EDGAR 10-K Filing

Company CIK: 1471265
Filing Year: 2022
Filename: 1471265_10-K_2022_0001471265-22-000009.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Northwest Bancshares, Inc.
Northwest Bancshares, Inc., a Maryland corporation, was incorporated in September 2009 to be the successor corporation to Northwest Bancorp, Inc., the former stock holding company for Northwest Bank, upon completion of the mutual-to-stock conversion of Northwest Bancorp, MHC. The terms “Northwest”, “the Company”, “we”, “us” and “our” refer to Northwest Bancshares, Inc., unless indicated otherwise by the context.
The conversion was completed December 18, 2009 when the Company sold 68,878,267 shares of common stock at $10.00 per share in the related offering. Concurrent with the completion of the offering, shares of Northwest Bancorp, Inc. common stock owned by public stockholders were exchanged for shares of Northwest Bancshares, Inc.’s common stock. We also issued 1,277,565 shares of common stock and contributed $1.0 million in cash from the offering proceeds to Northwest Charitable Foundation, a charitable foundation that we established for the benefit of the communities in which Northwest Bank operates. As of December 31, 2021, the Company had 126,612,183 shares outstanding and a market capitalization of approximately $1.793 billion.
Our executive offices are located at 3 Easton Oval, Suite 500, Columbus, Ohio 43219. We also maintain administrative offices located at 100 Liberty Street, Warren, Pennsylvania 16365. The telephone number for these addresses is (814) 726-2140.
The Company’s website (www.northwest.com) contains a direct link to Northwest Bancshares, Inc.’s filings with the Securities and Exchange Commission, including copies of annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these filings, if any. Information on our website shall not be considered a part of this report. Copies of our filings may be obtained, without charge, by written request to Shareholder Relations, 100 Liberty Street, P.O. Box 128, Warren, Pennsylvania 16365, or emailing shareholderrelations@northwest.com.
Northwest Bank
Northwest Bank is a Pennsylvania-chartered savings bank headquartered in Warren, Pennsylvania, which is located in northwestern Pennsylvania. Northwest Bank is a community-oriented financial institution offering personal and business banking solutions, investment management and trust services. Northwest Bank’s mutual savings bank predecessor was founded in 1896.
As of December 31, 2021, Northwest Bank operated 170 community-banking locations throughout its market area in Pennsylvania, western New York, eastern Ohio, and Indiana. Our principal lending activities are the origination of loans secured by first mortgages on owner-occupied, one-to-four-family residences, shorter term consumer loans, and commercial business and commercial real estate loans.
Our principal sources of funds are personal and business deposits, borrowed funds and the principal and interest payments on loans and marketable securities. Our principal source of income is interest received on loans and marketable securities. Our principal expenses are the cost of employee compensation and benefits and the interest paid on deposits and borrowed funds.
Northwest Bank’s principal executive office is located at 100 Liberty Street, Warren, Pennsylvania 16365, and the telephone number at that address is (814) 726-2140.
Market Area and Competition
Northwest Bank is headquartered in northwestern Pennsylvania and has expanded primarily through acquisitions, into the southwestern and central regions of Pennsylvania, as well as western New York, northeastern Ohio, and Indiana. As of December 31, 2021, we operated 170 community banking locations across these market areas. All of the aforementioned market areas are served by a number of competing financial institutions. As a result, we encounter strong competition both in attracting deposits and in originating loans. Our most direct competition for deposits comes from other banks, brokerage houses and credit unions in our market areas. We expect continued competition from these financial institutions in the foreseeable future. With the continued acceptance of internet banking by our customers and consumers generally, competition for deposits has increased from institutions operating outside of our market area.
The following description of our market area is based upon information obtained from SNL Securities, the Bureau of Labor Statistics, the Federal Housing Financial Agency and the Mortgage Bankers Association.
Pennsylvania Market Area. Our retail branch network of 100 community banking offices within the state of Pennsylvania encompasses 28 counties. Our western Pennsylvania market has a diverse economy driven by healthcare and education industries, service businesses, technology companies and small manufacturing operations. Our southeastern Pennsylvania market is primarily driven by service businesses but also serves as a bedroom community to the cities of Baltimore, Maryland and Philadelphia, Pennsylvania.
Our Pennsylvania market area has a total population of approximately 4.6 million and total households of approximately 1.9 million as of December 31, 2021. The Pennsylvania markets in which we operate our retail branches contain approximately half of Pennsylvania’s population and a similar percentage of households. These markets have experienced a 1.9% decrease in population between 2010 and 2021. As of December 31, 2021, the market’s average median household income has increased over the last year by 8.5%, to $62,382, compared to the national median income level of $72,465. The household income growth rate in Pennsylvania of 11.4%, is projected to be slightly below the national average growth rates during the next five years of 12.1%. As of December 31, 2021, the market’s unemployment rate was 3.82%, slightly lower than the state of Pennsylvania rate of 4.0% and the national average of 3.9%.
As of September 30, 2021, the House Price Index for the last four quarters in the state of Pennsylvania increased by 14.67%, compared to an increase in the national average of 4.2%. Nationally, foreclosures have receded from their record highs to the lowest levels since the fourth quarter of 2006. As of September 30, 2021, the foreclosure rate for mortgage loans on one-to-four unit residential properties in the state of Pennsylvania was one in every 4,486 housing units, compared to the national average of one in every 3,019 housing units.
Western New York Market Area. Our retail branch network of 31 community banking offices in New York encompasses five counties in the western portion of the state. This market has a diverse economy driven by healthcare and education industries, service businesses, technology companies and small manufacturing operations.
Our New York market area has a total population of approximately 2.2 million and total households of approximately 911,000 as of December 31, 2021. This area has experienced an increase in population between 2010 and 2021, of 2.79%. The average median household income in this market increased by 5.3% over the last year to $64,326 as of December 31, 2021, compared to the national median income level of $72,465. As of December 31, 2021, the unemployment rate for our New York market area was 3.23%, compared to the national average of 3.9%.
As of September 30, 2021, the House Price Index for the last four quarters in our New York market increased by 16.56%, compared to an increase in the national average of 4.2%. As of September 30, 2021, the foreclosure rate for mortgage loans on one-to-four unit residential properties in the state of New York was one in every 4,044 housing units, compared to the national average of one in every 3,019 housing units.
Northeastern Ohio Market Area. Our retail branch network of 14 community banking offices includes two counties in northeastern Ohio, including the Cleveland metro area. The major employment sectors in this market are similar to the contiguous market in western Pennsylvania.
Our Ohio market area has a total population of approximately 860,000 and total households of approximately 353,000 as of December 31, 2021. This area has experienced an increase in population between 2010 and 2021, of 4.7%. The median household income for our Ohio market decreased 0.1% over the last year to $63,988 as of December 31, 2021, compared to the national median income level of $72,465. As of December 31, 2021, the unemployment rate for our Ohio market was 3.65%, compared to the national average of 3.9%.
As of September 30, 2021, the House Price Index for the last four quarters in our Ohio market area increased by 15.20%, compared to an increase in the national average of 4.2%. As of September 30, 2021, the foreclosure rate for mortgage loans on one-to-four unit residential properties in the state of Ohio was one in every 2,002 housing units, compared to the national average of one in every 3,019 housing units.
Indiana Market Area. Our retail branch network of 25 community banking offices includes eight counties in Indiana. This market has a diverse economy driven by healthcare and education industries, service businesses, technology companies and small manufacturing operations.
Our Indiana market area has a total population of approximately 945,000 and total households of approximately 364,000 as of December 31, 2021. This area has experienced a decrease in population between 2010 and 2021, of 1.42%. The median household income for our Indiana market is $56,661 as of December 31, 2021, compared to the national median income level of $72,465. As of December 31, 2021, the unemployment rate for our Indiana market was 1.19%, compared to the national average of 3.9%.
As of September 30, 2021, the House Price Index for the last four quarters in our Indiana market area increased by 16.63%, compared to an increase in the national average of 4.2%. As of September 30, 2021, the foreclosure rate for mortgage loans on one-to-four unit residential properties in the state of Indiana was one in every 2,012 housing units, compared to the national average of one in every 3,019 housing units.
Lending Activities
General. Our principal lending activities are the origination of fixed and adjustable-rate loans collateralized by one-to-four-family residential real estate, shorter term consumer loans and loans collateralized by multi-family residential and commercial real estate as well as commercial business loans. Generally, we focus our lending activities in the geographic areas where we maintain offices.
In an effort to manage interest rate risk, we have sought to make our interest-earning assets more interest rate sensitive by originating adjustable-rate loans, such as adjustable-rate residential mortgage loans and home equity lines of credit, and by originating short-term and medium-term fixed-rate consumer loans. In recent years we have emphasized the origination of commercial real estate loans and commercial business loans, which generally have adjustable-rates of interest and shorter maturities than one-to-four-family residential real estate loans. Because we originate a substantial amount of long-term fixed-rate mortgage loans collateralized by one-to-four-family residential real estate, when possible, we originate and underwrite loans according to standards that allow us to sell them into the secondary mortgage market for purposes of managing interest-rate risk and liquidity. The sale of mortgage loans supports our strategy to grow the consumer and commercial loan portfolios faster than our portfolio of long-term fixed-rate residential mortgage loans. We currently sell low-yielding fixed-rate residential mortgage loans with maturities of more than 15 years, and on a more limited basis, those with maturities of 15 years or less, while retaining all adjustable-rate residential mortgage loans. With the build out of our Columbus, Ohio mortgage fulfillment center, our intention is to sell more loans into the secondary market servicing released. We also retain servicing on some of the mortgage loans we sell which generates monthly service fee income. We generally retain in our portfolio all consumer loans that we originate while we periodically sell participation loans in the multi-family residential, commercial real estate or commercial business loans that we originate in an effort to reduce the concentration of certain individual credits and the risk associated with certain businesses, industries or geographies.
Residential Mortgage Loans. We offer residential mortgage loans with terms typically ranging from 15 to 30 years, with either fixed or adjustable interest rates. Our mortgage loans are amortized on a monthly basis with both principal and interest due monthly. Originations of fixed-rate residential mortgage loans versus adjustable-rate residential mortgage loans are monitored on an ongoing basis. The percentage of adjustable-rate residential mortgage originations to total originations is affected significantly by the level of market interest rates, customer preference, our interest rate sensitivity and liquidity position, as well as loan products offered by our competitors. Therefore, even when our strategy is to increase the origination of adjustable-rate residential mortgage loans, market conditions may be such that there is greater demand for fixed-rate mortgage loans. Adjustable-rate residential mortgage loans totaled $28.4 million, or 0.3%, of our gross loan portfolio at December 31, 2021.
Our fixed-rate residential mortgage loan products offer fixed-rates for up to 30 years. Whenever possible, our fixed-rate residential mortgages are originated and underwritten according to secondary mortgage market guidelines in order to manage credit risk, as well as interest rate risk and liquidity risk. Our adjustable-rate residential mortgage loans offer initial interest rate adjustment periods of five and seven years, terms up to 30 years and adjustments based on changes in designated market indices.
Regulations limit the amount that a savings bank may lend relative to appraised values of real estate securing the loans, as determined by an appraisal at the time of loan origination. Such regulations permit a maximum loan-to-value of 95% for residential properties and 80% for all other real estate secured loans. We generally limit the maximum loan-to-value on both fixed-rate and adjustable-rate residential mortgage loans without private mortgage insurance, to 80% of the lesser of appraised values or purchase prices of real estate serving as collateral for our mortgage loans. Limited special financing programs allow for insured loans with loan-to-value ratios of up to 97%, and uninsured loans with loan-to-value ratios up to 100%. The appraisal process is managed by Northwest Appraisal Services, and appraisals are performed by in-house appraiser staff or by appraisers deemed qualified by our chief appraiser. We require fire and casualty insurance, as well as a title guaranty regarding good title, on all properties securing our residential mortgage loans. We also require flood insurance for loans secured by properties located within special flood hazard areas.
Included in our $2.970 billion portfolio of residential mortgage loans are construction loans of $61.5 million, or 0.6% of our gross loan portfolio. We offer fixed-rate and adjustable-rate residential construction-to-permanent loans primarily for the construction of owner-occupied one-to four-family residences in our market area to builders or owners who have a contract for construction. Construction loans are originated with terms of up to 30 years with an allowance of up to one year for construction. Advances are made as construction is completed, and interest is charged on the total amount of credit extended. At the end of the construction period, repayment terms convert to fully amortizing payments, with both principal and interest due monthly. Construction lending generally involves a greater degree of credit risk than permanent residential mortgage lending, as repayment of construction loans is often dependent upon the successful completion of construction projects. Construction delays or the inability of borrowers to sell
properties once construction is completed may impair borrowers’ ability to repay loans. Private mortgage insurance is required for construction loans with loan-to-value ratios in excess of 80%, and the maximum loan-to-value ratio for construction loans is 95% of the lower of cost to build or as-completed appraised value.
In addition, we originate loans within our market area that are secured by individual unimproved or improved lots. Land loans for the construction of owner-occupied residential real estate properties are currently offered with fixed-rates for terms of up to ten years. The maximum loan-to-value ratio for these loans is 80% of the as-completed appraised value.
Our residential mortgage loans customarily include due-on-sale clauses, which are provisions giving us the right to declare loans immediately due and payable in the event, among other things, borrowers sell or otherwise dispose of underlying real properties serving as collateral for loans.
Home Equity Loans and Lines of Credit. Generally, our home equity loans are secured by the borrower’s principal residence with a maximum loan-to-value ratio, including the principal balances of both the first and second mortgage loans, of 90% or less. We generally underwrite home equity loans and lines of credit in a manner similar to our underwriting of residential mortgage loans.
Home equity loans are offered on a fixed-rate basis with amortized terms of up to 20 years. Principal and interest is due monthly. At December 31, 2021, our fixed-rate home equity loans totaled $862.5 million, or 8.6% of gross loans.
Home equity lines of credit are offered on an adjustable-rate basis with terms of up to 25 years, including a draw period of 10 years each. Although home equity lines of credit require interest-only payments during draw periods, they are underwritten using amortizing principal and interest payments based on current rates of equivalent fixed-rate products. The disbursed portion of home equity lines of credit totaled $452.7 million, or 4.5% of gross loans, with $726.8 million remaining undistributed as of December 31, 2021.
Other Consumer Loans. The principal types of other consumer loans we offer are direct and indirect automobile loans, sales finance loans, unsecured personal loans, credit card loans, and loans secured by deposit accounts. These loans are typically offered with maturities of ten years or less.
The underwriting standards we employ for consumer loans include a determination of the applicant’s credit history and an assessment of ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally, from any verifiable secondary income. Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.
Consumer loans entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as automobiles, mobile homes, boats, recreation vehicles, appliances and furniture. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In particular, amounts realizable on the sale of repossessed automobiles may be significantly reduced based upon the condition of the automobiles and the lack of demand for used automobiles. At December 31, 2021, other consumer loans totaled $1.776 billion, or 17.7% of gross loans.
Commercial Real Estate Loans. Our multi-family commercial real estate loans are secured by multi-family residences, such as rental properties, student housing, and senior living facilities. Our commercial real estate loans are secured by nonresidential properties such as hotels, commercial offices, medical buildings, manufacturing facilities and retail establishments. At December 31, 2021, a significant portion of our multi-family commercial real estate and commercial real estate loans were secured by properties located within our market area.
Our largest commercial relationship with an aggregate total exposure of $129.5 million as of December 31, 2021, comprised of student housing, medical, senior housing, office, industrial, retail, aerospace and transportation engineering, the largest of which is $37.6 million of the total exposure attributed to multi-family residential. All loans were performing in accordance with their terms as of December 31, 2021. Our largest commercial real estate loan relationship as of December 31, 2021 had an aggregate total exposure of $127.7 million, of which $125.6 million was comprised of commercial real estate loans. These loans are secured by retail space, office space, hotels, self-storage, restaurant, and a charter school. All the loans in this relationship are performing in accordance with their agreed upon terms as of December 31, 2021.
Multi-family commercial and commercial real estate loans are offered with both adjustable and fixed interest rates. The terms of each multi-family residential and commercial real estate loan are negotiated on a case-by-case basis. We generally originate multi-
family commercial and commercial real estate loans in amounts up to 80% of the appraised value of the property collateralizing the loan. At December 31, 2021, commercial real estate loans totaled $3.024 billion, or 30.2% of gross loans.
Loans secured by multi-family commercial and commercial real estate generally involve a greater degree of credit risk than residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family commercial and commercial real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.
Commercial Loans. We offer commercial loans to finance various activities in our market area, some of which are secured in part by additional real estate collateral. At December 31, 2021, our largest commercial loan relationship had an aggregate total exposure of $49.4 million, and was secured by a sports franchise. This loan was performing in accordance with their agreed upon terms as of December 31, 2021.
Commercial business loans are offered with both fixed and adjustable interest rates. Underwriting standards we employ for commercial business loans include a determination of the applicant’s ability to meet existing obligations and payments on the proposed loan from operating cash flows generated by the applicant’s business. The financial strength of each applicant is also assessed through a review of financial statements provided by the applicant.
We originate commercial loans through our network of Small Business and Commercial Loan Officers located in our areas. In addition, our Commercial Finance group originates loans where multiple banks may be involved in the credit facilities. These loans are made to companies operating in our market area. Many of these companies carry public debt ratings.
Commercial loans generally have higher interest rates than residential loans, but they also may involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower’s business. We strive to obtain personal guarantees from the borrower or a third party as a condition to originating commercial loans. At December 31, 2021, commercial loans totaled $861.7 million, or 8.6% of gross loans.
Loan Originations, Solicitation, Processing and Commitments. Upon receiving a retail loan application, we obtain a credit report and verification of employment to confirm specific information relating to the applicant’s employment, income, and credit standing. In the case of a real estate loan, either an in-house appraiser, or an approved external appraiser, appraises the real estate intended to secure the proposed loan. For certain home equity loans we may use an approved alternative valuation such as an assessed value or Affordable Market Value (AMV). A loan underwriter checks the loan document file for accuracy and completeness and verifies the information provided.
For our personal loans, including residential mortgage loans, home equity loans and lines of credit, automobile loans, credit cards and other unsecured loans, we have implemented a credit approval process based on a laddered individual loan authority system. Real estate secured loans are underwritten centrally by our underwriting team. Non-real estate loans are underwritten by both local loan officers or a centralized underwriting team who are granted various levels of authority based on their lending experience and expertise. These authority levels are reviewed by the Credit Committee on at least an annual basis.
For commercial loans, aggregate credit exposures over $1.0 million are underwritten by Credit Administration. Our commercial loan policy assigns individual lending limits for our various commercial loan officers and dual authority consisting of an individual from Commercial Lending and Credit Administration. Lending authorities are established by the Credit Committee. The Senior Loan Committee meets weekly to approve extensions of credit in excess of the maximum dual authority limits. The Credit Committee meets monthly to review the assigned lending limits and to monitor our lending policies, loan activity, economic conditions, and concentrations of credit.
Our general policy is to make no loans, either individually or in the aggregate to one borrower or single source of repayment, in excess of $30.0 million. The Aggregate Credit Exposure limit is $100.0 million. Under certain circumstances, for instance well-qualified customers or customers with multiple individually qualified projects, this limit may be exceeded subject to the approval of the Senior Loan Committee. Criticized/classified loans exceeding $5.0 million or unusual loan requests are reviewed with the Risk Management Committee of the Board of Directors at each quarterly meeting. In addition, the Chief Credit Officer has the authority to require that the Board of Directors review any loan that has been approved by the Senior Loan Committee with which the Chief Credit Officer has specific concerns.
After a loan is approved, a loan commitment letter is promptly issued to the borrower. At December 31, 2021, we had commitments to originate $335.7 million of loans.
Loan Origination Fees and Costs. We defer loan origination fees received from borrowers and costs to originate loans and amortize such amounts as an adjustment of yield over the life of the loan by using the level yield method. Deferred loan fees and costs are recognized as part of interest income immediately upon prepayment or the sale of the related loan. At December 31, 2021, we had $53.5 million of net deferred loan origination fees. Loan origination fees vary with the volume and type of loans and commitments originated and purchased, principal repayments, and competitive conditions in the marketplace.
Loan origination costs were $25.1 million, $29.6 million and $15.5 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Loans-to-One Borrower. As of December 31, 2021, the largest aggregate amount loaned to one borrower, or related borrowers, totaled $129.5 million in exposure and was secured by student housing, medical space, senior housing, office space, industrial, aerospace and transportation engineering and retail space. Our second largest lending relationship totaled $127.7 million in exposure and was secured by student housing, retail space, office space and commercial development. Our third largest commercial relationship totaled $88.5 million in exposure and was secured by a hotel, retail space, office space, multi-family, a charter school, self-storage, and a restaurant. Our fourth largest commercial relationship totaled $82.3 million in exposure and was secured by hotels, senior housing, and office space. Our fifth largest commercial relationship totaled $49.4 million in exposure and was secured by a sports franchise. All of these loans were performing in accordance with their terms at December 31, 2021.
Investment Activities
Our Board of Directors has primary responsibility for establishing and overseeing our investment policy. The Board of Directors has delegated authority to implement the investment policy to our Chief Financial Officer. The investment policy is reviewed at least annually, and any changes to the policy are subject to approval by the Board of Directors. The overall objectives of the investment policy are to maintain a portfolio of high quality and diversified investments, to provide liquidity, and to control interest rate risk while providing an acceptable return. The investment portfolio is also used to provide collateral for qualified deposits and borrowings, to provide additional earnings when loan production is low, and to reduce our tax liability. The policy dictates that investment decisions give consideration to the safety of principal, liquidity requirements and potential returns. All purchase and sale transactions are reported to the Board of Directors on a monthly basis.
Our investment policy does not permit the purchase of complex securities and derivatives as defined in federal banking regulations and other high-risk securities, nor does it permit additional investments in non-agency mortgage-backed securities, pooled trust preferred securities, or single issuer trust preferred securities.
At the time of purchase, we designate a security as either held-to-maturity or available-for-sale based upon our ability and intentions. Securities available-for-sale are carried at fair value and securities held-to-maturity are carried at amortized cost. On a quarterly basis, we measure expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Available-for-sale debt securities in an unrealized loss position are reviewed for impairment at least quarterly. If impairment exists, credit related impairment losses are recorded through an allowance for credit losses while noncredit related impairment losses are recorded in accumulated other comprehensive income (for available-for-sale securities). The fair values of our securities are based on published or securities dealers’ market values, when available. See Note 4 to the Consolidated Financial Statements for a detailed analysis and description of our investment portfolio and valuation techniques.
We purchase debentures and mortgage-backed securities that generally are issued by the Federal Home Loan Bank (“FHLB”), Fannie Mae (“FNMA”), Freddie Mac (“FHLMC”) or Ginnie Mae (“GNMA”). Historically, we have invested in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense and to lower our credit risk as a result of the guarantees provided by FHLMC, FNMA or GNMA.
Sources of Funds
General. Deposits are the primary funding source for lending and other investing purposes. In addition to deposits, we derive funds from the amortization, prepayment and sale of loans and mortgage-backed securities, the maturity of investment securities, operations and, if needed, borrowings. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments and sales are influenced significantly by general interest rates and market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer term basis for general business purposes, including to manage interest rate risk.
Deposits. Personal and business deposits are generated from our market area by offering a broad selection of deposit instruments including checking accounts, savings accounts, money market deposit accounts, term certificate accounts and individual retirement accounts. While we accept deposits of $250,000 or more, we do not offer premium rates for such deposits. We accept brokered deposits through the CDARS program, but generally do not solicit funds outside our market area. As of December 31, 2021, we had deposits through the CDARS program with an aggregate balance of $2.9 million. In addition, we acquired brokered certificates
of deposit in the MutualBank transaction that have yet to mature. The deposits have a balance of $11.4 million as of December 31, 2021. Deposit account terms vary according to the minimum balance required, the period of time during which the funds must remain on deposit, and the interest rate, among other factors. We regularly execute changes in our deposit rates based upon general market interest rates, competition, and liquidity requirements.
Borrowings. We may utilize borrowings to supplement our supply of lendable funds and to meet deposit withdrawal requirements. Borrowings from the FHLB of Pittsburgh and Indianapolis typically are collateralized by a portion of our real estate loans. In addition to the FHLB, we have borrowing facilities with the Federal Reserve Bank, three correspondent banks and we borrow funds, in the form of corporate repurchase agreements, from municipalities, corporations and school districts.
Northwest Bank is a member of the FHLB of Pittsburgh and Indianapolis. The FHLB functions as a central bank providing credit for Northwest Bank and other member financial institutions. As a member, Northwest Bank is required to own capital stock in the FHLB of Pittsburgh and Indianapolis and is authorized to apply for borrowings on the security of certain of its real estate loans, provided certain standards related to creditworthiness have been met. Borrowings are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of borrowings are based either on a fixed percentage of a member institution’s net worth or on the FHLB’s assessment of the institution’s creditworthiness.
On September 9, 2020, the Company issued $125.0 million of 4.00% fixed-to-floating rate subordinated notes with a maturity date of September 15, 2030. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 4.00%, payable semi-annually in arrears commencing on March 15, 2021, and a floating rate of interest equivalent to the 3-month Term Secured Overnight Financing Rate (“SOFR”) plus 3.89% payable quarterly in arrears commencing on December 15, 2025. The subordinated debt issuance costs of approximately $1.8 million are being amortized over five years on a straight-line basis into interest expense.
Subsidiary Activities
Northwest Bancshares, Inc.’s sole direct consolidated subsidiary is Northwest Bank. Northwest Bancshares, Inc. also owns all of the common stock of seven statutory business trusts: Northwest Bancorp Capital Trust III, a Delaware statutory business trust, Northwest Bancorp Statutory Trust IV, a Connecticut statutory business trust, LNB Trust II, a Delaware statutory business trust, Union National Capital Trust I, a Delaware statutory business trust, Union National Capital Trust II, a Delaware statutory business trust, MFBC Statutory Trust I, a Delaware statutory business trust, and Universal Preferred Trust, a Delaware statutory business trust (the “Trusts”). At December 31, 2021, the Trusts have issued a total of $128.9 million of trust preferred securities. The Trusts are not consolidated with Northwest Bancshares, Inc. At December 31, 2021, Northwest Bancshares, Inc.’s investment in the Trusts totaled $4.0 million, and the Trusts had assets of $129.1 million, net of discounts due to fair value adjustments made at the time of acquisition of Union Community Bank and MutualFirst Financial, Inc.
At December 31, 2021, Northwest Bank had five active wholly-owned subsidiaries; Great Northwest Corporation, Allegheny Services, Inc., Northwest Capital Group, Inc., Mutual Federal Interest Corporation, and Northwest Settlement Agency, LLC. For financial reporting purposes all of these companies are included in the Consolidated Financial Statements of Northwest Bancshares, Inc.
Great Northwest Corporation holds equity investments in government-assisted, low-income housing projects in various locations throughout our market area. At December 31, 2021, Northwest Bank had an equity investment in Great Northwest Corporation of $13.7 million. For the year ended December 31, 2021, Great Northwest Corporation had net income of $252,000, generated primarily from federal low-income housing tax credits.
Allegheny Services, Inc. is a Delaware investment company that holds mortgage loans originated through our wholesale lending operation as well as municipal bonds. At December 31, 2021, Northwest Bank had an equity investment in Allegheny Services, Inc. of $872.1 million, and for the year ended December 31, 2021, Allegheny Services, Inc. had net income of $14.5 million.
Northwest Capital Group, Inc.’s principal activity is to own, operate and ultimately divest of properties that were acquired in foreclosure. At December 31, 2021, Northwest Bank had an equity investment of $11.6 million in Northwest Capital Group, Inc., with a $13,000 net loss reported for the year ended December 31, 2021.
Mutual Federal Interest Corporation, which is a Nevada corporation, holds and manages a portion of the Northwest Bank investment portfolio and consumer closed-end first mortgage loans. At December 31, 2021, Northwest Bank had an equity investment in Mutual Federal Interest Corporation of $498.5 million. For the year ended December 31, 2021, Mutual Federal Interest Corporation had net income of $5.5 million.
Northwest Settlement Agency, LLC provides title insurance to borrowers of Northwest Bank and other lenders. At December 31, 2021, Northwest Bank had an equity investment in Northwest Settlement Agency, LLC of $3.8 million. For the year ended December 31, 2021, Northwest Settlement Agency, LLC had a net loss of $80,000.
Northwest Bank strategically ceased operating several business lines in prior periods.
The Bert Company (doing business as Northwest Insurance Services, which was sold April 30, 2021) was an employee benefits and property and casualty insurance agency specializing in commercial and personal insurance as well as retirement benefit plans. At December 31, 2021, Northwest Bank had an equity investment of $28.2 million in The Bert Company.
Northwest Advisors, Inc., a federally registered investment advisor, which provided investment management programs and investment portfolio planning services, ceased operations and became inactive during 2018. At December 31, 2021, Northwest Bank had an equity investment in Northwest Advisors, Inc. of $819,000.
Northwest Financial Services, Inc. provided retail brokerage services and became inactive during the fourth quarter of 2017. At December 31, 2021, Northwest Bank had an equity investment in Northwest Financial Services of $9.4 million.
On July 14, 2017, Northwest Consumer Discount Company, Inc. became inactive as all consumer finance offices were closed. At December 31, 2021, Northwest Bank had an equity investment in Northwest Consumer Discount Company of $44.3 million.
Federal regulations require insured institutions to provide 30 days advance notice to the Federal Deposit Insurance Corporation (“FDIC”) before establishing or acquiring a subsidiary or conducting a new activity in a subsidiary. The insured institution must also provide the FDIC such information as may be required by applicable regulations and must conduct the activity in accordance with the rules and orders of the FDIC. In addition to other enforcement and supervision powers, the FDIC may determine after notice and opportunity for a hearing that the continuation of a savings bank’s ownership of or relation to a subsidiary constitutes a serious risk to the safety, soundness or stability of the savings bank, or is inconsistent with the purposes of federal banking laws. Upon the making of such a determination, the FDIC may order the savings bank to divest the subsidiary or take other actions.
Human Capital Management
Workforce Demographics. As of December 31, 2021, we had 2,251 full-time and 162 part-time employees, or 2,332 full-time equivalent employees (“FTEs”). This represents a decrease of 89 FTEs, or 3.7%, from December 31, 2020 when we had 2,318 full-time and 205 part-time employees, or 2,421 FTEs. This decrease is a result of our efforts to optimize our retail network. As a financial institution, approximately 44% of our employee population are employed at our 170 banking offices across Pennsylvania, New York, Ohio and Indiana and approximately 4% are employed at our customer call centers. Our annual turnover rate was 30.2% as of December 31, 2021. None of our employees are represented by a collective bargaining group.
As a community bank, our reputation is an extremely valuable and important component of our business. We strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates.
Inclusion and Diversity. We believe that an environment where all employees can contribute, innovate and thrive is key to our success in the future. With the goal of continuing to deliver an inclusive and diverse environment at Northwest, we have developed the Northwest Inclusion Council which consists of senior advisors and leaders throughout our Company’s footprint. This council is focused on engaging our entire employee population and leveraging their diverse talents and perspectives to uphold our Company’s core values.
Workforce Health and Safety. The health and safety of our employees, their families and the communities we serve is our top priority. The COVID-19 pandemic presented an unpredictable and challenging environment across the globe. Throughout this pandemic, we committed to take every measure and precaution to protect our employees while continuing to serve our customers and being mindful of the fiduciary responsibility we have to our shareholders.
Compensation and Benefits. Our compensation program is designed to attract and retain talented individuals to support our business objectives and achieve our strategic goals. We provide employees with compensation packages that include base salaries, and if eligible, incentive compensation, annual bonuses and incentive stock benefits. In addition, we also offer employees a 401(k) Plan with an employer match contribution, medical, dental, disability, life, wellness plan, employee assistance plan, paid time off, flexible spending accounts, and voluntary benefits.
SUPERVISION AND REGULATION
General
As a bank holding company, we are required to comply with the rules and regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), and are also required to file certain reports with and are subject to examination by the Federal Reserve Board. We are also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Northwest Bank is a Pennsylvania-chartered stock savings bank and our deposit accounts are insured up to applicable limits by the FDIC’s Deposit Insurance Fund (the “DIF”). Northwest Bank is subject to extensive regulation by the Department of Banking and Securities of the Commonwealth of Pennsylvania (the “Department of Banking”), as its chartering agency, and by the FDIC, as its primary federal regulator and the insurer of its deposit accounts. Northwest Bank must file reports with the Department of Banking and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions including acquisitions of other financial institutions. Northwest Bank is examined periodically by the Department of Banking and the FDIC to test Northwest Bank’s compliance with various laws and regulations. This regulation and supervision, as well as federal and state law, establishes a comprehensive framework of activities in which Northwest Bank may engage and is intended primarily for the protection of the DIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and with their examination policies, including policies with respect to the classification of assets and the establishment of adequate credit loss reserves for regulatory purposes. Any change in these laws or regulations, whether by the Department of Banking or the FDIC, could have a material adverse impact on the Company, Northwest Bank and their respective operations. Additionally, when the consolidated assets of a financial institution and its holding company exceed $10 billion, the financial institution becomes subject to additional statutory and regulatory requirements that will result in additional costs. This includes enhanced risk management and corporate governance processes, and examination for compliance with federal financial consumer protection laws by the Consumer Financial Protection Bureau (“CFPB”) rather than the FDIC. As of December 31, 2021, our consolidated assets were $14.502 billion.
Set forth below is a brief description of certain regulatory requirements that are applicable to Northwest Bank and Northwest Bancshares, Inc. The description below is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on Northwest Bank and Northwest Bancshares, Inc.
Pennsylvania Savings Bank Law
The Pennsylvania Banking Code of 1965, as amended (the “Banking Code”) contains detailed provisions governing the organization, operations, corporate powers, savings and investment authority, branching, and rights and responsibilities of directors, officers and employees of Pennsylvania savings banks. A Pennsylvania savings bank may locate or change the location of its principal place of business and establish an office anywhere in, or adjacent to, Pennsylvania, with the prior approval of the Department of Banking. The Banking Code delegates extensive rulemaking power and administrative discretion to the Department of Banking in its supervision and regulation of state-chartered savings banks.
Although the Department of Banking may accept the examinations and reports of the FDIC in lieu of its own examination, the current practice is for the Department of Banking to conduct joint examinations with the FDIC. The Department of Banking may order any savings bank to discontinue any violation of law or unsafe or unsound business practice and may direct any director, officer, or employee of a savings bank engaged in a violation of law, unsafe or unsound practice or breach of fiduciary duty to show cause at a hearing before the Department of Banking why such person should not be removed. Legislation enacted in 2012 clarified the Department of Banking’s examination and enforcement authority over subsidiaries of Pennsylvania institutions and authorized the assessment of civil money penalties of up to $25,000 under certain circumstances for violations of laws or orders related to the institution or unsafe or unsound practices or breaches of fiduciary duties. The Department of Banking may also appoint a receiver or conservator for an institution in appropriate cases.
Loans-to-One Borrower Limitation
In accordance with the Banking Code, a Pennsylvania chartered savings bank, with certain limited exceptions, may lend to a single or related group of borrowers on an “unsecured” basis an amount equal to 15% of its capital accounts, the aggregate of capital, surplus, undivided profits, capital securities and reserve for credit losses. The Northwest Bank Credit Committee has established an internal lending limit, either individually or in the aggregate to one customer, or a single source of repayment, of $30.0 million and Aggregate Credit Exposure of $100.0 million. Under certain circumstances, for instance well qualified customers or customers with multiple individually qualified projects, this limit may be exceeded subject to the approval of the Senior Loan Committee. As of
December 31, 2021 we had ten credit relationships that were equal to or exceeded our $30.0 million internal limit for individual borrower and two credit relationships that were equal to or exceeded the $100.0 million internal limit for Aggregate Credit Exposure.
Dividends
The Company’s ability to pay dividends depends, to a large extent, upon Northwest Bank’s ability to pay dividends to the Company. The Banking Code states that no dividend may be paid out of surplus without approval of the Department of Banking. Dividends may be paid out of accumulated net earnings. No dividend may generally be paid that would result in Northwest Bank failing to comply with its regulatory capital requirements.
Federal Banking Regulation
Northwest Bank is also subject to extensive regulation, examination and supervision by the FDIC, as its primary federal regulator. Such regulation and supervision:
•Limits the activities and investment authority of Northwest Bank;
•Establishes a continuing and affirmative obligation, consistent with Northwest Bank’s safe and sound operation, to help meet the credit needs of its community, including low and moderate income neighborhoods;
•Establishes various capital categories resulting in various levels of regulatory scrutiny applied to the institutions in a particular category; and
•Establishes standards for safety and soundness.
The FDIC is required by law to examine each regulated institution every twelve months. The FDIC has the authority to order any savings bank and its directors, officers, attorneys or employees to discontinue any violation of law or unsafe or unsound banking practice.
Insurance of Deposit Accounts
The deposit accounts of Northwest Bank are insured by the DIF to the maximum amount provided by law. The FDIC insures deposits up to the standard maximum deposit insurance amount of $250,000. This insurance is backed by the full faith and credit of the United States Government.
The FDIC charges insured depository institutions premiums to maintain the DIF. Under the FDIC’s risk-based assessment system, insured institutions deemed less risky pay lower FDIC assessments. Assessments for institutions with $10 billion or more of assets are primarily based on a scorecard approach by the FDIC, including factors such as examination ratings and modeling measuring the institution’s ability to withstand asset-related and funding-related stress and potential loss to the DIF should the bank fail. The assessment range (inclusive of possible adjustments specified by the regulations) for institutions with greater than $10 billion of total assets is 1.5 to 40 basis points.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC. The management of Northwest Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance.
Capital Requirements
Federal regulations require federally insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8.0%, and a 4.0% Tier 1 capital to total assets leverage ratio.
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance-sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk.
Common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income, up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations. The company did exercise this opt-out election during the year ended December 31, 2021.
In assessing an institution’s capital adequacy, the FDIC takes into consideration not only these numeric factors but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
Any institution that fails any of the regulatory capital requirements is subject to enforcement action by the FDIC. Such action may include a capital directive, a cease and desist order, civil money penalties, restrictions on an institution’s operations, termination of federal deposit insurance, and the appointment of a conservator or receiver. Such action, through enforcement proceedings or otherwise, may require a variety of corrective measures.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.
The following table shows the Basel III regulatory capital levels that must be maintained to avoid limitations on capital distributions and discretionary bonus payments, effective January 1, 2019.
January 1, 2019
Common equity Tier 1 ratio plus capital conservation buffer 7.000 %
Tier 1 risk-based capital ratio plus capital conservation buffer 8.500 %
Total risk-based capital ratio plus capital conservation buffer 10.500 %
As of December 31, 2021, Northwest Bank’s capital exceeded all applicable regulatory requirements and it had an appropriate capital conservation buffer.
Northwest Bank is also subject to capital guidelines of the Department of Banking. Although not adopted in regulation form, the Department of Banking requires 6% leverage capital and 10% risk-based capital. The components of leverage and risk-based capital are substantially the same as those defined by the FDIC.
Prompt Corrective Action
Federal law requires, among other things, that federal bank regulators take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For this purpose, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under applicable regulations, an institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. Institutions that fall into an “undercapitalized” category are subject to a variety of mandatory and discretionary supervisory actions, including a restriction on capital distributions and the requirement to file a capital restoration plan with the regulators. Performance under the capital restoration plan must be guaranteed by the parent holding company up to the lesser of the amount of the capital deficiency when deemed undercapitalized or 5% of the institution’s total assets. Federal regulations also specify circumstances under which a federal banking agency may reclassify a well capitalized institution as adequately capitalized, and may require an adequately capitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically undercapitalized). As of December 31, 2021, Northwest Bank was well-capitalized for this purpose.
