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 are included in the Company's financial results beginning April 19, 2014 and the combined company's banking operations are operating under the Umpqua Bank name and brand.

The structure of the transaction was as follows:


•	Sterling merged with and into the Company (the "Merger" or the "Sterling Merger") with the Company as the surviving corporation in the Merger;


•	Immediately following the Merger, Sterling's wholly owned banking 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 had 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.


•	Each outstanding warrant issued by Sterling converted into a warrant exercisable for 1.671 shares of the Company's common stock and $2.18 in cash for each warrant when exercised;


•	Each outstanding option to purchase a share of Sterling common stock converted into an option to purchase 1.7896 shares of Company's common stock, subject to vesting conditions; and


•	Each outstanding restricted stock unit in respect of Sterling common stock converted into a restricted stock unit in respect of 1.7896 shares the Company common stock, subject to vesting conditions.

A summary of the consideration paid, the assets acquired and liabilities assumed in the Merger are presented below:



(in thousands)
	Sterling
	April 18, 2014
Fair value of consideration to Sterling shareholders:
Cash paid			$	136,200
Liability recorded for warrants' cash payment per share			6,453
Fair value of common shares issued			1,939,497
Fair value of warrants, common stock options, and restricted stock exchanged			50,317
Total consideration			2,132,467
Fair value of assets acquired:
Cash and cash equivalents	$	253,067
Investment securities	1,378,300
Loans held for sale	214,911
Loans and leases	7,123,168
Premises and equipment	116,576
Residential mortgage servicing rights	62,770
Other intangible assets	54,562
Other real estate owned	8,666
Bank owned life insurance	193,246
Deferred tax asset	299,847
Accrued interest receivable	23,553
Other assets	148,906
Total assets acquired	9,877,572
Fair value of liabilities assumed:
Deposits	7,086,052
Securities sold under agreements to repurchase	584,746
Term debt	854,737
Junior subordinated debentures	156,171
Other liabilities	85,319
Total liabilities assumed	$	8,767,025
Net assets acquired			1,110,547
Goodwill			$	1,021,920

Amounts recorded are estimates of fair value. The primary reason for the Merger was to continue the Company's growth strategy, including expanding our geographic footprint in markets throughout the West Coast. All of the goodwill recorded has been attributed to the Community Banking segment and reporting unit. The Community Banking segment will benefit from the cost saves and greater economy of scales to deliver financial solutions to its customers. None of the goodwill will be deductible for income tax purposes.

Subsequent to acquisition, the Company repaid 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. On June 20, 2014, the Company completed the required divestiture of six stores acquired in the Merger to another financial institution. The divestiture of the six stores included $211.5 million of deposits and $88.3 million of loans.

As of April 18, 2014, the unpaid principal balance on purchased non-impaired loans was $7.0 billion. The fair value of the purchased non-impaired loans was $6.7 billion, resulting in a discount of $230.5 million being recorded on these loans.

The following table presents the acquired purchased impaired loans as of the acquisition date:



(in thousands)	Purchased impaired
Contractually required principal and interest payments	$	604,136
Nonaccretable difference	(95,614		)
Cash flows expected to be collected	508,522
Accretable yield	(110,757		)
Fair value of purchased impaired loans	$	397,765

The operations of Sterling are included in our operating results beginning on April 19, 2014, and contributed the following net interest income, provision for loan losses, non-interest income and expense, income tax benefit, and net income for the year ended December 31, 2014.



(in thousands)
	Period from April 19, 2014 to
	December 31, 2014
Net interest income	$	339,254
Provision for loan losses	19,998
Non-interest income	82,212
Non-interest expense, excluding merger expense	227,007
Merger related expense	73,255
Income tax provision	36,473
Net income	$	64,733

The following table provides a breakout of Merger related expense for the year ended December 31, 2014.



(in thousands)	Year ended
	December 31, 2014
Personnel	$	18,837
Legal and professional	22,276
Charitable contributions	10,000
Investment banking fees	9,573
Contract termination	10,378
Communication	2,522
Other	8,731
Total Merger related expense	$	82,317

The following table presents unaudited pro forma results of operations for the years ended December 31, 2014 and 2013, as if the Sterling Merger had occurred on January 1, 2013. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2013. The pro forma results include the impact of certain acquisition accounting adjustments including accretion of loan discount, intangible assets amortization and deposit, borrowing premium accretion, and other reclasses of expenses between years. These adjustments increased pro forma net income by $82.4 million and $12.9 million for the years ended December 31, 2014 and 2013, respectively.



