UMPQ-2014.03.31-10Q

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: March 31, 2014
 
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: 216,936,489 shares outstanding as of April 30, 2014

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)
 
 
 
 
March 31,
 
December 31,
 
2014
 
2013
ASSETS
 
 
 
Cash and due from banks
$
196,963

 
$
178,685

Interest bearing deposits
887,620

 
611,224

Temporary investments
525

 
514

Total cash and cash equivalents
1,085,108

 
790,423

Investment securities
 
 
 
Trading, at fair value
4,498

 
5,958

Available for sale, at fair value
1,701,730

 
1,790,978

Held to maturity, at amortized cost
5,465

 
5,563

Loans held for sale, at fair value
73,106

 
104,664

Non-covered loans and leases
7,411,108

 
7,354,403

Allowance for non-covered loan and lease losses
(86,709
)
 
(85,314
)
Net non-covered loans and leases
7,324,399

 
7,269,089

Covered loans, net of allowance of $10,320 and $9,771
342,263

 
363,992

Restricted equity securities
29,948

 
30,685

Premises and equipment, net
180,199

 
177,680

Goodwill and other intangible assets, net
775,488

 
776,683

Mortgage servicing rights, at fair value
49,220

 
47,765

Non-covered other real estate owned
22,034

 
21,833

Covered other real estate owned
1,746

 
2,102

FDIC indemnification asset
18,362

 
23,174

Bank owned life insurance
97,589

 
96,938

Deferred tax asset, net
11,393

 
16,627

Other assets
116,178

 
111,958

Total assets
$
11,838,726

 
$
11,636,112

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits
 
 
 
Noninterest bearing
$
2,465,606

 
$
2,436,477

Interest bearing
6,807,977

 
6,681,183

Total deposits
9,273,583

 
9,117,660

Securities sold under agreements to repurchase
262,483

 
224,882

Term debt
250,964

 
251,494

Junior subordinated debentures, at fair value
87,800

 
87,274

Junior subordinated debentures, at amortized cost
101,818

 
101,899

Other liabilities
127,602

 
125,477

Total liabilities
10,104,250

 
9,908,686

COMMITMENTS AND CONTINGENCIES (NOTE 10)

 

SHAREHOLDERS' EQUITY
 
 
 
Common stock, no par value, shares authorized: 400,000,000 in 2014 and 200,000,000 in 2013; issued and outstanding: 112,319,525 in 2014 and 111,973,203 in 2013
1,514,969

 
1,514,485

Retained earnings
219,686

 
217,917

Accumulated other comprehensive loss
(179
)
 
(4,976
)
Total shareholders' equity
1,734,476

 
1,727,426

Total liabilities and shareholders' equity
$
11,838,726

 
$
11,636,112


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
 
March 31,
 
2014
 
2013
INTEREST INCOME
 
 
 
Interest and fees on non-covered loans and leases
$
91,268

 
$
78,545

Interest and fees on covered loans and leases
12,718

 
14,580

Interest and dividends on investment securities:
 
 
 
Taxable
9,291

 
8,644

Exempt from federal income tax
2,112

 
2,288

Dividends
50

 
24

Interest on temporary investments and interest bearing deposits
441

 
252

Total interest income
115,880

 
104,333

INTEREST EXPENSE
 
 
 
Interest on deposits
3,848

 
5,878

Interest on securities sold under agreement to repurchase and federal funds purchased
41

 
31

Interest on term debt
2,273

 
2,273

Interest on junior subordinated debentures
1,880

 
1,962

Total interest expense
8,042

 
10,144

Net interest income
107,838

 
94,189

PROVISION FOR NON-COVERED LOAN AND LEASE LOSSES 
5,400

 
6,988

PROVISION FOR COVERED LOAN LOSSES
571

 
232

Net interest income after provision for loan and lease losses
101,867

 
86,969

NON-INTEREST INCOME
 
 
 
Service charges on deposit accounts
7,767

 
6,992

Brokerage commissions and fees
3,725

 
3,636

Mortgage banking revenue, net
10,439

 
23,568

Gain on investment securities, net
—

 
7

Loss on junior subordinated debentures carried at fair value
(542
)
 
(542
)
Change in FDIC indemnification asset
(4,840
)
 
(5,073
)
Other income
6,458

 
5,427

Total non-interest income
23,007

 
34,015

NON-INTEREST EXPENSE
 
 
 
Salaries and employee benefits
53,218

 
51,505

Net occupancy and equipment
16,501

 
14,735

Communications
2,902

 
3,203

Marketing
1,005

 
861

Services
5,990

 
5,893

Supplies
896

 
718

FDIC assessments
1,863

 
1,651

Net gain on non-covered other real estate owned
(18
)
 