Transactions with Affiliates
Transactions between Northwest Bank and its affiliates, including the Company, are limited by Sections 23A and 23B of the Federal Reserve Act, applicable to FDIC-insured state nonmember banks by Section 18(j) of the Federal Deposit Insurance Act, and its implementing regulations. In general, transactions with affiliates must be on terms that are at least as favorable to the bank as comparable transactions with non-affiliates. In addition, certain types of affiliate transactions are restricted to an aggregate percentage of the bank’s capital. Certain transactions with affiliates are required to be secured by specified collateral.
Activities and Investments of Insured State-Chartered Banks
Federal law generally limits the activities as principal and equity investments of state-chartered banks insured by the FDIC and its subsidiaries to those that are permissible for national banks. Before engaging in a new activity as principal that is not permissible for a national bank or otherwise permissible under federal law or FDIC regulations, an insured savings bank must seek approval from the FDIC to engage in such activity. The FDIC will not approve the activity unless the savings bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the DIF.
Federal Home Loan Bank System
Northwest Bank is a member of the Federal Home Loan Bank System, which consists of 11 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Pittsburgh and the Federal Home Loan Bank of Indianapolis, Northwest Bank is required to acquire and hold share of capital stock in the Federal Home Loan Bank in specified amounts. As of December 31, 2021, Northwest Bank was in compliance with this requirement.
The USA PATRIOT Act
The USA Patriot Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The USA Patriot Act also requires the federal banking agencies to take into consideration the effectiveness of controls designed to combat money-laundering activities in determining whether to approve a merger or other acquisition application of a member institution. Accordingly, if we engage in a merger or other acquisition, our controls designed to combat money laundering would be considered as part of the application process. We have established policies, procedures and systems designed to comply with these regulations.
Holding Company Regulation
General. Prior to March 31, 2021, Northwest Bancshares, Inc. was regulated as a savings and loan holding company within the meaning of the Home Owners’ Loan Act of 1933, as amended (“HOLA”). Federal law allows a state savings bank, such as Northwest Bank, to elect to be treated as a savings association, provided that it qualifies as a “Qualified Thrift Lender”. Such election results in its holding company being regulated as a savings and loan holding company by the Federal Reserve Board rather than as a bank holding company. Northwest Bank had previously made the Section 10(1) election, but revoked the election effective March 31, 2021. Therefore, as of such date, Northwest Bancshares, Inc. is regulated by the Federal Reserve Board as a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (“Bank Holding Company Act”).
As a bank holding company, Northwest Bancshares, Inc. is subject to regulation, examination and supervision by, and periodic reporting to, the Federal Reserve Board. The Federal Reserve Board has enforcement authority over the Company and any non-bank subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a risk to Northwest Bank.
Permissible Activities. The Company’s activities are limited to the activities permissible for bank holding companies, which generally include activities deemed by the Federal Reserve Board to be closely related or a proper incident to banking or managing or controlling banks. A bank holding company that meets certain criteria may elect to be regulated as a financial holding company and thereby engage in a broader array of financial activities, such as underwriting equity securities and insurance. Northwest Bancshares, Inc. has not elected to be regulated as a financial holding company.
Federal law prohibits a bank holding company, including Northwest Bancshares, Inc., from acquiring, directly or indirectly, more than 5% of a class of voting securities of, or all or substantially all of the assets of, another bank or bank holding company, without prior written approval of the Federal Reserve Board. In evaluating applications by bank holding companies to acquire banks,
the Federal Reserve Board considers, among other factors, the financial and managerial resources and future prospects of the parties, the effect of the acquisition on the risk to the DIF, the convenience and needs of the community, competitive factors and compliance with anti-money laundering laws.
Capital. Bank holding companies with greater than $3 billion in total consolidated assets are subject to consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions. As is the case with institutions themselves, the capital conservation buffer was phased in between 2016 and 2019. Northwest Bancshares, Inc. was in compliance with the holding company capital requirements and the capital conservation buffer as of December 31, 2021.
Source of Strength Doctrine. The “source of strength doctrine” requires bank holding companies to provide assistance to their subsidiary depository institutions in the event the subsidiary depository institution experiences financial difficulty. The Federal Reserve Board has issued regulations requiring that all bank holding companies serve as a source of financial and managerial strength to their subsidiary depository institutions.
Capital Distributions. The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall supervisory financial condition. Separate regulatory guidance provides for prior consultation with Federal Reserve Bank supervisory staff concerning dividends in certain circumstances, such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend, the proposed dividend exceeds earnings for the period for which it is being paid, or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The guidance also provides for prior consultation with supervisory staff for material increases in the amount of a bank holding company’s common stock dividend. The ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized.
Federal Reserve Board regulatory guidance also indicates that a bank holding company should inform Federal Reserve Bank staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the bank holding company is experiencing financial weaknesses or the repurchase or redemption would result in a net reduction, at the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. Federal Reserve Board regulations require prior approval for a bank holding company to repurchase or redeem its equity securities if the gross consideration, when combined with net consideration paid for all such repurchases or redemptions during the preceding 12 months, will equal 10% or more of the holding company’s consolidated net worth. There is an exception for well-capitalized bank holding companies that meet specified qualitative criteria. Federal Reserve Board guidance provides for prior consultation with supervisory staff and nonobjection under specified circumstances prior to a holding company repurchasing or redeeming regulatory capital instruments, including common stock, regardless of the applicability of the previously referenced notification requirement.
These regulatory policies may affect the ability of Northwest Bancshares, Inc. to pay dividends, repurchase shares of its common stock or otherwise engage in capital distributions.
Acquisition of the Company. Under the Change in Bank Control Act, no person may acquire control of a bank holding company, such as Northwest Bancshares, Inc., unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under the Change in Bank Control Act, means ownership, control of or power to vote 25% or more of any class of voting stock. There is a rebuttable presumption of control upon the acquisition of 10% or more of a class of voting stock if the holding company involved has its shares registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or if no other person will own, control or hold the power to vote a greater percentage of that class of voting security after the acquisition.
A company that acquires control of a bank holding company, such as Northwest Bancshares, Inc., must receive prior Federal Reserve Board approval under the Bank Holding Company Act. Control, as defined under the Bank Holding Company Act, means ownership, control or power to vote 25% or more of any class of voting stock, control in any manner over the election of a majority of the company’s directors, or a determination by the regulator that the acquirer has the power to exercise, directly or indirectly, a controlling influence over the management or policies of the company. The Federal Reserve Board adopted a final rule, effective September 30, 2020, that revised its framework for determining whether a company, under the Bank Holding Company Act, exercises a “controlling influence” over a bank or a bank holding company. The Federal Reserve Board’s final rule applies to questions of control under the Bank Holding Company Act but does not extend to the Change in Bank Control Act.
Federal Securities Laws
Our common stock is registered with the SEC under Section 12(b) of the Exchange Act. We are also subject to the proxy rules, tender offer rules, insider trading restrictions, annual and periodic reporting, and other requirements of the Exchange Act.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 was enacted to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the Securities and Exchange Commission, under the Exchange Act. The Company has policies, procedures and systems designed to comply with these regulations.
FEDERAL AND STATE TAXATION
Federal Taxation. For federal income tax purposes, Northwest Bancshares, Inc. files a consolidated federal income tax return with its wholly-owned subsidiaries on a calendar year basis. The applicable federal income tax expense or benefit is properly allocated to each subsidiary based upon taxable income or loss calculated on a separate company basis.
We account for income taxes using the asset and liability method which accounts for deferred income taxes by applying the enacted statutory rates in effect at the balance sheet date to differences between the book basis and the tax basis of assets and liabilities. The resulting deferred tax liabilities and assets are adjusted to reflect changes in tax laws.
On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”), was signed into law. The Act includes many provisions that affect our income tax expense, including reducing our federal tax rate from 35.0% to 21.0% effective January 1, 2018. As a result of the rate reduction, we were required to re-measure, through income tax expense in the period of enactment, our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or settled. The re-measurement of our net deferred tax liability resulted in a 2017 income tax benefit of $3.1 million.
State Taxation. As a Maryland business corporation, Northwest Bancshares, Inc. is required to file annual tax returns with the State of Maryland. In addition, Northwest Bancshares, Inc. is subject to Pennsylvania’s corporate net income tax. Dividends received from Northwest Bank qualify for a 100% dividends received deduction and are not subject to corporate net income tax.
Northwest Bank is subject to Pennsylvania’s mutual thrift institutions tax based on Northwest Bank’s net income determined in accordance with generally accepted accounting principles, with certain adjustments. The tax rate under the mutual thrift institutions tax is 11.5%. Interest on Pennsylvania and federal obligations is excluded from net income. An allocable portion of interest expense incurred to carry the tax-free obligations is disallowed as a deduction. Northwest Bank is also subject to taxes in the other states in which it conducts business. These taxes are apportioned based upon the volume of business conducted in those states as a percentage of the whole. A majority of Northwest Bank’s affairs are conducted in Pennsylvania; however as the Company’s operational footprint expands, taxes paid to other states, such as New York (with a 6.5% rate) and Indiana (with a 6% rate) have grown slightly in significance.
The subsidiaries of Northwest Bank are subject to a Pennsylvania corporate net income tax and are also subject to other applicable taxes in the states where they conduct business.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
In addition to factors discussed in the description of our business and elsewhere in this report, as well as other filings we make with the SEC, the following are factors that could adversely affect our future results of operations and financial condition.
Risks Related to the COVID-19 Pandemic
The economic impact of the COVID-19 outbreak could continue to affect our financial condition and results of operations.
The COVID-19 pandemic has caused significant economic dislocation in the United States, resulting in an unprecedented slow-down in economic activity. The economic effects, including disruptions to the global supply chain, of the COVID-19 outbreak have had a destabilizing effect on financial markets, key market indices, and overall economic activity. Various state governments and federal agencies have required lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain
industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be fully controlled and abated. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
•demand for our products and services may decline, making it difficult to grow assets and income;
•loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
•collateral for loans, especially real estate, may decline in value, which could cause credit losses to increase;
•our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
•a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;
•our wealth management revenues may decline with continuing market turmoil;
•our cyber security risks are increased as the result of an increase in the number of employees working remotely;
•a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets;
•the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on our goodwill or core deposit and customer relationships intangibles that could result in an impairment charge being recorded for that period, that would adversely impact our results of operations and the ability of Northwest Bank to pay dividends to us;
•we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and
•FDIC premiums may increase if the agency experiences additional resolution costs.
Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.
Risk Related to our Lending Activities
Our commercial loan portfolio is increasing and the inherently higher risk of loss may lead to additional provisions for credit losses or charge-offs, which would negatively impact earnings and capital.
Commercial loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the business and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan. Commercial business loans expose us to additional risk since they typically are dependent on the borrower’s ability to make repayments from the cash flows of the business and are secured by non-real estate collateral that may depreciate over time. Further, our commercial business loans may be secured by collateral other than real estate, such as inventory and accounts receivable, the value of which may be more difficult to appraise, control or collect and may be more susceptible to fluctuation in value at the time of default.
The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.
The FDIC and the other federal bank regulatory agencies have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution
that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. A financial institution may have a concentration in commercial real estate lending if, among other factors, (i) total reported loans for construction, land acquisition and development, and other land represent 100% or more of total capital, or (ii) total reported loans secured by multi-family and non-farm residential properties, loans for construction, land acquisition and development and other land, and loans otherwise sensitive to the general commercial real estate market, including loans to commercial real estate related entities, represent 300% or more of total capital. Based on these factors, we have a concentration in multi-family and commercial real estate lending, as such loans represent 407.4% of total bank capital as of December 31, 2021. The particular focus of the guidance is on exposure to commercial real estate loans that are dependent on the cash flow from the real estate held as collateral and that are likely to be at greater risk to conditions in the commercial real estate market (as opposed to real estate collateral held as a secondary source of repayment or as an abundance of caution). The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us or that may result in a curtailment of our multi-family and commercial real estate lending that would adversely affect our loan originations and profitability.
If the allowance for credit losses is not sufficient to cover actual credit losses, our earnings could decrease.
Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant credit losses, which may have a material adverse effect on operating results. We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. If our assumptions prove to be incorrect, the allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease net income.
Our emphasis on originating commercial real estate and commercial loans is one of the more significant factors in evaluating the allowance for credit losses. As we continue to increase the amount of such loans, increased provisions for credit losses may be necessary, which would decrease our earnings. In addition, any future credit deterioration, including as a result of COVID-19, could require us to increase our allowance for credit losses in the future.
Bank regulators periodically review our allowance for credit losses and may require an increase to the provision for credit losses or further loan charge-offs. Any increase in our allowance for credit losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations or financial condition.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or regulations or more stringent interpretations or enforcement policies with respect to existing laws and regulations may increase our exposure to environmental liability, and heightened pressure from investors and other stakeholders may require to incur additional expenses with respect to environmental matters. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.
Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.
Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions, operating process changes and other issues. The impact on our customers will likely vary depending on their specific attributes, including reliance on role in carbon intensive
activities. among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. In addition, we could face reductions in creditworthiness on the part of some customers or in the value of asset securing loans. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
The foreclosure process may adversely impact our recoveries on non-performing loans.
The judicial foreclosure process is protracted, which delays our ability to resolve non-performing loans through the sale of the underlying collateral. The longer timelines have been the result of the economic crisis, additional consumer protection initiatives related to the foreclosure process, increased documentary requirements and judicial scrutiny, and, both voluntary and mandatory programs under which lenders may consider loan modifications or other alternatives to foreclosure. These reasons and the legal and regulatory responses have impacted the foreclosure process and completion time of foreclosures for residential mortgage lenders. This may result in a material adverse effect on collateral values and our ability to minimize its losses.
Risks Related to Laws and Regulations
Changes in laws and regulations and the cost of compliance with new laws and regulations may adversely affect our operations and our income.
The Company and Northwest Bank are subject to extensive regulation, supervision and examination by the Federal Reserve Board, the Department of Banking and the FDIC. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on Northwest Bank’s operations, reclassify assets, determine the adequacy of Northwest Bank’s allowance for credit losses and determine the level of deposit insurance premiums assessed. The laws and regulations applicable to us are subject to frequent change and interpretations. Any change in these regulations and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material impact on our operations.
The potential exists for additional federal or state laws and regulations, or changes in policy, affecting lending and funding practices and liquidity standards. Moreover, bank regulatory agencies have been active in responding to concerns and trends identified in examinations, and have issued many formal enforcement orders requiring capital ratios in excess of regulatory requirements. Bank regulatory agencies, such as the Federal Reserve Board, the Department of Banking, the CFPB and the FDIC, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors. In addition, new laws and regulations may increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions or affect our ability to pursue further acquisition opportunities. During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations.
We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material penalties.
The Community Reinvestment Act (“CRA”), the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.
We could become subject to more stringent capital requirements, which could adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.
Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and define “capital” for calculating these ratios. The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. Unrealized gains and losses on certain “available-for-sale” securities holdings are to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out was exercised. The Bank exercised this one-time opt-out option. The regulations also establish a “capital conservation buffer” of 2.5% and the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
At December 31, 2021, Northwest Bank has met all of these requirements, including the full 2.5% capital conservation buffer.
The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk-based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy, and could limit our ability to make distributions, including paying out dividends or buying back shares. Specifically, Northwest Bank’s ability to pay dividends will be limited if it does not have the capital conservation buffer required by the capital rules, which may limit our ability to pay dividends to stockholders.
The Federal Reserve Board may require us to commit capital resources to support Northwest Bank.
Federal law requires that a holding company act as a source of financial and managerial strength to its subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve Board may require a holding company to make capital injections into a troubled subsidiary bank and may charge the holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Thus, any borrowing or funds needed to raise capital required to make a capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.
Future legislative or regulatory actions responding to perceived financial and market problems could impair our ability to foreclose on collateral.
There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. Were proposals such as these, or other proposals limiting our rights as a creditor, to be implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor.
Legal and regulatory proceedings and related matters could adversely affect us or the financial services industry in general.
We, and other participants in the financial services industry upon whom we rely to operate, have been and may in the future become involved in legal and regulatory proceedings. Most of the proceedings we consider to be in the normal course of our business are typical for the industry; however, it is inherently difficult to assess the outcome of these matters, and other participants in the financial services industry or we may not prevail in any proceeding or litigation. There could be substantial cost and management diversion in such litigation and proceedings, and any adverse determination could have a materially adverse effect on our business, brand or image, or our financial condition and results of our operations.
Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve Board. An important function of the Federal Reserve Board is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve Board to implement these objectives are open market purchases and sales of U.S.
government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
Risk Related to Market Interest Rates
Changes in interest rates could adversely affect our results of operations and financial condition.
While we strive to control the impact of changes in interest rates on our net income, our results of operations and financial condition could be significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and investment securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits, borrowings and trust preferred securities. Because it is difficult to perfectly match the maturities and cash flows from our financial assets and liabilities our net income could be adversely impacted by changes in the level of interest rates or the slope of the Treasury yield curve.
Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and investment securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans. Also, increases in interest rates may extend the life of fixed rate assets, which would restrict our ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive as a result of the higher interest rates.
Changes in interest rates also affect the current fair value of our interest-earning investment securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At December 31, 2021, the fair value of our investment and mortgage-backed securities portfolio totaled $2.300 billion. Net unrealized losses on these securities totaled $(33.1) million at December 31, 2021.
Any increase in market interest rates may reduce our mortgage banking income. We generate revenues primarily from gains on the sale of mortgage loans to investors, and from the amortization of deferred mortgage servicing rights. We recognized noninterest income of $15.9 million on mortgage banking activities during the year ended December 31, 2021. We also earn interest on loans held for sale while awaiting delivery to our investors. In a rising or higher interest rate environment, our mortgage loan originations may decrease, resulting in fewer loans that are available for sale. This would result in a decrease in interest income and a decrease in revenues from loan sales. In addition, our results of operations are affected by the amount of noninterest expense associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment, data processing and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in mortgage loan origination activity.
At December 31, 2021, our interest rate risk analysis indicated that the market value of our equity would decrease by 9.3% if there was an instant parallel 200 basis point increase in market interest rates. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk”.
A continuation of the historically low interest rate environment and the possibility that we may access higher-cost funds to support our loan growth and operations may adversely affect our net interest income and profitability.
In recent years the Federal Reserve Board’s policy has been to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. Our ability to reduce our interest expense may be limited at current interest rate levels while the average yield on our interest-earning assets may continue to decrease, and our interest expense may increase as we access non-core funding sources or increase deposit rates to fund our operations. A continuation of a low interest rate environment or an increase in our cost of funds may adversely affect our net interest income, which would have an adverse effect on our profitability.
Risk Related to our Business Strategy
Acquisitions may disrupt our business and dilute stockholder value.
We regularly evaluate merger and acquisition opportunities with other financial institutions and financial services companies. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. We would seek acquisition partners that offer us either significant market presence or the potential to expand our market footprint and improve profitability through economies of scale or expanded services.
Acquiring other banks, businesses, or branches may have an adverse effect on our financial results and may involve various other risks commonly associated with acquisitions, including, among other things:
•difficulty in estimating the value of the target company;
•payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term;
•potential exposure to unknown or contingent liabilities of the target company;
•exposure to potential asset quality problems of the target company;
•potential volatility in reported income associated with goodwill impairment losses;
•difficulty and expense of integrating the operations and personnel of the target company;
•inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits of the acquisition;
•potential disruption to our business;
•potential diversion of our management’s time and attention;
•the possible loss of key employees and customers of the target company; and
•potential changes in banking or tax laws or regulations that may affect the target company.
Acquisitions may not enhance our cash flows, business, financial condition, results of operations or prospects as expected and such acquisitions may have an adverse effect on our results of operations, particularly during periods in which the acquisitions are being integrated into our operations.
Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that we will have sufficient capital resources to satisfy our capital requirements for the foreseeable future. We may at some point, however, need to raise additional capital to support our continued growth. If we raise capital through the issuance of additional shares of our common stock or other securities, it would dilute the ownership interests of existing stockholders and may dilute the per share book value of our common stock. New investors may also have rights, preferences and privileges senior to our current stockholders, which may adversely impact our current stockholders. Also, the need to raise additional capital may force our management to spend more time in managerial and financing-related activities than in operational activities.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we may not be able to raise additional capital, if needed, with favorable terms. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.
New lines of business or new products and services may subject us to additional risks.
From time to time, we may implement new lines of business or offer new products and services within existing lines of business. In addition, we will continue to make investments in research, development, and marketing for new products and services. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we may invest significant time and resources. Initial timetables for the development and introduction of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. Furthermore, if customers do not perceive our new offerings as providing significant value, they may fail to accept our new products and services. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, the burden on management and our information technology of introducing any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services
could have a material adverse effect on our business, financial condition and results of operations.
Our business strategy includes growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
Our business strategy includes growth in assets, deposits and the scale of our operations. Achieving our growth targets will require us to attract customers that currently bank at other financial institutions in our market, thereby increasing our share of the market. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market area and our ability to manage our growth. In order to successfully manage our growth, the Company may need to adopt and effectively implement new or revise existing policies, procedures, and controls, as well as hire additional employees or pay higher salaries to retain existing employees, to maintain credit quality, control costs and oversee the Company’s operations. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected.
Uncertainties associated with increased loan originations may result in errors in our judgment of collectability, which may lead to additional provisions for credit losses or charge-offs, which would negatively affect our operations.
Increasing loan originations would likely require us to lend to borrowers with which we have limited experience. Accordingly, we would not have a significant payment history pattern with which to judge future collectability. Further, newly originated loans have not been subjected to unfavorable economic conditions. As a result, it may be difficult to predict the future performance of newly originated loans. These loans may have delinquency or charge-off levels above our recent historical experience, which could adversely affect our future performance.
Risk Related to Economic Conditions
A worsening of economic conditions in our market area could reduce demand for our products and services and/or result in increases in our level of non-performing loans, which could adversely affect our operations, financial condition and earnings.
Our performance is significantly impacted by the general economic conditions in our primary markets in Pennsylvania, New York, Ohio, and Indiana. At December 31, 2021, 49.8% of our loan portfolio was secured by properties located in Pennsylvania, and 25.2% of our loan portfolio was secured by properties located in New York, with a large portion of the rest of our loans secured by real estate located in Ohio and Indiana. Local economic conditions have a significant impact on the ability of our borrowers to repay loans and the value of the collateral securing loans.
A deterioration in economic conditions, as a result of COVID-19 or otherwise, could result in the following consequences, any of which could have a material adverse affect on our business, financial condition, liquidity and results of operations:
•demand for our products and services may decline;
•loan delinquencies, problem assets and foreclosures may increase;
•collateral for loans, especially real estate, may decline in value, in turn reducing customers’ future borrowing power, and reducing the value of assets and collateral associated with existing loans; and
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
In addition, deflationary pressures, while possibly lowering our operating costs, could have a significant negative effect on our borrowers, especially our business borrowers, and the values of underlying collateral securing loans, which could negatively affect our financial performance.
Risk Related to Competitive Matters
Strong competition may limit growth and profitability.
Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, fintech companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. In addition, some have competitive advantages such as the credit union exemption from paying federal income tax. Competitive factors driven by consumer sentiment or otherwise can also reduce our ability to generate fee income, such as through overdraft fees. Our profitability depends upon our ability to successfully compete in our market areas.
Risk Related to Operational Matters
Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings.
Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur or may not be adequately addressed if they do occur. In addition, any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.
Our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs. Despite the defensive measures we take to manage our internal technological and operational infrastructure, threats may originate externally from third parties such as foreign governments, organized crime and other hackers, and outsource or infrastructure-support providers and application developers, or may originate internally from within our organization. Furthermore, we may not be able to ensure that all of our clients, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means.
In addition, we outsource a significant amount of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
The occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.
Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.
Our risk management framework is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report and control our exposure to risk, including strategic, market, liquidity, credit, interest rate, compliance and operational risks. While we use a broad and diversified set of risk monitoring and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.
Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes.
Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, losses may still occur.
We could be adversely affected by the soundness of other financial institutions and other third parties we rely on.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional customers. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due. Furthermore, successful operation of our debit card and cash management solutions business depends on the soundness of third party processors, clearing agents and others that we rely on to conduct our merchant business. Any losses resulting from such third parties could adversely affect our business, financial condition and results of operations.
Risks Related to Accounting Matters
If our intangible assets, including goodwill, are either partially or fully impaired in the future, it would decrease earnings.
We are required to test our goodwill and other identifiable intangible assets for impairment on an annual basis and more regularly if indicators of impairment exist. The impairment testing process considers a variety of factors, including the current market price of our common stock, the estimated net present value of our assets and liabilities and information concerning the terminal valuation of similar insured depository institutions. Future impairment testing may result in a partial or full impairment of the value of our goodwill or other identifiable intangible assets, or both. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment. However, the recording of such an impairment loss would have no impact on the tangible book value of our shares of common stock or our regulatory capital levels.
Changes in management’s estimates and assumptions may have a material impact on our Consolidated Financial Statements and our financial condition or operating results.
In preparing this annual report as well as periodic reports we are required to file under the Securities Exchange Act of 1934, including our Consolidated Financial Statements, our management is and will be required under applicable rules and regulations to make estimates and assumptions as of a specified date. These estimates and assumptions are based on management’s best estimates and experience as of that date and are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. Areas requiring significant estimates and assumptions by management include our valuation of investment securities, our determination of our income tax provision and goodwill, and our evaluation of the adequacy of our allowance for credit losses.
Risk Related to Investment Activities
We could record future losses on our investment securities portfolio.
A number of factors or combinations of factors could require us to conclude in one or more future reporting periods that an unrealized loss that exists with respect to these and other securities constitutes a credit related impairment, which could result in material losses to us. These factors include, but are not limited to, failure by the issuer to make scheduled interest payments, the issuer of the securities and their creditworthiness, any changes to the rating of the security and any adverse conditions specifically related to the security that would render us unable to forecast a full recovery in value. In addition, the fair values of securities could decline if the overall economy and the financial condition of some of the issuers deteriorates and there remains limited liquidity for these securities.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Balance Sheet Analysis-Securities” for a discussion of our securities portfolio and the unrealized losses related to the portfolio, as well as the “Marketable Securities” and “Disclosures about Fair Value of Financial Instruments” footnotes to the audited financial statements.
Our exposure to municipalities may lead to operating losses.
Our municipal bond portfolio may be impacted by the effects of economic stress on state and local governments. At December 31, 2021, we had $125.5 million invested in debt obligations of states, municipalities and political subdivisions (collectively referred to as our municipal bond portfolio). We also had $206.9 million of loans outstanding to municipalities and political subdivisions. Widespread concern currently exists regarding the stress on state and local governments emanating from: (i) declining revenues; (ii) large unfunded liabilities to government workers; and (iii) entrenched cost structures. Debt-to-gross domestic product ratios for the majority of states have been deteriorating due to, among other factors, declines in federal monetary assistance provided as the United States is currently experiencing the largest deficit in its history. This concern has led to speculation about the potential for a significant deterioration in the municipal bond market, which could materially affect our results of operations, financial condition and liquidity. We may not be able to mitigate the exposure in our municipal portfolio if state and local governments are unable to fulfill their obligations. The risk of widespread issuer defaults may also increase if there are changes in legislation that permit states, or additional municipalities and political subdivisions, to file for bankruptcy protection or if there are judicial interpretations that, in a bankruptcy or other proceeding, lessen the value of any structural protections.
The financial services sector represents a significant concentration within our investment portfolio.
Within our investment portfolio, we have a significant amount of corporate debt and mortgage-backed securities issued by companies in the financial services sector. Given current market conditions, this sector has an enhanced level of credit risk.
Risk Related to Our Debit and Credit Activities
Changes in card network rules or standards could adversely affect our business.
In order to provide our debit card and cash management solutions, we are members of the Visa network. As such, we are subject to card network rules that could subject us to a variety of fines or penalties that may be assessed on us. The termination of our membership or any changes in card network rules or standards, including interpretation and implementation of existing rules or standards, could increase the cost of operating our merchant services business or limit our ability to provide debit card and cash management solutions to or through our customers, and could have a material adverse effect on our business, financial condition and results of operations.
Changes in card network fees could impact our operations.
From time to time, the card networks increase the fees (known as interchange fees) that they charge to acquirers and that we charge to our merchants. It is possible that competitive pressures will result in us absorbing a portion of such increases in the future, which would increase our costs, reduce our profit margin and adversely affect our business and financial condition. In addition, the card networks require certain capital requirements. An increase in the required capital level would further limit our use of capital for other purposes.
Our business could suffer if there is a decline in the use of debit cards as a payment mechanism or if there are adverse developments with respect to the financial services industry in general.
As the financial services industry evolves, consumers may find debit financial services to be less attractive than traditional or other financial services. Consumers might not use debit card financial services for any number of reasons, including the general perception of our industry. If consumers do not continue or increase their usage of debit cards, including making changes in the way debit cards are loaded, our operating revenues and debit card deposits may remain at current levels or decline. Any projected growth for the industry may not occur or may occur more slowly than estimated. If consumer acceptance of debit financial services does not continue to develop or develops more slowly than expected or if there is a shift in the mix of payment forms, such as cash, credit cards, and debit cards, away from our products and services, it could have a material adverse effect on our financial position and results of operations.
Other Risk Related to Our Business
The corporate governance provisions in our articles of incorporation and bylaws, and the corporate governance provisions under Maryland law, may prevent or impede the holders of our common stock from obtaining representation on our Board of Directors and may impede takeovers of the Company that our board might conclude are not in the best interest of us or our stockholders.
Provisions in our articles of incorporation and bylaws may prevent or impede holders of our common stock from obtaining representation on our Board of Directors and may make takeovers of Northwest Bancshares, Inc. more difficult. As a result, our stockholders may not have the opportunity to participate in such a transaction, which could provide a premium over the prevailing price of our common stock. The provisions that may discourage takeover attempts or make them more difficult include that our Board of Directors is divided into three staggered classes. A classified board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. Our articles of incorporation include a provision that no person will be entitled to vote any shares of our common stock in excess of 10% of our outstanding shares of common stock. This limitation does not apply to the purchase of shares by a tax-qualified employee stock benefit plan established by us. In addition, our articles of incorporation and bylaws restrict who may call special meetings of stockholders and how directors may be removed from office. Additionally, in certain instances, the Maryland General Corporation Law requires a supermajority vote of our stockholders to approve a merger or other business combination with a large stockholder, if the proposed transaction is not approved by a majority of our directors.
We are a community bank and our ability to maintain our reputation is critical to the success of our business and the failure to do so may materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our
customers and caring about our customers and associates. If our reputation is negatively affected by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and operating results may be adversely affected.
If our government banking deposits were lost within a short period of time, this could negatively impact our liquidity and earnings.
As of December 31, 2021, we held $742.7 million of deposits from municipalities throughout Pennsylvania, New York, Ohio, and Indiana. These deposits may be more volatile than other deposits. If a significant amount of these deposits were withdrawn within a short period of time, it could have a negative impact on our short-term liquidity and have an adverse impact on our earnings.
Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. As we continue to grow, we are likely to become more dependent on these sources, which may include FHLB advances, proceeds from the sale of loans, federal funds purchased and brokered certificates of deposit. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.
We are required to transition from the use of the LIBOR interest rate index in the future.
We have certain loans indexed to LIBOR to calculate the loan interest rate. The LIBOR index will be discontinued for U.S. Dollar settings effective June 30, 2023. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR. The implementation of a substitute index or indices for the calculation of interest rates under our loan agreements with our borrowers may incur significant expenses in effecting the transition, may result in reduced loan balances if borrowers do not accept the substitute index or indices, and may result in disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute index or indices, which could have an adverse effect on our results of operations. Additionally, since alternative rates are calculated differently, the transition may change our market risk profile, requiring changes to the risk and pricing models.
A protracted government shutdown may result in reduced loan originations and related gains on sale and could negatively affect our financial condition and results of operations.
During any protracted federal government shutdown, we may not be able to close certain loans and we may not be able to recognize non-interest income on the sale of loans. Some of the loans we originate are sold directly to government agencies, and some of these sales may be unable to be consummated during the shutdown. In addition, we believe that some borrowers may determine not to proceed with their home purchase and not close on their loans, which would result in a permanent loss of the related non-interest income. A federal government shutdown could also result in reduced income for government employees or employees of companies that engage in business with the federal government, which could result in greater loan delinquencies, increases in our nonperforming, criticized and classified assets and a decline in demand for our products and services.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
As of December 31, 2021, we conducted our business through our main office located in Warren, Pennsylvania, 94 other full-service offices and six free-standing drive-through locations throughout our market area in central and western Pennsylvania, 30 full-service offices and one free-standing drive-through location in western New York, 13 full-service offices and one free-standing drive-through location in eastern Ohio, and 25 full-service office locations in Indiana. At December 31, 2021, our premises and equipment had an aggregate net book value of approximately $156.5 million.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
Northwest Bancshares, Inc. and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on our financial condition and/or results of operations. See Note 19 in the notes to the Consolidated Financial Statements.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed on the NASDAQ Global Select Market under the symbol “NWBI”. As of February 22, 2022, we had 25 registered market makers, 10,182 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 126,672,903 shares outstanding.
Payment of dividends on our shares of common stock is subject to determination and declaration by the Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, our results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will continue to be declared or, if declared, what the amount of dividends will be. See “Item 1. Business Supervision and Regulation - Holding Company Regulation - Source of Strength/Capital Distributions” for additional information regarding our ability to pay dividends.
There were no sales of unregistered securities during the quarter ended December 31, 2021.
On December 13, 2012, the Board of Directors approved a program that authorizes the repurchase of approximately 5,000,000 shares of common stock. This program does not have expiration date. During the quarter ended December 31, 2021, we did not repurchase any shares and there are a maximum of 2,261,130 remaining shares that can be purchased under the current repurchase program.
Stock Performance Graph
The following stock performance graph compares (a) the cumulative total return on our common stock between December 31, 2016 and December 31, 2021, (b) the cumulative total return on stocks included in the Total Return Index for the NASDAQ Stock Market (US) over such period, and (c) the cumulative total return on stocks included in the NASDAQ Bank Index over such period. Cumulative return assumes the reinvestment of dividends, and is expressed in dollars based on an assumed investment of $100.
There can be no assurance that our stock performance will continue in the future with the same or similar trend depicted in the graph. We will not make or endorse any predictions as to future stock performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Northwest Bancshares, Inc., the NASDAQ Composite Index, and the NASDAQ Bank Index
At December 31,
2016 2017 2018 2019 2020 2021
Northwest Bancshares, Inc. 100.00 96.47 101.67 104.06 85.34 100.55
NASDAQ Composite 100.00 129.64 125.96 172.17 249.51 304.85
NASDAQ Bank 100.00 106.14 88.44 109.61 101.31 144.54

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our principal business consists of collecting deposits and making loans primarily secured by various types of collateral, including real estate and other assets in the markets in which we are located. Attracting and maintaining deposits is affected by a number of factors, including interest rates paid on competing deposits and other investments offered by other financial and non-financial institutions, account maturities, fee structures, and levels of personal income and savings. Lending activities are affected by the demand for funds and thus are influenced by interest rates, the number and quality of alternative lenders and regional economic conditions. Sources of funds for lending activities include deposits, borrowings, repayments on loans, cash flows from investment and mortgage-backed securities and income provided from operations.
Our earnings depend primarily on net interest income, which is the difference between interest earned on our interest-earning assets, consisting primarily of loans and investment securities, and the interest paid on interest-bearing liabilities, consisting primarily of deposits, borrowed funds, and trust-preferred securities. Net interest income is a function of our interest rate spread, which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest-bearing liabilities, as well as a function of the average balance of interest-earning assets compared to the average balance of interest-bearing liabilities. Also contributing to our earnings is noninterest income, which consists primarily of service charges and fees on loan and deposit products and services, fees related to investment management and trust services, net gains and losses on the sale of assets and mortgage banking income. Net interest income and noninterest income are offset by provisions for credit losses, general administrative and other expenses, including employee compensation and benefits and occupancy and processing costs, as well as by state and federal income tax expense.
Our net income was $154.3 million, or $1.21 per diluted share, for the year ended December 31, 2021 compared to $74.9 million, or $0.62 per diluted share, for the year ended December 31, 2020 and $110.4 million, or $1.04 per diluted share, for the year ended December 31, 2019. The provision for credit losses was a credit of $11.9 million for the year ended December 31, 2021 compared to a provision expense of $84.0 million for the year ended December 31, 2020 and a provision expense of $22.7 million for the year ended December 31, 2019.
Selected Financial and Other Data
The summary financial information presented below is derived in part from the Company’s Consolidated Financial Statements. The following is only a summary and should be read in conjunction with the Consolidated Financial Statements and notes included elsewhere in this document. The information at December 31, 2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019 is derived in part from the audited Consolidated Financial Statements that appear in this document.
At December 31,
2021 2020
(In thousands)
Selected Consolidated Financial Data:
Total assets $ 14,501,508 13,806,268
Cash and cash equivalents 1,279,259 736,277
Marketable securities held-to-maturity 124,451 67,990
Marketable securities available-for-sale 1,548,592 252,237
Mortgage-backed securities held-to-maturity 643,703 178,887
Mortgage-backed securities available-for-sale 1,297,915 1,146,704
Loans receivable, net of allowance for credit losses:
Residential mortgage loans held-for-sale 25,056 58,786
Residential mortgage loans 2,962,191 3,002,069
Home equity loans 1,314,631 1,461,744
Consumer loans 1,820,381 1,490,297
Commercial real estate loans 2,957,460 3,255,990
Commercial loans 834,432 1,177,536
Total loans receivable, net 9,914,151 10,446,422
Deposits 12,301,165 11,599,233
Borrowed funds 139,093 159,715
Subordinated debt 123,575 123,329
Shareholders’ equity 1,583,571 1,538,703
For the years ended December 31,
2021 2020 2019
(In thousands except per share data)
Selected Consolidated Operating Data:
Total interest income $ 418,508 434,068 417,380
Total interest expense 27,246 42,340 56,914
Net interest income 391,262 391,728 360,466
Provision for credit losses (11,883) 83,975 22,659
Net interest income after provision for credit losses 403,145 307,753 337,807
Noninterest income 142,889 132,265 99,407
Noninterest expense 344,910 347,492 296,103
Income before income taxes 201,124 92,526 141,111
Income tax expense 46,801 17,672 30,679
Net income $ 154,323 74,854 110,432
Earnings per share:
Basic $ 1.22 0.62 1.05
Diluted $ 1.21 0.62 1.04
At or for the year ended December 31,
2021 2020 2019
Selected Financial Ratios and Other Data:
Return on average assets (1), (5), (6), (7), (8) 1.08 % 0.58 % 1.07 %
Return on average equity (2), (5), (6), (7), (8) 9.91 % 4.72 % 8.36 %
Average capital to average assets 10.89 % 12.29 % 12.79 %
Capital to total assets 10.92 % 11.14 % 12.90 %
Tangible common equity to tangible assets 8.43 % 8.48 % 9.72 %
Net interest rate spread (3) 2.89 % 3.24 % 3.62 %
Net interest margin (4) 2.98 % 3.36 % 3.84 %
Noninterest expense to average assets (5), (6), (7) 2.41 % 2.70 % 2.87 %
Efficiency ratio (5), (6), (7), (8) 63.53 % 65.01 % 62.97 %
Noninterest income to average assets (8) 1.00 % 1.03 % 0.96 %
Net interest income to noninterest expense (5), (6), (7) 1.13x 1.13x 1.22x
Dividend payout ratio 65.29 % 122.58 % 69.23 %
Nonperforming loans to net loans receivable 1.60 % 0.99 % 0.79 %
Nonperforming assets to total assets 1.10 % 0.77 % 0.67 %
Allowance for credit losses to nonperforming loans 64.38 % 129.99 % 84.09 %
Allowance for credit losses to loans receivable 1.02 % 1.27 % 0.66 %
Average interest-earning assets to average interest-bearing liabilities 1.39x 1.35x 1.35x
Number of banking offices 170 170 181
(1)Represents net income divided by average assets.
