NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Significant Accounting Policies
Nature of Operations-Umpqua Holdings Corporation (the "Company" or "Umpqua") is a financial holding company with headquarters in Portland, Oregon, that is engaged primarily in the business of commercial and retail banking and the delivery of retail brokerage services. The Company provides a wide range of banking, wealth management, mortgage and other financial services to corporate, institutional and individual customers through its wholly-owned banking subsidiary Umpqua Bank (the "Bank"). The Company engages in the retail brokerage business through its wholly-owned subsidiary Umpqua Investments, Inc. ("Umpqua Investments"). The Bank also has a wholly-owned subsidiary, Financial Pacific Leasing Inc. ("FinPac"), a commercial equipment leasing company.
Pivotus Ventures, Inc., was a wholly-owned subsidiary of Umpqua Holdings Corporation, which used a startup dynamic and collaboration with other institutions to validate, develop, and test new bank platforms. In October 2018, the Company sold substantially all of the assets of this subsidiary.
The Company and its subsidiaries are subject to regulation by certain federal and state agencies and undergo periodic examination by these regulatory agencies.
Basis of Financial Statement Presentation-The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with prevailing practices within the banking and securities industries. In preparing such financial statements, management is required to make certain estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses, the valuation of mortgage servicing rights, the fair value of junior subordinated debentures, and the valuation of goodwill.
Consolidation-The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, including the Bank and Umpqua Investments. All significant intercompany balances and transactions have been eliminated in consolidation. As of December 31, 2019, the Company had 23 wholly-owned trusts ("Trusts") that were formed to issue trust preferred securities and related common securities of the Trusts. The Company has not consolidated the accounts of the Trusts in its consolidated financial statements as they are considered to be variable interest entities for which the Company is not a primary beneficiary. As a result, the junior subordinated debentures issued by the Company to the Trusts are reflected on the Company's consolidated balance sheet as junior subordinated debentures.
Subsequent events-The Company has evaluated events and transactions through the date the consolidated financial statements were issued for potential recognition or disclosure.
Cash and Cash Equivalents-Cash and cash equivalents include cash and due from banks and temporary investments which are federal funds sold and interest bearing balances due from other banks. Cash and cash equivalents generally have a maturity of 90 days or less at the time of purchase.
Equity and Other Securities-Equity and other securities are carried at fair value with realized and unrealized gains or losses recorded in non-interest income.
Investment Securities-Debt securities are classified as held to maturity if the Company has both the intent and ability to hold those securities to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of purchase premiums and accretion of purchase discounts, computed by the effective interest method over their contractual lives.
Debt securities are classified as available for sale if the Company intends and has the ability to hold those securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell a debt security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized holding gains or losses are included in other comprehensive income ("OCI") as a separate component of shareholders' equity, net of tax. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.
The Company reviews 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 the Company intends to sell a security or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis of the investment, which may be maturity, and other factors. For debt securities, if the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security, but does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings.
Loans Held for Sale-The Company has elected to account for residential mortgage loans held for sale at fair value. Fair value is determined based on quoted secondary market prices for similar loans, including the implicit fair value of embedded servicing rights. The change in fair value of loans held for sale is primarily driven by changes in interest rates subsequent to loan funding and changes in the fair value of the related servicing asset, resulting in revaluation adjustments to the recorded fair value. The inputs used in the fair value measurements are considered Level 2 inputs. The use of the fair value option allows the change in the fair value of loans to more effectively offset the change in the fair value of derivative instruments that are used as economic hedges to loans held for sale. Loan origination fees and direct origination costs are recognized immediately in net income. Interest income on loans held for sale is included in interest income in the Consolidated Statements of Income and recognized when earned. Loans held for sale are placed on nonaccrual in a manner consistent with loans held for investment. The Company recognizes the gain or loss on the sale of loans when the sales criteria for derecognition are met.
Acquired Loans and Leases-Purchased loans and leases are recorded at their fair value at the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased impaired or purchased non-impaired. Purchased impaired loans reflect credit deterioration since origination such that it is probable at acquisition that the Company will be unable to collect all contractually required payments.
Purchased impaired loans are aggregated into pools based on individually evaluated common risk characteristics and aggregate expected cash flows are estimated for each pool. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation. The risk characteristics used to aggregate the purchased impaired loans into different pools include risk rating, underlying collateral, type of interest rate (fixed or adjustable), types of amortization, loan purpose, and other similar factors. A loan will be removed from a pool of loans only if the loan is sold, foreclosed, or assets are received in full satisfaction of the loan, and will be removed from the pool at its carrying value. If an individual loan is removed from a pool of loans, the difference between its relative carrying amount and the cash, fair value of the collateral, or other assets received will be recognized in income immediately as interest income on loans and would not affect the effective yield used to recognize the accretable yield on the remaining pool. If, at acquisition, the loans are collateral dependent and acquired primarily for the rewards of ownership of the underlying collateral, or if cash flows expected to be collected cannot be reasonably estimated, no accrual of income occurs.
The cash flows expected to be received over the life of the pool are estimated by management. These cash flows are input into a loan accounting system which calculates the carrying values of the pools and underlying loans, book yields, effective interest income and impairment, if any, based on actual and projected events. Default rates, loss severity, and prepayment speed assumptions are periodically reassessed and updated within the accounting system to update management's expectation of future cash flows. The excess of the cash flows expected to be collected over a pool's carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the pool using the effective yield method. The accretable yield may change due to changes in the timing and amounts of expected cash flows. Changes in the accretable yield are disclosed quarterly.
The excess of the undiscounted contractual amounts due over the cash flows expected to be collected is considered to be the nonaccretable difference. The nonaccretable difference represents the estimate of the credit losses expected to occur and was considered in determining the fair value of the loans as of the acquisition date. Subsequent to the acquisition date, any increases in expected cash flows over those expected at the purchase date in excess of fair value are adjusted through a change to the accretable yield on a prospective basis. Any subsequent decreases in expected cash flows attributable to credit deterioration are recognized by recording a provision for loan losses. The purchased impaired loans acquired are subject to the Company's credit review and monitoring.
The purchased impaired loan portfolio also includes revolving lines of credit with funded and unfunded commitments. The funded portion of these loans, representing the balances outstanding at the time of acquisition, are accounted for as purchased impaired. The unfunded portion of these loans as of the acquisition date as well as any additional advances on these loans subsequent to the acquisition date are not classified as purchased impaired, and are accounted for similar to newly originated loans.
For purchased non-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income using the effective interest method over the remaining period to contractual maturity or until repayment in full or sale of the loan.
Originated Loans and Leases-Loans are stated at the amount of unpaid principal, net of unearned income and any deferred fees or costs. All discounts and premiums are recognized over the contractual life of the loan as yield adjustments. Leases are recorded at the amount of minimum future lease payments receivable and estimated residual value of the leased equipment, net of unearned income and any deferred fees. Initial direct costs related to lease originations are deferred as part of the investment in direct financing leases and amortized over their term using the effective interest method. Unearned lease income is amortized over the term using the effective interest method.
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. The carrying value of impaired loans is based on the present value of expected future cash flows (discounted at each loan's effective interest rate), estimated note sale price, or, for collateral dependent loans, at fair value of the collateral, less selling costs. If the measurement of each impaired loan's value is less than the recorded investment in the loan, the Bank recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. This can be accomplished by charging off the impaired portion of the loan or establishing a specific component to be provided for in the allowance for loan and lease losses.
Income Recognition on Non-Accrual and Impaired Loans- Loans, including impaired loans, are classified as non-accrual if the collection of principal and interest is doubtful. Generally, this occurs when a loan is past due as to maturity or payment of principal or interest by 90 days or more, unless such loans are well-secured and in the process of collection. If a loan or portion thereof is partially charged-off, the loan is considered impaired and classified as non-accrual. Loans that are less than 90 days past due may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt.
Generally, when a loan is classified as non-accrual, all uncollected accrued interest is reversed from interest income and the accrual of interest income is terminated. In addition, any cash payments subsequently received are applied as a reduction of principal outstanding. In cases where the future collectability of the principal balance in full is expected, interest income may be recognized on a cash basis. A loan may be restored to accrual status when the borrower's financial condition improves so that full collection of future contractual payments is considered likely. For those loans placed on non-accrual status due to payment delinquency, return to accrual status will generally not occur until the borrower demonstrates repayment ability over a period of not less than six months.
Loans and leases are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms. All loans and leases determined to be impaired are individually assessed for impairment except for homogeneous loans which are collectively evaluated for impairment. The specific factors considered in determining that a loan or lease is impaired include borrower financial capacity, current economic, business and market conditions, collection efforts, collateral position and other factors deemed relevant. Generally, impaired loans and leases are placed on non-accrual status and all cash receipts are applied to the principal balance. Continuation of accrual status and recognition of interest income on impaired loans and leases is generally limited to performing restructured loans.
Loans are reported as troubled debt restructurings when the Bank grants a more than insignificant concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured loans are 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. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan and lease losses.
The decision to classify a loan as impaired is made by the Bank's Allowance for Loan and Lease Losses ("ALLL") Committee. The ALLL Committee meets regularly to review the status of all problem and potential problem loans. If the ALLL Committee concludes a loan is impaired but recovery of principal and interest is expected, an impaired loan may remain on accrual status.
Allowance for Loan and Lease Losses- The Company performs regular credit reviews of the loan and lease portfolio to determine the credit quality of the portfolio and the adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan. The Company's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the allowance for loan and lease losses. The ALLL Committee, is responsible for, among other things, regularly reviewing the ALLL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status. The ALLL Committee also approves removing loans and leases from impaired status. The Company's Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly basis.
Each risk rating is assessed an inherent credit loss factor that determines the amount of the allowance for loan and lease losses provided for that group of loans and leases with similar risk rating and loan type. Credit loss factors may vary by region based on management's belief that there may ultimately be different credit loss rates experienced in each region.
Regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. When the Company identifies a loan as impaired, the impairment is measured 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, the current fair value of the collateral is used, less selling costs, instead of discounted cash flows. If it is determined that the value of the impaired loan is less than the recorded investment in the loan, the Company will either recognize an impairment reserve as a specific component to be provided for in the allowance for loan and lease losses or will charge-off the impaired balance on collateral dependent loans if it is determined that such amount represents a confirmed loss. The combination of the risk rating-based allowance component and the impairment reserve allowance component lead to an allocated allowance for loan and lease losses.
The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less than 5% of the allowance, but may be maintained at higher levels during times of economic conditions characterized by falling real estate values. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends.
As adjustments become necessary, they are reported in earnings in the periods in which they become known as a change in the provision for loan and lease losses and a corresponding charge to the allowance. Loans, or portions thereof, deemed uncollectible are charged to the allowance. Provisions for losses, and recoveries on loans previously charged-off, are added to the allowance.
The adequacy of the ALLL is monitored on a regular basis and is based on management's evaluation of numerous factors. These factors include the quality of the current loan portfolio; the trend in the loan portfolio's risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information.
Management believes that the ALLL was adequate as of December 31, 2019. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. A substantial percentage of the Company's loan portfolio is secured by real estate, and as a result, a significant decline in real estate market values may require an increase in the ALLL. In addition, as of January 1, 2020, the Company has adopted Accounting Standards Update No. 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is commonly referred to as "CECL." This accounting change will have a significant impact on how our allowance for credit losses is calculated, as well as the related disclosures.
Reserve for Unfunded Commitments-A reserve for unfunded commitments ("RUC") is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with the Bank's commitment to lend funds under existing agreements, such as letters or lines of credit. Management determines the adequacy of the reserve for unfunded commitments based upon reviews of individual credit facilities, current economic conditions, the risk characteristics of the various categories of commitments and other relevant factors. The reserve is based on estimates, and ultimate losses may vary from the current estimates. These estimates are evaluated on a regular basis and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Draws on unfunded commitments that are considered uncollectible at the time funds are advanced are charged to the allowance for loan and lease losses. Provisions for unfunded commitment losses are added to the reserve for unfunded commitments, which is included in the Other Liabilities section of the consolidated balance sheets.
Loan and Lease Fees and Direct Loan Origination Costs-Origination and commitment fees and direct loan origination costs for loans and leases held for investment are deferred and recognized as an adjustment to the yield over the life of the portfolio loans and leases.
Restricted Equity Securities-Restricted equity securities consists mostly of the Bank's investment in Federal Home Loan Bank of Des Moines ("FHLB") stock that is carried at par value, which reasonably approximates its fair value. Management periodically evaluates FHLB stock for other-than-temporary or permanent impairment. Management's determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value.
As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At December 31, 2019, the Bank's minimum required investment in FHLB stock was $46.2 million. The Bank may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB.
Premises and Equipment-Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided over the estimated useful life of equipment, generally three to ten years, on a straight-line or accelerated basis. Depreciation is provided over the estimated useful life of premises, up to 39 years, on a straight-line or accelerated basis. Generally, leasehold improvements are amortized or accreted over the life of the related lease, or the life of the related asset, whichever is shorter. Expenditures for major renovations and betterments of the Company's premises and equipment are capitalized. The Company purchases, as well as internally develops and customizes, certain software to enhance or perform internal business functions. Software development costs incurred in the preliminary project stages are charged to non-interest expense. Costs associated with designing software configuration, installation, coding programs and testing systems are capitalized and amortized using the straight-line method over three to seven years. Implementation costs incurred for software that is part of a hosting arrangement are capitalized in other assets and amortized on a straight-line basis over the life of the contract. Management reviews long-lived assets anytime that a change in circumstance indicates that the carrying amount of these assets may not be recoverable.
Goodwill and Other Intangibles-Intangible assets are comprised of goodwill and other intangibles acquired in business combinations. Goodwill is not amortized but instead is periodically tested for impairment. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives, and also reviewed for impairment. Amortization of intangible assets is included in non-interest expense in the Consolidated Statements of Income.
On at least an annual basis, goodwill is assessed for impairment at the reporting unit level either qualitatively or quantitatively. Additionally, the Company performs a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, a significant decline in expected future cash flows; a sustained, significant decline in the Company's stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse action or assessment by a regulator; and unanticipated competition. If the qualitative assessment results indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative impairment test is required. If the fair value of the reporting unit is less than its carrying amount, an impairment charge would be recorded for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to the reporting unit. In 2019, the Company elected to change the date of the annual goodwill impairment analysis to October 31 from the previous date of December 31. The Company determined that the date change allows for additional resources and time to analyze the factors that could affect goodwill prior to financial statement reporting. The Company believes this change is immaterial and would not change the impairment analysis results.
Residential Mortgage Servicing Rights ("MSR")- The Company determines its classes of servicing assets based on the asset type being serviced along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets. The Company measures its residential mortgage servicing assets at fair value and reports changes in fair value through earnings. Fair value adjustments encompass market-driven valuation changes and the runoff in value that occurs from the passage of time, which are separately disclosed. Under the fair value method, the MSR is carried in the balance sheet at fair value and the changes in fair value are reported in earnings under the caption residential mortgage banking revenue, net in the period in which the change occurs.
The expected life of the loans underlying the MSR can vary from management's estimates due to prepayments by borrowers, especially when rates change significantly. Prepayments outside of management's estimates would impact the recorded value of the residential mortgage servicing rights. The value of the residential mortgage servicing rights is also dependent upon the discount rate used in the model, which management reviews on an ongoing basis. A significant increase in the discount rate would reduce the value of residential mortgage servicing rights.
GNMA Loan Sales-The Company originates government guaranteed loans which are sold to Government National Mortgage Association ("GNMA"). Pursuant to GNMA servicing guidelines, the Company has the unilateral right to repurchase certain delinquent loans (loans past due 90 days or more) sold to GNMA, if the loans meet defined delinquent loan criteria. As a result of this unilateral right, once the delinquency criteria have been met, and regardless of whether the repurchase option has been exercised, the Company accounts for the loans as if they had been repurchased. The Company recognizes these loans within loans and leases, net and also recognizes a corresponding liability that is recorded in other liabilities. If the loan is repurchased, the liability is settled and the loan remains.
SBA/USDA Loans Sales, Servicing, and Commercial Servicing Asset-The Bank, on a limited basis, sells or transfers loans, including the guaranteed portion of Small Business Administration ("SBA") and United States Department of Agriculture ("USDA") loans (with servicing retained) for cash proceeds. The Bank records a servicing asset when it sells a loan and retains the servicing rights. The servicing asset is recorded at fair value upon sale, and the fair value is estimated by discounting estimated net future cash flows from servicing using discount rates that approximate current market rates and using estimated prepayment rates. Subsequent to initial recognition, the servicing rights are carried at the lower of amortized cost or fair value, and are amortized in proportion to, and over the period of, the estimated net servicing income.
For purposes of evaluating and measuring impairment, the fair value of Commercial and SBA servicing rights are measured using a discounted estimated net future cash flow model as described above. Any impairment is measured as the amount by which the carrying value of servicing rights for an interest rate-stratum exceeds its fair value. No impairment charges were recorded for the years ended December 31, 2019, 2018 and 2017, related to these servicing assets.
