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United States  
Securities and Exchange Commission 
Washington, D.C. 20549 
 
FORM 10-Q
☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended: September 30, 2019
or

☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
for the transition period from                                        to                                       .
 
Commission File Number: 001-34624 
 
Umpqua Holdings Corporation 
(Exact Name of Registrant as Specified in Its Charter)
Oregon93-1261319 
(State or Other Jurisdiction(I.R.S. Employer Identification Number)
of Incorporation or Organization) 
 
One SW Columbia Street, Suite 1200 
Portland, Oregon 97258 
(Address of Principal Executive Offices)(Zip Code) 
 
(503) 727-4100 
(Registrant's Telephone Number, Including Area Code) 

Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASSTRADING SYMBOLNAME OF EXCHANGE
Common StockUMPQThe NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒   Yes   ☐   No 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒   Yes   ☐   No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☒   Large accelerated filer   ☐   Accelerated filer   ☐   Non-accelerated filer  
 ☐   Smaller reporting company  ☐  Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐   Yes   ☒   No 

Indicate the number of shares outstanding for each of the issuer's classes of common stock, as of the latest practical date:
Common stock, no par value: 220,216,539 shares outstanding as of October 31, 2019

Table of Contents
UMPQUA HOLDINGS CORPORATION 
FORM 10-Q 
Table of Contents 
 
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2
Table of Contents
PART I.       FINANCIAL INFORMATION
Item 1.         Financial Statements (unaudited) 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED BALANCE SHEETS 
(UNAUDITED)
(in thousands, except shares)September 30, 2019December 31, 2018
ASSETS  
Cash and due from banks (restricted cash of $85,035 and $37,408)
$433,620  $335,419  
Interest bearing cash and temporary investments (restricted cash of $415 and $1,232)
757,824  287,218  
Total cash and cash equivalents1,191,444  622,637  
Investment securities  
Equity and other, at fair value64,764  61,841  
Available for sale, at fair value2,842,076  2,977,108  
Held to maturity, at amortized cost3,320  3,606  
Loans held for sale, at fair value355,022  166,461  
Loans and leases21,520,794  20,422,666  
Allowance for loan and lease losses(156,288) (144,871) 
Net loans and leases21,364,506  20,277,795  
Restricted equity securities54,463  40,268  
Premises and equipment, net203,391  227,423  
Operating lease right-of-use assets108,187  —  
Goodwill 1,787,651  1,787,651  
Other intangible assets, net19,750  23,964  
Residential mortgage servicing rights, at fair value151,383  169,025  
Other real estate owned4,026  10,958  
Bank owned life insurance318,533  313,626  
Other assets462,339  257,418  
Total assets$28,930,855  $26,939,781  
LIABILITIES AND SHAREHOLDERS' EQUITY  
Deposits  
Noninterest bearing$7,123,180  $6,667,467  
Interest bearing15,311,554  14,470,019  
Total deposits22,434,734  21,137,486  
Securities sold under agreements to repurchase296,717  297,151  
Borrowings1,106,674  751,788  
Junior subordinated debentures, at fair value267,798  300,870  
Junior subordinated debentures, at amortized cost88,553  88,724  
Operating lease liabilities116,924  —  
Deferred tax liability, net67,055  25,846  
Other liabilities262,884  281,474  
Total liabilities24,641,339  22,883,339  
COMMITMENTS AND CONTINGENCIES (NOTE 6)
SHAREHOLDERS' EQUITY  
Common stock, no par value, shares authorized: 400,000,000 in 2019 and 2018; issued and outstanding: 220,212,134 in 2019 and 220,255,039 in 2018
3,511,493  3,512,874  
Retained earnings733,059  602,482  
Accumulated other comprehensive income (loss)44,964  (58,914) 
Total shareholders' equity4,289,516  4,056,442  
Total liabilities and shareholders' equity$28,930,855  $26,939,781  

See notes to condensed consolidated financial statements
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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME 
(UNAUDITED) 
(in thousands, except per share amounts)Three Months EndedNine Months Ended
 September 30, 2019September 30, 2018September 30, 2019September 30, 2018
INTEREST INCOME    
Interest and fees on loans and leases$266,111  $246,410  $788,968  $718,021  
Interest and dividends on investment securities:    
Taxable12,546  24,435  42,789  48,633  
Exempt from federal income tax1,727  2,048  5,762  6,233  
Dividends599  549  1,690  1,450  
Interest on temporary investments and interest bearing deposits4,204  2,800  9,837  6,044  
Total interest income285,187  276,242  849,046  780,381  
INTEREST EXPENSE    
Interest on deposits45,876  25,692  123,561  62,561  
Interest on securities sold under agreement to repurchase and federal funds purchased448  103  1,661  321  
Interest on borrowings4,238  3,439  12,484  10,278  
Interest on junior subordinated debentures5,652  5,640  17,520  15,972  
Total interest expense56,214  34,874  155,226  89,132  
Net interest income228,973  241,368  693,820  691,249  
PROVISION FOR LOAN AND LEASE LOSSES 23,227  11,711  56,263  38,686  
Net interest income after provision for loan and lease losses205,746  229,657  637,557  652,563  
NON-INTEREST INCOME    
Service charges on deposits16,627  15,574  47,858  46,089  
Brokerage revenue4,060  3,947  11,850  12,302  
Residential mortgage banking revenue, net47,000  31,484  67,760  103,085  
(Loss) gain on sale of debt securities, net—  —  (7,186) 14  
Gain (loss) on equity securities, net257  (462) 83,559  (1,894) 
Gain on loan and lease sales, net1,762  2,772  5,864  5,350  
BOLI income2,067  2,051  6,328  6,181  
Other income16,739  17,022  40,042  51,479  
Total non-interest income88,512  72,388  256,075  222,606  
NON-INTEREST EXPENSE    
Salaries and employee benefits106,819  103,575  311,526  323,466  
Occupancy and equipment, net35,446  36,530  107,723  112,775  
Communications3,617  4,165  11,743  13,045  
Marketing3,804  3,969  10,842  8,857  
Services15,326  14,794  40,763  46,482  
FDIC assessments2,587  4,303  8,366  13,475  
Loss (gain) on other real estate owned, net1,188  (128) 3,815  (258) 
Intangible amortization1,405  1,541  4,214  4,624  
Other expenses13,398  10,543  36,605  38,511  
Total non-interest expense183,590  179,292  535,597  560,977  
Income before provision for income taxes110,668  122,753  358,035  314,192  
Provision for income taxes26,166  31,772  87,690  78,240  
Net income$84,502  $90,981  $270,345  $235,952  
Earnings per common share:    
Basic$0.38  $0.41  $1.23  $1.07  
Diluted$0.38  $0.41  $1.23  $1.07  
Weighted average number of common shares outstanding:    
Basic220,285  220,224  220,379  220,292  
Diluted220,583  220,620  220,642  220,751  

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  
(UNAUDITED) 
 
(in thousands)Three Months EndedNine Months Ended
 September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Net income$84,502  $90,981  $270,345  $235,952  
Available for sale securities:    
Unrealized gains (losses) arising during the period26,352  (29,262) 100,381  (75,479) 
Income tax (expense) benefit related to unrealized gains (losses)(6,778) 7,471  (25,819) 19,270  
Reclassification adjustment for net realized losses (gains) in earnings—  —  7,186  (14) 
Income tax (benefit) expense related to realized losses (gains) —  —  (1,848) 4  
Net change in unrealized gains (losses) for available for sale securities19,574  (21,791) 79,900  (56,219) 
Junior subordinated debentures, at fair value:
Unrealized gains (losses) arising during the period8,450  (2,409) 32,254  (5,605) 
Income tax (expense) benefit related to unrealized gains (losses)(2,173) 615  (8,276) 1,431  
Net change in unrealized gains (losses) for junior subordinated debentures, at fair value6,277  (1,794) 23,978  (4,174) 
Other comprehensive income (loss), net of tax25,851  (23,585) 103,878  (60,393) 
Comprehensive income$110,353  $67,396  $374,223  $175,559  

See notes to condensed consolidated financial statements
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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY  
(UNAUDITED)   

(in thousands, except shares)Common StockAccumulated Other Comprehensive Income (Loss) 
 SharesAmountRetained EarningsTotal
Balance at January 1, 2018  220,148,824  $3,517,258  $477,101  $(24,992) $3,969,367  
Net income      78,972     78,972  
Other comprehensive loss, net of tax         (32,672) (32,672) 
Stock-based compensation   1,829        1,829  
Stock repurchased and retired(201,473) (4,340)       (4,340) 
Issuances of common stock under stock plans 513,485  759        759  
Cash dividends on common stock ($0.20 per share)
      (44,149)    (44,149) 
Junior subordinated debentures, at fair value, cumulative effect adjustment (1)(9,710) 9,710  —  
Balance at March 31, 2018  220,460,836  $3,515,506  $502,214  $(47,954) $3,969,766  
Net income      65,999     65,999  
Other comprehensive loss, net of tax         (4,136) (4,136) 
Stock-based compensation   1,550        1,550  
Stock repurchased and retired(334,854) (8,167)       (8,167) 
Issuances of common stock under stock plans78,709  257        257  
Cash dividends on common stock ($0.20 per share)
      (44,182)    (44,182) 
Balance at June 30, 2018  220,204,691  $3,509,146  $524,031  $(52,090) $3,981,087  
Net income      90,981     90,981  
Other comprehensive loss, net of tax         (23,585) (23,585) 
Stock-based compensation   2,140        2,140  
Stock repurchased and retired(17,784) (386)       (386) 
Issuances of common stock under stock plans51,324  49        49  
Cash dividends on common stock ($0.21 per share)
      (46,393)    (46,393) 
Balance at September 30, 2018  220,238,231  $3,510,949  $568,619  $(75,675) $4,003,893  
Net income80,311  80,311  
Other comprehensive income, net of tax16,761  16,761  
Stock-based compensation1,994  1,994  
Stock repurchased and retired(3,537) (69) (69) 
Issuances of common stock under stock plans20,345  —  —  
Cash dividends on common stock ($0.21 per share)
(46,448) (46,448) 
Balance at December 31, 2018  220,255,039  $3,512,874  $602,482  $(58,914) $4,056,442  














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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
(UNAUDITED) 

(in thousands, except shares)Common StockAccumulated Other Comprehensive Income (Loss) 
 SharesAmountRetained EarningsTotal
Balance at January 1, 2019220,255,039  $3,512,874  $602,482  $(58,914) $4,056,442  
Net income  74,033   74,033  
Other comprehensive income, net of tax   29,632  29,632  
Stock-based compensation 754    754  
Stock repurchased and retired(108,088) (1,918)   (1,918) 
Issuances of common stock under stock plans310,257  21    21  
Cash dividends on common stock ($0.21 per share)
  (46,394)  (46,394) 
Leases, cumulative effect adjustment (2)(244) (244) 
Balance at March 31, 2019  220,457,208  $3,511,731  $629,877  $(29,282) $4,112,326  
Net income  111,810   111,810  
Other comprehensive income, net of tax   48,395  48,395  
Stock-based compensation 2,722    2,722  
Stock repurchased and retired(4,113) (62)   (62) 
Issuances of common stock under stock plans45,589  —    —  
Cash dividends on common stock ($0.21 per share)
  (46,684)  (46,684) 
Balance at June 30, 2019220,498,684  $3,514,391  $695,003  $19,113  $4,228,507  
Net income  84,502   84,502  
Other comprehensive income, net of tax   25,851  25,851  
Stock-based compensation 2,350    2,350  
Stock repurchased and retired(300,719) (5,248)   (5,248) 
Issuances of common stock under stock plans14,169  —    —  
Cash dividends on common stock ($0.21 per share)
  (46,446)  (46,446) 
Balance at September 30, 2019220,212,134  $3,511,493  $733,059  $44,964  $4,289,516  

(1) The cumulative effect adjustment from retained earnings to accumulated other comprehensive income (loss) relates to the implementation of new accounting guidance for the junior subordinated debentures that the Company previously elected to fair value on a recurring basis.

(2) The cumulative effect adjustment relates to the implementation of new accounting guidance for leases. Refer to Note 1 for discussion of the new accounting guidance.


See notes to condensed consolidated financial statements


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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 
(UNAUDITED) 

(in thousands)Nine Months Ended
 September 30, 2019September 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net income$270,345  $235,952  
Adjustments to reconcile net income to net cash provided by operating activities:  
Amortization of investment premiums, net19,592  15,485  
Loss (gain) on sale of investment securities, net7,186  (14) 
Loss (gain) on sale of other real estate owned, net802  (324) 
Valuation adjustment on other real estate owned3,013  66  
Provision for loan and lease losses56,263  38,686  
Change in cash surrender value of bank owned life insurance(6,365) (6,281) 
Depreciation, amortization and accretion33,126  40,015  
Gain on sale of premises and equipment(1,568) (2,365) 
Gain on store divestiture(1,225) (1,157) 
Additions to residential mortgage servicing rights carried at fair value(16,772) (22,012) 
Change in fair value of residential mortgage servicing rights carried at fair value34,414  125  
Gain on redemption of junior subordinated debentures at amortized cost—  (1,043) 
Stock-based compensation5,826  5,519  
Net increase in equity and other investments(1,217) (123) 
(Gain) loss on equity securities, net(83,559) 1,894  
Gain on sale of loans and leases, net(65,707) (59,485) 
Change in fair value of loans held for sale (5,758) 1,103  
Origination of loans held for sale(2,029,682) (2,283,639) 
Proceeds from sales of loans held for sale1,906,722  2,306,652  
Change in other assets and liabilities:  
Net (increase) decrease in other assets(183,131) 6,167  
Net (decrease) increase in other liabilities(20,180) 43,380  
Net cash (used in) provided by operating activities(77,875) 318,601  
CASH FLOWS FROM INVESTING ACTIVITIES:  
Purchases of investment securities available for sale(563,606) (283,948) 
Proceeds from investment securities available for sale778,259  341,680  
Proceeds from investment securities held to maturity432  385  
Proceeds from sale of equity securities81,853  —  
Purchases of restricted equity securities(220,200) (45,601) 
Redemption of restricted equity securities206,005  48,840  
Net change in loans and leases(1,235,214) (991,726) 
Proceeds from sales of loans and leases88,776  119,783  
Change in premises and equipment(8,230) (5,686) 
Proceeds from bank owned life insurance death benefits1,869  1,481  
Proceeds from sales of other real estate owned5,835  2,805  
Net cash paid in store divestiture(44,646) (35,219) 
Net cash used in investing activities$(908,867) $(847,206) 
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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) 
(UNAUDITED)
(in thousands)Nine Months Ended
 September 30, 2019September 30, 2018
CASH FLOWS FROM FINANCING ACTIVITIES:      
Net increase in deposit liabilities$1,347,046  $981,648  
Net decrease in securities sold under agreements to repurchase(434) (7,324) 
   Proceeds from borrowings810,670  50,000  
Repayment of borrowings(455,670) (100,652) 
Repayment of junior subordinated debentures at amortized cost—  (10,598) 
Dividends paid on common stock(138,856) (127,662) 
Proceeds from stock options exercised21  1,065  
Repurchase and retirement of common stock(7,228) (12,893) 
Net cash provided by financing activities1,555,549  773,584  
Net increase in cash and cash equivalents568,807  244,979  
Cash and cash equivalents, beginning of period622,637  634,280  
Cash and cash equivalents, end of period$1,191,444  $879,259  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:      
Cash paid during the period for:      
Interest$155,232  $83,255  
Income taxes$107,933  $49,475  
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Changes in unrealized gains and losses on investment securities available for sale, net of taxes$79,900  $(56,219) 
Changes in unrealized gains and losses on junior subordinated debentures carried at fair value, net of taxes$23,978  $(4,174) 
Junior subordinated debentures, at fair value, cumulative effect adjustment $—  $9,710  
Cash dividend declared on common stock and payable after period-end$46,245  $46,253  
Change in GNMA mortgage loans recognized due to repurchase option$(3,690) $(4,407) 
Transfer of loans to other real estate owned$2,718  $2,587  


See notes to condensed consolidated financial statements
 
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – 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 2018 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 2018 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. ("FinPac"), a commercial equipment leasing company.
 
In preparing these condensed consolidated financial statements, the Company has evaluated events and transactions subsequent to September 30, 2019 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.

Change in application of accounting principle

The Company's management elected to change the date of the annual goodwill impairment analysis to October 31 from the previous date of December 31. The Company determined that the date change allows for additional resources and time to analyze the factors that could affect goodwill prior to financial statement reporting. The Company believes this change to be immaterial and that the change will not produce different impairment results.

Application of new accounting guidance

As of January 1, 2019, Umpqua adopted the Financial Accounting Standard Board's ("FASB") Accounting Standard Update ("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 requires 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. Refer to Note 11 - Leases for further discussion of Umpqua's accounting policies for leases within the scope of ASC 842.

ASC 842 provides for a number of practical expedients in transition. We have elected the package of practical expedients, which permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easement; the latter not being applicable to us. The Company also did not elect the practical expedient to not separate lease and non-lease components on our real estate leases where we are the lessee.

In addition, ASC 842 provides practical expedients for an entity's ongoing accounting. The Company has elected the short-term lease recognition exemption for certain leases. This means, for those leases that have a term of less than 12 months, we will not recognize right-of-use ("ROU") assets or lease liabilities.

