Edgar Filing: UMPQUA HOLDINGS CORP

10-Q

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, 2015
	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: 220,217,028 shares outstanding as of October 31, 2015

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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	56
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	81
Item 4.	Controls and Procedures	81
Part II. OTHER INFORMATION		82
Item 1.	Legal Proceedings	82
Item 1A.	Risk Factors	82
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82
Item 3.	Defaults Upon Senior Securities	83
Item 4.	Mine Safety Disclosures	83
Item 5.	Other Information	83
Item 6.	Exhibits	83
SIGNATURES		84
EXHIBIT INDEX		85

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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,
	2015			2014
ASSETS
Noninterest bearing cash	$	283,773		$	282,455
Interest bearing cash and temporary investments (restricted cash of $70,707 and $47,717)	673,843			1,322,716
Total cash and cash equivalents	957,616			1,605,171
Investment securities
Trading, at fair value	9,509			9,999
Available for sale, at fair value	2,482,478			2,298,555
Held to maturity, at amortized cost	4,699			5,211
Loans held for sale ($395,421 and $286,802, at fair value)	398,015			286,802
Loans and leases	16,387,934			15,327,732
Allowance for loan and lease losses	(130,133		)	(116,167		)
Net loans and leases	16,257,801			15,211,565
Restricted equity securities	46,904			119,334
Premises and equipment, net	330,306			317,834
Goodwill	1,788,640			1,786,225
Other intangible assets, net	48,314			56,733
Residential mortgage servicing rights, at fair value	124,814			117,259
Other real estate owned	23,892			37,942
FDIC indemnification asset	892			4,417
Bank owned life insurance	297,321			294,296
Deferred tax asset, net	149,320			230,442
Other assets	241,783			228,118
Total assets	$	23,162,304		$	22,609,903
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing	$	5,207,129		$	4,744,804
Interest bearing	12,259,895			12,147,295
Total deposits	17,467,024			16,892,099
Securities sold under agreements to repurchase	323,722			313,321
Term debt	889,358			1,006,395
Junior subordinated debentures, at fair value	253,665			249,294
Junior subordinated debentures, at amortized cost	101,334			101,576
Other liabilities	291,649			269,592
Total liabilities	19,326,752			18,832,277
COMMITMENTS AND CONTINGENCIES (NOTE 9)
SHAREHOLDERS' EQUITY
Common stock, no par value, shares authorized: 400,000,000 in 2015 and 2014; issued and outstanding: 220,216,672 in 2015 and 220,161,120 in 2014	3,517,751			3,519,316
Retained earnings	303,729			246,242
Accumulated other comprehensive income	14,072			12,068
Total shareholders' equity	3,835,552			3,777,626
Total liabilities and shareholders' equity	$	23,162,304		$	22,609,903

