Fair Value Measurement

The following table presents estimated fair values of the Company's financial instruments as of September 30, 2018 and December 31, 2017, whether or not recognized or recorded at fair value in the Condensed Consolidated Balance Sheets:



(in thousands)		September 30, 2018				December 31, 2017
	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
FINANCIAL ASSETS:
Cash and cash equivalents	1	$	879,259	$	879,259	$	634,280	$	634,280
Equity and other investment securities	1,2	62,454		62,454		12,255		12,255
Investment securities available for sale	1,2	2,864,394		2,864,394		3,065,769		3,065,769
Investment securities held to maturity	3	3,672		4,728		3,803		4,906
Loans held for sale	2	289,537		289,537		259,518		259,518
Loans and leases, net (1)	3	19,710,007		19,561,695		18,878,584		18,875,046
Restricted equity securities	1	40,269		40,269		43,508		43,508
Residential mortgage servicing rights	3	175,038		175,038		153,151		153,151
Bank owned life insurance assets	1	311,922		311,922		306,864		306,864
Derivatives	2,3	18,718		18,718		32,256		32,256
Visa Class B common stock	3	—		113,020		—		86,380
FINANCIAL LIABILITIES:
Deposits	1,2	$	20,892,774	$	20,861,685	$	19,948,300	$	19,930,568
Securities sold under agreements to repurchase	2	286,975		286,975		294,299		294,299
Term debt	2	751,764		733,041		802,357		790,532
Junior subordinated debentures, at fair value	3	282,846		282,846		277,155		277,155
Junior subordinated debentures, at amortized cost	3	88,781		71,734		100,609		81,944
Derivatives	2	39,893		39,893		9,288		9,288

(1) The estimated fair value of loans and leases, net for September 30, 2018 reflects an exit price assumption. The December 31, 2017 fair value estimate is not based on an exit price assumption.

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 September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018
Description	Total		Level 1		Level 2		Level 3
FINANCIAL ASSETS:
Equity and other investment securities
Investments in mutual funds and other securities	$	50,065	$	50,065	$	—	$	—
Equity securities held in rabbi trusts	12,241		12,241		—		—
Other investments securities (1)	148		—		148		—
Investment securities available for sale
U.S. Treasury and agencies	39,469		—		39,469		—
Obligations of states and political subdivisions	294,664		—		294,664		—
Residential mortgage-backed securities and collateralized mortgage obligations	2,530,261		—		2,530,261		—
Loans held for sale, at fair value	289,537		—		289,537		—
Residential mortgage servicing rights, at fair value	175,038		—		—		175,038
Derivatives
Interest rate lock commitments	5,159		—		—		5,159
Interest rate forward sales commitments	1,950		—		1,950		—
Interest rate swaps	10,890		—		10,890		—
Foreign currency derivative	719		—		719		—
Total assets measured at fair value	$	3,410,141	$	62,306	$	3,167,638	$	180,197
FINANCIAL LIABILITIES:
Junior subordinated debentures, at fair value	$	282,846	$	—	$	—	$	282,846
Derivatives
Interest rate forward sales commitments	77		—		77		—
Interest rate swaps	39,303		—		39,303		—
Foreign currency derivative	513		—		513		—
Total liabilities measured at fair value	$	322,739	$	—	$	39,893	$	282,846

(1) Other investment securities includes securities held by Umpqua Investments as trading debt securities.



(in thousands)	December 31, 2017
Description	Total		Level 1		Level 2		Level 3
FINANCIAL ASSETS:
Trading securities
Obligations of states and political subdivisions	$	273	$	—	$	273	$	—
Equity securities	11,982		11,982		—		—
Investment securities available for sale
U.S. Treasury and agencies	39,698		—		39,698		—
Obligations of states and political subdivisions	308,456		—		308,456		—
Residential mortgage-backed securities and collateralized mortgage obligations	2,665,645		—		2,665,645		—
Investments in mutual funds and other securities	51,970		51,970				—
Loans held for sale, at fair value	259,518		—		259,518		—
Residential mortgage servicing rights, at fair value	153,151		—		—		153,151
Derivatives
Interest rate lock commitments	4,752		—		—		4,752
Interest rate forward sales commitments	286		—		286		—
Interest rate swaps	26,081		—		26,081		—
Foreign currency derivative	1,137		—		1,137		—
Total assets measured at fair value	$	3,522,949	$	63,952	$	3,301,094	$	157,903
FINANCIAL LIABILITIES:
Junior subordinated debentures, at fair value	$	277,155	$	—	$	—	$	277,155
Derivatives
Interest rate forward sales commitments	567		—		567		—
Interest rate swaps	7,229		—		7,229		—
Foreign currency derivative	1,492		—		1,492		—
Total liabilities measured at fair value	$	286,443	$	—	$	9,288	$	277,155

The following methods were used to estimate the fair value of each class of financial instrument that are carried at fair value in the tables above:

Securities— Fair values for investment securities are based on quoted market prices when available or through the use of alternative approaches, such as matrix or model pricing, or broker indicative bids, when market quotes are not readily accessible or available. Management periodically reviews the pricing information received from the third-party pricing service and compares it to a secondary pricing service, evaluating significant price variances between services to determine an appropriate estimate of fair value to report.

Loans Held for Sale— Fair value for residential mortgage loans originated as held for sale is determined based on quoted secondary market prices for similar loans, including the implicit fair value of embedded servicing rights.

