UMPQ-2013.6.30-10Q

United States  
Securities and Exchange Commission 
Washington, D.C. 20549 
 
FORM 10-Q
[X]
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
for the quarterly period ended: June 30, 2013
 
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)
OREGON 
93-1261319 
(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) 
 
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.
 
[X]   Yes   [  ]   No 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
 
[X]   Yes   [  ]   No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
[X]   Large accelerated filer   [    ]   Accelerated filer   [    ]   Non-accelerated filer   [  ]   Smaller reporting company 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
[  ]   Yes   [X]   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: 111,904,138 shares outstanding as of July 31, 2013

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)
 
 
 
 
June 30,
 
December 31,
 
2013
 
2012
ASSETS
 
 
 
Cash and due from banks
$
143,409

 
$
223,532

Interest bearing deposits
659,817

 
315,053

Temporary investments
1,768

 
5,202

Total cash and cash equivalents
804,994

 
543,787

Investment securities
 
 
 
Trading, at fair value
3,863

 
3,747

Available for sale, at fair value
2,083,755

 
2,625,229

Held to maturity, at amortized cost
3,741

 
4,541

Loans held for sale, at fair value
173,994

 
320,132

Non-covered loans and leases
6,787,117

 
6,681,080

Allowance for non-covered loan and lease losses
(85,836
)
 
(85,391
)
Net non-covered loans and leases
6,701,281

 
6,595,689

Covered loans and leases, net of allowance of $14,367 and $18,275
419,059

 
477,078

Restricted equity securities
32,112

 
33,443

Premises and equipment, net
170,145

 
162,667

Goodwill and other intangible assets, net
682,971

 
685,331

Mortgage servicing rights, at fair value
38,192

 
27,428

Non-covered other real estate owned
13,235

 
17,138

Covered other real estate owned
3,484

 
10,374

FDIC indemnification asset
36,263

 
52,798

Other assets
225,119

 
236,061

Total assets
$
11,392,208

 
$
11,795,443

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits
 
 
 
Noninterest bearing
$
2,218,536

 
$
2,278,914

Interest bearing
6,737,789

 
7,100,361

Total deposits
8,956,325

 
9,379,275

Securities sold under agreements to repurchase
176,447

 
137,075

Term debt
252,543

 
253,605

Junior subordinated debentures, at fair value
86,159

 
85,081

Junior subordinated debentures, at amortized cost
102,060

 
110,985

Other liabilities
103,322

 
105,383

Total liabilities
9,676,856

 
10,071,404

COMMITMENTS AND CONTINGENCIES (NOTE 10)

 

SHAREHOLDERS' EQUITY
 
 
 
Common stock, no par value, 200,000,000 shares authorized; issued and outstanding: 111,898,620 in 2013 and 111,889,959 in 2012
1,512,657

 
1,512,400

Retained earnings
203,058

 
187,293

Accumulated other comprehensive (loss) income
(363
)
 
24,346

Total shareholders' equity
1,715,352

 
1,724,039

Total liabilities and shareholders' equity
$
11,392,208

 
$
11,795,443


See notes to condensed consolidated financial statements

3
Table of Contents

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

(in thousands, except per share amounts)
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
INTEREST INCOME
 
 
 
 
 
 
 
Interest and fees on non-covered loans
$
78,434

 
$
77,637

 
$
156,979

 
$
155,296

Interest and fees on covered loans
14,750

 
16,935

 
29,330

 
34,278

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
8,103

 
16,535

 
16,747

 
34,655

Exempt from federal income tax
2,237

 
2,291

 
4,525

 
4,568

Dividends
90

 
28

 
114

 
34

Interest on temporary investments and interest bearing deposits
401

 
168

 
653

 
405

Total interest income
104,015

 
113,594

 
208,348

 
229,236

INTEREST EXPENSE
 
 
 
 
 
 
 
Interest on deposits
5,864

 
8,169

 
11,742

 
17,014

Interest on securities sold under agreement
 
 
 
 
 
 
 
to repurchase and federal funds purchased
33

 
79

 
64

 
159

Interest on term debt
2,305

 
2,305

 
4,578

 
4,609

Interest on junior subordinated debentures
1,920

 
2,029

 
3,882

 
4,087

Total interest expense
10,122

 
12,582

 
20,266

 
25,869

Net interest income
93,893

 
101,012

 
188,082

 
203,367

PROVISION FOR NON-COVERED LOAN AND LEASE LOSSES 
2,993

 
6,638

 
9,981

 
9,805

(RECAPTURE OF) PROVISION FOR COVERED LOAN AND LEASE LOSSES
(3,072
)
 
1,406

 
(2,840
)
 
1,375

Net interest income after provision for (recapture of) loan and lease losses
93,972

 
92,968

 
180,941

 
192,187

NON-INTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
7,478

 
7,190

 
14,470

 
13,856

Brokerage commissions and fees
3,662

 
3,532

 
7,298

 
6,476

Mortgage banking revenue, net
24,289

 
15,641

 
47,857

 
28,723

Gain on investment securities, net
8

 
1,030

 
15

 
1,178

Loss on junior subordinated debentures carried at fair value
(547
)
 
(547
)
 
(1,089
)
 
(1,095
)
Change in FDIC indemnification asset
(8,294
)
 
(4,040
)
 
(13,367
)
 
