News Column

NORTHWEST BANCSHARES, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 8, 2014

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 worse than expected; competition among depository and other financial institutions; inflation and changes in the interest rate environment



that reduce our margins or reduce the fair value of financial instruments;

adverse changes in the securities markets; our ability to enter new markets successfully,



capitalize

on growth opportunities and our ability to successfully integrate acquired entities, if any; 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;

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

Refer to Note 1 of the Notes to Consolidated Financial Statements in Item 8 of Part II of our 2013 Annual Report on Form 10-K.

Executive Summary and Comparison of Financial Condition

Total assets at June 30, 2014 were $7.902 billion, an increase of $20.8 million, or 0.3%, from $7.881 billion at December 31, 2013. This increase in assets was due to an increase in net loans receivable of $79.3 million, which was partially offset by a decrease in marketable securities of $46.2 million. The net increase in total assets was funded by increases in deposits and advances from borrowers for taxes and insurance of $105.0 million and $11.0 million, respectively, as well as net income of $27.4 million year-to-date. Partially offsetting these funding increases was a decrease in retained earnings of $98.4 million due primarily to the payment of dividends of $1.36 per share which includes the special $1.00 per share dividend declared and paid in the second quarter this year. 48

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Total loans receivable increased by $79.4 million, or 1.4%, to $5.886 billion at June 30, 2014, from $5.806 billion at December 31, 2013. Loans funded during the six months ended June 30, 2014, of $940.4 million exceeded loan maturities and principal repayments of $842.8 million and mortgage loan sales of $1.0 million. Our business banking loan portfolio increased by $90.1 million, or 4.5%, to $2.101 billion at June 30, 2014 from $2.011 billion at December 31, 2013, as we continue to emphasize the origination and retention of commercial and commercial real estate loans. Our personal banking loan portfolio decreased by $10.6 million, or 0.3%, to $3.785 billion at June 30, 2014 from $3.795 billion at December 31, 2013. This decrease is primarily attributable to a $17.0 million decrease in home equity loans. As growth in the first half of the year was hampered by the wet Spring conditions. Total deposits increased by $105.0 million, or 1.9%, to $5.774 billion at June 30, 2014 from $5.669 billion at December 31, 2013. All deposit account types, with the exception of time deposits, increased during the six months ended June 30, 2014. Noninterest-bearing demand deposits increased by $83.6 million, or 10.6%, to $872.7 million at June 30, 2014 from $789.1 million at December 31, 2013. Interest-bearing demand deposits increased by $48.7 million, or 5.7%, to $901.5 million at June 30, 2014 from $852.8 million at December 31, 2013. Money market deposit accounts increased by $15.3 million, or 1.3%, to $1.183 billion at June 30, 2014 from $1.168 billion at December 31, 2013. Savings deposits increased by $44.7 million, or 3.8%, to $1.236 billion at June 30, 2014 from $1.192 billion at December 31, 2013. Time deposits, however, decreased by $87.2 million, or 5.2%, to $1.580 billion at June 30, 2014 from $1.667 billion at December 31, 2013. We believe the increase in more liquid types of deposit accounts is due primarily to customers' reluctance to lock in time deposits at these historically low rates as well as our new marketing campaign which started during March 2014 to attract demand deposit customers. Borrowed funds decreased by $12.3 million, or 1.4%, to $869.3 million at June 30, 2014, from $881.6 million at December 31, 2013. This decrease is the result of a $12.3 million decrease in collateralized borrowings. None of our FHLB advances matured during the quarter and the next scheduled maturity is in February 2015. Total shareholders' equity at June 30, 2014 was $1.072 billion, or $11.30 per share, a decrease of $84.3 million, or 7.3%, from $1.157 billion, or $12.27 per share, at December 31, 2013. This decrease was the result of cash dividend payments during the six months ended June 30, 2014 of $125.8 million. Partially offsetting this decrease was year-to-date net income of $27.4 million, an increase in paid-in-capital of $6.5 million related to employee incentive stock option exercises and a decrease in accumulated other comprehensive loss of $6.7 million due to an improvement in the unrealized gain position of the investment securities portfolio. Financial institutions and their holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. 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. 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 and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to total 49 --------------------------------------------------------------------------------

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assets (as defined). Capital ratios are presented in the tables below. Dollar amounts in the accompanying tables are in thousands.