A premium over the adjusted carrying value is received upon the sale of the guaranteed portion of an SBA or USDA loan. The Bank's investment in an SBA or USDA loan is allocated among the sold and retained portions of the loan based on the relative fair value of each portion at the time of loan origination, adjusted for payments and other activities. Because the portion retained does not carry an SBA or USDA guarantee, part of the gain recognized on the sold portion of the loan is deferred and amortized as a yield enhancement on the retained portion in order to obtain a market equivalent yield.
Revenue Recognition-The majority of the Company's revenues come from interest income and other sources, including loans, leases, securities, and derivatives. The Company recognizes income in accordance with the applicable accounting guidance for these revenue sources. The Company's revenues that are within the scope of Accounting Standards Codification Topic 606 are presented within non-interest income and include service charges on deposits, brokerage revenue, and interchange income. The gain (loss) on the sale of other real estate owned is included in non-interest expense.
Revenue within the contracts with customers guidance is recognized when obligations under the terms of a contract with customers are satisfied. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. When the amount of consideration is variable, the Company will only recognize revenue to the extent that it is probable that the cumulative amount recognized will not be subject to a significant reversal in the future. Substantially all of the Company's contracts with customers have expected durations of one year or less and payments are typically due when or as the services are rendered or shortly thereafter. When third parties are involved in providing services to customers, the Company recognizes revenue on a gross basis when it has control over those services being provided to the customer; otherwise, revenue is recognized for the net amount of any fee or commission.
Income Taxes-Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company's income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets ("DTA") if it is determined to be more likely than not, that all or some portion of the potential deferred tax asset will not be realized.
Deferred tax assets are recognized subject to management's judgment that realization is "more likely than not." Uncertain tax positions that meet the more likely than not recognition threshold are measured to determine the amount of benefit to recognize. An uncertain tax position is measured at the amount of benefit that management believes has a greater than 50% likelihood of realization upon settlement.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the DTA will or will not be realized. The Company's ultimate realization of the DTA is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment. The amount of deferred taxes recognized could be impacted by changes to any of these variables.
The Company earns Investment Tax Credits on certain equipment leases and use the deferral method to account for these tax credits. Under this method, the Investment Tax Credits are recognized as a reduction of depreciation expense over the life of the asset.
Derivatives-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. The commitments to originate mortgage loans held for sale and the related forward delivery contracts are considered derivatives. The Bank also executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are hedged by simultaneously entering into an offsetting interest rate swap that the Bank executes with a third party, such that the Bank minimizes its net risk exposure. The Company considers all free-standing derivatives as economic hedges and recognizes these derivatives as either assets or liabilities in the balance sheet, and requires measurement of those instruments at fair value through adjustments to current earnings. None of the Company's derivatives are designated as hedging instruments.
The fair value of the derivative residential mortgage loan commitments is estimated using the net present value of expected future cash flows. Assumptions used include pull-through rate assumption based on historical information, current mortgage interest rates, the stage of completion of the underlying application and underwriting process, direct origination costs yet to be incurred, the time remaining until the expiration of the derivative loan commitment, and the expected net future cash flows related to the associated servicing of the loan.
Operating Segments- Public enterprises are required to report certain information about their operating segments in its financial statements. They are also required to report certain enterprise-wide information about the Company's products and services, its activities in different geographic areas, and its reliance on major customers. The basis for determining the Company's operating segments is the manner in which management operates the business. The Company reports four primary segments, which are also the Company's reporting units: Wholesale Bank, Wealth Management, Retail Bank, and Home Lending with the remainder as Corporate and other.
Stock-Based Compensation- The Company recognizes expense in the income statement for the grant-date fair value of restricted stock awards issued to employees over the employees' requisite service period (generally the vesting period). An estimate of expected forfeitures is included in the calculation of stock-based compensation expense over the vesting period, and actual forfeitures are recognized when they occur. The fair value of the restricted stock awards is based on the Company's share price on the grant date. Restricted stock awards generally vest ratably over three to five years and are recognized as expense over that same period of time.
Certain restricted stock awards (performance share awards) are subject to performance-based and market-based vesting criteria in addition to a requisite service period and cliff vest based on those conditions at the end of three years. Compensation expense is recognized over the service period to the extent restricted stock awards are expected to vest. The fair value of the performance-based restricted stock award grants is estimated as of the grant date using a Monte Carlo simulation pricing model.
Earnings per Share ("EPS")- Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method. For all periods presented, restricted stock awards are potentially dilutive instruments issued by the Company. Undistributed losses are not allocated to the nonvested stock-based payment awards as the holders are not contractually obligated to share in the losses of the Company.
Fair Value Measurements- Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy for disclosure of assets and liabilities measured or disclosed at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect estimates about market data. In general, fair values determined by Level 1 inputs utilize quoted prices for identical assets or liabilities traded in active markets that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Application of new accounting guidance
As of January 1, 2019, the Company 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 right-of-use 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 7 - Leases for further discussion of the Company's accounting policies for leases within the scope of ASC 842.
ASC 842 provides for a number of practical expedients in transition. The Company elected the package of practical expedients, which permitted management to not reassess under the new standard the prior conclusions about lease identification, lease classification and initial direct costs. Management did not elect the use-of-hindsight or the practical expedient pertaining to land easement; the latter not being applicable to the Company. Management also did not elect the practical expedient to not separate lease and non-lease components on real estate leases where the Company is the lessee.
In addition, ASC 842 provides practical expedients for an entity's ongoing accounting. The Company elected the short-term lease recognition exemption for certain leases. This means, for those leases that have a term of less than 12 months, the Company did not recognize right-of-use ("ROU") assets or lease liabilities.
The Company adopted ASC 842 by electing the optional practical expedient to use the prospective approach, which allowed the Company to adopt the new standard with a cumulative effect adjustment as of the beginning of the year of adoption with prior year comparative financial information and disclosures remaining as previously reported. Consequently, no adjustments were made to the balance sheet prior to January 1, 2019, and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019. Adoption of the new standard resulted in the recognition of new lease ROU assets of $110.7 million and lease liabilities of $119.4 million on the balance sheet for operating leases as of December 31, 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 the consolidated net income and had no impact on cash flows.
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.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU was issued to simplify the subsequent measurement of goodwill and the amendment eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendment is effective for annual reporting periods beginning after December 31, 2019, with early adoption permitted. The Company early adopted the ASU as of October 1, 2019, to simplify the annual goodwill impairment analysis. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
Recently Issued 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 ("CECL"). The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates but will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for specified periods. The adoption date for the Company was January 1, 2020. The guidance was applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at January 1, 2020. However, certain provisions of the guidance are only required to be applied on a prospective basis.
CECL is not prescriptive in the methodology used to determine the expected credit loss estimate. Therefore, management has flexibility in selecting the methodology. The expected credit losses must be estimated over a financial asset's contractual term, adjusted for prepayments utilizing quantitative and qualitative factors. There are also specific considerations for purchased credit-deteriorated, troubled debt restructured, and collateral dependent loans. CECL also applies to the reserve for unfunded commitments.
The combination of the current expected credit loss, qualitative factors, collateral dependent, troubled debt restructuring, purchased credit deteriorated, and the reserve for unfunded commitments represent the allowance for credit losses ("ACL").
The estimate of expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is the starting point for estimating expected credit losses. Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics – e.g. underwriting standards, portfolio mix or asset terms, and differences in economic conditions – both current conditions and reasonable and supportable forecasts. When the Company is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial asset, it has estimated expected credit losses for the remaining life using an approach that reverts to historical credit loss information.
The Company utilizes complex models to obtain reasonable and supportable forecasts; most of the models calculate two predictive metrics, the probability of default ("PD") and loss given default ("LGD"). The PD measures the probability that a loan will default within a given time horizon and primarily measures the adequacy of the debtor's cash flow as the primary source of repayment of the loan or lease. The LGD is the expected loss which would be realized presuming a default has occurred and primarily measures the value of the collateral or other secondary source of repayment related to the collateral. The ACL is measured on a collective (pool) basis when similar characteristics exist. The Company has selected models at the portfolio level using a risk-based approach, with larger, more complex portfolios having more complex models.
The Bank established an Economic Forecast Committee ("EFC"). The purpose of the Committee is to, among other things, determine a reasonable and supportable forecast to be used in developing the Bank's estimate of expected credit losses on financial assets.
For ACL calculation purposes, the EFC considered the financial and economic environment at the time of assessment and different economic scenarios that differed in the levels of severity and sensitivity to the ACL results. The EFC determined the use of a consensus of third-party baseline forecasts was reasonable and supportable as it is based on multiple surveys of baseline forecasts of the U.S. economy from credible subject matter experts and institutions, giving greater consideration to forecasts that were produced most recently. In this consensus scenario, the probability that the economy will perform better than this consensus is equal to the probability that it will perform worse.
Loss factors from the models, prepayment speeds, and qualitative factors are inputs into the Company's CECL accounting application. Once this information is aggregated, the Company uses two methods to calculate the current expected credit loss: 1) the discounted cash flow ("DCF") method, which is used for all loans and leases except lines of credit and 2) the non-discounted cash flow method which is used for lines of credit. The DCF method utilizes the effective interest rate of individual assets to discount the expected credit losses adjusted for prepayments. The difference in the net present value and the amortized cost of the asset will result in the required allowance. The non-discounted cash flow method uses the exposure at default, along with the expected credit losses adjusted for prepayments to calculate the required allowance.
The Bank is finalizing data, model validation, and the assessment of the impact of adoption. Based on the Bank's portfolio composition as of December 31, 2019, and the current economic environment, the management estimates the new guidance will result in an allowance for loan and lease losses between $213 million to $219 million. It is estimated this increase will decrease the Bank's tier 1 capital by 24 to 26 basis points and increase the Bank's total risk-based capital by approximately 4 basis points.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The ASU was issued to improve the effectiveness of disclosures surrounding fair value measurements. The ASU removes numerous disclosures from Topic 820 including: transfers between level 1 and 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation process for level 3 fair value measurements. The ASU also modified and added disclosure requirements in regards to changes in unrealized gains and losses included in other comprehensive income, as well as the range and weighted average of unobservable inputs for level 3 fair value measurements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The guidance is not expected to have a significant impact on the Company's consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The ASU was issued in an effort to simplify accounting for income taxes by removing specific technical exceptions. Specifically, the guidance will remove the need for companies to analyze whether (1) the exception to the incremental approach for intra-period tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments, and (3) the exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses apply in a given period. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this ASU on the Company's consolidated financial statements.
Note 2 – Cash and Cash Equivalents
The Bank is required to maintain an average reserve balance with the Federal Reserve Bank or maintain such reserve balance in the form of cash. The amount of required reserve balance at December 31, 2019 and 2018 was approximately $145.6 million and $129.1 million, respectively, and was met by holding cash and maintaining an average balance with the Federal Reserve Bank.
The Company had restricted cash included in cash and due from banks on the balance sheet of $86.5 million and $37.4 million as of December 31, 2019 and 2018, respectively, relating mostly to collateral required on interest rate swaps as discussed in Note 19. At December 31, 2019 and 2018, there was $590,000 and $1.2 million, respectively, in restricted cash included in interest bearing cash and temporary investments on the balance sheet, relating to collateral requirements for derivatives for mortgage banking activities.
Note 3 – Investment Securities
The following tables present the amortized cost, unrealized gains, unrealized losses and approximate fair values of debt securities at December 31, 2019 and 2018:
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Amortized Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
Available for sale:
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
$
|
642,009
|
|
|
$
|
5,919
|
|
|
$
|
(4,324)
|
|
|
$
|
643,604
|
|
Obligations of states and political subdivisions
|
251,531
|
|
|
9,600
|
|
|
(37)
|
|
|
261,094
|
|
Residential mortgage-backed securities and collateralized mortgage obligations
|
1,896,708
|
|
|
18,962
|
|
|
(5,686)
|
|
|
1,909,984
|
|
Total available for sale securities
|
$
|
2,790,248
|
|
|
$
|
34,481
|
|
|
$
|
(10,047)
|
|
|
$
|
2,814,682
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities and collateralized mortgage obligations
|
$
|
3,260
|
|
|
$
|
1,003
|
|
|
$
|
—
|
|
|
$
|
4,263
|
|
Total held to maturity securities
|
$
|
3,260
|
|
|
$
|
1,003
|
|
|
$
|
—
|
|
|
$
|
4,263
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
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
|
|
Total available for sale securities
|
$
|
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
|
|
Total held to maturity securities
|
$
|
3,606
|
|
|
$
|
1,038
|
|
|
$
|
—
|
|
|
$
|
4,644
|
|
Debt securities that were in an unrealized loss position as of December 31, 2019 and 2018 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to increases in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral.
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
|
12 Months or Longer
|
|
|
|
Total
|
|
|
(in thousands)
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
$
|
313,169
|
|
|
$
|
4,324
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
313,169
|
|
|
$
|
4,324
|
|
Obligations of states and political subdivisions
|
4,611
|
|
|
30
|
|
|
1,906
|
|
|
7
|
|
|
6,517
|
|
|
37
|
|
Residential mortgage-backed securities and collateralized mortgage obligations
|
288,866
|
|
|
1,628
|
|
|
402,802
|
|
|
4,058
|
|
|
691,668
|
|
|
5,686
|
|
Total temporarily impaired securities
|
$
|
606,646
|
|
|
$
|
5,982
|
|
|
$
|
404,708
|
|
|
$
|
4,065
|
|
|
$
|
1,011,354
|
|
|
$
|
10,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
|
12 Months or Longer
|
|
|
|
Total
|
|
|
(in thousands)
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These unrealized losses on the Company's debt securities are due to increases in average market interest rates and are not due to the underlying credit of the issuers. The unrealized losses were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors the published credit ratings of the Company's securities for material rating or outlook changes.
As of December 31, 2019, 98% of the Company's obligations of states and political subdivision securities were rated A3/A- or higher by rating agencies. In addition, substantially all of these securities 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 December 31, 2019 are issued or guaranteed by government sponsored enterprises. It is expected that these securities will be settled at a price at least equal to the amortized cost of each investment.
Because the decline in fair value of the Company's securities 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 loss of $7.3 million. This was a tactical effort to reduce interest rate sensitivity for a potentially decreasing interest rate environment. The sales were primarily residential mortgage-backed securities and collateralized mortgage obligations and the purchases were non-callable agency bonds. The transaction resulted in an increased duration of the overall investment securities portfolio and a reduction in the portion of investments subject to prepayment.
The following table presents the contractual maturities of debt securities at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available For Sale
|
|
|
|
Held To Maturity
|
|
|
(in thousands)
|
Amortized Cost
|
|
Fair Value
|
|
Amortized Cost
|
|
Fair Value
|
Amounts maturing in:
|
|
|
|
|
|
|
|
Due within one year
|
$
|
24,535
|
|
|
$
|
24,556
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Due after one year through five years
|
55,511
|
|
|
56,266
|
|
|
—
|
|
|
—
|
|
Due after five years through ten years
|
836,024
|
|
|
842,546
|
|
|
15
|
|
|
16
|
|
Due after ten years
|
1,874,178
|
|
|
1,891,314
|
|
|
3,245
|
|
|
4,247
|
|
Total securities
|
$
|
2,790,248
|
|
|
$
|
2,814,682
|
|
|
$
|
3,260
|
|
|
$
|
4,263
|
|
The following table presents the gross realized gains and losses on the sale of debt securities available for sale for the years ended December 31, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
(in thousands)
|
Gain
|
|
|
Loss
|
|
|
Gain
|
|
|
Loss
|
|
Obligations of states and political subdivisions
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Residential mortgage-backed securities and collateralized mortgage obligations
|
144
|
|
|
7,345
|
|
|
14
|
|
|
—
|
|
Total gains and losses on sale of debt securities
|
$
|
161
|
|
|
$
|
7,345
|
|
|
$
|
14
|
|
|
$
|
—
|
|
The following table presents the gains and losses on equity securities for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
Unrealized gain (loss) recognized on equity securities held at the end of the period
|
$
|
1,660
|
|
|
$
|
(1,484)
|
|
Net gain recognized on equity securities sold during the period
|
81,815
|
|
|
—
|
|
Total gain (loss) on equity securities, net
|
$
|
83,475
|
|
|
$
|
(1,484)
|
|
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 December 31, 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
|
$
|
329,453
|
|
|
$
|
330,412
|
|
Other securities pledged principally to secure repurchase agreements
|
477,244
|
|
|
483,489
|
|
Total pledged securities
|
$
|
806,697
|
|
|
$
|
813,901
|
|
Note 4 – Loans and Leases
The following table presents the major types of loans and leases, net of deferred fees and costs, as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
Commercial real estate
|
|
|
|
Non-owner occupied term, net
|
$
|
3,545,566
|
|
|
$
|
3,573,065
|
|
Owner occupied term, net
|
2,496,088
|
|
|
2,480,371
|
|
Multifamily, net
|
3,514,774
|
|
|
3,304,763
|
|
Construction & development, net
|
678,740
|
|
|
736,254
|
|
Residential development, net
|
189,010
|
|
|
196,890
|
|
Commercial
|
|
|
|
Term, net
|
2,232,817
|
|
|
2,232,923
|
|
Lines of credit & other, net
|
1,212,393
|
|
|
1,169,525
|
|
Leases & equipment finance, net
|
1,465,489
|
|
|
1,330,155
|
|
Residential
|
|
|
|
Mortgage, net
|
4,215,424
|
|
|
3,635,073
|
|
Home equity loans & lines, net
|
1,237,512
|
|
|
1,176,477
|
|
Consumer & other, net
|
407,871
|
|
|
587,170
|
|
Total loans and leases, net of deferred fees and costs
|
$
|
21,195,684
|
|
|
$
|
20,422,666
|
|
The loan balances are net of deferred fees and costs of $71.9 million and $70.4 million as of December 31, 2019 and 2018, respectively. Net loans also include net discounts on acquired loans of $30.2 million and $50.0 million as of December 31, 2019 and 2018, respectively. As of December 31, 2019, loans totaling $13.8 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 $125.3 million and $183.7 million at December 31, 2019 and 2018, respectively. The carrying balance of purchased impaired loans was $89.5 million and $134.5 million at December 31, 2019 and 2018, respectively.