Umpqua adopted ASC 842 using the prospective approach without corresponding changes in the comparable prior periods. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. Adoption of the new standard resulted in the recognition of new lease ROU assets of $108.2 million and lease liabilities of $116.9 million on the balance sheet for our operating leases as of September 30, 2019. The difference between the additional lease assets and lease liabilities, net of the deferred tax impact, was recorded as an adjustment to retained earnings. This standard did not materially impact our consolidated net income and had no impact on cash flows.

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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). This ASU reduces complexity for the accounting for costs of implementing a cloud computing service arrangement. This 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 early adopted the ASU as of January 1, 2019 and will apply the new standard prospectively. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

Recent accounting pronouncements 

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 planned adoption date for the Company is January 1, 2020. The guidance is to be applied on a modified retrospective basis with the cumulative effect of initially applying the amendments recognized in retained earnings at the date of initial application. However, certain provisions of the guidance are only required to be applied on a prospective basis.

The ASU does not prescribe a method for implementation but does require the method chosen to be reasonable and supportable. The Company will use purchased and internally developed models. The majority of the models produce loan-level probability of default and loss given default factors. These factors are then used to determine life of loan loss rates, adjusted for prepayments. Two methods will be used to calculate the current expected credit loss: the discounted cash flow method for term loans and the non-discounted cash flow method for lines of credit. Along with the quantitative factors produced by the models, qualitative factors will be taken into consideration when developing the allowance amount.

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 implementation and is finalizing model build and validation, documenting process flow and internal controls, and conducting parallel runs. In addition, detailed and thorough disclosures are in the process of being developed to explain the complexity and aid the users of the financial statements to make informed decisions.

Management believes this ASU will have significant operational impacts as well as financial impacts on allowance estimates, capital ratios, and volatility of profit and loss. Based on our portfolio composition as of September 30, 2019, and the current economic environment, it is estimated the new guidance will result in an increase between 30% - 45% in the allowance for loan and lease losses; however, the Company is still in the process of testing and validating results and therefore the estimate is subject to change. The impact upon adoption will depend on the characteristics of the Company’s portfolios as well as the macroeconomic conditions and forecasts upon adoption, the validation of models and methodologies, and other management judgments.


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Note 2 – Investment Securities 
 
The following tables present the amortized costs, unrealized gains, unrealized losses and approximate fair values of debt securities at September 30, 2019 and December 31, 2018: 
 (in thousands)September 30, 2019
Amortized CostUnrealized GainsUnrealized LossesFair Value
AVAILABLE FOR SALE:            
U.S. Treasury and agencies$576,089  $11,379  $(268) $587,200  
Obligations of states and political subdivisions258,853  10,212  (35) 269,030  
Residential mortgage-backed securities and collateralized mortgage obligations
1,968,346  22,424  (4,924) 1,985,846  
 $2,803,288  $44,015  $(5,227) $2,842,076  
HELD TO MATURITY:    
Residential mortgage-backed securities and collateralized mortgage obligations
$3,320  $1,018  $—  $4,338  
 $3,320  $1,018  $—  $4,338  

 (in thousands)
December 31, 2018
Amortized CostUnrealized GainsUnrealized LossesFair Value
AVAILABLE FOR SALE:    
U.S. Treasury and agencies$40,002  $—  $(346) $39,656  
Obligations of states and political subdivisions308,972  2,785  (2,586) 309,171  
Residential mortgage-backed securities and collateralized mortgage obligations
2,696,913  3,590  (72,222) 2,628,281  
 $3,045,887  $6,375  $(75,154) $2,977,108  
HELD TO MATURITY:    
Residential mortgage-backed securities and collateralized mortgage obligations
$3,606  $1,038  $—  $4,644  
 $3,606  $1,038  $—  $4,644  

Debt securities that were in an unrealized loss position as of September 30, 2019 and December 31, 2018 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position.
 (in thousands)
September 30, 2019
Less than 12 Months12 Months or LongerTotal
 Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
AVAILABLE FOR SALE:      
U.S. Treasury and agencies$47,566  $226  $19,956  $42  $67,522  $268  
Obligations of states and political subdivisions
5,764  21  1,911  14  7,675  35  
Residential mortgage-backed securities and collateralized mortgage obligations
104,014  160  522,391  4,764  626,405  4,924  
Total temporarily impaired securities$157,344  $407  $544,258  $4,820  $701,602  $5,227  

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 (in thousands)
December 31, 2018
Less than 12 Months12 Months or LongerTotal
 Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
AVAILABLE FOR SALE:      
U.S. Treasury and agencies$—  $—  $39,656  $346  $39,656  $346  
Obligations of states and political subdivisions
59,963  800  38,691  1,786  98,654  2,586  
Residential mortgage-backed securities and collateralized mortgage obligations
332,103  5,432  1,992,546  66,790  2,324,649  72,222  
Total temporarily impaired securities$392,066  $6,232  $2,070,893  $68,922  $2,462,959  $75,154  
 
The unrealized losses on U.S. Treasury and agencies securities are due to increases in market interest rates since acquisition of each security and are not due to the underlying credit of the issuers. The unrealized losses on obligations of states and political subdivisions were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors the published credit ratings of these securities for material rating or outlook changes. Substantially all of the Company's obligations of states and political subdivisions are general obligation issuances. All of the available for sale residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at September 30, 2019 are issued or guaranteed by government sponsored enterprises. The unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that these securities will be settled at a price at least equal to the amortized cost of each investment.

Because the unrealized loss is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities and it is not more likely than not that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until maturity, these investments are not considered other-than-temporarily impaired. 

In June 2019, the Company completed a strategic restructuring of a portion of the available for sale debt securities portfolio. This restructuring resulted in the sale of certain securities at a gross loss of $7.3 million. This was a tactical effort to reduce interest rate sensitivity for a potentially decreasing interest rate environment and improve the cash liquidity position of the Company. The sales were primarily residential mortgage-backed securities and collateralized mortgage obligations and the purchases were non-callable agency bonds. The transaction resulted in an increased duration of the overall investment securities portfolio and a reduction in the portion of investments subject to prepayment.

The following table presents the contractual maturities of debt securities at September 30, 2019:  
 (in thousands)
Available For SaleHeld To Maturity
 Amortized CostFair ValueAmortized CostFair Value
Due within one year$24,236  $24,228  $—  $—  
Due after one year through five years52,813  53,341  —  —  
Due after five years through ten years796,964  811,297  16  16  
Due after ten years1,929,275  1,953,210  3,304  4,322  
 $2,803,288  $2,842,076  $3,320  $4,338  

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The following table presents the gross realized gains and losses on the sale of debt securities available for sale for the nine months ended September 30, 2019 and 2018. There were no realized gains or losses on the sale of debt securities available for sale for the three months ended September 30, 2019 and 2018.
 (in thousands)
Nine Months Ended
September 30, 2019September 30, 2018
Gain  Loss  Gain  Loss  
Obligations of states and political subdivisions$16  $—  $—  $—  
Residential mortgage-backed securities and collateralized mortgage obligations143  (7,345) 14  —  
$159  $(7,345) $14  $—  

The following table presents the gains and losses on equity securities for the three and nine months ended September 30, 2019 and 2018:

 (in thousands)
Three Months EndedNine Months Ended
September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Unrealized gain (loss) recognized on equity securities held at the end of the period$295  $(462) $1,744  $(1,894) 
Net gain (loss) recognized on equity securities sold during the period(38) —  81,815  —  
Total gain (loss) recognized on equity securities$257  $(462) $83,559  $(1,894) 

In June 2019, the Company completed the sale of all shares owned of Class B common stock of Visa Inc. resulting in a one-time gain of $81.9 million.

The following table presents, as of September 30, 2019, investment securities which were pledged to secure borrowings, public deposits, and repurchase agreements as permitted or required by law: 
 (in thousands)
Amortized CostFair Value
To state and local governments to secure public deposits$922,449  $934,186  
Other securities pledged principally to secure repurchase agreements490,393  498,739  
Total pledged securities$1,412,842  $1,432,925  


 
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Note 3 – Loans and Leases  
 
The following table presents the major types of loans and leases, net of deferred fees and costs, as of September 30, 2019 and December 31, 2018: 
(in thousands)September 30, 2019December 31, 2018
Commercial real estate  
Non-owner occupied term, net$3,495,555  $3,573,065  
Owner occupied term, net2,566,299  2,480,371  
Multifamily, net3,479,986  3,304,763  
Construction & development, net771,214  736,254  
Residential development, net191,500  196,890  
Commercial
Term, net2,310,759  2,232,923  
Lines of credit & other, net1,254,755  1,169,525  
Leases & equipment finance, net1,485,753  1,330,155  
Residential
Mortgage, net4,245,674  3,635,073  
Home equity loans & lines, net1,224,578  1,176,477  
Consumer & other, net494,721  587,170  
Total loans, net of deferred fees and costs$21,520,794  $20,422,666  
 
The loan balances are net of deferred fees and costs of $73.6 million and $70.4 million as of September 30, 2019 and December 31, 2018, respectively. Net loans also include discounts on acquired loans of $37.0 million and $50.0 million as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, loans totaling $13.4 billion were pledged to secure borrowings and available lines of credit.

The outstanding contractual unpaid principal balance of purchased impaired loans, excluding acquisition accounting adjustments, was $146.3 million and $183.7 million at September 30, 2019 and December 31, 2018, respectively. The carrying balance of purchased impaired loans was $104.8 million and $134.5 million at September 30, 2019 and December 31, 2018, respectively.

The following table presents the changes in the accretable yield for purchased impaired loans for the three and nine months ended September 30, 2019 and 2018:
(in thousands)Three Months EndedNine Months Ended
September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Balance, beginning of period$46,019  $62,966  $56,564  $74,268  
Accretion to interest income(6,982) (3,793) (17,300) (19,694) 
Disposals(3,350) (1,147) (7,923) (9,001) 
Reclassifications from non-accretable difference4,357  169  8,703  12,622  
Balance, end of period$40,044  $58,195  $40,044  $58,195  

Umpqua, through its commercial equipment leasing subsidiary, FinPac, is a direct provider of commercial equipment leasing and financing throughout the United States, originating business through three distinct channels: small and mid-ticket third party originators, vendor finance, and Umpqua Bank Equipment Leasing & Finance. Direct finance leases are included within the lease and equipment finance segment within the loans and leases, net line item. All of these leases typically have terms of three to 5 years and are considered to be direct financing leases. Interest income recognized on these leases was $8.1 million and $24.6 million for the three and nine months ended September 30, 2019, respectively.

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Residual values on leases are established at the time equipment is leased based on an estimate of the value of the leased equipment when the Company expects to dispose of the equipment, typically at the termination of the lease. An annual evaluation is also performed each fiscal year by an independent valuation specialist and equipment residuals are confirmed or adjusted in conjunction with such evaluation.

The following table presents the net investment in direct financing leases as of September 30, 2019 and December 31, 2018: 
(in thousands)September 30, 2019December 31, 2018
Minimum lease payments receivable  $463,834  $450,258  
Estimated guaranteed and unguaranteed residual values  85,360  79,455  
Initial direct costs - net of accumulated amortization  9,806  10,950  
Unearned income  (73,083) (79,777) 
Net investment in direct financing leases  $485,917  $460,886  

The following table presents the scheduled minimum lease payments receivable as of September 30, 2019:
(in thousands)
YearAmount  
2019$41,122  
2020148,284  
2021117,687  
202274,456  
202338,675  
Thereafter43,610  
$463,834  

Loans and leases sold 
 
In the course of managing the loan and lease portfolio, at certain times, management may decide to sell loans and leases. The following table summarizes the carrying value of loans and leases sold by major loan type during the three and nine months ended September 30, 2019 and 2018: 
(in thousands)Three Months EndedNine Months Ended
 September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Commercial real estate    
Non-owner occupied term, net$16,467  $3,215  $24,229  $8,369  
Owner occupied term, net2,780  12,751  15,751  26,843  
Multifamily, net—  4,432  —  4,432  
Commercial    
Term, net7,670  13,331  23,633  33,120  
Lines of credit & other, net1,619  —  1,619  —  
Leases & equipment finance, net—  —  17,571  —  
Residential    
Mortgage, net—  41,669  109  41,669  
Total$28,536  $75,398  $82,912  $114,433  


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Note 4 – Allowance for Loan and Lease Loss and Credit Quality 
 
The Bank's methodology for assessing the appropriateness of the Allowance for Loan and Lease Loss ("ALLL") consists of three key elements: 1) the formula allowance; 2) the specific allowance; and 3) the unallocated allowance. By incorporating these factors into a single allowance requirement analysis, we believe all risk-based activities within the loan and lease portfolios are simultaneously considered. 

Formula Allowance 
When loans and leases are originated or acquired, they are assigned a risk rating that is reassessed periodically during the term of the loan or lease through the credit review process.  The Bank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the formula allowance. 
 
The formula allowance is calculated by applying risk factors that represent our estimate of incurred losses to various segments of pools of outstanding loans and leases. Risk factors are assigned to each portfolio segment based on management's evaluation of the losses inherent within each segment. Segments with greater risk of loss will therefore be assigned a higher risk factor. 
 
Base risk – The portfolio is segmented into loan categories, and these categories are assigned a Base risk factor based on an evaluation of the loss inherent within each segment. 
 
Extra risk – Additional risk factors provide for an additional allocation of ALLL based on the loan and lease risk rating system and loan delinquency, and reflect the increased level of inherent losses associated with more adversely classified loans and leases. 

Risk factors may be changed periodically based on management's evaluation of the following factors: loss experience; changes in the level of non-performing loans and leases; regulatory exam results; changes in the level of adversely classified loans and leases; improvement or deterioration in economic conditions; and any other factors deemed relevant. Additionally, FinPac considers additional quantitative and qualitative factors:  migration analysis; a static pool analysis of historic recoveries; and forecasting uncertainties. A migration analysis is a technique used to estimate the likelihood that an account will progress through the various delinquency states and ultimately be charged off.
 
Specific Allowance 
Regular credit reviews of the portfolio identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired when, based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using discounted cash flows or estimated note sale price, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize an impairment reserve as a specific allowance to be provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral-dependent loans if it is determined that such amount represents a confirmed loss.  Loans determined to be impaired are excluded from the formula allowance so as not to double-count the loss exposure.
 
The combination of the formula allowance component and the specific allowance component represents the allocated allowance for loan and lease losses. There was no unallocated allowance as of September 30, 2019 and December 31, 2018.
 
The reserve for unfunded commitments ("RUC") is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the ALLL and RUC are monitored on a regular basis and are based on management's evaluation of numerous factors. These factors include the quality of the current loan portfolio; the trend in the loan portfolio's risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information.
 
There have been no significant changes to the Bank's ALLL methodology or policies in the periods presented. 
 
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Activity in the Allowance for Loan and Lease Losses 
 
The following tables summarize activity related to the allowance for loan and lease losses by loan and lease portfolio segment for the three and nine months ended September 30, 2019 and 2018: 
(in thousands)Three Months Ended September 30, 2019
 Commercial Real EstateCommercialResidentialConsumer & Other
Total 
Balance, beginning of period$48,997  $68,353  $23,654  $10,065  $151,069  
Charge-offs(497) (20,457) (305) (1,853) (23,112) 
Recoveries177  4,263  94  570  5,104  
Provision2,524  18,797  1,113  793  23,227  
Balance, end of period$51,201  $70,956  $24,556  $9,575  $156,288  
(in thousands)Three Months Ended September 30, 2018
 Commercial Real EstateCommercialResidentialConsumer & OtherTotal 
Balance, beginning of period$47,285  $65,765  $20,275  $11,231  $144,556  
Charge-offs(415) (13,926) (95) (1,460) (15,896) 
Recoveries413  2,473  237  532  3,655  
(Recapture) provision(942) 11,133  609  911  11,711  
Balance, end of period$46,341  $65,445  $21,026  $11,214  $144,026  

(in thousands)Nine Months Ended September 30, 2019
 Commercial Real EstateCommercialResidentialConsumer & OtherTotal
Balance, beginning of period$47,904  $63,957  $22,034  $10,976  $144,871  
Charge-offs(3,035) (48,364) (507) (5,065) (56,971) 
Recoveries733  9,228  399  1,765  12,125  
Provision5,599  46,135  2,630  1,899  56,263  
Balance, end of period$51,201  $70,956  $24,556  $9,575  $156,288  
(in thousands)Nine Months Ended September 30, 2018
 Commercial Real EstateCommercialResidentialConsumer & OtherTotal
Balance, beginning of period$45,765  $63,305  $19,360  $12,178  $140,608  
Charge-offs(1,088) (40,270) (801) (4,364) (46,523) 
Recoveries919  8,097  538  1,701  11,255  
Provision745  34,313  1,929  1,699  38,686  
Balance, end of period$46,341  $65,445  $21,026  $11,214  $144,026  
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The following tables present the allowance and recorded investment in loans and leases by portfolio segment and balances individually or collectively evaluated for impairment as of September 30, 2019 and 2018: 
 (in thousands)
September 30, 2019
 Commercial Real EstateCommercialResidentialConsumer & OtherTotal 
Allowance for loans and leases:
Collectively evaluated for impairment$49,676  $70,783  $24,255  $9,567  $154,281  
Individually evaluated for impairment188  10  —  —  198  
Loans acquired with deteriorated credit quality1,337  163  301  8  1,809  
Total$51,201  $70,956  $24,556  $9,575  $156,288  
Loans and leases:    
Collectively evaluated for impairment$10,402,556  $5,043,000  $5,450,319  $494,414  $21,390,289  
Individually evaluated for impairment17,973  7,696  —  —  25,669  
Loans acquired with deteriorated credit quality84,025  571  19,933  307  104,836  
Total$10,504,554  $5,051,267  $5,470,252  $494,721  $21,520,794  
 
 (in thousands)
September 30, 2018
 Commercial Real EstateCommercialResidentialConsumer & OtherTotal 
Allowance for loans and leases:
Collectively evaluated for impairment$44,353  $65,135  $20,671  $11,173  $141,332  
Individually evaluated for impairment215  5  —  —  220  
Loans acquired with deteriorated credit quality1,773  305  355  41  2,474  
Total$46,341  $65,445  $21,026  $11,214  $144,026  
Loans and leases:    
Collectively evaluated for impairment$9,934,169  $4,543,599  $4,583,986  $603,752  $19,665,506  
Individually evaluated for impairment25,410  18,133  —  —  43,543  
Loans acquired with deteriorated credit quality113,363  3,280  27,934  407  144,984  
Total$10,072,942  $4,565,012  $4,611,920  $604,159  $19,854,033  
 

Summary of Reserve for Unfunded Commitments Activity 

The following tables present a summary of activity in the RUC and unfunded commitments for the three and nine months ended September 30, 2019 and 2018: 
(in thousands) Three Months EndedNine Months Ended
 September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Balance, beginning of period$4,857  $4,130  $4,523  $3,963  
Net charge to other expense228  164  562  331  
Balance, end of period$5,085  $4,294  $5,085  $4,294  

 (in thousands)Total
Unfunded loan and lease commitments: 
September 30, 2019$5,744,307  
September 30, 2018$5,244,832  
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Asset Quality and Non-Performing Loans and Leases
 
We manage asset quality and control credit risk through diversification of the loan and lease portfolio and the application of policies designed to promote sound underwriting and loan and lease monitoring practices. The Bank's Credit Quality Administration is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank.  Reviews of non-performing, past due loans and leases and larger credits, designed to identify potential charges to the allowance for loan and lease losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan and lease portfolio, prevailing economic conditions and other factors. 

