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: September 30, 2016
 
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 
 
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: 220,208,309 shares outstanding as of October 31, 2016


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)
 
 
 
 
September 30,
 
December 31,
 
2016
 
2015
ASSETS
 
 
 
Cash and due from banks (restricted cash of $107,399 and $58,813)
$
364,013

 
$
277,645

Interest bearing cash and temporary investments (restricted cash of $1,004 and $3,938)
1,102,428

 
496,080

Total cash and cash equivalents
1,466,441

 
773,725

Investment securities
 
 
 
Trading, at fair value
10,866

 
9,586

Available for sale, at fair value
2,520,037

 
2,522,539

Held to maturity, at amortized cost
4,302

 
4,609

Loans held for sale, at fair value
565,624

 
363,275

Loans and leases
17,392,051

 
16,866,536

Allowance for loan and lease losses
(133,692
)
 
(130,322
)
Net loans and leases
17,258,359

 
16,736,214

Restricted equity securities
47,537

 
46,949

Premises and equipment, net
306,287

 
328,734

Goodwill
1,787,651

 
1,787,793

Other intangible assets, net
38,753

 
45,508

Residential mortgage servicing rights, at fair value
114,446

 
131,817

Other real estate owned
8,309

 
22,307

Bank owned life insurance
297,561

 
291,892

Deferred tax asset, net
27,587

 
138,082

Other assets
290,454

 
203,351

Total assets
$
24,744,214

 
$
23,406,381

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits
 
 
 
Noninterest bearing
$
5,993,793

 
$
5,318,591

Interest bearing
12,924,987

 
12,388,598

Total deposits
18,918,780

 
17,707,189

Securities sold under agreements to repurchase
309,463

 
304,560

Term debt
902,678

 
888,769

Junior subordinated debentures, at fair value
260,114

 
255,457

Junior subordinated debentures, at amortized cost
101,012

 
101,254

Other liabilities
331,959

 
299,818

Total liabilities
20,824,006

 
19,557,047

COMMITMENTS AND CONTINGENCIES (NOTE 8)

 

SHAREHOLDERS' EQUITY
 
 
 
Common stock, no par value, shares authorized: 400,000,000 in 2016 and 2015; issued and outstanding: 220,207,300 in 2016 and 220,171,091 in 2015
3,514,858

 
3,520,591

Retained earnings
388,678

 
331,301

Accumulated other comprehensive income (loss)
16,672

 
(2,558
)
Total shareholders' equity
3,920,208

 
3,849,334

Total liabilities and shareholders' equity
$
24,744,214

 
$
23,406,381


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
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
INTEREST INCOME
 
 
 
 
 
 
 
Interest and fees on loans and leases
$
212,037

 
$
218,975

 
$
640,255

 
$
649,993

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
10,779

 
11,882

 
35,797

 
35,188

Exempt from federal income tax
2,181

 
2,393

 
6,599

 
7,284

Dividends
332

 
112

 
1,063

 
382

Interest on temporary investments and interest bearing deposits
1,090

 
440

 
2,222

 
1,814

Total interest income
226,419

 
233,802

 
685,936

 
694,661

INTEREST EXPENSE
 
 
 
 
 
 
 
Interest on deposits
8,999

 
7,450

 
25,952

 
21,934

Interest on securities sold under agreement to repurchase
32

 
43

 
100

 
134

Interest on term debt
3,558

 
3,629

 
11,592

 
10,585

Interest on junior subordinated debentures
3,938

 
3,465

 
11,500

 
10,208

Total interest expense
16,527

 
14,587

 
49,144

 
42,861

Net interest income
209,892

 
219,215

 
636,792

 
651,800

PROVISION FOR LOAN AND LEASE LOSSES 
13,091

 
8,153

 
28,503

 
32,044

Net interest income after provision for loan and lease losses
196,801

 
211,062

 
608,289

 
619,756

NON-INTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposits
15,762

 
15,616

 
45,945

 
44,701

Brokerage revenue
4,129

 
5,003

 
12,803

 
14,420

Residential mortgage banking revenue, net
47,206

 
24,041

 
99,415

 
92,282

Gain on investment securities, net

 
220

 
858

 
355

Gain on loan sales, net
1,285

 
5,212

 
9,296

 
20,651

Loss on junior subordinated debentures carried at fair value
(1,590
)
 
