NWBI US Equity☆

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our principal business consists of collecting deposits and making loans 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 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 insurance and investment management and trust services, and net gains and losses on the sale of assets. 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 $74.9 million, or $0.62 per diluted share, for the year ended December 31, 2020 compared to $110.4 million, or $1.04 per diluted share, for the year ended December 31, 2019 and $105.5 million, or $1.02 per diluted share, for the year ended December 31, 2018. The provision for credit losses was $84.0 million for the year ended December 31, 2020 compared to $22.7 million for the year ended December 31, 2019 and $20.3 million for the year ended December 31, 2018.

Critical Accounting Policies

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 policies we believe are critical.

Allowance for Credit Losses.We recognize that losses will be experienced on loans and that the risk of loss varies with the type of loan, the creditworthiness of the borrower, general economic conditions and the quality of the collateral for the loan. 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 twelve 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.

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 loans deteriorate as a result of the factors discussed previously. Any material increase in the

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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.

Valuation of Investment Securities. Our investment securities are classified as either held-to-maturity or available-for-sale. Held-to-maturity securities are carried at amortized cost, while available-for-sale securities are carried at fair value. Unrealized gains or losses on available-for-sale securities, net of deferred taxes, are reported in other comprehensive income. Fair values are determined as described in Note 17 of the notes to the Consolidated Financial Statements. Semi-annually (at May 31 and November 30), 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. Additional information related to our investment securities can be found in Note 1(d) of the notes to the Consolidated Financial Statements.

On a quarterly basis, we measure expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Available-for-sale debt securities in an unrealized loss position are reviewed for impairment at least quarterly. An investment security is deemed impaired if the fair value of the investment is less than its amortized cost. In making this determination, 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. 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 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. Any future deterioration in the fair value of an investment security, or the determination that impairment exists, may have a material adverse affect on future earnings.

Goodwill. Goodwill is not subject to regular amortization but instead is required to be 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 the totality of 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 impairment test would be unnecessary. However, if we conclude otherwise, it would then be required to perform the quantitative impairment test. In the quantitative impairment test, the fair value of each reporting unit is compared to its carrying amount in order to determine if impairment is indicated. If the estimated fair value exceeds the carrying amount, the reporting unit is not deemed to be impaired. If the estimated fair value is below the carrying value of the reporting unit, the difference is the amount of impairment. 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.

Future changes in the economic environment or the operations of the reporting units could cause changes to these variables, which could give rise to declines in the estimated fair value of goodwill. Declines in fair value could result in impairment being identified. 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.

During the first quarter of 2020, the Company determined the COVID-19 pandemic and its negative effect on the global economy to be a triggering event. As a result, the Company, with the assistance of a third-party specialist, performed a quantitative impairment analysis in accordance with ASU 2017-04 as of March 31, 2020. This analysis indicated the aggregate fair value of Northwest Bank, the sole reporting unit of Northwest Bancshares, Inc., exceeded the carrying value and therefore goodwill was not impaired. Given the results of the quantitative goodwill analysis performed during the first quarter and the absence of any significant changes in the economic environment that would indicate a change in the conclusion of the quantitative analysis performed, the Company elected to perform a qualitative goodwill impairment test as of June 30, 2020 in accordance with ASC 350, as updated by ASU 2017-04, and concluded that goodwill was not impaired as of June 30, 2020. As of December 31, 2020 and 2019, there were no events or changes in circumstances that would cause us to update that goodwill impairment test and we have concluded there is no impairment in goodwill.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Using this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the

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realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on an ongoing basis as regulatory and business factors change. A reduction in estimated future taxable income could require us to record a valuation allowance. Changes in levels of valuation allowances could result in increased income tax expense, and could negatively affect earnings.

Pension Benefits. 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 accordance with U.S. generally accepted accounting principles, actual results that differ from the assumptions are amortized over average future service and, therefore, generally affect recognized expense. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our pension obligations and future expense.

In determining the projected benefit obligations for pension benefits at December 31, 2020 and 2019, we used a discount rate of 2.39% and 3.14%, 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.

Recently Issued Accounting Standards

The following Accounting Standard Updates ("ASU") issued by the FASB have not yet been adopted.

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. This guidance is effective for annual periods beginning after December 15, 2020, with early adoption permitted, and requires retrospective adoption for all periods presented. We do not expect this guidance to have a material impact on our financial statements.

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. This guidance is effective for annual periods beginning after December 15, 2020, including interim periods within those years, with early adoption permitted. We do not expect this guidance to have a material impact on our financial statements.

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 on contract modifications and hedge accounting 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.

Balance Sheet Analysis

Assets. Total assets at December 31, 2020 were $13.806 billion, an increase of $3.312 billion, or 31.6%, from $10.494 billion at December 31, 2019. This increase in assets was due primarily to an increase in net loans receivable of $1.696 billion primarily due to the acquisition of MutualBank in April 2020. A discussion of significant changes follows.

Cash and cash equivalents. Cash and cash equivalents increased by $675.4 million to $736.3 million at December 31, 2020, from $60.8 million at December 31, 2019. This increase was a result of increases in deposits of $3.007 billion and borrowings of $36.7 million offset slightly by funding gross loan growth of $1.772 billion.

