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.
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.
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 | | | — | |
| | | | | | |