(130
)
Net (gain) loss on covered other real estate owned
(46
)
 
284

Intangible amortization
1,194

 
1,204

Merger related expenses
5,983

 
1,531

Other expenses
7,030

 
4,307

Total non-interest expense
96,518

 
85,762

Income before provision for income taxes
28,356

 
35,222

Provision for income taxes
9,592

 
11,861

Net income
$
18,764

 
$
23,361



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
 
March 31,
 
2014
 
2013
Net income
$
18,764

 
$
23,361

Dividends and undistributed earnings allocated to participating securities
113

 
183

Net earnings available to common shareholders
$
18,651

 
$
23,178

Earnings per common share:
 
 
 
Basic
$0.17
 
$0.21
Diluted
$0.17
 
$0.21
Weighted average number of common shares outstanding:
 
 
 
Basic
112,170

 
111,937

Diluted
112,367

 
112,118


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
 
March 31,
 
2014
 
2013
Net income
$
18,764

 
$
23,361

Available for sale securities:
 
 
 
Unrealized gains (losses) arising during the period
7,979

 
(4,425
)
Reclassification adjustment for net gains realized in earnings (net of tax expense of $3 for the three months ended March 31, 2013)
—

 
(4
)
Income tax (expense) benefit related to unrealized losses
(3,192
)
 
1,770

Net change in unrealized gains (losses)
4,787

 
(2,659
)
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 $6 and $12 for the three months ended March 31, 2014 and 2013, respectively)
10

 
17

Net change in unrealized losses related to factors other than credit
10

 
17

Other comprehensive income (loss), net of tax
4,797

 
(2,642
)
Comprehensive income
$
23,561

 
$
20,719


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
 
Income (Loss)
 
Total
BALANCE AT JANUARY 1, 2013
111,889,959

 
$
1,512,400

 
$
187,293

 
$
24,346

 
$
1,724,039

Net income
 
 
 
 
98,361

 
 
 
98,361

Other comprehensive loss, net of tax
 
 
 
 
 
 
(29,322
)
 
(29,322
)
Comprehensive income
 
 
 
 
 
 
 
 
$
69,039

Stock-based compensation
 
 
5,017

 
 
 
 
 
5,017

Stock repurchased and retired
(584,677
)
 
(9,360
)
 
 
 
 
 
(9,360
)
Issuances of common stock under stock plans
 
 
 
 
 
 
 
 
 
and related net tax benefit
667,921

 
6,428

 
 
 
 
 
6,428

Cash dividends on common stock ($0.60 per share)
 
 
 
 
(67,737
)
 
 
 
(67,737
)
Balance at December 31, 2013
111,973,203

 
$
1,514,485

 
$
217,917

 
$
(4,976
)
 
$
1,727,426

 
 
 
 
 
 
 
 
 
 
BALANCE AT JANUARY 1, 2014
111,973,203

 
$
1,514,485

 
$
217,917

 
$
(4,976
)
 
$
1,727,426

Net income
 
 
 
 
18,764

 
 
 
18,764

Other comprehensive income, net of tax
 
 
 
 
 
 
4,797

 
4,797

Comprehensive income
 
 
 
 
 
 
 
 
$
23,561

Stock-based compensation
 
 
1,534

 
 
 
 
 
1,534

Stock repurchased and retired
(256,894
)
 
(4,614
)
 
 
 
 
 
(4,614
)
Issuances of common stock under stock plans
 
 
 
 
 
 
 
 
 
and related net tax benefit
603,216

 
3,564

 
 
 
 
 
3,564

Cash dividends on common stock ($0.15 per share)
 
 
 
 
(16,995
)
 
 
 
(16,995
)
Balance at March 31, 2014
112,319,525

 
$
1,514,969

 
$
219,686

 
$
(179
)
 
$
1,734,476


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)
 
Three months ended
 
March 31,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
18,764

 
$
23,361

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of investment premiums, net
4,000

 
11,042

Gain on sale of investment securities, net
—

 
(7
)
Gain on sale of non-covered other real estate owned
(117
)
 
(499
)
Gain on sale of covered other real estate owned
(46
)
 
(270
)
Valuation adjustment on non-covered other real estate owned
99

 
369

Valuation adjustment on covered other real estate owned
—

 
554

Provision for non-covered loan and lease losses
5,400

 
6,988

Provision for covered loan losses
571

 
232

Proceeds from bank owned life insurance
187

 
1,173

Change in cash surrender value of bank owned life insurance
(838
)
 
(1,980
)
Change in FDIC indemnification asset
4,840

 
5,073

Depreciation, amortization and accretion
4,280

 
4,497

Increase in mortgage servicing rights
(2,408
)
 