(in thousands, except per share data)	Pro Forma
	Year Ended
	December 31,
	2014		2013
Net interest income	$	910,715	$	873,972	^(1),(2),(3)
Provision for loan and lease losses	40,241		10,716
Non-interest income	205,557		242,609		^(4),(5),(6)
Non-interest expense	704,488		802,371		^{(7), (8)}
Income before provision for income taxes	371,543		303,494
Provision for income taxes	136,228		98,603
Net income	235,315		204,891
Dividends and undistributed earnings allocated to participating securities	484		788
Net earnings available to common shareholders	$	234,831	$	204,103
Earnings per share:
Basic	$	1.03	$	0.94
Diluted	$	1.02	$	0.93
Average shares outstanding:
Basic	227,807		216,025
Diluted	229,690		218,508

(1) Includes $31.9 million and $127.5 million of incremental loan discount accretion for the years ended December 31, 2014 and 2013, respectively.

(2) Includes a reduction of interest income of $1.8 million and $6.6 million related to investment securities premiums amortization for the years ended December 31, 2014 and 2013, respectively.

(3) Includes a reduction of interest expense related to amortization of deposit and borrowing premium of $5.9 million and $22.1 million for the years ended December 31, 2014 and 2013, respectively.

(4) Includes a reduction of service charges on deposit of $1.7 million and $5.8 million as a result of passing the $10 billion asset threshold for the years ended December 31, 2014 and 2013, respectively.

(5) Includes a loss on junior subordinated debentures carried at fair value of $1.1 million and $3.9 million for the years ended December 31, 2014 and 2013, respectively.

(6) Includes the reversal of the $7.0 million loss on the required divestiture of six Sterling stores in connection with the Merger for the year ended December 31, 2014.

(7) Includes $2.1 million and $7.8 million of core deposit intangible amortization for the years ended ended December 31, 2014 and 2013, respectively.

(8) The year ended December 31, 2014 was adjusted to exclude $98.2 million of merger expenses. The year ended December 31, 2013 was adjusted to include these charges.

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 was the sole shareholder of FinPac Leasing, the primary operating subsidiary of FinPac that engages in equipment leasing and financing activities. FinPac Leasing was 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 had no assets and have been dissolved. With the dissolution of FPHC, the Bank holds all of the outstanding stock of FinPac Leasing.

•

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.

A summary of consideration paid, and the assets acquired and liabilities assumed at their fair values, in the acquisition of FinPac are presented below.



(in thousands)	FinPac
	July 1, 2013
Fair value of consideration:
Cash			$	156,110
Fair value of assets acquired:
Cash and equivalents	$	6,452
Loans and leases, net	264,336
Premises and equipment	491
Other assets	8,015
Total assets acquired	$	279,294
Fair value of liabilities assumed:
Term debt	211,204
Other liabilities	8,757
Total liabilities assumed	$	219,961
Net assets acquired			59,333
Goodwill			$	96,777

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 $66.1 million, non-interest expense of $15.9 million, and net income of $18.7 million net of tax, for the year ended December 31, 2014. FinPac's results of operations prior to the acquisition are not included in our operating results. There are $110,000 FinPac merger related expenses for the year ended December 31, 2014. FinPac merger related expenses were $1.6 million for the year ended December 31, 2013.

Leases acquired from FinPac are presented below as of acquisition date:



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

The following tables present unaudited pro forma results of operations for the year ended December 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 acquisition actually occurred on January 1, 2013. The pro forma results include the impact of certain acquisition accounting adjustments which reduced pro forma earnings available to common shareholders by $4.2 million for the year ended December 31, 2013.



(in thousands, except per share data)	Pro Forma
	Year ended
	December 31, 2013
Net interest income	$	423,600
Provision for loan and lease losses	13,988
Non-interest income	122,753
Non-interest expense	373,181
Income before provision for income taxes	159,184
Provision for income taxes	55,879
Net income	103,305
Dividends and undistributed earnings allocated to participating securities	829
Net earnings available to common shareholders	$	102,476
Earnings per share:
Basic	$	0.92
Diluted	$	0.91
Average shares outstanding:
Basic	111,938
Diluted	112,176