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United States  
Securities and Exchange Commission 
Washington, D.C. 20549 
 
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
for the quarterly period ended:
June 30, 2019
 
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) 
 
(503727-4100 
(Registrant's Telephone Number, Including Area Code) 

Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS
TRADING SYMBOL
NAME OF EXCHANGE
Common Stock
UMPQ
The NASDAQ Global Select Market

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.       Yes      No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).       Yes      No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
   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      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: 220,199,367 shares outstanding as of July 31, 2019


Table of Contents

UMPQUA HOLDINGS CORPORATION 
FORM 10-Q 
Table of Contents 
 
3
Item 1.
3
Item 2.
44
Item 3.
65
Item 4.
66
66
Item 1.
66
Item 1A.
66
Item 2.
66
Item 3.
67
Item 4.
67
Item 5.
67
Item 6.
67
68

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)
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Cash and due from banks (restricted cash of $58,911 and $37,408)
$
342,508

 
$
335,419

Interest bearing cash and temporary investments (restricted cash of $2,953 and $1,232)
691,283

 
287,218

Total cash and cash equivalents
1,033,791

 
622,637

Investment securities
 
 
 
Equity and other, at fair value
66,358

 
61,841

Available for sale, at fair value
2,698,398

 
2,977,108

Held to maturity, at amortized cost
3,416

 
3,606

Loans held for sale, at fair value
356,645

 
166,461

Loans and leases
20,953,371

 
20,422,666

Allowance for loan and lease losses
(151,069
)
 
(144,871
)
Net loans and leases
20,802,302

 
20,277,795

Restricted equity securities
43,063

 
40,268

Premises and equipment, net
210,285

 
227,423

Operating lease right-of-use assets
112,752

 

Goodwill
1,787,651

 
1,787,651

Other intangible assets, net
21,155

 
23,964

Residential mortgage servicing rights, at fair value
139,780

 
169,025

Other real estate owned
8,423

 
10,958

Bank owned life insurance
316,435

 
313,626

Other assets
385,621

 
257,418

Total assets
$
27,986,075

 
$
26,939,781

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits
 
 
 
Noninterest bearing
$
6,771,087

 
$
6,667,467

Interest bearing
15,047,926

 
14,470,019

Total deposits
21,819,013

 
21,137,486

Securities sold under agreements to repurchase
308,052

 
297,151

Term debt
821,712

 
751,788

Junior subordinated debentures, at fair value
277,028

 
300,870

Junior subordinated debentures, at amortized cost
88,610

 
88,724

Operating lease liabilities
121,742

 

Deferred tax liability, net
57,757

 
25,846

Other liabilities
263,654

 
281,474

Total liabilities
23,757,568

 
22,883,339

COMMITMENTS AND CONTINGENCIES (NOTE 6)

 

SHAREHOLDERS' EQUITY
 
 
 
Common stock, no par value, shares authorized: 400,000,000 in 2019 and 2018; issued and outstanding: 220,498,684 in 2019 and 220,255,039 in 2018
3,514,391

 
3,512,874

Retained earnings
695,003

 
602,482

Accumulated other comprehensive income (loss)
19,113

 
(58,914
)
Total shareholders' equity
4,228,507

 
4,056,442

Total liabilities and shareholders' equity
$
27,986,075

 
$
26,939,781


See notes to condensed consolidated financial statements

3


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME 
(UNAUDITED) 
(in thousands, except per share amounts)
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
INTEREST INCOME
 
 
 
 
 
 
 
Interest and fees on loans and leases
$
264,110

 
$
242,123

 
$
522,857

 
$
471,611

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
10,287

 
8,499

 
30,243

 
24,198

Exempt from federal income tax
1,921

 
2,057

 
4,035

 
4,185

Dividends
574

 
433

 
1,091

 
901

Interest on temporary investments and interest bearing deposits
4,708

 
2,080

 
5,633

 
3,244

Total interest income
281,600

 
255,192

 
563,859

 
504,139

INTEREST EXPENSE
 
 
 
 
 
 
 
Interest on deposits
43,591

 
21,259

 
77,685

 
36,869

Interest on securities sold under agreement to repurchase and federal funds purchased
403

 
155

 
1,213

 
218

Interest on term debt
4,563

 
3,478

 
8,246

 
6,839

Interest on junior subordinated debentures
5,881

 
5,400

 
11,868

 
10,332

Total interest expense
54,438

 
30,292

 
99,012

 
54,258

Net interest income
227,162

 
224,900

 
464,847

 
449,881

PROVISION FOR LOAN AND LEASE LOSSES 
19,352

 
13,319

 
33,036

 
26,975

Net interest income after provision for loan and lease losses
207,810

 
211,581

 
431,811

 
422,906

NON-INTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposits
15,953

 
15,520

 
31,231

 
30,515

Brokerage revenue
3,980

 
4,161

 
7,790

 
8,355

Residential mortgage banking revenue, net
9,529

 
33,163

 
20,760

 
71,601

(Loss) gain on sale of debt securities, net
(7,186
)
 
14

 
(7,186
)
 
14

Gain (loss) on equity securities, net
82,607

 
(1,432
)
 
83,302

 
(1,432
)
Gain on loan and lease sales, net
3,333

 
1,348

 
4,102

 
2,578

BOLI income
2,093

 
2,060

 
4,261

 
4,130

Other income
11,514

 
16,817

 
23,303

 
34,457

Total non-interest income
121,823

 
71,651

 
167,563

 
150,218

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
104,049

 
113,340

 
204,707

 
219,891

Occupancy and equipment, net
36,032

 
37,584

 
72,277

 
76,245

Communications
3,906

 
4,447

 
8,126

 
8,880

Marketing
4,312

 
3,088

 
7,038

 
4,888

Services
13,227

 
16,627

 
25,437

 
31,688

FDIC assessments
2,837

 
4,692

 
5,779

 
9,172

Loss (gain) on other real estate owned, net
2,678

 
(92
)
 
2,627

 
(130
)
Intangible amortization
1,405

 
1,542

 
2,809

 
3,083

Other expenses
11,969

 
14,344

 
23,207

 
27,968

Total non-interest expense
180,415

 
195,572

 
352,007

 
381,685

Income before provision for income taxes
149,218

 
87,660

 
247,367

 
191,439

Provision for income taxes
37,408

 
21,661

 
61,524

 
46,468

Net income
$
111,810

 
$
65,999

 
$
185,843

 
$
144,971

Earnings per common share:
 
 
 
 
 
 
 
Basic
$0.51
 
$0.30
 
$0.84
 
$0.66
Diluted
$0.51
 
$0.30
 
$0.84
 
$0.66
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
220,487

 
220,283

 
220,427

 
220,326

Diluted
220,719

 
220,647

 
220,692

 
220,760


4


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  
(UNAUDITED) 
 
(in thousands)
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Net income
$
111,810

 
$
65,999

 
$
185,843

 
$
144,971

Available for sale securities:
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
40,760

 
(4,027
)
 
74,029

 
(46,217
)
Income tax (expense) benefit related to unrealized gains (losses)
(10,484
)
 
1,028

 
(19,041
)
 
11,799

 
 
 
 
 
 
 
 
Reclassification adjustment for net realized losses (gains) in earnings
7,186

 
(14
)
 
7,186

 
(14
)
Income tax (benefit) expense related to realized losses (gains)
(1,848
)
 
4

 
(1,848
)
 
4

Net change in unrealized gains (losses) for available for sale securities
35,614

 
(3,009
)
 
60,326

 
(34,428
)
 
 
 
 
 
 
 
 
Junior subordinated debentures, at fair value:
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
17,240

 
(1,513
)
 
23,804

 
(3,196
)
Income tax (expense) benefit related to unrealized gains (losses)
(4,459
)
 
386

 
(6,103
)
 
816

Net change in unrealized gains (losses) for junior subordinated debentures, at fair value
12,781

 
(1,127
)
 
17,701

 
(2,380
)
Other comprehensive income (loss), net of tax
48,395

 
(4,136
)
 
78,027

 
(36,808
)
Comprehensive income
$
160,205

 
$
61,863

 
$
263,870

 
$
108,163


See notes to condensed consolidated financial statements

5


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, 2018
220,148,824

 
$
3,517,258

 
$
477,101

 
$
(24,992
)
 
$
3,969,367

Net income
 

 
 

 
78,972

 
 

 
78,972

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 (1)
 
 
 
 
(9,710
)
 
9,710

 

Balance at March 31, 2018
220,460,836

 
$
3,515,506

 
$
502,214

 
$
(47,954
)
 
$
3,969,766

Net income
 

 
 

 
65,999

 
 

 
65,999

Other comprehensive loss, net of tax
 

 
 

 
 

 
(4,136
)
 
(4,136
)
Stock-based compensation
 

 
1,550

 
 

 
 

 
1,550

Stock repurchased and retired
(334,854
)
 
(8,167
)
 
 

 
 

 
(8,167
)
Issuances of common stock under stock plans
78,709

 
257

 
 

 
 

 
257

Cash dividends on common stock ($0.20 per share)
 

 
 

 
(44,182
)
 
 

 
(44,182
)
Balance at June 30, 2018
220,204,691

 
$
3,509,146

 
$
524,031

 
$
(52,090
)
 
$
3,981,087

Net income
 

 
 

 
90,981

 
 

 
90,981

Other comprehensive loss, net of tax
 

 
 

 
 

 
(23,585
)
 
(23,585
)
Stock-based compensation
 

 
2,140

 
 

 
 

 
2,140

Stock repurchased and retired
(17,784
)
 
(386
)
 
 

 
 

 
(386
)
Issuances of common stock under stock plans
51,324

 
49

 
 

 
 

 
49

Cash dividends on common stock ($0.21 per share)
 

 
 

 
(46,393
)
 
 

 
(46,393
)
Balance at September 30, 2018
220,238,231

 
$
3,510,949

 
$
568,619

 
$
(75,675
)
 
$
4,003,893

Net income
 
 
 
 
80,311

 
 
 
80,311

Other comprehensive income, net of tax
 
 
 
 
 
 
16,761

 
16,761

Stock-based compensation
 
 
1,994

 
 
 
 
 
1,994

Stock repurchased and retired
(3,537
)
 
(69
)
 
 
 
 
 
(69
)
Issuances of common stock under stock plans
20,345

 

 
 
 
 
 

Cash dividends on common stock ($0.21 per share)
 
 
 
 
(46,448
)
 
 
 
(46,448
)
Balance at December 31, 2018
220,255,039

 
$
3,512,874

 
$
602,482

 
$
(58,914
)
 
$
4,056,442















6



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

(in thousands, except shares)
Common Stock
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Shares
 
Amount
 
Retained Earnings
 
 
Total
Balance at January 1, 2019
220,255,039

 
$
3,512,874

 
$
602,482

 
$
(58,914
)
 
$
4,056,442

Net income
 
 
 
 
74,033

 
 
 
74,033

Other comprehensive income, net of tax
 
 
 
 
 
 
29,632

 
29,632

Stock-based compensation
 
 
754

 
 
 
 
 
754

Stock repurchased and retired
(108,088
)
 
(1,918
)
 
 
 
 
 
(1,918
)
Issuances of common stock under stock plans
310,257

 
21

 
 
 
 
 
21

Cash dividends on common stock ($0.21 per share)
 
 
 
 
(46,394
)
 
 
 
(46,394
)
Leases, cumulative effect adjustment (2)
 
 
 
 
(244
)
 
 
 
(244
)
Balance at March 31, 2019
220,457,208

 
$
3,511,731

 
$
629,877

 
$
(29,282
)
 
$
4,112,326

Net income
 
 
 
 
111,810

 
 
 
111,810

Other comprehensive income, net of tax
 
 
 
 
 
 
48,395

 
48,395

Stock-based compensation
 
 
2,722

 
 
 
 
 
2,722

Stock repurchased and retired
(4,113
)
 
(62
)
 
 
 
 
 
(62
)
Issuances of common stock under stock plans
45,589

 

 
 
 
 
 

Cash dividends on common stock ($0.21 per share)
 
 
 
 
(46,684
)
 
 
 
(46,684
)
Balance at June 30, 2019
220,498,684

 
$
3,514,391

 
$
695,003

 
$
19,113

 
$
4,228,507


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

(2) The cumulative effect adjustment relates to the implementation of new accounting guidance for leases. Refer to Note 1 for discussion of the new accounting guidance.


See notes to condensed consolidated financial statements


7


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(UNAUDITED) 
(in thousands)
Six Months Ended
 
June 30, 2019
 
June 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
185,843

 
$
144,971

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of investment premiums, net
12,338

 
18,750

Loss (gain) on sale of investment securities, net
7,186

 
(14
)
Gain on sale of other real estate owned, net
(107
)
 
(196
)
Valuation adjustment on other real estate owned
2,734

 
66

Provision for loan and lease losses
33,036

 
26,975

Change in cash surrender value of bank owned life insurance
(4,267
)
 
(4,203
)
Depreciation, amortization and accretion
22,600

 
27,411

Gain on sale of premises and equipment
(687
)
 
(1,789
)
Gain on store divestiture
(1,225
)
 

Additions to residential mortgage servicing rights carried at fair value
(9,379
)
 
(13,390
)
Change in fair value of residential mortgage servicing rights carried at fair value
38,624

 
324

Gain on redemption of junior subordinated debentures at amortized cost

 
(1,043
)
Stock-based compensation
3,476

 
3,379

Net increase in equity and other investments
(3,068
)
 
(1,504
)
(Gain) loss on equity securities, net
(83,302
)
 
1,432

Gain on sale of loans and leases, net
(34,471
)
 
(33,746
)
Change in fair value of loans held for sale
(7,685
)
 
(5,402
)
Origination of loans held for sale
(1,185,240
)
 
(1,526,715
)
Proceeds from sales of loans held for sale
1,033,110

 
1,390,161

Change in other assets and liabilities:
 
 
 
Net increase in other assets
(114,975
)
 
(13,585
)
Net (decrease) increase in other liabilities
(12,309
)
 
37,491

Net cash (used in) provided by operating activities
(117,768
)
 
49,373

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investment securities available for sale
(322,410
)
 
(134,071
)
Proceeds from investment securities available for sale
662,496

 
227,920

Proceeds from investment securities held to maturity
282

 
278

Proceeds from sale of equity securities
81,853

 

Purchases of restricted equity securities
(205,400
)
 
(45,600
)
Redemption of restricted equity securities
202,605

 
46,788

Net change in loans and leases
(619,257
)
 
(687,453
)
Proceeds from sales of loans and leases
58,478

 
41,613

Change in premises and equipment
(5,387
)
 
(2,820
)
Proceeds from bank owned life insurance death benefits
1,869

 
1,481

Proceeds from sales of other real estate owned
856

 
1,629

Net cash paid in store divestiture
(44,646
)
 

Net cash used in investing activities
$
(188,661
)
 
$
(550,235
)
 
 
 
 

8


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) 
(UNAUDITED)
(in thousands)
Six Months Ended
 
June 30, 2019
 
June 30, 2018
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Net increase in deposit liabilities
$
731,192

 
$
796,618

Net increase (decrease) in securities sold under agreements to repurchase
10,901

 
(20,633
)
   Proceeds from term debt borrowings
330,670

 
50,000

Repayment of term debt borrowings
(260,670
)
 
(50,652
)
Repayment of junior subordinated debentures at amortized cost

 
(10,598
)
Dividends paid on common stock
(92,551
)
 
(83,650
)
Proceeds from stock options exercised
21

 
1,016

Repurchase and retirement of common stock
(1,980
)
 
(12,507
)
Net cash provided by financing activities
717,583

 
669,594

Net increase in cash and cash equivalents
411,154

 
168,732

Cash and cash equivalents, beginning of period
622,637

 
634,280

Cash and cash equivalents, end of period
$
1,033,791

 
$
803,012

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
96,766

 
$
51,048

Income taxes
$
58,827

 
$
38,029

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized gains on investment securities available for sale, net of taxes
$
60,326

 
$
(34,428
)
Change in unrealized gains on junior subordinated debentures carried at fair value, net of taxes
$
17,701

 
$
(2,380
)
Junior subordinated debentures, at fair value, cumulative effect adjustment
$

 
$
9,710

Cash dividend declared on common stock and payable after period-end
$
46,305

 
$
44,012

Change in GNMA mortgage loans recognized due to repurchase option
$
(3,470
)
 
$
(3,223
)
Transfer of loans to other real estate owned
$
948

 
$
1,866



See notes to condensed consolidated financial statements
 

9


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 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 2018 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 2018 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. ("FinPac"), a commercial equipment leasing company.
 
