$	1,696,715					777						0.18		%
Interest-bearing demand deposits			2,428,060						812						0.13		%				1,674,779						1,569						0.38		%
Money market deposit accounts			2,204,810						1,600						0.29		%				1,776,558						3,433						0.78		%
Time deposits			1,761,260						6,276						1.43		%				1,561,034						6,705						1.72		%
Borrowed funds (f)			371,700						296						0.32		%				147,119						413						1.13		%
Junior subordinated debentures			127,472						837						2.60		%				121,757						1,307						4.25		%
Total interest-bearing liabilities			8,777,504						10,469						0.48		%				6,977,962						14,204						0.82		%
Noninterest-bearing demand deposits (g)			2,401,368																		1,888,697
Noninterest-bearing liabilities			882,391																		225,623
Total liabilities			12,061,263																		9,092,282
Shareholders’ equity			1,528,868																		1,320,382
Total liabilities and shareholders’ equity			$	13,590,131																	$	10,412,664
Net interest income/Interest rate spread									98,989						3.27		%										93,005						3.71		%
Net interest-earning assets/Net interest margin			$	2,954,114											3.38		%				$	2,524,477											3.91		%
Ratio of interest-earning assets to interest-bearing liabilities			1.34X																		1.36X

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

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

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

(d)Interest income on tax-free investment securities and tax-free loans are presented on a fully taxable equivalent ("FTE") basis.

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

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

(g)Average cost of deposits were 0.35% and 0.58%, respectively.

(h)Annualized. Shown on a FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate applicable to each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: loans — 4.06% and 4.71%, respectively; investment securities — 2.36% and 2.01%, respectively; interest-earning assets — 3.72% and 4.51%, respectively. GAAP basis net interest rate spreads were 3.24% and 3.69%, respectively; and GAAP basis net interest margins were 3.34% and 3.90%, 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 quarter ended June 30, 2020 vs. 2019
			Increase/(decrease) due to																		Total increase/(decrease)
			Rate						Volume
Interest-earning assets:
Loans receivable			$	(13,626)					16,052						2,426
Mortgage-backed securities			(636)						394						(242)
Investment securities			455						(408)						47
FHLB stock, at cost			(91)						83						(8)
Other interest-earning deposits			(153)						179						26
Total interest-earning assets			(14,051)						16,300						2,249
Interest-bearing liabilities:
Savings deposits			(191)						61						(130)
Interest-bearing demand deposits			(1,005)						248						(757)
Money market deposit accounts			(2,134)						302						(1,832)
Time deposits			(1,124)						694						(430)
Borrowed funds			(295)						178						(117)
Junior subordinated debentures			(508)						39						(469)
Total interest-bearing liabilities			(5,257)						1,522						(3,735)
Net change in net interest income			$	(8,794)					14,778						5,984

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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.

			Six months ended June 30,
			2020																														2019
			Average balance						Interest						Avg. yield/ cost (g)						Average balance						Interest						Avg. yield/ cost (g)
Assets
Interest-earning assets:
Residential mortgage loans			$	2,969,096					57,081						3.85		%				$	2,850,031					58,582						4.11		%
Home equity loans			1,380,076						28,607						4.17		%				1,292,662						33,765						5.27		%
Consumer loans			1,249,233						27,153						4.37		%				909,007						20,927						4.64		%
Commercial real estate loans			2,952,084						66,032						4.42		%				2,681,848						66,303						4.92		%
Commercial loans			936,924						20,124						4.25		%				643,005						16,933						5.24		%
Loans receivable (a) (b) (d) (includes FTE adjustments of $1,011 and $658, respectively)			9,487,413						198,997						4.22		%				8,376,553						196,510						4.73		%
Mortgage-backed securities (c)			691,564						8,213						2.38		%				624,786						8,245						2.64		%
Investment securities (c) (d) (includes FTE adjustments of $289 and $111, respectively)			157,231						2,125						2.70		%				226,815						2,364						2.08		%
FHLB stock, at cost			19,062						571						6.02		%				16,096						487						6.10		%
Other interest-earning deposits			329,284						320						0.19		%				16,381						259						3.14		%
Total interest-earning assets (includes FTE adjustments of $1,300 and $769, respectively)			10,684,554						210,226						3.96		%				9,260,631						207,865						4.53		%
Noninterest-earning assets (e)			1,409,247																		889,409
Total assets			$	12,093,801																	$	10,150,040
Liabilities and shareholders’ equity
Interest-bearing liabilities:
Savings deposits			$	1,747,656					1,375						0.16		%				$	1,673,957					1,535						0.18		%
Interest-bearing demand deposits			2,171,970						2,119						0.20		%				1,588,989						2,732						0.35		%
Money market deposit accounts			2,061,226						4,688						0.46		%				1,735,185						6,011						0.70		%
Time deposits			1,645,077						12,557						1.54		%				1,497,208						12,351						1.66		%
Borrowed funds (f)			305,910						1,005						0.66		%				202,029						1,419						1.42		%
Junior subordinated debentures			124,638						1,875						2.98		%				118,242						2,463						4.14		%
Total interest-bearing liabilities			8,056,477						23,619						0.59		%				6,815,610						26,511						0.78		%
Noninterest-bearing demand deposits (g)			2,022,177																		1,699,496
Noninterest-bearing liabilities			575,658																		336,600
Total liabilities			10,654,312																		8,851,706
Shareholders’ equity			1,439,489																		1,298,334
Total liabilities and shareholders’ equity			$	12,093,801																	$	10,150,040
Net interest income/Interest rate spread									186,607						3.37		%										181,354						3.75		%
Net interest-earning assets/Net interest margin			$	2,628,077											3.49		%				$	2,445,021											3.92		%
Ratio of interest-earning assets to interest-bearing liabilities			1.33X																		1.36X

