Edgar Filing: UMPQUA HOLDINGS CORP

UMPQ-2013.9.30-10Q

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: September 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: 111,929,202 shares outstanding as of October 31, 2013

Table of Contents

UMPQUA HOLDINGS CORPORATION

FORM 10-Q

Table of Contents



PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements (unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	72
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	113
Item 4.	Controls and Procedures	113
Part II. OTHER INFORMATION		114
Item 1.	Legal Proceedings	114
Item 1A.	Risk Factors	114
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	116
Item 3.	Defaults Upon Senior Securities	117
Item 4.	Mine Safety Disclosures	117
Item 5.	Other Information	117
Item 6.	Exhibits	117
SIGNATURES		118
EXHIBIT INDEX		119

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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,			December 31,
	2013			2012
ASSETS
Cash and due from banks	$	193,188		$	223,532
Interest bearing deposits	503,369			315,053
Temporary investments	534			5,202
Total cash and cash equivalents	697,091			543,787
Investment securities
Trading, at fair value	4,012			3,747
Available for sale, at fair value	1,910,082			2,625,229
Held to maturity, at amortized cost	5,766			4,541
Loans held for sale, at fair value	113,993			320,132
Non-covered loans and leases	7,228,904			6,681,080
Allowance for non-covered loan and lease losses	(84,694		)	(85,391		)
Net non-covered loans and leases	7,144,210			6,595,689
Covered loans, net of allowance of $11,918 and $18,275	397,083			477,078
Restricted equity securities	31,444			33,443
Premises and equipment, net	173,876			162,667
Goodwill and other intangible assets, net	778,094			685,331
Mortgage servicing rights, at fair value	41,853			27,428
Non-covered other real estate owned	18,249			17,138
Covered other real estate owned	2,980			10,374
FDIC indemnification asset	29,427			52,798
Other assets	221,137			236,061
Total assets	$	11,569,297		$	11,795,443
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing	$	2,421,008		$	2,278,914
Interest bearing	6,646,232			7,100,361
Total deposits	9,067,240			9,379,275
Securities sold under agreements to repurchase	215,310			137,075
Term debt	252,017			253,605
Junior subordinated debentures, at fair value	86,718			85,081
Junior subordinated debentures, at amortized cost	101,979			110,985
Other liabilities	120,038			105,383
Total liabilities	9,843,302			10,071,404
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SHAREHOLDERS' EQUITY
Common stock, no par value, 200,000,000 shares authorized; issued and outstanding: 111,928,762 in 2013 and 111,889,959 in 2012	1,513,225			1,512,400
Retained earnings	209,597			187,293
Accumulated other comprehensive income	3,173			24,346
Total shareholders' equity	1,725,995			1,724,039
Total liabilities and shareholders' equity	$	11,569,297		$	11,795,443

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 ended						Nine months ended
	September 30,						September 30,
	2013			2012			2013			2012
INTEREST INCOME
Interest and fees on non-covered loans and leases	$	93,706		$	78,090		$	250,685		$	233,386
Interest and fees on covered loans and leases	11,837			20,325			41,167			54,603
Interest and dividends on investment securities:
Taxable	7,882			13,057			24,629			47,712
Exempt from federal income tax	2,200			2,302			6,725			6,870
Dividends	51			3			165			37
Interest on temporary investments and interest bearing deposits	284			331			937			736
Total interest income	115,960			114,108			324,308			343,344
INTEREST EXPENSE
Interest on deposits	4,845			7,623			16,587			24,637
Interest on securities sold under agreement
to repurchase and federal funds purchased	35			73			99			232
Interest on term debt	2,338			2,335			6,916			6,944
Interest on junior subordinated debentures	1,933			2,037			5,815			6,124
Total interest expense	9,151			12,068			29,417			37,937
Net interest income	106,809			102,040			294,891			305,407
PROVISION FOR NON-COVERED LOAN AND LEASE LOSSES	3,008			7,078			12,989			16,883
(RECAPTURE OF) PROVISION FOR COVERED LOAN LOSSES	(1,904		)	2,927			(4,744		)	4,302
Net interest income after provision for (recapture of) loan and lease losses	105,705			92,035			286,646			284,222
NON-INTEREST INCOME
Service charges on deposit accounts	8,374			7,122			22,844			20,978
Brokerage commissions and fees	3,854			3,186			11,152			9,662
Mortgage banking revenue, net	15,071			24,346			62,928			53,069
Gain on investment securities, net	3			21			18			1,199
Loss on junior subordinated debentures carried at fair value	(554		)	(554		)	(1,643		)	(1,649		)
Change in FDIC indemnification asset	(6,474		)	(4,759		)	(19,841		)	(10,644		)
Other income	5,870			4,317			19,198			17,227
Total non-interest income	26,144			33,679			94,656			89,842
NON-INTEREST EXPENSE
Salaries and employee benefits	53,699			49,543			157,271			146,615
Net occupancy and equipment	16,019			13,441			45,813			40,519
Communications	2,772			2,740			8,802			8,527
Marketing	1,596			1,104			3,753			3,855
Services	6,445			5,910			18,339			18,703
Supplies	742			627			2,120			1,936
FDIC assessments	1,709			1,699			5,032			5,553
Net (gain) loss on non-covered other real estate owned	(27		)	2,168			(303		)	6,244
Net (gain) loss on covered other real estate owned	(68		)	461			154			3,084
Intangible amortization	1,186			1,189			3,595			3,612
Merger related expenses	4,856			85			7,197			338
Other expenses	6,675			8,007			17,524			22,620
Total non-interest expense	95,604			86,974			269,297			261,606
Income before provision for income taxes	36,245			38,740			112,005			112,458
Provision for income taxes	12,768			13,587			38,914			38,525
Net income	$	23,477		$	25,153		$	73,091		$	73,933

