Disclosures About Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2022

Fair Value Disclosures [Abstract]

Disclosures About Fair Value of Financial Instruments

Disclosures About Fair Value of Financial Instruments

We are required to disclose fair value information about financial instruments whether or not recognized in the Consolidated Statement of Financial Condition. Fair value information of certain financial instruments and all nonfinancial instruments is not required to be disclosed. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Financial assets and liabilities recognized or disclosed at fair value on a recurring basis and certain financial assets and liabilities on a non-recurring basis are accounted for using a three-level hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. This hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest level input that has a significant impact on fair value measurement is used.

Financial assets and liabilities are categorized based upon the following characteristics or inputs to the valuation techniques:

•Level 1 - Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in actively traded markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities. 

•Level 2 - Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets or liabilities that are actively traded. Level 2 also includes pricing models in which the inputs are corroborated by market data, for example, matrix pricing. 

•Level 3 - Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following: 

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

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

•Quotes and other information from brokers or other external sources where the inputs are not deemed observable. 

We are responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value. We perform due diligence to understand the inputs used or how the data was calculated or derived. We also corroborate the reasonableness of external inputs in the valuation process.

    The carrying amounts reported in the Consolidated Statement of Financial Condition approximate fair value for the following

financial instruments: cash and cash equivalents, marketable securities available-for-sale, residential mortgage loans held-for-sale, accrued interest receivable, interest rate lock commitments, forward commitments, interest rate swaps, savings and checking deposits, foreign exchange swaps, risk participation agreements, and accrued interest payable.

Marketable Securities

Where available, market values are based on quoted market prices, dealer quotes, and prices obtained from independent pricing services.

Debt securities — available-for-sale - Generally, debt securities are valued using pricing for similar securities, recently executed transactions and other pricing models utilizing observable inputs. The valuation for most debt securities is classified as Level 2. Securities within Level 2 include corporate bonds, municipal bonds, mortgage-backed securities and U.S. government obligations. Certain debt securities which were AAA rated at purchase do not have an active market and as such we have used an alternative method to determine the fair value of these securities. The fair value has been determined using a discounted cash flow model using market assumptions, which generally include cash flow, collateral and other market assumptions. As such, securities which otherwise would have been classified as Level 2 securities if an active market for those assets or similar assets existed are included herein as Level 3 assets.

Debt securities — held-to-maturity - The fair value of debt securities held-to-maturity is determined in the same manner as debt securities available-for-sale.

Loans Receivable

Loans with comparable characteristics including collateral and re-pricing structures are segregated for valuation purposes. Each loan pool is separately valued utilizing a discounted cash flow analysis. Projected monthly cash flows are discounted to present value using a market rate for comparable loans, which is not considered an exit price. Characteristics of comparable loans include remaining term, coupon interest, and estimated prepayment speeds. Delinquent loans are separately evaluated given the impact delinquency has on the projected future cash flow of the loan including the approximate discount or market rate, which is not considered an exit price.

Loans Held-for-Sale

    The estimated fair value of loans held-for-sale is based on market bids obtained from potential buyers.

FHLB Stock

Due to the restrictions placed on the transferability of FHLB stock, it is not practical to determine the fair value. FHLB stock is recorded at cost.

Deposit Liabilities

The estimated fair value of deposits with no stated maturity, which includes demand deposits, money market, and other savings accounts, is the amount payable on demand. Although market premiums paid for depository institutions reflect an additional value for these low-cost deposits, adjusting fair value for any value expected to be derived from retaining those deposits for a future period of time or from the benefit that results from the ability to fund interest-earning assets with these deposit liabilities is prohibited. The fair value estimates of deposit liabilities do not include the benefit that results from the low-cost funding provided by these deposits compared to the cost of borrowing funds in the market. Fair values for time deposits are estimated using a discounted cash flow calculation that applies contractual cost currently being offered in the existing portfolio to current market rates being offered

locally for deposits of similar remaining maturities. The valuation adjustment for the portfolio consists of the present value of the difference of these two cash flows, discounted at the assumed market rate of the corresponding maturity.

Borrowed Funds

Fixed rate advances are valued by comparing their contractual cost to the prevailing market cost. The carrying amount of repurchase agreements approximates their fair value.

Subordinated Debentures

The fair value of our subordinated debentures is calculated using the discounted cash flows at rates observable for other similarly traded liabilities.

Junior Subordinated Debentures

The fair value of junior subordinated debentures is calculated using the discounted cash flows at the prevailing rate of interest.

Interest Rate Lock Commitments and Forward Commitments

    The fair value of interest rate lock commitments is based on the value of underlying loans held-for-sale which is based on quoted prices for similar loans in the secondary market. This value is then adjusted based on the probability of the loan closing (i.e., the “pull-through” amount, a significant unobservable input). The fair value of forward sale commitments is based on quoted prices from the secondary market based on the settlement date of the contracts.