Non-Accrual Loans and Leases and Loans and Leases Past Due  
 
The following tables summarize our non-accrual loans and leases and loans and leases past due, by loan and lease class, as of September 30, 2019 and December 31, 2018: 
(in thousands)September 30, 2019
 Greater than 30 to 59 Days Past Due60 to 89 Days Past Due90+ Days and AccruingTotal Past Due Non-Accrual
Current & Other (1)
Total Loans and Leases
Commercial real estate       
Non-owner occupied term, net$20  $1,690  $—  $1,710  $9,677  $3,484,168  $3,495,555  
Owner occupied term, net4,131  4,062  1  8,194  5,609  2,552,496  2,566,299  
Multifamily, net—  —  —  —  —  3,479,986  3,479,986  
Construction & development, net—  —  —  —  —  771,214  771,214  
Residential development, net—  —  —  —  —  191,500  191,500  
Commercial     
Term, net465  1,012  —  1,477  2,763  2,306,519  2,310,759  
Lines of credit & other, net1,961  533  226  2,720  1,048  1,250,987  1,254,755  
Leases & equipment finance, net7,199  9,906  3,321  20,426  12,539  1,452,788  1,485,753  
Residential     
Mortgage, net (2)
—  7,698  35,401  43,099  —  4,202,575  4,245,674  
Home equity loans & lines, net1,317  1,109  1,232  3,658  —  1,220,920  1,224,578  
Consumer & other, net2,445  842  791  4,078  —  490,643  494,721  
Total, net of deferred fees and costs$17,538  $26,852  $40,972  $85,362  $31,636  $21,403,796  $21,520,794  

(1) Other includes purchased credit impaired loans of $104.8 million.
(2) Includes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase that are past due 90 days or more, totaling $5.2 million at September 30, 2019.
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 (in thousands)December 31, 2018
 Greater than 30 to 59 Days Past Due60 to 89 Days Past Due90+ Days and AccruingTotal Past Due Non-Accrual
Current & Other (1)
Total Loans and Leases
Commercial real estate       
Non-owner occupied term, net$1,192  $1,042  $—  $2,234  $10,033  $3,560,798  $3,573,065  
Owner occupied term, net3,920  1,372  1  5,293  8,682  2,466,396  2,480,371  
Multifamily, net107  —  —  107  4,298  3,300,358  3,304,763  
Construction & development, net—  —  —  —  —  736,254  736,254  
Residential development, net—  —  —  —  —  196,890  196,890  
Commercial    
Term, net992  117  —  1,109  11,772  2,220,042  2,232,923  
Lines of credit & other, net1,286  143  83  1,512  2,275  1,165,738  1,169,525  
Leases & equipment finance, net8,571  8,754  3,016  20,341  13,763  1,296,051  1,330,155  
Residential    
Mortgage, net (2)
—  4,900  39,218  44,118  —  3,590,955  3,635,073  
Home equity loans & lines, net987  368  2,492  3,847  —  1,172,630  1,176,477  
Consumer & other, net2,711  911  551  4,173  —  582,997  587,170  
Total, net of deferred fees and costs$19,766  $17,607  $45,361  $82,734  $50,823  $20,289,109  $20,422,666  

(1) Other includes purchased credit impaired loans of $134.5 million.
(2) Includes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase that are past due 90 days or more, totaling $8.9 million at December 31, 2018.

Impaired Loans and Leases

Loans with no related allowance reported generally represent non-accrual loans, which are also considered impaired loans. The Bank recognizes the charge-off on impaired loans in the period it arises for collateral-dependent loans.  Therefore, the non-accrual loans as of September 30, 2019 have already been written down to their estimated net realizable value and are expected to be resolved with no additional material loss, absent further decline in net realizable value.  The valuation allowance on impaired loans primarily represents the impairment reserves on performing restructured loans, and is measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan's carrying value. 

The following tables summarize our impaired loans and leases by loan class as of September 30, 2019 and December 31, 2018: 
(in thousands)September 30, 2019
 Recorded Investment 
 Unpaid Principal BalanceWithout AllowanceWith AllowanceRelated Allowance
Commercial real estate    
Non-owner occupied term, net$16,088  $9,518  $3,661  $115  
Owner occupied term, net6,174  3,959  835  73  
Commercial  
Term, net11,791  5,018  12  1  
Lines of credit & other, net971  858  —  —  
Leases & equipment finance, net1,808  —  1,808  9  
Total, net of deferred fees and costs$36,832  $19,353  $6,316  $198  
 
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(in thousands)December 31, 2018
 Recorded Investment 
 Unpaid Principal BalanceWithout AllowanceWith AllowanceRelated Allowance
Commercial real estate    
Non-owner occupied term, net$14,877  $9,847  $3,715  $90  
Owner occupied term, net8,188  6,178  878  88  
Multifamily, net4,493  4,298  —  —  
Commercial   
Term, net22,770  11,089  3,770  2  
Lines of credit & other, net7,145  2,065  —  —  
Leases & equipment finance, net417  417  —  —  
Total, net of deferred fees and costs$57,890  $33,894  $8,363  $180  

The following tables summarize our average recorded investment and interest income recognized on impaired loans and leases by loan class for the three and nine months ended September 30, 2019 and 2018: 
(in thousands) 
Three Months Ended
 September 30, 2019September 30, 2018
 Average Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest Income Recognized
Commercial real estate    
Non-owner occupied term, net$12,901  $34  $13,475  $33  
Owner occupied term, net5,439  10  9,551  10  
Multifamily, net—  —  4,072  —  
Commercial   
Term, net5,258  47  14,244  51  
Lines of credit & other, net891  —  2,608  —  
Leases & equipment finance, net2,017  28  828  —  
Total, net of deferred fees and costs$26,506  $119  $44,778  $94  

(in thousands) 
Nine Months Ended
 September 30, 2019September 30, 2018
 Average Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest Income Recognized
Commercial real estate    
Non-owner occupied term, net$12,833  $98  $14,047  $238  
Owner occupied term, net5,927  28  10,506  30  
Multifamily, net1,731  —  3,970  60  
Commercial    
Term, net9,408  151  17,728  196  
Lines of credit & other, net1,333  —  3,667  —  
Leases & equipment finance, net1,855  57  450  —  
Total, net of deferred fees and costs$33,087  $334  $50,368  $524  
The impaired loans for which these interest income amounts were recognized primarily relate to accruing restructured loans. 
 
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Credit Quality Indicators 
 
As previously noted, the Bank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk.  The Bank differentiates its lending portfolios into homogeneous loans and leases and non-homogeneous loans and leases. Homogeneous loans and leases are not risk rated until they are greater than 30 days past due, and risk rating is based on the past due status of the loan or lease. The 10 risk rating categories can be generally described by the following groupings for loans and leases:
 
Minimal Risk—A minimal risk loan or lease, risk rated 1, is to a borrower of the highest quality. The borrower has an unquestioned ability to produce consistent profits and service all obligations and can absorb severe market disturbances with little or no difficulty. 
 
Low Risk—A low risk loan or lease, risk rated 2, is similar in characteristics to a minimal risk loan.  Margins may be smaller or protective elements may be subject to greater fluctuation. The borrower will have a strong demonstrated ability to produce profits, provide ample debt service coverage and to absorb market disturbances. 

Modest Risk—A modest risk loan or lease, risk rated 3, is a desirable loan or lease with excellent sources of repayment and no currently identifiable risk associated with collection. The borrower exhibits a very strong capacity to repay the credit in accordance with the repayment agreement. The borrower may be susceptible to economic cycles, but will have reserves to weather these cycles. 

Average Risk—An average risk loan or lease, risk rated 4, is an attractive loan or lease with sound sources of repayment and no material collection or repayment weakness evident. The borrower has an acceptable capacity to pay in accordance with the agreement. The borrower is susceptible to economic cycles and more efficient competition, but should have modest reserves sufficient to survive all but the most severe downturns or major setbacks.
 
Acceptable Risk—An acceptable risk loan or lease, risk rated 5, is a loan or lease with lower than average, but still acceptable credit risk. These borrowers may have higher leverage, less certain but viable repayment sources, have limited financial reserves and may possess weaknesses that can be adequately mitigated through collateral, structural or credit enhancement. The borrower is susceptible to economic cycles and is less resilient to negative market forces or financial events. Reserves may be insufficient to survive a modest downturn. 

Watch—A watch loan or lease, risk rated 6, is still pass-rated, but represents the lowest level of acceptable risk due to an emerging risk element or declining performance trend. Watch ratings are expected to be temporary, with issues resolved or manifested to the extent that a higher or lower rating would be appropriate. The borrower should have a plausible plan, with reasonable certainty of success, to correct the problems in a short period of time.
 
Special Mention—A special mention loan or lease, risk rated 7, has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the institution's credit position at some future date. They contain unfavorable characteristics and are generally undesirable. Loans and leases in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a substandard classification. A special mention loan or lease has potential weaknesses, which if not checked or corrected, weaken the asset or inadequately protect the Bank's position at some future date. For commercial and commercial real estate homogeneous loans and leases to be classified as special mention, risk rated 7, the loan or lease is greater than 30 to 59 days past due from the required payment date at month-end. Residential and consumer and other homogeneous loans are risk rated 7, when the loan is greater than 30 to 89 days past due from the required payment date at month-end. 

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Substandard—A substandard asset, risk rated 8, is inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. Loans and leases are classified as substandard when they have unsatisfactory characteristics causing unacceptable levels of risk. A substandard loan or lease normally has one or more well-defined weaknesses that could jeopardize repayment of the debt. The likely need to liquidate assets to correct the problem, rather than repayment from successful operations is the key distinction between special mention and substandard. Commercial and commercial real estate homogeneous loans and leases are classified as a substandard loan or lease, risk rated 8, when the loan or lease is 60 to 89 days past due from the required payment date at month-end. Residential and consumer and other homogeneous loans are classified as a substandard loan, risk rated 8, when an open-end loan is 90 to 180 days past due from the required payment date at month-end or when a closed-end loan 90 to 120 days is past due from the required payment date at month-end.

Doubtful—Loans or leases classified as doubtful, risk rated 9, have all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work towards strengthening of the asset, classification as a loss (and immediate charge-off) is deferred until more exact status may be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, and perfection of liens on additional collateral and refinancing plans. In certain circumstances, a doubtful rating will be temporary, while the Bank is awaiting an updated collateral valuation. In these cases, once the collateral is valued and appropriate margin applied, the remaining un-collateralized portion will be charged-off. The remaining balance, properly margined, may then be upgraded to substandard, however must remain on non-accrual.  Commercial and commercial real estate homogeneous doubtful loans or leases, risk rated 9, are 90 to 179 days past due from the required payment date at month-end. 
 
Loss—Loans or leases classified as loss, risk rated 10, are considered un-collectible and of such little value that the continuance as an active Bank asset is not warranted. This rating does not mean that the loan or lease has no recovery or salvage value, but rather that the loan or lease should be charged-off now, even though partial or full recovery may be possible in the future. For a commercial or commercial real estate homogeneous loss loan or lease to be risk rated 10, the loan or lease is 180 days and more past due from the required payment date. These loans are generally charged-off in the month in which the 180 day time period elapses. Residential, consumer and other homogeneous loans are risk rated 10, when a loan becomes past due 120 cumulative days from the contractual due date.  Residential and consumer loans secured by real estate are generally charged down to net realizable value in the month in which the loan becomes 180 days past due. All other residential, consumer, and other homogeneous loans are generally charged-off in the month in which the 120 day period elapses. 
 
Impaired—Loans are classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement, without unreasonable delay. This generally includes all loans classified as non-accrual and troubled debt restructurings. Impaired loans are risk rated for internal and regulatory rating purposes, but presented separately for clarification. 

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The following tables summarize our internal risk rating by loan and lease class for the loan and lease portfolio, including purchased credit impaired loans, as of September 30, 2019 and December 31, 2018: 
(in thousands)September 30, 2019
 Pass/WatchSpecial MentionSubstandardDoubtfulLoss
Impaired (1)
Total
Commercial real estate       
Non-owner occupied term, net$3,428,080  $35,036  $19,100  $—  $160  $13,179  $3,495,555  
Owner occupied term, net2,468,692  69,676  23,057  80  —  4,794  2,566,299  
Multifamily, net3,468,743  8,850  2,393  —  —  —  3,479,986  
Construction & development, net741,050  30,164  —  —  —  —  771,214  
Residential development, net191,500  —  —  —  —  —  191,500  
Commercial   
Term, net2,269,473  10,752  25,498  2  4  5,030  2,310,759  
Lines of credit & other, net1,190,456  44,219  18,995  227  —  858  1,254,755  
Leases & equipment finance, net1,451,038  7,199  9,906  13,796  2,006  1,808  1,485,753  
Residential  
Mortgage, net (2)
4,201,253  8,034  36,214  —  173  —  4,245,674  
Home equity loans & lines, net1,220,793  2,487  1,012  —  286  —  1,224,578  
Consumer & other, net490,608  3,288  796  —  29  —  494,721  
Total, net of deferred fees and costs$21,121,686  $219,705  $136,971  $14,105  $2,658  $25,669  $21,520,794  
(1) The percentage of impaired loans classified as pass/watch, special mention and substandard was 3.3%, 13.6% and 83.1%, respectively, as of September 30, 2019.
(2) Includes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase that are past due 90 days or more, totaling $5.2 million at September 30, 2019, which is included in the substandard category.

(in thousands)December 31, 2018
 Pass/WatchSpecial MentionSubstandardDoubtfulLoss
Impaired (1)
Total
Commercial real estate       
Non-owner occupied term, net$3,497,801  $38,346  $23,234  $—  $122  $13,562  $3,573,065  
Owner occupied term, net2,422,351  28,447  22,136  54  327  7,056  2,480,371  
Multifamily, net3,284,445  11,481  4,539  —  —  4,298  3,304,763  
Construction & development, net734,318  —  1,936  —  —  —  736,254  
Residential development, net196,890  —  —  —  —  —  196,890  
Commercial        
Term, net2,196,753  15,519  5,670  53  69  14,859  2,232,923  
Lines of credit & other, net1,103,677  42,831  20,639  313  —  2,065  1,169,525  
Leases & equipment finance, net1,296,235  8,571  8,754  14,247  1,931  417  1,330,155  
Residential        
Mortgage, net (2)
3,588,976  5,169  38,766  —  2,162  —  3,635,073  
Home equity loans & lines, net1,172,040  1,878  1,418  —  1,141  —  1,176,477  
Consumer & other, net582,962  3,622  559  —  27  —  587,170  
Total, net of deferred fees and costs$20,076,448  $155,864  $127,651  $14,667  $5,779  $42,257  $20,422,666  
(1) The percentage of impaired loans classified as pass/watch, special mention and substandard was 3.2%, 8.8% and 88.0%, respectively, as of December 31, 2018.
(2) Includes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase that are past due 90 days or more, totaling $8.9 million at December 31, 2018, which is included in the substandard category.

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Troubled Debt Restructurings 

At September 30, 2019 and December 31, 2018, impaired loans of $14.3 million and $13.9 million, respectively, were classified as accruing restructured loans. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. In order for a newly restructured loan to be considered for accrual status, the loan's collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. Impaired restructured loans carry a specific allowance and the allowance on impaired restructured loans is calculated consistently across the portfolios. 

There were $500,000 available commitments for troubled debt restructurings outstanding as of September 30, 2019 and $338,000 as of December 31, 2018. 
 