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued)

(UNAUDITED)

(in thousands, except per share amounts)



	Three months ended				Nine months ended
	September 30,				September 30,
	2013		2012		2013		2012
Net income	$	23,477	$	25,153	$	73,091	$	73,933
Dividends and undistributed earnings allocated to participating securities	196		170		576		499
Net earnings available to common shareholders	$	23,281	$	24,983	$	72,515	$	73,434
Earnings per common share:
Basic	$0.21		$0.22		$0.65		$0.66
Diluted	$0.21		$0.22		$0.65		$0.65
Weighted average number of common shares outstanding:
Basic	111,912		111,899		111,934		111,928
Diluted	112,195		112,151		112,154		112,159

See notes to condensed consolidated financial statements

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)



	Three months ended						Nine months ended
	September 30,						September 30,
	2013			2012			2013			2012
Net income	$	23,477		$	25,153		$	73,091		$	73,933
Available for sale securities:
Unrealized gains (losses) arising during the period	5,878			1,863			(35,342		)	(2,167		)
Reclassification adjustment for net gains realized in earnings (net of tax expense $1 and $8 for the three months ended September 30, 2013 and 2012, respectively, and net of tax expense of $7 and $480 for the nine months ended September 30, 2013 and 2012, respectively)	(2		)	(13		)	(11		)	(719		)
Income tax (expense) benefit related to unrealized losses	(2,351		)	(745		)	14,137			867
Net change in unrealized gains (losses)	3,525			1,105			(21,216		)	(2,019		)
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 $7 and $23 for the three months ended September 30, 2013 and 2012, respectively, and net of tax benefit of $29 and $76 for the nine months ended September 30, 2013 and 2012, respectively)	11			35			43			114
Net change in unrealized losses related to factors other than credit	11			35			43			114
Other comprehensive income (loss), net of tax	3,536			1,140			(21,173		)	(1,905		)
Comprehensive income	$	27,013		$	26,293		$	51,918		$	72,028

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)



									Accumulated
									Other
	Common Stock					Retained			Comprehensive
	Shares		Amount			Earnings			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						73,091						73,091
Other comprehensive loss, net of tax									(21,173		)	(21,173		)
Comprehensive income												$	51,918
Stock-based compensation			3,531									3,531
Stock repurchased and retired	(319,164	)	(4,704		)							(4,704		)
Issuances of common stock under stock plans
and related net tax benefit	357,967		1,998									1,998
Cash dividends on common stock ($0.45 per share)						(50,787		)				(50,787		)
Balance at September 30, 2013	111,928,762		$	1,513,225		$	209,597		$	3,173		$	1,725,995

