Northwest Bancorp Inc - Quarterly Report (10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2008


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 0-23817

Northwest Bancorp, Inc.

(Exact name of registrant as specified in its charter)


United States of America		23-2900888

(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 þ 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 o	Accelerated Filer þ	Non-Accelerated Filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

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

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

Common Stock ($0.10 par value) 48,468,475 shares outstanding as of July 31, 2008

NORTHWEST BANCORP, INC.
INDEX


	PAGE
PART I FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Consolidated Statements of Financial Condition as of June 30, 2008 and December 31, 2007		1

Consolidated Statements of Income for the three months and six months ended June 30, 2008 and 2007		2

Consolidated Statements of Changes in Shareholders’ Equity for the three months ended June 30, 2008 and 2007		3

Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2008 and 2007		4

Consolidated Statements of Cash Flows for the three months and six months ended June 30, 2008 and 2007		5

Notes to Consolidated Financial Statements — Unaudited		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures about Market Risk		33

Item 4. Controls and Procedures		34

PART II OTHER INFORMATION

Item 1. Legal Proceedings		34

Item 1A. Risk Factors		34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		34

Item 3. Defaults Upon Senior Securities		35

Item 4. Submission of Matters to a Vote of Security Holders		35

Item 5. Other Information		36

Item 6. Exhibits		36

Signatures		37

Certifications
EX-31.1
EX-31.2
EX-32.1

ITEM 1. FINANCIAL STATEMENTS

NORTHWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share data)


	(unaudited)
	June 30,			December 31,
	2008			2007
Assets
Cash and due from banks	$	98,548			75,905
Interest-earning deposits in other financial institutions		—			153,160
Federal funds sold and other short-term investments		5,811			1,551
Marketable securities available-for-sale (amortized cost of $1,290,881 and $1,125,426)		1,288,291			1,133,367

Total cash and investments		1,392,650			1,363,983

Loans held for sale		3,396			28,412

Mortgage loans — one- to four- family		2,468,293			2,386,506
Home equity loans		1,001,529			973,161
Consumer loans		284,801			272,867
Commercial real estate loans		940,104			845,397
Commercial business loans		343,080			331,063

Total loans		5,041,203			4,837,406
Allowance for loan losses		(43,293	)		(41,784	)

Total loans, net		4,997,910			4,795,622

Federal Home Loan Bank stock, at cost		50,068			31,304
Accrued interest receivable		26,489			27,084
Real estate owned, net		8,407			8,667
Premises and equipment, net		115,266			110,894
Bank owned life insurance		121,051			118,682
Goodwill		171,363			171,614
Mortgage servicing rights		8,821			8,955
Other intangible assets		9,196			11,782
Other assets		15,112			14,929

Total assets	$	6,916,333			6,663,516


Liabilities and Shareholders’ equity
Liabilities:
Noninterest-bearing demand deposits	$	393,408			361,102
Interest-bearing demand deposits		731,169			717,991
Savings deposits		1,545,131			1,426,545
Time deposits		2,716,639			3,036,696

Total deposits		5,386,347			5,542,334

Borrowed funds		724,305			339,115
Junior subordinated deferrable interest debentures held by trusts that issued guaranteed capital debt securities		108,287			108,320
Advances by borrowers for taxes and insurance		33,699			24,159
Accrued interest payable		4,530			4,356
Other liabilities		36,414			32,354

Total liabilities		6,293,582			6,050,638

Shareholders’ equity:
Preferred stock, $0.10 par value: 50,000,000 authorized, no shares issued		—			—
Common stock, $0.10 par value: 500,000,000 shares authorized, 51,210,750 and 51,191,109 issued, respectively		5,121			5,119
Paid-in capital		216,142			214,606
Retained earnings		477,110			458,425
Accumulated other comprehensive (loss)/ income		(6,199	)		816
Treasury stock, at cost, 2,742,800 and 2,610,800 shares, respectively		(69,423	)		(66,088	)

		622,751			612,878

Total liabilities and shareholders’ equity	$	6,916,333			6,663,516

See accompanying notes to consolidated financial statements — unaudited

NORTHWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share amounts)


	Three months ended						Six months ended
	June 30,						June 30,
	2008			2007			2008			2007
Interest income:
Loans	$	80,520			76,812			161,409			151,178
Mortgage-backed securities		9,514			7,344			16,684			15,036
Taxable investment securities		3,217			7,887			7,066			15,969
Tax-free investment securities		3,028			3,134			6,021			6,367
Interest-earning deposits		710			3,650			2,506			5,869

Total interest income		96,989			98,827			193,686			194,419

Interest expense:
Deposits		36,451			47,120			79,281			91,744
Borrowed funds		6,972			6,338			12,529			12,571

Total interest expense		43,423			53,458			91,810			104,315

Net interest income		53,566			45,369			101,876			90,104
Provision for loan losses		3,395			2,066			5,689			4,072

Net interest income after provision for loan losses		50,171			43,303			96,187			86,032

Noninterest income:
Service charges and fees		8,153			6,509			15,791			12,517
Trust and other financial services income		1,783			1,560			3,531			3,018
Insurance commission income		583			752			1,163			1,244
Gain on sale of loans, net		—			150			—			634
Gain/ (loss) on sale of real estate owned, net		(254	)		(23	)		(341	)		56
Gain on sale of investments, net		68			—			971			—
Other -than-temporary impairment of investments securities		(1,152	)		—			(1,472	)		—
Income from bank owned life insurance		1,177			1,098			2,369			2,167
Mortgage banking income		329			462			671			719
Other operating income		1,120			858			2,139			1,500

Total noninterest income		11,807			11,366			24,822			21,855

Noninterest expense:
Compensation and employee benefits		22,244			20,375			44,966			42,029
Premises and occupancy costs		5,318			5,326			11,043			10,787
Office operations		3,263			3,352			6,520			6,137
Processing expenses		4,715			3,729			8,919			7,280
Advertising		1,430			1,375			2,409			2,499
Federal deposit insurance premiums		1,020			165			1,844			329
Professional services		595			534			1,330			1,063
Amortization of other intangible assets		1,284			878			2,586			1,781
Loss on early extinguishment of debt		—			—			705			—
Other expenses		1,619			2,043			3,593			3,748

Total noninterest expense		41,488			37,777			83,915			75,653


Income before income taxes		20,490			16,892			37,094			32,234

Federal and state income taxes		6,048			4,592			10,030			8,637


Net income	$	14,442			12,300			27,064			23,597


Basic earnings per share	$	0.30			0.25			0.56			0.48


Diluted earnings per share	$	0.30			0.25			0.56			0.47

See accompanying notes to unaudited consolidated financial statements

NORTHWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(dollars in thousands)


											Accumulated
											Other						Total
	Common Stock					Paid-in		Retained			Comprehensive			Treasury			Shareholders’
Three months ended June 30, 2007	Shares			Amount		Capital		Earnings			Loss			Stock			Equity
Beginning balance at March 31, 2007		49,815,041		$	5,115		212,376		432,428			(10,076	)		(31,364	)		608,479

Comprehensive income:
Net income		—			—		—		12,300			—			—			12,300
Change in unrealized loss on securities, net of tax of $(3,407)		—			—		—		—			(5,329	)		—			(5,329	)

Total comprehensive income		—			—		—		12,300			(5,329	)		—			6,971

Exercise of stock options		10,565			1		123		—			—			—			124

Stock-based compensation expense		—			—		526		—			—			—			526

Issuance of RRP shares		800			—		—		—			—			—			—

Purchase of treasury stock		(677,700	)		—		—		—			—			(18,992	)		(18,992	)

Dividends paid ($0.20 per share)		—			—		—		(3,776	)		—			—			(3,776	)


Ending balance at June 30, 2007		49,148,706		$	5,116		213,025		440,952			(15,405	)		(50,356	)		593,332


										Accumulated
										Other						Total
	Common Stock				Paid-in		Retained			Comprehensive			Treasury			Shareholders’
Three months ended June 30, 2008	Shares		Amount		Capital		Earnings			Loss			Stock			Equity
Beginning balance at March 31, 2008		48,454,438	$	5,120		215,532		466,609			2,987			(69,423	)		620,825

Comprehensive income:
Net income		—		—		—		14,442			—			—			14,442
Change in unrealized loss on securities, net of tax of $(5,873)		—		—		—		—			(9,186	)		—			(9,186	)

Total comprehensive income		—		—		—		14,442			(9,186	)		—			5,256

Exercise of stock options		13,512		1		151		—			—			—			152

Stock-based compensation expense		—		—		459		—			—			—			459

Purchase of treasury stock		—		—		—		—			—			—			—

Dividends paid ($0.22 per share)		—		—		—		(3,941	)		—			—			(3,941	)


Ending balance at June 30, 2008		48,467,950	$	5,121		216,142		477,110			(6,199	)		(69,423	)		622,751

See accompanying notes to unaudited consolidated financial statements

NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(dollars in thousands)


											Accumulated
											Other						Total
	Common Stock					Paid-in		Retained			Comprehensive			Treasury			Shareholders’
Six months ended June 30, 2007	Shares			Amount		Capital		Earnings			Loss			Stock			Equity
Beginning balance at December 31, 2006		50,029,327		$	5,114		211,295		425,024			(11,609	)		(25,263	)		604,561

Comprehensive income:
Net income		—			—		—		23,597			—			—			23,597
Change in unrealized loss on securities, net of tax of $(2,427)		—			—		—		—			(3,796	)		—			(3,796	)