The following tables present troubled debt restructurings by accrual versus non-accrual status and by loan class as of September 30, 2019 and December 31, 2018: 
(in thousands) September 30, 2019
 Accrual StatusNon-Accrual StatusTotal Modifications
Commercial real estate, net$3,999  $6,599  $10,598  
Commercial, net5,308  93  5,401  
Residential, net5,002  —  5,002  
Total, net of deferred fees and costs$14,309  $6,692  $21,001  
 
(in thousands)December 31, 2018
 Accrual StatusNon-Accrual StatusTotal Modifications
Commercial real estate, net$4,524  $9,290  $13,814  
Commercial, net3,696  8,736  12,432  
Residential, net5,704  —  5,704  
Total, net of deferred fees and costs$13,924  $18,026  $31,950  

The Bank's policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain.  The Bank's policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.

There were no new restructured loans during the three months ended September 30, 2019 and September 30, 2018. The following tables present newly restructured loans that occurred during the nine months ended September 30, 2019 and September 30, 2018:

(in thousands)Nine Months Ended
September 30, 2019September 30, 2018
Commercial real estate, net$118  $—  
Commercial, net1,842  —  
Residential, net7  106  
Total, net of deferred fees and costs$1,967  $106  

For the periods presented in the tables above, the outstanding recorded investment was the same pre and post modification and all modifications were combination modifications. There were no financing receivables modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the three and nine months ended September 30, 2019 and 2018.

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Note 5 – Residential Mortgage Servicing Rights 
 
The Company measures its mortgage servicing rights at fair value with changes in fair value reported in residential mortgage banking revenue in the Condensed Consolidated Statements of Income. The following table presents the changes in the Company's residential mortgage servicing rights ("MSR") for the three and nine months ended September 30, 2019 and 2018: 

(in thousands) Three Months EndedNine Months Ended
 September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Balance, beginning of period$139,780  $166,217  $169,025  $153,151  
Additions for new MSR capitalized7,393  8,622  16,772  22,012  
Changes in fair value:    
Changes due to collection/realization of expected cash flows over time(6,835) (6,007) (20,171) (18,108) 
Changes due to valuation inputs or assumptions (1)
11,045  6,206  (14,243) 17,983  
Balance, end of period$151,383  $175,038  $151,383  $175,038  

(1)The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates.

Information related to our serviced loan portfolio as of September 30, 2019 and December 31, 2018 is as follows: 
(dollars in thousands)September 30, 2019December 31, 2018
Balance of loans serviced for others$15,707,519  $15,978,885  
MSR as a percentage of serviced loans0.96 %1.06 %
 
The amount of contractually specified servicing fees, late fees and ancillary fees earned, recorded in residential mortgage banking revenue, was $11.3 million and $33.2 million for the three and nine months ended September 30, 2019, respectively, as compared to $10.3 million and $31.2 million for the three and nine months ended September 30, 2018, respectively. 

Note 6 – Commitments and Contingencies 
 
Financial Instruments with Off-Balance-Sheet Risk — The Company's financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of the Bank's business and involve elements of credit, liquidity, and interest rate risk. 
 
The following table presents a summary of the Bank's commitments and contingent liabilities:  
 (in thousands)
As of September 30, 2019
Commitments to extend credit$5,661,080  
Forward sales commitments$637,954  
Commitments to originate residential mortgage loans held for sale$421,515  
Standby letters of credit$83,227  
 
The Bank is a party to financial instruments with off-balance-sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve elements of credit and interest-rate risk similar to the risk involved in on-balance sheet items. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments. 
 
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. 

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There were no financial guarantees in connection with standby letters of credit that the Bank was required to perform on during the three and nine months ended September 30, 2019 and September 30, 2018. At September 30, 2019, approximately $63.0 million of standby letters of credit expire within one year, and $20.2 million expire thereafter.

Residential mortgage loans sold into the secondary market are sold with limited recourse against the Company, meaning that the Company may be obligated to repurchase or otherwise reimburse the investor for incurred losses on any loans that suffer an early payment default, are not underwritten in accordance with investor guidelines or are determined to have pre-closing borrower misrepresentations. As of September 30, 2019, the Company had a residential mortgage loan repurchase reserve liability of $1.6 million. For loans sold to GNMA, the Bank has a unilateral right, but not the obligation, to repurchase loans that are past due 90 days or more. As of September 30, 2019, the Bank has recorded a liability for the loans subject to this repurchase right of $5.2 million, and has recorded these loans as part of the loan portfolio as if we had repurchased these loans.
 
Legal Proceedings—Umpqua is involved in legal proceedings occurring in the ordinary course of business. Based on information currently available, advice of counsel and available insurance coverage, we believe that the eventual outcome of actions against the Company or its subsidiaries will not, individually or in the aggregate, have a material adverse effect on our consolidated financial condition. However, it is possible that the ultimate resolution of a matter, if unfavorable, may be material to our results of operations for any particular period.

Contingencies—In late 2017, the Company launched "Umpqua Next Gen," an initiative designed to modernize and evolve the Bank focusing on operational excellence, balanced growth and human-digital programs. As part of this initiative, the Company evaluated every part of our operations and how we could evolve to deliver a highly differentiated and compelling banking experience. In 2018, Umpqua consolidated 31 stores. During the nine months ended September 30, 2019, Umpqua consolidated 16 stores and sold 4 stores. The Next Gen strategy involves evaluation of possible future consolidations and Umpqua plans to consolidate 7 additional stores in 2019.

Concentrations of Credit Risk— The Bank grants real estate mortgage, real estate construction, commercial, agricultural and installment loans and leases to customers throughout Oregon, Washington, California, Idaho, and Nevada. In management's judgment, a concentration exists in real estate-related loans, which represented approximately 75% of the Bank's loan and lease portfolio at September 30, 2019 and December 31, 2018.  Commercial real estate concentrations are managed to assure wide geographic and business diversity. Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, material increases in interest rates, changes in tax policies, tightening credit or refinancing markets, or a decline in real estate values in the Bank's primary market areas in particular, could have an adverse impact on the repayment of these loans.  Personal and business incomes, proceeds from the sale of real property, or proceeds from refinancing, represent the primary sources of repayment for a majority of these loans. 
 
The Bank recognizes the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive exposure to any single correspondent, the Bank has established general standards for selecting correspondent banks as well as internal limits for allowable exposure to any single correspondent. In addition, the Bank has an investment policy that sets forth limitations that apply to all investments with respect to credit rating and concentrations with an issuer.
  
Note 7 – 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 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. 
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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 DerivativesLiability Derivatives
Derivatives not designated as hedging instrumentSeptember 30, 2019December 31, 2018September 30, 2019December 31, 2018
Interest rate lock commitments$9,070  $6,757  $—  $—  
Interest rate forward sales commitments801  1  1,260  2,963  
Interest rate swaps189,366  42,276  4,010  12,746  
Foreign currency derivatives1,175  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 EndedNine Months Ended
Derivatives not designated as hedging instrumentSeptember 30, 2019September 30, 2018September 30, 2019September 30, 2018
Interest rate lock commitments$922  $(1,623) $2,313  $407  
Interest rate forward sales commitments(2,467) 2,029  (11,875) 10,773  
Interest rate swaps(2,281) 224  (8,712) 1,645  
Foreign currency derivatives527  556  1,522  1,371  
Total$(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.

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Note 8 – Earnings Per Common Share  
 
The following is a computation of basic and diluted earnings per common share for the three and nine months ended September 30, 2019 and 2018: 
(in thousands, except per share data)Three Months EndedNine Months Ended
 September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Net income$84,502  $90,981  $270,345  $235,952  
    
Weighted average number of common shares outstanding - basic220,285  220,224  220,379  220,292  
Effect of potentially dilutive common shares (1)
298  396  263  459  
Weighted average number of common shares outstanding - diluted220,583  220,620  220,642  220,751  
EARNINGS PER COMMON SHARE:    
Basic$0.38  $0.41  $1.23  $1.07  
Diluted$0.38  $0.41  $1.23  $1.07  
(1)Represents the effect of the assumed exercise of stock options, vesting of non-participating restricted shares, and vesting of restricted stock units, based on the treasury stock method. 

Note 9 – Segment Information 
 
The Company reports four primary segments: Wholesale Bank, Wealth Management, Retail Bank, and Home Lending with the remainder as Corporate and other.

The Wholesale Bank segment includes lending, treasury and cash management services and customer risk management products to middle market corporate, commercial and business banking customers and includes the operations of FinPac, a commercial leasing company. The Wealth Management segment consists of the operations of Umpqua Investments, which offers a full range of retail brokerage and investment advisory services and products to its clients who consist primarily of individual investors, and Umpqua Private Bank, which serves high net worth individuals with liquid investable assets and provides customized financial solutions and offerings. The Retail Bank segment includes retail and small business lending and deposit services for customers served through the Bank's store network. The Home Lending segment originates, sells and services residential mortgage loans. The Corporate and other segment includes activities that are not directly attributable to one of the four principal lines of business and includes the operations of the parent company, eliminations and the economic impact of certain assets, capital and support functions not specifically identifiable within the other lines of business.

Management monitors the Company's results using an internal performance measurement accounting system, which provides line of business results and key performance measures. The application and development of these management reporting methodologies is a dynamic process and is subject to periodic enhancements. As these enhancements are made, financial results presented by each reportable segment may be periodically revised retrospectively, if material.

The provision for income taxes is allocated to business segments using a 25% effective tax rate. The residual income tax expense or benefit arising from tax planning strategies or other tax attributes to arrive at the consolidated effective tax rate is retained in Corporate and Other.

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Summarized financial information concerning the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables: 
(in thousands)Three Months Ended September 30, 2019
 Wholesale BankWealth ManagementRetail BankHome LendingCorporate & OtherConsolidated
Net interest income$111,047  $5,491  $84,235  $13,039  $15,161  $228,973  
Provision for loan and lease losses20,693  5  1,356  904  269  23,227  
Non-interest income16,053  4,713  16,196  47,161  4,389  88,512  
Non-interest expense58,425  10,315  66,461  36,438  11,951  183,590  
Income (loss) before income taxes47,982  (116) 32,614  22,858  7,330  110,668  
Provision (benefit) for income taxes11,995  (29) 8,153  5,715  332  26,166  
Net income (loss)$35,987  $(87) $24,461  $17,143  $6,998  $84,502  
(in thousands)Nine Months Ended September 30, 2019
 Wholesale BankWealth ManagementRetail BankHome LendingCorporate & OtherConsolidated
Net interest income$330,208  $17,964  $258,730  $33,793  $53,125  $693,820  
Provision for loan and lease losses49,173  826  3,601  1,953  710  56,263  
Non-interest income38,945  13,953  47,377  68,067  87,733  256,075  
Non-interest expense169,178  29,100  196,345  97,892  43,082  535,597  
Income before income taxes150,802  1,991  106,161  2,015  97,066  358,035  
Provision for income taxes37,700  498  26,540  504  22,448  87,690  
Net income$113,102  $1,493  $79,621  $1,511  $74,618  $270,345  

(in thousands)Three Months Ended September 30, 2018
 Wholesale BankWealth ManagementRetail BankHome LendingCorporate & OtherConsolidated
Net interest income$113,103  $6,368  $87,885  $10,495  $23,517  $241,368  
Provision (recapture) for loan and lease losses10,786  107  830  202  (214) 11,711  
Non-interest income15,282  4,691  16,105  32,712  3,598  72,388  
Non-interest expense57,359  8,403  64,878  32,808  15,844  179,292  
Income before income taxes60,240  2,549  38,282  10,197  11,485  122,753  
Provision for income taxes15,060  638  9,570  2,550  3,954  31,772  
Net income$45,180  $1,911  $28,712  $7,647  $7,531  $90,981  
(in thousands)Nine Months Ended September 30, 2018
 Wholesale BankWealth ManagementRetail BankHome LendingCorporate & OtherConsolidated
Net interest income$337,087  $17,907  $248,735  $29,468  $58,052  $691,249  
Provision for loan and lease losses35,430  456  1,785  902  113  38,686  
Non-interest income46,639  14,437  47,291  104,398  9,841  222,606  
Non-interest expense167,539  26,742  206,881  100,137  59,678  560,977  
Income before income taxes180,757  5,146  87,360  32,827  8,102  314,192  
Provision for income taxes45,189  1,287  21,840  8,207  1,717  78,240  
Net income $135,568  $3,859  $65,520  $24,620  $6,385  $235,952  

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(in thousands)September 30, 2019
 Wholesale BankWealth ManagementRetail BankHome LendingCorporate & OtherConsolidated
Total assets$15,509,793  $684,382  $1,989,096  $4,366,847  $6,380,737  $28,930,855  
Total loans and leases $15,170,243  $668,636  $1,915,330  $3,831,214  $(64,629) $21,520,794  
Total deposits$4,015,123  $1,156,352  $13,711,620  $453,833  $3,097,806  $22,434,734  

(in thousands)December 31, 2018
 Wholesale BankWealth ManagementRetail BankHome LendingCorporate & OtherConsolidated
Total assets$14,920,507  $536,024  $2,015,263  $3,680,004  $5,787,983  $26,939,781  
Total loans and leases $14,717,512  $521,988  $1,934,602  $3,320,634  $(72,070) $20,422,666  
Total deposits$3,776,047  $1,068,025  $13,016,976  $219,584  $3,056,854  $21,137,486  
 
 
Note 10 – Fair Value Measurement 
 
The following table presents estimated fair values of the Company's financial instruments as of September 30, 2019 and December 31, 2018, whether or not recognized or recorded at fair value in the Condensed Consolidated Balance Sheets:  
(in thousands)September 30, 2019December 31, 2018
 LevelCarrying ValueFair ValueCarrying ValueFair Value
FINANCIAL ASSETS:    
Cash and cash equivalents1  $1,191,444  $1,191,444  $622,637  $622,637  
Equity and other investment securities1,2  64,764  64,764  61,841  61,841  
Investment securities available for sale2  2,842,076  2,842,076  2,977,108  2,977,108  
Investment securities held to maturity3  3,320  4,338  3,606  4,644  
Loans held for sale, at fair value2  355,022  355,022  166,461  166,461  
Loans and leases, net
3  21,364,506  21,566,083  20,277,795  20,117,939  
Restricted equity securities1  54,463  54,463  40,268  40,268  
Residential mortgage servicing rights2,3  151,383  151,383  169,025  169,025  
Bank owned life insurance1  318,533  318,533  313,626  313,626  
Derivatives2,3  200,412  200,412  49,484  49,484  
Visa Inc. Class B common stock (1)
3  —  —  —  99,353  
FINANCIAL LIABILITIES:    
Deposits1,2  $22,434,734  $22,457,847  $21,137,486  $21,116,852  
Securities sold under agreements to repurchase2  296,717  296,717  297,151  297,151  
Borrowings2  1,106,674  1,105,167  751,788  738,107  
Junior subordinated debentures, at fair value3  267,798  267,798  300,870  300,870  
Junior subordinated debentures, at amortized cost3  88,553  69,511  88,724  76,569  
Derivatives2  6,285  6,285  15,982  15,982  
(1) In June 2019, the Company sold all 486,346 shares of the Visa Inc. Class B common stock held, an equity security that did not have a readily determinable fair value, resulting in a one-time realized gain of $81.9 million. Accordingly, the book value and fair value are zero at September 30, 2019, as the Company no longer holds this security.


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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, 2019 and December 31, 2018: 
(in thousands) 
September 30, 2019
DescriptionTotalLevel 1Level 2Level 3
FINANCIAL ASSETS:
Equity and other investment securities    
Investments in mutual funds and other securities$52,218  $52,218  $—  $—  
Equity securities held in rabbi trusts12,102  12,102  —  —  
Other investments securities (1)
444  —  444  —  
Investment securities available for sale    
U.S. Treasury and agencies587,200  —  587,200  —  
Obligations of states and political subdivisions269,030  —  269,030  —  
Residential mortgage-backed securities and collateralized mortgage obligations1,985,846  —  1,985,846  —  
Loans held for sale, at fair value355,022  —  355,022  —  
Residential mortgage servicing rights, at fair value (2)
151,383  —  36,191  115,192  
Derivatives    
Interest rate lock commitments9,070  —  —  9,070  
Interest rate forward sales commitments801  —  801  —  
Interest rate swaps189,366  —  189,366  —  
Foreign currency derivative1,175  —  1,175  —  
Total assets measured at fair value$3,613,657  $64,320  $3,425,075  $124,262  
FINANCIAL LIABILITIES:
Junior subordinated debentures, at fair value$267,798  $—  $—  $267,798  
Derivatives    
Interest rate forward sales commitments1,260  —  1,260  —  
Interest rate swaps4,010  —  4,010  —  
Foreign currency derivative1,015  —  1,015  —  
Total liabilities measured at fair value$274,083  $—  $6,285  $267,798  

(1) Other investment securities includes securities held by Umpqua Investments as trading debt securities.
(2) For more discussion of the portion of MSR at fair value transferred to level 2, refer to Note 12, Subsequent Event.
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(in thousands) December 31, 2018
DescriptionTotalLevel 1Level 2Level 3
FINANCIAL ASSETS:
Equity and other investment securities    
Investments in mutual funds and other securities$50,475  $50,475  $—  $—  
Equity securities held in rabbi trusts
10,918  10,918  —  —  
  Other investments securities (1)
448  —  448  —  
Investment securities available for sale
U.S. Treasury and agencies39,656  —  39,656  —  
Obligations of states and political subdivisions309,171  —  309,171  —  
Residential mortgage-backed securities and collateralized mortgage obligations2,628,281  —  2,628,281  —  
Loans held for sale, at fair value166,461  —  166,461  —  
Residential mortgage servicing rights, at fair value169,025  —  —  169,025  
Derivatives    
Interest rate lock commitments6,757  —  —  6,757  
Interest rate forward sales commitments1  —  1  —  
Interest rate swaps42,276  —  42,276  —  
Foreign currency derivative450  —  450  —  
Total assets measured at fair value$3,423,919  $61,393  $3,186,744  $175,782  
FINANCIAL LIABILITIES:
Junior subordinated debentures, at fair value$300,870  $—  $—  $300,870  
Derivatives    
Interest rate forward sales commitments2,963  —  2,963  —  
Interest rate swaps12,746  —  12,746  —  
Foreign currency derivative273  —  273  —  
Total liabilities measured at fair value$316,852  $—  $15,982  $300,870  
(1) Other investment securities includes securities held by Umpqua Investments as trading debt securities.