The following table presents the changes in the accretable yield for purchased impaired loans for the years ended December 31, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
Balance, beginning of period
|
$
|
56,564
|
|
|
$
|
74,268
|
|
Accretion to interest income
|
(24,797)
|
|
|
(24,095)
|
|
Disposals
|
(12,936)
|
|
|
(10,231)
|
|
Reclassifications from non-accretable difference
|
13,786
|
|
|
16,622
|
|
Balance, end of period
|
$
|
32,617
|
|
|
$
|
56,564
|
|
The Bank, 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. Direct finance leases are included within the lease and equipment finance segment within the loans and leases, net line item. 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 was $32.8 million and $35.4 million at December 31, 2019 and 2018, 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.
The following table presents the net investment in direct financing leases as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
Minimum lease payments receivable
|
|
$
|
435,574
|
|
|
$
|
450,258
|
|
Estimated guaranteed and unguaranteed residual values
|
|
86,633
|
|
|
79,455
|
|
Initial direct costs - net of accumulated amortization
|
|
9,400
|
|
|
10,950
|
|
Unearned income
|
|
(68,177)
|
|
|
(79,777)
|
|
Net investment in direct financing leases
|
|
$
|
463,430
|
|
|
$
|
460,886
|
|
The following table presents the scheduled minimum lease payments receivable as of December 31, 2019:
|
|
|
|
|
|
(in thousands)
|
|
Year
|
Amount
|
|
2020
|
$
|
148,658
|
|
2021
|
119,863
|
|
2022
|
77,781
|
|
2023
|
41,941
|
|
2024
|
21,679
|
|
Thereafter
|
25,652
|
|
Total minimum lease payments receivable
|
$
|
435,574
|
|
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 years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
Commercial real estate
|
|
|
|
Non-owner occupied term, net
|
$
|
40,496
|
|
|
$
|
11,473
|
|
Owner occupied term, net
|
25,454
|
|
|
36,269
|
|
Multifamily, net
|
13,849
|
|
|
4,432
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
Term, net
|
38,227
|
|
|
46,194
|
|
Lines of credit & other, net
|
1,619
|
|
|
—
|
|
Leases & equipment finance, net
|
54,499
|
|
|
16,166
|
|
Residential
|
|
|
|
Mortgage, net
|
1,849
|
|
|
41,669
|
|
|
|
|
|
Consumer & other, net
|
65,322
|
|
|
—
|
|
Total loans and leases sold, net
|
$
|
241,315
|
|
|
$
|
156,203
|
|
Note 5 – 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 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, management believes all risk-based activities within the loan and lease portfolios are simultaneously considered.
Formula Allowance
When loans and leases are originated or acquired, they are assigned a risk rating that is reassessed periodically during the term of the loan or lease through the credit review process. The Bank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the formula allowance.
The formula allowance is calculated by applying risk factors that represent the 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, FinPac 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, management determines that the Bank will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When management identifies a loan as impaired, the Bank measures 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, the Bank uses the current fair value of the collateral, less selling costs, instead of discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan, the Bank either recognizes an impairment reserve as a specific allowance to be provided for in the allowance for loan and lease losses or charges-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 December 31, 2019 and 2018 .
The reserve for unfunded commitments is established to absorb inherent losses associated with the Bank's 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 factors deemed relevant.
There have been no significant changes to the Bank's ALLL methodology or policies in the periods presented.
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 years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
(in thousands)
|
Commercial Real Estate
|
|
Commercial
|
|
Residential
|
|
Consumer & Other
|
|
Total
|
Balance, beginning of period
|
$
|
47,904
|
|
|
$
|
63,957
|
|
|
$
|
22,034
|
|
|
$
|
10,976
|
|
|
$
|
144,871
|
|
Charge-offs
|
(5,849)
|
|
|
(62,098)
|
|
|
(862)
|
|
|
(6,896)
|
|
|
(75,705)
|
|
Recoveries
|
885
|
|
|
12,310
|
|
|
476
|
|
|
2,277
|
|
|
15,948
|
|
Provision
|
7,907
|
|
|
59,651
|
|
|
3,066
|
|
|
1,891
|
|
|
72,515
|
|
Balance, end of period
|
$
|
50,847
|
|
|
$
|
73,820
|
|
|
$
|
24,714
|
|
|
$
|
8,248
|
|
|
$
|
157,629
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
(in thousands)
|
Commercial Real Estate
|
|
Commercial
|
|
Residential
|
|
Consumer & Other
|
|
Total
|
Balance, beginning of period
|
$
|
45,765
|
|
|
$
|
63,305
|
|
|
$
|
19,360
|
|
|
$
|
12,178
|
|
|
$
|
140,608
|
|
Charge-offs
|
(2,950)
|
|
|
(55,902)
|
|
|
(877)
|
|
|
(6,321)
|
|
|
(66,050)
|
|
Recoveries
|
1,184
|
|
|
10,421
|
|
|
570
|
|
|
2,233
|
|
|
14,408
|
|
Provision
|
3,905
|
|
|
46,133
|
|
|
2,981
|
|
|
2,886
|
|
|
55,905
|
|
Balance, end of period
|
$
|
47,904
|
|
|
$
|
63,957
|
|
|
$
|
22,034
|
|
|
$
|
10,976
|
|
|
$
|
144,871
|
|
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 December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
(in thousands)
|
Commercial Real Estate
|
|
Commercial
|
|
Residential
|
|
Consumer & Other
|
|
Total
|
Allowance for loans and leases:
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
$
|
49,458
|
|
|
$
|
73,670
|
|
|
$
|
24,431
|
|
|
$
|
8,240
|
|
|
$
|
155,799
|
|
Individually evaluated for impairment
|
155
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
155
|
|
Loans acquired with deteriorated credit quality
|
1,234
|
|
|
150
|
|
|
283
|
|
|
8
|
|
|
1,675
|
|
Total allowance for loans and leases
|
$
|
50,847
|
|
|
$
|
73,820
|
|
|
$
|
24,714
|
|
|
$
|
8,248
|
|
|
$
|
157,629
|
|
Loans and leases:
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
$
|
10,342,342
|
|
|
$
|
4,904,136
|
|
|
$
|
5,435,692
|
|
|
$
|
407,565
|
|
|
$
|
21,089,735
|
|
Individually evaluated for impairment
|
10,466
|
|
|
5,982
|
|
|
—
|
|
|
—
|
|
|
16,448
|
|
Loans acquired with deteriorated credit quality
|
71,370
|
|
|
581
|
|
|
17,244
|
|
|
306
|
|
|
89,501
|
|
Total loans and leases, net
|
$
|
10,424,178
|
|
|
$
|
4,910,699
|
|
|
$
|
5,452,936
|
|
|
$
|
407,871
|
|
|
$
|
21,195,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
(in thousands)
|
Commercial Real Estate
|
|
Commercial
|
|
Residential
|
|
Consumer & Other
|
|
Total
|
Allowance for loans and leases:
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
$
|
46,014
|
|
|
$
|
63,707
|
|
|
$
|
21,669
|
|
|
$
|
10,934
|
|
|
$
|
142,324
|
|
Individually evaluated for impairment
|
178
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
180
|
|
Loans acquired with deteriorated credit quality
|
1,712
|
|
|
248
|
|
|
365
|
|
|
42
|
|
|
2,367
|
|
Total allowance for loans and leases
|
$
|
47,904
|
|
|
$
|
63,957
|
|
|
$
|
22,034
|
|
|
$
|
10,976
|
|
|
$
|
144,871
|
|
Loans and leases:
|
|
|
|
|
|
|
|
|
|
Collectively evaluated for impairment
|
$
|
10,162,148
|
|
|
$
|
4,712,327
|
|
|
$
|
4,784,694
|
|
|
$
|
586,768
|
|
|
$
|
20,245,937
|
|
Individually evaluated for impairment
|
24,916
|
|
|
17,341
|
|
|
—
|
|
|
—
|
|
|
42,257
|
|
Loans acquired with deteriorated credit quality
|
104,279
|
|
|
2,935
|
|
|
26,856
|
|
|
402
|
|
|
134,472
|
|
Total loans and leases, net
|
$
|
10,291,343
|
|
|
$
|
4,732,603
|
|
|
$
|
4,811,550
|
|
|
$
|
587,170
|
|
|
$
|
20,422,666
|
|
Summary of Reserve for Unfunded Commitments Activity
The following tables present a summary of activity in the RUC and unfunded commitments for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
Balance, beginning of period
|
$
|
4,523
|
|
|
$
|
3,963
|
|
Net charge to other expense
|
583
|
|
|
560
|
|
|
|
|
|
Balance, end of period
|
$
|
5,106
|
|
|
$
|
4,523
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total
|
Unfunded loan and lease commitments:
|
|
|
December 31, 2019
|
|
$
|
5,726,854
|
|
December 31, 2018
|
|
$
|
5,475,484
|
|
Asset Quality and Non-Performing Loans and Leases
The Bank manages 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 department 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 non-accrual loans and leases and loans and leases past due by loan and lease class as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
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
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
121
|
|
|
$
|
121
|
|
|
$
|
2,920
|
|
|
$
|
3,542,525
|
|
|
$
|
3,545,566
|
|
Owner occupied term, net
|
975
|
|
|
470
|
|
|
1
|
|
|
1,446
|
|
|
4,600
|
|
|
2,490,042
|
|
|
2,496,088
|
|
Multifamily, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,514,774
|
|
|
3,514,774
|
|
Construction & development, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
678,740
|
|
|
678,740
|
|
Residential development, net
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
189,010
|
|
|
189,010
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term, net
|
136
|
|
|
381
|
|
|
—
|
|
|
517
|
|
|
3,458
|
|
|
2,228,842
|
|
|
2,232,817
|
|
Lines of credit & other, net
|
3,548
|
|
|
376
|
|
|
36
|
|
|
3,960
|
|
|
767
|
|
|
1,207,666
|
|
|
1,212,393
|
|
Leases & equipment finance, net
|
10,685
|
|
|
11,176
|
|
|
3,086
|
|
|
24,947
|
|
|
14,499
|
|
|
1,426,043
|
|
|
1,465,489
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage, net(2)
|
—
|
|
|
8,104
|
|
|
36,642
|
|
|
44,746
|
|
|
—
|
|
|
4,170,678
|
|
|
4,215,424
|
|
Home equity loans & lines, net
|
2,173
|
|
|
867
|
|
|
1,804
|
|
|
4,844
|
|
|
—
|
|
|
1,232,668
|
|
|
1,237,512
|
|
Consumer & other, net
|
2,043
|
|
|
948
|
|
|
615
|
|
|
3,606
|
|
|
—
|
|
|
404,265
|
|
|
407,871
|
|
Total, net of deferred fees and costs
|
$
|
19,560
|
|
|
$
|
22,322
|
|
|
$
|
42,305
|
|
|
$
|
84,187
|
|
|
$
|
26,244
|
|
|
$
|
21,085,253
|
|
|
$
|
21,195,684
|
|
(1) Other includes purchased credit impaired loans of $89.5 million.
(2) Includes government guaranteed GNMA mortgage loans that the Bank has the right but not the obligation to repurchase that are past due 90 days or more, totaling $4.3 million at December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
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 the Bank 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 December 31, 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 impaired loans and leases by loan class as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Recorded Investment
|
|
|
|
|
(in thousands)
|
Unpaid Principal Balance
|
|
Without Allowance
|
|
With Allowance
|
|
Related Allowance
|
Commercial real estate
|
|
|
|
|
|
|
|
Non-owner occupied term, net
|
$
|
6,556
|
|
|
$
|
2,920
|
|
|
$
|
3,646
|
|
|
$
|
84
|
|
Owner occupied term, net
|
5,004
|
|
|
3,080
|
|
|
820
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
Term, net
|
5,428
|
|
|
3,510
|
|
|
—
|
|
|
—
|
|
Lines of credit & other, net
|
896
|
|
|
767
|
|
|
—
|
|
|
—
|
|
Leases & equipment finance, net
|
1,705
|
|
|
1,705
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, net of deferred fees and costs
|
$
|
19,589
|
|
|
$
|
11,982
|
|
|
$
|
4,466
|
|
|
$
|
155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
Recorded Investment
|
|
|
|
|
(in thousands)
|
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 table summarizes the average recorded investment and interest income recognized on impaired loans and leases by loan class for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
(in thousands)
|
Average Recorded Investment
|
|
Interest Income Recognized
|
|
Average Recorded Investment
|
|
Interest Income Recognized
|
Commercial real estate
|
|
|
|
|
|
|
|
Non-owner occupied term, net
|
$
|
11,524
|
|
|
$
|
132
|
|
|
$
|
13,950
|
|
|
$
|
270
|
|
Owner occupied term, net
|
5,650
|
|
|
37
|
|
|
9,816
|
|
|
40
|
|
Multifamily, net
|
1,385
|
|
|
—
|
|
|
4,036
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
Term, net
|
8,274
|
|
|
186
|
|
|
17,154
|
|
|
250
|
|
Lines of credit & other, net
|
1,226
|
|
|
—
|
|
|
3,347
|
|
|
—
|
|
Leases & equipment finance, net
|
1,867
|
|
|
84
|
|
|
443
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total, net of deferred fees and costs
|
$
|
29,926
|
|
|
$
|
439
|
|
|
$
|
48,746
|
|
|
$
|
620
|
|
The impaired loans for which these interest income amounts were recognized primarily relate to accruing restructured loans.
Credit Quality Indicators
As previously noted, the Bank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The Bank differentiates its lending portfolios into homogeneous loans and leases and non-homogeneous loans and leases. Homogeneous loans and leases are not risk rated until they are greater than 30 days past due, and risk rating is based on the past due status of the loan or lease. The 10 risk rating categories can be generally described by the following groupings for loans and leases:
Minimal Risk—A minimal risk loan or lease, risk rated 1, is to a borrower of the highest quality. The borrower has an unquestioned ability to produce consistent profits and service all obligations and can absorb severe market disturbances with little or no difficulty.
Low Risk—A low risk loan or lease, risk rated 2, is similar in characteristics to a minimal risk loan. Margins may be smaller or protective elements may be subject to greater fluctuation. The borrower will have a strong demonstrated ability to produce profits, provide ample debt service coverage and to absorb market disturbances.
Modest Risk—A modest risk loan or lease, risk rated 3, is a desirable loan or lease with excellent sources of repayment and no currently identifiable risk associated with collection. The borrower exhibits a very strong capacity to repay the credit in accordance with the repayment agreement. The borrower may be susceptible to economic cycles, but will have reserves to weather these cycles.
Average Risk—An average risk loan or lease, risk rated 4, is an attractive loan or lease with sound sources of repayment and no material collection or repayment weakness evident. The borrower has an acceptable capacity to pay in accordance with the agreement. The borrower is susceptible to economic cycles and more efficient competition, but should have modest reserves sufficient to survive all but the most severe downturns or major setbacks.
Acceptable Risk—An acceptable risk loan or lease, risk rated 5, is a loan or lease with lower than average, but still acceptable credit risk. These borrowers may have higher leverage, less certain but viable repayment sources, have limited financial reserves and may possess weaknesses that can be adequately mitigated through collateral, structural or credit enhancement. The borrower is susceptible to economic cycles and is less resilient to negative market forces or financial events. Reserves may be insufficient to survive a modest downturn.
Watch—A watch loan or lease, risk rated 6, is still pass-rated, but represents the lowest level of acceptable risk due to an emerging risk element or declining performance trend. Watch ratings are expected to be temporary, with issues resolved or manifested to the extent that a higher or lower rating would be appropriate. The borrower should have a plausible plan, with reasonable certainty of success, to correct the problems in a short period of time.
Special Mention—A special mention loan or lease, risk rated 7, has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the institution's credit position at some future date. They contain unfavorable characteristics and are generally undesirable. Loans and leases in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a substandard classification. A special mention loan or lease has potential weaknesses, which if not checked or corrected, weaken the asset or inadequately protect the Bank's position at some future date. For commercial and commercial real estate homogeneous loans and leases to be classified as special mention, risk rated 7, the loan or lease is greater than 30 to 59 days past due from the required payment date at month-end. Residential and consumer and other homogeneous loans are risk rated 7, when the loan is greater than 30 to 89 days past due from the required payment date at month-end.