Total comprehensive income		—			—		—		23,597			(3,796	)		—			19,801

Exercise of stock options		23,579			2		376		—			—			—			378

Stock-based compensation expense		—			—		1,354		—			—			—			1,354

Issuance of RRP shares		4,300			—		—		—			—			—			—

Purchase of treasury stock		(908,500	)		—		—		—			—			(25,093	)		(25,093	)

Dividends paid ($0.40 per share)		—			—		—		(7,669	)		—			—			(7,669	)


Ending balance at June 30, 2007		49,148,706		$	5,116		213,025		440,952			(15,405	)		(50,356	)		593,332


											Accumulated
											Other						Total
	Common Stock					Paid-in		Retained			Comprehensive			Treasury			Shareholders’
Six months ended June 30, 2008	Shares			Amount		Capital		Earnings			Income			Stock			Equity
Beginning balance at December 31, 2007		48,580,309		$	5,119		214,606		458,425			816			(66,088	)		612,878

Effects of changing pension plan measurement date pursuant to FASB Statement No. 158 net of tax of $(319) and $361, respectively		—			—		—		(499	)		572			—			73


Beginning balance, as adjusted		48,580,309			5,119		214,606		457,926			1,388			(66,088	)		612,951

Comprehensive income:
Net income		—			—		—		27,064			—			—			27,064
Change in unrealized loss on securities, net of tax of $(4,850)		—			—		—		—			(7,587	)		—			(7,587	)

Total comprehensive income		—			—		—		27,064			(7,587	)		—			19,477

Exercise of stock options		19,641			2		241		—			—			—			243

Stock-based compensation expense		—			—		1,295		—			—			—			1,295

Purchase of treasury stock		(132,000	)		—		—		—			—			(3,335	)		(3,335	)

Dividends paid ($0.44 per share)		—			—		—		(7,880	)		—			—			(7,880	)


Ending balance at June 30, 2008		48,467,950		$	5,121		216,142		477,110			(6,199	)		(69,423	)		622,751

See accompanying notes to unaudited consolidated financial statements

NORTHWEST BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Three months ended						Six months ended
	June 30,						June 30,
	2008			2007			2008			2007
OPERATING ACTIVITIES:
Net Income	$	14,442			12,300			27,064			23,597
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		3,395			2,066			5,689			4,072
Net (gain)/ loss on sale of assets		544			(311	)		726			(528	)
Net gain on Visa Inc. share redemption		—			—			(672	)		—
Net depreciation, amortization and accretion		4,026			3,251			7,667			6,999
Decrease (increase) in other assets		1,549			(8,365	)		2,627			(8,025	)
(Decrease)/ increase in other liabilities		(709	)		1,920			5,553			4,984
Net amortization of premium/ discount on marketable securities		(1,892	)		(1,098	)		(3,626	)		(2,057	)
Deferred income tax expense (benefit)		—			1,034			(141	)		1,209
Noncash write-down of investment securities		1,152			—			1,472			—
Origination of loans held for sale		(33,416	)		(51,771	)		(108,030	)		(99,282	)
Proceeds from sale of loans held for sale		34,875			55,602			105,228			104,613
Noncash compensation expense related to stock benefit plans		459			526			1,295			1,447

Net cash provided by operating activities		24,425			15,154			44,852			37,029

INVESTING ACTIVITIES:
Purchase of marketable securities available-for-sale		(102,787	)		(19,859	)		(406,697	)		(32,662	)
Proceeds from maturities and principal reductions of marketable securities held-to-maturity		—			26,762			—			52,400
Proceeds from maturities and principal reductions of marketable securities available-for-sale		75,732			23,953			240,755			71,652
Proceeds from sale of marketable securities available-for-sale		1,042			—			1,042			—
Loan originations		(528,668	)		(434,236	)		(883,700	)		(739,283	)
Proceeds from loan maturities and principal reductions		361,529			313,781			673,198			566,065
Net (purchase) sale of FHLB stock		(9,658	)		378			(18,764	)		501
Proceeds from sale of real estate owned		2,866			1,547			3,822			2,575
Net (purchase) sale of real estate owned for investment		38			39			77			(178	)
Purchase of premises and equipment		(5,569	)		(1,704	)		(8,765	)		(4,079	)
Acquisitions, net of cash received		—			(25,150	)		—			(25,150	)

Net cash used by investing activities		(205,475	)		(114,489	)		(399,032	)		(108,159	)

NORTHWEST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)


	Three months ended						Six months ended
	June 30,						June 30,
	2008			2007			2008			2007
FINANCING ACTIVITIES:
Increase (decrease) in deposits, net		(169,321	)		21,276			(155,987	)		205,659
Proceeds from long-term borrowings		225,000			—			460,000			—
Repayments of long-term borrowings		(67	)		(25,032	)		(84,134	)		(25,047	)
Net increase/ (decrease) in short-term borrowings		2,827			(10,110	)		9,476			261
Increase in advances by borrowers for taxes and insurance		6,365			6,543			9,540			9,268
Cash dividends paid		(3,941	)		(3,776	)		(7,880	)		(7,669	)
Purchase of treasury stock		—			(18,992	)		(3,335	)		(25,093	)
Proceeds from stock options exercised		152			124			243			285

Net cash provided by financing activities		61,015			(29,967	)		227,923			157,664

Net (decrease)/ increase in cash and cash equivalents		(120,035	)		(129,302	)		(126,257	)		86,534


Cash and cash equivalents at beginning of period		224,394			370,169			230,616			154,333
Net (decrease)/ increase in cash and cash equivalents		(120,035	)		(129,302	)		(126,257	)		86,534

Cash and cash equivalents at end of period	$	104,359			240,867			104,359			240,867


Cash and cash equivalents:
Cash and due from banks		98,548			89,479			98,548			89,479
Interest-earning deposits in other financial institutions		—			148,647			—			148,647
Federal funds sold and other short-term investments		5,811			2,741			5,811			2,741

Total cash and cash equivalents		104,359			240,867			104,359			240,867


Cash paid during the period for:
Interest on deposits and borrowings (including interest credited to deposit accounts of $31,509, $41,123 $69,036 and $78,973, respectively)		42,592			51,979			91,636			102,720

Income taxes		5,754			3,791			6,155			4,454


Business acquisitions:
Fair value of assets acquired		—			211,846			—			211,846
Cash paid		—			(25,150	)		—			(25,150	)

Liabilities assumed		—			186,696			—			186,696


Non-cash activities:
Loans transferred to real estate owned		2,256			1,462			3,903			2,128

Sale of real estate owned financed by the Company		159			502			260			596

Loans transferred to held for investment from loans held for sale		24,827			—			24,827			—

See accompanying notes to unaudited consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

(1) Basis of Presentation and Informational Disclosures

The Northwest group of companies, headquartered in Warren, Pennsylvania, is organized in a two-tier holding company structure. Northwest Bancorp, MHC, a federal mutual holding company, owns approximately 63% of the outstanding shares of common stock of Northwest Bancorp, Inc. (the “Company”). The Company, a federally-chartered savings and loan holding company, is regulated by the Office of Thrift Supervision (“OTS”). The primary activity of the Company is the ownership of all of the issued and outstanding common stock of Northwest Savings Bank, a Pennsylvania-chartered savings bank (“Northwest”). Northwest is regulated by both the FDIC and the Pennsylvania Department of Banking. At June 30, 2008, Northwest operated 166 community-banking offices throughout Pennsylvania, western New York, eastern Ohio, Maryland and southern Florida.

The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiaries, Northwest, Northwest Settlement Agency, LLC, Northwest Consumer Discount Company, Northwest Finance Company, Northwest Financial Services, Inc., Northwest Capital Group, Inc., Boetger & Associates, Inc., Allegheny Services, Inc. and Great Northwest Corporation. The unaudited consolidated financial statements of the Company 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 and 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, 2007.

Certain items previously reported have been reclassified to conform to the current period’s reporting format. The reclassifications had no material effect on the Company’s financial condition or results of operations. The results of operations for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

Stock-Based Compensation

On January 16, 2008 the Company awarded employees 191,709 stock options with an exercise price of $25.03 and a grant date fair value of $3.28 per stock option. Awarded stock options vest over a five-year period beginning on the date of issuance. At June 30, 2008 there was compensation expense of $1.7 million for each of the RRP stock award and stock option plans remaining to be recognized. Stock-based compensation expense of $459,000 and $526,000 for the three months ended June 30, 2008 and 2007, respectively, was recognized in compensation expense relating to the Company’s RRP and stock option plans. Stock-based compensation expense of $1.3 million and $1.4 million for the six months ended June 30, 2008 and 2007, respectively, was recognized in compensation expense relating to the Company’s RRP and stock option plans.

Income Taxes

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 prescribes 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. FIN 48 states that 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 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.

The Company adopted the provisions of FIN 48 on January 1, 2007. No adjustments were recorded as a result of the implementation of FIN 48. As of January 1, 2008, the Company had a liability for

unrecognized tax benefits of $1.1 million, of which $706,000, when recognized in March 2008, impacted the effective tax rate. As of June 30, 2008, the Company had no liability for unrecognized tax benefits.

