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DERIVATIVES AND HEDGING
 6 Months Ended
Jun. 30, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVES AND HEDGING DERIVATIVES AND HEDGING
The Company, through its Banner Bank subsidiary, 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 obtains dealer quotations to value its derivative contracts.

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.

Derivatives Designated in Hedge Relationships

Interest Rate Swaps with Dealer Counterparties: The Company’s fixed-rate loans result in exposure to losses in value or net interest income as interest rates change. The risk management objective for hedging fixed-rate loans is to effectively convert the fixed-rate received to a floating rate. The Company has hedged exposure to changes in the fair value of certain fixed-rate loans through the use of interest rate swaps. For a qualifying fair value hedge, changes in the value of the derivatives are recognized in current period earnings along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged.

Under a prior program, clients received fixed interest rate commercial loans and Banner Bank subsequently hedged that fixed-rate loan by entering into an interest rate swap with a dealer counterparty. Banner Bank receives fixed-rate payments from the clients on the loans and makes similar fixed-rate payments to the dealer counterparty on the swaps in exchange for variable-rate payments based on the one-month LIBOR index. Some of these interest rate swaps are designated as fair value hedges. Through application of the “short cut method of accounting,” there is an assumption that the hedges are effective. Banner Bank discontinued originating interest rate swaps under this program in 2008.

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 accumulated other comprehensive income (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 Corporation’s variable-rate assets. During the next 12 months, the Company estimates that an additional $8.8 million will be reclassified as an increase to interest income.

As of June 30, 2022 and December 31, 2021, the notional values or contractual amounts and fair values of the Company’s derivatives designated in hedge relationships were as follows (in thousands):
Asset DerivativesLiability Derivatives
June 30, 2022December 31, 2021June 30, 2022December 31, 2021
Notional/
Contract Amount
Fair
   Value (1)
Notional/
Contract Amount
Fair
   Value (1)
Notional/
Contract Amount
Fair
   Value (2)
Notional/
Contract Amount
Fair
   Value (2)
Interest Rate Swaps used in Cash Flow Hedges$— $— $— $— $400,000 $398 $400,000 $279 

(1)    Included in Loans Receivable on the Consolidated Statements of Financial Condition.
(2)    Included in Other Liabilities on the Consolidated Statements of Financial Condition.
The following table presents the effect of cash flow hedge accounting on AOCI for the three and six months ended June 30, 2022 (in thousands):

For the Three Months Ended June 30, 2022
Amount of Gain or (Loss) Recognized in AOCI on Derivative Amount of Gain or (Loss) Recognized in AOCI Included ComponentAmount of Gain or (Loss) Recognized in AOCI Excluded ComponentLocation of Gain or (Loss) Recognized from AOCI into IncomeAmount of Gain or (Loss) Reclassified from AOCI into IncomeAmount of Gain or (Loss) Reclassified from AOCI into Income Included ComponentAmount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
Interest rate swaps$(3,617)$(3,617)$— Interest Income$161 $161 $— 
For the Six Months Ended June 30, 2022
Amount of Gain or (Loss) Recognized in AOCI on DerivativeAmount of Gain or (Loss) Recognized in AOCI Included ComponentAmount of Gain or (Loss) Recognized in AOCI Excluded ComponentLocation of Gain or (Loss) Recognized from AOCI into IncomeAmount of Gain or (Loss) Reclassified from AOCI into IncomeAmount of Gain or (Loss) Reclassified from AOCI into Income Included ComponentAmount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
Interest rate swaps$(17,642)$(17,642)$— Interest Income$912 $912 $— 

At June 30, 2022 and December 31, 2021 we had recorded total net unrealized losses on cash flow hedges in AOCI, net of taxes of $15.1 million and $958,000, respectively.

