Derivative Financial Instruments

6 Months Ended

Jun. 30, 2024

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 the year ended December 31, 2023 the Company entered into seven 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 $175 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-SOFR swap rate, the designated benchmark interest rate being hedged. Based upon our contemporaneous quantitative analysis at the inception of the interest rate swaps, we have determined these interest rate swaps qualify for hedge accounting in accordance with ASC 815, Derivatives and Hedging. Our cash flow hedges are recorded within other assets on the Consolidated Statement of Financial Condition at their estimated fair value.

As long as the hedge remains highly effective, the changes in the fair value of derivatives designated, and that qualify, as cash flow hedges are recorded in accumulated other comprehensive income and are 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 into earnings. Amount reclassified into earnings are included in interest expense in the Consolidated Statement of Income.

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. These risk participation agreements are recorded within other liabilities on the Consolidated Statement of Financial Condition at their estimated fair value. Changes to the fair value of the the risk participation agreements are included in other operating income in the Consolidated Statement of Income.

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


	Asset derivatives			Liability derivatives
	Notional amount		Fair value	Notional amount	Fair value
At June 30, 2024
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	175,000	2,726	—	—
Derivatives not designated as hedging instruments:
Interest rate swap agreements	743,036		44,420	743,036	44,450
Foreign exchange swap agreements	2,824		2	5,790	25
Interest rate lock commitments	29,284		791	—	—
Forward commitments	2,661		70	—	—
Risk participation agreements	—		—	116,473	106
Total Derivatives	$	952,805	48,009	865,299	44,581

At December 31, 2023


Derivatives designated as hedging instruments:
Interest rate swap agreements	$	75,000	713	100,000	1,198
Derivatives not designated as hedging instruments:
Interest rate swap agreements	725,139		41,406	725,139	41,437
Foreign exchange swap agreements	—		—	12,278	291
Interest rate lock commitments	21,857		641	—	—
Forward commitments	281		12	—	—
Risk participation agreements	—		—	101,727	14
Total derivatives	$	822,277	42,772	939,144	42,940

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


	For the quarter ended June 30,			For the six months ended June 30,
	2024		2023	2024	2023
Hedging derivatives:
Decrease in interest expense	$	734	203	1,467	203

Non-hedging swap derivatives:
(Decrease)/increase in other income	(112)		(128)	175	(330)
Increase in mortgage banking income	323		349	208	176

The following table presents information regarding our derivative financial instruments designated as hedging for the quarter ended June 30, 2024 (dollars in thousands):


	Notional amount		Effective rate		Estimated decrease to interest expense in the next twelve months		Maturity date	Remaining term (in months)
Interest rate products:
Issued May 11, 2023	$	25,000	3.50	%	$	(543)	5/11/2027	34
Issued May 12, 2023	25,000		3.54	%	(532)		5/12/2028	46
Issued May 19, 2023	25,000		3.83	%	(458)		11/19/2027	41
Issued May 31, 2023	25,000		4.05	%	(404)		11/30/2026	29
Issued July 26, 2023	25,000		4.24	%	(356)		7/26/2028	49
Issued July 31, 2023	25,000		4.35	%	(334)		1/31/2028	43
Issued August 9, 2023	25,000		4.32	%	(337)		8/9/2027	37
Total	$	175,000			$	(2,964)