Fair Value Measurement

The following table presents estimated fair values of the Company's financial instruments as of June 30, 2016 and December 31, 2015, whether or not recognized or recorded at fair value in the Condensed Consolidated Balance Sheets:



(in thousands)		June 30, 2016				December 31, 2015
		Carrying		Fair		Carrying		Fair
	Level	Value		Value		Value		Value
FINANCIAL ASSETS:
Cash and cash equivalents	1	$	905,363	$	905,363	$	773,725	$	773,725
Trading securities	1,2	10,188		10,188		9,586		9,586
Investment securities available for sale	2	2,482,072		2,482,072		2,522,539		2,522,539
Investment securities held to maturity	3	4,382		5,250		4,609		5,590
Loans held for sale	2	552,681		552,762		363,275		363,275
Loans and leases, net	3	17,224,198		17,386,430		16,736,214		16,661,079
Restricted equity securities	1	47,542		47,542		46,949		46,949
Residential mortgage servicing rights	3	112,095		112,095		131,817		131,817
Bank owned life insurance assets	1	295,444		295,444		291,892		291,892
Derivatives	2,3	93,747		93,747		43,549		43,549
Visa Class B common stock	3	—		56,198		—		58,751
FINANCIAL LIABILITIES:
Deposits	1,2	$	18,258,474	$	18,271,000	$	17,707,189	$	17,709,555
Securities sold under agreements to repurchase	2	360,234		360,234		304,560		304,560
Term debt	2	902,999		914,008		888,769		890,852
Junior subordinated debentures, at fair value	3	258,660		258,660		255,457		255,457
Junior subordinated debentures, at amortized cost	3	101,093		76,597		101,254		75,654
Derivatives	2	95,103		95,103		41,514		41,514

Fair Value of Assets and Liabilities Measured on a Recurring Basis

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015:



(in thousands)	June 30, 2016
Description	Total		Level 1		Level 2		Level 3
FINANCIAL ASSETS:
Trading securities
Obligations of states and political subdivisions	$	76	$	—	$	76	$	—
Equity securities	10,112		10,112		—		—
Investment securities available for sale
Obligations of states and political subdivisions	298,106		—		298,106		—
Residential mortgage-backed securities and collateralized mortgage obligations	2,181,923		—		2,181,923		—
Investments in mutual funds and other equity securities	2,043		—		2,043		—
Loans held for sale, at fair value	542,917		—		542,917		—
Residential mortgage servicing rights, at fair value	112,095		—		—		112,095
Derivatives
Interest rate lock commitments	11,028		—		—		11,028
Interest rate swaps	82,588		—		82,588		—
Foreign currency derivative	131		—		131		—
Total assets measured at fair value	$	3,241,019	$	10,112	$	3,107,784	$	123,123
FINANCIAL LIABILITIES:
Junior subordinated debentures, at fair value	$	258,660	$	—	$	—	$	258,660
Derivatives
Interest rate forward sales commitments	7,224		—		7,224		—
Interest rate swaps	87,545		—		87,545		—
Foreign currency derivative	334		—		334		—
Total liabilities measured at fair value	$	353,763	$	—	$	95,103	$	258,660



(in thousands)	December 31, 2015
Description	Total		Level 1		Level 2		Level 3
FINANCIAL ASSETS:
Trading securities
Obligations of states and political subdivisions	$	75	$	—	$	75	$	—
Equity securities	9,511		9,511		—		—
Investment securities available for sale
Obligations of states and political subdivisions	313,117		—		313,117		—
Residential mortgage-backed securities and collateralized mortgage obligations	2,207,420		—		2,207,420		—
Investments in mutual funds and other equity securities	2,002		—		2,002		—
Loans held for sale, at fair value	363,275		—		363,275		—
Residential mortgage servicing rights, at fair value	131,817		—		—		131,817
Derivatives
Interest rate lock commitments	3,631		—		—		3,631
Interest rate forward sales commitments	1,155		—		1,155		—
Interest rate swaps	38,567		—		38,567		—
Foreign currency derivative	196		—		196		—
Total assets measured at fair value	$	3,070,766	$	9,511	$	2,925,807	$	135,448
FINANCIAL LIABILITIES:
Junior subordinated debentures, at fair value	$	255,457	$	—	$	—	$	255,457
Derivatives
Interest rate forward sales commitments	971		—		971		—
Interest rate swaps	40,238		—		40,238		—
Foreign currency derivative	305		—		305		—
Total liabilities measured at fair value	$	296,971	$	—	$	41,514	$	255,457

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 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. For loans not originated as held for sale, these loans are accounted for at lower of cost or market, with the fair value estimated based on the expected sales price.

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.

Residential Mortgage Servicing Rights— The fair value of mortgage servicing rights 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 external 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 an external valuation firm to determine or validate the reasonableness of inputs and factors that are used to determine the fair value. The ending carrying (fair) value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. Due to credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads, we have classified this as a Level 3 fair value measure.

Derivative Instruments— The fair value of the interest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate. The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. The fair value of the interest rate swaps is determined using a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the CVA associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2016, the Bank has assessed the significance of the impact of the CVA on the overall valuation of its interest rate swap positions and has determined that the CVA are not significant to the overall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap derivative valuations in Level 2 of the fair value hierarchy.

