Business Combinations

Sterling Financial Corporation

As of the close of business on April 18, 2014, the Company completed its merger with Sterling Financial Corporation, a Washington corporation ("Sterling"). The results of Sterling's operations will be included in the Company's financial results beginning April 19, 2014 and the combined company's banking operations will operate under the Umpqua Bank name and brand. As of December 31, 2013, Sterling had total assets of $10.3 billion, $7.3 billion in loans, and $7.1 billion in deposits.

The structure of the transaction is as follows:


•	Sterling merged 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 merged with and into the Bank (the "Bank Merger"), with the Bank as the surviving bank in the Bank Merger;


•	Holders of shares of common stock of Sterling 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;


•	Holders of outstanding warrants of Sterling, which represent the right to purchase a corresponding share of common stock of Sterling, have the right to receive 1.671 shares of the Company's common stock and $2.18 in cash for each warrant when exercised;


•	Holders of outstanding options to purchase shares of Sterling common stock converted into 1.7896 options to purchase the Company's common stock, subject to vesting conditions;


•	Holders of outstanding restricted stock units of Sterling common stock converted into 1.7896 restricted stock units of the Company, subject to vesting conditions;

Aggregate consideration for the Merger is estimated at $2.1 billion and includes the following:


•	Cash of $136.2 million


•	Common stock issued of $1.9 billion;


•	Warrants issued of $52.8 million;


•	Restricted stock units and stock options of $8.8 million.

The primary reason for the Merger is to continue the Company's growth strategy, including expanding our geographic footprint in markets throughout the West Coast. Six stores are expected to be divested to Banner Bank in the second quarter of 2014. The Company expects to repay securities sold under agreements to repurchase acquired of $500.0 million, funded through the sale of acquired investment securities in the second quarter of 2014.

The Merger will be accounted for using the purchase acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration exchanged will be recorded at fair value as of the acquisition date. Preliminary fair values for all assets and liabilities are not reported herein as the Company is still in the process of determining the preliminary fair values. The Company expects to disclose preliminary assets acquired and liabilities assumed, including fair value adjustments, as well as supplemental pro forma information, in the Company's June 30, 2014 Form 10-Q. Goodwill will not be deductible for income tax purposes as the merger is accounted for as a tax-free exchange for tax purposes.

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. FinPac Leasing is also the sole shareholder of FPF, FPF II and FPF III, which are bankruptcy-remote entities that formerly served as lien holder for certain leases. FPF, FPF II and FPF III have no assets or current business activities and are anticipated to be dissolved 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 $15.7 million, non-interest expense of $3.9 million , and net income of $4.2 million net of tax, for the three months ended March 31, 2014. FinPac's results of operations prior to the acquisition are not included in our operating results. There are no merger related expenses for the three months ended March 31, 2014.

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.

(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

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 table presents unaudited pro forma results of operations for the three months ended March 31, 2013 as if the acquisition of FinPac had occurred on January 1, 2013. 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, 2013.

(in thousands, except per share data)



	Three months ended March 31, 2013
					Pro Forma				Pro Forma
	Company		FinPac (a)		Adjustments				Combined
Net interest income	$	94,189	$	12,547	$	(1,224	)	(b)	$	105,512
Provision for non-covered loan and lease losses	6,988		2,577		—			(c)	9,565
Provision for covered loan losses	232		—		—				232
Non-interest income	34,015		790		—				34,805
Non-interest expense	85,762		3,832		(203		)	(d)	89,391
Income before provision for income taxes	35,222		6,928		(1,021		)		41,129
Provision for income taxes	11,861		2,716		(357		)	(e)	14,220
Net income	23,361		4,212		(664		)		26,909
Dividends and undistributed earnings allocated to participating securities	183		—		28				211
Net earnings available to common shareholders	$	23,178	$	4,212	$	(692	)		$	26,698
Earnings per share:
Basic	$	0.21							$	0.24
Diluted	$	0.21							$	0.24
Average shares outstanding:
Basic	111,937								111,937
Diluted	112,118								112,118

(a) FinPac amounts represent results from January 1, 2013 to March 31, 2013.

(b) Adjustment of interest income from loans and 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 loans and leases, which is approximately four years, and will be amortized into income using the effective yield method.

(c) As acquired loans and 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 35%.