(1,590
)
 
(4,734
)
 
(4,717
)
BOLI income
2,116

 
2,165

 
6,407

 
6,510

Other income
11,802

 
10,705

 
31,330

 
32,177

Total non-interest income
80,710

 
61,372

 
201,320

 
206,379

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
105,341

 
106,482

 
319,424

 
324,733

Occupancy and equipment, net
38,181

 
37,235

 
114,326

 
104,253

Communications
5,107

 
4,443

 
15,966

 
15,131

Marketing
2,124

 
2,846

 
7,978

 
7,920

Services
9,983

 
10,389

 
32,183

 
35,382

FDIC assessments
4,109

 
3,369

 
11,523

 
9,738

(Gain) loss on other real estate owned, net
(14
)
 
(158
)
 
(82
)
 
2,136

Intangible amortization
1,867

 
2,806

 
6,755

 
8,419

Merger related expenses
2,011

 
5,991

 
12,095

 
41,870

Goodwill impairment

 

 
142

 

Other expenses
12,478

 
9,791

 
33,377

 
28,149

Total non-interest expense
181,187

 
183,194

 
553,687

 
577,731

Income before provision for income taxes
96,324

 
89,240

 
255,922

 
248,404

Provision for income taxes
34,515

 
31,633

 
92,257

 
88,884

Net income
$
61,809

 
$
57,607

 
$
163,665

 
$
159,520




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
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
61,809

 
$
57,607

 
$
163,665

 
$
159,520

Dividends and undistributed earnings allocated to participating securities
31

 
84

 
92

 
261

Net earnings available to common shareholders
$
61,778

 
$
57,523

 
$
163,573

 
$
159,259

Earnings per common share:
 
 
 
 
 
 
 
Basic
$0.28
 
$0.26
 
$0.74
 
$0.72
Diluted
$0.28
 
$0.26
 
$0.74
 
$0.72
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
220,291

 
220,297

 
220,313

 
220,370

Diluted
220,751

 
220,904

 
220,936

 
221,062


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
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
61,809

 
$
57,607

 
$
163,665

 
$
159,520

Available for sale securities:
 
 
 
 
 
 
 
Unrealized (losses) gains arising during the period
(9,768
)
 
15,258

 
32,228

 
3,695

Income tax benefit (expense) related to unrealized gains
3,780

 
(6,103
)
 
(12,472
)
 
(1,478
)
 
 
 
 
 
 
 
 
Reclassification adjustment for net realized gains in earnings

 
(220
)
 
(858
)
 
(355
)
Income tax expense related to realized gains

 
88

 
332

 
142

Other comprehensive (loss) income, net of tax
(5,988
)
 
9,023

 
19,230

 
2,004

Comprehensive income
$
55,821

 
$
66,630

 
$
182,895

 
$
161,524


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)
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Other
 
 
 
Common Stock
 
Retained
 
Comprehensive
 
 
 
Shares
 
Amount
 
Earnings
 
Income (Loss)
 
Total
BALANCE AT JANUARY 1, 2015
220,161,120

 
$
3,519,316

 
$
246,242

 
$
12,068

 
$
3,777,626

Net income
 
 
 
 
222,539

 
 
 
222,539

Other comprehensive loss, net of tax
 
 
 
 
 
 
(14,626
)
 
(14,626
)
Stock-based compensation
 
 
14,383

 
 
 
 
 
14,383

Stock repurchased and retired
(844,215
)
 
(14,589
)
 
 
 
 
 
(14,589
)
Issuances of common stock under stock plans and related net tax benefit
854,186

 
1,481

 
 
 
 
 
1,481

Cash dividends on common stock ($0.62 per share)
 
 
 
 
(137,480
)
 
 
 
(137,480
)
Balance at December 31, 2015
220,171,091

 
$
3,520,591

 
$
331,301

 
$
(2,558
)
 
$
3,849,334

 
 
 
 
 
 
 
 
 
 