Interest Rate and Foreign Exchange Swap Agreements and Risk Participation Agreements

    The fair value of interest rate swaps is based upon the present value of the expected future cash flows using the LIBOR swap curve, the basis for the underlying interest rate. To price interest rate swaps, cash flows are first projected for each payment date using the fixed rate for the fixed side of the swap and the forward rates for the floating side of the swap. These swap cash flows are then discounted to time zero using LIBOR zero-coupon interest rates. The sum of the present value of both legs is the fair market value of the interest rate swap. These valuations have been derived from our third party vendor’s proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions that we believe to be reasonable. The fair value of the foreign exchange swap is derived from proprietary models rather than actual market quotations. The proprietary models are based upon financial principles and assumptions we believe to be reasonable. Risk participation agreements are entered into when Northwest purchases a portion of a commercial loan that has an interest rate swap. Northwest assumes credit risk on its portion of the interest rate swap should the borrower fail to pay as agreed. The value of risk participation agreements is determined based on the value of the swap after considering the credit quality, probability of default, and loss given default of the borrower.

Off-Balance Sheet Financial Instruments

These financial instruments generally are not sold or traded, and estimated fair values are not readily available. However, the fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. Commitments to extend credit are generally short-term in nature and, if drawn upon, are issued under current market terms. At December 31, 2022 and 2021, there was no significant unrealized appreciation or depreciation on these financial instruments.

The following table sets forth the carrying amount and estimated fair value of our financial instruments included in the Consolidated Statement of Financial Condition at December 31, 2022 and 2021:                             

	December 31, 2022
	Carrying amount		Estimated fair value	Level 1	Level 2	Level 3
Financial assets:
Cash and cash equivalents	$	139,365	139,365	139,365	—	—
Securities available-for-sale	1,218,108		1,218,108	—	1,218,108	—
Securities held-to-maturity	881,249		751,384	—	751,384	—
Loans receivable, net	10,792,503		9,910,852	—	—	9,910,852
Residential mortgage loans held-for-sale	9,913		9,913	—	—	9,913
Accrued interest receivable	35,528		35,528	35,528	—	—
Interest rate lock commitments	559		559	—	—	559
Forward commitments	128		128	—	128	—
Interest rate swaps not designated as hedging instruments	26,642		26,642	—	26,642	—
FHLB stock	40,143		40,143	—	—	—
Total financial assets	$	13,144,138	12,132,622	174,893	1,996,262	9,921,324
Financial liabilities:
Savings and checking deposits	$	10,412,263	10,412,263	10,412,263	—	—
Time deposits	1,052,285		1,059,790	—	—	1,059,790
Borrowed funds	681,166		680,996	680,996	—	—
Subordinated debt	113,840		102,554	—	102,554	—
Junior subordinated debentures	129,314		133,546	—	—	133,546
Foreign exchange swaps	23		23	—	23	—
Interest rate swaps not designated as hedging instruments	45,464		45,464	—	45,464	—
Risk participation agreements	18		18	—	18	—
Accrued interest payable	3,231		3,231	3,231	—	—
Total financial liabilities	$	12,437,604	12,437,885	11,096,490	148,059	1,193,336

	December 31, 2021
	Carrying amount		Estimated fair value	Level 1	Level 2	Level 3
Financial assets:
Cash and cash equivalents	$	1,279,259	1,279,259	1,279,259	—	—
Securities available-for-sale	1,548,592		1,548,592	—	1,548,592	—
Securities held-to-maturity	768,154		751,513	—	751,513	—
Loans receivable, net	9,889,095		9,648,825	—	—	9,648,825
Residential mortgage loans held-for-sale	25,056		25,056	—	—	25,056
Accrued interest receivable	25,599		25,599	25,599	—	—
Interest rate lock commitments	1,684		1,684	—	—	1,684
Forward commitments	371		371	—	371	—
Interest rate swaps not designated as hedging instruments	31,254		31,254	—	31,254	—
FHLB stock	14,184		14,184	—	—	—
Total financial assets	$	13,583,248	13,326,337	1,304,858	2,331,730	9,675,565
Financial liabilities:
Savings and checking accounts	$	10,973,610	10,973,610	10,973,610	—	—
Time deposits	1,327,555		1,339,308	—	—	1,339,308
Borrowed funds	139,093		139,093	139,093	—	—
Subordinated debt	123,575		129,138	—	129,138	—
Junior subordinated debentures	129,054		120,083	—	—	120,083
Foreign exchange swaps	341		341	—	341	—
Interest rate swaps not designated as hedging instruments	31,357		31,357	—	31,357	—
Risk participation agreements	60		60	—	60	—
Accrued interest payable	1,804		1,804	1,804	—	—
Total financial liabilities	$	12,726,449	12,734,794	11,114,507	160,896	1,459,391

Fair value estimates are made at a point-in-time, based on relevant market data and information about the instrument. The preceding methods and assumptions were used in estimating the fair value of financial instruments at December 31, 2022 and 2021. 

