Edgar Filing: UMPQUA HOLDINGS CORP

Form 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: June 30, 2011

¨	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

of Incorporation or Organization)

(I.R.S. Employer

Identification Number)

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: 114,538,506 shares outstanding as of July 29, 2011

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	55

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	88

Item 4.	Controls and Procedures	88

PART II. OTHER INFORMATION		89

Item 1.	Legal Proceedings	89

Item 1A.	Risk Factors	89

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	89

Item 3.	Defaults Upon Senior Securities	89

Item 4.	(Removed and Reserved)	90

Item 5.	Other Information	90

Item 6.	Exhibits	90

SIGNATURES		91

EXHIBIT INDEX		92

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except shares)


	June 30, 2011		December 31, 2010
ASSETS
Cash and due from banks	$	137,033	$	111,946
Interest bearing deposits		478,221		891,634
Temporary investments		628		545

Total cash and cash equivalents		615,882		1,004,125
Investment securities
Trading, at fair value		2,522		3,024
Available for sale, at fair value		3,177,460		2,919,180
Held to maturity, at amortized cost		5,553		4,762
Loans held for sale		60,416		75,626
Non-covered loans and leases		5,735,553		5,658,987
Allowance for non-covered loan and lease losses		(97,795)		(101,921)

Net non-covered loans and leases		5,637,758		5,557,066
Covered loans and leases, net of allowance of $10,219 and $2,721		698,676		785,898
Restricted equity securities		32,839		34,475
Premises and equipment, net		145,192		136,599
Goodwill and other intangible assets, net		679,671		681,969
Mortgage servicing rights, at fair value		16,350		14,454
Non-covered other real estate owned		34,409		32,791
Covered other real estate owned		30,153		29,863
FDIC indemnification asset		116,928		146,413
Other assets		205,883		242,465

Total assets	$	11,459,692	$	11,668,710

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing	$	1,733,640	$	1,616,687
Interest bearing		7,412,772		7,817,118

Total deposits		9,146,412		9,433,805
Securities sold under agreements to repurchase		120,889		73,759
Term debt		256,719		262,760
Junior subordinated debentures, at fair value		81,766		80,688
Junior subordinated debentures, at amortized cost		102,705		102,866
Other liabilities		76,880		72,258

Total liabilities		9,785,371		10,026,136

COMMITMENTS AND CONTINGENCIES (NOTE 10)

SHAREHOLDERS’ EQUITY
Common stock, no par value, 200,000,000 shares authorized; issued and outstanding: 114,537,782 in 2011 and 114,536,814 in 2010		1,540,933		1,540,928
Retained earnings		96,434		76,701
Accumulated other comprehensive income		36,954		24,945

Total shareholders’ equity		1,674,321		1,642,574

Total liabilities and shareholders’ equity	$	11,459,692	$	11,668,710

See notes to condensed consolidated financial statements

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)


	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
INTEREST INCOME
Interest and fees on loans	$	101,547	$	97,240	$	201,827	$	187,948
Interest and dividends on investment securities
Taxable		24,348		15,569		46,391		31,644
Exempt from federal income tax		2,178		2,247		4,343		4,434
Dividends		4		3		7		3
Interest on temporary investments and interest bearing deposits		340		545		741		944

Total interest income		128,417		115,604		253,309		224,973
INTEREST EXPENSE
Interest on deposits		14,698		18,463		30,364		37,252
Interest on securities sold under agreement to repurchase and federal funds purchased		131		123		253		246
Interest on term debt		2,301		2,779		4,590		4,299
Interest on junior subordinated debentures		1,926		1,939		3,839		3,824

Total interest expense		19,056		23,304		39,046		45,621

Net interest income		109,361		92,300		214,263		179,352
PROVISION FOR NON-COVERED LOAN AND LEASE LOSSES		15,459		29,767		30,489		71,873
PROVISION FOR COVERED LOAN AND LEASE LOSSES		3,755		-		11,023		-

Net interest income after provision for loan and lease losses		90,147		62,533		172,751		107,479
NON-INTEREST INCOME
Service charges on deposit accounts		8,540		9,585		16,361		17,950
Brokerage commissions and fees		3,276		3,139		6,653		5,778
Mortgage banking revenue, net		4,807		3,209		10,082		6,687
Gain (loss) on investment securities, net
Gain on sale of investment securities, net		5,678		-		5,678		1
Total other-than-temporary impairment losses		(110)		-		(110)		(5)
Portion of other-than-temporary impairment losses transferred from		-
other comprehensive income		63		-		38		(284)

Total gain (loss) on investment securities, net		5,631		-		5,606		(288)
(Loss) gain on junior subordinated debentures carried at fair value		(547)		-		(1,089)		6,088
Bargain purchase gain on acquisition		-		-		-		6,437

Change in FDIC indemnification asset		(5,551)		263		(2,646)		873
Other income		3,471		2,367		6,245		5,085

Total non-interest income		19,627		18,563		41,212		48,610
NON-INTEREST EXPENSE
Salaries and employee benefits		43,808		39,604		88,418		75,844
Net occupancy and equipment		12,547		11,472		25,064		22,148
Communications		2,796		2,596		5,606		4,820
Marketing		1,798		1,714		2,649		2,723
Services		6,026		5,831		11,908		10,746
Supplies		843		1,003		1,624		1,729
FDIC assessments		2,821		3,555		6,694		6,999
Net loss (gain) on other real estate owned		3,917		(952)		7,701		1,359
Intangible amortization		1,251		1,368		2,502		2,676
Merger related expenses		71		2,169		252		4,075
Other expenses		7,329		6,473		14,990		11,585

Total non-interest expense		83,207		74,833		167,408		144,704
Income before provision for income taxes		26,567		6,263		46,555		11,385
Provision for (benefit from) income taxes		8,782		2,800		15,303		(592)

Net income	$	17,785	$	3,463	$	31,252	$	11,977

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(UNAUDITED)

(in thousands, except per share amounts)


	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Net income	$	17,785	$	3,463	$	31,252		11,977
Preferred stock dividends		-		-		-		12,192
Dividends and undistributed earnings allocated to participating securities		86		16		148		31

Net earnings (loss) available to common shareholders	$	17,699	$	3,447	$	31,104	$	(246)

Earnings (loss) per common share:
Basic	$	0.15	$	0.03	$	0.27	$	-
Diluted	$	0.15	$	0.03	$	0.27	$	-
Weighted average number of common shares outstanding:
Basic		114,611		110,135		114,593		101,205
Diluted		114,785		114,733		114,796		101,435

See notes to condensed consolidated financial statements

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except shares)


	Preferred Stock		Common Stock				Retained Earnings		Accumulated Other Comprehensive (Loss) Income			Total
	Preferred Stock		Shares		Amount		Retained Earnings					Total
BALANCE AT JANUARY 1, 2010	$	204,335		86,785,588	$	1,253,288	$	83,939	$	24,955		$	1,566,517
Net income								28,326					28,326
Other comprehensive loss, net of tax										(10	)		(10)

