Umpqua Holdings Q3 2007 Earnings Call Transcript

Umpqua Holdings Corporation (UMPQ)

Q3 2007 Earnings Call

October 18, 2007 1:00 pm ET

Executives

Ronald Farnsworth - Senior Vice President of Finance

Ray Davis - President & Chief Executive Officer

Brad Copeland - Chief Credit Officer

Bill Fike - President of Umpqua Bank California

Mark Wardlow - Senior Credit Officer

Analysts

Matthew Clark - KBW

Brett Rabatin - FTN Midwest

Brent Christ - Fox-Pitt

Joe Morford - RBC Capital Markets

Jim Bradshaw - D.A. Davidson

Todd Hagerman - Credit Suisse

K.C. Ambrecht - Millennium

Presentation

Operator

Good afternoon. My name is Laticia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Umpqua Holdings Third Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Question and Answer session (Operator Instructions). I would now like to turn the call over to Mr. Farnsworth, Senior Vice President of Finance. Sir, you may begin.

Ronald Farnsworth

Excellent. Thank you. Good morning. And thank you for joining us today as we discuss the results of operations for the Third Quarter of 2007 for Umpqua Holdings Corporation. In reviewing the Company's prospects today, we will make forward-looking statements, which are provided under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

These statements are subject to certain risks and uncertainties, and our actual results may differ materially from those that we anticipate and predict today. We encourage you to review the risk factors stated in the Company's 10-K, 10-Qs, and other reports filed with the SEC. And we caution you not to place undue reliance on forward-looking statements. The Company does not intend to correct or update any of the forward-looking statements that we make today.

With us this morning are Ray Davis, President and CEO of Umpqua Holdings Corporation, and Brad Copeland, our Chief Credit Officer. David Edson, President of Northwest region, Bill Fike, President of our California region, and Mark Wardlow, our EVP and Senior Credit Officer are here for the question and answer session. A two-week rebroadcast of this call will be available two hours after the call by dialing 800-642-1687. This number is also noted in the earnings release we issued this morning.

I'll now turn the call over to Ray Davis.

Ray Davis

Good morning. Earlier today, the Company announced Third Quarter Earnings well below expectations. This shortfall is related to increased provision for losses in the Residential Development segment of our loan portfolio. This segment deteriorated during the Third Quarter based on a housing market downturn. The majority of issues are in our northern California markets where the housing downturn has been the most significant.

In a minute, I will ask Brad Copeland to provide specifics on our loan portfolio, but you may be assured that management has taken an aggressive stance in risk rating these problem credits and has taken the necessary valuation impairments to protect the income prospects of the Company for the future.

Before Brad comments in more detail, let me share other significant achievements for the quarter. Our loans grew $97 million, split evenly by region. For the quarter, the Oregon/Washington region grew at a 6% annualized rate, while California grew at an 8% annualized rate. Our deposits increased $104 million, or 6% annualized with $96 million or 11% in Oregon/Washington. California deposits grew only modestly due to the current environment.

Overall, Non-interest Checking Accounts still remain above 20%. The recent FDIC deposit market share report for Oregon shows Umpqua increased total market share from 6.8% to 7.2% taking us up one spot to the number five position in the State. Our California market share also increased, moving us up four positions.

The Company's Debit Card Interchange income is also up 38% year-over-year, and net charge-offs were minimal at only $800,000 year-to-date. Ron Farnsworth will provide more information on our net interest margin, capital, and other financial matters shortly.

Now, I'm going to turn the call over to Brad Copeland, our Chief Credit Officer.

Brad Copeland

Thanks, Ray. The housing industry slowdown persists throughout the country and has been amplified in our northern California region, leading to a decline in our key credit quality indicators. Our total loan portfolio is $6.1 billion; of this, $764 million are residential development loans, which include land, acquisition and development and single-family construction. Of this total, $424 million are in our Oregon/Washington region, while $340 million are in California. To break this down further, the two largest components consist of Land Loans of $246 million and Acquisition and Development Loans of $315 million. Total Non-performing loans increased $21 million to $69 million or 1.13% of total loans, up from $48 million or 0.80% for Second Quarter. The total Non-performing Loan increase is centered in five relationships.

Of the total Non-performing Loans, 83% are within the Residential Development segment, and 82% of these loans are in California. It is obvious that the deterioration of this segment is being driven by economic conditions.

Like others in our industry, the current housing market downturn is primarily responsible for our current credit issues. To report to you on the actions our credit teams have taken over the last several months, we have completed the review of every loan in this segment of the portfolio. We have conservatively valued each problem loan based on updated appraisals, leading to an Impairment Reserve increase of $11.2 million for the quarter.

Downgrades this quarter, combined with the Impairment increase, led to the $20.4 million provision for loan loss - and we are actively working with each borrower to resolve problem credits. For example, we have already sold $10 million of our Oreo this past week at no loss.

This credit originated in Central Oregon and was included in non-performing loans during the Second Quarter. Since we are currently engaged in resolution discussions, we will be unable to address or discuss details on specific credits during today's call.

Looking forward, we forecast the following; we expect up to another $20 million of Non-performing Loans to be resolved during the Fourth Quarter. We anticipate charge-offs in Q4 to be less than the provision for loan losses taken this year to date. We don't expect further provision on these non-performing loans, as they currently have impairment reserves set aside within their allowance for loan losses.

We expect non-performing loans to remain in the range of $60 million to $70 million at year end. And finally, we expect other real estate owned to be in the range of $10 million to $29 million at year end. These forecasts are based on our current view of the housing market across our footprint.

Despite the pressures on credit quality, there are several positives on the credit front. Excluding non-performing loans, other past due loans were less than 1% of total loans at quarter end. Delinquency Ratios in our C&I and commercial real estate portfolios were 0.23% and 0.24%. The wine industry group, we mentioned during our last earnings call, is up and running with approximately $50 million of deals in the pipeline.

Our pipelines remain healthy across all markets. We are having success in changing the composition of our California loan portfolio, increasing C&I loans from 14% to 22% year over year. Also, the mix of new loans generated year to date has changed dramatically, with 45% of new loan volume consisting of C&I loans.

We have been successful in targeting two additional new segments for generating loan growth, Municipal and Educational entities. To date, we have booked $50 million in new loans to borrowers in these categories with another $20 million in the pipeline.

And we have upgraded our California front line lending and management staff considerably during the past several months. This has been accomplished by hiring several seasoned banking professionals with well-rounded backgrounds in a variety of loan types.

I'll now turn the call back to Ron.

Ronald Farnsworth

Thank you, Brad. During this past quarter our Net Interest Margin declined 14 Basis Points with nine Basis Points coming from reduced earnings asset yields, and three Basis Points related to increased costs of interest-bearing liabilities. Mix changes account for the last two Basis Points.

During the Third Quarter, we reversed $1.3 million of interest income on new nonaccrual loans. This reversal reduced loan yields by nine Basis Points, and the Net Interest Margin by seven Basis Points, or half of the overall margin decline.

While the costs of interest-bearing deposits increased three Basis Points during the quarter, it actually declined ten Basis Points in the month of September. This resulted from reductions made to several products in anticipation of Fed funds rate decreases. Given these moves, we believe the margin is stabilized.

Within non-interest income, the largest changes were in Mortgage-banking Revenue and other income. While Mortgage-banking Revenue declined $1.2 million from the Second Quarter, $900,000 related to a swing in the fair value of mortgage servicing rights. We're very pleased with the balance of Production Revenue achieved this quarter given the slowdown in the mortgage market.

Our mortgage team projects a stable pipeline for the balance of the year. We plan to start hedging the fair value change of the MSR portfolio starting in Q4 with a goal to minimize the volatility to earnings from this asset going forward.

Other income includes a $4.1 million fair value increase on Trust Preferred Borrowings. Earlier this year, we elected fair value measurement on new Trust Preferred issues, and the favorable spreads we achieved in Q3 compared to current market spreads resulted in those fair value gains.

Also, Strand, Atkinson, Williams & York, our retail brokerage subsidiary, reported record quarterly net income. Total Non-interest expense, excluding merger expense, increased $1.1 million during the quarter. Occupancy Expense and Intangible Amortization increased due to a full three months of North Bay included here in the Third Quarter.

