UMPQ-2013.9.30-10Q

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, 2013
 
or
[  ]
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: 001-34624 
 
Umpqua Holdings Corporation 
 
(Exact Name of Registrant as Specified in Its Charter)
OREGON 
93-1261319 
(State or Other Jurisdiction
(I.R.S. Employer Identification Number)
of Incorporation or Organization)
 
 
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).
 
[X]   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 “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
[X]   Large accelerated filer   [    ]   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: 111,929,202 shares outstanding as of October 31, 2013


Table of Contents

UMPQUA HOLDINGS CORPORATION 
FORM 10-Q 
Table of Contents 
 
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

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,
 
December 31,
 
2013
 
2012
ASSETS
 
 
 
Cash and due from banks
$
193,188

 
$
223,532

Interest bearing deposits
503,369

 
315,053

Temporary investments
534

 
5,202

Total cash and cash equivalents
697,091

 
543,787

Investment securities
 
 
 
Trading, at fair value
4,012

 
3,747

Available for sale, at fair value
1,910,082

 
2,625,229

Held to maturity, at amortized cost
5,766

 
4,541

Loans held for sale, at fair value
113,993

 
320,132

Non-covered loans and leases
7,228,904

 
6,681,080

Allowance for non-covered loan and lease losses
(84,694
)
 
(85,391
)
Net non-covered loans and leases
7,144,210

 
6,595,689

Covered loans, net of allowance of $11,918 and $18,275
397,083

 
477,078

Restricted equity securities
31,444

 
33,443

Premises and equipment, net
173,876

 
162,667

Goodwill and other intangible assets, net
778,094

 
685,331

Mortgage servicing rights, at fair value
41,853

 
27,428

Non-covered other real estate owned
18,249

 
17,138

Covered other real estate owned
2,980

 
10,374

FDIC indemnification asset
29,427

 
52,798

Other assets
221,137

 
236,061

Total assets
$
11,569,297

 
$
11,795,443

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Deposits
 
 
 
Noninterest bearing
$
2,421,008

 
$
2,278,914

Interest bearing
6,646,232

 
7,100,361

Total deposits
9,067,240

 
9,379,275

Securities sold under agreements to repurchase
215,310

 
137,075

Term debt
252,017

 
253,605

Junior subordinated debentures, at fair value
86,718

 
85,081

Junior subordinated debentures, at amortized cost
101,979

 
110,985

Other liabilities
120,038

 
105,383

Total liabilities
9,843,302

 
10,071,404

COMMITMENTS AND CONTINGENCIES (NOTE 10)

 

SHAREHOLDERS' EQUITY
 
 
 
Common stock, no par value, 200,000,000 shares authorized; issued and outstanding: 111,928,762 in 2013 and 111,889,959 in 2012
1,513,225

 
1,512,400

Retained earnings
209,597

 
187,293

Accumulated other comprehensive income
3,173

 
24,346

Total shareholders' equity
1,725,995

 
1,724,039

Total liabilities and shareholders' equity
$
11,569,297

 
$
11,795,443


See notes to condensed consolidated financial statements

3

Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME 
(UNAUDITED) 

(in thousands, except per share amounts)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
INTEREST INCOME
 
 
 
 
 
 
 
Interest and fees on non-covered loans and leases
$
93,706

 
$
78,090

 
$
250,685

 
$
233,386

Interest and fees on covered loans and leases
11,837

 
20,325

 
41,167

 
54,603

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable
7,882

 
13,057

 
24,629

 
47,712

Exempt from federal income tax
2,200

 
2,302

 
6,725

 
6,870

Dividends
51

 
3

 
165

 
37

Interest on temporary investments and interest bearing deposits
284

 
331

 
937

 
736

Total interest income
115,960

 
114,108

 
324,308

 
343,344

INTEREST EXPENSE
 
 
 
 
 
 
 
Interest on deposits
4,845

 
7,623

 
16,587

 
24,637

Interest on securities sold under agreement
 
 
 
 
 
 
 
to repurchase and federal funds purchased
35

 
73

 
99

 
232

Interest on term debt
2,338

 
2,335

 
6,916

 
6,944

Interest on junior subordinated debentures
1,933

 
2,037

 
5,815

 
6,124

Total interest expense
9,151

 
12,068

 
29,417

 
37,937

Net interest income
106,809

 
102,040

 
294,891

 
305,407

PROVISION FOR NON-COVERED LOAN AND LEASE LOSSES 
3,008

 
7,078

 
12,989

 
16,883

(RECAPTURE OF) PROVISION FOR COVERED LOAN LOSSES
(1,904
)
 
2,927

 
(4,744
)
 
4,302

Net interest income after provision for (recapture of) loan and lease losses
105,705

 
92,035

 
286,646

 
284,222

NON-INTEREST INCOME
 
 
 
 
 
 
 
Service charges on deposit accounts
8,374

 
7,122

 
22,844

 
20,978

Brokerage commissions and fees
3,854

 
3,186

 
11,152

 
9,662

Mortgage banking revenue, net
15,071

 
24,346

 
62,928

 
53,069

Gain on investment securities, net
3

 
21

 
18

 
1,199

Loss on junior subordinated debentures carried at fair value
(554
)
 
(554
)
 
(1,643
)
 
(1,649
)
Change in FDIC indemnification asset
(6,474
)
 
(4,759
)
 