Comprehensive income												$	28,316

Issuance of common stock				8,625,000		89,786							89,786
Stock-based compensation						3,505							3,505
Stock repurchased and retired				(22,541)		(284)							(284)
Issuances of common stock under stock plans and related net tax benefit				173,767		844							844
Redemption of preferred stock issued to U.S. Treasury		(214,181)											(214,181)
Issuance of preferred stock		198,289											198,289
Conversion of preferred stock to common stock		(198,289)		18,975,000		198,289							-
Amortization of discount on preferred stock		9,846						(9,846)					-
Dividends declared on preferred stock								(3,686)					(3,686)
Repurchase of warrants issued to U.S. Treasury						(4,500)							(4,500)
Cash dividends on common stock ($0.20 per share)								(22,032)					(22,032)

Balance at December 31, 2010	$	-		114,536,814	$	1,540,928	$	76,701	$	24,945		$	1,642,574


BALANCE AT JANUARY 1, 2011	$	-		114,536,814	$	1,540,928	$	76,701	$	24,945		$	1,642,574
Net income								31,252					31,252
Other comprehensive income, net of tax										12,009			12,009

Comprehensive income												$	43,261

Stock-based compensation						1,987							1,987
Stock repurchased and retired				(170,205)		(1,960)							(1,960)
Issuances of common stock under stock plans and related net tax deficiencies				171,173		(22)							(22)
Cash dividends on common stock ($0.10 per share)								(11,519)					(11,519)

Balance at June 30, 2011	$	-		114,537,782	$	1,540,933	$	96,434	$	36,954		$	1,674,321

See notes to condensed consolidated financial statements

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)


	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
Net income	$	17,785	$	3,463	$	31,252	$	11,977

Available for sale securities:
Unrealized gains arising during the period		24,835		14,249		25,649		28,094
Reclassification adjustment for net gains realized in earnings (net of tax expense of $2,271 for the three months ended June 30, 2011 and net of tax expense of $2,271 and $1 for the six months ended June 30, 2011 and 2010, respectively)		(3,407)		-		(3,407)		(1)
Income tax expense related to unrealized gains		(9,934)		(5,699)		(10,259)		(11,238)

Net change in unrealized gains		11,494		8,550		11,983		16,855

Held to maturity securities:
Unrealized (losses) gains related to factors other than credit (net of tax benefit of $35 and $30 for the three and six months ended June 30, 2011, respectively, and tax expense of $69 for the six months ended June 30, 2010)		(53)		-		(45)		103
Reclassification adjustment for impairments realized in net income (net of tax benefit of $10 for the three months ended June 30, 2011, and net of tax benefit of $20 and $116 for the six months ended June 30, 2011 and 2010, respectively)		15		-		30		173
Accretion of unrealized losses related to factors other than credit to investment securities held to maturity (net of tax benefit of $10 and $34 for the three months ended June 30, 2011 and 2010, respectively, and net of tax benefit of $27 and $74 for the six months ended June 30, 2011 and 2010, respectively)		15		50		41		112

Net change in unrealized losses related to factors other than credit		(23)		50		26		388

Other comprehensive income, net of tax		11,471		8,600		12,009		17,243

Comprehensive income	$	29,256	$	12,063	$	43,261	$	29,220

See notes to condensed consolidated financial statements

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)


	Six months ended June 30,
	2011		2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	31,252	$	11,977
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of investment premiums, net		16,389		7,196
Gain on sale of investment securities, net		(5,678)		(1)
Other-than-temporary impairment on investment securities held to maturity		72		289
Loss on sale of non-covered other real estate owned		1,160		1,156
Gain on sale of covered other real estate owned		(898)		(1,519)
Valuation adjustment on non-covered other real estate owned		5,518		1,721
Valuation adjustment on covered other real estate owned		1,921		5
Provision for non-covered loan and lease losses		30,489		71,873
Provision for covered loan and lease losses		11,023		-
Bargain purchase gain on acquisition		-		(6,437)
Change in FDIC indemnification asset		2,646		(873)
Depreciation, amortization and accretion		6,218		7,186
Increase in mortgage servicing rights		(2,407)		(2,008)
Change in mortgage servicing rights carried at fair value		511		1,800
Change in junior subordinated debentures carried at fair value		1,078		(6,076)
Stock-based compensation		1,987		1,425
Net decrease in trading account assets		502		530
Gain on sale of loans		(1,819)		(3,441)
Origination of loans held for sale		(290,058)		(248,744)
Proceeds from sales of loans held for sale		307,087		245,788
Excess tax benefits from the exercise of stock options		(4)		(56)
Change in other assets and liabilities:
Net decrease in other assets		5,954		15,369
Net increase in other liabilities		4,759		27,810

Net cash provided by operating activities		127,680		124,970


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities available for sale		(690,720)		(197,709)
Purchases of investment securities held to maturity		(1,573)		-
Proceeds from investment securities available for sale		441,721		133,573
Proceeds from investment securities held to maturity		757		883
Redemption of restricted equity securities		1,636		92
Net non-covered loan and lease (originations) paydowns		(136,582)		169,418
Net covered loan and lease paydowns		63,417		49,379
Proceeds from sales of loans		6,777		21,009
Proceeds from disposals of furniture and equipment		180		1,096
Purchases of premises and equipment		(16,877)		(33,687)
Net proceeds from FDIC indemnification asset		48,850		6,764
Proceeds from sales of non-covered other real estate owned		17,026		13,931
Proceeds from sales of covered other real estate owned		7,355		2,832
Proceeds from sale of acquired insurance portfolio		-		5,150
Cash acquired in merger, net of cash consideration paid		-		179,046

Net cash (used) provided by investing activities		(258,033)		351,777

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)

(in thousands)


	Six months ended June 30,
	2011		2010
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposit liabilities		(286,867)		(29,686)
Net increase (decrease) in securities sold under agreements to repurchase		47,130		(465)
Repayment of term debt		(5,000)		(138,719)
Redemption of preferred stock		-		(214,181)
Proceeds from issuance of preferred stock		-		198,289
Net proceeds from issuance of common stock		-		89,786
Redemption of warrants		-		(4,500)
Dividends paid on preferred stock		-		(3,682)
Dividends paid on common stock		(11,506)		(9,137)
Excess tax benefits from stock based compensation		4		56
Proceeds from stock options exercised		309		918
Retirement of common stock		(1,960)		(259)

Net cash used by financing activities		(257,890)		(111,580)

Net (decrease) increase in cash and cash equivalents		(388,243)		365,167
Cash and cash equivalents, beginning of period		1,004,125		605,413