At June 30, 2014 Minimum capital Well capitalized Actual requirements (1) requirements (1) Amount Ratio Amount Ratio Amount Ratio Total capital (to risk weighted assts) Northwest Bancshares, Inc. $ 1,052,813 20.30 % - - - - Northwest Savings Bank 907,333 17.55 % 413,700 8.00 % 517,125 10.00 % Tier I capital (to risk weighted assets) Northwest Bancshares, Inc. 987,164 19.03 % - - - - Northwest Savings Bank 842,439 16.29 % 206,850 4.00 % 310,275 6.00 % Tier I capital (leverage) (to average assets) Northwest Bancshares, Inc. 987,164 12.86 % - - - - Northwest Savings Bank 842,439 10.85 % 310,504 4.00 % 388,130 5.00 % At December 31, 2013 Minimum capital Well capitalized Actual requirements (1) requirements (1) Amount Ratio Amount Ratio Amount Ratio Total capital (to risk weighted assts) Northwest Bancshares, Inc. $ 1,147,027 22.46 % - - - - Northwest Savings Bank 946,531 18.60 % 407,062 8.00 % 508,828 10.00 % Tier I capital (to risk weighted assets) Northwest Bancshares, Inc. 1,081,060 21.17 % - - - - Northwest Savings Bank 882,234 17.34 % 203,531 4.00 % 305,297 6.00 % Tier I capital (leverage) (to average assets) Northwest Bancshares, Inc. 1,081,060 13.87 % - - - - Northwest Savings Bank 882,234 11.42 % 309,127 4.00 % 386,408 5.00 %



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(1) The Federal Reserve does not yet have formal capital requirements established for savings and loan holding companies.

In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that will revise 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 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain "available-for-sale" securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. 50 --------------------------------------------------------------------------------



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The final rule becomes effective for Northwest on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective. The final rule also officially implements these consolidated capital requirements for savings and loan holding companies, such as the Company, effective January 1, 2015. The following table shows the Basel III regulatory capital levels that must be maintained to avoid limitations on capital distributions and discretionary bonus payments for the periods indicated: Basel III Regulatory Capital Requirements January 1, January 1, January 1, January 1, January 1, Current 2015 2016 2017 2018 2019 New common equity tier 1 ratio plus capital conservation buffer - 4.50 % 5.125 % 5.75 % 6.375 % 7.00 % Tier 1 risk-based capital ratio 4.00 % - - - - - Tier 1 risk-based capital ratio plus capital conservation buffer - 6.00 % 6.625 % 7.25 % 7.875 % 8.50 % Total risk-based capital ratio 8.00 % - - - - - Total risk-based capital ratio plus capital conservation buffer - 8.00 % 8.625 % 9.25 % 9.875 % 10.50 % 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, 2014 was 11.7%. We adjust liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes and insurance on mortgage loan escrow accounts, repayment of borrowings and loan commitments. At June 30, 2014 Northwest had $2.082 billion of additional borrowing capacity available with the FHLB, including $150.0 million on an overnight line of credit, as well as $192.7 million of borrowing capacity available with the Federal Reserve Bank and $80.0 million with two correspondent banks. We paid $104.6 million and $22.0 million in cash dividends during the quarters ended June 30, 2014 and 2013, respectively, and $125.8 million and $22.0 million for the six months ended June 30, 2014 and 2013, respectively. As was previously announced, we paid a regular dividend of $0.13 per share and a special dividend of $1.00 per share in the second quarter of 2014. The common stock dividend payout ratio (dividends declared per share divided by net income per share) was 807.1% and 160.0% for the quarters ended June 30, 2014 and 2013, respectively, on dividends of $1.13 per share and $0.24 per share, respectively. The common stock dividend payout ratio for the six-month periods ended June 30, 2014 and 2013 was 453.3% and 75.0%, respectively, on dividends of $1.36 and $0.24 per share, respectively. On July 16, 2014, the Board of Directors declared a dividend of $0.13 per share payable on August 14, 2014 to shareholders of record as of July 31, 2014. This represents the 79th 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. 51

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Table of Contents June 30, December 31, 2014 2013 (Dollars in thousands) Loans 90 days or more delinquent: Residential mortgage loans $ 21,994$ 24,625 Home equity loans 7,810 8,344 Other consumer loans 1,966 2,057 Commercial real estate loans 15,290 18,433 Commercial loans 4,214 4,298 Total loans 90 days or delinquent $ 51,274$ 57,757 Total real estate owned (REO) 14,915 18,203 Total loans 90 days or more delinquent and REO 66,189



75,960

Total loans 90 days or more delinquent to net loans receivable

0.88 %



1.01 %

Total loans 90 days or more delinquent and REO to total assets 0.84 % 0.96 % Nonperforming assets: Nonaccrual loans - loans 90 days or more delinquent $ 51,274



57,757

Nonaccrual loans - loans less than 90 days delinquent 45,483

49,464

Loans 90 days or more past maturity and still accruing 271 690 Total nonperforming loans 97,028 107,911 Total nonperforming assets $ 111,943 126,114 Nonaccrual troubled debt restructured loans * $ 23,949



28,889

Accruing troubled debt restructured loans 39,844



50,277

Total troubled debt restructured loans $ 63,793 79,166



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* Included in nonaccurual loans above.

