Junior Subordinated Debentures

6 Months Ended

Jun. 30, 2011

Junior Subordinated Debentures

Junior Subordinated Debentures

Note 9 – Junior Subordinated Debentures

The following is information about the Company's wholly-owned trusts ("Trusts") as of June 30, 2011:

(dollars in thousands)

Trust Name	Issue Date	Issued and Outstanding Amount		Carrying Value (1)		Rate (2)	Effective Rate (3)			Maturity Date	Redemption Date
AT FAIR VALUE:
Umpqua Statutory Trust II	October 2002	$	20,619	$	13,999	Floating (4)		11.62	%	October 2032	October 2007
Umpqua Statutory Trust III	October 2002		30,928		21,235	Floating (5)		11.62	%	November 2032	November 2007
Umpqua Statutory Trust IV	December 2003		10,310		6,551	Floating (6)		11.64	%	January 2034	January 2009
Umpqua Statutory Trust V	December 2003		10,310		6,540	Floating (6)		11.64	%	March 2034	March 2009
Umpqua Master Trust I	August 2007		41,238		20,733	Floating (7)		11.69	%	September 2037	September 2012
Umpqua Master Trust IB	September 2007		20,619		12,708	Floating (8)		11.65	%	December 2037	December 2012
			134,024		81,766
AT AMORTIZED COST:
HB Capital Trust I	March 2000		5,310		6,357	10.875%		8.20	%	March 2030	March 2010
Humboldt Bancorp Statutory Trust I	February 2001		5,155		5,916	10.200%		8.23	%	February 2031	February 2011
Humboldt Bancorp Statutory Trust II	December 2001		10,310		11,405	Floating (9)		3.00	%	December 2031	December 2006
Humboldt Bancorp Statutory Trust III	September 2003		27,836		30,670	Floating (10)		2.48	%	September 2033	September 2008
CIB Capital Trust	November 2002		10,310		11,241	Floating (5)		3.01	%	November 2032	November 2007
Western Sierra Statutory Trust I	July 2001		6,186		6,186	Floating (11)		3.85	%	July 2031	July 2006
Western Sierra Statutory Trust II	December 2001		10,310		10,310	Floating (9)		3.85	%	December 2031	December 2006
Western Sierra Statutory Trust III	September 2003		10,310		10,310	Floating (12)		3.18	%	September 2033	September 2008
Western Sierra Statutory Trust IV	September 2003		10,310		10,310	Floating (12)		3.18	%	September 2033	September 2008
			96,037		102,705
	Total	$	230,061	$	184,471

(1) Includes purchase accounting adjustments, net of accumulated amortization, for junior subordinated debentures assumed in connection with previous mergers as well as fair value adjustments related to trusts recorded at fair value.

(2) Contractual interest rate of junior subordinated debentures.

(3) Effective interest rate based upon the carrying value as of June 2011.

(4) Rate based on LIBOR plus 3.35%, adjusted quarterly.

(5) Rate based on LIBOR plus 3.45%, adjusted quarterly.

(6) Rate based on LIBOR plus 2.85%, adjusted quarterly.

(7) Rate based on LIBOR plus 1.35%, adjusted quarterly.

(8) Rate based on LIBOR plus 2.75%, adjusted quarterly.

(9) Rate based on LIBOR plus 3.60%, adjusted quarterly.

(10) Rate based on LIBOR plus 2.95%, adjusted quarterly.

(11) Rate based on LIBOR plus 3.58%, adjusted quarterly.

(12) Rate based on LIBOR plus 2.90%, adjusted quarterly.

The Trusts are reflected as junior subordinated debentures in the Condensed Consolidated Balance Sheets. The common stock issued by the Trusts is recorded in other assets in the Condensed Consolidated Balance Sheets, and totaled $6.9 million at June 30, 2011 and December 31, 2010.

On January 1, 2007, the Company selected the fair value measurement option for certain pre-existing junior subordinated debentures (the Umpqua Statutory Trusts). The remaining junior subordinated debentures as of the adoption date were acquired through business combinations and were measured at fair value at the time of acquisition. In 2007, the Company issued two series of trust preferred securities and elected to measure each instrument at fair value. Accounting for the junior subordinated debentures originally issued by the Company 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.

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. Generally, an increase in the credit risk adjusted spread and/or a decrease in the three month LIBOR will result in positive fair value adjustments. Conversely, a decrease in the credit risk adjusted spread and/or an increase in the three month LIBOR will result in negative fair value adjustments.

Through the first quarter of 2010 we obtained valuations from a third-party pricing service to assist with the estimation and determination of fair value of these liabilities. In these valuations, the credit risk adjusted interest spread for potential new issuances through the primary market and implied spreads of these instruments when traded as assets on the secondary market, were estimated to be significantly higher than the contractual spread of our junior subordinated debentures measured at fair value. The difference between these spreads has resulted in the cumulative gain in fair value, reducing the carrying value of these instruments as reported on our Condensed Consolidated Balance Sheets. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") was signed into law which, among other things, limits the ability of certain bank holding companies to treat trust preferred security debt issuances as Tier 1 capital. This law may require many banks to raise new Tier 1 capital and is expected to effectively close the trust-preferred securities markets from offering new issuances in the future. As a result of this legislation, our third-party pricing service noted that they were no longer to able to provide reliable fair value estimates related to these liabilities given the absence of observable or comparable transactions in the market place in recent history or as anticipated into the future.

Due to inactivity in the junior subordinated debenture market and the inability to obtain 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, 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. Additionally, the Company utilizes an external valuation firm to validate the reasonableness of the Company's assessment of inputs that ultimately determines the estimated fair value of these liabilities. The Company has determined that the underlying inputs and assumptions have not materially changed since that last available third-party valuation.

Absent changes to the significant inputs utilized in the discounted cash flow model used to measure the fair value of these instruments at each reporting period, the cumulative discount for each junior subordinated debenture will reverse over time, ultimately returning the carrying values of these instruments to their notional values at their expected redemption dates, in a manner similar to the effective yield method as if these instruments were accounted for under the amortized cost method. This will result in recognizing losses on junior subordinated debentures carried at fair value on a quarterly basis within non-interest income. For the three and six months ended June 30, 2011 and 2010, we recorded a loss of $547,000 and $1.1 million and no gain and a gain of $6.1 million, respectively, resulting from the change in fair value of the junior subordinated debentures recorded at fair value. Observable activity in the junior subordinated debenture and related markets in future periods may change the effective rate used to discount these liabilities, and could result in additional fair value adjustments (gains or losses on junior subordinated debentures measured at fair value) outside the expected periodic change in fair value had the fair value assumptions remained unchanged.

As noted above, the Dodd-Frank Act limits the ability of certain bank holding companies to treat trust preferred security debt issuances as Tier 1 capital. As the Company had less than $15 billion in assets at December 31, 2009, under the Dodd-Frank Act, the Company will be able to continue to include its existing trust preferred securities, less the common stock of the Trusts, in Tier 1 capital. At June 30, 2011, the Company's restricted core capital elements were 18% of total core capital, net of goodwill and any associated deferred tax liability.