(19,841
)
 
(10,644
)
Other income
5,870

 
4,317

 
19,198

 
17,227

Total non-interest income
26,144

 
33,679

 
94,656

 
89,842

NON-INTEREST EXPENSE
 
 
 
 
 
 
 
Salaries and employee benefits
53,699

 
49,543

 
157,271

 
146,615

Net occupancy and equipment
16,019

 
13,441

 
45,813

 
40,519

Communications
2,772

 
2,740

 
8,802

 
8,527

Marketing
1,596

 
1,104

 
3,753

 
3,855

Services
6,445

 
5,910

 
18,339

 
18,703

Supplies
742

 
627

 
2,120

 
1,936

FDIC assessments
1,709

 
1,699

 
5,032

 
5,553

Net (gain) loss on non-covered other real estate owned
(27
)
 
2,168

 
(303
)
 
6,244

Net (gain) loss on covered other real estate owned
(68
)
 
461

 
154

 
3,084

Intangible amortization
1,186

 
1,189

 
3,595

 
3,612

Merger related expenses
4,856

 
85

 
7,197

 
338

Other expenses
6,675

 
8,007

 
17,524

 
22,620

Total non-interest expense
95,604

 
86,974

 
269,297

 
261,606

Income before provision for income taxes
36,245

 
38,740

 
112,005

 
112,458

Provision for income taxes
12,768

 
13,587

 
38,914

 
38,525

Net income
$
23,477

 
$
25,153

 
$
73,091

 
$
73,933



4

Table of Contents



UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued) 
(UNAUDITED) 
 
(in thousands, except per share amounts)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
23,477

 
$
25,153

 
$
73,091

 
$
73,933

Dividends and undistributed earnings allocated to participating securities
196

 
170

 
576

 
499

Net earnings available to common shareholders
$
23,281

 
$
24,983

 
$
72,515

 
$
73,434

Earnings per common share:
 
 
 
 
 
 
 
Basic
$0.21
 
$0.22
 
$0.65
 
$0.66
Diluted
$0.21
 
$0.22
 
$0.65
 
$0.65
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
111,912

 
111,899

 
111,934

 
111,928

Diluted
112,195

 
112,151

 
112,154

 
112,159


See notes to condensed consolidated financial statements

5

Table of Contents


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME  
(UNAUDITED) 
 
(in thousands)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
23,477

 
$
25,153

 
$
73,091

 
$
73,933

Available for sale securities:
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
5,878

 
1,863

 
(35,342
)
 
(2,167
)
Reclassification adjustment for net gains realized in earnings (net of tax expense $1 and $8 for the three months ended September 30, 2013 and 2012, respectively, and net of tax expense of $7 and $480 for the nine months ended September 30, 2013 and 2012, respectively)
(2
)
 
(13
)
 
(11
)
 
(719
)
Income tax (expense) benefit related to unrealized losses
(2,351
)
 
(745
)
 
14,137

 
867

Net change in unrealized gains (losses)
3,525

 
1,105

 
(21,216
)
 
(2,019
)
Held to maturity securities:
 
 
 
 
 
 
 
Accretion of unrealized losses related to factors other than credit to investment securities held to maturity (net of tax benefit of $7 and $23 for the three months ended September 30, 2013 and 2012, respectively, and net of tax benefit of $29 and $76 for the nine months ended September 30, 2013 and 2012, respectively)
11

 
35

 
43

 
114

Net change in unrealized losses related to factors other than credit
11

 
35

 
43

 
114

Other comprehensive income (loss), net of tax
3,536

 
1,140

 
(21,173
)
 
(1,905
)
Comprehensive income
$
27,013

 
$
26,293

 
$
51,918

 
$
72,028


See notes to condensed consolidated financial statements

6

Table of Contents


UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY  
(UNAUDITED)   
 
(in thousands, except shares)
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Other
 
 
 
Common Stock
 
Retained
 
Comprehensive
 
 
 
Shares
 
Amount
 
Earnings
 
Income
 
Total
BALANCE AT JANUARY 1, 2012
112,164,891

 
$
1,514,913

 
$
123,726

 
$
33,774

 
$
1,672,413

Net income
 
 
 
 
101,891

 
 
 
101,891

Other comprehensive loss, net of tax
 
 
 
 
 
 
(9,428
)
 
(9,428
)
Comprehensive income
 
 
 
 
 
 
 
 
$
92,463

Stock-based compensation
 
 
4,041

 
 
 
 
 
4,041

Stock repurchased and retired
(596,000
)
 
(7,436
)
 
 
 
 
 
(7,436
)
Issuances of common stock under stock plans
 
 
 
 
 
 
 
 
 
and related net tax benefit
321,068

 
882

 
 
 
 
 
882

Cash dividends on common stock ($0.34 per share)
 
 
 
 
(38,324
)
 
 
 
(38,324
)
Balance at December 31, 2012
111,889,959

 
$
1,512,400

 
$
187,293

 
$
24,346

 
$
1,724,039

 
 
 
 
 
 
 
 
 
 
BALANCE AT JANUARY 1, 2013
111,889,959

 
$
1,512,400

 
$
187,293

 
$
24,346

 
$
1,724,039

Net income
 
 
 
 
73,091

 
 
 
73,091

Other comprehensive loss, net of tax
 
 
 
 
 
 
(21,173
)
 