Marketable securities. Marketable securities increased by $739.9 million, or 88.3%, to $1.578 billion at December 31, 2020, from $837.9 million at December 31, 2019. This increase was a result of using excess deposits to purchase higher yielding investment securities.

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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,

Amortizedcost Fairvalue Amortizedcost Fairvalue Amortizedcost Fairvalue

(In thousands)

Residential mortgage-backed securities available-for-sale:

Marketable securities available-for-sale:

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,

Amortizedcost Fairvalue Amortizedcost Fairvalue Amortizedcost Fairvalue

(In thousands)

Residential mortgage-backed securities held-to-maturity:

Marketable securities held-to-maturity:

Debt issued by the U.S. government and agencies $ 67,990 67,879 — — — —

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,

(In thousands)

Residential mortgage-backed securities:

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Market 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 market securities and mortgage-backed securities portfolios at December 31, 2020. Adjustable-rate mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust.

(Dollars in thousands)

Marketable securities held-to-maturity:

Marketable securities available-for-sale:

Residential mortgage-backed securities available-for-sale:

Residential mortgage-backed securities held-to-maturity:

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 5 of the notes to the Consolidated Financial Statements.

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Loans Receivable. Net loans receivable increased by $1.696 billion, or 19.4%, to $10.446 billion at December 31, 2020, from $8.751 billion at December 31, 2019. This increase was due primarily to the addition of $1.508 billion, at fair value, of loans related to the acquisition of MutualBank, as well as organic growth of $187.5 million over the last twelve months.

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,

Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent

(Dollars in thousands)

Personal Banking:

Consumer loans:

Commercial Banking:

(1) Consists primarily of secured and unsecured personal loans.

The following table sets forth the maturity of our loan portfolio at December 31, 2020. 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.

Personal Banking:

Commercial Banking:

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The following table sets forth at December 31, 2020, the dollar amount of all fixed-rate and adjustable-rate loans due one year or more after December 31, 2020. Adjustable and floating-rate loans are included in the table based on the contractual due date of the loan.

At December 31, 2020 (In thousands) Fixed Adjustable Total

Personal Banking:

Commercial Banking:

Deposits. Total deposits increased by $3.007 billion, or 35.0%, to $11.599 billion at December 31, 2020 from $8.592 billion at December 31, 2019 primarily due to the addition of $1.617 billion of deposits, at fair value, from the acquisition of MutualBank. In addition, legacy total deposits increased by $1.390 billion, or 16.2%. Our legacy noninterest-bearing demand deposits increased by $773.2 million, or 48.0%, to $2.383 billion at December 31, 2020 from $1.610 billion at December 31, 2019 and our legacy interest-bearing demand deposits increased by $424.6 million, or 21.8%, to $2.369 billion at December 31, 2020 from $1.944 billion at December 31, 2019. Additionally, our legacy time deposits increased by $400.6 million, or 25.5%, legacy money market deposit accounts increased by $341.4 million, or 18.3%, to $2.205 billion at December 31, 2020 from $1.864 billion at December 31, 2019, and legacy savings deposits increased by $251.6 million, or 15.7%, to $1.856 billion at December 31, 2020 from $1.605 billion at December 31, 2019. This deposit growth is a result of PPP loan funds and consumer stimulus checks as well as consumer saving trends this past year.

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,

(Dollars in thousands)

Time deposits:

(1) Represents percentage of total deposits.

(2) Represents weighted average nominal rate at year end.

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The following table sets forth the dollar amount of deposits in each state by branch location as of December 31, 2020.

State Balance Percent

(Dollars in thousands)

The following table indicates the amount of our certificates of deposit of $100,000 or more by time remaining until maturity at December 31, 2020.

Maturity period Certificates of deposit

(In thousands)

Over three months through six months 84,469

Over six months through twelve months 140,136

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Borrowings. Borrowings increased by $36.7 million, or 14.9%, to $283.0 million at December 31, 2020 from $246.3 million at December 31, 2019. This increase was a result of the Company issuing $125.0 million of 4.00% fixed-to-floating rate subordinated notes during the third quarter of 2020, and $45.0 million increase in collateralized borrowings. This increase was offset by a decrease of $131.6 million in FHLB borrowings.

The following table sets forth information concerning our borrowings at the dates and for the periods indicated.

During the years ended December 31,

(Dollars in thousands)

FHLB borrowings:

Weighted average interest rate during year 1.67 % 2.38 % 2.33 %

Weighted average interest rate at end of year 1.92 % 1.81 % 2.60 %

Collateralized borrowings:

Weighted average interest rate during year 0.25 % 0.25 % 0.20 %

Weighted average interest rate at end of year 0.19 % 0.29 % 0.24 %

Subordinated borrowings:

Average balance outstanding $ 123,294 — —

Maximum outstanding at end of any month during year 123,329 — —

Balance outstanding at end of year 123,329 — —

Weighted average interest rate during year 4.00 % — % — %

Weighted average interest rate at end of year 4.00 % — % — %

Total borrowings:

Weighted average interest rate during year 1.44 % 1.39 % 0.82 %

Weighted average interest rate at end of year 1.98 % 1.24 % 1.53 %

Shareholders’ equity. Total shareholders’ equity at December 31, 2020 was $1.539 billion, an increase of $185.4 million, or 13.7%, from $1.353 billion at December 31, 2019. This increase in equity was primarily the result of the impact of the issuance of common stock for the MutualBank acquisition of $213.4 million in the second quarter of 2020 as well as net income of $74.9 million. This increase was partially offset by the payment of cash dividends of $93.1 million.