(6,403
)
Change in mortgage servicing rights carried at fair value
953

 
1,734

Change in junior subordinated debentures carried at fair value
526

 
535

Stock-based compensation
1,534

 
1,185

Net decrease in trading account assets
1,460

 
564

Gain on sale of loans
(9,684
)
 
(28,484
)
Change in loans held for sale carried at fair value
(324
)
 
10,798

Origination of loans held for sale
(213,060
)
 
(471,175
)
Proceeds from sales of loans held for sale
254,109

 
675,150

Excess tax benefits from the exercise of stock options
(892
)
 
(27
)
Change in other assets and liabilities:
 
 
 
Net (increase) decrease in other assets
(791
)
 
14,337

Net increase (decrease) in other liabilities
2,077

 
(14,007
)
Net cash provided by operating activities
70,640

 
234,740

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investment securities available for sale
—

 
(51,191
)
Proceeds from investment securities available for sale
93,176

 
264,313

Proceeds from investment securities held to maturity
167

 
402

Redemption of restricted equity securities
737

 
660

Net non-covered loan and lease originations
(80,709
)
 
(3,363
)
Net covered loan paydowns
19,378

 
17,346

Proceeds from sales of non-covered loans
22,272

 
17,515

Proceeds from disposals of furniture and equipment
30

 
112

Purchases of premises and equipment
(8,162
)
 
(5,166
)
Net (payments) proceeds from FDIC indemnification asset
(812
)
 
1,710

Proceeds from sales of non-covered other real estate owned
1,512

 
4,284

Proceeds from sales of covered other real estate owned
402

 
3,935

Net cash provided by investing activities
$
47,991

 
$
250,557


8
Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) 
(UNAUDITED) 
 
(in thousands)
 
Three months ended
 
March 31,
 
2014
 
2013
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Net increase (decrease) in deposit liabilities
$
155,999

 
$
(307,500
)
Net increase in securities sold under agreements to repurchase
37,601

 
5,735

Repayment of junior subordinated debentures
—

 
(8,764
)
Dividends paid on common stock
(16,936
)
 
—

Excess tax benefits from stock based compensation
892

 
27

Proceeds from stock options exercised
3,112

 
34

Retirement of common stock
(4,614
)
 
(428
)
Net cash provided (used) by financing activities
176,054

 
(310,896
)
Net increase in cash and cash equivalents
294,685

 
174,401

Cash and cash equivalents, beginning of period
790,423

 
543,787

Cash and cash equivalents, end of period
$
1,085,108

 
$
718,188

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
9,032

 
$
11,181

Income taxes
$
1,456

 
$
1,100

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized losses (gains) on investment securities available for sale, net of taxes
$
4,787

 
$
(2,659
)
Change in unrealized losses on investment securities held to maturity
 

 
 

related to factors other than credit, net of taxes
$
10

 
$
17

Cash dividend declared on common stock and payable after period-end
$
16,947

 
$
11,288

Transfer of non-covered loans to non-covered other real estate owned
$
1,878

 
$
5,689

Transfer of covered loans to covered other real estate owned
$
—

 
$
1,741

Transfer of covered loans to non-covered loans
$
1,780

 
$
7,899

Transfer (to) from FDIC indemnification asset (from) to due from FDIC and other
$
(28
)
 
$
1,679

Receivable from sales of covered other real estate owned
$
185

 
$
—



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.  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 2013 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 2013 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. The Bank also has a wholly-owned subsidiary, Financial Pacific Leasing Inc., a commercial equipment leasing company.
 
In preparing these financial statements, the Company has evaluated events and transactions subsequent to March 31, 2014 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
As of the close of business on April 18, 2014, the Company completed its merger with Sterling Financial Corporation, a Washington corporation ("Sterling").  The results of Sterling's operations will be included in the Company's financial results beginning April 19, 2014 and the combined company's banking operations will operate under the Umpqua Bank name and brand. As of December 31, 2013, Sterling had total assets of $10.3 billion, $7.3 billion in loans, and $7.1 billion in deposits.

The structure of the transaction is as follows:
•
Sterling merged 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 merged 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 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;
•
Holders of outstanding warrants of Sterling, which represent the right to purchase a corresponding share of common stock of Sterling, have the right to receive 1.671 shares of the Company's common stock and $2.18 in cash for each warrant when exercised;
•
Holders of outstanding options to purchase shares of Sterling common stock converted into 1.7896 options to purchase the Company's common stock, subject to vesting conditions;
•
Holders of outstanding restricted stock units of Sterling common stock converted into 1.7896 restricted stock units of the Company, subject to vesting conditions;

Aggregate consideration for the Merger is estimated at $2.1 billion and includes the following:
•
Cash of $136.2 million
•
Common stock issued of $1.9 billion;
•
Warrants issued of $52.8 million;
•
Restricted stock units and stock options of $8.8 million.