Cash and cash equivalents, end of period	$	615,882	$	970,580


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	41,302	$	46,373
Income taxes	$	6,850	$	150

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized gains on investment securities available for sale, net of taxes	$	11,983	$	16,855
Change in unrealized losses on investment securities held to maturity related to factors other than credit, net of taxes	$	26	$	388
Cash dividend declared on common and preferred stock and payable after period-end	$	5,754	$	5,743
Transfer of non-covered loans to non-covered other real estate owned	$	25,322	$	17,895
Transfer of covered loans to covered other real estate owned	$	8,668	$	2,669
Transfer from FDIC indemnification asset to due from FDIC and other	$	26,839	$	23,037
Transfer of covered loans to non-covered loans	$	4,114	$	-
Conversion of preferred stock to common stock			$	198,289
Acquisitions:
Assets acquired	$	-	$	1,512,048
Liabilities assumed	$	-	$	1,505,611

See notes to condensed consolidated financial statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Summary of Significant Accounting Policies

Basis of Financial Statement Presentation

The accounting and financial reporting policies of Umpqua Holdings Corporation (referred to in this report as “we”, “our” or “the Company”) conform to accounting principles generally accepted in the United States of America. The accompanying interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Umpqua Bank (“Bank”), and Umpqua Investments, Inc. (“Umpqua Investments”). All material inter-company balances and transactions have been eliminated. The consolidated financial statements have not been audited. In preparing these financial statements, the Company has evaluated events and transactions subsequent to June 30, 2011 for potential recognition or disclosure. A more detailed description of our accounting policies is included in the 2010 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 2010 Annual Report filed on Form 10-K.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim period. Certain reclassifications of prior period amounts have been made to conform to current classifications.

Note 2 – Business Combinations

On January 22, 2010, the Washington Department of Financial Institutions closed EvergreenBank (“Evergreen”), Seattle, Washington and appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. That same date, Umpqua Bank assumed the banking operations of Evergreen from the FDIC under a whole bank purchase and assumption agreement with loss-sharing. Under the terms of the loss-sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, other real estate owned (“OREO”) and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on the first $90.0 million on covered assets for Evergreen and absorb 95% of losses and share in 95% of loss recoveries exceeding $90.0 million, except the Bank will incur losses up to $30.2 million before the loss-sharing commences. The loss-sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition date. With this agreement, Umpqua Bank assumed six additional store locations in the greater Seattle, Washington market. This acquisition is consistent with our community banking expansion strategy and provides further opportunity to fill in our market presence in the greater Seattle, Washington market.

On February 26, 2010, the Washington Department of Financial Institutions closed Rainier Pacific Bank (“Rainier”), Tacoma, Washington and appointed the FDIC as receiver. That same date, Umpqua Bank assumed the banking operations of Rainier from the FDIC under a whole bank purchase and assumption agreement with loss-sharing. Under the terms of the loss-sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, OREO and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on the first $95.0 million of losses on covered assets and absorb 95% of losses and share in 95% of loss recoveries exceeding $95.0 million. The loss-sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition dates. With this agreement, Umpqua Bank assumed 14 additional store locations in Pierce County and surrounding areas. This acquisition expands our presence in the south Puget Sound region of Washington State.

The operations of Evergreen and Rainier are included in our operating results from January 23, 2010 and February 27, 2010, respectively, and added combined revenue of $9.8 million and $24.5 million, non-interest expense of $4.8 million and $9.4 million, and earnings of $1.4 million and $5.4 million, net of tax, for the three and six months ended June 30, 2011, and added combined revenue of $10.4 million and $22.8 million, non-interest expense of $6.6 million and $11.3 million, and earnings of $2.5 million and $7.6 million, net of tax, for the three and six months ended June 30, 2010, respectively. These operating results include a bargain purchase gain of $6.4 million, which is not indicative of future operating results. Evergreen’s and Rainiers’s results of operations prior to the acquisition are not included in our operating results. Merger-related expenses of $52,000 and $102,000 for the three and six months ended June 30, 2011, respectively, and $1.6 million and $3.3 million for the three and six months ended June 30, 2010, respectively, have been incurred in connection with these acquisitions and recognized in a separate line item on the Condensed Consolidated Statements of Operations.

On June 18, 2010, the Nevada State Financial Institutions Division closed Nevada Security Bank (“Nevada Security”), Reno, Nevada and appointed the FDIC as receiver. That same date, Umpqua Bank assumed the banking operations of Nevada Security from the FDIC under a whole bank purchase and assumption agreement with loss-sharing. Under the terms of the loss-sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, OREO, and accrued interest

on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on all covered assets. The loss-sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition dates. With this agreement, Umpqua Bank assumed five additional store locations, including three in Reno, Nevada, one in Incline Village, Nevada, and one in Roseville, California. This acquisition expands our presence into the State of Nevada.

The operations of Nevada Security are included in our operating results from June 19, 2010, and added revenue of $2.8 million and $9.4 million, non-interest expense of $2.6 million and $6.1 million, and loss of $532,000 and $627,000, net of tax, for the three and six months ended, June 30, 2011 and revenue of $529,000, non-interest expense of $582,000, and loss of $34,000, net of tax, for the three and six months ended, June 30, 2010, respectively. Nevada Security’s results of operations prior to the acquisition are not included in our operating results. Merger-related expenses of $12,000 and $23,000 for the three and six months ended June 30, 2011, respectively, and $402,000 for the three and six months ended June 30, 2010, respectively, have been incurred in connection with the acquisition of Nevada Security and recognized as a separate line item on the Condensed Consolidated Statements of Operations.

We refer to the acquired loans and other real estate owned that are subject to the loss-sharing agreements as “covered loans” and “covered other real estate owned”, respectively, and these are presented as separate line items in our consolidated balance sheet. Collectively these balances are referred to as “covered assets.” Certain types of modifications or restructuring activities subsequent to acquisition may disqualify a loan from loss-share coverage under the provisions of the loss-share agreement. Loans that have been disqualified from loss-share coverage are prospectively reported as non-covered loans.

The assets acquired and liabilities assumed from the Evergreen, Rainier, and Nevada Security acquisitions have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition dates. The fair values of the assets acquired and liabilities assumed were determined based on the requirements of the Fair Value Measurements and Disclosures topic of the Financial Accounting Standards Board Accounting Standards Codification (the “FASB ASC”). The amounts are subject to adjustments based upon final settlement with the FDIC. In addition, the tax treatment of FDIC-assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date. The terms of the agreements provide for the FDIC to indemnify the Bank against claims with respect to liabilities of Evergreen, Rainier, and Nevada Security not assumed by the Bank and certain other types of claims identified in the agreement. The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain of $6.4 million in the Evergreen acquisition, $35.8 million of goodwill in the Rainier acquisition and $10.4 million of goodwill in the Nevada Security acquisition.