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

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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 increases 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 $1.0 million 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.

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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 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, 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.

Comparison of Results of Operations for the Years Ended December 31, 2019 and 2018

General. Net income for the year ended December 31, 2019 was $110.4 million, or $1.04 per diluted share, an increase of $4.9 million, or 4.7%, from $105.5 million, or $1.02 per diluted share, for the year ended December 31, 2018. The increase in net income resulted from an increase in net interest income of $21.8 million, or 6.4% and noninterest income of $7.7 million, or 8.4%. Partially offsetting these increases were an increase in provision for credit losses of $2.3 million, or 11.4%, an increase in noninterest expense of $20.0 million, or 7.2%, and an increase in income tax expense of $2.3 million, or 7.9%.

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Net income for the year ended December 31, 2019 represents returns on average equity and average assets of 8.36% and 1.07%, respectively, compared to 8.61% and 1.11% for the year ended December 31, 2018. A discussion of significant changes follows.

Interest Income. Total interest income increased by $41.6 million, or 11.1%, to $417.4 million for the year ended December 31, 2019 from $375.8 million for the year ended December 31, 2018. This increase is the result of an increase in the average balance of interest earning assets of $675.3 million, or 7.7%, to $9.438 billion for the year ended December 31, 2019 from $8.763 billion for the year ended December 31, 2018 and an increase in the average yield on interest-earning assets to 4.44% for the year ended December 31, 2019 from 4.30% for the year ended December 31, 2018.

Interest income on loans receivable increased by $38.2 million, or 10.7%, to $394.8 million for the year ended December 31, 2019 from $356.6 million for the year ended December 31, 2018. This increase in interest income on loans receivable is attributed to increases in the average balance and average yield on loans receivable. The average balance increased by $671.0 million, or 8.5%, to $8.555 billion for the year ended December 31, 2019 from $7.884 billion for the year ended December 31, 2018. This increase is due primarily to the addition of $407.8 million, at fair value, of loans related to the UCB acquisition and organic loan growth of $349.4 million. Additionally, the average yield on loans receivable increased to 4.63% for the year ended December 31, 2019 from 4.54% for the year ended December 31, 2018. The average loan yield was positively affected by increases in market interest rates before the Federal Reserve started its interest rate easing strategy in March of 2019.

Interest income on mortgage-backed securities increased by $2.9 million, or 21.0%, to $16.7 million for the year ended December 31, 2019 from $13.8 million for the year ended December 31, 2018. This increase is the result of increases in both the average balance and average yield. The average balance of mortgage-backed securities increased by $53.2 million, or 9.1%, to $639.8 million for the year ended December 31, 2019 from $586.6 million for the year ended December 31, 2018. The average yield on mortgage-backed securities increased to 2.61% for the year ended December 31, 2019 from 2.35% for the year ended December 31, 2018 due to the purchase of fixed-rate mortgage-backed securities, including the UCB portfolio, which had yields higher than the existing Northwest portfolio.

Interest income on investment securities remained relatively flat, increasing by $103,000, or 2.5%, to $4.2 million for the year ended December 31, 2019 from $4.1 million for the year ended December 31, 2018. This increase is the result of an increase in the average yield on investment securities to 2.17% for the year ended December 31, 2019 from 1.84% for the year ended December 31, 2018, due primarily to the addition of higher yielding investments, including municipal bonds, from the UCB acquisition. Partially offsetting this increase was a decrease in the average balance of investment securities of $35.2 million, or 14.6%, to $205.8 million for the year ended December 31, 2019 from $241.0 million for the year ended December 31, 2018, which was primarily due to the maturity or call of government agency securities.

Dividends on FHLB stock increased by $604,000, or 133.6%, to $1.1 million for the year ended December 31, 2019 from $452,000 for the year ended December 31, 2018. This increase is the result of increases in both the average balance and average yield. The average balance on FHLB stock increased by $4.1 million, or 39.8%, to $14.5 million for the year ended December 31, 2019 from $10.4 million for the year ended December 31, 2018. Additionally, the average yield on FHLB stock increased to 7.29% for the year ended December 31, 2019 from 4.37% for the year ended December 31, 2018. Required FHLB stock holdings fluctuate with, among other things, the utilization of our borrowing capacity as well as capital requirements established by the FHLB.