The following methods were used to estimate the fair value of each class of financial instrument that is 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 the 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. Approximately $36.2 million of MSR was held for sale as of September 30, 2019, so the fair value of this portion was based upon the sales price as the transaction was completed shortly after quarter end. Accordingly, the portion of the MSR asset sold in the fourth quarter were transferred to level 2 in the fair value hierarchy.
 
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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, 2019, 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, 2019: 
Financial InstrumentValuation TechniqueUnobservable InputWeighted Average
Residential mortgage servicing rightsDiscounted cash flow  
  Constant prepayment rate13.35%  
  Discount rate9.75%  
Interest rate lock commitmentsInternal pricing model
Pull-through rate87.56%  
Junior subordinated debenturesDiscounted cash flow  
  Credit spread5.27%  

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, 2019, 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).
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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, 2019 and 2018: 

(in thousands)Three Months EndedThree Months Ended
September 30, 2019September 30, 2018
Residential mortgage servicing rights  Interest rate lock commitments, net  Junior subordinated debentures, at fair value  Residential mortgage servicing rights  Interest rate lock commitments, net  Junior subordinated debentures, at fair value  
Beginning Balance$139,780  $8,149  $277,028  $166,217  $6,782  $280,669  
Transfer out of Level 3(36,191) —  —  —  —  —  
Change included in earnings4,210  1,456  4,495  199  (284) 4,486  
Change in fair values included in comprehensive income/loss—  —  (8,450) —  —  2,409  
Purchases and issuances7,393  9,027  —  8,622  4,679  —  
Sales and settlements—  (9,562) (5,275) —  (6,018) (4,718) 
Ending Balance$115,192  $9,070  $267,798  $175,038  $5,159  $282,846  
Net change in unrealized gains or (losses) relating to items held at end of period$11,045  $9,070  $(3,955) $6,206  $5,159  $6,895  
Nine Months EndedNine Months Ended
September 30, 2019September 30, 2018
Residential mortgage servicing rights  Interest rate lock commitments, net  Junior subordinated debentures, at fair value  Residential mortgage servicing rights  Interest rate lock commitments, net  Junior subordinated debentures, at fair value  
Beginning Balance$169,025  $6,757  $300,870  $153,151  $4,752  $277,155  
Transfer out of Level 3(36,191) —  —  —  —  —  
Change included in earnings(34,414) 4,455  13,952  (125) (1,288) 12,544  
Change in fair values included in comprehensive income/loss—  —  (32,254) —  —  5,605  
Purchases and issuances16,772  21,318  —  22,012  19,211  —  
Sales and settlements—  (23,460) (14,770) —  (17,516) (12,458) 
Ending Balance$115,192  $9,070  $267,798  $175,038  $5,159  $282,846  
Net change in unrealized gains or (losses) relating to items held at end of period$(14,243) $9,070  $(18,302) $17,983  $5,159  $18,149  

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. 

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The change in fair value of junior subordinated debentures is attributable to the change in the instrument specific credit risk, accordingly, the unrealized gains on fair value of junior subordinated debentures for the three and nine months ended September 30, 2019 of $8.5 million and $32.3 million, respectively, are recorded net of tax as an other comprehensive gain of $6.3 million and $24.0 million, respectively. Comparatively, losses of $2.4 million and $5.6 million, respectively, were recorded net of tax as an other comprehensive loss of $1.8 million and $4.2 million, respectively, for the three and nine months ended September 30, 2018. The gain recorded for the three and nine months ended September 30, 2019 was due primarily to a decline in the discount rates, partially offset by an increase in the credit spread as compared to prior periods.

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, 2019
 TotalLevel 1Level 2Level 3
Loans and leases$25,000  $—  $—  $25,000  
Other real estate owned2,390  —  —  2,390  
 $27,390  $—  $—  $27,390  

(in thousands) 
December 31, 2018
 TotalLevel 1Level 2Level 3
Loans and leases$98,696  $—  $—  $98,696  
Other real estate owned7,532  —  —  7,532  
 $106,228  $—  $—  $106,228  

The following table presents the losses resulting from nonrecurring fair value adjustments for the three and nine months ended September 30, 2019 and 2018:  
 (in thousands)
Three Months EndedNine Months Ended
 September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Loans and leases$20,435  $14,436  $51,212  $42,158  
Other real estate owned279  —  3,013  66  
Total loss from nonrecurring measurements$20,714  $14,436  $54,225  $42,224  

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 and leases that have been adjusted to fair value.  When we identify a collateral dependent loan or lease as impaired, we measure the impairment using the current fair value of the collateral, less selling costs. Depending on the characteristics of a loan or lease, 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 or lease is less than its recorded investment, we recognize this impairment and adjust the carrying value of the loan or lease to fair value through the allowance for loan and lease losses.  The loss represents charge-offs or impairments on collateral dependent loans and leases for fair value adjustments based on the fair value of collateral.
 
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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, 2019 and December 31, 2018:

(in thousands)September 30, 2019December 31, 2018
Fair Value Aggregate Unpaid Principal BalanceFair Value Less Aggregate Unpaid Principal BalanceFair ValueAggregate Unpaid Principal BalanceFair Value Less Aggregate Unpaid Principal Balance
  Loans held for sale$355,022  $343,073  $11,949  $166,461  $160,270  $6,191  

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. For the three and nine months ended September 30, 2019, the Company recorded a net decrease in fair value of $1.9 million and an increase of $5.8 million, respectively. 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.

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.

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Note 11 – Leases

The Bank leases store locations, corporate office space, and equipment under non-cancelable leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

The leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of the leases provide the Company with one or more options to renew, with renewal terms that can extend the lease term from one to 10 years or more. The exercise of lease renewal options is at our sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We rent or sublease certain real estate to third parties. Our sublease portfolio consists of operating leases of mainly former store locations or excess space in store or corporate facilities.
 
The following table presents the balance sheet information related to leases as of September 30, 2019:

(in thousands) 
LeasesSeptember 30, 2019
Operating lease right-of-use assets$108,187  
Operating lease liabilities$116,924  

The following table presents the components of lease expense for the three and nine months ended September 30, 2019:

(in thousands) Three Months EndedNine Months Ended
Lease CostsSeptember 30, 2019September 30, 2019
Operating lease costs$8,091  $24,333  
Short-term lease costs184  660  
Variable lease costs1  (2) 
Sublease income(625) (2,027) 
Net lease costs$7,651  $22,964  

Prior to the adoption of ASU 2016-02, rent expense for the three and nine months ended September 30, 2018 was $9.6 million and $28.6 million, respectively, and was partially offset by rent income of $671,000 and $2.0 million, respectively.

The following table presents the supplemental cash flow information related to leases for the nine months ended September 30, 2019:

(in thousands) Nine Months Ended
Cash FlowsSeptember 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$24,773  
Right of use assets obtained in exchange for new operating lease liabilities$15,339  

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The following table presents the maturities of lease liabilities as of September 30, 2019:

(in thousands) 
YearOperating Leases
Remainder of 2019$8,239  
202029,392  
202123,842  
202218,497  
202314,513  
Thereafter37,701  
Total lease payments132,184  
Less: imputed interest(15,260) 
Present value of lease liabilities$116,924  

The following table presents the operating lease term and discount rate as of September 30, 2019:

September 30, 2019
Weighted-average remaining lease term (years)6.8
Weighted-average discount rate3.60 %

The following table sets forth, as of December 31, 2018, the future minimum lease payments under non-cancelable leases and future minimum income receivable under non-cancelable operating subleases:

(in thousands) 
YearLeases PaymentsSubleases Income
2019$33,948  $2,851  
202029,535  2,711  
202123,898  2,333  
202218,250  1,718  
202314,100  1,337  
Thereafter37,963  3,477  
Total$157,694  $14,427  

Note 12 – Subsequent Event

On October 1, 2019, Umpqua closed on the sale of the mortgage servicing rights to $3.4 billion of mortgage loans serviced for others. The sale resulted in a gain on fair value of $7.8 million recorded at the end of the third quarter, as the mortgage servicing rights are recorded at fair value.

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Item 2.         Management's Discussion and Analysis of Financial Condition and Results of Operations 
 
Forward-Looking Statements 
 
This Report contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. These statements may include statements that expressly or implicitly predict future results, performance or events. Statements other than statements of historical fact are forward-looking statements. You can find many of these statements by looking for words such as "anticipates," "expects," "believes," "estimates," "intends" and "forecast," and words or phrases of similar meaning. We make forward-looking statements regarding projected sources of funds; the Company's liquidity position; Next Gen initiatives; investments in data, analytics, technology, training and marketing; our securities portfolio; loan sales; adequacy of our allowance for loan and lease losses and reserve for unfunded commitments; provision for loan and lease losses; impaired loans and future losses; performance of troubled debt restructurings; our commercial real estate portfolio, its collectability and subsequent charge-offs; resolution of non-accrual loans; litigation; dividends; junior subordinated debentures; fair values of certain assets and liabilities, including mortgage servicing rights values and sensitivity analyses; store consolidations; tax rates; the effect of accounting pronouncements; and the effect of changes in accounting methodology. Forward-looking statements involve substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. Risks and uncertainties include those set forth in our filings with the Securities and Exchange Commission (the "SEC") and the following factors that might cause actual results to differ materially from those presented: 
•our ability to successfully implement and sustain information technology product and system enhancements and operational initiatives;
•our ability to attract new deposits and loans and leases;
•our ability to retain deposits during store consolidations; 
•demand for financial services in our market areas; 
•competitive market pricing factors; 
•our ability to effectively develop and implement new technology;
•deterioration in economic conditions that could result in increased loan and lease losses, especially those risks associated with concentrations in real estate related loans; 
•market interest rate volatility; 
•prolonged low interest rate environments;
•compression of our net interest margin; 
•stability and cost of funding sources;
•continued availability of borrowings and other funding sources such as brokered and public deposits; 
•changes in legal or regulatory requirements or the results of regulatory examinations that could increase expenses or restrict growth;
•our ability to recruit and retain key management and staff; 
•availability of, and competition for, acquisition opportunities; 
•significant decline in the market value of the Company that could result in an impairment of goodwill; 
•our ability to raise capital or incur debt on reasonable terms; 
•regulatory limits on the Bank's ability to pay dividends to the Company; 
•financial services reform and the impact of legislation and implementing regulations on our business operations, including our compliance costs, interest expense, and revenue;
•a breach or failure of our operational or security systems, or those of our third-party vendors, including as a result of cyber-attacks; and
•competition, including from financial technology companies.
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There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. Forward-looking statements are made as of the date of this Form 10-Q. We do not intend to update these forward-looking statements. Readers should consider any forward-looking statements in light of this explanation, and we caution readers about relying on forward-looking statements.
  
General 
Umpqua Holdings Corporation, an Oregon corporation, is a financial holding company with two principal operating subsidiaries, Umpqua Bank and Umpqua Investments, Inc.   

With headquarters located in Roseburg, Oregon, the Bank is considered one of the most innovative community banks in the United States, recognized nationally and internationally for its unique company culture and customer experience strategy, which we believe differentiates the Company from its competition. The Bank provides a wide range of banking, wealth management, mortgage and other financial services to corporate, institutional and individual customers, and also has a wholly-owned subsidiary, Financial Pacific Leasing, Inc., a commercial equipment leasing company.

Umpqua Investments is a registered broker-dealer and registered investment advisor with offices in Oregon, Washington, and California, and also offers products and services through Umpqua Bank stores. The firm is one of the oldest investment companies in the Northwest. Umpqua Investments offers a full range of investment products and services including: stocks, fixed income securities (municipal, corporate, and government bonds, CDs, and money market instruments), mutual funds, annuities, options, retirement planning, advisory account services, goals based planning and insurance.

Along with its subsidiaries, the Company is subject to the regulations of state and federal agencies and undergoes periodic examinations by these regulatory agencies.  
  
Executive Overview 
 
Significant items for the three and nine months ended September 30, 2019 were as follows: 

Financial Performance
 
•Net income per diluted common share was $0.38 and $1.23 for the three and nine months ended September 30, 2019 compared to $0.41 and $1.07 for the three and nine months ended September 30, 2018.  
 
•Net interest margin, on a tax equivalent basis, was 3.63% and 3.78% for the three and nine months ended September 30, 2019 as compared to 4.09% and 4.00% for the three and nine months ended September 30, 2018.  The decrease in net interest margin for the three and nine months ended September 30, 2019, compared to the same periods in the prior year, was driven by an increase in the cost of interest-bearing liabilities coupled with lower average yields on the securities portfolio, offset by higher average yields on the loan and lease portfolio.

•Residential mortgage banking revenue was $47.0 million and $67.8 million for the three and nine months ended September 30, 2019, as compared to $31.5 million and $103.1 million for the three and nine months ended September 30, 2018.  The increase for the three month period was primarily driven by an increase in the origination and sale of residential mortgages of $10.4 million, as compared to the prior period, as well as a gain on fair value of the MSR asset of $4.2 million as compared to a gain of $199,000 for the same period in 2018. The higher gain on the fair value was mainly due to the $7.8 million gain recorded for the portion of mortgage servicing rights held for sale at the end of the quarter. The closed loans for sale volume increased 12% for the three months ended September 30, 2019, as compared to the same period in the prior year and the gain on sale margin increased to 3.72%, compared to 2.77% in the same period of the prior year. The decrease for the nine month period was primarily driven by a loss on fair value of the MSR asset of $34.4 million as compared to a loss of $125,000 for the same period in 2018. The closed loans for sale volume decreased 11% for the nine months ended September 30, 2019, as compared to the same period in the prior year; which was offset by the gain on sale margin which increased to 3.40%, compared to 3.15% in the same period of the prior year.

•In June 2019, the Company sold all of its holdings of Visa Inc. Class B common stock for a one-time gain of $81.9 million, which was partially offset by a $7.2 million loss on the sale of debt securities during the nine months ended September 30, 2019.

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•Total gross loans and leases were $21.5 billion as of September 30, 2019, an increase of $1.1 billion, as compared to December 31, 2018.  The increase is due to strong loan production in the residential real estate, commercial loan, and commercial real estate portfolios.
 
•Total deposits were $22.4 billion as of September 30, 2019, an increase of $1.3 billion, compared to December 31, 2018.  This increase was due to growth in time deposit and non-interest bearing demand deposits.
 
•Total consolidated assets were $28.9 billion as of September 30, 2019, compared to $26.9 billion at December 31, 2018. The increase was due to strong loan and deposit growth during the year. A portion of the increase was due to the addition of the operating lease right of use assets recorded as a result of the application of the new lease standard, ASC 842 as of January 1, 2019.  

Credit Quality

•Non-performing assets decreased to $71.4 million, or 0.25% of total assets, as of September 30, 2019, as compared to $98.2 million, or 0.36% of total assets, as of December 31, 2018.  Non-performing loans and leases were $67.4 million, or 0.31% of total loans and leases, as of September 30, 2019, as compared to $87.3 million, or 0.43% of total loans and leases, as of December 31, 2018.

•The provision for loan and lease losses was $23.2 million and $56.3 million for the three and nine months ended September 30, 2019, as compared to $11.7 million and $38.7 million for the three and nine months ended September 30, 2018. The increase for the three and nine months ended September 30, 2019, compared to the same periods of the prior year, was primarily attributable to strong growth in the loan and lease portfolio, along with higher net charge-offs. As an annualized percentage of average outstanding loans and leases, the provision for loan and lease losses recorded for the three and nine months ended September 30, 2019 was 0.44% and 0.36%, respectively, as compared to 0.24% and 0.27%, respectively, for the same periods in 2018.

Capital and Growth Initiatives

•The Company's total risk based capital was 13.6% and its Tier 1 common to risk weighted assets ratio was 10.9% as of September 30, 2019. As of December 31, 2018, the Company's total risk based capital ratio was 13.5% and its Tier 1 common to risk weighted assets ratio was 10.7%.
 
•Cash dividends declared in the third quarter of 2019 were $0.21 per common share.

•We continue to make progress on "Umpqua Next Gen," an initiative started in late 2017 designed to modernize and evolve the Bank. We focused on operational excellence, balanced growth and human digital programs in 2018. During the nine months ended September 30, 2019, Umpqua continued store rationalization, consolidating 16 stores and selling an additional 4 stores, as part of this initiative, with plans to consolidate 7 additional stores by the end of the year. We have utilized the savings generated from store consolidations to reinvest in technology, data and analytics, new customer-focused technologies, associate training, a re-designed corporate website, digital marketing efforts, and new online account origination capabilities. The Company rolled out "Go-To" the industry's first human digital banking platform earlier this year, already reaching 34,000 enrolled customers. In addition, the Bank continues to implement predictive analytics tools to assist bankers with serving their customers.