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,
	2015			2014			2015			2014
INTEREST INCOME
Interest and fees on loans and leases	$	219,488		$	223,972		$	651,979		$	536,950
Interest and dividends on investment securities:
Taxable	11,639			12,136			34,458			34,155
Exempt from federal income tax	2,637			2,790			8,014			7,599
Dividends	113			81			382			259
Interest on temporary investments and interest bearing deposits	440			544			1,814			1,407
Total interest income	234,317			239,523			696,647			580,370
INTEREST EXPENSE
Interest on deposits	7,450			6,773			21,934			16,696
Interest on securities sold under agreement to repurchase	43			54			134			298
Interest on term debt	3,629			3,586			10,585			9,223
Interest on junior subordinated debentures	3,465			3,394			10,208			8,340
Total interest expense	14,587			13,807			42,861			34,557
Net interest income	219,730			225,716			653,786			545,813
PROVISION FOR LOAN AND LEASE LOSSES	8,153			14,333			32,044			35,000
Net interest income after provision for loan and lease losses	211,577			211,383			621,742			510,813
NON-INTEREST INCOME
Service charges on deposits	15,638			16,090			44,759			39,228
Brokerage revenue	5,003			4,882			14,420			13,173
Residential mortgage banking revenue, net	24,041			25,996			92,282			60,776
Gain on investment securities, net	220			902			355			1,878
Gain on loan sales	5,212			8,309			20,651			9,383
Loss on junior subordinated debentures carried at fair value	(1,590		)	(1,590		)	(4,717		)	(3,501		)
Change in FDIC indemnification asset	1,432			(2,728		)	(1,053		)	(13,169		)
BOLI income	1,656			2,161			6,460			4,864
Other income	8,737			8,143			31,186			18,237
Total non-interest income	60,349			62,165			204,343			130,869
NON-INTEREST EXPENSE
Salaries and employee benefits	105,974			102,564			324,683			251,340
Occupancy and equipment, net	37,235			33,029			104,253			78,276
Communications	4,443			3,932			15,131			11,000
Marketing	2,860			2,739			7,936			4,901
Services	10,285			14,619			35,063			33,010
FDIC assessments	3,369			3,038			9,738			7,476
(Gain) loss on other real estate owned, net	(158		)	313			2,136			507
Intangible amortization	2,806			3,103			8,419			7,105
Merger related expenses	5,991			8,632			41,870			72,146
Other expenses	9,881			10,589			28,452			27,446
Total non-interest expense	182,686			182,558			577,681			493,207
Income before provision for income taxes	89,240			90,990			248,404			148,475
Provision for income taxes	31,633			32,107			88,884			53,399
Net income	$	57,607		$	58,883		$	159,520		$	95,076

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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,
	2015		2014		2015		2014
Net income	$	57,607	$	58,883	$	159,520	$	95,076
Dividends and undistributed earnings allocated to participating securities	84		142		261		338
Net earnings available to common shareholders	$	57,523	$	58,741	$	159,259	$	94,738
Earnings per common share:
Basic	$0.26		$0.27		$0.72		$0.54
Diluted	$0.26		$0.27		$0.72		$0.54
Weighted average number of common shares outstanding:
Basic	220,297		217,245		220,370		175,627
Diluted	220,904		218,941		221,062		176,656

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,
	2015			2014			2015			2014
Net income	$	57,607		$	58,883		$	159,520		$	95,076
Available for sale securities:
Unrealized gains (losses) arising during the period	15,258			(8,862		)	3,695			21,052
Reclassification adjustment for net gains realized in earnings (net of tax expense of $88 and $361 for the three months ended September 30, 2015 and 2014, respectively, and net of tax expense of $142 and $751 for the nine months ended September 30, 2015 and 2014, respectively)	(132		)	(542		)	(213		)	(1,127		)
Income tax (expense) benefit related to unrealized gains	(6,103		)	3,545			(1,478		)	(8,421		)
Net change in unrealized gains (losses)	9,023			(5,859		)	2,004			11,504
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 $37 for the nine months ended September 30, 2014)	—			—			—			57
Net change in unrealized losses related to factors other than credit	—			—			—			57
Other comprehensive income (loss), net of tax	9,023			(5,859		)	2,004			11,561
Comprehensive income	$	66,630		$	53,024		$	161,524		$	106,637

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 (Loss)			Total
BALANCE AT JANUARY 1, 2014	111,973,203		$	1,514,485		$	217,917		$	(4,976	)	$	1,727,426
Cumulative effect adjustment						(3,509		)				(3,509		)
Restated balance at January 1, 2014						214,408						1,723,917
Net income, retrospectively adjusted						147,658						147,658
Other comprehensive income, net of tax									17,044			17,044
Stock issued in connection with merger ⁽¹⁾	104,385,087		1,989,030									1,989,030
Stock-based compensation			15,292									15,292
Stock repurchased and retired	(403,828	)	(7,183		)							(7,183		)
Issuances of common stock under stock plans and related net tax benefit ⁽²⁾	4,206,658		7,692									7,692
Cash dividends on common stock ($0.60 per share)						(115,824		)				(115,824		)
Balance at December 31, 2014	220,161,120		$	3,519,316		$	246,242		$	12,068		$	3,777,626

BALANCE AT JANUARY 1, 2015	220,161,120		$	3,519,316		$	246,242		$	12,068		$	3,777,626
Net income						159,520						159,520
Other comprehensive income, net of tax									2,004			2,004
Stock-based compensation			11,275									11,275
Stock repurchased and retired	(778,579	)	(14,536		)							(14,536		)
Issuances of common stock under stock plans and related net tax benefit	834,131		1,696									1,696
Cash dividends on common stock ($0.46 per share)						(102,033		)				(102,033		)
Balance at September 30, 2015	220,216,672		$	3,517,751		$	303,729		$	14,072		$	3,835,552

(1) The amount of common stock issued in connection with the merger is net of $784,000 of issuance costs.

