Umpqua Holdings Q4 2007 Earnings Call Transcript

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 |  About: Umpqua Holdings Corporation (UMPQ)
by: SA Transcripts

Umpqua Holdings Corporation (NASDAQ:UMPQ)

Q4 2007 Earnings Call

January 24, 2008 1:00 pm ET

Executives

Ronald L. Farnsworth – Principal Financial Officer

Raymond P. Davis – President, Chief Financial Officer

Brad F. Copeland – Senior Executive Vice-President, Chief Credit Officer

David M. Edson – Executive Vice President

William T. Fike – President Umpqua Bank – California

Mark Wordlow – Senior Credit Officer

Analysts

Todd Hagerman – Credit Suisse

Brent Chris – Fox-Pitt Kelton

Morton O’Tool Smith

Brett Rabatan – FTN Midwest Securities Corp.

Joe Morford – RBC Capital Markets

Jim Bradshaw – D.A. Davidson & Co.

Mathew Clark – Keefe, Bruyette & Woods

Jeff Manning – Oregonian Newspaper

Operator

Good afternoon. My name is Thia and I will be the conference operator today. At this time I would like to welcome everyone to the Umpqua Holdings fourth 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. (Operators Instructions) I will now turn the conference over to Ron Farnsworth. Sir please go ahead.

Ronald L. Farnsworth

Good morning and thank you for joining us today as we discuss results of operations for the fourth quarter and full year 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 10K, 10Q 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, CEO of Umpqua Holdings Corporation and Brad Copeland our Chief Credit Officer, Dave Edson President of our Northwest region, Bill Fike President of our California Region and Mark Wordlow our Senior Credit Officer will also be 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.

Raymond P. Davis

Thank you Ron and good morning everybody. For the year 2007 management reported operating earnings of $65.3 million or $1.08 per diluted share compared to $87.3 million or $1.65 per diluted share for the year of 2006. For the fourth quarter of 2007 the company reported operating earnings of $9.6 million or $0.16 per diluted share compared to $24.8 million or $0.42 per diluted share for the fourth quarter of 2006. Operating earnings exclude merger related expenses; no tax was totaled $71,000 for the fourth quarter and $2 million for the year 2007. Before we focus our call on credit quality there are several other actions that impacted our performance this past quarter including the following: we accrued $5.1 million for our estimated pro rata share of the Visa membership litigation expense related to their settlement with American Express and ongoing litigation with Discover. We anticipate our proportionate share of the proceeds of the planned public offering by Visa in the near future will more than offset this liability.

Deposit growth this past quarter was mixed. California deposits grew $71 million while Oregon, Washington remained flat. Our organic growth rate for deposits for the year was 5% made up of 6% growth in Oregon, Washington and 4% growth in California. Total deposit growth for the year including our acquisition was 13%. Excluding the acquisition of North Bay Bank Corp., the company’s loan growth also was 5%. Our Oregon, Washington credit team grew their organic loan totals by 10% for the year. In California we incurred a reduction in total loan’s outstanding of 3%. This result was due to management’s decision to eliminate loans that were stressed as well as to reduce our residential development portfolio. Before I turn the call over to Brad to discuss our credit quality status a few comments from me on our performance in this area.

First, I want to reiterate what has been said in previous calls that the credit and special assets teams here at Umpqua are experienced professionals that are more than capable of dealing with our problems. During our third quarter earnings call we provided you with specific credit quality measurement guidance for the fourth quarter which we are pleased to report we achieved in all areas. It is also important to comment that the loan issues that Umpqua is dealing with now are traditional credit issues they are not complicated investments or loan products but plain vanilla credit that has fallen victim to the current housing and economic downturn. This past quarter’s non-performing loan total which would have been better had it not been for one previously classified $24.7 million relationship that was placed on non-accrual late in the quarter. This property was a multi-use commercial residential asset that is well secured and we expect no loss on this property. Excluding this the average non-accrual loan relationship is $1.6 million. Our management team feels that we are near an inflection point with our credit quality issues in California. We are of this opinion due to the lack of any significant new classified loans for the last 90 days and due to the extensive loan audits our teams have completed this past quarter. We recognize that like other institutions we are somewhat at the mercy of economic conditions. However, at this point in the cycle we understand and have identified our issues and are working quickly towards a resolution and look forward to returning to the normalized earnings in the near future. Ron Farnsworth will provide more information on our net interest margin, capital and other financial matters in a few minutes. Now Brad will give you more detail on our credit quality status.