The Company recognizes interest accrued related to: (1) unrecognized tax benefits in Federal and state income taxes and (2) refund claims in Other operating income. The Company recognizes penalties (if any) in Federal and state income taxes. There is no amount accrued for the payment of interest or penalties at June 30, 2008. With few exceptions, the Company is no longer subject to examinations by the Internal Revenue Service, or the Department of Revenue and Taxation in the states in which it conducts business for the tax years ended prior to June 30, 2005. The Company is currently under a regularly scheduled examination by the Internal Revenue Service for the fiscal year ended June 30, 2005, the six-month period ended December 31, 2005 and the calendar year ended December 31, 2006.

Recently Issued Accounting Standards

Fair Value Measurements: In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities, but does not expand the use of fair value in any circumstance. SFAS 157 also requires expanded disclosures about the effect of fair value measurements on an entity’s financial statements. This statement applies when other standards require or permit assets and liabilities to be measured at fair value. SFAS is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Additionally, in February 2008, the FASB issued FSP 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which delays the effective date of SFAS 157 for non-recurring, non-financial instruments to fiscal years beginning after November 15, 2008. The Company adopted the non-delayed provisions of SFAS 157 on January 1, 2008. See Footnote 8 for further analysis of the impact of the adoption of this standard.

Fair Value Option: In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. SFAS 159 became effective January 1, 2008. We have not elected to value any assets or liabilities (not otherwise measured at fair value) under SFAS 159. We continue to evaluate the impact of SFAS 159 should we elect fair value measurement for any asset or liability in the future.

Business Combinations: In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (“SFAS 141(R)”) . SFAS 141 (R) is intended to improve financial reporting by creating greater consistency in the accounting and financial reporting of business combinations, resulting in more complete, comparable and relevant information for investors and other users of financial statements. SFAS 141 (R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and expands the disclosure requirements for material business combinations. SFAS 141 (R) will be effective for the Company beginning January 1, 2009. We are currently evaluating the effects this new standard will have on future acquisitions.

(2) Business Segments

The Company operates in two reportable business segments: Community Banking and Consumer Finance. The Community Banking segment provides services traditionally offered by full-service community banks, including commercial and individual demand, savings and time deposit accounts and commercial, mortgage and consumer loans, as well as brokerage and investment management and trust services. The Consumer Finance segment, which is comprised of Northwest Consumer Discount Company,

a subsidiary of Northwest, operating 48 offices in Pennsylvania and two offices in southwestern New York, 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.

As of or for the three months ended:


	Community		Consumer
June 30, 2008 ($ in 000’s)	Banks		Finance		All Other *			Consolidated
External interest income	$	91,973		5,016		—			96,989
Intersegment interest income		1,214		—		(1,214	)		—
Interest expense		42,288		1,272		(137	)		43,423
Provision for loan losses		2,500		895		—			3,395
Noninterest income		11,247		525		35			11,807
Noninterest expense		38,692		2,674		122			41,488
Income tax expense (benefit)		6,202		254		(408	)		6,048
Net income		14,752		446		(756	)		14,442

Total assets	$	6,795,617		116,949		3,767			6,916,333


	Community		Consumer
June 30, 2007 ($ in 000’s)	Banks		Finance		All Other *			Consolidated
External interest income	$	94,134		4,693		—			98,827
Intersegment interest income		2,037		—		(2,037	)		—
Interest expense		49,597		2,097		1,764			53,458
Provision for loan losses		1,500		566		—			2,066
Noninterest income		10,581		730		55			11,366
Noninterest expense		35,632		1,993		152			37,777
Income tax expense (benefit)		4,914		305		(627	)		4,592
Net income		15,109		462		(3,271	)		12,300

Total assets	$	6,865,125		122,454		(89,418	)		6,898,161


*		Eliminations consist of intercompany loans, interest income and interest expense.

As of or for the six months ended:


	Community		Consumer
June 30, 2008 ($ in 000’s)	Banks		Finance		All Other *			Consolidated
External interest income	$	183,460		10,224		2			193,686
Intersegment interest income		2,781		—		(2,781	)		—
Interest expense		89,004		2,895		(89	)		91,810
Provision for loan losses		4,000		1,689		—			5,689
Noninterest income		23,646		1,091		85			24,822
Noninterest expense		78,219		5,423		273			83,915
Income tax expense (benefit)		10,586		453		(1,009	)		10,030
Net income		28,078		855		(1,869	)		27,064

Total assets	$	6,795,617		116,949		3,767			6,916,333


	Community		Consumer
June 30, 2007 ($ in 000’s)	Banks		Finance		All Other *			Consolidated
External interest income	$	184,852		9,565		2			194,419
Intersegment interest income		4,083		—		(4,083	)		—
Interest expense		96,610		4,204		3,501			104,315
Provision for loan losses		3,000		1,072		—			4,072
Noninterest income		20,546		1,202		107			21,855
Noninterest expense		71,137		4,190		326			75,653
Income tax expense (benefit)		9,370		518		(1,251	)		8,637
Net income		29,364		783		(6,550	)		23,597

Total assets	$	6,865,125		122,454		(89,418	)		6,898,161


*		Eliminations consist of intercompany loans, interest income and interest expense.

(3) Goodwill and Other Intangible Assets

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


	June 30,			December 31,
	2008			2007
Amortizable intangible assets:
Core deposit intangibles – gross	$	30,275			30,275
Less: accumulated amortization		(21,412	)		(19,318	)


Core deposit intangibles – net		8,863			10,957


Customer and Contract intangible assets – gross		2,781			2,781
Less: accumulated amortization		(2,448	)		(1,956	)


Customer and Contract intangible assets – net	$	333			825

The following information shows the actual aggregate amortization expense for the current quarter, the prior year’s quarter, the current six-month period and the prior year six-month period 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 three months ended 6/30/08	$	1,284

For the three months ended 6/30/07		878

For the six months ended 6/30/08		2,586

For the six months ended 6/30/07		1,781

For the year ending 12/31/08		4,443

For the year ending 12/31/09		2,847

For the year ending 12/31/10		1,896

For the year ending 12/31/11		1,445

For the year ending 12/31/12		693

For the year ending 12/31/13		355

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


	Community			Consumer
	Banks			Finance		Total
Balance at December 31, 2006	$	154,457			1,313		155,770
Goodwill acquired		15,844			—		15,844
Impairment losses		—			—		—

Balance at December 31, 2007		170,301			1,313		171,614
Adjustment to purchase price allocation		(251	)		—		(251	)
Goodwill acquired		—			—		—
Impairment losses		—			—		—

Balance at June 30, 2008	$	170,050			1,313		171,363

(4) Borrowed Funds

Borrowed funds at June 30, 2008 and December 31, 2007 are presented in the following table:


	June 30, 2008					December 31, 2007
			Average					Average
	Amount		rate			Amount		rate
Term notes payable to the FHLB of Pittsburgh:
Due within one year	$	159		2.67	%		84,031		5.00	%
Due between one and two years		36,790		4.14	%		35,588		4.63	%
Due between two and three years		135,000		4.17	%		36,567		4.36	%
Due between three and four years		100,000		3.78	%		65,000		5.02	%
Due between four and five years		125,000		3.96	%		35,000		4.55	%
Due between five and ten years		235,809		3.99	%		839		2.81	%


		632,758					257,025

Revolving line of credit, FHLB of Pittsburgh		—		—			—		—

Investor notes payable, due various dates through 2009		4,619		4.99	%		4,638		4.99	%

Securities sold under agreement to repurchase, due within one year		86,928		1.50	%		77,452		3.25	%


Total borrowed funds	$	724,305					339,115

Borrowings from the FHLB of Pittsburgh are secured by the Company’s investment securities, mortgage-backed securities and qualifying first mortgage loans. Certain of these borrowings are subject to restrictions or penalties in the event of prepayment.

The revolving line of credit with the FHLB of Pittsburgh carries a commitment of $150.0 million maturing on December 7, 2011. The rate is adjusted daily and any borrowings on this line may be repaid at any time without penalty.

(5) Guarantees

The Company issues 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. The Company is required to perform under a standby letter of credit when drawn upon by the guaranteed third party in the case of nonperformance by the Company’s 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 policies and procedures. Collateral may be obtained based on management’s credit assessment of the customer. At June 30, 2008, the

maximum potential amount of future payments the Company could be required to make under these standby letters of credit was $14.5 million, of which $11.2 million is fully collateralized. At June 30, 2008, the Company had a liability (deferred income) of $137,000 related to the standby letters of credit. There are no recourse provisions that would enable the Company to recover any amounts from third parties.

(6) 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. Stock options to purchase 587,673 of common stock with a weighted average exercise price of $25.47 per share were outstanding during the three and six months ended June 30, 2008 but were not included in the computation of diluted earnings per share for these periods because the options’ exercise price was greater than the average market price of the common shares. There were no anti-dilutive stock options for the three months or six months ended June 30, 2007. The computation of basic and diluted earnings per share follows (in thousands, except per share amounts):


	Three months ended				Six months ended
	June 30,				June 30,
	2008		2007		2008		2007
Reported net income	$	14,442		12,300		27,064		23,597

Weighted average common shares outstanding		48,359		49,280		48,345		49,516
Dilutive potential shares due to effect of stock options		201		321		238		293


Total weighted average common shares and dilutive potential shares		48,560		49,601		48,583		49,809


Basic earnings per share:	$	0.30		0.25		0.56		0.48


Diluted earnings per share:	$	0.30		0.25		0.56		0.47

(7) Pension and Other Post-retirement Benefits (in thousands):


	Three months ended June 30,
	Pension Benefits						Other Post-retirement Benefits
	2008			2007			2008		2007
Service cost	$	1,255			1,239			—		—
Interest cost		1,140			1,024			24		24
Expected return on plan assets		(1,247	)		(1,103	)		—		—
Amortization of transition asset		—			—			—		—
Amortization of prior service cost		13			20			—		—
Amortization of the net (gain) loss		31			187			11		11

Net periodic benefit cost	$	1,192			1,367			35		35


	Six months ended June 30,
	Pension Benefits						Other Post-retirement Benefits
	2008			2007			2008		2007
Service cost	$	2,510			2,479			—		—
Interest cost		2,280			2,047			48		47
Expected return on plan assets		(2,494	)		(2,205	)		—		—
Amortization of transition asset		—			—			—		—
Amortization of prior service cost		26			39			—		—
Amortization of the net (gain) loss		62			374			22		21

Net periodic benefit cost	$	2,384			2,734			70		68

The Company made no contribution to its pension or other post-retirement benefit plans during the six months ended June 30, 2008. The Company anticipates making a tax-deductible contribution to its defined benefit pension plan for the year ending December 31, 2008.