(2) The shares issued include 2,889,896 of warrants exercised.

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,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	159,520		$	95,076
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of investment premiums, net	18,135			15,320
Gain on sale of investment securities, net	(355		)	(1,878		)
(Gain) loss on sale of other real estate owned, net	(646		)	301
Valuation adjustment on other real estate owned	2,782			206
Provision for loan and lease losses	32,044			35,000
Change in cash surrender value of bank owned life insurance	(6,588		)	(4,008		)
Change in FDIC indemnification asset	1,053			13,169
Depreciation and amortization	37,716			27,299
Increase in residential mortgage servicing rights	(27,812		)	(16,583		)
Change in residential mortgage servicing rights carried at fair value	20,257			8,393
Change in junior subordinated debentures carried at fair value	4,371			4,082
Stock-based compensation	11,275			11,597
Net decrease in trading account assets	490			724
Gain on sale of loans	(115,399		)	(63,729		)
Change in loans held for sale carried at fair value	(5,716		)	(6,894		)
Origination of loans held for sale	(2,703,100		)	(1,523,959		)
Proceeds from sales of loans held for sale	2,694,945			1,638,975
Excess tax benefits from the exercise of stock options	(563		)	(2,046		)
Change in other assets and liabilities:
Net increase in other assets	67,919			19,847
Net increase in other liabilities	23,317			23,203
Net cash provided by operating activities	213,645			274,095
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale	(706,964		)	(346,844		)
Proceeds from investment securities available for sale	508,428			1,116,539
Proceeds from investment securities held to maturity	481			566
Redemption of restricted equity securities	72,430			4,190
Net loan and lease originations	(1,313,156		)	(792,592		)
Proceeds from sales of loans	246,100			284,274
Proceeds from disposals of furniture and equipment	3,571			1,923
Purchases of premises and equipment	(59,117		)	(43,761		)
Net proceeds from (payments to) FDIC indemnification asset	1,571			(2,359		)
Proceeds from bank owned life insurance	4,485			681
Proceeds from sales of other real estate owned	18,747			11,768
Net cash paid in branch divestiture	—			(127,557		)
Cash acquired in merger, net of cash consideration paid	—			116,867
Net cash (used) provided by investing activities	$	(1,223,424	)	$	223,695

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

(in thousands)	Nine Months Ended
	September 30,
	2015			2014
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposit liabilities	$	578,995		$	739,173
Net increase (decrease) in securities sold under agreements to repurchase	10,401			(470,261		)
Repayment of term debt	(114,999		)	(47,003		)
Dividends paid on common stock	(99,333		)	(66,557		)
Excess tax benefits from stock based compensation	563			2,046
Proceeds from stock options exercised	1,133			5,161
Retirement of common stock	(14,536		)	(7,062		)
Net cash provided by financing activities	362,224			155,497
Net (decrease) increase in cash and cash equivalents	(647,555		)	653,287
Cash and cash equivalents, beginning of period	1,605,171			790,423
Cash and cash equivalents, end of period	$	957,616		$	1,443,710

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	50,156		$	38,955
Income taxes	$	17,334		$	6,622
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized gains on investment securities available for sale, net of taxes	$	2,004		$	11,504
Change in unrealized losses on investment securities held to maturity related to factors other than credit, net of taxes	$	—		$	57
Cash dividend declared on common stock and payable after period-end	$	35,285		$	32,684
Transfer of loans to other real estate owned	$	6,833		$	14,089
Transfer from FDIC indemnification asset to due from FDIC and other	$	2,472		$	2,194
Acquisitions:
Assets acquired, including goodwill of $1,024,335	$	—		$	9,877,740
Liabilities assumed	$	—		$	8,769,608