Brad F. Copeland

As you’re all aware of the US experiencing a significant if not unparalleled slow down in the housing industry. The impact on Umpqua related to this down turn is a s previously reported principally located in our Northern California Region. This led to an increase during 2007 in our fee credit quality indicators classified loans, non-performing loans and other real estate owned. During this past quarter and as we have reported in previous calls Umpqua has been aggressive in identifying properly risk rating and resolving stressed credits. Our approach has been to avoid surprises to the market place. Our pro-active steps have produced tangible results. The actions of our credit teams have brought our credit quality majors within the guidance given during our third quarter earnings call. In that regard, since we are currently engaged in a variety of discussion with borrowers we will be unable to address details on specific existing or resolved credits on today’s call.

During our last conference call we reported our expectation of resolving a $20 million non-performing loan during the fourth quarter. We actually resolved $30.5 million comprised of $20.2 million in non-performing loans and $10.3 million on other real estate owned. In addition, of our $9.8 million of loans 90 days past due and accruing we resolved $4.8 million in early January. We had forecasted charge offs in Q4 to be less than the provision for loan losses taken through Q3. Actual net charge offs were $21.2 million compared to a $24 million loan provision through Q3. We had expected non-performing assets to be in the $70 to $99 million range actual non-performing assets were $98 million. Of our non-performing loans 75% are within our residential development segment and 73% of these are in California.

Let me share some of the actions taken this past quarter. We completed an extensive review of all loans risk rated or watched or worse. We are confident our potential problem loans have been identified, are properly risk rated and are receiving the appropriate management oversight. We have properly valued each problem loan based on updated appraisals leading to an impairment reserve of $9.9 million down from $16.2 million last quarter. This lower number was arrived at by charging off $8.7 million of compared reserve while adding $2.3 million during the quarter. Total charge offs for Q4 were comprised of $8.7 million from the Q3 impairment reserve and $13 million for non-performing loans resolved within the quarter. The calculated provision for loan losses for fourth quarter was $13.8 million. This is down 33% from the $20.4 million provision taken during the third quarter. An additional provision of $4 million was added to the unallocated portion of the allowance, increasing the total provision recognized in the fourth quarter to $17.8 million. Our total allowance for credit loss now stands at $86.1 million or 1.42% of loans outstanding. The unallocated reserve of $4 million represents 4.8% of the total.

At year end our total loan portfolio stood at $6 billion. Of this commercial and residential real estate was $3.4 billion, commercial was $1.4 billion and the balance of $1.2 billion was in construction. Of our $1.2 billion construction portfolio $514 million are commercial construction loans performing with no notable issues. The balance of $674 million are residential development loans which include land, acquisition and development and single family construction. This total is down $90 million or 12% from last quarter. The average residential development loan was $894,000. We remain optimistic that should our loan resolutions go as planned the company will report further progress in improving our loan quality metrics throughout the first half of 2008.

There are several positives on the credit front I’d like to report to you as follows: outside of our non-performing loans past due loans 30 to 89 days were 0.64% of total loans down from 0.98% last quarter. The delinquency ratios in our C&I and our commercial real estate portfolios remain strong at 0.21% and 0.54% respectively. The wine industry group we mentioned during our last earnings call continues to ramp up and has approximately $38 million of transactions in the pipeline with $10 million in closed loans. Across all markets our pipelines remain healthy with a total of $800 million split evenly between our two regions. It is important to mention that approximately 40% of the pipeline are C&I loans.