BALANCE AT JANUARY 1, 2016
220,171,091

 
$
3,520,591

 
$
331,301

 
$
(2,558
)
 
$
3,849,334

Net income
 
 
 
 
163,665

 
 
 
163,665

Other comprehensive income, net of tax
 
 
 
 
 
 
19,230

 
19,230

Stock-based compensation
 
 
7,523

 
 
 
 
 
7,523

Stock repurchased and retired
(931,523
)
 
(14,354
)
 
 
 
 
 
(14,354
)
Issuances of common stock under stock plans
and related net tax benefit
967,732

 
1,098

 
 
 
 
 
1,098

Cash dividends on common stock ($0.48 per share)
 
 
 
 
(106,288
)
 
 
 
(106,288
)
Balance at September 30, 2016
220,207,300

 
$
3,514,858

 
$
388,678

 
$
16,672

 
$
3,920,208


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)
Nine months ended
 
September 30,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
163,665

 
$
159,520

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of investment premiums, net
16,401

 
18,135

Gain on sale of investment securities, net
(858
)
 
(355
)
Gain on sale of other real estate owned, net
(1,683
)
 
(646
)
Valuation adjustment on other real estate owned
1,601

 
2,782

Provision for loan and lease losses
28,503

 
32,044

Change in cash surrender value of bank owned life insurance
(6,483
)
 
(6,588
)
Depreciation, amortization and accretion
44,607

 
37,716

Loss on sale of premises and equipment
5,221

 
2,543

Additions to residential mortgage servicing rights carried at fair value
(25,020
)
 
(27,812
)
Change in fair value of residential mortgage servicing rights carried at fair value
42,391

 
20,257

Change in junior subordinated debentures carried at fair value
4,657

 
4,371

Stock-based compensation
7,523

 
11,275

Net (increase) decrease in trading account assets
(1,280
)
 
490

Gain on sale of loans
(136,949
)
 
(115,399
)
Change in loans held for sale carried at fair value
(13,555
)
 
(5,716
)
Origination of loans held for sale
(2,928,951
)
 
(2,703,100
)
Proceeds from sales of loans held for sale
3,133,551

 
2,694,945

Goodwill impairment
142

 

Change in other assets and liabilities:
 
 
 
Net decrease in other assets
9,336

 
69,980

Net increase in other liabilities
44,314

 
23,317

Net cash provided by operating activities
387,133

 
217,759

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investment securities available for sale
(443,094
)
 
(706,964
)
Proceeds from investment securities available for sale
461,342

 
508,428

Proceeds from investment securities held to maturity
389

 
481

Purchases of restricted equity securities
(600
)
 

Redemption of restricted equity securities
12

 
72,430

Net change in loans and leases
(1,248,475
)
 
(1,313,156
)
Proceeds from sales of loans
429,997

 
246,100

Net change in premises and equipment
(22,573
)
 
(58,089
)
Proceeds from bank owned life insurance death benefits
814

 
4,485

Proceeds from sales of other real estate owned
13,608

 
18,747

Net cash used in investing activities
$
(808,580
)
 
$
(1,227,538
)
 
 
 
 

8

Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) 
(UNAUDITED)
(in thousands)
Nine months ended
 
September 30,
 
2016
 
2015
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Net increase in deposit liabilities
$
1,213,354

 
$
578,995

Net increase in securities sold under agreements to repurchase
4,903

 
10,401

   Proceeds from term debt borrowings
490,000

 

Repayment of term debt borrowings
(475,014
)
 
(114,999
)
Dividends paid on common stock
(105,824
)
 
(99,333
)
Proceeds from stock options exercised
1,098

 
1,696

Repurchase and retirement of common stock
(14,354
)
 
(14,536
)
Net cash provided by financing activities
1,114,163

 
362,224

Net increase (decrease) in cash and cash equivalents
692,716

 
(647,555
)
Cash and cash equivalents, beginning of period
773,725

 
1,605,171

Cash and cash equivalents, end of period
$
1,466,441

 
$
957,616

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
53,783

 
$
50,156

Income taxes
$
12,921

 
$
17,334

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized gains on investment securities available for sale, net of taxes
$
19,230