(21,173
)
Comprehensive income
 
 
 
 
 
 
 
 
$
51,918

Stock-based compensation
 
 
3,531

 
 
 
 
 
3,531

Stock repurchased and retired
(319,164
)
 
(4,704
)
 
 
 
 
 
(4,704
)
Issuances of common stock under stock plans
 
 
 
 
 
 
 
 
 
and related net tax benefit
357,967

 
1,998

 
 
 
 
 
1,998

Cash dividends on common stock ($0.45 per share)
 
 
 
 
(50,787
)
 
 
 
(50,787
)
Balance at September 30, 2013
111,928,762

 
$
1,513,225

 
$
209,597

 
$
3,173

 
$
1,725,995


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,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
73,091

 
$
73,933

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of investment premiums, net
27,984

 
33,023

Gain on sale of investment securities, net
(18
)
 
(1,199
)
(Gain) loss on sale of non-covered other real estate owned
(751
)
 
481

Gain on sale of covered other real estate owned
(549
)
 
(1,031
)
Valuation adjustment on non-covered other real estate owned
448

 
5,763

Valuation adjustment on covered other real estate owned
703

 
4,115

Provision for non-covered loan and lease losses
12,989

 
16,883

(Recapture of) provision for covered loan losses
(4,744
)
 
4,302

Proceeds from bank owned life insurance
1,173

 

Change in FDIC indemnification asset
19,841

 
10,644

Depreciation, amortization and accretion
13,292

 
11,848

Increase in mortgage servicing rights
(15,182
)
 
(11,923
)
Change in mortgage servicing rights carried at fair value
757

 
5,618

Change in junior subordinated debentures carried at fair value
1,637

 
1,633

Stock-based compensation
3,531

 
2,981

Net increase in trading account assets
(265
)
 
(744
)
Gain on sale of loans
(52,899
)
 
(50,668
)
Change in loans held for sale carried at fair value
11,099

 
(11,324
)
Origination of loans held for sale
(1,368,902
)
 
(1,359,520
)
Proceeds from sales of loans held for sale
1,614,097

 
1,294,321

Excess tax benefits from the exercise of stock options
(40
)
 
(51
)
Change in other assets and liabilities:
 
 
 
Net decrease (increase) in other assets
34,007

 
(9,348
)
Net (decrease) increase in other liabilities
(11,983
)
 
22,493

Net cash provided by operating activities
359,316

 
42,230

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of investment securities available for sale
(51,191
)
 
(784,797
)
Purchases of investment securities held to maturity
(2,126
)
 
(931
)
Proceeds from investment securities available for sale
702,910

 
1,018,791

Proceeds from investment securities held to maturity
1,073

 
511

Redemption of restricted equity securities
1,999

 
1,216

Net non-covered loan and lease originations
(352,390
)
 
(391,733
)
Net covered loan paydowns
68,819

 
85,510

Proceeds from sales of non-covered loans
60,298

 
13,496

Proceeds from insurance settlement on loss of property
575

 
1,425

Proceeds from fee on termination of merger transaction

 
1,600

Proceeds from disposals of furniture and equipment
330

 
1,700

Purchases of premises and equipment
(25,575
)
 
(17,155
)
Net proceeds from FDIC indemnification asset
4,621

 
26,615

Proceeds from sales of non-covered other real estate owned
13,940

 
18,834

Proceeds from sales of covered other real estate owned
9,794

 
11,523

Net cash paid in acquisition
(149,658
)
 

Net cash provided (used) by investing activities
283,419

 
(13,395
)

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Table of Contents

UMPQUA HOLDINGS CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) 
(UNAUDITED) 
 
(in thousands)
 
Nine months ended
 
September 30,
 
2013
 
2012
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Net decrease in deposit liabilities
(311,708
)
 
(136,519
)
Net increase in securities sold under agreements to repurchase
78,235

 
36,446

Repayment of term debt
(211,204
)
 

Repayment of junior subordinated debentures
(8,764
)
 

Dividends paid on common stock
(33,837
)
 
(25,919
)
Excess tax benefits from stock based compensation
40

 
51

Proceeds from stock options exercised
2,511

 
324

Retirement of common stock
(4,704
)
 
(5,378
)
Net cash used by financing activities
(489,431
)
 
(130,995
)
Net increase (decrease) in cash and cash equivalents
153,304

 
(102,160
)
Cash and cash equivalents, beginning of period
543,787

 
598,766

Cash and cash equivalents, end of period
$
697,091

 
$
496,606

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
32,419

 
$
40,653

Income taxes
$
27,711

 
$
31,825

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Change in unrealized losses on investment securities available for sale, net of taxes
$
(21,216
)
 
$
(2,019
)
Change in unrealized losses on investment securities held to maturity
 

 
 

related to factors other than credit, net of taxes
$
43

 
$
114

Cash dividend declared on common stock and payable after period-end
$
16,930

 
$
10,140

Transfer of non-covered loans to non-covered other real estate owned
$
14,747

 
$
10,167

Transfer of covered loans to covered other real estate owned
$
2,554

 
$
3,227

Transfer of covered loans to non-covered loans
$
13,366

 
$
14,367

Transfer from FDIC indemnification asset to due from FDIC and other
$
3,530

 
$
19,939

Acquisitions:
 
 
 
Assets acquired
$
376,071

 
$

Liabilities assumed
$
219,961

 
$



See notes to condensed consolidated financial statements
 

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Table of Contents

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.  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 2012 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 2012 Annual Report filed on Form 10-K. References to "Bank" refer to our subsidiary Umpqua Bank, an Oregon state-chartered commercial bank, and references to "Umpqua Investments" refer to our subsidiary Umpqua Investments, Inc., a registered broker-dealer and investment adviser.
 
In preparing these financial statements, the Company has evaluated events and transactions subsequent to September 30, 2013 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 
 
Sterling Financial Corporation
On September 11, 2013, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Sterling Financial Corporation, a Washington corporation ("Sterling"). The Merger Agreement provides that Sterling will merge with and into the Company (the "Merger"), with the Company as the surviving corporation in the Merger. Immediately following the Merger, Sterling's wholly owned subsidiary, Sterling Savings Bank, will merge with and into the Bank (the "Bank Merger"), with the Bank as the surviving bank in the Bank Merger. Holders of shares of common stock of Sterling will have the right to receive 1.671 shares of the Company's common stock and $2.18 in cash for each share of Sterling common stock.

The completion of the Merger is subject to customary conditions, including (1) adoption of the Merger Agreement by Sterling's shareholders and by the Company's shareholders, (2) approval of an amendment to the Company's articles of incorporation to increase the number of authorized shares of the Company's common stock, (3) authorization for listing on the NASDAQ of the shares of the Company's common stock to be issued in the Merger, (4) the receipt of required regulatory approvals for the Merger and the Bank Merger from the Federal Reserve Board, Federal Deposit Insurance Corporation and Oregon and Washington state bank regulators, in each case without the imposition of any materially burdensome regulatory condition, (5) effectiveness of the registration statement on Form S-4 for the Company's common stock to be issued in the Merger, and (6) the absence of any order, injunction or other legal restraint preventing the completion of the Merger or making the completion of the Merger illegal. Each party's obligation to complete the Merger is also subject to certain additional customary conditions. The Merger Agreement provides certain termination rights for both the Company and Sterling and further provides that, upon termination of the Merger Agreement under certain circumstances, the Company or Sterling, as applicable, will be obligated to pay the other party a termination fee of $75 million.

The Merger is expected to be completed in the first half of 2014. A summary of the terms of the Merger Agreement and other related agreements are summarized in, and the Merger Agreement has been filed as an exhibit to, the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on September 17, 2013.

Financial Pacific Holding Corp.
On July 1, 2013, the Bank acquired Financial Pacific Holding Corp. ("FPHC") based in Federal Way, Washington, and its subsidiary, Financial Pacific Leasing, Inc ("FinPac Leasing"), and its subsidiaries, Financial Pacific Funding, Inc. ("FPF"), Financial Pacific Funding II, Inc. ("FPF II") and Financial Pacific Funding III, Inc. ("FPF III"). As part of the same transaction, the Company acquired two related entities, FPC Leasing Corporation ("FPC") and Financial Pacific Reinsurance Co., Ltd. ("FPR"). FPHC, FinPac Leasing, FPF, FPF II, FPF III, FPC and FPR are collectively referred to herein as "FinPac". FinPac provides business-essential commercial equipment leases to various industries throughout the United States and Canada. It originates leases through its brokers, lessors, and direct marketing programs. The results of FinPac's operations are included in the consolidated financial statements as of July 1, 2013.


10

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The aggregate consideration for the FinPac purchase was $158.0 million. Of that amount, $156.1 was distributed in cash, and $1.9 million was exchanged for restricted shares of the Company stock. The restricted shares were issued from the Company’s 2013 Incentive Plan pursuant to employment agreements between the Company and certain executives of FinPac, vest over a period of either two or three years, and will be recognized over that time period within the salaries and employee benefits line item on the Consolidated Statements of Income. The structure of the transaction was as follows:

The Bank acquired all of the outstanding stock of FPHC, a shell holding company, which is the sole shareholder of FinPac Leasing, the primary operating subsidiary of FinPac that engages in equipment leasing and financing activities, and is also the sole shareholder of FPF and FPF III, which are bankruptcy-remote entities that serve as lien holder for certain leases. FinPac Leasing is also the sole shareholder of FPF II, which no longer engages in any activities or holds any assets and is anticipated to be wound up in the near future.
The Company acquired all of the outstanding stock of FPC, a Canadian leasing subsidiary, and FPR, a corporation organized in the Turks & Caicos Islands that reinsures a portion of the liability risk of each insurance policy that is issued by a third party insurance company on leased equipment when the lessee fails to meet its contractual obligations under the lease or financing agreement to obtain insurance on the leased equipment.

The acquisition provides diversification, and a scalable platform that is consistent with expansion initiatives that the Bank has completed over the last three years, including growth in the business banking, agricultural lending and home builder lending groups. The transaction leverages excess capital of the Company and deploys excess liquidity into significantly higher yielding assets, provides growth and diversification, and is anticipated to increase profitability. There is no tax deductible goodwill or other intangibles.

The operations of FinPac are included in our operating results from July 1, 2013, and added revenue of $14.8 million, non-interest expense of $3.5 million , and net income of $6.0 million net of tax, for the three and nine months ended September 30, 2013. FinPac's results of operations prior to the acquisition are not included in our operating results. Merger related expenses of $629,000 and $1.4 million for the three and nine months ended September 30, 2013 have been incurred in connection with the acquisition of FinPac and are recognized within the merger related expenses line item on the Consolidated Statements of Income.