Derivatives Not Designated in Hedge Relationships

Interest Rate Swaps: Banner 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 Banking: 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 in 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.
As of June 30, 2022 and December 31, 2021, the notional values or contractual amounts and fair values of the Company’s derivatives not designated in hedge relationships were as follows (in thousands):
Asset DerivativesLiability Derivatives
June 30, 2022December 31, 2021June 30, 2022December 31, 2021
Notional/
Contract Amount
Fair
   Value (1)
Notional/
Contract Amount
Fair
   Value (1)
Notional/
Contract Amount
Fair
   Value (2)
Notional/
Contract Amount
Fair
   Value (2)
Interest rate swaps$462,005 $22,229 $551,606 $20,826 $462,005 $32,842 $551,606 $11,336 
Risk participation agreements1,400 — — — 51,759 139 — — 
Mortgage loan commitments
33,607 357 87,986 1,467 5,406 14 26,329 66 
Forward sales contracts
12,775 113 56,086 88 34,000 74 98,500 74 
$509,787 $22,699 $695,678 $22,381 $553,170 $33,069 $676,435 $11,476 

(1)Included in Other assets on the Consolidated Statements of Financial Condition, with the exception of certain interest swaps and mortgage loan commitments (with a fair value of $3,000 at June 30, 2022 and $20,000 at December 31, 2021), which are included in Loans Receivable.
(2)Included in Other Liabilities on the Consolidated Statements of Financial Condition.

Gains (losses) recognized in income on non-designated hedging instruments for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
Location on Consolidated
Statements of Operations		Three Months Ended
June 30,		Six Months Ended
June 30,
2022202120222021
Mortgage loan commitmentsMortgage banking operations$1,889 $(363)$(1,110)$(2,646)
Forward sales contractsMortgage banking operations(2,287)(1,872)(1)1,139 
$(398)$(2,235)$(1,111)$(1,507)

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 Banner Bank and the dealer counterparties, the agreements contain a provision where if Banner Bank fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and Banner Bank would be required to settle its obligations. Similarly, Banner 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 Banner Bank to maintain a specific capital level. If Banner Bank had breached any of these provisions at June 30, 2022 or December 31, 2021, it could have been required to settle its obligations under the agreements at the termination value. As of June 30, 2022 and December 31, 2021, the termination value of derivatives in a net liability position related to these agreements was $8,000 and $24.9 million, respectively. 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 $26.0 million and $45.8 million as of June 30, 2022 and December 31, 2021, 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 of interest rate swap derivatives between Banner Bank 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. As of June 30, 2022 and December 31, 2021, the variation margin adjustment was a negative adjustment of $8.9 million and $10.7 million, respectively.
The following tables present additional information related to the Company’s derivative contracts, by type of financial instrument, as of June 30, 2022 and December 31, 2021 (in thousands):
June 30, 2022
Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition
Gross Amounts RecognizedAmounts offset
in the Statement
of Financial Condition		Net Amounts
in the Statement
of Financial Condition		Netting Adjustment Per Applicable Master Netting AgreementsFair Value
of Financial Collateral
in the Statement
of Financial Condition		Net Amount
Derivative assets
Interest rate swaps$22,229 $— $22,229 $— $— $22,229 
$22,229 $— $22,229 $— $— $22,229 
Derivative liabilities
Interest rate swaps$33,240 $— $33,240 $— $(8)$33,232 
$33,240 $— $33,240 $— $(8)$33,232 
December 31, 2021
Gross Amounts of Financial Instruments Not Offset in the Consolidated Statements of Financial Condition
Gross Amounts RecognizedAmounts offset
in the Statement
of Financial Condition		Net Amounts
in the Statement
of Financial Condition		Netting Adjustment Per Applicable Master Netting AgreementsFair Value
of Financial Collateral
in the Statement
of Financial Condition		Net Amount
Derivative assets
Interest rate swaps$20,826 $— $20,826 $— $— $20,826 
$20,826 $— $20,826 $— $— $20,826 
Derivative liabilities
Interest rate swaps$11,615 $— $11,615 $— $(9,669)$1,946 
$11,615 $— $11,615 $— $(9,669)$1,946