In preparing these condensed consolidated financial statements, the Company has evaluated events and transactions subsequent to June 30, 2019 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, 2019, Umpqua adopted the Financial Accounting Standard Board's ("FASB") Accounting Standard Update ("ASU") No. 2016-02, Leases (Topic 842) as well as additional ASUs for enhancement, clarification or transition of the new lease standard (collectively "ASC 842"). ASC 842 requires 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. Refer to Note 11 - Leases for further discussion of Umpqua's accounting policies for leases within the scope of ASC 842.

ASC 842 provides for a number of practical expedients in transition. We have elected the package of practical expedients, which permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easement; the latter not being applicable to us. The Company also did not elect the practical expedient to not separate lease and non-lease components on our real estate leases where we are the lessee.

In addition, ASC 842 provides practical expedients for an entity's ongoing accounting. The Company has elected the short-term lease recognition exemption for certain leases. This means, for those leases that have a term of less than 12 months, we will not recognize right-of-use ("ROU") assets or lease liabilities.

Umpqua adopted ASC 842 using the prospective approach without corresponding changes in the comparable prior periods. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. Adoption of the new standard resulted in the recognition of new lease ROU assets of $112.8 million and lease liabilities of $121.7 million on the balance sheet for our operating leases as of June 30, 2019. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as an adjustment to retained earnings. This standard did not materially impact our consolidated net income and had no impact on cash flows.


10


In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (A Consensus of the FASB Emerging Issues Task Force). This ASU reduces complexity for the accounting for costs of implementing a cloud computing service arrangement. This ASU aligns the requirements for capitalization of implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU requires an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs to develop or obtain internal use software that cannot be capitalized under subtopic 350-40, such as training costs and certain data conversion costs, also cannot be capitalized for a hosting arrangement that is a service contract. The capitalized costs will be amortized over the life of the service contract. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company early adopted the ASU as of January 1, 2019 and will apply the new standard prospectively. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Recent accounting pronouncements 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as well as additional ASUs for enhancement, clarification or transition of the new standard (collectively "ASC 326"). ASC 326 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 guidance 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, ASC 326 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASC 326 also allows the Company an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. ASC 326 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 continues to work on implementation and is finalizing model build and validation, documenting process flow and controls, and has begun parallel runs.  The new guidance may result in an increase in the allowance for loan and lease losses; however, the Company is still in the process of determining the magnitude of the change and its impact on the Company's consolidated financial statements.


11


Note 2 – Investment Securities 
 
The following tables present the amortized costs, unrealized gains, unrealized losses and approximate fair values of debt securities at June 30, 2019 and December 31, 2018
 (in thousands)
June 30, 2019
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
AVAILABLE FOR SALE:
 

 
 

 
 

 
 

U.S. Treasury and agencies
$
335,541

 
$
1,701

 
$
(141
)
 
$
337,101

Obligations of states and political subdivisions
262,859

 
8,262

 
(169
)
 
270,952

Residential mortgage-backed securities and collateralized mortgage obligations
2,087,562

 
15,862

 
(13,079
)
 
2,090,345

 
$
2,685,962

 
$
25,825

 
$
(13,389
)
 
$
2,698,398

HELD TO MATURITY:
 
 
 
 
 
 
 
Residential mortgage-backed securities and collateralized mortgage obligations
$
3,416

 
$
1,046

 
$

 
$
4,462

 
$
3,416

 
$
1,046

 
$

 
$
4,462


 (in thousands)
December 31, 2018
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value
AVAILABLE FOR SALE:
 
 
 
 
 
 
 
U.S. Treasury and agencies
$
40,002

 
$

 
$
(346
)
 
$
39,656

Obligations of states and political subdivisions
308,972

 
2,785

 
(2,586
)
 
309,171

Residential mortgage-backed securities and collateralized mortgage obligations
2,696,913

 
3,590

 
(72,222
)
 
2,628,281

 
$
3,045,887

 
$
6,375

 
$
(75,154
)
 
$
2,977,108

HELD TO MATURITY:
 
 
 
 
 
 
 
Residential mortgage-backed securities and collateralized mortgage obligations
$
3,606

 
$
1,038

 
$

 
$
4,644

 
$
3,606

 
$
1,038

 
$

 
$
4,644



Debt securities that were in an unrealized loss position as of June 30, 2019 and December 31, 2018 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position.
 (in thousands)
June 30, 2019
 
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
$
9,091

 
$
62

 
$
19,919

 
$
79

 
$
29,010

 
$
141

Obligations of states and political subdivisions
865

 
1

 
17,516

 
168

 
18,381

 
169

Residential mortgage-backed securities and collateralized mortgage obligations
37,742

 
211

 
1,084,016

 
12,868

 
1,121,758

 
13,079

Total temporarily impaired securities
$
47,698

 
$
274

 
$
1,121,451

 
$
13,115

 
$
1,169,149

 
$
13,389



12


 (in thousands)
December 31, 2018
 
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
$

 
$

 
$
39,656

 
$
346

 
$
39,656

 
$
346

Obligations of states and political subdivisions
59,963

 
800

 
38,691

 
1,786

 
98,654

 
2,586

Residential mortgage-backed securities and collateralized mortgage obligations
332,103

 
5,432

 
1,992,546

 
66,790

 
2,324,649

 
72,222

Total temporarily impaired securities
$
392,066

 
$
6,232

 
$
2,070,893

 
$
68,922

 
$
2,462,959

 
$
75,154


 
The unrealized losses on U.S. treasury and agencies securities are due to increases in market interest rates and not due to the underlying credit of the issuers. The unrealized losses on obligations of states and 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. 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 June 30, 2019 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 unrealized loss 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. 

In June 2019, the Company completed a strategic restructuring of a portion of the available for sale debt securities portfolio. This restructuring resulted in the sale of certain securities at a gross loss of $7.3 million. This was a tactical effort to reduce interest rate sensitivity for a potentially decreasing interest rate environment, increase operational efficiency, and improve the cash liquidity position of the Company.

The following table presents the contractual maturities of debt securities at June 30, 2019:  
 (in thousands)
Available For Sale
 
Held To Maturity
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due within one year
$
4,845

 
$
4,884

 
$

 
$

Due after one year through five years
72,849

 
73,246

 

 

Due after five years through ten years
646,027

 
649,917

 
18

 
18

Due after ten years
1,962,241

 
1,970,351

 
3,398

 
4,444

 
$
2,685,962

 
$
2,698,398

 
$
3,416

 
$
4,462




13


The following table presents the gross realized gains and losses on the sale of debt securities available for sale for the three and six months ended June 30, 2019 and 2018:
 (in thousands)
Three Months Ended
 
June 30, 2019
 
June 30, 2018
 
Gain
 
Loss
 
Gain
 
Loss
Obligations of states and political subdivisions
$
16

 
$

 
$

 
$

Residential mortgage-backed securities and collateralized mortgage obligations
143

 
(7,345
)
 
14

 

 
$
159

 
$
(7,345
)
 
$
14

 
$

 
 
 
 
 
 
 
 
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
Gain
 
Loss
 
Gain
 
Loss
Obligations of states and political subdivisions
$
16

 
$

 
$

 
$

Residential mortgage-backed securities and collateralized mortgage obligations
143

 
(7,345
)
 
14

 

 
$
159

 
$
(7,345
)
 
$
14

 
$



The following table presents the gains and losses on equity securities for the three and six months ended June 30, 2019 and 2018:

 (in thousands)
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Unrealized gain (loss) recognized on equity securities held at the end of the period
$
754

 
$
(1,432
)
 
$
1,449

 
$
(1,432
)
Net gain recognized on equity securities sold during the period
81,853

 

 
81,853

 

Total gain (loss) recognized on equity securities
$
82,607

 
$
(1,432
)
 
$
83,302

 
$
(1,432
)


In June 2019, the Company completed the sale of all shares owned of Class B common stock of Visa Inc. resulting in a one-time gain of $81.9 million.

The following table presents, as of June 30, 2019, 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 state and local governments to secure public deposits
$
1,047,739

 
$
1,053,644

Other securities pledged principally to secure repurchase agreements
429,303

 
431,883

Total pledged securities
$
1,477,042

 
$
1,485,527




 

14


Note 3 – Loans and Leases  
 
The following table presents the major types of loans and leases, net of deferred fees and costs, as of June 30, 2019 and December 31, 2018
(in thousands)
June 30, 2019
 
December 31, 2018
Commercial real estate
 
 
 
Non-owner occupied term, net
$
3,537,084

 
$
3,573,065

Owner occupied term, net
2,396,674

 
2,480,371

Multifamily, net
3,341,547

 
3,304,763

Construction & development, net
732,932

 
736,254

Residential development, net
199,421

 
196,890

Commercial
 
 
 
Term, net
2,271,346

 
2,232,923

Lines of credit & other, net
1,280,587

 
1,169,525

Leases & equipment finance, net
1,449,579

 
1,330,155

Residential
 
 
 
Mortgage, net
3,995,643

 
3,635,073

Home equity loans & lines, net
1,215,215

 
1,176,477

Consumer & other, net
533,343

 
587,170

Total loans, net of deferred fees and costs
$
20,953,371

 
$
20,422,666


 
The loan balances are net of deferred fees and costs of $72.8 million and $70.4 million as of June 30, 2019 and December 31, 2018, respectively. Net loans also include discounts on acquired loans of $41.3 million and $50.0 million as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019, loans totaling $12.9 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 $158.8 million and $183.7 million at June 30, 2019 and December 31, 2018, respectively. The carrying balance of purchased impaired loans was $113.6 million and $134.5 million at June 30, 2019 and December 31, 2018, respectively.

The following table presents the changes in the accretable yield for purchased impaired loans for the three and six months ended June 30, 2019 and 2018:
(in thousands)
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Balance, beginning of period
$
51,073

 
$
66,677

 
$
56,564

 
$
74,268

Accretion to interest income
(5,433
)
 
(7,123
)
 
(10,318
)
 
(15,901
)
Disposals
(2,230
)
 
(2,838
)
 
(4,573
)
 
(7,854
)
Reclassifications from non-accretable difference
2,609

 
6,250

 
4,346

 
12,453

Balance, end of period
$
46,019

 
$
62,966

 
$
46,019

 
$
62,966



Umpqua, through its commercial equipment leasing subsidiary, FinPac, is a direct provider of commercial equipment leasing and financing throughout the United States, originating business through three distinct channels: small and mid-ticket third party originators, vendor finance, and Umpqua Bank Equipment Leasing & Finance. All of these leases typically have terms of three to five years and are considered to be direct financing leases. Interest income recognized on these leases is $8.1 million and $16.5 million for the three and six months ended June 30, 2019, respectively.

Residual values on leases are established at the time equipment is leased based on an estimate of the value of the leased equipment when the Company expects to dispose of the equipment, typically at the termination of the lease. An annual evaluation is also performed each fiscal year by an independent valuation specialist and equipment residuals are confirmed or adjusted in conjunction with such evaluation.

15



The following table presents the net investment in direct financing leases as of June 30, 2019 and December 31, 2018
(in thousands)
June 30, 2019
 
December 31, 2018
Minimum lease payments receivable
$
471,092

 
$
450,258

Estimated guaranteed and unguaranteed residual values
80,742

 
79,455

Initial direct costs - net of accumulated amortization
10,017

 
10,950

Unearned income
(74,280
)
 
(79,777
)
Net investment in direct financing leases
$
487,571

 
$
460,886



The following table presents the scheduled minimum lease payments receivable as of June 30, 2019:
(in thousands)
 
Year
Amount
2019
$
82,148

2020
142,684

2021
111,239

2022
67,966

2023
32,423

Thereafter
34,632

 
$
471,092



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 six months ended June 30, 2019 and 2018
(in thousands)
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Commercial real estate
 
 
 
 
 
 
 
Non-owner occupied term, net
$
2,943

 
$
763

 
$
7,762

 
$
5,154

Owner occupied term, net
8,261

 
8,542

 
12,971

 
14,092

Commercial
 
 
 
 
 
 
 
Term, net
10,522

 
9,331

 
15,963

 
19,789

Leases & equipment finance, net
17,571

 

 
17,571

 

Residential
 
 
 
 
 
 
 
Mortgage, net

 

 
109

 

Total
$
39,297

 
$
18,636

 
$
54,376

 
$
39,035



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. 

16


 
The formula allowance is calculated by applying risk factors that represent our estimate of incurred losses 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 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 June 30, 2019 and December 31, 2018.
 
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. 
 

17


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 and six months ended June 30, 2019 and 2018
(in thousands)
Three Months Ended June 30, 2019
 
Commercial Real Estate
 
Commercial
 
Residential
 
Consumer & Other
 
Total 
Balance, beginning of period
$
47,841

 
$
64,370

 
$
22,173

 
$
10,488

 
$
144,872

Charge-offs
(387
)
 
(14,697
)
 
(67
)
 
(1,556
)
 
(16,707
)
Recoveries
219

 
2,611

 
150

 
572

 
3,552

Provision
1,324

 
16,069

 
1,398

 
561

 
19,352

Balance, end of period
$
48,997

 
$
68,353

 
$
23,654

 
$
10,065

 
$
151,069

 
 
 
 
 
 
 
 
 
 
(in thousands)
Three Months Ended June 30, 2018
 
Commercial Real Estate
 
Commercial
 
Residential
 
Consumer & Other
 
Total 
Balance, beginning of period
$
46,005

 
$
64,626

 
$
19,833

 
$
11,469

 
$
141,933

Charge-offs
(362
)
 
(12,869
)
 
(460
)
 
(1,124
)
 
(14,815
)
Recoveries
289

 
3,171

 
98

 
561

 
4,119

Provision
1,353

 
10,837

 
804

 
325

 
13,319

Balance, end of period
$
47,285

 
$
65,765

 
$
20,275

 
$
11,231

 
$
144,556

(in thousands)
Six Months Ended June 30, 2019
 
Commercial Real Estate
 
Commercial
 
Residential
 
Consumer & Other
 
Total
Balance, beginning of period
$
47,904

 
$
63,957

 
$
22,034

 
$
10,976

 
$
144,871

Charge-offs
(2,538
)
 
(27,907
)
 
(202
)
 
(3,212
)
 
(33,859
)
Recoveries
556

 
4,965

 
305

 
1,195

 
7,021

Provision
3,075

 
27,338

 
1,517

 
1,106

 
33,036

Balance, end of period
$
48,997

 
$
68,353

 
$
23,654

 
$
10,065

 
$
151,069

 
 
 
 
 
 
 
 
 
 
(in thousands)
Six Months Ended June 30, 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
(673
)
 
(26,344
)
 
(706
)
 
(2,904
)
 
(30,627
)
Recoveries
506

 
5,624

 
301

 
1,169

 
7,600

Provision
1,687

 
23,180

 
1,320

 
788

 
26,975

Balance, end of period
$
47,285

 
$
65,765

 
$
20,275

 
$
11,231

 
$
144,556

 
 
 
 
 
 
 
 
 
 

18


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 June 30, 2019 and 2018
 (in thousands)
June 30, 2019
 
Commercial Real Estate
 
Commercial
 
Residential
 
Consumer & Other
 
Total 
Allowance for loans and leases:
Collectively evaluated for impairment
$
47,337