A summary of the net assets acquired and the estimated fair value adjustments of FinPac are presented below:
(in thousands)
 
FinPac
 
July 1, 2013
Cost basis net assets
$
61,446

Cash payment paid
(156,110
)
Fair value adjustments:
 
Non-covered loans and leases, net
6,881

Other intangible assets
(8,516
)
Other assets
(1,650
)
Term debt
(400
)
Other liabilities
1,355

Goodwill
$
(96,994
)

The statement of assets acquired and liabilities assumed at their fair values of FinPac are presented below. Additional adjustments to the purchase price allocation may be required, specifically to leases, other assets, other liabilities and taxes.
(in thousands)

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Table of Contents

 
FinPac
 
July 1, 2013
Assets Acquired:
 
Cash and equivalents
$
6,452

Non-covered loans and leases, net
264,336

Premises and equipment
491

Goodwill
96,994

Other assets
7,798

 Total assets acquired
$
376,071

 
 
Liabilities Assumed:
 
Term debt
211,204

Other liabilities
8,757

 Total liabilities assumed
219,961

 Net Assets Acquired
$
156,110


Non-covered leases acquired from FinPac that are not subject to the requirements of FASB ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30") are presented below at acquisition:
(in thousands)
 
FinPac
 
July 1, 2013
Contractually required payments
$
350,403

Purchase adjustment for credit
$
(20,520
)
Balance of non-covered loans and leases, net
$
264,336


The following tables present unaudited pro forma results of operations for the three and nine months ended September 30, 2013 and 2012 as if the acquisition of FinPac had occurred on January 1, 2012. The proforma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisitions actually occurred on January 1, 2012.


12

Table of Contents

(in thousands, except per share data)
 
Three months ended September 30, 2013
 
 
 
Pro Forma
 
Pro Forma
 
Company
FinPac (a)
Adjustments
 
Combined
Net interest income
$
92,311

$
14,498

$
(1,121
)
 (b)
$
105,688

Provision for non-covered loan and lease losses
1,228

1,780

1,524

 (d)
4,532

Recapture of provision for covered loan losses
(1,904
)


 
(1,904
)
Non-interest income
25,815

329


 
26,144

Non-interest expense
92,108

3,496

(474
)
 (c)
95,130

  Income before provision for income taxes
26,694

9,551

(2,171
)
 
34,074

Provision for income taxes
9,169

3,599

(868
)
 (e)
11,900

  Net income
17,525

5,952

(1,303
)
 
22,174

Dividends and undistributed earnings allocated to participating securities
196


52

 
248

Net earnings available to common shareholders
$
17,329

$
5,952

$
(1,355
)
 
$
21,926

Earnings per share:
 
 
 
 
 
      Basic
$
0.15

 
 
 
$
0.20

      Diluted
$
0.15

 
 
 
$
0.20

Average shares outstanding:
 
 
 
 
 
      Basic
111,912

 
 
 
111,912

      Diluted
112,195

 
 
 
112,195

(a) FinPac amounts represent results from July 1, 2013 to September 30, 2013.
(b) Consists of change in yields due to fair value adjustments.
(c) Consists of merger related expenses of $629,000 at the Bank, additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.
(d) Consists of adjustment to FinPac provision for credit losses due to purchase accounting adjustments.
(e) Income tax effect of pro forma adjustments at 40%.

(in thousands, except per share data)
 
Nine months ended September 30, 2013
 
 
 
Pro Forma
 
Pro Forma
 
Company
FinPac (a)
Adjustments
 
Combined
Net interest income
$
280,393

$
40,024

$
(1,513
)
 (b)
$
318,904

Provision for non-covered loan and lease losses
11,209

5,052

4,565

 (d)
20,826

Recapture of provision for covered loan losses
(4,744
)


 
(4,744
)
Non-interest income
94,327

1,641


 
95,968

Non-interest expense
265,801

11,784

(1,802
)
 (c)
275,783

  Income before provision for income taxes
102,454

24,829

(4,276
)
 
123,007

Provision for income taxes
35,315

9,434

(1,710
)
 (e)
43,039

  Net income
67,139

15,395

(2,566
)
 
79,968

Dividends and undistributed earnings allocated to participating securities
576


110

 
686

Net earnings available to common shareholders
$
66,563

$
15,395

$
(2,676
)
 
$
79,282

Earnings per share:
 
 
 
 
 
      Basic
$
0.59

 
 
 
$
0.71

      Diluted
$
0.59

 
 
 
$
0.71

Average shares outstanding:
 
 
 
 
 
      Basic
111,934

 
 
 
111,934

      Diluted
112,154

 
 
 
112,154


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Table of Contents

(a) FinPac amounts represent results from January 1, 2013 to September 30, 2013.
(b) Consists of interest expense benefit of FinPac utilizing Bank funding, and change in yields due to fair value adjustments.
(c) Consists of merger related expenses of $1.4 million at the Bank, additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.
(d) Consists of adjustment to FinPac provision for credit losses due to purchase accounting adjustments.
(e) Income tax effect of pro forma adjustments at 40%.

(in thousands, except per share data)
 
Three months ended September 30, 2012
 
 
 
Pro Forma
 
Pro Forma
 
Company
FinPac (a)
Adjustments
 
Combined
Net interest income
$
102,040

$
12,030

$
1,167

 (b)
$
115,237

Provision for non-covered loan and lease losses
7,078

2,516

1,361

 (d)
10,955

Provision for covered loan losses
2,927



 
2,927

Non-interest income
33,679

749


 
34,428

Non-interest expense
86,974

3,836

(303
)
 (c)
90,507

  Income before provision for income taxes
38,740

6,427

109

 
45,276

Provision for income taxes
13,587

2,425

44

 (e)
16,056

  Net income
25,153

4,002

65

 
29,220

Dividends and undistributed earnings allocated to participating securities
170


27

 
197

Net earnings available to common shareholders
$
24,983

$
4,002

$
38

 
$
29,023

Earnings per share:
 
 
 
 
 
      Basic
$
0.22

 
 
 
$
0.26

      Diluted
$
0.22

 
 
 
$
0.26

Average shares outstanding:
 
 
 
 
 
      Basic
111,899

 
 
 
111,899

      Diluted
112,151

 
 
 
112,151

(a) FinPac amounts represent results from July 1, 2012 to September 30, 2012.
(b) Consists of interest expense benefit of FinPac utilizing Bank funding, and change in yields due to fair value adjustments.
(c) Consists of additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.
(d) Consists of adjustment to FinPac provision for credit losses due to purchase accounting adjustments.
(e) Income tax effect of pro forma adjustments at 40%.


14

Table of Contents

(in thousands, except per share data)
 
Nine months ended September 30, 2012
 
 
 
Pro Forma
 
Pro Forma
 
Company
FinPac (a)
Adjustments
 
Combined
Net interest income
$
305,407

$
35,897

$
3,509

 (b)
$
344,813

Provision for non-covered loan and lease losses
16,883

8,213

415

 (d)
25,511

Provision for covered loan losses
4,302



 
4,302

Non-interest income
89,842

2,751


 
92,593

Non-interest expense
261,606

11,545

(910
)
 (c)
272,241

  Income before provision for income taxes
112,458

18,890

4,004

 
135,352

Provision for income taxes
38,525

7,131

1,601

 (e)
47,257

  Net income
73,933

11,759

2,403

 
88,095

Dividends and undistributed earnings allocated to participating securities
499


96

 
595

Net earnings available to common shareholders
$
73,434

$
11,759

$
2,307

 
$
87,500

Earnings per share:
 
 
 
 
 
      Basic
$
0.66

 
 
 
$
0.78

      Diluted
$
0.65

 
 
 
$
0.78

Average shares outstanding:
 
 
 
 
 
      Basic
111,928

 
 
 
111,928

      Diluted
112,159

 
 
 
112,159

(a) FinPac amounts represent results from January 1, 2012 to September 30, 2012.
(b) Consists of interest expense benefit of FinPac utilizing Bank funding, and change in yields due to fair value adjustments.
(c) Consists of additional expense related to restricted stock, and FinPac amortization of intangible assets, director compensation and travel, and management fees.
(d) Consists of adjustment to FinPac provision for credit losses due to purchase accounting adjustments.
(e) Income tax effect of pro forma adjustments at 40%.

Circle Bancorp
On November 14, 2012, the Company acquired all of the assets and liabilities of Circle Bancorp (“Circle”), which has been accounted for under the acquisition method of accounting for cash consideration of $24.9 million, including the redemption of all common and preferred shares and outstanding warrants and options. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition dates, and are subject to change for up to one year after the closing date of the acquisition. This acquisition was consistent with the Company's overall banking expansion strategy and provided further opportunity to enter growth markets in the San Francisco Bay Area of California. Upon completion of the acquisition, all Circle Bank branches operated under the Umpqua Bank name. The acquisition added Circle Bank's network of six branches in Corte Madera, Novato, Petaluma, San Francisco, San Rafael and Santa Rosa, California to Umpqua Bank's network of locations in California, Oregon, Washington and Nevada. The application of the acquisition method of accounting resulted in the recognition of $11.9 million of goodwill. There is no tax deductible goodwill or other intangibles.

The operations of Circle are included in our operating results from November 15, 2012, and added revenue of $4.2 million and $13.3 million, non-interest expense of $1.3 million and $5.2 million, and net income of $1.7 million and $4.5 million net of tax, for the three and nine months ended September 30, 2013. Circle's results of operations prior to the acquisition are not included in our operating results. Merger-related expenses of $32,000 and $981,000 for the three and nine months ended September 30, 2013 have been incurred in connection with the acquisition of Circle and recognized within the merger related expenses line item on the Consolidated Statements of Income.
A summary of the net assets acquired and the estimated fair value adjustments of Circle are presented below:

15

Table of Contents

(in thousands)
 
Circle Bank
 
November 14, 2012
 
 
Cost basis net assets
$
17,127

Cash payment paid
(24,860
)
Fair value adjustments:
 
Non-covered loans and leases, net
(2,622
)
Other intangible assets
830

Non-covered other real estate owned
(487
)
Deposits
(904
)
Term debt
(2,404
)
Other
1,398

Goodwill
$
(11,922
)

The statement of assets acquired and liabilities assumed at their fair values of Circle are presented below:
(in thousands)
 
Circle Bank
 
November 14, 2012
Assets Acquired:
 