Other Expense increased $1.3 million, comprised of increases in Marketing, Services, and other expense categories related to ongoing growth initiatives, promotions, and new store R&D costs.

And finally, compensation declined $900,000, resulting from further realization of cost savings announced in the Second Quarter.

Management continues to focus on controlling costs in this difficult environment, with specific achievements this year including North Bay cost savings being ahead of plans, based on an accelerated system integration, the realization and continued focus on cost saving initiatives announced in Q2, and the overall reduction of expense to average assets of 2.55% in Q3, down 13 Basis Points from a year ago.

As expected last quarter, we had $263,000 of merger related expense for the North Bay acquisition, with no further merger expense related to this deal expected in the future. The Effective Income Tax Rate declined to 31% this quarter related to greater efficiency of tax credit investments.

We expect the full year Effective Tax Rate to be approximately 35% consistent with the year-to-date September rates. To touch on capital matters, of the $60 million in New Trust Preferred Issuance in Q3, we used $25 million of those proceeds in September to redeem an existing Trust Preferred carrying a higher spread.

The balance of $35 million was used to repurchase 1.65 million shares of common stock. Based on the capital moves in the Third Quarter, we reduced our excess capital position to desired levels as evidenced by the 6.25% Tangible Equity Ratio at the end of Q3.

Our previously announced plan to issue another $70 million of Trust Preferred Borrowings in the Fourth Quarter is on hold at least for another quarter, until we see improvement in the credit markets. While our recently increased authorization leaves us with 1.5 million more shares to repurchase, we do not expect significant repurchase activity in the Fourth Quarter, but will reassess as funding opportunities arise. Finally, our liquidity is strong, including $1.7 billion in available borrowing lines.

I'll now turn the call back to Ray for summary comments.

Ray Davis

Just a few closing comments; we have provided you with a lot of details on the status of our residential development loan portfolio, and to conclude, I will comment that management believes strongly that our issues are manageable, and we do look forward to getting back to a more normalized earnings rate soon.

Another point; we will be opening our new South Waterfront store in Portland, Oregon on November 5th. This store is the next evolution in our delivery systems and will include new technology that will continue to enhance Umpqua's customer experience.

We’re also pleased to report that the rollout of our Neighborhood Store concept continues to gain momentum. Our first store in Bend, Oregon opened in March of 2004 and has reached $92 million in deposits. Our four other neighborhood stores are exceeding deposit growth expectations as well.

The Umpqua customer loyalty program, which we kicked off last quarter, has moved the company's retention rate up to 92% compared to an industry average of around 80%. Our cross-sell rate to new customers continues to increase, with our year-to-date cross-sell ratio at 4.7. Products per household is now up to 3.9.

I want to express my appreciation to our lending professionals for the incredible hard work and dedication they have demonstrated over the last several months. I am proud to work alongside them.

For the last fourteen years, we have focused on growing through quality service, innovation, and delivering long-term shareholder value. We're not pleased with this quarter's performance.

However, in today's difficult operating environment for banks, I want to assure you that we are committed to enhancing shareholder value, and that will remain as our primary strategic focus.

As always, we appreciate your interest in Umpqua Holdings Corporation. We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Matthew Clark with KBW.

Matthew Clark - KBW

Hi. Good morning guys.

Ray Davis

Good morning.

Matthew Clark - KBW

Can you maybe first just talk about the Impairment Reserve of $16.2 million that you guys have taken on the non-performers of $67 million, $68 million? I guess that implies about 24% severity.

Could you give us a sense as to how we should think about that and whether that's enough for, I guess, the Northern California market that has seen land values that have been down arguably anywhere from 40% to 50%, and what that means for underlying collateral?

Ray Davis

Matt, this is Ray. Obviously, each of these credits are looked at on an individual basis, and Impairments, depending on the size of Impairment range, we don't look at it as a group, nor do we make conclusions from what the overall percentage is, up or down.

We look at them on a loan-by-loan basis, and that's the way this has been computed.

Matthew Clark - KBW

Okay. And then as it relates to reserving going forward, I will assume, as you guys negotiate and take write-downs on -- or write off some of these problem loans, it's going to bleed the reserve back down.

I guess, can you talk about how you think about reserving from here? And I would assume we wouldn't return to the 115 that we saw last quarter, but I would assume we trend down some?

Ray Davis

I think that's a fair assessment. I think that obviously, as we mentioned in our comments that we've been very aggressive in increasing the reserve to protect the earnings flow for the future periods.

And I am glad you bring it up in fact, because clearly, whatever charge-offs we have on these particular loans that we have already addressed, will not impact earnings. It will be an allowance adjustment.

It will -- I'm sure that, yes, the answer to the question is, I'm sure it will come down, but I don't believe it will be a steep decrease.

Matthew Clark - KBW

Okay. And then finally, can you just talk about your ability to grow C&I here this quarter? Looks like a 56% annualized rate in California. I'm just curious as to how you're able to do that.

I know it's a competitive product that everybody wants to grow these days, so just curious as to how you are running the business?

Bill Fike

I think that we started an initiative to grow the C&I portfolio about a year-and-a-half ago by bringing on some folks -- a team from a competitor that really gave us the focus on that.

And in addition to their efforts, we have really tried to get away from the real estate emphasis that we've had in the California market since we really entered that. As you know, relationship building takes a long time, and C&I businesses are much more difficult to move than our traditional real estate borrowers.

We've had some great success, and the last quarter, we had the largest growth in the C&I portfolio that we've had in the last year-and-a-half. We had 45% of our new loans year to date have been C&I versus 30% last year, 2006.

Our portfolio mix has changed now to where our C&I portfolio was 14% a year ago and now it's up to 22%, so we're making some headway in moving the composition of the portfolio.

It is a slow process, but I'm very optimistic that the strides we've made will continue. Our pipeline is down a little bit in the C&I side now just because we've had so much success over the last quarter in bringing those on, but that effort is not going to change.

Matthew Clark - KBW

Okay, and then one more if I may; can you talk about how you're thinking about capital these days? We heard about the buyback. We heard about the TRUP. But with MPAs at the kind of an elevated level here, just talk about how you think about the buyback, how you think about potential acquisitions and even dividend increases from here?

Ronald Farnsworth

Matt, this is Ron Farnsworth. From a capital standpoint we've got our capital levels down to levels we feel are valid, and give us enough cushion for potential reductions in the reserve as these loans are charged off over the coming quarter.

In terms of Dividends, we feel very strong that our Dividend will continue - no plans to change the Dividend. We reassess that on an annual basis in terms of increases historically. And on the Trust Preferred front, again, we're waiting for the credit markets to stabilize.

Matthew Clark - KBW

And on acquisitions?

Ray Davis

Matt, it’s Ray. I think we have been very consistent in our comments on that, and I don't think they really have changed. Clearly, with all of the bank industry stocks being depressed, it makes it a little more difficult. But we'll remain opportunistic, if it makes sense, but that's not our priority right now.

Our priority right now is to work through these issues to get back to normalized earnings.

Matthew Clark - KBW

Great. Thanks, guys.

Operator

Your next question comes from Brett Rabatin with FTN Midwest.

Brett Rabatin - FTN Midwest

Hello, everyone.

Ray Davis

Good morning.

Brett Rabatin - FTN Midwest

Wanted to first address the Margin; I'm curious Ray, if I understood correctly in the guidance that you guys think the margin has stabilized, and I'm curious, at least from the regulatory filing perspective, I know you've about over $2 billion of loans repricing with Fed movement, and so, I'm curious on the guidance for this margin to be stable if it also assumes that the asset yields are equivalent to 3Q levels or similar?

Could you just talk some more about the margin and why you think it's stabilized?

Brad Copeland

Sure thing, Brett. And just as a way of the numbers, for every 25 Basis Point change in the Fed funds rate, we're going to see about a five Basis Point change in our loan yields, which is four to five Basis Points on the Margins.

