Current Report Filing (8-k)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

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

Date of Report (Date of Earliest Event Reported): June 17, 2014

Umpqua Holdings Corporation

(Exact Name of Registrant as Specified in Its Charter)

Oregon

001-34624

93-1261319

(State or Other Jurisdiction

of Incorporation)

(Commission

File Number)

(IRS Employer

Identification No.)

One SW Columbia, Suite 1200

Portland, Oregon 97258

(Address of Principal Executive Offices) (Zip Code)

Registrant’s Telephone Number, Including Area Code: (503) 727-4100

Not Applicable

Former Name or Former Address, if Changed Since Last Report

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01. Other Events.

As previously announced, on April 18, 2014, Umpqua Holdings Corporation, an Oregon corporation (“Umpqua”), completed its previously announced merger (the “Merger”) with Sterling Financial Corporation, a Washington corporation (“Sterling”) pursuant to an Agreement and Plan of Merger, dated September 11, 2013, between Umpqua and Sterling. At the closing of the Merger, Sterling merged with and into Umpqua, with Umpqua surviving the Merger as the surviving corporation.

Attached hereto as Exhibits 99.1 and 99.2, and incorporated herein by reference are, respectively, (i) the unaudited and unreviewed consolidated balance sheets of Sterling and subsidiaries as of March 31, 2014 and December 31, 2013, and the related consolidated statements of income, comprehensive income, and cash flows for each of the three months ended March 31, 2014 and 2013, as well as the accompanying notes thereto and (ii) unaudited pro forma condensed combined financial statements of Umpqua and Sterling, as of and for the three months ended March 31, 2014, reflecting the Merger.

Forward-Looking Statements

This Form 8-K includes forward-looking statements within the meaning of the “Safe-Harbor” provisions of the Private Securities Litigation Reform Act of 1995, which management believes are a benefit to shareholders. These statements are necessarily subject to risk and uncertainty and actual results could differ materially due to various risk factors, including those set forth from time to time in our filings with the SEC. You should not place undue reliance on forward-looking statements and we undertake no obligation to update any such statements. In this Form 8-K we make forward-looking statements regarding the size and growth potential from the Merger; cost savings and other synergies expected to result from the Merger; and the financial and accounting impact of the Merger and related integration activities. Specific risks that could cause results to differ from the forward-looking statements are set forth in our filings with the SEC and include, without limitation, changes in the discounted cash flow model used to determine the fair value of Sterling’s assets, prolonged low interest rate environment, unanticipated weakness in loan demand or loan pricing, deterioration in the economy, material reductions in revenue or material increases in expenses, lack of strategic growth opportunities or our failure to execute on those opportunities, our inability to effectively manage problem credits, certain loan assets becoming ineligible for loss sharing, unanticipated increases in the cost of deposits; Umpqua’s ability to achieve the synergies and earnings accretion contemplated by the merger; Umpqua’s ability to promptly and effectively integrate the businesses of Sterling and Umpqua; the diversion of management time on issues related to merger integration; changes in laws or regulations; and changes in general economic conditions.

Item 9.01. Financial Statements and Exhibits.

(d) Exhibits.

Exhibit Number		Description
99.1		Unaudited and Unreviewed Consolidated balance sheets of Sterling Financial Corporation and subsidiaries as of March 31, 2014 and December 31, 2013, and the related consolidated statements of income, comprehensive income, and cash flows for each of the three months ended March 31, 2014 and 2013, as well as the accompanying notes thereto

99.2		Unaudited Pro Forma Condensed Consolidated Financial Statements of Umpqua Holdings Corporation and Sterling Financial Corporation as of and for the three months ended March 31, 2014

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Umpqua Holdings Corporation


Date: June 17, 2014	By:	/s/ Andrew H. Ognall
	Name:	Andrew H. Ognall
	Title:	Executive Vice President, General Counsel and Secretary

EXHIBIT INDEX

Exhibit Number		Description
99.1		Unaudited and Unreviewed Consolidated balance sheets of Sterling Financial Corporation and subsidiaries as of March 31, 2014 and December 31, 2013, and the related consolidated statements of income, comprehensive income, and cash flows for each of the three months ended March 31, 2014 and 2013, as well as the accompanying notes thereto

99.2		Unaudited Pro Forma Condensed Consolidated Financial Statements of Umpqua Holdings Corporation and Sterling Financial Corporation as of and for the three months ended March 31, 2014

Exhibit 99.1

TABLE OF CONTENTS

March 31, 2014

		Page
Financial Information

	Financial Statements (Unaudited and Unreviewed)
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Cash Flows	5
	Notes to Consolidated Financial Statements	6
	1 - Basis of Presentation	6
	2 - Business Combinations	7
	3 - Investments and MBS	10
	4 - Loans Receivable and Allowance for Credit Losses	11
	5 - Goodwill and Other Intangible Assets	21
	6 - Junior Subordinated Debentures	22
	7 - Earnings Per Share	23
	8 - Noninterest Expense	23
	9 - Income Taxes	24
	10 - Stock Based Compensation	24
	11 - Derivatives and Hedging	25
	12 - Offsetting Assets and Liabilities	26
	13 - Fair Value	26
	14 - Regulatory Capital	31
	15 - Segment Information	31
	16 - Commitments and Contingencies	32
	17 - Subsequent Event	33

STERLING FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS (UNAUDITED AND UNREVIEWED)

(in thousands, except shares)

	March 31, 2014			December 31, 2013
ASSETS:
Cash and cash equivalents:
Interest bearing	$	329,916		$	428,746
Noninterest bearing	106,650			109,942
Total cash and cash equivalents	436,566			538,688
Restricted cash	7,000			6,747
Investments and mortgage-backed securities (“MBS”):
Available for sale	1,386,382			1,429,812
Held to maturity	154			165
Loans held for sale ($146,336 and $138,952 at fair value)	229,084			138,952
Loans receivable, net ($25,741 and $26,462 at fair value)	7,285,163			7,331,228
Accrued interest receivable	28,896			28,493
Other real estate owned, net (“OREO”)	7,891			8,047
Properties and equipment, net	98,095			101,610
Bank-owned life insurance (“BOLI”)	193,015			191,553
Goodwill	52,018			52,018
Other intangible assets, net	14,342			15,561
Mortgage servicing rights, net	59,955			60,100
Deferred tax asset, net	275,502			284,059
Other assets, net	134,474			132,216
Total assets	$	10,208,537		$	10,319,249
LIABILITIES:
Deposits:
Noninterest bearing	1,896,353			$	1,881,360
Interest bearing	5,236,517			5,193,630
Total deposits	7,132,870			7,074,990
Advances from Federal Home Loan Bank (“FHLB”)	976,059			1,146,103
Securities sold under repurchase agreements	539,972			531,679
Junior subordinated debentures	245,300			245,299
Accrued interest payable	4,073			4,284
Accrued expenses and other liabilities	99,055			100,947
Total liabilities	8,997,329			9,103,302
SHAREHOLDERS’ EQUITY:
Preferred stock, 10,000,000 shares authorized; no shares outstanding	0			0
Common stock, 151,515,151 shares authorized; 62,452,826 and 62,363,741 shares outstanding, respectively	1,972,921			1,972,457
Accumulated other comprehensive income	27,273			19,857
Accumulated deficit	(788,986		)	(776,367		)
Total shareholders’ equity	1,211,208			1,215,947
Total liabilities and shareholders’ equity	$	10,208,537		$	10,319,249

See notes to consolidated financial statements.

STERLING FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED AND UNREVIEWED)

(in thousands, except share amounts)

	Three Months Ended
	March 31,
	2014			2013
Interest income:
Loans	$	86,153		$	81,187
MBS	8,261			7,297
Investments and cash equivalents	2,252			2,273
Total interest income	96,666			90,757
Interest expense:
Deposits	5,153			6,307
Short-term borrowings	145			446
Long-term borrowings	7,680			7,110
Total interest expense	12,978			13,863
Net interest income	83,688			76,894
Provision for credit losses	0			0
Net interest income after provision for credit losses	83,688			76,894
Noninterest income:
Fees and service charges	14,632			14,130
Mortgage banking operations	7,788			13,794
BOLI	1,461			1,557
Gains on sales of securities	0			0
Gains on other loan sales	2,641			25
Other	(6,312		)	8,060
Total noninterest income	20,210			37,566
Noninterest expense	85,165			81,929
Income before income taxes	18,733			32,531
Income tax provision	(6,380		)	(9,853		)
Net income	$	12,353		$	22,678
Earnings per share - basic	$	0.20		$	0.36
Earnings per share - diluted	$	0.19		$	0.36
Dividends declared per share	$	0.40		$	0.00
Weighted average shares outstanding - basic	62,398,357			62,242,183
Weighted average shares outstanding - diluted	63,730,740			63,004,784

See notes to consolidated financial statements.

STERLING FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED AND UNREVIEWED)

(in thousands)

			Three Months Ended
			March 31,
			2014					2013
Net income			$	12,353				$	22,678
Beginning balance, accumulated other comprehensive income	$	19,857				$	60,712
Other comprehensive income (loss):
Change in unrealized gains on investments and MBS available for sale			11,771					(7,359		)
Less deferred income tax (provision) benefit			(4,355		)			2,723
Net other comprehensive income (loss)			7,416					(4,636		)
Ending balance, accumulated other comprehensive income	$	27,273				$	56,076
Comprehensive income			$	19,769				$	18,042

For the periods presented, accumulated other comprehensive income was comprised solely of unrealized market value adjustments on available for sale securities.

See notes to consolidated financial statements.

STERLING FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED AND UNREVIEWED)

(in thousands)

	Three Months Ended March 31,
	2014			2013
Cash flows from operating activities:
Net income	$	12,353		$	22,678
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain on sales of loans	(9,213		)	(10,614		)
Net (gain) loss on mortgage servicing rights	96			(2,834		)
Stock based compensation	1,095			632
Loss on OREO	436			214
Increase in cash surrender value of BOLI	(1,447		)	(1,461		)
Depreciation and amortization	10,152			10,692
Bargain purchase gain	0			(7,544		)
Loss on pending sale of branches	7,000			0
Change in:
Accrued interest receivable	(403		)	(2,253		)
Prepaid expenses and other assets	(944		)	2,148
Accrued interest payable	(211		)	(419		)
Accrued expenses and other liabilities	(14,385		)	(47,044		)
Proceeds from sales of loans originated for sale	300,624			797,735
Loans originated for sale	(303,269		)	(631,632		)
Net cash provided by operating activities	1,884			130,298
Cash flows from investing activities:
Change in restricted cash	(253		)	16,826
Net change in loans	(189,161		)	(129,515		)
Proceeds from sales of loans	147,523			2,190
Proceeds from maturities of investment securities	12,896			169
Purchase of MBS	0			(76,590		)
Principal payments received on MBS	40,842			108,098
Office properties and equipment, net	(1,230		)	(5,537		)
Improvements and other changes to OREO	11			(125		)
Proceeds from sales of OREO	2,327			6,738
Net change in cash and cash equivalents from acquisitions	0			6,877
Net cash provided (used in) by investing activities		12,955			(70,869	)
Cash flows from financing activities:
Net change in deposits		57,880			43,499
Advances from FHLB	125,000			225,000
Repayment of advances from FHLB	(295,026		)	(290,054		)
Net change in short term repurchase agreements	8,293			(5,801		)
Payments under structured repurchase agreements	0			(50,000		)
Proceeds from stock issuance, net	(631		)	413
Cash dividends paid	(12,477		)	0
Net cash used in financing activities	(116,961		)	(76,943		)
Net change in cash and cash equivalents	(102,122		)	(17,514		)
Cash and cash equivalents, beginning of period	538,688			299,878
Cash and cash equivalents, end of period	$	436,566		$	282,364
Supplemental disclosures:
Cash paid during the period for:
Interest	$	13,189		$	14,247
Income taxes, net	2,215			687
Noncash financing and investing activities:
Foreclosed real estate acquired in settlement of loans	2,618			6,764
Common stock cash dividend accrued	12,494			0

See notes to consolidated financial statements.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

1. Basis of Presentation:

The foregoing unaudited and unreviewed interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, these financial statements do not include all of the disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. These unaudited and unreviewed interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements as disclosed in the annual report on Form 10-K for the year ended December 31, 2013. References to “Sterling,” in this report are to Sterling Financial Corporation, a Washington corporation, and its consolidated subsidiaries on a combined basis, unless otherwise specified or the context otherwise requires. References to “Sterling Bank” refer to our subsidiary Sterling Savings Bank, a Washington state-chartered commercial bank. In the opinion of management, the unaudited interim consolidated financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim periods presented.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of Sterling’s consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions, which could have a material effect on the reported amounts of Sterling’s consolidated financial position and results of operations.

In addition to other established accounting policies, the following is a discussion of recent accounting pronouncements:

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-04, “Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date.” ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of such obligations. ASU 2013-04 is effective for fiscal years beginning after December 15, 2013, and did not have a material impact on Sterling’s consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU No. 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. No new recurring disclosures are required. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2013, and are to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The adoption of ASU No. 2013-11 did not have a material impact on Sterling’s consolidated financial statements.

In January 2014, the FASB issued ASU No. 2014-01, “Accounting for Investments in Qualified Affordable Housing Projects.” ASU 2014-04 permits an entity to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense (benefit). The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and should be applied prospectively. The adoption of ASU No. 2014-01 is not expected to have a material impact on Sterling’s consolidated financial statements.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

In January 2014, the FASB issued ASU No. 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” ASU 2014-04 clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual and interim reporting periods beginning on or after December 15, 2014 and can be applied with a modified retrospective transition method or prospectively. The adoption of ASU No. 2014-04 is not expected to have a material impact on Sterling’s consolidated financial statements.

2. Business Combinations:

Commerce National Bank. On October 1, 2013, Sterling paid $42.9 million in cash to acquire Commerce National Bank (“CNB”). The following table summarizes the amounts recorded at closing:

	October 1, 2013
	(in thousands)
Cash and cash equivalents	$	8,555
Investments and MBS	69,353
Loans receivable, net	161,043
Goodwill	15,384
Core deposit intangible	1,160
Other assets	5,325
Total assets acquired	$	260,820
Deposits	$	189,563
Advances from FHLB	25,000
Other liabilities	3,350
Total liabilities assumed	217,913
Net assets acquired	$	42,907

The recorded goodwill represents the inherent value of the CNB transaction, as a result of the expected enhancement of Sterling’s operations in Southern California. The amount of goodwill deductible for income tax purposes is approximately equivalent to the recorded book value. The core deposit intangible has an amortization period of approximately ten years and will be amortized on an accelerated basis. The fair value of assets acquired and liabilities assumed are presented above.

As of October 1, 2013, the unpaid principal balance and contractual interest (“contractual cash flows”) on purchased loans was $164.2 million. Sterling estimated that $3.7 million of these cash flows would be uncollectable, resulting in a combined credit and interest rate discount of $3.8 million being recorded on these loans. As of the acquisition date, the amount of loans purchased from CNB that exhibited evidence of credit deterioration was immaterial.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

Boston Private Bank and Trust Company. On May 10, 2013, Sterling paid $123.0 million in cash to acquire the Puget Sound operations of Boston Private Bank & Trust Company (“Boston Private”). The Boston Private Puget Sound offices were located in Seattle, Bellevue and Redmond, Washington. Upon acquisition, the Boston Private Seattle branch was consolidated into one of Sterling’s existing Seattle branches. The following table summarizes the amounts recorded at closing:

	May 10, 2013
	(in thousands)
Cash and cash equivalents	$	340
Loans receivable, net	273,353
Goodwill	14,056
Core deposit intangible	1,674
Other assets	2,721
Total assets acquired	$	292,144
Deposits	$	168,246
Other liabilities	913
Total liabilities assumed	169,159
Net assets acquired	$	122,985

The recorded goodwill represents the inherent value of the Boston Private transaction, which expands Sterling’s presence in the Puget Sound market through the addition of two branch offices and the associated customer relationships. The additional branches are along the I-5 corridor, which Sterling identified as its primary focus for growth. The amount of goodwill deductible for income tax purposes is approximately equivalent to the recorded book value. The core deposit intangible will be amortized on an accelerated basis over approximately ten years.

As of May 10, 2013, the contractual cash flows on purchased loans was $280.7 million. Sterling estimated that $3.5 million of these cash flows would be uncollectable, resulting in a combined credit and interest rate discount of $5.1 million being recorded on these loans. As of the acquisition date, none of the loans purchased from Boston Private exhibited evidence of credit deterioration.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

American Heritage Holdings. On February 28, 2013, Sterling paid $6.5 million in cash and paid off an existing note payable of $2.2 million for a total of $8.7 million in consideration to acquire American Heritage Holdings, the holding company for Borrego Springs Bank, N.A. (“Borrego”). Immediately following the acquisition, Borrego was merged with and into Sterling’s principal operating subsidiary, Sterling Bank, with Borrego’s operations continuing under the registered trade name of Borrego Springs Bank. As a result of this transaction, Sterling has expanded its SBA lending platform and added depository branches in Southern California. The following table summarizes the amounts recorded at closing:

	February 28, 2013
	(in thousands)
Cash and cash equivalents		15,626
Investments and MBS	1,030
Loans receivable, net	97,262
Core deposit intangible	453
Other assets	27,197
Total assets acquired	$	141,568
Deposits	$	118,221
Other liabilities	7,054
Total liabilities assumed	125,275
Net assets acquired	16,293
Consideration paid	8,749
Bargain purchase gain	$	7,544

We recognized a bargain purchase gain of $7.5 million in the transaction for the net assets acquired in excess of the purchase price, primarily due to limited market for Borrego’s assets, in addition to Borrego’s regulatory and capital constraints. The bargain purchase gain is included in other noninterest income on the income statement for the three months ended March 31, 2013. The core deposit intangible has a weighted average amortization period of ten years and will be amortized on an accelerated basis. On the acquisition date of February 28, 2013, the contractual cash flows of purchased impaired loans, which are described in Note 4, from Borrego were $16.1 million, cash flows expected to be collected were $13.6 million, and the fair value of the loans was $11.9 million, with $9.8 million of these loans being guaranteed by government agencies.

As of February 28, 2013, the unpaid principal balance and contractual interest (“contractual cash flows”) on purchased loans that had not exhibited evidence of credit deterioration was $83.3 million. Sterling estimated that $3.9 million of these cash flows would be uncollectable, resulting in a combined credit and interest rate discount of $4.5 million being recorded on these loans.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

3. Investments and MBS:

The carrying and fair values of investments and MBS are summarized as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
March 31, 2014
Available for sale
MBS	$	1,206,561	$	14,798	$	(15,199	)	$	1,206,160
Municipal bonds	171,787		8,639		(426		)	180,000
Other	213		9		0			222
Total	$	1,378,561	$	23,446	$	(15,625	)	$	1,386,382
Held to maturity
Tax credits	$	154	$	0	$	0		$	154
Total	$	154	$	0	$	0		$	154
December 31, 2013
Available for sale
MBS	$	1,248,908	$	13,269	$	(22,277	)	$	1,239,900
Municipal bonds	184,642		6,045		(997		)	189,690
Other	212		10		0			222
Total	$	1,433,762	$	19,324	$	(23,274	)	$	1,429,812
Held to maturity
Tax credits	$	165	$	0	$	0		$	165
Total	$	165	$	0	$	0		$	165

The following table summarizes Sterling’s investments and MBS that had a market value below their amortized cost as of March 31, 2014 and December 31, 2013, segregated by those investments that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or longer:

	Less than 12 months					12 months or longer					Total
	Market Value		Unrealized Losses			Market Value		Unrealized Losses			Market Value		Unrealized Losses
	(in thousands)
March 31, 2014
MBS	$	448,824	$	(13,409	)	$	33,932	$	(1,790	)	$	482,756	$	(15,199	)
Municipal bonds	1,429		(18		)	3,772		(408		)	5,201		(426		)
Other	0		0			0		0			0		0
Total	$	450,253	$	(13,427	)	$	37,704	$	(2,198	)	$	487,957	$	(15,625	)
December 31, 2013
MBS	$	679,954	$	(22,277	)	$	0	$	0		$	679,954	$	(22,277	)
Municipal bonds	10,051		(268		)	12,947		(729		)	22,998		(997		)
Other	0		0			0		0			0		0
Total	$	690,005	$	(22,545	)	$	12,947	$	(729	)	$	702,952	$	(23,274	)

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

Management evaluates investment securities for other-than-temporary declines in fair value each quarter. If the fair value of investment securities falls below the amortized cost and the decline is deemed to be other-than temporary, the securities are written down to current market value, resulting in the recognition of an other-than-temporary impairment (“OTTI”). During the three months ended March 31, 2014 and 2013, no securities were determined to be other-than-temporarily impaired.

The following table presents the amortized cost and fair value of available for sale and held to maturity securities as of March 31, 2014, grouped by contractual maturity. Actual maturities for MBS will differ from contractual maturities as a result of the level of prepayments experienced on the underlying mortgages.

	Held to maturity				Available for sale
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(in thousands)
Due within one year	$	0	$	0	$	0	$	0
Due after one year through five years	0		0		1,724		1,820
Due after five years through ten years	0		0		90,332		91,181
Due after ten years	154		154		1,286,505		1,293,381
Total	$	154	$	154	$	1,378,561	$	1,386,382

4. Loans Receivable and Allowance for Credit Losses:

The following table presents the composition of Sterling’s loan portfolio as of the balance sheet dates:

	March 31, 2014			December 31, 2013
	(in thousands)
Residential real estate	$	1,187,998		$	1,119,574
Commercial real estate (“CRE”):
Investor CRE	1,109,880			1,114,768
Multifamily	2,126,241			2,156,434
Construction	83,740			71,693
Total CRE	3,319,861			3,342,895
Commercial:
Owner occupied CRE	1,381,997			1,431,140
Commercial & Industrial (“C&I”)	714,700			742,142
Total commercial	2,096,697			2,173,282
Consumer	804,254			822,068
Gross loans receivable	7,408,810			7,457,819
Deferred loan costs (fees), net	12,329			10,703
Allowance for loan losses	(135,976		)	(137,294		)
Net loans receivable	$	7,285,163		$	7,331,228

As of March 31, 2014 and December 31, 2013, loans pledged as collateral for borrowings from the FHLB and the Federal Reserve were $4.88 billion and $4.95 billion, respectively.

Loans receivable include purchased impaired loans, which are loans acquired that are deemed to exhibit evidence of credit deterioration since origination and therefore, are classified as impaired. The accounting for purchased impaired loans is periodically updated for changes in the loans’ cash flow expectations, and reflected in interest income over the life of the loans as accretable yield. As of March 31, 2014, no allowance for credit losses was recorded in connection with purchased impaired loans, and the unpaid principal balance and carrying amount of these loans were $27.5 million and $16.6 million, respectively.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

The following table presents a roll-forward of accretable yield over the periods presented:

	Three Months Ended March 31,
	2014			2013
	(in thousands)
Beginning balance	$	2,989		$	1,332
Additions	0			1,774
Accretion to interest income	(593		)	(205		)
Reclassifications	(635		)	160
Ending balance	$	1,761		$	3,061

As of March 31, 2014 and December 31, 2013, net loans receivable included unamortized discounts on acquired loans of $26.2 million and $28.4 million, respectively. The following table presents, as of March 31, 2014, the five-year projected loan discount accretion to be recognized as an increase to interest income:

	Amount
	(in thousands)
Remainder of 2014	$	4,005

Years ended December 31,
2015		3,613
2016		2,239
2017		1,494
2018		1,011
2019		812

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

The following table sets forth details by segment for Sterling’s loan portfolio and related allowance as of the balance sheet dates:

	Residential Real Estate		Commercial Real Estate		Commercial		Consumer		Unallocated		Total
	(in thousands)
March 31, 2014
Loans receivable, gross:
Individually evaluated for impairment	$	13,675	$	55,706	$	40,947	$	0	$	0	$	110,328
Collectively evaluated for impairment	1,174,323		3,264,155		2,055,750		804,254		0		7,298,482
Total loans receivable, gross	$	1,187,998	$	3,319,861	$	2,096,697	$	804,254	$	0	$	7,408,810
Allowance for loan losses:
Individually evaluated for impairment	$	2,964	$	987	$	2,803	$	133	$	0	$	6,887
Collectively evaluated for impairment	8,742		39,917		33,328		26,476		20,626		129,089
Total allowance for loan losses	$	11,706	$	40,904	$	36,131	$	26,609	$	20,626	$	135,976
December 31, 2013
Loans receivable, gross:
Individually evaluated for impairment	$	7,924	$	58,232	$	37,794	$	0	$	0	$	103,950
Collectively evaluated for impairment	1,111,650		3,284,663		2,135,488		822,068		0		7,353,869
Total loans receivable, gross	$	1,119,574	$	3,342,895	$	2,173,282	$	822,068	$	0	$	7,457,819
Allowance for loan losses:
Individually evaluated for impairment	$	2,968	$	952	$	2,842	$	155	$	0	$	6,917
Collectively evaluated for impairment	11,277		40,201		39,272		27,423		12,204		130,377
Total allowance for loan losses	$	14,245	$	41,153	$	42,114	$	27,578	$	12,204	$	137,294

Purchased credit impaired loans included in loans collectively evaluated for impairment as of March 31, 2014 are $16.6 million and as of December 31, 2013 are $16.7 million.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

The following tables present a roll-forward by segment of the allowance for credit losses for the periods presented:

	Residential Real Estate			Commercial Real Estate			Commercial			Consumer			Unallocated			Total
	(in thousands)
2014 first quarter activity
Allowance for loan losses:
Beginning balance, Jan 1	$	14,245		$	41,153		$	42,114		$	27,578		$	12,204		$	137,294
Provisions	(2,453		)	(518		)	(5,384		)	(67		)	8,422			0
Charge-offs	(252		)	(635		)	(2,221		)	(1,336		)	0			(4,444		)
Recoveries	166			904			1,622			434			0			3,126
Ending balance, March 31	11,706			40,904			36,131			26,609			20,626			135,976
Reserve for unfunded credit commitments:
Beginning balance, Jan 1	3,320			998			3,132			3,599			72			11,121
Provisions	397			108			(114		)	(114		)	(277		)	0
Charge-offs	(222		)	0			0			0			0			(222		)
Recoveries	0			0			0			0			0			0
Ending balance, March 31	3,495			1,106			3,018			3,485			(205		)	10,899
Total credit allowance	$	15,201		$	42,010		$	39,149		$	30,094		$	20,421		$	146,875
2013 first quarter activity
Allowance for loan losses:
Beginning balance, Jan 1	$	19,847		$	48,094		$	41,874		$	25,602		$	18,928		$	154,345
Provisions	960			(1,091		)	(1,610		)	1,512			229			0
Charge-offs	(1,019		)	(2,923		)	(1,588		)	(1,644		)	0			(7,174		)
Recoveries	180			1,055			920			347			0			2,502
Ending balance, March 31	19,968			45,135			39,596			25,817			19,157			149,673
Reserve for unfunded credit commitments:
Beginning balance, Jan 1	2,230			405			2,806			2,118			443			8,002
Provisions	(309		)	(50		)	(373		)	604			128			0
Charge-offs	(12		)	0			0			0			0			(12		)
Recoveries	0			0			0			0			0			0
Ending balance, March 31	1,909			355			2,433			2,722			571			7,990
Total credit allowance	$	21,877		$	45,490		$	42,029		$	28,539		$	19,728		$	157,663

In establishing the allowance for loan losses, Sterling groups its loan portfolio into classes of loans collectively evaluated for impairment. The groups are further segregated based on internal risk ratings. Both qualitative and quantitative data are

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

considered in determining the probability of default and loss given default for each group of loans. The probability of default and loss given default are used to calculate an estimated inherent loss rate. If a loan is determined to be impaired, Sterling prepares an individual evaluation of the loan. The individual evaluation compares the present value of future cash flows or the fair value of the underlying collateral to the recorded investment in the loan. The results of the individual impairment evaluation would determine the need to record a charge-off or establish a specific reserve.

Sterling assigns risk rating classifications to its loans. These risk ratings are divided into the following groups:

Pass - the asset is considered of sufficient quality to preclude a Marginal rating. Pass assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral.

Marginal - the asset is susceptible to deterioration if stressed from a cash flow or earnings shock, with liquidity and leverage possibly below industry norms. The borrower may have few reserves to cover debt service, besides current income. A business generating cash flows that service the debt may be dependent on the successful reception of new products in the marketplace.

Special Mention - the asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or of Sterling’s credit position at some future date. Special Mention assets are not adversely classified and do not expose Sterling to sufficient risk to warrant adverse classification.

Substandard - the asset is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified have well-defined weaknesses. They are characterized by the distinct possibility that Sterling may sustain some loss if the deficiencies are not corrected.

Doubtful/Loss - the Doubtful asset has the weaknesses of those classified Substandard with the added characteristic that the weaknesses make collection in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. An asset classified Loss is the portion of the asset that is considered uncollectible and/or of such little value that its continuance as an asset, without a charge-off or establishment of a specific reserve, is not warranted. This classification does not necessarily mean that an asset has absolutely no recovery or salvage value; but rather, it is not practical or desirable to defer writing off an asset that is no longer deemed to have financial value, even though partial recovery may be recognized in the future.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

The following table presents credit quality indicators for Sterling’s loan portfolio grouped according to internally assigned risk ratings and performance status:

			Commercial Real Estate						Commercial
	Residential Real Estate		Investor CRE		Multifamily		Construction		Owner Occupied CRE		Commercial & Industrial		Consumer		Total		% of Total
	(in thousands)
March 31, 2014
Pass	$	1,107,383	$	609,598	$	2,031,012	$	22,824	$	775,855	$	514,739	$	777,947	$	5,839,358	79%
Marginal	53,313		430,241		87,379		58,376		503,862		169,777		15,765		1,318,713		18%
Special mention	7,533		37,006		6,798		1,107		58,875		17,668		5,411		134,398		2%
Substandard	16,805		32,185		915		1,433		41,718		12,478		4,998		110,532		1%
Doubtful/Loss	2,964		850		137		0		1,687		38		133		5,809		0%
Total	$	1,187,998	$	1,109,880	$	2,126,241	$	83,740	$	1,381,997	$	714,700	$	804,254	$	7,408,810	100%
Restructured	$	23,160	$	3,380	$	0	$	2,081	$	20,302	$	766	$	20	$	49,709	1%
Nonaccrual	14,717		22,538		0		783		20,657		2,661		3,732		65,088		1%
Nonperforming	37,877		25,918		0		2,864		40,959		3,427		3,752		114,797		2%
Performing	1,150,121		1,083,962		2,126,241		80,876		1,341,038		711,273		800,502		7,294,013		98%
Total	$	1,187,998	$	1,109,880	$	2,126,241	$	83,740	$	1,381,997	$	714,700	$	804,254	$	7,408,810	100%

December 31, 2013
Pass	$	1,038,460	$	602,384	$	2,058,031	$	14,591	$	785,237	$	521,711	$	794,032	$	5,814,446	78%
Marginal	52,154		435,022		87,830		53,742		544,329		177,998		15,955		1,367,030		18%
Special mention	7,808		44,934		9,296		1,128		61,103		17,761		6,193		148,223		2%
Substandard	18,184		31,613		1,140		2,232		38,709		24,672		5,733		122,283		2%
Doubtful/Loss	2,968		815		137		0		1,762		0		155		5,837		0%
Total	$	1,119,574	$	1,114,768	$	2,156,434	$	71,693	$	1,431,140	$	742,142	$	822,068	$	7,457,819	100%
Restructured	$	22,337	$	3,005	$	0	$	2,084	$	19,553	$	774	$	21	$	47,774	1%
Nonaccrual	15,571		23,709		222		1,582		20,472		3,230		4,516		69,302		1%
Nonperforming	37,908		26,714		222		3,666		40,025		4,004		4,537		117,076		2%
Performing	1,081,666		1,088,054		2,156,212		68,027		1,391,115		738,138		817,531		7,340,743		98%
Total	$	1,119,574	$	1,114,768	$	2,156,434	$	71,693	$	1,431,140	$	742,142	$	822,068	$	7,457,819	100%

Purchased credit impaired loans of $5.4 million as of March 31, 2014, and $5.7 million as of December 31, 2013, are included in the nonaccrual loans.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

Aging by class for Sterling’s loan portfolio as of March 31, 2014 and December 31, 2013 was as follows:

			Commercial Real Estate						Commercial
	Residential Real Estate		Investor CRE		Multifamily		Construction		Owner Occupied CRE		Commercial & Industrial		Consumer		Total		% of Total
	(in thousands)
March 31, 2014
30 - 59 days past due	$	5,741	$	3,017	$	1,519	$	0	$	9,302	$	659	$	6,435	$	26,673	0%
60 - 89 days past due	924		2,511		411		0		4,870		104		1,515		10,335		0%
> 90 days past due	15,101		12,332		0		783		11,551		2,346		3,396		45,509		1%
Total past due	21,766		17,860		1,930		783		25,723		3,109		11,346		82,517		1%
Current	1,166,232		1,092,020		2,124,311		82,957		1,356,274		711,591		792,908		7,326,293		99%
Total Loans	$	1,187,998	$	1,109,880	$	2,126,241	$	83,740	$	1,381,997	$	714,700	$	804,254	$	7,408,810	100%
> 90 days and accruing	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	0%
December 31, 2013
30 - 59 days past due	$	2,544	$	1,575	$	378	$	0	$	6,069	$	1,066	$	5,332	$	16,964	0%
60 - 89 days past due	1,258		1,230		0		0		1,350		1,893		1,473		7,204		0%
> 90 days past due	15,175		12,553		222		1,582		12,086		1,997		4,030		47,645		1%
Total past due	18,977		15,358		600		1,582		19,505		4,956		10,835		71,813		1%
Current	1,100,597		1,099,410		2,155,834		70,111		1,411,635		737,186		811,233		7,386,006		99%
Total Loans	$	1,119,574	$	1,114,768	$	2,156,434	$	71,693	$	1,431,140	$	742,142	$	822,068	$	7,457,819	100%
> 90 days and accruing	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0	0%

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

Sterling considers its nonperforming loans to be impaired loans. The following table summarizes impaired loans by class as of March 31, 2014 and December 31, 2013:

					Book Balance
	Unpaid Principal Balance		Charge-Offs		Without Specific Reserve		With Specific Reserve		Specific Reserve
	(in thousands)
March 31, 2014
Residential real estate	$	43,709	$	5,832	$	29,644	$	8,233	$	2,964
CRE:
Investor CRE	32,325		6,407		20,809		5,109		850
Multifamily	0		0		0		0		0
Construction	5,030		2,166		2,864		0		0
Total CRE	37,355		8,573		23,673		5,109		850
Commercial:
Owner Occupied CRE	44,765		3,806		26,172		14,787		2,766
C&I	10,218		6,791		2,217		1,210		33
Total commercial	54,983		10,597		28,389		15,997		2,799
Consumer	3,896		144		3,220		532		133
Total	$	139,943	$	25,146	$	84,926	$	29,871	$	6,746

					Book Balance
	Unpaid Principal Balance		Charge-Offs		Without Specific Reserve		With Specific Reserve		Specific Reserve
	(in thousands)
December 31, 2013
Residential real estate	$	43,910	$	6,002	$	29,984	$	7,924	$	2,968
CRE:
Investor CRE	32,908		6,194		21,732		4,982		815
Multifamily	222		0		222		0		0
Construction	12,986		9,320		3,666		0		0
Total CRE	46,116		15,514		25,620		4,982		815
Commercial:
Owner Occupied CRE	43,810		3,785		26,154		13,871		2,842
C&I	10,806		6,802		4,004		0		0
Total commercial	54,616		10,587		30,158		13,871		2,842
Consumer	4,770		233		3,953		584		155
Total	$	149,412	$	32,336	$	89,715	$	27,361	$	6,780

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

The following table presents the average book balance and interest income recognized for impaired loans by class for the periods presented:

	Three Months Ended March 31,
	2014				2013
	Average Book Balance		Interest Income Recognized		Average Book Balance		Interest Income Recognized
	(in thousands)
Residential real estate	$	37,893	$	152	$	43,127	$	152
Investor CRE	26,316		42		47,490		347
Multifamily	111		0		6,487		35
Construction	3,265		38		16,951		1,701
Owner Occupied CRE	40,492		174		58,785		394
C&I	3,715		6		4,723		34
Consumer	4,144		0		6,668		5
Total	$	115,936	$	412	$	184,231	$	2,668

The following tables present loans that were modified and recorded as troubled debt restructurings (“TDR’s”) during the following period:

	Three Months Ended March 31,
	2014					2013
	Number of Contracts	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Contracts	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
	(in thousands, except number of contracts)
Residential real estate	4	$	1,271	$	1,274	9	$	2,134	$	1,929
Investor CRE	1	439		437		3	1,482		1,180
Multifamily	0	0		0		0	0		0
Construction	0	0		0		0	0		0
Owner Occupied CRE	1	1,000		996		3	2,432		2,414
C&I	0	0		0		0	0		0
Consumer	0	0		0		0	0		0
Total (1)	6	$	2,710	$	2,707	15	$	6,048	$	5,523

(1) Amounts exclude specific loan loss reserves.

Substantially all TDRs are determined to be impaired prior to being restructured. As such, they are individually evaluated for impairment, unless they are considered homogeneous loans in which case they are collectively evaluated for impairment. As of March 31, 2014, Sterling had specific reserves of $62,000 on TDRs which were restructured during the previous three months. There were no loans that were removed from TDR status during the three months ended March 31, 2014.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

The following table shows the post-modification recorded investment by class for TDRs restructured during the periods presented by the primary type of concession granted:

	Principal Deferral		Rate Reduction		Extension of Terms		Forgiveness of Principal and/or Interest		Total
	(in thousands)
Three Months Ended March 31, 2014
Residential Real Estate	$	516	$	758	$	0	$	0	$	1,274
Investor CRE	437		0		0		0		437
Multifamily	0		0		0		0		0
Construction	0		0		0		0		0
Owner CRE	0		0		996		0		996
C&I	0		0		0		0		0
Consumer	0		0		0		0		0
Total	$	953	$	758	$	996	$	0	$	2,707

Three Months Ended March 31, 2013
Residential Real Estate	$	0	$	1,395	$	203	$	331	$	1,929
Investor CRE	0		1,139		0		41		1,180
Multifamily	0		0		0		0		0
Construction	0		0		0		0		0
Owner CRE	730		1,684		0		0		2,414
C&I	0		0		0		0		0
Consumer	0		0		0		0		0
Total	$	730	$	4,218	$	203	$	372	$	5,523

Restructurings that result in the forgiveness of principal or interest are typically part of a bankruptcy settlement. There were two Owner CRE TDRs with a value of $107,000 that were completed during the twelve month period ended March 31, 2014 that subsequently defaulted during the period. During the three months ended March 31, 2014, and 2013, there were $1.1 million, and $1.2 million of TDRs that were returned to accrual status, respectively.

The following table outlines accrual status of TDRs as of the dates shown:

	March 31,
	2014		2013
	(in thousands)
TDRs on nonaccrual status	$	14,987	$	22,383
TDRs on accrual status	34,723		47,102
Total TDRs	$	49,710	$	69,485

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

5. Goodwill and Other Intangible Assets:

Goodwill represents the excess of a purchase price over the net assets acquired. The following table presents a roll-forward of Sterling’s goodwill:

	2014		2013
	(in thousands)
Beginning balance, January 1	$	52,018	$	22,577
Acquired	0		0
Ending balance, March 31	$	52,018	$	22,577

Goodwill is not amortized, but is reviewed for impairment at least annually. Other intangible assets at March 31, 2014 and December 31, 2013 were comprised of core deposit intangibles from various acquisitions, and other identifiable intangibles related to the trust and wealth management business acquired in 2012. The following table provides details of other intangible assets:

	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
	(in thousands)
March 31, 2014
Core deposit intangibles	$	58,707	$	45,823	$	12,884
Other	1,800		342		1,458
	$	60,507	$	46,165	$	14,342
December 31, 2013
Core deposit intangibles	$	58,707	$	44,652	$	14,055
Other	1,800		294		1,506
	$	60,507	$	44,946	$	15,561

The following table provides the projected core deposit and other intangibles amortization expense for the remainder of 2014 and the next five years:

	Amount
Remainder of 2014	$	2,641

Years ended December 31,
2015	2,779
2016	1,606
2017	1,447
2018	1,314
2019	1,232

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

6. Junior Subordinated Debentures:

Sterling has raised regulatory capital through the formation of trust subsidiaries and has assumed similar obligations through mergers with other financial institutions. The trusts are business trusts in which Sterling owns all of the common equity. The proceeds from the sale of the securities were used to purchase junior subordinated debentures issued by Sterling. Sterling’s obligations under the junior subordinated debentures and related documents, taken together, constitute a full and unconditional guarantee by Sterling of the trusts’ obligations. The junior subordinated debentures are treated as debt of Sterling. The junior subordinated debentures mature 30 years after issuance, and are redeemable, subject to certain conditions. As of March 31, 2014, all of Sterling’s junior subordinated debentures were redeemable at par, at their applicable quarterly or semiannual interest payment dates.

Details of the junior subordinated debentures are as follows:

Maturity

Next Interest

March 31, 2014

Subsidiary Issuer

Issue Date

Date

Payment Date

Rate

Amount

(in thousands)

Sterling Capital Trust IX

July 2007

Oct 2037

April 2014

1.64

46,392

Sterling Capital Trust VIII

Sept 2006

Dec 2036

June 2014

1.86

51,547

Sterling Capital Trust VII

June 2006

June 2036

June 2014

1.76

56,702

Lynnwood Financial Statutory Trust II

June 2005

June 2035

June 2014

2.03

10,310

Sterling Capital Trust VI

June 2003

Sept 2033

June 2014

3.43

10,310

Sterling Capital Statutory Trust V

May 2003

June 2033

June 2014

3.49

20,619

Sterling Capital Trust IV

May 2003

May 2033

May 2014

3.39

10,310

Sterling Capital Trust III

April 2003

April 2033

April 2014

3.49

14,433

Lynnwood Financial Statutory Trust I

Mar 2003

Mar 2033

June 2014

3.39

9,426

Klamath First Capital Trust I

July 2001

July 2031

July 2014

4.09

15,251

2.36

245,300

* Weighted average rate.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

7. Earnings Per Share:

The following table presents the computations for basic and diluted earnings per common share:

	Three Months Ended March 31,
	2014		2013
	(in thousands, except shares and per share amounts)
Numerator:
Net income	$	12,353	$	22,678
Denominator:
Weighted average shares outstanding - basic	62,398,357		62,242,183
Dilutive securities outstanding	1,332,383		762,601
Weighted average shares outstanding - diluted	63,730,740		63,004,784
Earnings per share - basic	$	0.20	$	0.36
Earnings per share - diluted	$	0.19	$	0.36
Antidilutive securities outstanding (weighted average):
Stock options	6,103		18,315
Restricted shares	47,359		1,295
Total antidilutive securities outstanding	53,462		19,610

8. Noninterest Expense:

The following table details the components of Sterling’s noninterest expense:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
Employee compensation and benefits	$	47,576	$	42,436
OREO operations	1,508		2,030
Occupancy and equipment	7,629		9,859
Data processing	7,737		6,577
FDIC insurance	1,178		1,930
Professional fees	3,241		5,952
Depreciation	3,989		2,934
Advertising	1,666		2,436
Travel and entertainment	1,200		1,171
Merger and acquisition	2,715		1,036
Amortization of other intangible assets	1,218		1,659
Other	5,508		3,909
Total noninterest expense	$	85,165	$	81,929

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

9. Income Taxes:

During the three months ended March 31, 2014, Sterling recognized income tax expense of $6.4 million, reflecting a 34% effective tax rate, compared to income tax expense of $9.9 million and an effective tax rate of 30% for the three months ended March 31, 2013. The effective tax rate for the three months ended March 31, 2013 reflected permanent differences between book income and tax income, from the Borrego acquisition bargain purchase gain, in addition to tax exempt municipal bond and BOLI income. As of March 31, 2014, the net deferred tax asset was $275.5 million, including $241.7 million of net operating loss and tax credit carry-forwards, compared with $284.1 million as of December 31, 2013, including $242.3 million of net operating loss and tax credit carry-forwards.

10. Stock Based Compensation:

The following table presents a summary of restricted stock unit activity during the period:

	Shares		Weighted Average Grant Price
Balance, January 1, 2014	454,079		$	21.27
Granted	170,492		33.41
Vested	(107,612	)	32.84
Expired	(3,722	)	20.57
Outstanding, March 31, 2014	513,237		$	22.88

The following table presents a summary of stock option activity during the period:

	Shares		Weighted Average Exercise Price
Balance, January 1, 2014	252,626		$	50.87
Granted	0		0.00
Exercised	0		0.00
Expired	(1,947	)	1,190.00
Cancelled	0		0.00
Outstanding, March 31, 2014	250,679		$	42.02
Exercisable, March 31, 2014	102,022		$	71.75

The following table presents the weighted average remaining contractual life and the aggregate intrinsic value for stock options as of the dates indicated:

	Stock Options
	Outstanding			Exercisable
	Weighted Average Life	Intrinsic Value		Weighted Average Life	Intrinsic Value
	(dollars in thousands)
March 31, 2014	8.7 years	$	2,861	8.5 years	$	1,210
December 31, 2013	9.0 years	3,046		8.4 years	889

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

As of March 31, 2014, a total of 4.8 million shares remained available for grant under Sterling’s 2007 and 2010 Long-Term Incentive Plans. The stock options outstanding under these plans have terms of six and 10 years. Stock based compensation expense recognized during the periods presented was as follows:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
Stock options	$	199	$	104
Restricted stock	896		991
Total	$	1,095	$	1,095

As of March 31, 2014, unrecognized equity compensation expense totaled $11.9 million as the underlying outstanding awards had not yet been earned. This amount will be recognized over a weighted average period of 3.2 years.

11. Derivatives and Hedging:

Sterling enters into interest rate swap transactions with loan customers. The interest rate risk on these swap transactions is hedged by Sterling entering into offsetting interest rate swap agreements with various unaffiliated counterparties (“broker-dealers”). Both customer and broker-dealer related interest rate derivatives are carried at fair value, which includes consideration of counterparty credit risk.

As part of its mortgage banking activities, Sterling makes commitments to prospective borrowers on residential mortgage loan applications, which may have the interest rates locked for a period of 10 to 60 days or longer, if extended (“interest rate lock commitments”). The fair value of interest rate lock commitments presented in the table below has been adjusted to reflect the expected fallout. These interest rate lock commitments, and loans held for sale that have not been committed to investors, give rise to interest rate risk. Sterling hedges the interest rate risk arising from these mortgage banking activities by entering into forward sales agreements on MBS with third parties (“forward commitments”).

Residential mortgage loans held for sale that were not committed to investors were $134.8 million and $129.5 million as of March 31, 2014 and December 31, 2013, respectively. The following table summarizes Sterling’s mortgage banking operations and interest rate swaps:

	March 31, 2014
			Fair Value
	Notional		Asset		Liability
	(in thousands)
Interest rate lock commitments, net	$	136,528	$	2,569	$	0
Forward commitments	243,500		50		0
Interest rate swaps - broker-dealer	20,693		0		580
Interest rate swaps - customer	20,693		557		0

	December 31, 2013
			Fair Value
	Notional		Asset		Liability
	(in thousands)
Interest rate lock commitments, net	$	99,215	$	1,740	$	0
Forward commitments	211,000		2,231		0
Interest rate swaps - broker-dealer	21,054		0		516
Interest rate swaps - customer	22,090		508		0

The fair value of these derivatives is included in other assets and liabilities, respectively. Gains and losses on Sterling’s mortgage banking derivative transactions are included in mortgage banking income, while gains and losses on Sterling’s interest rate swap agreements are included in other noninterest income. The following table sets forth these gains and losses:

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

	Three Months Ended March 31,
	2014			2013
	(in thousands)
Mortgage banking operations	$	(749	)	$	(10,168	)
Other noninterest income	(4		)	76

Also included in mortgage banking income were loan servicing fees of $475,000 and $2.7 million for the three months ended March 31, 2014 and 2013, respectively.

12. Offsetting Assets and Liabilities:

Certain derivatives and repurchase agreements are subject to net settlement. Depending on the governing disclosure rules or elections made by management, amounts are presented gross or net on a balance sheet. The following summarizes the presentation of Sterling’s interest rate swaps and securities sold under repurchase agreements, all of which are presented gross on Sterling’s balance sheet:

	Amount		Amount Offset on Balance		Amount Presented on		Pledged Collateral on Balance Sheet				Net
	Recognized		Sheet		Balance Sheet		Securities		Cash		Position
	(in thousands)
March 31, 2014
Assets
Interest rate swaps	$	557	$	0	$	557	$	0	$	0	$	557
Total	$	557	$	0	$	557	$	0	$	0	$	557
Liabilities
Securities sold under repurchase agreements	$	539,972	$	0	$	539,972	$	539,972	$	0	$	0
Interest rate swaps	580		0		580		0		580		0
Total	$	540,552	$	0	$	540,552	$	539,972	$	580	$	0
December 31, 2013
Assets
Interest rate swaps	$	508	$	0	$	508	$	0	$	0	$	508
Total	$	508	$	0	$	508	$	0	$	0	$	508
Liabilities
Securities sold under repurchase agreements	$	531,679	$	0	$	531,679	$	531,679	$	0	$	0
Interest rate swaps	516		0		516		0		516		0
Total	$	532,195	$	0	$	532,195	$	531,679	$	516	$	0

Sterling’s cash, and investments and MBS included cash and securities pledged against its interest rate swap and securities sold under repurchase agreements liabilities.

13. Fair Value:

Fair value estimates are determined as of a specific date using quoted market prices, where available, or various assumptions and estimates. As the assumptions underlying these estimates change, the fair value of the financial instruments will change. The use of assumptions and various valuation techniques, as well as the absence of secondary markets for certain financial

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

instruments, will likely reduce the comparability of fair value disclosures between financial institutions. Accordingly, the aggregate fair value amounts presented do not represent and should not be construed to represent the full underlying value of Sterling.

The carrying amounts and fair values of financial instruments as of the periods indicated were as follows. Other assets are comprised of FHLB stock and derivatives, while other liabilities are comprised of derivatives:

		March 31, 2014				December 31, 2013
	Level	Carrying Amount		Fair Value		Carrying Amount		Fair Value
		(in thousands)
Financial assets:
Cash and cash equivalents	1	$	443,566	$	443,566	$	545,435	$	545,435
Investments and MBS:
Available for sale	2	1,386,382		1,386,382		1,429,812		1,429,812
Held to maturity	2	154		154		165		165
Loans held for sale	2	229,084		229,084		138,952		138,952
Loans receivable, net	3	7,285,163		7,306,368		7,331,228		7,344,637
Mortgage servicing rights, net	3	59,955		75,118		60,100		75,017
Other assets (1)	2	97,289		97,289		99,756		99,756
Financial liabilities:
Non-maturity deposits	2	5,491,427		5,491,427		5,373,544		5,373,544
Deposits with stated maturities	2	1,641,443		1,656,275		1,701,446		1,717,039
Borrowings	2	1,761,331		1,684,343		1,923,081		1,845,614
Other liabilities	2	580		580		516		516

(1) Other assets includes FHLB stock. As of March 31, 2014 and December 31, 2013, FHLB stock was carried at $94.1 million and $95.3 million, respectively.

Companies have the option of carrying financial assets and liabilities at fair value, which can be implemented on all or individually selected financial instruments. The framework for defining and measuring fair value requires that one of three valuation methods be used to determine fair market value: the market approach, the income approach or the cost approach. To increase consistency and comparability in fair value measurements and related disclosures, the standard also creates a fair value hierarchy to prioritize the inputs to these valuation methods into the following three levels:

· Level 1 inputs are a select class of observable inputs, based upon the quoted prices for identical instruments in active markets that are accessible as of the measurement date, and are to be used whenever available.

· Level 2 inputs are other types of observable inputs, such as quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; or other inputs that are observable or can be derived from or supported by observable market data. Level 2 inputs are to be used whenever Level 1 inputs are not available.

· Level 3 inputs are substantially unobservable, reflecting the reporting entity’s own assumptions regarding what market participants would assume when pricing a financial instrument. Level 3 inputs are to be used only when Level 1 and Level 2 inputs are unavailable.

The methods and assumptions used to estimate the fair value of certain financial instruments are as follows:

Cash and Cash Equivalents. The carrying value of cash and cash equivalents approximates fair value due to the relatively short-term nature of these instruments.

Investments and MBS. The fair value of investments and MBS are provided by a third-party pricing service. These valuations are based on market data using pricing models that vary by asset class and incorporate available current trade, bid and other market information, and for structured securities, cash flow and loan performance data. The pricing processes utilize benchmark curves, benchmarking of similar securities, sector groupings, and matrix pricing. Option adjusted spread models are also used to

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

assess the impact of changes in interest rates and to develop prepayment scenarios. All models and processes used take into account market convention.

Loans Held for Sale. Sterling has elected to carry residential loans held for sale at fair value. The fair values of residential loans are based on investor quotes in the secondary market, determined by the fair value of options and commitments to sell or issue mortgage loans. The fair value election was made to match changes in the value of these loans with the value of their economic hedges. Loan origination fees, costs and servicing rights, which were previously deferred on these loans, are now recognized as part of the loan value at origination. Nonresidential loans held for sale are carried at the lower of cost or market (“LOCOM”) due to the frequency of these loan sale transactions, as well as the availability of market data for these loan types.

Loans Receivable. The fair value of performing loans is estimated by discounting the cash flows using interest rates that consider the current credit and interest rate risk inherent in the loans and current economic and lending conditions and does not incorporate the exit price concept of fair value. The fair value of nonperforming collateral-dependent loans is estimated based upon the value of the underlying collateral. The fair value of other nonperforming loans is estimated by discounting management’s current estimate of future cash flows using a rate estimated to be commensurate with the risks involved. Changes in the various inputs in the fair value of nonperforming loans will have a significant impact on the fair value.

Mortgage Servicing Rights. The fair value of mortgage servicing rights is estimated using a discounted cash flow model to arrive at the net present value of expected earnings from the servicing of the loans. Model inputs include prepayment speeds, market interest rates, contractual interest rates on the loans being serviced, the amount of other fee income generated and other factors. The fair value of mortgage servicing rights is impacted by any changes in these inputs.

Deposits. The fair values of deposits subject to immediate withdrawal such as interest and noninterest bearing checking, regular savings, and money market deposit accounts, are equal to the amounts payable on demand at the reporting date. Fair values for time deposits are estimated by discounting future cash flows using interest rates currently offered on time deposits with similar remaining maturities.

Borrowings. The carrying amounts of short-term borrowings under repurchase agreements, federal funds purchased, short-term FHLB advances and other short-term borrowings approximate their fair values due to the relatively short period of time between the origination of the instruments and the expected payment dates on the instruments. The fair value of long-term FHLB advances and other long-term borrowings is estimated using discounted cash flow analysis based on Sterling’s current incremental borrowing rates for similar types of borrowing arrangements with similar remaining terms.

Derivatives. Valuations of interest rate lock commitments and forward commitments are estimated using quoted market prices for similar instruments. Fair values for the interest rate swaps are based on the present value differential between the fixed interest rate payments and the floating interest rate payments as projected by the forward interest rate curve, over the term of the swap, with the recorded amount net of any credit valuation adjustments.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents Sterling’s financial instruments that are measured at fair value on a recurring basis:

	Total		Level 1		Level 2		Level 3
	(in thousands)
March 31, 2014
Investment securities available for sale:
MBS	$	1,206,160	$	0	$	1,206,160	$	0
Municipal bonds	180,000		0		180,000		0
Other	222		0		222		0
Total investment securities available for sale	1,386,382		0		1,386,382		0
Loans held for sale	146,336		0		146,336		0
Loans receivable, net	25,741		0		0		25,741
Other assets - derivatives	3,176		0		3,176		0
Total assets	$	1,561,635	$	0	$	1,535,894	$	25,741
Other liabilities - derivatives	580		0		580		0
Total liabilities	$	580	$	0	$	580	$	0
December 31, 2013
Investment securities available for sale:
MBS	$	1,239,900	$	0	$	1,239,900	$	0
Municipal bonds	189,690		0		189,690		0
Other	222		0		222		0
Total investment securities available for sale	1,429,812		0		1,429,812		0
Loans held for sale	138,952		0		138,952		0
Loans receivable, net	26,462		0		0		26,462
Other assets - derivatives	4,479		0		4,479		0
Total assets	$	1,599,705	$	0	$	1,573,243	$	26,462
Other liabilities - derivatives	516		0		516		0
Total liabilities	$	516	$	0	$	516	$	0

The following table presents the changes in fair value for loans receivable measured at fair value on a recurring basis using Level 3 inputs:

	Three months ended March 31,
	2014			2013
	(in thousands)
Beginning balance	$	26,462		$	23,177
Transfers from held for sale	416			16,571
Principal payments and payoffs	(1,261		)	(806		)
Valuation adjustments	124			(47		)
Ending balance	$	25,741		$	38,895

The change in value between the aggregate fair value and the aggregate unpaid principal balance of loans receivable carried at fair value were a gain $124,000 during the three months ended March 31, 2014, and a loss of $47,000 during the three months

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

ended March 31, 2013, and were included in income from mortgage banking operations. Valuation adjustments were based on current market rates for comparable loans, in addition to discounts applied based on specific loan characteristics.

Derivatives include mortgage banking interest rate lock and loan delivery commitments, and interest rate swaps. See Note 11 for a further discussion of these derivatives. The difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale that are carried at fair value were included in earnings as follows:

	Three Months Ended March 31,
	2014		2013
	(in thousands)
Mortgage banking operations	$	1,781	$	(10,189	)

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

Sterling may be required, from time to time, to measure certain assets at fair value on a non-recurring basis from application of LOCOM accounting or write-downs of individual assets. The following table presents the carrying value for these assets as of the dates indicated:

	March 31, 2014								Losses During the
	Total Carrying Value		Level 1		Level 2		Level 3		Three Months Ended March 31, 2014
	(in thousands)
Loans held for sale	$	82,748	$	0	$	0	$	82,748	$	(6,811	)
Loans	31,269		0		0		31,269		(983		)
OREO	989		0		0		989		(138		)
Mortgage servicing rights	59,955		0		0		59,955		(96		)

	December 31, 2013								Gains (Losses)
	Total Carrying Value		Level 1		Level 2		Level 3		During the Year Ended December 31, 2013
Loans	$	118,037	$	0	$	0	$	118,037	$	(15,352	)
OREO	522		0		0		522		(930		)
Mortgage servicing rights	60,100		0		0		60,100		6,948

The loans held for sale disclosed above relate to loans that were identified to be divested as part of the branch sales that are expected to be sold in the second quarter of 2014. Based on the agreement to sell those branches, the loans will be sold at a loss. The loans disclosed above represent the net balance of loans as of period end for which a charge-off or specific reserve has been recognized during the three months ended March 31, 2014, and the year ended December 31, 2013, respectively, with these losses comprised of charge-offs and increases in the specific reserve. OREO represents the carrying value of properties for which a specific reserve was recorded during the periods presented as a result of updated appraisals subsequent to foreclosure. The appraisals may use comparable sales and income approach valuation methods and may be adjusted to reflect current market or property information. In addition to the loan and OREO losses disclosed above, charge-offs at foreclosure for properties held as of period end totaled $129,000 and $884,000 for the three months ended March 31, 2014 and the year ended December 31, 2013, respectively. Fair value adjustments to the mortgage servicing rights were mainly due to market derived assumptions associated with mortgage prepayment speeds. Sterling carries its mortgage servicing rights at LOCOM, and they are accordingly measured at fair value on a non-recurring basis. Qualitative information regarding the fair value measurements for Level 3 financial instruments are as follows:

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

	March 31, 2014
	Method	Inputs
Loans	Income, Market, Comparable Sales, Discounted Cash Flows	External appraised values; probability weighting of broker price opinions; management assumptions regarding market trends or other relevant factors; selling costs ranging from 4.5% to 9%.
OREO	Income, Market, Comparable Sales, Discounted Cash Flows	External appraised values; probability weighting of broker price opinions; management assumptions regarding market trends or other relevant factors; selling costs ranging from 4.5% to 9%.
Mortgage servicing rights	Discounted Cash Flow	Weighted average prepayment speed: residential 9.6%, commercial 12.1%; weighted average discount rate: residential 9.7%, commercial 15.8%.

14. Regulatory Capital:

The following table sets forth the respective regulatory capital positions for Sterling and Sterling Bank as of March 31, 2014:

	Actual			Adequately Capitalized			Well-Capitalized
	Amount		Ratio	Amount		Ratio	Amount		Ratio
	(in thousands)
Tier 1 leverage ratio
Sterling	$	1,135,769	11.5%	$	393,586	4.0%	$	491,982	5.0%
Sterling Bank	1,100,641		11.2%	393,456		4.0%	491,820		5.0%
Tier 1 risk-based capital ratio
Sterling	1,135,769		14.9%	305,534		4.0%	458,300		6.0%
Sterling Bank	1,100,641		14.4%	305,599		4.0%	458,399		6.0%
Total risk-based capital ratio
Sterling	1,231,883		16.1%	611,067		8.0%	763,834		10.0%
Sterling Bank	1,196,775		15.7%	611,198		8.0%	763,998		10.0%

15. Segment Information:

Sterling’s operations are divided into two primary business segments that represent its core businesses:

· Community Banking - providing traditional banking services through the retail banking, private banking and commercial banking groups, including the originating and servicing of commercial real estate, owner occupied CRE and C&I loans.

· Home Loan Division - originating and selling residential real estate loans through its mortgage banking operations, on both a servicing-retained and servicing-released basis.

The Eliminations caption represents intercompany eliminations.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

	As of and for the Three Months Ended March 31, 2014
	Community Banking		Home Loan Division			Eliminations			Total
	(in thousands)
Interest income	$	94,247	$	2,419		$	0		$	96,666
Interest expense	12,182		0			796			12,978
Net interest income	82,065		2,419			(796		)	83,688
Provision for credit losses	0		0			0			0
Noninterest income	10,531		9,679			0			20,210
Noninterest expense	67,730		17,330			105			85,165
Income (loss) before income taxes	$	24,866	$	(5,232	)	$	(901	)	$	18,733
Total assets	$	10,028,063	$	154,239		$	26,235		$	10,208,537

	As of and for the Three Months Ended March 31, 2013
	Community Banking		Home Loan Division		Eliminations			Total
	(in thousands)
Interest income	$	83,690	$	7,067	$	0		$	90,757
Interest expense	12,419		0		1,444			13,863
Net interest income	71,271		7,067		(1,444		)	76,894
Provision for credit losses	0		0		0			0
Noninterest income	21,185		16,373		8			37,566
Noninterest expense	62,453		17,472		2,004			81,929
Income (loss) before income taxes	$	30,003	$	5,968	$	(3,440	)	$	32,531
Total assets	$	8,942,231	$	308,209	$	5,996		$	9,256,436

16. Commitments and Contingencies:

Merger Litigation. Sterling, its directors and Umpqua Holdings Corporation (“Umpqua”) are named as defendants in three lawsuits pending in the Superior Court of Washington in and for Spokane County, which have been consolidated under the caption In re Sterling Financial Corp. Merger Litigation, Lead No. 13-2-03848-4. The consolidated litigation generally alleges that the directors of Sterling breached their duties to the Sterling shareholders by approving the Merger, failing to take steps to maximize shareholder value, engaging in a flawed sales process, and agreeing to deal protection provisions in the merger agreement that are alleged to unduly favor Umpqua. Umpqua is alleged to have aided and abetted the alleged breaches of duty. The consolidated litigation also alleges that the disclosures approved by the Sterling board in connection with the Merger and the vote thereon are false and misleading in various respects. As relief, the complaints seek, among other things, an injunction against consummation of the Merger, rescission of the Merger if it is effected, damages in an unspecified amount, and the payment of plaintiffs’ attorneys’ fees and costs. The defendants believe that the lawsuits are without merit. On January 16, 2014 the parties to the consolidated litigation entered into a memorandum of understanding to settle the consolidated litigation (such memorandum including plaintiffs’ agreement to stay the consolidated litigation, except for proceedings relating to the settlement), subject to court approval and other customary conditions, including the execution of definitive documentation. The proposed settlement covers all holders of Sterling common stock (other than the defendants and their immediate families, heirs and assigns) from and including November 1, 2012 until the consummation of the Merger. The proposed settlement provides for the defendants to make certain additional disclosures, which were included in the proxy statement/prospectus that was mailed to Sterling shareholders in connection with the special meeting at which the Merger was approved. The proposed settlement does not provide for any other consideration from the defendants, including any monetary consideration (other than potentially attorneys’ fees as described in the following paragraph). Sterling shareholders who are members of the proposed settlement class will, at a later date, receive written notice containing the full terms of the proposed settlement and proposed release of class claims and related matters.

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

In the event that the parties enter into a settlement, a hearing will be scheduled at which the Superior Court of Washington in and for Spokane County will consider the fairness, reasonableness, and adequacy of the settlement. If the settlement is finally approved by the court, it will resolve and release all claims in the consolidated litigation that were or could have been brought challenging any aspect of the proposed Merger, the merger agreement and the transactions contemplated thereby, and any disclosure made in connection therewith (but excluding dissenters’ rights pursuant to Chapter 23B.13 of the WBCA), among other claims, pursuant to terms that will be disclosed to shareholders prior to final approval of the settlement. In addition, in connection with the settlement, the parties contemplate that plaintiffs’ counsel will file a petition in the Superior Court of Washington in and for Spokane County for an award of attorneys’ fees and expenses to be paid by Sterling or its successor, which the defendants may oppose. Sterling or its successor will pay or cause to be paid any attorneys’ fees and expenses awarded by the Superior Court of Washington in and for Spokane County. There can be no assurance that the parties will ultimately enter into a settlement or that the Superior Court of Washington in and for Spokane County will approve the settlement even if the parties were to enter into such stipulation. In such event, the proposed settlement as contemplated by the memorandum of understanding may be terminated. Sterling management believes the proposed settlement will have no adverse material impact on Sterling.

Neither the memorandum of understanding nor the ultimate settlement is, and neither should be construed as, an admission of wrongdoing or liability by any defendant. Sterling, its directors and Umpqua continue to believe that the consolidated litigation is without merit and vigorously deny the allegations that Sterling’s directors breached their fiduciary duties.

Securities Class Action Litigation. On December 11, 2009, a putative securities class action complaint, captioned City of Roseville Employees’ Retirement System v. Sterling Financial Corp., et al., No. CV 09-00368-EFS, was filed in the United States District Court for the Eastern District of Washington against Sterling and certain of its current and former officers. The Court appointed City of Roseville Employees’ Retirement System as lead plaintiff on March 9, 2010. On June 18, 2010, lead plaintiff filed a consolidated complaint alleging that the defendants violated sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 by making false and misleading statements concerning our business and financial results. The consolidated complaint purported to be brought on behalf of a class of persons who purchased or otherwise acquired Sterling’s stock during the period from July 23, 2008 to October 15, 2009. The consolidated complaint alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by failing to disclose the extent of Sterling’s delinquent commercial real estate, construction and land development loans, properly record losses for impaired loans, and properly reserve for loan losses, thereby causing Sterling’s stock price to be artificially inflated during the purported class period. Plaintiffs sought unspecified damages and attorneys’ fees and costs. On August 30, 2010, Sterling moved to dismiss the Complaint. On March 2, 2011, after complete briefing, the court held a hearing on the motion to dismiss. On August 5, 2013, the court granted the motion to dismiss without prejudice. On October 11, 2013, the lead plaintiff filed an amended consolidated complaint. The amended consolidated complaint names the same defendants, specifies the same class period, alleges the same violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seeks the same relief. The amended consolidated complaint contains similar allegations of improper disclosure regarding Sterling’s lending practices, status of loans and reserving and accounting for loans. On January 24, 2014, Sterling moved to dismiss the amended consolidated complaint. Sterling believes the lawsuit is without merit and continues to vigorously defend against it. Failure by Sterling to obtain a favorable resolution of the claims set forth in the complaint could have a material adverse effect on our business, results of operations and financial condition. Currently, a loss resulting from these claims is not considered probable or reasonably estimable in amount.

Additionally, Sterling is involved in ongoing litigation, primarily related to its normal business operations. When establishing a liability for contingent litigation losses, Sterling determines a range of potential losses for each matter that is both probable and estimable, and records the amount it considers to be the best estimate within the range. For these matters and others where an unfavorable outcome is reasonably possible but not probable, there is no estimable range of possible losses. Sterling believes that the eventual outcome from these cases will not, individually or in the aggregate, have a material adverse effect on its consolidated financial position.

17. Subsequent Event:

On September 11, 2013, Sterling entered into a definitive agreement to merge (the “Merger”) with and into Umpqua, with headquarters in Portland, Oregon. As of the close of business on April 18, 2014, the Merger was completed with Sterling merging with and into Umpqua, as the surviving corporation in the Merger. Sterling Bank was merged with and into Umpqua Bank, an Oregon state chartered bank and wholly owned subsidiary of Umpqua. The combined company will operate under the

STERLING FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2014

Umpqua Bank name and brand. Under the terms of the Merger, Sterling shareholders received 1.671 shares of Umpqua common stock and $2.18 in cash, without interest, for each share of Sterling common stock.

On February 19, 2014, Sterling entered into a definitive agreement for the sale of six depository branches located in Coos County and Douglas County, Oregon to Banner Bank (“Banner”), a wholly owned subsidiary of Banner Corporation. The branches are being divested in connection with the Merger pursuant to agreements with the United States Department of Justice and the Federal Reserve Board. Under the terms of the agreement, Sterling Bank will pay a negative premium of approximately $7.0 million for Banner to acquire approximately $225 million of deposits and $90 million of performing loans. During the three months ended March 31, 2014, the $7.0 million negative premium was recorded as a loss on assets held for sale in other noninterest income on the consolidated statements of income. This transaction is subject to customary closing conditions, and is expected to be completed during the second quarter of 2014.

Exhibit 99.2

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma condensed combined balance sheet as of March 31, 2014 is presented as if the merger with Sterling had occurred on March 31, 2014.

(in thousands)

	Umpqua Historical			Sterling Historical			Pro Forma Merger Adjustments			Notes	Pro Forma Combined
Cash and due from banks	$	196,963		$	106,650		$	—			$	303,613
Restricted cash	—			7,000			—				7,000
Interest bearing deposits	887,620			329,916			(328,694		)	A	888,842
Temporary investments	525			—			—				525
Total cash and cash equivalents	1,085,108			443,566			(328,694		)		1,199,980
Investment securities, trading	4,498			4,493			—				8,991
Investment securities, available for sale	1,701,730			1,386,382			—				3,088,112
Investment securities, held to maturity	5,465			154			—				5,619
Loans held for sale	73,106			229,084			(82,748		)	B	219,442
Non-covered loans and leases	7,411,108			7,421,139			(318,347		)	C	14,513,900
Less: allowance for noncovered loan and lease losses	(86,709		)	(135,976		)	135,976			D	(86,709		)
Non-covered loans and leases, net	7,324,399			7,285,163			(182,371		)		14,427,191
Covered loans and leases, net of allowance	342,263			—			—				342,263
Restricted equity securities	29,948			—			—				29,948
Premises and equipment, net	180,199			98,095			22,662			E	300,956
Mortgage servicing rights	49,220			59,955			11,986			F	121,161
Goodwill	764,304			52,018			971,494			G	1,787,816
Other intangible assets, net	11,184			14,342			40,219			H	65,745
Non-covered other real estate owned	22,034			7,891			(460		)	I	29,465
Covered other real estate owned	1,746			—			—				1,746
FDIC indemnification asset	18,362			—			—				18,362
Bank owned life insurance	97,589			193,015			—				290,604
Deferred tax asset	11,393			275,502			29,165			J	316,060
Accrued interest receivable	24,572			28,896			—				53,468
Other assets	91,606			129,981			—				221,587
Total assets	$	11,838,726		$	10,208,537		$	481,253			$	22,528,516


Non-interest bearing demand deposits	$	2,465,606		$	1,896,353		$	(56,831	)	K	$	4,305,128
Interest bearing deposits	6,807,977			5,236,517			(153,800		)	K	11,890,694
Total deposits	9,273,583			7,132,870			(210,631		)		16,195,822

Securities sold under agreements to repurchase - customer	262,483			39,972			—				302,455
Securities sold under agreements to repurchase - broker/dealer	—			500,000			46,795			L	546,795
Term debt	250,964			976,059			3,690			M	1,230,713
Junior subordinated debentures, at fair value	87,800			—			156,105			N	243,905
Junior subordinated debentures, at amortized cost	101,818			245,300			(245,300		)	O	101,818
Other liabilities	127,602			103,128			333			P	231,063
Total liabilities	10,104,250			8,997,329			(249,008		)		18,852,571

Preferred stock	—			—			—				—
Common stock	1,514,969			1,972,921			20,548			Q	3,508,438
Retained earnings/accumulated deficit	219,686			(788,986		)	736,986			R	167,686
Accumulated other comprehensive income	(179		)	27,273			(27,273		)	S	(179		)
Total shareholders’ equity	1,734,476			1,211,208			730,261				3,675,945

Total liabilities and shareholders’ equity	$	11,838,726		$	10,208,537		$	481,253			$	22,528,516

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma condensed combined income statements for the three months ended March 31, 2013 and March 31, 2014 are presented as if the merger and the FinPac acquisition had occurred on January 1, 2013.

	Three Months Ended March 31, 2014													Three Months Ended March 31, 2013
(in thousands, except earnings per share)	Umpqua Historical			Sterling Historical			Sterling Pro Forma Merger Adjustments			Notes	Pro Forma Combined			Umpqua Historical			FPH, LLC Historical (1/1/2013 to 3/31/2013)		FinPac Pro Forma Merger Adjustments (1/1/2013 to 3/31/2013)			Notes	Sterling Historical		Sterling Pro Forma Merger Adjustments			Notes	Pro Forma Combined
Interest Income:
Non-covered loans and leases	$	91,268		$	86,153		$	5,568		T	$	182,989		$	78,545		$	14,294	$	(1,224	)	T	$	81,187	$	4,061		T	$	176,863
Covered loans	12,718			—			—				12,718			14,580			—		—				—		—				14,580
Interest and dividends on investment securities	11,453			10,357			—				21,810			10,956			—		—				9,418		—				20,374
Temporary investments and interest bearing deposits	441			156			(173		)	U	424			252			—		—				152		(173		)	U	231
Total interest income	115,880			96,666			5,395				217,941			104,333			14,294		(1,224		)		90,757		3,888				212,048

Interest Expense:
Deposits	3,848			5,153			(1,424		)	V	7,577			5,878			—		—				6,307		(2,236		)	V	9,949
Federal funds purchased and securities sold under agreement to repurchase	41			4,657			(3,360		)	W	1,338			31			—		—				4,775		(3,360		)	W	1,446
Term debt	2,273			1,757			(406		)	X	3,624			2,273			1,747		—				1,333		(291		)	X	5,062
Junior subordinated debentures	1,880			1,411			—				3,291			1,962			—		—				1,448		—				3,410
Total interest expense	8,042			12,978			(5,190		)		15,830			10,144			1,747		—				13,863		(5,887		)		19,867

Net interest income	107,838			83,688			10,585				202,111			94,189			12,547		(1,224		)		76,894		9,775				192,181

Provision for credit losses - non-covered	5,400			—			—			Y	5,400			6,988			2,577		—			Y	—		—			Y	9,565
(Recapture of) provision for credit losses - covered	571			—			—				571			232			—		—				—		—				232
Net interest income after provision for (recapture of) credit losses	101,867			83,688			10,585				196,140			86,969			9,970		(1,224		)		76,894		9,775				182,384

Non-interest income:
Service charges on deposit accounts	7,767			13,710			(4,247		)	Z	17,230			6,992			—		—				13,140		(3,463		)	Z	16,669
Brokerage commissions and fees	3,725			922			—				4,647			3,636			—		—				990		—				4,626
Mortgage banking revenue, net	10,439			7,788			—				18,227			23,568			—		—				13,794		—				37,362
Gain on sale of investment securities, net	—			—			—				—			7			—		—				—		—				7
Other than temporary impairment losses on investment securities	—			—			—				—			—			—		—				—		—				—
Portion of other-than-temporary impairment losses transferred from OCI	—			—			—				—			—			—		—				—		—				—
Loss on junior subordinated debentures carried at fair value	(542		)	—			(966		)	AA	(1,508		)	(542		)	—		—				—		(966		)	AA	(1,508		)
Bargain purchase gain on acquisition	—			—			—				—			—			—		—				7,544		—				7,544
Gain (Loss) on other assets	7			(6,389		)	7,000			AB	618			121			—		—				57		—				178
Charge on prepayment of debt	—			—			—				—			—			—		—				—		—				—
Gain on other loan sales	517			2,641			—				3,158			744			—		—				25		—				769
Bank owned life insurance	736			1,461			—				2,197			760			—		—				1,557		—				2,317
Change in FDIC indemnification asset	(4,840		)	—			—				(4,840		)	(5,073		)	—		—				—		—				(5,073		)
Other income	5,198			77			—				5,275			3,802			790		—				459		—				5,051
Total non-interest income	23,007			20,210			1,787				45,004			34,015			790		—				37,566		(4,429		)		67,942

Non-interest expense:
Salaries and employee benefits	53,218			47,576			(101		)	AC	100,693			51,505			1,979		182			AC	42,436		(5		)	AC	96,097
Net occupancy and equipment	16,501			11,761			—				28,262			14,735			407		—				10,173		—				25,315
Communications	2,902			9,783			—				12,685			3,203			81		—				8,728		—				12,012
Marketing	1,005			1,666			—				2,671			861			—		—				2,436		—				3,297
Supplies	896			321			—				1,217			718			—		—				469		—				1,187
Services	5,990			3,241			—				9,231			5,893			682		—				5,952		—				12,527
FDIC assessments	1,863			1,178			—				3,041			1,651			—		—				1,930		—				3,581
Net (gain) loss on non-covered OREO	(18		)	1,508			—				1,490			(130		)	—		—				2,030		—				1,900
Net (gain) loss on covered OREO	(46		)	—			—				(46		)	284			—		—				—		—				284
Intangible amortization	1,194			1,218			1,735			AD	4,147			1,204			177		—				1,659		2,024			AD	5,064
Merger related expense	5,983			2,715			—				8,698			1,531			—		—				1,036		—				2,567
Other expenses	7,030			4,198			(213		)	AE	11,015			4,307			506		(385		)	AE	5,080		(233		)	AE	9,275
Total non-interest expense	96,518			85,165			1,421				183,104			85,762			3,832		(203		)		81,929		1,786				173,106

Income before provision for income taxes	28,356			18,733			10,951				58,040			35,222			6,928		(1,021		)		32,531		3,560				77,220
Provision for income taxes	9,592			6,380			4,216			AF	20,188			11,861			2,716		(393		)	AF	9,853		1,371			AF	25,408
Net income	$	18,764		$	12,353		$	6,735			$	37,852		$	23,361		$	4,212	$	(628	)		$	22,678	$	2,189			$	51,812

Net income	$	18,764		$	12,353		$	6,735			$	37,852		$	23,361		$	4,212	$	(628	)		$	22,678	$	2,189			$	51,812
Dividends and undistributed earnings allocated to participating securities	113			—			—				113			183			—		28				—		—				211
Net earnings available to common shareholders	$	18,651		$	12,353		$	6,735			$	37,739		$	23,178		$	4,212	$	(656	)		$	22,678	$	2,189			$	51,601

Earnings per common share:
Basic	$	0.17		$	0.20						$	0.17		$	0.21		$	—					$	0.36					$	0.24
Diluted	$	0.17		$	0.19						$	0.17		$	0.21		$	—					$	0.36					$	0.24

Weighted average number of common shares outstanding:
Basic	112,170			62,398			41,870			AG	216,438			111,937			—		—				62,242		41,765			AG	215,944
Diluted	112,367			63,731			42,782			AH	218,880			112,118			—		—				63,005		43,247			AH	218,370

Note 1—Basis of Presentation

The unaudited pro forma condensed combined financial information and explanatory notes have been prepared to illustrate the effects of the merger involving Umpqua and Sterling under the acquisition method of accounting with Umpqua treated as the acquirer. The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not necessarily indicate the financial results of the combined companies had the companies actually been combined at the beginning of each period presented, nor does it necessarily indicate the results of operations in future periods or the future financial position of the combined entities. Under the acquisition method of accounting, the assets and liabilities of Sterling, as of the effective date of the merger, will be recorded by Umpqua at their respective fair values and the excess of the merger consideration over the fair value of Sterling’s net assets will be allocated to goodwill.

The merger, which was completed on April 18, 2014, provided for Sterling common shareholders to receive 1.671 shares of Umpqua common stock and $2.18 in cash for each share of Sterling common stock they held immediately prior to the merger. The value of the per share merger consideration was approximately $33.23 based upon the $18.58 closing price of Umpqua common stock on the date of merger closing multiplied by the exchange ratio of 1.671 and adding the cash portion of the merger consideration of $2.18 per share. The pro forma allocation of purchase price reflected in the unaudited pro forma condensed combined financial information is subject to adjustment and may vary from the actual purchase price allocation that will be recorded. Adjustments may include, but not be limited to, changes in (i) Sterling’s balance sheet through the effective time of the merger; (ii) total merger related expenses if consummation and/or implementation costs vary from currently estimated amounts; and (iii) the underlying values of assets and liabilities if market conditions differ from current assumptions.

The accounting policies of both Umpqua and Sterling are in the process of being reviewed in detail. Upon completion of such review, conforming adjustments or financial statement reclassification may be determined.

Note 2—Estimated Merger and Integration Costs

In connection with the merger, the plan to integrate Umpqua’s and Sterling’s operations is still being developed. Over the next several months, the specific details of these plans will continue to be refined. Umpqua and Sterling are currently in the process of assessing the two companies’ personnel, benefit plans, premises, equipment, computer systems, supply chain methodologies, and service contracts to determine where they may take advantage of redundancies or where it will be beneficial or necessary to convert to one system. Certain decisions arising from these assessments may involve involuntary termination of Sterling’s employees, vacating Sterling’s leased premises, changing information systems, canceling contracts between Sterling and certain service providers and selling or otherwise disposing of certain premises, furniture and equipment owned by Sterling. Additionally, as part of our formulation of the integration plan, certain actions regarding existing Umpqua information systems, premises, equipment, benefit plans, supply chain methodologies, supplier contracts, and involuntary termination of personnel may be taken. Umpqua expects to incur merger-related expenses including system conversion costs, employee retention and severance agreements, communications to customers, and others. To the extent there are costs associated with these actions, the costs will be recorded based on the nature and timing of these integration actions. Most acquisition and restructuring costs are recognized separately from a business combination and generally will be expensed as incurred. We estimate total merger related cost to be approximately $80 million. We incurred $6.2 million of merger expense in 2013 and $6.0 during three months ended March 31, 2014, and anticipate the majority of the remainder to be incurred in 2014.

Note 3—Estimated Annual Cost Savings

Umpqua expects to realize $87 million in annual pre-tax cost savings following the merger, which management expects to be phased-in over a two-year period, but there is no assurance that the anticipated cost savings will be realized on the anticipated time schedule or at all. These cost savings are not reflected in the presented pro forma financial information.

Note 4—Divestiture of Sterling branches

Due to competitive considerations of the merger in accordance with regulatory guidelines, Sterling branches in several banking markets will be divested in conjunction with the merger. These amounts are reflected in the pro forma adjustments below. However, other asset dispositions not required as further discussed in Note 2 are not included in the pro forma adjustments.

Note 5—Preliminary Purchase Accounting Allocation

The unaudited pro forma condensed combined financial information reflects the issuance of approximately 104,386,252 shares of Umpqua common stock totaling approximately $1.94 billion as well as cash consideration of approximately $136.2 million and liability for future cash consideration for exchange of warrants of $6.5 million. The merger will be accounted for using the acquisition method of accounting; accordingly Umpqua will recognize Sterling’s assets (including identifiable intangible assets) and liabilities at their respective estimated fair values as of the merger date. Accordingly, the pro forma purchase consideration and the assets acquired and the liabilities assumed based on their estimated fair values are summarized in the following table.

	March 31, 2014
	(in thousands)
Fair value consideration to Sterling shareholders
Cash paid (62,469,331 shares at $2.18 per share and cash-in-lieu of fractional shares)			$	136,191
Liability recorded for warrants (2,960,238 shares at $2.18 per share)			6,453
Fair value of common shares issued (62,469,331 shares at approximately $31.05 price per share)			1,939,497
Fair value of warrants, common stock options, and restricted stock exchanged (6,380,825 shares at a weighted average pre-merger service period cost per share of approximately $8.46)			53,972
Total pro forma purchase price			$	2,136,113
Fair value of assets acquired:
Cash and cash equivalents	$	303,063
Investment securities	1,391,029
Non-covered loans and leases, net	7,249,128
Premises and equipment, net	120,757
Mortgage servicing rights	71,941
Other intangible assets, net	54,561
Non-covered other real estate owned	7,431
Bank owned life insurance	193,015
Deferred tax asset	304,667
Accrued interest receivable	28,896
Other assets	129,981
Total assets acquired	$	9,854,469
Fair value of liabilities assumed:
Deposits	$	6,922,239
Securities sold under agreements to repurchase	586,767
Term debt	979,749
Junior subordinated debentures	156,105
Other liabilities	103,128
Total liabilities assumed	$	8,747,988
Net assets acquired			$	1,106,481
Preliminary pro forma goodwill			$	1,023,512

Note 6—Pro Forma Adjustments

The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information. All adjustments are based on current assumptions and valuations, which are subject to change.

