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FAIR VALUE OF FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2022
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company’s financial instruments as of December 31, 2022 and 2021, whether or not recognized or recorded in the Consolidated Statements of Financial Condition (in thousands):
 December 31, 2022December 31, 2021
 LevelCarrying ValueEstimated Fair ValueCarrying ValueEstimated Fair Value
Assets:    
Cash and cash equivalents1$243,062 $243,062 $2,134,300 $2,134,300 
Securities—trading328,694 28,694 26,981 26,981 
Securities—available-for-sale22,789,031 2,789,031 3,638,993 3,638,993 
Securities—held-to-maturity21,109,319 933,513 464,008 484,483 
Securities—held-to-maturity38,648 8,667 57,347 57,370 
Securities purchased under agreements to resell2300,000 300,000 300,000 300,000 
Loans held for sale256,857 56,948 96,487 96,914 
Loans receivable, net310,005,259 9,810,965 8,952,664 9,100,516 
Equity securities1553 553 1,000 1,298 
FHLB stock312,000 12,000 12,000 12,000 
Bank-owned life insurance1297,565 297,565 244,156 244,156 
Mortgage servicing rights315,331 35,148 16,045 24,393 
SBA servicing rights3835 835 1,161 1,161 
Investments in limited partnerships312,427 12,427 10,257 10,257 
Derivatives:
Interest rate swaps219,339 19,339 20,826 20,826 
Interest rate lock and forward sales commitments2,3142 142 1,555 1,555 
Liabilities:    
Demand, interest checking and money market accounts210,186,439 10,186,439 10,703,586 10,703,586 
Regular savings22,710,090 2,710,090 2,784,716 2,784,716 
Certificates of deposit2723,530 702,581 838,631 836,877 
FHLB advances250,000 50,000 50,000 50,287 
Other borrowings2232,799 232,799 264,490 264,490 
Subordinated notes, net298,947 96,718 98,564 105,241 
Junior subordinated debentures374,857 74,857 119,815 119,815 
Derivatives:
Interest rate swaps237,150 37,150 11,615 11,615 
Interest rate lock and forward sales commitments2,3118 118 140 140 
Risk participation agreement267 67 — — 

The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). When measuring fair value, management will maximize the use of observable inputs and minimize the use of unobservable inputs whenever possible. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies.  However, considerable judgment is required to interpret data to develop the estimates of fair value.  Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.  In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments.  This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.
Items Measured at Fair Value on a Recurring Basis:

The following tables present financial assets and liabilities measured at fair value on a recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets and liabilities as of December 31, 2022 and 2021 (in thousands):
 December 31, 2022
 Level 1Level 2Level 3Total
Assets:    
Securities—trading
Corporate bonds (TPS securities)$— $— $28,694 $28,694 
Securities—available-for-sale    
U.S. Government and agency obligations— 55,108 — 55,108 
Municipal bonds— 261,209 — 261,209 
Corporate bonds— 121,853 — 121,853 
Mortgage-backed or related securities— 2,139,336 — 2,139,336 
Asset-backed securities— 211,525 — 211,525 
 — 2,789,031 — 2,789,031 
Loans held for sale(1)
— 2,305 — 2,305 
Equity securities553 — — 553 
SBA servicing rights— — 835 835 
Investment in limited partnerships— — 12,427 12,427 
Derivatives
Interest rate swaps— 19,339 — 19,339 
Interest rate lock and forward sales commitments— 61 81 142 
 $553 $2,810,736 $42,037 $2,853,326 
Liabilities:    
Junior subordinated debentures$— $— $74,857 $74,857 
Derivatives    
Interest rate swaps— 37,150 — 37,150 
Interest rate lock and forward sales commitments— 76 42 118 
Risk participation agreement— 67 — 67 
 $— $37,293 $74,899 $112,192 
 December 31, 2021
 Level 1Level 2Level 3Total
Assets:    
Securities—trading    
Corporate bonds (TPS securities)$— $— $26,981 $26,981 
Securities—available-for-sale    
U.S. Government and agency obligations— 201,332 — 201,332 
Municipal bonds— 308,612 — 308,612 
Corporate bonds— 117,347 — 117,347 
Mortgage-backed or related securities— 2,805,268 — 2,805,268 
Asset-backed securities— 206,434 — 206,434 
 — 3,638,993 — 3,638,993 
Loans held for sale(1)
— 39,775 — 39,775 
SBA servicing rights— — 1,161 1,161 
Investment in limited partnerships— — 10,257 10,257 
Derivatives    
Interest rate swaps— 20,826 — 20,826 
Interest rate lock and forward sales commitments— 88 1,467 1,555 
 $— $3,699,682 $39,866 $3,739,548 
Liabilities    
Junior subordinated debentures$— $— $119,815 $119,815 
Derivatives    
Interest rate swaps— 11,615 — 11,615 
Interest rate lock and forward sales commitments— 140 — 140 
 $— $11,755 $119,815 $131,570 

(1)    The unpaid principal balance of residential mortgage loans held for sale carried at fair value on a recurring basis was $2.2 million and $38.6 million at December 31, 2022 and 2021, respectively.

