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 second quarter of 2014.

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 $29.9 million, non-interest expense of $8.8 million, and net income of $9.5 million net of tax, for the year ended December 31, 2013. FinPac's results of operations prior to the acquisition are not included in our operating results. Merger related expenses of $1.6 million for the year ended December 31, 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	1,572
Goodwill	$	(96,777	)

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	96,777
Other assets	8,015
Total assets acquired	$	376,071

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

No accrued restructuring charges were recorded with the FinPac acquisition.

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 years ended December 31, 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)



	December 31, 2013
						Pro Forma				Pro Forma
	Company			FinPac (a)		Adjustments				Combined
Net interest income	$	404,965		$	25,526	$	(6,891	)	(b)	$	423,600
Provision for non-covered loan and lease losses	16,829			3,272		—			(c)	20,101
Recapture of provision for covered loan losses	(6,113		)	—		—				(6,113		)
Non-interest income	121,441			1,312		—				122,753
Non-interest expense	364,661			8,596		(76		)	(d)	373,181
Income before provision for income taxes	151,029			14,970		(6,815		)		159,184
Provision for income taxes	52,668			5,835		(2,835		)	(e)	55,668
Net income	98,361			9,135		(3,980		)		103,516
Dividends and undistributed earnings allocated to participating securities	788			—		41				829
Net earnings available to common shareholders	$	97,573		$	9,135	$	(4,021	)		$	102,687
Earnings per share:
Basic	$	0.87								$	0.92
Diluted	$	0.87								$	0.92
Average shares outstanding:
Basic	111,938									111,938
Diluted	112,176									112,176

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

(b) Adjustment of interest income from leases due to the estimated loss of income from the write-off of FinPac's loan mark (related to a prior acquisition) and the amortization of the new interest rate mark and the accretion of the acquisition accounting adjustment relating to the credit mark. The amortization period will be the contractual lives of the leases, which is approximately four years, and will be amortized into income using the effective yield method.

(c) As acquired leases are recorded at fair value, Umpqua would expect a reduction in the historical provision for loan and leases losses from FinPac; however, no adjustment to the historical amount of FinPac provision for loan and lease losses is reflected.

(d) Adjustment to reflect additional compensation expense related to restricted stock granted to FinPac management and the removal of FinPac director compensation and travel fees, and FinPac management fees of the Financial Pacific Holdings, LLC entity which was not acquired.

(e) Income tax effect of pro forma adjustments at the Company's statutory tax rate of 35%.

(in thousands, except per share data)



	December 31, 2012
					Pro Forma				Pro Forma
	Company		FinPac (a)		Adjustments				Combined
Net interest income	$	407,236	$	50,809	$	(5,332	)	(b)	$	452,713
Provision for non-covered loan and lease losses	21,796		7,291		—			(c)	29,087
Provision for covered loan losses	7,405		—		—				7,405
Non-interest income	136,829		4,132		—				140,961
Non-interest expense	359,652		16,101		(1,236		)	(d)	374,517
Income before provision for income taxes	155,212		31,549		(4,096		)		182,665
Provision for income taxes	53,321		12,192		(1,434		)	(e)	64,079
Net income	101,891		19,357		(2,662		)		118,586
Dividends and undistributed earnings allocated to participating securities	682		—		112				794
Net earnings available to common shareholders	$	101,209	$	19,357	$	(2,774	)		$	117,792
Earnings per share:
Basic	$	0.90							$	1.05
Diluted	$	0.90							$	1.05
Average shares outstanding:
Basic	111,935								111,935
Diluted	112,151								112,151

(a) FinPac amounts represent results from January 1, 2012 to December 31, 2012.

(d) Adjustment to reflect additional compensation expense related to restricted stock granted to FinPac management and the removal of FinPac director compensation and travel fees, FinPac management fees, and other expenses of Financial Pacific Holdings, LLC entity which was not acquired.

(e) Income tax effect of pro forma adjustments at the Company's statutory tax rate of 35%.

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 were 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 $17.0 million and $2.3 million, non-interest expense of $6.6 million and $2.8 million, and net income of $5.8 million and net loss of $306,000, net of tax, for the years ended December 31, 2013 and 2012, respectively. Circle's results of operations prior to the acquisition are not included in our operating results. Merger-related expenses of $996,000 and $1.9 million for the years ended December 31, 2013 and 2012, respectively, 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	1,407
Goodwill	$	(11,913	)

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	11,913
Other intangible assets	830
Non-covered other real estate owned	1,602
Other assets	6,478
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

Accrued restructuring charges relating to the Circle acquisition are recorded in other liabilities and were none and $631,000 at December 31, 2013 and 2012, respectively.

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)



	Circle Bank
	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 December 31, 2013 and December 31, 2012:

(in thousands)



	December 31,		December 31,		November 14,
	2013		2012		2012
Contractually required principal payments	$	5,523	$	12,231	$	12,252
Carrying balance of acquired purchase credit impaired non-covered loans	$	2,268	$	5,809	$	5,815

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

The following table presents the key components of merger-related expense for years ended December 31, 2013, 2012 and 2011. Substantially all of the merger-related expenses incurred during 2013 were in connection with the acquisition of FinPac and the proposed merger of Sterling. Substantially all of the merger-related expenses incurred during 2012 were in connection with the acquisition of Circle Bancorp and substantially all of the merger-related expenses incurred during 2011 were in connection with the FDIC-assisted purchase and assumption of Evergreen Bank, Rainier Pacific Bank, and Nevada Security Bank.

Merger-Related Expense



	2013		2012		2011
Professional fees	$	7,755	$	1,145	$	173
Compensation and relocation	158		856		—
Communications	49		66		—
Premises and equipment	44		29		82
Travel	140		98		11
Other	690		144		94
Total	$	8,836	$	2,338	$	360

No additional merger-related expenses are expected in connection with the Circle acquisition or the FDIC-assisted purchase and assumption of Evergreen, Rainier, and Nevada Security.