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

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

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

(d)Interest income on tax-free investment securities and tax-free loans are presented on a fully taxable equivalent ("FTE") basis.

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

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

(g)Average cost of deposits were 0.43% and 0.56%, respectively.

(h)Annualized. Shown on a FTE basis. The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate applicable to each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: loans — 4.20% and 4.71%, respectively; investment securities — 2.34% and 1.99%, respectively; interest-earning assets — 3.93% and 4.51%, respectively. GAAP basis net interest rate spreads were 3.34% and 3.73%, respectively; and GAAP basis net interest margins were 3.47% and 3.90%, 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 six months ended June 30, 2020 vs. 2019
			Increase/(decrease) due to																		Total increase/(decrease)
			Rate						Volume
Interest-earning assets:
Loans receivable			$	(21,359)					23,846						2,487
Mortgage-backed securities			(825)						793						(32)
Investment securities			701						(940)						(239)
FHLB stock, at cost			(6)						90						84
Other interest-earning deposits			(245)						306						61
Total interest-earning assets			(21,734)						24,095						2,361
Interest-bearing liabilities:
Savings deposits			(222)						62						(160)
Interest-bearing demand deposits			(1,189)						576						(613)
Money market deposit accounts			(2,081)						758						(1,323)
Time deposits			(957)						1,164						207
Borrowed funds			(759)						344						(415)
Junior subordinated debentures			(698)						110						(588)
Total interest-bearing liabilities			(5,906)						3,014						(2,892)
Net change in net interest income			$	(15,828)					21,081						5,253

 

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Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

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

 

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

 

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

 

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

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

 

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

 

The following table illustrates the simulated impact of a 100 bps, 200 bps or 300 bps upward or a 100 bps downward movement in interest rates on net income, return on average equity, earnings per share and market value of equity.  This analysis was prepared assuming that interest-earning asset and interest-bearing liability levels at June 30, 2020 remain constant. The impact of the rate movements was computed by simulating the effect of an immediate and sustained shift in interest rates over a twelve-month period from June 30, 2020 levels.

						Increase																														Decrease
Parallel shift in interest rates over the next 12 months						100 bps						200 bps						300 bps						100 bps
Projected percentage increase/(decrease) in net interest income						1.4		%				2.2		%				2.9		%				(1.7)		%
Projected percentage increase/(decrease) in net income						4.0		%				6.3		%				8.5		%				(4.7)		%
Projected increase/(decrease) in return on average equity						3.7		%				6.0		%				8.1		%				(4.5)		%
Projected increase/(decrease) in earnings per share						$	0.04					$	0.06					$	0.09					$	(0.04)
Projected percentage decrease in market value of equity						—		%				(2.1)		%				(4.9)		%				(8.3)		%

 

        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.

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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 12.

 

Item 1A. RISK FACTORS

        In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the SEC. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

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

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

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

•demand for our products and services may decline, making it difficult to grow assets and income;

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•if the economy is unable to substantially reopen or remain open and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

•collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

•our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

•as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

•a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend,

•our wealth management revenues may decline with continuing market turmoil;

•our cyber security risks are increased as the result of an increase in the number of employees working remotely;

•we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

•Federal Deposit Insurance Corporation premiums may increase if the agency experience additional resolution costs;

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

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

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

a)   Not applicable.

 

b)    Not applicable.

c) During the quarter ending June 30, 2020, there were no shares of common stock repurchased.

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.

101.INS			The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH			XBRL Taxonomy Extension Schema Document.
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB			XBRL Taxonomy Extension Label Linkbase.
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document.
104			The cover page of this Quarterly Report on Form 10-Q, formatted in inline XBRL.

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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 7, 2020

By:

/s/ Ronald J. Seiffert

Ronald J. Seiffert

Chairman, President and Chief Executive Officer

(Duly Authorized Officer)

Date:

August 7, 2020

By:

/s/ Jeffrey R. White

Jeffrey R. White

Controller

(Principal Accounting Officer)

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