XML 29 R20.htm IDEA: XBRL DOCUMENT
v3.23.3

DERIVATIVES AND HEDGING | 9 Months Ended
--- | ---
Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVES AND HEDGING | Banner Bank is party to various derivative instruments that are used for asset and liability management and client financing needs. Derivative instruments are contracts between two or more parties that have a notional amount and an underlying variable, require no net investment and allow for the net settlement of positions. The notional amount serves as the basis for the payment provision of the contract and takes the form of units, such as shares or dollars. The underlying variable represents a specified interest rate, index, or other component. The interaction between the notional amount and the underlying variable determines the number of units to be exchanged between the parties and influences the market value of the derivative contract. The Company’s predominant derivative and hedging activities involve interest rate swaps related to certain term loans and forward sales contracts associated with mortgage banking activities. Generally, these instruments help the Company manage exposure to market risk and meet client financing needs. Market risk represents the possibility that economic value or net interest income will be adversely affected by fluctuations in external factors such as market-driven interest rates and prices or other economic factors. As of September 30, 2023 and December 31, 2022, the notional values or contractual amounts and fair values of the Company’s derivatives were as follows (in thousands):
| Asset Derivatives |  | Liability Derivatives
| September 30, 2023 |  | December 31, 2022 |  | September 30, 2023 |  | December 31, 2022
| Notional/ Contract Amount |  | Fair Value |  | Notional/ Contract Amount |  | Fair Value |  | Notional/ Contract Amount |  | Fair Value |  | Notional/ Contract Amount |  | Fair Value
Hedged interest rate swaps | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 400,000 |  |  | $ | 21,166 |  |  | $ | 400,000 |  |  | $ | 26,485 |
Interest rate swaps not designated in hedge relationships | 431,935 |  |  | 43,821 |  |  | 440,731 |  |  | 37,119 |  |  | 431,935 |  |  | 43,866 |  |  | 440,731 |  |  | 37,150 |
Master netting agreements |  |  | (20,012) |  |  |  |  | (17,780) |  |  |  |  | (20,012) |  |  |  |  | (17,780) |
Cash offset/(settlement) |  |  | — |  |  |  |  | — |  |  |  |  | 918 |  |  |  |  | (8,705) |
Net interest rate swaps |  |  | 23,809 |  |  |  |  | 19,339 |  |  |  |  | 45,938 |  |  |  |  | 37,150 |
Risk participation agreements | 1,108 |  |  | — |  |  | 1,283 |  |  | — |  |  | 45,639 |  |  | 19 |  |  | 47,283 |  |  | 67 |
Mortgage loan commitments | 26,278 |  |  | 102 |  |  | 15,920 |  |  | 81 |  |  | — |  |  | — |  |  | 12,367 |  |  | 42 |
Forward sales contracts | 28,544 |  |  | 236 |  |  | 16,568 |  |  | 61 |  |  | 4,368 |  |  | 25 |  |  | 3,000 |  |  | 76 |
Total | $ | 487,865 |  |  | $ | 24,147 |  |  | $ | 474,502 |  |  | $ | 19,481 |  |  | $ | 481,942 |  |  | $ | 45,982 |  |  | $ | 503,381 |  |  | $ | 37,335 |
The Company’s asset derivatives are included in other assets, while the liability derivatives are included in accrued expenses and other liabilities on the Consolidated Statements of Financial Condition. Interest Rate Swaps used in Cash Flow Hedges: The Company’s floating rate loans result in exposure to losses in value or net interest income as interest rates change. The risk management objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. During the fourth quarter of 2021, the Company entered into interest rate swaps designated as cash flow hedges to hedge the variable cash flows associated with existing floating rate loans. These hedge contracts involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making floating-rate payments over the life of the agreements without exchange of the underlying notional amount. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest income in the same period during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are made on the Company’s variable-rate assets. During the next 12 months, the Company estimates that an additional $17.8 million will be reclassified as a decrease to interest income. The following table presents the effect of cash flow hedge accounting on AOCI for the three and nine months ended September 30, 2023 and 2022 (in thousands):
| For the Three Months Ended September 30, 2023
| Amount of Gain or (Loss) Recognized in AOCI on Derivative |  | Amount of Gain or (Loss) Recognized in AOCI Included Component |  | Amount of Gain or (Loss) Recognized in AOCI Excluded Component |  | Location of Gain or (Loss) Recognized from AOCI into Income |  | Amount of Gain or (Loss) Reclassified from AOCI into Income |  | Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component |  | Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