(8) Fair Value Measurements

Effective January 1, 2008, the Company adopted the provisions of SFAS 157 for all 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. SFAS 157 establishes a three-level hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. The fair value 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:

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

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

	o		Quotes from brokers or other external sources where the inputs are not deemed observable.

The Company is responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value. The Company performs due diligence to understand the inputs used or how the data was calculated or derived. The Company corroborates the reasonableness of external inputs in the valuation process.

The following table represents assets measured at fair value on a recurring basis as of June 30, 2008 (in thousands):


							Total
							assets at
Investment securities — available for sale	Level 1		Level 2		Level 3		fair value
Equity securities — available for sale	$	6,080		—		220		6,300

Debt securities — available for sale		—		1,261,790		20,201		1,281,991


Total assets	$	6,080		1,261,790		20,421		1,288,291

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 debt securities are a combination of multiple securities, including an investor note (Level 2), an income note (Level 3) and agency zero coupon bond (Level 2). The fair value of the various components of these securities is determined using Level 2 and Level 3 techniques. As such, the overall securities are classified as Level 3.

Equity securities – available for sale — Level 1 securities include publicly traded securities valued using quoted market prices. Level 3 securities include investments in two financial institutions that provide financial services only to investor banks received as part of previous acquisitions without observable market data to determine the investments fair values. These securities can only be sold back to the issuing financial institution at cost.

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 three months ended June 30, 2008 (in thousands):


	Equity		Debt
	securities		securities
Balance at April 1, 2008	$	220		21,208
Total net realized investment gains/ (losses) and net change in unrealized appreciation/ (depreciation):
Included in net income		—		—
Included in other comprehensive income		—		(1,007	)
Purchases and sales		—		—
Net transfers in (out) of Level 3		—		—


Balance at June 30, 2008	$	220		20,201

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 six months ended June 30, 2008 (in thousands):


	Equity		Debt
	securities		securities
Balance at January 1, 2008	$	220		22,369
Total net realized investment gains/ (losses) and net change in unrealized appreciation/ (depreciation):
Included in net income		—		—
Included in other comprehensive income		—		(2,168	)
Purchases and sales		—		—
Net transfers in (out) of Level 3		—		—


Balance at June 30, 2008	$	220		20,201

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans held for sale, loans measured for impairment and mortgage servicing rights. The following table represents the fair value measurement for nonrecurring assets as of June 30, 2008 (in thousands):


							Total
							assets at
	Level 1		Level 2		Level 3		fair value
Loans held for sale	$	3,396		—		—		3,396

Loans measured for impairment		—		—		28,995		28,995

Mortgage servicing rights		—		—		408		408


Total assets	$	3,396		—		29,403		32,799

Loans held for sale – Mortgage loans held for sale are recorded at the lower of carrying value or market value. The fair value of mortgage loans held for sale in based on what secondary markets are currently offering. As the fair value is determined by a quoted price from Freddie Mac, and the Company has open delivery contracts with Freddie Mac, the Company classifies loans held for sale as nonrecurring Level 1.

Impaired loans – A loan is considered to be impaired when it is probable that all of the principal and interest due under the original terms of the loan may not be collected. Impairment is measured based on the fair value of the underlying collateral. The Company measures impairment on all nonaccrual commercial and commercial real estate loans for which it has established specific reserves as part of the specific allocated allowance component of the allowance for loan losses. The Company classifies impaired loans as nonrecurring Level 3.

Mortgage servicing rights – Mortgage servicing rights represent the value associated with servicing residential mortgage loans, when the mortgage loans have been sold into the secondary market and the related servicing has been retained by the Company. 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.

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. The Company has 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 interest rates which could impact our net interest margin;

	•		Adverse changes in our loan portfolio and the resulting credit risk-related losses;

	•		The adequacy of the allowance for loan losses;

	•		Changes in general economic or business conditions resulting in changes in demand for credit and other services, among other things;

	•		Changes in consumer confidence, spending and savings habits relative to the bank and non-bank financial services we provide;

	•		Compliance with laws and regulatory requirements of federal and state agencies;

	•		New legislation affecting the financial services industry;

	•		Competition from other financial institutions in originating loans and attracting deposits;

	•		Our ability to effectively implement technology driven products and services;

	•		Sources of liquidity;

	•		Changes in costs and expenses; and

	•		Our success in managing the risks involved in the foregoing.

Overview of Critical Accounting Policies Involving Estimates

The Company’s critical accounting policies involve accounting estimates that: a) require assumptions about highly uncertain matters, and b) could vary sufficiently enough to cause a material effect on the Company’s financial condition or results of operations.

Allowance for Loan Losses. In originating loans, the Company recognizes that losses will be experienced on loans and that the risk of loss will vary with, among other things, the type of loan, the creditworthiness of the borrower, general economic conditions and the quality of the collateral for the loan. The Company maintains an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance for loan losses represents management’s estimate of probable losses based on all available information. The allowance for loan losses is based on management’s evaluation of the collectibility of the loan portfolio, including past loan loss experience, known and inherent losses, information about specific borrower situations and estimated collateral values, and current economic conditions. The loan portfolio and other credit exposures are regularly reviewed by management in its determination of the allowance for loan losses. The methodology for assessing the appropriateness of the allowance includes a review of historical losses, peer group comparisons, industry data and economic conditions. As an integral part of their examination process, regulatory agencies periodically review the Company’s allowance for loan losses and may require the Company to make additional provisions for estimated losses based upon judgments different from those of management. In establishing the allowance for loan losses, loss factors are applied to various pools of outstanding loans. Loss factors are derived using the Company’s historical loss experience and may be adjusted for factors that affect the collectibility of the portfolio as of the evaluation date. Commercial loans that are criticized and are over a certain dollar amount are evaluated individually to determine the required allowance for loan losses and to evaluate the potential impairment of such loans under Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (“SFAS 114”). Although management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations. The allowance is based on information known at the time of the review. Changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings. Such changes could impact future results. Management believes, to the best of their knowledge, that all known losses as of the balance sheet date have been recorded.

Goodwill. Goodwill is not subject to amortization but must be tested for impairment at least annually, and possibly more frequently if certain events or changes in circumstances arise. Impairment testing requires that the fair value of each reporting unit be compared to its carrying amount, including goodwill. Reporting units are identified based upon analyzing each of the Company’s individual operating segments. A reporting unit is defined as any distinct, separately identifiable component of an operating segment for which complete, discrete financial information is available that management regularly reviews. Goodwill is allocated to the carrying value of each reporting unit based on its relative fair value at the time it is acquired. Determining the fair value of a reporting unit requires a high degree of subjective management judgment. A discounted cash flow valuation model is used to determine the fair value of each reporting unit. The discounted cash flow model incorporates such variables as growth of net income, interest rates and terminal values. Based upon an evaluation of key data and market factors, management selects the specific variables to be incorporated into the valuation model. Future changes in the economic environment or the operations of the operating units could cause changes to these variables, which could give rise to declines in the estimated fair value of the reporting unit. Declines in fair value could result in impairment being identified. The Company has established June 30 ^th of each year as the date for conducting its annual goodwill impairment assessment. The variables are selected as of that date and the valuation model is run to determine the fair value of each reporting unit. At June 30, 2008, the Company did not identify any individual reporting unit where the fair value was less than the carrying value.

Deferred Income Taxes. The Company uses the asset and liability method of accounting for income taxes as prescribed in Statement of Financial Accounting Standards No. 109, “ Accounting for Income Taxes” (“SFAS 109”). Using this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates the Company makes in determining our deferred tax assets, which are inherently subjective, are reviewed on an ongoing basis as regulatory and business factors change. A reduction in estimated future taxable income could require the Company to record a valuation allowance. Changes in levels of valuation allowances could result in increased income tax expense, and could negatively affect earnings.

Other Intangible Assets. Using the purchase method of accounting for acquisitions, the Company is required to record the assets acquired, including identified intangible assets, and liabilities assumed at their fair values. These fair values often involve estimates based on third party valuations, including appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques, which are inherently subjective. Core deposit and other intangible assets are recorded in purchase accounting when a premium is paid to acquire other entities or deposits. Other intangible assets, which are determined to have finite lives, are amortized based on the period of estimated economic benefits received, primarily on an accelerated basis.

