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EX-32 - SECTION 906 CERTIFICATION OF CEO, PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER - UMPQUA HOLDINGS CORPdex32.htm
EX-31.3 - SECTION 302 CERTIFICATION OF PRINCIPLE ACCOUNTING OFFICER - UMPQUA HOLDINGS CORPdex313.htm
EX-10.1 - EMPLOYMENT AGREEMENT - UMPQUA HOLDINGS CORPdex101.htm
EX-31.2 - SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - UMPQUA HOLDINGS CORPdex312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - UMPQUA HOLDINGS CORPdex311.htm
EX-10.2 - EMPLOYMENT AGREEMENT - UMPQUA HOLDINGS CORPdex102.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

for the quarterly period ended:    September 30, 2010

 

¨ 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 Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

OREGON   93-1261319

(State or Other Jurisdiction

of Incorporation or Organization)

  (I.R.S. Employer
Identification Number)

One SW Columbia Street, Suite 1200

Portland, Oregon 97258

(Address of Principal Executive Offices)(Zip Code)

(503) 727-4100

(Registrant’s Telephone Number, Including Area Code)

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).

¨  Yes     ¨  No

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

¨  Large accelerated 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     x  No

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

Common stock, no par value: 114,532,543 shares outstanding as of October 31, 2010

 

 

 


Table of Contents

 

UMPQUA HOLDINGS CORPORATION

FORM 10-Q

Table of Contents

 

 

 

PART I. FINANCIAL INFORMATION

     3   

Item 1.

   Financial Statements (unaudited)      3   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      40   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      74   

Item 4.

   Controls and Procedures      74   

PART II. OTHER INFORMATION

     75   

Item 1.

   Legal Proceedings      75   

Item 1A.

   Risk Factors      75   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      77   

Item 3.

   Defaults Upon Senior Securities      77   

Item 4.

   (Removed and Reserved)      77   

Item 5.

   Other Information      77   

Item 6.

   Exhibits      77   

SIGNATURES

     78   

EXHIBIT INDEX

     79   

 

2


Table of Contents

 

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except shares)

 

     September 30,
2010
     December 31,
2009
 

ASSETS

     

Cash and due from banks

     $ 124,633           $ 113,353     

Interest bearing deposits

     933,911           491,462     

Temporary investments

     5,496           598     
                 

Total cash and cash equivalents

     1,064,040           605,413     

Investment securities

     

Trading, at fair value

     2,155           2,273     

Available for sale, at fair value

     2,599,263           1,795,616     

Held to maturity, at amortized cost

     5,108           6,061     

Loans held for sale

     57,407           33,715     

Non-covered loans and leases

     5,698,267           5,999,267     

Allowance for loan and lease losses

     (108,098)          (107,657)    
                 

Net non-covered loans and leases

     5,590,169           5,891,610     

Covered loans and leases

     840,469           -          

Restricted equity securities

     34,665           15,211     

Premises and equipment, net

     133,728           103,266     

Goodwill and other intangible assets, net

     680,893           639,634     

Mortgage servicing rights, at fair value

     13,454           12,625     

Non-covered other real estate owned

     32,024           24,566     

Covered other real estate owned

     30,348           -          

FDIC indemnification asset

     217,696           -          

Other assets

     231,552           251,382     
                 

Total assets

     $ 11,532,971           $ 9,381,372     
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

     

Deposits

     

Noninterest bearing

     $ 1,578,717           $ 1,398,332     

Interest bearing

     7,722,623           6,042,102     
                 

Total deposits

     9,301,340           7,440,434     

Securities sold under agreements to repurchase

     55,333           45,180     

Term debt

     268,256           76,274     

Junior subordinated debentures, at fair value

     80,146           85,666     

Junior subordinated debentures, at amortized cost

     102,946           103,188     

Other liabilities

     73,236           64,113     
                 

Total liabilities

     9,881,257           7,814,855     
                 

COMMITMENTS AND CONTINGENCIES (NOTE 9)

     

SHAREHOLDERS’ EQUITY

     

Preferred stock, no par value, 2,000,000 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: 114,531,514 in 2010 and 86,785,588 in 2009

     1,540,029           1,253,288     

Retained earnings

     75,502           83,939     

Accumulated other comprehensive income

     36,183           24,955     
                 

Total shareholders’ equity

     1,651,714           1,566,517     
                 

Total liabilities and shareholders’ equity

     $       11,532,971           $       9,381,372     
                 

See notes to condensed consolidated financial statements

 

3


Table of Contents

 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2010      2009      2010      2009  

INTEREST INCOME

           

Interest and fees on loans

     $       112,652           $       89,474           $       300,600           $       266,587     

Interest and dividends on investment securities

           

Taxable

     17,421           15,365           49,065           43,625     

Exempt from federal income tax

     2,221           2,020           6,655           5,755     

Dividends

     6           22           9           22     

Interest on temporary investments and interest bearing deposits

     646           207           1,590           258     
                                   

Total interest income

     132,946           107,088           357,919           316,247     

INTEREST EXPENSE

           

Interest on deposits

     19,913           22,132           57,165           68,552     

Interest on securities sold under agreement to repurchase and federal funds purchased

     136           163           382           527     

Interest on term debt

     2,533           917           6,832           3,935     

Interest on junior subordinated debentures

     2,047           2,114           5,871           7,069     
                                   

Total interest expense

     24,629           25,326           70,250           80,083     
                                   

Net interest income

     108,317           81,762           287,669           236,164     

PROVISION FOR NON-COVERED LOAN AND LEASE LOSSES

     24,228           52,108           96,101           140,531     

PROVISION FOR COVERED LOAN AND LEASE LOSSES

     667           -                667           -          
                                   

Net interest income after provision for loan and lease losses

     83,422           29,654           190,901           95,633     

NON-INTEREST INCOME

           

Service charges on deposit accounts

     8,756           8,542           26,706           24,565     

Brokerage commissions and fees

     2,609           1,993           8,387           5,117     

Mortgage banking revenue, net

     7,138           4,288           13,825           14,617     

Gain (loss) on investment securities, net

           

Gain on sale of investment securities, net

     2,331           162           2,331           8,682     

Total other-than-temporary impairment losses

     (37)          -                (42)          (12,492)    

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

     (7)          (4)          (290)          2,733     
                                   

Total gain (loss) on investment securities, net

     2,287           158           1,999           (1,077)    

(Loss) gain on junior subordinated debentures carried at fair value

     (554)          982           5,534           10,173     

Bargain purchase gain on acquisition

     -                -                8,456           -          

Change in FDIC indemnification asset

     (11,948)          -                (11,075)          -          

Other income

     3,845           1,962           8,930           7,097     
                                   

Total non-interest income

     12,133           17,925           62,762           60,492     

NON-INTEREST EXPENSE

           

Salaries and employee benefits

     42,964           31,583           118,808           94,697     

Net occupancy and equipment

     11,448           9,937           33,596           29,266     

Communications

     2,480           1,806           7,300           5,398     

Marketing

     2,468           1,157           5,191           3,596     

Services

     5,507           5,210           16,253           15,942     

Supplies

     1,177           920           2,906           2,559     

FDIC assessments

     3,910           3,321           10,909           12,645     

Net (gain) loss on other real estate owned

     (317)          8,641           1,042           14,110     

Intangible amortization

     1,356           1,319           4,032           4,043     

Goodwill impairment

     -                -                -                111,952     

Merger related expenses

     1,643           -                5,718           273     

Other expenses

     12,534           4,455           24,119           12,422     
                                   

Total non-interest expense

     85,170           68,349           229,874           306,903     

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

     10,385           (20,770)          23,789           (150,778)   

Provision for (benefit from) income taxes

     2,194           (13,626)          2,410           (24,094)    
                                   

Net income (loss)

     $ 8,191           $ (7,144)          $ 21,379           $ (126,684)    
                                   

 

4


Table of Contents

 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)

(UNAUDITED)

(in thousands, except per share amounts)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2010      2009      2010      2009  

Net income (loss)

     $       8,191           $       (7,144)          21,379           (126,684)    

Preferred stock dividends

     -                3,225           12,192           9,632     

Dividends and undistributed earnings allocated to participating securities

     18           7           49           22     
                                   

Net earnings (loss) available to common shareholders

     $ 8,173           $ (10,376)          $ 9,138           $ (136,338)    
                                   

Earnings (loss) per common share:

           

Basic

     $ 0.07           $ (0.14)          $ 0.09           $ (2.10)    

Diluted

     $ 0.07           $ (0.14)          $ 0.09           $ (2.10)    

Weighted average number of common shares outstanding:

           

Basic

     114,528           74,085           105,695           64,878     

Diluted

     114,760           74,085           105,924           64,878     

See notes to condensed consolidated financial statements

 

5


Table of Contents

 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except shares)

 

     Preferred
Stock
    

 

 

Common Stock

     Retained
Earnings
     Accumulated
Other
Comprehensive
Income
     Total  
      Shares      Amount           

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

              21,379             21,379    

Other comprehensive income, net of tax

                 11,228          11,228    
                       

Comprehensive income

                  $ 32,607    
                       

Issuance of common stock

        8,625,000          89,786                89,786    

Stock-based compensation

           2,627                2,627    

Stock repurchased and retired

        (22,310)         (282)               (282)   

Issuances of common stock under stock plans and related net tax benefits

        168,236          821                821    

Amortization of discount on preferred stock

     9,846                (9,846)            -          

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                -          

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 ($0.15 per share)

              (16,284)            (16,284)   
                                                     

Balance at September 30, 2010

   $ -                114,531,514        $ 1,540,029        $ 75,502        $ 36,183        $ 1,651,714    
                                                     

See notes to condensed consolidated financial statements

 

6


Table of Contents

 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(in thousands)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2010      2009      2010      2009  

Net income (loss)

     $       8,191           $       (7,144)          $       21,379           $       (126,684)    
                                   

Available for sale securities:

           

Unrealized (losses) gains arising during the period

     (7,976)          29,579           20,117           35,365     

Reclassification adjustment for net gains realized in earnings (net of tax expense of $932 and $65 for the three months and net of tax expense of $932 and $3,337 for the nine months ended September 30, 2010 and 2009, respectively)

     (1,399)          (97)          (1,399)          (5,066)    

Income tax benefit (expense) related to unrealized (losses) gains

     3,190           (11,831)          (8,047)          (14,146)    
                                   

Net change in unrealized (losses) or gains

     (6,185)          17,651           10,671           16,153     
                                   

Held to maturity securities:

           

Reclassification adjustment for impairments realized in net income (net of tax benefit of $1,716 for the nine months ended September 30, 2009)

     -                -                -                2,574     

Amortization of unrealized losses on investment securities transferred to held to maturity (net of tax benefit of $70 for the nine months ended September 30, 2009)

     -                -                -                103     
                                   

Net change in unrealized losses on investment securities transferred to held to maturity

     -                -                -                2,677     
                                   

Unrealized gains (losses) related to factors other than credit (net of tax expense of $70 and $1 for the three months and net of tax expense of $139 and net of tax benefit of $1,094 for the nine months ended September 30, 2010 and 2009, respectively)

     105           1           208           (1,641)    

Reclassification adjustment for impairments realized in net income (net of tax benefit of $18 and $2 for the three months and $133 and $2 for the nine months ended September 30, 2010 and 2009, respectively)

     26           2           199           2     

Accretion of unrealized losses related to factors other than credit to investment securities held to maturity (net of tax benefit of $26 and $78 for the three months and $100 and $78 for the nine months ended September 30, 2010 and 2009, respectively)

     39           118           150           118     
                                   

Net change in unrealized losses related to factors other than credit

     170           121           557           (1,521)    
                                   

Other comprehensive (loss) income, net of tax

     (6,015)          17,772           11,228           17,309     
                                   

Comprehensive income (loss)

     $ 2,176           $ 10,628           $ 32,607           $ (109,375)    
                                   

See notes to condensed consolidated financial statements

 

7


Table of Contents

 

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

     Nine months ended
September 30,
 
     2010      2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

     

Net income (loss)

     $ 21,379           $ (126,684)    

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

     

Amortization of investment premiums, net

     12,230           5,721     

Gain on sale of investment securities, net

     (2,331)          (8,682)    

Other-than-temporary impairment on investment securities available for sale

     -                239     

Other-than-temporary impairment on investment securities held to maturity

     332           9,520     

Loss on sale of non-covered other real estate owned

     1,379           6,939     

Gain on sale of covered other real estate owned

     (3,425)          -          

Valuation adjustment on non-covered other real estate owned

     2,163           7,171     

Valuation adjustment on covered other real estate owned

     925           -          

Provision for non-covered loan and lease losses

     96,101           140,531     

Provision for covered loan and lease losses

     667           -          

Bargain purchase gain on acquisition

     (8,456)          -          

Change in FDIC indemnification asset

     11,075           -          

Depreciation, amortization and accretion

     9,121           7,915     

Goodwill impairment

     -                111,952     

Increase in mortgage servicing rights

     (3,624)          (5,958)    

Change in mortgage servicing rights carried at fair value

     2,857           2,611     

Change in junior subordinated debentures carried at fair value

     (5,520)          (10,528)    

Stock-based compensation

     2,627           1,695     

Net decrease in trading account assets

     118           75     

Gain on sale of loans

     (9,282)          (4,943)    

Origination of loans held for sale

     (454,662)          (520,302)    

Proceeds from sales of loans held for sale

     439,663           523,760     

Excess tax benefits from the exercise of stock options

     (56)          -          

Change in other assets and liabilities:

     

Net decrease (increase) in other assets

     21,531           (30,673)    

Net increase (decrease) in other liabilities

     4,030           (5,889)    
                 

Net cash provided by operating activities

     138,842           104,470     
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

     

Purchases of investment securities available for sale

     (1,004,194)          (980,168)    

Proceeds from investment securities available for sale

     262,067           404,166     

Proceeds from investment securities held to maturity

     1,080           2,045     

Redemption of restricted equity securities

     282           1,280     

Net non-covered loan and lease paydowns (originations)

     144,292           (109,348)    

Net covered loan and lease paydowns

     70,697           -          

Proceeds from sales of loans

     35,464           7,848     

Proceeds from disposals of furniture and equipment

     1,100           181     

Purchases of premises and equipment

     (40,978)          (7,824)    

Net proceeds from FDIC indemnification asset

     24,103           -          

Proceeds from sales of non-covered other real estate owned

     18,867           20,759     

Proceeds from sales of covered other real estate owned

     9,544           -          

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

     (293,480)          (482,156)    
                 

 

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UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)

(in thousands)

 

     Nine months ended
September 30,
 
     2010      2009  

CASH FLOWS FROM FINANCING ACTIVITIES:

     

Net increase in deposit liabilities

     713,503           443,003     

Net increase in securities sold under agreements to repurchase

     10,153           2,443     

Repayment of term debt

     (161,968)          (130,140)    

Redemption of preferred stock

     (214,181)          -          

Proceeds from issuance of preferred stock

     198,289           -          

Net proceeds from issuance of common stock

     89,786           245,697     

Redemption of warrants

     (4,500)          -          

Dividends paid on preferred stock

     (3,686)          (8,062)    

Dividends paid on common stock

     (14,882)          (9,051)    

Excess tax benefits from stock based compensation

     56           -          

Proceeds from stock options exercised

     977           275     

Retirement of common stock

     (282)          (170)    
                 

Net cash provided by financing activities

     613,265           543,995     
                 

Net increase in cash and cash equivalents

     458,627           166,309     

Cash and cash equivalents, beginning of period

     605,413           204,676     
                 

Cash and cash equivalents, end of period

     $ 1,064,040           $ 370,985     
                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

     

Cash paid during the period for:

     

Interest

     $ 71,887           $ 82,840     

Income taxes

     $ 175           $ 44     

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

     

Change in unrealized gains on investment securities available for sale, net of taxes

     $ 10,671           $ 16,153     

Change in unrealized losses on investment securities transferred to held to maturity, net of taxes

     $ -                $ 2,677     

Change in unrealized losses on investment securities held to maturity related to factors other than credit, net of taxes

     $ 557           $ (1,521)    

Cash dividend declared on common and preferred stock and payable after period-end

     $ 5,743           $ 4,346     

Transfer of non-covered loans to non-covered other real estate owned

     $ 29,867           $ 34,408     

Transfer of covered loans to covered other real estate owned

     $ 10,453           $ -          

Conversion of preferred stock to common stock

     $ 198,289           $ -          

Acquisitions:

     

Assets acquired

     $ 1,514,067           $ 4,978     

Liabilities assumed

     $       1,505,611           $       183,883     

See notes to condensed consolidated financial statements

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Summary of Significant Accounting Policies

The accounting and financial reporting policies of Umpqua Holdings Corporation (referred to in this report as “we”, “our” or “the Company”) conform to accounting principles generally accepted in the United States of America. The accompanying interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Umpqua Bank (“Bank”), and Umpqua Investments, Inc. (“Umpqua Investments”). Prior to July 2009, Umpqua Investments was known as Strand, Atkinson, Williams & York, Inc. All material inter-company balances and transactions have been eliminated. The consolidated financial statements have not been audited. A more detailed description of our accounting policies is included in the 2009 Annual Report filed on Form 10-K. These interim condensed consolidated financial statements should be read in conjunction with the financial statements and related notes contained in the 2009 Annual Report filed on Form 10-K.

In preparing these financial statements, the Company has evaluated events and transactions subsequent to September 30, 2010 for potential recognition or disclosure. In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim period. Certain reclassifications of prior period amounts have been made to conform to current classifications.

Note 2 – Business Combinations

On January 22, 2010, the Washington Department of Financial Institutions closed EvergreenBank (“Evergreen”), Seattle, Washington and appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. That same date, Umpqua Bank assumed the banking operations of Evergreen 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, other real estate owned (“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. 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 now operates five additional store locations in the greater Seattle, Washington market. This acquisition is consistent with our community banking expansion strategy and provides further opportunity to fill in our market presence in the greater Seattle, Washington market.

On February 26, 2010, the Washington Department of Financial Institutions closed Rainier Pacific Bank (“Rainier”), Tacoma, Washington 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 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 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 now operates 14 additional store locations in Pierce County and surrounding areas. This acquisition expands our presence in the south Puget Sound region of Washington State.

The operations of Evergreen and Rainier are included in our operating results from January 23, 2010 and February 27, 2010, respectively, and added combined revenue of $9.3 million and $34.1 million, non-interest expense of $6.6 million and $17.9 million, and earnings of $1.3 million and $10.1 million, net of tax, for the three and nine months ended September 30, 2010. For the nine months ended September 30, 2010, these operating results include a bargain purchase gain of $8.5 million, which is not indicative of future operating results. Evergreen’s and Rainiers’s results of operations prior to the acquisition are not included in our operating results. Merger-related expenses of $748,000 and $4.1 million for the three and nine months ended September 30, 2010 have been incurred in connection with these acquisitions and recognized in a separate line item on the Condensed Consolidated Statements of Operations.

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,

 

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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 now operates 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 $3.9 million and $4.4 million, non-interest expense of $3.0 million and $3.6 million, and earnings of $578,000 and $544,000, net of tax, for the three and nine months ended September 30, 2010. Nevada Security’s results of operations prior to the acquisition are not included in our operating results. Merger-related expenses of $741,000 and $1.1 million for the three and nine months ended September 30, 2010 have been incurred in connection with the acquisition of Nevada Security and recognized as a separate line item on the Condensed Consolidated Statements of Operations.

We refer to the acquired loan portfolios and other real estate owned as “covered loans” and “covered other real estate owned”, respectively, and these are presented as separate line items in our consolidated balance sheet. Collectively these balances are referred to as “covered assets”.

The assets acquired and liabilities assumed from the Evergreen, Rainier, and Nevada Security acquisitions have been accounted for under the acquisition method of accounting (formerly the purchase method). 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 acquired 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 each acquisition, as additional information relating to closing data becomes available. The amounts are also subject to adjustments based upon final settlement with the FDIC. In addition, the tax treatment of FDIC-assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the acquisition date. The terms of the agreements provide for the FDIC to indemnify the Bank against claims with respect to liabilities of Evergreen, Rainier, and Nevada Security not assumed by the Bank and certain other types of claims identified in the agreement. The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain of $8.5 million in the Evergreen acquisition, $34.7 million of goodwill in the Rainier acquisition and $8.8 million of goodwill in the Nevada Security acquisition.

A summary of the net assets (liabilities) received from the FDIC and the estimated fair value adjustments are presented below:

(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

    (118,414)         (105,224)         (113,977)    

Other real estate owned

    (2,422)         (6,581)         (17,939)    

Other intangible assets

    440          6,253          322     

FDIC indemnification asset

    73,774          78,055          101,045     

Deposits

    (1,023)         (1,828)         (1,950)    

Term debt

    (2,496)         (13,035)         -          

Other

    (214)         (1,445)         48     
                       

Bargain purchase gain (goodwill)

    $ 8,456          $ (34,749)         $ (8,772)    
                       

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.

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.

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.

 

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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. However, 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 expires 90 days from the acquisition dates. 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 $300,000 of furniture and equipment for Evergreen, $26.3 million of real estate and furniture and equipment for Rainier, and $161,000 of furniture and equipment for Nevada Security. The Bank has the option to purchase additional furniture and equipment and one store location as part of the Nevada Security acquisition, and expects resolution in the fourth quarter of 2010.

The statement of assets acquired and liabilities assumed at their estimated fair values of Evergreen, Rainier, and Nevada Security 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

     251,528           456,253           214,505     

Premises and equipment

     -                17           50     

Restricted equity securities

     3,073           13,712           2,951     

Goodwill

     -                34,749           8,772     

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

     73,774           78,055           101,045     

Other assets

     1,293           4,948           3,326     
                          

Total assets acquired

     $ 355,298           $ 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

     $ 8,456           $ -                $ -          
                          

Rainier’s assets and liabilities were significant at a level to require disclosure of one year of historical financial statements and related 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 are not and will 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 added net earnings of approximately $644,000 and $2.0 million for the three and nine months ended September 30, 2010, net of tax, and approximately $507,000 and $1.0 million for the three and nine months ended September 30, 2009, net of tax, 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

 

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second or third quarter of 2009, but began incurring overhead expenses such as salaries and employee benefits expense and rent expense. The Company does not expect to incur any significant additional acquisition-related expenses in connection with the assumption of certain deposits and assets of the Bank of Clark County.

Note 3 – Investment Securities

The following table presents the amortized costs, unrealized gains, unrealized losses and approximate fair values of investment securities at September 30, 2010 and December 31, 2009:

 

September 30, 2010

           

(in thousands)

           
     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

AVAILABLE FOR SALE:

           

U.S. Treasury and agencies

     $ 117,631           $ 1,762           $ (1)          $ 119,392     

Obligations of states and political subdivisions

     217,995           12,284           (28)          230,251     

Residential mortgage-backed securities and collateralized mortgage obligations

     2,200,313           54,140           (7,048)          2,247,405     

Other debt securities

     145           14           -                159     

Investments in mutual funds and other equity securities

     1,959           97           -                2,056     
                                   
     $       2,538,043           $       68,297           $       (7,077)          $       2,599,263     
                                   

HELD TO MATURITY:

           

Obligations of states and political subdivisions

     $ 2,595           $ 13           $ -                $ 2,608     

Residential mortgage-backed securities and collateralized mortgage obligations

     2,513           322           (260)          2,575     
                                   
     $ 5,108           $ 335           $ (260)          $ 5,183     
                                   

December 31, 2009

           

(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     
                                   

Investment securities that were in an unrealized loss position as of September 30, 2010 and December 31, 2009 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.

 

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September 30, 2010

                 

(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

     $ -                $ -                $ 116           $ 1           $ 116           $ 1     

Obligations of states and political subdivisions

     2,125           25           1,024           3           3,149           28     

Residential mortgage-backed securities and collateralized mortgage obligations

     701,326           7,040           1,547           8           702,873           7,048     
                                                     

Total temporarily impaired securities

     $       703,451           $       7,065           $       2,687           $       12           $       706,138           $       7,077     
                                                     

HELD TO MATURITY:

                 

Residential mortgage-backed securities and collateralized mortgage obligations

     $ -                $ -                $ 801           $ 260           $ 801           $ 260     
                                                     

Total temporarily impaired securities

     $ -                $ -                $ 801           $ 260           $ 801           $ 260     
                                                     

December 31, 2009

                 

(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     
                                                     

The unrealized losses on investments in U.S. Treasury and agencies 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 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 September 30, 2010. 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 Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired.

Of the residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at September 30, 2010, 99.9% 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. 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 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 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. 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

 

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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 accordingly to the procedures described above.

The following tables present the OTTI losses for the three and nine months ended September 30, 2010 and 2009, respectively:

(in thousands)

 

     Three months ended
September 30, 2010
     Three months ended
September 30, 2009
 
     Held To
    Maturity    
     Available
    For Sale    
     Held To
    Maturity    
     Available
    For Sale    
 

Total other-than-temporary impairment losses

     $ 37           $ -                $ -                $ -          

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

     7           -                        -          
                                   

Net impairment losses recognized in earnings (2)

     $ 44           $ -                $         $ -          
                                   
     Nine months ended
September 30, 2010
     Nine months ended
September 30, 2009
 
     Held To
Maturity
     Available
For Sale
     Held To
Maturity
     Available
For Sale
 

Total other-than-temporary impairment losses

     $ 42           $ -                $ 12,253          $ 239     

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

     290           -                (2,733)         -          
                                   

Net impairment losses recognized in earnings (2)

     $ 332           $ -                $ 9,520          $ 239     
                                   

 

(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 relate to 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 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 collateralized mortgage obligations as of September 30, 2010:

 

     Range        Weighted    
Average
         Minimum            Maximum       

Constant prepayment rate

   4.0%      25.0%      14.9%  

Collateral default rate

   8.0%      45.0%      16.8%  

Loss severity

   20.0%      50.0%      34.5%  

 

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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 and the remaining impairment loss related to all other factors recognized in OCI for the three and nine months ended September 30, 2010 and 2009, respectively:

(in thousands)

 

     Three months ended
September 30, 2010
     Three months ended
September 30, 2009
 

Balance, beginning of period

     $ 12,652           $ 11,546     

Additions:

     

Initial OTTI credit losses

     -                -          

Subsequent OTTI credit losses

     44           4     

Reductions:

     

Securities sold, matured or paid-off

     -                -          
                 

Balance, end of period

     $       12,696           $       11,550     
                 

(in thousands)

 

     Nine months ended
September 30, 2010
     Nine months ended
September 30, 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

     332           172     

Reductions:

     

Securities sold, matured or paid-off

     -                (1,785)    
                 

Balance, end of period

     $ 12,696           $       11,550     
                 

The following table presents the maturities of investment securities at September 30, 2010:

September 30, 2010

(in thousands)

 

    Available For Sale     Held To Maturity  
    Amortized
Cost
    Fair
Value
    Amortized
Cost
    Fair
Value
 

AMOUNTS MATURING IN:

       

Three months or less

    $ 9,031          $ 9,005          $ 125          $ 125     

Over three months through twelve months

    163,689          166,304          1,711          1,753     

After one year through five years

    1,724,245          1,774,158          2,434          2,419     

After five years through ten years

    612,176          620,119          591          637     

After ten years

    26,943          27,621          247          249     

Other investment securities

    1,959          2,056          -               -          
                               
    $       2,538,043          $       2,599,263          $       5,108          $       5,183     
                               

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.

 

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The following table presents the gross realized gains and gross realized losses on the sale of securities available for sale for the three and nine months ended September 30, 2010 and 2009:

(in thousands)

 

     Three months ended
September 30, 2010
     Three months ended
September 30, 2009
 
     Gains      Losses      Gains      Losses  

Obligations of states and political subdivisions

   $ —         $ —         $ —         $ 1   

Residential mortgage-backed securities and collateralized mortgage obligations

     2,331         —           700         537   
                                   
   $ 2,331       $ —         $ 700       $ 538   
                                   
     Nine months ended
September 30, 2010
     Nine months ended
September 30, 2009
 
     Gains      Losses      Gains      Losses  

U.S. Treasury and agencies

   $ —         $ 1       $ —         $ —     

Obligations of states and political subdivisions

     2         1         —           1   

Residential mortgage-backed securities and collateralized mortgage obligations

     2,331         —           9,195         591   
                                   
   $ 2,333       $ 2       $ 9,195       $ 592   
                                   

The following table presents, as of September 30, 2010, investment securities which were pledged to secure borrowings and public deposits as permitted or required by law:

(in thousands)

 

     Amortized
Cost
     Fair
Value
 

To Federal Home Loan Bank to secure borrowings

   $ 299,387       $ 314,283   

To state and local governments to secure public deposits

     831,757         859,357   

To U.S. Treasury and Federal Reserve to secure customer tax payments

     5,420         5,838   

Other securities pledged, principally to secure deposits

     278,797         289,748   
                 

Total pledged securities

   $ 1,415,361       $ 1,469,226   
                 

Note 4 – Non-covered Loans, Leases and Allowance for Loan and Lease Losses

Non-covered loans refer to loans not covered by the FDIC loss-sharing agreements. Covered loans are discussed in Note 5.

The following table presents the major types of non-covered loans recorded in the balance sheets as of September 30, 2010 and December 31, 2009. The classification of non-covered loan balances presented is reported in accordance with the regulatory reporting requirements.

(in thousands)

 

     September 30,
2010
    December 31,
2009
 

Real estate - construction and land development

   $ 453,248      $ 618,476   

Real estate - commercial and agricultural

     3,425,384        3,482,687   

Real estate - single and multi-family residential

     753,483        726,658   

Commercial, industrial and agricultural

     991,440        1,090,275   

Leases

     32,428        34,528   

Installment and other

     53,216        58,044   
                
     5,709,199        6,010,668   

Deferred loan fees, net

     (10,932     (11,401
                

Total loans and leases

   $ 5,698,267      $ 5,999,267   
                

 

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The following table summarizes activity relate to the allowance for loan and lease losses (“ALLL”) on non-covered loans for the three and nine months ended September 30, 2010 and 2009:

Allowance for Loan and Lease Losses

(in thousands)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2010     2009     2010     2009  

Balance, beginning of period

   $ 113,914      $ 98,370      $ 107,657      $ 95,865   

Provision for loan and lease losses

     24,228        52,108        96,101        140,531   

Charge-offs

     (31,418     (48,443     (102,731     (135,365

Recoveries

     1,374        1,101        7,071        2,105   
                                

Balance, end of period

   $ 108,098      $ 103,136      $ 108,098      $ 103,136   
                                

At September 30, 2010, the recorded investment in non-covered loans classified as impaired totaled $215.3 million, with a corresponding valuation allowance (included in the allowance for loan and lease losses on non-covered loans) of $1.8 million. Due to declining real estate values in our markets, it is increasingly likely that an impairment reserve on collateral dependent real estate non-covered loans represents a confirmed loss. As a result, the Company recognizes the charge-off of impairment reserves on non-covered impaired loans in the period it arises for collateral dependent loans. Therefore, the non-covered non-accrual loans as of September 30, 2010 have already been written-down to their estimated net realizable value, based on disposition value, and are expected to be resolved with no additional material loss, absent further decline in market prices. The valuation allowance on non-covered impaired loans 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, 2009, the total recorded investment in non-covered impaired loans totaled $328.0 million, with a corresponding valuation allowance of $2.7 million. The average recorded investment in non-covered impaired loans was approximately $269.0 million during the nine months ended September 30, 2010 and $234.5 million for the year ended December 31, 2009.

At September 30, 2010 and December 31, 2009, non-covered impaired loans of $75.6 million and $134.9 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 non-covered 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 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 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 Company has no obligations to lend additional funds on the non-covered restructured loans as of September 30, 2010. Non-covered non-accrual loans totaled $139.7 million at September 30, 2010, and $193.1 million at December 31, 2009.

Note 5 – Covered Assets and FDIC Indemnification Asset

Covered LoansLoans 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 expected cash flow reimbursements expected from the FDIC.

Acquired loans are valued as of acquisition date in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 805, Business Combinations. Loans purchased with evidence of credit deterioration since origination for 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 significant 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, the Company elected to account for all acquired loans under ASC 310-30. Under FASB ASC 805 and ASC 310-30, loans are recorded at fair 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 covered 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.

 

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The following table reflects the estimated fair value of the acquired loans at the acquisition dates:

(in thousands)

 

     Evergreen     Rainier     Nevada Security  
     January 22, 2010     February 26, 2010     June 18, 2010  

Gross loans acquired

   $ 369,942      $ 561,477      $ 328,482   

Fair value discount

     (118,414     (105,224     (113,977
                        

Covered loans, net

   $ 251,528      $ 456,253      $ 214,505   
                        

The outstanding contractual unpaid principal balance, excluding purchase accounting adjustments, at September 30, 2010 was $278.7 million, $496.7 million and $309.5 million, for Evergreen, Rainier, and Nevada Security, respectively, as compared to $305.1 million, $517.2 million and $325.6 million, for Evergreen, Rainier, and Nevada Security, respectively, at June 30, 2010.

The following table presents the major types of covered loans as of September 30, 2010. The classification of covered loan balances presented is reported in accordance with the regulatory reporting requirements.

(in thousands)

 

     September 30, 2010  
     Evergreen      Rainier      Nevada Security  

Real estate - construction and land development

   $ 27,118       $ 10,798       $ 21,526   

Real estate - commercial and agricultural

     108,288         210,811         132,321   

Real estate - single and multi-family residential

     54,979         166,149         23,100   

Commercial, industrial and agricultural

     20,924         24,541         28,628   

Installment and other

     2,001         8,765         520   
                          
   $ 213,310       $ 421,064       $ 206,095   
                          

At June 30, 2010, the covered loan balances were $220.9 million, $437.0 million, and $207.2 million for Evergreen, Rainier, and Nevada Security, respectively.

In estimating the fair value of the covered loans at the acquisition date, we (a) calculated the contractual amount and timing of undiscounted 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 the undiscounted expected cash flows exceed the estimated fair value of the acquired loans is the “accretable yield”. The accretable yield is then measured at each financial reporting date and represents the difference between the remaining undiscounted expected cash flows and the current carrying value of the loans.

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  

Undiscounted contractual cash flows

   $ 412,638      $ 785,018      $ 368,975   

Undiscounted cash flows not expected to be collected (nonaccretable difference)

     (105,908     (106,082     (114,756
                        

Undiscounted cash flows expected to be collected

     306,730        678,936        254,219   

Accretable yield at acquisition

     (55,202     (222,683     (39,714
                        

Estimated fair value of loans acquired at acquisition

   $ 251,528      $ 456,253      $ 214,505   
                        

 

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The following table presents the changes in the accretable yield for the three and nine months ended September 30, 2010 for each respective acquired loan portfolio:

 

     Three months ended  
     Evergreen
September 30, 2010
    Rainier
September 30, 2010
    Nevada Security
September 30, 2010
 

Balance, beginning of period

   $ 52,980      $ 207,404      $ 39,161   

Additions resulting from acquisitions

     —          —          —     

Accretion to interest income

     (14,677     (9,138     (5,062

Disposals

     —          —          —     

Reclassifications (to)/from nonaccretable difference

     12,284        (384     1,491   
                        

Balance, end of period

   $ 50,587      $ 197,882      $ 35,590   
                        
     Nine months ended  
     Evergreen
September 30, 2010
    Rainier
September 30, 2010
    Nevada Security
September 30, 2010
 

Balance, beginning of period

   $ —        $ —        $ —     

Additions resulting from acquisitions

     55,202        222,684        39,714   

Accretion to interest income

     (21,432     (20,739     (5,615

Disposals

     (257     —          —     

Reclassifications (to)/from nonaccretable difference

     17,074        (4,063     1,491   
                        

Balance, end of period

   $ 50,587      $ 197,882      $ 35,590   
                        

Covered Other Real Estate OwnedAll 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. 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 three and nine months ended September 30, 2010:

(in thousands)

 

     Three months ended
September 30, 2010
    Nine months ended
September 30, 2010
 

Balance, beginning of period

   $ 28,290      $ —     

Acquisition

     —          26,939   

Additions to covered OREO

     7,784        10,453   

Dispositions of covered OREO

     (4,806     (6,119

Valuation adjustments in the period

     (920     (925
                

Balance, end of period

   $ 30,348      $ 30,348   
                

FDIC Indemnification AssetThe 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 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 and covered other real estate owned. Any increases in cash flow of the covered assets over 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 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 share recoveries.

 

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The following table summarizes the activity related to the FDIC indemnification asset for the three and nine months ended September 30, 2010:

(in thousands)

 

     Three months ended
September 30, 2010
    Nine months ended
September 30, 2010
 

Balance, beginning of period

   $ 246,982      $ —     

Acquisitions

     —          252,874   

Change in FDIC indemnification asset

     (11,948     (11,075

Payments from FDIC

     (15,716     (22,481

Due to FDIC

     (1,622     (1,622
                

Balance, end of period

   $ 217,696      $ 217,696   
                

Note 6 – Mortgage Servicing Rights

The following table presents the changes in the Company’s mortgage servicing rights (“MSR”) for the three and nine months ended September 30, 2010 and 2009:

(in thousands)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2010     2009     2010     2009  

Balance, beginning of period

   $ 12,895      $ 10,631      $ 12,625      $ 8,205   

Additions for new mortgage servicing rights capitalized

     1,616        1,723        3,624        5,958   

Acquired mortgage servicing rights

     —          —          62        —     

Changes in fair value:

        

Due to changes in model inputs or assumptions(1)

     (890     (2,580     (761     (3,155

Other(2)

     (167     1,778        (2,096     544   
                                

Balance, end of period

   $ 13,454      $ 11,552      $ 13,454      $ 11,552   
                                

 

(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 September 30, 2010 and December 31, 2009 was as follows:

(dollars in thousands)

 

     September 30,
2010
     December 31,
2009
 

Balance of loans serviced for others

   $ 1,471,759       $ 1,277,832   

MSR as a percentage of serviced loans

     0.91%         0.99%   

The amount of contractually specified servicing fees, late fees and ancillary fees earned, recorded in mortgage banking revenue on the Condensed Consolidated Statements of Operations, was $1.0 million and $2.8 million for the three and nine months ended September 30, 2010, as compared to $796,000 and $2.2 million for the three and nine months ended September 30, 2009.

Key assumptions used in measuring the fair value of MSR as of September 30, 2010 and December 31, 2009 were as follows:

 

     September 30,
2010
     December 31,
2009
 

Constant prepayment rate

     16.70%         18.35%   

Discount rate

     8.65%         8.70%   

Weighted average life (years)

     4.9         4.5   

 

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Note 7 – Other Real Estate Owned

The following table presents the changes in non-covered other real estate owned (“OREO”) for the three and nine months ended September 30, 2010 and 2009:

(in thousands)

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2010      2009      2010      2009  

Balance, beginning of period

   $ 25,653        $ 36,030        $ 24,566        $ 27,898    

Additions to OREO

     11,972          9,049          29,867          34,408    

Dispositions of OREO

     (5,159)         (13,779)         (20,246)         (28,430)   

Valuation adjustments in the period

     (442)         (4,595)         (2,163)         (7,171)   
                                   

Balance, end of period

   $ 32,024        $ 26,705        $ 32,024        $ 26,705    
                                   

Note 8 – Junior Subordinated Debentures

As of September 30, 2010, the Company had 14 wholly-owned trusts (“Trusts”), including a Master Trust formed in 2007 to issue two separate series of trust preferred securities, that were formed to issue trust preferred securities and related common securities of the Trusts and are not consolidated. Nine Trusts, representing aggregate total obligations of approximately $96.0 million (fair value of approximately $107.3 million as of the merger dates), were assumed in connection with previous mergers.

Following is information about the Trusts as of September 30, 2010:

Junior 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       $ 13,772         Floating  (4)      11.62%         October 2032         October 2007   

Umpqua Statutory Trust III

     October 2002         30,928         20,895         Floating  (5)      11.62%         November 2032         November 2007   

Umpqua Statutory Trust IV

     December 2003         10,310         6,430         Floating  (6)      11.64%         January 2034         January 2009   

Umpqua Statutory Trust V

     December 2003         10,310         6,416         Floating  (6)      11.64%         March 2034         March 2009   

Umpqua Master Trust I

     August 2007         41,238         20,149         Floating  (7)      11.69%         September 2037         September 2012   

Umpqua Master Trust IB

     September 2007         20,619         12,484         Floating  (8)      11.65%         December 2037         December 2012   
                               
        134,024         80,146              
                               

AT AMORTIZED COST:

                   

HB Capital Trust I

     March 2000         5,310         6,398         10.875%        8.15%         March 2030         March 2010   

Humboldt Bancorp Statutory Trust I

     February 2001         5,155         5,945         10.200%        8.19%         February 2031         February 2011   

Humboldt Bancorp Statutory Trust II

     December 2001         10,310         11,445         Floating  (9)      3.03%         December 2031         December 2006   

Humboldt Bancorp Statutory Trust III

     September 2003         27,836         30,768         Floating  (10)      2.51%         September 2033         September 2008   

CIB Capital Trust

     November 2002         10,310         11,274         Floating  (5)      3.11%         November 2032         November 2007   

Western Sierra Statutory Trust I

     July 2001         6,186         6,186         Floating  (11)      4.05%         July 2031         July 2006   

Western Sierra Statutory Trust II

     December 2001         10,310         10,310         Floating  (9)      3.89%         December 2031         December 2006   

Western Sierra Statutory Trust III

     September 2003         10,310         10,310         Floating  (12)      3.43%         September 2033         September 2008   

Western Sierra Statutory Trust IV

     September 2003         10,310         10,310         Floating  (12)      3.43%         September 2033         September 2008   
                               
        96,037         102,946              
                               
     Total       $ 230,061       $ 183,092              
                               

 

(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 September 2010.
(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.
(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.

 

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The $230.1 million of trust preferred securities issued to the Trusts as of September 30, 2010 and December 31, 2009, with carrying values of $183.1 million and $188.9 million, respectively, are reflected as junior subordinated debentures in the Condensed Consolidated Balance Sheets. The common stock issued by the Trusts is recorded in other assets in the Condensed Consolidated Balance Sheets, and totaled $6.9 million at September 30, 2010 and December 31, 2009.

All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of September 30, 2010, under guidance issued by the Board of Governors of the Federal Reserve System (“Federal Reserve Board”). Effective 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 September 30, 2010, the Company’s restricted core capital elements were 19% of total core capital, net of goodwill and any associated deferred tax liability. There can be no assurance that the Federal Reserve Board will not further limit the amount of trust preferred securities permitted to be included in Tier 1 capital for regulatory capital purposes.

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 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.

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 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. 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 estimated credit risk adjusted 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. For additional assurance, we obtain a valuation from a third-party pricing service to validate the results of our model.

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 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 discounts 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%) was representative of the nonperformance risk premium a market participant would require under current market conditions as of March 31, 2010. Generally, an increase 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 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 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

 

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the market place in recent history or as anticipated into the future. As a result, for the third quarter of 2010, 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 of the fair value of these liabilities as of September 30, 2010. 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 $53.9 million as of September 30, 2010, over each junior subordinated debenture’s 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 quarterly basis within non-interest income. 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 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) above the periodic change in fair value under the effective yield method.

For the three and nine months ended September 30, 2010, we recorded a loss of $554,000 and a gain of $5.5 million, respectively, as compared to gains of $982,000 and $10.2 million, for the three and nine months ended September 30, 2009, respectively, resulting from the change 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 in the current year primarily results from the widening of the credit risk adjusted spread over the contractual rate of each junior subordinated debenture measured at fair value. 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, a change in fair value of the junior subordinated debentures during the period represents changes in the market’s nonperformance risk expectations and pricing of this type of debt, and not as a result of changes to our entity-specific credit risk. Any gains recognized are recorded in gain on junior subordinated debentures carried at fair value within non-interest income. 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 $80.1 million had contractual unpaid principal amounts of $134.0 million outstanding as of September 30, 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.

Note 9 – Commitments and Contingencies

Lease Commitments — The Company leases 127 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 operated in four additional leased facilities at September 30, 2010. The Company has the option to purchase one of these leased facilities.

Rent expense for the three and nine months ended September 30, 2010 was $4.0 million and $11.3 million, respectively, compared to $3.2 million and $9.5 million, respectively, in the comparable periods in 2009. Rent expense was offset by rent income for the three and nine months ended September 30, 2010 of $275,000 and $750,000 respectively, compared to $146,000 and $426,000, respectively, in the comparable periods in 2009.

Financial Instruments with Off-Balance-Sheet Risk — The Company’s financial statements do not reflect various commitments and contingent liabilities that arise in the normal course of the Bank’s business and involve elements of credit, liquidity, and interest rate risk.

The following table presents a summary of the Bank’s commitments and contingent liabilities:

(in thousands)

 

             As of September 30, 2010           

Commitments to extend credit

     $ 1,014,699     

Commitments to extend overdrafts

     $ 213,192     

Commitments to originate loans held for sale

     $ 184,220     

Forward sales commitments

     $ 142,139     

Standby letters of credit

     $ 42,941     

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 amounts recognized in the Condensed Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of the Bank’s involvement in particular classes of financial instruments.

 

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The Bank’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 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 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’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 has not been required to perform on any financial guarantees and did not incur any losses in connection with standby letters of credit during the three and nine months ended September 30, 2010 and 2009. At September 30, 2010, approximately $19.7 million of standby letters of credit expire within one year, and $23.2 million expire thereafter. Upon issuance, the Company 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 $212,000 as of September 30, 2010.

At September 30, 2010 and December 31, 2009, the reserve for unfunded commitments, which is included in other liabilities on the Condensed Consolidated Balance Sheets, was $797,000 and $731,000, respectively. The adequacy of the reserve for unfunded commitments is reviewed on a quarterly basis, based upon changes in the amount of commitments, loss experience, and economic conditions.