The following methods were used to estimate the fair value of each class of financial instruments above:

Securities:  The estimated fair values of investment securities and mortgaged-backed securities are priced using current active market quotes, if available, which are considered Level 1 measurements.  For most of the portfolio, matrix pricing based on the securities’ relationship to other benchmark quoted prices is used to establish the fair value.  These measurements are considered Level 2.  Due to the continued limited activity in the trust preferred markets that have limited the observability of market spreads for some of the Company’s TPS securities, management has classified these securities as a Level 3 fair value measure. Management periodically reviews the pricing information received from third-party pricing services and tests those prices against other sources to validate the reported fair values.

Loans Held for Sale: Fair values for residential mortgage loans held for sale are determined by comparing actual loan rates to current secondary market prices for similar loans.

Equity Securities: Equity securities are invested in a publicly traded stock. The fair value of these securities are based on daily quoted market prices.

SBA Servicing Rights: Fair values are estimated based on an independent dealer analysis by discounting estimated net future cash flows from servicing. The evaluation utilizes assumptions market participants would use in determining fair value including prepayment speeds, delinquency and foreclosure rates, the discount rate, servicing costs, and the timing of cash flows.  The SBA servicing portfolio is stratified by loan type and fair value estimates are adjusted up or down based on the serviced loan interest rates versus current rates on new loan originations since the most recent independent analysis.
Junior Subordinated Debentures:  The fair value of junior subordinated debentures is estimated using an income approach technique. The significant inputs included in the estimation of fair value are the credit risk adjusted spread and three month LIBOR. The credit risk adjusted spread represents the nonperformance risk of the liability. The Company utilizes an external valuation firm to validate the reasonableness of the credit risk adjusted spread used to determine the fair value. The junior subordinated debentures are carried at fair value which represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. Due to inactivity in the trust preferred markets that have limited the observability of market spreads, management has classified this as a Level 3 fair value measurement.

Derivatives: Derivatives include interest rate swap agreements, interest rate lock commitments to originate loans held for sale, forward sales contracts to sell loans and securities related to mortgage banking activities and risk participation agreements. Fair values for these instruments, which generally change as a result of changes in the level of market interest rates, are estimated based on dealer quotes and secondary market sources. As the interest rate lock commitments use a pull-through rate that is considered an unobservable input, these derivatives are classified as a level 3 fair value measurement.

Off-Balance Sheet Items: Off-balance sheet financial instruments include unfunded commitments to extend credit, including standby letters of credit, and commitments to purchase investment securities. The fair value of these instruments is not considered to be material.

Limitations: The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2022 and 2021.  The factors used in the fair value estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3):

The following table provides a description of the valuation technique, unobservable inputs and quantitative and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a recurring and non-recurring basis at December 31, 2022 and 2021:
December 31
20222021
Financial InstrumentsValuation TechniqueUnobservable InputsWeighted Average RateWeighted Average Rate
Corporate bonds (TPS securities)Discounted cash flowsDiscount rate8.27 %3.71 %
Junior subordinated debenturesDiscounted cash flowsDiscount rate8.27 %3.71 %
Loans individually evaluatedCollateral valuationsDiscount to appraised valuen/a
8.5% to 20.0%
REOAppraisalsDiscount to appraised value68.35 %60.91 %
Interest rate lock commitmentsPricing modelPull-through rate78.65 %86.64 %
Investments in limited partnershipsNet Asset ValueInfrequent transactionsn/an/a
SBA servicing rightsDiscounted cash flowsConstant prepayment rate14.10%12.25%

TPS Securities: Management believes that the credit risk-adjusted spread used to develop the discount rate utilized in the fair value measurement of TPS securities is indicative of the risk premium a willing market participant would require under current market conditions for instruments with similar contractual rates and terms and conditions and issuers with similar credit risk profiles and with similar expected probability of default. Management attributes the change in fair value of these instruments, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of assets subsequent to their issuance.

Junior subordinated debentures: Similar to the TPS securities discussed above, management believes that the credit risk-adjusted spread utilized in the fair value measurement of the junior subordinated debentures is indicative of the risk premium a willing market participant would require under current market conditions for an issuer with Banner’s credit risk profile. Management attributes the change in fair value of the junior subordinated debentures, compared to their par value, primarily to perceived general market adjustments to the risk premiums for these types of liabilities subsequent to their issuance. Future contractions in the risk adjusted spread relative to the spread currently utilized to measure the Company’s junior subordinated debentures at fair value as of December 31, 2022, or the passage of time, will result in negative fair value adjustments. At December 31, 2022, the discount rate utilized was based on a credit spread of 350 basis points and three month LIBOR of 477 basis points.

Interest rate lock commitments: The fair value of the interest rate lock commitments is based on secondary market sources adjusted for an estimated pull-through rate. The pull-through rate is based on historical loan closing rates for similar interest rate lock commitments. An increase or decrease in the pull-through rate would have a corresponding, positive or negative fair value adjustment.

SBA servicing asset: The constant prepayment rate (CPR) is set based on industry data. An increase in the CPR would result in a negative fair value adjustment, where a decrease in CPR would result in a positive fair value adjustment.
The following table provides a reconciliation of the assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2022 and 2021 (in thousands):
Level 3 Fair Value Inputs
 TPS SecuritiesBorrowings— Junior Subordinated DebenturesInterest Rate Lock and Forward Sales CommitmentsInvestments in Limited PartnershipsSBA Servicing Asset
Balance, January 1, 2021$24,980 $116,974 $5,221 $2,819 $— 
Net change recognized in earnings2,001 — (3,754)2,615 1,161 
Net change recognized in AOCI— 11,089 — — — 
Purchases, issuances and settlements— — — 4,823 — 
Redemptions— (8,248)— — — 
Balance, December 31, 202126,981 119,815 1,467 10,257 1,161 
Net change recognized in earnings1,713 — (1,428)(460)(326)
Net change recognized in AOCI— 5,560 — — — 
Purchases, issuances and settlements— — — 2,630 — 
Redemptions— (50,518)— — — 
Balance, December 31, 2022$28,694 $74,857 $39 $12,427 $835 

Interest income and dividends from the TPS securities are recorded as a component of interest income. Interest expense related to the junior subordinated debentures is measured based on contractual interest rates and reported in interest expense.  The change in fair value of the junior subordinated debentures, which represents changes in instrument specific credit risk, is recorded in other comprehensive income. The change in fair value of the investment in limited partnerships and the SBA servicing asset are recorded as a component of non-interest income.

Items Measured at Fair Value on a Non-recurring Basis

The following tables present financial assets and liabilities measured at fair value on a non-recurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at December 31, 2022 and 2021 (in thousands):
 December 31, 2022
 Level 1Level 2Level 3Total
Loans individually evaluated$— $— $1,883 $1,883 
REO— — 340 340 
Loans held for sale— 49,474 — 49,474 
 December 31, 2021
 Level 1Level 2Level 3Total
Loans individually evaluated$— $— $2,989 $2,989 
REO— — 852 852 

The following table presents the losses resulting from non-recurring fair value adjustments for the years ended December 31, 2022, 2021 and 2020 (in thousands):
For the years ended December 31,
202220212020
Loans individually evaluated$(626)$(303)$(3,482)
REO— — (45)
Loans held for sale(2,538)— — 
Total loss from non-recurring measurements$(3,164)$(303)$(3,527)
Loans individually evaluated: Expected credit losses for loans evaluated individually are measured based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or when the Bank determines that foreclosure is probable, the expected credit loss is measured based on the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. As a practical expedient, the Bank measures the expected credit loss for a loan using the fair value of the collateral, if repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Bank’s assessment as of the reporting date. In both cases, if the fair value of the collateral is less than the amortized cost basis of the loan, the Bank will recognize an allowance as the difference between the fair value of the collateral, less costs to sell (if applicable) at the reporting date and the amortized cost basis of the loan. If the fair value of the collateral exceeds the amortized cost basis of the loan, any expected recovery added to the amortized cost basis will be limited to the amount previously charged-off by the subsequent changes in the expected credit losses for loans evaluated individually are included within the provision for credit losses in the same manner in which the expected credit loss initially was recognized or as a reduction in the provision that would otherwise be reported.

REO: The Company records REO (acquired through a lending relationship) at fair value on a non-recurring basis. Fair value adjustments on REO are based on updated real estate appraisals which are based on current market conditions. All REO properties are recorded at the lower of the estimated fair value of the real estate, less expected selling costs, or the carrying amount of the defaulted loans. From time to time, non-recurring fair value adjustments to REO are recorded to reflect partial write-downs based on an observable market price or current appraised value of property. Banner considers any valuation inputs related to REO to be Level 3 inputs. The individual carrying values of these assets are reviewed for impairment at least annually and any additional impairment charges are expensed to operations.

Loans held for sale: The multifamily held for sale loans are carried at the lower of cost or market value. Lower of cost or market adjustments for multifamily loans held for sale are calculated based on discounted cash flows using a discount rate that is a combination of market spreads for similar loan types added to selected index rates. If the fair value of the multifamily held for sale loans is lower than the amortized cost basis of the loans, a net unrealized loss is recognized through the valuation allowance by charges to income.