Executive Summary

The Company’s total assets at June 30, 2008 were $6.916 billion, an increase of $252.8 million, or 3.8%, from $6.664 billion at December 31, 2007. This increase in assets is primarily attributed to an increase in cash and investments of $28.7 million, or 2.1%, and an increase in net loans receivable of $202.3 million, or 4.2%, funded primarily by an increase in borrowed funds of $385.2 million, or 113.6%, partially offset by a decrease in deposits of $156.0 million, or 2.8%.

Net loans receivable increased by $202.3 million, or 4.2%, to $4.998 billion at June 30, 2008 from $4.796 billion at December 31, 2007. This strong loan demand was funded primarily by additional borrowings from the Federal Home Loan Bank of Pittsburgh (“FHLB”). During the six months ended June 30, 2008 the Company increased its commercial loan portfolio by $106.7 million, or 9.1%.

Deposits decreased by $156.0 million, or 2.8%, to $5.386 billion at June 30, 2008 from $5.542 billion at December 31, 2007. Noninterest-bearing demand deposits increased by $32.3 million, or 8.9%, to $393.4 million at June 30, 2008 from $361.1 million at December 31, 2007, interest-bearing demand deposits increased by $13.2 million, or 1.8%, to $731.2 million at June 30, 2008 from $718.0 million at December 31, 2007 and savings deposits increased by $118.6 million, or 8.3%, to $1.545 billion at June 30, 2008 from $1.427 billion at December 31, 2007, while time deposits decreased by $320.1 million, or 10.5%, to $2.717 billion at June 30, 2008 from $3.037 billion at December 31, 2007. The decrease in time deposits was a result of the Bank using alternative funding sources in an effort to decrease the overall cost of funds and to improve its interest-rate sensitivity position.

Borrowings increased by $385.2 million, or 113.6%, to $724.3 million at June 30, 2008 from $339.1 million at December 31, 2007. During the six months ended June 30, 2008, the Company borrowed $460.0 million from the FHLB while pre-paying $76.0 million of higher rate FHLB advances scheduled to mature during the current year. The FHLB advances were borrowed at a weighted average rate of 3.77% and with a weighted average maturity of 5.5 years.

Total shareholders’ equity at June 30, 2008 was $622.8 million, an increase of $9.9 million, or 1.6%, from $612.9 million at December 31, 2007. This increase was primarily attributable to net income of $27.1 million for this six month period, which was partially offset by a decrease in other comprehensive income of $7.6 million, dividends paid of $7.9 million and the purchase of 132,000 treasury shares at a total cost of $3.3 million.

Effective January 1, 2008, the Company adopted SFAS 157, which defines fair value, establishes a consistent framework for measuring fair value and expands the disclosure requirements related to fair value measurements. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value. SFAS 157 requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The adoption of SFAS 157 did not have a material impact on the operations of the Company.

Northwest is 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 the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Northwest must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. 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 Northwest 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 average assets (as defined). Dollar amounts in the accompanying tables are in thousands.


June 30, 2008
						Minimum Capital					Well Capitalized
	Actual					Requirements					Requirements
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	575,383		13.44	%		342,413		8.00	%		428,016		10.00	%

Tier I Capital (to risk weighted assets)		531,784		12.42	%		171,206		4.00	%		256,810		6.00	%

Tier I Capital (leverage) (to average assets)		531,784		7.76	%		205,627		3.00	%*		342,711		5.00	%


December 31, 2007
						Minimum Capital					Well Capitalized
	Actual					Requirements					Requirements
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital (to risk weighted assets)	$	571,785		14.10	%		324,304		8.00	%		405,380		10.00	%

Tier I Capital (to risk weighted assets)		529,833		13.07	%		162,152		4.00	%		243,228		6.00	%

Tier I Capital (leverage) (to average assets)		529,833		8.21	%		193,630		3.00	%*		322,717		5.00	%


*		The FDIC has indicated that the most highly rated institutions which meet certain criteria will be required to maintain a ratio of 3%, and all other institutions will be required to maintain an additional capital cushion of 100 to 200 basis points. As of June 30, 2008, the Company had not been advised of any additional requirements in this regard.

Northwest is 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 liquid assets as a percentage of deposits and borrowings (“liquidity ratio”). This ratio at June 30, 2008 was 17.9%. The Company and Northwest 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, loan commitments and the repurchase of treasury shares. During the quarter ended June 30, 2008 the Company borrowed $225.0 million from the FHLB at an average rate of 3.95% with an average life of 5.33 years. The Company has continued to borrow from the FHLB as a funding alternative to renewing maturing higher cost certificates of deposits. This strategy has enabled the Bank to decrease its cost of funds from 3.66% for the quarter ended December 31, 2007 to 2.99% for the quarter ended June 30, 2008. As of June 30, 2008 the Bank had approximately $2.7 billion of additional borrowing capacity available with the FHLB, including a $150.0 million line of credit.

The Company paid $3.9 million and $3.8 million in cash dividends during the quarters ended June 30, 2008 and 2007, respectively. The Company paid $7.9 million and $7.7 million in cash dividends during the six months ended June 30, 2008 and 2007, respectively. Annually, Northwest Bancorp, MHC requests the non-objection of the OTS to waive its receipt of dividends from the Company when such dividends are not needed for regulatory capital, working capital or other purposes. The common stock dividend payout ratio (dividends declared per share divided by net income per share) was 73.3% in the current quarter on a dividend of $0.22 per share compared with 80.0% in the same quarter last year on a dividend of $0.20 per share. As a result of Northwest Bancorp, MHC waiving its receipt of dividend payments, actual dividends paid to minority shareholders represented 27.3% and 29.1% of net income for the quarter and six months ended June 30, 2008 compared to 30.7% and 32.5% of net income for the quarter and six months ended June 30, 2007. The Company has declared a dividend of $0.22 per share payable on August 14, 2008 to shareholders of record as of July 31, 2008.

Nonperforming Assets

The following table sets forth information with respect to the Company’s nonperforming assets. Nonaccrual loans are those loans on which the accrual of interest has ceased. Loans are automatically placed on nonaccrual status when they are more than 90 days contractually delinquent and may also be placed on nonaccrual status even if not more than 90 days delinquent but other conditions exist. Other nonperforming assets represent property acquired by the Company 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, 2008			December 31, 2007
	(Dollars in Thousands)
Loans accounted for on a nonaccrual basis:
One-to-four family residential loans	$	12,599			12,542
Multifamily and commercial real estate loans		23,104			24,323
Consumer loans		6,984			7,582
Commercial business loans		26,336			5,163
Total		69,023			49,610
Total nonperforming loans as a percentage of loans		1.37	%		1.03	%
Total real estate acquired through foreclosure and other real estate owned		8,407			8,667
Total nonperforming assets	$	77,430			58,277
Total nonperforming assets as a percentage of total assets		1.12	%		0.87	%

A loan is considered to be impaired, as defined by SFAS No. 114 when based on current information and events, it is probable that the Company 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 prescribed by SFAS 114: (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 reserve is allocated for the impairment. Impaired loans at June 30, 2008 and December 31, 2007 were $69.0 million and $49.6 million, respectively.

Allowance for Loan Losses

The Company’s Board of Directors has adopted an “Allowance for Loan 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 the Company’s policies and procedures and other supervisory and regulatory guidelines.

On an ongoing basis, the Credit Review 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. On an on going basis the loan officer along with the Credit Review department grades or classifies problem loans or potential problem loans based upon their knowledge of the lending relationship and other information previously accumulated. The Company’s loan grading system for problem loans is consistent with industry regulatory guidelines which classify loans as “special mention”, “substandard”, “doubtful” or “loss.” Loans that do not expose the Company to risk sufficient to warrant classification in one of the subsequent categories, but which possess some weaknesses, are designated as “special mention”. A “substandard” loan is any loan that is more than 90 days 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 a 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 reserve in not warranted.

The loans that have been classified as substandard or doubtful are reviewed by the Credit Review department for possible impairment under the provisions of SFAS 114. A loan is considered impaired when, based on current information and events, it is probable that the Company 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 Review department determines the proper measure of impairment for each loan based on one of three methods as prescribed by SFAS 114: (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 Review 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 under the provisions of Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies.” This segmentation is accomplished by grouping loans of similar product types, risk characteristics and industry concentration into homogeneous pools. A range of losses for each pool is then established based upon historical loss ratios. This historical net charge-off amount is then analyzed and adjusted based on historical 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 range of losses 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 the Credit Committee on a quarterly basis. The Credit Committee reviews the processes and documentation presented, reviews the concentration of credit by industry and customer, discusses lending products, activity, competition and collateral values, as well as economic conditions in general and in each market area of the Company. 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 the Company’s delinquency trends, nonperforming asset amounts and ALL levels and ratios compared to its 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.

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.

Management acknowledges that this is a dynamic process and consists of factors, many of which are external and out of management’s 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.

Comparison of Operating Results for the Quarter Ended June 30, 2008 and 2007

Net income for the three months ended June 30, 2008 was $14.4 million, or $0.30 per diluted share, an increase of $2.1 million, or 17.4%, from $12.3 million, or $0.25 per diluted share, for the same quarter last year. The increase in net income resulted primarily from an increase in net interest income of $8.2 million and an increase in noninterest income of $441,000, which were partially offset by an increase in the provision for loan losses of $1.3 million, an increase in noninterest expense of $3.7 million and an increase in income taxes of $1.5 million. A discussion of each change follows.

Annualized, net income for the three months ended June 30, 2008 represents a 9.30% and 0.83% return on average equity and return on average assets, respectively, compared to 8.21% and 0.73% for the same quarter last year.

