Edgar Filing: Northwest Bancshares, Inc.

June 30,
2016

December 31,
2015

Fair value

Notional amount

Collateral posted

Document

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

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

For the transition period from to

Commission File Number 001-34582

NORTHWEST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



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

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

(814) 726-2140

(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer x Accelerated Filer o Non-Accelerated Filer o Smaller reporting company o

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

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

Common Stock ($0.01 par value) 102,518,588 shares outstanding as of July 31, 2016

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NORTHWEST BANCSHARES, INC.

INDEX



		PAGE
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Financial Condition as of June 30, 2016 and December 31, 2015 (Unaudited)	1

	Consolidated Statements of Income for the quarter and six months ended June 30, 2016 and 2015 (Unaudited)	2

	Consolidated Statements of Comprehensive Income for the quarter and six months ended June 30, 2016 and 2015 (Unaudited)	3

	Consolidated Statements of Changes in Shareholders’ Equity for the quarter ended June 30, 2016 and 2015 (Unaudited)	4

	Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2016 and 2015 (Unaudited)	5

	Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (Unaudited)	6

	Notes to Consolidated Financial Statements (Unaudited)	8

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61

Item 4.	Controls and Procedures	62

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	62

Item 1A.	Risk Factors	63

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

Item 3.	Defaults Upon Senior Securities	63

Item 4.	Mine Safety Disclosures	63

Item 5.	Other information	63

Item 6.	Exhibits	64

	Signature	65

	Certifications

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ITEM 1. FINANCIAL STATEMENTS

NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(in thousands, except share data)



	June 30, 2016			December 31, 2015
Assets
Cash and due from banks	$	87,711		92,263
Interest-earning deposits in other financial institutions	223,084			74,510
Federal funds sold and other short-term investments	636			635
Marketable securities available-for-sale (amortized cost of $692,403 and $868,956)	705,297			874,405
Marketable securities held-to-maturity (fair value of $25,978 and $32,552)	25,144			31,689
Total cash and investments	1,041,872			1,073,502

Personal Banking loans:
Residential mortgage loans held for sale	39,942			—
Residential mortgage loans	2,717,656			2,750,564
Home equity loans	1,162,174			1,187,106
Consumer loans	546,550			510,617
Total Personal Banking loans	4,466,322			4,448,287
Commercial Banking loans:
Commercial real estate loans	2,363,376			2,351,434
Commercial loans	465,223			422,400
Total Business Banking loans	2,828,599			2,773,834
Total loans	7,294,921			7,222,121
Allowance for loan losses	(60,781		)	(62,672	)
Total loans, net	7,234,140			7,159,449

Federal Home Loan Bank stock, at cost	40,321			40,903
Accrued interest receivable	20,713			21,072
Real estate owned, net	4,950			8,725
Premises and equipment, net	151,643			154,351
Bank owned life insurance	169,616			168,509
Goodwill	262,140			261,736
Other intangible assets	8,095			8,982
Other assets	30,485			54,670
Total assets	$	8,963,975		8,951,899

Liabilities and Shareholders’ Equity
Liabilities:
Noninterest-bearing checking deposits	$	1,189,032		1,177,256
Interest-bearing checking deposits	1,110,607			1,080,086
Money market deposit accounts	1,295,127			1,274,504
Savings deposits	1,444,947			1,386,017
Time deposits	1,596,288			1,694,718
Total deposits	6,636,001			6,612,581

Borrowed funds	959,969			975,007
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities	111,213			111,213
Advances by borrowers for taxes and insurance	45,288			33,735
Accrued interest payable	737			1,993
Other liabilities	55,312			54,207
Total liabilities	7,808,520			7,788,736

Shareholders’ equity:
Preferred stock, $0.01 par value: 50,000,000 authorized, no shares issued	—			—
Common stock, $0.01 par value: 500,000,000 shares authorized, 102,472,947 and 101,871,737 shares issued, respectively	1,025			1,019
Paid-in capital	722,980			717,603
Retained earnings	470,337			489,292
Unallocated common stock of employee stock ownership plan	(19,370		)	(20,216	)
Accumulated other comprehensive loss	(19,517		)	(24,535	)
Total shareholders’ equity	1,155,455			1,163,163
Total liabilities and shareholders’ equity	$	8,963,975		8,951,899

See accompanying notes to unaudited consolidated financial statements

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(in thousands, except per share data)



	Quarter ended June 30,					Six months ended June 30,
	2016			2015		2016	2015
Interest income:
Loans receivable	$	82,645		70,985		163,426	141,696
Mortgage-backed securities	2,115			2,058		4,344	4,292
Taxable investment securities	756			1,129		1,794	2,174
Tax-free investment securities	707			1,143		1,431	2,491
FHLB dividends	401			475		868	1,878
Interest-earning deposits	70			180		129	319
Total interest income	86,694			75,970		171,992	152,850

Interest expense:
Deposits	5,865			5,691		11,953	11,457
Borrowed funds	4,143			8,101		11,801	16,234
Total interest expense	10,008			13,792		23,754	27,691

Net interest income	76,686			62,178		148,238	125,159
Provision for loan losses	4,199			1,050		5,859	1,950
Net interest income after provision for loan losses	72,487			61,128		142,379	123,209
Noninterest income:
Gain on sale/ call of investments	227			566		354	661
Service charges and fees	10,630			9,228		20,695	17,887
Trust and other financial services income	3,277			3,094		6,538	5,870
Insurance commission income	2,768			2,210		5,482	4,638
Gain/ (loss) on real estate owned, net	111			(541	)	360	(1,587	)
Income from bank owned life insurance	1,105			1,008		2,700	1,921
Mortgage banking income	446			218		664	458
Other operating income	1,711			742		2,930	1,302
Total noninterest income	20,275			16,525		39,723	31,150

Noninterest expense:
Compensation and employee benefits	34,349			28,920		67,382	56,815
Premises and occupancy costs	6,275			5,899		12,812	12,166
Office operations	3,343			2,905		6,803	5,817
Collections expense	729			603		1,405	1,371
Processing expenses	8,172			7,392		16,586	14,597
Marketing expenses	2,541			3,190		4,432	5,166
Federal deposit insurance premiums	1,442			1,286		2,945	2,633
Professional services	2,129			1,652		3,962	3,444
Amortization of intangible assets	710			269		1,385	537
Real estate owned expense	295			514		606	1,206
Restructuring/ acquisition expense	3,386			467		4,021	814
FHLB prepayment penalty	36,978			—		36,978	—
Other expenses	2,912			2,038		7,219	4,280
Total noninterest expense	103,261			55,135		166,536	108,846
Income/ (loss) before income taxes	(10,499		)	22,518		15,566	45,513

Federal and state income taxes expense/ (benefit)	(3,491		)	7,213		4,590	14,038

Net income/ (loss)	$	(7,008	)	15,305		10,976	31,475

Basic earnings/ (loss) per share	$	(0.07	)	0.17		0.11	0.34

Diluted earnings per share	$	(0.07	)	0.17		0.11	0.34

See accompanying notes to unaudited consolidated financial statements

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(in thousands)



	Quarter ended June 30,					Six months ended June 30,
	2016			2015		2016	2015
Net income/ (loss)	$	(7,008	)	15,305		10,976	31,475
Other comprehensive income net of tax:
Net unrealized holding gains/ (losses) on marketable securities:
Unrealized holding gains/ (losses) net of tax of $(659), $1,139, $(2,879) and $(746), respectively	1,027			(1,788	)	4,502	1,164
Reclassification adjustment for (gains)/ losses included in net income, net of tax of $(14), $179, $(25) and $222 respectively	22			(279	)	39	(347	)
Net unrealized holding gains on marketable securities	1,049			(2,067	)	4,541	817

Change in fair value of interest rate swaps, net of tax of $(90), $(263), $(14) and $(287), respectively	166			488		26	532

Defined benefit plan:
Reclassification adjustments for prior period service costs and net losses included in net income, net of tax of $(144), $(140), $(288) and $(280), respectively	226			219		451	438

Other comprehensive income/ (loss)	1,441			(1,360	)	5,018	1,787

Total comprehensive income/ (loss)	$	(5,567	)	13,945		15,994	33,262

See accompanying notes to unaudited consolidated financial statements

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(dollars in thousands, expect share data)

Quarter ended June 30, 2015



										Accumulated Other		Unallocated		Total
	Common Stock					Paid-in		Retained		Comprehensive		common stock		Shareholders’
	Shares		Amount			Capital		Earnings		Loss		of ESOP		Equity
Beginning balance at March 31, 2015	94,553,350		$	946		624,584		484,774		(21,223	)	(21,565	)	1,067,516

Comprehensive income:
Net income	—		—			—		15,305		—		—		15,305

Other comprehensive loss, net of tax of $915	—		—			—		—		(1,360	)	—		(1,360	)

Total comprehensive income/ (loss)	—		—			—		15,305		(1,360	)	—		13,945

Exercise of stock options	60,849		—			632		—		—		—		632

Stock-based compensation expense, including tax benefit of $6	306,350		3			1,316		—		—		80		1,399

Share repurchases	(179,800	)	(2		)	(2,211	)	—		—		—		(2,213	)

Dividends paid ($0.14 per share)	—		—			—		(12,929	)	—		—		(12,929	)

Ending balance at June 30, 2015	94,740,749		$	947		624,321		487,150		(22,583	)	(21,485	)	1,068,350

Quarter ended June 30, 2016



							Accumulated Other		Unallocated		Total
	Common Stock			Paid-in	Retained		Comprehensive		common stock		Shareholders’
	Shares	Amount		Capital	Earnings		Income/ (loss)		of ESOP		Equity
Beginning balance at March 31, 2016	101,848,509	$	1,018	718,027	492,316		(20,958	)	(19,815	)	1,170,588

Comprehensive income:
Net loss	—	—		—	(7,008	)	—		—		(7,008	)

Other comprehensive income, net of tax of $(907)	—	—		—	—		1,441		—		1,441

Total comprehensive income/ (loss)	—	—		—	(7,008	)	1,441		—		(5,567	)

Exercise of stock options	300,721	4		3,262	—		—		—		3,266

Stock-based compensation expense, including tax benefit of $187	323,717	3		1,691	—		—		445		2,139

Dividends paid ($0.15 per share)	—	—		—	(14,971	)	—		—		(14,971	)

Ending Balance at June 30, 2016	102,472,947	$	1,025	722,980	470,337		(19,517	)	(19,370	)	1,155,455

See accompanying notes to unaudited consolidated financial statements

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(dollars in thousands, expect share data)

Six months ended June 30, 2015



										Accumulated Other		Unallocated		Total
	Common Stock					Paid-in		Retained		Comprehensive		common stock		Shareholders’
	Shares		Amount			Capital		Earnings		Income/ (loss)		of ESOP		Equity
Beginning balance at December 31, 2014	94,721,453		$	947		626,134		481,577		(24,370	)	(21,641	)	1,062,647

Comprehensive income:
Net income	—		—			—		31,475		—		—		31,475

Other comprehensive income, net of tax of $(1,091)	—		—			—		—		1,787		—		1,787

Total comprehensive income	—		—			—		31,475		1,787		—		33,262

Exercise of stock options	210,746		2			2,065		—		—		—		2,067

Stock-based compensation expense, including tax benefit of $23	306,350		3			2,120		—		—		156		2,279

Share repurchases	(497,800	)	(5		)	(5,998	)	—		—		—		(6,003	)

Dividends paid ($0.28 per share)	—		—			—		(25,902	)	—		—		(25,902	)

Ending balance at June 30, 2015	94,740,749		$	947		624,321		487,150		(22,583	)	(21,485	)	1,068,350

Six months ended June 30, 2016



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

Comprehensive income:
Net income	—		—			—		10,976		—		—		10,976

Other comprehensive income, net of tax of $(3,206)	—		—			—		—		5,018		—		5,018

Total comprehensive income	—		—			—		10,976		5,018		—		15,994

Exercise of stock options	423,393		5			4,578		—		—		—		4,583

Stock-based compensation expense, including tax benefit of $206	323,717		3			2,549		—		—		846		3,398

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

Dividends paid ($0.30 per share)	—		—			—		(29,931	)	—		—		(29,931	)

Ending balance at June 30, 2016	102,472,947		$	1,025		722,980		470,337		(19,517	)	(19,370	)	1,155,455

See accompanying notes to unaudited consolidated financial statements

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)



	Six months ended June 30,
	2016			2015
OPERATING ACTIVITIES:
Net Income	$	10,976		31,475
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	5,859			1,950
Net gain on sale of assets	(2,127		)	(311	)
Net depreciation, amortization and accretion	5,332			2,571
Decrease in other assets	23,505			11,233
Increase in other liabilities	2,284			1,169
Net amortization on marketable securities	1,035			173
Noncash write-down of real estate owned	927			1,927
FHLB prepayment penalty	24,520			—
Deferred income tax benefit	(650		)	—
Origination of loans held for sale	(114,140		)	(221	)
Proceeds from sale of loans held for sale	74,042			224
Noncash compensation expense related to stock benefit plans	3,192			2,256
Net cash provided by operating activities	34,755			52,446

INVESTING ACTIVITIES:
Purchase of marketable securities available-for-sale	(2,000		)	(59,980	)
Proceeds from maturities and principal reductions of marketable securities held-to-maturity	6,544			42,409
Proceeds from maturities and principal reductions of marketable securities available-for-sale	177,781			111,630
Proceeds from sale of marketable securities available-for-sale	91			1,214
Loan originations	(1,221,930		)	(996,253	)
Proceeds from loan maturities and principal reductions	1,182,305			850,823
Net sale/ (purchase) of Federal Home Loan Bank stock	582			(4,773	)
Proceeds from sale of real estate owned	5,989			5,704
Sale of real estate owned for investment, net	304			304
Purchase of premises and equipment	(8,235		)	(5,172	)
Acquisitions, net of cash received	(684		)	(438	)
Net cash provided by/ (used in) investing activities	140,747			(54,532	)

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NORTHWEST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)

(in thousands)



	Six months ended June 30,
	2016			2015
FINANCING ACTIVITIES:
Increase in deposits, net	$	23,420		61,940
Proceeds from long-term borrowings	—			85,000
Repayments of long-term borrowings, including prepayment penalty	(774,546		)	(50,026	)
Net increase/ (decrease) in short-term borrowings	734,988			(24,027	)
Increase in advances by borrowers for taxes and insurance	11,553			11,256
Cash dividends paid	(29,931		)	(25,902	)
Purchase of common stock for retirement	(1,752		)	(6,003	)
Proceeds from stock options exercised	4,583			2,067
Excess tax benefit from stock-based compensation	206			23
Net cash provided by/ (used in) financing activities	(31,479		)	54,328

Net increase in cash and cash equivalents	$	144,023		52,242

Cash and cash equivalents at beginning of period	$	167,408		240,706
Net increase in cash and cash equivalents	144,023			52,242
Cash and cash equivalents at end of period	$	311,431		292,948

Cash and cash equivalents:
Cash and due from banks	$	87,711		84,000
Interest-earning deposits in other financial institutions	223,084			208,311
Federal funds sold and other short-term investments	636			637
Total cash and cash equivalents	$	311,431		292,948

Cash paid during the period for:
Interest on deposits and borrowings (including interest credited to deposit accounts of $11,335 and $10,508, respectively)	$	25,010		27,325
Income taxes	$	1,502		4,823

Business acquisitions:
Fair value of assets acquired	$	810		438
Cash paid, net	(684		)	(438	)
Liabilities assumed	$	126		—

Non-cash activities:
Loans foreclosures and repossessions	$	1,854		5,012
Sale of real estate owned financed by the Company	$	1,260		174

See accompanying notes to unaudited consolidated financial statements

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited


(1)	Basis of Presentation and Informational Disclosures

Northwest Bancshares, Inc. (the “Company”) or (“NWBI”), a Maryland corporation headquartered in Warren, Pennsylvania, is a savings and loan holding company regulated by the Board of Governors of the Federal Reserve System. The primary activity of the Company is the ownership of all of the issued and outstanding common stock of Northwest Bank, a Pennsylvania-chartered savings bank (“Northwest”). Northwest is regulated by the FDIC and the Pennsylvania Department of Banking. Northwest operates 157 community-banking offices throughout Pennsylvania, western New York, eastern Ohio and Maryland.

The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiary, Northwest, and Northwest’s subsidiaries Northwest Settlement Agency, LLC, Northwest Consumer Discount Company, Northwest Financial Services, Inc., Northwest Advisors, Inc., Northwest Capital Group, Inc., Allegheny Services, Inc., Great Northwest Corporation, Boetger & Associates, Inc. and The Bert Company. The unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information or footnotes required for complete annual financial statements. In the opinion of management, all adjustments necessary for the fair presentation of the Company’s financial position and results of operations have been included. The consolidated statements have been prepared using the accounting policies described in the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 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.

During the quarter ended June 30, 2016, we identified and corrected an error that arose in prior periods related to the amortization of certain deferred loan fees related to letters of credit, which had the impact of understating our interest income. We have assessed the materiality of these corrections of errors and concluded, based on qualitative and quantitative considerations, that the adjustments are not material to the financial statements as a whole. As a result, $1.1 million of deferred loan fees were recognized in loan interest income for the quarter and six months ended June 30, 2016. For the quarter and six months ended June 30, 2015 loan interest income would have increased by $53,000 and $98,000, respectively, income tax expense would have increased by $21,000 and $38,000, respectively, and net income would have increased by $32,000 and $60,000, respectively.

The results of operations for the quarter and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016, or any other period.

Stock-Based Compensation

On May 18, 2016, we awarded employees 660,600 stock options and directors 64,800 stock options with an exercise price of $14.15 and grant date fair value of $1.52 per stock option. On May 18, 2016, we also awarded employees 310,160 restricted common shares and directors 24,300 restricted common shares with a grant date fair value of $14.51. Awarded stock options and common shares vest over a ten-year period with the first vesting occurring on the grant date. Stock-based compensation expense of $1.9 million and $1.4 million for the quarters ended June 30, 2016 and 2015, and $3.2 million and $2.3 million for the six months ended June 30, 2016 and 2015, respectively, was recognized in compensation expense relating to our stock benefit plans. At June 30, 2016 there was compensation expense of $4.6 million to be recognized for awarded but unvested stock options and $17.0 million for unvested common shares.

Income Taxes- Uncertain Tax Positions

Accounting standards prescribe a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. At June 30, 2016 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, 2015, 2014, 2013 and 2012. We are currently under

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audit by the state of New York for the tax periods ended December 31, 2014, 2013, 2012 and 2011. At June 30, 2016 we have accrued $219,000 for the payment of interest and penalties related to this audit.

Impact of New Accounting Standards

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

In January 2016 the FASB issued ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10)”. This guidance requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Additionally, this guidance requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact this standard will have on our results of operations and financial position.

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

In March 2016 the FASB issued ASU 2016-08, “Principal Versus Agent Considerations”. This guidance clarifies the implementation guidance on principal versus agent considerations of ASU 2014-09 "Revenue from Contracts with Customers (Topic 606)". When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). When (or as) an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer. When (or as) an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. This guidance is effective retrospectively for annual reporting periods beginning after December 15, 2017, including interim periods within those years and early adoption is not permitted. We are currently evaluating the impact this standard will have on our results of operations and financial position.

In March 2016 the FASB issued ASU 2016-09, “Improvements to Employee Share-based Payment Accounting”. This guidance is part of the FASB's Simplification Initiative and simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those years and early adoption is permitted. We do not expect that this standard will have a material impact on our results of operations or financial position.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments, which eliminates the probable initial recognition threshold for credit losses requiring, instead, that all financial assets (or group of financial assets) measured at amortized cost be presented at the net amount expected to be collected inclusive of the entity’s current estimate of all lifetime expected credit losses. This guidance also applies to certain off-balance-sheet credit exposures such as unfunded commitments and non-derivative financial guarantees. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) in order to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The income statement under this guidance will reflect the initial

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recognition of current expected credit losses for newly recognized assets, as well as any increases or decreases of expected credit losses that have occurred during the period. This guidance retains many currently-existing disclosures related to the credit quality of an entity’s assets and the related allowance for credit losses amended to reflect the change to an expected credit loss methodology, as well as enhanced disclosures to provide information to users at a more disaggregated level. Upon adoption, ASU 2016-13 provides for a modified retrospective transition by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is effective, except for debt securities for which an other-than-temporary impairment has previously been recognized. For these debt securities, a prospective transition is provided in order to maintain the same amortized cost prior to and subsequent to the effective date of the ASU. This guidance is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those annual periods with early adoption permitted for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. We are currently evaluating the impact this standard will have on our results of operations and financial position.


(2)	Business Segments

We operate in two reportable business segments: Community Banking and Consumer Finance. The Community Banking segment provides services traditionally offered by full-service community banks, including business and personal deposit accounts and business and personal loans, as well as insurance, brokerage and investment management and trust services. The Consumer Finance segment, which is comprised of Northwest Consumer Discount Company, a subsidiary of Northwest, operates 51 offices in Pennsylvania and offers personal installment loans for a variety of consumer and real estate products. This activity is funded primarily through an intercompany borrowing relationship with Allegheny Services, Inc., a subsidiary of Northwest. Net income is the primary measure used by management to measure segment performance. The following tables provide financial information for these reportable segments. The “All Other” column represents the parent company and elimination entries necessary to reconcile to the consolidated amounts presented in the financial statements.

At or for the quarter ended (in thousands):



	Community			Consumer
June 30, 2016	Banking			Finance	All other (1)		Consolidated
External interest income	$	82,137		4,324	233		86,694
Intersegment interest income/ expense	631			—	(631	)	—
Interest expense	8,924			631	453		10,008
Provision for loan losses	3,365			834	—		4,199
Noninterest income	19,848			400	27		20,275
Noninterest expense	100,079			2,878	304		103,261
Income tax expense (benefit)	(3,245		)	158	(404	)	(3,491	)
Net income	$	(6,507	)	223	(724	)	(7,008	)
Total assets	$	8,839,334		108,282	16,359		8,963,975



	Community		Consumer
June 30, 2015	Banking		Finance	All other (1)		Consolidated
External interest income	$	71,273	4,492	205		75,970
Intersegment interest income/ expense	582		—	(582	)	—
Interest expense	12,781		582	429		13,792
Provision for loan losses	850		200	—		1,050
Noninterest income	16,080		411	34		16,525
Noninterest expense	51,682		3,081	372		55,135
Income tax expense (benefit)	7,183		434	(404	)	7,213
Net income	$	15,439	606	(740	)	15,305
Total assets	$	7,740,273	108,348	15,889		7,864,510


(1)	Eliminations consist of intercompany loans, interest income and interest expense.

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



	Community		Consumer
June 30, 2016	Banking		Finance	All other (1)		Consolidated
External interest income	$	162,975	8,567	450		171,992
Intersegment interest income	1,273		—	(1,273	)	—
Interest expense	21,605		1,273	876		23,754
Provision for loan losses	4,578		1,281	—		5,859
Noninterest income	38,854		780	89		39,723
Noninterest expense	160,051		5,807	678		166,536
Income tax expense (benefit)	4,997		409	(816	)	4,590
Net income	$	11,871	577	(1,472	)	10,976
Total assets	$	8,839,334	108,282	16,359		8,963,975



	Community		Consumer
June 30, 2015	Banking		Finance	All other (1)		Consolidated
External interest income	$	143,604	8,822	424		152,850
Intersegment interest income	1,157		—	(1,157	)	—
Interest expense	25,669		1,157	865		27,691
Provision for loan losses	1,100		850	—		1,950
Noninterest income	30,406		681	63		31,150
Noninterest expense	102,122		6,034	690		108,846
Income tax expense (benefit)	14,218		609	(789	)	14,038
Net income	$	32,058	853	(1,436	)	31,475
Total assets	$	7,740,273	108,348	15,889		7,864,510


(1)	Eliminations consist of intercompany loans, interest income and interest expense.

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(3)	Investment securities and impairment of investment securities

The following table shows the portfolio of investment securities available-for-sale at June 30, 2016 (in thousands):



	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses		Fair value
Debt issued by the U.S. government and agencies:
Due in one year or less	$	9	—	—		9

Debt issued by government sponsored enterprises:
Due in one year or less	15,000		—	(1	)	14,999
Due after one year through five years	163,440		830	(51	)	164,219
Due after five years through ten years	670		5	—		675
Due after ten years	—		—	—		—

Equity securities	3,351		459	(87	)	3,723

Municipal securities:
Due in one year or less	1,035		3	—		1,038
Due after one year through five years	13,666		167	(1	)	13,832
Due after five years through ten years	12,067		432	—		12,499
Due after ten years	47,985		1,989	—		49,974

Corporate debt issues:
Due after ten years	14,432		2,890	(469	)	16,853

Residential mortgage-backed securities:
Fixed rate pass-through	104,094		3,587	(26	)	107,655
Variable rate pass-through	48,949		2,336	(5	)	51,280
Fixed rate non-agency CMOs	2,022		181	—		2,203
Fixed rate agency CMOs	190,336		1,226	(777	)	190,785
Variable rate agency CMOs	75,347		341	(135	)	75,553
Total residential mortgage-backed securities	420,748		7,671	(943	)	427,476
Total marketable securities available-for-sale	$	692,403	14,446	(1,552	)	705,297

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The following table shows the portfolio of investment securities available-for-sale at December 31, 2015 (in thousands):



	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses		Fair value
Debt issued by the U.S. government and agencies:
Due in one year or less	$	11	—	—		11

Debt issued by government sponsored enterprises:
Due in one year or less	15,500		3	(48	)	15,455
Due after one year through five years	257,463		298	(1,395	)	256,366
Due after five years through ten years	12,721		14	(23	)	12,712
Due after ten years	9,815		135	(43	)	9,907

Equity securities	1,400		500	(6	)	1,894

Municipal securities:
Due in one year or less	1,684		8	—		1,692
Due after one year through five years	14,327		117	(4	)	14,440
Due after five years through ten years	12,400		323	—		12,723
Due after ten years	52,286		1,727	—		54,013

Corporate debt issues:
Due after ten years	14,463		2,417	(405	)	16,475

Residential mortgage-backed securities:
Fixed rate pass-through	118,266		2,480	(420	)	120,326
Variable rate pass-through	54,292		2,616	(7	)	56,901
Fixed rate non-agency CMOs	2,519		230	—		2,749
Fixed rate agency CMOs	215,719		389	(3,881	)	212,227
Variable rate agency CMOs	86,090		476	(52	)	86,514
Total residential mortgage-backed securities	476,886		6,191	(4,360	)	478,717
Total marketable securities available-for-sale	$	868,956	11,733	(6,284	)	874,405

The following table shows the portfolio of investment securities held-to-maturity at June 30, 2016 (in thousands):



	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses	Fair value
Municipal securities:
Due after five years through ten years	$	274	1	—	275
Due after ten years	4,805		159	—	4,964

Residential mortgage-backed securities:
Fixed rate pass-through	5,785		368	—	6,153
Variable rate pass-through	3,213		76	—	3,289
Fixed rate agency CMOs	10,182		217	—	10,399
Variable rate agency CMOs	885		13	—	898
Total residential mortgage-backed securities	20,065		674	—	20,739
Total marketable securities held-to-maturity	$	25,144	834	—	25,978

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The following table shows the portfolio of investment securities held-to-maturity at December 31, 2015 (in thousands):



	Amortized cost		Gross unrealized holding gains	Gross unrealized holding losses	Fair value
Municipal securities:
Due after five years through ten years	$	274	1	—	275
Due after ten years	6,336		239	—	6,575

Residential mortgage-backed securities:
Fixed rate pass-through	6,458		351	—	6,809
Variable rate pass-through	3,618		41	—	3,659
Fixed rate agency CMOs	14,033		219	—	14,252
Variable rate agency CMOs	970		12	—	982
Total residential mortgage-backed securities	25,079		623	—	25,702
Total marketable securities held-to-maturity	$	31,689	863	—	32,552

The following table shows the fair value of and gross unrealized losses on investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at June 30, 2016 (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	$	14,999	(1	)	11,570	(51	)	26,569	(52	)
Municipal securities	2,188		(1	)	—	—		2,188	(1	)
Corporate issues	—		—		1,958	(469	)	1,958	(469	)
Equity securities	2,463		(87	)	—	—		2,463	(87	)
Residential mortgage-backed securities - agency	27,425		(70	)	88,558	(873	)	115,983	(943	)

Total temporarily impaired securities	$	47,075	(159	)	102,086	(1,393	)	149,161	(1,552	)



	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	$	143,751	(723	)	92,961	(786	)	236,712	(1,509	)
Municipal securities	7,505		(4	)	—	—		7,505	(4	)
Corporate debt issues	—		—		2,021	(405	)	2,021	(405	)
Equity securities	544		(6	)	—	—		544	(6	)
Residential mortgage-backed securities - agency	122,109		(598	)	149,889	(3,762	)	271,998	(4,360	)

Total temporarily impaired securities	$	273,909	(1,331	)	244,871	(4,953	)	518,780	(6,284	)

We review our investment portfolio for indications of impairment. This review includes analyzing the length of time and the extent to which amortized costs have exceeded fair values, the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer, and the intent to hold the investments for a period of time sufficient to allow for a recovery in value. Certain investments are evaluated using our best estimate of future cash flows.

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If the estimate of cash flows indicates that an adverse change has occurred, other-than-temporary impairment is recognized for the amount of the unrealized loss that was deemed credit related.

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

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



	2016			2015
Beginning balance at April 1, (1)	$	8,424		8,865
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized	—			—
Reduction for losses realized during the quarter	(16		)	(16		)
Reduction for securities called realized during the quarter	—			(360		)
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized	—			—
Ending balance at June 30,	$	8,408		$	8,489


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



	2016			2015
Beginning balance at January 1, (1)	$	8,436		8,894
Credit losses on debt securities for which other-than-temporary impairment was not previously recognized	—			—
Reduction for losses realized during the six months	(28		)	(45	)
Reduction for securities called realized during the nine months	—			(360	)
Additional credit losses on debt securities for which other-than-temporary impairment was previously recognized	—			—
Ending balance at June 30,	$	8,408		8,489


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

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(4)	Loans receivable

The following table shows a summary of our loans receivable at June 30, 2016 and December 31, 2015 (in thousands):



	June 30, 2016							December 31, 2015
	Originated			Acquired		Total		Originated		Acquired		Total
Personal Banking:
Residential mortgage loans (1)	$	2,714,268		42,304		2,756,572		2,695,561		45,716		2,741,277
Home equity loans	1,039,457			122,717		1,162,174		1,055,907		131,199		1,187,106
Consumer loans	381,677			154,321		535,998		307,961		202,656		510,617
Total Personal Banking	4,135,402			319,342		4,454,744		4,059,429		379,571		4,439,000

Commercial Banking:
Commercial real estate loans	2,173,571			387,131		2,560,702		2,094,710		429,564		2,524,274
Commercial loans	440,785			50,814		491,599		372,540		65,175		437,715
Total Commercial Banking	2,614,356			437,945		3,052,301		2,467,250		494,739		2,961,989
Total loans receivable, gross	6,749,758			757,287		7,507,045		6,526,679		874,310		7,400,989

Deferred loan costs	18,530			4,116		22,646		14,806		5,259		20,065
Allowance for loan losses	(55,323		)	(5,458	)	(60,781	)	(60,970	)	(1,702	)	(62,672	)
Undisbursed loan proceeds:
Residential mortgage loans	(11,068		)	—		(11,068	)	(10,778	)	—		(10,778	)
Commercial real estate loans	(193,808		)	(3,518	)	(197,326	)	(159,553	)	(13,287	)	(172,840	)
Commercial loans	(24,281		)	(2,095	)	(26,376	)	(11,132	)	(4,183	)	(15,315	)
Total loans receivable, net	$	6,483,808		750,332		7,234,140		6,299,052		860,397		7,159,449

(1) Includes $39.9 million of loans held for sale at June 30, 2016.

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



	June 30, 2016		December 31, 2015
Acquired loans evaluated individually for future credit losses:
Outstanding principal balance	$	17,719	$	21,069
Carrying value	14,043		16,867

Acquired loans evaluated collectively for future credit losses:
Outstanding principal balance	749,206		848,194
Carrying value	741,747		839,973

Total acquired loans:
Outstanding principal balance	766,925		869,263
Carrying value	755,790		856,840

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



	Total
Balance at December 31, 2014	$	—
LNB Bancorp, Inc. acquisition	1,672
Accretion	(377		)
Net reclassification from nonaccretable yield	724
Balance at December 31, 2015	2,019
Accretion	(628		)
Net reclassification from nonaccretable yield	628
Balance at June 30, 2016	$	2,019

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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 six months ended June 30, 2016 (in thousands):



	Carrying value		Outstanding principal balance	Related impairment reserve	Average recorded investment in impaired loans	Interest income recognized
Personal Banking:
Residential mortgage loans	$	1,446	2,248	21	1,546	103
Home equity loans	1,515		2,868	6	1,586	108
Consumer loans	201		399	2	216	20
Total Personal Banking	3,162		5,515	29	3,348	231

Commercial Banking:
Commercial real estate loans	10,631		11,938	353	10,675	391
Commercial loans	250		266	—	250	6
Total Commercial Banking	10,881		12,204	353	10,925	397

Total	$	14,043	17,719	382	14,273	628

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, 2015 (in thousands):



	Carrying value		Outstanding principal balance	Related impairment reserve	Average recorded investment in impaired loans	Interest income recognized
Personal Banking:
Residential mortgage loans	$	1,981	2,910	14	2,083	41
Home equity loans	2,084		3,455	6	2,222	51
Consumer loans	267		492	2	305	18
Total Personal Banking	4,332		6,857	22	4,610	110

Commercial Banking:
Commercial real estate loans	12,288		13,946	353	12,867	249
Commercial loans	247		266	—	335	18
Total Commercial Banking	12,535		14,212	353	13,202	267

Total	$	16,867	21,069	375	17,812	377

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



	Balance June 30, 2016		Current period provision		Charge-offs		Recoveries	Balance March 31, 2016
Originated loans:
Personal Banking:
Residential mortgage loans	$	3,022	501		(1,803	)	67	4,257
Home equity loans	3,335		230		(439	)	135	3,409
Consumer loans	7,924		2,382		(2,146	)	394	7,294
Total Personal Banking	14,281		3,113		(4,388	)	596	14,960

Commercial Banking:
Commercial real estate loans	25,686		(3,509	)	(1,317	)	645	29,867
Commercial loans	15,356		901		(885	)	417	14,923
Total Commercial Banking	41,042		(2,608	)	(2,202	)	1,062	44,790
Total originated loans	55,323		505		(6,590	)	1,658	59,750

Acquired loans:
Personal Banking:
Residential mortgage loans	61		35		(49	)	67	8
Home equity loans	1,128		1,217		(507	)	120	298
Consumer loans	552		501		(186	)	38	199
Total Personal Banking	1,741		1,753		(742	)	225	505

Commercial Banking:
Commercial real estate loans	3,165		1,660		(414	)	184	1,735
Commercial loans	552		281		(18	)	1	288
Total Commercial Banking	3,717		1,941		(432	)	185	2,023
Total acquired loans	5,458		3,694		(1,174	)	410	2,528

Total	$	60,781	4,199		(7,764	)	2,068	62,278

The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the quarter ended June 30, 2015 (in thousands):



	Balance June 30, 2015		Current period provision		Charge-offs		Recoveries	Balance March 31, 2015
Personal Banking:
Residential mortgage loans	$	4,892	76		(278	)	17	5,077
Home equity loans	3,445		(187	)	(542	)	131	4,043
Consumer loans	6,244		1,865		(1,759	)	303	5,835
Total Personal Banking	14,581		1,754		(2,579	)	451	14,955

Commercial Banking:
Commercial real estate loans	30,163		(1,558	)	(3,439	)	1,908	33,252
Commercial loans	14,313		4,832		(6,356	)	724	15,113
Total Commercial Banking	44,476		3,274		(9,795	)	2,632	48,365

Unallocated	—		(3,978	)	—		—	3,978
Total	$	59,057	1,050		(12,374	)	3,083	67,298

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



	Balance June 30, 2016		Current period provision		Charge-offs		Recoveries	Balance December 31, 2015
Originated loans:
Personal Banking:
Residential mortgage loans	$	3,022	504		(2,292	)	118	4,692
Home equity loans	3,335		(43	)	(737	)	174	3,941
Other consumer loans	7,924		4,027		(4,373	)	782	7,488
Total Personal Banking	14,281		4,488		(7,402	)	1,074	16,121

Commercial Banking:
Commercial real estate loans	25,686		(7,715	)	(1,500	)	2,553	32,348
Commercial loans	15,356		3,340		(996	)	511	12,501
Total Commercial Banking	41,042		(4,375	)	(2,496	)	3,064	44,849
Total originated loans	55,323		113		(9,898	)	4,138	60,970

Acquired loans:
Personal Banking:
Residential mortgage loans	61		72		(124	)	95	18
Home equity loans	1,128		1,955		(1,193	)	265	101
Other consumer loans	552		709		(362	)	95	110
Total Personal Banking	1,741		2,736		(1,679	)	455	229

Commercial Banking:
Commercial real estate loans	3,165		2,474		(1,128	)	380	1,439
Commercial loans	552		536		(24	)	6	34
Total Commercial Banking	3,717		3,010		(1,152	)	386	1,473
Total acquired loans	5,458		5,746		(2,831	)	841	1,702

Total	$	60,781	5,859		(12,729	)	4,979	62,672

The following table provides information related to the allowance for loan losses by portfolio segment and by class of financing receivable for the six months ended June 30, 2015 (in thousands):



	Balance June 30, 2015		Current period provision		Charge-offs		Recoveries	Balance December 31, 2014
Personal Banking:
Residential mortgage loans	$	4,892	(206	)	(613	)	130	5,581
Home equity loans	3,445		(400	)	(884	)	179	4,550
Other consumer loans	6,244		3,135		(3,699	)	690	6,118
Total Personal Banking	14,581		2,529		(5,196	)	999	16,249

Commercial Banking:
Commercial real estate loans	30,163		(1,316	)	(4,552	)	2,642	33,389
Commercial loans	14,313		5,102		(7,080	)	2,776	13,515
Total Commercial Banking	44,476		3,786		(11,632	)	5,418	46,904

Unallocated	—		(4,365	)	—		—	4,365

Total	$	59,057	1,950		(16,828	)	6,417	67,518

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At June 30, 2016, we expect to fully collect the carrying value of our acquired loans and have determined that we can reasonably estimate their future cash flows including those loans that are 90 days or more delinquent. As a result, we do not consider our acquired loans that are 90 days or more delinquent to be nonaccrual or impaired and continue to recognize interest income on these loans, including the loans’ accretable discount.

The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at June 30, 2016 (in thousands):



	Total loans receivable		Allowance for loan losses	Nonaccrual loans (1)	Loans past due 90 days or more and still accruing (2)	TDRs	Allowance related to TDRs	Additional commitments to customers with loans classified as TDRs
Personal Banking:
Residential mortgage loans	$	2,757,598	3,083	18,370	2	7,340	251	—
Home equity loans	1,162,174		4,463	6,733	—	2,205	405	—
Consumer loans	546,550		8,476	2,903	171	—	—	—
Total Personal Banking	4,466,322		16,022	28,006	173	9,545	656	—

Commercial Banking:
Commercial real estate loans	2,363,376		28,851	37,080	—	27,999	2,028	203
Commercial loans	465,223		15,908	10,792	299	11,569	1,256	131
Total Commercial Banking	2,828,599		44,759	47,872	299	39,568	3,284	334

Total	$	7,294,921	60,781	75,878	472	49,113	3,940	334


(1)	Includes $18.1 million of nonaccrual TDRs.


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

The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at December 31, 2015 (in thousands):



	Total loans receivable		Allowance for loan losses	Nonaccrual loans (1)	Loans past due 90 days or more and still accruing (2)	TDRs	Allowance related to TDRs	Additional commitments to customers with loans classified as TDRs
Personal Banking:
Residential mortgage loans	$	2,740,892	4,710	19,772	4	6,360	1,189	—
Home equity loans	1,187,106		4,042	7,522	—	2,298	605	—
Consumer loans	520,289		7,598	3,452	976	—	—	—
Total Personal Banking	4,448,287		16,350	30,746	980	8,658	1,794	—

Commercial Banking:
Commercial real estate loans	2,351,434		33,787	33,421	206	31,970	2,257	241
Commercial loans	422,400		12,535	7,495	148	10,487	631	79
Total Commercial Banking	2,773,834		46,322	40,916	354	42,457	2,888	320

Total	$	7,222,121	62,672	71,662	1,334	51,115	4,682	320


(1)	Includes $21.1 million of nonaccrual TDRs.


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

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The following table provides geographical information related to the loan portfolio by portfolio segment and class of financing receivable at June 30, 2016 (in thousands):



	Pennsylvania			New York		Ohio		Maryland		Other		Total
Loans receivable:
Personal Banking:
Residential mortgage loans	$	2,324,087		181,713		71,305		124,887		55,606		2,757,598
Home equity loans	859,960			125,112		148,757		24,316		4,029		1,162,174
Consumer loans	263,384			12,555		107,267		1,942		161,402		546,550
Total Personal Banking	3,447,431			319,380		327,329		151,145		221,037		4,466,322

Commercial Banking:
Commercial real estate loans	954,237			795,715		454,354		115,546		43,524		2,363,376
Commercial loans	329,151			56,340		64,018		5,641		10,073		465,223
Total Commercial Banking	1,283,388			852,055		518,372		121,187		53,597		2,828,599

Total	$	4,730,819		1,171,435		845,701		272,332		274,634		7,294,921

Percentage of total loans receivable	64.9		%	16.0	%	11.6	%	3.7	%	3.8	%	100.0	%

The following table provides delinquency information related to the loan portfolio by portfolio segment and class of financing receivable at June 30, 2016 (in thousands):



	Pennsylvania			New York		Ohio		Maryland		Other		Total
Loans 90 or more days delinquent: (1)
Personal Banking:
Residential mortgage loans	$	9,914		2,168		1,094		1,222		648		15,046
Home equity loans	2,784			872		1,296		470		—		5,422
Consumer loans	2,097			59		19		—		224		2,399
Total Personal Banking	14,795			3,099		2,409		1,692		872		22,867

Commercial Banking:
Commercial real estate loans	6,957			2,402		5,632		110		143		15,244
Commercial loans	3,229			795		565		120		—		4,709
Total Commercial Banking	10,186			3,197		6,197		230		143		19,953

Total	$	24,981		6,296		8,606		1,922		1,015		42,820

Percentage of total loans 90 or more days delinquent	58.3		%	14.7	%	20.1	%	4.5	%	2.4	%	100.0	%


(1)	Includes $2.9 million of acquired loans considered accruing.

Table of Contents

The following table provides geographical information related to the loan portfolio by portfolio segment and class of financing receivable at December 31, 2015 (in thousands):



	Pennsylvania			New York		Ohio		Maryland		Other		Total
Loans receivable:
Personal Banking:
Residential mortgage loans	$	2,310,860		171,790		70,209		129,129		58,904		2,740,892
Home equity loans	879,447			124,291		154,003		24,458		4,907		1,187,106
Consumer loans	260,170			12,244		102,034		1,870		143,971		520,289
Total Personal Banking	3,450,477			308,325		326,246		155,457		207,782		4,448,287

Commercial Banking:
Commercial real estate loans	965,090			749,435		453,180		122,775		60,954		2,351,434
Commercial loans	284,611			53,420		68,327		5,662		10,380		422,400
Total Commercial Banking	1,249,701			802,855		521,507		128,437		71,334		2,773,834

Total	$	4,700,178		1,111,180		847,753		283,894		279,116		7,222,121

Percentage of total loans receivable	65.1		%	15.4	%	11.7	%	3.9	%	3.9	%	100.0	%

The following table provides delinquency information related to the loan portfolio by portfolio segment and class of financing receivable at December 31, 2015 (in thousands):



	Pennsylvania			New York		Ohio		Maryland		Other		Total
Loans 90 or more days delinquent: (1)
Personal Banking:
Residential mortgage loans	$	10,998		1,801		1,308		1,341		902		16,350
Home equity loans	3,204			639		1,294		975		—		6,112
Consumer loans	2,780			90		24		—		32		2,926
Total Personal Banking	16,982			2,530		2,626		2,316		934		25,388

Commercial Banking:
Commercial real estate loans	10,439			3,012		4,823		251		506		19,031
Commercial loans	1,582			859		158		—		—		2,599
Total Commercial Banking	12,021			3,871		4,981		251		506		21,630

Total	$	29,003		6,401		7,607		2,567		1,440		47,018

Percentage of total loans 90 or more days delinquent	61.6		%	13.6	%	16.2	%	5.5	%	3.1	%	100.0	%


(1)	Includes $3.8 million of acquired loans considered accruing.

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The following table provides information related to the composition of originated impaired loans by portfolio segment and by class of financing receivable at and for the six months ended June 30, 2016 (in thousands):



	Nonaccrual loans 90 or more days delinquent		Nonaccrual loans less than 90 days delinquent	Loans less than 90 days delinquent reviewed for impairment	TDRs less than 90 days delinquent not included elsewhere	Total impaired loans	Average recorded investment in impaired loans	Interest income recognized on impaired loans
Personal Banking:
Residential mortgage loans	$	14,829	3,541	—	6,165	24,535	24,219	549
Home equity loans	5,226		1,507	—	1,737	8,470	9,096	237
Consumer loans	2,374		529	—	—	2,903	3,065	73
Total Personal Banking	22,429		5,577	—	7,902	35,908	36,380	859

Commercial Banking:
Commercial real estate loans	12,960		24,120	4,443	13,982	55,505	69,232	1,647
Commercial loans	4,566		6,226	2,843	3,942	17,577	15,896	465
Total Commercial Banking	17,526		30,346	7,286	17,924	73,082	85,128	2,112

Total	$	39,955	35,923	7,286	25,826	108,990	121,508	2,971

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, 2015 (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	$	15,810	3,962	—	5,086	24,858	24,554	944
Home equity loans	5,650		1,872	—	1,847	9,369	9,644	497
Consumer loans	2,900		552	—	—	3,452	2,977	101
Total Personal Banking	24,360		6,386	—	6,933	37,679	37,175	1,542

Commercial Banking:
Commercial real estate loans	16,449		16,972	16,121	16,467	66,009	77,166	3,226
Commercial loans	2,459		5,036	2,014	4,654	14,163	16,187	694
Total Commercial Banking	18,908		22,008	18,135	21,121	80,172	93,353	3,920

Total	$	43,268	28,394	18,135	28,054	117,851	130,528	5,462

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The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at June 30, 2016 (in thousands):



	Loans collectively evaluated for impairment		Loans individually evaluated for impairment	Loans individually evaluated for impairment for which there is a related impairment reserve	Related impairment reserve	Loans individually evaluated for impairment for which there is no related reserve
Personal Banking:
Residential mortgage loans	$	2,749,415	8,183	8,183	251	—
Home equity loans	1,159,969		2,205	2,205	405	—
Consumer loans	546,469		81	81	18	—
Total Personal Banking	4,455,853		10,469	10,469	674	—

Commercial Banking:
Commercial real estate loans	2,329,716		33,660	33,284	2,402	376
Commercial loans	453,046		12,177	12,177	1,159	—
Total Commercial Banking	2,782,762		45,837	45,461	3,561	376

Total	$	7,238,615	56,306	55,930	4,235	376

The following table provides information related to the evaluation of impaired loans by portfolio segment and by class of financing receivable at December 31, 2015 (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	$	2,733,741	7,151	7,151	1,189	—
Home equity loans	1,184,808		2,298	2,298	605	—
Consumer loans	520,159		130	130	50	—
Total Personal Banking	4,438,708		9,579	9,579	1,844	—

Commercial Banking:
Commercial real estate loans	2,297,599		53,835	35,937	2,675	17,898
Commercial loans	411,342		11,058	7,673	489	3,385
Total Commercial Banking	2,708,941		64,893	43,610	3,164	21,283

Total	$	7,147,649	74,472	53,189	5,008	21,283

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

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

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

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



	For the quarters ended June 30,
	2016				2015
	Number of contracts	Amount			Number of contracts	Amount
Beginning TDR balance:	227	$	48,248		242	$	60,645
New TDRs	9	1,662			4	386
Re-modified TDRs	3	863			1	45
Net paydowns		(1,421		)		(3,617		)
Charge-offs:
Residential mortgage loans	—	—			—	—
Home equity loans	—	—			1	(68		)
Commercial real estate loans	—	—			1	(9		)
Commercial loans	—	—			—	—
Paid-off loans:
Residential mortgage loans	—	—			1	(53		)
Home equity loans	1	(1		)	—	—
Commercial real estate loans	4	(41		)	6	(926		)
Commercial loans	1	(197		)	6	(219		)
Ending TDR balance:	230	$	49,113		231	$	56,184

Accruing TDRs		$	31,015			$	40,741
Non-accrual TDRs		18,098				15,443

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



	For the six months ended June 30,
	2016				2015
	Number of contracts				Number of contracts
Beginning TDR balance:	227	$	51,115		248	$	61,788
New TDRs	18	5,011			6	498
Re-modified TDRs	4	1,063			2	130
Net paydowns		(2,904		)		(4,440		)
Charge-offs:
Residential mortgage loans	—	—			—	—
Home equity loans	—	—			3	(99		)
Commercial real estate loans	—	—			2	(23		)
Commercial loans	1	(43		)	2	(387		)
Paid-off loans:
Residential mortgage loans	—	—			1	(53		)
Home equity loans	3	(232		)	1	(6		)
Commercial real estate loans	8	(4,562		)	8	(1,005		)
Commercial loans	3	(335		)	6	(219		)
Ending TDR balance:	230	$	49,113		231	$	56,184

Accruing TDRs		$	31,015			$	40,741
Non-accrual TDRs		18,098				15,443

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



	For the quarter ended June 30, 2016					For the six months ended June 30, 2016
	Number of contracts	Recorded investment at the time of modification		Current recorded investment	Current allowance	Number of contracts	Recorded investment at the time of modification		Current recorded investment	Current allowance
Troubled debt restructurings:
Personal Banking:
Residential mortgage loans	2	$	526	525	17	5	$	1,033	1,028	49
Home equity loans	4	224		191	47	5	280		246	60
Consumer loans	—	—		—	—	—	—		—	—
Total Personal Banking	6	750		716	64	10	1,313		1,274	109

Commercial Banking:
Commercial real estate loans	2	812		807	31	4	2,096		2,076	297
Commercial loans	4	963		963	481	8	2,665		1,751	575
Total Commercial Banking	6	1,775		1,770	512	12	4,761		3,827	872

Total	12	$	2,525	2,486	576	22	$	6,074	5,101	981

At June 30, 2016, no TDRs modified within the previous twelve months have subsequently defaulted.

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	For the quarter ended June 30, 2015					For the six months ended June 30, 2015
	Number of contracts	Recorded investment at the time of modification		Current recorded investment	Current allowance	Number of contracts	Recorded investment at the time of modification		Current recorded investment	Current allowance
Troubled debt restructurings:
Personal Banking:
Residential mortgage loans	2	$	120	119	—	4	$	232	230	1
Home equity loans	1	2		2	—	2	87		85	17
Consumer loans	—	—		—	—	—	—		—	—
Total Personal Banking	3	122		121	—	6	319		315	18

Commercial Banking:
Commercial real estate loans	1	12		12	1	1	12		12	1
Commercial loans	1	297		294	29	1	297		294	29
Total Commercial Banking	2	309		306	30	2	309		306	30

Total	5	$	431	427	30	8	$	628	621	48

Troubled debt restructurings modified within the previous twelve months that have subsequently defaulted:
Personal Banking:
Residential mortgage loans	1	$	251	250	—	1	$	251	250	—
Home equity loans	1	23		21	—	1	23		21	—
Consumer loans	—	—		—	—	—	—		—	—
Total Personal Banking	2	274		271	—	2	274		271	—

Commercial Banking:
Commercial real estate loans	—	—		—	—	—	—		—	—
Commercial loans	—	—		—	—	1	50		—	—
Total Commercial Banking	—	—		—	—	1	50		—	—

Total	2	$	274	271	—	3	$	324	271	—

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



		Type of modification
	Number of contracts	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	2	$	—	—	525	—	525
Home equity loans	4	68		—	—	123	191
Consumer loans	—	—		—	—	—	—
Total Personal Banking	6	68		—	525	123	716

Commercial Banking:
Commercial real estate loans	2	—		429	378	—	807
Commercial loans	4	—		963	—	—	963
Total Commercial Banking	6	—		1,392	378	—	1,770

Total	12	$	68	1,392	903	123	2,486

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The following table provides information as of June 30, 2015 for troubled debt restructurings (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the quarter ended June 30, 2015 (dollars in thousands):



		Type of modification
	Number of contracts	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	2	$	74	—	—	45	119
Home equity loans	1	—		—	2	—	2
Consumer loans	—	—		—	—	—	—
Total Personal Banking	3	74		—	2	45	121

Commercial Banking:
Commercial real estate loans	1	—		—	12	—	12
Commercial loans	1	—		—	294	—	294
Total Commercial Banking	2	—		—	306	—	306

Total	5	$	74	—	308	45	427

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



		Type of modification
	Number of contracts	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	5	$	363	—	617	48	1,028
Home equity loans	5	123		—	—	123	246
Other consumer loans	—	—		—	—	—	—
Total Personal Banking	10	486		—	617	171	1,274

Commercial Banking:
Commercial real estate loans	4	—		429	378	1,269	2,076
Commercial loans	8	—		—	963	788	1,751
Total Commercial Banking	12	—		429	1,341	2,057	3,827

Total	22	$	486	429	1,958	2,228	5,101

Table of Contents

The following table provides information as of June 30, 2015 for troubled debt restructurings (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, 2015 (dollars in thousands):



		Type of modification
	Number of contracts	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	4	$	74	—	111	45	230
Home equity loans	2	83		—	2	—	85
Other consumer loans	—	—		—	—	—	—
Total Personal Banking	6	157		—	113	45	315

Commercial Banking:
Commercial real estate loans	1	—		—	12	—	12
Commercial loans	1	—		—	294	—	294
Total Commercial Banking	2	—		—	306	—	306

Total	8	$	157	—	419	45	621

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



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

Commercial Banking:
Commercial real estate loans	—	—		—	—	—	—
Commercial loans	3	—		863	—	—	863
Total Commercial Banking	3	—		863	—	—	863

Total	3	$	—	863	—	—	863



	Number of	Type of re-modification
	re-modified TDRs	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	1	$	—	—	—	45	45
Home equity loans	—	—		—	—	—	—
Consumer loans	—	—		—	—	—	—
Total Personal Banking	1	—		—	—	45	45

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

Total	1	$	—	—	—	45	45

Table of Contents

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



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

Commercial Banking:
Commercial real estate loans	1	—		—	—	191	191
Commercial loans	3	—		863	—	—	863
Total Commercial Banking	4	—		863	—	191	1,054

Total	4	$	—	863	—	191	1,054



	Number of	Type of re-modification
	re-modified TDRs	Rate		Payment	Maturity date	Other	Total
Personal Banking:
Residential mortgage loans	1	$	—	—	—	45	45
Home equity loans	1	83		—	—	—	83
Other consumer loans	—	—		—	—	—	—
Total Personal Banking	2	83		—	—	45	128

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

Total	2	$	83	—	—	45	128

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The following table provides information related to loan payment delinquencies at June 30, 2016 (in thousands):



	30-59 Days delinquent		60-89 Days delinquent	90 Days or greater delinquent	Total delinquency	Current	Total loans receivable	90 Days or greater delinquent and accruing (1)
Originated loans:
Personal Banking:
Residential mortgage loans	$	2,468	5,360	14,492	22,320	2,692,974	2,715,294	—
Home equity loans	4,617		1,291	4,545	10,453	1,029,004	1,039,457	—
Consumer loans	6,032		2,068	2,224	10,324	377,789	388,113	—
Total Personal Banking	13,117		8,719	21,261	43,097	4,099,767	4,142,864	—

Commercial Banking:
Commercial real estate loans	3,824		5,623	10,018	19,465	1,960,298	1,979,763	—
Commercial loans	402		2,076	4,566	7,044	409,460	416,504	—
Total Commercial Banking	4,226		7,699	14,584	26,509	2,369,758	2,396,267	—
Total originated loans	17,343		16,418	35,845	69,606	6,469,525	6,539,131	—

Acquired loans:
Personal Banking:
Residential mortgage loans	885		273	554	1,712	40,592	42,304	217
Home equity loans	371		144	877	1,392	121,325	122,717	196
Consumer loans	693		179	175	1,047	157,390	158,437	25
Total Personal Banking	1,949		596	1,606	4,151	319,307	323,458	438

Commercial Banking:
Commercial real estate loans	1,004		3,142	5,226	9,372	374,241	383,613	2,284
Commercial loans	131		353	143	627	48,092	48,719	143
Total Commercial Banking	1,135		3,495	5,369	9,999	422,333	432,332	2,427
Total acquired loans	3,084		4,091	6,975	14,150	741,640	755,790	2,865

Total loans	$	20,427	20,509	42,820	83,756	7,211,165	7,294,921	2,865


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

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The following table provides information related to loan payment delinquencies at December 31, 2015 (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	$	25,503	7,541	15,564	48,608	2,646,568	2,695,176	—
Home equity loans	4,870		1,836	5,251	11,957	1,043,950	1,055,907	—
Consumer loans	6,092		2,340	2,857	11,289	301,085	312,374	—
Total Personal Banking	36,465		11,717	23,672	71,854	3,991,603	4,063,457	—

Commercial Banking:
Commercial real estate loans	22,212		6,875	14,942	44,029	1,891,128	1,935,157	—
Commercial loans	1,703		598	2,449	4,750	356,658	361,408	—
Total Commercial Banking	23,915		7,473	17,391	48,779	2,247,786	2,296,565	—
Total originated loan	60,380		19,190	41,063	120,633	6,239,389	6,360,022	—

Acquired loans:
Personal Banking:
Residential mortgage loans	440		249	786	1,475	44,241	45,716	540
Home equity loans	936		642	861	2,439	128,760	131,199	462
Consumer loans	1,009		181	69	1,259	206,656	207,915	26
Total Personal Banking	2,385		1,072	1,716	5,173	379,657	384,830	1,028

Commercial Banking:
Commercial real estate loans	2,665		1,353	4,089	8,107	408,170	416,277	2,582
Commercial loans	1,165		—	150	1,315	59,677	60,992	140
Total Commercial Banking	3,830		1,353	4,239	9,422	467,847	477,269	2,722
Total acquired loan	6,215		2,425	5,955	14,595	847,504	862,099	3,750

Total	$	66,595	21,615	47,018	135,228	7,086,893	7,222,121	3,750

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

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

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

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

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jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.

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

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

The following table sets forth information about credit quality indicators updated during the quarter ended June 30, 2016 (in thousands):



	Pass		Special mention	Substandard	Doubtful	Loss	Total loans receivable
Originated loans:
Personal Banking:
Residential mortgage loans	$	2,700,637	—	14,657	—	—	2,715,294
Home equity loans	1,032,759		—	6,698	—	—	1,039,457
Consumer loans	386,208		—	1,905	—	—	388,113
Total Personal Banking	4,119,604		—	23,260	—	—	4,142,864

Commercial Banking:
Commercial real estate loans	1,813,712		56,459	109,578	14	—	1,979,763
Commercial loans	361,002		14,725	37,713	3,064	—	416,504
Total Commercial Banking	2,174,714		71,184	147,291	3,078	—	2,396,267
Total originated loans	6,294,318		71,184	170,551	3,078	—	6,539,131

Acquired loans:
Personal Banking:
Residential mortgage loans	40,464		—	1,840	—	—	42,304
Home equity loans	120,251		—	2,466	—	—	122,717
Consumer loans	157,966		—	471	—	—	158,437
Total Personal Banking	318,681		—	4,777	—	—	323,458

Commercial Banking:
Commercial real estate loans	356,871		6,892	19,850	—	—	383,613
Commercial loans	47,176		710	833	—	—	48,719
Total Commercial Banking	404,047		7,602	20,683	—	—	432,332
Total acquired loans	722,728		7,602	25,460	—	—	755,790

Total loans	$	7,017,046	78,786	196,011	3,078	—	7,294,921

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The following table sets forth information about credit quality indicators, which were updated during the year ended December 31, 2015 (in thousands):



	Pass		Special mention	Substandard	Doubtful	Loss	Total loans receivable
Originated loans:
Personal Banking:
Residential mortgage loans	$	2,680,562	—	13,274	—	1,340	2,695,176
Home equity loans	1,048,397		—	7,510	—	—	1,055,907
Consumer loans	309,900		—	2,474	—	—	312,374
Total Personal Banking	4,038,859		—	23,258	—	1,340	4,063,457

Commercial Banking:
Commercial real estate loans	1,778,140		46,518	110,384	115	—	1,935,157
Commercial loans	299,455		23,023	37,820	1,110	—	361,408
Total Commercial Banking	2,077,595		69,541	148,204	1,225	—	2,296,565
Total originated loans	6,116,454		69,541	171,462	1,225	1,340	6,360,022

Acquired loans:
Personal Banking:
Residential mortgage loans	44,930		—	786	—	—	45,716
Home equity loans	130,338		—	861	—	—	131,199
Consumer loans	207,846		—	69	—	—	207,915
Total Personal Banking	383,114		—	1,716	—	—	384,830

Commercial Banking:
Commercial real estate loans	392,811		6,872	16,594	—	—	416,277
Commercial loans	59,948		707	337	—	—	60,992
Total Commercial Banking	452,759		7,579	16,931	—	—	477,269
Total acquired loans	835,873		7,579	18,647	—	—	862,099

Total	$	6,952,327	77,120	190,109	1,225	1,340	7,222,121


(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, 2016			December 31, 2015
Amortizable intangible assets:
Core deposit intangibles — gross	$	37,953		30,578
Acquisitions	—			7,375
Less: accumulated amortization	(32,114		)	(31,192	)
Core deposit intangibles — net	5,839			6,761
Customer and Contract intangible assets — gross	8,496			8,234
Acquisitions	498			262
Less: accumulated amortization	(6,738		)	(6,275	)
Customer and Contract intangible assets — net	$	2,256		2,221

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The following table shows the actual aggregate amortization expense for the quarters ended June 30, 2016 and 2015, 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, 2016	$	710
For the quarter ended June 30, 2015	269
For the six months ended June 30, 2016	1,385
For the six months ended June 30, 2015	537
For the year ending December 31, 2016	2,716
For the year ending December 31, 2017	2,224
For the year ending December 31, 2018	1,762
For the year ending December 31, 2019	1,300
For the year ending December 31, 2020	837
For the year ending December 31, 2021	462

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



	Community Banking		Consumer Finance	Total
Balance at December 31, 2014	$	173,710	1,613	175,323
Goodwill acquired	86,413		—	86,413
Impairment losses	—		—	—
Balance at December 31, 2015	260,123		1,613	261,736
Goodwill acquired	404		—	404
Impairment losses	—		—	—
Balance at June 30, 2016	$	260,527	1,613	262,140

We are in the process of performing our annual goodwill impairment test as of June 30, 2016 and do not anticipate that goodwill will be impaired. See Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2015 Annual Report on Form 10-K for a description of our testing procedures.


