Business Combinations

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

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

•

The Bank acquired all of the outstanding stock of FPHC, a shell holding company, which is the sole shareholder of FinPac Leasing, the primary operating subsidiary of FinPac that engages in equipment leasing and financing activities, and is also the sole shareholder of FPF and FPF III, which are bankruptcy-remote entities that serve as lien holder for certain leases. FinPac Leasiimg is also the sole shareholder of FPF II, which no longer engages in any activities or holds any assets and is antcipated to be wound up in the near future.

•

The Company acquired all of the outstanding stock of FPC, a Canadian leasing subsidiary, and FPR, a corporation organized in the Turks & Caicos Islands that reinsures a portion of the liability risk of each insurance policy that is issued by a third party insurance company on leased equipment when the lessee fails to meet its contractual obligations under the lease or financing agreement to obtain insurance on the leased equipment.

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

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

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

(in thousands)



	FinPac
	July 1, 2013
Cost basis net assets	$	61,446
Cash payment paid	(156,110		)
Fair value adjustments:
Non-covered loans and leases, net	19,214
Other intangible assets	(8,516		)
Deferred tax assets	(4,995		)
Term debt	(527		)
Other liabilities	176
Goodwill	$	(89,312	)

The statement of assets acquired and liabilities assumed at their fair values of FinPac are presented below. Additional adjustments to the purchase price allocation may be required, specifically to leases, other assets, other liabilities and taxes.

(in thousands)



	FinPac
	July 1, 2013
Assets Acquired:
Cash and equivalents	$	6,452
Non-covered loans and leases, net	276,669
Premises and equipment	491
Goodwill	89,312
Other assets	4,453
Total assets acquired	$	377,377

Liabilities Assumed:
Term debt	211,331
Other liabilities	9,936
Total liabilities assumed	221,267
Net Assets Acquired	$	156,110

Non-covered leases acquired from FinPac that are not subject to the requirements of FASB ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30") are presented below at acquisition:

(in thousands)



	FinPac
	July 1, 2013
Contractually required principal payments	$	350,403
Purchase adjustment for credit, interest rate, and liquidity	$	18,740
Balance of non-covered loans and leases, net	$	276,669

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

(in thousands, except per share data)



	Three months ended June 30, 2013
						Pro Forma				Pro Forma
	Company			FinPac (a)		Adjustments				Combined
Net interest income	$	93,893		$	11,943	$	(100	)	(b)	$	105,736
Provision for non-covered loan and lease losses	2,993			218		2,393			(d)	5,604
Recapture of provision for covered loan and lease losses	(3,072		)	—		—				(3,072		)
Non-interest income	34,497			522		—				35,019
Non-interest expense	87,931			3,435		(910		)	(c)	90,456
Income before provision for income taxes	40,538			8,812		(1,583		)		47,767
Provision for income taxes	14,285			3,327		(633		)	(e)	16,979
Net income	26,253			5,485		(950		)		30,788
Dividends and undistributed earnings allocated to participating securities	197			—		34				231
Net earnings available to common shareholders	$	26,056		$	5,485	$	(984	)		$	30,557
Earnings per share:
Basic	$	0.23								$	0.27
Diluted	$	0.23								$	0.27
Average shares outstanding:
Basic	111,954									111,954
Diluted	112,145									112,145

(a) FinPac amounts represent results from April 1, 2013 to June 30, 2013. Acquisition date is July 1, 2013.

(b) Consists of interest expense benefit of FinPac utilizing Bank funding, and change in yields due to fair value adjustments.

(c) Consists of merger related expenses of $0.7 million at the Bank, additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.

(d) Consists of adjustment to FinPac provision for credit losses due to purchase accounting adjustments.

(e) Income tax effect of pro forma adjustments at 40%.

(in thousands, except per share data)



	Six months ended June 30, 2013
						Pro Forma				Pro Forma
	Company			FinPac (a)		Adjustments				Combined
Net interest income	$	188,082		$	23,875	$	(464	)	(b)	$	211,493
Provision for non-covered loan and lease losses	9,981			2,878		3,182			(d)	16,041
Recapture of provision for covered loan and lease losses	(2,840		)	—		—				(2,840		)
Non-interest income	68,512			1,312		—				69,824
Non-interest expense	173,693			6,997		(1,340		)	(c)	179,350
Income before provision for income taxes	75,760			15,312		(2,306		)		88,766
Provision for income taxes	26,146			5,848		(923		)	(e)	31,071
Net income	49,614			9,464		(1,383		)		57,695
Dividends and undistributed earnings allocated to participating securities	380			—		62				442
Net earnings available to common shareholders	$	49,234		$	9,464	$	(1,445	)		$	57,253
Earnings per share:
Basic	$	0.44								$	0.51
Diluted	$	0.44								$	0.51
Average shares outstanding:
Basic	111,946									111,946
Diluted	112,133									112,133

(a) FinPac amounts represent results from January 1, 2013 to June 30, 2013. Acquisition date is July 1, 2013.