Interest Income

Total interest income decreased by $1.8 million, or 1.8%, on a taxable equivalent basis, to $99.0 million due to a decrease in the average yield earned on interest earning assets, which was partially offset by an increase in the average balance of interest earning assets. The average yield on interest earning assets, on a taxable equivalent basis, decreased to 6.15% for the quarter ended June 30, 2008 from 6.43% for the quarter ended June 30, 2007. The average yield on all categories of interest earning assets, except investment securities, decreased from the previous period. Average interest earning assets increased by $152.5 million, or 2.4%, to $6.427 billion for the quarter ended June 30, 2008 from $6.275 billion for the quarter ended June 30, 2007.

Interest income on loans increased by $3.8 million, or 4.9%, on a taxable equivalent basis, to $80.9 million for the quarter ended June 30, 2008 from $77.1 million for the quarter ended June 30, 2007. Average loans receivable increased by $401.3 million, or 8.8%, to $4.957 billion for the quarter ended June 30, 2008 from $4.556 billion for the quarter ended June 30, 2007. This increase is primarily attributable to strong loan

demand throughout the Company’s market area, as well as the acquisition of CSB Bank in June 2007. This increase in average loans receivable was partially offset by a decrease in the average yield earned on loans, which decreased to 6.51% for the quarter ended June 30, 2008 from 6.78% for the quarter ended June 30, 2007. This decrease is primarily attributable to the Company’s variable rate loans repricing in a generally lower interest rate environment.

Interest income on mortgage-backed securities increased by $2.2 million, or 29.6%, to $9.5 million for the quarter ended June 30, 2008 from $7.3 million for the quarter ended June 30, 2007. This increase is primarily the result of an increase in the average balance, which increased by $211.4 million, or 35.8%, to $802.5 million for the quarter ended June 30, 2008 from $591.1 million for the quarter ended June 30, 2007. This increase in average balance was partially offset by a decrease in the average yield, which decreased to 4.74% for the quarter ended June 30, 2008 from 4.97% for the quarter ended June 30, 2007. The increase in the average balance is primarily the result of the Company investing cash flows from maturities in the investment portfolio into mortgage-backed securities, which typically offer higher yields.

Interest income on investment securities decreased by $4.6 million, or 38.0%, to $7.6 million, on a taxable equivalent basis, for the quarter ended June 30, 2008 from $12.2 million, on a taxable equivalent basis, for the quarter ended June 30, 2007. The average balance decreased by $337.2 million, or 41.1%, to $482.7 million for the quarter ended June 30, 2008 from $819.9 million for the quarter ended June 30, 2007. The decrease in average balance was partially offset by an increase in the average yield, which increased to 6.27% for the quarter ended June 30, 2008 from 5.95% for the quarter ended June 30, 2007. The average balance decreased primarily as a result of bonds maturing or being called during the end of 2007 and first half of 2008 as well as the November 2007 sale of approximately $120.0 million of investment securities, the proceeds of which were used to purchase mortgage-backed securities and to fund loans. The average yield increased to 6.27%, from 5.95%, on a taxable equivalent basis, as a result of tax-free assets, which have a higher yield, comprising a larger percentage of the investment portfolio.

Interest income on interest-earning deposits decreased by $2.9 million, or 80.5%, as both the average balance and the average yield decreased significantly. The average balance decreased by $134.8 million, or 49.1%, to $139.5 million for the quarter ended June 30, 2008 from $274.3 for the quarter ended June 30, 2007. The average balance decreased due to the funding of loan demand. The average yield decreased to 2.01% from 5.26% as a result of decreases in the overnight federal funds rate.

Interest Expense

Total interest expense decreased by $10.0 million, or 18.8%, to $43.4 million for the quarter ended June 30, 2008 from $53.5 million for the quarter ended June 30, 2007. This decrease in interest expense was due to a decrease in the average cost of interest-bearing liabilities to 2.99% from 3.74%, which was partially offset by an increase in the average balance of interest-bearing liabilities of $103.9 million, or 1.8%. Average interest-bearing liabilities increased to $5.837 billion for the quarter ended June 30, 2008 from $5.733 billion for the quarter ended June 30, 2007. The decrease in the cost of funds resulted primarily from a decrease in the level of market interest rates.

Net Interest Income

Net interest income increased by $8.2 million, or 17.4%, on a taxable equivalent basis, to $55.6 million for the quarter ended June 30, 2008 from $47.4 million for the quarter ended June 30, 2007. This increase in net interest income was attributable to the factors discussed above. The Company’s net interest rate spread increased to 3.16% for the quarter ended June 30, 2008 from 2.69% for the quarter ended June 30, 2007 while its net interest margin increased to 3.46% for the quarter ended June 30, 2008 from 3.02% for the quarter ended June 30, 2007.

Provision for Loan Losses

The provision for loan losses increased by $1.3 million, or 64.3%, to $3.4 million for the quarter ended June 30, 2008 from $2.1 million for the quarter ended June 30, 2007. Similarly, net charge-offs increased by $1.3 million over the same periods. Management analyzes the allowance for loan losses as

described in the section entitled “Allowance for Loan Losses.” The provision that is recorded is sufficient, in management’s judgment, to bring this reserve to a level that reflects the losses inherent in the Company’s loan portfolio relative to loan mix, economic conditions and historical loss experience. Management believes, to the best of their knowledge, that all known losses as of the balance sheet dates have been recorded.

Noninterest Income

Noninterest income increased by $441,000, or 3.9%, to $11.8 million for the quarter ended June 30, 2008 from $11.4 million for the quarter ended June 30, 2007. This increase was primarily due to increases in service charges and fees and trust and other financial services income. Service charges and fees increased $1.6 million, or 25.3% as a result of the Company’s continued focus on fee-producing products and services. Trust and other financial services income increased $223,000, or 14.3%, primarily due to the growth of assets under management. During the quarter ended June 30, 2008, the Company recorded $1.2 million of additional other-than-temporary impairment charges on a trust preferred security issued by another bank and Freddie Mac preferred securities. The Company routinely monitors its investment portfolio for impairment and records write-downs when it has been determined that an impairment is considered other-than-temporary.

Noninterest Expense

Noninterest expense increased by $3.7 million, or 9.8%, to $41.5 million for the quarter ended June 30, 2008 from $37.8 million for the same quarter in the prior year. The largest increases were in compensation and employee benefits, processing expenses, federal deposit insurance premiums and amortization of intangible assets, while premises and occupancy costs, office operations and advertising expenses remained flat. Compensation and employee benefits increased by $1.8 million, or 9.2%, to $22.2 million for the quarter ended June 30, 2008 from $20.4 million for the quarter ended June 30, 2007. This increase is primarily due to the addition of 60 full-time equivalent employees and the continuing increase in healthcare cost. Processing expenses increased by $1.0 million, or 26.4%, to $4.7 million for the quarter ended June 30, 2008 from $3.7 million for the quarter ended June 30, 2007. This increase is primarily attributable to the growth of the Company’s processing services, which also provide fee income. Federal deposit insurance premiums increased to $1.0 million for the quarter ended June 30, 2008 from $165,000 for the quarter ended June 30, 2007. This increase is a result of the FDIC’s assessment of insurance premiums to federally-insured institutions beginning January 1, 2007 in an effort to replenish its insurance fund. Northwest had credits that were used to reduce the premiums paid in 2007. Amortization of intangible assets increased by $406,000, or 46.2%, to $1.3 million for the quarter ended June 30, 2008 as a result of the Company’s acquisition of CSB Bank in June 2007.

Income Taxes

The provision for income taxes for the quarter ended June 30, 2008 increased by $1.5 million, or 31.7%, compared to the same period last year. This increase in income tax is primarily a result of an increase in income before income taxes of $3.6 million, or 21.3%. The Company’s effective tax rate for the quarter ended June 30, 2008 was 29.5% compared to 27.2% experienced in the same quarter last year as a result of the percentage of income earned on tax-free assets decreasing compared to the prior period.

Comparison of Operating Results for the Six Months Ended June 30, 2008 and 2007

Net income for the six months ended June 30, 2008 was $27.1 million, or $0.56 per diluted share, an increase of $3.5 million, or 14.7%, from $23.6 million, or $0.47 per diluted share, for the same period in the prior year. The increase in net income resulted from an increase in net interest income of $11.8 million, or 13.1%, and an increase in noninterest income of $3.0 million, or 13.6%, which were partially offset by an increase in the provision for loan losses of $1.6 million, or 39.7%, an increase in noninterest expense of $8.3 million, or 10.9% and an increase in income tax expense of $1.4 million, or 16.1%.

Annualized, net income for the six months ended June 30, 2008 represents an 8.72% and 0.79% return on average equity and return on average assets, respectively, compared to 7.82% and 0.71% for the same period in the prior year.

Interest Income

Total interest income decreased by $868,000, or less than 1%, on a taxable equivalent basis, to $197.7 million for the six-month period ended June 30, 2008 from $198.6 million for the six-month period ended June 30, 2007 due to a decrease in the average yield, which was partially offset by an increase in average balance of interest earning assets. The average yield on interest earning assets decreased to 6.23% for the six-month period ended June 30, 2008 from 6.40% for the six-month period ended June 30, 2007. The average yield on all categories of interest earning assets, except investment securities, decreased from the previous period. Average interest earning assets increased by $101.2 million, or 1.6%, to $6.324 billion for the six-month period ended June 30, 2008 from $6.222 billion for the six-month period ended June 30, 2007.