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 conform to accounting principles generally accepted in the United States of America. The accompanying interim condensed 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 condensed consolidated financial statements have not been audited. A more detailed description of our accounting policies is included in the 2014 Annual Report filed on Form 10-K. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the 2014 Annual Report filed on Form 10-K. All references in this report to "Umpqua," "we," "our," "us," the "Company" or similar references mean Umpqua Holdings Corporation, and include our consolidated subsidiaries where the context so requires. 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 condensed consolidated financial statements, the Company has evaluated events and transactions subsequent to September 30, 2015 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.

Application of new accounting guidance

As of January 1, 2015, Umpqua adopted the Financial Accounting Standards Board's ("FASB") Accounting Standard Update ("ASU") No. 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. Application of ASU No. 2014-01 provides for a consistent accounting method for our investments in qualified affordable housing projects using a proportional amortization method. As required by ASU No. 2014-01, the new accounting methodology has been retrospectively applied resulting in changes to other non-interest income, tax expense, and net income, deferred tax asset, other assets, and retained earnings in the prior periods presented. The effect of this change was a decrease in net income of $110,000 and $330,000 for the three and nine months ended September 30, 2015, respectively. The effect of this change on the revised September 30, 2014 income statements was a decrease in net income of $107,000 for the three months ended September 30, 2014 and an increase of $102,000 for the nine months ended September 30, 2014. Retained earnings as of January 1, 2014, has been adjusted down by $3.5 million for the effect of the retroactive application of the new standard.

As of January 1, 2015, Umpqua applied FASB ASU No. 2014-04, Receivables -Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. ASU 2014-04 clarifies when a repossession or foreclosure has occurred. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. As of September 30, 2015, Umpqua had $2.4 million of foreclosed residential real estate property held as other real estate owned. Umpqua's recorded investment in consumer mortgage loans collateralized by residential real estate property in process of foreclosure was $4.1 million as of September 30, 2015.

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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 are included in the Company's financial results beginning April 19, 2014 and the combined company's banking operations are operating under the Umpqua Bank name and brand.

The structure of the transaction was as follows:


•	Sterling merged with and into the Company (the "Merger" or the "Sterling Merger") with the Company as the surviving corporation in the Merger;


•	Immediately following the Merger, Sterling's wholly owned banking 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 had 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;


•	Each outstanding warrant issued by Sterling converted into a warrant exercisable for 1.671 shares of the Company's common stock and $2.18 in cash for each warrant when exercised;


•	Each outstanding option to purchase a share of Sterling common stock converted into an option to purchase 1.7896 shares of the Company's common stock, subject to vesting conditions; and


•	Each outstanding restricted stock unit in respect of Sterling common stock converted into a restricted stock unit in respect of 1.7896 shares of the Company common stock, subject to vesting conditions.

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A summary of the consideration paid, the assets acquired and liabilities assumed in the Merger are presented below:



(in thousands)
	Sterling
	April 18, 2014
Fair value of consideration to Sterling shareholders:
Cash paid			$	136,200
Liability recorded for warrants' cash payment per share			6,453
Fair value of common shares issued			1,939,497
Fair value of warrants, common stock options, and restricted stock exchanged			50,317
Total consideration			2,132,467
Fair value of assets acquired:
Cash and cash equivalents	$	253,067
Investment securities	1,378,300
Loans held for sale	214,911
Loans and leases	7,123,168
Premises and equipment	116,576
Residential mortgage servicing rights	62,770
Other intangible assets	54,562
Other real estate owned	8,666
Bank owned life insurance	193,246
Deferred tax asset	300,015
Accrued interest receivable	23,553
Other assets	148,906
Total assets acquired	9,877,740
Fair value of liabilities assumed:
Deposits	7,086,052
Securities sold under agreements to repurchase	584,746
Term debt	854,737
Junior subordinated debentures	156,171
Other liabilities	87,902
Total liabilities assumed	$	8,769,608
Net assets acquired			1,108,132
Goodwill			$	1,024,335

The primary reason for the Merger was to continue the Company's growth strategy, including expanding our geographic footprint in markets throughout the West Coast. All of the goodwill recorded has been attributed to the Community Banking segment and reporting unit. None of the goodwill will be deductible for income tax purposes.

