Document
United States  
Securities and Exchange Commission 
Washington, D.C. 20549 
 
FORM 10-Q
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
for the quarterly period ended: March 31, 2018
 
or
[  ]
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
for the transition period from                                        to                                       .
 
Commission File Number: 001-34624 
 
Umpqua Holdings Corporation 
(Exact Name of Registrant as Specified in Its Charter)
OREGON 
93-1261319 
(State or Other Jurisdiction
(I.R.S. Employer Identification Number)
of Incorporation or Organization)
 
 
One SW Columbia Street, Suite 1200 
Portland, Oregon 97258 
(Address of Principal Executive Offices)(Zip Code) 
 
(503) 727-4100 
(Registrant's Telephone Number, Including Area Code) 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
[X]   Yes   [  ]   No 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
[X]   Yes   [  ]   No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
[X]   Large accelerated filer   [  ]   Accelerated filer   [ ]   Non-accelerated filer  
 [  ]   Smaller reporting company  [  ]  Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. [  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
[  ]   Yes   [X]   No 
 
Indicate the number of shares outstanding for each of the issuer's classes of common stock, as of the latest practical date:
 
Common stock, no par value: 220,171,947 shares outstanding as of April 30, 2018


Table of Contents

UMPQUA HOLDINGS CORPORATION 
FORM 10-Q 
Table of Contents 
 
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2

Table of Contents

PART I.        FINANCIAL INFORMATION
Item 1.        Financial Statements (unaudited) 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED BALANCE SHEETS 
(UNAUDITED)
(in thousands, except shares)
March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
Cash and due from banks (restricted cash of $30,120 and $27,939)
$
304,681

 
$
330,856

Interest bearing cash and temporary investments
264,508

 
303,424

Total cash and cash equivalents
569,189

 
634,280

Investment securities
 
 
 
Equity and other, at fair value
63,295

 
12,255

Available for sale, at fair value
2,947,414

 
3,065,769

Held to maturity, at amortized cost
3,667

 
3,803

Loans held for sale, at fair value
299,739

 
259,518

Loans and leases
19,314,589

 
19,080,184

Allowance for loan and lease losses
(141,933
)
 
(140,608
)
Net loans and leases
19,172,656

 
18,939,576

Restricted equity securities
43,501

 
43,508

Premises and equipment, net
259,354

 
269,182

Goodwill
1,787,651

 
1,787,651

Other intangible assets, net
28,589

 
30,130

Residential mortgage servicing rights, at fair value
164,760

 
153,151

Other real estate owned
13,055

 
11,734

Bank owned life insurance
307,745

 
306,864

Other assets
215,028

 
224,018

Total assets
$
25,875,643

 
$
25,741,439

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits
 
 
 
Noninterest bearing
$
6,699,399

 
$
6,505,628

Interest bearing
13,407,457

 
13,442,672

Total deposits
20,106,856

 
19,948,300

Securities sold under agreements to repurchase
291,984

 
294,299

Term debt
801,868

 
802,357

Junior subordinated debentures, at fair value
278,410

 
277,155

Junior subordinated debentures, at amortized cost
88,895

 
100,609

Deferred tax liability, net
39,277

 
37,503

Other liabilities
254,471

 
266,430

Total liabilities
21,861,761

 
21,726,653

COMMITMENTS AND CONTINGENCIES (NOTE 8)

 

SHAREHOLDERS' EQUITY
 
 
 
Common stock, no par value, shares authorized: 400,000,000 in 2018 and 2017; issued and outstanding: 220,460,836 in 2018 and 220,148,824 in 2017
3,515,506

 
3,517,258

Retained earnings
546,330

 
522,520

Accumulated other comprehensive loss
(47,954
)
 
(24,992
)
Total shareholders' equity
4,013,882

 
4,014,786

Total liabilities and shareholders' equity
$
25,875,643

 
$
25,741,439


See notes to condensed consolidated financial statements

3

Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME 
(UNAUDITED) 

(in thousands, except per share amounts)
Three Months Ended
 
March 31, 2018
 
March 31, 2017
INTEREST INCOME
 
 
 
Interest and fees on loans and leases
$
227,738

 
$
205,996

Interest and dividends on investment securities:
 
 
 
Taxable
15,699

 
13,931

Exempt from federal income tax
2,128

 
2,242

Dividends
468

 
388

Interest on temporary investments and interest bearing deposits
1,164

 
1,557

Total interest income
247,197

 
224,114

INTEREST EXPENSE
 
 
 
Interest on deposits
15,610

 
9,648

Interest on securities sold under agreement to repurchase and federal funds purchased
63

 
30

Interest on term debt
3,361

 
3,510

Interest on junior subordinated debentures
4,932

 
4,201

Total interest expense
23,966

 
17,389

Net interest income
223,231

 
206,725

PROVISION FOR LOAN AND LEASE LOSSES 
13,656

 
11,672

Net interest income after provision for loan and lease losses
209,575

 
195,053

NON-INTEREST INCOME
 
 
 
Service charges on deposits
14,995

 
14,729

Brokerage revenue
4,194

 
4,122

Residential mortgage banking revenue, net
38,438

 
26,834

Loss on sale of investment securities, net

 
(2
)
Gain on loan sales, net
1,230

 
1,754

Loss on junior subordinated debentures carried at fair value

 
(1,555
)
BOLI income
2,070

 
2,069

Other income
17,640

 
12,274

Total non-interest income
78,567

 
60,225

NON-INTEREST EXPENSE
 
 
 
Salaries and employee benefits
106,551

 
106,473

Occupancy and equipment, net
38,661

 
38,673

Communications
4,433

 
5,104

Marketing
1,800

 
1,733

Services
15,061

 
11,305

FDIC assessments
4,480

 
4,087

(Gain) loss on other real estate owned, net
(38
)
 
82

Intangible amortization
1,541

 
1,689

Merger related expenses

 
1,020

Other expenses
13,624

 
12,548

Total non-interest expense
186,113

 
182,714

Income before provision for income taxes
102,029

 
72,564

Provision for income taxes
24,360

 
26,561

Net income
$
77,669

 
$
46,003




4

Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued) 
(UNAUDITED) 

(in thousands, except per share amounts)
Three Months Ended
 
March 31, 2018
 
March 31, 2017
Net income
$
77,669

 
$
46,003

Dividends and undistributed earnings allocated to participating securities
6

 
12

Net earnings available to common shareholders
$
77,663

 
$
45,991

Earnings per common share:
 
 
 
Basic
$0.35
 
$0.21
Diluted
$0.35
 
$0.21
Weighted average number of common shares outstanding:
 
 
 
Basic
220,370

 
220,287

Diluted
220,825

 
220,779


See notes to condensed consolidated financial statements

5

Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  
(UNAUDITED) 
 
(in thousands)
Three Months Ended
 
March 31, 2018
 
March 31, 2017
Net income
$
77,669

 
$
46,003

Available for sale securities:
 
 
 
Unrealized (losses) gains arising during the period
(42,190
)
 
4,142

Income tax benefit (expense) related to unrealized (losses) gains
10,771

 
(1,604
)
 
 
 
 
Reclassification adjustment for net realized losses in earnings

 
2

Income tax benefit related to realized losses

 
(1
)
Net change in unrealized (losses) gains for available for sale securities
(31,419
)
 
2,539

 
 
 
 
Junior subordinated debentures, at fair value:
 
 
 
Unrealized losses arising during the period
(1,683
)
 

Income tax benefit related to unrealized losses
430

 

Net change in unrealized losses for junior subordinated debentures, at fair value
(1,253
)
 

Other comprehensive (loss) income, net of tax
(32,672
)
 
2,539

Comprehensive income
$
44,997

 
$
48,542


See notes to condensed consolidated financial statements

6

Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY  
(UNAUDITED)   

(in thousands, except shares)
Common Stock
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Shares
 
Amount
 
Retained Earnings
 
 
Total
Balance at January 1, 2017
220,177,030

 
$
3,515,299

 
$
422,839

 
$
(21,343
)
 
$
3,916,795

Net income
 
 
 
 
246,019

 
 
 
246,019

Other comprehensive income, net of tax
 
 
 
 
 
 
781

 
781

Stock-based compensation
 
 
9,612

 
 
 
 
 
9,612

Stock repurchased and retired
(468,555
)
 
(8,614
)
 
 
 
 
 
(8,614
)
Issuances of common stock under stock plans
440,349

 
961

 
 
 
 
 
961

Cash dividends on common stock ($0.68 per share)
 
 
 
 
(150,768
)
 
 
 
(150,768
)
Tax rate effect reclassification (1)
 
 
 
 
4,430

 
(4,430
)
 

Balance at December 31, 2017
220,148,824

 
$
3,517,258

 
$
522,520

 
$
(24,992
)
 
$
4,014,786

 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
220,148,824

 
$
3,517,258

 
$
522,520

 
$
(24,992
)
 
$
4,014,786

Net income
 
 
 
 
77,669

 
 
 
77,669

Other comprehensive loss, net of tax
 
 
 
 
 
 
(32,672
)
 
(32,672
)
Stock-based compensation
 
 
1,829

 
 
 
 
 
1,829

Stock repurchased and retired
(201,473
)
 
(4,340
)
 
 
 
 
 
(4,340
)
Issuances of common stock under stock plans
513,485

 
759

 
 
 
 
 
759

Cash dividends on common stock ($0.20 per share)
 
 
 
 
(44,149
)
 
 
 
(44,149
)
Junior subordinated debentures, at fair value, cumulative effect adjustment (2)
 
 
 
 
(9,710
)
 
9,710

 

Balance at March 31, 2018
220,460,836

 
$
3,515,506

 
$
546,330

 
$
(47,954
)
 
$
4,013,882


(1) The reclassification adjustment from accumulated other comprehensive income (loss) to retained earnings relating to the effects from the application of the Tax Cuts and Jobs Act of 2017.

(2) The cumulative effect adjustment from retained earnings to accumulated other comprehensive income (loss) relating to the implementation of new accounting guidance for the junior subordinated debentures that the Company previously elected to fair value on a recurring basis. Refer to Note 1 for discussion of the new accounting guidance.


See notes to condensed consolidated financial statements

7

Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(UNAUDITED) 
(in thousands)
Three Months Ended
 
March 31, 2018
 
March 31, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
77,669

 
$
46,003

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of investment premiums, net
5,907

 
6,878

Loss on sale of investment securities, net

 
2

(Gain) loss on sale of other real estate owned, net
(43
)
 
15

Valuation adjustment on other real estate owned
5

 
67

Provision for loan and lease losses
13,656

 
11,672

Change in cash surrender value of bank owned life insurance
(2,105
)
 
(2,104
)
Depreciation, amortization and accretion
13,943

 
14,862

Gain on sale of premises and equipment
(1,341
)
 

Additions to residential mortgage servicing rights carried at fair value
(6,530
)
 
(7,041
)
Change in fair value of residential mortgage servicing rights carried at fair value
(5,079
)
 
7,670

Gain on redemption of junior subordinated debentures at amortized cost
(1,043
)
 

Change in junior subordinated debentures carried at fair value

 
1,396

Stock-based compensation
1,829

 
2,804

Net increase in equity and other account assets
(107
)
 
(277
)
Gain on sale of loans, net
(14,508
)
 
(22,746
)
Change in loans held for sale carried at fair value
306

 
(4,885
)
Origination of loans held for sale
(687,226
)
 
(754,715
)
Proceeds from sales of loans held for sale
659,977

 
795,837

Change in other assets and liabilities:
 
 
 
Net decrease in other assets
10,116

 
19,235

Net increase (decrease) in other liabilities
1,814

 
(54,791
)
Net cash provided by operating activities
67,240

 
59,882

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investment securities available for sale
(89,145
)
 
(672,148
)
Proceeds from investment securities available for sale
107,908

 
127,195

Proceeds from investment securities held to maturity
172

 
124

Purchases of restricted equity securities

 
(1
)
Redemption of restricted equity securities
7

 
7

Net change in loans and leases
(274,731
)
 
(360,236
)
Proceeds from sales of loans
21,629

 
25,259

Net change in premises and equipment
(462
)
 
(6,937
)
Proceeds from sales of other real estate owned
161

 
927

Net cash used in investing activities
$
(234,461
)
 
$
(885,810
)
 
 
 
 

8

Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) 
(UNAUDITED)
(in thousands)
Three Months Ended
 
March 31, 2018
 
March 31, 2017
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Net increase in deposit liabilities
$
158,771

 
$
146,619

Net decrease in securities sold under agreements to repurchase
(2,315
)
 
(48,668
)
   Proceeds from term debt borrowings
50,000

 
100,000

Repayment of term debt borrowings
(50,513
)
 
(100,000
)
Repayment of junior subordinated debentures at amortized cost
(10,598
)
 

Dividends paid on common stock
(39,634
)
 
(35,243
)
Proceeds from stock options exercised
759

 
230

Repurchase and retirement of common stock
(4,340
)
 
(1,796
)
Net cash provided by financing activities
102,130

 
61,142

Net decrease in cash and cash equivalents
(65,091
)
 
(764,786
)
Cash and cash equivalents, beginning of period
634,280

 
1,449,432

Cash and cash equivalents, end of period
$
569,189

 
$
684,646

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
23,489

 
$
18,161

Income taxes
$
11,440

 
$
8,281

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized gains on investment securities available for sale, net of taxes
$
(31,419
)
 
$
2,539

Change in unrealized gains on junior subordinated debentures carried at fair value, net of taxes
$
(1,253
)
 
$

Junior subordinated debentures, at fair value, cumulative effect adjustment
$
9,710

 
$

Cash dividend declared on common stock and payable after period-end
$
44,016

 
$
35,264

Change in GNMA mortgage loans recognized due to repurchase option
$
(6,152
)
 
$
(5,603
)
Transfer of loans to other real estate owned
$
1,444

 
$
789

Receivable from BOLI death benefits
$
1,224

 
$



See notes to condensed consolidated financial statements
 

9

Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Summary of Significant Accounting Policies 
 
The accounting and financial reporting policies of Umpqua Holdings Corporation conform to accounting principles generally accepted in the United States of America. The accompanying interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All material inter-company balances and transactions have been eliminated. The condensed consolidated financial statements have not been audited. A more detailed description of our accounting policies is included in the 2017 Annual Report filed on Form 10-K. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the 2017 Annual Report filed on Form 10-K. All references in this report to "Umpqua," "we," "our," "us," the "Company" or similar references mean Umpqua Holdings Corporation, and include our consolidated subsidiaries where the context so requires. References to "Bank" refer to our subsidiary Umpqua Bank, an Oregon state-chartered commercial bank, and references to "Umpqua Investments" refer to our subsidiary Umpqua Investments, Inc., a registered broker-dealer and investment adviser. The Bank also has a wholly-owned subsidiary, Financial Pacific Leasing Inc., a commercial equipment leasing company. Pivotus Ventures, Inc., a wholly-owned subsidiary of Umpqua Holdings Corporation, focuses on advancing bank innovation by developing new bank platforms that could have a significant impact on the experience and economics of banking.
 
In preparing these condensed consolidated financial statements, the Company has evaluated events and transactions subsequent to March 31, 2018 for potential recognition or disclosure. In management's opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim period.  Certain reclassifications of prior period amounts have been made to conform to current classifications.

Application of new accounting guidance

As of January 1, 2018, Umpqua adopted the Financial Accounting Standard Board's ("FASB") Accounting Standard Update ("ASU") No. 2014-09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively "ASC 606"), which (i) creates a single framework for recognizing revenue from contracts with customers that are within its scope and (ii) revises when it is appropriate to recognize a gain or loss from the transfer of nonfinancial assets such as other real estate owned. The majority of Umpqua's revenues come from interest income and other sources, including loans, leases, securities, and derivatives, that are outside the scope of ASC 606. Umpqua's revenues that are within the scope of ASC 606 are presented within Non-Interest Income and are recognized as revenue as the Company satisfies its obligation to the customer. Revenues within the scope of ASC 606 include service charges on deposits, brokerage revenue, interchange income, and the sale of other real estate owned. Refer to Note 15 - Revenue from Contracts with Customers for further discussion of Umpqua's accounting policies for revenue sources within the scope of ASC 606.

Umpqua adopted ASC 606 using the modified retrospective method applied on all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior period amounts continue to be reported in accordance with legacy generally accepted accounting principles ("GAAP"). The adoption of ASC 606 did not result in a material change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded.

As of January 1, 2018, Umpqua applied FASB ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance relates to the recognition and measurement of financial instruments. This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Upon adoption, certain equity securities were reclassified from available for sale to the equity securities classification on the balance sheet. The ASU was applied prospectively. The amendment also requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. This ASU also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The disclosures in the fair value footnote have been updated accordingly.


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Table of Contents

The amendment also requires a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk (also referred to as "own credit") when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The Company's junior subordinated debentures are variable-rate instruments based on LIBOR, with the majority reseting quarterly. Applying the updated guidance, the FASB noted that the entire risk in excess of the risk free or benchmark rate could be considered instrument-specific credit risk. The Company has determined that all changes in fair value of the junior subordinated debentures are due to changes in value other than in the benchmark rate, and accordingly are instrument-specific credit risk. As such, the Company calculated the change in the discounted cash flows based on updated market credit spreads since the election of the fair value option for each junior subordinated debenture measured at fair value to be a net gain of $13.0 million. The gain was recorded, net of the tax effect, as a cumulative effect adjustment between retained earnings and accumulated other comprehensive income (loss), resulting in an adjustment of $9.7 million upon adoption.

For the first quarter of 2018, the change in fair value is attributable to the change in the instrument specific credit risk of the junior subordinated debentures, as determined by the application of ASU 2016-01. Accordingly, the loss on fair value of junior subordinated debentures for the quarter ended March 31, 2018 of $1.7 million is recorded in other comprehensive income (loss), net of tax, as an other comprehensive loss of $1.3 million.

Note 2 – Investment Securities 
 
The following tables present the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at March 31, 2018 and December 31, 2017
 (in thousands)
March 31, 2018
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
AVAILABLE FOR SALE:
 

 
 

 
 

 
 

U.S. Treasury and agencies
$
40,017

 
$

 
$
(499
)
 
$
39,518

Obligations of states and political subdivisions
299,855

 
3,295

 
(3,599
)
 
299,551

Residential mortgage-backed securities and collateralized mortgage obligations
2,682,266

 
956

 
(74,877
)
 
2,608,345

 
$
3,022,138

 
$
4,251

 
$
(78,975
)
 
$
2,947,414

HELD TO MATURITY:
 
 
 
 
 
 
 
Residential mortgage-backed securities and collateralized mortgage obligations
$
3,667

 
$
1,002

 
$

 
$
4,669

 
$
3,667

 
$
1,002

 
$

 
$
4,669


 (in thousands)
December 31, 2017
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
AVAILABLE FOR SALE:
 
 
 
 
 
 
 
U.S. Treasury and agencies
$
40,021

 
$

 
$
(323
)
 
$
39,698

Obligations of states and political subdivisions
303,352

 
6,206

 
(1,102
)
 
308,456

Residential mortgage-backed securities and collateralized mortgage obligations
2,703,997

 
2,039

 
(40,391
)
 
2,665,645

Investments in mutual funds and other securities
51,959

 
11

 

 
51,970

 
$
3,099,329

 
$
8,256

 
$
(41,816
)
 
$
3,065,769

HELD TO MATURITY:
 
 
 
 
 
 
 
Residential mortgage-backed securities and collateralized mortgage obligations
$
3,803

 
$
1,103

 
$

 
$
4,906

 
$
3,803

 
$
1,103

 
$

 
$
4,906


The above tables reflect that the equity securities are no longer classified as available for sale securities, and instead separately disclosed on the balance sheet. The equity securities were previously reported in investments in mutual funds and other securities within available for sale investment securities. 