We’re having success in changing the composition of our California loan portfolio, increasing C&I loans from 16 to 22% year-over-year. Also the mix of new loans generated for the year changed dramatically with 45% of new loan volume consisting of C&I loans. Our Sacramento Corporate team alone generated $102 million in new loans during 2007 with 81% of this production being in the C&I category. Our Napa commercial team which was formally the Vintage Bank produced $30 million in new loans for the last half of 2007 with 44% of this production being C&I loans. We were successful in entering a new market by lending to tax exempt entities. During 2007 we booked in excess of $65 million of these loans with another $30 million in the pipeline. Additionally we experienced 40% loan growth in our Puget Sound market. As you can tell we have increased our focus on commercial and industrial lending. This has been accomplished by adding several seasoned C&I professionals throughout our footprint.

I’d like to close with a few comments on our underwriting practices and special assets team. First we have never deviated from our standard underwriting practices. They are strong today as at nay point over the last several years. These practices have served us well over our history. We have no sub-prime loans nor stated income construction loans. And finally it’s important for you to understand the depth and experience of our special assets group. This team which has been in place since 2002, is comprised of 19 full time work-out specialists. Our manager has 30 years of experience in lending, collection and problem resolution. The commercial work-out officers located throughout the bank’s footprint have an average of 19 years of banking experience each. For many of these professionals this is the third economic downturn they have worked through. As Chief Credit Officer of the bank I am pleased to have such an experienced and seasoned group of officers working with us through the cycle. I’ll now turn the call back to Ron.

Ronald L. Farnsworth

Our fourth quarter net interest margin was 4% a decrease from the third quarter was due to the continued decline in short term interest rates along with interest reversals on new non-accrual loans which together resulted in a 31 basis point decline in earning asset yields. The interest reversals in Q4 alone represented 15 basis points of our loan yield decline and 13 basis points of margin decline. Excluding the interest reversals our fourth quarter margin would have been 4.13%. We were able to offset a portion of this decline with reduction of interest bearing deposits of 16 basis points. Interest expense on deposits declined $1 million in the fourth quarter. Of this a decline of $2 million related to rate reduction offset by an increase of $1 million related to the increase in average interest bearing deposits of $118 million over the third quarter.

In our call last quarter I told you I thought the margin was stabilizing, while we were able to match the impact of loan yields solely from Q4 Fed cuts with deposit rate cuts we were not successful in matching the entire decline. The treasury market rally combined with the slow down in construction lending has lead to significantly more dollars in the market chasing the smaller pool of loan opportunity. When this happens the industry tends to compete first on rate. To match this pressure on loan yields our goal is to continue driving deposit costs down. While we have $2 billion in loans [inaudible] prime and a total of $3.3 billion re-pricing within one year we also have $3.4 billion in interest bearing non-timed deposits available for re-pricing. In addition we have $650 million in time deposits maturing within 90 days and $1.8 billion maturing within a year. Given these sources of funds we believe we have the ability to match the Fed cuts with downward re-pricing on deposits.

Within non-interest income the largest changes this quarter were in mortgage banking revenue and other income. Mortgage banking revenue increased $650,000 from the third quarter. Production revenue was up 4% on a sequential quarter basis. On a volume increase of 2% and $82 million for the quarter. Total volume for the year was $364 million a decline of only 12% from 2006 which is strong given the overall market slowdown in mortgage activity. The net MSR evaluation change was a positive $222,000 this quarter. Excluding early pay-off of $184,000 the gross MSR valuation increase was actually $406,000. Offsetting a portion of this was the new MSR edge implemented mid-quarter which cost $334,000 as mortgage rates increased towards the end of Q4.

Other income in the third quarter included a $4.1 million fair value increase on trust preferred borrowing. Here in the fourth quarter we had a $725,000 gain on sale of excess property. Excluding these two items from both quarters other non-interest income increased $580,000 in Q4. Also our retail brokerage subsidiary reported net income increase of 180% over 2006. This increase has been gradual and steady throughout the year as management works diligently to recruit new brokers, increase the weighting of managed fee sources and increase the efficiency in back room operation.