The primary reason for the Merger is to continue the Company's growth strategy, including expanding our geographic footprint in markets throughout the West Coast. Six stores are expected to be divested to Banner Bank in the second quarter of 2014. The Company expects to repay securities sold under agreements to repurchase acquired of $500.0 million, funded through the sale of acquired investment securities in the second quarter of 2014.

The Merger will be accounted for using the purchase acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged will be recorded at fair value as of the acquisition date. Preliminary fair values for all assets and liabilities are not reported herein as the Company is still in the process of determining the preliminary fair

10
Table of Contents

values. The Company expects to disclose preliminary assets acquired and liabilities assumed, including fair value adjustments, as well as supplemental pro forma information, in the Company's June 30, 2014 Form 10-Q. Goodwill will not be deductible for income tax purposes as the merger is accounted for as a tax-free exchange for tax purposes.

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.

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. FinPac Leasing is also the sole shareholder of FPF, FPF II and FPF III, which are bankruptcy-remote entities that formerly served as lien holder for certain leases. FPF, FPF II and FPF III have no assets or current business activities and are anticipated to be dissolved 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 $15.7 million, non-interest expense of $3.9 million , and net income of $4.2 million net of tax, for the three months ended March 31, 2014. FinPac's results of operations prior to the acquisition are not included in our operating results. There are no merger related expenses for the three months ended March 31, 2014.

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
1,572

Goodwill
$
(96,777
)

11
Table of Contents


The statement of assets acquired and liabilities assumed at their fair values of FinPac are presented below.
(in thousands)
 
FinPac
 
July 1, 2013
Assets Acquired:
 
Cash and equivalents
$
6,452

Non-covered loans and leases, net
264,336

Premises and equipment
491

Goodwill
96,777

Other assets
8,015

 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 table presents unaudited pro forma results of operations for the three months ended March 31, 2013 as if the acquisition of FinPac had occurred on January 1, 2013. 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, 2013.




12
Table of Contents

(in thousands, except per share data)
 
Three months ended March 31, 2013
 
 
 
Pro Forma
 
Pro Forma
 
Company
FinPac (a)
Adjustments
 
Combined
Net interest income
$
94,189

$
12,547

$
(1,224
)
 (b)
$
105,512

Provision for non-covered loan and lease losses
6,988

2,577

—

(c)
9,565

Provision for covered loan losses
232

—

—

 
232

Non-interest income
34,015

790

—

 
34,805

Non-interest expense
85,762

3,832

(203
)
(d)
89,391

  Income before provision for income taxes
35,222

6,928

(1,021
)
 
41,129

Provision for income taxes
11,861

2,716

(357
)
 (e)
14,220

  Net income
23,361

4,212

(664
)
 
26,909

Dividends and undistributed earnings allocated to participating securities
183

—

28

 
211

Net earnings available to common shareholders
$
23,178

$
4,212

$
(692
)
 
$
26,698

Earnings per share:
 
 
 
 
 
      Basic
$
0.21

 
 
 
$
0.24

      Diluted
$
0.21

 
 
 
$
0.24

Average shares outstanding:
 
 
 
 
 
      Basic
111,937

 
 
 
111,937

      Diluted
112,118

 
 
 
112,118


(a) FinPac amounts represent results from January 1, 2013 to March 31, 2013.
(b) Adjustment of interest income from loans and leases due to the estimated loss of income from the write-off of FinPac's loan mark (related to a prior acquisition) and the amortization of the new interest rate mark and the accretion of the acquisition accounting adjustment relating to the credit mark. The amortization period will be the contractual lives of the loans and leases, which is approximately four years, and will be amortized into income using the effective yield method.
(c) As acquired loans and leases are recorded at fair value, Umpqua would expect a reduction in the historical provision for loan and leases losses from FinPac; however, no adjustment to the historical amount of FinPac provision for loan and lease losses is reflected.
(d) Adjustment to reflect additional compensation expense related to restricted stock granted to FinPac management and the removal of FinPac director compensation and travel fees, and FinPac management fees of the Financial Pacific Holdings, LLC entity which was not acquired.
(e) Income tax effect of pro forma adjustments at 35%.