(2)Represents net income divided by average equity.
(3)Represents average yield on interest-earning assets less average cost of interest-bearing liabilities (shown on a fully taxable equivalent (“FTE”) basis).
(4)Represents net interest income as a percentage of average interest-earning assets (shown on a FTE basis).
(5) 2019 includes $4.2 million restructuring/acquisition expense.
(6) 2020 includes $20.8 million acquisition/branch optimization expense, $41.6 million estimated provision for credit losses related to COVID-19 and $18.2 million
estimated provision for credit losses related to the effect of CECL on the acquisition of MutualBank.
(7) 2021 includes $3.5 million in merger, asset disposition and restructuring expense.
(8) 2021 includes $25.3 million gain on sale of insurance business.
Critical Accounting Estimates
Our significant accounting policies are described in Note 1 of the notes to the Consolidated Financial Statements. Certain accounting policies are important to the understanding of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances, including, but without limitation, changes in interest rates, performance of the economy, financial condition of borrowers and laws and regulations. The following are the accounting estimates we believe are critical.
Allowance for Credit Losses. We recognize that losses will be experienced on assets and that the risk of loss varies with the type of asset, the creditworthiness of a borrower, general economic conditions and the quality of the collateral, if any. We maintain an allowance for expected lifetime losses in the loan portfolio. The allowance for credit losses represents management’s estimate of lifetime expected losses based on all available information. The allowance for credit losses is based on management’s evaluation of relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The loan portfolio is reviewed regularly by management in its determination of the allowance for credit 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 our allowance for credit losses and may require us to make additional provisions for estimated losses based upon judgments different from those of management. In establishing the allowance for credit losses, a combination of statistical models are applied to various pools of outstanding loans. We use a twenty-four month forecasting period and revert to historical average loss rates thereafter. Credit relationships that have been classified as substandard or doubtful and are greater than or equal to $1.0 million are reviewed by the Credit Administration department to determine if they no longer continue to demonstrate similar risk characteristics to their loan pool. If a loan no longer demonstrates similar risk characteristics to their loan pool they are removed from the pool and an individual assessment will be performed. The allowance calculation is also supplemented with qualitative reserves that takes into consideration the current portfolio and specific risk characteristics, such as changes in underwriting standards, portfolio mix, delinquency level, or
term, as well as changes in environmental conditions, among other factors, that have occurred but are not yet reflected in the quantitative model component.
Our allowance for credit losses is sensitive to a number of inputs, most notably the macroeconomic forecast assumptions as well as the reasonable and supportable forecasting periods that are incorporated in our estimate of credit losses. Therefore, as the macroeconomic environment and related forecasts change or decisions are made to shorten or lengthen the forecasting period, the allowance for credit losses may change materially. The following sensitivity analyses do not represent management’s expectations of the deterioration of our portfolios or the economic environment, but are provided as hypothetical scenarios to assess the sensitivity of the allowance for credit losses to changes in key inputs. We utilized a multi-scenario based macroeconomic forecast in determining the December 31, 2021 allowance for credit losses, which included a weighting of three scenarios: an upside scenario, a baseline scenario and a downside scenario. We placed the most weight on the baseline scenario, with the remaining weight split evenly between the upside and downside scenario. If we placed 100% weighting on the baseline scenario, the quantitative allowance for credit losses would have been approximately $11.4 million lower. These forecasts revert to our long-term historical average loss rate after a 24 month forecasting period. If we shortened the forecasting period to twelve months and reverted to our long-term historical loss rate thereafter, the quantitative allowance for credit losses would have been approximately $833,000 higher.
Although management believes that it uses the best information available to establish the allowance for credit losses, future adjustments to the allowance for credit 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 credit losses is adequate or that increases will not be necessary should the quality of assets deteriorate as a result of the factors discussed previously. Any material increase in the allowance for credit losses may adversely affect our 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. For further information related to our allowance for credit losses, see Note 1(f) of the notes to the Consolidated Financial Statements.
Recently Issued Accounting Standards
The following Accounting Standard Updates (“ASU”) issued by the FASB have not yet been adopted.
In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. This ASU provides temporary optional guidance to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The guidance provides expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The amendments primarily include contract modifications and hedge accounting, as well as providing a one-time election for the sale or transfer of debt securities classified as held-to-maturity. This guidance is effective March 12, 2020 through December 31, 2022. We are currently in the process of evaluating the amendments and determining the impact on our financial statements.
In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform”. This ASU provides amendments, which are elective, and apply to all entities that have derivative instruments that use an interest rate for margining, discounting or contract price alignment of certain derivative instruments that are modified as a result of the reference rate reform. This guidance is effective as of the date of issuance through December 31, 2022. We are currently in the process of evaluating the amendments and determining the impact on our financial statements.
Balance Sheet Analysis
Assets. Total assets at December 31, 2021 were $14.502 billion, an increase of $695.2 million, or 5.0%, from $13.806 billion at December 31, 2020. This increase in assets was due to an increase in both marketable securities and total cash and cash equivalents. A discussion of significant changes follows.
Cash and cash equivalents. Cash and cash equivalents increased by $543.0 million to $1.279 billion at December 31, 2021, from $736.3 million at December 31, 2020. This increase was primarily due to the increase in customer deposit balances associated with consumer stimulus checks and loan funds from the Paycheck Protection Program (“PPP”).
Marketable securities. Marketable securities increased by $738.9 million, or 46.8%, to $2.317 billion at December 31, 2021, from $1.578 billion at December 31, 2020. This increase was primarily a result of investing excess cash generated by deposits within our held-to-maturity portfolio.
The following table sets forth certain information regarding the amortized cost and fair value of our available-for-sale marketable securities portfolio and mortgage-backed securities portfolio at the dates indicated.
At December 31,
2021 2020
Amortized
cost Fair
value Amortized
cost Fair
value
(In thousands)
Residential mortgage-backed securities available-for-sale:
Fixed rate pass-through $ 265,604 265,468 339,406 346,445
Variable rate pass-through 11,306 11,591 14,778 15,189
Fixed rate agency CMOs 997,680 980,999 723,586 734,251
Variable rate agency CMOs 39,695 39,857 50,333 50,819
Total residential mortgage-backed securities available-for-sale 1,314,285 1,297,915 1,128,103 1,146,704
Marketable securities available-for-sale:
U.S. Government, agency and GSEs 125,260 121,976 134,948 135,424
Municipal securities 125,457 128,701 112,634 116,813
Total marketable securities available-for-sale $ 1,565,002 1,548,592 1,375,685 1,398,941
The following table sets forth certain information regarding the amortized cost and fair value of our held-to-maturity marketable securities portfolio and mortgage-backed securities portfolio at the dates indicated.
At December 31,
2021 2020
Amortized
cost Fair
value Amortized
cost Fair
value
(In thousands)
Residential mortgage-backed securities held-to-maturity:
Fixed rate pass-through $ 183,092 180,989 1,723 1,854
Variable rate pass-through 667 691 919 949
Fixed rate agency CMOs 459,345 449,585 107,651 108,365
Variable rate agency CMOs 599 616 604 619
Total residential mortgage-backed securities held-to-maturity 643,703 631,881 110,897 111,787
Marketable securities held-to-maturity:
U.S. Government and agencies 124,451 119,632 67,990 67,879
Total marketable securities held-to-maturity $ 768,154 751,513 178,887 179,666
The following table sets forth information regarding the issuers and the carrying value of our mortgage-backed securities at the dates indicated.
At December 31,
2021 2020
(In thousands)
Residential mortgage-backed securities:
FNMA $ 704,070 532,532
GNMA 577,684 367,354
FHLMC 659,433 357,249
Other (including non-agency) 431 466
Total residential mortgage-backed securities $ 1,941,618 1,257,601
Marketable Securities Portfolio Maturities and Yields. The following table sets forth the scheduled maturities, carrying values, amortized cost, market values and weighted average yields for our marketable securities and mortgage-backed securities portfolios at December 31, 2021. The annualized weighted average yields are calculated by taking the interest of the marketable securities divided by the amortized cost. Adjustable-rate mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust.
One year or less More than one year
to five years More than five years
to ten years More than ten years Total
Amortized
cost Annualized
weighted
average
yield (1) Amortized
cost Annualized
weighted
average
yield (1) Amortized
cost Annualized
weighted
average
yield (1) Amortized
cost Annualized
weighted
average
yield (1) Amortized
cost Fair
value Annualized
weighted
average
yield (1)
(Dollars in thousands)
Marketable securities
available-for-sale:
Government sponsored entities $ 177 1.51 % $ 991 2.82 % $ 46,411 1.02 % $ - - % $ 47,579 46,085 1.06 %
U.S. Government and
agency obligations - - % 20,000 0.87 % - - % 57,681 1.26 % 77,681 75,891 1.16 %
Municipal securities 946 3.45 % 1,261 2.75 % 23,692 2.33 % 99,558 2.13 % 125,457 128,701 2.19 %
Total marketable securities available-for-sale 1,123 3.14 % 22,252 1.07 % 70,103 1.47 % 157,239 1.82 % 250,717 250,677 1.66 %
Residential mortgage-backed securities available-for-sale:
Pass-through certificates 11,307 2.05 % 6,218 1.38 % 34,033 1.80 % 225,352 1.36 % 276,910 277,058 1.44 %
CMOs 39,957 0.66 % 4,189 2.04 % 28,102 1.32 % 965,127 1.33 % 1,037,375 1,020,857 1.30 %
Total residential
mortgage-backed securities available-for-sale 51,264 0.97 % 10,407 1.65 % 62,135 1.58 % 1,190,479 1.33 % 1,314,285 1,297,915 1.33 %
Marketable securities
held-to-maturity:
U.S. Government and
agency obligations - - % 16,478 - % 107,973 1.00 % - - % 124,451 119,632 0.87 %
Residential mortgage-backed securities held-to-maturity:
Pass-through certificates 667 1.63 % 792 3.53 % 20,283 1.30 % 162,017 1.18 % 183,759 181,679 1.21 %
CMOs 599 0.72 % - - % 20,211 0.92 % 439,134 1.17 % 459,944 450,202 1.16 %
Total residential
mortgage-backed securities held-to-maturity 1,266 1.20 % 792 3.53 % 40,494 1.11 % 601,151 1.17 % 643,703 631,881 1.17 %
Total marketable securities and mortgage-backed securities $ 53,653 1.02 % $ 49,929 0.87 % $ 280,705 1.26 % $ 1,948,869 1.32 % $ 2,333,156 2,300,105 1.30 %
Further information and analysis of our investment portfolio, including tables with information related to gross unrealized gains and losses on available-for sale and held-to-maturity marketable securities and tables showing the fair value and gross unrealized losses on marketable securities aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position are located in Note 4 of the Notes to the Consolidated Financial Statements.
Loans Receivable. Net loans receivable decreased by $532.3 million, or 5.1%, to $9.914 billion at December 31, 2021, from $10.446 billion at December 31, 2020. This decrease was due primarily to loan paydowns and payoffs outpacing new originations across all of our loan portfolios with the exception of our consumer loan portfolio which increased $330.8 million, or 21.9%, to $1.839 billion at December 31, 2021 from $1.508 billion at December 31, 2020.
Set forth below are selected data related to the composition of our loan portfolio by type of loan as of the dates indicated.
At December 31,
2021 2020 2019
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Personal Banking:
Residential mortgage loans held-for-sale $ 25,056 0.3 % $ 58,786 0.5 % $ 7,709 0.1 %
Residential mortgage loans 2,969,564 29.6 % 3,009,335 28.4 % 2,860,418 32.5 %
Home equity loans 1,319,931 13.2 % 1,467,736 13.9 % 1,342,918 15.2 %
Vehicle loans 1,484,231 14.8 % 1,152,673 10.9 % 861,192 9.8 %
Consumer loans (1) 354,517 3.5 % 355,320 3.4 % 263,940 3.0 %
Total Personal Banking 6,153,299 61.4 % 6,043,850 57.1 % 5,336,177 60.6 %
Commercial Banking:
Commercial real estate 3,015,484 30.1 % 3,345,889 31.6 % 2,754,390 31.3 %
Commercial loans 847,609 8.5 % 1,191,110 11.3 % 718,107 8.1 %
Total Commercial Banking 3,863,093 38.6 % 4,536,999 42.9 % 3,472,497 39.4 %
Total loans receivable, gross 10,016,392 100.0 % 10,580,849 100.0 % 8,808,674 100.0 %
Total allowance for credit losses (102,241) (134,427) (57,941)
Total loans receivable, net $ 9,914,151 $ 10,446,422 $ 8,750,733
(1) Consists primarily of secured and unsecured personal loans.
The following table sets forth the maturity of our loan portfolio at December 31, 2021. Demand loans and loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. Adjustable and floating-rate loans are included in the period in which they contractually mature, and fixed-rate loans are included in the period in which the contractual repayment is due.
At December 31, 2021 (In thousands) Due in one year or less Due after
one year
through
five years Due after
five years
through
fifteen years Due after fifteen years Total
Personal Banking:
Residential mortgage loans $ 154,090 501,766 1,176,937 1,144,352 2,977,145
Home equity loans 101,236 335,017 471,546 407,407 1,315,206
Consumer loans 376,838 1,181,324 217,515 9 1,775,686
Total Personal Banking 632,164 2,018,107 1,865,998 1,551,768 6,068,037
Commercial Banking:
Commercial real estate loans 549,636 1,056,330 1,148,217 269,708 3,023,891
Commercial loans 251,047 474,247 106,312 30,098 861,704
Total Commercial Banking 800,683 1,530,577 1,254,529 299,806 3,885,595
Total Loans $ 1,432,847 3,548,684 3,120,527 1,851,574 9,953,632
Net unearned income and unamortized premiums and discounts 62,760
Total Loans Receivable $ 10,016,392
The following table sets forth at December 31, 2021, the dollar amount of all fixed-rate and adjustable-rate loans due one year or more after December 31, 2021. Adjustable and floating-rate loans are included in the table based on the contractual due date of the loan.
At December 31, 2021 (In thousands) Fixed Adjustable Total
Personal Banking:
Residential mortgage loans $ 2,797,356 25,699 2,823,055
Home equity loans 781,701 432,269 1,213,970
Consumer loans 1,372,011 26,837 1,398,848
Total Personal Banking 4,951,068 484,805 5,435,873
Commercial Banking:
Commercial real estate loans 612,827 1,861,428 2,474,255
Commercial loans 193,959 416,698 610,657
Total Commercial Banking 806,786 2,278,126 3,084,912
Total $ 5,757,854 2,762,931 8,520,785
Deposits. Total deposits increased by $701.9 million, or 6.1%, to $12.301 billion at December 31, 2021 from $11.599 billion at December 31, 2020. This increase was primarily due to an increase in noninterest-bearing demand deposits of $383.3 million, or 14.1%, to $3.100 billion at December 31, 2021 from $2.716 billion at December 31, 2020 and an increase in savings deposits of $256.3 million, or 12.5%, to $2.304 billion at December 31, 2021 from $2.047 billion at December 31, 2020. In addition, money market deposit accounts increased by $192.3 million, or 7.9%, to $2.630 billion at December 31, 2021 from $2.438 billion at December 31, 2020 and interest-bearing demand deposits increased by $184.5 million, or 6.7%, to $2.940 billion at December 31, 2021 from $2.756 billion at December 31, 2020. These deposit account increases were the result of both consumer stimulus checks and PPP loan funds as well as consumer saving trends. Partially offsetting these increases, time deposits decreased by $314.5 million, or 19.2%, as customer trends have moved funds from term products to checking and savings accounts.
The following table sets forth the dollar amount of deposits in the various types of accounts we offered at the dates indicated.
At December 31,
2021 2020
Balance Percent (1) Rate (2) Balance Percent (1) Rate (2)
(Dollars in thousands)
Savings deposits $ 2,303,760 18.7 % 0.10 % $ 2,047,424 17.7 % 0.12 %
Demand deposits 6,039,968 49.1 % 0.01 % 5,472,174 47.2 % 0.02 %
Money market deposit accounts 2,629,882 21.4 % 0.10 % 2,437,539 21.0 % 0.15 %
Time deposits:
Maturing within 1 year 890,101 7.2 % 0.68 % 990,769 8.5 % 0.96 %
Maturing 1 to 3 years 368,535 3.0 % 1.28 % 545,049 4.7 % 1.61 %
Maturing more than 3 years 68,919 0.6 % 0.43 % 106,278 0.9 % 1.63 %
Total certificates 1,327,555 10.8 % 0.84 % 1,642,096 14.1 % 1.22 %
Total deposits $ 12,301,165 100.0 % 0.14 % $ 11,599,233 100.0 % 0.23 %
(1) Represents percentage of total deposits.
(2) Represents weighted average nominal rate at year end.
The following table sets forth the dollar amount of deposits in each state by branch location as of December 31, 2021.
State Balance Percent
(Dollars in thousands)
Pennsylvania $ 6,991,776 56.8 %
New York 2,846,373 23.1 %
Ohio 1,034,641 8.4 %
Indiana 1,428,375 11.7 %
Total $ 12,301,165 100.0 %
The following table indicates the amount of our certificates of deposits of $250,000 or more by time remaining until maturity at December 31, 2021.
Maturity period Certificates of deposit
(In thousands)
Three months or less $ 27,027
Over three months through six months 22,282
Over six months through twelve months 32,694
Over twelve months 41,733
Total $ 123,736
At December 31, 2021 and 2020, we had deposits in excess of $250,000 (the limit for FDIC insurance) of $123.7 million and $181.7 million, respectively. At those dates, we had no deposits that were uninsured for any other reason.
Borrowings. Borrowings decreased by $20.4 million, or 7.2%, to $262.7 million at December 31, 2021 from $283.0 million at December 31, 2020. This decrease was a result of $22.0 million of term notes payable to the FHLB maturing during the current year.
The following table sets forth information concerning our borrowings at the dates and for the periods indicated.
During the years ended December 31,
2021 2020
(Dollars in thousands)
FHLB borrowings:
Average balance outstanding $ 1,671 $ 183,062
Maximum outstanding at end of any month during year 7,019 302,644
Balance outstanding at end of year - 22,054
Weighted average interest rate during year 2.20 % 1.67 %
Weighted average interest rate at end of year - % 1.92 %
Collateralized borrowings:
Average balance outstanding $ 132,100 $ 122,782
Maximum outstanding at end of any month during year 139,568 150,638
Balance outstanding at end of year 139,093 137,661
Weighted average interest rate during year 0.19 % 0.25 %
Weighted average interest rate at end of year 0.19 % 0.19 %
Subordinated borrowings:
Average balance outstanding $ 123,481 $ 123,294
Maximum outstanding at end of any month during year 123,560 123,329
Balance outstanding at end of year 123,575 123,329
Weighted average interest rate during year 4.00 % 4.00 %
Weighted average interest rate at end of year 4.00 % 4.00 %
Total borrowings:
Average balance outstanding $ 258,742 $ 346,442
Maximum outstanding at end of any month during year 269,931 440,079
Balance outstanding at end of year 262,668 283,044
Weighted average interest rate during year 2.03 % 1.44 %
Weighted average interest rate at end of year 1.98 % 1.98 %
Shareholders’ equity. Total shareholders’ equity at December 31, 2021 was $1.584 billion, an increase of $44.9 million, or 2.9%, from $1.539 billion at December 31, 2020. This increase in equity was primarily the result of net income for the year ended December 31, 2021 of $154.3 million. This increase was partially offset by the payment of cash dividends of $100.3 million for the year ended December 31, 2021.
Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020
General. Net income for the year ended December 31, 2021 was $154.3 million, or $1.21 per diluted share, an increase of $79.5 million, or 106.2%, from $74.9 million, or $0.62 per diluted share, for the year ended December 31, 2020. The increase in net income resulted from a decrease in provision for credit losses of $95.9 million, or 114.2%, an increase in noninterest income of $10.6 million, or 8.0%, and a decrease in noninterest expense of $2.6 million, or 0.7%. Partially offsetting these increases was an increase in income tax expense of $29.1 million, or 164.8%, and a decrease in net interest income of $466,000, or 0.1%.
Net income for the year ended December 31, 2021 represents returns on average equity and average assets of 9.91% and 1.08%, respectively, compared to 4.72% and 0.58% for the year ended December 31, 2020. A discussion of significant changes follows.
Interest Income. Total interest income decreased by $15.6 million, or 3.6%, to $418.5 million for the year ended December 31, 2021 from $434.1 million for the year ended December 31, 2020. This decrease is the result of decreases in the average yield on interest-earning assets to 3.16% for the year ended December 31, 2021 from 3.70% for the year ended December 31, 2020. This decrease in average yield is attributed to a decline in overall market interest rates. Partially offsetting this decrease in rates was an increase in the average balance of interest-earning assets of $1.503 billion, or 12.8%, to $13.236 billion for the year ended December 31, 2021 from $11.733 billion for the year ended December 31, 2020.
Interest income on loans receivable decreased by $20.6 million, or 5.0%, to $390.3 million for the year ended December 31, 2021 from $410.9 million for the year ended December 31, 2020. This decrease in interest income on loans receivable is primarily due to a decrease in the average yield on loans receivable to 3.81% for the year ended December 31, 2021 from 4.07% for the year ended December 31, 2020 primarily due to the decrease in market interest rates. Partially offsetting this decrease was an increase in the average balance of loans receivable which increased $135.2 million, or 1.3%, to $10.240 billion for the year ended December 31, 2021 from $10.104 billion for the year ended December 31, 2020 primarily due to growth in our consumer portfolio. At December 31, 2021, there was $69.4 million in PPP loans outstanding, and included in loan interest income for the year ended December 31, 2021 was $14.6 million of accretion related to PPP fees, net of origination costs, compared to $5.7 million for the year ended December 31, 2020.
Interest income on mortgage-backed securities increased by $4.0 million, or 23.2%, to $21.5 million for the year ended December 31, 2021 from $17.4 million for the year ended December 31, 2020. This increase is the result of an increase in the average balance of mortgage-backed securities by $814.3 million, or 91.5%, to $1.704 billion for the year ended December 31, 2021 from $889.7 million for the year ended December 31, 2020. This increase was primarily a result of additional purchases utilizing excess cash from deposit growth during the current year. Partially offsetting this increase in average balance was a decrease in the average yield on mortgage-backed securities to 1.26% for the year ended December 31, 2021 from 1.96% for the year ended December 31, 2020. This decrease in yield was the result of the new security purchases made at lower yields due to decreases in market interest rates.
Interest income on investment securities increased by $1.1 million, or 26.1%, to $5.1 million for the year ended December 31, 2021 from $4.0 million for the year ended December 31, 2020. This increase is primarily the result of an increase in the average balance of investment securities of $154.7 million, or 78.9%, to $350.8 million for the year ended December 31, 2021 from $196.1 million for the year ended December 31, 2020, which was primarily due to the utilization of excess funds from deposit growth. Partially offsetting this increase in average balances was a decrease in the average yield on investment securities to 1.45% for the year ended December 31, 2021 from 2.06% for the year ended December 31, 2020 as new investment purchases were at lower yields than the existing portfolio due to lower market interest rates.
Dividends on FHLB stock decreased by $574,000, or 58.5%, to $407,000 for the year ended December 31, 2021 from $981,000 for the year ended December 31, 2020. This decrease is the result of decreases in the average yield on FHLB stock which decreased to 2.01% for the year ended December 31, 2021 from 4.50% for the year ended December 31, 2020. The FHLB of Pittsburgh decreased yields on required stock holdings due to lower market interest rates. In addition, the average balance of FHLB stock decreased by $1.6 million, or 7.1%, to $20.2 million for the year ended December 31, 2021 from $21.8 million for the year ended December 31, 2020. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.
Interest income on interest-earning deposits increased by $475,000, or 66.1%, to $1.2 million for the year ended December 31, 2021 from $719,000 for the year ended December 31, 2020. This increase is attributable to an increase in the average balance of interest-earning deposits. The average balance increased by $400.7 million, or 77.0%, to $921.4 million for the year ended December 31, 2021 from $520.7 million for the year ended December 31, 2020 due to excess liquidity from steady deposit inflows. Partially offsetting this increase was a decrease in the average yield on interesting-earning deposits to 0.13% for the year ended December 31, 2021 from 0.14% for the year ended December 31, 2020.
Interest Expense. Interest expense decreased by $15.1 million, or 35.6%, to $27.2 million for the year ended December 31, 2021 from $42.3 million for the year ended December 31, 2020. This decrease in interest expense was primarily due to the decline in the average cost of interest-bearing liabilities which decreased to 0.29% for the year ended December 31, 2021 from 0.49% for the year ended December 31, 2020. This decrease resulted from decreases in the interest rates paid on deposits and junior subordinated debentures in response to decreases in market interest rates. Partially offsetting this decrease was an increase in the average balance of interest-bearing liabilities by $797.9 million, or 9.2%, to $9.501 billion for the year ended December 31, 2021 from $8.703 billion for the year ended December 31, 2020. This increase in average balance resulted from internal growth in deposits and the issuance of $125.0 million of fixed-to-floating subordinated debt in September of 2020.
Net Interest Income. Net interest income remained relatively flat, decreasing by $466,000, or 0.1%, to $391.3 million for the year ended December 31, 2021 from $391.7 million for the year ended December 31, 2020. This decline was attributable to the overall decrease in interest income and interest expense that largely offset each other. Our interest rate spread decreased to 2.88% for the year ended December 31, 2021 from 3.21% for the year ended December 31, 2020 and our net interest margin also decreased to 2.96% for the year ended December 31, 2021 from 3.34% for the year ended December 31, 2020 primarily due to the change in interest-earning asset mix. Contributing to the decline was an increase in average cash balances of $400.7 million, earning 0.13%, due to deposit growth associated with PPP loan funds and consumer stimulus checks.
Provision for Credit Losses. We analyze the allowance for credit losses as described in Note 1(f) of the Notes to the Consolidated Financial Statements. The provision for credit losses decreased by $95.9 million, or 114.2%, to a net credit of $11.9 million for the year ended December 31, 2021 compared to a provision expense of $84.0 million for the year ended December 31, 2020. The prior year provision was elevated due to the uncertainty of COVID-19 and the negative effects to the economic forecasts. Throughout 2021, we were able to release those credit loss reserves that were previously built up as the economic forecasts and our overall credit quality improved. Total classified loans decreased by $126.1 million, or 25.8%, to $363.2 million at December 31, 2021 from $489.3 million at December 31, 2020. In addition, net charge-offs to average loans decreased to 0.20% for the year ended December 31, 2021 from 0.27% for the year ended December 31, 2020.
In determining the amount of the current period provision, we considered current economic conditions, including unemployment levels, bankruptcy filings, and changes in real estate values, and assessed the impact of these factors on the quality of our loan portfolio and historical loss experience. We analyze the allowance for credit losses as described in the section entitled “Allowance for Credit Losses”. The provision that is recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period and historical loss experience at December 31, 2021.
Noninterest Income. Noninterest income increased by $10.6 million, or 8.0%, to $142.9 million for the year ended December 31, 2021 from $132.3 million for the year ended December 31, 2020. This increase is largely due to the $25.3 million gain recognized on the sale of the insurance business in the second quarter of 2021. Also contributing to this increase was a $7.0 million, or 33.5%, increase in trust and other financial services income to $27.9 million for the year ended December 31, 2021 from $20.9 million for the year ended December 31, 2020 as a result of growth in both customer accounts and market gains. Partially offsetting these increases, was a decrease in mortgage banking income of $15.5 million, or 49.4%, to $15.9 million for the year ended December 31, 2021 from $31.4 million for the year ended December 31, 2020, due primarily to the impact of less favorable pricing in the secondary market. Additionally, service charges and fees decreased $3.8 million, or 6.8%, to $51.8 million for the year ended December 31, 2021 from $55.6 million for the year ended December 31, 2020 due to the impact of the Durbin amendment on our interchange fees which came into effect in the second half of 2020.
Noninterest Expense. Noninterest expense decreased by $2.6 million, or 0.7%, to $344.9 million for the year ended December 31, 2021 from $347.5 million for the year ended December 31, 2020. This decrease was primarily due to a decrease of $17.3 million, or 83.4%, in merger, asset disposition and restructuring expense to $3.5 million for the year ended December 31, 2021 from $20.8 million for the year ended December 31, 2020 due to expenses incurred in the prior year for the MutualBank acquisition and the 2020 branch optimization initiative. Also, other expenses decreased $8.1 million, or 49.4%, to $8.3 million for the year ended December 31, 2021 from $16.5 million for the year ended December 31, 2020 primarily due to the decrease in the reserve for unfunded commitments. The prior year was significantly impacted by the onset of COVID-19 and the uncertainty surrounding the possible negative effect on loan commitments and undrawn lines of credit. Partially offsetting these decreases was an increase in compensation and employee benefits of $15.5 million, or 8.7%, to $193.9 million for the year ended December 31, 2021 from $178.4 million for the year ended December 31, 2020 primarily due to increases in health insurance and other benefits costs, regular merit expense and the addition of MutualBank and other strategic personnel. Additionally, processing expenses increased $5.7 million, or 11.4%, to $55.8 million for the year ended December 31, 2021 from $50.1 million for the year ended December 31, 2020, as we continue to invest in technology and infrastructure as well as increases in activity-driven utilization fees for ATM, check card and online and mobile banking. Lastly, professional service expense increased $5.1 million, or 41.2%, to $17.6 million for the year ended
December 31, 2021 from $12.5 million for the year ended December 31, 2020 primarily due to the utilization of third-party experts to assist with our digital strategy rollout.
Income Taxes. The provision for income taxes increased by $29.1 million, or 164.8%, to $46.8 million for the year ended December 31, 2021 from $17.7 million for the year ended December 31, 2020. This increase in income tax expense is primarily due to the $108.6 million, or 117.4%, increase in pretax income to $201.1 million for the year ended December 31, 2021 from $92.5 million for the year ended December 31, 2020. In addition, our effective tax rate for the year ended December 31, 2021 was 23.3% compared to 19.1% for the year ended December 31, 2020.
Comparison of Results of Operations for the Years Ended December 31, 2020 and 2019
General. Net income for the year ended December 31, 2020 was $74.9 million, or $0.62 per diluted share, a decrease of $35.6 million, or 32.2%, from $110.4 million, or $1.04 per diluted share, for the year ended December 31, 2019. The decrease in net income resulted from an increase in provision for credit losses of $61.3 million, or 270.6%, and an increase in noninterest expense of $51.4 million, or 17.4%. Partially offsetting these increases were an increase in noninterest income of $32.9 million, or 33.1%, an increase in net interest income of $31.3 million, or 8.7%, and a decrease in income tax expense of $13.0 million, or 42.4%.
Net income for the year ended December 31, 2020 represents returns on average equity and average assets of 4.72% and 0.58%, respectively, compared to 8.36% and 1.07% for the year ended December 31, 2019. A discussion of significant changes follows.
Interest Income. Total interest income increased by $16.7 million, or 4.0%, to $434.1 million for the year ended December 31, 2020 from $417.4 million for the year ended December 31, 2019. This increase is the result of an increase in the average balance of interest-earning assets of $2.294 billion, or 24.3%, to $11.733 billion for the year ended December 31, 2020 from $9.438 billion for the year ended December 31, 2019. Partially offsetting this increase in average balances was a decrease in the average yield on interest-earning assets to 3.70% for the year ended December 31, 2020 from 4.42% for the year ended December 31, 2019. This decrease in average yield is attributed to a decline in overall market interest rates.
Interest income on loans receivable increased by $16.1 million, or 4.1%, to $410.9 million for the year ended December 31, 2020 from $394.8 million for the year ended December 31, 2019. This increase in interest income on loans receivable is attributed to the increase in the average balance on loans receivable. The average balance increased by $1.549 billion, or 18.1%, to $10.104 billion for the year ended December 31, 2020 from $8.555 billion for the year ended December 31, 2019. This increase is due primarily to the addition of $1.517 billion, at fair value, of loans related to the MutualBank acquisition and organic loan growth of $255.2 million. Contributing to this organic loan growth was the origination of approximately $500.0 million of PPP loans. Included in loan interest income for the year ended December 31, 2020 is $3.1 million of accretion related to MutualBank loan purchase accounting and $5.7 million of accretion related to PPP fees, net of origination costs. Partially offsetting this increase in average balances was a decrease in the average yield on loans receivable to 4.07% for the year ended December 31, 2020 from 4.61% for the year ended December 31, 2019 primarily due to the decrease in market interest rates.
Interest income on mortgage-backed securities increased by $746,000, or 4.5%, to $17.4 million for the year ended December 31, 2020 from $16.7 million for the year ended December 31, 2019. This increase is the result of an increase in the average balance of mortgage-backed securities by $250.0 million, or 39.1%, to $889.7 million for the year ended December 31, 2020 from $639.8 million for the year ended December 31, 2019. This increase was primarily a result of investment securities received as part of the MutualBank acquisition as well as additional purchases utilizing excess cash from deposit growth during the current year. Partially offsetting this increase was a decrease in the average yield on mortgage-backed securities to 1.96% for the year ended December 31, 2020 from 2.61% for the year ended December 31, 2019. This decrease in yield was partially due to the assumption of mortgage-backed securities from MutualBank with market yields lower than the existing Northwest portfolio due to mark-to-market purchase accounting adjustments. In addition, new security purchases were made at lower yields due to decreases in market interest rates.
Interest income on investment securities remained relatively flat, decreasing by $200,000, or 4.7%, to $4.0 million for the year ended December 31, 2020 from $4.2 million for the year ended December 31, 2019. This decrease is the result of a decrease in the average balance of investment securities of $9.7 million, or 4.7%, to $196.1 million for the year ended December 31, 2020 from $205.8 million for the year ended December 31, 2019, which was primarily due to the maturity or call of government agency securities. The average yield on investment securities remained flat at 2.06% for the years ended December 31, 2020 and December 31, 2019.
Dividends on FHLB stock decreased by $75,000, or 7.1%, to $981,000 for the year ended December 31, 2020 from $1.1 million for the year ended December 31, 2019. This decrease is the result of decreases in the average yield on FHLB stock which decreased to 4.50% for the year ended December 31, 2020 from 7.29% for the year ended December 31, 2019. The FHLB of Pittsburgh recently decreased yields on required stock holdings in reaction to lower market interest rates. Slightly offsetting this
decrease was an increase in the average balance on FHLB stock by $7.3 million, or 50.5%, to $21.8 million for the year ended December 31, 2020 from $14.5 million for the year ended December 31, 2019 primarily due to FHLB stock acquired and retained from MutualBank. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.
Interest income on interest-earning deposits increased by $119,000, or 19.8%, to $719,000 for the year ended December 31, 2020 from $600,000 for the year ended December 31, 2019. This increase is attributable to an increase in the average balance of interest-earning deposits. The average balance increased by $497.4 million to $520.7 million for the year ended December 31, 2020 from $23.3 million for the year ended December 31, 2019 due to excess liquidity from recent deposit inflows. Partially offsetting this increase was a decrease in the average yield on interesting-earning deposits to 0.14% for the year ended December 31, 2020 from 2.54% for the year ended December 31, 2019, as a result of the Federal Reserve decreasing their targeted federal funds rate.
Interest Expense. Interest expense decreased by $14.6 million, or 25.6%, to $42.3 million for the year ended December 31, 2020 from $56.9 million for the year ended December 31, 2019. This decrease in interest expense was primarily due to the decline in the average cost of interest-bearing liabilities which decreased to 0.49% for the year ended December 31, 2020 from 0.82% for the year ended December 31, 2019. This decrease resulted from decreases in the interest rates paid on deposits and borrowed funds in response to decreases in market interest rates. Partially offsetting this decrease was an increase in the average balance of interest bearing liabilities by $1.736 billion, or 24.9%, to $8.703 billion for the year ended December 31, 2020 from $6.968 billion for the year ended December 31, 2019. This increase in average balance resulted from both internal growth in deposits and borrowings as well as the addition of $1.617 billion of deposits and $232.2 million of borrowed funds from the acquisition of MutualBank.
Net Interest Income. Net interest income increased by $31.3 million, or 8.7%, to $391.7 million for the year ended December 31, 2020 from $360.5 million for the year ended December 31, 2019. This increase is attributable to the factors discussed above. Despite the overall increase in net interest income due primarily to balance sheet growth, our interest rate spread decreased to 3.21% for the year ended December 31, 2020 from 3.61% for the year ended December 31, 2019 and our net interest margin also decreased to 3.34% for the year ended December 31, 2020 from 3.82% for the year ended December 31, 2019 primarily due to declining interest-earning asset yields. Contributing to the decline in asset yields was an increase in average cash balances of $497.4 million, earning just 0.14%, due to deposit growth associated with PPP loan funds and consumer stimulus checks.
Provision for Credit Losses. We analyze the allowance for credit losses as described in Note 1(f) of the notes to the Consolidated Financial Statements. The provision for credit losses increased by $61.3 million to $84.0 million for the year ended December 31, 2020 from $22.7 million for the year ended December 31, 2019. During the current year, the Company adopted ASU 2016-13, (“CECL”), which requires that all financial assets measured at amortized cost be presented at the net amount expected to be collected inclusive of the Company’s current estimate of all lifetime expected credit losses. The economic impact of COVID-19, in combination with CECL, including the purchase accounting impact from MutualBank, caused the increase in the provision for the year.
In determining the amount of the current period provision, we considered current economic conditions, including unemployment levels, bankruptcy filings, and changes in real estate values, and assessed the impact of these factors on the quality of our loan portfolio and historical loss experience. We analyze the allowance for credit losses as described in the section entitled “Allowance for Credit Losses”. The provision that was recorded is sufficient, in our judgment, to bring this reserve to a level that reflects the current expected lifetime losses in our loan portfolio relative to loan mix, a reasonable and supportable economic forecast period and historical loss experience at December 31, 2020.
Noninterest Income. Noninterest income increased by $32.9 million, or 33.1%, to $132.3 million for the year ended December 31, 2020 from $99.4 million for the year ended December 31, 2019. This increase is primarily attributable to a $27.6 million increase in mortgage banking income to $31.4 million for the year ended December 31, 2020 from $3.8 million for the year ended December 31, 2019 due to continued efforts to expand our secondary market sales capabilities over the last year, as well as an interest rate environment conducive to refinance activity and attractive secondary market pricing. In addition, trust and other financial services income increased by $3.2 million, or 17.8%, to $20.9 million for the year ended December 31, 2020 from $17.8 million for the year ended December 31, 2019, as well as an increase of $2.5 million, or 4.8%, in service charges and fees to $55.6 million for the year ended December 31, 2020 from $53.1 million for the year ended December 31, 2019, both due primarily to additional fee income as a result of the MutualBank acquisition.