Total managed expense increased $4.4 million during the quarter. Included in another expense was the $5.1 million charge for Visa litigation Ray mentioned earlier. We expect proceeds from their planned IPO to more than offset this expense but we’re required to separate the two events for accounting purposes. Excluding this charge total managed expense actually declined $725,000 this quarter. Compensation declined $300,000 this line also included a $500,000 severance charge related to job eliminations made over the past quarter. Occupancy declined $150,000 related to vacating excess properties and other non-issues expense excluding the Visa charge was flat in Q4 but included a $500,000 increase in FDITC from the new deposit insurance assessment program along with $190,000 in OREO expense. Operating expense to average assets was 2.60% in 2007 down 15 basis points from 275 in 2006. The effective income tax rate declined to 25% this quarter related to a greater impact in tax exempt and tax credit.

To touch on capital matters our bank total risk based capital ratio is 10.8% at yearend up from 10.7% last quarter and our tangible equity to assets ratio increased slightly to 6.27%. Our trust preferred refinancing is still on hold and there are no stock re-purchases planned in the near term. Finally our liquidity is strong with $1.9 billion in available borrowing lines. I will now turn the call back to Ray for summary comments.

Raymond P. Davis

Okay just a few closing comments. As previously reported management is working diligently to return to a more normalized earnings level. We believe this possible as we approach returning to historical net charge off levels. Regarding dividends the company has every intention of continuing our current dividend policy and anticipates no disruption of our cash dividends to shareholders. In spite of tough economic conditions the company remains growth oriented. This is evidenced by a recent decision that including enhancing our commercial credit teams in Seattle and Portland by the continued search for new neighborhood stores sites, adding brokers to our brokerage unit and the November opening of our south water front store in Portland that we call our innovation laboratory. This unique store is being recognized throughout the country as another new innovative delivery vehicle developed by Umpqua and our technology partners.

Once again I want to express my appreciation to our lending professionals for their hard work and dedication they have demonstrated over the last several months. As I said last quarter I am proud to work along side them. The strength of our company culture has been incredible over the last several months as management has asked our staff to work harder while making sacrifices. As I’ve said repeatedly over the years our culture is the single most valuable asset the company possesses and will continue to fuel our future success. This again was made abundantly clear to all of us here at Umpqua and earlier this week Fortune Magazine announced their 2008, 100 Best Company’s to work for. I’m pleased to announce that Umpqua achieved this status for the second year in a row finishing 13th for all companies. Now I realize it is difficult for many of you to translate this into earnings per share but let me reassure you that for the long haul these accolades are important considerations as we continue to strengthen our unique value proposition and stand out from our peers. To the many shareholders that are listening to this call I want to thank you as well for the support during these trying times, your confidence and management inspires us to perform better. Over the next several weeks I will be out throughout our footprint hopefully meeting with many of you to discuss our company. As always we appreciate your interest in Umpqua Holdings Corporation and we know would like to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll pause for just a moment to compile the Q&A roster. The first question is from Todd Hagerman with Credit Suisse.

Todd Hagerman – Credit Suisse

Just a couple of questions, first off maybe Brad and Ray, questions on the reserve and the un-allocated portion that you referenced earlier, why the change linked quarter? Was there a change in the methodology? And, could you give us a little bit more background in terms with the $86 million that you reference, how is that allocated against the residential construction A&D portfolio?

Raymond P. Davis

Let me address the un-allocated question that you had. You know after we finished our computations of the reserve, of the amount that we should be providing, you know, due to the economic times that are going on, we have a company policy that we have always followed in computing our reserve and our company policy states clearly that our un-allocated reserve will remain between 0% and 5%. With the situation going on throughout the United States right now we felt it was prudent for us to add some reserve in the fourth quarter to bolster our reserves and watch and see what happens to the economy over the next few months.

Todd Hagerman – Credit Suisse

Okay but there’s nothing necessarily in terms of you referenced the 30 to 89 past due, there’s nothing necessarily there that suggests that that un-allocated will show up as allocated next quarter?

Raymond P. Davis

No there is nothing there, that’s correct.