And in the month of September, we did have the Fed drop about 50 Basis Points. We were successful in lowering our deposit costs hence, where for a full month, the primary change would have led to about a 10 Basis Point drop in loan yields. We feel pretty good about being able to get ahead of that on the deposit side going forward.

Brett Rabatin - FTN Midwest

Does the TRUP that you issued not offset some of the -- I saw the press release indicated the September 10 Basis Point decline interest-bearing costs. I guess I'm looking at the potential for that to somewhat offset the funding cost decreases that you were able to achieve.

And then just assuming that the construction portfolio does decline in size over the next year, and sort of asset yields seem like they could be lower going forward.

Brad Copeland

Well, on the Trust Preferred side, we do expect a benefit to the margin based on the -- the $60 million we added in Q3 carried a weighted average rate of 182 over a three-month LIBOR, and that three-month LIBOR is pretty highly correlated to Fed funds.

We did see a couple Basis Points of benefit in Q3 from there. We expect that to continue based on forecasts over the next two quarters.

Brett Rabatin - FTN Midwest

Okay. Let me go in a different direction. I'm curious, in the press release and in the comments you talked about instructing the credit professionals to take a close look at stuff, and I think we had this discussion also last quarter, so I guess I'm hoping for some color around what changes have been made in the past month or two in relation to identifying credits and looking closely at problem potential loans?

Mark Wardlow

This is Mark Wardlow. Pretty much we are continuing on with what I outlined on the last call. We are continually looking at every loan in this segment of the portfolio. We have required additional reporting around these loans.

And we mentioned in the earnings call, we have aggressively downgraded any deals that we anticipate any problems with, and then those deals are also being managed through our special assets division very aggressively. So, at this point we believe we've identified all the problems in that segment of the portfolio.

Brett Rabatin - FTN Midwest

Okay. And then for additional color, can you talk about the 30 to 89 past due - not that it is a great indicator of non-accrual potential loans, but just where that number is presently? I know it was like $33 million in the Second Quarter.

Mark Wardlow

Yes, as Brad mentioned, if you exclude our non-performing loans, our delinquency ratio is under 1% for the rest of the portfolio, and that's spread evenly pretty much throughout our footprint in a variety of different loan types.

Brett Rabatin - FTN Midwest

Okay. But you don't have the exact number for past dues?

Mark Wardlow

Yes, I do. You're looking for the past dues for zero through 80 or 90 days? Is that what you're looking for?

Brett Rabatin - FTN Midwest

Correct.

Mark Wardlow

Okay. We have $38 million in total past dues up to 60 days, and another $21 million in total past dues between 60 days and 90 days, and $1.5 million past due over 90 days that are not on non-accrual.

Brett Rabatin - FTN Midwest

Okay, so $38 million that's under 60 days and $21 million that's 60 days to 90 days?

Mark Wardlow

Yes.

Brett Rabatin - FTN Midwest

Okay.

Mark Wardlow

And $1.5 million for over 90 days that’s not on non-accrual.

Brett Rabatin - FTN Midwest

Alright, great. Thanks for the color.

Mark Wardlow

You're welcome.

Operator

Your next question comes from Brent Christ with Fox-Pitt.

Brent Christ - Fox-Pitt

Good morning.

Ray Davis

Good morning, Brent.

Brent Christ - Fox-Pitt

Just a follow up on Credit; I guess with the outlook you gave for expectations at the end of the Fourth Quarter in terms of NPAs it sounds like you have some stuff that you're hoping to move off the books, but there's also going to be some back-filling that and replacing it.

I'm just curious in terms of -- if you think you may have to take some additional provisioning or build reserves related to some of those new loans that are migrating towards NPA, or if that was fully contemplated in the reserve build this quarter?

Ray Davis

Yeah. I think we went through the forecast that we outlined Brent - that we stand by. We feel that that's really going to be the flow for the rest of the year.

Brent Christ - Fox-Pitt

And then just in terms of thinking about the reserve obviously, the ratio will probably come down as it had some losses on a few of these non-performers. But if you back out the specific Impairment Reserve, it looks like from both the second and Third Quarter, it looks like you are obviously building the core reserve ex the Impairment a little bit. Is that the expectation that that's going to continue to rise going forward?