(5,885
)
Other income
7,901

 
6,120

 
13,328

 
12,910

Total non-interest income
34,497

 
28,926

 
68,512

 
56,163

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
52,067

 
49,979

 
103,572

 
97,072

Net occupancy and equipment
15,059

 
13,580

 
29,794

 
27,078

Communications
2,827

 
2,845

 
6,030

 
5,787

Marketing
1,296

 
1,761

 
2,157

 
2,751

Services
6,001

 
6,631

 
11,894

 
12,793

Supplies
660

 
644

 
1,378

 
1,309

FDIC assessments
1,672

 
1,886

 
3,323

 
3,854

Net (gain) loss on non-covered other real estate owned
(146
)
 
889

 
(276
)
 
4,076

Net (gain) loss on covered other real estate owned
(62
)
 
169

 
222

 
2,623

Intangible amortization
1,205

 
1,211

 
2,409

 
2,423

Merger related expenses
810

 
153

 
2,341

 
253

Other expenses
6,542

 
7,188

 
10,849

 
14,613

Total non-interest expense
87,931

 
86,936

 
173,693

 
174,632

Income before provision for income taxes
40,538

 
34,958

 
75,760

 
73,718

Provision for income taxes
14,285

 
11,681

 
26,146

 
24,938

Net income
$
26,253

 
$
23,277

 
$
49,614

 
$
48,780



4
Table of Contents



UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued) 
(UNAUDITED) 
 
(in thousands, except per share amounts)
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
26,253

 
$
23,277

 
$
49,614

 
$
48,780

Dividends and undistributed earnings allocated to participating securities
197

 
162

 
380

 
329

Net earnings available to common shareholders
$
26,056

 
$
23,115

 
$
49,234

 
$
48,451

Earnings per common share:
 
 
 
 
 
 
 
Basic
$0.23
 
$0.21
 
$0.44
 
$0.43
Diluted
$0.23
 
$0.21
 
$0.44
 
$0.43
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
111,954

 
111,897

 
111,946

 
111,943

Diluted
112,145

 
112,078

 
112,133

 
112,120


See notes to condensed consolidated financial statements

5
Table of Contents


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  
(UNAUDITED) 
 
(in thousands)
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
26,253

 
$
23,277

 
$
49,614

 
$
48,780

Available for sale securities:
 
 
 
 
 
 
 
Unrealized losses arising during the period
(36,793
)
 
(6,050
)
 
(41,220
)
 
(4,029
)
Reclassification adjustment for net gains realized in earnings (net of tax expense $3 and $412 for the three months ended June 30, 2013 and 2012, respectively, and net of tax expense of $6 and $471 for the six months ended June 30, 2013 and 2012, respectively)
(5
)
 
(618
)
 
(9
)
 
(707
)
Income tax benefit related to unrealized losses
14,717

 
2,420

 
16,488

 
1,612

Net change in unrealized losses
(22,081
)
 
(4,248
)
 
(24,741
)
 
(3,124
)
Held to maturity securities:
 
 
 
 
 
 
 
Accretion of unrealized losses related to factors other than credit to investment securities held to maturity (net of tax benefit of $10 and $25 for the three months ended June 30, 2013 and 2012, respectively, and net of tax benefit of $21 and $53 for the six months ended June 30, 2013 and 2012, respectively)
14

 
38

 
32

 
79

Net change in unrealized losses related to factors other than credit
14

 
38

 
32

 
79

Other comprehensive income, net of tax
(22,067
)
 
(4,210
)
 
(24,709
)
 
(3,045
)
Comprehensive income
$
4,186

 
$
19,067

 
$
24,905

 
$
45,735


See notes to condensed consolidated financial statements

6
Table of Contents


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY  
(UNAUDITED)   
 
(in thousands, except shares)
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Other
 
 
 
Common Stock
 
Retained
 
Comprehensive
 
 
 
Shares
 
Amount
 
Earnings
 
(Loss) Income
 
Total
BALANCE AT JANUARY 1, 2012
112,164,891

 
$
1,514,913

 
$
123,726

 
$
33,774

 
$
1,672,413

Net income
 
 
 
 
101,891

 
 
 
101,891

Other comprehensive loss, net of tax
 
 
 
 
 
 
(9,428
)
 
(9,428
)
Comprehensive income
 
 
 
 
 
 
 
 
$
92,463

Stock-based compensation
 
 
4,041

 
 
 
 
 
4,041

Stock repurchased and retired
(596,000
)
 
(7,436
)
 
 
 
 
 
(7,436
)
Issuances of common stock under stock plans
 
 
 
 
 
 
 
 
 
and related net tax benefit
321,068

 
882

 
 
 
 
 
882

Cash dividends on common stock ($0.34 per share)
 
 
 
 
(38,324
)
 
 
 
(38,324
)
Balance at December 31, 2012
111,889,959

 
$
1,512,400

 
$
187,293

 
$
24,346

 
$
1,724,039

 
 
 
 
 
 
 
 
 
 
BALANCE AT JANUARY 1, 2013
111,889,959

 
$
1,512,400

 
$
187,293

 
$
24,346

 
$
1,724,039

Net income
 
 
 
 
49,614

 
 
 
49,614

Other comprehensive loss, net of tax
 
 
 
 
 
 
(24,709
)
 
(24,709
)
Comprehensive income
 
 
 
 
 
 
 
 
$
24,905

Stock-based compensation
 
 
2,222

 
 
 
 