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Investment securities that were in an unrealized loss position as of March 31, 2018 and December 31, 2017 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position.
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 (in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
AVAILABLE FOR SALE:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agencies
$
39,518

 
$
499

 
$

 
$

 
$
39,518

 
$
499

Obligations of states and political subdivisions
92,400

 
2,058

 
24,496

 
1,541

 
116,896

 
3,599

Residential mortgage-backed securities and collateralized mortgage obligations
1,309,122

 
27,267

 
1,209,663

 
47,610

 
2,518,785

 
74,877

Total temporarily impaired securities
$
1,441,040

 
$
29,824

 
$
1,234,159

 
$
49,151

 
$
2,675,199

 
$
78,975


December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 (in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
AVAILABLE FOR SALE:
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and agencies
$
39,699

 
$
323

 
$

 
$

 
$
39,699

 
$
323

Obligations of states and political subdivisions
20,566

 
322

 
24,798

 
780

 
45,364

 
1,102

Residential mortgage-backed securities and collateralized mortgage obligations
1,184,000

 
10,368

 
1,226,364

 
30,023

 
2,410,364

 
40,391

Total temporarily impaired securities
$
1,244,265

 
$
11,013

 
$
1,251,162

 
$
30,803

 
$
2,495,427

 
$
41,816

 
The unrealized losses on the available for sale securities portfolio were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities and are not due to the underlying credit of the issuers. Management monitors the securities within the portfolio, including the published credit ratings of the obligations of state and political subdivisions securities for material rating or outlook changes. As of March 31, 2018, 97% of the obligations of states and political subdivisions securities were rated A3/A- or higher by rating agencies. Substantially all of the Company's obligations of states and political subdivisions are general obligation issuances. All of the available for sale residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at March 31, 2018 are issued or guaranteed by government sponsored enterprises. It is expected that the mortgage-backed securities and collateralized mortgage obligations securities will be settled at a price at least equal to the amortized cost of each investment.

Because the decline in fair value of the available for sale securities portfolio is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities and it is not more likely than not that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until maturity, these investments are not considered other-than-temporarily impaired. 


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The following table presents the contractual maturities of investment securities at March 31, 2018:  
 (in thousands)
Available For Sale
 
Held To Maturity
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
AMOUNTS MATURING IN:
 
 
 
 
 
 
 
Due within one year
$
22,399

 
$
22,267

 
$

 
$

Due after one year through five years
73,780

 
73,824

 

 

Due after five years through ten years
435,437

 
429,274

 
18

 
19

Due after ten years
2,490,522

 
2,422,049

 
3,649

 
4,650

 
$
3,022,138

 
$
2,947,414

 
$
3,667

 
$
4,669


The following table presents, as of March 31, 2018, investment securities which were pledged to secure borrowings, public deposits, and repurchase agreements as permitted or required by law: 
 (in thousands)
Amortized Cost
 
Fair Value
To the Federal Home Loan Bank to secure borrowings
$
449

 
$
448

To state and local governments to secure public deposits
904,227

 
887,820

Other securities pledged principally to secure repurchase agreements
435,384

 
422,762

Total pledged securities
$
1,340,060

 
$
1,311,030


 
 
Note 3 – Loans and Leases  
 
The following table presents the major types of loans and leases, net of deferred fees and costs, as of March 31, 2018 and December 31, 2017
(in thousands)
March 31, 2018
 
December 31, 2017
Commercial real estate
 
 
 
Non-owner occupied term, net
$
3,526,221

 
$
3,491,137

Owner occupied term, net
2,476,287

 
2,488,251

Multifamily, net
3,131,275

 
3,087,792

Construction & development, net
522,680

 
540,707

Residential development, net
179,871

 
165,865

Commercial
 
 
 
Term, net
2,025,213

 
1,944,987

Lines of credit & other, net
1,147,028

 
1,166,173

Leases and equipment finance, net
1,228,709

 
1,167,503

Residential
 
 
 
Mortgage, net
3,283,945

 
3,192,185

Home equity loans & lines, net
1,107,822

 
1,103,297

Consumer & other, net
685,538

 
732,287

Total loans and leases, net of deferred fees and costs
$
19,314,589

 
$
19,080,184

 
The loan balances are net of deferred fees and costs of $73.7 million and $73.3 million as of March 31, 2018 and December 31, 2017, respectively. Net loans also include discounts on acquired loans of $5.6 million and $9.5 million as of March 31, 2018 and December 31, 2017, respectively. As of March 31, 2018, loans totaling $12.3 billion were pledged to secure borrowings and available lines of credit.


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The outstanding contractual unpaid principal balance of purchased impaired loans, excluding acquisition accounting adjustments, was $231.0 million and $252.5 million at March 31, 2018 and December 31, 2017, respectively. The carrying balance of purchased impaired loans was $173.5 million and $189.1 million at March 31, 2018 and December 31, 2017, respectively.

The following table presents the changes in the accretable yield for purchased impaired loans for the three months ended March 31, 2018 and 2017:
(in thousands)
Three Months Ended
 
March 31, 2018
 
March 31, 2017
Balance, beginning of period
$
74,268

 
$
95,579

Accretion to interest income
(8,778
)
 
(8,912
)
Disposals
(5,016
)
 
(3,287
)
Reclassifications from non-accretable difference
6,203

 
3,391

Balance, end of period
$
66,677

 
$
86,771


Loans and leases sold 
 
In the course of managing the loan and lease portfolio, at certain times, management may decide to sell loans and leases.  The following table summarizes the carrying value of loans and leases sold by major loan type during the three months ended March 31, 2018 and 2017
(in thousands)
Three Months Ended
 
March 31, 2018
 
March 31, 2017
Commercial real estate
 
 
 
Non-owner occupied term, net
$
4,391

 
$
1,707

Owner occupied term, net
5,550

 
6,675

Commercial
 
 
 
Term, net
10,458

 
2,630

Leases and equipment finance, net

 
12,493

Total
$
20,399

 
$
23,505



Note 4 – Allowance for Loan and Lease Loss and Credit Quality 
 
The Bank's methodology for assessing the appropriateness of the Allowance for Loan and Lease Loss ("ALLL") consists of three key elements: 1) the formula allowance; 2) the specific allowance; and 3) the unallocated allowance. By incorporating these factors into a single allowance requirement analysis, we believe all risk-based activities within the loan and lease portfolios are simultaneously considered. 

Formula Allowance 
When loans and leases are originated or acquired, they are assigned a risk rating that is reassessed periodically during the term of the loan or lease through the credit review process.  The Bank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the formula allowance. 
 
The formula allowance is calculated by applying risk factors to various segments of pools of outstanding loans and leases. Risk factors are assigned to each portfolio segment based on management's evaluation of the losses inherent within each segment. Segments with greater risk of loss will therefore be assigned a higher risk factor. 
 
Base risk The portfolio is segmented into loan categories, and these categories are assigned a Base risk factor based on an evaluation of the loss inherent within each segment. 
 

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Extra risk – Additional risk factors provide for an additional allocation of ALLL based on the loan and lease risk rating system and loan delinquency, and reflect the increased level of inherent losses associated with more adversely classified loans and leases. 

Risk factors may be changed periodically based on management's evaluation of the following factors: loss experience; changes in the level of non-performing loans and leases; regulatory exam results; changes in the level of adversely classified loans and leases; improvement or deterioration in economic conditions; and any other factors deemed relevant. Additionally, Financial Pacific Leasing Inc. considers additional quantitative and qualitative factors:  migration analysis; a static pool analysis of historic recoveries; and forecasting uncertainties. A migration analysis is a technique used to estimate the likelihood that an account will progress through the various delinquency states and ultimately be charged off.
 
Specific Allowance 
Regular credit reviews of the portfolio identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired when, based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using discounted cash flows or estimated note sale price, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize an impairment reserve as a specific allowance to be provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral-dependent loans if it is determined that such amount represents a confirmed loss.  Loans determined to be impaired are excluded from the formula allowance so as not to double-count the loss exposure.
 
The combination of the formula allowance component and the specific allowance component represents the allocated allowance for loan and lease losses. There was no unallocated allowance as of March 31, 2018 and December 31, 2017.
 
Management believes that the ALLL was adequate as of March 31, 2018. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses.
 
The reserve for unfunded commitments ("RUC") is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the ALLL and RUC are monitored on a regular basis and are based on management's evaluation of numerous factors. These factors include the quality of the current loan portfolio; the trend in the loan portfolio's risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information.
 
There have been no significant changes to the Bank's ALLL methodology or policies in the periods presented. 
 

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Table of Contents

Activity in the Allowance for Loan and Lease Losses 
 
The following tables summarize activity related to the allowance for loan and lease losses by loan and lease portfolio segment for the three months ended March 31, 2018 and 2017
(in thousands)
Three Months Ended March 31, 2018
 
Commercial Real Estate
 
Commercial
 
Residential
 
Consumer & Other
 
Total 
Balance, beginning of period
$
45,765

 
$
63,305

 
$
19,360

 
$
12,178

 
$
140,608

Charge-offs
(311
)
 
(13,475
)
 
(246
)
 
(1,780
)
 
(15,812
)
Recoveries
217

 
2,453

 
203

 
608

 
3,481

Provision
334

 
12,343

 
516

 
463

 
13,656

Balance, end of period
$
46,005

 
$
64,626

 
$
19,833

 
$
11,469

 
$
141,933

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
Commercial Real Estate
 
Commercial
 
Residential
 
Consumer & Other
 
Total 
Balance, beginning of period
$
47,795

 
$
58,840

 
$
17,946

 
$
9,403

 
$
133,984

Charge-offs
(339
)
 
(10,104
)
 
(210
)
 
(2,349
)
 
(13,002
)
Recoveries
400

 
2,030

 
197

 
1,011

 
3,638

  Provision
1,150

 
8,351

 
33

 
2,138

 
11,672

Balance, end of period
$
49,006

 
$
59,117

 
$
17,966

 
$
10,203

 
$
136,292

 
 
 
 
 
 
 
 
 
 
The following tables present the allowance and recorded investment in loans and leases by portfolio segment and balances individually or collectively evaluated for impairment as of March 31, 2018 and 2017
 (in thousands)
March 31, 2018
 
Commercial Real Estate
 
Commercial
 
Residential
 
Consumer & Other
 
Total 
Allowance for loans and leases:
Collectively evaluated for impairment
$
43,546

 
$
64,203

 
$
19,451

 
$
11,428

 
$
138,628

Individually evaluated for impairment
600

 
5

 

 

 
605

Loans acquired with deteriorated credit quality
1,859

 
418

 
382

 
41

 
2,700

Total
$
46,005

 
$
64,626

 
$
19,833

 
$
11,469

 
$
141,933

Loans and leases:
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
9,672,055

 
$
4,372,824

 
$
4,359,153

 
$
685,124

 
$
19,089,156

Individually evaluated for impairment
27,898

 
24,043

 

 

 
51,941

Loans acquired with deteriorated credit quality
136,381

 
4,083

 
32,614

 
414

 
173,492

Total
$
9,836,334

 
$
4,400,950

 
$
4,391,767

 
$
685,538

 
$
19,314,589

 

16

Table of Contents

 (in thousands)
March 31, 2017
 
Commercial Real Estate
 
Commercial
 
Residential
 
Consumer & Other
 
Total 
Allowance for loans and leases:
Collectively evaluated for impairment
$
45,722

 
$
58,763

 
$
17,374

 
$
10,146

 
$
132,005

Individually evaluated for impairment
735

 
7

 

 

 
742

Loans acquired with deteriorated credit quality
2,549

 
347

 
592

 
57

 
3,545

Total
$
49,006

 
$
59,117

 
$
17,966

 
$
10,203

 
$
136,292

Loans and leases:
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
9,243,447

 
$
3,714,197

 
$
3,890,613

 
$
665,412

 
$
17,513,669

Individually evaluated for impairment
40,353

 
15,357

 

 

 
55,710

Loans acquired with deteriorated credit quality
212,947

 
5,293

 
41,449

 
570

 
260,259

Total
$
9,496,747

 
$
3,734,847

 
$
3,932,062

 
$
665,982

 
$
17,829,638

 

Summary of Reserve for Unfunded Commitments Activity 

The following tables present a summary of activity in the RUC and unfunded commitments for the three months ended March 31, 2018 and 2017
(in thousands) 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
Balance, beginning of period
$
3,963

 
$
3,611

Net charge to other expense
166

 
(116
)
Balance, end of period
$
4,129

 
$
3,495


 (in thousands)
 
Total
Unfunded loan and lease commitments:
 
 
March 31, 2018
 
$
5,085,021

March 31, 2017
 
$
4,215,048

 
Asset Quality and Non-Performing Loans and Leases
 
We manage asset quality and control credit risk through diversification of the loan and lease portfolio and the application of policies designed to promote sound underwriting and loan and lease monitoring practices. The Bank's Credit Quality Administration is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank.  Reviews of non-performing, past due loans and leases and larger credits, designed to identify potential charges to the allowance for loan and lease losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan and lease portfolio, prevailing economic conditions and other factors. 


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Table of Contents

Non-Accrual Loans and Leases and Loans and Leases Past Due  
 
The following tables summarize our non-accrual loans and leases and loans and leases past due, by loan and lease class, as of March 31, 2018 and December 31, 2017
(in thousands)
March 31, 2018
 
Greater than 30 to 59 Days Past Due
 
60 to 89 Days Past Due
 
90+ Days and Accruing
 
Total Past Due
 
 Non-Accrual
 
Current & Other (1)
 
Total Loans and Leases
Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

 
 

Non-owner occupied term, net
$
2,398

 
$
477

 
$

 
$
2,875

 
$
2,364

 
$
3,520,982

 
$
3,526,221

Owner occupied term, net
3,083

 

 

 
3,083

 
12,341

 
2,460,863

 
2,476,287

Multifamily, net
161

 

 

 
161

 
344

 
3,130,770

 
3,131,275

Construction & development, net

 

 

 

 

 
522,680

 
522,680

Residential development, net

 

 

 

 

 
179,871

 
179,871

Commercial
 
 
 
 
 
 
 
 
 
 
 
 

Term, net
1,891

 
51

 

 
1,942

 
14,331

 
2,008,940

 
2,025,213

Lines of credit & other, net
941

 
64

 

 
1,005

 
3,088

 
1,142,935

 
1,147,028

Leases and equipment finance, net
11,223

 
7,169

 

 
18,392

 
13,307

 
1,197,010

 
1,228,709

Residential
 
 
 
 
 
 
 
 
 
 
 
 

Mortgage, net (2)
4,985

 
1,955

 
29,111

 
36,051

 

 
3,247,894

 
3,283,945

Home equity loans & lines, net
1,252

 
454

 
2,386

 
4,092

 

 
1,103,730

 
1,107,822

Consumer & other, net
1,979

 
567

 
257

 
2,803

 

 
682,735

 
685,538

Total, net of deferred fees and costs
$
27,913

 
$
10,737

 
$
31,754

 
$
70,404

 
$
45,775

 
$
19,198,410

 
$
19,314,589


(1) Other includes purchased credit impaired loans of $173.5 million.
(2) Includes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase that are past due 90 days or more, totaling $6.3 million at March 31, 2018.

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Table of Contents

 (in thousands)
December 31, 2017
 
Greater than 30 to 59 Days Past Due
 
60 to 89 Days Past Due
 
90+ Days and Accruing
 
Total Past Due
 
 Non-Accrual
 
Current & Other (1)
 
Total Loans and Leases
Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

 
 

Non-owner occupied term, net
$
207

 
$
2,097

 
$

 
$
2,304

 
$
4,578

 
$
3,484,255

 
$
3,491,137

Owner occupied term, net
4,997

 
2,015

 
71

 
7,083

 
13,870

 
2,467,298

 
2,488,251

Multifamily, net

 

 

 

 
355

 
3,087,437

 
3,087,792

Construction & development, net

 

 

 

 

 
540,707

 
540,707

Residential development, net

 

 

 

 

 
165,865

 
165,865

Commercial
 
 
 
 
 

 

 
 
 
 
 
 
Term, net
597

 
1,076

 

 
1,673

 
14,686

 
1,928,628

 
1,944,987

Lines of credit & other, net
1,263

 

 
401

 
1,664

 
6,402

 
1,158,107

 
1,166,173

Leases and equipment finance, net
8,494

 
10,133

 
2,857

 
21,484

 
11,574

 
1,134,445

 
1,167,503

Residential
 
 
 
 
 
 

 
 
 
 
 
 
Mortgage, net (2)

 
6,716

 
36,977

 
43,693

 

 
3,148,492

 
3,192,185

Home equity loans & lines, net
2,004

 
285

 
2,587

 
4,876

 

 
1,098,421

 
1,103,297

Consumer & other, net
3,116

 
870

 
529

 
4,515

 

 
727,772

 
732,287

Total, net of deferred fees and costs
$
20,678

 
$
23,192

 
$
43,422

 
$
87,292

 
$
51,465

 
$
18,941,427

 
$
19,080,184


(1) Other includes purchased credit impaired loans of $189.1 million.
(2) Includes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase that are past due 90 days or more, totaling $12.4 million at December 31, 2017.

Impaired Loans 

Loans with no related allowance reported generally represent non-accrual loans, which are also considered impaired loans. The Bank recognizes the charge-off on impaired loans in the period it arises for collateral-dependent loans.  Therefore, the non-accrual loans as of March 31, 2018 have already been written down to their estimated net realizable value and are expected to be resolved with no additional material loss, absent further decline in market prices.  The valuation allowance on impaired loans primarily represents the impairment reserves on performing restructured loans, and is measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan's carrying value. 


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Table of Contents

The following tables summarize our impaired loans by loan class as of March 31, 2018 and December 31, 2017
(in thousands)
March 31, 2018
 

 
Recorded Investment
 
 
 
Unpaid Principal Balance
 
Without Allowance
 
With Allowance
 
Related Allowance
Commercial real estate
 
 
 
 
 
 
 
Non-owner occupied term, net
$
13,409

 
$
45

 
$
13,280

 
$
396

Owner occupied term, net
11,381

 
9,782

 
928

 
99

Multifamily, net
3,989

 
344

 
3,519

 
105

Commercial
 
 
 
 
 
 
 
Term, net
27,448

 
18,490

 
2,340

 
5

Lines of credit & other, net
7,487

 
3,069

 

 

Leases and equipment finance, net
144

 
144

 

 

Total, net of deferred fees and costs
$
63,858

 
$
31,874

 
$
20,067

 
$
605

 
(in thousands)
December 31, 2017
 
 
 
Recorded Investment
 
 
 
Unpaid Principal Balance
 
Without Allowance
 
With Allowance
 
Related Allowance
Commercial real estate
 
 
 
 
 
 
 
Non-owner occupied term, net
$
15,930

 
$
2,603

 
$
13,310

 
$
314

Owner occupied term, net
12,775

 
11,272

 
940

 
94

Multifamily, net
3,994

 
355

 
3,519

 
123

Commercial
 
 
 
 
 
 
 
Term, net
28,117

 
19,084

 
2,510

 
4

Lines of credit & other, net
8,018

 
6,383

 

 

Total, net of deferred fees and costs
$
68,834

 
$
39,697

 
$
20,279

 
$
535




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Table of Contents

The following table summarizes our average recorded investment and interest income recognized on impaired loans by loan class for the three months ended March 31, 2018 and 2017
(in thousands) 
Three Months Ended
 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Commercial real estate
 
 
 
 
 
 
 
Non-owner occupied term, net
$
14,620

 
$
102

 
$
15,735

 
$
149

Owner occupied term, net
11,461

 
10

 
8,952

 
61

Multifamily, net
3,868

 
30

 
3,939

 
30

Construction & development, net

 

 
1,312

 
11

Residential development, net

 

 
7,445

 
75

Commercial
 
 
 
 
 
 
 
Term, net
21,212

 
89

 
12,827

 
35

Lines of credit & other, net
4,726

 

 
4,966

 
12

Leases and equipment finance, net
72

 

 
232

 

Total, net of deferred fees and costs
$
55,959

 
$
231

 
$
55,408

 
$
373

 
 
 
 
 
 
 
 
The impaired loans for which these interest income amounts were recognized primarily relate to accruing restructured loans. 
 
Credit Quality Indicators 
 
As previously noted, the Bank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk.  The Bank differentiates its lending portfolios into homogeneous loans and leases and non-homogeneous loans and leases. Homogeneous loans and leases are not risk rated until they are greater than 30 days past due, and risk rating is based on the past due status of the loan or lease. The 10 risk rating categories can be generally described by the following groupings for loans and leases:
 
Minimal Risk—A minimal risk loan or lease, risk rated 1, is to a borrower of the highest quality. The borrower has an unquestioned ability to produce consistent profits and service all obligations and can absorb severe market disturbances with little or no difficulty. 
 
Low Risk—A low risk loan or lease, risk rated 2, is similar in characteristics to a minimal risk loan.  Margins may be smaller or protective elements may be subject to greater fluctuation. The borrower will have a strong demonstrated ability to produce profits, provide ample debt service coverage and to absorb market disturbances. 

Modest Risk—A modest risk loan or lease, risk rated 3, is a desirable loan or lease with excellent sources of repayment and no currently identifiable risk associated with collection. The borrower exhibits a very strong capacity to repay the credit in accordance with the repayment agreement. The borrower may be susceptible to economic cycles, but will have reserves to weather these cycles. 

Average Risk—An average risk loan or lease, risk rated 4, is an attractive loan or lease with sound sources of repayment and no material collection or repayment weakness evident. The borrower has an acceptable capacity to pay in accordance with the agreement. The borrower is susceptible to economic cycles and more efficient competition, but should have modest reserves sufficient to survive all but the most severe downturns or major setbacks.
 
Acceptable Risk—An acceptable risk loan or lease, risk rated 5, is a loan or lease with lower than average, but still acceptable credit risk. These borrowers may have higher leverage, less certain but viable repayment sources, have limited financial reserves and may possess weaknesses that can be adequately mitigated through collateral, structural or credit enhancement. The borrower is susceptible to economic cycles and is less resilient to negative market forces or financial events. Reserves may be insufficient to survive a modest downturn. 

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Watch—A watch loan or lease, risk rated 6, is still pass-rated, but represents the lowest level of acceptable risk due to an emerging risk element or declining performance trend. Watch ratings are expected to be temporary, with issues resolved or manifested to the extent that a higher or lower rating would be appropriate. The borrower should have a plausible plan, with reasonable certainty of success, to correct the problems in a short period of time.
 
Special Mention—A special mention loan or lease, risk rated 7, has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the institution's credit position at some future date. They contain unfavorable characteristics and are generally undesirable. Loans and leases in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a substandard classification. A special mention loan or lease has potential weaknesses, which if not checked or corrected, weaken the asset or inadequately protect the Bank's position at some future date. For commercial and commercial real estate homogeneous loans and leases to be classified as special mention, risk rated 7, the loan or lease is greater than 30 to 59 days past due from the required payment date at month-end. Residential and consumer and other homogeneous loans are risk rated 7, when the loan is greater than 30 to 89 days past due from the required payment date at month-end. 

Substandard—A substandard asset, risk rated 8, is inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. Loans and leases are classified as substandard when they have unsatisfactory characteristics causing unacceptable levels of risk. A substandard loan or lease normally has one or more well-defined weaknesses that could jeopardize repayment of the debt. The likely need to liquidate assets to correct the problem, rather than repayment from successful operations is the key distinction between special mention and substandard. Commercial and commercial real estate homogeneous loans and leases are classified as a substandard loan or lease, risk rated 8, when the loan or lease is 60 to 89 days past due from the required payment date at month-end. Residential and consumer and other homogeneous loans are classified as a substandard loan, risk rated 8, when an open-end loan is 90 to 180 days past due from the required payment date at month-end or when a closed-end loan 90 to 120 days is past due from the required payment date at month-end.

Doubtful—Loans or leases classified as doubtful, risk rated 9, have all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work towards strengthening of the asset, classification as a loss (and immediate charge-off) is deferred until more exact status may be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, and perfection of liens on additional collateral and refinancing plans. In certain circumstances, a doubtful rating will be temporary, while the Bank is awaiting an updated collateral valuation. In these cases, once the collateral is valued and appropriate margin applied, the remaining un-collateralized portion will be charged-off. The remaining balance, properly margined, may then be upgraded to substandard, however must remain on non-accrual.  Commercial and commercial real estate homogeneous doubtful loans or leases, risk rated 9, are 90 to 179 days past due from the required payment date at month-end. 
 
Loss—Loans or leases classified as loss, risk rated 10, are considered un-collectible and of such little value that the continuance as an active Bank asset is not warranted. This rating does not mean that the loan or lease has no recovery or salvage value, but rather that the loan or lease should be charged-off now, even though partial or full recovery may be possible in the future. For a commercial or commercial real estate homogeneous loss loan or lease to be risk rated 10, the loan or lease is 180 days and more past due from the required payment date. These loans are generally charged-off in the month in which the 180 day time period elapses. Residential, consumer and other homogeneous loans are risk rated 10, when a closed-end loan becomes past due 120 cumulative days or when an open-end retail loan becomes past due 180 cumulative days from the contractual due date.   These loans are generally charged-off in the month in which the 120 or 180 day period elapses. 
 
Impaired—Loans are classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement, without unreasonable delay. This generally includes all loans classified as non-accrual and troubled debt restructurings. Impaired loans are risk rated for internal and regulatory rating purposes, but presented separately for clarification. 


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Table of Contents

The following tables summarize our internal risk rating by loan and lease class for the loan and lease portfolio, including purchased credit impaired loans, as of March 31, 2018 and December 31, 2017
(in thousands)
March 31, 2018
 
Pass/Watch
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Impaired (1)
 
Total
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied term, net
$
3,438,686

 
$
41,494

 
$
32,609

 
$
107

 
$

 
$
13,325

 
$
3,526,221

Owner occupied term, net
2,398,088

 
40,054

 
27,239

 

 
196

 
10,710

 
2,476,287

Multifamily, net
3,101,489

 
13,298

 
12,625

 

 

 
3,863

 
3,131,275

Construction & development, net
518,676

 
1,833

 
2,171

 

 

 

 
522,680

Residential development, net
179,871

 

 

 

 

 

 
179,871

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Term, net
1,963,577

 
31,646

 
9,047

 
43

 
70

 
20,830

 
2,025,213

Lines of credit & other, net
1,107,212

 
13,420

 
23,324

 

 
3

 
3,069

 
1,147,028

Leases and equipment finance, net
1,197,468

 
11,223

 
7,169

 
11,125

 
1,580

 
144

 
1,228,709

Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage, net (2)
3,239,104

 
7,545

 
33,920

 

 
3,376

 

 
3,283,945

Home equity loans & lines, net
1,103,210

 
2,003

 
2,270

 

 
339

 

 
1,107,822

Consumer & other, net
682,643

 
2,543

 
284

 

 
68

 

 
685,538

Total, net of deferred fees and costs
$
18,930,024

 
$
165,059

 
$
150,658

 
$
11,275

 
$
5,632

 
$
51,941

 
$
19,314,589

(1) The percentage of impaired loans classified as pass/watch and substandard was 2.2% and 97.8%, respectively, as of March 31, 2018.
(2) Includes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase that are past due 90 days or more, totaling $6.3 million at March 31, 2018, which is included in the substandard category.

(in thousands)
December 31, 2017
 
Pass/Watch
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Impaired (1)
 
Total
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied term, net
$
3,396,178

 
$
45,189

 
$
33,143

 
$
630

 
$
84

 
$
15,913

 
$
3,491,137

Owner occupied term, net
2,409,301

 
30,393

 
35,191

 
448

 
706

 
12,212

 
2,488,251

Multifamily, net
3,064,079

 
14,200

 
5,639

 

 

 
3,874

 
3,087,792

Construction & development, net
538,526

 

 
2,181

 

 

 

 
540,707

Residential development, net
165,426

 

 
439

 

 

 

 
165,865

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Term, net
1,900,230

 
12,735

 
10,266

 
82

 
80

 
21,594

 
1,944,987

Lines of credit & other, net
1,122,258

 
6,539

 
30,941

 
52

 

 
6,383

 
1,166,173

Leases and equipment finance, net
1,134,446

 
8,494

 
10,133

 
12,868

 
1,562

 

 
1,167,503

Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage, net (2)
3,145,363

 
7,512

 
35,928

 

 
3,382

 

 
3,192,185

Home equity loans & lines, net
1,097,886

 
2,558

 
2,322

 

 
531

 

 
1,103,297

Consumer & other, net
727,677

 
3,997

 
568

 

 
45

 

 
732,287

Total, net of deferred fees and costs
$
18,701,370

 
$
131,617

 
$
166,751

 
$
14,080

 
$
6,390

 
$
59,976

 
$
19,080,184

(1) The percentage of impaired loans classified as pass/watch and substandard was 1.7%, and 98.3%, respectively, as of December 31, 2017.
(2) Includes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase that are past due 90 days or more, totaling $12.4 million at December 31, 2017, which is included in the substandard category.

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Table of Contents


Troubled Debt Restructurings 

At March 31, 2018 and December 31, 2017, impaired loans of $31.7 million and $32.2 million, respectively, were classified as accruing restructured loans. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. In order for a newly restructured loan to be considered for accrual status, the loan's collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. Impaired restructured loans carry a specific allowance and the allowance on impaired restructured loans is calculated consistently across the portfolios. 

There were no available commitments for troubled debt restructurings outstanding as of March 31, 2018 and $917,000 as of December 31, 2017
 
The following tables present troubled debt restructurings by accrual versus non-accrual status and by loan class as of March 31, 2018 and December 31, 2017
(in thousands) 
March 31, 2018
 
Accrual Status
 
Non-Accrual Status
 
Total Modifications
Commercial real estate, net
$
17,647

 
$
5,088

 
$
22,735

Commercial, net
7,556

 
13,711

 
21,267

Residential, net
6,456

 

 
6,456

Total, net of deferred fees and costs
$
31,659

 
$
18,799

 
$
50,458

 
(in thousands)
December 31, 2017
 
Accrual Status
 
Non-Accrual Status
 
Total Modifications
Commercial real estate, net
$
17,694

 
$
5,088

 
$
22,782

Commercial, net
7,787

 
16,978

 
24,765

Residential, net
6,676

 

 
6,676

Total, net of deferred fees and costs
$
32,157

 
$
22,066

 
$
54,223


The Bank's policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain.  The Bank's policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.


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Table of Contents

The following tables present newly restructured loans that occurred during the three months ended March 31, 2018 and 2017
 (in thousands)
Three Months Ended March 31, 2018
 
Rate Modifications
 
Term Modifications
 
Interest Only Modifications
 
Payment Modifications
 
Combination Modifications
 
Total Modifications
Residential, net
$

 
$

 
$

 
$

 
$
106

 
$
106

Total, net of deferred fees and costs
$

 
$

 
$

 
$

 
$
106

 
$
106

 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
Rate Modifications
 
Term Modifications
 
Interest Only Modifications
 
Payment Modifications
 
Combination Modifications
 
Total Modifications
Commercial, net
$

 
$

 
$

 
$

 
$
2,919

 
$
2,919

Residential, net

 

 

 

 
253

 
253

Total, net of deferred fees and costs
$

 
$

 
$

 
$

 
$
3,172

 
$
3,172

 
 
 
 
 
 
 
 
 
 
 
 
For the periods presented in the tables above, the outstanding recorded investment was the same pre and post modification. There were $10.2 million in financing receivables modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the three months ended March 31, 2018. There were $118,000 in financing receivables modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the three months ended March 31, 2017.

Note 5–Goodwill and Other Intangible Assets

Goodwill totaled $1.8 billion as of March 31, 2018 and December 31, 2017, and represents the excess of the total acquisition price paid over the fair value of the assets acquired, net of the fair values of liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis at December 31 of each year or whenever events or changes in circumstances indicate the carrying value may not be recoverable. No events or circumstances since the December 31, 2017 annual impairment test were noted that would indicate it was more likely than not a goodwill impairment exists.

The following table summarizes the changes in the Company's other intangible assets for the year ended December 31, 2017, and the three months ended March 31, 2018.
(in thousands)
Other Intangible Assets
 
Gross
Accumulated Amortization
Net
Balance, December 31, 2016
$
113,471

$
(76,585
)
$
36,886

Amortization

(6,756
)
(6,756
)
Balance, December 31, 2017
113,471

(83,341
)
30,130

Amortization

(1,541
)
(1,541
)
Balance, March 31, 2018
$
113,471

$
(84,882
)
$
28,589


Core deposit intangible asset values were determined by an analysis of the cost differential between the core deposits inclusive of estimated servicing costs and alternative funding sources for core deposits acquired through acquisitions. The core deposit intangible assets recorded are amortized on an accelerated basis over a period of approximately 10 years. No impairment losses separate from the scheduled amortization have been recognized in the periods presented.


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The table below presents the forecasted amortization expense for other intangible assets acquired in all mergers:
(in thousands)
 
Year
Expected Amortization
Remainder of 2018
$
4,625

2019
5,618

2020
4,986

2021
4,520

2022
4,095

Thereafter
4,745

 
$
28,589


Note 6 – Residential Mortgage Servicing Rights 
 
The following table presents the changes in the Company's residential mortgage servicing rights ("MSR") for the three months ended March 31, 2018 and 2017
(in thousands) 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
Balance, beginning of period
$
153,151

 
$
142,973

Additions for new MSR capitalized
6,530

 
7,041

Changes in fair value:
 
 
 
 Due to changes in model inputs or assumptions (1)
14,933

 
(3,606
)
 Other (2)
(9,854
)
 
(4,064
)
Balance, end of period
$
164,760

 
$
142,344

 
(1)
Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates. 
(2)
Represents changes due to collection/realization of expected cash flows over time. 

Information related to our serviced loan portfolio as of March 31, 2018 and December 31, 2017 is as follows: 
(dollars in thousands)
March 31, 2018
 
December 31, 2017
Balance of loans serviced for others
$
15,442,915

 
$
15,336,597

MSR as a percentage of serviced loans
1.07
%
 
1.00
%
 
The amount of contractually specified servicing fees, late fees and ancillary fees earned, recorded in residential mortgage banking revenue, was $10.5 million and $9.9 million for the three months ended March 31, 2018 and March 31, 2017, respectively. 
 
Key assumptions used in measuring the fair value of MSR as of March 31, 2018 and December 31, 2017 were as follows: 
 
March 31, 2018
 
December 31, 2017
Constant prepayment rate
11.13
%
 
12.27
%
Discount rate
9.69
%
 
9.70
%
Weighted average life (years)
6.8

 
6.3

 
  

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A sensitivity analysis of the current fair value to changes in discount and prepayment speed assumptions as of March 31, 2018 and December 31, 2017 is as follows:
(in thousands)
March 31, 2018
 
December 31, 2017
Constant prepayment rate
 
 
 
Effect on fair value of a 10% adverse change
$
(6,483
)
 
$
(6,290
)
Effect on fair value of a 20% adverse change
$
(12,499
)
 
$
(12,093
)
 
 
 
 
Discount rate
 
 
 
Effect on fair value of a 100 basis point adverse change
$
(6,756
)
 
$
(5,840
)
Effect on fair value of a 200 basis point adverse change
$
(12,994
)
 
$
(11,249
)

The sensitivity analysis presents the hypothetical effect on fair value of the MSR. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in an assumption to the change in fair value is not linear. Additionally, in the analysis, the impact of an adverse change in one assumption is calculated independent of any impact on other assumptions. In reality, changes in one assumption may change another assumption.


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Table of Contents

Note 7 – Junior Subordinated Debentures 

Following is information about the Company's wholly-owned trusts ("Trusts") as of March 31, 2018:  
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Trust Name
 
Issue Date
 
Issued Amount
 
Carrying Value (1)
 
Rate (2)
 
Effective
 Rate (3)
 
Maturity Date
AT FAIR VALUE:
 
 
 
 
 
 
 
 
 
 
 
 
Umpqua Statutory Trust II
 
October 2002
 
$
20,619

 
$
17,684

 
Floating rate, LIBOR plus 3.35%, adjusted quarterly
 
5.97%
 
October 2032
Umpqua Statutory Trust III
 
October 2002
 
30,928

 
26,762

 
Floating rate, LIBOR plus 3.45%, adjusted quarterly
 
6.11%
 
November 2032
Umpqua Statutory Trust IV
 
December 2003
 
10,310

 
8,332

 
Floating rate, LIBOR plus 2.85%, adjusted quarterly
 
5.66%
 
January 2034
Umpqua Statutory Trust V
 
December 2003
 
10,310

 
8,232

 
Floating rate, LIBOR plus 2.85%, adjusted quarterly
 
6.30%
 
March 2034
Umpqua Master Trust I
 
August 2007
 
41,238

 
25,706

 
Floating rate, LIBOR plus 1.35%, adjusted quarterly
 
5.57%
 
September 2037
Umpqua Master Trust IB
 
September 2007
 
20,619

 
15,786

 
Floating rate, LIBOR plus 2.75%, adjusted quarterly
 
6.37%
 
December 2037
Sterling Capital Trust III
 
April 2003
 
14,433

 
12,254

 
Floating rate, LIBOR plus 3.25%, adjusted quarterly
 
5.92%
 
April 2033
Sterling Capital Trust IV
 
May 2003
 
10,310

 
8,597

 
Floating rate, LIBOR plus 3.15%, adjusted quarterly
 
5.98%
 
May 2033
Sterling Capital Statutory Trust V
 
May 2003
 
20,619

 
17,306

 
Floating rate, LIBOR plus 3.25%, adjusted quarterly
 
6.60%
 
June 2033
Sterling Capital Trust VI
 
June 2003
 
10,310

 
8,565

 
Floating rate, LIBOR plus 3.20%, adjusted quarterly
 
6.41%
 
September 2033
Sterling Capital Trust VII
 
June 2006
 
56,702

 
36,996

 
Floating rate, LIBOR plus 1.53%, adjusted quarterly
 
5.59%
 
June 2036
Sterling Capital Trust VIII
 
September 2006
 
51,547

 
33,925

 
Floating rate, LIBOR plus 1.63%, adjusted quarterly
 
5.70%
 
December 2036
Sterling Capital Trust IX
 
July 2007
 
46,392

 
29,426

 
Floating rate, LIBOR plus 1.40%, adjusted quarterly
 
4.88%
 
October 2037
Lynnwood Financial Statutory Trust I
 
March 2003
 
9,279

 
7,701

 
Floating rate, LIBOR plus 3.15%, adjusted quarterly
 
6.55%
 
March 2033
Lynnwood Financial Statutory Trust II
 
June 2005
 
10,310

 
7,185

 
Floating rate, LIBOR plus 1.80%, adjusted quarterly
 
5.63%
 
June 2035
Klamath First Capital Trust I
 
July 2001
 
15,464

 
13,953

 
Floating rate, LIBOR plus 3.75%, adjusted semiannually
 
6.34%
 
July 2031
 
 
 
 
$
379,390

 
$
278,410

 
 
 
 
 
 
AT AMORTIZED COST:
 
 
 
 
 
 
 
 
 
 
 
 
Humboldt Bancorp Statutory Trust II
 
December 2001
 
10,310

 
11,043

 
Floating rate, LIBOR plus 3.60%, adjusted quarterly
 
4.91%
 
December 2031
Humboldt Bancorp Statutory Trust III
 
September 2003
 
27,836

 
29,791

 
Floating rate, LIBOR plus 2.95%, adjusted quarterly
 
4.35%
 
September 2033
CIB Capital Trust
 
November 2002
 
10,310

 
10,945

 
Floating rate, LIBOR plus 3.45%, adjusted quarterly
 
4.58%
 
November 2032
Western Sierra Statutory Trust I
 
July 2001
 
6,186

 
6,186

 
Floating rate, LIBOR plus 3.58%, adjusted quarterly
 
5.35%
 
July 2031
Western Sierra Statutory Trust II
 
December 2001
 
10,310

 
10,310

 
Floating rate, LIBOR plus 3.60%, adjusted quarterly
 
5.78%
 
December 2031
Western Sierra Statutory Trust III
 
September 2003
 
10,310

 
10,310

 
Floating rate, LIBOR plus 2.90%, adjusted quarterly
 
4.62%
 
September 2033
Western Sierra Statutory Trust IV
 
September 2003
 
10,310

 
10,310

 
Floating rate, LIBOR plus 2.90%, adjusted quarterly
 
4.62%
 
September 2033
 
 
 
 
85,572

 
88,895

 
 
 
 
 
 
 
 
Total
 
$
464,962

 
$
367,305

 
 
 
 
 
 
 
(1)
Includes acquisition accounting adjustments, net of accumulated amortization, for junior subordinated debentures assumed in connection with previous mergers as well as fair value adjustments related to trusts recorded at fair value. 
(2)
Contractual interest rate of junior subordinated debentures. 
(3)
Effective interest rate based upon the carrying value as of March 31, 2018

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Table of Contents

 
The Trusts are reflected as junior subordinated debentures in the Condensed Consolidated Balance Sheets.  The common stock issued by the Trusts is recorded in other assets in the Condensed Consolidated Balance Sheets, and totaled $14.0 million at March 31, 2018 and $14.3 million at December 31, 2017. As of March 31, 2018, all of the junior subordinated debentures were redeemable at par, at their applicable quarterly or semiannual interest payment dates.