A summary of the net assets (liabilities) received from the FDIC and the estimated fair value adjustments are presented below:

(in thousands)


	Evergreen		Rainier		Nevada Security
	January 22, 2010		February 26, 2010		June 18, 2010
Cost basis net assets (liabilities)	$	58,811	$	(50,295)	$	53,629
Cash payment received from (paid to) the FDIC		-		59,351		(29,950)
Fair value adjustments:
Loans		(117,449)		(103,137)		(112,975)
Other real estate owned		(2,422)		(6,581)		(17,939)
Other intangible assets		440		6,253		322
FDIC indemnification asset		71,755		76,603		99,160
Deposits		(1,023)		(1,828)		(1,950)
Term debt		(2,496)		(13,035)		-
Other		(1,179)		(3,139)		(690)

Bargain purchase gain (goodwill)	$	6,437	$	(35,808)	$	(10,393)

In FDIC-assisted transactions, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer’s bid, the FDIC may be required to make a cash payment to the acquirer or the acquirer may be required to make payment to the FDIC.

In the Evergreen acquisition, cost basis net assets of $58.8 million were transferred to the Company. The bargain purchase gain represents the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed.

In the Rainier acquisition, cost basis net liabilities of $50.3 million and a cash payment received from the FDIC of $59.4 million were transferred to the Company. The goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired. Goodwill of $27.5 million and core deposit intangible assets of $1.1 million recognized are deductible for income tax purposes.

In the Nevada Security acquisition, cost basis net assets of $53.6 million were transferred to the Company and a cash payment of $30.0 million was made to the FDIC. The goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired. Goodwill of $36.5 million and core deposit intangible assets of $322,000 recognized are deductible for income tax purposes.

The Bank did not immediately acquire all the real estate, banking facilities, furniture or equipment of Evergreen, Rainier, or Nevada Security as part of the purchase and assumption agreements. Rather, the Bank was granted the option to purchase or lease the real estate and furniture and equipment from the FDIC. The term of this option expired 90 days from the acquisition dates, unless extended by the FDIC. Acquisition costs of the real estate and furniture and equipment are based on current mutually agreed upon appraisals. Umpqua exercised the right to purchase approximately $344,000 of furniture and equipment for Evergreen, $26.3 million of real estate and furniture and equipment for Rainier, and $2.0 million of real estate and furniture and equipment for Nevada Security. The Bank had the option to purchase one store location as part of the Nevada Security acquisition and purchased it in the second quarter of 2011.

The statement of assets acquired and liabilities assumed at their estimated fair values of Evergreen, Rainier, and Nevada Security are presented below:

(in thousands)


	Evergreen		Rainier		Nevada Security
	January 22, 2010		February 26, 2010		June 18, 2010
Assets Acquired:
Cash and equivalents	$	18,919	$	94,067	$	66,060
Investment securities		3,850		26,478		22,626
Covered loans		252,493		458,340		215,507
Premises and equipment		-		17		50
Restricted equity securities		3,073		13,712		2,951
Goodwill		-		35,808		10,393
Other intangible assets		440		6,253		322
Mortgage servicing rights		-		62		-
Covered other real estate owned		2,421		6,580		17,938
FDIC indemnification asset		71,755		76,603		99,160
Other assets		328		3,254		2,588

Total assets acquired	$	353,279	$	721,174	$	437,595


Liabilities Assumed:
Deposits	$	285,775	$	425,771	$	437,299
Term debt		60,813		293,191		-
Other liabilities		254		2,212		296

Total liabilities assumed		346,842		721,174		437,595

Net assets acquired/bargain purchase gain	$	6,437	$	-	$	-

Rainier’s assets and liabilities were significant at a level to require disclosure of one year of historical financial statements and related pro forma financial disclosure. However, given the pervasive nature of the loss-sharing agreement entered into with the FDIC, the historical information of Rainier is much less relevant for purposes of assessing the future operations of the combined entity. In addition, prior to closure Rainier had not completed an audit of their financial statements, and we determined that audited financial statements were not and would not be reasonably available for the year ended December 31, 2009. Given these considerations, the Company requested, and received, relief from the Securities and Exchange Commission from submitting certain financial information of Rainier. The assets and liabilities of Evergreen and Nevada Security were not at a level that requires disclosure of historical or pro forma financial information.

Note 3 – Investment Securities

The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at June 30, 2011 and December 31, 2010:

June 30, 2011

(in thousands)


	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
AVAILABLE FOR SALE:
U.S. Treasury and agencies	$	117,392	$	1,561	$	-	$	118,953
Obligations of states and political subdivisions		213,053		10,072		(227)		222,898
Residential mortgage-backed securities and collateralized mortgage obligations		2,782,517		54,657		(3,745)		2,833,429
Other debt securities		152		-		(2)		150
Investments in mutual funds and other equity securities		1,959		71		-		2,030

	$	3,115,073	$	66,361	$	(3,974)	$	3,177,460

HELD TO MATURITY:
Obligations of states and political subdivisions	$	1,945	$	3	$	-	$	1,948
Residential mortgage-backed securities and collateralized mortgage obligations		3,608		202		(25)		3,785

	$	5,553	$	205	$	(25)	$	5,733

December 31, 2010

(in thousands)


	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
AVAILABLE FOR SALE:
U.S. Treasury and agencies	$	117,551	$	1,239	$	(1)	$	118,789
Obligations of states and political subdivisions		213,129		4,985		(1,388)		216,726
Residential mortgage-backed securities and collateralized mortgage obligations		2,543,974		57,506		(19,976)		2,581,504
Other debt securities		152		-		-		152
Investments in mutual funds and other equity securities		1,959		50				2,009

	$	2,876,765	$	63,780	$	(21,365)	$	2,919,180

HELD TO MATURITY:
Obligations of states and political subdivisions	$	2,370	$	5	$	-	$	2,375
Residential mortgage-backed securities and collateralized mortgage obligations		2,392		216		(209)		2,399

	$	4,762	$	221	$	(209)	$	4,774

Investment securities that were in an unrealized loss position as of June 30, 2011 and December 31, 2010 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.

