Business Combinations

Sterling Financial Corporation

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

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

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

Financial Pacific Holding Corp.

On July 1, 2013, the Bank acquired Financial Pacific Holding Corp. ("FPHC") based in Federal Way, Washington, and its subsidiary, Financial Pacific Leasing, Inc ("FinPac Leasing"), and its subsidiaries, Financial Pacific Funding, Inc. ("FPF"), Financial Pacific Funding II, Inc. ("FPF II") and Financial Pacific Funding III, Inc. ("FPF III"). As part of the same transaction, the Company acquired two related entities, FPC Leasing Corporation ("FPC") and Financial Pacific Reinsurance Co., Ltd. ("FPR"). FPHC, FinPac Leasing, FPF, FPF II, FPF III, FPC and FPR are collectively referred to herein as "FinPac". FinPac provides business-essential commercial equipment leases to various industries throughout the United States and Canada. It originates leases through its brokers, lessors, and direct marketing programs. The results of FinPac's operations are included in the consolidated financial statements as of July 1, 2013.

The aggregate consideration for the FinPac purchase was $158.0 million. Of that amount, $156.1 was distributed in cash, and $1.9 million was exchanged for restricted shares of the Company stock. The restricted shares were issued from the Company’s 2013 Incentive Plan pursuant to employment agreements between the Company and certain executives of FinPac, vest over a period of either two or three years, and will be recognized over that time period within the salaries and employee benefits line item on the Consolidated Statements of Income. The structure of the transaction was as follows:

•

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

•

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

The acquisition provides diversification, and a scalable platform that is consistent with expansion initiatives that the Bank has completed over the last three years, including growth in the business banking, agricultural lending and home builder lending groups. The transaction leverages excess capital of the Company and deploys excess liquidity into significantly higher yielding assets, provides growth and diversification, and is anticipated to increase profitability. There is no tax deductible goodwill or other intangibles.

The operations of FinPac are included in our operating results from July 1, 2013, and added revenue of $14.8 million, non-interest expense of $3.5 million , and net income of $6.0 million net of tax, for the three and nine months ended September 30, 2013. FinPac's results of operations prior to the acquisition are not included in our operating results. Merger related expenses of $629,000 and $1.4 million for the three and nine months ended September 30, 2013 have been incurred in connection with the acquisition of FinPac and are recognized within the merger related expenses line item on the Consolidated Statements of Income.

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

(in thousands)



	FinPac
	July 1, 2013
Cost basis net assets	$	61,446
Cash payment paid	(156,110		)
Fair value adjustments:
Non-covered loans and leases, net	6,881
Other intangible assets	(8,516		)
Other assets	(1,650		)
Term debt	(400		)
Other liabilities	1,355
Goodwill	$	(96,994	)

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

(in thousands)



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

Liabilities Assumed:
Term debt	211,204
Other liabilities	8,757
Total liabilities assumed	219,961
Net Assets Acquired	$	156,110

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

(in thousands)



	FinPac
	July 1, 2013
Contractually required payments	$	350,403
Purchase adjustment for credit	$	(20,520	)
Balance of non-covered loans and leases, net	$	264,336

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

(in thousands, except per share data)



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

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

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

(c) Consists of merger related expenses of $629,000 at the Bank, additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.

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

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

(in thousands, except per share data)



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

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

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

(c) Consists of merger related expenses of $1.4 million at the Bank, additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.

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

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

(in thousands, except per share data)



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

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

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

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

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

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

(in thousands, except per share data)



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

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

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

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

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

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

Circle Bancorp

On November 14, 2012, the Company acquired all of the assets and liabilities of Circle Bancorp (“Circle”), which has been accounted for under the acquisition method of accounting for cash consideration of $24.9 million, including the redemption of all common and preferred shares and outstanding warrants and options. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition dates, and are subject to change for up to one year after the closing date of the acquisition. This acquisition was consistent with the Company's overall banking expansion strategy and provided further opportunity to enter growth markets in the San Francisco Bay Area of California. Upon completion of the acquisition, all Circle Bank branches operated under the Umpqua Bank name. The acquisition added Circle Bank's network of six branches in Corte Madera, Novato, Petaluma, San Francisco, San Rafael and Santa Rosa, California to Umpqua Bank's network of locations in California, Oregon, Washington and Nevada. The application of the acquisition method of accounting resulted in the recognition of $11.9 million of goodwill. There is no tax deductible goodwill or other intangibles.

The operations of Circle are included in our operating results from November 15, 2012, and added revenue of $4.2 million and $13.3 million, non-interest expense of $1.3 million and $5.2 million, and net income of $1.7 million and $4.5 million net of tax, for the three and nine months ended September 30, 2013. Circle's results of operations prior to the acquisition are not included in our operating results. Merger-related expenses of $32,000 and $981,000 for the three and nine months ended September 30, 2013 have been incurred in connection with the acquisition of Circle and recognized within the merger related expenses line item on the Consolidated Statements of Income.

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

(in thousands)



	Circle Bank
	November 14, 2012

Cost basis net assets	$	17,127
Cash payment paid	(24,860		)
Fair value adjustments:
Non-covered loans and leases, net	(2,622		)
Other intangible assets	830
Non-covered other real estate owned	(487		)
Deposits	(904		)
Term debt	(2,404		)
Other	1,398
Goodwill	$	(11,922	)

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

(in thousands)



	Circle Bank
	November 14, 2012
Assets Acquired:
Cash and equivalents	$	39,328
Investment securities	793
Non-covered loans and leases, net	246,665
Premises and equipment	7,695
Restricted equity securities	2,491
Goodwill	11,922
Other intangible assets	830
Non-covered other real estate owned	1,602
Other assets	6,469
Total assets acquired	$	317,795

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

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

(in thousands)



	November 14,
	2012
Contractually required principal payments	$	242,999
Purchase adjustment for credit	(5,760		)
Balance of performing non-covered loans	$	240,850

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

(in thousands)



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

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