Summary of Critical Accounting Policies 
 
Our critical accounting policies are described in detail in the Summary of Critical Accounting Policies section of the Form 10-K for the year ended December 31, 2018, filed with the SEC on February 21, 2019. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. The Company’s critical accounting policies include the allowance for loan and lease losses and reserve for unfunded commitments, residential mortgage servicing rights, valuation of goodwill, and fair value. During the quarter, the Company elected to change the date of the annual goodwill impairment analysis from December 31 to October 31. The Company believes this change is immaterial and does not expect the change to produce different impairment results. There have been no material changes to the valuation techniques or models during the nine months ended September 30, 2019. 

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Results of Operations
 
Overview 
 
For the three and nine months ended September 30, 2019, net income was $84.5 million and $270.3 million, or $0.38 and $1.23 per diluted common share as compared to net income of $91.0 million and $236.0 million, or $0.41 and $1.07 per diluted common share for the three and nine months ended September 30, 2018.

The decrease in net income for the three months ended September 30, 2019, compared to the same period of the prior year was attributable to a decrease in net interest income, an increase in the provision for loan and lease losses and an increase in non-interest expense, offset by an increase in non-interest income and a decrease in income tax expense. The decrease in net interest income was driven by higher cost of funds, due to competitive rates and pricing specials on the deposit portfolio, as well as lower average yields on the securities portfolios, offset by higher volume and average yields on the loan and lease portfolio. The increase in the provision for loan and lease losses is primarily attributable to growth in the loan and lease portfolio, as well as an increase in net charge-offs. The increase in non-interest expense was driven by higher mortgage banking related expenses and exit and disposal costs during the period, as well as increased losses on other real estate owned during the period. The increase in non-interest income was driven by an increase in residential mortgage revenue, due to a higher gain on the fair market value of the MSR asset, driven by the $7.8 million fair value gain recorded for the portion of the mortgage servicing rights held for sale at the end of the quarter.

The increase in net income for the nine months ended September 30, 2019, compared to the same period of the prior year was attributable to an increase in non-interest income and a decrease in non-interest expense, offset by an increase in the provision for loan and lease losses as well as in income tax expense. The increase in non-interest income was primarily due to the one-time gain on sale of Visa Inc. Class B common stock held by the Company, partially offset by a decrease in residential mortgage banking revenue. The decrease in non-interest expense was driven by lower salaries and benefits expense, resulting from the Company's operational excellence initiatives, a reduction in consulting fees, lower occupancy and equipment expense resulting from the reduction in the number of store locations, as well as lower FDIC assessments, offset by a loss on other real estate owned.

The following table presents the return on average assets, average common shareholders' equity and average tangible common shareholders' equity for the three and nine months ended September 30, 2019 and 2018. For each of the periods presented, the table includes the calculated ratios based on reported net income. Our return on average common shareholders' equity is negatively impacted as the result of capital required to support goodwill. To the extent this performance metric is used to compare our performance with other financial institutions that do not have merger and acquisition-related intangible assets, we believe it is beneficial to also consider the return on average tangible common shareholders' equity. The return on average tangible common shareholders' equity is calculated by dividing net income by average shareholders' common equity less average goodwill and intangible assets, net (excluding MSRs). The return on average tangible common shareholders' equity is considered a non-GAAP financial measure and should be viewed in conjunction with the return on average common shareholders' equity.  

 
(dollars in thousands) Three Months EndedNine Months Ended
 September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Return on average assets1.18 %1.36 %1.31 %1.21 %
Return on average common shareholders' equity7.87 %9.00 %8.67 %7.90 %
Return on average tangible common shareholders' equity13.67 %16.42 %15.32 %14.49 %
Calculation of average common tangible shareholders' equity:    
Average common shareholders' equity$4,260,810  $4,011,856  $4,169,008  $3,991,773  
Less: average goodwill and other intangible assets, net(1,808,191) (1,814,000) (1,809,583) (1,815,521) 
Average tangible common shareholders' equity$2,452,619  $2,197,856  $2,359,425  $2,176,252  

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Additionally, management believes tangible common equity and the tangible common equity ratio are meaningful measures of capital adequacy. Umpqua believes the exclusion of certain intangible assets in the computation of tangible common equity and tangible common equity ratio provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the operating results and capital of the Company.  Tangible common equity is calculated as total shareholders' equity less preferred stock and less goodwill and other intangible assets, net (excluding MSRs).  In addition, tangible assets are total assets less goodwill and other intangible assets, net (excluding MSRs).  The tangible common equity ratio is calculated as tangible common shareholders' equity divided by tangible assets. The tangible common equity and tangible common equity ratio is considered a non-GAAP financial measure and should be viewed in conjunction with the total shareholders' equity and the total shareholders' equity ratio. 

The following table provides a reconciliation of ending shareholders' equity (GAAP) to ending tangible common equity (non-GAAP), and ending assets (GAAP) to ending tangible assets (non-GAAP) as of September 30, 2019 and December 31, 2018: 

 (dollars in thousands) 
September 30, 2019December 31, 2018
Total shareholders' equity$4,289,516  $4,056,442  
Subtract:  
Goodwill1,787,651  1,787,651  
Other intangible assets, net19,750  23,964  
Tangible common shareholders' equity$2,482,115  $2,244,827  
Total assets$28,930,855  $26,939,781  
Subtract:
Goodwill1,787,651  1,787,651  
Other intangible assets, net19,750  23,964  
Tangible assets$27,123,454  $25,128,166  
Tangible common equity ratio9.15 %8.93 %
 
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not reviewed or audited.  Although we believe these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.
  
Net Interest Income 
 
Net interest income for the three months ended September 30, 2019 was $229.0 million, a decrease of $12.4 million compared to the same period in 2018. The decrease in net interest income for the three months ended September 30, 2019 as compared to the same period in 2018, was driven by growth in interest-bearing liabilities and an increase in the average cost of funds due to competitive rates and pricing specials on the deposit portfolio, as well as lower average yields on the securities portfolio. The decrease was partially offset by the higher yields and growth in the loan and lease portfolio.

Net interest income for the nine months ended September 30, 2019 was $693.8 million, an increase of $2.6 million compared to the same period in 2018. The increase in net interest income for the nine months ended September 30, 2019 as compared to the same period in 2018, was driven by growth in interest-earning assets, specifically the loan and lease portfolio, reflecting strong growth during the period, along with higher average yields on loans and leases and loans held for sale. The increase was partially offset by increased volumes of interest-bearing liabilities and an increase in the average cost of funds.

The net interest margin (net interest income as a percentage of average interest-earning assets) on a fully tax equivalent basis was 3.63% and 3.78%, respectively, for the three and nine months ended September 30, 2019, a decrease of 46 basis points and 22 basis points, respectively, as compared to the same periods in 2018. The decrease in net interest margin for the three and nine months ended September 30, 2019, primarily resulted from an increase in the cost of interest-bearing liabilities which was partially offset by higher average yields on the loan and lease portfolio. The cost of interest bearing liabilities increased 43 basis points and 47 basis points, respectively, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018. The yield on loans and leases increased by 4 basis points and 15 basis points, respectively, for the three and nine months ended September 30, 2019, as compared to the same periods in 2018.
 
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Our net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, as well as changes in the yields earned on interest-earning assets and rates paid on deposits and borrowed funds. The Company continues to be "asset-sensitive." In a declining interest rate environment, a decrease or no change in cost of funds coupled with a decrease in yields on earning assets could further compress the net interest margin.

The following tables present condensed average balance sheet information, together with interest income and yields on average interest-earning assets, and interest expense and rates paid on average interest-bearing liabilities for the three and nine months ended September 30, 2019 and 2018: 
 
(dollars in thousands)Three Months Ended
 September 30, 2019September 30, 2018
 Average BalanceInterest Income or ExpenseAverage Yields or RatesAverage BalanceInterest Income or ExpenseAverage Yields or Rates
INTEREST-EARNING ASSETS:        
Loans held for sale$328,155  $3,953  4.82 %$320,494  $4,220  5.27 %
Loans and leases (1)21,170,915  262,158  4.93 %19,709,113  242,190  4.89 %
Taxable securities2,648,092  13,145  1.99 %2,687,635  24,984  3.72 %
Non-taxable securities (2)252,765  2,086  3.30 %278,937  2,519  3.61 %
Temporary investments and interest-bearing cash759,416  4,204  2.20 %558,597  2,800  1.99 %
Total interest-earning assets25,159,343  $285,546  4.52 %23,554,776  $276,713  4.67 %
Other assets3,197,639    2,906,750    
Total assets$28,356,982    $26,461,526    
INTEREST-BEARING LIABILITIES:      
Interest-bearing demand deposits$2,363,626  $3,117  0.52 %$2,369,092  $2,241  0.38 %
Money market deposits6,962,370  16,575  0.94 %6,150,199  6,820  0.44 %
Savings deposits1,462,198  557  0.15 %1,483,687  452  0.12 %
Time deposits4,501,270  25,627  2.26 %3,894,163  16,179  1.65 %
Total interest-bearing deposits15,289,464  45,876  1.19 %13,897,141  25,692  0.73 %
Repurchase agreements and federal funds purchased313,089  448  0.57 %278,131  103  0.15 %
Borrowings860,285  4,238  1.95 %787,074  3,439  1.73 %
Junior subordinated debentures365,079  5,652  6.14 %369,183  5,640  6.06 %
Total interest-bearing liabilities16,827,917  $56,214  1.33 %15,331,529  $34,874  0.90 %
Non-interest-bearing deposits6,880,093    6,865,676    
Other liabilities388,162    252,465    
Total liabilities24,096,172    22,449,670    
Common equity4,260,810    4,011,856    
Total liabilities and shareholders' equity$28,356,982    $26,461,526    
NET INTEREST INCOME$229,332   $241,839   
NET INTEREST SPREAD 3.19 % 3.77 %
NET INTEREST INCOME TO EARNING ASSETS OR NET INTEREST MARGIN (1), (2)3.63 %4.09 %
(1)Non-accrual loans and leases are included in the average balance.   
(2)Tax-exempt income has been adjusted to a tax equivalent basis at a 21% tax rate. The amount of such adjustment was an addition to recorded income of approximately $359,000 for the three months ended September 30, 2019, as compared to $471,000 for the same period in 2018. 
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(dollars in thousands)Nine Months Ended
 September 30, 2019September 30, 2018
 Average BalanceInterest Income or ExpenseAverage Yields or RatesAverage BalanceInterest Income or ExpenseAverage Yields or Rates
INTEREST-EARNING ASSETS:      
Loans held for sale$260,600  $10,069  5.15 %$304,912  $11,002  4.81 %
Loans and leases (1)20,724,820  778,899  5.02 %19,397,476  707,019  4.87 %
Taxable securities2,696,001  44,479  2.20 %2,734,443  50,083  2.44 %
Non-taxable securities (2)270,461  6,991  3.45 %281,538  7,697  3.65 %
Temporary investments and interest bearing cash567,709  9,837  2.32 %441,067  6,044  1.83 %
Total interest-earning assets24,519,591  $850,275  4.63 %23,159,436  $781,845  4.51 %
Other assets3,112,041    2,896,043    
Total assets$27,631,632    $26,055,479    
INTEREST-BEARING LIABILITIES:      
Interest-bearing demand deposits$2,338,787  $8,555  0.49 %$2,338,396  $5,016  0.29 %
Money market deposits6,702,551  42,943  0.86 %6,460,770  18,429  0.38 %
Savings deposits1,468,449  1,237  0.11 %1,467,866  866  0.08 %
Time deposits4,381,484  70,826  2.16 %3,446,181  38,250  1.48 %
Total interest-bearing deposits14,891,271  123,561  1.11 %13,713,213  62,561  0.61 %
Repurchase agreements and federal funds purchased325,281  1,661  0.68 %288,751  321  0.15 %
Borrowings852,659  12,484  1.96 %796,991  10,278  1.72 %
Junior subordinated debentures378,816  17,520  6.18 %370,093  15,972  5.77 %
Total interest-bearing liabilities16,448,027  $155,226  1.26 %15,169,048  $89,132  0.79 %
Non-interest-bearing deposits6,648,638    6,655,431    
Other liabilities365,959    239,227    
Total liabilities23,462,624    22,063,706    
Common equity4,169,008    3,991,773    
Total liabilities and shareholders' equity$27,631,632    $26,055,479    
NET INTEREST INCOME$695,049   $692,713   
NET INTEREST SPREAD 3.37 %  3.72 %
NET INTEREST INCOME TO EARNING ASSETS OR NET INTEREST MARGIN (1), (2)  3.78 %  4.00 %
(1)Non-accrual loans and leases are included in the average balance.   
(2)Tax-exempt income has been adjusted to a tax equivalent basis at a 21% tax rate. The amount of such adjustment was an addition to recorded income of approximately $1.2 million for the nine months ended September 30, 2019, as compared to $1.5 million for the same period in 2018. 

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The following tables set forth a summary of the changes in tax equivalent net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for the three and nine months ended September 30, 2019 as compared to the same periods in 2018. Changes in tax equivalent interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances. 
 
 (in thousands)
Three Months Ended September 30,
 2019 compared to 2018
 Increase (decrease) in interest income and expense due to changes in
 VolumeRateTotal
INTEREST-EARNING ASSETS:   
Loans held for sale$101  $(368) $(267) 
Loans and leases18,071  1,897  19,968  
Taxable securities(363) (11,476) (11,839) 
Non-taxable securities (1)
(225) (208) (433) 
Temporary investments and interest bearing cash1,088  316  1,404  
     Total (1)
18,672  (9,839) 8,833  
INTEREST-BEARING LIABILITIES:   
Interest bearing demand deposits(5) 881  876  
Money market deposits1,008  8,747  9,755  
Savings deposits(7) 112  105  
Time deposits2,799  6,649  9,448  
Repurchase agreements13  332  345  
Borrowings337  462  799  
Junior subordinated debentures(63) 75  12  
Total4,082  17,258  21,340  
Net increase (decrease) in net interest income (1)$14,590  $(27,097) $(12,507) 

(1)Tax exempt income has been adjusted to a tax equivalent basis at a 21% tax rate. 
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(in thousands)Nine Months Ended September 30,
 2019 compared to 2018
 Increase (decrease) in interest income and expense due to changes in
 VolumeRateTotal
INTEREST-EARNING ASSETS:   
Loans held for sale$(1,673) $740  $(933) 
Loans and leases49,402  22,478  71,880  
Taxable securities(695) (4,909) (5,604) 
Non-taxable securities (1)
(296) (410) (706) 
Temporary investments and interest bearing cash1,975  1,818  3,793  
     Total (1)
48,713  19,717  68,430  
INTEREST-BEARING LIABILITIES:   
Interest bearing demand deposits1  3,538  3,539  
Money market715  23,799  24,514  
Savings—  371  371  
Time deposits12,148  20,428  32,576  
Repurchase agreements387  953  1,340  
Borrowings751  1,455  2,206  
Junior subordinated debentures383  1,165  1,548  
Total14,385  51,709  66,094  
Net increase in net interest income (1)
$34,328  $(31,992) $2,336  

(1)Tax exempt income has been adjusted to a tax equivalent basis at a 21% tax rate. 

Provision for Loan and Lease Losses 
 
The provision for loan and lease losses was $23.2 million and $56.3 million, respectively, for the three and nine months ended September 30, 2019, as compared to $11.7 million and $38.7 million, respectively, for the three and nine months ended September 30, 2018. The increase in the provision for the three and nine months ended September 30, 2019 as compared to the same prior year periods is primarily attributable to growth in the loan and lease portfolio, as well as an increase in net charge-offs. As an annualized percentage of average outstanding loans and leases, the provision for loan and lease losses recorded for the three and nine months ended September 30, 2019 was 0.44% and 0.36%, respectively, as compared to 0.24% and 0.27% for the same periods in 2018. 
 
For the three and nine months ended September 30, 2019, net charge-offs were $18.0 million and $44.8 million, respectively, or 0.34% and 0.29%, respectively, of average loans and leases (annualized), as compared to $12.2 million and $35.3 million, respectively, or 0.25% and 0.24%, respectively, of average loans and leases (annualized), for the three and nine months ended September 30, 2018. The majority of net charge-offs relate to losses realized in the lease and equipment finance portfolio, which is included in the commercial loan portfolio.

The Company recognizes the charge-off of impairment reserves on impaired loans in the period they arise for collateral-dependent loans.  Therefore, the non-accrual loans of $31.6 million as of September 30, 2019 have been written-down to their estimated fair value, less estimated costs to sell, and are expected to be resolved with no additional material loss, absent further decline in market prices. 
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Non-Interest Income 
 
Non-interest income for the three and nine months ended September 30, 2019 was $88.5 million and $256.1 million, respectively, an increase of $16.1 million and $33.5 million, respectively, or 22% and 15%, respectively, as compared to the same periods in 2018. The following table presents the key components of non-interest income for the three and nine months ended September 30, 2019 and 2018: 
 
(in thousands)Three Months EndedNine Months Ended
 September 30,September 30,
 20192018Change AmountChange Percent20192018Change AmountChange Percent
Service charges on deposits$16,627  $15,574  $1,053  7 %$47,858  $46,089  $1,769  4 %
Brokerage revenue4,060  3,947  113  3 %11,850  12,302  (452) (4)%
Residential mortgage banking revenue, net47,000  31,484  15,516  49 %67,760  103,085  (35,325) (34)%
(Loss) gain on sale of debt securities, net—  —  —  nm  (7,186) 14  (7,200) nm  
Gain (loss) on equity securities, net 257  (462) 719  (156)%83,559  (1,894) 85,453  nm  
Gain on loan and lease sales, net1,762  2,772  (1,010) (36)%5,864  5,350  514  10 %
BOLI income2,067  2,051  16  1 %6,328  6,181  147  2 %
Other income16,739  17,022  (283) (2)%40,042  51,479  (11,437) (22)%
Total$88,512  $72,388  $16,124  22 %$256,075  $222,606  $33,469  15 %
nm = Not meaningful

Service charges on deposits for the three and nine months ended September 30, 2019, increased $1.1 million and $1.8 million, respectively, due to an increase in analyzed account fees during the periods.