In the first quarter of 2018, the Company paid $10.6 million to redeem the debt securities of the Humboldt Bancorp Statutory Trust I and HB Capital Trust I.

The Company has elected the fair value measurement option for junior subordinated debentures originally issued by the Company (the Umpqua Statutory Trusts) and for junior subordinated debentures acquired from Sterling.

The fair value of the junior subordinated debentures increased during the first quarter, however, based on the application of ASU 2016-01, no loss was recorded in earnings for the three months ended March 31, 2018. Instead the loss of $1.7 million was recorded in other comprehensive income (loss), net of tax. The loss recorded in earnings resulting from the change in the fair value of these instruments was $1.6 million for the three months ended March 31, 2017.

Note 8 – Commitments and Contingencies 
 
Lease Commitments — As of March 31, 2018, the Bank leased 225 sites under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. 
 
Rent expense for the three months ended March 31, 2018 and March 31, 2017 was $9.6 million and $9.8 million, respectively. Rent expense was partially offset by rent income of $684,000 and $513,000 for the three months ended March 31, 2018 and March 31, 2017, respectively.
 
Financial Instruments with Off-Balance-Sheet Risk — The Company's financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of the Bank's business and involve elements of credit, liquidity, and interest rate risk. 
 
The following table presents a summary of the Bank's commitments and contingent liabilities:  
 (in thousands)
As of March 31, 2018
Commitments to extend credit
$
5,015,077

Forward sales commitments
$
528,128

Commitments to originate residential mortgage loans held for sale
$
349,106

Standby letters of credit
$
69,944

 
The Bank is a party to financial instruments with off-balance-sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve elements of credit and interest-rate risk similar to the risk involved in on-balance sheet items recognized in the Condensed Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. 
 
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. 
 

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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any covenant or condition established in the applicable contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. While most standby letters of credit are not utilized, a significant portion of such utilization is on an immediate payment basis. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral varies but may include cash, accounts receivable, inventory, premises and equipment and income-producing commercial properties. 
 
Standby letters of credit and written financial guarantees are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including international trade finance, commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary. There were no financial guarantees in connection with standby letters of credit that the Bank was required to perform on during the three months ended March 31, 2018 and March 31, 2017. At March 31, 2018, approximately $39.1 million of standby letters of credit expire within one year, and $30.9 million expire thereafter. During the three months ended March 31, 2018 and March 31, 2017, the Bank recorded approximately $113,000 and $154,000, respectively, in fees associated with standby letters of credit.  

Residential mortgage loans sold into the secondary market are sold with limited recourse against the Company, meaning that the Company may be obligated to repurchase or otherwise reimburse the investor for incurred losses on any loans that suffer an early payment default, are not underwritten in accordance with investor guidelines or are determined to have pre-closing borrower misrepresentations. As of March 31, 2018, the Company had a residential mortgage loan repurchase reserve liability of $1.4 million. For loans sold to GNMA, the Bank has a unilateral right, but not the obligation, to repurchase loans that are past due 90 days or more. As of March 31, 2018, the Bank has recorded a liability for the loans subject to this repurchase right of $6.3 million, and has recorded these loans as part of the loan portfolio as if we had repurchased these loans.
 
Legal Proceedings—Umpqua is involved in legal proceedings occurring in the ordinary course of business. Based on information currently available, advice of counsel and available insurance coverage, we believe that the eventual outcome of actions against the Company or its subsidiaries will not, individually or in the aggregate, have a material adverse effect on our consolidated financial condition. However, it is possible that the ultimate resolution of a matter, if unfavorable, may be material to our results of operations for any particular period.

Concentrations of Credit Risk— The Bank grants real estate mortgage, real estate construction, commercial, agricultural and installment loans and leases to customers throughout Oregon, Washington, California, Idaho, and Nevada. In management's judgment, a concentration exists in real estate-related loans, which represented approximately 75% of the Bank's loan and lease portfolio at March 31, 2018 and December 31, 2017.  Commercial real estate concentrations are managed to assure wide geographic and business diversity. Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, material increases in interest rates, changes in tax policies, tightening credit or refinancing markets, or a decline in real estate values in the Bank's primary market areas in particular, could have an adverse impact on the repayment of these loans.  Personal and business incomes, proceeds from the sale of real property, or proceeds from refinancing, represent the primary sources of repayment for a majority of these loans. 
 
The Bank recognizes the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive exposure to any single correspondent, the Bank has established general standards for selecting correspondent banks as well as internal limits for allowable exposure to any single correspondent. In addition, the Bank has an investment policy that sets forth limitations that apply to all investments with respect to credit rating and concentrations with an issuer.
  

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Table of Contents

Note 9 – Derivatives 
 
The Bank may use derivatives to hedge the risk of changes in the fair values of interest rate lock commitments and residential mortgage loans held for sale. None of the Company's derivatives are designated as hedging instruments.  Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in income. The Company primarily utilizes forward interest rate contracts in its derivative risk management strategy. 

The Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage loan commitments.  Credit risk associated with forward contracts is limited to the replacement cost of those forward contracts in a gain position.  There were no counterparty default losses on forward contracts in the three months ended March 31, 2018 and 2017.  Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Bank limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the Company completes the transaction by either paying or receiving a fee to or from the broker/dealer equal to the increase or decrease in the market value of the forward contract. At March 31, 2018, the Bank had commitments to originate mortgage loans held for sale totaling $349.1 million and forward sales commitments of $528.1 million, which are used to hedge both on-balance sheet and off-balance sheet exposures. 
 
The Bank executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.  Those interest rate swaps are simultaneously hedged by offsetting the interest rate swaps that the Bank executes with a third party, such that the Bank minimizes its net risk exposure. As of March 31, 2018, the Bank had 673 interest rate swaps with an aggregate notional amount of $3.2 billion related to this program.  As of December 31, 2017, the Bank had 653 interest rate swaps with an aggregate notional amount of $3.0 billion related to this program.

As of March 31, 2018 and December 31, 2017, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $21.4 million and $7.2 million, respectively.  The Bank has collateral posting requirements for initial margins with its clearing members and clearing houses and has been required to post collateral against its obligations under these agreements of $30.0 million and $28.2 million as of March 31, 2018 and December 31, 2017, respectively. 

Umpqua's interest rate swap derivatives are cleared through the Chicago Mercantile Exchange and London Clearing House. These clearing houses characterize the variation margin payments, for derivative contracts that are referred to as settled-to-market, as settlements of the derivative's mark-to-market exposure and not collateral. Umpqua accounts for the variation margin as an adjustment to our cash collateral, as well as a corresponding adjustment to our derivative asset and liability. As of March 31, 2018, the variation margin adjustment was a positive adjustment of $8.7 million as compared to a negative adjustment of $20.5 million at December 31, 2017.
 
The Bank incorporates credit valuation adjustments ("CVA") to appropriately reflect nonperformance risk in the fair value measurement of its derivatives. As of March 31, 2018 and December 31, 2017, the net CVA decreased the settlement values of the Bank's net derivative assets by $498,000 and $1.7 million, respectively. Various factors impact changes in the CVA over time, including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.

The Bank also executes foreign currency hedges as a service for customers. These foreign currency hedges are then offset with hedges with other third-party banks to limit the Bank's risk exposure.
 
The following table summarizes the types of derivatives, separately by assets and liabilities, and the fair values of such derivatives as of March 31, 2018 and December 31, 2017:  
(in thousands)
 
Asset Derivatives
 
Liability Derivatives
Derivatives not designated as hedging instrument
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
Interest rate lock commitments
 
$
5,874

 
$
4,752

 
$

 
$

Interest rate forward sales commitments
 
1,013

 
286

 
1,145

 
567

Interest rate swaps
 
12,206

 
26,081

 
21,424

 
7,229

Foreign currency derivatives
 
52

 
1,137

 
106

 
1,492

Total
 
$
19,145

 
$
32,256

 
$
22,675

 
$
9,288


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The following table summarizes the types of derivatives and the gains (losses) recorded during the three months ended March 31, 2018 and 2017:  
(in thousands)
 
Three Months Ended
Derivatives not designated as hedging instrument
 
March 31, 2018
 
March 31, 2017
Interest rate lock commitments
 
$
1,122

 
$
2,219

Interest rate forward sales commitments
 
8,244

 
(2,733
)
Interest rate swaps
 
1,131

 
(727
)
Foreign currency derivatives
 
335

 
409

Total
 
$
10,832

 
$
(832
)
 
The gains and losses on the Company's mortgage banking derivatives are included in residential mortgage banking revenue. The gains and losses on the Company's interest rate swaps and foreign currency derivatives are included in other income.

The following table summarizes the derivatives that have a right of offset as of March 31, 2018 and December 31, 2017:
(in thousands)
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
 
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets/Liabilities presented in the Statement of Financial Position
 
Financial Instruments
 
Collateral Posted
 
Net Amount
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
12,206

 
$

 
$
12,206

 
$
(12,206
)
 
$

 
$

Foreign currency derivatives
 
52

 

 
52

 

 

 
52

Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
21,424

 
$

 
$
21,424

 
$
(12,206
)
 
$

 
$
9,218

Foreign currency derivatives
 
106

 

 
106

 

 

 
106

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
26,081

 
$

 
$
26,081

 
$
(7,229
)
 
$

 
$
18,852

Foreign currency derivatives
 
1,137

 

 
1,137

 

 

 
1,137

Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
7,229

 
$

 
$
7,229

 
$
(7,229
)
 
$

 
$

Foreign currency derivatives
 
1,492

 

 
1,492

 

 

 
1,492



Note 10 – Shareholders' Equity and Stock Compensation

Stock-Based Compensation 
 
The compensation cost related to stock options, restricted stock and restricted stock units in Company stock granted to employees and included in salaries and employee benefits was $1.6 million, for the three months ended March 31, 2018, as compared to $2.5 million, for the three months ended March 31, 2017. The total income tax benefit recognized related to stock-based compensation was $401,000 for the three months ended March 31, 2018, as compared to $977,000 for the three months ended March 31, 2017
 

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The following table summarizes information about stock option activity for the three months ended March 31, 2018
(in thousands, except per share data)
Three Months Ended March 31, 2018
 
Options Outstanding
 
Weighted-Avg Exercise Price
 
Weighted-Avg Remaining Contractual Term (Years)
 
Aggregate Intrinsic Value
Balance, beginning of period
98

 
$
11.99

 
 
 
 
Exercised
(65
)
 
$
11.73

 
 
 
 
Balance, end of period
33

 
$
12.49

 
3.19
 
$
297

Options exercisable, end of period
33

 
$
12.49

 
3.19
 
$
297

 
The total intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three months ended March 31, 2018 was $658,000, as compared to the three months ended March 31, 2017 of $112,000.

During the three months ended March 31, 2018, the amount of cash received from the exercise of stock options was $116,000, as compared to the three months ended March 31, 2017 of $49,000. Total consideration was $759,000, for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 of $230,000.
 
The Company grants restricted stock periodically for the benefit of employees and directors. Restricted shares generally vest over a three year period, subject to time or time plus performance vesting conditions.  The following table summarizes information about nonvested restricted share activity for the three months ended March 31, 2018:  
(in thousands, except per share data)
Three Months Ended March 31, 2018
 
Restricted Shares Outstanding
 
Weighted Average Grant Date Fair Value
Balance, beginning of period
1,248

 
$
16.61

Granted
431

 
$
21.75

Vested/released
(449
)
 
$
15.67

Forfeited/expired
(82
)
 
$
15.02

Balance, end of period
1,148

 
$
19.02


The total fair value of restricted shares vested and released during the three months ended March 31, 2018 was $9.7 million, as compared to the three months ended March 31, 2017 of $4.5 million
 
The Company granted restricted stock units in connection with the acquisition of Sterling as replacement awards, as well as part of the 2007 Long Term Incentive Plan for the benefit of certain executive officers. Restricted stock unit grants may be subject to performance-based vesting as well as other approved vesting conditions.  The total number of restricted stock units granted represents the maximum number of restricted stock units eligible to vest based upon the performance and service conditions set forth in the grant agreements.

The following table summarizes information about nonvested restricted stock unit activity for the three months ended March 31, 2018
(in thousands, except per share data)
Three Months Ended March 31, 2018
 
Restricted Stock Units Outstanding
 
Weighted Average Grant Date Fair Value
Balance, beginning of period
22

 
$
18.58

Forfeited/expired
(1
)
 
$
18.58

Balance, end of period
21

 
$
18.58



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Table of Contents

There were no restricted stock units vested and released during the three months ended March 31, 2018. The total fair value of restricted stock units vested and released during the three months ended March 31, 2017 was $41,000.

As of March 31, 2018, there was no unrecognized compensation cost related to nonvested stock options.  As of March 31, 2018, there was $14.0 million of total unrecognized compensation cost related to nonvested restricted stock awards which is expected to be recognized over a weighted-average period of 2.00 years, assuming expected performance conditions are met for certain awards. As of March 31, 2018, there was $4,000 of total unrecognized compensation cost related to nonvested restricted stock units which is expected to be recognized over a weighted-average period of 0.01 years. 
 
For the three months ended March 31, 2018, the Company received income tax benefits of $2.6 million, as compared to the three months ended March 31, 2017 of $1.8 million, related to the exercise of non-qualified employee stock options, disqualifying dispositions on the exercise of incentive stock options, the vesting of restricted shares and the vesting of restricted stock units. The tax deficiency or benefit is recorded as income tax expense or benefit in the period the shares are vested.

Note 11 – Income Taxes 
 
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, as well as in the majority of states and in Canada. As of March 31, 2018, the Company has a net deferred tax liability of $39.3 million, which is net of certain deferred tax assets. The Company has a deferred tax asset of $2.6 million for state net operating loss ("NOL") carry-forwards. The Company believes that it is more likely than not that the benefit from certain state NOL carry-forwards will not be realized and therefore has provided a valuation allowance of $1.1 million against the deferred tax assets relating to these NOL carry-forwards. 
 
The Company had gross unrecognized tax benefits of $3.1 million as of March 31, 2018.  If recognized, the unrecognized tax benefit would reduce the 2018 annual effective tax rate by 0.5%. During the three months ended March 31, 2018, the Company accrued $25,000 of interest relating to its liability for unrecognized tax benefits.  Interest on unrecognized tax benefits is reported by the Company as a component of tax expense.  As of March 31, 2018, the accrued interest related to unrecognized tax benefits was $377,000.
 
Note 12 – Earnings Per Common Share  
 
Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of earnings per share pursuant to the two-class method.  The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Certain of the Company's nonvested restricted stock awards qualify as participating securities. 
 
Net earnings is allocated between the common stock and participating securities pursuant to the two-class method.  Basic earnings per common share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested restricted shares. 
 
Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares, excluding the participating securities, were issued using the treasury stock method. For all periods presented, stock options, restricted stock awards and restricted stock units are the only potentially dilutive non-participating instruments issued by the Company.  Next, we determine and include in diluted earnings per common share calculation the more dilutive effect of the participating securities using the treasury stock method or the two-class method. Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under the two-class method as the holders are not contractually obligated to share in the losses of the Company. 
 

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The following is a computation of basic and diluted earnings per common share for the three months ended March 31, 2018 and 2017
(in thousands, except per share data)
Three Months Ended
 
March 31, 2018
 
March 31, 2017
NUMERATORS:
 
 
 
Net income
$
77,669

 
$
46,003

Less:
 
 
 
Dividends and undistributed earnings allocated to participating securities (1)
6

 
12

Net earnings available to common shareholders
$
77,663

 
$
45,991

DENOMINATORS:
 
 
 
Weighted average number of common shares outstanding - basic
220,370

 
220,287

Effect of potentially dilutive common shares (2)
455

 
492

Weighted average number of common shares outstanding - diluted
220,825

 
220,779

EARNINGS PER COMMON SHARE:
 
 
 
Basic
$
0.35

 
$
0.21

Diluted
$
0.35

 
$
0.21

 
(1)
Represents dividends paid and undistributed earnings allocated to certain nonvested restricted stock awards. 
(2)
Represents the effect of the assumed exercise of stock options, vesting of non-participating restricted shares, and vesting of restricted stock units, based on the treasury stock method. 

The following table presents the weighted average outstanding securities that were not included in the computation of diluted earnings per common share because their effect would be anti-dilutive for the three months ended March 31, 2018 and 2017
(in thousands)
Three Months Ended
 
March 31, 2018
 
March 31, 2017
Stock options

 
36

 
Note 13 – Segment Information 
 
The Company reports four primary segments: Commercial Bank, Wealth Management, Retail Bank, and Home Lending with the remainder as Corporate and other.

The Commercial Bank segment includes lending, treasury and cash management services and customer risk management products to small businesses, middle market and larger commercial customers and includes the operations of Financial Pacific Leasing Inc., a commercial leasing company. The Wealth Management segment consists of the operations of Umpqua Investments, which offers a full range of retail brokerage and investment advisory services and products to its clients who consist primarily of individual investors, and Umpqua Private Bank, which serves high net worth individuals with liquid investable assets and provides customized financial solutions and offerings. The Retail Bank segment includes retail lending and deposit services for customers served through the Bank's store network. The Home Lending segment originates, sells and services residential mortgage loans. The Corporate and other segment includes activities that are not directly attributable to one of the four principal lines of business and includes the operations of Pivotus Ventures, Inc. and the parent company, eliminations and the economic impact of certain assets, capital and support functions not specifically identifiable within the other lines of business.

Management monitors the Company's results using an internal performance measurement accounting system, which provides line of business results and key performance measures. The application and development of these management reporting methodologies is a dynamic process and is subject to periodic enhancements. As these enhancements are made, financial results presented by each reportable segment may be periodically revised retrospectively, if material.

The provision for income taxes is allocated to business segments using a 25% effective tax rate for 2018 and 37% for 2017. The residual income tax expense or benefit arising from tax planning strategies or other tax attributes to arrive at the consolidated effective tax rate is retained in Corporate and Other.