Interest income on interest-earning deposits decreased by $235,000, or 28.1%, to $600,000 for the year ended December 31, 2019 from $835,000 for the year ended December 31, 2018. This decrease is attributable to a decrease in the average balance of interest-earning deposits. The average balance decreased by $17.8 million, or 43.3%, to $23.3 million for the year ended December 31, 2019 from $41.1 million for the year ended December 31, 2018, due to the utilization of excess cash to fund loan growth. Partially offsetting this decrease was an increase in the average yield on interesting-earning deposits to 2.54% for the year ended December 31, 2019 from 2.00% for the year ended December 31, 2018, as a result of previous increases in the targeted Federal Funds rate by the Federal Reserve Board before declining in the second half of 2019.

Interest Expense. Interest expense increased by $19.8 million, or 53.2%, to $56.9 million for the year ended December 31, 2019 from $37.1 million for the year ended December 31, 2018. This increase in interest expense was due to both an increase in the average balance of interest-bearing liabilities and the increase in the average cost of interest-bearing liabilities. The average balance increased by $486.9 million, or 7.5%, to $6.968 billion for the year ended December 31, 2019 from $6.481 billion for the year ended December 31, 2018. This increase was primarily due to the UCB acquisition, which included $479.4 million in deposits. Additionally, the average yield on interest-bearing liabilities increased to 0.82% for the year ended December 31, 2019 from 0.57% for the year ended December 31, 2018. This increase resulted from increases in the interest rates paid on deposits and borrowed funds in response to increases in market interest rates.

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Net Interest Income. Net interest income increased by $21.8 million, or 6.4%, to $360.5 million for the year ended December 31, 2019 from $338.6 million for the year ended December 31, 2018. This increase is attributable to the factors discussed above. Our interest-bearing deposit costs rose greater than yields on interest-earning assets reducing both our interest rate spread and net interest margin. Our interest rate spread decreased to 3.62% for the year ended December 31, 2019 from 3.73% for the year ended December 31, 2018 and our net interest margin also decreased to 3.84% for the year ended December 31, 2019 from 3.88% for the year ended December 31, 2018.

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 $2.3 million, or 11.4%, to $22.7 million for the year ended December 31, 2019 from $20.3 million for the year ended December 31, 2018. This increase is due primarily to a downgrade of an $11.5 million commercial loan resulting in a credit loss reserve on this relationship of approximately $7.4 million. Partially offsetting this increase was a decrease in total nonaccrual loans by $3.4 million, or 4.7%, to $68.9 million, or 0.78% of total loans, at December 31, 2019 from $72.3 million, or 0.90% of total loans, at December 31, 2018. In addition, total loan delinquency decreased to $119.4 million, or 1.36% of total loans at December 31, 2019 from $121.5 million, or 1.51% of total loans at December 31, 2018.

In determining the amount of the current period provision for the year ended December 31, 2019, we considered current economic conditions as of that period, 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 factors.

The provision that was recorded was sufficient, in our judgment, to bring this reserve to a level that reflects the losses inherent in our loan portfolio relative to loan mix, economic conditions and historical loss experience as of December 31, 2019.

Noninterest Income. Noninterest income increased by $7.7 million, or 8.4%, to $99.4 million for the year ended December 31, 2019 from $91.7 million for the year ended December 31, 2018. This increase is primarily attributable to a $3.2 million, or 540.8%, increase in mortgage banking income to $3.8 million for the year ended December 31, 2019 from $596,000 for the year ended December 31, 2018, as a result of expanding our secondary market sales capabilities. Service charges and fees also increased $2.3 million, or 4.5%, to $53.1 million for the year ended December 31, 2019 from $50.8 million for the year ended December 31, 2018, primarily due to additional fees collected on deposit accounts due to a recent change in fee structure while also being positively impacted by transaction volume. We also recognized a gain of $1.7 million during the current year on the sale of approximately $98.2 million of one-to-four family mortgage loans from our portfolio. In addition, trust and other financial services income increased by $1.2 million, or 7.1%, to $17.8 million for the year ended December 31, 2019 from $16.6 million for the year ended December 31, 2018, due primarily to new brokerage production. Slightly offsetting these increases was a decrease of $1.4 million, or 24.1%, in income on bank owned life insurance to $4.4 million for the year ended December 31, 2019 from $5.8 million for the year ended December 31, 2018 due to death benefits received in the prior year.

Noninterest Expense. Noninterest expense increased by $20.0 million, or 7.2%, to $296.1 million for the year ended December 31, 2019 from $276.1 million for the year ended December 31, 2018. All noninterest expense categories, with the exception