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, 2014 and December 31, 2013 were $164.0 million and $173.8 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 52 --------------------------------------------------------------------------------



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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. 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 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 53

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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 consistent methodology each period when analyzing the adequacy of the allowance for loan losses and the related provision for loan losses. As part of the analysis as of June 30, 2014, we considered the economic conditions in our markets, such as unemployment and bankruptcy levels as well as changes in 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 increased by $94,000, or 0.1%, to $71.4 million, or 1.21% of total loans, at June 30, 2014 from $71.3 million, or 1.23% of total loans, at December 31, 2013. This increase is primarily attributable to seven business banking loans requiring additional reserves totaling $12.2 million. Partially offsetting these factors was the continued improvement in overall asset quality as classified loans, TDRs and non-accrual loans delinquent 90 days or more decreased by $26.1 million, $15.4 million and $6.5 million, respectively, compared to December 31, 2013. We also consider how the level of non-accrual loans and historical charge-offs have influenced the required amount of allowance for loan losses. Non-accrual loans of $96.8 million or 1.64% of total loans receivable, at June 30, 2014 decreased by $10.4 million, or 9.8%, from $107.2 million, or 1.85% of total loans receivable, at December 31, 2013. As a percentage of average loans, annualized net charge-offs increased to 0.54% for the six months ended June 30, 2014 compared to 0.36% for the year ended December 31, 2013, as the result of the charge-off of two commercial loans totaling $8.1 million.



Comparison of Operating Results for the Quarters Ended June 30, 2014 and 2013

Net income for the quarter ended June 30, 2014 was $12.7 million, or $0.14 per diluted share, a decrease of $763,000, or 5.7%, from $13.5 million, or $0.15 per diluted share, for the quarter ended June 30, 2013. The decrease in net income resulted from a decrease in net interest income of $1.2 million, or 1.9%, and increases in the provision for loan losses of $2.9 million, or 53.3% and in noninterest expense of $1.0 million, or 1.9%. Partially offsetting these factors was an increase in noninterest income of $3.7 million, or 27.7%, and a decrease in income tax expense of $586,000, or 11.6%. Annualized, net income for the quarter ended June 30, 2014 represents a 4.77% and 0.64% return on average equity and return on average assets, respectively, compared to 4.79% and 0.68% for the same quarter last year. A discussion of significant changes follows. Interest Income Total interest income decreased by $2.4 million, or 3.0%, to $76.4 million for the quarter ended June 30, 2014 due primarily to a decrease in the average yield earned on interest earning assets to 4.17% for the quarter ended June 30, 2014 from 4.23% for the quarter ended June 30, 2013. The average yield on all categories of interest earning assets decreased when compared to the prior year period, with the exception of Federal Home Loan Bank of Pittsburgh stock ("FHLB") and other interest earning deposits. Additionally, the average balance of interest earning assets decreased by $33.9 million, or 0.5%, to $7.410 billion for the quarter ended June 30, 2014 from $7.444 billion for the quarter ended June 30, 2013. Interest income on loans receivable decreased by $1.2 million, or 1.7%, to $70.8 million for the quarter ended June 30, 2014 from to $72.0 million for the quarter ended June 30, 2013. This decrease in interest income on loans receivable can be attributed to a decline in the average yield which decreased to 54

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4.87% for the quarter ended June 30, 2014 from 5.12% for the quarter ended June 30, 2013. The continued decline in average yield is due primarily to the historically low level of market interest rates in general and continued competitive pricing pressure for new, as well as existing, credit relationships. Partially offsetting this decrease was an increase in the average balance of loans receivable which increased by $209.8 million, or 3.7%, to $5.834 billion for the quarter ended June 30, 2014 from $5.624 billion for the quarter ended June 30, 2013. This increase is due to continued success in increasing market share and the retention of most of the residential mortgage loans originated by our wholesale lending function rather than selling a portion of these originations in the secondary market. Interest income on mortgage-backed securities decreased by $642,000, or 19.4%, to $2.7 million for the quarter ended June 30, 2014 from $3.3 million for the quarter ended June 30, 2013. This decrease is the result of decreases in both the average balance and average yield. The average balance of mortgage-backed securities decreased by $125.5 million, or 17.3%, to $601.1 million for the quarter ended June 30, 2014 from $726.6 for the quarter ended June 30, 2013 due primarily to redirecting cash flows from these securities to fund loan growth as well as the payment of cash dividends. The average yield on mortgage-backed securities decreased to 1.77% for the quarter ended June 30, 2014 from 1.82% for the quarter ended June 30, 2013. The decrease in average yield resulted primarily from the purchase of mortgage-backed securities at generally lower interest rates than the existing portfolio. Interest income on investment securities decreased by $516,000, or 16.5%, to $2.6 million for the quarter ended June 30, 2014 from $3.1 million for the quarter ended June 30, 2013. This decrease is the result of decreases in both the average balance and average yield. The average balance of investment securities decreased by $24.5 million, or 4.6%, to $507.3 million for the quarter ended June 30, 2014 from $531.8 million for the quarter ended June 30, 2013. This decrease is due primarily to the maturity or call of municipal and government bonds and the use of these proceeds to fund loan growth. The average yield of investment securities decreased to 2.06% for the quarter ended June 30, 2014 from 2.35% for the quarter ended June 30, 2013. This decrease is primarily the result of higher rate, tax-free, municipal securities maturing or being called and being replaced by lower yielding, shorter duration government agency securities. For the quarter ended June 30, 2014 we received dividends on FHLB stock of $697,000 on an average balance of $43.9 million, resulting in a yield of 6.34%, compared to dividends of $34,000 on an average balance of $48.1 million, resulting in a yield of 0.28% for the quarter ended June 30, 2013. As a result of the improved financial condition of the FHLB of Pittsburgh, they have been able to increase their dividends to member financial institutions. These dividends are reported as other operating income on our Consolidated Statements of Income. Interest income on interest-earning deposits decreased by $54,000, or 15.9%, to $286,000 for the quarter ended June 30, 2014 from $340,000 for the quarter ended June 30, 2013. This decrease is due to a decrease in the average balance which decreased by $89.5 million, or 17.4%, to $424.4 million for the quarter ended June 30, 2014 from $513.9 million for the quarter ended June 30, 2013, due to the utilization of cash to fund loan growth and the payment of dividends over the past year. Interest Expense Interest expense decreased by $1.2 million, or 7.9%, to $14.2 million for the quarter ended June 30, 2014 from $15.4 million for the quarter ended June 30, 2013. This decrease in interest expense was due to a decrease in the average cost of interest-bearing liabilities, which decreased to 0.97% for the quarter ended June 30, 2014 from 1.04% for the quarter ended June 30, 2013, as well as a decrease in the average balance of interest-bearing liabilities, which decreased by $73.4 million, or 1.2%, to $5.892 billion for the quarter ended June 30, 2014 from $5.966 billion for the quarter ended June 30, 2013. The decrease in the 55