Noninterest Expense. Noninterest expense increased by $51.4 million, or 17.4%, to $347.5 million for the year ended December 31, 2020 from $296.1 million for the year ended December 31, 2019. All noninterest expense categories, with the exception of real estate owned expense, increased compared to last year. The largest drivers of the overall increase were an increase of $16.6 million in acquisition and branch optimization expenses to $20.8 million for the year ended December 31, 2020 from $4.2 million for the year ended December 31, 2019 due to expenses incurred as part of the MutualBank acquisition as well as expenses incurred as part of the branch optimization initiative that occurred during December. In addition, compensation and employee benefits expense
increased by $15.3 million, or 9.4%, to $178.4 million for the year ended December 31, 2020 from $163.1 million for the year ended December 31, 2019, due to internal growth in compensation and staff as well as the addition of MutualBank employees. Also contributing to the increase was an increase in processing expenses of $7.6 million, or 17.9%, to $50.1 million for the year ended December 31, 2020 from $42.5 million for the year ended December 31, 2019, primarily due to our continued efforts to invest in technology and infrastructure as well as improvements to our mortgage and commercial loan origination platforms. Additionally, FDIC premiums increased by $4.1 million to $4.8 million for the year ended December 31, 2020 from $685,000 for the year ended December 31, 2019 due to assessment credits received in the prior year.
Income Taxes. The provision for income taxes decreased by $13.0 million, or 42.4%, to $17.7 million for the year ended December 31, 2020 from $30.7 million for the year ended December 31, 2019. This decrease in income tax expense is primarily due to the $48.6 million, or 34.4%, decrease in pretax income to $92.5 million for the year ended December 31, 2020 from $141.1 million for
the year ended December 31, 2019. In addition, our effective tax rate for the year ended December 31, 2020 was 19.1% compared to 21.7% for the year ended December 31, 2019.
Asset Quality
We actively manage asset quality through our underwriting practices and collection procedures. Our underwriting practices are focused on balancing risk and return while our collection operations focus on diligently working with delinquent borrowers in an effort to minimize losses.
Collection procedures. Our collection procedures for personal loans generally provide that at 15 days delinquent, a notice of late charges is sent and personal contact efforts are attempted by telephone to strengthen the collection process and obtain reasons for the delinquency. Also, plans to establish a payment program are developed. Personal contact efforts are continued throughout the collection process, as necessary. Generally, if a loan becomes 30 days past due, a collection letter is sent and the loan becomes subject to possible legal action if suitable arrangements for payment have not been made. In addition, the borrower is given information which provides access to consumer counseling services to the extent required by the regulations of the Department of Housing and Urban Development and other applicable authorities. When a loan continues in a delinquent status for 60 days or more, and a payment schedule has not been developed or kept by the borrower, we may send the borrower a notice of intent to foreclose, providing for cure periods of at least 30 days. If not cured, foreclosure proceedings are initiated.
Nonperforming assets. Loans are reviewed on a regular basis and are placed on nonaccrual status when, in the opinion of management, the collection of all contractual principal and/or interest is doubtful. Loans are automatically placed on nonaccrual status when either principal or interest is 90 days or more past due. Interest accrued and unpaid at the time a loan is placed on a nonaccrual status is reversed and charged against interest income.
Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time that it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at the lower of the related loan balance or its fair value as determined by an appraisal, less estimated costs of disposal. If the value of the property is less than the principal balance, less any related specific credit loss reserve allocations, the difference is charged against the allowance for credit losses. Any subsequent write-down of real estate owned or loss at the time of disposition is charged against earnings.
Nonaccrual, Past Due, Restructured Loans and Nonperforming Assets. The following table sets forth information with respect to nonperforming assets. Nonaccrual loans are those loans on which the accrual of interest has ceased. Generally, when a loan becomes 90 days past due, we fully reverse all accrued interest thereon and cease to accrue interest thereafter. Exceptions are made for loans that have contractually matured, are in the process of being modified to extend the maturity date and are otherwise current as to principal and interest, and well secured loans that are in process of collection. Loans may also be placed on nonaccrual before they reach 90 days past due if conditions exist that call into question our ability to collect all contractual principal and/or interest. Other nonperforming assets represent property acquired through foreclosure or repossession. Foreclosed property is carried at the lower of its fair value less estimated costs to sell or the principal balance of the related loan.
At December 31,
2021 2020
(Dollars in thousands)
Loans 90 days or more past due:
Residential mortgage loans $ 7,641 14,489
Home equity loans 4,262 8,441
Vehicle loans 1,635 4,599
Consumer loans 765 1,459
Commercial real estate loans 23,489 23,307
Commercial real estate loans - owner occupied 574 1,980
Commercial loans 1,105 7,325
Total loans 90 days or more past due $ 39,471 61,600
Total real estate owned (REO) $ 873 2,232
Total loans 90 days or more past due and REO 40,344 63,832
Total loans 90 days or more past due to net loans receivable 0.40 % 0.59 %
Total loans 90 days or more past due and REO to total assets 0.28 % 0.46 %
Nonperforming assets:
Nonaccrual loans - loans 90 days or more past due $ 39,140 61,015
Nonaccrual loans - loans less than 90 days past due 119,331 41,817
Loans 90 days or more past due still accruing 331 585
Total nonperforming loans 158,802 103,417
Total nonperforming assets $ 159,675 105,649
Nonaccrual troubled debt restructuring loans (1) $ 17,216 10,704
Accruing troubled debt restructuring loans 13,072 21,431
Total troubled debt restructuring loans $ 30,288 32,135
(1)Also included in nonaccrual loans above.
Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans, or other assets including other real estate owned, considered to be of lesser quality as “substandard,” “doubtful,” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the financial institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable”. Assets classified as “loss” are those considered “uncollectible” so that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the savings institution to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated as “special mention”. At December 31, 2021, we had 109 loans, with an aggregate principal balance of $79.9 million, designated as “special mention”.
We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. Our largest classified assets generally are also our largest nonperforming assets.
The following table sets forth the aggregate amount of our classified assets at the dates indicated.
At December 31,
2021 2020
(In thousands)
Substandard assets $ 364,035 491,557
Doubtful assets - -
Loss assets - -
Total classified assets $ 364,035 491,557
Allowance for Credit Losses. We adopted CECL on January 1, 2020, as further described in Note 1. Our Board of Directors has adopted an “Allowance for Credit Losses” (“ACL”) policy designed to provide management with a systematic methodology for determining and documenting the allowance for credit losses each reporting period. This methodology was developed to provide a consistent process and review procedure to ensure that the allowance for credit losses is in conformity with GAAP, our policies and procedures and other supervisory and regulatory guidelines.
On an ongoing basis, the Credit Administration department, as well as loan officers, branch managers and department heads, review and monitor the loan portfolio for problem loans. This portfolio monitoring includes a review of the monthly delinquency reports as well as historical comparisons and trend analysis. Personal and small business commercial loans are classified primarily by delinquency status. In addition, a meeting is held every quarter with each region to monitor the performance and status of commercial loans on an internal watch list. On an on-going basis, the loan officer, in conjunction with a portfolio manager, grades or classifies problem commercial loans or potential problem commercial loans based upon their knowledge of the lending relationship and other information previously accumulated. This rating is also reviewed independently by our Loan Review department on a periodic basis. Our loan grading system for problem commercial loans is consistent with industry regulatory guidelines which classifies loans as “substandard”, “doubtful” or “loss”. Loans that do not expose us to risk sufficient to warrant classification in one of the previous categories, but which possess some weaknesses, are designated as “special mention”. A “substandard” loan is any loan that is 90 days or more contractually delinquent or is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as “doubtful” have all the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions or values, highly questionable and improbable. Loans classified as “loss” have all the weakness inherent in those classified as “doubtful” and are considered uncollectible.
Credit relationships that have been classified as substandard or doubtful and are greater than or equal to $1.0 million are reviewed by the Credit Administration department to determine if they no longer continue to demonstrate similar risk characteristics to their loan pool. If a loan no longer demonstrates similar risk characteristics to their loan pool they are removed from the pool and an individual assessment will be performed.
If it is determined that a loan needs to be individually assessed, the Credit Administration department determines the proper measure of fair value for each loan based on one of three methods: (1) the present value of expected future cash flows discounted at the loan’s effective interest rate; (2) the loan’s observable market price; or (3) the fair value of the collateral if the loan is collateral dependent, less costs of sale or disposal. If the measurement of the fair value of the loan is more or less than the amortized cost basis of the loan, the Credit Administration department adjusts the specific allowance associated with that individual loan accordingly.
If a substandard or doubtful loan is not grouped with other loans that possess common characteristics for evaluation and analysis, it is considered individually for impairment. For the purpose of calculating reserves, we have grouped our loans into seven segments: residential mortgage loans, home equity loans, vehicle loans, consumer loans, commercial real estate loans, commercial real estate loans - owner occupied and commercial loans. The allowance for credit losses is measured using a combination of statistical models. We use a twenty-four month forecasting period and revert to historical average loss rates thereafter. Reversion to average loss rates takes place over twelve months. Historical average loss rates are calculated using historical data beginning in October 2009 through the current period.
The credit losses for individually assessed loans along with the estimated loss for each homogeneous pool are consolidated into one summary document. This summary schedule along with the support documentation used to establish this schedule is presented to management’s Allowance for Credit Losses Committee (“ACL Committee”) monthly. The ACL Committee reviews and approves the processes and ACL documentation presented. Based on this review and discussion, the appropriate amount of ACL is estimated and any adjustments to reconcile the actual ACL with this estimate are determined. The ACL Committee also considers if any changes to the methodology are needed. In addition to the ACL Committee’s review and approval, a review is performed by the Risk Management Committee of the Board of Directors on a quarterly basis and annually by internal audit.
In addition to the reviews by management’s ACL Committee and the Board of Directors’ Risk Management Committee, regulators from the FDIC and the Pennsylvania Department of Banking perform an extensive review on at least an annual basis for the adequacy of the ACL and its conformity with regulatory guidelines and pronouncements. Any recommendations or enhancements from these independent parties are considered by management and the ACL Committee and implemented accordingly.
We acknowledge that this is a dynamic process and consists of factors, many of which are external and out of our control that can change frequently, rapidly and substantially. The adequacy of the ACL is based upon estimates using all the information previously discussed as well as current and known circumstances and events. There is no assurance that actual portfolio losses will not be substantially different than those that were estimated.
We utilize a structured methodology each period when analyzing the adequacy of the allowance for credit losses and the related provision for credit losses, which the ACL Committee assesses regularly for appropriateness. As part of the analysis as of December 31, 2021, we considered the most recent economic conditions and forecasts available which incorporated the impact of COVID-19. In addition, we considered the overall trends in asset quality, reserves on individually assessed loans, historical loss rates and collateral valuations. The ACL decreased by $32.2 million, or 23.9%, to $102.2 million, or 1.02% of gross loans at December 31, 2021 from $134.4 million, or 1.27% of total loans, at December 31, 2020. During 2020 our allowance increased $8.8 million as a result of recording the initial allowance on the purchased credit deteriorated loans acquired from MutualBank. The non-purchased credit deteriorated loans acquired from MutualBank resulted in a credit mark of $28.1 million and an additional allowance of $18.2 million, as required by CECL. The estimated economic impact of COVID-19 caused us to increase our provision for credit loss expense by approximately $41.6 million for the year ended December 31, 2020. Throughout 2021, we were able to release those credit loss reserves that were previously built up as the economic forecasts improved as well as our overall credit quality.
Quarterly, management’s Credit Committee reviews the concentration of credit by industry and customer, lending products and activity, competition and collateral values, as well as economic conditions in general and in each of our market areas. The Credit Committee also reviews and discusses delinquency trends, nonperforming asset amounts and ACL levels and ratios compared to our peer group as well as state and national statistics.
We also consider how the levels of non-accrual loans and historical charge-offs have influenced the required amount of ACL. Nonaccrual loans of $158.5 million, or 1.59% of total gross loans receivable at December 31, 2021, increased by $55.6 million, or 54.1%, from $102.8 million, or 0.98% of total gross loans receivable, at December 31, 2020. This increase was primarily related to loans within the hospitality industry that were placed on nonaccrual after the end of their deferral periods. As a percentage of average loans, net charge-offs decreased to 0.20% for the year ended December 31, 2021 compared to 0.27% for the year ended December 31, 2020. The decrease in net charge-offs was largely due to a $9.1 million charge-off on one commercial loan which was previously downgraded and reserved for in 2020 prior to the onset of COVID-19.
Analysis of the Allowance for Credit Losses. The following table sets forth the analysis of the allowance for credit losses for the periods indicated.
Years ended December 31,
2021 2020
(Dollars in thousands)
Loans receivable $ 10,016,392 10,580,849
Average loans outstanding 10,239,620 10,104,453
Allowance for credit losses
Balance at beginning of period 134,427 57,941
CECL adoption - 10,792
Initial allowance on loans purchased with credit deterioration - 8,845
Provision for credit losses (11,883) 83,975
Charge-offs:
Residential mortgage loans (3,672) (917)
Home equity loans (3,380) (608)
Vehicle loans (4,632) (6,827)
Consumer loans (5,417) (5,831)
Commercial real estate loans (11,933) (4,240)
Commercial real estate loans - owner occupied (890) (83)
Commercial loans (4,213) (16,212)
Total charge-offs (34,137) (34,718)
Recoveries:
Residential mortgage loans 935 362
Home equity loans 900 766
Vehicle loans 2,536 2,536 1,867
Consumer loans 2,360 1,542
Commercial real estate loans 2,189 1,287
Commercial real estate loans - owner occupied 107 107 27
Commercial loans 4,807 1,741
Total recoveries 13,834 7,592
Balance at end of period $ 102,241 134,427
Allowance for credit losses as a percentage of loans receivable 1.02 % 1.27 %
Net charge-offs as a percentage of average loans outstanding:
Residential mortgage loans 0.09 % 0.02 %
Home equity loans 0.18 % (0.01) %
Vehicle loans 0.16 % 0.48 %
Consumer loans 0.97 % 1.36 %
Commercial real estate loans 0.35 % 0.11 %
Commercial real estate loans - owner occupied 0.19 % 0.01 %
Commercial loans (0.06) % 1.26 %
Total Average Loans Receivable 0.20 % 0.27 %
Allowance for credit losses as a percentage of nonperforming loans 64.38 % 129.99 %
Allowance for credit losses as a percentage of nonperforming assets 64.03 % 127.24 %
Allocation of Allowance for Credit Losses. The following tables set forth the allocation of the allowance for credit losses by loan category at the dates indicated. The allowance for credit losses allocated to each category is not necessarily indicative of future losses in any particular category.
At December 31,
2021 2020
Amount % of total
loans (1) Amount % of total
loans (1)
(Dollars in thousands)
Balance at end of year applicable to:
Residential mortgage loans $ 7,373 29.9 % $ 7,266 29.0 %
Home equity loans 5,300 13.2 % 5,992 13.9 %
Vehicle loans 15,483 14.8 % 14,825 11.0 %
Consumer loans 2,884 3.5 % 2,871 3.3 %
Commercial real estate loans 54,141 26.2 % 79,381 26.9 %
Commercial real estate loans - owner occupied 3,883 3.9 % 10,518 4.7 %
Commercial loans 13,177 8.5 % 13,574 11.2 %
Total $ 102,241 100.0 % $ 134,427 100.0 %
(1)Represents percentage of loans in each category to total loans.
Average Balance Sheets
The following tables set forth average balance sheets, average yields, on a fully taxable equivalent (“FTE”) basis, and average costs, and certain other information at and for the periods indicated. All average balances are daily average balances. Non-accrual loans are included in the computation of average balances. The yields set forth below include the effect of deferred fees and discounts and premiums that are amortized or accreted to interest income or expense. The average yield for loans receivable and investment securities are calculated on a FTE basis. There were no out-of-period adjustments or other exclusions from the amounts presented in the table.
For the years ended December 31,
2021 2020 2019
Average
balance Interest Average
yield/cost
(12) Average
balance Interest Average
yield/cost
(12) Average
balance Interest Average
yield/cost
(12)
(Dollars in thousands)
Interest-earning assets:
Loans receivable (includes FTE adjustments of $1,922, $2,223 and $1,335, respectively) (1), (2), (3) $ 10,239,620 392,265 3.83 % $ 10,104,453 413,131 4.09 % $ 8,554,954 396,144 4.63 %
Mortgage-backed securities (4) 1,704,006 21,463 1.26 % 889,744 17,416 1.96 % 639,764 16,670 2.61 %
Investment securities (includes FTE adjustments of $747, $797 and $225, respectively) (4), (5) 350,806 5,848 1.67 % 196,071 4,841 2.47 % 205,757 4,470 2.17 %
FHLB stock, at cost 20,229 407 2.01 % 21,781 981 4.50 % 14,477 1,056 7.29 %
Interest-earning deposits 921,360 1,194 0.13 % 520,666 719 0.14 % 23,305 600 2.54 %
Total interest-earning assets (includes FTE adjustments of $2,669, $3,020 and $1,560, respectively) 13,236,021 421,177 3.18 % 11,732,715 437,088 3.73 % 9,438,257 418,940 4.44 %
Noninterest-earning assets (6) 1,072,313 1,159,405 890,760
Total assets $ 14,308,334 $ 12,892,120 $ 10,329,017
Interest-bearing liabilities:
Savings deposits $ 2,232,454 2,440 0.11 % $ 1,885,517 2,640 0.14 % $ 1,655,495 3,115 0.19 %
Interest-bearing demand deposits 2,862,677 1,660 0.06 % 2,432,427 3,358 0.14 % 1,651,393 6,012 0.36 %
Money market deposit accounts 2,554,975 2,570 0.10 % 2,224,904 6,995 0.31 % 1,778,661 13,010 0.73 %
Time deposits 1,463,522 12,452 0.85 % 1,687,381 22,903 1.36 % 1,555,726 27,079 1.74 %
Borrowed funds (7) 135,285 616 0.46 % 315,116 1,628 0.52 % 206,458 2,865 1.39 %
Subordinated debt (8) 123,457 4,980 4.03 % 31,326 1,562 4.99 % - - - %
Junior subordinated debentures 128,915 2,528 1.93 % 126,683 3,254 2.53 % 120,012 4,833 3.97 %
Total interest-bearing liabilities 9,501,285 27,246 0.29 % 8,703,354 42,340 0.49 % 6,967,745 56,914 0.82 %
Noninterest-bearing demand deposits (9) 2,999,392 2,357,725 1,835,622
Noninterest-bearing liabilities 250,075 246,294 204,198
Total liabilities 12,750,752 11,307,373 9,007,565
Shareholders’ equity 1,557,582 1,584,747 1,321,452
Total liabilities and shareholders’ equity $ 14,308,334 $ 12,892,120 $ 10,329,017
Net interest income 393,931 394,748 362,026
Net interest rate spread (10) 2.89 % 3.24 % 3.62 %
Net interest-earning assets/net interest margin (11) $ 3,734,736 2.98 % $ 3,029,361 3.36 % $ 2,470,512 3.84 %
Ratio of average interest-earning assets to average interest-bearing liabilities 1.39X 1.35X 1.35X
(1)Average gross loans receivable includes loans held as available-for-sale and loans placed on nonaccrual status.
(2)Interest income includes accretion/amortization of deferred loan fees/expenses, which was not material.
(3)Interest income on tax-free loans is presented on a FTE basis including adjustments, as indicated.
(4)Average balances do not include the effect of unrealized gains or losses on securities held as available-for-sale.
(5)Interest income on tax-free investment securities is presented on a FTE basis including adjustments, as indicated.
(6)Average balances include the effect of unrealized gains or losses on securities held as available-for-sale.
(7)Average balances include FHLB borrowings and collateralized borrowings.
(8)On September 9, 2020, the Company issued $125.0 million of 4.00% fixed-to-floating rate subordinated notes with a maturity of September 15, 2030.
(9)Average cost of deposits were 0.16%, 0.34% and 0.58%, respectively.
(10)Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(11)Net interest margin represents net interest income as a percentage of average interest-earning assets.
(12)Shown on a FTE basis and in consideration of applicable current federal, state and local tax rates. GAAP basis yields for the years ended December 31, 2021, 2020 and 2019 were - Loans: 3.81%, 4.07% and 4.61%, respectively, Investment securities: 1.45%, 2.06% and 2.06%, respectively, Interest-earning assets: 3.16%, 3.70% and 4.42%, respectively. GAAP basis net interest rate spreads were 2.88%, 3.21% and 3.61%, respectively, and GAAP basis net interest margins were 2.96%, 3.34% and 3.82%, respectively.
Rate/Volume Analysis
The following table presents, on a FTE basis, the changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the year ended December 31, 2021 compared to 2020 and for the year ended December 31, 2020 compared to 2019. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) changes in volume multiplied by the prior year rate; (2) changes in rate multiplied by the prior year volume; and (3) the total increase or decrease. Changes not solely attributable to rate or volume have been allocated proportionately to the change due to volume and the change due to rate. There were no out-of-period adjustments or other exclusions from the amounts presented in the table.
Years ended December 31, 2021 vs. 2020 Years ended December 31, 2020 vs. 2019
Increase/(decrease)
due to Total
increase/(decrease) Increase/(decrease)
due to Total
increase/(decrease)
Rate Volume Rate Volume
(In thousands)
Interest-earning assets:
Loans receivable $ (26,044) 5,178 (20,866) (46,366) 63,353 16,987
Mortgage-backed securities (6,209) 10,256 4,047 (4,147) 4,893 746
Investment securities (1,572) 2,579 1,007 610 (239) 371
FHLB stock, at cost (543) (31) (574) (404) 329 (75)
Interest-earning deposits (42) 517 475 (569) 688 119
Total interest-earning assets (34,410) 18,499 (15,911) (50,876) 69,024 18,148
Interest-bearing liabilities:
Savings deposits (579) 379 (200) (797) 322 (475)
Interest-bearing demand deposits (1,947) 250 (1,697) (3,732) 1,078 (2,654)
Money market deposit accounts (4,757) 332 (4,425) (7,418) 1,403 (6,015)
Time deposits (8,547) (1,905) (10,452) (5,963) 1,787 (4,176)
Borrowed funds (193) (819) (1,012) (964) 1,289 325
Subordinated debt (298) 3,716 3,418 - - -
Junior subordinated debentures (761) 35 (726) (1,764) 185 (1,579)
Total interest-bearing liabilities (17,082) 1,988 (15,094) (20,638) 6,064 (14,574)
Net change in net interest income $ (17,328) 16,511 (817) (30,238) 62,960 32,722
Liquidity and Capital Resources
Northwest Bank is required to maintain a sufficient level of liquid assets, as determined by management and defined and reviewed for adequacy by the FDIC during their regular examinations. The FDIC, however, does not prescribe by regulation a minimum amount or percentage of liquid assets. The FDIC allows us to consider any unencumbered, available-for-sale marketable security, whose sale would not impair our capital adequacy, to be eligible for liquidity. Liquidity is monitored through the use of a standard liquidity ratio of liquid assets to borrowings plus deposits. Using this formula, Northwest Bank’s liquidity ratio was 21.24% as of December 31, 2021. We adjust our liquidity level in order to meet funding needs of deposit outflows, repayment of borrowings and loan commitments. We also adjust liquidity as appropriate to meet our asset and liability management objectives. Liquidity needs can also be met by temporarily drawing upon lines-of-credit established for such reasons. At December 31, 2021, Northwest Bank had $3.613 billion of additional borrowing capacity available with the FHLB of Pittsburgh, including a $250.0 million overnight line of credit, which had no balance at December 31, 2021, as well as $101.0 million of borrowing capacity available with the Federal Reserve Bank and $110.0 million with three correspondent banks.
In addition to deposits, our primary sources of funds are the amortization and repayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rate levels, economic conditions, and competition. We manage the pricing of our deposits to maintain a desired deposit balance. In addition, we invest excess funds in short-term interest earning and other assets, which provide liquidity to meet lending requirements. Short-term interest-earning deposits amounted to $1.211 billion at December 31, 2021. For additional information about our cash flows from operating, financing, and investing activities, see the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.
A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing, and financing activities. The primary sources of cash during the current year were net income, principal repayments on loans and mortgage-backed securities and net increase in deposits.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLB of Pittsburgh and the Federal Reserve Bank of Cleveland, which provide an additional source of funds. At December 31, 2021, Northwest Bank had no outstanding advances with the FHLB of Pittsburgh. We borrow from these sources to reduce interest rate risk and to provide liquidity when necessary.
At December 31, 2021, our customers had $1.054 billion of unused lines of credit available and $355.7 million in loan commitments. This amount does not include the unfunded portion of loans in process. Time deposits scheduled to mature in less than one year at December 31, 2021, totaled $890.1 million. We believe that a significant portion of such deposits will remain with us.
Deposits are our primary source of externally generated funds. The level of deposit inflows during any given period is heavily influenced by factors outside of our control, such as consumer savings tendencies, the general level of short-term and long-term market interest rates, as well as higher alternative yields that investors may obtain on competing investments such as money market mutual funds. Financial institutions, such as Northwest Bank, are also subject to deposit outflows. Our net deposits increased by $701.9 million for the year ended December 31, 2021, increased by $3.007 billion for the year ended December 31, 2020 and increased by $697.8 million for the year ended December 31, 2019.
Similarly, the amount of principal repayments on loans and the amount of new loan originations is heavily influenced by the general level of market interest rates, consumer confidence and consumer spending. Funds received from loan maturities and principal payments on loans for the years ended December 31, 2021, 2020 and 2019 were $4.490 billion, $4.384 billion and $3.275 billion, respectively. Loan originations for the years ended December 31, 2021, 2020 and 2019 were $4.715 billion, $5.386 billion and $3.789 billion, respectively. We also sell a portion of the loans we originate as part of our mortgage banking operations, and the cash flows from such sales for the years ended December 31, 2021, 2020 and 2019 were $804.7 million, $704.7 million and $62.4 million, respectively.
We experience significant cash flows from our portfolio of marketable securities as principal payments are received on mortgage-backed securities and as investment securities mature or are called. Cash flow from the repayment of principal and the maturity or call of marketable securities for the years ended December 31, 2021, 2020 and 2019 were $517.9 million, $396.3 million and $245.8 million, respectively.
When necessary, we utilize borrowings as a source of liquidity and as a source of funds for long-term investment when market conditions permit. The net cash flow from the receipt and repayment of borrowings was a net decrease of $20.7 million, a net decrease of $192.4 million and a net increase of $11.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Northwest Bancshares, Inc. is a separate legal entity from Northwest Bank and must provide for its own liquidity to pay dividends to shareholders, to repurchase its common stock and for other corporate purposes. Northwest Bancshares’ primary source of liquidity is the dividend payments it receives from Northwest Bank. During 2020, Northwest Bancshares, Inc. issued $125.0 million of subordinated debt. At December 31, 2021, Northwest Bancshares, Inc. (on an unconsolidated basis) had liquid assets of $128.0 million.
Other activity with respect to cash flow was the payment of cash dividends on common stock in the amount of $100.3 million million, $93.1 million and $76.2 million for years the ended December 31, 2021, 2020 and 2019, respectively.
At December 31, 2021, stockholders’ equity totaled $1.584 billion. During 2021, our Board of Directors declared regular quarterly cash dividends totaling $0.79 per share of common stock.
We monitor the capital levels of Northwest Bank to provide for current and future business opportunities and to meet regulatory guidelines for “well capitalized” institutions. Northwest Bank is required by the Pennsylvania Department of Banking and Securities and the FDIC to meet minimum capital adequacy requirements. At December 31, 2021, Northwest Bank exceeded all regulatory minimum capital requirements and is considered to be “well capitalized”. In addition, as of December 31, 2021, we were not aware of any recommendation by a regulatory authority that, if it were implemented, would have a material effect on liquidity, capital resources or operations.
Regulatory Capital Requirements. Northwest Bank is subject to minimum capital requirements established by the FDIC. See “Item 1. Business Supervision and Regulation - Capital Requirements and Prompt Corrective Action”. The following table summarizes Northwest Bank’s total shareholders’ equity, regulatory capital, total risk-based assets, and leverage and risk-based capital ratios at the dates indicated.
At December 31,
2021 2020
(Dollars in thousands)
Total shareholders' equity (GAAP capital) $ 1,714,817 1,616,666
Add: Accumulated other comprehensive loss 25,980 21,582
Less: non-qualifying intangible assets (273,435) (284,220)
CET 1 capital 1,467,362 1,354,028
Additions to Tier 1 capital - -
Leverage or Tier 1 capital 1,467,362 1,354,028
Add: Tier 2 capital (1) 83,722 124,282
Total risk-based capital $ 1,551,084 1,478,310
Average assets for leverage ratio $ 14,251,169 13,672,614
Net risk-weighted assets including off-balance-sheet items $ 9,855,420 9,930,043
CET 1 capital ratio 14.889 % 13.636 %
Minimum requirement 4.500 % 4.500 %
Leverage capital ratio 10.296 % 9.903 %
Minimum requirement 4.000 % 4.000 %
Total risk-based capital ratio 15.738 % 14.887 %
Minimum requirement 8.000 % 8.000 %
(1)Tier 2 capital consists of the allowance for credit losses, which is limited to 1.25% of total risk-weighted assets as detailed under the regulations of the FDIC, and 45% of pre-tax net unrealized gains on securities available-for-sale.
Northwest Bank is also subject to capital guidelines of the Pennsylvania Department of Banking. Although not adopted in regulation form, the Department of Banking requires 6% leverage capital and 10% total risk-based capital. See “Item 1. Business - Supervision and Regulation - Capital Requirements and Prompt Corrective Action”.
Contractual Obligations. We are obligated to make future payments according to various contracts. The following table presents the expected future payments of the contractual obligations aggregated by obligation type at December 31, 2021.
Payments due
Less than
one year One year to
less than
three years Three years
to less than
five years Five years
or greater Total
(In thousands)
Supplemental Executive Retirement Plan (1) $ - - - 1,487 1,487
Collateralized borrowings (2) 139,093 - - - 139,093
Subordinated debentures (2) - - - 125,000 125,000
Junior subordinated debentures (2) - - - 129,054 129,054
Operating leases (3) 6,080 10,816 9,556 48,471 74,923
Total $ 145,173 10,816 9,556 304,012 469,557
Commitments to extend credit $ 355,682 - - - 355,682
(1)See Note 15 to the Consolidated Financial Statements, Employee Benefit Plans, for additional information.
(2)See Note 11 to the Consolidated Financial Statements, Borrowed Funds, for additional information.
(3)See Note 3 to the Consolidated Financial Statements, Leases, for additional information.
Impact of Inflation and Changing Prices. The Consolidated Financial Statements and notes thereto, presented elsewhere herein, have been prepared in accordance with United States generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.
Off-Balance-Sheet Arrangements. As a financial services provider, we are routinely a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, we routinely enter into commitments to purchase and sell residential mortgage loans.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Management
The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap”. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or re-price within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or re-pricing within a specific time period and the amount of interest-bearing liabilities maturing or re-pricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to positively affect net interest income. Similarly, during a period of falling interest rates, a negative gap would tend to positively affect net interest income while a positive gap would tend to adversely affect net interest income.
Our practice is to reduce our exposure to interest rate risk generally by matching the maturities of our interest rate sensitive assets and liabilities and by increasing the interest rate sensitivity of our interest-earning assets. We purchase adjustable-rate investment securities and mortgage-backed securities, which at December 31, 2021, totaled $54.1 million, and originate adjustable-rate loans, which at December 31, 2021, totaled $3.257 billion or 32.7% of our gross loan portfolio. Of our $13.331 billion of interest-earning assets at December 31, 2021, $3.311 billion, or 24.84%, consisted of assets with adjustable rates of interest. When open market conditions are favorable, we also attempt to reduce interest rate risk by lengthening the maturities of our interest-bearing liabilities by using FHLB advances as a source of long-term fixed-rate funds, if necessary, and by promoting longer-term certificates of deposit.
At December 31, 2021, total interest-earning assets maturing or re-pricing within one year exceeded total interest-bearing liabilities maturing or re-pricing in the same period by $433.5 million, representing a positive one-year gap ratio of 2.99%.
The following table sets forth, on a carrying value basis, the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2021, which are expected to re-price or mature, based upon certain assumptions, in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown that re-price or mature during a particular period were determined in accordance with the earlier of the term of re-pricing or the contractual term of the asset or liability. We believe that these assumptions approximate the standards used in the financial services industry and consider them appropriate and reasonable.
Amounts maturing or re-pricing
Within
1 year Over
1-3 years Over
3-5 years Over
5-10 years Over
10-20 years Total
(Dollars in thousands)
Rate-sensitive assets:
Interest-earning deposits $ 1,061,019 - - - - 1,061,019
Mortgage-backed securities:
Fixed-rate 360,240 545,930 352,683 630,051 - 1,888,904
Variable-rate 52,714 - - - - 52,714
Investment securities 18,610 35,842 44,527 276,149 - 375,128
Mortgage loans:
Adjustable-rate 20,447 6,215 1,555 212 - 28,429
Fixed-rate 528,057 879,215 662,576 807,811 71,057 2,948,716
Home equity loans:
Adjustable-rate 452,745 - - - - 452,745
Fixed-rate 259,321 366,744 189,303 44,138 2,955 862,461
Consumer loans 720,996 901,868 150,104 2,714 4 1,775,686
Commercial real estate loans 1,704,977 950,242 341,179 27,493 - 3,023,891
Commercial loans 586,280 174,192 43,496 52,533 5,203 861,704
Total rate-sensitive assets 5,765,406 3,860,248 1,785,423 1,841,101 79,219 13,331,397
Rate-sensitive liabilities:
Time deposits 897,513 366,193 58,963 4,844 42 1,327,555
Money market deposit accounts 2,539,412 - - - 90,470 2,629,882
Savings deposits 587,359 341,263 341,263 853,156 180,719 2,303,760
Interest-bearing demand deposits 1,039,876 360,754 360,754 901,885 277,173 2,940,442
FHLB borrowings (378) (757) 124,710 - - 123,575
Other borrowings 139,093 - - - - 139,093
Trust preferred securities 129,054 - - - - 129,054
Total rate-sensitive liabilities 5,331,929 1,067,453 885,690 1,759,885 548,404 9,593,361
Interest sensitivity gap per period $ 433,477 2,792,795 899,733 81,216 (469,185) 3,738,036
Cumulative interest sensitivity gap $ 433,477 3,226,272 4,126,005 4,207,221 3,738,036 3,738,036
Cumulative interest sensitivity gap as a
percentage of total assets 2.99 % 22.23 % 28.43 % 28.99 % 25.75 % 25.75 %
Cumulative interest-earning assets as a percent of cumulative interest-bearing liabilities 108.13 % 150.42 % 156.64 % 146.51 % 138.96 % 138.96 %
At December 31, 2020, we had a cumulative interest sensitivity gap as a percentage of total assets of 25.14%. We have an Asset/Liability Committee, consisting of members of management, which meets monthly to review market interest rates, economic conditions, the pricing of interest earning assets and interest bearing liabilities and our balance sheet structure. On a quarterly basis, this committee also reviews our interest rate risk position and our cash flow projections.
Our Board of Directors has a Risk Management Committee, which meets quarterly, and reviews interest rate risks and trends, our interest sensitivity position, our liquidity position and the market risk inherent in our investment portfolio.
In an effort to assess interest rate risk, we use a simulation model to determine the effect of immediate incremental increases and decreases in interest rates on net interest income, net income and the market value of our equity. Certain assumptions are made regarding loan prepayments and decay rates of savings and interest-bearing demand deposit accounts. Because it is difficult to accurately project the market reaction of depositors and borrowers, the effect of actual changes in interest rates on these assumptions may differ from simulated results. We have established the following guidelines for assessing interest rate risk:
Net Interest Income Simulation. Given a parallel shift of 100 basis points (“bps”), 200 bps, and 300 bps in interest rates, the estimated net interest income may not decrease by more than 5%, 10%, and 15%, respectively, within a one-year period.
Net Income Simulation. Given a parallel shift of 100 bps, 200 bps, and 300 bps in interest rates, the estimated net income may not decrease by more than 10%, 20%, and 30%, respectively, within a one-year period.
Market Value of Equity Simulation. The market value of our equity is the present value of our assets and liabilities. Given a parallel shift of 100 bps, 200 bps, and 300 bps in interest rates, the market value of equity may not decrease by more than 15%, 30%, and 35%, respectively, from the computed economic value at current interest rate levels.
The following table illustrates the simulated impact of a parallel 100 bps, 200 bps or 300 bps upward or 100 bps downward movement in interest rates on net interest income, net income, return on average equity, earnings per share, and market value of equity. These analyses were prepared assuming that total interest-earning asset and interest-bearing liability levels at December 31, 2021 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 December 31, 2021 levels.
Increase Decrease
Parallel shift in interest rates over the next 12 months 100 bps 200 bps 300 bps 100 bps
Projected percentage increase/(decrease) in net interest income 1.3 % 1.9 % 2.4 % (4.0) %
Projected percentage increase/(decrease) in net income 4.0 % 6.0 % 7.8 % (11.7) %
Projected increase/(decrease) in return on average equity 3.8 % 5.8 % 7.6 % (11.3) %
Projected increase/(decrease) in earnings per share $ 0.03 $ 0.04 $ 0.06 $ (0.09)
Projected percentage increase/(decrease) in market value of equity (3.2) % (9.3) % (15.0) % (7.7) %
The following table illustrates the simulated impact of a parallel 100 bps, 200 bps or 300 bps upward or 100 bps downward movement in interest rates on net interest income, net income, return on average equity, earnings per share, and market value of equity. These analyses were prepared assuming that total interest-earning asset and interest-bearing liability levels at December 31, 2020 remain constant. The impact of the rate movements was computed by simulating the effect of an immediate and sustained shift in interest rates over a twelve-month period from December 31, 2020 levels.
Increase Decrease
Parallel shift in interest rates over the next 12 months 100 bps 200 bps 300 bps 100 bps
Projected percentage decrease in net interest income 1.7 % 2.3 % 2.5 % (2.4) %
Projected percentage decrease in net income 4.2 % 5.8 % 6.5 % (5.6) %
Projected decrease in return on average equity 4.0 % 5.6 % 6.2 % (5.4) %
Projected decrease in earnings per share $ 0.04 $ 0.06 $ 0.06 $ (0.06)
Projected percentage decrease in market value of equity 1.2 % (0.4) % (5.0) % (8.4) %
The figures included in the tables above represent projections that were computed based upon certain assumptions including loan prepayment rates and deposit decay rates. These assumptions are inherently uncertain and, as a result, we 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.
When assessing our interest rate sensitivity, analysis of historical trends indicates that loans will prepay at various speeds (or annual rates) depending on the variance between the weighted average portfolio rates and the current market rates. In preparing the table above, the following assumptions were used: (i) adjustable-rate mortgage loans will prepay at an annual rate of 8% to 25%; (ii) fixed-rate mortgage loans will prepay at an annual rate of 6% to 24%, depending on the type of loan; (iii) commercial loans will prepay at an annual rate of 6% to 30%; and (iv) consumer loans held by Northwest Bank will prepay at an annual rate of 12% to 30%. In regards to our deposits, it has been assumed that (i) fixed maturity deposits will not be withdrawn prior to maturity; (ii) a significant majority of money market accounts will re-price immediately; (iii) savings accounts will gradually re-price over three years; and (iv) checking accounts will re-price either when the rates on such accounts re-price as interest rate levels change, or when deposit holders withdraw funds from such accounts and select other types of deposit accounts, such as certificate accounts, which may have higher interest rates. For purposes of this analysis, management has estimated, based on historical trends, that $1.040 billion, or 35.4%, of our interest-bearing demand accounts and $587.4 million, or 25.5%, of our savings deposits are interest sensitive and may re-price in one year or less, and that the remainder may re-price over longer time periods.