Note 3 – Investment Securities 
 
The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at March 31, 2014 and December 31, 2013: 

March 31, 2014

13
Table of Contents

(in thousands)
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
AVAILABLE FOR SALE:
 
 
 
 
 
 
 
U.S. Treasury and agencies
$
242

 
$
20

 
$
(1
)
 
$
261

Obligations of states and political subdivisions
222,195

 
8,781

 
(1,297
)
 
229,679

Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
1,477,553

 
14,077

 
(21,814
)
 
1,469,816

Investments in mutual funds and
 
 
 
 
 
 
 
other equity securities
1,959

 
15

 
—

 
1,974

 
$
1,701,949

 
$
22,893

 
$
(23,112
)
 
$
1,701,730

HELD TO MATURITY:
 
 
 
 
 
 
 
Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
$
5,465

 
$
333

 
$
(8
)
 
$
5,790

 
$
5,465

 
$
333

 
$
(8
)
 
$
5,790


December 31, 2013
(in thousands)
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
AVAILABLE FOR SALE:
 
 
 
 
 
 
 
U.S. Treasury and agencies
$
249

 
$
20

 
$
(1
)
 
$
268

Obligations of states and political subdivisions
229,969

 
7,811

 
(2,575
)
 
235,205

Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
1,567,001

 
15,359

 
(28,819
)
 
1,553,541

Investments in mutual funds and
 
 
 
 
 
 
 
other equity securities
1,959

 
5

 
—

 
1,964

 
$
1,799,178

 
$
23,195

 
$
(31,395
)
 
$
1,790,978

HELD TO MATURITY:
 
 
 
 
 
 
 
Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
5,563

 
330

 
(19
)
 
5,874

 
$
5,563

 
$
330

 
$
(19
)
 
$
5,874

 
Investment securities that were in an unrealized loss position as of March 31, 2014 and December 31, 2013 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. 
 

14
Table of Contents

March 31, 2014
(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
$
—

 
$
—

 
$
25

 
$
1

 
$
25

 
$
1

Obligations of states and political subdivisions
38,975

 
1,165

 
1,767

 
132

 
40,742

 
1,297

Residential mortgage-backed securities and
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
412,636

 
9,553

 
284,346

 
12,261

 
696,982

 
21,814

Total temporarily impaired securities
$
451,611

 
$
10,718

 
$
286,138

 
$
12,394

 
$
737,749

 
$
23,112

HELD TO MATURITY:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities and
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
$
169

 
$
8

 
$
—

 
$
—

 
$
169

 
$
8

Total temporarily impaired securities
$
169

 
$
8

 
$
—

 
$
—

 
$
169

 
$
8


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. 
 
December 31, 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
$
—

 
$
—

 
$
32

 
$
1

 
$
32

 
$
1

Obligations of states and political subdivisions
48,342

 
2,575

 
—

 
—

 
48,342

 
2,575

Residential mortgage-backed securities and
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
475,982

 
15,951

 
249,695

 
12,868

 
725,677

 
28,819

Total temporarily impaired securities
$
524,324

 
$
18,526

 
$
249,727

 
$
12,869

 
$
774,051

 
$
31,395

HELD TO MATURITY:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities and
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
$
156

 
$
19

 
$
—

 
$
—

 
$
156

 
$
19

Total temporarily impaired securities
$
156

 
$
19

 
$
—

 
$
—

 
$
156

 
$
19

 
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 ("OTTI"). 
 
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 March 31, 2014. 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 OTTI. 
 
All of the available for sale residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at March 31, 2014 are issued or guaranteed by governmental agencies. The unrealized losses on

15
Table of Contents

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, these investments are not considered OTTI. 

We review investment securities on an ongoing basis for the presence of 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 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 March 31, 2014: 
 
(in thousands)
 
Available For Sale
 
Held To Maturity
 
Amortized
 
Fair
 
Amortized
 
Fair
 
Cost
 
Value
 
Cost
 
Value
AMOUNTS MATURING IN:
 
 
 
 
 
 
 
Three months or less
$
9,295

 
$
9,337

 
$
—

 
$
—

Over three months through twelve months
61,111

 
62,068

 
291

 
309

After one year through five years
960,569

 
975,746

 
279

 
487

After five years through ten years
614,744

 
597,870

 
427

 
485

After ten years
54,271

 
54,735

 
4,468

 
4,509

Other investment securities
1,959

 
1,974

 
—

 
—

 
$
1,701,949

 
$
1,701,730

 
$
5,465

 
$
5,790

 
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. 
 
There were gross realized gains on the sale of securities available for sale of none and $7,000 for the three months ended March 31, 2014 and 2013. 