 
$
2,004

Cash dividend declared on common stock and payable after period-end
$
35,250

 
$
35,285

Transfer of loans to loans held for sale
$
265,741

 
$

Change in GNMA mortgage loans recognized due to repurchase option
$
(11,857
)
 
$
7,640

Transfer of loans to other real estate owned
$
5,409

 
$
6,833

Transfers from other real estate owned to loans due to internal financing
$
5,881

 
$



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 2015 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 2015 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 September 30, 2016 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. In the second quarter of 2016, the loan portfolio was analyzed for correct classification of certain commercial and commercial real estate loan types, and as a result of this analysis, loan classifications were updated. The prior period loan classifications have been updated to be comparable to the current period presentation in note 3 -Loans and Leases and note 4 -Allowance for Loan and Lease Losses and Credit Quality.

During the first quarter of 2016, Umpqua identified an error related to the accounting for loans sold to Ginnie Mae (“GNMA”) that have become past due 90 days or more. Pursuant to GNMA purchase and sales agreements, Umpqua has the unilateral right to repurchase loans that become past due 90 days or more. As a result of this unilateral right, once the delinquency criteria has been met, and regardless of whether the repurchase option has been exercised, the loan should be recognized, with an offsetting liability, to account for these loans that no longer meet the true-sale criteria. The Company has continued to grow the portfolio of GNMA loans sold and serviced, which has led to an increasing number and amount of delinquent loans. As such, the Company has recorded an adjustment to record the balance of the GNMA loans sold and serviced that are over 90 days past due, but not repurchased, as loans, with a corresponding other liability. Management evaluated the materiality of the error from qualitative and quantitative perspectives and concluded that the error was immaterial to the prior period financial statements taken as a whole. To provide consistency in the amounts reported in the comparable periods, the Company has recognized the delinquent GNMA loans for which the Company has the unconditional repurchase option, as well as the corresponding other liability, for the periods reported. As of December 31, 2015, this change resulted in an increase in loans and leases, net loans and leases, total assets, other liabilities, and total liabilities of $19.2 million. This change did not affect net income or shareholders' equity for any period.
Application of new accounting guidance
As of April 1, 2016, Umpqua adopted the Financial Accounting Standards Board's (FASB) Accounting Standard Update ("ASU") No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09, seeks to simplify several aspects of the accounting for employee share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. As required by ASU 2016-09, all adjustments are reflected as of the beginning of the fiscal year, January 1, 2016. By applying this ASU, the Company no longer adjusts common stock for the tax impact of shares released, instead the tax impact is recognized as tax expense in the period the shares are released. This simplifies the tracking of the excess tax benefits and deficiencies, but could cause volatility in tax expense for the periods presented. The statement of cash flows has been adjusted to reflect the provisions of this ASU. The application of this ASU did not have a material impact on the financial statements.

 

10

Table of Contents

Note 2 – Investment Securities 
 
The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at September 30, 2016 and December 31, 2015

 (in thousands)
September 30, 2016
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
AVAILABLE FOR SALE:
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
292,213

 
$
11,625

 
$
(469
)
 
$
303,369

Residential mortgage-backed securities and collateralized mortgage obligations
2,198,654

 
20,038

 
(4,058
)
 
2,214,634

Investments in mutual funds and other equity securities
1,959

 
75

 

 
2,034

 
$
2,492,826

 
$
31,738

 
$
(4,527
)
 
$
2,520,037

HELD TO MATURITY:
 
 
 
 
 
 
 
Residential mortgage-backed securities and collateralized mortgage obligations
$
4,302

 
$
892

 
$

 
$
5,194

 
$
4,302

 
$
892

 
$

 
$
5,194


 (in thousands)
December 31, 2015
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
AVAILABLE FOR SALE:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
300,998

 
$
12,741

 
$
(622
)
 
$
313,117

Residential mortgage-backed securities and collateralized mortgage obligations
2,223,742

 
7,218

 
(23,540
)
 
2,207,420

Investments in mutual funds and other equity securities
1,959

 
43

 

 
2,002

 
$
2,526,699

 
$
20,002

 
$
(24,162
)
 