Interest income on loans increased by $10.3 million, or 6.8%, on a taxable equivalent basis, to $162.2 million for the six-month period ended June 30, 2008 from $151.9 million for the six-month period ended June 30, 2007. Average loans receivable increased by $396.4 million, or 8.8%, to $4.908 billion for the six-month period ended June 30, 2008 from $4.511 billion for the six-month period ended June 30, 2007. This increase is primarily attributable to strong loan demand throughout the Company’s market area, as well as the acquisition of CSB Bank in June 2007. The increase in average loans receivable was partially offset by a decrease in the average yield earned on loans, which decreased to 6.58% for the six-month period ended June 30, 2008 from 6.76% for the six-month period ended June 30, 2007. This decrease is primarily attributable the Company’s variable rate loans repricing in a lower general interest rate environment.

Interest income on mortgage-backed securities increased by $1.7 million, or 11.0%, to $16.7 million for the six-month period ended June 30, 2008 from $15.0 million for the six-month period ended June 30, 2007. This increase is primarily the result of an increase in the average balance, which increased by $82.5 million, or 13.6%, to $688.9 million for the six-month period ended June 30, 2008 from $606.4 million for the six-month period ended June 30, 2007. This increase in average balance was partially offset by a decrease in the average yield, which decreased to 4.84% for the six-month period ended June 30, 2008 from 4.96% for the six-month period ended June 30, 2007. The increase in the average balance is primarily the result of the Company investing cash flows from the investment portfolio in these securities in an effort to receive a higher yield. The decrease in the average yield is a result of the decrease in interest rates over the previous year period as well as an emphasis on purchasing variable-rate securities, which currently offer lower yields.

Interest income on investment securities decreased by $9.2 million, or 36.9%, to $15.6 million, on a taxable equivalent basis, for the six-month period ended June 30, 2008 from $24.8 million, on a taxable equivalent basis, for the six-month period ended June 30, 2007 as the average balance decreased by $347.6 million, or 40.9%, to $502.4 million for the six-month period ended June 30, 2008 from $850.0 million for the six-month period ended June 30, 2007. The decrease in average balance was partially offset by an increase in the average yield, which increased to 6.21% for the six-month period ended June 30, 2008 from 5.82% for the six-month period ended June 30, 2007. The average balance decreased primarily as a result of bonds maturing or being called during the end of 2007 and first half of 2008 as well as the November 2007 sale of approximately $120.0 million of investment securities, the proceeds of which were used to fund the purchase of mortgage-backed securities and the origination of loans. The average yield increased as a result of tax-free assets with a higher yield comprising a larger percentage of the investment portfolio.

Interest income on interest-earning deposits decreased by $3.4 million, or 57.3%, as both the average balance and the average yield decreased. The average balance decreased by $35.2 million, or 16.0%, to $185.3 million for the six-month period ended June 30, 2008 from $220.4 for the six-month period ended June 30, 2007. The average yield decreased to 2.68% from 5.29% as a result of decreases in the overnight federal funds rate.

Interest Expense

Total interest expense decreased by $12.5 million, or 12.0%, to $91.8 million for the six-month period ended June 30, 2008 from $104.3 million for the six-month period ended June 30, 2007 due to a decrease in the average cost of interest-bearing liabilities to 3.21% from 3.71%, which was partially offset by an increase in the average balance of interest-bearing liabilities of $83.3 million, or 1.5%. Average interest-bearing liabilities increased to $5.751 billion for the six-month period ended June 30, 2008 from $5.668 billion for the six-month period ended June 30, 2007. The decrease in the cost of funds resulted primarily from a decrease in the level of market interest rates.

Net Interest Income

Net interest income increased by $11.6 million, or 12.3%, on a taxable equivalent basis, to $105.9 million for the six-month period ended June 30, 2008 from $94.3 million for the six-month period ended June 30, 2007. This increase in net interest income was attributable to the factors discussed above. The Company’s net interest rate spread increased to 3.02% for the six-month period ended June 30, 2008 from 2.69% for the six-month period ended June 30, 2007 while its net interest margin increased to 3.35% for the six-month period ended June 30, 2008 from 3.03% for the six-month period ended June 30, 2007.

Provision for Loan Losses

The provision for loan losses increased by $1.6 million, or 39.7%, to $5.7 million for the six-month period ended June 30, 2008 from the previous year. Similarly, net charge-offs increased by $1.4 million over the same periods. Management analyzes the allowance for loan losses as described in the section entitled “Allowance for Loan Losses.” The provision that is recorded is sufficient, in management’s judgment, to bring this reserve to a level that reflects the losses inherent in the Company’s loan portfolio relative to loan mix, economic conditions and historical loss experience. Management believes, to the best of their knowledge, that all known losses as of the balance sheet dates have been recorded.

Noninterest Income

Noninterest income increased by $2.9 million, or 13.6%, to $24.8 million for the current six-month period from $21.9 million for the same period in the prior fiscal year. Service charges and fees increased $3.3 million, or 26.2%, to $15.8 million for the six-month period ended June 30, 2008 from $12.5 million for the six-month period ended June 30, 2007. Trust and other financial services income increased $513,000, or 17.0%, to $3.5 million for the six-month period ended June 30, 2008 from $3.0 million for the six-month period ended June 30, 2007 and a $971,000 gain on the sale of investments was recorded in the current period, primarily do to the mandatory redemption of Visa Inc. stock, with no gain recorded in the prior year period. These increases were largely offset by other-than-temporary impairment charges of $1.5 million during the six-month period ended June 30, 2008. Beginning in the fourth quarter of 2007, the Company has recorded cumulative other-than-temporary impairment charges of $2.8 million related to its investment in Freddie Mac preferred stock, with an original book value of $7.5 million. As of June 30, 2008 the Company has a carrying value of Freddie Mac preferred stock of $4.7 million and continues to monitor these investments for additional impairment.

Noninterest Expense

Noninterest expense increased by $8.2 million, or 10.9%, to $83.9 million from $75.7 million for the same period in the prior year. All major expense categories, except advertising expense, increased as a result of the growth of the Company and the expansion of the Company’s products, services and delivery channels.

The largest increase was in compensation and employee benefits expense. Compensation and employee benefits increased as a result of increases in health care costs, normal annual merit increases in salaries and the addition of employees used in the delivery of products and services.

Income Taxes

The provision for income taxes for the six months ended June 30, 2008 increased by $1.4 million, or 16.1%, compared to the same period last year. This increase in income tax expense is primarily due to an increase in income before income taxes of $4.9 million, or 15.1%, to $37.1 million from $32.2 million. In addition, the Company’s effective tax rate increased slightly to 27.0% from 26.8% as a smaller percentage of income was generated from tax-free assets.

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 assets and average cost of 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.


	Three months ended June 30,
	2008								2007
						Avg.								Avg.
	Average					Yield/			Average					Yield/
	Balance			Interest		Cost (h)			Balance			Interest		Cost (h)
ASSETS:
Interest earning assets:
Loans (a) (b) (d)	$	4,957,008			80,914		6.51	%		4,555,680			77,106		6.78	%
Mortgage-backed securities (c)		802,465			9,514		4.74	%		591,116			7,343		4.97	%
Investment securities (c) (d) (e)		482,682			7,568		6.27	%		819,891			12,203		5.95	%
FHLB stock		45,648			306		2.68	%		33,841			506		5.98	%
Other interest earning deposits		139,500			710		2.01	%		274,275			3,649		5.26	%


Total interest earning assets		6,427,303			99,012		6.15	%		6,274,803			100,807		6.43	%

Noninterest earning assets (f)		508,488								462,310


TOTAL ASSETS		6,935,791								6,737,113


LIABILITIES AND SHAREHOLDERS’ EQUITY:
Interest bearing liabilities:
Savings accounts		783,099			2,303		1.18	%		810,792			2,919		1.44	%
Now accounts		748,735			1,578		0.85	%		700,052			2,934		1.68	%
Money market demand accounts		738,252			3,363		1.83	%		628,712			5,832		3.72	%
Certificate accounts		2,830,805			29,207		4.15	%		3,085,152			35,435		4.61	%
Borrowed funds (g)		627,431			5,837		3.74	%		404,414			4,574		4.54	%
Debentures		108,295			1,135		4.14	%		103,556			1,764		6.74	%


Total interest bearing liabilities		5,836,617			43,423		2.99	%		5,732,678			53,458		3.74	%

Noninterest bearing liabilities		477,733								405,027


Total liabilities		6,314,350								6,137,705

Shareholders’ equity		621,441								599,408


TOTAL LIABILITIES AND EQUITY	$	6,935,791								6,737,113


Net interest income/ Interest rate spread					55,589		3.16	%					47,349		2.69	%

Net interest earning assets/ Net interest margin	$	590,686					3.46	%		542,125					3.02	%

Ratio of interest earning assets to interest bearing liabilities		1.10	X							1.09	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)		Interest income on tax-free investment securities and tax-free loans is presented on a fully taxable equivalent basis.

(e)		Average balances include Fannie Mae and FHLMC stock.

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

(g)		Average balances include FHLB borrowings, securities sold under agreements to repurchase and other borrowings.

(h)		Annualized.

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 the Company’s 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), (iii) the net change. Changes that cannot be attributed to either rate or volume have been allocated to both rate and volume.