Todd Hagerman – Credit Suisse

Okay and then again just could you give us a better sense of how the $86 million applies to the kind of the troubled residential A&D portfolio?

Raymond P. Davis

75% Todd.

Todd Hagerman – Credit Suisse

Okay and if I look at the charge-offs that you’ve recognize over the last two quarters if you will and the impairment reserves and so forth, can you break that down for me in the sense of give me a picture of kind of the average hair cut that you’ve taken in on these non-performing loans that you’ve recognize?

Raymond P. Davis

Todd, we anticipated that question and let me say this to you, we don’t want to answer that and we don’t want to answer it primarily because we are in intense negotiations to resolve future credits and I think to show all our cards on that would really be a mistake for us so we’re going to pause on that particular part of your question.

Todd Hagerman – Credit Suisse

Okay and then just finally in terms of the watch list or the criticized list again I think you made reference to this before but can you again just give a better sense of the migration or how that trend did from September to year-end?

Mark Wordlow

The watch list from September to year end was, we had a reduction in our classified credits overall, our criticized and classified credits over all. So we were encouraged by the positive movement in that direction.

Todd Hagerman – Credit Suisse

Can you give me an order of magnitude?

Mark Wordlow

Yes. Roughly in the criticized classified category we had a reduction somewhere in the $30 to $40 million range.

Operator

The next question is from Brent Christ with Fox Fit.

Brent Chris – Fox-Pitt Kelton

Can you talk a little bit more about the large $25 million non-performer that was added late in the quarter just in terms of some more details on the nature of the relationship and why you’re confident that there’s no loss content there?

Raymond P. Davis

Again let me restate what we’ve said it’s a commercial sort of a combination commercial real estate property. It is well secured through our collateral and recent appraisals as well as very strong guarantors. So we believe we’re in very good shape on that piece of property and anticipate no loss.

Brent Chris – Fox-Pitt Kelton

And where from a geographic perspective, where’s it located?

Raymond P. Davis

It’s in the Greater Sacramento area.

Brent Chris – Fox-Pitt Kelton

Sacramento and is the collateral real estate on that?

Raymond P. Davis

Yes.

Brent Chris – Fox-Pitt Kelton

Okay. Great and then switching gears just in terms of kind of your outlook for loan growth you mentioned the $100 million pipeline we kind of splint evenly between the Oregon, Washington and California markets. Could you talk a little bit about your growth expectations into 2008 with the potential for some further unwinding in the construction portfolio?

Raymond P. Davis

Well as you know we’ve always been growth oriented and clearly our intentions as I’ve stated are we’re going to remain a very growth oriented company as we continue to add people in the specific markets that make a great deal of sense and where we see the potential for ongoing growth. So we certainly don’t anticipate our growth levels any lower than what they are but again as everybody on the call’s aware we do not give specific guidance on future numbers. But we are focused on continuing to grow this organization and as Brad mentioned while we I believe, dramatically improve the mix.

Operator

The next question is from Morton O’Tool Smith

Morton O’Tool Smith

Hi I’m a new shareholder as of November 2007 and I was wondering why no share buybacks? I’m putting my money in, I’m showing confidence in the management as Mr. Davis’s, why is the bank not doing the same?

Raymond P. Davis

Good question. Through 2007 we had repurchased a little over $4 million shares of stock. That was through the third quarter 2000 between Q2, Q3, today we are sitting on about 10.8% total risk based capital at the bank level. We do not feel it’s prudent to artificially depress that number in this environment. That’s why we pulled that off the table.

Morton O’Tool Smith

Just to follow-up would there be a point in future where you might reconsider if the stock touched new lows?

Raymond P. Davis

It’s always possible. We do have still a lot of dry powder as far as stock would could potentially buy back in the future.

Operator

The next question is from Brett Rabatan with FTN West.

Brett Rabatan – FTN Midwest Securities Corp.