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Summarized financial information concerning the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables: 
(in thousands)
Three Months Ended March 31, 2018
 
Commercial Bank
 
Wealth Management
 
Retail Bank
 
Home Lending
 
Corporate & Other
 
Consolidated
Net interest income
$
111,735

 
$
6,003

 
$
79,852

 
$
8,845

 
$
16,796

 
$
223,231

Provision (recapture) for loan and lease losses
13,368

 
167

 
361

 
492

 
(732
)
 
13,656

Non-interest income
15,729

 
4,896

 
15,193

 
38,408

 
4,341

 
78,567

Non-interest expense
54,574

 
8,768

 
71,143

 
32,297

 
19,331

 
186,113

Income before income taxes
59,522

 
1,964

 
23,541

 
14,464

 
2,538

 
102,029

Provision (benefit) for income taxes
14,880

 
491

 
5,885

 
3,616

 
(512
)
 
24,360

Net income
$
44,642

 
$
1,473

 
$
17,656

 
$
10,848

 
$
3,050

 
$
77,669


(in thousands)
Three Months Ended March 31, 2017
 
Commercial Bank
 
Wealth Management
 
Retail Bank
 
Home Lending
 
Corporate & Other
 
Consolidated
Net interest income
$
102,497

 
$
4,429

 
$
68,044

 
$
9,498

 
$
22,257

 
$
206,725

Provision for loan and lease losses
9,109

 
200

 
1,816

 
27

 
520

 
11,672

Non-interest income
12,474

 
4,748

 
14,831

 
26,880

 
1,292

 
60,225

Non-interest expense
49,857

 
8,369

 
73,670

 
40,986

 
9,832

 
182,714

Income (loss) before income taxes
56,005

 
608

 
7,389

 
(4,635
)
 
13,197

 
72,564

Provision (benefit) for income taxes
20,722

 
225

 
2,734

 
(1,715
)
 
4,595

 
26,561

Net income (loss)
$
35,283

 
$
383

 
$
4,655

 
$
(2,920
)
 
$
8,602

 
$
46,003


(in thousands)
March 31, 2018
 
Commercial Bank
 
Wealth Management
 
Retail Bank
 
Home Lending
 
Corporate & Other
 
Consolidated
Total assets
$
14,066,932

 
$
465,097

 
$
2,075,472

 
$
3,487,936

 
$
5,780,206

 
$
25,875,643

Total loans and leases
$
13,896,561

 
$
452,537

 
$
1,991,976

 
$
3,001,719

 
$
(28,204
)
 
$
19,314,589

Total deposits
$
3,747,374

 
$
998,332

 
$
12,807,253

 
$
277,678

 
$
2,276,219

 
$
20,106,856


(in thousands)
December 31, 2017
 
Commercial Bank
 
Wealth Management
 
Retail Bank
 
Home Lending
 
Corporate & Other
 
Consolidated
Total assets
$
13,856,963

 
$
437,873

 
$
2,143,830

 
$
3,355,189

 
$
5,947,584

 
$
25,741,439

Total loans and leases
$
13,683,264

 
$
423,813

 
$
2,054,058

 
$
2,921,897

 
$
(2,848
)
 
$
19,080,184

Total deposits
$
3,776,080

 
$
993,559

 
$
12,449,568

 
$
222,494

 
$
2,506,599

 
$
19,948,300

 
 

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Note 14 – Fair Value Measurement 
 
The following table presents estimated fair values of the Company's financial instruments as of March 31, 2018 and December 31, 2017, whether or not recognized or recorded at fair value in the Condensed Consolidated Balance Sheets:  
(in thousands)
 
 
March 31, 2018
 
December 31, 2017
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
FINANCIAL ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
1
 
$
569,189

 
$
569,189

 
$
634,280

 
$
634,280

Equity and other investment securities
1,2
 
63,295

 
63,295

 
12,255

 
12,255

Investment securities available for sale
1,2
 
2,947,414

 
2,947,414

 
3,065,769

 
3,065,769

Investment securities held to maturity
3
 
3,667

 
4,669

 
3,803

 
4,906

Loans held for sale
2
 
299,739

 
299,739

 
259,518

 
259,518

Loans and leases, net (1)
3
 
19,172,656

 
19,047,732

 
18,939,576

 
18,936,038

Restricted equity securities
1
 
43,501

 
43,501

 
43,508

 
43,508

Residential mortgage servicing rights
3
 
164,760

 
164,760

 
153,151

 
153,151

Bank owned life insurance assets
1
 
307,745

 
307,745

 
306,864

 
306,864

Derivatives
2,3
 
19,145

 
19,145

 
32,256

 
32,256

Visa Class B common stock
3
 

 
90,622

 

 
86,380

FINANCIAL LIABILITIES:
 
 
 
 
 
 
 
 
 
Deposits
1,2
 
$
20,106,856

 
$
20,079,490

 
$
19,948,300

 
$
19,930,568

Securities sold under agreements to repurchase
2
 
291,984

 
291,984

 
294,299

 
294,299

Term debt
2
 
801,868

 
783,741

 
802,357

 
790,532

Junior subordinated debentures, at fair value
3
 
278,410

 
278,410

 
277,155

 
277,155

Junior subordinated debentures, at amortized cost
3
 
88,895

 
72,044

 
100,609

 
81,944

Derivatives
2
 
22,675

 
22,675

 
9,288

 
9,288


(1) The estimated fair value of loans and leases, net for March 31, 2018 reflects an exit price assumption. The December 31, 2017 fair value estimate is not based on an exit price assumption.

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Table of Contents

Fair Value of Assets and Liabilities Measured on a Recurring Basis 

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017
(in thousands) 
March 31, 2018
Description
Total
 
Level 1
 
Level 2
 
Level 3
FINANCIAL ASSETS:
 
 
 
 
 
 
 
Equity and other investment securities
 
 
 
 
 
 
 
Investments in mutual funds and other securities
$
50,933

 
$
50,933

 
$

 
$

Equity securities held in rabbi trusts
12,293

 
12,293

 

 

Other investments securities (1)
69

 

 
69

 

Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury and agencies
39,518

 

 
39,518

 

Obligations of states and political subdivisions
299,551

 

 
299,551

 

Residential mortgage-backed securities and collateralized mortgage obligations
2,608,345

 

 
2,608,345

 

Loans held for sale, at fair value
299,739

 

 
299,739

 

Residential mortgage servicing rights, at fair value
164,760

 

 

 
164,760

Derivatives
 
 
 
 
 
 
 
Interest rate lock commitments
5,874

 

 

 
5,874

Interest rate forward sales commitments
1,013

 

 
1,013

 

Interest rate swaps
12,206

 

 
12,206

 

Foreign currency derivative
52

 

 
52

 

Total assets measured at fair value
$
3,494,353

 
$
63,226

 
$
3,260,493

 
$
170,634

FINANCIAL LIABILITIES:
 
 
 
 
 
 
 
Junior subordinated debentures, at fair value
$
278,410

 
$

 
$

 
$
278,410

Derivatives
 
 
 
 
 
 
 
Interest rate forward sales commitments
1,145

 

 
1,145

 

Interest rate swaps
21,424

 

 
21,424

 

Foreign currency derivative
106

 

 
106

 

Total liabilities measured at fair value
$
301,085

 
$

 
$
22,675

 
$
278,410


(1) Other investment securities includes securities held by Umpqua Investments as trading debt securities.

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Table of Contents

 (in thousands)
December 31, 2017
Description
Total
 
Level 1
 
Level 2
 
Level 3
FINANCIAL ASSETS:
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
273

 
$

 
$
273

 
$

Equity securities
11,982

 
11,982

 

 

Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury and agencies
39,698

 

 
39,698

 

Obligations of states and political subdivisions
308,456

 

 
308,456

 

Residential mortgage-backed securities and collateralized mortgage obligations
2,665,645

 

 
2,665,645

 

Investments in mutual funds and other securities
51,970

 
51,970

 


 

Loans held for sale, at fair value
259,518

 

 
259,518

 

Residential mortgage servicing rights, at fair value
153,151

 

 

 
153,151

Derivatives
 
 
 
 
 
 
 
Interest rate lock commitments
4,752

 

 

 
4,752

Interest rate forward sales commitments
286

 

 
286

 

Interest rate swaps
26,081

 

 
26,081

 

Foreign currency derivative
1,137

 

 
1,137

 

Total assets measured at fair value
$
3,522,949

 
$
63,952

 
$
3,301,094

 
$
157,903

FINANCIAL LIABILITIES:
 
 
 
 
 
 
 
Junior subordinated debentures, at fair value
$
277,155

 
$

 
$

 
$
277,155

Derivatives
 
 
 
 
 
 
 
Interest rate forward sales commitments
567

 

 
567

 

Interest rate swaps
7,229

 

 
7,229

 

Foreign currency derivative
1,492

 

 
1,492

 

Total liabilities measured at fair value
$
286,443

 
$

 
$
9,288

 
$
277,155

 
The following methods were used to estimate the fair value of each class of financial instrument that are carried at fair value in the tables above: 
 
Securities— Fair values for investment securities are based on quoted market prices when available or through the use of alternative approaches, such as matrix or model pricing, or broker indicative bids, when market quotes are not readily accessible or available. Management periodically reviews the pricing information received from the third-party pricing service and compares it to a secondary pricing service, evaluating significant price variances between services to determine an appropriate estimate of fair value to report.
 
Loans Held for Sale— Fair value for residential mortgage loans originated as held for sale is determined based on quoted secondary market prices for similar loans, including the implicit fair value of embedded servicing rights.
 
Residential Mortgage Servicing Rights— The fair value of MSR is estimated using a discounted cash flow model. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income net of servicing costs. This model is periodically validated by an independent model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. Management believes the significant inputs utilized are indicative of those that would be used by market participants. 
 

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Junior Subordinated Debentures— The fair value of junior subordinated debentures is estimated using an income approach valuation technique.  The significant inputs utilized in the estimation of fair value of these instruments are the credit risk adjusted spread and three month LIBOR. The credit risk adjusted spread represents the nonperformance risk of the liability, contemplating the inherent risk of the obligation. The Company periodically utilizes a valuation firm to determine or validate the reasonableness of inputs and factors that are used to determine the fair value. The ending carrying (fair) value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants.  Due to credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads, we have classified this as a Level 3 fair value measure.  
 
Derivative Instruments— The fair value of the interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate.  The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. The fair value of the interest rate swaps is determined using a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the CVA associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2018, the Bank has assessed the significance of the impact of the CVA on the overall valuation of its interest rate swap positions and has determined that the CVA are not significant to the overall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.   
 
Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3) 
 
The following table provides a description of the valuation technique, significant unobservable inputs, 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 basis at March 31, 2018
Financial Instrument
Valuation Technique
Unobservable Input
Weighted Average
Residential mortgage servicing rights
Discounted cash flow
 
 
 
 
Constant Prepayment Rate
11.13%
 
 
Discount Rate
9.69%
Interest rate lock commitment
Internal Pricing Model
 
 
 
 
Pull-through rate
88.02%
Junior subordinated debentures
Discounted cash flow
 
 
 
 
Credit Spread
4.97%

Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement of the residential mortgage servicing rights will result in negative fair value adjustments (and a decrease in the fair value measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement).

An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in positive fair value adjustments (and an increase in the fair value measurement). Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement).

Management believes that the credit risk adjusted spread utilized in the fair value measurement of the junior subordinated debentures carried at fair value is indicative of the nonperformance risk premium a willing market participant would require under current market conditions, that is, the inactive market. Management attributes the change in fair value of the junior subordinated debentures during the period to market changes in the nonperformance expectations and pricing of this type of debt. The widening of the credit risk adjusted spread above the Company's contractual spreads has primarily contributed to the positive fair value adjustments.  Future contractions in the instrument-specific credit risk adjusted spread relative to the spread currently utilized to measure the Company's junior subordinated debentures at fair value as of March 31, 2018, or the passage of time, will result in negative fair value adjustments.  Generally, an increase in the credit risk adjusted spread and/or the forward swap interest rate curve will result in positive fair value adjustments (and decrease the fair value measurement). Conversely, a decrease in the credit risk adjusted spread and/or the forward swap interest rate curve will result in negative fair value adjustments (and increase the fair value measurement).

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The following tables provide a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three months ended March 31, 2018 and 2017
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
Beginning Balance
 
Change included in earnings
 
Change in fair values included in comprehensive income (loss)
 
Purchases and issuances
 
Sales and settlements
 
Ending Balance
 
Net change in unrealized gains or (losses) relating to items held at end of period
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage servicing rights
$
153,151

 
$
5,079

 
$

 
$
6,530

 
$

 
$
164,760

 
$
8,434

Interest rate lock commitment, net
4,752

 
(1,253
)
 

 
6,433

 
(4,058
)
 
5,874

 
5,874

Junior subordinated debentures, at fair value
277,155

 
3,775

 
1,683

 

 
(4,203
)
 
278,410

 
5,458

 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage servicing rights
$
142,973

 
$
(7,670
)
 
$

 
$
7,041

 
$

 
$
142,344

 
$
(3,955
)
Interest rate lock commitment, net
4,076

 
797

 

 
10,649

 
(9,228
)
 
6,294

 
6,294

Junior subordinated debentures, at fair value
262,209

 
4,680

 

 

 
(3,284
)
 
263,605

 
4,680

 
 
 
 
 
 
 
 
 
 
 
 
Changes in residential mortgage servicing rights carried at fair value are recorded in residential mortgage banking revenue within non-interest income. Gains (losses) on interest rate lock commitments carried at fair value are recorded in residential mortgage banking revenue within non-interest income. The contractual interest expense on the junior subordinated debentures is recorded on an accrual basis as interest on junior subordinated debentures within interest expense. Settlements related to the junior subordinated debentures represent the payment of accrued interest that is embedded in the fair value of these liabilities. 

For 2017, the Company recorded gains (losses) on junior subordinated debentures carried at fair value in non-interest income. As discussed in Note 1, Summary of Significant Accounting Policies, the Company applied new guidance to the accounting for the gain/loss on fair value of the junior subordinated debentures. For the three months ended March 31, 2018, the change in fair value is attributable to the change in the instrument specific credit risk of the junior subordinated debentures, accordingly, the loss on fair value of junior subordinated debentures for the quarter ended March 31, 2018 of $1.7 million is recorded net of tax as an other comprehensive loss of $1.3 million.

From time to time, certain assets are measured at fair value on a nonrecurring basis.  These adjustments to fair value generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment, typically on collateral dependent loans. 
 
Fair Value of Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis 
 
The following tables present information about the Company's assets and liabilities measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period.  The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported upon. 
(in thousands)
March 31, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
Loans and leases
$
27,535

 
$

 
$

 
$
27,535

Other real estate owned
112

 

 

 
112

 
$
27,647

 
$

 
$

 
$
27,647



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(in thousands) 
December 31, 2017
 
Total
 
Level 1
 
Level 2
 
Level 3
Loans and leases
$
75,121

 
$

 
$

 
$
75,121

Other real estate owned
68

 

 

 
68

 
$
75,189

 
$

 
$

 
$
75,189


The following table presents the losses resulting from nonrecurring fair value adjustments for the three months ended March 31, 2018 and 2017:  
 (in thousands)
Three Months Ended
 
March 31, 2018
 
March 31, 2017
Loans and leases
$
14,039

 
$
11,242

Other real estate owned
5

 
67

Total loss from nonrecurring measurements
$
14,044

 
$
11,309


The following provides a description of the valuation technique and inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis. Unobservable inputs and qualitative information about the unobservable inputs are not presented as the fair value is determined by third-party information. The loans and leases amounts above represent impaired, collateral dependent loans that have been adjusted to fair value.  When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals, but in some cases, the value of the collateral may be estimated as having little to no value. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses.  The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral.
 
The other real estate owned amount above represents impaired real estate that has been adjusted to fair value.  Other real estate owned represents real estate which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property's new basis. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on other real estate owned for fair value adjustments based on the fair value of the real estate. 
 
Fair Value Option
The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale accounted for under the fair value option as of March 31, 2018 and December 31, 2017:

 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
March 31, 2018
 
December 31, 2017
 
Fair Value
 
 Aggregate Unpaid Principal Balance
 
Fair Value Less Aggregate Unpaid Principal Balance
 
Fair Value
 
Aggregate Unpaid Principal Balance
 
Fair Value Less Aggregate Unpaid Principal Balance
  Loans held for sale
$
299,739

 
$
291,248

 
$
8,491

 
$
259,518

 
$
250,721

 
$
8,797


Residential mortgage loans held for sale accounted for under the fair value option are measured initially at fair value with subsequent changes in fair value recognized in earnings. Gains and losses from such changes in fair value are reported as a component of residential mortgage banking revenue, net in the Condensed Consolidated Statements of Income. For the three months ended March 31, 2018, the Company recorded a net decrease in fair value of $306,000. For the three months ended March 31, 2017, the Company recorded a net increase in fair value of $4.9 million.


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The Company selected the fair value measurement option for existing junior subordinated debentures (the Umpqua Statutory Trusts) and for junior subordinated debentures acquired from Sterling. The remaining junior subordinated debentures were acquired through previous business combinations and were measured at fair value at the time of acquisition and subsequently measured at amortized cost.

Accounting for the selected junior subordinated debentures at fair value enables us to more closely align our financial performance with the economic value of those liabilities. Additionally, we believe it improves our ability to manage the market and interest rate risks associated with the junior subordinated debentures. The junior subordinated debentures measured at fair value and amortized cost are presented as separate line items on the balance sheet. The ending carrying (fair) value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants under current market conditions as of the measurement date.

Due to inactivity in the junior subordinated debenture market and the lack of observable quotes of our, or similar, junior subordinated debenture liabilities or the related trust preferred securities when traded as assets, we utilize an income approach valuation technique to determine the fair value of these liabilities using our estimation of market discount rate assumptions. The Company monitors activity in the trust preferred and related markets, to the extent available, evaluates changes related to the current and anticipated future interest rate environment, and considers our entity-specific creditworthiness, to validate the reasonableness of the credit risk adjusted spread and effective yield utilized in our discounted cash flow model. We also consider changes in the interest rate environment in our valuation, specifically the absolute level and the shape of the slope of the forward swap curve.

Note 15 – Revenue from Contracts with Customers 

All of the Company's revenue from contracts with customers in the scope of ASC 606 is recognized in Non-Interest Income with the exception of the (gain) loss on other real estate owned, which is included in Non-Interest Expense. The following table presents the Company's sources of Non-Interest Income for the three months ended March 31, 2018 and 2017. Items outside of the scope of ASC 606 are noted as such.
(in thousands)
Three Months Ended
 
March 31, 2018
 
March 31, 2017
Non-interest income:
 
 
 
Service charges on deposits
 
 
 
Account maintenance fees
$
4,140

 
$
4,250

Transaction-based and overdraft service charges
6,256

 
6,359

Debit/ATM interchange fees
4,599

 
4,120

Total service charges on deposits
14,995

 
14,729

Brokerage revenue
4,194

 
4,122

Residential mortgage banking revenue (a)
38,438

 
26,834

Loss on investment securities, net (a)

 
(2
)
Gain on loan sales, net (a)
1,230

 
1,754

Loss on junior subordinated debentures carried at fair value (a)

 
(1,555
)
BOLI income (a)
2,070

 
2,069

Other income
 
 
 
Merchant fee income
841

 
962

Credit card and interchange income
1,693

 
1,518

Remaining other income (a)
15,106

 
9,794

Total other income
17,640

 
12,274

Total non-interest income
$
78,567

 
$
60,225

(a) Not within scope of ASC 606


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Table of Contents

Deposit service charges

Umpqua earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposits accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

Debit and ATM interchange fee income and expenses

Debit and ATM interchange income represent fees earned when a debit card issued by Umpqua is used. Umpqua earns interchange fees from debit cardholder transactions through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ debit card. Certain expenses directly associated with the credit and debit card are recorded on a net basis with the interchange income.