Subsequent to acquisition, the Company repaid 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. On June 20, 2014, the Company completed the required divestiture of six stores acquired in the Merger to another financial institution. The divestiture of the six stores included $211.5 million of deposits and $88.3 million of loans. The assets were sold at a discount of $7.0 million, which was recorded by Sterling prior to the Merger.

As of April 18, 2014, the unpaid principal balance on purchased non-impaired loans was $7.0 billion. The fair value of the purchased non-impaired loans was $6.7 billion, resulting in a discount of $230.5 million being recorded on these loans.

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The following table presents the acquired purchased impaired loans as of the acquisition date:



(in thousands)	Purchased impaired
Contractually required principal payments	$	604,136
Nonaccretable difference	(95,614		)
Cash flows expected to be collected	508,522
Accretable yield	(110,757		)
Fair value of purchased impaired loans	$	397,765

The operations of Sterling are included in our operating results beginning on April 19, 2014, and contributed an estimated net interest income of $106.9 million and $328.2 million and net income of $34.7 million and $97.6 million for the three and nine months ended September 30, 2015, respectively.

The following table provides a breakout of Merger related expense for the three and nine months ended September 30, 2015.



(in thousands)	Three Months Ended			Nine Months Ended
	September 30, 2015			September 30, 2015
Personnel	$	2,665		$	10,395
Legal and professional	2,238			19,977
Contract termination	154			154
Premises and Equipment	1,473			6,738
Communication	548			1,980
Other	(1,087		)	2,626
Total Merger related expense	$	5,991		$	41,870

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The following table presents unaudited pro forma results of operations for the three and nine months ended September 30, 2014, as if the Sterling Merger had occurred on January 1, 2013. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2013. The pro forma results include the impact of certain purchase accounting adjustments including accretion of loan discount, intangible assets amortization and deposit and borrowing premium accretion. These purchase accounting adjustments increased pro forma net income by $1.6 million and $50.5 million for the three and nine months ended September 30, 2014.



(in thousands, except per share data)	Pro Forma
	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2014		2014
Net interest income	$	225,715	$	682,679	^{(1), (2), (3)}
Provision for loan and lease losses	14,333		35,000
Non-interest income	62,163		157,134		^{(4), (5), (6)}
Non-interest expense	179,918		565,573		^{(7), (8)}
Income before provision for income taxes	93,627		239,240
Provision for income taxes	33,122		88,325
Net income	60,505		150,915
Dividends and undistributed earnings allocated to participating securities	142		338
Net earnings available to common shareholders	$	60,363	$	150,577
Earnings per share:
Basic	$	0.28	$	0.69
Diluted	$	0.28	$	0.69
Average shares outstanding:
Basic	217,245		216,884
Diluted	218,941		218,801

(1) Includes zero and $31.9 million of incremental loan discount accretion for the three and nine months ended September 30, 2014.

(2) Includes a reduction of interest income of zero and $1.8 million related to investment securities premiums amortization for the three and nine months ended September 30, 2014.

(3) Includes a reduction of interest expense of zero and $5.9 million related to deposit and borrowing premiums amortization for the three and nine months ended September 30, 2014.

(4) Includes a reduction of service charges on deposits of zero and $1.7 million as a result of passing the $10 billion asset threshold for the three and nine months ended September 30, 2014.

(5) Includes a loss on junior subordinated debentures carried at fair value of zero and $1.1 million for the three and nine months ended September 30, 2014.

(6) Includes the reversal of the $7.0 million loss on the required divestiture of six Sterling stores in connection with the Merger for the nine months ended September 30, 2014.

(7) Includes a net increase of zero and $2.1 million of incremental core deposit intangible amortization for the three and nine months ended September 30, 2014.