Ray Davis

No.

Brent Christ - Fox-Pitt

Okay. And then secondly, you mentioned going through all of the loans in the residential development portfolio with some new appraisals. Any sense of how the current LTVs stand, particularly in the California market?

Mark Wardlow

No, Brent, I tell you, that's a very broad question. Every single deal is a little bit different. Obviously, when we originate these loans, our Loan to Value, I think we talked in great detail in the last quarter's call they range between 50% and 75% depending on the transaction, with our borrowers having a pretty substantial cash position in these deals.

But the values of properties in California, it's not -- this is not isolated to Umpqua Bank; it is virtually every bank in the California market, not just California, other parts of the United States as well are going through some pretty interesting steep slopes of a line, if you will, on how fast the housing market has really gripped the country.

Brent Christ - Fox-Pitt

Okay. And then the last question on Credit. Last quarter, you guys outlined four specific non-performers that accounted for most of the increase and it sounds like you are in the process or have divested the large Oregon Credit, but any updates in terms of the other three? Are they still on non-performing, or did any of those move off in the Third Quarter?

Ray Davis

The only one that we have moved off at this moment is that $10 million credit that we talked to you about; those other credits are deep into resolution discussions, and obviously don't want to talk specifically about those to foul those up. But we are aggressively pursuing the resolution of those credits.

Brent Christ - Fox-Pitt

Okay, thanks a lot.

Operator

Your next question comes from Glen Gerard with Umpqua.

Ray Davis

Hello?

Operator

Sir, your line is open. Your next question comes from Joe Morford with RBC Capital.

Joe Morford - RBC Capital Markets

Good morning, everyone.

Ray Davis

Good morning.

Joe Morford - RBC Capital Markets

I guess, just a follow up on Matthew's question in terms of the reserving -- I know you look at each project individually to determine Impairment Reserve. But I guess if you could just talk a little bit more about just how you go about getting comfortable that you are adequately reserved for the problems you've identified?

How current are these appraisals and how can they adequately keep up in terms of the drop in values when there's just not a lot of bids for properties or sales being done?

Mark Wardlow

Joe, this is Mark Wardlow again. We are on deals that are stressed. We are getting updated appraisals. We've done a lot of that in the last quarter, and as you might expect depending upon the submarket, there has been some deterioration in values.

We use that as a basis to establish what our Impairment Reserves are; individual loans, individual appraisals, compared to the individual loan balances.

Joe Morford - RBC Capital Markets

Okay. So, all of these appraisals have been updated in the last couple of months then it sounds like?

Mark Wardlow

Yes. On our stress deals, yes.

Joe Morford - RBC Capital Markets

And I know you're not really talking about specifics, but just in general can you tell us a little bit more about the types of projects that you're seeing having problems? Are they condo developments, single-family homes? Are they closer to Sacramento or more the outer lying areas? Just give us a little more flavor, or any kind of trends you're seeing.

Mark Wardlow

Sure. Most of our problems are located in the greater Sacramento area -- or County area around Sacramento, I'll use that term, and they are a variety of deals. Most of them are either Acquisition and Development Loans for residential construction, or they are single-family residential construction loans, that due to the slowing market conditions have been slow to absorb. And they're pretty much centralized again in the Northern California region, more specifically in Sacramento.

Joe Morford - RBC Capital Markets

Okay. And then I guess just lastly, where are you all in your exam cycle with the regulators, and when was your last review with them?

Raymond Davis

Yes. I'm sorry for the hesitation there. We're sensitive to what we say or don't say.

Joe Morford - RBC Capital Markets

Sure, I understand.

Raymond Davis

But I can tell you that we have finished our exam as of -- maybe within the week, we have finished our exam.

Joe Morford - RBC Capital Markets

Okay.

Raymond Davis

Okay?

Joe Morford - RBC Capital Markets

Great. Thanks very much, Ray.

Operator

Your next question comes from Jim Bradshaw with D.A. Davidson.

Jim Bradshaw - D.A. Davidson

Good morning.

Raymond Davis

Good morning, Jim.