 
2,222

Stock repurchased and retired
(208,009
)
 
(2,811
)
 
 
 
 
 
(2,811
)
Issuances of common stock under stock plans
 
 
 
 
 
 
 
 
 
and related net tax benefit
216,670

 
846

 
 
 
 
 
846

Cash dividends on common stock ($0.30 per share)
 
 
 
 
(33,849
)
 
 
 
(33,849
)
Balance at June 30, 2013
111,898,620

 
$
1,512,657

 
$
203,058

 
$
(363
)
 
$
1,715,352


See notes to condensed consolidated financial statements

7
Table of Contents

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

 
Six months ended
 
June 30,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
49,614

 
$
48,780

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of investment premiums, net
20,486

 
21,778

Gain on sale of investment securities, net
(15
)
 
(1,178
)
Gain on sale of non-covered other real estate owned
(713
)
 
(643
)
Gain on sale of covered other real estate owned
(457
)
 
(723
)
Valuation adjustment on non-covered other real estate owned
437

 
4,719

Valuation adjustment on covered other real estate owned
679

 
3,346

Provision for non-covered loan and lease losses
9,981

 
9,805

(Recapture of) provision for covered loan and lease losses
(2,840
)
 
1,375

Proceeds from bank owned life insurance
1,173

 
—

Change in FDIC indemnification asset
13,367

 
5,885

Depreciation, amortization and accretion
8,921

 
7,949

Increase in mortgage servicing rights
(11,110
)
 
(6,281
)
Change in mortgage servicing rights carried at fair value
346

 
1,952

Change in junior subordinated debentures carried at fair value
1,078

 
1,007

Stock-based compensation
2,222

 
1,942

Net increase in trading account assets
(116
)
 
(992
)
Gain on sale of loans
(47,116
)
 
(22,101
)
Change in loans held for sale carried at fair value
16,801

 
(5,993
)
Origination of loans held for sale
(1,000,688
)
 
(786,697
)
Proceeds from sales of loans held for sale
1,174,397

 
703,875

Excess tax benefits from the exercise of stock options
(49
)
 
(49
)
Change in other assets and liabilities:
 
 
 
Net decrease (increase) in other assets
26,744

 
(1,218
)
Net (decrease) increase in other liabilities
(20,189
)
 
11,199

Net cash provided (used) by operating activities
242,953

 
(2,263
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investment securities available for sale
(51,191
)
 
(419,078
)
Proceeds from investment securities available for sale
530,898

 
727,750

Proceeds from investment securities held to maturity
914

 
363

Redemption of restricted equity securities
1,331

 
869

Net non-covered loan and lease originations
(160,345
)
 
(239,262
)
Net covered loan and lease paydowns
47,744

 
56,468

Proceeds from sales of non-covered loans
53,264

 
5,964

Proceeds from insurance settlement on loss of property
575

 
1,425

Proceeds from fee on termination of merger transaction
—

 
1,600

Proceeds from disposals of furniture and equipment
139

 
1,508

Purchases of premises and equipment
(16,514
)
 
(12,197
)
Net proceeds from FDIC indemnification asset
3,065

 
21,418

Proceeds from sales of non-covered other real estate owned
11,210

 
12,208

Proceeds from sales of covered other real estate owned
8,126

 
8,733

Net cash provided by investing activities
429,216

 
167,769


8
Table of Contents

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

 
Six months ended
 
June 30,
 
2013
 
2012
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Net decrease in deposit liabilities
(422,723
)
 
(104,348
)
Net increase in securities sold under agreements to repurchase
39,372

 
24,736

Repayment of junior subordinated debentures
(8,764
)
 
—

Dividends paid on common stock
(16,931
)
 
(15,777
)
Excess tax benefits from stock based compensation
49

 
49

Proceeds from stock options exercised
846

 
78

Retirement of common stock
(2,811
)
 
(5,234
)
Net cash used by financing activities
(410,962
)
 
(100,496
)
Net increase in cash and cash equivalents
261,207

 
65,010

Cash and cash equivalents, beginning of period
543,787

 
598,766

Cash and cash equivalents, end of period
$
804,994

 
$
663,776

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
21,825

 
$
27,573

Income taxes
$
13,100

 
$
13,800

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized losses on investment securities available for sale, net of taxes
$
(24,741
)
 
$
(3,124
)
Change in unrealized losses on investment securities held to maturity
 

 
 

related to factors other than credit, net of taxes
$
32

 
$
79

Cash dividend declared on common stock and payable after period-end
$
16,907

 
$
10,139

Transfer of non-covered loans to non-covered other real estate owned
$
7,032

 
$
8,993

Transfer of covered loans to covered other real estate owned
$
2,554

 
$
1,346

Transfer of covered loans to non-covered loans
$
10,560

 
$
9,299

Transfer from FDIC indemnification asset to due from FDIC and other
$
3,168

 
$
16,399

Receivable from sales of covered other real estate owned
$
1,096

 
$
290



See notes to condensed consolidated financial statements
 

9
Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Summary of Significant Accounting Policies 
 
The accounting and financial reporting policies of Umpqua Holdings Corporation (referred to in this report as “we”, “our” or “the Company”) conform to accounting principles generally accepted in the United States of America. The accompanying interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Umpqua Bank (“Bank”), and Umpqua Investments, Inc. (“Umpqua Investments”).  All material inter-company balances and transactions have been eliminated. The consolidated financial statements have not been audited. A more detailed description of our accounting policies is included in the 2012 Annual Report filed on Form 10-K. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the 2012 Annual Report filed on Form 10-K. 
 