Cash and equivalents
$
39,328

Investment securities
793

Non-covered loans and leases, net
246,665

Premises and equipment
7,695

Restricted equity securities
2,491

Goodwill
11,922

Other intangible assets
830

Non-covered other real estate owned
1,602

Other assets
6,469

 Total assets acquired
$
317,795

 
 
Liabilities Assumed:
 
Deposits
$
250,408

Junior subordinated debentures
8,764

Term debt
55,404

Other liabilities
3,219

 Total liabilities assumed
$
317,795


Non-covered loans acquired from Circle that are not subject to the requirements of FASB ASC 310-30 Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30") are presented below at acquisition:
(in thousands)
 
November 14,
 
2012
Contractually required principal payments
$
242,999

Purchase adjustment for credit
(5,760
)
Balance of performing non-covered loans
$
240,850


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Table of Contents

Non-covered loans acquired from Circle that are subject to the requirements of ASC 310-30 are presented below at acquisition and as of September 30, 2013 and December 31, 2012

(in thousands)
 
November 14,
 
December 31,
 
September 30,
 
2012
 
2012
 
2013
Contractually required principal payments
$
12,252

 
$
12,231

 
$
5,606

Carrying balance of acquired purchase credit impaired non-covered loans
$
5,815

 
$
5,809

 
$
2,263


The acquisition of Circle is not considered significant to the Company's financial statements and therefore pro forma financial information is not included.

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, 2013 and December 31, 2012

September 30, 2013
(in thousands)
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
AVAILABLE FOR SALE:
 
 
 
 
 
 
 
U.S. Treasury and agencies
$
256

 
$
22

 
$

 
$
278

Obligations of states and political subdivisions
233,499

 
9,146

 
(2,114
)
 
240,531

Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
1,668,904

 
18,140

 
(19,900
)
 
1,667,144

Other debt securities
60

 
74

 

 
134

Investments in mutual funds and
 
 
 
 
 
 
 
other equity securities
1,959

 
36

 

 
1,995

 
$
1,904,678

 
$
27,418

 
$
(22,014
)
 
$
1,910,082

HELD TO MATURITY:
 
 
 
 
 
 
 
Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
$
5,766

 
$
265

 
$
(1
)
 
$
6,030

 
$
5,766

 
$
265

 
$
(1
)
 
$
6,030



17

Table of Contents

December 31, 2012
(in thousands)
 
Amortized
 
Unrealized
 
Unrealized
 
Fair
 
Cost
 
Gains
 
Losses
 
Value
AVAILABLE FOR SALE:
 
 
 
 
 
 
 
U.S. Treasury and agencies
$
45,503

 
$
318

 
$
(1
)
 
$
45,820

Obligations of states and political subdivisions
245,606

 
18,119

 

 
263,725

Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
2,291,253

 
28,747

 
(6,624
)
 
2,313,376

Other debt securities
143

 
79

 

 
222

Investments in mutual funds and
 
 
 
 
 
 
 
other equity securities
1,959

 
127

 

 
2,086

 
$
2,584,464

 
$
47,390

 
$
(6,625
)
 
$
2,625,229

HELD TO MATURITY:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
595

 
$
1

 
$

 
$
596

Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations
3,946

 
197

 
(7
)
 
4,136

 
$
4,541

 
$
198

 
$
(7
)
 
$
4,732

 
Investment securities that were in an unrealized loss position as of September 30, 2013 and December 31, 2012 are presented in the following tables, based on the length of time individual securities have been in an unrealized loss position. In the opinion of management, these securities are considered only temporarily impaired due to changes in market interest rates or the widening of market spreads subsequent to the initial purchase of the securities, and not due to concerns regarding the underlying credit of the issuers or the underlying collateral. 
 
September 30, 2013
(in thousands)
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
AVAILABLE FOR SALE:
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and agencies
$

 
$

 
$

 
$

 
$

 
$

Obligations of states and political subdivisions
47,814

 
2,114

 

 

 
47,814

 
2,114

Residential mortgage-backed securities and
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
440,921

 
13,680

 
264,968

 
6,220

 
705,889

 
19,900

Total temporarily impaired securities
$
488,735

 
$
15,794

 
$
264,968

 
$
6,220

 
$
753,703

 
$
22,014

HELD TO MATURITY:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities and
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
$

 
$

 
$
46

 
$
1

 
$
46

 
$
1

Total temporarily impaired securities
$

 
$

 
$
46

 
$
1

 
$
46

 
$
1


Unrealized losses on the impaired held to maturity collateralized mortgage obligations include the unrealized losses related to factors other than credit that are included in other comprehensive income. 
 

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Table of Contents

December 31, 2012
(in thousands)
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
AVAILABLE FOR SALE:
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury and agencies
$

 
$

 
$
59

 
$
1

 
$
59

 
$
1

Residential mortgage-backed securities and
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
780,234

 
5,548

 
106,096

 
1,076

 
886,330

 
6,624

Total temporarily impaired securities
$
780,234

 
$
5,548

 
$
106,155

 
$
1,077

 
$
886,389

 
$
6,625

HELD TO MATURITY:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities and
 
 
 
 
 
 
 
 
 
 
 
collateralized mortgage obligations
$

 
$

 
$
48

 
$
7

 
$
48

 
$
7

Total temporarily impaired securities
$

 
$

 
$
48

 
$
7

 
$
48

 
$
7

 
The unrealized losses on investments in U.S. Treasury and agency 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, 2013. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because the Bank does not intend to sell the securities in this class and it is not likely that the Bank will be required to sell these securities before recovery of their amortized cost basis, which may include holding each security until maturity, the unrealized losses on these investments are not considered other-than-temporarily impaired. 
 