(8) Includes a net decrease of $2.6 million and $46.1 million of merger expenses for the three and nine months ended September 30, 2014.

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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, 2015 and December 31, 2014:



(in thousands)	September 30, 2015
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
AVAILABLE FOR SALE:
Obligations of states and political subdivisions	$	314,305	$	12,974	$	(815	)	$	326,464
Residential mortgage-backed securities and collateralized mortgage obligations	2,143,275		18,866		(8,208		)	2,153,933
Investments in mutual funds and other equity securities	2,016		65		—			2,081
	$	2,459,596	$	31,905	$	(9,023	)	$	2,482,478
HELD TO MATURITY:
Residential mortgage-backed securities and collateralized mortgage obligations	$	4,699	$	582	$	(1	)	$	5,280
	$	4,699	$	582	$	(1	)	$	5,280



(in thousands)	December 31, 2014
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
AVAILABLE FOR SALE:
U.S. Treasury and agencies	$	213	$	16	$	—		$	229
Obligations of states and political subdivisions	325,189		14,056		(841		)	338,404
Residential mortgage-backed securities and collateralized mortgage obligations	1,951,514		17,398		(11,060		)	1,957,852
Investments in mutual funds and other equity securities	2,016		54		—			2,070
	$	2,278,932	$	31,524	$	(11,901	)	$	2,298,555
HELD TO MATURITY:
Residential mortgage-backed securities and collateralized mortgage obligations	$	5,088	$	358	$	(15	)	$	5,431
Other investment securities	123		—		—			123
	$	5,211	$	358	$	(15	)	$	5,554

Investment securities that were in an unrealized loss position as of September 30, 2015 and December 31, 2014 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.

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September 30, 2015
(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:
Obligations of states and political subdivisions	$	12,536	$	158	$	8,034	$	657	$	20,570	$	815
Residential mortgage-backed securities and collateralized mortgage obligations	463,453		3,239		312,840		4,969		776,293		8,208
Total temporarily impaired securities	$	475,989	$	3,397	$	320,874	$	5,626	$	796,863	$	9,023
HELD TO MATURITY:
Residential mortgage-backed securities and collateralized mortgage obligations	$	39	$	1	$	—	$	—	$	39	$	1
Total temporarily impaired securities	$	39	$	1	$	—	$	—	$	39	$	1



December 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:
Obligations of states and political subdivisions	$	11,100	$	547	$	8,550	$	294	$	19,650	$	841
Residential mortgage-backed securities and collateralized mortgage obligations	220,577		815		495,096		10,245		715,673		11,060
Total temporarily impaired securities	$	231,677	$	1,362	$	503,646	$	10,539	$	735,323	$	11,901
HELD TO MATURITY:
Residential mortgage-backed securities and collateralized mortgage obligations	$	224	$	15	$	—	$	—	$	224	$	15
Total temporarily impaired securities	$	224	$	15	$	—	$	—	$	224	$	15

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, 2015. 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, 2015 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 be settled at a price at least equal to 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 other-than-temporarily impaired.

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The following table presents the maturities of investment securities at September 30, 2015:



(in thousands)	Available For Sale				Held To Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
AMOUNTS MATURING IN:
Three months or less	$	13,055	$	13,108	$	—	$	—
Over three months through twelve months	82,603		83,377		9		12
After one year through five years	1,778,642		1,798,598		391		934
After five years through ten years	431,360		431,514		239		273
After ten years	151,920		153,800		4,060		4,061
Other investment securities	2,016		2,081		—		—
	$	2,459,596	$	2,482,478	$	4,699	$	5,280

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 losses on the sale of securities available for sale for the three and nine months ended September 30, 2015 and 2014:



(in thousands)	Three Months Ended
	September 30, 2015				September 30, 2014
	Gains		Losses		Gains		Losses
U.S. Treasury and agencies	$	13	$	—	$	—	$	—
Obligations of states and political subdivisions	6		—		—		—
Residential mortgage-backed securities and collateralized mortgage obligations	634		433		902		—
	$	653	$	433	$	902	$	—