Interest rate swaps | $ | (1,455) |  |  | $ | (1,455) |  |  | $ | — |  |  | Interest Income |  | $ | (4,546) |  |  | $ | (4,546) |  |  | $ | — |
| For the Nine Months Ended September 30, 2023
| Amount of Gain or (Loss) Recognized in AOCI on Derivative |  | Amount of Gain or (Loss) Recognized in AOCI Included Component |  | Amount of Gain or (Loss) Recognized in AOCI Excluded Component |  | Location of Gain or (Loss) Recognized from AOCI into Income |  | Amount of Gain or (Loss) Reclassified from AOCI into Income |  | Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component |  | Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
Interest rate swaps | $ | (5,845) |  |  | $ | (5,845) |  |  | $ | — |  |  | Interest Income |  | $ | (12,317) |  |  | $ | (12,317) |  |  | $ | — |
| For the Three Months Ended September 30, 2022
| Amount of Gain or (Loss) Recognized in AOCI on Derivative |  | Amount of Gain or (Loss) Recognized in AOCI Included Component |  | Amount of Gain or (Loss) Recognized in AOCI Excluded Component |  | Location of Gain or (Loss) Recognized from AOCI into Income |  | Amount of Gain or (Loss) Reclassified from AOCI into Income |  | Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component |  | Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
Interest rate swaps | $ | (9,153) |  |  | $ | (9,153) |  |  | $ | — |  |  | Interest Income |  | $ | (1,283) |  |  | $ | (1,283) |  |  | $ | — |
| For the Nine Months Ended September 30, 2022
| Amount of Gain or (Loss) Recognized in AOCI on Derivative |  | Amount of Gain or (Loss) Recognized in AOCI Included Component |  | Amount of Gain or (Loss) Recognized in AOCI Excluded Component |  | Location of Gain or (Loss) Recognized from AOCI into Income |  | Amount of Gain or (Loss) Reclassified from AOCI into Income |  | Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component |  | Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
Interest rate swaps | $ | (26,795) |  |  | $ | (26,795) |  |  | $ | — |  |  | Interest Income |  | $ | (371) |  |  | $ | (371) |  |  | $ | — |
At September 30, 2023 and December 31, 2022, we recorded total net unrealized losses on cash flow hedges in AOCI of $15.2 million and $20.1 million, respectively. Interest Rate Swaps: The Bank uses an interest rate swap program for commercial loan clients that provides the client with a variable-rate loan and enters into an interest rate swap in which the client receives a variable-rate payment in exchange for a fixed-rate payment. The Bank offsets its risk exposure by entering into an offsetting interest rate swap with a dealer counterparty for the same notional amount and length of term as the client interest rate swap providing the dealer counterparty with a fixed-rate payment in exchange for a variable-rate payment. These swaps do not qualify as designated hedges; therefore, each swap is accounted for as a freestanding derivative. Risk Participation Agreements: In conjunction with the purchase or sale of participating interests in loans, the Company also participates in related swaps through risk participation agreements. The existing credit derivatives resulting from these participations are not designated as hedges as they are not used to manage interest rate risk in the Company’s assets or liabilities and are not speculative. Mortgage Loan Commitments: The Company sells originated one- to four-family mortgage loans into the secondary mortgage loan markets. During the period of loan origination and prior to the sale of the loans into the secondary market, the Company has exposure to movements in interest rates associated with written interest rate lock commitments with potential borrowers to originate one- to four-family loans that are intended to be sold and for closed one- to four-family mortgage loans held for sale for which fair value accounting has been elected, that are awaiting sale and delivery into the secondary market. The Company economically hedges the risk of changing interest rates associated with these mortgage loan commitments by entering into forward sales contracts to sell one- to four-family mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates. Gains (losses) recognized in income within mortgage banking operations on non-designated hedging instruments for the three and nine months ended September 30, 2023 and 2022, were as follows (in thousands):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Mortgage loan commitments | $ | (165) |  |  | $ | (472) |  |  | $ | 65 |  |  | $ | (1,582) |
Forward sales contracts | 522 |  |  | 682 |  |  | 601 |  |  | 681 |
