Derivatives

The Bank may use derivatives to hedge the risk of changes in the fair values of interest rate lock commitments and residential mortgage loans held for sale. None of the Company's derivatives are designated as hedging instruments. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in income. The Company primarily utilizes forward interest rate contracts in its derivative risk management strategy.

The Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage loan commitments. Credit risk associated with forward contracts is limited to the replacement cost of those forward contracts in a gain position. There were no counterparty default losses on forward contracts in the three months ended March 31, 2017 and 2016. 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 March 31, 2017, the Bank had commitments to originate mortgage loans held for sale totaling $447.7 million and forward sales commitments of $626.4 million, which are used to hedge both on-balance sheet and off-balance sheet exposures.

The Bank executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting the interest rate swaps that the Bank executes with a third party, such that the Bank minimizes its net risk exposure. As of March 31, 2017, the Bank had 548 interest rate swaps with an aggregate notional amount of $2.5 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 March 31, 2017 and December 31, 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 $6.3 million and $34.9 million, respectively. The Bank has collateral posting requirements for initial margin with its clearing members and clearing houses and has been required to post collateral against its obligations under these agreements of $27.1 million and $50.3 million as of March 31, 2017 and December 31, 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 March 31, 2017, the variation margin was $21.9 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 March 31, 2017 and December 31, 2016, the net CVA decreased the settlement values of the Bank's net derivative assets by $945,000 and $241,000, respectively.

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 tables summarize the types of derivatives, separately by assets and liabilities, and the fair values of such derivatives as of March 31, 2017 and December 31, 2016:



(in thousands)	Asset Derivatives				Liability Derivatives
Derivatives not designated	March 31,		December 31,		March 31,		December 31,
as hedging instrument	2017		2016		2017		2016
Interest rate lock commitments	$	6,294	$	4,076	$	—	$	—
Interest rate forward sales commitments	78		8,054		3,807		1,318
Interest rate swaps	27,368		34,701		6,333		34,871
Foreign currency derivative	289		670		298		874
Total	$	34,029	$	47,501	$	10,438	$	37,063

The following table summarizes the types of derivatives and the gains (losses) recorded during the three months ended March 31, 2017 and 2016:



(in thousands)	Three Months Ended
Derivatives not designated	March 31,
as hedging instrument	2017			2016
Interest rate lock commitments	$	2,219		$	4,624
Interest rate forward sales commitments	(2,733		)	(11,097		)
Interest rate swaps	(727		)	(1,793		)
Foreign currency derivative	409			261
Total	$	(832	)	$	(8,005	)

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 derivative are included in other income.

The following table summarizes the derivatives that have a right of offset as of March 31, 2017 and December 31, 2016:



(in thousands)							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
March 31, 2017
Derivative Assets
Interest rate swaps	$	27,368	$	—	$	27,368	$	(6,333	)	$	—		$	21,035
Foreign currency derivative	289		—		289		—			—			289
Derivative Liabilities
Interest rate swaps	$	6,333	$	—	$	6,333	$	(6,333	)	$	—		$	—
Foreign currency derivative	298		—		298		—			—			298

December 31, 2016
Derivative Assets
Interest rate swaps	$	34,701	$	—	$	34,701	$	(11,225	)	$	—		$	23,476
Foreign currency derivative	670		—		670		—			—			670
Derivative Liabilities
Interest rate swaps	$	34,871	$	—	$	34,871	$	(11,225	)	$	(23,646	)	$	—
Foreign currency derivative	874		—		874		—			—			874

The above table represents the impact of the changes to the derivative clearing rules that treat the variation margin as a settlement.