The following table represents assets and liabilities measured at fair value on a recurring basis as of December 31, 2022:     

	Level 1		Level 2	Level 3	Total at fair value
Debt securities:
U.S. government and agencies	$	—	60,592	—	60,592
Government sponsored enterprises	—		39,201	—	39,201
States and political subdivisions	—		111,766	—	111,766
Corporate	—		12,978	—	12,978
Total debt securities	—		224,537	—	224,537
Residential mortgage-backed securities:
GNMA	—		12,434	—	12,434
FNMA	—		117,218	—	117,218
FHLMC	—		74,991	—	74,991
Non-agency	—		6	—	6
Collateralized mortgage obligations:
GNMA	—		364,553	—	364,553
FNMA	—		185,588	—	185,588
FHLMC	—		238,781	—	238,781
Total mortgage-backed securities	—		993,571	—	993,571
Interest rate lock commitments	—		—	559	559
Forward commitments	—		128	—	128
Interest rate swaps not designated as hedging instruments	—		26,642	—	26,642
Total assets	$	—	1,244,878	559	1,245,437
Foreign exchange swaps	$	—	23	—	23
Interest rate swaps not designated as hedging instruments	—		45,464	—	45,464
Risk participation agreements	—		18	—	18
Total liabilities	$	—	45,505	—	45,505

The following table represents assets and liabilities measured at fair value on a recurring basis as of December 31, 2021:     

	Level 1		Level 2	Level 3	Total at fair value
Debt securities:
U.S. government and agencies	$	—	75,891	—	75,891
Government sponsored enterprises	—		46,085	—	46,085
States and political subdivisions	—		128,701	—	128,701
Total debt securities	—		250,677	—	250,677
Residential mortgage-backed securities:
GNMA	—		16,510	—	16,510
FNMA	—		160,063	—	160,063
FHLMC	—		100,055	—	100,055
Non-agency	—		431	—	431
Collateralized mortgage obligations:
GNMA	—		492,328	—	492,328
FNMA	—		269,060	—	269,060
FHLMC	—		259,468	—	259,468
Total mortgage-backed securities	—		1,297,915	—	1,297,915
Interest rate lock commitments	—		—	1,684	1,684
Forward commitments	—		371	—	371
Interest rate swaps not designated as hedging instruments	—		31,254	—	31,254
Total assets	$	—	1,580,217	1,684	1,581,901
Foreign exchange swaps	$	—	341	—	341
Interest rate swaps not designated as hedging instruments	—		31,357	—	31,357
Risk participation agreements	—		60	—	60
Total liabilities	$	—	31,758	—	31,758

The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the year ended December 31, 2022 and 2021:                      

	Years ended December 31,
	2022		2021
Beginning balance January 1,	$	1,684	6,465
Net activity	(1,125)		(4,781)
Ending balance December 31,	$	559	1,684

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans individually assessed, real estate owned, and MSRs.

The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of December 31, 2022:                                     

	Level 1		Level 2	Level 3	Total assets  at fair value
Loans individually assessed	$	—	—	15,416	15,416
Mortgage servicing rights	—		—	95	95
Real estate owned, net	—		—	413	413
Total assets	$	—	—	15,924	15,924

The following table represents the fair market measurement for only those nonrecurring assets that had a fair market value below the carrying amount as of December 31, 2021:                                        

	Level 1		Level 2	Level 3	Total assets  at fair value
Loans individually assessed	$	—	—	46,968	46,968
Mortgage servicing rights	—		—	380	380
Real estate owned, net	—		—	873	873
Total assets	$	—	—	48,221	48,221

Individually Assessed Loans - A loan is considered to be individually assessed as described in Note 1(f). We classify loans individually assessed as nonrecurring Level 3.

Mortgage servicing rights - Mortgage servicing rights represent the value of servicing residential mortgage loans, when the mortgage loans have been sold into the secondary market and the associated servicing has been retained. The value is determined through a discounted cash flow analysis, which uses interest rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management judgment. Servicing rights and the related mortgage loans are segregated into categories or homogeneous pools based upon common characteristics. Adjustments are only made when the estimated discounted future cash flows are less than the carrying value, as determined by individual pool. As such, mortgage servicing rights are classified as nonrecurring Level 3.

Real Estate Owned - Real estate owned is comprised of property acquired through foreclosure or voluntarily conveyed by borrowers. These assets are recorded on the date acquired at the lower of the related loan balance or fair value, less estimated disposition costs, with the fair value being determined by appraisal. Subsequently, foreclosed assets are valued at the lower of the amount recorded at acquisition date or fair value, less estimated disposition costs. We classify real estate owned as nonrecurring Level 3.

The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which we have utilized Level 3 inputs to determine fair value at December 31, 2022:

	Fair value ($)	Valuation techniques	Significant  unobservable inputs	Range  (weighted average)
Loans individually assessed	15,416	Appraisal value (1)	Estimated cost to sell	10%
		Discounted cash flow	Discount rate	6.48% (6.48%)
Mortgage servicing rights	95	Discounted cash flow	Annual service cost	$85
			Prepayment rate	6.6% to 12.2% (9.0%)
			Expected life (months)	58.2 to 105.0 (77.6)
			Option adjusted spread	700 basis points
			Forward yield curve	4.12% to 5.04%
Real estate owned, net	413	Appraisal value (1)	Estimated cost to sell	10%
Loans held for sale	9,913	Quoted prices for similar loans in active markets adjusted by an expected pull-through rate	Estimated pull-through rate	100%

(1)  Fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable.