UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,


United States  
Securities and Exchange Commission 
Washington, D.C. 20549

FORM 10-K

[ x ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended: December 31, 2010

[    ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             .

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended: December 31, 2013
[  ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from  to .
Commission File Number: 000-25597

UMPQUA HOLDINGS CORPORATION001-34624

(Exact name


Umpqua Holdings Corporation 
 (Exact Name of Registrant as specifiedSpecified in its charter)

Its Charter)
OREGON93-1261319
(State or Other Jurisdiction
of Incorporation or Organization)
(I.R.S. Employer Identification Number)
of Incorporation or Organization)

ONEOne SW COLUMBIA STREET, SUITEColumbia Street, Suite 1200 PORTLAND, OREGON
Portland, Oregon 97258

(Address of principal executive offices) (zip code)

Principal Executive Offices)(Zip Code) 

(503) 727-4100

(Registrant’s telephone number, including area code)

Telephone Number, Including Area Code) 


Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

NONE

 
Securities registered pursuant to Section 12(g) of the Act: Common Stock

Securities registered pursuant to Section 12(g) of the Act:                          Common Stock


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ X]   Yes   [ ]   No [    ]


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.  Yes  
[  ]   Yes   [X]   No [ x ]


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
[X]   Yes   [  ]   No [    ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
[    ]X]   Yes   [  ]   No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitiondefinitions of “accelerated filer”, “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check one:

[X]   Large Acceleratedaccelerated filer   [ x    ]   Accelerated filer   [    ]   Non-accelerated filer   [  ]   Smaller reporting company [    ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  
[  ]   Yes   [X]   No [ x ]


The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2010,2013, based on the closing price on that date of $11.48$15.01 per share, and 113,577,225110,811,826 shares held was $1,303,866,547.

$1,663,285,508.

Indicate the number of shares outstanding for each of the issuer’s classes of common stock, as of the latest practical date:

The number of shares of the Registrant’sRegistrant's common stock (no par value) outstanding as of January 31, 20112014 was 114,561,195.

112,185,772.


DOCUMENTS INCORPORATED BY REFERENCE


Portions of the Proxy Statement for the 20112014 Annual Meeting of Shareholders of Umpqua Holdings Corporation ("Proxy Statement") are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.



Umpqua Holdings Corporation

Table of Contents

UMPQUA HOLDINGS CORPORATION 
FORM 10-K CROSS REFERENCE INDEX


 
 2

ITEM 1.

18

ITEM 1A.

RISK FACTORS25

ITEM 1B.

UNRESOLVED STAFF COMMENTS
 25

 25

ITEM 3.

LEGAL PROCEEDINGS25

ITEM 4.

(REMOVED AND RESERVED)25

 26

MARKET FOR REGISTRANT’SREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 26

SELECTED FINANCIAL DATA
 30

MANAGEMENT’S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 32

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 88

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 92

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 172

CONTROLS AND PROCEDURES
 172

ITEM 9B.

OTHER INFORMATION172

 173

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 173

ITEM 11.

173

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 173

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
173 

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES  
173 

PART IV

  174

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  174

SIGNATURES

175

EXHIBIT INDEX

177


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PART I

ITEM 1. BUSINESS.

This Annual Report on Form 10-K contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995. These statements may include statements that expressly or implicitly predict future results, performance or events. Statements other than statements of historical fact are forward-looking statements. You can find many of these statements by looking for words such as “anticipates,” “expects,” “believes,” “estimates” and “intends” and words or phrases of similar meaning. We make forward-looking statements regarding projected sources of funds, use of proceeds, availability of acquisition and growth opportunities, dividends, adequacy of our allowance for loan and lease losses, reserve for unfunded commitments and provision for loan and lease losses, performance of troubled debt restructurings, our commercial real estate portfolio and subsequent chargeoffs.chargeoffs, our covered loan portfolio and the Federal Deposit Insurance Corporation ("FDIC") indemnification asset, the benefits of the Financial Pacific leasing, Inc. ("FinPac") acquisition, and the proposed merger ("Merger") with Sterling Financial Corporation ("Sterling"). Forward-looking statements involve substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. There are many factors that could cause actual results to differ materially from those contemplated by these forward-looking statements. Risks and uncertainties that could cause our financial performance to differ materially from our goals, plans, expectations and projections expressed in forward-looking statements include those set forth in our filings with the SEC,Securities and Exchange Commission ("SEC"), Item 1A of this Annual Report on Form 10-K, and the following:
our ability to attract new deposits and loans and leases; 
demand for financial services in our market areas; 
competitive market pricing factors; 
deterioration in economic conditions that could result in increased loan and lease losses; 
risks associated with concentrations in real estate related loans; 
market interest rate volatility; 
compression of our net interest margin; 
stability of funding sources and continued availability of borrowings; 
changes in legal or regulatory requirements or the results of regulatory examinations that could restrict growth; 
our ability to recruit and retain key management and staff; 
availability of, and competition for acquisition opportunities; 
risks associated with merger and acquisition integration; 
significant decline in the market value of the Company that could result in an impairment of goodwill; 
our ability to raise capital or incur debt on reasonable terms; 
regulatory limits on the Bank’s ability to pay dividends to the Company; 
the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and related rules and regulations on the Company’s business operations and competitiveness, including the impact of executive compensation restrictions, which may affect the Company’s ability to retain and recruit executives in competition with firms in other industries who do not operate under those restrictions;
the impact of the Dodd-Frank Act on the Company’s interest expense, FDIC deposit insuranceassessments, regulatory compliance expenses, and interchange fee revenue, which includes a  maximum permissible interchange fee that an issuer may receive for an electronic debit transaction, resulting in a decrease in interchange revenue on an average transaction; and
the impact of the new “Basel III” capital rules issued by federal banking regulators in July 2013 ("Basel III Rules") that could require the Company to adjust the fair value, including the acceleration of losses, of the trust preferred securities.
the possibility that the proposed Merger with Sterling does not close when expected or at all because required regulatory, shareholder or other approvals and other conditions to closing are not received or satisfied on a timely basis or at all;
the effect on the trading price of our stock if the Merger with Sterling is not completed;   

3


benefits from the Merger may not be fully realized or may take longer to realize than expected, including as a result of changes in general economic and market conditions, interest rates, monetary policy, laws and regulations and their enforcement, and the degree of competition in the geographic and business areas in which we operate;
Sterling’s business may not be integrated into Umpqua’s successfully, or such integration may take longer to accomplish than expected;
the anticipated growth opportunities and cost savings from the Merger may not be fully realized or may take longer to realize than expected;
operating costs, customer losses and business disruption following factors that might cause actual resultsthe Merger, including adverse developments in relationships with employees, may be greater than expected; and
management time and effort will be diverted to differ materially from those presented:

our ability to attract new deposits and loans and leases;

demand for financial services in our market areas;

competitive market pricing factors;

deterioration in economic conditions that could result in increased loan and lease losses;

risks associated with concentrations in real estate related loans;

market interest rate volatility;

stability of funding sources and continued availability of borrowings;

changes in legal or regulatory requirements or the results of regulatory examinations that could restrict growth;

our ability to recruit and retain key management and staff;

availability of, and competition for, FDIC-assisted acquisition opportunities;

risks associated with merger and acquisition integration;

significant decline in the market value of the Company that could result in an impairment of goodwill;

our ability to raise capital or incur debt on reasonable terms;

regulatory limits on the Bank’s ability to pay dividends to the Company;

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and related rules and regulations on the Company’s business operations and competitiveness, including the impact of executive compensation restrictions, which may affect the Company’s ability to retain and recruit executives in competition with firms in other industries who do not operate under those restrictions.

the impact of the Dodd-Frank Act on the Company’s interchange fee revenue, interest expense, FDIC deposit insurance assessments and regulatory compliance expenses.

the resolution of Merger-related issues.


For a more detailed discussion of some of the risk factors, see the section entitled “Risk Factors” below. We do not intend to update any factors, except as required by SEC rules, or to publicly announce revisions to any of our forward-looking statements. Any forward-looking statement speaks only as of the date that sucksuch statement was made. You should consider any forward looking statements in light of this explanation, and we caution you about relying on forward-looking statements.

Umpqua Holdings Corporation


Introduction


Umpqua Holdings Corporation (referred to in this report as “we,” “our,” “Umpqua,” and “the Company”), an Oregon corporation, was formed as a bank holding company in March 1999. At that time, we acquired 100% of the outstanding shares of South Umpqua Bank, an Oregon state-chartered bank formed in 1953. We became a financial holding company in March 2000 under the provisions of the Gramm-Leach-Bliley Act.Act of 1999 ("GLB Act"). Umpqua has two principal operating subsidiaries, Umpqua Bank (the “Bank”) and Umpqua Investments, Inc. (“Umpqua Investments”). Prior to July 2009, Umpqua Investments was known as Strand, Atkinson, Williams and York, Inc. (“Strand”).


We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other information with the Securities and Exchange Commission (“SEC”).SEC. You may obtain these reports, and any amendments, from the SEC’sSEC's website atwww.sec.gov. You may obtain copies of these reports, and any amendments, through our website atwww.umpquaholdingscorp.com. These reports are available through our website as soon as reasonably practicable after they are filed electronically with the SEC. All of our SEC filings since November 14, 2002 have been made available on our website within two days of filing with the SEC.


General Background

Prior to 2009, the Company’s footprint stretched from Seattle, Washington, to Sacramento, Calififornia, and included the Portland metropolitan and Willamette Valley areas of

Headquartered in Roseburg, Oregon, along the I-5 corridor, southern Oregon, the Oregon coast, Northern California, and Napa Valley. On January 16, 2009, the Washington Department of Financial Institutions closed the Bank of Clark County, Vancouver, Washington, and appointed the Federal Deposit Insurance Corporation (“FDIC”) as its receiver. The FDIC entered into a purchase and assumption agreement with Umpqua Bank to assume certain assets and the insured non-brokered deposit balances, representing two branches, at no premium. On January 22, 2010, the Washington Department of Financial Institutions closed EvergreenBank (“Evergreen”), Seattle, Washington. Umpqua Bank entered into a whole bank purchase and assumption agreement with the FDIC to assume all of the deposits of Evergreen and purchase essentially all of the assets. The FDIC and Umpqua Bank entered into a loss-share transaction on $374.8 million of Evergreen’s assets. Umpqua Bank will share in the losses on the asset pools covered under the loss-share agreement. Evergreen’s six Seattle metropolitan area branches opened as Umpqua Bank stores on January 25, 2010. On February 26, 2010, the Washington Department of Financial Institutions closed Rainier Pacific Bank (“Rainier”), Tacoma, Washington. Umpqua Bank entered into a whole bank purchase and assumption agreement with the FDIC to assume all of the deposits of Rainier and purchase essentially all of the assets. The FDIC and Umpqua Bank entered into a loss-share transaction on $574.6 million of Rainiers’s assets. Umpqua Bank will share in the losses on the asset pools covered under the loss-share agreement. Rainier’s 14 Tacoma metropolitan area branches opened as Umpqua Bank stores on March 1, 2010. On June 18, 2010, the Nevada State Financial Institutions Division closed Nevada Security Bank (“Nevada Security”), Reno, Nevada and appointed the FDIC as receiver. Umpqua Bank entered into a whole bank purchase and assumption agreement with the FDIC to assume all of the deposits of Nevada Security and purchase essentially all of the assets. The FDIC and Umpqua Bank entered into a loss-share transaction on $364.4 million of Nevada Security’s assets. Umpqua Bank will share in the losses on the asset pools covered under the loss-share agreement. Nevada Security’s four Nevada and one Northern California area branches opened as Umpqua Bank stores on June 21, 2010.

Headquartered in Portland, Oregon, we engage primarily in the business of commercial and retail banking and the delivery of retail brokerage services. The Bank provides a wide range of banking, mortgage banking and other financial services to corporate, institutional and individual customers. Along with our subsidiaries, we are subject to the regulations of state and federal agencies and undergo periodic examinations by these regulatory agencies. See “Supervision and Regulation” below for additional information.

We areis considered one of the most innovative community banks in the United States combining a retail product delivery approach with an emphasis on quality-assured personal service. The Bankand has evolved from a traditional community bank into a community-oriented financial services retailer by implementingimplemented a variety of retail marketing strategies to increase revenue and differentiate ourselvesthe itself from ourits competition.

The Bank combines a high touch customer experience with the sophisticated products and expertise of a commercial bank. The Bank provides a wide range of banking, wealth management, mortgage and other financial services to corporate, institutional, and individual customers. The Bank also has a wholly-owned subsidiary, Financial Pacific Leasing Inc., a commercial equipment leasing company.

Umpqua Investments is a registered broker-dealer and registered investment advisor with offices in Portland, Eugene,Lake Oswego, and Medford, Oregon, and in manySanta Rosa, California, and also offers products and services offered through Umpqua Bank stores. The firm is one of the oldest investment companies in the Northwest and is actively engaged in the communities it serves. Umpqua Investments offers a full range of investment products and services including: stocks, fixed income securities (municipal, corporate, and government bonds, CDs, and money market instruments), mutual funds, annuities, options, retirement planning, money management services and life insurance.

Along with its subsidiaries, the Company is subject to the regulations of state and federal agencies and undergoes periodic examinations by these regulatory agencies.  
Business Strategy

Our

Umpqua Bank’s principal objective is to become the leading community-oriented financial services retailer throughout the Pacific Northwest and Northern California. WeWestern United States. With the proposed Sterling merger, we plan to continue the expansion of our market from Seattle to San Francisco, primarily along the I-5 corridor.into Southern California, Eastern Washington, Eastern Oregon, and Idaho. We intend to continue to grow our assets and increase profitability and shareholder value by differentiating ourselves from competitors through the following strategies:


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Table of Contents

Capitalize Onon Innovative Product Delivery System. Our philosophy has been to develop an environment for the customer that makes the banking experience relevant and enjoyable. With this approach in mind, we have developed a unique store concept that offers “one-stop” shopping and includes distinct physical areas or boutiques, such as a “serious about service center,” an “investment opportunity center” and a “computer café,” which make the Bank’sBank's products and services more tangible and accessible. In 2006, we introduced our “Neighborhood Stores” and in 2007, we introduced the Umpqua “Innovation Lab.” In 2010, we introduced the next generation version of our Neighborhood Store in the Capitol Hill area of Seattle, Washington. In 2013, we introduced the next generation of our flagship store in San Francisco. We are continuing to remodel existing and acquired stores in metropolitan locations to further our retail vision.vision and have a consistent brand experience.

Deliver Superior Quality Service. We insist on quality service as an integral part of our culture, from the Board of Directors to our new salesnewest associates, and believe we are among the first banks to introduce a measurable quality service program. Under our “return on quality” program, the performance of each sales associate’sassociate and store’s performancestore is evaluated monthly based on specific measurable factors such as the “sales effectiveness ratio” that totals the average number of banking products purchased by each new customer. The evaluations also encompass factors such as the number of new loan and deposit accounts generated in each store, reports by incognito “mystery shoppers” and customer surveys. Based on scores achieved, Umpqua’s “return on quality” program rewards both individual sales associates and store teams with financial incentives. Through such programs, we believe we canare able to measure the quality of service provided to our customers and maintain employee focus on quality customer service.

Establish Strong Brand Awareness. As a financial services retailer, we devote considerable resources to developing the “Umpqua Bank” brand. This is done through design strategy, marketing, merchandising, community based events, and delivery through our unique store environment.customer facing channels. From bankBank branded bags of custom roasted coffee beans and chocolate coins with each transaction, to educational seminars and three Umpqua-branded ice cream trucks, Umpqua’s goal is to engage our customer with the brand in a whole new way. The unique look and feel of our stores and interactive displays help position us as an innovative, customer friendlycustomer-friendly retailer of financial products and services. We build consumer preference for our products and services through strong brand awareness. During 2005, we secured naming rights to the office tower in Portland, Oregon in which our administrative offices and main branch are now located. This downtown building now displays prominent illuminated signage with the Bank’s name and logo.

Use Technology to Expand Customer Base. Although our strategy continues to emphasize superior personal service, as consumer preferences evolve we plancontinue to expand user-friendly, technology-based systems to attract customers that may preferwho want to interact with their financial institution electronically. We offer technology-based services including remote deposit capture, online banking, bill pay and treasury services, mobile banking, voice response banking, automatic payroll deposit programs, advanced function ATMs, interactive product kiosks, and a robust internet web site. We believe the availability of both traditional bank services and electronic banking services enhances our ability to attract a broader range of customers.customers and wrap our value proposition across all channels.

Increase Market Share in Existing Markets and Expand Into New Markets. As a result of our innovative retail product orientation, measurable quality service program and strong brand awareness, we believe that there is significant potential to increase business with current customers, to attract new customers in our existing markets and to enter new markets.

Umpqua Holdings Corporation

Pursue FDIC-assisted transactions.Strategic Acquisitions. A part of our strategy in this economic environment is to pursue certain failingthe acquisition of banks that the FDIC makes available for bid, and that meet our strategic objectives. Failed bank transactions are attractive opportunities becausefinancial services companies in markets where we can acquire loans subject to a loss share agreement with the FDIC, or at a significant discount, that limits our downside risk on the purchased loan portfolio and, apart from our assumption of deposit liabilities, we have significant discretion as to the non-deposit liabilities that we assume. Assets purchased from the FDIC are marked to their fair value. We have completed four FDIC-assisted transactions since January 1, 2009.see growth potential.

Marketing and Sales

Our goal of increasing our share of financial services in our market areas is driven by a marketing and sales planstrategy with the following key components:

Media Advertising.Our comprehensive marketing campaigns aim to strengthen the Umpqua Bank brand and heighten public awareness about our innovative delivery of financial products and services. The bankBank has been recognized nationally for its use of new media and unique approach. From programs like Umpqua’sthe Bank's Discover Local Music Project and our ice cream truck,trucks, to campaigns like “SaveSave Hard Spend Smart”Smart and the “Lemonaire,”Lemonaire, Umpqua is utilizing nontraditional media channels and leveraging mass market media in new ways. In 2005 Umpqua dubbed the term “hand-shake marketing”"hand-shake marketing" to describe the Company’sBank's fresh approach to localized marketing.


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Table of Contents

Retail Store Concept. As a financial services provider, we believe that the store environment is critical to successfully market and sell products and services. Retailers traditionally have displayed merchandise within their stores in a manner designed to encourage customers to purchase their products. Purchases are made on the spur of the moment due to the products’products' availability and attractiveness. Umpqua Bank believes this same concept can be applied to financial institutions and accordingly displays financial services and products through tactile merchandising within our stores. Unlike many financial institutions whose strategy is to discourage customers from visiting their facilities in favor of ATMs or other forms of electronic banking, we encourage customers to visit our stores, where they are greeted by well-trained sales associates and encouraged to browse and to make “impulse purchases.” Our “Next Generation” store model includes features like free wireless, free use of laptop computers, customers can use, opening rooms with fresh fruit and refrigerated beverages and innovative products packaging like MainStreet for businesses - a package that includes relationship pricing for deposit and loan products, access to our LocalSpace our social network for small businesses, and invitation to “Business Therapy” seminars. The stores host a variety of after-hours events, from poetry readings to seminars on how to build an art collection. To bring financial services to our customers in a cost-effective way, we introduced “Neighborhood Stores.” We build these stores in established neighborhoods and design them to be neighborhood hubs. These stand-alone full-service stores are smaller size and emphasize advanced technology. To strengthen brand recognition, all Neighborhood Stores are similar in appearance. Umpqua’s “Innovation Lab” is a one-of-a-kind location, showcasing emerging and existing technologies that foster community and redefine what consumers can expect from a banking experience. As a testing ground for new initiatives, the Lab will change regularly to feature new technology, products, services and community events. In 2013, Umpqua Bank launched our flagship store in San Francisco which received international recognition as the Retail Design Institutes 2013 Store of the Year award.

Service Culture.    Umpqua believes We believe strongly that if we lead with a service culture, we will have more opportunity to sell our products and services and to create deeper customer relationships.relationships across all divisions, from retail to mortgage and commercial. Although a successful marketing program will attract customers to visit, our stores, a service environment and a well-trained sales team are critical to selling our products and services. We believe that our service culture has become well established throughout the organization due to our unique facility designs and ongoing training of our “Universal Associates”associates on all aspects of sales and service. We train our associatesprovide training at our in-house training facility, known as “The World’sWorld's Greatest Bank University,” to recognize and celebrate exceptional service, and pay commissions for the sale of the Bank’sBank's products and services. This service culture has helped transform us from a traditional community bank to a nationally recognized marketing company focused on selling financial products and services.

Products and Services

We offer a full array of financial products to meet the banking needs of our market area and target customers. To ensure the ongoing viability of our product offerings, we regularly examine the desirability and profitability of existing and potential new products. To make it easy for new prospective customers to bank with us and access our products, we offer a “Switch Kit,” which allows a customer to open a primary checking account with Umpqua Bank in less than ten minutes. Other avenues

through which customers can access our products include our web site equipped with an e-switchkit which includes automated billpay switch, internet banking through “umpqua.online,” mobile banking, and our 24-hour telephone voice response system.

Deposit Products. We offer a traditional array of deposit products, including non-interest bearing checking accounts, interest bearing checking and savings accounts, money market accounts and certificates of deposit. These accounts earn interest at rates established by management based on competitive market factors and management’smanagement's desire to increase certain types or maturities of deposit liabilities. Our approach is to tailor fit products and bundle those that meet the customer’s needs. This approach addsis designed to add value for the customer, increasesincrease products per household and producesproduce higher service fee income. We also offer a seniors program to customers over fifty years old, which includes an array of banking services and other amenities, such as purchase discounts, vacation trips and seminars.

During the economic downturn, Umpqua opted to increase FDIC insurance coverage for our customers, providing greater peace of mind during these difficult times. In addition, the Company has an agreement with Promontory Interfinancial Network that makes it possible to offer FDIC insurance to depositors in excess of the current deposit limits. This Certificate of Deposit Account Registry Service (“CDARS”) uses a deposit-matching program to distribute excess deposit balances across other participating banks. This product is designed to enhance our ability to attract and retain customers and increase deposits, by providing additional FDIC coverage to customers. Due to the nature of the placement of the funds, CDARS deposits are classified as “brokered deposits” by regulatory agencies.

Private Bank. Umpqua Private Bank serves high net worth individuals with liquid investable assets by providing customized financial solutions and offerings. The private bank is designed to augment Umpqua’s existing high-touch customer experience, and works collaboratively with the Bank’s affiliate retail brokerage Umpqua Investments and with the independent capitalinvestment management firm Ferguson Wellman Capital Management, Inc. ("Ferguson Wellman") to offer a comprehensive, integrated approach that meets clients’ financial goals.

Retail Brokerage Services.    Umpqua Investments provides a full range of brokeragegoals, including financial planning, trust services, including equity and fixed income products, mutual funds, annuities, options, retirement planning and money management services. Additionally, Umpqua Investments offers life insurance policies. At December 31, 2010, Umpqua Investments had 44 Series 7-licensed financial advisors serving clients at three stand-alone retail brokerage offices and “Investment Opportunity Centers” located in many Bank stores.

Asset Management Services.    investments. Umpqua entered into a strategic alliance with Ferguson Wellman in the fall of 2009 to further enhance our offerings to individuals, unions and corporate retirement plans, endowments and foundations.

Retail Brokerage Services and Investment Advisory Services. Umpqua Investments in its combined role as a broker/dealer and a registered investment advisor may provide comprehensive financial planning advice to its clients as well as standard broker/dealer services for traditional brokerage accounts. This advice can include cash management, risk management (insurance planning/sales), investment planning (including investment advice, supervisory services and/or portfolio checkups), retirement planning (for employees and employers), and/or estate planning. The broker/dealer side of Umpqua Investments offers a full range of brokerage services including equity and fixed income products, mutual funds, annuities, options and life insurance products. At December 31, 2013, Umpqua Investments had 41 Series 7-licensed financial advisors serving clients at four stand-alone retail brokerage offices, one location located within a retirement facility, and “Investment Opportunity Centers” located in many Bank stores.

6


Commercial Loans and Leases and Commercial Real Estate Loans. We offer specialized loans for business and commercial customers, including accounts receivable and inventory financing, equipment loans, commercial equipment leases, international trade, real estate construction loans and permanent financing and SBASmall Business Administration ("SBA") program financing.financing as well as capital markets and treasury management services. Additionally, we offer specially designed loan products for small businesses through our Small Business Lending Center, and have recently introduced a new business banking division to increase lending to small and mid-sized businesses. Ongoing credit management activities continue to focus on commercial real estate loans given this is a significant portion of our loan portfolio. We are also engaged in initiatives that continue to diversify the loan portfolio including a strong focus on commercial and industrial loans in addition to financing owner-occupied properties.

Residential Real Estate Loans. Real estate loans are available for construction, purchase, and refinancing of residential owner-occupied and rental properties. Borrowers can choose from a variety of fixed and adjustable rate options and terms. We sell most residential real estate loans that we originate into the secondary market. Servicing is retained on the majority of these loans. We also support the Home Affordable Refinance Program and Home Affordable Modification Program.

Consumer Loans. We provide loans to individual borrowers for a variety of purposes, including secured and unsecured personal loans, home equity and personal lines of credit and motor vehicle loans.

Market Area and Competition

The geographic markets we serve are highly competitive for deposits, loans, leases and retail brokerage services. We compete with traditional banking and thrift institutions, as well as non-bank financial service providers, such as credit unions, brokerage

Umpqua Holdings Corporation

firms and mortgage companies. In our primary market areas of Oregon, Western Washington, Northern California, and Nevada, major banks and large regional banks generally hold dominant market share positions. By virtue of their larger capital bases, these institutions have significantly larger lending limits than we do and generally have more expansive branch networks. Competition also includes other commercial banks that are community-focused.

As the industry becomes increasingly dependent on and oriented toward technology-driven delivery systems, permitting transactions to be conducted by telephone, computer and the internet, non-bank institutions are able to attract funds and provide lending and other financial services even without offices located in our primary service area. Some insurance companies and brokerage firms compete for deposits by offering rates that are higher than may be appropriate for the Bank in relation to its asset and liability management objectives. However, we offer a wide array of deposit products and believe we can compete effectively through rate-driven product promotions. We also compete with full service investment firms for non-bank financial products and services offered by Umpqua Investments.

Credit unions present a significant competitive challenge for our banking services and products. As credit unions currently enjoy an exemption from income tax, they are able to offer higher deposit rates and lower loan rates than we can on a comparable basis. Credit unions are also not currently subject to certain regulatory constraints, such as the Community Reinvestment Act ("CRA"), which, among other things, requires us to implement procedures to make and monitor loans throughout the communities we serve. Adhering to such regulatory requirements raises the costs associated with our lending activities, and reduces potential operating profits. Accordingly, we seek to compete by focusing on building customer relationships, providing superior service and offering a wide variety of commercial banking products, that do not compete directly with products and services typically offered by the credit unions, such as commercial real estate loans, inventory and accounts receivable financing, and SBA program loans for qualified businesses.

Many of our stores are located in markets that have historically experienced growth below statewide averages. During the past several years, the States of Oregon, California, Washington, and Nevada have experienced economic difficulties. To the extent the fiscal condition of state and local governments does not improve, there could be an adverse effect on business conditions in the affected state that would negatively impact the prospects for the Bank’sBank's operations located there.

The current adverse economic conditions, driven by the U.S. recession, the housing market downturn, and declining real estate values in our markets, have negatively impacted aspects of our loan portfolio and the markets we serve. Continued deterioration in the real estate market or other segments of our loan portfolio could further negatively impact our operations in these markets, financial condition and results of operations.

The following table presents the Bank’s market share percentage for total deposits as of June 30, 2010,2013, in each county where we have operations. The table also indicates the ranking by deposit size in each market. All information in the table was obtained from SNL Financial of Charlottesville, Virginia, which compiles deposit data published by the FDIC as of June 30, 20102013 and updates the information for any bank mergers and acquisitions completed subsequent to the reporting date.

Oregon 
County  Market
Share
   Market
Rank
   Number
of Stores
 

Benton

   6.5   7     1  

Clackamas

   3.3   8     5  

Coos

   39.5   1     5  

Curry

   29.3   2     1  

Deschutes

   4.4   7     5  

Douglas

   62.6   1     10  

Jackson

   14.8   1     9  

Josephine

   17.3   2     5  

Lane

   18.1   1     9  

Lincoln

   12.7   3     2  

Linn

   11.7   4     3  

Marion

   7.3   5     3  

Multnomah

   3.0   6     14  

Washington

   3.3   9     3  

California 
County  Market
Share
   Market
Rank
   Number
of Stores
 

Amador

   4.6   7     1  

Butte

   3.2   8     2  

Calaveras

   24.6   2     4  

Colusa

   34.6   1     2  

Contra Costa

   0.2   26     2  

El Dorado

   7.4   4     5  

Glenn

   27.1   3     2  

Humboldt

   26.4   1     7  

Lake

   15.0   3     2  

Mendocino

   2.9   7     1  

Napa

   11.6   3     7  

Placer

   7.4   3     9  

Sacramento

   1.2   15     6  

San Joaquin

   0.6   20     1  

Shasta

   2.6   8     1  

Solano

   4.0   9     4  

Stanislaus

   0.9   15     2  

Sutter

   15.4   3     2  

Tehama

   16.3   3     2  

Trinity

   25.0   2     1  

Tuolumne

   16.2   3     5  

Yolo

   2.7   12     1  

Yuba

   24.0   2     2  

Umpqua Holdings Corporation

Washington 
County  Market
Share
   Market
Rank
   Number
of Stores
 

Clark

   8.2   6     5  

King

   0.5   21     8  

Pierce

   3.9   8     11  

Snohomish

   0.4   24     1  

Nevada 
County  Market
Share
   Market
Rank
   Number
of Stores
 

Washoe

   0.7   7     4  


7


Oregon
 Market
Market
Number
CountyShare
Rank
of Stores
Benton5.3%7
1
Clackamas2.8%7
5
Coos36.4%1
5
Curry19.3%3
1
Deschutes4.5%8
5
Douglas62.5%1
9
Jackson14.5%2
9
Josephine15.6%2
5
Lane15.5%2
9
Lincoln7.8%7
2
Linn12.2%5
3
Marion7.2%6
3
Multnomah4.3%6
16
Washington3.9%7
5

8


California
 Market
Market
Number
CountyShare
Rank
of Stores
Amador4.9%7
1
Butte2.8%10
2
Calaveras24.0%2
4
Colusa39.5%1
2
Contra Costa0.3%22
2
El Dorado6.9%4
5
Glenn29.7%2
2
Humboldt24.0%1
7
Lake17.6%2
2
Marin1.7%12
3
Mendocino3.3%7
1
Napa10.8%3
7
Placer4.1%6
9
Sacramento0.8%17
6
San Francisco0.0%40
1
San Joaquin0.6%18
1
San Luis Obispo0.1%13
1
Santa Clara0.0%47
1
Shasta1.8%9
1
Solano3.3%9
4
Sonoma0.4%19
3
Stanislaus0.9%15
2
Sutter13.8%2
2
Tehama16.8%1
2
Trinity26.4%2
1
Tuolumne15.7%3
5
Yolo2.6%11
1
Yuba25.9%2
2
Washington
 Market
Market
Number
CountyShare
Rank
of Stores
Clark6.7%7
5
King0.7%18
15
Pierce3.5%8
11
Snohomish0.8%22
1
Nevada
 Market
Market
Number
CountyShare
Rank
of Stores
Washoe0.3%8
4


9


Lending and Credit Functions

The Bank makes both secured and unsecured loans to individuals and businesses. At December 31, 2010,2013, commercial real estate, commercial, residential, and consumer and other represented approximately 69%58.8%, 22%28.8%, 9%11.7%, and 1%0.7%, respectively, of the total non-covered loan and lease portfolio.

Inter-agency guidelines adopted by federal bank regulators mandate that financial institutions establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an allowable amount of non-conforming loans as a percentage of capital. We have adopted as loan policy loan-to-value limits that range from 5% to 10% less than the federal guidelines for each category; however, policy exceptions are permitted for real estate loan customers with strong financial credentials.

Allowance for Loan and Lease Losses (“ALLL”) Methodology

The Bank performs regular credit reviews of the loan and lease portfolio to determine the credit quality and adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process. The Company’s risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the allowance for loan and lease losses. The Bank has a management ALLL Committee, which is responsible for, among other things, regularly reviewing the ALLL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status. The ALLL Committee also approves removing loans and leases from impaired status. The Bank’sBank's Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly basis.

Each risk rating is assessed an inherent credit loss factor that determines the amount of the allowance for loan and lease losses provided for that group of loans and leases with similar risk rating. Credit loss factors may vary by region based on management’smanagement's belief that there may ultimately be different credit loss rates experienced in each region.

Regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired when based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize an impairment reserve as a specific component to be provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral dependent loans if it is determined that such amount represents a confirmed loss. The combination of the risk rating-based allowance component and the impairment reserve allowance component lead to an allocated allowance for loan and lease losses.

The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less than 10%5% of the allowance, but may be maintained at higher levels during times of deteriorating economic conditions characterized by falling real estate values. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends. As of December 31, 2010, the2013, there was no unallocated allowance amount represented 8% of the allowance.

amount.

Management believes that the ALLL was adequate as of December 31, 2010.2013. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review. Approximately 82%74% of our total loan portfolio is secured by real estate, and aany future significant decline in real estate market values may require an increase in the allowance for loan and lease losses. The U.S. recession, the housing market downturn, and declining real estate values in our markets have negatively impacted aspects of our residential development, commercial real estate, commercial construction and commercial loan portfolios, and have led to an increase in non-performing loans and the allowance for loan and lease losses. A continued deterioration or a prolonged delay in economic recovery in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.

ALLL.

Employees

As of December 31, 2010,2013, we had a total of 2,1852,490 full-time equivalent employees. None of the employees are subject to a collective bargaining agreement and management believes its relations with employees to be good. For the eighth year in a row, Umpqua Bank was named #25 onto Fortune magazine’s 2011 list of “100 Best Companies to Work For”, #23For," ranked #71 on the 2010 list, #34 on the 2009 list, #13 on the 2008 list and #34 on the 20072014 list. Information regarding employment agreements with our executive officers is contained in Item 11 below, which item is incorporated by reference to our proxy statement for the 20112014 annual meeting of shareholders.


10


Government Policies

The operations of our subsidiaries are affected by state and federal legislative changes and by policies of various regulatory authorities. These policies include, for example, statutory maximum legal lending rates, domestic monetary policies of the Board of Governors of the Federal Reserve System ("Federal Reserve"), United States fiscal policy, and capital adequacy and liquidity constraints imposed by federal and state regulatory agencies. Congress enacted theEmergency Economic Stabilization Act of 2008 (“EESA”), which granted significant authority to the U.S. Department of the Treasury (the “Treasury”) to invest in financial institutions, guarantee debt, buy troubled assets and take other action designed to stabilize financial markets. In November 2008, the Company closed a transaction under the Capital Purchase Program (“CPP”) in which the Company issued 214,181 shares of cumulative preferred stock to the Treasury and issued a warrant to purchase 2,221,795 (reduced in 2009 to 1,110,898) shares of common stock at $14.46 per share in exchange for $214,181,000. Agreements executed in connection with the CPP transaction placed restrictions on compensation payable to senior executive officers and provided that the Company may not declare dividends that exceed $0.19 per common share per quarter without Treasury’s prior written consent. Federal and state governments have been actively responding to the financial market crisis that unfolded in 2008 and legislative and regulatory initiatives are expected to continue for the foreseeable future. In connection with the company’s public offering in February 2010, Umpqua repurchased the preferred stock from the Treasury and the warrant in March 2010. See Note 22 of theNotes to the Consolidated Financial Statement in Item 8 below.

Supervision and Regulation
General.

General. We are extensively regulated under federal and state law. These laws and regulations are generally intended to protect depositors and customers, not shareholders. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. Any change in applicable laws or regulations may have a material effect on our business and prospects. Our operations may be affected by legislative changes and by the policies of various regulatory authorities. We cannot accurately predict the nature or the extent of the effects on our business and earnings that fiscal or monetary policies, or new federal or state legislation may have in the future. Umpqua is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities

Umpqua Holdings Corporation

Exchange Act of 1934, as amended, both as administered by the Securities and Exchange Commission. As a listed company on NASDAQ, Umpqua is subject to NASDAQ rules for listed companies.

Holding Company Regulation. We are a registered financial holding company under the Gramm-Leach-BlileyGLB Act, of 1999 (the “GLB Act”), and are subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As a financial holding company, we are examined by and file reports with the Federal Reserve. The Federal Reserve expects a bank holding company to serve as a source of financial and managerial strength to its subsidiary bank and, under appropriate circumstances, to commit resources to support the subsidiary bank.

Financial holding companies are bank holding companies that satisfy certain criteria and are permitted to engage in activities that traditional bank holding companies are not. The qualifications and permitted activities of financial holdings companies are described below under “Regulatory Structure of the Financial Services Industry.

Federal and State Bank Regulation. Umpqua Bank, as a state chartered bank with deposits insured by the FDIC, is primarily subject to the supervision and regulation of the Oregon Department of Consumer and Business Services Division of Finance ("DCBS") and Corporate Securities, the Washington Department of Financial Institutions ("DFI"), the California Department of Financial Institutions,Business Oversight ("DBO"), the Nevada Division of Financial Institutions, the FDIC and the FDIC.Consumer Financial Protection Bureau ("CFPB"). These agencies may prohibit the Bank from engaging in what they believe constitute unsafe or unsound banking practices. Our primary state regulator, (the State of Oregon)DCBS, regularly examines the Bank or participates in joint examinations with the FDIC.

The Community Reinvestment Act (“CRA”)CRA requires that, in connection with examinations of financial institutions within its jurisdiction, the FDIC evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or new facility. A less than “Satisfactory” rating would result in the suspension of any growth of the Bank through acquisitions or opening de novo branches until the rating is improved. As of the most recent CRA examination in April 2010,July 2013, the Bank’sBank's CRA rating was “Satisfactory.”

Banks are also subject to certain restrictions imposed by the Federal Reserve Act on extensions of credit to executive officers, directors, principal shareholders or any related interest of such persons. Extensions of credit must be made on substantially the same terms, including interest rates and collateral as, and follow credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with persons not affiliated with the bank, and must not involve more than the normal risk of repayment or present other unfavorable features. Banks are also subject to certain lending limits and restrictions on overdrafts to such persons. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other regulatory sanctions.

The Federal Reserve Act and related Regulation W limit the amount of certain loan and investment transactions between the Bank and its affiliates, require certain levels of collateral for such loans, and limit the amount of advances to third parties that may be collateralized by the securities of Umpqua or its subsidiaries. Regulation W requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving nonaffiliated companies or, in the absence of comparable transactions, on terms and under circumstances, including credit standards, that in good faith would be offered to or would apply to nonaffiliated companies. Umpqua and its subsidiaries have adopted an Affiliate Transactions Policy and have entered into various affiliate agreements in compliance with Regulation W.


11

Table of Contents

The Federal Reserve and the FDIC have adopted non-capital safety and soundness standards for institutions. These standards cover internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, and standards for asset quality, earnings and stock valuation. An institution that fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that it will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions. We believe that the Bank is in compliance with these standards.

Federal Deposit Insurance. Substantially all deposits with Umpqua Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a bank’s capital level and supervisory ratings. The base assessment rates under the Federal Deposit Insurance Reform Act of 2005 (“Reform Act”), enacted in February 2006, ranged from $0.02 to $0.40 per $100 of deposits annually. The FDIC could increase or decrease the assessment rate schedule five basis points (annualized) higher or lower than the base rates in order to manage the DIF to prescribed statutory target levels. For 2007 the effective assessment amounts were $0.03 above the base rate amounts. Assessment rates for well managed, well capitalized institutions ranged from $0.05 to $0.07 per $100 of deposits annually. The Bank’s assessment rate for 2008 fell within this range. In 2007, the FDIC issued one-time assessment credits that could be used to offset this expense. The Bank’s credit was fully utilized in 2007 and covered the majority of that year’s assessment. The Bank did not have any remaining credit to offset assessments in 2008.

In December 2008, the FDIC adopted a rule that amended the system for risk-based assessments and changed assessment rates in attempt to restore targeted reserve ratios in the DIF. Effective January 1, 2009, the risk-based assessment rates were uniformly raised by seven basis points (annualized). On February 27, 2009, the FDIC adopted further modified the risk-based assessment system, effective April 1, 2009, to effectively require larger risk institutions to pay a larger share of the assessment. Characteristics of larger risk institutions include a significant reliance on secured liabilities or brokered deposits, particularly when combined with rapid asset growth. The rule also provided incentives for institutions to hold long-term unsecured debt and, for smaller institutions, high levels of Tier 1 capital. The initial base assessment rates range from $0.12 to $0.45 per $100 of deposits annually. After potential adjustments related to unsecured debt, secured liabilities and brokered deposit balances, the final total assessment rates range from $0.07 to $0.775 per $100 of deposits annually. Initial base assessment rates for well managed, well capitalized institutions ranged from $0.12 to $0.16 per $100 of deposits annually. The Bank’s assessment rate for 2010 fell within this range. Further increases in the assessment rate could have a material adverse effect on our earnings, depending upon the amount of the increase.

In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. Under the new restoration plan, the FDIC will forego the uniform three-basis point increase in initial assessment rates schedules for January 1, 2011, and maintain the current schedule of assessment rates. At least semi-annually, the FDIC will update its loss and income projections for the DIF and, if needed, increase or decrease assessment rates.
On February 7, 2011, the FDIC adopted a final rule modifying the risk-based assessment system from a domestic deposit base to a scorecard based assessment system, effective April 1, 2011. As of April 1, 2011, the Bank was categorized as a large institution as the Bank has more than $10 billion in assets. The FDIC has proposed additional rulesinitial base assessment rates range from 5 to change35 basis points. After potential adjustments related to unsecured debt and brokered deposit balances, the deposit insurancefinal total assessment system.

rates range from 2.5 to 45 basis points. Initial base assessment rates for large institutions ranged from five to 35 basis points. The Bank’s assessment rate for 2013 fell at the low end of this range. Further increases in the assessment rate could have a material adverse effect on our earnings, depending upon the amount of the increase.

In 2006, the Federal Deposit Insurance Reform Act ("Reform Act") increased the deposit insurance limit for certain retirement plan deposit accounts from $100,000 to $250,000. The basic insurance limit for other deposits, including individuals, joint account holders, businesses, government entities, and trusts, remained at $100,000. The Reform Act also provided for the merger of the two deposit insurance funds administered by the FDIC, the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund, (“SAIF”), into the DIF. On October 3, 2008, the EESAEmergency Economic Stabilization Act of 2008 ("EESA") temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The basic deposit insurance limit would have returned to $100,000 after December 31, 2009. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase in the standard maximum deposit insurance amount to $250,000 per depositor through December 31, 2013. The standard maximum deposit insurance amount would returnhave returned to $100,000 on January 1, 2014. The Dodd-Frank Act permanently raises the current standard maximum federal deposit insurance amount from $100,000 to $250,000 per qualified account.

In November 2008, the FDIC approved the final rulingrule establishing the Transaction Account Guarantee Program (“TAGP”) as part of the Temporary Liquidity Guarantee Program (“TLGP”). Under this program, effective immediately and through December 31, 2009, all non-interest bearing transaction accounts became fully guaranteed by the FDIC for the entire amount in the account. This unlimited coverage also extended to NOW (interest bearing deposit accounts) earning an interest rate no greater than 0.50% and all IOLTAs (lawyers’ trust accounts). Coverage under the TAGP, funded through insurance premiums paid by participating financial institutions, was in addition to and separate from the additional coverage announced under EESA. In August 2009, the FDIC extended the TAGP portion of the TLGP through June 30, 2010. In June 2010, the FDIC extended the TAGP portion of the TLGP for an additional six months, from July 1, 2010 to December 31, 2010. The rule

Umpqua Holdings Corporation

required that interest rates on qualifying NOW accounts offered by banks participating in the program be reduced to 0.25% from 0.50%. The rule provided for an additional extension of the program, without further rulemaking, for a period of time not to exceed December 31, 2011. Umpqua elected to participate in the TAGP program through the extended period. In July 2010, the Dodd-Frank Act was enacted, which provides for unlimited deposit insurance for noninterest bearing transactions accounts (excluding NOW, but including IOLTAs) beginning December 31, 2010 for a period of two years.

The TAGP expired as of December 31, 2012 and the FDIC will no longer provide separate, unlimited deposit insurance under that program.

The FDIC may terminate the deposit insurance of any insured depository institution if it determines that the institution has engaged in or is engaging in unsafe and unsound banking practices, is in an unsafe or unsound condition or has violated any applicable law, regulation or order or any condition imposed in writing by, or pursuant to, any written agreement with the FDIC. The termination of deposit insurance for the Bank could have a material adverse effect on our financial condition and results of operations due to the fact that the Bank’sBank's liquidity position would likely be affected by deposit withdrawal activity.


12

Table of Contents

Dividends. Under the Oregon Bank Act and the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the Bank is subject to restrictions on the payment of cash dividends to its parent company. A bank may not pay cash dividends if that payment would reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. In addition, under the Oregon Bank Act, the amount of the dividend paid by the Bank may not be greater than net unreserved retained earnings, after first deducting to the extent not already charged against earnings or reflected in a reserve, all bad debts, which are debts on which interest is unpaid and past due at least six months unless the debt is fully secured and in the process of collection; all other assets charged-off as required by Oregon bank regulators or a state or federal examiner; and all accrued expenses, interest and taxes of the Bank. In addition, state and federal regulatory authorities are authorized to prohibit banks and holding companies from paying dividends that would constitute an unsafe or unsound banking practice. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality, and overall financial condition.

The agreements that we executed with the Treasury in connection with the CPP transaction provided that the Company could not pay dividends on, repurchase, or redeem any other class of stock unless we were current in the payment of all dividends on the preferred stock issued to Treasury. Furthermore, the agreement limited the amount of cash dividends on the Company’s common stock. Those agreements and the related dividend limitations terminated in the first quarter of 2010 when we repurchased the warrants from the Treasury. See Note 22 of theNotes to the Consolidated Financial Statement in Item 8 below.

Capital Adequacy. The federal and state bank regulatory agencies use capital adequacy guidelines in their examination and regulation of holding companies and banks. If capital falls below the minimum levels established by these guidelines, a holding company or a bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities.

The FDIC and Federal Reserve have adopted risk-based capital guidelines for holding companies and banks. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profile among holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The capital adequacy guidelines limit the degree to which a holding company or bank may leverage its equity capital.

Federal regulations establish minimum requirements for the capital adequacy of depository institutions, such as the Bank. Banks with capital ratios below the required minimums are subject to certain administrative actions, including prompt corrective action, the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing.

On July 2, 2013, federal banking regulators approved final rules that revise the regulatory capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework ("Basel III"). The Federal Deposit Insurance Corporation Improvement Actphase-in period for the final rules will begin for the Company on January 1, 2015, with full compliance with the final rules entire requirement phased in on January 1, 2019.

The final rules, among other things, include a new common equity Tier 1 capital (“CET1”) to risk-weighted assets ratio, including a capital conservation buffer, which will gradually increase from 4.5% on January 1, 2015 to 7.0% on January 1, 2019. The final rules also raise the minimum ratio of 1991 (“FDICIA”)Tier 1 capital to risk-weighted assets from 4.0% to 6.0% on January 1, 2015 to 8.5% on January 1, 2019, as well as require a minimum leverage ratio of 4.0%.

Also, under the final rules, if an institution grows above $15 billion as a result of an acquisition, or organically grows above $15 billion and then makes an acquisition, the combined trust preferred security debt issuances would be phased out of Tier 1 and into Tier 2 capital (75% in 2015 and 100% in 2016). It is possible the Company may accelerate redemption of the existing junior subordinated debentures.  This could result in adjustments to the fair value of these instruments including the acceleration of losses on junior subordinated debentures carried at fair value within non-interest income. The Company currently does not intend to redeem the junior subordinated debentures following the proposed merger in order to support regulatory total capital levels.

The final rules also provide for a number of adjustments to and deductions from the new CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including the Company and the Bank, may make a one-time permanent election to continue to exclude these items. The Company and Bank expect to make this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company's securities portfolio. In addition, deductions include, for example, the requirement that mortgage servicing rights, certain deferred tax assets not dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.
FDICIA requires federal banking regulators to take “prompt corrective action” with respect to a capital-deficient institution, including requiring a capital restoration plan and restricting certain growth activities of the institution. Umpqua could be required to guarantee any such capital restoration plan required of the Bank if the Bank became undercapitalized. Pursuant to FDICIA, regulations were adopted defining five capital

levels: well capitalized, adequately capitalized, undercapitalized, severely undercapitalized and critically undercapitalized. Under the regulations, the Bank is considered “well capitalized” as of December 31, 2010.

2013.


13


Federal and State Regulation of Broker-Dealers. Umpqua Investments Inc. is a fully disclosed introducing broker-dealer clearing through First Clearing LLC.  Umpqua Investments is regulated by the Financial Industry Regulatory Authority (“FINRA”) and has deposits insured through the Securities Investors Protection Corp (“SIPC”) as well as third party insurers.  FINRA performs regular examinations of the firmUmpqua Investments that include reviews of policies, procedures, recordkeeping, trade practices, and customer protection as well as other inquiries.

SIPC protects client securities and cash up to $500,000, including $100,000 for cash with additional coverage provided through First Clearing for the remaining net equity balance in a brokerage account, if any.  This coverage does not include losses in investment accounts.

Broker-Dealer and Related Regulatory Supervision. Umpqua Investments is a member of, and is subject to the regulatory supervision of, the FINRA. Areas subject to this regulatoryFINRA oversight review include compliance with trading rules, financial reporting, investment suitability, for clients, and compliance with stock exchange rules and regulations.

Effects of Government Monetary Policy. Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve implements national monetary policy for such purposes as curbing inflation and combating recession, through its open market operations in U.S. Government securities, control of the discount rate applicable to borrowings from the Federal Reserve, and establishment of reserve requirements against certain deposits. These activities influence growth of bank loans, investments and deposits, and also affect interest rates charged on loans or paid on deposits. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.

Regulatory Structure of the Financial Services Industry. Federal laws and regulations governing banking and financial services underwent significant changes in recent years and are subject to significant changes in the future. From time to time, legislation is introduced in the United States Congress that contains proposals for altering the structure, regulation, and competitive relationships of the nation’snation's financial institutions. If enacted into law, these proposals could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, and other financial institutions. Whether or in what form any such legislation may be adopted or the extent to which our business might be affected thereby cannot be predicted.

The GLB Act, enacted in November 1999, repealed sections of the Banking Act of 1933, commonly referred to as the Glass-Steagall Act, that prohibited banks from engaging in securities activities, and prohibited securities firms from engaging in banking. The GLB Act created a new form of holding company, known as a financial holding company, that is permitted to acquire subsidiaries that are variously engaged in banking, securities underwriting and dealing, and insurance underwriting.

A bank holding company, if it meets specified requirements, may elect to become a financial holding company by filing a declaration with the Federal Reserve, and may thereafter provide its customers with a broader spectrum of products and services than a traditional bank holding company is permitted to do. A financial holding company may, through a subsidiary, engage in any activity that is deemed to be financial in nature and activities that are incidental or complementary to activities that are financial in nature. These activities include traditional banking services and activities previously permitted to bank holding companies under Federal Reserve regulations, but also include underwriting and dealing in securities, providing investment advisory services, underwriting and selling insurance, merchant banking (holding a portfolio of commercial businesses, regardless of the nature of the business, for investment), and arranging or facilitating financial transactions for third parties.

To qualify as a financial holding company, the bank holding company must be deemed to be well-capitalized and well-managed, as those terms are used by the Federal Reserve. In addition, each subsidiary bank of a bank holding company must also be well-capitalized and well-managed and be rated at least “satisfactory” under the Community Reinvestment Act.CRA. A bank holding company that does not qualify, or has not chosen, to become a financial holding company must limit its activities to traditional banking activities and those non-banking activities the Federal Reserve has deemed to be permissible because they are closely related to the business of banking.

Umpqua Holdings Corporation

The GLB Act also includes provisions to protect consumer privacy by prohibiting financial services providers, whether or not affiliated with a bank, from disclosing non-public personal, financial information to unaffiliated parties without the consent of the customer, and by requiring annual disclosure of the provider’sprovider's privacy policy.

Legislation enacted by Congress

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal Act”), which became effective in 1995, permits interstate banking and branching, which allows banks to expand nationwide through acquisition, consolidation or merger. Under this law, an adequately capitalized bank holding company may acquire banks in any state or merge banks across state lines if permitted by state law. Further, banks may establish and operate branches in any state subject to the restrictions of applicable state law. Under Oregon law, an out-of-state bank or bank holding company may merge with or acquire an Oregon state chartered bank or bank holding company ifupon receipt of approval from the Director of the Oregon bank, or in the caseDepartment of a bank holding company, the subsidiary bank, has been in existence for a minimum of three years,Consumer and the law of the state in which the acquiring bank is located permits such merger.Business Services. The Bank now has the ability to open additional de novo branches in the states of Oregon, California,Washington, and Nevada.


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Section 613 of the Dodd-Frank Act eliminates interstate branching restrictions that were implemented as part of the Riegle-Neal Interstate Banking and Branching Efficiency Act, of 1994, and removes many restrictions on de novo interstate branching by national and state-chartered banks. The FDIC and the OCCOffice of the Comptroller of the Currency now have authority to approve applications by insured state nonmember banks and national banks, respectively, to establish de novo branches in states other than the bank’s home state if “the law of the State in which the branch is located, or is to be located, would permit establishment of the branch, if the bank were a State bank chartered by such State.” The enactment of this sectionSection 613 may significantly increase interstate banking by community banks in western states, where barriers to entry were previously high.

Anti-Terrorism Legislation. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (“USA Patriot Act”), enacted in 2001:

prohibits banks from providing correspondent accounts directly to foreign shell banks;

imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals;

requires financial institutions to establish an anti-money-laundering (“AML”) compliance program; and

generally eliminates civil liability for persons who file suspicious activity reports.


The USA Patriot Act also increases governmental powers to investigate terrorism, including expanded government access to account records. The Department of the Treasury is empowered to administer and make rules to implement the Act, which to some degree, affects our record-keeping and reporting expenses. Should the Bank’sBank's AML compliance program be deemed insufficient by federal regulators, we would not be able to grow through acquiring other institutions or opening de novo branches.

Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 addresses public company corporate governance, auditing, accounting, executive compensation and enhanced and timely disclosure of corporate information.

The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and regulation of the relationship between a Board of Directors and management and between a Board of Directors and its committees.

The Sarbanes-Oxley Act provides for, among other things:

prohibition on personal loans by Umpqua to its directors and executive officers except loans made by the Bank in accordance with federal banking regulations;

independence requirements for Board audit committee members and our auditors;

certification of reports under the Securities Exchange Act reportsof 1994 ("Exchange Act") by the chief executive officer, chief financial officer and principal accounting officer;

disclosure of off-balance sheet transactions;

expedited reporting of stock transactions by insiders; and

increased criminal penalties for violations of securities laws.


The Sarbanes-Oxley Act also requires:

management to establish, maintain, and evaluate disclosure controls and procedures;

management to report on its annual assessment of the effectiveness of internal controls over financial reporting;

our external auditor to attest to the effectiveness of internal controls over financial reporting.


The SEC has adopted regulations to implement various provisions of the Sarbanes-Oxley Act, including disclosures in periodic filings pursuant to the Exchange Act. Also, in response to the Sarbanes-Oxley Act, NASDAQ adopted new standards for listed companies. In 2004, the Sarbanes-Oxley Act substantially increased our reporting and compliance expenses.

Emergency Economic Stabilization Act of 2008 (EESA). This act granted broad powers to the U.S. Treasury, the FDIC, and the Federal Reserve to stabilize the financial markets under the following programs:

the Capital Purchase Program allocated $250 billion to the United States Treasury ("Treasury") to purchase senior preferred shares and warrants to purchase commons stock from approved financial institutions;


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the Troubled Asset Purchase Program allocated $250 billion to the Treasury to purchase troubled assets from financial institutions, with Treasury to also receive securities issued by participating institutions;

the Temporary Liquidity Guaranty Program (“TLGP”)TLGP authorized the FDIC to insure newly issued senior unsecured debt and insure the total balance in non-interest bearing transactional deposit accounts of those institutions who elect to participate;

and

the Commercial Paper and Money Market Investor Funding Facilities authorized the Federal Reserve Bank of New York to purchase rated commercial paper from U.S. companies and to purchase money market instruments from U.S. money market mutual funds.


The Dodd-Frank Wall Street Reform and Consumer Protection Act. On July 21, 2010, President Barack Obama signed the Dodd-Frank Act, which iswas a sweeping overhaul of financial industry regulation. In general, the Act:

CreatesCreated a systemic-risk council of top regulators, the Financial Stability Oversight Council (FSOC), whose purpose is to identify risks and respond to emerging threats to the financial stability of the U.S. arising from large, interconnected bank holding companies or nonbank financial companies;

GivesGave the FDIC authority to unwind large failing financial firms. Treasury would supply funds to cover the up-front costs of winding down the failed firm, but the government would have to put a “repayment plan”"repayment plan" in place. Regulators wouldwill recoup any losses incurred from the wind-down afterwards by assessing fees on financial firms with more than $50 billion in assets;

DirectsDirected the FDIC to base deposit-insurance assessments on assets minus tangible capital instead of on domestic deposits and requires the FDIC to increase premium rates to raise the Deposit Insurance Fund’s (DIF)Fund's ("DIF") minimum reserve ratio from 1.15% to 1.35% by September 30, 2020. Banks, like Umpqua, with consolidated assets greater than $10 billion would pay the increased premiums;

ExtendsExtended the FDIC’sFDIC's Transaction Account Guarantee (TAG) program to December 31, 2012. There iswas no “opt-out” from the extension;

Permanently increasesincreased FDIC deposit-insurance coverage to $250,000, retroactive to January 1, 2008. The Act eliminatesact also eliminated the 1.5% cap on the DIF reserve ratio and automatic dividends when the ratio exceeds 1.35%. Under the agreement, theThe FDIC would havealso has discretion on whether to provide dividends to DIF members;

Umpqua Holdings Corporation

AuthorizesAuthorized banks to pay interest on business checking accounts, which is likely to significantly increase our interest expense;

Creates a new Consumer Financial Protection Bureau (CFPB),Created the CFPB, housed under the Federal Reserve and led by a director appointed by the President and confirmed by the Senate. All existing consumer laws and regulations will be transferred to this agency and each existing regulatory agency will contribute their respective consumer regulatory and exam staffs to the CFPB;

Grants toGave the CFPB the authority to write consumer protection rules for banks and nonbank financial firms offering consumer financial services or products and to ensure that consumers are protected from “unfair, deceptive, or abusive” acts or practices. The CFPB also would havenow has authority to examine and enforce regulations for banks like Umpqua, with greater than $10 billion in assets;

AuthorizesAuthorized the CFPB to require banks to compile and provide reports relating to its consumer lending, marketing and other consumer business activities and to make that information available to the public if it isdoing so “in the public interest”;

DirectsDirected the Federal Reserve to set interchange fees for debit card transactions charged by banks with more than $10 billion in assets. ItThe Federal Reserve must establish what it determines are reasonable fees by factoring in their transaction costs compared to those for checks;

Requires loan originators to retain 5% of any loan sold and securitized, unless it is a “qualified residential mortgage”, which includes standard 30 and 15 year fixed rate loans. It also specifically exempts from risk retention FHA, VA, Farmer Mac and Rural Housing Service loans;

Excludes the proceeds of trust preferred securities from Tier 1 capital except for trust preferred securities issued before May 19, 2010 by bank holding companies, like the Company, with less than $15 billion in assets at December 31, 2009;

AdoptsAdopted additional various mortgage lending and predatory lending provisions;

RequiresRequired federal regulators jointly to prescribe regulations mandating that financial institutions with more than $1 billion in assets to disclose to their regulators their incentive compensation plans to permit the regulators to determine whether the plans provide executive officers, employees, directors or principal shareholders with excessive compensation, fees or benefits;benefits, or could lead to material financial loss to the institution;


Imposes

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Imposed a number of requirements related to executive compensation that apply to all public companies, such as prohibition of broker discretionary voting in connection with a shareholder vote on executive compensation; mandatory shareholder “say on pay” (every one to three years) and “say on golden parachutes”; and clawback of incentive compensation from current or former executive officers following any accounting restatement;

EstablishesEstablished a modified version of the “Volcker Rule” and generally prohibits banks from engaging in proprietary trading or holding or obtaining an interest in a hedge fund or private equity fund, to the extent that it would exceed 3% of itsthe bank's Tier 1 capital. A bank’sbank's interest in any single hedge fund or private equity fund may not exceed 3% of the assets of that fund.


Joint Agency Guidance on Incentive Compensation. On June 21, 2010, federal banking regulators issued final joint agency guidance on Sound Incentive Compensation Policies. This guidance applies to executive and non-executive incentive compensation plans administered by banks. The guidance says that incentive compensation programs must:
Provide employees incentives that appropriately balance risk and reward.
Be compatible with effective controls and risk- management; and
Be supported by strong corporate governance, including active and effective oversight by the board;

The Federal Reserve reviews, as part of the regular, risk-focused examination process, the incentive compensation arrangements of the Company and other banking organizations. The findings of the supervisory initiatives are included in reports of examination and any deficiencies will be incorporated into the Company’s supervisory ratings, which can affect the Company’s ability to make acquisitions and take other actions.

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ITEM 1A.   RISK FACTORS.

In addition to the other information set forth in this report, you should carefully consider the factors discussed below. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this report.

Difficult market conditions have adversely affected and may continue to have an adverse affecteffect on our industry.

Since 2007, dramatic declines in the housing market, with falling home prices and increasing foreclosures and unemployment and under-employment have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities as well as major commercial and investment banks. These write-downs have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit haveThe protracted poor economy has led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected our business, financial condition and results of operations. We expecthave experienced only moderate improvement in these conditions in the recent past, and we do not expect significant improvement in the economy in the near future. There is a risk that economic conditions will deteriorate. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:

We face increased regulation of our industry, including as a result ofregulations promulgated under the Emergency Economic Stabilization Act of 2008 (the “EESA”), the American Recovery and Reinvestment Act of 2009 (the “ARRA”) and Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).Act. Compliance with such regulation will increase our costs, reduce existing sources of revenue and may limit our ability to pursue business opportunities.

Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage, and underwrite our customers become less predictive of future performance.

The process we use to estimate losses inherent in our loan portfolio requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans, which process may no longer be capable of accurate estimation and may, in turn, impact its reliability.

We may be required to pay significantly higher Federal Deposit Insurance Corporation premiums in the future if losses further deplete the FDIC deposit insurance fund.

There may be downward pressure on our stock price.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions and government sponsored entities.

We may face increased competition due to intensified consolidation of the financial services industry.


If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

The majority of our assets are loans, which if not repaid would result in losses to the Bank.

The Bank, like other lenders, is subject to credit risk, which is the risk of losing principal or interest due to borrowers’ failure to repay loans in accordance with their terms. Underwriting and documentation controls cannot mitigate all credit risk. A downturn in the economy or the real estate market in our market areas or a rapid increase in interest rates could have a negative effect on

Umpqua Holdings Corporation

collateral values and borrowers’ ability to repay. To the extent loans are not paid timely by borrowers, the loans are placed on non-accrual status, thereby reducing interest income. Further, under these circumstances, an additional provision for loan and lease losses or unfunded commitments may be required. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—”AllowanceOperations- “Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments”, “Provision for Loan and Lease Losses” and “Asset Quality and Non-Performing Assets”.

A large percentage of our loan portfolio is secured by real estate, in particular commercial real estate. Continued deteriorationDeterioration in the real estate market or other segments of our loan portfolio would lead to additional losses, which could have a material adverse effect on our business, financial condition and results of operations.

As of December 31, 2010,2013, approximately 82%74% of our total loan portfolio is secured by real estate, the majority of which is commercial real estate. As a result of increased levels of commercial and consumer delinquencies and declining real estate values, sine 2007 we have experienced elevated levels of net charge-offs and allowances for loan and lease reserves. Increases in commercial and consumer delinquency levels or continued declines in real estate market values would require increased net charge-offs and increases in the allowance for loan and lease losses, which could have a material adverse effect on our business, financial condition and results of operations and prospects.

Continued deterioration

Deterioration in the real estate market could result in loans that we have restructured to become delinquent and classified as non-accrual loans.


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At December 31, 2010,2013, impaired loans of $84.4$68.8 million were classified as performing restructured loans. We restructured the loans in response to borrower financial difficulty, and generally provided for a temporaryby providing modification of loan repayment terms. Loans are reported as restructured when we grant significant concessions to a borrower experiencing financial difficulties that we would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending theloan maturity dates or providing a lower interest rate than would be normally available for a transaction of similar risk. In exchange for these concessions, at the time of restructure, we require additional collateral to bring the loan to value to at most 100%. A further decline in the economic conditions in our general market areas or other factors could adversely impact borrowers with restructured loans and cause borrowers to become delinquent or otherwise default or call into question their ability to repay full interest and principal in accordance with the restructured terms, which would result in the restructured loan being reclassified as non-accrual.

a non-accrual loan.

The effects of the current economic recession have been particularly severe in our primary market areas in the Pacific Northwest, Northern California, and Nevada.

Substantially all of our loans are to businesses and individuals in Northern California, Oregon, Washington, and Nevada. The Pacific Northwest has had one of the nation’s highest unemployment rates and major employers in Oregon and Washington have implemented substantial employee layoffs or scaled back growth plans. Severe declines in housing prices and property values have been particularly acute in our primary market areas. The States of California, Oregon, Washington, and Nevada continue to face fiscal challenges, the long-term effects of which on each State’s economy cannot be predicted. A further deterioration in the economic conditions or a prolonged delay in economic recovery in our primary market areas could result in the following consequences, any of which could materially and adversely affect our business: loan delinquencies may increase; problem assets and foreclosures may increase putting further price pressures on valuations generally; demand for our products and services may decrease; low cost or noninterest bearing deposits may decrease; and collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with our existing loans.

The benefits of our FDIC loss-sharing agreements may be reduced or eliminated.

In connection with Umpqua Bank’s assumption of the banking operations of EvergreenBank,Evergreen Bank, Rainier Pacific Bank, and Nevada Security Bank, the Bank and the FDIC entered into Whole Bank Purchase and Assumption Agreements with Loss-Share.Loss-Share (collectively, "Loss Share Agreements"). Our decisions regarding the fair value of assets acquired, including the FDIC loss-sharing assets, could be inaccurate which could materially and adversely affect our business, financial condition, results of operations, and future prospects. prospects.Management makes various

assumptions and judgments about the collectability of the acquired loans, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of secured loans. In FDIC-assisted acquisitions that include loss-sharing agreements, we record a loss-sharing asset that reflects our estimate of the timing and amount of future losses that are anticipated to occur in and used to value the acquired loan portfolio. In determining the size of the loss-sharing asset, we analyze the loan portfolio based on historical loss experience, volume and classification of loans, volume and trends in delinquencies and nonaccruals, local economic conditions, and other pertinent information.

If our assumptions relating to the timing or amount of expected losses are incorrect, thereour operating results could be a negative impact on our operating results.negatively impacted. Increases in the amount of future losses in response to different economic conditions or adverse developments in the acquired loan portfolio may result in increased credit loss provisions. Changes in our estimate of the timing of those losses, specifically if those losses are to occur beyond the applicable loss-sharing periods, may result in impairments of the FDIC indemnification asset.

In addition, the Loss Share Agreements expire, by their terms on or before July 1, 2015. After expiration, we will no longer receive reimbursement from the FDIC for losses sustained in these acquired portfolios.
Our ability to obtain reimbursement under the loss-sharing agreements on covered assets depends on our compliance with the terms of the loss-sharing agreements.

Management must certify to the FDIC on a quarterly basis our compliance with the terms of the FDIC loss-sharing agreementsLoss share Agreements as a prerequisite to obtaining reimbursement from the FDIC for realized losses on covered assets. The required terms of the agreementsLoss Share Agreements are extensive and failure to comply with any of the guidelines could result in a specific asset or group of assets permanently losing their loss-sharing coverage. Additionally, management may decide to forgo loss-share coverage on certain assets to allow greater flexibility over the management of certain assets. As of December 31, 2010, $815.82013, covered assets were $366.1 million, or 7.0%3.1%, of the Company’s assets were covered by the aforementioned FDIC loss-sharing agreements.

Company's total assets.

Under the terms of the FDIC loss-sharing agreements, the assignment or transfer of a loss-sharing agreement to another entity generally requires the written consent of the FDIC. In addition, the Bank may not assign or otherwise transfer a loss-sharing agreement during its term without the prior written consent of the FDIC. No assurances can be given that we will manage the covered assets in such a way as to maintain loss-share coverage on all such assets.

FDIC-assisted acquisition opportunities may not become available

Our pending merger with Sterling, given its size and increased competition mayscope, will likely make it more difficult for us to successfully bid on failedengage in traditional M&A transactions in the near term.


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The successful closing and integration of our proposed merger with Sterling is presently our top priority and it will take significant resources over the next 12 to 24 months to accomplish that goal. During this integration phase it is unlikely that we would receive regulatory approval to acquire another bank transactions.

Our near-term business strategy includes analyzing and bidding on failing banks thatour ability to engage in traditional merger and acquisition transactions will be constrained over the FDIC plans to place in receivership. The FDIC may not place banks that meet our strategic objectives into receivership. Failed bank transactions are attractive opportunities in part because of loss sharing arrangements, or significant discounts, with the FDIC that limit the acquirer’s downside risk on the purchased loan portfolio. In addition, assets purchased from the FDIC are marked to their fair value and in many cases there often is little or no addition to goodwill arising from FDIC-assisted transaction. However, the bidding process for failing banks has become very competitive and the FDIC does not provide information about bids until after the failing bank is closed. We may not be able to match or beat the bids of other acquirers unless we bid aggressively by increasing the premium paid on assumed deposits or reducing the discount bid on assets purchased, which could make the acquisition less beneficial to the financial performance of the Bank.

near term.


A rapid change in interest rates, or maintenance of rates at historically high or low levels for an extended period, could make it difficult to maintain our current interest income spread and could result in reduced earnings.

Our earnings are largely derived from net interest income, which is interest income and fees earned on loans and investments, less interest paid on deposits and other borrowings. Interest rates are highly sensitive to many factors that are beyond the control of our management, including general economic conditions and the policies of various governmental and regulatory authorities. As interest rates change, net interest income is affected. With fixed rate assets (such as fixed rate loans and most investment securities) and liabilities (such as certificates of deposit), the effect on net interest income depends on the cash flows associated with the maturity of the asset or liability. Asset/liability management policies may not be successfully implemented and from time to time our risk position is not balanced. An unanticipated rapid decrease or increase in interest rates could have an adverse effect on the spreads between the interest rates earned on assets and the rates of interest paid on liabilities, and therefore on the level of net interest income. For instance, any rapid increase in interest rates in the future could result in

Umpqua Holdings Corporation

interest expense increasing faster than interest income because of fixed rate loans and longer-term investments. Historically low rates for an extended period of time result in reduced returns from the investment and loan portfolios. Further, substantially higher interest rates generally reduce loan demand and may result in slower loan growth than previously experienced. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—”Operations-“Quantitative and Qualitative Disclosures about Market Risk”.

Interest rate volatility and credit risk adjusted rate spreads may impact our financial assets and liabilities measured at fair value, particularly the fair value of our junior subordinated debentures.

The widening of the credit risk adjusted rate spreads on potential new issuances of junior subordinated debentures above our contractual spreads and reductions in three month LIBOR rates have contributed to the cumulative positive fair value adjustmentsadjustment in our junior subordinated debentures carried at fair value over the last three years.value. Tightening of these credit risk adjusted rate spreads and interest rate volatility may result in recognizing negative fair value adjustments charged to earnings in the future.

The Dodd-Frank Act and other recent legislative and regulatory initiatives contain numerous provisions and requirements that could detrimentally affect the Company’s business.

The Dodd-Frank Act and related regulations subject us and other financial institutions to additional restrictions, oversight, reporting obligations and costs, which could have an adverse impact on our business, financial condition, results of operations or the price of our common stock. In addition, this increased regulation of the financial services industry restricts the ability of firms within the industry to conduct business consistent with historical practices, including aspects such as compensation, interest rates, new and inconsistent consumer protection regulations and mortgage regulation, among others. Congress or state legislatures could also adopt laws reducing the amount that borrowers are otherwise contractually required to pay under existing loan contracts, require lenders to extend or restructure certain loans or limit foreclosure and collection remedies. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied.

We cannot predict the substance or impact of pending or future legislation or regulation, or the application thereof. Compliance with such current and potential regulation and scrutiny will significantly increase our costs, impede the efficiency of our internal business processes, may require us to increase our regulatory capital and may limit our ability to pursue business opportunities in an efficient manner. In response, we may be required to or choose to raise additional capital, which could have a dilutive effect on the existing holders of our common stock and adversely affect the market price of our common stock.

We are subject to extensive regulation under federal and state laws. These laws and regulations are primarily intended to protect customers, depositors and the deposit insurance fund, rather than shareholders. The Bank is an Oregon state-chartered commercial bank whose primary regulator is the DSBS. The Bank is also subject to the supervision by and the regulations of the DFI, the DBO, the Nevada Division of Financial Institutions, the FDIC, which insures bank deposits and the CFPB. Umpqua Investments is subject to extensive regulation by the SEC and the FINRA. Umpqua is subject to regulation and supervision by the Federal Reserve System, the SEC and NASDAQ. Federal and state regulations may place banks and brokerage firms at a competitive disadvantage compared to less regulated competitors such as finance companies, credit unions, mortgage banking companies and leasing companies. There is also the possibility that laws could be enacted that would prohibit a company from controlling both an FDIC-insured bank and a broker dealer, or restrict their activities if under common ownership. If we receive less than satisfactory results on regulatory examinations, we could be restricted from making acquisitions, adding new stores, developing new lines of business, or otherwise continuing our growth strategy for a period of time. Future changes in federal and state banking and brokerage regulations could adversely affect our operating results and ability to continue to compete effectively.

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We may be required to raise additional capital in the future, but that capital may not be available when it is needed, or it may only be available on unacceptable terms, which could adversely affect our financial condition and results of operations.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations or to support future FDIC-assisted acquisitions.operations. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we may not be able to raise additional capital, if needed, on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations and pursue our growth strategy could be materially impaired.

We and the Bank are currently well capitalized under applicable regulatory guidelines. However, our business could be negatively affected if we or the Bank failed to remain well capitalized. For example, because Umpqua Bank is well capitalized and we otherwise qualify as a financial holding company, we are permitted to engage in a broader range of activities than are permitted to a bank holding company. Loss of financial holding company status could require that we cease these broader activities. The banking regulators are authorized (and sometimes required) to impose a wide range of requirements, conditions, and restrictions on banks, thrifts, and bank holding companies that fail to maintain adequate capital levels. Further the new capital requirements of the Basel III Rules will become applicable to us beginning January 1, 2015.

New rules will require increased capital and restrict TRUPS as a component of as Tier 1 Capital.
In June 2013, federal banking regulators jointly issued the Basel III Rules. The rules impose new capital requirements and implement Section 171 of the Dodd Frank Act.  The new rules are to be phased in through 2019, beginning January 1, 2015.  Among other things, the rules will require that we maintain a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8%, and a leverage ratio of 4%.  In addition, we will have to maintain an additional capital conservation buffer of 2.5% of total risk weighted assets or be subject to limitations on dividends and other capital distributions, as well as limiting discretionary bonus payments to executive officers.  The new rules also restrict trust preferred securities/junior subordinated debentures ("TRUPS") from comprising more than 25% of our Tier 1 capital.  TRUPS now constitute approximately 18% of our Tier 1 capital. If an institution grows above $15 billion as a result of an acquisition, or organically grows above $15 billion and then makes an acquisition, the combined trust preferred issuances would be phased out of Tier 1 and into Tier 2 capital (75% in 2015 and 100% in 2016). It is possible the Company may accelerate redemption of the existing junior subordinated debentures.  This could result in adjustments to the fair value of these instruments including the acceleration of losses on junior subordinated debentures carried at fair value within non-interest income. The Company currently does not intend to redeem the junior subordinated debentures following the proposed merger in order to support regulatory total capital levels. The new rules may require us to raise more common capital or other capital that qualifies as Tier 1 capital. The application of more stringent capital requirements could, among other things, result in lower returns on invested capital and result in regulatory actions if we were to be unable to comply with such requirements. But based on the current components and levels of our capital and assets, we believe that we will be in compliance with the new capital requirements.
Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. An adverse regulatory action against us could detrimentally impact our access to liquidity sources. Our ability to borrow could also be impaired by factors that are nonspecific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole as evidenced by turmoil in the domestic and worldwide credit markets.

Our wholesale funding sources may prove insufficient to support our future growth or an unexpected reduction in deposits.

We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and

investments. If we grow more rapidly than any increase in our deposit balances, we are likely to become more dependent on these sources, which include Federal Home Loan Bank advances, proceeds from the sale of loans and liquidity resources at the holding company. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs, and our profitability would be adversely affected.

As a bank holding company that conducts substantially all of our operations through Umpquathe Bank, our banking subsidiary, our ability to pay dividends, repurchase our shares or to repay our indebtedness depends upon liquid assets held by the holding company and the results of operations of our subsidiaries.

Umpqua Holdings Corporation


21

Table of Contents

The Company is a separate and distinct legal entity from our subsidiaries and it receives substantially all of its revenue from dividends paid from Umpquathe Bank. There are legal limitations on the extent to which the Bank may extend credit, pay dividends or otherwise supply funds to, or engage in transactions with, us. Our inability to receive dividends from the Bank could adversely affect our business, financial condition, results of operations and prospects.

Our net income depends primarily upon Umpquathe Bank’s net interest income, which is the income that remains after deducting from total income generated by earning assets the expense attributable to the acquisition of the funds required to support earning assets (primarily interest paid on deposits). The amount of interest income is dependent on many factors including the volume of earning assets, the general level of interest rates, the dynamics of changes in interest rates and the levels of nonperforming loans. All of those factors affect the Bank’s ability to pay dividends to the holding company.

Company.

Various statutory provisions restrict the amount of dividends the Bank can pay to us without regulatory approval. The Bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet the “adequately capitalized” level in accordance with regulatory capital requirements. It is also possible that, depending upon the financial condition of the Bank and other factors, regulatory authorities could conclude that payment of dividends or other payments, including payments to us, is an unsafe or unsound practice and impose restrictions or prohibit such payments. Under Oregon law, the Bank may not pay dividends in excess of unreserved retained earnings, deducting there from, to the extent not already charged against earnings or reflected in a reserve, the following: (1) all bad debts, which are debts on which interest is past due and unpaid for at least six months, unless the debt is fully secured and in the process of collection; (2) all other assets charged-off as required by Oregon bank regulators or a state or federal examiner; and (3) all accrued expenses, interest and taxes of the institution. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition.

A significant decline in the company’s market valueCompany’s stock price or expected future cash flows, or a material adverse change in our results of operations or prospects, could result in an impairment of goodwill.

Recently,our goodwill

From time to time, the Company’s common stock has been tradingtraded at a price below its book value, including goodwill and other intangible assets.  The valuation of goodwill is estimated using discounted cash flows of forecasted earnings, estimated salesA significant and sustained decline in our stock price based on recent observable market transactions and market capitalization, based on current stock price.a significant decline in our expected future cash flows, a significant adverse change in the business climate or slower growth rates could result in impairment of our goodwill.  If impairment was deemed to exist, a write down of the assetgoodwill would occur with a charge to earnings. In the second quarter 2009, we recognized

We have a goodwill impairment charge of $112.0 million related to our Community Banking operating segment. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—“Goodwill and Other Intangible Assets”.

Agross deferred tax asset position comprises $9.6of $98.4 million of our total assets at December 31, 2010,2013, and we are required to assess the recoverability of this asset on an ongoing basis.

Deferred tax assets are evaluated on a quarterly basis to determine if they are expected to be recoverable in the future. Our evaluation considers positive and negative evidence to assess whether it is more likely than not that a portion of the asset will not be realized. The risk of a valuation allowance increases if continuing operating losses are incurred. Future negative operating performance or other negative evidence may result in a valuation allowance being recorded against some or all of this amount. A valuation allowance on our deferred tax asset could have a material adverse impact on our capital and results of operations.

Umpqua Holdings Corporation

We are pursuing an aggressive growth strategy that is expected to include mergers and acquisitions, which could create integration risks.

Umpqua is among the fastest-growing community financial services organizations in the United States. Since 2000, we have completed the acquisition and integration of 1011 other financial institutions. There is no assurance that future acquisitions will be successfully integrated. We have announced our intentcontinue to pursue FDIC-assistedtraditional merger and acquisition opportunities, traditional M&A transactions and to open new stores in Oregon, Washington and California to continue our growth strategy. If we pursue our growth strategy too aggressively, or if factors beyond management’s control divert attention away from our integration plans, we might not be able to realize some or all of the anticipated benefits. Moreover, we are dependent on the efforts of key personnel to achieve the synergies associated with our acquisitions. The loss of one or more of our key persons could have a material adverse effect upon our ability to achieve the anticipated benefits.

The financial services industry is highly competitive.

competitive with respect to deposits, loans and products.


22


We face pricing competition for loans and deposits. We also face competition with respect to customer convenience, product lines, accessibility of service and service capabilities. Our most direct competition comes from other banks, brokerages, mortgage companies and savings institutions. We also face competition from credit unions, government-sponsored enterprises, mutual fund companies, insurance companies and other non-bank businesses. This significant competition in attracting and retaining deposits and making loans as well as in providing other financial services throughout our market area may impact future earnings and growth.

Our success depends, in part, on the ability to adapt products and services to evolving industry standards. There is increasing pressure to provide products and services at lower prices. This can reduce net interest income and non-interest income from fee-based products and services. In addition, new technology-driven products and services are often introduced and adopted, which could require us to make substantial capital expenditures to modify or adapt existing products and services or develop new products and services. We may not be successful in introducing new products and services or those new products may not achieve market acceptance. We could lose business, be forced to price products and services on less advantageous terms to retain or attract clients, or be subject to cost increases. As a result, our business, financial condition or results of operations may be adversely affected.

Involvement in non-bank business creates risks associated with the securities industry.

Umpqua Investments’ retail brokerage operations present special risks not borne by community banks that focus exclusively on community banking. For example, the brokerage industry is subject to fluctuations in the stock market that may have a significant adverse impact on transaction fees, customer activity and investment portfolio gains and losses. Likewise, additional or modified regulations may adversely affect Umpqua Investments’ operations. Umpqua Investments is also dependent on a small number of established brokers, whose departure could result in the loss of a significant number of customer accounts. A significant decline in fees and commissions or trading losses suffered in the investment portfolio could adversely affect Umpqua Investments’ income and potentially require the contribution of additional capital to support its operations. Umpqua Investments is subject to claim arbitration risk arising from customers who claim their investments were not suitable or that their portfolios were too actively traded. These risks increase when the market, as a whole, declines. The risks associated with retail brokerage may not be supported by the income generated by those operations. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—”Operations-“Non-interest Income”.

Our banking and brokerage operations are subject to extensive government regulation that is expected to become more burdensome, increase our costs and make us less competitive compared to financial services firms that are not subject to the same regulation.

We and our subsidiaries are subject to extensive regulation under federal and state laws. These laws and regulations are primarily intended to protect customers, depositors and the deposit insurance fund, rather than shareholders. The Bank is an Oregon state-chartered commercial bank whose primary regulator is the Oregon Division of Finance and Corporate Securities. The Bank is also subject to the supervision by and the regulations of the Washington Department of Financial Institutions, the California Department of Financial Institutions, the Nevada Division of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”), which insures bank deposits. Umpqua Investments is subject to extensive regulation by the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority. Umpqua is subject to regulation and supervision by the Board of Governors of the Federal Reserve System, the SEC and NASDAQ. Federal and state regulations may place banks and brokerage firms at a competitive disadvantage compared to less regulated competitors such as finance companies, credit unions, mortgage banking companies and leasing companies. There is also the possibility that laws could be enacted that would prohibit a company from controlling both an FDIC-insured bank and a broker dealer, or restrict their activities if under common ownership. If we receive less than satisfactory results on regulatory examinations, we could be restricted from making acquisitions, adding new stores, developing new lines of business or otherwise continuing our growth

strategy for a period of time. Future changes in federal and state banking and brokerage regulations could adversely affect our operating results and ability to continue to compete effectively.

The value of the securities in our investment securities portfolio may be negatively affected by continued disruptions in securities markets.

The market for some of the investment securities held in our portfolio has become extremely volatile over the past three years. Volatile market conditions or deteriorating financial performance of the issuer or obligor may detrimentally affect the value of these securities. There can be no assurance that the declines in market value associated with these disruptions will not result in other-than-temporary or permanent impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our net income and capital levels.

The volatility of our mortgage banking business can adversely affect earnings if our mitigating strategies are not successful.

Changes in interest rates greatly affect the mortgage banking business. One of the principal risks in this area is prepayment of mortgages and the consequent detrimental effect on the value of mortgage servicing rights (“MSR”).rights. We may employ hedging strategies to mitigate this risk but if the hedging decisions and strategies are not successful, our net income could be adversely affected. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—”Operations-“Mortgage Servicing Rights”.

Our business is highly reliant on technology and our ability to manage the operational risks associated with technology.

Our business involves storing and processing sensitive consumer and business customer data. A cyber security breach may result in theft of such data or disruption of our transaction processing systems. We depend on internal systems and outsourced technology to support all aspectsthese data storage and processing operations. Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operations. Interruption A material breach of customer data security may negatively impact our business reputation and cause a loss of customers, result in increased expense to contain the event and/or failure of these systems creates arequire that we provide credit monitoring services for affected customers, result in regulatory fines and sanctions and/or result in litigation. Cyber security risk of business loss such as civil fines or damage claims from privacy breaches and adverse customer experience. Risk management programs are expensive to maintain and will not protect the Company from all risks associated with maintaining the security of customer information,data and the Company’s proprietary data from external and internal intrusions, disaster recovery and failures in the controls used by our vendors.

In addition, Congress and the legislatures of states in which we operate regularly consider legislation that would impose more stringent data privacy requirements.

Our business is highly reliant on third party vendors and our ability to manage the operational risks associated with outsourcing those services.


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We rely on third parties to provide services that are integral to our operations. These third party service providersvendors provide services that support our operations, including the storage and processing of sensitive consumer and business customer data, as well as our sales efforts. AnyA cyber security breach of a vendor’s system may result in theft of our data or disruption of business processes.  A material breach of customer data security at a service provider’s site may negatively impact our business reputation and cause a loss of customers; result in increased expense to contain the event and/or require that we provide credit monitoring services provided by these third parties, for affected customers, result in regulatory fines and sanctions and/or any reputational risk or damage they may suffer asresult in litigation.  In most cases, we will remain primarily liable to our customers for losses arising from a resultbreach of such disruptions could have an adverse effecta vendor’s data security system. We rely on our reputation, operationsoutsourced service providers to implement and maintain prudent cyber security controls.  We have procedures in place to assess a vendor’s cyber security controls prior to establishing a contractual relationship and to periodically review assessments of those control systems; however, these procedures are not infallible and a vendor’s system can be breached despite the procedures we employ. We have alliances with other companies that assist in our ability to meet the needs of our customers.sales efforts. In our assetwealth management business, we have a businessan alliance with Ferguson Wellman, a registered investment advisor to whom we refer customers for investment advice and asset management services. We cannot be sure that we will be able to maintain these relationships on favorable terms. We are dependent on third party service providers forIn addition, some of our data processing and information processing services that support our day-to-day banking and brokerage services. Some of these providers are provided by companies associated with our competitors. The loss of these third partyvendor relationships could produce disruption of servicedisrupt the services we provide to our customers and cause us to incur significant costsexpense in connection with replacing these services.

Store construction can disrupt banking activities and may not be completed on time or within budget, which could result in reduced earnings.

The Bank has, over the past several years, been transformed from a traditional community bank into a community-oriented financial services retailer. We have announced plans to build new stores in Oregon, Washington and Californiathroughout our current footprint as part of our de novo branching strategy. This includes our strategy of building “Neighborhood Stores.” We also continue to remodel acquired bank branches to resemble retail stores that include distinct physical areas or boutiques such as a “serious about service center,” an “investment opportunity center” and a “computer cafe.” Store construction involves significant expense and risks associated with locating store sites and delays in obtaining permits and completing construction. Remodeling involves significant expense, disrupts banking activities during the remodeling period, and presents a new look and feel to the banking services and products being offered. Financial constraints may delay remodeling projects. Customers may not react favorably to the construction-related activities or the remodeled look and feel. There are risks that construction or remodeling costs will exceed forecasted budgets and that there may be delays in completing the projects, which could cause disruption in those markets.

Damage to our brand and reputation could significantly harm our business and prospects.
Our brand and reputation are important assets. Our relationship with many of our customers is predicated upon our reputation as a high quality provider of financial services that adheres to the highest standards of ethics, service quality and regulatory compliance. We believe that our brand has been, and continues to be, well received in our industry, with current and potential customers, investors and employees. Our ability to attract and retain customers, investors and employees depends upon external perceptions of us. Damage to our reputation among existing and potential customers, investors and employees could cause significant harm to our business and prospects and may arise from numerous sources, including litigation or regulatory actions, failing to deliver minimum standards of service and quality, lending practices, inadequate protection of customer information, sales and marketing efforts, compliance failures, unethical behavior and the misconduct of employees. Adverse developments with respect to our industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us.
The market price of Umpqua Holdings Corporation

Changescommon stock after the Merger may be affected by factors different from those affecting the shares of Sterling or Umpqua currently.

Upon completion of the Merger, holders of Sterling common stock will become holders of Umpqua common stock. Umpqua’s business differs in accounting standards may impact how we report our financial conditionimportant respects from that of Sterling, and, accordingly, the results of operations.

Our accounting policiesoperations of the combined company and methods are fundamental to how we record and report our financial condition andthe market price of Umpqua common stock after the completion of the Merger may be affected by factors different from those currently affecting the independent results of Umpqua’s operations. From

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the merger.
Before the Merger and the related merger of the Bank and Sterling Savings Bank may be completed, Umpqua and Sterling must obtain approvals from the Federal Reserve Board, the FDIC, the Director of the DCBS, and the Director of the DFI. Other approvals, waivers or consents from regulators may also be required. In determining whether to grant these approvals the regulators consider a variety of factors, including the regulatory standing of each party. An adverse development in either party’s regulatory standing or other factors could result in an inability to obtain approval or delay their receipt. Regulators may impose conditions on the completion of the Merger or the bank merger or require changes to the terms of the Merger or the bank merger. Such conditions or changes could have the effect of delaying or preventing completion of the Merger or the bank merger or imposing additional costs on or limiting the

24


revenues of the combined company following the Merger and the bank merger, any of which might have an adverse effect on the combined company following the merger.
Combining the two companies may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the merger may not be realized.
Umpqua and Sterling have operated and, until the completion of the Merger, will continue to timeoperate, independently. The success of the Financial Accounting Standards Board (“FASB”) changesMerger, including anticipated benefits and cost savings, will depend, in part, on Umpqua’s ability to successfully combine and integrate the businesses of Umpqua and Sterling in a manner that permits growth opportunities and does not materially disrupt the existing customer relations nor result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. The loss of key employees could adversely affect Umpqua’s ability to successfully conduct its business, which could have an adverse effect on Umpqua’s financial accountingresults and reporting standardsthe value of its common stock. If Umpqua experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that governcause Umpqua and/or Sterling to lose customers or cause customers to remove their accounts from Umpqua and/or Sterling and move their business to competing financial institutions. Integration efforts between the preparationtwo companies will also divert management attention and resources. These integration matters could have an adverse effect on each of our financial statements. These changes canUmpqua and Sterling during this transition period and for an undetermined period after completion of the Merger on the combined company. In addition, the actual cost savings of the Merger could be difficultless than anticipated.
Termination of the Merger agreement could negatively impact Umpqua.
If the Merger agreement is terminated, there may be various consequences. For example, Umpqua’s businesses may have been impacted adversely by the failure to predictpursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the merger. Umpqua has also devoted significant internal resources to the pursuit of the Merger and can materially impact how we record and report our financial condition and resultsthe expected benefit of operations. In some cases, wethose resource allocations would be lost if the merger is not completed. Additionally, if the Merger agreement is terminated, the market price of Umpqua’s common stock could decline to the extent that the current market prices reflect a market assumption that the merger will be completed. If the Merger agreement is terminated under certain circumstances, Umpqua may be required to applypay to Sterling a newtermination fee of $75 million.
Umpqua will be subject to business uncertainties and contractual restrictions while the Merger is pending.
Uncertainty about the effect of the Merger on employees and customers may have an adverse effect on Umpqua. These uncertainties may impair Umpqua’s ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with Umpqua to seek to change existing business relationships. Retention of certain employees by Umpqua may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with Umpqua. If key employees depart because of issues relating to the uncertainty and difficulty of integration or revised standard retroactively, resultinga desire not to remain with Umpqua, Umpqua’s business could be harmed. In addition, subject to certain exceptions, each of Umpqua and Sterling has agreed to operate its business in the ordinary course prior to closing.
If the Merger is not completed, Umpqua will have incurred substantial expenses without realizing the expected benefits of the Merger.
Umpqua has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger agreement. If the Merger is not completed, Umpqua would have to recognize these expenses without realizing the expected benefits of the Merger.
The merger agreement limits Umpqua’s ability to pursue acquisition proposals and requires us to pay a restatementtermination fee of prior period financial statements.

$75 million under limited circumstances, including circumstances relating to acquisition proposals. Additionally, certain provisions of Umpqua’s articles of incorporation and bylaws may deter potential acquirers.

The Merger agreement prohibits Umpqua from soliciting, initiating, knowingly encouraging or knowingly facilitating certain third‑party acquisition proposals. The Merger agreement also provides that Umpqua must pay a termination fee in the amount of $75 million in the event that the Merger agreement is terminated under certain circumstances, including Umpqua’s failure to abide by certain obligations not to solicit acquisition proposals. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of Umpqua from considering or proposing such an acquisition. Additionally, Umpqua’s restated articles of incorporation authorize the board of directors, when evaluating a merger, tender offer or exchange offer, sale of substantially all assets or similar transaction to consider the effects on Umpqua’s employees, customers, suppliers and

25


communities as well as its shareholders. This provision can be amended only by the affirmative vote of at least 75% of outstanding shares. In addition, under both Oregon and Washington law, certain business combinations involving Umpqua or Sterling with their large shareholders are restricted without the approval of the board of directors of Umpqua or Sterling, respectively.
In addition, in connection with the merger agreement, certain funds associated with Warburg Pincus & Co. (which we refer to collectively as “Warburg Pincus”) and certain funds associated with Thomas H. Lee Advisors, LLC (which we refer to collectively as “Thomas H. Lee”), which collectively as of the Merger announcement date had the right to vote approximately 44% of the outstanding shares of Sterling common stock, agreed, subject to certain exceptions to vote their shares of Sterling common stock in favor of the Merger.
These provisions and agreements, and other provisions of Umpqua’s articles of incorporation or bylaws or of the Oregon Business Corporation Act, could make it more difficult for a third‑party to acquire control of Umpqua or Sterling or may discourage a potential competing acquirer.
Holders of Umpqua common stock will have a reduced ownership and voting interest after the merger and will exercise less influence over management.
Holders of Umpqua common stock currently have the right to vote in the election of the board of directors and on other matters affecting Umpqua. Upon the completion of the Merger, each Sterling shareholder who receives shares of Umpqua common stock will become a shareholder of Umpqua. It is currently expected that the former shareholders of Sterling as a group will receive shares in the Merger constituting approximately 49% of the outstanding shares of Umpqua common stock immediately after the Merger. As a result, current shareholders of Umpqua as a group will own approximately 51% of the outstanding shares of Umpqua common stock immediately after the Merger. Because of this, current Umpqua shareholders may have less influence than they now have on the management and policies of Umpqua.
Umpqua’s shareholders may not approve the increase in authorized shares of common stock necessary to pay the merger consideration to Sterling.
Umpqua’s shareholders will be asked to approve an amendment to Umpqua’s restated articles of incorporation to increase the number of authorized shares of no par value common stock from 200,000,000 to 400,000,000. Currently, Umpqua does not have sufficient shares of common stock authorized, unissued and unreserved under its restated articles of incorporation to allow for the issuance of the shares needed to complete the Merger. If Umpqua fails to obtain shareholder approval of the articles amendment proposal, the merger agreement may be terminated.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.


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ITEM 2. PROPERTIES.

The executive offices of Umpqua and Umpqua Investments are located at One SW Columbia Street in Portland, Oregon in office space that is leased. The main office of Umpqua Investments is located at 200 SW Market Street in Portland, Oregon in office space that is leased. The Bank owns its main officeBank's headquarters, located in Roseburg, Oregon.Oregon, is owned. At December 31, 2010,2013, the Bank conducted Community Bankingcommunity banking activities or operated Commercial Banking Centers at 183206 locations, in Northern California, Oregon and Washington along the I-5 corridor; in the San Francisco Bay area, Inland Foothills, Napa, and Coastal regions in California; in Bend and along the Pacific Coast of Oregon; in greater Seattle and Bellevue, Washington, and in Reno, Nevada, of which 6465 are owned and 119141 are leased under various agreements. As of December 31, 2010,2013, the Bank also operated 1113 facilities for the purpose of administrative and other functions, such as back-office support, of which four4 are owned and seven9 are leased. All facilities are in a good state of repair and appropriately designed for use as banking or administrative office facilities. As of December 31, 2010,2013, Umpqua Investments leased four stand-alone offices from unrelated third parties, one stand-alone office from the Bank, and also leased space in sixnine Bank stores under lease agreements that are based on market rates.

Additional information with respect to owned premises and lease commitments is included in Notes 8 and 20, respectively, of theNotes to Consolidated Financial Statementsin Item 8 below.

ITEM 3. LEGAL PROCEEDINGS.

In December 2010, we closed the settlement of two litigation cases filed in the Circuit Court of the State of Oregon for Multnomah County by Kevin D. Padrick, Trustee of the Summit Accommodators Liquidating Trust (case no. 0906-08488) and by Danae Miller and fifty-seven additional plaintiffs, who are creditors in the Summit bankruptcy (case no. 0909-12729), together with a related case filed by Padrick against various insurance companies who issued policies to Summit Accommodators, Inc., which was filed in U.S. District Court for the District of Oregon (case no. 3:10-CV195). The terms of the settlement are confidential and no party admitted liability, fault or wrongdoing.

Due to the nature of our business, we are involved in legal proceedings that arise in the ordinary course of our business. While the outcome of these matters is currently not determinable, we do not expect that the ultimate costs to resolve these matters will have a material adverse effect on our consolidated financial position, results of operations, cash flows, or cash flows.

our ability to close the proposed Sterling merger. 

In our Form 10-K for the period ending December 31, 2011, we initially reported on a class action lawsuit filed in the U.S. District Court for the Northern District of California against the Bank by Amber Hawthorne relating to overdraft fees and the posting order of point of sale and ACH items.  On October 25, 2013, U.S. District Judge Jon S. Tigar issued an order dismissing with prejudice the plaintiff’s claims for “unfair” prong of the California Unfair Competition Law (the UCL), breach of the implied covenant of good faith and fair dealing, breach of contract, and unjust enrichment.  Accordingly, the only claims remaining in the action are for alleged violation of the “unlawful” and “fraudulent” prongs of the UCL and for conversion.

The Company has also been named as a defendant in two separate class action lawsuits filed in Spokane County, Washington, Superior Court arising from the proposed Sterling merger (Case Nos. 13-2-03848-4 and 13-2-03904-9). Specifically, the plaintiffs in the actions allege that Sterling and its directors breached their fiduciary shareholder duties by agreeing to the merger terms and that the Company aided and abetted such breach. The actions further seek to enjoin the proposed Sterling merger. The court has consolidated the cases before a single judge for further administration. On January 16, 2014, the parties executed a Memorandum of Understanding (the “MOU”) that contains the essential terms of a settlement and dismissal of the consolidated cases. The MOU does not call for the payment of any money damages, but does require the defendants to make certain additional disclosures relating to the proposed merger and to pay the attorney fees, costs, and expenses of plaintiffs’ counsel incurred in connection with the action. The terms of the MOU further provided that if the parties cannot agree on the amount of fees, costs, and expenses to be paid by the defendants to plaintiffs’ counsel, such amount shall be decided by the court.

See Note 20 (Legal Proceedings) of the Notes to Consolidated Financial Statements in Item 8 below for a discussion of the Company’s involvement in litigation pertaining to Visa, Inc.

ITEM 4. (REMOVED AND RESERVED)MINE SAFETY DISCLOSURES.

Not applicable


PART II


ITEM 5. MARKET FOR REGISTRANT’SREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

(a)    Our Common Stockcommon stock is traded on The NASDAQ Global Select Market under the symbol “UMPQ.” As of December 31, 2010,2013, there were 200,000,000 common shares authorized for issuance. The following table presents the high and low sales prices of our common stock for each period, based on inter-dealer prices that do not include retail mark-ups, mark-downs or commissions, and cash dividends declared for each period:

Quarter Ended

  High   Low   Cash Dividend
Per Share
 

December 31, 2010

  $12.59    $10.42    $0.05  

September 30, 2010

  $13.15    $10.20    $0.05  

June 30, 2010

  $15.90    $11.34    $0.05  

March 31, 2010

  $14.24    $10.87    $0.05  

December 31, 2009

  $13.73    $9.41    $0.05  

September 30, 2009

  $11.84    $6.95    $0.05  

June 30, 2009

  $12.11    $7.58    $0.05  

March 31, 2009

  $14.54    $6.68    $0.05  

In April 2010, our shareholders increased our common shares authorized for issuance from 100,000,000 shares to 200,000,000 shares. In addition, they increased the authorized preferred shares from 2,000,000 shares to 4,000,000 shares.



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Quarter EndedHigh
 Low
 Cash Dividend Per Share
December 31, 2013$19.65
 $16.09
 $0.15
September 30, 2013$17.48
 $15.08
 $0.15
June 30, 2013$15.29
 $11.45
 $0.20
March 31, 2013$13.54
 $12.00
 $0.10
     
December 31, 2012$13.03
 $11.17
 $0.09
September 30, 2012$13.88
 $11.84
 $0.09
June 30, 2012$13.72
 $11.84
 $0.09
March 31, 2012$13.86
 $11.72
 $0.07
As of December 31, 2010,2013, our common stock was held by approximately 4,9004,299 shareholders of record, a number that does not include beneficial owners who hold shares in “street name”, or shareholders from previously acquired companies that have not exchanged their stock. At December 31, 2010,2013, a total of 2.1 million981,000 stock options, 401,000992,000 shares of restricted stock and 225,00095,000 restricted stock units were outstanding. Additional information about stock options, restricted stock and restricted stock units is included in Note 22 of theNotes to Consolidated Financial Statementsin Item 8 below and in Item 12 below.

The payment of future cash dividends is at the discretion of our Board of Directors and subject to a number of factors, including results of operations, general business conditions, growth, financial condition and other factors deemed relevant by the Board of Directors. Further, our ability to pay future cash dividends is subject to certain regulatory requirements and restrictions discussed in theSupervision and Regulationsection in Item 1 above.

In connection with the issuance and sale of preferred stock in the fourth quarter of 2008, the Company had entered into a Letter Agreement including the Securities Purchase Agreement—Standard Terms (the “Agreement”) with the U.S. Treasury. The Agreement had contained certain limitations on the payment of quarterly cash dividends on the Company’s common stock in excess of $0.19 per share, and on the Company’s ability to repurchase its common stock. The preferred stock had no maturity date and ranked senior to our common stock with respect to the payment of dividends and distribution of amounts payable upon liquidation, dissolution and winding up of the Company. The preferred had no general voting or participation rights, and no sinking fund requirements. In the event dividends on the preferred stock were not paid in full for six dividend periods, whether or not consecutive, the preferred stock holders would have had the right to elect two directors. Additional information about the preferred stock is included in Note 22 of theNotes to Consolidated Financial Statementsin Item 8 below. Following the company’s public offering in February 2010, Umpqua redeemed the preferred stock on February 17, 2010 and repurchased the warrants held by the Treasury on March 31, 2010 and thereby terminated the restrictions on the payment of common stock dividends under the Agreement. See Note 22 of theNotes to the Consolidated Financial Statement in Item 8 below.

During 2010, Umpqua’s2013, Umpqua's Board of Directors declaredapproved a quarterly cash dividend of $0.05$0.10 per common share for the first quarter, $0.20 per quarter.common share for the second quarter and $0.15 per common share for the third and fourth quarters. These dividends were made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset growth. We expect that the dividend rate will be reassessed on a quarterly basis by the Board of Directors in accordance with the dividend policy. Such dividends are subject to the restrictions described in the preceding paragraph.

Umpqua Holdings Corporation

We have a dividend reinvestment plan that permits shareholder participants to purchase shares at the then-current market price in lieu of the receipt of cash dividends. Shares issued in connection with the dividend reinvestment plan are purchased in open market transactions.

Equity Compensation Plan Information


The following table sets forth information about equity compensation plans that provide for the award of securities or the grant of options to purchase securities to employees and directors of Umpqua and its subsidiaries and its predecessors by merger that were in effect at December 31, 2010.

(shares in thousands)

  Equity Compensation Plan Information 
    
  (A  (B  (C
Plan category Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
  Weighted average exercise
price of outstanding
options, warrants and
rights(4)
  Number of securities
remaining available for
future issuance under  equity
compensation plans
excluding securities
reflected in column (A)
 

Equity compensation plans approved by security holders

   

2003 Stock Incentive Plan(1)

  1,623   $15.70    1,799  

2007 Long Term Incentive Plan(2)

  225        736  

Other(3)

  482   $11.91      
         

Total

  2,330   $14.82    2,535  

Equity compensation plans not approved by security holders

            
         

Total

  2,330   $14.82    2,535  
         

2013
.


28


(shares in thousands)     
  Equity Compensation Plan Information 
  (A) (B) (C)
  Number of securities   Number of securities
  to be issued Weighted average remaining available for future
  upon exercise of exercise price of issuance under equity
  outstanding options outstanding options, compensation plans excluding
Plan category warrants and rights warrants and rights (4) securities reflected in column (A)
Equity compensation plans      
approved by security holders      
2013 Stock Incentive Plan (1) 
 $
 3,831
2003 Stock Incentive Plan (1) 981
 $16.58
 
2007 Long Term Incentive Plan (1),(2) 95
 $
 
Other (3) 38
 $15.87
 
Total 1,114
 $16.17
 3,831
  
 
 
Equity compensation plans 
 
 
not approved by security holders 
 $
 
  
 
 
Total 1,114
 $16.17
 3,831

(1)At Umpqua’s 2010 Annual Meeting,the annual meeting on April 16, 2013, shareholders approved an amendmentthe 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 toor the 2007 Long Term Incentive Plan. The Company has options outstanding under two prior plans adopted in 1995 and 2000, respectively. With the adoption of the 2013 Plan, no additional grants can be issued under the previous plans. The Company also assumed various plans in connection with mergers and acquisitions but does not make an additional two million shares of stock available for issuance through awards of incentive stock options, nonqualified stock options or restricted stock grants provided awards of stockunder those plans. Stock options and restricted stock grants underawards generally vest ratably over three to five years and are recognized as expense over that same period of time. Under the 2003 Stock Incentive Plan, when added to options outstanding under all other plans, are limited to a maximum 10%terms of the outstanding shares2013 Plan, options and awards generally vest ratably over a period of three to five years, the exercise price of each option equals the market price of the Company's common stock on a fully diluted basis. The Plan’s terminationthe date was extended to June 30, 2015.of the grant, and the maximum term is ten years.
(2)
At Umpqua’s 2007 Annual Meeting, shareholders approved a 2007 Long Term Incentive Plan. The plan authorized the issuance of one million shares of stock through awards of performance-based restricted stock unit grants to executive officers. TargetThere were no grants approved to be issued in 2013 and target grants of 111,00020,000 and maximum grants of 194,00025,000 were approved to be issued in 2007, target grants of 105,000 and maximum grants of 183,000 were approved to be issued in 2008, and target grants of 65,000 and maximum grants of 114,000 were approved to be issued in 20092012 under this plan. During 2008, 76,000 units forfeited upon the retirement of an executive. During 2009, 23,0002011, 63,300 units vested and were released and 57,00047,475 units forfeited upon the retirement of an executive.forfeited. During 2010, 16,0002012, no units vested and were released and 94,000113,750 units forfeited upon the retirement of an executive.forfeited. During 2013, no units vested and were released and 35,000 units forfeited. As of December 31, 2010, 197,0002013, 95,000 restricted stock units are expected to vest if the current estimate of performance-based targets is satisfied, and would result in 764,000there are no securities available for future issuance.
(3)Includes other Umpqua stock plans and stock plans assumed through previous mergers. Includes 24,000 shares issued under North Bay Bancorp’s stock option plans, having a weighted average exercise price of $17.17. Includes 270,000 shares issued under all other previously acquired companies’ stock option plans, having a weighted average exercise price of $8.58 per share.
(4)Weighted average exercise price is based solely on securities with an exercise price.

(b)Not applicable.


(b)    Not applicable.

(c)    The following table provides information about repurchases of common stock by the Company during the quarter ended December 31, 2010:

Period  Total number
of Shares
Purchased(1)
   Average Price
Paid per Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced  Plan(2)
   Maximum Number
of Remaining
Shares that May
be Purchased at
Period End under
the Plan
 

10/1/10 - 10/31/10

   231    $11.31          1,542,945  

11/1/10 - 11/30/10

       $          1,542,945  

12/1/10 - 12/31/10

       $          1,542,945  
              

Total for quarter

   231    $11.31         

2013

29


Period 
Total number
of Common Shares
Purchased (1)
 
Average Price
Paid per Common Share
 Total Number of Shares Purchased as Part of Publicly Announced Plan (2) Maximum Number of Remaining Shares that May be Purchased at Period End under the Plan
10/1/13 - 10/31/13 200
 $16.40
 
 12,013,429
11/1/13 - 11/30/13 228,282
 $17.32
 
 12,013,429
12/1/13 - 12/31/13 37,031
 $18.88
 
 12,013,429
Total for quarter 265,513
 $17.54
 
  
(1)Shares repurchased by the Company during the quarter consist of cancellation of 2311,134 restricted shares to pay withholding taxes. There were no264,379 shares tendered in connection with option exercises and no shares were repurchased pursuant to the Company’s publicly announced corporate stock repurchase plan described in (2) below.

(2)
The Company’s share repurchase plan, which was first approved by the Board and announced in August 2003, originally authorized the repurchase of up to 1.0 million shares. Prior to 2008, the authorization was amended on September 29, 2011 to increase the number of common shares available for repurchase limitunder the plan to 6.015 million shares. OnThe repurchase program was extended in April 21, 2009, the Board of Directors approved an extension2013 to the expiration date of the common stock repurchase plan torun through June 30, 2011.2015. As of December 31, 2010,2013, a total of 1.512.0 million shares remained available for repurchase. The Company repurchased no98,027 shares in 2013, 512,280 shares in 2012, and 2.5 million shares under the repurchase plan in 2010 or 2009.2011. The timing and amount of future repurchases will depend upon the market price for our common stock, securities laws restricting repurchases, asset growth, earnings, and our capital plan.

During the year ended December 31, 2010, there


There were 4,515438,136 and 37,720 shares tendered in connection with option exercises. Duringexercises during the yearyears ended December 31, 2009, there were no shares tendered in connection with option exercises.2013 and 2012, respectively. Restricted shares cancelled to pay withholding taxes totaled 12,44348,514 and 11,25745,873 shares during the years ended December 31, 20102013 and 2009,2012, respectively. RestrictedThere were no restricted stock units cancelled to pay withholding taxes totaled 5,583 during the yearyears ended December 31, 2010. Restricted stock units cancelled to pay withholding taxes totaled 8,259 during the year ended December 31, 2009.

Umpqua Holdings Corporation

2013STOCK PERFORMANCE GRAPH and

2012, respectively.


30


Stock Performance Graph

The following chart, which is furnished not filed, compares the yearly percentage changes in the cumulative shareholder return on our common stock during the five fiscal years ended December 31, 2010,2013, with (i) the Total Return Index for NASDAQ Bank Stocks (ii) the Total Return Index for The Nasdaq Stock Market (U.S. Companies) and (iii) the Standard and Poor’s 500. This comparison assumes $100.00 was invested on December 31, 2005,2008, in our common stock and the comparison indices, and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. Price information from December 31, 20052008 to December 31, 2010,2013, was obtained by using the NASDAQ closing prices as of the last trading day of each year.

   Period Ending 
 12/31/2005  12/31/2006  12/31/2007  12/31/2008  12/31/2009  12/31/2010 

Umpqua Holdings Corporation

 $100.00   $105.36   $56.91   $56.05   $52.98   $48.91  

Nasdaq Bank Stocks

 $100.00   $113.82   $91.16   $71.52   $59.87   $68.34  

Nasdaq U.S.

 $100.00   $110.39   $122.15   $73.32   $106.57   $125.91  

S&P 500

 $100.00   $115.79   $122.16   $76.96   $97.33   $111.99  

 Period Ending
12/31/200812/31/200912/31/201012/31/201112/31/201212/31/2013
Umpqua Holdings Corporation$100.00$93.10$85.95$89.49$87.45$149.79
Nasdaq Bank Stocks$100.00$65.67$74.97$67.10$79.64$143.84
Nasdaq U.S.$100.00$87.24$103.08$102.26$120.42$281.22
S&P 500$100.00$79.68$91.68$93.61$108.59$228.19



31


ITEM 6. SELECTED FINANCIAL DATA.

Umpqua Holdings Corporation

Annual Financial Trends


(in thousands, except per share data)

    2010   2009  2008   2007   2006 

Interest income

  $488,596    $423,732   $442,546    $488,392    $405,941  

Interest expense

   93,812     103,024    152,239     202,438     143,817  
     

Net interest income

   394,784     320,708    290,307     285,954     262,124  

Provision for non-covered loan and lease losses

   113,668     209,124    107,678     41,730     2,552  

Provision for covered loan and lease losses

   5,151                     

Non-interest income

   75,904     73,516    107,118     64,829     53,525  

Non-interest expense

   311,063     267,178    215,588     210,804     177,104  

Goodwill impairment

        111,952    982            

Merger related expenses

   6,675     273         3,318     4,773  
     

Income (loss) before provision for (benefit from) income taxes

   34,131     (194,303  73,177     94,931     131,220  

Provision for (benefit from) income taxes

   5,805     (40,937  22,133     31,663     46,773  
     

Net income (loss)

   28,326     (153,366  51,044     63,268     84,447  

Preferred stock dividends

   12,192     12,866    1,620            

Dividends and undistributed earnings allocated to participating securities

   67     30    154     187     192  
     

Net earnings (loss) available to common shareholders

  $16,067    $(166,262 $49,270    $63,081    $84,255  
     

YEAR END

         

Assets

  $11,668,710    $9,381,372   $8,597,550    $8,340,053    $7,344,236  

Earning assets

   10,374,131     8,344,203    7,491,498     7,146,841     6,287,202  

Non-covered loans and leases(1)

   5,658,987     5,999,267    6,131,374     6,055,635     5,361,862  

Covered loans and leases

   785,898                     

Deposits

   9,433,805     7,440,434    6,588,935     6,589,326     5,840,294  

Term debt

   262,760     76,274    206,531     73,927     9,513  

Junior subordinated debentures, at fair value

   80,688     85,666    92,520     131,686       

Junior subordinated debentures, at amortized cost

   102,866     103,188    103,655     104,680     203,688  

Common shareholders’ equity

   1,642,574     1,362,182    1,284,830     1,239,938     1,156,211  

Total shareholders’ equity

   1,642,574     1,566,517    1,487,008     1,239,938     1,156,211  

Common shares outstanding

   114,537     86,786    60,146     59,980     58,080  

AVERAGE

         

Assets

  $10,830,486    $8,975,178   $8,342,005    $7,897,568    $6,451,660  

Earning assets

   9,567,341     7,925,014    7,215,001     6,797,834     5,569,619  

Non-covered loans and leases(1)

   5,783,452     6,103,666    6,118,540     5,822,907     4,803,509  

Covered Loans and leases

   681,569                     

Deposits

   8,607,980     7,010,739    6,459,576     6,250,521     5,003,949  

Term debt

   261,170     129,814    194,312     57,479     58,684  

Junior subordinated debentures

   184,134     190,491    226,349     221,833     187,994  

Common shareholders’ equity

   1,589,393     1,315,953    1,254,730     1,222,628     970,394  

Total shareholders’ equity

   1,657,544     1,519,119    1,281,220     1,222,628     970,394  

Basic common shares outstanding

   107,922     70,399    60,084     59,828     52,311  

Diluted common shares outstanding

   108,153     70,399    60,424     60,404     52,990  

PER COMMON SHARE DATA

         

Basic earnings (loss)

  $0.15    $(2.36 $0.82    $1.05    $1.61  

Diluted earnings (loss)

   0.15     (2.36  0.82     1.04     1.59  

Book value

   14.34     15.70    21.36     20.67     19.91  

Tangible book value(2)

   8.39     8.33    8.76     7.92     8.21  

Cash dividends declared

   0.20     0.20    0.62     0.74     0.60  

Umpqua Holdings Corporation

(dollars in thousands)

 

          
    2010   2009   2008   2007   2006 

PERFORMANCE RATIOS

          

Return on average assets(3)

   0.15%     -1.85%     0.59%     0.80%     1.31%  

Return on average common shareholders’ equity(4)

   1.01%     -12.63%     3.93%     5.16%     8.68%  

Return on average tangible common shareholders’ equity(5)

   1.76%     -26.91%     9.99%     13.05%     20.79%  

Efficiency ratio(6), (7)

   66.90%     95.34%     54.08%     60.62%     57.32%  

Average common shareholders’ equity to average assets

   14.68%     14.66%     15.04%     15.48%     15.04%  

Leverage ratio(8)

   10.56%     12.79%     12.38%     9.24%     10.28%  

Net interest margin (fully tax equivalent)(9)

   4.17%     4.09%     4.07%     4.24%     4.74%  

Non-interest revenue to total net revenue(10)

   16.13%     18.65%     26.95%     18.48%     16.96%  

Dividend payout ratio(11)

   133.33%     -8.47%     75.61%     70.48%     37.27%  

ASSET QUALITY

          

Non-covered, non-performing loans

  $  145,248    $  199,027    $  133,366    $  91,099    $  9,058  

Non-covered, non-performing assets

   178,039     223,593     161,264     98,042     9,058  

Allowance for non-covered loan and lease losses

   101,921     107,657     95,865     84,904     60,090  

Net charge-offs

   119,404     197,332     96,717     21,994     574  

Non-covered, non-performing loans to total loans

   2.57%     3.32%     2.18%     1.50%     0.17%  

Non-covered, non-performing assets to total assets

   1.53%     2.38%     1.88%     1.18%     0.12%  

Allowance for non-covered loan and lease losses to total non-covered loans and leases

   1.80%     1.79%     1.56%     1.40%     1.12%  

Allowance for credit losses to total non-covered loans

   1.82%     1.81%     1.58%     1.42%     1.15%  

Net charge-offs to average non-covered loans and leases

   2.06%     3.23%     1.58%     0.38%     0.01%  

 20132012201120102009
Interest income$442,846
$456,085
$501,753
$488,596
$423,732
Interest expense37,881
48,849
73,301
93,812
103,024
Net interest income404,965
407,236
428,452
394,784
320,708
Provision for non-covered loan and lease losses16,829
21,796
46,220
113,668
209,124
(Recapture of) provision for covered loan and lease losses(6,113)7,405
16,141
5,151

Non-interest income121,441
136,829
84,118
75,904
73,516
Non-interest expense355,825
357,314
338,611
311,063
267,178
Goodwill impairment



111,952
Merger related expenses8,836
2,338
360
6,675
273
   Income (loss) before provision for (benefit from) income taxes151,029
155,212
111,238
34,131
(194,303)
Provision for (benefit from) income taxes52,668
53,321
36,742
5,805
(40,937)
Net income (loss)98,361
101,891
74,496
28,326
(153,366)
Preferred stock dividends


12,192
12,866
Dividends and undistributed earnings allocated to participating securities788
682
356
67
30
Net earnings (loss) available to common shareholders$97,573
$101,209
$74,140
$16,067
$(166,262)
      
YEAR END     
Assets$11,636,112
$11,795,443
$11,562,858
$11,668,710
$9,381,372
Earning assets10,267,981
10,465,505
10,263,923
10,374,131
8,344,203
Non-covered loans and leases (1)
7,354,403
6,681,080
5,888,098
5,658,987
5,999,267
Covered loans and leases, net363,992
477,078
622,451
785,898

Deposits9,117,660
9,379,275
9,236,690
9,433,805
7,440,434
Term debt251,494
253,605
255,676
262,760
76,274
Junior subordinated debentures, at fair value87,274
85,081
82,905
80,688
85,666
Junior subordinated debentures, at amortized cost101,899
110,985
102,544
102,866
103,188
Common shareholders' equity1,727,426
1,724,039
1,672,413
1,642,574
1,362,182
Total shareholders' equity1,727,426
1,724,039
1,672,413
1,642,574
1,566,517
Common shares outstanding111,973
111,890
112,165
114,537
86,786
      
AVERAGE     
Assets$11,507,688
$11,499,499
$11,600,435
$10,830,486
$8,975,178
Earning assets10,224,606
10,252,167
10,332,242
9,567,341
7,925,014
Non-covered loans and leases (1)
6,950,740
6,153,116
5,723,771
5,783,452
6,103,666
Covered loans and leases, net416,862
554,078
707,026
681,569

Deposits9,057,673
9,124,619
9,301,978
8,607,980
7,010,739
Term debt252,546
254,601
257,496
261,170
129,814
Junior subordinated debentures189,237
187,139
184,115
184,134
190,491
Common shareholders' equity1,729,083
1,701,403
1,671,893
1,589,393
1,315,953
Total shareholders' equity1,729,083
1,701,403
1,671,893
1,657,544
1,519,119
Basic common shares outstanding111,938
111,935
114,220
107,922
70,399
Diluted common shares outstanding112,176
112,151
114,409
108,153
70,399
      
PER COMMON SHARE DATA     
Basic earnings (loss)$0.87
$0.90
$0.65
$0.15
$(2.36)
Diluted earnings (loss)0.87
0.90
0.65
0.15
(2.36)
Book value15.43
15.41
14.91
14.34
15.70

32


Tangible book value (2)
8.49
9.28
8.87
8.39
8.33
Cash dividends declared0.60
0.34
0.24
0.20
0.20
      
(dollars in thousands)     
 20132012201120102009
PERFORMANCE RATIOS     
Return on average assets (3)
0.85%0.88%0.64%0.15%(1.85)%
Return on average common shareholders' equity (4)
5.64%5.95%4.43%1.01%(12.63)%
Return on average tangible common shareholders' equity (5)
9.78%9.87%7.47%1.76%(26.91)%
Efficiency ratio (6), (7)
68.68%65.54%65.58%66.90%95.34 %
Average common shareholders' equity to average assets15.03%14.80%14.41%14.68%14.66 %
Leverage ratio (8)
10.90%11.44%10.91%10.56%12.79 %
Net interest margin (fully tax equivalent) (9)
4.01%4.02%4.19%4.17%4.09 %
Non-interest revenue to total net revenue (10)
23.07%25.15%16.41%16.13%18.65 %
Dividend payout ratio (11)
68.97%37.78%36.92%133.33%(8.47)%
      
ASSET QUALITY     
Non-covered, non-performing loans and leases$35,321
$70,968
$91,383
$145,248
$199,027
Non-covered, non-performing assets57,154
88,106
125,558
178,039
223,593
Allowance for non-covered loan and lease losses85,314
85,391
92,968
101,921
107,657
Net non-covered charge-offs16,906
29,373
55,173
119,404
197,332
Non-covered, non-performing loans and leases to non-covered loans and leases0.48%1.06%1.55%2.57%3.32 %
Non-covered, non-performing assets to total assets0.49%0.75%1.09%1.53%2.38 %
Allowance for non-covered loan and lease     
    losses to total non-covered loans and leases1.16%1.28%1.58%1.80%1.79 %
Allowance for non-covered credit losses to non-covered loans and leases1.18%1.30%1.59%1.82%1.81 %
Net charge-offs to average non-covered loans and leases0.24%0.48%0.96%2.06%3.23 %
(1)Excludes loans held for sale
(2)Average common shareholders’shareholders' equity less average intangible assets (excluding MSR) divided by shares outstanding at the end of the year. See Management’s Discussion and Analysis of Financial Condition and Results of Operations-“Results of Operations - Overview” for the reconciliation of non-GAAP financial measures, in Item 7 of this report.
(3)Net earnings (loss) available to common shareholders divided by average assets.
(4)Net earnings (loss) available to common shareholders divided by average common shareholders’shareholders' equity.
(5)Net earnings (loss) available to common shareholders divided by average common shareholders’shareholders' equity less average intangible assets. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—”Operations-“Results of Operations - Overview” for the reconciliation of non-GAAP financial measures, in Item 7 of this report.
(6)Non-interest expense divided by the sum of net interest income (fully tax equivalent) and non-interest income.
(7)The efficiency ratio calculation includes goodwill impairment charges of $112.0 million and $1.0 million in 2009 and 2008, respectively.2009. Goodwill impairment losses are a non-cash expense that have no direct effect on the Company’s or the Bank’s liquidity or capital ratios.
(8)Tier 1 capital divided by leverage assets. Leverage assets are defined as quarterly average total assets, net of goodwill, intangibles and certain other items as required by the Federal Reserve.
(9)Net interest margin (fully tax equivalent) is calculated by dividing net interest income (fully tax equivalent) by average interest earnings assets.
(10)Non-interest revenue divided by the sum of non-interest revenue and net interest income
(11)Dividends declared per common share divided by basic earnings per common share.


ITEM 7. MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS AND RISK FACTORS


See the discussion of forward-looking statements and risk factors in Part I Item 1 and Item 1A of this report.

EXECUTIVE OVERVIEW


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Significant items for the year ended December 31, 20102013 were as follows:


Financial Performance 
Capital, FDIC Assisted Acquisitions and Growth Initiatives

Raised $303.6 million through a public offering by issuing 8,625,000 shares ofNet earnings available to common stock and 18,975,000 depository shares, which were converted into common stock. After deducting underwriting discounts and commissions and offering expenses, net proceeds to the Company were $288.1 million. The proceeds from the offering qualify as Tier 1 capital and were used to redeem the preferred stock issued to the United States Department of the Treasury (“U.S. Treasury”) under the TARP Capital Purchase program (“CPP”), to fund FDIC-assisted acquisition opportunities and for general corporate purposes.

Redeemed all of the outstanding preferred stock issued to the U.S. Treasury under the TARP CPP for an aggregate purchase price of $214.2 million. Also, repurchased the common stock warrant issued to the U.S. Treasury for $4.5 million. This represents full repayment of all TARP obligations and cancellation of all equity interests in the Company held by the U.S. Treasury.

Increased our total risk based capital ratio to 17.6% as of December 31, 2010, compared to 17.2% as of December 31, 2009, due to the successful public stock offering completed in February 2010, partially offset by the redemption of preferred stock issued to the U.S. Treasury and growth in total assets from FDIC-assisted transactions.

Declared cash dividends of $0.05 per common share for each quarter in 2010. In determining the amount of dividends to be paid, we consider capital preservation, expected asset growth, projected earnings and our overall dividend pay-out ratio.

Umpqua Bank entered into purchase and assumption agreements with the FDIC to purchase certain assets and assume certain liabilities of EvergreenBank (“Evergreen”) in Seattle, Washington, Rainier Pacific Bank (“Rainier”) in Tacoma, Washington, and Nevada Security Bank (“Nevada Security”) in Reno, Nevada. Total assets assumed were $353.3 million, $721.2 million and $437.6 million, respectively, and resulted in six and 14 new stores in the Washington market, and three in the greater Reno, Nevada area, one in Incline Village, Nevada, and one in Roseville, California.

Opened a new Commercial Banking Center in Walnut Creek, California, and Community Banking stores in Portland, Oregon, Santa Rosa, California, and Seattle, Washington.

Launched our new Trust Services Group and new Debt Capital Markets Group to provide additional products and services to our customers.

Financial Performance

Net earningsshareholders per diluted common share was $0.15 in 2010,were $0.87 for the year ended December 31, 2013, as compared to net loss of $2.36 per diluted common share earned in 2009. The increase in net$0.90 for the year ended December 31, 2012.  Operating earnings per diluted common share is principally attributed to reduced provision for loan and lease losses and no goodwill impairment in 2010. Operating income per diluted common share, defined as earnings available to common shareholders before net gains or losses on junior subordinated debentures carried at fair value, net of tax bargain purchase gains on acquisitions, net of tax,and merger related expenses, net of tax, and goodwill impairment divided by the same diluted share total used in determining diluted earnings per common share, was $0.12 in 2010,were $0.94 for the year ended December 31, 2013, as compared to operating lossincome per diluted common share of $0.82 in 2009.$0.93 for the year ended December 31, 2012.  Operating income per diluted common share is

considered a “non-GAAP” financial measure.  More information regarding this measurement and reconciliation to the comparable GAAP measurement is provided under the heading Results of Operations - Overview below. 

Umpqua Holdings Corporation

considered a “non-GAAP” financial measure. More information regarding this measurement and reconciliation to the comparable GAAP measurement is provided under the headingResults of Operations—Overviewbelow.

Net interest margin, on a tax equivalent basis, increasedwas 4.01% for the year ended December 31, 2013, compared to 4.17% in 2010 from 4.09% in 2009.4.02% for the year ended December 31, 2012.  The increasedecrease in net interest margin resulted from the decline in non-covered loan and lease yields, the decline in investment yields, an increase in interest bearing cash, the decrease in average investment balances and in average covered loan balances, partially offset by the increase in average coverednon-covered loans and leases outstanding, increased yield onthe increase in non-interest bearing deposits, and the decrease in the cost of interest bearing deposits. Excluding the impact of loan disposal gains from the covered loan portfolio as a result of payoffs ahead of expectations, and declining costs of interest bearing deposits, partially offset by interestand fee reversals of newon non-accrual loans, a decline in non-covered loans outstanding,our adjusted net interest margin was 3.89% for the impact of holding much higher levels of interest bearing cash, and the purchase of low-yielding taxable investments securities during the current year ended December 31, 2013, as compared to the prior year. Excluding a $3.3 million reversal of interest income on loans in 2010, the tax equivalentadjusted net interest margin would have been 4.21%.

We recorded gains of $5.0 million in3.86% for the income statement representingyear ended December 31, 2012. Adjusted net interest margin is considered a “non-GAAP” financial measure. More information regarding this measurement and reconciliation to the change in fair value on our junior subordinated debentures measured at fair value in 2010, compared to gainscomparable GAAP measurement is provided under the heading Results of $6.5 million in 2009.

Operations - Overview below. 


Mortgage banking revenue was $21.2$78.9 million in 2010,for 2013, compared to $18.7$84.2 million in 2009.for 2012.  Closed mortgage volume increased 4%decreased 12% in the current year-to-date over the prior year same period due to anlower refinancing activity attributable to the increase in purchase and refinancing activity, resulting from historically low mortgage interest rates.

rates, partially offset by increased purchase activity driven by continued improvement of the housing market.


Total gross non-covered loans and leases decreased to $5.7were $7.4 billion as of December 31, 2010, a decrease2013, an increase of $340.3$673.3 million, or 5.7%10.1%, as compared to December 31, 2009.2012.  This decreaseincrease is principally attributable to charge-offs of $128.5 million, transfers to otherincreased commercial real estate, owned of $41.5 million, loans sold of $38.7 million,commercial, and net loan paydowns of $146.3 millionresidential mortgage production during the year.

year as well as the acquired FinPac lease portfolio.

Total deposits were $9.4$9.1 billion as of December 31, 2010, an increase2013, a decrease of $2.0 billion,$261.6 million, or 26.8%2.8%, as compared to December 31, 2009. Excluding the deposits acquired through FDIC-assisted acquisitions, the annualized organic deposit growth rate was 13.3%2012.

  The decline resulted primarily from customer transfers of balances to securities sold under agreements to repurchase and from anticipated run-off of higher priced money market and time deposits.

Total consolidated assets were $11.7$11.6 billion as of December 31, 2010,2013, as compared to $9.4$11.8 billion as of at December 31, 2009, representing an increase of $2.3 billion or 24.4%2012.  The increase is primarily attributable to the FDIC-assisted acquisitions of Evergreen, Rainier, and Nevada Security and organic growth in deposits.


Credit Quality

Non-covered, non-performing assets decreased to $178.0$57.2 million, or 1.53%0.49% of total assets, as of December 31, 2010,2013, as compared to $223.6$88.1 million, or 2.38%0.75% of total assets, as of December 31, 2009.2012.  Non-covered, non-performing loans and leases decreased to $145.2$35.3 million, or 2.57% of non-covered total loans, as of December 31, 2010, compared to $199.0 million, or 3.32%0.48% of total non-covered loans and leases, as of December 31, 2009. Non-covered, non-accrual2013, as compared to $71.0 million, or 1.06% of total non-covered loans and leases as of December 31, 2012.  Non-accrual loans have been written-down to their estimated net realizable values.

Net charge-offs on non-covered loans were $119.4$16.9 million in 2010,for the year ended December 31, 2013, or 2.06%0.24% of average non-covered loans and leases, as compared to net charge-offs of $197.3$29.4 million, or 3.23%0.48% of average non-covered loans and leases, in 2009. for the year ended December 31, 2012.  

The overall improving trends in credit quality indicators in the current year has contributed to the decrease in net charge-offs.

Provisionprovision for non-covered loan and lease losses in 2010 was $113.7$16.8 million for 2013, as compared to $209.1$21.8 million recognized for 2012. This change resulted primarily from a decrease in 2009. For the first time since 2005, provision expense was less than net charge offs for the year,charge-offs as a result of improving conditionscontinued reduction of non-performing loans and leases.


Capital and Growth Initiatives

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Total risk based capital decreased to 14.7% as of December 31, 2013, compared to 16.5% as of December 31, 2012, due to the increase in goodwill and risk-weighted assets as compared to December 31, 2012, as a result of the non-coveredFinPac acquisition and organic loan portfolio.

growth.


Declared cash dividends of $0.60 per common share for 2013 compared to $0.34 per common share for 2012.

Completed the acquisition of FinPac in July 2013 and announced in September 2013, the proposed merger with Sterling.
Opened four new Home Lending offices and four new Community Banking stores.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

The SEC defines “critical accounting policies” as those that require application of management’smanagement's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Our significant accounting policies are described in Note 1 in theNotes to Consolidated

Financial Statements in Item 8 of this report. Not all of these criticalsignificant accounting policies require management to make difficult, subjective or complex judgments or estimates. Management believes that the following policies would be considered critical under the SEC’sSEC's definition.


Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments

The Bank performs regular credit reviews of the loan and lease portfolio to determine the credit quality and adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process.  The Company’sBank’s risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the allowance for loan and lease losses. The Bank has a management Allowance for Loan and Lease Losses (“ALLL”) Committee, which is responsible for, among other things, regularly reviewing the ALLL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status.  The ALLL Committee also approves removing loans and leases from impaired status.  The Bank’sBank's Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly basis.


Each risk rating is assessed an inherent credit loss factor that determines the amount of the allowance for loan and lease losses provided for that group of loans and leases with similar risk rating. Credit loss factors may vary by region based on management’smanagement's belief that there may ultimately be different credit loss rates experienced in each region.

Regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired when based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize an impairment reserve as a specific component to be provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral dependent loans if it is determined that such amount represents a confirmed loss.  The combination of the risk rating-based allowance component and the impairment reserve allowance component lead to an allocated allowance for loan and lease losses.

The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less than 10%5% of the allowance, but may be maintained at higher levels during times of economic conditions characterized by falling real estate values. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends. As of December 31, 2010, the2013, there was no unallocated allowance amount represented 8% of the allowance.

amount.

The reserve for unfunded commitments (“RUC”) is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the ALLL and RUC are monitored on a regular basis and are based on management’smanagement's evaluation of numerous factors. These factors include the quality of the current loan portfolio; the trend in the loan portfolio’sportfolio's risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information.

Management believes that the ALLL was adequate as of December 31, 2010.2013. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the

35


provision for loan and lease losses in future periods if warranted as a result of their review. Approximately 82%74% of our loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the allowance for loan and lease losses.

Umpqua Holdings Corporation

Covered Loans and FDIC Indemnification Asset

Loans acquired in a FDIC-assisted acquisition that are subject to a loss-share agreement are referred to as “covered loans” and reported separately in our statements of financial condition. Acquired loans arewere aggregated into pools based on individually evaluated common risk characteristics and aggregate expected cash flows were estimated for each pool. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation. The cash flows expected to be received over the life of the pool were estimated by management with the assistance of a third party valuation specialist. These cash flows were input into a FASB ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”), compliant accounting loan system which calculates the carrying values of the pools and underlying loans, book yields, effective interest income and impairment, if any, based on actual and projected events. Default rates, loss severity, and prepayment speeds assumptions will beare periodically reassessed and updated within the accounting model to update our expectation of future cash flows. The excess of the cash flows expected to be collected over a pool’s carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the loan or pool using the effective yield method. The accretable yield may change due to changes in the timing and amounts of expected cash flows. Changes in the accretable yield are disclosed quarterly.

The Company has elected to account for amounts receivable under the loss-share agreement as an indemnification asset in accordance with FASB ASC 805, Business Combinations.Combinations (“ASC 805”). The FDIC indemnification asset is initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreement. The difference between the presentcarrying value and the undiscounted cash flows the Company expects to collect from the FDIC will be accreted or amortized into non-interest income over the life of the FDIC indemnification asset.

asset, which is maintained at the loan pool level. 

Mortgage Servicing Rights

In accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”MSR”860,Transfers and Servicing, the

The Company determines its classes of servicing assets based on the asset type being serviced along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets. The Company elected to measuremeasures its residential mortgage servicing assets at fair value and to reportreports changes in fair value through earnings.  Fair value adjustments encompass market-driven valuation changes and the runoff in value that occurs from the passage of time, which are separately reported. Under the fair value method, the MSR is carried in the balance sheet at fair value and the changes in fair value are reported in earnings under the caption mortgage banking revenue in the period in which the change occurs.

Retained mortgage servicing rights are measured at fair valuevalues as of the date of sale. We use quoted market prices when available. Subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the MSR, the present value of expected net future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.income net of servicing costs. This model is periodically validated by an independent external model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available.

The expected life of the loan can vary from management’smanagement's estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of management’smanagement's estimates would negatively impact the recorded value of the mortgage servicing rights. The value of the mortgage servicing rights is also dependent upon the discount rate used in the model, which we base on current market rates. Management reviews this rate on an ongoing basis based on current market rates. A significant increase in the discount rate would reduce the value of mortgage servicing rights. Additional information is included in Note 10 of theNotes to Consolidated Financial Statements.


Valuation of Goodwill and Intangible Assets

At December 31, 2010,2013, we had $682.0$776.7 million in goodwill and other intangible assets as a result of business combinations. Goodwill and other intangible assets with indefinite lives are not amortized but instead are periodically tested for impairment. Management performs an impairment analysis for the intangible assets with indefinite lives on an annual basis as of December 31.  Additionally, goodwill and other intangible assets with indefinite lives are evaluated on an interim basis when events or circumstance indicate impairment potentially exists.  As aThe impairment analysis requires management to make subjective judgments. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions. There can be no assurance that changes in circumstances, estimates or assumption may result in additional impairment of the year-end analysis in 2008, management

determined that there was a $1.0 million impairment related to the Retail Brokerage reporting segment asall, or some portion of, December 31, 2008, which resulted from the Company’s evaluation following the departuregoodwill. 



36


The Company performed aits annual goodwill impairment analysis of the Community Banking reporting segment as of June 30, 2009, due to a further decline in the Company’s market capitalization below the book value of equity and continued weakness in the banking industry. The Company engaged an independent valuation consultant to assist us in determining whether our goodwill asset was impaired. The valuation of the reporting unit was determined using discounted cash flows of forecasted earnings, estimated sales price multiples based on recent observable market transactions and market capitalization based on current stock price. The results of the Company’s and valuation specialist’s step one test indicated that the reporting unit’s fair value was less than its carrying value, and therefore the Company performed a step two analysis. In the step two analysis, we calculated the fair value for the reporting unit’s assets and liabilities, as well as its unrecognized identifiable intangible assets, such as the core deposit intangible and trade name, in order to determine the implied fair value of goodwill. Fair value adjustments to items on the balance sheet primarily related to investment securities held to maturity, loans, other real estate owned, Visa Class B common stock, deferred taxes, deposits, term debt, and junior subordinated debentures. Based on the results of the step two analysis, the Company determined that the implied fair value of the goodwill was greater than its carrying amount on the Company’s balance sheet, and as a result, recognized a goodwill impairment loss of $112.0 million. This write-down of goodwill is a non-cash charge that did not affect the Company’s or the Bank’s liquidity or operations. In addition, because goodwill is excluded in the calculation of regulatory capital, the Company’s “well-capitalized” capital ratios were not affected by this charge.

The Company evaluated the Community Banking reporting segment as of December 31, 2010.2013. In the first step of the goodwill impairment test the Company determined that the fair value of the Community Banking reporting unit exceeded its carrying amount. This determination is consistent with the events occurring after the Company recognized the $112.0 million impairment of goodwill second quarter of 2009. First, the market capitalization and estimated fair value of the Company increased significantly subsequent to the recognition of the impairment charge as the fair value of the Company’s stock increased 57% from June 30, 2009 to December 31, 2010. Secondly, the Company’s successful public common stock offerings in the third quarter of 2009 and first quarter of 2010 diluted the carrying value of the reporting unit’s book equity on a per share basis. The impairment analysis requires management to make subjective judgments. Events and factors that may significantly affect the estimates include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures, technology, changes in discount rates and specific industry and market conditions. There can be no assurance that changes in circumstances, estimates or assumption will not result in additional impairment of all, or some portion of, goodwill. Additional information is included in Note 9 of theNotes to Consolidated Financial Statements.

Stock-based Compensation

ConsistentIn accordance with the provisions of FASB ASC 718,Stock Compensation, we recognize expense in the income statement for the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over the employees’ requisite service period (generally the vesting period). The requisite service period may be subject to performance conditions. The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model.model or a Monte Carlo simulation pricing model, as required by the features of the grants. Management assumptions utilized at the time of grant impact the fair value of the option calculated under the Black-Scholes methodology,pricing model, and ultimately, the expense that will be recognized over the life of theexpected service period related to each option. Additional information is included in Note 1 of theNotes to Consolidated Financial Statements.

Fair Value

FASB ASC 820,Fair Value Measurements and Disclosures, establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely,

Umpqua Holdings Corporation

financial instruments rarely traded or not quoted will generally have little or no pricing observability and a higher degree of judgment utilized in measuring fair value. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established and the characteristics specific to the transaction. See Note 24 of theNotes to Consolidated Financial Statements for additional information about the level of pricing transparency associated with financial instruments carried at fair value.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2009, FASB issued ASU No. 2009-17,Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets.This update codifies SFAS No. 166,Accounting for Transfers of Financial Assets—an Amendment of FASB Statement No. 140, which was previously issued by FASB in June 2009 but was not included in the original codification. ASU 2009-17 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. This statement was effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein. This standard primarily impacts the Company’s accounting and reporting of transfers representing a portion of a financial asset for which the Company has a continuing involvement, generally known as loan participations. In order to recognize the transfer of a portion of a financial asset as a sale, the transferred portion and any portion that continues to be held by the transferor must represent a participating interest, and the transfer of the participating interest must meet the conditions for surrender of control. To qualify as a participating interest (i) the portions of a financial asset must represent a proportionate ownership interest in an entire financial asset, (ii) from the date of transfer, all cash flows received from the entire financial asset must be divided proportionately among the participating interest holders in an amount equal to their share of ownership, (iii) involve no recourse (other than standard representation and warranties) to, or subordination by, any participating interest holder, and (iv) no party has the right to pledge or exchange the entire financial asset. If the participating interest or surrender of control criteria are not met the transfer is not accounted for as a sale and derecognition of the asset is not appropriate. Rather the transaction is accounted for as a secured borrowing arrangement. The impact of certain participations being reported as secured borrowings rather than derecognizing a portion of a financial asset would increase total assets (loans), liabilities (term debt) and their respective interest income and expense. An increase in total assets also increases regulatory risk-weighted assets and could negatively impact our capital ratios. The Company reviews our participation agreements to ensure new originations meet the criteria to allow for sale accounting in order to limit the impact upon our financial statements. The terms contained in certain participation and loan sale agreements, however, are outside the control of the Company. These arrangements largely relate to Small Business Administration (“SBA”) loan sales. These sales agreements contain recourse provisions (generally 90 days) that will initially preclude sale accounting; however, once the recourse provision expires, transfers of portions of financial assets may be reevaluated to determine if they meet the participating interest definition. As a result, we report SBA and potentially certain other transfers of financial assets as secured borrowings which will defer the gain of sale on these transactions, at least until the recourse provision expires, assuming all other sales criteria for each transaction are met. The Company does not believe it has or will have a significant amount of participations subject to recourse provisions or other features that would preclude derecognition of the assets transferred. The adoption of ASU No. 2009-17 did not materially impact the Company’s consolidated financial statements.

In December 2009, FASB issued ASU No. 2009-18,Consolidations (Topic 810)—Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.This update codifies SFAS No. 167,Amendments to FASB Interpretation No. 46(R), which was previously issued by FASB in June 2009 but was not included in the original codification. ASU 2009-18 eliminates FASB Interpretations 46(R) (“FIN 46(R)”) exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity (“VIE”). Under the revised guidance, the primary beneficiary of a VIE (party who must consolidate the VIE) is the enterprise that has (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE, or the right to receive benefits of the VIE that could potentially be significant to the VIE. ASU 2009-18 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses

or its right to receive benefits of an entity must be disregarded in applying FIN 46(R) provisions. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. This statement requires additional disclosures regarding an entity’s involvement in a variable interest entity. This statement was effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein. The Company evaluated the impact of this guidance in regards to our involvement with variable interest entities. This guidance potentially impacted the accounting for our limited partnership equity investments in affordable housing development funds and real estate investment funds. In regards to affordable housing investments, the primary activities that most significantly impacts the VIE’s economic performance include leasing rental units at appropriate rent rates in compliance with low income housing restrictions and requirements, operating the rental property thereby generating income/loss from the partnership operations, and protecting the low income housing tax credits from recapture. As a limited partner, the Company generally does not participate in the control of the partnerships’ business, our involvement is limited to providing a stated amount of financial support (commitment or subscription) as stated within contractual agreements, and the primary purpose of the investment is to receive the tax attributes (tax credits) of the partnership. The general partner, which generally are a developer or non-profit organization, exercise the day-to-day control and management of the partnerships that most significantly impacts the VIE’s economic performance. In regards to the real estate investment funds, the primary activities that most significantly impacts the VIE’s economic performance include the development, financing, and leasing of real estate related properties, and ultimately finding a profitable exit from such investments. The Company’s involvement in these funds are limited minority interest partners. According to the terms of the partnerships, the general partners have exclusive control to manage the enterprise and power to direct activities that impact the VIE’s economic performance. The impact of adoption did not result in the Company consolidating or deconsolidating any variable interest entities as accounted for under previous guidance and, therefore, did not have a material impact on the Company’s consolidated financial statements.

In January 2010,July 2012, the FASB issued ASU No. 2010-06,Fair Value Measurements2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. With the Update, a company testing indefinite-lived intangibles for impairment now has the option to assess qualitative factors to determine whether the existence of events and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. FASB ASU No. 2010-06 requires (i)circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value disclosuresof the indefinite-lived intangible asset and perform the quantitative impairment test by each class of assets and liabilities (generally a subset within a line item as presented incomparing the statement of financial position) rather than major category, (ii) for items measured at fair value on a recurring basis,with the amounts of significant transfers between Levels 1carrying amount in accordance with current guidance. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and 2, and transfers into and out of Level 3, andproceed directly to performing the reasons for those transfers, including separate discussion relatedquantitative impairment test. An entity will be able to resume performing the transfers into each level apart from transfers out of each level, and (iii) gross presentation of the amounts of purchases, sales, issuances, and settlementsqualitative assessment in the Level 3 recurring measurement reconciliation. Additionally, the ASU clarifies that a description of the valuation techniques(s) and inputs used to measure fair values is required for both recurring and nonrecurring fair value measurements. Also, if a valuation technique has changed, entities should disclose that change and the reason for the change. Disclosures other than the gross presentation changes in the Level 3 reconciliation wereany subsequent period. The amendments are effective for the first reporting period beginning after December 15, 2009. The requirement to present the Level 3 activity of purchases, sales, issuances,annual and settlements on a gross basis will be effectiveinterim goodwill impairment tests performed for fiscal years beginning after DecemberSeptember 15, 2010.2012.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2010,October 2012, the FASB issued ASUASU. No. 2010-09,2012-06, Subsequent Events (Topic 855)—AmendmentsAccounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution.  The Update clarifies that when an entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently, a change in the cash flows expected to Certain Recognition and disclosure Requirements. This ASU eliminatesbe collected on the requirementindemnification asset occurs, as a result of a change in cash flows expected to be collected on the assets subject to indemnification, the reporting entity should subsequently account for to disclose the date through which a Company has evaluated subsequent events and refineschange in the scopemeasurement of the disclosure requirements for reissued financial statements. This ASU wasindemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The amendments are effective for the first quarter of 2010. This ASU did not have a material impactannual and interim reporting periods beginning on the Company’s consolidated financial statements.

In March 2010, the FASB issued ASU No. 2010-11,Derivatives and Hedging (Topic 815)—Scope Exception Related to Embedded Credit Derivatives. The ASU eliminates the scope exception for bifurcation of embedded credit derivatives in interests in securitized financial assets, unless they are created solely by subordination of one financial instrument to another. The ASU was effective the first quarter beginningor after JuneDecember 15, 2010.2012. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.


37


In April 2010,January 2013, the FASB issued ASU No. 2010-18,Receivables (Topic 310)—Effect2013-01, Clarifying the Scope of a Loan Modification When the Loan Is Part of a Pool That is Accounted for as a Single AssetDisclosures about Offsetting Assets and Liabilities. This ASUThe Update clarifies that modifications of loansASU. No. 2011-11 applies only to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are accounted for withineither offset or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and financial liabilities subject to a pool under Topic 310-30 do not resultmaster netting arrangement or similar agreement are no longer subject to the disclosure requirements in the removal of those loans from the pool even if the modification of those loans would

Umpqua Holdings Corporation

otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. No additional disclosures are required with this ASU. 2011-11. The amendments in this ASU are effective for modifications of loans accounted for within pools under Topic 310-30 occurring in the firstannual and interim or annual period endingreporting periods beginning on or after July 15, 2010. The amendments are to be applied prospectively and early application is permitted. Upon initial adoption of the guidance in this ASU, an entity may make a one-time election to terminate accounting for loans as a pool under Topic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.January 1, 2013. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In July 2010,February 2013, the FASB issued ASU No. 2010-20,Receivables (Topic 310): Disclosures about the Credit Quality2013-02, Reporting of Financing Receivables and the Allowance for Credit Losses.TheAmounts Reclassified Out of Accumulated Other Comprehensive Income. ASU expands existing disclosures to require an entity to provide additional information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them. Specifically, entities will be required to present a roll forward of activity in the allowance for credit losses, the nonaccrual status of financing receivables by class of financing receivables, and impaired financing receivables by class of financing receivables, all on a disaggregated basis. The ASU alsoNo. 2013-02 requires an entity to provide additional disclosuresinformation about the amounts reclassified out of accumulated other comprehensive income by component and to present either on credit quality indicators of financing receivables at the endface of the statement where net income is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period by class of financing receivables, the aging of past due financing receivables at the end of the reporting period by class of financing receivables, the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses and significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio segment. For public entities, the disclosures of period-end balancesperiod. The amendments are effective for interimannual and annual reporting periods ending after December 15, 2010. For public entities, the disclosures of activity are effective for interim and annual reporting periods beginning on or after December 15, 2010.2012. The adoption of this ASU No. 2013-02 did not have a material impact on the Company’sCompany's consolidated financial statements and the disclosures required are included in Note 6 of theNotes to Consolidated Financial Statements.statements.

In December 2010,July 2013, the FASB issued ASU No. 2010-29,Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This update clarifies that if comparative financial statements are presented in disclosure of supplementary pro forma information for a business combination, revenue and earnings2013-10, Inclusion of the combined entity should be disclosedFed Funds Effective Swap Rate (or Overnight Index Swap Rate) as thougha Benchmark Interest Rate for Hedge Accounting Purposes. ASU No. 2013-10 permits the business combination occurred asuse of the beginning of the comparable prior annual reporting period only. Additionally, supplemental pro forma disclosures should includeFed Funds Effective Swap Rate (OIS) to be used as a description of the nature and amount of material, nonrecurring pro forma adjustments included in the reported pro forma revenue and earnings. This updateU.S. benchmark interest rate for hedge account purposes. The amendment is effective prospectively for business combinations for which the acquisition date isqualifying new or redesiginated hedging relationships entered into on or after July 17, 2013. The adoption of ASU No. 2013-10 did not have a material impact on the beginningCompany's consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the firstapplicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. No new recurring disclosures are required. The amendments are effective for annual and interim reporting periodperiods beginning on or after December 15, 2010.2013 and are to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of this ASU No. 2013-11 is not expected to have a material impact on the Company’sCompany's consolidated financial statements.

In December 2010,January 2014, the FASB issued ASU No. 2010-28—Intangibles—Goodwill and Other (Topic 350): When2014-01, Accounting for Investments in Qualified Affordable Housing Projects. ASU 2014-04 permit an entity to Perform Step 2make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amountsinvestment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this Update modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal years,annual and interim reporting periods within those years, beginning on or after December 15, 2010. Early adoption2014 and should be applied prospectively. The Company is currently reviewing the requirements of ASU No. 2014-01, but does not permitted.expect the ASU to have a material impact on the Company's consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon foreclosure. ASU 2014-04 clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and can be applied with a modified retrospective transition method or prospectively. The adoption of this ASU No. 2014-04 is not expected to have a material impact on the Company’sCompany's consolidated financial statements.

In January 2010, the FASB issued ASU No. No. 2011-01,Deferral of the Effective Date of Disclosures aboutTroubled Debt Restructuringsin Update No. 2010-20. This ASU temporarily delays the effective date of the disclosures about troubled debt restructurings in Update 2010-20 for public entities. The delay is intended to allow the Board time to complete its deliberations

on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. Accordingly, the Company has not included the disclosures deferred by this ASU.

RESULTS OF OPERATIONS—OVERVIEW

OPERATIONS--OVERVIEW

For the year ended December 31, 2010,2013, net earnings available to common shareholders was $16.1were $97.6 million, or $0.15$0.87 per diluted common share, as compared to net lossearnings available to common shareholders of $166.3$101.2 million, or $0.90 per diluted common share for the year ended December 31, 2012. The decrease in net earnings available to common shareholders in 2013 is principally

38


attributable to decreased net interest income, decreased non-interest income increased non-interest expense, partially offset by decreased provision for covered loan and lease losses and recapture of provision for covered loan losses.

For the year ended December 31, 2012, net earnings available to common shareholders were $101.2 million, or $0.90 per diluted common share, as compared to net earnings available to common shareholders of $74.1 million, or $2.36$0.65 per diluted common share for the year ended December 31, 2009.2011. The increase in net earnings available to common shareholders in 20102012 is principally attributable to increased net interestnon-interest income increased non-interest income,and decreased provision for loan losses, and decreased non-interest expense. Non-interest income includes a bargain purchase gain on acquisition of $6.4 million relating to the acquisition of Evergreen. We assumed certain assets and liabilities of Evergreen, Rainier, and Nevada Security on January 22, 2010, February 26, 2010, and June 18, 2010, respectively, and the results of the acquired operations are included in our financial results starting on January 23, 2010, February 27, 2010, and June 19, 2010, respectively.

For the year ended December 31, 2009, net loss available to common shareholders was $166.3 million, or $2.36 per diluted common share. The decrease in net earnings available to common shareholders in 2009 is principally attributable to increased provision for loan and lease losses, decreased non-interest income, increased non-interest expense and increased preferred stock dividends, partially offset by increaseddecreased net interest income. Non-interest expense in the year ended December 31, 2009 includes a goodwill impairment charge recognized in the second quarter of $112.0 million related to the Community Banking operating segment. We assumed the insured non-brokered deposit balancesincome and certain other assets of the Bank of Clark County on January 16, 2009 and the results of the acquired operations are included in our financial results starting on January 17, 2009.

increased non-interest expense.

We recognizeUmpqua recognizes gains or losses on our junior subordinated debentures carried at fair value resulting from the estimated market credit risk adjusted spread and changes in interest rates that do not directly correlate with the Company’s operating performance. Also, we incurUmpqua incurs significant expenses related to the completion and integration of mergers and acquisitions. Additionally, we may recognize goodwill impairment losses that have no direct effect on the Company’s or the Bank’s cash balances, liquidity, or regulatory capital ratios. Lastly, weUmpqua may recognize one-time bargain purchase gains on certain FDIC-assisted acquisitions that are not reflective of Umpqua’s on-going earnings power. Accordingly, management believes that our operating results are best measured on a comparative basis excluding the impact of gains or losses on junior subordinated debentures measured at fair value, net of tax, merger-related expenses, net of tax, and other charges related to business combinations such as goodwill impairment charges or bargain purchase gains, net of tax. We defineoperating earnings as earnings available to common shareholders before gains or losses on junior subordinated debentures carried at fair value, net of tax, bargain purchase gains on acquisitions, net of tax, merger related expenses, net of tax, and goodwill impairment, and we calculateoperating earnings per diluted share by dividing operating earnings by the same diluted share total used in determining diluted earnings per common share (see Note 25 of theNotes to Consolidated Financial Statementsin Item 8 below). Operating earnings and operating earnings per diluted share are considered “non-GAAP” financial measures. Although we believe the presentation of non-GAAP financial measures provides a better indication of our operating performance, readers of this report are urged to review the GAAP results as presented in theFinancial Statements and Supplementary Datain Item 8 below.

Umpqua Holdings Corporation

The following table provides the reconciliation of earnings available to common shareholders (GAAP) to operating earnings (non-GAAP), and earnings per diluted common share (GAAP) to operating earnings per diluted share (non-GAAP) for the years ended December 31, 2013, 2012, and 2011:   
Reconciliation of Net Earnings Available to Common Shareholders to Operating Earnings
Years Ended December 31,
(in thousands, except per share data)
 2013 2012 2011
Net earnings available to common shareholders$97,573
 $101,209
 $74,140
Adjustments:     
Net loss on junior subordinated debentures carried at fair value, net of tax (1)1,318
 1,322
 1,318
Merger-related expenses, net of tax (1)6,820
 1,403
 216
Operating earnings$105,711
 $103,934
 $75,674
Per diluted share:     
Net earnings available to common shareholders$0.87
 $0.90
 $0.65
Adjustments:     
Net loss on junior subordinated debentures carried at fair value, net of tax (1)0.01
 0.01
 0.01
Merger-related expenses, net of tax (1)0.06
 0.02
 
Operating earnings$0.94
 $0.93
 $0.66

(1) Adjusted for income tax effect of pro forma operating earnings of 40% for tax-deductible items.


39


Management believes adjusted net interest income and adjusted net interest margin are useful financial measures because they enable investors to evaluate the underlying growth or compression in these values excluding interest income adjustments related to credit quality. Management uses these measures to evaluate adjusted net interest income operating results exclusive of credit costs, in order to monitor our effectiveness in growing higher interest yielding assets and managing our cost of interest bearing liabilities over time. Adjusted net interest income is calculated as net interest income, adjusting tax exempt interest income to its taxable equivalent, adding back interest and fee reversals related to new non-accrual loans during the period, and deducting the interest income gains recognized from loan disposition activities within covered loan pools. Adjusted net interest margin is calculated by dividing adjusted net interest income by a period’s average interest earning assets. Adjusted net interest income and adjusted net interest margin are considered “non-GAAP” financial measures. Although we believe the presentation of non-GAAP financial measures provides a better indication of our operating performance, readers of this report are urged to review the GAAP results as presented in the Financial Statements and Supplementary Data in Item 8 below.
The following table presents a reconciliation of operating earnings (loss) and operating earnings (loss) per diluted sharenet interest income to adjusted net earnings (loss)interest income and net earnings (loss) per diluted common shareinterest margin to adjusted net interest margin for the years ended December 31, 2010, 20092013, 2012, and 2008:

2011:

Reconciliation of Operating Earnings (Loss)Net Interest Income to Adjusted Net (Loss) Earnings AvailableInterest Income and Net Interest Margin to Common ShareholdersAdjusted Net Interest Margin 

Years Ended December 31,



(dollars in thousands, except per share data)

    2010  2009  2008 

Net earnings (loss) available to common shareholders

  $16,067   $(166,262 $49,270  

Net gain on junior subordinated debentures carried at fair value, net of tax

   (2,988  (3,889  (23,342

Bargain purchase gain on acquisitions, net of tax

   (3,862        

Goodwill impairment

       111,952    982  

Merger-related expenses, net of tax

   4,005    164      
     

Operating earnings (loss)

  $13,222   $(58,035 $26,910  
     

Per diluted common share:

    

Net earnings (loss) available to common shareholders

  $0.15   $(2.36 $0.82  

Net gain on junior subordinated debentures carried at fair value, net of tax

   (0.03  (0.06  (0.39

Bargain purchase gain on acquisitions, net of tax

   (0.04        

Goodwill impairment

       1.59    0.01  

Merger-related expenses, net of tax

   0.04    0.01    0.01  
     

Operating earnings (loss)

  $0.12   $(0.82 $0.45  
     

thousands)

 2013 2012 2011
Net interest income - tax equivalent basis (1)$409,544
 $411,886
 $432,748
Adjustments:     
Interest and fee reversals on non-accrual loans922
 1,498
 1,751
Covered loan disposal gains(13,135) (17,829) (26,327)
Adjusted net interest income - tax equivalent basis (1)$397,331
 $395,555
 $408,172
Average interest earning assets$10,224,606
 $10,252,167
 $10,332,242
Net interest margin - consolidated (1)4.01% 4.02% 4.19%
Adjusted net interest margin - consolidated (1)3.89% 3.86% 3.95%
(1)
Tax-exempt income has been adjusted to a tax equivalent basis at a 35% tax rate. The amount of such adjustment was an addition to recorded income of approximately $4.6 million, $4.7 million, and $4.3 million for the years ended 2013, 2012, and 2011 respectively.
The following table presents the returns on average assets, average common shareholders’shareholders' equity and average tangible common shareholders’shareholders' equity for the years ended December 31, 2010, 20092013, 2012, and 2008.2011. For each of the yearsperiods presented, the table includes the calculated ratios based on reported net earnings (loss) available to common shareholders and operating earnings (loss)income as shown in the table above. Our return on average common shareholders’shareholders' equity is negatively impacted as athe result of capital required to support goodwill. To the extent this performance metric is used to compare our performance with other financial institutions that do not have merger-relatedmerger and acquisition-related intangible assets, we believe it beneficial to also consider the return on average tangible common tangible shareholders’shareholders' equity. The return on average tangible common tangible shareholders’shareholders' equity is calculated by dividing net earnings (loss) available to common shareholders by average common shareholders’shareholders' common equity less average goodwill and intangible assets, net (excluding MSRs). The return on average tangible common shareholders’shareholders' equity is considered a non-GAAP financial measure and should be viewed in conjunction with the return on average common shareholders’shareholders' equity.

Returns

Return on Average Assets, Common Shareholders’Shareholders' Equity and Tangible Common Shareholders’Shareholders' Equity

For the Years Ended December 31,



40



(dollars in thousands)

    2010  2009  2008 

RETURNS ON AVERAGE ASSETS:

    

Net earnings (loss) available to common shareholders

   0.15%    -1.85%    0.59%  

Operating earnings (loss)

   0.12%    -0.65%    0.32%  

RETURNS ON AVERAGE COMMON SHAREHOLDERS’ EQUITY:

    

Net earnings (loss) available to common shareholders

   1.01%    -12.63%    3.93%  

Operating earnings (loss)

   0.83%    -4.41%    2.14%  

RETURNS ON AVERAGE TANGIBLE COMMON SHAREHOLDERS’ EQUITY:

    

Net earnings (loss) available to common shareholders

   1.76%    -26.91%    9.99%  

Operating earnings (loss)

   1.45%    -9.39%    5.46%  

CALCULATION OF AVERAGE TANGIBLE COMMON SHAREHOLDERS’ EQUITY:

    

Average common shareholders’ equity

  $1,589,393   $1,315,953   $1,254,730  

Less: average goodwill and other intangible assets, net

   (674,597  (698,223  (761,672
     

Average tangible common shareholders’ equity

  $914,796   $617,730   $493,058  
     

 2013 2012 2011
Returns on average assets:     
Net earnings available to common shareholders0.85% 0.88% 0.64%
Operating earnings0.92% 0.90% 0.65%
Returns on average common shareholders' equity:     
Net earnings available to common shareholders5.64% 5.95% 4.43%
Operating earnings6.11% 6.11% 4.53%
Returns on average tangible common shareholders' equity:     
Net earnings available to common shareholders9.78% 9.87% 7.47%
Operating earnings10.60% 10.14% 7.63%
Calculation of average common tangible shareholders' equity:     
Average common shareholders' equity$1,729,083
 $1,701,403
 $1,671,893
Less: average goodwill and other intangible assets, net(731,525) (676,354) (679,588)
Average tangible common shareholders' equity$997,558
 $1,025,049
 $992,305

Additionally, management believes tangible common equity and the tangible common equity ratio are meaningful measures of capital adequacy. Umpqua believes the exclusion of certain intangible assets in the computation of tangible common equity and tangible common equity ratio provides a meaningful base for period-to-period and company-to-company comparisons, which management believes will assist investors in analyzing the operating results and capital of the Company. Tangible common equity is calculated as total shareholders’shareholders' equity less preferred stock and less goodwill and other intangible assets, net (excluding MSRs). In addition, tangible assets are total assets less goodwill and other intangible assets, net (excluding MSRs).  The tangible common equity ratio is calculated as tangible common shareholders’ equity divided by tangible assets. The tangible common equity and tangible common equity ratio is considered a non-GAAP financial measure and should be viewed in conjunction with the total shareholders’ equity and the total shareholders’ equity ratio.

Umpqua Holdings Corporation

The following table provides a reconciliation of ending shareholders’ equity (GAAP) to ending tangible common equity (non-GAAP), and ending assets (GAAP) to ending tangible assets (non-GAAP) as of December 31, 20102013 and December 31, 2009:

2012

Reconciliations of Total Shareholders’Shareholders' Equity to Tangible Common Shareholders’Shareholders' Equity and Total Assets to Tangible Assets


(dollars in thousands)

    2010   2009 

Total shareholders’ equity

  $1,642,574    $1,566,517  

Subtract:

    

Preferred Stock

        204,335  

Goodwill and other intangible assets, net

   681,969     639,634  
     

Tangible common shareholders’ equity

  $960,605    $722,548  
     

Total assets

  $11,668,710    $9,381,372  

Subtract:

    

Goodwill and other intangible assets, net

   681,969     639,634  
     

Tangible assets

  $10,986,741    $8,741,738  
     

Tangible common equity ratio

   8.74%     8.27%  

 December 31, December 31,
 2013 2012
Total shareholders' equity$1,727,426
 $1,724,039
Subtract:   
Goodwill and other intangible assets, net776,683
 685,331
Tangible common shareholders' equity$950,743
 $1,038,708
Total assets$11,636,112
 $11,795,443
Subtract:   
Goodwill and other intangible assets, net776,683
 685,331
Tangible assets$10,859,429
 $11,110,112
Tangible common equity ratio8.75% 9.35%
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited.  Although we believe these non-GAAP financial measure are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

NET INTEREST INCOME


41


Net interest income is the largest source of our operating income. Net interest income for 20102013 was $394.8$405.0 million, an increasea decrease of $74.1$2.3 million or 23% over 2009. Net interest income for 2009 was $320.7 million, an increase of $30.4 million, or 10% over 2008.0.6% compared to the same period in 2012. The negative impact to net interest income of the reversal of interest income on loans during the year was $3.3 million in 2010 and $4.4 million in both 2009 and 2008. The increasedecrease in net interest income in 20102013 as compared to 20092012 is attributable to growtha decrease in outstanding average interest-earning assets, primarily covered loans, and investment securities, partially offset by a decline in non-covered loans outstanding. In addition to organic growth, the FDIC-assisted purchase and assumption of certain assets and liabilities of Evergreen, Rainier, and Nevada Security, which were completed on January 22, 2010, February 26, 2010, and June 18, 2010, respectively, contributed to an increase in interest earning assets and interest bearing liabilities in 2010 over 2009. The increase in net interest income in 2009 as compared to 2008 is attributable to growth in outstanding average interest earnings assets, primarily investment securities, and a modest increasedecrease in net interest margin, partially offset by growthan increase in average non-covered loans and leases and a decrease in interest-bearing liabilities. 

Net interest bearing liabilities, primarily time deposits. In addition to organic growth, the FDIC-assisted purchase and assumptionincome for 2012 was $407.2 million, a decrease of certain assets and liabilities of the Bank of Clark County, which was completed on January 16, 2009, partially contributed$21.2 million or 5.0% compared to the increasesame period in 2011. The decrease in net interest earningincome in 2012 as compared to 2011 is attributable to a decrease in outstanding average interest-earning assets, primarily covered loans, investment securities and interest bearing liabilitiescash, and a decrease in 2009 over 2008.

net interest margin, partially offset by an increase in average non-covered loans and leases and a decrease in average interest-bearing liabilities.


The net interest margin (net interest income as a percentage of average interest earningsinterest-earning assets) on a fully tax-equivalenttax equivalent basis was 4.17%4.01% for 2010, an increasethe 2013, a decrease of 81 basis points as compared to the same period in 2009.2012.  The increasedecrease in net interest margin primarily resulted from an increasethe decline in non-covered loan yields, the decrease in average covered loans outstanding, increased yield ona decline in investment yields, a decrease in loan disposal gains from the covered loan portfolio, asand an increase in average interest bearing cash, offset by an increase in average non-covered loans and leases outstanding, a resultdecline in the cost of payoffs ahead of expectations,interest-bearing deposits, and a decrease in ouraverage interest-bearing liabilities. 

Loan disposal related activities within the covered loan portfolio, either through loans being paid off in full or transferred to other real estate owned (“OREO”), result in gains within covered loan interest expenseincome to earningthe extent assets received in satisfaction of 32 basis points due to declining costsdebt (such as cash or the net realizable value of OREO received) exceeds the allocated carrying value of the loan disposed of from the pool.  Loan disposal activities contributed $13.1 million of interest bearing deposits, partially offset by the interest reversals of new non-accrual loans (contributingincome for 2013 compared to a 4 basis point decline), a decline in non-covered loans outstanding, and the impact of holding much higher levels$17.8 million of interest bearing cash with the Federal Reserve Bank (at 25 basis points). The increase inincome for 2012 and $26.3 million of interest income for 2011.  While dispositions of covered loans positively impact net interest margin, related to covered loan yields was offset bywe recognize a corresponding decrease to the change in FDIC indemnification asset inwithin other non-interest income that partially offsets the impact to net income.

Net interest income for 2013 was negatively impacted by $0.9 million reversal of interest and fee income on non-covered, non-accrual loans, as compared to the $1.5 million for 2012 and $1.8 million for 2011. 

Excluding the impact of covered loan disposal gains and interest and fee income reversals on non-covered, non-accrual loans, tax equivalent net interest margin would have been 3.89%, 3.86%, and 3.95% for 2013, 2012, and 2011 respectively.

Partially offsetting the decrease in earning asset yields in 2013, as compared to 2012, is the continued reduction of the cost of interest-bearing liabilities, specifically interest-bearing deposits.  The total cost of interest-bearing deposits for 2013 was 0.31%, representing a decrease of 13 basis points compared 2012
The net interest margin on a fully tax-equivalent basis was 4.09%4.02% for 2009, an increase2012, a decrease of 217 basis points as compared to the same period in 2008.2011. The increasedecrease in net interest margin primarily resulted from thea decline in non-covered loan yields, decrease in our interest expense to earning assets of 81 basis pointsaverage covered loans outstanding, a decrease in 2009 resultingloan disposal gains from the lower costs of interest bearing deposits,covered loan portfolio, and junior subordinated debentures that are indexed to the three month LIBOR. This wasa decline in investment yields, partially offset by the decreased yield on interest-earning assets of 79 basis points primarily resulting from reductionsa decrease in the prime rate, holding higheraverage interest bearing cash, balances with the Federal Reserve Bank (at 25 basis points), and interest reversals on loans. The increased interest bearing cash balances result from the historically low yields availablean increase in average non-covered loans outstanding, a decrease in the bond markets that do not present an attractive long-term investment alternative. The $4.4 million reversalcost of interest income on loansinterest-bearing deposits, and a decrease in 2009 contributed to a 6 basis point decline in the tax equivalent net interest margin for the year.

Umpqua Holdings Corporation

average interest-bearing liabilities. 

Our net interest income is affected by changes in the amount and mix of interest earningsinterest-earning assets and interest bearinginterest-bearing liabilities, as well as changes in the yields earned on interest earningsinterest-earning assets and rates paid on deposits and borrowed funds. The following table presentstables present condensed average balance sheet information, together with interest income and yields on average interest earningsinterest-earning assets, and interest expense and rates paid on average interest bearinginterest-bearing liabilities for the years ended December 31, 2010, 20092013, 2012 and 2008:

2011: 



42


Average Rates and Balances


(dollars in thousands)

  2010  2009  2008 
   Average
Balance
  Interest
Income
or
Expense
  Average
Yields or
Rates
  Average
Balance
  Interest
Income
or
Expense
  Average
Yields or
Rates
  Average
Balance
  Interest
Income
or
Expense
  Average
Yields or
Rates
 

INTEREST EARNING ASSETS:

         

Non-covered loans and leases(1)

 $5,828,637   $336,235    5.77 $6,145,927   $355,195    5.78 $6,136,380   $393,927    6.42

Covered loans and leases

  681,569    73,897    10.84          NA            NA  

Taxable securities

  1,946,222    67,402    3.46  1,386,960    60,217    4.34  883,987    41,523    4.70

Non-taxable securities(2)

  227,589    13,109    5.76  198,641    11,522    5.80  170,277    9,667    5.68

Temporary investments and interest bearing deposits

  883,324    2,223    0.25  193,486    526    0.27  24,357    443    1.82
               

Total interest earning assets

  9,567,341    492,866    5.15  7,925,014    427,460    5.39  7,215,001    445,560    6.18

Allowance for non-covered loan and lease losses

  (102,016    (96,916    (84,649  

Other assets

  1,365,161      1,147,080      1,211,653    
                  

Total assets

 $10,830,486     $8,975,178     $8,342,005    
                  

INTEREST BEARING LIABILITIES:

         

Interest bearing checking and savings accounts

 $4,203,109   $31,632    0.75 $3,333,088   $32,341    0.97 $3,196,763   $55,739    1.74

Time deposits

  2,875,706    44,609    1.55  2,358,697    56,401    2.39  2,007,550    73,631    3.67

Securities sold under agreements to repurchase and federal funds purchased

  54,696    517    0.95  60,722    680    1.12  99,366    2,220    2.23

Term debt

  261,170    9,229    3.53  129,814    4,576    3.53  194,312    6,994    3.60

Junior subordinated debentures

  184,134    7,825    4.25  190,491    9,026    4.74  226,349    13,655    6.03
               

Total interest bearing liabilities

  7,578,815    93,812    1.24  6,072,812    103,024    1.70  5,724,340    152,239    2.66

Noninterest bearing deposits

  1,529,165      1,318,954      1,255,263    

Other liabilities

  64,962      64,293      81,182    
                  

Total liabilities

�� 9,172,942      7,456,059      7,060,785    

Preferred equity

  68,151      203,166      26,490    

Common equity

  1,589,393      1,315,953      1,254,730    
                  

Total shareholders’ equity

  1,657,544      1,519,119      1,281,220    
                  

Total liabilities and shareholders’ equity

 $10,830,486     $8,975,178     $8,342,005    
                  

NET INTEREST INCOME(2)

  $399,054     $324,436     $293,321   
                  

NET INTEREST SPREAD

    3.91    3.69    3.52

AVERAGE YIELD ON EARNING ASSETS(1),(2)

    5.15    5.39    6.18

INTEREST EXPENSE TO EARNING ASSETS

    0.98    1.30    2.11
                  

NET INTEREST INCOME TO EARNING ASSETS OR NET INTEREST MARGIN(1),(2)

    4.17    4.09    4.07
                  

 2013 2012 2011
   Interest Average    Interest Average    Interest Average 
 Average Income or Yields or Average Income or Yields or Average Income or Yields or
 Balance Expense Rates Balance Expense Rates Balance Expense Rates
INTEREST-EARNING ASSETS:                 
Non-covered loans and leases (1)$7,089,123
 $343,717
 4.85% $6,331,519
 $313,294
 4.95% $5,794,106
 $319,702
 5.52%
Covered loans, net416,862
 54,497
 13.07% 554,078
 73,518
 13.27% 707,026
 86,011
 12.17%
Taxable securities1,952,611
 34,398
 1.76% 2,743,672
 59,161
 2.16% 2,968,501
 85,797
 2.89%
Non-taxable securities (2)247,010
 13,477
 5.46% 258,816
 13,834
 5.34% 224,085
 12,949
 5.78%
Temporary investments and interest-bearing deposits519,000
 1,336
 0.26% 364,082
 928
 0.25% 638,524
 1,590
 0.25%
Total interest earning assets10,224,606
 447,425
 4.38% 10,252,167
 460,735
 4.49% 10,332,242
 506,049
 4.90%
Allowance for non-covered loan and lease losses(86,227)     (86,656)     (96,748)    
Other assets1,369,309
     1,333,988
     1,364,941
    
Total assets$11,507,688
     $11,499,499
     $11,600,435
    
INTEREST-BEARING LIABILITIES:                 
Interest-bearing checking and savings accounts$4,976,008
 $4,784
 0.10% $4,987,873
 $9,463
 0.19% $4,765,091
 $20,647
 0.43%
Time deposits1,796,669
 15,971
 0.89% 2,102,711
 21,670
 1.03% 2,754,533
 35,096
 1.27%
Federal funds purchased and repurchase agreements177,888
 141
 0.08% 142,363
 288
 0.20% 113,129
 539
 0.48%
Term debt252,546
 9,248
 3.66% 254,601
 9,279
 3.64% 257,496
 9,255
 3.59%
Junior subordinated debentures189,237
 7,737
 4.09% 187,139
 8,149
 4.35% 184,115
 7,764
 4.22%
Total interest-bearing liabilities7,392,348
 37,881
 0.51% 7,674,687
 48,849
 0.64% 8,074,364
 73,301
 0.91%
Non-interest-bearing deposits2,284,996
     2,034,035
     1,782,354
    
Other liabilities101,261
     89,373
     71,824
    
Total liabilities9,778,605
     9,798,095
     9,928,542
    
Common equity1,729,083
     1,701,403
     1,671,893
    
Total liabilities and shareholders' equity$11,507,688
     $11,499,498
     $11,600,435
    
NET INTEREST INCOME  $409,544
     $411,886
     $432,748
  
NET INTEREST SPREAD    3.87%     3.85%  
  
 3.99%
AVERAGE YIELD ON EARNING ASSETS  (1), (2)    4.38%     4.49%  
  
 4.90%
INTEREST EXPENSE TO EARNING ASSETS    0.37%     0.47%  
  
 0.71%
NET INTEREST INCOME TO EARNING ASSETS OR NET INTEREST MARGIN (1), (2)    4.01%     4.02%  
  
 4.19%
(1)Non-covered non-accrual loans, leases, and mortgage loans held for sale are included in the average balance.

(2) Tax-exempt income has been adjusted to a tax equivalent basis at a 35% tax rate. The amount of such adjustment was an addition to recorded income of approximately $4.3 million, $3.7 million, and $3.0 million for the years ended 2010, 2009 and 2008, respectively.

(2)
Tax-exempt income has been adjusted to a tax equivalent basis at a 35% tax rate. The amount of such adjustment was an addition to recorded income of approximately $4.6 million, $4.7 million, and $4.3 million for the years ended 2013, 2012, and 2011, respectively.


The following table sets forth a summary of the changes in tax equivalent net interest income due to changes in average asset and liability balances (volume) and changes in average rates (rate) for 20102013 as compared to 20092012 and 20092012 compared to 2008.2011. Changes in tax equivalent interest income and expense, which are not attributable specifically to either volume or rate, are allocated proportionately between both variances.

Rate/Volume Analysis



43


(in thousands)

                        2010 COMPARED TO 2009                       2009 COMPARED TO 2008 
   INCREASE (DECREASE) IN INTEREST
INCOME AND EXPENSE DUE TO
CHANGES IN
  INCREASE (DECREASE) IN INTEREST
INCOME AND EXPENSE DUE TO
CHANGES IN
 
    VOLUME  RATE  TOTAL  VOLUME  RATE  TOTAL 

INTEREST EARNING ASSETS:

       

Non-covered loans and leases

  $(18,304 $(656 $(18,960 $612   $(39,344 $(38,732

Covered loans and leases

   73,897        73,897              

Taxable securities

   21,009    (13,824  7,185    22,047    (3,353  18,694  

Non-taxable securities(1)

   1,668    (81  1,587    1,641    214    1,855  

Temporary investments and interest bearing deposits

   1,739    (42  1,697    746    (663  83  
     

Total(1)

   80,009    (14,603  65,406    25,046    (43,146  (18,100

INTEREST BEARING LIABILITIES:

       

Interest bearing checking and savings accounts

   7,424    (8,133  (709  2,285    (25,683  (23,398

Time deposits

   10,694    (22,486  (11,792  11,380    (28,610  (17,230

Securities sold under agreements to repurchase and federal funds purchased

   (64  (99  (163  (675  (865  (1,540

Term debt

   4,642    11    4,653    (2,277  (141  (2,418

Junior subordinated debentures

   (293  (908  (1,201  (1,966  (2,663  (4,629
     

Total

   22,403    (31,615  (9,212  8,747    (57,962  (49,215
     

Net increase in net interest income(1)

  $57,606   $17,012   $74,618   $16,299   $14,816   $31,115  
     

 2013 compared to 2012 2012 compared to 2011
 Increase (decrease) in interest income Increase (decrease) in interest income
 and expense due to changes in and expense due to changes in
 Volume Rate Total Volume Rate Total
INTEREST-EARNING ASSETS:           
Non-covered loans and leases$36,842
 $(6,419) $30,423
 $28,204
 $(34,612) $(6,408)
Covered loans, net(17,953) (1,068) (19,021) (19,795) 7,302
 (12,493)
Taxable securities(15,148) (9,615) (24,763) (6,119) (20,517) (26,636)
Non-taxable securities (1)(640) 283
 (357) 1,905
 (1,020) 885
Temporary investments and interest bearing deposits399
 9
 408
 (698) 36
 (662)
     Total (1)3,500
 (16,810) (13,310) 3,497
 (48,811) (45,314)
INTEREST-BEARING LIABILITIES:           
Interest bearing checking and savings accounts(22) (4,657) (4,679) 923
 (12,107) (11,184)
Time deposits(2,931) (2,768) (5,699) (7,427) (5,999) (13,426)
Repurchase agreements and federal funds59
 (206) (147) 114
 (365) (251)
Term debt(75) 44
 (31) (105) 129
 24
Junior subordinated debentures91
 (503) (412) 129
 256
 385
Total(2,878) (8,090) (10,968) (6,366) (18,086) (24,452)
Net increase (decrease) in net interest income (1)$6,378
 $(8,720) $(2,342) $9,863
 $(30,725) $(20,862)
(1)
Tax exempt income has been adjusted to a tax equivalent basis at a 35% tax rate.


PROVISION FOR LOAN AND LEASE LOSSES

The provision for non-covered loan and lease losses was $113.7$16.8 million for 2010,2013, as compared to $209.1$21.8 million for 20092012, and $107.7$46.2 million for 2008.2011.  As a percentage of average outstanding non-covered loans and leases, the provision for loan and lease losses recorded for 20102013 was 1.97%0.24%, a decrease of 14611 basis points from 20092012 and an increasea decrease of 2157 basis points from 2008, respectively.

2011.

The decrease in the provision for loan and lease losses in 20102013 as compared to 20092012 and 2012 compared to 2011 is principally attributable to a reduction in downgrades within the portfolio, an easing in the velocity of declining real estate values in our markets and the resulting impact on our commercial real estate and commercial construction portfolio, and the decrease in net charge-offs during the period. The increase in the provision for loan and lease losses in 2009 as compared to 2008 is principally attributable to downgrades within the portfolio related primarily to the housing market downturn and its impact on our residential development and other segments of our portfolio, the U.S. recession and declining real estate values in our markets and the resulting impact on our commercial real estate and commercial construction portfolio, and the increase in loans charged-off.

Prior to the second quarter of 2008, the Company established specific reserves within the allowance for loan and leases losses for loan impairments and recognized the charge-offa result of the impairment reserve when thecontinued resolution of non-performing loans and reduction in classified assets, partially offset by non-covered loan was resolved, sold, or foreclosed

Umpqua Holdings Corporation

growth.


and transferred to other real estate owned. Due to declining real estate values in our markets and the deterioration of the U.S. economy in general, it is increasingly likely that impairment reserves on collateral dependent loans, particularly those relating to real estate, will not be recoverable and represent a confirmed loss. As a result, beginning in the second quarter of 2008, theThe Company began recognizingrecognizes the charge-off of impairment reserves on impaired loans in the period they arise for collateral dependent loans.  This process has effectively accelerated the recognition of charge-offs recognized since the second quarter of 2008. The change in our assessment of the possible recoverability of our collateral dependent impaired loans’ carrying values has ultimately had no impact on our impairment valuation procedures or the amount of provision for loan and leases losses included within theConsolidated Statements of Operations. Therefore, the non-covered, non-accrual loans of $138.2$31.9 million as of December 31, 20102013 have already been written-down to their estimated fair value, less estimated costs to sell, and are expected to be resolved with no additional material loss, absent further decline in market prices. Depending on the characteristics of a loan, the fair value of collateral is estimated by obtaining external appraisals.

The provision for non-covered loan and lease losses is based on management’smanagement's evaluation of inherent risks in the loan portfolio and a corresponding analysis of the allowance for non-covered loan and lease losses. Additional discussion on loan quality and the allowance for non-covered loan and lease losses is provided under the headingAsset Quality and Non-Performing Assetsbelow.


The recapture of covered loan and lease losses was $6.1 million for 2013, as compared to provision for covered loan and lease losses of $7.4 million for 2012 and $16.1 million for 2011. Recapture of provision results from improvements in the year ended December 31, 2010 was $5.2 million.amount and the timing of expected cash flows on the acquired loans compared to those previously estimated and charge-offs of unpaid principal balance against previously established allowance, as measured on a pool basis.  Provisions for covered loan and leasesloans are recognized subsequent to acquisition to the extent it is probable we will be unable to collect all cash flows expected at acquisition plus additional cash flows expected to be collected arising from changes in estimateestimates after acquisition, considering both the timing and amount of those expected cash flows.  Provisions may be required when determined losses of unpaid principal incurred exceed previous loss expectations to-date, or future cash flows previously expected to be collectible are no longer probable of collection.  Provisions for covered loan and lease losses, excludingincluding amounts advanced subsequent to acquisition, are not reflected in the allowance for non-covered loan and lease losses, rather as a valuation allowance netted against the carrying value of the covered loan and lease balance accounted for under ASC 310-30, in accordance with theapplicable guidance.


44


NON-INTEREST INCOME

Non-interest income for the 2013 was $121.4 million, a decrease of $15.4 million, or 11.2%, as compared to the same period in 20102012. Non-interest income for 2012 was $75.9$136.8 million, an increase of $2.4$52.7 million, or 3%62.7%, as compared to 2009. Non-interest income in 2009 was $73.5 million, a decrease of $33.6 million, or 31%, compared to 2008.2011. The following table presents the key components of non-interest income for years ended December 31, 2010, 20092013, 2012 and 2008:

2011: 

Non-Interest Income

Years Ended December 31,

(dollars in thousands)

  2010 compared to 2009  2009 compared to 2008 
   2010  2009  Change
Amount
  Change
Percent
  2009  2008  Change
Amount
  Change
Percent
 

Service charges on deposit accounts

 $34,874   $32,957   $1,917    6%   $32,957   $34,775   $(1,818  -5

Brokerage commissions and fees

  11,661    7,597    4,064    53%    7,597    8,948    (1,351  -15

Mortgage banking revenue, net

  21,214    18,688    2,526    14%    18,688    2,436    16,252    667

Gain (loss) on investment securities, net

  1,912    (1,677  3,589    -214%    (1,677  1,349    (3,026  -224

Gain on junior subordinated debentures carried at fair value

  4,980    6,482    (1,502  -23%    6,482    38,903    (32,421  -83

Proceeds from Visa mandatory partial redemption

                   12,633    (12,633  -100

Bargain purchase gain on acquisition

  6,437        6,437    NM               

Change in FDIC indemnification asset

  (16,445      (16,445  NM               

Other income

  11,271    9,469    1,802    19%    9,469    8,074    1,395    17
          

Total

 $75,904   $73,516   $2,388    3%   $73,516   $107,118   $(33,602  -31
          

NM – Not meaningful

  2013 compared to 2012  2012 compared to 2011
      Change Change     Change Change
  2013 2012 Amount Percent 2012 2011 Amount Percent
Service charges on deposit accounts $30,952
 $28,299
 $2,653
 9 % $28,299
 $33,096
 $(4,797) (14)%
Brokerage commissions and fees 14,736
 12,967
 1,769
 14 % 12,967
 12,787
 180
 1 %
Mortgage banking revenue, net 78,885
 84,216
 (5,331) (6)% 84,216
 26,550
 57,666
 217 %
Gain on investment securities, net 209
 3,868
 (3,659) (95)% 3,868
 7,376
 (3,508) (48)%
Loss on junior subordinated debentures carried at fair value (2,197) (2,203) 6
 0 % (2,203) (2,197) (6) 0 %
Change in FDIC indemnification asset (25,549) (15,234) (10,315) 68 % (15,234) (6,168) (9,066) 147 %
Other income 24,405
 24,916
 (511) (2)% 24,916
 12,674
 12,242
 97 %
Total $121,441
 $136,829
 $(15,388) (11)% $136,829
 $84,118
 $52,711
 63 %
The increase in deposit service charges in 20102013 compared to 20092012 is principally attributable to increased non-sufficient funds and overdraft fee incomeprimarily the result of the acquisition of Circle Bank ("Circle") in the current period due to higher average overdraft balancesfourth quarter of 2012 and due to increased deposit service charges related to the deposits acquired in the Rainier, Evergreenour newly expanded business and Nevada Security acquisitions, offset by reductions in non-sufficient funds and overdraft fee income from recent regulatory reform changes, which took place in the third quarter of 2010.consumer checking account options. The decrease in deposit service charges in 20092012 compared to 20082011 is principally attributablethe result of a reduction in interchange fee revenue relating to decreased non-sufficient funds and overdraft fee income due to lower average overdraft balances.

the Durbin Amendment, part of the Dodd-Frank Act, which became effective October 1, 2011.


Brokerage commissions and fees in 20102013 increased 53% as a result ofdue to the increase in managed account fees and new balances at Umpqua Investments. In 2013, assets under management at Umpqua Investments. Brokerage commissions and fees declined asInvestments, a resultpart of the continuation of stressed conditions in the trading market during 2009, relativeWealth Management segment, increased to 2008, and the departure of certain Umpqua Investments financial advisors in the fourth quarter of 2008.$2.60 billion as compared to $2.28 billion at December 31, 2012. Brokerage commissions and fees in the second half of 20092012 increased 43% over the first half of 2009, due to the new leadership’s ability to recruit new brokers and growincrease in managed account fees at Umpqua Investments. In 2012, assets under management.

management at Umpqua Investments increased to $2.28 billion as compared to $2.09 billion at December 31, 2011.

Mortgage banking revenue in 2010 increasedfor the year ended December 31, 2013 decreased due to anlower refinancing activity attributable to the increase in mortgage interest rates, partially offset by increased purchase and refinancing activity driven by continued improvement of the housing market compared to 2009.the same period of the prior year. Closed mortgage volume for 20102013 was $785.4 million,$1.9 billion, representing a 4% increase over 200912% decrease compared to 2012 production.  Closed mortgage volume for 20092012 was $757.0 million,$2.2 billion, representing an 131%a 121% increase over 20082011 production. The continuing lowIncreased mortgage interest rate environmentrates compared to the same period of the prior year has contributed to a $3.9$2.4 million declineincrease in fair value on the mortgage servicing right (“MSR”)MSR asset in 2010,2013, compared to a $3.2$8.5 million decline in fair value recognized in 2009. Additionally,2012. As of December 31, 2013, the Company serviced $4.4 billion of mortgage banking revenue in the first quarter of 2008 reflects a $2.4 million realized loss on an ineffective MSR hedge, which has been suspended indefinitely, due to widening spreadsloans for others, and price declines that were not offset by a corresponding gain in the related MSR asset.

mortgage servicing right asset is valued at $47.8 million, or 1.09% of the total serviced portfolio principal balance.

The net gain onIn connection with the sale of investment securities, we recognized in 2010 represents the realizeda gain on sale of $209,000 in 2013, compared to $4.0 million for 2012 and $7.7 million for 2011. During 2012, the Company sold investment securities of $2.3 million offset by an other-than-temporary impairment (“OTTI”) charge of $414,000. The net loss on investment securities recognized in 2009 represents an other-than-temporary impairment (“OTTI”) charge of $10.6 million, partially offset by the realized gain on sale of investment securities of $8.9 million. In 2008, the Company realized a $5.5 million gain on sale of investment securitiesto fund non-covered loan growth as part of a repositioning of the investment portfoliowell as to reduce the weighted average lifeprice risk of the portfolio if interest rates were to increase significantly.
A loss of $2.2 million was recognized in response2013, 2012, and 2011 respectively, which represents the change of fair value on the junior subordinated debentures recorded at fair value. Absent future changes to the current economic outlook, and other factors.significant inputs utilized in the discounted cash flow model used to measure the fair value of these instruments, the cumulative discount for each junior subordinated debenture will reverse over time, ultimately returning the carrying values of these instruments to their notional value at their expected redemption dates. This gain was partially offset by a $4.2 million OTTI charge. The OTTI charge recognizedwill result in earnings for all periods primarily related to held to maturity non-agency collateralized mortgage obligations, and the amount recognized in earnings represents our estimate of the credit loss component of the total impairment. Additional discussion on the OTTI charges and gain on sale of investment securities are provided in Note 4 of theNotes to Consolidated Financial Statements and under the headingInvestment Securities.

The gainrecognizing losses on junior subordinated debentures carried at fair value primarily resulted from the widening of the credit risk adjusted spread over the contractual rate of each junior subordinated debenture measured at fair value.within non-interest income. Additional information on the junior subordinated debentures carried at fair value is included in Note 18 of theNotes to Consolidated Financial Statementsand under the headingJunior Subordinated Debentures.

A bargain purchase gain



45


The change in FDIC indemnification asset represents a decreasechange in cash flows expected to be realizedrecoverable under the loss-share agreements entered into with the FDIC in connection with the Evergreen, Rainier, and Nevada Security FDIC-assisted acquisitions, resulting primarily by collecting more than originally expected on accelerated payoffs, partially offset by the loss sharing on the covered provision for loan losses.acquisitions. Additional information on the FDIC indemnification asset is included in Note 7 of theNotes to Consolidated Financial Statementsand under the headingCovered Assetsbelow.

In

Other income in 2013 compared to 2012 decreased primarily due to a $2.8 million reduction in debt capital market revenue from $9.9 million in 2012 to $7.1 million in 2013, partially offset by income from FinPac operations of $1.1 million. Other income in 2012 as compared to 2011 increased primarily due to the first quarterdebt capital market revenue of 2008 Visa completed an initial public offering$9.9 million related to initiation of this interest rate swap program in the second half of 2011 with commercial banking customers to facilitate their risk management strategies. Additionally, in 2012, in connection with the termination of a definitive agreement between the Company and American Perspective Bank, the Company received $12.6 million as parta termination fee of a subsequent mandatory partial redemption of our Visa Class B shares. As part of this offering, Visa also established a $3.0 billion escrow account to cover settlements, the resolution of pending litigation and related claims (“covered litigation”). The Company’s remaining 468,659 shares of Visa Class B common stock are restricted and may not be transferred until the later of

Umpqua Holdings Corporation

(1) three years from the date of the initial public offering or (2) the period of time necessary to resolve the covered litigation. A conversion ratio of 0.71429 was established for the conversion rate of Class B shares into Class A shares. If the funds in the escrow account are insufficient to settle all the covered litigation, Visa may sell additional Class A shares, use the proceeds to settle litigation, and further reduce the conversion ratio. If funds remain in the escrow account after all litigation is settled, the Class B conversion ratio will be increased to reflect that surplus. In December 2008, Visa deposited additional funds into the escrow account to satisfy a settlement with Discover Card related to an antitrust lawsuit. In July 2009, Visa deposited additional funds into the litigation escrow account to provide additional reserves to cover potential losses related to the two remaining litigation cases. The deposit of these funds into the escrow account reduced the conversion ratio applicable to Class B common stock outstanding from 0.71429 per Class A share to 0.5824 per Class A share. In May 2010, Visa deposited an additional $500 million into the litigation escrow account. As a result of the deposit, the conversion ratio applicable to Class B common stock outstanding decreased further from 0.5824 per Class A share to 0.5550 per Class A share. In October 2010, Visa deposited an additional $800 million into the litigation escrow account. As a result of the deposit, the conversion ratio applicable to Class B common stock outstanding decreased further from 0.5550 per Class A share to 0.5102 per Class A share. As of December 31, 2010, the value of the Class A shares was $70.38 per share. The value of unredeemed Class A equivalent shares owned by the Company was $16.8 million as of December 31, 2010, and has not been reflected in the accompanying financial statements.

Other income increased in 2010 over 2009 by $1.8 million, primarily attributable to various sundry recoveries. Other income increased in 2009 over 2008 as a result of compensatory damages awarded to the Company and increased income on trading assets invested in trust for the benefit of certain executives or former employees of acquired institutions as required by agreements. The increase was partially offset by decreased gains and broker fee income related to Small Business Administration loan sales and proceeds from a legal settlement.

$1.6 million.

NON-INTEREST EXPENSE

Non-interest expense for 20102013 was $317.7$364.7 million a decrease, an increase of $61.7$5.0 million, or 16%1.4%, as compared to 2009.2012. Non-interest expense for 20092012 was $379.4$359.7 million, an increase of $162.8$20.7 million, or 75%6.1%, as compared to 2008.2011.  The following table presents the key elements of non-interest expense for the years ended December 31, 2010, 20092013, 2012 and 2008.

2011.

Non-Interest Expense

Years Ended December 31,

(dollars in thousands)

   2010 compared to 2009   2009 compared to 2008 
    2010   2009   Change
Amount
  Change
Percent
   2009   2008  Change
Amount
  Change
Percent
 

Salaries and employee benefits

  $162,875    $126,850    $36,025    28%    $126,850    $114,600   $12,250    11%  

Net occupancy and equipment

   45,940     39,673     6,267    16%     39,673     37,047    2,626    7%  

Communications

   10,464     7,671     2,793    36%     7,671     7,063    608    9%  

Marketing

   6,225     4,529     1,696    37%     4,529     4,573    (44  -1%  

Services

   22,576     21,918     658    3%     21,918     18,792    3,126    17%  

Supplies

   3,998     3,257     741    23%     3,257     2,908    349    12%  

FDIC assessments

   15,095     15,825     (730  -5%     15,825     5,182    10,643    205%  

Net loss on other real estate owned

   5,925     23,204     (17,279  -74%     23,204     8,313    14,891    179%  

Intangible amortization and impairment

   5,389     6,165     (776  -13%     6,165     5,857    308    5%  

Goodwill impairment

        111,952     (111,952  NM     111,952     982    110,970    NM  

Merger related expenses

   6,675     273     6,402    NM     273         273    NM  

Visa litigation

                 NM          (5,183  5,183    -100%  

Other expenses

   32,576     18,086     14,490    80%     18,086     16,436    1,650    10%  
            

Total

  $317,738    $379,403    $(61,665  -16%    $379,403    $216,570   $162,833    75%  
            

NM – Not meaningful

Management believes there are several categories of non-interest expense which are outside of the control of the Company or depend on changes in market values, including FDIC deposit insurance assessments, gain or loss on other real estate owned,

 2013 compared to 2012 2012 compared to 2011
     Change Change     Change Change
 2013 2012 Amount Percent 2012 2011 Amount Percent
Salaries and employee benefits$209,991
 $200,946
 $9,045
 5 % $200,946
 $179,480
 $21,466
 12 %
Net occupancy and equipment62,067
 55,081
 6,986
 13 % 55,081
 51,284
 3,797
 7 %
Communications11,974
 11,573
 401
 3 % 11,573
 11,214
 359
 3 %
Marketing6,062
 5,064
 998
 20 % 5,064
 6,138
 (1,074) (17)%
Services25,483
 25,823
 (340) (1)% 25,823
 24,170
 1,653
 7 %
Supplies2,843
 2,506
 337
 13 % 2,506
 2,824
 (318) (11)%
FDIC assessments6,954
 7,308
 (354) (5)% 7,308
 10,768
 (3,460) (32)%
Net loss on non-covered other real estate owned1,113
 9,245
 (8,132) (88)% 9,245
 10,690
 (1,445) (14)%
Net loss on covered other real estate owned135
 3,410
 (3,275) (96)% 3,410
 7,481
 (4,071) (54)%
Intangible amortization4,781
 4,816
 (35) (1)% 4,816
 4,948
 (132) (3)%
Merger related expenses8,836
 2,338
 6,498
 278 % 2,338
 360
 1,978
 549 %
Other expenses24,422
 31,542
 (7,120) (23)% 31,542
 29,614
 1,928
 7 %
Total$364,661
 $359,652
 $5,009
 1 % $359,652
 $338,971
 $20,681
 6 %

Salaries and employee benefits costs increased $9.0 million as well as infrequently occurring expenses such as merger related costs and goodwill impairments. Excluding the impact of these non-controllable or infrequently occurring items, non-interest expense increased $61.9 million, or 27%, in 2010 over 2009, which is more than the 24% growth in total assets during the current year. Excluding the impact of these non-controllable or infrequently occurring items, non-interest expense increased $20.9 million in 2009 over 2008. In 2009, of the increase, $6.1 million relatescompared to the same period prior year primarily as a result of an increase of full-time equivalent employees, which includes 39 employees associated with the Circle acquisition in variable costs inNovember 2012 and 125 employees associated with the Mortgage Division that directly corresponds toFinPac acquisition (since the significant increase in mortgage banking revenue as discussed under the headingNon-Interest Incomeabove. Excluding the incremental impact of the mortgage division’s variable costs, non-interest expense in 2009 over 2008 increased $15.0 million, or 7%July 1, 2013 acquisition date).

Of the $36.0$21.5 million increase in total salaries and employee benefits expense in 20102012 compared to 2009,2011, approximately $13.8$17.7 million of the increase is due to mortgage and commercial banking production in 2012, $2.6 million relates to ongoing growth initiatives in our technology group and the remainder of the increase is the result of the FDIC-assisted acquisition of Rainier, Evergreen, and Nevada Security, respectively, $1.2 million is the result of variable mortgage compensation based on increased volume and revenue, $724,000 is a result of reduced loan origination activity related to lower customer demand, resulting in a reduced offset to compensation expense for deferred loan costs. The remainder primarily results from the increase in employees (not through acquisition) by 108 in full-time equivalents in 2010. Of the $12.3 million increase in total salaries and employee benefits expense in 2009 compared to 2008, approximately $5.3 million is a direct result of increased production in our mortgage banking division, and $1.6 million is a result of reduced loan origination activity related to lower customer demand, resulting in a reduced offset to compensation expense for deferred loan costs. The remainder primarily results from the increase in employees by 157 full-time equivalents in 2009.

Circle acquisition.

Net occupancy and equipment expense continuesincreased in 2013 as compared to increase primarilythe prior year as a result of the growthaddition of 4 stores, full phase in of the numbersix locations from the Circle acquisition, and $857,000 in occupancy and equipment expense related to FinPac subsequent to acquisition. Net occupancy and equipment expense increased in 2012 a result of our Company’s locations. The growth in 2010 is the resultaddition of the cost of three new Home Lending Centers in Oregon, the operation of a full year of 2011 additions, and the six locations now operating new locations throughfrom the FDIC-assisted acquisition of Rainier, Evergreen and Nevada Security, respectively, the addition of fiveCircle. The 2011 additions included ten de novo Community Banking locations, in Portland, Oregon, Seattle, Washington, and Santa Rosa, California, the opening of one new Commercial Banking Center in Walnut Creek, California and two Mortgage Offices in Tigard, Oregon, and Longview, Washington. Additionally, in 2010, we remodeled 48 stores, including locations acquired. The growth in 2009 reflects the two new banking locations obtained through the FDIC-assisted purchase and assumption of the Bank of Clark County in January 2009, the addition of two de novo Community Banking locations, in Portland, Oregon and Vancouver, Washington, and the opening of a new Commercial Banking Center in Lynnwood, Washington. In 2008, we opened a new Commercial Banking Center in San Francisco, California and a Mortgage Office and an administrative facility in Stockton, California. Additionally,Hillsboro, Oregon.

46


Communications costs increased in 2008, we remodeled 38 stores,2013 compared to 2012, and in 2012 compared to 2011, primarily locations acquired through acquisitions,due to meet Umpqua brand standards and customer expectations throughout the California region. The increase in net occupancy and equipment expense in 2009 also reflects increased maintenance contract and software amortization costs.

Communications, marketing and supplies fluctuated in the current yeardata processing cost as a result of normal operationsthe Company’s continued growth and the FDIC assumptions.expansion. Marketing and supplies expenses increased in 2013 compared to 2012 due to costs associated with branding initiatives and decreased in 2012 compared to 2011, due to cost containment efforts and a reduced spend associated with acquisitions and expansion into new markets in 2011. Services expense decreased in 2013 compared to 2012 and increased in 20092012 compared to 20082011 primarily due to higherfluctuations related to legal and other professional fees and remains elevated in 2010.

fees.

The decrease in FDIC assessments decreased in 2010 resulted from2013, compared to 2012, and in 2012, compared to 2011, as a result of the one-time $4.0 million specialadoption by the FDIC of a final rule that changed the assessment incurredrate and the assessment base (from a domestic deposit base to a scorecard based assessment system for banks with more than $10 billion in assets) effective in the second quarter of 2009, partially offset by the industry wide increase2011, resulting in thea lower assessment rate organic deposit growth, and deposit growth resulting frombase and decreased assessment to the FDIC-assisted acquisitions. The increase in FDIC assessment expense in 2009 compared to 2008 resulted fromCompany.

In the industry-wide increase in assessment rates and a one-time $4.0 million special assessment imposed in the second quarter of 2009 by the FDIC in efforts to rebuild the Deposit Insurance Fund. Additional discussion on FDIC insurance assessments is provided in Item 1Business above, under the headingFederal Deposit Insurance.year ended

The slowdown in the housing industry, which has continued to detrimentally affect our residential development portfolio, has led to a continued elevated level of foreclosures on residential development related properties and movement of the properties into other real estate owned (“OREO”). Through 2010, declines in the market values of these properties after foreclosure have resulted in additional losses on the sale of the properties or by valuation adjustments. As a result, during 2010, the Company

Umpqua Holdings Corporation

recognized losses on sale of non-covered OREO of $4.0 million and non-covered valuation adjustments of $4.1 million. During 2009,December 31, 2013, the Company recognized lossesa net loss (which includes loss on sale ofand valuation adjustments) on non-covered OREO properties of $11.0$1.1 million, as compared to a net loss on non-covered OREO properties of $9.2 million and non-covered valuation adjustments of $12.2 million. During 2008,$10.7 million in the years ended December 31, 2012 and 2011, respectively. In the year ended December 31, 2013, the Company recognized lossesa net loss (which includes loss on sale of non-covered OREO of $3.2 million and non-covered valuation adjustments of $5.1 million.

Included within the results for 2010, the Company recognized gainsadjustments) on sale of covered OREO properties of $4.1 million, representing proceeds received in excess of their estimated acquisition date fair values, and valuation adjustments of $1.9 million. As the estimated credit losses realized on these properties were less than originally anticipated at acquisition date, there is a corresponding decrease in non-interest income within the Change in FDIC indemnification asset line item representing the reduction of anticipated covered credit losses. Additional discussion regarding our procedures to determine and recognize valuation adjustments on other real estate owned is provided under the headingAsset Quality and Non-Performing Assetsbelow.

The decrease in intangible amortization in 2010$135,000, as compared to 2009,net losses on covered OREO properties of $3.4 million and increase in intangible amortization in 2009 as compared to 2008, results primarily from an $804,000 impairment recognized$7.5 million in the fourth quarteryear ended December 31, 2012 and 2011, respectively. This is primarily the result of 2009 related to the merchant servicing portfolio obtained through a prior acquisition, partially offset by the run-offimproving real estate values, allowing for better realization of intangible assets in 2009 that were amortized on an accelerated basis.

The goodwill impairment charge incurred in 2009 relates to the Community Banking operating segment. This charge primarily resulted from a decline in the fair valuemarket values of the Community Banking reporting unit, which corresponded to the decline in the Company’s market capitalization and the banking industry in general, and its effect on the implied fair value of the goodwill. The goodwill impairment charge incurred in 2008 related to the Retail Brokerage reporting segment, which resulted from the Company’s evaluation following the departure of certain Umpqua Investments financial advisors. Discussion related to the goodwill impairment charge is provided in Note 9 of theNotes to Consolidated Financial Statements and under the headingGoodwill and Other Intangible Assetsbelow.existing OREO properties.


We incur significant expenses in connection with the completion and integration of bank acquisitions that are not capitalizable. The merger-related expense incurred in 2011 related primarily to FDIC-assisted acquisitions, while those incurred in 2012 relate to the acquisition of Circle and in 2013, primarily relate to the acquisition of FinPac and the proposed merger with Sterling. Classification of expenses as merger-related is done in accordance with the provisions of a Board-approved policy.  The following table presents the merger-related expenses by major category for the yearyears ended December 31, 20102013, 2012 and 2009. The Company incurred no merger-related expenses in 2008. The merger-related expenses incurred in 2010 relate to the FDIC-assisted acquisitions of Evergreen, Rainier, and Nevada Security. The merger-related expenses incurred in 2009 relate to the FDIC-assisted purchase and assumption of certain assets and liabilities of the Bank of Clark County. We do not expect to incur any additional significant merger-related expenses in connection with the Evergreen, Rainier, Nevada Security, Bank of Clark County or any other previous acquisition.

2011.

Merger-Related Expense

Years Ended December 31,

(in thousands)

    2010   2009 

Professional fees

  $2,984    $143  

Compensation and relocation

   962     39  

Communications

   330     61  

Premises and equipment

   630     2  

Travel

   710       

Other

   1,059     28  
     

Total

  $6,675    $273  
     

In connection with Visa establishing a $3.0 billion litigation escrow account from the proceeds of an initial public offering, the Company reversed the $5.2 million reserve

 201320122011
Professional fees$7,755
$1,145
$173
Compensation and relocation158
856

Communications49
66

Premises and equipment44
29
82
Travel140
98
11
Other690
144
94
   Total$8,836
$2,338
$360
Other non-interest expense decreased in the first quarter of 2008, reflected2013 as compared to 2012 as a reductionresult of other non-interest expense. We were requiredas a result of a decrease in loan and OREO workout related costs, partially offset by an increase due to recognizeFinPac operations and an estimate of Visa’s pending litigation settlements in the fourth quarter of 2007 based on our

ownership position priorFDIC loss sharing claw back liability expense recorded due to the initial public offering by Visa. With the escrow litigation account funded for the estimated liability for covered litigation, we were able to reverse the accrual. In October 2008, Visa announced that it had reached a settlement with Discover Card related to an antitrust lawsuit. Umpqua Bank and other Visa member banks are obligated to fund the settlement and share in losses resulting from this litigation that are not already provided for in the escrow account. Visa notified the Company that it had established an additional reserve related to the settlement with Discover Card that has not already been funded into the escrow account. In connection with this settlement, the Company recorded, in the third quarter of 2008, a liability and corresponding expense of $2.1 million pre-tax, for its proportionate share of that liability. The Company is not a party to the Visa litigation and its liability arises solely from the Bank’s membership interest in Visa. In December 2008, this liability and expense were reversed when Visa deposited additional funds into the escrow account to cover the remaining amountbetter than expected performance of the settlement.

Evergreen Bank FDIC assisted acquisition. Other non-interest expense increased in 20102012 over 2009 primarily2011 as a result of increased professional fees and increased local taxes, partially offset by decreased expenses related to problem covered and non-covered loans and covered and non-covered other real estate owned as well as various other growth initiatives underway. Other non-interest expense increased in 2009 over 2008 primarily as a result of expenses related to problem loans, other real estate owned, and settlement fees related to the retail brokerage subsidiary.

owned.


INCOME TAXES

Our consolidated effective tax rate as a percentage of pre-tax income for 20102013 was 17.0%34.9%, compared to 21.0%34.4% for 20092012 and 30.2%33.0% for 2008.2011. The effective tax rates were belowdiffered from the federal statutory rate of 35% and the apportioned state rate of 5.6%7.1% (net of the federal tax benefit) principally because of the non-deductible impairment loss on goodwill (for 2009),relative amount of income we earn in each state jurisdiction, non-taxable income arising from bank-owned life insurance, income on tax-exempt investment securities, nondeductible merger expenses and tax credits arising from low income housing investments, Business Energy tax credits and exemptions related to loans and hiring in designated enterprise zones. The income tax expense from income taxes in 2010 is a result of the operating income recognized in the period.

investments.


Additional information on income taxes is provided in Note 13 of theNotes to Consolidated Financial Statementsin Item 8 below.


FINANCIAL CONDITION

INVESTMENT SECURITIES


47


The composition of our investment securities portfolio reflects management’smanagement's investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of interest income. The investment securities portfolio also mitigates interest rate and credit risk inherent in the loan portfolio, while providing a vehicle for the investment of available funds, a source of liquidity (by pledging as collateral or through repurchase agreements) and collateral for certain public funds deposits.

Trading securities consist of securities held in inventory by Umpqua Investments for sale to its clients and securities invested in trust for the benefit of certain executives or former employees of acquired institutions as required by agreements. Trading securities were $3.0$6.0 million at December 31, 2010,2013, as compared to $2.3$3.7 million at December 31, 2009.2012. This increase is principally attributable to increases in the fair market value of investments securities invested for the benefit of former employees and contributions made to supplemental retirement plans for the benefit of certain executives of $162,000 and an increase of $586,000 in Umpqua Investments’ inventory of trading securities.

Investment securities available for sale increased $1.1were $1.8 billion to $2.9 billion as of December 31, 2010, as2013 compared to $2.6 billion at December 31, 2009. This increase is principally attributable to purchases2012.  Paydowns of $1.5 billion of investment securities available for sale and investment securities available for sale of $53.0$803.9 million assumed in the Evergreen, Rainier, and Nevada Security acquisitions, which were partially offset by paydowns of $408.7 million and, amortization of net purchase price premiums of $20.5 million.

$32.7 million and a decrease in fair value of investments securities available for sale of $49.0 million were partially offset by purchases of $51.2 million of investment securities available for sale.  


Investment securities held to maturity were $4.8$5.6 million as of December 31, 2010,2013 as compared to $6.1holdings of $4.5 million at December 31, 2009. This decrease is principally attributable2012. The change primarily relates to purchases of $2.1 million, partially offset by paydowns and maturities of investment securities held to maturity of $1.7 million, partially offset by the accretion of the non-credit related losses in other comprehensive income of $288,000.

Umpqua Holdings Corporation

$1.4 million.

The following table presents the available for sale and held to maturity investment securities portfolio by major type as of December 31 for each of the last three years:

Summary of Investment Securities

As of December 31,

(dollars in thousands)

   December 31, 
    2010   2009   2008 

AVAILABLE FOR SALE:

      

U.S. Treasury and agencies

  $118,789    $11,794    $31,226  

Obligations of states and political subdivisions

   216,726     211,825     179,585  

Residential mortgage-backed securities and collateralized mortgage obligations

   2,581,504     1,569,849     1,025,295  

Other debt securities

   152     159     634  

Investments in mutual funds and other equity securities

   2,009     1,989     1,972  
     
  $2,919,180    $1,795,616    $1,238,712  
     

HELD TO MATURITY:

      

Obligations of states and political subdivisions

  $2,370    $3,216    $4,166  

Residential mortgage-backed securities and collateralized mortgage obligations

   2,392     2,845     11,496  

Other investment securities

             150  
     
  $4,762    $6,061    $15,812  
     

 December 31,
 2013 2012 2011
AVAILABLE FOR SALE     
U.S. Treasury and agencies$268
 $45,820
 $118,465
Obligations of states and political subdivisions235,205
 263,725
 253,553
Residential mortgage-backed securities and collateralized mortgage obligations1,553,541
 2,313,376
 2,794,355
Other debt securities
 222
 134
Investments in mutual funds and other equity securities1,964
 2,086
 2,071
 $1,790,978
 $2,625,229
 $3,168,578
HELD TO MATURITY     
Obligations of states and political subdivisions$
 $595
 $1,335
Residential mortgage-backed securities and collateralized mortgage obligations5,563
 3,946
 3,379
 $5,565
 $4,543
 $4,714

The following table presents information regarding the amortized cost, fair value, average yield and maturity structure of the investment portfolio at December 31, 2010.

2013.

Investment Securities Composition*

December 31, 2010

2013

(dollars in thousands)

    Amortized
Cost
   

Fair

Value

   Average
Yield
 

U.S. TREASURY AND AGENCIES

      

One year or less

  $    $     0.00

One to five years

   117,333     118,557     1.30

Five to ten years

   218     232     3.68
       
   117,551     118,789     1.30

OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS

      

One year or less

   25,640     25,966     5.77

One to five years

   74,450     77,475     5.53

Five to ten years

   71,628     72,868     6.10

Over ten years

   43,781     42,792     6.14
       
   215,499     219,101     5.87

OTHER DEBT SECURITIES

      

Over ten years

   152     152     5.99

Serial maturities

   2,546,366     2,583,903     3.41

Other investment securities

   1,959     2,009     3.60
       

Total securities

  $2,881,527    $2,923,954     3.51
       


48


 Amortized
 Fair
 Average
 Cost
 Value
 Yield
U.S. TREASURY AND AGENCIES     
One year or less$34
 $34
 2.56%
One to five years215
 234
 3.68%
 249
 268
 3.54%
      
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS     
One year or less26,276
 26,598
 5.72%
One to five years89,020
 93,325
 6.03%
Five to ten years78,196
 80,461
 5.30%
Over ten years36,477
 34,821
 4.74%
 229,969
 235,205
 5.55%
      
OTHER DEBT SECURITIES     
Serial maturities1,572,564
 1,559,415
 2.23%
      
Other investment securities1,959
 1,964
 2.40%
Total securities$1,804,741
 $1,796,852
 2.67%
*Weighted average yields are stated on a federal tax-equivalent basis of 35%. Weighted average yields for available for sale investments have been calculated on an amortized cost basis.


The mortgage-related securities in “Serial maturities” in the table above include both pooled mortgage-backed issues and high-quality collaterized mortgage obligation structures, with an average duration of 2.74.0 years. These mortgage-related securities provide yield spread to U.S. Treasury or agency securities; however, the cash flows arising from them can be volatile due to refinancing of the underlying mortgage loans.


The equity security in “Other investment securities” in the table above at December 31, 20102013 principally represents an investment in a Community Reinvestment Act investment fund comprised largely of mortgage-relatedmortgage-backed securities, although funds may also invest in municipal bonds, money market accountscertificates of deposit, repurchase agreements, or asset-backed securities.

securities issued by other investment companies.

We review investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the change in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors.

Prior to the second quarter of 2009, the Company would assess an OTTI or permanent impairment based on the nature of the decline and whether the Company had the ability and intent to hold the investments until a market price recovery. If the Company determined a security to be other-than-temporarily or permanently impaired, the full amount of impairment would be recognized through earnings in its entirety. New guidance related to the recognition and presentation of OTTI of debt securities became effective in the second quarter of 2009. Rather than asserting whether a Company has the ability and intent to hold an investment until a market price recovery, a Company must consider whether they intend to sell a security or if it is likely that they would be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity.

For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI.   
The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI.  For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the OTTI amount recorded in OCI increaseswill increase the carrying value of the investment, and doeswould not affect earnings. If there is an indication of additional credit losses the security is reevaluated accordinglyaccording to the procedures described above.

Prior to the Company’s adoption of the new guidance related to the recognition and presentation of OTTI of debt securities which became effective in the second quarter of 2009, the Company recorded a $2.1 million OTTI charge in the three months ended March 31, 2009. This charge related to three non-agency collateralized mortgage obligations carried as held to maturity for which the default rates and loss severities of the underlying collateral and credit coverage ratios of the security indicated that it was probable that credit losses were expected to occur. In 2008, the Company recorded $4.2 million in OTTI. Charges of $3.8 million related to seven non-agency collateralized mortgage obligations carried as held to maturity for which the default rates and loss severities of the underlying collateral and credit coverage ratios of the security indicated that it was probable that credit losses were expected to occur. These securities were valued by third party pricing services using matrix or model pricing methodologies, and were corroborated by broker indicative bids. The remaining non-agency securities within mortgage-backed securities and collateralized mortgage obligations carried as held to maturity were specifically evaluated for OTTI, and the default rates and loss severities of the underlying collateral indicated that credit losses are not expected to occur. Upon adoption of the new OTTI guidance in the second quarter of 2009, the Company analyzed these securities as well as other securities where OTTI had been previously recognized, and determined that as of the adoption date such losses were credit related. As such, there was no cumulative effect adjustment to the opening balance of retained earnings or a corresponding adjustment to accumulated OCI.

Umpqua Holdings Corporation

The following table presents the OTTI losses for the years ended December 31, 2010, 2009, and 2008.

   2010   2009   2008 
    Held To
Maturity
   Available
For Sale
   Held To
Maturity
  Available
For Sale
   Held To
Maturity
   Available
For Sale
 

Total other-than-temporary impairment losses

  $93    $    $12,317   $239    $4,041    $139  

Portion of other-than-temporary impairment losses transferred from (recognized in) other comprehensive income(1)

   321          (1,983              
     

Net impairment losses recognized in earnings(2)

  $414    $    $10,334   $239    $4,041    $139  
     

(1)Represents other-than-temporary impairment losses related to all other factors.
(2)Represents other-than-temporary impairment losses related to credit losses.

The OTTI recognized on investment securities held to maturity primarily relates to 29 non-agency collateralized mortgage obligations for all periods presented. Each of these securities holds various levels of credit subordination. The underlying mortgage loans of these securities were originated from 2003 through 2007. At origination, the weighted average loan-to-value of the underlying mortgages was 69%; the underlying borrowers had weighted average FICO scores of 731, and 59% were limited documentation loans. These securities were valued by third-party pricing services using matrix or model pricing methodologies and were corroborated by broker indicative bids. We estimated the cash flows of the underlying collateral for each security considering credit, interest and prepayment risk models that incorporate management’s estimate of projected key assumptions including prepayment rates, collateral default rates and loss severity. Assumptions utilized vary from security to security, and are influenced by factors such as loan interest rates, geographic location, borrower characteristics and vintage, and historical experience. We then used a third party to obtain information about the structure of each security, including subordination and other credit enhancements, in order to determine how the underlying collateral cash flows will be distributed to each security issued in the structure. These cash flows were then discounted at the interest rate used to recognize interest income on each security. We review the actual collateral performance of these securities on a quarterly basis and update the inputs as appropriate to determine the projected cash flows. The following table presents a summary of the significant inputs utilized to measure management’s estimate of the credit loss component on these non-agency residential collateralized mortgage obligations as of December 31, 2010 and 2009:

   2010  2009 
   Range  

Weighted

Average

  Range  

Weighted

Average

 
    Minimum  Maximum   Minimum  Maximum  

Constant prepayment rate

   5.0  20.0  14.9  4.0  25.0  14.8

Collateral default rate

   5.0  15.0  10.6  8.0  45.0  16.7

Loss severity

   25.0  55.0  37.9  20.0  40.0  31.4

In the second quarter of 2009 the Company recorded an OTTI charge of $239,000 related to an available for sale collateralized debt obligation that holds trust preferred securities. Management noted certain deferrals and defaults in the pool and believes the impairment represents credit loss in its entirety.


Gross unrealized losses in the available for sale investment portfolio was $21.4$31.4 million at December 31, 2010.2013.  This consisted primarily of unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations of $20.0$28.8 million and unrealized losses on obligations.  The

49


unrealized losses were primarily caused by interest rate increases subsequent to the purchase of the securities, and not credit quality. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit

of the issuers or the underlying collateral. Additional information about the investment securities portfolio is provided in Note 43 of theNotes to Consolidated Financial Statements in Item 8 below.

.


RESTRICTED EQUITY SECURITIES

Restricted equity securities were $34.5$30.7 million at December 31, 20102013 and $15.2$33.4 million at December 31, 2009.2012.  The increasedecrease of $19.3$2.7 million is attributable to the FDIC-assisted acquisitions of Evergreen, Rainier, and Nevada Security. Of the $34.5 million at December 31, 2010, $28.6 million and $4.6 million represent the Bank’s investment instock redemptions by the Federal Home Loan Banks (“FHLB”) of San Francisco and Seattle during the period.  Of the $30.7 million at December 31, 2013, $29.4 million represent the Bank’s investment in the FHLBs of Seattle and San Francisco, respectively.Francisco.  The remaining restricted equity securities represent investments in Pacific Coast Bankers’ Bancshares stock. FHLB stock is carried at par and does not have a readily determinable fair value. Ownership of FHLB stock is restricted to the FHLB and member institutions, and can only be purchased and redeemed at par.   The remaining restricted equity securities primarily represent investments in Pacific Coast Bankers’ Bancshares stock.

Although as of December 31, 2010,

In September 2012, the FHLB of Seattle complies with all of its regulatory requirements (including the risk-based capital requirement), it remains classified as “undercapitalized”was notified by the Federal Housing Finance Agency (“Finance Agency”). On October 25, 2010, that it is now classified as “adequately capitalized” as compared to the prior classification of “undercapitalized.” Under Finance Agency announced that the Board of Directors ofregulations, the FHLB of Seattle agreed to the stipulation and issuance ofmay repurchase excess capital stock under certain conditions; however it may not redeem stock or pay a Consent Order by thedividend without Finance Agency that resolves certain capital and supervisory matters. The Consent Order and associated agreement constitute the FHLB’s capital restoration plan, which included steps the FHLB would take to resume timely repurchases and redemptions of member capital stock.

Management periodically evaluates FHLB stock for other-than-temporary or permanent impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.

Under Finance Agency regulations, a FHLB that fails to meet any regulatory capital requirement may not declare a dividend or redeem or repurchase capital stock in excess of what is required for members’ current loans. The FHLBs have access to the U.S. Government-Sponsored Enterprise Credit Facility, a secured lending facility that serves as a liquidity backstop, substantially reducing the likelihood that the FHLBs would need to sell securities to raise liquidity and, thereby, cause the realization of large economic losses. Standard and Poors rating of AA+ was reaffirmed in July 2010.approval. Based on the above, the Company has determined there is not an other-than-temporary impairment on the FHLB stock investment as of December 31, 2010.

2013. 


LOANS AND LEASES
Non-Covered

Non-covered loansLoans and leases

Leases, net 

Total non-covered loans and leases outstanding at December 31, 20102013 were $5.7$7.4 billion a decrease, an increase of $340.3$673.3 million or 5.7%, from as compared to year-end 2009.2012. This decreaseincrease is principally attributable to net loan and lease originations of $484.9 million, loans and leases acquired in the FinPac acquisition of $264.3 million, and covered loans transferred to non-covered loans and leases of $14.8 million, partially offset by charge-offs of $128.5$31.0 million, transfers to other real estate owned of $41.5$21.6 million, and non-covered loans sold of $38.7$60.3 million and non-covered net loan paydowns and maturities of $146.3 million during the period.


The Bank provides a wide variety of credit services to its customers, including construction loans, commercial lines of credit, secured and unsecured commercial loans, commercial real estate loans, residential mortgage loans, home equity credit lines, consumer loans and commercial leases. Loans are principally made on a secured basis to customers who reside, own property or operate businesses within the Bank’sBank's principal market area.

Umpqua Holdings Corporation

The following table presents the composition of the non-covered loan and lease portfolio, net of deferred fees and costs, as of December 31 for each of the last five years.

Non-covered Loan and Lease Portfolio Composition

As of December 31,

(dollars in thousands)

  2010  2009  2008  2007  2006 
  Amount  Percentage  Amount  Percentage  Amount  Percentage  Amount  Percentage  Amount  Percentage 
  

Commercial real estate

 $3,879,102    68.5 $4,115,593    68.6 $4,139,289    67.5 $4,187,819    69.2 $3,807,715    71.0%   

Commercial

  1,256,872    22.2  1,390,491    23.2  1,503,400    24.5  1,438,505    23.8  1,153,088    21.5%   

Residential

  501,001    8.9  468,486    7.8  465,361    7.6  404,900    6.6  369,607    6.9%   

Consumer & other

  33,043    0.6  36,098    0.6  34,774    0.6  35,700    0.6  42,912    0.8%   

Deferred loan fees, net

  (11,031  -0.2  (11,401  -0.2  (11,450  -0.2  (11,289  -0.2  (11,460  -0.2%   
    

Total loans and leases

 $5,658,987    100.0 $5,999,267    100.0 $6,131,374    100.0 $6,055,635    100.0 $5,361,862    100.0%   
    

 2013 2012 2011 2010 2009
 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial real estate, net$4,325,024
 58.8% $4,183,254
 62.7% $3,802,252
 64.6% $3,868,396
 68.3% $4,104,308
 68.4%
Commercial, net2,119,796
 28.8% 1,719,139
 25.7% 1,456,329
 24.8% 1,255,142
 22.2% 1,388,325
 23.2%
Residential, net861,470
 11.7% 741,100
 11.0% 590,467
 10.0% 502,170
 8.9% 470,315
 7.8%
Consumer & other, net48,113
 0.7% 37,587
 0.6% 39,050
 0.6% 33,279
 0.6% 36,319
 0.6%
Total loans and leases, net$7,354,403
 100.0% $6,681,080
 100.0% $5,888,098
 100.0% $5,658,987
 100.0% $5,999,267
 100.0%
The following table presents the concentration distribution of our non-covered loan and lease portfolio by major type:

Non-Covered Loan and Lease Concentrations

As of December 31, 20102013 and 2009

2012


50



(dollars in thousands)

   2010  2009 
   Amount  Percentage  Amount  Percentage 
  

Commercial real estate

     

Term & multifamily

  $3,483,475    61.6 $3,523,104    58.7%   

Construction & development

   247,814    4.4  366,680    6.1%   

Residential development

   147,813    2.6  225,809    3.8%   

Commercial

     

Term

   509,453    9.0  585,856    9.8%   

LOC & other

   747,419    13.2  804,635    13.4%   

Residential

     

Mortgage

   222,416    3.9  182,757    3.0%   

Home equity loans & lines

   278,585    4.9  285,729    4.8%   

Consumer & other

   33,043    0.6  36,098    0.6%   

Deferred loan fees, net

   (11,031  -0.2  (11,401  -0.2%   
     

Total

  $5,658,987    100.0 $5,999,267    100.0%   
     

 December 31, 2013 December 31, 2012
 Amount Percentage Amount Percentage
Commercial real estate       
Non-owner occupied term, net$2,328,260
 31.7% $2,316,909
 34.5%
Owner occupied term, net1,259,583
 17.1% 1,276,840
 19.2%
Multifamily, net403,537
 5.5% 331,735
 5.1%
Construction & development, net245,231
 3.3% 200,631
 3.0%
Residential development, net88,413
 1.2% 57,139
 0.9%
Commercial       
Term, net770,845
 10.5% 797,061
 11.9%
LOC & other, net987,360
 13.4% 890,808
 13.3%
Leases and equipment finance, net361,591
 4.9% 31,270
 0.5%
Residential       
Mortgage, net597,201
 8.1% 478,463
 7.1%
Home equity loans & lines, net264,269
 3.6% 262,637
 3.9%
Consumer & other, net48,113
 0.7% 37,587
 0.6%
Total, net of deferred fees and costs$7,354,403
 100.0% $6,681,080
 100.0%

The following table presents the maturity distribution of our non-covered loan portfolios and the sensitivity of these loans to changes in interest rates as of December 31, 2010:

rates:

Maturities and Sensitivities of Non-covered Loans to Changes in Interest Rates

as of December 31, 2013
(in thousands)

   By Maturity   Loans Over One Year
by Rate Sensitivity
 
    One Year
or Less
   One Through
Five Years
   Over Five
Years
   Total   Fixed
Rate
   Floating
Rate
 

Commercial real estate

  $   494,905    $1,230,126    $2,154,071    $3,879,102    $693,871    $2,690,326  

Commercial(1)

  $605,008    $403,804    $217,182    $1,225,994    $407,985    $213,001  

        Loans Over One Year 
 By Maturity  by Rate Sensitivity 
 One Year
 One Through
 Over Five
   Fixed
 Floating
 or Less
 Five Years
 Years
 Total
 Rate
 Rate
Commercial real estate$531,755
 $1,384,831
 $2,408,438
 $4,325,024
 $830,941
 $2,962,328
Commercial (1)$905,562
 $453,797
 $398,846
 $1,758,205
 $360,324
 $492,319

(1)Excludes the lease and equipment finance portfolio.

In order


CoveredLoans, Net
Total covered loans outstanding at December 31, 2013 were $364.0 million, a decrease of $113.1 million as compared to assist with understanding the concentrationsyear-end 2012. This decrease is principally attributable to net loan paydowns and risks associated with our portfolio, we are providing several additional tablesmaturities of $101.9 million and transfers of covered loans to provide detailsnon-covered loans and leases of the most significant classes of the Company’s non-covered loan portfolio. The classification of non-covered loan balances are presented in accordance with how management monitors and manages the risks of the non-covered loan portfolio, including how the Company applies its allowance for non-covered loan and lease losses methodology.

Umpqua Holdings Corporation

$14.8 million.

The following table presents a distributionthe composition of the non-covered commercial real estate term & multifamilycovered loan portfolio by type and region asfor each of the last four years.
Covered Loan Portfolio Composition
As of December 31, 2010 and December 31, 2009.

Non-Covered Commercial Real Estate Term & Multifamily Portfolio by Type and Region

(dollars in thousands)

  December 31, 2010    
   Northwest
Oregon
  Central
Oregon
  Southern
Oregon
  Washington  Greater
Sacramento
  Northern
California
  Total  December 31,
2009
 

Non-owner occupied:

        

Commercial building

 $134,268   $3,660   $34,948   $37,863   $77,562   $102,485   $390,786   $376,934  

Medical office

  66,564    1,081    15,087    4,172    13,681    12,272    112,857    131,574  

Professional office

  152,400    7,497    50,722    29,378    119,363    58,609    417,969    438,149  

Storage

  28,290    789    17,460        17,105    34,113    97,757    97,150  

Multi-family

  67,899    742    10,855    5,550    8,079    23,466    116,591    98,310  

Resort

  5,432        679                6,111    7,145  

Retail

  204,502    4,787    30,573    12,334    158,695    57,591    468,482    510,469  

Residential

  35,278    97    8,769    5,032    8,796    16,428    74,400    80,336  

Farmland & agricultural

  4,993    188    517        197    18,071    23,966    36,041  

Apartments

  69,500        9,963    458    17,269    17,607    114,797    105,251  

Assisted living

  59,774        67,529    1,743    4,309    7,880    141,235    185,751  

Hotel & motel

  45,747        823    11,355    17,724    5,757    81,406    99,636  

Industrial

  28,066    2,554    6,343        33,192    22,081    92,236    101,539  

RV park

  31,559    655    18,307        780    5,353    56,654    54,107  

Warehouse

  10,125        230        1,148    1,612    13,115    14,568  

Other

  27,481    491    3,409    1,858    3,515    6,880    43,634    49,441  
    

Total

 $971,878   $22,541   $276,214   $109,743   $481,415   $390,205   $2,251,996   $2,386,401  

Owner occupied:

        

Commercial building

 $160,780   $2,737   $28,600   $17,367   $73,444   $106,884   $389,812   $380,253  

Medical office

  93,370    3,814    18,410    531    6,318    26,707    149,150    115,412  

Professional office

  59,839    2,242    12,044    1,381    22,028    18,139    115,673    106,414  

Storage

  14,681    146            1,837    12,863    29,527    21,108  

Multi-family

  801        51    3,145    146        4,143    1,087  

Resort

  5,596        4,247        3,050    1,038    13,931    9,934  

Retail

  47,212    2,428    10,833    2,302    46,013    51,152    159,940    168,873  

Residential

  5,980        2,599        1,698    2,204    12,481    13,821  

Farmland & agricultural

  9,869        802    2,000        45,676    58,347    56,632  

Apartments

  1,042        721        642        2,405    994  

Assisted living

  47,558        115        6,799    15,483    69,955    50,385  

Hotel & motel

  13,139        184    708        34,156    48,187    37,464  

Industrial

  54,014    1,378    15,104    6,725    8,171    37,193    122,585    119,046  

RV park

  824        2,489        153    1,139    4,605    4,088  

Warehouse

  10,774        398            6,783    17,955    19,361  

Other

  27,653    517            231    4,382    32,783    31,831  
    

Total

 $553,132   $13,262   $96,597   $34,159   $  170,530   $  363,799   $  1,231,479   $  1,136,703  
    

Total

 $  1,525,010   $  35,803   $  372,811   $  143,902   $651,945   $754,004   $3,483,475   $3,523,104  
    

   December 31, 2009 
    Northwest
Oregon
   Central
Oregon
   Southern
Oregon
   Washington   Greater
Sacramento
   Northern
California
   Total 

Total non-owner occupied

  $1,035,772    $24,138    $294,399    $79,539    $503,644    $448,909    $2,386,401  

Total owner occupied

   509,465     14,798     95,356     24,926     139,733     352,425     1,136,703  
     

Total

  $  1,545,237    $  38,936    $  389,755    $  104,465    $  643,377    $  801,334    $  3,523,104  
     

The following table presents a distribution


51

Table of the non-covered term commercial real estate portfolio by type and year of origination as of December 31, 2010:

Non-Covered Commercial Real Estate Term & Multifamily Portfolio by Type and Year of Origination

(in thousands)

   December 31, 2010 
    Prior to
2000
   2001 -
2004
   2005 -
2006
   2007 -
2008
   2009 -
2010
   Total 

Non-owner occupied:

            

Commercial building

  $7,460    $82,050    $59,593    $146,719    $94,964    $390,786  

Medical office

   386     44,662     16,740     29,894     21,175     112,857  

Professional office

   7,370     148,548     114,326     81,507     66,218     417,969  

Storage

   1,526     45,550     20,381     25,340     4,960     97,757  

Multi-family

   3,065     25,153     18,182     44,174     26,017     116,591  

Resort

   714     1,292          679     3,426     6,111  

Retail

   9,441     154,190     140,338     132,675     31,838     468,482  

Residential

   1,256     7,493     26,135     21,287     18,229     74,400  

Farmland & agricultural

   829     1,114     6,105     5,148     10,770     23,966  

Apartments

   800     20,208     21,075     19,140     53,574     114,797  

Assisted living

   5,888     52,101     46,712     15,553     20,981     141,235  

Hotel & motel

   9,615     26,254     19,546     22,585     3,406     81,406  

Industrial

   3,806     40,577     33,768     10,107     3,978     92,236  

RV park

   2,834     16,820     13,589     10,063     13,348     56,654  

Warehouse

   1,056     8,567     2,996     496          13,115  

Other

   636     11,872     10,488     19,636     1,002     43,634  
     

Total

  $56,682    $686,451    $549,974    $585,003    $373,886    $2,251,996  

Owner occupied:

            

Commercial building

  $9,349    $70,494    $77,524    $127,557    $104,888    $389,812  

Medical office

   2,190     22,424     9,807     41,323     73,406     149,150  

Professional office

   2,857     32,148     35,510     34,148     11,010     115,673  

Storage

   525     7,783     9,879     10,686     654     29,527  

Multi-family

   168     830               3,145     4,143  

Resort

   405     10,494     134          2,898     13,931  

Retail

   5,393     36,691     59,884     51,309     6,663     159,940  

Residential

   101     5,041     4,941     1,307     1,091     12,481  

Farmland & agricultural

   798     14,180     12,605     14,734     16,030     58,347  

Apartments

   40          602     914     849     2,405  

Assisted living

   4,930     7,505     41,448     13,636     2,436     69,955  

Hotel & motel

   5,688     25,515     5,624     1,541     9,819     48,187  

Industrial

   2,422     42,161     30,793     15,785     31,424     122,585  

RV park

   835     1,557     130     1,949     134     4,605  

Warehouse

   108     7,823     2,600     2,776     4,648     17,955  

Other

        2,999     21,586     7,348     850     32,783  
     

Total

  $35,809    $287,645    $313,067    $325,013    $269,945    $1,231,479  
     

Total

  $  92,491    $  974,096    $  863,041    $  910,016    $  643,831    $  3,483,475  
     

Umpqua Holdings Corporation

The following table presents a distribution of the non-covered term commercial real estate portfolio by type and year of maturity as of December 31, 2010:

Non-Covered Commercial Real Estate Term & Multifamily Portfolio by Type and Year of Maturity

(in thousands)

   December 31, 2010 
    2011   2012   2013 -
2014
   2015 -
2016
   2017 -
2021
   2022 &
Later
   Total 

Non-owner

              

Commercial building

  $22,853    $22,682    $79,639    $82,637    $169,425    $13,550    $390,786  

Medical office

   305     549     33,974     14,969     54,618     8,442     112,857  

Professional office

   25,820     11,306     94,325     125,222     147,667     13,629     417,969  

Storage

   8,371     13     23,901     27,156     37,205     1,111     97,757  

Multi-family

   4,079     2,790     16,877     20,795     65,595     6,455     116,591  

Resort

             809     4,140     1,162          6,111  

Retail

   37,900     20,968     98,145     152,987     153,632     4,850     468,482  

Residential

   15,877     8,826     13,933     9,513     19,089     7,162     74,400  

Farmland & agricultural

   1,237          3,095     6,275     10,583     2,776     23,966  

Apartments

   4,981     2,287     7,044     14,689     84,074     1,722     114,797  

Assisted living

   6,640     13,674     3,720     66,246     48,771     2,184     141,235  

Hotel & motel

   7,635     2,103     18,251     19,847     29,639     3,931     81,406  

Industrial

   5,168     7,365     15,734     28,918     29,563     5,488     92,236  

RV park

   1,412     2,056     11,260     10,343     29,286     2,297     56,654  

Warehouse

   462     635     7,561     1,452     1,930     1,075     13,115  

Other

   14,050     3,249     13,487     3,982     5,394     3,472     43,634  
     

Total

  $156,790    $98,503    $441,755    $589,171    $887,633    $78,144    $2,251,996  

Owner occupied:

              

Commercial building

  $5,374    $16,186    $47,261    $69,550    $197,367    $54,074    $389,812  

Medical office

   533     1,841     9,415     7,043     106,839     23,479     149,150  

Professional office

   2,105     3,535     20,717     24,965     58,841     5,510     115,673  

Storage

   1,456          2,630     7,019     17,412     1,010     29,527  

Multi-family

             830     51     3,262          4,143  

Resort

             3,954     134     5,596     4,247     13,931  

Retail

   7,968     2,829     31,698     36,630     72,216     8,599     159,940  

Residential

   1,547     1,507     2,350     1,708     3,826     1,543     12,481  

Farmland & agricultural

   3,950     349     12,110     12,505     26,726     2,707     58,347  

Apartments

             40          2,365          2,405  

Assisted living

   11,917          12,277     28,411     14,934     2,416     69,955  

Hotel & motel

        4,089     12,516     15,298     6,434     9,850     48,187  

Industrial

   5,011     8,405     14,443     29,394     53,784     11,548     122,585  

RV park

   79     40     1,731     384     2,218     153     4,605  

Warehouse

   320     1,189     5,192     4,588     6,580     86     17,955  

Other

   2,521     60     964     1,524     27,631     83     32,783  
     

Total

  $42,781    $40,030    $178,128    $239,204    $606,031    $125,305    $1,231,479  
     

Total

  $199,571    $138,533    $619,883    $828,375    $1,493,664    $203,449    $3,483,475  
     

The following table presents a distribution of the non-covered commercial real estate construction portfolio by type and region as of December 31, 2010 and December 31, 2009.

Non-Covered Commercial Real Estate Construction and Development Portfolio by Type and Region

(in thousands)

  December 31, 2010    
   Northwest
Oregon
  Central
Oregon
  Southern
Oregon
  Washington  Greater
Sacramento
  Northern
California
  Total  December 31,
2009
 

Non-owner occupied:

        

Commercial building

 $897   $   $2,297   $300   $16,236   $6,147   $25,877   $65,998  

Medical office

  12,458                    1,430    13,888    16,093  

Professional office

  9,294        2,238        8,525    3,020    23,077    35,152  

Storage

  8,447                        8,447    10,905  

Multi-family

              2,837    7,868        10,705    7,523  

Retail

  10,968                2,530        13,498    23,469  

Residential

  27,156    310    3,822    1,784    22,990    5,996    62,058    91,205  

Apartments

  13,324                        13,324    13,621  

Assisted living

  9,300                3,747        13,047    16,405  

Hotel & motel

                              4,070  

Industrial

                              1,533  

Other

  124                    2,980    3,104    3,249  
    

Total

 $91,968   $310   $8,357   $4,921   $61,896   $19,573   $187,025   $289,223  

Owner occupied:

        

Commercial building

 $12,646   $   $166   $   $584   $11,983   $25,379   $35,432  

Medical office

  14,479                        14,479    18,849  

Professional office

                                

Storage

                              995  

Multi-family

                                

Retail

                              4,041  

Residential

  5,346                    598    5,944    9,275  

Apartments

                              860  

Assisted living

  7,342                        7,342    7,472  

Hotel & motel

                      5,447    5,447      

Industrial

  2,121        77                2,198    533  

Other

                                
    

Total

 $41,934   $   $243   $   $584   $18,028   $60,789   $77,457  
    

Total

 $133,902   $310   $8,600   $4,921   $62,480   $37,601   $247,814   $366,680  
    

   December 31, 2009 
    Northwest
Oregon
   Central
Oregon
   Southern
Oregon
   Washington   Greater
Sacramento
   Northern
California
   Total 

Total non-owner occupied

  $134,247    $1,778    $8,415    $14,064    $102,008    $28,711    $289,223  

Total owner occupied

   43,537          692          17,607     15,621     77,457  
     

Total

  $177,784    $1,778    $9,107    $14,064    $119,615    $44,332    $366,680  
     

Umpqua Holdings Corporation

The following table presents a distribution of the non-covered commercial loan portfolio (excluding leases) by type and region as of December 31, 2010 and December 31, 2009.

Commercial Loan Portfolio by Type and Region

(in thousands)

  December 31, 2010    
   Northwest
Oregon
  Central
Oregon
  Southern
Oregon
  Washington  Greater
Sacramento
  Northern
California
  Total  December 31,
2009
 

Commercial line of credit

 $101,125   $1,453   $22,531   $22,826   $154,244   $70,140   $372,319   $464,417  

Asset-based line of credit

  111,948    118    8,831    13,021    11,245    61,022    206,185    147,374  

Term loans

  155,608    3,433    27,037    9,753    48,209    99,927    343,967    379,433  

Agricultural

  25,050        459        332    57,491    83,332    84,230  

Municipal

  11,858        18,485        37,587    4,064    71,994    119,896  

SBA

                      57,529    57,529    60,936  

Small business lending

  42,569            4,769    41,752        89,090    98,183  
    

Total

 $448,158   $5,004   $77,343   $50,369   $293,369   $350,173   $1,224,416   $1,354,469  
    

   December 31, 2009 
    Northwest
Oregon
   Central
Oregon
   Southern
Oregon
   Washington   Greater
Sacramento
   Northern
California
   Total 

Total

  $513,375    $7,348    $81,185    $47,573    $320,784    $384,204    $1,354,469  
     

Due to the impact of the continuing housing market downturn on our residential development loan portfolio, discussion of and tables related to this loan segment is provided under the headingAsset Quality and Non-Performing Assets below.

Covered loans and leases, net

Total covered loans and leases outstanding at December 31, 2010 were $785.9 million. All covered loans and leases were acquired in 2010. Contents


 2013 2012 20112010
 Amount Percent Amount Percent Amount Percent AmountPercent
Commercial real estate, net$305,131
 81.6% $399,514
 80.8% $506,637
 79.4% $619,248
78.5%
Commercial, net22,417
 6.0% 38,521
 7.7% 57,576
 9.1% 78,003
9.9%
Residential, net41,953
 11.3% 51,267
 10.3% 64,588
 10.2% 80,504
10.2%
Consumer & other, net4,262
 1.1% 6,051
 1.2% 7,970
 1.3% 10,864
1.4%
Total, net of deferred fees and costs373,763
 100.0% 495,353
 100.0% 636,771
 100.0% 788,619
100.0%
Allowance for covered loans(9,771)   (18,275)   (14,320)   (2,721) 
Total$363,992
   $477,078
   $622,451
   $785,898
 

The following table presents the concentration distribution of our covered loan portfolio atby major type:
Covered Loan Concentrations
As of December 31, 2010.

Covered Loan and Leases, Net Concentrations

(dollars in thousands)

   2010 
   Amount   Percentage 

Commercial real estate

    

Term & multifamily

  $569,642     72.5%  

Construction & development

   22,435     2.9%  

Residential development

   24,706     3.1%  

Commercial

    

Term

   42,600     5.4%  

LOC & other

   35,227     4.5%  

Residential

    

Mortgage

   44,824     5.7%  

Home equity loans & lines

   35,625     4.5%  

Consumer & other

   10,839     1.4%  
     

Total

  $785,898     100.0%  
     


 December 31, 2013 December 31, 2012
 Amount Percentage Amount Percentage
Commercial real estate       
Non-owner occupied term, net$206,902
 55.4% $264,481
 53.4%
Owner occupied term, net49,817
 13.3% 68,650
 13.9%
Multifamily, net37,671
 10.1% 44,878
 9.1%
Construction & development, net3,455
 0.9% 11,711
 2.4%
Residential development, net7,286
 1.9% 9,794
 2.0%
Commercial       
Term, net15,719
 4.2% 23,524
 4.7%
LOC & other, net6,698
 1.8% 14,997
 3.0%
Residential       
Mortgage, net22,316
 6.0% 27,825
 5.6%
Home equity loans & lines, net19,637
 5.3% 23,442
 4.7%
Consumer & other, net4,262
 1.1% 6,051
 1.2%
Total, net of deferred fees and costs373,763
 100.0% 495,353
 100.0%
Allowance for covered loans(9,771)   (18,275)  
Total$363,992
   $477,078
  
The covered loans are subject to loss-sharing agreements with the FDIC. Under the terms of the Evergreen Bank acquisition loss-sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments,

other real estate owned (“OREO”) OREO and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on the first $90.0 million on covered assets for Evergreen and absorb 95% of losses and share in 95% of loss recoveries exceeding $90.0 million, except for the Bank will incur losses up to $30.2 million before the loss-sharing will commence. As of December 31, 2013, losses have exceeded $30.2 million. The loss-sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition dates.

Under the terms of the Rainier Pacific Bank loss-sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, OREO and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on the first $95.0 million of losses on covered assets and absorb 95% of losses and share in 95% of loss recoveries exceeding $95.0 million. The loss-sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition dates.

Under the terms of the Nevada Security Bank loss-sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, OREO and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on all covered assets. The loss-sharing arrangements for non-single family residential and

52


single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition dates.


Discussion of and tables related to the covered loan segment is provided under the headingAsset Quality and Non-Performing Assets.


ASSET QUALITY AND NON-PERFORMING ASSETS

Non-Covered Loans andLeases

We manage asset quality and control credit risk through diversification of the non-covered loan and lease portfolio and the application of policies designed to promote sound underwriting and loan and lease monitoring practices. The Bank’sBank's Credit Quality Group is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank. The provision for non-covered loan and lease losses charged to earnings is based upon management’smanagement's judgment of the amount necessary to maintain the allowance at a level adequate to absorb probable incurred losses. The amount of provision charge is dependent upon many factors, including loan and lease growth, net charge-offs, changes in the composition of the non-covered loan and lease portfolio, delinquencies, management’smanagement's assessment of loan and lease portfolio quality, general economic conditions that can impact the value of collateral, and other trends. The evaluation of these factors is performed through an analysis of the adequacy of the allowance for loan and lease losses. Reviews of non-performing, past due non-covered loans and leases and larger credits, designed to identify potential charges to the allowance for loan and lease losses, and to determine the adequacy of the allowance, are conducted on a quarterly basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan and lease portfolio, prevailing economic conditions and other factors. Additional information regarding the methodology used in determining the adequacy of the allowance for loan and lease losses is contained in Part I Item 1 of this report in the section titledLending and Credit Functions.Functions

.

Non-covered, non-performing loans and leases, which include non-covered, non-accrual loans and leases and non-covered accruing loans and leases past due over 90 days, totaled $145.2$35.3 million or 2.57%0.48% of total non-covered loans and leases as of December 31, 2010,2013, as compared to $199.0$71.0 million, or 3.32%1.06% of total non-covered loans and leases, at December 31, 2009.2012. Non-covered, non-performing assets, which include non-covered, non-performing loans and leases and non-covered, foreclosed real estate (“other real estate owned”)i.e. OREO, totaled $57.2 million, totaled $178.0 million, or 1.53%0.49% of total assets as of December 31, 20102013 compared with $223.6$88.1 million, or 2.38%0.75% of total assets as of December 31, 2009.2012.  The decrease in non-performing assets in 20102013 is attributable to the improving economic environment, an easingincrease in the velocity of declining real estate values in our markets and the resulting impact on our commercial real estate and commercial construction portfolio.

Umpqua Holdings Corporation

A loan is considered impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Generally, when non-covered loans are identified as impaired they are moved to our Special Assets Division.Department. When we identify a loan as impaired, we measure the loan for potential impairment using discount cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral.  In these cases, we will use the current fair value of collateral, less selling costs.  The starting point for determining the fair value of collateral is through obtaining external appraisals.  Generally, external appraisals are updated every six to nine12 months.  We obtain appraisals from a pre-approved list of independent, third party, local appraisal firms.  Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (a) currently licensed in the state in which the property is located, (b) is experienced in the appraisal of properties similar to the property being appraised, (c) is actively engaged in the appraisal work, (d) has knowledge of current real estate market conditions and financing trends, (e) is reputable, and (f) is not on Freddie Mac’s noror the Bank’s Exclusionary List of appraisers and brokers. In certain cases appraisals will be reviewed by our Real Estate Valuation Services groupGroup to ensure the quality of the appraisal and the expertise and independence of the appraiser. Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment.  Our impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification.  Typical justified adjustments might include discounts for continued market deterioration subsequent to appraisal date, adjustments for the release of collateral contemplated in the appraisal, or the value of other collateral or consideration not contemplated in the appraisal. An appraisal over one year old in most cases will be considered stale dated and an updated or new appraisal will be required.  Any adjustments from appraised value to net realizable value are detailed and justified in the impairment analysis, which is reviewed and approved by senior credit quality officers and the Company’s Allowance for Loan and Lease Losses (“ALLL”)Bank's ALLL Committee. Although an external appraisal is the primary source to value collateral dependent loans, we may also utilize values obtained through purchase and sale agreements, negotiated short sales, broker price opinions, or the sales price of the note.  These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period.  Appraisals or other alternative sources of value received subsequent to the reporting period, but prior to our filing of periodic reports, are considered and evaluated to ensure our periodic filings are materially correct and not misleading. Based on these processes, we do not believe there are significant time lapses for the recognition of additional loan loss provisions or charge-offs from the date they become known.


53


Non-covered loans and leases are classified as non-accrual when collection of principal or interest is doubtful—generally if they are past due as to maturity or payment of principal or interest by 90 days or more—unless such non-covered loans and leases are well-secured and in the process of collection. Additionally, all loans that are impaired are considered for non-accrual status.  Non-covered loans and leases placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan or lease agreement appear relatively certain.

Upon acquisition of real estate collateral, typically through the foreclosure process, we promptly begin to market the property for sale. If we do not begin to receive offers or indications of interest we will analyze the price and review market conditions to assess whether a lower price reflects the market value of the property and would enable us to sell the property.  In addition, we update appraisals on other real estate owned property six to nine12 months after the most recent appraisal. Increases in valuation adjustments recorded in a period are primarily based on a) updated appraisals received during the period, or b) management’smanagement's authorization to reduce the selling price of the property during the period.  Unless a current appraisal is available, an appraisal will be ordered prior to a loan moving to other real estate owned. Foreclosed properties held as other real estate owned are recorded at the lower of the recorded investment in the loan (prior to foreclosure) or the fair market value of the property less expected selling costs. Non-covered other real estate owned at December 31, 20102013 totaled $32.8$21.8 million and consisted of 4319 properties.


Non-covered loans are reported as restructured when the Bank grants a more than insignificant concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider.  Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s) or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Impairment

reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan and lease losses.

The Company has written down impaired, non-covered non-accrual loans as of December 31, 20102013 to their estimated net realizable value, based on disposition value and expects resolution with no additional material loss, absent further decline in market prices.


The following table summarizes our non-covered non-performing assets as of December 31 for each of the last five years.

and restructured loans:   

Non-Covered Non-Performing Assets

As of December 31,

(dollars in thousands)

    2010   2009   2008   2007   2006 

Non-covered, non-performing assets

          

Non-covered loans on non-accrual status

  $138,177    $193,118    $127,914    $81,317    $8,629  

Non-covered loans past due 90 days or more and accruing

   7,071     5,909     5,452     9,782     429  
     

Total non-covered non-performing loans

   145,248     199,027     133,366     91,099     9,058  

Non-covered other real estate owned

   32,791     24,566     27,898     6,943       
     

Total non-covered non-performing assets

  $178,039    $223,593    $161,264    $98,042    $9,058  
     

Restructured loans(1)

  $84,441    $134,439    $23,540    $    $7,986  
     

Allowance for non-covered loan and lease losses

  $101,921    $107,657    $95,865    $84,904    $60,090  

Reserve for unfunded commitments

   818     731     983     1,182     1,313  
     

Allowance for credit losses

  $102,739    $108,388    $96,848    $86,086    $61,403  
     

Asset quality ratios:

          

Non-covered non-performing assets to total assets

   1.53%     2.38%     1.88%     1.18%     0.12%  

Non-covered non-performing loans to total non-covered loans

   2.57%     3.32%     2.18%     1.50%     0.17%  

Allowance for non-covered loan losses to total non-covered loans

   1.80%     1.79%     1.56%     1.40%     1.12%  

Allowance for credit losses to total non-covered loans

   1.82%     1.81%     1.58%     1.42%     1.15%  

Allowance for credit losses to total non-covered non-performing loans

   71%     54%     73%     94%     678%  

 2013 2012 2011 2010 2009
Non-covered loans and leases on non-accrual status$31,891
 $66,736
 $80,562
 $138,177
 $193,118
Non-covered loans and leases past due 90 days or more and accruing3,430
 4,232
 10,821
 7,071
 5,909
Total non-covered non-performing loans and leases35,321
 70,968
 91,383
 145,248
 199,027
Non-covered other real estate owned21,833
 17,138
 34,175
 32,791
 24,566
Total non-covered non-performing assets$57,154
 $88,106
 $125,558
 $178,039
 $223,593
Restructured loans (1)
$68,791
 $70,602
 $80,563
 $84,441
 $134,439
Allowance for non-covered loan and lease losses$85,314
 $85,391
 $92,968
 $101,921
 $107,657
Reserve for unfunded commitments1,436
 1,223
 940
 818
 731
Allowance for non-covered credit losses$86,750
 $86,614
 $93,908
 $102,739
 $108,388
Asset quality ratios:         
Non-covered non-performing assets to total assets0.49% 0.75% 1.09% 1.53% 2.38%
Non-covered non-performing loans and leases to total non-covered loans and leases0.48% 1.06% 1.55% 2.57% 3.32%
Allowance for non-covered loan and lease losses to total non-covered loans and leases1.16% 1.28% 1.58% 1.80% 1.79%
Allowance for non-covered credit losses to total non-covered loans and leases1.18% 1.30% 1.59% 1.82% 1.81%
Allowance for non-covered credit losses to total non-covered non-performing loans and leases246% 122% 103% 71% 54%

54


(1)Represents accruing restructured non-covered loans performing according to their restructured terms.

Umpqua Holdings Corporation

The following tables summarize our non-covered non-performing assets by loan type and region as of December 31, 20102013 and December 31, 2009:

2012Non-covered,

Non-Covered Non-Performing Assets by Type and Region


(in thousands)

  December 31, 2010 
   Northwest
Oregon
  Central
Oregon
  Southern
Oregon
  Washington  Greater
Sacramento
  Northern
California
  Total 

Loans on non-accrual status:

       

Commercial real estate

       

Term & multifamily

 $24,180   $4,816   $537   $1,898   $9,010   $8,721   $49,162  

Construction & development

  12,726        472        6,817    109    20,124  

Residential development

  10,191    110    2,122    3,033    10,761    8,369    34,586  

Commercial

       

Term

  710    1,679    320    373    98    3,092    6,272  

LOC & other

  7,586    878    768    6,830    8,628    3,343    28,033  

Residential

       

Mortgage

                            

Home equity loans & lines

                            

Consumer & other

                            
    

Total

  55,393    7,483    4,219    12,134    35,314    23,634    138,177  

Loans past due 90 days or more and accruing:

       

Commercial real estate

       

Term & multifamily

 $79   $   $   $176   $2,753   $   $3,008  

Construction & development

                            

Residential development

                            

Commercial

                         

Term

                            

LOC & other

                            

Residential

                         

Mortgage

  2,925                        2,925  

Home equity loans & lines

  73                159        232  

Consumer & other

  880                26        906  
    

Total

  3,957            176    2,938        7,071  
    

Total non-performing loans

  59,350    7,483    4,219    12,310    38,252    23,634    145,248  

Other real estate owned:

       

Commercial real estate

       

Term & multifamily

 $5,396   $   $1,656   $   $3,091   $5,686   $15,829  

Construction & development

  3,443    539        313    4,392        8,687  

Residential development

  674    1,844    1,368    112        1,118    5,116  

Commercial

       

Term

                            

LOC & other

                            

Residential

       

Mortgage

  954                        954  

Home equity loans & lines

                            

Consumer & other

                  481    1,724    2,205  
    

Total other real estate owned

  10,467    2,383    3,024    425    7,964    8,528    32,791  
    

Total non-performing assets

 $69,817   $9,866   $7,243   $12,735   $46,216   $32,162   $178,039  
    

   December 31, 2009 
    Northwest
Oregon
   Central
Oregon
   Southern
Oregon
   Washington   Greater
Sacramento
   Northern
California
   Total 

Loans on non-accrual status:

              

Commercial real estate

              

Term & multifamily

  $16,101    $4,043    $5,029    $1,566    $20,821    $14,819    $62,379  

Construction & development

   10,061     987          2,700     18,602     4,308     36,658  

Residential development

   4,090     2,729     4,950          23,391     10,324     45,484  

Commercial

              

Term

   3,338     2,347     264     509     188     2,174     8,820  

LOC & other

   27,991     1,244     217     9,454     140     731     39,777  

Residential

              

Mortgage

                                   

Home equity loans & lines

                                   

Consumer & other

                                   
     

Total

   61,581     11,350     10,460     14,229     63,142     32,356     193,118  

Loans past due 90 days or more and accruing:

              

Commercial real estate

              

Term & multifamily

  $    $    $    $247    $    $    $247  

Construction & development

                                   

Residential development

                                   

Commercial

              

Term

                       16          16  

LOC & other

                  1,000     250          1,250  

Residential

              

Mortgage

   4,126                              4,126  

Home equity loans & lines

   92                    140          232  

Consumer & other

   4                    34          38  
     

Total

   4,222               1,247     440          5,909  
     

Total non-performing loans

   65,803     11,350     10,460     15,476     63,582     32,356     199,027  

Other real estate owned:

              

Commercial real estate

              

Term & multifamily

  $430    $    $514    $    $    $    $944  

Construction & development

   359     392          426     3,595          4,772  

Residential development

   2,772     4,643     1,064     4,885     1,987     144     15,495  

Commercial

              

Term

                            151     151  

LOC & other

   303     982                         1,285  

Residential

              

Mortgage

   1,919                              1,919  

Home equity loans & lines

                                   

Consumer & other

                                   
     

Total other real estate owned

   5,783     6,017     1,578     5,311     5,582     295     24,566  
     

Total non-performing assets

  $71,586    $17,367    $12,038    $20,787    $69,164    $32,651    $223,593  
     

Umpqua Holdings Corporation

 December 31, 2013
   Northwest Southern Northern Central Greater Bay  
 Washington Oregon Oregon California California California Total
Loans and leases on non-accrual status:            
Commercial real estate             
Non-owner occupied term, net$
 $1,065
 $3,484
 $389
 $1,599
 $2,656
 $9,193
Owner occupied term, net
 509
 
 2,093
 
 3,602
 6,204
Multifamily, net
 
 
 
 580
 355
 935
Construction & development, net
 
 
 
 
 
 
Residential development, net
 2,801
 
 
 
 
 2,801
Commercial             
Term, net
 1,040
 
 182
 
 
 1,222
LOC & other, net
 4,620
 207
 3,615
 171
 110
 8,723
Leases and equipment finance, net2,813
 
 
 
 
 
 2,813
Residential             
Mortgage, net
 
 
 
 
 
 
Home equity loans & lines, net
 
 
 
 
 
 
Consumer & other, net
 
 
 
 
 
 
Total2,813
 10,035
 3,691
 6,279
 2,350
 6,723
 31,891
Loans and leases past due 90 days or more and accruing:          
Commercial real estate             
Non-owner occupied term, net$
 $
 $
 $
 $
 $
 $
Owner occupied term, net
 
 
 437
 
 173
 610
Multifamily, net
 
 
 
 
 
 
Construction & development, net
 
 
 
 
 
 
Residential development, net
 
 
 
 
 
 
Commercial             
Term, net
 
 
 
 
 
 
LOC & other, net
 
 
 
 
 
 
Leases and equipment finance, net517
 
 
 
 
 
 517
Residential             
Mortgage, net
 
 35
 100
 25
 
 160
Home equity loans & lines, net
 2,070
 
 
 
 
 2,070
Consumer & other, net14
 20
 25
 8
 5
 1
 73
Total531
 2,090
 60
 545
 30
 174
 3,430
Total non-performing loans and leases3,344
 12,125
 3,751
 6,824
 2,380
 6,897
 35,321
Other real estate owned:             
Commercial real estate             
Non-owner occupied term$
 $11,428
 $
 $155
 $64
 $
 $11,647
Owner occupied term
 311
 562
 219
 1,905
 
 2,997
Multifamily
 
 
 
 
 
 

55


Construction & development662
 5,130
 
 
 163
 
 5,955
Residential development
 373
 
 
 
 
 373
Commercial             
Term
 
 
 
 460
 
 460
LOC & other
 
 
 
 
 
 
Leases and equipment finance
 
 
 
 
 
 
Residential             
Mortgage
 
 45
 
 
 
 45
Home equity loans & lines
 356
 
 
 
 
 356
Consumer & other
 
 
 
 
 
 
Total662
 17,598
 607
 374
 2,592
 
 21,833
Total non-performing assets$4,006
 $29,723
 $4,358
 $7,198
 $4,972
 $6,897
 $57,154
(in thousands) 
 December 31, 2012
   Northwest Southern Northern Central Greater Bay  
 Washington Oregon Oregon California California California Total
Loans and leases on non-accrual status:            
Commercial real estate             
Non-owner occupied term, net$139
 $21,165
 $3,543
 $2,259
 $2,506
 $4,183
 $33,795
Owner occupied term, net
 1,199
 
 255
 6,995
 
 8,449
Multifamily, net
 319
 
 
 727
 
 1,046
Construction & development, net662
 
 
 
 3,515
 
 4,177
Residential development, net
 5,132
 
 
 
 
 5,132
Commercial             
Term, net114
 2,602
 239
 2,987
 921
 177
 7,040
LOC & other, net
 1,180
 172
 
 2,922
 2,753
 7,027
Leases and equipment finance, net
 
 
 
 
 
 
Residential             
Mortgage, net
 
 
 
 
 
 
Home equity loans & lines, net
 
 
 
 
 49
 49
Consumer & other, net
 
 
 
 
 21
 21
Total915
 31,597
 3,954
 5,501
 17,586
 7,183
 66,736
Loans and leases past due 90 days or more and accruing:          
Commercial real estate             
Non-owner occupied term, net$
 $
 $
 $
 $
 $
 $
Owner occupied term, net
 
 
 
 
 
 
Multifamily, net
 
 
 
 
 
 
Construction & development, net
 
 
 
 
 
 
Residential development, net
 
 
 
 
 
 
Commercial             
Term, net
 81
 
 
 
 
 81
LOC & other, net
 
 
 
 
 
 
Leases and equipment finance, net
 
 
 
 
 
 
Residential             
Mortgage, net
 3,303
 
 
 
 
 3,303
Home equity loans & lines, net
 355
 50
 215
 
 138
 758
Consumer & other, net2
 5
 20
 8
 25
 30
 90

56


Total2
 3,744
 70
 223
 25
 168
 4,232
Total non-performing loans and leases917
 35,341
 4,024
 5,724
 17,611
 7,351
 70,968
Other real estate owned:             
Commercial real estate             
Non-owner occupied term$
 $4,092
 $
 $366
 $
 $
 $4,458
Owner occupied term
 1,730
 
 381
 
 
 2,111
Multifamily
 
 
 
 
 
 
Construction & development
 
 
 
 984
 1,440
 2,424
Residential development1,693
 312
 655
 
 886
 
 3,546
Commercial             
Term
 1,656
 
 
 
 
 1,656
LOC & other, net907
 63
 
 
 
 
 970
Leases and equipment finance
 
 
 
 
 
 
Residential             
Mortgage
 964
 
 
 
 
 964
Home equity loans & lines
 656
 
 
 191
 162
 1,009
Consumer & other
 
 
 
 
 
 
Total2,600
 9,473
 655
 747
 2,061
 1,602
 17,138
Total non-performing assets$3,517
 $44,814
 $4,679
 $6,471
 $19,672
 $8,953
 $88,106

As of December 31, 2010,2013, the non-covered non-performing assets of $178.0$57.2 million have been written down by 39%29%, or $111.8$22.9 million, from their original balance of $289.8 million.

Of these non-covered, non-performing loan balances as of December 31, 2010, 42% are directly affected by the housing market downturn or the real estate bubble, or indirectly impacted from the contraction of real estate dependent businesses. The remaining non-covered, non-performing loans in these segments primarily reflect the impact of the U.S. recession on certain businesses.

$80.1 million

The Company is continually performing extensive reviews of our permanent commercial real estate portfolio, including stress testing.  These reviews are beingwere performed on both our non-owner and owner occupied credits. These reviews are beingwere completed to verify leasing status, to ensure the accuracy of risk ratings, and to develop proactive action plans with borrowers on projects.projects where debt service coverage has dropped below the Bank’s benchmark.  The stress testing has been performed to determine the effect of rising cap rates, interest rates and vacancy rates, on this portfolio.  Based on our analysis, the CompanyBank believes our lending teams are effectively managing the risks in this portfolio. There can be no assurance that any further declines in economic conditions, such as potential increases in retail or office vacancy rates, will exceed the projected assumptions utilized in the stress testing and may result in additional non-covered, non-performing loans in the future.


The following table summarizes our non-covered loans and leases past due 30-89 days by loan type and by region as of December 31, 20102013 and December 31, 2009.2012. Loans and leases past due 30-89 days have increased 16%decreased 36% between the two periods.

Non-Covered Loans and Leases Past Due 30-89 Days by Type and Region

(in thousands)

   December 31, 2010 
    Northwest
Oregon
   Central
Oregon
   Southern
Oregon
   Washington   Greater
Sacramento
   Northern
California
   Total 

Commercial real estate

              

Term & multifamily

  $6,636    $1,719    $    $    $5,524    $9,045    $22,924  

Construction & development

   373                    8,525          8,898  

Residential development

                       480     160     640  

Commercial

              

Term

   354               64     868     1,655     2,941  

LOC & other

   1,542          17     1,670     1,291     1,961     6,481  

Residential

              

Mortgage

   2,414                              2,414  

Home equity loans & lines

   469               200     1,778          2,447  

Consumer & other

   1,339               100     32     1     1,472  
     

Total

  $13,127    $1,719    $17    $2,034    $18,498    $12,822    $48,217  
     

   December 31, 2009 
    Northwest
Oregon
   Central
Oregon
   Southern
Oregon
   Washington   Greater
Sacramento
   Northern
California
   Total 

Commercial real estate

              

Term & multifamily

  $4,160    $695    $287    $3,819    $2,629    $7,055    $18,645  

Construction & development

   442               683          110     1,235  

Residential development

   7,500     1,041               283     126     8,950  

Commercial

         ��    

Term

   544     323               2     4,786     5,655  

LOC & other

   1,009     206               770     745     2,730  

Residential

              

Mortgage

   1,927                              1,927  

Home equity loans & lines

   359                    921          1,280  

Consumer & other

   885                    151          1,036  
     

Total

  $16,826    $2,265    $287    $4,502    $4,756    $12,822    $41,458  
     

Our non-covered residential development loan portfolio, a subset


57


 December 31, 2013
   Northwest Southern Northern Central Greater Bay  
 Washington Oregon Oregon California California California Total
Commercial real estate             
Non-owner occupied term, net$
 $400
 $287
 $
 $2,554
 $729
 $3,970
Owner occupied term, net
 502
 340
 
 67
 751
 1,660
Multifamily, net
 
 
 
 
 
 
Construction & development, net
 
 
 
 
 
 
Residential development, net
 
 
 
 
 
 
Commercial             
Term, net6
 15
 
 5
 218
 599
 843
LOC & other, net
 63
 111
 1,800
 281
 83
 2,338
Leases and equipment finance, net3,896
 12
 
 
 
 
 3,908
Residential             
Mortgage, net
 225
 346
 113
 10
 341
 1,035
Home equity loans & lines, net
 1,392
 
 
 
 
 1,392
Consumer & other, net20
 52
 29
 4
 7
 32
 144
Total, net of deferred fees and costs$3,922
 $2,661
 $1,113
 $1,922
 $3,137
 $2,535
 $15,290

(dollars in thousands)

    December 31,
2009
   March 31,
2010
  June 30,
2010
  September 30,
2010
  December 31,
2010
  Change Since
December 31,
2009
 

Northwest Oregon

  $88,762    $81,409   $75,373   $69,129   $64,263    -28

Central Oregon

   9,059     4,962    4,107    4,079    3,629    -60

Southern Oregon

   19,006     17,149    13,440    8,774    6,256    -67

Washington

   8,616     8,462    7,723    7,570    9,308    8

Greater Sacramento

   74,993     67,676    54,710    52,761    49,329    -34

Northern California

   25,373     22,140    20,653    18,072    15,028    -41
      

Total

  $225,809    $201,798   $176,006   $160,385   $147,813    -35
      

Percentage of non-covered total loan portfolio

   4%     3%    3%    3%    3%   

Quarterly change amount

    $(24,011 $(25,792 $(15,621 $(12,572 

Quarterly change percentage

     -11%    -13%    -9%    -8%   

Year-to-date change amount

    $(24,011 $(49,803 $(65,424 $(77,996 

Year-to-date change percentage

     -11%    -22%    -29%    -35%   

 December 31, 2012
   Northwest Southern Northern Central Greater Bay  
 Washington Oregon Oregon California California California Total
              
Commercial real estate             
Non-owner occupied term, net$317
 $899
 $138
 $
 $3,462
 $1,413
 $6,229
Owner occupied term, net
 511
 645
 1,799
 
 1,347
 4,302
Multifamily, net
 
 
 
 
 
 
Construction & development, net
 283
 
 
 
 
 283
Residential development, net
 
 
 
 479
 
 479
Commercial             
Term, net
 413
 164
 1,214
 22
 1,878
 3,691
LOC & other, net24
 1,446
 74
 104
 1,383
 183
 3,214
Leases and equipment finance, net
 
 
 
 
 
 
Residential             
Mortgage, net
 3,508
 
 
 
 
 3,508
Home equity loans & lines, net
 250
 221
 266
 161
 714
 1,612
Consumer & other, net
 329
 20
 61
 63
 
 473
Total, net of deferred fees and costs$341
 $7,639
 $1,262
 $3,444
 $5,570
 $5,535
 $23,791

Non-Covered Restructured Loans 
At December 31, 2010, $34.6 million, or 24%, of the total $145.2 million of non-covered non-performing loans were non-covered residential development loans. The following table presents a geographic distribution of the non-performing residential development loans during 2010 by quarter:

2013Non-Covered Residential Development Non-Performing Loans

(dollars in thousands)

    December 31,
2009
   March 31,
2010
  June 30,
2010
  September 30,
2010
  December 31,
2010
  Change Since
December 31,
2009
 

Northwest Oregon

  $4,090    $1,389   $7,799   $8,353   $10,191    149

Central Oregon

   2,729     936    109    109    110    -96

Southern Oregon

   4,950     4,145    2,366    2,840    2,122    -57

Washington

            1,497    1,260    3,033    100

Greater Sacramento

   23,391     19,011    13,730    13,063    10,761    -54

Northern California

   10,324     7,829    7,108    4,453    8,369    -19
      

Total

  $45,484    $33,310   $32,609   $30,078   $34,586    -24
      

Percentage of non-performing loans

   23%     17%    18%    20%    24%   

Quarterly change amount

    $(12,174 $(701 $(2,531 $4,508   

Quarterly change percentage

     -27%    -2%    -8%    15%   

Year-to-date change amount

    $(12,174 $(12,875 $(15,406 $(10,898 

Year-to-date change percentage

     -27%    -28%    -34%    -24%   

Umpqua Holdings Corporation

The following table presents the remaining non-covered performing residential development loans by size and geographic distribution as of December 31, 2010:

2012Non-Covered Residential Development Performing Loans

(dollars in thousands)

    $250k
and less
   $250k to
$1 million
   $1 million to
$3 million
   $3 million to
$5 million
   $5 million to
$10 million
   $10 million
and greater
   Total 

Northwest Oregon

  $1,955    $5,646    $8,189    $10,277    $13,541    $14,464    $54,072  

Central Oregon

   384     718     2,417                    3,519  

Southern Oregon

   1,174     1,860     1,100                    4,134  

Washington

   601     344     5,330                    6,275  

Greater Sacramento

   3,308     3,905     1,894     4,780     11,455     13,226     38,568  

Northern California

   1,489     1,026     4,144                    6,659  
     

Total

  $8,911    $13,499    $23,074    $15,057    $24,996    $27,690    $113,227  
     

At December 31, 2010 and December 31, 2009,, non-covered impaired loans of $84.4$68.8 million and $134.4$70.6 million were classified as non-covered performing restructured loans, respectively.  The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporaryby providing modification of loan repayment terms. The non-covered performing restructured loans on accrual status represent principally the only impaired loans accruing interest at each respective date.December 31, 2013.  In order for a restructured loan to be considered performing and on accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan ismust be current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. The Company had no obligationsobligation to lend additional funds on the restructured loans as of December 31, 2010.

2013


58


Residential Modification Program 
The Bank’s modification program is designed to enable the Bank to work with its customers experiencing financial difficulty to maximize repayment. While the Bank has designed guidelines similar to the government sponsored Home Affordable Refinance Program and Home Affordable Modification Program, the Bank participates in the programs only in the capacity as servicer on behalf of investor loans that have been sold.   

A and B Note Workout Structures 
The Bank performs A note/B note workout structures as a subset of the Bank’s troubled debt restructuring strategy.  The amount of loans restructured using this structure was $3.8 million and $12.6 million as of December 31, 2013 and December 31, 2012, respectively.     
Under an A note/B note workout structure, a new A note is underwritten in accordance with customary troubled debt restructuring underwriting standards and is reasonably assured of full repayment while the corresponding B note is not.  The B note is immediately charged-off upon restructuring. 
If the loan was on accrual prior to the troubled debt restructuring being documented with the loan legally bifurcated into an A note fully supporting accrual status and a B note or amount fully contractually forgiven and charged-off, the A note may remain on accrual status.  If the loan was on nonaccrual at the time the troubled debt restructuring was documented with the loan legally bifurcated into an A note fully supporting accrual status and a B note or amount contractually forgiven and fully charged-off, the A note may be returned to accrual status, and risk rated accordingly, after a reasonable period of performance under the troubled debt restructuring terms.  Six months of payment performance is generally required to return these loans to accrual status. 
The A note will continue to be classified as a troubled debt restructuring and only may be removed from impaired status in years after the restructuring if (a) the restructuring agreement specifies an interest rate equal to or greater than the rate that the Bank was willing to accept at the time of the restructuring for a new loan with comparable risk and (b) the loan is not impaired based on the terms specified by the restructuring agreement. 
The following tables summarize our performing non-covered performing restructured loans by loan type and region as of December 31, 20102013 and December 31, 2009:

2012

Non-Covered Restructured Loans by Type and Region

(in thousands)

    December 31, 2010 
  Northwest
Oregon
   Central
Oregon
   Southern
Oregon
   Washington   Greater
Sacramento
   Northern
California
   Total 

Commercial real estate

              

Term & multifamily

  $9,446    $    $3,888    $    $11,820    $3,543    $28,697  

Construction & development

                       5,434          5,434  

Residential development

   22,277               5,330     21,322          48,929  

Commercial

                            904     904  

Term

              

LOC & other

                            298     298  

Residential

   179                              179  

Mortgage

              

Home equity loans & lines

                                   

Consumer & other

                                   
     

Total

  $31,902    $    $3,888    $5,330    $38,576    $4,745    $84,441  
     

    December 31, 2009 
  Northwest
Oregon
   Central
Oregon
   Southern
Oregon
   Washington   Greater
Sacramento
   Northern
California
   Total 

Commercial real estate

              

Term & multifamily

  $18,349    $    $5,790    $    $9,742    $7,866    $41,747  

Construction & development

                                   

Residential development

   26,994          306     7,985     33,103          68,388  

Commercial

              

Term

   315                         1,785     2,100  

LOC & other

   400                    279     16,843     17,522  

Residential

   4,597                              4,597  

Mortgage

              

Home equity loans & lines

   31                    35          66  

Consumer & other

   6                    13          19  
     

Total

  $50,692    $    $6,096    $7,985    $43,172    $26,494    $134,439  
     

 December 31, 2013
   Northwest Southern Northern Central Greater Bay  
 Washington Oregon Oregon California California California Total
Commercial real estate             
Non-owner occupied term, net$13,188
 $13,492
 $3,865
 $
 $6,821
 $
 $37,366
Owner occupied term, net
 650
 
 608
 3,944
 
 5,202
Multifamily, net
 
 
 
 
 
 
Construction & development, net
 8,498
 
 
 1,092
 
 9,590
Residential development, net
 6,987
 
 
 7,915
 
 14,902
Commercial

            
Term, net
 
 
 
 1,258
 
 1,258
LOC & other, net
 
 
 
 
 
 
Leases and equipment finance, net
 
 
 
 
 
 
Residential

            
Mortgage, net
 473
 
 
 
 
 473
Home equity loans & lines, net
 
 
 
 
 
 
Consumer & other, net
 
 
 
 
 
 
Total, net of deferred fees and costs$13,188
 $30,100
 $3,865
 $608
 $21,030
 $
 $68,791

59


(in thousands)
 December 31, 2012
  
 Northwest Southern Northern Central Greater Bay  
 Washington Oregon Oregon California California California Total
Commercial real estate 
  
  
  
  
  
  
Non-owner occupied term, net$13,482
 $10,055
 $3,870
 $
 $6,922
 $
 $34,329
Owner occupied term, net
 670
 
 654
 3,960
 
 5,284
Multifamily, net
 
 
 
 
 
 
Construction & development, net
 8,739
 
 
 3,813
 
 12,552
Residential development, net
 8,455
 
 
 8,686
 
 17,141
Commercial             
Term, net
 
 
 350
 
 
 350
LOC & other, net
 
 
 
 820
 
 820
Leases and equipment finance, net
 
 
 
 
 
 
Residential             
Mortgage, net
 
 
 
 
 
 
Home equity loans & lines, net
 
 
 
 
 126
 126
Consumer & other, net
 
 
 
 
 
 
Total, net of deferred fees and costs$13,482
 $27,919
 $3,870
 $1,004
 $24,201
 $126
 $70,602

The following table presents a distribution of our performing non-covered performing restructured loans by year of maturity, according to the restructured terms, as of December 31, 2010:

2013

(in thousands)

Year  Amount 

2011

  $58,519  

2012

   16,356  

2013

     

2014

   1,631  

2015

   5,293  

Thereafter

   2,642  
     

Total

  $84,441  
     

YearAmount
2014$43,710
20159,691
20168,498
20172,475
20183,944
Thereafter473
Total$68,791
The Bank has had varying degrees of success with different types of concessions.  The following table presents the percentage of troubled debt restructurings, by type of concession, at December 31, 2013 that have performed and are expected to perform according to the troubled debt restructuring agreement: 
December 31, 2013
Rate99%
Interest Only100%
Payment100%
Combination90%
A further decline in the economic conditions in our general market areas or other factors could adversely impact individual borrowers or the loan portfolio in general. Accordingly, there can be no assurance that loans will not become 90 days or more past due, become impaired or placed on non-accrual status, restructured or transferred to other real estate owned in the future. Additional information about the loan portfolio is provided in Note 5 of theNotes to Consolidated Financial Statementsin Item 8 below.

Covered Non-Performing Assets 

60


Covered non-performing assets

Covered non-performing assets, which include covered other real estate owned (“covered OREO”) totaled $29.9$2.1 million representing 0.26%, or 0.02% of total assets at December 31, 2010.2013 as compared to $10.4 million, or 0.09% of total assets at December 31, 2012. These covered non-performingnonperforming assets are subject to shared-loss agreements with the FDIC.

The following tables summarize our covered non-performing assets by loan type as of December 31, 2013 and December 31, 2012


(in thousands)
 December 31, 2013
 Evergreen Rainier Nevada Security Total
Covered other real estate owned:       
Commercial real estate       
Non-owner occupied term$234
 $55
 $72
 $361
Owner occupied term
 
 
 
Multifamily
 
 
 
Construction & development417
 
 1,048
 1,465
Residential development
 
 97
 97
Commercial       
Term
 
 179
 179
LOC & other
 
 
 
Residential       
Mortgage
 
 
 
Home equity loans & lines
 
 
 
Consumer & other
 
 
 
Total$651
 $55
 $1,396
 $2,102
(in thousands)
 December 31, 2012
 Evergreen Rainier Nevada Security Total
Covered other real estate owned:       
Commercial real estate       
Non-owner occupied term$958
 $1,415
 $2,015
 $4,388
Owner occupied term
 125
 356
 481
Multifamily
 
 
 
Construction & development319
 482
 3,286
 4,087
Residential development347
 
 243
 590
Commercial       
Term
 332
 
 332
LOC & other
 
 
 
Residential       
Mortgage421
 75
 
 496
Home equity loans & lines
 
 
 
Consumer & other
 
 
 
Total$2,045
 $2,429
 $5,900
 $10,374
Total non-performing loans and leases

Non-PerformingAssets

The following tables summarize our total (including covered and non-covered) nonperforming assets at December 31:

    2010   2009   2008   2007   2006 

Loans on non-accrual status

  $138,177    $193,118    $127,914    $81,317    $8,629  

Loans past due 90 days or more and accruing

   7,071     5,909     5,452     9,782     429  
     

Total non-performing loans

   145,248     199,027     133,366     91,099     9,058  

Other real estate owned

   62,654     24,566     27,898     6,943       
     

Total non-performing assets

  $207,902    $223,593    $161,264    $98,042    $9,058  
     

Umpqua Holdings Corporation


61


(dollars in thousands) 
 2013 2012 2011 2010 2009
Loans and leases on non-accrual status$31,891
 $66,736
 $80,562
 $138,177
 $193,118
Loans and leases past due 90 days or more and accruing3,430
 4,232
 10,821
 7,071
 5,909
Total non-performing loans and leases35,321
 70,968
 91,383
 145,248
 199,027
Other real estate owned23,935
 27,512
 53,666
 62,654
 24,566
Total non-performing assets$59,256
 $98,480
 $145,049
 $207,902
 $223,593
Asset quality ratios:         
Total non-performing assets to total assets0.51% 0.83% 1.25% 1.78% 2.38%
Total non-performing loans and leases to total loans and leases0.46% 0.99% 1.40% 2.25% 3.32%

ALLOWANCE FOR NON-COVERED LOAN AND LEASE LOSSES AND RESERVE FOR UNFUNDED COMMITMENTS

The allowance for non-covered loan and lease losses (“ALLL”) totaled $101.9 million and $107.7$85.3 million at December 31, 2010 and 2009, respectively.2013, a decrease of $77,000 from the $85.4 million at December 31, 2012. The decrease in the allowanceALLL from the prior year-end is a result of improving credit quality characteristics of the non-covered lease and loan portfolio, partially offset by non-covered loan and lease growth. Additional discussion on the change in provision for loan and lease losses as of December 31, 2010 as compared to prior year is principally attributable to a decrease in provisionprovided under the heading Provision for non-covered loanLoan and lease losses at a level below net charge offs for the year, as a result of the improving conditions of the non-covered loan portfolio.

Lease Losses above.

The following table sets forthprovides a summary of activity in the allocationALLL by major loan type for each of the allowance for non-covered loan and lease losses:

five years ended December 31:

Allowance for loanNon-CoveredLoan and lease losses CompositionLease Losses 

As of December 31,

(in thousands)

    2010   2009   2008   2007   2006 

Commercial real estate

  $64,405    $67,281    $57,907    $57,433    $41,135  

Commercial

   22,146     24,583     23,104     19,514     14,094  

Residential

   5,926     5,811     5,778     3,406     3,111  

Consumer & other

   803     455     484     504     603  

Unallocated

   8,641     9,527     8,592     4,047     1,147  
     

Allowance for loan and lease losses

  $101,921    $107,657    $95,865    $84,904    $60,090  
     

 2013 2012 2011 2010 2009
Balance, beginning of period$85,391
 $92,968
 $101,921
 $107,657
 $95,865
Loans charged-off:         
Commercial real estate, net(7,445) (22,349) (36,011) (71,030) (136,382)
Commercial, net(19,266) (12,209) (21,071) (50,242) (57,932)
Residential, net(3,458) (5,282) (6,333) (5,168) (4,331)
Consumer & other, net(826) (1,499) (1,636) (2,061) (2,222)
Total loans charged-off(30,995) (41,339) (65,051) (128,501) (200,867)
Recoveries:         
Commercial real estate, net3,322
 5,409
 5,906
 6,980
 1,334
Commercial, net9,914
 5,356
 3,348
 1,318
 1,549
Residential, net351
 762
 239
 334
 126
Consumer & other, net502
 439
 385
 465
 526
Total recoveries14,089
 11,966
 9,878
 9,097
 3,535
Net charge-offs(16,906) (29,373) (55,173) (119,404) (197,332)
Provision charged to operations16,829
 21,796
 46,220
 113,668
 209,124
Balance, end of period$85,314
 $85,391
 $92,968
 $101,921
 $107,657
As a percentage of average non-covered loans and leases:         
Net charge-offs0.24% 0.48% 0.96% 2.06% 3.23%
Provision for non-covered loan and lease losses0.24% 0.35% 0.81% 1.97% 3.43%
Recoveries as a percentage of charge-offs45.46% 28.95% 15.19% 7.08% 1.76%

62


The unallocated portion of ALLL provides for coverage of credit losses inherent in the loan portfolio but not captured in the credit loss factors that are utilized in the risk rating-based component, or in the specific impairment reserve component of the allowance for loan and lease losses, and acknowledges the inherent imprecision of all loss prediction models. As of At both December 31, 2010, the2013 and December 31, 2012, there was no unallocated allowance amount represented 8% of the allowance for loan and lease losses, compared to 9% at December 31, 2009.losses. The level in unallocated ALLL in the current year reflects management’s evaluation of the existing general business and economic conditions, and decliningimproving credit quality and collateral values of real estate in our markets. The ALLL composition should not be interpreted as an indication of specific amounts or loan categories in which future charge-offs may occur.

The following table provides a summary of activity insets forth the ALLL by major loan type for eachallocation of the five years ended December 31:

Activity in the Allowanceallowance for non-covered loan and lease losses

Years Ended and percent of loans and leases in each category to total loans and leases, net of deferred fees, as of December 31: 


Allowance for Non-covered Loan and Lease Losses Composition
As of December 31,

(dollars in thousands)

    2010  2009  2008  2007  2006 

Balance at beginning of year

  $107,657   $95,865   $84,904   $60,090   $43,885  

Loans charged off:

      

Commercial real estate

   (71,030  (136,382  (82,919  (20,632  (300

Commercial

   (50,242  (57,932  (14,614  (2,208  (2,353

Residential

   (5,168  (4,331  (1,597  (547  (213

Consumer & other

   (2,061  (2,222  (1,922  (1,343  (1,339
     

Total loans charged off

   (128,501  (200,867  (101,052  (24,730  (4,205

Recoveries:

      

Commercial real estate

   6,980    1,334    2,571    1,022    739  

Commercial

   1,318    1,549    1,021    819    1,996  

Residential

   334    126    148    241    108  

Consumer & other

   465    526    595    654    788  
     

Total recoveries

   9,097    3,535    4,335    2,736    3,631  
     

Net charge-offs

   (119,404  (197,332  (96,717  (21,994  (574

Addition incident to mergers

               5,078    14,227  

Provision charged to operations

   113,668    209,124    107,678    41,730    2,552  
     

Balance at end of year

  $101,921   $107,657   $95,865   $84,904   $60,090  
     

Ratio of net charge-offs to average non-covered loans

   2.06%    3.23%    1.58%    0.38%    0.01%  

Ratio of provision to average non-covered loans

   1.97%    3.43%    1.76%    0.72%    0.05%  

Recoveries as a percentage of charge-offs

   7.08%    1.76%    4.29%    11.06%    86.35%  

The decrease in the ALLL as of December 31, 2010 is primarily a result of the decrease in the provision for loan and lease losses in 2010. The decrease in the provision for loan and lease losses is due to improving credit quality of the loan portfolio.

 2013 2012 2011 2010 2009
 Amount % Amount % Amount % Amount % Amount %
Commercial real estate, net$53,433
 58.8% $54,909
 62.7% $59,574
 64.6% $64,405
 68.3% $67,281
 68.4%
Commercial, net24,191
 28.8% 22,925
 25.7% 20,485
 24.8% 22,146
 22.2% 24,583
 23.2%
Residential, net6,827
 11.7% 6,925
 11.0% 7,625
 10.0% 5,926
 8.9% 5,811
 7.8%
Consumer & other, net863
 0.7% 632
 0.6% 867
 0.6% 803
 0.6% 455
 0.6%
Unallocated
   
   4,417
  
 8,641
  
 9,527
  
Allowance for non-covered loan and lease losses$85,314
   $85,391
   $92,968
  
 $101,921
  
 $107,657
  

All impaired loans are individually evaluated for impairment. If the measurement of each impaired loans’loans' value is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. This can be accomplished by charging-off the impaired portion of the loan or establishing a specific component within the allowance for loan and lease losses. If in management’s assessment the sources of repayment will not result in a reasonable probability that the carrying value of a loan can be recovered, the amount of a loan’s specific impairment is charged-off against the allowance for loan and lease losses. Prior to the second quarter of 2008, theThe Company established specific reserves within the allowance for loan and leases losses for loan impairments and recognized the charge-off of the impairment reserve when the loan was resolved, sold, or foreclosed and transferred to other real estate owned. Due to declining real estate values in our markets and the deterioration of the U.S. economy in general, it became increasingly likely that impairment reserves on collateral dependent loans, particularly those relating to real estate, would not be recoverable and represented a confirmed loss. As a result, beginning in the second quarter of 2008, the Company began recognizingrecognizes the charge-off of impairment reserves on impaired loans in the period they arise for collateral dependent loans. This process has effectively accelerated the recognition of charge-offs recognized since the second quarter of 2008. The change in our assessment of the possible recoverability of our collateral dependent impaired loans’ carrying values has ultimately had no impact on our impairment valuation procedures or the amount of provision for loan and leases losses included within the

Umpqua Holdings Corporation

Consolidated Statements of Operations. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan and lease losses.

At December 31, 2010,2013, the recorded investment in non-covered loans classified as impaired totaled $222.6$100.8 million, with a corresponding valuation allowance (included in the allowance for loan and lease losses) of $5.2 million.$1.8 million.  The valuation allowance on impaired loans represents the impairment reserves on performing current and former non-covered restructured loans and nonaccrual loans. At December 31, 2009,2012, the total recorded investment in non-covered impaired loans was $328.0$142.4 million, with a corresponding valuation allowance (included in the allowance for loan and lease losses) of $2.7 million.

$1.4 million.  The majority of loan charge-offs invaluation allowance on impaired loans represents the impairment reserves on performing current year relate to real estate related credits. In the current year we experienced decreased charge-offs in all categories except for residential. These charge-offs were largely driven by economic conditions coupled with falling real estate values in our markets. The majority of all charge-offs taken in the current year relate to borrowers that were directly affected by the housing market downturn or indirectly impacted from the contraction of real estate dependent businesses.

and former non-covered restructured loans and nonaccrual loans at December 31, 2012

The following table presents a summary of activity in the reserve for unfunded commitments (“RUC”):

Summary of Reserve for Unfunded Commitments Activity

Years Ended December 31,


63


(in thousands)

   December 31, 2010 
    Commercial
Real Estate
  Commercial   Residential   Consumer
& Other
   Total 

Balance, beginning of year

  $57   $484    $144    $46    $731  

Net change to other expense

   (24  91     14     6     87  
     

Balance, end of year

  $33   $575    $158    $52    $818  
     

Unfunded commitments

  $33,326   $548,920    $210,574    $45,556    $838,376  
     

   December 31, 2009 
    Commercial
Real Estate
  Commercial  Residential  Consumer
& Other
   Total 

Balance, beginning of year

  $151   $625   $161   $46    $983  

Net change to other expense

   (94  (141  (17       (252
     

Balance, end of year

  $57   $484   $144   $46    $731  
     

Unfunded commitments

  $58,206   $479,153   $220,697   $39,354    $797,410  
     

   December 31, 2008 
    Commercial
Real Estate
  Commercial  Residential   Consumer
& Other
  Total 

Balance, beginning of year

  $247   $728   $159    $48   $1,182  

Net change to other expense

   (96  (103  2     (2  (199
     

Balance, end of year

  $151   $625   $161    $46   $983  
     

Unfunded commitments

  $154,906   $617,759   $245,706    $38,832   $1,057,203  
     

 2013 2012 2011
Balance, beginning of period$1,223
 $940
 $818
Net change to other expense:     
Commercial real estate, net48
 113
 26
Commercial, net93
 174
 58
Residential, net59
 (12) 27
Consumer & other, net13
 8
 11
Total change to other expense213
 283
 122
Balance, end of period$1,436
 $1,223
 $940
We believe that the ALLL and RUC at December 31, 20102013 are sufficient to absorb losses inherent in the loan and lease portfolio and credit commitments outstanding as of that date respectively, based on the best information available. This assessment, based in part

on historical levels of net charge-offs, loan and lease growth, and a detailed review of the quality of the loan and lease portfolio, involves uncertainty and judgment. Therefore, the adequacy of the ALLL and RUC cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review.


ALLOWANCE FOR COVERED LOAN LOSSES
The allowance for covered loan and lease losses (“ALLL”) totaled $9.8 million at December 31, 2013, a decrease of $8.5 million from the $18.3 million at December 31, 2012. The decrease in the covered ALLL from the prior year end results from improvements in the amount and the timing of expected cash flows on the acquired loans compared to those previously estimated and charge-offs of unpaid principal balance against previously established allowance, as measured on a pool basis. 

The following table summarizes activity related to the allowance for covered loan losses by covered loan portfolio segment for each of the four years ended December 31:
Allowance forCoveredLoan Losses 
(in thousands)

64


 2013 2012 2011 2010
Balance, beginning of period$18,275
 $14,320
 $2,721
 $
Loans charged-off:       
Commercial real estate, net(2,303) (2,921) (3,177) (2,439)
Commercial, net(1,544) (1,613) (660) (266)
Residential, net(197) (596) (1,657) 
Consumer & other, net(459) (659) (1,192) 
Total loans charged-off(4,503) (5,789) (6,686) (2,705)
Recoveries:       
Commercial real estate, net1,114
 1,264
 1,348
 11
Commercial, net531
 733
 512
 263
Residential, net218
 237
 142
 
Consumer & other, net249
 105
 142
 1
Total recoveries2,112
 2,339
 2,144
 275
Net charge-offs(2,391) (3,450) (4,542) (2,430)
Covered (recapture of) provision charged to operations(6,113) 7,405
 16,141
 5,151
Balance, end of period$9,771
 $18,275
 $14,320
 $2,721
        
As a percentage of average covered loans:       
Net charge-offs0.57 % 0.62% 0.64% 0.36%
(Recapture of) provision for covered loan losses(1.47)% 1.34% 2.28% 0.76%

The following table sets forth the allocation of the allowance for covered loan losses and percent of covered loans in each category to total loans, net of deferred fees as of December 31: 

Allowance for Covered Loan Losses Composition
As of December 31,
(dollars in thousands) 
 2013 2012 2011 2010
 Amount % Amount % Amount % Amount %
Commercial real estate, net$6,105
 81.6% $12,129
 80.7% $8,939
 79.4% $2,465
 78.5%
Commercial, net2,837
 6.0% 4,980
 7.8% 3,964
 9.1% 176
 9.9%
Residential, net660
 11.3% 804
 10.3% 991
 10.2% 56
 10.2%
Consumer & other, net169
 1.1% 362
 1.2% 426
 1.3% 24
 1.4%
Allowance for covered loan losses$9,771
   $18,275
   $14,320
   $2,721
  
MORTGAGE SERVICING RIGHTS

The following table presents the key elements of our mortgage servicing rights asset as of December 31, 2010, 20092013, 2012, and 2008:

2011: 

Summary of Mortgage Servicing Rights

Years Ended December 31,



(in thousands)

65


 2013 2012 2011
Balance, beginning of period$27,428
 $18,184
 $14,454
Additions for new mortgage servicing rights capitalized17,963
 17,710
 6,720
Changes in fair value:     
 Due to changes in model inputs or assumptions(1)5,688
 (4,651) (858)
 Other(2)(3,314) (3,815) (2,132)
Balance, end of period$47,765
 $27,428
 $18,184

(1)Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates.
(2) Represents changes due to collection/realization of expected cash flows over time.

Information related to our serviced loan portfolio as of December 31, 2013, 2012, and 2011 was as follows: 

(dollars in thousands)

    2010  2009  2008 

Balance, beginning of year

  $12,625   $8,205   $10,088  

Additions for new mortgage servicing rights capitalized

   5,645    7,570    2,694  

Acquired mortgage servicing rights

   62          

Changes in fair value:

    

Due to changes in model inputs or assumptions(1)

   (1,598  (3,469  (1,270

Other(2)

   (2,280  319    (3,307
     

Balance, end of year

  $14,454   $12,625   $8,205  
     

Balance of loans serviced for others

  $1,603,414   $1,277,832   $955,494  

MSR as a percentage of serviced loans

   0.90%    0.99%    0.86%  

(1)Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates.
(2)Represents changes due to collection/realization of expected cash flows over time.

 December 31, 2013 December 31, 2012 December 31, 2011
Balance of loans serviced for others$4,362,499
 $3,162,080
 $2,009,849
MSR as a percentage of serviced loans1.09% 0.87% 0.90%

Mortgage servicing rights are adjusted to fair value quarterly with the change recorded in mortgage banking revenue. The value of mortgage servicing rights is impacted by market rates for mortgage loans. Historically low market rates can cause prepayments to increase as a result of refinancing activity. To the extent loans are prepaid sooner than estimated at the time servicing assets are originally recorded, it is possible that certain mortgage servicing rights assets may decrease in value. Generally, the fair value of our mortgage servicing rights will increase as market rates for mortgage loans rise and decrease if market rates fall.


In the fourth quarter of 2007, the Company began using derivative instruments to hedge the risk of changes in the fair value of MSR due to changes in interest rates. Starting in late February 2008 and continuing into March 2008, the bond markets experienced extraordinary volatility. This volatility resulted in widening spreads and price declines on the derivative instruments that were not offset by corresponding gains in the MSR asset. As a result, a $2.4 million charge was recognized within mortgage banking revenue in the first quarter of 2008. In March 2008, the Company indefinitely suspended the MSR hedge, given the continued volatility. Additional information about the Company’s mortgage servicing rights is provided in Note 10 of theNotes to Consolidated Financial Statementsin Item 8 below.

GOODWILL AND OTHER INTANGIBLE ASSETS

At December 31, 2010,2013, we had recognized goodwill and other intangible assets of $655.9$776.7 million, as compared to $610.0$685.3 million at December 31, 2009. The increase of $45.9 million2012.  Goodwill is due to the acquisition of Rainier and Nevada Security. The goodwill recorded in connection with acquisitionsbusiness combinations and represents the excess of the purchase price over the estimated fair value of the net assets acquired. Goodwill increased in 2013 over 2012 as a result of the FinPac acquisition.

At December 31, 2013, we had recorded goodwill of $764.3 million, as compared to $668.2 million at December 31, 2012. Goodwill and other intangible assets with indefinite lives are not amortized but instead are periodically tested for impairment. Management evaluates goodwill and intangible assets with indefinite lives on an annual basis as of December 31. Additionally, we perform impairment evaluations on an interim basis when events or circumstances indicate impairment potentially exists. A significant

Umpqua Holdings Corporation

amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse action or assessment by a regulator; and unanticipated competition.

The Company has the option to perform a qualitative assessment before completing the goodwill impairment test involves a two-step process. The first step compares the fair value of a reporting unit (e.g. Retail Brokerage and Community Banking) to its carrying value. If the reporting unit’s fair value is less than its carrying value, the Company would be required to proceed to the second step. In the second step the Company calculates the implied fair value of the reporting unit’s goodwill. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. The estimated fair value of the Company is allocated to all of the Company’s assets and liabilities, including any unrecognized identifiable intangible assets, as if the Company had been acquired in a business combination and the estimated fair value of the reporting unit is the price paid to acquire it. The allocation process is performed only for purposes of determining the amount of goodwill impairment. No assets or liabilities are written up or down, nor are any additional unrecognized identifiable intangible assets recorded as a part of this process. Any excess of the estimated purchase price over the fair value of the reporting unit’s net assets represents the implied fair value of goodwill. If the carrying amount of the goodwill is greater than the implied fair value of that goodwill, an impairment loss would be recognized as a charge to earnings in an amount equal to that excess.

Substantially all of the Company’s goodwill is associated with our community banking operations. Due to a decline in the Company’s market capitalization below book value of equity and continued weakness in the banking industry, the Company performed a goodwill impairment evaluation of the Community Banking operating segment as of June 30, 2009. The Company engagedperforms the first step on an independent valuation consultant to assist usannual basis and in determining whether and to what extent ourbetween if certain events or circumstances indicate goodwill asset wasmay be impaired. We utilized a variety


66

Table of valuation techniques to analyze and measure the estimated fair value of reporting units under both the income and market valuation approach. Under the income approach, the fair value of the reporting unit is determined by projecting future earnings for five years, utilizing a terminal value based on expected future growth rates, and applying a discount rate reflective of current market conditions. The estimation of forecasted earnings uses management’s best estimate of economic and market conditions over the projected periods and considers estimated growth rates in loans and deposits and future expected changes in net interest margins. Various market-based valuation approaches are utilized and include applying market price to earnings, core deposit premium, and tangible book value multiples as observed from relevant, comparable peer companies of the reporting unit. We also valued the reporting unit by applying an estimated control premium to the market capitalization. Weightings are assigned to each of the aforementioned model results, judgmentally allocated based on the observability and reliability of the inputs, to arrive at a final fair value estimate of the reporting unit. The results of the Company’s and valuation specialist’s step one impairment test indicated that the reporting unit’s fair value was less than its carrying value. As a result, the Company performed a step two analysis. The external valuation specialist assisted management’s analysis under step two of the goodwill impairment test. Under this approach, we calculated the fair value for the reporting unit’s assets and liabilities, as well as its unrecognized identifiable intangible assets, such as the core deposit intangible and trade name. Fair value adjustments to items on the balance sheet primarily related to investment securities held to maturity, loans, other real estate owned, Visa Class B common stock, deferred taxes, deposits, term debt, and junior subordinated debentures carried at amortized cost. The external valuation specialist assisted management to estimate the fair value of our unrecognized identifiable assets, such as the core deposit intangible and trade name.

The most significant fair value adjustment made in this analysis was to adjust the carrying value of the Company’s loans receivable portfolio to fair value. The fair value of the Company’s loan receivable portfolio at June 30, 2009 was estimated in a manner similar to methodology utilized as part of the December 31, 2008 goodwill impairment evaluation. As part of the December 31, 2008 loan valuation, the loan portfolio was stratified into sixty-eight loan pools that shared common characteristics, namely loan type, payment terms, and whether the loans were performing or non-performing. Each loan pool was discounted at a rate that considers current market interest rates, credit risk, and assumed liquidity premiums required based upon the nature of the underlying pool. Due to the disruption in the financial markets experienced during 2008 and continuing through 2009, the liquidity premium reflects the reduction in demand in the secondary markets for all grades of non-conforming credit, including those that are performing. Liquidity premiums for individual loan categories generally ranged

from 4.6% for performing loans to 30% for construction and non-performing loans. At December 31, 2008, the fair value of the overall loan portfolio was calculated to be at a 9% discount relative to its book value. The composition of the loan portfolio at June 30, 2009, including loan type and performance indicators, was substantially similar to the loan portfolio at December 31, 2008. At June 30, 2009, the fair value of the loan portfolio was estimated to be at a 12% discount relative to its carrying value. The additional discount is primarily attributed to the additional liquidity premium required as of the measurement date associated with the Company’s concentration of commercial real estate loans.

Contents


Other significant fair value adjustments utilized in this goodwill impairment analysis included the value of the core deposit intangible asset which was calculated as 0.53% of core deposits, and includes all deposits except certificates of deposit. The carrying value of other real estate owned was discounted by 25%, representing a liquidity adjustment given the current market conditions. The fair value of our trade name, which represents the competitive advantage associated with our brand recognition and ability to attract and retain relationships, was estimated to be $19.3 million. The fair value of our junior subordinated debentures carried at amortized cost was determined in a manner and utilized inputs, primarily the credit risk adjusted spread, consistent with our methodology for determining the fair value of junior subordinated debentures recorded at fair value. Information relating to our methodologies for estimating the fair value of financial instruments that were adjusted to fair value as part of this analysis, including the Visa Class B common stock, deposits, term debt, and junior subordinated debentures, is included in Note 24 of theNotes to Consolidated Financial Statements.

Based on the results of the step two analysis, the Company determined that the implied fair value of the goodwill was less than its carrying amount on the Company’s balance sheet, and as a result, we recognized a goodwill impairment loss of $112.0 million in the second quarter of 2009. This write-down of goodwill is a non-cash charge that does not affect the Company’s or the Bank’s liquidity or operations. In addition, because goodwill is excluded in the calculation of regulatory capital, the Company’s “well-capitalized” regulatory capital ratios are not affected by this charge.

The Company also conducted its annual evaluation of goodwill for impairment as of December 31, 2010.2013 for both the Community Banking and Wealth Management segments. In the first step of the goodwill impairment test, the Company determined for both segments that the fair value of the Community Banking reporting unit exceeded its carrying amount. This determination is consistent with the events occurring after the Company recognized the $112.0 million impairment of goodwill second quarter of 2009. First, the market capitalization and estimated fair value of the Company increased significantly subsequent to the recognition of the impairment charge as the fair value of the Company’s stock increased 57% from June 30, 2009 to December 31, 2010. Secondly, the Company’s successful public common stock offerings in the third quarter of 2009 and first quarter of 2010 diluted the carrying value of the reporting book equity on a per share basis, against which the fair value of the reporting unit is measured. The significant assumptions and methodology utilized to test for goodwill impairment as of December 31, 2010 were consistent with these used at December 31, 2009.

If the Company’s common stock price declines further or continues to trade below book value per common share, or should general economic conditions deteriorate further or remain depressed for a prolonged period of time, particularly in the financial industry, the Company may be required to recognize additional impairment of all, or some portion of, its goodwill. It is possible that changes in circumstances, existing at the measurement date or at other times in the future, or changes in the numerous estimates associated with management’s judgments, assumptions and estimates made in assessing the fair value of our goodwill, such as valuation multiples, discount rates, or projected earnings, could result in an impairment charge in future periods. Additional impairment charges, if any, may be material to the Company’s results of operations and financial position. However, any potential future impairment charge will have no effect on the Company’s or the Bank’s cash balances, liquidity, or regulatory capital ratios.

The inputs management utilizes to estimate the fair value of a reporting unit in step one of the goodwill impairment test, and estimating the fair values of the underlying assets and liabilities of a reporting unit in the second step of the goodwill impairment test, require management to make significant judgments, assumptions and estimates where observable market may not readily exist. Such inputs include, but are not limited to, trading multiples from comparable transactions, control premiums, the value that may arise from synergies and other benefits that would accrue from control over an entity, and the appropriate rates to discount projected cash flows. Additionally, there may be limited current market inputs to value certain assets or liabilities, particularly loans and junior subordinated debentures. These valuation inputs are considered to be Level 3 inputs.

Umpqua Holdings Corporation

Management will continue to monitor the relationship of the Company’s market capitalization to both its book value and tangible book value, which management attributes to both financial services industry-wide and Company specific factors, and to evaluate the carrying value of goodwill and other intangible assets.

As a result of the December 31, 2008 goodwill impairment evaluation related to the Retail Brokerage reporting segment, management determined that there was a $1.0 million impairment following the departure of certain Umpqua Investments financial advisors. The valuation of the impairment at the Retail Brokerage operating segment was determined using an income approach by discounting cash flows of forecasted earnings. The key assumptions used to estimate the fair value of each reporting unit include earnings forecasts for five years, a terminal value based on expected future growth rates, and a discount rate reflective of current market conditions. The Company evaluated the Retail Brokerage reporting segment’s goodwill for impairment as of December 31, 2010. The first step of the goodwill impairment test indicated that the reporting unit’s fair value exceeded its carrying value. As of No goodwill impairment losses have been recognized in the periods presented. 

At December 31, 2010, the ending carrying value of the Retail Brokerage segment’s goodwill was $2.7 million.

At December 31, 2010,2013, we had other intangible assets of $26.1$12.4 million, as compared to $29.6$17.1 million at December 31, 2009.2012.   As part of a business acquisition, a portion of the purchase price is allocated to the other value of intangible assets such as the merchant servicing portfolio or core deposits, which includes all deposits except certificates of deposit. The value of these other intangible assets werewas determined bywith the assistance of a third party based on the net present value of future cash flows for the merchant servicing portfolio and an analysis of the cost differential between the core deposits and alternative funding sources for the core deposit intangible. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives, and are also reviewed for impairment. We amortize other intangible assets on an accelerated or straight-line basis over an estimated ten to fifteen year life. In the fourth quarter of 2009, the Company recognized an $804,000 impairment related to the merchant servicing portfolio obtained through a prior acquisition. The remaining decrease in otherOther intangible assets resulted from scheduleddecreased in 2013 over 2012 as a result of intangible asset amortization. No other impairment losses wereseparate from the scheduled amortization have been recognized in connection with other intangible assets since their initial recognition.

the periods presented. 


Additional information regarding our accounting for goodwill and other intangible assets is included in Notes 1, 2 and 9 of theNotes to Consolidated Financial Statementsin Item 8 below.

DEPOSITS

Total deposits were $9.4$9.1 billion at December 31, 2010, an increase2013, a decrease of $2.0 billion,$261.6 million, or 26.8%2.8%, as compared to year-end 2009. Excluding2012 due to the deposits acquired through the FDIC-assisted purchasetransfer of balances to securities sold under agreements to repurchase and assumptionfrom anticipated run-off of Evergreen, Rainier,higher priced money market, time and Nevada Security, the annualized organic deposit growth rate was 13.3%. Of the total change in deposit balances during the current year, deposits from consumers and businesses increased $1.9 billion, and deposits from public entities increased $46.8 million. Despite the increased competitive pressures to build deposits in light of the current recessionary economic climate, management attributes the ability to maintain our overall deposit base and grow certain lines of business to ongoing business development and marketing efforts in our service markets. Information on average deposit balances and average rates paid is included under theNet Interest Incomesection of this report.deposits. Additional information regarding interest bearing deposits is included in Note 14 of theNotes to Consolidated Financial Statementsin Item 8 below.

The following table presents the deposit balances by major category as of December 31:

31, 2013 and December 31, 2012

Deposits

As of December 31,

(dollars in thousands)

   2010  2009 
   Amount   Percentage  Amount   Percentage 
  

Noninterest bearing

  $1,616,687     17 $1,398,332     19%  

Interest bearing demand

   927,224     10  872,184     12%  

Savings and money market

   3,817,245     41  2,813,805     37%  

Time, $100,000 or greater

   2,191,055     23  1,603,410     22%  

Time, less than $100,000

   881,594     9  752,703     10%  
     

Total

  $9,433,805     100 $7,440,434     100%  
     

 December 31, 2013 December 31, 2012
 Amount Percentage Amount Percentage
Non-interest bearing$2,436,477
 26% $2,278,914
 24%
Interest bearing demand1,233,070
 14% 1,215,002
 13%
Money market3,349,946
 37% 3,407,047
 37%
Savings560,699
 6% 475,325
 5%
Time, $100,000 or greater1,065,380
 12% 1,429,153
 15%
Time, less than $100,000472,088
 5% 573,834
 6%
Total$9,117,660
 100% $9,379,275
 100%
 The following table presents the average amount of and average rate paid by major category as of December 31:

(dollars in thousands) 
 2013 2012 2011
 Average Average Average Average Average Average
 Deposits Rate Deposits Rate Deposits Rate
Non-interest bearing$2,284,996
  $2,034,035
  $1,782,354
 
Interest bearing demand1,176,841
 0.08% 1,112,394
 0.18% 903,721
 0.34%
Money market3,276,179
 0.11% 3,447,806
 0.21% 3,487,624
 0.49%
Savings521,387
 0.06% 427,673
 0.07% 373,746
 0.10%
Time1,796,669
 0.89% 2,102,711
 1.03% 2,754,533
 1.27%
Total$9,056,072
   $9,124,619
   $9,301,978
  
The following table presents the scheduled maturities of time deposits of $100,000 and greater as of December 31, 2010:

2013:


67


Maturities of Time Deposits of $100,000 and Greater


(in thousands)

Three months or less

  $642,060  

Over three months through six months

   325,706  

Over six months through twelve months

   839,661  

Over twelve months

   383,628  
     

Time, $100,000 and over

  $2,191,055  
     


 Amount
Three months or less$226,849
Over three months through six months211,268
Over six months through twelve months253,595
Over twelve months373,668
Time, $100,000 and over$1,065,380

The Company has an agreement with Promontory Interfinancial Network LLC (“Promontory”) that makes it possible to provide FDIC deposit insurance to balances in excess of current deposit insurance limits.  Promontory’s Certificate of Deposit Account Registry Service (“CDARS”) uses a deposit-matching program to exchange Bank deposits in excess of the current deposit insurance limits for excess balances at other participating banks, on a dollar-for-dollar basis, that would be fully insured at the Bank.  This product is designed to enhance our ability to attract and retain customers and increase deposits, by providing additional FDIC coverage to customers.  CDARS deposits can be reciprocal or one-way.  All of the Bank’s CDARS deposits are reciprocal.reciprocal and are considered brokered deposits under regulatory guidelines.  At December 31, 20102013 and December 31, 2009,2012, the Company’s CDARS balances totaled $323.2$66.9 million and $290.3$154.1 million, respectively.  Of these totals, at December 31, 20102013 and December 31, 2009, $300.62012, $62.2 million and  $245.6$146.1 million, respectively, represented time deposits equal to or greater than $100,000 but were fully insured under current deposit insurance limits.

On November 21, 2008, the FDIC approved the final ruling establishing the Transaction Account Guarantee Program (“TAGP”) as part of the Temporary Liquidity Guarantee Program (“TLGP”). Under this program, all

The Dodd-Frank Act provided for unlimited deposit insurance for non-interest bearing transactiontransactions accounts, are fully guaranteed by the FDIC for the entire amount in the account. This unlimited coverage also extends toexcluding NOW (interest bearing deposit accounts) earning an interest rate no greater than 0.50% and including all IOLTAs (lawyers’(lawyers' trust accounts). Coverage under the TAGP, funded through insurance premiums paid by participating financial institutions, is in addition to and separate from the additional coverage announced under EESA. On August 26, 2009, the FDIC extended the TAGP portion of the TLGP through June 30, 2010. On June 22, 2010, the FDIC extended the TAGP portion of the TLGP for an additional six months, from July 1, 2010 to December 31, 2010. The rule requires that interest rates on qualifying NOW accounts offered by banks participating in the program be reduced to 0.25% from 0.50%. The rule provides for an additional extension of the program, without further rulemaking, for a period of time not to exceed December 31, 2011. Umpqua has elected to participate in the TAGP program through the extended period. The Dodd-Frank Act provides for unlimited deposit insurance for noninterest bearing transactions accounts (excluding NOW), beginning December 31, 2010 for a period of two years.

Umpqua Holdings Corporation

Also, the The program expired December 31, 2012. The Dodd-Frank Act permanently raisesraised the current standard maximum federal deposit insurance amount from $100,000 to $250,000 per qualified account.

BORROWINGS

At December 31, 2010,2013, the Bank had outstanding $73.8$224.9 million of securities sold under agreements to repurchase and no outstanding federal funds purchased balances. Additional information regarding securities sold under agreements to repurchase and federal funds purchased is provided in Notes 15 and 16 ofNotes to Consolidated Financial Statementsin Item 8 below.

At December 31, 2010, the


The Bank had outstanding term debt of $262.8$251.5 million at December 31, 2013, primarily with the Federal Home Loan Bank (“FHLB”). Term debt outstanding as of December 31, 2010 increased $186.52013 decreased $2.1 million since December 31, 2009 primarily2012 as a result of termaccretion of purchase accounting adjustments. Term debt assumed in the EvergreenFinPac acquisition of $211.2 million was paid upon acquisition. Advances from the FHLB amounted to $245.0 million of the total term debt and Rainier acquisitions, partially offsetare secured by repayment of FHLB borrowings. Management expects continued use ofinvestment securities and loans secured by real estate.  The FHLB advances as a source of shorthave fixed interest rates ranging from 4.46% to 4.72% and long-term funding. The following table summarizes the maturity dates of FHLB advances outstanding (excluding the remaining purchase accounting adjustments relating to the Rainier acquisition of $12.2 million at December 31, 2010)mature in 2016 and weighted average contractual interest rate (excluding the accretion of purchase accounting adjustments) at December 31, 2010:

    Amount   Wtd Avg. Rate 

2011

  $5,000     2.19

2012

          

2013

          

2014

          

2015

          

Thereafter

   245,016     4.56
       

Total

  $250,016     4.51
       

2017. Additional information regarding term debt is provided in Note 17 ofNotes to Consolidated Financial Statementsin Item 8 below.


JUNIOR SUBORDINATED DEBENTURES

We had junior subordinated debentures with carrying values of $183.6$189.2 million and $188.9$196.1 million respectively, at December 31, 20102013 and 2009.

At December 31, 2010,2012, respectively.  The decrease is primarily due to the redemption of $8.8 million in junior subordinated debentures during the first quarter of 2013 which were assumed in the Circle acquisition in November 2012.

At December 31, 2013, approximately $219.6 million, or 95% of the total issued amount, had interest rates that are adjustable on a quarterly basis based on a spread over three month LIBOR.  Interest expense for junior subordinated debentures decreased in 20102013 as compared to 20092012 and in 2009 as compared to 2008,2011, primarily resulting from decreases in short-term market interest rates andthree month LIBOR.  Although increases in short-term market interest ratesthree month LIBOR will increase the interest expense for junior subordinated debentures, we believe that other attributes of our balance sheet will serve to mitigate the impact to net interest income on a consolidated basis.

On January 1, 2007, the Company elected the fair value measurement option for certain pre-existing junior subordinated debentures of $97.9 million (the Umpqua Statutory Trusts).  The remaining junior subordinated debentures as of the adoption date were acquired through business combinations and were measured at fair value at the time of acquisition. In 2007, the Company issued two series of trust preferred securities and elected to measure each instrument at fair value. Accounting for junior subordinated debentures originally issued by the Company at fair value enables us to more closely align our financial performance with the economic value of

68


those liabilities. Additionally, we believe it improves our ability to manage the market and interest rate risks associated with the junior subordinated debentures. The junior subordinated debentures measured at fair value and amortized cost have been presented as separate line items on the balance sheet. The ending carrying (fair) value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants under current market conditions as of the measurement date.

Prior to the second quarter of 2009, we estimated the fair value of junior subordinated debentures using an internal discounted cash flow model. The future cash flows of these instruments were extended to the next available redemption date or maturity date as appropriate based upon the spreads of recent issuances or quotes from brokers for comparable bank holding companies, as available, compared to the contractual spread of each junior subordinated debenture measured at fair value.

The significant inputs utilized in the estimation of fair value of these instruments isare the credit risk adjusted spread and three month LIBOR.  The credit risk adjusted spread represents the nonperformance risk of the liability, contemplating both the inherent risk of the obligation and the Company’s entity-specific credit risk.obligation.  Generally, an increase in the credit risk adjusted spread and/or a decrease in the three month LIBOR will result in positive fair value adjustments.  Conversely, a decrease in the credit risk adjusted spread and/or an increase in the three month LIBOR will result in negative fair value adjustments.  For additional assurance,
Through the first quarter of 2010 we obtained valuations from a third party pricing service to validate the results of our model. Prior to the third quarter of 2008, we utilized a credit risk adjusted spread that was based upon recent issuances or quotes from brokers for comparable bank holding companies as of the date of valuation, and we considered this to be a Level 2 input. Due to the increasing credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of credit risk adjusted market spreads, we classified this as a Level 3 fair value measure in the third quarter of 2008.

In the second quarter of 2009, due to continued inactivity in the junior subordinated debenture and related markets and clarified guidance relating to the determination of fair value when the volume and level of activity for an asset or liability have significantly decreased or where transactions are not orderly, management evaluated and determined to rely on a third-party pricing service to estimateassist with the estimation and determination of fair value of these liabilities.  The pricing service utilized an income approach valuation technique, specifically an option-adjusted spread (“OAS”) valuation model. This OAS model values the cash flows over multiple interest rate scenarios and discountsIn these cash flows using a credit risk adjustment spread over the three month LIBOR swap curve. The OAS model utilized is more sophisticated and computationally intensive than the model previously used; however, the models react similarly to changes in the underlying inputs, and the results are considered comparable. With the assistance of a third-party pricing service, we determined that a credit risk adjusted spread of 725 basis points (an effective yield of approximately 11.6%) is representative of the nonperformance risk premium a market participant would require under current market conditions as of March 31, 2010. Generally, an increase invaluations, the credit risk adjusted interest spread and/or a decreasefor potential new issuances through the primary market and implied spreads of these instruments when traded as assets on the secondary market, were estimated to be significantly higher than the contractual spread of our junior subordinated debentures measured at fair value.  The difference between these spreads has resulted in the swap curve will resultcumulative gain in positive fair value, adjustments. Conversely, a decrease inreducing the credit risk adjusted spread and/or an increase in the swap curve will result in negative faircarrying value adjustments.

of these instruments as reported on our Consolidated Balance Sheets. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed into law which, among other things, limits the ability of certain bank holding companies to treat trust preferred security debt issuances as Tier 1 capital.  This law may require many banks to raise new Tier 1 capital and will effectively closeclosed the trust-preferred securities markets from offering new issuances in the future.  As a result of this legislation, our third-party pricing service noted that they were no longer to able to provide reliable fair value estimates related to these liabilities given the absence of observable or comparable transactions in the market place in recent history or as anticipated into the future.    As a result, management evaluated

Due to inactivity in the junior subordinated debenture market and the inability to obtain observable quotes of our, or similar, junior subordinated debenture liabilities or the related trust preferred securities when traded as assets, we utilize an income approach valuation technique to determine the fair value of these liabilities using our estimation of market discount rate assumptions. The Company monitors activity in the trust preferred and related markets, to the extent available, changes related to the current market conditions and determined thatanticipated future interest rate environment, and considers our entity-specific creditworthiness, to validate the 11.6%reasonableness of the credit risk adjusted spread and effective yield utilized to discountin our discounted cash flow model.  Regarding the activity in and condition of the junior subordinated debentures,debt market, we noted no observable changes in the current period as it relates to companies comparable to our size and condition, in either the related prices,primary or secondary markets.  Relating to determine fair value asthe interest rate environment, we considered the change in slope and shape of March 31, 2010 continued to represent appropriate estimatesthe forward LIBOR swap curve in the current period, the affects of which did not result in a significant change in the fair value of these liabilities. Since
The Company’s specific credit risk is implicit in the credit risk adjusted spread used to determine the fair value of our junior subordinated debentures. As our Company had less than $15 billionis not specifically rated by any credit agency, it is difficult to specifically attribute changes in assets at December 31,our estimate of the applicable credit risk adjusted spread to specific changes in our own creditworthiness versus changes in the market’s required return from similar companies. As a result, these considerations must be largely based off of qualitative considerations as we do not have a credit rating and we do not regularly issue senior or subordinated debt that would provide us an independent measure of the changes in how the market quantifies our perceived default risk.   

On a quarterly basis we assess entity-specific qualitative considerations that if not mitigated or represents a material change from the prior reporting period may result in a change to the perceived creditworthiness and ultimately the estimated credit risk adjusted spread utilized to value these liabilities.  Entity-specific considerations that positively impact our creditworthiness include: our strong capital position resulting from our successful public stock offerings in 2009 underand 2010, that offers us flexibility to pursue business opportunities such as mergers and  acquisitions, or expand our footprint and product offerings; having significant levels of on and off-balance sheet liquidity; being profitable; and, having an experienced management team.  However, these positive considerations are mitigated by significant risks and uncertainties that impact our creditworthiness and ability to maintain capital adequacy in the future. Specific risks and concerns include: given our concentration of loans secured by real estate in our loan portfolio, a continued and sustained deterioration of the real estate market may result in declines in the value of the underlying collateral and increased delinquencies that could result in an increased of charge-offs; despite recent improvement, our credit quality metrics remain negatively elevated since 2007 relative to historical standards; the continuation of current economic downturn that has been particularly severe in our primary markets could adversely affect our business; recent increased regulation facing our industry, such as the Dodd-Frank Act, will increase the cost of compliance and restrict our ability to conduct business consistent with historical practices, and could negatively impact profitability; we have a significant amount of goodwill and other intangible assets that dilute our available tangible common equity; and the carrying value of certain material, recently recorded assets on our balance sheet, such as the FDIC loss-sharing indemnification asset, are highly reliant on management estimates, such as the timing or amount of losses that are estimated to be covered, and the assumed continued compliance with the provisions of the loss-share agreement. To the extent assumptions

69


ultimately prove incorrect or should we consciously forego or unknowingly violate the guidelines of the agreement, an impairment of the asset may result which would reduce capital.  
Additionally, the Company will be ableperiodically utilizes an external valuation firm to continuedetermine or validate the reasonableness of the assessments of inputs and factors that ultimately determines the estimate fair value of these liabilities. The extent we involve or engage these external third parties correlates to include its existing trust preferred securitiesmanagement’s assessment of the current subordinate debt market, how the current environment and market compares to the preceding quarter, and perceived changes in Tier 1 capital.

the Company’s own creditworthiness during the quarter.  In periods of potential significant valuation changes and at year-end reporting periods we typically engage third parties to perform a full independent valuation of these liabilities.  For periods where management has assessed the market and other factors impacting the underlying valuation assumptions of these liabilities, and has determined significant changes to the valuation of these liabilities in the current period are remote, the scope of the valuation specialist’s review is limited to a review the reasonableness of management’s assessment of inputs.  In the thirdfourth quarter of 2010,2013, the Company began utilizing aengaged an external valuation firm to prepare an independent valuation of our junior subordinated debentures measured at fair value and the results were consistent with the Company’s valuation.  

Absent changes to the significant inputs utilized in the discounted cash flow model used to measure the fair value of these instruments at fair value each reporting period, which will have the long-term effect of amortizing the cumulative fair value discount of $53.3 million, as of December 31, 2010, overfor each junior subordinated debentures expected term, to eventually returndebenture will reverse over time, ultimately returning the carrying valuevalues of these instruments to their notional values at their expected redemption dates. This will resultdates, in recognizinga manner similar to the effective yield method as if these instruments were accounted for under the amortized cost method.   For the years ended December 31, 2013, 2012, and 2011, we recorded losses onof $2.2 million, respectively, resulting from the change in fair value of the junior subordinated debentures carriedrecorded at fair value on a quarterly basis within non-interest income. For additional assurance, we obtained a valuation from a third-party to validate the results of our model at December 31, 2010. The results of the valuation were consistent with the results of our internal model. The Company will continue to monitor activity in the trust preferred markets.value.  Observable activity in the junior subordinated debenture and related markets in future periods may change the effective rate used to discount these liabilities, and could result in additional fair value adjustments (gains or losses on junior subordinated debentures measured at fair value) aboveoutside the expected periodic change in fair value underhad the effective yield method.

Umpqua Holdings Corporation

Forfair value assumptions remained unchanged. 

On July 2, 2013, the years endedfederal banking regulators approved the final proposed rules that revise the regulatory capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework ("Basel III"). Under the original proposed rule, trust preferred security debt issuances would have been phased out of Tier 1 capital into Tier 2 capital over a 10 year period. Under the final rule, consistent with Section 171 of the Dodd-Frank Act, bank holding companies with less than $15 billion assets as of December 31, 2010, 2009 will be grandfathered and 2008, we recorded gains of $5.0 million, $6.5 million and $38.9 million, respectively, resulting from the changemay continue to include these instruments in fair value of the junior subordinated debentures recorded at fair value. The change in fair value of the junior subordinated debentures carried at fair value during these periods primarily result from the widening of the credit risk adjusted spread. Management believes that the credit risk adjusted spread being utilized is indicative of the nonperformance risk premium a willing market participant would require under current market conditions, that is, the inactive market. In management’s estimation, the change in fair value of the junior subordinated debentures during the periods represent changes in the market’s nonperformance risk expectations and pricing of this type of debt, and notTier 1 capital, subject to certain restrictions. However, if an institution grows above $15 billion as a result of changesan acquisition, or organically grows above $15 billion and then makes an acquisition, the combined trust preferred security debt issuances would be phased out of Tier 1 and into Tier 2 capital (75% in 2015 and 100% in 2016). If the Company exceeds $15 billion in consolidated assets other than in an organic manner and these instruments no longer qualify as Tier 1 capital, it is possible the Company may accelerate redemption of the existing junior subordinated debentures.  This could result in adjustments to our entity-specific credit risk. Any gains recognized are recorded in gainthe fair value of these instruments including the acceleration of losses on junior subordinated debentures carried at fair value within non-interest income. The Company currently does not intend to redeem the junior subordinated debentures following the proposed merger in order to support regulatory total capital levels. At December 31, 2013, the Company's restricted core capital elements were 18.6% of total core capital, net of goodwill and any associated deferred tax liability. 

The contractual interest expense on junior subordinated debentures continues to be recorded on an accrual basis and is reported in interest expense. The junior subordinated debentures recorded at fair value of $80.7$87.3 million had contractual unpaid principal amounts of $134.0 million outstanding as of December 31, 2013. The junior subordinated debentures recorded at fair value of $85.1 million had contractual unpaid principal amounts of $134.0 million outstanding as of December 31, 2010. The junior subordinated debentures recorded at fair value of $85.7 million had contractual unpaid principal amounts of $134.0 million outstanding as of December 31, 2009.

2012.

Additional information regarding junior subordinated debentures measured at fair value is included in Note 2418 of theNotes to Consolidated Financial Statements in Item 8 below.

All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of December 31, 2010,2013, under guidance issued by the Board of Governors of the Federal Reserve System. Additional information regarding the terms of the junior subordinated debentures, including maturity/redemption dates, interest rates and the fair value election, is included in Note 18 of theNotes to Consolidated Financial Statements in Item 8 below.

.


LIQUIDITY AND CASH FLOW

The principal objective of our liquidity management program is to maintain the Bank’sBank's ability to meet the day-to-day cash flow requirements of our customers who either wish to withdraw funds or to draw upon credit facilities to meet their cash needs.

We monitor the sources and uses of funds on a daily basis to maintain an acceptable liquidity position. One source of funds includes public deposits. Individual state laws require banks to collateralize public deposits, typically as a percentage of their public deposit

70


balance in excess of FDIC insurance.  Public deposits represent 10.3%11.0% and 10.6% of total deposits at December 31, 20102013 and 12.4% at December 31, 2009.2012, respectively. The amount of collateral required varies by state and may also vary by institution within each state, depending on the individual state’s risk assessment of depository institutions. Changes in the pledging requirements for uninsured public deposits may require pledging additional collateral to secure these deposits, drawing on other sources of funds to finance the purchase of assets that would be available to be pledged to satisfy a pledging requirement, or could lead to the withdrawal of certain public deposits from the Bank. In addition to liquidity from core deposits and the repayments and maturities of loans and investment securities, the Bank can utilize established uncommitted federal funds lines of credit, sell securities under agreements to repurchase, borrow on a secured basis from the FHLB or issue brokered certificates of deposit.

The Bank had available lines of credit with the FHLB totaling $1.9$2.2 billion at December 31, 20102013 subject to certain collateral requirements, namely the amount of pledged loans and investment securities. The Bank had available lines of credit with the Federal Reserve totaling $289.4$391.7 million subject to certain collateral requirements, namely the amount of certain pledged loans at December 31, 2010.loans. The Bank had uncommitted federal funds line of credit agreements with additional financial institutions totaling $125.0$185.0 million at December 31, 2010.2013. Availability of the lines is subject to federal funds balances available for loan and continued borrower eligibility. These lines are intended to support short-term liquidity needs, and the agreements may restrict the consecutive day usage.

The Company is a separate entity from the Bank and must provide for its own liquidity. Substantially all of the Company’sCompany's revenues are obtained from dividends declared and paid by the Bank. In 2010, thereThere were no$62.0 million of dividends paid by the Bank to the Company.Company in 2013.  There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to the Company. We believe that such restrictions will not have an adverse impact on the ability of the Company to fund its quarterly cash dividend distributions to common shareholders when approved, and meet its ongoing cash obligations, which consist principally of

debt service on the $230.1 million (issued amount) of outstanding junior subordinated debentures. As of December 31, 2010,2013, the Company did not have any borrowing arrangements of its own.

Additional discussion related to liquidity related risks given the current economic climate is provided in Item 1ARisk Factors above.

As disclosed in theConsolidatedStatements of Cash Flows in Item 8 of this report,, net cash provided by operating activities was $198.6$413.1 million during 2010. The2013, with the difference between cash provided by operating activities and net income largely consistedconsisting of non-cash items including a $113.7proceeds from the sale of loans held for sale of $1.9 billion, offset by originations of loans held for sale of $1.6 billion.  This compares to net cash provided by operating activities of $26.5 million provisionduring 2012, with the difference between cash provided by operating activities and net income largely consisting of originations of loans held for non-covered loan and lease losses. sale of $2.0 billion, offset by proceeds from the sale of loans held for sale of $1.9 billion.
Net cash of $556.4$281.1 million usedprovided by investing activities during the 2013 consisted principally of $1.5 billionproceeds from investment securities available for sale of $803.9 million, net covered loan paydowns of $101.9 million, and proceeds from sale of non-covered loans and leases of $60.3 million, partially offset by $484.9 million of net non-covered loan originations, net cash paid in acquisition of $149.7 million, $51.2 million of purchases of investment securities available for sale, and $47.6 million of purchases of premises and equipment partially offsetof $34.0 million.   This compares to net cash of $121.5 million used by net non-covered loan paydowns and maturitiesinvesting activities during 2012, which consisted principally of $146.3 million, net covered loan paydowns of $119.9 million, proceeds from investment securities available for sale of $408.7$1.5 billion, net covered loan paydowns of $114.8 million, net cash acquired in FDIC-assisted acquisitionsacquisition of $179.0$39.3 million, net proceeds from the FDIC indemnification asset of $48.4$29.5 million, proceeds from the sale of loans of $38.7 million,and proceeds from the sale of non-covered other real estate owned of $25.1$27.1 million, partially offset by purchases of investment securities available for sale of $994.6 million, net non-covered loan originations of $587.4 million and proceeds from the salepurchases of covered other real estate ownedpremises and equipment of $14.6 million. The $756.5$22.8 million,
Net cash of cash provided$447.5 million used by financing activities during 2013 primarily consisted of $847.9$261.2 million decrease in net deposits, repayment of FinPac term debt of $211.7 million, dividends paid on common stock of $50.8 million, $9.4 million of common stock repurchased, and $8.8 million of repayment of junior subordinated debentures, partially offset by $87.8 million increase in securities sold under agreements to repurchase. This compares to net cash of $203.0 million used by financing activities during 2012, which consisted primarily of $107.4 million decrease in net deposits, $28.6repayment of term debt of $55.4 million, $46.2 million of dividends paid on common stock, and $7.4 million of common stock repurchased, partially offset by $12.5 million increase in net securities sold under agreements to repurchase, $89.8 million in net proceeds from the issuance of common stock and $198.3 million in net proceeds from the issuance of preferred stock, partially offset by $165.8 million repayment of term debt, $214.2 million of redemption of preferred stock, $4.5 million of redemption of warrants, $20.6 million of dividends paid on common stock and $3.7 million of dividends paid on preferred stock.

repurchase.

Although we expect the Bank’sBank's and the Company’sCompany's liquidity positions to remain satisfactory during 2011,2014, it is possible that our deposit growthbalances for 20112014 may not be maintained at previous levels due to pricing pressure or, in order to generate deposit growth, our pricing may need to be adjusted in a manner that results in increased interest expense on deposits.

OFF-BALANCE-SHEET ARRANGEMENTS

OFF-BALANCE-SHEET-ARRANGEMENTS
Information regarding Off-Balance-Sheet Arrangements is included in Note 20 and Note 21 of theNotes to Consolidated Financial Statements in Item 8 below.below

.

The following table presents a summary of significant contractual obligations extending beyond one year as of December 31, 20102013 and maturing as indicated:


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Future Contractual Obligations

As of December 31, 2010:

2013:

(in thousands)

    

Less than

1 Year

   1 to 3
Years
   3 to 5
Years
   More than
5 Years
   Total 

Deposits(1)

  $  8,865,806    $  511,172    $  54,398    $2,429    $9,433,805  

Term debt

   5,000               245,528     250,528  

Junior subordinated debentures(2)

                  230,061     230,061  

Operating leases

   14,814     24,705     18,061     24,855     82,435  

Other long-term liabilities(3)

   2,019     3,501     3,199     35,311     44,030  
     

Total contractual obligations

  $8,887,352    $538,663    $74,899    $537,827    $  10,038,741  
     

(1)Deposits with indeterminate maturities, such as demand, savings and money market accounts, are reflected as obligations due in less than one year.
(2)Represents the issued amount of all junior subordinated debentures.
(3)Includes maximum payments related to employee benefit plans, assuming all future vesting conditions are met. Additional information about employee benefit plans is provided in Note 19 of theNotes to Consolidated Financial Statements in Item 8 below.

Umpqua Holdings Corporation


  Less than 1 Year 1 to 3 Years 3 to 5 Years More than 5 Years Total
Deposits (1) $8,589,729
 $422,107
 $103,729
 $2,555
 $9,118,120
Term debt 
 
 245,016
 495
 245,511
Junior subordinated debentures (2) 
 
 
 230,061
 230,061
Operating leases 17,757
 29,711
 17,396
 22,938
 87,802
Other long-term liabilities (3) 1,740
 3,880
 4,503
 30,991
 41,114
  Total contractual obligations $8,609,226
 $455,698
 $370,644
 $287,040
 $9,722,608

(1) Deposits with indeterminate maturities, such as demand, savings and money market accounts, are reflected as obligations due in less than one year.
(2) Represents the issued amount of all junior subordinated debentures.
(3) Includes maximum payments related to employee benefit plans, assuming all future vesting conditions are met. Additional information about employee benefit plans is provided in Note 19 of the Notes to Consolidated Financial Statements in Item 8 below.

The table above does not include interest payments or purchase accounting adjustments related to deposits, term debt or junior subordinated debentures.

As of December 31, 2010,2013, the Company has a liability for unrecognized tax benefits relating to California tax incentives and temporary differences in the amount of $762,000,$795,000, which includes accrued interest of $172,000.$193,000. As the Company is not able to estimate the period in which this liability will be paid in the future, this amount is not included in the future contractual obligations table above.

CONCENTRATIONS OF CREDIT RISK

Information regarding Concentrations of Credit Risk is included in NotesNote 3, 5, and 20 of theNotes to Consolidated Financial Statements.Statements

in Item 8 below.

CAPITAL RESOURCES

Shareholders’

Shareholders' equity at December 31, 20102013 was $1.6$1.7 billion, an increase of $76.1$3.4 million or 5%, from December 31, 2009.2012. The increase in shareholders’shareholders' equity during 2010the year ended was principally due to the $288.1 million in net proceeds from the public stock offering in February 2010, net income of $28.3$98.4 million, offset by the redemptionother comprehensive loss, net of preferred stock under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“CPP”)tax, of $214.2$29.3 million repurchase of warrants issued to the United States Department of Treasury (“U.S. Treasury”) for $4.5 million, and common stock dividends declared of $22.0$67.7 million and preferred stock dividends of $3.7 million.

.

The Federal Reserve Board has in place guidelines for risk-based capital requirements applicable to U.S. banks and bank/financial holding companies. These risk-based capital guidelines take into consideration risk factors, as defined by regulation, associated with various categories of assets, both on and off-balance sheet. Under the guidelines, capital strength is measured in two tiers, which are used in conjunction with risk-adjusted assets to determine the risk-based capital ratios. The guidelines require an 8% total risk-based capital ratio, of which 4% must be Tier I1 capital. Our consolidated Tier I1 capital, which consists of shareholders’shareholders' equity and qualifying trust-preferred securities, less other comprehensive income, goodwill, other intangible assets, disallowed servicing assets and disallowed deferred tax assets, totaled $1.2 billion at December 31, 2010.2013. Tier II2 capital components include all, or a portion of, the allowance for loan and lease losses and the portion of trust preferred securities in excess of Tier I1 statutory limits. The total of Tier I1 capital plus Tier II2 capital components is referred to as Total Risk-Based Capital, and was $1.3 billion at December 31, 2010.2013. The percentage ratios, as calculated under the guidelines, were 16.36%13.56% and 17.62%14.66% for Tier I1 and Total Risk-Based Capital, respectively, at December 31, 2010.2013. The Tier 1 and Total Risk-Based Capital ratios at December 31, 20092012 were 15.91%15.27% and 17.16%16.52%, respectively.


72


A minimum leverage ratio is required in addition to the risk-based capital standards and is defined as period-end shareholders’shareholders' equity and qualifying trust preferred securities, less other comprehensive income, goodwill and deposit-based intangibles, divided by average assets as adjusted for goodwill and other intangible assets. Although a minimum leverage ratio of 4% is required for the highest-rated financial holding companies that are not undertaking significant expansion programs, the Federal Reserve Board may require a financial holding company to maintain a leverage ratio greater than 4% if it is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve Board. The Federal Reserve Board uses the leverage and risk-based capital ratios to assess capital adequacy of banks and financial holding companies. Our consolidated leverage ratios at December 31, 20102013 and 20092012 were 10.56%10.90% and 12.79%11.44%, respectively. As of December 31, 2010,2013, the most recent notification from the FDIC categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’sBank's regulatory capital category.

On July 2, 2013, the federal banking regulators approved the final proposed rules that revise the regulatory capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework ("Basel III"). The phase-in period for the final rules will begin for the Company on January 1, 2015, with full compliance with the final rules entire requirement phased in on January 1, 2019.

The final rules, among other things, include a new common equity Tier 1 capital (“CET1”) to risk-weighted assets ratio, including a capital conservation buffer, which will gradually increase from 4.5% on January 1, 2015 to 7.0% on January 1, 2019. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% on January 1, 2015 to 8.5% on January 1, 2019, as well as require a minimum leverage ratio of 4.0%.

Also, under the final rules, if an institution grows above $15 billion as a result of an acquisition, or organically grows above $15 billion and then makes an acquisition, the combined trust preferred security debt issuances would be phased out of Tier 1 and into Tier 2 capital (75% in 2015 and 100% in 2016). It is possible the Company may accelerate redemption of the existing junior subordinated debentures.  This could result in adjustments to the fair value of these instruments including the acceleration of losses on junior subordinated debentures carried at fair value within non-interest income. The Company currently does not intend to redeem the junior subordinated debentures following the proposed merger in order to support regulatory total capital levels.

The final rules also provide for a number of adjustments to and deductions from the new CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including the Company and the Bank, may make a one-time permanent election to continue to exclude these items. The Company and Bank expect to make this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company's securities portfolio. In addition, deductions include, for example, the requirement that mortgage servicing rights, certain deferred tax assets not dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. The Company and the Bank are currently evaluating the provisions of the final rules and expected impact.

During the year ended December 31, 2010,2013, the Company made no contributions to the Bank. At December 31, 2010,2013, all three of the capital ratios of the Bank exceeded the minimum ratios required by federal regulation. Management monitors these ratios on a regular basis to ensure that the Bank remains within regulatory guidelines. Further information regarding the actual and required capital ratios is provided in Note 23 of theNotes to Consolidated Financial Statements in Item 8 below.

On August 13, 2009, the Company raised $258.7 million through a public offering by issuing 26,538,461 shares of the Company’s common stock, including 3,461,538 shares pursuant to the underwriters’ over-allotment option, at a share price of $9.75 per share. The net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were $245.7 million. The net proceeds from the offering qualified as Tier 1 capital and were to be used for general corporate purposes, which included capital to support growth and acquisition opportunities and positioned the Company for redemption of preferred stock and warrants issued to the U.S. Treasury under the CPP. In connection with the public offering, the number of shares of common stock underlying the warrant held by the U.S. Treasury was reduced by 50%, to 1,110,898 shares. In connection with the company’s public offering in February 2010, Umpqua repurchased the preferred stock. See Note 22 of theNotes to the Consolidated Financial Statement in Item 8 below.

On February 3, 2010, the Company raised $303.6 million through a public offering by issuing 8,625,000 shares of the Company’s common stock, including 1,125,000 shares pursuant to the underwriters’ over-allotment option, at a share price of $11.00 per share and 18,975,000 depository shares, including 2,475,000 depository shares pursuant to the underwriter’s over-allotment option, also at a price of $11.00 per share. Fractional interests (1/100th) in each share of the Series B Common Stock Equivalent were represented by the 18,975,000 depositary shares; as a result, each depositary share would convert into one share of common stock. The net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were $288.1 million. The net proceeds from the offering were used to redeem the preferred stock issued to the United States Department of the Treasury (“U.S. Treasury”) under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“CPP”), to fund FDIC-assisted acquisition opportunities and for general corporate purposes.

On February 17, 2010, the Company redeemed all of the outstanding Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued to the U.S. Treasury under the TARP CPP for an aggregate purchase price of $214.2 million. As a result of the repurchase of the Series A preferred stock, the Company incurred a one-time deemed dividend of $9.7 million due to the accelerated amortization of the remaining issuance discount on the preferred stock.

On March 31, 2010, the Company repurchased the common stock warrant issued to the U.S. Treasury pursuant to the TARP CPP, for $4.5 million. The warrant repurchase, together with the Company’s redemption in February 2010 of the entire amount of Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued to the U.S. Treasury, represents full repayment of all TARP obligations and cancellation of all equity interests in the Company held by the U.S. Treasury.

On April 20, 2010, shareholders of the Company approved an amendment to the Company’s Restated Articles of Incorporation. The amendment, which became effective on April 21, 2010, increased the number of authorized shares of common stock to 200,000,000 (from 100,000,000). As a result of the effectiveness of the amendment, as of the close of business on April 21, 2010, the Company’s Series B Common Stock Equivalent preferred stock automatically converted into newly issued shares of common stock at a conversion rate of 100 shares of common stock for each share of Series B Common Stock Equivalent preferred stock. All shares of Series B Common Stock Equivalent preferred stock and representative depositary shares ceased to exist upon the conversion. Trading in the depositary shares on NASDAQ (ticker symbol “UMPQP”) ceased and the UMPQP symbol voluntarily delisted effective as of the close of business on April 21, 2010.

During 2010, Umpqua’s2013, Umpqua's Board of Directors declaredapproved a quarterly cash dividend of $0.05 per common share per quarter.$0.10 for the first quarter, $0.20 for the second quarter, and $0.15 for the third and fourth quarter, respectively. These dividends were made pursuant to our existing dividend policy and in consideration of, among other things, earnings, regulatory capital levels, the overall payout ratio and expected asset growth. We expect that the dividend rate will be reassessed on a quarterly basis by the Board of Directors in accordance with the dividend policy. The payment of cash dividends is subject to regulatory limitations as described under theSupervision and Regulationsection of Part I of this report.

There is no assurance that future cash dividends on common shares will be declared or increased. The following table presents cash dividends declared and dividend payout ratios (dividends declared per common share divided by basic earnings per common share) for the years ended December 31, 2010, 20092013, 2012 and 2008:

2011:


Cash Dividends and Payout Ratios per Common Share

    2010   2009   2008 

Dividend declared per common share

  $0.20    $0.20    $0.62  

Dividend payout ratio

   133%     -8%     76%  

Umpqua Holdings Corporation

 2013 2012 2011
Dividend declared per common share$0.60
 $0.34
 $0.24
Dividend payout ratio69% 38% 37%

73



The Company’s share repurchase plan, which was first approved by the Board and announced in August 2003, originally authorized the repurchase of up to 1.0 million shares. Prior to 2008, the authorization was amended on September 29, 2011 to increase the number of common shares available for repurchase limitunder the plan to 6.015 million shares. OnIn April 21, 2009,2013, the Board of Directors approved an extensionrepurchase program was extended to the expiration date of the common stock repurchase plan torun through June 30, 2011.2015. As of December 31, 2010,2013, a total of 1.512.0 million shares remained available for repurchase. The Company repurchased no98,027 shares under the repurchase plan in 2010 or 2009.2013. The timing and amount of future repurchases will depend upon the market price for our common stock, securities laws restricting repurchases, asset growth, earnings, and our capital plan. In addition, our stock plans provide that option and award holders may pay for the exercise price and tax withholdings in part or whole by tendering previously held shares.

ITEM 7A.QUANTITATIVE AND QUALITATIVEQUALITIATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk arises primarily from credit risk and interest rate risk inherent in our investment, lending and financing activities. To manage our credit risk, we rely on various controls, including our underwriting standards and loan policies, internal loan monitoring and periodic credit reviews as well as our allowance of loan and lease losses (“ALLL”) methodology, all of which are administered by the Bank’s Credit Quality Group or ALLL Committee. Additionally, the Bank’s Enterprise Risk and Credit Committee (formerly the Loan and Investment Committee) provides board oversight over the Company’s loan and investment portfolio risk management functions, and the Bank’s Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology.
Interest rate risk is the potential for loss resulting from adverse changes in the level of interest rates on the Company’s net interest income. The absolute level and volatility of interest rates can have a significant impact on our profitability. The objective of interest rate risk management is to identify and manage the sensitivity of net interest income to changing interest rates to achieve our overall financial objectives. Based on economic conditions, asset quality and various other considerations, management establishes tolerance ranges for interest rate sensitivity and manages within these ranges. Net interest income and the fair value of financial instruments are greatly influenced by changes in the level of interest rates. We manage exposure to fluctuations in interest rates through policies that are established by the Asset/Liability Management Committee (“ALCO”). The ALCO meets monthly and has responsibility for developing asset/liability management policy, formulating and implementing strategies to improve balance sheet positioning and earnings and reviewing interest rate sensitivity. The Board of Directors’Directors' Enterprise Risk and Credit Committee (formerly the Loan and Investment CommitteeCommittee) provides oversight of the asset/liability management process, reviews the results of the interest rate risk analyses prepared for the ALCO and approves the asset/liability policy on an annual basis.

Management utilizes an

We measure our interest rate simulation model to estimate the sensitivity ofrisk position on at least a quarterly basis using three methods: (i) gap analysis, (ii) net interest income simulation; and (iii) economic value of equity (fair value of financial instruments) modeling. The results of these analyses are reviewed by ALCO and the Loan and Investment Committee quarterly. If hypothetical changes to interest rates cause changes to our simulated net interest income simulation or economic value of equity modeling outside of our pre-established internal limits, we may adjust the asset and liability size or mix in marketan effort to bring our interest rates. Such estimates are based upon a number of assumptions for each scenario, includingrate risk exposure within our established limits.
Gap Analysis

A gap analysis provides information about the level of balance sheet growth, depositvolume and repricing characteristics and relationship between the amounts of interest-sensitive assets and interest-bearing liabilities at a particular point in time. An effective interest rate strategy attempts to match how the volume of prepayments. Interest rate sensitivity is a function of the repricing characteristics of our interest earningssensitive assets and interest bearing liabilities. These repricing characteristics are the time frames within which the interest bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable timeframe, thereby minimizing the impact of interest rate changes on net interest income. InterestGap analysis measures interest rate sensitivity is measuredat a point in time as the difference between the estimated volumes of assetsasset and liabilities at a point in time that are subject toliability cash flows or repricing atcharacteristics across various time horizons: immediate to three months, four to twelve months, one to five years, over five years, and on a cumulative basis. The differences are known as interest sensitivity gaps. The main focus of this interest rate management tool is the gap sensitivity identified as the cumulative one year gap. The table below sets forth interest sensitivity gaps for these different intervals as of December 31, 2010.

Umpqua Holdings Corporation

2013.

Interest Sensitivity Gap

(dollars in thousands)

    By Repricing Interval   

Non-Rate-
Sensitive

  

Total

 
    0-3 Months  4-12 Months  1-5 Years   Over 5
Years
    

ASSETS

         

Interest bearing deposits

  $891,634   $   $    $    $   $891,634  

Temporary Investments

   545                      545  

Trading account assets

   3,024                      3,024  

Securities available for sale

   300,430    666,451    1,419,266     400,118     132,915    2,919,180  

Securities held to maturity

   2,073    1,569    1,000     119     1    4,762  

Total loans and loans held for sale

   1,971,725    1,239,800    2,945,943     243,975     119,068    6,520,511  

Non-interest earning assets

                     1,329,054    1,329,054  
     

Total assets

   3,169,431    1,907,820    4,366,209     644,212     1,581,038   $11,668,710  
           

LIABILITIES AND SHAREHOLDERS’ EQUITY

         

Interest bearing demand deposits

   927,224                     $927,224  

Savings and money market deposits

   3,817,245                      3,817,245  

Time deposits

   811,631    1,692,233    565,164     2,430     1,191    3,072,649  

Securities sold under agreements to repurchase

   73,759                      73,759  

Term debt

   5,009    26    137     245,358     12,230    262,760  

Junior subordinated debentures

   166,260             10,465     6,829    183,554  

Non-interest bearing liabilities and shareholders’ equity

                     3,331,519    3,331,519  
     

Total liabilities and shareholders’ equity

   5,801,128    1,692,259    565,301     258,253     3,351,769   $11,668,710  
         

Interest rate sensitivity gap

   (2,631,697  215,561    3,800,908     385,959     (1,770,731 

Cumulative interest rate sensitivity gap

  $(2,631,697 $(2,416,136 $1,384,772    $1,770,731    $   
      

Cumulative gap as a % of earning assets

   -25.5%    -23.4%    13.4%     17.1%     
        


74


 By Estimated Cash Flow or Repricing Interval   
 0-34-121-5Over 5Non-Rate-  
 MonthsMonthsYearsYearsSensitive Total
ASSETS       
Interest bearing deposits$611,224
$
$
$
$
 $611,224
Temporary investments514




 514
Trading account assets5,958




 5,958
Securities held to maturity2,679
228
335
5,964
(3,643) 5,563
Securities available for sale111,647
270,462
830,048
524,012
54,809
 1,790,978
Loans held for sale101,795



2,869
 104,664
Non-covered loans and leases2,921,007
1,318,340
2,676,756
402,282
36,018
 7,354,403
Covered loans and leases109,697
128,982
130,095
10,233
(15,015) 363,992
Non-interest earning assets



1,398,816
 1,398,816
Total assets3,864,521
1,718,012
3,637,234
942,491
1,473,854
 $11,636,112
        
LIABILITIES AND SHAREHOLDERS' EQUITY   
Interest bearing demand deposits$1,233,070
$
$
$
$
 $1,233,070
Money market deposits3,349,946




 3,349,946
Savings deposits560,699




 560,699
Time deposits337,104
675,008
522,875
2,481

 1,537,468
Securities sold under agreements to repurchase224,882




 224,882
Term debt8
25
245,148
330
5,983
 251,494
Junior subordinated debentures, at fair value134,024
   (46,750) 87,274
Junior subordinated debentures, at amortized cost85,572


10,465
5,862
 101,899
Non-interest bearing liabilities and shareholders' equity



4,289,380
 4,289,380
Total liabilities and shareholders' equity5,925,305
675,033
768,023
13,276
4,254,475
 11,636,112
        
Interest rate sensitivity gap(2,060,784)1,042,979
2,869,211
929,215
(2,780,621)  
Cumulative interest rate sensitivity gap$(2,060,784)$(1,017,805)$1,851,406
$2,780,621
$
  
Cumulative gap as a % of earning assets(20)%(10)%18%27%   

The gap table has inherent limitations and actual results may vary significantly from the results suggested by the gap table. The gap table is unable to incorporate certain balance sheet characteristics or factors. The gap table assumes a static balance sheet and looks at the repricing of existing assets and liabilities without consideration of new loans and deposits that reflect a more current interest rate environment. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly, while the timing of repricing for both the asset and the liability remains the same, thus impacting net interest income. This characteristic is referred to as basis risk and generally relates to the possibility that the repricing characteristics of short-term assets tied to the prime rate are different from those of short-term funding sources such as certificates of deposit. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate sensitivity analysis. These prepayments may have a significant impact on our net interest margin.
For example, unlike the net interest income simulation, the interest rate risk profile of certain deposit products and floating rate loans that have reached their floors cannot be captured effectively in a gap table. Although the table shows the amount of certain assets and liabilities scheduled to reprice in a given time frame, it does not reflect when or to what extent such repricings may actually occur. For example, interest-bearing checking, money market and savings deposits are shown to reprice in the first three months, but we may choose to reprice these deposits more slowly and incorporate only a portion of the movement in market rates based on market conditions at that time. Alternatively, a loan which has reached its floor may not reprice upwards even though market interest rates increase causing such loan to act like a fixed rate loan regardless of its scheduled repricing date. The gap table as presented cannot factor in the flexibility we believe we have in repricing deposits or the floors on our loans.

75


Because of these factors, an interest sensitivity gap analysis may not provide an accurate or complete assessment of our exposure to changes in interest rates.

We utilizebelieve the estimated effect of a change in interest rates is better reflected in our net interest income and economic value of equity simulations.

Net Interest Income Simulation
Interest rate sensitivity is a function of the repricing characteristics of our interest earnings assets and interest bearing liabilities. These repricing characteristics are the time frames within which the interest bearing assets and liabilities are subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates.
Management utilizes an interest rate simulation model to monitorestimate the sensitivity of net interest income to changes in market interest rates. This model is an interest rate risk management tool and evaluatethe results are not necessarily an indication of our future net interest income. This model has inherent limitations and these results are based on a given set of rate changes and assumptions at one point in time. These estimates are based upon a number of assumptions for each scenario, including changes in the size or mix of the balance sheet, new volume rates for new balances, the rate of prepayments, and the correlation of pricing to changes in the interest rate environment. For example, for interest bearing deposit balances we may choose to reprice these balances more slowly and incorporate only a portion of the movement in market rates based on market conditions at that time. Additionally, our primary analysis assumes a static balance sheet, both in terms of the total size and mix of our balance sheet, meaning cash flows from the maturity or repricing of assets and liabilities are redeployed in the same instrument at modeled rates.
Changes that could vary significantly from our assumptions include loan and deposit growth or contraction, changes in the mix of our earning assets or funding sources, the performance of loans accounted for under the expected cash flow method, and future asset/liability management decisions, all of which may have significant effects on our net interest income. Also, some of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances may occur. In addition, the simulation model does not take into account any future actions management could undertake to mitigate the impact of changinginterest rate changes or the impact a change in interest rates may have on net interest income. our credit risk profile, loan prepayment estimates and spread relationships, which can change regularly. Actions we could undertake include, but are not limited to, growing or contracting the balance sheet, changing the composition of the balance sheet, or changing our pricing strategies for loans or deposits.
The estimated impact on our net interest income over a time horizon of one year as of December 31, 2010 is2013, 2012, and 2011 are indicated in the table below. For the scenarios shown, the interest rate simulation assumes a parallel and sustained shift in market interest rates ratably over a twelve-month period and no change in the composition or size of the balance sheet. For example, the “up 200 basis points” scenario is based on a theoretical increase in market rates of 16.7 basis points per month for twelve months applied to the balance sheet of December 31 for each respective year.

Interest Rate Simulation Impact on Net Interest Income

As of December 31,

2013

(dollars in thousands)

  2010  2009  2008 
   Increase (Decrease)
in Net Interest
Income from
Base Scenario
�� Percentage
Change
  Decrease
in Net Interest
Income from Base
Scenario
  Percentage
Change
  Increase (Decrease)
in Net Interest
Income from
Base Scenario
  Percentage
Change
 

Up 200 basis points

 $9,115    2.4%   $(2,118  -0.6%   $(9,539  -3.6%  

Up 100 basis points

 $6,464    1.7%   $(3,033  -0.9%   $(4,824  -1.8%  

Down 100 basis points

 $(12,478  -3.3%   $(290  -0.1%   $1,370    0.5%  

Down 200 basis points

 $(21,512  -5.7%   $(7,609  -2.2%   $(2,304  -0.9%  

At


  2013 2012 2011
  Increase  Increase  Increase 
  (Decrease)  (Decrease)  (Decrease) 
  in Net Interest  in Net Interest  in Net Interest 
   Income fromPercentage  Income fromPercentage  Income fromPercentage
  Base ScenarioChange Base ScenarioChange Base ScenarioChange
Up 300 basis points $3,248
0.8 % $10,665
3.0 % $6,383
1.6 %
Up 200 basis points $3,186
0.8 % $11,116
3.1 % $5,031
1.3 %
Up 100 basis points $2,370
0.6 % $7,545
2.1 % $2,021
0.5 %
Down 100 basis points $(12,052)(2.9)% $(11,500)(3.2)% $(6,153)(1.5)%
Down 200 basis points $(28,023)(6.8)% $(20,273)(5.6)% $(15,460)(3.9)%
Down 300 basis points $(41,488)(10.1)% $(28,521)(7.9)% $(24,236)(6.1)%


76


Asset sensitivity indicates that in a rising interest rate environment the Company’s net interest margin would increase and in decreasing interest rate environment a Company’s net interest margin would decrease. Liability sensitivity indicates that in a rising interest rate environment a Company’s net interest margin would decrease and in a decreasing interest rate environment a Company’s net interest margin would increase. For all years presented, we were “asset-sensitive” in both increased and decreased market interest rate scenarios. The relative level of asset sensitivity as of December 31, 2008,2013 has decreased in increasing interest rate environments compared to December 31, 2012 and December 31, 2011. The relative level of asset sensitivity in decreasing interest rate environments as of December 31, 2013 is slightly less sensitive as compared to 2012 and more sensitive as compared to 2011. It should be noted that although net interest income simulation results are presented through the down 300 basis points interest rate environments, we do not believe the down 200 and 300 basis point scenarios are plausible given the current level of interest rates.
In general, we view the net interest income model results as more relevant to the Company’s current operating profile (a going concern), and we primarily manage our balance sheet was in a “liability-sensitive” position, as the repricing characteristics were such that an increase in market interest rates would have a negative effectbased on net interest income and a decrease in market interest rates would have positive effect on net interest income. At December 31, 2009, we were “liability-sensitive” in an increased market interest rate scenario, and “asset-sensitive” in a decreased interest rate scenario. At December 31, 2010, we were “asset-sensitive.” Somethis information.
Economic Value of the assumptions made in the simulation model may not materialize and unanticipated events and circumstances will occur. In addition, the simulation model does not take into account any future actions which we could undertake to mitigate an adverse impact due to changes in interest rates from those expected, in the actual level of market interest rates or competitive influences on our deposit base.

A secondEquity

Another interest rate sensitivity measure we utilize is the quantification of marketeconomic value changes for all financial assets and liabilities, given an increase or decrease in market interest rates. This approach provides a longer-term view of interest rate risk, capturing all future expected cash flows. Assets and liabilities with option characteristics are measured based on different interest rate path valuations using statistical rate simulation techniques.

The projections are by their nature forward-looking and therefore inherently uncertain, and include various assumptions regarding cash flows and discount rates.

The table below illustrates the effects of various instantaneous market interest rate changes on the fair values of financial assets and liabilities (excluding mortgage servicing rights) as compared to the corresponding carrying values and fair values:

Interest Rate Simulation Impact on Fair Value of Financial Assets and Liabilities

As of December 31,

2013

(dollars in thousands)

   2010   2009 
    Decrease in
Estimated Fair
Value of Equity
  Percentage
Change
   Increase (Decrease)
in Estimated Fair
Value of Equity
  Percentage
Change
 

Up 200 basis points

  $(114,667  -5.0%    $(93,095  -4.3%  

Up 100 basis points

  $(59,857  -2.6%    $(49,027  -2.3%  

Down 100 basis points

  $(55,141  -2.4%    $19,874    0.9%  

Down 200 basis points

  $(126,830  -5.5%    $6,007    0.3%  

Consistent with the results


  2013 2012
  Increase in  Increase in 
  Estimated FairPercentage Estimated FairPercentage
  Value of EquityChange Value of EquityChange
Up 300 basis points $24,660
1.3% $30,222
1.7%
Up 200 basis points $20,446
1.1% $67,259
3.7%
Up 100 basis points $11,123
0.6% $66,930
3.7%
Down 100 basis points $8,311
0.4% $13,471
0.7%
Down 200 basis points $32,714
1.8% $64,763
3.6%
Down 300 basis points $64,519
3.5% $101,963
5.6%

As of December 31, 2013, our economic value of equity model indicates an asset sensitive profile in theincreasing interest rate simulation impact on netenvironments and a liability sensitive profile, in decreasing interest income,rate environments. This suggests a sudden or sustained increase in increasing or decreasing interest rate scenarios would result in an increase in our estimated economic value of equity. Our overall sensitivity to market interest rate changes as of December 31, 20102013 has increaseddecreased as compared to December 31, 2009.

Umpqua Holdings Corporation

2012. As of December 31, 2013, our estimated economic value of equity (fair value of financial assets and liabilities) exceeded our book value of equity. This result is primarily based on the value placed on the Company’s significant amount of noninterest bearing and low cost interest bearing deposits and fixed rates or floors characteristics included in the Company’s loan portfolio. While noninterest bearing deposits do not impact the net interest income simulation, the value of these deposits has a significant impact on the economic value of equity model, particularly when market rates are assumed to rise.

IMPACT OF INFLATION AND CHANGING PRICES

A financial institution’sinstitution's asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature, with relatively little investment in fixed assets or inventories. Inflation has an important impact on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain appropriate capital ratios. We believe that the impact of inflation on financial results depends on management’smanagement's ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on performance. We have an asset/liability management program which attempts to manage interest rate sensitivity. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.


77


Our financial statements included in Item 8 below have been prepared in accordance with accounting principles generally accepted in the United States, which requires us to measure financial position and operating results principally in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on our results of operations is through increased operating costs, such as compensation, occupancy and business development expenses. In management’smanagement's opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the rate of inflation. Although interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including U.S. fiscal and monetary policy and general national and global economic conditions.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Umpqua Holdings Corporation and Subsidiaries


We have audited the accompanying consolidated balance sheets of Umpqua Holdings Corporation and Subsidiaries (the Company) as of December 31, 20102013 and 2009,2012, and the related consolidated statements of operations,income, comprehensive income, changes in shareholders’shareholders' equity, comprehensive income (loss), and cash flows for each of the three years in the three-year period ended December 31, 2010.2013. We also have audited the Company’s internal control over financial reporting as of December 31, 2010,2013, based on criteria established in Internal Control—Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting based on our audits.

We conducted our audits in accordance with auditingthe standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our auditaudits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management as well asand evaluating the overall consolidated financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risks.risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Umpqua Holdings Corporation and Subsidiariessubsidiaries as of December 31, 20102013 and 2009,2012, and the consolidated results of their operations and their cash flows for each of the three years in the three-year period ended December 31, 2010,2013, in conformity with generally accepted accounting principles generally accepted in the United States of America. Also in our opinion, Umpqua Holdings Corporation and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 20102013, based on criteria established in Internal Control—Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Commission.



78


/s/ Moss Adams LLP

Portland, Oregon

February 17, 2011

Umpqua Holdings Corporation

14, 2014




79


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS

December 31, 20102013 and 2009

2012

(in thousands, except shares)

    December 31,
2010
  December 31,
2009
 

ASSETS

   

Cash and due from banks

  $111,946   $113,353  

Interest bearing deposits

   891,634    491,462  

Temporary investments

   545    598  
     

Total cash and cash equivalents

   1,004,125    605,413  

Investment securities

   

Trading, at fair value

   3,024    2,273  

Available for sale, at fair value

   2,919,180    1,795,616  

Held to maturity, at amortized cost

   4,762    6,061  

Loans held for sale

   75,626    33,715  

Non-covered loans and leases

   5,658,987    5,999,267  

Allowance for loan and lease losses

   (101,921  (107,657
     

Net non-covered loans and leases

   5,557,066    5,891,610  

Covered loans and leases, net

   785,898      

Restricted equity securities

   34,475    15,211  

Premises and equipment, net

   136,599    103,266  

Goodwill and other intangible assets, net

   681,969    639,634  

Mortgage servicing rights, at fair value

   14,454    12,625  

Non-covered other real estate owned

   32,791    24,566  

Covered other real estate owned

   29,863      

FDIC indemnification asset

   146,413      

Other assets

   242,465    251,382  
     

Total assets

  $11,668,710   $9,381,372  
     

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

Deposits

   

Noninterest bearing

  $1,616,687   $1,398,332  

Interest bearing

   7,817,118    6,042,102  
     

Total deposits

   9,433,805    7,440,434  

Securities sold under agreements to repurchase

   73,759    45,180  

Term debt

   262,760    76,274  

Junior subordinated debentures, at fair value

   80,688    85,666  

Junior subordinated debentures, at amortized cost

   102,866    103,188  

Other liabilities

   72,258    64,113  
     

Total liabilities

   10,026,136    7,814,855  
     

COMMITMENTS AND CONTINGENCIES (NOTE 20)

   

SHAREHOLDERS’ EQUITY

   

Preferred stock, no par value, 4,000,000 shares authorized; Series A (liquidation preference $1,000 per share) issued and outstanding: none in 2010 and 214,181 in 2009

       204,335  

Common stock, no par value, 200,000,000 shares authorized; issued and outstanding: 114,536,814 in 2010 and 86,785,588 in 2009

   1,540,928    1,253,288  

Retained earnings

   76,701    83,939  

Accumulated other comprehensive income

   24,945    24,955  
     

Total shareholders’ equity

   1,642,574    1,566,517  
     

Total liabilities and shareholders’ equity

  $11,668,710   $9,381,372  
     


 December 31, December 31,
 2013 2012
ASSETS   
Cash and due from banks$178,685
 $223,532
Interest bearing deposits611,224
 315,053
Temporary investments514
 5,202
Total cash and cash equivalents790,423
 543,787
Investment securities   
Trading, at fair value5,958
 3,747
Available for sale, at fair value1,790,978
 2,625,229
Held to maturity, at amortized cost5,563
 4,541
Loans held for sale, at fair value104,664
 320,132
Non-covered loans and leases7,354,403
 6,681,080
Allowance for non-covered loan and lease losses(85,314) (85,391)
Net non-covered loans and leases7,269,089
 6,595,689
Covered loans, net of allowance of $9,771 and $18,275363,992
 477,078
Restricted equity securities30,685
 33,443
Premises and equipment, net177,680
 162,667
Goodwill and other intangible assets, net776,683
 685,331
Mortgage servicing rights, at fair value47,765
 27,428
Non-covered other real estate owned21,833
 17,138
Covered other real estate owned2,102
 10,374
FDIC indemnification asset23,174
 52,798
Bank owned life insurance96,938
 93,831
Deferred tax asset, net16,627
 3,528
Other assets111,958
 138,702
Total assets$11,636,112
 $11,795,443
LIABILITIES AND SHAREHOLDERS' EQUITY   
Deposits   
Noninterest bearing$2,436,477
 $2,278,914
Interest bearing6,681,183
 7,100,361
Total deposits9,117,660
 9,379,275
Securities sold under agreements to repurchase224,882
 137,075
Term debt251,494
 253,605
Junior subordinated debentures, at fair value87,274
 85,081
Junior subordinated debentures, at amortized cost101,899
 110,985
Other liabilities125,477
 105,383
Total liabilities9,908,686
 10,071,404
COMMITMENTS AND CONTINGENCIES (NOTE 20)
 
SHAREHOLDERS' EQUITY   
Common stock, no par value, 200,000,000 shares authorized; issued and outstanding: 111,973,203 in 2013 and 111,889,959 in 20121,514,485
 1,512,400
Retained earnings217,917
 187,293
Accumulated other comprehensive (loss) income(4,976) 24,346
Total shareholders' equity1,727,426
 1,724,039
Total liabilities and shareholders' equity$11,636,112
 $11,795,443

See notes to condensed consolidated financial statements


80


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS

INCOME

For the Years Ended December 31, 2010, 20092013, 2012 and 2008

2011

(in thousands, except per share amounts)

    2010  2009  2008 

INTEREST INCOME

    

Interest and fees on loans

  $410,132   $355,195   $393,927  

Interest and dividends on investment securities

    

Taxable

   67,388    60,195    41,189  

Exempt from federal income tax

   8,839    7,794    6,653  

Dividends

   14    22    334  

Interest on temporary investments and interest bearing deposits

   2,223    526    443  
     

Total interest income

   488,596    423,732    442,546  

INTEREST EXPENSE

    

Interest on deposits

   76,241    88,742    129,370  

Interest on securities sold under agreements to repurchase and federal funds purchased

   517    680    2,220  

Interest on term debt

   9,229    4,576    6,994  

Interest on junior subordinated debentures

   7,825    9,026    13,655  
     

Total interest expense

   93,812    103,024    152,239  
     

Net interest income

   394,784    320,708    290,307  

PROVISION FOR NON-COVERED LOAN AND LEASE LOSSES

   113,668    209,124    107,678  

PROVISION FOR COVERED LOAN AND LEASE LOSSES

   5,151          
     

Net interest income after provision for loan and lease losses

   275,965    111,584    182,629  

NON-INTEREST INCOME

    

Service charges on deposit accounts

   34,874    32,957    34,775  

Brokerage commissions and fees

   11,661    7,597    8,948  

Mortgage banking revenue, net

   21,214    18,688    2,436  

Gain (loss) on investment securities, net

    

Gain on sale of investment securities, net

   2,326    8,896    5,529  

Total other-than-temporary impairment losses

   (93  (12,556  (4,180

Portion of other-than-temporary impairment losses (transferred from) recognized in other comprehensive income

   (321  1,983      
     

Total gain (loss) on investment securities, net

   1,912    (1,677  1,349  

Gain on junior subordinated debentures carried at fair value

   4,980    6,482    38,903  

Bargain purchase gain on acquisition

   6,437          

Change in FDIC indemnification asset

   (16,445        

Proceeds from Visa mandatory partial redemption

           12,633  

Other income

   11,271    9,469    8,074  
     

Total non-interest income

   75,904    73,516    107,118  

NON-INTEREST EXPENSE

    

Salaries and employee benefits

   162,875    126,850    114,600  

Net occupancy and equipment

   45,940    39,673    37,047  

Communications

   10,464    7,671    7,063  

Marketing

   6,225    4,529    4,573  

Services

   22,576    21,918    18,792  

Supplies

   3,998    3,257    2,908  

FDIC assessments

   15,095    15,825    5,182  

Net loss on other real estate owned

   5,925    23,204    8,313  

Intangible amortization and impairment

   5,389    6,165    5,857  

Goodwill impairment

       111,952    982  

Merger related expenses

   6,675    273      

Visa litigation

      ��    (5,183

Other expenses

   32,576    18,086    16,436  
     

Total non-interest expense

   317,738    379,403    216,570  

Income (loss) before provision for (benefit from) income taxes

   34,131    (194,303  73,177  

Provision for (benefit from) income taxes

   5,805    (40,937  22,133  
     

Net income (loss)

  $28,326   $(153,366 $51,044  
     

Umpqua Holdings Corporation


 2013 2012 2011
INTEREST INCOME     
Interest and fees on non-covered loans and leases$343,717
 $313,294
 $319,702
Interest and fees on covered loans and leases54,497
 73,518
 86,011
Interest and dividends on investment securities:     
Taxable34,146
 59,078
 85,785
Exempt from federal income tax8,898
 9,184
 8,653
Dividends252
 83
 12
Interest on temporary investments and interest bearing deposits1,336
 928
 1,590
Total interest income442,846
 456,085
 501,753
INTEREST EXPENSE     
Interest on deposits20,755
 31,133
 55,743
Interest on securities sold under agreement     
to repurchase and federal funds purchased141
 288
 539
Interest on term debt9,248
 9,279
 9,255
Interest on junior subordinated debentures7,737
 8,149
 7,764
Total interest expense37,881
 48,849
 73,301
Net interest income404,965
 407,236
 428,452
PROVISION FOR NON-COVERED LOAN AND LEASE LOSSES 16,829
 21,796
 46,220
(RECAPTURE OF) PROVISION FOR COVERED LOAN LOSSES(6,113) 7,405
 16,141
Net interest income after provision for (recapture of) loan and lease losses394,249
 378,035
 366,091
NON-INTEREST INCOME     
Service charges on deposit accounts30,952
 28,299
 33,096
Brokerage commissions and fees14,736
 12,967
 12,787
Mortgage banking revenue, net78,885
 84,216
 26,550
Gain on investment securities, net209
 3,868
 7,376
Loss on junior subordinated debentures carried at fair value(2,197) (2,203) (2,197)
Change in FDIC indemnification asset(25,549) (15,234) (6,168)
Other income24,405
 24,916
 12,674
Total non-interest income121,441
 136,829
 84,118
NON-INTEREST EXPENSE     
Salaries and employee benefits209,991
 200,946
 179,480
Net occupancy and equipment62,067
 55,081
 51,284
Communications11,974
 11,573
 11,214
Marketing6,062
 5,064
 6,138
Services25,483
 25,823
 24,170
Supplies2,843
 2,506
 2,824
FDIC assessments6,954
 7,308
 10,768
Net loss on non-covered other real estate owned1,113
 9,245
 10,690
Net loss on covered other real estate owned135
 3,410
 7,481
Intangible amortization4,781
 4,816
 4,948
Merger related expenses8,836
 2,338
 360
Other expenses24,422
 31,542
 29,614
Total non-interest expense364,661
 359,652
 338,971
Income before provision for income taxes151,029
 155,212
 111,238
Provision for income taxes52,668
 53,321
 36,742
Net income$98,361
 $101,891
 $74,496


81


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONSINCOME (Continued)

For the Years Ended December 31, 2010, 20092013, 2012 and 2008

2011

(in thousands, except per share amounts)

    2010   2009  2008 

Net income (loss)

  $28,326    $(153,366 $51,044  

Preferred stock dividends

   12,192     12,866    1,620  

Dividends and undistributed earnings allocated to participating securities

   67     30    154  
     

Net earnings (loss) available to common shareholders

  $16,067    $(166,262 $49,270  
     

Earnings (loss) per common share:

     

Basic

  $0.15    $(2.36 $0.82  

Diluted

  $0.15    $(2.36 $0.82  

Weighted average number of common shares outstanding:

     

Basic

   107,922     70,399    60,084  

Diluted

   108,153     70,399    60,424  


 2013 2012 2011
Net income$98,361
 $101,891
 $74,496
Dividends and undistributed earnings allocated to participating securities788
 682
 356
Net earnings available to common shareholders$97,573
 $101,209
 $74,140
Earnings per common share:     
Basic$0.87 $0.90 $0.65
Diluted$0.87 $0.90 $0.65
Weighted average number of common shares outstanding:     
Basic111,938
 111,935
 114,220
Diluted112,176
 112,151
 114,409

See notes to consolidated financial statements


82


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

COMPREHENSIVE INCOME

For the Years Ended December 31, 2010, 20092013, 2012 and 2008

2011

(in thousands, except shares)

  

Preferred
Stock

  Common Stock  

Retained
Earnings

  

Accumulated

Other

Comprehensive
(Loss) Income

  

Total

 
  Shares  Amount    

BALANCE AT JANUARY 1, 2008

 $    59,980,161   $988,780   $251,545   $(387 $1,239,938  

Net income

     51,044     51,044  

Other comprehensive income, net of tax

      14,459    14,459  
        

Comprehensive income

      $65,503  
        

Stock-based compensation

    3,893      3,893  

Stock repurchased and retired

   (8,199  (129    (129

Issuances of common stock under stock plans and related tax benefit

   174,438    1,022      1,022  

Issuance of preferred stock to U.S. Treasury

  201,927        201,927  

Issuance of warrants to U.S. Treasury

    12,254      12,254  

Amortization of discount on preferred stock

  251      (251     

Cash dividends on common stock ($0.62 per share)

     (37,400   (37,400
    

Balance at December 31, 2008

 $202,178    60,146,400   $1,005,820   $264,938   $14,072   $1,487,008  
    

BALANCE AT JANUARY 1, 2009

 $202,178    60,146,400   $1,005,820   $264,938   $14,072   $1,487,008  

Net loss

     (153,366   (153,366

Other comprehensive income, net of tax

      10,883    10,883  
        

Comprehensive loss

      $(142,483
        

Issuance of common stock

   26,538,461    245,697      245,697  

Stock-based compensation

    2,188      2,188  

Stock repurchased and retired

   (19,516  (174    (174

Issuances of common stock under stock plans and related net tax deficiencies

   120,243    (243    (243

Amortization of discount on preferred stock

  2,157      (2,157     

Dividends declared on preferred stock

     (10,739   (10,739

Cash dividends on common stock ($0.20 per share)

     (14,737   (14,737
    

Balance at December 31, 2009

 $204,335    86,785,588   $1,253,288   $83,939   $24,955   $1,566,517  
    

BALANCE AT JANUARY 1, 2010

 $204,335    86,785,588   $1,253,288   $83,939   $24,955   $1,566,517  

Net income

     28,326     28,326  

Other comprehensive (loss) income, net of tax

      (10  (10
        

Comprehensive income

      $28,316  
        

Issuance of common stock

   8,625,000    89,786      89,786  

Stock-based compensation

    3,505      3,505  

Stock repurchased and retired

   (22,541  (284    (284

Issuances of common stock under stock plans and related net tax benefit

   173,767    844      844  

Redemption of preferred stock issued to U.S. Treasury

  (214,181      (214,181

Issuance of preferred stock

  198,289        198,289  

Conversion of preferred stock to common stock

  (198,289  18,975,000    198,289        

Amortization of discount on preferred stock

  9,846      (9,846     

Dividends declared on preferred stock

     (3,686   (3,686

Repurchase of warrants issued to U.S. Treasury

    (4,500    (4,500

Cash dividends on common stock ($0.20 per share)

     (22,032   (22,032
    

Balance at December 31, 2010

 $    114,536,814   $1,540,928   $76,701   $24,945   $1,642,574  
    

thousands)


 2013 2012 2011
Net income$98,361
 $101,891
 $74,496
Available for sale securities:     
Unrealized (losses) gains arising during the period(48,755) (12,004) 22,101
Reclassification adjustment for net gains realized in earnings (net of tax expense $84, $1,609, and $3,094 in 2013, 2012, and 2011, respectively)(125) (2,414) (4,641)
Income tax benefit (expense) related to unrealized (losses) gains19,502
 4,802
 (8,840)
Net change in unrealized (losses) gains(29,378) (9,616) 8,620
Held to maturity securities:     
Unrealized losses related to factors other than credit (net of tax benefit of $34 in 2011)
 
 (52)
Reclassification adjustment for impairments realized in net income (net of tax benefit of $42 and $108 in 2012 and 2011, respectively)
 62
 161
Accretion of unrealized losses related to factors other than credit to investment securities held to maturity (net of tax benefit of $37, $84, and $66 in 2013, 2012, and 2011, respectively)56
 126
 100
Net change in unrealized losses related to factors other than credit56
 188
 209
Other comprehensive (loss) income, net of tax(29,322) (9,428) 8,829
Comprehensive income$69,039
 $92,463
 $83,325

See notes to consolidated financial statements

Umpqua Holdings Corporation


83


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

CHANGES IN SHAREHOLDERS' EQUITY

For the Years Ended December 31, 2010, 20092013, 2012 and 2008

2011

(in thousands)

   2010  2009  2008 
  

Net income (loss)

  $28,326   $(153,366 $51,044  
     

Available for sale securities:

    

Unrealized gains arising during the year

   1,305    23,888    33,950  

Reclassification adjustment for gains realized in net income (net of tax expense of $930, $3,431, and $2,156 in 2010, 2009, and 2008, respectively)

   (1,396  (5,147  (3,234

Income tax expense related to unrealized gains

   (522  (9,555  (13,580
     

Net change in unrealized gains

   (613  9,186    17,136  
     

Held to maturity securities:

    

Unrealized losses on investment securities available for sale transferred to investment securities held to maturity (net of tax benefit of $2,988 in 2008)

           (4,482

Reclassification adjustment for impairments realized in net income (net of tax benefit of $1,716 and $1,146 in 2009 and 2008, respectively)

       2,574    1,718  

Amortization of unrealized losses on investment securities transferred to held to maturity (net of tax benefit of $70 and $58 for 2009 and 2008, respectively)

       103    87  
     

Net change in unrealized losses on investment securities transferred to held to maturity

       2,677    (2,677
     

Unrealized gain (losses) related to factors other than credit (net of tax benefit of $150 and tax expense of $1,080 in 2010 and 2009, respectively)

   225    (1,620    

Reclassification adjustment for impairments realized in net income (net of tax benefit of $137 and $307 in 2010 and 2009, respectively)

   205    460      

Accretion of unrealized losses related to factors other than credit to investment securities held to maturity (net of tax benefit of $115 and $120 in 2010 and 2009, respectively)

   173    180      
     

Net change in unrealized losses related to factors other than credit

   603    (980    
     

Other comprehensive (loss) income, net of tax

   (10  10,883    14,459  
     

Comprehensive income (loss)

  $28,316   $(142,483 $65,503  
     

thousands, except shares)


       Accumulated  
     Other  
 Common Stock Retained Comprehensive  
 Shares Amount Earnings Income (Loss) Total
BALANCE AT JANUARY 1, 2011114,536,814
 $1,540,928
 $76,701
 $24,945
 $1,642,574
Net income    74,496
   74,496
Other comprehensive income, net of tax      8,829
 8,829
Comprehensive income        $83,325
Stock-based compensation  3,785
     3,785
Stock repurchased and retired(2,557,056) (29,754)     (29,754)
Issuances of common stock under stock plans         
and related net tax deficiencies185,133
 (46)     (46)
Cash dividends on common stock ($0.24 per share)    (27,471)   (27,471)
Balance at December 31, 2011112,164,891
 $1,514,913
 $123,726
 $33,774
 $1,672,413
          
BALANCE AT JANUARY 1, 2012112,164,891
 $1,514,913
 $123,726
 $33,774
 $1,672,413
Net income    101,891
   101,891
Other comprehensive loss, net of tax      (9,428) (9,428)
Comprehensive income        $92,463
Stock-based compensation  4,041
     4,041
Stock repurchased and retired(596,000) (7,436)     (7,436)
Issuances of common stock under stock plans         
and related net tax benefit321,068
 882
     882
Cash dividends on common stock ($0.34 per share)    (38,324)   (38,324)
Balance at December 31, 2012111,889,959
 $1,512,400
 $187,293
 $24,346
 $1,724,039
          
BALANCE AT JANUARY 1, 2013111,889,959
 $1,512,400
 $187,293
 $24,346
 $1,724,039
Net income    98,361
   98,361
Other comprehensive loss, net of tax      (29,322) (29,322)
Comprehensive income        $69,039
Stock-based compensation  5,017
     5,017
Stock repurchased and retired(584,677) (9,360)     (9,360)
Issuances of common stock under stock plans         
and related net tax benefit667,921
 6,428
     6,428
Cash dividends on common stock ($0.60 per share)    (67,737)   (67,737)
Balance at December 31, 2013111,973,203
 $1,514,485
 $217,917
 $(4,976) $1,727,426

See notes to consolidated financial statements


84


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS

FLOW

For the Years Ended December 31, 2010, 20092013, 2012 and 2008

2011

(in thousands)

   2010  2009  2008 
  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income (loss)

  $28,326   $(153,366 $51,044  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Restricted equity securities stock dividends

           (198

Deferred income tax expense (benefit)

   4,393    (18,360  9,889  

Amortization of investment premiums, net

   20,464    9,301    1,898  

Gain on sale of investment securities, net

   (2,326  (8,896  (5,529

Other-than-temporary impairment on investment securities available for sale

       239    139  

Other-than-temporary impairment on investment securities held to maturity

   414    10,334    4,041  

Loss on sale of non-covered other real estate owned

   4,023    10,957    3,229  

Gain on sale of covered other real estate owned

   (4,113        

Valuation adjustment on non-covered other real estate owned

   4,074    12,247    5,084  

Valuation adjustment on covered other real estate owned

   1,941          

Provision for non-covered loan and lease losses

   113,668    209,124    107,678  

Provision for covered loan and lease losses

   5,151          

Bargain purchase gain on acquisition

   (6,437        

Change in FDIC indemnification asset

   16,445          

Depreciation, amortization and accretion

   9,199    11,649    7,085  

Goodwill impairment

       111,952    982  

Increase in mortgage servicing rights

   (5,645  (7,570  (2,694

Change in mortgage servicing rights carried at fair value

   3,878    3,150    4,577  

Change in junior subordinated debentures carried at fair value

   (4,978  (6,854  (39,166

Stock-based compensation

   3,505    2,188    3,893  

Net (increase) decrease in trading account assets

   (751  (286  850  

Gain on sale of loans

   (10,923  (6,649  (790

Origination of loans held for sale

   (702,449  (682,535  (250,439

Proceeds from sales of loans held for sale

   670,872    677,598    241,481  

Excess tax benefits from the exercise of stock options

   (7  (1  (5

Change in other assets and liabilities

    

Net decrease (increase) in other assets

   47,011    (72,570  18,032  

Net increase (decrease) in other liabilities

   2,914    (8,426  (14,535
     

Net cash provided by operating activities

   198,649    93,226    146,546  
     

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchases of investment securities available for sale

   (1,498,224  (1,002,490  (811,868

Proceeds from investment securities available for sale

   408,670    464,376    635,883  

Proceeds from investment securities held to maturity

   1,675    2,282    1,705  

Purchases of restricted equity securities

           (4,415

Redemption of restricted equity securities

   472    1,280    3,395  

Net non-covered loan and lease paydowns (originations)

   146,252    (121,257  (230,098

Net covered loan and lease paydowns

   119,941          

Proceeds from sales of loans

   38,744    12,519    22,952  

Proceeds from disposals of furniture and equipment

   1,237    270    357  

Purchases of premises and equipment

   (47,559  (11,239  (10,737

Net proceeds from FDIC indemnification asset

   48,443          

Proceeds from sales of non-covered other real estate owned

   25,124    26,167    15,319  

Proceeds from sales of covered other real estate owned

   14,598          

Proceeds from sale of acquired insurance portfolio

   5,150          

Cash acquired in merger, net of cash consideration paid

   179,046    178,905      
     

Net cash used by investing activities

   (556,431  (449,187  (377,507
     

Umpqua Holdings Corporation

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

For the Years Ended December 31, 2010, 2009 and 2008

(in thousands)

    2010  2009  2008 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase (decrease) in deposit liabilities

  $847,895   $667,610   $(437

Net decrease in federal funds purchased

           (69,500

Net increase (decrease) in securities sold under agreements to repurchase

   28,579    (2,408  11,294  

Proceeds from term debt borrowings

           345,000  

Repayment of term debt

   (165,789  (130,191  (212,284

Proceeds from issuance of preferred stock

   198,289        201,927  

Redemption of preferred stock

   (214,181        

Proceeds from issuance of warrants

           12,254  

Repurchase of warrants issued to U.S. Treasury

   (4,500        

Net proceeds from issuance of common stock

   89,786    245,697      

Dividends paid on preferred stock

   (3,686  (10,739    

Dividends paid on common stock

   (20,626  (13,399  (45,796

Excess tax benefits from the exercise of stock options

   7    1    5  

Proceeds from stock options exercised

   1,004    301    1,233  

Retirement of common stock

   (284  (174  (129
     

Net cash provided by financing activities

   756,494    756,698    243,567  
     

Net increase in cash and cash equivalents

   398,712    400,737    12,606  

Cash and cash equivalents, beginning of year

   605,413    204,676    192,070  
     

Cash and cash equivalents, end of year

  $1,004,125   $605,413   $204,676  
     

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the year for:

    

Interest

  $99,556   $106,541   $156,686  

Income taxes

  $285   $48   $6,092  

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

    

Change in unrealized gains on investment securities available for sale, net of taxes

  $(613 $9,186   $17,136  

Change in unrealized loss on investment securities transferred to held to maturity, net of taxes

  $   $2,677   $(2,677

Change in unrealized losses on investment securities held to maturity related to factors other than credit, net of taxes

  $603   $(980 $  

Cash dividend declared on common and preferred stock and payable after period-end

  $5,745   $4,346   $3,016  

Transfer of investment securities available for sale to held to maturity

  $   $   $12,580  

Transfer of non-covered loans to non-covered other real estate owned

  $41,491   $50,914   $44,587  

Transfer of covered loans to covered other real estate owned

  $15,350   $   $  

Conversion of preferred stock to common stock

  $198,289   $   $  

Receivable from sales of noncovered other real estate owned and loans

  $45   $4,875   $  

Acquisitions:

    

Assets acquired

  $1,512,048   $4,978   $  

Liabilities assumed

  $1,505,611   $183,883   $  

 2013 2012 2011
CASH FLOWS FROM OPERATING ACTIVITIES:     
Net income$98,361
 $101,891
 $74,496
Adjustments to reconcile net income to net cash provided by operating activities:     
Deferred income tax expense7,748
 6,421
 2,000
Amortization of investment premiums, net32,663
 45,082
 36,086
Gain on sale of investment securities, net(209) (4,023) (7,735)
Other-than-temporary impairment on investment securities held to maturity
 155
 359
(Gain) loss on sale of non-covered other real estate owned(335) 2,349
 1,743
Gain on sale of covered other real estate owned(577) (1,236) (1,228)
Valuation adjustment on non-covered other real estate owned1,448
 6,896
 8,947
Valuation adjustment on covered other real estate owned712
 4,646
 8,709
Provision for non-covered loan and lease losses16,829
 21,796
 46,220
(Recapture of) provision for covered loan losses(6,113) 7,405
 16,141
Proceeds from bank owned life insurance1,173
 1,870
 818
Change in cash surrender value of bank owned life insurance(4,280) (3,145) (3,212)
Change in FDIC indemnification asset25,549
 15,234
 6,168
Depreciation, amortization and accretion18,267
 16,040
 13,151
Increase in mortgage servicing rights(17,963) (17,710) (6,720)
Change in mortgage servicing rights carried at fair value(2,374) 8,466
 2,990
Change in junior subordinated debentures carried at fair value2,193
 2,175
 2,217
Stock-based compensation5,017
 4,041
 3,785
Net (increase) decrease in trading account assets(2,211) (1,438) 715
Gain on sale of loans(65,644) (91,945) (26,838)
Change in loans held for sale carried at fair value14,503
 (13,965) (3,435)
Origination of loans held for sale(1,649,911) (2,022,195) (821,744)
Proceeds from sales of loans held for sale1,913,776
 1,910,071
 828,952
Excess tax benefits from the exercise of stock options(65) (52) (6)
Change in other assets and liabilities:     
Net decrease (increase) in other assets32,129
 5,401
 (15,404)
Net (decrease) increase in other liabilities(7,589) 22,255
 15,177
Net cash provided by operating activities413,097
 26,485
 182,352
CASH FLOWS FROM INVESTING ACTIVITIES:     
Purchases of investment securities available for sale(51,191) (994,574) (1,190,686)
Purchases of investment securities held to maturity(2,126) (931) (1,573)
Proceeds from investment securities available for sale803,866
 1,481,600
 927,276
Proceeds from investment securities held to maturity1,353
 1,304
 1,637
Redemption of restricted equity securities2,758
 1,629
 1,894
Net non-covered loan and lease originations(484,933) (587,396) (327,032)
Net covered loan paydowns101,861
 114,815
 119,772
Proceeds from sales of non-covered loans60,298
 14,242
 11,185
Proceeds from insurance settlement on loss of property575
 1,425
 
Proceeds from fee on termination of merger transaction
 1,600
 
Proceeds from disposals of furniture and equipment410
 2,029
 921
Purchases of premises and equipment(33,995) (22,817) (33,974)
Net proceeds from FDIC indemnification asset5,332
 29,478
 54,881
Proceeds from sales of non-covered other real estate owned15,830
 27,093
 35,340
Proceeds from sales of covered other real estate owned10,692
 12,694
 17,615
Net cash (paid) acquired in acquisition(149,658) 39,328
 
Net cash provided (used) by investing activities281,072
 121,519
 (382,744)
      

85


      
UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOW (Continued)
For the Years Ended December 31, 2013, 2012 and 2011
(in thousands)
     
      
 2013 2012 2011
CASH FLOWS FROM FINANCING ACTIVITIES: 
  
  
Net decrease in deposit liabilities(261,184) (107,445) (196,063)
Net increase in securities sold under agreements to repurchase87,807
 12,470
 50,846
Repayment of term debt(211,727) (55,404) (4,993)
Repayment of junior subordinated debentures(8,764) 
 
Dividends paid on common stock(50,768) (46,201) (25,317)
Excess tax benefits from stock based compensation65
 52
 6
Proceeds from stock options exercised6,398
 981
 308
Repurchases and retirement of common stock(9,360) (7,436) (29,754)
Net cash used by financing activities(447,533) (202,983) (204,967)
Net increase (decrease) in cash and cash equivalents246,636
 (54,979) (405,359)
Cash and cash equivalents, beginning of period543,787
 598,766
 1,004,125
Cash and cash equivalents, end of period$790,423
 $543,787
 $598,766
      
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 
  
  
Cash paid during the period for: 
  
  
Interest$40,826
 $52,198
 $78,690
Income taxes$41,993
 $44,350
 $47,608
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:     
Change in unrealized losses on investment securities available for sale, net of taxes$(29,378) $(9,616) $8,620
Change in unrealized losses on investment securities held to maturity 
  
  
related to factors other than credit, net of taxes$56
 $188
 $209
Cash dividend declared on common stock and payable after period-end$16,936
 $
 $7,890
Transfer of non-covered loans to non-covered other real estate owned$21,638
 $17,699
 $47,414
Transfer of covered loans to covered other real estate owned$2,555
 $6,987
 $15,271
Transfer of covered loans to non-covered loans$14,783
 $16,166
 $12,263
Transfer from FDIC indemnification asset to due from FDIC and other$4,075
 $23,057
 $49,156
Receivable from sales of noncovered other real estate owned and loans$
 $
 $1,100
Receivable from sales of covered other real estate owned$
 $
 $547
Acquisitions:     
Assets acquired$376,071
 $317,751
 $
Liabilities assumed$219,961
 $317,751
 $


See notes to consolidated financial statements


86


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 – Significant Accounting Policies 
Years Ended December 31, 2010, 2009 and 2008

NOTE 1.    SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations—Umpqua-Umpqua Holdings Corporation (the “Company”) is a financial holding company headquartered in Portland, Oregon, that is engaged primarily in the business of commercial and retail banking and the delivery of retail brokerage services. The Company provides a wide range of banking, assetwealth management, mortgage banking and other financial services to corporate, institutional and individual customers through its wholly-owned banking subsidiary Umpqua Bank (the “Bank”). The Company engages in the retail brokerage business through its wholly-owned subsidiary Umpqua Investments, Inc. (“Umpqua Investments”). Prior to July 2009, Umpqua Investments was known as Strand, Atkinson, Williams & York,The Bank also has a wholly-owned subsidiary, Financial Pacific Leasing Inc., a commercial equipment leasing company. The Company and its subsidiaries are subject to regulation by certain federal and state agencies and undergo periodic examination by these regulatory agencies.

Basis of Financial Statement Presentation—The-The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and with prevailing practices within the banking and securities industries. In preparing such financial statements, management is required to make certain estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses, the valuation of mortgage servicing rights, the fair value of junior subordinated debentures, the valuation of covered loans and the FDIC indemnification asset, and the valuation of goodwill and other intangible assets.

Consolidation—The-The accompanying consolidated financial statements include the accounts of the Company, the Bank and Umpqua Investments. All significant intercompany balances and transactions have been eliminated in consolidation. As of December 31, 2010,2013, the Company had 1415 wholly-owned trusts (“Trusts”) that were formed to issue trust preferred securities and related common securities of the Trusts. The Company has not consolidated the accounts of the Trusts in its consolidated financial statements in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”FASB”) ASC 810, Consolidation.Consolidation (“ASC 810”). As a result, the junior subordinated debentures issued by the Company to the Trusts are reflected on the Company’s consolidated balance sheet as junior subordinated debentures.

Subsequent events—The-The Company has evaluated events and transactions subsequent to December 31, 20102013 for potential recognition or disclosure.

Cash and Cash Equivalents—Cash-Cash and cash equivalents include cash and due from banks, and temporary investments which are federal funds sold and interest bearing balances due from other banks. Cash and cash equivalents generally have a maturity of 90 days or less at the time of purchase.

Trading Account Securities—Debt-Debt and equity securities held for resale are classified as trading account securities and reported at fair value. Realized and unrealized gains or losses are recorded in non-interest income.

Investment Securities—Debt-Debt securities are classified asheld to maturityif the Company has both the intent and ability to hold those securities to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the effective interest method over their contractual lives.

Securities are classified asavailable for saleif the Company intends and has the ability to hold those securities for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized holding gains or losses are included in other comprehensive income as a separate component of shareholders’shareholders' equity, net of tax. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Premiums and discounts are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.

Umpqua Holdings Corporation and Subsidiaries

Prior to the second quarter of 2009, the Company would assess an other-than-temporary impairment (“OTTI”) or permanent impairment based on the nature of the decline and whether the Company has the ability and intent to hold the investments until a market price recovery. If the Company determined a security to be other-than-temporarily or permanently impaired, the full amount of impairment would be recognized through earnings in its entirety. New guidance related to the recognition and presentation of OTTI of debt securities became effective in the second quarter of 2009. Rather than asserting whether a Company has the ability and intent to hold an investment until a market price recovery, a Company must consider whether it intends to sell a security or if it is likely that they would be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity. For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows. The accretion of the amount recorded in OCI increases the carrying value of the investment and does not affect earnings. If there is an indication of additional credit losses the security is re-evaluated according to the procedures described above. OTTI losses totaling $414,000, $10.6 million, and $4.2 million were recognized through earnings in the years ended December 31, 2010, 2009 and 2008, respectively, within total gain (loss) on investment securities, net.

Transfers of securities from available for sale to held to maturity are accounted for at fair value as of the date of the transfer. The difference between the fair value and the par value at the date of transfer is considered a premium or discount and is accounted for accordingly. Any unrealized gain or loss at the date of the transfer is reported in OCI, and is amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount, and will offset or mitigate the effect on interest income of the amortization of the premium or discount for that held to maturity security.


87


Loans Held for Sale—Loans-The Company has elected to account for loans held for sale, which includes mortgage loans, and are reported at fair value in accordance with FASB ASC 825 Financial Instruments. Fair value is determined based on quoted secondary market prices for similar loans, including the lowerimplicit fair value of cost or market value. Cost generally approximates marketembedded servicing rights. The change in fair value given the short duration of these assets. Gains or losses on the sale of loans that are held for sale are recognized atis primarily driven by changes in interest rates subsequent to loan funding and changes in the time of the sale and determined by the difference between net sale proceeds and the net book value of the loans less the estimated fair value of any retained mortgagerelated servicing rights.asset, resulting in revaluation adjustments to the recorded fair value. The inputs used in the fair value measurements are considered Level 2 inputs. The use of the fair value option allows the change in the fair value of loans to more effectively offset the change in the fair value of derivative instruments that are used as economic hedges to loans held for sale. Loan origination fees and direct origination costs are recognized immediately in net income in accordance with the fair value option accounting requirements. Interest income on loans held for sale is included in interest income in the

Non-Covered Loans Consolidated Statements of Income and recognized when earned. Loans are statedplaced on nonaccrual in a manner consistent with non-covered loans.

Acquired Loans and Leases-Purchased loans and leases are recorded at their fair value at the amountacquisition date. Credit discounts are included in the determination of unpaid principal, net of unearned incomefair value; therefore, an allowance for loan and any deferred feeslease losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either purchased impaired or costs. All discounts and premiums are recognized over the estimated life of the loan as yield adjustments. This estimated life is adjusted for prepayments.

Loans are classified aspurchased non-impaired. Purchased impairedwhen, based on current information and events, loans reflect credit deterioration since origination such that it is probable at acquisition that the BankCompany will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement. The carrying value ofall contractually required payments.

Purchased impaired loans is based on the present value of expected future cash flows (discounted at each loan’s effective interest rate) or, for collateral dependent loans, at fair value of the collateral, less selling costs. If the measurement of each impaired loans’ value is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses. This can be accomplished by charging-off the impaired portion of the loan or establishing a specific component to be provided for in the allowance for loan and lease losses.

Covered Loans—Loans acquired in a FDIC-assisted acquisition that are subject to a loss-share agreement are referred to as “covered loans” and reported separately in our consolidated balance sheets. Covered loans are reported exclusive of the expected cash flow reimbursements expected from the FDIC. Acquired loans are aggregated into pools based on individually evaluated common risk characteristics and aggregate expected cash flows were estimated for each pool. A pool is accounted

for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation. The Company aggregated all of the purchased impaired loans acquired in the FDIC-assisted acquisitions into different pools based on common risk characteristics such as risk rating, underlying collateral, type of interest rate (fixed or adjustable), types of amortization, and other similar factors. A loan will be removed from a pool of loans only if the loan is sold, foreclosed, or assets are received in full satisfaction of the loan, and will be removed from the pool at its carrying value. If an individual loan is removed from a pool of loans, the difference between its relative carrying amount and its cash, fair value of the collateral, or other assets received will be recognized in income immediately as interest income on loans and would not affect the effective yield used to recognize the accretable yield on the remaining pool.  Loans originally placed into a performing pool are not be reported individually as 30-89 days past due, non-performing (90+ days past due or nonaccrual), or accounted for as a troubled debt restructuring as the pool is the unit of accounting. Rather, these metrics related to the underlying loans within a performing pool will be considered in our ongoing assessment and estimates of future cash flows. If, at acquisition, the loans are collateral dependent and acquired primarily for the rewards of ownership of the underlying collateral, or if cash flows expected to be collected cannot be reasonably estimated, accrual of income is inappropriate. Such loans will be placed into nonperforming (nonaccrual) loan pools quarterly.

The cash flows expected to be received over the life of the pool were estimated by management with the assistance of a third party valuation specialist.management. These cash flows were input into a FASB ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”) compliant loan accounting system which calculates the carrying values of the pools and underlying loans, book yields, effective interest income and impairment, if any, based on actual and projected events. Default rates, loss severity, and prepayment speeds assumptions will be periodically reassessed and updated within the accounting system to update our expectation of future cash flows. The excess of the cash flows expected to be collected over a pool’s carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the loan or pool using the effective yield method. The accretable yield may change due to changes in the timing and amounts of expected cash flows. Changes in the accretable yield are disclosed quarterly.

The excess of the undiscounted contractual balances due over the cash flows expected to be collected is considered to be the nonaccretable difference. The nonaccretable difference represents our estimate of the credit losses expected to occur and was considered in determining the fair value of the loans as of the acquisition date. Subsequent to the acquisition date, any increases in expected cash flows over those expected at purchase date in excess of fair value are adjusted through an increase to the accretable yield on a prospective basis. Any subsequent decreases in expected cash flows over those expected at the purchase dateattributable to credit deterioration are recognized by recording a provision for covered loan losses.

The coveredpurchased impaired loans acquired are and will continue to be subject to the Company’s internal and external credit review and monitoring. If credit deterioration is experienced subsequent to the initial acquisition fair value amount, such deterioration will be measured, and a provision for credit losses will be charged to earnings. These provisions will be mostly offset by an increase to the FDIC indemnification asset, and will be recognized in non-interest income.

The coveredpurchased impaired loan portfolio also includes revolving lines of credit with funded and unfunded commitments. Funds advancedBalances outstanding at the time of acquisition are accounted for under FASB ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality.310-30. Any additional advances on these loans subsequent to the acquisition date are not accounted for under ASC 310-30.
For purchased non-impaired loans, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the estimated life of the loans.
Based on the characteristics of loans acquired in a Federal Deposit Insurance Corporation (“FDIC”) assisted transaction and the impact of associated loss-sharing arrangements, the Company determined that it was appropriate to apply the expected cash flows approach described above to all loans acquired in such transactions.  Loans acquired in a FDIC-assisted acquisition that are subject to a loss-share agreement are referred to as “covered loans” and reported separately in our consolidated balance sheets. Covered loans are reported exclusive of the expected cash flow reimbursements expected from the FDIC. 


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For purchased leases and equipment finance loans, the difference in the cash flows expected to be collected over the initial allocation of fair value to the acquired leases and loans is accreted into interest income over their related term based on the effective interest method.

Originated Loans and Leases

-Loans are stated at the amount of unpaid principal, net of unearned income and any deferred fees or costs. All discounts and premiums are recognized over the estimated life of the loan as yield adjustments. Leases are recorded at the amount of minimum future lease payments receivable and estimated residual value of the leased equipment, net of unearned income and any deferred fees. Initial direct costs related to lease originations are deferred as part of the investment in direct financing leases and amortized over their term using the effective interest method. Unearned lease income is amortized over their term using the effective interest method.

Loans are classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement. The carrying value of impaired loans is based on the present value of expected future cash flows (discounted at each loan's effective interest rate) or, for collateral dependent loans, at fair value of the collateral, less selling costs. If the measurement of each impaired loans' value is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses.  This can be accomplished by charging-off the impaired portion of the loan or establishing a specific component to be provided for in the allowance for loan and lease losses.
FDIC Indemnification Asset-The Company has elected to account for amounts receivable under the loss-share agreement as an indemnification asset in accordance with FASB ASC 805,Business Combinations. The FDIC indemnification asset is initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreement. The difference between the present value and the undiscounted cash flows the Company expects to collect from the FDIC will be accreted or amortized into non-interest income over the life of the FDIC indemnification asset.


Subsequent to initial recognition, the FDIC indemnification asset is reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the covered portfolio. These adjustments are measured on the same basis as the related covered loans, at a pool level, and covered other real estate owned. Generally, any increases in cash flow of the covered assets over those previously expected will result in prospective increases in the loan pool yield and amortization of the FDIC indemnification asset. Any decreases in cash flow of the covered assets under those previously expected will trigger impairments on the underlying loan pools and will result in a corresponding gain of the

Umpqua Holdings Corporation and Subsidiaries

FDIC indemnification asset. Increases and decreases to the FDIC indemnification asset are recorded as adjustments to non-interest income. The resulting carrying value of the indemnification asset represents the present value of amounts recoverable from the FDIC for future expected losses and the amounts due from the FDIC for claims related to covered losses.

Income Recognition on Non-Covered, Non-Accrual and Impaired Loans—Non-covered-Non-covered loans, including impaired non-covered loans, are classified as non-accrual if the collection of principal and interest is doubtful. Generally, this occurs when a non-covered loan is past due as to maturity or payment of principal or interest by 90 days or more, unless such non-covered loans are well-secured and in the process of collection. Generally, if a non-covered loan or portion thereof is partially charged-off, the non-covered loan is considered impaired and classified as non-accrual. Non-covered loans that are less than 90 days past due may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt.

When a non-covered loan is classified as non-accrual, all uncollected accrued interest is reversed to interest income and the accrual of interest income is terminated. Generally, any cash payments are applied as a reduction of principal outstanding. In cases where the future collectability of the principal balance in full is expected, interest income may be recognized on a cash basis. A non-covered loan may be restored to accrual status when the borrower’sborrower's financial condition improves so that full collection of future contractual payments is considered likely. For those non-covered loans placed on non-accrual status due to payment delinquency, thisreturn to accrual status will generally not occur until the borrower demonstrates repayment ability over a period of not less than six months.

Non-covered loans are reported as restructured when the Bank grants a more than insignificant concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider. Examples of such concessions include forgiveness of principal or accrued interest, extending the maturity date(s)date or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan and lease losses.


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The decision to classify a non-covered loan as impaired is made by the Bank’sBank's Allowance for Loan and Lease Losses (“ALLL”) Committee. The ALLL Committee meets regularly to review the status of all problem and potential problem loans. If the ALLL Committee concludes a loan is impaired but recovery of the full principal and interest is expected, an impaired loan may remain on accrual status.

Allowance for Loan and Lease Losses- The Bank performs regular credit reviews of the loan and lease portfolio to determine the credit quality of the portfolio and the adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan through the credit review process. The Company’s risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the allowance for loan and lease losses. The Bank has a management ALLL Committee, which is responsible for, among other things, regularly reviewing the ALLL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status. The ALLL Committee also approves removing loans and leases from impaired status. The Bank’sBank's Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly basis.

Each risk rating is assessed an inherent credit loss factor that determines the amount of the allowance for loan and lease losses provided for that group of loans and leases with similar risk rating. Credit loss factors may vary by region based on management’smanagement's belief that there may ultimately be different credit loss rates experienced in each region.

Regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired when based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment

using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize this impairment reserve as a specific component to be provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral dependent loans if it is determined that such amount represents a confirmed loss. The combination of the risk rating-based allowance component and the impairment reserve allowance component lead to an allocated allowance for loan and lease losses.

The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less than 10%5% of the allowance, but may be maintained at higher levels during times of economic conditions characterized by falling real estate values. The unallocated amount is reviewed periodically based on trends in credit losses, the results of credit reviews and overall economic trends.

As adjustments become necessary, they are reported in earnings in the periods in which they become known as a change in the provision for loan and lease losses and a corresponding charge to the allowance. Loans, or portions thereof, deemed uncollectible are charged to the allowance. Provisions for losses, and recoveries on loans previously charged-off, are added to the allowance.

The adequacy of the ALLL is monitored on a regular basis and is based on management’smanagement's evaluation of numerous factors. These factors include the quality of the current loan portfolio; the trend in the loan portfolio’sportfolio's risk ratings; current economic conditions; loan concentrations; loan growth rates; past-due and non-performing trends; evaluation of specific loss estimates for all significant problem loans; historical charge-off and recovery experience; and other pertinent information.

Management believes that the ALLL was adequate as of December 31, 2010.2013. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review. Approximately 82%74% of our loan portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the allowance for loan and lease losses. The U.S. recession, the housing market downturn, and declining real estate values in our markets have negatively impacted aspects of our residential development, commercial real estate, commercial constructionloan portfolio, and commercial loan portfolios, and have led in recent past years to an increase in non-performing loans, charge-offs, and the allowance for loan and lease losses. A continuedrenewed deterioration or prolonged delay in economic recovery in our markets may adversely affect our loan portfolio and may lead to additional charges to the provision for loan and lease losses.


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Reserve for Unfunded Commitments—A-A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with the Bank’sBank's commitment to lend funds under existing agreements such as letters or lines of credit. Management determines the adequacy of the reserve for unfunded commitments based upon reviews of individual credit facilities, current economic conditions, the risk characteristics of the various categories of commitments and other relevant factors. The reserve is based on estimates, and ultimate losses may vary from the current estimates. These estimates are evaluated on a regular basis and, as adjustments become necessary, they are reported in earnings in the periods in which they become known. Draws on unfunded commitments that are considered uncollectible at the time funds are advanced are charged to the allowance.allowance for loan and lease losses. Provisions for unfunded commitment losses and recoveries on loans commitments previously charged-off, are added to the reserve for unfunded commitments, which is included in theOther Liabilities section of the consolidated balance sheets.

Loan Fees and Direct Loan Origination Costs—Loan-Loans held for investment origination and commitment fees and direct loan origination costs are deferred and recognized as an adjustment to the yield over the life of the relatedportfolio loans.

Restricted Equity Securities—Restricted-Restricted equity securities were $34.5$30.7 million and $15.2$33.4 million at December 31, 20102013 and 2009,2012, respectively. Federal Home Loan Bank stock amounted to $33.2$29.4 million and $14.3$32.2 million of the total restricted securities as of December 31, 20102013 and 2009,2012, respectively. Federal Home Loan Bank stock represents the Bank’sBank's investment in the

Umpqua Holdings Corporation and Subsidiaries

Federal Home Loan Banks of Seattle and San Francisco (“FHLB”) stock and is carried at par value, which reasonably approximates its fair value. Management periodically evaluates FHLB stock for other-than-temporary or permanent impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as (1) the significance of any decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, (3) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB, and (4) the liquidity position of the FHLB.

In September 2012, the FHLB of Seattle was notified by the Federal Housing Finance Agency (“Finance Agency”) that it is now classified as “adequately capitalized” as compared to the prior classification of “undercapitalized.” Under Finance Agency regulations, the FHLB of Seattle may repurchase excess capital stock under certain conditions; however it may not redeem stock or pay a dividend without Finance Agency approval. Based on the above, the Company has determined there is not an other-than-temporary impairment on the FHLB stock investment as of December 31, 2013.

As a member of the FHLB system, the Bank is required to maintain a minimum level of investment in FHLB stock based on specific percentages of its outstanding mortgages, total assets, or FHLB advances. At December 31, 2010,2013, the Bank’sBank's minimum required investment in FHLB stock was $7.6 million.$13.5 million. The Bank may request redemption at par value of any stock in excess of the minimum required investment. Stock redemptions are at the discretion of the FHLB. The remaining restricted equity securities balance primarily represents an investment in Pacific Coast Bankers’ Bancshares stock.

Premises and Equipment—Premises-Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided over the estimated useful life of equipment, generally three to ten years, on a straight-line or accelerated basis. Depreciation is provided over the estimated useful life of premises, up to 39 years, on a straight-line or accelerated basis. LeaseholdGenerally, leasehold improvements are amortized over the life of the related lease, or the life of the related asset, whichever is shorter. Expenditures for major renovations and betterments of the Company’sCompany's premises and equipment are capitalized.

Management reviews long-lived and intangible assets any time that a change in circumstance indicates that the carrying amount of these assets may not be recoverable. Recoverability of these assets is determined by comparing the carrying value of the asset to the forecasted undiscounted cash flows of the operation associated with the asset. If the evaluation of the forecasted cash flows indicates that the carrying value of the asset is not recoverable, the asset is written down to fair value.

Goodwill and Other Intangibles—Intangible-Intangible assets are comprised of goodwill and other intangibles acquired in business combinations. Goodwill and intangible assets with indefinite useful lives are not amortized. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives, and also reviewed for impairment. Amortization of intangible assets is included in other non-interest expense in theConsolidated Statements of OperationsIncome.

The Company performs a goodwill impairment analysis on an annual basis as of December 31. Additionally, the Company performs a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; adverse action or assessment by a regulator; and unanticipated competition.


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On at least an annual basis, we assess the qualitative factors to determine whether it is necessary to perform a quantitative impairment test.  The goodwillquantitative impairment test involves a two-step process. The first step compares the fair value of a reporting unit to its carrying value. If the reporting unit’s fair value is less than its carrying value, the Company would be required to proceed to the second step. In the second step the Company calculates the implied fair value of the reporting unit’s goodwill. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. The estimated fair value of the Company is allocated to all of the Company’s assets and liabilities, including any unrecognized identifiable intangible assets, as if the Company had been acquired in a business combination and the estimated fair value of the reporting unit is the price paid to acquire it. The allocation process is performed only for purposes of determining the amount of goodwill impairment. No assets or liabilities are written up or down, nor are any additional unrecognized identifiable intangible assets recorded as a part of this process. Any excess of the estimated purchase price over the fair value of the reporting unit’s net assets represents the implied fair value of goodwill. If the carrying amount of the goodwill is greater than the implied fair value of that goodwill, an impairment loss would be recognized as a charge to earnings in an amount equal to that excess.


Mortgage Servicing Rights (“MSR”)- The Company determines its classes of servicing assets based on the asset type being serviced along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets. The Company measures its residential mortgage servicing assets at fair value and reports changes in fair value through earnings. Fair value adjustments that encompass market-driven valuation changes and the runoff in value that occurs from the passage of time, are each separately reported. Under the fair value method, the MSR is carried in the balance sheet at fair value and the changes in fair value are reported in earnings under the caption mortgage banking revenue in the period in which the change occurs.

Retained mortgage servicing rights are measured at fair value as of the date of sale. We use quoted market prices when available. Subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the MSR, the present value of net expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.income net of servicing costs. This model is periodically validated by an independent external model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. Key assumptions used in measuring the fair value of MSR as of December 31 2010 were as follows:

    2010   2009   2008 

Constant prepayment rate

   18.54%     18.35%     13.69%  

Discount rate

   8.62%     8.70%     8.85%  

Weighted average life (years)

   4.5     4.5     5.0  

 2013 2012 2011
Constant prepayment rate12.74% 21.39% 20.39%
Discount rate8.69% 8.65% 8.60%
Weighted average life (years)6.0
 4.7
 4.5
The expected life of the loan can vary from management’smanagement's estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of management’smanagement's estimates would negatively impact the recorded value of the mortgage servicing rights. The value of the mortgage servicing rights is also dependent upon the discount rate used in the model, which we base on current market rates. Management reviews this rate on an ongoing basis based on current market rates. A significant increase in the discount rate would reduce the value of mortgage servicing rights.

SBA/USDA Loans Sales and Servicing—The-The Bank, on a limited basis, sells or transfers loans, including the guaranteed portion of Small Business Administration (“SBA”) and Department of Agriculture (“USDA”) loans (with servicing retained) for cash proceeds equal to the principal amount of loans, as adjusted to yield interest to the investor based upon the current market rates. The Bank records ana servicing asset representing the right to service loans for others when it sells a loan and retains the servicing rights. The carryingservicing asset is recorded at fair value of loans is allocated between the loanupon sale, and the servicing rights, based on their relative fair values. The fair value of servicing rights is estimated by discounting estimated net future cash flows from servicing using discount rates that approximate current market rates and using estimated prepayment rates. TheSubsequent to initial recognition, the servicing rights are carried at the lower of amortized cost or fair market value, and are amortized in proportion to, and over the period of, the estimated net servicing income, assuming prepayments.income.

For purposes of evaluating and measuring impairment, the fair value of servicing rights are based onmeasured using a discounted estimated net future cash flow methodology, current prepayment speeds and market discount rates.model as described above.  Any impairment is measured as the amount by which the carrying value of servicing rights for a stratuman interest rate-stratum exceeds its fair value. The carrying value of SBA/USDA servicing rights at December 31, 20102013 and 20092012 were $721,000$610,000 and $728,000,$498,000, respectively. No impairment charges were recorded for the years ended December 31, 2010, 2009 or 20082013, 2012 and 2011, related to SBA/USDA servicing assets.


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A premium over the adjusted carrying value is received upon the sale of the guaranteed portion of an SBA or USDA loan. The Bank’sBank's investment in an SBA or USDA loan is allocated among the sold and retained portions of the loan based on the relative fair value of each portion at the time of loan origination, adjusted for payments and other activities. Because the portion retained does not carry an SBA or USDA guarantee, part of the gain recognized on the sold portion of the loan may beis deferred and amortized as a yield enhancement on the retained portion in order to obtain a market equivalent yield.

Non-Covered Other Real Estate Owned—Non-covered-Non-covered other real estate owned (“non-covered OREO”) represents real estate which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell the property, which becomes the property’sproperty's new basis. Any write-downs based on the asset’sasset's fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new

Umpqua Holdings Corporation and Subsidiaries

cost basis or fair value, net of estimated costs to sell. Subsequent valuation adjustments are recognized within net loss on non-covered OREO. Revenue and expenses from operations and subsequent adjustments to the carrying amount of the property are included in other non-interest expense in theConsolidated Statements of OperationsIncome.

In some instances, the Bank may make loans to facilitate the sales of other real estate owned. Management reviews all sales for which it is the lending institution for compliance with sales treatment under provisions established within FASB ASC 360-20,Real Estate Sales. Any gains related to sales of other real estate owned may be deferred until the buyer has a sufficient initial and continuing investment in the property.

Covered Other Real Estate Owned - All OREO acquired in FDIC-assisted acquisitions that are subject to a FDIC loss-share agreement are referred to as “covered OREO” and reported separately in our statementsConsolidated Statements of financial position.Financial Position. Covered OREO is reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered OREO at the collateral’s net realizable value, less selling costs.

Covered OREO was initially recorded at its estimated fair value on the acquisition date based on similar market comparable valuations less estimated selling costs. Any subsequent valuation adjustments due to declines in fair value will be charged to non-interest expense, and will be mostly offset by non-interest income representing the corresponding increase to the FDIC indemnification asset for the offsetting loss reimbursement amount. Any recoveries of previous valuation adjustments will be credited to non-interest expense with a corresponding charge to non-interest income for the portion of the recovery that is due to the FDIC.

Income Taxes—Income-Income taxes are accounted for using the asset and liability method. Under this method a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’sCompany's income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not, that all or some portion of the potential deferred tax asset will not be realized.

Derivative Loan Commitments—TheDerivatives-The Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage loan commitments. The commitments to originate mortgage loans held for sale and the related forward delivery contracts are considered derivatives. The Bank also executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting the interest rate swaps that the Bank executes with a third party, such that the Bank minimizes its net risk exposure. The Company recognizes all derivatives as either assets or liabilities in the balance sheet and requires measurement of those instruments at fair value through adjustments to accumulated other comprehensive income and/or current earnings, as appropriate.earnings. None of the Company’s derivatives are designated as hedging instruments. Rather, they are accounted for as free-standing derivatives, or economic hedges, and the Company reports changes in fair values of its derivatives in current period net income.

The fair value of the derivative loan commitments is estimated using the net present value of expected future cash flows. Assumptions used include pull-through rate assumption based on historical information, current mortgage interest rates, the stage of completion of the underlying application and underwriting process, the time remaining until the expiration of the derivative loan commitment, and the expected net future cash flows related to the associated servicing of the loan.

Operating Segments- Public enterprises are required to report certain information about their operating segments in a complete set of financial statements to shareholders. They are also required to report certain enterprise-wide information about the Company’sCompany's products and services, its activities in different geographic areas, and its reliance on major customers. The basis for determining the Company’sCompany's operating segments is the manner in which management operates the business. Management has identified three primary business segments, Community Banking, Retail BrokerageHome Lending, and Mortgage Banking.Wealth Management.


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Share-Based Payment—The Company has two active stock-based compensation plans that provide for the granting of stock options and restricted stock to eligible employees and directors. In-In accordance with FASB ASC 718,Stock Compensation,we recognize in the income statement the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over the employees’ requisite service period (generally the vesting period). The requisite service period may be subject to performance conditions.

The Company’s 2003 Stock

At the annual meeting on April 16, 2013, shareholders approved the Company's 2013 Incentive Plan provides(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 grantingissuance under the plan. With the adoption of stock optionsthe 2013 Plan, no additional grants can be issued under the previous plans. The Company also assumed various plans in connection with mergers and restricted stock awards.acquisitions but does not make grants under those plans. Stock options and restricted stock awards generally vest ratably over 5three to five years and are recognized as expense over that same period of time.

Under the terms of the 2013 Plan, the exercise price of each option equals the market price of the Company's common stock on the date of the grant, and the maximum term is ten years.


The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model using assumptions noted in the following table.table or a Monte Carlo simulation pricing model. Expected volatility is based on the historical volatility of the price of the Company’sCompany's common stock. The Company uses historical data to estimate option exercise and stock option forfeiture rates within the valuation model. The expected term of options granted is determined based on historical experience with similar options, giving consideration to the contractual terms and vesting schedules, and represents the period of time that options granted are expected to be outstanding. The expected dividend yield is based on dividend trends and the market value of the Company’s common stock at the time of grant. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant corresponding to the estimated expected term of the options granted. There were no stock options granted in 2013. The following weighted average assumptions were used to determine the fair value of stock option grants as of the grant date to determine compensation cost for the years ended December 31, 2010, 20092012 and 2008:

    2010   2009   2008 

Dividend yield

   2.72%     2.23%     4.39%  

Expected life (years)

   7.1     7.3     7.3  

Expected volatility

   52%     46%     34%  

Risk-free rate

   2.69%     2.18%     3.29%  

Weighted average grant date fair value of options granted

  $5.24    $3.65    $3.32  

The Company’s 2007 Long Term Incentive Plan provides for granting of restricted stock units for the benefit of certain executive officers. 2011:

 2012 2011
Dividend yield3.90% 2.79%
Expected life (years)7.4
 7.1
Expected volatility53% 52%
Risk-free rate1.27% 2.71%
Weighted average fair value of options on date of grant$4.39
 $4.65

Restricted stock unit grants and certain restricted stock awards are subject to performance-based and market-based vesting as well as other approved vesting conditions. The current restricted stock units outstandingconditions and cliff vest after three years based on performance and servicethose conditions. Compensation expense is recognized over the service period to the extent restricted stock units are expected to vest.

Earnings per Share—According-According to the revised provisions of FASB ASC 260,Earnings Per Share, which became effective January 1, 2009, nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Certain of the Company’s nonvested restricted stock awards qualify as participating securities.

Net income less any preferred dividends accumulated for the period (whether or not declared), is allocated between the common stock and participating securities pursuant to the two-class method, based on their rights to receive dividends, participate in earnings or absorb losses.Basic earnings per common share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested restricted shares.

Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares, excluding the participating securities, were issued using the treasury stock method. For all periods presented, warrants, stock options, certain restricted stock awards and restricted stock units are the only potentially dilutive non-participating instruments issued by the Company. Next, we determine and include in diluted earnings per common share calculation the more dilutive effect of the participating securities using the treasury stock method or the two-class method. Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under the two-class method as the holders are not contractually obligated to share in the losses of the Company.

All earnings per common share amounts for 2008 have been retrospectively adjusted to conform to the revised provisions of FASB ASC 260. The impact of the revised provisions had no effect for the year ended December 31, 2008.

Advertising expenses—Advertising-Advertising costs are generally expensed as incurred.

Umpqua Holdings Corporation and Subsidiaries


94


Fair Value Measurements- FASB ASC 820,Fair Value Measurements and DisclosuresDisclosure, (“ASC 820”), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. In general, fair values determined by Level 1 inputs utilize quoted prices for identical assets or liabilities traded in active markets that the Company has the ability to access. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Recently Issued Accounting Pronouncements- In December 2009, FASB issued ASU No. 2009-17,Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets.This update codifed SFAS No. 166,Accounting for Transfers of Financial Assets—an Amendment of FASB Statement No. 140, which was previously issued by FASB in June 2009 but was not included in the original codification. ASU 2009-17 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. This statement is effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein. This standard will primarily impact the Company’s accounting and reporting of transfers representing a portion of a financial asset for which the Company has a continuing involvement, generally known as loan participations. In order to recognize the transfer of a portion of a financial asset as a sale, the transferred portion and any portion that continues to be held by the transferor must represent a participating interest, and the transfer of the participating interest must meet the conditions for surrender of control. To qualify as a participating interest (i) the portions of a financial asset must represent a proportionate ownership interest in an entire financial asset, (ii) from the date of transfer, all cash flows received from the entire financial asset must be divided proportionately among the participating interest holders in an amount equal to their share of ownership, (iii) involve no recourse (other than standard representation and warranties) to, or subordination by, any participating interest holder, and (iv) no party has the right to pledge or exchange the entire financial asset. If the participating interest or surrender of control criteria are not met the transfer is not accounted for as a sale and derecognition of the asset is not appropriate. Rather the transaction is accounted for as a secured borrowing arrangement. The impact of certain participations being reported as secured borrowings rather than derecognizing a portion of a financial asset would increase total assets (loans), liabilities (term debt) and their respective interest income and expense. An increase in total assets also increases regulatory risk-weighted assets and could negatively impact our capital ratios. The Company reviews our participation agreements to ensure new originations meet the criteria to allow for sale accounting in order to limit the impact upon our financial statements. The terms contained in certain participation and loan sale agreements, however, are outside the control of the Company. These arrangements largely relate to Small Business Administration (“SBA”) loan sales. These sales agreements contain recourse provisions (generally 90 days) that will initially preclude sale accounting. However, once the recourse provision expires, transfers of portions of financial assets may be reevaluated to determine if they meet the participating interest definition. As a result, we expect to report SBA and potentially certain other transfers of financial assets as secured borrowings which will defer the gain of sale on these transactions, at least until the recourse provision expires, assuming all other sales criteria for each transaction are met. The Company does not believe it has or will have a significant amount of participations subject to recourse provisions or other features that would preclude derecognition of the assets transferred. The adoption of ASU No. 2009-17 did not materially impact the Company’s consolidated financial statements.

In December 2009, FASB issued ASU No. 2009-18,Consolidations (Topic 810)—Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.This update codifed SFAS No. 167,Amendments to FASB Interpretation No. 46(R), which was previously issued by FASB in June 2009 but was not included in the original codification. ASU 2009-18 eliminates FASB Interpretations 46(R) (“FIN 46(R)”) exceptions to consolidating qualifying special-purpose entities, contains new criteria for determining the primary beneficiary, and increases the frequency of required reassessments to determine whether a company is the primary beneficiary of a variable interest entity (“VIE”). Under the revised guidance, the primary beneficiary of a VIE (party who must consolidate the VIE) is the enterprise that has (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE, or the right to receive benefits of the VIE that could potentially be significant to the VIE. ASU 2009-18 also contains a new requirement that any term, transaction, or arrangement that does not have a substantive effect on an entity’s status as a variable interest entity, a company’s power over a variable interest entity, or a company’s obligation to absorb losses or its right to receive benefits of an entity must be disregarded in applying FIN 46(R) provisions. The elimination of the qualifying special-purpose entity concept and its consolidation exceptions means more entities will be subject to consolidation assessments and reassessments. This statement requires additional disclosures regarding an entity’s involvement in a variable interest entity. This statement is effective for annual reporting periods beginning after November 15, 2009, and for interim periods therein. The Company has evaluated the impact of this guidance in regards to our involvement with variable interest entities. This guidance potentially impacts the accounting for our limited partnership equity investments in affordable housing development funds and real estate investment funds. In regards to affordable housing investments, the primary activities that most significantly impacts the VIE’s economic performance include leasing rental units at appropriate rent rates in compliance with low income housing restrictions and requirements, operating the rental property thereby generating income/loss from the partnership operations, and protecting the low income housing tax credits from recapture. As a limited partner, the Company generally does not participate in the control of the partnerships’ business, our involvement is limited to providing a stated amount of financial support (commitment or subscription) as stated within contractual agreements, and the primary purpose of the investment is to receive the tax attributes (tax credits) of the partnership. The general partner, which generally are a developer or non-profit organization, exercise the day-to-day control and management of the partnerships that most significantly impacts the VIE’s economic performance. In regards to the real estate investment funds, the primary activities that most significantly impacts the VIE’s economic performance include the development, financing, and leasing of real estate related properties, and ultimately finding a profitable exit from such investments. The Company’s involvement in these funds are a limited partners minority interest. According to the terms of the partnerships, the general partners have exclusive control to manage the enterprise and power to direct activities that impact the VIE’s economic performance. The impact of adoption did not result in the Company consolidating or deconsolidating any variable interest entities as accounted for under previous guidance and, therefore, did not have a material impact on the Company’s consolidated financial statements.

In January 2010,July 2012, the FASB issued ASU No. 2010-06,Fair Value Measurements2012-02, Testing Indefinite-Lived Intangible Assets for Impairment. With the Update, a company testing indefinite-lived intangibles for impairment now has the option to assess qualitative factors to determine whether the existence of events and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. FASB ASU No. 2010-06 requires (i)circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value disclosuresof the indefinite-lived intangible asset and perform the quantitative impairment test by each class of assets and liabilities (generally a subset within a line item as presented incomparing the statement of financial position) rather than major category, (ii) for items measured at fair value on a recurring basis,with the amounts of significant transfers between Levels 1carrying amount in accordance with current guidance. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and 2, and transfers into and out of Level 3, andproceed directly to performing the reasons for those transfers, including separate discussion relatedquantitative impairment test. An entity will be able to resume performing the transfers into each level apart from transfers out of each level, and (iii) gross presentation of the amounts of purchases, sales, issuances, and settlementsqualitative assessment in the Level 3 recurring measurement reconciliation. Additionally, the ASU clarified that a description of the valuation techniques(s) and inputs used to measure fair values is required for both recurring and nonrecurring fair value measurements. Also, if a valuation technique has changed, entities should disclose that change and the reason for the change. Disclosures other than the gross presentation changes in the Level 3 reconciliation wereany subsequent period. The amendments are effective for the first reporting period beginning after December 15, 2009. The requirement to present the Level 3 activity of purchases, sales, issuances,annual and settlements on a gross basis will be effectiveinterim goodwill impairment tests performed for fiscal years beginning after DecemberSeptember 15, 2010. The Company is currently evaluating the impact of adoption of FASB ASU No. 2010-06. We do not expect the adoption of this ASU will have a material impact on the Company’s consolidated financial statements.

Umpqua Holdings Corporation and Subsidiaries

In February 2010, the FASB issued ASU No. 2010-09,Subsequent Events (Topic 855)—Amendments to Certain Recognition and disclosure Requirements. This ASU eliminated the requirement for to disclose the date through which a Company has evaluated subsequent events and refines the scope of the disclosure requirements for reissued financial statements. This ASU was effective for the first quarter of 2010. This ASU did not have a material impact on the Company’s consolidated financial statements.

In March 2010, the FASB issued ASU No. 2010-11,Derivatives and Hedging (Topic 815)—Scope Exception Related to Embedded Credit Derivatives. The ASU eliminated the scope exception for bifurcation of embedded credit derivatives in interests in securitized financial assets, unless they are created solely by subordination of one financial instrument to another. The ASU was effective the first quarter beginning after June 15, 2010.2012.  The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In April 2010,October 2012, the FASB issued ASU No. 2010-18,Receivables (Topic 310)—EffectASU. 2012-06, Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Loan Modification When the Loan Is PartGovernment-Assisted Acquisition of a Pool That is Accounted forFinancial Institution.  The Update clarifies that when an entity recognizes an indemnification asset as a Single Asset. This ASU clarified that modificationsresult of loans that are accounted for within a pool under Topic 310-30 do not resultgovernment-assisted acquisition of a financial institution and subsequently, a change in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continuecash flows expected to be required to consider whethercollected on the poolindemnification asset occurs, as a result of assetsa change in which the loan is included is impaired if expected cash flows expected to be collected on the assets subject to indemnification, the reporting entity should subsequently account for the pool change. No additional disclosures are required with this ASU.change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The amendments in this ASU are effective for modifications of loans accounted for within pools under Topic 310-30 occurring in the firstannual and interim or annual period endingreporting periods beginning on or after JulyDecember 15, 2010. The amendments are to be applied prospectively and early application is permitted. Upon initial adoption of the guidance in this ASU, an entity may make a onetime election to terminate accounting for loans as a pool under Topic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.2012. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In July 2010,January 2013, the FASB issued ASU No. 2010-20,Receivables (Topic 310):2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The Update clarifies that ASU. 2011-11 applies only to derivatives, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and financial liabilities subject to a master netting arrangement or similar agreement are no longer subject to the Credit Quality of Financing Receivables and the Allowance for Credit Losses.disclosure requirements in ASU. 2011-11. The ASU expands existing disclosures to require an entity to provide additional information in their disclosures about the credit quality of their financing receivables and the credit reserves held against them. Specifically, entities will be required to present a roll forward of activity in the allowance for credit losses, the nonaccrual status of financing receivables by class of financing receivables, and impaired financing receivables by class of financing receivables, all on a disaggregated basis. The ASU also requires an entity to provide additional disclosures on credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables, the aging of past due financing receivables at the end of the reporting period by class of financing receivables, the nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses and significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio segment. For public entities, the disclosures of period-end balancesamendments are effective for interimannual and annual reporting periods ending after December 15, 2010. For public entities, the disclosures of activity are effective for interim and annual reporting periods beginning on or after December 15, 2010.January 1, 2013. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In December 2010,February 2013, the FASB issued ASU No. 2010-29,Business Combinations (Topic 805): Disclosure2013-02, Reporting of Supplementary Pro Forma Information for Business CombinationsAmounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2010-29. This ASU2013-02 requires that if a publican entity discloses comparative financial statements, then those disclosuresto provide information about the amounts reclassified out of revenueaccumulated other comprehensive income by component and earningsto present either on the face of the combined entity shouldstatement where net income is presented, or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be as thoughreclassified to net income in its entirety in the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable priorsame reporting period. The amendments are effective for annual and interim reporting period only. The ASU also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. The ASU will be applied prospectively for business combinations that are consummated on or after the beginning of the first annual reporting periodperiods beginning on or after December 15, 2010.2012. The adoption of this ASU willNo. 2013-02 did not have ana material impact on the Company’sCompany's consolidated financial statements.

In December 2010,July 2013, the FASB issued ASU No. 2010-28,Intangibles—Goodwill and Other (Topic 350): When to Perform Step 22013-10, Inclusion of the Goodwill Impairment TestFed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Reporting Units with Zero or Negative Carrying AmountsHedge Accounting Purposes. This ASU modifies Step 1 ofNo. 2013-10 permits the

goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity will be required to perform Step 2 use of the goodwill impairment test if there are adverse qualitative factors that indicate that it is more likely than not thatFed Funds Effective Swap Rate (OIS) to be used as a goodwill impairment exists.U.S. benchmark interest rate for hedge account purposes. The ASUamendment is effective prospectively for fiscal years, and interim periods within those years, beginningqualifying new or redesiginated hedging relationships entered into on or after December 15, 2010, for public reporting entities.July 17, 2013. The adoption of this ASU willNo. 2013-10 did not have ana material impact on the Company’sCompany's consolidated financial statements.


95


In January 2010,July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2011-01,Deferral2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the Effective Dateapplicable jurisdiction to settle any additional income taxes that would result from the disallowance of Disclosures aboutTroubled Debt Restructuringsa tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in Update No. 2010-20. This ASU temporarily delaysthe financial statements as a liability and should not be combined with deferred tax assets. No new recurring disclosures are required. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2013 and are to be applied prospectively to all unrecognized tax benefits that exist at the effective datedate. Retrospective application is permitted. The adoption of ASU No. 2013-11 is not expected to have a material impact on the Company's consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. ASU 2014-04 permit an entity to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the disclosures about troubled debt restructuringsinvestment in Update 2010-20proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for public entities.annual and interim reporting periods beginning on or after December 15, 2014 and should be applied prospectively. The delayCompany is intendedcurrently reviewing the requirements of ASU No. 2014-01, but does not expect the ASU to allowhave a material impact on the Board timeCompany's consolidated financial statements.
In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon foreclosure. ASU 2014-04 clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to complete its deliberations on what constituteshave received physical possession of residential real estate property collateralizing a troubled debt restructuring. The effective dateconsumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the new disclosures about troubled debt restructurings for public entities andborrower conveying all interest in the guidance for determining what constitutesresidential real estate property to the creditor to satisfy that loan through completion of a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective fordeed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual and interim reporting periods endingbeginning on or after JuneDecember 15, 2011. Accordingly,2014 and can be applied with a modified retrospective transition method or prospectively. The adoption of ASU No. 2014-04 is not expected to have a material impact on the Company has not included the disclosures deferred by this ASU.Company's consolidated financial statements.

Reclassifications- Certain amounts reported in prior years’years' financial statements have been reclassified to conform to the current presentation. The results of the reclassifications are not considered material and have no effect on previously reported net earnings (losses) available to common shareholders and earnings (losses) per common share.

Note 2 – Business Combinations 
Sterling Financial Corporation
NOTE 2.    BUSINESS COMBINATIONS

On January 22, 2010,September 11, 2013, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Sterling Financial Corporation, a Washington Department of Financial Institutions closed EvergreenBank (“Evergreen”corporation ("Sterling"). The Merger Agreement provides that Sterling will merge with and into the Company (the "Merger"), Seattle, Washingtonwith 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 appointedinto 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 stockand $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 (“FDIC”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.


96


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 receiver. That same date, Umpqua Bank assumed"FinPac". FinPac provides business-essential commercial equipment leases to various industries throughout the bankingUnited 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 EvergreenJuly 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 FDIC underCompany’s 2013 Incentive Plan pursuant to employment agreements between the Company and certain executives of FinPac, vest over a whole bank purchaseperiod of either two or three years, and assumption agreement with loss-sharing. Underwill be recognized over that time period within the termssalaries and employee benefits line item on the Consolidated Statements of Income. The structure of the loss-sharing agreement,transaction was as follows:

The Bank acquired all of the FDIC will coveroutstanding stock of FPHC, a substantialshell 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 any future lossesthe liability risk of each insurance policy that is issued by a third party insurance company on loans, related unfunded loan commitments, other real estate owned (“OREO”) and accrued interest on loans for upleased equipment when the lessee fails to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveriesmeet its contractual obligations under the lease or financing agreement to obtain insurance on the first $90.0 million on covered assets for Evergreenleased equipment.

The acquisition provides diversification, and absorb 95% of losses and share in 95% of loss recoveries exceeding $90.0 million, except the Bank will incur losses up to $30.2 million before the loss-sharing will commence. The loss-sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition date. With this agreement, Umpqua Bank assumed six additional store locations in the greater Seattle, Washington market. This acquisitiona scalable platform that is consistent with our community banking expansion strategy and provides further opportunity to fill in our market presenceinitiatives that the Bank has completed over the last three years, including growth in the greater Seattle, Washington market.

On February 26, 2010, the Washington Department of Financial Institutions closed Rainier Pacific Bank (“Rainier”), Tacoma, Washingtonbusiness banking, agricultural lending and appointed the FDIC as receiver. That same date, Umpqua Bank assumed the banking operations of Rainier from the FDIC under a whole bank purchase and assumption agreement with loss-sharing. Under the termshome builder lending groups. The transaction leverages excess capital of the loss-sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, OREOCompany and accrued interest on loans for updeploys excess liquidity into significantly higher yielding assets, provides growth and diversification, and is anticipated to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on the first $95.0 million of losses on covered assets and absorb 95% of losses and share in 95% of loss recoveries exceeding $95.0 million. The loss-sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition dates. With this agreement, Umpqua Bank assumed 14 additional store locations in Pierce County and surrounding areas. This acquisition expands our presence in the south Puget Sound region of Washington State.

increase profitability. There is no tax deductible goodwill or other intangibles.


The operations of Evergreen and RainierFinPac are included in our operating results from January 23, 2010 and February 27, 2010, respectively,July 1, 2013, and added combined revenue of $54.0$29.9 million, non-interest expense of $23.6$8.8 million, and earningsnet income of $11.0$9.5 million net of tax, for the year ended December 31, 2010. These operating results include a bargain purchase gain of $6.4 million, which is not indicative of future operating results. Evergreen’s and Rainiers’s2013. FinPac's results of operations prior to the acquisition are not included in our operating results. Merger-relatedMerger related expenses of $4.4$1.6 million for the year ended December 31, 2010 have been incurred in connection with these acquisitions and recognized in a separate line item on theCondensed Consolidated Statements of Operations.2013

Umpqua Holdings Corporation and Subsidiaries

On June 18, 2010, the Nevada State Financial Institutions Division closed Nevada Security Bank (“Nevada Security”), Reno, Nevada and appointed the FDIC as receiver. That same date, Umpqua Bank assumed the banking operations of Nevada Security from the FDIC under a whole bank purchase and assumption agreement with loss-sharing. Under the terms of the loss-sharing agreement, the FDIC will cover a substantial portion of any future losses on loans, related unfunded loan commitments, OREO, and accrued interest on loans for up to 90 days. The FDIC will absorb 80% of losses and share in 80% of loss recoveries on all covered assets. The loss-sharing arrangements for non-single family residential and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions are in effect for 8 years and 10 years, respectively, from the acquisition dates. With this agreement, Umpqua Bank assumed five additional store locations, including three in Reno, Nevada, one in Incline Village, Nevada, and one in Roseville, California. This acquisition expands our presence into the State of Nevada.

The operations of Nevada Security are included in our operating results from June 19, 2010, and added revenue of $15.1 million, non-interest expense of $7.3 million, and earnings of $1.3 million, net of tax, for the year ended December 31, 2010. Nevada Security’s results of operations prior to the acquisition are not included in our operating results. Merger-related expenses of $1.7 million for the year ended December 31, 2010 have been incurred in connection with the acquisition of Nevada SecurityFinPac and are recognized as a separatewithin the merger related expenses line item on theCondensed Consolidated Statements of Operations.Income.

We refer to


A summary of the net assets acquired loan portfolios and other real estate owned as “covered loans” and “covered other real estate owned”, respectively, and thesethe estimated fair value adjustments of FinPac are presented as separate line items below:
(in our consolidated balance sheet. Collectively these balances are referred to as “covered assets”.

thousands)

 FinPac
 July 1, 2013
Cost basis net assets$61,446
Cash payment paid(156,110)
Fair value adjustments: 
Non-covered loans and leases, net6,881
Other intangible assets(8,516)
Other assets(1,650)
Term debt(400)
Other liabilities1,572
Goodwill$(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)

97


 FinPac
 July 1, 2013
Assets Acquired: 
Cash and equivalents$6,452
Non-covered loans and leases, net264,336
Premises and equipment491
Goodwill96,777
Other assets8,015
 Total assets acquired$376,071
  
Liabilities Assumed: 
Term debt211,204
Other liabilities8,757
 Total liabilities assumed219,961
 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.


98


(in thousands, except per share data)
 December 31, 2013
   Pro Forma Pro Forma
 CompanyFinPac (a)Adjustments Combined
Net interest income$404,965
$25,526
$(6,891)(b)$423,600
Provision for non-covered loan and lease losses16,829
3,272

(c)20,101
Recapture of provision for covered loan losses(6,113)

 (6,113)
Non-interest income121,441
1,312

 122,753
Non-interest expense364,661
8,596
(76)(d)373,181
  Income before provision for income taxes151,029
14,970
(6,815) 159,184
Provision for income taxes52,668
5,835
(2,835)(e)55,668
  Net income98,361
9,135
(3,980) 103,516
Dividends and undistributed earnings allocated to participating securities788

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:     
      Basic111,938
   111,938
      Diluted112,176
   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 Evergreen, Rainier,write-off of FinPac's loan mark (related to a prior acquisition) and Nevada Security acquisitions havethe 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%.


99


(in thousands, except per share data)
 December 31, 2012
   Pro Forma Pro Forma
 CompanyFinPac (a)Adjustments Combined
Net interest income$407,236
$50,809
$(5,332)(b)$452,713
Provision for non-covered loan and lease losses21,796
7,291

(c)29,087
Provision for covered loan losses7,405


 7,405
Non-interest income136,829
4,132

 140,961
Non-interest expense359,652
16,101
(1,236)(d)374,517
  Income before provision for income taxes155,212
31,549
(4,096) 182,665
Provision for income taxes53,321
12,192
(1,434)(e)64,079
  Net income101,891
19,357
(2,662) 118,586
Dividends and undistributed earnings allocated to participating securities682

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:     
      Basic111,935
   111,935
      Diluted112,151
   112,151
(a) FinPac amounts represent results from January 1, 2012 to December 31, 2012.
(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, 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.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. The fair values of the assets acquireddates, and liabilities assumed were determined based on the requirements of the Fair Value Measurements and Disclosures topic of the Financial Accounting Standards Board Accounting Standards Codification (the “FASB ASC”). The fair values of assets and liabilities acquired, including the calculation of the undiscounted contractual cash flows and beginning accretable yield relating to the acquired loan portfolios, and the indemnification asset are still pending finalization and are subject to change for up to one year after the closing date of eachthe acquisition. This acquisition as additional information relating to closing data becomes available. The amounts are also subject to adjustments based upon final settlementwas consistent with the FDIC. In addition,Company's overall banking expansion strategy and provided further opportunity to enter growth markets in the tax treatmentSan Francisco Bay Area of FDIC-assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes asCalifornia.Upon completion of the acquisition, date.all Circle Bank branches operated under the Umpqua Bank name. The termsacquisition added Circle Bank's network of the agreements provide for the FDICsix branches in Corte Madera, Novato, Petaluma, San Francisco, San Rafael and Santa Rosa, California to indemnify the Bank against claims with respect to liabilitiesUmpqua Bank's network of Evergreen, Rainier,locations in California, Oregon, Washington and Nevada Security not assumed by the Bank and certain other types of claims identified in the agreement.Nevada. The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain$11.9 million of $6.4goodwill. 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 Evergreenyears ended December 31, 2013 and 2012, respectively, have been incurred in connection with the acquisition $35.6 million of goodwill inCircle and recognized within the Rainier acquisition and $10.4 millionmerger related expenses line item on the Consolidated Statements of goodwill in the Nevada Security acquisition.

Income.

A summary of the net assets (liabilities) received from the FDICacquired and the estimated fair value adjustments of Circle are presented below:


100


(in thousands)

    Evergreen  Rainier  Nevada Security 
    January 22, 2010  February 26, 2010  June 18, 2010 

Cost basis net assets (liabilities)

  $58,811   $(50,295 $53,629  

Cash payment received from (paid to) the FDIC

       59,351    (29,950

Fair value adjustments:

    

Loans

   (117,449  (103,137  (112,975

Other real estate owned

   (2,422  (6,581  (17,939

Other intangible assets

   440    6,253    322  

FDIC indemnification asset

   71,755    76,847    99,160  

Deposits

   (1,023  (1,828  (1,950

Term debt

   (2,496  (13,035    

Other

   (1,179  (3,135  (690
     

Bargain purchase gain (goodwill)

  $6,437   $(35,560 $(10,393
     

In FDIC-assisted transactions, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer’s bid, the FDIC may be required to make a cash payment to the acquirer or the acquirer may be required to make payment to the FDIC.

In the Evergreen acquisition, cost basis net assets of $58.8 million were transferred to the Company. The bargain purchase gain represents the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed. Core deposit intangible assets of $250,000 recognized are deductible for income tax purposes.

In the Rainier acquisition, cost basis net liabilities of $50.3 million and a cash payment received from the FDIC of $59.4 million were transferred to the Company. The goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired. Goodwill of $27.5 million and core deposit intangible assets of $1.1 million recognized are deductible for income tax purposes.

In the Nevada Security acquisition, cost basis net assets of $53.6 million were transferred to the Company and a cash payment of $30.0 million was made to the FDIC. The goodwill represents the excess of the estimated fair value of the liabilities assumed over the estimated fair value of the assets acquired. Goodwill of $10.4 million and core deposit intangible assets of $322,000 recognized are deductible for income tax purposes.

The Bank did not immediately acquire all the real estate, banking facilities, furniture or equipment of Evergreen, Rainier, or Nevada Security as part of the purchase and assumption agreements. Rather, the Bank was granted the option to purchase or lease the real estate and furniture and equipment from the FDIC. The term of this option expired 90 days from the acquisition dates, unless extended by the FDIC. Acquisition costs of the real estate and furniture and equipment are based on current mutually agreed upon appraisals. Prior to the expiration of option term, Umpqua exercised the right to purchase approximately $344,000 of furniture and equipment for Evergreen, $26.3 million of real estate and furniture and equipment for Rainier, and $153,000 of furniture and equipment for Nevada Security. The Bank has the option to purchase one store location as part of the Nevada Security acquisition and expects resolution in the first quarter of 2011.

 Circle Bank
 November 14, 2012
  
Cost basis net assets$17,127
Cash payment paid(24,860)
Fair value adjustments: 
Non-covered loans and leases, net(2,622)
Other intangible assets830
Non-covered other real estate owned(487)
Deposits(904)
Term debt(2,404)
Other1,407
Goodwill$(11,913)

The statement of assets acquired and liabilities assumed at their estimated fair values of Evergreen, Rainier, and Nevada SecurityCircle are presented below:


(in thousands)

   Evergreen   Rainier   Nevada Security 
    January 22, 2010   February 26, 2010   June 18, 2010 

Assets Acquired:

      

Cash and equivalents

  $18,919    $94,067    $66,060  

Investment securities

   3,850     26,478     22,626  

Covered loans

   252,493     458,340     215,507  

Premises and equipment

        17     50  

Restricted equity securities

   3,073     13,712     2,951  

Goodwill

        35,560     10,393  

Other intangible assets

   440     6,253     322  

Mortgage servicing rights

        62       

Covered other real estate owned

   2,421     6,580     17,938  

FDIC indemnification asset

   71,755     76,847     99,160  

Other assets

   328     3,258     2,588  
     

Total assets acquired

  $353,279    $721,174    $437,595  
     

Liabilities Assumed:

      

Deposits

  $285,775    $425,771    $437,299  

Term debt

   60,813     293,191       

Other liabilities

   254     2,212     296  
     

Total liabilities assumed

   346,842     721,174     437,595  
     

Net assets acquired/bargain purchase gain

  $6,437    $    $  
     

Umpqua Holdings Corporation

 Circle Bank
 November 14, 2012
Assets Acquired: 
Cash and equivalents$39,328
Investment securities793
Non-covered loans and leases, net246,665
Premises and equipment7,695
Restricted equity securities2,491
Goodwill11,913
Other intangible assets830
Non-covered other real estate owned1,602
Other assets6,478
 Total assets acquired$317,795
  
Liabilities Assumed: 
Deposits$250,408
Junior subordinated debentures8,764
Term debt55,404
Other liabilities3,219
 Total liabilities assumed$317,795

Accrued restructuring charges relating to the Circle acquisition are recorded in other liabilities and Subsidiaries

Rainier’s assetswere none and liabilities were$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

101



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 at a level to require disclosure of one year of historicalthe Company's financial statements and relatedtherefore pro forma financial disclosure. However, given the pervasive nature of the loss-sharing agreement entered into with the FDIC, the historical information of Rainier is much less relevant for purposes of assessing the future operations of the combined entity. In addition, prior to closure Rainier had not completed an audit of their financial statements, and we determined that audited financial statements were not and would not be reasonably available for the year ended December 31, 2009. Given these considerations, the Company requested, and received, relief from the Securities and Exchange Commission from submitting certain financial information of Rainier. The assets and liabilities of Evergreen and Nevada Security were not at a level that requires disclosure of historical or pro forma financial information.

On January 16, 2009, the Washington Department of Financial Institutions closed the Bank of Clark County, Vancouver, Washington, and appointed the FDIC as its receiver. The FDIC entered into a purchase and assumption agreement with Umpqua Bank to assume the insured non-brokered deposit balances, which totaled $183.9 million, at no premium. The Company recorded the deposit related liabilities at book value. In connection with the assumption, Umpqua Bank acquired certain assets totaling $23.0 million, primarily cash and marketable securities, with the difference of $160.9 million representing funds received directly from the FDIC. Through this agreement, Umpqua Bank now operates two additional store locations in Vancouver, Washington. In addition, the FDIC reimbursed Umpqua Bank for all overhead costs related to the acquired Bank of Clark County operations for 90 days following closing, while Umpqua Bank paid the FDIC a servicing fee on assumed deposit accounts for that same period.

The results of the Bank of Clark County’s operations have been included in the consolidated financial statements beginning January 17, 2009 and contributed net earnings of approximately $2.0 million and $1.6 million for the years ended December 31, 2010 and 2009, net of tax, respectively, which primarily represents interest income earned from the proceeds of the assumption which were invested in investment securities available for sale and service income on deposits. This was partially offset by interest expense on deposits, salaries and employee benefits expense, and the accrued servicing fee paid to the FDIC. Umpqua did not incur the FDIC servicing fee expense during the second or third quarter of 2009, but began incurring overhead expenses such as salaries and employee benefits expense and rent expense.

included.


The Company incurs significant expenses related to mergers that cannot be capitalized. Generally, these expenses begin to be recognized while due diligence is being conducted and continue until such time as all systems have been converted and operational functions become fully integrated. Merger-related expenses are presented as a line item on theConsolidated Statements of Operations.

The following table presents the key components of merger-related expense for years ended December 31, 20102013, 2012 and 2009. The Company incurred no merger-related expenses in 2008.2011. Substantially all of the merger-related expenses incurred during 20102013 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. Substantially all of the merger-related expenses incurred during 2009 were in connection with the FDIC-assisted purchase and assumption of certain assets and liabilities of the Bank of Clark County.

Security Bank.


Merger-Related Expense

(in thousands)

    2010   2009 

Professional fees

  $2,984    $143  

Compensation and relocation

   962     39  

Communications

   330     61  

Premises and equipment

   630     2  

Travel

   710       

Other

   1,059     28  
     

Total

  $6,675    $273  
     


 201320122011
Professional fees$7,755
$1,145
$173
Compensation and relocation158
856

Communications49
66

Premises and equipment44
29
82
Travel140
98
11
Other690
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 certain assets and liabilities of the Bank of Clark County or any other prior acquisitions, however additional merger-related expense may be recorded related to the Evergreen, Rainier, and Nevada Securities assumptions.

Security.


Note 3 – Cash and Due From Banks
NOTE 3.    CASH AND DUE FROM BANKS

The Bank is required to maintain an average reserve balance with the Federal Reserve Bank or maintain such reserve balance in the form of cash. The amount of required reserve balance at December 31, 20102013 and 20092012 was approximately $31.8$27.2 million and $58.6$29.8 million, respectively, and was met by holding cash and maintaining an average balance with the Federal Reserve Bank.


NOTE 4.    INVESTMENT SECURITIESNote 4

– Investment Securities 

The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at December 31, 20102013 and 2009:

2012


December 31, 2010

2013


102


(in thousands)

    Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
  Fair Value 

AVAILABLE FOR SALE:

       

U.S. Treasury and agencies

  $117,551    $1,239    $(1 $118,789  

Obligations of states and political subdivisions

   213,129     4,985     (1,388  216,726  

Residential mortgage-backed securities and collateralized mortgage obligations

   2,543,974     57,506     (19,976  2,581,504  

Other debt securities

   152              152  

Investments in mutual funds and other equity securities

   1,959     50      2,009  
     
  $2,876,765    $63,780    $(21,365 $2,919,180  
     

HELD TO MATURITY:

       

Obligations of states and political subdivisions

  $2,370    $5    $   $2,375  

Residential mortgage-backed securities and collateralized mortgage obligations

   2,392     216     (209  2,399  
     
  $4,762    $221    $(209 $4,774  
     

 Amortized Unrealized Unrealized Fair
 Cost Gains Losses Value
AVAILABLE FOR SALE:       
U.S. Treasury and agencies$249
 $20
 $(1) $268
Obligations of states and political subdivisions229,969
 7,811
 (2,575) 235,205
Residential mortgage-backed securities and       
collateralized mortgage obligations1,567,001
 15,359
 (28,819) 1,553,541
Investments in mutual funds and       
other equity securities1,959
 5
 
 1,964
 $1,799,178
 $23,195
 $(31,395) $1,790,978
HELD TO MATURITY:       
Residential mortgage-backed securities and       
collateralized mortgage obligations$5,563
 $330
 $(19) $5,874
 $5,563
 $330
 $(19) $5,874

December 31, 2009

2012

(in thousands)

    Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
  Fair Value 

AVAILABLE FOR SALE:

       

U.S. Treasury and agencies

  $11,588    $208    $(2 $11,794  

Obligations of states and political subdivisions

   205,549     6,480     (204  211,825  

Residential mortgage-backed securities and collateralized mortgage obligations

   1,533,149     40,272     (3,572  1,569,849  

Other debt securities

   145     14         159  

Investments in mutual funds and other equity securities

   1,959     30         1,989  
     
  $1,752,390    $47,004    $(3,778 $1,795,616  
     

HELD TO MATURITY:

       

Obligations of states and political subdivisions

  $3,216    $11    $   $3,227  

Residential mortgage-backed securities and collateralized mortgage obligations

   2,845     251     (187  2,909  
     
  $6,061    $262    $(187 $6,136  
     

Umpqua Holdings Corporation and Subsidiaries

 Amortized Unrealized Unrealized Fair
 Cost Gains Losses Value
AVAILABLE FOR SALE:       
U.S. Treasury and agencies$45,503
 $318
 $(1) $45,820
Obligations of states and political subdivisions245,606
 18,119
 
 263,725
Residential mortgage-backed securities and       
collateralized mortgage obligations2,291,253
 28,747
 (6,624) 2,313,376
Other debt securities143
 79
 
 222
Investments in mutual funds and       
other equity securities1,959
 127
 
 2,086
 $2,584,464
 $47,390
 $(6,625) $2,625,229
HELD TO MATURITY:       
Obligations of states and political subdivisions$595
 $1
 $
 $596
Residential mortgage-backed securities and       
collateralized mortgage obligations3,946
 197
 (7) 4,136
 $4,541
 $198
 $(7) $4,732
Investment securities that were in an unrealized loss position as of December 31, 20102013 and 2009December 31, 2012 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral:

collateral. 


103


December 31, 2010

2013

(in thousands)

   Less than 12 Months   12 Months or Longer   Total 
    

Fair

Value

   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   

Fair

Value

   Unrealized
Losses
 

AVAILABLE FOR SALE:

            

U.S. Treasury and agencies

  $    $    $110    $1    $110    $1  

Obligations of states and political subdivisions

   60,110     1,366     1,003     22     61,113     1,388  

Residential mortgage-backed securities and collateralized mortgage obligations

   1,238,483     19,968     1,539     8     1,240,022     19,976  
     

Total temporarily impaired securities

  $1,298,593    $21,334    $2,652    $31    $1,301,245    $21,365  
     

HELD TO MATURITY:

            

Residential mortgage-backed securities and collateralized mortgage obligations

  $    $    $658    $209    $658    $209  
     

Total temporarily impaired securities

  $    $    $658    $209    $658    $209  
     

 Less than 12 Months 12 Months or Longer Total
 Fair Unrealized Fair Unrealized Fair Unrealized
 Value Losses Value Losses Value Losses
AVAILABLE FOR SALE: 
  
  
  
  
  
U.S. Treasury and agencies$
 $
 $32
 $1
 $32
 $1
Obligations of states and political subdivisions48,342
 2,575
 
 
 48,342
 2,575
Residential mortgage-backed securities and           
collateralized mortgage obligations475,982
 15,951
 249,695
 12,868
 725,677
 28,819
Total temporarily impaired securities$524,324
 $18,526
 $249,727
 $12,869
 $774,051
 $31,395
HELD TO MATURITY:           
Residential mortgage-backed securities and           
collateralized mortgage obligations$156
 $19
 $
 $
 $156
 $19
Total temporarily impaired securities$156
 $19
 $
 $
 $156
 $19

Unrealized losses on the impaired held to maturity collateralized mortgage obligations include the unrealized losses related to factors other than credit that are included in other comprehensive income. 
December 31, 2009

2012

(in thousands)

   Less than 12 Months   12 Months or Longer   Total 
    Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 

AVAILABLE FOR SALE:

            

U.S. Treasury and agencies

  $    $    $133    $2    $133    $2  

Obligations of states and political subdivisions

   13,209     123     1,937     81     15,146     204  

Residential mortgage-backed securities and collateralized mortgage obligations

   293,035     3,529     958     43     293,993     3,572  
     

Total temporarily impaired securities

  $306,244    $3,652    $3,028    $126    $309,272    $3,778  
     

HELD TO MATURITY:

            

Residential mortgage-backed securities and collateralized mortgage obligations

  $    $    $620    $187    $620    $187  
     

Total temporarily impaired securities

  $    $    $620    $187    $620    $187  
     

 Less than 12 Months 12 Months or Longer Total
 Fair Unrealized Fair Unrealized Fair Unrealized
 Value Losses Value Losses Value Losses
AVAILABLE FOR SALE: 
  
  
  
  
  
U.S. Treasury and agencies$
 $
 $59
 $1
 $59
 $1
Residential mortgage-backed securities and           
collateralized mortgage obligations780,234
 5,548
 106,096
 1,076
 886,330
 6,624
Total temporarily impaired securities$780,234
 $5,548
 $106,155
 $1,077
 $886,389
 $6,625
HELD TO MATURITY:           
Residential mortgage-backed securities and           
collateralized mortgage obligations$
 $
 $48
 $7
 $48
 $7
Total temporarily impaired securities$
 $
 $48
 $7
 $48
 $7
The unrealized losses on investments in U.S. Treasury and agenciesagency securities were caused by interest rate increases subsequent to the purchase of these securities. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than par. Because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost bases,basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

The unrealized losses on obligations of political subdivisions were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities. Management monitors published credit ratings of these securities and no adverse ratings changes have occurred since the date of purchase of obligations of political subdivisions which are in an unrealized loss position as of December 31, 2010.2013. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost bases,basis, which may include holding each security until maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

All of the available for sale residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at December 31, 20102013 are issued or guaranteed by governmental agencies. The unrealized losses on residential mortgage-backed securities and collateralized mortgage obligations were caused by changes in market interest rates or the widening of market spreads subsequent to the initial purchase of these securities, and not concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that these securities will not be settled at a price less than the amortized cost of each investment.

104


Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost bases,basis, which may include holding each security until contractual maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.


We review investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) or permanent impairment, taking into consideration current market conditions, fair value in relationship to cost, extent and nature of the declinechange in fair value, issuer rating changes and trends, whether we intend to sell a security or if it is likely that we will be required to sell the security before recovery of our amortized cost basis of the investment, which may be maturity, and other factors.  For debt securities, if we intend to sell the security or it is likely that we will be required to sell the security before recovering its cost basis, the entire impairment loss would be recognized in earnings as an OTTI. If we do not intend to sell the security and it is not likely that we will be required to sell the security but we do not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI.  The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (“OCI”). Impairment losses related to all other factors are presented as separate categories within OCI. For investment securities held to maturity, this amount is accreted over the remaining life of the debt security prospectively based on the amount and timing of future estimated cash flows.  The accretion of the OTTI amount recorded in OCI will increase the carrying value of the investment, and would not affect earnings.  If there is an indication of additional credit losses the security is re-evaluated accordinglyaccording to the procedures described above.

The following tables present the OTTI losses for For the years ended December 31, 2010, 20092013, 2012, and 2008.

(in thousands)

  2010  2009  2008 
   Held To
Maturity
  Available
For Sale
  Held To
Maturity
  Available
For Sale
  Held To
Maturity
  

Available

For Sale

 

Total other-than-temporary impairment losses

 $93   $   $12,317   $239   $4,041   $139  

Portion of other-than-temporary impairment losses transferred from (recognized in) other comprehensive income(1)

  321        (1,983            
    

Net impairment losses recognized in earnings(2)

 $414   $   $10,334   $239   $4,041   $139  
    

(1)Represents other-than-temporary2011, we recognized net impairment losses related to all other factors.
(2)Represents other-than-temporary impairment losses related to credit losses.

Umpqua Holdings Corporation and Subsidiaries

New guidance related to the recognition and presentation of OTTI of debt securities became effective beginning in the second quarter of 2009. Rather than asserting whether a Company has the ability and intent to hold an investment until a market price recovery, a Company must consider whether they intend to sell a security or if it is likely that they would be required to sell the security before recovery of the amortized cost basis of the investment, which may be maturity. The $8.2 million in OTTI recognized on investment securities held to maturity subsequent to March 31, 2009 primarily relates to 29 non-agency residential collateralized mortgage obligations. Each of these securities holds various levels of credit subordination. The underlying mortgage loans of these securities were originated from 2003 through 2007. At origination, the weighted average loan-to-value of the underlying mortgages was 69%; the underlying borrowers had weighted average FICO scores of 731, and 59% were limited documentation loans. These securities are valued by third-party pricing services using matrix or model pricing methodologies and were corroborated by broker indicative bids. We estimate cash flows of the underlying collateral for each security considering credit, interest and prepayment risk models that incorporate management’s estimate of projected key assumptions including prepayment rates, collateral default rates and loss severity. Assumptions utilized vary from security to security, and are influenced by factors such as loan interest rates, geographic location, borrower characteristics and vintage, and historical experience. We then used a third party to obtain information about the structure of each security, including subordination and other credit enhancements, in order to determine how the underlying collateral cash flows will be distributed to each security issued in the structure. These cash flows are then discounted at the interest rate used to recognize interest income on each security. We review the actual collateral performance of these securities on a quarterly basis and update the inputs as appropriate to determine the projected cash flows. The following table presents a summary of the significant inputs utilized to measure management’s estimate of the credit loss component on these non-agency residential collateralized mortgage obligations as of December 31, 2010 and 2009:

   2010  2009 
   Range  Weighted
Average
  Range  Weighted
Average
 
    Minimum  Maximum   Minimum  Maximum  

Constant prepayment rate

   5.0  20.0  14.9  4.0  25.0  14.8

Collateral default rate

   5.0  15.0  10.6  8.0  45.0  16.7

Loss severity

   25.0  55.0  37.9  20.0  40.0  31.4

In the second quarter of 2009 the Company recorded an OTTI charge of $239,000 related to an available for sale collateralized debt obligation that holds trust preferred securities. Management noted certain deferrals and defaults in the pool and believes the impairment represents credit loss in its entirety. Through December 31, 2010, no further OTTI charges have been recorded on available for sale securities.

The following table presents a roll forward of the credit loss component of held to maturity debt securities that have been written down for OTTI with the credit loss component recognized in earnings of none, $155,000, and the remaining impairment loss related to all other factors recognized in OCI for the years ended December 31, 2010 and 2009, respectively, since the adoption of the revised guidance related to the recognition and presentation of OTTI of debt securities:

(in thousands)

   2010   2009 

Balance, beginning of period

  $12,364    $  

Cumulative OTTI credit losses upon adoption of new OTTI guidance

        5,952  

Additions:

    

Initial OTTI credit losses

        7,211  

Subsequent OTTI credit losses

   414     986  

Reductions:

    

Securities sold, matured or paid-off

        (1,785
     

Balance, end of period

  $12,778    $12,364  
     

Prior to the Company’s adoption of the new guidance related to the recognition and presentation of OTTI of debt securities which became effective in the second quarter of 2009, the Company would assess an OTTI or permanent impairment based on the nature of the decline and whether the Company had the ability and intent to hold the investments until a market price recovery. In the three months ended March 31, 2009, the Company recorded a $2.1 million OTTI charge. This charge related to three non-agency residential collateralized mortgage obligations carried as held to maturity for which the default rates and loss severities of the underlying collateral and credit coverage ratios of the security indicated that it was probable that credit losses were expected to occur. In 2008, the Company recorded $4.2 million in OTTI. Charges of $3.8 million related to seven non-agency residential collateralized mortgage obligations carried as held to maturity for which the default rates and loss severities of the underlying collateral and credit coverage ratios of the security indicated that it was probable that credit losses were expected to occur. These securities were valued by third party pricing services using matrix or model pricing methodologies, and were corroborated by broker indicative bids. The remaining non-agency securities within residential mortgage-backed securities and collateralized mortgage obligations carried as held to maturity were specifically evaluated for OTTI, and the default rates and loss severities of the underlying collateral indicated that credit losses are not expected to occur. Upon adoption of the new OTTI guidance in the second quarter of 2009, the Company analyzed these securities as well as other securities where OTTI had been previously recognized, and determined that as of the adoption date such losses were credit related. As such, there was no cumulative effect adjustment to the opening balance of retained earnings or a corresponding adjustment to accumulated OCI.

In addition, during 2008 the Company recorded an OTTI charge of $139,000 related to a collateralized debt obligation that holds trust preferred securities in investments available for sale where default and deferrals on the underlying debt indicate credit losses are expected to occur within the security. An additional $225,000 charge was recognized during 2008 for preferred stock carried as an investment held to maturity.

$359,000, respectively.

The following table presents the maturities of investment securities at December 31, 2010:

2013

(in thousands)

   Available For Sale   Held To Maturity 
    Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value
 

AMOUNTS MATURING IN:

        

Three months or less

  $5,939    $5,959    $340    $341  

Over three months through twelve months

   326,696     337,305     1,485     1,488  

After one year through five years

   2,168,213     2,203,498     581     586  

After five years through ten years

   305,940     303,540     92     95  

After ten years

   68,018     66,869     2,264     2,264  

Other investment securities

   1,959     2,009            
     
  $2,876,765    $2,919,180    $4,762    $4,774  
     

 Available For Sale Held To Maturity
 Amortized Fair Amortized Fair
��Cost Value Cost Value
AMOUNTS MATURING IN:       
Three months or less$15,169
 $15,204
 $
 $
Over three months through twelve months100,712
 102,426
 357
 407
After one year through five years1,055,812
 1,067,340
 728
 983
After five years through ten years554,722
 534,083
 44
 49
After ten years70,804
 69,961
 4,434
 4,435
Other investment securities1,959
 1,964
 
 
 $1,799,178
 $1,790,978
 $5,563
 $5,874
The amortized cost and fair value of collateralized mortgage obligations and mortgage-backed securities are presented by expected average life, rather than contractual maturity, in the preceding table. Expected maturities may differ from contractual maturities because borrowers have the right to prepay underlying loans without prepayment penalties.

Umpqua Holdings Corporation and Subsidiaries

The following table presents the gross realized gains and gross realized losses on the sale of securities available for sale for the years ended December 31, 2010, 20092013, 2012 and 2008:

2011

(in thousands)

   2010   2009   2008 
    Gains   Losses   Gains   Losses   Gains   Losses 

U.S. Treasury and agencies

  $     —    $1    $    $    $522    $  

Obligations of states and political subdivisions

   3     7          1     6       

Residential mortgage-backed securities and collateralized mortgage obligations

   2,331          9,409     591     6,681     145  

Investments in mutual funds and other equity securities

                            1,535  
     
  $2,334    $8    $9,409    $592    $7,209    $1,680  
     

 2013 2012 2011
 Gains Losses Gains Losses Gains Losses
U.S. Treasury and agencies$
 $
 $371
 $
 $
 $
Obligations of states and political subdivisions10
 1
 10
 1
 8
 
Residential mortgage-backed securities and           
collateralized mortgage obligations
 
 4,578
 953
 8,544
 817
Other debt securities200
 
 18
 
 
 
 $210
 $1
 $4,977
 $954
 $8,552
 $817

105



The following table presents, as of December 31, 2010,2013, investment securities which were pledged to secure borrowings, and public deposits, and repurchase agreements as permitted or required by law:

(in thousands)

    Amortized Cost   Fair Value 

To Federal Home Loan Bank to secure borrowings

  $290,983    $307,348  

To state and local governments to secure public deposits

   861,472     888,565  

To U.S. Treasury and Federal Reserve to secure customer tax payments

   4,879     5,148  

Other securities pledged, principally to secure deposits

   261,807     269,448  
     

Total pledged securities

  $  1,419,141    $  1,470,509  
     

The carrying value of investment securities pledged as of December 31, 2009 was $1.5 billion.

 Amortized Fair
 Cost Value
To Federal Home Loan Bank to secure borrowings$11,303
 $11,689
To state and local governments to secure public deposits833,068
 824,737
Other securities pledged principally to secure repurchase agreements324,253
 318,708
Total pledged securities$1,168,624
 $1,155,134

NOTE 5. NON-COVERED LOANS AND LEASESNote 5

– Non-Covered Loans and Leases 

The following table presents the major types of non-covered loans and leases, net of deferred fees and costs of $495,000 and $12.1 million, recorded in the balance sheets as of December 31, 20102013 and 2009:

2012

(in thousands)

    2010  2009 

Commercial real estate

   

Term & multifamily

  $3,483,475   $3,523,104  

Construction & development

   247,814    366,680  

Residential development

   147,813    225,809  

Commercial

   

Term

   509,453    585,856  

LOC & other

   747,419    804,635  

Residential

   

Mortgage

   222,416    182,757  

Home equity loans & lines

   278,585    285,729  

Consumer & other

   33,043    36,098  
     

Total

   5,670,018    6,010,668  

Deferred loan fees, net

   (11,031  (11,401
     

Total

  $5,658,987   $5,999,267  
     

 December 31, December 31,
 2013 2012
Commercial real estate   
Non-owner occupied term, net$2,328,260
 $2,316,909
Owner occupied term, net1,259,583
 1,276,840
Multifamily, net403,537
 331,735
Construction & development, net245,231
 200,631
Residential development, net88,413
 57,139
Commercial   
Term, net770,845
 797,061
LOC & other, net987,360
 890,808
Leases and equipment finance, net361,591
 31,270
Residential   
Mortgage, net597,201
 478,463
Home equity loans & lines, net264,269
 262,637
Consumer & other, net48,113
 37,587
Total loans and leases, net of deferred fees and costs$7,354,403
 $6,681,080
As of December 31, 2010,2013, loans totaling $3.0$5.3 billion were pledged to secure borrowings and available lines of credit.


NOTE 6. ALLOWANCE FOR NON-COVERED LOAN LOSS AND CREDIT QUALITYAt

December 31, 2013, non-covered loans accounted for under ASC 310-30 were $21.9 million. At December 31, 2012, non-covered loans accounted for under ASC 310-30 were $19.3 million.


The following table presents the net investment in direct financing leases and loans, net as ofDecember 31, 2013 and 2012

(in thousands)

106


 December 31, December 31,
 2013 2012
Minimum lease payments receivable$242,220
 $26,265
Estimated guaranteed and unguaranteed residual value8,455
 3,163
Initial direct costs - net of accumulated amortization3,824
 
Unearned income(55,110) (3,238)
Equipment finance loans, including unamortized deferred fees and costs151,721
 
Interim lease receivables6,752
 5,080
Accretable yield/purchase accounting adjustments3,729
 
Net investment in direct financing leases and loans$361,591
 $31,270
    
Allowance for credit losses(3,775) (225)
    
Net investment in direct financing leases and loans - net$357,816
 $31,045

The following table presents the scheduled minimum lease payments receivable, excluding equipment finance loans, as of December 31, 2013:

(in thousands)
2014$96,275
201568,310
201642,366
201723,790
20189,333
Thereafter2,146
 $242,220

Note 6– Allowance for Non-Covered Loan and Lease Loss and Credit Quality 
The Bank has a management Allowance for Loan and Lease Losses (“ALLL”) Committee, which is responsible for, among other things, regularly reviewing the ALLL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status.  The ALLL Committee also approves removing loans and leases from impaired status.  The Bank’sBank's Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly basis.

Our methodology for assessing the appropriateness of the ALLL consists of three key elements, which include 1) the Formula Allowance;formula allowance; 2) the Specific Allowance;specific allowance; and 3) the Unallocated Allowance.unallocated allowance. By incorporating these factors into a single allowance requirement analysis, all risk-based activities within the loan portfolio are simultaneously considered.


Formula Allowance

The Bank performs regular credit reviews of the loan and lease portfolio to determine the credit quality and adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically during the term of the loan or lease through the credit review process.  The Company’sBank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 risk rating categories are a primary factor in determining an appropriate amount for the Formulaformula allowance. 
The formula allowance for loan and lease losses.

The Formula Allowance is calculated by applying risk factors to various segments of pools of outstanding loans.loans and leases. Risk factors are assigned to each portfolio segment based on management’s evaluation of the losses inherent within each segment. Segments or regions with greater risk of loss will therefore be assigned a higher risk factor.

Base riskThe portfolio is segmented into loan categories, and these categories are assigned a Base Risk factor based on an evaluation of the loss inherent within each segment.


107


Extra riskAdditional risk factors provide for an additional allocation of ALLL based on the loan and lease risk rating system and loan delinquency, and reflect the increased level of inherent losses associated with more adversely classified loans.

loans and leases. 

Changes to risk factorsRisk factors are assigned at origination and may be changed periodically based on management’s evaluation of the following factors: loss experience; changes in the level of non-performing loans;loans and leases; regulatory exam results; changes in the level of adversely classified loans and leases (positive or negative); improvement or deterioration in local economic conditions; and any other factors deemed relevant.

Specific Allowance

Regular credit reviews of the portfolio also identify loans that are considered potentially impaired. Potentially impaired loans are referred to the ALLL Committee which reviews and approves designated loans as impaired. A loan is considered impaired, when based on current information and events, we determine that we will probably not be able to collect all amounts due according to the loan contract, including scheduled interest payments. When we identify a loan as impaired, we measure the impairment using discounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral. In these cases, we use the current fair value of the collateral, less selling costs, instead of discounted cash flows. If we determine that the value of the impaired loan is less than the recorded investment in the loan, we either recognize an impairment reserve as a Specific Allowancespecific allowance to be provided for in the allowance for loan and lease losses or charge-off the impaired balance on collateral dependent loans if it is determined that such amount represents a confirmed loss.  Loans determined to be impaired with a specific allowance are excluded from the formula allowance so as not to double-count the loss exposure. Prior to the second quarter of 2008, we would recognize the charge-off of the impairment reserve of a collateral depending non-accrual loan when the loan was resolved, sold, or foreclosed/transferred to OREO. Starting in the second quarter of 2008, we accelerated the charge-off of the impairment reserve to the period in which it arises. Therefore theThe non-accrual impaired loans as of period end have already been partially charge offcharged-off to their estimated net realizable value, and are expected to be resolved over the coming quarters with no additional material loss, absent further decline in market prices.

Umpqua Holdings Corporation and Subsidiaries

The combination of the Formulaformula allowance component and the Specificspecific allowance component lead to anrepresents the allocated allowance for loan and lease losses.

Unallocated Allowance

The Bank may also maintain an unallocated allowance amount to provide for other credit losses inherent in a loan and lease portfolio that may not have been contemplated in the credit loss factors. This unallocated amount generally comprises less than 10%5% of the allowance, but may be maintained at higher levels during times of deteriorating economic conditions characterized by falling real estate values. The unallocated amount is reviewed quarterly with consideration of factors including, but not limited to:

• Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

• Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

• Changes in the nature and volume of the portfolio and in the terms of loans;

loans and leases; 

• Changes in the experience and ability of lending management and other relevant staff;

• Changes in the volume and severity of past due loans, the volume of nonaccrual loans and leases, and the volume and severity of adversely classified or graded loans;

• Changes in the quality of the institution’s loan and lease review system;

• Changes in the value of underlying collateral for collateral-depending loans;

• The existence and effect of any concentrations of credit, and changes in the level of such concentrations;

 and

• The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institutions’ existing portfolio.


These factors are evaluated through a management survey of the Chief Credit Officer, Chief Lending Officer, Senior Credit Officers, Special AssetAssets Manager, and Credit Review Manager. The survey requests responses to evaluate current changes in the nine qualitative factors. This information is then incorporated into our understanding of the reasonableness of the formula factors and our evaluation of the unallocated portion of the ALLL.

The reserve for unfunded commitments (“RUC”) is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the ALLL and RUC are monitored on a regular basis and are based on management’s evaluation of numerous factors. For each portfolio segment, these factors include:

The quality of the current loan portfolio;

The trend in the loan portfolio’s risk ratings;

Current economic conditions;

Loan concentrations;

Loan growth rates;

Past-due and non-performing trends;

Evaluation of specific loss estimates for all significant problem loans;

Historical short (one year), medium (three year), and long-term charge-off rates,

Recovery experience;

Peer comparison loss rates.

There have been no significant changes to the Bank’s methodology or policies in the periods presented.

Management believes that the ALLL was adequate as of December 31, 2010.2013. There is, however, no assurance that future loan and lease losses will not exceed the levels provided for in the ALLL and could possibly result in additional charges to the provision for loan and lease losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan and lease losses in future periods if warranted as a result of their review. Approximately 82%74% of our loan and lease portfolio is secured by real estate, and a significant decline in real estate market values may require an increase in the allowance for loan and lease losses. The recent U.S. recession, the housing market downturn, and declining real estate values in our markets have negatively impacted aspects of our residential development, commercial real estate, commercial constructionloan and commercial loan portfolios.lease portfolio. A continued deterioration in our markets may adversely affect our loan and lease portfolio and may lead to additional charges to the provision for loan and lease losses.


108

Table of Contents

The reserve for unfunded commitments (“RUC”) is established to absorb inherent losses associated with our commitment to lend funds, such as with a letter or line of credit. The adequacy of the ALLL and RUC are monitored on a regular basis and are based on management's evaluation of numerous factors. For each portfolio segment, these factors include: 
• The quality of the current loan and lease portfolio; 
• The trend in the loan portfolio's risk ratings; 
• Current economic conditions; 
• Loan and lease concentrations; 
• Loan and lease growth rates; 
• Past-due and non-performing trends; 
• Evaluation of specific loss estimates for all significant problem loans; 
• Historical short (one year), medium (three year), and long-term charge-off rates; 
• Recovery experience; and
• Peer comparison loss rates. 
There have been no significant changes to the Bank’s methodology or policies in the periods presented. 
Activity in the Non-Covered Allowance for Loan and Lease Losses

The following table summarizes activity related to the allowance for non-covered loan and lease losses by non-covered loan and lease portfolio segment for the years endedDecember 31, 20102013 and 2009:

2012, respectively: 

(in thousands)

   December 31, 2010 
    Commercial
Real Estate
  Commercial  Residential  Consumer
& Other
  Unallocated  Total 

Allowance:

       

Balance at beginning of year:

  $67,281   $24,583   $5,811   $455   $9,527   $107,657  

Charge-offs

   (71,030  (50,242  (5,168  (2,061      (128,501

Recoveries

   6,980    1,318    334    465        9,097  

Provision

   61,174    46,487    4,949    1,944    (886  113,668  
     

Ending balance

  $64,405   $22,146   $5,926   $803   $8,641   $101,921  
     

Ending balance: individually evaluated for impairment

  $2,520   $2,711   $8   $    $5,239  
          

Non-covered Loans and leases:

       

Ending balance(1)

  $3,879,102   $1,256,872   $501,001   $33,043    $5,670,018  
          

Ending balance: individually evaluated for impairment

  $186,933   $35,507   $179   $    $222,619  
          

(1)The gross non-covered loan and lease balance excludes deferred loans fees of $11.0 million for the year ended December 31, 2010.

Umpqua Holdings Corporation

 December 31, 2013
 Commercial     Consumer    
 Real Estate Commercial Residential & Other Unallocated Total
Balance, beginning of period$54,909
 $22,925
 $6,925
 $632
 $
 $85,391
Charge-offs(7,445) (19,266) (3,458) (826) 
 (30,995)
Recoveries3,322
 9,914
 351
 502
 
 14,089
Provision2,647
 10,618
 3,009
 555
 
 16,829
Balance, end of period$53,433
 $24,191
 $6,827
 $863
 $
 $85,314
            
 December 31, 2012
 Commercial     Consumer    
 Real Estate Commercial Residential & Other Unallocated Total
Balance, beginning of period$59,574
 $20,485
 $7,625
 $867
 $4,417
 $92,968
Charge-offs(22,349) (12,209) (5,282) (1,499) 
 (41,339)
Recoveries5,409
 5,356
 762
 439
 
 11,966
Provision12,275
 9,293
 3,820
 825
 (4,417) 21,796
Balance, end of period$54,909
 $22,925
 $6,925
 $632
 $
 $85,391

The following table presents the allowance and Subsidiaries

  December 31, 2009 
   Commercial
Real Estate
  Commercial  Residential  Consumer
& Other
  Unallocated  Total 

Allowance:

      

Balance at beginning of year:

 $57,907   $23,104   $5,778   $484   $8,592   $95,865  

Charge-offs

  (136,382  (57,932  (4,331  (2,222      (200,867

Recoveries

  1,334    1,549    126    526        3,535  

Provision

  144,422    57,862    4,238    1,667    935    209,124  
    

Ending balance

 $67,281   $24,583   $5,811   $455   $9,527   $107,657  
         

Ending balance: individually evaluated for impairment

 $3,319   $15   $153   $    $3,487  
         

Non-covered Loans and leases:

      

Ending balance(1)

 $4,115,593   $1,390,491   $468,486   $36,098    $6,010,668  
         

Ending balance: individually evaluated for impairment

 $254,657   $68,215   $5,167   $    $328,039  
         

(1)The gross non-covered loan and lease balance excludes deferred loans fees of $11.4 million for the year ended December 31, 2009.

Additional allowancerecorded investment in non-covered loans and leases by portfolio segment and balances individually or collectively evaluated for covered loan lossimpairment as of $375,000 was recorded at December 31, 2010. See Note 7 for discussion on covered assets.

2013 and 2012, respectively: 

(in thousands)

109


 December 31, 2013
 Commercial     Consumer    
 Real Estate Commercial Residential & Other Unallocated Total
Allowance for non-covered loans and leases:
Collectively evaluated for impairment$51,648
 $24,179
 $6,827
 $863
 $
 $83,517
Individually evaluated for impairment1,785
 12
 
 
 
 1,797
Total$53,433
 $24,191
 $6,827
 $863
 $
 $85,314
Non-covered loans and leases:           
Collectively evaluated for impairment$4,235,744
 $2,108,293
 $861,470
 $48,113
   $7,253,620
Individually evaluated for impairment89,280
 11,503
 
 
   100,783
Total$4,325,024
 $2,119,796
 $861,470
 $48,113
   $7,354,403
(in thousands)
 December 31, 2012
 Commercial     Consumer    
 Real Estate Commercial Residential & Other Unallocated Total
Allowance for non-covered loans and leases:
Collectively evaluated for impairment$53,513
 $22,925
 $6,920
 $632
 $
 $83,990
Individually evaluated for impairment1,396
 
 5
 
 
 1,401
Total$54,909
 $22,925
 $6,925
 $632
 $
 $85,391
Non-covered loans and leases:          
Collectively evaluated for impairment$4,059,419
 $1,700,761
 $740,925
 $37,566
   $6,538,671
Individually evaluated for impairment123,835
 18,378
 175
 21
   142,409
Total$4,183,254
 $1,719,139
 $741,100
 $37,587
   $6,681,080

The non-covered loan and lease balance are net of deferred loans fees of $495,000 at December 31, 2013 and $12.1 million at December 31, 2012.  

Summary of Reserve for Unfunded Commitments Activity


The following table presents a summary of activity in the reserve for unfunded commitments (“RUC”) and unfunded commitments at for the years endedDecember 31, 20102013 and 2009:

2012, respectively: 


(in thousands)

   December 31, 2010 
    Commercial
Real Estate
  Commercial   Residential   Consumer
& Other
   Total 

Balance, beginning of year

  $57   $484    $144    $46    $731  

Net change to other expense

   (24  91     14     6     87  
     

Balance, end of year

  $33   $575    $158    $52    $818  
     

Unfunded commitments

  $33,326   $548,920    $210,574    $45,556    $838,376  
     

   December 31, 2009 
    Commercial
Real Estate
  Commercial  Residential  Consumer
& Other
   Total 

Balance, beginning of year

  $151   $625   $161   $46    $983  

Net change to other expense

   (94  (141  (17       (252
     

Balance, end of year

  $57   $484   $144   $46    $731  
     

Unfunded commitments

  $58,206   $479,153   $220,697   $39,354    $797,410  
     

 December 31, 2013
 Commercial     Consumer  
 Real Estate Commercial Residential & Other Total
Balance, beginning of period$172
 $807
 $173
 $71
 $1,223
Net change to other expense48
 93
 59
 13
 213
Balance, end of period$220
 $900
 $232
 $84
 $1,436
          
 December 31, 2012
 Commercial     Consumer  
 Real Estate Commercial Residential & Other Total
Balance, beginning of period$59
 $633
 $185
 $63
 $940
Net change to other expense113
 174
 (12) 8
 283
Balance, end of period$172
 $807
 $173
 $71
 $1,223


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Table of Contents

(in thousands) 
 Commercial     Consumer  
 Real Estate Commercial Residential & Other Total
Unfunded loan and lease commitments:         
December 31, 2013$237,042
 $1,012,257
 $336,559
 $52,588
 $1,638,446
December 31, 2012$196,292
 $925,642
 $257,508
 $52,170
 $1,431,612
Non-covered loans and leases sold

In the course of managing the loan and lease portfolio, at certain times, management may decide to sell loans prior to resolution.and leases.  The following table summarizes loans and leases sold by loan portfolio during the years endedDecember 31:

31, 2013 and 2012, respectively: 

(inIn thousands)

    2010   2009 

Commercial Real Estate

    

Term & multifamily

  $8,848    $3,540  

Construction & development

   4,686     2,625  

Residential development

   15,255     1,450  

Commercial

    

Term

   9,915     4,904  

LOC & other

   40       
     

Total

  $38,744    $12,519  
     

 2013 2012
Commercial real estate   
Non-owner occupied term$4,039
 $10,623
Owner occupied term3,738
 1,473
Multifamily
 
Construction & development3,515
 
Residential development363
 12
Commercial   
Term47,635
 
LOC & other
 1,942
Leases and equipment finance
 
Residential   
Mortgage1,008
 192
Home equity loans & lines
 
Consumer & other
 
Total$60,298
 $14,242

Asset Quality and Non-Performing Loans

 and Leases

We manage asset quality and control credit risk through diversification of the non-covered loan and lease portfolio and the application of policies designed to promote sound underwriting and loan and lease monitoring practices. The Bank’sBank's Credit Quality Group is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures across the Bank.  Reviews of non-performing, past due non-covered loans and leases and larger credits, designed to identify potential charges to the allowance for loan and lease losses, and to determine the adequacy of the allowance, are conducted on an ongoing basis. These reviews consider such factors as the financial strength of borrowers, the value of the applicable collateral, loan and lease loss experience, estimated loan and lease losses, growth in the loan and lease portfolio, prevailing economic conditions and other factors.

A loan is considered impaired when, based on current information and events, we determine it is probable that we will not be able to collect all amounts due according to the loan contract, including scheduled interest payments. Generally, when non-covered loans are identified as impaired, they are moved to ourthe Special Assets Division. When we identify a loan as impaired, we measure the loan for potential impairment using discountdiscounted cash flows, except when the sole remaining source of the repayment for the loan is the liquidation of the collateral.  In these cases, we will use the current fair value of collateral, less selling costs.  The starting point for determining the fair value of collateral is through obtaining external appraisals.  Generally, external appraisals are updated every six to nine12 months.  We obtain appraisals from a pre-approved list of independent, third party, local appraisal firms.  Approval and addition to the list is based on experience, reputation, character, consistency and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is: (a) currently licensed in the state in which the property is located, (b) is experienced in the appraisal of properties similar to the property being appraised, (c) is actively engaged in the appraisal work, (d) has knowledge of current real estate market conditions and financing trends, (e) is reputable, and (f) is not on Freddie Mac’s noror the Bank’s Exclusionary List of appraisers and brokers. In certain cases appraisals will be reviewed by our Real Estate Valuation Services groupGroup to ensure the quality

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of the appraisal and the expertise and independence of the appraiser. Upon receipt and review, an external appraisal is utilized to measure a loan for potential impairment.  Our impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification.  Typical justified adjustments might include discounts for continued market deterioration subsequent to appraisal date, adjustments for the release of collateral contemplated in the appraisal, or the value of other collateral or consideration not contemplated in the appraisal. An appraisal over one year old in most cases will be considered stale dated and an updated or new appraisal will be required.  Any adjustments from appraised value to net realizable value are detailed and justified in the impairment analysis, which is reviewed and approved by senior credit quality officers and the Company’s Allowance for Loan and Lease Losses (“ALLL”)Bank's ALLL Committee. Although an external appraisal is the primary source to value collateral dependent loans, we may also utilize values obtained through purchase and sale agreements, negotiated short sales, broker price opinions, or the sales price of the note.  These alternative sources of value are used only if

Umpqua Holdings Corporation and Subsidiaries

deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed and approved on a quarterly basis at or near the end of each reporting period. Appraisals or other alternative sources of value received subsequent to the reporting period, but prior to our filing of periodic reports, are considered and evaluated to ensure our periodic filings are materially correct and not misleading.  Based on these processes, we do not believe there are significant time lapses for the recognition of additional loan loss provisions or charge-offs from the date they become known.

Loans and leases are classified as non-accrual when collection of principal or interest is doubtful—generally if they are past due as to maturity or payment of principal or interest by 90 days or more—unless such loans are well-secured and in the process of collection. Additionally, all loans that are impaired are considered for non-accrual status. Loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear relatively certain.


Loans are reported as restructured when the Bank grants a more than insignificant concession(s) to a borrower experiencing financial difficulties that it would not otherwise consider.  Examples of such concessions include a reduction in the loan rate, forgiveness of principal or accrued interest, extending the maturity date(s)date or providing a lower interest rate than would be normally available for a transaction of similar risk. As a result of these concessions, restructured loans are impaired as the Bank will not collect all amounts due, both principal and interest, in accordance with the terms of the original loan agreement. Impairment reserves on non-collateral dependent restructured loans are measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value. These impairment reserves are recognized as a specific component to be provided for in the allowance for loan and lease losses.

Loans and leases are reported as past due when installment payments, interest payments, or maturity payments are past due based on contractual terms. All loans determined to be impaired are individually assessed for impairment except for impaired homogeneous loans which are collectively evaluated for impairment in accordance with FASB ASC 450, Contingencies (“ASC 450”). The Companyspecific factors considered in determining that a loan is impaired include borrower financial capacity, current economic, business and market conditions, collection efforts, collateral position and other factors deemed relevant. Generally, impaired loans are placed on non-accrual status and all cash receipts are applied to the principal balance.  Continuation of accrual status and recognition of interest income is generally limited to performing restructured loans. 
The Bank has written down impaired, non-accrual loans as of December 31, 20102013 to their estimated net realizable value, generally based on disposition value, and expects resolution with no additional material loss, absent further decline in market prices.


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Table of Contents

Non-Covered Non-Accrual Loans and Leases and Loans and Leases Past Due

The following table summarizes our non-covered non-accrual loans and leases and loans and leases past due by loan and lease class as of December 31, 20102013 and December 31, 2009:

2012


(in thousands)

  December 31, 2010 
   30-59 Days
Past Due
  60-89 Days
Past Due
  

Greater

Than

90 Days
and Accruing

  Total Past
Due
  Nonaccrual  Current  Total Non-covered
Loans and Leases
 

Commercial real estate

       

Term & multifamily

 $14,596   $8,328   $3,008   $25,932   $49,162   $3,408,381   $3,483,475  

Construction & development

  2,172    6,726        8,898    20,124    218,792    247,814  

Residential development

  640            640    34,586    112,587    147,813  

Commercial

       

Term

  2,010    932        2,942    6,271    500,240    509,453  

LOC & other

  5,939    1,418    18    7,375    28,034    712,010    747,419  

Residential

       

Mortgage

  1,314    1,101    3,372    5,787        216,629    222,416  

Home equity loans & lines

  1,096    1,351    232    2,679        275,906    278,585  

Consumer & other

  361    233    441    1,035        32,008    33,043  
    

Total

 $28,128   $20,089   $7,071   $55,288   $138,177   $5,476,553   $5,670,018  
     

Deferred loan fees, net

        (11,031
         

Total

       $5,658,987  
         

  December 31, 2009 
   30-59 Days
Past Due
  60-89 Days
Past Due
  

Greater

Than

90 Days
and Accruing

  Total Past
Due
  Nonaccrual  Current  Total Non-covered
Loans and Leases
 

Commercial real estate

       

Term & multifamily

 $8,839   $9,809   $247   $18,895   $62,379   $3,441,830   $3,523,104  

Construction & development

  442    793        1,235    36,658    328,787    366,680  

Residential development

  7,500    1,449        8,949    45,484    171,376    225,809  

Commercial

       

Term

  4,806    836    29    5,671    8,821    571,364    585,856  

LOC & other

  2,044    1,083    1,250    4,377    39,776    760,482    804,635  

Residential

       

Mortgage

  1,861    79    4,113    6,053        176,704    182,757  

Home equity loans & lines

  1,011    269    232    1,512        284,217    285,729  

Consumer & other

  218    420    38    676        35,422    36,098  
        

Total

 $26,721   $14,738   $5,909   $47,368   $193,118   $5,770,182   $6,010,668  
     

Deferred loan fees, net

        (11,401
         

Total

       $5,999,267  
         

Had non-accrual

 December 31, 2013
 30-59 60-89 Greater Than       Total Non-
 Days Days 90 Days and Total Non- Current & covered Loans
 Past Due Past Due Accruing Past Due accrual 
Other (1)
 and Leases
Commercial real estate 
  
  
  
  
  
  
Non-owner occupied term, net$3,618
 $352
 $
 $3,970
 $9,193
 $2,315,097
 $2,328,260
Owner occupied term, net1,320
 340
 610
 2,270
 6,204
 1,251,109
 1,259,583
Multifamily, net
 
 
 
 935
 402,602
 403,537
Construction & development, net
 
 
 
 
 245,231
 245,231
Residential development, net
 
 
 
 2,801
 85,612
 88,413
Commercial             
Term, net901
 1,436
 
 2,337
 8,723
 759,785
 770,845
LOC & other, net619
 224
 
 843
 1,222
 985,295
 987,360
Leases and equipment finance, net2,202
 1,706
 517
 4,425
 2,813
 354,353
 361,591
Residential             
Mortgage, net1,050
 342
 2,070
 3,462
 
 593,739
 597,201
Home equity loans & lines, net473
 563
 160
 1,196
 
 263,073
 264,269
Consumer & other, net69
 75
 73
 217
 
 47,896
 48,113
Total, net of deferred fees and costs$10,252
 $5,038
 $3,430
 $18,720
 $31,891
 $7,303,792
 $7,354,403

(1) Other includes non-covered loans performed according to their original terms, additional interest incomeaccounted for under ASC 310-30.


113

Table of approximately $9.7 million, $9.6 million, and $7.2 million would have been recognized in 2010, 2009 and 2008, respectively.

Umpqua Holdings Corporation and Subsidiaries

Non-covered Impaired Loans

The following table summarizes our impaired loans by loan class as of December 31, 2010 and December 31, 2009:

Contents


(in thousands)

   2010 
    Unpaid
Principal
Balance
   Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 

With no related allowance recorded

          

Commercial real estate

          

Term & multifamily

  $62,605    $49,790    $    $56,003    $  

Construction & development

   33,091     25,558          27,588       

Residential development

   63,859     39,011          37,603       

Commercial

          

Term

   8,024     6,969          9,420       

LOC & other

   56,046     19,814          38,215       

Residential

          

Mortgage

                         

Home equity loans & lines

                         

Consumer & other

                         

With an allowance recorded

          

Commercial real estate

          

Term & multifamily

  $29,926    $28,070    $1,614    $28,518    $823  

Construction & development

                  1,706     38  

Residential development

   46,059     44,504     906     54,607     1,474  

Commercial

          

Term

   205     205     9     402     48  

LOC & other

   9,878     8,519     2,702     1,884     14  

Residential

          

Mortgage

   179     179     8     3,750     6  

Home equity loans & lines

                  21       

Consumer & other

                         

Total

          

Commercial Real Estate

   235,540     186,933     2,520     206,025     2,335  

Commercial

   74,153     35,507     2,711     49,921     62  

Residential

   179     179     8     3,771     6  

Consumer & Other

                         
     

Total

  $309,872    $222,619    $5,239    $259,717    $ 2,403  
     

   2009 
    Unpaid
Principal
Balance
   Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 

With no related allowance recorded

          

Commercial real estate

          

Term & multifamily

  $94,616    $65,020    $    $36,038    $  

Construction & development

   60,673     36,659          19,654       

Residential development

   88,341     54,925          77,819       

Commercial

          

Term

   11,384     10,484          4,923       

LOC & other

   87,001     56,695          21,150       

Residential

          

Mortgage

                         

Home equity loans & lines

                         

Consumer & other

                         

With an allowance recorded

          

Commercial real estate

          

Term & multifamily

  $39,105    $39,105    $731    $20,720    $763  

Construction & development

                  1,574    

Residential development

   60,373     58,948     2,588     36,556     1,288  

Commercial

          

Term

   436     436     12     7,287     26  

LOC & other

   600     600     3     7,681     156  

Residential

          

Mortgage

   5,082     5,167     153     2,022     194  

Home equity loans & lines

   66               18     2  

Consumer & other

   18                      

Total

          

Commercial Real Estate

   343,108     254,657     3,319     192,361     2,051  

Commercial

   99,421     68,215     15     41,041     182  

Residential

   5,148     5,167     153     2,040     196  

Consumer & Other

   18                      
     

Total

  $447,695    $328,039    $3,487    $235,442    $ 2,429  
     

 December 31, 2012
 30-59 60-89 Greater Than       Total Non-
 Days Days 90 Days and Total Non- Current & covered Loans
 Past Due Past Due Accruing Past Due accrual Other (1) and Leases
Commercial real estate 
  
  
  
  
  
  
Non-owner occupied term, net$5,132
 $1,097
 $
 $6,229
 $33,797
 $2,276,883
 $2,316,909
Owner occupied term, net2,615
 1,687
 
 4,302
 8,448
 1,264,090
 1,276,840
Multifamily, net
 
 
 
 1,045
 330,690
 331,735
Construction & development, net283
 
 
 283
 4,177
 196,171
 200,631
Residential development, net479
 
 
 479
 5,132
 51,528
 57,139
Commercial     
        
Term, net3,009
 746
 81
 3,836
 7,040
 786,185
 797,061
LOC & other, net1,647
 1,503
 
 3,150
 7,027
 880,631
 890,808
Leases and equipment finance, net
 
 
 
 
 31,270
 31,270
Residential             
Mortgage, net2,906
 602
 3,303
 6,811
 
 471,652
 478,463
Home equity loans & lines, net1,398
 214
 758
 2,370
 49
 260,218
 262,637
Consumer & other, net282
 191
 90
 563
 21
 37,003
 37,587
Total, net of deferred fees and costs$17,751
 $6,040
 $4,232
 $28,023
 $66,736
 $6,586,321
 $6,681,080

(1) Other includes non-covered loans accounted for under ASC 310-30.

Non-Covered Impaired Loans 

Loans with no related allowance reported generally represent non-accrual loans. The CompanyBank recognizes the charge-off of impairment reserves on impaired loans in the period it arises for collateral dependent loans.  Therefore, the non-accrual loans as of December 31, 20102013 have already been written-down to their estimated net realizable value, based on dispositionnet realizable value, and are expected to be resolved with no additional material loss, absent further decline in market prices.  The valuation allowance on impaired loans primarily represents the impairment reserves on performing restructured loans, and is measured by comparing the present value of expected future cash flows on the restructured loans discounted at the interest rate of the original loan agreement to the loan’s carrying value.

At December 31, 20102013 and 2009,December 31, 2012, impaired loans of $84.4$68.8 million and $134.9$70.6 million were classified as accruing restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, and generally provideby providing for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest at each respective date.  In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. The CompanyBank had no obligationsobligation to lend additional funds on the restructured loans as of December 31, 2010.

Umpqua Holdings Corporation2013

The following table summarizes our non-covered impaired loans, including average recorded investment and Subsidiaries

Forinterest income recognized on impaired non-covered loans, by loan class for the years ended December 31, 2010, 20092013 and 2008, interest income2012



114

Table of approximately $2.4 million, $2.4 million and $732,000, respectively, was recognized Contents

(in connection with impaired loans. thousands)
 December 31, 2013
 Unpaid     Average Interest
 Principal Recorded Related Recorded Income
 Balance Investment Allowance Investment Recognized
With no related allowance recorded:         
Commercial real estate         
Non-owner occupied term, net$19,350
 $18,285
 $
 $31,024
 $
Owner occupied term, net6,674
 6,204
 
 3,014
 
Multifamily, net1,416
 935
 
 765
 
Construction & development, net9,518
 8,498
 
 12,021
 
Residential development, net12,347
 5,776
 
 7,592
 
Commercial         
Term, net22,750
 8,723
 
 10,981
 
LOC & other, net5,886
 1,222
 
 2,836
 
Residential         
Mortgage, net
 
 
 
 
Home equity loans & lines, net
 
 
 70
 
Consumer & other, net
 
 
 1
 
With an allowance recorded:         
Commercial real estate         
Non-owner occupied term, net31,252
 31,362
 928
 32,250
 1,512
Owner occupied term, net5,202
 5,202
 198
 4,448
 205
Multifamily, net
 
 
 
 
Construction & development, net1,091
 1,091
 11
 1,898
 484
Residential development, net10,166
 11,927
 648
 14,759
 644
Commercial         
Term, net
 300
 8
 974
 17
LOC & other, net1,258
 1,258
 4
 1,172
 51
Residential         
Mortgage, net
 
 
 153
 
Home equity loans & lines, net
 
 
 25
 
Consumer & other, net
 
 
 
 
Total:         
Commercial real estate, net97,016
 89,280
 1,785
 107,771
 2,845
Commercial, net29,894
 11,503
 12
 15,963
 68
Residential, net
 
 
 248
 
Consumer & other, net
 
 
 1
 
Total, net of deferred fees and costs$126,910
 $100,783
 $1,797
 $123,983
 $2,913

115

Table of Contents

(in thousands)
 December 31, 2012
 Unpaid     Average Interest
 Principal Recorded Related Recorded Income
 Balance Investment Allowance Investment Recognized
With no related allowance recorded:         
Commercial real estate         
Non-owner occupied term, net$38,654
 $33,912
 $
 $36,167
 $
Owner occupied term, net10,085
 8,449
 
 7,998
  
Multifamily, net1,214
 1,045
 
 886
  
Construction & development, net18,526
 15,638
 
 17,899
 
Residential development, net9,293
 6,091
 
 15,518
 
Commercial         
Term, net13,729
 10,532
 
 11,966
 
LOC & other, net10,778
 7,846
 
 7,949
 
Residential         
Mortgage, net
 
 
 
 
Home equity loans & lines, net50
 49
 
 301
 
Consumer & other, net21
 21
 
 4
 
With an allowance recorded:         
Commercial real estate         
Non-owner occupied term, net35,732
 35,732
 762
 25,608
 1,076
Owner occupied term, net5,284
 5,284
 436
 3,328
 37
Multifamily, net
 
 
 
 
Construction & development, net1,091
 1,091
 14
 2,400
 672
Residential development, net16,593
 16,593
 184
 18,417
 747
Commercial         
Term, net
 
 
 443
 182
LOC & other, net
 
 
 795
 9
Residential         
Mortgage, net
 
 
 
 
Home equity loans & lines, net126
 126
 5
 127
 6
Consumer & other, net
 
 
 
 
Total:         
Commercial real estate, net136,472
 123,835
 1,396
 128,221
 2,532
Commercial, net24,507
 18,378
 
 21,153
 191
Residential, net176
 175
 5
 428
 6
Consumer & other, net21
 21
 
 4
 
Total, net of deferred fees and costs$161,176
 $142,409
 $1,401
 $149,806
 $2,729

The impaired loans for which these interest income amounts were recognized primarily relate to accruing restructured loans.

Non-covered

Non-Covered Credit Quality Indicators

As previously noted, the Company’sBank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk.  The Bank differentiates its lending portfolios into homogeneous loans (generally consumer loans)and leases and non-homogeneous loans (generally all non-consumer loans).and leases. The 10 risk rating categories can be generally described by the following groupings for non-homogeneous loans:

Pass/Watch—These loans range fromand leases: 

Minimal Risk—A minimal risk loan or lease, risk rated 1, is to a borrower of the highest quality. The borrower has an unquestioned ability to produce consistent profits and service all obligations and can absorb severe market disturbances with little or no difficulty. 

116


Low Risk—A low risk loan or lease, risk rated 2, is similar in characteristics to a minimal risk loan.  Margins may be smaller or protective elements may be subject to greater fluctuation. The borrower will have a strong demonstrated ability to produce profits, provide ample debt service coverage and to absorb market disturbances. 
Modest Risk—A modest risk loan or lease, risk rated 3, is a desirable loan or lease with excellent sources of repayment and no currently identifiable risk associated with collection. The borrower exhibits a very strong capacity to repay the credit in accordance with the repayment agreement. The borrower may be susceptible to economic cycles, but will have reserves to weather these cycles. 
Average Risk—An average risk loan or lease, risk rated 4, is an attractive loan or lease with sound sources of repayment and no material collection or repayment weakness evident. The borrower has an acceptable capacity to pay in accordance with the agreement. The borrower is susceptible to economic cycles and more efficient competition, but should have modest reserves sufficient to survive all but the most severe downturns or major setbacks. 
Acceptable Risk—An acceptable risk loan or lease, risk rated 5, is a loan or lease with lower than average, but still acceptable credit risk. These borrowers may have higher leverage, less certain but viable repayment sources, have limited financial reserves and may possess weaknesses that can be adequately mitigated through collateral, structural or credit enhancement. The borrower is susceptible to economic cycles and is less resilient to negative market forces or financial events. Reserves may be insufficient to survive a modest downturn. 


Watch—A watch loan or lease, risk rated 6, is still pass-rated, but represents the lowest level of acceptable risk due to an emerging risk element or declining performance trend. Watch ratings are expected to be temporary, with issues resolved or manifested to the extent that a higher or lower rating would be appropriate. The borrower should have a plausible plan, with reasonable certainty of success, to correct the problems in a short period of time. Borrowers rated watch are characterized by elements of uncertainty, such as: 
Borrower may be experiencing declining operating trends, strained cash flows or less-than anticipated performance. Cash flow should still be adequate to cover debt service, and the negative trends should be identified as being of a short-term or temporary nature. 
The borrower may have experienced a minor, unexpected covenant violation. 
Companies who may be experiencing tight working capital or have a cash cushion deficiency. 
A loan or lease may also be a watch if financial information is late, there is a documentation deficiency, the borrower has experienced unexpected management turnover, or if they face industry issues that, when combined with performance factors create uncertainty in their future ability to perform. 
Delinquent payments, increasing and material overdraft activity, request for bulge and/or out-of-formula advances may be an indicator of inadequate working capital and may suggest a lower rating. 
Failure of the intended repayment source to materialize as expected, or renewal of a loan (other than cash/marketable security secured or lines of credit) without reduction are possible indicators of a watch or worse risk rating. 
Special MentionMention—A Special Mentionspecial mention loan or lease, risk rated 7, has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or the institutions credit position at some future date. They contain unfavorable characteristics and are generally undesirable. Loans and leases in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of a Substandardsubstandard classification. A Special Mentionspecial mention loan or lease has potential weaknesses, which if not checked or corrected, weaken the asset or inadequately protect the Bank’s position at some future date. Such weaknesses include:

Performance is poor or significantly less than expected. There may be a temporary debt-servicing deficiency or inadequate working capital as evidenced by a cash cushion deficiency, but not to the extent that repayment is compromised. Material violation of financial covenants is common.

Loans or leases with unresolved material issues that significantly cloud the debt service outlook, even though a debt servicing deficiency does not currently exist.

Modest underperformance or deviation from plan for real estate loans where absorption of rental/sales units is necessary to properly service the debt as structured. Depth of support for interest carry provided by owner/guarantors may mitigate and provide for improved rating.

This rating may be assigned when a loan officer is unable to supervise the credit properly, due to inadequate expertise, an inadequate loan agreement, an inability to control collateral, failure to obtain proper documentation, or any other deviation from prudent lending practices.

Unlike a Substandardsubstandard credit, there should be a reasonable expectation that these temporary issues will be corrected within the normal course of business, rather than a liquidation of assets, and in a reasonable period of time.

SubstandardSubstandard—A substandard asset, risk rated 8, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not

117


corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. Loans and leases are classified as Substandardsubstandard when they have unsatisfactory characteristics causing unacceptable levels of risk. A substandard loan or lease normally has one or more well-defined weaknesses that could jeopardize repayment of the debt. The likely need to liquidate assets to correct the problem, rather than repayment from successful operations is the key distinction between Special Mentionspecial mention and Substandard.substandard. The following are examples of well-defined weaknesses:
• 

Cash flow deficiencies or trends are of a magnitude to jeopardize current and future payments with no immediate relief. A loss is not presently expected, however the outlook is sufficiently uncertain to preclude ruling out the possibility.

Borrower• The borrower has been unable to adjust to prolonged and unfavorable industry or economic trends.

• Material underperformance or deviation from plan for real estate loans where absorption of rental/sales units is necessary to properly service the debt and risk is not mitigated by willingness and capacity of owner/guarantor to support interest payments.

• Management character or honesty has become suspect. This includes instances where the borrower has become uncooperative.

• Due to unprofitable or unsuccessful business operations, some form of restructuring of the business, including liquidation of assets, has become the primary source of loan repayment. Cash flow has deteriorated, or been diverted, to the point that sale of collateral is now the Bank’s primary source of repayment (unless this was the original source of repayment). If the collateral is under the Bank’s control and is cash or other liquid, highly marketable securities and properly margined, then a more appropriate rating might be Special Mentionspecial mention or Watch.

watch. 

• The borrower is bankrupt, or for any other reason, future repayment is dependent on court action.

• There is material, uncorrectable faulty documentation or materially suspect financial information.


Doubtful/LossDoubtful—Loans or leases classified as Doubtfuldoubtful, risk rated 9, have all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work towards strengthening of the asset, classification as a loss (and immediate charge off)charge-off) is deferred until more exact status may be determined. Pending factors include proposed merger, acquisition, liquidation procedures, capital injection, and perfection of liens on additional collateral and refinancing plans. In certain circumstances, a Doubtfuldoubtful rating will be temporary, while the Bank is awaiting an updated collateral valuation. In these cases, once the collateral is valued and appropriate margin applied, the remaining un-collateralized portion will be charged off.charged-off. The remaining balance, properly margined, may then be upgraded to Substandard,substandard, however must remain on non-accrual. A
Loss—Loans or leases classified as loss, rating is assigned to loansrisk rated 10, are considered un-collectible and of such little value that the continuance as an active Bank asset is not warranted. This rating does not mean that the loan or lease has no recovery or salvage value, but rather that the loan or lease should be charged offcharged-off now, even though partial or full recovery may be possible in the future.

ImpairedImpaired—Loans are classified as Impaired impairedwhen, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement, without unreasonable delay. This generally includes all loans classified as non-accrual and troubled debt restructurings. Impaired loans are risk rated for internal and regulatory rating purposes, but presented separately for clarification. 

Homogeneous loans and leases are not risk rated until they are greater than 30 days past due, and risk rating is based primarily on the past due status of the loan or lease.  The risk rating categories can be generally described by the following groupings for commercial and commercial real estate homogeneous loans and leases: 
Special Mention—A homogeneous special mention loan or lease, risk rated 7, is 30-59 days past due from the required payment date at month-end. 
Substandard—A homogeneous substandard loan or lease, risk rated 8, is 60-89 days past due from the required payment date at month-end. 
Doubtful—A homogeneous doubtful loan or lease, risk rated 9, is 90-179 days past due from the required payment date at month-end. 
Loss—A homogeneous loss loan or lease, risk rated 10, is 180 days and more past due from the required payment date. These loans are generally charged-off in the month in which the 180 day time period elapses. 
The risk rating categories can be generally described by the following groupings for residential and consumer and other homogeneous loans: 
Special Mention—A homogeneous retail special mention loan, risk rated 7, is 30-89 days past due from the required payment date at month-end. 

118


Substandard—A homogeneous retail substandard loan, risk rated 8, is an open-end loan 90-180 days past due from the required payment date at month-end or a closed-end loan 90-120 days past due from the required payment date at month-end. 
Loss—A homogeneous retail loss loan, risk rated 10, is a closed-end loan that becomes past due 120 cumulative days or an open-end retail loan that becomes past due 180 cumulative days from the contractual due date.   These loans are generally charged-off in the month in which the 120 or 180 day period elapses. 
The following table summarizes our internal risk rating by loan and lease class for the non-covered loan and lease portfolio as of December 31, 2013 and December 31, 2012
(in thousands)  
 December 31, 2013
 Pass/Watch Special Mention Substandard Doubtful Loss Impaired Total
Commercial real estate             
Non-owner occupied term, net$2,073,366
 $108,263
 $96,984
 $
 $
 $49,647
 $2,328,260
Owner occupied term, net1,182,865
 27,615
 37,524
 173
 
 11,406
 1,259,583
Multifamily, net385,335
 5,574
 11,693
 
 
 935
 403,537
Construction & development, net230,262
 2,054
 3,326
 
 
 9,589
 245,231
Residential development, net67,019
 1,836
 1,855
 
 
 17,703
 88,413
Commercial             
Term, net718,778
 23,393
 19,651
 
 
 9,023
 770,845
LOC & other, net951,109
 24,197
 9,574
 
 
 2,480
 987,360
Leases and equipment finance, net351,971
 4,585
 1,706
 2,996
 333
 
 361,591
Residential             
Mortgage, net593,723
 1,405
 743
 
 1,330
 
 597,201
Home equity loans & lines, net263,070
 1,038
 25
 
 136
 
 264,269
Consumer & other, net47,895
 144
 33
 
 41
 
 48,113
Total, net of deferred fees and costs$6,865,393
 $200,104
 $183,114
 $3,169
 $1,840
 $100,783
 $7,354,403

(in thousands)
 December 31, 2012
 Pass/Watch Special Mention Substandard Doubtful Loss Impaired Total
Commercial real estate             
Non-owner occupied term, net$1,993,369
 $174,892
 $79,004
 $
 $
 $69,644
 $2,316,909
Owner occupied term, net1,185,721
 26,475
 50,911
 
 
 13,733
 1,276,840
Multifamily, net324,315
 1,950
 4,425
 
 
 1,045
 331,735
Construction & development, net165,185
 12,654
 6,063
 
 
 16,729
 200,631
Residential development, net25,018
 4,373
 5,064
 
 
 22,684
 57,139
Commercial             
Term, net717,546
 22,256
 46,727
 
 
 10,532
 797,061
LOC & other, net847,883
 19,510
 15,569
 
 
 7,846
 890,808
Leases and equipment finance, net31,270
 
 
 
 
 
 31,270
Residential             
Mortgage, net471,206
 3,510
 1,120
 
 2,627
 
 478,463
Home equity loans & lines, net260,086
 1,616
 
 
 760
 175
 262,637
Consumer & other, net37,056
 419
 57
 
 34
 21
 37,587
Total, net of deferred fees and costs$6,058,655
 $267,655
 $208,940
 $
 $3,421
 $142,409
 $6,681,080

119


The percentage of non-covered impaired loans classified as watch, special mention, and substandard was 6.4%, 3.7%, and 89.9%, respectively, as of December 31, 2013. The percentage of non-covered impaired loans classified as watch, special mention, and substandard was 9.0%, 1.7%, and 89.3%, respectively, as of December 31, 2012
Troubled Debt Restructurings 
At December 31, 2013 and December 31, 2012, impaired loans of $68.8 million and $70.6 million were classified as accruing restructured loans, respectively. The restructurings were granted in response to borrower financial difficulty, and generally provide for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow. Impaired restructured loans carry a specific allowance and the allowance on impaired restructured loans is calculated consistently across the portfolios. 

There were no available commitments for troubled debt restructurings outstanding as of December 31, 2013 and none as of December 31, 2012
The following tables present troubled debt restructurings by accrual versus non-accrual status and by loan class as of December 31, 20102013 and December 31, 2009:

2012



(in thousands)

   December 31, 2010 
   Pass/Watch  Special Mention  Substandard   Doubtful/Loss   Impaired   Total 

Commercial real estate

         

Term & multifamily

 $2,978,116   $314,094   $113,405    $    $77,860    $3,483,475  

Construction & development

  145,108    25,295    51,853          25,558     247,814  

Residential development

  27,428    13,764    23,106          83,515     147,813  

Commercial

         

Term

  472,512    17,658    12,109          7,174     509,453  

LOC & other

  646,163    30,761    42,162          28,333     747,419  

Residential

         

Mortgage

  216,899    2,414    786     2,138     179     222,416  

Home equity loans & lines

  275,906    2,447    125     107          278,585  

Consumer & other

  32,008    595    29     411          33,043  
    

Total

 $4,794,140   $407,028   $243,575    $2,656    $222,619    $5,670,018  
      

Deferred loan fees, net

          (11,031
            

Total

         $5,658,987  
            

Umpqua Holdings Corporation

 December 31, 2013
 Accrual Non-Accrual Total
 Status Status Modifications
Commercial real estate     
Non-owner occupied term, net$37,366
 $
 $37,366
Owner occupied term, net5,202
 
 5,202
Multifamily, net
 
 
Construction & development, net9,590
 
 9,590
Residential development, net14,902
 2,196
 17,098
Commercial     
Term, net
 2,603
 2,603
LOC & other, net1,258
 
 1,258
Leases and equipment finance, net
 
 
Residential     
Mortgage, net473
 
 473
Home equity loans & lines, net
 
 
Consumer & other, net
 
 
Total, net of deferred fees and costs$68,791
 $4,799
 $73,590
(in thousands)

120


 December 31, 2012
 Accrual Non-Accrual Total
 Status Status Modifications
Commercial real estate     
Non-owner occupied term, net$34,329
 $16,200
 $50,529
Owner occupied term, net5,284
 405
 5,689
Multifamily, net
 
 
Construction & development, net12,552
 3,516
 16,068
Residential development, net17,141
 4,921
 22,062
Commercial     
Term, net350
 4,641
 4,991
LOC & other, net820
 1,493
 2,313
Leases and equipment finance, net
 
 
Residential     
Mortgage, net
 
 
Home equity loans & lines, net126
 
 126
Consumer & other, net
 
 
Total, net of deferred fees and costs$70,602
 $31,176
 $101,778

The Bank’s policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and Subsidiaries

   December 31, 2009 
    Pass/Watch   Special Mention   Substandard   Doubtful/Loss   Impaired   Total 

Commercial real estate

            

Term & multifamily

  $3,052,419    $235,767    $130,793    $    $104,125    $3,523,104  

Construction & development

   231,602     45,458     52,961          36,659     366,680  

Residential development

   41,227     27,655     43,054          113,873     225,809  

Commercial

            

Term

   516,503     25,081     33,352          10,920     585,856  

LOC & other

   654,071     48,809     44,460          57,295     804,635  

Residential

            

Mortgage

   172,100     1,927     1,461     2,102     5,167     182,757  

Home equity loans & lines

   284,217     1,280     232               285,729  

Consumer & other

   35,426     633     34     5          36,098  
     

Total

  $4,987,565    $386,610    $306,347    $2,107    $328,039    $6,010,668  
       

Deferred loan fees, net

             (11,401
               

Total

            $5,999,267  
               

interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain.  The Bank’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status. 

The types of modifications offered can generally be described in the following categories: 
NOTE 7. COVERED ASSETS AND INDEMNIFICATION ASSETRate Modification

—A modification in which the interest rate is modified. 

Term Modification —A modification in which the maturity date, timing of payments, or frequency of payments is changed. 
Interest Only Modification—A modification in which the loan is converted to interest only payments for a period of time. 
Payment Modification—A modification in which the payment amount is changed, other than an interest only modification described above. 
Combination Modification—Any other type of modification, including the use of multiple types of modifications. 
The following table reflectstables present newly non-covered restructured loans that occurred during the estimated fair valueyears endedDecember 31, 2013 and 2012, respectively: 

121


(in thousands)
 December 31, 2013
 Rate Term Interest Only Payment Combination  
 Modifications Modifications Modifications Modifications Modifications Total
Commercial real estate           
Non-owner occupied term, net$
 $
 $4,291
 $
 $
 $4,291
Owner occupied term, net
 
 
 
 
 
Multifamily, net
 
 
 
 
 
Construction & development, net
 
 
 
 
 
Residential development, net
 
 
 
 
 
Commercial           
Term, net
 
 
 
 3,588
 3,588
LOC & other, net
 
 
 
 452
 452
Leases and equipment finance, net
 
 
 
 
 
Residential           
Mortgage, net
 
 
 
 478
 478
Home equity loans & lines, net
 
 
 
 
 
Consumer & other, net
 
 
 
 
 
Total, net of deferred fees and costs$
 $
 $4,291
 $
 $4,518
 $8,809
            
 December 31, 2012
 Rate Term Interest Only Payment Combination  
 Modifications Modifications Modifications Modifications Modifications Total
Commercial real estate           
Non-owner occupied term, net$14,333
 $
 $
 $
 $2,595
 $16,928
Owner occupied term, net587
 
 
 
 4,722
 5,309
Multifamily, net
 
 
 
 
 
Construction & development, net
 
 
 
 
 
Residential development, net
 
 
 
 
 
Commercial           
Term, net
 
 
 
 
 
LOC & other, net
 
 
 820
 
 820
Leases and equipment finance, net
 
 
 
 
 
Residential           
Mortgage, net
 
 
 
 
 
Home equity loans & lines, net
 
 
 
 
 
Consumer & other, net
 
 
 
 
 
Total, net of deferred fees and costs$14,920
 $
 $
 $820
 $7,317
 $23,057
For the periods presented in the tables above, the outstanding recorded investment was the same pre and post modification. 
The following tables represent financing receivables modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the years endedDecember 31, 2013 and 2012, respectively: 
(in thousands)

122


 2013 2012
Commercial real estate   
Non-owner occupied term, net$
 $
Owner occupied term, net
 217
Multifamily, net
 
Construction & development, net
 
Residential development, net
 633
Commercial   
Term, net1,786
 
LOC & other, net
 26
Leases and equipment finance, net
 
Residential   
Mortgage, net
 
Home equity loans & lines, net
 
Consumer & other, net
 
Total, net of deferred fees and costs$1,786
 $876

Note 7 – Covered Assets andIndemnification Asset 
Covered Loans, Net
Loans acquired in a FDIC-assisted acquisition that are subject to a loss-share agreement are referred to as covered loans and reported separately in our statements of financial condition. Covered loans are reported exclusive of the acquired loans atcash flow reimbursements expected from the acquisition dates:

(in thousands)

   Evergreen   Rainier   Nevada Security   Total 
    January 22, 2010   February 26, 2010   June 18, 2010   

Commercial real estate

        

Term & multifamily

  $141,076    $331,869    $154,119    $627,064  

Construction & development

   18,832     562     9,481     28,875  

Residential development

   16,219     10,340     15,641     42,200  

Commercial

        

Term

   27,272     14,850     18,257     60,379  

LOC & other

   23,965     18,169     11,408     53,542  

Residential

        

Mortgage

   11,886     39,897     1,539     53,322  

Home equity loans & lines

   8,308     31,029     4,421     43,758  

Consumer & other

   4,935     11,624     641     17,200  
     

Total

  $252,493    $458,340    $215,507    $926,340  
     

FDIC.

The following table presents the major types of covered loans as of December 31, 2010:

2013 and December 31, 2012

(in thousands)

  2010 
   Evergreen   Rainier   Nevada Security   Total 

Commercial real estate

       

Term & multifamily

 $124,743    $303,585    $141,314    $569,642  

Construction & development

  14,162     854     7,419     22,435  

Residential development

  11,024     2,310     11,372     24,706  

Commercial

       

Term

  18,828     10,811     12,961     42,600  

LOC & other

  11,876     14,320     9,031     35,227  

Residential

       

Mortgage

  8,129     35,026     1,669     44,824  

Home equity loans & lines

  6,737     25,163     3,725     35,625  

Consumer & other

  2,781     8,058          10,839  
    

Total

 $198,280    $400,127    $187,491    $785,898  
    

 December 31, 2013
 Evergreen Rainier Nevada Security Total
Commercial real estate       
Non-owner occupied term, net$29,019
 $117,076
 $60,807
 $206,902
Owner occupied term, net18,582
 14,711
 16,524
 49,817
Multifamily, net7,626
 22,210
 7,835
 37,671
Construction & development, net1,506
 
 1,949
 3,455
Residential development, net1,861
 
 5,425
 7,286
Commercial       
Term, net5,651
 768
 9,300
 15,719
LOC & other, net2,664
 1,934
 2,100
 6,698
Residential       
Mortgage, net3,075
 17,468
 1,773
 22,316
Home equity loans & lines, net2,820
 14,782
 2,035
 19,637
Consumer & other, net954
 3,308
 
 4,262
Total, net of deferred fees and costs$73,758
 $192,257
 $107,748
 $373,763
Allowance for covered loans      (9,771)
Total      $363,992
 December 31, 2012
 Evergreen Rainier Nevada Security Total
Commercial real estate       
Non-owner occupied term, net$36,074
 $157,055
 $71,352
 $264,481
Owner occupied term, net26,682
 18,853
 23,115
 68,650
Multifamily, net10,132
 23,777
 10,969
 44,878
Construction & development, net4,941
 637
 6,133
 11,711
Residential development, net3,840
 
 5,954
 9,794
Commercial       
Term, net9,961
 2,230
 11,333
 23,524
LOC & other, net4,984
 7,081
 2,932
 14,997
Residential       
Mortgage, net3,948
 22,059
 1,818
 27,825
Home equity loans & lines, net3,478
 17,178
 2,786
 23,442
Consumer & other, net1,855
 4,143
 53
 6,051
Total, net of deferred fees and costs$105,895
 $253,013
 $136,445
 $495,353
Allowance for covered loans      (18,275)
Total      $477,078

The outstanding contractual unpaid principal balance, excluding purchase accounting adjustments, at December 31, 20102013 was $286.6$93.8 million $481.7, $224.1 million and $295.4$144.5 million, for Evergreen, Rainier, and Nevada Security, respectively.

respectively, as compared to Acquired$137.7 million, $297.0 million and $198.4 million, for Evergreen, Rainier, and Nevada Security, respectively, at December 31, 2012

In estimating the fair value of the covered loans are valued as ofat the acquisition date, in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 805,Business Combinations. Loans purchased with evidencewe (a) calculated the contractual amount and timing of credit deterioration since origination forundiscounted principal and interest payments and (b) estimated the amount and timing of undiscounted expected principal and interest payments. The difference between these two amounts represents the nonaccretable difference. 
On the acquisition date, the amount by which it is probable that all contractually required payments will not be collected are accounted for under FASB ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality. Because of the significantundiscounted expected cash flows exceed the estimated fair value discounts associated with the acquired portfolios, the concentration of real estate related loans (to finance or secured by real estate collateral) and the decline in real estate values in the regions serviced, and after considering the underwriting standards of the acquired originating bank,loans is the Company elected to account for all acquired loans under ASC 310-30. Under FASB ASC 805“accretable yield”. The accretable yield is then measured at each financial reporting date and ASC 310-30, loans are recorded at fairrepresents the difference between the remaining undiscounted expected cash flows and the current carrying value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for loan losses is not carried over or recorded as of the acquisition date.

The following table presents a reconciliation of the undiscounted contractual cash flows, nonaccretable difference, accretable yield, and fair value of covered loans for each respective acquired loan portfolio at the acquisition dates:.

(in thousands)

   Evergreen  Rainier  Nevada Security    
    January 22, 2010  February 26, 2010  June 18, 2010  Total 

Undiscounted contractual cash flows

  $498,216   $821,972   $396,134   $1,716,322  

Undiscounted cash flows not expected to be collected (nonaccretable difference)

   (124,131  (125,774  (115,021  (364,926
     

Undiscounted cash flows expected to be collected

   374,085    696,198    281,113    1,351,396  

Accretable yield at acquisition

   (121,592  (237,858  (65,606  (425,056
     

Estimated fair value of loans acquired at acquisition

  $252,493   $458,340   $215,507   $926,340  
     

Umpqua Holdings Corporation and Subsidiaries

loans. 

The following table presents the changes in the accretable yield for the yearyears ended December 31, 20102013 and 2012 for each respective acquired loan portfolio:

   2010 
    Evergreen  Rainier  Nevada
Security
  Total 

Balance, beginning of period

  $   $   $   $  

Additions resulting from acquisitions

   121,592    237,858    65,606    425,056  

Accretion to interest income

   (29,533  (33,353  (11,011  (73,897

Disposals

   (6,572  (12,830  (2,376  (21,778

Reclassifications (to)/from nonaccretable difference

   5,284    (19,060  21,296    7,520  
     

Balance, end of period

  $90,771   $172,615   $73,515   $336,901  
     

(in thousands)
 December 31, 2013
 Evergreen Rainier Nevada Security Total
Balance, beginning of period$34,567
 $102,468
 $46,353
 $183,388
Accretion to interest income(12,695) (23,511) (15,292) (51,498)
Disposals(3,221) (12,362) (3,703) (19,286)
Reclassifications from nonaccretable difference1,412
 5,194
 7,274
 13,880
Balance, end of period20,063
 $71,789
 $34,632
 $126,484
        
 December 31, 2012
 Evergreen Rainier Nevada Security Total
Balance, beginning of period$56,479
 $120,333
 $61,021
 $237,833
Accretion to interest income(21,237) (30,325) (19,969) (71,531)
Disposals(9,688) (19,705) (5,214) (34,607)
Reclassifications from nonaccretable difference9,013
 32,165
 10,515
 51,693
Balance, end of period$34,567
 $102,468
 $46,353
 $183,388

123



Allowance for Covered Loan Losses 
The following table summarizes activity related to the allowance for covered loan losses by covered loan portfolio segment for the years ended December 31, 2013 and 2012, respectively: 
(in thousands)  
 December 31, 2013
 Commercial     Consumer  
 Real Estate Commercial Residential & Other Total
Balance, beginning of period$12,129
 $4,980
 $804
 $362
 $18,275
Charge-offs(2,303) (1,544) (197) (459) (4,503)
Recoveries1,114
 531
 218
 249
 2,112
(Recapture) provision(4,835) (1,130) (165) 17
 (6,113)
Balance, end of period$6,105
 $2,837
 $660
 $169
 $9,771
          
 December 31, 2012
 Commercial     Consumer  
 Real Estate Commercial Residential & Other Total
Balance, beginning of period$8,939
 $3,964
 $991
 $426
 $14,320
Charge-offs(2,921) (1,613) (596) (659) (5,789)
Recoveries1,264
 733
 237
 105
 2,339
Provision4,847
 1,896
 172
 490
 7,405
Balance, end of period$12,129
 $4,980
 $804
 $362
 $18,275
The following table presents the allowance and recorded investment in covered loans by portfolio segment as of December 31, 2013 and 2012
(in thousands)
 December 31, 2013
 Commercial     Consumer  
 Real Estate Commercial Residential & Other Total
Allowance for covered loans:         
Loans acquired with deteriorated credit quality (1)$5,995
 $2,713
 $609
 $118
 $9,435
Collectively evaluated for impairment (2)110
 124
 51
 51
 336
Total$6,105
 $2,837
 $660
 $169
 $9,771
Covered loans:         
Loans acquired with deteriorated credit quality (1)$304,232
 $15,781
 $36,960
 $1,739
 $358,712
Collectively evaluated for impairment (2)899
 6,636
 4,993
 2,523
 15,051
Total$305,131
 $22,417
 $41,953
 $4,262
 $373,763

124


 December 31, 2012
 Commercial     Consumer  
 Real Estate Commercial Residential & Other Total
Allowance for covered loans:         
Loans acquired with deteriorated credit quality (1)$11,756
 $4,559
 $755
 $315
 $17,385
Collectively evaluated for impairment (2)373
 421
 49
 47
 890
Total$12,129
 $4,980
 $804
 $362
 $18,275
Covered loans:         
Loans acquired with deteriorated credit quality (1)$393,464
 $25,402
 $46,382
 $3,360
 $468,608
Collectively evaluated for impairment (2)6,050
 13,119
 4,885
 2,691
 26,745
Total$399,514
 $38,521
 $51,267
 $6,051
 $495,353
(1) In accordance with ASC 310-30, the valuation allowance is netted against the carrying value of the covered loan balance.

(2) The allowance on covered loan losses includes an allowance on covered loan advances on acquired loans subsequent to acquisition.
The valuation allowance on covered loans was reduced by recaptured provision of $8.8 million, $3.8 million, and $3.5 million for the years ended December 31, 2013, 2012 and 2011
Covered Credit Quality Indicators 
Covered loans are risk rated in a manner consistent with non-covered loans. As previously noted, the Bank’s risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk.  The 10 risk rating groupings are described fully in Note 6. The following table includes loans acquired with deteriorated credit quality accounted for under ASC 310-30, and advances made subsequent to acquisition on covered loans.
The following table summarizes our internal risk rating grouping by covered loans, net as of December 31, 2013 and December 31, 2012
(in thousands) 
 December 31, 2013
   Special        
 Pass/Watch Mention Substandard Doubtful Loss Total
Commercial real estate           
Non-owner occupied term, net$133,452
 $26,321
 $44,279
 $
 $
 $204,052
Owner occupied term, net30,119
 3,370
 14,971
 213
 
 48,673
Multifamily, net24,213
 2,563
 10,409
 
 
 37,185
Construction & development, net1,117
 
 1,686
 
 
 2,803
Residential development, net492
 224
 5,541
 54
 
 6,311
Commercial           
Term, net3,753
 3,141
 6,128
 258
 
 13,280
LOC & other, net4,630
 991
 681
 
 
 6,302
Residential           
Mortgage, net22,175
 
 
 
 
 22,175
Home equity loans & lines, net19,043
 
 76
 
 
 19,119
Consumer & other, net4,092
 
 
 
 
 4,092
Total, net of deferred fees and costs$243,086
 $36,610
 $83,771
 $525
 $
 $363,992


125


 December 31, 2012
   Special        
 Pass/Watch Mention Substandard Doubtful Loss Total
Construction & development           
Non-owner occupied term, net$177,791
 $30,253
 $42,590
 $8,471
 $
 $259,105
Owner occupied term, net43,698
 7,803
 10,417
 4,673
 
 66,591
Multifamily, net22,234
 9,824
 9,804
 1,781
 
 43,643
Construction & development, net1,792
 195
 4,315
 3,386
 
 9,688
Residential development, net
 391
 6,658
 1,309
 
 8,358
Commercial           
Term, net9,020
 3,401
 4,986
 2,021
 
 19,428
LOC & other, net11,498
 354
 1,080
 1,181
 
 14,113
Residential           
Mortgage, net27,596
 
 
 
 
 27,596
Home equity loans & lines, net22,790
 
 77
 
 
 22,867
Consumer & other, net5,689
 
 
 
 
 5,689
Total, net of deferred fees and costs$322,108
 $52,221
 $79,927
 $22,822
 $
 $477,078
Covered Other Real Estate Owned 
All other real estate owned (“OREO”) acquired in FDIC-assisted acquisitions that are subject to a FDIC loss-share agreement are referred to as “covered OREO” and reported separately in our statements of financial position. Covered OREO is reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered OREO at the collateral’s net realizable value, less selling costs. 
Covered OREO was initially recorded at its estimated fair value on the acquisition date based on similar market comparable valuations less estimated selling costs. Subsequent to acquisition, loan collateral transferred to OREO is at its net realizable value. Any subsequent valuation adjustments due to declines in fair value will be charged to non-interest expense, and will be mostly offset by non-interest income representing the corresponding increase to the FDIC indemnification asset for the offsetting loss reimbursement amount. Any recoveries of previous valuation adjustments will be credited to non-interest expense with a corresponding charge to non-interest income for the portion of the recovery that is due to the FDIC. 
The following table summarizes the activity related to the covered OREO for the yearyears ended December 31, 2010:

    2010 

Balance, beginning of period

  $  

Acquisition

   26,939  

Additions to covered OREO

   15,350  

Dispositions of covered OREO

   (10,485

Valuation adjustments in the period

   (1,941
     

Balance, end of period

  $29,863  
     

2013, 2012 and 2011

(in thousands) 
 2013 2012 2011
Balance, beginning of period$10,374
 $19,491
 $29,863
Additions to covered OREO2,555
 6,987
 15,271
Dispositions of covered OREO(10,115) (11,458) (16,934)
Valuation adjustments in the period(712) (4,646) (8,709)
Balance, end of period$2,102
 $10,374
 $19,491

FDIC Indemnification Asset 
The Company has elected to account for amounts receivable under the loss-share agreement as an indemnification asset in accordance with FASB ASC 805, Business Combinations. The FDIC indemnification asset is initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-shareagreement. The difference between the present value and the undiscounted cash flows the Company expects to collect from the FDIC will be accreted into non-interestincome over the life of the FDIC indemnification asset.
Subsequent to initial recognition, the FDIC indemnification asset is reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the covered assets. These adjustments are measured on the same basis as the related covered loans and covered other real estate owned. Any increases in cash flow of the covered assets over

126


those expected will reduce the FDIC indemnification asset and any decreases in cash flow of the covered assets under those expected will increase the FDIC indemnification asset. Increases and decreases to the FDIC indemnification asset are recorded as adjustments to non-interest income. The resulting carrying value of the indemnification asset represents the amounts recoverable from the FDIC for future expected losses, and the amounts due from the FDIC for claims related to covered losses the Company have incurred less amounts due back to the FDIC relating to shared recoveries. 
The following table summarizes the activity related to the FDIC indemnification asset for each respective acquired portfolio for the yearyears ended December 31, 2010:

   2010 
    Evergreen  Rainier  Nevada
Security
  Total 

Balance, beginning of period

  $   $   $   $  

Acquisitions

   71,755    76,847    99,160    247,762  

Change in FDIC indemnification asset

   (12,864  (7,045  3,464    (16,445

Transfers to due from FDIC

   (18,285  (26,076  (40,543  (84,904
     

Balance, end of period

  $40,606   $43,726   $62,081   $146,413  
     

2013NOTE 8.    PREMISES AND EQUIPMENT and

2012


(in thousands) 
 December 31, 2013
 Evergreen Rainier Nevada Security Total
Balance, beginning of period$14,876
 $15,110
 $22,812
 $52,798
Change in FDIC indemnification asset(8,556) (6,280) (10,713) (25,549)
Transfers to due from FDIC and other(1,111) (814) (2,150) (4,075)
Balance, end of period$5,209
 $8,016
 $9,949
 $23,174
        
 December 31, 2012
 Evergreen Rainier Nevada Security Total
Balance, beginning of period$28,547
 $28,272
 $34,270
 $91,089
Change in FDIC indemnification asset(9,611) (6,355) 732
 (15,234)
Transfers to due from FDIC and other(4,060) (6,807) (12,190) (23,057)
Balance, end of period$14,876
 $15,110
 $22,812
 $52,798

Note 8–Premises and Equipment
The following table presents the major components of premises and equipment at December 31, 20102013 and 2009:

2012:

(in thousands)

    2010  2009 

Land

  $23,174   $14,132  

Buildings and improvements

   115,807    94,583  

Furniture, fixtures and equipment

   95,909    87,885  

Construction in progress

   4,471    3,971  
     

Total premises and equipment

   239,361    200,571  

Less: Accumulated depreciation and amortization

   (102,762  (97,305
     

Premises and equipment, net

  $136,599   $103,266  
     

 2013 2012
Land$26,438
 $26,438
Buildings and improvements153,771
 134,464
Furniture, fixtures and equipment131,691
 121,086
Construction in progress13,172
 10,488
Total premises and equipment325,072
 292,476
Less: Accumulated depreciation and amortization(147,392) (129,809)
Premises and equipment, net$177,680
 $162,667
Depreciation expense totaled $14.4$20.5 million $12.8, $17.6 million and $11.8$16.5 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.

Umpqua’s subsidiaries have entered into a number of non-cancelable lease agreements with respect to premises and equipment. See Note 20 for more information regarding rental expense, net of rent income, and minimum annual rental commitments under non-cancelable lease agreements.

NOTE 9.    GOODWILL AND OTHER INTANGIBLE ASSETS

Note 9–Goodwill and Other Intangible Assets
The following table summarizes the changes in the Company’sCompany's goodwill and other intangible assets for the years ended December 31, 2007, 2008, 2009,2010, 2011, 2012, and 2010.2013. Goodwill is reflected by operating segment; all other intangible assets are related to the Community Banking segment.

(in thousands)

   Goodwill 
   Community Banking  Retail Brokerage 
    Gross  Accumulated
Impairment
  Total  Gross   Accumulated
Impairment
  Total 

Balance, December 31, 2007

  $719,570   $   $719,570   $3,697    $   $3,697  

Reductions

   (234      (234             

Impairment

                    (982  (982
     

Balance, December 31, 2008

   719,336        719,336    3,697     (982  2,715  

Reductions

   (81      (81             

Impairment

       (111,952  (111,952             
     

Balance, December 31, 2009

   719,255    (111,952  607,303    3,697     (982  2,715  

Net additions

   45,954     45,954               

Reductions

   (96      (96             
     

Balance, December 31, 2010

  $765,113   $(111,952 $653,161   $3,697    $(982 $2,715  
     

   Other Intangible Assets 
    Gross  Accumulated
Amortization
  Net 

Balance, December 31, 2007

  $56,213   $(14,574 $41,639  

Amortization

       (5,857  (5,857
     

Balance, December 31, 2008

   56,213    (20,431  35,782  

Impairment

       (804  (804

Amortization

       (5,362  (5,362
     

Balance, December 31, 2009

   56,213    (26,597  29,616  

Net additions

   7,016        7,016  

Reductions

   (5,150      (5,150

Amortization

       (5,389  (5,389
     

Balance, December 31, 2010

  $58,079   $(31,986 $26,093  
     


127


 Goodwill
 Community Banking Wealth Management
  Accumulated   Accumulated 
 GrossImpairmentTotal GrossImpairmentTotal
Balance, December 31, 2010$765,113
$(111,952)$653,161
 $3,697
$(982)$2,715
Net additions247

247
 


Reductions(44)
(44) 


Balance, December 31, 2011765,316
(111,952)653,364
 3,697
(982)2,715
Net additions12,545

12,545
 


Reductions(452)
(452) 


Balance, December 31, 2012777,409
(111,952)665,457
 3,697
(982)2,715
Net additions96,777

96,777
 


Reductions(644)
(644) 


Balance, December 31, 2013$873,542
$(111,952)$761,590
 $3,697
$(982)$2,715
        
 Other Intangible Assets    
  Accumulated     
 GrossAmortizationNet    
Balance, December 31, 2010$58,079
$(31,986)$26,093
    
Net additions


    
Amortization
(4,948)(4,948)    
Balance, December 31, 201158,079
(36,934)21,145
    
Net additions830

830
    
Amortization
(4,816)(4,816)    
Balance, December 31, 201258,909
(41,750)17,159
    
Net additions


    
Amortization
(4,781)(4,781)    
Balance, December 31, 2013$58,909
$(46,531)$12,378
    
Goodwill additions in 2013 relate to the Rainier and Nevada Security acquisitionsFinPac acquisition and represent the excess of the total purchase price paid over the fair valuesvalue of the assets acquired, net of the fair values of liabilities assumed. Additional information on the acquisition and purchase price allocation is provided in Note 2. Goodwill additions in 2012 relate to the Circle acquisition and represent the excess of the total purchase price paid over the fair value of the assets acquired, net of the fair values of liabilities assumed. Additional information on the acquisition and purchase price allocation is provided in Note 2. Goodwill additions in 2011 relate to purchase accounting adjustments finalized relating to the Rainier acquisition. The reductionsreduction to goodwill include decreasesin 2013 of $96,000, $81,000$644,000 relates to purchase accounting adjustments. The reduction to goodwill in 2012 and $234,000 in 2010, 20092011 of $452,000, and 2008, respectively,$44,000 are due to the recognition of tax benefits upon exercise of fully vested acquired stock options.

Umpqua Holdings Corporation and Subsidiaries

Intangible additions in 2012 relate to the Evergreen, Rainier, and Nevada Security acquisitionsCircle acquisition and represent core deposits, which includes all deposits except certificates of deposit, and an insurance related customer relationship, which was sold in the second quarter of 2010 for the same value recorded in the purchase price allocation.deposit. The values of the core deposit intangible assets were determined by an analysis of the cost differential between the core deposits and alternative funding sources. The value of the insurance related customer relationship was determined based on market indicators. Intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives, and are also reviewed for impairment. We amortize other intangible assets on an accelerated or straight-line basis over an estimated ten to fifteen year life. No impairment losses separate from the scheduled amortization have been recognized in the periods presented.

The Company performed a goodwill impairment analysis of the Community Banking operating segment as of June 30, 2009, due to a decline in the Company’s market capitalization below book value of equity and continued weakness in the banking industry. The Company engaged an independent valuation consultant to assist us in determining whether and to what extent our goodwill asset was impaired. The results of the Company’s and valuation specialist’s step one impairment test indicated that the reporting unit’s fair value was less than its carrying value, and therefore the Company performed a step two analysis. As part of the second step of the goodwill impairment analysis, we calculated the fair value of the reporting unit’s assets and liabilities, as well as its unrecognized identifiable intangible assets, such as the core deposit intangible and trade name. Fair value adjustments to items on the balance sheet primarily related to investment securities held to maturity, loans, other real estate owned, Visa Class B common stock, deferred taxes, deposits, term debt, and junior subordinated debentures carried at amortized cost. The external valuation specialist assisted management to estimate the fair value of our unrecognized identifiable assets, such as the core deposit intangible and trade name.

The most significant fair value adjustment made in this analysis was to adjust the carrying value of the Company’s loans receivable portfolio to fair value. The fair value of the Company’s loan receivable portfolio at June 30, 2009 was estimated in a manner similar to methodology utilized as part of the December 31, 2008 goodwill impairment evaluation. As part of the December 31, 2008 loan valuation, the loan portfolio was stratified into sixty-eight loan pools that shared common characteristics, namely loan type, payment terms, and whether the loans were performing or non-performing. Each loan pool was discounted at a rate that considers current market interest rates, credit risk, and assumed liquidity premiums required based upon the nature of the underlying pool. Due to the disruption in the financial markets experienced during 2008 and continuing through 2009, the liquidity premium reflects the reduction in demand in the secondary markets for all grades of non-conforming credit, including those that are performing. Liquidity premiums for individual loan categories generally ranged from 4.6% for performing loans to 30% for construction and non-performing loans. At December 31, 2008, the fair value of the overall loan portfolio was calculated to be at a 9% discount relative to its book value. The composition of the loan portfolio at June 30, 2009, including loan type and performance indicators, was substantially similar to the loan portfolio at December 31, 2008. At June 30, 2009, the fair value of the loan portfolio was estimated to be at a 12% discount relative to its carrying value. The additional discount is primarily attributed to the additional liquidity premium required as of the measurement date associated with the Company’s concentration of commercial real estate loans.

Other significant fair value adjustments utilized in this goodwill impairment analysis included the value of the core deposit intangible asset which was calculated as 0.53% of core deposits, and includes all deposits except certificates of deposit. The carrying value of other real estate owned was discounted by 25%, representing a liquidity adjustment given the current market conditions. The fair value of our trade name, which represents the competitive advantage associated with our brand recognition and ability to attract and retain relationships, was estimated to be $19.3 million. The fair value of our junior subordinated debentures carried at amortized cost was determined in a manner and utilized inputs, primarily the credit risk adjusted spread, consistent with our methodology for determining the fair value of junior subordinated debentures recorded at fair value.

Based on the results of the step two analysis, the Company determined that the implied fair value of the goodwill was less than its carrying amount on the Company’s balance sheet, and as a result, recognized a goodwill impairment loss of $112.0 million in the second quarter of 2009. This write-down of goodwill is a non-cash charge that does not affect the Company’s or the Bank’s liquidity or operations. In addition, because goodwill is excluded in the calculation of regulatory capital, the Company’s “well-capitalized” capital ratios were not affected by this charge.

The Company conducted its annual evaluation of goodwill for impairment at both December 31, 20102013 and 2009,2012 , respectively. At December 31, 2010,both dates, in the first step of the goodwill impairment test, the Company determined that the fair value of the Community Banking and Wealth Management reporting unitunits exceeded its carrying amount. This determination is consistent with the events occurring after the Company recognized the $112.0 million impairment of goodwill in the second quarter of 2009. First, the market capitalization and estimated fair value of the Company increased significantly subsequent to the recognition of the impairment charge, as the fair value of the Company’s stock increased 57% from June 30, 2009 to December 31, 2010. Secondly, the Company’s successful public common stock offerings in the third quarter of 2009 and first quarter of 2010 diluted the carrying value of the reporting unit’s book equity on a per share basis, against which the fair value of the reporting unit is measured. The significant assumptions and methodology utilized to test for goodwill impairment as of December 31, 20102013 were consistent with those used at December 31, 2009.

If the Company’s common2012.


128


A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, a significant decline in our expected future cash flows; a sustained, significant decline in our stock price declines furtherand market capitalization; a significant adverse change in legal factors or continues to trade below book value per common share, or should general economic conditions deteriorate further or remain depressed for a prolonged period of time, particularly in the financial industry,business climate; adverse action or assessment by a regulator; and unanticipated competition.
The Company has the Company may be requiredoption to recognize additionalperform a qualitative assessment before completing the goodwill impairment of all, or some portion of, its goodwill. It is possible that changes in circumstances, existing at the measurement date or at other times in the future, or changes in the numerous estimates associated with management’s judgments, assumptions and estimates made in assessing the fair value of our goodwill, such as valuation multiples, discount rates, or projected earnings, could result in an impairment charge in future periods. Additional impairment charges, if any, may be material to the Company’s results of operations and financial position. However, any potential future impairment charge will have no effect on the Company’s or the Bank’s cash balances, liquidity, or regulatory capital ratios.

test two-step process. The inputs management utilizes to estimatefirst step compares the fair value of a reporting unit in step one of the goodwill impairment test, and estimating the fair values of the underlying assets and liabilities of a reporting unit in the second step of the goodwill impairment test, require management to make significant judgments, assumptions and estimates where observable market may not readily exist. Such inputs include, but are not limited to, trading multiples from comparable transactions, control premiums, the value that may arise from synergies and other benefits that would accrue from control over an entity, and the appropriate rates to discount projected cash flows. Additionally, there may be limited current market inputs to value certain assets or liabilities, particularly loans and junior subordinated debentures. These valuation inputs are considered to be Level 3 inputs.

Management will continue to monitor the relationship of the Company’s market capitalization to both its book value and tangible book value, which management attributes to both financial services industry-wide and Company specific factors, and to evaluate the carrying value of goodwill and other intangible assets.

As a result of the December 31, 2008 goodwill impairment evaluation related to the Retail Brokerage reporting segment, management determined that there was a $1.0 million impairment following the departure of certain Umpqua Investments financial advisors. The valuation of the impairment at the Retail Brokerage operating segment was determined using an income approach by discounting cash flows of forecasted earnings. The key assumptions used to estimate the fair value of each reporting unit include earnings forecasts for five years, a terminal value based on expected future growth rates, and a discount rate reflective of current market conditions. The Company evaluated the Retail Brokerage reporting segment’s goodwill for impairment as of December 31, 2010. The first step of the goodwill impairment test indicated thatvalue. If the reporting unit’s fair value exceededis less than its carrying value, therefore, no additional impairment was recognized.

In 2009, the Company recognized an $804,000 impairment relatedwould be required to proceed to the merchant servicing portfoliosecond step. In the second step the Company calculates the implied fair value of the reporting unit’s goodwill. The implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination. The estimated fair value of the Company is allocated to all of the Company’s assets and liabilities, including any unrecognized identifiable intangible assets, as if the Company had been acquired in a business combination and the estimated fair value of the reporting unit is the price paid to acquire it. The allocation process is performed only for purposes of determining the amount of goodwill impairment. No assets or liabilities are written up or down, nor are any additional unrecognized identifiable intangible assets recorded as a resultpart of this process. Any excess of the estimated purchase price over the fair value of the reporting unit’s net assets represents the implied fair value of goodwill. If the carrying amount of the goodwill is greater than the implied fair value of that goodwill, an impairment loss would be recognized as a decreasecharge to earnings in an amount equal to that excess. The Company performs the actualfirst step on an annual basis and expected future cash flows related to the income stream. Additional information on intangible assets related to acquisitions is provided in Note 2.

Umpqua Holdings Corporation and Subsidiaries

between if certain events or circumstances indicate goodwill may be impaired.

The table below presents the forecasted amortization expense for intangible assets acquired in all mergers:

(in thousands)

Year  Expected
Amortization
 

2011

  $4,948  

2012

   4,795  

2013

   4,623  

2014

   4,403  

2015

   4,182  

Thereafter

   3,142  
     
  $26,093  
     

 Expected
YearAmortization
2014$4,528
20154,286
20162,520
2017549
2018190
Thereafter305
 $12,378
NOTE 10.     MORTGAGE SERVICING RIGHTSNote 10

– Mortgage Servicing Rights 

The following table presents the changes in the Company’s mortgage servicing rights (“MSR”) for the years ended December 31, 2010, 20092013, 2012 and 2008:

2011: 


(in thousands)

    2010  2009  2008 

Balance, beginning of year

  $12,625   $8,205   $10,088  

Additions for new mortgage servicing rights capitalized

   5,645    7,570    2,694  

Acquired mortgage servicing rights

   62          

Changes in fair value:

    

Due to changes in model inputs or assumptions(1)

   (1,598  (3,469  (1,270

Other(2)

   (2,280  319    (3,307
     

Balance, end of year

  $14,454   $12,625   $8,205  
     

Balance of loans serviced for others

  $1,603,414   $1,277,832   $955,494  

MSR as a percentage of serviced loans

   0.90%    0.99%    0.86%  

 2013 2012 2011
Balance, beginning of period$27,428
 $18,184
 $14,454
Additions for new mortgage servicing rights capitalized17,963
 17,710
 6,720
Changes in fair value:     
 Due to changes in model inputs or assumptions(1)
5,688
 (4,651) (858)
 Other(2)
(3,314) (3,815) (2,132)
Balance, end of period$47,765
 $27,428
 $18,184
(1)Principally reflects changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates.
(2)Represents changes due to collection/realization of expected cash flows over time.

Information related to our serviced loan portfolio as of December 31, 2013, 2012 and 2011 is as follows: 
(dollars in thousands)

129


 December 31, 2013 December 31, 2012 December 31, 2011
Balance of loans serviced for others$4,362,499
 $3,162,080
 $2,009,849
MSR as a percentage of serviced loans1.09% 0.87% 0.90%
The amount of contractually specified servicing fees, late fees and ancillary fees earned, recorded in mortgage banking revenue on theConsolidated Statements of OperationsIncome, were $3.9was $10.4 million $3.0, $6.6 million, and $2.5$4.7 million respectively, for the years ended December 31, 2010, 20092013, 2012 and 2008.2011. 

In 2007,

A sensitivity analysis of the Company began using derivative instrumentscurrent fair value to hedge the risk of changes in discount and prepayment speed assumptions as of December 31, 2013 and December 31, 2012 is as follows:
 December 31, 2013 December 31, 2012
Constant prepayment rate   
Effect on fair value of a 10% adverse change$(2,255) $(1,445)
Effect on fair value of a 20% adverse change$(4,323) $(2,754)
    
Discount rate   
Effect on fair value of a 100 basis point adverse change$(1,832) $(889)
Effect on fair value of a 200 basis point adverse change$(3,534) $(1,720)

The sensitivity analysis presents the hypothetical effect on fair value of MSR duethe MSR. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in an assumption to the change in fair value is not linear. Additionally, in the analysis, the impact of an adverse change in one assumption is calculated independent of any impact on other assumptions. In reality, changes in interest rates. Starting in late February 2008 and continuing into March 2008, the bond markets experienced extraordinary volatility. This volatility resulted in widening spreads and price declines on the derivative instruments that were not offset by corresponding gains in the MSR asset. As a result, a $2.4 million charge was recognized within mortgage banking revenue in the first quarter of 2008. In March 2008, the Company suspended the MSR hedge strategy, given the continued volatility.

one assumption may change another assumption.


NOTE 11.     NON-COVERED OTHER REAL ESTATE OWNED, NETNote 11

– Non-covered Other Real Estate Owned, Net 

The following table presents the changes in non-covered other real estate owned (“OREO”), net of valuation allowance, for the years ended December 31, 2010, 20092013, 2012 and 2008:

2011: 

(in thousands)

    2010  2009  2008 

Balance, beginning of period

  $24,566   $27,898   $6,943  

Additions to OREO

   41,491    50,914    44,587  

Dispositions of OREO

   (29,192  (41,999  (18,548

Valuation adjustments in the period

   (4,074  (12,247  (5,084
     

Balance, end of period

  $32,791   $24,566   $27,898  
     

 2013 2012 2011
Balance, beginning of period$17,138
 $34,175
 $32,791
Additions to OREO due to acquisition
 1,602
 
Additions to OREO21,638
 17,699
 47,414
Dispositions of OREO(15,495) (29,442) (37,083)
Valuation adjustments in the period(1,448) (6,896) (8,947)
Balance, end of period$21,833
 $17,138
 $34,175

OREO properties are recorded at the lower of the recorded investment in the loan (prior to foreclosure) or the fair market value of the property less expected selling costs. The Company recognized valuation allowances of $2.4$1.0 million, $11.4$1.8 million, and $3.5$5.1 million on its non-covered OREO balances as of December 31, 2010, 20092013, 2012 and 2008,2011, respectively. Valuation allowances on non-covered OREO balances are based on updated appraisals of the underlying properties as received during a period or management’smanagement's authorization to reduce the selling price of a property during the period.

During the year, residential properties were purchased from two executives of the company as part of their relocation. The price paid by the company was the average value of two separate independent appraisals. At year end these properties represented $2.2 million of the total non-covered OREO balance.

NOTE 12. OTHER ASSETS

Other assets consisted of the following at December 31, 20102013 and 2009:

2012:


130


(in thousands)

    2010   2009 

Cash surrender value of life insurance policies

  $90,161    $86,853  

Due from FDIC

   36,461     7,977  

Accrued interest receivable

   30,307     29,261  

Prepaid FDIC deposit assessment

   29,369     42,206  

Deferred tax assets, net

   9,649     16,881  

Equity method investments

   8,377     7,247  

Investment in unconsolidated Trusts

   6,933     6,933  

Income taxes receivable

   516     24,071  

Other

   30,692     29,953  
     

Total

  $242,465    $251,382  
     

 2013 2012
Accrued interest receivable$23,720
 $26,998
Derivative assets17,921
 23,942
Income taxes receivable15,665
 12,859
Equity method investments9,641
 11,031
Investment in unconsolidated Trusts6,933
 6,933
Due from FDIC3,322
 12,606
Prepaid FDIC deposit assessment
 12,307
Other34,756
 32,026
  Total$111,958
 $138,702
The amount due from the FDIC at December 31, 2010 relates to the FDIC-assisted acquisitions of Evergreen, Rainier, and Nevada Security. See further discussion at Note 7. The amount due from the FDIC at December 31, 2009 relates to the FDIC-assisted purchase and assumption of certain assets and liabilities of the Bank of Clark County and was collected in the first quarter of 2010.

The Company invests in limited partnerships that operate qualified affordable housing projects to receive tax benefits in the form of tax deductions from operating losses and tax credits. The Company accounts for the investments under the equity method. The Company’s remaining capital commitments to these partnerships at December 31, 20102013 and 20092012 were approximately $1.9$1.4 million and $199,000,$4.1 million, respectively. Such amounts are included in other liabilities on the consolidated balance sheets.

Also see Note 18 for information on the Company’s investment in Trusts.

Umpqua Holdings CorporationTrusts and Subsidiaries

Note 21 for information on the Company’s derivatives.


NOTE 13.    INCOME TAXESNote 13

– Income Taxes 

The following table presents the components of income tax (benefit) expense attributable to continuing operations(benefit) included in theConsolidated Statements of OperationsIncome for the years ended December 31:

(in thousands)

    Current  Deferred  Total 

YEAR ENDED DECEMBER 31, 2010:

    

Federal

  $(1,714 $6,364   $4,650  

State

   3,126    (1,971  1,155  
     
  $1,412   $4,393   $5,805  
     

YEAR ENDED DECEMBER 31, 2009:

    

Federal

  $(24,339 $(7,471 $(31,810

State

   1,762    (10,889  (9,127
     
  $(22,577 $(18,360 $(40,937
     

YEAR ENDED DECEMBER 31, 2008:

    

Federal

  $8,178   $10,949   $19,127  

State

   4,066    (1,060  3,006  
     
  $12,244   $9,889   $22,133  
     

 Current Deferred Total
YEAR ENDED DECEMBER 31, 2013:     
  Federal$36,733
 $7,459
 $44,192
  State8,187
 289
 8,476
 $44,920
 $7,748
 $52,668
YEAR ENDED DECEMBER 31, 2012:   �� 
  Federal$44,268
 $(426) $43,842
  State2,632
 6,847
 9,479
 $46,900
 $6,421
 $53,321
YEAR ENDED DECEMBER 31, 2011:     
  Federal$29,932
 $(40) $29,892
  State4,810
 2,040
 6,850
 $34,742
 $2,000
 $36,742
The following table presents a reconciliation of income taxes computed at the Federal statutory rate to the actual effective rate for the years ended December 31:

    2010  2009  2008 

Statutory Federal income tax rate

   35.0  35.0  35.0%  

Goodwill impairment

       -20.0  0.5%  

State tax, net of Federal income tax

   2.5  2.9  3.2%  

Tax-exempt income

   -13.6  2.2  -5.4%  

Tax credits

   -5.5  1.0  -2.9%  

Other

   -1.4  -0.1  -0.2%  
     

Effective income tax rate

   17.0  21.0  30.2%  
     


131


 2013 2012 2011
Statutory Federal income tax rate35.0 % 35.0 % 35.0 %
State tax, net of Federal income tax4.4 % 4.4 % 3.8 %
Tax-exempt income(3.2)% (3.0)% (3.7)%
Tax credits(1.8)% (1.1)% (1.5)%
Nondeductible merger expenses1.0 % 0.1 %  %
Other(0.5)% (1.0)% (0.6)%
    Effective income tax rate34.9 % 34.4 % 33.0 %
The following table reflects the effects of temporary differences that give rise to the components of the net deferred tax asset (recorded in other assets recorded on the consolidated balance sheets)sheets as of December 31:

(in thousands)

    2010   2009 

DEFERRED TAX ASSETS:

    

Covered loans

  $49,334    $—    

Allowance for loan and lease losses

   41,084     43,529  

Tax credits

   13,289     13,871  

Other real estate owned

   11,873     4,369  

Accrued severance and deferred compensation

   10,690     10,445  

Net operating loss carryforwards

   8,897     3,386  

Non-covered loans

   3,401     1,927  

Basis differences of stock and securities

   2,998     2,842  

Discount on trust preferred securities

   2,753     2,891  

Other

   7,719     7,579  
     

Total gross deferred tax assets

   152,038     90,839  

DEFERRED TAX LIABILITIES:

    

FDIC indemnification asset

   73,719       

Fair market value adjustment on junior subordinated debentures

   20,801     19,734  

Unrealized gain on investment securities

   16,966     17,290  

Mortgage servicing rights

   5,782     4,974  

Premises and equipment depreciation

   5,581     4,334  

Intangibles

   5,228     12,943  

Other

   5,136     5,062  

Leased assets

   4,879     5,196  

Deferred loan fees

   4,297     4,425  
     

Total gross deferred tax liabilities

   142,389     73,958  
     

Net deferred tax assets

  $9,649    $16,881  
     

 2013 2012
DEFERRED TAX ASSETS:   
  Allowance for loan and lease losses$33,652
 $33,782
  Covered loans16,788
 28,610
  Accrued severance and deferred compensation13,080
 13,376
  Non-accrual loans5,760
 4,759
  Tax credits5,716
 3,655
  Unrealized loss on investment securities3,318
 
  Non-covered other real estate owned3,023
 1,974
  Covered other real estate owned831
 5,120
  Other16,230
 14,702
    Total gross deferred tax assets98,398
 105,978
    
DEFERRED TAX LIABILITIES:   
  Mortgage servicing rights18,855
 10,847
  Fair market value adjustment on preferred securities18,649
 19,567
  FDIC indemnification asset10,471
 25,913
  Leased assets9,719
 3,930
  Deferred loan fees7,525
 5,706
  Premises and equipment depreciation7,356
 8,834
  Intangibles5,633
 5,161
  Unrealized gain on investment securities
 16,306
  Other3,512
 6,186
    Total gross deferred tax liabilities81,720
 102,450
    
Valuation allowance(51) 
    
Net deferred tax assets$16,627
 $3,528

The Company has determined that it is not required to establish a valuation allowance for a portion of the deferred tax assets as management believes it is more likely than not that a deferred tax asset of $51,000 as December 31, 2013, relating to Canadian net operating losses, may not be able to be utilized in the future. The Company has determined that no other valuation allowance for the remaining deferred tax assets is required as management believes it is more likely than not that the remaining deferred tax assets of $152.0$98.3 million and $90.8$106.0 million at December 31, 20102013 and 2009,2012, respectively, will be realized principally through carry-back to taxable income in prior years and future reversals of existing taxable temporary differences. Management further believes that future taxable income will be sufficient to realize the benefits of temporary deductible differences that cannot be realized through carry-back to prior years or through the reversal of future temporary taxable differences.


132



The tax credits consist entirely of state tax credits of $8.9 million and $9.5 million at December 31, 20102013 and 2009, respectively, and $4.3 million and $4.3 million of alternative minimum tax and federal low income housing credits at December 31, 2010 and 2009 separately.2012. The state tax credits, comprised primarily of State of Oregon Business Energy Tax Credits (“BETC”), will be utilized to offset future state income taxes. The Company made its first BETC purchase in 2004, and has made subsequent BETC purchases in each year thereafter. Most of the state tax credits benefit a five-year period, with an eight-year carry-forward allowed. Federal low income housing credits have a twenty-year carry forward and the alternative minimum tax credits may be carried forward indefinitely. Management believes, based upon the Company’s historical performance that the deferred tax assets relating to these tax credits will be realized in the normal course of operations, and, accordingly, management has not reduced these deferred tax assets by a valuation allowance.

The Company has federal and state net operating loss carry forwards of $8.9 million at December 31, 2010. The federal net operating losses may be carried forward twenty years. The state net operating losses may be carried forward twenty years in California and fifteen years in Oregon. Management believes, based upon the Company’s historical performance, that the

Umpqua Holdings Corporation and Subsidiaries

deferred tax assets relating to federal and state net operating losses will be realized in the normal course of operations, and, accordingly, management has not reduced these deferred tax assets by a valuation allowance.


The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, as well as the Oregon and California state jurisdictions. Except forAdditionally, as a result of the California amended returnsFinPac acquisition, the Company will now be subject to filings in the majority of an acquired institution for the tax years 2001, 2002,states and 2003, and only as it relates to the net interest deduction taken on these amended returns, thein Canada. The Company is no longer subject to U.S. federal or Oregonand other state tax authorities examinations for years before 2009, except in California for years before 2005 and for Canadian tax authority examinations for years before 2007 and California state tax authority examinations for years before 2004. The Internal Revenue Service concluded an examination of2012.

In accordance with the Company’s U.S. income tax returns for 2006 through 2008 in 2010. The results of these examinations had no significant impact on the Company’s financial statements.

The Company adopted the revised provisions of FASB ASC 740,Income Taxes, (“ASC 740”), relating to the accounting for uncertainty in income taxes, on January 1, 2007. Upon the implementation of the revised provisions, the Company recognized no material adjustment in the form of a liability for unrecognized tax benefits. The Company periodically reviews its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This review takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns, recent positions taken by the taxing authorities on similar transactions, if any, and the overall tax environment.


The Company recorded a reductionan increase in its liability for unrecognized tax benefits relating to California tax incentives and temporary differences in the amount of $1.7 million$4,000 during 2013 and $1.2 millionan increase of $47,000 during 2010 and 2009, respectively.2012. The Company had gross unrecognized tax benefits recorded as of December 31, 20102013 and 20092012 in the amounts of $590,000$602,000 and $2.3 million,$598,000, respectively. If recognized the unrecognized tax benefit would impactreduce the 20102013 annual effective tax rate by 1.1%0.3%. During 2010, theThe Company also accrued $194,000$24,000 of interest related to unrecognized tax benefits whichand recognized a benefit of $6,000 in interest reversed primarily due to the reductions of its liability for unrecognized tax benefits during 2013 and 2012 , respectively. Interest on unrecognized tax benefits is reported by the Company as a component as of tax expense. As of December 31, 2010,2013 and 2012, the accrued interest related to unrecognized tax benefits is $171,000.

$193,000 and $168,000, respectively.


Detailed below is a reconciliation of the Company’s unrecognized tax benefits, gross of any related tax benefits, for the years ended December 31, 20102013 and 2009,2012, respectively:


(in thousands)

    2010  2009 

Balance, beginning of period

  $2,263   $1,042  

Changes based on tax positions related to the current year

       692  

Changes based on tax positions related to prior years

   (1,674  589  

Reductions for tax positions of prior years

       (60
     

Balance, end of period

  $589   $2,263  
     

 2013 2012
Balance, beginning of period$598
 $550
Effectively settled positions4
 (39)
Changes for tax positions of prior years
 87
Balance, end of period$602
 $598

NOTE 14.    INTEREST BEARING DEPOSITSNote 14

– Interest Bearing Deposits 


The following table presents the major types of interest bearing deposits at December 31, 20102013 and 2009:

2012:

(in thousands)

    2010   2009 

Negotiable order of withdrawal (NOW)

  $927,224    $872,184  

Savings and money market

   3,817,245     2,813,805  

Time, $100,000 and over

   2,191,055     1,603,410  

Time less than $100,000

   881,594     752,703  
     

Total interest bearing deposits

  $7,817,118    $6,042,102  
     

 2013 2012
Interest bearing demand$1,233,070
 $1,215,002
Money market3,349,946
 3,407,047
Savings560,699
 475,325
Time, $100,000 and over1,065,380
 1,429,153
Time less than $100,000472,088
 573,834
Total interest bearing deposits$6,681,183
 $7,100,361
The following table presents interest expense for each deposit type for the years ended December 31, 2010, 20092013, 2012 and 2008:

2011:

(in thousands)

    2010   2009   2008 

NOW

  $4,677    $4,884    $8,005  

Savings and money market

   26,955     27,457     47,734  

Time, $100,000 and over

   31,735     36,070     42,690  

Other time less than $100,000

   12,874     20,331     30,941  
     

Total interest on deposits

  $76,241    $88,742    $129,370  
     


133


 2013 2012 2011
Interest bearing demand$978
 $1,980
 $3,056
Money market3,485
 7,193
 17,236
Savings321
 291
 356
Time, $100,000 and over11,911
 16,067
 25,771
Other time less than $100,0004,060
 5,602
 9,324
Total interest on deposits$20,755
 $31,133
 $55,743
The following table presents the scheduled maturities of time deposits as of December 31, 2010:

2013:

(in thousands)

Year  Amount 

2011

  $2,504,650  

2012

   276,845  

2013

   234,327  

2014

   22,658  

2015

   31,740  

Thereafter

   2,429  
     

Total time deposits

  $3,072,649  
     

YearAmount
2014$1,009,077
2015204,701
2016217,406
201778,728
201825,001
Thereafter2,555
Total time deposits$1,537,468

The following table presents the remaining maturities of time deposits of $100,000 or more as of December 31, 2010:

2013:

(in thousands)

Year  Amount 

Three months or less

  $642,060  

Over three months through six months

   325,706  

Over six months through twelve months

   839,661  

Over twelve months

   383,628  
     

Time, $100,000 and over

  $2,191,055  
     

 Amount
Three months or less$226,849
Over three months through six months211,268
Over six months through twelve months253,595
Over twelve months373,668
Time, $100,000 and over$1,065,380

NOTE 15.    SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASENote 15

– Securities Sold Under Agreements To Repurchase


The following table presents information regarding securities sold under agreements to repurchase at December 31, 20102013 and 2009:

2012:

(dollars in thousands)

    Repurchase
Amount
   Weighted
Average
Interest
Rate
  Carrying
Value of
Underlying
Assets
   Market
Value of
Underlying
Assets
 

December 31, 2010

  $73,759     0.66 $75,305    $75,305  

December 31, 2009

  $45,180     1.05 $46,166    $46,166  

   Weighted Carrying Market
   Average Value of Value of
 Repurchase Interest Underlying Underlying
 Amount Rate Assets Assets
        
December 31, 2013$224,882
 0.07% $229,439
 $229,439
December 31, 2012$137,075
 0.14% $139,373
 $139,373
The securities underlying agreements to repurchase entered into by the Bank are for the same securities originally sold, with a one-day maturity. In all cases, the Bank maintains control over the securities. Securities sold under agreements to repurchase averaged approximately $54.7$177.9 million $56.8, $142.4 million, and $47.7$113.1 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively. The maximum amount outstanding at any month end for the years ended December 31, 2010, 20092013, 2012 and 20082011, was $73.8$233.8 million $64.3, $166.3 million, and $55.6$148.2 million, respectively. Investment securities are pledged as collateral in an amount equal to or greater than the repurchase agreements.

Umpqua Holdings Corporation and Subsidiaries

NOTE 16.    FEDERAL FUNDS PURCHASEDNote 16

– Federal Funds Purchased 


134



At December 31, 20102013 and 2009,2012, the Company had no outstanding federal funds purchased balances. The Bank had available lines of credit with the FHLB totaling $1.9$2.2 billion at December 31, 2010.2013. The Bank had available lines of credit with the Federal Reserve totaling $289.4$391.7 million subject to certain collateral requirements, namely the amount of certain pledged loans.loans at December 31, 2013. The Bank had uncommitted federal funds line of credit agreements with additional financial institutions totaling $125.0$185.0 million at December 31, 2010.2013. At December 31, 2010,2013, the lines of credit had interest rates ranging from 0.30%0.3% to 3.00%0.8%. Availability of the lines is subject to federal funds balances available for loan and continued borrower eligibility and are reviewed and renewed periodically throughout the year. These lines are intended to support short-term liquidity needs, and the agreements may restrict consecutive day usage.


NOTE 17.    TERM DEBTNote 17

– Term Debt


The Bank had outstanding secured advances from the FHLB and other creditors at December 31, 20102013 and 20092012 with carrying values of $262.8$251.5 million and $76.3$253.6 million, respectively.

The following table summarizes the future contractual maturities of borrowed funds (excluding the remaining unamortized purchase accounting adjustments relating to the Rainier acquisition of $12.2$6.0 million) as of December 31, 2010:

2013:

(dollars in thousands)

Year  Amount 

2011

  $5,000  

2012

     

2013

     

2014

     

2015

     

Thereafter

   245,528  
     

Total borrowed funds

  $250,528  
     

Year Amount
2014 $
2015 
2016 190,016
2017 55,000
2018 
Thereafter 495
Total borrowed funds$245,511
The maximum amount outstanding from the FHLB under term advances at month end during 2010 and 2009 was $355.2 million and $205.9 million, respectively. Thethe average balance outstanding on FHLB term advances during 2010both 2013 and 20092012 was $247.5 million and $129.2 million, respectively.$245.0 million. The average interest rate on the borrowings (excluding the accretion of purchase accounting adjustments) was 4.41%4.6% in 20102013 and 3.59% in 2009.2012. The FHLB requires the Bank to maintain a required level of investment in FHLB and sufficient collateral to qualify for notes. The Bank has pledged as collateral for these notes all FHLB stock, all funds on deposit with the FHLB, and its investments and commercial real estate portfolios, accounts, general intangibles, equipment and other property in which a security interest can be granted by the Bank to the FHLB.

NOTE 18.    JUNIOR SUBORDINATED DEBENTURES

As


135


Note 18– Junior Subordinated Debentures 
Following is information about the TrustsCompany’s wholly-owned trusts (“Trusts”) as of December 31, 2010:

2013Junior Subordinated Debentures

(dollars in thousands)

Trust Name Issue Date  Issued
Amount
  Carrying
Value(1)
  Rate(2)  Effective
Rate(3)
  Maturity Date  Redemption
Date
 

AT FAIR VALUE:

       

Umpqua Statutory Trust II

  October 2002   $20,619   $13,846    Floating(4)   11.62  October 2032    October 2007  

Umpqua Statutory Trust III

  October 2002    30,928    21,007    Floating(5)   11.62  November 2032    November 2007  

Umpqua Statutory Trust IV

  December 2003    10,310    6,467    Floating(6)   11.64  January 2034    January 2009  

Umpqua Statutory Trust V

  December 2003    10,310    6,459    Floating(6)   11.64  March 2034    March 2009  

Umpqua Master Trust I

  August 2007    41,238    20,348    Floating(7)   11.69  September 2037    September 2012  

Umpqua Master Trust IB

  September 2007    20,619    12,561    Floating(8)   11.65  December 2037    December 2012  
         
   134,024    80,688      
         

AT AMORTIZED COST:

       

HB Capital Trust I

  March 2000    5,310    6,385    10.875  8.17  March 2030    March 2010  

Humboldt Bancorp Statutory Trust I

  February 2001    5,155    5,935    10.200  8.20  February 2031    February 2011  

Humboldt Bancorp Statutory Trust II

  December 2001    10,310    11,432    Floating(9)   3.05  December 2031    December 2006  

Humboldt Bancorp Statutory Trust III

  September 2003    27,836    30,735    Floating(10)   2.52  September 2033    September 2008  

CIB Capital Trust

  November 2002    10,310    11,263    Floating(5)   3.03  November 2032    November 2007  

Western Sierra Statutory Trust I

  July 2001    6,186    6,186    Floating(11)   3.87  July 2031    July 2006  

Western Sierra Statutory Trust II

  December 2001    10,310    10,310    Floating(9)   3.90  December 2031    December 2006  

Western Sierra Statutory Trust III

  September 2003    10,310    10,310    Floating(12)   3.19  September 2033    September 2008  

Western Sierra Statutory Trust IV

  September 2003    10,310    10,310    Floating(12)   3.19  September 2033    September 2008  
         
   96,037    102,866      
         
  Total   $230,061   $183,554      
         

   Issued Carrying   Effective    
Trust NameIssue Date Amount Value (1) Rate (2) Rate (3) Maturity Date Redemption Date
AT FAIR VALUE:             
Umpqua Statutory Trust IIOctober 2002 $20,619
 $14,791
 Floating (4) 5.00% October 2032 October 2007
Umpqua Statutory Trust IIIOctober 2002 30,928
 22,392
 Floating (5) 5.10% November 2032 November 2007
Umpqua Statutory Trust IVDecember 2003 10,310
 6,978
 Floating (6) 4.57% January 2034 January 2009
Umpqua Statutory Trust VDecember 2003 10,310
 6,957
 Floating (6) 4.58% March 2034 March 2009
Umpqua Master Trust IAugust 2007 41,238
 22,696
 Floating (7) 2.89% September 2037 September 2012
Umpqua Master Trust IBSeptember 2007 20,619
 13,460
 Floating (8) 4.58% December 2037 December 2012
   134,024
 87,274
        
AT AMORTIZED COST:             
HB Capital Trust IMarch 2000 5,310
 6,218
 10.875% 8.39% March 2030 March 2010
Humboldt Bancorp Statutory Trust IFebruary 2001 5,155
 5,819
 10.200% 8.37% February 2031 February 2011
Humboldt Bancorp Statutory Trust IIDecember 2001 10,310
 11,271
 Floating (9) 3.04% December 2031 December 2006
Humboldt Bancorp Statutory Trust IIISeptember 2003 27,836
 30,344
 Floating (10) 2.50% September 2033 September 2008
CIB Capital TrustNovember 2002 10,310
 11,131
 Floating (5) 3.02% November 2032 November 2007
Western Sierra Statutory Trust IJuly 2001 6,186
 6,186
 Floating (11) 3.82% July 2031 July 2006
Western Sierra Statutory Trust IIDecember 2001 10,310
 10,310
 Floating (9) 3.84% December 2031 December 2006
Western Sierra Statutory Trust IIISeptember 2003 10,310
 10,310
 Floating (12) 3.14% September 2033 September 2008
Western Sierra Statutory Trust IVSeptember 2003 10,310
 10,310
 Floating (12) 3.14% September 2033 September 2008
   96,037
 101,899
        
 Total $230,061
 $189,173
        
(1)Includes purchase accounting adjustments, net of accumulated amortization, for junior subordinated debentures
assumed in connection with previous mergers as well as fair value adjustments related to trusts recorded at fair value.
(2)Contractual interest rate of junior subordinated debentures.
(3)
Effective interest rate based upon the carrying value as of December 2010.31, 2013
(4)
Rate based on LIBOR plus 3.35%, adjusted quarterly.
(5)
Rate based on LIBOR plus 3.45%, adjusted quarterly.
(6)
Rate based on LIBOR plus 2.85%, adjusted quarterly.
(7)
Rate based on LIBOR plus 1.35%, adjusted quarterly.

Umpqua Holdings Corporation and Subsidiaries

(8)
Rate based on LIBOR plus 2.75%, adjusted quarterly.
(9)
Rate based on LIBOR plus 3.60%, adjusted quarterly.
(10)
Rate based on LIBOR plus 2.95%, adjusted quarterly.
(11)
Rate based on LIBOR plus 3.58%, adjusted quarterly.
(12)
Rate based on LIBOR plus 2.90%, adjusted quarterly.

The $230.1 million of trust preferred securities issued to the Trusts as of December 31, 2010 and 2009, with carrying values of $183.6 and $188.9 million, respectively, are reflected as junior subordinated debentures in the consolidated balance sheets.Consolidated Balance Sheets.  The common stock issued by the Trusts is recorded in other assets in the consolidated balance sheets,Consolidated Balance Sheets, and totaled $6.9$6.9 million at December 31, 20102013 and 2009.

All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of $7.2 million at December 31, 2010, under guidance issued by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”)2012Effective April 11, 2005, the Federal Reserve Board adopted a rule that permits the inclusion of trust preferred securities in Tier 1 capital, but with stricter quantitative limits. The Federal Reserve Board rule, with a five-year transition period set to end on March 31, 2009, would have limited the aggregate amount of trust preferred securities and certain other restricted core capital elements to 25% of Tier 1 capital, net of goodwill and any associated deferred tax liability. The rule allowed the amount of trust preferred securities and certain other elements in excess of the limit to be included in Tier 2 capital, subject to restrictions. In response to the stressed conditions in the financial markets and in order to promote stability in the financial markets and the banking industry, on March 17, 2009, the Federal Reserved adopted a new rule that delayed the effective date of the new limits on the inclusion of trust preferred securities and other restricted core capital elements in Tier 1 capital until March 31, 2011. At December 31, 2010, the Company’s restricted core capital elements were 18.8% of total core capital, net of goodwill and any associated deferred tax liability.


On January 1, 2007, the Company selected the fair value measurement option for certain pre-existing junior subordinated debentures of $97.9 million (the Umpqua Statutory Trusts). The remaining junior subordinated debentures as of the adoption date were acquired through business combinations and were measured at fair value at the time of acquisition. In 2007, the Company issued two series of trust preferred securities and elected to measure each instrument at fair value. Accounting for the junior subordinated debentures originally issued by the Company at fair value enables us to more closely align our financial performance with the economic value of those liabilities. Additionally, we believe it improves our ability to manage the market and interest rate risks associated with the junior subordinated debentures. The junior subordinated debentures measured at fair value and amortized cost have beenare presented as separate line items on the balance sheet. The ending carrying (fair) value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants under current market conditions as of the measurement date.


136


The significant inputs utilized in the estimation of fair value of these instruments are the credit risk adjusted spread and three month LIBOR.  The credit risk adjusted spread represents the nonperformance risk of the liability, contemplating the inherent risk of the obligation.  Generally, an increase in the credit risk adjusted spread and/or a decrease in the three month LIBOR will result in positive fair value adjustments.  Conversely, a decrease in the credit risk adjusted spread and/or an increase in the three month LIBOR will result in negative fair value adjustments. 
Through the first quarter of 2010 we obtained valuations from a third-party pricing service to assist with the estimation and determination of fair value of these liabilities. In these valuations, the credit risk adjusted interest spread for potential new issuances through the primary market and implied spreads of these instruments when traded as assets on the secondary market, were estimated to be significantly higher than the contractual spread of our junior subordinated debentures measured at fair value. The difference between these spreads has resulted in the cumulative gain in fair value, reducing the carrying value of these instruments as reported on our Consolidated Balance Sheets. In July 2010, the Dodd-Frank Wall Street Reform and consumer Protection Act (the "Dodd-Frank Act") was signed into law which, among other things, limits the ability of certain bank holding companies to treat trust preferred security debt issuances as Tier 1 capital. This law may require many banks to raise new Tier 1 capital and has effectively closed the trust-preferred securities markets from offering new issuances in the future. As a result of this legislation, our third-party pricing service noted that they were no longer able to provide reliable fair value estimates related to these liabilities given the absence of observable or comparable transactions in the market place in recent history or as anticipated into the future. 
Due to inactivity in the junior subordinated debenture market and the inability to obtain observable quotes of our, or similar, junior subordinated debenture liabilities or the related trust preferred securities when traded as assets, we utilize an income approach valuation technique to determine the fair value of these liabilities using our estimation of market discount rate assumptions. The significant inputs utilizedCompany monitors activity in the estimationtrust preferred and related markets, to the extent available, changes related to the current and anticipated future interest rate environment, and considers our entity-specific creditworthiness, to validate the reasonableness of fair value of these instruments is the credit risk adjusted spread and three month LIBOR. effective yield utilized in our discounted cash flow model.  Regarding the activity in and condition of the junior subordinated debt market, we noted no observable changes in the current period as it relates to companies comparable to our size and condition, in either the primary or secondary markets.  Relating to the interest rate environment, we considered the change in slope and shape of the forward LIBOR swap curve in the current period, the effects of which did not result in a significant change in the fair value of these liabilities. 
The Company’s specific credit risk adjusted spread represents the nonperformance risk of the liability, contemplating both the inherent risk of the obligation and the Company’s entity-specific credit risk. Generally, an increaseis implicit in the credit risk adjusted spread and/or a decrease inused to determine the three month LIBOR will result in positive fair value adjustments. Conversely, a decreaseof our junior subordinated debentures. As our Company is not specifically rated by any credit agency, it is difficult to specifically attribute changes in our estimate of the applicable credit risk adjusted spread and/or an increaseto specific changes in our own creditworthiness versus changes in the three month LIBOR willmarket’s required return from similar companies. As a result, these considerations must be largely based off of qualitative considerations as we do not have a credit rating and we do not regularly issue senior or subordinated debt that would provide us an independent measure of the changes in how the market quantifies our perceived default risk. 

On a quarterly basis we assess entity-specific qualitative considerations that if not mitigated or represents a material change from the prior reporting period may result in negative fair value adjustments. Priora change to the second quarter of 2009, we estimated the fair value of junior subordinated debentures using an internal discounted cash flow model. The future cash flows of these instruments were extended to the next available redemption date or maturity date as appropriate based uponperceived creditworthiness and ultimately the estimated credit risk adjusted spreadsspread utilized to value these liabilities.  Entity-specific considerations that positively impact our creditworthiness include: our strong capital position resulting from our successful public stock offerings in 2009 and 2010 that offers us flexibility to pursue business opportunities such as mergers and  acquisitions, or expand our footprint and product offerings; having significant levels of on and off-balance sheet liquidity; being profitable (after excluding the one-time goodwill impairment charge recognized in 2009); and, having an experienced management team.  However, these positive considerations are mitigated by significant risks and uncertainties that impact our creditworthiness and ability to maintain capital adequacy in the future. Specific risks and concerns include: given our concentration of loans secured by real estate in our loan portfolio, a continued and sustained deterioration of the real estate market may result in declines in the value of the underlying collateral and increased delinquencies that could result in an increase of charge-offs; despite recent issuancesimprovement, our credit quality metrics remain negatively elevated since 2007 relative to historical standards; the continuation of current economic downturn that has been particularly severe in our primary markets could adversely affect our business; recent increased regulation facing our industry, such as the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009 and the Dodd-Frank Act, will increase the cost of compliance and restrict our ability to conduct business consistent with historical practices, require that we hold additional capital and could negatively impact profitability; we have a significant amount of goodwill and other intangible assets that dilute our available tangible common equity; and the carrying value of certain material, recently recorded assets on our balance sheet, such as the FDIC loss-sharing indemnification asset, are highly reliant on management estimates, such as the timing or quotes from brokers for comparable bank holding companies, as available, comparedamount of losses that are estimated to be covered, and the contractual spreadassumed continued compliance with the provisions of each junior subordinated debenture measured at fair value. For additional assurance,the applicable loss-share agreement. To the extent assumptions ultimately prove incorrect or should we obtained aconsciously forego or unknowingly violate the guidelines of the agreement, an impairment of the asset may result which would reduce capital. 
Additionally, the Company periodically utilizes an external valuation from a third-party pricing servicefirm to determine or validate the resultsreasonableness of our model.

In the second quarterassessments of 2009, due to continued inactivity ininputs and factors that ultimately determines the junior subordinated debenture and related markets and clarified guidance relating to the determination of fair value when the volume and level of activity for an asset or liability have significantly decreased or where transactions are not orderly, management evaluated and determined to rely on a third-party pricing service to estimate theestimated fair value of these liabilities. The pricing service utilized an income approach valuation technique, specifically an option-adjusted spread (“OAS”) valuation model. This OAS model valuesextent we involve or


137


engage these external third parties correlates to management’s assessment of the cash flows over multiple interest rate scenarioscurrent subordinated debt market, how the current environment and discounts these cash flows using a credit risk adjustment spread overmarket compares to the three month LIBOR swap curve. The OAS model utilized is more sophisticatedpreceding quarter, and computationally intensive than the model previously used; however, the models react similarly toperceived changes in the Company’s own creditworthiness during the quarter.  In periods of potential significant valuation changes and at year-end reporting periods we typically engage third parties to perform a full independent valuation of these liabilities.  For periods where management has assessed the market and other factors impacting the underlying inputs,valuation assumptions of these liabilities, and has determined significant changes to the valuation of these liabilities in the current period are remote, the scope of the valuation specialist’s review is limited to a review the reasonableness of management’s assessment of inputs. In the fourth quarter of 2013, the Company engaged an external valuation firm to prepare an independent valuation of our junior subordinated debentures measured at fair value and the results are considered comparable. Withwere consistent with the assistance of a third-party pricing service, we determined that a credit risk adjusted spread of 725 basis points (an effective yield of approximately 11.6%) is representative ofCompany's valuation.
Absent changes to the nonperformance risk premium a market participant would require under current market conditions as of March 31, 2010. Generally, an increasesignificant inputs utilized in the credit risk adjusted spread and/or a decrease in the swap curve will result in positive fair value adjustments. Conversely, a decrease in the credit risk adjusted spread and/or an increase in the swap curve will result in negative fair value adjustments.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed into law which, among other things, limits the ability of certain bank holding companiesdiscounted cash flow model used to treat trust preferred security debt issuances as Tier 1 capital. This law may require many banks to raise new Tier 1 capital and will effectively close the trust-preferred securities markets from offering new issuances in the future. As a result of this legislation, our third-party pricing service noted that they were no longer to able to provide reliable fair value estimates related to these liabilities given the absence of observable or comparable transactions in the market place in recent history or as anticipated into the future. As a result, management evaluated current market conditions and determined that the 11.6% effective yield utilized to discount the junior subordinated debentures, and the related prices, to determine fair value as of March 31, 2010 continued to represent appropriate estimates ofmeasure the fair value of these liabilities. Since the Company had less than $15 billion in assets at December 31, 2009, under the Dodd-Frank Act, the Company will be able to continue to include its existing trust preferred securities in Tier 1 capital.

In the third quarter of 2010, the Company began utilizing a discounted cash flow model to measure these instruments at fair value each reporting period, which will have the long-term effect of amortizing the cumulative fair value discount of $53.3 million, as of December 31, 2010, overfor each junior subordinated debentures expected term, to eventually returndebenture will reverse over time, ultimately returning the carrying valuevalues of these instruments to their notional values at their expected redemption dates.dates, in a manner similar to the effective yield method as if these instruments were accounted for under the amortized cost method.  This will result in recognizing losses on junior subordinated debentures carried at fair value on a quarterly basis within non-interest income.  For additional assurance, we obtained a valuation from a third-party to validate the results of our model at years ended December 31, 2010. The results2013, 2012 and 2011, we recorded loss of $2.2 million resulting from the change in fair value of the valuation were consistent with the results of our internal model. The Company will continue to monitor activity in the trust preferred markets to validate the 11.6% effective yield utilized.junior subordinated debentures recorded at fair value. Observable activity in the junior subordinated debenture and related markets in future periods may change the effective rate used to discount these liabilities, and could result in additional fair value adjustments (gains or losses on junior subordinated debentures measured at fair value) aboveoutside the expected periodic change in fair value underhad the effective yield method.

Forfair value assumptions remained unchanged. 

On July 2, 2013, the years endedfederal banking regulators approved the final rules that revise the regulatory capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework ("Basel III"). Under the final rule, consistent with Section 171 of the Dodd-Frank Act, bank holding companies with less than $15 billion assets as of December 31, 2010, 2009 will be grandfathered and 2008, we recorded gains of $5.0 million, $6.5 million and $38.9 million, respectively, resulting from the changemay continue to include these instruments in fair value of the junior subordinated debentures recorded at fair value. The change in fair value of the junior subordinated debentures carried at fair value during these periods primarily result from the widening of the credit risk adjusted spread. Management believes that the credit risk adjusted spread being utilized is indicative of the nonperformance risk premium a willing market participant would require under current market conditions, that is, the inactive market. In management’s estimation, the change in fair value of the junior subordinated debentures during the periods represent changes in the market’s nonperformance risk expectations and pricing of this type of debt, and notTier 1 capital, subject to certain restrictions. However, if an institution grows above $15 billion as a result of changesan acquisition, or organically grows above $15 billion and then makes an acquisition, the combined trust preferred issuances would be phased out of Tier 1 and into Tier 2 capital (75% in 2015 and 100% in 2016 and later). If the Company exceeds $15 billion in consolidated assets other than in an organic manner and these instruments no longer qualify as Tier 1 capital, it is possible the Company may accelerate redemption of the existing junior subordinated debentures.  This could result in adjustments to our entity-specific credit risk. Any gains recognized are recorded in gainthe fair value of these instruments including the acceleration of losses on junior subordinated debentures carried at fair value within non-interest income. The contractual interest expense onCompany currently does not intend to redeem the junior subordinated debentures continuesfollowing the proposed merger in order to be recorded on an accrual basis and is reported in interest expense. The junior subordinated debentures recorded at fair value of $80.7 million had contractual unpaid principal amounts of $134.0 million outstanding as of support regulatory total capital levels. At December 31, 2010. The junior subordinated debentures recorded at fair value2013, the Company's restricted core capital elements were 18.6% of $85.7 million had contractual unpaid principal amountstotal core capital, net of $134.0 million outstanding as of December 31, 2009.

Umpqua Holdings Corporationgoodwill and Subsidiaries

any associated deferred tax liability.


NOTE 19.    EMPLOYEE BENEFIT PLANSNote 19

– Employee Benefit Plans


Employee Savings Plan—Substantially-Substantially all of the Bank’sBank's and Umpqua Investments’Investments' employees are eligible to participate in the Umpqua Bank 401(k) and Profit Sharing Plan (the “Umpqua 401(k) Plan”), a defined contribution and profit sharing plan sponsored by the Company. Employees may elect to have a portion of their salary contributed to the plan in conformity with Section 401(k) of the Internal Revenue Code. At the discretion of the Company’sCompany's Board of Directors, the Company may elect to make matching and/or profit sharing contributions to the Umpqua 401(k) Plan based on profits of the Bank. FinPac employees are also eligible to participate in a 401(k) Savings Plan (the "FinPac 401(k) Plan"). Under the provisions of the FinPac 401(k) Plan, employees may elect to have a portion of their salary contributed to the plan and FinPac elects to make a matching contribution. The Company’sFinPac 401(k) Plan also permits FinPac to make a discretionary profit-sharing match. The Company's contributions under the planboth plans charged to expense amounted to $2.2$3.8 million, $2.1$3.0 million, and $2.3$2.7 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.

Supplemental Retirement Plan—The-The Company has established the Umpqua Holdings Corporation Deferred Compensation & Supplemental Retirement Plan (the “DC/SRP”), a nonqualified deferred compensation plan to help supplement the retirement income of certain highly compensated executives selected by resolution of the Company’sCompany's Board of Directors. The DC/SRP has two components, a supplemental retirement plan (“SRP”) and a deferred compensation plan (“DCP”). The Company may make discretionary contributions to the SRP. For the years ended December 31, 2010, 20092013, 2012 and 2008,2011, the Company’sCompany's matching contribution charged to expense for these supplemental plans totaled $56,000, $6,000$123,000, $116,000, and $73,000,$96,000, respectively. The SRP plan balances at December 31, 20102013 and 20092012 were $387,000$678,000 and $358,000,$566,000, respectively, and are recorded in other liabilities. Under the DCP, eligible officers may elect to defer up to 50% of their salary into a plan account. The DCP plan balance was $300,000$2.1 million and $142,000$1.1 million at December 31, 20102013 and 2009,2012, respectively.


138


Salary Continuation Plans—The-The Bank sponsors various salary continuation plans for the CEO and certain retired employees. These plans are unfunded, and provide for the payment of a specified amount on a monthly basis for a specified period (generally 10 to 20 years) after retirement. In the event of a participant employee’semployee's death prior to or during retirement, the Bank is obligated to pay to the designated beneficiary the benefits set forth under the plan. At December 31, 20102013 and 2009,2012, liabilities recorded for the estimated present value of future salary continuation plan benefits totaled $16.3$19.0 million and $15.6$19.5 million, respectively, and are recorded in other liabilities. For the years ended December 31, 2010, 20092013, 2012 and 2008,2011, expense recorded for the salary continuation plan benefits totaled $849,000, $2.5 million, and $1.8 million, $1.8 million and $1.9 million, respectively.

Deferred Compensation Plans and Rabbi Trusts—Trusts-The Bank from time to time adopts deferred compensation plans that provide certain key executives with the option to defer a portion of their compensation. In connection with prior acquisitions, the Bank assumed liability for certain deferred compensation plans for key employees, retired employees and directors. Subsequent to the effective date of the acquisitions, no additional contributions were made to these plans. At December 31, 20102013 and 2009,2012, liabilities recorded in connection with deferred compensation plan benefits totaled $3.0$1.9 million and $5.0$2.3 million, respectively, and are recorded in other liabilities.

The Bank has established and sponsors, for some deferred compensation plans assumed in connection with prior mergers, irrevocable trusts commonly referred to as “Rabbi Trusts.” The trust assets (generally cash and trading assets) are consolidated in the Company’s balance sheets and the associated liability (which equals the related asset balances) is included in other liabilities. The asset and liability balances related to these trusts as of December 31, 20102013 and 20092012 were $1.5$3.9 million and $1.6$2.9 million, respectively.

The Bank has purchased, or acquired through mergers, life insurance policies in connection with the implementation of certain executive supplemental income, salary continuation and deferred compensation retirement plans. These policies provide protection against the adverse financial effects that could result from the death of a key employee and provide tax-exempt income to offset expenses associated with the plans. It is the Bank’s intent to hold these policies as a long-term investment. However, there will be an income tax impact if the Bank chooses to surrender certain policies. Although the lives of individual current or former management-level employees are insured, the Bank is the owner and sole or partial beneficiary. At December 31, 20102013 and 2009,2012, the cash surrender value of these policies was $90.2$96.9 million and $86.9$93.8 million, respectively. At December 31, 20102013 and 2009,2012, the Bank also had liabilities for post-retirement benefits payable to other partial beneficiaries under some of these life insurance policies of $1.4$1.8 million and $1.3$1.9 million, respectively. The Bank is exposed to credit risk to the extent an insurance company is unable to fulfill its financial obligations under a policy. In order to mitigate this risk, the Bank uses a variety of insurance companies and regularly monitors their financial condition.


Note 20 – Commitments and Contingencies 

NOTE 20.    COMMITMENTS AND CONTINGENCIES

Lease Commitments—The CompanyBank leases 137155 sites under non-cancelable operating leases. The leases contain various provisions for increases in rental rates, based either on changes in the published Consumer Price Index or a predetermined escalation schedule. Substantially all of the leases provide the Company with the option to extend the lease term one or more times following expiration of the initial term. In addition, in connection with the Nevada Security acquisition, the Company has the option to purchase one of these leased facilities, which is expected to be resolved in first quarter 2011.

Rent expense for the years ended December 31, 2010, 20092013, 2012 and 20082011 was $15.3$19.1 million $13.0, $17.3 million, and $12.7 million, respectively.$16.6 million. Rent expense was offset by rent income of $1.0 million, $555,000 and $668,000 for the years ended December 31, 2010, 20092013, 2012 and 2008, respectively.

2011 of $785,000, $1.0 million and $1.0 million.


The following table sets forth, as of December 31, 2010,2013, the future minimum lease payments under non-cancelable operating leases and future minimum income receivable under non-cancelable operating subleases:

(in thousands)

    Lease
Payments
   Sublease
Income
 

2011

  $14,814    $1,113  

2012

   13,302     790  

2013

   11,403     513  

2014

   10,010     320  

2015

   8,051     280  

Thereafter

   24,855     200  
     

Total

  $82,435    $3,216  
     

 Lease
 Sublease
 Payments
 Income
2014$17,757
 $578
201515,937
 477
201613,774
 311
20179,826
 142
20187,570
 46
Thereafter22,938
 
Total$87,802
 $1,554

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Financial Instruments with Off-Balance-Sheet Risk—The Company’sCompany's financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of the Bank’sBank's business and involve elements of credit, liquidity, and interest rate risk. 
The following table presents a summary of the Bank’sBank's commitments and contingent liabilities:

(in thousands)

    As of December 31, 2010 

Commitments to extend credit

  $1,010,928  

Commitments to extend overdrafts

  $224,313  

Forward sales commitments

  $108,600  

Commitments to originate loans held for sale

  $57,431  

Standby letters of credit

  $55,180  

 As of December 31, 2013
Commitments to extend credit$1,606,910
Commitments to extend overdrafts$207,389
Forward sales commitments$152,500
Commitments to originate loans held for sale$77,314
Standby letters of credit$58,830
The Bank is a party to financial instruments with off-balance-sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve elements of credit and interest-rate risk similar to the amountsrisk involved in on-balance sheet items recognized in the consolidated balance sheets.Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of the Bank’sBank's involvement in particular classes of financial instruments.

The Bank’sBank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, and financial guarantees written, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any covenant or condition established in the applicable contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. While most standby letters of credit are not utilized, a significant portion of such utilization is on an immediate payment basis. The Bank evaluates each customer’s

Umpqua Holdings Corporation and Subsidiaries

customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Bank upon extension of credit, is based on management’smanagement's credit evaluation of the counterparty. Collateral varies but may include cash, accounts receivable, inventory, premises and equipment and income-producing commercial properties.

Standby letters of credit and financial guarantees written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including international trade finance, commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds cash, marketable securities, or real estate as collateral supporting those commitments for which collateral is deemed necessary. The Bank haswas not been required to perform on any financial guarantees butand had $116,000 in recoveries and incurred no$78,000 in losses and $23,000 in connection with standby letters of credit during the yearsyear ended December 31, 2010 and 2009.2013.  The Bank haswas not been required to perform on any financial guarantees and incurred $2.2 million losses in connection with standby letters of credit during the  year ended December 31, 2012. The Bank was not required to perform on any financial guarantees but did not incur any losses of $110,000 in connection with standby letters of credit during the year ended December 31, 2008.2011. At December 31, 2010,2013, approximately $26.7$40.8 million of standby letters of credit expire within one year, and $28.5$18.0 million expire thereafter. Upon issuance, the CompanyBank recognizes a liability equivalent to the amount of fees received from the customer for these standby letter of credit commitments. Fees are recognized ratably over the term of the standby letter of credit. The estimated fair value of guarantees associated with standby letters of credit was $207,000$183,000 as of December 31, 2010.

At December 31, 2010 and 2009, the reserve for unfunded commitments, which is included in other liabilities on the consolidated balance sheet, was $818,000 and $731,000, respectively. The adequacy of the reserve for unfunded commitments is reviewed on a quarterly basis, based upon changes in the amounts of commitments, loss experience, and economic conditions.

2013


Mortgage loans sold to investors may be sold with servicing rights retained, withfor which the Bank makes only the standard legal representations and warranties regarding recourseas to meeting certain underwriting and collateral documentation standards. In the Bank.past two years, the Bank has had to repurchase fewer than 20 loans due to deficiencies in underwriting or loan documentation and has not realized significant losses related to these repurchases. Management believes that any liabilities that may result from such recourse provisions are not significant.

Legal ProceedingsIn November 2007, Visa Inc. (“Visa”) announced that it had reached a settlement with American Express related to an antitrust lawsuit. UmpquaThe Bank and other Visa member banks are obligated to fund the settlement and share in losses resulting from this litigation. In the fourth quarter of 2007, the Company recorded a liability and corresponding expense of approximately $3.9 million pre-tax, for its proportionate share of that settlement.owns

In addition, Visa notified the Company that it had established a contingency reserve related to unsettled litigation with Discover Card. In connection with this contingency, the Company recorded, in the fourth quarter of 2007, a liability and corresponding expense of $1.2 million pre-tax, for its proportionate share of that liability. The Company is not a party to the Visa litigation and its liability arises solely from the Bank’s membership interest in Visa.

During 2007, Visa announced that it completed restructuring transactions in preparation for an initial public offering of its Class A stock, and, as part of those transactions, Umpqua Bank’s membership interest was exchanged for 764,036468,659 shares of Class B common stock of Visa Inc. which are convertible into Class A common stock at a conversion ratio of 0.4206 per Class A share. As of December 31, 2013, the value of the Class A shares was $222.68 per share. Utilizing the conversion ratio, the value of unredeemed Class A equivalent shares owned by the Bank was $43.9


140


million as of December 31, 2013, and has not been reflected in Visa. In March 2008, Visa completed its initial public offering. Following the initial public offering, the Company received $12.6 million proceeds as a mandatory partial redemption of 295,377 shares, reducing the Company’s holdings from 764,036 shares to 468,659accompanying financial statements. The shares of Visa Inc. Class B common stock. A conversion ratio of 0.71429 was established for the conversion rate of Class B shares into Class A shares. Using the proceeds from this offering,stock are restricted and may not be transferred. Visa also established a $3.0 billionmember banks are required to fund an escrow account to cover settlements, resolution of pending litigation and related claims (“covered litigation”). In connection with Visa’s establishment of the litigation escrow account, the Company reversed the $5.2 million Visa litigation related reserve in the first quarter of 2008.

In October 2008, Visa announced that it had reached a settlement with Discover Card related to an antitrust lawsuit. Umpqua Bank and other Visa member banks were obligated to fund the settlement and share in losses resulting from this litigation that were not already provided for in the escrow account. Visa notified the Company that it had established an additional reserve related to the settlement with Discover Card that had not already been funded into the escrow account. In connection with this settlement, the Company recorded, in the third quarter of 2008, a liability and corresponding expense of $2.1 million pre-tax,

for its proportionate share of that liability. In December 2008, this liability and expense were reversed when Visa deposited additional funds into the escrow account to cover the remaining amount of the settlement. The deposit of funds into the escrow account further reduced the conversion ratio applicable to Class B common stock outstanding from 0.71429 per Class A share to 0.6296 per Class A share.

In July 2009, Visa deposited an additional $700 million into the litigation escrow account. While the outcome of the two remaining litigation cases remains unknown, this addition to the escrow account provides additional reserves to cover potential losses. As a result of the deposit, the conversion ratio applicable to Class B common stock outstanding decreased further from 0.6296 per Class A share to 0.5824 per Class A share.

In May 2010, Visa deposited an additional $500 million into the litigation escrow account. As a result of the deposit, the conversion ratio applicable to Class B common stock outstanding decreased further from 0.5824 per Class A share to 0.5550 per Class A share.

In October 2010, Visa deposited an additional $800 million into the litigation escrow account. As a result of the deposit, the conversion ratio applicable to Class B common stock outstanding decreased further from 0.5550 per Class A share to 0.5102 per Class A share.

The remaining unredeemed shares of Visa Class B common stock are restricted and may not be transferred until the later of (1) three years from the date of the initial public offering or (2) the period of time necessary to resolve the covered litigation.claims. If the funds in the escrow account are insufficient to settle all the covered litigation, Visa Inc. may sell additional Class A shares and use the proceeds to settle litigation, and further reducethereby reducing the conversion ratio.  If funds remain in the escrow account after all litigation is settled, the Class B conversion ratio will be increased to reflect that surplus.

As

On July 13, 2012, Visa, Inc. announced that it had entered into a memorandum of understanding obligating it to enter into a settlement agreement to resolve the multi-district interchange litigation brought by the class plaintiffs in the matter styled In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, Case No. 5-MD-1720 (JG) (JO) in the U.S. District Court for the Eastern District of New York. The claims originally were brought by a class of U.S. retailers in 2005.  The settlement was approved by the Court on December 31, 2010,13, 2013, and Visa’s share of the settlement to be paid is estimated at $4.4 billion.  The effect of this settlement on the value of the Bank’s Class A shares was $70.38 per share. Utilizing the conversion ratio effective October 2010, the value of unredeemed Class A equivalent shares owned by the Company was $16.8 million as of December 31, 2010, and has not been reflected in the accompanying financial statements.

B common stock is unknown at this time. 

In the ordinary course of business, various claims and lawsuits are brought by and against the Company and its subsidiaries, including the Bank and Umpqua Investments. In the opinion of management, there is no pending or threatened proceeding in which an adverse decision could result in a material adverse change in the Company’sCompany's consolidated financial condition or results of operations.

Concentrations of Credit Risk—RiskThe CompanyBank grants real estate mortgage, real estate construction, commercial, agricultural and installment loans and leases to customers throughout Oregon, Washington, California, and Nevada. In management’s judgment, a concentration exists in real estate-related loans, which representedapproximately 82%74% and 81%, respectively, 79%of the Company’sBank’s non-covered loan and lease portfolio at December 31, 20102013 and 2009.December 31, 2012.  Commercial realestate concentrations are managed toassure wide geographic and business diversity. Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, material increases in interest rates, changes in tax policies, tightening credit or refinancing markets, or a decline in real estate values in the Company’sBank's primary market areas in particular, such as was seen with the deterioration in the residential development market since 2007 and aspects of our commercial real estate, commercial construction and commercial loan portfolios, could have an adverse impact on the repayment of these loans.  Personal and business incomes, proceeds from the sale of real property, or proceeds from refinancing, represent the primary sources of repaymentfor a majority of these loans.

The Bank recognizes the credit risks inherent in dealing with other depository institutions. Accordingly, to prevent excessive exposure to any single correspondent, the Bank has established general standards for selecting correspondent banks as well as internal limits for allowable exposure to any single correspondent. In addition, the Bank has an investment policy that sets forth limitations that apply to all investments with respect to credit rating and concentrations perwith an issuer.

NOTE 21.    DERIVATIVESNote 21

– Derivatives 

The CompanyBank may use derivatives to hedge the risk of changes in the fair values of interest rate lock commitments, residential mortgage loans held for sale, and mortgage servicing rights. None of the Company’s derivatives are designated as hedging

Umpqua Holdings Corporation and Subsidiaries

instruments.  Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in income. The Company primarily utilizes forward interest rate contracts in its derivative risk management strategy.


The Bank enters into forward delivery contracts to sell residential mortgage loans or mortgage-backed securities to broker/dealers at specific prices and dates (“MBS TBAs”) in order to hedge the interest rate risk in its portfolio of mortgage loans held for sale and its residential mortgage loan commitments.  Credit risk associated with forward contracts is limited to the replacement cost of those forward contracts in a gain position.  There were no counterparty default losses on forward contracts in 2010, 2009 or 2008.2013, 2012, and 2011.  Market risk with respect to forward contracts arises principally from changes in the value of contractual positions due to changes in interest rates. The Bank limits its exposure to market risk by monitoring differences between commitments to customers and forward contracts with broker/dealers. In the event the Company has forward delivery contract commitments in excess of available mortgage loans, the Company completes the transaction by either paying or receiving a fee to or from the broker/dealer equal to the increase or decrease in the market value of the forward contract. At December 31, 2010,2013, the Bank had commitments to originate mortgage loans held for sale totaling $57.4$77.3 million and forward sales commitments of $108.6 million.

In the fourth quarter of 2007, the Company began using derivative instruments, primarily MBS TBAs, to hedge the risk of changes in the fair value of MSR due to changes in interest rates. Starting in late February 2008 and continuing into March 2008, the bond markets experienced extraordinary volatility. This volatility resulted in widening spreads and price declines on the derivative instruments that were not offset by corresponding gains in the MSR asset. In March of 2008, the Company suspended the MSR hedge, given the continued volatility.

$152.5 million

The following tables summarize the types of derivatives, separately by assets and liabilities, their locations on the consolidated balance sheets, and the fair values of such derivatives as of December 31, 2010 and 2009:

(in thousands)

Underlying Risk Exposure  Description   Balance Sheet Location        2010   2009 

Asset Derivatives

          

Interest rate contracts

   Rate lock commitments     Other assets      $306    $124  

Interest rate contracts

   Forward sales commitments     Other assets       754     845  
            

Total asset derivatives

        $1,060    $969  
            

Liability Derivatives

          

Interest rate contracts

   Rate lock commitments     Other liabilities      $170    $133  

Interest rate contracts

   Forward sales commitments     Other liabilities       191       
            

Total liability derivatives

        $361    $133  
            

The following table summarizes the types of derivatives, their location on theConsolidated Statements of Operations, and the losses recorded in 2010, 2009 and 2008:

(in thousands)

Underlying Risk Exposure  Description   Income Statement
Location
   2010  2009  2008 

Interest rate contracts

   Rate lock commitments     Mortgage banking revenue    $146   $(1,176 $1,099  

Interest rate contracts

   Forward sales commitments     Mortgage banking revenue     (3,034  (255  (184

Interest rate contracts

   MSR hedge instruments     Mortgage banking revenue             (2,398
       

Total

      $(2,888 $(1,431 $(1,483
       

The Company’sBank’s mortgage banking derivative instruments do not have specific credit risk-related contingent features.  The forward sales commitments do have contingent features that may require transferring collateral to the broker/dealers upon their request. However, this amount would be limited to the net unsecured loss exposure at such point in time and would not materially affect the Company’s liquidity or results of operations.

NOTE 22.    SHAREHOLDERS’ EQUITYThe Bank executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.  Those interest rate swaps are simultaneously hedged by offsetting the interest rate swaps that the Bank executes with a third party, such that the Bank minimizes its net risk exposure. As of

On November 14, 2008, in exchange forDecember 31, 2013, the Bank had 254 interest rate swaps with an aggregate purchase price


141


notional amount of $1.3 billion related to this program. As of December 31, 2012, the Bank had 164 interest rate swaps with an aggregate notional amount of $912.0 million the Company issued and soldrelated to the United States Department of the Treasury (“U.S. Treasury”) pursuant to the TARP Capital Purchase Program (the “CPP”) the following: (i) 214,181 shares of the Company’s newly designated non-convertible Fixed Rate Cumulative Perpetual Preferred Stock, Series A, (the “preferred stock”) no par value per share and liquidation preference $1,000 per share (and $214.2 million liquidation preference in the aggregate) and (ii) a warrant to purchase up to 2,221,795 shares of the Company’s common stock, no par value per share, at an exercise price of $14.46 per share, subject to certain customary anti-dilution and other adjustments.

On August 13, 2009, the Company raised $258.7 million through a public offering by issuing 26,538,461 shares of the Company’s common stock, including 3,461,538 shares pursuant to the underwriters’ over-allotment option, at a share price of $9.75 per share. The net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were $245.7 million. The net proceeds from the offering qualify as Tier 1 capital and will be used for general corporate purposes, which may include capital to support growth and acquisition opportunities, and it positioned the Company for redemption of preferred stock issued to the U.S. Treasury under the Capital Purchase Program. this program. 

In connection with the Company’s public offeringinterest rate swap program with commercial customers, the Bank has agreements with its derivative counterparties that contain a provision where if the Bank defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Bank could also be declared in default on its derivative obligations. The Bank also has agreements with its derivative counterparties that contain a provision where if the Bank fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and the Bank would be required to settle its obligations under the agreements. Similarly, the Bank could be required to settle its obligations under certain of its agreements if specific regulatory events occur, such as if the Bank were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels. If the Bank had breached any of these provisions at December 31, 2013, it could have been required to settle its obligations under the agreements at the termination value.
As of December 31, 2013 and 2012, the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $12.1 million and $21.8 million, respectively.  The Bank has collateral posting requirements for initial or variation margins with its clearing members and clearing houses and has been required to post collateral against its obligations under these agreements of $13.0 million and none as of December 31, 2013 and 2012, respectively.  The Bank also has minimum collateral posting thresholds with certain of its derivative counterparties, and has been required to post collateral against its obligations under these agreements of none and $22.5 million as of December 31, 2013 and 2012, respectively.

The fair value of the interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts).  The variable cash payments (or receipts) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. In addition, to comply with the provisions of ASC 820, the Bank incorporates credit valuation adjustments (“CVA”) to appropriately reflect nonperformance risk in the fair value measurements of its derivatives. The CVA is calculated by determining the total expected exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying the counterparties’ credit spreads to the exposure. For derivatives with two-way exposure, specifically, the Bank’s interest rate swaps, the counterparty’s credit spread is applied to the Bank’s exposure to the counterparty, and the Bank’s own credit spread is applied to the counterparty’s exposure to the Bank, and the net CVA is reflected in the Bank’s derivative valuations. The total expected exposure of a derivative is derived using market-observable inputs, such as yield curves and volatilities. For the Bank’s own credit spread and for counterparties having publicly available credit information, the credit spreads over LIBOR used in the calculations represent implied credit default swap spreads obtained from a third quarterparty credit data provider. For counterparties without publicly available credit information, which are primarily commercial banking customers, the credit spreads over LIBOR used in the calculations are estimated by the Bank based on current market conditions, including consideration of 2009,current borrowing spreads for similar customers and transactions, review of existing collateralization or other credit enhancements, and changes in credit sector and entity-specific credit information. In adjusting the numberfair value of its derivative contracts for the effect of nonperformance risk, the Bank has considered the impact of netting and any applicable credit enhancements.  Effective January 1, 2012, the Company made an accounting policy election to use the exception commonly referred to as the “portfolio exception” with respect to measuring counterparty credit risk for its interest rate swap derivative instruments that are subject to master netting agreements with commercial banking customers that are hedged with offsetting interest rate swaps with third parties.

As of January 1, 2013, the Bank changed its valuation methodology for interest rate swap derivatives to discount cash flows based on Overnight Index Swap (“OIS”) rates. Fully collateralized trades are discounted using OIS with no additional economic adjustments to arrive at fair value. Uncollateralized or partially-collateralized trades are also discounted at OIS, but include appropriate economic adjustments for funding costs (e.g., a LIBOR-OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk. The Company is making the changes to better align its inputs, assumptions, and pricing methodologies with those used in its principal market by most dealers and major market participants. The changes in valuation methodology are applied prospectively as a change in accounting estimate and are immaterial to the Company's financial statements.


142


The following tables summarize the types of derivatives, separately by assets and liabilities, their locations on the Consolidated Balance Sheets, and the fair values of such derivatives as of December 31, 2013 and December 31, 2012
(in thousands)
    Asset Derivatives Liability Derivatives
Derivatives not designated Balance Sheet December 31, December 31, December 31, December 31,
as hedging instrument Location 2013 2012 2013 2012
Interest rate lock commitments Other assets/Other liabilities $706
 $1,496
 $
 $18
Interest rate forward sales commitments Other assets/Other liabilities 1,250
 133
 6
 905
Interest rate swaps Other assets/Other liabilities 15,965
 22,213
 14,556
 22,048
Total   $17,921
 $23,842
 $14,562
 $22,971
The following table summarizes the types of derivatives, their locations within the ConsolidatedStatements of Income, and the gains (losses) recorded during the 2013, 2012, and 2011: 
(in thousands)
Derivatives not designated Income Statement December 31,
as hedging instrument Location 2013 2012 2011
Interest rate lock commitments Mortgage banking revenue $(772) $(271) $1,613
Interest rate forward sales commitments Mortgage banking revenue 13,225
 (21,281) (10,579)
Interest rate swaps Other income 1,243
 336
 (187)
Total   $13,696
 $(21,216) $(9,153)
As of December 31, 2013 and 2012, the net CVA increased the settlement values of the Bank’s net derivative assets by $1.4 million and decreased the settlement values of the Bank's net derivative assets by $45,000, respectively. The gains (losses) above on the interest rate swaps relate to CVAs. Various factors impact changes in the CVA over time, including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments. 

The following table summarizes the offsetting derivatives assets that have a right of offset as of December 31, 2013 and December 31, 2012:

(in thousands)
        Gross Amounts Not Offset in the Statement of Financial Position  
  Gross Amounts of Recognized Assets/Liabilities Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets/Liabilities presented in the Statement of Financial Position Financial Instruments Collateral Posted Net Amount
December 31, 2013            
Derivative Assets            
Interest rate swaps $15,965
 $
 $15,965
 $(4,852) $(2,207) $8,906
Derivative Liabilities            
Interest rate swaps $14,556
 $
 $14,556
 $(4,852) $(9,704) $
             
December 31, 2012            
Derivative Assets            
Interest rate swaps $22,213
 $
 $22,213
 $(16) $
 $22,197
Derivative Liabilities            
Interest rate swaps $22,048
 $
 $22,048
 $(16) $(22,032) $

Note 22– Stock Compensation and Share Repurchase Plan

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

143


Company's common stock underlyingfor issuance under the warrant held by the U.S. Treasury was reduced by 50%, to 1,110,898 shares.

plan.


On February 3, 2010, the Company raised $303.6 million through a public offering by issuing 8,625,000 shares ofJune 17, 2011, the Company’s commonCompensation Committee modified restricted stock including 1,125,000 shares pursuantawards and option grants that were originally issued to fourteen executive officers on January 31, 2011, as follows:
Added performance vesting conditions linking total shareholder return, compared to the underwriters’ over-allotment option, atreturn of a share priceregional bank stock total return index;
Awards will cliff vest after three years instead of $11.00 per share and 18,975,000 depository shares, including 2,475,000 depository shares pursuanttime vest over a four year period, but only to the underwriter’s over-allotment option, also atextent that the performance conditions are met; and
The modified grants will vest in whole or in part only if total shareholder return achieves specified targets, subject to prorated vesting upon death, disability, qualifying retirement, termination for good reason or a pricechange of $11.00 per share. Fractional interests (1/100th) in each share of the Series B Common Stock Equivalent were represented by the 18,975,000 depositary shares; as a result, each depository share would convert into one share of common stock. The net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were $288.1 million. The net proceeds from the offering were used to redeem the preferred stock issued to the United States Department of the Treasury (U.S. Treasury) under the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“CPP”), to fund FDIC-assisted acquisition opportunities and for general corporate purposes.

On February 17, 2010, the Company redeemed all of the outstanding Fixed Rate Cumulative Perpetual Preferred Stock, Series A, issued to the U.S. Treasury under the TARP CPP for an aggregate purchase price of $214.2 million. control.


As a result of the repurchase of the Series A preferred stock, the Company incurred a one-time deemed dividend of $9.8 million due to the accelerated amortization of the remaining issuance discount on the preferred stock.

On March 31, 2010, the Company repurchased the common stock warrant issued to the U.S. Treasury pursuant to the TARP CPP, for $4.5 million. The warrant repurchase, together with the Company’s redemption in February 2010 of the entire amount of Fixed Rate Cumulative Perpetual Preferred modification, there was no incremental compensation cost.


Stock Series A, issued to the U.S. Treasury, represents full repayment of all TARP obligations and cancellation of all equity interests in the Company held by the U.S. Treasury.

On April 20, 2010, shareholders of the Company approved an amendment to the Company’s Restated Articles of Incorporation. The amendment, which became effective on April 21, 2010, increased the number of authorized shares of common stock to 200,000,000 (from 100,000,000). As a result of the effectiveness of the amendment, as of the close of business on April 21, 2010, the Company’s Series B Common Stock Equivalent preferred stock automatically converted into newly issued shares of common stock at a conversion rate of 100 shares of common stock for each share of Series B Common Stock Equivalent preferred stock. All shares of Series B Common Stock Equivalent preferred stock and representative depositary shares ceased to exist upon the conversion. Trading in the depositary shares on NASDAQ (ticker symbol “UMPQP”) ceased and the UMPQP symbol voluntarily delisted effective as of the close of business on April 21, 2010.

Umpqua Holdings Corporation and Subsidiaries

Options

Stock Plans—The Company’s 2007 Long Term Incentive Plan (“2007 LTI Plan”) authorizes the award of up to 1 million restricted stock unit grants, which are subject to performance-based vesting as well as other approved vesting conditions. The Company’s 2003 Stock Incentive Plan (“2003 Plan”) provides for grants of up to 4 million shares. The 2003 Plan terminates June 30, 2015, but it may be extended with the approval of the board and shareholders. The 2003 Plan further provides that no grants may be issued if existing options and subsequent grants under the 2003 Plan exceed 10% of the Company’s outstanding shares on a diluted basis. Under the terms of the 2003 Plan, options and awards generally vest ratably over a period of five years, the exercise price of each option equals the market price of the Company’s common stock on the date of the grant, and the maximum term is ten years.

The Company has options outstanding under two prior plans adopted in 1995 and 2000, respectively. With the adoption of the 2003 Plan, no additional grants can be issued under the previous plans. The Company also assumed various plans in connection with mergers and acquisitions but does not make grants under those plans.

The following table summarizes information about stock option activity for the years ended December 31, 2010, 20092013, 2012 and 2008:

2011


(shares in thousands)

  2010  2009  2008 
   Options
Outstanding
  Weighted Avg.
Exercise Price
  Options
Outstanding
  Weighted Avg.
Exercise Price
  Options
Outstanding
  Weighted Avg.
Exercise Price
 

Balance, beginning of year

  1,763   $15.05    1,819   $15.66    1,582   $15.94  

Granted

  450   $12.39    229   $9.34    527   $14.20  

Exercised

  (112 $8.97    (51 $5.93    (132 $9.34  

Forfeited/expired

  (34 $13.83    (234 $16.20    (158 $18.96  
               

Balance, end of year

  2,067   $14.82    1,763   $15.05    1,819   $15.66  
               

Options exercisable, end of year

  1,217   $16.65    1,071   $15.90    1,121   $15.05  
               

 2013 2012 2011
          
 Options Weighted-Avg  OptionsWeighted-Avg  OptionsWeighted-Avg
 Outstanding Exercise Price  OutstandingExercise Price  OutstandingExercise Price
Balance, beginning of period1,850
 $15.37
 2,151
$14.48
 2,067
$14.82
Granted
 $
 20
$11.98
 237
$11.01
Exercised(515) $12.42
 (174)$5.63
 (40)$7.67
Forfeited/expired(354) $17.46
 (147)$13.45
 (113)$15.72
Balance, end of period981
 $16.17
 1,850
$15.37
 2,151
$14.48
Options exercisable, end of period627
 $18.86
 1,263
$17.11
 1,334
$16.13
          
The following table summarizes information about outstanding stock options issued under all plans as of December 31, 2010:

2013:

(shares in thousands)

   Options Outstanding   Options Exercisable 
Range of Exercise Prices  Options
Outstanding
   Weighted Avg.
Remaining
Contractual Life
(Years)
   Weighted Avg.
Exercise Price
   Options
Exercisable
   Weighted Avg.
Exercise Price
 

$4.58 to $10.37

   418     6.2    $7.44     241    $6.06  

$10.49 to $12.87

   585     8.8    $12.12     79    $11.56  

$12.90 to $15.50

   432     5.4    $14.76     265    $14.49  

$16.93 to $23.49

   479     3.4    $21.09     479    $21.09  

$24.25 to $28.43

   153     4.9    $25.77     153    $25.77  
                
   2,067     6.0    $14.82     1,217    $16.65  
                


 Options Outstanding  Options Exercisable
    Weighted Avg.      
    Remaining      
Range of Options  Contractual Life  Weighted Avg.  Options  Weighted Avg.
Exercise Prices Outstanding (Years)  Exercise Price  Exercisable  Exercise Price
$4.58 to $10.97277
 6.4 $10.38
 64
 $8.96
$11.53 to $12.87252
 6.2 $12.05
 121
 $11.93
$13.45 to $23.49299
 2.3 $20.09
 289
 $20.32
$24.25 to $28.425153
 1.9 $25.77
 153
 $25.77
 981
 4.4 $16.17
 627
 $18.86

The compensation cost related to stock options, including costs related to unvested options assumed in connection with acquisitions, that has been charged against income (included in salaries and employee benefits) was $861,000, $1.4$778,000, $1.1 million, and $1.0$1.2 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.

The total income tax benefit recognized in the income statement related to stock options was $344,000, $541,000$311,000, $448,000, and $420,000$463,000 for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.

The total intrinsic value (which is the amount by which the stock price exceeds the exercise price) of both options outstanding and options exercisable as of December 31, 2010,2013, was $2.2$4.7 million and $1.5$1.9 million, respectively.

144


The weighted average remaining contractual term of options exercisable was 4.23.0 years as of December 31, 2010. 2013.
The total intrinsic value of options exercised was $420,000, $220,000$2.3 million, $1.2 million, and $666,000,$147,000, in the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.
During the years ended December 31, 2010, 20092013, 2012 and 2008,2011, the amount of cash received from the exercise

of stock options was $1.0$159,000, $831,000, and $230,000 and total consideration was $6.4 million, $301,000$981,000, and $1.2 million,$309,000, respectively.

As of December 31, 2010,2013, there was $2.9 million$640,000 of total unrecognized compensation cost related to nonvested stock options which is expected to be recognized over a weighted-average period of 3.40.6 years.

Restricted Shares
The Company grants restricted stock awards periodically as a part of the 2003 Plan for the benefit of employees.employees and directors. Restricted shares issued prior to 2011 generally vest on an annual basis over five years. A deferred restricted stock award was grantedRestricted shares issued since 2011 generally vest over a three years period, subject to an executive in the second quarter of 2007. The award vests monthly based on continued service in various increments through July 1, 2011. The Company will issue certificates for the vested award within the seventh month following termination of the executive’s employment.time or time plus performance vesting conditions.  The following table summarizes information about nonvested restricted shares outstandingshare activity at December 31:

31, 2013

(shares in thousands)

   2010   2009   2008 
    Restricted
Shares
Outstanding
  Average Grant
Date Fair Value
   Restricted
Shares
Outstanding
  Average Grant
Date Fair Value
   Restricted
Shares
Outstanding
  Average Grant
Date Fair Value
 

Balance, beginning of year

   187   $21.46     216   $23.42     247   $25.11  

Granted

   274   $12.16     26   $9.83     32   $15.18  

Released

   (46 $22.23     (46 $23.81     (42 $25.81  

Forfeited/expired

   (14 $13.32     (9 $22.85     (21 $26.11  
                  

Balance, end of year

   401   $15.29     187   $21.46     216   $23.42  
                  

 2013 2012 2011
   Weighted   Weighted   Weighted
 Restricted Average Grant Restricted Average Grant Restricted Average Grant
 Shares Outstanding Date Fair Value Shares Outstanding Date Fair Value Shares Outstanding Date Fair Value
Balance, beginning of period763
 $12.39
 585
 $12.98
 401
 $15.29
Granted467
 $13.04
 369
 $11.80
 282
 $11.02
Released(153) $12.17
 (147) $13.50
 (82) $17.58
Forfeited/expired(85) $11.74
 (44) $11.52
 (16) $12.91
Balance, end of period992
 $12.79
 763
 $12.39
 585
 $12.98

The compensation cost related to restricted stock awards that has been charged against income (included in salaries and employee benefits) was $1.9$3.7 million $1.4, $2.7 million, and $1.2$2.3 million for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.

The total income tax benefit recognized in the income statement related to restricted stock awards was $746,000, $548,000$1.5 million, $1.1 million, and $493,000$899,000 for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.

The total fair value of restricted shares vested was $571,000, $445,000$2.0 million, $1.9 million, and $660,000,$919,000, for the years ended December 31, 2010, 20092013, 2012 and 2008,2011, respectively.

As of December 31, 2010,2013, there was $3.3$6.4 million of total unrecognized compensation cost related to nonvested restricted stock awards which is expected to be recognized over a weighted-average period of 2.81.4 years.


Restricted Stock Units
The Company grantsgranted restricted stock units as a part of the 2007 Long Term Incentive Plan for the benefit of certain executive officers.  Restricted stock unit grants are subject to performance-based vesting as well as other approved vesting conditions.  In the first quarter of 2008 and 2009, restricted stock units were granted to executives that cliff vest after three years based on performance and service 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.  

The following table summarizes information about nonvested restricted stock unitsshares outstanding at December 31:


(shares in thousands)

   2010   2009   2008 
    Restricted
Stock Units
Outstanding
  Weighted
Average Grant
Date Fair Value
   Restricted
Stock Units
Outstanding
  Weighted
Average Grant
Date Fair Value
   Restricted
Stock Units
Outstanding
  Weighted
Average Grant
Date Fair Value
 

Balance, beginning of year

   335   $15.54     301   $19.48     194   $24.52  

Granted

      $     114   $8.01     183   $14.33  

Released

   (16 $24.52     (23 $21.33        $  

Forfeited/expired

   (94 $24.52     (57 $18.98     (76 $19.95  
                  

Balance, end of year

   225   $11.13     335   $15.54     301   $19.48  
                  


145


 2013 2012 2011
  Weighted  Weighted  Weighted
 Restricted Average Restricted Average Restricted Average
  Stock Units Grant Date  Stock Units Grant Date  Stock Units Grant Date
  Outstanding Fair Value  Outstanding Fair Value  Outstanding Fair Value
Balance, beginning of period130
$10.41
 219
$9.17
 225
$11.13
Granted
$
 25
$10.39
 105
$10.42
Released
$
 
$
 (63)$14.33
Forfeited/expired(35)$10.42
 (114)$8.01
 (48)$14.33
Balance, end of period95
$10.41
 130
$10.41
 219
$9.17

The compensation cost related to restricted stock units that has been charged against income (included in salaries and employee benefits) was $778,000$144,000, $237,000, and $391,000 for the yearyears ended December 31, 2010. For the year ended December 31, 2009, the

Umpqua Holdings Corporation2013, 2012 and Subsidiaries

Company recorded a reversal of compensation cost of $539,000 related to restricted stock units that has been credited to salaries and employee benefits expense. The compensation cost related to restricted stock units that has been charged against income was $1.6 million for the year ended December 31, 2008. 2011, respectively.


The total income tax benefit recognized in the income statement related to restricted stock units was $311,000$58,000, $95,000 and $156,000 for the yearyears ended December 31, 2010. The total income tax expense recognized in the income statement related to restricted stock units was $215,000 for the year ended December 31, 2009,2013, 2012 and the total income tax benefit recognized in the income statement related to restricted stock units was $645,000 for the year ended December 31, 2008. 2011, respectively.

The total fair value of restricted stock units vested and released was $213,000 and $186,000none for the years ended December 31, 20102013 and 2009, respectively. No restricted stock unites were vested2012 and released$677,000 for the year ended December 31, 2008. 2011.

As of December 31, 2010,2013, there was $332,000$105,000 of total unrecognized compensation cost related to nonvested restricted stock units which is expected to be recognized over a weighted-average period of 0.60.4 years, assuming the current expectation of performance conditions are met.


For the years ended December 31, 2010, 20092013, 2012 and 2008,2011, the Company received income tax benefits of $406,000, $326,000,$1.7 million, $1.2 million, and $527,000,$694,000, respectively, related to the exercise of non-qualified employee stock options, disqualifying dispositions in the exercise of incentive stock options, the vesting of restricted shares and the vesting of restricted stock units.

For the yearyears ended December 31, 2010,2013, 2012 and 2011, the Company had a net tax benefit of $148,000 and net tax deficiencies (tax deficiency resulting from tax deductions less than the compensation cost recognized) of $216,000, compared to net tax deficiencies of $369,000$59,000 and $195,000 for the years ended December 31, 2009 and 2008,$261,000, respectively. Only cash flows from gross excess tax benefits are classified as financing cash flows.


Share Repurchase Plan- The Company’s share repurchase plan, which was first approved by the Board and announced in August 2003, originally authorized the repurchase of up to 1.0 million shares. Prior to 2008, the authorization was amended on September 29, 2011 to increase the number of common shares available for repurchase limitunder the plan to 6.015 million shares. OnIn April 21, 2009,2013, the Board of Directors approved an extensionrepurchase program was extended to the expiration date of the common stock repurchase plan torun through June 30, 2011.2015. As of December 31, 2010,2013, a total of 1.512.0 million shares remained available for repurchase. The Company repurchased no98,027 shares under the repurchase plan in 2010 or 2009.2013, 512,280 shares under the repurchase plan in 2012 and 2.5 million shares in 2011. The timing and amount of future repurchases will depend upon the market price for our common stock, securities laws restricting repurchases, asset growth, earnings, and our capital plan.


We also have certain stock option and restricted stock plans which provide for the payment of the option exercise price or withholding taxes by tendering previously owned or recently vested shares. During the yearyears ended December 31, 2010,2013 and 2012, there were 4,515438,000 and 38,000 shares tendered in connection with option exercises. During the year ended December 31, 2009, there were no shares tendered in connection with option exercises.exercises, respectively. Restricted shares cancelled to pay withholding taxes totaled 12,44349,000 and 11,25746,000 shares during the years ended December 31, 20102013 and 2009,2012, respectively. RestrictedThere were no restricted stock units cancelled to pay withholding taxes totaled 5,583 and 8,259 duringfor the years ended December 31, 20102013 and 2009, respectively.

2012.


NOTE 23.    REGULATORY CAPITALNote 23

– Regulatory Capital


The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’sCompany's financial statements. Under capital adequacy guidelines, the Company must meet specific capital guidelines that involve quantitative measures of the Company’sCompany's assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The Company’sCompany's capital amounts and classifications are also subject to qualitative judgments by the regulators about risk components, asset risk weighting, and other factors.


146


Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets (as defined in the regulations), and of Tier 1 capital to average assets (as defined in the regulations). Management believes, as of December 31, 2010,2013, that the Company meets all capital adequacy requirements to which it is subject.

The Company’sCompany's capital amounts and ratios as of December 31, 20102013 and 2009December 31, 2012 are presented in the following table:

(dollars in thousands)

   Actual  For Capital
Adequacy
purposes
  To be Well
Capitalized
 
    Amount   Ratio  Amount   Ratio  Amount   Ratio 

AS OF DECEMBER 31, 2010:

          

Total Capital

          

(to Risk Weighted Assets)

          

Consolidated

  $1,253,333     17.62 $569,050     8.00 $711,313     10.00

Umpqua Bank

  $1,085,839     15.27 $568,874     8.00 $711,093     10.00

Tier I Capital

          

(to Risk Weighted Assets)

          

Consolidated

  $1,164,226     16.36 $284,652     4.00 $426,978     6.00

Umpqua Bank

  $996,798     14.02 $284,393     4.00 $426,590     6.00

Tier I Capital

          

(to Average Assets)

          

Consolidated

  $1,164,226     10.56 $440,995     4.00 $551,243     5.00

Umpqua Bank

  $996,798     9.04 $441,061     4.00 $551,326     5.00

AS OF DECEMBER 31, 2009:

          

Total Capital

          

(to Risk Weighted Assets)

          

Consolidated

  $1,197,831     17.16 $558,429     8.00 $698,037     10.00

Umpqua Bank

  $938,653     13.46 $557,892     8.00 $697,365     10.00

Tier I Capital

          

(to Risk Weighted Assets)

          

Consolidated

  $1,110,311     15.91 $279,148     4.00 $418,722     6.00

Umpqua Bank

  $851,227     12.21 $278,862     4.00 $418,293     6.00

Tier I Capital

          

(to Average Assets)

          

Consolidated

  $1,110,311     12.79 $347,243     4.00 $434,054     5.00

Umpqua Bank

  $851,227     9.81 $347,085     4.00 $433,857     5.00


     For Capital To be Well
 Actual Adequacy purposes Capitalized
 Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2013           
Total Capital           
(to Risk Weighted Assets)           
Consolidated$1,279,586
 14.66% $698,273
 8.00% $872,842
 10.00%
Umpqua Bank$1,177,782
 13.51% $697,428
 8.00% $871,785
 10.00%
Tier 1 Capital           
(to Risk Weighted Assets)           
Consolidated$1,183,061
 13.56% $348,986
 4.00% $523,478
 6.00%
Umpqua Bank$1,081,282
 12.40% $348,801
 4.00% $523,201
 6.00%
Tier 1 Capital           
(to Average Assets)           
Consolidated$1,183,061
 10.90% $434,151
 4.00% $542,689
 5.00%
Umpqua Bank$1,081,282
 9.97% $433,814
 4.00% $542,268
 5.00%
As of December 31, 2012           
Total Capital           
(to Risk Weighted Assets)           
Consolidated$1,357,206
 16.52% $657,243
 8.00% $821,553
 10.00%
Umpqua Bank$1,234,010
 15.03% $656,825
 8.00% $821,031
 10.00%
Tier 1 Capital           
(to Risk Weighted Assets)           
Consolidated$1,254,514
 15.27% $328,622
 4.00% $492,933
 6.00%
Umpqua Bank$1,131,373
 13.78% $328,410
 4.00% $492,615
 6.00%
Tier 1 Capital           
(to Average Assets)           
Consolidated$1,254,514
 11.44% $438,641
 4.00% $548,302
 5.00%
Umpqua Bank$1,131,373
 10.32% $438,517
 4.00% $548,146
 5.00%

The Company is a registered financial holding company under the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”), and is subject to the supervision of, and regulation by, the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank is an Oregon state chartered bank with deposits insured by the Federal Deposit Insurance Corporation (“FDIC”), and is subject to the supervision and regulation of the Director of the Oregon Department of Consumer and Business Services, administered through the Division of Finance and Corporate Securities, and to the supervision and regulation of the California Department of Financial Institutions, the Washington Department of Financial Institutions and the FDIC. As of December 31, 2010,2013 , the most recent notification from the FDIC categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. The Company is not subject to the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’sBank's regulatory capital category.

Umpqua Holdings Corporation

On July 2, 2013, the federal banking regulators approved the final proposed rules that revise the regulatory capital rules to incorporate certain revisions by the Basel Committee on Banking Supervision to the Basel capital framework ("Basel III"). The phase-in period for the final rules will begin for the Company on January 1, 2015, with full compliance with the final rules entire requirement phased in on January 1, 2019.

147



The final rules, among other things, include a new common equity Tier 1 capital (“CET1”) to risk-weighted assets ratio, including a capital conservation buffer, which will gradually increase from 4.5% on January 1, 2015 to 7.0% on January 1, 2019. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% on January 1, 2015 to 8.5% on January 1, 2019, as well as require a minimum leverage ratio of 4.0%.

Also, if an institution grows above $15 billion as a result of an acquisition, or organically grows above $15 billion and Subsidiaries

then makes an acquisition, the combined trust preferred security debt issuances would be phased out of Tier 1 and into Tier 2 capital (75% in 2015 and 100% in 2016). It is possible the Company may accelerate redemption of the existing junior subordinated debentures.  This could result in adjustments to the fair value of these instruments including the acceleration of losses on junior subordinated debentures carried at fair value within non-interest income. The Company currently does not intend to redeem the junior subordinated debentures following the proposed merger in order to support regulatory total capital levels.


The final rules also provide for a number of adjustments to and deductions from the new CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under Basel III, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including the Company and the Bank, may make a one-time permanent election to continue to exclude these items. The Company and Bank expect to make this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company's securities portfolio. In addition, deductions include, for example, the requirement that mortgage servicing rights, certain deferred tax assets not dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. The Company and the Bank are currently evaluating the provisions of the final rules and expected impact.

NOTE 24.    FAIR VALUESNote 24

– Fair Value Measurement 

The following table presents estimated fair values of the Company’s financial instruments as of December 31, 20102013 and December 31, 2009,2012, whether or not recognized or recorded at fair value in theConsolidated Balance Sheets:


148


(in thousands)

   2010   2009 
    Carrying
Value
   Fair Value   Carrying
Value
   Fair Value 

FINANCIAL ASSETS:

        

Cash and cash equivalents

  $1,004,125    $1,004,125    $605,413    $605,413  

Trading securities

   3,024     3,024     2,273     2,273  

Securities available for sale

   2,919,180     2,919,180     1,795,616     1,795,616  

Securities held to maturity

   4,762     4,774     6,061     6,136  

Loans held for sale

   75,626     75,626     33,715     33,715  

Non-covered loans and leases, net

   5,557,066     5,767,506     5,891,610     5,891,708  

Covered loans and leases

   785,898     893,682            

Restricted equity securities

   34,475     34,475     15,211     15,211  

Mortgage servicing rights

   14,454     14,454     12,625     12,625  

Bank owned life insurance assets

   90,161     90,161     86,853     86,853  

FDIC indemnification asset

   146,413     90,011            

Derivatives

   1,060     1,060     969     969  

Visa Class B common stock

        15,987          19,336  

FINANCIAL LIABILITIES:

        

Deposits

  $9,433,805    $9,464,406    $7,440,434    $7,440,631  

Securities sold under agreement to repurchase

   73,759     73,759     45,180     45,180  

Term debt

   262,760     282,127     76,274     77,130  

Junior subordinated debentures, at fair value

   80,688     80,688     85,666     85,666  

Junior subordinated debentures, at amortized cost

   102,866     65,771     103,188     69,194  

Derivatives

   361     361     133     133  

 December 31, 2013 December 31, 2012
 Carrying Fair Carrying Fair
 Value Value Value Value
FINANCIAL ASSETS:       
Cash and cash equivalents$790,423
 $790,423
 $543,787
 $543,787
Trading securities5,958
 5,958
 3,747
 3,747
Securities available for sale1,790,978
 1,790,978
 2,625,229
 2,625,229
Securities held to maturity5,563
 5,874
 4,541
 4,732
Loans held for sale, at fair value104,664
 104,664
 320,132
 320,132
Non-covered loans and leases, net7,269,089
 7,250,596
 6,595,689
 6,652,179
Covered loans, net363,992
 409,555
 477,078
 543,628
Restricted equity securities30,685
 30,685
 33,443
 33,443
Mortgage servicing rights47,765
 47,765
 27,428
 27,428
Bank owned life insurance assets96,938
 96,938
 93,831
 93,831
FDIC indemnification asset23,174
 6,001
 52,798
 18,714
Derivatives17,921
 17,921
 23,842
 23,842
Visa Class B common stock
 41,700
 
 28,385
FINANCIAL LIABILITIES:       
Deposits$9,117,660
 $9,125,832
 $9,379,275
 $9,396,646
Securities sold under agreements to repurchase224,882
 224,882
 137,075
 137,075
Term debt251,494
 270,004
 253,605
 289,404
Junior subordinated debentures, at fair value87,274
 87,274
 85,081
 85,081
Junior subordinated debentures, at amortized cost101,899
 72,009
 110,985
 78,529
Derivatives14,562
 14,562
 22,971
 22,971


149


Fair Value of Assets and Liabilities Not Measured at Fair Value 

The following table presents information about the level in the fair value hierarchy for the Company’s assets and liabilities that are not measured at fair value as of December 31, 2013 and December 31, 2012
(in thousands)
 December 31, 2013
DescriptionTotal Level 1 Level 2 Level 3
ASSETS       
Cash and cash equivalents$790,423
 $790,423
 $
 $
Securities held to maturity5,958
 
 
 5,958
Non-covered loans and leases, net7,250,596
 
 
 7,250,596
Covered loans, net409,555
 
 
 409,555
Restricted equity securities30,685
 30,685
 
 
Bank owned life insurance assets96,938
 96,938
 
 
FDIC indemnification asset6,001
 
 
 6,001
Visa Class B common stock41,700
 
 
 41,700
LIABILITIES       
Deposits       
Non-maturity deposits$7,580,192
 $7,580,192
 $
 $
Deposits with stated maturities1,545,640
 
 1,545,640
 
Securities sold under agreements to repurchase224,882
 
 224,882
 
Term debt270,004
 
 270,004
 
Junior subordinated debentures, at amortized cost72,009
 
 
 72,009

(in thousands)
 December 31, 2012
DescriptionTotal Level 1 Level 2 Level 3
ASSETS       
Cash and cash equivalents$543,787
 $543,787
 $
 $
Securities held to maturity4,732
 
 
 4,732
Non-covered loans and leases, net6,652,179
 
 
 6,652,179
Covered loans, net543,628
 
 
 543,628
Restricted equity securities33,443
 33,443
 
 
Bank owned life insurance assets93,831
 93,831
 
 
FDIC indemnification asset18,714
 
 
 18,714
Visa Class B common stock28,385
 
 
 28,385
LIABILITIES       
Deposits       
Non-maturity deposits$7,376,288
 $7,376,288
 $
 $
Deposits with stated maturities2,020,358
 
 2,020,358
 
Securities sold under agreements to repurchase137,075
 
 137,075
 
Term debt289,404
 
 289,404
 
Junior subordinated debentures, at amortized cost78,529
 
 
 78,529





Fair Value of Assets and Liabilities Measured on a Recurring Basis 

150


The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis at as of December 31, 20102013 and 2009:

December 31, 2012

(in thousands)

   Fair Value at December 31, 2010 
Description  Total   Level 1   Level 2   Level 3 

Trading securities

        

Obligations of states and political subdivisions

  $1,282    $1,282    $    $  

Equity securities

   1,645     1,645            

Other investments securities(1)

   97     97            

Available for sale securities

        

U.S. Treasury and agencies

   118,789          118,789       

Obligations of states and political subdivisions

   216,726          216,726       

Residential mortgage-backed securities and collateralized mortgage obligations

   2,581,504          2,581,504       

Other debt securities

   152          152       

Investments in mutual funds and other equity securities

   2,009          2,009       

Mortgage servicing rights, at fair value

   14,454               14,454  

Derivatives

   1,060          1,060       
     

Total assets measured at fair value

  $2,937,718    $3,024    $2,920,240    $14,454  
     

Junior subordinated debentures, at fair value

  $80,688    $    $    $80,688  

Derivatives

   361          361       
     

Total liabilities measured at fair value

  $81,049    $    $361    $80,688  
     

   Fair Value at December 31, 2009 
Description  Total   Level 1   Level 2   Level 3 

Trading securities

        

Obligations of states and political subdivisions

  $693    $693    $    $  

Equity securities

   1,438     1,438            

Other investments securities(1)

   142     142            

Available for sale securities

        

U.S. Treasury and agencies

   11,794          11,794       

Obligations of states and political subdivisions

   211,825          211,825       

Residential mortgage-backed securities and collateralized mortgage obligations

   1,569,849          1,569,849       

Other debt securities

   159          159       

Investments in mutual funds and other equity securities

   1,989          1,989       

Mortgage servicing rights, at fair value

   12,625               12,625  

Derivatives

   969          969       
     

Total assets measured at fair value

  $1,811,483    $2,273    $1,796,585    $12,625  
     

Junior subordinated debentures, at fair value

  $85,666    $    $    $85,666  

Derivatives

   133          133       
     

Total liabilities measured at fair value

  $85,799    $    $133    $85,666  
     

 December 31, 2013
DescriptionTotal Level 1 Level 2 Level 3
Trading securities       
Obligations of states and political subdivisions$2,366
 $
 $2,366
 $
Equity securities3,498
 3,498
 
 
Other investments securities(1)
94
 
 94
 
Available for sale securities       
U.S. Treasury and agencies268
 
 268
 
Obligations of states and political subdivisions235,205
 
 235,205
 
Residential mortgage-backed securities and       
 collateralized mortgage obligations1,553,541
 
 1,553,541
 
Other debt securities
 
 
 
Investments in mutual funds and other equity securities1,964
 
 1,964
 
Loans held for sale, at fair value104,664
   104,664
  
Mortgage servicing rights, at fair value47,765
 
 
 47,765
Derivatives       
Interest rate lock commitments706
 
 
 706
Interest rate forward sales commitments1,250
 
 1,250
 
Interest rate swaps15,965
 
 15,965
 
Total assets measured at fair value$1,967,286
 $3,498
 $1,915,317
 $48,471
Junior subordinated debentures, at fair value$87,274
 $
 $
 $87,274
Derivatives       
Interest rate lock commitments
 
 
 
Interest rate forward sales commitments6
 
 6
 
Interest rate swaps14,556
 
 14,556
 
Total liabilities measured at fair value$101,836
 $
 $14,562
 $87,274

151


(in thousands)
 December 31, 2012
DescriptionTotal Level 1 Level 2 Level 3
Trading securities       
Obligations of states and political subdivisions$1,216
 $
 $1,216
 $
Equity securities2,408
 2,408
 
 
Other investments securities(1)
123
 
 123
 
Available for sale securities       
U.S. Treasury and agencies45,820
 
 45,820
 
Obligations of states and political subdivisions263,725
 
 263,725
 
Residential mortgage-backed securities and       
collateralized mortgage obligations2,313,376
 
 2,313,376
 
Other debt securities222
 
 222
 
Investments in mutual funds and other equity securities2,086
 
 2,086
 
Loans held for sale, at fair value320,132
   320,132
  
Mortgage servicing rights, at fair value27,428
 
 
 27,428
Derivatives       
Interest rate lock commitments1,496
 
 
 1,496
Interest rate forward sales commitments133
 
 133
 
Interest rate swaps22,213
 
 22,213
 
Total assets measured at fair value$3,000,378
 $2,408
 $2,969,046
 $28,924
Junior subordinated debentures, at fair value$85,081
 $
 $
 $85,081
Derivatives       
Interest rate lock commitments18
 
 
 18
Interest rate forward sales commitments905
 
 905
 
Interest rate swaps22,048
 
 22,048
 
Total liabilities measured at fair value$108,052
 $
 $22,953
 $85,099
(1)Principally represents U.S. Treasury and agencies or residential mortgage-backed securities issued or guaranteed by governmental agencies.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

above: 

Cash and Cash Equivalents—For short-term instruments, including cash and due from banks, and interest bearing deposits with banks, the carrying amount is a reasonable estimate of fair value.

Securities—Fair values for investment securities are based on quoted market prices when available or through the use of alternative approaches, such as matrix or model pricing, or broker indicative bids, when market quotes are not readily accessible or available. Management periodically reviews the pricing information received from the third-party pricing service and compares it to secondary pricing service, evaluating significant price variances between services to determine an appropriate estimate of fair value to report.

Loans Held Forfor SaleFor Fair value is determined based on quoted secondary market prices for similar loans, held for sale, carryingincluding the implicit fair value approximates fair value.of embedded servicing rights.

Non-covered Loans and Leases - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, including commercial, real estate and consumer loans. Each loan category is further segregated by fixed and variable rate. For variableadjustable rate loans, carrying value approximates fair value. Effective in the second quarter of 2010, theloans. The fair value of fixed rate loans is calculated by discounting contractualexpected cash flows at rates which similar loans are currently being made. These amounts are discounted further by embedded probable losses expected to be realized in the portfolio.

Covered LoansCovered loans are initially measured at their estimated fair value on thetheir date of acquisition.acquisition as described in Note 7. Subsequent to acquisition, the fair value of covered loans is measured using the same methodology as that of non-covered loans.


152


Restricted Equity Securities – The carrying value of restricted equity securities approximates fair value as the shares can only be redeemed by the issuing institution at par.


Mortgage Servicing Rights-The fair value of mortgage servicing rights is estimated using a discounted cash flow model.  Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.income net of servicing costs. This model is periodically validated by an independent external model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. Due to the limited observability of all significant inputs utilized in the

Umpqua Holdings Corporation and Subsidiaries

valuation model, particularly the discount rate and projected constant prepayment rate, and how changes in these assumptions could potentially impact the ending valuation of this asset, as well as the lack of readily available quotes or observable trades of similar assets in the current period, we began classifyingclassify this as a Level 3 fair value measure in the third quarter of 2009. The transfer into Level 3 did not result in any changes in the methodology applied or the amount of realized or unrealized gains or losses recognized in the period.measure. Management believes the significant inputs utilized are indicative of those that would be used by market participants.

Bank Owned Life Insurance AssetsFair values of insurance policies owned are based on the insurance contract’s cash surrender value.

FDIC Indemnification Asset - The FDIC indemnification asset is calculated as the expected future cash flows under the loss-share agreement discounted by a rate reflective of the creditworthiness of the FDIC as would be required from the market.

Visa Class B Common Stock - The fair value of Visa Class B common stock is estimated by applying a 5% discount to the value of the unredeemed Class A equivalent shares.  The discount primarily represents the risk related to the further potential reduction of the conversion ratio between Class B and Class A shares and a liquidity risk premium. 
Deposits—The fair value of deposits with no stated maturity, such as non-interest bearing deposits, savings and interest checking accounts, and money market accounts, is equal to the amount payable on demand as of December 31, 2010 and 2009.demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Securities Sold under Agreements to Repurchase and Federal Funds Purchased - For short-term instruments, including securities sold under agreements to repurchase and federal funds purchased, the carrying amount is a reasonable estimate of fair value.

Term Debt—The fair value of medium term notes is calculated based on the discounted value of the contractual cash flows using current rates at which such borrowings can currently be obtained.

Junior Subordinated Debentures -The fair value of junior subordinated debentures is estimated using an income approach valuation technique.  The ending carrying (fair) value of the junior subordinated debentures measured at fair value represents the estimated amount that would be paid to transfer these liabilities in an orderly transaction amongst market participants.  Due to the increasing credit concerns in the capital markets and inactivity in the trust preferred markets that have limited the observability of market spreads, we have classified this as a Level 3 fair value measure since the third quarter of 2008. In the second quarter of 2009, due to continued inactivity in the junior subordinated debenture and related markets and clarified guidance relating to the determination of fair value when the volume and level of activity for an asset or liability have significantly decreased or where transactions are not orderly, management evaluated and determined to rely on a third-party pricing service to estimate the fair value of these liabilities. The pricing service utilizes an income approach valuation technique, specifically an option-adjusted spread (“OAS”) valuation model. This OAS model values the cash flows over multiple interest rate scenarios and discounts these cash flows using a credit risk adjustment spread over the three month LIBOR swap curve. Prior to the second quarter of 2009, we estimated the fair value of junior subordinated debentures using an internal discounted cash flow model. The OAS model utilized is more sophisticated and computationally intensive than the model previously used; however, the models react similarly to changes in the underlying inputs, and the results are considered comparable.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed into law which, among other things, limits the ability for certain bank holding companies to treat trust preferred security debt issuances as Tier 1 capital. It is anticipated that this law may require many banks to raise new Tier 1 capital and would effectively close the trust-preferred securities markets from offering new issuances in the future. As a result of this legislation, our third-party pricing service noted that they are no longer to able to provide reliable fair value estimates related to these liabilities given the absence of observable or comparable transactions in the market place in recent history or as anticipated into the future. As a result, Management evaluated current market conditions and determined that the 11.6% effective yield utilized to discount the junior subordinated debentures, and the related prices, to determine fair value as of March 31, 2010, continued to represent appropriate estimates the fair value of these liabilities as of December 31, 2010.

In the third quarter of 2010, the Company began utilizing a discounted cash flow model to measure these instruments at fair value, which will have the long-term effect of amortizing the cumulative fair value discount of $53.3 million, as of December 31, 2010, over each junior subordinated debentures expected term, to eventually return the carrying value of these instruments to

their notional values at their expected redemption dates. This will result in recognizing losses on junior subordinated debentures carried at fair value on a quarterly basis within non-interest income.measure.  For additional assurance, we obtained a valuation from a third-party to validate the results of our model at December 31, 2010. The resultsfurther discussion of the valuation were consistent with the results of our internal model. The Company will continue to monitor activity in the trust preferred markets to validate the 11.6% effective yield utilized. Observable activity in the junior subordinated debenturetechnique and related markets in future periods may change the effective rate used to discount these liabilities, and could result in additional fair value adjustments (gains or losses on junior subordinated debentures measured at fair value) above the periodic change in fair value under the effective yield method.

inputs, see Note 18. 

Derivative Instruments -The fair value of the derivative instruments isinterest rate lock commitments and forward sales commitments are estimated using quoted or published market prices for similar instruments, adjusted for factors such as pull-through rate assumptions based on historical information, where appropriate.

Visa Class B Common Stock  The pull-through rate assumptions are considered Level 3 valuation inputs and are significant to the interest rate lock commitment valuation; as such, the interest rate lock commitment derivatives are classified as Level 3. The fair value of Visa Class B common stockthe interest rate swaps is estimateddetermined using a discounted cash flow technique incorporating credit valuation adjustments to reflect nonperformance risk in the measurement of fair value. Although the Bank has determined that the majority of the inputs used to value its interest rate swap derivatives fall within Level 2 of the fair value hierarchy, the CVA associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by applying a 5% discountitself and its counterparties. However, as of December 31, 2013, the Bank has assessed the significance of the impact of the CVA on the overall valuation of its interest rate swap positions and has determined that the CVA are not significant to the valueoverall valuation of its interest rate swap derivatives. As a result, the Bank has classified its interest rate swap derivative valuations in Level 2 of the unredeemed Class A equivalent shares. The discount primarily represents the risk related to the further potential reductionfair value hierarchy.   

Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs (Level 3) 

153


The following table provides a reconciliationdescription of the valuation technique, significant unobservable input, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended at December 31, 2010 and 2009. The amount included2013
(in thousands)
Financial InstrumentValuation TechniqueUnobservable InputWeighted Average (Range)
Mortgage servicing rightsDiscounted cash flow
Constant Prepayment Rate12.74%
Discount Rate8.69%
Interest rate lock commitmentInternal Pricing Model
Pull-through rate80.9%
Junior subordinated debenturesDiscounted cash flow
Credit Spread6.53%

Generally, any significant increases in the “Transfer into Level 3” column represents the beginning balance of an item in the period (interim quarter) for which it was designated as a Level 3 fair value measure.

(in thousands)

   Beginning
Balance
  Change
included in
earnings
  Issuances  Settlements  Transfers
into Level 3
  Ending
Balance
  Net change in
unrealized gains
or losses relating
to items held at
end of period
 

2010

       

Mortgage servicing rights

 $12,625   $(3,878 $5,707   $   $   $14,454   $(1,965

Junior subordinated debentures

  85,666    (1,004      (3,974      80,688    (1,004

2009

       

Mortgage servicing rights

 $   $(1,341 $3,335   $   $10,631   $12,625   $(467

Junior subordinated debentures

  92,520    (1,675      (5,179      85,666    (1,675

Gains (losses) on mortgage servicing rights carried at fair value are recorded in mortgage banking revenue within other non-interest income. Gains resulting from the widening of the credit risk adjusted spreadconstant prepayment rate and changes in the three month LIBOR swap curve are recorded as gains on junior subordinated debentures carried at fair value within other non-interest income. The contractual interest expense on the junior subordinated debentures is recorded on an accrual basis as interest on junior subordinated debentures within interest expense. Settlements related to the junior subordinated debentures represent the payment of accrued interest that is embeddeddiscount rate utilized in the fair value measurement of these liabilities.

the mortgage servicing rights will result in negative fair value adjustments (and a decrease in the fair value measurement). Conversely, a decrease in the constant prepayment rate and discount rate will result in a positive fair value adjustment (and increase in the fair value measurement).


An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in positive fair value adjustments (and an increase in the fair value measurement.) Conversely, a decrease in the pull-through rate will result in a negative fair value adjustment (and a decrease in the fair value measurement.)
Management believes that the credit risk adjusted spread being utilized in the fair value measurement of the junior subordinated debentures carried at fair value is indicative of the nonperformance risk premium a willing market participant would require under current market conditions, that is, the inactive market. Management attributes the change in fair value of the junior subordinated debentures during the period to market changes in the nonperformance expectations and pricing of this type of debt, and not as a result of changes to our entity-specific credit risk. The widening of the credit risk adjusted spread above the Company’s contractual spreads has primarily contributed to the positive fair value adjustments.  Future contractions in the credit risk adjusted spread relative to the spread currently utilized to measure the Company’s junior subordinated debentures at fair value as of December 31, 2010,2013, or the passage of time, will result in negative fair value adjustments.  Generally, an increase in the credit risk adjusted spread and/or a decrease in the three month LIBOR swap curve will result in positive fair value adjustments.adjustments (and decrease the fair value measurement).  Conversely, a decrease in the credit risk adjusted spread and/or an increase in the three month LIBOR swap curve will result in negative fair value adjustments.

Umpqua Holdings Corporationadjustments (and increase the fair value measurement). 

The following table provides a reconciliation of assets and Subsidiaries

liabilities measured at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended December 31, 2013 and 2012

(in thousands)
 Beginning Balance Change included in earnings Purchases and issuances Sales and settlements Ending
Balance
 Net change in
unrealized gains
or (losses) relating
to items held at
end of period
2013           
Mortgage servicing rights, at fair value$27,428
 $2,374
 $17,963
 $
 $47,765
 $2,376
Interest rate lock commitment1,478
 (1,478) 62,560
 (61,854) 706
 706
Junior subordinated debentures, at fair value85,081
 6,090
 
 (3,897) 87,274
 6,090
            
2012 
  
  
  
  
  
Mortgage servicing rights, at fair value$18,184
 $(8,466) $17,710
 $
 $27,428
 $(3,778)
Interest rate lock commitment1,749
 (1,749) 111,473
 (109,995) 1,478
 1,478
Junior subordinated debentures, at fair value82,905
 6,350
 
 (4,174) 85,081
 6,350


154


Gains (losses) on mortgage servicing rights carried at fair value are recorded in mortgage banking revenue within other non-interest income. Gains (losses) on interest rate lock commitments carried at fair value are recorded in mortgage banking revenue within other non-interest income. Gains (losses) on junior subordinated debentures carried at fair value are recorded within other non-interest income.  The contractual interest expense on the junior subordinated debentures is recorded on an accrual basis as interest on junior subordinated debentures within interest expense. Settlements related to the junior subordinated debentures represent the payment of accrued interest that is embedded in the fair value of these liabilities. 

Additionally, from time to time, certain assets are measured at fair value on a nonrecurring basis.  These adjustments to fair value generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment. 
Fair Value of Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The following table presents information about the Company’s assets and liabilities measured at fair value on a nonrecurring basis for which a nonrecurring change in fair value has been recorded during the years ended December 31, 2010 and 2009.reporting period.  The amounts disclosed below represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported upon.

(in thousands)

    December 31, 2010 
Description  Total   Level 1   Level 2   Level 3 

Investment securities, held to maturity

        

Residential mortgage-backed securities and collateralized mortgage obligations

  $1,226    $    $    $1,226  

Non-covered loans and leases

   74,639               74,639  

Non-covered other real estate owned

   7,958               7,958  

Covered other real estate owned

   8,708         8,708  
     
  $92,531    $    $    $92,531  
     

    December 31, 2009 
Description  Total   Level 1   Level 2   Level 3 

Investment securities, held to maturity

        

Residential mortgage-backed securities and collateralized mortgage obligations

  $2,875    $    $    $2,875  

Non-covered loans and leases

   138,134               138,134  

Goodwill

   607,307               607,307  

Other intangible assets, net

   295               295  

Non-covered other real estate owned

   16,607               16,607  
     
  $765,218    $    $    $765,218  
     

 December 31, 2013
 Total Level 1 Level 2 Level 3
Non-covered loans and leases$20,421
 $
 $
 $20,421
Non-covered other real estate owned1,986
 
 
 1,986
Covered other real estate owned2,770
 
 
 2,770
 $25,177
 $
 $
 $25,177

(in thousands)
 December 31, 2012
 Total Level 1 Level 2 Level 3
Investment securities, held to maturity       
Residential mortgage-backed securities       
and collateralized mortgage obligations$432
 $
 $
 $432
Non-covered loans and leases34,007
 
 
 34,007
Non-covered other real estate owned4,671
 
 
 4,671
Covered other real estate owned8,957
 
 
 8,957
 $48,067
 $
 $
 $48,067

The following table presents the losses resulting from nonrecurring fair value adjustments for the years ended December 31, 2010, 20092013, 2012 and 2008:

2011

(in thousands)

    2010   2009   2008 

Investment securities, held to maturity

      

Residential mortgage-backed securities and collateralized mortgage obligations

  $414    $10,334    $3,816  

Other debt securities

             225  

Non-covered loans and leases

   119,240     185,810     86,607  

Goodwill

        111,952     982  

Other intangible assets, net

        804       

Non-covered other real estate owned

   4,074     12,247     5,084  

Covered other real estate owned

   1,941            
     

Total loss from nonrecurring measurements

  $125,669    $321,147    $96,714  
     

 2013 2012 2011
Investment securities, held to maturity     
Residential mortgage-backed securities     
and collateralized mortgage obligations$
 $155
 $359
Non-covered loans and leases27,171
 37,897
 51,883
Non-covered other real estate owned1,448
 6,896
 8,947
Covered other real estate owned712
 4,646
 8,709
Total loss from nonrecurring measurements$29,331
 $49,594
 $69,898

155


The following provides a description of the valuation technique and inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at December 31, 2013. Unobservable inputs and qualitative information about the unobservable inputs, as required by ASC 820-10-50-2-bbb, are not presented as the fair value is determined by third-party information.

The investment securities held to maturity above relate to non-agency collateralized mortgage obligations where other-than-temporary impairment (“OTTI”)OTTI has been identified and the investments have been adjusted to fair value.  The fair value of these investments securities were obtained from third-party pricing services using matrix or model pricing methodologies and were corroborated by broker indicative bids.  While we do not expect to recover the entire amortized cost basis of these securities, as we as we do not intend to sell these securities and it is not likely that we will be required to sell these securities before maturity, only the credit loss component of the impairment is recognized in earnings.  The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected.  The remaining impairment loss related to all other factors, the difference between the present value of the cash flows expected

to be collected and fair value,  is recognized as a charge to a separate component other comprehensive income (“OCI”).of OCI. We estimate the cash flows of the underlying collateral within each security considering credit, interest and prepayment risk models that incorporate management’s estimate of projected key assumptions including prepayment rates, collateral default rates and loss severity.  Assumptions utilized vary from security to security, and are influenced by factors such as loan interest rates, geographic location, borrower characteristics and vintage, and historical experience.  We then use a third party to obtain information about the structure of each security, including subordination and other credit enhancements, in order to determine how the underlying collateral cash flows will be distributed to each security issued in the structure.  These cash flows are then discounted at the interest rate used to recognize interest income on each security.


The non-covered loans and leases amount above represents impaired, collateral dependent loans that have been adjusted to fair value.  When we identify a collateral dependent loan as impaired, we measure the impairment using the current fair value of the collateral, less selling costs.  Depending on the characteristics of a loan, the fair value of collateral is generally estimated by obtaining external appraisals.  If we determine that the value of the impaired loan is less than the recorded investment in the loan, we recognize this impairment and adjust the carrying value of the loan to fair value through the allowance for loan and lease losses.  The loss represents charge-offs or impairments on collateral dependent loans for fair value adjustments based on the fair value of collateral. The carrying value of loans fully charged-off is zero.

The goodwill amount above represents goodwill that has been adjusted to fair value. The impairment charge recognized in 2009 relates to the Community Banking reporting segment. The Company engaged an independent valuation consultant to assist the Company in estimating the fair value of the Community Banking reporting unit for step one of the goodwill impairment test. We utilized a variety of valuation techniques to analyze and measure the estimated fair value of the reporting unit under both the income and market valuation approach. Under the income approach, the fair value of the reporting unit is determined by projecting future earnings for five years, utilizing a terminal value based on expected future growth rates, and applying a discount rate reflective of current market conditions. The estimation of forecasted earnings uses management’s best estimates of economic and market conditions over the projected periods and considers estimated growth rates in loans and deposits and future expected changes in net interest margins. Various market-based valuation approaches are utilized and include applying market price to earnings, core deposit premium, and tangible book value multiples as observed from relevant, comparable peer companies of the reporting unit. We also valued the reporting unit by applying an estimated control premium to the market capitalization. Weightings are assigned to each of the aforementioned model results, judgmentally allocated based on the observability and reliability of the inputs, to arrive at a final fair value estimate of the reporting unit. Because the step one analysis indicated that the implied fair value of goodwill was likely lower than the carrying amount, we completed step two of the goodwill impairment test. In step two of the goodwill impairment test, we calculated the fair value for the reporting unit’s assets and liabilities, as well as its unrecognized identifiable intangible assets, such as the core deposit intangible and trade name, in order to determine the implied fair value of goodwill. Fair value adjustments to items on the balance sheet primarily related to investment securities held to maturity, loans, other real estate owned, Visa Class B common stock, deferred taxes, deposits, term debt, and junior subordinated debentures carried at amortized cost. The external valuation specialist assisted management to estimate the fair value of our unrecognized identifiable assets, such as the core deposit intangible and trade name. Information relating to our methodologies for estimating the fair value of financial instruments is described above. Through this process, the Company determined that the implied fair value of the reporting unit’s goodwill was less than its carrying amount, and as a result, we recognized a goodwill impairment charge equal to that deficit. The goodwill impairment charge recognized in 2008 relates to the Retail Brokerage reporting segment. The impairment resulted from the Company’s evaluation following the departure of certain financial advisors. The valuation of the impairment at the Retail Brokerage operating segment was determined using an income approach by discounting cash flows of forecasted earnings.

The other intangible asset, net, amount above represents a merchant servicing portfolio income stream that has been adjusted to fair value. The impairment charge is a result of a decrease in the actual and expected future cash flows related to the income stream. The fair value of the merchant servicing portfolio was determined using an income approach (discounted cash flow model)zeroFuture cash flows were estimated based on actual historical experience and consideration of future expectations, including the discount revenue rates, offsetting operating expenses, growth and attrition rates, as well as other factors, discounted at a 14% discount rate.

Umpqua Holdings Corporation and Subsidiaries

The non-covered and covered other real estate owned amount above represents impaired real estate that has been adjusted to fair value.  Non-covered other real estate owned represents real estate which the Bank has taken control of in partial or full satisfaction of loans. At the time of foreclosure, other real estate owned is recorded at the lower of the carrying amount of the loan or fair value less costs to sell, which becomes the property’sproperty's new basis. Any write-downs based on the asset’sasset's fair value at the date of acquisition are charged to the allowance for loan and lease losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Fair value adjustments on other real estate owned are recognized within net loss on real estate owned. The loss represents impairments on non-covered other real estate owned for fair value adjustments based on the fair value of the real estate.

Fair Value Option
NOTE 25.    EARNINGS PER COMMON SHAREThe following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale accounted for under the fair value option as of

December 31, 2013 and December 31, 2012:


(in thousands)
            
 December 31, 2013 December 31, 2012
     Fair Value     Fair Value
   Aggregate Less Aggregate   Aggregate Less Aggregate
   Unpaid Unpaid   Unpaid Unpaid
 Fair  Principal Principal Fair Principal Principal
 Value Balance Balance Value Balance Balance
  Loans held for sale$104,664
 $101,795
 $2,869
 $320,132
 $302,760
 $17,372

Loans held for sale accounted for under the fair value option are measured initially at fair value with subsequent changes in fair value recognized in earnings. Gains and losses from such changes in fair value are reported as a component of mortgage banking revenue, net in the Consolidated Statements of Income. For the years ended December 31, 2013, 2012 and 2011 the Company recorded a net decrease of $14.5 million, a net increase of $14.0 million, and a net increase of $3.4 million, respectively, representing the change in fair value reflected in earnings.


156


There were nononaccrual mortgage loans held for sale or mortgage loans held for sale 90 days or more past due and still accruing interest as of December 31, 2013 and December 31, 2012, respectively.
Note 25– Earnings Per Common Share
The following is a computation of basic and diluted earnings per common share for the years ended December 31, 2010, 20092013, 2012 and 2008:

2011

(in thousands, except per share)

    2010   2009  2008 

NUMERATORS:

     

Net income (loss)

  $28,326    $(153,366 $51,044  

Preferred stock dividends

   12,192     12,866    1,620  

Dividends and undistributed earnings allocated to participating securities(1)

   67     30    154  
     

Net earnings (loss) available to common shareholders

  $16,067    $(166,262 $49,270   
     

DENOMINATORS:

     

Weighted average number of common shares outstanding—basic

   107,922     70,399    60,084  

Effect of potentially dilutive common shares(2)

   231         340  
     

Weighted average number of common shares outstanding—diluted

   108,153     70,399    60,424  
     

EARNINGS (LOSS) PER COMMON SHARE:

     

Basic

  $0.15    $(2.36 $0.82  

Diluted

  $0.15    $(2.36 $0.82  

share data)
 2013 2012 2011
NUMERATORS:     
Net income$98,361
 $101,891
 $74,496
Less:     
Dividends and undistributed earnings allocated to participating securities (1)
788
 682
 356
Net earnings available to common shareholders$97,573
 $101,209
 $74,140
DENOMINATORS:     
Weighted average number of common shares outstanding - basic111,938
 111,935
 114,220
Effect of potentially dilutive common shares (2)
238
 216
 189
Weighted average number of common shares outstanding - diluted112,176
 112,151
 114,409
EARNINGS PER COMMON SHARE:     
Basic$0.87
 $0.90
 $0.65
Diluted$0.87
 $0.90
 $0.65
(1)Represents dividends paid and undistributed earnings allocated to nonvested restricted stock awards.
(2)Represents the effect of the assumed exercise of warrants, assumed exercise of stock options, vesting of
non-participating restricted shares, and vesting of restricted stock units, based on the treasury stock method.


The following table presents the weighted average outstanding non-participating securities that were not included in the computation of diluted earnings per common share because their effect would be anti-dilutive for the years ended December 31, 2010, 20092013, 2012 and 2008:

2011

(in thousands)

    2010   2009   2008 

Stock options

   1,954     1,826     1,136  

CPP warrant

   274     1,811     291  

Non-participating, nonvested restricted shares

   9     17     26  

Restricted stock units

        100     3  
     
   2,237     3,754     1,456  
     

In the fourth quarter of 2008, the Company issued the CPP warrant to the U.S. Treasury to purchase up to 2,221,795 shares of common stock. This security was not included in the computation of diluted EPS for the years ended December 31, 2009 and 2008 because the warrant’s exercise price was greater than the average market price of common shares. The weighted average number of outstanding common stock underlying the CPP warrant in 2008 is calculated from the date of issuance. The weighted average number of outstanding common stock underlying the CPP warrant in 2009 reflects the 50% reduction of the

number of shares of common stock underlying the warrant in connection with the Company’s qualifying public offering in the third quarter of 2009. The weighted average number of outstanding common stock underlying the CPP warrant in 2010 reflects the repurchase of the warrants in connection with the Company’s full repayment of TARP obligations and cancellation of all equity interests in the Company held by the U.S. Treasury.

 2013 2012 2011
Stock options669
 1,306
 1,815
NOTE 26.    OPERATING SEGMENTSNote 26

– Segment Information 

The Company operates three primary segments: Community Banking, Mortgage BankingHome Lending and Retail Brokerage.Wealth Management. The Community Banking segment’ssegment's principal business focus is the offering of loan and deposit products to its business and retail customers in its primary market areas. As of December 31, 2010,2013, the Community Banking segment operates 183operated 206 locations throughout Oregon, Northern California, Washington, and Nevada.

The Mortgage BankingHome Lending segment, which operates as a division of the Bank, originates, sells and services residential mortgage loans.

The Retail BrokerageWealth Management segment consists of the operations of Umpqua Investments, which offers a full range of retail brokerage and investment advisory services and products to its clients who consist primarily of individual investors.investors, and Umpqua Private Bank, which serves high net worth individuals with liquid investable assets and provides customized financial solutions and offerings. The Company accounts for intercompany fees and services between Umpqua Investments and the Bank at an estimated fair value according to regulatory requirements for services provided.  Intercompany items relate primarily to management services, referral fees and deposit rebates for Umpqua Investment client deposits placed directly or indirectly with the bank.

rebates. 

Summarized financial information concerning the Company’sCompany's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables:


157


Year Ended December 31, 2010

2013

(in thousands)

    Community
Banking
  Retail
Brokerage
   Mortgage
Banking
   Consolidated 

Interest income

  $472,930   $3,102    $12,564    $488,596  

Interest expense

   90,875    182     2,755     93,812  
     

Net interest income

   382,055    2,920     9,809     394,784  

Provision for non-covered loan losses

   113,668              113,668  

Provision for covered loan losses

   5,151              5,151  

Non-interest income

   42,445    12,056     21,403     75,904  

Non-interest expense

   288,535    13,597     15,606     317,738  
     

Income (loss) before income taxes

   17,146    1,379     15,606     34,131  

Provision for (benefit from) income taxes

   (989  552     6,242     5,805  
     

Net income (loss)

   18,135    827     9,364     28,326  

Preferred stock dividends

   12,192              12,192  

Dividends and undistributed earnings allocated to participating securities

   67              67  
     

Net earnings (loss) available to common shareholders

  $5,876   $827    $9,364    $16,067  
     

Total assets

  $11,338,457   $13,981    $316,272    $11,668,710  

Total loans (covered and non-covered)

  $6,222,163   $    $222,722    $6,444,885  

Total deposits

  $9,280,738   $141,468    $11,599    $9,433,805  

Umpqua Holdings Corporation and Subsidiaries

 Community Wealth Home  
 Banking Management Lending Consolidated
Interest income$406,099
 $14,755
 $21,992
 $442,846
Interest expense34,636
 731
 2,514
 37,881
Net interest income371,463
 14,024
 19,478
 404,965
Provision for non-covered loan and lease losses16,829
 
 
 16,829
Recapture of provision for covered loan losses(6,113) 
 
 (6,113)
Non-interest income26,440
 15,662
 79,339
 121,441
Non-interest expense308,894
 16,849
 38,918
 364,661
Income before income taxes78,293
 12,837
 59,899
 151,029
Provision for income taxes23,544
 5,164
 23,960
 52,668
Net income54,749
 7,673
 35,939
 98,361
Dividends and undistributed earnings allocated       
to participating securities788
 
 
 788
Net earnings available to common shareholders$53,961
 $7,673
 $35,939
 $97,573
        
Total assets$10,822,990
 $126,060
 $687,062
 $11,636,112
Total loans and leases (covered and non-covered)$7,076,279
 $110,087
 $532,029
 $7,718,395
Total deposits$8,734,175
 $356,784
 $26,701
 $9,117,660
Year Ended December 31, 2009

2012

(in thousands)

   Community
Banking
  Retail
Brokerage
  Mortgage
Banking
  Consolidated 

Interest income

 $410,805   $122   $12,805   $423,732  

Interest expense

  99,383        3,641    103,024  
    

Net interest income

  311,422    122    9,164    320,708  

Provision for loan and lease losses

  209,124            209,124  

Non-interest income

  45,275    9,349    18,892    73,516  

Non-interest expense

  353,322    11,878    14,203    379,403  
    

(Loss) income before income taxes

  (205,749  (2,407  13,853    (194,303

(Benefit from) provision for income taxes

  (45,527  (951  5,541    (40,937
    

Net (loss) income

  (160,222  (1,456  8,312    (153,366

Preferred stock dividends

  12,866            12,866  

Dividends and undistributed earnings allocated to participating securities

  30            30  
    

Net (loss) earnings available to common shareholders

 $(173,118 $(1,456 $8,312   $(166,262
    

Total assets

 $9,127,104   $13,634   $240,634   $9,381,372  

Total loans (covered and non-covered)

 $5,807,214   $   $192,053   $5,999,267  

Total deposits

 $7,432,647   $   $7,787   $7,440,434  

 Community Wealth Home  
 Banking Management Lending Consolidated
Interest income$420,622
 $15,192
 $20,271
 $456,085
Interest expense45,240
 865
 2,744
 48,849
Net interest income375,382
 14,327
 17,527
 407,236
Provision for non-covered loan and lease losses21,796
 
 
 21,796
Provision for covered loan losses7,405
 
 
 7,405
Non-interest income38,272
 13,759
 84,798
 136,829
Non-interest expense307,089
 15,108
 37,455
 359,652
Income before income taxes77,364
 12,978
 64,870
 155,212
Provision for income taxes22,202
 5,171
 25,948
 53,321
Net income55,162
 7,807
 38,922
 101,891
Dividends and undistributed earnings allocated       
to participating securities682
 
 
 682
Net earnings available to common shareholders$54,480
 $7,807
 $38,922
 $101,209
        
Total assets$10,984,996
 $90,370
 $720,077
 $11,795,443
Total loans and leases (covered and non-covered)$6,713,792
 $74,132
 $370,234
 $7,158,158
Total deposits$8,968,867
 $382,033
 $28,375
 $9,379,275

Year Ended December 31, 2008

2011

(in thousands)

   Community
Banking
  Retail
Brokerage
  Mortgage
Banking
  Consolidated 

Interest income

 $430,205   $35   $12,306   $442,546  

Interest expense

  147,070        5,169    152,239  
    

Net interest income

  283,135    35    7,137    290,307  

Provision for loan and lease losses

  107,678            107,678  

Non-interest income

  95,043    9,439    2,636    107,118  

Non-interest expense

  199,029    9,425    8,116    216,570  
    

Income before income taxes

  71,471    49    1,657    73,177  

Provision for income taxes

  21,063    407    663    22,133  
    

Net income (loss)

  50,408    (358  994    51,044  

Preferred stock dividends

  1,620            1,620  

Dividends and undistributed earnings allocated to participating securities

  154            154  
    

Net earnings (loss) available to common shareholders

 $48,634   $(358 $994   $49,270  
    

Total assets

 $8,376,734   $7,656   $213,160   $8,597,550  

Total loans (covered and non-covered)

 $5,951,047   $   $180,327   $6,131,374  

Total deposits

 $6,582,440   $   $6,495   $6,588,935  


158


 Community Wealth Home  
 Banking Management Lending Consolidated
Interest income$474,167
 $13,362
 $14,224
 $501,753
Interest expense68,751
 2,067
 2,483
 73,301
Net interest income405,416
 11,295
 11,741
 428,452
Provision for non-covered loan and lease losses46,220
 
 
 46,220
Provision for covered loan losses16,141
 
 
 16,141
Non-interest income43,282
 13,963
 26,873
 84,118
Non-interest expense302,883
 15,630
 20,458
 338,971
Income before income taxes83,454
 9,628
 18,156
 111,238
Provision for income taxes26,023
 3,457
 7,262
 36,742
Net income57,431
 6,171
 10,894
 74,496
Dividends and undistributed earnings allocated       
to participating securities356
 
 
 356
Net earnings available to common shareholders$57,075
 $6,171
 $10,894
 $74,140
        
Total assets$11,086,493
 $53,044
 $423,321
 $11,562,858
Total loans and leases (covered and non-covered)$6,171,368
 $38,810
 $300,371
 $6,510,549
Total deposits$8,830,353
 $390,992
 $15,345
 $9,236,690

NOTE 27.    RELATED PARTY TRANSACTIONSNote 27

– Related Party Transactions


In the ordinary course of business, the Bank has made loans to its directors and executive officers (and their associated and affiliated companies). All such loans have been made on the same terms as those prevailing at the time of origination to other borrowers.

The following table presents a summary of aggregate activity involving related party borrowers for the years ended December 31, 2010, 20092013, 2012 and 2008:

2011:

(in thousands)

    2010  2009  2008 

Loans outstanding at beginning of year

  $12,301   $13,968   $9,628  

New loans and advances

   1,409    1,819    7,714  

Less loan repayments

   (3,467  (3,471  (3,374

Reclassification(1)

   (979  (15    
     

Loans outstanding at end of year

  $9,264   $12,301   $13,968  
     

(1)Represents loans that were once considered related party but are no longer considered related party, or loans that were not related party that subsequently became related party loans.

  2013 2012 2011
Loans outstanding at beginning of year $12,272
 $12,245
 $9,264
New loans and advances 3,584
 2,697
 10,041
Less loan repayments (2,213) (2,113) (7,060)
Reclassification (1)
 (336) (557) 
Loans outstanding at end of year $13,307
 $12,272
 $12,245
(1) Represents loans that were once considered related party but are no longer considered related party, or loans that were not related party that subsequently became related party loans.
At December 31, 20102013 and 20092012 deposits of related parties amounted to $13.9$15.3 million and $14.3$16.3 million, respectively.

NOTE 28.    PARENT COMPANY FINANCIAL STATEMENTSNote 28

– Parent Company Financial Statements


Condensed Balance Sheets

December 31,

(in thousands)

    2010   2009 

ASSETS

    

Non-interest bearing deposits with subsidiary banks

  $128,450    $215,190  

Investments in:

    

Bank subsidiary

   1,695,914     1,535,981  

Nonbank subsidiaries

   20,560     19,853  

Receivable from nonbank subsidiary

   8       

Other assets

   1,782     5,499   
     

Total assets

  $1,846,714    $1,776,523  
     

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Payable to bank subsidiary

  $26    $60  

Other liabilities

   20,560     21,092  

Junior subordinated debentures, at fair value

   80,688     85,666  

Junior subordinated debentures, at amortized cost

   102,866     103,188  
     

Total liabilities

   204,140     210,006  

Shareholders’ equity

   1,642,574     1,566,517  
     

Total liabilities and shareholders’ equity

  $1,846,714    $1,776,523  
     

Umpqua Holdings Corporation and Subsidiaries


159


 2013 2012
ASSETS   
  Non-interest bearing deposits with subsidiary banks$72,679
 $82,383
  Investments in:   
    Bank subsidiary1,847,168
 1,829,305
    Nonbank subsidiaries29,193
 25,308
  Other assets1,590
 1,498
    Total assets$1,950,630
 $1,938,494
    
LIABILITIES AND SHAREHOLDERS' EQUITY   
  Payable to bank subsidiary$93
 $49
  Other liabilities33,938
 18,340
  Junior subordinated debentures, at fair value87,274
 85,081
  Junior subordinated debentures, at amortized cost101,899
 110,985
    Total liabilities223,204
 214,455
  Shareholders' equity1,727,426
 1,724,039
    Total liabilities and shareholders' equity$1,950,630
 $1,938,494

Condensed Statements of Income

Year Ended December 31,

(in thousands)

    2010  2009  2008 

INCOME

    

Dividends from subsidiaries

  $245   $18,306   $52,953  

Other income

   5,081    6,656    38,528  
     

Total income

   5,326    24,962    91,481  

EXPENSES

    

Management fees paid to subsidiaries

   291    305    183  

Other expenses

   9,116    10,079    14,638  
     

Total expenses

   9,407    10,384    14,821  
     

(Loss) income before income tax and equity in undistributed earnings of subsidiaries

   (4,081  14,578    76,660  

Income tax (benefit) expense

   (1,594  (1,677  9,736  
     

Net income before equity in undistributed earnings of subsidiaries

   (2,487  16,255    66,924   

Equity in (distributions in excess) undistributed earnings of subsidiaries

   30,813    (169,621  (15,880
     

Net income (loss)

   28,326    (153,366  51,044  

Preferred stock dividends

   12,192    12,866    1,620  

Dividends and undistributed earnings allocated to participating securities

   67    30    154  
     

Net earnings (loss) available to common shareholders

  $16,067   $(166,262 $49,270  
     

 2013 2012 2011
INCOME     
  Dividends from subsidiaries$62,241
 $78,755
 $17,743
  Other income(2,321) (2,174) (2,127)
    Total income59,920
 76,581
 15,616
      
EXPENSES     
  Management fees paid to subsidiaries501
 459
 469
  Other expenses8,885
 9,189
 9,072
    Total expenses9,386
 9,648
 9,541
      
Income before income tax benefit and equity in undistributed     
  earnings of subsidiaries50,534
 66,933
 6,075
Income tax benefit(4,446) (4,904) (4,325)
Net income before equity in undistributed earnings of subsidiaries54,980
 71,837
 10,400
Equity in undistributed earnings of subsidiaries43,381
 30,054
 64,096
Net income98,361
 101,891
 74,496
Dividends and undistributed earnings allocated to participating securities788
 682
 356
Net earnings available to common shareholders$97,573
 $101,209
 $74,140
Condensed Statements of Cash Flows

Year Ended December 31,

(in thousands)

    2010  2009  2008 

OPERATING ACTIVITIES:

    

Net income (loss)

  $28,326   $(153,366 $51,044  

Adjustment to reconcile net income (loss) to net cash provided by operating activities:

    

(Distributions in excess) equity in undistributed earnings of subsidiaries

   (30,813  169,621    15,880  

Gain on sale of investment securities

       (79    

Depreciation, amortization and accretion

   (322  (467  (1,025

Change in fair value of junior subordinated debentures

   (4,978  (6,854  (39,166

Net decrease (increase) in other assets

   3,717    (637  1,184  

Net (decrease) increase in other liabilities

   (1,930  1,523    13,889  
     

Net cash (used) provided by operating activities

   (6,000  9,741    41,806  

INVESTING ACTIVITIES:

    

Investment in subsidiaries

   (126,500  (87,000  (160,000

Proceeds from investment securities held to maturity

       229      

Net (increase) decrease in receivables from nonbank subsidiaries

   (8      283  
     

Net cash used by investing activities

   (126,508  (86,771  (159,717

FINANCING ACTIVITIES:

    

Net increase (decrease) in payables to subsidiaries

   (34  53      

Proceeds from issuance of preferred stock

   198,289        201,927  

Redemption of preferred stock

   (214,181        

Proceeds from issuance of warrants

           12,254  

Redemption of warrants

   (4,500        

Net proceeds from issuance of common stock

   89,786    245,697      

Dividends paid on preferred stock

   (3,686  (10,739    

Dividends paid on common stock

   (20,626  (13,399  (45,796

Stock repurchased

   (284  (174  (129

Proceeds from exercise of stock options

   1,004    301    1,233  
     

Net cash provided by financing activities

   45,768    221,739    169,489  

Change in cash and cash equivalents

   (86,740  144,709    51,578  

Cash and cash equivalents, beginning of year

   215,190    70,481    18,903  
     

Cash and cash equivalents, end of year

  $128,450   $215,190   $70,481  
     

Umpqua Holdings Corporation and Subsidiaries



160


 2013 2012 2011
OPERATING ACTIVITIES:     
  Net income$98,361
 $101,891
 $74,496
  Adjustment to reconcile net income to net cash     
     provided by operating activities:     
    Equity in undistributed earnings of subsidiaries(43,381) (30,054) (64,096)
   Depreciation, amortization and accretion(322) (322) (322)
   Change in fair value of junior subordinated debentures2,193
 2,182
 2,217
   Net (increase) decrease in other assets(92) 4,925
 (3,933)
   Net (decrease) increase in other liabilities(1,361) (1,184) 3,736
    Net cash provided by operating activities55,398
 77,438
 12,098
      
INVESTING ACTIVITIES:     
  Investment in subsidiaries(2,928) (24,970) (3,668)
  Acquisitions
 419
 
  Net decrease in receivables from nonbank subsidiaries
 
 8
    Net cash used by investing activities(2,928) (24,551) (3,660)
      
FINANCING ACTIVITIES:     
  Net (decrease) increase in payables to subsidiaries(8,448) 17
 7
  Dividends paid on common stock(50,767) (46,201) (25,317)
  Stock repurchased(9,356) (7,433) (29,754)
  Proceeds from exercise of stock options6,397
 980
 309
    Net cash used by financing activities(62,174) (52,637) (54,755)
      
Change in cash and cash equivalents(9,704) 250
 (46,317)
Cash and cash equivalents, beginning of year82,383
 82,133
 128,450
Cash and cash equivalents, end of year$72,679
 $82,383
 $82,133

NOTE 29.    QUARTERLY FINANCIAL INFORMATIONNote 29– Quarterly Financial Information (Unaudited)


The following tables present the summary results for the eight quarters ending December 31, 2010:

2010

2013:

(in thousands, except per share information)

   2010 
    December 31   September 30   June 30   March 31  Four
Quarters
 

Interest income

  $130,677    $132,946    $115,604    $109,369   $488,596  

Interest expense

   23,562     24,629     23,304     22,317    93,812  
     

Net interest income

   107,115     108,317     92,300     87,052    394,784  

Provision for non-covered loan and lease losses

   17,567     24,228     29,767     42,106    113,668  

Provision for covered loan and lease losses

   4,484     667              5,151  

Non-interest income

   15,161     12,133     18,563     30,047    75,904  

Non-interest expense

   87,864     85,170     74,833     69,871    317,738  
     

Income before provision for (benefit from) income taxes

   12,361     10,385     6,263     5,122    34,131  

Provision for (benefit from) income taxes

   4,203     2,194     2,800     (3,392  5,805  
     

Net income

   8,158     8,191     3,463     8,514    28,326  

Preferred stock dividends

                  12,192    12,192  

Dividends and undistributed earnings allocated to participating securities

   18     18     16     15    67  
     

Net earnings (loss) available to common shareholders

  $8,140    $8,173    $3,447    $(3,693 $16,067  
     

Basic earnings (loss) per common share

  $0.07    $0.07    $0.03    $(0.04 

Diluted earnings (loss) per common share

  $0.07    $0.07    $0.03    $(0.04 

Cash dividends declared per common share

  $0.05    $0.05    $0.05    $0.05   

2009


161


 2013
     Four
 December 31September 30June 30March 31Quarters
Interest income$118,538
$115,960
$104,015
$104,333
$442,846
Interest expense8,464
9,151
10,122
10,144
37,881
   Net interest income110,074
106,809
93,893
94,189
404,965
Provision for non-covered loan and lease losses3,840
3,008
2,993
6,988
16,829
(Recapture of) provision for covered loan and lease losses(1,369)(1,904)(3,072)232
(6,113)
Non-interest income26,785
26,144
34,497
34,015
121,441
Non-interest expense95,364
95,604
87,931
85,762
364,661
   Income before provision for income taxes39,024
36,245
40,538
35,222
151,029
Provision for income taxes13,754
12,768
14,285
11,861
52,668
Net income25,270
23,477
26,253
23,361
98,361
Dividends and undistributed earnings allocated     
  to participating securities212
196
197
183
788
Net earnings available to common shareholders$25,058
$23,281
$26,056
$23,178
$97,573
      
Basic earnings per common share$0.22
$0.21
$0.23
$0.21
 
Diluted earnings per common share$0.22
$0.21
$0.23
$0.21
 
Cash dividends declared per common share$0.15
$0.15
$0.20
$0.10
 

(in thousands, except per share information)

   2009 
    December 31  September 30  June 30  March 31  Four
Quarters
 

Interest income

  $107,485   $107,088   $104,783   $104,376   $423,732  

Interest expense

   22,941    25,326    25,794    28,963    103,024  
     

Net interest income

   84,544    81,762    78,989    75,413    320,708  

Provision for non-covered loan and lease losses

   68,593    52,108    29,331    59,092    209,124  

Non-interest income

   13,024    17,925    27,050    15,517    73,516  

Non-interest expense

   72,500    68,349    178,603    59,951    379,403  
     

Income before income taxes

   (43,525  (20,770  (101,895  (28,113  (194,303

Provision for income taxes

   (16,843  (13,626  2,396    (12,864  (40,937
     

Net income

   (26,682  (7,144  (104,291  (15,249  (153,366

Preferred stock dividends

   3,234    3,225    3,216    3,191    12,866  

Dividends and undistributed earnings allocated to participating securities

   8    7    7    8    30  
     

Net earnings available to common shareholders

  $(29,924 $(10,376 $(107,514 $(18,448 $(166,262
     

Basic earnings per common share

  $(0.34 $(0.14 $(1.79 $(0.31 

Diluted earnings per common share

  $(0.34 $(0.14 $(1.79 $(0.31 

Cash dividends declared per common share

  $0.05   $0.05   $0.05   $0.05   

 2012
     Four
 December 31September 30June 30March 31Quarters
Interest income$112,741
$114,108
$113,594
$115,642
$456,085
Interest expense10,912
12,068
12,582
13,287
48,849
   Net interest income101,829
102,040
101,012
102,355
407,236
Provision for non-covered loan and lease losses4,913
7,078
6,638
3,167
21,796
Provision for (recapture of) covered loan and lease losses3,103
2,927
1,406
(31)7,405
Non-interest income46,987
33,679
28,926
27,237
136,829
Non-interest expense98,046
86,974
86,936
87,696
359,652
   Income before provision for income taxes42,754
38,740
34,958
38,760
155,212
Provision for income taxes14,796
13,587
11,681
13,257
53,321
Net income27,958
25,153
23,277
25,503
101,891
Dividends and undistributed earnings allocated     
  to participating securities183
170
162
167
682
Net earnings available to common shareholders$27,775
$24,983
$23,115
$25,336
$101,209
      
Basic earnings per common share$0.25
$0.22
$0.21
$0.23
 
Diluted earnings per common share$0.25
$0.22
$0.21
$0.23
 
Cash dividends declared per common share$0.09
$0.09
$0.09
$0.07
 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

Not applicable.


162


ITEM 9A. CONTROLS AND PROCEDURES.

On a quarterly basis, we carry out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, Principal Financial Officer and Principal Accounting Officer of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. As of December 31, 2010,2013, our management, including our Chief Executive Officer, Principal Financial Officer, and Principal Accounting Officer, concluded that our disclosure controls and procedures arewere effective in timely alerting them to material information relating to us that is required to be included in our periodic SEC filings.

Although we change and improve our internal controls over financial reporting on an ongoing basis, we do not believe that any such changes occurred in the fourth quarter 20102013 that materially affected or are reasonably likely to materially affect our internal control over financial reporting.


REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Umpqua Holdings Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’sCompany's internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’sCompany's internal control over financial reporting includes those policies and procedures that:

Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’sCompany's assets;

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with the authorizations of management and directors of the Company; and

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’sCompany's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’sCompany's internal control over financial reporting as of December 31, 2010.2013. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Control - Integrated Framework. Based on our assessment and those criteria, we believe that, as of December 31, 2010,2013, the Company maintained effective internal control over financial reporting.

The Company’sCompany's registered public accounting firm has audited the Company’s consolidated financial statements and the effectiveness of our internal control over financial reporting as of and for the year ended December 31, 20102013 that are included in this annual report and issued their Report of Independent Registered Public Accounting Firm, appearing under Item 8. The attestation report expresses an unqualified opinion on the effectiveness of the Company’sCompany's internal controls over financial reporting as of December 31, 2010.

2013.

February 17, 2011

14, 2014



163


ITEM 9B. OTHER INFORMATION.

None.

Umpqua Holdings Corporation

PART III


ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The response to this item is incorporated by reference to Umpqua’s Proxy Statement for the 20112014 annual meeting of shareholders under the captions “Annual Meeting Business”- “Item 1, Election of Directors”, “Information About Directors and Executive Officers”, “Corporate Governance Overview” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

ITEM 11. EXECUTIVE COMPENSATION.

The response to this item is incorporated by reference to the Proxy Statement, under the caption "Compensation Discussion and Analysis.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The response to this item is set forth in Part II, Item 5, “Equity Compensation Plan Information” and is incorporated by reference to the Proxy Statement, under the caption "Security Ownership of Management and Others."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The response to this item is incorporated by reference to the Proxy Statement, under the captions “Compensation Discussion“Annual Meeting Business- Item 1, Election of Directors” and Analysis” and “Executive Compensation Decisions.”

"Related Party Transactions."

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS14. PRINCIPAL ACCOUNTING FEES AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

SERVICES.

The response to this item is incorporated by reference to the Proxy Statement, under the caption “Security OwnershipItem 2-Ratification of Management and Others.”

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The response to this item is incorporated by reference to the Proxy Statement, under the caption “Related Party Transactions.”

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES.

The response to this item is incorporated by reference to the Proxy Statement,Auditor Appointment under the caption “Independent Registered Public Accounting Firm.”

PART IV


ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)
(1)Financial Statements:


The consolidated financial statements are included as Item 8 of this Form 10-K.

(2)Financial Statement Schedules:


All schedules have been omitted because the information is not required, not applicable, not present in amounts sufficient to require submission of the schedule, or is included in the financial statements or notes thereto.

(3)The exhibits filed as part of this report and exhibits incorporated herein by reference to other documents are listed on the Index of Exhibits to this annual report on Form 10-K on sequential page 177.166.

Umpqua Holdings Corporation


164


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Umpqua Holdings Corporation has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on February 17, 2011.

14, 2014.

UMPQUA HOLDINGS CORPORATION (Registrant)

By:

/s/ Raymond P. Davis

February 14, 2014
 Date: February 17, 2011

Raymond P. Davis, President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

SignatureTitleDate

/s/    Raymond P. Davis        

Raymond P. Davis

President, Chief Executive Officer

and Director (Principal Executive Officer)

February 17, 2011

/s/    Ronald L. Farnsworth        

Ronald L. Farnsworth

Executive Vice President, Chief Financial Officer (Principal Financial Officer)February 17, 2011

/s/    Neal T. McLaughlin        

Neal T. McLaughlin

Executive Vice President, Treasurer (Principal Accounting Officer)February 17, 2011

/s/    Allyn C. Ford        

Allyn C. Ford

DirectorFebruary 17, 2011

/s/    Peggy Y. Fowler        

Peggy Y. Fowler

DirectorFebruary 17, 2011

/s/    David B. Frohnmayer        

David B. Frohnmayer

DirectorFebruary 17, 2011

/s/    Stephen M. Gambee        

Stephen M. Gambee

DirectorFebruary 17, 2011

/s/    Jose R. Hermocillo        

Jose R. Hermocillo

DirectorFebruary 17, 2011

/s/    William A. Lansing        

William A. Lansing

DirectorFebruary 17, 2011

/s/    Luis F. Machuca        

Luis F. Machuca

DirectorFebruary 17, 2011

SignatureTitleDate

/s/    Diane D. Miller        

Diane D. Miller

DirectorFebruary 17, 2011

/s/    Bryan L. Timm        

Bryan L. Timm

DirectorFebruary 17, 2011

/s/    Hilliard C. Terry, III        

Hilliard C. Terry, III

DirectorFebruary 17, 2011

/s/    Frank R. J. Whittaker        

Frank R. J. Whittaker

DirectorFebruary 17, 2011

Umpqua Holdings Corporation

EXHIBIT INDEX

Exhibit    
 2.1SignatureTitleDate
/s/ Raymond P. DavisPresident, Chief Executive Officer and DirectorFebruary 14, 2014
Raymond P. Davis(Principal Executive Officer)
 (a)
/s/ Ronald L. FarnsworthExecutive Vice President, Chief Financial OfficerFebruary 14, 2014
Ronald L. Farnsworth(Principal Financial Officer)
 Whole Bank Purchase and Assumption Agreement with Loss-Share dated January 22, 2010 entered into between Umpqua Bank, as Assuming Bank, the Federal Deposit Insurance Corporation (FDIC) in its corporate capacity and the FDIC, as Receiver for EvergreenBank, Seattle, Washington.
�� 2.2/s/ Neal T. McLaughlinExecutive Vice President, TreasurerFebruary 14, 2014
Neal T. McLaughlin(Principal Accounting Officer)
 (b)
/s/ Peggy Y. FowlerDirectorFebruary 14, 2014
Peggy Y. Fowler Whole Bank Purchase and Assumption Agreement with Loss-Share dated February 26, 2010 entered into between Umpqua Bank, as Assuming Bank, the Federal Deposit Insurance Corporation (FDIC) in its corporate capacity and the FDIC, as Receiver for Rainier Pacific Bank, Tacoma, Washington.
 2.3 (c)
/s/ Stephen M. GambeeDirectorFebruary 14, 2014
Stephen M. Gambee Whole Bank Purchase and Assumption Agreement with Loss-Share dated June 18, 2010 entered into between Umpqua Bank, as Assuming Bank, the Federal Deposit Insurance Corporation (FDIC) in its corporate capacity and the FDIC, as Receiver for Nevada Security Bank, Reno, Nevada.
 3.1 

(d)

/s/ James S. GreeneDirectorFebruary 14, 2014
James S. Greene 
/s/ Luis F. MachucaDirectorFebruary 14, 2014
Luis F. Machuca
/s/ Laureen E. SeegerDirectorFebruary 14, 2014
Laureen E. Seeger
/s/ Dudley R. SlaterDirectorFebruary 14, 2014
Dudley R. Slater
/s/ Susan F. StevensDirectorFebruary 14, 2014
Susan F. Stevens
/s/ Hilliard C. Terry, IIIDirectorFebruary 14, 2014
Hilliard C. Terry, III
/s/ Bryan L. TimmDirectorFebruary 14, 2014
Bryan L. Timm
/s/ Frank R. J. WhittakerDirectorFebruary 14, 2014
Frank R. J. Whittaker

165


EXHIBIT INDEX
Exhibit
2.1Agreement and Plan of Merger, dated as of September 11, 2013, by and between Sterling Financial Corporation and Umpqua Holdings Corporation (incorporated by reference to Annex A to the joint proxy statement/prospectus contained the Registration Statement on Form S-4 (Registration No. 333-192346) filed November 15, 2013)
3.1(a) Restated Articles of Incorporation with designation of Fixed Rate Cumulative Perpetual Preferred Stock, Series A and designation of Series B Common Stock Equivalent preferred stock.stock
 3.2 
(e)3.2(b) Bylaws, as amended.amended 
 4.1 
(f)4.1(c) Specimen Common Stock Certificate
 4.2 
(g)4.2(d) Amended and Restated Declaration of Trust for Umpqua Master Trust I, dated August 9, 2007
 4.3 
(h)4.3(e) Indenture, dated August 9, 2007, by and between Umpqua Holdings Corporation and LaSalle Bank National Association
 4.4 
(i)4.4(f) Series A Guarantee Agreement, dated August 9, 2007, by and between Umpqua Holdings Corporation and LaSalle Bank National Association
 4.5 
(j)4.5(g) Series B Guarantee Agreement, dated September 6, 2007, by and between Umpqua Holdings Corporation and LaSalle Bank National Association
 4.6 
(k)4.6(h) Series B Supplement pursuant to Amended and Restated Declaration of Trust dated August 9, 2007
10.1 
(l)10.1**(i) Third Restated Supplemental Executive Retirement Plan effective April 16, 2008 between the Company and Raymond P. Davis
10.2 
(m)10.2**(j) Employment Agreement dated effective July 1, 2003, between the Company and Raymond P. Davis
10.3 
(n)10.3**(k) Umpqua Holdings Corporation 2005 Performance-Based Executive Incentive Plan
10.4 
(o)10.4**(l) 2003 Stock Incentive Plan, as amended, effective March 5, 2007
10.5 
(p)10.5**(m) 2007 Long Term Incentive Plan effective March 5, 2007
10.6 (q)Employment Agreement with Brad Copeland dated March 10, 2006
10.710.6**

(r)

(n) Employment Agreement with Kelly J. Johnson dated January 15, 2009

10.8 

(s)

Employment Agreement with Colin Eccles dated January 21, 2009

10.910.7**

(t)

(o) Form of Employment Agreement with Ronald L. Farnsworth, Steven L. Philpott and Neal T. McLaughlin, each dated March 5, 2008

10.10 

(u)

10.8**

(p) Form of Long Term Incentive Restricted Stock Unit Agreement

10.11 

(v)

10.9**

(q) Split-Dollar Insurance Agreement dated April 16, 2008 between the Company and Raymond P. Davis

10.12 

(w)

10.10**

(r) Form of First Amendment to Employment Agreement effective September 16, 2008 between the Company and Brad Copeland and between the Company and Barbara Baker.

Baker
10.13 

(x)

Form of Lock-Up Agreement between J.P. Morgan Securities, Inc., as Representative of the several Underwriters and the Company’s directors and executive officers

10.1410.11**

(y)

(s) Employment Agreement dated effective March 24,21, 2010 between the Company and Cort O’Haver

10.15 

(z)

10.12**

(t) Employment Agreement dated effective June 1, 2010 between the Company and Mark Wardlow

10.16 

(aa)

10.13**
(u) Form of Amendment No. 1 to Nonqualified Stock Option Agreements between Company and Executive Officers that were originally issued January 31, 2011
 

Employment Agreement dated effective November 15, 201010.14**

(v) Form of Amendment No. 1 to Restricted Stock Agreements between the Company and Ulderico (Rick) Calero, Jr.

Executive Officers that were originally issued January 31, 2011
12
 

10.15**

(w) Form of Amendment to Employment Agreement effective January 9, 2013, between the Company and Ronald L. Farnsworth, Steven L. Philpott and Neal T. McLaughlin
10.16**(x) Umpqua Holdings Corporation 2013 Incentive Plan, effective December 14, 2012
10.17**(y) Form of Restricted Stock Award Agreement under 2013 Incentive Plan (Service Vesting)
10.18**(z) Form of Restricted Stock Award Agreement under 2013 Incentive Plan (Performance Vesting)
10.19**(aa) Form of Restricted Stock Award Agreement under 2013 Incentive Plan (162(m) Performance Vesting)
10.20Investor Letter Agreement, dated September 11, 2013, between Umpqua Holdings Corporation, Sterling Financial Corporation, Warburg Pincus Private Equity X, L.P. and Warburg Pincus X Partners, L.P. (incorporated by reference to Annex B to the joint proxy statement/prospectus contained in the Registration Statement on Form S-4 (Registration No. 333-192346) filed November 15, 2013)

166


10.21Investor Letter Agreement, dated September 11, 2013, between Umpqua Holdings Corporation, Sterling Financial Corporation, Thomas H. Lee Equity Fund VI, L.P., Thomas H. Lee Parallel Fund VI, L.P. and Thomas H. Lee Parallel (DT) Fund VI, L.P. (attached as Annex C to the joint proxy statement/prospectus contained in the Registration Statement on Form S-4 (Registration No. 333-192346) filed November 15, 2013)
10.22**(bb) Employment Agreement, dated September 11, 2013, by and between Umpqua Holdings Corporation and J. Gregory Seibly
12Ratio of Earnings to Fixed Charges

21.1

Subsidiaries of the Registrant

Registrants
23.1
 

23.1

Consent of Independent Registered Public Accounting Firm - Moss Adams LLP

31.1
 

31.1

Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit  
31.2

Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

31.3
 

31.3

Certification of Principal Accounting Officer under Section 302 of the Sarbanes-Oxley Act of 2002

32

Certification of Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS XBRL Instance Document * 
101.SCH XBRL Taxonomy Extension Schema Document * 
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document * 
101.DEF XBRL Taxonomy Extension Definition Linkbase Document * 
101.LAB XBRL Taxonomy Extension Label Linkbase Document * 
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document * 

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities and Exchange Act of 1934, as amended and otherwise are not subject to liability under those sections. 

**Indicates compensatory plan or arrangement

167


99.1

Subsequent Year Certification of the Chief Executive Officer pursuant to Section 111(b) of the Emergency Economic Stabilization Act of 2008

99.2

Subsequent Year Certification of the Chief Financial Officer pursuant to Section 111(b) of the Emergency Economic Stabilization Act of 2008

(a)Incorporated by reference to Exhibit 2.1 to Form 10-Q filed May 7, 2010
(b)Incorporated by reference to Exhibit 2.2 to Form 10-Q filed May 7, 2010
(c)Incorporated by reference to Exhibit 99.3 to Form 8-K/A filed June 22, 2010
(d)Incorporated by reference to Exhibit 3.1 to Form 10-Q filed May 7, 2010
(e)(b)Incorporated by reference to Exhibit 3.2 to Form 8-K filed April 22, 2008
(f)(c)Incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8 (No. 333-77259) filed with the SEC on April 28, 1999
(g)(d)Incorporated by reference to Exhibit 4.1 to Form 8-K filed August 10, 2007
(h)(e)Incorporated by reference to Exhibit 4.2 to Form 8-K filed August 10, 2007
(i)(f)Incorporated by reference to Exhibit 4.3 to Form 8-K filed August 9,10, 2007
(j)(g)Incorporated by reference to Exhibit 4.3 to Form 8-K filed September 7, 2007
(j)(h)Incorporated by reference to Exhibit 4.4 to Form 8-K filed September 7, 2007
(l)(i)Incorporated by reference to Exhibit 99.1 to Form 8-K/A filed April 22, 2008
(m)(j)Incorporated by reference to Exhibit 10.4 to Form 10-Q filed August 14, 2003
(n)(k)Incorporated by reference to Appendix B to Form DEF 14A filed March 31, 2005
(o)(l)Incorporated by reference to Appendix A to Form DEF 14A filed March 14, 2007
(p)(m)Incorporated by reference to Appendix B to Form DEF 14A filed March 14, 2007
(q)(n)Incorporated by reference to Exhibit 10.2 to Form 8-K filed March 21, 2006
(r)IncorporatedIncorporate by reference to Exhibit 10.7 to Form 10-K filed February 19, 2010
(s)Incorporated by reference to Exhibit 10.8 to Form 10-K filed February 19, 2010
(t)(o)Incorporated by reference to Exhibit 99.1 to Form 8-K filed March 7, 2008
(u)(p)Incorporated by reference to Exhibit 10.4 to Form 10-Q filed August 3, 2007
(v)(q)Incorporated by reference to Exhibit 99.2 to Form 8-K filed April 22, 2008
(w)(r)Incorporated by reference to Exhibit 99.1 to Form 8-K filed October 8, 2008
(x)Incorporated by reference to Exhibit 10.1 to Form 10-Q filed May 7, 2010
(y)(s)Incorporated by reference to Exhibit 10.1 to Form 10-Q filed November 4, 21012010
(z)(t)Incorporated by reference to Exhibit 10.2 to Form 10-Q filed November 4, 2010
(aa)(u)Incorporated by reference to Exhibit 99.1 to Form 8-K filed February 4, 2011.2011
(v)Incorporated by reference to Exhibit 10.2 to Form 8-K filed June 20, 2011
(w)Incorporated by reference to Exhibit 99.1 to Form 8-K filed January 14, 2013
(x)Incorporated by reference to Appendix A to DEF 14A filed February 25, 2013
(y)Incorporated by reference to Exhibit 99.1 to Form 8-K filed January 31, 2014
(z)Incorporated by reference to Exhibit 99.1 to Form 8-K filed January 31, 2014
(aa)Incorporated by reference to Exhibit 99.1 to Form 8-K filed January 31, 2014
(bb)Incorporated by reference to Exhibit 10.3 to Form S-4 filed November 15, 2013 (Registration No. 333-192346)

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168