| $ | 357 |  |  | $ | 210 |  |  | $ | 666 |  |  | $ | (901) |
The Company is exposed to credit-related losses in the event of nonperformance by the counterparty to these agreements. Credit risk of the financial contract is controlled through the credit approval, limits, and monitoring procedures and management does not expect the counterparties to fail their obligations. In connection with the interest rate swaps between the Bank and the dealer counterparties, the agreements contain a provision where if the Bank fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and the Bank would be required to settle its obligations. Similarly, the Bank could be required to settle its obligations under certain of its agreements if specific regulatory events occur, such as a publicly issued prompt corrective action directive, cease and desist order, or a capital maintenance agreement that required the Bank to maintain a specific capital level. If the Bank had breached any of these provisions at September 30, 2023 or December 31, 2022, it could have been required to settle its obligations under the agreements at the termination value. As of September 30, 2023 and December 31, 2022, the Company had no obligations to dealer counterparties related to these agreements. The Company generally posts collateral against derivative liabilities in the form of cash, government agency-issued bonds, mortgage-backed securities, or commercial mortgage-backed securities. Collateral posted against derivative liabilities was $19.3 million and $22.2 million as of September 30, 2023 and December 31, 2022, respectively. The collateral posted included restricted cash of $18.3 million and $15.9 million as of September 30, 2023 and 2022, respectively. Derivative assets and liabilities are recorded at fair value on the balance sheet. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis and to offset net derivative positions with related collateral where applicable. In addition, some interest rate swap derivatives between the Company and the dealer counterparties are cleared through central clearing houses. These clearing houses characterize the variation margin payments as settlements of the derivative’s market exposure and not as collateral. The variation margin is treated as an adjustment to our cash collateral, as well as a corresponding adjustment to our derivative liability. The variation margin adjustment was a positive adjustment of $918,000 and a negative adjustment of $8.7 million as of September 30, 2023 and December 31, 2022, respectively. The following tables present additional information related to the Company’s derivative contracts, by type of financial instrument, as of September 30, 2023 and December 31, 2022 (in thousands):
| September 30, 2023
|  |  |  |  |  |  | Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition |  |
| Gross Amounts Recognized |  | Amounts offset in the Statement of Financial Condition |  | Net Amounts in the Statement of Financial Condition |  | Netting Adjustment Per Applicable Master Netting Agreements |  | Fair Value of Financial Collateral in the Statement of Financial Condition |  | Net Amount
Derivative assets |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 43,821 |  |  | $ | (20,012) |  |  | $ | 23,809 |  |  | $ | — |  |  | $ | — |  |  | $ | 23,809 |
| $ | 43,821 |  |  | $ | (20,012) |  |  | $ | 23,809 |  |  | $ | — |  |  | $ | — |  |  | $ | 23,809 |
Derivative liabilities |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 65,032 |  |  | $ | (19,094) |  |  | $ | 45,938 |  |  | $ | — |  |  | $ | (17,408) |  |  | $ | 28,530 |
| $ | 65,032 |  |  | $ | (19,094) |  |  | $ | 45,938 |  |  | $ | — |  |  | $ | (17,408) |  |  | $ | 28,530 |
| December 31, 2022
|  |  |  |  |  |  | Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition |  |
| Gross Amounts Recognized |  | Amounts offset in the Statement of Financial Condition |  | Net Amounts in the Statement of Financial Condition |  | Netting Adjustment Per Applicable Master Netting Agreements |  | Fair Value of Financial Collateral in the Statement of Financial Condition |  | Net Amount
Derivative assets |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 37,119 |  |  | $ | (17,780) |  |  | $ | 19,339 |  |  | $ | — |  |  | $ | — |  |  | $ | 19,339 |
| $ | 37,119 |  |  | $ | (17,780) |  |  | $ | 19,339 |  |  | $ | — |  |  | $ | — |  |  | $ | 19,339 |
Derivative liabilities |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 63,634 |  |  | $ | (26,484) |  |  | $ | 37,150 |  |  | $ | — |  |  | $ | (14,972) |  |  | $ | 22,178 |
| $ | 63,634 |  |  | $ | (26,484) |  |  | $ | 37,150 |  |  | $ | — |  |  | $ | (14,972) |  |  | $ | 22,178 |

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration