DEAR SHAREHOLDER,
2017 was a pivotal year for Umpqua Holdings Corporation. In addition to completing a successful leadership transition and developing and
launching Umpqua Next Gen, a long-term strategic initiative to modernize the company and deliver enhanced financial performance, we also
delivered strong growth and solid financial results. Collectively, these accomplishments have built a strong foundation for the future – one
that will benefit our shareholders, customers, associates and communities.
Umpqua’s footprint includes some of the most dynamic markets in the United States, and our growth demonstrates the strength of the
company’s value proposition and experienced teams in those markets. We grew loans and leases by 9 percent and deposits by 5 percent,
respectively, over the previous year. Just under half of the total loan growth came from the commercial portfolio, driven in part by the strong
performance in our new Corporate Banking Division. As part of our balanced growth approach, we’re maintaining very strong credit quality,
with non-performing assets of just 0.37 percent of the company’s total assets.
In addition, management remains focused on prudent capital stewardship and delivering sustainable shareholder value, as demonstrated
by our strong capital position and shareholder returns. Last year, we were pleased to report total shareholder return of 12 percent, which
included an increase in our tangible book value per common share and another year of healthy dividends.
As we look to the future, we have great confidence in Umpqua’s position both strategically and financially. As a $25 billion bank in some
of the country’s fastest growing markets, with a strong brand, culture and customer value proposition, we have a terrific opportunity. Our
priority is to invest in high-growth areas that will allow us to generate strong, sustained organic growth and shareholder returns.
Through our Next Gen initiative, we’re evolving the organization to reflect how customers choose to bank – building a smart, streamlined,
customer-centric company that provides value customers want to pay for. Through our human digital banking strategy, we’re investing in
technology to empower even deeper customer relationships and serve communities in new ways. And we’re continuing to invest in and
evolve our culture so it remains relevant and inspiring to all who work here – and a powerful tool in attracting top talent.
As always, Umpqua’s success last year and the opportunities in front of us this year are due to the hard work and commitment of Umpqua’s
4,500 incredibly talented associates. They work tirelessly to bring our values, customer experience and culture to life, and we share their
commitment to delivering outstanding results for one another, and for our shareholders, customers and communities.
Thank you for your investment and interest in Umpqua.
Sincerely,
Cort O’Haver
President & CEO
Peggy Fowler
Board Chair
This annual report includes forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements are subject to risk
and uncertainty and actual results could differ materially due to certain risk factors, including those set forth in the attached Form 10-K and our filings with the SEC. You should not place undue reliance
on forward-looking statements. We make forward-looking statements about growth and the introduction of new products and services.
U M P Q U A H O L D I N G S C O R P O R A T I O N — A N N U A L R E P O R T 2 0 1 7
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended: December 31, 2017
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to .
Commission File Number: 001-34624
Umpqua Holdings Corporation
(Exact Name of Registrant as Specified in Its Charter)
OREGON
(State or Other Jurisdiction
of Incorporation or Organization)
93-1261319
(I.R.S. Employer Identification Number)
One SW Columbia Street, Suite 1200
Portland, Oregon 97258
(Address of Principal Executive Offices)(Zip Code)
(503) 727-4100
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ X] Yes [ ] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.
[ ] Yes [X] No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
[X] Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2017, based on the closing price on that date of
$18.36 per share, and 218,363,053 shares held was $4,009,145,653.
Indicate the number of shares outstanding for each of the issuer's classes of common stock, as of the latest practical date:
The number of shares of the Registrant's common stock (no par value) outstanding as of January 31, 2018 was 220,289,511.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2018 Annual Meeting of Shareholders of Umpqua Holdings Corporation ("Proxy Statement") are incorporated by
reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.
UMPQUA HOLDINGS CORPORATION
FORM 10-K CROSS REFERENCE INDEX
PART I
PART II
PART III
PART IV
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 16. FORM 10-K SUMMARY
EXHIBIT INDEX
SIGNATURES
3
3
16
23
23
23
23
24
24
28
30
56
61
134
134
134
135
135
135
135
135
135
135
135
135
136
138
2
ITEM 1. BUSINESS.
PART I
In this Annual Report on Form 10-K, we refer to Umpqua Holdings Corporation as the "Company," "Umpqua," "we," "us,"
"our," or similar references.
This Annual Report on Form 10-K contains certain forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe
harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. These statements
may include statements that expressly or implicitly predict future results, performance or events. Statements other than
statements of historical fact are forward-looking statements. You can find many of these statements by looking for words such
as "anticipates," "expects," "believes," "estimates", "intends" and "forecast" and words or phrases of similar meaning. We
make forward-looking statements regarding projected sources of funds; NextGen initiatives; investments in data, analytics
and technology; our securities portfolio; loan sales; adequacy of our allowance for loan and lease losses and reserve for
unfunded commitments; provision for loan and lease losses; impaired loans and future losses; performance of troubled debt
restructurings; our commercial real estate portfolio, its collectability and subsequent charge-offs; resolution of non-accrual
loans; litigation; Pivotus Ventures, Inc.; junior subordinated debentures; mortgage servicing rights values; tax rates and the
effect of accounting pronouncements. Forward-looking statements involve substantial risks and uncertainties, many of which
are difficult to predict and are generally beyond our control. There are many factors that could cause actual results to differ
materially from those contemplated by these forward-looking statements. Risks and uncertainties include those set forth in
our filings with the Securities and Exchange Commission (the "SEC") and the following factors that might cause actual
results to differ materially from those presented:
• our ability to attract new deposits and loans and leases and to retain deposits during store consolidations;
• demand for financial services in our market areas;
• competitive market pricing factors;
• our ability to effectively develop and implement new technology;
• deterioration in economic conditions that could result in increased loan and lease losses, especially those risks
associated with concentrations in real estate related loans;
• market interest rate volatility;
• prolonged low interest rate environments;
• compression of our net interest margin;
• stability of funding sources and continued availability of borrowings;
• changes in legal or regulatory requirements or the results of regulatory examinations that could increase expenses
or restrict growth;
• our ability to recruit and retain key management and staff;
• availability of, and competition for acquisition opportunities;
• risks associated with merger and acquisition integration;
• significant decline in the market value of the Company that could result in an impairment of goodwill;
• our ability to raise capital or incur debt on reasonable terms;
• regulatory limits on the Bank's ability to pay dividends to the Company;
• financial services reform, including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection
Act and other legislation and implementing regulations on the Company's business operations, including our
compliance costs, interest expense, and revenue;
• a breach or failure of our operational or security systems, or those of our third-party vendors, including as a
result of cyber attacks; and
• competition, including from financial technology companies.
3
For a more detailed discussion of some of the risk factors, see the section entitled "Risk Factors" below. We do not intend to
update any factors, except as required by SEC rules, or to publicly announce revisions to any of our forward-looking
statements. Any forward-looking statement speaks only as of the date that such statement was made. You should consider any
forward-looking statements in light of this explanation, and we caution you about relying on forward-looking statements.
Introduction
Umpqua Holdings Corporation, an Oregon corporation, was formed as a bank holding company in March 1999. At that time,
we acquired 100% of the outstanding shares of South Umpqua Bank, an Oregon state-chartered bank formed in 1953. We
became a financial holding company in March 2000 under the provisions of the Gramm-Leach-Bliley Act of 1999 ("GLB
Act"). Umpqua has two principal operating subsidiaries, Umpqua Bank (the "Bank") and Umpqua Investments, Inc.
("Umpqua Investments").
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and
other information with the SEC. You may obtain these reports, and any amendments, from the SEC's website at www.sec.gov.
You may obtain copies of these reports, and any amendments, through our website at www.umpquabank.com. These reports
are available through our website as soon as reasonably practicable after they are filed electronically with the SEC.
General Background
Headquartered in Roseburg, Oregon, Umpqua Bank is considered one of the most innovative community banks in the United
States, recognized nationally and internationally for its unique company culture and customer experience strategy, which
differentiate the Company from its competition. The Bank provides a broad range of banking, wealth management, mortgage
and other financial services to corporate, institutional, and individual customers, and also has a wholly-owned subsidiary,
Financial Pacific Leasing Inc., a commercial equipment leasing company.
Umpqua Investments is a registered broker-dealer and registered investment advisor with offices in Oregon, Washington, and
California, and also offers products and services through Umpqua Bank stores. The firm is one of the oldest investment
companies in the Northwest. Umpqua Investments offers a full range of investment products and services including: stocks,
fixed income securities (municipal, corporate, and government bonds, CDs, and money market instruments), mutual funds,
annuities, options, retirement planning, advisory account services, goals based planning and insurance.
Pivotus Ventures, Inc. as a subsidiary of Umpqua Holdings Corporation, uses a startup dynamic and collaboration with other
institutions to validate, develop, and test new bank platforms that could have a significant impact on the experience and
economics of banking. We believe the collaborative model will enhance Pivotus' ability to imagine and develop disruptive
technologies, test them with a broad range of customers, and deliver them at scale.
Along with its subsidiaries, the Company is subject to the regulations of state and federal agencies and undergoes regular
examinations by these regulatory agencies.
Business Strategy
Umpqua Bank's primary objective is to become the leading community-oriented financial services organization throughout
the Western United States. We intend to continue to increase market share, grow our assets and increase profitability and
shareholder value by differentiating ourselves from competitors through the following strategies:
Use Technology to Retain and Expand Customer Base. As consumer preferences evolve with technological changes, our
strategy remains consistent: deliver an extraordinary experience across all customer touchpoints. As a result, we continue to
expand user-friendly, technology-based systems that reflect and complement the distinct customer experience the Company is
known for. We believe this positions Umpqua well to adapt quickly as customer use of physical and digital channels evolves.
We offer technology-based services including remote deposit capture, online banking, bill pay and treasury services, mobile
banking, voice response banking, automatic payroll deposit programs, advanced function ATMs, interactive product kiosks,
and our web site. We believe the combination of physical and electronic banking services enhances our ability to attract a
broader range of customers and wrap our value proposition across all channels.
4
Capitalize on Innovative Product Delivery System. Our philosophy has been to create a unique delivery model that
transforms banking from a chore into an experience that's both relevant to customers and highly differentiated from other
financial institutions. With this approach in mind, we maintain a bank store concept designed to reflect customer and
community preferences and drive revenue growth by making the Bank's products and services more tangible and accessible.
In the second quarter of 2017, the Company announced the launch of "Umpqua Next Gen," a 3-year strategic initiative
designed to modernize the company, diversify and increase revenue, and streamline expenses. Umpqua Next Gen builds on
the customer-centric approach to banking, allowing us to differentiate ourselves in the marketplace and create a competitive
advantage. This strategy is called Human Digital Banking, an approach that helps the Company transform into an
organization that uses technology, data and analytics to empower our associates to build deeper, more valuable, and more
profitable customer relationships.
Given the current industry shift in customer banking preferences, we are in the process of optimizing and right sizing our
physical footprint to reflect those changing preferences and to remain focused on growing deep customer relationships. The
investments we are making in digital and data make it possible for our customers to bank in more convenient ways and will
empower our associates to be even more effective and efficient in providing smart, valuable financial solutions for customers.
During the fourth quarter of 2017, we introduced a new suite of digital offerings and capabilities, including a new, mobile-
optimized website, enhanced online origination capabilities and new digital products, which will be supported by a digital
marketing campaign.
Focus on Customer Experience. At every level of the Company, from the Board of Directors to our newest associates, and
across all customer service delivery channels, we are focused on delivering an extraordinary customer experience. It is an
integral part of our culture, and we believe we are among the first banks to introduce a measurable quality service program.
Under our Return on Quality or ROQ program, the performance of each sales associate and store is evaluated based on
specific measurable factors, including reports by incognito "mystery shoppers" and customer surveys. Based on scores
achieved, Umpqua's ROQ program rewards both individual sales associates and store teams with financial incentives.
Through such programs, we are able to measure the quality of the experience provided to our customers and maintain
employee focus on quality customer service.
Establish Strong Brand Awareness. As a financial services provider, we devote considerable resources to developing the
"Umpqua Bank" brand. This is done through design strategy, marketing, merchandising, and delivery through our customer-
facing channels, as well as through active public relations, social media and community based events and initiatives. From
Bank-branded bags of custom roasted coffee beans and Umpqua-branded ice cream trucks, to educational seminars, in-store
events and social giving campaigns, Umpqua's goal is to engage our customers and communities in fresh and engaging ways.
The unique look and feel of our stores and interactive displays help demonstrate our commitment to being an innovative,
customer-friendly provider of financial products and services, and our active community engagement and investments stand
out with commercial customers. Our brand activation approach is based on actions, not just advertising, and builds strong
consumer awareness of our products and services.
Prudently Manage Capital. An important part of our strategy is to continue to manage capital prudently, and to employ
excess capital in a thoughtful and opportunistic manner that improves shareholder returns. We accomplish this through
dividends, share repurchases, and pursuing strategic acquisitions, which could include technology-driven enterprises or banks
and financial services companies in markets where we see growth potential.
Marketing and Sales
Our goal of increasing our share of financial services in our market areas is driven by a technology, marketing,
communications and sales strategy with the following key components:
Integrated Marketing and Communications. Our comprehensive marketing and communications strategy aims to strengthen
the Umpqua Bank brand and generate public awareness through innovative marketing and PR initiatives that stand out in our
markets and our industry. The Bank has been recognized nationally for its use of new media and unique approach. From the
Bank's Local Spotlight program, ice cream trucks and social giving platform, to interactive initiatives, Umpqua is leveraging
both traditional and emerging media channels in new ways to advance the brand and create meaningful connections with
consumers.
5
Retail Store Concept. Being in the financial services business, we believe that the physical environment continues to play a
critical role both in creating awareness of our brand and franchise, as well as in successfully providing the right products and
services to our customers. Using a more retailer-oriented approach, we encourage existing and potential customers to come in
to our physical locations. To that end, we designed our physical locations to display financial services and products in ways
that are highly tactile and engaging. Unlike many financial institutions, we encourage all in our communities to visit our
stores, where they are greeted by well-trained associates and encouraged to browse our products and services. Our "Next
Generation" store model includes features like free wireless, free use of laptop computers, open rooms with refrigerated
beverages and innovative product packaging. The stores host a variety of after-hours events, from poetry readings and yoga
classes to movie nights and seminars on how to build an art collection.
Service Culture. We believe strongly that if we lead with a service culture, we will have more opportunity to provide our
products and services and to create deeper customer relationships across all divisions, from retail to mortgage and
commercial. Although a successful marketing program will attract customers to visit, a highly tuned service environment and
well-trained associates are critical to selling products and services. Umpqua's service culture has become well established
throughout the organization due to a clear focus and ongoing training of our associates on all aspects of sales and service. We
provide training through our in-house training, known as "The World's Greatest Bank University," to recognize and celebrate
exceptional service. This service culture has become iconic in our industry, and is a key element in our ability to attract both
talented associates and loyal customers.
Products and Services
We offer an array of traditional and digital financial products to meet the banking needs of our market area and target
customers. To ensure the ongoing viability of our product offerings, we regularly examine the desirability and profitability of
existing and potential new products. Other avenues through which customers can access our products include our web site,
mobile banking app, and our 24-hour telephone voice response system.
Deposit Products. We offer deposit products, including non-interest bearing checking accounts, interest bearing checking and
savings accounts, money market accounts and certificates of deposit. Interest-bearing accounts earn interest at rates
established by management based on competitive market factors and management's desire to increase certain types or
maturities of deposit liabilities. Our approach is to tailor fit products and bundle those that meet the customer's needs. This
approach is designed to add value for the customer, increase products per household and generate related fee income.
Private Bank. Umpqua Private Bank serves high net worth individuals and nonprofits, providing investment services. The
private bank is designed to augment Umpqua's existing high-touch customer experience, and works collaboratively with the
Bank's affiliate Umpqua Investments to offer a comprehensive, integrated approach that meets clients' financial goals,
including financial planning, trust services, and investments.
Broker Dealer and Investment Advisory Services. In its combined role as a broker/dealer and a registered investment advisor,
Umpqua Investments may provide comprehensive financial planning advice to its clients as well as investment services. This
advice can include cash management, risk management (insurance planning/sales), investment planning (including
investment advice and/or portfolio checkups), retirement planning (for employees and employers), or estate planning. The
broker/dealer side of Umpqua Investments offers a full range of brokerage services including equity and fixed income
products, mutual funds, annuities, options and life insurance products. At December 31, 2017, Umpqua Investments had 33
Series 7-licensed financial advisors serving clients at stand-alone retail brokerage offices, as well as "Investment Opportunity
Centers" located in select Bank stores.
Commercial Loans and Leases and Commercial Real Estate Loans. We offer specialized loans for business and commercial
customers, including accounts receivable and inventory financing, multi-family loans, equipment loans, commercial
equipment leases, international trade, real estate construction loans and permanent financing and Small Business
Administration ("SBA") program financing as well as capital markets and treasury management services. Additionally, we
offer specially designed loan products for small businesses through our Small Business Lending Center, and have a business
banking division to increase lending to small and mid-sized businesses. Ongoing credit management activities continue to
focus on commercial real estate loans given this is a significant portion of our loan portfolio. We are also engaged in
initiatives that continue to diversify the loan portfolio including a strong focus on commercial and industrial loans in addition
to financing owner-occupied properties.
6
Residential Real Estate Loans. Real estate loans are available for the construction, purchase, and refinancing of residential
owner-occupied and rental properties. Borrowers can choose from a variety of fixed and adjustable rate options and terms.
We sell most residential real estate loans that we originate into the secondary market. Servicing is retained on the majority of
these loans. We also support the Home Affordable Refinance Program and Home Affordable Modification Program.
Consumer Loans. We provide loans to individual borrowers for a variety of purposes, including secured and unsecured
personal loans, home equity and personal lines of credit and motor vehicle loans. Loans may be made directly to borrowers or
through Umpqua's dealer banking department.
Market Area and Competition
The geographic markets we serve are highly competitive for deposits, loans, leases and retail brokerage services. We compete
with traditional banking institutions, as well as non-bank financial service providers, such as credit unions, brokerage firms
and mortgage companies. In our primary market areas of Oregon, Washington, California, Idaho, and Nevada, major banks
and large regional banks generally hold dominant market share positions. By virtue of their larger capital bases, these
institutions have significantly larger lending limits than we do, generally have more expansive branch networks, and can
invest in technology on a larger scale than we can. Competition also includes other commercial banks that are community-
focused.
As the industry becomes increasingly oriented toward technology-driven delivery systems, permitting transactions to be
conducted on computers, phones, tablets, and other mobile devices, non-bank institutions are able to attract funds and provide
lending and other financial services even without offices located in our primary service area. Some insurance companies and
brokerage firms compete for deposits by offering rates that are higher than may be appropriate for the Bank in relation to its
asset and liability management objectives. However, we offer a wide array of deposit products and believe we can compete
effectively through rate-driven product promotions. We also compete with full service investment firms for non-bank
financial products and services offered by Umpqua Investments.
Credit unions present a significant competitive challenge for our banking services and products. As credit unions currently
enjoy an exemption from income tax, they are able to offer higher deposit rates and lower loan rates than banks can on a
comparable basis. Credit unions are also not currently subject to certain regulatory constraints, such as the Community
Reinvestment Act ("CRA"), which, among other things, requires us to implement procedures to make and monitor loans
throughout the communities we serve. Adhering to such regulatory requirements raises the costs associated with our lending
activities, and reduces potential operating profits. Accordingly, we seek to compete by focusing on building customer
relationships, providing superior service and offering a wide variety of commercial banking products, such as commercial
real estate loans, inventory and accounts receivable financing, and SBA program loans for qualified businesses.
7
The following tables presents the Bank's market share percentage for total deposits as of June 30, 2017, in each county where
we have operations. The table also indicates the ranking by deposit size in each market. All information in the table was
obtained from S&P Global, which compiles deposit data published by the Federal Deposit Insurance Corporation ("FDIC") as
of June 30, 2017 and updates the information for any bank mergers and acquisitions completed subsequent to the reporting
date.
County
Baker
Benton
Clackamas
Columbia
Coos
Curry
Deschutes
Douglas
Grant
Harney
Jackson
Josephine
Klamath
Lake
Lane
Lincoln
Linn
Malheur
Marion
Multnomah
Polk
Tillamook
Umatilla
Union
Wallowa
Washington
Yamhill
Oregon
Market Share
Market Rank
Number of Stores
27.0%
7.6%
3.1%
16.9%
35.0%
44.5%
7.7%
72.9%
21.0%
22.6%
18.8%
18.1%
30.2%
32.2%
16.7%
8.2%
13.0%
23.2%
5.6%
4.6%
6.4%
29.3%
5.6%
22.5%
24.4%
6.4%
2.4%
2
6
7
3
1
1
6
1
3
3
1
2
1
2
2
6
5
2
7
6
7
2
7
2
2
6
9
1
2
4
1
5
3
6
9
1
1
8
5
3
1
9
2
3
3
3
16
1
1
2
2
1
7
1
8
County
Adams
Asotin
Benton
Clallam
Clark
Columbia
Douglas
Franklin
Garfield
Grant
Grays Harbor
King
Kitsap
Kittitas
Klickitat
Lewis
Okanogan
Pierce
Skamania
Snohomish
Spokane
Thurston
Walla Walla
Whatcom
Whitman
Washington
Market Share
Market Rank
Number of Stores
21.3%
16.1%
5.2%
4.6%
15.1%
24.9%
6.4%
8.1%
55.9%
8.0%
8.5%
1.7%
0.9%
12.8%
33.9%
14.3%
22.8%
4.1%
65.4%
0.7%
8.2%
3.3%
3.0%
2.8%
9.2%
3
3
8
7
3
3
7
5
1
7
4
10
15
4
1
2
2
8
1
21
7
12
6
11
5
2
1
2
2
11
1
1
1
1
2
2
23
1
2
2
4
2
10
1
2
9
4
2
4
3
9
County
Amador
Butte
Calaveras
Colusa
Contra Costa
El Dorado
Glenn
Humboldt
Lake
Los Angeles
Marin
Mendocino
Napa
Orange
Placer
Sacramento
San Diego
San Francisco
San Joaquin
San Luis Obispo
Santa Clara
Shasta
Solano
Sonoma
Stanislaus
Sutter
Tehama
Trinity
Tuolumne
Ventura
Yolo
Yuba
California
Market Share
Market Rank
Number of Stores
4.7%
2.5%
27.6%
42.1%
0.5%
5.4%
32.4%
25.5%
17.1%
0.0%
1.6%
4.0%
9.2%
0.7%
4.8%
0.7%
0.2%
0.1%
0.6%
0.4%
0.0%
1.8%
3.3%
4.0%
1.0%
11.0%
16.4%
27.8%
13.4%
0.2%
2.2%
23.2%
7
10
2
1
17
6
2
1
2
71
12
6
4
25
6
16
31
27
17
11
40
8
8
9
15
4
1
2
4
21
10
3
1
1
4
2
3
3
2
6
2
3
3
1
5
1
6
5
3
3
1
1
1
1
4
8
2
2
2
1
2
1
1
2
10
County
Ada
Benewah
Idaho
Kootenai
Latah
Nez Perce
Valley
County
Clark
Washoe
Idaho
Market Share
Market Rank
Number of Stores
0.5%
21.1%
48.4%
2.5%
24.4%
16.7%
24.0%
17
3
1
8
2
3
3
2
1
3
3
2
2
2
Nevada
Market Share
Market Rank
Number of Stores
0.0%
0.2%
32
8
1
4
Lending and Credit Functions
The Bank makes both secured and unsecured loans to individuals and businesses. At December 31, 2017, commercial real
estate, commercial, residential, and consumer and other represented approximately 51.2%, 22.4%, 22.5%, and 3.9%,
respectively, of the total loan and lease portfolio.
Inter-agency guidelines adopted by federal bank regulators mandate that financial institutions establish real estate lending
policies with maximum allowable real estate loan-to-value limits, subject to an allowable amount of non-conforming loans as
a percentage of capital. We have adopted as loan policy loan-to-value limits that range from 5% to 10% less than the federal
guidelines for each category; however, policy exceptions are permitted for real estate loan customers with strong financial
credentials.
Loans and Leases
We manage asset quality and control credit risk through diversification of the loan and lease portfolio and the application of
policies designed to promote sound underwriting and loan and lease monitoring practices. The Bank's Credit Quality Group is
charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of
these policies and procedures across the Bank. The provision for loan and lease losses charged to earnings is based upon
management's judgment of the amount necessary to maintain the allowance at a level adequate to absorb probable incurred
losses. The amount of provision charged is dependent upon many factors, including loan and lease growth, net charge-offs,
changes in the composition of the loan and lease portfolio, delinquencies, management's assessment of loan and lease
portfolio quality, general economic conditions that can impact the value of collateral, and other trends. The evaluation of
these factors is performed through an analysis of the adequacy of the allowance for loan and lease losses. 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 a quarterly 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.
Employees
As of December 31, 2017, we had a total of 4,380 full-time equivalent employees. None of the employees are subject to a
collective bargaining agreement and management believes its relations with employees to be good. Information regarding
employment agreements with our executive officers is contained in Item 11 below, which item is incorporated by reference to
our proxy statement for the 2018 annual meeting of shareholders.
11
Government Policies
The operations of our subsidiaries are affected by state and federal legislative and regulatory changes and by policies of
various regulatory authorities, including, domestic monetary policies of the Board of Governors of the Federal Reserve
System ("Federal Reserve"), United States fiscal policy, and capital adequacy and liquidity constraints imposed by federal
and state regulatory agencies.
Supervision and Regulation
General. We are extensively regulated under federal and state law. These laws and regulations are generally intended to
protect depositors and customers, not shareholders. To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. Any change in
applicable laws or regulations may have a material effect on our business and prospects. We cannot accurately predict the
nature or the extent of the effects on our business and earnings that fiscal or monetary policies, or new federal or state
legislation or regulation may have in the future. Umpqua is subject to the disclosure and other requirements of the Securities
Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and rules promulgated thereunder and
administered by the Securities and Exchange Commission. As a listed company on NASDAQ, Umpqua is subject to
NASDAQ rules for listed companies.
The Federal Reserve and the FDIC have adopted non-capital safety and soundness standards for financial institutions. These
standards cover internal controls, information and internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, compensation, fees and benefits, and standards for asset quality, earnings and stock valuation. An
institution that fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that it will take
to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.
Holding Company Regulation. We are a registered financial holding company under the GLB Act, and are subject to the
supervision of, and regulation by the Federal Reserve. As a financial holding company, we are examined by and file reports
with the Federal Reserve. The Federal Reserve expects a bank holding company to serve as a source of financial and
managerial strength to its subsidiary bank and, under appropriate circumstances, to commit resources to support the
subsidiary bank.
Financial holding companies are bank holding companies that satisfy certain criteria and are permitted to engage in activities
that traditional bank holding companies are not. The qualifications and permitted activities of financial holdings companies
are described below under "Regulatory Structure of the Financial Services Industry."
Federal and State Bank Regulation. Umpqua Bank, as a state chartered bank with deposits insured by the FDIC, is primarily
subject to the supervision and regulation of the Oregon Department of Consumer and Business Services Division of Financial
Regulation("DCBS"), the Washington Department of Financial Institutions ("DFI"), the California Department of Business
Oversight ("DBO"), the Idaho Department of Finance Banking Section, the Nevada Division of Financial Institutions, the
FDIC and the Consumer Financial Protection Bureau ("CFPB"). These agencies may prohibit the Bank from engaging in
what they believe constitute unsafe or unsound banking practices. Our primary state regulator, DCBS, regularly examines the
Bank or participates in joint examinations with the FDIC.
Community Reinvestment Act and Fair Lending Laws. Umpqua Bank has a responsibility under the CRA, as implemented by
FDIC regulations, to help meet the credit needs of its communities, including low and moderate-income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are best suited to its particular community, consistent
with the CRA. In connection with its examination, the FDIC assesses Umpqua Bank's record of compliance with the CRA. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit discrimination in lending practices on the basis
of characteristics specified in those statutes. These factors are also considered in evaluating mergers, acquisitions and
applications to open a branch or new facility. Umpqua Bank's failure to comply with the provisions of the CRA could, at a
minimum, result in regulatory restrictions on its activities and the activities of Umpqua potentially resulting in the suspension
of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. Umpqua Bank's
failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions against
it by the FDIC, as well as other federal regulatory agencies, including the CFPB and the Department of Justice. As of the
most recent CRA examination, the Bank's CRA rating was "Satisfactory."
12
Transactions with Affiliates and Insiders. Banks are also subject to certain restrictions imposed by the Federal Reserve Act on
extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons. Extensions
of credit must be made on substantially the same terms, including interest rates and collateral, and follow credit underwriting
procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not affiliated
with the bank, and must not involve more than the normal risk of repayment or present other unfavorable features. Banks are
also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result
in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent or
other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other
regulatory sanctions.
The Federal Reserve Act and related Regulation W limit the amount of certain loan and investment transactions between the
Bank and its affiliates, require certain levels of collateral for such loans, and limit the amount of advances to third parties that
may be collateralized by the securities of Umpqua or its subsidiaries. Regulation W requires that certain transactions between
the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the
time for comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on
terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to
nonaffiliated companies. Umpqua and its subsidiaries have adopted an Affiliate Transactions Policy and have entered into
various affiliate agreements in compliance with Regulation W.
Financial Privacy. Federal law and certain state laws currently contain client privacy protection provisions. These provisions
limit the ability of banks and other financial institutions to disclose non-public information about consumers to affiliated
companies and non-affiliated third parties. These rules require disclosure of privacy policies to clients and, in some circumstances,
allow consumers to prevent disclosure of certain personal information to affiliates or non-affiliated third parties by means of
opt out or opt in authorizations. Pursuant to the Gramm-Leach-Bliley Act and certain state laws, companies are required to notify
clients of security breaches resulting in unauthorized access to their personal information. In connection with the regulations
governing the privacy of consumer financial information, the federal banking agencies have also adopted guidelines for
establishing information security standards and programs to protect such information.
Federal Deposit Insurance. Substantially all deposits with Umpqua Bank are insured up to applicable limits by the Deposit
Insurance Fund ("DIF") of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The standard
maximum federal deposit insurance amount is $250,000 per qualified account.
The FDIC may terminate the deposit insurance of any insured depository institution if it determines that the institution has
engaged in or is engaging in unsafe and unsound banking practices, is in an unsafe or unsound condition or has violated any
applicable law, regulation or order or any condition imposed in writing by, or pursuant to, any written agreement with the
FDIC. The termination of deposit insurance for the Bank would have a material adverse effect on our financial condition and
results of operations.
Dividends. Under the Oregon Bank Act and the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the Bank is subject to restrictions on the payment of cash dividends to its parent company. A bank may not pay
cash dividends if that payment would reduce the amount of its capital below that necessary to meet minimum applicable
regulatory capital requirements. In addition, under the Oregon Bank Act, the amount of the dividend paid by the Bank may
not be greater than net unreserved retained earnings, after first deducting to the extent not already charged against earnings or
reflected in a reserve, all bad debts, which are debts on which interest is unpaid and past due at least six months unless the
debt is fully secured and in the process of collection; all other assets charged-off as required by Oregon bank regulators or a
state or federal examiner; and all accrued expenses, interest and taxes of the Bank. In addition, state and federal regulatory
authorities are authorized to prohibit banks and holding companies from paying dividends that would constitute an unsafe or
unsound banking practice. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank
holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only
to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention
that is consistent with the holding company's capital needs, asset quality, and overall financial condition.
Capital Adequacy. The federal and state bank regulatory agencies use capital adequacy guidelines in their examination and
regulation of holding companies and banks. If capital falls below the minimum levels established by these guidelines, a
holding company or a bank may be denied approval to acquire or establish additional banks or non-bank businesses or to
open new facilities.
13
The FDIC and Federal Reserve have adopted risk-based capital guidelines for holding companies and banks. The risk-based
capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among
holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weightings. The
resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The capital
adequacy guidelines limit the degree to which a holding company or bank may leverage its equity capital.
On July 2, 2013, federal banking regulators approved final rules that revised the regulatory capital rules to incorporate certain
revisions by the Basel Committee on Banking Supervision to the Basel capital framework ("Basel III"). The phase-in period
for the final rules began for the Company on January 1, 2015, with full compliance with the final rules' requirements phased
in on January 1, 2019.
The final rules, among other things, include a new common equity Tier 1 capital ("CET1") to risk-weighted assets ratio,
including a capital conservation buffer. The required CET1 ratio will gradually increase from 4.5% on January 1, 2015 to
7.0% on January 1, 2019. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 6.0%,
which is the current minimum, to 8.5% on January 1, 2019, as well as require a minimum leverage ratio of 4.0%.
Under the final rules, as Umpqua grew above $15.0 billion in assets as a result of an acquisition, the combined trust preferred
security debt issuances were phased out of Tier 1 and into Tier 2 capital (75% starting in the first quarter of 2015 and 100%
starting in the first quarter of 2016).
On November 21, 2017, the federal banking regulators finalized a halt in the phase-in of certain provisions of the rule for
certain banks including Umpqua. The final rules had provided for a number of adjustments to and deductions from the new
CET1. Deductions included, for example, the requirement that mortgage servicing rights, certain deferred tax assets not
dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from
CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of
CET1. Effective on January 1, 2018, the 2017 rule pauses the full transition to the Basel III treatment for these items.
Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, the Company and
the Bank, have made a one-time permanent election to continue to exclude these items in order to avoid significant variations
in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company's securities
portfolio.
FDICIA requires federal banking regulators to take "prompt corrective action" with respect to a capital-deficient institution,
including requiring a capital restoration plan and restricting certain growth activities of the institution. Umpqua could be
required to guarantee any such capital restoration plan required of the Bank if the Bank became undercapitalized. Pursuant to
FDICIA, regulations were adopted defining five capital levels: well capitalized, adequately capitalized, undercapitalized,
severely undercapitalized and critically undercapitalized. Under the regulations, the Bank is considered "well capitalized" as
of December 31, 2017.
Federal and State Regulation of Broker-Dealers. Umpqua Investments is a fully disclosed introducing broker-dealer clearing
through Wells Fargo Clearing Services, LLC. Umpqua Investments is regulated by the Financial Industry Regulatory
Authority ("FINRA"), as well as the SEC, and has customer funds insured through the Securities Investors Protection Corp
("SIPC") as well as third party insurers. FINRA and the SEC perform regular examinations of Umpqua Investments that
include reviews of policies, procedures, recordkeeping, trade practices, and customer protection as well as other inquiries.
SIPC protects client securities and cash up to $500,000, including $100,000 for cash with Wells Fargo Clearing Services,
LLC maintaining additional coverage through Lexington Insurance Company, for the remaining net equity balance in a
brokerage account, if any. This coverage does not include losses in investment accounts.
Effects of Government Monetary Policy. Our earnings and growth are affected not only by general economic conditions, but
also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve
implements national monetary policy for such purposes as curbing inflation and combating recession, through its open
market operations in U.S. Government securities, control of the discount rate applicable to borrowings from the Federal
Reserve, and establishment of reserve requirements against certain deposits. These activities influence growth of bank loans,
investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future
changes in monetary policies and their impact on us cannot be predicted with certainty.
14
Regulation of the Financial Services Industry. Federal laws and regulations governing banking and financial services
underwent significant changes in recent years and we believe will continue to undergo significant changes in the future. From
time to time, legislation is introduced in the United States Congress that contains proposals for altering the structure,
regulation, and competitive relationships of the nation's financial institutions. If enacted into law, these proposals could
increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance
among banks, savings associations, and other financial institutions. Whether or in what form any such legislation may be
adopted or the extent to which our business might be affected thereby cannot be predicted.
The GLB Act, enacted in November 1999, repealed sections of the Banking Act of 1933, commonly referred to as the Glass-
Steagall Act, that prohibited banks from engaging in securities activities, and prohibited securities firms from engaging in
banking. The GLB Act created a new form of holding company, known as a financial holding company, that is permitted to
acquire subsidiaries that are engaged in banking, securities underwriting and dealing, and insurance underwriting.
To qualify as a financial holding company, the bank holding company must be deemed to be well-capitalized and well-
managed, as those terms are used by the Federal Reserve. In addition, each subsidiary bank of a bank holding company must
also be well-capitalized and well-managed and be rated at least "satisfactory" under the CRA. A bank holding company that
does not qualify, or has not chosen, to become a financial holding company must limit its activities to traditional banking
activities and those non-banking activities the Federal Reserve has deemed to be permissible because they are closely related
to the business of banking.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal Act") permits interstate banking and
branching, which allows banks to expand nationwide through acquisition, consolidation or merger. Under this law, an
adequately capitalized bank holding company may acquire banks in any state or merge banks across state lines if permitted
by state law. Further, banks may establish and operate branches in any state subject to the restrictions of applicable state law.
Under Oregon law, an out-of-state bank or bank holding company may merge with or acquire an Oregon state chartered bank
or bank holding company upon receipt of approval from the Director of the DCBS. The Bank now has the ability to open
additional de novo branches in the states of Oregon, California, Washington, Idaho, and Nevada.
Section 613 of the Dodd-Frank Act eliminated interstate branching restrictions that were implemented as part of the Riegle-
Neal Act, and removed many restrictions on de novo interstate branching by national and state-chartered banks. The FDIC
and the Office of the Comptroller of the Currency now have authority to approve applications by insured state nonmember
banks and national banks, respectively, to establish de novo branches in states other than the bank's home state if "the law of
the State in which the branch is located, or is to be located, would permit establishment of the branch, if the bank were a State
bank chartered by such State." The enactment of this Section 613 may significantly increase interstate banking by
community banks in western states, where barriers to entry were previously high.
Anti-Terrorism Legislation. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act ("USA Patriot Act") prohibits banks from providing correspondent accounts directly to foreign
shell banks, as well as imposes due diligence requirements on banks opening and holding accounts for foreign financial
institutions or wealthy foreign individuals. Banks are also required to have effective compliance processes in place relating
to anti-money laundering ("AML") compliance, as well as compliance with the Bank Secrecy Act.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 addresses public company corporate governance, auditing,
accounting, executive compensation and enhanced and timely disclosure of corporate information.
The Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21, 2010, the Dodd-Frank Act was signed, which
was a sweeping overhaul of financial industry regulation. The Dodd-Frank Act created the Financial Stability Oversight
Council and permanently raised the FDIC deposit insurance coverage to $250,000. In addition, the Dodd-Frank Act added
additional requirements on Bank and their regulators, including additional interchange fee limits, mortgage limit
requirements, and say-on-pay executive compensation requirements.
Stress Testing and Capital Planning. Umpqua is subject to the annual Dodd-Frank Act capital stress testing (DFAST)
requirements of the Federal Reserve and the FDIC. As part of the DFAST process, Umpqua is required to submit the results
of the company-run stress tests to the FDIC by July 31, and Umpqua will disclose certain results from stress testing exercises,
generally in October of each year.
15
CFPB Regulation and Supervision. The Dodd-Frank Act gives the CFPB authority to examine Umpqua and Umpqua Bank
for compliance with a broad range of federal consumer financial laws and regulations, including the laws and regulations that
relate to credit card, deposit, mortgage and other consumer financial products and services the Bank offers. In addition, the
Dodd-Frank Act gives the CFPB broad authority to take corrective action against Umpqua and Umpqua Bank as it deems
appropriate. The CFPB is authorized to issue regulations and take enforcement actions to prevent and remedy acts and
practices relating to consumer financial products and services that it deems to be unfair, deceptive or abusive. The agency
also has authority to impose new disclosure requirements for any consumer financial product or service.
In addition, the CFPB's regulations require lenders to conduct a reasonable and good faith determination at or before
consummation of a residential mortgage loan that the borrower will have a reasonable ability to repay the loan. The
regulations also define criteria for making Qualified Mortgages which entitle the lender and any assignee to either a
conclusive or rebuttable presumption of compliance with the ability to repay rule. The mortgage servicing rules include new
standards for notices to consumers, loss mitigation procedures, and consumer requests for information.
Joint Agency Guidance on Incentive Compensation. Federal banking regulators joint agency guidance applies to executive
and non-executive incentive compensation plans administered by banks. The guidance says that incentive compensation
programs must:
• Provide employees incentives that appropriately balance risk and reward.
• Be compatible with effective controls and risk- management; and
• Be supported by strong corporate governance, including active and effective oversight by the board;
The Federal Reserve reviews, as part of the regular, risk-focused examination process, the incentive compensation
arrangements of the Company and other banking organizations. The findings of the supervisory initiatives are included in
reports of examination and any deficiencies will be incorporated into the Company's supervisory ratings, which can affect the
Company's ability to make acquisitions and take other actions.
ITEM 1A. RISK FACTORS.
In addition to the other information set forth in this report, you should carefully consider the risk factors discussed below.
These factors could adversely affect our business, financial condition, liquidity, results of operations and capital position, and
the value of, and return on, an investment in the Company. These factors could cause our actual results to differ materially
from our historical results or the results contemplated by the forward-looking statements contained in this report. An
investment in the Company involves risk, including the possibility that the value of the investment could fall substantially
and that dividends on the investment could be reduced or eliminated.
Difficult or volatile market conditions or weak economic conditions may adversely affect our business.
Our business and financial performance are vulnerable to weak economic conditions, primarily in the United States and
especially in the western United States. A deterioration in economic conditions in our primary market areas could result in
the following consequences, any of which could materially and adversely affect our business: increased loan delinquencies;
problem assets and foreclosures; significant write-downs of asset values; volatile financial markets; lower demand for our
products and services; reduced low cost or noninterest bearing deposits; intangible asset impairment; and collateral for loans
made by us, especially real estate, may decline in value, in turn reducing customers' borrowing power, and reducing the value
of assets and collateral associated with our existing loans. Additional issues surrounding weakening economic conditions and
volatile markets that could adversely impact us include:
• Increased regulation of our industry, and resulting increased costs associated with regulatory compliance and
potential limits on our ability to pursue business opportunities.
• Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use
to select, manage, and underwrite our customers become less predictive of future performance.
• The process we use to estimate losses inherent in our loan portfolio requires difficult, subjective, and complex
judgments, including forecasts of economic conditions and how these economic predictions might impair the
ability of our borrowers to repay their loans, which process may no longer be capable of accurate estimation and
may, in turn, impact its reliability.
• Downward pressure on our stock price.
16
The majority of our assets are loans, which if not repaid would result in losses to the Bank.
The Bank, like other lenders, is subject to credit risk, which is the risk of losing principal or interest due to borrowers' failure
to repay loans in accordance with their terms. Underwriting and documentation controls cannot mitigate all credit risk. A
downturn in the economy or the real estate market in our market areas or a rapid increase in interest rates could have a
negative effect on collateral values and borrowers' ability to repay. To the extent loans are not paid timely by borrowers, the
loans are placed on non-accrual status, thereby reducing interest income. Further, under these circumstances, an additional
provision for loan and lease losses or unfunded commitments may be required.
Deterioration in the real estate market or other segments of our loan portfolio would lead to additional losses, which could
have a material adverse effect on our business, financial condition and results of operations.
As of December 31, 2017, approximately 75% of our total loan portfolio is secured by real estate, the majority of which is
commercial real estate. Our success depends in part on economic conditions in the western United States and adverse changes
in markets where our real estate collateral is located could adversely affect our business. Increases in delinquency rates or
declines in real estate market values would require increased net charge-offs and increases in the allowance for loan and lease
losses, which could have a material adverse effect on our business, financial condition and results of operations and
prospects.
A rapid change in interest rates, or maintenance of rates at historically high or low levels for an extended period, could
make it difficult to improve or maintain our current interest income spread and could result in reduced earnings.
Our earnings are largely derived from net interest income, which is interest income and fees earned on loans and investments,
less interest paid on deposits and other borrowings. Interest rates are highly sensitive to many factors that are beyond the
control of our management, including general economic conditions and the policies of various governmental and regulatory
authorities. The actions of the Federal Reserve influence the rates of interest that we charge on loans and that we pay on
borrowings and interest-bearing deposits. We cannot predict the nature or timing of future changes in monetary, tax and other
policies or the effects that they may have on our activities and financial results.
As interest rates change, net interest income is affected. With fixed rate assets (such as fixed rate loans and most investment
securities) and liabilities (such as certificates of deposit), the effect on net interest income depends on the cash flows
associated with the maturity of the asset or liability. Asset/liability management policies may not be successfully
implemented and from time to time our risk position is not balanced. An unanticipated rapid decrease or increase in interest
rates could have an adverse effect on the spreads between the interest rates earned on assets and the rates of interest paid on
liabilities, and therefore on the level of net interest income. For instance, any rapid increase in interest rates in the future
could result in interest expense increasing faster than interest income because of fixed rate loans and longer-term
investments. Historically low rates for an extended period of time result in reduced returns from the investment and loan
portfolios. The current low interest rate environment could affect consumer and business behavior in ways that are adverse to
us and negatively impact our ability to increase our net interest income. Further, substantially higher interest rates generally
reduce loan demand and may result in slower loan growth than previously experienced.
While interest rates recently rose off historic lows set in July 2016, both shorter-term and longer-term interest rates remain
below historical averages, as well as the yield curve, which has been relatively flat compared to recent years. A flat yield
curve combined with low interest rates generally leads to lower revenue and reduced margins because it tends to limit our
ability to increase the spread between asset yields and funding costs. Sustained periods of time with a flat yield curve coupled
with low interest rates could have a material adverse effect on our earnings and our net interest margin. Although the Federal
Reserve's recent decision to raise short-term interest rates may reduce prepayment risk, debt service requirements for some of
our borrowers will increase, which may adversely affect those borrowers' ability to pay as contractually obligated. This could
result in additional delinquencies or charge-offs and negatively impact our results of operations.
17
Changes in interest rates could reduce the value of mortgage servicing rights (MSR).
We acquire MSR when we keep servicing rights after we sell originated residential mortgage loans. We sell the majority of
our originated residential mortgage loans with servicing retained. We measure MSR at fair value. Fair value is the present
value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the
likelihood of prepayment by borrowers. Changes in interest rates can affect prepayment assumptions and consequently MSR
fair value. When interest rates fall, borrowers are usually more likely to prepay their mortgage loans by refinancing them at a
lower rate. As the likelihood of prepayment increases, MSR fair value can decrease, which reduces earnings in the period in
which the decrease occurs.
A low interest rate environment increases our exposure to prepayment risk in our mortgage portfolio and the mortgage-
backed securities in our investment portfolio. Increased prepayments, refinancing or other factors that impact loan balances
could reduce expected revenue associated with mortgage assets and could also lead to a reduction in the value of our
mortgage servicing rights, which could have a negative impact on our financial results.
Our mortgage banking revenue can fluctuate significantly.
We earn revenue from fees received for originating, selling and servicing mortgage loans. Generally, if interest rates rise, the
demand for mortgage loans tends to fall, reducing the revenue we receive from originations and sales of mortgage loans. At
the same time, mortgage banking revenue can increase through increases in fair value. When interest rates decline,
originations tend to increase and the value of MSR tends to decline, also with some offsetting revenue effect. The negative
effect on revenue from a decrease in the fair value of residential MSR is immediate, but any offsetting revenue benefit from
more originations and the MSR relating to new loans accrues over time. It is also possible that even if interest rates were to
fall, mortgage originations may also fall or any increase in mortgage originations may not be enough to offset the decrease in
the MSR value caused by the lower rates.
We depend upon programs administered by Fannie Mae, Freddie Mac and Ginnie Mae.
Our ability to generate revenues in our home lending group depends on programs administered by government-sponsored
entities that play an important role in the residential mortgage industry. During 2017, 76% of mortgage loans were originated
for sale to, or through programs sponsored by Fannie Mae, Freddie Mac or Ginnie Mae. We service loans on behalf of Fannie
Mae and Freddie Mac, as well as loans that have been securitized pursuant to securitization programs sponsored by Fannie
Mae, Freddie Mac and Ginnie Mae. A majority of our mortgage servicing rights and loans serviced through subservicing
agreements relate to these servicing activities. These entities establish the base service fee to compensate us for servicing
loans as well as the assessment of fines and penalties that may be imposed upon us for failing to meet servicing standards.
Our status as a Fannie Mae, Freddie Mac and Ginnie Mae approved seller and servicer is subject to compliance with
guidelines and failure to meet such guidelines could result in the unilateral termination of our status as an approved seller or
servicer. Changes in the existing government-sponsored mortgage programs or servicing eligibility standards through
legislation or otherwise, or our failure to maintain a relationship with each of Fannie Mae, Freddie Mac and Ginnie Mae,
could materially and adversely affect our business, financial position, results of operations and cash flows through negative
impact on the pricing of mortgage related assets in the secondary market, higher mortgage rates to borrowers, or lower
mortgage origination volumes and margins.
The financial services industry is highly competitive.
We face pricing competition for loans and deposits. We also face competition with respect to customer convenience, product
lines, accessibility of service and service capabilities. Our most direct competition comes from other banks, brokerages,
mortgage companies and savings institutions, but more recently has also come from financial technology (or "fintech")
companies that rely on technology to provide financial services. We also face competition from credit unions, government-
sponsored enterprises, mutual fund companies, insurance companies and other non-bank businesses. The significant
competition in attracting and retaining deposits and making loans, as well as providing other financial services throughout
our market area may impact future earnings and growth. Our success depends, in part, on the ability to adapt products and
services to evolving industry standards. There is increasing pressure to provide products and services at lower prices, which
can reduce net interest income and non-interest income from fee-based products and services.
18
The failure to understand and adapt to continual technological changes could negatively impact our business.
The financial services industry is undergoing rapid technological change with frequent introductions of new technology-
driven products and services by depository institutions and fintech companies. New technology-driven products and services
are often introduced and adopted, including innovative ways that customers can make payments, access products and manage
accounts. We could be required to make substantial capital expenditures to modify or adapt existing products and services or
develop new products and services. We may not be successful in introducing new products and services or those new
products may not achieve market acceptance. We could lose business, be forced to price products and services on less
advantageous terms to retain or attract clients, or be subject to cost increases if we do not effectively develop and implement
new technology. Our future success depends, in part, upon our ability to address the needs of our customers by using
technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in
operations. In addition, advances in technology such as digital, mobile, telephone, text, and on-line banking; e-commerce;
and self-service automatic teller machines and other equipment, as well as changing customer preferences to access our
products and services through digital channels, could decrease the value of our store network and other assets. We may close
or sell certain stores and restructure or reduce our remaining stores and work force. These actions could lead to losses on
assets, expense to reconfigure stores and loss of customers in certain markets. As a result, our business, financial condition or
results of operations may be adversely affected.
We are subject to extensive government regulation and supervision; compliance with new and existing legislation,
regulation and supervisory requirements and expectations could detrimentally affect the Company's business.
Umpqua Holdings Corporation and its subsidiaries, primarily Umpqua Bank, are subject to extensive federal and state
regulation and supervision, the primary focus of which is to protect customers, depositors, the deposit insurance fund and the
safety and soundness of the banking system as a whole, and not shareholders. The quantity and scope of applicable federal
and state regulations may place banks and brokerage firms at a competitive disadvantage compared to less regulated
competitors such as fintech companies, finance companies, credit unions, mortgage banking companies and leasing
companies. Banking and consumer lending laws and regulations apply to almost every aspect of our business, including
lending, capital, investments, deposits, other services and products, risk management, dividends and acquisitions.
Legislation and regulation with respect to our industry has increased in recent years, and we expect that supervision and
regulation will continue to expand in scope and complexity. Congress and federal regulatory agencies continually review
banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including
changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and
unpredictable ways, and could subject us to additional costs, limits on the services and products we may offer or limits on the
pricing of banking services and products. In addition, establishing systems and processes to achieve compliance with laws
and regulation increases our costs and could limit our ability to pursue business opportunities.
If we receive less than satisfactory results on regulatory examinations, we could be subject to damage to our reputation,
significant fines and penalties, requirements to increase compliance and risk management activities and related costs and
restriction on acquisitions, new locations, new lines of business, or continued growth. Future changes in federal and state
banking and brokerage regulations could adversely affect our operating results and ability to continue to compete effectively.
For example, the Dodd-Frank Act and related regulations subject us to additional restrictions, oversight and reporting
obligations, which have significantly increased costs. And over the last several years, state and federal regulators have
focused on enhanced risk management practices, compliance with the Bank Secrecy Act and anti-money laundering laws,
data integrity and security, use of service providers, and fair lending and other consumer protection issues, which has
increased our need to build additional processes and infrastructure. Government agencies charged with adopting and
interpreting laws, rules and regulations, may do so in an unforeseen manner, including in ways that potentially expand the
reach of the laws, rules or regulations more than initially contemplated or currently anticipated. We cannot predict the
substance or impact of pending or future legislation or regulation, or the application thereof. Compliance with such current
and potential regulation and scrutiny could significantly increase our costs, impede the efficiency of our internal business
processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient
manner. Our success depends on our ability to maintain compliance with both existing and new laws and regulations.
19
Interest rate volatility and credit risk adjusted rate spreads may impact our financial assets and liabilities measured at fair
value, particularly the fair value of our junior subordinated debentures.
The widening of the credit risk adjusted rate spreads on potential new issuances of junior subordinated debentures above our
contractual spreads and reductions in three-month LIBOR rates have contributed to the cumulative positive fair value
adjustment in our junior subordinated debentures carried at fair value. Tightening of these credit risk adjusted rate spreads
and interest rate volatility may result in recognizing negative fair value adjustments charged to earnings in the future.
We may be required to raise additional capital in the future, but that capital may not be available when it is needed, or it
may only be available on unacceptable terms, which could adversely affect our financial condition and results of
operations.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are
outside our control, and on our financial performance. Accordingly, we may not be able to raise additional capital, if needed,
on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations and
pursue our growth strategy could be materially impaired. We and the Bank are currently well capitalized under applicable
regulatory guidelines. However, our business could be negatively affected if we or the Bank failed to remain well capitalized.
For example, because Umpqua Bank is well capitalized and we otherwise qualify as a financial holding company, we are
permitted to engage in a broader range of activities than are permitted to a bank holding company. Loss of financial holding
company status could require that we cease these broader activities. The banking regulators are authorized (and sometimes
required) to impose a wide range of requirements, conditions, and restrictions on banks, thrifts, and bank holding companies
that fail to maintain adequate capital levels.
New rules will require increased capital.
In June 2013, federal banking regulators jointly issued the Basel III rules. The rules imposed new capital requirements and
implement Section 171 of the Dodd Frank Act. The new rules were to be phased in through 2019, however, on November 21,
2017, the federal banking regulators finalized a halt in the phase-in of certain provisions of the rule for certain banks
including Umpqua. Among other things, the Basel III rules require that we maintain a common equity Tier 1 capital ratio of
4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8%, and a leverage ratio of 4%. In addition, we must maintain an
additional capital conservation buffer of 2.5% of total risk weighted assets or be subject to limitations on dividends and other
capital distributions, as well as limiting discretionary bonus payments to executive officers. It is possible the Company may
accelerate redemption of the existing junior subordinated debentures to support regulatory total capital levels. This could
result in adjustments to the fair value of these instruments including the acceleration of losses on junior subordinated
debentures carried at fair value within non-interest income. The new rules may require us to raise more common capital or
other capital that qualifies as Tier 1 capital. The application of more stringent capital requirements could, among other things,
result in lower returns on invested capital and result in regulatory actions if we were to be unable to comply with such
requirements.
Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale or pledging as
collateral of loans and other assets could have a substantial negative effect on our liquidity. Our access to funding sources in
amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services
industry in general. An adverse regulatory action against us could detrimentally impact our access to liquidity sources. Our
ability to borrow could also be impaired by factors that are nonspecific to us, such as severe disruption of the financial
markets or negative news and expectations about the prospects for the financial services industry as a whole as evidenced by
turmoil in the domestic and worldwide credit markets.
20
Our wholesale funding sources may prove insufficient to support our future growth or an unexpected reduction in
deposits.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity
management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans
and investments. If we grow more rapidly than any increase in our deposit balances, we are likely to become more dependent
on these sources, which include brokered deposits, Federal Home Loan Bank advances, proceeds from the sale of loans and
liquidity resources at the holding company. Our financial flexibility will be severely constrained if we are unable to maintain
our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If
we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not
increase proportionately to cover our costs, and our profitability would be adversely affected.
As a bank holding company that conducts substantially all of our operations through the Bank, our ability to pay
dividends, repurchase our shares or to repay our indebtedness depends upon liquid assets held by the holding company
and the results of operations of our subsidiaries.
The Company is a separate and distinct legal entity from our subsidiaries and it receives substantially all of its revenue from
dividends paid from the Bank. There are legal limitations on the extent to which the Bank may extend credit, pay dividends
or otherwise supply funds to, or engage in transactions with, us. Our inability to receive dividends from the Bank could
adversely affect our business, financial condition, results of operations and prospects.
Our net income depends primarily upon the Bank's net interest income, which is the income that remains after deducting from
total income generated by earning assets the expense attributable to the acquisition of the funds required to support earning
assets (primarily interest paid on deposits). The amount of interest income is dependent on many factors including the volume
of earning assets, the general level of interest rates, the dynamics of changes in interest rates and the levels of nonperforming
loans. All of those factors affect the Bank's ability to pay dividends to the Company.
Various statutory provisions restrict the amount of dividends the Bank can pay to us without regulatory approval. The Bank
may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet the
"adequately capitalized" level in accordance with regulatory capital requirements. It is also possible that, depending upon the
financial condition of the Bank and other factors, regulatory authorities could conclude that payment of dividends or other
payments, including payments to us, is an unsafe or unsound practice and impose restrictions or prohibit such payments.
Under Oregon law, the Bank may not pay dividends in excess of unreserved retained earnings, deducting there from, to the
extent not already charged against earnings or reflected in a reserve, the following: (1) all bad debts, which are debts on
which interest is past due and unpaid for at least six months, unless the debt is fully secured and in the process of collection;
(2) all other assets charged-off as required by Oregon bank regulators or a state or federal examiner; and (3) all accrued
expenses, interest and taxes of the institution. The Federal Reserve has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay
cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate
of earnings retention that is consistent with the holding company's capital needs, asset quality and overall financial condition.
Our business is highly reliant on technology and our ability to manage the operational risks associated with technology.
Our business involves storing and processing sensitive consumer and business customer data. We depend on internal systems
and outsourced technology to support these data storage and processing operations. Despite our efforts to ensure the security
and integrity of our systems, we may not be able to anticipate, detect or recognize threats to our systems or to implement
effective preventive measures against all cyber security breaches. Cyberattack techniques change regularly and can originate
from a wide variety of sources, including third parties who are or may be involved in organized crime or linked to terrorist
organizations or hostile foreign governments, and such third parties may seek to gain access to systems directly or using
equipment or security passwords belonging to employees, customers, third-party service providers or other users of our
systems. These risks may increase in the future as we continue to increase our mobile and other internet-based product
offerings and expands our internal usage of web-based products and applications. A cyber security breach or cyberattack
could persist for a long time before being detected and could result in theft of sensitive data or disruption of our transaction
processing systems.
21
Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and
efficiency of our business operations. A material breach of customer data security may negatively impact our business
reputation and cause a loss of customers, result in increased expense to contain the event and/or require that we provide credit
monitoring services for affected customers, result in regulatory fines and sanctions and/or result in litigation. Cyber security
risk management programs are expensive to maintain and will not protect the Company from all risks associated with
maintaining the security of customer data and the Company's proprietary data from external and internal intrusions, disaster
recovery and failures in the controls used by our vendors. In addition, Congress and the legislatures of states in which we
operate regularly consider legislation that would impose more stringent data privacy requirements, resulting in increased
compliance costs.
Our business is highly reliant on third party vendors and our ability to manage the operational risks associated with
outsourcing those services.
We rely on third parties to provide services that are integral to our operations. These vendors provide services that support
our operations, including the storage and processing of sensitive consumer and business customer data, as well as our sales
efforts. A cyber security breach of a vendor's system may result in theft of our data or disruption of business processes. A
material breach of customer data security at a service provider's site may negatively impact our business reputation and cause
a loss of customers; result in increased expense to contain the event and/or require that we provide credit monitoring services
for affected customers, result in regulatory fines and sanctions and/or result in litigation. In most cases, we will remain
primarily liable to our customers for losses arising from a breach of a vendor's data security system. We rely on our
outsourced service providers to implement and maintain prudent cyber security controls. We have procedures in place to
assess a vendor's cyber security controls prior to establishing a contractual relationship and to periodically review
assessments of those control systems; however, these procedures are not infallible and a vendor's system can be breached
despite the procedures we employ. We have alliances with other companies that assist in our sales efforts. We cannot be sure
that we will be able to maintain these relationships on favorable terms. In addition, some of our data processing services are
provided by companies associated with our competitors. The loss of these vendor relationships could disrupt the services we
provide to our customers and cause us to incur significant expense in connection with replacing these services.
Damage to our brand and reputation could significantly harm our business and prospects.
Our brand and reputation are important assets. Our relationship with many of our customers is predicated upon our reputation
as a high-quality provider of financial services that adheres to the highest standards of ethics, service quality and regulatory
compliance. We believe that our brand has been, and continues to be, well received in our industry, with current and potential
customers, investors and employees. Our ability to attract and retain customers, investors and employees depends upon
external perceptions of us. Damage to our reputation among existing and potential customers, investors and employees could
cause significant harm to our business and prospects and may arise from numerous sources, including litigation or regulatory
actions, failing to deliver minimum standards of service and quality, lending practices, inadequate protection of customer
information, sales and marketing efforts, compliance failures, unethical behavior and the misconduct of employees. Adverse
developments with respect to our industry may also, by association, negatively impact our reputation or result in greater
regulatory or legislative scrutiny or litigation against us.
A decline in the Company's stock price or expected future cash flows, or a material adverse change in our results of
operations or prospects, could result in impairment of our goodwill.
From time to time, the Company's common stock has traded at a price below its book value, including goodwill and other
intangible assets. A significant and sustained decline in our stock price and market capitalization, a significant decline in our
expected future cash flows, a significant adverse change in the business climate or slower growth rates could result in
impairment of our goodwill. We have a significant goodwill asset on our balance sheet. If impairment was deemed to exist, a
write down of goodwill would occur with a charge to earnings.
22
Involvement in non-bank business creates risks associated with the securities industry.
Umpqua Investments' retail brokerage operations present special risks not borne by financial institutions that focus
exclusively on traditional community banking. For example, the brokerage industry is subject to fluctuations in the stock
market that may have a significant adverse impact on transaction fees, customer activity and investment portfolio gains and
losses. Likewise, additional or modified regulations may adversely affect Umpqua Investments' operations. Umpqua
Investments is also dependent on a small number of established brokers, whose departure could result in the loss of a
significant number of customer accounts. A significant decline in fees and commissions or trading losses suffered in the
investment portfolio could adversely affect Umpqua Investments' income and potentially require the contribution of
additional capital to support its operations. Umpqua Investments is subject to claim arbitration risk arising from customers
who claim their investments were not suitable or that their portfolios were too actively traded. These risks increase when the
market declines. The risks associated with retail brokerage may not be supported by the income generated by those
operations. See Management's Discussion and Analysis of Financial Condition and Results of Operations-"Non-interest
Income".
The value of the securities in our investment securities portfolio may be negatively affected by disruptions in securities
markets.
The market for some of the investment securities held in our portfolio has become volatile over the past three years. Volatile
market conditions or deteriorating financial performance of the issuer or obligor may detrimentally affect the value of these
securities. There can be no assurance that the declines in market value associated with these disruptions will not result in
other-than-temporary or permanent impairments of these assets, which would lead to accounting charges that could have a
material adverse effect on our net income and capital levels.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
The executive offices of Umpqua and Umpqua Investments are located at One SW Columbia Street in Portland, Oregon in
office space that is leased. The Bank's headquarters, located in Roseburg, Oregon, is owned. At December 31, 2017, the Bank
conducted community banking activities or operated Commercial Banking Centers at 333 locations, in Oregon, Washington,
California, Idaho and Nevada, of which 137 are owned and 196 are leased under various agreements. As of December 31,
2017, the Bank also operated 22 facilities for the purpose of administrative and other functions, such as back-office support,
of which 3 are owned and 19 are leased. All facilities are in a good state of repair and appropriately designed for use as
banking or administrative office facilities. As of December 31, 2017, Umpqua Investments leased 4 stand-alone offices from
unrelated third parties and also leased space in 7 Bank stores under lease agreements based on market rates.
ITEM 3. LEGAL PROCEEDINGS.
Due to the nature of our business, we are involved in legal proceedings that arise in the ordinary course of our business.
While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these
matters will have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is traded on The NASDAQ Global Select Market under the symbol "UMPQ." As of
(a)
December 31, 2017, there were 400,000,000 common shares authorized for issuance. The following table presents the high
and low sales prices of our common stock for each period, based on inter-dealer prices that do not include retail mark-ups,
mark-downs or commissions, and cash dividends declared for each period:
Quarter Ended
December 31, 2017
September 30, 2017
June 30, 2017
March 31, 2017
December 31, 2016
September 30, 2016
June 30, 2016
March 31, 2016
High
Low
Cash Dividend
Per Share
$
$
$
$
$
$
$
$
22.86
19.69
19.09
19.50
19.30
16.51
16.78
16.35
$
$
$
$
$
$
$
$
19.45
16.77
16.65
16.68
14.78
14.79
14.61
13.46
$
$
$
$
$
$
$
$
0.18
0.18
0.16
0.16
0.16
0.16
0.16
0.16
As of December 31, 2017, our common stock was held by approximately 4,834 shareholders of record, a number that does
not include beneficial owners who hold shares in "street name", or shareholders from previously acquired companies that
have not exchanged their stock. At December 31, 2017, a total of 98,000 stock options, 1.2 million shares of restricted shares
and 22,000 restricted stock units were outstanding.
The payment of future cash dividends is at the discretion of our Board of Directors and subject to a number of factors,
including results of operations, general business conditions, growth, financial condition and other factors deemed relevant by
the Board of Directors. Further, our ability to pay future cash dividends is subject to certain regulatory requirements and
restrictions discussed in the Supervision and Regulation section in Item 1 above.
During 2017, Umpqua's Board of Directors approved a quarterly cash dividend of $0.16 per common share for first and
second quarters and $0.18 for third and fourth quarters. These dividends were made pursuant to our existing dividend policy
and in consideration of, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset
growth. We expect that the dividend rate will be reassessed on a quarterly basis by the Board of Directors in accordance with
the dividend policy.
We have a dividend reinvestment plan that permits shareholder participants to purchase shares at the then-current market
price in lieu of the receipt of cash dividends. Shares issued in connection with the dividend reinvestment plan are purchased
in open market transactions.
24
Equity Compensation Plan Information
The following table sets forth information about equity compensation plans that provide for the award of securities or the
grant of options to purchase securities to employees and directors of Umpqua and its subsidiaries and predecessors by merger
that were in effect at December 31, 2017.
(shares in thousands)
Plan category
Equity compensation plans approved by
security holders
2013 Stock Incentive Plan (1)
2003 Stock Incentive Plan (1)
Other (2)
Total
Equity compensation plans not
approved by security holders
Total
Equity Compensation Plan Information
(A)
(B)
(C)
Number of securities
to be issued upon
exercise of
outstanding options
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights (3)
Number of securities remaining
available for future issuance
under equity compensation plans
excluding securities reflected in
column (A)
— $
$
125
33
158
$
$
— $
158
$
—
16.38
16.42
16.39
—
16.39
6,985
—
—
6,985
—
6,985
(1) Shareholders approved the Company's 2013 Incentive Plan (the "2013 Plan") on April 16, 2013, and approved
an amendment to the 2013 plan to increase the number of authorized shares at the 2016 annual meeting of
shareholders. The 2013 Plan authorizes the issuance of equity awards to directors and employees and reserves
12.0 million shares of the Company's common stock for issuance under the plan (up to 6 million shares for
"full value awards" as described below). With the adoption of the 2013 Plan, no additional awards will be
issued from prior plans. Under the terms of the 2013 Plan, options and awards generally vest ratably over a
period of three to five years, the exercise price of each option equals the market price of the Company's common
stock on the date of the grant, and the maximum term is ten years. The 2013 Plan weights "full value
awards" (restricted shares and performance share awards) as two shares issued from the total authorized under
the 2013 Plan; we have issued only full value awards under the 2013 Plan. For purposes of column (C) above,
the total number of shares available for future issuance under the 2013 Plan for full value awards was 3.5
million at December 31, 2017. At December 31, 2017, 1.2 million shares issued under the 2013 Plan as
restricted stock/performance share awards were outstanding, but subject to forfeiture in the event time or
performance based conditions are not met.
Includes other Umpqua stock plans and stock plans assumed through previous mergers.
(2)
(3) Weighted average exercise price is based solely on securities with an exercise price.
(b)
Not applicable.
25
(c)
The following table provides information about repurchases of common stock by the Company during the quarter
ended December 31, 2017:
Period
10/1/17 - 10/31/17
11/1/17 - 11/30/17
12/1/17 - 12/31/17
Total for quarter
Total number
of Common
Shares
Purchased (1)
Average Price
Paid per
Common
Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plan
(2)
Maximum Number of
Remaining Shares that
May be Purchased at
Period End under the
Plan
821
103,405
364
104,590
$
$
$
$
19.79
20.66
21.07
20.65
—
100,000
—
100,000
10,582,429
10,482,429
10,482,429
(1) Common shares repurchased by the Company during the quarter consist of cancellation of 4,305 shares to be
issued upon vesting of restricted stock awards and 285 shares to be issued upon vesting of restricted stock
units to pay withholding taxes. During the three months ended December 31, 2017, 100,000 shares were
repurchased pursuant to the Company's publicly announced corporate stock repurchase plan described in (2)
below.
(2) The Company's share repurchase plan, which was first approved by the Board and announced in August 2003,
was amended on September 29, 2011 to increase the number of common shares available for repurchase under
the plan to 15 million shares. The repurchase program has been extended multiple times by the board with
the current expiration date of July 31, 2019. As of December 31, 2017, a total of 10.5 million shares remained
available for repurchase. The Company repurchased 325,000 shares under the repurchase plan during 2017,
repurchased 635,000 shares in 2016, and 571,000 shares under the repurchase plan in 2015. The timing and
amount of future repurchases will depend upon the market price for our common stock, securities laws
restricting repurchases, asset growth, earnings, and our capital plan.
There were 35,000 and 154,000 shares tendered in connection with option exercises during the years ended December 31,
2017 and 2016, respectively. Restricted shares cancelled to pay withholding taxes totaled 91,000 and 279,000 shares during
the years ended December 31, 2017 and 2016, respectively. There were 17,000 restricted stock units cancelled to pay
withholding taxes during the years ended December 31, 2017 and 49,000 in 2016.
26
Stock Performance Graph
The following chart, which is furnished not filed, compares the yearly percentage changes in the cumulative shareholder
return on our common stock during the five fiscal years ended December 31, 2017, with (i) the Total Return Index for
NASDAQ Bank Stocks (ii) the Total Return Index for The Nasdaq Stock Market (U.S. Companies) (iii) the Standard and
Poor's 500 and (iv) the Total Return Index for Nasdaq Bank Stocks and (v) SNL U.S. Bank Nasdaq. This comparison assumes
$100.00 was invested on December 31, 2012, in our common stock and the comparison indices, and assumes the
reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. Price information from
December 31, 2012 to December 31, 2017, was obtained by using the NASDAQ closing prices as of the last trading day of
each year.
Umpqua Holdings Corporation
Nasdaq U.S.
S&P 500
SNL U.S. Bank Nasdaq
Period Ending
12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017
$100.00
$100.00
$100.00
$100.00
$168.70
$140.12
$132.39
$143.73
$155.18
$160.78
$150.51
$148.86
$150.46
$171.97
$152.59
$160.70
$184.91
$187.22
$170.84
$222.81
$212.22
$242.71
$208.14
$234.58
27
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ITEM 6. SELECTED FINANCIAL DATA.
Umpqua Holdings Corporation
Annual Financial Trends
(in thousands, except per share data)
2017
2016
2015
2014
2013
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expense
Merger related expenses
Income before provision for income taxes
Provision for income taxes
Net income
$
938,104
$
910,639
$
929,866
$
822,521
$
442,846
78,216
859,888
47,254
277,196
738,551
9,324
341,955
95,936
246,019
66,051
844,588
41,674
299,940
721,842
15,313
365,699
132,759
232,940
58,232
871,634
36,589
275,724
718,060
45,582
347,127
124,588
222,539
48,693
773,828
40,241
181,174
601,746
82,317
230,698
83,040
147,658
37,881
404,965
10,716
122,895
355,825
8,836
152,483
54,192
98,291
Dividends and undistributed earnings allocated to participating
securities
56
125
357
484
788
Net earnings available to common shareholders
$
245,963
$
232,815
$
222,182
$
147,174
$
97,503
YEAR END
Assets
Earning assets
Loans and leases (1)
Deposits
Term debt
Junior subordinated debentures, at fair value
Junior subordinated debentures, at amortized cost
Total shareholders' equity
Common shares outstanding
AVERAGE
Assets
Earning assets
Loans and leases (1)
Deposits
Term debt
Junior subordinated debentures
Total shareholders' equity
Basic common shares outstanding
Diluted common shares outstanding
PER COMMON SHARE DATA
Basic earnings
Diluted earnings
Book value
Tangible book value (2)
Cash dividends declared
$25,741,439
$24,813,119
$23,406,381
$22,620,965
$11,636,666
22,768,461
21,775,347
20,309,574
19,381,411
10,272,043
19,080,184
17,508,663
16,866,536
15,338,794
7,732,228
19,948,300
19,020,985
17,707,189
16,892,099
9,117,660
802,357
277,155
100,609
852,397
262,209
100,931
888,769
255,457
101,254
1,006,395
249,294
101,576
251,494
87,274
101,899
4,014,786
3,916,795
3,849,334
3,777,626
1,723,917
220,149
220,177
220,171
220,161
111,973
$25,127,244
$24,121,462
$22,905,541
$19,169,098
$11,507,688
22,178,926
21,010,501
19,727,031
16,484,664
10,224,606
18,235,547
17,258,081
15,938,127
13,003,762
7,367,602
19,351,738
18,347,451
17,250,810
14,407,331
9,057,673
846,542
365,196
897,050
359,003
923,992
352,872
815,017
301,525
252,546
189,237
3,969,866
3,898,599
3,820,505
3,137,858
1,729,083
220,251
220,836
220,282
220,908
220,327
221,045
186,550
187,554
111,938
112,176
$
$
1.12
1.11
18.24
9.98
0.68
$
1.06
1.05
17.79
9.50
0.64
$
1.01
1.01
17.48
9.16
0.62
$
0.79
0.78
17.16
8.79
0.60
0.87
0.87
15.40
8.46
0.60
28
(dollars in thousands)
2017
2016
2015
2014
2013
PERFORMANCE RATIOS
Return on average assets (3)
Return on average common shareholders' equity (4)
Return on average tangible common shareholders' equity (5)
Efficiency ratio (6)
Average common shareholders' equity to average assets
Leverage ratio (7)
Net interest margin (fully tax equivalent) (8)
Non-interest income to total net revenue (9)
Dividend payout ratio (10)
ASSET QUALITY
Non-performing loans and leases (11)
Non-performing assets (11)
Allowance for loan and lease losses
Net charge-offs
Non-performing loans and leases to loans and leases
Non-performing assets to total assets
Allowance for loan and lease losses to total loans and leases
Allowance for credit losses to loans and leases
Net charge-offs to average loans and leases
0.98%
6.20%
11.45%
65.51%
15.80%
9.38%
3.90%
24.38%
60.71%
0.97%
5.97%
11.25%
64.15%
16.16%
9.21%
4.04%
26.21%
60.38%
0.97%
5.82%
11.22%
66.27%
16.68%
9.73%
4.44%
24.03%
61.39%
0.77%
4.69%
9.17%
71.23%
16.37%
10.99%
4.73%
18.97%
75.95%
0.85%
5.64%
9.77%
66.83%
15.03%
10.90%
4.01%
23.28%
68.97%
$
82,459
$
56,134
$
44,384
$
59,553
$
35,321
94,193
140,608
40,630
62,872
133,984
38,012
66,691
130,322
22,434
97,495
116,167
19,159
0.43%
0.37%
0.74%
0.76%
0.22%
0.32%
0.25%
0.77%
0.79%
0.22%
0.26%
0.28%
0.77%
0.79%
0.14%
0.39%
0.43%
0.76%
0.78%
0.15%
59,256
95,085
19,297
0.46%
0.51%
1.23%
1.25%
0.26%
(1) Excludes loans held for sale
(2) Average common shareholders' equity less average intangible assets (excluding MSR) divided by shares outstanding at
the end of the year. See Management's Discussion and Analysis of Financial Condition and Results of
Operation"-"Results of Operations - Overview" for the reconciliation of non-GAAP financial measures, in Item 7 of
this report.
(3) Net earnings available to common shareholders divided by average assets.
(4) Net earnings available to common shareholders divided by average common shareholders' equity.
(5) Net earnings available to common shareholders divided by average common shareholders' equity less average
intangible assets. See Management's Discussion and Analysis of Financial Condition and Results of
Operations-"Results of Operations - Overview" for the reconciliation of non-GAAP financial measures, in Item 7 of
this report.
(6) Non-interest expense divided by the sum of net interest income (fully tax equivalent) and non-interest income.
(7) Tier 1 capital divided by leverage assets. Leverage assets are defined as quarterly average total assets, net of goodwill,
intangibles and certain other items as required by the Federal Reserve.
(8) Net interest margin (fully tax equivalent) is calculated by dividing net interest income (fully tax equivalent) by average
interest earnings assets.
(9) Non-interest income divided by the sum of non-interest income and net interest income.
(10) Dividends declared per common share divided by basic earnings per common share.
(11) Excludes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to
repurchase that are past due 90 days or more totaling $12.4 million, $10.9 million, $19.2 million, $11.1 million and
$4.1 million, as of December 31, 2017, 2016, 2015, 2014, and 2013, respectively.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD LOOKING STATEMENTS AND RISK FACTORS
See the discussion of forward-looking statements and risk factors in Part I Item 1 and Item 1A of this report.
EXECUTIVE OVERVIEW
Significant items for the year ended December 31, 2017 were as follows:
Financial Performance
• Net earnings available to common shareholders per diluted common share were $1.11 for the year ended
December 31, 2017, as compared to $1.05 for the year ended December 31, 2016.
• Due to the passage of the Tax Cuts and Jobs Act ("Tax Act") in December 2017, the Company recognized a $26.9
million net benefit to the provision for income taxes related to a revaluation of the net deferred tax liability and
amortization of tax credit investments, partially offset by the non-deductibility of certain executive compensation.
• Net interest margin, on a tax equivalent basis, was 3.90% for the year ended December 31, 2017, compared to
4.04% for the year ended December 31, 2016. The decrease in net interest margin compared to the same period in
the prior year was driven by lower average yields on the loan and lease portfolio, reflecting a lower level of
accretion of the credit discount, along with an increase in the cost of interest-bearing liabilities.
• Residential mortgage banking revenue was $136.3 million for 2017, compared to $157.9 million for 2016. The
decrease for the year ended December 31, 2017 was driven by a 14.4% decrease in closed loans for sale volume,
as well as a lower gain on sale margin to 3.51%, compared to 3.72% in the same period of the prior year. These
were partially offset by a lower negative fair value adjustment of $23.3 million on the MSR asset relative to the
negative fair value adjustment of $25.9 million for the year ended December 31, 2016.
• Total gross loans and leases were $19.1 billion as of December 31, 2017, an increase of $1.6 billion, or 9%,
compared to December 31, 2016. This increase reflects balanced growth across the Company's commercial term,
multifamily, leases and equipment finance, and mortgage portfolios.
• Total deposits were $19.9 billion as of December 31, 2017, an increase of $927.3 million, as compared to
December 31, 2016. The increase was primarily attributable to growth in demand, money market, and savings
accounts.
• Total consolidated assets were $25.7 billion as of December 31, 2017, as compared to $24.8 billion at
December 31, 2016.
Credit Quality
• Non-performing assets increased to $94.2 million, or 0.37% of total assets, as of December 31, 2017, as compared
to $62.9 million, or 0.25% of total assets, as of December 31, 2016. Non-performing loans were $82.5 million, or
0.43% of total loans, as of December 31, 2017, as compared to $56.1 million, or 0.32% of total loans as of
December 31, 2016. This increase primarily reflects several larger loans which moved to non-performing status
during the year.
• The provision for loan and lease losses was $47.3 million for 2017, as compared to $41.7 million recognized for
2016. The increase was principally attributable to strong growth in the loan and lease portfolio. Net charge-offs on
loans were $40.6 million for the year ended December 31, 2017, or 0.22% of average loans and leases, as
compared to net charge-offs of $38.0 million, or 0.22% of average loans and leases, for the year ended
December 31, 2016.
30
Capital and Growth Initiatives
• Umpqua introduced "Next-Gen," an initiative to modernize and evolve the Bank. At the center of Next-Gen is a
new strategy we are calling human-digital banking, which uses technology to build on Umpqua's customer-centric
brand and culture and to differentiate Umpqua in the marketplace with a new competitive advantage. Through
Next-Gen, we will activate our mission, providing personalized banking for all anytime, anywhere.
• The Company's total risk based capital was 14.1% and its Tier 1 common to risk weighted assets ratio was 11.1%
as of December 31, 2017. As of December 31, 2016, the Company's total risk based ratio was 14.7% and its Tier
1 common to risk weighted assets ratio was 11.5%.
• Declared cash dividends of $0.68 per common share for 2017 and $0.64 per common share for 2016.
• Repurchased 325,000 shares of common stock for $6.0 million.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain
and may change in future periods. Our significant accounting policies are described in Note 1 in the Notes to Consolidated
Financial Statements in Item 8 of this report. Not all of these significant accounting policies require management to make
difficult, subjective or complex judgments or estimates. Management believes that the following policies would be
considered critical under the SEC's definition.
Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments
The Bank performs regular credit reviews of the loan and lease portfolio to determine the credit quality and adherence to
underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically
during the term of the loan through the credit review process. The Bank's risk rating methodology assigns risk ratings
ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in
determining an appropriate amount for the allowance for loan and lease losses. The Bank has a management Allowance for
Loan and Lease Losses ("ALLL") Committee, which is responsible for, among other things, regularly reviewing the ALLL
methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted
accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status. The
ALLL Committee also approves removing loans and leases from impaired status. The Bank's Audit and Compliance
Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly
basis.
Each risk rating is assessed an inherent credit loss factor that determines the amount of the allowance for loan and lease
losses provided for that group of loans and leases with similar risk rating. Credit loss factors may vary by region based on
management's belief that there may ultimately be different credit loss rates experienced in each region. Regular credit reviews
of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the
ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired when based on
current information and events, we determine that we will probably not be able to collect all amounts due according to the
loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using
discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the
collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows.
If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize an
impairment reserve as a specific component to be provided for in the allowance for loan and lease losses or charge-off the
impaired balance on collateral dependent loans if it is determined that such amount represents a confirmed loss. The
combination of the risk rating-based allowance component and the impairment reserve allowance component lead to an
allocated allowance for loan and lease losses.
31
The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease
portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less
than 5% of the allowance, but may be maintained at higher levels during times of economic conditions characterized by
falling real estate values. The unallocated amount is reviewed periodically based on trends in credit losses, the results of
credit reviews and overall economic trends. As of December 31, 2017, there was no unallocated allowance amount.
The reserve for unfunded commitments ("RUC") is established to absorb inherent losses associated with our commitment to
lend funds, such as with a letter or line of credit. The adequacy of the ALLL and RUC are monitored on a regular basis and
are based on management's evaluation of numerous factors. These factors include the quality of the current loan portfolio; the
trend in the loan portfolio's risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and
non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and
recovery experience; and other pertinent information.
Management believes that the ALLL was adequate as of December 31, 2017. There is, however, no assurance that future loan
losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for
loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require
additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review. A
substantial percentage of our loan portfolio is secured by real estate; as a result, a significant decline in real estate market
values may require an increase in the allowance for loan and lease losses.
Acquired Loans
Acquired loans and leases are recorded at their fair value at the acquisition date. For purchased non-impaired loans, the
difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to
interest income using the effective interest method over the remaining contractual period to maturity.
The acquired loans that are purchased impaired loans are aggregated into pools based on individually evaluated common risk
characteristics and aggregate expected cash flows were estimated for each pool. A pool is accounted for as a single asset with
a single interest rate, cumulative loss rate and cash flow expectation. The cash flows expected to be received over the life of
the pool were estimated by management. These cash flows were input into an accounting loan system which calculates the
carrying values of the pools and underlying loans, book yields, effective interest income and impairment, if any, based on
actual and projected events. Default rates, loss severity, and prepayment speeds assumptions are periodically reassessed and
updated within the accounting model to update our expectation of future cash flows. The excess of the cash flows expected to
be collected over a pool's carrying value is considered to be the accretable yield and is recognized as interest income over the
estimated life of the loan or pool using the effective yield method. The accretable yield may change due to changes in the
timing and amounts of expected cash flows. Changes in the accretable yield are disclosed quarterly.
Residential Mortgage Servicing Rights ("MSR")
The Company determines its classes of servicing assets based on the asset type being serviced along with the methods used to
manage the risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets. The
Company measures its residential mortgage servicing assets at fair value and reports changes in fair value through
earnings. Fair value adjustments encompass market-driven valuation changes and the runoff in value that occurs from the
passage of time, which are separately reported. Under the fair value method, the MSR is carried in the balance sheet at fair
value and the changes in fair value are reported in earnings under the caption residential mortgage banking revenue in the
period in which the change occurs.
Retained mortgage servicing rights are measured at fair value as of the date of the related loan sale. We use quoted market
prices when available. Subsequent fair value measurements are determined using a discounted cash flow model. In order to
determine the fair value of the MSR, the present value of expected net future cash flows is estimated. Assumptions used
include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income net
of servicing costs. This model is periodically validated by an independent model validation group. The model assumptions
and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker
valuations and industry surveys, as available.
32
Valuation of Goodwill and Intangible Assets
Goodwill and other intangible assets with indefinite lives are not amortized but instead are periodically tested for impairment.
Management performs an impairment analysis for the intangible assets with indefinite lives on an annual basis as of
December 31. Additionally, goodwill and other intangible assets with indefinite lives are evaluated on an interim basis when
events or circumstances indicate impairment potentially exists. The impairment analysis requires management to make
subjective judgments. Events and factors that may significantly affect the estimates include, among others, competitive
forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount
rates and specific industry and market conditions. There can be no assurance that changes in circumstances, estimates or
assumptions may result in additional impairment of all, or some portion of, goodwill or other intangible assets.
The Company performed its annual goodwill impairment analysis as of December 31, 2017. The Company assessed
qualitative factors to determine whether the existence of events and circumstances indicated that it is more likely than not that
the indefinite-lived intangible asset is impaired, and determined no factors indicated an impairment. During 2017, the
Company modified its reporting units based on a change in segment reporting. Goodwill previously allocated to the
Community Banking reporting unit was split into multiple new segments. The Company performed an analysis to allocate
goodwill between the new reporting units of Commercial Bank, Retail Bank, and Wealth Management. The Company
performed its analysis of goodwill for both the Company as a whole, as well as analyzing any factors that would impact the
individual reporting units.
Stock-based Compensation
We recognize expense in the income statement for the grant-date fair value of restricted shares and stock options as equity-
based forms of compensation issued to employees over the employees' requisite service period (generally the vesting period).
The requisite service period may be subject to performance conditions. The fair value of the restricted shares is based on the
Company's share price on the grant date. Management assumptions utilized at the time of grant impact the fair value of the
option calculated under the pricing model, and ultimately, the expense that will be recognized over the expected service
period related to each option.
Fair Value
A hierarchical disclosure framework associated with the level of pricing observability is utilized in measuring financial
instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally
correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which
fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a
lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will
generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing
observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument
is new to the market and not yet established and the characteristics specific to the transaction.
RECENT ACCOUNTING PRONOUNCEMENTS
Information regarding Recent Accounting Pronouncements is included in Note 1 of the Notes to Consolidated Financial
Statements in Item 8 below.
33
RESULTS OF OPERATIONS-OVERVIEW
For the year ended December 31, 2017, net earnings available to common shareholders were $246.0 million, or $1.11 per
diluted common share, as compared to net earnings available to common shareholders of $232.8 million, or $1.05 per diluted
common share for the year ended December 31, 2016. The increase for the year ended December 31, 2017 compared to the
prior year was mainly attributable to the $26.9 million net benefit to the provision for income taxes related to the revaluation
of the net deferred tax liability and amortization of tax credit investments associated with the passage of the Tax Cuts and
Jobs Act in December 2017 ("Tax Act"), partially offset by the non-deductibility of certain executive compensation. The
Company also had an increase in net interest income, which is driven primarily by higher average balances of loans and
leases. The increase in net interest income was offset by a decrease in non-interest income and an increase in non-interest
expense. The decrease in non-interest income was driven primarily by lower residential mortgage banking revenue and higher
net loss on junior subordinated debentures carried at fair value. The increase in non-interest expense was primarily driven by
higher salaries and benefits expense, offset by lower merger related expenses.
For the year ended December 31, 2016, net earnings available to common shareholders were $232.8 million, or $1.05 per
diluted common share, as compared to net earnings available to common shareholders of $222.2 million, or $1.01 per diluted
common share for the year ended December 31, 2015. The increase in net earnings available to common shareholders in 2016
is principally attributable to a decline in non-interest expense, reflecting lower merger related expenses and lower salaries and
benefits expense, partially offset by higher mortgage banking expenses due to the increase in mortgage originations. Total
revenues increased from the prior year as increased mortgage banking revenues were offset by lower average yields on
interest-earning assets, along with a lower level of interest income arising from the accretion of the credit discount recorded
on acquired loans.
The following table presents the returns on average assets, average common shareholders' equity and average tangible
common shareholders' equity for the years ended December 31, 2017, 2016, and 2015. For each of the periods presented, the
table includes the calculated ratios based on reported net earnings available to common shareholders. Our return on average
common shareholders' equity is negatively impacted as the result of capital required to support goodwill. To the extent this
performance metric is used to compare our performance with other financial institutions that do not have merger and
acquisition-related intangible assets, we believe it is beneficial to also consider the return on average tangible common
shareholders' equity. The return on average tangible common shareholders' equity is calculated by dividing net earnings
available to common shareholders by average shareholders' common equity less average goodwill and intangible assets, net
(excluding MSRs). The return on average tangible common shareholders' equity is considered a non-GAAP financial measure
and should be viewed in conjunction with the return on average common shareholders' equity.
Return on Average Assets, Common Shareholders' Equity and Tangible Common Shareholders' Equity
For the Years Ended December 31,
(dollars in thousands)
Return on average assets
Return on average common shareholders' equity
Return on average tangible common shareholders' equity
Calculation of average common tangible shareholders' equity:
Average common shareholders' equity
Less: average goodwill and other intangible assets, net
Average tangible common shareholders' equity
2017
2016
2015
0.98%
6.20%
11.45%
0.97%
5.97%
11.25%
0.97%
5.82%
11.22%
$ 3,969,866
(1,821,223)
$ 2,148,643
$ 3,898,599
(1,828,575)
$ 2,070,024
$ 3,820,505
(1,839,599)
$ 1,980,906
Additionally, management believes tangible common equity and the tangible common equity ratio are meaningful measures
of capital adequacy. Umpqua believes the exclusion of certain intangible assets in the computation of tangible common
equity and tangible common equity ratio provides a meaningful base for period-to-period and company-to-company
comparisons, which management believes will assist investors in analyzing the operating results and capital of the Company.
Tangible common equity is calculated as total shareholders' equity less preferred stock and less goodwill and other intangible
assets, net (excluding MSRs). In addition, tangible assets are total assets less goodwill and other intangible assets, net
(excluding MSRs). The tangible common equity ratio is calculated as tangible common shareholders' equity divided by
tangible assets. The tangible common equity and tangible common equity ratio is considered a non-GAAP financial measure
and should be viewed in conjunction with the total shareholders' equity and the total shareholders' equity ratio.
34
The following table provides a reconciliation of ending shareholders' equity (GAAP) to ending tangible common equity (non-
GAAP), and ending assets (GAAP) to ending tangible assets (non-GAAP) as of December 31, 2017 and December 31, 2016:
Reconciliations of Total Shareholders' Equity to Tangible Common Shareholders' Equity and Total Assets to Tangible
Assets
(dollars in thousands)
Total shareholders' equity
Subtract:
Goodwill
Other intangible assets, net
Tangible common shareholders' equity
Total assets
Subtract:
Goodwill
Other intangible assets, net
Tangible assets
Tangible common equity ratio
December 31,
2017
$ 4,014,786
December 31,
2016
$ 3,916,795
1,787,651
1,787,651
30,130
36,886
$ 2,197,005
$ 2,092,258
$ 25,741,439
$ 24,813,119
1,787,651
30,130
1,787,651
36,886
$ 23,923,658
$ 22,988,582
9.18%
9.10%
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not
audited. Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a
company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of
results as reported under GAAP.
NET INTEREST INCOME
Net interest income is the largest source of our income. Net interest income for 2017 was $859.9 million, an increase of
$15.3 million or 2% compared to the same period in 2016. The increase in net interest income in 2017 as compared to 2016
is driven primarily by higher average balances of loans and leases and investment securities, partially offset by lower average
yields on loans and leases including a lower level of accretion of the credit discount from acquired loans. The increase in net
interest income was also offset by increased volumes of interest-bearing liabilities and an increase in the average cost of
funds due to rising market rates in 2017.
Net interest income for 2016 was $844.6 million, a decrease of $27.0 million or 3% compared to the same period in 2015.
The decrease in net interest income in 2016 as compared to 2015 is primarily attributable to lower average yields on interest-
earning assets, specifically within the loan and lease portfolio. The decrease was partially offset by growth in average
interest-earning assets. The decrease in net interest income also reflects a higher average cost of funds, primarily driven by
an increase in the cost of time deposits, as well as an increase in the interest expense on junior subordinated debentures
The net interest margin (net interest income as a percentage of average interest-earning assets) on a fully tax equivalent basis
was 3.90% for 2017, a decrease of 14 basis points as compared to 2016. The decrease in net interest margin primarily
resulted from lower average yields on the loan and lease portfolio, as well as an increase in the cost of interest-bearing
liabilities. The yield on loans and leases for 2017 decreased by 16 basis points as compared to 2016. The total cost of interest-
bearing liabilities for 2017 was 0.53%, representing an increase of 7 basis points compared to 2016. The cost of time deposits
was 1.05% in 2017 compared to 0.86% in 2016.
The net interest margin on a fully tax-equivalent basis was 4.04% for 2016, a decrease of 40 basis points as compared to the
same period in 2015. The decrease in net interest margin primarily resulted from the lower level of accretion of the credit
discount recorded on acquired loans, as well as decreased yields on earning assets.
35
Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities,
as well as changes in the yields earned on interest-earning assets and rates paid on deposits and borrowed funds. The
following table presents condensed average balance sheet information, together with interest income and yields on average
interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for years ended
December 31, 2017, 2016 and 2015:
Average Rates and Balances
(dollars in thousands)
2017
Interest
Income
or
Expense
Average
Yields
or
Rates
Average
Balance
2016
Interest
Income
or
Expense
Average
Balance
Average
Yields
or Rates
Average
Balance
2015
Interest
income
or
Expense
Average
Yields
or
Rates
INTEREST-EARNING ASSETS:
Loans held for sale
Loans and leases (1)
Taxable securities
Non-taxable securities (2)
Temporary investments and interest-
bearing deposits
$
383,802
$ 14,374
3.75% $
416,724
$ 15,995
3.84% $
333,455
$ 12,407
18,235,547
851,147
4.67% 17,258,081
834,072
4.83% 15,938,127
857,026
2,851,136
286,605
59,478
13,244
2.09%
4.62%
2,314,062
284,780
47,826
13,426
2.07% 2,275,512
4.71%
310,684
48,550
14,684
421,836
4,380
1.04%
736,854
3,918
0.53%
869,253
2,236
Total interest earning assets
22,178,926
942,623
4.25% 21,010,501
915,237
4.36% 19,727,031
934,903
Allowance for loan and lease losses
(138,587)
Other assets
Total assets
INTEREST-BEARING
LIABILITIES:
3,086,905
$25,127,244
(132,492)
3,243,453
$24,121,462
(126,063)
3,304,573
$22,905,541
Interest-bearing checking
$ 2,322,194
$ 3,725
0.16% $ 2,189,589
$
2,415
0.11% $ 2,080,126
$ 1,957
6,773,939
10,499
0.15% 6,376,178
Money market deposits
6,741,983
13,069
699
28,089
45,582
475
14,159
18,000
78,216
Savings deposits
Time deposits
1,412,039
2,672,687
Total interest-bearing deposits
13,148,903
Federal funds purchased and
repurchase agreements
Term debt
Junior subordinated debentures
344,200
846,542
365,196
Total interest-bearing liabilities
14,704,841
Non-interest-bearing deposits
Other liabilities
Total liabilities
Common equity
6,202,835
249,702
21,157,378
3,969,866
Total liabilities and shareholders'
equity
$25,127,244
0.19%
0.05%
1.05%
1,248,831
2,518,507
0.35% 12,730,866
0.14%
1.67%
4.93%
333,919
897,050
359,003
0.53% 14,320,838
5,616,585
285,440
20,222,863
3,898,599
$24,121,462
655
0.05% 1,063,151
21,671
35,240
132
15,005
15,674
66,051
0.86% 2,715,847
0.28% 12,235,302
0.04%
1.67%
4.37%
321,079
923,992
352,872
0.46% 13,833,245
5,015,508
236,283
19,085,036
3,820,505
$22,905,541
9,491
1,105
17,286
29,839
173
14,470
13,750
58,232
NET INTEREST INCOME
NET INTEREST SPREAD
AVERAGE YIELD ON EARNING
ASSETS (1), (2)
INTEREST EXPENSE TO
EARNING ASSETS
NET INTEREST INCOME TO
EARNING ASSETS OR NET
INTEREST MARGIN (1), (2)
$864,407
$ 849,186
$876,671
3.72%
4.25%
0.35%
3.90%
3.90%
4.36%
0.32%
4.04%
3.72%
5.38%
2.13%
4.73%
0.26%
4.74%
0.09%
0.15%
0.10%
0.64%
0.24%
0.05%
1.57%
3.90%
0.42%
4.32%
4.74%
0.30%
4.44%
(1) Non-accrual loans and leases are included in the average balance.
(2) Tax-exempt income has been adjusted to a tax equivalent basis at a 35% tax rate. The amount of such adjustment was an
addition to recorded income of approximately $4.5 million, $4.6 million, and $5.0 million for the years ended 2017, 2016,
and 2015, respectively.
36
The following table sets forth a summary of the changes in tax equivalent net interest income due to changes in average asset
and liability balances (volume) and changes in average rates (rate) for 2017 as compared to 2016 and 2016 compared to 2015.
Changes in tax equivalent interest income and expense, which are not attributable specifically to either volume or rate, are
allocated proportionately between both variances.
(in thousands)
2017 compared to 2016
2016 compared to 2015
Increase (decrease) in interest income
and expense due to changes in
Increase (decrease) in interest income
and expense due to changes in
Volume
Rate
Total
Volume
Rate
Total
INTEREST-EARNING ASSETS:
Loans held for sale
Loans and leases
Taxable securities
Non-taxable securities (1)
Temporary investments and interest bearing
deposits
Total (1)
INTEREST-BEARING LIABILITIES:
Interest bearing demand
Money market
Savings
Time deposits
Repurchase agreements and federal funds
Term debt
Junior subordinated debentures
Total
Net increase (decrease) in net interest
income (1)
$
(1,240) $
(381) $
46,233
11,200
86
(29,158)
452
(268)
(1,621) $
17,075
11,652
(182)
(2,171)
54,108
2,633
(26,722)
462
27,386
156
(50)
83
1,391
4
(845)
275
1,154
2,620
(39)
5,027
339
(1)
2,051
1,310
2,570
44
6,418
343
(846)
2,326
1,014
11,151
12,165
3,185
$
67,744
814
(1,221)
(386)
70,136
107
606
168
(1,332)
7
(431)
243
(632)
$
403
(90,698)
(1,538)
(37)
3,588
(22,954)
(724)
(1,258)
2,068
(89,802)
1,682
(19,666)
351
402
(618)
5,717
(48)
966
1,681
8,451
458
1,008
(450)
4,385
(41)
535
1,924
7,819
$
53,094
$ (37,873) $
15,221
$
70,768
$ (98,253) $ (27,485)
(1) Tax exempt income has been adjusted to a tax equivalent basis at a 35% tax rate.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses was $47.3 million for 2017, as compared to $41.7 million for 2016, and $36.6 million
for 2015. As a percentage of average outstanding loans and leases, the provision for loan and lease losses recorded for 2017
was 0.26%, an increase of 2 basis points from 2016 and an increase of 3 basis points from 2015.
The increase in the provision for loan and lease losses in 2017 as compared to 2016 is primarily attributable to strong growth
in the loan portfolio, as well as an increase in net charge-offs. The loan portfolio increased by $1.6 billion since December
31, 2017. Net-charge offs were $40.6 million for 2017, or 0.22% of average loans and leases, as compared to net charge-offs
of $38.0 million, or 0.22% of average loans and leases for 2016. For 2017, $613,000 of the provision for loan and lease
losses was related to previously acquired loans that were not purchased credit impaired. For 2016, there was a $262,000
recapture of the provision for loan and lease losses related to previously acquired loans that were not purchased credit
impaired.
37
The increase in the provision in 2016 as compared to 2015 is principally attributable to strong growth in the loan portfolio, as
well as an increase in net charge-offs. The economy in the Pacific Northwest improved causing the risk ratings of many of
our borrowers, as well as the value of the underlying collateral for real estate collateral loans, to improve as compared to prior
years. The loan portfolio increased by $642.1 million since December 31, 2015. For 2016, there was a $262,000 recapture of
the provision for loan and lease losses related to previously acquired loans that were not purchased credit impaired as
compared to $375,000 in the provision for loan and lease losses for the year ended December 31, 2015. Net-charge offs
for 2016 were $38.0 million compared to $22.4 million for 2015. The increase in charge-offs related to the lease portfolio
which has been a strong growth area for the past few years, although the credit quality metrics for the portfolio remain strong.
The Company recognizes the charge-off of impairment reserves on impaired loans in the period they arise for collateral
dependent loans. Therefore, the non-accrual loans of $51.5 million as of December 31, 2017 have already been written-down
to their estimated fair value, less estimated costs to sell, and are expected to be resolved with no additional material loss,
absent further decline in market prices.
NON-INTEREST INCOME
Non-interest income for 2017 was $277.2 million, a decrease of $22.7 million, or 8%, as compared to the same period in
2016. Non-interest income for 2016 was $299.9 million, an increase of $24.2 million, or 9%, as compared to 2015. The
following table presents the key components of non-interest income for years ended December 31, 2017, 2016 and 2015:
Non-Interest Income
Years Ended December 31,
(dollars in thousands)
2017 compared to 2016
2016 compared to 2015
2017
2016
Change
Amount
Change
Percent
2016
2015
Change
Amount
Change
Percent
Service charges on deposits
$ 61,469
$ 61,268
$
201
— % $ 61,268
$ 59,740
$ 1,528
Brokerage revenue
16,083
17,033
(950)
(6)%
17,033
18,481
(1,448)
Residential mortgage banking revenue, net
136,276
157,863
(21,587)
(14)% 157,863
124,722
33,141
Gain on investment securities, net
Gain on sale of loans, net
27
858
16,721
13,356
(831)
3,365
(97)%
858
2,922
25 %
13,356
22,380
(2,064)
(9,024)
Loss on junior subordinated debentures
carried at fair value
(14,727)
(6,323)
(8,404)
133 %
(6,323)
(6,306)
8,214
8,514
53,133
47,371
(300)
5,762
(4)%
12 %
8,514
8,351
47,371
45,434
1,937
$277,196
$299,940
$(22,744)
(8)% $299,940
$275,724
$ 24,216
(17)
163
BOLI income
Other income
Total
3 %
(8)%
27 %
(71)%
(40)%
— %
2 %
4 %
9 %
Brokerage commissions and fees in 2017 decreased primarily due to lower annuity and mutual fund account fees at Umpqua
Investments offset by increases in managed account fees. Assets under management at Umpqua Investments were $3.4 billion
at December 31, 2017, compared to $3.2 billion at December 31, 2016. Brokerage commissions and fees in 2016 decreased
due to a decrease in managed account fees at Umpqua Investments. Assets under management at Umpqua Investments were
$3.2 billion at both December 31, 2016 and December 31, 2015.
Residential mortgage banking revenue for the period ended December 31, 2017 as compared to December 31, 2016
decreased by $21.6 million. The decrease was primarily driven by a 14% decrease in closed loans for sale volume, as well as
a decrease in the gain on sale margin to 3.51%, compared to 3.72% in 2016. This decrease was partially offset by $4.6
million growth in servicing and $2.7 million less of a loss on the fair value of the MSR. Residential mortgage banking
revenue for the period ended December 31, 2016 as compared to December 31, 2015 increased by $33.1 million due to an
increase in production, represented by a 14% increase in closed loans for sale volume, partially offset by losses related to the
change in fair value of MSR which were higher in 2016 as compared to 2015.
The gain on loan sales for the year ended December 31, 2017, increased by $3.4 million due to a higher volume of leases sold
during the year. The decrease from 2015 to 2016, was the result of the mix and volume of loans sold during 2016.
38
A loss on junior subordinated debentures carried at fair value of $14.7 million was recognized in 2017, an increase of $8.4
million, compared to a loss of $6.3 million for both 2016 and 2015. The increase in 2017 was the result of the change in fair
value due to the estimated continued tightening of market credit spreads for these instruments.
Other income in 2017 compared to 2016 increased by $5.8 million, attributable to increased collaboration income from
Pivotus of $2.5 million and increased swap revenue of $3.9 million as compared to 2016. Other income in 2016 as compared
to 2015 increased by $1.9 million, with increases attributable to various fees that have increased due to the increase in loans
and due to increased swap revenue of $1.7 million as compared to 2015.
NON-INTEREST EXPENSE
Non-interest expense for 2017 was $747.9 million, an increase of $10.7 million, or 1%, as compared to 2016. Non-interest
expense for 2016 was $737.2 million, a decrease of $26.5 million, or 3%, as compared to 2015. The following table presents
the key elements of non-interest expense for the years ended December 31, 2017, 2016 and 2015.
Non-Interest Expense
Years Ended December 31,
(dollars in thousands)
2017 compared to 2016
2016 compared to 2015
2017
2016
Change
Amount
Change
Percent
2016
2015
Change
Amount
Change
Percent
Salaries and employee benefits
$438,180
$424,830
$ 13,350
3 % $424,830
$430,936
$ (6,106)
Occupancy and equipment, net
150,545
151,944
Communications
Marketing
Services
FDIC assessments
18,932
8,918
45,302
15,014
21,265
10,913
42,795
15,508
(Gain) loss on other real estate owned, net
(557)
(279)
(1)% 151,944
142,975
8,969
21,265
10,913
42,795
15,508
(279)
20,615
11,419
46,379
13,480
1,894
650
(506)
(3,584)
2,028
(2,173)
(115)%
Intangible amortization
Merger related expenses
Goodwill impairment
Other expenses
Total
nm = not meaningful
6,756
9,324
—
8,622
15,313
142
55,461
46,102
8,622
11,225
(2,603)
15,313
45,582
(30,269)
142
—
142
6,965
20 %
46,102
39,137
$747,875
$737,155
$ 10,720
1 % $737,155
$763,642
$(26,487)
(1,399)
(2,333)
(1,995)
2,507
(494)
(278)
(1,866)
(5,989)
(142)
9,359
(11)%
(18)%
6 %
(3)%
100 %
(22)%
(39)%
nm
(1)%
6 %
3 %
(4)%
(8)%
15 %
(23)%
(66)%
nm
18 %
(3)%
Salaries and employee benefits costs increased $13.4 million for 2017 as compared to the prior year primarily related to
increases in insurance costs, employee profit sharing and retirement benefits, as well as an increase in full-time equivalent
employees. A portion of the increase includes increased compensation for Pivotus. The decrease from 2015 to 2016 primarily
related to decreased employee stock-based compensation, as well as declines in certain employee benefits and commissions.
Net occupancy and equipment expense decreased in 2017 as compared to the prior year as a result of a decline in the
amortization of purchase price adjustments related to furniture, fixtures, and equipment from prior acquisitions. The increase
for 2016 as compared to 2015 was due to additional maintenance contracts related to certain infrastructure system contracts.
Communications costs decreased in 2017 compared to 2016 primarily due to decreased data processing costs due to
consolidation and efficiency efforts. Communication costs increased in 2016 compared to 2015 due to increased data
processing costs as a result of the Company's continued growth and expansion.
Marketing expense decreased in 2017 compared to 2016 and in 2016 as compared to 2015 primarily related to lower
advertising costs associated with branding initiatives in prior years. Services expense increased in 2017 compared to 2016,
due to increased examination and consulting fees. The decrease in 2016 compared to 2015 primarily due to decreased fees
for services related to system conversions.
39
FDIC assessments decreased in 2017 compared to 2016 due to changes adopted after a review of the Bank's assessment
methodology and reporting process. FDIC assessments increased in 2016 compared 2015 due to the increase in the assets and
deposits from organic growth, offset by a surcharge in 2016 that did not occur in 2015.
In the year ended December 31, 2017, the Company recognized a net gain on OREO properties of $557,000, as compared to
a net gain on OREO properties of $279,000 for the year ended December 31, 2016 and a $1.9 million loss for the year ended
December 31, 2015. The gains in 2017 and 2016 are primarily the result of improving real estate values, allowing for better
realization of market values of existing OREO properties.
We incur significant expenses in connection with the completion and integration of bank acquisitions that are not
capitalizable. These merger related expenses are recorded in accordance with a Board approved accounting policy with
respect to merger related charges, including internal and external charges. These expenses include acquisition related
expenses, certain facility closure related costs, customer communications, restructuring expenses (including associate
severance and retention charges) and expenses related to conversions of systems, including consulting costs. The merger
related expenses incurred in 2017, 2016, and 2015, relate to the merger with Sterling. In 2017, the merger related expenses
are primarily related to costs associated with final work on a non-customer facing system conversion.
Merger Related Expense
Years Ended December 31,
(in thousands)
Legal and professional
Premises and Equipment
Personnel
Communication
Contract termination
Other
2017
2016
2015
$
7,590
$
6,904
$
980
754
—
—
—
5,950
1,405
291
—
763
21,849
6,640
11,564
2,309
154
3,066
45,582
Total merger related expense
$
9,324
$
15,313
$
Other non-interest expense increased by $9.4 million in 2017 as compared to 2016 due to an increase in brokered deposit fees
of $2.6 million due to increased market rates. Exit and disposal costs increased by $1.3 million due to continuing retail store
consolidation efforts, charitable contributions increased by $1.5 million, and net non-performing loan expenses increased by
$1.1 million. Other non-interest expense increased in 2016 as compared to 2015 due to exit or disposal costs of $4.7
million for the year ended December 31, 2016, which relates to the store consolidations that occurred during the second and
third quarters of 2016.
40
INCOME TAXES
Our consolidated effective tax rate as a percentage of pre-tax income for 2017 was 28.1%, compared to 36.3% for 2016 and
35.9% for 2015. The effective tax rates differed from the federal statutory rate of 35% and the apportioned state rate of 5.1%
(net of the federal tax benefit) principally because of the impacts related to the Tax Act, the relative amount of income we
earn in each state jurisdiction, income on tax-exempt investment securities, non-taxable income arising from bank owned life
insurance, tax credits arising from low income housing investments and nondeductible executive compensation.
The provision for income taxes includes a net credit of $26.9 million, which includes $28.1 million related to the revaluation
of our net deferred tax liability and amortization of tax credit investments associated with the passage of the Tax Act partially
offset by the non-deductibility of certain executive compensation. For Umpqua, the Tax Act is expected to result in a lower
future federal corporate tax rate as well as other prospective positive and negative impacts. Examples of positive impacts, in
addition to a lower federal corporate rate, include the repeal of the alternative minimum tax and full expensing of purchased
capital assets. Examples of negative impacts include the phase out of FDIC assessment expense deductibility and loss of the
performance based compensation exclusion.
In light of the Tax Act, the Company took the opportunity to make additional investments across the organization, including
$3.2 million related to employee profit sharing and $2.0 million in donations to the Umpqua Bank Charitable Foundation. In
2018, the Company anticipates strategic investments in digital and technology capabilities that will enhance the customer
experience for our business customers.
41
INVESTMENT SECURITIES
FINANCIAL CONDITION
The composition of our investment securities portfolio reflects management's investment strategy of maintaining an
appropriate level of liquidity while providing a relatively stable source of interest income. The investment securities portfolio
also mitigates interest rate and credit risk inherent in the loan portfolio, while providing a vehicle for the investment of
available funds, a source of liquidity (by pledging as collateral or through repurchase agreements) and collateral for certain
public funds deposits.
Trading securities consist of securities held in inventory by Umpqua Investments for sale to its clients and securities invested
in trust for the benefit of certain executives or former employees of acquired institutions as required by agreements. Trading
securities were $12.3 million at December 31, 2017, as compared to $11.0 million at December 31, 2016. This increase is
principally attributable to an increase in Rabbi Trusts balances.
Investment securities available for sale were $3.1 billion as of December 31, 2017, compared to $2.7 billion at December 31,
2016. The increase is due to purchases of $952.8 million of investment securities available for sale and an increase in fair
value of investments securities available for sale of $1.3 million, offset by paydowns of $559.7 million and amortization of
net purchase price premiums of $29.3 million.
Investment securities held to maturity were $3.8 million as of December 31, 2017 as compared to holdings of $4.2 million at
December 31, 2016. The change primarily relates to paydowns and maturities of investment securities held to maturity of
$520,000.
The following table presents the available for sale and held to maturity investment securities portfolio by major type as of
December 31 for each of the last three years:
Summary of Investment Securities
(in thousands)
AVAILABLE FOR SALE
U.S. Treasury and agencies
Obligations of states and political subdivisions
Residential mortgage-backed securities and
collateralized mortgage obligations
Investments in mutual funds and other equity securities
HELD TO MATURITY
Residential mortgage-backed securities and
collateralized mortgage obligations
December 31,
2017
2016
2015
$
39,698
$
— $
308,456
307,697
—
313,117
2,665,645
2,391,553
2,207,420
51,970
1,970
2,002
$
3,065,769
$
2,701,220
$
2,522,539
$
$
3,803
3,803
$
$
4,216
4,216
$
$
4,609
4,609
42
The following table presents information regarding the amortized cost, fair value, average yield and maturity structure of the
investment portfolio at December 31, 2017.
Investment Securities Composition*
December 31, 2017
U.S. TREASURY AND AGENCIES
One to five years
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS
One year or less
One to five years
Five to ten years
Over ten years
Amortized
Cost
Fair Value
Average Yield
$
40,021
$
40,021
39,698
39,698
23,517
127,897
138,637
13,301
303,352
23,577
130,938
140,738
13,203
308,456
1.51%
1.51%
5.04%
5.02%
4.17%
3.96%
4.59%
2.02%
2.33%
2.27%
OTHER SECURITIES
Residential mortgage-backed securities and collateralized mortgage
obligations
Other investment securities
Total securities
2,707,800
2,670,551
51,959
51,970
$
3,103,132
$
3,070,675
*Weighted average yields are stated on a federal tax-equivalent basis of 35%. Weighted average yields for available for sale
investments have been calculated on an amortized cost basis.
The mortgage-related securities in the table above include both pooled mortgage-backed issues and high-quality
collateralized mortgage obligation structures, with an average duration of 3.7 years. These mortgage-related securities
provide yield spread to U.S. Treasury or agency securities; however, the cash flows arising from them can be volatile due to
refinancing of the underlying mortgage loans.
The securities in "Other investment securities" in the table above at December 31, 2017 and 2016, principally represents
investments in a fixed income mutual fund to support our Community Reinvestment Act initiatives.
We review investment securities on an ongoing basis for the presence of other-than-temporary impairment ("OTTI") or
permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and
nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is more likely
than not that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may
be maturity, and other factors.
Gross unrealized losses in the available for sale investment portfolio was $41.8 million at December 31, 2017. This consisted
primarily of unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations of $40.4
million. The unrealized losses were primarily caused by interest rate increases subsequent to the purchase of the securities,
and not credit quality. In the opinion of management, these securities are considered only temporarily impaired due to
changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not
due to concerns regarding the underlying credit of the issuers or the underlying collateral.
43
RESTRICTED EQUITY SECURITIES
Restricted equity securities were $43.5 million at December 31, 2017 and $45.5 million at December 31, 2016. The decrease
is attributable to net redemptions of Federal Home Loan Banks ("FHLB") stock. Of the $43.5 million at December 31, 2017,
$42.0 million represents the Bank's investment in the FHLBs of Des Moines and San Francisco. FHLB stock is carried at par
and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to the FHLB and member
institutions, and can only be purchased and redeemed at par.
LOANS AND LEASES
Loans and Leases, net
Total loans and leases outstanding at December 31, 2017 were $19.1 billion, an increase of $1.6 billion as compared to year-
end 2016. This increase is principally attributable to net new loan and lease originations of $1.9 billion, partially offset by
loans sold of $254.4 million, charge-offs of $55.9 million and transfers to other real estate owned of $11.2 million during the
period.
The following table presents the composition of the loan and lease portfolio, net of deferred fees and costs, as of December
31 for each of the last five years.
Loan and Lease Portfolio Composition
As of December 31,
(dollars in
thousands)
Commercial real
estate, net
2017
2016
2015
2014
2013
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
$ 9,773,752
51.2% $ 9,395,062
53.7% $ 9,331,804
55.4% $ 8,903,660
58.1% $ 4,630,155
Commercial, net
4,278,663
Residential, net
4,295,482
22.4%
22.5%
3,575,627
3,899,815
20.4%
22.3%
3,174,570
3,832,973
18.8%
22.7%
2,948,823
3,097,275
19.2% 2,142,213
20.2%
907,485
59.9%
27.7%
11.7%
Consumer &
other, net
Total loans and
leases, net
732,287
3.9%
638,159
3.6%
527,189
3.1%
389,036
2.5%
52,375
0.7%
$19,080,184
100.0% $17,508,663
100.0% $16,866,536
100.0% $15,338,794
100.0% $ 7,732,228
100.0%
44
Loan and Lease Concentrations
The following table presents the concentration distribution of our loan and lease portfolio by major type:
(dollars in thousands)
Commercial real estate
Non-owner occupied term, net
Owner occupied term, net
Multifamily, net
Construction & development, net
Residential development, net
Commercial
Term, net
Lines of credit & other, net
Leases and equipment finance, net
Residential
Mortgage, net
Home equity loans & lines, net
Consumer & other, net
December 31, 2017
December 31, 2016
Amount
Percentage
Amount
Percentage
$
3,491,137
18.3% $
3,330,442
2,488,251
3,087,792
540,707
165,865
1,944,987
1,166,173
1,167,503
3,192,185
1,103,297
732,287
13.0%
16.2%
2.8%
0.9%
10.2%
6.1%
6.1%
16.7%
5.8%
3.9%
2,599,055
2,858,956
463,625
142,984
1,508,780
1,116,259
950,588
2,887,971
1,011,844
638,159
19.0%
14.9%
16.3%
2.7%
0.8%
8.6%
6.4%
5.4%
16.5%
5.8%
3.6%
100.0%
Total, net of deferred fees and costs
$ 19,080,184
100.0% $ 17,508,663
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table presents the maturity distribution of our commercial real estate and commercial loan portfolios and the
rate sensitivity of these loans to changes in interest rates as of December 31, 2017:
(in thousands)
By Maturity
One Year
or Less
One
Through
Five Years
Over Five
Years
Loans Over One Year
by Rate Sensitivity
Total
Fixed Rate
Floating
Rate
Commercial real estate
Commercial (1)
$
791,621
$ 2,019,149
$ 6,962,982
$ 9,773,752
$ 1,281,316
$ 7,700,815
$ 1,620,361
$ 796,581
$
694,218
$ 3,111,160
$
798,698
$ 692,101
(1) Excludes the lease and equipment finance portfolio.
45
ASSET QUALITY AND NON-PERFORMING ASSETS
The following table summarizes our non-performing assets and restructured loans:
Non-Performing Assets
As of December 31,
(dollars in thousands)
Loans and leases on non-accrual status
Loans and leases past due 90 days or more and
accruing (1)
Total non-performing loans and leases
Other real estate owned
Total non-performing assets
Restructured loans (2)
2017
51,465
30,994
82,459
11,734
94,193
32,157
$
$
$
2016
27,765
28,369
56,134
6,738
62,872
40,667
$
$
$
2015
29,215
15,169
44,384
22,307
66,691
31,355
$
$
$
2014
52,041
7,512
59,553
37,942
97,495
54,836
$
$
$
Allowance for loan and lease losses
$ 140,608
$ 133,984
$ 130,322
$ 116,167
Reserve for unfunded commitments
3,963
3,611
3,574
3,539
Allowance for credit losses
Asset quality ratios:
$ 144,571
$ 137,595
$ 133,896
$ 119,706
2013
31,891
3,430
35,321
23,935
59,256
68,791
95,085
1,436
96,521
$
$
$
$
$
Non-performing assets to total assets
0.37%
0.25%
0.28%
0.43%
0.51%
Non-performing loans and leases to total loans
and leases
Allowance for loan and lease losses to total loans
and leases
Allowance for credit losses to total loans and
leases
0.43%
0.32%
0.26%
0.39%
0.46%
0.74%
0.77%
0.77%
0.76%
1.23%
0.76%
0.79%
0.79%
0.78%
1.25%
Allowance for credit losses to total non-
performing loans and leases
175%
(1) Excludes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase
that are past due 90 days or more totaling $12.4 million, $10.9 million, $19.2 million, $11.1 million and $4.1 million, as
of December 31, 2017, 2016, 2015, 2014, and 2013, respectively.
302%
201%
245%
273%
(2) Represents accruing restructured loans performing according to their restructured terms.
Under acquisition accounting rules, loans (including those considered non-performing) acquired from Sterling were recorded
at their estimated fair value. The Company recognized the loan portfolio acquired from Sterling at fair value as of the
acquisition date, which resulted in a discount to the loan portfolio's previous carrying value. Neither the credit portion nor
any other portion of the fair value mark is reflected in the reported allowance for loan and lease losses, or related allowance
coverage ratios, but we believe should be considered when comparing the current period ratios to similar ratios in periods
prior to the acquisition of Sterling due to the impact of the purchase credit impaired loans not being included in non-
performing loans, however, these acquired loans are included in the total loans and leases. In addition, the allowance for
credit loss ratios have declined from periods prior to the acquisition of Sterling due to the acquired loans being included in
total loans and leases, but not having a related allowance due to the application of the credit discount.
The purchased non-credit impaired loans had remaining credit discount that will accrete into interest income over the life of
the loans of $26.2 million and $43.9 million, as of December 31, 2017 and 2016, respectively. The purchased credit impaired
loan pools had remaining discounts of $33.2 million and $45.7 million, as of December 31, 2017 and 2016, respectively.
Loans acquired with deteriorating credit quality are accounted for as purchased credit impaired pools. Typically, this would
include loans that were considered non-performing or restructured as of acquisition date. Accordingly, subsequent to
acquisition, loans included in the purchased credit impaired pools are not reported as non-performing loans based upon their
individual performance status, so the categories of nonaccrual, impaired and 90 days past due and accruing do not include
any purchased credit impaired loans.
46
Restructured Loans
At December 31, 2017 and 2016, impaired loans of $32.2 million and $40.7 million were classified as performing
restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, by providing
modification of loan repayment terms. The performing restructured loans on accrual status represent principally the only
impaired loans accruing interest at December 31, 2017. In order for a restructured loan to be considered performing and on
accrual status, the loan's collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan must
be current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments
from a verified source of cash flow. There were $917,000 available commitments for troubled debt restructurings outstanding
as of December 31, 2017 and none in 2016.
The following table presents a distribution of our performing restructured loans by year of maturity, according to the
restructured terms, as of December 31, 2017:
(in thousands)
Year
2018
2019
2020
2021
2022
Thereafter
Total
Amount
$
22,306
745
54
2,575
—
6,477
32,157
$
47
ALLOWANCE FOR LOAN AND LEASE LOSSES AND RESERVE FOR UNFUNDED COMMITMENTS
The allowance for loan and lease losses ("ALLL") totaled $140.6 million at December 31, 2017, an increase of $6.6 million
from the $134.0 million at December 31, 2016. The increase in the ALLL from the prior year-end is primarily due to loan and
lease growth.
The following table provides a summary of activity in the ALLL by major loan type, net of deferred fees for each of the five
years ended December 31:
Allowance for Loan and Lease Losses
(dollars in thousands)
Balance, beginning of period
Loans charged-off:
Commercial real estate, net
Commercial, net
Residential, net
Consumer & other, net
Total loans charged-off
Recoveries:
Commercial real estate, net
Commercial, net
Residential, net
Consumer & other, net
Total recoveries
Net charge-offs
Provision charged to operations
Balance, end of period
2017
$ 133,984
2016
130,322
$
2015
116,167
$
2014
$ 95,085
2013
$ 103,666
(2,407)
(44,511)
(985)
(8,016)
(55,919)
3,068
8,163
764
3,294
15,289
(40,630)
47,254
(3,137)
(35,545)
(1,885)
(9,356)
(49,923)
1,958
4,995
1,028
3,930
11,911
(38,012)
41,674
(6,797)
(20,247)
(970)
(7,557)
(35,571)
2,682
5,001
641
4,813
13,137
(22,434)
36,589
(8,030)
(16,824)
(1,855)
(3,469)
(30,178)
2,539
6,744
462
1,274
11,019
(19,159)
40,241
(9,748)
(20,810)
(3,655)
(1,285)
(35,498)
4,436
10,445
569
751
16,201
(19,297)
10,716
$ 140,608
$
133,984
$
130,322
$ 116,167
$ 95,085
As a percentage of average loans and leases:
Net charge-offs
Provision for loan and lease losses
Recoveries as a percentage of charge-offs
0.22%
0.26%
27.34%
0.22%
0.24%
23.86%
0.14%
0.23%
0.15%
0.31%
0.26%
0.15%
36.93%
36.51%
45.64%
The unallocated portion of ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the
credit loss factors that are utilized in the risk rating-based component, or in the specific impairment reserve component of the
allowance for loan and lease losses, and acknowledges the inherent imprecision of all loss prediction models. At both
December 31, 2017 and 2016, there was no unallocated allowance for loan and lease losses.
48
The following table sets forth the allocation of the allowance for loan and lease losses and percent of loans and leases in each
category to total loans and leases, net of deferred fees, as of December 31:
Allowance for Loan and Lease Losses Composition
As of December 31,
(dollars in thousands)
2017
2016
2015
2014
2013
Amount
% Amount
% Amount
% Amount
% Amount
Commercial real estate, net
$ 45,765
51.2% $ 47,795
53.7% $ 54,293
55.4% $ 55,184
58.1% $ 59,538
Commercial, net
Residential, net
Consumer & other, net
63,305
22.4%
58,840
20.4%
47,487
18.8%
41,216
19.2%
27,028
19,360
12,178
22.5%
17,946
22.3%
22,017
22.7%
15,922
20.2%
3.9%
9,403
3.6%
6,525
3.1%
3,845
2.5%
7,487
1,032
Allowance for loan and lease losses
$ 140,608
$ 133,984
$ 130,322
$ 116,167
$ 95,085
%
59.9%
27.7%
11.7%
0.7%
At December 31, 2017, the recorded investment in loans classified as impaired totaled $60.0 million, with a corresponding
valuation allowance (included in the allowance for loan and lease losses) of $535,000. The valuation allowance on impaired
loans represents the impairment reserves on performing current and former restructured loans and nonaccrual loans. At
December 31, 2016, the total recorded investment in impaired loans was $54.0 million, with a corresponding valuation
allowance (included in the allowance for loan and lease losses) of $867,000. The valuation allowance on impaired loans
represents the impairment reserves on performing current and former restructured loans and nonaccrual loans at
December 31, 2016.
The following table presents a summary of activity in the reserve for unfunded commitments ("RUC"):
Summary of Reserve for Unfunded Commitments Activity
Years Ended December 31,
(in thousands)
Balance, beginning of period
Net charge to other expense
Balance, end of period
2017
2016
2015
$
$
3,611
352
3,963
$
$
3,574
37
3,611
$
$
3,539
35
3,574
We believe that the ALLL and RUC at December 31, 2017 are sufficient to absorb probable losses inherent in the loan and
lease portfolio and credit commitments outstanding as of that date based on the best information available. This assessment,
based in part on historical levels of net charge-offs, loan and lease growth, and a detailed review of the quality of the loan and
lease portfolio, involves uncertainty and judgment. Therefore, the adequacy of the ALLL and RUC cannot be determined
with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their
periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods
if warranted as a result of their review.
49
RESIDENTIAL MORTGAGE SERVICING RIGHTS
The following table presents the key elements of our residential mortgage servicing rights asset as of December 31, 2017,
2016, and 2015:
Summary of Residential Mortgage Servicing Rights
Years Ended December 31,
(in thousands)
Balance, beginning of period
Additions for new MSR capitalized
Changes in fair value:
Due to changes in model inputs or assumptions (1)
Other (2)
Balance, end of period
2017
2016
2015
142,973
33,445
(1,952)
(21,315)
153,151
$
$
131,817
37,082
7,873
(33,799)
142,973
$
$
117,259
35,284
(380)
(20,346)
131,817
$
$
(1) Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes
in interest rates.
(2) Represents changes due to collection/realization of expected cash flows over time.
Information related to our serviced loan portfolio as of December 31, 2017, 2016, and 2015 was as follows:
(dollars in thousands)
Balance of loans serviced for others
MSR as a percentage of serviced loans
December 31,
2017
$ 15,336,597
December 31,
2016
$ 14,327,368
December 31,
2015
$ 13,047,266
1.00%
1.00%
1.01%
Residential mortgage servicing rights are adjusted to fair value quarterly with the change recorded in residential mortgage
banking revenue. The value of residential mortgage servicing rights is impacted by market rates for mortgage loans.
Historically low market rates can cause prepayments to increase as a result of refinancing activity. To the extent loans are
prepaid sooner than estimated at the time servicing assets are originally recorded, it is possible that certain residential
mortgage servicing rights assets may decrease in value. Generally, the fair value of our residential mortgage servicing rights
will increase as market rates for mortgage loans rise and decrease if market rates fall.
GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2017 and 2016, we had goodwill of $1.8 billion. Goodwill is recorded in connection with business
combinations and represents the excess of the purchase price over the estimated fair value of the net assets acquired. For the
years ended December 31, 2017 and 2015, there were no goodwill impairment losses recognized. For the year ended
December 31, 2016, there were goodwill impairment losses of $142,000 recognized related to a small subsidiary winding
down operations.
At December 31, 2017, we had other intangible assets of $30.1 million, as compared to $36.9 million at December 31, 2016.
As part of a business acquisition, the fair value of identifiable intangible assets such as core deposits, which includes all
deposits except certificates of deposit, are recognized at the acquisition date. Intangible assets with definite useful lives are
amortized to their estimated residual values over their respective estimated useful lives, and are also reviewed for
impairment. We amortize other intangible assets on an accelerated or straight-line basis over an estimated ten to fifteen year
life. Other intangible assets decreased in 2017 from 2016 as a result of amortization of the other intangible assets of $6.8
million during the year. No impairment losses have been recognized in the periods presented.
50
DEPOSITS
Total deposits were $19.9 billion at December 31, 2017, an increase of $927.3 million, or 5%, as compared to year-end 2016
due to growth in demand, money market, and savings accounts, partially offset by a decline in time deposits.
The following table presents the deposit balances by major category as of December 31, 2017 and 2016:
Deposits
(dollars in thousands)
Non-interest bearing
Interest bearing demand
Money market
Savings
Time, $100,000 or greater
Time, less than $100,000
Total
December 31, 2017
December 31, 2016
Amount
6,505,628
$
Percentage
33% $
2,384,133
7,037,891
1,446,860
1,684,498
12%
35%
7%
8%
Amount
5,861,469
2,296,532
6,932,717
1,325,757
1,702,982
889,290
$ 19,948,300
5%
901,528
100% $ 19,020,985
Percentage
31%
12%
36%
7%
9%
5%
100%
The following table presents the scheduled maturities of time deposits of $100,000 and greater as of December 31, 2017:
Maturities of Time Deposits of $100,000 and Greater
(in thousands)
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Time, $100,000 and over
$
Amount
313,389
171,345
394,876
804,888
$
1,684,498
The Company has brokered deposits, including Certificate of Deposit Account Registry Service ("CDARS") included in time
and money market deposits. The CDARS products are designed to enhance our ability to attract and retain customers and
increase deposits, by providing additional FDIC coverage to customers. At December 31, 2017, the Company's brokered
deposits, including CDARS, were $930.9 million compared to $1.0 billion as of December 31, 2016.
BORROWINGS
At December 31, 2017, the Bank had outstanding $294.3 million of securities sold under agreements to repurchase and no
outstanding federal funds purchased balances. The Bank had outstanding term debt of $802.4 million at December 31, 2017,
primarily with the Federal Home Loan Bank ("FHLB"). Term debt outstanding as of December 31, 2017 decreased $50.0
million since December 31, 2016 as a result of maturity payoffs, offset by new advances. Advances from the FHLB are
secured by investment securities and loans secured by real estate. The FHLB advances have coupon interest rates ranging
from 1.16% to 7.10% and mature in 2018 through 2033.
51
JUNIOR SUBORDINATED DEBENTURES
We had junior subordinated debentures with carrying values of $377.8 million and $363.1 million at December 31, 2017 and
December 31, 2016, respectively. The increase is due to the change in fair value for the junior subordinated debentures
elected to be carried at fair value. A net loss of $14.7 million for this period reflects the continued tightening of market credit
spreads. As of December 31, 2017, the majority of the junior subordinated debentures had interest rates that are adjustable on
a quarterly basis based on a spread over three month LIBOR.
The Company has notified the Trustees of the HB Capital Trust I and Humboldt Bancorp Statutory Trust I of the redemption
of all debt securities of these two trusts in the first quarter of 2018. The redemption of these high rate debentures will not
adversely impact the liquidity or capital of the Company.
LIQUIDITY AND CASH FLOW
The principal objective of our liquidity management program is to maintain the Bank's ability to meet the day-to-day cash
flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash
needs.
We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. One source of funds
includes public deposits. Individual state laws require banks to collateralize public deposits, typically as a percentage of their
public deposit balance in excess of FDIC insurance. Public deposits represent 8.8% and 8.6% of total deposits at
December 31, 2017 and at December 31, 2016, respectively. The amount of collateral required varies by state and may also
vary by institution within each state, depending on the individual state's risk assessment of depository institutions. Changes in
the pledging requirements for uninsured public deposits may require pledging additional collateral to secure these deposits,
drawing on other sources of funds to finance the purchase of assets that would be available to be pledged to satisfy a pledging
requirement, or could lead to the withdrawal of certain public deposits from the Bank. In addition to liquidity from core
deposits and the repayments and maturities of loans and investment securities, the Bank can utilize established uncommitted
federal funds lines of credit, sell securities under agreements to repurchase, borrow on a secured basis from the FHLB or
issue brokered certificates of deposit.
The Bank had available lines of credit with the FHLB totaling $6.7 billion at December 31, 2017 subject to certain collateral
requirements, namely the amount of pledged loans and investment securities. The Bank had available lines of credit with the
Federal Reserve totaling $544.0 million subject to certain collateral requirements, namely the amount of certain pledged
loans. The Bank had uncommitted federal funds line of credit agreements with additional financial institutions totaling
$450.0 million at December 31, 2017. Availability of these lines is subject to federal funds balances available for loan and
continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements may restrict
consecutive day usage.
The Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the Company's
revenues are obtained from dividends declared and paid by the Bank. There were $168.5 million of dividends paid by the
Bank to the Company in 2017. There are statutory and regulatory provisions that could limit the ability of the Bank to pay
dividends to the Company. We believe that such restrictions will not have an adverse impact on the ability of the Company to
fund its quarterly cash dividend distributions to common shareholders and meet its ongoing cash obligations, which consist
principally of debt service on the outstanding junior subordinated debentures.
As disclosed in the Consolidated Statements of Cash Flows, net cash provided by operating activities was $509.7 million
during 2017, with the difference between cash provided by operating activities and net income largely consisting of proceeds
from the sale of loans held for sale of $3.7 billion, offset by originations of loans held for sale of $3.4 billion, as well as the
gain on sale of loans of $143.7 million. This compares to net cash provided by operating activities of $421.6 million during
2016, with the difference between cash provided by operating activities and net income largely consisting of proceeds from
the sale of loans held for sale of $4.1 billion, offset by originations of loans held for sale of $4.0 billion, as well as the gain on
sale of loans of $178.1 million.
52
Net cash of $2.0 billion used in investing activities during 2017 consisted principally of $1.9 billion of net change in loans
and leases and $952.8 million in purchases of investment securities available for sale, partially offset by proceeds from
investment securities available for sale of $559.7 million and proceeds from sale of loans and leases of $271.1 million. This
compares to net cash of $919.0 million used in investing activities during 2016, which consisted principally of net changes in
loans and leases of $1.2 billion, purchases of investment securities available for sale of $852.1 million, partially offset by
proceeds from investment securities available for sale of $619.8 million and proceeds from sale of loans and leases of $475.8
million.
Net cash of $666.8 million provided by financing activities during 2017 primarily consisted of $928.5 million increase in net
deposits and $205.0 million proceeds from term debt borrowings, partially offset by repayment of debt of $255.0 million and
dividends paid on common stock of $145.4 million. This compares to net cash of $1.2 billion provided by financing
activities during 2016, which consisted primarily of $1.3 billion increase in net deposits, and $490.0 million proceeds from
term debt borrowings, partially offset by repayment of term debt of $525.0 million and $141.1 million dividends paid on
common stock.
Although we expect the Bank's and the Company's liquidity positions to remain satisfactory during 2018, it is possible that
our deposit balances for 2018 may not be maintained at previous levels due to store consolidations or pricing pressure. In
addition, in order to generate deposit growth, our pricing may need to be adjusted in a manner that results in increased
interest expense on deposits.
OFF-BALANCE-SHEET-ARRANGEMENTS
Information regarding Off-Balance-Sheet Arrangements is included in Note 18 and 19 of the Notes to Consolidated Financial
Statements in Item 8 below.
The following table presents a summary of significant contractual obligations extending beyond one year as of December 31,
2017 and maturing as indicated:
Future Contractual Obligations
As of December 31, 2017:
(in thousands)
Deposits (1)
Term debt
Junior subordinated debentures (2)
Operating leases
Other long-term liabilities (3)
Less than 1
Year
$ 18,732,786
1 to 3 Years
3 to 5 Years
More than 5
Years
Total
$
761,405
$
450,128
$
3,981
$ 19,948,300
100,000
305,000
390,000
—
33,856
4,588
—
58,273
7,868
—
36,462
7,175
5,140
475,427
48,977
47,525
800,140
475,427
177,568
67,156
Total contractual obligations
$ 18,871,230
$ 1,132,546
$
883,765
$
581,050
$ 21,468,591
(1) Deposits with indeterminate maturities, such as demand, savings and money market accounts, are reflected as obligations
due in less than one year.
(2) Represents the issued amount of all junior subordinated debentures.
(3) Includes maximum payments related to employee benefit plans, assuming all future vesting conditions are met. Additional
information about employee benefit plans is provided in Note 17 of the Notes to Consolidated Financial Statements in Item 8
below.
The table above does not include interest payments or purchase accounting adjustments related to deposits, term debt or
junior subordinated debentures.
As of December 31, 2017, the Company has a liability for unrecognized tax benefits in the amount of $3.5 million, which
includes accrued interest of $353,000. As the Company is not able to estimate the period in which this liability will be paid in
the future, this amount is not included in the future contractual obligations table above.
53
CONCENTRATIONS OF CREDIT RISK
Information regarding Concentrations of Credit Risk is included in Note 2, 4, and 18 of the Notes to Consolidated Financial
Statements in Item 8 below.
CAPITAL RESOURCES
Shareholders' equity at December 31, 2017 was $4.0 billion, an increase of $98.0 million from December 31, 2016. The
increase in shareholders' equity during the year ended was principally due to net income of $246.0 million, offset by common
stock dividends declared of $150.8 million.
The Federal Reserve Board has in place guidelines for risk-based capital requirements applicable to U.S. banks and bank/
financial holding companies. These risk-based capital guidelines take into consideration risk factors, as defined by regulation,
associated with various categories of assets, both on and off-balance sheet.
On July 2, 2013, the federal banking regulators approved the final proposed rules that revised the regulatory capital rules to
incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework ("Basel III").
The phase-in period for the final rules began for the Company on January 1, 2015, with full compliance with the final rules
entire requirement phased in on January 1, 2019.
The final rules, among other things, include a common equity Tier 1 capital ("CET1") to risk-weighted assets ratio, including
a capital conservation buffer. The required CET1 ratio will gradually increase from 4.5% on January 1, 2015 to 7.0% on
January 1, 2019. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 6.0%, which is the
current minimum, to 8.5% on January 1, 2019, as well as require a minimum leverage ratio of 4.0%.
Under the final rule, as Umpqua is above $15.0 billion in assets as a result of an acquisition, the combined trust preferred
security debt issuances were phased out of Tier 1 and into Tier 2 capital (75% starting in the first quarter of 2015 and 100%
starting in the first quarter of 2016).
On November 21, 2017, the federal banking regulators finalized a halt in the phase-in of certain provisions of the rules for
certain banks including Umpqua. The final rules had provided for a number of adjustments to and deductions from the new
CET1. The deductions included, for example, the requirement that mortgage servicing rights, certain deferred tax assets not
dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from
CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of
CET1. Effective on January 1, 2018, the 2017 rule pauses the full transition to the Basel III treatment for these items.
Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, the Company and
the Bank have made a one-time permanent election to continue to exclude these items in order to avoid significant variations
in the level of capital depending on the impact of interest rate fluctuations on the fair value of the Company's securities
portfolio.
Under the BASEL III guidelines, capital strength is measured in three tiers, which are used in conjunction with risk-adjusted
assets to determine the risk-based capital ratios. The guidelines require an 8% total risk-based capital ratio, of which 6% must
be Tier 1 capital and 4.5% must be CET1. Our CET1 capital primarily includes shareholders' equity less certain deductions
for goodwill and other intangibles, net of taxes, net unrealized gains (losses) on AFS securities, net of tax, and certain
deferred tax assets that arise from tax loss and credit carry-forwards, and totaled $2.2 billion at December 31, 2017. Tier 1
capital is primarily comprised of common equity Tier 1 capital, less certain additional deductions applied during the phase-in
period, totaled $2.2 billion at December 31, 2017. Tier 2 capital components include all, or a portion of, the allowance for
loan and lease losses in excess of Tier 1 statutory limits. The total of Tier 1 capital plus Tier 2 capital components is referred
to as Total Risk-Based Capital, and was $2.8 billion at December 31, 2017. The percentage ratios, as calculated under the
guidelines, were 11.07%, 11.07% and 14.06% for CET1, Tier 1 and Total Risk-Based Capital, respectively, at December 31,
2017. The CET1, Tier 1 and Total Risk-Based Capital ratios at December 31, 2016 were 11.47%, 11.47% and 14.72%,
respectively.
54
A minimum leverage ratio is required in addition to the risk-based capital standards and is defined as period-end shareholders'
equity, less accumulated other comprehensive income, goodwill and deposit-based intangibles, divided by average assets as
adjusted for goodwill and other intangible assets. Although a minimum leverage ratio of 4% is required for the highest-rated
financial holding companies that are not undertaking significant expansion programs, the Federal Reserve Board may require
a financial holding company to maintain a leverage ratio greater than 4% if it is experiencing or anticipating significant
growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve Board. The Federal Reserve
Board uses the leverage and risk-based capital ratios to assess capital adequacy of banks and financial holding companies.
Our consolidated leverage ratios at December 31, 2017 and 2016 were 9.38% and 9.21%, respectively. As of December 31,
2017, the most recent notification from the FDIC categorized the Bank as "well-capitalized" under the regulatory framework
for prompt corrective action. There are no conditions or events since that notification that management believes have changed
the Bank's regulatory capital category.
During the year ended December 31, 2017, the Company made no capital contributions to the Bank. At December 31, 2017,
all four of the capital ratios of the Bank exceeded the minimum ratios required by federal regulation. Management monitors
these ratios on a regular basis to ensure that the Bank remains within regulatory guidelines.
During 2017, Umpqua's Board of Directors approved a cash dividend of $0.16 per common share in the first and second
quarters and $0.18 per common share in the third and fourth quarters. These dividends were made pursuant to our existing
dividend policy and in consideration of, among other things, earnings, regulatory capital levels, the overall payout ratio and
expected asset growth. We expect that the dividend rate will be reassessed on a quarterly basis by the Board of Directors in
accordance with the dividend policy.
There is no assurance that future cash dividends on common shares will be declared or increased. The following table
presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings
per common share) for the years ended December 31, 2017, 2016 and 2015:
Cash Dividends and Payout Ratios per Common Share
Dividend declared per common share
Dividend payout ratio
2017
2016
2015
$
0.68
$
0.64
$
61%
60%
0.62
61%
The Company's share repurchase plan, which was first approved by the Board and announced in August 2003, provided
authority to repurchase up to 15 million shares of our common stock. In 2017, the Board of Directors approved an extension
of the repurchase plan to July 31, 2019. As of December 31, 2017, a total of 10.5 million shares remained available for
repurchase. The Company repurchased 325,000 shares under the repurchase plan in 2017. The timing and amount of future
repurchases will depend upon the market price for our common stock, securities laws restricting repurchases, asset growth,
earnings, and our capital plan. In addition, our stock plans provide that option and award holders may pay for the exercise
price and tax withholdings in part or whole by tendering previously held shares.
55
ITEM 7A. QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk arises primarily from credit risk and interest rate risk inherent in our investment, lending and financing
activities. To manage our credit risk, we rely on various controls, including our underwriting standards and loan policies,
internal loan monitoring and periodic credit reviews as well as our allowance of loan and lease losses ("ALLL")
methodology, all of which are administered by the Bank's Credit Quality Group or ALLL Committee. Additionally, the
Company's Enterprise Risk and Credit Committee provides board oversight over the Company's loan portfolio risk
management functions, the Company's Finance and Capital Committee provides board oversight over the Company's
investment portfolio and hedging risk management functions, and the Bank's Audit and Compliance Committee provides
board oversight of the ALLL process and reviews and approves the ALLL methodology.
Interest rate risk is the potential for loss resulting from adverse changes in the level of interest rates on the Company's net
interest income. The absolute level and volatility of interest rates can have a significant impact on our profitability. The
objective of interest rate risk management is to identify and manage the sensitivity of net interest income to changing interest
rates to achieve our overall financial objectives. Based on economic conditions, asset quality and various other
considerations, management establishes tolerance ranges for interest rate sensitivity and manages within these ranges. Net
interest income and the fair value of financial instruments are greatly influenced by changes in the level of interest rates. We
manage exposure to fluctuations in interest rates through policies that are established by the Asset/Liability Management
Committee ("ALCO"). The ALCO meets monthly and has responsibility for developing asset/liability management policy,
formulating and implementing strategies to improve balance sheet positioning and earnings and reviewing interest rate
sensitivity. The Board of Directors' Finance and Capital Committee provides oversight of the asset/liability management
process, reviews the results of the interest rate risk analyses prepared for the ALCO and approves the asset/liability policy on
an annual basis.
We measure our interest rate risk position on at least a quarterly basis using three methods: (i) gap analysis, (ii) net interest
income simulation; and (iii) economic value of equity (fair value of financial instruments) modeling. The results of these
analyses are reviewed by ALCO and the Finance and Capital Committee quarterly. If hypothetical changes to interest rates
cause changes to our simulated net interest income simulation or economic value of equity modeling outside of our pre-
established internal limits, we may adjust the asset and liability size or mix in an effort to bring our interest rate risk exposure
within our established limits.
Gap Analysis
A gap analysis provides information about the volume and repricing characteristics and relationship between the amounts of
interest-sensitive assets and interest-bearing liabilities at a particular point in time. An effective interest rate strategy attempts
to match how the volume of interest sensitive assets and interest bearing liabilities respond to changes in interest rates within
an acceptable timeframe, thereby minimizing the impact of interest rate changes on net interest income. Gap analysis
measures interest rate sensitivity at a point in time as the difference between the estimated volumes of asset and liability cash
flows or repricing characteristics across various time horizons: immediate to three months, four to twelve months, one to five
years, over five years, and on a cumulative basis. The differences are known as interest sensitivity gaps. The main focus of
this interest rate management tool is the gap sensitivity identified as the cumulative one year gap. As of December 31, 2017,
the cumulative one year gap has improved from 35% in 2016 to 31% in 2017. The improvement from the prior year is a
result of greater emphasis on variable rate and shorter duration loan fundings, reducing long term asset exposure through
targeted loan sales, and the renewal and extension of term borrowings which enable the Company to secure long term fixed
rate stable funding. The table below sets forth interest sensitivity gaps for these different intervals as of December 31, 2017.
56
Interest Sensitivity Gap
(in thousands)
ASSETS
By Estimated Cash Flow or Repricing Interval
0-3 Months
4-12 Months
1-5 Years
Over 5
Years
Non-Rate
Sensitive
Total
Interest bearing cash and temporary investments
$
303,424
$
— $
— $
— $
— $
303,424
Trading account assets
Securities held to maturity
Securities available for sale
Loans held for sale
Loans and leases
Non-interest earning assets
Total assets
12,255
74
132,138
255,282
—
152
—
744
—
2,933
363,163
1,350,602
1,201,467
—
—
—
—
(100)
18,399
4,236
12,255
3,803
3,065,769
259,518
6,870,736
2,586,510
7,370,189
2,273,754
(21,005)
19,080,184
—
—
—
—
3,016,486
3,016,486
7,573,909
2,949,825
8,721,535
3,478,154
3,018,016
$25,741,439
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing demand deposits
Money market deposits
Savings deposits
Time deposits
Securities sold under agreements to repurchase
Term debt
Junior subordinated debentures, at fair value
Junior subordinated debentures, at amortized cost
Non-interest bearing liabilities and shareholders' equity
$ 2,384,133
$
— $
— $
— $
— $ 2,384,133
7,037,891
1,446,860
473,508
294,299
50,000
379,390
85,572
—
—
—
—
—
897,912
1,198,490
—
—
50,000
695,000
—
—
—
—
—
—
—
—
3,878
—
5,140
—
10,465
—
—
—
—
2,217
(102,235)
4,572
7,037,891
1,446,860
2,573,788
294,299
802,357
277,155
100,609
— 10,824,347
10,824,347
Total liabilities and shareholders' equity
12,151,653
947,912
1,893,490
19,483
10,728,901
$25,741,439
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
Cumulative gap as a % of earning assets
(4,577,744)
2,001,913
6,828,045
3,458,671
(7,710,885)
$(4,577,744)
$(2,575,831)
$ 4,252,214
$ 7,710,885
$
—
(20)%
(11)%
19%
34%
The gap table has inherent limitations and actual results may vary significantly from the results suggested by the gap table.
The gap table is unable to incorporate certain balance sheet characteristics or factors. The gap table assumes a static balance
sheet and looks at the repricing of existing assets and liabilities without consideration of new loans and deposits that reflect a
more current interest rate environment. Changes in the mix of earning assets or supporting liabilities can either increase or
decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset
and its supporting liability can vary significantly, while the timing of repricing for both the asset and the liability remains the
same, thus impacting net interest income. This characteristic is referred to as basis risk and generally relates to the possibility
that the repricing index of short-term assets is different from those of short-term liabilities. Varying interest rate environments
can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate
sensitivity analysis. These prepayments may have a significant impact on our net interest margin.
For example, unlike the net interest income simulation, the interest rate risk profile of certain deposit products and floating
rate loans that have reached their floors cannot be captured effectively in a gap table. Although the table shows the amount of
certain assets and liabilities scheduled to reprice in a given time frame, it does not reflect when or to what extent such
repricings may actually occur. For example, interest-bearing checking, money market and savings deposits are shown to
reprice in the first three months, but we may choose to reprice these deposits more slowly and incorporate only a portion of
the movement in market rates based on market conditions at that time. Alternatively, a loan which has reached its floor may
not reprice upwards even though market interest rates increase causing such loan to act like a fixed rate loan regardless of its
scheduled repricing date. The gap table as presented cannot factor in the flexibility we believe we have in repricing deposits
or the floors on our loans.
Because of these factors, an interest sensitivity gap analysis may not provide an accurate or complete assessment of our
exposure to changes in interest rates. We believe the estimated effect of a change in interest rates is better reflected in our net
interest income and economic value of equity simulations.
57
Net Interest Income Simulation
Interest rate sensitivity is a function of the repricing characteristics of our interest earning assets and interest bearing
liabilities. These repricing characteristics are the time frames within which the interest bearing assets and liabilities are
subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments. Interest rate
sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during
periods of changes in market interest rates.
Management utilizes an interest rate simulation model to estimate the sensitivity of net interest income to changes in market
interest rates. This model is an interest rate risk management tool and the results are not necessarily an indication of our
future net interest income. This model has inherent limitations and these results are based on a given set of rate changes and
assumptions at one point in time. These estimates are based upon a number of assumptions for each scenario, including
changes in the size or mix of the balance sheet, new volume rates for new balances, the rate of prepayments, and the
correlation of pricing to changes in the interest rate environment. For example, for interest bearing deposit balances we may
choose to reprice these balances more slowly and incorporate only a portion of the movement in market rates based on
market conditions at that time. Our primary analysis assumes a static balance sheet, both in terms of the total size and mix of
our balance sheet, meaning cash flows from the maturity or repricing of assets and liabilities are redeployed in the same
instrument at modeled rates.
Changes that could vary significantly from our assumptions include loan and deposit growth or contraction, changes in the
mix of our earning assets or funding sources, the performance of loans accounted for under the expected cash flow method,
and future asset/liability management decisions, all of which may have significant effects on our net interest income. Also,
some of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances may
occur. In addition, the simulation model does not take into account any future actions management could undertake to
mitigate the impact of interest rate changes or the impact a change in interest rates may have on our credit risk profile, loan
prepayment estimates and spread relationships, which can change regularly. Actions we could undertake include, but are not
limited to, growing or contracting the balance sheet, changing the composition of the balance sheet, or changing our pricing
strategies for loans or deposits.
The estimated impact on our net interest income over a time horizon of one year as of December 31, 2017, 2016, and 2015
are indicated in the table below. For the scenarios shown, the interest rate simulation assumes a parallel and sustained shift in
market interest rates ratably over a twelve-month period and no change in the composition or size of the balance sheet. For
example, the "up 200 basis points" scenario is based on a theoretical increase in market rates of 16.7 basis points per month
for twelve months applied to the balance sheet of December 31 for each respective year.
Interest Rate Simulation Impact on Net Interest Income
As of December 31,
Up 300 basis points
Up 200 basis points
Up 100 basis points
Down 100 basis points
Down 200 basis points
Down 300 basis points
2017
2016
2015
5.5 %
3.9 %
2.1 %
(3.9)%
(8.1)%
4.9 %
3.5 %
2.1 %
(3.8)%
(7.4)%
(11.3)%
(10.3)%
2.5 %
1.9 %
1.2 %
(2.7)%
(5.7)%
(7.8)%
58
Asset sensitivity indicates that in a rising interest rate environment the Company's net interest margin would increase and in a
decreasing interest rate environment the Company's net interest margin would decrease. Liability sensitivity indicates that in
a rising interest rate environment a Company's net interest margin would decrease and in a decreasing interest rate
environment the Company's net interest margin would increase. For all years presented, we were "asset-sensitive" meaning
we expect our net interest income to increase as market rates increase. The relative level of asset sensitivity as of
December 31, 2017 has increased from the prior periods presented due to the following strategic actions: 1. greater emphasis
on C&I lending which typically carry shorter durations and more frequent repricing characteristics; 2. increased focus on
swap variable rate production; 3. greater emphasis on reducing long term asset exposure through targeted loan sales; and 4.
renewal and extension of term borrowings which enables the Company to secure long term fixed rate stable funding. In the
decreasing interest rate environments, we show a decline in net interest income as interest bearing assets re-price lower and
deposits remain at or near their floors. It should be noted that although net interest income simulation results are presented
through the down 300 basis points interest rate environments, we do not believe the down 200 and 300 basis point scenarios
are plausible in the near term given the current level of interest rates.
Interest rate sensitivity in the first year of the net interest income simulation for increasing interest rate scenarios is negatively
impacted by the cost of non-maturity deposits repricing immediately while interest earnings assets (primarily the loan and
leases held for investment portfolio) reprice at a slower rate based upon the instrument level repricing characteristics (refer to
the Interest Sensitivity Gap table above). As a result, interest sensitivity in increasing interest rates scenarios improves in
subsequent years as these assets reprice. Management also prepares and reviews the longer term trends of the net interest
income simulation to measure and monitor risk. This analysis assumes the same rate shift over the first year of the scenario
as described above, and holding steady thereafter. The estimated impact on our net interest income over the first and second
year time horizons as it relates to our balance sheet as of December 31, 2017 is indicated in the table below.
Interest Rate Simulation Impact on Net Interest Income
As of December 31, 2017
Up 300 basis points
Up 200 basis points
Up 100 basis points
Down 100 basis points
Down 200 basis points
Down 300 basis points
Year 1
Year 2
5.5 %
3.9 %
2.1 %
(3.9)%
(8.1)%
(11.3)%
7.5 %
5.4 %
3.1 %
(10.5)%
(21.0)%
(25.6)%
In general, we view the net interest income model results as more relevant to the Company's current operating profile (a
going concern), and we primarily manage our balance sheet based on this information.
Economic Value of Equity
Another interest rate sensitivity measure we utilize is the quantification of economic value changes for all financial assets and
liabilities, given an increase or decrease in market interest rates. This approach provides a longer-term view of interest rate
risk, capturing all future expected cash flows. Assets and liabilities with option characteristics are measured based on
different interest rate path valuations using statistical rate simulation techniques. The projections are by their nature forward-
looking and therefore inherently uncertain, and include various assumptions regarding cash flows and discount rates.
59
The table below illustrates the effects of various instantaneous market interest rate changes on the fair values of financial
assets and liabilities as compared to the corresponding carrying values and fair values:
Interest Rate Simulation Impact on Fair Value of Financial Assets and Liabilities
As of December 31,
Up 300 basis points
Up 200 basis points
Up 100 basis points
Down 100 basis points
Down 200 basis points
Down 300 basis points
2017
2016
(6.6)%
(3.7)%
(1.1)%
(4.6)%
(5.1)%
(4.6)%
(8.3)%
(4.6)%
(1.8)%
(3.4)%
(2.6)%
(3.7)%
As of December 31, 2017, our economic value of equity model indicates a liability sensitive profile. This suggests a sudden
or sustained increase in market interest rates would result in a decrease in our estimated economic value of equity. Our
overall sensitivity to market interest rate changes as of December 31, 2017 has decreased in the rising rate environment
compared to December 31, 2016. As of December 31, 2017, our estimated economic value of equity (fair value of financial
assets and liabilities) exceeded our book value of equity. This result is primarily based on the value placed on the Company's
significant amount of noninterest bearing and low cost interest bearing deposits. While noninterest bearing deposits do not
impact the net interest income simulation, the value of these deposits has a significant impact on the economic value of
equity model, particularly when market rates are assumed to rise.
IMPACT OF INFLATION AND CHANGING PRICES
A financial institution's asset and liability structure is substantially different from that of an industrial firm in that primarily
all assets and liabilities of a bank are monetary in nature, with relatively little investment in fixed assets or inventories.
Inflation has an important impact on the growth of total assets and the resulting need to increase equity capital at higher than
normal rates in order to maintain appropriate capital ratios. We believe that the impact of inflation on financial results
depends on management's ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on
performance. We have an asset/liability management program which attempts to manage interest rate sensitivity. In addition,
periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.
Our financial statements included in Item 8 below have been prepared in accordance with accounting principles generally
accepted in the United States, which requires us to measure financial position and operating results principally in terms of
historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The
primary effect of inflation on our results of operations is through increased operating costs, such as compensation, occupancy
and business development expenses. In management's opinion, changes in interest rates affect the financial condition of a
financial institution to a far greater degree than changes in the rate of inflation. Although interest rates are greatly influenced
by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate.
Interest rates are highly sensitive to many factors that are beyond our control, including U.S. fiscal and monetary policy and
general national and global economic conditions.
60
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Umpqua Holdings Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Umpqua Holdings Corporation and Subsidiaries (the
"Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income,
changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2017, and the
related notes, (collectively referred to as the "consolidated financial statements"). We also have audited the Company's
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -
Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 2017 and 2016, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control -
Integrated Framework (2013) issued by COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company's consolidated financial statements and an opinion on the Company's internal control
over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in
all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
61
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Moss Adams LLP
Portland, Oregon
February 23, 2018
We have served as the Company's auditor since 2005.
62
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2017 and 2016
(in thousands, except shares)
ASSETS
Cash and due from banks
Interest bearing cash and temporary investments
Total cash and cash equivalents
Investment securities
Trading, at fair value
Available for sale, at fair value
Held to maturity, at amortized cost
Loans held for sale, at fair value
Loans and leases
Allowance for loan and lease losses
Net loans and leases
Restricted equity securities
Premises and equipment, net
Goodwill
Other intangible assets, net
Residential mortgage servicing rights, at fair value
Other real estate owned
Bank owned life insurance
Deferred tax asset, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing
Interest bearing
Total deposits
Securities sold under agreements to repurchase
Term debt
Junior subordinated debentures, at fair value
Junior subordinated debentures, at amortized cost
Deferred tax liability, net
Other liabilities
Total liabilities
COMMITMENTS AND CONTINGENCIES (NOTE 18)
SHAREHOLDERS' EQUITY
Common stock, no par value, shares authorized: 400,000,000 as of December 31, 2017 and 2016; issued
and outstanding: 220,148,824 as of December 31, 2017 and 220,177,030 as of December 31, 2016
Retained earnings
Accumulated other comprehensive loss
Total shareholders' equity
Total liabilities and shareholders' equity
See notes to consolidated financial statements
63
December 31,
2017
December 31,
2016
$
330,856
$
303,424
634,280
12,255
3,065,769
3,803
259,518
19,080,184
(140,608)
18,939,576
43,508
269,182
1,787,651
30,130
153,151
11,734
306,864
—
224,018
331,994
1,117,438
1,449,432
10,964
2,701,220
4,216
387,318
17,508,663
(133,984)
17,374,679
45,528
303,882
1,787,651
36,886
142,973
6,738
299,673
34,322
227,637
$
$
25,741,439
$
24,813,119
6,505,628
$
13,442,672
19,948,300
294,299
802,357
277,155
100,609
37,503
266,430
21,726,653
5,861,469
13,159,516
19,020,985
352,948
852,397
262,209
100,931
—
306,854
20,896,324
3,517,258
522,520
(24,992)
4,014,786
3,515,299
422,839
(21,343)
3,916,795
$
25,741,439
$
24,813,119
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2017, 2016 and 2015
(in thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans and leases
Interest and dividends on investment securities:
Taxable
Exempt from federal income tax
Dividends
Interest on temporary investments and interest bearing deposits
Total interest income
INTEREST EXPENSE
Interest on deposits
Interest on securities sold under agreement to repurchase and federal funds purchased
Interest on term debt
Interest on junior subordinated debentures
Total interest expense
Net interest income
PROVISION FOR LOAN AND LEASE LOSSES
Net interest income after provision for loan and lease losses
NON-INTEREST INCOME
Service charges on deposits
Brokerage revenue
Residential mortgage banking revenue, net
Gain on sales of investment securities, net
Gain on loan sales, net
Loss on junior subordinated debentures carried at fair value
BOLI income
Other income
Total non-interest income
NON-INTEREST EXPENSE
Salaries and employee benefits
Occupancy and equipment, net
Communications
Marketing
Services
FDIC assessments
(Gain) loss on other real estate owned, net
Intangible amortization
Merger related expenses
Goodwill impairment
Other expenses
Total non-interest expense
Income before provision for income taxes
Provision for income taxes
Net income
2017
2016
2015
$
865,521
$
850,067
$
869,433
57,987
8,725
1,491
4,380
938,104
45,582
475
14,159
18,000
78,216
859,888
47,254
812,634
61,469
16,083
136,276
27
16,721
(14,727)
8,214
53,133
277,196
438,180
150,545
18,932
8,918
45,302
15,014
(557)
6,756
9,324
—
55,461
747,875
341,955
95,936
46,427
8,828
1,399
3,918
910,639
35,240
132
15,005
15,674
66,051
844,588
41,674
802,914
61,268
17,033
157,863
858
13,356
(6,323)
8,514
47,371
47,842
9,647
708
2,236
929,866
29,839
173
14,470
13,750
58,232
871,634
36,589
835,045
59,740
18,481
124,722
2,922
22,380
(6,306)
8,351
45,434
299,940
275,724
424,830
151,944
21,265
10,913
42,795
15,508
(279)
8,622
15,313
142
46,102
737,155
365,699
132,759
430,936
142,975
20,615
11,419
46,379
13,480
1,894
11,225
45,582
—
39,137
763,642
347,127
124,588
222,539
$
246,019
$
232,940
$
64
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Continued)
For the Years Ended December 31, 2017, 2016 and 2015
(in thousands, except per share amounts)
Net income
Dividends and undistributed earnings allocated to participating securities
Net earnings available to common shareholders
Earnings per common share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
See notes to consolidated financial statements
2017
2016
2015
$
$
246,019
56
245,963
$
$
232,940
125
232,815
$
$
$1.12
$1.11
220,251
220,836
$1.06
$1.05
220,282
220,908
222,539
357
222,182
$1.01
$1.01
220,327
221,045
65
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2017, 2016 and 2015
(in thousands)
Net income
Available for sale securities:
Unrealized gains (losses) arising during the period
Income tax (expense) benefit related to unrealized gains (losses)
Reclassification adjustment for net realized gains in earnings
Income tax expense related to realized gains
Other comprehensive income (loss), net of tax
Comprehensive income
See notes to consolidated financial statements
2017
2016
2015
$
246,019
$
232,940
$
222,539
1,301
(503)
(27)
10
781
(29,817)
11,558
(858)
332
(18,785)
(20,860)
8,031
(2,922)
1,125
(14,626)
$
246,800
$
214,155
$
207,913
66
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2017, 2016 and 2015
(in thousands, except shares)
Common Stock
Balance at January 1, 2015
220,161,120
$
3,519,316
$
Shares
Amount
Net income
Other comprehensive loss, net of tax
Stock-based compensation
Stock repurchased and retired
Issuances of common stock under stock plans
Cash dividends on common stock ($0.62 per share)
(844,215)
854,186
14,383
(14,589)
1,481
(137,480)
Retained
Earnings
246,242
222,539
Accumulated
Other
Comprehensive
Income (Loss)
$
12,068
(14,626)
Total
$
3,777,626
222,539
(14,626)
14,383
(14,589)
1,481
(137,480)
Balance at December 31, 2015
220,171,091
$
3,520,591
$
331,301
$
(2,558) $
3,849,334
Balance at January 1, 2016
220,171,091
$
3,520,591
$
331,301
$
(2,558) $
3,849,334
Net income
Other comprehensive loss, net of tax
Stock-based compensation
Stock repurchased and retired
Issuances of common stock under stock plans
Cash dividends on common stock ($0.64 per share)
232,940
(18,785)
(1,117,061)
1,123,000
9,790
(17,708)
2,626
(141,402)
232,940
(18,785)
9,790
(17,708)
2,626
(141,402)
Balance at December 31, 2016
220,177,030
$
3,515,299
$
422,839
$
(21,343) $
3,916,795
Balance at January 1, 2017
220,177,030
$
3,515,299
$
422,839
$
(21,343) $
3,916,795
Net income
Other comprehensive income, net of tax
Stock-based compensation
Stock repurchased and retired
Issuances of common stock under stock plans
Cash dividends on common stock ($0.68 per share)
Tax rate effect reclassification (1)
Balance at December 31, 2017
(468,555)
440,349
9,612
(8,614)
961
246,019
781
(150,768)
4,430
(4,430)
246,019
781
9,612
(8,614)
961
(150,768)
—
220,148,824
$
3,517,258
$
522,520
$
(24,992) $
4,014,786
(1) The reclassification adjustment from accumulated other comprehensive income (loss) to retained earnings relating to
the effects from the application of the Tax Cuts and Jobs Act of 2017.
See notes to consolidated financial statements
67
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended December 31, 2017, 2016 and 2015
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2017
2016
2015
246,019
232,940
222,539
66,634
29,340
(27)
(703)
146
47,254
(8,300)
—
57,968
(1,442)
—
(33,445)
23,267
14,946
9,612
(1,291)
(143,716)
(453)
115,650
23,743
(858)
(1,998)
1,719
41,674
(8,595)
82
59,256
6,737
142
(37,082)
25,926
6,752
9,790
(1,378)
(178,141)
3,517
99,966
23,544
(2,922)
(888)
2,782
36,589
(8,501)
853
51,593
3,655
—
(35,284)
20,726
6,163
14,383
413
(150,855)
696
(3,414,431)
(3,990,278)
(3,497,920)
3,669,679
4,127,503
3,549,226
1,041
(52,388)
509,710
(27,080)
11,622
421,643
24,692
15,290
376,740
(952,819)
559,746
520
(243,171)
245,191
(1,876,127)
271,124
(4,278)
1,601
(750)
—
632
6,705
(852,101)
(1,074,205)
619,752
805,640
501
(600)
2,021
(1,150,919)
475,810
(30,313)
814
—
—
140
15,855
598
—
72,442
(1,816,164)
288,805
(69,341)
5,351
—
6,476
684
22,803
(1,991,626)
(919,040)
(1,756,911)
Deferred income tax expense
Amortization of investment premiums, net
Gain on sales of investment securities, net
Gain on sale of other real estate owned, net
Valuation adjustment on other real estate owned
Provision for loan and lease losses
Change in cash surrender value of bank owned life insurance
Change in FDIC indemnification asset
Depreciation, amortization and accretion
(Gain) loss on sale of premises and equipment
Goodwill impairment
Additions to residential mortgage servicing rights carried at fair value
Change in fair value residential mortgage servicing rights carried at fair value
Change in junior subordinated debentures carried at fair value
Stock-based compensation
Net (increase) decrease in trading account assets
Gain on sale of loans, net
Change in loans held for sale carried at fair value
Origination of loans held for sale
Proceeds from sales of loans held for sale
Change in other assets and liabilities:
Net decrease (increase) in other assets
Net (decrease) increase in other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale
Proceeds from investment securities available for sale
Proceeds from investment securities held to maturity
Purchases of restricted equity securities
Redemption of restricted equity securities
Net change in loans and leases
Proceeds from sales of loans
Net change in premises and equipment
Proceeds from bank owned life insurance death benefit
Purchase of bank owned life insurance
Proceeds from redemption of bank owned life insurance cash surrender value
Net change in proceeds from FDIC indemnification asset
Proceeds from sales of other real estate owned
Net cash used in investing activities
68
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (Continued)
For the Years Ended December 31, 2017, 2016 and 2015
(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit liabilities
Net (decrease) increase in securities sold under agreements to repurchase
Proceeds from term debt borrowings
Repayment of term debt borrowings
Dividends paid on common stock
Proceeds from stock options exercised
Repurchases and retirement of common stock
Net cash provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
Income taxes
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Change in unrealized losses on investment securities available for sale, net of taxes
Tax rate effect reclassification
Cash dividend declared on common stock and payable after period-end
Change in GNMA mortgage loans recognized due to repurchase option
Transfer of loans to other real estate owned
Transfers from other real estate owned to loans due to internal financing
See notes to consolidated financial statements
2017
2016
2015
928,462
(58,649)
205,000
(254,998)
(145,398)
961
(8,614)
1,315,886
48,388
490,000
(525,014)
(141,074)
2,626
(17,708)
666,764
1,173,104
(815,152)
1,449,432
675,707
773,725
820,210
(8,761)
150,000
(264,998)
(134,618)
1,481
(14,589)
548,725
(831,446)
1,605,171
$
634,280
$
1,449,432
$
773,725
$
$
$
$
$
$
$
$
80,015
30,087
$
$
70,796
8,164
$
$
67,884
13,263
781
$
(18,785) $
(14,626)
(4,430) $
— $
—
39,634
1,571
11,222
78
$
$
$
$
35,243
$
35,281
(8,319) $
5,888
5,881
$
$
8,114
9,062
—
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Significant Accounting Policies
Nature of Operations-Umpqua Holdings Corporation (the "Company") 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., a commercial
equipment leasing company. Pivotus Ventures, Inc., a wholly-owned subsidiary of Umpqua Holdings Corporation, uses a
startup dynamic and collaboration with other institutions to validate, develop, and test new bank platforms that could have a
significant impact on the experience and economics of banking.
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 and other intangible assets.
Consolidation-The accompanying consolidated financial statements include the accounts of the Company, the Bank and its
subsidiary, Umpqua Investments, and Pivotus. All significant intercompany balances and transactions have been eliminated in
consolidation. As of December 31, 2017, the Company had 25 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 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.
Trading Account Securities-Debt and equity securities held for resale are classified as trading account securities and reported
at fair value. Realized and unrealized gains or losses are 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.
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 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.
70
Transfers of securities from available for sale to held to maturity are accounted for at fair value as of the date of the transfer.
The difference between the fair value and the par value at the date of transfer is considered a premium or discount and is
accounted for accordingly. Any unrealized gain or loss at the date of the transfer is reported in OCI, and is amortized over the
remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or
discount, and will offset or mitigate the effect on interest income of the amortization of the premium or discount for that held
to maturity security.
We review investment securities on an ongoing basis for the presence of other-than-temporary impairment ("OTTI") or
permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and
nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is more likely
than not that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may
be maturity, and other factors. For debt securities, if we intend to sell the security or it is more likely than not that we 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 we do not intend to sell the security and it is not more likely than not that we will be required to sell the security but
we do 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 loans held for sale, which is comprised of residential mortgage
loans, 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 will be periodically reassessed and updated within the accounting system to update our expectation of
future cash flows. The excess of the cash flows expected to be collected over a pool's carrying value is considered to be the
accretable yield and is recognized as interest income over the estimated life of the 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.
71
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 our 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 and will
continue to be 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.
For purchased leases and equipment finance loans, the difference in the cash flows expected to be collected over the initial
allocation of fair value to the acquired leases and loans is accreted into interest income over their related term based on the
effective interest method.
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, we
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. Generally, 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 to interest income and the
accrual of interest income is terminated. Generally, 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.
72
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 Bank 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 Bank
has a management ALLL Committee, which is responsible for, among other things, regularly reviewing the ALLL
methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted
accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status. The
ALLL Committee also approves removing loans and leases from impaired status. The 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 we identify a loan as
impaired, we measure the impairment using discounted cash flows or estimated note sale price, except when the sole
remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value
of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is
less than the recorded investment in the loan, we either recognize an impairment reserve as a specific component to be
provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral dependent loans if it is
determined that such amount represents a confirmed loss. The combination of the risk rating-based allowance component
and the impairment reserve allowance component lead to an allocated allowance for loan and lease losses.
The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease
portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less
than 5% of the allowance, but may be maintained at higher levels during times of economic conditions characterized by
falling real estate values. The unallocated amount is reviewed periodically based on trends in credit losses, the results of
credit reviews and overall economic trends.
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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, 2017. There is, however, no assurance that future loan
losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for
loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require
additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review. A
substantial percentage of our loan portfolio is secured by real estate, and as a result a significant decline in real estate market
values may require an increase in the ALLL.
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 were $43.5 million and $45.5 million at December 31, 2017 and
2016, respectively. Federal Home Loan Bank stock amounted to $42.0 million and $44.1 million of the total restricted
securities as of December 31, 2017 and 2016, respectively. Federal Home Loan Bank stock represents the Bank's investment
in the Federal Home Loan Banks of Des Moines and San Francisco ("FHLB") stock and 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, 2017, the Bank's
minimum required investment in FHLB stock was $42.0 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. The remaining
restricted equity securities balance primarily represents an investment in Pacific Coast Bankers' Bancshares stock.
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, as
well as costs incurred for software that is part of a hosting arrangement, 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.
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Management reviews long-lived assets any time that a change in circumstance indicates that the carrying amount of these
assets may not be recoverable. Recoverability of these assets is determined by comparing the carrying value of the asset to
the forecasted undiscounted cash flows of the operation associated with the asset. If the evaluation of the forecasted cash
flows indicates that the carrying value of the asset is not recoverable, the asset is written down to fair value.
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.
The Company performs a goodwill impairment analysis on an annual basis as of December 31. On at least an annual basis,
we assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. 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 our expected future cash flows; a sustained, significant
decline in our 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.
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.
Retained MSR are measured at fair value as of the date of the related loan sale. We use quoted market prices when available.
Subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value
of the MSR, the present value of expected net future cash flows is estimated. Assumptions used include market discount
rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income net of servicing costs. This
model is periodically validated by an independent model validation group. The model assumptions and the MSR fair value
estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry
surveys, as available.
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 Ginnie Mae ("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 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.
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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, 2017, 2016 and 2015, 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.
Other Real Estate Owned- Other real estate owned ("OREO") represents real estate which the Bank has taken control of in
partial or full satisfaction of loans. At the time of foreclosure, OREO is recorded at fair value less costs to sell the property,
which becomes the property's new basis. Any write-downs 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. Subsequent valuation adjustments are recognized within net loss
on OREO. Revenue and expenses from operations are included in other non-interest expense in the Consolidated Statements
of Income.
In some instances, the Bank may make loans to facilitate the sales of other real estate owned. Management reviews all sales
for which it is the lending institution to determine if it meets the criteria to recognize the sale for accounting purposes. Any
gains related to sales of other real estate owned may be deferred until the buyer has a sufficient initial and continuing
investment in the property.
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.
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.
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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. In the first quarter of 2017, the
Company realigned its operating segments based on changes in its internal reporting structure to align with the changes in the
Company's Chief Operating Decision Maker. The Company now reports four primary segments, which are also the
Company's reporting units: Commercial Bank, Wealth Management, Retail Bank, and Home Lending with the remainder as
Corporate and other.
Share-Based Payment- We recognize expense in the income statement for the grant-date fair value of restricted share
awards, stock options and other equity-based forms of compensation issued to employees over the employees' requisite
service period (generally the vesting period). The requisite service period may be subject to performance conditions. The fair
value of the restricted share awards is based on the Company's share price on the grant date.
Stock options and restricted stock awards generally vest ratably over three to five years and are recognized as expense over
that same period of time. The exercise price of each option equals the market price of the Company's common stock on the
date of the grant, and the maximum term is ten years.
Certain restricted stock awards are subject to performance-based and market-based vesting as well as other approved vesting
conditions and cliff vest based on those conditions. Compensation expense is recognized over the service period to the extent
restricted stock awards are expected to vest. The fair value of the restricted stock award grants is estimated as of the grant
date using a Monte Carlo simulation pricing model.
Earnings per Share ("EPS")- Nonvested share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents are participating securities and are included in the computation of EPS pursuant to the two-class
method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common
stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed
earnings. Certain of the Company's nonvested restricted stock awards qualify as participating securities.
Net income is allocated between the common stock and participating securities pursuant to the two-class method, based on
their rights to receive dividends, participate in earnings or absorb losses. Basic earnings per common share is computed by
dividing net earnings available to common shareholders by the weighted average number of common shares outstanding
during the period, excluding participating nonvested restricted shares.
Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include
the number of additional common shares that would have been outstanding if potentially dilutive common shares, excluding
the participating securities, were issued using the treasury stock method. For all periods presented, stock options, certain
restricted stock awards and restricted stock units are potentially dilutive non-participating instruments issued by the
Company. Next, we determine and include in diluted earnings per common share calculation the more dilutive effect of the
participating securities using the treasury stock method or the two-class method. Undistributed losses are not allocated to the
nonvested share-based payment awards (the participating securities) under the two-class method as the holders are not
contractually obligated to share in the losses of the Company.
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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 our 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.
Recently Issued Accounting Pronouncements-
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2014-09, Revenue from Contracts with Customers (Topic 606), which creates Topic 606 and supersedes Topic 605, Revenue
Recognition. In August 2015, FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which
postponed the effective date of 2014-09. Multiple ASUs and interpretative guidance have been issued in connection with
ASU 2014-09. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates
than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable
consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
The standard is effective for public entities for interim and annual periods beginning after December 15, 2017; early adoption
is not permitted. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the
standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to
the most current period presented in the financial statements with the cumulative effect of initially applying the standard
recognized at the date of initial application. The Company has reviewed all revenue sources to determine the sources that are
in scope for this guidance. As a bank, key revenue sources, such as interest income, have been identified as out of scope of
this new guidance. The Company's overall assessment of key in-scope revenue sources include service charges on deposits,
credit card and payment processing fees, and brokerage revenues. The Company adopted the guidance on January 1, 2018,
utilizing the modified retrospective approach. The guidance will not have a material or significant impact on the Company's
consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and
measurement of financial instruments. This ASU requires equity investments (except those accounted for under the equity
method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair
value recognized in net income. In addition, the amendment requires public business entities to use the exit price notion
when measuring the fair value of financial instruments for disclosure purposes and requires separate presentation of financial
assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables)
on the balance sheet or the accompanying notes to the financial statements. This ASU also eliminates the requirement for
public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required
to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendment also requires a
reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of
a liability resulting from a change in the instrument specific credit risk (also referred to as "own credit") when the
organization has elected to measure the liability at fair value in accordance with the fair value option for financial
instruments. ASU No. 2016-01 is effective for financial statements issued for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. The Company adopted the guidance on January 1, 2018 and will not
have a material impact on the Company's consolidated financial statements.
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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this update require lessees,
among other things, to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating
leases under previous authoritative guidance. This update also introduces new disclosure requirements for leasing
arrangements. ASU 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2018,
including interim periods within those fiscal years, with early adoption permitted. The Company has established a project
team for the implementation of this new standard. The team has completed implementation of a new leasing software that
will support the current leasing process, as well as aid in the transition to the new leasing guidance. Although an estimate of
the impact of the new leasing standard has not yet been determined, the Company expects a significant new lease asset and
related lease liability on the balance sheet due to the number of leased properties the Bank currently has that are accounted
for under current operating lease guidance.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of
credit losses on loans and other financial instruments held by financial institutions and other organizations. The ASU
requires the measurement of all expected credit losses for certain financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will
now use forward-looking information to better inform their credit loss estimates, but will continue to use judgment to
determine which loss estimation method is appropriate for their circumstances. The ASU requires enhanced disclosures to
help investors and other financial statement users better understand significant estimates and judgments used in estimating
credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include
qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial
statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased
financial assets with credit deterioration. The ASU is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. Early application will be permitted for specified periods. The Company has an
established cross-functional team and project management governance process in place to manage implementation of this
new guidance. The team has been working on the process by vetting the data elements and implementing modeling options
that are expected to be critical to the new process. An estimate of the impact of this standard has not yet been determined,
however, the impact is expected to be significant.
In January 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. Early adoption of the update is permitted. The Company does not expect this ASU to have a material impact on the
Company's consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, Other Income —Gains and Losses from the Derecognition of
Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial
Sales of Nonfinancial Assets. The amendment clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets
the definition of an in substance nonfinancial asset. The amendments also define the term in substance nonfinancial asset. The
amendments clarify that nonfinancial assets within the scope of Subtopic 610-20 may include nonfinancial assets transferred
within a legal entity to a counterparty. A contract that includes the transfer of ownership interests in one or more consolidated
subsidiaries is within the scope of Subtopic 610-20 if substantially all of the fair value of the assets that are promised to the
counterparty in a contract is concentrated in nonfinancial assets. The amendments clarify that an entity should identify each
distinct nonfinancial asset or in substance nonfinancial asset promised to a counterparty and derecognize each asset when a
counterparty obtains control of it. The amendment is effective at the same time as the Topic 606, Revenue from Contracts
with Customers. For public entities, the amendments are effective for annual reporting periods beginning after December 15,
2017, including interim reporting periods within that reporting period. The Company adopted the guidance on January 1,
2018 and does not expect this ASU to have a material impact on the Company's consolidated financial statements.
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In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities. The ASU is intended to improve and simplify accounting rules for hedge accounting by
better aligning a company's financial reporting for hedging activities with the economic objectives of those activities. The
standard refines and expands hedge accounting for both financial (e.g., interest rate) and commodity risks. Its provisions
create more transparency around how economic results are presented, both on the face of the financial statements and in the
footnotes. The ASU takes effect for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2018, early adoption is permitted in any interim period or fiscal years before the effective date of the standard. The Company
is currently evaluating the impact of this ASU on the Company's consolidated financial statements.
In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) - Land Easement Practical Expedient for Transition to
Topic 842. The ASU clarifies the application of the new lease guidance to land easements and eases adoption efforts for
some land easements. The amendment provides an optional transition practical expedient to not evaluate under Topic 842
existing or expired land easements that were not previously accounted for as leases under Topic 840, Leases. An entity that
elects this practical expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the
entity adopts Topic 842. An entity that does not elect this practical expedient should evaluate all existing or expired land
easements in connection with the adoption of the new lease requirements in Topic 842 to assess whether they meet the
definition of a lease. The ASU has the same effective date and transition requirements as ASU 2016-02, which is effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application will be
permitted for specified periods. The Company is currently evaluating the impact of this ASU on the Company's consolidated
financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU was issued to address
certain stranded tax effects in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act of 2017.
The ASU provides companies the option to reclassify stranded tax effects within AOCI to retained earnings in each period in
which the effect of the change from the newly enacted corporate tax rate is recorded. The amount of the reclassification
would be calculated on the basis of the difference between the historical and newly enacted tax rates for deferred tax
liabilities and assets related to items within accumulated other comprehensive income. The ASU requires companies to
disclose its accounting policy related to releasing income tax effects from AOCI, whether it has elected to reclassify the
stranded tax effects, and information about the other income tax effects that are reclassified. The guidance is effective for
fiscal years beginning after December 15, 2018, including interim periods, therein, and early adoption is permitted for public
business entities for which financial statements have not yet been issued. As of December 31, 2017, Umpqua adopted the
ASU and made a reclassification adjustment from accumulated other comprehensive income to retained earnings on the
Consolidated Statements of Changes in Shareholders' Equity, related to the stranded tax effects due to the change in the
federal corporate tax rate applied on the unrealized gains (losses) on investments on a portfolio basis, to reflect the provisions
of this ASU.
Reclassifications- Certain amounts reported in prior years' consolidated financial statements have been reclassified to
conform to the current presentation. In the first quarter of 2017, the Company realigned its operating segments based on
changes in its internal reporting structure to align with the changes in the Company's Chief Operating Decision Maker. The
Company now reports four primary segments: Commercial Bank, Wealth Management, Retail Bank, and Home Lending with
the remainder as Corporate and other. As a result of this realignment, segment reporting was updated. The prior periods have
been updated to be comparable to the current period presentation in Note 24 - Segment Information.
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, 2017 and 2016 was approximately $163.4
million and $138.4 million, respectively, and was met by holding cash and maintaining an average balance with the Federal
Reserve Bank.
Umpqua had restricted cash included in cash and due from banks on the balance sheet of $27.9 million as of December 31,
2017, and $51.0 million as of December 31, 2016, relating mostly to collateral required on interest rate swaps as discussed in
Note 19.
80
Note 3 – Investment Securities
The following tables present the amortized costs, unrealized gains, unrealized losses and approximate fair values of
investment securities at December 31, 2017 and 2016:
December 31, 2017
(in thousands)
AVAILABLE FOR SALE:
U.S. Treasury and agencies
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
$
40,021
$
— $
(323) $
Obligations of states and political subdivisions
Residential mortgage-backed securities and
collateralized mortgage obligations
Investments in mutual funds and other equity securities
303,352
2,703,997
51,959
6,206
2,039
11
$
3,099,329
$
8,256
$
(1,102)
39,698
308,456
(40,391)
—
(41,816) $
2,665,645
51,970
3,065,769
HELD TO MATURITY:
Residential mortgage-backed securities and
collateralized mortgage obligations
December 31, 2016
(in thousands)
AVAILABLE FOR SALE:
$
$
3,803
3,803
$
$
1,103
1,103
$
$
— $
— $
4,906
4,906
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
Obligations of states and political subdivisions
$
305,708
$
5,526
$
(3,537) $
307,697
Residential mortgage-backed securities and
collateralized mortgage obligations
Investments in mutual funds and other equity securities
HELD TO MATURITY:
Residential mortgage-backed securities and
collateralized mortgage obligations
2,428,387
1,959
3,664
11
$
2,736,054
$
9,201
$
(40,498)
—
(44,035) $
2,391,553
1,970
2,701,220
$
$
4,216
4,216
$
$
1,001
1,001
$
$
— $
— $
5,217
5,217
81
Investment securities that were in an unrealized loss position as of December 31, 2017 and December 31, 2016 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, 2017
(in thousands)
Less than 12 Months
12 Months or Longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
AVAILABLE FOR SALE:
U.S. Treasury and agencies
Obligations of states and political
subdivisions
Residential mortgage-backed securities
and collateralized mortgage obligations
$
39,699
$
323
$
— $
— $
39,699
$
323
20,566
322
24,798
780
45,364
1,102
1,184,000
10,368
1,226,364
30,023
2,410,364
40,391
Total temporarily impaired securities
$1,244,265
$
11,013
$1,251,162
$
30,803
$2,495,427
$
41,816
December 31, 2016
(in thousands)
AVAILABLE FOR SALE:
Obligations of states and political
subdivisions
Residential mortgage-backed securities
and collateralized mortgage obligations
Less than 12 Months
12 Months or Longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
71,571
$
3,065
$
1,828
$
472
$
73,399
$
3,537
1,855,304
35,981
182,804
4,517
2,038,108
40,498
Total temporarily impaired securities
$1,926,875
$
39,046
$ 184,632
$
4,989
$2,111,507
$
44,035
The unrealized losses on U.S. treasury and agencies securities are due to increases in market interest rates and are not due to
the underlying credit of the issuers. The unrealized losses on obligations of states and political subdivisions were caused by
changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities.
Management monitors the published credit ratings of these securities for material rating or outlook changes. As
of December 31, 2017, 95% of these securities were rated A3/A- or higher by rating agencies. Substantially all of the
Company's obligations of states and political subdivisions are general obligation issuances. All of the available for sale
residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at
December 31, 2017 are issued or guaranteed by government sponsored enterprises. The unrealized losses on residential
mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the
widening of market spreads subsequent to the initial purchase of these securities, and not concerns regarding the underlying
credit of the issuers or the underlying collateral. It is expected that these securities will be settled at a price at least equal to
the amortized cost of each investment.
Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality,
and because the Bank does not intend to sell the securities and it is not 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.
82
The following table presents the contractual maturities of investment securities at December 31, 2017:
(in thousands)
AMOUNTS MATURING IN:
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
Other investment securities
Available For Sale
Held To Maturity
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
$
2,302
94,866
$
2,313
95,169
— $
—
431,773
2,518,429
51,959
431,832
2,484,485
51,970
19
3,784
—
$
3,099,329
$
3,065,769
$
3,803
$
—
—
19
4,887
—
4,906
The following table presents the gross realized gains and losses on the sale of securities available for sale for the years ended
December 31, 2017, 2016 and 2015:
(in thousands)
2017
2016
2015
Gains
Losses
Gains
Losses
Gains
Losses
U.S. Treasury and agencies
$
— $
— $
— $
— $
13
$
Obligations of states and political subdivisions
Residential mortgage-backed securities and
collateralized mortgage obligations
—
135
9
99
971
270
—
383
631
3,119
—
—
841
$
135
$
108
$ 1,241
$
383
$ 3,763
$
841
The following table presents, as of December 31, 2017, investment securities which were pledged to secure borrowings,
public deposits, and repurchase agreements as permitted or required by law:
(in thousands)
To Federal Home Loan Bank to secure borrowings
To state and local governments to secure public deposits
Other securities pledged principally to secure repurchase agreements
Total pledged securities
Amortized
Cost
Fair Value
$
453
$
459
1,108,242
429,549
1,104,046
423,465
$
1,538,244
$
1,527,970
83
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, 2017 and
2016:
(in thousands)
Commercial real estate
Non-owner occupied term, net
Owner occupied term, net
Multifamily, net
Construction & development, net
Residential development, net
Commercial
Term, net
Lines of credit & other, net
Leases and equipment finance, net
Residential
Mortgage, net
Home equity loans & lines, net
Consumer & other, net
Total loans, net of deferred fees and costs
December 31,
2017
December 31,
2016
$
$
3,491,137
2,488,251
3,087,792
540,707
165,865
1,944,987
1,166,173
1,167,503
3,330,442
2,599,055
2,858,956
463,625
142,984
1,508,780
1,116,259
950,588
3,192,185
1,103,297
732,287
$ 19,080,184
2,887,971
1,011,844
638,159
$ 17,508,663
The loan balances are net of deferred fees and costs of $73.3 million and $67.7 million as of December 31, 2017 and 2016,
respectively. Net loans also include net discounts on acquired loans of $9.5 million and $41.3 million as of December 31,
2017 and 2016, respectively. As of December 31, 2017, loans totaling $12.0 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 $252.5 million and $368.2 million at December 31, 2017 and 2016, respectively. The carrying balance of
purchased impaired loans was $189.1 million and $280.4 million at December 31, 2017 and 2016, respectively.
The following table presents the changes in the accretable yield for purchased impaired loans for the year ended
December 31, 2017, and 2016:
(in thousands)
Balance, beginning of period
Accretion to interest income
Disposals
Reclassifications from nonaccretable difference
Balance, end of period
2017
2016
$
95,579
(36,279)
(13,120)
28,088
132,829
(44,795)
(18,290)
25,835
74,268
$
95,579
$
$
84
The following table presents the net investment in direct financing leases and loans as of December 31, 2017 and 2016:
(in thousands)
Minimum lease payments receivable
Estimated guaranteed and unguaranteed residual values
Initial direct costs - net of accumulated amortization
Unearned income
Equipment finance loans, including unamortized deferred fees and costs
Accretable yield/purchase accounting adjustments
Net investment in direct financing leases and loans
Allowance for credit losses
December 31,
2017
December 31,
2016
$
467,654
$
422,872
85,231
13,561
(93,268)
694,322
3
70,199
13,978
(91,630)
535,143
26
1,167,503
950,588
(35,286)
(31,976)
Net investment in direct financing leases and loans
$
1,132,217
$
918,612
The following table presents the scheduled minimum lease payments receivable, excluding equipment finance loans, as of
December 31, 2017:
(in thousands)
Year
2018
2019
2020
2021
2022
Thereafter
Loans and leases sold
$
Amount
148,870
119,004
87,701
59,522
27,468
25,089
$
467,654
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, 2017 and 2016:
(in thousands)
Commercial real estate
Non-owner occupied term, net
Owner occupied term, net
Multifamily, net
Construction & development, net
Commercial
Term, net
Lines of credit & other, net
Leases and equipment finance, net
Residential
Mortgage, net
Total
85
2017
2016
$
13,062
$
47,221
—
287
16,278
187
76,082
20,693
33,986
129,879
—
11,849
—
26,851
101,286
$
254,403
$
239,196
462,454
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 ("ALLL") consists of
three key elements: 1) the formula allowance; 2) the specific allowance; and 3) the unallocated allowance. By incorporating
these factors into a single allowance requirement analysis, we believe all risk-based activities within the loan and lease
portfolios are simultaneously considered.
Formula Allowance
When loans and leases are originated or acquired, they are assigned a risk rating that is reassessed periodically during the
term of the loan or lease through the credit review process. The Bank's risk rating methodology assigns risk ratings ranging
from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an
appropriate amount for the formula allowance.
The formula allowance is calculated by applying risk factors to various segments of pools of outstanding loans and leases.
Risk factors are assigned to each portfolio segment based on management's evaluation of the losses inherent within each
segment. Segments with greater risk of loss will therefore be assigned a higher risk factor.
Base risk – The portfolio is segmented into loan categories, and these categories are assigned a Base risk factor based on an
evaluation of the loss inherent within each segment.
Extra risk – Additional risk factors provide for an additional allocation of ALLL based on the loan and lease risk rating
system and loan delinquency, and reflect the increased level of inherent losses associated with more adversely classified loans
and leases.
Risk factors may be changed periodically based on management's evaluation of the following factors: loss experience;
changes in the level of non-performing loans and leases; regulatory exam results; changes in the level of adversely classified
loans and leases; improvement or deterioration in economic conditions; and any other factors deemed relevant. Additionally,
Financial Pacific Leasing Inc. considers additional quantitative and qualitative factors: migration analysis; a static pool
analysis of historic recoveries; and forecasting uncertainties. A migration analysis is a technique used to estimate the
likelihood that an account will progress through the various delinquency states and ultimately be charged off.
Specific Allowance
Regular credit reviews of the portfolio identify loans that are considered potentially impaired. Potentially impaired loans are
referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired
when, based on current information and events, we determine that we will probably not be able to collect all amounts due
according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the
impairment using discounted cash flows or estimated note sale price, except when the sole remaining source of the repayment
for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs,
instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in
the loan, we either recognize an impairment reserve as a specific allowance to be provided for in the allowance for loan and
lease losses or charge-off the impaired balance on collateral-dependent loans if it is determined that such amount represents a
confirmed loss. Loans determined to be impaired are excluded from the formula allowance so as not to double-count the loss
exposure.
The combination of the formula allowance component and the specific allowance component represents the allocated
allowance for loan and lease losses. There was no unallocated allowance as of December 31, 2017 and December 31, 2016.
Management believes that the ALLL was adequate as of December 31, 2017. There is, however, no assurance that future loan
and lease losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the
provision for loan and lease losses.
The RUC is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line
of credit. The adequacy of the ALLL and RUC are monitored on a regular basis and are based on management's evaluation of
numerous factors. These factors include the quality of the current loan portfolio; the trend in the loan portfolio's risk ratings;
current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of
specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent
information.
86
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 summarizes activity related to the allowance for loan and lease losses by loan and lease portfolio
segment for the years ended December 31, 2017 and 2016:
(in thousands)
Balance, beginning of period
Charge-offs
Recoveries
(Recapture) provision
Balance, end of period
Balance, beginning of period
Charge-offs
Recoveries
(Recapture) provision
Balance, end of period
`
December 31, 2017
Commercial
Real Estate
47,795
$
(2,407)
3,068
(2,691)
45,765
$
Commercial
58,840
$
(44,511)
8,163
Residential
17,946
$
(985)
764
40,813
63,305
$
1,635
19,360
$
December 31, 2016
Commercial
Real Estate
54,293
$
(3,137)
1,958
(5,319)
47,795
$
Commercial
47,487
$
(35,545)
4,995
41,903
58,840
$
Residential
22,017
$
(1,885)
1,028
(3,214)
17,946
$
$
$
$
$
Consumer
& Other
Total
$ 133,984
(55,919)
15,289
9,403
(8,016)
3,294
7,497
12,178
47,254
$ 140,608
Consumer
& Other
Total
$ 130,322
(49,923)
11,911
6,525
(9,356)
3,930
8,304
9,403
41,674
$ 133,984
The valuation allowance on purchased impaired loans was increased by provision expense, which includes amounts related to
subsequent deterioration of purchased impaired loans, of $396,000 for the year ended December 31, 2017, and $1.4 million
for the year ended December 31, 2016. The increase due to the provision expense of the valuation allowance on purchased
impaired loans was offset by recaptured provision of $733,000 for the year ended December 31, 2017, and $1.1 million for
the year ended December 31, 2016.
87
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, 2017 and 2016:
(in thousands)
December 31, 2017
Commercial
Real Estate Commercial Residential
Consumer
& Other
Total
Allowance for loans and leases:
Collectively evaluated for impairment
$
43,186
$
62,912
$
18,912
$
12,150
$
137,160
Individually evaluated for impairment
Loans acquired with deteriorated credit quality
531
2,048
4
389
—
448
—
28
535
2,913
Total
Loans and leases:
$
45,765
$
63,305
$
19,360
$
12,178
$
140,608
Collectively evaluated for impairment
$ 9,592,471
$ 4,246,535
$ 4,260,258
$
731,831
$18,831,095
Individually evaluated for impairment
Loans acquired with deteriorated credit quality
31,999
149,282
27,977
4,151
—
35,224
—
456
59,976
189,113
Total
$ 9,773,752
$ 4,278,663
$ 4,295,482
$
732,287
$19,080,184
(in thousands)
December 31, 2016
Commercial
Real Estate Commercial Residential
Consumer
& Other
Total
Allowance for loans and leases:
Collectively evaluated for impairment
$
44,205
$
58,515
$
17,353
$
9,345
$
129,418
Individually evaluated for impairment
Loans acquired with deteriorated credit quality
859
2,731
8
317
—
593
—
58
867
3,699
Total
Loans and leases:
$
47,795
$
58,840
$
17,946
$
9,403
$
133,984
Collectively evaluated for impairment
$ 9,124,422
$ 3,555,660
$ 3,856,658
$
637,563
$17,174,303
Individually evaluated for impairment
Loans acquired with deteriorated credit quality
39,998
230,642
13,976
5,991
—
43,157
—
596
Total
$ 9,395,062
$ 3,575,627
$ 3,899,815
$
638,159
53,974
280,386
$17,508,663
88
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,
2017 and 2016:
(in thousands)
Balance, beginning of period
Net charge to other expense
Balance, end of period
(in thousands)
Unfunded loan and lease commitments:
December 31, 2017
December 31, 2016
December 31,
2017
December 31,
2016
$
$
3,611
352
3,963
$
$
3,574
37
3,611
Total
$
$
4,947,750
4,192,059
Asset Quality and Non-Performing Loans and Leases
We manage asset quality and control credit risk through diversification of the loan and lease portfolio and the application of
policies designed to promote sound underwriting and loan and lease monitoring practices. The Bank's Credit Quality
Administration is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the
consistent application of these policies and procedures across the Bank. Reviews of non-performing, past due loans and
leases and larger credits, designed to identify potential charges to the allowance for loan and lease losses, and to determine
the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial
strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses,
growth in the loan and lease portfolio, prevailing economic conditions and other factors.
89
Non-Accrual Loans and Leases and Loans and Leases Past Due
The following tables summarize our non-accrual loans and leases and loans and leases past due by loan and lease class as of
December 31, 2017 and December 31, 2016:
(in thousands)
December 31, 2017
Greater than
30 to 59 Days
Past Due
60 to 90
Days
Past Due
Greater than
90 Days and
Accruing
Total
Past Due
Non-
Accrual
Current &
Other (1)
Total Loans
and Leases
Commercial real estate
Non-owner occupied term,
net
$
207
$ 2,097
$
— $ 2,304
$ 4,578
$ 3,484,255
$ 3,491,137
Owner occupied term, net
4,997
2,015
—
—
—
—
—
—
71
—
—
—
7,083
13,870
2,467,298
2,488,251
—
—
—
355
3,087,437
3,087,792
—
—
540,707
540,707
165,865
165,865
597
1,263
1,076
—
—
401
1,673
1,664
14,686
6,402
1,928,628
1,944,987
1,158,107
1,166,173
8,494
10,133
2,857
21,484
11,574
1,134,445
1,167,503
—
6,716
36,977
43,693
— 3,148,492
3,192,185
2,004
3,116
285
870
2,587
529
4,876
4,515
— 1,098,421
1,103,297
—
727,772
732,287
$
20,678
$ 23,192
$
43,422
$ 87,292
$51,465
$18,941,427
$19,080,184
Multifamily, net
Construction &
development, net
Residential development,
net
Commercial
Term, net
Lines of credit & other, net
Leases and equipment
finance, net
Residential
Mortgage, net(2)
Home equity loans & lines,
net
Consumer & other, net
Total, net of deferred fees
and costs
(1) Other includes purchased credit impaired loans of $189.1 million.
(2) Includes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase
that are past due 90 days or more, totaling $12.4 million at December 31, 2017.
90
(in thousands)
December 31, 2016
Greater than
30 to 59 Days
Past Due
60 to 89
Days
Past Due
Greater than
90 Days and
Accruing
Total
Past Due
Non-
Accrual
Current &
Other (1)
Total Loans
and Leases
Commercial real estate
Non-owner occupied term,
net
$
Owner occupied term, net
Multifamily, net
Construction &
development, net
Residential development,
net
Commercial
Term, net
Lines of credit & other, net
Leases and equipment
finance, net
Residential
Mortgage, net (2)
Home equity loans & lines,
net
Consumer & other, net
Total, net of deferred fees
and costs
718
974
—
—
—
319
1,673
$ 1,027
$
1,047
$ 2,792
$ 2,100
$ 3,325,550
$ 3,330,442
4,539
—
—
—
233
27
1
—
—
—
—
—
5,514
—
—
—
4,391
476
2,589,150
2,599,055
2,858,480
2,858,956
—
—
463,625
463,625
142,984
142,984
552
1,700
6,880
4,998
1,501,348
1,508,780
1,109,561
1,116,259
5,343
6,865
1,808
14,016
8,920
927,652
950,588
10
3,114
33,703
36,827
— 2,851,144
2,887,971
289
3,261
848
1,185
2,080
587
3,217
5,033
— 1,008,627
1,011,844
—
633,126
638,159
$
12,587
$ 17,838
$
39,226
$ 69,651
$27,765
$17,411,247
$17,508,663
(1) Other includes purchased credit impaired loans of $280.4 million.
(2) Includes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase
that are past due 90 days or more, totaling $10.9 million at December 31, 2016.
Impaired Loans
Loans with no related allowance reported generally represent non-accrual loans, which are also considered impaired loans.
The Bank recognizes the charge-off on impaired loans in the period it arises for collateral dependent loans. Therefore, the
non-accrual loans as of December 31, 2017 have already been written-down to their estimated net realizable value and are
expected to be resolved with no additional material loss, absent further decline in market prices. The valuation allowance on
impaired loans primarily represents the impairment reserves on performing restructured loans, and is measured by comparing
the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan
agreement to the loan's carrying value.
91
The following tables summarize our impaired loans by loan class as of December 31, 2017 and 2016:
(in thousands)
Commercial real estate
Non-owner occupied term, net
Owner occupied term, net
Multifamily, net
Commercial
Term, net
Lines of credit & other, net
Total, net of deferred fees and costs
(in thousands)
Commercial real estate
Non-owner occupied term, net
Owner occupied term, net
Multifamily, net
Construction & development, net
Residential development, net
Commercial
Term, net
Lines of credit & other, net
Total, net of deferred fees and costs
December 31, 2017
Recorded Investment
Unpaid
Principal
Balance
Without
Allowance
With
Allowance
Related
Allowance
$
15,930
$
2,603
$
13,310
$
12,775
3,994
28,117
8,018
11,272
355
19,084
6,383
940
3,519
2,510
—
$
68,834
$
39,697
$
20,279
$
314
94
123
4
—
535
December 31, 2016
Recorded Investment
Unpaid
Principal
Balance
Without
Allowance
With
Allowance
Related
Allowance
$
19,797
$
278
$
19,116
$
8,467
4,015
1,091
7,304
16,875
8,279
1,768
476
—
—
5,982
4,755
6,445
3,520
1,091
7,304
3,239
—
524
131
123
9
72
8
—
$
65,828
$
13,259
$
40,715
$
867
92
The following table summarizes our average recorded investment and interest income recognized on impaired loans by loan
class for the years ended December 31, 2017 and 2016:
(in thousands)
Commercial real estate
Non-owner occupied term, net
Owner occupied term, net
Multifamily, net
Construction & development, net
Residential development, net
Commercial
Term, net
Lines of credit & other, net
Leases and equipment finance, net
Total, net of deferred fees and costs
December 31, 2017
December 31, 2016
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
$
16,959
$
10,087
3,906
961
5,816
17,157
6,287
148
551
151
122
22
163
330
55
—
$
14,766
$
6,475
3,971
1,532
7,666
16,843
3,851
—
530
146
121
72
315
217
60
—
$
61,321
$
1,394
$
55,104
$
1,461
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.
93
Watch—A watch loan or lease, risk rated 6, is still pass-rated, but represents the lowest level of acceptable risk due to an
emerging risk element or declining performance trend. Watch ratings are expected to be temporary, with issues resolved or
manifested to the extent that a higher or lower rating would be appropriate. The borrower should have a plausible plan, with
reasonable certainty of success, to correct the problems in a short period of time.
Special Mention—A special mention loan or lease, risk rated 7, has potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset
or the institution's credit position at some future date. They contain unfavorable characteristics and are generally undesirable.
Loans and leases in this category are currently protected but are potentially weak and constitute an undue and unwarranted
credit risk, but not to the point of a substandard classification. A special mention loan or lease has potential weaknesses,
which if not checked or corrected, weaken the asset or inadequately protect the Bank's position at some future date. For
commercial and commercial real estate homogeneous loans and leases to be classified as special mention, risk rated 7, the
loan or lease is greater than 30 to 59 days past due from the required payment date at month-end. Residential and consumer
and other homogeneous loans are risk rated 7, when the loan is greater than 30 to 89 days past due from the required payment
date at month-end.
Substandard—A substandard asset, risk rated 8, is inadequately protected by the current worth and paying capacity of the
obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that
jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if
the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have
to exist in individual assets classified substandard. Loans and leases are classified as substandard when they have
unsatisfactory characteristics causing unacceptable levels of risk. A substandard loan or lease normally has one or more well-
defined weaknesses that could jeopardize repayment of the debt. The likely need to liquidate assets to correct the problem,
rather than repayment from successful operations is the key distinction between special mention and substandard.
Commercial and commercial real estate homogeneous loans and leases are classified as a substandard loan or lease, risk rated
8, when the loan or lease is 60 to 89 days past due from the required payment date at month-end. Residential and consumer
and other homogeneous loans are classified as a substandard loan, risk rated 8, when an open-end loan is 90 to 180 days past
due from the required payment date at month-end or when a closed-end loan 90 to 120 days is past due from the required
payment date at month-end.
Doubtful—Loans or leases classified as doubtful, risk rated 9, have all the weaknesses inherent in one classified substandard
with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing
facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of
certain important and reasonably specific pending factors, which may work towards strengthening of the asset, classification
as a loss (and immediate charge-off) is deferred until more exact status may be determined. Pending factors include proposed
merger, acquisition, liquidation procedures, capital injection, and perfection of liens on additional collateral and refinancing
plans. In certain circumstances, a doubtful rating will be temporary, while the Bank is awaiting an updated collateral
valuation. In these cases, once the collateral is valued and appropriate margin applied, the remaining un-collateralized portion
will be charged-off. The remaining balance, properly margined, may then be upgraded to substandard, however must remain
on non-accrual. Commercial and commercial real estate homogeneous doubtful loans or leases, risk rated 9, are 90 to 179
days past due from the required payment date at month-end.
Loss—Loans or leases classified as loss, risk rated 10, are considered un-collectible and of such little value that the
continuance as an active Bank asset is not warranted. This rating does not mean that the loan or lease has no recovery or
salvage value, but rather that the loan or lease should be charged-off now, even though partial or full recovery may be
possible in the future. For a commercial or commercial real estate homogeneous loss loan or lease to be risk rated 10, the loan
or lease is 180 days and more past due from the required payment date. These loans are generally charged-off in the month in
which the 180 day time period elapses. Residential, consumer and other homogeneous loans are risk rated 10, when a closed-
end loan becomes past due 120 cumulative days or when an open-end retail loan becomes past due 180 cumulative days from
the contractual due date. These loans are generally charged-off in the month in which the 120 or 180 day period elapses.
Impaired—Loans are classified as impaired when, based on current information and events, it is probable that the Bank will
be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original
loan agreement, without unreasonable delay. This generally includes all loans classified as non-accrual and troubled debt
restructurings. Impaired loans are risk rated for internal and regulatory rating purposes, but presented separately for
clarification.
94
The following tables summarize our internal risk rating by loan and lease class for the loan and lease portfolio, including
purchased credit impaired loans, as of December 31, 2017 and December 31, 2016:
(in thousands)
December 31, 2017
Pass/Watch
Special
Mention
Substandard Doubtful
Loss
Impaired (1)
Total
$
84
$
15,913
$ 3,491,137
Commercial real estate
Non-owner occupied
term, net
$ 3,396,178
$
45,189
$
33,143
$
Owner occupied term, net
2,409,301
Multifamily, net
Construction &
development, net
Residential development,
net
3,064,079
538,526
165,426
30,393
14,200
—
—
35,191
5,639
2,181
439
Commercial
Term, net
Lines of credit & other,
net
Leases and equipment
finance, net
Residential
Mortgage, net(2)
Home equity loans &
lines, net
Consumer & other, net
Total, net of deferred fees
and costs
1,900,230
12,735
10,266
1,122,258
6,539
30,941
1,134,446
8,494
10,133
12,868
1,562
3,145,363
7,512
35,928
1,097,886
727,677
2,558
3,997
2,322
568
—
—
—
3,382
531
45
630
448
—
—
—
82
52
706
—
—
—
80
—
12,212
3,874
2,488,251
3,087,792
—
—
540,707
165,865
21,594
1,944,987
6,383
1,166,173
—
—
—
—
1,167,503
3,192,185
1,103,297
732,287
$18,701,370
$
131,617
$
166,751
$ 14,080
$
6,390
$
59,976
$ 19,080,184
(1) The percentage of impaired loans classified as pass/watch and substandard was 1.7% and 98.3% respectively, as of
December 31, 2017.
(2) Includes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase
that are past due 90 days or more, totaling $12.4 million at December 31, 2017, which is included in the substandard
category.
95
(in thousands)
December 31, 2016
Pass/Watch
Special
Mention
Substandard Doubtful
Loss
Impaired (1)
Total
Commercial real estate
Non-owner occupied
term, net
$ 3,205,241
$
55,194
$
48,699
$ 1,368
$
546
$
19,394
$ 3,330,442
Owner occupied term, net
2,466,247
2,828,370
75,189
11,903
458,328
1,712
134,491
—
46,781
14,687
2,494
1,189
972
—
—
—
1,653
—
—
—
347
244
978
2,014
980
88
8,213
3,996
2,599,055
2,858,956
1,091
463,625
7,304
142,984
9,221
1,508,780
4,755
1,116,259
—
—
—
—
950,588
2,887,971
1,011,844
638,159
1,458,699
15,716
24,678
119
1,063,305
10,565
37,387
3
927,378
5,614
6,866
9,752
2,830,547
1,803
53,607
1,006,647
633,098
1,490
4,446
2,727
527
—
—
—
Multifamily, net
Construction &
development, net
Residential development,
net
Commercial
Term, net
Lines of credit & other,
net
Leases and equipment
finance, net
Residential
Mortgage, net(2)
Home equity loans &
lines, net
Consumer & other, net
Total, net of deferred fees
and costs
$ 17,012,351
$ 183,632
$
239,642
$ 12,214
$ 6,850
$
53,974
$ 17,508,663
(1) The percentage of impaired loans classified as pass/watch, special mention, substandard and doubtful was 8.1%, 6.5%, 82.5%,
and 2.9% respectively, as of December 31, 2016.
(2) Includes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase
that are past due 90 days or more, totaling $10.9 million at December 31, 2016, which is included in the substandard
category.
Troubled Debt Restructurings
At December 31, 2017 and December 31, 2016, impaired loans of $32.2 million and $40.7 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 $917,000 in available commitments for troubled debt restructurings outstanding as of December 31, 2017 and
none as of December 31, 2016.
96
The following tables present troubled debt restructurings by accrual versus non-accrual status and by loan class as of
December 31, 2017 and December 31, 2016:
(in thousands)
Commercial real estate, net
Commercial, net
Residential, net
Total, net of deferred fees and costs
(in thousands)
Commercial real estate, net
Commercial, net
Residential, net
Total, net of deferred fees and costs
December 31, 2017
Accrual Status
Non-Accrual
Status
Total
Modifications
$
$
17,694
$
5,088
$
7,787
6,676
32,157
$
16,978
—
22,066
$
22,782
24,765
6,676
54,223
Accrual Status
December 31, 2016
Non-Accrual
Status
$
$
30,563
3,054
7,050
40,667
$
$
Total
Modifications
30,563
6,399
7,050
44,012
$
— $
3,345
—
3,345
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, 2017 and 2016:
(in thousands)
December 31, 2017
Rate
Modifications
Term
Modifications
Interest Only
Modifications
Payment
Modifications
Combination
Modifications
Total
Modifications
Commercial real estate, net
$
— $
— $
— $
— $
5,086
$
—
—
—
187
—
—
—
—
21,846
1,458
5,086
21,846
1,645
$
— $
187
$
— $
— $
28,390
$
28,577
Commercial, net
Residential, net
Total, net of deferred fees
and costs
Rate
Modifications
Term
Modifications
Interest Only
Modifications
Payment
Modifications
Combination
Modifications
Total
Modifications
December 31, 2016
Commercial real estate, net
$
— $
— $
— $
— $
15,193
$
15,193
Commercial, net
Residential, net
Consumer & other, net
Total, net of deferred fees
and costs
—
—
—
—
—
—
—
—
—
—
—
—
4,600
2,882
77
4,600
2,882
77
$
— $
— $
— $
— $
22,752
$
22,752
For the periods presented in the tables above, the outstanding recorded investment was the same pre and post modification.
There were $118,000 in financing receivables modified as troubled debt restructurings within the previous 12 months for
which there was a payment default during the year ended December 31, 2017. There were $926,000 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, 2016.
97
Note 6–Premises and Equipment
The following table presents the major components of premises and equipment at December 31, 2017 and 2016:
(in thousands)
Land
Buildings and improvements
Furniture, fixtures and equipment
Software
Construction in progress and other
Total premises and equipment
Less: Accumulated depreciation and amortization
Premises and equipment, net
Estimated
useful life
7-39 years
4-20 years
3-7 years
2017
2016
$
36,167
$
214,636
147,928
86,681
33,419
518,831
(249,649)
269,182
$
$
43,820
229,341
142,265
78,669
23,104
517,199
(213,317)
303,882
Depreciation expense totaled $50.1 million, $51.8 million and $47.6 million for the years ended December 31, 2017, 2016
and 2015, respectively.
Umpqua's subsidiaries have entered into a number of non-cancelable lease agreements with respect to premises and
equipment. See Note 18 for more information regarding rent expense, net of rental income, and minimum annual rental
commitments under non-cancelable lease agreements.
Note 7–Goodwill and Other Intangible Assets
The following tables summarize the changes in the Company's goodwill for the years ended December 31, 2015, 2016 and
2017.
(in thousands)
Balance, December 31, 2014
Net additions
Balance, December 31, 2015
Reductions
Balance, December 31, 2016
Balance, December 31, 2017
Goodwill
Accumulated
Impairment
Total
Gross
$
1,899,159
$
(112,934) $
1,786,225
1,568
1,900,727
—
1,900,727
$
1,900,727
$
—
(112,934)
(142)
(113,076)
(113,076) $
1,568
1,787,793
(142)
1,787,651
1,787,651
Goodwill is required to be allocated to reporting units, which for Umpqua have been determined to be the same as our
operating segments. Prior to 2017, all goodwill was allocated to the Community Banking segment. In 2017, the Company
realigned our segment reporting and the Community Banking segment was split into multiple operating segments.
Accordingly, the Company allocated goodwill to the new segments of Commercial Bank, Wealth Management, and Retail
Bank, based on their relative fair values as estimated using discounted cash flows as compared to their carrying value
estimated using a risk-based capital approach. As of December 31, 2017, goodwill was allocated to the reporting units as
follows:
(in thousands)
Goodwill
Balance, December 31, 2017
$
1,033,744
$
2,715
$
751,192
$
1,787,651
Commercial
Bank
Wealth
Management
Retail Bank
Total
98
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. Goodwill additions of $1.6 million in 2015 relate to correcting immaterial errors in acquisition
accounting adjustments, and the reduction of goodwill in 2016 of $142,000 relates to a goodwill impairment loss recognized
during the first quarter related to a small subsidiary that is winding down operations. The Company conducted its annual
evaluation of goodwill for impairment at both December 31, 2017. The Company assessed qualitative factors to determine
whether the existence of events and circumstances indicated that it is more likely than not that the indefinite-lived intangible
asset is impaired, and determined no factors indicated any additional impairment. Based on this analysis, no further testing
was determined to be necessary. There were no goodwill impairment losses recognized during the year ended December 31,
2017.
The following tables summarize the changes in the Company's other intangible assets for the years ended December 31,
2015, 2016 and 2017.
Balance, December 31, 2014
Amortization
Balance, December 31, 2015
Amortization
Balance, December 31, 2016
Amortization
Balance, December 31, 2017
Other Intangible Assets
Accumulated
Amortization
Net
Gross
$
113,471
$
—
113,471
—
113,471
—
$
113,471
$
(56,738) $
(11,225)
(67,963)
(8,622)
(76,585)
(6,756)
(83,341) $
56,733
(11,225)
45,508
(8,622)
36,886
(6,756)
30,130
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, 2017:
(in thousands)
Year
2018
2019
2020
2021
2022
Thereafter
Expected
Amortization
$
6,166
5,618
4,986
4,520
4,095
4,745
$
30,130
99
Note 8 – Residential Mortgage Servicing Rights
The following table presents the changes in the Company's residential mortgage servicing rights ("MSR") for the years ended
December 31, 2017, 2016 and 2015:
(in thousands)
Balance, beginning of period
Additions for new MSR capitalized
Changes in fair value:
Due to changes in model inputs or assumptions (1)
Other (2)
Balance, end of period
2017
2016
2015
142,973
33,445
(1,952)
(21,315)
153,151
$
$
131,817
37,082
7,873
(33,799)
142,973
$
$
117,259
35,284
(380)
(20,346)
131,817
$
$
(1) Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by
changes in interest rates.
(2) Represents changes due to collection/realization of expected cash flows over time.
Information related to our serviced loan portfolio as of December 31, 2017, 2016 and 2015 is as follows:
(dollars in thousands)
Balance of loans serviced for others
MSR as a percentage of serviced loans
December 31,
2017
$ 15,336,597
December 31,
2016
$ 14,327,368
December 31,
2015
$ 13,047,266
1.00%
1.00%
1.01%
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 $39.9 million, $35.3 million, and $28.0 million for the years
ended December 31, 2017, 2016 and 2015, respectively.
Key assumptions used in measuring the fair value of MSR as of December 31 were as follows:
Constant prepayment rate
Discount rate
Weighted average life (years)
December 31,
2017
December 31,
2016
December 31,
2015
12.27%
9.70%
6.3
11.43%
9.69%
6.6
11.70%
9.68%
6.5
A sensitivity analysis of the current fair value to changes in discount and prepayment speed assumptions as of December 31,
2017 and December 31, 2016 is as follows:
Constant prepayment rate
Effect on fair value of a 10% adverse change
Effect on fair value of a 20% adverse change
Discount rate
Effect on fair value of a 100 basis point adverse change
Effect on fair value of a 200 basis point adverse change
December 31,
2017
December 31,
2016
$
$
$
$
(6,290)
(12,093)
(5,840)
(11,249)
$
$
$
$
(6,075)
(11,720)
(5,817)
(11,118)
100
The sensitivity analysis presents the hypothetical effect on fair value of the MSR. The effect of such hypothetical change in
assumptions generally cannot be extrapolated because the relationship of the change in an assumption to the change in fair
value is not linear. Additionally, in the analysis, the impact of an adverse change in one assumption is calculated independent
of any impact on other assumptions. In reality, changes in one assumption may change another assumption.
Note 9 – Other Real Estate Owned
The following table presents the changes in other real estate owned ("OREO") for the years ended December 31, 2017, 2016
and 2015:
(in thousands)
Balance, beginning of period
Additions to OREO
Dispositions of OREO
Valuation adjustments in the period
Balance, end of period
2017
2016
2015
$
$
6,738
$
22,307
$
11,222
(6,080)
(146)
11,734
$
5,888
(19,738)
(1,719)
6,738
$
37,942
9,062
(21,915)
(2,782)
22,307
As of December 31, 2017, 2016 and 2015, the Company had valuation allowances on its OREO balances of $349,000,
$365,000, and $4.1 million, respectively. Valuation allowances on OREO balances are based on updated appraisals of the
underlying properties as received during a period or management's authorization to reduce the selling price of a property
during the period. As of December 31, 2017 and 2016, Umpqua had $354,000 and $1.6 million, respectively, of foreclosed
residential real estate property held as other real estate owned. Umpqua's recorded investment in consumer mortgage loans
collateralized by residential real estate property in process of foreclosure was $10.1 million and $10.7 million as of
December 31, 2017 and 2016, respectively.
Note 10 - Other Assets
Other assets consisted of the following at December 31, 2017 and 2016:
(in thousands)
Accrued interest receivable
Derivative assets
Low-income housing tax credit investments
Prepaid expenses
Investment in unconsolidated trust subsidiaries
Income taxes receivable
Insurance premium receivable
Commercial servicing asset
Other
Total
2017
2016
$
64,044
$
32,256
29,959
21,047
14,277
13,360
9,555
5,169
34,351
56,042
47,501
23,021
19,013
14,277
4,841
7,557
6,391
48,994
$
224,018
$
227,637
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. The Company recognized $3.1 million of
proportional amortization as a component of income tax expense for the year ended December 31, 2017, which includes
$765,000 of additional amortization resulting from the Tax Cuts and Jobs Act of 2017, and recognized $3.0 million in
affordable housing tax credits and other tax benefits during the year. The Company recognized $1.8 million of proportional
amortization as a component of income tax expense for the year ended December 31, 2016 and recognized $2.4 million in
affordable housing tax credits and other tax benefits during 2016. The Company has federal low income housing tax credit
carryforwards of $7.1 million and $7.9 million as of December 31, 2017 and 2016, respectively. The Company's remaining
capital commitments to these partnerships at December 31, 2017 and 2016 were approximately $18.2 million and $12.7
million, respectively. Such amounts are included in other liabilities on the consolidated balance sheets.
101
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:
(in thousands)
YEAR ENDED DECEMBER 31, 2017:
Federal
State
YEAR ENDED DECEMBER 31, 2016:
Federal
State
YEAR ENDED DECEMBER 31, 2015:
Federal
State
Current
Deferred
Total
$
$
$
$
$
$
19,287
10,015
29,302
8,003
9,106
17,109
22,914
1,708
24,622
$
$
$
$
$
$
56,171
10,463
66,634
102,031
13,619
115,650
81,267
18,699
99,966
$
$
$
$
$
$
75,458
20,478
95,936
110,034
22,725
132,759
104,181
20,407
124,588
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:
Statutory Federal income tax rate
State tax, net of Federal income tax
Revaluation effect of the Tax Cuts and Jobs Act of 2017
Tax-exempt income
BOLI
Tax credits
Nondeductible executive compensation
Other
Effective income tax rate
2017
2016
2015
35.0 %
4.0 %
(8.2)%
(2.0)%
(1.1)%
(0.4)%
0.4 %
0.4 %
28.1 %
35.0 %
4.0 %
— %
(1.8)%
(0.9)%
(0.3)%
— %
0.3 %
36.3 %
35.0 %
4.0 %
— %
(1.8)%
(1.1)%
(0.1)%
— %
(0.1)%
35.9 %
The revaluation effect of the Tax Cuts and Jobs Act of 2017 represents the revaluation of our net deferred tax liability and
amortization of tax credit investments associated with the passage of the act in December 2017. While no provisional
amounts were used in calculating the tax effects of the Tax Cuts and Jobs Act of 2017, certain amounts may be subject to
change as future guidance is issued. Additionally, the state impacts resulting from the Federal legislation have been
calculated based upon existing laws and may be subject to change as states issue new guidance or legislation related to the
Act. We believe that all items calculated and presented herein will not materially change as a result of any future guidance or
legislation. In addition, we have made an adjustment between retained earnings and accumulated other comprehensive
income related to the stranded tax effects due to the change in the federal corporate tax rate applied on the unrealized gains
(losses) on investments on a portfolio basis.
102
The following table reflects the effects of temporary differences that give rise to the components of the net deferred tax
(liabilities) assets recorded on the consolidated balance sheets as of December 31:
(in thousands)
DEFERRED TAX ASSETS:
Allowance for loan and lease losses
Accrued severance and deferred compensation
Tax credit carryforwards
Unrealized losses on investment securities
Loan discount
Net operating loss carryforwards
Other
Total gross deferred tax assets
DEFERRED TAX LIABILITIES:
Residential mortgage servicing rights
Fair market value adjustment on junior subordinated debentures
Leases
Deferred loan fees and costs
Intangibles
Other
Total gross deferred tax liabilities
Valuation allowance
2017
2016
$
36,566
$
17,497
12,252
5,158
3,565
2,159
16,890
94,087
40,414
26,538
19,673
18,146
12,969
12,760
52,360
25,565
21,037
9,275
16,623
48,121
33,872
206,853
57,858
45,958
8,259
23,800
18,710
16,856
130,500
171,441
(1,090)
(1,090)
Net deferred tax (liabilities) assets
$
(37,503) $
34,322
The Company believes it is more likely than not that it will be able to fully realize the benefit of its federal NOL
carryforwards. The Company also believes that it is more likely than not that the benefit from certain state NOL and tax
credit carryforwards will not be realized and therefore has provided a valuation allowance of $1.1 million as of both
December 31, 2017 and 2016, on the deferred tax assets relating to these state NOL and tax credit carry-forwards. 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 $93.0 million
and $205.8 million at December 31, 2017 and 2016, 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 carryback to prior years or through the
reversal of future temporary taxable differences.
The tax credit carryforwards consist of state tax credits of $4.3 million and $5.6 million at December 31, 2017 and 2016,
respectively. The state tax credits will be utilized to offset future state income taxes. Most of the state tax credits benefit a
five-year period, with an eight-year carryforward allowed. Federal low income housing credits, which have a twenty-year
carryforward, totaled $7.9 million and $5.9 million at December 31, 2017 and 2016, respectively. Alternative minimum tax
credits totaling $9.5 million at December 31, 2017, have become refundable under the Tax Cuts and Jobs Act of 2017 and
have been relocated on the balance sheet from deferred tax asset to receivable. Alternative minimum tax credits totaled $9.5
million at December 31, 2016.
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. federal tax examinations for years before 2014, and no longer subject to
other state tax authorities' examinations for years before 2013, except in California, for years before 2005, and for Canadian
tax authority examinations for years before 2014.
103
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 $3.1 million and $3.0 million recorded as of
December 31, 2017 and 2016, respectively. If recognized, the unrecognized tax benefit would reduce the 2017 annual
effective tax rate by 1%. As of December 31, 2017 and 2016, the accrued interest related to unrecognized tax benefits is
$353,000 and $354,000, respectively.
Detailed below is a reconciliation of the Company's unrecognized tax benefits, gross of any related tax benefits, for the years
ended December 31, 2017 and 2016, respectively:
(in thousands)
Balance, beginning of period
Changes for tax positions of current year
Changes for tax positions of prior years
Lapse of statute of limitations
Balance, end of period
Note 12 – Interest Bearing Deposits
2017
2016
$
$
3,006
$
86
—
(13)
3,079
$
2,888
118
561
(561)
3,006
The following table presents the major types of interest bearing deposits at December 31, 2017 and 2016:
(in thousands)
Interest bearing demand
Money market
Savings
Time, $100,000 and over
Time less than $100,000
Total interest bearing deposits
2017
2016
$
2,384,133
$
2,296,532
7,037,891
1,446,860
1,684,498
889,290
6,932,717
1,325,757
1,702,982
901,528
$ 13,442,672
$ 13,159,516
As of December 31, 2017 and 2016, the Company had time deposits of $631.3 million and $799.5 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, 2017:
(in thousands)
Year
2018
2019
2020
2021
2022
Thereafter
Total time deposits
Amount
$
1,358,274
616,827
144,578
329,203
120,925
3,981
$
2,573,788
104
The following table presents the remaining maturities of time deposits of $100,000 or more as of December 31, 2017:
(in thousands)
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Time, $100,000 and over
$
Amount
313,389
171,345
394,876
804,888
$
1,684,498
Note 13 – Securities Sold Under Agreements to Repurchase
The following table presents information regarding securities sold under agreements to repurchase at December 31, 2017 and
2016:
(dollars in thousands)
December 31, 2017
December 31, 2016
Repurchase
Amount
$
$
294,299
352,948
Weighted
Average
Interest Rate
Carrying
Value of
Underlying
Assets
Market Value
of Underlying
Assets
0.06% $
0.04% $
353,327
409,927
$
$
353,327
409,927
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 $316.1 million, $333.9 million, and $321.1 million for the years ended December 31, 2017, 2016
and 2015, respectively. The maximum amount outstanding at any month end for the years ended December 31, 2017, 2016
and 2015, was $334.9 million, $360.2 million, and $334.6 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, 2017 and 2016, the Company had no outstanding federal funds purchased balances. The Bank had available
lines of credit with the FHLB totaling $6.7 billion at December 31, 2017 subject to certain collateral requirements. The Bank
had available lines of credit with the Federal Reserve totaling $544.0 million subject to certain collateral requirements,
namely the amount of certain pledged loans at December 31, 2017. The Bank had uncommitted federal funds line of credit
agreements with additional financial institutions totaling $450.0 million at December 31, 2017. At December 31, 2017, the
lines of credit had interest rates ranging from 1.6% to 2.0%. 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.
105
Note 15 – Term Debt
The Bank had outstanding secured advances from the FHLB and other creditors at December 31, 2017 and 2016 with
carrying values of $802.4 million and $852.4 million, respectively.
The following table summarizes the future contractual maturities of borrowed funds as of December 31, 2017:
(in thousands)
Year
2018
2019
2020
2021
2022
Thereafter
Total borrowed funds
(1) Amount shows contractual borrowings, excluding acquisition accounting adjustments.
Amount
100,000
155,000
150,000
390,000
—
5,140
800,140 (1)
$
$
The maximum amount outstanding from the FHLB under term advances at a month end during 2017 and 2016 was $850.1
million and $900.2 million, respectively. The average balance outstanding during 2017 and 2016 was $844.4 million and
$894.2 million, respectively. The average contractual interest rate on the borrowings was 1.7% in both 2017 and 2016. 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,
and its investments 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.
106
Note 16 – Junior Subordinated Debentures
Following is information about the Company's wholly-owned trusts ("Trusts") as of December 31, 2017:
Issue Date
Issued
Amount
Carrying
Value (1)
Rate (2)
Effective
Rate (3)
Maturity
Date
(dollars in thousands)
Trust Name
AT FAIR VALUE:
Umpqua Statutory Trust II
Umpqua Statutory Trust III
Umpqua Statutory Trust IV
Umpqua Statutory Trust V
Umpqua Master Trust I
Umpqua Master Trust IB
October
2002
October
2002
December
2003
December
2003
August
2007
September
2007
$
20,619
$
17,545
30,928
26,586
10,310
8,232
10,310
8,207
41,238
25,674
20,619
15,800
Sterling Capital Trust III
April 2003
14,433
12,120
Sterling Capital Trust IV
May 2003
10,310
8,550
Sterling Capital Statutory Trust V
May 2003
20,619
17,306
Sterling Capital Trust VI
June 2003
10,310
8,586
Sterling Capital Trust VII
June 2006
56,702
36,942
Sterling Capital Trust VIII
Sterling Capital Trust IX
Lynnwood Financial Statutory Trust I
September
2006
July 2007
March
2003
51,547
33,891
46,392
29,089
9,279
7,712
Lynnwood Financial Statutory Trust II
June 2005
10,310
7,083
Klamath First Capital Trust I
July 2001
15,464
13,832
AT AMORTIZED COST:
HB Capital Trust I
Humboldt Bancorp Statutory Trust I
Humboldt Bancorp Statutory Trust II
Humboldt Bancorp Statutory Trust III
CIB Capital Trust
Western Sierra Statutory Trust I
Western Sierra Statutory Trust II
Western Sierra Statutory Trust III
Western Sierra Statutory Trust IV
March
2000
February
2001
December
2001
September
2003
November
2002
July 2001
December
2001
September
2003
September
2003
379,390
277,155
5,310
5,994
5,155
5,664
10,310
11,056
27,836
29,823
10,310
10,956
6,186
6,186
10,310
10,310
10,310
10,310
10,310
10,310
96,037
100,609
Total
$ 475,427
$ 377,764
107
Floating rate, LIBOR plus 3.35%,
adjusted quarterly
Floating rate, LIBOR plus 3.45%,
adjusted quarterly
Floating rate, LIBOR plus 2.85%,
adjusted quarterly
Floating rate, LIBOR plus 2.85%,
adjusted quarterly
Floating rate, LIBOR plus 1.35%,
adjusted quarterly
Floating rate, LIBOR plus 2.75%,
adjusted quarterly
Floating rate, LIBOR plus 3.25%,
adjusted quarterly
Floating rate, LIBOR plus 3.15%,
adjusted quarterly
Floating rate, LIBOR plus 3.25%,
adjusted quarterly
Floating rate, LIBOR plus 3.20%,
adjusted quarterly
Floating rate, LIBOR plus 1.53%,
adjusted quarterly
Floating rate, LIBOR plus 1.63%,
adjusted quarterly
Floating rate, LIBOR plus 1.40%,
adjusted quarterly
Floating rate, LIBOR plus 3.15%,
adjusted quarterly
Floating rate, LIBOR plus 1.80%,
adjusted quarterly
Floating rate, LIBOR plus 3.75%,
adjusted semiannually
10.875%
10.200%
Floating rate, LIBOR plus 3.60%,
adjusted quarterly
Floating rate, LIBOR plus 2.95%,
adjusted quarterly
Floating rate, LIBOR plus 3.45%,
adjusted quarterly
Floating rate, LIBOR plus 3.58%,
adjusted quarterly
Floating rate, LIBOR plus 3.60%,
adjusted quarterly
Floating rate, LIBOR plus 2.90%,
adjusted quarterly
Floating rate, LIBOR plus 2.90%,
adjusted quarterly
5.56%
October
2032
5.66% November
5.27%
2032
January
2034
5.59% March 2034
4.72% September
2037
5.66% December
2037
5.51% April 2033
5.51% May 2033
5.87% June 2033
5.75% September
2033
4.78% June 2036
4.90% December
4.36%
2036
October
2037
5.80% March 2033
4.93% June 2035
5.82% July 2031
8.70% March 2030
8.59% February
2031
4.36% December
2031
3.81% September
2033
4.18% November
2032
4.96% July 2031
5.20% December
2031
4.26% September
2033
4.26% September
2033
(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, 2017.
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 $14.3 million at December 31, 2017 and
December 31, 2016. As of December 31, 2017, 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.
Based on tightening in the credit spreads, the fair value of the junior subordinated debentures increased during the year,
which cause the loss from the change in the fair value measurement to increase from prior years. Losses recorded resulting
from the change in the fair value of these instruments were $14.7 million, $6.3 million and $6.3 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
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. In light of the Tax Cuts and Jobs
Act, the Company took the opportunity to make investments in employee profit sharing of $3.2 million for the year ended
December 31, 2017. The Company's contributions charged to expense including the match and profit sharing amounted to
$9.8 million, $7.3 million, and $7.4 million for the years ended December 31, 2017, 2016 and 2015, 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. For the years ended December 31, 2017, 2016 and 2015, the Company's
matching contribution charged to expense for these supplemental plans totaled $333,000, $142,000, and $178,000,
respectively. The SRP plan balances at December 31, 2017 and 2016 were $1.3 million and $1.1 million, 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 $8.4 million and $6.7 million at December 31, 2017 and 2016, respectively. In addition, the
Company has established a supplemental retirement plan for the former Executive Chairman of the Board of Directors. The
plan balance for this plan was $9.4 million and $8.7 million as of December 31, 2017 and 2016, 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,
2017 and 2016, liabilities recorded for the estimated present value of future plan benefits totaled $30.8 million and $33.4
million, respectively, and are recorded in other liabilities. For the years ended December 31, 2017, 2016 and 2015, expense
recorded for these plan's benefits totaled $2.2 million, $1.9 million, and $1.1 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, 2017 and 2016 were $12.1 million and $10.4 million, respectively.
108
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, 2017 and 2016, the cash surrender value of these policies was $306.9 million
and $299.7 million, respectively. At December 31, 2017 and 2016, the Bank also had liabilities for post-retirement benefits
payable to other partial beneficiaries under some of these life insurance policies of $6.6 million and $6.5 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
Lease Commitments — The Bank leases 233 sites under non-cancelable operating leases. The leases contain various
provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined
escalation schedule. Substantially all of the leases provide the Company with the option to extend the lease term one or more
times following expiration of the initial term.
Rent expense for the years ended December 31, 2017, 2016 and 2015 was $38.4 million, $38.5 million, and $38.3 million.
Rent expense was partially offset by rent income for the years ended December 31, 2017, 2016 and 2015 of $2.2 million,
$2.0 million, and $1.4 million.
The following table sets forth, as of December 31, 2017, the future minimum lease payments under non-cancelable operating
leases and future minimum income receivable under non-cancelable operating subleases:
(in thousands)
Year
2018
2019
2020
2021
2022
Thereafter
Total
Lease
Payments
Sublease
Income
$
33,856
$
31,304
26,969
20,882
15,580
48,977
2,472
2,492
2,425
2,066
1,591
4,182
$
177,568
$
15,228
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)
Commitments to extend credit
Forward sales commitments
Commitments to originate residential mortgage loans held for sale
Standby letters of credit
As of December 31, 2017
4,876,706
$
$
$
$
447,688
263,999
71,044
109
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 year ended December 31, 2017 and $150,000 in financial guarantees during the year ended
December 31, 2016. At December 31, 2017, approximately $47.7 million of standby letters of credit expire within one year,
and $23.3 million expire thereafter. During the years ended December 31, 2017 and 2016, the Bank recorded approximately
$863,000 and $818,000, 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, 2017, the Company had a residential mortgage loan repurchase reserve
liability of $1.2 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, 2017, the Bank has recorded a liability for the loans subject to this
repurchase right of $12.4 million, and has recorded these loans as part of the loan portfolio as if we had repurchased these
loans.
Legal Proceedings—The Bank owns 483,806 shares of Class B common stock of Visa Inc. which are convertible into Class
A common stock at a conversion ratio of 1.6483 per Class A share. As of December 31, 2017, the closing value of the Class A
shares was $114.02 per share. Utilizing the conversion ratio, the value of unredeemed Class A equivalent shares owned by the
Bank was $90.9 million as of December 31, 2017, and has not been reflected in the accompanying financial statements. The
shares of Visa Inc. Class B common stock are restricted and may not be transferred. Visa member banks are required to fund
an escrow account to cover settlements, resolution of pending litigation and related claims. If the funds in the escrow account
are insufficient to settle all the covered litigation, Visa Inc. may sell additional Class A shares and use the proceeds to settle
litigation, thereby reducing the conversion ratio. If funds remain in the escrow account after all litigation is settled, the Class
B conversion ratio will be increased to reflect that surplus.
110
On July 13, 2012, Visa, Inc. announced that it had entered into a memorandum of understanding obligating it to enter into a
settlement agreement to resolve the multi-district interchange litigation brought by the class plaintiffs in the matter styled In
re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, Case No. 5-MD-1720 (JG) (JO) in the U.S.
District Court for the Eastern District of New York. The claims originally were brought by a class of U.S. retailers in 2005.
The settlement was approved by the Court on December 13, 2013, and Visa's share of the settlement to be paid is estimated
at $4.4 billion. However, the December 13, 2013 decision of the Court was reversed and remanded by the Second Circuit
Court of Appeals on June 30, 2016, thus the effect of this decision on the value of the Bank's Class B common stock is
unknown at this time.
Umpqua is involved in legal proceedings occurring in the ordinary course of business. Based on information currently
available, advice of counsel and available insurance coverage, we believe that the eventual outcome of actions against the
Company or its subsidiaries will not, individually or in the aggregate, have a material adverse effect on our consolidated
financial condition. However, it is possible that the ultimate resolution of a matter, if unfavorable, may be material to our
results of operations for any particular period.
Contingencies—In October 2017, the Company announced the Next Gen strategy, which includes a plan to consolidate
approximately 30 store locations by the end of the first quarter of 2018. Severance expenses for any impacted employees, as
well as certain real estate costs have been accrued. 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 75% and 76% of the Bank's
loan and lease portfolio at December 31, 2017 and December 31, 2016. Commercial real estate concentrations are managed
to assure wide geographic and business diversity. Although management believes such concentrations have no more than the
normal risk of collectability, a substantial decline in the economy in general, material increases in interest rates, changes in
tax policies, tightening credit or refinancing markets, or a decline in real estate values in the Bank's primary market areas in
particular, could have an adverse impact on the repayment of these loans. Personal and business incomes, proceeds from the
sale of real property, or proceeds from refinancing, represent the primary sources of repayment for a majority of these loans.
The Bank recognizes the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive
exposure to any single correspondent, the Bank has established general standards for selecting correspondent banks as well as
internal limits for allowable exposure to any single correspondent. In addition, the Bank has an investment policy that sets
forth limitations that apply to all investments with respect to credit rating and concentrations with an issuer.
Note 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 2017, 2016, and
2015. 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, 2017, the
Bank had commitments to originate mortgage loans held for sale totaling $264.0 million and forward sales commitments of
$447.7 million, which are used to hedge both on-balance sheet and off-balance sheet exposures.
111
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, 2017, the Bank had 653 interest
rate swaps with an aggregate notional amount of $3.0 billion related to this program. As of December 31, 2016, the Bank had
516 interest rate swaps with an aggregate notional amount of $2.3 billion related to this program.
As of December 31, 2017 and 2016, 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 $7.2 million and $34.9
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 $28.2 million and $50.3
million as of December 31, 2017 and 2016, respectively.
Effective in the first quarter of 2017, the Chicago Mercantile Exchange and London Clearing House amended their respective
rulebooks to legally characterize variation margin payments, for derivative contracts that are referred to as settled-to-market
(STM), as settlements of the derivative's mark-to-market exposure and not collateral. Based on these changes, Umpqua has
treated the variation margin as a settlement, which has resulted in a decrease in our cash collateral, and a corresponding
decrease in our derivative asset and liability. As of December 31, 2017, the variation margin was $20.5 million. The change
was applied prospectively so prior period balances have not been adjusted.
The Bank incorporates credit valuation adjustments ("CVA") to appropriately reflect nonperformance risk in the fair value
measurement of its derivatives. As of December 31, 2017 and 2016, the net CVA decreased the settlement values of the
Bank's net derivative assets by $1.7 million and $241,000, respectively. Various factors impact changes in the CVA over time,
including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities,
which affect the total expected exposure of the derivative instruments.
The Bank also executes foreign currency hedges as a service for customers. These foreign currency hedges are then offset
with hedges with other third-party banks to limit the Bank's risk exposure.
The following table summarizes the types of derivatives, separately by assets and liabilities and the fair values of such
derivatives as of December 31, 2017 and December 31, 2016:
(in thousands)
Derivatives not designated as hedging instrument
Interest rate lock commitments
Interest rate forward sales commitments
Interest rate swaps
Foreign currency derivatives
Total
Asset Derivatives
Liability Derivatives
December 31,
2017
December 31,
2016
December 31,
2017
December 31,
2016
$
$
4,752
$
4,076
$
— $
286
26,081
1,137
8,054
34,701
670
567
7,229
1,492
32,256
$
47,501
$
9,288
$
—
1,318
34,871
874
37,063
The following table summarizes the types of derivatives and the gains (losses) recorded during the years ended 2017, 2016,
and 2015:
(in thousands)
December 31,
Derivatives not designated as hedging instrument
2017
2016
2015
Interest rate lock commitments
Interest rate forward sales commitments
Interest rate swaps
Foreign currency derivatives
Total
$
$
676
$
445
$
(11,024)
(1,451)
1,094
(3,730)
1,497
1,335
(10,705) $
(453) $
763
(4,752)
162
1,011
(2,816)
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.
112
The following table summarizes the derivatives that have a right of offset as of December 31, 2017 and December 31, 2016:
(in thousands)
December 31, 2017
Derivative Assets
Interest rate swaps
Foreign currency derivative
Derivative Liabilities
Interest rate swaps
Foreign currency derivative
December 31, 2016
Derivative Assets
Interest rate swaps
Foreign currency derivative
Derivative Liabilities
Interest rate swaps
Foreign currency derivative
Gross Amounts Not Offset in
the Statement of Financial
Position
Gross
Amounts of
Recognized
Assets/
Liabilities
Gross
Amounts
Offset in the
Statement of
Financial
Position
Net Amounts of
Assets/
Liabilities
presented in the
Statement of
Financial
Position
Financial
Instruments
Collateral
Posted
Net Amount
$
$
$
$
26,081
$
1,137
7,229
$
1,492
34,701
$
670
34,871
$
874
— $
—
— $
—
— $
—
— $
—
26,081
$
(7,229) $
1,137
—
— $
—
18,852
1,137
7,229
$
(7,229) $
1,492
—
— $
—
—
1,492
34,701
$
(11,225) $
— $
23,476
670
—
—
34,871
$
(11,225) $
(23,646) $
874
—
—
670
—
874
The above table represents the impact of the changes to the derivative clearing rules that treat the variation margin as a
settlement.
Note 20 – Stock Compensation and Share Repurchase Plan
Stock-Based Compensation
The compensation cost related to stock options, restricted stock and restricted stock units in Company stock granted to
employees and included in salaries and employee benefits was $8.5 million, $8.7 million and $13.6 million for the years
ended December 31, 2017, 2016, and 2015, respectively. The total income tax benefit recognized related to stock-based
compensation was $3.3 million, $3.3 million and $5.2 million for the years ended December 31, 2017, 2016, and 2015,
respectively.
As of December 31, 2017, there was no unrecognized compensation costs related to nonvested stock options. As of
December 31, 2017, there was $8.4 million of total unrecognized compensation cost related to nonvested restricted stock
awards which is expected to be recognized over a weighted-average period of 1.21 years, assuming expected performance
conditions are met for certain awards. As of December 31, 2017, there was $249,000 of total unrecognized compensation cost
related to nonvested restricted stock units which is expected to be recognized over a weighted-average period of 0.25 years.
113
Stock Options
The following table summarizes information about stock option activity for the years ended December 31, 2017, 2016 and
2015:
(shares in thousands)
2017
2016
2015
Balance, beginning of period
Exercised
Forfeited/expired
Balance, end of period
Options exercisable, end of
period
Options
Outstanding
219
Weighted-Avg.
Exercise Price
15.74
$
(71) $
(50) $
98
98
$
$
13.59
26.12
11.99
11.99
Weighted-Avg.
Options
Exercise Price
Outstanding
14.58
$
472
(219) $
(34) $
$
219
24.19
11.95
15.74
Weighted-Avg.
Options
Exercise Price
Outstanding
16.80
$
807
(83) $
(252) $
$
472
14.58
22.88
11.06
211
$
15.88
437
$
14.78
The following table summarizes information about outstanding stock options issued under all plans as of December 31, 2017:
(shares in thousands)
Options Outstanding
Options Exercisable
Range of Exercise Prices
$10.49 to $11.59
$11.89
$11.98 to $12.87
Options
Outstanding
Weighted Avg.
Remaining
Contractual Life
(Years)
Weighted Avg.
Exercise Price
Options
Exercisable
Weighted Avg.
Exercise Price
21
40
37
98
1.69
2.09
3.49
2.54
$
$
$
$
11.22
11.89
12.51
11.99
21
40
37
98
$
$
$
$
11.22
11.89
12.51
11.99
The total intrinsic value (which is the amount by which the stock price exceeds the exercise price) as of December 31, 2017,
was $863,000 for options outstanding and exercisable.
The weighted average remaining contractual term of options exercisable was 2.5 years as of December 31, 2017.
The total intrinsic value of options exercised was $382,000, $1.2 million, and $535,000, in the years ended December 31,
2017, 2016 and 2015, respectively.
During the years ended December 31, 2017, 2016 and 2015, the amount of cash received from the exercise of stock options
was $354,000, $432,000, and $195,000 and total consideration was $961,000, $2.6 million, and $925,000, respectively.
114
Restricted Shares
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 year ended December 31:
(shares in thousands)
2017
2016
2015
Balance, beginning of period
Granted
Vested/released
Forfeited/expired
Balance, end of period
Restricted
Shares
Outstanding
1,096
Weighted
Average
Grant Date
Fair Value
15.61
$
Restricted
Shares
Outstanding
1,376
Weighted
Average
Grant Date
Fair Value
16.18
$
Restricted
Shares
Outstanding
1,386
Weighted
Average
Grant Date
Fair Value
15.39
$
624
$
(318) $
(154) $
1,248
$
18.19
16.37
16.39
16.61
601
$
(766) $
(115) $
$
1,096
14.46
15.87
14.70
15.61
639
$
(516) $
(133) $
$
1,376
15.83
14.58
15.22
16.18
The total fair value of restricted shares vested was $5.8 million, $12.0 million, and $8.6 million, for the years ended
December 31, 2017, 2016 and 2015, respectively.
Restricted Stock Units
The Company granted restricted stock units in connection with the acquisition of Sterling as replacement awards, as well as
part of the 2007 Long Term Incentive Plan for the benefit of certain executive officers. Restricted stock unit grants may be
subject to performance-based vesting as well as other approved vesting conditions. The total number of restricted stock units
granted represents the maximum number of restricted stock units eligible to vest based upon the performance and service
conditions set forth in the grant agreements.
The following table summarizes information about nonvested restricted stock units outstanding at December 31:
(shares in thousands)
2017
2016
2015
Balance, beginning of period
Released
Forfeited/expired
Balance, end of period
Restricted
Stock Units
Outstanding
78
Weighted
Average
Grant Date
Fair Value
18.58
$
(51) $
(5) $
22
$
18.58
18.58
18.58
Weighted
Restricted
Average
Stock Units
Grant Date
Fair Value
Outstanding
18.58
$
263
(137) $
(48) $
$
78
18.58
18.58
18.58
Weighted
Restricted
Average
Stock Units
Grant Date
Fair Value
Outstanding
18.03
$
675
(254) $
(158) $
$
263
18.58
18.48
17.99
The total fair value of restricted stock units vested and released was $906,000, $2.2 million, and $4.4 million for the years
ended December 31, 2017, 2016, and 2015 respectively.
For the years ended December 31, 2017, 2016 and 2015, the Company received income tax benefits of $2.7 million, $5.9
million, and $5.2 million, respectively, related to the exercise of non-qualified employee stock options, disqualifying
dispositions in the exercise of incentive stock options, the vesting of restricted shares and the vesting of restricted stock units.
For the years ended December 31, 2017 and 2016, the Company did not record a tax deficiency or benefit as a component of
equity due to the application of ASU 2016-09. For the year ended December 31, 2015, the Company had a net excess tax
benefit resulting from tax deductions greater than the compensation cost recognized of $552,000. The tax deficiency or
benefit is now recorded as income tax expense or benefit in the period the shares are vested.
115
Share Repurchase Plan- The Company's share repurchase plan, which was first approved by the Board and announced in
August 2003, and amended in September 2011, authorized the repurchase of up to 15 million shares of common stock. In
2017, the Board extended the plan to run through July 31, 2019. As of December 31, 2017, a total of 10.5 million shares
remained available for repurchase. The Company repurchased 325,000 shares under the repurchase plan in 2017, repurchased
635,000 shares under the repurchase plan in 2016, and repurchased 571,000 shares under the repurchase plan in 2015. The
timing and amount of future repurchases will depend upon the market price for our common stock, securities laws restricting
repurchases, asset growth, earnings, and our capital plan.
We also have certain stock option and restricted stock plans which provide for the payment of the option exercise price or
withholding taxes by tendering previously owned or recently vested shares. During the years ended December 31, 2017,
2016, and 2015, there were 35,000, 154,000, and 52,000 shares tendered in connection with option exercises, respectively.
Restricted shares cancelled to pay withholding taxes totaled 91,000, 279,000, and 135,000 shares during the years ended
December 31, 2017, 2016 and 2015, respectively. There were 17,000, 49,000, and 86,000 restricted stock units cancelled to
pay withholding taxes for the years ended December 31, 2017, 2016, and 2015, 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, 2017, that the Company meets all capital adequacy requirements to which it is subject.
116
The Company's capital amounts and ratios, as calculated under regulatory guidelines of Basel III at December 31, 2017 and
2016 are presented in the following table:
(dollars in thousands)
As of December 31, 2017
Total Capital
(to Risk Weighted Assets)
Consolidated
Umpqua Bank
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated
Umpqua Bank
Tier 1 Common
(to Risk Weighted Assets)
Consolidated
Umpqua Bank
Tier 1 Capital
(to Average Assets)
Consolidated
Umpqua Bank
As of December 31, 2016
Total Capital
(to Risk Weighted Assets)
Consolidated
Umpqua Bank
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated
Umpqua Bank
Tier 1 Common
(to Risk Weighted Assets)
Consolidated
Umpqua Bank
Tier 1 Capital
(to Average Assets)
Consolidated
Umpqua Bank
Actual
For Capital Adequacy
Purposes
To be Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 2,844,261
14.06% $ 1,618,009
8.00% $ 2,022,511
$ 2,668,069
13.21% $ 1,615,698
8.00% $ 2,019,623
10.00%
10.00%
$ 2,238,540
11.07% $ 1,213,507
6.00% $ 1,618,009
$ 2,523,599
12.50% $ 1,211,774
6.00% $ 1,615,698
$ 2,238,540
11.07% $
910,130
4.50% $ 1,314,632
$ 2,523,599
12.50% $
908,830
4.50% $ 1,312,755
$ 2,238,540
9.38% $
954,403
4.00% $ 1,193,003
$ 2,523,599
10.59% $
953,264
4.00% $ 1,191,579
8.00%
8.00%
6.50%
6.50%
5.00%
5.00%
$ 2,707,693
14.72% $ 1,471,577
8.00% $ 1,839,471
$ 2,534,927
13.79% $ 1,470,731
8.00% $ 1,838,414
10.00%
10.00%
$ 2,108,948
11.47% $ 1,103,682
6.00% $ 1,471,577
$ 2,397,449
13.04% $ 1,103,048
6.00% $ 1,470,731
$ 2,108,948
11.47% $
827,762
4.50% $ 1,195,656
$ 2,397,449
13.04% $
827,286
4.50% $ 1,194,969
$ 2,108,948
9.21% $
915,917
4.00% $ 1,144,896
$ 2,397,449
10.47% $
916,260
4.00% $ 1,145,325
8.00%
8.00%
6.50%
6.50%
5.00%
5.00%
The Company is a registered financial holding company under the Gramm-Leach-Bliley Act of 1999, and is subject to the
supervision of, and regulation by, the Board of Governors of the Federal Reserve System. The Bank is an Oregon state
chartered bank with deposits insured by the FDIC, and is subject to the supervision and regulation of the FDIC and the
Director of the Oregon Department of Consumer and Business Services, administered through the Division of Finance and
Corporate Securities, as well as to the supervision and regulation of the California, Washington, Idaho, and Nevada banking
regulators. As of December 31, 2017, the most recent notification from the FDIC categorized the Bank as "well-capitalized"
under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that
management believes have changed the Bank's regulatory capital category.
117
On July 2, 2013, the federal banking regulators approved the final proposed rules that revise the regulatory capital rules to
incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework ("Basel III").
The phase-in period for the final rules began for the Company on January 1, 2015, with full compliance with the final rules
entire requirement phased in on January 1, 2019.
The final rules, among other things, include a common equity Tier 1 capital ("CET1") to risk-weighted assets ratio, including
a capital conservation buffer. The required CET1 ratio will gradually increase from 4.5% on January 1, 2015 to 7.0% on
January 1, 2019. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 6.0% which is the
current minimum, to 8.5% on January 1, 2019, as well as require a minimum leverage ratio of 4.0%.
Under the final rule, as Umpqua is above $15.0 billion in assets as a result of an acquisition, the combined trust preferred
security debt issuances were phased out of Tier 1 and into Tier 2 capital (75% starting in the first quarter of 2015 and 100%
starting in the first quarter of 2016).
On November 21, 2017, the federal banking regulators finalized a halt in the phase-in of certain provisions of the rule for
certain banks, including Umpqua. The final rules had provided for a number of adjustments to and deductions from the new
CET1. The deductions included, for example, the requirement that mortgage servicing rights, certain deferred tax assets not
dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from
CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of
CET1. Effective on January 1, 2018, the 2017 rule pauses the full transition to the Basel III treatment for these items.
Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, the Company and
the Bank have made a one-time permanent election to continue to exclude these items in order to avoid significant variations
in the level of capital depending on the impact of interest rate fluctuations on the fair value of the Company's securities
portfolio.
118
Note 22 – Fair Value Measurement
The following table presents estimated fair values of the Company's financial instruments as of December 31, 2017 and
December 31, 2016, whether or not recognized or recorded at fair value in the Consolidated Balance Sheets:
(in thousands)
FINANCIAL ASSETS:
Cash and cash equivalents
Trading securities
Investment securities available for sale
Investment securities held to maturity
Loans held for sale, at fair value
Loans and leases, net
Restricted equity securities
Residential mortgage servicing rights
Bank owned life insurance assets
Derivatives
Visa Class B common stock
FINANCIAL LIABILITIES:
Deposits
Securities sold under agreements to repurchase
Term debt
Junior subordinated debentures, at fair value
Junior subordinated debentures, at amortized cost
Derivatives
December 31, 2017
December 31, 2016
Level
Carrying
Value
Fair Value
Carrying
Value
Fair Value
1
1,2
1,2
3
2
3
1
3
1
2,3
3
$
634,280
$
634,280
$ 1,449,432
$ 1,449,432
12,255
12,255
10,964
10,964
3,065,769
3,065,769
2,701,220
2,701,220
3,803
259,518
4,906
259,518
4,216
387,318
5,217
387,318
18,939,576
18,936,038
17,374,679
17,385,156
43,508
153,151
306,864
32,256
—
43,508
153,151
306,864
32,256
86,380
45,528
142,973
299,673
47,501
—
45,528
142,973
299,673
47,501
59,107
1,2
$19,948,300
$19,930,568
$19,020,985
$19,016,330
2
2
3
3
2
294,299
802,357
277,155
100,609
9,288
294,299
790,532
277,155
81,944
9,288
352,948
852,397
262,209
100,931
37,063
352,948
844,377
262,209
77,640
37,063
119
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, 2017 and December 31, 2016:
(in thousands)
Description
FINANCIAL ASSETS:
Trading securities
December 31, 2017
Total
Level 1
Level 2
Level 3
Obligations of states and political subdivisions
$
273
$
— $
273
$
Equity securities
Investment securities available for sale
U.S. Treasury and agencies
Obligations of states and political subdivisions
Residential mortgage-backed securities and collateralized
mortgage obligations
Investments in mutual funds and other equity securities
Loans held for sale, at fair value
Residential mortgage servicing rights, at fair value
Derivatives
Interest rate lock commitments
Interest rate forward sales commitments
Interest rate swaps
Foreign currency derivative
Total assets measured at fair value
FINANCIAL LIABILITIES:
—
—
—
—
—
—
—
11,982
11,982
—
39,698
308,456
2,665,645
51,970
259,518
153,151
4,752
286
26,081
1,137
$ 3,522,949
—
—
39,698
308,456
— 2,665,645
—
51,970
259,518
—
—
—
—
—
—
—
153,151
—
286
26,081
1,137
4,752
—
—
—
$
$
63,952
$ 3,301,094
$ 157,903
— $
— $ 277,155
Junior subordinated debentures, at fair value
$
277,155
Derivatives
Interest rate forward sales commitments
Interest rate swaps
Foreign currency derivative
567
7,229
1,492
—
—
—
567
7,229
1,492
—
—
—
Total liabilities measured at fair value
$
286,443
$
— $
9,288
$ 277,155
120
(in thousands)
Description
FINANCIAL ASSETS:
Trading securities
December 31, 2016
Total
Level 1
Level 2
Level 3
Obligations of states and political subdivisions
$
662
$
— $
662
$
Equity securities
10,302
10,302
—
Investment securities available for sale
Obligations of states and political subdivisions
Residential mortgage-backed securities and collateralized
mortgage obligations
Investments in mutual funds and other equity securities
Loans held for sale, at fair value
Residential mortgage servicing rights, at fair value
Derivatives
Interest rate lock commitments
Interest rate forward sales commitments
Interest rate swaps
Foreign currency derivatives
Total assets measured at fair value
FINANCIAL LIABILITIES:
307,697
2,391,553
1,970
387,318
142,973
4,076
8,054
34,701
670
$ 3,289,976
Junior subordinated debentures, at fair value
$
262,209
—
—
—
—
—
—
307,697
2,391,553
1,970
387,318
— 142,973
—
4,076
8,054
34,701
670
—
—
—
—
—
—
—
—
—
—
—
—
$
$
10,302
$ 3,132,625
$ 147,049
— $
— $ 262,209
Derivatives
Interest rate forward sales commitments
Interest rate swaps
Foreign currency derivatives
1,318
34,871
874
—
—
—
1,318
34,871
874
—
—
—
Total liabilities measured at fair value
$
299,272
$
— $
37,063
$ 262,209
The following methods were used to estimate the fair value of each class of financial instrument in the tables above:
Cash and Cash Equivalents - For short-term instruments, including noninterest bearing cash and due from banks, and interest
bearing cash, the carrying amount is a reasonable estimate of fair value.
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.
Loans and Leases - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are
segregated by type, including commercial, real estate and consumer loans. Each loan category is further segregated by fixed
and adjustable rate loans. The fair value of loans is calculated by discounting expected cash flows at rates which similar loans
are currently being made. These amounts are discounted further by embedded probable losses expected to be realized in the
portfolio.
Restricted Equity Securities - The carrying value of restricted equity securities approximates fair value as the shares can only
be redeemed by the issuing institution at par.
121
Residential Mortgage Servicing Rights - The fair value of the MSR is estimated using a discounted cash flow
model. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates,
and ancillary fee income net of servicing costs. This model is periodically validated by an independent model validation
group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios
as well as to MSR broker valuations and industry surveys, as available. Management believes the significant inputs utilized
are indicative of those that would be used by market participants.
Bank Owned Life Insurance Assets- Fair values of insurance policies owned are based on the insurance contract's cash
surrender value.
Visa Inc. Class B Common Stock - The fair value of Visa Class B common stock is estimated by applying a 5% discount to
the value of the unredeemed Class A equivalent shares. The discount primarily represents the risk related to the further
potential reduction of the conversion ratio between Class B and Class A shares and a liquidity risk premium.
Deposits - The fair value of deposits with no stated maturity, such as non-interest bearing deposits, savings and interest
checking accounts, and money market accounts, is equal to the amount payable on demand. The fair value of certificates of
deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
Securities Sold under Agreements to Repurchase - For short-term instruments, including securities sold under agreements to
repurchase and federal funds purchased, the carrying amount is a reasonable estimate of fair value.
Term Debt - The fair value of term notes is calculated based on the discounted value of the contractual cash flows using
current rates at which such borrowings can currently be obtained.
Junior Subordinated Debentures - The fair value of junior subordinated debentures is estimated using an income approach
valuation technique. The significant inputs utilized in the estimation of fair value of these instruments are the credit risk
adjusted spread and three month LIBOR. The credit risk adjusted spread represents the nonperformance risk of the liability,
contemplating the inherent risk of the obligation. The Company periodically utilizes a valuation firm to determine or validate
the reasonableness of inputs and factors that are used to determine the fair value. The ending carrying (fair) value of the
junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these
liabilities in an orderly transaction amongst market participants. Due to credit concerns in the capital markets and inactivity
in the trust preferred markets that have limited the observability of market spreads, we have classified this as a Level 3 fair
value measure.
Derivative Instruments - The fair value of the interest rate lock commitments and forward sales commitments are estimated
using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions
based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation
inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment
derivatives are classified as Level 3. The fair value of the interest rate swaps is determined using a discounted cash flow
technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value.
Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within
Level 2 of the fair value hierarchy, the CVA associated with its derivatives utilize Level 3 inputs, such as estimates of current
credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2017, 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.
122
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, 2017:
Financial Instrument
Residential mortgage servicing rights
Valuation Technique
Discounted cash flow
Unobservable Input
Weighted Average
Interest rate lock commitments
Internal pricing model
Junior subordinated debentures
Discounted cash flow
Constant prepayment rate
Discount rate
Pull-through rate
Credit spread
12.27%
9.70%
88.83%
4.97%
Generally, any significant increases in the constant prepayment rate and discount rate utilized in the fair value measurement
of the residential mortgage servicing rights will result in negative fair value adjustments (and a decrease in the fair value
measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value
adjustment (and increase in the fair value measurement).
An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative
will result in positive fair value adjustments (and an increase in the fair value measurement.) Conversely, a decrease in the
pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement.)
Management believes that the credit risk adjusted spread utilized in the fair value measurement of the junior subordinated
debentures carried at fair value is indicative of the nonperformance risk premium a willing market participant would require
under current market conditions, that is, the inactive market. Management attributes the change in fair value of the junior
subordinated debentures during the period to market changes in the nonperformance expectations and pricing of this type of
debt, and not as a result of changes to our entity-specific credit risk. The widening of the credit risk adjusted spread above the
Company's contractual spreads has primarily contributed to the positive fair value adjustments. Future contractions in the
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, 2017, or the passage of time, will result in negative fair value adjustments. Generally, an
increase in the credit risk adjusted spread and/or the forward swap interest rate curve will result in positive fair value
adjustments (and decrease the fair value measurement). Conversely, a decrease in the credit risk adjusted spread and/or the
forward swap interest rate curve will result in negative fair value adjustments (and increase the fair value measurement).
123
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, 2017 and 2016.
(in thousands)
Change
included
in
earnings
Purchases
and
issuances
Beginning
Balance
Sales and
settlements
Ending
Balance
Net change in
unrealized gains
or (losses) relating
to items held at
end of period
2017
Residential mortgage servicing rights, at
fair value
Interest rate lock commitments, net
Junior subordinated debentures, at fair
value
2016
Residential mortgage servicing rights, at
fair value
Interest rate lock commitments, net
Junior subordinated debentures, at fair
value
$ 142,973
4,076
$ (23,267) $ 33,445
39,310
2,461
$
— $153,151
$
(41,095)
4,752
262,209
28,147
—
(13,201)
277,155
(6,799)
4,752
28,147
$ 131,817
3,631
$ (25,926) $ 37,082
58,881
834
$
— $142,973
4,076
(59,270)
$
(14,133)
4,076
255,457
17,815
—
(11,063)
262,209
17,815
Changes in residential MSR 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. Gains (losses) on junior subordinated debentures carried at fair value are recorded in
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.
Additionally, from time to time, certain assets are measured at fair value on a nonrecurring basis. These adjustments to fair
value generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to
impairment, typically on collateral dependent loans.
Fair Value of Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following tables present information about the Company's assets and liabilities measured at fair value on a nonrecurring
basis for which a nonrecurring change in fair value has been recorded during the reporting period. The amounts disclosed
below represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair
value as of the dates reported upon.
(in thousands)
Loans and leases
Other real estate owned
(in thousands)
Loans and leases
Other real estate owned
December 31, 2017
Total
Level 1
Level 2
Level 3
— $
—
— $
— $
75,121
—
68
— $
75,189
December 31, 2016
Level 1
Level 2
Level 3
— $
—
— $
— $
—
— $
25,753
2,612
28,365
$
$
$
$
75,121
68
75,189
Total
25,753
2,612
28,365
$
$
$
$
124
The following table presents the losses resulting from nonrecurring fair value adjustments for the years ended December 31,
2017, 2016 and 2015:
(in thousands)
Loans and leases
Other real estate owned
2017
2016
2015
48,488
146
33,289
1,719
29,083
2,782
31,865
Total loss from nonrecurring measurements
$
48,634
$
35,008
$
The following provides a description of the valuation technique and inputs for the Company's assets and liabilities classified
as Level 3 and measured at fair value on a nonrecurring basis. Unobservable inputs and qualitative information about the
unobservable inputs are not presented as the fair value is determined by third-party information. The loans and leases
amounts above represent impaired, collateral dependent loans that have been adjusted to fair value. When we identify a
collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling
costs. Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external
appraisals, but in some cases, the value of the collateral may be estimated as having little to no value. If we determine that
the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the
carrying value of the loan to fair value through the allowance for loan and lease losses. The loss represents charge-offs or
impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral.
The other real estate owned amount above represents impaired real estate that has been adjusted to fair value. Other real
estate owned represents real estate which the Bank has taken control of in partial or full satisfaction of loans. At the time of
foreclosure, other real estate owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell,
which becomes the property's new basis. Any write-downs based on the asset's fair value at the date of acquisition are
charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that
the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments
on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on other real
estate owned for fair value adjustments based on the fair value of the real estate.
Fair Value Option
The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of
loans held for sale accounted for under the fair value option as of December 31, 2017 and December 31, 2016:
(in thousands)
December 31, 2017
December 31, 2016
Fair Value
Fair Value
Aggregate Less Aggregate
Aggregate Less Aggregate
Fair
Value
Unpaid
Principal
Balance
Unpaid
Principal
Balance
Fair
Value
Unpaid
Principal
Balance
Unpaid
Principal
Balance
Loans held for sale
$ 259,518
$
250,721
$
8,797
$ 387,318
$
378,974
$
8,344
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, 2017, 2016 and 2015, the Company recorded a net increase of $453,000, a net decrease of $3.5 million, and a
net decrease of $696,000, respectively, representing the change in fair value reflected in earnings.
The Company selected the fair value measurement option for existing junior subordinated debentures (the Umpqua Statutory
Trusts) and for junior subordinated debentures acquired from Sterling. The remaining junior subordinated debentures were
acquired through previous business combinations and were measured at fair value at the time of acquisition and subsequently
measured at amortized cost.
125
Accounting for the selected junior subordinated debentures at fair value enables us to more closely align our financial
performance with the economic value of those liabilities. Additionally, we believe it improves our ability to manage the
market and interest rate risks associated with the junior subordinated debentures. The junior subordinated debentures
measured at fair value and amortized cost are presented as separate line items on the balance sheet. The ending carrying (fair)
value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to
transfer these liabilities in an orderly transaction amongst market participants under current market conditions as of the
measurement date.
Due to inactivity in the junior subordinated debenture market and the lack of observable quotes of our, or similar, junior
subordinated debenture liabilities or the related trust preferred securities when traded as assets, we utilize an income approach
valuation technique to determine the fair value of these liabilities using our estimation of market discount rate assumptions.
The Company monitors activity in the trust preferred and related markets, to the extent available, evaluates changes related to
the current and anticipated future interest rate environment, and considers our entity-specific creditworthiness, to validate the
reasonableness of the credit risk adjusted spread and effective yield utilized in our discounted cash flow model. We also
consider changes in the interest rate environment in our valuation, specifically the absolute level and the shape of the slope of
the forward swap curve.
Note 23 – Earnings Per Common Share
The following is a computation of basic and diluted earnings per common share for the years ended December 31, 2017,
2016 and 2015:
(in thousands, except per share data)
NUMERATORS:
Net income
Less:
2017
2016
2015
$
246,019
$
232,940
$
222,539
Dividends and undistributed earnings allocated to participating securities (1)
Net earnings available to common shareholders
56
125
357
$
245,963
$
232,815
$
222,182
DENOMINATORS:
Weighted average number of common shares outstanding - basic
Effect of potentially dilutive common shares (2)
Weighted average number of common shares outstanding - diluted
EARNINGS PER COMMON SHARE:
Basic
Diluted
220,251
220,282
220,327
585
626
718
220,836
220,908
221,045
$
$
1.12
1.11
$
$
1.06
1.05
$
$
1.01
1.01
(1) Represents dividends paid and undistributed earnings allocated to nonvested restricted stock awards.
(2) Represents the effect of the assumed exercise of stock options, vesting of non-participating restricted shares, and vesting of
restricted stock units, based on the treasury stock method.
The following table presents the weighted average outstanding securities that were not included in the computation of diluted
earnings per common share because their effect would be anti-dilutive for the years ended December 31, 2017, 2016 and
2015:
(in thousands)
Stock options
Restricted stock
2017
2016
2015
9
1
51
—
95
3
126
Note 24 – Segment Information
In the first quarter of 2017, the Company realigned its operating segments based on changes in its internal reporting structure
to align with the change in the Company's Chief Operating Decision Maker. The Company now reports four primary
segments: Commercial Bank, Wealth Management, Retail Bank, and Home Lending with the remainder as Corporate and
other. The prior periods have been recast to reflect current presentation of segments.
The Commercial Bank segment includes lending, treasury and cash management services and customer risk management
products to small businesses, middle market and larger commercial customers and includes the operations of Financial
Pacific Leasing Inc., a commercial leasing company. The Wealth Management segment consists of the operations of Umpqua
Investments, which offers a full range of retail brokerage and investment advisory services and products to its clients who
consist primarily of individual investors, and Umpqua Private Bank, which serves high net worth individuals with liquid
investable assets and provides customized financial solutions and offerings. The Retail Bank segment includes retail lending
and deposit services for customers served through the Bank's store network. The Home Lending segment originates, sells and
services residential mortgage loans. The Corporate and other segment includes activities that are not directly attributable to
one of the four principal lines of business and includes the operations of Pivotus Ventures, Inc. and the parent company,
eliminations and the economic impact of certain assets, capital and support functions not specifically identifiable within the
other lines of business.
Management monitors the Company's results using an internal performance measurement accounting system, which provides
line of business results and key performance measures. 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.
Noninterest 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, noninterest expense, or other identified drivers.
127
The provision for loan and lease losses is based on the methodology consistent with our process to estimate our 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 37% effective tax rate. The residual income tax
expense or benefit arising from changes in tax rates due to the Tax Act, tax planning strategies or other tax attributes to arrive
at the consolidated effective tax rate is retained in Corporate and Other.
Summarized financial information concerning the Company's reportable segments and the reconciliation to the consolidated
financial results is shown in the following tables:
(in thousands)
Year Ended December 31, 2017
Commercial
Bank
434,942
$
Wealth
Management
22,103
$
Retail Bank
282,622
$
Home
Lending
Corporate
& Other
$
39,487
$
80,734
Consolidated
859,888
$
37,108
52,054
218,266
231,622
360
18,697
32,123
8,317
7,701
62,366
288,236
49,051
1,692
142,763
146,690
33,868
393
1,316
62,560
19,097
47,254
277,196
747,875
341,955
Net interest income
Provision for loan and lease
losses
Non-interest income
Non-interest expense
Income before income taxes
Provision (benefit) for income
taxes
85,700
3,077
18,149
12,531
Net income
$
145,922
Total assets
Total loans and leases
Total deposits
$ 13,856,963
$ 13,683,264
$ 3,776,080
$
$
$
$
5,240
$
30,902
$
21,337
$
437,873
423,813
993,559
2,143,830
$ 3,355,189
2,054,058
$ 2,921,897
12,449,568
$
222,494
(in thousands)
Year Ended December 31, 2016
(23,521)
42,618
95,936
$
246,019
5,947,584
$ 25,741,439
(2,848) $ 19,080,184
$ 19,948,300
2,506,599
Commercial
Bank
$
422,022
Wealth
Management
21,341
$
Retail Bank
254,043
$
Home
Lending
$
41,435
Corporate
& Other
$ 105,747
Consolidated
844,588
$
Net interest income
Provision (recapture) for loan
and lease losses
Non-interest income
Non-interest expense
Income before income taxes
Provision for income taxes
Net income
$
145,950
Total assets
Total loans and leases
$ 12,829,249
$ 12,640,383
35,348
48,227
203,233
231,668
85,718
587
19,554
34,213
6,095
2,255
3,840
$
8,049
62,726
293,307
15,413
5,703
9,710
437,058
415,737
1,893,433
1,806,554
$
$
$
(3,426)
163,527
154,922
53,466
19,783
1,116
5,906
51,480
59,057
19,300
41,674
299,940
737,155
365,699
132,759
33,683
$
39,757
$
232,940
3,243,600
2,685,181
229,358
6,409,779
$ 24,813,119
(39,192) $ 17,508,663
$ 19,020,985
2,458,430
$
$
$
$
Total deposits
$
3,288,837
$ 1,011,454
12,032,906
128
(in thousands)
Year Ended December 31, 2015
Commercial
Bank
416,385
$
Wealth
Management
17,412
$
Retail Bank
240,147
$
Home
Lending
Corporate
& Other
$
35,130
$
162,560
Consolidated
871,634
$
Net interest income
Provision for loan and lease
losses
Non-interest income
Non-interest expense
Income before income taxes
Provision for income taxes
25,655
38,126
198,614
230,242
85,190
Net income
$
145,052
Total assets
Total loans and leases
Total deposits
$ 12,342,117
$ 12,153,712
$ 2,955,578
$
$
$
$
Note 25 – Related Party Transactions
38
21,152
37,355
1,171
433
738
8,187
62,141
290,230
3,871
1,432
2,709
144,846
142,150
35,117
12,994
—
9,459
95,293
76,726
24,539
36,589
275,724
763,642
347,127
124,588
$
2,439
$
22,123
$
52,187
$
222,539
366,438
$ 1,720,569
$ 3,281,256
$ 5,696,001
346,905
$ 1,624,004
$ 2,771,990
$
813,327
$ 11,352,058
$
17,374
$ 2,568,852
$ 23,406,381
(30,075) $ 16,866,536
$ 17,707,189
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, 2017, 2016 and 2015:
(in thousands)
Loans outstanding at beginning of year
New loans and advances
Less loan repayments
Reclassification (1)
Loans outstanding at end of year
2017
2016
2015
$
$
9,836
$
10,302
$
3,982
(3,516)
(1,319)
8,983
2,006
(2,472)
—
$
9,836
$
19,718
7,165
(16,506)
(75)
10,302
(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, 2017 and 2016, deposits of related parties amounted to $11.8 million and $9.9 million, respectively.
129
Note 26 – Parent Company Financial Statements
Condensed Balance Sheets
December 31,
(in thousands)
ASSETS
2017
2016
Non-interest bearing deposits with subsidiary bank
$
124,915
$
92,540
Investments in:
Bank subsidiary
Nonbank subsidiaries
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Payable to bank subsidiary
Other liabilities
Junior subordinated debentures, at fair value
Junior subordinated debentures, at amortized cost
Total liabilities
Shareholders' equity
Total liabilities and shareholders' equity
Condensed Statements of Income
Year Ended December 31,
(in thousands)
INCOME
Dividends from subsidiaries
Other income
Total income
EXPENSES
Management fees paid to subsidiaries
Other expenses
Total expenses
Income before income tax benefit and equity in undistributed earnings of
subsidiaries
Income tax benefit
Net income before equity in undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
Dividends and undistributed earnings allocated to participating securities
4,299,940
4,204,591
33,368
382
43,488
3,914
$
4,458,605
$
4,344,533
$
$
115
65,940
277,155
100,609
443,819
75
64,523
262,209
100,931
427,738
4,014,786
3,916,795
$
4,458,605
$
4,344,533
2017
2016
2015
$
$
177,798
(14,678)
163,120
$
164,481
(6,284)
158,197
153,437
(6,272)
147,165
1,003
20,325
21,328
141,792
(25,679)
167,471
78,548
246,019
56
946
17,389
18,335
139,862
(8,887)
148,749
84,191
232,940
125
447
15,564
16,011
131,154
(7,269)
138,423
84,116
222,539
357
Net earnings available to common shareholders
$
245,963
$
232,815
$
222,182
130
Condensed Statements of Cash Flows
Year Ended December 31,
(in thousands)
OPERATING ACTIVITIES:
Net income
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries
Depreciation, amortization and accretion
Change in junior subordinated debentures carried at fair value
Net decrease in other assets
Net decrease in other liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES:
Change in advances to subsidiaries
Net cash provided (used) by investing activities
FINANCING ACTIVITIES:
Net increase in advances from subsidiaries
Dividends paid on common stock
Repurchases and retirement of common stock
Proceeds from stock options exercised
Net cash used by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2017
2016
2015
$
246,019
$
232,940
$
222,539
(78,548)
(322)
14,946
3,532
(2,006)
183,621
(84,191)
(322)
6,752
972
(2,112)
154,039
(84,116)
(322)
6,163
617
(2,903)
141,978
1,690
1,690
3,258
3,258
(5,000)
(5,000)
115
(145,398)
(8,614)
961
(152,936)
45
(141,074)
(17,708)
2,626
(156,111)
32,375
92,540
1,186
91,354
—
(134,618)
(14,589)
1,481
(147,726)
(10,748)
102,102
$
124,915
$
92,540
$
91,354
131
Note 27 – Quarterly Financial Information (Unaudited)
The following tables present the summary results for the eight quarters ended December 31, 2017:
(in thousands, except per share information)
2017
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expense
Income before provision for income
taxes
Provision for income taxes
Net income
Dividends and undistributed earnings
allocated to participating securities
Net earnings available to common
shareholders
Basic earnings per common share
Diluted earnings per common share
Cash dividends declared per common
share
$
$
$
$
December 31
September 30
June 30
March 31
Four
Quarters
$
242,135
$
240,716
$
231,139
$
224,114
$
938,104
21,514
220,621
12,928
70,450
192,786
85,357
3,486
81,871
16
81,855
0.37
0.37
0.18
$
$
$
$
20,252
220,464
11,997
75,402
188,354
95,515
34,182
61,333
14
61,319
0.28
0.28
0.18
$
$
$
$
19,061
212,078
10,657
71,119
184,021
88,519
31,707
56,812
14
56,798
0.26
0.26
0.16
$
$
$
$
17,389
206,725
11,672
60,225
182,714
72,564
26,561
46,003
12
78,216
859,888
47,254
277,196
747,875
341,955
95,936
246,019
56
45,991
$
245,963
0.21
0.21
0.16
(in thousands, except per share information)
2016
December 31
September 30
June 30
March 31
Four
Quarters
$
224,703
$
226,419
$
225,453
$
234,064
$
910,639
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Non-interest income
Non-interest expense
Income before provision for income
taxes
Provision for income taxes
Net income
Dividends and undistributed earnings
allocated to participating securities
Net earnings available to common
shareholders
Basic earnings per common share
Diluted earnings per common share
Cash dividends declared per common
share
$
$
$
$
16,527
209,892
13,091
80,710
181,187
96,324
34,515
61,809
31
61,778
0.28
0.28
0.16
$
$
$
$
16,255
209,198
10,589
74,659
188,511
84,757
30,470
54,287
32
54,255
0.25
0.25
0.16
$
$
$
$
16,362
217,702
4,823
45,951
183,989
74,841
27,272
47,569
66,051
844,588
41,674
299,940
737,155
365,699
132,759
232,940
29
125
47,540
$
232,815
0.22
0.22
0.16
16,907
207,796
13,171
98,620
183,468
109,777
40,502
69,275
33
69,242
0.31
0.31
0.16
$
$
$
$
132
Note 28 – Subsequent Events
In February 2018, the Company redeemed the debt securities of the Humboldt Bancorp Statutory Trust I. The Company paid
$5.5 million, which included the principal balance, interest and fees. The Company plans to also redeem the debt securities
of HB Capital Trust I in March 2018. These balances are included in the Junior Subordinated Debentures at amortized cost
on the Consolidated Balance Sheets as of December 31, 2017.
133
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES.
On a quarterly basis, we carry out an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer, Principal Financial Officer, and Principal Accounting Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange
Act of 1934. As of December 31, 2017, our management, including our Chief Executive Officer, Principal Financial Officer,
and Principal Accounting Officer, concluded that our disclosure controls and procedures were effective in timely alerting
them to material information relating to us that is required to be included in our periodic SEC filings.
Although we change and improve our internal controls over financial reporting on an ongoing basis, we do not believe that
any such changes occurred in the fourth quarter 2017 that materially affected or are reasonably likely to materially affect our
internal control over financial reporting.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Umpqua Holdings Corporation is responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company's internal
control system is designed to provide reasonable assurance to our management and Board of Directors regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. The Company's internal control over financial reporting includes those policies and
procedures that:
• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company's assets;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being
made only in accordance with the authorizations of management and directors of the Company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2017.
In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control - Integrated Framework (2013). Based on our assessment and those criteria, we believe that,
as of December 31, 2017, the Company maintained effective internal control over financial reporting.
The Company's independent registered public accounting firm has audited the Company's consolidated financial statements
that are included in this annual report and the effectiveness of our internal control over financial reporting as of December 31,
2017 and issued their Report of Independent Registered Public Accounting Firm, appearing under Item 8. The audit report
expresses an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of
December 31, 2017.
February 23, 2018
ITEM 9B. OTHER INFORMATION.
Not Applicable
134
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The response to this item is incorporated by reference to Umpqua's Proxy Statement for the 2018 annual meeting of
shareholders under the captions "Item 1. Election of Directors," "Information About Executive Officers," "Corporate
Governance Overview" and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION.
The response to this item is incorporated by reference to the Proxy Statement, under the captions "Director Compensation,"
"Compensation Discussion and Analysis," "Compensation Committee Report," and "Compensation Tables."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The response to this item is set forth in Part II, Item 5, "Equity Compensation Plan Information" of this Annual Report on
Form 10-K, and is incorporated by reference to the Proxy Statement, under the caption "Security Ownership of Management
and Others."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The response to this item is incorporated by reference to the Proxy Statement, under the captions "Item 1. Election of
Directors" and "Related Party Transactions."
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The response to this item is incorporated by reference to the Proxy Statement, Item 2-Ratification of Registered Public
Accounting Firm Appointment.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(1) Financial Statements:
The consolidated financial statements are included as Item 8 of this Form 10-K.
(2) Financial Statement Schedules:
All schedules have been omitted because the information is not required, not applicable, not present in amounts sufficient to
require submission of the schedule, or is included in the financial statements or notes thereto.
(3) The exhibits filed as part of this report and incorporated herein by reference to other documents are listed on the Exhibit
Index to this annual report on Form 10-K, immediately following the signatures.
ITEM 16. FORM 10-K SUMMARY.
None.
135
Exhibit
#
Description
Location
EXHIBIT INDEX
3.1
Restated Articles of Incorporation, as amended
3.2
Bylaws, as amended
4.1
Specimen Common Stock Certificate
Incorporated by reference to Exhibit 3.1 to Form
10-Q filed May 7, 2014
Incorporated by reference to Exhibit 3.2 to Form
8-K filed April 21, 2017
Incorporated by reference to Exhibit 4 to the
Registration Statement on Form S-8 (No.
333-77259) filed with the SEC on April 28, 1999
4.2
The Company agrees to furnish upon request to the
Commission a copy of each instrument defining the rights
of holders of senior and subordinated debt of the Company.
10.1**
10.2**
10.3**
10.4**
Third Restated Supplemental Executive Retirement Plan
effective April 16, 2008 between the Company and
Raymond P. Davis
Incorporated by reference to Exhibit 99.1 to
Form 8-K/A filed April 22, 2008
2003 Stock Incentive Plan, as amended, effective March 5,
2007
Incorporated by reference to Appendix A to Form
DEF 14A filed March 14, 2007
Form of Employment Agreement with executive officer
Farnsworth
Incorporated by reference to Exhibit 99.1 to
Form 8-K filed March 7, 2008
Form of First Amendment to form of Employment
Agreement with executive officers Farnsworth and
McLaughlin
Incorporated by reference to Exhibit 99.1 to
Form 8-K filed January 14, 2013
10.5**
Employment Agreement dated effective March 24, 2010
between the Company and Cort O'Haver
Incorporated by reference to Exhibit 10.1 to
Form 10-Q filed November 4, 2010
10.6.a**
First Amendment to Employment Agreement with Cort
O'Haver dated effective December 1, 2014
Incorporated by reference to Exhibit 10.9 to
Form 10-K filed February 23, 2015.
10.6.b**
Second Amendment to Employment Agreement with Cort
O'Haver dated effective January 1, 2017
Incorporated by reference to Exhibit 10.7.B to
Form 10-K filed February 23, 2017
10.7**
Employment Agreement dated effective November 23,
2015 between Umpqua Bank and Tory Nixon
Incorporated by reference to Exhibit 10.8 to
Form 10-K filed February 23, 2017
10.7.a**
First Amendment to Employment Agreement with Tory
Nixon dated effective December 31, 2017
Filed herewith
10.8**
10.9**
Employment Agreement dated effective July 1, 2015
between the Company and David Shotwell
Incorporated by reference to Exhibit 99.1 to
Form 8-K filed July 1, 2015
Umpqua Holdings Corporation 2013 Incentive Plan,
effective December 14, 2012, as amended
Incorporated by reference to Exhibit 10.10 to
Form 10-K filed February 23, 2017
10.10**
Form of Restricted Stock Award Agreement under 2013
Incentive Plan (Service Vesting)
Incorporated by reference to Exhibit 10.11 to
Form 10-K filed February 25, 2016
10.11**
Form of Restricted Stock Award Agreement under 2013
Incentive Plan (Performance Vesting)
Incorporated by reference to Exhibit 10.12 to
Form 10-K filed February 25, 2016
10.12**
Sterling Financial Corporation 2010 Long-Term Incentive
Plan
Incorporated by reference to Exhibit 99.1 to the
Registration Statement on Form S-8 of Sterling
Financial Corporation filed December 9, 2010
10.13**
Employment Agreement between the Company and
Andrew Ognall dated as of May 1, 2014
Incorporated by reference to Exhibit 10.16 to
Form 10-K filed February 25, 2016
10.14**
Employment Agreement between the Company and Neal
McLaughlin dated as of March 1, 2005
Incorporated by reference to Exhibit 10.15 to
Form 10-K filed February 23, 2017
136
Exhibit
#
10.15**
12.0
21.1
23.1
31.1
31.2
31.3
32
Description
Location
Employment Agreement between the Company and Rilla
Delorier dated as of April 10, 2017
Incorporated by reference to Exhibit 10.1 to
Form 10-Q filed August 4, 2017
Ratio of Earnings to Fixed Charges
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting
Firm - Moss Adams LLP
Filed herewith
Filed herewith
Filed herewith
Certification of Chief Executive Officer under Section 302
of the Sarbanes-Oxley Act of 2002
Filed herewith
Certification of Chief Financial Officer under Section 302
of the Sarbanes-Oxley Act of 2002
Filed herewith
Certification of Principal Accounting Officer under Section
302 of the Sarbanes-Oxley Act of 2002
Filed herewith
Certification of Chief Executive Officer, Principal
Financial Officer and Principal Accounting Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Filed herewith
101.INS XBRL Instance Document *
101.SCH XBRL Taxonomy Extension Schema Document *
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB XBRL Taxonomy Extension Label Linkbase Document *
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement
or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities
and Exchange Act of 1934, as amended and otherwise are not subject to liability under those sections.
**Indicates compensatory plan or arrangement
137
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Umpqua Holdings Corporation
has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on February 23,
2018.
UMPQUA HOLDINGS CORPORATION (Registrant)
/s/ Cort L. O'Haver
Cort L. O'Haver, President and Chief Executive Officer
February 23, 2018
Signature
Title
Date
/s/ Cort L. O'Haver
Cort L. O'Haver
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 23, 2018
/s/ Ronald L. Farnsworth
Ronald L. Farnsworth
/s/ Neal T. McLaughlin
Neal T. McLaughlin
/s/ Peggy Y. Fowler
Peggy Y. Fowler
/s/ Stephen M. Gambee
Stephen M. Gambee
/s/ James S. Greene
James S. Greene
/s/ Luis F. Machuca
Luis F. Machuca
/s/ Maria M. Pope
Maria M. Pope
/s/ John F. Schultz
John F. Schultz
/s/ Susan F. Stevens
Susan F. Stevens
/s/ Hilliard C. Terry, III
Hilliard C. Terry, III
/s/ Bryan L. Timm
Bryan L. Timm
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
February 23, 2018
Executive Vice President, Treasurer
(Principal Accounting Officer)
Chair
Director
Director
Director
Director
Director
Director
Director
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
February 23, 2018
Vice Chair
February 23, 2018
138
Stock Trading Market
Umpqua Holdings Corporation trades
on the NASDAQ Global Select Market
under the symbol UMPQ.
Headquarters and Investor Information
Umpqua Holdings Corporation
One SW Columbia Street, Suite 1200
Portland, OR 97258
503-727-4226
www.umpquabank.com/investor-relations
Transfer Agent
Computershare
P.O. Box 505000
Louisville, KY 40233
1-800-922-2641
www.computershare.com/investor
Annual Shareholders’ Meeting
The annual meeting of Umpqua Holdings
Corporation will be held at 2:00 pm, local time,
on April 18, 2018 at the RiverPlace Hotel,
1510 SW Harbor Way, Portland, OR 97201