(in thousands)


	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
AVAILABLE FOR SALE:
Obligations of states and political subdivisions	$	10,716	$	210	$	1,831	$	17	$	12,547	$	227
Residential mortgage-backed securities and collateralized mortgage obligations		709,167		3,727		4,476		18		713,643		3,745
Other debt securities		-		-		150		2		150		2

Total temporarily impaired securities	$	719,883	$	3,937	$	6,457	$	37	$	726,340	$	3,974

HELD TO MATURITY:
Residential mortgage-backed securities and collateralized mortgage obligations	$	-	$	-	$	345	$	25	$	345	$	25

Total temporarily impaired securities	$	-	$	-	$	345	$	25	$	345	$	25

December 31, 2010

(in thousands)


	Less than 12 Months				12 Months or Longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
AVAILABLE FOR SALE:
U.S. Treasury and agencies	$	-	$	-	$	110	$	1	$	110	$	1
Obligations of states and political subdivisions		60,110		1,366		1,003		22		61,113		1,388
Residential mortgage-backed securities and collateralized mortgage obligations		1,238,483		19,968		1,539		8		1,240,022		19,976

Total temporarily impaired securities	$	1,298,593	$	21,334	$	2,652	$	31	$	1,301,245	$	21,365


HELD TO MATURITY:
Residential mortgage-backed securities and collateralized mortgage obligations	$	-	$	-	$	658	$	209	$	658	$	209

Total temporarily impaired securities	$	-	$	-	$	658	$	209	$	658	$	209

The unrealized losses on obligations of political subdivisions were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors published credit ratings of these securities and no adverse ratings changes have occurred since the date of purchase of obligations of political subdivisions which are in an unrealized loss position as of June 30, 2011. 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 Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

All of the available for sale residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at June 30, 2011 are issued or guaranteed by governmental agencies. The unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

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

The following tables present the OTTI losses for the three and six months ended June 30, 2011 and 2010:

(in thousands)


	Three months ended June 30,
	2011		2010
Total other-than-temporary impairment losses	$	110	$	-
Portion of other-than-temporary impairment losses recognized in other comprehensive income ⁽¹⁾		(63)		-

Net impairment losses recognized in earnings ⁽²⁾	$	47	$	-


		Six months ended June 30,
	2011		2010
Total other-than-temporary impairment losses	$	110	$	5
Portion of other-than-temporary impairment losses (recognized in) transferred from other comprehensive income ⁽¹⁾		(38)		284

Net impairment losses recognized in earnings ⁽²⁾	$	72	$	289

(1)	Represents other-than-temporary impairment losses related to all other factors.

(2)	Represents other-than-temporary impairment losses related to credit losses.

The OTTI recognized on investment securities held to maturity relate to non-agency residential collateralized mortgage obligations. Each of these securities holds various levels of credit subordination. The underlying mortgage loans of these securities were originated from 2003 through 2007. At origination, the weighted average loan-to-value of the underlying mortgages was 69%; the underlying borrowers had weighted average FICO scores of 731, and 59% were limited documentation loans. These securities are valued by third-party pricing services using matrix or model pricing methodologies and were corroborated by broker indicative bids. We estimate cash flows of the underlying collateral for each security considering credit, interest and prepayment risk models that incorporate management’s estimate of projected key assumptions including prepayment rates, collateral default rates and loss severity. Assumptions utilized vary from security to security, and are influenced by factors such as loan interest rates, geographic location, borrower characteristics and vintage, and historical experience. We then used a third party to obtain information about the structure of each security, including subordination and other credit enhancements, in order to determine how the underlying collateral cash flows will be distributed to each security issued in the structure. These cash flows are then discounted at the interest rate used to recognize interest income on each security. We review the actual collateral performance of these securities on a quarterly basis and update the inputs as appropriate to determine the projected cash flows. The following table presents a summary of the significant inputs utilized to measure management’s estimate of the credit loss component on these non-agency collateralized mortgage obligations as of June 30, 2011 and 2010:


	2011			2010
	Range		Weighted	Range		Weighted
	Minimum	Maximum	Average	Minimum	Maximum	Average
Constant prepayment rate	5.0%	20.0%	14.4%	4.0%	25.0%	14.9%
Collateral default rate	5.0%	30.0%	13.2%	8.0%	45.0%	16.8%
Loss severity	30.0%	65.0%	39.0%	20.0%	50.0%	34.6%

The following table presents a roll forward of the credit loss component of held to maturity debt securities that have been written down for OTTI with the credit loss component recognized in earnings and the remaining impairment loss related to all other factors recognized in OCI for the three and six months ended June 30, 2011 and 2010:

(in thousands)


	Three months ended June 30,
	2011		2010
Balance, beginning of period	$	12,803	$	12,653
Subsequent OTTI credit losses		47		-

Balance, end of period	$	12,850	$	12,653

(in thousands)


	Six months ended June 30,
	2011		2010
Balance, beginning of period	$	12,778	$	12,364
Subsequent OTTI credit losses		72		289

Balance, end of period	$	12,850	$	12,653

The following table presents the maturities of investment securities at June 30, 2011:

(in thousands)


	Available For Sale				Held To Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
AMOUNTS MATURING IN:
Three months or less	$	17,296	$	17,379	$	590	$	591
Over three months through twelve months		287,207		294,045		85		85
After one year through five years		1,992,369		2,037,495		613		618
After five years through ten years		750,874		761,393		49		50
After ten years		65,368		65,118		4,216		4,389
Other investment securities		1,959		2,030		-		-

	$	3,115,073	$	3,177,460	$	5,553	$	5,733

The amortized cost and fair value of collateralized mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity, in the preceding table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay underlying loans without prepayment penalties.

The following table presents the gross realized gains and gross realized losses on the sale of securities available for sale for the three and six months ended June 30, 2011 and 2010:

(in thousands)


	Three months ended June 30, 2011				Three months ended June 30, 2010
	Gains		Losses		Gains		Losses
Obligations of states and political subdivisions	$	7	$	-	$	-	$	-
Residential mortgage-backed securities and collateralized mortgage obligations		6,475		804		-		-

	$	6,482	$	804	$	-	$	-


	Six months ended June 30, 2011				Six months ended June 30, 2010
	Gains		Losses		Gains		Losses
Obligations of states and political subdivisions	$	7	$	-	$	2	$	1
Residential mortgage-backed securities and collateralized mortgage obligations		6,475		804		-		-

	$	6,482	$	804	$	2	$	1

The following table presents, as of June 30, 2011, investment securities which were pledged to secure borrowings and public deposits as permitted or required by law:

(in thousands)


	Amortized Cost		Fair Value
To Federal Home Loan Bank to secure borrowings	$	226,584	$	237,852
To state and local governments to secure public deposits		599,429		622,425
Other securities pledged		163,987		165,943

Total pledged securities	$	990,000	$	1,026,220

Note 4 – Non-covered Loans and Leases

The following table presents the major types of non-covered loans recorded in the balance sheets as of June 30, 2011 and December 31, 2010:

(in thousands)


	June 30, 2011			December 31, 2010
Commercial real estate
Term & multifamily	$	3,532,134		$	3,483,475
Construction & development		184,707			247,814
Residential development		112,657			147,813
Commercial
Term		572,402			509,453
LOC & other		788,268			747,419
Residential
Mortgage		245,034			222,416
Home equity loans & lines		277,453			278,585
Consumer & other		34,584			33,043

Total		5,747,239			5,670,018
Deferred loan fees, net		(11,686	)		(11,031	)

Total	$	5,735,553		$	5,658,987

As of June 30, 2011, loans totaling $3.5 billion were pledged to secure borrowings and available lines of credit.