of federal deposit insurance premiums, marketing expense, and real estate owned expense, increased compared to 2018. Most of these increases resulted from the UCB acquisition as well as the MutualBank acquisition which closed and converted in the second quarter of 2020. The largest driver of the overall increase was a $10.7 million, or 7.0%, increase in compensation and employee benefits expense to $163.1 million for the year ended December 31, 2019 from $152.4 million for the year ended December 31, 2018, due to both internal growth in compensation and staff as well as the addition of UCB employees. Also contributing to the increase was an increase in processing expenses of $3.4 million, or 8.7%, to $42.5 million for the year ended December 31, 2019 from $39.0 million for the year ended December 31, 2018, primarily due to our continued efforts to invest in technology and infrastructure as well as improvements to our mortgage and commercial loan origination platforms. Acquisition expense increased by $3.2 million, or 311.0%, to $4.2 million for the year ended December 31, 2019 from $1.0 million for the year ended December 31, 2018 due both to costs incurred as part of the UCB acquisition as well as initial expenses incurred as a result of the MutualBank acquisition. Professional services expenses also increased by $1.7 million, or 15.9% primarily as a result of the continued consulting engagements related to the implementation of CECL as well as a deposit consulting engagement focused on product, price and promotion. Additionally, other noninterest expense increased by $2.7 million or 23.5%, to $14.0 million for the year ended December 31, 2019 from $11.3 million for the year ended December 31, 2018, due to both an increase in pension related servicing costs and an increase in litigation expenses. Slightly offsetting these increases was a decrease in FDIC premiums of $2.1 million, or 75.1%, due to an FDIC assessment credit received during the 2019 as a result of the deposit insurance fund becoming fully funded as well as a decrease in marketing expense of $1.4 million, or 17.0%, due primarily to our debit card reward program being discontinued.

Income Taxes. The provision for income taxes increased by $2.3 million, or 7.9%, to $30.7 million for the year ended December 31, 2019 from $28.4 million for the year ended December 31, 2018. This increase in income tax expense is primarily the result of the $7.2 million, or 5.4%, increase in pretax income to $141.1 million for the year ended December 31, 2019 from $133.9 million for the year ended December 31, 2018. In addition, our effective tax rate for the year ended December 31, 2019 was 21.7% compared to 21.2% for the year ended December 31, 2018.

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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.

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At December 31,

(Dollars in thousands)

Loans 90 days or more past due:

Nonperforming assets:

(1)Also included in nonaccrual loans above.

During the year ended December 31, 2020, gross interest income of approximately $6.4 million would have been recorded on loans accounted for on a nonaccrual basis if the loans had been current and in accordance with their original terms throughout the year. We recognized $842,000 of interest income on nonaccrual and troubled debt restructuring loans during the year ended December 31, 2020.

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 “special mention.” At December 31, 2020, we had 198 loans, with an aggregate principal balance of $149.3 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,

(In thousands)

Doubtful assets — — —

Loss assets — — —

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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” 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 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 twelve 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 either 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.

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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, 2020, 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 increased by $76.5 million, or 132.0%, to $134.4 million, or 1.27% of total loans at December 31, 2020 from $57.9 million, or 0.66% of total loans, at December 31, 2019. Due to the adoption of CECL, our allowance increased $10.8 million. In addition, 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.

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 $102.8 million, or 0.98% of total gross loans receivable at December 31, 2020, increased by $34.0 million, or 49.3%, from $68.9 million, or 0.78% of total gross loans receivable, at December 31, 2019. As a percentage of average loans, net charge-offs increased to 0.27% for the year ended December 31, 2020 compared to 0.23% for the year ended December 31, 2019. The increase in net charge-offs was largely impacted by a $9.1 million charge-off on one commercial loan which was previously downgraded and reserved for prior to the onset of COVID-19.

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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,

(Dollars in thousands)

Allowance for credit losses

CECL adoption 10,792 — — — —

Initial allowance on loans purchased with credit deterioration 8,845 — — — —

Charge-offs:

Recoveries:

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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,

Amount % of totalloans (1) Amount % of totalloans (1) Amount % of totalloans (1)

(Dollars in thousands)

Balance at end of year applicable to:

At December 31,

Amount % of totalloans (1) Amount % of totalloans (1)

(Dollars in thousands)

Balance at end of year applicable to:

(1)Represents percentage of loans in each category to total loans.

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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.

For the years ended December 31,

(Dollars in thousands)

Interest-earning assets:

Interest-bearing liabilities:

(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)Average cost of deposits were 0.34%, 0.58% and 0.39%, respectively.

(9)Net interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(10)Net interest margin represents net interest income as a percentage of average interest-earning assets.

(11)Shown on a FTE basis. GAAP basis yields for the years ended December 31, 2020, 2019 and 2018 were - Loans: 4.07%, 4.61% and 4.52%, respectively, Investment securities: 2.06%, 2.06% and 1.72%, respectively, Interest-earning assets: 3.70%, 4.42% and 4.29%, respectively. GAAP basis net interest rate spreads were 3.21%, 3.61% and 3.72%, respectively, and GAAP basis net interest margins were 3.34%, 3.82% and 3.86%, respectively.

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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, 2020 compared to 2019 and for the year ended December 31, 2019 compared to 2018. 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.

Rate Volume Rate Volume

(In thousands)

Interest-earning assets:

Interest-bearing liabilities:

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 16.78% as of December 31, 2020. 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, 2020, Northwest Bank had $3.872 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, 2020, as well as $95.4 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 $595.9 million at December 31, 2020. 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.

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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 the subordinated debt offering.

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, FHLB of Indianapolis and the Federal Reserve Bank of Cleveland, which provide an additional source of funds. At December 31, 2020, Northwest Bank had advances of $22.1 million from the FHLB of Indianapolis. We borrow from these sources to reduce interest rate risk and to provide liquidity when necessary.