The following table presents, as of March 31, 2014, investment securities which were pledged to secure borrowings, public deposits, and repurchase agreements as permitted or required by law: 
 

16
Table of Contents

(in thousands)
 
Amortized
 
Fair
 
Cost
 
Value
To Federal Home Loan Bank to secure borrowings
$
8,783

 
$
9,089

To state and local governments to secure public deposits
933,911

 
928,206

Other securities pledged principally to secure repurchase agreements
347,901

 
342,649

Total pledged securities
$
1,290,595

 
$
1,279,944

 
 
  
Note 4 – Non-Covered Loans and Leases  
 
The following table presents the major types of non-covered loans and leases, net of deferred costs, net of $4.7 million and net of deferred fees, net of $495,000, recorded on the balance sheet as of March 31, 2014 and December 31, 2013, respectively: 
 
(in thousands)
 
March 31,
 
December 31,
 
2014
 
2013
Commercial real estate
 
 
 
Non-owner occupied term, net
$
2,311,952

 
$
2,328,260

Owner occupied term, net
1,282,482

 
1,259,583

Multifamily, net
400,927

 
403,537

Construction & development, net
229,262

 
245,231

Residential development, net
89,510

 
88,413

Commercial
 
 
 
Term, net
735,004

 
770,845

LOC & other, net
1,005,800

 
987,360

Leases and equipment finance, net
388,418

 
361,591

Residential
 
 
 
Mortgage, net
651,042

 
597,201

Home equity loans & lines, net
268,497

 
264,269

Consumer & other, net
48,214

 
48,113

Total loans and leases, net of deferred fees and costs
7,411,108

 
7,354,403

 
As of March 31, 2014, loans totaling $5.4 billion were pledged to secure borrowings and available lines of credit.

At March 31, 2014 and December 31, 2013, non-covered loans accounted for under ASC 310-30 were $23.1 million and $21.9 million, respectively.

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 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 includes 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

17
Table of Contents

during the term of the loan or lease through the credit review process.  The Bank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the formula allowance. 
 
The formula allowance is calculated by applying risk factors to various segments of pools of outstanding loans and leases. Risk factors are assigned to each portfolio segment based on management’s evaluation of the losses inherent within each segment. Segments 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 and lease risk rating system and loan delinquency, and reflect the increased level of inherent losses associated with more adversely classified loans and leases. 
 
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 and leases; regulatory exam results; changes in the level of adversely classified loans and leases (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 and leases; 
• 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 leases, and the volume and severity of adversely classified or graded loans; 
• Changes in the quality of the institution’s loan and lease 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. 


18
Table of Contents

These factors are evaluated through a management survey of the Chief Credit Officer, Chief Lending Officer, Senior Credit Officers, Special Assets Manager, and Credit Review Manager. The survey requests responses to evaluate current changes in the nine qualitative 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 March 31, 2014. There is, however, no assurance that future loan and lease 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 74% of our loan and lease 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 and lease portfolio. A continued deterioration in our markets may adversely affect our loan and lease 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 and lease portfolio; 
• The trend in the loan portfolio's risk ratings; 
• Current economic conditions; 
• Loan and lease concentrations; 
• Loan and lease growth rates; 
• Past-due and non-performing trends; 
• Evaluation of specific loss estimates for all significant problem loans; 
• Historical short (one year), medium (three year), and long-term charge-off rates; 
• Recovery experience; and
• Peer comparison loss rates. 
 
There have been no significant changes to the Bank’s methodology or policies in the periods presented. 
 
Activity in the Non-Covered Allowance for Loan and Lease Losses 
 
The following table summarizes activity related to the allowance for non-covered loan and lease losses by non-covered loan and lease portfolio segment for three months ended March 31, 2014 and 2013: 
 
(in thousands)
 
Three months ended March 31, 2014
 
Commercial
 
 
 
 
 
Consumer
 
 
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Unallocated
 
Total
Balance, beginning of period
$
53,433

 
$
24,191

 
$
6,827

 
$
863

 
$
—

 
$
85,314

Charge-offs
(1,895
)
 
(3,350
)
 
(132
)
 
(188
)
 
—

 
(5,565
)
Recoveries
439

 
981

 
47

 
93

 
—

 
1,560

(Recapture) provision
(130
)
 
4,940

 
449

 
141

 
—

 
5,400

Balance, end of period
$
51,847

 
$
26,762

 
$
7,191

 
$
909

 
$
—

 
$
86,709

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2013
 
Commercial
 
 
 
 
 
Consumer
 
 
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Unallocated
 
Total
Balance, beginning of period
$
54,909

 
$
22,925

 
$
6,925

 
$
632

 
$
—

 
$
85,391

Charge-offs
(1,454
)
 
(6,174
)
 
(904
)
 
(193
)
 
—

 
(8,725
)
Recoveries
470

 
367

 
92

 
109

 
—

 
1,038

Provision
1,170

 
4,543

 
1,106

 
169

 
—

 
6,988

Balance, end of period
$
55,095

 
$
21,661

 
$
7,219

 
$
717

 
$
—

 
$
84,692


19
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
The following table presents the allowance and recorded investment in non-covered loans and leases by portfolio segment and balances individually or collectively evaluated for impairment as of March 31, 2014 and 2013: 
 
