Derivative Financial Instruments

12 Months Ended

Dec. 31, 2022

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 at such time was to reduce our exposure to variability in interest-related cash outflows attributable to changes in the USD-LIBOR swap rate, the designated benchmark interest rate being hedged. Based upon our contemporaneous quantitative analysis at the inception of each interest rate swap, we have determined these interest rate swaps qualified for hedge accounting in accordance with ASC 815, Derivatives and Hedging.

As long as the hedge remains highly effective the 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. A hedging relationship that is determined to not be highly effective no longer qualifies for hedge accounting and any gain or loss is recognized immediately in earnings. During the quarter of September 30, 2020, the Company discontinued these cash flow hedges and, as a result, reclassified a $1.3 million loss into earnings. As of December 31, 2022, the Company had no cash flow hedges.

Derivatives Not Designated as Hedging Instruments

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

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

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

The following table presents information regarding our derivative financial instruments for the periods indicated:


	Asset derivatives			Liability derivatives
	Notional amount		Fair value	Notional amount	Fair value
At December 31, 2022


Derivatives not designated as hedging instruments:
Interest rate swap agreements	$	651,114	26,642	651,114	45,464
Foreign exchange swap agreements	—		—	2,328	23
Interest rate lock commitments	19,727		559	—	—
Forward commitments	4,909		128	—	—
Risk participation agreements	—		—	114,159	18
Total derivatives	$	675,750	27,329	767,601	45,505

At December 31, 2021
Derivatives not designated as hedging instruments:
Interest rate swap agreements	$	644,997	31,254	644,997	31,357
Foreign exchange swap agreements	—		—	17,124	341
Interest rate lock commitments	67,473		1,684	—	—
Forward commitments	14,484		371	—	—
Risk participation agreements	—		—	93,135	60
Total derivatives	$	726,954	33,309	755,256	31,758

The following table presents income or expenses recognized on derivatives for the periods indicated:


	For the years ended December 31,
	2022		2021	2020
Hedging derivatives:
Decrease in interest expense	$	—	—	(35)

Non-hedging swap derivatives:
(Decrease)/increase in other income	(83)		1,033	(700)
Increase in mortgage banking income	1,368		5,515	6,867