(6)	Guarantees

We issue standby letters of credit in the normal course of business. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. We are required to perform under a standby letter of credit when drawn upon by the guaranteed third party in the case of nonperformance by our customer. The credit risk associated with standby letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal loan underwriting procedures. Collateral may be obtained based on management’s credit assessment of the customer. At June 30, 2016, the maximum potential amount of future payments we could be required to make under these standby letters of credit was $33.4 million, of which $24.7 million is fully collateralized. At June 30, 2016, we had a liability, which represents deferred income, of $301,000 related to the standby letters of credit. There are no recourse provisions that would enable us to recover any amounts from third parties.


(7)	Earnings Per Share

Basic earnings per common share (EPS) is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding for the period, without considering any dilutive items. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. All stock options outstanding during the quarter ended June 30, 2016 were included in the computation of diluted earnings per share because the options’ exercise price was less than the average market price of the common shares of $14.15. Stock options to purchase 1,711,080 shares of common stock with a weighted average exercise price of $12.64 per share were outstanding during the quarter ended June 30, 2015 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares of $12.32. Stock options to purchase 723,459 shares of common stock with a weighted average exercise price of $14.15 per share were outstanding during the six months ended June 30, 2016 but were

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not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares of $13.43. Stock options to purchase 4,344,225 shares of common stock with a weighted average exercise price of $12.42 per share were outstanding during the six months ended June 30, 2015 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares of $12.11.

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



	Quarter ended June 30,				Six months ended June 30,
	2016			2015	2016	2015
Reported net income/ (loss)	$	(7,008	)	15,305	10,976	31,475

Weighted average common shares outstanding	99,177,609			91,538,172	99,033,676	91,585,766
Dilutive potential shares due to effect of stock options	1,065,833			459,833	778,049	364,450
Total weighted average common shares and dilutive potential shares	100,243,442			91,998,005	99,811,725	91,950,216

Basic earnings/ (loss) per share:	$	(0.07	)	0.17	0.11	0.34

Diluted earnings/ (loss) per share:	$	(0.07	)	0.17	0.11	0.34


(8)	Pension and Other Post-retirement Benefits

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

Components of net periodic benefit cost



	Quarter ended June 30,
	Pension benefits					Other post-retirement benefits
	2016			2015		2016	2015
Service cost	$	1,374		1,430		—	—
Interest cost	1,695			1,531		18	15
Expected return on plan assets	(2,475		)	(2,593	)	—	—
Amortization of prior service cost	(580		)	(581	)	—	—
Amortization of the net loss	928			925		22	15
Net periodic (benefit)/ cost	$	942		712		40	30



	Six months ended June 30,
	Pension benefits					Other post-retirement benefits
	2016			2015		2016	2015
Service cost	$	2,748		2,860		—	—
Interest cost	3,391			3,062		35	30
Expected return on plan assets	(4,949		)	(5,186	)	—	—
Amortization of prior service cost	(1,161		)	(1,162	)	—	—
Amortization of the net loss	1,855			1,850		45	30
Net periodic (benefit)/ cost	$	1,884		1,424		80	60

We anticipate making a contribution to our defined benefit pension plan of $4.0 million to $8.0 million during the year ending December 31, 2016.

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(9)	Disclosures About Fair Value of Financial Instruments

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

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

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


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


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


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


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


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


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

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

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

Marketable Securities

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

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

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

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

Federal Home Loan Bank (“FHLB”) Stock

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

Deposit Liabilities

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

Borrowed Funds

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

Junior Subordinated Debentures

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

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

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

Off-Balance Sheet Financial Instruments

These financial instruments generally are not sold or traded, and estimated fair values are not readily available. However, the fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. Commitments to extend credit are generally short-term in nature and, if drawn upon, are issued under current market terms. At June 30, 2016 and December 31, 2015, 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, 2016 (in thousands):



	Carrying amount		Estimated fair value	Level 1	Level 2	Level 3
Financial assets:
Cash and cash equivalents	$	311,431	311,431	311,431	—	—
Securities available-for-sale	705,297		705,297	3,723	692,855	8,719
Securities held-to-maturity	25,144		25,978	—	25,978	—
Loans receivable, net	7,234,140		7,634,998	39,942	—	7,595,056
Accrued interest receivable	20,713		20,713	20,713	—	—
FHLB Stock	40,321		40,321	—	—	—
Total financial assets	$	8,337,046	8,738,738	375,809	718,833	7,603,775

Financial liabilities:
Savings and checking deposits	$	5,039,713	5,039,713	5,039,713	—	—
Time deposits	1,596,288		1,613,089	—	—	1,613,089
Borrowed funds	959,969		959,838	139,652	—	820,186
Junior subordinated debentures	111,213		114,577	—	—	114,577
Cash flow hedges - swaps	4,236		4,236	—	4,236	—
Accrued interest payable	737		737	737	—	—
Total financial liabilities	$	7,712,156	7,732,190	5,180,102	4,236	2,547,852

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, 2015 (in thousands):



	Carrying amount		Estimated fair value	Level 1	Level 2	Level 3
Financial assets:
Cash and cash equivalents	$	167,408	167,408	167,408	—	—
Securities available-for-sale	874,405		874,405	1,894	863,556	8,955
Securities held-to-maturity	31,689		32,552	—	32,552	—
Loans receivable, net	7,159,449		7,482,431	—	—	7,482,431
Accrued interest receivable	21,072		21,072	21,072	—	—
FHLB Stock	40,903		40,903	—	—	—
Total financial assets	$	8,294,926	8,618,771	190,374	896,108	7,491,386

Financial liabilities:
Savings and checking accounts	$	4,917,863	4,917,863	4,917,863	—	—
Time deposits	1,694,718		1,710,388	—	—	1,710,388
Borrowed funds	975,007		998,527	118,664	—	879,863
Junior subordinated debentures	111,213		115,268	—	—	115,268
Cash flow hedges - swaps	4,276		4,276	—	4,276	—
Accrued interest payable	1,993		1,993	1,993	—	—
Total financial liabilities	$	7,705,070	7,748,315	5,038,520	4,276	2,705,519

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, 2016 and December 31, 2015. There were no transfers of financial instruments between Level 1 and Level 2 during the nine months ended June 30, 2016.

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The following table represents assets and liabilities measured at fair value on a recurring basis at June 30, 2016 (in thousands):



	Level 1		Level 2		Level 3	Total assets at fair value
Equity securities	$	3,723	—		—	3,723

Debt securities:
U.S. government and agencies	—		9		—	9
Government sponsored enterprises	—		179,893		—	179,893
States and political subdivisions	—		77,343		—	77,343
Corporate	—		8,134		8,719	16,853
Total debt securities	—		265,379		8,719	274,098

Residential mortgage-backed securities:
GNMA	—		24,935		—	24,935
FNMA	—		88,878		—	88,878
FHLMC	—		44,528		—	44,528
Non-agency	—		594		—	594
Collateralized mortgage obligations:
GNMA	—		8,561		—	8,561
FNMA	—		110,365		—	110,365
FHLMC	—		140,047		—	140,047
SBA	—		7,365		—	7,365
Non-agency	—		2,203		—	2,203
Total mortgage-backed securities	—		427,476		—	427,476

Interest rate swaps	—		(4,236	)	—	(4,236	)

Total assets and liabilities	$	3,723	688,619		8,719	701,061

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The following table represents assets and liabilities measured at fair value on a recurring basis at December 31, 2015 (in thousands):



	Level 1		Level 2		Level 3	Total assets at fair value
Equity securities	$	1,894	—		—	1,894

Debt securities:
U.S. government and agencies	—		11		—	11
Government sponsored enterprises	—		294,440		—	294,440
States and political subdivisions	—		82,868		—	82,868
Corporate	—		7,520		8,955	16,475
Total debt securities	—		384,839		8,955	393,794

Residential mortgage-backed securities:
GNMA	—		27,082		—	27,082
FNMA	—		99,170		—	99,170
FHLMC	—		50,369		—	50,369
Non-agency	—		606		—	606
Collateralized mortgage obligations:
GNMA	—		10,669		—	10,669
FNMA	—		122,528		—	122,528
FHLMC	—		157,378		—	157,378
SBA	—		8,166		—	8,166
Non-agency	—		2,749		—	2,749
Total mortgage-backed securities	—		478,717		—	478,717

Interest rate swaps	—		(4,276	)	—	(4,276	)

Total assets and liabilities	$	1,894	859,280		8,955	870,129

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



	Quarter ended				Six months ended
	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Beginning balance	$	8,590	10,306		8,955		10,597

Total net realized investment gains/ (losses) and net change in unrealized appreciation/ (depreciation):
Included in net income as OTTI	—		—		—		—
Included in other comprehensive income	129		(1,083	)	(236	)	(1,374	)

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

Ending balance	$	8,719	9,223		8,719		9,223

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Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment, mortgage servicing rights, and real estate owned. The following table represents the fair value measurement for nonrecurring assets at June 30, 2016 (in thousands):



	Level 1		Level 2	Level 3	Total assets at fair value
Loans measured for impairment	$	—	—	51,695	51,695

Mortgage servicing rights	$	—	—	40	40

Real estate owned	—		—	4,950	4,950

Total assets	$	—	—	56,685	56,685

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans measured for impairment and real estate owned. The following table represents the fair value measurement for nonrecurring assets at December 31, 2015 (in thousands):



	Level 1		Level 2	Level 3	Total assets at fair value
Loans measured for impairment	$	—	—	48,181	48,181

Real estate owned	—		—	8,725	8,725

Total assets	$	—	—	56,906	56,906

Impaired loans — A loan is considered to be impaired as described in Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2015 Annual Report on Form 10-K. We classify loans individually evaluated for impairment that require a specific reserve as nonrecurring Level 3.

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

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

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The table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at June 30, 2016 (dollar amounts in thousands):



	Fair value		Valuation techniques	Significant unobservable inputs	Range (weighted average)
Debt securities	$	8,719	Discounted cash	Discount margin	0.4% to 2.1% (0.7%)
			flow	Default rates	1.0%
				Prepayment speeds	1.0 annually

Loans measured for impairment	51,695		Appraisal value (1)	Estimated cost to sell	10.0%
			Discounted cash flow	Discount rate	3.8% to 20.0% (11.0%)

Mortgage servicing rights	40		Discounted cash	Annual service cost	$80
			flow	Prepayment rates	7.3% to 8.4% (7.9%)
				Expected life (months)	64.2 to 67.3 (65.5)
				Option adjusted spread	800 basis points
				Forward yield curve	0.5% to 1.7% (1.0%)

Real estate owned	4,950		Appraisal value (1)	Estimated cost to sell	10.0%


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

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


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

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

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

As a result of the LNB acquisition we acquired two statutory business trusts: LNB Trust I and LNB Trust II; both are Delaware statutory business trusts. The outstanding stock issued by LNB Trust I was redeemed on December 15, 2015. At June 30, 2016, LNB Trust II had 7,875 cumulative trust preferred securities outstanding (liquidation value of $1,000 per preferred security or $7,875,000) with a stated maturity of June 15, 2037. These securities carry a fixed interest rate of 6.64% through June 15, 2017,

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then becomes a floating interest rate, which is reset quarterly, equal to three-month LIBOR plus 1.48%. LNB Trust II invested the proceeds of the offerings in junior subordinated deferrable interest debentures acquired by the Company. The structure of these debentures mirrors the structure of the trust-preferred securities. LNB Trust II holds $8,119,000 of junior subordinated debentures. The subordinated debentures are the sole assets of the Trusts. Cash distributions on the trust securities are made on a quarterly basis to the extent interest on the debentures is received by the Trusts.

We are currently a counterparty to two interest rate swap agreements (swaps), designating the swaps as cash flow hedges. The swaps are intended to protect against the variability of cash flows associated with Trust III and Trust IV. The first swap modifies the re-pricing characteristics of Trust III, wherein for a ten year period expiring in September 2018, the Company receives interest of three-month LIBOR from a counterparty and pays a fixed rate of 4.61% to the same counterparty calculated on a notional amount of $25.0 million. The other swap modifies the re-pricing characteristics of Trust IV, wherein for a ten year period expiring in December 2018, the Company receives interest of three-month LIBOR from a counterparty and pays a fixed rate of 4.09% to the same counterparty calculated on a notional amount of $25.0 million. The swap agreements were entered into with a counterparty that met our credit standards and the agreements contain collateral provisions protecting the at-risk party. We believe that the credit risk inherent in the contracts is not significant. At June 30, 2016, $4.7 million of cash was pledged as collateral to the counterparty.

At June 30, 2016, the fair value of the swap agreements was $(4.2) million and was the amount we would have expected to pay if the contracts were terminated. There was no material hedge ineffectiveness for these swaps.

The following table shows liability derivatives, included in other liabilities, at June 30, 2016 and December 31, 2015 (in thousands):


(11)	Legal Proceedings

We establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated. As of June 30, 2016 we have not accrued for any legal proceedings based on our analysis of currently available information which is subject to significant judgment and a variety of assumptions and uncertainties. Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances. Due to the inherent subjectivity of assessments and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate loss to us from legal proceedings.

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

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



	For the quarter ended June 30, 2016
	Unrealized gains and (losses) on securities available- for-sale		Change in fair value of interest rate swaps		Change in defined benefit pension plans		Total
Balance as of March 31, 2016	$	6,817	(2,919	)	(24,856	)	(20,958	)
Other comprehensive income before reclassification adjustments	1,027		166		—		1,193
Amounts reclassified from accumulated other comprehensive income (1), (2)	22		—		226		248

Net other comprehensive income	1,049		166		226		1,441

Balance as of June 30, 2016	$	7,866	(2,753	)	(24,630	)	(19,517	)



	For the quarter ended June 30, 2015
	Unrealized gains and (losses) on securities available- for-sale			Change in fair value of interest rate swaps		Change in defined benefit pension plans		Total
Balance as of March 31, 2015	$	6,345		(4,034	)	(23,534	)	(21,223	)

Other comprehensive income before reclassification adjustments	(1,788		)	488		—		(1,300	)
Amounts reclassified from accumulated other comprehensive income (3), (4)	(279		)	—		219		(60	)

Net other comprehensive income/ (loss)	(2,067		)	488		219		(1,360	)

Balance as of June 30, 2015	$	4,278		(3,546	)	(23,315	)	(22,583	)


(1)	Consists of realized loss on securities (gain on sales of investments, net) of $(36), net of tax (income tax expense) of $14.


(2)	Consists of amortization of prior service cost (compensation and employee benefits) of $580 and amortization of net loss (compensation and employee benefits) of $(950), net of tax (income tax expense) of $144. See note 8.


(3)	Consists of realized gains on securities (gain on sales of investments, net) of $458, net of tax (income tax expense) of $(179).