The above assumptions are annual percentages based on remaining balances and should not be regarded as indicative of the actual prepayments and withdrawals that we may experience. Moreover, certain shortcomings are inherent in the analysis presented by the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to re-pricing, they may react in different degrees to changes in market interest rates. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of or lag behind changes in market interest rates. Additionally, certain assets, such as some adjustable-rate loans, have
features that restrict changes in interest rates on a short-term basis and over the life of the asset. Moreover, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in preparing the table.
In addition, we regularly measure and monitor the market value of our net assets and the changes therein. While fluctuations are expected because of changes in interest rates, we have established policy limits for various interest rate scenarios. Given interest rate shocks of +100 to +300 bps and -100 bps the market value of net assets is not expected to decrease by more than 15% to 35%.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.
Management, including the principal executive officer and principal financial officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). Based on such assessment, management concluded that, as of December 31, 2021, the Company’s internal control over financial reporting is effective based upon those criteria.
KPMG LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Report and has issued a report with respect to the effectiveness of the Company’s internal control over financial reporting.
/s/ Ronald J. Seiffert /s/ William W. Harvey, Jr.
Ronald J. Seiffert, Chairman, President and Chief Executive Officer (Principal Executive Officer) William W. Harvey, Jr., Senior Executive Vice President
and Chief Financial Officer (Principal Financial Officer)
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Northwest Bancshares, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Northwest Bancshares, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated February 25, 2022 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
February 25, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Northwest Bancshares, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of Northwest Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2021 and December 31, 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and December 31, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 25, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 5 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments”.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for credit losses for loans evaluated on a collective basis
As discussed in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for credit losses for loans was $102.2M, as of December 31, 2021, a portion which included the measure of expected credit losses on a collective (pool) basis for those loans that share similar risk characteristics (the collective ACL). The expected credit loss methodologies apply either a probability of default and loss given default loss assumption or a portfolio-level loss net charge-off rate assumption to loan level exposures on an undiscounted basis over the contractual term of the loans, adjusted for prepayments. The Company uses a twenty-four-month reasonable and supportable forecast period, which is based on a probability-weighted multiple macroeconomic scenarios approach and reverts to historical average loss rates over a twelve-month period for the remaining life of the loans. The following collective ACL modeling methodologies were developed for each significant loan portfolio segment: (1) the allowance for credit losses within the mortgage and home equity loan portfolios are calculated at the loan-level using projected default rates, prepayment rates, and severity rates as well as macroeconomic forecasts determined at the pool level; (2) the allowance for credit losses within the vehicle loan portfolio is calculated at the portfolio-level using a vintage analysis to project portfolio-level net charge-off rates; (3) the allowance for credit losses is calculated for commercial
real estate and commercial small business loans at the portfolio-level using a regression model to project portfolio-level net charge-off rates as well as macroeconomic forecasts; and (4) the allowance for credit losses for the commercial real estate and commercial loan portfolio is calculated at loan-level using projected default and severity rates as well as macroeconomic forecasts determined at the pool level. A portion of the collective ACL is comprised of adjustments to historical loss information for asset-specific risk characteristics to reflect the extent they do not exist in the historical loss information. These adjustments are based on qualitative factors not reflected in the quantitative models but are likely to impact the measurement of estimated credit losses.
We identified the assessment of the collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ACL due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ACL methodologies, including the models and methods used to estimate (1) the default, severity, prepayments, and projected portfolio-level net charge-off rates, and their significant assumptions, including the macroeconomic forecast scenarios and economic assumptions, and the reasonable and supportable forecast periods, and (2) the qualitative factors and their significant assumptions, including adjustments to account for current and expected macroeconomic conditions. The assessment also included an evaluation of the conceptual soundness and performance of the models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s collective ACL estimate, including controls over the:
•development of the collective ACL methodologies
•continued use and conceptual soundness of the default, severity, prepayments, and projected portfolio-level net charge-off rate (model assumptions)
•performance monitoring of the models
•determination and measurement of the significant assumptions used in the models
•determination of the qualitative factors, including the significant assumptions used in the measurement of the qualitative factors
•analysis of the collective ACL results, trends, and ratios.
We evaluated the Company’s process to develop the collective ACL estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
•evaluating the Company’s collective ACL methodologies for compliance with U.S. generally accepted accounting principles
•evaluating judgments made by the Company relative to the development and performance testing of the model assumptions by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
•assessing the conceptual soundness and performance testing of the model assumptions by inspecting the model documentation to determine whether the models are suitable for their intended use
•evaluating the economic forecast scenarios and underlying assumptions by comparing it to the Company’s business environment and relevant industry practices
•evaluating the length of the historical observation period and reasonable and supportable forecast by comparing them to specific portfolio risk characteristics and trends
•evaluating the methodology used to develop the qualitative factors and the effect of certain factors on the collective ACL compared with relevant credit risk factors and consistency with credit trends.
We also assessed the sufficiency of the audit evidence obtained related to the collective ACL by evaluating the cumulative results of the audit procedures, qualitative aspects of the Company’s accounting practices, and potential bias in the accounting estimate.
/s/ KPMG LLP
We have served as the Company’s auditor since 1963.
Pittsburgh, Pennsylvania
February 25, 2022
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, excluding share data)
December 31,
2021 2020
Assets
Cash and cash equivalents $ 1,279,259 736,277
Marketable securities available-for-sale (amortized cost of $1,565,002 and $1,375,685, respectively)
1,548,592 1,398,941
Marketable securities held-to-maturity (fair value of $751,513 and $179,666, respectively)
768,154 178,887
Total cash and cash equivalents and marketable securities 3,596,005 2,314,105
Loans held-for-sale 25,056 58,786
Loans held for investment 9,991,336 10,522,063
Allowance for credit losses (102,241) (134,427)
Loans receivable, net 9,914,151 10,446,422
FHLB stock, at cost 14,184 21,748
Accrued interest receivable 25,599 35,554
Real estate owned, net 873 2,232
Premises and equipment, net 156,524 161,538
Bank-owned life insurance 256,213 253,951
Goodwill 380,997 382,279
Other intangible assets, net 12,836 19,936
Other assets 144,126 168,503
Total assets $ 14,501,508 13,806,268
Liabilities and shareholders’ equity
Liabilities:
Deposits $ 12,301,165 11,599,233
Borrowed funds 139,093 159,715
Subordinated debt 123,575 123,329
Junior subordinated debentures 129,054 128,794
Advances by borrowers for taxes and insurance 44,582 45,230
Accrued interest payable 1,804 2,054
Other liabilities 178,664 209,210
Total liabilities 12,917,937 12,267,565
Shareholders’ equity:
Preferred stock, $0.01 par value: 50,000,000 authorized, no shares issued
- -
Common stock, $0.01 par value: 500,000,000 shares authorized, 126,612,183 and 127,019,452 shares issued and outstanding, respectively
1,266 1,270
Additional paid-in capital 1,010,405 1,015,502
Retained earnings 609,529 555,480
Accumulated other comprehensive loss (37,629) (33,549)
Total shareholders’ equity 1,583,571 1,538,703
Total liabilities and shareholders’ equity $ 14,501,508 13,806,268
See accompanying notes to Consolidated Financial Statements.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, excluding share data)
Years ended December 31,
2021 2020 2019
Interest income:
Loans receivable $ 390,343 410,907 394,809
Mortgage-backed securities 21,463 17,416 16,670
Taxable investment securities 2,616 1,985 3,401
Tax-free investment securities 2,485 2,060 844
FHLB stock dividends 407 981 1,056
Interest-earning deposits 1,194 719 600
Total interest income 418,508 434,068 417,380
Interest expense:
Deposits 19,122 35,896 49,216
Borrowed funds 8,124 6,444 7,698
Total interest expense 27,246 42,340 56,914
Net interest income 391,262 391,728 360,466
Provision for credit losses (11,883) 83,975 22,659
Net interest income after provision for credit losses 403,145 307,753 337,807
Noninterest income:
Gain/(loss) on sale of investments (176) 236 50
Gain on sale of loans - 1,302 1,734
Service charges and fees 51,837 55,613 53,065
Trust and other financial services income 27,921 20,922 17,765
Insurance commission income 3,633 9,132 8,068
Gain/(loss) on real estate owned, net 442 (106) (53)
Income from bank-owned life insurance 6,050 5,190 4,418
Mortgage banking income 15,892 31,391 3,819
Gain on sale of insurance business 25,327 - -
Other operating income 11,963 8,585 10,541
Total noninterest income 142,889 132,265 99,407
Noninterest expense:
Compensation and employee benefits 193,887 178,375 163,086
Premises and occupancy costs 31,073 30,622 28,717
Office operations 13,769 15,728 14,133
Collections expense 1,932 3,275 2,560
Processing expenses 55,763 50,050 42,453
Marketing expenses 8,237 7,695 6,998
Federal deposit insurance premiums 4,975 4,767 685
Professional services 17,621 12,482 12,287
Amortization of intangible assets 5,553 6,856 6,543
Real estate owned expense 298 359 478
Merger, asset disposition and restructuring expense 3,453 20,789 4,168
Other expenses 8,349 16,494 13,995
Total noninterest expense 344,910 347,492 296,103
Income before income taxes 201,124 92,526 141,111
Provision for income taxes:
Federal 35,306 14,896 24,069
State 11,495 2,776 6,610
Total provision for income taxes 46,801 17,672 30,679
Net income $ 154,323 74,854 110,432
Basic earnings per share $ 1.22 0.62 1.05
Diluted earnings per share $ 1.21 0.62 1.04
See accompanying notes to Consolidated Financial Statements.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Years ended December 31,
2021 2020 2019
Net income $ 154,323 74,854 110,432
Other comprehensive income net of tax:
Net unrealized holding gains/(losses) on marketable securities:
Unrealized holding gains/(losses), net of tax of $10,333, $(5,607), and $(3,994), respectively
(28,873) 13,711 9,984
Reclassification adjustment for gains included in net income, net of tax of $92, $6, and $2, respectively
(287) (15) (5)
Net unrealized holding gains/(losses) on marketable securities (29,160) 13,696 9,979
Change in fair value of interest rate swaps:
Unrealized holding losses on interest rate swaps, net of tax of $0, $209, and $0, respectively
- (946) -
Reclassification adjustment for losses included in net income, net of tax of $0, $(209), and $0, respectively
- 946 -
Net change in fair value of interest rate swaps - - -
Defined benefit plan:
Net gain/(loss), net of tax $(9,144), $4,169, $3,193, respectively
23,748 (11,301) (8,059)
Reclassification adjustments for prior period service costs and net losses included in net income,
net of tax of $(515), $(395), and $(334), respectively
1,332 997 835
Net gain/(loss) on defined benefit plans 25,080 (10,304) (7,224)
Other comprehensive income/(loss) (4,080) 3,392 2,755
Total comprehensive income $ 150,243 78,246 113,187
See accompanying notes to Consolidated Financial Statements.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands, excluding share data)
Common
stock Additional paid-in
capital Retained
earnings Accumulated
other
comprehensive
income/(loss) Total
shareholders’
equity
Balance at December 31, 2018 $ 1,034 745,926 550,374 (39,696) 1,257,638
Comprehensive income:
Net income - - 110,432 - 110,432
Other comprehensive income, net of tax of $(1,129)
- - - 2,755 2,755
Total comprehensive income - - 110,432 2,755 113,187
Acquisition of Union Community Bank 24 43,264 - - 43,288
Reclassification due to adoption of ASU No. 2016-02 - - (1,226) - (1,226)
Exercise of stock options 9 9,718 - - 9,727
Stock-based compensation expense 3 6,842 - - 6,845
Stock-based compensation forfeited (1) - - - (1)
Dividends paid ($0.72 per share)
- - (76,173) - (76,173)
Balance at December 31, 2019 1,069 805,750 583,407 (36,941) 1,353,285
Comprehensive income:
Net income - - 74,854 - 74,854
Other comprehensive income, net of tax of $(1,287)
- - - 3,392 3,392
Total comprehensive income - - 74,854 3,392 78,246
Acquisition of Mutual Bank 206 213,200 - - 213,406
Reclassification due to adoption of ASU No. 2016-13 - - (9,649) - (9,649)
Exercise of stock options 1 1,478 - - 1,479
Share repurchases (7) (9,269) - - (9,276)
Stock-based compensation expense 3 4,236 - - 4,239
Stock-based compensation forfeited (2) 2 - - -
Other - 105 - - 105
Dividends paid ($0.76 per share)
- - (93,132) - (93,132)
Balance at December 31, 2020 1,270 1,015,502 555,480 (33,549) 1,538,703
Comprehensive income:
Net income - - 154,323 - 154,323
Other comprehensive income, net of tax of $858
- - - (4,080) (4,080)
Total comprehensive income - - 154,323 (4,080) 150,243
Exercise of stock options 12 13,999 - - 14,011
Share repurchases (18) (23,836) - - (23,854)
Stock-based compensation expense 3 4,739 - - 4,742
Stock-based compensation forfeited (1) 1 - - -
Dividends paid ($0.79 per share)
- - (100,274) - (100,274)
Balance at December 31, 2021 $ 1,266 1,010,405 609,529 (37,629) 1,583,571
See accompanying notes to Consolidated Financial Statements.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
2021 2020 2019
Operating activities:
Net income $ 154,323 74,854 110,432
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses (11,883) 83,975 22,659
Net gain on sale of assets (1,201) (3,249) (2,472)
Mortgage banking activity (20,120) (25,798) -
Gain on sale of insurance business (25,327) - -
Net depreciation, amortization and accretion 6,633 4,738 3,824
(Increase)/decrease in other assets 22,163 (16,097) (66,080)
Increase in other liabilities 4,025 47,018 53,998
Net amortization on marketable securities 7,757 3,797 922
Noncash compensation expense related to stock benefit plans 4,742 4,239 6,845
Noncash write-down of real estate owned 173 321 607
Deferred income tax (benefit)/expense 12,314 (8,084) 2,776
Origination of loans held-for-sale (752,831) (729,939) (68,400)
Proceeds from sale of loans held-for-sale 804,690 704,660 62,351
Net cash provided by operating activities 205,458 140,435 127,462
Investing activities:
Purchase of marketable securities held-to-maturity (658,817) (164,629) -
Purchase of marketable securities available-for-sale (705,146) (830,487) (200,204)
Proceeds from maturities and principal reductions of marketable securities held-to-maturity 68,495 3,760 4,707
Proceeds from maturities and principal reductions of marketable securities available-for-sale 449,372 392,511 241,079
Proceeds from sale of marketable securities available-for-sale 59,579 1,096 32,389
Proceeds of bank-owned life insurance 3,984 596 2,638
Loan originations (3,961,816) (4,655,969) (3,721,001)
Proceeds from loan maturities and principal reductions 4,490,089 4,383,933 3,275,400
Proceeds from sale of loans held for investment - 50,791 97,923
Net proceeds of FHLB stock 7,564 6,107 1,348
Proceeds from sale of real estate owned 2,700 1,651 4,198
Proceeds from sale of real estate owned for investment, net 305 607 608
Purchases of premises and equipment (17,517) (12,254) (10,899)
Proceeds from sale of insurance business 28,238 - -
Acquisitions, net of cash received - 261,712 (28,779)
Net cash used in investing activities (232,970) (560,575) (300,593)
NORTHWEST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
2021 2020 2019
Financing activities:
Net increase in deposits $ 701,932 1,390,187 218,449
Proceeds from long-term borrowings - 123,211 -
Repayments of long-term borrowings (22,105) (206,908) -
Net increase/(decrease) in short-term borrowings 1,432 (108,675) 11,947
Increase/(decrease) in advances by borrowers for taxes and insurance (648) (1,315) 1,238
Cash dividends paid on common stock (100,274) (93,132) (76,173)
Proceeds from stock options exercised 14,011 1,479 9,727
Purchase of common stock for retirement (23,854) (9,276) -
Net cash provided by financing activities 570,494 1,095,571 165,188
Net increase/(decrease) in cash and cash equivalents $ 542,982 675,431 (7,943)
Cash and cash equivalents at beginning of period $ 736,277 60,846 68,789
Net increase/(decrease) in cash and cash equivalents 542,982 675,431 (7,943)
Cash and cash equivalents at end of period $ 1,279,259 736,277 60,846
Cash paid during the period for:
Interest on deposits and borrowings (including interest credited to deposit accounts of
$18,711, $34,313, and $44,928, respectively)
$ 27,496 41,428 54,277
Income taxes 33,576 29,767 29,283
Business acquisitions:
Fair value of assets acquired $ - 2,090,599 584,253
Northwest Bancshares, Inc. common stock issued - (213,406) (43,288)
Net cash paid - - (45,600)
Liabilities assumed $ - 1,877,193 495,365
Noncash activities:
Loan foreclosures and repossessions $ 4,897 5,643 5,815
Sale of real estate owned financed by the Company 54 126 44
See accompanying notes to Consolidated Financial Statements.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
Northwest Bancshares, Inc., a Maryland corporation headquartered in Columbus, Ohio, is the federal savings and loan holding company for its wholly owned subsidiary, Northwest Bank. Northwest Bank, a Pennsylvania chartered savings bank, offers personal and business deposit and loan products as well as investment management and insurance services through its 170 banking locations in Pennsylvania, New York, Ohio, and Indiana. We have determined that we have one reportable business segment.
(b) Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all intercompany accounts and transactions.
(c) Cash and Cash Equivalents
For purposes of the statements of financial condition and cash flows, cash and cash equivalents include cash and amounts due from banks, interest-bearing deposits in other financial institutions, federal funds sold, and other short-term investments with original maturities of three months or less.
(d) Marketable Securities
We classify marketable securities at the time of purchase as held-to-maturity, available-for-sale, or trading. Securities for which management has the intent and ability to hold until maturity are classified as held-to-maturity and are carried at cost, adjusted for amortization of premiums and accretion of discounts on a level yield basis (amortized cost). If it is management’s intent at the time of purchase to hold securities for an indefinite period of time and/or to use such securities as part of its asset/liability management strategy, the securities are classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported as accumulated other comprehensive income/(loss), a separate component of shareholders’ equity, net of tax. Securities classified as available-for-sale include securities that may be sold in response to changes in interest rates, resultant prepayment risk, or other market factors. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and are reported at fair value, with changes in fair value included in earnings. The cost of securities sold is determined on a specific identification basis. We held no securities classified as trading at or during the years ended December 31, 2021 and 2020. Fair values are determined as described in Note 17. Throughout the year we validate the prices received from third parties by comparing them to prices provided by a different independent pricing service. We have reviewed the detailed valuation methodologies provided to us by our pricing services.
On a quarterly basis, we measure expected credit losses on held-to-maturity debt securities on a collective basis by major security type and all of our held-to-maturity debt securities are residential mortgage-backed securities. Accrued interest receivable on held-to-maturity debt securities totaled $2.2 million and $1.8 million at December 31, 2021 and December 31, 2020, respectively, and is excluded from estimated credit losses. All of our residential mortgage-backed securities are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses.
For available-for-sale debt securities in an unrealized loss position, on at least a quarterly basis, we review our investments for impairment. An investment security is deemed impaired if the fair value of the investment is less than its amortized cost. We consider both our intent to sell and the likelihood that we will not have to sell the investment securities before recovery of their amortized cost basis during our evaluation. If we intend to sell the investment security or if it is more likely than not that we will be required to sell the investment security, the entire impairment is recorded in earnings. For available-for-sale debt securities that do not meet this criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment we consider the issuer of the securities and their creditworthiness, any changes to the rating of the security and any adverse conditions specifically related to the security, among other factors. Also, we may evaluate the business and financial outlook of the issuer, as well as broader economic performance indicators. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
recorded for the credit loss, limited by the amount that the fair value is less than amortized cost. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when we believe the uncollectibility of an available-for-sale security is confirmed or when there is an intent or requirement to sell the security.
Accrued interest receivable on available-for-sale debt securities totaled $1.9 million at December 31, 2021 and December 31, 2020, and is excluded from the estimate of credit losses.
A debt security is placed on nonaccrual status at the time any principal or interest payments become 90 days past due. The receivable for interest income that is accrued but not collected is reversed against interest income when the debt security is placed on nonaccrual status.
(e) Loans Receivable
Our portfolio segments are based on the class of financing receivable. Additionally, the class of financing receivables are based on several factors including the method for monitoring and assessing credit risk and the risk characteristics of the financing receivables. Based on evaluation of the nature of our financing receivables, along with the nature and extent of exposure to credit risk arising from these receivables, our portfolio segments were determined to be Personal Banking and Business Banking loans.
•Personal Banking loans consist of the following classes of financing receivables:
◦Residential mortgage loans - fixed and adjustable rate mortgage loans
◦Home equity loans - first and second mortgage loans and home equity lines of credit
◦Vehicle loans - direct and indirect automobile and motorcycle loans
◦Consumer loans - unsecured lines of credit, credit card loans, and other consumer loans
•Business Banking loans consist of the following classes of financing receivables:
◦Commercial real estate - multi-family commercial real estate loans are secured by multi-family residences, such as rental properties and loans secured by nonresidential properties such as hotels, commercial offices, medical buildings, manufacturing facilities and retail establishments, excluding owner-occupied loans, and including small business commercial real estate loans
◦Commercial real estate - owner-occupied loans - commercial real estate loans secured by residential or non-residential properties
◦Commercial loans - other commercial loans, including small business commercial loans
Loans are reported at amortized cost. Amortized cost is the principal balance outstanding, net of any deferred purchased premiums and discounts, deferred origination fees or costs and the allowance for credit losses. Accrued interest receivable totaled $21.3 million and $31.7 million at December 31, 2021 and December 31, 2020, respectively, and was reported in accrued interest receivable on the Consolidated Statements of Financial Position. Accrued interest receivable is excluded from the amortized cost basis of loans and from the estimate of allowance for credit losses. Interest income on loans is credited to income as earned. Interest earned on loans for which no payments were received during the month is accrued at month end.
Accrued interest on loans more than 90 days delinquent is reversed and such loans are placed on nonaccrual status. All loans are placed on nonaccrual status when principal or interest is 90 days or more delinquent or when there is reasonable doubt that interest or principal will not be collected in accordance with the contractual terms. Interest receipts on all nonaccrual loans are recognized as interest income when it has been determined that all principal and interest will be collected or are applied to principal when collectability of contractual principal is in doubt. Nonaccrual loans generally are restored to an accrual basis when principal and interest become current and a period of performance has been established in accordance with the contractual terms, typically six months.
A loan is considered to be a troubled debt restructuring loan (“TDR”) when the borrower is experiencing financial difficulties and the restructuring constitutes a concession. TDRs may include modifications of terms of loans, receipts of assets from borrowers in partial or full satisfaction of loans, or a combination thereof. A modified loan is determined to be a TDR based on the contractual terms as specified by the original loan agreement or the most recent modification. Once classified as a TDR, a loan is removed from
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
such classification under three circumstances: (1) the loan is paid off, (2) the loan is charged off, or (3) if, at the beginning of the current fiscal year, the loan has performed in accordance with the modified terms for a minimum of six consecutive months and at the time of modification the loan’s interest rate represented a then current market interest rate for a loan of similar risk.
Loan delinquency is measured based on the number of days since the payment due date. Past due status is measured using the loan’s contractual maturity date.
Personal Banking loans are charged-off or charged down when they become 180 days delinquent, unless the borrower has filed for bankruptcy. Business Banking loans are charged-off or charged down when, in our opinion, they are no longer collectible or when it has been determined that the collateral value no longer supports the carrying value of the loan for loans that are collateral dependent.
Loan fees and certain direct loan origination costs are deferred and the net deferred fee or cost is then recognized using the level-yield method over the contractual life of the loan as an adjustment to interest income.
We identify certain residential mortgage loans which will be sold prior to maturity, as loans held-for-sale. These loans are recorded at fair value less estimated cost to sell. At December 31, 2021 and 2020, there were $25.1 million and $58.8 million of residential mortgage loans classified as held-for-sale, respectively.
Acquired loans that are not considered purchased with credit deterioration (“PCD”) are initially measured at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.
Acquired loans may be classified as PCD loans upon acquisition if they have experienced more than insignificant credit deterioration since origination. Loans are considered to have experienced more than insignificant credit deterioration if they are greater than 30 days past due, classified special mention or worse or on nonaccrual status. An allowance for credit losses on day 1 is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The allowance is recognized on day 1 by adding it to the fair value of the loan, which is the “Day 1 amortized cost”. There is no credit loss expense recognized on PCD loans because the initial allowance is established by grossing-up the amortized cost of the PCD loan. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.
(f) Allowance for Credit Losses and Provision for Credit Losses
The allowance for credit losses is deducted from, or added to, the loan’s amortized cost basis to present the net amount expected to be collected on our lending portfolios. We estimate the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Loans are charged off against the allowance when we believe the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
Expected credit losses are estimated over the contractual term of the loans, adjusted for prepayments. The contractual term excludes expected extensions, renewals and modifications unless we had a reasonable expectation at the reporting date that a TDR will be executed for an individual borrower or the extension or renewal option is included in the contract and is not unconditionally cancellable by the Company.
Credit card receivables do not have stated maturities. In determining the estimated life of a credit card receivable, we first estimate the future cash flows expected to be received and then apply those expected future cash flows to the credit card balance. Expected credit losses for credit cards are determined by estimating the amount and timing of principal payments expected to be received as payment for the balance outstanding as of the reporting date and applying those principal payments against the balance outstanding as of the reporting period until the expected payments have been fully allocated. The allowance for credit losses is recorded for the excess of the balance outstanding as of the reporting period over the expected principal payments.
The allowance for credit losses is measured on a collective (“pool”) basis when similar risk characteristics exist. For the purpose of calculating portfolio-level reserves, we have grouped our loans into seven segments: residential mortgage loans, home
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
equity loans, vehicle loans, consumer loans, commercial real estate loans, commercial real estate owner-occupied and commercial loans. The allowance for credit losses is measured at the pool level utilizing loan-level inputs wherever possible. We use a twenty-four month forecasting period and revert to historical average loss rates thereafter. The reasonable and supportable forecast is based on a probability-weighted multiple economic scenario approach and obtained from a third party vendor. Reversion to the mean takes place over a twelve-month period. Our loss rate models utilize a linear reversion method. For our Probability of Default (“PD”)/Loss Given Default (“LDG”) models we revert the PD utilizing exponential reversion, which is an accelerated method, and the LGD utilizing a linear reversion method. Historical average loss rates are calculated using historical data beginning in 2009 through the current period. As part of the analysis as of December 31, 2021, we considered the most recent economic conditions and forecasts available which incorporated the impact of COVID-19.
Mortgage and Home Equity Loans
The allowance for credit losses within the mortgage and home equity loan classes is calculated at the pool-level using a non-discounted cash flow method through a PD and LGD model developed by an external third-party. These classes are further divided into smaller pools of loans with similar risk characteristics such as: lines versus loans, fixed versus variable, senior lien position versus junior lien position, among other things.
For each pool, the models project default rates, prepayment rates, and severity rates. The models accept as inputs key risk drivers such as: current balance, original credit bureau score, original loan-to-value ratio, type of collateral, location of collateral, delinquency status, loan age, among other characteristics. They also utilize macroeconomic forecasts of home price indices, unemployment rates, gross domestic product, and others.
Vehicle Loans
The allowance for credit losses within the vehicle loan portfolio is calculated at the portfolio-level using a non-discounted cash flow method through a loss rate model developed internally with the assistance of an external third-party. The allowance for vehicle loans utilizes a vintage analysis to project portfolio-level net charge-off rates. The class is further divided into short term versus long term loans, prime versus subprime borrowers, and origination vintage. This model uses current balance, original credit bureau score, original debt-to-income ratio, loan term, loan age, and other product characteristics as key risk drivers.
The model used for vehicle loans is not natively sensitive to macroeconomic conditions. The necessary adjustments to account for current and expected macroeconomic conditions is captured via our qualitative adjustment framework.
Consumer Loans
The allowance for credit losses within the consumer loan portfolio is calculated at the portfolio-level using a non-discounted cash flow method through a suite of loss rate models developed internally with the assistance of an external third-party. This class of financing receivables is further divided into credit cards, unsecured lines of credit and other consumer loans.
The allowance for credit losses for credit cards and unsecured lines of credit is calculated using two transition matrix models to project portfolio-level net charge-off rates. Both models use current balance and delinquency status as key risk drivers. These models are not natively sensitive to macroeconomic conditions. The necessary adjustments to account for current and expected macroeconomic conditions is captured via our qualitative adjustment framework.
For other consumer loans, a regression model is used to project portfolio-level net charge-off rates. This model uses borrower information and macroeconomic forecasts as key inputs.
Commercial Real Estate Loans
The commercial real estate loan class is further segmented into smaller pools of loans with similar risk characteristics, commercial real estate loans and small business commercial real estate loans.
The allowance for credit losses for the commercial real estate loan portfolio is calculated at the pool level using a non-discounted cash flow method through a PD/LGD model developed by an external third-party. This model projects default and severity rates. The model accepts as inputs key risk drivers such as: current balance, original loan-to-value-ratio, type of collateral, location of collateral, delinquency status, loan age, obligor financial statement information, and expected prepayment rates, among other
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
characteristics. It also utilizes macroeconomic forecasts of commercial real estate price indices, unemployment rates, gross domestic product and others.
The allowance for credit losses is calculated for commercial real estate small business loans at the portfolio-level using a non-discounted cash flow method through a loss rate model developed internally with the assistance of an external third-party. A regression model is used to project portfolio-level net charge-off rates. This model uses loan characteristics and macroeconomic forecasts as key inputs.
Commercial Loans and Commercial Real Estate - Owner Occupied Loans
The allowance for credit losses for the commercial loan portfolio and the commercial real estate - owner occupied loan portfolio is calculated at the pool level using a non-discounted cash flow method through a PD/LGD model developed by an external third-party. The commercial loan class is further segmented into smaller pools of loans with similar risk characteristics, commercial loans and commercial small business loans.
The commercial loan portfolio and the commercial real estate owner occupied loan portfolio models project default and severity rates. The model accepts as inputs key risk drivers such as the obligor financial statement information, collateral type, the obligor’s primary industry, expected prepayment rates, among other characteristics. It also utilizes macroeconomic forecasts of unemployment rates, gross domestic product, corporate bond spreads, and others.
The allowance for credit losses for commercial small business loans is calculated at the portfolio-level using a non-discounted cash flow method through a loss rate model developed internally with the assistance of an external third-party. A regression model is used to project portfolio-level net charge-off rates. This model uses loan characteristics and macroeconomic forecasts as key inputs.
Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When we determine that foreclosure is probable or when the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs. If this criteria is not met, a discounted cash flow method is used to determine the allowance for credit losses. All changes in the discounted cash flow method over time are reported in the allowance for credit losses.
The allowance calculation is also supplemented with qualitative reserves that takes into consideration the current portfolio and specific risk characteristics, such as changes in underwriting standards, portfolio mix, delinquency level, or term, as well as changes in environmental conditions, among other factors, that have occurred but are not yet reflected in the quantitative model component.
The allowance for credit losses on a TDR is measured using the same method as all other loans held for investment, except when the value of the concession cannot be measured using a method other than the discounted cash flow method. When the value of a concession is measured using the discounted cash flow method, the allowance for credit losses is determined by discounting the expected future cash flows at the original interest rate of the loan.
For off-balance-sheet credit exposures, we estimate expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable. The liability for credit losses on off-balance-sheet credit exposures is adjusted through a provision for credit loss expense and is included within “other expenses”. We estimate the liability balance using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. The estimate includes a consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Off-balance-sheet exposures that are not unconditionally cancellable have been identified for the mortgage, home equity, commercial real estate, and commercial loan portfolios.
Results for reporting periods beginning after January 1, 2020 are presented under CECL methodology while prior period amounts continue to be reported in accordance with Accounting Standards Codification (“ASC”) Topic 450, Contingencies; and specific reserves based upon ASC Topic 310, Receivables. ASC Topic 450 applies to homogeneous loan pools such as commercial loans, consumer lines of credit and residential mortgages that are not individually evaluated for impairment. ASC Topic 310 is applied to commercial and consumer loans that are individually evaluated for impairment.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
(g) Real Estate Owned
Real estate owned is comprised of property either acquired through foreclosure or voluntarily conveyed by borrowers. These assets are recorded on the date acquired at the lower of the loan balance or fair value of the collateral, less estimated disposition costs, with the fair value being determined by an appraisal. Any initial write-down is charged to the allowance for credit losses. Subsequently, foreclosed assets are valued at the lower of the amount recorded at acquisition date or the current fair value, less estimated disposition costs. Any subsequent write-down or gains or losses realized from the disposition of such property are credited or charged to noninterest income.
(h) Restricted Investment in FHLB Stock
Federal law requires a member institution of the FHLB system to hold stock of its district FHLB according to a predetermined formula. FHLB stock is carried at cost and evaluated for impairment based on the ultimate recoverability of the par value. FHLB stock can only be purchased, redeemed and transferred at par value. Dividends are reported in interest income in the Consolidated Statements of Income.
(i) Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation is accumulated on a straight-line basis over the estimated useful lives of the related assets. Estimated lives range from three to 39 years. Amortization of leasehold improvements is accumulated on a straight-line basis over the terms of the related leases or the useful lives of the related assets, whichever is shorter.
(j) Goodwill
Goodwill is generated from the premium paid for an acquisition and is allocated to reporting units, which are either our reportable segments or one level below. Reporting units are identified based upon analyzing each individual operating segment. A reporting unit is defined as a distinct, separately identifiable component of an operating segment for which complete, discrete financial information is available that management regularly reviews.
Goodwill is not subject to amortization but is tested for impairment at least annually and possibly more frequently if certain events occur or changes in circumstances arise. In testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If, after assessing all events and circumstances, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then performing the two-step impairment test would be unnecessary. However, if we conclude otherwise, it would then be required to perform the first step of the goodwill impairment test and continue to the second step, if necessary. Step 1 requires the fair value of each reporting unit be compared to its carrying amount, including goodwill. Determining the fair value of a reporting unit requires a high degree of subjective judgment, including developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. We have established June 30 of each year as the date for conducting our annual goodwill impairment assessment. Quarterly, we evaluate if there are any triggering events that would require an update to our previous assessment.
We conducted our annual impairment assessment as of June 30, 2021 by first performing a qualitative assessment of goodwill to determine if it was more likely than not that the fair value was less than the carrying value. In performing a qualitative analysis, factors considered include, but are not limited to, macroeconomic conditions, industry and market conditions and overall financial performance. The results of the qualitative assessment for 2021 indicated that it was not more likely than not that the fair value of the reporting unit was less than the carrying value. Consequently, no additional quantitative two-step impairment test was required and no impairment was recorded in 2021. Future events could cause us to conclude that goodwill has become impaired, which would result in recording an impairment loss. There were no changes in our operations that would cause us to update the assessment performed as of June 30, 2021 and 2020. Accordingly, we have determined that goodwill is not impaired as of December 31, 2021 and 2020.
(k) Core Deposit and Other Identifiable Intangibles
Through the assistance of an independent third party, we analyze and prepare a core deposit study for all bank acquisitions or other identifiable intangible asset study, such as customer lists, for all non-bank acquisitions. The core deposit study reflects the cumulative present value benefit of acquiring deposits versus an alternative source of funding. The other identifiable intangible asset
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
study reflects the cumulative present value benefit of acquiring the income stream from an existing customer base versus developing new business relationships. Based upon analysis, the amount of the premium related to the core deposits or other identifiable intangibles of the business purchased is calculated along with the estimated life of the intangible. The intangible, which is recorded in other intangible assets, is then amortized to expense on an accelerated basis over an approximate life of typically between seven to eleven years.
(l) Bank-Owned Life Insurance
We own insurance on the lives of a certain group of current and former employees and directors. The policies were purchased to help offset the increase in the costs of various benefit plans, including healthcare, as well as the directors deferred compensation plan. The cash surrender value of these policies is included as an asset on the Consolidated Statements of Financial Condition and any increases in the cash surrender value are recorded as tax-free noninterest income on the Consolidated Statements of Income. In the event of the death of an insured individual covered by these policies, after distribution to the insured’s beneficiaries, if any, we receive a tax-free death benefit, which is recorded as noninterest income.
(m) Deposits
Interest on deposits is accrued and charged to expense monthly and is paid or credited in accordance with the terms of the accounts.
(n) Revenue Recognition
Revenue that is not associated with our financial assets and financial liabilities is recognized when performance obligations under the terms of a contract with our customers are satisfied. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. The majority of our revenue continues to be recognized at the point in time when the services are provided to our customers.
(o) Pension Plans
We maintain multiple noncontributory defined benefit pension plans (“Pension Plan”) for substantially all of our employees. The net periodic pension cost has been calculated using service cost, interest cost, expected returns on plan assets and net amortization. The other components of the net periodic benefit cost are included in other expense on the Consolidated Statement of Income and are reported separately from the service costs.
Pension expense and obligations depend on assumptions used in calculating such amounts. These assumptions include discount rates, anticipated salary increases, interest costs, expected return on plan assets, mortality rates, and other factors. In determining the projected benefit obligations for pension benefits at December 31, 2021 and 2020, we used a discount rate of 2.75% and 2.39%, respectively. We use the FTSE (previously Citigroup) Pension Liability Index rates matching the duration of our benefit payments as of the measurement date, December 31, to determine the discount rate.
(p) Income Taxes
We join with our wholly owned subsidiaries in filing a consolidated federal income tax return. In accordance with an intercompany tax allocation agreement, the applicable federal income tax expense or benefit is allocated to each subsidiary based upon taxable income or loss calculated on a separate company basis. Each subsidiary is responsible for payment of its own federal income tax liability or receives reimbursement of federal income tax benefit. In addition, deferred taxes are calculated and maintained on a separate company basis.
We account for income taxes under the asset and liability method. The objective of the asset and liability method is to establish deferred tax assets and liabilities for temporary differences between the financial reporting and tax basis of our assets and liabilities based on the tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities with regard to a change in tax rates is recognized in the tax provision in the period the change is enacted. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
(q) Stock-Related Compensation
We determine the fair value of each option award, estimated on the grant date, using the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton option-pricing model uses variables including expected volatilities, expected term, risk-free discount rate and annual rate of quarterly dividends. Expected volatilities are based on historical volatility of the Company’s stock. The expected terms are based upon actual exercise and forfeiture experience of previous option grants. The risk-free rate is based on yields on U.S. Treasury securities of a similar maturity to the expected term of the options. For options outstanding at December 31, 2021, the following assumptions were used to determine the option’s fair value: (1) annual rate of quarterly dividends ranging from 3.9% to 7.5% based on historical dividends and market prices; (2) expected volatility of 13.0% to 19.0% based on historical average monthly volatility; (3) risk-free discount rates ranging from 0.7% to 2.9%; and (4) expected lives of nine to ten years based on previous grants. During the year ended December 31, 2021, we awarded 621,972 stock options to employees and 72,000 stock options to directors. During the year ended December 31, 2020, we awarded 556,476 stock options to employees and 57,600 stock options to directors. The options granted in 2021 and 2020 vest over a five or seven-year period, depending on the date of the grant, with the first vesting occurring on the grant date. New shares are issued when options are exercised. Option awards are generally granted with an exercise price equal to the closing market price of the Company’s stock on the day before the grant date.
