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Disclosures About Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2024
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, 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 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.

Cash Flow Hedges, 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 SOFR discount 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 SOFR 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 that 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 March 31, 2024 and December 31, 2023, 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 March 31, 2024 (in thousands): 
Carrying
amount
Estimated
fair value
Level 1Level 2Level 3
Financial assets:     
Cash and cash equivalents$119,319 119,319 119,319 — — 
Securities available-for-sale1,094,009 1,094,009 — 1,094,009 — 
Securities held-to-maturity801,107 680,353 — 680,353 — 
Loans receivable, net11,368,267 10,370,310 — — 10,370,310 
Loans held-for-sale8,082 8,082 — 213 7,869 
Accrued interest receivable50,680 50,680 50,680 — — 
Interest rate lock commitments479 479 — — 479 
Forward commitments58 58 — 58 — 
Foreign exchange swaps— — 
Interest rate swaps designated as hedging instruments2,300 2,300 — 2,300 — 
Interest rate swaps not designated as hedging instruments45,188 45,188 — 45,188 — 
FHLB stock30,811 30,811 — — — 
Total financial assets$13,520,302 12,401,591 169,999 1,822,123 10,378,658 
Financial liabilities:     
Savings and checking deposits$9,284,830 9,284,830 9,284,830 — — 
Time deposits2,786,814 2,333,365 — — 2,333,365 
Borrowed funds400,783 389,997 389,997 — — 
Subordinated debt114,276 112,027 — 112,027 — 
Junior subordinated debentures129,639 123,167 — — 123,167 
Interest rate swaps not designated as hedging instruments45,220 45,220 — 45,220 — 
Risk participation agreements17 17 — 17 — 
Accrued interest payable17,395 17,395 17,395 — — 
Total financial liabilities$12,778,974 12,306,018 9,692,222 157,264 2,456,532 
 
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, 2023 (in thousands): 
Carrying
amount
Estimated
fair value
Level 1Level 2Level 3
Financial assets:     
Cash and cash equivalents$122,260 122,260 122,260 — — 
Securities available-for-sale1,043,359 1,043,359 — 1,043,359 — 
Securities held-to-maturity814,839 699,506 — 699,506 — 
Loans receivable, net11,280,798 10,274,593 — — 10,274,593 
Residential mortgage loans held-for-sale8,768 8,768 — — 8,768 
Accrued interest receivable 47,353 47,353 47,353 — — 
Interest rate lock commitments641 641 — — 641 
Forward commitments12 12 — 12 — 
Interest rate swaps designated as hedging instruments713 713 — 713 — 
Interest rate swaps not designated as hedging instruments41,406 41,406 — 41,406 — 
FHLB stock30,146 30,146 — — — 
Total financial assets$13,390,295 12,268,757 169,613 1,784,996 10,284,002 
Financial liabilities:     
Savings and checking accounts$9,377,021 9,377,021 9,377,021 — — 
Time deposits2,602,881 2,113,177 — — 2,113,177 
Borrowed funds398,895 386,446 386,446 — — 
Subordinated debt114,189 109,471 — 109,471 — 
Junior subordinated debentures129,574 112,159 — — 112,159 
Foreign exchange swaps291 291 — 291 — 
Interest rate swaps designated as hedging instruments1,198 1,198 — 1,198 — 
Interest rate swaps not designated as hedging instruments41,437 41,437 — 41,437 — 
Risk participation agreements 14 14 — 14 — 
Accrued interest payable13,669 13,669 13,669 — — 
Total financial liabilities$12,679,169 12,154,883 9,777,136 152,411 2,225,336 

Fair value estimates are made at a point-in-time, based on relevant market data and information about the instrument. The methods and assumptions detailed above were used in estimating the fair value of financial instruments at both March 31, 2024 and December 31, 2023.
     