Substandard—A substandard asset, risk rated 8, is inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. Loans and leases are classified as substandard when they have unsatisfactory characteristics causing unacceptable levels of risk. A substandard loan or lease normally has one or more well-defined weaknesses that could jeopardize repayment of the debt. The likely need to liquidate assets to correct the problem, rather than repayment from successful operations is the key distinction between special mention and substandard. Commercial and commercial real estate homogeneous loans and leases are classified as a substandard loan or lease, risk rated 8, when the loan or lease is 60 to 89 days past due from the required payment date at month-end. Residential and consumer and other homogeneous loans are classified as a substandard loan, risk rated 8, when an open-end loan is 90 to 180 days past due from the required payment date at month-end or when a closed-end loan 90 to 120 days is past due from the required payment date at month-end.
Doubtful—Loans or leases classified as doubtful, risk rated 9, have all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work towards strengthening of the asset, classification as a loss (and immediate charge-off) is deferred until more exact status may be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, and perfection of liens on additional collateral and refinancing plans. In certain circumstances, a doubtful rating will be temporary, while the Bank is awaiting an updated collateral valuation. In these cases, once the collateral is valued and appropriate margin applied, the remaining un-collateralized portion will be charged-off. The remaining balance, properly margined, may then be upgraded to substandard, however must remain on non-accrual. Commercial and commercial real estate homogeneous doubtful loans or leases, risk rated 9, are 90 to 179 days past due from the required payment date at month-end.
Loss—Loans or leases classified as loss, risk rated 10, are considered un-collectible and of such little value that the continuance as an active Bank asset is not warranted. This rating does not mean that the loan or lease has no recovery or salvage value, but rather that the loan or lease should be charged-off now, even though partial or full recovery may be possible in the future. For a commercial or commercial real estate homogeneous loss loan or lease to be risk rated 10, the loan or lease is 180 days and more past due from the required payment date. These loans are generally charged-off in the month in which the 180 day time period elapses. Residential, consumer and other homogeneous loans are risk rated 10, when a 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.
The following tables summarize the internal risk rating by loan and lease class for the loan and lease portfolio, including purchased credit impaired loans, as of December 31, 2019 and 2018 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Pass/Watch
|
|
Special Mention
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
Impaired (1)
|
|
Total
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-owner occupied term, net
|
$
|
3,495,686
|
|
|
$
|
28,838
|
|
|
$
|
14,355
|
|
|
$
|
121
|
|
|
$
|
—
|
|
|
$
|
6,566
|
|
|
$
|
3,545,566
|
|
Owner occupied term, net
|
2,422,734
|
|
|
38,834
|
|
|
30,461
|
|
|
159
|
|
|
—
|
|
|
3,900
|
|
|
2,496,088
|
|
Multifamily, net
|
3,503,483
|
|
|
10,693
|
|
|
598
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,514,774
|
|
Construction & development, net
|
661,458
|
|
|
17,282
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
678,740
|
|
Residential development, net
|
189,010
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
189,010
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term, net
|
2,172,704
|
|
|
7,626
|
|
|
48,973
|
|
|
—
|
|
|
4
|
|
|
3,510
|
|
|
2,232,817
|
|
Lines of credit & other, net
|
1,171,892
|
|
|
17,422
|
|
|
22,278
|
|
|
34
|
|
|
—
|
|
|
767
|
|
|
1,212,393
|
|
Leases & equipment finance, net
|
1,424,339
|
|
|
10,685
|
|
|
11,176
|
|
|
15,305
|
|
|
2,279
|
|
|
1,705
|
|
|
1,465,489
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage, net(2)
|
4,169,363
|
|
|
8,298
|
|
|
36,588
|
|
|
—
|
|
|
1,175
|
|
|
—
|
|
|
4,215,424
|
|
Home equity loans & lines, net
|
1,232,518
|
|
|
3,126
|
|
|
1,218
|
|
|
—
|
|
|
650
|
|
|
—
|
|
|
1,237,512
|
|
Consumer & other, net
|
404,248
|
|
|
2,990
|
|
|
615
|
|
|
—
|
|
|
18
|
|
|
—
|
|
|
407,871
|
|
Total, net of deferred fees and costs
|
$
|
20,847,435
|
|
|
$
|
145,794
|
|
|
$
|
166,262
|
|
|
$
|
15,619
|
|
|
$
|
4,126
|
|
|
$
|
16,448
|
|
|
$
|
21,195,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The percentage of impaired loans classified as pass/watch, special mention and substandard was 5.0%, 25.0% and 70.0% respectively, as of December 31, 2019.
(2) Includes government guaranteed GNMA mortgage loans that the Bank has the right but not the obligation to repurchase that are past due 90 days or more, totaling $4.3 million at December 31, 2019, which is included in the substandard category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
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 the Bank 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.
Troubled Debt Restructurings
At December 31, 2019 and 2018, impaired loans of $18.6 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 $98,000 and $338,000 of available commitments for troubled debt restructurings outstanding as of December 31, 2019 and 2018, respectively.
The following tables present troubled debt restructurings by accrual versus non-accrual status and by loan class as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
(in thousands)
|
Accrual Status
|
|
Non-Accrual Status
|
|
Total Modifications
|
Commercial real estate, net
|
$
|
3,968
|
|
|
$
|
—
|
|
|
$
|
3,968
|
|
Commercial, net
|
4,105
|
|
|
—
|
|
|
4,105
|
|
Residential, net
|
10,460
|
|
|
—
|
|
|
10,460
|
|
Consumer & other, net
|
43
|
|
|
—
|
|
|
43
|
|
Total, net of deferred fees and costs
|
$
|
18,576
|
|
|
$
|
—
|
|
|
$
|
18,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
(in thousands)
|
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.
The following tables present newly restructured loans that occurred during the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
Commercial real estate, net
|
$
|
118
|
|
|
$
|
—
|
|
Commercial, net
|
1,842
|
|
|
—
|
|
Residential, net
|
7,549
|
|
|
106
|
|
Consumer & other, net
|
43
|
|
|
—
|
|
Total, net of deferred fees and costs
|
$
|
9,552
|
|
|
$
|
106
|
|
For the periods presented in the table above, the outstanding recorded investment was the same pre and post modification and all modifications were combination modifications. There were $329,000 financing receivables modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the year ended December 31, 2019. There were no in financing receivables modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the year ended December 31, 2018.
Note 6–Premises and Equipment
The following table presents the major components of premises and equipment at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
|
Estimated useful life
|
Land
|
$
|
34,161
|
|
|
$
|
34,388
|
|
|
|
Buildings and improvements
|
204,639
|
|
|
209,948
|
|
|
7 - 39 years
|
Furniture, fixtures and equipment
|
136,403
|
|
|
141,579
|
|
|
4 - 20 years
|
Software
|
104,802
|
|
|
97,897
|
|
|
3 - 7 years
|
Construction in progress and other
|
16,432
|
|
|
21,496
|
|
|
|
Total premises and equipment
|
496,437
|
|
|
505,308
|
|
|
|
Less: Accumulated depreciation and amortization
|
(294,977)
|
|
|
(277,885)
|
|
|
|
Premises and equipment, net
|
$
|
201,460
|
|
|
$
|
227,423
|
|
|
|
Depreciation expense totaled $37.3 million, $44.4 million and $50.1 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Note 7 – 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 ten years or more. The exercise of lease renewal options is at management's 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. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company rents or subleases certain real estate to third parties. The Company's 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 December 31, 2019:
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
Leases
|
|
Operating lease right-of-use assets
|
$
|
110,718
|
|
Operating lease liabilities
|
$
|
119,429
|
|
The following table presents the components of lease expense for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Lease Costs
|
|
2019
|
Operating lease costs
|
|
$
|
32,358
|
|
Short-term lease costs
|
|
820
|
|
Variable lease costs
|
|
8
|
|
Sublease income
|
|
(2,765)
|
|
Net lease costs
|
|
$
|
30,421
|
|
The following table presents the supplemental cash flow information related to leases for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
Cash Flows
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
|
$
|
33,004
|
|
Right of use assets obtained in exchange for new operating lease liabilities
|
|
$
|
27,878
|
|
The following table presents the maturities of lease liabilities as of December 31, 2019:
|
|
|
|
|
|
(in thousands)
|
|
Year
|
Operating Leases
|
2020
|
$
|
31,029
|
|
2021
|
26,277
|
|
2022
|
20,832
|
|
2023
|
16,234
|
|
2024
|
11,914
|
|
Thereafter
|
27,186
|
|
Total lease payments
|
133,472
|
|
Less: imputed interest
|
(14,043)
|
|
Present value of lease liabilities
|
$
|
119,429
|
|
The following table presents the operating lease term and discount rate as of December 31, 2019:
|
|
|
|
|
|
|
December 31, 2019
|
Weighted-average remaining lease term (years)
|
6.4
|
Weighted-average discount rate
|
3.45
|
%
|
The following disclosures were required prior to the Company's adoption of ASC 842. Rent expense for the years ended December 31, 2018 and 2017 was $37.9 million and $38.4 million, respectively, and was partially offset by rent income of $2.6 million and $2.2 million, respectively.
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
|
Lease Payments
|
|
Sublease 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
|
|
Note 8–Goodwill and Other Intangible Assets
Goodwill totaled $1.8 billion, which includes $113.1 million in accumulated impairment for the years ended December 31, 2019 and 2018. Goodwill represents the excess of the total acquisition price paid over the fair value of the assets acquired, net of the fair value of liabilities assumed. There has been no change to goodwill in any of the periods presented. Goodwill is required to be allocated to reporting units, which the Company has determined to be the same as its operating segments.
As of December 31, 2019 and 2018, goodwill was allocated to the reporting units as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
(in thousands)
|
Wholesale Bank
|
|
Wealth Management
|
|
Retail Bank
|
|
Total
|
|
|
|
|
|
|
|
|
Allocated goodwill, December 31, 2019 and 2018
|
$
|
1,033,744
|
|
|
|
$
|
2,715
|
|
|
|
$
|
751,192
|
|
|
$
|
1,787,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company conducted its annual evaluation of goodwill for impairment as of October 31, 2019, by assessing qualitative factors to determine whether the existence of events and circumstances indicated that it is more likely than not that the indefinite-lived intangible asset is impaired. Based on that assessment, the Company determined that the Retail Bank and Wealth Management reporting units had no factors indicating any additional impairment and no further testing was determined to be necessary. For the Wholesale Bank reporting unit, the qualitative testing showed that there were negative indicators that would require a quantitative assessment of goodwill due to the decline in interest rates and slower growth rates than previously forecast.
The Company performed a quantitative analysis of the Wholesale bank reporting unit, by comparing the fair value of the reporting unit with its carrying amount. The Company estimated the fair value of its Wholesale Bank reporting unit using an income approach. The income approach estimates the fair value of the reporting unit by discounting management's projections of the reporting unit's cash flows, including a terminal value to estimate the fair value of cash flows beyond the final year of projected results, discounted using an estimated cost of capital discount rate.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates,
and market factors. Estimating the fair value of individual reporting units requires management to make assumptions and estimates regarding the Company's future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax rates, discount rates, growth rates, and other market factors. If current expectations of future growth rates are not met, if market factors outside of the Company's control, such as discount rates and market multiples, change, or if management's expectations or plans otherwise change, then goodwill allocated to one or more of the Company's reporting units might become impaired in the future.
Upon completing the quantitative impairment analysis, the Company determined that no impairment was indicated as the estimated fair value was in excess of the carrying value of the Wholesale Bank reporting unit. As such, there was no goodwill impairment loss recorded during the year ended December 31, 2019. There were also no goodwill impairment losses for the years ended December 31, 2018 and 2017.
The following table summarizes the changes in the Company's other intangible assets for the years ended December 31, 2017, 2018 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Intangible Assets
|
|
|
|
|
(in thousands)
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Balance, December 31, 2016
|
$
|
113,471
|
|
|
$
|
(76,585)
|
|
|
$
|
36,886
|
|
|
|
|
|
|
|
Amortization
|
—
|
|
|
(6,756)
|
|
|
(6,756)
|
|
Balance, December 31, 2017
|
113,471
|
|
|
(83,341)
|
|
|
30,130
|
|
|
|
|
|
|
|
Amortization
|
—
|
|
|
(6,166)
|
|
|
(6,166)
|
|
Balance, December 31, 2018
|
113,471
|
|
|
(89,507)
|
|
|
23,964
|
|
|
|
|
|
|
|
Amortization
|
—
|
|
|
(5,618)
|
|
|
(5,618)
|
|
Balance, December 31, 2019
|
$
|
113,471
|
|
|
$
|
(95,125)
|
|
|
$
|
18,346
|
|
Core deposit intangible asset values were determined by an analysis of the cost differential between the core deposits inclusive of estimated servicing costs and alternative funding sources for core deposits acquired through acquisitions. The core deposit intangible assets recorded are amortized on an accelerated basis over a period of approximately 10 years. No impairment losses separate from the scheduled amortization have been recognized in the periods presented.
The table below presents the forecasted amortization expense for intangible assets at December 31, 2019:
|
|
|
|
|
|
(in thousands)
|
|
Year
|
Expected Amortization
|
2020
|
$
|
4,986
|
|
2021
|
4,520
|
|
2022
|
4,095
|
|
2023
|
3,686
|
|
2024
|
1,059
|
|
Thereafter
|
—
|
|
Total intangible assets
|
$
|
18,346
|
|
Note 9 – 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 Consolidated Statements of Income. The following table presents the changes in the Company's residential mortgage servicing rights for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
Balance, beginning of period
|
$
|
169,025
|
|
|
$
|
153,151
|
|
|
$
|
142,973
|
|
Additions for new MSR capitalized
|
25,169
|
|
|
29,069
|
|
|
33,445
|
|
Sale of MSR assets
|
(34,401)
|
|
|
—
|
|
|
—
|
|
Changes in fair value:
|
|
|
|
|
|
Changes due to collection/realization of expected cash flows over time
|
(25,408)
|
|
|
(24,533)
|
|
|
(23,059)
|
|
Changes due to valuation inputs or assumptions (1)
|
(19,375)
|
|
|
11,338
|
|
|
(208)
|
|
Balance, end of period
|
$
|
115,010
|
|
|
$
|
169,025
|
|
|
$
|
153,151
|
|
(1) The change 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 the serviced loan portfolio as of December 31, 2019, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
|
December 31, 2017
|
Balance of loans serviced for others
|
$
|
12,276,943
|
|
|
$
|
15,978,885
|
|
|
$
|
15,336,597
|
|
MSR as a percentage of serviced loans
|
0.94
|
%
|
|
1.06
|
%
|
|
1.00
|
%
|
In October 2019, Umpqua closed on the sale of $34.4 million in residential mortgage servicing rights for $3.4 billion of residential mortgage loans serviced for others. The Company continues to analyze the portfolio and anticipates another sale in 2020 in an effort to improve the overall profitability of the business and reduce potential future volatility from future rate changes.
The amount of contractually specified servicing fees, late fees and ancillary fees earned, recorded in residential mortgage banking revenue on the Consolidated Statements of Income, was $42.2 million, $42.8 million, and $39.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Key assumptions used in measuring the fair value of MSR as of December 31, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
|
December 31, 2017
|
Constant prepayment rate
|
13.33
|
%
|
|
12.95
|
%
|
|
12.27
|
%
|
Discount rate
|
9.75
|
%
|
|
9.70
|
%
|
|
9.70
|
%
|
Weighted average life (years)
|
6.0
|
|
6.2
|
|
6.3
|
A sensitivity analysis of the current fair value to changes in discount and prepayment speed assumptions as of December 31, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Constant prepayment rate
|
|
|
|
Effect on fair value of a 10% adverse change
|
$
|
(5,410)
|
|
|
$
|
(7,104)
|
|
Effect on fair value of a 20% adverse change
|
$
|
(10,403)
|
|
|
$
|
(13,651)
|
|
|
|
|
|
Discount rate
|
|
|
|
Effect on fair value of a 100 basis point adverse change
|
$
|
(4,366)
|
|
|
$
|
(6,438)
|
|
Effect on fair value of a 200 basis point adverse change
|
$
|
(8,418)
|
|
|
$
|
(12,398)
|
|
The sensitivity analysis presents the hypothetical effect on fair value of the MSR, due to the change in assumptions. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in an assumption to the change in fair value is not linear. Additionally, in the analysis, the impact of an adverse change in one assumption is calculated independent of any impact on other assumptions. In reality, changes in one assumption may change another assumption.
Note 10 - Other Assets
Other assets consisted of the following at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
Derivative assets
|
$
|
150,574
|
|
|
$
|
49,484
|
|
Low-income housing tax credit investments
|
88,215
|
|
|
39,146
|
|
Accrued interest receivable
|
70,210
|
|
|
70,530
|
|
Prepaid expenses
|
31,456
|
|
|
26,403
|
|
Income taxes receivable
|
16,274
|
|
|
2,629
|
|
Investment in unconsolidated trust subsidiaries
|
13,962
|
|
|
13,962
|
|
Insurance premium receivable
|
10,415
|
|
|
10,336
|
|
Commercial servicing asset
|
5,133
|
|
|
4,364
|
|
Other real estate owned
|
3,295
|
|
|
10,958
|
|
Other equity investment
|
—
|
|
|
6,400
|
|
Other
|
44,667
|
|
|
34,164
|
|
Total other assets
|
$
|
434,201
|
|
|
$
|
268,376
|
|
The Company invests in limited partnerships that operate qualified affordable housing projects to receive tax benefits in the form of tax deductions from operating losses and tax credits. The Company accounts for the investments using the proportional amortization method; amortization of the investment in qualified affordable housing projects is recorded in the provision for income taxes together with the tax credits and benefits received. As of December 31, 2019, 2018 and 2017, the Company recognized $3.6 million, $2.8 million, and $3.1 million, respectively, of proportional amortization as a component of income tax expense and recognized $4.3 million, $3.3 million, and $3.0 million, respectively, in affordable housing tax credits and other tax benefits during the years. The Company's remaining capital commitments to these partnerships at December 31, 2019 and 2018 were approximately $60.4 million and $20.2 million, respectively, and are included in other liabilities on the consolidated balance sheets.
Other real estate owned represents property acquired through foreclosure or other proceedings and is carried at the lower of cost or fair value, less costs to sell. The Bank's recorded investment in consumer mortgage loans collateralized by residential real estate property in process of foreclosure was $7.3 million and $8.2 million as of December 31, 2019 and 2018, respectively.
Note 11 – Income Taxes
The following table presents the components of income tax provision included in the Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Current
|
|
Deferred
|
|
Total
|
Year ended December 31, 2019:
|
|
|
|
|
|
Federal
|
$
|
90,227
|
|
|
$
|
(5,123)
|
|
|
$
|
85,104
|
|
State
|
28,125
|
|
|
1,579
|
|
|
29,704
|
|
Total provision for income taxes
|
$
|
118,352
|
|
|
$
|
(3,544)
|
|
|
$
|
114,808
|
|
Year ended December 31, 2018:
|
|
|
|
|
|
Federal
|
$
|
68,651
|
|
|
$
|
11,655
|
|
|
$
|
80,306
|
|
State
|
18,960
|
|
|
7,157
|
|
|
26,117
|
|
Total provision for income taxes
|
$
|
87,611
|
|
|
$
|
18,812
|
|
|
$
|
106,423
|
|
Year ended December 31, 2017:
|
|
|
|
|
|
Federal
|
$
|
19,287
|
|
|
$
|
66,559
|
|
|
$
|
85,846
|
|
State
|
10,015
|
|
|
10,869
|
|
|
20,884
|
|
Total provision for income taxes
|
$
|
29,302
|
|
|
$
|
77,428
|
|
|
$
|
106,730
|
|
The following table presents a reconciliation of income taxes computed at the Federal statutory rate to the actual effective rate for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Statutory Federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
State tax, net of Federal benefit
|
5.0
|
%
|
|
5.0
|
%
|
|
4.0
|
%
|
Nondeductible FDIC premiums
|
0.2
|
%
|
|
0.3
|
%
|
|
—
|
%
|
Nondeductible executive compensation
|
—
|
%
|
|
0.1
|
%
|
|
0.3
|
%
|
Tax-exempt income
|
(1.2)
|
%
|
|
(1.2)
|
%
|
|
(2.0)
|
%
|
BOLI
|
(0.4)
|
%
|
|
(0.4)
|
%
|
|
(1.0)
|
%
|
|
|
|
|
|
|
Revaluation effect of the Tax Cuts and Jobs Act of 2017
|
—
|
%
|
|
—
|
%
|
|
(5.8)
|
%
|
Other
|
(0.1)
|
%
|
|
0.4
|
%
|
|
0.1
|
%
|
Effective income tax rate
|
24.5
|
%
|
|
25.2
|
%
|
|
30.6
|
%
|
The following table reflects the effects of temporary differences that give rise to the components of the net deferred tax liabilities recorded on the consolidated balance sheets as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
Deferred tax assets:
|
|
|
|
Allowance for loan and lease losses
|
$
|
41,176
|
|
|
$
|
37,767
|
|
Operating lease liabilities
|
30,750
|
|
|
—
|
|
Accrued severance and deferred compensation
|
16,131
|
|
|
15,378
|
|
Acquired loans
|
9,953
|
|
|
14,342
|
|
Accrued bonuses
|
6,993
|
|
|
7,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State taxes
|
5,906
|
|
|
3,639
|
|
Unrealized losses on investment securities
|
—
|
|
|
15,086
|
|
Other
|
10,737
|
|
|
14,023
|
|
Total gross deferred tax assets
|
121,646
|
|
|
108,171
|
|
Deferred tax liabilities:
|
|
|
|
Residential mortgage servicing rights
|
30,901
|
|
|
44,598
|
|
Direct financing leases
|
29,741
|
|
|
22,640
|
|
Operating lease right-of-use asset
|
28,506
|
|
|
—
|
|
Fair market value adjustment on junior subordinated debentures
|
27,404
|
|
|
20,752
|
|
|
|
|
|
Deferred loan fees and costs
|
21,450
|
|
|
19,841
|
|
Goodwill
|
11,703
|
|
|
9,880
|
|
|
|
|
|
Unrealized gains on investment securities
|
8,014
|
|
|
—
|
|
|
|
|
|
Other
|
15,765
|
|
|
15,216
|
|
Total gross deferred tax liabilities
|
173,484
|
|
|
132,927
|
|
Valuation allowance
|
(1,090)
|
|
|
(1,090)
|
|
Net deferred tax liabilities
|
$
|
(52,928)
|
|
|
$
|
(25,846)
|
|
The Company believes it is more likely than not that the benefit from certain state net operating loss ("NOL") carryforwards will not be realized and therefore has provided a valuation allowance of $1.1 million as of both December 31, 2019 and 2018, on the deferred tax assets relating to these state NOL carryforwards. The Company has determined that no other valuation allowance for the remaining deferred tax assets is required as management believes it is more likely than not that the remaining gross deferred tax assets, net of the valuation allowance, of $120.6 million and $107.1 million at December 31, 2019 and 2018, respectively, will be realized principally through future reversals of existing taxable temporary differences. Management further believes that future taxable income will be sufficient to realize the benefits of temporary deductible differences that cannot be realized through carry-back to prior years or through the reversal of future temporary taxable differences.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, as well as the majority of states and Canada. The Company is no longer subject to U.S. and Canadian tax examinations for years before 2016, and is no longer subject to state tax examinations for years before 2015, with the exception of California, where the statute is still open for tax years 2012 and 2013.
The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities' examinations of the Company's tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.
The Company had gross unrecognized tax benefits in the amounts of $4.3 million and $5.0 million recorded as of December 31, 2019 and 2018, respectively. If recognized, the unrecognized tax benefit would reduce the 2019 annual effective tax rate by 0.8%. Interest on unrecognized tax benefits is reported by the Company as a component of tax expense. As of December 31, 2019 and 2018, the accrued interest related to unrecognized tax benefits is $70,000 and $351,000, respectively.
During 2019, a settlement was entered into with California for the 2005 to 2011 tax years resulting in the reversal of $516,000 of gross unrecognized tax benefits. The 2019 gross unrecognized tax benefits also includes a $183,000 reversal related to a partial refund for amended returns filed with California for the 2012 and 2013 tax years, for which $1.7 million of unrecognized tax benefits was recorded in 2018.
Detailed below is a reconciliation of the Company's gross unrecognized tax benefits for the years ended December 31, 2019 and 2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
Balance, beginning of period
|
$
|
4,971
|
|
|
$
|
3,079
|
|
|
|
|
|
Changes for tax positions of current year
|
34
|
|
|
165
|
|
Changes for tax positions of prior years
|
—
|
|
|
1,727
|
|
Settlement
|
(698)
|
|
|
—
|
|
|
|
|
|
Balance, end of period
|
$
|
4,307
|
|
|
$
|
4,971
|
|
Note 12 – Interest Bearing Deposits
The following table presents the major types of interest bearing deposits at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
Interest bearing demand
|
$
|
2,524,534
|
|
|
$
|
2,340,471
|
|
Money market
|
6,930,815
|
|
|
6,645,390
|
|
Savings
|
1,471,475
|
|
|
1,492,685
|
|
Time, $100,000 or greater
|
3,420,446
|
|
|
2,947,084
|
|
Time less than $100,000
|
1,220,859
|
|
|
1,044,389
|
|
Total interest bearing deposits
|
$
|
15,568,129
|
|
|
$
|
14,470,019
|
|
As of December 31, 2019 and 2018, the Company had time deposits of $1.2 billion and $979.6 million, respectively, that meet or exceed the FDIC insurance limit of $250,000.
The following table presents the scheduled maturities of time deposits as of December 31, 2019:
|
|
|
|
|
|
(in thousands)
|
|
Year
|
Amount
|
2020
|
$
|
3,206,379
|
|
2021
|
1,185,027
|
|
2022
|
144,068
|
|
2023
|
36,068
|
|
2024
|
56,177
|
|
Thereafter
|
13,586
|
|
Total time deposits
|
$
|
4,641,305
|
|
The following table presents the remaining maturities of time deposits of $100,000 or more as of December 31, 2019:
|
|
|
|
|
|
(in thousands)
|
Amount
|
Three months or less
|
$
|
857,766
|
|
Over three months through six months
|
814,803
|
|
Over six months through twelve months
|
740,025
|
|
Over twelve months
|
1,007,852
|
|
Time, $100,000 and over
|
$
|
3,420,446
|
|
Note 13 – Securities Sold Under Agreements to Repurchase
The following table presents information regarding securities sold under agreements to repurchase at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
Repurchase Amount
|
|
Weighted Average Interest Rate
|
|
Carrying Value of Underlying Assets
|
|
Market Value of Underlying Assets
|
December 31, 2019
|
$
|
311,308
|
|
|
0.57
|
%
|
|
$
|
392,315
|
|
|
$
|
392,315
|
|
December 31, 2018
|
$
|
297,151
|
|
|
0.38
|
%
|
|
$
|
337,015
|
|
|
$
|
337,015
|
|
The securities underlying agreements to repurchase entered into by the Bank are for the same securities originally sold, with a one-day maturity. In all cases, the Bank maintains control over the securities. Securities sold under agreements to repurchase averaged approximately $299.6 million, $282.6 million, and $316.1 million for the years ended December 31, 2019, 2018, and 2017, respectively. The maximum amount outstanding at any month end for the years ended December 31, 2019, 2018, and 2017, was $336.8 million, $315.4 million, and $334.9 million, respectively. Investment securities are pledged as collateral in an amount equal to or greater than the repurchase agreements.
Note 14 – Federal Funds Purchased
At December 31, 2019 and 2018, the Company had no outstanding federal funds purchased balances. The Bank had available lines of credit with the FHLB totaling $7.0 billion at December 31, 2019 subject to certain collateral requirements. The Bank had available lines of credit with the Federal Reserve totaling $652.1 million subject to certain collateral requirements, namely the amount of certain pledged loans at December 31, 2019. The Bank had uncommitted federal funds line of credit agreements with additional financial institutions totaling $460.0 million at December 31, 2019. At December 31, 2019, the lines of credit had interest rates ranging from 1.8% to 2.6%. Availability of the lines is subject to federal funds balances available for loan and continued borrower eligibility and are reviewed and renewed periodically throughout the year. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage.
Note 15 – Borrowings
The Bank had outstanding secured advances from the FHLB and other creditors at December 31, 2019 and 2018 with carrying values of $906.6 million and $751.8 million, respectively. The following table summarizes the future contractual maturities of borrowed funds as of December 31, 2019:
|
|
|
|
|
|
(in thousands)
|
|
Year
|
Amount
|
2020
|
$
|
510,000
|
|
2021
|
390,000
|
|
2022
|
—
|
|
2023
|
—
|
|
2024
|
—
|
|
Thereafter
|
5,000
|
|
Total borrowed funds(1)
|
$
|
905,000
|
|
(1) Amount shows contractual borrowings, excluding acquisition accounting adjustments.
The maximum amount outstanding from the FHLB under term advances at a month end during 2019 and 2018 was $1.1 billion and $800.1 million, respectively. The average balance outstanding during 2019 and 2018 was $895.0 million and $783.7 million, respectively. The average contractual interest rate on the borrowings was 1.9% in 2019 and 1.8% in 2018. The FHLB requires the Bank to maintain a required level of investment in FHLB and sufficient collateral to qualify for secured advances. The Bank has pledged as collateral for these secured advances all FHLB stock, all funds on deposit with the FHLB, investment and commercial real estate portfolios, accounts, general intangibles, equipment and other property in which a security interest can be granted by the Bank to the FHLB.
Note 16 – Junior Subordinated Debentures
Following is information about the Company's wholly-owned Trusts as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust Name
|
|
Issue Date
|
|
Issued Amount
|
|
Carrying Value (1)
|
|
Rate (2)
|
|
Effective Rate (3)
|
|
Maturity Date
|
AT FAIR VALUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Umpqua Statutory Trust II
|
|
October 2002
|
|
$
|
20,619
|
|
|
$
|
17,535
|
|
|
Floating rate, LIBOR plus 3.35%, adjusted quarterly
|
|
6.22
|
%
|
|
October 2032
|
Umpqua Statutory Trust III
|
|
October 2002
|
|
30,928
|
|
|
26,524
|
|
|
Floating rate, LIBOR plus 3.45%, adjusted quarterly
|
|
6.25
|
%
|
|
November 2032
|
Umpqua Statutory Trust IV
|
|
December 2003
|
|
10,310
|
|
|
8,244
|
|
|
Floating rate, LIBOR plus 2.85%, adjusted quarterly
|
|
6.05
|
%
|
|
January 2034
|
Umpqua Statutory Trust V
|
|
December 2003
|
|
10,310
|
|
|
8,133
|
|
|
Floating rate, LIBOR plus 2.85%, adjusted quarterly
|
|
6.02
|
%
|
|
March 2034
|
Umpqua Master Trust I
|
|
August 2007
|
|
41,238
|
|
|
25,238
|
|
|
Floating rate, LIBOR plus 1.35%, adjusted quarterly
|
|
5.30
|
%
|
|
September 2037
|
Umpqua Master Trust IB
|
|
September 2007
|
|
20,619
|
|
|
15,496
|
|
|
Floating rate, LIBOR plus 2.75%, adjusted quarterly
|
|
6.18
|
%
|
|
December 2037
|
Sterling Capital Trust III
|
|
April 2003
|
|
14,433
|
|
|
12,141
|
|
|
Floating rate, LIBOR plus 3.25%, adjusted quarterly
|
|
6.13
|
%
|
|
April 2033
|
Sterling Capital Trust IV
|
|
May 2003
|
|
10,310
|
|
|
8,523
|
|
|
Floating rate, LIBOR plus 3.15%, adjusted quarterly
|
|
6.12
|
%
|
|
May 2033
|
Sterling Capital Statutory Trust V
|
|
May 2003
|
|
20,619
|
|
|
17,124
|
|
|
Floating rate, LIBOR plus 3.25%, adjusted quarterly
|
|
6.26
|
%
|
|
June 2033
|
Sterling Capital Trust VI
|
|
June 2003
|
|
10,310
|
|
|
8,473
|
|
|
Floating rate, LIBOR plus 3.20%, adjusted quarterly
|
|
6.20
|
%
|
|
September 2033
|
Sterling Capital Trust VII
|
|
June 2006
|
|
56,702
|
|
|
36,457
|
|
|
Floating rate, LIBOR plus 1.53%, adjusted quarterly
|
|
5.32
|
%
|
|
June 2036
|
Sterling Capital Trust VIII
|
|
September 2006
|
|
51,547
|
|
|
33,375
|
|
|
Floating rate, LIBOR plus 1.63%, adjusted quarterly
|
|
5.44
|
%
|
|
December 2036
|
Sterling Capital Trust IX
|
|
July 2007
|
|
46,392
|
|
|
28,922
|
|
|
Floating rate, LIBOR plus 1.40%, adjusted quarterly
|
|
5.61
|
%
|
|
October 2037
|
Lynnwood Financial Statutory Trust I
|
|
March 2003
|
|
9,279
|
|
|
7,629
|
|
|
Floating rate, LIBOR plus 3.15%, adjusted quarterly
|
|
6.20
|
%
|
|
March 2033
|
Lynnwood Financial Statutory Trust II
|
|
June 2005
|
|
10,310
|
|
|
7,012
|
|
|
Floating rate, LIBOR plus 1.80%, adjusted quarterly
|
|
5.43
|
%
|
|
June 2035
|
Klamath First Capital Trust I
|
|
July 2001
|
|
15,464
|
|
|
13,986
|
|
|
Floating rate, LIBOR plus 3.75%, adjusted semiannually
|
|
6.64
|
%
|
|
July 2031
|
Total junior subordinated debentures at fair value
|
|
|
|
379,390
|
|
|
274,812
|
|
|
|
|
|
|
|
AT AMORTIZED COST:
|
|
|
|
|
|
|
|
|
|
|
|
|
Humboldt Bancorp Statutory Trust II
|
|
December 2001
|
|
10,310
|
|
|
10,949
|
|
|
Floating rate, LIBOR plus 3.60%, adjusted quarterly
|
|
4.68
|
%
|
|
December 2031
|
Humboldt Bancorp Statutory Trust III
|
|
September 2003
|
|
27,836
|
|
|
29,563
|
|
|
Floating rate, LIBOR plus 2.95%, adjusted quarterly
|
|
4.13
|
%
|
|
September 2033
|
CIB Capital Trust
|
|
November 2002
|
|
10,310
|
|
|
10,868
|
|
|
Floating rate, LIBOR plus 3.45%, adjusted quarterly
|
|
4.68
|
%
|
|
November 2032
|
Western Sierra Statutory Trust I
|
|
July 2001
|
|
6,186
|
|
|
6,186
|
|
|
Floating rate, LIBOR plus 3.58%, adjusted quarterly
|
|
5.51
|
%
|
|
July 2031
|
Western Sierra Statutory Trust II
|
|
December 2001
|
|
10,310
|
|
|
10,310
|
|
|
Floating rate, LIBOR plus 3.60%, adjusted quarterly
|
|
5.50
|
%
|
|
December 2031
|
Western Sierra Statutory Trust III
|
|
September 2003
|
|
10,310
|
|
|
10,310
|
|
|
Floating rate, LIBOR plus 2.90%, adjusted quarterly
|
|
4.89
|
%
|
|
October 2033
|
Western Sierra Statutory Trust IV
|
|
September 2003
|
|
10,310
|
|
|
10,310
|
|
|
Floating rate, LIBOR plus 2.90%, adjusted quarterly
|
|
4.89
|
%
|
|
September 2033
|
Total junior subordinated debentures at amortized cost
|
|
|
|
85,572
|
|
|
88,496
|
|
|
|
|
|
|
|
Total junior subordinated debentures
|
|
|
|
$
|
464,962
|
|
|
$
|
363,308
|
|
|
|
|
|
|
|
(1)Includes acquisition accounting adjustments, net of accumulated amortization, for junior subordinated debentures assumed in connection with previous mergers as well as fair value adjustments related to trusts recorded at fair value.