At December 31, 2020, our customers had $1.045 billion of unused lines of credit available and $251.1 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, 2020, totaled $990.8 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 $3.007 billion for the year ended December 31, 2020, increased by $697.8 million for the year ended December 31, 2019 and increased by $67.2 million for the year ended December 31, 2018.

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 and also includes approximately $500.0 million of PPP loans. Funds received from loan maturities and principal payments on loans for the years ended December 31, 2020, 2019 and 2018 were $4.384 billion, $3.275 billion and $2.726 billion, respectively. Loan originations for the years ended December 31, 2020, 2019 and 2018 were $5.386 billion, $3.789 billion and $3.004 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, 2020, 2019 and 2018 were $704.7 million, $62.4 million and $4.5 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, 2020, 2019 and 2018 were $396.3 million, $245.8 million and $217.3 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 $192.4 million, a net increase of $11.9 million and a net increase of $126.2 million for the years ended December 31, 2020, 2019 and 2018, 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. The payment of dividends by Northwest Bank is subject to regulatory requirements. In addition, during 2020, Northwest Bancshares, Inc. issued $125.0 million of subordinated debt. At December 31, 2020, Northwest Bancshares, Inc. (on an unconsolidated basis) had liquid assets of $172.1 million.

Other activity with respect to cash flow was the payment of cash dividends on common stock in the amount of $93.1 million million, $76.2 million and $69.9 million for the ended December 31, 2020, 2019 and 2018, respectively.

At December 31, 2020, stockholders’ equity totaled $1.539 billion. During 2020, our Board of Directors declared regular quarterly cash dividends totaling $0.76 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 the FDIC to meet minimum capital adequacy requirements. At December 31, 2020, Northwest Bank exceeded all regulatory minimum capital requirements and is considered to be “well capitalized.” In addition, as of December 31, 2020, 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.

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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,

(Dollars in thousands)

Add: Accumulated other comprehensive loss 21,582 25,263

Additions to Tier 1 capital — —

Net risk-weighted assets including off-balance-sheet items $ 9,930,043 8,273,978

(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, 2020.

Payments due

(In thousands)

Supplemental Executive Retirement Plan (1) $ 839 — — 1,158 1,997

Term notes payable to the FHLB of Indiana (2) — — — 22,054 22,054

(1)See Note 16 to the Consolidated Financial Statements, Employee Benefit Plans, for additional information.

(2)See Note 12 to the Consolidated Financial Statements, Borrowed Funds, for additional information.

(3)See Note 4 to the Consolidated Financial Statements, Leases, for additional information.

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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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Management

The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest rate sensitive” and by monitoring an institution’s interest rate sensitivity “gap.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or re-price within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or re-pricing within a specific time period and the amount of interest-bearing liabilities maturing or re-pricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to positively affect net interest income. Similarly, during a period of falling interest rates, a negative gap would tend to positively affect net interest income while a positive gap would tend to adversely affect net interest income.

Our practice is to reduce our exposure to interest rate risk generally by matching the maturities of our interest rate sensitive assets and liabilities and by increasing the interest rate sensitivity of our interest-earning assets. We purchase adjustable-rate investment securities and mortgage-backed securities, which at December 31, 2020, totaled $69.5 million, and originate adjustable-rate loans, which at December 31, 2020, totaled $3.744 billion or 35.4% of our gross loan portfolio. Of our $10.581 billion of interest-earning assets at December 31, 2020, $3.769 billion, or 35.6%, consisted of assets with adjustable rates of interest. When open market conditions are favorable, we also attempt to reduce interest rate risk by lengthening the maturities of our interest-bearing liabilities by using FHLB advances as a source of long-term fixed-rate funds, if necessary, and by promoting longer-term certificates of deposit.

At December 31, 2020, total interest-earning assets maturing or re-pricing within one year exceeded total interest-bearing liabilities maturing or re-pricing in the same period by $864.8 million, representing a positive one-year gap ratio of 6.26%.

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The following table sets forth, on a carrying value basis, the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2020, which are expected to re-price or mature, based upon certain assumptions, in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown that re-price or mature during a particular period were determined in accordance with the earlier of the term of re-pricing or the contractual term of the asset or liability. We believe that these assumptions approximate the standards used in the financial services industry and consider them appropriate and reasonable.

Amounts maturing or re-pricing

(Dollars in thousands)

Rate-sensitive assets:

Mortgage-backed securities:

Mortgage loans:

Home equity loans:

Rate-sensitive liabilities:

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

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

In an effort to assess interest rate risk, we use a simulation model to determine the effect of immediate incremental increases and decreases in interest rates on net interest income, net income and the market value of our equity. Certain assumptions are made regarding loan prepayments and decay rates of savings and interest-bearing demand deposit accounts. Because it is difficult to accurately project the market reaction of depositors and borrowers, the effect of actual changes in interest rates on these assumptions may differ from simulated results. We have established the following guidelines for assessing interest rate risk:

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

Net Income Simulation. Given a parallel shift of 100 bps, 200 bps, and 300 bps in interest rates, the estimated net income may not decrease by more than 10%, 20%, and 30%, respectively, within a one-year period.