During the year ended December 31, 2021, we awarded 307,207 restricted shares to employees and 27,000 restricted shares to directors. During the year ended December 31, 2020, we awarded 261,091 restricted shares to employees and 21,600 restricted shares to directors. These common share awards vest over a five or seven-year period, depending on the date of the grant, with the first vesting occurring on the grant date. Once shares have vested, they are no longer restricted. Compensation expense, in the amount of the fair market value of the common stock at the date of the grant will be recognized pro rata over the periods in which the shares vest. While restricted, the recipients are entitled to all shareholder rights, except that the shares may not be sold, pledged, or otherwise disposed of and are required to be held in a trust. For additional information regarding grants of stock options and common shares, see Note 15.
Stock-based employee compensation expense related to common share awards of $4.1 million, $3.5 million and $5.7 million was included in income before income taxes during the years ended December 31, 2021, 2020 and 2019, respectively. The effect on net income for the years ended December 31, 2021, 2020 and 2019 was a reduction of $2.9 million, $2.5 million and $4.1 million, respectively. Total compensation expense for unvested stock options of $1.7 million has yet to be recognized as of December 31, 2021. The weighted average period over which this remaining stock option expense will be recognized is approximately 4.34 years.
(r) Derivative Financial Instruments
We recognize all derivative financial instruments as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. An entity that elects to use hedge accounting is required, at inception, to establish the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Those methods must be consistent with our approach to managing risk.
At times, we utilize interest rate swap agreements as part of the management of interest rate risk to hedge the interest rate risk on our trust preferred debentures. Amounts receivable or payable are recognized as accrued under the terms of the agreements and the differential is recorded as an adjustment to interest expense. The interest rate swaps are designated as cash flow hedges, with the effective portion of the derivative’s unrealized gain or loss recorded as a component of other comprehensive income which is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the unrealized gain or loss, if any, would be recorded in other expense. For derivatives that are not designated as hedging instruments, any gain or loss is recognized immediately in earnings.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
(s) Off-Balance-Sheet Instruments
In the normal course of business, we extend credit in the form of loan commitments, undisbursed lines of credit, and standby letters of credit. These off-balance-sheet instruments involve, to various degrees, elements of credit and interest rate risk not reported in the Consolidated Statement of Financial Condition. We utilize the same underwriting standards for these instruments as other extensions of credit.
(t) Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. The estimates and assumptions that we deem important to our financial statements relate to the allowance for loan losses, the accounting treatment and valuation of our investment securities portfolio, the analysis of the carrying value of goodwill, pension and income taxes. These estimates and assumptions are based on management’s best estimates and judgment and we evaluate them using historical experience and other factors, including the current economic environment. We adjust our estimates and assumptions when facts and circumstances dictate. As future events cannot be determined, actual results could differ significantly from our estimates.
(u) Reclassification of Prior Years’ Statements
Certain items previously reported have been reclassified to conform with the current year’s reporting format.
(2) Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans”. This guidance removes and adds disclosure requirements for defined benefit pension or other post-retirement plans. On January 1, 2021, the Company adopted ASU 2018-14 on a retrospective basis for disclosures impacted. The adoption of this standard did not have a material effect on our results of operations or financial position. Refer to Note 15, “Employee Benefit Plans”.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes - Simplifying the Accounting for Income Taxes”. This guidance simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. On January 1, 2021, the Company adopted ASU 2019-12 on a prospective basis. The adoption of the standard did not have a material effect on our results of operations or financial position.
(3) Leases
At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification of a finance or operating lease. Operating lease right of use (“ROU”) assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments. ROU assets are further adjusted for lease incentives and initial direct costs.
The Company has operating leases for certain branch and office facilities or land with lease terms up to 35 years. These leases generally contain renewal options for periods ranging from one to ten years. These options are included in the lease term when it is reasonably certain that the options will be exercised.
Some of the Company’s lease arrangements contain lease components (e.g., minimum rent payments) and non-lease components (e.g., common area maintenance, taxes, etc.). For all leases, the Company elected the option of not separating lease and non-lease components and instead we account for them as a single lease component.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Certain lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected adjustment for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Generally, the Company cannot practically determine the interest rate implicit in the lease. Therefore, the Company uses its incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.
Lease expense for these leases is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred. The components of lease cost recognized within our Consolidated Statements of Income were as follows:
For the years ended December 31,
2021 2020
Operating lease costs (office operations) $ 5,802 6,139
Variable lease costs (office operations) 662 680
Total operating lease costs $ 6,464 6,819
Amounts reported in the Consolidated Statements of Financial Condition were as follows:
For the years ended December 31,
2021 2020
Operating leases:
Operating lease ROU assets (other assets) $ 54,887 48,329
Operating lease liabilities (other liabilities) 57,726 52,206
Other information related to leases were as follows:
For the years ended December 31,
2021 2020
Supplemental cash flow information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow from operating leases $ 6,143 6,204
ROU assets obtained in exchange for lease obligations 12,866 8,657
Weighted average remaining lease term 15.9 years 15.1 years
Weighted average discount rate 3.1 % 3.4 %
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Amounts disclosed for ROU assets obtained in exchange for lease obligations include amounts added to the carrying amount of ROU assets resulting from lease modifications and reassessments.
Maturities of lease liabilities by fiscal year for our operating leases are as follows:
As of December 31, 2021
2022 $ 6,080
2023 5,777
2024 5,039
2025 4,822
2026 4,734
Thereafter 48,471
Total lease payments 74,923
Less amount of lease payments representing interest 17,197
Total present value of lease payments $ 57,726
Rental expense for the years ended December 31, 2021, 2020 and 2019 was $6.5 million, $6.8 million and $6.2 million, respectively.
(4) Marketable Securities
Marketable securities available-for-sale at December 31, 2021 are as follows:
Amortized cost Gross unrealized
holding gains Gross unrealized
holding losses Fair value
Debt issued by the U.S. government and agencies:
Due in one year through five years $ 20,000 - (68) 19,932
Due after ten years 57,681 - (1,722) 55,959
Debt issued by government sponsored enterprises:
Due in less than one year 177 - - 177
Due in one year through five years 991 73 - 1,064
Due in five years through ten years 46,411 1 (1,568) 44,844
Municipal securities:
Due in less than one year 946 13 - 959
Due in one year through five years 1,261 22 (3) 1,280
Due in five years through ten years 23,692 661 (146) 24,207
Due after ten years 99,558 2,884 (187) 102,255
Residential mortgage-backed securities:
Fixed rate pass-through 265,604 2,389 (2,525) 265,468
Variable rate pass-through 11,306 294 (9) 11,591
Fixed rate agency CMOs 997,680 2,284 (18,965) 980,999
Variable rate agency CMOs 39,695 224 (62) 39,857
Total residential mortgage-backed securities 1,314,285 5,191 (21,561) 1,297,915
Total marketable securities available-for-sale $ 1,565,002 8,845 (25,255) 1,548,592
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Marketable securities held-to-maturity at December 31, 2021 are as follows:
Amortized cost Gross unrealized
holding gains Gross unrealized
holding losses Fair value
Debt issued by the U.S. government and agencies:
Due in one year through five years $ 16,478 - (206) 16,272
Due in five years through ten years 107,973 - (4,613) 103,360
Residential mortgage-backed securities:
Fixed rate pass-through 183,092 58 (2,161) 180,989
Variable rate pass-through 667 24 - 691
Fixed rate agency CMOs 459,345 251 (10,011) 449,585
Variable rate agency CMOs 599 17 - 616
Total residential mortgage-backed securities 643,703 350 (12,172) 631,881
Total marketable securities held-to-maturity $ 768,154 350 (16,991) 751,513
Marketable securities available-for-sale at December 31, 2020 are as follows:
Amortized cost Gross unrealized
holding gains Gross unrealized
holding losses Fair value
Debt issued by the U.S. government and agencies:
Due after ten year $ 40,761 211 (55) 40,917
Debt issued by government-sponsored enterprises:
Due in less than one year 24,976 159 - 25,135
Due in one year through five years 238 3 - 241
Due in five years through ten years 68,973 238 (80) 69,131
Municipal securities:
Due in less than one year 4,008 14 - 4,022
Due in one year through five years 2,803 63 (2) 2,864
Due in five years through ten years 16,045 429 (5) 16,469
Due after ten years 89,778 3,752 (72) 93,458
Residential mortgage-backed securities:
Fixed rate pass-through 339,406 7,125 (86) 346,445
Variable rate pass-through 14,778 431 (20) 15,189
Fixed rate agency CMOs 723,586 11,758 (1,093) 734,251
Variable rate agency CMOs 50,333 519 (33) 50,819
Total residential mortgage-backed securities 1,128,103 19,833 (1,232) 1,146,704
Total marketable securities available-for-sale $ 1,375,685 24,702 (1,446) 1,398,941
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Marketable securities held-to-maturity at December 31, 2020 are as follows:
Amortized cost Gross unrealized
holding gains Gross unrealized
holding losses Fair value
Debt issued by the U.S. government and agencies:
Due after five years through ten years $ 67,990 12 (123) 67,879
Residential mortgage-backed securities:
Fixed rate pass-through 1,723 131 - 1,854
Variable rate pass-through 919 30 - 949
Fixed rate agency CMOs 107,651 716 (2) 108,365
Variable rate agency CMOs 604 15 - 619
Total residential mortgage-backed securities 110,897 892 (2) 111,787
Total marketable securities held-to-maturity $ 178,887 904 (125) 179,666
The following table shows the contractual maturity of our residential mortgage-backed securities available-for-sale at December 31, 2021:
Amortized cost Fair value
Residential mortgage-backed securities:
Due in less than one year $ 490 491
Due in one year through five years 14,013 14,126
Due after five years through ten years 89,594 89,948
Due after ten years 1,210,188 1,193,350
Total residential mortgage-backed securities $ 1,314,285 1,297,915
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table shows the contractual maturity of our residential mortgage-backed securities held-to-maturity at December 31, 2021:
Amortized cost Fair value
Residential mortgage-backed securities:
Due in one year through five years $ 792 833
Due after five years through ten years 40,494 38,817
Due after ten years 602,417 592,231
Total residential mortgage-backed securities $ 643,703 631,881
The following table presents information regarding the issuers and the carrying values of our mortgage-backed securities at December 31, 2021 and 2020:
December 31,
2021 2020
Residential mortgage-backed securities:
FNMA $ 704,070 532,532
GNMA 577,684 367,354
FHLMC 659,433 357,249
Other (including non-agency) 431 466
Total residential mortgage-backed securities $ 1,941,618 1,257,601
Marketable securities having a carrying value of $227.5 million at December 31, 2021 were pledged under collateral agreements. During the year ended December 31, 2021, we sold marketable securities classified as available-for-sale for $59.6 million, with gross realized gains of $410,000 and gross realized losses of $396,000. During the year ended December 31, 2020, we sold marketable securities classified as available-for-sale for $1.1 million, with gross realized gains of $64,000 and no gross realized losses. During the year ended December 31, 2019, we sold marketable securities classified as available-for-sale for $32.4 million, with gross realized gains of $29,000 and no gross realized losses. During the years ended December 31, 2021 and 2020, we did not recognize allowance for credit losses in our investment portfolio and during the year ended December 31, 2019, we did not recognize non-cash credit related other-than-temporary-impairment in our investment portfolio.
The following table shows the fair value and gross unrealized losses on investment securities, for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2021:
Less than 12 months 12 months or more Total
Fair value Unrealized
loss Fair value Unrealized
loss Fair value Unrealized
loss
U.S. government sponsored enterprises $ 132,782 (3,504) 106,160 (4,673) 238,942 (8,177)
Municipal securities 25,118 (336) - - 25,118 (336)
Residential mortgage-backed securities 1,428,582 (26,516) 184,389 (7,217) 1,612,971 (33,733)
Total temporarily impaired securities $ 1,586,482 (30,356) 290,549 (11,890) 1,877,031 (42,246)
The following table shows the fair value and gross unrealized losses on investment securities, for which an allowance for credit losses has not been recorded, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2020:
Less than 12 months 12 months or more Total
Fair value Unrealized
loss Fair value Unrealized
loss Fair value Unrealized
loss
U.S. government sponsored enterprises $ 67,809 (179) 1,923 (80) 69,732 (259)
Municipal securities 4,257 (79) - - 4,257 (79)
Residential mortgage-backed securities 300,767 (1,202) 5,533 (31) 306,300 (1,233)
Total temporarily impaired securities $ 372,833 (1,460) 7,456 (111) 380,289 (1,571)
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The Company does not believe that the available-for-sale debt securities that were in an unrealized loss position as of December 31, 2021, which were comprised of 245 individual securities, represents a credit loss impairment. All of these securities were issued by U.S. government agencies or U.S. government-sponsored agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The unrealized losses were primarily attributable to changes in the interest rate environment and not due to the credit quality of these investment securities. The Company does not have the intent to sell these investment securities and it is likely that we will not be required to sell these securities before their anticipated recovery, which may be at maturity.
All of the Company’s held-to-maturity securities are issued by U.S. government-sponsored agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. Therefore, the Company did not record an allowance for credit losses for these securities as of December 31, 2021.
The following table presents the credit quality for our held-to-maturity securities, based on the latest information available as of December 31, 2021. The credit ratings are sourced from nationally recognized rating agencies, including Moody’s and S&P, or when credit ratings cannot be sourced from the agencies, they are presented based on asset type. All of our held-to-maturity securities were current in their payment of principal and interest as of December 31, 2021.
AA+ Total
Held-to-maturity securities:
Debt issued by the U.S. government-sponsored agencies $ 124,451 124,451
Residential mortgage-backed securities 643,703 643,703
Total marketable securities held-to-maturity $ 768,154 768,154
(5) Loans Receivable
On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments” using the modified retrospective transition approach. As a result, the Company was not required to adjust its comparative period financial information for effects of the standard or make the new required ASC 326 disclosures for periods before the date of adoption (i.e., January 1, 2020).
The following table shows a summary of our loans receivable at amortized cost basis at December 31, 2021 and December 31, 2020 (in thousands):
December 31, 2021 December 31, 2020
Originated Acquired Total Originated Acquired Total
Personal Banking:
Residential mortgage loans (1) $ 2,783,459 211,161 2,994,620 2,753,593 314,528 3,068,121
Home equity loans 1,107,202 212,729 1,319,931 1,175,703 292,033 1,467,736
Vehicle loans 1,384,246 99,985 1,484,231 995,040 157,633 1,152,673
Consumer loans 307,961 46,556 354,517 288,066 67,254 355,320
Total Personal Banking 5,582,868 570,431 6,153,299 5,212,402 831,448 6,043,850
Commercial Banking:
Commercial real estate loans 2,202,027 423,454 2,625,481 2,223,108 624,873 2,847,981
Commercial real estate loans - owner occupied 321,253 68,750 390,003 344,016 153,892 497,908
Commercial loans 765,877 81,732 847,609 1,019,482 171,628 1,191,110
Total Commercial Banking 3,289,157 573,936 3,863,093 3,586,606 950,393 4,536,999
Total loans receivable, gross 8,872,025 1,144,367 10,016,392 8,799,008 1,781,841 10,580,849
Allowance for credit losses (86,750) (15,491) (102,241) (102,874) (31,553) (134,427)
Total loans receivable, net (2) $ 8,785,275 1,128,876 9,914,151 8,696,134 1,750,288 10,446,422
(1)Includes $25.1 million and $58.8 million of loans held-for-sale at December 31, 2021 and December 31, 2020, respectively.
(2)Includes $62.8 million and $40.9 million of net unearned income, unamortized premiums and discounts and deferred fees and costs at December 31, 2021 and December 31, 2020, respectively.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
As of December 31, 2021, 2020, and 2019, we serviced loans for others approximating $1.622 billion, $1.516 billion, and $793.1 million, respectively. These loans serviced for others are not our assets and are not included in our financial statements.
As of December 31, 2021 and 2020, approximately 41% and 42%, respectively, of our loan portfolio was secured by properties located in Pennsylvania. We do not believe we have significant concentrations of credit risk to any one group of borrowers given our underwriting and collateral requirements.
Loans receivable as of December 31, 2021 and 2020 include $3.277 billion and $3.690 billion, respectively, of adjustable rate loans and $6.739 billion and $6.840 billion, respectively, of fixed rate loans.
The following table provides information related to the allowance for credit losses by portfolio segment and by class of financing receivable for the year ended December 31, 2021 (in thousands):
Balance as of December 31, 2021 Current
period provision Charge-offs Recoveries Balance as of December 31, 2020
Allowance for Credit Losses
Personal Banking:
Residential mortgage loans $ 7,373 2,844 (3,672) 935 7,266
Home equity loans 5,300 1,788 (3,380) 900 5,992
Vehicle loans 15,483 2,754 (4,632) 2,536 14,825
Consumer loans 2,884 3,070 (5,417) 2,360 2,871
Total Personal Banking 31,040 10,456 (17,101) 6,731 30,954
Commercial Banking:
Commercial real estate loans 54,141 (15,496) (11,933) 2,189 79,381
Commercial real estate loans - owner occupied 3,883 (5,852) (890) 107 10,518
Commercial loans 13,177 (991) (4,213) 4,807 13,574
Total Commercial Banking 71,201 (22,339) (17,036) 7,103 103,473
Total $ 102,241 (11,883) (34,137) 13,834 134,427
Allowance for Credit Losses -
off-balance-sheet exposure
Personal Banking:
Residential mortgage loans $ 2 - - - 2
Home equity loans 39 4 - - 35
Total Personal Banking 41 4 - - 37
Commercial Banking:
Commercial real estate loans 881 (2,568) - - 3,449
Commercial real estate loans - owner occupied 142 (184) - - 326
Commercial loans 1,394 (1,157) - - 2,551
Total Commercial Banking 2,417 (3,909) - - 6,326
Total off-balance-sheet exposure $ 2,458 (3,905) - - 6,363
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table provides information related to the allowance for credit losses by portfolio segment and by class of financing receivable for the year ended December 31, 2020 and includes the cumulative effect of adopting ASU 2016-13 (in thousands):
Balance as of December 31, 2020 Current
period provision Charge-offs Recoveries Initial ACL
on loans purchased with credit deterioration Cumulative effect of ASU 2016-13* Balance as of December 31, 2019
Allowance for Credit Losses
Personal Banking:
Residential mortgage loans $ 7,266 (3,289) (917) 362 1,095 7,441 2,574
Home equity loans 5,992 (3,357) (608) 766 216 5,786 3,189
Vehicle loans 14,825 11,416 (6,827) 1,867 235 842 7,292
Consumer loans 2,871 4,126 (5,831) 1,542 157 (2,424) 5,301
Total Personal Banking 30,954 8,896 (14,183) 4,537 1,703 11,645 18,356
Commercial Banking:
Commercial real estate loans 79,381 58,483 (4,240) 1,287 5,720 2,288 15,843
Commercial real estate loans - owner occupied 10,518 2,588 (83) 27 963 1,278 5,745
Commercial loans 13,574 14,008 (16,212) 1,741 459 (4,419) 17,997
Total Commercial Banking 103,473 75,079 (20,535) 3,055 7,142 (853) 39,585
Total $ 134,427 83,975 (34,718) 7,592 8,845 10,792 57,941
Allowance for Credit Losses -
off-balance-sheet exposure
Personal Banking:
Residential mortgage loans $ 2 2 - - - - -
Home equity loans 35 5 - - - (293) 323
Consumer loans - - - - - (402) 402
Total Personal Banking 37 7 - - - (695) 725
Commercial Banking:
Commercial real estate loans 3,449 1,438 - - - 1,934 77
Commercial real estate loans - owner occupied 326 235 - - - 88 3
Commercial loans 2,551 1,459 - - - 923 169
Total Commercial Banking 6,326 3,132 - - - 2,945 249
Total off-balance-sheet exposure $ 6,363 3,139 - - - 2,250 974
* Includes the impact of the initial allowance on PCD loans of $517,000.
During the year ended December 31, 2020, we sold $50.0 million of loans that were classified as held-for-investment, for a gain of $1.3 million, which is reported in gain on sale of loans on the Consolidated Statements of Income.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table provides information related to the allowance for credit losses by portfolio segment and by class of financing receivable for the year ended December 31, 2019, prior to the adoption of ASU 2016-13 (in thousands):
Balance as of December 31, 2019 Current
period provision Charge-offs Recoveries Balance as of December 31, 2018
Originated loans
Personal Banking:
Residential mortgage loans $ 2,463 (1,089) (935) 433 4,054
Home equity loans 2,830 46 (619) 219 3,184
Consumer loans 12,055 10,025 (11,537) 2,487 11,080
Total Personal Banking 17,348 8,982 (13,091) 3,139 18,318
Commercial Banking:
Commercial real estate loans 17,292 (5,241) (5,078) 1,232 26,379
Commercial loans 16,799 12,449 (3,237) 533 7,054
Total Commercial Banking 34,091 7,208 (8,315) 1,765 33,433
Total originated loans 51,439 16,190 (21,406) 4,904 51,751
Acquired loans
Personal Banking:
Residential mortgage loans 111 184 (231) 75 83
Home equity loans 359 322 (502) 191 348
Consumer loans 538 156 (270) 233 419
Total Personal Banking 1,008 662 (1,003) 499 850
Commercial Banking:
Commercial real estate loans 4,296 2,092 (389) 597 1,996
Commercial loans 1,198 3,715 (3,414) 280 617
Total Commercial Banking 5,494 5,807 (3,803) 877 2,613
Total acquired loans 6,502 6,469 (4,806) 1,376 3,463
Total $ 57,941 22,659 (26,212) 6,280 55,214
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at December 31, 2021 (in thousands):
Total loans
receivable Allowance for
credit losses Nonaccrual
loans (1) Loans 90 days past due and accruing TDRs Allowance
related to
TDRs Additional
commitments
to customers
with loans
classified as
TDRs
Personal Banking:
Residential mortgage loans $ 2,994,620 7,373 10,402 - 6,749 1,442 -
Home equity loans 1,319,931 5,300 5,758 - 1,781 718 -
Vehicle loans 1,484,231 15,483 3,263 - - - -
Consumer loans 354,517 2,884 675 331 - - -
Total Personal Banking 6,153,299 31,040 20,098 331 8,530 2,160 -
Commercial Banking:
Commercial real estate loans 2,625,481 54,141 129,666 - 17,025 2,024 400
Commercial real estate loans - owner occupied 390,003 3,883 1,233 - 159 24 -
Commercial loans 847,609 13,177 7,474 - 4,574 609 60
Total Commercial Banking 3,863,093 71,201 138,373 - 21,758 2,657 460
Total $ 10,016,392 102,241 158,471 331 30,288 4,817 460
(1)Includes $17.2 million of nonaccrual TDRs.
The following table provides information related to the loan portfolio by portfolio segment and by class of financing receivable at December 31, 2020 (in thousands):
Total loans
receivable Allowance for
credit losses Nonaccrual
loans (1) Loans 90 days past due and accruing TDRs Allowance
related to
TDRs Additional
commitments
to customers
with loans
classified as
TDRs
Personal Banking:
Residential mortgage loans $ 3,068,121 7,266 15,924 - 8,431 560 -
Home equity loans 1,467,736 5,992 9,123 - 2,058 381 26
Vehicle loans 1,152,673 14,825 5,533 1 - - -
Consumer loans 355,320 2,871 1,031 584 1 - -
Total Personal Banking 6,043,850 30,954 31,611 585 10,490 941 26
Commercial Banking:
Commercial real estate loans 2,847,981 79,381 44,092 - 18,430 787 471
Commercial real estate loans - owner occupied 497,908 10,518 3,642 - 761 123 -
Commercial loans 1,191,110 13,574 23,487 - 2,454 165 362
Total Commercial Banking 4,536,999 103,473 71,221 - 21,645 1,075 833
Total $ 10,580,849 134,427 102,832 585 32,135 2,016 859
(1)Includes $10.7 million of nonaccrual TDRs.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table presents the amortized cost of our loans on nonaccrual status as of the beginning and end of the year ended December 31, 2021 (in thousands):
Nonaccrual
loans at
January 1, 2021 December 31, 2021
Nonaccrual loans
with an allowance Nonaccrual
loans with
no allowance Total Nonaccrual
loans at the end of the period Loans 90 days
past due
and accruing
Personal Banking:
Residential mortgage loans $ 15,924 10,402 - 10,402 -
Home equity loans 9,123 5,551 207 5,758 -
Vehicle loans 5,533 3,251 12 3,263 -
Consumer loans 1,031 674 1 675 331
Total Personal Banking 31,611 19,878 220 20,098 331
Commercial Banking:
Commercial real estate loans 44,092 65,529 64,137 129,666 -
Commercial real estate loans - owner occupied 3,642 1,233 - 1,233 -
Commercial loans 23,487 3,941 3,533 7,474 -
Total Commercial Banking 71,221 70,703 67,670 138,373 -
Total $ 102,832 90,581 67,890 158,471 331
During the year ended December 31, 2021, we recognized $803,000 of interest income on nonaccrual and troubled debt restructuring loans.
The following table presents the amortized cost of our loans on nonaccrual status as of the beginning and end of the year ended December 31, 2020, (in thousands):
Nonaccrual loans at January 1, 2020 December 31, 2020
Nonaccrual loans with an allowance Nonaccrual loans with no allowance Total Nonaccrual
loans at the end of the period Loans 90 days past and accruing
Personal Banking:
Residential mortgage loans $ 14,476 15,924 - 15,924 -
Home equity loans 6,745 8,871 252 9,123 -
Vehicle loans 3,147 5,377 156 5,533 1
Consumer loans 1,079 1,030 1 1,031 584
Total Personal Banking 25,447 31,202 409 31,611 585
Commercial Banking:
Commercial real estate loans 18,832 27,079 17,013 44,092 -
Commercial real estate loans - owner occupied 16,032 3,642 - 3,642 -
Commercial loans 8,559 18,069 5,418 23,487 -
Total Commercial Banking 43,423 48,790 22,431 71,221 -
Total $ 68,870 79,992 22,840 102,832 585
During the year ended December 31, 2020, we recognized $842,000 of interest income on nonaccrual and troubled debt restructuring loans.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2021 (in thousands):
Real estate Equipment Other Total
Personal Banking:
Residential mortgage loans
$ 580 - - 580
Home equity loans
99 - - 99
Total Personal Banking 679 - - 679
Commercial Banking:
Commercial real estate loans 119,825 1,705 - 121,530
Commercial loans 3,973 1,926 - 5,899
Total Commercial Banking 123,798 3,631 - 127,429
Total $ 124,477 3,631 - 128,108
The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2020 (in thousands):
Real estate Equipment Other Total
Personal Banking:
Residential mortgage loans
$ 1,269 - - 1,269
Home equity loans
99 - - 99
Total Personal Banking 1,368 - - 1,368
Commercial Banking:
Commercial real estate loans
79,392 1,997 1,703 83,092
Commercial loans
3,313 197 11,069 14,579
Total Commercial Banking 82,705 2,194 12,772 97,671
Total $ 84,073 2,194 12,772 99,039
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Our loan portfolios include loans that have been modified in a TDR, where concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include: extending the note’s maturity date, permitting interest only payments, reducing the interest rate to a rate lower than current market rates for new debt with similar risk, reducing the principal payment, principal forbearance or other actions. These concessions are applicable to all loan segments and classes. Certain TDRs are classified as nonperforming at the time of restructuring and may be returned to performing status after considering the borrower’s sustained repayment performance for a period of at least six months.
When we modify loans in a TDR, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, the loan’s observable market price or the current fair value of the collateral, less selling costs, for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premiums or discounts), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment in accordance with ASC 310-10. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan.
Loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, we evaluate the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, partial charge-offs may be taken to further write-down the carrying value of the loan, or the loan may be charged-off completely.
In March 2020 and August 2020, joint statements were issued by federal and state regulatory agencies, after consultation with the FASB, to clarify that short-term loan modifications are not TDRs if made on a good-faith basis in response to COVID-19 to borrowers who were current prior to any relief. Under this guidance, six months is provided as an example of short-term, and current is defined as less than 30 days past due at the time the modification program is implemented. The guidance also provides that these modified loans generally will not be classified as nonaccrual during the term of the modification. For borrowers who are 30 days or more past due when enrolling in a loan modification program related to the COVID-19 pandemic, we evaluate the loan modifications under our existing TDR framework, and where such a loan modification would result in a concession to a borrower experiencing financial difficulty, the loan will be accounted for as a TDR and will generally not accrue interest.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table provides a roll forward of troubled debt restructurings for the periods indicated (dollars in thousands):
For the years ended December 31,
2021 2020
Number of
contracts Amount Number of
contracts Amount
Beginning TDR balance: 170 $ 32,135 176 $ 31,999
New TDRs 9 7,253 14 1,497
Re-modified TDRs 9 7,370 5 9,693
Net paydowns - (3,420) - (9,806)
Charge-offs:
Residential mortgage loans - - - -
Home equity loans 1 (29) 1 (10)
Vehicle loans - - - -
Commercial real estate loans 2 (53) - -
Commercial real estate loans - owner occupied 1 (105) - -
Commercial loans 6 (170) - -
Paid-off loans:
Residential mortgage loans 10 (1,216) 2 (330)
Home equity loans 6 (147) 5 (44)
Vehicle loans - - - -
Commercial real estate loans 11 (3,064) 3 (321)
Commercial real estate loans - owner occupied 3 (198) 2 (324)
Commercial loans 5 (698) 7 (219)
Ending TDR balance: 134 $ 30,288 170 $ 32,135
Accruing TDRs $ 13,072 $ 21,431
Nonaccrual TDRs 17,216 10,704
The following tables provide information related to TDRs (including re-modified TDRs) by portfolio segment and by class of financing receivable during the periods indicated (in thousands):
For the year ended December 31, 2021
Number of
contracts Recorded
investment
at the time of
modification Current
recorded
investment Current
allowance
Personal Banking:
Residential mortgage loans 1 $ 125 114 15
Home equity loans 3 155 34 34
Total Personal Banking 4 280 148 49
Commercial Banking:
Commercial real estate loans 8 12,006 10,572 1,453
Commercial loans 6 4,147 3,903 451
Total Commercial Banking 14 16,153 14,475 1,904
Total 18 $ 16,433 14,623 1,953
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
For the year ended December 31, 2020
Number of
contracts Recorded
investment
at the time of
modification Current
recorded
investment Current
allowance
Personal Banking:
Residential mortgage loans 1 $ 90 88 5
Home equity loans 2 86 79 9
Total Personal Banking 3 176 167 14
Commercial Banking:
Commercial real estate loans 9 7,365 7,615 311
Commercial real estate loans - owner occupied 1 58 48 8
Commercial loans 5 2,944 408 40
Total Commercial Banking 15 10,367 8,071 359
Total 18 $ 10,543 8,238 373
For the year ended December 31, 2019
Number of
contracts Recorded
investment
at the time of
modification Current
recorded
investment Current
allowance
Personal Banking:
Residential mortgage loans 3 $ 297 297 19
Home equity loans 5 171 165 12
Total Personal Banking 8 468 462 31
Commercial Banking:
Commercial real estate loans 10 8,333 7,369 613
Commercial loans 4 221 192 21
Total Commercial Banking 14 8,554 7,561 634
Total 22 $ 9,022 8,023 665
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table provides information as of December 31, 2021 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the year ended December 31, 2021 (in thousands):
Type of modification
Number of contracts Rate Payment Maturity date Other Total
Personal Banking:
Residential mortgage loans
1 $ 114 - - - 114
Home equity loans
3 - 30 4 - 34
Total Personal Banking 4 114 30 4 - 148
Commercial Banking:
Commercial real estate loans
8 2,077 - 8,424 71 10,572
Commercial loans
6 171 - 3,732 - 3,903
Total Commercial Banking 14 2,248 - 12,156 71 14,475
Total 18 $ 2,362 30 12,160 71 14,623
The following table provides information as of December 31, 2020 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the year ended December 31, 2020 (in thousands):
Type of modification
Number of contracts Rate Payment Maturity date Other Total
Personal Banking:
Residential mortgage loans
1 $ - - 88 - 88
Home equity loans
2 65 - 14 - 79
Total Personal Banking 3 65 - 102 - 167
Commercial Banking:
Commercial real estate loans
9 - - 7,335 280 7,615
Commercial real estate loans - owner occupied 1 - - 48 - 48
Commercial loans
5 - 111 217 80 408
Total Commercial Banking 15 - 111 7,600 360 8,071
Total 18 $ 65 111 7,702 360 8,238
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table provides information as of December 31, 2019 for TDRs (including re-modified TDRs) by type of modification, by portfolio segment and class of financing receivable for modifications during the year ended December 31, 2019 (in thousands):
Type of modification
Number of contracts Rate Payment Maturity date Other Total
Personal Banking:
Residential mortgage loans
3 $ - - 297 - 297
Home equity loans
5 109 - 56 - 165
Total Personal Banking 8 109 - 353 - 462
Commercial Banking:
Commercial real estate loans
10 - 2,541 4,828 - 7,369
Commercial loans
4 37 - 155 - 192
Total Commercial Banking 14 37 2,541 4,983 - 7,561
Total 22 $ 146 2,541 5,336 - 8,023
The following table provides information related to re-modified trouble debt restructurings by portfolio segment and class of financing receivable for modifications during the year ended December 31, 2021 (in thousands):
Type of re-modification
Number of
re-modified TDRs Rate Payment Maturity date Other Total
Personal Banking:
Residential mortgage loans
1 $ 114 - - - 114
Home equity loans
1 - - - - -
Total Personal Banking 2 114 - - - 114
Commercial Banking:
Commercial real estate loans
7 2,077 - 5,108 71 7,256
Total Commercial Banking 7 2,077 - 5,108 71 7,256
Total 9 $ 2,191 - 5,108 71 7,370
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table provides information related to re-modified trouble debt restructurings by portfolio segment and class of financing receivable for modifications during the year ended December 31, 2020 (in thousands):
Type of re-modification
Number of
re-modified TDRs Rate Payment Maturity date Other Total
Personal Banking:
Residential mortgage loans
- $ - - - - -
Home equity loans
- - - - - -
Total Personal Banking - - - - - -
Commercial Banking:
Commercial real estate loans
3 - - 6,652 - 6,652
Commercial real estate loans - owner occupied 1 48 48
Commercial loans
1 - - - 80 80
Total Commercial Banking 5 - - 6,700 80 6,780
Total 5 $ - - 6,700 80 6,780
The following table provides information related to re-modified trouble debt restructurings by portfolio segment and class of financing receivable for modifications during the year ended December 31, 2019 (in thousands):
Type of re-modification
Number of
re-modified TDRs Rate Payment Maturity date Other Total
Personal Banking:
Residential mortgage loans
- $ - - - - -
Home equity loans
- - - - - -
Total Personal Banking - - - - - -
Commercial Banking:
Commercial real estate loans
7 - 219 4,448 - 4,667
Commercial loans
1 - - 38 - 38
Total Commercial Banking 8 - 219 4,486 - 4,705
Total 8 $ - 219 4,486 - 4,705
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table provides information related to troubled debt restructurings modified within the previous twelve months
of December 31, 2021 that subsequently defaulted:
Number of
contracts Recorded
investment
at the time of
modification Current
recorded
investment Current
allowance
Commercial Banking:
Commercial real estate loans 1 $ 4,167 3,823 -
Total Commercial Banking 1 4,167 3,823 -
Total 1 $ 4,167 3,823 -
No TDRs modified within the previous twelve months of December 31, 2020 or December 31, 2019 subsequently defaulted.
The following table provides information related to the amortized cost basis of loan payment delinquencies at December 31, 2021 (in thousands):
30-59 days
delinquent 60-89 days
delinquent 90 days or
greater
delinquent Total
delinquency Current Total loans
receivable 90 days or
greater
delinquent
and accruing
Personal Banking:
Residential mortgage loans
$ 20,567 5,433 7,641 33,641 2,960,979 2,994,620 -
Home equity loans
3,153 949 4,262 8,364 1,311,567 1,319,931 -
Vehicle loans
5,331 1,487 1,635 8,453 1,475,778 1,484,231 -
Consumer loans
1,205 519 765 2,489 352,028 354,517 331
Total Personal Banking 30,256 8,388 14,303 52,947 6,100,352 6,153,299 331
Commercial Banking:
Commercial real estate loans
16,938 699 23,489 41,126 2,584,355 2,625,481 -
Commercial real estate loans - owner occupied
127 70 574 771 389,232 390,003 -
Commercial loans
193 727 1,105 2,025 845,584 847,609 -
Total Commercial Banking 17,258 1,496 25,168 43,922 3,819,171 3,863,093 -
Total loans $ 47,514 9,884 39,471 96,869 9,919,523 10,016,392 331
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table provides information related to the amortized cost basis loan payment delinquencies at December 31, 2020 (in thousands):
30-59 days
delinquent 60-89 days
delinquent 90 days or
greater
delinquent Total
delinquency Current Total loans
receivable 90 days or
greater
delinquent
and accruing
Personal Banking:
Residential mortgage loans $ 28,797 5,083 14,489 48,369 3,019,752 3,068,121 -
Home equity loans 4,763 1,656 8,441 14,860 1,452,876 1,467,736 -
Vehicle loans 7,707 1,776 4,599 14,082 1,138,592 1,152,674 1
Consumer loans 2,867 966 1,459 5,292 350,027 355,319 584
Total Personal Banking 44,134 9,481 28,988 82,603 5,961,247 6,043,850 585
Commercial Banking:
Commercial real estate loans
6,692 1,615 23,307 31,614 2,816,366 2,847,980 -
Commercial real estate loans - owner occupied 4,231 - 1,980 6,211 491,698 497,909 -
Commercial loans 6,405 864 7,325 14,594 1,176,516 1,191,110 -
Total Commercial Banking 17,328 2,479 32,612 52,419 4,484,580 4,536,999 -
Total loans $ 61,462 11,960 61,600 135,022 10,445,827 10,580,849 585
Credit Quality Indicators: For Commercial Banking loans we categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans by credit risk. Credit relationships greater than or equal to $1.0 million classified as special mention or substandard are reviewed quarterly for deterioration or improvement to determine if the loan is appropriately classified. We use the following definitions for risk ratings other than pass:
Special Mention - Loans designated as special mention have specific, well-defined risk issues, which create a high level of uncertainty regarding the long-term viability of the business. Loans in this class are considered to have high-risk characteristics. A special mention loan exhibits material negative financial trends due to company-specific or systemic conditions. If these potential weaknesses are not mitigated, they threaten the borrower’s capacity to meet its debt obligations. Special mention loans still demonstrate sufficient financial flexibility to react to and positively address the root cause of the adverse financial trends without significant deviations from their current business strategy. Their potential weaknesses deserve our close attention and warrant enhanced monitoring.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard. In addition, those weaknesses make collection or liquidation in full highly questionable and improbable. A loan classified as doubtful exhibits discernible loss potential, but a complete loss seems very unlikely. The possibility of a loss on a doubtful loan is high, but because of certain important and reasonably specific pending factors that may strengthen the loan, its classification as an estimated loss is deferred until a more exact status can be determined.
Loss - Loans classified as loss are considered uncollectible and of such value that the continuance as a loan is not warranted. A loss classification does not mean that the loan has no recovery or salvage value; instead, it means that it is not practical or desirable to defer writing off all or a portion of a basically worthless loan even though partial recovery may be possible in the future.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
For Personal Banking loans a pass risk rating is maintained until they are greater than 90 days past due, and risk rating reclassification is based primarily on past due status of the loan. The risk rating categories can generally be described by the following groupings:
Pass - Loans classified as pass are homogeneous loans that are less than 90 days past due from the required payment date at month-end.