Brokerage revenue

As of the three months ended March 31, 2018 and 2017, Umpqua had revenues of $4.2 million and $4.1 million, respectively, for the performance of brokerage services for its clients through Umpqua Investments. Brokerage fees consist of transaction
fees earned from asset management, trade execution and administrative fees from investments. Asset Management fees are variable, since they are based on the underlying portfolio value, which is subject to market conditions and amounts invested by clients. Asset management fees are recognized over the period that services are provided, and when the portfolio values are known or can be estimated at the end of each quarter. Brokerage transaction fees are fixed and determinable, based on security type and trade volume, and are recognized upon trade execution. In addition, revenues are earned from selling insurance and annuity policies. The amount of revenue earned is determined by the value and type of each instrument sold and is recognized when the policy is in force.

Merchant fee income

Merchant fee income represents fees earned by Umpqua for card payment services provided to its merchant customers. Umpqua has a contract with a third party to provide card payment services to merchants that contract for those services. The third party provider passes the payments made by the merchants through to Umpqua. Umpqua, in turn, pays the third party provider for the services it provides to the merchants. These payments to the third party provider are recorded as expenses as a net reduction against fee income. In addition, a portion of the payment received represents interchange fees which are passed through to the card issuing bank. Income is primarily earned based on the dollar volume and number of transactions processed. The performance obligation is satisfied and the related fee is earned when each payment is accepted by the processing network. For the three months ended March 31, 2018 and 2017, Umpqua had merchant processing fee revenue of $841,000 and $962,000, respectively, included in other income.

Credit card and interchange income and expenses

Credit card interchange income represent fees earned when a credit card issued by the Company is used. Similar to the debit card interchange, Umpqua earns an interchange fee for each transaction made with the Umpqua's branded credit cards. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ credit card. Certain expenses and rebates directly related to the credit card interchange contract are recorded net to the interchange income. For the three months ended March 31, 2018 and 2017, credit card and interchange income included in other income was $1.7 million and $1.5 million, respectively.

Gain/loss on other real estate owned, net

Umpqua records a gain or loss from the sale of other real estate owned when control of the property transfers to the buyer, which generally occurs at the time of an executed deed of trust. When Umpqua finances the sale of other real estate owned to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the other real estate owned asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on sale, Umpqua adjusts the transaction price and related gain or loss on sale if a significant financing component is present.

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Table of Contents

Item 2.         Management's Discussion and Analysis of Financial Condition and Results of Operations 
 
Forward-Looking Statements 
 
This Report contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. These statements may include statements that expressly or implicitly predict future results, performance or events. Statements other than statements of historical fact are forward-looking statements. You can find many of these statements by looking for words such as "anticipates," "expects," "believes," "estimates," "intends" and "forecast," and words or phrases of similar meaning. We make forward-looking statements regarding projected sources of funds; the Company's liquidity position; dividends; NextGen initiatives; investments in data, analytics and technology; our securities portfolio; loan sales; adequacy of our allowance for loan and lease losses and reserve for unfunded commitments; provision for loan and lease losses; impaired loans and future losses; performance of troubled debt restructurings; our commercial real estate portfolio, its collectability and subsequent charge-offs; resolution of non-accrual loans; litigation; Pivotus Ventures, Inc.; junior subordinated debentures; mortgage servicing rights values; tax rates and the effect of accounting pronouncements. Forward-looking statements involve substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. Risks and uncertainties include those set forth in our filings with the Securities and Exchange Commission (the "SEC") and the following factors that might cause actual results to differ materially from those presented: 
our ability to attract new deposits and loans and leases and to retain deposits during store consolidations; 
demand for financial services in our market areas; 
competitive market pricing factors; 
our ability to effectively develop and implement new technology;
deterioration in economic conditions that could result in increased loan and lease losses, especially those risks associated with concentrations in real estate related loans; 
market interest rate volatility; 
compression of our net interest margin; 
stability of funding sources and continued availability of borrowings; 
changes in legal or regulatory requirements or the results of regulatory examinations that could increase expenses or restrict growth;
our ability to recruit and retain key management and staff; 
availability of, and competition for, acquisition opportunities; 
risks associated with merger and acquisition integration; 
significant decline in the market value of the Company that could result in an impairment of goodwill; 
our ability to raise capital or incur debt on reasonable terms; 
regulatory limits on the Bank's ability to pay dividends to the Company; 
financial services reform, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and other legislation and implementing regulations, on the Company's business operations, including our compliance costs, interest expense, and revenue;
a breach or failure of our operational or security systems, or those of our third-party vendors, including as a result of cyber attacks; and
competition, including from financial technology companies.
There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. Forward-looking statements are made as of the date of this Form 10-Q. We do not intend to update these forward-looking statements. Readers should consider any forward-looking statements in light of this explanation, and we caution readers about relying on forward-looking statements.
  

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Table of Contents

General 
Umpqua Holdings Corporation, an Oregon corporation, is a financial holding company with two principal operating subsidiaries, Umpqua Bank and Umpqua Investments, Inc.   

With headquarters located in Roseburg, Oregon, the Bank is considered one of the most innovative community banks in the United States, recognized nationally and internationally for its unique company culture and customer experience strategy, which differentiate the Company from its competition. The Bank provides a wide range of banking, wealth management, mortgage and other financial services to corporate, institutional and individual customers, and also has a wholly-owned subsidiary, Financial Pacific Leasing, Inc., a commercial equipment leasing company.

Umpqua Investments is a registered broker-dealer and registered investment advisor with offices in Oregon, Washington, and California, and also offers products and services through Umpqua Bank stores. The firm is one of the oldest investment companies in the Northwest. Umpqua Investments offers a full range of investment products and services including: stocks, fixed income securities (municipal, corporate, and government bonds, CDs, and money market instruments), mutual funds, options, retirement planning, advisory account services, goals based planning, insurance and annuities.

Pivotus Ventures, Inc., a subsidiary of Umpqua Holdings Corporation, uses a startup dynamic and collaboration with other institutions to validate, develop, and test new bank platforms that could have a significant impact on the experience and economics of banking.

Along with its subsidiaries, the Company is subject to the regulations of state and federal agencies and undergoes periodic examinations by these regulatory agencies.  
  
Executive Overview 
 
Significant items for the three months ended March 31, 2018 were as follows: 

Financial Performance
 
Net earnings available to common shareholders per diluted common share were $0.35 for the three months ended March 31, 2018, compared to $0.21 for the three months ended March 31, 2017.  
 
Net interest margin, on a tax equivalent basis, was 3.96% for the three months ended March 31, 2018, as compared to 3.85% for the three months ended March 31, 2017.  The increase in net interest margin for the three months ended March 31, 2018, compared to the same period in the prior year, was primarily driven by higher average yields on loans and leases and investment securities, along with a lower mix of interest-bearing cash, partially offset by a higher cost of funds.

Residential mortgage banking revenue was $38.4 million for the three months ended March 31, 2018, as compared to $26.8 million for the three months ended March 31, 2017.  The increase for the three month period was primarily driven by a positive fair value adjustment of $5.1 million on the MSR asset for the three months ended March 31, 2018, as compared to the negative fair value adjustment of $7.7 million on the MSR asset for the three months ended March 31, 2017. For-sale mortgage origination volume decreased 9% as compared to the same period in the prior year, while the gain on sale margin increased to 3.32% for the three months ended March 31, 2018, compared to 3.27% in the same period of the prior year.

Total gross loans and leases were $19.3 billion as of March 31, 2018, an increase of $234.4 million, as compared to December 31, 2017.  The increase reflects balanced growth across the Company's commercial term, leasing, multifamily, and residential mortgage loan portfolios, partially offset by a decline in a consumer loans attributable to the Company's decision to wind down its indirect auto loan business.
 
Total deposits were $20.1 billion as of March 31, 2018, an increase of $158.6 million, compared to December 31, 2017.  This increase was primarily attributable to growth in non-interest bearing demand and time deposits, partially offset by lower money market balances attributable to planned public funds run-off.
 
Total consolidated assets were $25.9 billion as of March 31, 2018, compared to $25.7 billion at December 31, 2017.  


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Table of Contents

Credit Quality

Non-performing assets decreased to $84.3 million, or 0.33% of total assets, as of March 31, 2018, as compared to $94.2 million, or 0.37% of total assets, as of December 31, 2017.  Non-performing loans were $71.3 million, or 0.37% of total loans, as of March 31, 2018, as compared to $82.5 million, or 0.43% of total loans, as of December 31, 2017.

The provision for loan and lease losses was $13.7 million for the three months ended March 31, 2018, as compared to the $11.7 million recognized for the three months ended March 31, 2017. The increase for the three months ended March 31, 2018, compared to the same period of the prior year was primarily attributable to an increase in net charge-offs during the quarter. For the three months ended March 31, 2018, net charge-offs were $12.3 million, or 0.26% of average loans and leases (annualized), as compared to $9.4 million, or 0.22% of average loans and leases (annualized), for the three months ended March 31, 2017.

Capital and Growth Initiatives

The Company's total risk based capital was 13.9% and its Tier 1 common to risk weighted assets ratio was 11.0% as of March 31, 2018. As of December 31, 2017, the Company's total risk based capital ratio was 14.1% and its Tier 1 common to risk weighted assets ratio was 11.1%.
 
Cash dividends declared in the first quarter of 2018 were $0.20 per common share, an increase of 25% from the comparable period of the prior year's cash dividend of $0.16 per common share.

In late 2017, the Company launched "Umpqua Next-Gen," an initiative designed to modernize and evolve the Bank. As part of the initiative, during the three months ended March 31, 2018, Umpqua consolidated 30 stores. As previously announced, a portion of the savings generated will be re-invested into technology, data and analytics, including new customer-focused technologies, associate training, a re-designed corporate website, digital marketing efforts, and new online account origination capabilities.





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Summary of Critical Accounting Policies 
 
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements for the year ended December 31, 2017 included in the Form 10-K filed with the SEC on February 23, 2018. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. Management believes that the following policies would be considered critical under the SEC's definition. 
 
Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments 
 
The Bank performs regular credit reviews of the loan and lease portfolio to determine the credit quality and adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process.  The Bank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the allowance for loan and lease losses. The Bank has a management Allowance for Loan and Lease Losses ("ALLL") Committee, which is responsible for, among other things, regularly reviewing the ALLL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status.  The ALLL Committee also approves removing loans and leases from impaired status.  The Bank's Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly basis. 

Each risk rating is assessed an inherent credit loss factor that determines the amount of the allowance for loan and lease losses provided for that group of loans and leases with similar risk rating. Credit loss factors may vary by region based on management's belief that there may ultimately be different credit loss rates experienced in each region.  
 
Regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired when based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize an impairment reserve as a specific component to be provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral dependent loans if it is determined that such amount represents a confirmed loss.  The combination of the risk rating-based allowance component and the impairment reserve allowance component lead to an allocated allowance for loan and lease losses.  
 
The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less than 5% of the allowance, but may be maintained at higher levels during times of economic conditions characterized by falling real estate values. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends. As of March 31, 2018, there was no unallocated allowance amount.
 
The RUC is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the ALLL and RUC are monitored on a regular basis and are based on management's evaluation of numerous factors. These factors include the quality of the current loan portfolio; the trend in the loan portfolio's risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information.  
 
Management believes that the ALLL was adequate as of March 31, 2018. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review. A substantial percentage of our loan portfolio is secured by real estate, as a result a significant decline in real estate market values may require an increase in the allowance for loan and lease losses.  
 

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Acquired Loans
 
Acquired loans and leases are recorded at their fair value at the acquisition date. For purchased non-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income using the effective interest method over the remaining contractual period to maturity.
The acquired loans that are purchased impaired loans are aggregated into pools based on individually evaluated common risk characteristics and aggregate expected cash flows were estimated for each pool. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation. The cash flows expected to be received over the life of the pool were estimated by management. These cash flows were input into an accounting loan system which calculates the carrying values of the pools and underlying loans, book yields, effective interest income and impairment, if any, based on actual and projected events. Default rates, loss severity, and prepayment speeds assumptions are periodically reassessed and updated within the accounting model to update our expectation of future cash flows. The excess of the cash flows expected to be collected over a pool's carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the loan or pool using the effective yield method. The accretable yield may change due to changes in the timing and amounts of expected cash flows. Changes in the accretable yield are disclosed quarterly.
 
Residential Mortgage Servicing Rights ("MSR") 
 
The Company determines its classes of servicing assets based on the asset type being serviced along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets. The Company measures its residential mortgage servicing assets at fair value and reports changes in fair value through earnings.  Fair value adjustments encompass market-driven valuation changes and the runoff in value that occurs from the passage of time, which are separately reported. Under the fair value method, the MSR is carried in the balance sheet at fair value and the changes in fair value are reported in earnings under the caption residential mortgage banking revenue in the period in which the change occurs. 
 
Retained mortgage servicing rights are measured at fair value as of the date of the related loan sale. We use quoted market prices when available. Subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the MSR, the present value of expected net future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income net of servicing costs. This model is periodically validated by an independent model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. 
 
Valuation of Goodwill and Intangible Assets 
 
Goodwill and other intangible assets with indefinite lives are not amortized but instead are periodically tested for impairment. Management performs an impairment analysis for the intangible assets with indefinite lives on an annual basis as of December 31.  Additionally, goodwill and other intangible assets with indefinite lives are evaluated on an interim basis when events or circumstances indicate impairment potentially exists.  The impairment analysis requires management to make subjective judgments. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions. There can be no assurance that changes in circumstances, estimates or assumptions may result in additional impairment of all, or some portion of, goodwill or other intangible assets. 

The Company performed its annual goodwill impairment analysis as of December 31, 2017. The Company assessed qualitative factors to determine whether the existence of events and circumstances indicated that it is more likely than not that the indefinite-lived intangible asset is impaired, and determined no factors indicated an impairment.
Stock-based Compensation 
 
We recognize expense in the income statement for the grant-date fair value of restricted shares and stock options as equity-based forms of compensation issued to employees over the employees' requisite service period (generally the vesting period). The requisite service period may be subject to performance conditions. The fair value of the restricted shares is based on the Company's share price on the grant date. Management assumptions utilized at the time of grant impact the fair value of the option calculated under the pricing model, and ultimately, the expense that will be recognized over the expected service period related to each option.
 

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Fair Value 
 
A hierarchical disclosure framework associated with the level of pricing observability is utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction.
  
Recent Accounting Pronouncements 
 
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update require lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing arrangements. ASU 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company has established a project team for the implementation of this new standard. The team has completed implementation of new lease software that will support the current leasing process, as well as aid in the transition to the new leasing guidance. Although an estimate of the impact of the new leasing standard has not yet been determined, the Company expects a significant new lease asset and related lease liability on the balance sheet due to the number of leased properties the Bank currently has that are accounted for under current operating lease guidance.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU requires the measurement of all expected credit losses for certain financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates, but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for specified periods. The Company has an established cross-functional team and project management governance process in place to manage implementation of this new guidance. The team has been working on the process by vetting the data elements and implementing modeling options that are expected to be critical to the new process. An estimate of the impact of this standard has not yet been determined, however, the impact is expected to be significant.

In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) - Land Easement Practical Expedient for Transition to Topic 842. The ASU clarifies the application of the new lease guidance to land easements and eases adoption efforts for some land easements. The amendment provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under Topic 840, Leases. An entity that elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The ASU has the same effective date and transition requirements as ASU 2016-02, which is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application will be permitted for specified periods. The Company is currently evaluating the impact of this ASU on the Company's consolidated financial statements.





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Table of Contents

Results of Operations
 
Overview 
 
For the three months ended March 31, 2018, net earnings available to common shareholders were $77.7 million, or $0.35 per diluted common share, as compared to net earnings available to common shareholders of $46.0 million, or $0.21 per diluted common share, for the three months ended March 31, 2017. The increase in net earnings for the three months ended March 31, 2018 compared to the same period of the prior year was attributable to an increase in net interest income, non-interest income, and lower income tax expense, offset by an increase in non-interest expense. The increase in net interest income was driven primarily by higher average yields on interest-earning assets, specifically within the loan and lease portfolio, offset by a higher cost of funds. The increase in non-interest income was driven primarily by higher residential mortgage banking revenues and no losses related to junior subordinated debentures carried at fair value included in earnings as that fair value adjustment is now included in other comprehensive loss. The decrease in the provision for income taxes was due to the Tax Cuts and Jobs Act passed in December 2017, resulting in an effective tax rate of 23.9% for the three months ended March 31, 2018, as compared to an effective tax rate of 36.6% for the three months ended March 31, 2017. The increase in non-interest expense was driven by an increase in exit and disposal costs during the period, related to 30 store consolidations during the period, and an increase in consulting fees during the quarter.
  
The following table presents the return on average assets, average common shareholders' equity and average tangible common shareholders' equity for the three months ended March 31, 2018 and 2017. For each of the periods presented, the table includes the calculated ratios based on reported net earnings available to common shareholders. Our return on average common shareholders' equity is negatively impacted as the result of capital required to support goodwill. To the extent this performance metric is used to compare our performance with other financial institutions that do not have merger and acquisition-related intangible assets, we believe it is beneficial to also consider the return on average tangible common shareholders' equity. The return on average tangible common shareholders' equity is calculated by dividing net earnings available to common shareholders by average shareholders' common equity less average goodwill and intangible assets, net (excluding MSRs). The return on average tangible common shareholders' equity is considered a non-GAAP financial measure and should be viewed in conjunction with the return on average common shareholders' equity.  
 
Return on Average Assets, Common Shareholders' Equity and Tangible Common Shareholders' Equity 
 
 
(dollars in thousands) 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
Return on average assets
1.23
%
 
0.75
%
Return on average common shareholders' equity
7.84
%
 
4.74
%
Return on average tangible common shareholders' equity
14.30
%
 
8.83
%
Calculation of average common tangible shareholders' equity:
 
 
 
Average common shareholders' equity
$
4,019,822

 
$
3,936,340

Less: average goodwill and other intangible assets, net
(1,817,068
)
 
(1,823,799
)
Average tangible common shareholders' equity
$
2,202,754

 
$
2,112,541


Additionally, management believes tangible common equity and the tangible common equity ratio are meaningful measures of capital adequacy. Umpqua believes the exclusion of certain intangible assets in the computation of tangible common equity and tangible common equity ratio provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the operating results and capital of the Company.  Tangible common equity is calculated as total shareholders' equity less preferred stock and less goodwill and other intangible assets, net (excluding MSRs).  In addition, tangible assets are total assets less goodwill and other intangible assets, net (excluding MSRs).  The tangible common equity ratio is calculated as tangible common shareholders' equity divided by tangible assets. The tangible common equity and tangible common equity ratio is considered a non-GAAP financial measure and should be viewed in conjunction with the total shareholders' equity and the total shareholders' equity ratio. 


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The following table provides a reconciliation of ending shareholders' equity (GAAP) to ending tangible common equity (non-GAAP), and ending assets (GAAP) to ending tangible assets (non-GAAP) as of March 31, 2018 and December 31, 2017
 
Reconciliations of Total Shareholders' Equity to Tangible Common Shareholders' Equity and Total Assets to Tangible Assets 
 
March 31, 2018
 
December 31, 2017
Total shareholders' equity
$
4,013,882

 
$
4,014,786

Subtract:
 
 
 
Goodwill
1,787,651

 
1,787,651

Other intangible assets, net
28,589

 
30,130

Tangible common shareholders' equity
$
2,197,642

 
$
2,197,005

Total assets
$
25,875,643

 
$
25,741,439

Subtract:
 
 
 
Goodwill
1,787,651

 
1,787,651

Other intangible assets, net
28,589

 
30,130

Tangible assets
$
24,059,403

 
$
23,923,658

Tangible common equity ratio
9.13
%
 
9.18
%
 
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not reviewed or audited.  Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.
  