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cost of funds resulted primarily from the current level of market interest rates which enabled us to reduce the rate of interest paid on time deposit products. Also contributing to the decrease was the maturity of an interest rate swap used to hedge the interest rate on our junior subordinated debentures. The decrease in average interest-bearing liabilities resulted from a reduction in average time deposits of $192.5 million, or 10.7%, compared to last year, as consumers continue to shift investment priorities to shorter duration or demand products as well as to utilize funds for living expenses. The decrease in time deposits was partially offset by a combined increase in the average balance of interest-bearing demand deposits, savings deposits and money market deposit accounts of $113.0 million, or 3.5%, compared to the average balance for the quarter ended June 30, 2013. Net Interest Income Net interest income decreased by $1.2 million, or 1.9%, to $62.1 million for the quarter ended June 30, 2014 from $63.3 million for the quarter ended June 30, 2013. This decrease is attributable to the factors discussed above. Loan growth enabled us to redirect cash flows from lower yielding securities which helped offset overall lower market interest rates and maintain our net interest spread and margin. Our net interest rate spread increased to 3.20% for the quarter ended June 30, 2014 from 3.19% for the quarter ended June 30, 2013 and our net interest margin decreased just one basis point to 3.39% for the quarter ended June 30, 2014 from 3.40% for the quarter ended June 30, 2013. Provision for Loan Losses The provision for loan losses increased by $2.9 million, or 53.3%, to $8.3 million for the quarter ended June 30, 2014 from $5.4 million for the quarter ended June 30, 2013. This increase is due primarily to six business banking loans requiring combined provisions of $5.9 million during the 2014 period. Improvements in overall asset quality helped to mitigate these increases as classified loans decreased by $19.8 million, or 8.6%, to $210.7 million at June 30, 2014 from $230.5 million at June 30, 2013. In addition, TDRs decreased by $22.7 million, or 26.3%, to $63.8 million at June 30, 2014 from $86.5 million at June 30, 2013 and loans 90 days or more delinquent decreased by $12.2 million, or 19.3%, to $51.3 million at June 30, 2014 from $63.5 million at June 30, 2013. 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. Net charge-offs for the quarter ended June 30, 2014 were $13.1 million compared to $4.8 million for the quarter ended June 30, 2013, however it was the result of the charge-off of just two commercial loans totaling $8.1 million. Annualized net charge-offs to average loans increased to 0.90% for the quarter ended June 30, 2014 from 0.34% for the quarter ended June 30, 2013. 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 $3.7 million, or 27.7%, to $17.1 million for the quarter ended June 30, 2014 from $13.4 million for the quarter ended June 30, 2013. The increase is primarily attributable to a decrease in loss on real estate owned and increases in trust and other financial services income as well as other operating income. Loss on real estate owned decreased by $1.7 million, or 75.4%, to $562,000 for the quarter ended June 30, 2014 from $2.3 million for the quarter ended June 30, 2013, as a result of a write-down of our largest REO property during the quarter ended June 30, 2013. Trust and other financial services income increased by $792,000, or 35.0% to $3.1 million for the quarter ended June 30, 2014 from $2.3 million for the quarter ended June 30, 2013. This increase is due to our acquisition of Evans Capital Management, Inc. as of January 1, 2014 as well as increases in the amount of assets under management. 56