Mortgage loans sold to investors may be sold with servicing rights retained, with only the standard legal representations and warranties regarding recourse to the Bank. Management believes that any liabilities that may result from such recourse provisions are not significant.

Legal Proceedings—During 2007, Visa Inc. (“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 764,036 shares of Class B common stock 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 468,659 shares of 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, Visa also established a $3.0 billion escrow account to cover settlements, resolution of pending litigation and related claims (“covered litigation”).

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. In December 2008, 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 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.

 

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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. 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.

As of September 30, 2010, the value of the Class A shares was $74.26 per share. Utilizing the new conversion ratio effective in October 2010, the value of unredeemed Class A equivalent shares owned by the Company was $17.8 million as of September 30, 2010, and has not been reflected in the accompanying financial statements.

In the ordinary course of business, various claims and lawsuits are brought by and against the Company, 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’s consolidated financial condition or results of operations.

Concentrations of Credit Risk - The Company grants real estate mortgage, real estate construction, commercial, agricultural and installment loans and leases to customers throughout Oregon, Washington and California. In management’s judgment, a concentration exists in real estate-related loans, which represented approximately 81% of the Company’s non-covered loan and lease portfolio at both September 30, 2010, and December 31, 2009. Commercial real estate concentrations are managed to assure 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’s primary market areas in particular, such as was seen with the deterioration in the residential development market since 2007, 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 repayment for 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 with an issuer.

Note 10 – Derivatives

The Company 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 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 the three and nine months ended September 30, 2010 and 2009. 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 September 30, 2010, the Bank had commitments to originate mortgage loans held for sale totaling $184.2 million and forward sales commitments of $142.1 million.

 

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The following tables summarize the types of derivatives, separately by assets and liabilities, their locations on the Condensed Consolidated Balance Sheets, and the fair values of such derivatives as of September 30, 2010 and December 31, 2009:

(in thousands)

 

Underlying
Risk Exposure

  

Description

  

Balance Sheet
Location

   September 30,
2010
     December 31,
2009
 

Asset Derivatives

           

Interest rate contracts

   Rate lock commitments    Other assets      $ 1,200           $ 124     

Interest rate contracts

   Forward sales commitments    Other assets      113           845     
                       

Total asset derivatives

           $ 1,313           $ 969     
                       

Liability Derivatives

           

Interest rate contracts

   Rate lock commitments    Other liabilities      $ 12           $ 133     

Interest rate contracts

   Forward sales commitments    Other liabilities      243           -          
                       

Total liability derivatives

           $       255           $       133     
                       

The following table summarizes the types of derivatives, their locations within the Condensed Consolidated Statements of Operations, and the gains (losses) recorded during the three and nine months ended September 30, 2010 and 2009:

(in thousands)

 

Underlying

Risk Exposure

  

Description

  

Income Statement

Location

   Three months  ended
September 30,
 
         2010      2009  

Interest rate contracts

   Rate lock commitments    Mortgage banking revenue      $ (8)          $ 332     

Interest rate contracts

   Forward sales commitments    Mortgage banking revenue      (2,183)          (956)    
                       

Total

           $ (2,191)          $ (624)    
                       

Underlying

Risk Exposure

  

Description

  

Income Statement

Location

   Nine months ended
September 30,
 
         2010      2009  

Interest rate contracts

   Rate lock commitments    Mortgage banking revenue      $ 1,198           $ (433)    

Interest rate contracts

   Forward sales commitments    Mortgage banking revenue      (6,532)          (649)    
                       

Total

           $ (5,334)          $ (1,082)    
                       

The Company’s 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 11 – Shareholders’ Equity

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.

 

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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.

Stock-Based Compensation

The compensation cost related to stock options, restricted stock and restricted stock units (included in salaries and employee benefits) was $1.2 million and $2.6 million for the three and nine months ended September 30, 2010, respectively, as compared to $391,000 and $1.7 million for the three and nine months ended September 30, 2009, respectively. The total income tax benefit recognized related to stock-based compensation was $481,000 and $1.1 million for the three and nine months ended September 30, 2010, respectively, as compared to $157,000 and $678,000 for the comparable periods in 2009, respectively.

The following table summarizes information about stock option activity for the nine months ended September 30, 2010:

(in thousands, except per share data)

 

    Nine months ended September 30, 2010  
    Options
      Outstanding      
    Weighted-Avg
    Exercise Price    
    Weighted-Avg
  Remaining Contractual  
Term (Years)
    Aggregate
  Intrinsic Value  
 

Balance, beginning of period

    1,763        $       15.05         

Granted

    425        $ 12.45         

Exercised

    (108)       $ 8.99         

Forfeited/expired

    (23)       $ 14.25         
             

Balance, end of period

    2,057        $ 14.84          6.18        $ 1,643     
             

Options exercisable, end of period

    1,231        $ 16.59          4.45        $       1,287     
             

The total intrinsic value (which is the amount by which the stock price exceeded the exercise price on the date of exercise) of options exercised during the three and nine months ended September 30, 2010 was $26,000 and $408,000, respectively. This compared to the total intrinsic value of options exercised during the three and nine months ended September 30, 2009 of $4,000 and $209,000, respectively. During the three and nine months ended September 30, 2010, the amount of cash received from the exercise of stock options was $59,000 and $976,000, respectively, as compared to $44,000 and $276,000 for the same periods in 2009, respectively.

The fair value of each option grant is estimated as of the grant date using the Black-Scholes option-pricing model. The following weighted average assumptions were used for stock options granted in the nine months ended September 30, 2010 and 2009:

 

                 Nine months ended             
September 30,
 
                 2010                               2009               

Dividend yield

     2.72%          2.23%    

Expected life (years)

     7.1           7.3     

Expected volatility

     52%          46%    

Risk-free rate

     2.72%          2.18%    

Weighted average fair value of options on date of grant

     $       5.27           $       3.65     

 

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The Company grants restricted stock periodically as a part of the 2003 Stock Incentive Plan for the benefit of employees. Restricted shares issued generally vest on an annual basis over five years. A deferred restricted stock award was granted 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. The following table summarizes information about nonvested restricted share activity for the nine months ended September 30, 2010:

(in thousands, except per share data)

 

          Nine months ended September 30, 2010         
    Restricted
Shares
        Outstanding         
    Weighted
Average Grant
        Date Fair Value        
 

Balance, beginning of period

    187          $ 21.46     

Granted

    265          $ 12.19     

Released

    (44)         $ 22.36     

Forfeited/expired

    (14)         $ 13.35     
         

Balance, end of period

    394          $ 15.40     
         

The total fair value of restricted shares vested and released during the three and nine months ended September 30, 2010 was $9,000 and $547,000, respectively. This compares to the total fair value of restricted shares vested and released during the three and nine months ended September 30, 2009 of $8,000 and $417,000, respectively.

The Company grants 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 second quarter of 2007, restricted stock units were granted that cliff vest after three years based on performance and service conditions. In the first quarter of 2008 and 2009, additional restricted stock units were granted to these executives under substantially similar vesting terms. 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 restricted stock unit activity for the nine months ended September 30, 2010:

(in thousands, except per share data)

 

           Nine months ended September 30, 2010         
     Restricted
Stock Units
        Outstanding        
     Weighted Average
Grant
        Date Fair Value        
 

Balance, beginning of period

     335         $ 15.54     

Granted

     -              $ -          

Released

     (16)        $ 24.52     

Forfeited/expired

     (95)        $ 24.52     
           

Balance, end of period

     224         $ 11.13     
           

No restricted stock units were vested and released during the three months ended September 30, 2010. The total fair value of restricted stock units vested and released during the nine months ended September 30, 2010 was $213,000. This compares to the total fair value of restricted stock units vested and released during the three and nine months ended September 30, 2009 of none and $186,000, respectively.