All of the available for sale residential mortgage-backed securities and collateralized mortgage obligations portfolio in an unrealized loss position at September 30, 2013 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 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

19

Table of Contents

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 according to the procedures described above. 
  
The following table presents the maturities of investment securities at September 30, 2013
 
(in thousands)
 
Available For Sale
 
Held To Maturity
 
Amortized
 
Fair
 
Amortized
 
Fair
 
Cost
 
Value
 
Cost
 
Value
AMOUNTS MATURING IN:
 
 
 
 
 
 
 
Three months or less
$
18,573

 
$
18,569

 
$

 
$

Over three months through twelve months
191,763

 
194,660

 
338

 
378

After one year through five years
1,294,846

 
1,303,726

 
863

 
1,085

After five years through ten years
361,759

 
354,446

 
89

 
89

After ten years
35,778

 
36,687

 
4,476

 
4,478

Other investment securities
1,959

 
1,994

 

 

 
$
1,904,678

 
$
1,910,082

 
$
5,766

 
$
6,030

 
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. 
 
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, 2013 and 2012: 
 
(in thousands)
 
Three months ended
 
Three months ended
 
September 30, 2013
 
September 30, 2012
 
Gains
 
Losses
 
Gains
 
Losses
U.S. Treasury and agencies
$

 
$

 
$

 
$

Obligations of states and political subdivisions
3

 

 
8

 

Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations

 

 

 

Other debt securities

 

 
13

 

 
$
3

 
$

 
$
21

 
$

 
 
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
 
 
Nine months ended
 
Nine months ended
 
September 30, 2013
 
September 30, 2012
 
Gains
 
Losses
 
Gains
 
Losses
U.S. Treasury and agencies
$

 
$

 
$
371

 
$

Obligations of states and political subdivisions
10

 
1

 
10

 
1

Residential mortgage-backed securities and
 
 
 
 
 
 
 
collateralized mortgage obligations

 

 
1,484

 
683

Other debt securities
9

 

 
18

 

 
$
19

 
$
1

 
$
1,883

 
$
684


The following table presents, as of September 30, 2013, investment securities which were pledged to secure borrowings, public deposits, and repurchase agreements as permitted or required by law: 

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(in thousands)
 
Amortized
 
Fair
 
Cost
 
Value
To Federal Home Loan Bank to secure borrowings
$
16,831

 
$
17,287

To state and local governments to secure public deposits
810,529

 
808,734

Other securities pledged principally to secure repurchase agreements
307,164

 
304,093

Total pledged securities
$
1,134,524

 
$
1,130,114

 
 
  
Note 4 – Non-Covered Loans and Leases  
 
The following table presents the major types of non-covered loans and leases recorded in the balance sheets as of September 30, 2013 and December 31, 2012
 
(in thousands)
 
September 30,
 
December 31,
 
2013
 
2012
Commercial real estate
 
 
 
Term & multifamily
$
4,005,983

 
$
3,938,443

Construction & development
247,809

 
202,118

Residential development
78,998

 
57,209

Commercial
 
 
 
Term
769,173

 
797,802

LOC & other
1,283,129

 
923,328

Residential
 
 
 
Mortgage
550,200

 
476,579

Home equity loans & lines
256,202

 
260,797

Consumer & other
43,621

 
37,327

Total
7,235,115

 
6,693,603

Deferred loan fees, net
(6,211
)
 
(12,523
)
Total
$
7,228,904

 
$
6,681,080

 
As of September 30, 2013, loans totaling $5.4 billion were pledged to secure borrowings and available lines of credit.

At September 30, 2013, non-covered loans accounted for under ASC 310-30 were $24.7 million. At December 31, 2012, non-covered accounted for under ASC 310-30 were $19.3 million.

Note 5 – Allowance for Non-Covered Loan and Lease Loss and Credit Quality 
 
The Bank has a management Allowance for Loan and Lease Losses (“ALLL”) Committee, which is responsible for, among other things, regularly reviewing the ALLL methodology, including loss factors, and ensuring that it is designed and applied in accordance with generally accepted accounting principles. The ALLL Committee reviews and approves loans and leases recommended for impaired status.  The ALLL Committee also approves removing loans and leases from impaired status.  The Bank's Audit and Compliance Committee provides board oversight of the ALLL process and reviews and approves the ALLL methodology on a quarterly basis. 
 
Our methodology for assessing the appropriateness of the ALLL consists of three key elements, which include 1) the formula allowance; 2) the specific allowance; and 3) the unallocated allowance. By incorporating these factors into a single allowance requirement analysis, all risk-based activities within the loan portfolio are simultaneously considered. 

Formula Allowance 
The Bank performs regular credit reviews of the loan and lease portfolio to determine the credit quality and adherence to underwriting standards. When loans and leases are originated, they are assigned a risk rating that is reassessed periodically

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during the term of the loan or lease through the credit review process.  The Bank's risk rating methodology assigns risk ratings ranging from 1 to 10, where a higher rating represents higher risk. The 10 ri