(2)Contractual interest rate of junior subordinated debentures.
(3)Effective interest rate based upon the carrying value as of December 31, 2019.
The Trusts are reflected as junior subordinated debentures in the Consolidated Balance Sheets. The common stock issued by the Trusts is recorded in other assets in the Consolidated Balance Sheets, and totaled $14.0 million at both December 31, 2019 and 2018. As of December 31, 2019, all of the junior subordinated debentures were redeemable at par, at their applicable quarterly or semiannual interest payment dates.
The Company selected the fair value measurement option for junior subordinated debentures originally issued by the Company (the Umpqua Statutory Trusts) and for junior subordinated debentures acquired from Sterling Financial Corporation. Based on an overall decline in discount rates, partially offset by an increase in the credit spreads, the fair value of the junior subordinated debentures decreased during the year. A gain of $25.9 million for the year ended December 31, 2019, as compared to the loss of $23.3 million for the year ended December 31, 2018, were recorded in other comprehensive income (loss).
Note 17 – Employee Benefit Plans
Employee Savings Plan-Substantially all of the Company's employees are eligible to participate in the Umpqua Bank 401(k) and Profit Sharing Plan (the "Umpqua 401(k) Plan"), a defined contribution and profit sharing plan sponsored by the Company. Employees may elect to have a portion of their salary contributed to the plan in conformity with Section 401(k) of the Internal Revenue Code. At the discretion of the Company's Board of Directors, the Company may elect to make matching and/or profit sharing contributions to the Umpqua 401(k) Plan based on profits of the Bank. As of December 31, 2019, the Company had no accrued funds for employee profit sharing to be paid subsequent to year-end compared to $3.3 million as of December 31, 2018. The Company's contributions charged to expense including the match and profit sharing amounted to $8.6 million, $10.7 million, and $9.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Supplemental Retirement Plans-The Company has established the Umpqua Holdings Corporation Deferred Compensation & Supplemental Retirement Plan (the "DC/SRP"), a nonqualified deferred compensation plan to help supplement the retirement income of certain highly compensated executives selected by resolution of the Company's Board of Directors. The DC/SRP has two components, a supplemental retirement plan ("SRP") and a deferred compensation plan ("DCP"). The Company may make discretionary contributions to the SRP. The SRP plan balances at December 31, 2019 and 2018 were $529,000 and $475,000, respectively, and are recorded in other liabilities. Under the DCP, eligible officers may elect to defer up to 50% of their salary into a plan account. The DCP plan balance was $9.7 million and $8.6 million at December 31, 2019 and 2018, respectively. In addition, the Company has established a supplemental retirement plan for the former Executive Chairman of the Board of Directors. The balance for this plan was $9.0 million and $9.4 million as of December 31, 2019 and 2018, respectively.
Acquired Plans- In connection with prior acquisitions, the Bank assumed liability for certain salary continuation, supplemental retirement, and deferred compensation plans for key employees, retired employees and directors of acquired institutions. Subsequent to the effective date of these acquisitions, no additional contributions were made to these plans. These plans are unfunded, and provide for the payment of a specified amount on a monthly basis for a specified period (generally 10 to 20 years) after retirement. In the event of a participant employee's death prior to or during retirement, the Bank, in most cases, is obligated to pay to the designated beneficiary the benefits set forth under the plans. At December 31, 2019 and 2018, liabilities recorded for the estimated present value of future plan benefits totaled $28.7 million and $27.3 million, respectively, and are recorded in other liabilities. For the years ended December 31, 2019, 2018 and 2017, expense recorded for these plan's benefits totaled $1.5 million, $1.0 million, and $2.2 million, respectively.
Rabbi Trusts-The Bank has established, for the DC/SRP plan noted above, and sponsors, for some deferred compensation plans assumed in connection with prior mergers, irrevocable trusts commonly referred to as "Rabbi Trusts." The trust assets (generally cash and trading assets) are consolidated in the Company's balance sheets and the associated liability (which equals the related asset balances) is included in other liabilities. The asset and liability balances related to these trusts as of December 31, 2019 and 2018 were $12.2 million and $11.0 million, respectively.
Bank-Owned Life Insurance-The Bank has purchased, or acquired through mergers, life insurance policies in connection with the implementation of certain executive supplemental income, salary continuation and deferred compensation retirement plans. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to offset expenses associated with the plans. It is the Bank's intent to hold these policies as a long-term investment. However, there will be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level employees are insured, the Bank is the owner and sole or partial beneficiary. At December 31, 2019 and 2018, the cash surrender value of these policies was $320.6 million and $313.6 million, respectively. At December 31, 2019 and 2018, the Bank also had liabilities for post-retirement benefits payable to other partial beneficiaries under some of these life insurance policies of $3.4 million and $6.8 million, respectively. The Bank is exposed to credit risk to the extent an insurance company is unable to fulfill its financial obligations under a policy. In order to mitigate this risk, the Bank uses a variety of insurance companies and regularly monitors their financial condition.
Note 18 – 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)
|
December 31, 2019
|
Commitments to extend credit
|
$
|
5,620,547
|
|
Forward sales commitments
|
$
|
668,177
|
|
Commitments to originate residential mortgage loans held for sale
|
$
|
289,136
|
|
Standby letters of credit
|
$
|
106,307
|
|
The Bank is a party to financial instruments with off-balance-sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve elements of credit and interest-rate risk similar to the risk involved in on-balance sheet items recognized in the Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any covenant or condition established in the applicable contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. While most standby letters of credit are not utilized, a significant portion of such utilization is on an immediate payment basis. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral varies but may include cash, accounts receivable, inventory, premises and equipment and income-producing commercial properties.
Standby letters of credit and written financial guarantees are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including international trade finance, commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary. There were no financial guarantees in connection with standby letters of credit that the Bank was required to perform on for the years ended December 31, 2019 and 2018. At December 31, 2019, approximately $94.2 million of standby letters of credit expire within one year, and $12.1 million expire thereafter. During the years ended December 31, 2019 and 2018, the Bank recorded approximately $1.5 million and $787,000, respectively in fees associated with standby letters of credit.
Residential mortgage loans sold into the secondary market are sold with limited recourse against the Company, meaning that the Company may be obligated to repurchase or otherwise reimburse the investor for incurred losses on any loans that suffer an early payment default, are not underwritten in accordance with investor guidelines or are determined to have pre-closing borrower misrepresentations. As of December 31, 2019, the Company had a residential mortgage loan repurchase reserve liability of $1.6 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 December 31, 2019, the Bank has recorded a liability for the loans subject to this repurchase right of $4.3 million, and has recorded these loans as part of the loan portfolio as if the Bank had repurchased these loans.
Legal Proceedings—The Company is involved in legal proceedings occurring in the ordinary course of business. Based on information currently available, advice of counsel and available insurance coverage, management believes 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 its consolidated financial condition. However, it is possible that the ultimate resolution of a matter, if unfavorable, may be material to results of operations for any particular period.
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, management evaluated every part of operations and how the Company could evolve to deliver a highly differentiated and compelling banking experience. In 2018, the Bank consolidated 31 stores. During the year ended December 31, 2019, the Bank consolidated an additional 23 stores and sold 4 stores. These costs were included in exit and disposal costs within other expenses in non-interest expense. Additional costs may be incurred as these stores are consolidated. The Next Gen strategy involves evaluation of these consolidations and possible future consolidations as part of the strategy.
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 76% and 75% of the Bank's loan and lease portfolio for December 31, 2019 and 2018, respectively. Commercial real estate concentrations are managed to ensure 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 19 – 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 2019, 2018, and 2017. Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Bank limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the Company completes the transaction by either paying or receiving a fee to or from the broker/dealer equal to the increase or decrease in the market value of the forward contract. At December 31, 2019, the Bank had commitments to originate mortgage loans held for sale totaling $289.1 million and forward sales commitments of $668.2 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 December 31, 2019, the Bank had 846 interest rate swaps with an aggregate notional amount of $5.7 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.
As of December 31, 2019 and 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 $7.0 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 $86.2 million and $36.9 million as of December 31, 2019 and 2018, respectively.
The Bank'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. The Company accounts for the variation margin as an adjustment to cash collateral, as well as a corresponding adjustment to the derivative asset and liability. As of December 31, 2019 and 2018, the variation margin adjustment was a negative adjustment of $144.8 million and $32.5 million, respectively.
The Bank incorporates credit valuation adjustments ("CVA") to appropriately reflect nonperformance risk in the fair value measurement of its derivatives. As of December 31, 2019 and 2018, the net CVA decreased the settlement values of the Bank's net derivative assets by $9.1 million and $3.0 million, respectively. Various factors impact changes in the CVA over time, including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.
The Bank also executes foreign currency hedges as a service for customers. These foreign currency hedges are then offset with hedges with other third-party banks to limit the Bank's risk exposure.
The Bank's derivative assets are included in other assets, while the derivative liabilities are included in other liabilities on the consolidated balance sheet. The following table summarizes the types of derivatives, separately by assets and liabilities and the fair values of such derivatives as of December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Asset Derivatives
|
|
|
|
Liability Derivatives
|
|
|
Derivatives not designated as hedging instrument
|
|
December 31, 2019
|
|
December 31, 2018
|
|
December 31, 2019
|
|
December 31, 2018
|
Interest rate lock commitments
|
|
$
|
7,056
|
|
|
$
|
6,757
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate forward sales commitments
|
|
105
|
|
|
1
|
|
|
1,351
|
|
|
2,963
|
|
Interest rate swaps
|
|
142,787
|
|
|
42,276
|
|
|
7,001
|
|
|
12,746
|
|
Foreign currency derivatives
|
|
626
|
|
|
450
|
|
|
456
|
|
|
273
|
|
Total derivative assets and liabilities
|
|
$
|
150,574
|
|
|
$
|
49,484
|
|
|
$
|
8,808
|
|
|
$
|
15,982
|
|
The following table summarizes the types of derivatives and the gains (losses) recorded during the years ended December 31, 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
Derivatives not designated as hedging instrument
|
|
2019
|
|
2018
|
|
2017
|
Interest rate lock commitments
|
|
$
|
298
|
|
|
$
|
2,006
|
|
|
$
|
676
|
|
Interest rate forward sales commitments
|
|
(12,096)
|
|
|
9,144
|
|
|
(11,024)
|
|
Interest rate swaps
|
|
(6,038)
|
|
|
(1,362)
|
|
|
(1,451)
|
|
Foreign currency derivatives
|
|
2,078
|
|
|
1,672
|
|
|
1,094
|
|
Total derivative (losses) gains
|
|
$
|
(15,758)
|
|
|
$
|
11,460
|
|
|
$
|
(10,705)
|
|
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.
Note 20 – Stock Compensation and Share Repurchase Plan
Stock-Based Compensation
The compensation cost related to restricted stock, stock options and restricted stock units in Company stock granted to employees and included in salaries and employee benefits was $7.0 million, $6.3 million and $8.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. The total income tax benefit recognized related to stock-based compensation was $1.8 million, $1.6 million and $3.3 million for the years ended December 31, 2019, 2018, and 2017, respectively.
As of December 31, 2019, there was $10.8 million of total unrecognized compensation cost related to nonvested restricted stock awards which is expected to be recognized over a weighted-average period of 1.77 years, assuming expected performance conditions are met for certain awards.
The Company grants restricted stock periodically for the benefit of employees and directors. Restricted shares generally vest over a three year period, subject to time or time plus performance vesting conditions. The following table summarizes information about nonvested restricted share activity for the years ended December 31, 2019, 2018, and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
|
(shares in thousands)
|
Restricted
Shares Outstanding
|
|
Weighted Average
Grant Date
Fair Value
|
|
Restricted Shares Outstanding
|
|
Weighted Average
Grant Date
Fair Value
|
|
Restricted
Shares Outstanding
|
|
Weighted Average
Grant Date
Fair Value
|
Balance, beginning of period
|
979
|
|
|
$
|
19.10
|
|
|
1,248
|
|
|
$
|
16.61
|
|
|
1,096
|
|
|
$
|
15.61
|
|
Granted
|
628
|
|
|
$
|
17.74
|
|
|
521
|
|
|
$
|
21.76
|
|
|
624
|
|
|
$
|
18.19
|
|
Vested/released
|
(388)
|
|
|
$
|
17.34
|
|
|
(554)
|
|
|
$
|
16.81
|
|
|
(318)
|
|
|
$
|
16.37
|
|
Forfeited/expired
|
(36)
|
|
|
$
|
19.58
|
|
|
(236)
|
|
|
$
|
17.19
|
|
|
(154)
|
|
|
$
|
16.39
|
|
Balance, end of period
|
1,183
|
|
|
$
|
18.94
|
|
|
979
|
|
|
$
|
19.10
|
|
|
1,248
|
|
|
$
|
16.61
|
|
The total fair value of restricted shares vested and released was $6.7 million, $11.9 million, and $5.8 million, for the years ended December 31, 2019, 2018 and 2017, respectively.
For the years ended December 31, 2019, 2018 and 2017, the Company received income tax benefits of $1.8 million, $3.4 million, and $2.7 million, respectively, related to the vesting of restricted shares. The tax deficiency or benefit is recorded as income tax expense or benefit in the period the shares are vested.
Share Repurchase Plan- The Company's share repurchase plan authorizes the repurchase of up to 15 million shares of common stock. The repurchase program has been extended multiple times by the board with the current expiration date of July 31, 2021. As of December 31, 2019, a total of 9.9 million shares remain available for repurchase. The Company repurchased 300,000, 327,000, and 325,000 shares under the repurchase plan in the years ended December 31, 2019, 2018, and 2017, respectively. The timing and amount of future repurchases will depend upon the market price for the Company's common stock, securities laws and regulations restricting repurchases, asset growth, earnings, and capital plan.
The Company also has restricted stock plans which provide for the payment of withholding taxes or the option exercise price by tendering previously owned or recently vested shares. Restricted shares cancelled to pay withholding taxes totaled 115,000, 187,000, and 91,000 shares during the years ended December 31, 2019, 2018 and 2017, respectively.
Note 21 – Regulatory Capital
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company's operations and financial statements. Under capital adequacy guidelines, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classifications are also subject to qualitative judgments by the regulators about risk components, asset risk weighting, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier 1 capital and Tier 1 common to risk-weighted assets (as defined in the regulations), and of Tier 1 capital to average assets (as defined in the regulations). Management believes, as of December 31, 2019, that the Company meets all capital adequacy requirements to which it is subject.