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Table of Contents Other operating income increased by $823,000, or 95.1%, to $1.7 million for the quarter ended June 30, 2014 from $865,000 for the quarter ended June, 2013, due primarily to the increase in dividends received on FHLB stock. Noninterest Expense Noninterest expense increased by $1.0 million, or 1.9%, to $53.8 million for the quarter ended June 30, 2014 from $52.8 million for the quarter ended June 30, 2013. This increase is primarily the result of increases in marketing expenses, professional services and compensation and employee benefits. Marketing expenses increased by $838,000, or 40.0%, to $2.9 million for the quarter ended June 30, 2014 from $2.1 million for the quarter ended June 30, 2013. This increase is primarily the result of ongoing loan and demand deposit marketing campaigns as well as the promotion of our recent awards from J.D. Power & Associates, Forbes and Keefe, Bruyette & Woods. Professional services increased by $576,000, or 48.0%, to $1.8 million for the quarter ended June 30, 2014 from $1.2 million for the quarter ended June 30, 2013, due primarily to consulting engagements to continued enhancement of our regulatory compliance management system. Compensation and employee benefits increased by $387,000, or 1.4% to $28.5 million for the quarter ended June 30, 2014 from $28.2 million for the quarter ended June 30, 2013. This increase is primarily the result of our acquisition of Evans Capital Management, Inc. These increases were partially offset by a decrease in processing expenses of $751,000, or 10.2%, to $6.6 million for the quarter ended June 30, 2014 from $7.4 million for the quarter ended June 30, 2013 due primarily to the timing of software and infrastructure upgrades. Income Taxes The provision for income taxes decreased by $586,000, or 11.6%, to $4.5 million for the quarter ended June 30, 2014 from $5.1 million for the quarter ended June 30, 2013. This decrease in income tax expense is primarily a result of the decrease in income before income taxes of $1.3 million, or 7.3%. In addition, the $1.00 per share special dividend paid on May 15, 2014 is deductible on the Company's common stock held in our Employee Stock Ownership Plan and 401(k) plan. Our effective tax rate for the quarter ended June 30, 2014 was 26.0% compared to 27.3% for the quarter ended June 30, 2013. We anticipate our effective tax rate to be between 26.0% and 27.0% for the year.



Comparison of operating results for the six months ended June 30, 2014 and 2013

Net income for the six months ended June 30, 2014 was $27.4 million, or $0.30 per diluted share, a decrease of $1.4 million, or 4.9%, from $28.8 million, or $0.32 per diluted share, for the same period last year. The decrease in net income resulted primarily from a decrease in net interest income of $4.3 million as well as an increase in the provision for loan losses of $3.2 million and an increase in the noninterest expense of $2.7 million. These changes were partially offset by an increase in noninterest income of $7.0 million and a decrease in income tax expense of $1.8 million. Annualized, net income for the six months ended June 30, 2014 represents a 4.97% and 0.70% return on average equity and return on average assets, respectively, compared to 5.12% and 0.73% for the same period last year. A discussion of significant changes follows. Interest Income Total interest income decreased by $6.9 million, or 4.4%, to $151.5 million for the six months ended June 30, 2014 from $158.4 million for the six months ended June 30, 2013, due to both a decrease in the average yield earned on interest earning assets and a slight decrease in the average balance of interest earning assets. The average yield on interest earning assets decreased to 4.17% for the six months ended June 30, 2014 from 4.30% for the six months ended June 30, 2013. The average yield on all categories of interest earning assets decreased compared to the same period last year with the exception of interest-earning deposits and dividends on FHLB stock. Average interest earning assets decreased by $2.4 million to 57

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$7.361 billion for the six months ended June 30, 2014 from $7.363 billion for the six months ended June 30, 2013.