(b) Consists of interest expense benefit of FinPac utilizing Bank funding, and change in yields due to fair value adjustments.

(c) Consists of merger related expenses of $0.8 million at the Bank, additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.

(d) Consists of adjustment to FinPac provision for credit losses due to purchase accounting adjustments.

(e) Income tax effect of pro forma adjustments at 40%.

(in thousands, except per share data)



	Three months ended June 30, 2012
					Pro Forma				Pro Forma
	Company		FinPac (a)		Adjustments				Combined
Net interest income	$	101,012	$	11,671	$	(806	)	(b)	$	111,877
Provision for non-covered loan and lease losses	6,638		2,866		1,168			(d)	10,672
Provision for covered loan and lease losses	1,406		—		—				1,406
Non-interest income	28,926		1,209		—				30,135
Non-interest expense	86,936		3,754		(303		)	(c)	90,387
Income before provision for income taxes	34,958		6,260		(1,671		)		39,547
Provision for income taxes	11,681		2,364		(668		)	(e)	13,377
Net income	23,277		3,896		(1,003		)		26,170
Dividends and undistributed earnings allocated to participating securities	162		—		20				182
Net earnings available to common shareholders	$	23,115	$	3,896	$	(1,023	)		$	25,988
Earnings per share:
Basic	$	0.21							$	0.23
Diluted	$	0.21							$	0.23
Average shares outstanding:
Basic	111,897								111,897
Diluted	112,078								112,078

(a) FinPac amounts represent results from April 1, 2012 to June 30, 2012. Acquisition date is July 1, 2013.

(b) Consists of interest expense benefit of FinPac utilizing Bank funding, and change in yields due to fair value adjustments.

(c) Consists of additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.

(d) Consists of adjustment to FinPac provision for credit losses due to purchase accounting adjustments.

(e) Income tax effect of pro forma adjustments at 40%.

(in thousands, except per share data)



	Six months ended June 30, 2012
					Pro Forma				Pro Forma
	Company		FinPac (a)		Adjustments				Combined
Net interest income	$	203,367	$	23,105	$	(1,790	)	(b)	$	224,682
Provision for non-covered loan and lease losses	9,805		6,075		(1,324		)	(d)	14,556
Provision for covered loan and lease losses	1,375		—		—				1,375
Non-interest income	56,163		2,002		—				58,165
Non-interest expense	174,632		7,353		(607		)	(c)	181,378
Income before provision for income taxes	73,718		11,679		141				85,538
Provision for income taxes	24,938		4,412		56			(e)	29,406
Net income	48,780		7,267		85				56,132
Dividends and undistributed earnings allocated to participating securities	329		—		50				379
Net earnings available to common shareholders	$	48,451	$	7,267	$	35			$	55,753
Earnings per share:
Basic	$	0.43							$	0.50
Diluted	$	0.43							$	0.50
Average shares outstanding:
Basic	111,943								111,943
Diluted	112,120								112,120

(a) FinPac amounts represent results from January 1, 2012 to June 30, 2012. Acquisition date is July 1, 2013.

(b) Consists of interest expense benefit of FinPac utilizing Bank funding, and change in yields due to fair value adjustments.

(c) Consists of additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.

(d) Consists of adjustment to FinPac provision for credit losses due to purchase accounting adjustments.

(e) Income tax effect of pro forma adjustments at 40%.

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

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

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

(in thousands)



	Circle Bank
	November 14, 2012

Cost basis net assets	$	17,127
Cash payment paid	(24,860		)
Fair value adjustments:
Non-covered loans and leases, net	(2,622		)
Other intangible assets	830
Non-covered other real estate owned	(487		)
Deposits	(904		)
Term debt	(2,404		)
Other	723
Goodwill	$	(12,597	)

The statement of assets acquired and liabilities assumed at their fair values of Circle are presented below:

(in thousands)



	Circle Bank
	November 14, 2012
Assets Acquired:
Cash and equivalents	$	39,328
Investment securities	793
Non-covered loans and leases, net	246,665
Premises and equipment	7,695
Restricted equity securities	2,491
Goodwill	12,597
Other intangible assets	830
Non-covered other real estate owned	1,602
Other assets	5,784
Total assets acquired	$	317,785

Liabilities Assumed:
Deposits	$	250,408
Junior subordinated debentures	8,764
Term debt	55,404
Other liabilities	3,209
Total liabilities assumed	$	317,785

Non-covered loans acquired from Circle that are not subject to the requirements of FASB ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30") are presented below at acquisition:

(in thousands)



	November 14,
	2012
Contractually required principal payments	$	242,999
Purchase adjustment for credit, interest rate, and liquidity	(2,149		)
Balance of performing non-covered loans	$	240,850

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

(in thousands)



	November 14,		December 31,		June 30,
	2012		2012		2013
Contractually required principal payments	$	12,252	$	12,231	$	9,194
Carrying balance of acquired purchase credit impaired non-covered loans	$	5,815	$	5,809	$	4,109

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