Residential Mortgage Servicing Rights— The fair value of 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.

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 September 30, 2018, 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 September 30, 2018:



Financial Instrument	Valuation Technique	Unobservable Input	Weighted Average
Residential mortgage servicing rights	Discounted cash flow
		Constant Prepayment Rate	12.19%
		Discount Rate	9.70%
Interest rate lock commitment	Internal Pricing Model
		Pull-through rate	90.02%
Junior subordinated debentures	Discounted cash flow
		Credit Spread	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. 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 instrument-specific credit risk adjusted spread relative to the spread currently utilized to measure the Company's junior subordinated debentures at fair value as of September 30, 2018, 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).

The following tables provide a reconciliation of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the three and nine months ended September 30, 2018 and 2017:



(in thousands)
Three Months Ended September 30,	Beginning Balance		Change included in earnings			Change in fair values included in comprehensive income (loss)		Purchases and issuances		Sales and settlements			Ending Balance		Net change in unrealized gains or (losses) relating to items held at end of period
2018
Residential mortgage servicing rights	$	166,217	$	199		$	—	$	8,622	$	—		$	175,038	$	3,747
Interest rate lock commitment, net	6,782		(284		)	—		4,679		(6,018		)	5,159		5,159
Junior subordinated debentures, at fair value	280,669		4,486			2,409		—		(4,718		)	282,846		6,895

2017
Residential mortgage servicing rights	$	141,832	$	(9,233	)	$	—	$	8,626	$	—		$	141,225	$	(4,730	)
Interest rate lock commitment, net	4,746		884			—		10,028		(10,877		)	4,781		4,781
Junior subordinated debentures, at fair value	265,423		5,043			—		—		(3,591		)	266,875		5,043



(in thousands)
Nine Months Ended September 30,	Beginning Balance		Change included in earnings			Change in fair values included in comprehensive income (loss)		Purchases and issuances		Sales and settlements			Ending Balance		Net change in unrealized gains or (losses) relating to items held at end of period
2018
Residential mortgage servicing rights	$	153,151	$	(125	)	$	—	$	22,012	$	—		$	175,038	$	10,410
Interest rate lock commitment, net	4,752		(1,288		)	—		19,211		(17,516		)	5,159		5,159
Junior subordinated debentures, at fair value	277,155		12,544			5,605		—		(12,458		)	282,846		18,149

2017
Residential mortgage servicing rights	$	142,973	$	(25,234	)	$	—	$	23,486	$	—		$	141,225	$	(12,954	)
Interest rate lock commitment, net	4,076		2,261			—		31,992		(33,548		)	4,781		4,781
Junior subordinated debentures, at fair value	262,209		14,595			—		—		(9,929		)	266,875		14,595

Changes in residential mortgage servicing rights carried at fair value are recorded in residential mortgage banking revenue within non-interest income. Gains (losses) on interest rate lock commitments carried at fair value are recorded in residential mortgage banking revenue within non-interest income. The contractual interest expense on the junior subordinated debentures is recorded on an accrual basis as interest on junior subordinated debentures within interest expense. Settlements related to the junior subordinated debentures represent the payment of accrued interest that is embedded in the fair value of these liabilities.

For 2017, the Company recorded gains (losses) on junior subordinated debentures carried at fair value in non-interest income. As discussed in Note 1, Summary of Significant Accounting Policies, the Company applied new guidance to the accounting for the gain/loss on fair value of the junior subordinated debentures. For the three and nine months ended September 30, 2018, the change in fair value is attributable to the change in the instrument specific credit risk of the junior subordinated debentures, accordingly, the losses on fair value of junior subordinated debentures for the three and nine months ended September 30, 2018 of $2.4 million and $5.6 million, respectively, are recorded net of tax as an other comprehensive loss of $1.8 million and $4.2 million, respectively.

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)	September 30, 2018
	Total		Level 1		Level 2		Level 3
Loans and leases	$	70,741	$	—	$	—	$	70,741
	$	70,741	$	—	$	—	$	70,741



(in thousands)	December 31, 2017
	Total		Level 1		Level 2		Level 3
Loans and leases	$	75,121	$	—	$	—	$	75,121
Other real estate owned	68		—		—		68
	$	75,189	$	—	$	—	$	75,189

The following table presents the losses resulting from nonrecurring fair value adjustments for the three and nine months ended September 30, 2018 and 2017:



(in thousands)	Three Months Ended				Nine Months Ended
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Loans and leases	$	14,436	$	11,138	$	42,158	$	34,294
Other real estate owned	—		39		66		146
Total loss from nonrecurring measurements	$	14,436	$	11,177	$	42,224	$	34,440

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 September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018						December 31, 2017
	Fair Value		Aggregate Unpaid Principal Balance		Fair Value Less Aggregate Unpaid Principal Balance		Fair Value		Aggregate Unpaid Principal Balance		Fair Value Less Aggregate Unpaid Principal Balance
Loans held for sale	$	289,537	$	281,843	$	7,694	$	259,518	$	250,721	$	8,797

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 Condensed Consolidated Statements of Income. For the three and nine months ended September 30, 2018, the Company recorded a net decrease in fair value of $6.5 million and $1.1 million, respectively. For the three and nine months ended September 30, 2017, the Company recorded a net increase in fair value of $136,000 and $7.2 million, 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. 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.