The following table represents assets and liabilities measured at fair value on a recurring basis at March 31, 2024 (in thousands):
Level 1Level 2Level 3Total assets 
at fair value
Debt securities:    
U.S. government and agencies$— 56,718 — 56,718 
Government-sponsored enterprises— 40,519 — 40,519 
States and political subdivisions— 74,271 — 74,271 
Corporate— 7,634 — 7,634 
Total debt securities— 179,142 — 179,142 
Residential mortgage-backed securities:    
GNMA— 31,305 — 31,305 
FNMA— 98,861 — 98,861 
FHLMC— 82,746 — 82,746 
Non-agency— — 
Collateralized mortgage obligations:    
GNMA— 374,391 — 374,391 
FNMA— 144,489 — 144,489 
FHLMC— 183,070 — 183,070 
Total mortgage-backed securities— 914,867 — 914,867 
Interest rate lock commitments— — 479 479 
Forward commitments— 58 — 58 
Foreign exchange swaps— — 
Interest rate swaps designated as hedging instruments— 2,300 — 2,300 
Interest rate swaps not designated as hedging instruments— 45,188 — 45,188 
Total assets$— 1,141,557 479 1,142,036 
Interest rate swaps not designated as hedging instruments— 45,220 — 45,220 
Risk participation agreements— 17 — 17 
Total liabilities $— 45,237 — 45,237 
The following table represents assets and liabilities measured at fair value on a recurring basis at December 31, 2023 (in thousands):
Level 1Level 2Level 3Total assets 
at fair value
Debt securities:    
U.S. government and agencies$— 58,314 — 58,314 
Government-sponsored enterprises— 40,597 — 40,597 
States and political subdivisions— 75,469 — 75,469 
Corporate— 7,688 — 7,688 
Total debt securities— 182,068 — 182,068 
Residential mortgage-backed securities:    
GNMA— 17,441 — 17,441 
FNMA— 102,678 — 102,678 
FHLMC— 70,830 — 70,830 
Non-agency— — 
Collateralized mortgage obligations:    
GNMA— 331,784 — 331,784 
FNMA— 148,892 — 148,892 
FHLMC— 189,661 — 189,661 
Total mortgage-backed securities— 861,291 — 861,291 
Interest rate lock commitments— — 641 641 
Forward commitments— 12 — 12 
Interest rate swaps designated as hedging instruments— 713 — 713 
Interest rate swaps not designated as hedging instruments— 41,406 — 41,406 
Total assets$— 1,085,490 641 1,086,131 
Foreign exchange swaps$— 291 — 291 
Interest rate swaps designated as hedging instruments— 1,198 — 1,198 
Interest rate swaps not designated as hedging instruments— 41,437 — 41,437 
Risk participation agreements— 14 — 14 
Total liabilities $— 42,940 — 42,940 

The following table presents the changes in Level 3 assets and liabilities measured at fair value on a recurring basis (in thousands):
For the quarter ended March 31,
20242023
Beginning balance,$641 559 
Interest rate lock commitments:
Net activity(162)(173)
Ending balance$479 386 

Certain assets and liabilities are measured at fair value on a nonrecurring basis after initial recognition such as loans held-for-sale, loans individually assessed, real estate owned, and mortgage servicing rights.
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 March 31, 2024 (in thousands):
Level 1Level 2Level 3Total assets 
at fair value
Loans individually assessed$— — 39,123 39,123 
Mortgage servicing rights— — 173 173 
Real estate owned, net— — 50 50 
Total assets$— — 39,346 39,346 

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, 2023 (in thousands): 
Level 1Level 2Level 3Total assets 
at fair value
Loans individually assessed$— — 36,747 36,747 
Mortgage servicing rights— — 133 133 
Real estate owned, net— — 104 104 
Total assets$— — 36,984 36,984 

Individually Assessed Loans - A loan is considered to be individually assessed as described in Note 1(f) of the Notes to the Consolidated Financial Statements in Item 8 of Part II of our 2023 Annual Report on Form 10-K. 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 March 31, 2024 (in thousands): 
 Fair valueValuation techniquesSignificant
unobservable inputs
Range  (weighted average)
Loans individually assessed$39,123 Appraisal value (1)Estimated cost to sell10%
Mortgage servicing rights173 Discounted cash flowAnnual service cost$89
Prepayment rate
6.6% to 18.2% (10.7%)
Expected life (months)
51.0 to 102.3 (72.3)
Option adjusted spread
729 basis points
Forward yield curve
5.43% to 5.33%
Real estate owned, net50 Appraisal value (1)Estimated cost to sell10%
Loans held for sale7,869 Quoted prices for similar loans in active markets adjusted by an expected pull-through rateEstimated pull-through rate100%
(1)Fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow method if the loan is not collateral dependent.