$
2,522,539

HELD TO MATURITY:
 
 
 
 
 
 
 
Residential mortgage-backed securities and collateralized mortgage obligations
$
4,609

 
$
981

 
$

 
$
5,590

 
$
4,609

 
$
981

 
$

 
$
5,590

 
Investment securities that were in an unrealized loss position as of September 30, 2016 and December 31, 2015 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position.
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 (in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
AVAILABLE FOR SALE:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
13,793

 
$
179

 
$
2,010

 
$
290

 
$
15,803

 
$
469

Residential mortgage-backed securities and collateralized mortgage obligations
345,169

 
1,291

 
199,606

 
2,767

 
544,775

 
4,058

Total temporarily impaired securities
$
358,962

 
$
1,470

 
$
201,616

 
$
3,057

 
$
560,578

 
$
4,527



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December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 (in thousands)
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
AVAILABLE FOR SALE:
 

 
 

 
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
2,530

 
$
83

 
$
8,208

 
$
539

 
$
10,738

 
$
622

Residential mortgage-backed securities and collateralized mortgage obligations
1,256,994

 
14,465

 
334,981

 
9,075

 
1,591,975

 
23,540

Total temporarily impaired securities
$
1,259,524

 
$
14,548

 
$
343,189

 
$
9,614

 
$
1,602,713

 
$
24,162

 
The unrealized losses on obligations of political subdivisions were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors the published credit ratings of these securities for material rating or outlook changes. As of September 30, 2016, 93% of these 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 September 30, 2016 are issued or guaranteed by government sponsored enterprises. The unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that these securities will be settled at a price at least equal to the amortized cost of each investment.

Because the decline in fair value 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 likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, these investments are not considered other-than-temporarily impaired. 

The following table presents the maturities of investment securities at September 30, 2016
 
 (in thousands)
Available For Sale
 
Held To Maturity
 
Amortized
 
Fair
 
Amortized
 
Fair
 
Cost
 
Value
 
Cost
 
Value
AMOUNTS MATURING IN:
 
 
 
 
 
 
 
Three months or less
$
24,868

 
$
24,960

 
$

 
$

Over three months through twelve months
93,437

 
94,520

 
3

 
3

After one year through five years
1,818,751

 
1,837,341

 
159

 
474

After five years through ten years
302,574

 
308,125

 
358

 
865

After ten years
251,237

 
253,057

 
3,782

 
3,852

Other investment securities
1,959

 
2,034

 

 

 
$
2,492,826

 
$
2,520,037

 
$
4,302

 
$
5,194


The amortized cost and fair value of collateralized mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity, in the preceding table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay underlying loans without prepayment penalties. 

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The following table presents the gross realized gains and losses on the sale of securities available for sale for the three and nine months ended September 30, 2016 and 2015:

(in thousands)
Three Months Ended
 
September 30, 2016
 
September 30, 2015
 
Gains
 
Losses
 
Gains
 
Losses
U.S. Treasury and agencies
$

 
$

 
$
13

 
$

Obligations of states and political subdivisions

 

 
6

 

Residential mortgage-backed securities and collateralized mortgage obligations

 

 
634

 
433

 
$

 
$

 
$
653

 
$
433

 
 
 
 
 
 
 
 
 
Nine Months Ended
 
September 30, 2016
 
September 30, 2015
 
Gains
 
Losses
 
Gains
 
Losses
U.S. Treasury and agencies
$

 
$

 
$
13

 
$

Obligations of states and political subdivisions
971

 

 
6

 

Residential mortgage-backed securities and collateralized mortgage obligations
270

 
383

 
1,177

 
841

 
$
1,241

 
$
383

 
$
1,196

 
$
841


The following table presents, as of September 30, 2016, investment securities which were pledged to secure borrowings, public deposits, and repurchase agreements as permitted or required by law: 
 (in thousands)
Amortized
 
Fair
 
Cost
 
Value
To Federal Home Loan Bank to secure borrowings
$
624

 
$
645

To state and local governments to secure public deposits
1,199,852

 
1,217,873

Other securities pledged principally to secure repurchase agreements
536,501

 
540,958

Total pledged securities
$
1,736,977

 
$
1,759,476


 
 