In preparing these financial statements, the Company has evaluated events and transactions subsequent to June 30, 2013 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.

 
Note 2 – Business Combinations 
 
On July 1, 2013, the Bank acquired Financial Pacific Holding Corp. ("FPHC") based in Federal Way, Washington, and its subsidiary, Financial Pacific Leasing, Inc ("FinPac Leasing"), and its subsidiaries, Financial Pacific Funding, Inc ("FPF"), Financial Pacific Funding II, Inc. ("FPF II") and Financial Pacific Funding III, Inc. ("FPF III"). As part of the same transaction, the Company acquired two related entities, FPC Leasing Corporation ("FPC") and Financial Pacific Reinsurance Co, Ltd. ("FPR"). FPHC, FinPac Leasing, FPF, FPF II, FPF III, FPC and FPR are collectively referred to herein as FinPac. FinPac provides business-essential commercial equipment leases to various industries throughout the United States and Canada. It originates leases through its brokers, lessors, and direct marketing programs. The results of FinPac's operations are not included in the consolidated financial statements as of June 30, 2013.

The aggregate consideration for the FinPac purchase was $158.0 million. Of that amount, $156.1 is distributed in cash, and $1.9 million was exchanged for restricted shares of the Company stock. The restricted shares were issued pursuant to employment agreements between the Company and certain executives of FinPac, vest over a period of either two or three years, and will be recognized over that time period within the salaries and employee benefits line item on the Consolidated Statements of Income. The structure of the transaction was as follows:

•
The Bank acquired all of the outstanding stock of FPHC, a shell holding company, which is the sole shareholder of FinPac Leasing, the primary operating subsidiary of FinPac that engages in equipment leasing and financing activities, and is also the sole shareholder of FPF and FPF III, which are bankruptcy-remote entities that serve as lien holder for certain leases. FinPac Leasiimg is also the sole shareholder of FPF II, which no longer engages in any activities or holds any assets and is antcipated to be wound up in the near future.
•
The Company acquired all of the outstanding stock of FPC, a Canadian leasing subsidiary, and FPR, a corporation organized in the Turks & Caicos Islands that reinsures a portion of the liability risk of each insurance policy that is issued by a third party insurance company on leased equipment when the lessee fails to meet its contractual obligations under the lease or financing agreement to obtain insurance on the leased equipment.

The acquisition provides diversification, and a scalable platform that is consistent with expansion initiatives that the Bank has completed over the last three years, including growth in the business banking, agricultural lending and home builder lending groups. The transaction leverages excess capital of the Company and deploys excess liquidity into significantly higher yielding assets, provides growth and diversification, and is anticipated to increase profitability.

The assets acquired and liabilities assumed are not included in the consolidated financial statements, including segment reporting, as of June 30, 2013 as the acquisition occurred on July 1, 2013. There is no tax deductible goodwill. Merger related expenses of $654,000 and $796,000 for the three and six months ended June 30, 2013 have been incurred in connection with the acquisition of FinPac and are recognized within the merger related expenses line item on the Consolidated Statements of Income.

A summary of the net assets acquired and the estimated fair value adjustments of FinPac are presented below:

10
Table of Contents

(in thousands)
 
FinPac
 
July 1, 2013
Cost basis net assets
$
61,446

Cash payment paid
(156,110
)
Fair value adjustments:
 
Non-covered loans and leases, net
19,214

Other intangible assets
(8,516
)
Deferred tax assets
(4,995
)
Term debt
(527
)
Other liabilities
176

Goodwill
$
(89,312
)

The statement of assets acquired and liabilities assumed at their fair values of FinPac are presented below. Additional adjustments to the purchase price allocation may be required, specifically to leases, other assets, other liabilities and taxes.
(in thousands)
 
FinPac
 
July 1, 2013
Assets Acquired:
 
Cash and equivalents
$
6,452

Non-covered loans and leases, net
276,669

Premises and equipment
491

Goodwill
89,312

Other assets
4,453

 Total assets acquired
$
377,377

 
 
Liabilities Assumed:
 
Term debt
211,331

Other liabilities
9,936

 Total liabilities assumed
221,267

 Net Assets Acquired
$
156,110


Non-covered leases acquired from FinPac that are not subject to the requirements of FASB ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30") are presented below at acquisition:
(in thousands)
 
FinPac
 
July 1, 2013
Contractually required principal payments
$
350,403

Purchase adjustment for credit, interest rate, and liquidity
$
18,740

Balance of non-covered loans and leases, net
$
276,669


The following tables present unaudited pro forma results of operations for the three and six months ended June 30, 2012 and 2013 as if the acquisition of FinPac had occurred on January 1, 2012. The proforma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisitions actually occurred on January 1, 2012.


