XML 58 R17.htm IDEA: XBRL DOCUMENT

Fair Value Measurement

3 Months Ended

Mar. 31, 2020

Note 10 – Fair Value Measurement

The following table presents estimated fair values of the Company's financial instruments as of March 31, 2020 and December 31, 2019, whether or not recognized or recorded at fair value in the Condensed Consolidated Balance Sheets:


		March 31, 2020						December 31, 2019
(in thousands)	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Cash and cash equivalents	1	$	1,657,716	$	1,657,716	$	1,362,756	$	1,362,756
Equity and other investment securities	1,2	80,797		80,797		80,165		80,165
Investment securities available for sale	2	2,890,475		2,890,475		2,814,682		2,814,682
Investment securities held to maturity	3	3,200		4,065		3,260		4,263
Loans held for sale, at fair value	2	481,541		481,541		513,431		513,431
Loans and leases, net	3	20,960,058		21,347,804		21,038,055		21,274,319
Restricted equity securities	1	58,062		58,062		46,463		46,463
Residential mortgage servicing rights	3	94,346		94,346		115,010		115,010
Bank owned life insurance	1	322,717		322,717		320,611		320,611
Derivatives	2,3	383,884		383,884		150,574		150,574
Financial liabilities:
Deposits	1,2	$	22,699,375	$	22,754,353	$	22,481,504	$	22,503,916
Securities sold under agreements to repurchase	2	346,245		346,245		311,308		311,308
Borrowings	2	1,196,597		1,203,538		906,635		906,160
Junior subordinated debentures, at fair value	3	195,521		195,521		274,812		274,812
Junior subordinated debentures, at amortized cost	3	88,439		54,020		88,496		70,909
Derivatives	2	34,820		34,820		8,808		8,808

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 March 31, 2020 and December 31, 2019:


(in thousands)	March 31, 2020
Description	Total		Level 1		Level 2		Level 3
Financial assets:
Equity and other investment securities

Investments in mutual funds and other securities	$	70,247	$	52,911	$	17,336	$	—
Equity securities held in rabbi trusts	10,191		10,191		—		—
Other investments securities ⁽¹⁾	359		—		359		—
Investment securities available for sale
U.S. Treasury and agencies	750,512		—		750,512		—
Obligations of states and political subdivisions	252,419		—		252,419		—
Residential mortgage-backed securities and collateralized mortgage obligations	1,887,544		—		1,887,544		—

Loans held for sale, at fair value	481,541		—		481,541		—
Residential mortgage servicing rights, at fair value	94,346		—		—		94,436
Derivatives
Interest rate lock commitments	23,727		—		—		23,727
Interest rate forward sales commitments	1,161		—		1,161		—
Interest rate swaps	358,204		—		358,204		—
Foreign currency derivative	792		—		792		—
Total assets measured at fair value	$	3,931,043	$	63,102	$	3,749,868	$	118,163
Financial liabilities:
Junior subordinated debentures, at fair value	$	195,521	$	—	$	—	$	195,521
Derivatives
Interest rate forward sales commitments	26,092		—		26,092		—
Interest rate swaps	8,128		—		8,128		—
Foreign currency derivative	600		—		600		—
Total liabilities measured at fair value	$	230,341	$	—	$	34,820	$	195,521

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


(in thousands)	December 31, 2019
Description	Total		Level 1		Level 2		Level 3
Financial assets:
Equity and other investment securities

Investments in mutual funds and other securities	$	67,133	$	52,096	$	15,037	$	—
Equity securities held in rabbi trusts	12,147		12,147		—		—
Other investments securities ⁽¹⁾	885		—		885		—
Investment securities available for sale
U.S. Treasury and agencies	643,604		—		643,604		—
Obligations of states and political subdivisions	261,094		—		261,094		—
Residential mortgage-backed securities and collateralized mortgage obligations	1,909,984		—		1,909,984		—

Loans held for sale, at fair value	513,431		—		513,431		—
Residential mortgage servicing rights, at fair value	115,010		—		—		115,010
Derivatives
Interest rate lock commitments	7,056		—		—		7,056
Interest rate forward sales commitments	105		—		105		—
Interest rate swaps	142,787		—		142,787		—
Foreign currency derivative	626		—		626		—
Total assets measured at fair value	$	3,673,862	$	64,243	$	3,487,553	$	122,066
Financial liabilities:
Junior subordinated debentures, at fair value	$	274,812	$	—	$	—	$	274,812
Derivatives
Interest rate forward sales commitments	1,351		—		1,351		—
Interest rate swaps	7,001		—		7,001		—
Foreign currency derivative	456		—		456		—
Total liabilities measured at fair value	$	283,620	$	—	$	8,808	$	274,812

⁽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 MSRs is estimated using a discounted cash flow model. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income net of servicing costs. This model is periodically validated by an independent model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. Management believes the significant inputs utilized are indicative of those that would be used by market participants.