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,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	73,091		$	73,933
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of investment premiums, net	27,984			33,023
Gain on sale of investment securities, net	(18		)	(1,199		)
(Gain) loss on sale of non-covered other real estate owned	(751		)	481
Gain on sale of covered other real estate owned	(549		)	(1,031		)
Valuation adjustment on non-covered other real estate owned	448			5,763
Valuation adjustment on covered other real estate owned	703			4,115
Provision for non-covered loan and lease losses	12,989			16,883
(Recapture of) provision for covered loan losses	(4,744		)	4,302
Proceeds from bank owned life insurance	1,173			—
Change in FDIC indemnification asset	19,841			10,644
Depreciation, amortization and accretion	13,292			11,848
Increase in mortgage servicing rights	(15,182		)	(11,923		)
Change in mortgage servicing rights carried at fair value	757			5,618
Change in junior subordinated debentures carried at fair value	1,637			1,633
Stock-based compensation	3,531			2,981
Net increase in trading account assets	(265		)	(744		)
Gain on sale of loans	(52,899		)	(50,668		)
Change in loans held for sale carried at fair value	11,099			(11,324		)
Origination of loans held for sale	(1,368,902		)	(1,359,520		)
Proceeds from sales of loans held for sale	1,614,097			1,294,321
Excess tax benefits from the exercise of stock options	(40		)	(51		)
Change in other assets and liabilities:
Net decrease (increase) in other assets	34,007			(9,348		)
Net (decrease) increase in other liabilities	(11,983		)	22,493
Net cash provided by operating activities	359,316			42,230
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale	(51,191		)	(784,797		)
Purchases of investment securities held to maturity	(2,126		)	(931		)
Proceeds from investment securities available for sale	702,910			1,018,791
Proceeds from investment securities held to maturity	1,073			511
Redemption of restricted equity securities	1,999			1,216
Net non-covered loan and lease originations	(352,390		)	(391,733		)
Net covered loan paydowns	68,819			85,510
Proceeds from sales of non-covered loans	60,298			13,496
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	330			1,700
Purchases of premises and equipment	(25,575		)	(17,155		)
Net proceeds from FDIC indemnification asset	4,621			26,615
Proceeds from sales of non-covered other real estate owned	13,940			18,834
Proceeds from sales of covered other real estate owned	9,794			11,523
Net cash paid in acquisition	(149,658		)	—
Net cash provided (used) by investing activities	283,419			(13,395		)

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

	Nine months ended
	September 30,
	2013			2012
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposit liabilities	(311,708		)	(136,519		)
Net increase in securities sold under agreements to repurchase	78,235			36,446
Repayment of term debt	(211,204		)	—
Repayment of junior subordinated debentures	(8,764		)	—
Dividends paid on common stock	(33,837		)	(25,919		)
Excess tax benefits from stock based compensation	40			51
Proceeds from stock options exercised	2,511			324
Retirement of common stock	(4,704		)	(5,378		)
Net cash used by financing activities	(489,431		)	(130,995		)
Net increase (decrease) in cash and cash equivalents	153,304			(102,160		)
Cash and cash equivalents, beginning of period	543,787			598,766
Cash and cash equivalents, end of period	$	697,091		$	496,606

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	32,419		$	40,653
Income taxes	$	27,711		$	31,825
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized losses on investment securities available for sale, net of taxes	$	(21,216	)	$	(2,019	)
Change in unrealized losses on investment securities held to maturity
related to factors other than credit, net of taxes	$	43		$	114
Cash dividend declared on common stock and payable after period-end	$	16,930		$	10,140
Transfer of non-covered loans to non-covered other real estate owned	$	14,747		$	10,167
Transfer of covered loans to covered other real estate owned	$	2,554		$	3,227
Transfer of covered loans to non-covered loans	$	13,366		$	14,367
Transfer from FDIC indemnification asset to due from FDIC and other	$	3,530		$	19,939
Acquisitions:
Assets acquired	$	376,071		$	—
Liabilities assumed	$	219,961		$	—

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 (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. 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. 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.

In preparing these financial statements, the Company has evaluated events and transactions subsequent to September 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

Sterling Financial Corporation

On September 11, 2013, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Sterling Financial Corporation, a Washington corporation ("Sterling"). The Merger Agreement provides that Sterling will merge with and into the Company (the "Merger"), with the Company as the surviving corporation in the Merger. Immediately following the Merger, Sterling's wholly owned subsidiary, Sterling Savings Bank, will merge with and into the Bank (the "Bank Merger"), with the Bank as the surviving bank in the Bank Merger. Holders of shares of common stock of Sterling will have the right to receive 1.671 shares of the Company's common stock and $2.18 in cash for each share of Sterling common stock.