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Note 3 – Loans and Leases  
 
The following table presents the major types of loans and leases, net of deferred fees and costs, as of September 30, 2016 and December 31, 2015
(in thousands)
September 30,
 
December 31,
 
2016
 
2015
Commercial real estate
 
 
 
Non-owner occupied term, net
$
3,280,660

 
$
3,226,836

Owner occupied term, net
2,573,942

 
2,582,874

Multifamily, net
2,968,019

 
3,151,516

Construction & development, net
388,934

 
271,119

Residential development, net
127,447

 
99,459

Commercial
 
 
 
Term, net
1,480,173

 
1,408,676

LOC & other, net
1,142,946

 
1,036,733

Leases and equipment finance, net
927,857

 
729,161

Residential
 
 
 
Mortgage, net
2,868,337

 
2,909,306

Home equity loans & lines, net
1,008,219

 
923,667

Consumer & other, net
625,517

 
527,189

Total loans and leases, net of deferred fees and costs
$
17,392,051

 
$
16,866,536

 
The loan balances are net of deferred fees and costs of $66.8 million and $47.0 million as of September 30, 2016 and December 31, 2015, respectively. Net loans also include discounts on acquired loans of $52.9 million and $105.6 million as of September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, loans totaling $10.3 billion were pledged to secure borrowings and available lines of credit.

The outstanding contractual unpaid principal balance of purchased impaired loans, excluding acquisition accounting adjustments, was $413.1 million and $540.4 million at September 30, 2016 and December 31, 2015, respectively. The carrying balance of purchased impaired loans was $301.3 million and $438.1 million at September 30, 2016 and December 31, 2015, respectively.


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The following table presents the changes in the accretable yield for purchased impaired loans for the three and nine months ended September 30, 2016 and 2015:
(in thousands)
 
Three Months Ended
 
 
September 30,
 
 
2016
 
2015
Balance, beginning of period
 
$
111,379

 
$
165,362

Accretion to interest income
 
(11,042
)
 
(14,432
)
Disposals
 
(4,209
)
 
(6,569
)
Reclassifications from nonaccretable difference
 
4,931

 
5,285

Balance, end of period
 
$
101,059

 
$
149,646

 
 
 
 
 
 
 
Nine months ended
 
 
September 30,
 
 
2016
 
2015
Balance, beginning of period
 
$
132,829

 
$
201,699

Accretion to interest income
 
(35,217
)
 
(42,864
)
Disposals
 
(15,470
)
 
(21,825
)
Reclassifications from nonaccretable difference
 
18,917

 
12,636

Balance, end of period
 
$
101,059

 
$
149,646

 
 
 
 
 

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 and nine months ended September 30, 2016 and 2015
(in thousands)
Three Months Ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Commercial real estate
 
 
 
 
 
 
 
Non-owner occupied term, net
$
1,340

 
$

 
$
18,614

 
$
7,181

Owner occupied term, net
10,380

 
20,003

 
28,283

 
39,963

Multifamily, net
49

 

 
129,879

 
435

Commercial
 
 
 
 
 
 
 
Term, net
1,809

 
1,079

 
4,729

 
4,499

Residential
 
 
 
 
 
 
 
Mortgage, net
103,465

 
54,938

 
239,196

 
173,371

Total
$
117,043

 
$
76,020

 
$
420,701

 
$
225,449



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

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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. 
 
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 local economic conditions; and any other factors deemed relevant.
 
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 is currently no unallocated allowance.
 
Management believes that the ALLL was adequate as of September 30, 2016. 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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Activity in the Allowance for Loan and Lease Losses 
 
The following table summarizes activity related to the allowance for loan and lease losses by loan and lease portfolio segment for the three and nine months ended September 30, 2016 and 2015
(in thousands)
Three Months Ended September 30, 2016
 
Commercial
 
 
 
 
 
Consumer
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Total
Balance, beginning of period
$
50,584

 
$
52,355

 
$
20,146

 
$
7,957

 
$
131,042

Charge-offs
(1,071
)
 
(8,975
)
 
(915
)
 
(2,127
)
 
(13,088
)
Recoveries
628

 
1,186

 
137

 
696

 
2,647

(Recapture) Provision
(2,839
)
 
12,846

 
626

 
2,458

 
13,091

Balance, end of period
$
47,302

 
$
57,412

 
$
19,994

 
$
8,984

 
$
133,692

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 
Commercial
 
 
 
 
 
Consumer
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Total
Balance, beginning of period
$
58,343

 
$
45,518

 
$
17,964

 
$
5,246

 
$
127,071

Charge-offs
(2,789
)
 
(3,266
)
 
(171
)
 
(2,250
)
 
(8,476
)
Recoveries
960

 
1,360

 
281

 
784

 
3,385

Provision
2,093

 
2,608

 
1,186

 
2,266

 
8,153

Balance, end of period
$
58,607

 
$
46,220

 
$
19,260

 
$
6,046

 
$
130,133


 
 
 
 
 
 
 
 
 
 
(in thousands)
Nine months ended September 30, 2016
 
Commercial
 
 
 
 
 
Consumer
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Total
Balance, beginning of period
$
54,293

 
$
47,487

 
$
22,017

 
$
6,525

 
$
130,322

Charge-offs
(2,137
)
 
(23,224
)
 
(1,546
)
 
(6,713
)
 
(33,620
)
Recoveries
1,348

 
3,633

 
661

 
2,845

 
8,487

(Recapture) Provision
(6,202
)
 
29,516

 
(1,138
)
 
6,327

 
28,503

Balance, end of period
$
47,302

 
$
57,412

 
$
19,994

 
$
8,984

 
$
133,692

 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
Commercial
 
 
 
 
 
Consumer
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Total
Balance, beginning of period
$
55,184

 
$
41,216

 
$
15,922

 
$
3,845

 
$
116,167

Charge-offs
(6,220
)
 
(15,917
)
 
(707
)
 
(5,619
)
 
(28,463
)
Recoveries
2,448

 
3,544

 
420

 
3,973

 
10,385

Provision
7,195

 
17,377

 
3,625

 
3,847

 
32,044

Balance, end of period
$
58,607

 
$
46,220

 
$
19,260

 
$
6,046

 
$
130,133


The valuation allowance on purchased impaired loans was increased by provision expense, which includes amounts related to subsequent deterioration of purchased impaired loans of $1.4 million for the nine months ended September 30, 2016, and $279,000 and $1.9 million for the three and nine months ended September 30, 2015, respectively. There was no provision expense that related to subsequent deterioration of purchased impaired loans recorded during the three months ended September 30, 2016. The increase due to the provision expense of the valuation allowance on purchased impaired loans was offset by recaptured provision of $55,000 and $902,000 for the three and nine months ended September 30, 2016, respectively, and $2.2 million and $2.4 million for the three and nine months ended September 30, 2015, respectively.


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Table of Contents

The following table presents the allowance and recorded investment in loans and leases by portfolio segment as of September 30, 2016 and 2015
 (in thousands)
September 30, 2016
 
Commercial
 
 
 
 
 
Consumer
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Total
Allowance for loans and leases:
Collectively evaluated for impairment
$
43,473

 
$
55,735

 
$
19,225

 
$
8,913

 
$
127,346

Individually evaluated for impairment
1,099

 
1,327

 

 

 
2,426

Loans acquired with deteriorated credit quality
2,730

 
350

 
769

 
71

 
3,920

Total
$
47,302

 
$
57,412

 
$
19,994

 
$
8,984

 
$
133,692

Loans and leases:
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
9,051,925

 
$
3,521,571

 
$
3,830,060

 
$
624,708

 
$
17,028,264

Individually evaluated for impairment
39,737

 
22,736

 

 

 
62,473

Loans acquired with deteriorated credit quality
247,340

 
6,669

 
46,496

 
809

 
301,314

Total
$
9,339,002

 
$
3,550,976

 
$
3,876,556

 
$
625,517

 
$
17,392,051

 
 (in thousands)
September 30, 2015
 
Commercial
 
 
 
 
 
Consumer
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Total
Allowance for loans and leases:
Collectively evaluated for impairment
$
55,054