(4)	Consists of amortization of prior service cost (compensation and employee benefits) of $581 and amortization of net loss (compensation and employee benefits) of $(940), net of tax (income tax expense) of $140. See note 8.

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



	For the six months ended June 30, 2016
	Unrealized gains and (losses) on securities available- for-sale		Change in fair value of interest rate swaps		Change in defined benefit pension plans		Total
Balance as of December 31, 2015	$	3,325	(2,779	)	(25,081	)	(24,535	)
Other comprehensive income before reclassification adjustments	4,502		26		—		4,528
Amounts reclassified from accumulated other comprehensive income (1), (2)	39		—		451		490

Net other comprehensive income	4,541		26		451		5,018

Balance as of June 30, 2016	$	7,866	(2,753	)	(24,630	)	(19,517	)



	For the six months ended June 30, 2015
	Unrealized gains and (losses) on securities available- for-sale			Change in fair value of interest rate swaps		Change in defined benefit pension plans		Total
Balance as of December 31, 2014	$	3,461		(4,078	)	(23,753	)	(24,370	)

Other comprehensive income before reclassification adjustments	1,164			532		—		1,696
Amounts reclassified from accumulated other comprehensive income (3), (4)	(347		)	—		438		91

Net other comprehensive income	817			532		438		1,787

Balance as of June 30, 2015	$	4,278		(3,546	)	(23,315	)	(22,583	)


(1)	Consists of realized gains on securities (gain on sales of investments, net) of $(64), net of tax (income tax expense) of $25.


(2)	Consists of amortization of prior service cost (compensation and employee benefits) of $1,161 and amortization of net loss (compensation and employee benefits) of $(1,900), net of tax (income tax expense) of $288. See note 8.


(3)	Consists of realized gains on securities (gain on sales of investments, net) of $569, net of tax (income tax expense) of $(222).


(4)	Consists of amortization of prior service cost (compensation and employee benefits) of $1,162 and amortization of net loss (compensation and employee benefits) of $(1,880), net of tax (income tax expense) of $280. See note 8.

(13) Subsequent events

As was previously announced, on April 28, 2016, Northwest signed a definitive agreement to acquire 18 Western New York bank branches with deposits of approximately $1.700 billion from First Niagara Bank N.A., subject to the closing of the KeyCorp/First Niagara Financial Group, Inc. merger. First Niagara Bank N.A., will be a wholly owned subsidiary of KeyCorp at the time of closing. The premium to be paid on the deposits to be transferred is 4.5%. In addition to receiving approximately $1.000 billion in cash from the transaction, Northwest will acquire approximately $511.0 million of performing business and personal loans.

The First Niagara branches are being sold in connection with First Niagara Financial Group, Inc pending acquisition by KeyCorp. The divestitures have been approved by the United States Department of Justice and the Federal Reserve Board following a customary anti-trust review. The transaction has received approvals from each party’s board of directors and the necessary regulatory approval and remains subject to other customary closing conditions. Pending such completion, the transaction is expected to close on September 9, 2016.

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

Forward-Looking Statements:

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

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


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


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


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


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


•	adverse changes in the securities markets;


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


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


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


•	changes in consumer spending, borrowing and savings habits;


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


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


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


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


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


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


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

Overview of Critical Accounting Policies Involving Estimates

Please refer to Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2015 Annual Report on Form 10-K.

Executive Summary and Comparison of Financial Condition

Total assets at June 30, 2016 were $8.964 billion, an increase of $12.1 million, or 0.1%, from $8.952 billion at December 31, 2015. This increase in assets was due primarily to increases in interest-earning deposits in other financial institutions of $148.6 million, or 199.4%, and net loans receivable of $74.7 million, or 1.0%. Partially offsetting these increases was a $175.7 million, or 19.4%, decrease in marketable securities.

Total loans receivable increased by $72.8 million, or 1.0%, to $7.295 billion at June 30, 2016, from $7.222 billion at December 31, 2015. Loans funded during the six months ended June 30, 2016, of $1.336 billion exceeded loan maturities, principal repayments and mortgage loan sales of $1.256 billion. Our commercial banking loan portfolio increased by $54.8 million, or 2.0%, to $2.829 billion at June 30, 2016 from $2.774 billion at December 31, 2015, as we continue to emphasize the origination of commercial and commercial real estate loans. Additionally, our personal banking loan portfolio increased by $18.0 million, or

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0.4%, to $4.466 billion at June 30, 2016 from $4.448 billion at December 31, 2015. This increase is primarily attributable to an increase in consumer loans of $26.3 million as a result of the success of our indirect automobile lending division.

Total deposits increased by $23.4 million, or 0.4%, to $6.636 billion at June 30, 2016 from $6.613 billion at December 31, 2015. All deposit types increased with the exception of time deposits. Noninterest-bearing demand deposits increased by $11.8 million, or 1.0%, to $1.189 billion at June 30, 2016 from $1.177 billion at December 31, 2015. Interest-bearing demand deposits increased by $30.5 million, or 2.8%, to $1.111 billion at June 30, 2016 from $1.080 billion at December 31, 2015. Savings deposits increased by $58.9 million, or 4.3%, to $1.445 billion at June 30, 2016 from $1.386 billion at December 31, 2015. Money market demand accounts increased by $20.6 million, or 1.6%, to $1.295 billion at June 30, 2016 from $1.275 billion at December 31, 2015. Partially offsetting these increases was a decrease in time deposits of $98.4 million, or 5.8%, to $1.596 billion at June 30, 2016 from $1.695 billion at December 31, 2015. We believe the increase in more liquid deposit accounts is due primarily to customers’ continued reluctance to lock in time deposits at these historically low rates and our emphasis on attracting low-cost fee-based deposits.

Borrowed funds decreased by $15.0 million, or 1.5%, to $960.0 million at June 30, 2016, from $975.0 million at December 31, 2015. This decrease is due to the repayment and maturity of $750.0 million of FHLB long-term borrowings. These long-term borrowings were refinanced with lower cost short-term borrowings, in anticipation of the pending acquisition of 18 community banking offices from First Niagara, which lead to an increase of $670.0 million and $44.0 million in FHLB short-term and overnight advances, respectively. Also offsetting this decrease was an increase of $20.4 million in collateralized borrowings.

Total shareholders’ equity at June 30, 2016 was $1.155 billion, or $11.28 per share, a decrease of $7.7 million, or 0.7%, from $1.163 billion, or $11.42 per share, at December 31, 2015. This decrease in equity was primarily the result of the payment of cash dividends of $29.9 million and the repurchase of 145,900 shares of common stock for $1.8 million during the six months ended June 30, 2016. Partially offsetting these decreases were net income of $11.0 million and a decrease in accumulated other comprehensive loss of $5.0 million due to an improvement in the net unrealized gain of the investment securities portfolio during the quarter ended June 30, 2016.

Regulatory Capital

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

In July 2013, the FDIC and the other federal regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new Common Equity Tier 1 (“CET1”) minimum capital requirement (4.5% of risk-weighted assets) and increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets). The rule limits an organization’s capital distributions and certain discretionary bonus payments if the organization does not hold a “capital conservation buffer” consisting of 2.5% of CET1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

The final rule became effective for Northwest on January 1, 2015. The capital conservation buffer requirement is being phased in beginning on January 1, 2016 and ending on January 1, 2019, when the full capital conservation buffer requirement will be effective.

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

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	At June 30, 2016
					Minimum capital			Well capitalized
	Actual				requirements (1)			requirements (1)
	Amount		Ratio		Amount	Ratio		Amount	Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc.	$	1,086,090	16.325	%	573,820	8.625	%	706,880	10.625	%
Northwest Bank	1,017,718		15.324	%	572,805	8.625	%	705,629	10.625	%

Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc.	1,025,142		15.409	%	440,760	6.625	%	573,820	8.625	%
Northwest Bank	956,931		14.409	%	439,980	6.625	%	572,805	8.625	%

CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc.	917,267		13.787	%	340,966	5.125	%	474,025	7.125	%
Northwest Bank	956,931		14.409	%	340,362	5.125	%	473,186	7.125	%

Tier 1 capital (leverage) (to average assets)
Northwest Bancshares, Inc.	1,025,142		11.844	%	346,206	4.000	%	432,757	5.000	%
Northwest Bank	956,931		11.045	%	346,571	4.000	%	433,214	5.000	%

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



	At December 31, 2015
					Minimum capital			Well capitalized
	Actual				requirements			requirements
	Amount		Ratio		Amount	Ratio		Amount	Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc.	$	1,102,468	16.63	%	530,257	8.00	%	662,821	10.00	%
Northwest Bank	1,006,230		15.20	%	529,498	8.00	%	661,872	10.00	%

Tier I capital (to risk weighted assets)
Northwest Bancshares, Inc.	1,039,574		15.68	%	397,693	6.00	%	530,257	8.00	%
Northwest Bank	943,554		14.26	%	397,123	6.00	%	529,498	8.00	%

CET1 capital (to risk weighted assets)
Northwest Bancshares, Inc.	931,699		14.06	%	298,269	4.50	%	430,834	6.50	%
Northwest Bank	943,554		14.26	%	297,843	4.50	%	430,217	6.50	%

Tier I capital (leverage) (to average assets)
Northwest Bancshares, Inc.	1,039,574		11.96	%	347,582	4.00	%	434,477	5.00	%
Northwest Bank	943,554		10.87	%	347,063	4.00	%	433,829	5.00	%

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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 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, 2016 was 11.1%. 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, 2016 Northwest had $2.224 billion of additional borrowing capacity available with the FHLB, including $150.0 million on an overnight line of credit, which is fully utilized at June 30, 2016, as well as $117.2 million of borrowing capacity available with the Federal Reserve Bank and $80.0 million with two correspondent banks.

Dividends

We paid $15.0 million and $12.9 million in cash dividends during the quarters ended June 30, 2016 and 2015, respectively. The common stock dividend payout ratio (dividends declared per share divided by net income/ (loss) per share) was (214.3%) and 82.4% for the quarters ended June 30, 2016 and 2015, respectively, on regular dividends of $0.15 per share for the quarter ended June 30, 2016 and on regular dividends of $0.14 per share for the quarter ended June 30, 2015. We paid $29.9 million and $25.9 million in cash dividends during the quarters ended June 30, 2016 and 2015, respectively. The common stock dividend payout ratio (dividends declared per share divided by net income per share) was 272.7% and 82.4% for the quarters ended June 30, 2016 and 2015, respectively, on regular dividends of $0.30 per share for the quarter ended June 30, 2016 and on regular dividends of $0.28 per share for the quarter ended June 30, 2015. On July 20, 2016, the Board of Directors declared a dividend of $0.15 per share payable on August 18, 2016 to shareholders of record as of August 4, 2016. This represents the 87th consecutive quarter we have paid a cash dividend.

Nonperforming Assets

The following table sets forth information with respect to nonperforming assets. Nonaccrual loans are those loans on which the accrual of interest has ceased. Generally, when a loan is 90 days past due, we fully reverse all accrued interest thereon and cease to accrue interest thereafter. Exceptions are made for loans that have contractually matured, are in the process of being modified to extend the maturity date and are otherwise current as to principal and interest, and well secured loans that are in process 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, 2016			December 31, 2015
	(Dollars in thousands)
Nonaccrual loans 90 days or more delinquent:
Residential mortgage loans	$	14,829		$	15,810
Home equity loans	5,226			5,650
Consumer loans	2,374			2,900
Commercial real estate loans	12,960			16,449
Commercial loans	4,566			2,459
Total loans 90 days or more delinquent	$	39,955		$	43,268
Total real estate owned (REO)	4,950			8,725
Total nonaccrual loans 90 days or more delinquent and REO	44,905			51,993
Total nonaccrual loans 90 days or more delinquent to net loans receivable	0.55		%	0.60		%
Total nonaccrual loans 90 days or more delinquent and REO to total assets	0.50		%	0.58		%
Nonperforming assets:
Nonaccrual loans - loans 90 days or more delinquent	39,955			43,268
Nonaccrual loans - loans less than 90 days delinquent	35,923			28,394
Loans 90 days or more past maturity and still accruing	472			1,334
Total nonperforming loans	76,350			72,996
Total nonperforming assets	$	81,300		81,721
Nonaccrual troubled debt restructured loans (1)	$	18,098		21,118
Accruing troubled debt restructured loans	31,015			29,997
Total troubled debt restructured loans	$	49,113		51,115


(1)	Included in nonaccurual loans above.

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At June 30, 2016, we expect to fully collect the carrying value of our purchased credit impaired loans and have determined that we can reasonably estimate their future cash flows including those loans that are 90 days or more delinquent. As a result, we do not consider these loans that are 90 days or more delinquent to be nonaccrual or impaired and continue to recognize interest income on these loans, including the loans’ accretable discount, which total $2.9 million at June 30, 2016.

A loan is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement including both contractual principal and interest payments. The amount of impairment is required to be measured using one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of collateral if the loan is collateral dependent. If the measure of the impaired loan is less than the recorded investment in the loan, a specific allowance is allocated for the impairment. Impaired loans at June 30, 2016 and December 31, 2015 were $109.0 million and $117.9 million, respectively.

Allowance for Loan Losses

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

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

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

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

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

The individual impairment measures along with the estimated loss for each homogeneous pool are consolidated into one summary document. This summary schedule along with the support documentation used to establish this schedule is presented to management’s Credit Committee on a quarterly basis. The Credit Committee reviews the processes and documentation presented, reviews the concentration of credit by industry and customer, lending products and activity, competition and collateral values, as well as economic conditions in general and in each of our market areas. Based on this review and discussion, the appropriate amount of ALL is estimated and any adjustments to reconcile the actual ALL with this estimate are determined. In addition, the

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Credit Committee considers if any changes to the methodology are needed. The Credit Committee also reviews and discusses delinquency trends, nonperforming asset amounts and ALL levels and ratios compared to our peer group as well as state and national statistics. Similarly, following the Credit Committee’s review and approval, a review is performed by the Risk Management Committee of the Board of Directors on a quarterly basis.

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

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

We utilize a structured methodology each period when analyzing the adequacy of the allowance for loan losses and the related provision for loan losses, which the Credit Committee assesses regularly for appropriateness. As part of the analysis as of June 30, 2016, we considered the economic conditions in our markets, such as unemployment and bankruptcy levels as well as changes in estimates of real estate collateral values. In addition, we considered the overall trends in asset quality, specific reserves already established for criticized loans, historical loss rates and collateral valuations. As a result of this analysis, the allowance for loan losses decreased by $1.9 million, or 3.0%, to $60.8 million, or 0.83% of total loans at June 30, 2016 from $62.7 million, or 0.87% of total loans, at December 31, 2015. This decrease is primarily attributable to the charge-off of $1.4 million of residential mortgage loans that were fully reserved.

We also consider how the levels of non-accrual loans and historical charge-offs have influenced the required amount of allowance for loan losses. Nonaccrual loans of $75.9 million or 1.05% of total loans receivable at June 30, 2016 increased by $4.2 million, or 5.9%, from $71.7 million, or 1.01% of total loans receivable, at December 31, 2015. As a percentage of average loans, annualized net charge-offs decreased to 0.21% for the six months ended June 30, 2016 compared to 0.23% for the year ended December 31, 2015.