	Nine Months Ended
	September 30, 2015				September 30, 2014
	Gains		Losses		Gains		Losses
U.S. Treasury and agencies	$	13	$	—	$	—	$	—
Obligations of states and political subdivisions	6		—		3		1
Residential mortgage-backed securities and collateralized mortgage obligations	1,177		841		1,876		—
	$	1,196	$	841	$	1,879	$	1

The following table presents, as of September 30, 2015, investment securities which were pledged to secure borrowings, public deposits, and repurchase agreements as permitted or required by law:



(in thousands)	Amortized		Fair
	Cost		Value
To Federal Home Loan Bank to secure borrowings	$	825	$	850
To state and local governments to secure public deposits	1,633,090		1,651,026
Other securities pledged principally to secure repurchase agreements	508,903		511,231
Total pledged securities	$	2,142,818	$	2,163,107

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Note 4 – Loans and Leases

The following table presents the major types of loans and leases, net of deferred fees and costs, as of September 30, 2015 and December 31, 2014:



(in thousands)	September 30,		December 31,
	2015		2014
Commercial real estate
Non-owner occupied term, net	$	3,148,288	$	3,290,610
Owner occupied term, net	2,655,340		2,633,864
Multifamily, net	2,961,609		2,638,618
Construction & development, net	287,757		258,722
Residential development, net	94,380		81,846
Commercial
Term, net	1,398,346		1,396,089
LOC & other, net	1,014,523		1,029,620
Leases and equipment finance, net	679,033		523,114
Residential
Mortgage, net	2,740,228		2,233,735
Home equity loans & lines, net	910,287		852,478
Consumer & other, net	498,143		389,036
Total loans and leases, net of deferred fees and costs	$	16,387,934	$	15,327,732

The loan balances are net of deferred fees and costs of $42.8 million and $26.3 million as of September 30, 2015 and December 31, 2014, respectively. Net loans include discounts on acquired loans of $131.9 million and $236.6 million as of September 30, 2015 and December 31, 2014, respectively. As of September 30, 2015, loans totaling $9.4 billion were pledged to secure borrowings and available lines of credit.

The outstanding contractual unpaid principal balance of purchased impaired loans, excluding acquisition accounting adjustments, was $599.2 million and $770.9 million at September 30, 2015 and December 31, 2014, respectively. The carrying balance of purchased impaired loans was $448.1 million and $562.9 million at September 30, 2015 and December 31, 2014, respectively.

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The following table presents the changes in the accretable yield for purchased impaired loans for the three and nine months ended September 30, 2015 and 2014:



(in thousands)	Three Months Ended
	September 30, 2015
	Evergreen			Rainier			Nevada Security			Circle			Sterling			Total
Balance, beginning of period	$	7,057		$	43,242		$	17,453		$	422		$	97,188		$	165,362
Accretion to interest income	(1,228		)	(3,585		)	(2,107		)	(56		)	(7,456		)	(14,432		)
Disposals	(844		)	(1,468		)	(1,230		)	(69		)	(2,958		)	(6,569		)
Reclassifications from nonaccretable difference	745			872			1,992			—			1,676			5,285
Balance, end of period	$	5,730		$	39,061		$	16,108		$	297		$	88,450		$	149,646

	Three Months Ended
	September 30, 2014
	Evergreen			Rainier			Nevada Security			Circle			Sterling			Total
Balance, beginning of period	$	10,576		$	56,609		$	27,837		$	965		$	104,540		$	200,527
Additions	—			—			—			—			—			—
Accretion to interest income	(1,546		)	(4,134		)	(2,798		)	(36		)	(9,743		)	(18,257		)
Disposals	(320		)	(1,051		)	(1,352		)	—			(4,111		)	(6,834		)
Reclassifications from (to) nonaccretable difference	2,213			3,260			728			(49		)	2,843			8,995
Balance, end of period	$	10,923		$	54,684		$	24,415		$	880		$	93,529		$	184,431