Balance Sheet
(dollars in thousands)
A	Adjustments to cash and cash equivalents
	To reflect cash used to purchase Sterling	$	(136,191	)
	To reflect cash paid for merger expenses	(52,000		)
	To reflect cash paid for divestiture of Sterling branches	(140,503		)
		$	(328,694	)

B	Adjustment to loans held for sale
	To reflect loans sold with divestiture of Sterling branches at merger date.	$	(82,748	)

C	Adjustments to non-covered loans and leases
	To reflect estimated fair value at merger date. The adjustment to loans is primarily related to credit deterioration in the acquired loan portfolio. The credit adjustment to loans is calculated as 3.5% of gross loans. During Umpqua’s due diligence on Sterling, Umpqua reviewed loan information across collateral types and geographic distributions. Umpqua applied traditional loan examination methodologies to arrive at the fair value adjustment. The rate adjustment to loans reflects estimated fair value at merger date based on current market rates for similar assets and will be accreted to income using the effective yield method over the contractual lives of the loans, which is approximately ten years.	$	(302,000	)
	To reflect removal of deferred loan fees, costs and dealer incentives	(16,347		)
		$	(318,347	)

D	Adjustment to allowance for non-covered loan and lease losses
	To remove Sterling allowance at merger date as the credit risk is contemplated in the fair value adjustment in Adjustment B above.	$	135,976

E	Adjustment to premises and equipment, net
	To reflect divestiture of Sterling branches at merger date.	$	(2,295	)
	To reflect fair value adjustments to acquired premises and equipment	$	24,957
		$	22,662

F	Adjustment to mortgage servicing rights
	To reflect estimated fair value at merger date based on current market rates for similar assets.	$	11,986

G	Adjustments to goodwill
	To remove Sterling goodwill at merger date	$	(52,018	)
	To reflect the goodwill associated with the merger	1,023,512
		$	971,494

H	Adjustments to other intangible assets, net
	To remove Sterling other intangible assets, net	$	(14,342	)
	To record the third party calculated fair value of acquired identifiable intangible assets. The acquired core deposit intangible will be amortized over ten years using a sum-of-the-years-digits method.	54,561
		$	40,219

I	Adjustment to non-covered other real estate owned
	To record the estimated fair value of acquired non-covered other real estate owned.	$	(460	)

J	Adjustments to deferred tax asset
	To reflect deferred tax asset created in the merger, which is calculated as follows:
	Adjustments to non-covered loans and leases	$	302,000
	Adjustment to allowance for non-covered loan and lease losses	(135,976		)
	Adjustment to deferred loan fees/costs	16,347
	Adjustments to premises and equipment	(24,957		)
	Adjustment to mortgage servicing rights	(11,986		)
	Adjustments to other intangible assets, net	(40,219		)
	Adjustment to non-covered other real estate owned	460
	Adjustments to deposits	14,915
	Adjustments to other liabilites (deferred revenue and rent)	(6,120		)
	Adjustment to securities sold under agreements to repurchase - broker/dealer	46,795
	Adjustments to term debt	3,690
	Adjustment to junior subordinated debentures	(89,195		)
	Subtotal for fair value adjustments	$	75,754
	Calculated deferred tax asset at Umpqua’s estimated statutory tax rate of 38.5%	$	29,165

K	Adjustments to deposits
	To reflect estimated fair value at merger date based on current market rates for similar products. This adjustment will be accreted into income over the estimated lives of the deposits, which is approximately three years.	$	14,915
	To reflect deposits sold with divestiture of Sterling branches at merger date.
	Non-interest bearing demand deposits	(56,831		)
	Interest bearing deposits	(168,715		)
		$	(210,631	)

L	Adjustment to securities sold under agreements to repurchase - broker/dealer
	To reflect estimated fair value at merger date based on current market rates and spreads for similar borrowings. This estimated premium will be accreted to interest expense over the remaining contractual life of such borrowings, which is approximately 4 years.	$	46,795

M	Adjustment to term debt
	To reflect estimated fair value at merger date based on current market rates and spreads for similar borrowings. This estimated premium will be accreted to interest expense over the remaining contractual life of such borrowings, which is approximately three years.	$	3,690

N	Adjustment to junior subordinated debentures, at fair value
	To reclassify junior subordinated debentures, at amortized cost to junior subordinated debentures, at fair value. Junior subordinated debentures acquired will be held at fair value.	$	245,300
	To reflect estimated fair value at merger date based on third party valuation.	(89,195		)
		$	156,105

O	Adjustment to junior subordinated debentures, at amortized cost
	To reclassify junior subordinated debentures, at amortized cost to junior subordinated debentures, at fair value. Junior subordinated debentures acquired will be held at fair value.	$	(245,300	)

P	Adjustment to other liabilities
	To remove deferred revenue and deferred rent liabilities	$	(6,120	)
	To record liability created due to exchange of Sterling warrants.	$	6,453
		$	333

Q	Adjustments to common stock
	To eliminate historical Sterling common stock	$	(1,972,921	)
	To reflect the issuance and exchange of Umpqua common stock to Sterling shareholders	1,993,469
		$	20,548

R	Adjustment to retained earnings/accumulated deficit
	To eliminate historical Sterling accumulated deficit	$	788,986
	To adjust for after tax merger expenses	(52,000		)
		$	736,986

S	Adjustment to accumulated other comprehensive income
	To eliminate historical Sterling accumulated other comprehensive income	$	(27,273	)

Income Statements (dollars in thousands)		Three Months Ended March 31, 2014			Three Months Ended March 31, 2013
T	Adjustments to non-covered loans and leases interest income
	FinPac
	To reflect adjusted interest income from leases due to the estimated loss of income from the write-off of FinPac’s loan mark and the amortization of the new interest rate mark and the accretion of the acquisition accounting adjustment relating to the credit mark. The amortization period will be the contractual lives of the leases, which is approximately four years, and will be amortized into income using the effective yield method.	$	—		$	(1,224	)
	Sterling
	To reflect accretion of loan rate discount resulting from non-covered loans and leases fair value pro forma Adjustment C using effective yield methodology over the estimated lives of the acquired loan portfolio, which is approximately ten years.	$	4,433		$	4,048
	To reclassify miscellaneous loan fees from service charges on deposit accounts to non-covered loans and leases interest income to conform with consolidated presentation.	2,248			1,316
	To reflect non-covered loans and leases interest income on branches divested at merger date.	(1,113		)	(1,303		)
		$	5,568		$	4,061

U	Adjustments to interest income on temporary investments and interest bearing deposits
	Sterling
	To reflect adjusted interest income on temporary investments and interest bearing cash due to cash paid for purchase and divestiture of Sterling branches.	$	(173	)	$	(173	)

V	Adjustments to interest expense on deposits
	Sterling
	To reflect amortization of deposit premium resulting from deposit fair value pro forma Adjustment K based on weighted average life of time deposits being approximately three years.	$	(1,283	)	$	(2,050	)
	To reflect interest expense on branches divested at merger date.	(141		)	(186		)
		$	(1,424	)	$	(2,236	)

W	Adjustments to interest expense on Federal funds purchased and securities sold under agreement to repurchase
	Sterling
	To reflect amortization of securities sold under agreements to repurchase premium resulting from Securities sold under agreements to repurchase fair value pro forma Adjustment L based on weighted average life of borrowings of 20 months.	$	(3,360	)	$	(3,360	)

X	Adjustments to interest expense on term debt
	Sterling
	To reflect amortization of term debt premium resulting from term debt fair value pro forma Adjustment M.	$	(406	)	$	(291	)

Y	Adjustments to provision for credit losses - non-covered
	FinPac
	With acquired leases recorded at fair value, Umpqua would expect a reduction in the historical the provision for loan and lease losses from FinPac, however no adjustment to the historical amount of FinPac provision for loan and lease losses is reflected in this pro forma financial information.	$	—		$	—

	Sterling
	With acquired loans recorded at fair value, Umpqua would expect a reduction in the provision for loan losses from Sterling, however no adjustment to the historical amount of Sterling provision for loan losses is reflected in this pro forma financial information.	$	—		$	—

Z	Adjustments to service charges on deposit accounts
	Sterling
	To reflect service charges on deposit accounts on branches divested at merger date.	$	(560	)	$	(708	)
	To reclassify miscellaneous loan fees from service charges on deposit accounts to non-covered loans and leases interest income to conform with consolidated presentation.	(2,248		)	(1,316		)
	To reflect lower service charges on deposit accounts as a result of passing $10 billion asset threshold.	(1,439		)	(1,439		)
		$	(4,247	)	$	(3,463	)

AA	Adjustment to loss on junior subordinated debentures carried at fair value
	Sterling
	To reflect change in fair value of junior subordinated debenture discount resulting from junior subordinated debenture fair value pro forma Adjustment N based on remaining average life of junior subordinated debentures of 23.1 years.	$	(966	)	$	(966	)

AB	Adjustment to gain (loss) on sale of other assets
	Sterling
	To remove loss on sale of branch divestiture.	$	7,000		$	—

AC	Adjustments to salaries and employee benefits
	FinPac
	To reflect additional compensation expense related to restricted stock granted to FinPac management.	$	—		$	205
	To remove Financial Pacific Holdings LLC salaries and employee benefits	—			(92		)
	To reclassify private equity compensation expense from other expense.	—			69
		$	—		$	182
	Sterling
	To reflect salaries and employee benefits related to branches divested at merger date.	$	(647	)	$	(551	)
	To reflect additional compensation expense related to restricted stock granted to Sterling management and retention bonuses of top five retained executives.	546			546
		$	(101	)	$	(5	)

AD	Adjustments to amortization of intangibles
	Sterling
	To reflect amortization of acquired intangible assets based on amortization period of ten years and using the sum-of-the-years-digits method of amortization	1,735			2,024
		$	1,735		$	2,024

AE	Adjustments to other expenses
	FinPac
	To remove management fees.	$	—		$	(286	)
	To remove director compensation and travel fees.	—			(30		)
	To reclassify private equity compensation expense to salaries and benefits.	—			(69		)
		$	—		$	(385	)
	Sterling
	To reflect other expenses related to branches divested at merger date.	(213		)	(233		)
		$	(213	)	$	(233	)

AF	Adjustments to income tax provision
	FinPac
	To reflect the income tax effect of pro forma adjustments at Umpqua’s statutory tax rate of 38.5%	$	—		$	(393	)
	Sterling
	To reflect the income tax effect of pro forma adjustments at Umpqua’s statutory tax rate of 38.5%	$	4,216		$	1,371

AG	Adjustment to weighted average number of common shares outstanding - Basic
	Sterling
	To reflect acquisition of Sterling common shares.	(62,398		)	(62,242		)
	To reflect issuance of Umpqua common stock as Sterling shareholders will receive 1.671 shares of Umpqua common stock for each share of Sterling common stock they hold immediately prior to the merger.	104,268			104,007
		41,870			41,765

AH	Adjustment to weighted average number of common shares outstanding - Diluted
	Sterling
	To reflect acquisition of Sterling common shares.	(63,731		)	(63,005		)
	To reflect issuance of Umpqua common stock as Sterling shareholders will receive 1.671 shares of Umpqua common stock for each share of Sterling common stock they hold immediately prior to the merger.	104,268			104,007
	To reflect issuance of Umpqua common stock as Sterling restricted stock award holders and stock option holders will receive 1.7896 shares of Umpqua common stock for each restricted stock award or stock option they hold immediately prior to the merger and Sterling warrant holders will receive 1.671 shares of Umpqua common stock for each warrant they hold immediately prior to the merger.	2,245			2,245
		42,782			43,247

COMPARATIVE PER SHARE DATA

Shares issued for purchase

104,386,252

	Umpqua		Pro Forma Combined Umpqua and FinPac		Sterling Historical		Umpqua Pro Forma Combined		Sterling Pro Forma Per Equivalent Sterling Share (1)
Basic Earnings
Three Months ended March 31, 2014	$	0.17	$	0.17	$	0.20	$	0.17	$	0.29
Three Months ended March 31, 2013	$	0.21	$	0.24	$	0.36	$	0.24	$	0.40

Diluted Earnings
Three Months ended March 31, 2014	$	0.17	$	0.17	$	0.19	$	0.17	$	0.29
Three Months ended March 31, 2013	$	0.21	$	0.24	$	0.36	$	0.24	$	0.40

Cash Dividends Paid (2)
Three Months ended March 31, 2014	$	0.15	$	0.15	$	0.20	$	0.15	$	0.25
Three Months ended March 31, 2013	$	0.10	$	0.10	$	—	$	0.10	$	0.17

Book Value
March 31, 2014	$	15.44	$	15.44	$	19.39	$	16.98	$	28.38
March 31, 2013	$	15.49	$	15.52	$	19.86	$	16.96	$	28.34