Interest income on loans receivable decreased by $4.8 million, or 3.3%, to $140.2 million for the six months ended June 30, 2014 from $145.0 million for the six months ended June 30, 2013. The average yield on loans receivable decreased to 4.85% for the six months ended June 30, 2014 from 5.15% for the six months ended June 30, 2013. The decrease in average yield is primarily attributable to the origination of new loans and rate reductions for existing variable rate loans in this historically low interest rate and highly competitive environment. This decrease was partially offset by an increase in the average balance of loans receivable of $197.4 million, or 3.5%, to $5.829 billion at June 30, 2014 from $5.631 billion at June 30, 2013. This increase is primarily attributable to our continued emphasis on building business banking loan relationships. Interest income on mortgage-backed securities decreased by $1.2 million, or 19.1%, to $5.5 million for the six months ended June 30, 2014 from $6.7 million for the six months ended June 30, 2013. This decrease is the result of decreases in both the average balance and average yield. The average balance of mortgage-backed securities decreased by $115.0 million, or 15.8%, to $611.1 million for the six months ended June 30, 2014 from $726.1 for the six months ended June 30, 2013 due primarily to redirecting cash flows to fund loan growth and the payment of dividends. The average yield on mortgage-backed securities decreased to 1.79% for the six months ended June 30, 2014 from 1.86% for the six months ended June 30, 2013. The decrease in average yield resulted from the purchase of mortgage-backed securities during this period of historically low market interest rates. Interest income on investment securities decreased by $749,000, or 12.3%, to $5.3 million for the six months ended June 30, 2014 from $6.1 million for the six months ended June 30, 2013. This decrease was the result of a decrease in the average yield on investment securities to 2.11% for the six months ended June 30, 2014 from 2.43% for the six months ended June 30, 2013, as a result of higher rate municipal bonds maturing or being called and replaced with lower yielding shorter duration government agency bonds. Partially offsetting this decrease was an increase in the average balance of investment securities of $6.4 million, or 1.3%, to $507.3 million for the six months ended June 30, 2014 from $500.9 million for the six months ended June 30, 2013, due to deploying excess cash flow in a manner to minimize net interest margin compression and extension risk. For the six months ended June 30, 2014 we received dividends on FHLB stock of $973,000 on an average balance of $43.8 million, resulting in a yield of 4.44%, compared to dividends of $71,000 on an average balance of $47.5 million, resulting in a yield of 0.30% for the six months ended June 30, 2013. These dividends are reported as other operating income on our Consolidated Statements of Income. Interest income on interest-earning deposits decreased by $105,000, or 17.8%, to $486,000 for the six months ended June 30, 2014 from $591,000 for the six months ended June 30, 2013. This decrease is due to the average balance decreasing by $87.6 million, or 19.1%, to $370.3 million for the six months ended June 30, 2014 from $457.9 million for the six months ended June 30, 2013. The average balance decreased due to common stock dividend payments and loan growth. The average yield on interest-earning deposits remained unchanged at 0.26% for the six months ended June 30, 2014 compared to the same period last year. Interest Expense Interest expense decreased by $2.7 million, or 8.6%, to $28.4 million for the six months ended June 30, 2014 from $31.1 million for the six months ended June 30, 2013. This decrease in interest expense was due to a decrease in the average balance of interest-bearing liabilities of $72.3 million, or 1.2%, to $5.878 58

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billion for the six months ended June 30, 2014 from $5.950 billion for the six months ended June 30, 2013. In addition, the average cost of interest-bearing liabilities decreased by eight basis points to 0.97% for the six months ended June 30, 2014 from 1.05% for the six months ended June 30, 2013. The decrease in interest-bearing liabilities is the result of a decrease in the average balance of time deposits of $198.5 million, or 10.9%, as we believe consumers continue to prefer more liquid deposit accounts as protection against possible higher interest rates in the future. Partially offsetting this decrease was an increase of $109.3 million, or 3.5% in all other deposit products. The decrease in the cost of funds was due primarily to a reduction in the rates paid on all deposit products and the maturity of an interest rate swap on our junior subordinated debentures. Net Interest Income Net interest income decreased by $4.3 million, or 3.4%, to $123.0 million for the six months ended June 30, 2014 from $127.3 million for the six months ended June 30, 2013. This decrease in net interest income was attributable to the factors discussed above. Our net interest rate spread decreased to 3.20% for the six months ended June 30, 2014 from 3.25% for the six months ended June 30, 2013, and our net interest margin decreased to 3.37% for the six months ended June 30, 2014 from 3.46% for the six months ended June 30, 2013. Provision for Loan Losses The provision for loan losses increased by $3.2 million, or 25.5%, to $15.8 million for the six months ended June 30, 2014 from $12.6 million for the six months ended June 30, 2013. This increase is due primarily to seven business banking loans requiring combined provisions of $12.2 million during the 2014 period. Improvements in overall asset quality partially offset these increases. Classified loans decreased by $19.8 million, or 8.6%, to $210.7 million at June 30, 2014 from $230.5 million at June 30, 2013. In addition, total nonaccrual loans decreased by $23.8 million, or 19.7%, to $96.8 million at June 30, 2014 from $120.6 million at June 30, 2013 and loans 90 days or more delinquent decreased by $12.2 million, or 19.3%, to $51.3 million at June 30, 2014 from $63.5 million at June 30, 2013. 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. Net charge-offs for the six months ended June 30, 2014 were $15.7 million compared to $13.2 million for the six months ended June 30, 2013. Annualized net charge-offs to average loans increased to 0.54% for the six months ended June 30, 2014 from 0.47% for the six months ended June 30, 2013. 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 $7.0 million, or 23.5%, to $36.8 million for the six months ended June 30, 2014 from $29.8 million for the six months ended June 30, 2013. The increase is primarily attributable to increases in gain on sale of investments and trust and other financial services income and a decrease in loss on real estate owned. Gain on sale of investments increased by $3.6 million to $3.7 million for the six months ended June 30, 2014 from $120,000 for the six months ended June 30, 2013, due to the sale of equity securities during the current year. Trust and other financial services income increased by $1.6 million, or 36.6% to $6.1 million for the six months ended June 30, 2014 from $4.5 million for the six months ended June 30, 2013. This increase is due to our acquisition of Evans Capital Management, Inc. as of January 1, 2014 as well as increases in the amount of assets under management. Loss on real estate owned decreased by $1.7 million, or 71.1%, to $697,000 for the six months ended June 30, 2014 from $2.4 million for the six months ended June 30, 2013, as a result of a write-down of our largest REO property 59 --------------------------------------------------------------------------------