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 Basel III at December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
|
For Capital Adequacy Purposes
|
|
|
|
To be Well Capitalized
|
|
|
(dollars in thousands)
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
3,104,444
|
|
|
13.96
|
%
|
|
$
|
1,779,265
|
|
|
8.00
|
%
|
|
$
|
2,224,081
|
|
|
10.00
|
%
|
Umpqua Bank
|
$
|
2,945,830
|
|
|
13.26
|
%
|
|
$
|
1,777,265
|
|
|
8.00
|
%
|
|
$
|
2,221,581
|
|
|
10.00
|
%
|
Tier 1 Capital
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
2,490,709
|
|
|
11.20
|
%
|
|
$
|
1,334,449
|
|
|
6.00
|
%
|
|
$
|
1,779,265
|
|
|
8.00
|
%
|
Umpqua Bank
|
$
|
2,783,095
|
|
|
12.53
|
%
|
|
$
|
1,332,949
|
|
|
6.00
|
%
|
|
$
|
1,777,265
|
|
|
8.00
|
%
|
Tier 1 Common
|
|
|
|
|
|
|
|
|
|
|
|
(to Risk Weighted Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
2,490,709
|
|
|
11.20
|
%
|
|
$
|
1,000,837
|
|
|
4.50
|
%
|
|
$
|
1,445,653
|
|
|
6.50
|
%
|
Umpqua Bank
|
$
|
2,783,095
|
|
|
12.53
|
%
|
|
$
|
999,712
|
|
|
4.50
|
%
|
|
$
|
1,444,028
|
|
|
6.50
|
%
|
Tier 1 Capital
|
|
|
|
|
|
|
|
|
|
|
|
(to Average Assets)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
2,490,709
|
|
|
9.16
|
%
|
|
$
|
1,087,509
|
|
|
4.00
|
%
|
|
$
|
1,359,387
|
|
|
5.00
|
%
|
Umpqua Bank
|
$
|
2,783,095
|
|
|
10.24
|
%
|
|
$
|
1,086,999
|
|
|
4.00
|
%
|
|
$
|
1,358,749
|
|
|
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 1 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 1 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 1 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
|
%
|
Note 22 – Fair Value Measurement
The following table presents estimated fair values of the Company's financial instruments as of December 31, 2019 and 2018, whether or not recognized or recorded at fair value in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
(in thousands)
|
Level
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
1
|
|
|
$
|
1,362,756
|
|
|
$
|
1,362,756
|
|
|
$
|
622,637
|
|
|
$
|
622,637
|
|
Equity and other investment securities
|
1,2
|
|
|
80,165
|
|
|
80,165
|
|
|
61,841
|
|
|
61,841
|
|
Investment securities available for sale
|
2
|
|
|
2,814,682
|
|
|
2,814,682
|
|
|
2,977,108
|
|
|
2,977,108
|
|
Investment securities held to maturity
|
3
|
|
|
3,260
|
|
|
4,263
|
|
|
3,606
|
|
|
4,644
|
|
Loans held for sale, at fair value
|
2
|
|
|
513,431
|
|
|
513,431
|
|
|
166,461
|
|
|
166,461
|
|
Loans and leases, net
|
3
|
|
|
21,038,055
|
|
|
21,274,319
|
|
|
20,277,795
|
|
|
20,117,939
|
|
|
|
|
|
|
|
|
|
|
|
Restricted equity securities
|
1
|
|
|
46,463
|
|
|
46,463
|
|
|
40,268
|
|
|
40,268
|
|
Residential mortgage servicing rights
|
3
|
|
|
115,010
|
|
|
115,010
|
|
|
169,025
|
|
|
169,025
|
|
Bank owned life insurance
|
1
|
|
|
320,611
|
|
|
320,611
|
|
|
313,626
|
|
|
313,626
|
|
Derivatives
|
2,3
|
|
|
150,574
|
|
|
150,574
|
|
|
49,484
|
|
|
49,484
|
|
Visa Inc. Class B common stock (1)
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
99,353
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
1,2
|
|
|
$
|
22,481,504
|
|
|
$
|
22,503,916
|
|
|
$
|
21,137,486
|
|
|
$
|
21,116,852
|
|
Securities sold under agreements to repurchase
|
2
|
|
|
311,308
|
|
|
311,308
|
|
|
297,151
|
|
|
297,151
|
|
Borrowings
|
2
|
|
|
906,635
|
|
|
906,160
|
|
|
751,788
|
|
|
738,107
|
|
Junior subordinated debentures, at fair value
|
3
|
|
|
274,812
|
|
|
274,812
|
|
|
300,870
|
|
|
300,870
|
|
Junior subordinated debentures, at amortized cost
|
3
|
|
|
88,496
|
|
|
70,909
|
|
|
88,724
|
|
|
76,569
|
|
Derivatives
|
2
|
|
|
8,808
|
|
|
8,808
|
|
|
15,982
|
|
|
15,982
|
|
(1) During 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 December 31, 2019, as the Company no longer holds this security.
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 December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
|
|
|
|
|
Description
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
Equity and other investment securities
|
|
|
|
|
|
|
|
Investments in mutual funds and other securities
|
$
|
67,133
|
|
|
$
|
52,096
|
|
|
$
|
15,037
|
|
|
$
|
—
|
|
Equity securities held in rabbi trusts
|
12,147
|
|
|
12,147
|
|
|
—
|
|
|
—
|
|
Other investments securities (1)
|
885
|
|
|
—
|
|
|
885
|
|
|
—
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
643,604
|
|
|
—
|
|
|
643,604
|
|
|
—
|
|
Obligations of states and political subdivisions
|
261,094
|
|
|
—
|
|
|
261,094
|
|
|
—
|
|
Residential mortgage-backed securities and collateralized mortgage obligations
|
1,909,984
|
|
|
—
|
|
|
1,909,984
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Loans held for sale, at fair value
|
513,431
|
|
|
—
|
|
|
513,431
|
|
|
—
|
|
Residential mortgage servicing rights, at fair value
|
115,010
|
|
|
|
—
|
|
|
|
—
|
|
|
|
115,010
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments
|
7,056
|
|
|
—
|
|
|
—
|
|
|
7,056
|
|
Interest rate forward sales commitments
|
105
|
|
|
—
|
|
|
105
|
|
|
—
|
|
Interest rate swaps
|
142,787
|
|
|
—
|
|
|
142,787
|
|
|
—
|
|
Foreign currency derivatives
|
626
|
|
|
—
|
|
|
626
|
|
|
—
|
|
Total assets measured at fair value
|
$
|
3,673,862
|
|
|
$
|
64,243
|
|
|
$
|
3,487,553
|
|
|
$
|
122,066
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Junior subordinated debentures, at fair value
|
$
|
274,812
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
274,812
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate forward sales commitments
|
1,351
|
|
|
—
|
|
|
1,351
|
|
|
—
|
|
Interest rate swaps
|
7,001
|
|
|
—
|
|
|
7,001
|
|
|
—
|
|
Foreign currency derivatives
|
456
|
|
|
—
|
|
|
456
|
|
|
—
|
|
Total liabilities measured at fair value
|
$
|
283,620
|
|
|
$
|
—
|
|
|
$
|
8,808
|
|
|
$
|
274,812
|
|
(1) Other investment securities includes securities held by Umpqua Investments as trading debt securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 derivatives
|
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 derivatives
|
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 MSRs 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.
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, the Company has 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 December 31, 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 December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instrument
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Weighted Average
|
Residential mortgage servicing rights
|
|
Discounted cash flow
|
|
|
|
|
|
|
|
|
Constant prepayment rate
|
|
13.33%
|
|
|
|
|
|
Discount rate
|
|
9.75%
|
|
Interest rate lock commitments
|
|
Internal pricing model
|
|
|
|
|
|
|
|
|
Pull-through rate
|
|
87.98%
|
|
Junior subordinated debentures
|
|
Discounted cash flow
|
|
|
|
|
|
|
|
|
Credit spread
|
|
5.14%
|
|
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 an 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 a decline in discount rates, partially offset by an increase in the credit spread for this type of debt. 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 December 31, 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 a decrease in 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 an increase in the fair value measurement).
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 years ended December 31, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
(in thousands)
|
Residential mortgage servicing rights
|
|
|
Interest rate lock commitments, net
|
|
|
Junior subordinated debentures, at fair value
|
|
|
Residential mortgage servicing rights
|
|
|
Interest rate lock commitments, net
|
|
|
Junior subordinated debentures, at fair value
|
|
Beginning balance
|
$
|
169,025
|
|
|
$
|
6,757
|
|
|
$
|
300,870
|
|
|
$
|
153,151
|
|
|
$
|
4,752
|
|
|
$
|
277,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change included in earnings
|
(44,783)
|
|
|
5,652
|
|
|
18,183
|
|
|
(13,195)
|
|
|
(27)
|
|
|
17,114
|
|
Change in fair values included in comprehensive income/loss
|
—
|
|
|
—
|
|
|
(25,855)
|
|
|
—
|
|
|
—
|
|
|
23,268
|
|
Purchases and issuances
|
25,169
|
|
|
29,291
|
|
|
—
|
|
|
29,069
|
|
|
23,010
|
|
|
—
|
|
Sales and settlements
|
(34,401)
|
|
|
(34,644)
|
|
|
(18,386)
|
|
|
—
|
|
|
(20,978)
|
|
|
(16,667)
|
|
Ending balance
|
$
|
115,010
|
|
|
$
|
7,056
|
|
|
$
|
274,812
|
|
|
$
|
169,025
|
|
|
$
|
6,757
|
|
|
$
|
300,870
|
|
Net change in unrealized (losses) or gains relating to items held at end of period
|
$
|
(19,375)
|
|
|
$
|
7,056
|
|
|
$
|
(7,672)
|
|
|
$
|
11,338
|
|
|
$
|
6,757
|
|
|
$
|
40,382
|
|
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.
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 year ended December 31, 2019 of $25.9 million are recorded net of tax as other comprehensive income of $19.2 million. Comparatively, losses of $23.3 million were recorded net of tax as other comprehensive losses of $17.3 million for the year ended December 31, 2018. The gain recorded for the year ended December 31, 2019 was due primarily to a decline in the discount rates, partially offset by 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
(in thousands)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Loans and leases
|
$
|
18,134
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,134
|
|
Other real estate owned
|
2,079
|
|
|
—
|
|
|
—
|
|
|
2,079
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value on a nonrecurring basis
|
$
|
20,213
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
(in thousands)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Loans and leases
|
$
|
98,696
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
98,696
|
|
Other real estate owned
|
7,532
|
|
|
—
|
|
|
—
|
|
|
7,532
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value on a nonrecurring basis
|
$
|
106,228
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
106,228
|
|
The following table presents the losses resulting from nonrecurring fair value adjustments for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases
|
$
|
67,956
|
|
|
$
|
59,727
|
|
|
$
|
48,488
|
|
Other real estate owned
|
3,013
|
|
|
1,277
|
|
|
146
|
|
|
|
|
|
|
|
Total losses from nonrecurring measurements
|
$
|
70,969
|
|
|
$
|
61,004
|
|
|
$
|
48,634
|
|
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 a collateral dependent loan or lease is identified as impaired, the Bank measures the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals, but in some cases, the value of the collateral may be estimated as having little to no value. If it is determined that the value of the impaired loan or lease is less than its recorded investment, the Bank recognizes this impairment and adjusts 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.
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 December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
(in thousands)
|
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
|
$
|
513,431
|
|
|
$
|
496,683
|
|
|
$
|
16,748
|
|
|
$
|
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 Consolidated Statements of Income. For the years ended December 31, 2019, 2018 and 2017, the Company recorded a net increase in fair value of $10.6 million, a net decrease of $2.6 million, and a net increase of $453,000, respectively, representing the change in fair value reflected in earnings.
The Company selected the fair value measurement option for the Umpqua Statutory Trusts and for junior subordinated debentures acquired from Sterling Financial Corporation. 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 the Company to more closely align financial performance with the economic value of those liabilities. Additionally, it improves the 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 the Company's, or similar, junior subordinated debenture liabilities or the related trust preferred securities when traded as assets, the Company utilizes an income approach valuation technique to determine the fair value of these liabilities using 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 entity-specific creditworthiness, to validate the reasonableness of the credit risk adjusted spread and effective yield utilized in the discounted cash flow model. The Company also considers changes in the interest rate environment in the valuation, specifically the absolute level and the shape of the slope of the forward swap curve.
Note 23 – Earnings Per Common Share
The following is a computation of basic and diluted earnings per common share for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
2019
|
|
2018
|
|
2017
|
Net income
|
$
|
354,095
|
|
|
$
|
316,263
|
|
|
$
|
242,313
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
220,339
|
|
|
220,280
|
|
|
220,251
|
|
Effect of potentially dilutive common shares (1)
|
311
|
|
|
457
|
|
|
585
|
|
Weighted average number of common shares outstanding - diluted
|
220,650
|
|
|
220,737
|
|
|
220,836
|
|
Earnings per common share:
|
|
|
|
|
|
Basic
|
$
|
1.61
|
|
|
$
|
1.44
|
|
|
$
|
1.10
|
|
Diluted
|
$
|
1.60
|
|
|
$
|
1.43
|
|
|
$
|
1.10
|
|
(1) Represents the effect of the assumed vesting of non-participating restricted shares, exercise of stock options, and vesting of restricted stock units, based on the treasury stock method.
The were 244,000 weighted average outstanding restricted shares that were not included in the computation of diluted earnings per common share because their effect would be anti-dilutive for the year ended December 31, 2019.
Note 24 – Segment Information
The Company reports four primary segments: Wholesale Bank, Wealth Management, Retail Bank, and Home Lending with the remainder as Corporate and other.
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 the operations of FinPac. 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. A primary objective of this profitability measurement system and related internal financial reporting practices are designed to produce consistent results that reflect the underlying economics of the business and to support strategic objectives and analysis based on how management views the business. Various methodologies employed within this system to measure performance are based on management's judgment or other subjective factors. Consequently, the information presented is not necessarily comparable with similar information for other financial institutions.
This system uses various techniques to assign balance sheet and income statement amounts to the business segments, including internal funds transfer pricing, allocations of income, expense, the provision for credit losses, and capital. 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.
Funds transfer pricing is used in the determination of net interest income reported by assigning a cost for funds used or credit for funds provided to all assets and liabilities within each business segment. In general, assets and liabilities are match-funded based on their maturity or repricing characteristics, adjusted for estimated prepayments if applicable. The value of funds provided or cost of funds used by the business segments is priced at rates that approximate wholesale market rates of the Company for funds with similar duration and re-pricing characteristics. Market rates are generally based on LIBOR or interest rate swap rates, plus consideration of the Company's incremental credit spread/cost of borrowing. As a result, the business segments are generally insulated from changes in interest rates. This method of funds transfer pricing also serves to transfer interest rate risk to Treasury, which is contained within the Corporate & Other segment. However, the business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions that are within overall Corporate guidelines.
Non-interest income and expenses directly attributable to a business segment are directly recorded within that business unit. To better analyze the total financial performance of each business unit and to consider the total cost to support a segment, management allocates centrally provided support services and other corporate overhead to the business segments based on various methodologies. Examples of these type of expense overhead pools include information technology, operations, human resources, finance, risk management, credit administration, legal, and marketing. Expense allocations are based on actual usage where practicably calculated or by management's estimate of such usage. Example of typical expense allocation drivers include number of employees, loan or deposits average balances or counts, origination or transaction volumes, credit quality related indicators, non-interest expense, or other identified drivers.
The provision for loan and lease losses is based on the methodology consistent with the Bank's process to estimate the consolidated allowance. The provision for credit losses incorporates the actual net charge-offs recognized related to loans contained within each business segment. The residual provision for credit losses to arrive at the consolidated provision for credit losses is included in Corporate and Other.
