Business Combinations

3 Months Ended

Mar. 31, 2015

Business Combinations [Abstract]

Business Combinations

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 stockand $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 stockand $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 the 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 of 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	300,015
Accrued interest receivable	23,553
Other assets	148,906
Total assets acquired	9,877,740
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	87,902
Total liabilities assumed	$	8,769,608
Net assets acquired			1,108,132
Goodwill			$	1,024,335

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. 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 acquiredinvestment 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. The assets were sold at a discount of $7.0 million, which was recorded by Sterling prior to the Merger.

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 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 an estimated net interest income of $114.0 million and net income of $33.9 million for the three months ended March 31, 2015.

The following table provides a breakout of Merger related expense for the three months ended March 31, 2015.

(in thousands)
	Three Months Ended
	March 31, 2015
Personnel	$	4,367
Legal and professional	3,913
Premises and Equipment	3,017
Communication	434
Other	2,351
Total Merger related expense	$	14,082

The following table presents unaudited pro forma results of operations for the three months ended March 31, 2014, 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 purchase accounting adjustments including accretion of loan discount, intangible assets amortization and deposit and borrowing premium accretion. These purchase accounting adjustments increased pro forma net income by $16.1 million for the three months ended March 31, 2014.

(in thousands, except per share data)	Pro Forma
	Three Months Ended
	March 31,
	2014
Net interest income	$	222,766	(1), (2), (3)
Provision for loan and lease losses	5,971
Non-interest income	45,018		(4), (5), (6)
Non-interest expense	188,488		(7)
Income before provision for income taxes	73,325
Provision for income taxes	26,073
Net income	47,252
Dividends and undistributed earnings allocated to participating securities	113
Net earnings available to common shareholders	$	47,139
Earnings per share:
Basic	$	0.22
Diluted	$	0.22
Average shares outstanding:
Basic	216,438
Diluted	217,523

(1) Includes $26.7 million of incremental loan discount accretion for the three months ended March 31, 2014.

(2) Includes a reduction of interest income of $1.5 million related to investment securities premiums amortization for the three months ended March 31, 2014.

(3) Includes a reduction of interest expense of $4.9 million related to deposit and borrowing premiums amortization for the three months ended March 31, 2014.

(4) Includes a reduction of service charges on deposits of $1.4 million as a result of passing the $10 billion asset threshold for the three months ended March 31, 2014.

(5) Includes a loss on junior subordinated debentures carried at fair value of $952,000 for the three months ended March 31, 2014.

(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 three months ended March 31, 2014.

(7) Includes a net increase of $5.4 million of merger expenses and $1.7 million of incremental core deposit intangible amortization for the three months ended March 31, 2014.