Net Interest Income 
 
Net interest income is the largest source of our income. Net interest income for the three months ended March 31, 2018 was $223.2 million, an increase of $16.5 million compared to the same period in 2017. The increase in net interest income for the three months ended March 31, 2018 as compared to the same period in 2017, was driven by growth in interest-earning assets, specifically the loan and lease portfolio. The increase was partially offset by increased volumes of interest-bearing liabilities and an increase in the average cost of funds due to rising market rates.

The net interest margin (net interest income as a percentage of average interest-earning assets) on a fully tax equivalent basis was 3.96%, for the three months ended March 31, 2018, an increase of 11 basis points as compared to the same period in 2017. The increase in net interest margin primarily resulted from higher average yields on the loan and lease portfolio and lower average balance of interest-bearing cash, offset by an increase in the cost of interest-bearing liabilities. The yield on loans and leases increased by 10 basis points for the three months ended March 31, 2018, as compared to the same period in 2017, due to the increase in short-term interest rates.
 
Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, as well as changes in the yields earned on interest-earning assets and rates paid on deposits and borrowed funds.


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The following table presents condensed average balance sheet information, together with interest income and yields on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three months ended March 31, 2018 and 2017

Average Rates and Balances  
 
(dollars in thousands)
Three Months Ended
 
Three Months Ended
 
March 31, 2018
 
March 31, 2017
 
Average Balance
 
Interest Income or Expense
 
Average Yields or Rates
 
Average Balance
 
Interest Income or Expense
 
Average Yields or Rates
INTEREST-EARNING ASSETS:
 
 
 
 
 
 
 
 
 
 
 

Loans held for sale
$
267,231

 
$
2,815

 
4.21
%
 
$
351,570

 
$
3,395

 
3.86
%
Loans and leases (1)
19,150,315

 
224,923

 
4.75
%
 
17,598,314

 
202,601

 
4.65
%
Taxable securities
2,793,449

 
16,167

 
2.31
%
 
2,723,576

 
14,319

 
2.10
%
Non-taxable securities (2)
286,603

 
2,640

 
3.68
%
 
286,444

 
3,409

 
4.76
%
Temporary investments and interest-bearing cash
303,670

 
1,164

 
1.55
%
 
804,354

 
1,557

 
0.79
%
Total interest-earning assets
22,801,268

 
$
247,709

 
4.39
%
 
21,764,258

 
$
225,281

 
4.18
%
Allowance for loan and lease losses
(142,409
)
 
 
 
 
 
(136,216
)
 
 
 
 
Other assets
3,027,612

 
 
 
 
 
3,102,243

 
 
 
 
Total assets
$
25,686,471

 
 
 
 
 
$
24,730,285

 
 
 
 
INTEREST-BEARING LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
2,323,232

 
$
1,210

 
0.21
%
 
$
2,265,934

 
$
645

 
0.12
%
Money market deposits
6,908,067

 
5,713

 
0.34
%
 
6,871,515

 
2,669

 
0.16
%
Savings deposits
1,463,058

 
163

 
0.05
%
 
1,364,808

 
128

 
0.04
%
Time deposits
2,798,608

 
8,524

 
1.24
%
 
2,617,479

 
6,206

 
0.96
%
Total interest-bearing deposits
13,492,965

 
15,610

 
0.47
%
 
13,119,736

 
9,648

 
0.30
%
Repurchase agreements and federal funds purchased
303,059

 
63

 
0.08
%
 
326,666

 
30

 
0.04
%
Term debt
802,297

 
3,361

 
1.70
%
 
852,351

 
3,510

 
1.67
%
Junior subordinated debentures
373,438

 
4,932

 
5.36
%
 
362,805

 
4,201

 
4.70
%
Total interest-bearing liabilities
14,971,759

 
23,966

 
0.65
%
 
14,661,558

 
17,389

 
0.48
%
Non-interest-bearing deposits
6,450,364

 
 
 
 
 
5,883,924

 
 
 
 
Other liabilities
244,526

 
 
 
 
 
248,463

 
 
 
 
Total liabilities
21,666,649

 
 
 
 
 
20,793,945

 
 
 
 
Common equity
4,019,822

 
 
 
 
 
3,936,340

 
 
 
 
Total liabilities and shareholders' equity
$
25,686,471

 
 
 
 
 
$
24,730,285

 
 
 
 
NET INTEREST INCOME
 
 
$
223,743

 
 
 
 
 
$
207,892

 
 
NET INTEREST SPREAD
 
 
 
 
3.74
%
 
 
 
 
 
3.70
%
AVERAGE YIELD ON EARNING ASSETS (1), (2)
 
 
 
 
4.39
%
 
 
 
 
 
4.18
%
INTEREST EXPENSE TO EARNING ASSETS
 
 
 
 
0.43
%
 
 
 
 
 
0.33
%
NET INTEREST INCOME TO EARNING ASSETS OR NET INTEREST MARGIN (1), (2)
 
 
 
 
3.96
%
 
 
 
 
 
3.85
%
 
(1)
Non-accrual loans and leases are included in the average balance.   
(2)
Tax-exempt income has been adjusted to a tax equivalent basis at a 21% tax rate for 2018 and a 35% tax rate for 2017. The amount of such adjustment was an addition to recorded income of approximately $512,000 for the three months ended March 31, 2018 as compared to $1.2 million for the same period in 2017
 
 
 
 
 
 
 
 
 
 
 
 

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The following table sets forth a summary of the changes in tax equivalent net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for the three months ended March 31, 2018 as compared to the same period in 2017. Changes in tax equivalent interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances. 

Rate/Volume Analysis  
 (in thousands)
Three Months Ended March 31,
 
2018 compared to 2017
 
Increase (decrease) in interest income and expense due to changes in
 
Volume
 
Rate
 
Total
INTEREST-EARNING ASSETS:
 
 
 
 
 
Loans held for sale
$
(862
)
 
$
282

 
$
(580
)
Loans and leases
18,133

 
4,189

 
22,322

Taxable securities
375

 
1,473

 
1,848

Non-taxable securities (1)
2

 
(771
)
 
(769
)
Temporary investments and interest bearing cash
(1,338
)
 
945

 
(393
)
     Total (1)
16,310

 
6,118

 
22,428

INTEREST-BEARING LIABILITIES:
 
 
 
 
 
Interest bearing demand deposits
16

 
549

 
565

Money market deposits
14

 
3,030

 
3,044

Savings deposits
10

 
25

 
35

Time deposits
453

 
1,865

 
2,318

Repurchase agreements
(2
)
 
35

 
33

Term debt
(209
)
 
60

 
(149
)
Junior subordinated debentures
126

 
605

 
731

Total
408

 
6,169

 
6,577

Net increase in net interest income (1)
$
15,902

 
$
(51
)
 
$
15,851

 
(1)
Tax exempt income has been adjusted to a tax equivalent basis at a 21% tax rate for 2018 and a 35% tax rate for 2017. 
 
 
 
 
 
 
Provision for Loan and Lease Losses 
 
The provision for loan and lease losses was $13.7 million for the three months ended March 31, 2018, as compared to $11.7 million, for the same period in 2017.  As an annualized percentage of average outstanding loans and leases, the provision for loan and lease losses recorded for the three months ended March 31, 2018 was 0.29%, as compared to 0.27% in the same period in 2017
 
The increase in the provision for the three months ended March 31, 2018 as compared to the same prior year period is primarily attributable to growth in the loan and lease portfolio, as well as an increase in net charge-offs. Net charge-offs on loans were $12.3 million for the three months ended March 31, 2018, or 0.26% of average loans and leases (annualized), as compared to net charge-offs of $9.4 million, or 0.22% of average loans and leases (annualized), for the three months ended March 31, 2017. The majority of net charge-offs are in the commercial loan portfolio, which was driven by losses realized in connection with growth in the lease portfolio.

The Company recognizes the charge-off of impairment reserves on impaired loans in the period they arise for collateral-dependent loans.  Therefore, the non-accrual loans of $45.8 million as of March 31, 2018 have been written-down to their estimated fair value, less estimated costs to sell, and are expected to be resolved with no additional material loss, absent further decline in market prices. 

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Non-Interest Income 
 
Non-interest income for the three months ended March 31, 2018 was $78.6 million, an increase of $18.3 million, or 30%, as compared to the same period in 2017. The following table presents the key components of non-interest income for the three months ended March 31, 2018 and 2017
 
Non-Interest Income 
(in thousands)
Three Months Ended
 
March 31,
 
2018
 
2017
 
Change Amount
 
Change Percent
Service charges on deposits
$
14,995

 
$
14,729

 
$
266

 
2
 %
Brokerage revenue
4,194

 
4,122

 
72

 
2
 %
Residential mortgage banking revenue, net
38,438

 
26,834

 
11,604

 
43
 %
Gain on investment securities, net

 
(2
)
 
2

 
(100
)%
Gain on loan sales, net
1,230

 
1,754

 
(524
)
 
(30
)%
Loss on junior subordinated debentures carried at fair value

 
(1,555
)
 
1,555

 
(100
)%
BOLI income
2,070

 
2,069

 
1

 
 %
Other income
17,640

 
12,274

 
5,366

 
44
 %
Total
$
78,567

 
$
60,225

 
$
18,342

 
30
 %
 
Residential mortgage banking revenue for the three months ended March 31, 2018 as compared to the same period of 2017 increased by $11.6 million. The increase was primarily driven by a positive MSR fair value adjustment of $5.1 million for the three months ended March 31, 2018, as compared to the negative MSR fair value adjustment of $7.7 million for the three months ended March 31, 2017. The increase is also due to a higher gain on sale margin, which increased to 3.32% for the three months ended March 31, 2018, compared to 3.27% in the same period of the prior year. Closed for-sale mortgage volume for the three months ended March 31, 2018 was $687.2 million compared to $754.7 million for the three months ended March 31, 2017.

For the three months ended March 31, 2018, the loss on junior subordinated debentures carried at fair value of $1.7 million is recorded net of tax as an other comprehensive loss of $1.3 million, rather than reported in earnings as in prior periods due to the change in accounting principle for liabilities elected to be recorded at fair value.

Other income for the three months ended March 31, 2018 compared to the same period in the prior year increased by $5.4 million. The increase was primarily related to the debt capital market swap derivatives revenues which increased by $2.8 million during the period. Also included in other income is a $1.0 million gain on the early redemption of two junior subordinated debentures that the Company redeemed during the three months ended March 31, 2018. During the three months ended March 31, 2018, the gain on residual value of leased assets increased by $1.2 million, also contributing to the increase in other income.
 

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Non-Interest Expense 
 
Non-interest expense for the three months ended March 31, 2018 was $186.1 million, an increase of $3.4 million, or 2% as compared to the same period in 2017. The following table presents the key elements of non-interest expense for the three months ended March 31, 2018 and 2017
 
Non-Interest Expense 
 
(in thousands)
Three Months Ended
 
March 31,
 
2018
 
2017
 
Change Amount
 
Change Percent
Salaries and employee benefits
$
106,551

 
$
106,473

 
$
78

 
 %
Occupancy and equipment, net
38,661

 
38,673

 
(12
)
 
 %
Communications
4,433

 
5,104

 
(671
)
 
(13
)%
Marketing
1,800

 
1,733

 
67

 
4
 %
Services
15,061

 
11,305

 
3,756

 
33
 %
FDIC assessments
4,480

 
4,087

 
393

 
10
 %
Gain on other real estate owned, net
(38
)
 
82

 
(120
)
 
(146
)%
Intangible amortization
1,541

 
1,689

 
(148
)
 
(9
)%
Merger related expenses

 
1,020

 
(1,020
)
 
(100
)%
Other expenses
13,624

 
12,548

 
1,076

 
9
 %
Total
$
186,113

 
$
182,714

 
$
3,399

 
2
 %

Services expense increased by $3.8 million for the three months ended March 31, 2018, as compared to the same period in the prior year, primarily related to consulting fees to help identify and implement organizational simplification and efficiencies, including procurement, occupancy optimization, and in providing a more efficient customer experience.

The merger related expenses of $1.0 million incurred in 2017 relate to the merger with Sterling and were the result of costs associated with the final work on a non-customer facing system conversion.
   
Other non-interest expense increased by $1.1 million for the three months ended March 31, 2018, as compared to the same period in the prior year. The increase is primarily due to $2.5 million in exit or disposal costs during the period, related to 30 store closures during the quarter, offset by a decrease in litigation settlement losses of $1.2 million as compared to the same period in 2017.

Income Taxes 
 
The Company's consolidated effective tax rate as a percentage of pre-tax income for the three months ended March 31, 2018 was 23.9%, as compared to 36.6% for the three months ended March 31, 2017. The effective tax rate for the three months ended March 31, 2018 differed from the federal statutory rate of 21% and the apportioned state rate of 6% (net of the federal tax benefit) principally because of the relative amount of income earned in each state jurisdiction, non-taxable income arising from bank-owned life insurance, income on tax-exempt investment securities, stock-based compensation, non-deductible FDIC premiums and tax credits arising from low-income housing investments.  

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FINANCIAL CONDITION 
 
Investment Securities 
 
Equity and other securities were $63.3 million at March 31, 2018, up from $12.3 million at December 31, 2017. The increase reflects the prospective change in classification of equity securities that were previously classified as available for sale.
 
Investment securities available for sale were $2.9 billion as of March 31, 2018, compared to $3.1 billion at December 31, 2017.  The decrease was due to sales and paydowns of $107.9 million and a decrease in fair value of investment securities available for sale of $42.2 million, offset by purchases of $89.1 million of investment securities.

Investment securities held to maturity were $3.7 million as of March 31, 2018, as compared to $3.8 million at December 31, 2017.
 
The following tables present the available for sale and held to maturity investment securities portfolio by major type as of March 31, 2018 and December 31, 2017
 
Investment Securities Composition
(dollars in thousands)
Investment Securities Available for Sale
 
March 31, 2018
 
December 31, 2017
 
Fair Value
 
%
 
Fair Value
 
%
U.S. Treasury and agencies
$
39,518

 
1
%
 
$
39,698

 
1
%
Obligations of states and political subdivisions
299,551

 
10
%
 
308,456

 
10
%
Residential mortgage-backed securities and collateralized mortgage obligations
2,608,345

 
89
%
 
2,665,645

 
87
%
Investments in mutual funds and other securities

 
%
 
51,970

 
2
%
Total
$
2,947,414

 
100
%
 
$
3,065,769

 
100
%
(dollars in thousands)
Investment Securities Held to Maturity
 
March 31, 2018
 
December 31, 2017
 
Amortized
Cost
 
%
 
Amortized
Cost
 
%
Residential mortgage-backed securities and collateralized mortgage obligations
$
3,667

 
100
%
 
$
3,803

 
100
%
Total
$
3,667

 
100
%
 
$
3,803

 
100
%
 
 
We review investment securities on an ongoing basis for the presence of other-than-temporary impairment ("OTTI") or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors.   
 
Gross unrealized losses in the available for sale investment portfolio were $79.0 million at March 31, 2018.  This consisted primarily of unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations of $74.9 million. The unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities and are not due to the underlying credit of the issuers. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.


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Table of Contents

Restricted Equity Securities 
 
Restricted equity securities were $43.5 million at March 31, 2018 and December 31, 2017. Of the $43.5 million at March 31, 2018, $42.0 million represented the Bank's investment in the FHLBs of Des Moines and San Francisco. FHLB stock is carried at par and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to the FHLB and member institutions, and can only be purchased and redeemed at par. 

Loans and Leases
 
Loans and Leases, net 
 
Total loans and leases outstanding at March 31, 2018 were $19.3 billion, an increase of $234.4 million as compared to year-end 2017. The increase is principally attributable to net new loan and lease originations of $274.7 million, partially offset by loans sold of $20.4 million, charge-offs of $15.8 million and transfers to other real estate owned of $1.4 million during the period.

The following table presents the concentration distribution of the loan and lease portfolio, net of deferred fees and costs, as of March 31, 2018 and December 31, 2017.
 
Loan and Lease Concentrations 
 (dollars in thousands)
March 31, 2018
 
December 31, 2017
 
Amount
 
Percentage
 
Amount
 
Percentage
Commercial real estate
 
 
 
 
 
 
 
Non-owner occupied term, net
$
3,526,221

 
18.3
%
 
$
3,491,137

 
18.3
%
Owner occupied term, net
2,476,287

 
12.8
%
 
2,488,251

 
13.0
%
Multifamily, net
3,131,275

 
16.2
%
 
3,087,792

 
16.2
%
Construction & development, net
522,680

 
2.7
%
 
540,707

 
2.8
%
Residential development, net
179,871

 
0.9
%
 
165,865

 
0.9
%
Commercial
 
 
 
 
 
 
 
Term, net
2,025,213

 
10.5
%
 
1,944,987

 
10.2
%
Lines of credit & other, net
1,147,028

 
5.9
%
 
1,166,173

 
6.1
%
Leases and equipment finance, net
1,228,709

 
6.4
%
 
1,167,503

 
6.1
%
Residential
 
 
 
 
 
 
 
Mortgage, net
3,283,945

 
17.0
%
 
3,192,185

 
16.7
%
Home equity loans & lines, net
1,107,822

 
5.7
%
 
1,103,297

 
5.8
%
Consumer & other, net
685,538

 
3.6
%
 
732,287

 
3.9
%
Total, net of deferred fees and costs
$
19,314,589

 
100.0
%
 
$
19,080,184

 
100.0
%


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Table of Contents

Asset Quality and Non-Performing Assets 

Non-Performing Assets 

The following table summarizes our non-performing assets and restructured loans as of March 31, 2018 and December 31, 2017:   
  (in thousands)
March 31, 2018
 
December 31, 2017
Loans and leases on non-accrual status
$
45,775

 
$
51,465

Loans and leases past due 90 days or more and accruing (1)
25,478

 
30,994

Total non-performing loans and leases
71,253

 
82,459

Other real estate owned
13,055

 
11,734

Total non-performing assets
$
84,308

 
$
94,193

Restructured loans (2)
$
31,659

 
$
32,157

Allowance for loan and lease losses
$
141,933

 
$
140,608

Reserve for unfunded commitments
4,129

 
3,963

Allowance for credit losses
$
146,062

 
$
144,571

Asset quality ratios:
 
 
 
Non-performing assets to total assets
0.33
%
 
0.37
%
Non-performing loans and leases to total loans and leases
0.37
%
 
0.43
%
Allowance for loan and leases losses to total loans and leases
0.73
%
 
0.74
%
Allowance for credit losses to total loans and leases
0.76
%
 
0.76
%
Allowance for credit losses to total non-performing loans and leases
205
%
 
175
%
  
(1)
Excludes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase that are past due 90 days or more totaling $6.3 million and $12.4 million at March 31, 2018 and December 31, 2017, respectively.
(2)
Represents accruing restructured loans performing according to their restructured terms. 

The purchased non-credit impaired loans had remaining credit discount that is expected to accrete into interest income over the life of the loans of $23.9 million and $26.2 million, as of March 31, 2018 and December 31, 2017, respectively. The purchased credit impaired loan pools had remaining discount of $30.0 million and $33.2 million, as of March 31, 2018 and December 31, 2017, respectively.

Loans acquired with deteriorated credit quality are accounted for as purchased credit impaired pools. Typically, this would include loans that were considered non-performing or restructured as of acquisition date. Accordingly, subsequent to acquisition, loans included in the purchased credit impaired pools are not reported as non-performing loans based upon their individual performance status, so the categories of nonaccrual, impaired and 90 days past due and accruing do not include any purchased credit impaired loans.

Restructured Loans 

At March 31, 2018 and December 31, 2017, impaired loans of $31.7 million and $32.2 million, respectively, were classified as performing restructured loans. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. In order for a new restructured loan to be considered performing and on accrual status, the loan's collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan must be current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow.
  