Jim Bradshaw - D.A. Davidson

Ron, the mark on the MSR asset was a little more than I would have guessed. I assume you had slower prepaid speeds, but were there any other major assumption changes in that number?

Ronald Farnsworth

No, it was strictly the market rates. And when I gave that $900,000 swing, that's because we had a gain in Q2.

Jim Bradshaw - D.A. Davidson

Right.

Ronald Farnsworth

Of $900,000, and a very, very modest decline in Q3.

Jim Bradshaw - D.A. Davidson

Okay.

Ronald Farnsworth

P&L from quarter to quarter, it was like $900,000 swing.

Jim Bradshaw - D.A. Davidson

Okay. Good.

Ronald Farnsworth

No change in assumptions, no change in models this past quarter.

Jim Bradshaw - D.A. Davidson

The $10 million OREO sale that you just completed, did you guys finance that and did you get cash into it if you did?

Ronald Farnsworth

We did finance it and it's under our standard underwriting rates, 80% Loan to Value.

Jim Bradshaw - D.A. Davidson

Okay. And then the sort of the new wave of things going into OREO in the Fourth Quarter, I think you said that was $10 million to $29 million or something like that. Are there substantial cash carry costs that you guys have for those?

Brad Copeland

It won't be substantial. There are some land deals in there, so it's going to be fairly routine on the cost to carry. And they are properties we feel are marketable; hopefully, won't be on our books very long.

Jim Bradshaw - D.A. Davidson

And Brad, are the projects basically done, ready to sell and absorption's just slow or are there curbs in the streets and electricity and things like that to put in still?

Brad Copeland

Most of them, the infrastructure is in and could be sold as is.

Jim Bradshaw - D.A. Davidson

Okay. And then the last question I had is, I just wonder what your thinking is on Goodwill Impairment. I wonder how often you test that? Is it an annual test or if you -- if Ron, you think maybe there is some risk to that Goodwill carry number you have?

Ronald Farnsworth

Good question, Jim. Yes, we actually test that quarterly and keep an eye on it, obviously throughout the quarter. We see comfortable margin on that for any impairment here at the end of Q3 and then in Q4. We don't think that's an issue.

Jim Bradshaw - D.A. Davidson

Okay, great. Thanks very much, guys.

Ronald Farnsworth

Thank you.

Operator

Your next question is from Todd Hagerman with Credit Suisse.

Todd Hagerman - Credit Suisse

Good morning, everybody. I just have a couple of questions. Just to clarify, Ray, in terms of the collateral values on the for-sale housing portfolio if you will. Again, with the specific reserves that you recognize in the current quarter, I'm assuming, with the individual projects or properties if you will, that every one of those properties is now in conformance with existing policy with those specific reserves?

Raymond Davis

Yes.

Todd Hagerman - Credit Suisse

Okay. So there's nothing out of policy as of today?

Raymond Davis

That's correct.

Todd Hagerman - Credit Suisse

Okay. And then just secondly, in terms of the construction portfolio growth that you did recognize in the quarter, although it does look like it's skewed towards the Oregon Washington market. Can you just talk a little bit about -- again, what type of construction growth that is, and if you have done anything in terms of your underwriting standards as it relates to construction in general?

Mark Wardlow

This is Mark. I'll take this and then maybe Dave and/or Bill want to fill in a little bit. But as we mentioned, I think on the last call, we have significantly -- over a year ago significantly tightened up our underwriting on any new land A&D single-family construction.

So any new originations in that category for about the last year have been very little. The growth you see in the portfolio for construction activity is spread throughout the footprint and it consists of deals outside of that product type. So we're looking at office buildings, retail centers, warehouse facilities, etcetera.

Todd Hagerman - Credit Suisse

Okay. In terms of the A&D, what would be -- what's your current policy in terms of collateral in terms of any prospective deal?

Mark Wardlow

As I mentioned, effectively we have not originated any new deals in this product type for over a year. If we do entertain a request to do one of these deals, it's got to be very solid from an LTV loan to cost, cash equity, secondary support from the borrower’s perspective. And effectively, I think most of our developers have pulled back realizing the market conditions and have elected not to go forward with these projects.

Todd Hagerman - Credit Suisse

Is it less than 50%?