As of September 30, 2010, there was $2.9 million of total unrecognized compensation cost related to nonvested stock options which is expected to be recognized over a weighted-average period of 3.6 years. As of September 30, 2010, there was $3.8 million of total unrecognized compensation cost related to nonvested restricted stock which is expected to be recognized over a weighted-average period of 3.0 years. As of September 30, 2010, there was $338,000 of total unrecognized compensation cost related to nonvested restricted stock units which is expected to be recognized over a weighted-average period of 0.9 years, assuming expected performance conditions are met.

For the three and nine months ended September 30, 2010, the Company received income tax benefits of $11,000 and $391,000, respectively, related to the exercise of non-qualified employee stock options, disqualifying dispositions on the exercise of incentive stock options, the vesting of restricted shares and the vesting of restricted stock units. For the three and nine months ended September 30, 2009, the Company received income tax benefits of $5,000 and $311,000, respectively. In the nine months ended September 30, 2010, the Company had net tax deficiencies (tax deficiency resulting from tax deductions less than the compensation cost recognized) of $207,000, compared to net tax deficiencies of $354,000 for the nine months ended September 30, 2009. Only cash flows from gross excess tax benefits are classified as financing cash flows.

 

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Note 12 – Income Taxes

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 for the California amended returns of an acquired institution for the tax years 2001, 2002, and 2003, and only as it relates to the net interest deduction taken on these amended returns, the Company is no longer subject to U.S. federal or Oregon state tax authority examinations for years before 2006 and California state tax authority examinations for years before 2004. The Internal Revenue Service concluded an examination of the Company’s U.S. income tax returns for 2006 and 2007 in the second quarter of 2010, and concluded an examination of the Company’s U.S. income tax return for 2008 in the third quarter of 2010. The results of these examinations had no significant impact on the Company’s financial statements.

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’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.

The Company applies the provisions of FASB ASC 740, Income Taxes, relating to the accounting for uncertainty in income taxes. 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 reduction in its liability for unrecognized tax benefits relating to temporary differences settled during audit in the second quarter of 2010. The Company had gross unrecognized tax benefits recorded as of September 30, 2010 in the amount of $590,000. If recognized, the unrecognized tax benefit would reduce the 2010 annual effective tax rate by 1.5%. During the first nine months of 2010, the Company recognized a benefit of $202,000 in interest reversed primarily due to the reduction of its liability for unrecognized tax benefits during the same period. Interest expense is reported by the Company as a component of tax expense. As of September 30, 2010, the accrued interest related to unrecognized tax benefits is $163,000.

Note 13 – Earnings Per Common Share

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. Basic earnings per common share is computed by dividing net income 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.

 

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The following is a computation of basic and diluted income (loss) per common share for the three and nine months ended September 30, 2010 and 2009:

 

         Three months ended    
September  30,
         Nine months ended    
September  30,
 
     2010      2009      2010      2009  

NUMERATORS:

           

Net income (loss)

     $ 8,191           $ (7,144)          $ 21,379           $ (126,684)    

Less:

           

Preferred stock dividends

     -                3,225           12,192           9,632     

Dividends and undistributed earnings allocated to participating securities (1)

     18           7           49           22     
                                   

Net income (loss) available to common shareholders

     $ 8,173           $ (10,376)          $ 9,138           $ (136,338)    
                                   

DENOMINATORS:

           

Weighted average number of common shares outstanding - basic

     114,528           74,085           105,695           64,878     

Effect of potentially dilutive common
shares
(2)

     232           -                229           -          
                                   

Weighted average number of common shares outstanding - diluted

     114,760           74,085           105,924           64,878     
                                   

INCOME (LOSS) PER COMMON SHARE:

           

Basic

     $ 0.07           $ (0.14)          $ 0.09           $ (2.10)    

Diluted

     $ 0.07           $ (0.14)          $ 0.09           $ (2.10)    

 

(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 securities that were not included in the computation of diluted earnings per common share because their effect would be anti-dilutive for the three and nine months ended September 30, 2010 and 2009.

(in thousands)

 

         Three months ended    
September  30,
         Nine months ended    
September  30,
 
     2010      2009      2010      2009  

Stock options

     2,000           1,778           2,062           1,844     

CPP warrant

     -                1,703           366           2,047     

Non-participating, nonvested restricted shares

     8           16           10           18     

Restricted stock units

     -                96           -                111     
                                   
     2,008           3,593           2,438           4,020     
                                   

Note 14 – Segment Information

The Company operates three primary segments: Community Banking, Mortgage Banking and Retail Brokerage. The Community Banking segment’s principal business focus is the offering of loan and deposit products to business and retail customers in its primary market areas. As of September 30, 2010, the Community Banking segment operated 184 locations throughout Oregon, Northern California, Washington, and Nevada.

The Mortgage Banking segment, which operates as a division of the Bank, originates, sells and services residential mortgage loans.

The Retail Brokerage segment consists of the operations of Umpqua Investments, which offers a full range of retail brokerage services and products to its clients who consist primarily of individual investors. The Company accounts for intercompany fees and services between Umpqua Investments and the Bank at estimated fair value according to regulatory requirements for services provided. Intercompany items relate primarily to management services, referral fees and deposit rebates.

 

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Summarized financial information concerning the Company’s reportable segments and the reconciliation to the consolidated financial results is shown in the following tables:

Segment Information

(in thousands)

 

     Three Months Ended September 30, 2010  
     Community
Banking
    

Retail

Brokerage

     Mortgage
Banking
     Consolidated  
        

Interest income

     $             129,591           $                     58           $             3,297           $             132,946     

Interest expense

     23,925           -                704           24,629     
        

Net interest income

     105,666           58           2,593           108,317     

Provision for loan and lease losses

     24,895           -                -                24,895     

Non-interest income

     2,263           2,683           7,187           12,133     

Non-interest expense

     77,480           3,474           4,216           85,170     
        

Income (loss) before income taxes

     5,554           (733)          5,564           10,385     

Provision for (benefit from) income taxes

     259           (291)          2,226           2,194     
        

Net income (loss)

     5,295           (442)          3,338           8,191     

Preferred stock dividends

     -                -                -                -          

Dividends and undistributed earnings allocated to participating securities

     18           -                -                18     
        

Net earnings (loss) available to common shareholders

     $ 5,277           $ (442)          $ 3,338         $ 8,173     
        
     Nine Months Ended September 30, 2010  
     Community
Banking
    

Retail

Brokerage

     Mortgage
Banking
     Consolidated  
        

Interest income

     $ 348,478           $                    201           $ 9,240           $ 357,919     

Interest expense

     68,214           -                2,036           70,250     
        

Net interest income

     280,264           201           7,204           287,669     

Provision for loan and lease losses

     96,768           -                -                96,768     

Non-interest income

     40,159           8,655           13,948           62,762     

Non-interest expense

     208,806           10,373           10,695           229,874     
        

Income (loss) before income taxes

     14,849           (1,517)          10,457           23,789     

(Benefit from) provision for income taxes

     (1,175)          (598)          4,183           2,410     
        

Net income (loss)

     16,024           (919)          6,274           21,379     

Preferred stock dividends

     12,192           -                -                12,192     

Dividends and undistributed earnings allocated to participating securities

     49           -                -                49     
        

Net (loss) earnings available to common shareholders

     $ 3,783           $ (919)          $ 6,274           $ 9,138     
        
     Three Months Ended September 30, 2009  
     Community
Banking
    

Retail

Brokerage

     Mortgage
Banking
     Consolidated  
        

Interest income

     $ 103,805           $ 46           $ 3,237         $ 107,088     

Interest expense

     24,463           -                863           25,326     
        

Net interest income

     79,342           46           2,374           81,762     

Provision for loan and lease losses

     52,108           -                -                52,108     

Non-interest income

     11,525           2,090