A further decline in the economic conditions in our general market areas or other factors could adversely impact individual borrowers or the loan portfolio in general. Accordingly, there can be no assurance that loans will not become 90 days or more past due, become impaired or placed on non-accrual status, restructured or transferred to other real estate owned in the future.



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Table of Contents

Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments 
 
The ALLL totaled $141.9 million at March 31, 2018, an increase of $1.3 million from $140.6 million at December 31, 2017. The following table shows the activity in the ALLL for the three months ended March 31, 2018 and 2017
 
Allowance for Loan and Lease Losses 

(in thousands)
Three months ended
 
March 31, 2018
 
March 31, 2017
Balance, beginning of period
$
140,608

 
$
133,984

Charge-offs
(15,812
)
 
(13,002
)
Recoveries
3,481

 
3,638

Net charge-offs
(12,331
)
 
(9,364
)
Provision for loan and lease losses
13,656

 
11,672

Balance, end of period
$
141,933

 
$
136,292

As a percentage of average loans and leases (annualized):
 
 
 
Net charge-offs
0.26
%
 
0.22
%
Provision for loan and lease losses
0.29
%
 
0.27
%
Recoveries as a percentage of charge-offs
22.01
%
 
27.98
%

The increase in allowance for loan and lease losses as of March 31, 2018 compared to the same period of the prior year was primarily the result of growth in our loan and lease portfolios. Additional discussion on the change in provision for loan and lease losses is provided under the heading Provision for Loan and Lease Losses above. 
 
The following table sets forth the allocation of the allowance for loan and lease losses and percent of loans in each category to total loans and leases as of March 31, 2018 and December 31, 2017
(dollars in thousands)
March 31, 2018
 
December 31, 2017
 
Amount
 
% Loans to total loans
 
Amount
 
% Loans to total loans
Commercial real estate
$
46,005

 
50.9
%
 
$
45,765

 
51.2
%
Commercial
64,626

 
22.8
%
 
63,305

 
22.4
%
Residential
19,833

 
22.7
%
 
19,360

 
22.5
%
Consumer & other
11,469

 
3.6
%
 
12,178

 
3.9
%
Allowance for loan and lease losses
$
141,933

 
 
 
$
140,608

 
 

At March 31, 2018, the recorded investment in loans classified as impaired totaled $51.9 million, with a corresponding valuation allowance (included in the allowance for loan and lease losses) of $605,000.  The valuation allowance on impaired loans represents the impairment reserves on performing current and former restructured loans and nonaccrual loans. At December 31, 2017, the total recorded investment in impaired loans was $60.0 million, with a corresponding valuation allowance (included in the allowance for loan and lease losses) of $535,000.  


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Table of Contents

The following table presents a summary of activity in the RUC:  
 
Summary of Reserve for Unfunded Commitments Activity 

(in thousands)
Three months ended
 
March 31, 2018
 
March 31, 2017
Balance, beginning of period
$
3,963

 
$
3,611

Net charge to other expense
166

 
(116
)
Balance, end of period
$
4,129

 
$
3,495

 
We believe that the ALLL and RUC at March 31, 2018 are sufficient to absorb losses inherent in the loan and lease portfolio and credit commitments outstanding as of that date based on the information available. This assessment, based in part on historical levels of net charge-offs, loan and lease growth, and a detailed review of the quality of the loan and lease portfolio, involves uncertainty and judgment. Therefore, the adequacy of the ALLL and RUC cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review.
 
Residential Mortgage Servicing Rights 
 
The following table presents the key elements of our residential mortgage servicing rights portfolio for the three months ended March 31, 2018 and 2017
 
Summary of Residential Mortgage Servicing Rights 
 (in thousands)
Three Months Ended
 
March 31, 2018
 
March 31, 2017
Balance, beginning of period
$
153,151

 
$
142,973

Additions for new MSR capitalized
6,530

 
7,041

Changes in fair value:
 
 
 
 Due to changes in model inputs or assumptions (1)
14,933

 
(3,606
)
 Other (2)
(9,854
)
 
(4,064
)
Balance, end of period
$
164,760

 
$
142,344

 
(1)
Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates.
(2)
Represents changes due to collection/realization of expected cash flows over time.

Information related to our residential serviced loan portfolio as of March 31, 2018 and December 31, 2017 was as follows: 
 
(dollars in thousands)
March 31, 2018
 
December 31, 2017
Balance of loans serviced for others
$
15,442,915

 
$
15,336,597

MSR as a percentage of serviced loans
1.07
%
 
1.00
%

Mortgage servicing rights are adjusted to fair value quarterly with the change recorded in mortgage banking revenue.
  

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Table of Contents

Goodwill and Other Intangibles Assets
 
At March 31, 2018 and December 31, 2017, we had goodwill of $1.8 billion.  Goodwill is recorded in connection with business combinations and represents the excess of the purchase price over the estimated fair value of the net assets acquired. There were no changes to goodwill during the three months ended March 31, 2018.
 
At March 31, 2018, we had other intangible assets of $28.6 million, as compared to $30.1 million at December 31, 2017.   As part of a business acquisition, the fair value of identifiable intangible assets such as core deposits, which include all deposits except certificates of deposit, are recognized at the acquisition date. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives, and are also reviewed for impairment. We amortize other intangible assets on an accelerated or straight-line basis over an estimated ten to fifteen year life. The decrease from December 31, 2017 relates to the amortization of the other intangible assets of $1.5 million for the three months ended March 31, 2018.
  

Deposits 

Total deposits were $20.1 billion at March 31, 2018, an increase of $158.6 million, as compared to December 31, 2017. The increase is attributable to growth in non-interest bearing demand and time deposits, partially offset by lower money market balances attributable to planned public funds run-off.
 
The following table presents the deposit balances by major category as of March 31, 2018 and December 31, 2017
(dollars in thousands) 
March 31, 2018
 
December 31, 2017
 
Amount
 
Percentage
 
Amount
 
Percentage
Non-interest bearing demand
$
6,699,399

 
33
%
 
$
6,505,628

 
33
%
Interest bearing demand
2,354,873

 
12
%
 
2,384,133

 
12
%
Money market
6,546,704

 
33
%
 
7,037,891

 
35
%
Savings
1,482,560

 
7
%
 
1,446,860

 
7
%
Time, $100,000 or greater
2,099,687

 
10
%
 
1,684,498

 
8
%
Time, less than $100,000
923,633

 
5
%
 
889,290

 
5
%
Total
$
20,106,856

 
100
%
 
$
19,948,300

 
100
%
 
The Company's brokered deposits, including Certificate of Deposit Account Registry Service ("CDARS"), totaled $1.1 billion at March 31, 2018 compared to $930.9 million at December 31, 2017.  

Borrowings 
 
At March 31, 2018, the Bank had outstanding $292.0 million of securities sold under agreements to repurchase and no outstanding federal funds purchased balances. The Bank had outstanding term debt consisting of advances from the FHLB of $801.9 million at March 31, 2018, and are secured by investment securities and loans secured by real estate. The FHLB advances have fixed interest rates ranging from 1.16% to 7.10% and mature in 2018 through 2033.

Junior Subordinated Debentures 
 
We had junior subordinated debentures with carrying values of $367.3 million and $377.8 million at March 31, 2018 and December 31, 2017, respectively.  The decrease is due to the redemption of the Humboldt Bancorp Statutory Trust I and HB Capital Trust I junior subordinated debentures, which had carrying values of $11.7 million as of December 31, 2017. The decrease is partially offset by the increase in fair value for the junior subordinated debentures elected to be carried at fair value. As of March 31, 2018, substantially all of the junior subordinated debentures had interest rates that are adjustable on a quarterly basis based on a spread over three month LIBOR.  

Liquidity and Cash Flow 
 
The principal objective of our liquidity management program is to maintain the Bank's ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. 
 

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We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. One source of funds includes public deposits. Individual state laws require banks to collateralize public deposits, typically as a percentage of their public deposit balance in excess of FDIC insurance.  Public deposits represented 7% of total deposits at March 31, 2018 and 9% of total deposits at December 31, 2017. The amount of collateral required varies by state and may also vary by institution within each state, depending on the individual state's risk assessment of depository institutions. Changes in the pledging requirements for uninsured public deposits may require pledging additional collateral to secure these deposits, drawing on other sources of funds to finance the purchase of assets that would be available to be pledged to satisfy a pledging requirement, or could lead to the withdrawal of certain public deposits from the Bank. In addition to liquidity from core deposits and the repayments and maturities of loans and investment securities, the Bank can utilize established uncommitted federal funds lines of credit, sell securities under agreements to repurchase, borrow on a secured basis from the FHLB or issue brokered certificates of deposit.  
 
The Bank had available lines of credit with the FHLB totaling $6.9 billion at March 31, 2018, subject to certain collateral requirements, namely the amount of pledged loans and investment securities. The Bank had available lines of credit with the Federal Reserve totaling $569.6 million, subject to certain collateral requirements, namely the amount of certain pledged loans. The Bank had uncommitted federal funds line of credit agreements with additional financial institutions totaling $450.0 million at March 31, 2018. Availability of these lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage. 
 
The Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the Company's revenues are obtained from dividends declared and paid by the Bank. There were $58.0 million of dividends paid by the Bank to the Company in the three months ended March 31, 2018.  There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Company. We believe that such restrictions will not have an adverse impact on the ability of the Company to fund its quarterly cash dividend distributions to common shareholders and meet its ongoing cash obligations, which consist principally of debt service on the outstanding junior subordinated debentures.  
 
As disclosed in the Condensed Consolidated Statements of Cash Flows, net cash provided by operating activities was $67.2 million during the three months ended March 31, 2018, with the difference between cash provided by operating activities and net income largely consisting of originations of loans held for sale of $687.2 million, offset by proceeds from the sale of loans held for sale of $660.0 million. This compares to net cash provided by operating activities of $59.9 million during the three months ended March 31, 2017, with the difference between cash provided by operating activities and net income largely consisting of proceeds from the sale of loans held for sale of $795.8 million, offset by originations of loans held for sale of $754.7 million.
 
Net cash of $234.5 million used in investing activities during the three months ended March 31, 2018, consisted principally of net loan originations of $274.7 million and purchases of investment securities available for sale of $89.1 million, offset by proceeds from investment securities available for sale of $107.9 million and proceeds from sale of loans and leases of $21.6 million. This compares to net cash of $885.8 million used in investing activities during the three months ended March 31, 2017, which consisted principally of purchases of investment securities available for sale of $672.1 million and net loan originations of $360.2 million, partially offset by proceeds from investment securities available for sale of $127.2 million and proceeds from the sale of loans and leases of $25.3 million.
 
Net cash of $102.1 million provided by financing activities during the three months ended March 31, 2018 primarily consisted of $158.8 million increase in net deposits and proceeds from term debt borrowings of $50.0 million, offset by $50.5 million repayment of term debt, the dividends paid on common stock of $39.6 million and $10.6 million repayment on junior subordinated debentures. This compares to net cash of $61.1 million provided by financing activities during the three months ended March 31, 2017, which consisted primarily of $146.6 million increase in net deposits and proceeds from term debt borrowings of $100.0 million, offset by $100.0 million repayment of term debt and $35.2 million in dividends paid on common stock.
 
Although we expect the Bank's and the Company's liquidity positions to remain satisfactory during 2018, it is possible that our deposit growth for 2018 may not be maintained at previous levels due to pricing pressure or store consolidations. In addition, in order to generate deposit growth, our pricing may need to be adjusted in a manner that results in increased interest expense on deposits.
  

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Table of Contents

Off-balance-Sheet Arrangements 
 
Information regarding Off-Balance-Sheet Arrangements is included in Note 8 of the Notes to Condensed Consolidated Financial Statements.
  
Concentrations of Credit Risk 
Information regarding Concentrations of Credit Risk is included in Note 8 of the Notes to Condensed Consolidated Financial Statements.

Capital Resources 
 
Shareholders' equity at March 31, 2018 was $4.0 billion, a decrease of $904,000 from December 31, 2017. The decrease in shareholders' equity during the three months ended March 31, 2018 was principally due to the quarterly dividend declared increasing to $0.20 per share and the other comprehensive loss, offset by net income for the period.

The Company's dividend policy considers, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset growth to determine the amount of dividends declared, if any, on a quarterly basis. There is no assurance that future cash dividends on common shares will be declared or increased. The following table presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the three months ended March 31, 2018 and 2017:   

Cash Dividends and Payout Ratios per Common Share 
 
 
Three months ended
 
March 31, 2018
 
March 31, 2017
Dividend declared per common share
$
0.20

 
$
0.16

Dividend payout ratio
57
%
 
76
%

As of March 31, 2018, a total of 10.5 million shares are available for repurchase under the Company's current share repurchase plan. The Board of Directors approved an extension of the repurchase plan to July 31, 2019. The timing and amount of future repurchases will depend upon the market price for our common stock, securities laws restricting repurchases, asset growth, earnings, and our capital plan.  In addition, our stock plans provide that option and award holders may pay for the exercise price and tax withholdings in part or whole by tendering previously held shares. 


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Table of Contents

The following table shows the Company's consolidated and the Bank's capital adequacy ratios compared to the regulatory minimum capital ratio and the regulatory minimum capital ratio needed to qualify as a "well-capitalized" institution, as calculated under regulatory guidelines of the Basel Committee on Banking Supervision to the Basel capital framework ("Basel III") at March 31, 2018 and December 31, 2017
 
  (dollars in thousands)
Actual
 
For Capital Adequacy purposes
 
To be Well Capitalized
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Total Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,854,095

 
13.89
%
 
$
1,644,128

 
8.00
%
 
$
2,055,160

 
10.00
%
Umpqua Bank
$
2,693,956

 
13.12
%
 
$
1,642,156

 
8.00
%
 
$
2,052,695

 
10.00
%
Tier I Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,257,034

 
10.98
%
 
$
1,233,096

 
6.00
%
 
$
1,644,128

 
8.00
%
Umpqua Bank
$
2,547,990

 
12.41
%
 
$
1,231,617

 
6.00
%
 
$
1,642,156

 
8.00
%
Tier I Common
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,257,034

 
10.98
%
 
$
924,822

 
4.50
%
 
$
1,335,854

 
6.50
%
Umpqua Bank
$
2,547,990

 
12.41
%
 
$
923,713

 
4.50
%
 
$
1,334,252

 
6.50
%
Tier I Capital
 
 
 
 
 
 
 
 
 
 
 
(to Average Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,257,034

 
9.45
%
 
$
955,267

 
4.00
%
 
$
1,194,083

 
5.00
%
Umpqua Bank
$
2,547,990

 
10.68
%
 
$
954,642

 
4.00
%
 
$
1,193,302

 
5.00
%
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Total Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,844,261

 
14.06
%
 
$
1,618,009

 
8.00
%
 
$
2,022,511

 
10.00
%
Umpqua Bank
$
2,668,069

 
13.21
%
 
$
1,615,698

 
8.00
%
 
$
2,019,623

 
10.00
%
Tier I Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,238,540

 
11.07
%
 
$
1,213,507

 
6.00
%
 
$
1,618,009

 
8.00
%
Umpqua Bank
$
2,523,599

 
12.50
%
 
$
1,211,774

 
6.00
%
 
$
1,615,698

 
8.00
%
Tier I Common
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,238,540

 
11.07
%
 
$
910,130

 
4.50
%
 
$
1,314,632

 
6.50
%
Umpqua Bank
$
2,523,599

 
12.50
%
 
$
908,830

 
4.50
%
 
$
1,312,755

 
6.50
%
Tier I Capital
 
 
 
 
 
 
 
 
 
 
 
(to Average Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,238,540

 
9.38
%
 
$
954,403

 
4.00
%
 
$
1,193,003

 
5.00
%
Umpqua Bank
$
2,523,599

 
10.59
%
 
$
953,264

 
4.00
%
 
$
1,191,579

 
5.00
%
 
Item 3.             Quantitative and Qualitative Disclosures about Market Risk 
 
Our assessment of market risk as of March 31, 2018 indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2017.
  

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Item 4.             Controls and Procedures 
 
Our management, including our Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer, has concluded that our disclosure controls and procedures are effective in timely alerting them to information relating to us that is required to be included in our periodic filings with the SEC. The disclosure controls and procedures were last evaluated by management as of March 31, 2018
 
No change in our internal controls occurred during the first quarter of 2018 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Part II. OTHER INFORMATION 

Item 1.      Legal Proceedings 

Due to the nature of our business, we are involved in legal proceedings that arise in the ordinary course of our business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
 
Item 1A.   Risk Factors 
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed under "Part I--Item 1A--Risk Factors" in our Form 10-K for the year ended December 31, 2017.   These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. There have been no material changes from the risk factors described in our Form 10-K.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds  
 
(a)Not applicable  
 
(b)Not applicable 

(c)The following table provides information about repurchases of common stock by the Company during the quarter ended March 31, 2018
Period
 
Total number
of Common Shares
Purchased (1)
 
Average Price
Paid per Common Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plan (2)
 
Maximum Number of Remaining Shares that May be Purchased at Period End under the Plan
1/1/18 - 1/31/18
 
97,242

 
$
21.07

 

 
10,482,429

2/1/18 - 2/28/18
 
66,512

 
$
21.93

 

 
10,482,429

3/1/18 - 3/31/18
 
49

 
$
22.51

 

 
10,482,429

Total for quarter
 
163,803

 
$
21.42

 

 
 
 
(1)
Common shares repurchased by the Company during the quarter consist of cancellation of 163,803 shares to be issued upon vesting of restricted stock awards and no shares to be issued upon vesting of restricted stock units to pay withholding taxes. During the three months ended March 31, 2018, no shares were repurchased pursuant to the Company's publicly announced corporate stock repurchase plan described in (2) below.

(2)
The Company's share repurchase plan, which was first approved by its Board of Directors and announced in August 2003, was amended on September 29, 2011 to increase the number of common shares available for repurchase under the plan to 15 million shares. The repurchase program has been extended multiple times by the board with the current expiration date of July 31, 2019. As of March 31, 2018, a total of 10.5 million shares remained available for repurchase. The timing and amount of future repurchases will depend upon the market price for our common stock, laws and regulations restricting repurchases, asset growth, earnings, and our capital plan.
  

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Table of Contents

Item 3.            Defaults upon Senior Securities 
Not applicable 
Item 4.            Mine Safety Disclosures 
Not applicable 
Item 5.            Other Information 
Not applicable 
Item 6.            Exhibits  
 
Exhibit #
Description
3.1
 
 
3.2
 
 
4.1
 
 
4.2
The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company.
 
 
31.1
 
 
31.2
 
 
31.3
 
 
32
 
 
                                    

101.INS XBRL Instance Document *
101.SCH XBRL Taxonomy Extension Schema Document *
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB XBRL Taxonomy Extension Label Linkbase Document *
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *
                         
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities and
Exchange Act of 1934, as amended and otherwise are not subject to liability under those sections.


(a)     Incorporated by reference to Exhibit 3.1 to Form 8-K filed April 23, 2018
(b)    Incorporated by reference to Exhibit 3.2 to Form 8-K filed April 21, 2017
(c)     Incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8 (No. 333-77259) filed April 28, 1999







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SIGNATURES 
 
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
 
 
UMPQUA HOLDINGS CORPORATION
 
 
(Registrant) 
 
 
 
Dated
May 4, 2018
/s/ Cort L. O'Haver                                           
 
 
Cort L. O'Haver
President and Chief Executive Officer  
 
 
 
Dated
May 4, 2018
/s/ Ronald L. Farnsworth
 
 
Ronald L. Farnsworth  
Executive Vice President/ Chief Financial Officer and 
Principal Financial Officer
 
 
 
Dated
May 4, 2018
/s/ Neal T. McLaughlin
 
 
Neal T. McLaughlin                                     
Executive Vice President/Treasurer and 
Principal Accounting Officer

68