11
Table of Contents

(in thousands, except per share data)
 
Three months ended June 30, 2013
 
 
 
Pro Forma
 
Pro Forma
 
Company
FinPac (a)
Adjustments
 
Combined
Net interest income
$
93,893

$
11,943

$
(100
)
 (b)
$
105,736

Provision for non-covered loan and lease losses
2,993

218

2,393

 (d)
5,604

Recapture of provision for covered loan and lease losses
(3,072
)
—

—

 
(3,072
)
Non-interest income
34,497

522

—

 
35,019

Non-interest expense
87,931

3,435

(910
)
 (c)
90,456

  Income before provision for income taxes
40,538

8,812

(1,583
)
 
47,767

Provision for income taxes
14,285

3,327

(633
)
 (e)
16,979

  Net income
26,253

5,485

(950
)
 
30,788

Dividends and undistributed earnings allocated to participating securities
197

—

34

 
231

Net earnings available to common shareholders
$
26,056

$
5,485

$
(984
)
 
$
30,557

Earnings per share:
 
 
 
 
 
      Basic
$
0.23

 
 
 
$
0.27

      Diluted
$
0.23

 
 
 
$
0.27

Average shares outstanding:
 
 
 
 
 
      Basic
111,954

 
 
 
111,954

      Diluted
112,145

 
 
 
112,145

(a) FinPac amounts represent results from April 1, 2013 to June 30, 2013. Acquisition date is July 1, 2013.
(b) Consists of interest expense benefit of FinPac utilizing Bank funding, and change in yields due to fair value adjustments.
(c) Consists of merger related expenses of $0.7 million at the Bank, additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.
(d) Consists of adjustment to FinPac provision for credit losses due to purchase accounting adjustments.
(e) Income tax effect of pro forma adjustments at 40%.

(in thousands, except per share data)
 
Six months ended June 30, 2013
 
 
 
Pro Forma
 
Pro Forma
 
Company
FinPac (a)
Adjustments
 
Combined
Net interest income
$
188,082

$
23,875

$
(464
)
 (b)
$
211,493

Provision for non-covered loan and lease losses
9,981

2,878

3,182

 (d)
16,041

Recapture of provision for covered loan and lease losses
(2,840
)
—

—

 
(2,840
)
Non-interest income
68,512

1,312

—

 
69,824

Non-interest expense
173,693

6,997

(1,340
)
 (c)
179,350

  Income before provision for income taxes
75,760

15,312

(2,306
)
 
88,766

Provision for income taxes
26,146

5,848

(923
)
 (e)
31,071

  Net income
49,614

9,464

(1,383
)
 
57,695

Dividends and undistributed earnings allocated to participating securities
380

—

62

 
442

Net earnings available to common shareholders
$
49,234

$
9,464

$
(1,445
)
 
$
57,253

Earnings per share:
 
 
 
 
 
      Basic
$
0.44

 
 
 
$
0.51

      Diluted
$
0.44

 
 
 
$
0.51

Average shares outstanding:
 
 
 
 
 
      Basic
111,946

 
 
 
111,946

      Diluted
112,133

 
 
 
112,133


12
Table of Contents

(a) FinPac amounts represent results from January 1, 2013 to June 30, 2013. Acquisition date is July 1, 2013.
(b) Consists of interest expense benefit of FinPac utilizing Bank funding, and change in yields due to fair value adjustments.
(c) Consists of merger related expenses of $0.8 million at the Bank, additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.
(d) Consists of adjustment to FinPac provision for credit losses due to purchase accounting adjustments.
(e) Income tax effect of pro forma adjustments at 40%.

(in thousands, except per share data)
 
Three months ended June 30, 2012
 
 
 
Pro Forma
 
Pro Forma
 
Company
FinPac (a)
Adjustments
 
Combined
Net interest income
$
101,012

$
11,671

$
(806
)
 (b)
$
111,877

Provision for non-covered loan and lease losses
6,638

2,866

1,168

 (d)
10,672

Provision for covered loan and lease losses
1,406

—

—

 
1,406

Non-interest income
28,926

1,209

—

 
30,135

Non-interest expense
86,936

3,754

(303
)
 (c)
90,387

  Income before provision for income taxes
34,958

6,260

(1,671
)
 
39,547

Provision for income taxes
11,681

2,364

(668
)
 (e)
13,377

  Net income
23,277

3,896

(1,003
)
 
26,170

Dividends and undistributed earnings allocated to participating securities
162

—

20

 
182

Net earnings available to common shareholders
$
23,115

$
3,896

$
(1,023
)
 
$
25,988

Earnings per share:
 
 
 
 
 
      Basic
$
0.21

 
 
 
$
0.23

      Diluted
$
0.21

 
 
 
$
0.23

Average shares outstanding:
 
 
 
 
 
      Basic
111,897

 
 
 
111,897

      Diluted
112,078

 
 
 
112,078

(a) FinPac amounts represent results from April 1, 2012 to June 30, 2012. Acquisition date is July 1, 2013.
(b) Consists of interest expense benefit of FinPac utilizing Bank funding, and change in yields due to fair value adjustments.
(c) Consists of additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.
(d) Consists of adjustment to FinPac provision for credit losses due to purchase accounting adjustments.
(e) Income tax effect of pro forma adjustments at 40%.