The loss on sale of debt securities for the nine months ended September 30, 2019, increased $7.2 million as compared to the same period of the prior year, due to a strategic restructuring of our available for sale debt securities portfolio to reduce interest rate sensitivity for a potentially decreasing interest rate environment, increase operational efficiency, and improve the cash liquidity position of the Company.

Gain on equity securities for the nine months ended September 30, 2019, compared to the same period in the prior year increased due primarily to the one-time gain on sale of all of the owned shares of Visa Inc. Class B common stock held by the Company during the second quarter.

The fluctuations in the gain on loan and lease sales for the three and nine months ended September 30, 2019, are due to changes in the mix and volume of loans sold during the periods.

Other income for the nine months ended September 30, 2019 compared to the same period in the prior year decreased by $11.4 million. The decrease was primarily related to a decline in the swap derivative value and other derivative related income attributable to the decrease in long-term interest rates during the period, as well as a decrease of debt capital market swap fee revenue of $1.5 million due to the timing of production.
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The following table presents our residential mortgage banking revenues for the three and nine months ended September 30, 2019 and 2018: 

 (in thousands)
Three Months EndedNine Months Ended
 September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Origination and sale$31,432  $20,983  $68,956  $71,979  
Servicing11,358  10,302  33,218  31,231  
Change in fair value of MSR asset:
Changes due to collection/realization of expected cash flows over time(6,835) (6,007) (20,171) (18,108) 
  Changes in valuation inputs or assumptions (1)
11,045  6,206  (14,243) 17,983  
Balance, end of period$47,000  $31,484  $67,760  $103,085  
(1)The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates.

Residential mortgage banking revenue for the three and nine months ended September 30, 2019, as compared to the same periods of 2018 increased by $15.5 million and decreased by $35.3 million, respectively. The increase for the three month period was primarily driven by a higher gain on fair value of the MSR asset of $4.2 million as compared to a gain on fair value of $199,000 for the same period in 2018, as well as increased originations during the period. The gain on fair value of the MSR asset was driven by the $7.8 million fair value gain recorded for the portion of mortgage servicing rights held for sale at the end of the quarter. In addition, the closed loans for sale volume for the three months ended September 30, 2019, increased 21% and the gain on sale margin increased to 3.72%, compared to 2.77% in the same period of the prior year.

The decrease for the nine months ended September 30, 2019, was the result of a higher loss on fair value of the MSR asset of $34.4 million as compared to a loss on fair value of $125,000 for the same period in 2018. This decrease was due to decreased interest rates during the nine months ended September 30, 2019 which caused prepayment speeds to rise as well as changes to inputs and assumptions in the valuation model. The closed loans for sale volume for the nine months ended September 30, 2019, decreased 11%, which was offset by the gain on sale margin increasing to 3.40%, compared to 3.15% in the same period of the prior year.


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Non-Interest Expense 
 
Non-interest expense for the three months ended September 30, 2019 was $183.6 million, an increase of $4.3 million or 2% as compared to the same period in 2018. Non-interest expense for the nine months ended September 30, 2019 was $535.6 million, a decrease of $25.4 million or 5% as compared to the same period in 2018. The following table presents the key elements of non-interest expense for the three and nine months ended September 30, 2019 and 2018: 

(in thousands)Three Months EndedNine Months Ended
 September 30,September 30,
 20192018Change AmountChange Percent20192018Change AmountChange Percent
Salaries and employee benefits$106,819  $103,575  $3,244  3 %$311,526  $323,466  $(11,940) (4)%
Occupancy and equipment, net35,446  36,530  (1,084) (3)%107,723  112,775  (5,052) (4)%
Communications3,617  4,165  (548) (13)%11,743  13,045  (1,302) (10)%
Marketing3,804  3,969  (165) (4)%10,842  8,857  1,985  22 %
Services15,326  14,794  532  4 %40,763  46,482  (5,719) (12)%
FDIC assessments2,587  4,303  (1,716) (40)%8,366  13,475  (5,109) (38)%
Loss (gain) on other real estate owned, net1,188  (128) 1,316  nm  3,815  (258) 4,073  nm  
Intangible amortization1,405  1,541  (136) (9)%4,214  4,624  (410) (9)%
Other expenses13,398  10,543  2,855  27 %36,605  38,511  (1,906) (5)%
Total$183,590  $179,292  $4,298  2 %$535,597  $560,977  $(25,380) (5)%
nm = Not meaningful

Salaries and employee benefits increased by $3.2 million for the three months ended September 30, 2019 and decreased by $11.9 million for the nine months ended September 30, 2019, as compared to the same periods in the prior year. The increase in salaries and employee benefits for the three months ended September 30, 2019, is primarily related to higher mortgage banking related expenses, due to increased originations during the period. The decrease in salaries and employee benefits for the nine months ended September 30, 2019, is primarily related to lower compensation, payroll taxes, and employee severance, resulting from the Company's operational efficiency initiatives in 2018, as well as lower group insurance rates during the period offset by the increase in mortgage banking related expenses.

Occupancy and equipment expense decreased by $1.1 million and $5.1 million, respectively, for the three and nine months ended September 30, 2019, as compared to the same periods in the prior year resulting from the reduction in the number of store locations.

Communications expense decreased by $548,000 and $1.3 million, respectively, for the three and nine months ended September 30, 2019, as compared to the same period in the prior year due to a decrease in data processing costs during the periods as the Company has executed on its operational expenditure initiatives, including improved procurement and contract renegotiation, as well as fewer stores in the footprint.

Marketing expense increased by $2.0 million for the nine months ended September 30, 2019, as compared to the same period in the prior year due to the marketing efforts to drive our strategic initiatives, including to gain traction with wholesale and middle-market customers and to promote our Go-To app, as well as digital marketing for new customers.

Services expense decreased by $5.7 million for the nine months ended September 30, 2019, as compared to the same period in the prior year, primarily related to lower consulting fees to assist with the identification and implementation of organizational simplification and efficiencies in the same period of the prior year.

FDIC assessments decreased by $1.7 million and $5.1 million for the three and nine months ended September 30, 2019, due to the discontinuation of the large-institution surcharge that had been included in the assessment in the prior periods.

The loss on other real estate owned for both the three and nine months ended September 30, 2019, was due to a valuation adjustment and subsequent loss on the sale of one property.

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Other non-interest expense increased by $2.9 million for the three months ended September 30, 2019 and decreased by $1.9 million for the nine months ended September 30, 2019, as compared to the same periods in the prior year. The increase for the three months ended September 30, 2019 is related to an increase in exit and disposal costs as well as state and local business taxes paid during the three months ended September 30, 2019. The decrease for the nine months ended September 30, 2019 is primarily related to a decrease in exit and disposal costs as the Company consolidated 16 stores and sold 4 in the nine months ended September 30, 2019 as compared to the 31 stores consolidated in 2018.

Income Taxes 
 
The Company's consolidated effective tax rate as a percentage of pre-tax income for the three and nine months ended September 30, 2019, was 23.6% and 24.5%, as compared to 25.9% and 24.9% for the three and nine months ended September 30, 2018. The effective tax rates differed from the statutory rate principally because of state taxes, the relative amount of income earned in each state jurisdiction, non-taxable income arising from bank-owned life insurance, income on tax-exempt investment securities, non-deductible FDIC premiums and tax credits arising from low income housing investments.

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FINANCIAL CONDITION 
 
Investment Securities 
 
Equity and other securities were $64.8 million at September 30, 2019, up from $61.8 million at December 31, 2018.
 
Investment securities available for sale were $2.8 billion as of September 30, 2019, compared to $3.0 billion at December 31, 2018.  The decrease was due to sales and paydowns of $778.3 million, partially offset by purchases of $563.6 million of investment securities as well as an increase of $107.6 million in fair value of investment securities available for sale.
 
The following tables present the available for sale and held to maturity investment securities portfolio by major type as of September 30, 2019 and December 31, 2018: 

(dollars in thousands)Investment Securities Available for Sale
 September 30, 2019December 31, 2018
 Fair Value%Fair Value%
U.S. Treasury and agencies$587,200  21 %$39,656  1 %
Obligations of states and political subdivisions269,030  9 %309,171  10 %
Residential mortgage-backed securities and collateralized mortgage obligations1,985,846  70 %2,628,281  89 %
Total$2,842,076  100 %$2,977,108  100 %

(dollars in thousands)Investment Securities Held to Maturity
 September 30, 2019December 31, 2018
 Amortized
Cost		%Amortized
Cost		%
Residential mortgage-backed securities and collateralized mortgage obligations$3,320  100 %$3,606  100 %
Total$3,320  100 %$3,606  100 %
 
 
We review investment securities on an ongoing basis for the presence of other-than-temporary impairment or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors.   

In June 2019, the Company completed a strategic restructuring of a portion of the available for sale debt securities portfolio. This restructuring resulted in the sale of certain securities at a gross loss of $7.3 million. This was a tactical effort to reduce interest rate sensitivity for a potentially decreasing interest rate environment and improve the cash liquidity position of the Company. The sales were primarily residential mortgage-backed securities and collateralized mortgage obligations and the purchases were non-callable agency bonds. The transaction resulted in an increased duration of the overall investment securities portfolio and a reduction in the portion of investments subject to prepayment.
 
Gross unrealized losses in the available for sale investment portfolio were $5.2 million at September 30, 2019.  This consisted primarily of unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations of $4.9 million. The unrealized losses were attributable to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities and are not attributable to changes in credit quality. In the opinion of management, these securities are considered only temporarily impaired due to these changes in market interest rates.

Restricted Equity Securities 
 
Restricted equity securities were $54.5 million at September 30, 2019 and $40.3 million at December 31, 2018, the majority of which represents the Bank's investment in the FHLB of Des Moines. The increase is attributable to purchases of FHLB stock during the period due to additional borrowing activity. FHLB stock is carried at par and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to the FHLB and member institutions and can only be purchased and redeemed at par. 

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Loans and Leases
 
Total loans and leases outstanding at September 30, 2019 were $21.5 billion, an increase of $1.1 billion as compared to December 31, 2018. The increase is attributable to net new loan and lease originations of $1.2 billion, partially offset by loans sold of $82.9 million and charge-offs of $57.0 million.

The following table presents the concentration distribution of the loan and lease portfolio, net of deferred fees and costs, as of September 30, 2019 and December 31, 2018.

 (dollars in thousands)
September 30, 2019December 31, 2018
 AmountPercentageAmountPercentage
Commercial real estate    
Non-owner occupied term, net$3,495,555  16.2 %$3,573,065  17.5 %
Owner occupied term, net2,566,299  11.9 %2,480,371  12.1 %
Multifamily, net3,479,986  16.2 %3,304,763  16.2 %
Construction & development, net771,214  3.6 %736,254  3.6 %
Residential development, net191,500  0.9 %196,890  1.0 %
Commercial  
Term, net2,310,759  10.8 %2,232,923  10.9 %
Lines of credit & other, net1,254,755  5.8 %1,169,525  5.7 %
Leases & equipment finance, net1,485,753  6.9 %1,330,155  6.5 %
Residential  
Mortgage, net4,245,674  19.7 %3,635,073  17.8 %
Home equity loans & lines, net1,224,578  5.7 %1,176,477  5.8 %
Consumer & other, net494,721  2.3 %587,170  2.9 %
Total, net of deferred fees and costs$21,520,794  100.0 %$20,422,666  100.0 %

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Asset Quality and Non-Performing Assets 

The following table summarizes our non-performing assets and restructured loans as of September 30, 2019 and December 31, 2018:   
 (dollars in thousands)
September 30, 2019December 31, 2018
Loans and leases on non-accrual status$31,636  $50,823  
Loans and leases past due 90 days or more and accruing (1)
35,745  36,444  
Total non-performing loans and leases67,381  87,267  
Other real estate owned4,026  10,958  
Total non-performing assets$71,407  $98,225  
Restructured loans (2)
$14,309  $13,924  
Allowance for loan and lease losses$156,288  $144,871  
Reserve for unfunded commitments5,085  4,523  
Allowance for credit losses$161,373  $149,394  
Asset quality ratios:  
Non-performing assets to total assets0.25 %0.36 %
Non-performing loans and leases to total loans and leases0.31 %0.43 %
Allowance for loan and leases losses to total loans and leases0.73 %0.71 %
Allowance for credit losses to total loans and leases0.75 %0.73 %
Allowance for credit losses to total non-performing loans and leases239 %171 %
(1)Excludes government guaranteed GNMA mortgage loans that Umpqua has the right but not the obligation to repurchase that are past due 90 days or more totaling $5.2 million and $8.9 million at September 30, 2019 and December 31, 2018, respectively.
(2)Represents accruing restructured loans performing according to their restructured terms. 

The purchased non-credit impaired loans had remaining discount that is expected to accrete into interest income over the life of the loans of $16.6 million and $24.7 million, as of September 30, 2019 and December 31, 2018, respectively. The purchased credit impaired loan pools had remaining discounts of $20.5 million and $24.9 million, as of September 30, 2019 and December 31, 2018, respectively.

Loans acquired with deteriorated credit quality are accounted for as purchased credit impaired pools. Typically, this would include loans that were considered non-performing or restructured as of acquisition date. Accordingly, subsequent to acquisition, loans included in the purchased credit impaired pools are not reported as non-performing loans based upon their individual performance status, so the categories of nonaccrual, impaired and 90 days past due and accruing do not include any purchased credit impaired loans.

At September 30, 2019 and December 31, 2018, impaired loans of $14.3 million and $13.9 million, respectively, were classified as performing restructured loans. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. In order for a new restructured loan to be considered performing and on accrual status, the loan's collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan must be current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow.
  
A further decline in the economic conditions in our general market areas or other factors could adversely impact individual borrowers or the loan portfolio in general. Accordingly, there can be no assurance that loans will not become 90 days or more past due, become impaired or placed on non-accrual status, restructured or transferred to other real estate owned in the future.

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Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments 
 
The ALLL totaled $156.3 million at September 30, 2019, an increase of $11.4 million from $144.9 million at December 31, 2018. The following table shows the activity in the ALLL for the three and nine months ended September 30, 2019 and 2018: 

 (dollars in thousands)
Three Months EndedNine Months Ended
 September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Balance, beginning of period$151,069  $144,556  $144,871  $140,608  
Loans charged-off:    
Charge-offs(23,112) (15,896) (56,971) (46,523) 
Recoveries5,104  3,655  12,125  11,255  
Net charge-offs(18,008) (12,241) (44,846) (35,268) 
Provision for loan and lease losses23,227  11,711  56,263  38,686  
Balance, end of period$156,288  $144,026  $156,288  $144,026  
As a percentage of average loans and leases (annualized):
Net charge-offs0.34 %0.25 %0.29 %0.24 %
Provision for loan and lease losses0.44 %0.24 %0.36 %0.27 %
Recoveries as a percentage of charge-offs22.08 %22.99 %21.28 %24.19 %

The increase in allowance for loan and lease losses as of September 30, 2019, compared to the same period of the prior year was primarily attributable to growth in the loan and lease portfolio. Additional discussion on the change in provision for loan and lease losses is provided under the heading Provision for Loan and Lease Losses above. 
 
The following table sets forth the allocation of the allowance for loan and lease losses and percent of loans in each category to total loans and leases as of September 30, 2019 and December 31, 2018: 

(dollars in thousands)September 30, 2019December 31, 2018
 Amount% Loans to total loansAmount% Loans to total loans
Commercial real estate$51,201  48.8 %$47,904  50.4 %
Commercial70,956  23.5 %63,957  23.1 %
Residential24,556  25.4 %22,034  23.6 %
Consumer & other9,575  2.3 %10,976  2.9 %
Allowance for loan and lease losses$156,288   $144,871   

At September 30, 2019, the recorded investment in loans classified as impaired totaled $25.7 million, with a corresponding valuation allowance (included in the allowance for loan and lease losses) of $198,000.  The valuation allowance on impaired loans represents the impairment reserves on performing current and former restructured loans and nonaccrual loans. At December 31, 2018, the total recorded investment in impaired loans was $42.3 million, with a corresponding valuation allowance (included in the allowance for loan and lease losses) of $180,000.  

We believe that the allowance for loan and lease losses and the reserve for unfunded commitments at September 30, 2019 are sufficient to absorb losses inherent in the loan and lease portfolio and credit commitments outstanding as of that date based on the information available. This assessment, based in part on historical levels of net charge-offs, loan and lease growth, and a detailed review of the quality of the loan and lease portfolio, involves uncertainty and judgment. Therefore, the adequacy of the ALLL and RUC cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review.
 
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Residential Mortgage Servicing Rights 
 
The following table presents the key elements of our residential mortgage servicing rights portfolio for the three and nine months ended September 30, 2019 and 2018: 
 
 (in thousands)
Three Months EndedNine Months Ended
 September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Balance, beginning of period$139,780  $166,217  $169,025  $153,151  
Additions for new MSR capitalized7,393  8,622  16,772  22,012  
Changes in fair value:
Changes due to collection/realization of expected cash flows over time(6,835) (6,007) (20,171) (18,108) 
Changes due to valuation inputs or assumptions (1)
11,045  6,206  (14,243) 17,983  
Balance, end of period$151,383  $175,038  $151,383  $175,038  
(1)The changes in valuation inputs and assumptions principally reflect changes in discount rates and prepayment speeds, which are primarily affected by changes in interest rates.