 
$
68,156

 
$
23,331

 
$
10,057

 
$
148,881

Individually evaluated for impairment
167

 
3

 

 

 
170

Loans acquired with deteriorated credit quality
1,493

 
194

 
323

 
8

 
2,018

Total
$
48,997

 
$
68,353

 
$
23,654

 
$
10,065

 
$
151,069

Loans and leases:
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
10,099,981

 
$
4,992,265

 
$
5,187,194

 
$
533,036

 
$
20,812,476

Individually evaluated for impairment
18,707

 
8,636

 

 

 
27,343

Loans acquired with deteriorated credit quality
88,970

 
611

 
23,664

 
307

 
113,552

Total
$
10,207,658

 
$
5,001,512

 
$
5,210,858

 
$
533,343

 
$
20,953,371

 
 (in thousands)
June 30, 2018
 
Commercial Real Estate
 
Commercial
 
Residential
 
Consumer & Other
 
Total 
Allowance for loans and leases:
Collectively evaluated for impairment
$
44,668

 
$
65,378

 
$
19,902

 
$
11,190

 
$
141,138

Individually evaluated for impairment
814

 
7

 

 

 
821

Loans acquired with deteriorated credit quality
1,803

 
380

 
373

 
41

 
2,597

Total
$
47,285

 
$
65,765

 
$
20,275

 
$
11,231

 
$
144,556

Loans and leases:
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
9,776,975

 
$
4,504,361

 
$
4,508,961

 
$
645,310

 
$
19,435,607

Individually evaluated for impairment
28,786

 
17,225

 

 

 
46,011

Loans acquired with deteriorated credit quality
124,554

 
3,768

 
29,143

 
411

 
157,876

Total
$
9,930,315

 
$
4,525,354

 
$
4,538,104

 
$
645,721

 
$
19,639,494

 

Summary of Reserve for Unfunded Commitments Activity 

The following tables present a summary of activity in the RUC and unfunded commitments for the three and six months ended June 30, 2019 and 2018
(in thousands) 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Balance, beginning of period
$
4,654

 
$
4,129

 
$
4,523

 
$
3,963

Net charge to other expense
203

 
1

 
334

 
167

Balance, end of period
$
4,857

 
$
4,130

 
$
4,857

 
$
4,130


 (in thousands)
 
Total
Unfunded loan and lease commitments:
 
 
June 30, 2019
 
$
5,587,294

June 30, 2018
 
$
5,077,579



19


 
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 tables summarize our non-accrual loans and leases and loans and leases past due, by loan and lease class, as of June 30, 2019 and December 31, 2018
(in thousands)
June 30, 2019
 
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
$
74

 
$
68

 
$

 
$
142

 
$
9,170

 
$
3,527,772

 
$
3,537,084

Owner occupied term, net
663

 
698

 

 
1,361

 
7,502

 
2,387,811

 
2,396,674

Multifamily, net

 

 

 

 

 
3,341,547

 
3,341,547

Construction & development, net
1,601

 

 

 
1,601

 

 
731,331

 
732,932

Residential development, net

 

 

 

 

 
199,421

 
199,421

Commercial
 
 
 
 
 
 
 
 
 
 
 
 

Term, net
486

 
457

 

 
943

 
3,348

 
2,267,055

 
2,271,346

Lines of credit & other, net
5,740

 
2,690

 

 
8,430

 
1,519

 
1,270,638

 
1,280,587

Leases & equipment finance, net
6,813

 
8,835

 
2,833

 
18,481

 
13,483

 
1,417,615

 
1,449,579

Residential
 
 
 
 
 
 
 
 
 
 
 
 

Mortgage, net (2)
25

 
7,414

 
35,684

 
43,123

 

 
3,952,520

 
3,995,643

Home equity loans & lines, net
1,150

 
582

 
2,206

 
3,938

 

 
1,211,277

 
1,215,215

Consumer & other, net
2,375

 
948

 
424

 
3,747

 

 
529,596

 
533,343

Total, net of deferred fees and costs
$
18,927

 
$
21,692

 
$
41,147

 
$
81,766

 
$
35,022

 
$
20,836,583

 
$
20,953,371


(1) Other includes purchased credit impaired loans of $113.6 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 $5.4 million at June 30, 2019.

20


 (in thousands)
December 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
$
1,192

 
$
1,042

 
$

 
$
2,234

 
$
10,033

 
$
3,560,798

 
$
3,573,065

Owner occupied term, net
3,920

 
1,372

 
1

 
5,293

 
8,682

 
2,466,396

 
2,480,371

Multifamily, net
107

 

 

 
107

 
4,298

 
3,300,358

 
3,304,763

Construction & development, net

 

 

 

 

 
736,254

 
736,254

Residential development, net

 

 

 

 

 
196,890

 
196,890

Commercial
 
 
 
 
 

 

 
 
 
 
 
 
Term, net
992

 
117

 

 
1,109

 
11,772

 
2,220,042

 
2,232,923

Lines of credit & other, net
1,286

 
143

 
83

 
1,512

 
2,275

 
1,165,738

 
1,169,525

Leases & equipment finance, net
8,571

 
8,754

 
3,016

 
20,341

 
13,763

 
1,296,051

 
1,330,155

Residential
 
 
 
 
 
 

 
 
 
 
 
 
Mortgage, net (2)

 
4,900

 
39,218

 
44,118

 

 
3,590,955

 
3,635,073

Home equity loans & lines, net
987

 
368

 
2,492

 
3,847

 

 
1,172,630

 
1,176,477

Consumer & other, net
2,711

 
911

 
551

 
4,173

 

 
582,997

 
587,170

Total, net of deferred fees and costs
$
19,766

 
$
17,607

 
$
45,361

 
$
82,734

 
$
50,823

 
$
20,289,109

 
$
20,422,666


(1) Other includes purchased credit impaired loans of $134.5 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 $8.9 million at December 31, 2018.

Impaired Loans and Leases

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 June 30, 2019 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 net realizable value.  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. 

The following tables summarize our impaired loans and leases by loan class as of June 30, 2019 and December 31, 2018
(in thousands)
June 30, 2019
 

 
Recorded Investment
 
 
 
Unpaid Principal Balance
 
Without Allowance
 
With Allowance
 
Related Allowance
Commercial real estate
 
 
 
 
 
 
 
Non-owner occupied term, net
$
15,570

 
$
8,941

 
$
3,681

 
$
89

Owner occupied term, net
7,394

 
5,238

 
847

 
78

Commercial
 
 
 
 
 
 
 
Term, net
12,245

 
5,440

 
46

 
2

Lines of credit & other, net
1,057

 
923

 

 

Leases & equipment finance, net
2,227

 
385

 
1,842

 
1

Total, net of deferred fees and costs
$
38,493

 
$
20,927

 
$
6,416

 
$
170

 

21


(in thousands)
December 31, 2018
 
 
 
Recorded Investment
 
 
 
Unpaid Principal Balance
 
Without Allowance
 
With Allowance
 
Related Allowance
Commercial real estate
 
 
 
 
 
 
 
Non-owner occupied term, net
$
14,877

 
$
9,847

 
$
3,715

 
$
90

Owner occupied term, net
8,188

 
6,178

 
878

 
88

Multifamily, net
4,493

 
4,298

 

 

Commercial
 
 
 
 
 
 
 
Term, net
22,770

 
11,089

 
3,770

 
2

Lines of credit & other, net
7,145

 
2,065

 

 

Leases & equipment finance, net
417

 
417

 

 

Total, net of deferred fees and costs
$
57,890

 
$
33,894

 
$
8,363

 
$
180



The following tables summarize our average recorded investment and interest income recognized on impaired loans and leases by loan class for the three and six months ended June 30, 2019 and 2018
(in thousands) 
Three Months Ended
 
June 30, 2019
 
June 30, 2018
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Commercial real estate
 
 
 
 
 
 
 
Non-owner occupied term, net
$
12,295

 
$
32

 
$
13,301

 
$
103

Owner occupied term, net
5,929

 
9

 
11,185

 
10

Multifamily, net
1,313

 

 
3,857

 
30

Commercial
 
 
 
 
 
 
 
Term, net
8,872

 
53

 
17,515

 
56

Lines of credit & other, net
1,204

 

 
2,609

 

Leases & equipment finance, net
2,597

 
28

 
509

 

Total, net of deferred fees and costs
$
32,210

 
$
122

 
$
48,976

 
$
199

(in thousands) 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
Average Recorded Investment
 
Interest Income Recognized
 
Average Recorded Investment
 
Interest Income Recognized
Commercial real estate
 
 
 
 
 
 
 
Non-owner occupied term, net
$
12,717

 
$
64

 
$
14,172

 
$
205

Owner occupied term, net
6,304

 
18

 
11,527

 
20

Multifamily, net
2,308

 

 
3,862

 
60

Commercial
 
 
 
 
 
 
 
Term, net
10,867

 
104

 
18,875

 
145

Lines of credit & other, net
1,491

 

 
3,867

 

Leases & equipment finance, net
1,871

 
29

 
339

 

Total, net of deferred fees and costs
$
35,558

 
$
215

 
$
52,642

 
$
430

 
 
 
 
 
 
 
 

The impaired loans for which these interest income amounts were recognized primarily relate to accruing restructured loans. 
 

22


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. 

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. 


23


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 loan becomes past due 120 cumulative days from the contractual due date.  Residential and consumer loans secured by real estate are generally charged down to net realizable value in the month in which the loan becomes 180 days past due. All other residential, consumer, and other homogeneous loans are generally charged-off in the month in which the 120 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. 


24


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 June 30, 2019 and December 31, 2018
(in thousands)
June 30, 2019
 
Pass/Watch
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Impaired (1)
 
Total
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied term, net
$
3,455,860

 
$
51,231

 
$
17,143

 
$
228

 
$

 
$
12,622

 
$
3,537,084

Owner occupied term, net
2,314,355

 
59,795

 
15,863

 
576

 

 
6,085

 
2,396,674

Multifamily, net
3,331,275

 
6,838

 
3,434

 

 

 

 
3,341,547

Construction & development, net
731,015

 
1,917

 

 

 

 

 
732,932

Residential development, net
199,421

 

 

 

 

 

 
199,421

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Term, net
2,222,485

 
34,191

 
7,926

 
1,090

 
168

 
5,486

 
2,271,346

Lines of credit & other, net
1,202,892

 
62,605

 
13,762

 
405

 

 
923

 
1,280,587

Leases & equipment finance, net
1,415,475

 
6,813

 
8,835

 
14,280

 
1,949

 
2,227

 
1,449,579

Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage, net (2)
3,950,673

 
7,840

 
36,846

 

 
284

 

 
3,995,643

Home equity loans & lines, net
1,210,910

 
1,981

 
1,565

 

 
759

 

 
1,215,215

Consumer & other, net
529,561

 
3,324

 
424

 

 
34

 

 
533,343

Total, net of deferred fees and costs
$
20,563,922

 
$
236,535

 
$
105,798

 
$
16,579

 
$
3,194

 
$
27,343

 
$
20,953,371

(1) The percentage of impaired loans classified as pass/watch, special mention and substandard was 3.3%, 14.3% and 82.4%, respectively, as of June 30, 2019.
(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 $5.4 million at June 30, 2019, which is included in the substandard category.

(in thousands)
December 31, 2018
 
Pass/Watch
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Impaired (1)
 
Total
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-owner occupied term, net
$
3,497,801

 
$
38,346

 
$
23,234

 
$

 
$
122

 
$
13,562

 
$
3,573,065

Owner occupied term, net
2,422,351

 
28,447

 
22,136

 
54

 
327

 
7,056

 
2,480,371

Multifamily, net
3,284,445

 
11,481

 
4,539

 

 

 
4,298

 
3,304,763

Construction & development, net
734,318

 

 
1,936

 

 

 

 
736,254

Residential development, net
196,890

 

 

 

 

 

 
196,890

Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
Term, net
2,196,753

 
15,519

 
5,670

 
53

 
69

 
14,859

 
2,232,923

Lines of credit & other, net
1,103,677

 
42,831

 
20,639

 
313

 

 
2,065

 
1,169,525

Leases & equipment finance, net
1,296,235

 
8,571

 
8,754

 
14,247

 
1,931

 
417

 
1,330,155

Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage, net (2)
3,588,976

 
5,169

 
38,766

 

 
2,162

 

 
3,635,073

Home equity loans & lines, net
1,172,040

 
1,878

 
1,418

 

 
1,141

 

 
1,176,477

Consumer & other, net
582,962

 
3,622

 
559

 

 
27

 

 
587,170

Total, net of deferred fees and costs
$
20,076,448

 
$
155,864

 
$
127,651

 
$
14,667

 
$
5,779

 
$
42,257

 
$
20,422,666

(1) The percentage of impaired loans classified as pass/watch, special mention and substandard was 3.2%, 8.8% and 88.0%, respectively, as of December 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 $8.9 million at December 31, 2018, which is included in the substandard category.

25


Troubled Debt Restructurings 

At June 30, 2019 and December 31, 2018, impaired loans of $15.3 million and $13.9 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 $90,000 in available commitments for troubled debt restructurings outstanding as of June 30, 2019 and $338,000 as of December 31, 2018
 
The following tables present troubled debt restructurings by accrual versus non-accrual status and by loan class as of June 30, 2019 and December 31, 2018
(in thousands) 
June 30, 2019
 
Accrual Status
 
Non-Accrual Status
 
Total Modifications
Commercial real estate, net
$
4,036

 
$
6,666

 
$
10,702

Commercial, net
5,752

 
93

 
5,845

Residential, net
5,479

 

 
5,479

Total, net of deferred fees and costs
$
15,267

 
$
6,759

 
$
22,026

 
(in thousands)
December 31, 2018
 
Accrual Status
 
Non-Accrual Status
 
Total Modifications
Commercial real estate, net
$
4,524

 
$
9,290

 
$
13,814

Commercial, net
3,696

 
8,736

 
12,432

Residential, net
5,704

 

 
5,704

Total, net of deferred fees and costs
$
13,924

 
$
18,026

 
$
31,950



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.


26


There were no new restructured loans during the three months ended June 30, 2018. The following tables present newly restructured loans that occurred during the three and six months ended June 30, 2019 and the six months ended June 30, 2018:
 (in thousands)
Three Months Ended June 30, 2019
 
Rate Modifications
 
Term Modifications
 
Interest Only Modifications
 
Payment Modifications
 
Combination Modifications
 
Total Modifications
Residential, net
$

 
$

 
$

 
$

 
$
7

 
$
7

Total, net of deferred fees and costs
$

 
$

 
$

 
$

 
$
7

 
$
7

 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Six Months Ended June 30, 2019
 
Rate Modifications
 
Term Modifications
 
Interest Only Modifications
 
Payment Modifications
 
Combination Modifications
 
Total Modifications
Commercial real estate, net
$

 
$

 
$

 
$

 
$
118

 
$
118

Commercial, net

 

 

 

 
1,842

 
1,842

Residential, net

 

 

 

 
7

 
7

Total, net of deferred fees and costs
$

 
$

 
$

 
$

 
$
1,967

 
$
1,967

 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Six Months Ended June 30, 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



For the periods presented in the tables above, the outstanding recorded investment was the same pre and post modification. There were no financing receivables modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the three and six months ended June 30, 2019. 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 six months ended June 30, 2018. There were none for the three months ended June 30, 2018.

Note 5 – Residential Mortgage Servicing Rights 
 
The Company measures its mortgage servicing rights at fair value with changes in fair value reported in residential mortgage banking revenue in the Condensed Consolidated Statements of Income.