Note 5 – Allowance for Non-Covered Loan Loss and Credit Quality

Allowance for Non-Covered Loan and Lease Losses

The Bank has a management Allowance for Loan and Lease Losses (“ALLL”) Committee, which is responsible for, among other things, regularly reviewing the ALLL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status. The ALLL Committee also approves removing loans and leases from impaired status. The Bank's Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly basis.

Our methodology for assessing the appropriateness of the ALLL consists of three key elements, which include 1) the formula allowance; 2) the specific allowance; and 3) the unallocated allowance. By incorporating these factors into a single allowance requirement analysis, all risk-based activities within the loan portfolio are simultaneously considered.

Formula Allowance

The Bank performs regular credit reviews of the loan and lease portfolio to determine the credit quality and adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process. The Company’s risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the formula allowance.

The formula allowance is calculated by applying risk factors to various segments of pools of outstanding loans. Risk factors are assigned to each portfolio segment based on management’s evaluation of the losses inherent within each segment. Segments or regions with greater risk of loss will therefore be assigned a higher risk factor.

Base risk – The portfolio is segmented into loan categories, and these categories are assigned a Base Risk factor based on an evaluation of the loss inherent within each segment.

Extra risk – Additional risk factors provide for an additional allocation of ALLL based on the loan risk rating system and loan delinquency, and reflect the increased level of inherent losses associated with more adversely classified loans.

Changes to risk factors – Risk factors are assigned at origination and may be changed periodically based on management’s evaluation of the following factors: loss experience; changes in the level of non-performing loans; regulatory exam results; changes in the level of adversely classified loans (positive or negative); improvement or deterioration in local economic conditions; and any other factors deemed relevant.

Specific Allowance

Regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired when based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize an impairment reserve as a Specific Allowance to be provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral dependent loans if it is determined that such amount represents a confirmed loss. Loans determined to be impaired with a specific allowance are excluded from the formula allowance so as not to double-count the loss exposure. The non-accrual impaired loans as of period end have already been partially charged off to their estimated net realizable value, and are expected to be resolved over the coming quarters with no additional material loss, absent further decline in market prices.

The combination of the formula allowance component and the specific allowance component lead to an 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 10% of the allowance, but may be maintained at higher levels during times of deteriorating economic conditions characterized by falling real estate values. The unallocated amount is reviewed quarterly with consideration of factors including, but not limited to:

•

Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

•

Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

•

Changes in the nature and volume of the portfolio and in the terms of loans;

•

Changes in the experience and ability of lending management and other relevant staff;

•

Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;

•

Changes in the quality of the institution’s loan review system;

•

Changes in the value of underlying collateral for collateral-depending loans;

•

The existence and effect of any concentrations of credit, and changes in the level of such concentrations;

•

The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institutions’ existing portfolio.

These factors are evaluated through a management survey of the Chief Credit Officer, Chief Lending Officers, Special Asset 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 June 30, 2011. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review. Approximately 80% of our loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the allowance for loan and lease losses. The U.S. recession, the housing market downturn, and declining real estate values in our markets have negatively impacted aspects of our residential development, commercial real estate, commercial construction and commercial loan portfolios. A continued deterioration in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.

The reserve for unfunded commitments (“RUC”) is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the ALLL and RUC are monitored on a regular basis and are based on management's evaluation of numerous factors. For each portfolio segment, these factors include:

•

The quality of the current loan portfolio;

•

The trend in the loan portfolio's risk ratings;

•

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 short (one year), medium (three year), and long-term charge-off rates,

•

Recovery experience;

•

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 tables summarizes activity related to the allowance for non-covered loan and lease losses by non-covered loan portfolio segment for the three and six months ended June 30, 2011 and 2010, respectively:

(in thousands)


	Three Months Ended June 30, 2011
	Commercial Real Estate		Commercial		Residential		Consumer & Other		Unallocated			Total
Balance, beginning of period	$	63,528	$	20,798	$	5,626	$	856	$	7,025		$	97,833
Charge-offs		(12,883)		(3,179)		(2,195)		(354)		-			(18,611)
Recoveries		2,208		695		100		111		-			3,114
Provision		9,129		5,436		1,623		255		(984	)		15,459

Balance, end of period	$	61,982	$	23,750	$	5,154	$	868	$	6,041		$	97,795


	Three Months Ended June 30, 2010
	Commercial Real Estate		Commercial		Residential		Consumer & Other		Unallocated			Total
Balance, beginning of period	$	70,460	$	20,890	$	8,235	$	863	$	10,336		$	110,784
Charge-offs		(19,605)		(9,961)		(1,201)		(787)		-			(31,554)
Recoveries		4,312		370		50		185		-			4,917
Provision		13,048		8,548		2,689		587		4,895			29,767

Balance, end of period	$	68,215	$	19,847	$	9,773	$	848	$	15,231		$	113,914


	Six Months Ended June 30, 2011
	Commercial Real Estate		Commercial		Residential		Consumer & Other		Unallocated			Total
Balance, beginning of period	$	64,405	$	22,146	$	5,926	$	803	$	8,641		$	101,921
Charge-offs		(24,314)		(11,355)		(2,929)		(888)		-			(39,486)
Recoveries		3,453		1,091		121		206		-			4,871
Provision		18,438		11,868		2,036		747		(2,600)			30,489

Balance, end of period	$	61,982	$	23,750	$	5,154	$	868	$	6,041		$	97,795


	Six Months Ended June 30, 2010
	Commercial Real Estate		Commercial		Residential		Consumer & Other		Unallocated			Total
Balance, beginning of period	$	67,281	$	24,583	$	5,811	$	455	$	9,527		$	107,657
Charge-offs		(35,535)		(32,865)		(1,837)		(1,076)		-			(71,313)
Recoveries		4,596		649		170		282		-			5,697
Provision		31,873		27,480		5,629		1,187		5,704			71,873

Balance, end of period	$	68,215	$	19,847	$	9,773	$	848	$	15,231		$	113,914

The following table presents the allowance and recorded investment in non-covered loans by portfolio segment and balances individually or collectively evaluated for impairment as of June 30, 2011 and 2010, respectively:

(in thousands)


	June 30, 2011
	Commercial Real Estate		Commercial		Residential		Consumer & Other		Unallocated		Total
Allowance for non-covered loans and leases:
Collectively evaluated for impairment	$	59,277	$	20,812	$	5,136	$	868	$	6,041	$	92,134
Individually evaluated for impairment		2,705		2,938		18		-		-		5,661

Total	$	61,982	$	23,750	$	5,154	$	868	$	6,041	$	97,795

Non-covered loans and leases:
Collectively evaluated for impairment	$	3,663,034	$	1,330,749	$	522,309	$	34,584			$	5,550,676
Individually evaluated for impairment		166,464		29,921		178		-				196,563