(in thousands)	Nine Months Ended
	September 30, 2015
	Evergreen			Rainier			Nevada Security			Circle			Sterling			Total
Balance, beginning of period	$	9,466		$	49,989		$	23,666		$	796		$	117,782		$	201,699
Accretion to interest income	(3,748		)	(10,522		)	(6,822		)	(205		)	(21,567		)	(42,864		)
Disposals	(3,227		)	(4,081		)	(3,295		)	(331		)	(10,891		)	(21,825		)
Reclassifications from nonaccretable difference	3,239			3,675			2,559			37			3,126			12,636
Balance, end of period	$	5,730		$	39,061		$	16,108		$	297		$	88,450		$	149,646

	Nine Months Ended
	September 30, 2014
	Evergreen			Rainier			Nevada Security			Circle			Sterling			Total
Balance, beginning of period	$	20,063		$	71,789		$	34,632		$	1,140		$	—		$	127,624
Additions	—			—			—			—			110,757			110,757
Accretion to interest income	(9,998		)	(14,671		)	(11,792		)	(211		)	(15,645		)	(52,317		)
Disposals	(5,061		)	(9,658		)	(5,258		)	—			(4,426		)	(24,403		)
Reclassifications from (to) nonaccretable difference	5,919			7,224			6,833			(49		)	2,843			22,770
Balance, end of period	$	10,923		$	54,684		$	24,415		$	880		$	93,529		$	184,431

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Loans acquired in an FDIC-assisted acquisition that are subject to a loss-share agreement are referred to as covered loans. Covered loans are reported exclusive of the cash flow reimbursements expected from the FDIC. The following table summarizes the activity related to the FDIC indemnification asset for the three and nine months ended September 30, 2015 and 2014:



(in thousands)	Three Months ended						Nine Months Ended
	September 30,						September 30,
	2015			2014			2015			2014
Balance, beginning of period	$	432		$	11,293		$	4,417		$	23,174
Change in FDIC indemnification asset	1,432			(2,728		)	(1,053		)	(13,169		)
Transfers to due from FDIC and other	(972		)	(754		)	(2,472		)	(2,194		)
Balance, end of period	$	892		$	7,811		$	892		$	7,811

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 and nine months ended September 30, 2015 and 2014:



(in thousands)	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
Commercial real estate
Non-owner occupied term, net	$	—	$	—	$	7,181	$	14,799
Owner occupied term, net	20,003		22,884		39,963		71,128
Multifamily, net	—		35,306		435		60,508
Construction & development, net	—		—		—		566
Residential development, net	—		—		—		800
Commercial
Term, net	1,079		4,199		4,499		30,068
LOC & other, net	—		299		—		5,361
Residential
Mortgage, net	54,938		54,917		173,371		60,951
Home equity loans & lines. net	—		—		—		24,445
Consumer & other, net	—		—		—		7,344
Total, net of deferred fees and costs	$	76,020	$	117,605	$	225,449	$	275,970

Note 5 – Allowance for Loan and Lease Loss and Credit Quality

The Bank's methodology for assessing the appropriateness of the Allowance for Loan and Lease Loss ("ALLL") consists of three key elements: 1) the formula allowance; 2) the specific allowance; and 3) the unallocated allowance. By incorporating these factors into a single allowance requirement analysis, we believe all risk-based activities within the loan and lease portfolios are simultaneously considered.

Formula Allowance

When loans and leases are originated or acquired, they are assigned a risk rating that is reassessed periodically 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.

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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.

Risk factors 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; improvement or deterioration in local economic conditions; and any other factors deemed relevant.

Specific Allowance

Regular credit reviews of the portfolio 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 or estimated note sale price, 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 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.

Management believes that the ALLL was adequate as of September 30, 2015. 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.

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. These factors include the quality of the current loan portfolio; the trend in the loan portfolio's risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information.

There have been no significant changes to the Bank's ALLL methodology or policies in the periods presented.

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Activity in the Allowance for Loan and Lease Losses

The following table summarizes activity related to the allowance for loan and lease losses by loan and lease portfolio segment for the three and nine months ended September 30, 2015 and 2014:

(in thousands)

Three Months Ended September 30, 2015

Commercial

Consumer

Real Estate

Commercial

Residential

& Other

Total

Balance, beginning of period