The following table presents the changes in the Company's residential mortgage servicing rights ("MSR") for the three and six months ended June 30, 2019 and 2018
(in thousands) 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Balance, beginning of period
$
158,946

 
$
164,760

 
$
169,025

 
$
153,151

Additions for new MSR capitalized
5,492

 
6,860

 
9,379

 
13,390

Changes in fair value:
 
 
 
 
 
 
 
Changes due to collection/realization of expected cash flows over time
(6,905
)
 
(5,903
)
 
(13,336
)
 
(12,101
)
Changes due to valuation inputs or assumptions (1)
(17,753
)
 
500

 
(25,288
)
 
11,777

Balance, end of period
$
139,780

 
$
166,217

 
$
139,780

 
$
166,217



(1) 
The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates.


27


Information related to our serviced loan portfolio as of June 30, 2019 and December 31, 2018 is as follows: 
(dollars in thousands)
June 30, 2019
 
December 31, 2018
Balance of loans serviced for others
$
15,796,102

 
$
15,978,885

MSR as a percentage of serviced loans
0.88
%
 
1.06
%

 
The amount of contractually specified servicing fees, late fees and ancillary fees earned, recorded in residential mortgage banking revenue, was $11.1 million and $21.9 million for the three and six months ended June 30, 2019, respectively, as compared to $10.4 million and $20.9 million for the three and six months ended June 30, 2018, respectively. 

Note 6 – Commitments and Contingencies 
 
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 June 30, 2019
Commitments to extend credit
$
5,523,351

Forward sales commitments
$
553,648

Commitments to originate residential mortgage loans held for sale
$
292,216

Standby letters of credit
$
63,943


 
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. 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. 

There were no financial guarantees in connection with standby letters of credit that the Bank was required to perform on during the three and six months ended June 30, 2019 and June 30, 2018. At June 30, 2019, approximately $50.8 million of standby letters of credit expire within one year, and $13.1 million expire thereafter.

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 June 30, 2019, the Company had a residential mortgage loan repurchase reserve liability of $1.7 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 June 30, 2019, the Bank has recorded a liability for the loans subject to this repurchase right of $5.4 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.


28


Contingencies—In late 2017, the Company launched "Umpqua Next Gen," an initiative designed to modernize and evolve the Bank focusing on operational excellence, balanced growth and human-digital programs. As part of this initiative, the Company evaluated every part of our operations and how we could evolve to deliver a highly differentiated and compelling banking experience. In 2018, Umpqua consolidated 31 stores. During the six months ended June 30, 2019, Umpqua consolidated 15 stores and sold 4 stores. The Next Gen strategy involves evaluation of possible future consolidations and Umpqua plans to consolidate additional stores in the last half of 2019.

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 June 30, 2019 and December 31, 2018.  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.
  
Note 7 – 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 and six months ended June 30, 2019 and 2018.  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 June 30, 2019, the Bank had commitments to originate mortgage loans held for sale totaling $292.2 million and forward sales commitments of $553.6 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 June 30, 2019, the Bank had 785 interest rate swaps with an aggregate notional amount of $4.6 billion related to this program.  As of December 31, 2018, the Bank had 767 interest rate swaps with an aggregate notional amount of $4.2 billion related to this program.

At June 30, 2019 and December 31, 2018, 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 $5.5 million and $12.7 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 $58.5 million and $36.9 million as of June 30, 2019 and December 31, 2018, 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 June 30, 2019, the variation margin adjustment was a negative adjustment of $142.7 million as compared to a negative adjustment of $32.5 million at December 31, 2018.

29


 
The Bank incorporates credit valuation adjustments ("CVA") to appropriately reflect nonperformance risk in the fair value measurement of its derivatives. The net CVA decreased the settlement values of the Bank's net derivative assets by $9.4 million and $3.0 million as of June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018:  
(in thousands)
 
Asset Derivatives
 
Liability Derivatives
Derivatives not designated as hedging instrument
 
June 30, 2019
 
December 31, 2018
 
June 30, 2019
 
December 31, 2018
Interest rate lock commitments
 
$
8,149

 
$
6,757

 
$

 
$

Interest rate forward sales commitments
 
58

 
1

 
3,189

 
2,963

Interest rate swaps
 
138,826

 
42,276

 
5,529

 
12,746

Foreign currency derivatives
 
802

 
450

 
605

 
273

Total
 
$
147,835

 
$
49,484

 
$
9,323

 
$
15,982


 
The following table summarizes the types of derivatives and the gains (losses) recorded during the three and six months ended June 30, 2019 and 2018:  
(in thousands)
 
Three Months Ended
 
Six Months Ended
Derivatives not designated as hedging instrument
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Interest rate lock commitments
 
$
(25
)
 
$
908

 
$
1,391

 
$
2,030

Interest rate forward sales commitments
 
(4,681
)
 
500

 
(9,408
)
 
8,744

Interest rate swaps
 
(3,951
)
 
290

 
(6,431
)
 
1,421

Foreign currency derivatives
 
524

 
480

 
995

 
815

Total
 
$
(8,133
)
 
$
2,178

 
$
(13,453
)
 
$
13,010


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


30


The following table summarizes the derivatives that have a right of offset as of June 30, 2019 and December 31, 2018:
(in thousands)
 
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
 
Gross Amounts Not Offset in the Statement of Financial Position
 
 
 
 
 
 
 
Financial Instruments
 
Collateral Posted
 
Net Amount
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
138,826

 
$

 
$
138,826

 
$
(5,529
)
 
$

 
$
133,297

Foreign currency derivatives
 
802

 

 
802

 

 

 
802

Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
5,529

 
$

 
$
5,529

 
$
(5,529
)
 
$

 
$

Foreign currency derivatives
 
605

 

 
605

 

 

 
605

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
42,276

 
$

 
$
42,276

 
$
(12,746
)
 
$

 
$
29,530

Foreign currency derivatives
 
450

 

 
450

 

 

 
450

Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
12,746

 
$

 
$
12,746

 
$
(12,746
)
 
$

 
$

Foreign currency derivatives
 
273

 

 
273

 

 

 
273




Note 8 – Earnings Per Common Share  
 

The following is a computation of basic and diluted earnings per common share for the three and six months ended June 30, 2019 and 2018
(in thousands, except per share data)
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Net income
$
111,810

 
$
65,999

 
$
185,843

 
$
144,971

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding - basic
220,487

 
220,283

 
220,427

 
220,326

Effect of potentially dilutive common shares (1)
232

 
364

 
265

 
434

Weighted average number of common shares outstanding - diluted
220,719

 
220,647

 
220,692

 
220,760

EARNINGS PER COMMON SHARE:
 
 
 
 
 
 
 
Basic
$
0.51

 
$
0.30

 
$
0.84

 
$
0.66

Diluted
$
0.51

 
$
0.30

 
$
0.84

 
$
0.66


(1) 
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. 

Note 9 – Segment Information 
 
The Company reports four primary segments: Wholesale Bank, Wealth Management, Retail Bank, and Home Lending with the remainder as Corporate and other.


31


The Wholesale Bank segment includes lending, treasury and cash management services and customer risk management products to middle market corporate, commercial and business banking 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 and small business 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 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. 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.

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 June 30, 2019
 
Wholesale Bank
 
Wealth Management
 
Retail Bank
 
Home Lending
 
Corporate & Other
 
Consolidated
Net interest income
$
110,883

 
$
6,084

 
$
86,047

 
$
10,809

 
$
13,339

 
$
227,162

Provision for loan and lease losses
16,490

 
576

 
1,116

 
922

 
248

 
19,352

Non-interest income
14,051

 
4,702

 
15,863

 
9,514

 
77,693

 
121,823

Non-interest expense
55,968

 
9,971

 
66,393

 
32,954

 
15,129

 
180,415

Income (loss) before income taxes
52,476

 
239

 
34,401

 
(13,553
)
 
75,655

 
149,218

Provision (benefit) for income taxes
13,119

 
60

 
8,601

 
(3,388
)
 
19,016

 
37,408

Net income (loss)
$
39,357

 
$
179

 
$
25,800

 
$
(10,165
)
 
$
56,639

 
$
111,810

 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Six Months Ended June 30, 2019
 
Wholesale Bank
 
Wealth Management
 
Retail Bank
 
Home Lending
 
Corporate & Other
 
Consolidated
Net interest income
$
219,161

 
$
12,473

 
$
174,495

 
$
20,754

 
$
37,964

 
$
464,847

Provision for loan and lease losses
28,480

 
821

 
2,245

 
1,049

 
441

 
33,036

Non-interest income
22,892

 
9,240

 
31,181

 
20,906

 
83,344

 
167,563

Non-interest expense
110,753

 
18,785

 
129,884

 
61,454

 
31,131

 
352,007

Income (loss) before income taxes
102,820

 
2,107

 
73,547

 
(20,843
)
 
89,736

 
247,367

Provision (benefit) for income taxes
25,705

 
527

 
18,387

 
(5,211
)
 
22,116

 
61,524

Net income (loss)
$
77,115

 
$
1,580

 
$
55,160

 
$
(15,632
)
 
$
67,620

 
$
185,843



32


(in thousands)
Three Months Ended June 30, 2018
 
Wholesale Bank
 
Wealth Management
 
Retail Bank
 
Home Lending
 
Corporate & Other
 
Consolidated
Net interest income
$
112,249

 
$
5,536

 
$
80,998

 
$
10,128

 
$
15,989

 
$
224,900

Provision for loan and lease losses
11,276

 
182

 
594

 
208

 
1,059

 
13,319

Non-interest income
15,628

 
4,850

 
15,993

 
33,278

 
1,902

 
71,651

Non-interest expense
55,606

 
9,571

 
70,860

 
35,032

 
24,503

 
195,572

Income (loss) before income taxes
60,995

 
633

 
25,537

 
8,166

 
(7,671
)
 
87,660

Provision (benefit) for income taxes
15,249

 
158

 
6,385

 
2,041

 
(2,172
)
 
21,661

Net income (loss)
$
45,746

 
$
475

 
$
19,152

 
$
6,125

 
$
(5,499
)
 
$
65,999

 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Six Months Ended June 30, 2018
 
Wholesale Bank
 
Wealth Management
 
Retail Bank
 
Home Lending
 
Corporate & Other
 
Consolidated
Net interest income
$
223,984

 
$
11,539

 
$
160,850

 
$
18,973

 
$
34,535

 
$
449,881

Provision for loan and lease losses
24,644

 
349

 
955

 
700

 
327

 
26,975

Non-interest income
31,357

 
9,746

 
31,186

 
71,686

 
6,243

 
150,218

Non-interest expense
110,180

 
18,339

 
142,003

 
67,329

 
43,834

 
381,685

Income (loss) before income taxes
120,517

 
2,597

 
49,078

 
22,630

 
(3,383
)
 
191,439

Provision (benefit) for income taxes
30,129

 
649

 
12,270

 
5,657

 
(2,237
)
 
46,468

Net income (loss)
$
90,388

 
$
1,948

 
$
36,808

 
$
16,973

 
$
(1,146
)
 
$
144,971


(in thousands)
June 30, 2019
 
Wholesale Bank
 
Wealth Management
 
Retail Bank
 
Home Lending
 
Corporate & Other
 
Consolidated
Total assets
$
15,122,715

 
$
635,001

 
$
2,007,335

 
$
4,161,236

 
$
6,059,788

 
$
27,986,075

Total loans and leases
$
14,826,414

 
$
618,160

 
$
1,936,144

 
$
3,634,935

 
$
(62,282
)
 
$
20,953,371

Total deposits
$
3,861,993

 
$
1,150,198

 
$
13,318,602

 
$
310,329

 
$
3,177,891

 
$
21,819,013


(in thousands)
December 31, 2018
 
Wholesale Bank
 
Wealth Management
 
Retail Bank
 
Home Lending
 
Corporate & Other
 
Consolidated
Total assets
$
14,920,507

 
$
536,024

 
$
2,015,263

 
$
3,680,004

 
$
5,787,983

 
$
26,939,781

Total loans and leases
$
14,717,512

 
$
521,988

 
$
1,934,602

 
$
3,320,634

 
$
(72,070
)
 
$
20,422,666

Total deposits
$
3,776,047

 
$
1,068,025

 
$
13,016,976

 
$
219,584

 
$
3,056,854

 
$
21,137,486

 
 

33


Note 10 – Fair Value Measurement 
 
The following table presents estimated fair values of the Company's financial instruments as of June 30, 2019 and December 31, 2018, whether or not recognized or recorded at fair value in the Condensed Consolidated Balance Sheets:  
(in thousands)
 
 
June 30, 2019
 
December 31, 2018
 
Level
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
FINANCIAL ASSETS:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
1
 
$
1,033,791

 
$
1,033,791

 
$
622,637

 
$
622,637

Equity and other investment securities
1,2
 
66,358

 
66,358

 
61,841

 
61,841

Investment securities available for sale
2
 
2,698,398

 
2,698,398

 
2,977,108

 
2,977,108

Investment securities held to maturity
3
 
3,416

 
4,462

 
3,606

 
4,644

Loans held for sale, at fair value
2
 
356,645

 
356,645

 
166,461

 
166,461

Loans and leases, net 
3
 
20,802,302

 
20,884,392

 
20,277,795

 
20,117,939

Restricted equity securities
1
 
43,063

 
43,063

 
40,268

 
40,268

Residential mortgage servicing rights
3
 
139,780

 
139,780

 
169,025

 
169,025

Bank owned life insurance
1
 
316,435

 
316,435

 
313,626

 
313,626

Derivatives
2,3
 
147,835

 
147,835

 
49,484

 
49,484

Visa Inc. Class B common stock (1)
3
 

 

 

 
99,353

FINANCIAL LIABILITIES:
 
 
 
 
 
 
 
 
 
Deposits
1,2
 
$
21,819,013

 
$
21,837,396

 
$
21,137,486

 
$
21,116,852

Securities sold under agreements to repurchase
2
 
308,052

 
308,052

 
297,151

 
297,151

Term debt
2
 
821,712

 
818,289

 
751,788

 
738,107

Junior subordinated debentures, at fair value
3
 
277,028

 
277,028

 
300,870

 
300,870

Junior subordinated debentures, at amortized cost
3
 
88,610

 
71,224

 
88,724

 
76,569

Derivatives
2
 
9,323

 
9,323

 
15,982

 
15,982


(1) In June 2019, the Company sold all 486,346 shares of the Visa Inc. Class B common stock held, an equity security that did not have a readily determinable fair value, resulting in a one-time realized gain of $81.9 million. Accordingly, the book value and fair value are zero at June 30, 2019, as the Company no longer holds this security.


