Derivative Financial Instruments

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We are a party to derivative financial instruments in the normal course of business to manage our own exposure to fluctuations in interest rates and to meet the needs of our customers. The primary derivatives that we use are interest rate swaps and caps and foreign exchange contracts, which are entered into with counterparties that meet established credit standards. We believe that the credit risk inherent in all of our derivative contracts is minimal based on our credit standards and the netting and collateral provisions of the interest rate swap agreements.

Derivatives Designated as Hedging Instruments

During March 2020, the Company entered into four separate pay-fixed interest rate swaps in order to synthetically convert short-term three month FHLB advances to fixed-rate term funding with an aggregate value of $100 million with maturities ranging from three to five years. Our risk management objective and strategy for these interest rate swaps is to reduce our exposure to variability in interest-related cash outflows attributable to changes in the USD-LIBOR swap rate, or its commercially accepted replacement, the designated benchmark interest rate being hedged. Based upon our contemporaneous quantitative analysis at the inception of each interest rate swap, we have determined these interest rate swaps qualify for hedge accounting in accordance with ASC 815, Derivatives and Hedging.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.

Derivatives Not Designated as Hedging Instruments

We act as an interest rate or foreign exchange swap counterparty for certain commercial borrowers in the normal course of servicing our customers, which are accounted for at fair value. We manage our exposure to such interest rate or foreign exchange swaps by entering into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the swaps we have with the commercial borrowers. These positions (referred to as “customer swaps”) directly offset each other and our exposure is the fair value of the derivatives due to changes in credit risk of our commercial borrowers and third parties. Customer swaps are recorded within other assets or other liabilities on the consolidated statement of financial condition at their estimated fair value. Changes to the fair value of assets and liabilities arising from these derivatives are included, net, in other operating income in the consolidated statement of income.

We enter into interest rate lock commitments for residential mortgage loans which commit us to lend funds to a potential borrower at a specific interest rate within a specified period of time. Interest rate lock commitments that relate to the origination of mortgage loans that will be held-for-sale are considered derivative financial instruments under applicable accounting guidance. Interest rate lock commitments on loans held-for-sale are carried at fair value in other assets on the consolidated statement of financial condition. Northwest sells loans to the secondary market on a mandatory or best efforts basis. The loans sold on a mandatory basis commit us to deliver a specific principal amount of mortgage loans to an investor at a specified price, by a specified date, or the commitment must be paired off. These forward commitments entered into on a mandatory delivery basis meet the definition of a derivative financial instrument. All closed loans to be sold on a mandatory delivery basis are classified as held-for-sale on the consolidated statement of financial condition. Changes to the fair value of the interest rate lock commitments and the forward commitments are recorded in mortgage banking income in the consolidated statements of income.

We enter into risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution should the borrower fail to perform on its interest rate derivative contract with the financial institution.

The following table presents information regarding our derivative financial instruments for the periods indicated (in thousands):



	Asset derivatives			Liability derivatives
	Notional amount		Fair value	Notional amount	Fair value
At March 31, 2020
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	—	—	100,000	558
Derivatives not designated as hedging instruments:
Interest rate swap agreements	446,598		54,656	446,598	54,818
Interest rate lock commitments	80,158		507	—	—
Forward commitments	5,465		197	—	—
Risk participation agreements	—		—	41,123	120
Total Derivatives	$	532,221	55,360	587,721	55,496

At December 31, 2019
Derivatives not designated as hedging instruments:
Interest rate swap agreements	$	391,502	20,889	391,502	20,952
Interest rate lock commitments	24,373		559	—	—
Forward commitments	5,151		145	—	—
Risk participation agreements	—		—	41,164	39
Total derivatives	$	421,026	21,593	432,666	20,991

The following table presents income or expense recognized on derivatives for the periods indicated (in thousands):



	For the quarter ended March 31,
	2020			2019
Hedging derivatives:
Decrease in interest expense	$	(12	)	—

Non-hedging swap derivatives:
Decrease in other income	(177		)	—
Increase in mortgage banking income	1			—

The following table presents the key characteristics of the Company's interest rate derivative transactions designated as cash flow hedges of interest rate risk as of March 31, 2020 (in thousands):



	Notional amount		Effective rate		Estimated increase/(decrease) to interest expense in the next twelve months	Maturity Date	Remaining term (in months)
Interest rate products:
Issued March 16, 2020	$	30,000	0.81	%	200	3/17/2025	60
Issued March 20, 2020	25,000		0.15	%	205	3/20/2023	36
Issued March 20, 2020	25,000		0.18	%	197	3/20/2024	48
Issued March 26, 2020	20,000		(0.07	)%	166	9/26/2024	54
Total	$	100,000			768