Total	$	3,829,498	$	1,360,670	$	522,487	$	34,584			$	5,747,239


	June 30, 2010
	Commercial Real Estate		Commercial		Residential		Consumer & Other		Unallocated		Total
Allowance for non-covered loans and leases:
Collectively evaluated for impairment	$	61,127	$	19,836	$	9,548	$	848	$	15,231	$	106,590
Individually evaluated for impairment		7,088		11		225		-				7,324

Total	$	68,215	$	19,847	$	9,773	$	848	$	15,231	$	113,914

Non-covered loans and leases:
Collectively evaluated for impairment	$	3,783,102	$	1,203,558	$	465,633	$	34,215			$	5,486,508
Individually evaluated for impairment		194,373		52,295		4,502		-				251,170

Total	$	3,977,475	$	1,255,853	$	470,135	$	34,215			$	5,737,678

(1)	The gross non-covered loan and lease balance excludes deferred loans fees of $11.7 million at June 30, 2011 and $11.0 million at June 30, 2010.

Summary of Reserve for Unfunded Commitments Activity

The following tables present a summary of activity in the reserve for unfunded commitments (“RUC”) and unfunded commitments for the three and six months ended June 30, 2011 and 2010, respectively:

(in thousands)


	Three Months Ended June 30, 2011
	Commercial Real Estate		Commercial		Residential		Consumer & Other		Total
Balance, beginning of period	$	76	$	621	$	162	$	52	$	911
Net change to other expense		(15)		84		7		1		77

Balance, end of period	$	61	$	705	$	169	$	53	$	988


	Three Months Ended June 30, 2010
	Commercial Real Estate		Commercial		Residential		Consumer & Other		Total
Balance, beginning of period	$	47	$	531	$	140	$	47	$	765
Net change to other expense		(6)		(21)		(4)		-		(31)

Balance, end of period	$	41	$	510	$	136	$	47	$	734


	Six Months Ended June 30, 2011
	Commercial Real Estate		Commercial		Residential		Consumer & Other		Total
Balance, beginning of period	$	33	$	575	$	158	$	52	$	818
Net change to other expense		28		130		11		1		170

Balance, end of period	$	61	$	705	$	169	$	53	$	988


	Six Months Ended June 30, 2010
	Commercial Real Estate		Commercial		Residential		Consumer & Other		Total
Balance, beginning of period	$	57	$	484	$	144	$	46	$	731
Net change to other expense		(16)		26		(8)		1		3

Balance, end of period	$	41	$	510	$	136	$	47	$	734


	Commercial Real Estate		Commercial		Residential		Consumer & Other		Total
Unfunded commitments:
June 30, 2011	$	61,478	$	674,210	$	226,790	$	45,483	$	1,007,961
June 30, 2010		41,354		501,667		209,643		39,938		792,602

Non-covered loans sold

In the course of managing the loan portfolio, at certain times, management may decide to sell loans prior to resolution. The following table summarizes loans sold by loan portfolio during the three and six months ended June 30, 2011 and 2010, respectively:

(in thousands)


	Three months ended June 30				Six months ended June 30
	2011		2010		2011		2010
Commercial real estate
Term & multifamily	$	1,385	$	969	$	3,884	$	10,728
Construction & development		-		-		-		1,175
Residential development		-		1,399		2		5,434
Commercial
Term		-		3,210		151		3,210
LOC & other		-		-		2,740		462

Total	$	1,385	$	5,578	$	6,777	$	21,009

Asset Quality and Non-Performing Loans

We manage asset quality and control credit risk through diversification of the non-covered loan portfolio and the application of policies designed to promote sound underwriting and loan 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 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 loss experience, estimated loan losses, growth in the loan 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 loans are identified as impaired they are moved to our 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 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 six to nine 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 nor 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 Company’s Allowance for Loan and Lease Losses (“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. 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 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 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(s) 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 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 consumer loans which are collectively evaluated for impairment in accordance with ASC 450, Contingencies. 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 Company has written down impaired, non-accrual loans as of June 30, 2011 to their estimated net realizable value, generally based on disposition value, and expects resolution with no additional material loss, absent further decline in market prices.

Non-Covered Non-Accrual Loans and Loans Past Due

The following table summarizes our non-covered non-accrual loans and loans past due by loan class as of June 30, 2011 and December 31, 2010:

(in thousands)


	June 30, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and Accruing		Total Past Due		Nonaccrual		Current		Total Non-covered Loans and Leases
Commercial real estate
Term & multifamily	$	15,154	$	16,940	$	555	$	32,649	$	53,059	$	3,446,426	$	3,532,134
Construction & development		99		-		-		99		8,093		176,515		184,707
Residential development		2,573		-		-		2,573		25,858		84,226		112,657
Commercial
Term		1,548		957		750		3,255		8,070		561,077		572,402
LOC & other		476		495		5,713		6,684		14,809		766,775		788,268
Residential
Mortgage		1,357		908		4,467		6,732		-		238,302		245,034
Home equity loans & lines		1,800		1,277		1,123		4,200		-		273,253		277,453
Consumer & other		207		60		529		796		-		33,788		34,584

Total	$	23,214	$	20,637	$	13,137	$	56,988	$	109,889	$	5,580,362	$	5,747,239

Deferred loan fees, net														(11,686	)

Total													$	5,735,553


	December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and Accruing		Total Past Due		Nonaccrual		Current		Total Non-covered Loans and Leases
Commercial real estate
Term & multifamily	$	14,596	$	8,328	$	3,008	$	25,932	$	49,162	$	3,408,381	$	3,483,475
Construction & development		2,172		6,726		-		8,898		20,124		218,792		247,814
Residential development		640		-		-		640		34,586		112,587		147,813
Commercial
Term		2,010		932		-		2,942		6,271		500,240		509,453
LOC & other		5,939		1,418		18		7,375		28,034		712,010		747,419
Residential
Mortgage		1,314		1,101		3,372		5,787		-		216,629		222,416
Home equity loans & lines		1,096		1,351		232		2,679		-		275,906		278,585
Consumer & other		361		233		441		1,035		-		32,008		33,043

Total	$	28,128	$	20,089	$	7,071	$	55,288	$	138,177	$	5,476,553	$	5,670,018

Deferred loan fees, net														(11,031	)

Total													$	5,658,987

Non-Covered Impaired Loans

The following table summarizes our impaired non-covered loans by loan class as of June 30, 2011 and December 31, 2010:

(in thousands)