34


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 June 30, 2019 and December 31, 2018
(in thousands) 
June 30, 2019
Description
Total
 
Level 1
 
Level 2
 
Level 3
FINANCIAL ASSETS:
 
 
 
 
 
 
 
Equity and other investment securities
 
 
 
 
 
 
 
Investments in mutual funds and other securities
$
51,924

 
$
51,924

 
$

 
$

Equity securities held in rabbi trusts
12,369

 
12,369

 

 

Other investments securities (1)
2,065

 

 
2,065

 

Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury and agencies
337,101

 

 
337,101

 

Obligations of states and political subdivisions
270,952

 

 
270,952

 

Residential mortgage-backed securities and collateralized mortgage obligations
2,090,345

 

 
2,090,345

 

Loans held for sale, at fair value
356,645

 

 
356,645

 

Residential mortgage servicing rights, at fair value
139,780

 

 

 
139,780

Derivatives
 
 
 
 
 
 
 
Interest rate lock commitments
8,149

 

 

 
8,149

Interest rate forward sales commitments
58

 

 
58

 

Interest rate swaps
138,826

 

 
138,826

 

Foreign currency derivative
802

 

 
802

 

Total assets measured at fair value
$
3,409,016

 
$
64,293

 
$
3,196,794

 
$
147,929

FINANCIAL LIABILITIES:
 
 
 
 
 
 
 
Junior subordinated debentures, at fair value
$
277,028

 
$

 
$

 
$
277,028

Derivatives
 
 
 
 
 
 
 
Interest rate forward sales commitments
3,189

 

 
3,189

 

Interest rate swaps
5,529

 

 
5,529

 

Foreign currency derivative
605

 

 
605

 

Total liabilities measured at fair value
$
286,351

 
$

 
$
9,323

 
$
277,028

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

35


(in thousands) 
December 31, 2018
Description
Total
 
Level 1
 
Level 2
 
Level 3
FINANCIAL ASSETS:
 
 
 
 
 
 
 
Equity and other investment securities
 
 
 
 
 
 
 
Investments in mutual funds and other securities
$
50,475

 
$
50,475

 
$

 
$

Equity securities held in rabbi trusts
10,918

 
10,918

 

 

  Other investments securities (1)
448

 

 
448

 

Investment securities available for sale
 
 
 
 
 
 
 
U.S. Treasury and agencies
39,656

 

 
39,656

 

Obligations of states and political subdivisions
309,171

 

 
309,171

 

Residential mortgage-backed securities and collateralized mortgage obligations
2,628,281

 

 
2,628,281

 

Loans held for sale, at fair value
166,461

 

 
166,461

 

Residential mortgage servicing rights, at fair value
169,025

 

 

 
169,025

Derivatives
 
 
 
 
 
 
 
Interest rate lock commitments
6,757

 

 

 
6,757

Interest rate forward sales commitments
1

 

 
1

 

Interest rate swaps
42,276

 

 
42,276

 

Foreign currency derivative
450

 

 
450

 

Total assets measured at fair value
$
3,423,919

 
$
61,393

 
$
3,186,744

 
$
175,782

FINANCIAL LIABILITIES:
 
 
 
 
 
 
 
Junior subordinated debentures, at fair value
$
300,870

 
$

 
$

 
$
300,870

Derivatives
 
 
 
 
 
 
 
Interest rate forward sales commitments
2,963

 

 
2,963

 

Interest rate swaps
12,746

 

 
12,746

 

Foreign currency derivative
273

 

 
273

 

Total liabilities measured at fair value
$
316,852

 
$

 
$
15,982

 
$
300,870

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

The following methods were used to estimate the fair value of each class of financial instrument that is 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 the 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. 
 

36


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 June 30, 2019, 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 June 30, 2019
Financial Instrument
Valuation Technique
Unobservable Input
Weighted Average
Residential mortgage servicing rights
Discounted cash flow
 
 
 
 
Constant prepayment rate
15.09%
 
 
Discount rate
9.70%
Interest rate lock commitments
Internal pricing model
 
 
 
 
Pull-through rate
88.48%
Junior subordinated debentures
Discounted cash flow
 
 
 
 
Credit spread
5.02%


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 June 30, 2019, 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).

37


 
The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and six months ended June 30, 2019 and 2018
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
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
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage servicing rights
$
158,946

 
$
(24,658
)
 
$

 
$
5,492

 
$

 
$
139,780

 
$
(17,753
)
Interest rate lock commitments, net
8,174

 
1,302

 

 
6,892

 
(8,219
)
 
8,149

 
8,149

Junior subordinated debentures, at fair value
294,121

 
4,685

 
(17,240
)
 

 
(4,538
)
 
277,028

 
(12,555
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage servicing rights
$
164,760

 
$
(5,403
)
 
$

 
$
6,860

 
$

 
$
166,217

 
$
500

Interest rate lock commitments, net
5,874

 
249

 

 
8,099

 
(7,440
)
 
6,782

 
6,782

Junior subordinated debentures, at fair value
278,410

 
4,283

 
1,513

 

 
(3,537
)
 
280,669

 
5,796

(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
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
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage servicing rights
$
169,025

 
$
(38,624
)
 
$

 
$
9,379

 
$

 
$
139,780

 
$
(25,288
)
Interest rate lock commitment, net
6,757

 
2,999

 

 
12,291

 
(13,898
)
 
8,149

 
8,149

Junior subordinated debentures, at fair value
300,870

 
9,457

 
(23,804
)
 

 
(9,495
)
 
277,028

 
(14,347
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 

 
 

 
 

 
 

 
 
 
 

 
 

Residential mortgage servicing rights
$
153,151

 
$
(324
)
 
$

 
$
13,390

 
$

 
$
166,217

 
$
11,777

Interest rate lock commitment, net
4,752

 
(1,004
)
 

 
14,532

 
(11,498
)
 
6,782

 
6,782

Junior subordinated debentures, at fair value
277,155

 
8,058

 
3,196

 

 
(7,740
)
 
280,669

 
11,254



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. 


38


The change in fair value of junior subordinated debentures is attributable to the change in the instrument specific credit risk, accordingly, the unrealized gains on fair value of junior subordinated debentures for the three and six months ended June 30, 2019 of $17.2 million and $23.8 million, respectively, are recorded net of tax as an other comprehensive gain of $12.8 million and $17.7 million, respectively. Comparatively, losses of $1.5 million and $3.2 million, respectively, were recorded net of tax as an other comprehensive loss of $1.1 million and $2.4 million, respectively, for the three and six months ended June 30, 2018. The gain recorded for the three and six months ended June 30, 2019 was due primarily to an increase in the credit spread as compared to prior periods.

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)
June 30, 2019
 
Total
 
Level 1
 
Level 2
 
Level 3
Loans and leases
$
40,453

 
$

 
$

 
$
40,453

Other real estate owned
5,178

 

 

 
5,178

 
$
45,631

 
$

 
$

 
$
45,631


(in thousands) 
December 31, 2018
 
Total
 
Level 1
 
Level 2
 
Level 3
Loans and leases
$
98,696

 
$

 
$

 
$
98,696

Other real estate owned
7,532

 

 

 
7,532

 
$
106,228

 
$

 
$

 
$
106,228



The following table presents the losses resulting from nonrecurring fair value adjustments for the three and six months ended June 30, 2019 and 2018:  
 (in thousands)
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Loans and leases
$
15,136

 
$
13,682

 
$
30,632

 
$
27,721

Other real estate owned
2,675

 
61

 
2,734

 
66

Total loss from nonrecurring measurements
$
17,811

 
$
13,743

 
$
33,366

 
$
27,787



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 and leases that have been adjusted to fair value.  When we identify a collateral dependent loan or lease as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan or lease, 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 or lease is less than its recorded investment, we recognize this impairment and adjust the carrying value of the loan or lease to fair value through the allowance for loan and lease losses.  The loss represents charge-offs or impairments on collateral dependent loans and leases for fair value adjustments based on the fair value of collateral.
 

39


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 June 30, 2019 and December 31, 2018:

(in thousands)
June 30, 2019
 
December 31, 2018
 
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
$
356,645

 
$
342,770

 
$
13,875

 
$
166,461

 
$
160,270

 
$
6,191



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 and six months ended June 30, 2019, the Company recorded a net increase in fair value of $4.9 million and $7.7 million, respectively. For the three and six months ended June 30, 2018, the Company recorded a net increase in fair value of $5.7 million and $5.4 million, respectively.

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.


40


Note 11 – Leases

The Bank leases store locations, corporate office space, and equipment under non-cancelable leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

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 one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more. The exercise of lease renewal options is at our sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We rent or sublease certain real estate to third parties. Our sublease portfolio consists of operating leases of mainly former store locations or excess space in store or corporate facilities.
 
The following table presents the balance sheet information related to leases as of June 30, 2019:

(in thousands) 
 
Leases
June 30, 2019
Operating lease right-of-use assets
$
112,752

Operating lease liabilities
$
121,742


The following table presents the components of lease expense for the three and six months ended June 30, 2019:

(in thousands) 
Three Months Ended
 
Six Months Ended
Lease Costs
June 30, 2019
 
June 30, 2019
Operating lease costs
$
8,116

 
$
16,242

Short-term lease costs
209

 
476

Variable lease costs
(5
)
 
(3
)
Sublease income
(615
)
 
(1,402
)
Net lease costs
$
7,705

 
$
15,313


Prior to the adoption of ASU 2016-02, rent expense for the three and six months ended June 30, 2018 was $9.4 million and $19.0 million, respectively, and was partially offset by rent income of $648,000 and $1.3 million, respectively.

The following table presents the supplemental cash flow information related to leases for the six months ended June 30, 2019:

(in thousands) 
Six Months Ended
Cash Flows
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
16,497

Right of use assets obtained in exchange for new operating lease liabilities
$
11,869




41


The following table presents the maturities of lease liabilities as of June 30, 2019:

(in thousands) 
 
Year
Operating Leases
Remainder of 2019
$
16,429

2020
28,842

2021
23,152

2022
17,969

2023
14,025

Thereafter
37,420

Total lease payments
137,837

Less: imputed interest
(16,095
)
Present value of lease liabilities
$
121,742


The following table presents the operating lease term and discount rate as of June 30, 2019:

 
June 30, 2019
Weighted-average remaining lease term (years)
6.8

Weighted-average discount rate
3.64
%


The following table sets forth, as of December 31, 2018, the future minimum lease payments under non-cancelable leases and future minimum income receivable under non-cancelable operating subleases:

(in thousands) 
 
 
 
Year
Leases Payments
 
Subleases Income
2019
$
33,948

 
$
2,851

2020
29,535

 
2,711

2021
23,898

 
2,333

2022
18,250

 
1,718

2023
14,100

 
1,337

Thereafter
37,963

 
3,477

Total
$
157,694

 
$
14,427




42


Note 12 – Subsequent Event

On July 19, 2019, Umpqua signed an indication of interest to sell the mortgage servicing rights to approximately $3.7 billion of mortgage loans serviced for others. The transaction is expected to close in the fourth quarter of 2019, pending the negotiation and finalization of the agreement, as well as customary approvals and closing conditions.


43


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; Next Gen initiatives; investments in data, analytics, technology, training and marketing; 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; dividends; junior subordinated debentures; fair values of certain assets and liabilities, including mortgage servicing rights values and sensitivity analyses; 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 successfully implement and sustain information technology product and system enhancements and operational initiatives;
our ability to attract new deposits and loans and leases;
our ability 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; 
prolonged low interest rate environments;
compression of our net interest margin; 
stability and cost of funding sources;
continued availability of borrowings and other funding sources such as brokered and public deposits; 
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 and the impact of legislation and implementing regulations on our 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.

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Table of Contents

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.
  
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 we believe differentiates 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, annuities, options, retirement planning, advisory account services, goals based planning and insurance.

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 and six months ended June 30, 2019 were as follows: 

Financial Performance
 
Net income per diluted common share was $0.51 and $0.84 for the three and six months ended June 30, 2019 compared to $0.30 and $0.66 for the three and six months ended June 30, 2018.  
 
Net interest margin, on a tax equivalent basis, was 3.70% and 3.86% for the three and six months ended June 30, 2019 as compared to 3.89% and 3.96% for the three and six months ended June 30, 2018.  The decrease in net interest margin for the three and six months ended June 30, 2019, compared to the same periods in the prior year, was driven by an increase in the cost of interest-bearing liabilities offset by higher average yields on the loan and lease portfolio, taxable securities, and loans held for sale.

Residential mortgage banking revenue was $9.5 million and $20.8 million for the three and six months ended June 30, 2019 as compared to $33.2 million and $71.6 million for the three and six months ended June 30, 2018.  The decrease for the three and six month period was primarily driven by a loss on fair value of the MSR asset of $24.7 million and $38.6 million, as compared to a loss of $5.4 million and $324,000 for the same periods in 2018. For-sale mortgage origination volume decreased 17% and 22%, for the three and six months ended June 30, 2019, as compared to the same periods in the prior year; and gain on sale margin decreased to 3.32% and 3.17% for the three and six months ended June 30, 2019, compared to 3.35% and 3.34%, in the same periods of the prior year.

The Company sold all of its holdings of Visa Inc. Class B common stock for a one-time gain of $81.9 million, which was partially offset by a $7.2 million loss on the sale of debt securities during the period.

Total gross loans and leases were $21.0 billion as of June 30, 2019, an increase of $530.7 million, as compared to December 31, 2018.  The increase is due to strong loan production in the commercial loan and residential real estate portfolios.
 
Total deposits were $21.8 billion as of June 30, 2019, an increase of $681.5 million, compared to December 31, 2018.  This increase was due to growth in non-interest bearing demand deposits, money market, and time deposit growth.
 

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Table of Contents

Total consolidated assets were $28.0 billion as of June 30, 2019, compared to $26.9 billion at December 31, 2018. The increase was due to strong loan and deposit growth for the first half of 2019. A portion of the increase was due to the addition of the operating lease right of use assets recorded as a result of the application of the new lease standard, ASC 842.  

Credit Quality

Non-performing assets decreased to $79.1 million, or 0.28% of total assets, as of June 30, 2019, as compared to $98.2 million, or 0.36% of total assets, as of December 31, 2018.  Non-performing loans were $70.7 million, or 0.34% of total loans, as of June 30, 2019, as compared to $87.3 million, or 0.43% of total loans, as of December 31, 2018.

The provision for loan and lease losses was $19.4 million and $33.0 million for the three and six months ended June 30, 2019, as compared to $13.3 million and $27.0 million for the three and six months ended June 30, 2018. The increase for the three and six months ended June 30, 2019, compared to the same periods of the prior year, was primarily attributable to strong growth in the loan and lease portfolio, along with higher net charge-offs. As an annualized percentage of average outstanding loans and leases, the provision for loan and lease losses recorded for the three and six months ended June 30, 2019 was 0.38% and 0.33%, respectively, as compared to 0.28% for the same periods in 2018.

Capital and Growth Initiatives

The Company's total risk based capital was 13.7% and its Tier 1 common to risk weighted assets ratio was 11.0% as of June 30, 2019. As of December 31, 2018, the Company's total risk based capital ratio was 13.5% and its Tier 1 common to risk weighted assets ratio was 10.7%.
 
Cash dividends declared in the second quarter of 2019 were $0.21 per common share, an increase of 5% from the comparable period of the prior year's second quarter cash dividend of $0.20 per common share.

We continue to make progress on "Umpqua Next Gen," an initiative started in late 2017 designed to modernize and evolve the Bank. We focused on operational excellence, balanced growth and human digital programs in 2018. During the six months ended June 30, 2019, Umpqua continued store rationalization, consolidating 15 stores and selling an additional 4 stores, as part of this initiative, with plans to consolidate additional stores by the end of the year. We have utilized the savings generated from store consolidations to reinvest in technology, data and analytics, new customer-focused technologies, associate training, a re-designed corporate website, digital marketing efforts, and new online account origination capabilities. The Company rolled out "Go-To" the industry's first human digital banking platform during the quarter and is implementing predictive analytics tools to assist bankers with serving their customers.

Summary of Critical Accounting Policies 
 
Our critical accounting policies are described in detail in the Summary of Critical Accounting Policies section of the Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The Company’s critical accounting policies include the allowance for loan and lease losses and reserve for unfunded commitments, residential mortgage servicing rights, valuation of goodwill, and fair value. There have been no material changes to the valuation techniques or models during the six months ended June 30, 2019


46

Table of Contents

Results of Operations
 
Overview 
 
For the three and six months ended June 30, 2019, net income was $111.8 million and $185.8 million, or $0.51 and $0.84 per diluted common share as compared to net income of $66.0 million and $145.0 million, or $0.30 and $0.66 per diluted common share for the three and six months ended June 30, 2018. The increase in net income for the three and six months ended June 30, 2019, compared to the same periods of the prior year was attributable to an increase in non-interest income, a decrease in non-interest expense and an increase in net interest income, offset by an increase in income tax expense and the provision for loan and lease losses.

The increase in non-interest income was due to the one-time gain on sale of Visa Inc. Class B common stock held by the Company, partially offset by a decrease in residential mortgage banking revenue driven by the loss on fair value change of the MSR asset. The decrease in non-interest expense was driven by lower salaries and benefits expense, resulting from the Company's operational excellence initiatives, a reduction in consulting fees, lower occupancy and equipment expense resulting from the reduction in the number of store locations, as well as lower FDIC assessments, offset by a loss on other real estate owned and higher marketing expense. The increase in net interest income was driven by higher volume and average yields on interest-earning assets, specifically within the loan and lease portfolio and taxable securities, offset by a higher cost of funds, due to higher short term interest rates relative to the comparable periods of the prior year.