Substandard - Loans classified as substandard are homogeneous loans that are greater than 90 days past due from the required payment date at month-end, loans classified as TDRs, or homogenous retail loans that are greater than 180 days past due from the requirement payment date at month-end that has been written down to the value of underlying collateral, less costs to sell.
Doubtful - Loans classified as doubtful are homogeneous loans that are greater than 180 days past due from the required payment date at month-end and not written down to the value of underlying collateral. These loans are generally charged-off in the month in which the 180 day period elapses.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Based on the most recent analysis performed, the amortized cost basis by risk category of loans by class of loans by origination year is as follows as of December 31, 2021 (in thousands):
2021 2020 2019 2018 2017 Prior Revolving loans Revolving loans converted to term loans Total loans
receivable
Personal Banking:
Residential mortgage loans
Pass $ 644,862 602,429 304,275 156,639 171,240 1,098,635 - - 2,978,080
Substandard 138 489 377 538 882 14,116 - - 16,540
Total residential mortgage loans 645,000 602,918 304,652 157,177 172,122 1,112,751 - - 2,994,620
Home equity loans
Pass 150,847 210,224 138,661 65,011 61,692 209,959 435,660 40,766 1,312,820
Substandard - - 441 60 455 3,820 1,275 1,060 7,111
Total home equity loans 150,847 210,224 139,102 65,071 62,147 213,779 436,935 41,826 1,319,931
Vehicle loans
Pass 801,084 292,804 205,653 119,304 34,546 27,576 - - 1,480,967
Substandard 387 365 1,141 745 379 247 - - 3,264
Total vehicle loans 801,471 293,169 206,794 120,049 34,925 27,823 - - 1,484,231
Consumer loans
Pass 117,856 81,266 47,195 20,595 9,794 12,202 63,025 1,578 353,511
Substandard 213 161 105 64 26 50 357 30 1,006
Total consumer loans 118,069 81,427 47,300 20,659 9,820 12,252 63,382 1,608 354,517
Total Personal Banking 1,715,387 1,187,738 697,848 362,956 279,014 1,366,605 500,317 43,434 6,153,299
Business Banking:
Commercial real estate loans
Pass 306,689 433,219 335,541 263,524 221,450 683,537 26,288 10,179 2,280,427
Special Mention 803 1,808 52,513 3,296 1,394 8,529 729 23 69,095
Substandard - 34,153 44,712 46,045 56,077 89,311 492 5,169 275,959
Total commercial real estate loans 307,492 469,180 432,766 312,865 278,921 781,377 27,509 15,371 2,625,481
Commercial real estate loans - owner occupied
Pass 69,084 19,452 51,997 60,824 57,676 94,687 2,822 2,707 359,249
Special Mention - - - 769 1,959 1,444 856 - 5,028
Substandard - - 3,575 2,887 7,840 10,602 - 822 25,726
Total commercial real estate loans - owner occupied 69,084 19,452 55,572 64,480 67,475 106,733 3,678 3,529 390,003
Commercial loans
Pass 224,367 110,171 73,276 27,668 20,748 76,987 262,805 12,301 808,323
Special Mention 197 661 812 1,195 50 581 2,234 - 5,730
Substandard 329 4,767 5,102 4,437 1,529 2,116 6,667 8,609 33,556
Total commercial loans 224,893 115,599 79,190 33,300 22,327 79,684 271,706 20,910 847,609
Total Business Banking 601,469 604,231 567,528 410,645 368,723 967,794 302,893 39,810 3,863,093
Total loans $ 2,316,856 1,791,969 1,265,376 773,601 647,737 2,334,399 803,210 83,244 10,016,392
For the year ended December 31, 2021, $27.3 million of revolving loans were converted to term loans.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Based on the most recent analysis performed, the amortized cost basis by risk category of loans by class of loans by origination year is as follows as of December 31, 2020 (in thousands):
2020 2019 2018 2017 2016 Prior Revolving loans Revolving loans converted to term loans Total loans receivable
Personal Banking:
Residential mortgage loans
Pass $ 641,963 418,057 229,477 247,426 215,893 1,289,728 - - 3,042,544
Substandard - 68 1,293 1,674 1,091 21,451 - - 25,577
Total residential mortgage loans 641,963 418,125 230,770 249,100 216,984 1,311,179 - - 3,068,121
Home equity loans
Pass 273,076 193,439 94,757 87,717 81,212 219,061 465,453 40,759 1,455,474
Substandard - 210 318 281 876 5,158 3,509 1,910 12,262
Total home equity loans 273,076 193,649 95,075 87,998 82,088 224,219 468,962 42,669 1,467,736
Vehicle loans
Pass 448,746 352,661 218,372 70,122 31,197 24,791 - - 1,145,889
Substandard 343 1,958 2,087 1,210 667 519 - - 6,784
Total vehicle loans 449,089 354,619 220,459 71,332 31,864 25,310 - - 1,152,673
Consumer loans
Pass 128,809 83,419 35,183 17,439 7,848 11,757 66,965 1,695 353,115
Substandard 133 399 139 192 36 619 686 1 2,205
Total consumer loans 128,942 83,818 35,322 17,631 7,884 12,376 67,651 1,696 355,320
Total Personal Banking 1,493,070 1,050,211 581,626 426,061 338,820 1,573,084 536,613 44,365 6,043,850
Business Banking:
Commercial real estate loans
Pass 417,390 473,115 316,045 264,702 195,168 709,459 36,980 29,755 2,442,614
Special Mention 584 3,381 20,180 24,675 15,424 15,817 597 3,048 83,706
Substandard 7,426 4,007 57,694 56,991 24,056 140,147 2,240 29,100 321,661
Total commercial real estate loans 425,400 480,503 393,919 346,368 234,648 865,423 39,817 61,903 2,847,981
Commercial real estate loans - owner occupied
Pass 24,895 67,162 87,497 71,626 46,760 100,081 4,422 7,648 410,091
Special Mention - 4,371 4,514 3,643 4,276 3,689 3,822 - 24,315
Substandard - 21,627 1,903 12,898 4,013 21,777 874 410 63,502
Total commercial real estate loans - owner occupied 24,895 93,160 93,914 88,167 55,049 125,547 9,118 8,058 497,908
Commercial loans
Pass 479,436 99,877 50,915 51,858 58,597 49,178 286,467 16,170 1,092,498
Special Mention 5,828 2,751 5,579 4,588 162 190 16,512 5,668 41,278
Substandard 1,660 3,343 2,932 2,016 2,266 3,003 27,988 14,126 57,334
Total commercial loans 486,924 105,971 59,426 58,462 61,025 52,371 330,967 35,964 1,191,110
Total Business Banking 937,219 679,634 547,259 492,997 350,722 1,043,341 379,902 105,925 4,536,999
Total loans $ 2,430,289 1,729,845 1,128,885 919,058 689,542 2,616,425 916,515 150,290 10,580,849
For the year ended December 31, 2020, $23.1 million of revolving loans were converted to term loans.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Our exposure to credit loss in the event of nonperformance by the other party to off-balance-sheet financial instruments is represented by the contract amount of the financial instrument. We use the same credit policies in making commitments for off- balance-sheet financial instruments as we do for on-balance-sheet instruments. Financial instruments with off-balance-sheet risk as of December 31, 2021 and 2020 are presented in the following table:
Years ended December 31,
2021 2020
Loans commitments $ 355,682 251,145
Undisbursed lines of credit 1,054,184 1,044,824
Standby letters of credit 45,521 45,137
Total $ 1,455,387 1,341,106
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral we obtain upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral held varies but generally may include cash, marketable securities, real estate and other property.
Outstanding loan commitments at December 31, 2021 for fixed rate loans were $185.3 million. The interest rates on these commitments approximate market rates at December 31, 2021. Outstanding loan commitments at December 31, 2021 for adjustable rate loans were $150.3 million. The fair values of these commitments are affected by fluctuations in market rates of interest.
We issue standby letters of credit in the normal course of business. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. We are required to perform under a standby letter of credit when drawn upon by the guaranteed third party in the case of nonperformance by our customer. The credit risk associated with standby letters of credit is essentially the same as that involved in extending loans to customers and is subject to normal credit policies. Collateral may be obtained based on management’s credit assessment of the customer. As of December 31, 2021, the maximum potential amount of future payments we could be required to make under these standby letters of credit is $45.5 million, of which $35.8 million is fully collateralized. A liability (which represents deferred income) of $500,000 and $493,000 has been recognized for the obligations as of December 31, 2021 and 2020, respectively, and there are no recourse provisions that would enable us to recover any amounts from third parties.
Mortgage servicing assets are recognized as separate assets when servicing rights are created through loan originations and the underlying loan is sold. Upon sale, the mortgage servicing right (“MSR”) is established, which represents the then-fair value of future net cash flows expected to be realized for performing the servicing activities. The fair value of the MSRs are estimated by calculating the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. In determining the fair value of the MSRs, stochastic modeling is performed using variables such as the forward yield curve, prepayment rates, annual service cost, average life expectancy and option adjusted spreads. MSRs are amortized against mortgage banking income in proportion to, and over the period of, the estimated future net servicing income of the underlying mortgage loans. MSRs are recorded in other assets on the Consolidated Statement of Financial Condition.
Capitalized MSRs are evaluated quarterly for impairment based on the estimated fair value of those rights. The MSRs are stratified by certain risk characteristics, primarily loan term and note rate. If impairment exists within a risk stratification tranche, a valuation allowance is established through a charge to income equal to the amount by which the carrying value exceeds the fair value. If it is later determined all or a portion of the temporary impairment no longer exists for a particular tranche, the valuation allowance is reduced or eliminated. We do not directly hedge against realized or potential future impairment losses on our MSRs.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table shows changes in MSRs as of and for the years ended December 31, 2021 and 2020:
Servicing rights Valuation allowance Net carrying
value and fair value
Balance at December 31, 2019
$ 1,848 (1) 1,847
Additions 9,549 (491) 9,058
Amortization (2,740) - (2,740)
Balance at December 31, 2020
8,657 (492) 8,165
Additions 4,604 481 5,085
Amortization (3,095) - (3,095)
Balance at December 31, 2021
$ 10,166 (11) 10,155
(6) Accrued Interest Receivable
Accrued interest receivable as of December 31, 2021 and 2020 is presented in the following table:
December 31,
2021 2020
Investment securities $ 1,591 1,660
FHLB dividends 89 197
Mortgage-backed securities 2,589 2,031
Loans receivable 21,330 31,666
$ 25,599 35,554
(7) FHLB Stock
Northwest Bank is a member of the FHLB of Pittsburgh and FHLB of Indianapolis. As a member of the FHLB of Pittsburgh, we are required to maintain an investment in the capital stock of the FHLB of Pittsburgh in accordance with their 2015 Capital Plan, at cost, in two subclasses based on the following ranges: Membership stock purchase (Subclass B-1) ranging from 0.05% to 1.0% of the member asset value as defined by the FHLB, currently at 0.10%; and Activity-based stock purchase (Subclass B-2) ranging from 2.0% to 6.0% of outstanding advances, currently at 4.0%; 0.0% to 6.0% of acquired member assets, currently at 4.0%; 0.0% to 4.0% of certain letters of credit, currently at 0.75%; and 0.0% to 6.0% of outstanding advance commitments settling more than 30 days after trade, currently at 0.0%.
As a member of the FHLB of Indianapolis, we are required to maintain an investment in the capital stock of the FHLB of Indianapolis in accordance with their capital plan that became effective on September 26, 2020. This plan requires the Company to invest in two subclasses based on the following ranges: Membership stock requirements (B-1 stock) ranging from 0.01% to 0.50% of the member asset value as defined by the FHLB, currently at 0.10%; and Activity-based stock requirements (B-2 stock) ranging from 1.0% to 6.0% of advances, currently at 4.5%; 1.0% to 6.0% for lines of credit, currently at 4.5%; 0.10% to 6.0% for letters of credit, currently at 0.10%; 1.0% to 6.0% of derivative contracts, currently at 4.5%; 0.0% to 6.0% for the mandatory Mortgage Purchase Program (“MPP”), currently at 0.0%; 0.0% to 6.0% for the optional MPP, currently at 4.5%; and 1.0% to 6.0% for Community Investment Program (“CIP”) advances, currently at 4.5%.
Our investment in the capital stock of the FHLB of Pittsburgh at December 31, 2021 and December 31, 2020 was $10.4 million and $8.6 million, respectively. In addition, our investment of capital stock of the FHLB of Indianapolis at December 31, 2021 was $3.8 million and $13.1 million at December 31, 2020. We received dividends on capital stock during the years ended December 31, 2021 and 2020 of $407,000 and $981,000, respectively. Future dividends may be established at different rates for the two subclasses of capital stock.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
(8) Premises and Equipment
Premises and equipment at December 31, 2021 and 2020 are summarized by major classification in the following table:
December 31,
2021 2020
Land and land improvements $ 25,449 26,878
Office buildings and improvements 152,654 154,439
Furniture, fixtures and equipment 138,242 134,821
Leasehold improvements 20,288 18,845
Total, at cost 336,633 334,983
Less accumulated depreciation and amortization (180,109) (173,445)
Premises and equipment, net $ 156,524 161,538
Depreciation and amortization expense for the years ended December 31, 2021, 2020 and 2019 was $12.1 million, $11.9 million and $11.7 million, respectively.
(9) Goodwill and Other Intangible Assets
The following table provides information for intangible assets subject to amortization for the years ended December 31, 2021 and 2020:
December 31,
2021 2020
Amortizable intangible assets:
Core deposit intangibles - gross $ 74,899 71,182
Acquisitions - 3,717
Less: accumulated amortization (62,158) (56,896)
Core deposit intangibles - net $ 12,741 18,003
Customer and Contract intangible assets - gross $ 12,775 12,775
Customer list intangible assets disposed of due to sale of insurance business (1,547) -
Less: accumulated amortization (11,133) (10,842)
Customer and Contract intangible assets - net 95 1,933
Total intangible assets - net $ 12,836 19,936
The following information shows the actual aggregate amortization expense for the years ended December 31, 2021, 2020 and 2019 as well as the estimated aggregate amortization expense, based upon current levels of intangible assets, for each of the five succeeding fiscal years:
For the year ended December 31, 2019 $ 6,543
For the year ended December 31, 2020 6,856
For the year ended December 31, 2021 5,553
For the year ending December 31, 2022 4,277
For the year ending December 31, 2023 3,270
For the year ending December 31, 2024 2,452
For the year ending December 31, 2025 1,662
For the year ending December 31, 2026 871
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table provides information for the changes in the carrying amount of goodwill:
Total
Balance at December 31, 2019 $ 346,103
Goodwill acquired 36,176
Balance at December 31, 2020 382,279
Purchase accounting adjustment 77
Goodwill disposed of due to sale of insurance business (1,359)
Balance at December 31, 2021 $ 380,997
We have determined that goodwill is not impaired as of December 31, 2021 and 2020. There were no events or changes in circumstances that would cause us to update that goodwill impairment test as of June 30, 2021 and 2020.
(10) Deposits
Deposit balances at December 31, 2021 and 2020 are shown in the table below:
December 31,
2021 2020
Noninterest-bearing demand deposits $ 3,099,526 2,716,224
Interest-bearing demand deposits 2,940,442 2,755,950
Money market deposit accounts 2,629,882 2,437,539
Savings deposits 2,303,760 2,047,424
Time deposits 1,327,555 1,642,096
Total deposits $ 12,301,165 11,599,233
The aggregate amount of time deposits with a minimum denomination of $100,000 at December 31, 2021 and 2020 was $439.5 million and $578.5 million, respectively.
Generally, deposits in excess of $250,000 are not federally insured. At December 31, 2021 and 2020, we had $4.194 billion and $3.744 billion of deposits in accounts exceeding $250,000, respectively.
The following table summarizes the contractual maturity of time deposits at December 31, 2021 and 2020:
December 31,
2021 2020
Due within 12 months $ 890,101 990,769
Due between 12 and 24 months 288,284 380,466
Due between 24 and 36 months 80,251 164,583
Due between 36 and 48 months 33,843 64,700
Due between 48 and 60 months 29,692 36,098
After 60 months 5,384 5,480
Total time deposits $ 1,327,555 1,642,096
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table summarizes the interest expense incurred on the respective deposits for the years ended December 31, 2021, 2020 and 2019:
Years ended December 31,
2021 2020 2019
Interest-bearing demand deposits $ 1,660 3,358 6,012
Money market deposit accounts 2,597 7,021 13,010
Savings deposits 2,413 2,614 3,115
Time deposits 12,452 22,903 27,079
Total interest expense on deposits $ 19,122 35,896 49,216
(11) Borrowed Funds
(a) Borrowings
Borrowed funds at December 31, 2021 and 2020 are presented in the following table:
December 31,
2021 2020
Amount Average rate Amount Average rate
Term notes payable to the FHLB:
Payable to the FHLB of Indianapolis acquired from MutualBank $ - - % $ 22,054 1.92 %
Total term notes payable to the FHLB - 22,054
Collateralized borrowings, due within one year 139,093 0.19 % 137,661 0.19 %
Total borrowed funds $ 139,093 $ 159,715
Borrowings from the Federal Home Loan Banks (“FHLB”) of Pittsburgh and Indianapolis, if any, are secured by our residential first mortgage and other qualifying loans. Certain of these borrowings are subject to restrictions or penalties in the event of prepayment. During the year ended December 31, 2021, $22.0 million of term notes payable to the FHLB of Indianapolis matured.
The revolving line of credit with the FHLB of Pittsburgh carries a commitment of $250.0 million. The rate is adjusted daily by the FHLB of Pittsburgh, and any borrowings on this line may be repaid at any time without penalty. The revolving line of credit had no balance as of December 31, 2021 and December 31, 2020.
At December 31, 2021 and December 31, 2020, collateralized borrowings due within one year were $139.1 million and $137.7 million, respectively. These borrowings are collateralized by cash or various securities held in safekeeping by the FHLB. The market value of these securities exceeds the value of the collateralized borrowings. The average amount of collateralized borrowings outstanding in the years ended December 31, 2021, 2020 and 2019 was $132.1 million, $122.8 million and $91.1 million, respectively. The maximum amount of collateralized borrowings outstanding during the years ended December 31, 2021, 2020 and 2019 was $139.6 million, $150.6 million and $101.1 million, respectively.
On September 9, 2020, the Company issued $125.0 million of 4.00% fixed-to-floating rate subordinated notes with a maturity date of September 15, 2030. The subordinated notes, which qualify as Tier 2 capital, bear interest at an annual rate of 4.00%, payable semi-annually in arrears commencing on March 15, 2021, and a floating rate of interest equivalent to the 3-month SOFR plus 3.89% payable quarterly in arrears commencing on December 15, 2025. The subordinated debt issuance costs of approximately $1.8 million are being amortized over five years on a straight-line basis into interest expense. At December 31, 2021 and December 31, 2020, subordinated debentures, net of issuance costs, were $123.6 million and $123.3 million, respectively.
(b) Trust Preferred Securities
The Company has seven statutory business trusts: Northwest Bancorp Capital Trust III, a Delaware statutory business trust, Northwest Bancorp Statutory Trust IV, a Connecticut statutory business trust, LNB Trust II, a Delaware statutory business trust, Union National Capital Trust I (“UNCT I”), a Delaware statutory business trust, Union National Capital Trust II (“UNCT II”), a Delaware statutory business trust, MFBC Statutory Trust I, a Delaware statutory trust, and Universal Preferred Trust, a Delaware statutory trust (the “Trusts”). The Trusts exist solely to issue preferred securities to third parties for cash, issue common securities to
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
the Company in exchange for capitalization of the Trusts, invest the proceeds from the sale of trust securities in an equivalent amount of debentures of the Company, and engage in other activities that are incidental to those previously listed.
The Trusts have invested the proceeds of the offerings in junior subordinated deferrable interest debentures issued by the Company. The structure of these debentures mirrors the structure of the trust-preferred securities. These subordinated debentures are the sole assets of the Trusts. As the shareholders of the trust preferred securities are the primary beneficiaries of the Trusts, the Trusts are not consolidated in our financial statements.
The following table sets forth a summary of the cumulative trust preferred securities and the junior subordinated debt held by the Trust as of December 31, 2021 and 2020.
Maturity date Interest rate Capital debt
securities December 31,
2021 2020
Northwest Bancorp Capital Trust III December 30, 2035 3-month LIBOR plus 1.38%
$ 50,000 51,547 51,547
Northwest Bancorp Statutory Trust IV December 15, 2035 3-month LIBOR plus 1.38%
50,000 51,547 51,547
LNB Trust II June 15, 2037 3-month LIBOR plus 1.48%
7,875 8,119 8,119
Union National Capital Trust I (1) January 23, 2034 3-month LIBOR plus 2.85%
8,000 7,950 7,925
Union National Capital Trust II (1) November 23, 2034 3-month LIBOR plus 2.00%
3,000 2,741 2,714
MFBC Statutory Trust I (1) September 15, 2035 3-month LIBOR plus 1.70%
5,000 3,580 3,476
Universal Preferred Trust (1) October 7, 2035 3-month LIBOR plus 1.69%
5,000 3,570 3,466
Total $ 128,875 129,054 128,794
(1) Net of discounts due to the fair value adjustment made at the time of acquisition.
Cash distributions on the trust securities are made on a quarterly basis to the extent interest on the debentures is received by the Trusts. We have the right to defer payment of interest on the subordinated debentures at any time, or from time-to-time, for periods not exceeding five years. If interest payments on the subordinated debentures are deferred, the distributions on the trust securities also are deferred. To date there have been no interest deferrals. Interest on the subordinated debentures and distributions on the trust securities is cumulative. Our obligation constitutes a full, irrevocable, and unconditional guarantee on a subordinated basis of the obligations of the trust under the preferred securities.
The Trusts must redeem the preferred securities when the debentures are paid at maturity or upon an earlier redemption of the debentures to the extent the debentures are redeemed. All or part of the debentures may be redeemed at any time. Also, the debentures may be redeemed at any time if existing laws or regulations, or the interpretation or application of these laws or regulations, change causing:
•the interest on the debentures to no longer be deductible by the Company for federal income tax purposes;
•the trust to become subject to federal income tax or to certain other taxes or governmental charges;
•the trust to register as an investment company; or
•the preferred securities do not qualify as Tier I capital.
We may, at any time, dissolve any of the Trusts and distribute the debentures to the trust security holders, subject to receipt of any required regulatory approval(s).
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
(12) Income Taxes
Total income tax was allocated for the years ended December 31, 2021, 2020 and 2019 as follows:
Years ended December 31,
2021 2020 2019
Income tax expense $ 46,801 17,672 30,679
Shareholders’ equity for unrealized gain/(loss) on securities available-for-sale (10,425) 5,061 3,992
Shareholders’ equity for pension adjustment 9,659 (3,774) (2,859)
Unallocated income tax $ 46,035 18,959 31,812
Income tax expense applicable to income before taxes consists of:
Years ended December 31,
2021 2020 2019
Current $ 34,487 25,756 27,903
Deferred 12,314 (8,084) 2,776
Total income tax expense $ 46,801 17,672 30,679
A reconciliation of the expected federal statutory income tax rate to the effective rate, expressed as a percentage of pretax income for the years ended December 31, 2021, 2020 and 2019, is as follows:
Years ended December 31,
2021 2020 2019
Expected tax rate 21.0 % 21.0 % 21.0 %
Tax-exempt interest income (0.9) % (1.7) % (0.8) %
State income tax, net of federal benefit 4.5 % 2.2 % 3.7 %
Bank-owned life insurance (0.6) % (1.1) % (0.6) %
Stock-based compensation (0.1) % 0.2 % (0.6) %
Dividends on stock plans (0.4) % (0.9) % (0.6) %
Low income housing and historic tax credits (0.2) % (0.9) % (0.5) %
Other - % 0.3 % 0.1 %
Effective tax rate 23.3 % 19.1 % 21.7 %
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 are presented below:
December 31,
2021 2020
Deferred tax assets:
Deferred compensation expense $ 4,230 4,272
Bad debts 23,273 30,418
Other reserves 1,333 2,358
Accrued post-retirement benefit cost 900 778
Stock benefit plans 623 820
Pension and post-retirement benefits 9,747 19,405
Unrealized loss on the fair value of securities available-for-sale 4,093 -
Deferred income 341 540
Lease liability 12,958 11,713
Purchase accounting 432 412
Net operating loss 2,140 2,800
Other 922 1,338
Total deferred tax assets 60,992 74,854
Deferred tax liabilities:
Pension expense 6,993 6,198
Intangible assets 16,543 15,419
Mortgage servicing rights 2,278 1,831
Fixed assets 5,287 4,740
Net deferred loan costs 2,338 1,548
Right of use asset 12,322 10,844
Unrealized gain on fair value of securities available-for-sale - 6,332
Interest rate derivatives 341 1,268
Other 2,503 2,670
Total deferred tax liabilities 48,605 50,850
Net deferred tax asset $ 12,387 24,004
We have $4.3 million of federal net operating loss carryovers subject to the annual limitation under Internal Revenue Code Section 382 at December 31, 2021. The carryovers begin to expire in 2029 and are expected to be fully realized. We have $38.1 million of Indiana net operating loss carryovers subject to annual limitation as Indiana conforms to the Internal Revenue Code Section 382 at December 31, 2021. The carryovers begin to expire in 2025. Due to limitation, we do not expect to realize $7.6 million of the Indiana net operating loss carryover. This is netted against the net operating loss deferred tax asset in the preceding table.
We recorded a valuation allowance against state deferred tax assets of a Northwest subsidiary since the subsidiary is not expected to utilize its deferred tax assets in the foreseeable future. This valuation allowance is netted against other deferred tax assets in the preceding table.
Other than stated above, we have determined that no valuation allowance is necessary for the deferred tax assets because it is more likely than not that these assets will be realized through future reversals of existing temporary differences and through future taxable income. We will continue to review the criteria related to the recognition of deferred tax assets on a regular basis.
We utilize a comprehensive approach to recognize, measure, present and disclose in our financial statements uncertain tax positions that the company has taken or expects to take on a tax return. We recognize interest accrued and penalties (if any) related to unrecognized tax benefits in income tax expense. The accrual for interest and penalties was not material for all years presented.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table presents changes in unrecognized tax benefits at December 31, 2021, 2020 and 2019:
Year ended December 31,
2021 2020 2019
Unrecognized tax benefits:
Balance, beginning of year $ 331 - -
Increases related to prior year tax positions 37 336 -
Decreases related to prior year tax positions (173) (5) -
Increases related to current year tax positions 46 - -
Settlements - - -
Lapse of statute - - -
Balance, end of year $ 241 $ 331 -
It is reasonably possible that over the next twelve months the amount of unrecognized tax benefits may change from the reevaluation of uncertain tax positions arising in examinations, in appeals, or in the courts, or from the closure of tax statutes. We do not expect any significant changes in unrecognized tax benefits during the next twelve months.
We are subject to routine audits of our tax returns by the Internal Revenue Service as well as all states in which we conduct business. We are subject to audit by the Internal Revenue Service for the tax periods ended after December 31, 2017 and generally subject to audit by any state in which we conduct business for the tax periods ended after December 31, 2017. We are under audit by the state of New York for tax years 2016 through 2018. We do not expect any material adjustments from this audit. No findings have been issued at this time.
(13) Shareholders’ Equity
Retained earnings are partially restricted in connection with regulations related to the insurance of deposit accounts, which requires Northwest to maintain certain statutory reserves. Northwest may not pay dividends on or repurchase any of its common stock if the effect thereof would reduce retained earnings below the level of adequate capitalization as defined by federal and state regulators.
In tax years prior to fiscal 1997, Northwest was permitted, under the Internal Revenue Code (“IRC”), to deduct an annual addition to a reserve for bad debts in determining taxable income, subject to certain limitations. Bad debt deductions for income tax purposes are included in taxable income of later years only if the bad debt reserve is used subsequently for purposes other than to absorb bad debt losses. Because Northwest does not intend to use the reserve for purposes other than to absorb losses, no deferred income taxes have been provided prior to fiscal 1987. Retained earnings at December 31, 2021 and 2020 include approximately $39.1 million representing such bad debt deductions for which no deferred income taxes have been provided.
(14) Earnings Per Share
Basic earnings per common share (“EPS”) is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period, without considering any dilutive items. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. During the year ended December 31, 2021, 2,146,897 stock options were not included in the computation of diluted earnings per share because the stock options’ exercise price was more than the average market price of the common shares of $13.80. During the year ended December 31, 2020, 4,677,841 stock options were not included in the computation of diluted earnings per share because the stock options’ exercise price was more than the average market price of the common shares of $11.54. During the year ended December 31, 2019, all stock options outstanding were included in the computation of diluted earnings per share because the stock options’ exercise price was less than the average market price of the common shares of $17.07.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2021, 2020 and 2019.
Years ended December 31,
2021 2020 2019
Net income $ 154,323 74,854 110,432
Less: Dividends and undistributed earnings allocated to participating securities 1,010 - -
Net income available to common shareholders $ 153,313 74,854 110,432
Weighted average common shares outstanding (1) 126,181,586 120,244,474 104,878,774
Add: Participating shares outstanding 828,251 - 960,375
Total weighted average common shares and dilutive potential shares (1) 127,009,837 120,244,474 105,839,149
Basic earnings per share (1) $ 1.22 0.62 1.05
Diluted earnings per share (1) $ 1.21 0.62 1.04
(1) Not in thousands.
(15) Employee Benefit Plans
(a) Pension Plans
We maintain noncontributory defined benefit pension plans covering substantially all employees and members of our board of directors. Retirement benefits are based on certain compensation levels, age, and length of service. Contributions are based on an actuarially determined amount to fund not only benefits attributed to service to date but also for those expected to be earned in the future. In addition, we have an unfunded Supplemental Executive Retirement Plan (“SERP”) to compensate those executive participants eligible for the defined benefit pension plan whose benefits are limited by Section 415 of the IRC.
We also sponsor a retirement savings plan in which substantially all employees participate. We provide a matching contribution of 100% of each employee’s contribution to a maximum of 4% of the employee’s compensation.
Effective August 1, 2020, the Pension Plan was amended to include a soft freeze. The soft freeze will allow those employees in an eligible position that were hired, rehired, or acquired on or before July 31, 2020, to continue to vest and accrue additional benefits for each year they are credited with 1,000 hours or more. Employees that are hired, rehired, acquired, or transfer to an eligible job classification on or after August 1, 2020 are not eligible to participate in the Pension Plan.
Total expense for all retirement plans, including defined benefit pension plans, was approximately $10.1 million, $8.2 million and $6.7 million, for the years ended December 31, 2021, 2020 and 2019, respectively.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Components of net periodic pension cost and other amounts recognized in other comprehensive income:
The following table sets forth components of net periodic pension cost and other amounts recognized in other comprehensive income for the years ended December 31, 2021, 2020 and 2019.
Years ended December 31,
2021 2020 2019
Defined benefit pension plan:
Service cost $ 11,440 8,391 5,949
Interest cost 6,070 6,855 7,353
Expected return on plan assets (13,859) (12,362) (11,037)
Amortization of prior service cost (2,322) (2,322) (2,322)
Amortization of the net loss 4,156 3,695 3,423
Net periodic pension cost, defined benefit pension plans 5,485 4,257 3,366
Other changes in defined benefit pension plan recognized in other comprehensive income:
Net (gain)/loss (36,552) 11,521 8,235
Amortization of prior service cost 2,322 2,323 2,323
Total recognized in other comprehensive income (34,230) 13,844 10,558
Total recognized in net periodic pension cost and other comprehensive income $ (28,745) 18,101 13,924
The estimated net loss and prior service credit for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic cost ending December 31, 2022 is $1.5 million and $4.0 million, respectively.
The following table sets forth information for the defined benefit pension plans’ funded status at December 31, 2021 and 2020:
December 31,
2021 2020
Change in benefit obligation:
Benefit obligation at beginning of year $ 258,589 222,497
Service cost 11,440 8,391
Interest cost 6,070 6,855
Actuarial (gain)/loss (19,834) 29,084
Benefits paid (9,331) (8,238)
Benefit obligation at end of year 246,934 258,589
Change in plan assets:
Fair value of plan assets at beginning of year $ 216,872 193,541
Actual return on plan assets 26,421 26,228
Employer contributions 5,476 5,341
Benefits paid (9,331) (8,238)
Fair value of plan assets at end of period 239,438 216,872
Funded status at end of year $ (7,496) (41,717)
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table sets forth the assumptions used to develop the net periodic pension cost:
Years ended December 31,
2021 2020 2019
Discount rate 2.39 % 3.14 % 4.15 %
Expected long-term rate of return on assets 6.50 % 6.50 % 7.00 %
Rate of increase in compensation levels 3.00 % 3.00 % 3.00 %
The following table sets forth the assumptions used to determine benefit obligations at the end of each period:
Years ended December 31,
2021 2020 2019
Discount rate 2.75 % 2.39 % 3.14 %
Expected long-term rate of return on assets 6.50 % 6.50 % 6.50 %
Rate of increase in compensation levels 3.00 % 3.00 % 3.00 %
The expected long-term rate of return on assets is based on the expected return of each of the asset categories, weighted based on the median of the target allocation for each category. We use the FTSE (previously Citigroup) Pension Liability Index rates matching the duration of our benefit payments as of the measurement date to determine the discount rate.
The accumulated benefit obligation for the funded defined benefit pension plan was $243.6 million, $254.2 million, and $217.3 million at December 31, 2021, 2020 and 2019, respectively. The accumulated benefit obligation for all unfunded defined benefit plans was $3.3 million, $4.4 million, and $5.2 million at December 31, 2021, 2020 and 2019, respectively.
The following table sets forth certain information related to our pension plans:
December 31,
2021 2020
Projected benefit obligation $ 246,934 258,589
Accumulated benefit obligation 246,934 258,589
Fair value of plan assets 239,438 216,872
We anticipate making a contribution to our defined benefit pension plan of $2.0 million to $4.0 million during the year ending December 31, 2022.
The investment policy as established by the Plan Administrative Committee, to be followed by the Trustee, is to invest assets based on the target allocations shown in the table below. To meet target allocation ranges set forth by the Plan Administrative Committee, periodically, the assets are reallocated by the Trustee. The investment policy is reviewed periodically to determine if the policy should be changed. Pension assets are conservatively invested with the goal of providing market or better returns with below market risks. Assets are invested in a balanced portfolio composed primarily of equities, fixed income, and cash or cash equivalent investments. The Trustee tries to maintain an approximate asset mix position of 20% to 50% bonds and 30% to 60% equities.
A maximum of 10% may be invested in any one stock, including the stock of Northwest Bancshares, Inc. The objective of holding equity securities is to provide capital appreciation consistent with the ownership of the common stocks of medium to large companies. Acceptable bond investments are direct or agency obligations of the U.S. Government or investment grade corporate bonds. The average maturity of the bond portfolio shall not exceed ten years.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table sets forth the weighted average asset allocation of defined benefit plans:
Target December 31,
allocation 2021 2020
Debt securities 20 - 50%
25 % 22 %
Equity securities 30 - 60%
66 % 67 %
Other 5 - 50%
9 % 11 %
Total 100 % 100 %
All of the assets held by the defined benefit pension plan are measured and recorded at estimated fair value on our balance sheet on a recurring basis as Level 1 assets, as defined by the fair value hierarchy defined in Note 16. The following tables sets forth the pension plan assets as of December 31, 2021 and 2020.
December 31,
2021 2020
Defined benefit pension assets:
Common stock $ 61,968 52,019
Mutual funds 154,676 140,746
Money market funds 11,946 15,068
Other 10,672 8,879
Total defined benefit pension plan assets (1) $ 239,262 216,712
(1) The defined benefit pension plan statement of net assets also includes accrued interest and dividends resulting in net assets available for benefits of $239.4 million and $216.9 million, respectfully.
The benefits expected to be paid in each year from 2022 to 2026 are $8.0 million, $8.8 million, $8.9 million, $9.4 million and $9.8 million, respectively. The aggregate benefits expected to be paid in the five years from 2027 to 2031 are $56.7 million. The expected benefits to be paid are based on the same assumptions used to measure our benefit obligations at December 31, 2021 and include estimated future employee service.
(b) Post-retirement Healthcare Plan
In addition to pension benefits, we provide post-retirement healthcare benefits for certain employees who were employed as of October 1, 1993 and were at least 55 years of age on that date. We use the accrual method of accounting for post-retirement benefits other than pensions.
Components of net periodic benefit cost and other amounts recognized in other comprehensive income:
The following table sets forth the net periodic benefit cost for the post-retirement healthcare benefits plan for the years ended December 31, 2021, 2020 and 2019:
Years ended December 31,
2021 2020 2019
Interest cost $ 42 26 52
Amortization of net loss 14 18 68
Net period benefit cost $ 56 44 120
The following table sets forth other changes in the post-retirement healthcare plan’s plan assets and benefit obligations recognized in other comprehensive income:
Years ended December 31,
2021 2020 2019
Net gain $ (66) (51) (475)
Total recognized in other comprehensive income $ (66) (51) (475)
Total recognized in net periodic benefit cost and other comprehensive loss $ (10) (7) (355)
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The estimated net loss for the post-retirement healthcare benefit plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the year ending December 31, 2022 is $6,000.
The following table sets forth the funded status of the post-retirement healthcare benefit plan at December 31, 2021 and 2020:
December 31,
2021 2020
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,807 889
Interest cost 42 26
Actuarial gain (53) (34)
Benefits paid (236) (111)
Defined benefit plan acquired from MutualBank - 1,037
Benefit obligation at end of year $ 1,560 1,807
Change in plan assets:
Employer contributions $ 236 111
Benefits paid (236) (111)
Funded status at year end $ (1,560) (1,807)
The assumptions used to develop the preceding information for post-retirement healthcare benefits are as follows:
Years ended December 31,
2021 2020 2019
Discount rate 2.39 % 3.14 % 4.15 %
Monthly cost of healthcare insurance per beneficiary (1) $ 343 370 391
Annual rate of increase in healthcare costs 5.00 % 4.00 % 4.00 %
(1) Not in thousands.
If the assumed rate of increase in healthcare costs was increased by one percentage point to 6% from the level presented above, the interest cost component of net periodic post-retirement healthcare benefit cost would increase by $2,000 and the accumulated post-retirement benefit obligation for healthcare benefits would increase by $85,000.
The following table sets forth information for plans with an accumulated benefit obligation in excess of plan assets:
December 31,
2021 2020
Projected benefit obligation $ 1,560 1,807
Accumulated benefit obligation 1,560 1,807
(c) Common Stock Awards
On April 18, 2018, we established the Northwest Bancshares, Inc. 2018 Equity Incentive Plan with 1,500,000 common shares authorized for award. From this plan, we awarded employees 256,800 common shares and outside directors 24,300 common shares with a grant date fair value of $17.27 per share (total market value of $4.9 million at issuance) on May 22, 2019. We also awarded employees 261,091 common shares and outside directors 21,600 common shares with a grant date fair value of $9.71 per share (total market value of $2.7 million at issuance) on May 20, 2020. In addition, on May 25, 2021, we awarded employees 293,755 restricted common shares and directors 27,000 restricted common shares with a grant date fair value of $13.68. These common shares vest over a five-year period with the first vesting occurring on the grant date. Also during 2021, we awarded discretionary grants of 13,452 common shares with a weighted average grant date fair value of $13.76. Total common shares forfeited from the 2018 plan were 163,267, of which 46,650 shares were forfeited during the year ended December 31, 2021. Forfeited shares may be awarded to other eligible recipients in future grants until the plan termination date in 2028.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
(d) Stock Option Plans
The Northwest Bancshares, Inc. 2018 Equity Incentive Plan also authorized the granting of 3,500,000 stock options authorized for award. On May 22, 2019, we granted employees 547,410 stock options and outside directors 64,800 stock options with an exercise price of $17.27 per share. On May 20, 2020, we granted employees 556,476 stock options and outside directors 57,600 stock options with an exercise price of $9.71 per share. On May 25, 2021, we granted employees 621,972 stock options and directors 72,000 stock options with an exercise price of $13.68 per share. These awarded stock options vest over a five-year period with the first vesting occurring on the grant date with a ten-year exercise period from the grant date.