Mark Wardlow

On our land loans, yes, the LTV would be 50% or less. Yes.

Todd Hagerman - Credit Suisse

Okay. And again -- so, your Northern California exposure, you're currently at or below that number?

Mark Wardlow

On our land loans that are performing, yes. If the LTVs are higher or they have been identified as problems that are being managed through special assets with the appropriate reserves.

Todd Hagerman - Credit Suisse

Okay. And then just -- lastly, just Ron, in terms of the MSR hedge that you mentioned for the Fourth Quarter, I'm assuming -- will that be more of a balance sheet hedge, natural balance sheet hedge on that or just something more specific that you have in mind?

Ronald Farnsworth

No. It'll be mortgage TBAs, just basically hedging the downside risk of the asset as opposed to earnings. So rates drop, MSRs that are unhedged tend to drop in value, end up with a decline in earnings. We want to negate that.

Todd Hagerman - Credit Suisse

Right. Now, I recognize that, but what I'm suggesting is, you're using your securities portfolio?

Ronald Farnsworth

No, sorry, no. It will be a specific hedge for the MSR asset.

Todd Hagerman - Credit Suisse

Okay, terrific. Thank you.

Ronald Farnsworth

Thank you.

Operator

(Operator Instructions) Your next question comes from Matthew Clark with KBW.

Matthew Clark - KBW

Hey, guys. Just a couple of quick follow-ups. Can you suggest, or is it realistic to suggest with a fair amount of confidence that all of these updated appraisals have considered the season up of the secondary market in August and the fact that sales activity in the month of September just fell off the map?

Brad Copeland

Yes. I mean if we've obtained an appraisal, our appraisers are looking at that very carefully, and our review appraisers are looking at that very carefully as well. And we realize that the market is moving very quickly. So, if there's doubt about a deal where we stand, we are getting updated appraisals. But as you know, the market is moving very quickly.

All right, okay. And then lastly, Ray, you mentioned in your comments about I guess your expectation or hope to return toward normalized earnings soon. Can you maybe give us a sense as to what you mean by normalized and what you mean by soon?

Ray Davis

Well, we don't give guidance, so I'm not going to predict when that's going to take place, but you can rest assured as I mentioned that we're moving as fast as possible. That's one of the reasons why we've been very aggressive in the way we've classified and valued these loans to take as much reserve as was necessary, and as much reserve that we could take.

So we can get as many of these problems behind us as possible and get back to our more normalized earnings rate. The one way to look at it Matt is, for the last couple of quarters we've had some spikes in the provisions that even going back -- you can go back as far as you want to go back, or they stand out as exceptional spikes, and obviously, we want to get the number back down to something that we can predict and get our earnings back up to our overall market value of the company…

Matthew Clark- KBW

Okay. Thank you.

Operator

Your next question comes from K.C. Ambrecht with Millennium.

K.C. Ambrecht - Millennium

Hi. Thank you very much for taking my question. So, Ray, maybe could you just give us a one-liner on what inning you think we're in, in terms of your construction book?

Ray Davis

K.C., that's hard to predict. That's a crystal ball number. I hate to speculate. I'm going to pass on that. I think to speculate on that is very dangerous for anybody, and it has no meaning, so I think I have to skip on that.

K.C. Ambrecht - Millennium

Let me try it a different way. Last quarter you guys said, well, we're seeing some softness and we think we have our arms around it, and then we walk in this quarter and you take a monster provision. So I'm just trying to get a sense whether we're going to have this for the next few quarters?

Ray Davis

As we went through the call, we gave you some -- for the first time actually, we don't normally even do this, but we have given you a guidance on our credit portfolio metrics and quality standards for the next quarter, so I think you can draw some pretty good conclusions from that.

K.C. Ambrecht - Millennium

Okay. Thank you.

Ray Davis

You bet.

Operator

At this time there are no further questions. Do you have any closing remarks?

Ray Davis

Yes. Okay. We'll go ahead and wrap it up. Thank you for your interest in Umpqua Holdings and your attendance today. Have a good day.

Operator

This concludes today's conference call. You may now disconnect.

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