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during 2013. Partially offsetting these favorable variances was a decrease in mortgage banking income of $678,000, or 56.9%, to $514,000 for the six months ended June 30, 2014 from $1.2 million for the six months ended June 30, 2013. This decrease resulted from fewer sales of residential mortgage loans into the secondary market during the current year compared to the same period last year. Noninterest Expense Noninterest expense increased by $2.7 million, or 2.6%, to $107.0 million for the six months ended June 30, 2014 from $104.3 million for the six months ended June 30, 2013. This increase is primarily the result of increases in professional services, marketing expenses, office operations and compensation and employee benefits. Professional services increased by $954,000, or 32.7%, to $3.8 million for the six months ended June 30, 2014 from $2.9 million for the six months ended June 30, 2013, due primarily to consulting engagements to test and refine our regulatory compliance management system. Marketing expenses increased by $575,000, or 14.4%, to $4.6 million for the six months ended June 30, 2014 from $4.0 million for the six months ended June 30, 2013. This increase is primarily the result of loan and demand deposit marketing campaigns which started during March 2014. Office operations increased by $491,000, or 6.9%, to $7.6 million for the six months ended June 30, 2014 from $7.1 million for the six months ended June 30, 2013, due primarily to increased collections costs. Compensation and employee benefits increased by $429,000, or 0.8% to $56.5 million for the six months ended June 30, 2014 from $56.1 million for the six months ended June 30, 2013. This increase is primarily the result of our acquisition of Evans Capital Management, Inc. These increases were partially offset by a decrease in federal deposit insurance premiums of $227,000, or 7.9%, to $2.6 million for the six months ended June 30, 2014 from $2.9 million for the six months ended June 30, 2013. Income Taxes The provision for income taxes decreased by $1.8 million, or 15.3%, to $9.7 million for the six months ended June 30, 2014 from $11.5 million for the six months ended June 30, 2013. This decrease in income tax expense is primarily a result of the decrease in income before income taxes of $3.2 million, or 7.9%. In addition, the $1.00 per share special dividend paid on May 15, 2014 is deductible on the Company's common stock held in our Employee Stock Ownership Plan and 401(k) plan. Our effective tax rate for the six months ended June 30, 2014 was 26.2% compared to 28.5% for the six months ended June 30, 2013. We anticipate our effective tax rate to be between 26.0% and 27.0% for the year. 60

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Table of Contents Average Balance Sheet (Dollars in thousands) The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are calculated using daily averages. Quarter ended June 30, 2014 2013 Avg. Avg. Average yield/ Average yield/ balance Interest cost (f) balance Interest cost (f) Assets: Interest-earning assets: Loans receivable (a) (b) (includes FTE adjustments of $540 and $561, respectively) $ 5,833,540 71,337 4.90 % 5,623,784 72,548 5.16 % Mortgage-backed securities (c) 601,066 2,666 1.77 % 726,583 3,308 1.82 % Investment securities (c) (includes FTE adjustments of $860 and $1,127, respectively) 507,315 3,472 2.74 % 531,802 4,255 3.20 % FHLB stock 43,944 697 6.34 % 48,110 34 0.28 % Other interest-earning deposits 424,434 286 0.27 %



513,930 340 0.26 %

Total interest-earning assets (includes FTE adjustments of $1,400 and $1,688, respectively) 7,410,299 78,458 4.24 %



7,444,209 80,485 4.32 %

Noninterest earning assets (d) 530,582 531,771 Total assets $ 7,940,881 7,975,980 Liabilities and shareholders' equity: Interest-bearing liabilities: Savings deposits $ 1,239,563 821 0.27 % 1,209,783 900 0.30 % Interest-bearing checking deposits 896,014 149 0.07 % 873,804 149 0.07 % Money market deposit accounts 1,182,542 792 0.27 % 1,121,579 748 0.27 % Time deposits 1,598,523 4,659 1.17 % 1,791,030 5,607 1.26 % Borrowed funds (e) 872,653 6,623 3.04 % 866,476 6,612 3.06 % Junior subordinated debentures 103,094 1,170 4.49 % 103,094 1,420 5.45 % Total interest-bearing liabilities 5,892,389 14,214 0.97 % 5,965,766 15,436 1.04 %

Noninterest-bearing checking deposits 852,253 778,468 Noninterest-bearing liabilities 128,072 102,191 Total liabilities 6,872,714 6,846,425 Shareholders' equity 1,068,167 1,129,555 Total liabilities and shareholders' equity $ 7,940,881 7,975,980 Net interest income/ Interest rate spread 64,244 3.27 % 65,049 3.28 % Net interest-earning assets/ Net interest margin $ 1,517,910 3.47 % 1,478,443 3.50 % Ratio of interest-earning assets to interest-bearing liabilities 1.26X 1.25X



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(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) 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 - 4.87% and 5.12%, respectively; Investment securities - 2.06% and 2.35%, respectively; interest-earning assets - 4.17% and 4.23%, respectively. GAAP basis net interest rate spreads were 3.20% and 3.19%, respectively; and GAAP basis net interest margins were 3.39% and 3.40%, respectively. 61