The following table summarizes the activity in our option plans during the years ended December 31, 2021, 2020 and 2019 (amounts in this table are not in thousands):
Years ended December 31,
2021 2020 2019
Number Weighted average
exercise price Number Weighted average
exercise price Number Weighted average
exercise price
Balance at beginning of year 5,243,172 $ 13.72 5,101,351 $ 14.28 5,612,812 $ 13.49
Granted (1) 693,972 13.68 614,076 9.71 612,210 17.27
Exercised (2) (1,219,581) 12.28 (131,309) 11.81 (917,845) 11.77
Forfeited/expired (337,253) 14.59 (340,946) 14.39 (205,826) 14.28
Balance at end of year 4,380,310 14.05 5,243,172 13.72 5,101,351 14.28
Exercisable at end of year 2,618,733 14.15 3,350,356 13.53 2,803,918 13.36
(1)Weighted average fair value of options at grant date: $0.64, $0.13 and $1.14, respectively.
(2)The total intrinsic value of options exercised was $2.3 million, $444,000 and $5.2 million, respectively.
The aggregate intrinsic value of all options expected to vest and fully vested options at December 31, 2021 is $448,066 and $26,973, respectively. The following table summarizes the number of options outstanding, number of options exercisable, and weighted average remaining life of all option grants as of December 31, 2021 (amounts in this table are not in thousands):
Exercise
price
$9.71
Exercise
price
$11.70
Exercise
price
$12.37
Exercise
price
$12.44
Exercise
price
$13.15
Options outstanding:
Number of options 515,674 189,338 332,520 252,951 278,012
Weighted average remaining contract life (years) 8.50 0.50 3.50 1.50 2.50
Options exercisable:
Number of options 175,719 189,338 258,792 234,308 236,034
Weighted average remaining term - vested (years) 8.50 0.50 3.50 1.50 2.50
Exercise
price
$13.68
Exercise
price
$14.15
Exercise
price
$15.57
Exercise
price
$16.59
Exercise
price
$17.27
Total
Average
$14.05
Options outstanding:
Number of options 664,918 441,989 540,305 681,771 482,832 4,380,310
Weighted average remaining contract life (years) 9.50 4.50 5.50 6.50 7.50 5.83
Options exercisable:
Number of options 150,032 313,173 344,900 461,605 254,832 2,618,733
Weighted average remaining term - vested (years) 9.50 4.50 5.50 6.50 7.50 4.34
(16) Disclosures About Fair Value of Financial Instruments
We are required to disclose fair value information about financial instruments whether or not recognized in the Consolidated Statement of Financial Condition. Fair value information of certain financial instruments and all nonfinancial instruments is not required to be disclosed. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Financial assets and liabilities recognized or disclosed at fair value on a recurring basis and certain financial assets and liabilities on a non-recurring basis are accounted for using a three-level hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. This hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest level input that has a significant impact on fair value measurement is used.
Financial assets and liabilities are categorized based upon the following characteristics or inputs to the valuation techniques:
•Level 1 - Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in actively traded markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.
•Level 2 - Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets or liabilities that are actively traded. Level 2 also includes pricing models in which the inputs are corroborated by market data, for example, matrix pricing.
•Level 3 - Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following:
•Quotes from brokers or other external sources that are not considered binding;
•Quotes from brokers or other external sources where it cannot be determined that market participants would in fact transact for the asset or liability at the quoted price; and
•Quotes and other information from brokers or other external sources where the inputs are not deemed observable.
We are responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value. We perform due diligence to understand the inputs used or how the data was calculated or derived. We also corroborate the reasonableness of external inputs in the valuation process.
The carrying amounts reported in the Consolidated Statement of Financial Condition approximate fair value for the following
financial instruments: cash and cash equivalents, marketable securities available-for-sale, accrued interest receivable, interest rate lock
commitments, forward commitments, interest rate swaps, savings and checking deposits and accrued interest payable.
Marketable Securities
Where available, market values are based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.
Debt securities - available-for-sale - Generally, debt securities are valued using pricing for similar securities, recently executed transactions and other pricing models utilizing observable inputs. The valuation for most debt securities is classified as Level 2. Securities within Level 2 include corporate bonds, municipal bonds, mortgage-backed securities and U.S. government obligations. Certain debt securities which were AAA rated at purchase do not have an active market and as such we have used an alternative method to determine the fair value of these securities. The fair value has been determined using a discounted cash flow model using market assumptions, which generally include cash flow, collateral and other market assumptions. As such, securities which otherwise would have been classified as Level 2 securities if an active market for those assets or similar assets existed are included herein as Level 3 assets.
Debt securities - held-to-maturity - The fair value of debt securities held-to-maturity is determined in the same manner as debt securities available-for-sale.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Loans Receivable
Loans with comparable characteristics including collateral and re-pricing structures are segregated for valuation purposes. Each loan pool is separately valued utilizing a discounted cash flow analysis. Projected monthly cash flows are discounted to present value using a market rate for comparable loans, which is not considered an exit price. Characteristics of comparable loans include remaining term, coupon interest, and estimated prepayment speeds. Delinquent loans are separately evaluated given the impact delinquency has on the projected future cash flow of the loan including the approximate discount or market rate, which is not considered an exit price.
Loans Held-for-Sale
The estimated fair value of loans held-for-sale is based on market bids obtained from potential buyers.
FHLB Stock
Due to the restrictions placed on the transferability of FHLB stock, it is not practical to determine the fair value.
Deposit Liabilities
The estimated fair value of deposits with no stated maturity, which includes demand deposits, money market, and other savings accounts, is the amount payable on demand. Although market premiums paid for depository institutions reflect an additional value for these low-cost deposits, adjusting fair value for any value expected to be derived from retaining those deposits for a future period of time or from the benefit that results from the ability to fund interest-earning assets with these deposit liabilities is prohibited. The fair value estimates of deposit liabilities do not include the benefit that results from the low-cost funding provided by these deposits compared to the cost of borrowing funds in the market. Fair values for time deposits are estimated using a discounted cash flow calculation that applies contractual cost currently being offered in the existing portfolio to current market rates being offered locally for deposits of similar remaining maturities. The valuation adjustment for the portfolio consists of the present value of the difference of these two cash flows, discounted at the assumed market rate of the corresponding maturity.
Borrowed Funds
Fixed rate advances are valued by comparing their contractual cost to the prevailing market cost. The carrying amount of repurchase agreements approximates their fair value.
Subordinated Debentures
The fair value of our subordinated debentures is calculated using the discounted cash flows at rates observable for other similarly traded liabilities.
Junior Subordinated Debentures
The fair value of junior subordinated debentures is calculated using the discounted cash flows at the prevailing rate of interest.
Interest Rate Lock Commitments and Forward Commitments
The fair value of interest rate lock commitments is based on the value of underlying loans held-for-sale which is based on quoted prices for similar loans in the secondary market. This value is then adjusted based on the probability of the loan closing (i.e., the “pull-through” amount, a significant unobservable input). The fair value of forward sale commitments is based on quoted prices from the secondary market based on the settlement date of the contracts.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Cash Flow Hedges, Interest Rate and Foreign Exchange Swap Agreements
The fair value of interest rate swaps is based upon the present value of the expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate. To price interest rate swaps, cash flows are first projected for each payment date using the fixed rate for the fixed side of the swap and the forward rates for the floating side of the swap. These swap cash flows are then discounted to time zero using LIBOR zero-coupon interest rates. The sum of the present value of both legs is the fair market value of the interest rate swap. These valuations have been derived from our third party vendor’s proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions that we believe to be reasonable. The fair value of the foreign exchange swap is derived from proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions we believe to be reasonable.
Off-Balance-Sheet Financial Instruments
These financial instruments generally are not sold or traded, and estimated fair values are not readily available. However, the fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. Commitments to extend credit are generally short-term in nature and, if drawn upon, are issued under current market terms. At December 31, 2021 and 2020, there was no significant unrealized appreciation or depreciation on these financial instruments.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the Consolidated Statement of Financial Condition at December 31, 2021 and 2020:
December 31, 2021
Carrying amount Estimated fair value Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents $ 1,279,259 1,279,259 1,279,259 - -
Securities available-for-sale 1,548,592 1,548,592 - 1,548,592 -
Securities held-to-maturity 768,154 751,513 - 751,513 -
Loans receivable, net 9,889,095 9,648,825 - - 9,648,825
Residential mortgage loans held-for-sale 25,056 25,056 - - 25,056
Accrued interest receivable 25,599 25,599 25,599 - -
Interest rate lock commitments 1,684 1,684 - - 1,684
Forward commitments 371 371 - 371 -
Interest rate swaps not designated as hedging instruments 31,254 31,254 - 31,254 -
FHLB stock 14,184 14,184 - - -
Total financial assets $ 13,583,248 13,326,337 1,304,858 2,331,730 9,675,565
Financial liabilities:
Savings and checking accounts $ 10,973,610 10,973,610 10,973,610 - -
Time deposits 1,327,555 1,339,308 - - 1,339,308
Borrowed funds 139,093 139,093 139,093 - -
Subordinated debt 123,575 129,138 - 129,138 -
Junior subordinated debentures 129,054 120,083 - - 120,083
Foreign exchange swaps 341 341 - 341 -
Interest rate swaps not designated as hedging instruments 31,357 31,357 - 31,357 -
Risk participation agreements 60 60 - 60 -
Accrued interest payable 1,804 1,804 1,804 - -
Total financial liabilities $ 12,726,449 12,734,794 11,114,507 160,896 1,459,391
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
December 31, 2020
Carrying amount Estimated fair value Level 1 Level 2 Level 3
Financial assets:
Cash and cash equivalents $ 736,277 736,277 736,277 - -
Securities available-for-sale 1,398,941 1,398,941 - 1,398,941 -
Securities held-to-maturity 178,887 179,666 - 179,666 -
Loans receivable, net 10,387,636 10,334,521 - - 10,334,521
Residential mortgage loans held-for-sale 58,786 58,786 - - 58,786
Accrued interest receivable 35,554 35,554 35,554 - -
Interest rate lock commitments 6,465 6,465 - - 6,465
Forward commitments 1,105 1,105 - 1,105 -
Interest rate swaps not designated as hedging instruments 53,863 53,863 - 53,863 -
FHLB stock 21,748 21,748 - - -
Total financial assets $ 12,879,262 12,826,926 771,831 1,633,575 10,399,772
Financial liabilities:
Savings and checking accounts $ 9,957,137 9,957,137 9,957,137 - -
Time deposits 1,642,096 1,669,546 - - 1,669,546
Borrowed funds 159,715 159,745 159,745 - -
Subordinated debt 123,329 123,329 - 123,329 -
Junior subordinated debentures 128,794 121,106 - - 121,106
Interest rate swaps not designated as hedging instruments 54,579 54,579 - 54,579 -
Risk participation agreements 86 86 - 86 -
Accrued interest payable 2,054 2,054 2,054 - -
Total financial liabilities $ 12,067,790 12,087,582 10,118,936 177,994 1,790,652
Fair value estimates are made at a point-in-time, based on relevant market data and information about the instrument. The preceding methods and assumptions were used in estimating the fair value of financial instruments at December 31, 2021 and 2020.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table represents assets and liabilities measured at fair value on a recurring basis as of December 31, 2021:
Level 1 Level 2 Level 3 Total at
fair value
Debt securities:
U.S. government and agencies $ - 75,891 - 75,891
Government sponsored enterprises - 46,085 - 46,085
States and political subdivisions - 128,701 - 128,701
Total debt securities - 250,677 - 250,677
Residential mortgage-backed securities:
GNMA - 16,510 - 16,510
FNMA - 160,063 - 160,063
FHLMC - 100,055 - 100,055
Non-agency - 431 - 431
Collateralized mortgage obligations:
GNMA - 492,328 - 492,328
FNMA - 269,060 - 269,060
FHLMC - 259,468 - 259,468
Total mortgage-backed securities - 1,297,915 - 1,297,915
Interest rate lock commitments - - 1,684 1,684
Forward commitments - 371 - 371
Interest rate swaps not designated as hedging instruments - 31,254 - 31,254
Total assets $ - 1,580,217 1,684 1,581,901
Foreign exchange swaps $ - 341 - 341
Interest rate swaps not designated as hedging instruments - 31,357 - 31,357
Risk participation agreements - 60 - 60
Total liabilities $ - 31,758 - 31,758
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table represents assets and liabilities measured at fair value on a recurring basis as of December 31, 2020:
Level 1 Level 2 Level 3 Total at
fair value
Debt securities:
U.S. government and agencies $ - 40,917 - 40,917
Government sponsored enterprises - 94,507 - 94,507
States and political subdivisions - 116,813 - 116,813
Total debt securities - 252,237 - 252,237
Residential mortgage-backed securities:
GNMA - 23,026 - 23,026
FNMA - 203,571 - 203,571
FHLMC - 134,572 - 134,572
Non-agency - 465 - 465
Collateralized mortgage obligations:
GNMA - 343,409 - 343,409
FNMA - 262,109 - 262,109
FHLMC - 179,552 - 179,552
Total mortgage-backed securities - 1,146,704 - 1,146,704
Interest rate lock commitments - - 6,465 6,465
Forward commitments - 1,105 - 1,105
Interest rate swaps not designated as hedging instruments - 53,863 - 53,863
Total assets $ - 1,453,909 6,465 1,460,374
Interest rate swaps not designated as hedging instruments $ - 54,579 - 54,579
Risk participation agreements - 86 - 86
Total liabilities $ - 54,665 - 54,665
The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2021 and 2020:
Years ended December 31,
2021 2020
Beginning balance January 1, $ 6,465 559
Total gains or losses:
Included in net income - -
Net activity (4,781) 5,906
Transfers from Level 3 - -
Transfers into of Level 3 - -
Ending balance December 31, $ 1,684 6,465
Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans held for sale, loans individually assessed, real estate owned, and MSRs.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of December 31, 2021:
Level 1 Level 2 Level 3 Total assets
at fair value
Loans individually assessed $ - - 46,968 46,968
Mortgage servicing rights - - 380 380
Real estate owned, net - - 873 873
Total assets $ - - 48,221 48,221
The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of December 31, 2020:
Level 1 Level 2 Level 3 Total assets
at fair value
Loans individually assessed $ - - 95,303 95,303
Real estate owned, net - - 2,232 2,232
Total assets $ - - 97,535 97,535
Individually Assessed Loans - A loan is considered to be individually assessed as described in Note 1(f) as part of the adoption of ASU 2016-13. We classify loans individually assessed as nonrecurring Level 3.
Mortgage servicing rights - Mortgage servicing rights represent the value of servicing residential mortgage loans, when the mortgage loans have been sold into the secondary market and the associated servicing has been retained. The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. Servicing rights and the related mortgage loans are segregated into categories or homogeneous pools based upon common characteristics. Adjustments are only made when the estimated discounted future cash flows are less than the carrying value, as determined by individual pool. As such, mortgage servicing rights are classified as nonrecurring Level 3.
Real Estate Owned - Real estate owned is comprised of property acquired through foreclosure or voluntarily conveyed by borrowers. These assets are recorded on the date acquired at the lower of the related loan balance or fair value, less estimated disposition costs, with the fair value being determined by appraisal. Subsequently, foreclosed assets are valued at the lower of the amount recorded at acquisition date or fair value, less estimated disposition costs. We classify real estate owned as nonrecurring Level 3.
The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at December 31, 2021:
Fair value ($) Valuation
techniques Significant
unobservable inputs Range
(weighted average)
Loans individually assessed 46,968 Appraisal value (1) Estimated cost to sell 10%
Discounted cash flow Discount rate 8.60% to 12.95% (9.61%)
Mortgage servicing rights 380 Discounted cash flow Annual service cost $84
Prepayment rate 7.1% to 23.6% (11.0%)
Expected life (months) 42.2 to 103.1 (72.8)
Option adjusted spread 650 basis points
Forward yield curve 0.09% to 1.51%
Real estate owned, net 873 Appraisal value (1) Estimated cost to sell 10%
Loans held for sale 25,056 Quoted prices for similar loans in active markets adjusted by an expected pull-through rate Estimated pull-through rate 100%
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
(17) Regulatory Capital Requirements
We and our banking subsidiary are subject to various regulatory capital requirements administered by the federal and state 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 our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices must be met. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Applicable regulations limit an organization’s capital distributions and certain discretionary bonus payments if the organization does not hold a “capital conservation buffer” consisting of 2.5% of Total Tier 1 and Common Equity Tier 1 (“CET1”) capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
Quantitative measures established by regulation to ensure capital adequacy require us and our banking subsidiary to maintain minimum amounts and ratios (set forth in the table below) of Total, Tier 1, and CET1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined). As of December 31, 2021 and 2020, we and our banking subsidiary exceeded all capital adequacy requirements to which we were subject.
We have elected to phase the estimated impact of CECL into regulatory capital in accordance with the interim final rule of the Board of Governors of the Federal Reserve System (FRB) and other U.S. banking agencies that became effective on March 31, 2020. As a result, we will delay recognizing the estimated impact of CECL on regulatory capital until after a two-year deferral period, which for us extends through December 31, 2021. Beginning on January 1, 2022, we will be required to phase in 25% of the previously deferred estimated capital impact of CECL, with an additional 25% to be phased in at the beginning of each subsequent year until fully phased in by the first quarter of 2025. Under the interim final rule, the estimated impact of CECL on regulatory capital that we will defer and later phase in is calculated as the entire day-one impact at adoption plus 25% of the subsequent change in allowance during the two-year deferral period.
As of December 15, 2021, the most recent assessment from FDIC, Northwest Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered “well-capitalized” for regulatory purposes. To be considered as “well capitalized,” Northwest Bank must maintain total risk-based, Tier 1 risk-based, CET 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the bank’s categories.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The actual, required, and well capitalized levels as of December 31, 2021 and 2020 were as follows:
At December 31, 2021
Actual Minimum capital
requirements (1) Well capitalized
requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,682,487 17.056 % $ 1,035,786 10.500 % $ 986,463 10.000 %
Northwest Bank 1,551,084 15.738 % 1,034,819 10.500 % 985,542 10.000 %
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,475,190 14.954 % 838,494 8.500 % 789,170 8.000 %
Northwest Bank 1,467,362 14.889 % 837,711 8.500 % 788,434 8.000 %
CET 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,350,125 13.687 % 690,524 7.000 % 641,201 6.500 %
Northwest Bank 1,467,362 14.889 % 689,879 7.000 % 640,602 6.500 %
Tier 1 capital (leverage to average assets)
Northwest Bancshares, Inc. 1,475,190 10.349 % 570,160 4.000 % 712,699 5.000 %
Northwest Bank 1,467,362 10.296 % 570,047 4.000 % 712,558 5.000 %
(1) Amounts and ratios include the 2021 capital conservation buffer of 2.5% with the exception of Tier 1 capital to average assets. For further information related to the capital conservation buffer, see “Item 1. Business - Supervision and Regulation”.
At December 31, 2020
Actual Minimum capital
requirements (1) Well capitalized
requirements
Amount Ratio Amount Ratio Amount Ratio
Total capital (to risk weighted assets)
Northwest Bancshares, Inc. $ 1,654,198 16.642 % $ 1,043,693 10.500 % $ 993,993 10.000 %
Northwest Bank 1,478,310 14.887 % 1,042,655 10.500 % 993,004 10.000 %
Tier 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,406,321 14.148 % 844,894 8.500 % 795,195 8.000 %
Northwest Bank 1,354,028 13.636 % 844,054 8.500 % 794,403 8.000 %
CET 1 capital (to risk weighted assets)
Northwest Bancshares, Inc. 1,281,516 12.893 % 695,795 7.000 % 646,096 6.500 %
Northwest Bank 1,354,028 13.636 % 695,103 7.000 % 645,453 6.500 %
Tier 1 capital (leverage to average assets)
Northwest Bancshares, Inc. 1,406,321 10.145 % 554,501 4.000 % 693,126 5.000 %
Northwest Bank 1,354,028 9.903 % 546,905 4.000 % 683,631 5.000 %
(1) Amounts and ratios include the 2020 capital conservation buffer of 2.5% with the exception of Tier 1 capital to average assets. For further information related to the capital conservation buffer, see Item 1. Business - “Supervision and Regulation”.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
(18) Contingent Liabilities
We and our 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 our financial statements. However, we cannot presently determine whether or not any claims against us will have a material adverse effect on our results of operations in any future reporting period.
(19) Legal Proceedings
We establish accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated. As of December 31, 2021, we do not anticipate that the aggregate ultimate liability arising out of any pending or threatened legal proceedings will be material to our Consolidated Financial Statements. Any such accruals are adjusted thereafter as appropriate to reflect changes in circumstances. Due to the inherent subjectivity of assessments and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate loss to us from legal proceedings.
During the year-ended December 31, 2018, Northwest and our subsidiary, The Bert Company (doing business as Northwest Insurance Services) (“NWIS”), were involved in a lawsuit against, among others, First National Bank of Pennsylvania (“FNB”) and their insurance subsidiary, First National Insurance Agency, LLC (“FNIA”). All counterclaims against Northwest were discontinued and, in December 2018, a verdict was rendered in favor of NWIS on several of its claims. Post-trial proceedings have continued throughout the current year and, due to the inherent uncertainties with respect to these proceedings, we have not accrued any awards associated with this verdict within our Consolidated Financial Statements as of December 31, 2021.
(20) Components of Accumulated Other Comprehensive Income
The following table sets forth the components of accumulated other comprehensive loss as of December 31, 2021 and 2020:
December 31,
2021 2020
Unrealized gain/(loss) on marketable securities available-for-sale $ (12,317) 16,843
Defined benefit pension plans (25,312) (50,392)
Accumulated other comprehensive loss $ (37,629) (33,549)
The following table shows the changes in accumulated other comprehensive loss by component for the year ended December 31, 2021:
Unrealized gains and losses on securities
available-for-sale Change in defined
benefit pension plans Total
Balance as of January 1, $ 16,843 (50,392) (33,549)
Other comprehensive income/(loss) before reclassification adjustments (1), (2) (28,873) 23,748 (5,125)
Amounts reclassified from accumulated other comprehensive income (3), (4) (287) 1,332 1,045
Net other comprehensive income/(loss) (29,160) 25,080 (4,080)
Balance as of December 31, $ (12,317) (25,312) (37,629)
(1)Consists of unrealized holding losses, net of tax of ($10,333).
(2)Consists of unrealized holdings gains, net of tax $9,144.
(3)Consists of realized holding losses, net of tax of ($92).
(4)Consists of realized gains, net of tax of $515.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table shows the changes in accumulated other comprehensive loss by component for the year ended December 31, 2020:
Unrealized gains and losses on securities available-for-sale Change in
fair value of
interest rate
swaps Change in defined
benefit pension plans Total
Balance as of January 1, $ 3,147 - (40,088) (36,941)
Other comprehensive income/(loss) before reclassification adjustments (1), (2), (3) 13,711 (946) (11,301) 1,464
Amounts reclassified from accumulated other comprehensive income (4), (5), (6) (15) 946 997 1,928
Net other comprehensive income/(loss) 13,696 - (10,304) 3,392
Balance as of December 31, $ 16,843 - (50,392) (33,549)
(1)Consists of unrealized holding gains, net of tax of $5,607.
(2)Consists of unrealized holding losses, net of tax of ($209).
(3)Consists of unrealized holding losses, net of tax of ($4,169).
(4)Consists of realized gains, net of tax of ($6).
(5)Consists of realized losses interest rate swaps, net of tax of $209.
(6)Consists of realized gains, net of tax of $395.
The following table shows the changes in accumulated other comprehensive loss by component for the year ended December 31, 2019:
Unrealized gains and losses on securities
available-for-sale Change in defined benefit pension plans Total
Balance as of January 1, $ (6,832) (32,864) (39,696)
Other comprehensive income/(loss) before reclassification adjustments (1), (2) 9,984 (8,059) 1,925
Amounts reclassified from accumulated other comprehensive income (3), (4) (5) 835 830
Net other comprehensive income/(loss) 9,979 (7,224) 2,755
Balance as of December 31, $ 3,147 (40,088) (36,941)
(1)Consists of unrealized holding gains, net of tax of $3,994.
(2)Consists of unrealized holding losses, net of tax of ($3,193).
(3)Consists of realized gains, net of tax of ($2).
(4)Consists of realized gains, net of tax of $334.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
(21) Parent Company Only Financial Statements - Condensed
Statements of Financial Condition
December 31,
2021 2020
Assets
Cash and cash equivalents $ 128,001 172,142
Investment in bank subsidiary 1,674,360 1,585,429
Other assets 9,199 9,352
Total assets $ 1,811,560 1,766,923
Liabilities and shareholders’ equity
Liabilities:
Debentures payable $ 252,629 252,123
Other liabilities 1,814 1,889
Total liabilities 254,443 254,012
Shareholders’ equity 1,557,117 1,512,911
Total liabilities and shareholders’ equity $ 1,811,560 1,766,923
Statements of Income
Years ended December 31,
2021 2020 2019
Income:
Interest income $ 87 196 209
Other income 527 553 628
Dividends from bank subsidiary 73,000 - 110,000
Undistributed earnings from equity investment in bank subsidiary 88,944 80,996 5,102
Total income 162,558 81,745 115,939
Expense:
Compensation and employee benefits 1,358 1,234 1,124
Other expenses 1,033 2,241 791
Interest expense 7,870 4,933 4,833
Total expense 10,261 8,408 6,748
Income before income taxes 152,297 73,337 109,191
Income tax benefit (2,026) (1,517) (1,241)
Net income $ 154,323 74,854 110,432
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
Statements of Cash Flows
Years ended December 31,
2021 2020 2019
Operating activities:
Net income $ 154,323 74,854 110,432
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed earnings of subsidiary (88,944) (80,996) (5,102)
Gain on sale of marketable securities - - (29)
Net change in other assets and liabilities 597 128,287 (43,453)
Net cash provided by operating activities 65,976 122,145 61,848
Investing activities:
Net purchase sale of marketable securities - - -
Net cash used in investing activities - - -
Financing activities:
Cash dividends paid on common stock (100,274) (93,132) (76,173)
Repurchase of Northwest stock (23,854) (9,276) -
Proceeds from stock options exercised 14,011 1,479 9,727
Net cash used in financing activities (110,117) (100,929) (66,446)
Net increase/(decrease) in cash and cash equivalents $ (44,141) 21,216 (4,598)
Cash and cash equivalents at beginning of period $ 172,142 150,926 155,524
Net increase/(decrease) in cash and cash equivalents (44,141) 21,216 (4,598)
Cash and cash equivalents at end of period $ 128,001 172,142 150,926
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
(22) Derivative Financial Instruments
We are a party to derivative financial instruments in the normal course of business to manage our own exposure to fluctuations in interest rates and to meet the needs of our customers. The primary derivatives that we use are interest rate swaps and caps and foreign exchange contracts, which are entered into with counterparties that meet established credit standards. We believe that the credit risk inherent in all of our derivative contracts is minimal based on our credit standards and the netting and collateral provisions of the interest rate swap agreements.
Derivatives Designated as Hedging Instruments
During March 2020, the Company entered into four separate pay-fixed interest rate swaps in order to synthetically convert short-term three month FHLB advances to fixed-rate term funding with an aggregate value of $100 million with maturities ranging from three to five years. Our risk management objective and strategy for these interest rate swaps at such time was to reduce our exposure to variability in interest-related cash outflows attributable to changes in the USD-LIBOR swap rate, the designated benchmark interest rate being hedged.Based upon our contemporaneous quantitative analysis at the inception of each interest rate swap, we have determined these interest rate swaps qualified for hedge accounting in accordance with ASC 815, Derivatives and Hedging.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the quarter of September 30, 2020, the Company discontinued these cash flow hedges and, as a result, reclassified a $1.3 million loss into earnings. As of December 31, 2021, the Company had no cash flow hedges.
Derivatives Not Designated as Hedging Instruments
We act as an interest rate or foreign exchange swap counterparty for certain commercial borrowers in the normal course of servicing our customers, which are accounted for at fair value. We manage our exposure to such interest rate or foreign exchange swaps by entering into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the swaps we have with the commercial borrowers. These positions (referred to as “customer swaps”) directly offset each other and our exposure is the fair value of the derivatives due to changes in credit risk of our commercial borrowers and third parties. Customer swaps are recorded within other assets or other liabilities on the Consolidated Statement of Financial Condition at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the Consolidated Statement of Income.
We enter into interest rate lock commitments for residential mortgage loans which commit us to lend funds to a potential borrower at a specific interest rate within a specified period of time. Interest rate lock commitments that relate to the origination of mortgage loans that will be held-for-sale are considered derivative financial instruments under applicable accounting guidance. Interest rate lock commitments on loans held-for-sale are carried at fair value in other assets on the Consolidated Statement of Financial Condition. Northwest sells loans to the secondary market on a mandatory or best efforts basis. The loans sold on a mandatory basis commit us to deliver a specific principal amount of mortgage loans to an investor at a specified price, by a specified date, or the commitment must be paired off. These forward commitments entered into on a mandatory delivery basis meet the definition of a derivative financial instrument. All closed loans to be sold on a mandatory delivery basis are classified as held-for-sale on the Consolidated Statement of Financial Condition. Changes to the fair value of the interest rate lock commitments and the forward commitments are recorded in mortgage banking income in the Consolidated Statements of Income.
We enter into risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution.
NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(All dollar amounts presented in tables are in thousands, except as indicated)
The following table presents information regarding our derivative financial instruments for the periods indicated:
Asset derivatives Liability derivatives
Notional amount Fair value Notional amount Fair value
At December 31, 2021
Derivatives not designated as hedging instruments:
Interest rate swap agreements $ 644,997 31,254 644,997 31,357
Foreign exchange swap agreements - - 17,124 341
Interest rate lock commitments 67,473 1,684 - -
Forward commitments 14,484 371 - -
Risk participation agreements - - 93,135 60
Total derivatives $ 726,954 33,309 755,256 31,758
At December 31, 2020
Derivatives not designated as hedging instruments:
Interest rate swap agreements $ 599,300 53,863 599,300 54,579
Interest rate lock commitments 171,357 6,465 - -
Forward commitments 25,474 1,105 - -
Risk participation agreements - - 77,532 86
Total derivatives $ 796,131 61,433 676,832 54,665
The following table presents income or expenses recognized on derivatives for the periods indicated:
For the years ended December 31,
2021 2020 2019
Hedging derivatives:
Decrease in interest expense $ - (35) -
Non-hedging swap derivatives:
Increase/(decrease) in other income 1,033 (700) (63)
Increase in mortgage banking income 5,515 6,867 -

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
There were no changes made in our internal controls during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
See Management’s Report On Internal Control Over Financial Reporting - filed herewith under Part II, Item 8. “Financial Statements and Supplementary Data”.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
Not applicable.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The “Proposal I-Election of Directors” section of the Company’s definitive proxy statement for the Company’s 2022 Annual Meeting of Stockholders (the “2022 Proxy Statement”) is incorporated herein by reference.
Executive Officers
The “Proposal I-Election of Directors-Executive Officers who are not Directors” section of the 2022 Proxy Statement is incorporated herein by reference.
Compliance with Section 16(a) of the Exchange Act
The “Proposal I-Election of Directors-Section 16(a) Beneficial Ownership Reporting Compliance” section of the 2022 Proxy Statement is incorporated herein by reference.
Code of Ethics
The “Proposal I-Election of Directors-Code of Ethics” section of the 2022 Proxy Statement is incorporated herein by reference. A copy of the Code of Ethics is available to shareholders on the “Governance Documents” portion of the Investor Relations’ section on the Company’s website at www.northwest.com.
Corporate Governance
Information regarding the audit committee and its composition and the audit committee’s financial expert required by this item is incorporated herein by reference to the section captioned “Proposal I-Election of Directors-Meetings and Committees of the Board of Directors-Audit Committee” section of the 2022 Proxy Statement.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The “Proposal I-Election of Directors-Meetings and Committees of the Board of Directors-Compensation Committee,” “-Compensation Committee Interlocks and Insider Participation,” “-Compensation Committee Report,” “-Compensation Discussion and Analysis,” “-Executive Compensation,” “-Employment Agreements,” “-Potential Payments to Named Executive Officers,” “-Defined Benefit Plan,” “-Supplemental Executive Retirement Plan,” “-Life Insurance Coverage” and “-Director Compensation” sections of the Company’s 2022 Proxy Statement are incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The “Proposal I-Election of Directors” section of the Company’s 2022 Proxy Statement is incorporated herein by reference.
The Company does not have any equity compensation program that was not approved by stockholders.
Set forth below is certain information as of December 31, 2021 regarding equity compensation plans that have been approved by stockholders.
Equity compensation plans approved by stockholders Number of securities to be issued upon exercise of outstanding options,
warrants and rights Weighted average
exercise price (1) Number of securities
remaining available for
issuance under plan
Northwest Bancshares, Inc. 2011 Equity Incentive Plan 2,035,115 $ 13.66 -
Northwest Bancshares, Inc. 2018 Equity Incentive Plan 2,345,195 $ 14.39 187,672
Total 4,380,310 $ 14.05 187,672
(1)Reflects exercise price of options only.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The “Proposal I-Election of Directors-Board Independence” and “Proposal I-Election of Directors-Transactions with Certain Related Persons” sections of the Company’s 2022 Proxy Statement are incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent registered public accounting firm is KPMG LLP, Pittsburgh, PA, Auditor Firm ID: 185.
The “Proposal II-Ratification of Appointment of Independent Registered Public Accounting Firm” section of the Company’s 2022 Proxy Statement is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following documents are filed as part of this Form 10-K.
(A)Management’s Report on Internal Control Over Financial Reporting
(B)Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
(C)Report of Independent Registered Public Accounting Firm
(D)Consolidated Statements of Financial Condition at December 31, 2021 and 2020
(E)Consolidated Statements of Income Years ended December 31, 2021, 2020 and 2019
(F)Consolidated Statements of Comprehensive Income Years ended December 31, 2021, 2020 and 2019
(G)Consolidated Statements of Changes in Shareholders’ Equity Years ended December 31, 2021, 2020 and 2019
(H)Consolidated Statements of Cash Flows Years ended December 31, 2021, 2020 and 2019
(I)Notes to the Consolidated Financial Statements
(a)(2) Financial Statement Schedules
None.
(a)(3) Exhibits
Regulation S-K
exhibit number Document Reference to prior filing
or exhibit number attached hereto
3.1
Articles of Incorporation (2)
3.2
Articles of Amendment to Articles of Incorporation (2)
3.3
Amended and Restated Bylaws of Northwest Bancshares, Inc. (2)
4.1
Form of Common Stock Certificate (2)
4.2
Description of Registrant’s Securities Filed herewith as Exhibit 4.2
10.1
Amendment and Restatement of Deferred Compensation Plan for Outside Directors Of Northwest Savings Bank and Eligible Affiliates (3)
10.2
Retirement Plan for Outside Directors of Northwest Savings Bank and Eligible Affiliates (3)
10.3
Amended and Restated Northwest Savings Bank Nonqualified Supplemental Retirement Plan (3)
10.4
Annual Performance Award Plan (4)
10.5
Northwest Bancorp, Inc. 2008 Stock Option Plan (5)
10.6
Amended and Restated Northwest Savings Bank and Affiliates Upper Managers Bonus Deferred Compensation Plan (3)
10.7
Employment Agreement for Ronald J. Seiffert (6)
10.8
Employment Agreement for William W. Harvey, Jr. (7)
10.9
Employment Agreement for John J. Golding (8)
10.10
Employment Agreement for Mark T. Reitzes (9)
10.11
Employment Agreement for Louis J. Torchio (8)
10.12
Northwest Bancshares, Inc. 2011 Equity Incentive Plan (10)
10.13
Acknowledgment and Waiver William W. Harvey (11)
10.14
Northwest Bancshares, Inc. 2018 Equity Incentive Plan (12)
10.15
Form of Non-Qualified Stock Option Award Agreement under the 2018 Equity Incentive Plan (13)
10.16
Form of Incentive Stock Option Award Agreement under the
2018 Equity Incentive Plan (13)
10.17
Form of Restricted Stock Award Agreement under the
2018 Equity Incentive Plan (14)
10.18
Form of Amendment to Employee Agreement (15)
12 Statement re: computation of ratios Not required
Subsidiaries of Registrant Filed herewith as Exhibit 21
Consent of experts and counsel Filed herewith as Exhibit 23
24 Power of Attorney Not required
31.1
Certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as Amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith as Exhibit 31.1
31.2
Certification pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as Amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith as Exhibit 31.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Filed herewith as Exhibit 32
101 Interactive Data File (XBRL) Filed herewith as Exhibit 101
104 Interactive Data File (XBRL) Filed herewith as Exhibit 104
(1) Intentionally Omitted.
(2) Incorporated by reference to the Company’s Registration Statement on Form S-1 (File No. 333-161805), filed with the SEC on September 9, 2009.
(3) Incorporated by reference to the Company’s Annual Report on Form 10-K (File No. 000-23817), filed with the SEC on March 4, 2009.
(4) Incorporated by reference to the Current Report on Form 8-K (File No. 001-34582), filed with the SEC on September 16, 2020.
(5) Incorporated by reference to the Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders (File No. 000-23817), filed with the SEC on April 11, 2008.
(6) Incorporated by reference to the Current Report on Form 8-K (File No. 001-34582), filed with the SEC on July 20, 2018.
(7) Incorporated by reference to the Periodic Report on Form 8-K (File No. 001-34582), filed with the SEC on March 9, 2015.
(8) Incorporated by reference to the Current Report on Form 8-K (File No. 001-34582), filed with the SEC on April 4, 2020.
(9) Incorporated by reference to the Company’s Annual Report on Form 10-K (File No. 001-34582), filed with the SEC on February 26, 2020.
(10) Incorporated by reference to the Company’s Annual Report on Form 10-K (File No. 001-34582), filed with the SEC on March 1, 2011.
(11) Incorporated by reference to the Company’s Annual Report on Form 10-K (File No. 001-34582), filed with the SEC on March 1, 2018.
(12) Incorporated by reference to Appendix A to the Definitive Proxy Statement for the 2018 Annual Meeting of Shareholders (File no. 001-34582), filed with the SEC on March 7, 2018.
(13) Incorporated by reference to the Current Report on Form 8-K (File No. 001-34582), filed with the SEC on July 2, 2020.
(14) Incorporated by reference to the Current Report on Form 8-K (File No. 001-34582), filed with the SEC on May 14, 2018.
(15) Incorporated by reference to the Current Report on Form 8-K (File No. 001-34582), filed with the SEC on November 16, 2021.