Comparison of Operating Results for the Quarters Ended June 30, 2016 and 2015

The Company experienced a net loss for the quarter ended June 30, 2016 of $7.0 million, or $0.07 per diluted share, due primarily to a $37.0 million prepayment penalty for strategically refinancing $715.0 million of term FHLB borrowings with short-term advances in anticipation of the funds to be received from the acquisition of 18 First Niagara offices and $1.700 billion of deposits in the third quarter of 2016. This loss was a decrease of $22.3 million, or 145.8%, from net income of $15.3 million, or $0.17 per diluted share, for the quarter ended June 30, 2015. The decrease in net income also resulted from an increase in noninterest expense of $48.2 million, or 87.3% and an increase in the provision for loan losses of $3.1 million or 299.9%. Partially offsetting these factors were increases in net interest income of $14.5 million, or 23.3%, noninterest income of $3.8 million, or 22.7%, and a decrease in income tax expense of $10.7million, or 148.4%. Annualized, net income/ (loss) for the quarter ended June 30, 2016 represents returns on average equity and average assets of (2.44%) and (0.32%), respectively, compared to 5.77% and 0.78% for the same quarter last year. A further discussion of significant changes follows.

Interest Income

Total interest income increased by $10.7 million, or 14.1%, to $86.7 million for the quarter ended June 30, 2016 from $76.0 million for the quarter ended June 30, 2015. This increase is the result of an increase in the average balance of interest earning assets of $783.7 million, or 10.7%, to $8.126 billion for the quarter ended June 30, 2016 from $7.343 billion for the quarter ended June 30, 2015 and an increase in the average yield earned on interest earning assets to 4.29% for the quarter ended June 30, 2016 from 4.15% for the quarter ended June 30, 2015.

Interest income on loans receivable increased by $11.6 million, or 16.4%, to $82.6 million for the quarter ended June 30, 2016 from $71.0 million for the quarter ended June 30, 2015. This increase in interest income on loans receivable can be attributed to an increase in the average balance of loans receivable of $1.200 billion, or 19.5%, to $7.257 billion for the quarter ended June 30, 2016 from $6.074 billion for the quarter ended June 30, 2015. This increase is due primarily to the addition of $928.1 million of loan balances, at fair value, from the LNB acquisition. Also contributing to this increase was internal loan growth of $415.0 million

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during the past year due to continued success in growing commercial banking relationships and our indirect automobile lending portfolio. Partially offsetting this increase was a decline in the average yield on loans receivable which decreased to 4.58% for the quarter ended June 30, 2016 from 4.69% for the quarter ended June 30, 2015. The decline in average yield is due primarily to the historically low level of market interest rates, as well as the overall lower average yield from the LNB portfolio.

Interest income on mortgage-backed securities remained flat at $2.1 million for the quarters ended June 30, 2016 and 2015. The average yield of mortgage-backed securities increased to 1.85% for the quarter ended June 30, 2016 from 1.72% for the quarter ended June 30, 2015 due to the LNB portfolio having higher yields than our existing portfolio. Offsetting this increase was a decrease in the average balance of mortgage-backed securities of $19.4 million, or 4.1%, to $458.4 million for the quarter ended June 30, 2016 from $477.8 million for the quarter ended June 30, 2015 despite the addition of $109.4 million, at fair value, of mortgage-backed security balances from the LNB acquisition. The cash flows from our existing portfolio were redirected to fund loan growth.

Interest income on investment securities decreased by $809,000, or 35.6%, to $1.5 million for the quarter ended June 30, 2016 from $2.3 million for the quarter ended June 30, 2015. This decrease is the result of decreases in both the average balance and average yield. The average balance of investment securities decreased by $169.1 million, or 35.0%, to $313.6 million for the quarter ended June 30, 2016 from $482.7 million for the quarter ended June 30, 2015. This decrease is due primarily to the maturity or call of municipal and government agency securities. The cash flows from our existing portfolio were redirected to fund loan growth and payoff FHLB advances. Partially offsetting this decrease was the addition of $74.7 million, at fair value, of municipal and government agency security balances from the LNB acquisition. The average yield of investment securities decreased slightly to 1.87% for the quarter ended June 30, 2016 from 1.88% for the quarter ended June 30, 2015.

Dividends on FHLB stock decreased by $74,000, or 15.6%, to $401,000 for the quarter ended June 30, 2016 from $475,000 for the quarter ended June 30, 2015. This decrease is attributable to decreases in both the average balance and average yield. The average yield of FHLB stock decreased to 4.84% for the quarter ended June 30, 2016 from 5.35% for the quarter ended June 30, 2015. Additionally, the average balance of FHLB stock decreased by $2.3 million, or 6.5% to $33.3 million for the quarter ended June 30, 2016 from $35.6 million for the quarter ended June 30, 2015. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.

Interest income on interest-earning deposits decreased by $110,000, or 61.1%, to $70,000 for the quarter ended June 30, 2016 from $180,000 for the quarter ended June 30, 2015. This decrease is due to a decrease in the average balance of $208.7 million, or 76.5%, to $64.0 million for the quarter ended June 30, 2016 from $272.7 million for the quarter ended June 30, 2015, due to the utilization of cash to payoff FHLB advances, fund loan growth, and fund the purchase of LNB. Partially offsetting this decrease was an increase in the average yield on interest-earning deposits to 0.43% for the quarter ended June 30, 2016 from 0.26% for the quarter ended June 30, 2015, as a result of the 25 basis point increase in December 2015 of the Federal Funds rate targeted by the Federal Reserve Bank.

Interest Expense

Interest expense decreased by $3.8 million, or 27.4%, to $10.0 million for the quarter ended June 30, 2016 from $13.8 million for the quarter ended June 30, 2015. This decrease in interest expense was due primarily to a decrease in the average cost of interest-bearing liabilities, which decreased to 0.63% for the quarter ended June 30, 2016 from 0.96% for the quarter ended June 30, 2015. This decrease is due primarily to the replacement of approximately $715.0 million of long-term FHLB advances with lower cost short-term FHLB advances in anticipation of the pending acquisition of 18 First Niagara community banking offices scheduled to close in the third quarter of 2016. Additionally, the average cost of each deposit type declined from the prior year in this low interest rate environment. Partially offsetting the decrease in cost was an increase in the average balance of $591.6 million, or 10.2%, to $6.365 billion for the quarter ended June 30, 2016 from $5.773 billion for the quarter ended June 30, 2015. This increase was due primarily to the addition of $1.017 billion, at fair value, of deposit balances from the LNB acquisition.

Net Interest Income

Net interest income increased by $14.5 million, or 23.3%, to $76.7 million for the quarter ended June 30, 2016 from $62.2 million for the quarter ended June 30, 2015. This increase is attributable to the factors discussed above. Redirecting existing funds and cash flow from investment securities to fund the LNB acquisition, which provided $1.140 billion of interest-earning assets, fund loan growth, and the repayment/ refinance long-term FHLB borrowings, improved our net interest spread and margin. Our net interest rate spread increased to 3.66% for the quarter ended June 30, 2016 from 3.19% for the quarter ended June 30, 2015 and our net interest margin increased to 3.77% for the quarter ended June 30, 2016 from 3.39% for the quarter ended June 30, 2015.

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Provision for Loan Losses

The provision for loan losses increased by $3.1 million, or 299.9%, to $4.2 million for the quarter ended June 30, 2016 from $1.1 million for the quarter ended June 30, 2015. This increase is due primarily to the downgrade of three commercial loans requiring an additional $1.7 million of combined reserves. However, the percentage of classified loans to total loans decreased to 2.73% at June 30, 2016 from 3.12% million at June 30, 2015. In addition, annualized net charge-offs decreased for the quarter ended June 30, 2016 to 0.31% of total loans compared to 0.61% for the quarter ended June 30, 2015.

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

Noninterest Income

Noninterest income increased by $3.8 million, or 22.7%, to $20.3 million for the quarter ended June 30, 2016 from $16.5 million for the quarter ended June 30, 2015. The increase is primarily attributable to increases in service charges and fees, gain on sale of real estate owned, and insurance commission income. Service charges and fees increased by $1.4 million, or 15.2%, to $10.6 million for the quarter ended June 30, 2016 from $9.2 million for the quarter ended June 30, 2015 due primarily to the growth in checking accounts from both the LNB acquisition and the successful execution of internal growth initiatives. Also contributing to the increase in noninterest income was an increase in gain on sale of real estate owned of $652,000, as we recognized a net gain of $111,000 for the quarter ended June 30, 2016 compared to a net loss of $541,000 for the same quarter last year. Additionally, insurance commission income increased by $558,000, or 25.2%, for the quarter ended June 30, 2016 compared to the same quarter last year as acquired companies and commercial banking referrals continue to generate additional revenue.

Noninterest Expense

Noninterest expense increased by $48.2 million, or 87.3%, to $103.3 million for the quarter ended June 30, 2016 from $55.1 million for the quarter ended June 30, 2015. This increase is primarily the result of the FHLB prepayment penalty and, to a lesser extent, increases in compensation and employee benefits, restructuring and acquisition expense, and processing expenses. During the quarter ended June 30, 2016, we replaced long-term FHLB advances with lower cost short-term advances incurring a $37.0 million prepayment penalty. This refinancing was done in anticipation of the pending acquisition of 18 First Niagara community banking offices with deposits of approximately $1.700 billion. Compensation and employee benefits increased by $5.4 million, or 18.8%, to $34.3 million for the quarter ended June 30, 2016 from $28.9 million for the quarter ended June 30, 2015. This increase is due primarily to the addition of lending and credit staff and the employees retained from the LNB acquisition. Restructuring and acquisition expense increased by $2.9 million to $3.4 million for the quarter ended June 30, 2016 from $467,000 for the quarter ended June 30, 2015. This increase is due primarily to restructuring costs of $2.8 million associated with the consolidation of 24 community banking offices. Processing expenses increased by $780,000, or 10.6%, to $8.2 million for the quarter ended June 30, 2016 from $7.4 million for the quarter ended June 30, 2015, due primarily to the acquisition of LNB, as well as technology upgrades. Also contributing to the increase in noninterest expense was an increase in office operations of $438,000, or 15.1%, and occupancy costs of $376,000, or 6.4%, for the quarter ended June 30, 2016, due primarily to the acquisition of LNB.

Income Taxes

The provision for income taxes decreased by $10.7 million, or 148.4%, to ($3.5) million for the quarter ended June 30, 2016 from $7.2 million for the quarter ended June 30, 2015. This decrease in income tax expense is primarily the result of a decrease in pretax income of $33.0 million, or 146.6%. We anticipate our effective tax rate to be between 28.0% and 30.0% for all of 2016.

Comparison of Operating Results for the Six Months Ended June 30, 2016 and 2015

Net income for the six months ended June 30, 2016 was $11.0 million, or $0.11 per diluted share, a decrease of $20.5 million, or 65.1%, from $31.5 million, or $0.34 per diluted share, for the six months ended June 30, 2015. The decrease in net income resulted from increases in noninterest expense of $57.7 million, or 53.0%, and provision for loan losses of $3.9 million, or 200.5%. Partially offsetting these factors were increases in net interest income of $23.1 million, or 18.4%, and noninterest income of $8.6 million, or 27.5%, as well as a decrease in income tax expense of of $9.4 million, or 67.3%. Annualized, net income

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for the six months ended June 30, 2016 represents returns on average equity and average assets of 1.90% and 0.25%, respectively, compared to 5.97% and 0.81% for the six months ended June 30, 2015. A discussion of significant changes follows.

Interest Income

Total interest income increased by $19.1 million, or 12.5%, to $172.0 million for the six months ended June 30, 2016 from $152.9 million for the six months ended June 30, 2015. This increase is the result of increases in both the average balance of and average yield earned on interest earning assets. The average balance of interest earning assets increased by $831.7 million, or 11.4%, to $8.143 billion for the six months ended June 30, 2016 from $7.311 billion for the six months ended June 30, 2015. Additionally, the average yield on interest-earning assets increased to 4.25% for the six months ended June 30, 2016 from 4.18% for the six months ended June 30, 2015.

Interest income on loans receivable increased by $21.7 million, or 15.3%, to $163.4 million for the six months ended June 30, 2016 from $141.7 million for the six months ended June 30, 2015. This increase in interest income on loans receivable can be attributed to an increase in the average balance of loans receivable of $1.191 billion, or 19.7%, to $7.238 billion for the six months ended June 30, 2016 from $6.047 billion for the six months ended June 30, 2015. This increase is due primarily to the addition of $928.1 million of loan balances, at fair value, from the LNB acquisition. Also contributing to this increase was internal loan growth of $415.0 million during the past year due to continued success in growing commercial banking relationships and our indirect automobile lending portfolio. Partially offsetting this increase was a decline in the average yield on loans receivable which decreased to 4.54% for the six months ended June 30, 2016 from 4.73% for the six months ended June 30, 2015. The decline in average yield is due primarily to the continued historically low level of market interest rates, as well as the overall lower yield of the LNB portfolio.

Interest income on mortgage-backed securities remained flat at $4.3 million for the six months ended June 30, 2016 and 2015. The average balance of mortgage-backed securities decreased by $18.9 million, or 3.8%, to $473.3 million for the six months ended June 30, 2016 from $492.2 million for the six months ended June 30, 2015 despite the addition of $109.4 million, at fair value, of mortgage-backed security balances from the LNB acquisition. The cash flow from these securities was redirected to fund the LNB acquisition, payoff FHLB advances, and fund loan growth. Partially offsetting this decrease was an increase in the average yield on mortgage-backed securities to 1.84% for the six months ended June 30, 2016 from 1.74% for the six months ended June 30, 2015 due to the acquisition of the higher yielding LNB portfolio.

Interest income on investment securities decreased by $1.5 million, or 30.9%, to $3.2 million for the six months ended June 30, 2016 from $4.7 million for the six months ended June 30, 2015. This decrease is the result of decreases in both the average balance and average yield. The average balance of investment securities decreased by $133.8 million, or 27.6%, to $350.6 million for the six months ended June 30, 2016 from $484.4 million for the six months ended June 30, 2015. This decrease is due primarily to the maturity or call of municipal and government agency securities and the use of these proceeds to fund the LNB acquisition, pay off FHLB advances, and fund loan growth. The average yield on investment securities decreased to 1.84% for the six months ended June 30, 2016 from 1.93% for the six months ended June 30, 2015. This decrease is primarily the result of higher rate, tax-free, municipal securities maturing or being called and, if replaced, being replaced by lower yielding, shorter duration government agency securities.

Dividends on FHLB stock decreased by $1.0 million, or 53.8%, to $868,000 for the six months ended June 30, 2016 from $1.9 million for the six months ended June 30, 2015. This decrease is due a $1.0 million special dividend paid in the first quarter of 2015. Additionally, the average balance decreased by $672,000, or 1.9%, to $35.2 million for the six months ended June 30, 2016 from $35.9 million for the six months ended June 30, 2015. Partially offsetting these factors was an increase in the average yield, exclusive of the special dividend, to 4.96% for the six months ended June 30, 2016 from 4.71% for the six months ended June 30, 2015. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.

Interest income on interest-earning deposits decreased by $190,000, or 59.6%, to $129,000 for the six months ended June 30, 2016 from $319,000 for the six months ended June 30, 2015. This decrease is due to a decrease in the average balance of $206.3 million, or 81.8%, to $45.9 million for the six months ended June 30, 2016 from $252.2 million for the six months ended June 30, 2015, due to the utilization of cash for the LNB acquisition, to pay off FHLB advances, and fund loan growth. Partially offsetting this decrease was an increase in the average yield on interest-earning deposits to 0.56% for the six months ended June 30, 2016 from 0.25% for the six months ended June 30, 2015, as a result of the 25 basis point increase in December 2015 of the Federal Funds rate targeted by the Federal Reserve Bank.

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Interest Expense

Interest expense decreased by $3.9 million, or 14.2%, to $23.8 million for the six months ended June 30, 2016 from $27.7 million for the six months ended June 30, 2015. This decrease in interest expense was due to a decline in the average cost of interest-bearing liabilities which decreased to 0.74% for the six months ended June 30, 2016 from 0.97% for the six months ended June 30, 2015. This decrease is due primarily to the replacement of long-term FHLB borrowings with lower cost short-term FHLB advances in anticipation of the pending acquisition of 18 First Niagara community banking offices. Additionally, the average cost of each deposit type declined from the prior year in this low interest rate environment. Partially offsetting this decrease was an increase in the average balance of interest-bearing liabilities, which increased by $631.6 million, or 10.9%, to $6.414 billion for the six months ended June 30, 2016 from $5.782 billion for the six months ended June 30, 2015. This increase was due primarily to the addition of $1.017 billion, at fair value, of deposit balances from the LNB acquisition.