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Table of Contents Rate/ Volume Analysis (Dollars in Thousands) The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume. Quarters ended June 30, 2014 and 2013 Net Rate Volume Change Interest earning assets: Loans receivable $ (3,917 ) 2,706 (1,211 ) Mortgage-backed securities (85 ) (557 ) (642 ) Investment securities (615 ) (168 ) (783 ) FHLB stock 666 (3 ) 663 Other interest-earning deposits 5 (59 ) (54 )



Total interest-earning assets (3,946 ) 1,919 (2,027 )

Interest-bearing liabilities: Savings deposits (99 ) 20 (79 )



Interest-bearing checking deposits (4 ) 4 - Money market deposit accounts

3 41 44 Time deposits (345 ) (603 ) (948 ) Borrowed funds (36 ) 47 11 Junior subordinated debentures (250 ) - (250 )



Total interest-bearing liabilities (731 ) (491 ) (1,222 )

Net change in net interest income $ (3,215 ) 2,410 (805 )

62

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Table of Contents Average Balance Sheet (Dollars in thousands) The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are calculated using daily averages. Six months ended June 30, 2014 2013 Avg. Avg. Average yield/ Average yield/ balance Interest cost (f) balance Interest cost (f) Assets: Interest-earning assets: Loans receivable (a) (b) (includes FTE adjustments of $1,084 and $1,115, respectively) $ 5,828,500 141,254 4.89 % $ 5,631,110 146,075 5.19 % Mortgage-backed securities (c) 611,050 5,459 1.79 % 726,057 6,749 1.86 % Investment securities (c) (includes FTE adjustments of $1,752 and $2,238, respectively) 507,334 7,099 2.80 % 500,881 8,334 3.33 % FHLB stock 43,830 973 4.44 % 47,492 71 0.30 % Other interest-earning deposits 370,292 486 0.26 % 457,871 591 0.26 % Total interest-earning assets (includes FTE adjustments of $2,836 and $3,353, respectively) 7,361,006 155,271 4.25 %



7,363,411 161,820 4.40 %

Noninterest earning assets (d) 575,490 584,030 Total assets $ 7,936,496 7,947,441 Liabilities and shareholders' equity: Interest-bearing liabilities: Savings deposits $ 1,224,042 1,624 0.27 % $ 1,195,216 1,794 0.30 % Interest-bearing checking deposits 873,972 288 0.07 % 857,121 289 0.07 % Money market deposit accounts 1,178,202 1,574 0.27 % 1,114,553 1,490 0.27 % Time deposits 1,621,745 9,425 1.17 % 1,820,244 11,645 1.29 % Borrowed funds (e) 876,897 13,180 3.03 % 860,017 13,038 3.06 % Junior subordinated debentures 103,094 2,327 4.49 % 103,094 2,825 5.45 % Total interest-bearing liabilities 5,877,952 28,418 0.97 % 5,950,245 31,081 1.05 %

Noninterest-bearing checking deposits 833,750 766,578 Noninterest-bearing liabilities 114,994 96,297 Total liabilities 6,826,696 6,813,120 Shareholders' equity 1,109,800 1,134,321 Total liabilities and shareholders' equity $ 7,936,496 7,947,441 Net interest income/ Interest rate spread 126,853 3.28 % 130,739 3.35 % Net interest-earning assets/ Net interest margin $ 1,483,054 3.45 % 1,413,166 3.55 % Ratio of interest-earning assets to interest-bearing liabilities 1.25X 1.24X



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(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) 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 - 4.85% and 5.15%, respectively; Investment securities - 2.11% and 2.43%, respectively; interest-earning assets - 4.17% and 4.30%, respectively. GAAP basis net interest rate spreads were 3.20% and 3.25%, respectively; and GAAP basis net interest margins were 3.37% and 3.46%, respectively. 63

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Table of Contents Rate/ Volume Analysis (Dollars in Thousands) The following table represents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume), and (iii) net change. Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume. Six months ended June 30, 2014 and 2013 Net Rate Volume Change Interest earning assets: Loans receivable $ (9,941 ) 5,120 (4,821 ) Mortgage-backed securities (263 ) (1,027 ) (1,290 ) Investment securities (1,342 ) 107 (1,235 ) FHLB stock 907 (5 ) 902 Other interest-earning deposits 8 (113 ) (105 )



Total interest-earning assets (10,631 ) 4,082 (6,549 )

Interest-bearing liabilities: Savings deposits (213 ) 43 (170 )



Interest-bearing checking deposits (7 ) 6 (1 ) Money market deposit accounts

(1 ) 85 84 Time deposits (950 ) (1,270 ) (2,220 ) Borrowed funds (112 ) 254 142 Junior subordinated debentures (498 ) - (498 )



Total interest-bearing liabilities (1,781 ) (882 ) (2,663 )

Net change in net interest income $ (8,850 ) 4,964 (3,886 )


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