Three months ended June 30, 2008 and 2007


							Net
	Rate			Volume			Change
Interest earning assets:
Loans	$	(3,075	)		6,883			3,808
Mortgage-backed securities		(455	)		2,626			2,171
Investment securities		652			(5,287	)		(4,635	)
FHLB stock		(377	)		177			(200	)
Other interest-earning deposits		(1,699	)		(1,240	)		(2,939	)

Total interest-earning assets		(4,954	)		3,159			(1,795	)

Interest-bearing liabilities:
Savings accounts		(522	)		(94	)		(616	)
Now accounts		(1,560	)		204			(1,356	)
Money market demand accounts		(3,485	)		1,016			(2,469	)
Certificate accounts		(3,412	)		(2,816	)		(6,228	)
Borrowed funds		(1,259	)		2,522			1,263
Debentures		(710	)		81			(629	)

Total interest-bearing liabilities		(10,948	)		913			(10,035	)


Net change in net interest income	$	5,994			2,246			8,240

Average Balance Sheet
(Dollars in Thousands)


	Six months ended June 30,
	2008								2007
						Avg.								Avg.
	Average					Yield/			Average					Yield/
	Balance			Interest		Cost (h)			Balance			Interest		Cost (h)
ASSETS:
Interest earning assets:
Loans (a) (b) (d)	$	4,907,866			162,191		6.58	%		4,511,499			151,908		6.76	%
Mortgage-backed securities (c)		688,911			16,684		4.84	%		606,439			15,036		4.96	%
Investment securities (c) (d) (e)		502,370			15,611		6.21	%		849,965			24,755		5.82	%
FHLB stock		39,174			717		3.66	%		34,004			1,009		5.93	%
Other interest earning deposits		185,255			2,506		2.68	%		220,441			5,868		5.29	%


Total interest earning assets		6,323,576			197,709		6.23	%		6,222,348			198,576		6.40	%

Noninterest earning assets (f)		497,741								433,583


TOTAL ASSETS		6,821,317								6,655,931


LIABILITIES AND SHAREHOLDERS’ EQUITY:
Interest bearing liabilities:
Savings accounts		767,551			4,529		1.19	%		808,464			5,790		1.44	%
Now accounts		737,138			3,714		1.01	%		682,230			5,562		1.64	%
Money market demand accounts		721,558			8,628		2.40	%		617,780			11,369		3.71	%
Certificate accounts		2,913,135			62,410		4.31	%		3,054,985			69,023		4.56	%
Borrowed funds (g)		503,179			9,740		3.89	%		400,752			9,070		4.56	%
Debentures		108,303			2,789		5.09	%		103,326			3,501		6.74	%


Total interest bearing liabilities		5,750,864			91,810		3.21	%		5,667,537			104,315		3.71	%

Noninterest bearing liabilities		449,991								385,006


Total liabilities		6,200,855								6,052,543

Shareholders’ equity		620,462								603,388


TOTAL LIABILITIES AND EQUITY		6,821,317								6,655,931


Net interest income/ Interest rate spread					105,899		3.02	%					94,261		2.69	%

Net interest earning assets/ Net interest margin	$	572,712					3.35	%		554,811					3.03	%

Ratio of interest earning assets to interest bearing liabilities		1.10	X							1.10	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)		Interest income on tax-free investment securities and tax-free loans is presented on a fully taxable equivalent basis.

(e)		Average balances include Fannie Mae and FHLMC stock.

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

(g)		Average balances include FHLB borrowings, securities sold under agreements to repurchase and other borrowings.

(h)		Annualized.

Rate/ Volume Analysis
(Dollars in Thousands)

Six months ended June 30, 2008 and 2007


							Net
	Rate			Volume			Change
Interest earning assets:
Loans	$	(4,060	)		14,343			10,283
Mortgage-backed securities		(397	)		2,045			1,648
Investment securities		1,657			(10,801	)		(9,144	)
FHLB stock		(445	)		153			(292	)
Other interest-earning deposits		(2,663	)		(699	)		(3,362	)

Total interest-earning assets		(5,908	)		5,041			(867	)

Interest-bearing liabilities:
Savings accounts		(1,000	)		(261	)		(1,261	)
Now accounts		(2,296	)		448			(1,848	)
Money market demand accounts		(4,651	)		1,910			(2,741	)
Certificate accounts		(3,581	)		(3,032	)		(6,613	)
Borrowed funds		(1,647	)		2,317			670
Debentures		(881	)		169			(712	)

Total interest-bearing liabilities		(14,056	)		1,551			(12,505	)


Net change in net interest income	$	8,148			3,490			11,638

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As the holding company for a savings bank, the Company’s primary market risk 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 reprice. The Company attempts to control interest rate risk by matching, within acceptable limits, the repricing periods of its assets and liabilities. Because the Company’s interest sensitive deposits typically have repricing periods or maturities of short duration, the Company has attempted to limit its exposure to interest sensitivity by borrowing funds with fixed-rates and longer maturities and by shortening the maturities of its assets by emphasizing the origination of short-term fixed rate consumer loans, and adjustable rate mortgage loans and commercial loans. The Company also continues to originate and sell a portion of its long-term, fixed-rate mortgage loans. In addition, the Company has purchased shorter term or adjustable-rate investment securities and adjustable-rate mortgage-backed securities.

The Company has an Asset/ Liability Committee consisting of several 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 Company’s balance sheet structure. On a quarterly basis, this Committee also reviews the Company’s interest rate risk position and the Bank’s cash flow projections.

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

In an effort to assess market risk, the Company utilizes a simulation model to determine the effect of immediate incremental increases and decreases in interest rates on net income and the market value of the Company’s equity. Certain assumptions are made regarding loan prepayments and decay rates of passbook and NOW accounts. Because it is difficult to accurately project the market reaction of depositors and borrowers, the effect of actual changes in interest on these assumptions may differ from simulated results. The Company has established the following guidelines for assessing interest rate risk:

Net income simulation . Given a parallel shift of 2% in interest rates, the estimated net income may not decrease by more than 20% within a one-year period.

Market value of equity simulation . The market value of the Company’s equity is the present value of the Company’s assets and liabilities. Given a parallel shift of 2% in interest rates, the market value of equity may not decrease by more than 35% of total shareholders’ equity.

The following table illustrates the simulated impact of a 1% or 2% upward or 1% or 2% 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 levels at June 30, 2008 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, 2008 levels.


	Increase						Decrease
Parallel shift in interest rates over the next 12 months		1.0	%		2.0	%		1.0	%		2.0	%

Projected percentage increase/ (decrease) in net income		(5.8	)%		(12.5	)%		2.7	%		(1.7	)%
Projected increase/ (decrease) in return on average equity		(2.9	)%		(6.2	)%		1.4	%		(0.6	)%
Projected increase/ (decrease) in earnings per share	$	(0.09	)	$	(0.20	)	$	0.04		$	(0.03	)
Projected percentage increase/ (decrease) in market value of equity		(6.6	)%		(17.7	)%		12.0	%		15.8	%

The figures included in the table above represent projections that were computed based upon certain assumptions including prepayment rates and decay rates. These assumptions are inherently uncertain and, as a result, the Company 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 the Company’s management, including the Principal Executive Officer and Principal Financial Officer, the Company 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 in timely alerting them to the material information relating to the Company (or the consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company and its subsidiaries are subject to a number of asserted and unasserted claims encountered in the normal course of business. Management believes that the aggregate liability, if any, that may result from such potential litigation will not have a material adverse effect on the Company’s financial statements.

Item 1A. Risk Factors

Not applicable.

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 Company’s repurchases of shares of common stock during the quarter ending June 30, 2008:


					Total number of		Maximum number
					shares purchased as		of shares yet
					part of a publicly		to be purchased
	Number of shares		Average price		announced repurchase		under the plan
Month	purchased		paid per share		plan (1)		(1)

April		—	$	—		—		273,600

May		—		—		—		273,600

June		—		—		—		273,600


		—	$	—


(1)		This program, announced in June 2007, to repurchase up to 1,000,000 shares of common stock is the Company’s third repurchase program and does not have an expiration date.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

	(a)		The Company held its Annual Meeting of Shareholders on May 21, 2008

	(b)		The name of each director elected at the Annual Meeting is as follows:

William J. Wagner
Thomas K. Creal, III.
A. Paul King

The name of each director whose term of office continued after the Annual Meeting is as follows:

Richard L. Carr
John M. Bauer
Robert G. Ferrier
Joseph F. Long
Richard E. McDowell
Philip M. Tredway

(c)

The following matters were voted upon at the Annual Meeting:

(i)

Election of three directors of the Company:


	For		Withheld
William J. Wagner		44,055,084		583,909
Thomas K. Creal, III.		43,978,924		660,069
A. Paul King		43,995,925		643,068

(ii)

Approval of the Northwest Bancorp, Inc. 2008 Stock Option Plan:


For			38,764,180
Against			1,432,649
Abstain			117,230
Broker non-votes			4,324,934

(iii)

Ratification of the appointment of KPMG LLP as the Company’s independent registered public accounting firm for the year ending December 31, 2008.


For			44,479,345
Against			81,541
Abstain			78,107
Broker non-votes			0

Item 5. Other Information

Not applicable.

Item 6. Exhibits

31.1		Certification of the Company’s 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 Company’s 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 Company’s 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.

Signatures

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 BANCORP, INC.



Date: August 11, 2008	By:	/s/ William J. Wagner
		William J. Wagner
		Chief Executive Officer



Date: August 11, 2008	By:	/s/ William W. Harvey, Jr.
		William W. Harvey, Jr.
		Chief Financial Officer

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