Summary of Significant Accounting Policies

The accounting and financial reporting policies of Umpqua Holdings Corporation conform to accounting principles generally accepted in the United States of America. The accompanying interim condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated. The condensed consolidated financial statements have not been audited. A more detailed description of our accounting policies is included in the 2017 Annual Report filed on Form 10-K. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the 2017 Annual Report filed on Form 10-K. All references in this report to "Umpqua," "we," "our," "us," the "Company" or similar references mean Umpqua Holdings Corporation and include our consolidated subsidiaries where the context so requires. References to "Bank" refer to our subsidiary Umpqua Bank, an Oregon state-chartered commercial bank, and references to "Umpqua Investments" refer to our subsidiary Umpqua Investments, Inc., a registered broker-dealer and investment adviser. The Bank also has a wholly-owned subsidiary, Financial Pacific Leasing Inc., a commercial equipment leasing company.

In preparing these condensed consolidated financial statements, the Company has evaluated events and transactions subsequent to September 30, 2018 for potential recognition or disclosure. In management's opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim period.

Certain reclassifications of prior period amounts have been made to conform to current classifications, as noted below. In August 2018, the SEC issued a final rule that amends certain of its disclosure requirements. The rule extends to interim periods the annual disclosure requirement of presenting changes in shareholders' equity; in addition, an analysis of changes in shareholders' equity will now be required for the current and comparative year-to-date interim periods. The final rule is effective 30 days after its publication in the Federal Register, which occurred on October 4, 2018. As such, for our third quarter filing, the Company has updated our Condensed Consolidated Statements of Changes in Shareholders' Equity to present the interim periods.

Out of Period Corrections

Subsequent to the issuance of the Company's June 30, 2018 condensed consolidated financial statements, the Company's management determined that a prospective interest method was incorrectly used to recognize income on the portfolio of residential mortgage-backed securities and collateralized mortgage obligations which had a fair value of $2.5 billion as of June 30, 2018. These securities are considered structured note securities as defined by ASC 320-10-35. Income on these securities should be recognized using the retrospective interest method. The Company has historically used the prospective method of income recognition for these securities. For other types of securities, there are other methods of income recognition allowed by the guidance. To reflect the change, management continued to further refine the estimate and an updated cumulative difference between these two methods of $7.0 million was recognized as an out of period adjustment in the three months ended September 30, 2018, resulting in an increase in interest income on taxable investment securities and a corresponding increase in the unrealized loss on taxable investment securities. An overall updated cumulative difference between these two methods of $169,000 was recognized as an out of period adjustment in the nine months ended September 30, 2018, resulting in a decrease in interest income on taxable investment securities and a corresponding decrease in the unrealized loss on taxable investment securities. We have concluded that this error has an immaterial impact to the results for 2018, as well as prior periods. The Company recorded the adjustments in the quarters ended June 30, 2018 (as previously disclosed) and September 30, 2018. No other periods have been updated to reflect these adjustments.

Correction of Prior Period Balances

Subsequent to the issuance of the Company's March 31, 2018 condensed consolidated financial statements, the Company's management determined that the calculation and corresponding recognition of the accretion of the purchase accounting discount on the loans acquired from Sterling Financial Corporation (ASC 310-20 loans) that were not impaired was calculated in a manner that was considered to be inconsistent with accounting principles generally accepted in the United States of America as indicated in ASC 310-20. As a result, the financial statements have been restated to reflect the correction of the difference in accretion/amortization related to the loans acquired. Management believes that the effect of this restatement is not material to our previously issued consolidated financial statements.

As the error began in 2014, a prior period adjustment has been recorded to reflect the difference in loans and leases, as well as retained earnings in the opening period that is first reported in this 10-Q. As a result, the condensed consolidated statements of income have been revised to reflect these changes to the applicable line items as follows.