 
$
45,693

 
$
18,577

 
$
5,978

 
$
125,302

Individually evaluated for impairment
533

 
390

 

 

 
923

Loans acquired with deteriorated credit quality
3,020

 
137

 
683

 
68

 
3,908

Total
$
58,607

 
$
46,220

 
$
19,260

 
$
6,046

 
$
130,133

Loans and leases:
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
8,768,933

 
$
3,023,609

 
$
3,608,456

 
$
497,107

 
$
15,898,105

Individually evaluated for impairment
38,041

 
22,402

 

 

 
60,443

Loans acquired with deteriorated credit quality
371,019

 
15,271

 
60,762

 
1,036

 
448,088

Total
$
9,177,993

 
$
3,061,282

 
$
3,669,218

 
$
498,143

 
$
16,406,636

 

The loan and lease balances are net of deferred fees and costs of $66.8 million and $42.8 million at September 30, 2016 and September 30, 2015, respectively.  

Summary of Reserve for Unfunded Commitments Activity 

The following table presents a summary of activity in the RUC and unfunded commitments for the three and nine months ended September 30, 2016 and 2015
(in thousands) 
Three Months Ended
 
Nine months ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Balance, beginning of period
$
3,531

 
$
2,864

 
$
3,574

 
$
3,539

Net change to other expense
5

 
217

 
(38
)
 
(458
)
Balance, end of period
$
3,536

 
$
3,081

 
$
3,536

 
$
3,081



18

Table of Contents

 (in thousands)
 
 
Total
Unfunded loan and lease commitments:
 
September 30, 2016
$
4,118,259

September 30, 2015
$
3,454,473

 
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. 

Non-Accrual Loans and Leases and Loans and Leases Past Due  
 
The following table summarizes our non-accrual loans and leases and loans and leases past due, by loan and lease class, as of September 30, 2016 and December 31, 2015
(in thousands)
September 30, 2016
 
Greater than 30 to 59 Days Past Due
 
60 to 89 Days Past Due
 
Greater than 90 Days and Accruing
 
Total Past Due
 
 Non-Accrual
 
Current & Other (1)
 
Total Loans and Leases
Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

 
 

Non-owner occupied term, net
$
1,463

 
$
10,254

 
$
155

 
$
11,872

 
$
1,261

 
$
3,267,527

 
$
3,280,660

Owner occupied term, net
460

 
4,498

 
58

 
5,016

 
3,248

 
2,565,678

 
2,573,942

Multifamily, net
143

 

 

 
143

 
995

 
2,966,881

 
2,968,019

Construction & development, net

 
324

 

 
324

 

 
388,610

 
388,934

Residential development, net

 

 

 

 

 
127,447

 
127,447

Commercial
 
 
 
 
 
 
 
 
 
 
 
 

Term, net
1,727

 

 

 
1,727

 
10,706

 
1,467,740

 
1,480,173

LOC & other, net
1,513

 
86

 

 
1,599

 
4,034

 
1,137,313

 
1,142,946

Leases and equipment finance, net
4,281

 
5,032

 
1,672

 
10,985

 
7,547

 
909,325

 
927,857

Residential
 
 
 
 
 
 
 
 
 
 
 
 

Mortgage, net (2)
5

 
3,346

 
29,483

 
32,834

 

 
2,835,503

 
2,868,337

Home equity loans & lines, net
1,196

 
967

 
1,641

 
3,804

 

 
1,004,415

 
1,008,219

Consumer & other, net
3,271

 
1,142

 
499

 
4,912

 

 
620,605

 
625,517

Total, net of deferred fees and costs
$
14,059

 
$
25,649

 
$
33,508

 
$
73,216

 
$
27,791

 
$
17,291,044

 
$
17,392,051


(1) Other includes purchased credit impaired loans of $301.3 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 $7.3 million at September 30, 2016.

19

Table of Contents

<
 (in thousands)
December 31, 2015
 
Greater than 30 to 59 Days Past Due
 
60 to 89 Days Past Due
 
Greater than 90 Days and Accruing
 
Total Past Due
 
 Non-Accrual
 
Current & Other (1)
 
Total Loans and Leases