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

The following table illustrates the simulated impact of a parallel 100 bps, 200 bps or 300 bps upward or 100 bps downward movement in interest rates on net interest income, net income, return on average equity, earnings per share, and market value of equity. These analyses were prepared assuming that total interest-earning asset and interest-bearing liability levels at December 31, 2020 remain constant. The impact of the rate movements was computed by simulating the effect of an immediate and sustained shift in interest rates over a twelve-month period from December 31, 2020 levels.

Increase Decrease

Projected percentage increase/(decrease) in net income 4.2 % 5.8 % 6.5 % (5.6) %

The following table illustrates the simulated impact of a parallel 100 bps, 200 bps or 300 bps upward or 100 bps downward movement in interest rates on net interest income, net income, return on average equity, earnings per share, and market value of equity. These analyses were prepared assuming that total interest-earning asset and interest-bearing liability levels at December 31, 2019 remain constant. The impact of the rate movements was computed by simulating the effect of an immediate and sustained shift in interest rates over a twelve-month period from December 31, 2019 levels.

Increase Decrease

Projected percentage decrease in net income (1.4) % (3.9) % (6.4) % (13.0) %

Projected decrease in return on average equity (1.4) % (3.8) % (6.2) % (12.6) %

Projected decrease in earnings per share $ (0.01) $ (0.03) $ (0.06) $ (0.13)

The figures included in the tables above represent projections that were computed based upon certain assumptions including loan prepayment rates and deposit decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates. Actual results may differ significantly due to timing, magnitude and frequency of interest rate changes and changes in market conditions.

When assessing our interest rate sensitivity, analysis of historical trends indicates that loans will prepay at various speeds (or annual rates) depending on the variance between the weighted average portfolio rates and the current market rates. In preparing the table above, the following assumptions were used: (i) adjustable-rate mortgage loans will prepay at an annual rate of 6% to 14%; (ii) fixed-rate mortgage loans will prepay at an annual rate of 5% to 14%, depending on the type of loan; (iii) commercial loans will prepay at an annual rate of 8% to 14%; (iv) consumer loans held by Northwest Bank will prepay at an annual rate of 18% to 24%; and (v) consumer loans that were formerly held by Northwest Consumer Discount Company will prepay at an annual rate of 55% to 70%. In regards to our deposits, it has been assumed that (i) fixed maturity deposits will not be withdrawn prior to maturity; (ii) a significant majority of money market accounts will re-price immediately; (iii) savings accounts will gradually re-price over three years; and (iv) checking accounts will re-price either when the rates on such accounts re-price as interest rate levels change, or when deposit holders withdraw funds from such accounts and select other types of deposit accounts, such as certificate accounts, which may have higher interest rates. For purposes of this analysis, management has estimated, based on historical trends, that $1,012.5 million, or 36.7%, of our interest-bearing demand accounts and $423.2 million, or 20.7%, of our savings deposits are interest sensitive and may re-price in one year or less, and that the remainder may re-price over longer time periods.

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The above assumptions are annual percentages based on remaining balances and should not be regarded as indicative of the actual prepayments and withdrawals that we may experience. Moreover, certain shortcomings are inherent in the analysis presented by the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to re-pricing, they may react in different degrees to changes in market interest rates. Also, interest rates on certain types of assets and liabilities may fluctuate in advance of or lag behind changes in market interest rates. Additionally, certain assets, such as some adjustable-rate loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Moreover, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in preparing the table.

In addition, we regularly measure and monitor the market value of our net assets and the changes therein. While fluctuations are expected because of changes in interest rates, we have established policy limits for various interest rate scenarios. Given interest rate shocks of +100 to +300 bps and -100 bps the market value of net assets is not expected to decrease by more than 15% to 35%.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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, 2020. 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, 2020, 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.

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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 subsidaries’ (the Company) internal control over financial reporting as of December 31, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2021 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 26, 2021

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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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2020, 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, 2020, 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 26, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 2 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 certain loans and off-balance sheet exposures

As discussed in Note 2 to the consolidated financial statements, the Company adopted ASU No. 2016-13, Financial Instruments— Credit Losses (ASC Topic 326) as of January 1, 2020. As discussed in Notes 2 and 6 to the consolidated financial statements, the Company’s allowance for credit losses for loans and liability for credit losses for off-balance sheet

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exposures was $134.4M and $6.4M, respectively, as of December 31, 2020, a portion which included the measure of expected credit losses on a collective (pool) basis for those loans and off-balance sheet exposures 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 twelve-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. The credit losses for off-balance sheet exposures is calculated using default rates, severity rates, consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated life. 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, the reasonable and supportable forecast periods, and credit risk ratings for certain commercial loans, 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

•development of the default, severity, prepayments, and projected portfolio-level net charge-off rate (model assumptions)

•identification and determination of the significant assumptions used in the models

•performance monitoring of the models

•development 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

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•testing individual credit risk ratings for a selection of commercial loan borrower relationships by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral

•evaluating the methodology used to develop the qualitative factors and the effect of those 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 26, 2021

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NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, excluding share data)

December 31,

Assets

Total cash and cash equivalents and marketable securities 2,314,105 898,783

Liabilities and shareholders’ equity

Liabilities:

Advances by borrowers for taxes and insurance 45,230 44,556

Shareholders’ equity:

Preferred stock, $0.01 par value: 50,000,000 authorized, no shares issued — —

Accumulated other comprehensive loss (33,549) (36,941)

See accompanying notes to Consolidated Financial Statements.