13
Table of Contents

(in thousands, except per share data)
 
Six months ended June 30, 2012
 
 
 
Pro Forma
 
Pro Forma
 
Company
FinPac (a)
Adjustments
 
Combined
Net interest income
$
203,367

$
23,105

$
(1,790
)
 (b)
$
224,682

Provision for non-covered loan and lease losses
9,805

6,075

(1,324
)
 (d)
14,556

Provision for covered loan and lease losses
1,375

—

—

 
1,375

Non-interest income
56,163

2,002

—

 
58,165

Non-interest expense
174,632

7,353

(607
)
 (c)
181,378

  Income before provision for income taxes
73,718

11,679

141

 
85,538

Provision for income taxes
24,938

4,412

56

 (e)
29,406

  Net income
48,780

7,267

85

 
56,132

Dividends and undistributed earnings allocated to participating securities
329

—

50

 
379

Net earnings available to common shareholders
$
48,451

$
7,267

$
35

 
$
55,753

Earnings per share:
 
 
 
 
 
      Basic
$
0.43

 
 
 
$
0.50

      Diluted
$
0.43

 
 
 
$
0.50

Average shares outstanding:
 
 
 
 
 
      Basic
111,943

 
 
 
111,943

      Diluted
112,120

 
 
 
112,120

(a) FinPac amounts represent results from January 1, 2012 to June 30, 2012. Acquisition date is July 1, 2013.
(b) Consists of interest expense benefit of FinPac utilizing Bank funding, and change in yields due to fair value adjustments.
(c) Consists of additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.
(d) Consists of adjustment to FinPac provision for credit losses due to purchase accounting adjustments.
(e) Income tax effect of pro forma adjustments at 40%.

On November 14, 2012, the Company acquired all of the assets and liabilities of Circle Bancorp (“Circle”), which has been accounted for under the acquisition method of accounting for cash consideration of $24.9 million, including the redemption of all common and preferred shares and outstanding warrants and options. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition dates, and are subject to change for up to one year after the closing date of the acquisition. This acquisition was consistent with the Company's overall banking expansion strategy and provided further opportunity to enter growth markets in the San Francisco Bay Area of California. Upon completion of the acquisition, all Circle Bank branches operated under the Umpqua Bank name. The acquisition added Circle Bank's network of six branches in Corte Madera, Novato, Petaluma, San Francisco, San Rafael and Santa Rosa, California to Umpqua Bank's network of locations in California, Oregon, Washington and Nevada. The application of the acquisition method of accounting resulted in the recognition of $12.6 million of goodwill. There is no tax deductible goodwill or other intangibles.

The operations of Circle are included in our operating results from November 15, 2012, and added revenue of $4.0 million and $9.1 million, non-interest expense of $1.2 million and $3.9 million, and net gain of $1.6 million and $2.9 million net of tax, for the three and six months ended June 30, 2013. Circle's results of operations prior to the acquisition are not included in our operating results. Merger-related expenses of $58,000 and $949,000 for the three and six months ended June 30, 2013 have been incurred in connection with the acquisition of Circle and recognized within the merger related expenses line item on the Consolidated Statements of Income.
A summary of the net assets acquired and the estimated fair value adjustments of Circle are presented below:

14
Table of Contents

(in thousands)
 
Circle Bank
 
November 14, 2012
 
 
Cost basis net assets
$
17,127

Cash payment paid
(24,860
)
Fair value adjustments:
 
Non-covered loans and leases, net
(2,622
)
Other intangible assets
830

Non-covered other real estate owned
(487
)
Deposits
(904
)
Term debt
(2,404
)
Other
723

Goodwill
$
(12,597
)

The statement of assets acquired and liabilities assumed at their fair values of Circle are presented below:
(in thousands)
 
Circle Bank
 
November 14, 2012
Assets Acquired:
 
Cash and equivalents
$
39,328

Investment securities
793

Non-covered loans and leases, net
246,665

Premises and equipment
7,695

Restricted equity securities
2,491

Goodwill
12,597

Other intangible assets
830

Non-covered other real estate owned
1,602

Other assets
5,784

 Total assets acquired
$
317,785

 
 
Liabilities Assumed:
 
Deposits
$
250,408

Junior subordinated debentures
8,764

Term debt
55,404

Other liabilities
3,209

 Total liabilities assumed
$
317,785


Non-covered loans acquired from Circle that are not subject to the requirements of FASB ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30") are presented below at acquisition:
(in thousands)
 
November 14,
 
2012
Contractually required principal payments
$
242,999

Purchase adjustment for credit, interest rate, and liquidity
(2,149
)
Balance of performing non-covered loans
$
240,850


15
Table of Contents

Non-covered loans acquired from Circle that are subject to the requirements of ASC 310-30 are presented below at acquisition and as of June 30, 2013 and December 31, 2012: 

(in thousands)
 
November 14,
 
December 31,
 
June 30,
 
2012
 
2012
 
2013
Contractually required principal payments
$
12,252

 
$
12,231

 
$
9,194

Carrying balance of acquired purchase credit impaired non-covered loans
$
5,815

 
$
5,809

 
$
4,109


The acquisition of Circle is not considered significant to the Company's financial statements and therefore pro forma financial information is not included.