The following table presents the return on average assets, average common shareholders' equity and average tangible common shareholders' equity for the three and six months ended June 30, 2019 and 2018. For each of the periods presented, the table includes the calculated ratios based on reported net income. 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 income 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
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Return on average assets
1.62
%
 
1.02
%
 
1.37
%
 
1.13
%
Return on average common shareholders' equity
10.80
%
 
6.64
%
 
9.09
%
 
7.34
%
Return on average tangible common shareholders' equity
19.14
%
 
12.18
%
 
16.21
%
 
13.50
%
Calculation of average common tangible shareholders' equity:
 
 
 
 
 
 
 
Average common shareholders' equity
$
4,153,175

 
$
3,988,825

 
$
4,122,346

 
$
3,981,948

Less: average goodwill and other intangible assets, net
(1,809,583
)
 
(1,815,529
)
 
(1,810,291
)
 
(1,816,294
)
Average tangible common shareholders' equity
$
2,343,592

 
$
2,173,296

 
$
2,312,055

 
$
2,165,654


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. 


47

Table of Contents

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 June 30, 2019 and December 31, 2018

Reconciliations of Total Shareholders' Equity to Tangible Common Shareholders' Equity and Total Assets to Tangible Assets 
 (dollars in thousands) 
June 30, 2019
 
December 31, 2018
Total shareholders' equity
$
4,228,507

 
$
4,056,442

Subtract:
 
 
 
Goodwill
1,787,651

 
1,787,651

Other intangible assets, net
21,155

 
23,964

Tangible common shareholders' equity
$
2,419,701

 
$
2,244,827

Total assets
$
27,986,075

 
$
26,939,781

Subtract:
 
 
 
Goodwill
1,787,651

 
1,787,651

Other intangible assets, net
21,155

 
23,964

Tangible assets
$
26,177,269

 
$
25,128,166

Tangible common equity ratio
9.24
%
 
8.93
%
 
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 for the three and six months ended June 30, 2019 was $227.2 million and $464.8 million, respectively, an increase of $2.3 million and $15.0 million, respectively, compared to the same periods in 2018. The increase in net interest income for the three and six months ended June 30, 2019 as compared to the same periods in 2018, was driven by growth in interest-earning assets, specifically the loan and lease portfolio, reflecting strong growth during the period, along with higher average yields on loans and leases, taxable securities, and loans held for sale related to higher interest rates during the period. The increase was partially offset by increased volumes of interest-bearing liabilities and an increase in the average cost of funds due to competitive pricing in the current rate environment.

The net interest margin (net interest income as a percentage of average interest-earning assets) on a fully tax equivalent basis was 3.70% and 3.86%, respectively, for the three and six months ended June 30, 2019, a decrease of 19 basis points and 10 basis points, respectively, as compared to the same periods in 2018. The decrease in net interest margin for the three and six months ended June 30, 2019, primarily resulted from an increase in the cost of interest-bearing liabilities which was partially offset by higher average yields on the loan and lease portfolio. The cost of interest bearing liabilities increased 51 basis points and 50 basis points, respectively, for the three and six months ended June 30, 2019, as compared to the same periods in 2018. The increase is due to increasing competition in an increasing interest rate environment. The yield on loans and leases increased by 16 basis points and 20 basis points, respectively, for the three and six months ended June 30, 2019, as compared to the same periods in 2018.
 
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. The Company continues to be "asset-sensitive." In a declining interest rate environment, a decrease in both cost of funds and yields on earning assets could further compress the net interest margin.


48

Table of Contents

The following tables present 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 and six months ended June 30, 2019 and 2018

Average Rates and Balances  
 
(dollars in thousands)
Three Months Ended
 
June 30, 2019
 
June 30, 2018
 
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
$
264,445

 
$
3,326

 
5.03
%
 
$
326,427

 
$
3,967

 
4.86
%
Loans and leases (1)
20,605,963

 
260,784

 
5.07
%
 
19,387,537

 
238,156

 
4.91
%
Taxable securities
2,683,472

 
10,861

 
1.62
%
 
2,723,406

 
8,932

 
1.31
%
Non-taxable securities (2)
271,633

 
2,325

 
3.42
%
 
279,158

 
2,539

 
3.64
%
Temporary investments and interest-bearing cash
783,703

 
4,708

 
2.41
%
 
458,133

 
2,080

 
1.82
%
Total interest-earning assets
24,609,216

 
$
282,004

 
4.59
%
 
23,174,661

 
$
255,674

 
4.41
%
Other assets
3,100,094

 
 
 
 
 
2,901,481

 
 
 
 
Total assets
$
27,709,310

 
 
 
 
 
$
26,076,142

 
 
 
 
INTEREST-BEARING LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
2,332,535

 
$
2,798

 
0.48
%
 
$
2,322,359

 
$
1,565

 
0.27
%
Money market deposits
6,747,290

 
15,351

 
0.91
%
 
6,332,372

 
5,896

 
0.37
%
Savings deposits
1,454,908

 
410

 
0.11
%
 
1,456,625

 
252

 
0.07
%
Time deposits
4,534,465

 
25,032

 
2.21
%
 
3,633,733

 
13,546

 
1.50
%
Total interest-bearing deposits
15,069,198

 
43,591

 
1.16
%
 
13,745,089

 
21,259

 
0.62
%
Repurchase agreements and federal funds purchased
292,057

 
403

 
0.55
%
 
285,338

 
155

 
0.22
%
Term debt
903,164

 
4,563

 
2.03
%
 
801,768

 
3,478

 
1.74
%
Junior subordinated debentures
382,530

 
5,881

 
6.17
%
 
367,705

 
5,400

 
5.89
%
Total interest-bearing liabilities
16,646,949

 
$
54,438

 
1.31
%
 
15,199,900

 
$
30,292

 
0.80
%
Non-interest-bearing deposits
6,556,090

 
 
 
 
 
6,645,689

 
 
 
 
Other liabilities
353,096

 
 
 
 
 
241,728

 
 
 
 
Total liabilities
23,556,135

 
 
 
 
 
22,087,317

 
 
 
 
Common equity
4,153,175

 
 
 
 
 
3,988,825

 
 
 
 
Total liabilities and shareholders' equity
$
27,709,310

 
 
 
 
 
$
26,076,142

 
 
 
 
NET INTEREST INCOME
 
 
$
227,566

 
 
 
 
 
$
225,382

 
 
NET INTEREST SPREAD
 
 
 
 
3.28
%
 
 
 
 
 
3.61
%
NET INTEREST INCOME TO EARNING ASSETS OR NET INTEREST MARGIN (1), (2)
 
 
 
 
3.70
%
 
 
 
 
 
3.89
%
(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. The amount of such adjustment was an addition to recorded income of approximately $404,000 for the three months ended June 30, 2019, as compared to $482,000 for the same period in 2018

49


(dollars in thousands)
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
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
$
226,263

 
$
6,116

 
5.41
%
 
$
296,992

 
$
6,782

 
4.57
%
Loans and leases (1)
20,498,075

 
516,741

 
5.07
%
 
19,239,586

 
464,829

 
4.87
%
Taxable securities
2,720,353

 
31,334

 
2.30
%
 
2,758,235

 
25,099

 
1.82
%
Non-taxable securities (2)
279,456

 
4,905

 
3.51
%
 
282,860

 
5,179

 
3.66
%
Temporary investments and interest bearing cash
470,266

 
5,633

 
2.42
%
 
381,328

 
3,244

 
1.72
%
Total interest-earning assets
24,194,413

 
$
564,729

 
4.69
%
 
22,959,001

 
$
505,133

 
4.44
%
Other assets
3,068,532

 
 
 
 
 
2,897,689

 
 
 
 
Total assets
$
27,262,945

 
 
 
 
 
$
25,856,690

 
 
 
 
INTEREST-BEARING LIABILITIES:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
2,326,162

 
$
5,438

 
0.47
%
 
$
2,322,793

 
$
2,775

 
0.24
%
Money market deposits
6,570,488

 
26,368

 
0.81
%
 
6,618,629

 
11,609

 
0.35
%
Savings deposits
1,471,626

 
680

 
0.09
%
 
1,459,824

 
414

 
0.06
%
Time deposits
4,320,599

 
45,199

 
2.11
%
 
3,218,477

 
22,071

 
1.38
%
Total interest-bearing deposits
14,688,875

 
77,685

 
1.07
%
 
13,619,723

 
36,869

 
0.55
%
Repurchase agreements and federal funds purchased
331,477

 
1,213

 
0.74
%
 
294,150

 
218

 
0.15
%
Term debt
848,783

 
8,246

 
1.96
%
 
802,031

 
6,839

 
1.72
%
Junior subordinated debentures
385,798

 
11,868

 
6.20
%
 
370,556

 
10,332

 
5.62
%
Total interest-bearing liabilities
16,254,933

 
$
99,012

 
1.23
%
 
15,086,460

 
$
54,258

 
0.73
%
Non-interest-bearing deposits
6,530,992

 
 
 
 
 
6,548,566

 
 
 
 
Other liabilities
354,674

 
 
 
 
 
239,716

 
 
 
 
Total liabilities
23,140,599

 
 
 
 
 
21,874,742

 
 
 
 
Common equity
4,122,346

 
 
 
 
 
3,981,948

 
 
 
 
Total liabilities and shareholders' equity
$
27,262,945

 
 
 
 
 
$
25,856,690

 
 
 
 
NET INTEREST INCOME
 
 
$
465,717

 
 
 
 
 
$
450,875

 
 
NET INTEREST SPREAD
 
 
 
 
3.46
%
 
 
 
 
 
3.71
%
NET INTEREST INCOME TO EARNING ASSETS OR NET INTEREST MARGIN (1), (2)
 
 
 
 
3.86
%
 
 
 
 
 
3.96
%
(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. The amount of such adjustment was an addition to recorded income of approximately $870,000 for the six months ended June 30, 2019, as compared to $1.0 million for the same period in 2018


50


The following tables set 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 and six months ended June 30, 2019 as compared to the same periods in 2018. 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 June 30,
 
2019 compared to 2018
 
Increase (decrease) in interest income and expense due to changes in
 
Volume
 
Rate
 
Total
INTEREST-EARNING ASSETS:
 
 
 
 
 
Loans held for sale
$
(775
)
 
$
134

 
$
(641
)
Loans and leases
14,933

 
7,695

 
22,628

Taxable securities
(132
)
 
2,061

 
1,929

Non-taxable securities (1)
(67
)
 
(147
)
 
(214
)
Temporary investments and interest bearing cash
1,807

 
821

 
2,628

     Total (1)
15,766

 
10,564

 
26,330

INTEREST-BEARING LIABILITIES:
 
 
 
 
 
Interest bearing demand deposits
7

 
1,226

 
1,233

Money market deposits
410

 
9,045

 
9,455

Savings deposits

 
158

 
158

Time deposits
3,907

 
7,579

 
11,486

Repurchase agreements
(33
)
 
281

 
248

Term debt
471

 
614

 
1,085

Junior subordinated debentures
223

 
258

 
481

Total
4,985

 
19,161

 
24,146

Net increase in net interest income (1)
$
10,781

 
$
(8,597
)
 
$
2,184


(1) 
Tax exempt income has been adjusted to a tax equivalent basis at a 21% tax rate. 

51


(in thousands)
Six Months Ended June 30,
 
2019 compared to 2018
 
Increase (decrease) in interest income and expense due to changes in
 
Volume
 
Rate
 
Total
INTEREST-EARNING ASSETS:
 
 
 
 
 
Loans held for sale
$
(1,771
)
 
$
1,105

 
$
(666
)
Loans and leases
31,813

 
20,099

 
51,912

Taxable securities
(344
)
 
6,579

 
6,235

Non-taxable securities (1)
(62
)
 
(212
)
 
(274
)
Temporary investments and interest bearing cash
869

 
1,520

 
2,389

     Total (1)
30,505

 
29,091

 
59,596

INTEREST-BEARING LIABILITIES:
 
 
 
 
 
Interest bearing demand deposits
4

 
2,659

 
2,663

Money market
(85
)
 
14,844

 
14,759

Savings
3

 
263

 
266

Time deposits
9,125

 
14,003

 
23,128

Repurchase agreements
372

 
623

 
995

Term debt
415

 
992

 
1,407

Junior subordinated debentures
438

 
1,098

 
1,536

Total
10,272

 
34,482

 
44,754

Net increase in net interest income (1)
$
20,233

 
$
(5,391
)
 
$
14,842


(1) 
Tax exempt income has been adjusted to a tax equivalent basis at a 21% tax rate. 

Provision for Loan and Lease Losses 
 
The provision for loan and lease losses was $19.4 million and $33.0 million, respectively, for the three and six months ended June 30, 2019, as compared to $13.3 million and $27.0 million, respectively, for the three and six months ended June 30, 2018. The increase in the provision for the three and six months ended June 30, 2019 as compared to the same prior year periods is primarily attributable to growth in the loan and lease portfolio, as well as an increase in net charge-offs. As an annualized percentage of average outstanding loans and leases, the provision for loan and lease losses recorded for the three and six months ended June 30, 2019 was 0.38% and 0.33%, respectively, as compared to 0.28% for the same periods in 2018
 
For the three and six months ended June 30, 2019, net charge-offs were $13.2 million and $26.8 million, respectively, or 0.26%, of average loans and leases (annualized) for both periods, as compared to $10.7 million and $23.0 million, respectively, or 0.22% and 0.24%, respectively, of average loans and leases (annualized), for the three and six months ended June 30, 2018. The majority of net charge-offs relate to losses realized in the lease and equipment finance portfolio, which is included in the commercial loan 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 $35.0 million as of June 30, 2019 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. 

52


Non-Interest Income 
 
Non-interest income for the three and six months ended June 30, 2019 was $121.8 million and $167.6 million, respectively, an increase of $50.2 million and $17.3 million, respectively, or 70% and 12%, respectively, as compared to the same periods in 2018. The following table presents the key components of non-interest income for the three and six months ended June 30, 2019 and 2018
 
Non-Interest Income 
(in thousands)
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
Change Amount
 
Change Percent
 
2019
 
2018
 
Change Amount
 
Change Percent
Service charges on deposits
$
15,953

 
$
15,520

 
$
433

 
3
 %
 
$
31,231

 
$
30,515

 
$
716

 
2
 %
Brokerage revenue
3,980

 
4,161

 
(181
)
 
(4
)%
 
7,790

 
8,355

 
(565
)
 
(7
)%
Residential mortgage banking revenue, net
9,529

 
33,163

 
(23,634
)
 
(71
)%
 
20,760

 
71,601

 
(50,841
)
 
(71
)%
(Loss) gain on sale of debt securities, net
(7,186
)
 
14

 
(7,200
)
 
nm

 
(7,186
)
 
14

 
(7,200
)
 
nm

Gain (loss) on equity securities, net
82,607

 
(1,432
)
 
84,039

 
nm

 
83,302

 
(1,432
)
 
84,734

 
nm

Gain on loan sales, net
3,333

 
1,348

 
1,985

 
147
 %
 
4,102

 
2,578

 
1,524

 
59
 %
BOLI income
2,093

 
2,060

 
33

 
2
 %
 
4,261

 
4,130

 
131

 
3
 %
Other income
11,514

 
16,817

 
(5,303
)
 
(32
)%
 
23,303

 
34,457

 
(11,154
)
 
(32
)%
Total
$
121,823

 
$
71,651

 
$
50,172

 
70
 %
 
$
167,563

 
$
150,218

 
$
17,345

 
12
 %
nm = Not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

The loss on sale of debt securities for the three and six months ended June 30, 2019, increased $7.2 million as compared to the same periods of the prior year due to a strategic restructuring of our available for sale debt securities portfolio to reduce interest rate sensitivity for a potentially decreasing interest rate environment, increase operational efficiency, and improve the cash liquidity position of the Company.