(in thousands, except per share amounts)	Three Months Ended September 30, 2017						Nine Months Ended September 30, 2017
(in thousands, except per share amounts)	As Originally Reported		Adjustment		As Revised		As Originally Reported		Adjustment		As Revised
Interest and fees on loans and leases	$	223,321	$	2,747	$	226,068	$	642,315	$	3,465	$	645,780
Total interest income	240,716		2,747		243,463		695,969		3,465		699,434
Net interest income	220,464		2,747		223,211		639,267		3,465		642,732
Net interest income after provision for loan and lease losses	208,467		2,747		211,214		604,941		3,465		608,406
Gain on loan sales, net	7,969		1,291		9,260		13,033		1,291		14,324
Total non-interest income	75,402		1,291		76,693		206,746		1,291		208,037
Income before provision for income taxes	95,515		4,038		99,553		256,598		4,756		261,354
Provision for income taxes	34,182		1,564		35,746		92,450		1,842		94,292
Net income	$	61,333	$	2,474	$	63,807	$	164,148	$	2,914	$	167,062
Net earnings available to common shareholders	$	61,319	$	2,474	$	63,793	$	164,108	$	2,914	$	167,022
Earnings per common share:
Basic	$0.28		$0.01		$0.29		$0.75		$0.01		$0.76
Diluted	$0.28		$0.01		$0.29		$0.74		$0.02		$0.76

In addition, the condensed consolidated balance sheet for December 31, 2017 has been revised to reflect these changes as follows:



(in thousands)	December 31, 2017
	As Originally Reported		Adjustment			As Revised
Loans and leases	$	19,080,184	$	(60,992	)	$	19,019,192
Net loans and leases	$	18,939,576	$	(60,992	)	$	18,878,584
Total assets	$	25,741,439	$	(60,992	)	$	25,680,447
Deferred tax liability, net	$	37,503	$	(15,573	)	$	21,930
Total liabilities	$	21,726,653	$	(15,573	)	$	21,711,080
Retained earnings	$	522,520	$	(45,419	)	$	477,101
Total shareholders' equity	$	4,014,786	$	(45,419	)	$	3,969,367
Total liabilities and shareholders' equity	$	25,741,439	$	(60,992	)	$	25,680,447

The condensed consolidated statement of changes in shareholders' equity has a prior period adjustment of $41.7 million to reflect the correction of the accretion amounts since the acquisition date in April 2014 to December 31, 2016. In addition, the following amounts have been revised in the condensed consolidated statement of changes in shareholders' equity.



(in thousands)	As Originally Reported		Adjustment			As Revised
Net income for the three months ended March 31, 2017	$	46,003	$	33		$	46,036
Net income for the three months ended June 30, 2017	$	56,812	$	407		$	57,219
Net income for the three months ended September 30, 2017	$	61,333	$	2,474		$	63,807
Net income for the three months ended December 31, 2017	$	81,871	$	(6,620	)	$	75,251
Retained earnings as of December 31, 2017	$	522,520	$	(45,419	)	$	477,101
Total equity as of December 31, 2017	$	4,014,786	$	(45,419	)	$	3,969,367

The condensed consolidated statement of comprehensive income has been updated to reflect the change in net income for the three and nine months ended September 30, 2017. Comprehensive income increased by $2.5 million for the three months ended September 30, 2017 to $66.3 million and by $2.9 million for the nine months ended September 30, 2017 to $180.9 million. The condensed consolidated statement of cash flows has also been updated to reflect these changes, resulting in an increase in cash flows provided by operating activities for September 30, 2017 of $3.5 million to reflect the increase in net income, the change in gain on sale of loans and the change in other liabilities (deferred tax liability) and a corresponding increase in the cash flows used in investing activities of $3.5 million for September 30, 2017 as part of the net change in loans and leases.

Periods not presented herein will be revised, as applicable, as they are included in future filings.