Net Interest Income

Net interest income increased by $23.0 million, or 18.4%, to $148.2 million for the six months ended June 30, 2016 from $125.2 million for the six months ended June 30, 2015. This increase is attributable to the factors discussed above. Redirecting existing funds and cash flow from investment securities to fund the LNB acquisition, which provided $1.140 billion of interest-earning assets, and to fund loan growth, as well as the repayment/ refinance of FHLB long-term borrowings, improved our net interest spread and margin. Our net interest rate spread increased to 3.51% for the six months ended June 30, 2016 from 3.21% for the six months ended June 30, 2015 and our net interest margin increased to 3.64% for the six months ended June 30, 2016 from 3.40% for the six months ended June 30, 2015.

Provision for Loan Losses

The provision for loan losses increased by $3.9 million, or 200.5%, to $5.9 million for the six months ended June 30, 2016 from $2.0 million for the six months ended June 30, 2015. This increase is due primarily to the downgrading of five commercial loans requiring an additional $2.5 million in combined reserves and increases in reserves for the oil and gas industry and indirect auto loans. However, the percentage of classified loans to total loans decreased to 2.73% at June 30, 2016 from 3.12% at June 30, 2015. In addition, annualized net charge-offs decreased for the six months ended ended June 30, 2016 to 0.21% of total loans compared to 0.34% for the six months ended ended June 30, 2015.

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

Noninterest Income

Noninterest income increased by $8.5 million, or 27.5%, to $39.7 million for the six months ended June 30, 2015 from $31.2 million for the six months ended June 30, 2015. The increase is primarily attributable to an increase in service charges and fees and a decrease in loss on real estate owned. Service charges and fees increased by $2.8 million, or 15.7%, to $20.7 million for the six months ended June 30, 2016 from $17.9 million for the six months ended June 30, 2015 due primarily to the growth in checking accounts from both the LNB acquisition and the successful execution of internal growth initiatives. Also contributing to the increase in noninterest income was an increase in gain on sale of real estate owned of $1.9 million, as we recognized a net gain of $360,000 for the six months ended June 30, 2016 compared to a net loss of $1.6 million for the same period last year. Other operating income increased by $1.6 million, or 125.0%, to $2.9 million for the six months ended June 30, 2016 from $1.3 million for the six months ended June 30, 2015 due primarily to income on paid-off purchased credit impaired loans. Additionally, insurance commission income and trust and other financial services income increased by $844,000 and $668,000, respectively, for the six months ended June 30, 2016 compared to the same period last year.

Noninterest Expense

Noninterest expense increased by $57.7 million, or 53.0%, to $166.5 million for the six months ended June 30, 2016 from $108.8 million for the six months ended June 30, 2015. This increase is primarily the result of a FHLB prepayment penalty and, to a lesser extent, increases in compensation and employee benefits, restructuring and acquisition expense, other expense, and processing expenses. During the six months ended June 30, 2016, we replaced long-term FHLB borrowings with lower cost short-term advances incurring a $37.0 million prepayment penalty. This refinancing occurred in anticipation of the pending acquisition of 18 First Niagara community banking offices with deposits of approximately $1.700 billion. Compensation and

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employee benefits increased by $10.6 million, or 18.6%, to $67.4 million for the six months ended June 30, 2016 from $56.8 million for the six months ended June 30, 2015. This increase is the result of the employees retained from LNB acquisition, the addition of lending and credit staff, and higher healthcare and stock benefit costs. Additionally, expenses totaling $4.0 million were incurred during the six months ended June 30, 2016 related to the consolidation of 24 community banking offices into existing offices and the aforementioned First Niagara acquisition. Also contributing to this increase in noninterest expense was an increase in other expense of $2.9 million, or 68.7%, as a result of an increase in charitable contributions made to utilize Pennsylvania Education Improvement Tax Credits. Processing expense increased by $2.0 million, or 13.6%, to $16.6 million for the six months ended June 30, 2016 from $14.6 million for the six months ended June 30, 2015, due primarily to technology upgrades, the additional maintenance costs attributable to the addition of the LNB operations, and the replacement of debit cards in an effort to enhance customer security.

Income Taxes

The provision for income taxes decreased by $9.4 million, or 67.3%, to $4.6 million for the six months ended June 30, 2016 from $14.0 million for the six months ended June 30, 2015. This decrease in income tax expense is primarily the result of a decrease in pretax income of $29.9 million, or 65.8%. Our effective tax rate for the six months ended June 30, 2016 was 29.5% compared to 30.8% for the six months ended June 30, 2015. We anticipate our effective tax rate to be between 28.0% and 30.0% for all of 2016.

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Average Balance Sheet

(Dollars in thousands)

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



	Quarter ended June 30,
	2016						2015
	Average balance			Interest	Avg. yield/ cost (g)		Average balance		Interest	Avg. yield/ cost (g)
Assets:
Interest-earning assets:
Residential mortgage loans	$	2,751,601		30,228	4.39	%	2,546,712		28,395	4.46	%
Home equity loans	1,163,900			12,701	4.39	%	1,054,508		11,402	4.34	%
Consumer loans	522,745			8,697	6.69	%	245,832		6,529	10.65	%
Commercial real estate loans	2,356,994			26,691	4.48	%	1,859,790		21,257	4.52	%
Commercial loans	461,808			4,902	4.20	%	367,069		3,862	4.16	%
Loans receivable (a) (b) (includes FTE adjustments of $574 and $460, respectively)	7,257,048			83,219	4.61	%	6,073,911		71,445	4.72	%
Mortgage-backed securities (c)	458,398			2,115	1.85	%	477,800		2,058	1.72	%
Investment securities (c) (includes FTE adjustments of $381 and $615, respectively)	313,647			1,844	2.35	%	482,670		2,887	2.39	%
FHLB stock	33,302			401	4.84	%	35,608		475	5.35	%
Other interest-earning deposits	63,950			70	0.43	%	272,691		180	0.26	%

Total interest-earning assets (includes FTE adjustments of $955 and $1,075, respectively)	8,126,345			87,649	4.34	%	7,342,680		77,045	4.21	%

Noninterest earning assets (d)	755,713						529,528

Total assets	$	8,882,058					7,872,208

Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Savings deposits	$	1,440,886		837	0.23	%	1,263,785		838	0.27	%
Interest-bearing checking deposits	1,130,122			144	0.05	%	920,071		131	0.06	%
Money market deposit accounts	1,294,381			829	0.26	%	1,147,017		759	0.27	%
Time deposits	1,616,260			4,055	1.01	%	1,409,740		3,963	1.13	%
Borrowed funds (e)	772,225			3,017	1.57	%	929,744		6,929	2.99	%
Junior subordinated debentures	111,213			1,126	4.01	%	103,094		1,172	4.49	%

Total interest-bearing liabilities	6,365,087			10,008	0.63	%	5,773,451		13,792	0.96	%

Noninterest-bearing checking deposits (f)	1,184,786						957,912
Noninterest-bearing liabilities	177,300						77,075

Total liabilities	7,727,173						6,808,438

Shareholders’ equity	1,154,885						1,063,770

Total liabilities and shareholders’ equity	$	8,882,058					7,872,208

Net interest income/ Interest rate spread				77,641	3.71	%			63,253	3.25	%

Net interest-earning assets/ Net interest margin	$	1,761,258			3.82	%	1,569,229			3.45	%

Ratio of interest-earning assets to interest-bearing liabilities	1.28		X				1.27	X


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


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


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


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


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


(f)	Average cost of deposits were 0.35% and 0.40%, respectively.

(g)

Annualized. Shown on a fully tax-equivalent basis (“FTE”). The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate of 35% for each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: Loans — 4.58% and 4.69%, respectively; Investment securities — 1.87% and 1.88%, respectively; interest-earning assets — 4.29% and 4.15%, respectively. GAAP basis net interest rate spreads were 3.66% and 3.19%, respectively; and GAAP basis net interest margins were 3.77% and 3.39%, respectively.

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Rate/ Volume Analysis

(Dollars in Thousands)

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

Quarters ended June 30, 2016 and 2015



	Rate			Volume		Net Change
Interest earning assets:
Loans receivable	$	(5,676	)	17,450		11,774
Mortgage-backed securities	147			(90	)	57
Investment securities	(49		)	(994	)	(1,043	)
FHLB stock	(42		)	(31	)	(73	)
Other interest-earning deposits	118			(228	)	(110	)
Total interest-earning assets	(5,502		)	16,107		10,605

Interest-bearing liabilities:
Savings deposits	(118		)	117		(1	)
Interest-bearing checking deposits	(17		)	30		13
Money market deposit accounts	(28		)	98		70
Time deposits	(489		)	581		92
Borrowed funds	(2,738		)	(1,174	)	(3,912	)
Junior subordinated debentures	(137		)	92		(45	)
Total interest-bearing liabilities	(3,527		)	(256	)	(3,783	)

Net change in net interest income	$	(1,975	)	16,363		14,388

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Average Balance Sheet

(Dollars in thousands)



	Six months ended June 30,
	2016						2015
	Average balance			Interest	Avg. yield/ cost (g)		Average balance			Interest	Avg. yield/ cost (g)
Assets:
Interest-earning assets:
Residential mortgage loans	$	2,745,695		60,013	4.37	%	$	2,529,553		56,650	4.48	%
Home equity loans	1,170,653			25,243	4.34	%	1,056,813			22,875	4.39	%
Consumer loans	516,419			16,916	6.59	%	242,896			12,819	10.64	%
Commercial real estate loans	2,353,371			52,684	4.43	%	1,829,724			42,184	4.59	%
Commercial loans	451,893			9,625	4.21	%	387,755			8,099	4.15	%
Loans receivable (a) (b) (includes FTE adjustments of $1,055 and $931, respectively)	7,238,031			164,481	4.57	%	6,046,741			142,627	4.76	%
Mortgage-backed securities (c)	473,346			4,344	1.84	%	492,209			4,292	1.74	%
Investment securities (c) (includes FTE adjustments of $770 and $1,341, respectively)	350,553			3,995	2.28	%	484,366			6,006	2.48	%
FHLB stock (h)	35,200			868	4.96	%	35,872			1,878	4.71	%
Other interest-earning deposits	45,926			129	0.56	%	252,210			319	0.25	%

Total interest-earning assets (includes FTE adjustments of $1,825 and $2,272, respectively)	8,143,056			173,817	4.29	%	7,311,398			155,122	4.24	%

Noninterest earning assets (d)	753,474						569,689

Total assets	$	8,896,530					7,881,087

Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Savings deposits	$	1,423,343		1,702	0.24	%	1,247,854			1,651	0.27	%
Interest-bearing checking deposits	1,111,981			300	0.05	%	899,260			262	0.06	%
Money market deposit accounts	1,291,457			1,694	0.26	%	1,156,079			1,524	0.27	%
Time deposits	1,640,291			8,257	1.01	%	1,430,989			8,020	1.13	%
Borrowed funds (e)	835,832			9,556	2.30	%	945,192			13,904	2.97	%
Junior subordinated debentures	111,213			2,245	3.99	%	103,094			2,330	4.50	%

Total interest-bearing liabilities	6,414,117			23,754	0.74	%	5,782,468			27,691	0.97	%

Noninterest-bearing checking deposits	1,109,662						936,090
Noninterest-bearing liabilities	213,301						98,992

Total liabilities	7,737,080						6,817,550

Shareholders’ equity	1,159,450						1,063,537

Total liabilities and shareholders’ equity	$	8,896,530					7,881,087

Net interest income/ Interest rate spread				150,063	3.55	%				127,431	3.27	%

Net interest-earning assets/ Net interest margin	$	1,728,939			3.69	%	1,528,930				3.46	%

Ratio of interest-earning assets to interest-bearing liabilities	1.27		X				1.26		X


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


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


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


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


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


(f)	Average cost of deposits were 0.37% and 0.41%, respectively.

(g)

Annualized. Shown on a fully tax-equivalent basis (“FTE”). The FTE basis adjusts for the tax benefit of income on certain tax exempt loans and investments using the federal statutory rate of 35% for each period presented. We believe this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts. GAAP basis yields were: Loans – 4.54% and 4.73%, respectively; Investment securities – 1.84% and 1.93%, respectively; interest-earning assets – 4.25% and 4.18%, respectively. GAAP basis net interest rate spreads were 3.51% and 3.21%, respectively; and GAAP basis net interest margins were 3.64% and 3.40%, respectively.


(h)	The average yield calculation excludes the $1.0 million special dividend paid in February 2015, the average yield was 10.59% with the special dividend included.

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Rate/ Volume Analysis

(Dollars in Thousands)

Six months ended June 30, 2016 and 2015



	Rate			Volume		Net Change
Interest earning assets:
Loans receivable	$	(13,364	)	35,218		21,854
Mortgage-backed securities	225			(173	)	52
Investment securities	(352		)	(1,659	)	(2,011	)
FHLB stock	(995		)	(15	)	(1,010	)
Other interest-earning deposits	386			(576	)	(190	)
Total interest-earning assets	(14,100		)	32,795		18,695

Interest-bearing liabilities:
Savings deposits	(182		)	233		51
Interest-bearing checking deposits	(24		)	62		38
Money market deposit accounts	(9		)	179		170
Time deposits	(939		)	1,176		237
Borrowed funds	(2,735		)	(1,613	)	(4,348	)
Junior subordinated debentures	(270		)	185		(85	)
Total interest-bearing liabilities	(4,159		)	222		(3,937	)

Net change in net interest income	$	(9,941	)	32,573		22,632

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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

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

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

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

The following table illustrates the simulated impact of a 100 bps, 200 bps or 300 bps upward or a 100 bps downward movement in interest rates on net income, return on average equity, earnings per share and market value of equity. This analysis was prepared assuming that interest-earning asset and interest-bearing liability levels at June 30, 2016 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, 2016 levels.



	Increase									Decrease
Non-parallel shift in interest rates over the next 12 months	100 bps			200 bps			300 bps			100 bps
Projected percentage increase/ (decrease) in net interest income	(2.5		)%	(4.9		)%	(7.1		)%	(3.1		)%
Projected percentage increase/ (decrease) in net income	(5.4		)%	(10.6		)%	(15.4		)%	(9.8		)%
Projected increase/ (decrease) in return on average equity	(5.2		)%	(10.3		)%	(15.0		)%	(9.5		)%
Projected increase/ (decrease) in earnings per share	$	(0.04	)	$	(0.08	)	$	(0.11	)	$	(0.07	)
Projected percentage increase/ (decrease) in market value of equity	(4.9		)%	(9.3		)%	(14.2		)%	0.6		%

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.

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 control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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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, 2015 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

A new accounting standard will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations

The FASB has adopted a new accounting standard that will be effective for our first fiscal year after December 15, 2019. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of providing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for loan losses. We are currently evaluating the impact this standard will have on our results of operations and financial position.

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

a.) Not applicable.

b.) Not applicable.

c.) The following table discloses information regarding the repurchase of shares of common stock during the quarter ending June 30, 2016:



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


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

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits



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

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

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



101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document



101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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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 9, 2016	By:	/s/ William J. Wagner
			William J. Wagner
			President and Chief Executive Officer
			(Duly Authorized Officer)


Date:	August 9, 2016	By:	/s/ Gerald J. Ritzert
			Gerald J. Ritzert
			Controller
			(Principal Accounting Officer)