The completion of the Merger is subject to customary conditions, including (1) adoption of the Merger Agreement by Sterling's shareholders and by the Company's shareholders, (2) approval of an amendment to the Company's articles of incorporation to increase the number of authorized shares of the Company's common stock, (3) authorization for listing on the NASDAQ of the shares of the Company's common stock to be issued in the Merger, (4) the receipt of required regulatory approvals for the Merger and the Bank Merger from the Federal Reserve Board, Federal Deposit Insurance Corporation and Oregon and Washington state bank regulators, in each case without the imposition of any materially burdensome regulatory condition, (5) effectiveness of the registration statement on Form S-4 for the Company's common stock to be issued in the Merger, and (6) the absence of any order, injunction or other legal restraint preventing the completion of the Merger or making the completion of the Merger illegal. Each party's obligation to complete the Merger is also subject to certain additional customary conditions. The Merger Agreement provides certain termination rights for both the Company and Sterling and further provides that, upon termination of the Merger Agreement under certain circumstances, the Company or Sterling, as applicable, will be obligated to pay the other party a termination fee of $75 million.

The Merger is expected to be completed in the first half of 2014. A summary of the terms of the Merger Agreement and other related agreements are summarized in, and the Merger Agreement has been filed as an exhibit to, the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on September 17, 2013.

Financial Pacific Holding Corp.

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 included in the consolidated financial statements as of July 1, 2013.

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The aggregate consideration for the FinPac purchase was $158.0 million. Of that amount, $156.1 was distributed in cash, and $1.9 million was exchanged for restricted shares of the Company stock. The restricted shares were issued from the Company’s 2013 Incentive Plan 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 Leasing is also the sole shareholder of FPF II, which no longer engages in any activities or holds any assets and is anticipated 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. There is no tax deductible goodwill or other intangibles.

The operations of FinPac are included in our operating results from July 1, 2013, and added revenue of $14.8 million, non-interest expense of $3.5 million , and net income of $6.0 million net of tax, for the three and nine months ended September 30, 2013. FinPac's results of operations prior to the acquisition are not included in our operating results. Merger related expenses of $629,000 and $1.4 million for the three and nine months ended September 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:

(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	6,881
Other intangible assets	(8,516		)
Other assets	(1,650		)
Term debt	(400		)
Other liabilities	1,355
Goodwill	$	(96,994	)

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)

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	FinPac
	July 1, 2013
Assets Acquired:
Cash and equivalents	$	6,452
Non-covered loans and leases, net	264,336
Premises and equipment	491
Goodwill	96,994
Other assets	7,798
Total assets acquired	$	376,071

Liabilities Assumed:
Term debt	211,204
Other liabilities	8,757
Total liabilities assumed	219,961
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 payments	$	350,403
Purchase adjustment for credit	$	(20,520	)
Balance of non-covered loans and leases, net	$	264,336

The following tables present unaudited pro forma results of operations for the three and nine months ended September 30, 2013 and 2012 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.

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(in thousands, except per share data)



	Three months ended September 30, 2013
						Pro Forma				Pro Forma
	Company			FinPac (a)		Adjustments				Combined
Net interest income	$	92,311		$	14,498	$	(1,121	)	(b)	$	105,688
Provision for non-covered loan and lease losses	1,228			1,780		1,524			(d)	4,532
Recapture of provision for covered loan losses	(1,904		)	—		—				(1,904		)
Non-interest income	25,815			329		—				26,144
Non-interest expense	92,108			3,496		(474		)	(c)	95,130
Income before provision for income taxes	26,694			9,551		(2,171		)		34,074
Provision for income taxes	9,169			3,599		(868		)	(e)	11,900
Net income	17,525			5,952		(1,303		)		22,174
Dividends and undistributed earnings allocated to participating securities	196			—		52				248
Net earnings available to common shareholders	$	17,329		$	5,952	$	(1,355	)		$	21,926
Earnings per share:
Basic	$	0.15								$	0.20
Diluted	$	0.15								$	0.20
Average shares outstanding:
Basic	111,912									111,912
Diluted	112,195									112,195

(a) FinPac amounts represent results from July 1, 2013 to September 30, 2013.

(b) Consists of change in yields due to fair value adjustments.