	June 30, 2011
	Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial real estate
Term & multifamily	$	65,617	$	53,059	$	-
Construction & development		33,793		22,446		-
Residential development		50,608		35,396		-
Commercial
Term		10,498		8,923		-
LOC & other		46,650		15,087		-
Residential
Mortgage		-		-		-
Home equity loans & lines		-		-		-
Consumer & other		-		-		-
With an allowance recorded:
Commercial real estate
Term & multifamily		12,705		12,705		396
Construction & development		13,363		12,343		122
Residential development		30,515		30,515		2,187
Commercial
Term		198		198		7
LOC & other		5,713		5,713		2,931
Residential
Mortgage		178		178		18
Home equity loans & lines		-		-		-
Consumer & other		-		-		-
Total:
Commercial real estate		206,601		166,464		2,705
Commercial		63,059		29,921		2,938
Residential		178		178		18
Consumer & other		-		-		-

Total	$	269,838	$	196,563	$	5,661


	December 31, 2010
	Unpaid Principal Balance		Recorded Investment		Related Allowance
With no related allowance recorded:
Commercial real estate
Term & multifamily	$	62,605	$	49,790	$	-
Construction & development		33,091		25,558		-
Residential development		63,859		39,011		-
Commercial
Term		8,024		6,969		-
LOC & other		56,046		19,814		-
Residential
Mortgage		-		-		-
Home equity loans & lines		-		-		-
Consumer & other		-		-		-

With an allowance recorded:
Commercial real estate
Term & multifamily		29,926		28,070		1,614
Construction & development		-		-		-
Residential development		46,059		44,504		906
Commercial
Term		205		205		9
LOC & other		9,878		8,519		2,702
Residential
Mortgage		179		179		8
Home equity loans & lines		-		-		-
Consumer & other		-		-		-
Total:
Commercial real estate		235,540		186,933		2,520
Commercial		74,153		35,507		2,711
Residential		179		179		8
Consumer & other		-		-		-

Total	$	309,872	$	222,619	$	5,239

Loans with no related allowance reported generally represent non-accrual loans. The Company recognizes the charge-off of impairment reserves on impaired loans in the period it arises for collateral dependent loans. Therefore, the non-accrual loans as of June 30, 2011 have already been written-down to their estimated net realizable value, based on disposition value, and are expected to be resolved with no additional material loss, absent further decline in market prices. The valuation allowance on impaired loans primarily represents the impairment reserves on performing restructured loans, and is 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.

At June 30, 2011 and December 31, 2010, impaired loans of $81.0 million and $84.4 million were classified as accruing restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. The restructured loans on accrual status and one loan included in loans past due 90+ days and accruing represent the only impaired loans accruing interest at June 30, 2011. The restructured loans on accrual status represent the only impaired loans accruing interest at December 31, 2010. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. The Company had no obligations to lend additional funds on the restructured loans as of June 30, 2011.

The following table summarizes our average recorded investment and interest income recognized on impaired non-covered loans by loan class for the three months and six months ended June 30, 2011 and 2010:

(in thousands)


	For the three months ended June 30, 2011				For the three months ended June 30, 2010
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate
Term & multifamily	$	54,086	$	-	$	57,851	$	-
Construction & development		21,063		-		24,668		-
Residential development		37,841		-		31,695		-
Commercial
Term		8,307		-		10,768		-
LOC & other		17,978		-		42,009		-
Residential
Mortgage		-		-		-		-
Home equity loans & lines		-		-		-		-
Consumer & other		-		-		-		-

With an allowance recorded:
Commercial real estate
Term & multifamily		15,733		233		29,731		220
Construction & development		8,905		266		4,264		-
Residential development		32,943		320		60,605		506
Commercial
Term		202		11		225		12
LOC & other		2,857		-		-		4
Residential
Mortgage		178		1		4,474		62
Home equity loans & lines		-		-		35		-
Consumer & other		-		-		-		-
Total:
Commercial real estate		170,571		819		208,814		726
Commercial		29,344		11		53,002		16
Residential		178		1		4,509		62
Consumer & other		-		-		-		-

Total	$	200,093	$	831	$	266,325	$	804


	For the six months ended June 30, 2011				For the six months ended June 30, 2010
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate
Term & multifamily	$	54,725	$	-	$	60,241	$	-
Construction & development		23,238		-		28,665		-
Residential development		37,762		-		39,438		-
Commercial
Term		8,678		-		10,673		-
LOC & other		24,724		-		46,905		-
Residential
Mortgage		-		-		-		-
Home equity loans & lines		-		-		-		-
Consumer & other		-		-		-		-
With an allowance recorded:
Commercial real estate
Term & multifamily		19,995		424		32,856		451
Construction & development		6,506		338		2,843		-
Residential development		40,165		670		60,053		937
Commercial
Term		268		23		296		24
LOC & other		2,532		-		200		8
Residential
Mortgage		1,369		3		4,705		121
Home equity loans & lines		7		-		23		1
Consumer & other		-		-		-		-
Total:
Commercial real estate		182,391		1,432		224,096		1,388
Commercial		36,202		23		58,074		32
Residential		1,376		3		4,728		122
Consumer & other		-		-		-		-

Total	$	219,969	$	1,458	$	286,898	$	1,542

The impaired loans for which these interest income amounts were recognized primarily relate to accruing restructured loans.

Non-covered Credit Quality Indicators

As previously noted, the Company’s risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The Bank differentiates its lending portfolios into homogeneous loans (generally consumer loans) and non-homogeneous loans (generally all non-consumer loans). The 10 risk rating categories can be generally described by the following groupings for non-homogeneous loans:

Minimal Risk – A minimal risk loan, risk rated 1, is to a borrower of the highest quality. The borrower has an unquestioned ability to produce consistent profits and service all obligations and can absorb severe market disturbances with little or no difficulty.

Low Risk – A low risk loan, risk rated 2, is similar in characteristics to a minimal risk loan. Margins may be smaller or protective elements may be subject to greater fluctuation. The borrower will have a strong demonstrated ability to produce profits, provide ample debt service coverage and to absorb market disturbances.

Modest Risk – A modest risk loan, risk rated 3, is a desirable loan with excellent sources of repayment and no currently identifiable risk of collection. The borrower exhibits a very strong capacity to repay the credit in accordance with the repayment agreement. The borrower may be susceptible to economic cycles, but will have reserves to weather these cycles.

Average Risk – An average risk loan, risk rated 4, is an attractive loan with sound sources of repayment and no material collection or repayment weakness evident. The borrower has an acceptable capacity to pay in accordance with the agreement. The borrower is susceptible to economic cycles and more efficient competition, but should have modest reserves sufficient to survive all but the most severe downturns or major setbacks.

Acceptable Risk – An acceptable risk loan, risk rated 5, is a loan with lower than average, but still acceptable credit risk. These borrowers may have higher leverage, less certain but viable repayment sources, have limited financial reserves and may possess weaknesses that can be adequately mitigated through collateral, structural or credit enhancement. The borrower is susceptible to economic cycles and is less resilient to negative market forces or financial events. Reserves may be insufficient to survive a modest downturn.

Watch – A watch loan, risk r