Note 3 – Investment Securities 
 
The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at June 30, 2013 and December 31, 2012: 

June 30, 2013
(in thousands)
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
AVAILABLE FOR SALE:
 
 
 
 
 
 
 
U.S. Treasury and agencies
$
263

 
$
23

 
$
(1
)
 
$
285

Obligations of states and political subdivisions
237,413

 
8,226

 
(3,439
)
 
242,200

Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
1,844,452

 
13,854

 
(19,278
)
 
1,839,028

Other debt securities
139

 
99

 
—

 
238

Investments in mutual funds and
 
 
 
 
 
 
 
other equity securities
1,959

 
45

 
—

 
2,004

 
$
2,084,226

 
$
22,247

 
$
(22,718
)
 
$
2,083,755

HELD TO MATURITY:
 
 
 
 
 
 
 
Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
$
3,741

 
$
178

 
$
(29
)
 
$
3,890

 
$
3,741

 
$
178

 
$
(29
)
 
$
3,890



16
Table of Contents

December 31, 2012
(in thousands)
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
AVAILABLE FOR SALE:
 
 
 
 
 
 
 
U.S. Treasury and agencies
$
45,503

 
$
318

 
$
(1
)
 
$
45,820

Obligations of states and political subdivisions
245,606

 
18,119

 
—

 
263,725

Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
2,291,253

 
28,747

 
(6,624
)
 
2,313,376

Other debt securities
143

 
79

 
—

 
222

Investments in mutual funds and
 
 
 
 
 
 
 
other equity securities
1,959

 
127

 
—

 
2,086

 
$
2,584,464

 
$
47,390

 
$
(6,625
)
 
$
2,625,229

HELD TO MATURITY:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
595

 
$
1

 
$
—

 
$
596

Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
3,946

 
197

 
(7
)
 
4,136

 
$
4,541

 
$
198

 
$
(7
)
 
$
4,732

 
Investment securities that were in an unrealized loss position as of June 30, 2013 and December 31, 2012 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral. 
 
June 30, 2013
(in thousands)
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
AVAILABLE FOR SALE:
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and agencies
$
—

 
$
—

 
$
45

 
$
1

 
$
45

 
$
1

Obligations of states and political subdivisions
61,350

 
3,439

 
—

 
—

 
61,350

 
3,439

Residential mortgage-backed securities and
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
648,150

 
16,742

 
260,972

 
2,536

 
909,122

 
19,278

Total temporarily impaired securities
$
709,500

 
$
20,181

 
$
261,017

 
$
2,537

 
$
970,517

 
$
22,718

HELD TO MATURITY:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities and
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
$
280

 
$
26

 
$
51

 
$
3

 
$
331

 
$
29

Total temporarily impaired securities
$
280

 
$
26

 
$
51

 
$
3

 
$
331

 
$
29


Unrealized losses on the impaired held to maturity collateralized mortgage obligations include the unrealized losses related to factors other than credit that are included in other comprehensive income. 
 

17
Table of Contents

December 31, 2012
(in thousands)
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
AVAILABLE FOR SALE:
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and agencies
$
—

 
$
—

 
$
59

 
$
1

 
$
59

 
$
1

Residential mortgage-backed securities and
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
780,234

 
5,548

 
106,096

 
1,076

 
886,330

 
6,624

Total temporarily impaired securities
$
780,234

 
$
5,548

 
$
106,155

 
$
1,077

 
$
886,389

 
$
6,625

HELD TO MATURITY:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities and
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
$
—

 
$
—

 
$
48

 
$
7

 
$
48

 
$
7

Total temporarily impaired securities
$
—

 
$
—

 
$
48

 
$
7

 
$
48

 
$
7

 
The unrealized losses on investments in U.S. Treasury and agency securities were caused by interest rate increases subsequent to the purchase of these securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than par. Because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired. 
 
The unrealized losses on obligations of 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 published credit ratings of these securities and no adverse ratings changes have occurred since the date of purchase of obligations of political subdivisions which are in an unrealized loss position as of June 30, 2013. Because the decline in fair value 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 in this class and it is not likely 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, the unrealized losses on these investments are not considered other-than-temporarily impaired. 
 
All of the available for sale residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at June 30, 2013 are issued or guaranteed by governmental agencies. 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 not be settled at a price less than the amortized cost of each investment. Because the decline in fair value 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 in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired. 

We review investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) 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.  For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI.  The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively

18
Table of Contents

based on the amount and timing of future estimated cash flows.  The accretion of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings.  If there is an indication of additional credit losses the security is re-evaluated according to the procedures described above. 
  
The following table presents the maturities of investment securities at June 30, 2013: 
 
(in thousands)
 
Available For Sale
 
Held To Maturity
 
Amortized
 
Fair
 
Amortized
 
Fair
 
Cost
 
Value
 
Cost
 
Value
AMOUNTS MATURING IN:
 
 
 
 
 
 
 
Three months or less
$
16,890

 
$
16,967

 
$
—

 
$
—

Over three months through twelve months
242,894

 
244,765

 
—

 
—

After one year through five years
1,347,825

 
1,353,712

 
63

 
66

After five years through ten years
382,779

 
376,209

 
23

 
24

After ten years
91,879

 
90,098

 
3,655

 
3,800

Other investment securities
1,959

 
2,004

 
—

 
—

 
$
2,084,226

 
$
2,083,755

 
$
3,741

 
$
3,890

 
The amortized cost and fair value of collateralized mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity, in the preceding table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay underlying loans without prepayment penalties. 
 