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NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, excluding share data)

Years ended December 31,

Interest income:

Interest expense:

Noninterest income:

Loss on real estate owned, net (106) (53) (631)

Noninterest expense:

Provision for income taxes:

See accompanying notes to Consolidated Financial Statements.

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NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

Years ended December 31,

Other comprehensive income net of tax:

Net unrealized holding gains/losses on marketable securities:

Change in fair value of interest rate swaps

Net change in fair value of interest rate swaps — — 840

Defined benefit plans:

See accompanying notes to Consolidated Financial Statements.

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NORTHWEST BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands, excluding share data)

Reclassification due to adoption of ASU No. 2018-02 — — 6,746 (6,746) —

Comprehensive income:

Other comprehensive loss, net of tax of $374 — — — (870) (870)

Stock-based compensation expense 4 7,019 — — 7,023

Stock-based compensation forfeited (5) 5 — — —

Comprehensive income:

Other comprehensive income, net of tax of $(1,129) — — — 2,755 2,755

Reclassification due to adoption of ASU No. 2016-02 — — (1,226) — (1,226)

Stock-based compensation expense 3 6,842 — — 6,845

Stock-based compensation forfeited (1) — — — (1)

Comprehensive income:

Other comprehensive income, net of tax of $(1,287) — — — 3,392 3,392

Reclassification due to adoption of ASU No. 2016-13 — — (9,649) — (9,649)

Stock-based compensation expense 3 4,236 — — 4,239

Stock-based compensation forfeited (2) 2 — — —

See accompanying notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Years ended December 31,

Operating activities:

Mortgage banking activity (25,798) — —

Net depreciation, amortization and accretion 4,738 3,824 8,120

Net amortization on marketable securities 3,797 922 1,871

Noncash compensation expense related to stock benefit plans 4,239 6,845 7,023

Noncash write-down of real estate owned 321 607 1,518

Investing activities:

Purchase of marketable securities held-to-maturity (164,629) — —

Proceeds from sale of loans held for investment 50,791 97,923 —

Sale of real estate owned for investment, net 607 608 607

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Years ended December 31,

Financing activities:

Proceeds from long-term borrowings 123,211 — —

Repayments of long-term borrowings (206,908) — —

Repurchase of Northwest stock (9,276) — —

Net increase/(decrease) in cash and cash equivalents $ 675,431 (7,943) (8,921)

Net increase/(decrease) in cash and cash equivalents 675,431 (7,943) (8,921)

Cash paid during the period for:

Business acquisitions:

Northwest Bancshares, Inc. common stock issued (213,406) (43,288) —

Net cash paid — (45,600) —

Noncash activities:

Sale of real estate owned financed by the Company 126 44 296

See accompanying notes to Consolidated Financial Statements.

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December 31, 2020, 2019 and 2018

(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 Warren, Pennsylvania, 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, 2020 and 2019.

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 $1.8 million and $1.5 million at December 31, 2020 and December 31, 2019, 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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020, 2019 and 2018

(All dollar amounts presented in tables are in thousands, except as indicated)

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 and $900,000 at December 31, 2020 and December 31, 2019, respectively, 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 $31.7 million and $23.3 million at December 31, 2020 and December 31, 2019, 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, except for loans that received six-month deferrals as a result of COVID-19. Accrued interest receivable on loans that received six-month deferrals was $4.4 million at December 31, 2020. 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 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

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December 31, 2020, 2019 and 2018

(All dollar amounts presented in tables are in thousands, except as indicated)

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, 2020 and 2019, there were $58.8 million and $7.7 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.

Upon adoption of ASC 326, we assessed our legacy loans that were previously accounted for under ASC 310-30 to determine whether they share similar risk characteristics and whether some or all of the assets should be assessed collectively with other loans that share similar risk characteristics. Upon adoption, an allowance for credit losses was determined for each loan and added to the loan's carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the loan and the new amortized cost is the noncredit premium or discount which will be amortized into interest income over the remaining life of the loan. Changes to the allowance for credit losses after adoption 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020, 2019 and 2018

(All dollar amounts presented in tables are in thousands, except as indicated)

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 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 twelve-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, 2020, we considered the most recent economic conditions and forecasts available which incorporated the impact of COVID-19. The ACL increased in the period largely attributable to 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020, 2019 and 2018

(All dollar amounts presented in tables are in thousands, except as indicated)

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 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

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December 31, 2020, 2019 and 2018

(All dollar amounts presented in tables are in thousands, except as indicated)

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 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.

(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