(in thousands)
 
March 31, 2014
 
Commercial
 
 
 
 
 
Consumer
 
 
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Unallocated
 
Total
Allowance for non-covered loans and leases:
Collectively evaluated for impairment
$
50,504

 
$
26,747

 
$
7,191

 
$
909

 
$
—

 
$
85,351

Individually evaluated for impairment
1,343

 
15

 
—

 
—

 
—

 
1,358

Total
$
51,847

 
$
26,762

 
$
7,191

 
$
909

 
$
—

 
$
86,709

Non-covered loans and leases:
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
4,222,943

 
$
2,114,681

 
$
919,539

 
$
48,214

 
 
 
$
7,305,377

Individually evaluated for impairment
91,190

 
14,541

 
—

 
—

 
 
 
105,731

Total
$
4,314,133

 
$
2,129,222

 
$
919,539

 
$
48,214

 
 
 
$
7,411,108

 
(in thousands)
 
March 31, 2013
 
Commercial
 
 
 
 
 
Consumer
 
 
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Unallocated
 
Total
Allowance for non-covered loans and leases:
Collectively evaluated for impairment
$
53,158

 
$
21,645

 
$
7,219

 
$
717

 
$
—

 
$
82,739

Individually evaluated for impairment
1,937

 
16

 
—

 
—

 
—

 
1,953

Total
$
55,095

 
$
21,661

 
$
7,219

 
$
717

 
$
—

 
$
84,692

Non-covered loans and leases:
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
4,071,110

 
$
1,668,522

 
$
748,115

 
$
41,173

 
 
 
$
6,528,920

Individually evaluated for impairment
114,553

 
19,375

 
338

 
—

 
 
 
134,266

Total
$
4,185,663

 
$
1,687,897

 
$
748,453

 
$
41,173

 
 
 
$
6,663,186

 

The non-covered loan and lease balances are net of deferred loans costs, net of $4.7 million at March 31, 2014 and net of deferred fees, net of $11.6 million at March 31, 2013.  


20
Table of Contents

Summary of Reserve for Unfunded Commitments Activity 

The following table presents a summary of activity in the RUC and unfunded commitments for the three months ended March 31, 2014 and 2013: 

(in thousands) 
 
Three months ended March 31, 2014
 
Commercial
 
 
 
 
 
Consumer
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Total
Balance, beginning of period
$
220

 
$
900

 
$
232

 
$
84

 
$
1,436

Net change to other expense
(26
)
 
(14
)
 
11

 
10

 
(19
)
Balance, end of period
$
194

 
$
886

 
$
243

 
$
94

 
$
1,417

 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2013
 
Commercial
 
 
 
 
 
Consumer
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Total
Balance, beginning of period
$
172

 
$
807

 
$
173

 
$
71

 
$
1,223

Net change to other expense
(13
)
 
43

 
9

 
7

 
46

Balance, end of period
$
159

 
$
850

 
$
182

 
$
78

 
$
1,269



 
 
 
 
 
 
 
 
 
 
(in thousands)  
 
Commercial
 
 
 
 
 
Consumer
 
 
 
Real Estate
 
Commercial
 
Residential
 
& Other
 
Total
Unfunded loan and lease commitments:
 
 
 
 
 
 
 
 
 
March 31, 2014
$
213,675

 
$
969,475

 
$
353,498

 
$
59,017

 
$
1,595,665

March 31, 2013
$
183,996

 
$
984,672

 
$
270,510

 
$
54,240

 
$
1,493,418

 
Non-covered loans and leases sold 
 
In the course of managing the loan and lease portfolio, at certain times, management may decide to sell loans and leases.  The following table summarizes loans and leases sold by loan portfolio during the three months ended March 31, 2014 and 2013: 
 
(In thousands) 
 
Three months ended
 
March 31,
 
2014
 
2013
Commercial real estate
 
 
 
Non-owner occupied term
$
3,193

 
$
—

Owner occupied term
2,147

 
2,850

Construction & development
—

 
3,515

Residential development
605

 
23

Commercial
 
 
 
Term
15,996

 
11,127

Residential
 
 
 
Mortgage
331

 
—

Total
$
22,272

 
$
17,515



21
Table of Contents

Asset Quality and Non-Performing Loans and Leases
 
We manage asset quality and control credit risk through diversification of the non-covered loan and lease portfolio and the application of policies designed to promote sound underwriting and loan and lease monitoring practices. The Bank's Credit Quality Group is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank.  Reviews of non-performing, past due non-covered loans and leases and larger credits, designed to identify potential charges to the allowance for loan and lease losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan and lease portfolio, prevailing economic conditions and other factors. 
 