(c) Consists of merger related expenses of $629,000 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)



	Nine months ended September 30, 2013
						Pro Forma				Pro Forma
	Company			FinPac (a)		Adjustments				Combined
Net interest income	$	280,393		$	40,024	$	(1,513	)	(b)	$	318,904
Provision for non-covered loan and lease losses	11,209			5,052		4,565			(d)	20,826
Recapture of provision for covered loan losses	(4,744		)	—		—				(4,744		)
Non-interest income	94,327			1,641		—				95,968
Non-interest expense	265,801			11,784		(1,802		)	(c)	275,783
Income before provision for income taxes	102,454			24,829		(4,276		)		123,007
Provision for income taxes	35,315			9,434		(1,710		)	(e)	43,039
Net income	67,139			15,395		(2,566		)		79,968
Dividends and undistributed earnings allocated to participating securities	576			—		110				686
Net earnings available to common shareholders	$	66,563		$	15,395	$	(2,676	)		$	79,282
Earnings per share:
Basic	$	0.59								$	0.71
Diluted	$	0.59								$	0.71
Average shares outstanding:
Basic	111,934									111,934
Diluted	112,154									112,154

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(a) FinPac amounts represent results from January 1, 2013 to September 30, 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 $1.4 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 September 30, 2012
					Pro Forma				Pro Forma
	Company		FinPac (a)		Adjustments				Combined
Net interest income	$	102,040	$	12,030	$	1,167		(b)	$	115,237
Provision for non-covered loan and lease losses	7,078		2,516		1,361			(d)	10,955
Provision for covered loan losses	2,927		—		—				2,927
Non-interest income	33,679		749		—				34,428
Non-interest expense	86,974		3,836		(303		)	(c)	90,507
Income before provision for income taxes	38,740		6,427		109				45,276
Provision for income taxes	13,587		2,425		44			(e)	16,056
Net income	25,153		4,002		65				29,220
Dividends and undistributed earnings allocated to participating securities	170		—		27				197
Net earnings available to common shareholders	$	24,983	$	4,002	$	38			$	29,023
Earnings per share:
Basic	$	0.22							$	0.26
Diluted	$	0.22							$	0.26
Average shares outstanding:
Basic	111,899								111,899
Diluted	112,151								112,151

(a) FinPac amounts represent results from July 1, 2012 to September 30, 2012.

(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%.

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(in thousands, except per share data)



	Nine months ended September 30, 2012
					Pro Forma				Pro Forma
	Company		FinPac (a)		Adjustments				Combined
Net interest income	$	305,407	$	35,897	$	3,509		(b)	$	344,813
Provision for non-covered loan and lease losses	16,883		8,213		415			(d)	25,511
Provision for covered loan losses	4,302		—		—				4,302
Non-interest income	89,842		2,751		—				92,593
Non-interest expense	261,606		11,545		(910		)	(c)	272,241
Income before provision for income taxes	112,458		18,890		4,004				135,352
Provision for income taxes	38,525		7,131		1,601			(e)	47,257
Net income	73,933		11,759		2,403				88,095
Dividends and undistributed earnings allocated to participating securities	499		—		96				595
Net earnings available to common shareholders	$	73,434	$	11,759	$	2,307			$	87,500
Earnings per share:
Basic	$	0.66							$	0.78
Diluted	$	0.65							$	0.78
Average shares outstanding:
Basic	111,928								111,928
Diluted	112,159								112,159

(a) FinPac amounts represent results from January 1, 2012 to September 30, 2012.

(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%.

Circle Bancorp

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 $11.9 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 $4.2 million and $13.3 million, non-interest expense of $1.3 million and $5.2 million, and net income of $1.7 million and $4.5 million net of tax, for the three and nine months ended September 30, 2013. Circle's results of operations prior to the acquisition are not included in our operating results. Merger-related expenses of $32,000 and $981,000 for the three and nine months ended September 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:

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(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	1,398
Goodwill	$	(11,922	)

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	11,922
Other intangible assets	830
Non-covered other real estate owned	1,602
Other assets	6,469
Total assets acquired	$	317,795

Liabilities Assumed:
Deposits	$	250,408
Junior subordinated debentures	8,764
Term debt	55,404
Other liabilities	3,219
Total liabilities assumed	$	317,795

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	(5,760		)
Balance of performing non-covered loans	$	240,850

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

(in thousands)



