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.

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)	Asset Derivatives				Liability Derivatives
Derivatives not designated as hedging instrument	December 31, 2017		December 31, 2016		December 31, 2017		December 31, 2016
Interest rate lock commitments	$	4,752	$	4,076	$	—	$	—
Interest rate forward sales commitments	286		8,054		567		1,318
Interest rate swaps	26,081		34,701		7,229		34,871
Foreign currency derivatives	1,137		670		1,492		874
Total	$	32,256	$	47,501	$	9,288	$	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	$	676		$	445		$	763
Interest rate forward sales commitments	(11,024		)	(3,730		)	(4,752		)
Interest rate swaps	(1,451		)	1,497			162
Foreign currency derivatives	1,094			1,335			1,011
Total	$	(10,705	)	$	(453	)	$	(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.

The following table summarizes the derivatives that have a right of offset as of December 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
December 31, 2017
Derivative Assets
Interest rate swaps	$	26,081	$	—	$	26,081	$	(7,229	)	$	—		$	18,852
Foreign currency derivative	1,137		—		1,137		—			—			1,137
Derivative Liabilities
Interest rate swaps	$	7,229	$	—	$	7,229	$	(7,229	)	$	—		$	—
Foreign currency derivative	1,492		—		1,492		—			—			1,492

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.