Derivatives

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 and nine months ended September 30, 2019 and 2018. 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 September 30, 2019, the Bank had commitments to originate mortgage loans held for sale totaling $421.5 million and forward sales commitments of $638.0 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 September 30, 2019, the Bank had 824 interest rate swaps with an aggregate notional amount of $5.4 billion related to this program. As of December 31, 2018, the Bank had 767 interest rate swaps with an aggregate notional amount of $4.2 billion related to this program.

At September 30, 2019 and December 31, 2018, 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 $4.0 million and $12.7 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 $84.3 million and $36.9 million as of September 30, 2019 and December 31, 2018, respectively.

Umpqua's interest rate swap derivatives are cleared through the Chicago Mercantile Exchange and London Clearing House. These clearing houses characterize the variation margin payments, for derivative contracts that are referred to as settled-to-market, as settlements of the derivative's mark-to-market exposure and not collateral. Umpqua accounts for the variation margin as an adjustment to our cash collateral, as well as a corresponding adjustment to our derivative asset and liability. As of September 30, 2019, the variation margin adjustment was a negative adjustment of $199.2 million as compared to a negative adjustment of $32.5 million at December 31, 2018.

The Bank incorporates credit valuation adjustments ("CVA") to appropriately reflect nonperformance risk in the fair value measurement of its derivatives. The net CVA decreased the settlement values of the Bank's net derivative assets by $14.0 million and $3.0 million as of September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018:


(in thousands)	Asset Derivatives						Liability Derivatives
Derivatives not designated as hedging instrument	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Interest rate lock commitments	$	9,070	$	6,757	$	—	$	—
Interest rate forward sales commitments	801		1		1,260		2,963
Interest rate swaps	189,366		42,276		4,010		12,746
Foreign currency derivatives	1,175		450		1,015		273
Total	$	200,412	$	49,484	$	6,285	$	15,982

The following table summarizes the types of derivatives and the gains (losses) recorded during the three and nine months ended September 30, 2019 and 2018:


(in thousands)	Three Months Ended						Nine Months Ended
Derivatives not designated as hedging instrument	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Interest rate lock commitments	$	922	$	(1,623)	$	2,313	$	407
Interest rate forward sales commitments	(2,467)		2,029		(11,875)		10,773
Interest rate swaps	(2,281)		224		(8,712)		1,645
Foreign currency derivatives	527		556		1,522		1,371
Total	$	(3,299)	$	1,186	$	(16,752)	$	14,196

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.