	November 14,		December 31,		September 30,
	2012		2012		2013
Contractually required principal payments	$	12,252	$	12,231	$	5,606
Carrying balance of acquired purchase credit impaired non-covered loans	$	5,815	$	5,809	$	2,263

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 September 30, 2013 and December 31, 2012:

September 30, 2013

(in thousands)



	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
AVAILABLE FOR SALE:
U.S. Treasury and agencies	$	256	$	22	$	—		$	278
Obligations of states and political subdivisions	233,499		9,146		(2,114		)	240,531
Residential mortgage-backed securities and
collateralized mortgage obligations	1,668,904		18,140		(19,900		)	1,667,144
Other debt securities	60		74		—			134
Investments in mutual funds and
other equity securities	1,959		36		—			1,995
	$	1,904,678	$	27,418	$	(22,014	)	$	1,910,082
HELD TO MATURITY:
Residential mortgage-backed securities and
collateralized mortgage obligations	$	5,766	$	265	$	(1	)	$	6,030
	$	5,766	$	265	$	(1	)	$	6,030

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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 September 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.

September 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	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of states and political subdivisions	47,814		2,114		—		—		47,814		2,114
Residential mortgage-backed securities and
collateralized mortgage obligations	440,921		13,680		264,968		6,220		705,889		19,900
Total temporarily impaired securities	$	488,735	$	15,794	$	264,968	$	6,220	$	753,703	$	22,014
HELD TO MATURITY:
Residential mortgage-backed securities and
collateralized mortgage obligations	$	—	$	—	$	46	$	1	$	46	$	1
Total temporarily impaired securities	$	—	$	—	$	46	$	1	$	46	$	1

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.

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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 September 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 September 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

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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 September 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	$	18,573	$	18,569	$	—	$	—
Over three months through twelve months	191,763		194,660		338		378
After one year through five years	1,294,846		1,303,726		863		1,085
After five years through ten years	361,759		354,446		89		89
After ten years	35,778		36,687		4,476		4,478
Other investment securities	1,959		1,994		—		—
	$	1,904,678	$	1,910,082	$	5,766	$	6,030

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 nine months ended September 30, 2013 and 2012:

(in thousands)



	Three months ended				Three months ended
	September 30, 2013				September 30, 2012
	Gains		Losses		Gains		Losses
U.S. Treasury and agencies	$	—	$	—	$	—	$	—
Obligations of states and political subdivisions	3		—		8		—
Residential mortgage-backed securities and
collateralized mortgage obligations	—		—		—		—
Other debt securities	—		—		13		—
	$	3	$	—	$	21	$	—

(in thousands)
	Nine months ended				Nine months ended
	September 30, 2013				September 30, 2012
	Gains		Losses		Gains		Losses
U.S. Treasury and agencies	$	—	$	—	$	371	$	—
Obligations of states and political subdivisions	10		1		10		1
Residential mortgage-backed securities and
collateralized mortgage obligations	—		—		1,484		683
Other debt securities	9		—		18		—
	$	19	$	1	$	1,883	$	684

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

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(in thousands)



	Amortized		Fair
	Cost		Value
To Federal Home Loan Bank to secure borrowings	$	16,831	$	17,287
To state and local governments to secure public deposits	810,529		808,734
Other securities pledged principally to secure repurchase agreements	307,164		304,093
Total pledged securities	$	1,134,524	$	1,130,114

Note 4 – Non-Covered Loans and Leases

The following table presents the major types of non-covered loans and leases recorded in the balance sheets as of September 30, 2013 and December 31, 2012:

(in thousands)



	September 30,			December 31,
	2013			2012
Commercial real estate
Term & multifamily	$	4,005,983		$	3,938,443
Construction & development	247,809			202,118
Residential development	78,998			57,209
Commercial
Term	769,173			797,802
LOC & other	1,283,129			923,328
Residential
Mortgage	550,200			476,579
Home equity loans & lines	256,202			260,797
Consumer & other	43,621			37,327
Total	7,235,115			6,693,603
Deferred loan fees, net	(6,211		)	(12,523		)
Total	$	7,228,904		$	6,681,080

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

At September 30, 2013, non-covered loans accounted for under ASC 310-30 were $24.7 million. At December 31, 2012, non-covered accounted for under ASC 310-30 were $19.3 million.

Note 5 – Allowance for Non-Covered Loan and Lease 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 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 rati