Application of new accounting guidance

As of January 1, 2018, Umpqua adopted the Financial Accounting Standard Board's ("FASB") Accounting Standard Update ("ASU") No. 2014-09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively "ASC 606"), which (i) creates a single framework for recognizing revenue from contracts with customers that are within its scope and (ii) revises when it is appropriate to recognize a gain or loss from the transfer of nonfinancial assets such as other real estate owned. The majority of Umpqua's revenues come from interest income and other sources, including loans, leases, securities, and derivatives, that are outside the scope of ASC 606. Umpqua's revenues that are within the scope of ASC 606 are presented within Non-Interest Income and are recognized as revenue as the Company satisfies its obligation to the customer. Revenues within the scope of ASC 606 include service charges on deposits, brokerage revenue, interchange income, and the sale of other real estate owned. Refer to Note 15 - Revenue from Contracts with Customers for further discussion of Umpqua's accounting policies for revenue sources within the scope of ASC 606.

Umpqua adopted ASC 606 using the modified retrospective method applied on all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior period amounts continue to be reported in accordance with legacy generally accepted accounting principles ("GAAP"). The adoption of ASC 606 did not result in a material change to the accounting for any of the in-scope revenue streams; as such, no cumulative effect adjustment was recorded.

As of January 1, 2018, Umpqua applied FASB ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance relates to 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. Upon adoption, certain equity securities were reclassified from available for sale to the equity securities classification on the balance sheet. The ASU was applied prospectively. The amendment also 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 disclosures in the fair value footnote have been updated accordingly.

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. The Company's junior subordinated debentures are variable-rate instruments based on LIBOR, with the majority resetting quarterly. Applying the updated guidance, the FASB noted that the entire risk in excess of the risk free or benchmark rate could be considered instrument-specific credit risk. The Company has determined that all changes in fair value of the junior subordinated debentures are due to changes in value other than in the benchmark rate, and accordingly are instrument-specific credit risk. As such, the Company calculated the change in the discounted cash flows based on updated market credit spreads since the election of the fair value option for each junior subordinated debenture measured at fair value to be a net gain of $13.0 million. The gain was recorded, net of the tax effect, as a cumulative effect adjustment between retained earnings and accumulated other comprehensive income (loss), resulting in an adjustment of $9.7 million upon adoption.

For 2018, the change in fair value is attributable to the change in the instrument specific credit risk of the junior subordinated debentures, as determined by the application of ASU 2016-01. Accordingly, the loss 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, is recorded in other comprehensive income (loss), net of tax, as an other comprehensive loss of $1.8 million and $4.2 million, respectively.

Recent accounting pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) as well as additional ASUs for enhancement, clarification or transition of the new lease standard (collectively "ASC 842"). ASC 842 will 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. ASC 842 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 elected to apply the package of practical expedients outlined in the ASU. In addition, the Company will elect the application method that allows for applying the standard as of January 1, 2019 prospectively without corresponding changes in the comparable prior periods. The Company continues to refine its process and system for application of the new lease standard, so no estimate of the right of use asset and related lease liability has been made. However, the Company expects to record a lease right of use asset and an increase in the 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 continues to work on the process by testing and documenting the models that are expected to be critical to the new process. The new guidance may result in an increase in the allowance for loan and lease losses, however, the Company is still in the process of determining the magnitude of the change and its impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The ASU was issued to improve the effectiveness of disclosures surrounding fair value measurements. The ASU removes numerous disclosures from Topic 820 including; transfers between level 1 and 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation process for level 3 fair value measurements. The ASU also modified and added disclosure requirements in regards to changes in unrealized gains and losses included in other comprehensive income, as well as the range and weighted average of unobservable inputs for level 3 fair value measurements. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The guidance is not expected to have a significant impact on the Company's consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (A Consensus of the FASB Emerging Issues Task Force). The ASU reduces complexity for the accounting for costs of implementing a cloud computing service arrangement. The ASU aligns the requirements for capitalization of implementation costs incurred in a hosting arrangement that is a service contract with those incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The ASU requires an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs to develop or obtain internal use software that cannot be capitalized under subtopic 350-40, such as training costs and certain data conversion costs, also cannot be capitalized for a hosting arrangement that is a service contract. The capitalized costs will be amortized over the life of the service contract. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of this ASU on the Company's consolidated financial statements.