The following table presents the gross realized gains and gross realized losses on the sale of securities available for sale for the three and six months ended June 30, 2013 and 2012: 
 
(in thousands)
 
Three months ended
 
Three months ended
 
June 30, 2013
 
June 30, 2012
 
Gains
 
Losses
 
Gains
 
Losses
U.S. Treasury and agencies
$
—

 
$
—

 
$
—

 
$
—

Obligations of states and political subdivisions
—

 
1

 
—

 
—

Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
—

 
—

 
1,484

 
454

Other debt securities
9

 
—

 
—

 
—

 
$
9

 
$
1

 
$
1,484

 
$
454

 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Six months ended
 
Six months ended
 
June 30, 2013
 
June 30, 2012
 
Gains
 
Losses
 
Gains
 
Losses
U.S. Treasury and agencies
$
—

 
$
—

 
$
371

 
$
—

Obligations of states and political subdivisions
7

 
1

 
2

 
1

Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
—

 
—

 
1,484

 
683

Other debt securities
9

 
—

 
5

 
—

 
$
16

 
$
1

 
$
1,862

 
$
684


The following table presents, as of June 30, 2013, investment securities which were pledged to secure borrowings, public deposits, and repurchase agreements as permitted or required by law: 

19
Table of Contents

 
(in thousands)
 
Amortized
 
Fair
 
Cost
 
Value
To Federal Home Loan Bank to secure borrowings
$
28,945

 
$
29,565

To state and local governments to secure public deposits
803,949

 
804,964

Other securities pledged principally to secure repurchase agreements
256,868

 
254,948

Total pledged securities
$
1,089,762

 
$
1,089,477

 
 
  
Note 4 – Non-Covered Loans and Leases  
 
The following table presents the major types of non-covered loans recorded in the balance sheets as of June 30, 2013 and December 31, 2012: 
 
(in thousands)
 
June 30,
 
December 31,
 
2013
 
2012
Commercial real estate
 
 
 
Term & multifamily
$
3,930,403

 
$
3,938,443

Construction & development
226,924

 
202,118

Residential development
66,750

 
57,209

Commercial
 
 
 
Term
770,083

 
797,802

LOC & other
994,659

 
923,328

Residential
 
 
 
Mortgage
508,815

 
476,579

Home equity loans & lines
258,240

 
260,797

Consumer & other
42,016

 
37,327

Total
6,797,890

 
6,693,603

Deferred loan fees, net
(10,773
)
 
(12,523
)
Total
$
6,787,117

 
$
6,681,080

 
As of June 30, 2013, loans totaling $5.4 billion were pledged to secure borrowings and available lines of credit.

At June 30, 2013, non-covered loans accounted for under ASC 310-30 were $23.7 million. At December 31, 2012, non-covered accounted for under ASC 310-30 were $19.3 million.

Note 5 – Allowance for Non-Covered Loan Loss and Credit Quality 
 
The Bank has a management Allowance for Loan and Lease Losses (“ALLL”) Committee, which is responsible for, among other things, regularly reviewing the ALLL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status.  The ALLL Committee also approves removing loans and leases from impaired status.  The Bank's Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly basis. 
 
Our methodology for assessing the appropriateness of the ALLL consists of three key elements, which include 1) the formula allowance; 2) the specific allowance; and 3) the unallocated allowance. By incorporating these factors into a single allowance requirement analysis, all risk-based activities within the loan portfolio are simultaneously considered. 

Formula Allowance 
The Bank performs regular credit reviews of the loan and lease portfolio to determine the credit quality and adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically

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during the term of the loan 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 to various segments of pools of outstanding loans. Risk factors are assigned to each portfolio segment based on management’s evaluation of the losses inherent within each segment. Segments or regions 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 risk rating system and loan delinquency, and reflect the increased level of inherent losses associated with more adversely classified loans. 
 
Changes to risk factors – Risk factors are assigned at origination and may be changed periodically based on management’s evaluation of the following factors: loss experience; changes in the level of non-performing loans; regulatory exam results; changes in the level of adversely classified loans (positive or negative); improvement or deterioration in local economic conditions; and any other factors deemed relevant. 
 
Specific Allowance 
Regular credit reviews of the portfolio also 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, 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 with a specific allowance are excluded from the formula allowance so as not to double-count the loss exposure. The non-accrual impaired loans as of period end have already been partially charged off to their estimated net realizable value, and are expected to be resolved over the coming quarters with no additional material loss, absent further decline in market prices. 
 
The combination of the formula allowance component and the specific allowance component represents the allocated allowance for loan and lease losses. 
 
Unallocated Allowance 
The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less than 5% of the allowance, but may be maintained at higher levels during times of deteriorating economic conditions characterized by falling real estate values. The unallocated amount is reviewed quarterly with consideration of factors including, but not limited to: 
• Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; 
• Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; 
• Changes in the nature and volume of the portfolio and in the terms of loans; 
• Changes in the experience and ability of lending management and other relevant staff; 
• Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans; 
• Changes in the quality of the institution’s loan review system; 
• Changes in the value of underlying collateral for collateral-depending loans; 
• The existence and effect of any concentrations of credit, and changes in the level of such concentrations; and
• The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institutions’ existing portfolio. 

These factors are evaluated through a management survey of the Chief Credit Officer, Chief Lending Officers, Special Assets Manager, and Credit Review Manager. The survey requests responses to evaluate current changes in the nine qualitative

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factors. This information is then incorporated into our understanding of the reasonableness of the formula factors and our evaluation of the unallocated portion of the ALLL. 
 
Management believes that the ALLL was adequate as of June 30, 2013. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. 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. Approximately 77% of our loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the allowance for loan and lease losses. The recent U.S. recession, the housing market downturn, and declining real estate values in our markets have negatively impacted aspects of our loan portfolio. A continued deterioration in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses. 
 
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. For each portfolio segment, these factors include: 
• The quality of the current loan portfolio; 
• The trend in the loan portfolio's risk ratings;