A loan is considered impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Generally, when non-covered loans are identified as impaired, they are moved to the Special Assets Division. When we identify a loan as impaired, we measure the loan for potential 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 will use the current fair value of collateral, less selling costs.  The starting point for determining the fair value of collateral is through obtaining external appraisals.  Generally, external appraisals are updated every 12 months.  We obtain appraisals from a pre-approved list of independent, third party, local appraisal firms.  Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (a) currently licensed in the state in which the property is located, (b) is experienced in the appraisal of properties similar to the property being appraised, (c) is actively engaged in the appraisal work, (d) has knowledge of current real estate market conditions and financing trends, (e) is reputable, and (f) is not on Freddie Mac’s or the Bank’s Exclusionary List of appraisers and brokers. In certain cases appraisals will be reviewed by our Real Estate Valuation Services Group to ensure the quality of the appraisal and the expertise and independence of the appraiser. Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment.  Our impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification.  Typical justified adjustments might include discounts for continued market deterioration subsequent to appraisal date, adjustments for the release of collateral contemplated in the appraisal, or the value of other collateral or consideration not contemplated in the appraisal. An appraisal over one year old in most cases will be considered stale dated and an updated or new appraisal will be required.  Any adjustments from appraised value to net realizable value are detailed and justified in the impairment analysis, which is reviewed and approved by senior credit quality officers and the Bank's ALLL Committee. Although an external appraisal is the primary source to value collateral dependent loans, we may also utilize values obtained through purchase and sale agreements, negotiated short sales, broker price opinions, or the sales price of the note.  These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period. Appraisals or other alternative sources of value received subsequent to the reporting period, but prior to our filing of periodic reports, are considered and evaluated to ensure our periodic filings are materially correct and not misleading.  Based on these processes, we do not believe there are significant time lapses for the recognition of additional loan loss provisions or charge-offs from the date they become known.  
 
Loans and leases are classified as non-accrual when collection of principal or interest is doubtful—generally if they are past due as to maturity or payment of principal or interest by 90 days or more—unless such loans are well-secured and in the process of collection. Additionally, all loans that are impaired are considered for non-accrual status. Loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear relatively certain. 

Loans are reported as restructured when the Bank grants a more than insignificant concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider.  Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan and lease losses. 
 
Loans and leases are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms. All loans determined to be impaired are individually assessed for impairment except for impaired

22
Table of Contents

homogeneous loans which are collectively evaluated for impairment in accordance with FASB ASC 450, Contingencies (“ASC 450”). The specific factors considered in determining that a loan is impaired include borrower financial capacity, current economic, business and market conditions, collection efforts, collateral position and other factors deemed relevant. Generally, impaired loans are placed on non-accrual status and all cash receipts are applied to the principal balance.  Continuation of accrual status and recognition of interest income is generally limited to performing restructured loans. 
 
The Bank has written down impaired, non-accrual loans as of March 31, 2014 to their estimated net realizable value, and expects resolution with no additional material loss, absent a further decline in market prices. 
 
Non-Covered Non-Accrual Loans and Leases and Loans and Leases Past Due  
 
The following table summarizes our non-covered non-accrual loans and leases and loans and leases past due, by loan and lease class, as of March 31, 2014 and December 31, 2013: 

(in thousands)
 
March 31, 2014
 
Greater than
 
 
 
90 Days and
 
 
 
 
 
 
 
Total non-
 
30 to 59
 
60 to 89
 
Greater
 
 
 
 
 
 
 
covered
 
Days
 
Days
 
and
 
Total
 
Non-
 
Current &
 
Loans
 
Past Due
 
Past Due
 
Accruing
 
Past Due
 
accrual
 
Other (1)
 
and Leases
Commercial real estate
 

 
 

 
 

 
 

 
 

 
 

 
 

Non-owner occupied term, net
$
1,736

 
$
533

 
$
369

 
$
2,638

 
$
15,948

 
$
2,293,366

 
$
2,311,952

Owner occupied term, net
625

 
466

 
36

 
1,127

 
5,449

 
1,275,906

 
1,282,482

Multifamily, net
3,855

 
1,145

 
—

 
5,000

 
355

 
395,572

 
400,927

Construction & development, net
—

 
—

 
—

 
—

 
—

 
229,262

 
229,262

Residential development, net
—

 
—

 
—

 
—

 
195

 
89,315

 
89,510

Commercial
 
 
 
 
 
 
 
 
 
 
 
 

Term, net
1,427

 
8,832

 
—

 
10,259

 
11,964

 
712,781

 
735,004

LOC & other, net
423

 
2,023

 
—

 
2,446

 
1,025

 
1,002,329

 
1,005,800

Leases and equipment finance, net
1,828

 
1,556

 
—