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3)

The following table provides a description of the valuation technique, significant unobservable inputs, and qualitative information about the unobservable inputs for the Company's assets and liabilities classified as Level 3 and measured at fair value on a recurring basis at June 30, 2016:



Financial Instrument	Valuation Technique	Unobservable Input	Weighted Average
Residential mortgage servicing rights	Discounted cash flow
		Constant Prepayment Rate	14.95%
		Discount Rate	9.70%
Interest rate lock commitment	Internal Pricing Model
		Pull-through rate	83.16%
Junior subordinated debentures	Discounted cash flow
		Credit Spread	5.84%

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 June 30, 2016, or the passage of time, will result in negative fair value adjustments. Generally, an increase in the credit risk adjusted spread and/or a decrease in the three month LIBOR swap 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 an increase in the three month LIBOR swap curve will result in negative fair value adjustments (and increase the fair value measurement).

The following table provides a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and six months ended June 30, 2016 and 2015.



(in thousands)
Three Months Ended June 30,	Beginning Balance		Change included in earnings			Purchases and issuances		Sales and settlements			Ending Balance		Net change in unrealized gains or (losses) relating to items held at end of period
2016
Residential mortgage servicing rights	$	117,172	$	(13,940	)	$	8,863	$	—		$	112,095	$	(12,134	)
Interest rate lock commitment, net	8,255		1,677			16,319		(15,223		)	11,028		11,028
Junior subordinated debentures, at fair value	256,917		4,380			—		(2,637		)	258,660		4,380

2015
Residential mortgage servicing rights	$	116,365	$	(423	)	$	11,264	$	—		$	127,206	$	1,456
Interest rate lock commitment, net	7,025		(781		)	11,604		(13,787		)	4,061		4,061
Junior subordinated debentures, at fair value	250,652		3,957			—		(2,395		)	252,214		3,957




(in thousands)
Six Months Ended June 30,	Beginning Balance		Change included in earnings			Purchases and issuances		Sales and settlements			Ending Balance		Net change in unrealized gains or (losses) relating to items held at end of period
2016
Residential mortgage servicing rights	$	131,817	$	(34,565	)	$	14,843	$	—		$	112,095	$	(31,961	)
Interest rate lock commitment, net	3,631		3,721			31,282		(27,606		)	11,028		11,028
Junior subordinated debentures, at fair value	255,457		8,674			—		(5,471		)	258,660		8,674

2015
Residential mortgage servicing rights	$	117,259	$	(10,154	)	$	20,101	$	—		$	127,206	$	(6,315	)
Interest rate lock commitment, net	2,867		(3,648		)	30,665		(25,823		)	4,061		4,061
Junior subordinated debentures, at fair value	249,294		7,835			—		(4,915		)	252,214		7,835

Changes in residential mortgage servicing rights carried at fair value are recorded in residential mortgage banking revenue within non-interest income. Gains (losses) on interest rate lock commitments carried at fair value are recorded in residential mortgage banking revenue within non-interest income. 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 table presents information about the Company's assets and liabilities measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the reporting period. The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported upon.



(in thousands)	June 30, 2016
	Total		Level 1		Level 2		Level 3
Loans and leases	$	25,906	$	—	$	—	$	25,906
Other real estate owned	9,089		—		—		9,089
	$	34,995	$	—	$	—	$	34,995



(in thousands)	December 31, 2015
	Total		Level 1		Level 2		Level 3
Loans and leases	$	24,690	$	—	$	—	$	24,690
Other real estate owned	802		—		—		802
	$	25,492	$	—	$	—	$	25,492

The following table presents the losses resulting from nonrecurring fair value adjustments for the three and six months ended June 30, 2016 and 2015:



(in thousands)	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Loans and leases	$	7,091	$	6,957	$	13,170	$	17,440
Other real estate owned	39		95		1,462		2,487
Total loss from nonrecurring measurements	$	7,130	$	7,052	$	14,632	$	19,927

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 amount above represents 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. 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 June 30, 2016 and December 31, 2015:

(in thousands)

June 30, 2016

December 31, 2015

Fair Value

Aggregate

Less Aggregate

Aggregate

Less Aggregate

Unpaid

Fair

Principal

Fair

Principal

Value

Balance

Value

Balance

Loans held for sale

542,917

517,247

25,670

363,275

351,414

11,861

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 three and six months ended June 30, 2016, the Company recorded a net increase in fair value of $8.9 million and $13.8 million, respectively. For the three and six months ended June 30, 2015, the Company recorded a net decrease in fair value of $5.2 million and $282,000, respectively, representing the change in fair value reflected in earnings.

There were no nonaccrual residential mortgage loans held for sale or residential mortgage loans held for sale 90 days or more past due and still accruing interest as of June 30, 2016 and December 31, 2015, respectively.

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

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

Due to inactivity in the junior subordinated debenture market and the lack of observable quotes of our, or similar, junior subordinated debenture liabilities or the related trust preferred securities when traded as assets, we utilize an income approach valuation technique to determine the fair value of these liabilities using our estimation of market discount rate assumptions. The Company monitors activity in the trust preferred and related markets, to the extent available, evaluates changes related to the current and anticipated future interest rate environment, and considers our entity-specific creditworthiness, to validate the reasonableness of the credit risk adjusted spread and effective yield utilized in our discounted cash flow model. Regarding the activity in and condition of the junior subordinated debt market, we noted no observable changes in the current period as it relates to companies comparable to our size and condition, in either the primary or secondary markets. Relating to the interest rate environment, we considered the change in slope and shape of the forward LIBOR swap curve in the current period, the effects of which did not result in a significant change in the fair value of these liabilities.