Junior Subordinated Debentures— The fair value of junior subordinated debentures is estimated using an income approach valuation technique. The significant inputs utilized in the estimation of fair value of these instruments are the credit risk adjusted spread and three-month LIBOR. The credit risk adjusted spread represents the nonperformance risk of the liability, contemplating the inherent risk of the obligation. The Company periodically utilizes a valuation firm to determine or validate the reasonableness of inputs and factors that are used to determine the fair value. The ending carrying (fair) value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants. Due to credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads, the Company has 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 March 31, 2020, 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 March 31, 2020:


Financial Instrument	Fair Value		Valuation Technique	Unobservable Input	Range of Inputs	Weighted Average
Residential mortgage servicing rights	$	94,346	Discounted cash flow
				Constant prepayment rate	11.94 - 68.65%	15.53%
				Discount rate	9.5 - 12.5%	9.73%
Interest rate lock commitments	$	23,727	Internal pricing model
				Pull-through rate	51.36 - 100.00%	84.74%
Junior subordinated debentures	$	195,521	Discounted cash flow
				Credit spread	5.34 - 7.97%	6.96%

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 decrease in the estimated fair value. 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 March 31, 2020, or the passage of time, will result in an increase in the estimated fair value. Generally, an increase in the credit risk adjusted spread and/or the forward swap interest rate curve will result in a decrease in the estimated fair value. Conversely, a decrease in the credit risk adjusted spread and/or the forward swap interest rate curve will result in an increase in the estimated fair value.

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 months ended March 31, 2020 and 2019:


	Three Months Ended										Three Months Ended
	March 31, 2020										March 31, 2019
(in thousands)	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	$	115,010	$	7,056	$	274,812	$	169,025	$	6,757	$	300,870

Change included in earnings	(30,687)		4,694		3,890		(13,966)		1,697		4,772
Change in fair values included in comprehensive income/loss	—		—		(78,862)		—		—		(6,564)
Purchases and issuances	10,023		27,001		—		3,887		5,399		—
Sales and settlements	—		(15,024)		(4,319)		—		(5,679)		(4,957)
Ending Balance	$	94,346	$	23,727	$	195,521	$	158,946	$	8,174	$	294,121
Change in unrealized gains or losses for the period included in earnings for assets held at end of period	$	(25,358)	$	23,727	$	3,890	$	(7,535)	$	8,174	$	4,772
Change in unrealized gains or losses for the period included in other comprehensive income for assets held at end of period	$	—	$	—	$	(78,862)	$	—	$	—	$	(6,564)

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.

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 months ended March 31, 2020 of $78.9 million are recorded net of tax as an other comprehensive gain of $58.6 million. Comparatively, gains of $6.6 million were recorded net of tax as an other comprehensive income of $4.9 million for the three months ended March 31, 2019. The gain recorded for the three months ended March 31, 2020 was due primarily to an overall increase in the discount rates due to an increase in the credit spread, partially offset by a decrease in projected payments 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.


	March 31, 2020
(in thousands)	Total		Level 1		Level 2		Level 3
Loans and leases	$	11,957	$	—	$	—	$	11,957
Goodwill (Wholesale Bank and Retail Bank)	—		—		—		—
Other real estate owned	207		—		—		207
Total assets measured at fair value on a nonrecurring basis	$	12,164	$	—	$	—	$	12,164


	December 31, 2019
(in thousands)	Total		Level 1		Level 2		Level 3



Loans and leases	$	18,134	$	—	$	—	$	18,134
Other real estate owned	2,079		—		—		2,079
Total assets measured at fair value on a nonrecurring basis	$	20,213	$	—	$	—	$	20,213

The following table presents the losses resulting from nonrecurring fair value adjustments for the three months ended March 31, 2020 and 2019:


	Three Months Ended
(in thousands)	March 31, 2020		March 31, 2019



Loans and leases	$	22,042	$	15,496
Goodwill impairment (Wholesale Bank and Retail Bank)	1,784,936		—
Other real estate owned	117		59
Total loss from nonrecurring measurements	$	1,807,095	$	15,555

Goodwill was evaluated for impairment as of March 31, 2020, for the Retail Bank and Wholesale Bank reporting units. Refer to Note 11 - Goodwill, for discussion of the Company's goodwill impairment analysis.

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, excluding goodwill. Unobservable inputs and qualitative information about the unobservable inputs are not presented as the fair value is determined by third-party information for loans and other real estate owned.

The loans and leases amounts above represent collateral dependent loans and leases that have been adjusted to fair value. When a loan or lease is identified as collateral dependent, the Bank measures 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 it is determines that the value of the collateral dependent loan or lease is less than its recorded investment, the Bank recognizes this impairment and adjusts the carrying value of the loan or lease to fair value through the allowance for credit 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.

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 credit 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 March 31, 2020 and December 31, 2019:


	March 31, 2020										December 31, 2019
(in thousands)	Fair Value		Aggregate Unpaid Principal Balance		Fair Value Less Aggregate Unpaid Principal Balance		Fair Value		Aggregate Unpaid Principal Balance		Fair Value Less Aggregate Unpaid Principal Balance
Loans held for sale	$	471,307	$	446,466	$	24,841	$	513,431	$	496,683	$	16,748

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 months ended March 31, 2020 and 2019, the Company recorded a net increase in fair value of $8.1 million and $2.8 million, respectively.

The Company selected the fair value measurement option for certain junior subordinated debentures. 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 the Company to more closely align financial performance with the economic value of those liabilities. Additionally, it improves the 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 the Company's, or similar, junior subordinated debenture liabilities or the related trust preferred securities when traded as assets, the Company utilizes an income approach valuation technique to determine the fair value of these liabilities using 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 entity-specific creditworthiness, to validate the reasonableness of the credit risk adjusted spread and effective yield utilized in the discounted cash flow model. The Company also consider changes in the interest rate environment in the valuation, specifically the absolute level and the shape of the slope of the forward swap curve.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details