Shareholders' Equity and Stock Compensation

On April 18, 2014, the Company completed the Merger with Sterling. The details of the conversion of Sterling common stock, stock options, and restricted stock units are included in Note 2. The conversion resulted in the issuance of 104,385,087 shares of common stock, 994,214 restricted stock units, and 439,921 stock options granted. Additionally, the 2,960,238 outstanding Sterling warrants were converted into warrants exercisable to receive 1.671 shares of Umpqua stock per warrant, with an exercise price of $12.88 as of the merger date. As of June 30, 2014, there were 2,995,130 warrants outstanding, with an exercise price of $12.73. Adjustments to the number and exercise price of these outstanding warrants occurred in the second quarter of 2014, due to dividend distributions triggering an anti-dilutive provision.

At a special meeting on February 25, 2014, the Company's shareholders approved an amendment to the Company's articles of incorporation, effective on April 18, 2014, increasing the number of authorized shares of common stock to 400,000,000.

At the annual meeting on April 16, 2013, shareholders approved the Company's 2013 Incentive Plan (the "2013 Plan"), which, among other things, authorizes the issuance of equity awards to directors and employees and reserves 4,000,000 shares of the Company's common stock for issuance under the plan. With the adoption of the 2013 Plan, no additional awards will be issued from the 2003 Stock Incentive Plan or the 2007 Long Term Incentive Plan.

Stock-Based Compensation

The compensation cost related to stock options, restricted stock and restricted stock units (included in salaries and employee benefits) was $3.6 million and $5.1 million for the three and six months ended June 30, 2014, as compared to $1.0 million and $2.2 million for the three and six months ended June 30, 2013. The total income tax benefit recognized related to stock-based compensation was $1.4 million and $2.0 million for the three and six months ended June 30, 2014 as compared to $415,000 and $889,000 for the three and six months ended June 30, 2013. During the three months ended June 30, 2014, vesting was accelerated for certain restricted stock units and stock options issued in connection with the merger with Sterling, resulting in $3.6 million of accelerated compensation expense which was recorded in merger expense.

The following table summarizes information about stock option activity for the six months ended June 30, 2014:



(in thousands, except per share data)	Six Months Ended June 30, 2014
					Weighted-Avg
	Options		Weighted-Avg		Remaining Contractual	Aggregate
	Outstanding		Exercise Price		Term (Years)	Intrinsic Value
Balance, beginning of period	981		$	16.17
Granted/Assumed	440		$	12.12
Exercised	(522	)	$	11.92
Forfeited/expired	(35	)	$	18.90
Balance, end of period	864		$	16.56	4.08	$	3,217
Options exercisable, end of period	697		$	17.60	3.20	$	2,268

The total intrinsic value (which is the amount by which the stock price exceeded the exercise price on the date of exercise) of options exercised during the three and six months ended June 30, 2014 was $1.4 million and $2.8 million, as compared to the three and six months ended June 30, 2013 of $130,000 and $137,000.

During the three and six months ended June 30, 2014, the amount of cash received from the exercise of stock options was $3.4 million and $4.3 million, as compared to the three and six months ended June 30, 2013 of $29,000 and $52,000. Total consideration was $3.6 million and $6.2 million for the three and six months ended June 30, 2014, as compared to the three and six months ended June 30, 2013 of $813,000 and $846,000.

The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. There were no stock options granted in the six months ended June 30, 2013. The following weighted average assumptions were used to determine the fair value of stock options grants as of grant date for the six months ended June 30, 2014:




	Six Months Ended
	June 30,
	2014
Dividend yield	3.25		%
Expected life (years)	6.79
Expected volatility	31		%
Risk-free rate	0.91		%
Weighted average fair value of options on date of grant	$	3.22

The Company grants restricted stock periodically for the benefit of employees and directors. Restricted shares issued prior to 2011 generally vest on an annual basis over five years. Restricted shares issued since 2011 generally vest over a three year period, subject to time or time plus performance vesting conditions. The following table summarizes information about nonvested restricted share activity for the six months ended June 30, 2014:



(in thousands, except per share data)	Six Months Ended June 30, 2014
	Restricted		Weighted
	Shares		Average Grant
	Outstanding		Date Fair Value
Balance, beginning of period	992		$	12.79
Granted/Assumed	836		$	17.34
Released	(362	)	$	12.21
Forfeited/expired	(13	)	$	13.17
Balance, end of period	1,453		$	15.54

The total fair value of restricted shares vested and released during the three and six months ended June 30, 2014 was $878,000 and $6.4 million as compared to the three and six months ended June 30, 2013 of $514,000 and $1.8 million.

The Company granted restricted stock units as a part of the 2007 Long Term Incentive Plan for the benefit of certain executive officers. In addition, the Company granted restricted stock units in connection with the acquisition of Sterling as replacement awards. Restricted stock unit grants may be subject to performance-based vesting as well as other approved vesting conditions. The total number of restricted stock units granted represents the maximum number of restricted stock units eligible to vest based upon the performance and service conditions set forth in the grant agreements.



(in thousands, except per share data)	Six Months Ended June 30, 2014
	Restricted		Weighted
	Stock Units		Average Grant
	Outstanding		Date Fair Value
Balance, beginning of period	95		$	10.41
Granted/Assumed	1,024		$	18.34
Released	(320	)	$	16.58
Forfeited/expired	(29	)	$	18.58
Balance, end of period	770		$	18.36

As of June 30, 2014, there was $568,000 of total unrecognized compensation cost related to nonvested stock options which is expected to be recognized over a weighted-average period of 1.95 years. As of June 30, 2014, there was $14.5 million of total unrecognized compensation cost related to nonvested restricted stock which is expected to be recognized over a weighted-average period of 1.73 years. As of June 30, 2014, there was $12.0 million of total unrecognized compensation cost related to nonvested restricted stock units which is expected to be recognized over a weighted-average period of 2.74 years, assuming expected performance conditions are met.

For the three and six months ended June 30, 2014, the Company received income tax benefits of $2.5 million and $5.7 million, respectively, as compared to the three and six months ended June 30, 2013 of $257,000 and $775,000, respectively, related to the exercise of non-qualified employee stock options, disqualifying dispositions on the exercise of incentive stock options, the vesting of restricted shares and the vesting of restricted stock units. In the six months ended June 30, 2014, the Company had net excess tax benefit (tax benefit resulting from tax deductions greater than the compensation cost recognized) of $1.2 million, compared to $33,000 of net tax deficiencies (tax deficiency resulting from tax deductions greater than the compensation cost recognized) for the six months ended June 30, 2013. Only gross excess tax benefits are classified as financing cash flows.