The provision for income taxes is allocated to business segments using a 25% effective tax rate for 2019 and 2018 and 37% for 2017. The residual income tax expense or benefit arising from changes in tax rates, 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 for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Wholesale Bank
|
|
Wealth Management
|
|
Retail Bank
|
|
Home Lending
|
|
Corporate & Other
|
|
Consolidated
|
Net interest income
|
$
|
431,591
|
|
|
$
|
23,240
|
|
|
$
|
348,583
|
|
|
$
|
46,603
|
|
|
$
|
70,617
|
|
|
$
|
920,634
|
|
Provision for loan and lease losses
|
64,346
|
|
|
804
|
|
|
4,923
|
|
|
2,033
|
|
|
409
|
|
|
72,515
|
|
Non-interest income
|
65,257
|
|
|
18,658
|
|
|
63,574
|
|
|
102,239
|
|
|
90,096
|
|
|
339,824
|
|
Non-interest expense
|
224,804
|
|
|
36,976
|
|
|
264,345
|
|
|
135,168
|
|
|
57,747
|
|
|
719,040
|
|
Income before income taxes
|
207,698
|
|
|
4,118
|
|
|
142,889
|
|
|
11,641
|
|
|
102,557
|
|
|
468,903
|
|
Provision for income taxes
|
51,924
|
|
|
1,030
|
|
|
35,722
|
|
|
2,910
|
|
|
23,222
|
|
|
114,808
|
|
Net income
|
$
|
155,774
|
|
|
$
|
3,088
|
|
|
$
|
107,167
|
|
|
$
|
8,731
|
|
|
$
|
79,335
|
|
|
$
|
354,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
14,864,484
|
|
|
$
|
710,873
|
|
|
$
|
2,293,362
|
|
|
$
|
4,423,869
|
|
|
$
|
6,554,221
|
|
|
$
|
28,846,809
|
|
Total loans and leases
|
$
|
14,581,339
|
|
|
$
|
693,569
|
|
|
$
|
2,209,990
|
|
|
$
|
3,768,584
|
|
|
$
|
(57,798)
|
|
|
$
|
21,195,684
|
|
Total deposits
|
$
|
4,293,384
|
|
|
$
|
1,221,869
|
|
|
$
|
13,717,335
|
|
|
$
|
279,226
|
|
|
$
|
2,969,690
|
|
|
$
|
22,481,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Wholesale Bank
|
|
Wealth Management
|
|
Retail Bank
|
|
Home Lending
|
|
Corporate & Other
|
|
Consolidated
|
Net interest income
|
$
|
451,513
|
|
|
$
|
24,346
|
|
|
$
|
339,180
|
|
|
$
|
39,897
|
|
|
$
|
83,703
|
|
|
$
|
938,639
|
|
Provision (recapture) for loan and lease losses
|
50,248
|
|
|
1,025
|
|
|
3,205
|
|
|
1,628
|
|
|
(201)
|
|
|
55,905
|
|
Non-interest income
|
59,118
|
|
|
19,434
|
|
|
63,407
|
|
|
119,538
|
|
|
17,920
|
|
|
279,417
|
|
Non-interest expense
|
224,260
|
|
|
36,165
|
|
|
274,306
|
|
|
130,404
|
|
|
74,330
|
|
|
739,465
|
|
Income before income taxes
|
236,123
|
|
|
6,590
|
|
|
125,076
|
|
|
27,403
|
|
|
27,494
|
|
|
422,686
|
|
Provision for income taxes
|
59,031
|
|
|
1,648
|
|
|
31,269
|
|
|
6,851
|
|
|
7,624
|
|
|
106,423
|
|
Net income
|
$
|
177,092
|
|
|
$
|
4,942
|
|
|
$
|
93,807
|
|
|
$
|
20,552
|
|
|
$
|
19,870
|
|
|
$
|
316,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Wholesale Bank
|
|
Wealth Management
|
|
Retail Bank
|
|
Home Lending
|
|
Corporate & Other
|
|
Consolidated
|
Net interest income
|
$
|
434,942
|
|
|
$
|
22,103
|
|
|
$
|
282,622
|
|
|
$
|
39,487
|
|
|
$
|
86,531
|
|
|
$
|
865,685
|
|
Provision for loan and lease losses
|
37,108
|
|
|
360
|
|
|
7,701
|
|
|
1,692
|
|
|
393
|
|
|
47,254
|
|
Non-interest income
|
52,054
|
|
|
18,697
|
|
|
62,366
|
|
|
142,763
|
|
|
2,607
|
|
|
278,487
|
|
Non-interest expense
|
218,266
|
|
|
32,123
|
|
|
288,236
|
|
|
146,690
|
|
|
62,560
|
|
|
747,875
|
|
Income before income taxes
|
231,622
|
|
|
8,317
|
|
|
49,051
|
|
|
33,868
|
|
|
26,185
|
|
|
349,043
|
|
Provision (benefit) for income taxes
|
85,700
|
|
|
3,077
|
|
|
18,149
|
|
|
12,531
|
|
|
(12,727)
|
|
|
106,730
|
|
Net income
|
$
|
145,922
|
|
|
$
|
5,240
|
|
|
$
|
30,902
|
|
|
$
|
21,337
|
|
|
$
|
38,912
|
|
|
$
|
242,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
13,856,963
|
|
|
$
|
437,873
|
|
|
$
|
2,143,830
|
|
|
$
|
3,355,189
|
|
|
$
|
5,886,592
|
|
|
$
|
25,680,447
|
|
Total loans and leases
|
$
|
13,683,264
|
|
|
$
|
423,813
|
|
|
$
|
2,054,058
|
|
|
$
|
2,921,897
|
|
|
$
|
(63,840)
|
|
|
$
|
19,019,192
|
|
Total deposits
|
$
|
3,776,080
|
|
|
$
|
993,559
|
|
|
$
|
12,449,568
|
|
|
$
|
222,494
|
|
|
$
|
2,506,599
|
|
|
$
|
19,948,300
|
|
Note 25 – Related Party Transactions
In the ordinary course of business, the Bank has made loans to its directors and executive officers (and their associated and affiliated companies). All such loans have been made in accordance with regulatory requirements.
The following table presents a summary of aggregate activity involving related party borrowers for the years ended December 31, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
Loans outstanding at beginning of year
|
$
|
9,079
|
|
|
$
|
8,983
|
|
|
$
|
9,836
|
|
New loans and advances
|
4,943
|
|
|
2,951
|
|
|
3,982
|
|
Less loan repayments
|
(3,482)
|
|
|
(2,854)
|
|
|
(3,516)
|
|
Reclassification (1)
|
—
|
|
|
(1)
|
|
|
(1,319)
|
|
Loans outstanding at end of year
|
$
|
10,540
|
|
|
$
|
9,079
|
|
|
$
|
8,983
|
|
(1) Represents loans that were once considered related party but are no longer considered related party, or loans that were not related party that subsequently became related party loans.
At December 31, 2019 and 2018, deposits of related parties amounted to $27.2 million and $18.9 million, respectively.
Note 26 – Parent Company Financial Statements
Summary financial information for Umpqua Holdings Corporation is as follows:
Condensed Balance Sheets
December 31, 2019 and 2018
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2019
|
|
December 31, 2018
|
ASSETS
|
|
|
|
Non-interest bearing deposits with subsidiary bank
|
$
|
130,368
|
|
|
$
|
116,245
|
|
Investments in:
|
|
|
|
Bank subsidiary
|
4,590,888
|
|
|
4,360,983
|
|
Non-bank subsidiaries
|
29,126
|
|
|
28,330
|
|
Other assets
|
518
|
|
|
8,478
|
|
Total assets
|
$
|
4,750,900
|
|
|
$
|
4,514,036
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
Payable to bank subsidiary
|
$
|
91
|
|
|
$
|
278
|
|
Other liabilities
|
73,586
|
|
|
67,722
|
|
Junior subordinated debentures, at fair value
|
274,812
|
|
|
300,870
|
|
Junior subordinated debentures, at amortized cost
|
88,496
|
|
|
88,724
|
|
Total liabilities
|
436,985
|
|
|
457,594
|
|
Shareholders' equity
|
4,313,915
|
|
|
4,056,442
|
|
Total liabilities and shareholders' equity
|
$
|
4,750,900
|
|
|
$
|
4,514,036
|
|
Condensed Statements of Income
Years Ended December 31, 2019, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
INCOME
|
|
|
|
|
|
Dividends from subsidiaries
|
$
|
219,143
|
|
|
$
|
212,457
|
|
|
$
|
177,798
|
|
Other (loss) income
|
(18)
|
|
|
1,154
|
|
|
(14,678)
|
|
Total income
|
219,125
|
|
|
213,611
|
|
|
163,120
|
|
EXPENSES
|
|
|
|
|
|
Management fees paid to subsidiaries
|
1,144
|
|
|
1,014
|
|
|
1,003
|
|
Other expenses
|
25,311
|
|
|
23,725
|
|
|
20,325
|
|
Total expenses
|
26,455
|
|
|
24,739
|
|
|
21,328
|
|
Income before income tax benefit and equity in undistributed earnings of subsidiaries
|
192,670
|
|
|
188,872
|
|
|
141,792
|
|
Income tax benefit
|
(5,742)
|
|
|
(5,052)
|
|
|
(25,679)
|
|
Net income before equity in undistributed earnings of subsidiaries
|
198,412
|
|
|
193,924
|
|
|
167,471
|
|
Equity in undistributed earnings of subsidiaries
|
155,683
|
|
|
122,339
|
|
|
74,842
|
|
Net income
|
$
|
354,095
|
|
|
$
|
316,263
|
|
|
$
|
242,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Cash Flows
Years Ended December 31, 2019, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
|
2017
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income
|
$
|
354,095
|
|
|
$
|
316,263
|
|
|
$
|
242,313
|
|
Adjustment to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Gain on Pivotus divestiture
|
—
|
|
|
(5,778)
|
|
|
—
|
|
Equity in undistributed earnings of subsidiaries
|
(155,683)
|
|
|
(122,339)
|
|
|
(74,842)
|
|
Depreciation, amortization and accretion
|
(228)
|
|
|
(244)
|
|
|
(322)
|
|
Change in junior subordinated debentures carried at fair value
|
—
|
|
|
—
|
|
|
14,946
|
|
Net decrease (increase) in other assets
|
7,960
|
|
|
(1,696)
|
|
|
3,532
|
|
Net increase (decrease) in other liabilities
|
79
|
|
|
1,581
|
|
|
(2,006)
|
|
Net cash provided by operating activities
|
206,223
|
|
|
187,787
|
|
|
183,621
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
Change in advances to subsidiaries
|
69
|
|
|
(211)
|
|
|
1,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
69
|
|
|
(211)
|
|
|
1,690
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
Net increase in advances from subsidiaries
|
179
|
|
|
163
|
|
|
115
|
|
Dividends paid on common stock
|
(185,101)
|
|
|
(173,914)
|
|
|
(145,398)
|
|
Repurchases and retirement of common stock
|
(7,268)
|
|
|
(12,962)
|
|
|
(8,614)
|
|
Repayment of junior subordinated debentures at amortized cost
|
—
|
|
|
(10,598)
|
|
|
—
|
|
Proceeds from stock options exercised
|
21
|
|
|
1,065
|
|
|
961
|
|
Net cash used in financing activities
|
(192,169)
|
|
|
(196,246)
|
|
|
(152,936)
|
|
Net increase (decrease) in cash and cash equivalents
|
14,123
|
|
|
(8,670)
|
|
|
32,375
|
|
Cash and cash equivalents, beginning of year
|
116,245
|
|
|
124,915
|
|
|
92,540
|
|
Cash and cash equivalents, end of year
|
$
|
130,368
|
|
|
$
|
116,245
|
|
|
$
|
124,915
|
|
Note 27 – Quarterly Financial Information (Unaudited)
The following tables present the summary results for the four quarters ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
(in thousands, except per share information)
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
|
Four Quarters
|
Interest income
|
$
|
282,030
|
|
|
$
|
285,187
|
|
|
$
|
281,600
|
|
|
$
|
282,259
|
|
|
$
|
1,131,076
|
|
Interest expense
|
55,216
|
|
|
56,214
|
|
|
54,438
|
|
|
44,574
|
|
|
210,442
|
|
Net interest income
|
226,814
|
|
|
228,973
|
|
|
227,162
|
|
|
237,685
|
|
|
920,634
|
|
Provision for loan and lease losses
|
16,252
|
|
|
23,227
|
|
|
19,352
|
|
|
13,684
|
|
|
72,515
|
|
Non-interest income
|
83,749
|
|
|
88,512
|
|
|
121,823
|
|
|
45,740
|
|
|
339,824
|
|
Non-interest expense
|
183,443
|
|
|
183,590
|
|
|
180,415
|
|
|
171,592
|
|
|
719,040
|
|
Income before provision for income taxes
|
110,868
|
|
|
110,668
|
|
|
149,218
|
|
|
98,149
|
|
|
468,903
|
|
Provision for income taxes
|
27,118
|
|
|
26,166
|
|
|
37,408
|
|
|
24,116
|
|
|
114,808
|
|
Net income
|
$
|
83,750
|
|
|
$
|
84,502
|
|
|
$
|
111,810
|
|
|
$
|
74,033
|
|
|
$
|
354,095
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
0.51
|
|
|
$
|
0.34
|
|
|
|
Diluted earnings per common share
|
$
|
0.38
|
|
|
$
|
0.38
|
|
|
$
|
0.51
|
|
|
$
|
0.34
|
|
|
|
Cash dividends declared per common share
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
(in thousands, except per share information)
|
December 31
|
|
September 30
|
|
June 30
|
|
March 31
|
|
Four Quarters
|
Interest income
|
$
|
286,768
|
|
|
$
|
276,242
|
|
|
$
|
255,192
|
|
|
$
|
248,947
|
|
|
$
|
1,067,149
|
|
Interest expense
|
39,378
|
|
|
34,874
|
|
|
30,292
|
|
|
23,966
|
|
|
128,510
|
|
Net interest income
|
247,390
|
|
|
241,368
|
|
|
224,900
|
|
|
224,981
|
|
|
938,639
|
|
Provision for loan and lease losses
|
17,219
|
|
|
11,711
|
|
|
13,319
|
|
|
13,656
|
|
|
55,905
|
|
Non-interest income
|
56,811
|
|
|
72,388
|
|
|
71,651
|
|
|
78,567
|
|
|
279,417
|
|
Non-interest expense
|
178,488
|
|
|
179,292
|
|
|
195,572
|
|
|
186,113
|
|
|
739,465
|
|
Income before provision for income taxes
|
108,494
|
|
|
122,753
|
|
|
87,660
|
|
|
103,779
|
|
|
422,686
|
|
Provision for income taxes
|
28,183
|
|
|
31,772
|
|
|
21,661
|
|
|
24,807
|
|
|
106,423
|
|
Net income
|
$
|
80,311
|
|
|
$
|
90,981
|
|
|
$
|
65,999
|
|
|
$
|
78,972
|
|
|
$
|
316,263
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
$
|
0.36
|
|
|
$
|
0.41
|
|
|
$
|
0.30
|
|
|
$
|
0.36
|
|
|
|
Diluted earnings per common share
|
$
|
0.36
|
|
|
$
|
0.41
|
|
|
$
|
0.30
|
|
|
$
|
0.36
|
|
|
|
Cash dividends declared per common share
|
$
|
0.21
|
|
|
$
|
0.21
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
|
Note 28 – Revenue from Contracts with Customers
All of the Company's revenue from contracts with customers in the scope of ASC 606 is recognized in non-interest income with the exception of the (gain) loss on other real estate owned, which is included in non-interest expense. The following table presents the Company's sources of non-interest income for the years ended December 31, 2019 and 2018. Items outside of the scope of ASC 606 are noted as such.
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2019
|
|
2018
|
Non-interest income:
|
|
|
|
Service charges on deposits
|
|
|
|
Account maintenance fees
|
$
|
20,672
|
|
|
$
|
17,378
|
|
Transaction-based and overdraft service charges
|
24,944
|
|
|
25,636
|
|
Debit/ATM interchange fees
|
18,898
|
|
|
19,110
|
|
Total service charges on deposits
|
64,514
|
|
|
62,124
|
|
Brokerage revenue
|
15,877
|
|
|
16,480
|
|
Residential mortgage banking revenue, net (a)
|
101,810
|
|
|
118,235
|
|
(Loss) gain on sale of debt securities, net (a)
|
(7,184)
|
|
|
14
|
|
Gain (loss) on equity securities, net (a)
|
83,475
|
|
|
(1,484)
|
|
Gain on loan and leases sales, net (a)
|
10,467
|
|
|
7,834
|
|
BOLI income (a)
|
8,406
|
|
|
8,297
|
|
Other income
|
|
|
|
Merchant fee income
|
5,207
|
|
|
4,565
|
|
Credit card and interchange income and expenses
|
8,946
|
|
|
7,392
|
|
Remaining other income (a)
|
48,306
|
|
|
55,960
|
|
Total other income
|
62,459
|
|
|
67,917
|
|
Total non-interest income
|
$
|
339,824
|
|
|
$
|
279,417
|
|
(a) Not within scope of ASC 606
Service charges on deposits
The Company earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposit accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.
Debit and ATM interchange income represents fees earned when a debit card issued by the Bank is used. The Bank earns interchange fees from debit cardholder transactions through the Visa payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' debit card. Certain expenses directly associated with the credit and debit card are recorded on a net basis with the interchange income.
Brokerage revenue
As of December 31, 2019 and 2018, the Company had revenues of $15.9 million and $16.5 million, respectively, for the performance of brokerage and advisory services for its clients through Umpqua Investments. Brokerage fees consist of fees earned from advisory asset management, trade execution and administrative fees from investments. Advisory asset management fees are variable, since they are based on the underlying portfolio value, which is subject to market conditions and asset flows. Advisory asset management fees are recognized quarterly and are based on the portfolio values at the end of each quarter. Brokerage accounts are charged commissions at the time of a transaction and the commission schedule is based upon the type of security and quantity. In addition, revenues are earned from selling insurance and annuity policies. The amount of revenue earned is determined by the value and type of each instrument sold and is recognized at the time the policy or contract is written.
Merchant fee income
Merchant fee income represents fees earned by the Bank for card payment services provided to its merchant customers. The Bank outsources these services to a third party to provide card payment services to these merchants. The third party provider passes the payments made by the merchants through to the Bank. The Bank, in turn, pays the third party provider for the services it provides to the merchants. These payments to the third party provider are recorded as expenses as a net reduction against fee income. In addition, a portion of the payment received represents interchange fees which are passed through to the card issuing bank. Income is primarily earned based on the dollar volume and number of transactions processed. The performance obligation is satisfied and the related fee is earned when each payment is accepted by the processing network. For the years ended December 31, 2019 and 2018, the Company had merchant processing fee revenue of $5.2 million and $4.6 million included in other income, respectively.
Credit card and interchange income and expenses
Credit card interchange income represent fees earned when a credit card issued by the Bank is used. Similar to the debit card interchange, the Bank earns an interchange fee for each transaction made with the Bank's branded credit cards. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders' credit card. Certain expenses and rebates directly related to the credit card interchange contract are recorded net to the interchange income. For the years ended December 31, 2019 and 2018, credit card and interchange income included in other income was $8.9 million and $7.4 million, respectively.
Gain/loss on other real estate owned, net
The Company records a gain or loss from the sale of other real estate owned when control of the property transfers to the buyer, which generally occurs at the time of an executed deed of trust. When the Bank finances the sale of other real estate owned to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the other real estate owned asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present.
Note 29 – Subsequent Events
In January 2020, the Company signed an indication of interest to sell the mortgage servicing rights to approximately $3.0 billion of mortgage loans serviced for others. The transaction is expected to close in the second quarter of 2020, pending the negotiation and finalization of the agreement, as well as customary approvals and closing conditions.