On October 1, 2019, Umpqua closed on the sale of the mortgage servicing rights to $3.4 billion of mortgage loans serviced for others. The sale of $36.2 million in MSR assets resulted in a gain on fair value of $7.8 million recorded at the end of the third quarter, as the mortgage servicing rights are recorded at fair value.

Information related to our residential serviced loan portfolio as of September 30, 2019 and December 31, 2018 was as follows: 
(dollars in thousands)September 30, 2019December 31, 2018
Balance of loans serviced for others$15,707,519  $15,978,885  
MSR as a percentage of serviced loans0.96 %1.06 %

Mortgage servicing rights are adjusted to fair value quarterly with the change recorded in mortgage banking revenue. The value of servicing rights can fluctuate based on changes in interest rates and other factors. Generally, as interest rates decline and loans are prepaid to take advantage of a refinance incentive, the total value of existing servicing rights declines as no further servicing fees are collected. Mortgage rates decreased during the nine months ended September 30, 2019, which caused prepayment speed assumptions to rise. This partially offset the $7.8 million fair value gain recorded for the portion of mortgage servicing rights held for sale at the end of the quarter.

The fair value of the MSR asset increased $11.0 million and decreased $14.2 million, respectively, due to changes to inputs to the valuation model including changes in discount rates and prepayment speeds, as well as the increase in value based on the sales price of MSR assets held for sale, during the three and nine months ended September 30, 2019. The fair value of the MSR asset decreased $6.8 million and $20.2 million, respectively, due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs during the three and nine months ended September 30, 2019. The change in the fair value of the MSR portfolio for the three and nine months ended September 30, 2018, due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs was a decrease of $6.0 million and $18.1 million, respectively, offset by an increase of $6.2 million for the three months ended and a decrease of $18.0 million, due to changes in the valuation inputs and assumptions.
 
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Goodwill and Other Intangible Assets
 
At September 30, 2019 and December 31, 2018, we had goodwill of $1.8 billion.  Goodwill is recorded in connection with business combinations and represents the excess of the purchase price over the estimated fair value of the net assets acquired. There were no changes to goodwill during the nine months ended September 30, 2019.
 
At September 30, 2019, we had other intangible assets of $19.8 million, compared to $24.0 million at December 31, 2018.   As part of a business acquisition, the fair value of identifiable intangible assets such as core deposits, which include all deposits except certificates of deposit, are recognized at the acquisition date. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives, and are also reviewed for impairment. We amortize other intangible assets on an accelerated or straight-line basis over an estimated ten year life. The decrease from December 31, 2018 relates to the amortization of the other intangible assets of $4.2 million for the nine months ended September 30, 2019.
  
Deposits 

Total deposits were $22.4 billion at September 30, 2019, an increase of $1.3 billion, as compared to December 31, 2018. The increase is attributable to growth in time deposits and non-interest bearing demand deposits.
 
The following table presents the deposit balances by major category as of September 30, 2019 and December 31, 2018: 
(dollars in thousands) September 30, 2019December 31, 2018
 AmountPercentageAmountPercentage
Non-interest bearing demand$7,123,180  32 %$6,667,467  32 %
Interest bearing demand2,406,404  11 %2,340,471  11 %
Money market6,646,383  30 %6,645,390  31 %
Savings1,469,302  6 %1,492,685  7 %
Time, $100,000 or greater3,589,406  16 %2,947,084  14 %
Time, less than $100,0001,200,059  5 %1,044,389  5 %
Total$22,434,734  100 %$21,137,486  100 %
 
The Company's brokered deposits totaled $1.5 billion at September 30, 2019, compared to $1.4 billion at December 31, 2018.  

Borrowings 
 
At September 30, 2019, the Bank had outstanding $296.7 million of securities sold under agreements to repurchase, a decrease of $434,000 from December 31, 2018. The Bank had outstanding borrowings consisting of advances from the FHLB as well as federal funds purchased of $1.1 billion at September 30, 2019, which increased $354.9 million from December 31, 2018. The FHLB advances are secured by investment securities and loans secured by real estate. The FHLB advances have fixed interest rates ranging from 1.40% to 7.10% and mature in 2020 through 2030.

Junior Subordinated Debentures 
 
We had junior subordinated debentures with carrying values of $356.4 million and $389.6 million at September 30, 2019 and December 31, 2018, respectively.  The decrease is due to the change in fair value for the junior subordinated debentures elected to be carried at fair value. As of September 30, 2019, substantially all of the junior subordinated debentures had interest rates that are adjustable on a quarterly basis based on a spread over three month LIBOR.  

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Liquidity and Cash Flow 
 
The principal objective of our liquidity management program is to maintain the Bank's ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs. 
 
We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. One source of funds includes public deposits. Individual state laws require banks to collateralize public deposits, typically as a percentage of their public deposit balance in excess of FDIC insurance.  Public deposits represented 8% of total deposits at September 30, 2019 and 9% of total deposits at December 31, 2018. The amount of collateral required varies by state and may also vary by institution within each state, depending on the individual state's risk assessment of depository institutions. Changes in the pledging requirements for uninsured public deposits may require pledging additional collateral to secure these deposits, drawing on other sources of funds to finance the purchase of assets that would be available to be pledged to satisfy a pledging requirement, or could lead to the withdrawal of certain public deposits from the Bank. In addition to liquidity from core deposits and the repayments and maturities of loans and investment securities, the Bank can utilize established uncommitted federal funds lines of credit, sell securities under agreements to repurchase, borrow on a secured basis from the FHLB or issue brokered certificates of deposit.  
 
The Bank had available lines of credit with the FHLB totaling $7.3 billion at September 30, 2019, subject to certain collateral requirements, namely the amount of pledged loans and investment securities. The Bank had available lines of credit with the Federal Reserve totaling $695.5 million, subject to certain collateral requirements, namely the amount of certain pledged loans. The Bank had uncommitted federal funds line of credit agreements with additional financial institutions totaling $460.0 million at September 30, 2019. Availability of these lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage. 
 
The Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the Company's revenues are obtained from dividends declared and paid by the Bank. There were $164.5 million of dividends paid by the Bank to the Company in the nine months ended September 30, 2019.  There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Company. We believe that such restrictions will not have an adverse impact on the ability of the Company to fund its quarterly cash dividend distributions to common shareholders and meet its ongoing cash obligations, which consist principally of debt service on the outstanding junior subordinated debentures.  
 
As disclosed in the Condensed Consolidated Statements of Cash Flows, net cash used in operating activities was $77.9 million during the nine months ended September 30, 2019, with the difference between cash used in operating activities and net income consisting of originations of loans held for sale of $2.0 billion, the increase in other assets of $183.1 million, gain on equity securities of $83.6 million, and gain on sale of loans of $65.7 million, offset by proceeds from the sale of loans held for sale of $1.9 billion, provision for loan and lease losses of $56.3 million, a loss on fair value of residential mortgage servicing rights carried at fair value of $34.4 million, and depreciation, amortization and accretion of $33.1 million. This compares to net cash provided by operating activities of $318.6 million during the nine months ended September 30, 2018, with the difference between cash provided by operating activities and net income consisting of the net increase in other liabilities and depreciation, amortization and accretion.
 
Net cash of $908.9 million used in investing activities during the nine months ended September 30, 2019, consisted principally of net loan originations of $1.2 billion, purchases of investment securities, available for sale of $563.6 million, purchase of restricted equity securities of $220.2 million, and net cash paid in divestiture of stores of $44.6 million, offset by proceeds from investment securities available for sale of $778.3 million, redemption of restricted equity securities of $206.0 million, proceeds from sales of loans of $88.8 million and proceeds from sale of equity securities of $81.9 million. This compares to net cash of $847.2 million used in investing activities during the nine months ended September 30, 2018, which consisted principally of net loan originations of $991.7 million, purchases of investment securities available for sale of $283.9 million, purchases of restricted equity securities of $45.6 million and net cash paid in divestiture of a store of $35.2 million, offset by proceeds from investment securities available for sale of $341.7 million, proceeds from the sale of loans and leases of $119.8 million and redemption of restricted equity securities of $48.8 million.
 
Net cash of $1.6 billion provided by financing activities during the nine months ended September 30, 2019, primarily consisted of $1.3 billion net increase in deposits and proceeds from borrowings of $810.7 million, offset by $455.7 million repayment of borrowings and $138.9 million of dividends paid on common stock. This compares to net cash of $773.6 million provided by financing activities during the nine months ended September 30, 2018, which consisted primarily of $981.6 million net increase in deposits and proceeds from borrowings of $50.0 million, offset by $127.7 million of dividends paid on common stock and $100.7 million repayment of borrowings.
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Although we expect the Bank's and the Company's liquidity positions to remain satisfactory during 2019, it is possible that our deposit growth for 2019 may not be maintained at previous levels due to pricing pressure or store consolidations. In addition, in order to generate deposit growth, our pricing may need to be adjusted in a manner that results in increased interest expense on deposits.
  
Off-balance-Sheet Arrangements 
 
Information regarding Off-Balance-Sheet Arrangements is included in Note 6 of the Notes to Condensed Consolidated Financial Statements.
  
Concentrations of Credit Risk 

Information regarding Concentrations of Credit Risk is included in Note 6 of the Notes to Condensed Consolidated Financial Statements.

Capital Resources 
 
Shareholders' equity at September 30, 2019 was $4.3 billion, an increase of $233.1 million from December 31, 2018. The increase in shareholders' equity during the nine months ended September 30, 2019 was principally due to net income and other comprehensive income for the period, offset by declared common dividends.

The Company's dividend policy considers, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset growth to determine the amount of dividends declared, if any, on a quarterly basis. There is no assurance that future cash dividends on common shares will be declared or increased. The following table presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the three and nine months ended September 30, 2019 and 2018:   
  
 Three Months EndedNine Months Ended
 September 30, 2019September 30, 2018September 30, 2019September 30, 2018
Dividend declared per common share$0.21  $0.21  $0.63  $0.61  
Dividend payout ratio55 %51 %51 %57 %

As of September 30, 2019, a total of 9.9 million shares are available for repurchase under the Company's current share repurchase plan. During the nine months ended September 30, 2019, 300,000 shares were repurchased under this plan. The Board of Directors approved an extension of the repurchase plan to July 31, 2021. The timing and amount of future repurchases will depend upon the market price for our common stock, securities laws restricting repurchases, asset growth, earnings, and our capital plan.  In addition, our stock plans provide that option and award holders may pay for the exercise price and tax withholdings in part or entirely by tendering previously held shares. 

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The following table shows the Company's consolidated and the Bank's capital adequacy ratios compared to the regulatory minimum capital ratio and the regulatory minimum capital ratio needed to qualify as a "well-capitalized" institution, as calculated under regulatory guidelines of the Basel Committee on Banking Supervision to the Basel capital framework ("Basel III") at September 30, 2019 and December 31, 2018: 
 
  (dollars in thousands)
ActualFor Capital Adequacy purposesTo be Well Capitalized
 AmountRatioAmountRatioAmountRatio
September 30, 2019      
Total Capital      
(to Risk Weighted Assets)      
Consolidated$3,061,945  13.63 %$1,797,526  8.00 %$2,246,907  10.00 %
Umpqua Bank$2,905,295  12.94 %$1,795,763  8.00 %$2,244,704  10.00 %
Tier I Capital      
(to Risk Weighted Assets)      
Consolidated$2,449,572  10.90 %$1,348,144  6.00 %$1,797,526  8.00 %
Umpqua Bank$2,743,960  12.22 %$1,346,822  6.00 %$1,795,763  8.00 %
Tier I Common
(to Risk Weighted Assets)
Consolidated$2,449,572  10.90 %$1,011,108  4.50 %$1,460,490  6.50 %
Umpqua Bank$2,743,960  12.22 %$1,010,117  4.50 %$1,459,058  6.50 %
Tier I Capital      
(to Average Assets)      
Consolidated$2,449,572  9.22 %$1,062,480  4.00 %$1,328,100  5.00 %
Umpqua Bank$2,743,960  10.34 %$1,061,749  4.00 %$1,327,186  5.00 %
December 31, 2018      
Total Capital      
(to Risk Weighted Assets)      
Consolidated$2,916,143  13.51 %$1,727,280  8.00 %$2,159,100  10.00 %
Umpqua Bank$2,765,748  12.83 %$1,724,757  8.00 %$2,155,946  10.00 %
Tier I Capital      
(to Risk Weighted Assets)      
Consolidated$2,315,750  10.73 %$1,295,460  6.00 %$1,727,280  8.00 %
Umpqua Bank$2,616,456  12.14 %$1,293,568  6.00 %$1,724,757  8.00 %
Tier I Common
(to Risk Weighted Assets)
Consolidated$2,315,750  10.73 %$971,595  4.50 %$1,403,415  6.50 %
Umpqua Bank$2,616,456  12.14 %$970,176  4.50 %$1,401,365  6.50 %
Tier I Capital      
(to Average Assets)      
Consolidated$2,315,750  9.31 %$994,905  4.00 %$1,243,631  5.00 %
Umpqua Bank$2,616,456  10.53 %$994,268  4.00 %$1,242,835  5.00 %
 
Item 3.             Quantitative and Qualitative Disclosures about Market Risk 
 
Our assessment of market risk as of September 30, 2019 indicates there are no material changes in the quantitative and qualitative disclosures from those in our Annual Report on Form 10-K for the year ended December 31, 2018.
  
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Item 4.             Controls and Procedures 
 
Our management, including our Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer, has concluded that our disclosure controls and procedures are effective in timely alerting them to information relating to us that is required to be included in our periodic filings with the SEC. The disclosure controls and procedures were last evaluated by management as of September 30, 2019. 
 
No change in our internal controls occurred during the third quarter of 2019 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Part II. OTHER INFORMATION 

Item 1.   Legal Proceedings 

Due to the nature of our business, we are involved in legal proceedings that arise in the ordinary course of our business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
 
Item 1A.   Risk Factors 
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed under "Part I--Item 1A--Risk Factors" in our Form 10-K for the year ended December 31, 2018.   These factors could materially and adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report. There have been no material changes from the risk factors described in our Form 10-K.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds  
 
(a)Not applicable  
 
(b)Not applicable 

(c)The following table provides information about repurchases of common stock by the Company during the quarter ended September 30, 2019: 
PeriodTotal number of Common Shares Purchased (1)Average Price Paid per Common ShareTotal Number of Shares Purchased as Part of Publicly Announced Plan (2)Maximum Number of Remaining Shares that May be Purchased at Period End under the Plan
7/1/19 - 7/31/19300,344  $17.44  300,000  9,855,429  
8/1/19 - 8/31/19176  $15.26  —  9,855,429  
9/1/19 - 9/30/19199  $16.59  —  9,855,429  
Total for quarter300,719  $17.44  300,000   
 
(1)Common shares repurchased by the Company during the quarter consist of cancellation of 719 shares to be issued upon vesting of restricted stock awards to pay withholding taxes. During the three months ended September 30, 2019, 300,000 shares were repurchased pursuant to the Company's publicly announced corporate stock repurchase plan described in (2) below.

(2)The Company's share repurchase plan, which was first approved by its Board of Directors and announced in August 2003, was amended on September 29, 2011 to increase the number of common shares available for repurchase under the plan to 15 million shares. The repurchase program has been extended multiple times by the board with the current expiration date of July 31, 2021. As of September 30, 2019, a total of 9.9 million shares remained available for repurchase. The timing and amount of future repurchases will depend upon the market price for our common stock, laws and regulations restricting repurchases, asset growth, earnings, and our capital plan.
  
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Item 3.            Defaults upon Senior Securities
 
Not applicable 

Item 4.            Mine Safety Disclosures 

Not applicable 

Item 5.            Other Information

Not applicable  

Item 6.            Exhibits  
 

Exhibit #  Description
3.1  
3.2  
4.1  
4.2  The Company agrees to furnish upon request to the Commission a copy of each instrument defining the rights of holders of senior and subordinated debt of the Company.
10.1*  
31.1  
31.2  
31.3  
32  
101.INS  Inline XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document
101.SCH  Inline XBRL Taxonomy Extension Schema Document
101.CAL  Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF  Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB  Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE  Inline XBRL Taxonomy Extension Presentation Linkbase Document
104  The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL (included in Exhibit 101)
*           Indicates compensatory plan or arrangement
(a)          Incorporated by reference to Exhibit 3.1 to Form 8-K filed April 23, 2018
(b)          Incorporated by reference to Exhibit 3.2 to Form 8-K filed April 21, 2017
(c)          Incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8 (No. 333-77259) filed April 28, 1999
(d) Incorporated by reference to Exhibit 10.1 to Form 10-Q filed August 6, 2019

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SIGNATURES 
 
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
UMPQUA HOLDINGS CORPORATION
(Registrant) 
DatedNovember 6, 2019
/s/ Cort L. O'Haver                                           
 Cort L. O'Haver
President and Chief Executive Officer  
DatedNovember 6, 2019/s/ Ronald L. Farnsworth
 Ronald L. Farnsworth  
Executive Vice President/ Chief Financial Officer and 
Principal Financial Officer
DatedNovember 6, 2019/s/ Neal T. McLaughlin
 
Neal T. McLaughlin                                     
Executive Vice President/Treasurer and 
Principal Accounting Officer

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