Gain on equity securities for the three and six months ended June 30, 2019, compared to the same periods in the prior year increased due primarily to the one-time gain on sale of all of the owned shares of Visa Inc. Class B common stock held by the Company.

The gain on loan sales for the three and six months ended June 30, 2019, increased by $2.0 million and $1.5 million, respectively, due to the mix and volume of loans sold during the periods.

Other income for the three and six months ended June 30, 2019 compared to the same periods in the prior year decreased by $5.3 million and $11.2 million, respectively. The decrease for both periods was primarily related the swap derivative value decrease of $4.2 million and $7.9 million, respectively, attributable to the decrease in long-term interest rates during the period, as well as a decrease of debt capital market swap fee revenue of $1.7 million and $4.6 million, respectively, due to the timing of production.

53


The following table presents our residential mortgage banking revenues for the three and six months ended June 30, 2019 and 2018

Summary of Residential Mortgage Banking Revenues
 (in thousands)
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Origination and sale
$
23,151

 
$
28,159

 
$
37,524

 
$
50,996

Servicing
11,036

 
10,407

 
21,860

 
20,929

Change in fair value of MSR asset:
 
 
 
 
 
 
 
Changes due to collection/realization of expected cash flows over time
(6,905
)
 
(5,903
)
 
(13,336
)
 
(12,101
)
  Changes in valuation inputs or assumptions (1)
(17,753
)
 
500

 
(25,288
)
 
11,777

Balance, end of period
$
9,529

 
$
33,163

 
$
20,760

 
$
71,601

(1) 
The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates.

Residential mortgage banking revenue for the three and six months ended June 30, 2019, as compared to the same periods of 2018 decreased by $23.6 million and $50.8 million, respectively. The decrease for the three and six month periods was primarily driven by a higher loss on fair value of the MSR asset of $24.7 million and $38.6 million, respectively, as compared to a loss on fair value of $5.4 million and $324,000 for the same periods in 2018. This decrease was due to decreased interest rates during the three and six months ended June 30, 2019 which caused prepayment speeds to rise as well as changes to inputs and assumptions in the valuation model. In addition, the closed loans for sale volume for the three and six months ended June 30, 2019, decreased 17% and 22%, respectively, due to a slowdown in refinance activity. The gain on sale margin decreased to 3.32% and 3.17% for the three and six months ended June 30, 2019, respectively, compared to 3.35% and 3.34%, respectively, in the same periods of the prior year.

Non-Interest Expense 
 
Non-interest expense for the three and six months ended June 30, 2019 was $180.4 million and $352.0 million, respectively a decrease of $15.2 million and $29.7 million, respectively, or 8% for both periods as compared to the same periods in 2018. The following table presents the key elements of non-interest expense for the three and six months ended June 30, 2019 and 2018
 
Non-Interest Expense 
(in thousands)
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
Change Amount
 
Change Percent
 
2019
 
2018
 
Change Amount
 
Change Percent
Salaries and employee benefits
$
104,049

 
$
113,340

 
$
(9,291
)
 
(8
)%
 
$
204,707

 
$
219,891

 
$
(15,184
)
 
(7
)%
Occupancy and equipment, net
36,032

 
37,584

 
(1,552
)
 
(4
)%
 
72,277

 
76,245

 
(3,968
)
 
(5
)%
Communications
3,906

 
4,447

 
(541
)
 
(12
)%
 
8,126

 
8,880

 
(754
)
 
(8
)%
Marketing
4,312

 
3,088

 
1,224

 
40
 %
 
7,038

 
4,888

 
2,150

 
44
 %
Services
13,227

 
16,627

 
(3,400
)
 
(20
)%
 
25,437

 
31,688

 
(6,251
)
 
(20
)%
FDIC assessments
2,837

 
4,692

 
(1,855
)
 
(40
)%
 
5,779

 
9,172

 
(3,393
)
 
(37
)%
Loss (gain) on other real estate owned, net
2,678

 
(92
)
 
2,770

 
nm

 
2,627

 
(130
)
 
2,757

 
nm

Intangible amortization
1,405

 
1,542

 
(137
)
 
(9
)%
 
2,809

 
3,083

 
(274
)
 
(9
)%
Other expenses
11,969

 
14,344

 
(2,375
)
 
(17
)%
 
23,207

 
27,968

 
(4,761
)
 
(17
)%
Total
$
180,415

 
$
195,572

 
$
(15,157
)
 
(8
)%
 
$
352,007

 
$
381,685

 
$
(29,678
)
 
(8
)%
nm = Not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

54



Salaries and employee benefits decreased by $9.3 million and $15.2 million for the three and six months ended June 30, 2019, as compared to the same periods in the prior year. The decrease in salaries and employee benefits for the three and six months ended June 30, 2019, is primarily related to lower compensation, payroll taxes, and employee severance, resulting from the Company's operational efficiency initiatives as well as lower group insurance rates during the period.

Occupancy and equipment expense decreased by $1.6 million and $4.0 million, respectively, for the three and six months ended June 30, 2019, as compared to the same periods in the prior year resulting from the reduction in the number of store locations.

Marketing expense increased by $1.2 million and $2.2 million, respectively, for the three and six months ended June 30, 2019, as compared to the same periods in the prior year due to the marketing efforts to drive our strategic initiatives, including to gain traction with wholesale and middle-market customers and to promote our Go-To app, which launched in April 2019, as well as digital marketing for new customers.

Services expense decreased by $3.4 million and $6.3 million, respectively, for the three and six months ended June 30, 2019, as compared to the same periods in the prior year, primarily related to lower consulting fees to assist with the identification and implementation of organizational simplification and efficiencies in the same periods of the prior year.

FDIC assessments decreased by $1.9 million and $3.4 million for the three and six months ended June 30, 2019, due to the discontinuation of the large-institution surcharge that had been included in the assessment in the prior periods.

The increased loss on other real estate owned for both the three and six months ended June 30, 2019, was due to a valuation adjustment on one property held.

Other non-interest expense decreased by $2.4 million and $4.8 million for the three and six months ended June 30, 2019, as compared to the same periods in the prior year. The decrease is primarily related to a decrease in exit and disposal costs during the three and six months ended June 30, 2019.

Income Taxes 
 
The Company's consolidated effective tax rate as a percentage of pre-tax income for the three and six months ended June 30, 2019, was 25.1% and 24.9%, as compared to 24.7% and 24.3% for the three and six months ended June 30, 2018. The effective tax rates differed from the statutory rate principally because of state taxes, 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, non-deductible FDIC premiums and tax credits arising from low income housing investments.


55


FINANCIAL CONDITION 
 
Investment Securities 
 
Equity and other securities were $66.4 million at June 30, 2019, up from $61.8 million at December 31, 2018.
 
Investment securities available for sale were $2.7 billion as of June 30, 2019, compared to $3.0 billion at December 31, 2018.  The decrease was due to sales and paydowns of $662.5 million, partially offset by purchases of $322.4 million of investment securities as well as an increase of $81.2 million in fair value of investment securities available for sale.

Investment securities held to maturity were $3.4 million as of June 30, 2019, comparable to $3.6 million at December 31, 2018.
 
The following tables present the available for sale and held to maturity investment securities portfolio by major type as of June 30, 2019 and December 31, 2018

 Investment Securities Composition
(dollars in thousands)
Investment Securities Available for Sale
 
June 30, 2019
 
December 31, 2018
 
Fair Value
 
%
 
Fair Value
 
%
U.S. Treasury and agencies
$
337,101

 
13
%
 
$
39,656

 
1
%
Obligations of states and political subdivisions
270,952

 
10
%
 
309,171

 
10
%
Residential mortgage-backed securities and collateralized mortgage obligations
2,090,345

 
77
%
 
2,628,281

 
89
%
Total
$
2,698,398

 
100
%
 
$
2,977,108

 
100
%

(dollars in thousands)
Investment Securities Held to Maturity
 
June 30, 2019
 
December 31, 2018
 
Amortized
Cost
 
%
 
Amortized
Cost
 
%
Residential mortgage-backed securities and collateralized mortgage obligations
$
3,416

 
100
%
 
$
3,606

 
100
%
Total
$
3,416

 
100
%
 
$
3,606

 
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.   

In June 2019, the Company completed a strategic restructuring of a portion of the available for sale debt securities portfolio. This restructuring resulted in the sale of certain securities at a gross loss of $7.3 million. This was a tactical effort to reduce interest rate sensitivity for a potentially decreasing interest rate environment, increase operational efficiency, and improve the cash liquidity position of the Company.
 
Gross unrealized losses in the available for sale investment portfolio were $13.4 million at June 30, 2019.  This consisted primarily of unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations of $13.1 million. The unrealized losses were attributable to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities and are not attributable to changes in credit quality. In the opinion of management, these securities are considered only temporarily impaired due to these changes in market interest rates.


56


Restricted Equity Securities 
 
Restricted equity securities were $43.1 million at June 30, 2019 and $40.3 million at December 31, 2018, the majority of which represents the Bank's investment in the FHLB of Des Moines. The increase is attributable to purchases of FHLB stock during the period due to additional borrowing activity. 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 June 30, 2019 were $21.0 billion, an increase of $530.7 million as compared to December 31, 2018. The increase is attributable to net new loan and lease originations of $619.3 million, partially offset by loans sold of $54.4 million and charge-offs of $33.9 million.

The following table presents the concentration distribution of the loan and lease portfolio, net of deferred fees and costs, as of June 30, 2019 and December 31, 2018.
 
Loan and Lease Concentrations 
 (dollars in thousands)
June 30, 2019
 
December 31, 2018
 
Amount
 
Percentage
 
Amount
 
Percentage
Commercial real estate
 
 
 
 
 
 
 
Non-owner occupied term, net
$
3,537,084

 
16.9
%
 
$
3,573,065

 
17.5
%
Owner occupied term, net
2,396,674

 
11.4
%
 
2,480,371

 
12.1
%
Multifamily, net
3,341,547

 
15.9
%
 
3,304,763

 
16.2
%
Construction & development, net
732,932

 
3.5
%
 
736,254

 
3.6
%
Residential development, net
199,421

 
1.0
%
 
196,890

 
1.0
%
Commercial
 
 
 
 
 
 
 
Term, net
2,271,346

 
10.9
%
 
2,232,923

 
10.9
%
Lines of credit & other, net
1,280,587

 
6.1
%
 
1,169,525

 
5.7
%
Leases & equipment finance, net
1,449,579

 
6.9
%
 
1,330,155

 
6.5
%
Residential
 
 
 
 
 
 
 
Mortgage, net
3,995,643

 
19.1
%
 
3,635,073

 
17.8
%
Home equity loans & lines, net
1,215,215

 
5.8
%
 
1,176,477

 
5.8
%
Consumer & other, net
533,343

 
2.5
%
 
587,170

 
2.9
%
Total, net of deferred fees and costs
$
20,953,371

 
100.0
%
 
$
20,422,666

 
100.0
%


57


Asset Quality and Non-Performing Assets 

Non-Performing Assets 

The following table summarizes our non-performing assets and restructured loans as of June 30, 2019 and December 31, 2018:   
 (dollars in thousands)
June 30, 2019
 
December 31, 2018
Loans and leases on non-accrual status
$
35,022

 
$
50,823

Loans and leases past due 90 days or more and accruing (1)
35,700

 
36,444

Total non-performing loans and leases
70,722

 
87,267

Other real estate owned
8,423

 
10,958

Total non-performing assets
$
79,145

 
$
98,225

Restructured loans (2)
$
15,267

 
$
13,924

Allowance for loan and lease losses
$
151,069

 
$
144,871

Reserve for unfunded commitments
4,857

 
4,523

Allowance for credit losses
$
155,926

 
$
149,394

Asset quality ratios:
 
 
 
Non-performing assets to total assets
0.28
%
 
0.36
%
Non-performing loans and leases to total loans and leases
0.34
%
 
0.43
%
Allowance for loan and leases losses to total loans and leases
0.72
%
 
0.71
%
Allowance for credit losses to total loans and leases
0.74
%
 
0.73
%
Allowance for credit losses to total non-performing loans and leases
220
%
 
171
%
(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 $5.4 million and $8.9 million at June 30, 2019 and December 31, 2018, respectively.
(2) 
Represents accruing restructured loans performing according to their restructured terms. 

The purchased non-credit impaired loans had remaining discount that is expected to accrete into interest income over the life of the loans of $19.0 million and $24.7 million, as of June 30, 2019 and December 31, 2018, respectively. The purchased credit impaired loan pools had remaining discounts of $22.3 million and $24.9 million, as of June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018, impaired loans of $15.3 million and $13.9 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.


58


Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments 
 
The ALLL totaled $151.1 million at June 30, 2019, an increase of $6.2 million from $144.9 million at December 31, 2018. The following table shows the activity in the ALLL for the three and six months ended June 30, 2019 and 2018
 
Allowance for Loan and Lease Losses 

 (dollars in thousands)
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Balance, beginning of period
$
144,872

 
$
141,933

 
$
144,871

 
$
140,608

Loans charged-off:
 
 
 
 
 
 
 
Charge-offs
(16,707
)
 
(14,815
)
 
(33,859
)
 
(30,627
)
Recoveries
3,552

 
4,119

 
7,021

 
7,600

Net charge-offs
(13,155
)
 
(10,696
)
 
(26,838
)
 
(23,027
)
Provision for loan and lease losses
19,352

 
13,319

 
33,036

 
26,975

Balance, end of period
$
151,069

 
$
144,556

 
$
151,069

 
$
144,556

As a percentage of average loans and leases (annualized):
 
 
 
 
 
 
 
Net charge-offs
0.26
%
 
0.22
%
 
0.26
%
 
0.24
%
Provision for loan and lease losses
0.38
%
 
0.28
%
 
0.33
%
 
0.28
%
Recoveries as a percentage of charge-offs
21.26
%
 
27.80
%
 
20.74
%
 
24.81
%

The increase in allowance for loan and lease losses as of June 30, 2019 compared to the same period of the prior year was primarily attributable to growth in the loan and lease portfolio. 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 June 30, 2019 and December 31, 2018
(dollars in thousands)
June 30, 2019
 
December 31, 2018
 
Amount
 
% Loans to total loans
 
Amount
 
% Loans to total loans
Commercial real estate
$
48,997

 
48.7
%
 
$
47,904

 
50.4
%
Commercial
68,353

 
23.9
%
 
63,957

 
23.1
%
Residential
23,654

 
24.9
%
 
22,034

 
23.6
%
Consumer & other
10,065

 
2.5
%
 
10,976

 
2.9
%
Allowance for loan and lease losses
$
151,069

 
 
 
$
144,871

 
 

At June 30, 2019, the recorded investment in loans classified as impaired totaled $27.3 million, with a corresponding valuation allowance (included in the allowance for loan and lease losses) of $170,000.  The valuation allowance on impaired loans represents the impairment reserves on performing current and former restructured loans and nonaccrual loans. At December 31, 2018, the total recorded investment in impaired loans was $42.3 million, with a corresponding valuation allowance (included in the allowance for loan and lease losses) of $180,000.  


59


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

(in thousands)
Three months ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Balance, beginning of period
$
4,654

 
$
4,129

 
$
4,523

 
$
3,963

Net charge to other expense
203

 
1

 
334

 
167

Balance, end of period
$
4,857

 
$
4,130

 
$
4,857

 
$
4,130

 
We believe that the ALLL and RUC at June 30, 2019 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 and six months ended June 30, 2019 and 2018
 
Summary of Residential Mortgage Servicing Rights 
 (in thousands)
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Balance, beginning of period
$
158,946

 
$
164,760

 
$
169,025

 
$
153,151

Additions for new MSR capitalized
5,492

 
6,860

 
9,379

 
13,390

Changes in fair value:
 
 
 
 
 
 
 
Changes due to collection/realization of expected cash flows over time
(6,905
)
 
(5,903
)
 
(13,336
)
 
(12,101
)
Changes due to valuation inputs or assumptions (1)
(17,753
)
 
500

 
(25,288
)
 
11,777

Balance, end of period
$
139,780

 
$
166,217

 
$
139,780

 
$
166,217

(1) 
The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates.

Information related to our residential serviced loan portfolio as of June 30, 2019 and December 31, 2018 was as follows: 
(dollars in thousands)
June 30, 2019
 
December 31, 2018
Balance of loans serviced for others
$
15,796,102

 
$
15,978,885

MSR as a percentage of serviced loans
0.88
%
 
1.06
%

Mortgage servicing rights are adjusted to fair value quarterly with the change recorded in mortgage banking revenue. The value of servicing rights can fluctuate based on changes in interest rates and other factors. Generally, as interest rates decline and loans are prepaid to take advantage of a refinance incentive, the total value of existing servicing rights declines as no further servicing fees are collected. Mortgage rates decreased during the three and six months ended June 30, 2019 which caused prepayment speed assumptions to rise.


60


The fair value of the MSR portfolio decreased $17.8 million and $25.3 million, respectively, due to changes to inputs to the valuation model including changes in discount rates and prepayment speeds and decreased $6.9 million and $13.3 million, respectively, due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs during the three and six months ended June 30, 2019. The decrease in the fair value of the MSR portfolio for the three and six months ended June 30, 2018, due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs were $5.9 million and $12.1 million, respectively, offset by an increase of $500,000 and $11.8 million, respectively, due to changes in the valuation inputs and assumptions.
 
Goodwill and Other Intangible Assets
 
At June 30, 2019 and December 31, 2018, 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 six months ended June 30, 2019.
 
At June 30, 2019, we had other intangible assets of $21.2 million, compared to $24.0 million at December 31, 2018.   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 year life. The decrease from December 31, 2018 relates to the amortization of the other intangible assets of $2.8 million for the six months ended June 30, 2019.
  

61


Deposits 

Total deposits were $21.8 billion at June 30, 2019, an increase of $681.5 million, as compared to December 31, 2018. The increase is attributable to growth in time deposits, money market deposits and non-interest bearing demand deposits.
 
The following table presents the deposit balances by major category as of June 30, 2019 and December 31, 2018
(dollars in thousands) 
June 30, 2019
 
December 31, 2018
 
Amount
 
Percentage
 
Amount
 
Percentage
Non-interest bearing demand
$
6,771,087

 
31
%
 
$
6,667,467

 
32
%
Interest bearing demand
2,355,473

 
11
%
 
2,340,471

 
11
%
Money market
6,789,036

 
31
%
 
6,645,390

 
31
%
Savings
1,446,332

 
7
%
 
1,492,685

 
7
%
Time, $100,000 or greater
3,289,216

 
15
%
 
2,947,084

 
14
%
Time, less than $100,000
1,167,869

 
5
%
 
1,044,389

 
5
%
Total
$
21,819,013

 
100
%
 
$
21,137,486

 
100
%
 
The Company's brokered deposits totaled $1.6 billion at June 30, 2019, compared to $1.4 billion at December 31, 2018.  The increase in brokered deposits serves to support our on-balance-sheet liquidity position.

Borrowings 
 
At June 30, 2019, the Bank had outstanding $308.1 million of securities sold under agreements to repurchase, an increase of $10.9 million from December 31, 2018. At both June 30, 2019 and December 31, 2018, there were no outstanding federal funds purchased balances. The Bank had outstanding term debt consisting of advances from the FHLB of $821.7 million at June 30, 2019, which increased $69.9 million from December 31, 2018. The FHLB advances are secured by investment securities and loans secured by real estate. The FHLB advances have fixed interest rates ranging from 1.40% to 7.10% and mature in 2019 through 2030.

Junior Subordinated Debentures 
 
We had junior subordinated debentures with carrying values of $365.6 million and $389.6 million at June 30, 2019 and December 31, 2018, respectively.  The decrease is due to the change in fair value for the junior subordinated debentures elected to be carried at fair value. As of June 30, 2019, 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. 
 
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 8% of total deposits at June 30, 2019 and 9% of total deposits at December 31, 2018. 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.  
 

62


The Bank had available lines of credit with the FHLB totaling $7.3 billion at June 30, 2019, 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 $637.3 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 $460.0 million at June 30, 2019. 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 $113.0 million of dividends paid by the Bank to the Company in the six months ended June 30, 2019.  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 used in operating activities was $117.8 million during the six months ended June 30, 2019, with the difference between cash used in operating activities and net income consisting of originations of loans held for sale of $1.2 billion, the increase in other assets of $115.0 million, gain on equity securities of $83.3 million, and gain on sale of loans of $34.5 million, offset by proceeds from the sale of loans held for sale of $1.0 billion, a loss on fair value of residential mortgage servicing rights carried at fair value of $38.6 million, provision for loan and lease losses of $33.0 million, and depreciation, amortization and accretion of $22.6 million. This compares to net cash provided by operating activities of $49.4 million during the six months ended June 30, 2018, with the difference between cash provided by operating activities and net income largely consisting of originations of loans held for sale of $1.5 billion, offset by proceeds from the sale of loans held for sale of $1.4 billion.
 
Net cash of $188.7 million used in investing activities during the six months ended June 30, 2019, consisted principally of net loan originations of $619.3 million, purchases of investment securities, available for sale of $322.4 million, purchase of restricted equity securities of $205.4 million, and net cash paid in divestiture of stores of $44.6 million, offset by proceeds from investment securities available for sale of $662.5 million, redemption of restricted equity securities of $202.6 million, proceeds from sale of Visa Inc. Class B common stock of $81.9 million, and proceeds from sales of loans of $58.5 million. This compares to net cash of $550.2 million used in investing activities during the six months ended June 30, 2018, which consisted principally of net loan originations of $687.5 million, purchases of investment securities available for sale of $134.1 million and purchases of restricted equity securities of $45.6 million, offset by proceeds from investment securities available for sale of $227.9 million, redemption of restricted equity securities of $46.8 million and proceeds from the sale of loans and leases of $41.6 million.
 
Net cash of $717.6 million provided by financing activities during the six months ended June 30, 2019 primarily consisted of $731.2 million net increase in deposits, proceeds from term debt borrowings of $330.7 million and a net increase in securities sold under agreements to repurchase of $10.9 million, offset by $260.7 million repayment of term debt and $92.6 million of dividends paid on common stock. This compares to net cash of $669.6 million provided by financing activities during the six months ended June 30, 2018, which consisted primarily of $796.6 million net increase in deposits and proceeds from term debt borrowings of $50.0 million, offset by $83.7 million of dividends paid on common stock, $50.7 million repayment of term debt, a net decrease in securities sold under agreements to repurchase of $20.6 million, $12.5 million in the repurchase and retirement of common stock and $10.6 million repayment on junior subordinated debentures.
 
Although we expect the Bank's and the Company's liquidity positions to remain satisfactory during 2019, it is possible that our deposit growth for 2019 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.
  
Off-balance-Sheet Arrangements 
 
Information regarding Off-Balance-Sheet Arrangements is included in Note 6 of the Notes to Condensed Consolidated Financial Statements.
  
Concentrations of Credit Risk 

Information regarding Concentrations of Credit Risk is included in Note 6 of the Notes to Condensed Consolidated Financial Statements.

63



Capital Resources 
 
Shareholders' equity at June 30, 2019 was $4.2 billion, an increase of $172.1 million from December 31, 2018. The increase in shareholders' equity during the six months ended June 30, 2019 was principally due to net income and other comprehensive income for the period, offset by declared common dividends.

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 and six months ended June 30, 2019 and 2018:   

Cash Dividends and Payout Ratios per Common Share 
 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
June 30, 2019
 
June 30, 2018
Dividend declared per common share
$
0.21

 
$
0.20

 
$
0.42

 
$
0.40

Dividend payout ratio
41
%
 
67
%
 
50
%
 
61
%

As of June 30, 2019, a total of 10.2 million shares are available for repurchase under the Company's current share repurchase plan. During the six months ended June 30, 2019, no shares were repurchased under this plan. The Board of Directors approved an extension of the repurchase plan to July 31, 2021. 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. 


64


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 June 30, 2019 and December 31, 2018
 
  (dollars in thousands)
Actual
 
For Capital Adequacy purposes
 
To be Well Capitalized
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Total Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
3,019,856

 
13.72
%
 
$
1,760,936

 
8.00
%
 
$
2,201,169

 
10.00
%
Umpqua Bank
$
2,859,453

 
13.01
%
 
$
1,758,676

 
8.00
%
 
$
2,198,346

 
10.00
%
Tier I Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,412,930

 
10.96
%
 
$
1,320,702

 
6.00
%
 
$
1,760,936

 
8.00
%
Umpqua Bank
$
2,703,566

 
12.30
%
 
$
1,319,007

 
6.00
%
 
$
1,758,676

 
8.00
%
Tier I Common
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,412,930

 
10.96
%
 
$
990,526

 
4.50
%
 
$
1,430,760

 
6.50
%
Umpqua Bank
$
2,703,566

 
12.30
%
 
$
989,255

 
4.50
%
 
$
1,428,925

 
6.50
%
Tier I Capital
 
 
 
 
 
 
 
 
 
 
 
(to Average Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,412,930

 
9.31
%
 
$
1,036,514

 
4.00
%
 
$
1,295,642

 
5.00
%
Umpqua Bank
$
2,703,566

 
10.44
%
 
$
1,035,739

 
4.00
%
 
$
1,294,674

 
5.00
%
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Total Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,916,143

 
13.51
%
 
$
1,727,280

 
8.00
%
 
$
2,159,100

 
10.00
%
Umpqua Bank
$
2,765,748

 
12.83
%
 
$
1,724,757

 
8.00
%
 
$
2,155,946

 
10.00
%
Tier I Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,315,750

 
10.73
%
 
$
1,295,460

 
6.00
%
 
$
1,727,280

 
8.00
%
Umpqua Bank
$
2,616,456

 
12.14
%
 
$
1,293,568

 
6.00
%
 
$
1,724,757

 
8.00
%
Tier I Common
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,315,750

 
10.73
%
 
$
971,595

 
4.50
%
 
$
1,403,415

 
6.50
%
Umpqua Bank
$
2,616,456

 
12.14
%
 
$
970,176

 
4.50
%
 
$
1,401,365

 
6.50
%
Tier I Capital
 
 
 
 
 
 
 
 
 
 
 
(to Average Assets)
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
2,315,750

 
9.31
%
 
$
994,905

 
4.00
%
 
$
1,243,631

 
5.00
%
Umpqua Bank
$
2,616,456

 
10.53
%
 
$
994,268

 
4.00
%
 
$
1,242,835

 
5.00
%
 
Item 3.             Quantitative and Qualitative Disclosures about Market Risk 
 
Our assessment of market risk as of June 30, 2019 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, 2018.
  

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Table of Contents

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 June 30, 2019
 
No change in our internal controls occurred during the second quarter of 2019 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, 2018.   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 June 30, 2019
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
4/1/19 - 4/30/19
 
1,797

 
$
17.33

 

 
10,155,429

5/1/19 - 5/31/19
 
1,849

 
$
16.65

 

 
10,155,429

6/1/19 - 6/30/19
 

 
$

 

 
10,155,429

Total for quarter
 
3,646

 
$
16.98

 

 
 
 
(1)
Common shares repurchased by the Company during the quarter consist of cancellation of 3,646 shares to be issued upon vesting of restricted stock awards to pay withholding taxes. During the three months ended June 30, 2019, 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, 2021. As of June 30, 2019, a total of 10.2 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.
 
 
10.1*
 
 
31.1
 
 
31.2
 
 
31.3
 
 
32
 
 
101.INS
Inline XBRL Instance Document - – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document
 
 
101.SCH
Inline XBRL Taxonomy Extension Schema Document
 
 
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
 
 
104
The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, formatted in Inline XBRL (included in Exhibit 101)
 
 
*
Indicates compensatory plan or arrangement
(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


67

Table of Contents

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
August 6, 2019
/s/ Cort L. O'Haver                                           
 
 
Cort L. O'Haver
President and Chief Executive Officer  
 
 
 
Dated
August 6, 2019
/s/ Ronald L. Farnsworth
 
 
Ronald L. Farnsworth  
Executive Vice President/ Chief Financial Officer and 
Principal Financial Officer
 
 
 
Dated
August 6, 2019
/s/ Neal T. McLaughlin
 
 
Neal T. McLaughlin                                     
Executive Vice President/Treasurer and 
Principal Accounting Officer

68


AMENDMENT TO
EMPLOYMENT AGREEMENT

This Amendment to Employment Agreement (the “Amendment”) is dated effective July 18, 2019 and amends the Employment Agreement by and between Umpqua Holdings Corporation and the undersigned officer (as previously amended, the “Employment Agreement”).

1.    The purpose of this Amendment is to extend the term of the Employment Agreement, which is set to expire December 31, 2019.

2    The duration of the Employment Agreement is hereby amended and extended to December 31, 2024, unless sooner terminated as set forth in the Employment Agreement.

3.    Except as specifically set forth herein, the Employment Agreement shall continue in full force and effect as written.

UMPQUA HOLDINGS CORPORATION

By:
 
Name:
 
Title:
 
 
 
OFFICER
 
 
 
 
Name:
 
 
 
 
 





1


EXHIBIT 31.1 
CERTIFICATION OF 
CHIEF EXECUTIVE OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Cort L. O'Haver, certify that:  
1.
I have reviewed this quarterly report on Form 10-Q of Umpqua Holdings Corporation; 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and  
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent function): 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.  
Date: August 6, 2019
 
/s/ Cort L. O'Haver
 
Cort L. O'Haver
 
President and Chief Executive Officer
 
Umpqua Holdings Corporation




EXHIBIT 31.2 
CERTIFICATION OF 
PRINCIPAL FINANCIAL OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ronald L. Farnsworth, certify that:  
1.
I have reviewed this quarterly report on Form 10-Q of Umpqua Holdings Corporation; 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and  
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent function): 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 
Date: August 6, 2019
 
/s/ Ronald L. Farnsworth
 
Ronald L. Farnsworth
 
Executive Vice President/Chief Financial Officer and
 
Principal Financial Officer
 
Umpqua Holdings Corporation




EXHIBIT 31.3 
CERTIFICATION OF 
PRINCIPAL ACCOUNTING OFFICER UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Neal T. McLaughlin, certify that:  
1.
I have reviewed this quarterly report on Form 10-Q of Umpqua Holdings Corporation; 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 
4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and  
5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent function): 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. 
Date: August 6, 2019
 
/s/ Neal T. McLaughlin
 
Neal T. McLaughlin
 
Executive Vice President/Treasurer and
 
Principal Accounting Officer
 
Umpqua Holdings Corporation




Exhibit 32 
CERTIFICATION OF 
CHIEF EXECUTIVE OFFICER, PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER UNDER SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 
This certification is given by the undersigned Chief Executive Officer, Principal Financial Officer and Principal Accounting Officer of Umpqua Holdings Corporation (the “registrant”) pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  Each of the undersigned hereby certifies, with respect to the registrant’s quarterly report on Form 10-Q for the period ended June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), that: 
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the registrant. 


 
/s/ Cort L. O'Haver
 
Cort L. O'Haver
 
President and Chief Executive Officer
 
Umpqua Holdings Corporation
 
 
 
/s/ Ronald L. Farnsworth
 
Ronald L. Farnsworth
 
Executive Vice President/Chief Financial Officer and
 
Principal Financial Officer
 
Umpqua Holdings Corporation
 
 
 
/s/ Neal T. McLaughlin
 
Neal T. McLaughlin
 
Executive Vice President/Treasurer and
 
Principal Accounting Officer
 
Umpqua Holdings Corporation
 
 
 
August 6, 2019