Ray I wanted to ask you, I’m just looking at the provision and thinking about what you indicated in your prepared comments and I’m trying to figure out and this is a macro question that I’ve been asking a few bank executives, is we haven’t right now things are seasonally slow in terms of housing sales and we really won’t know what they look like for another three or four months and so I’m curious on two things, one is what you guys are assuming in terms of the residential portfolio and how sales go this Spring? And then, how that kind of relates to what you’re assuming for that piece of the portfolio in terms of the provision in 4Q?

Raymond P. Davis

Brett are you talking about our mortgage division when you say real estate?

Brett Rabatan – FTN Midwest Securities Corp.

No, no, no, the construction, the construction loans that you guys have and particularly in Sacramento?

Raymond P. Davis

Well obviously we’re not making those loans and have not made those loans since, as we stated earlier, the beginning of 2006; so we’ve been out of that business. We’re in the business of winding those down as best that we can. But I will tell you though I don’t think anybody should jump to the conclusion that because you have residential development loans that there all bad, as we stated our average residential development loan is shy of a million dollars right now so these are numbers that for an organization our size you know are pretty easily manageable. So we felt very, very comfortable with that. I believe that to answer your question specifically we know that the total dollars of A&D loans will continue to decrease as other areas of the bank continue to go up. I do believe though when you think about the provision Brett, that we have as you know, been very aggressive in down grading loans as fast as we need to or should trying to get as many of these problems behind us as fast as we can so we can focus our attention on more productive activities and I think we’ve done a very good job in that. So I don’t see, well let’s put it this way, I look forward to our provision and turning back to a more normalized rate, you know, somewhere in that three to five range in the near term.

Brett Rabatan – FTN Midwest Securities Corp.

Okay and then Ray maybe as a follow-up I mean I think it’s fairly obvious that the investors that’s what there concerned about but not only for you but for the industry is the residential construction and specifically you know, your exposure in areas like Sacramento to the extent you could give any additional color on where the loan portfolio is in terms of it’s duration or maturity so to speak, ie you know, do you have a lot of properties that are in the early stages of being built? Then I guess the other thing is how your treating these loans i.e., will you extend them with some provisions for interest reserves? Or how you’re making sure there’s going to be enough cash around while the kind of slow environment plays out?

Mark Wordlow

As Ray alluded to earlier we have not originated any new loans in this category since the early part of 2006. The loans that we have on the books now therefore have very short durations. A lot of them are coming up for renewal or extension at this point. We’re treating them case by case, getting them reappraised as necessary. If required we have the borrower re-margin and/or reload interest reserves to carry it for the period of the extension to allow more times for the homes to be absorbed.

Raymond P. Davis

One thing that should give you comfort is as I said the average A&D loans are somewhere in the $900,000 range and our borrowers, when those loans were made those were strong borrowers and I know they’ve been, obviously been stressed but the vast majority of those people can carry that type loan without too much problem.

Brett Rabatan – FTN Midwest Securities Corp.

So you’re comfortable there not too leveraged for the slow environment doesn’t?

Raymond P. Davis

On a case by case basis as you know but overall we’ve got our hands around this.

Brett Rabatan – FTN Midwest Securities Corp.

And to make sure I understood properly you know obviously you said you hadn’t made loans in that area since the spring of 2006. Have there been any draw downs since then or do you have any commitments remaining?

Raymond P. Davis

Sure there have, sure there have. There was a loan made at the end of 2005 you can count on, there were draw downs in the first part through most of 2006.

Brett Rabatan – FTN Midwest Securities Corp.

So are there any remaining commitments in that portfolio or are they all drawn down to the extent that they will be?

Raymond P. Davis

There are still some, there are still, a low portion of it is in commitments but it’s very low.

Operator

The next question is from Joe Morford with RBC Capital Markets.

Joe Morford – RBC Capital Markets

First just a quick follow-up on the $24.7 million relationship just kind of curious, what was the event in the fourth quarter that caused you to put it on non-performing? Was it something to do with the residential part of it? The commercial? And what kind of your expectation right now in terms of timing for resolution here?

Raymond P. Davis

I can answer the question on timing is as fast as possible I mean we’re working diligently on this, as you can imagine. It should be clear to everybody we resolve this one loan and our non-performers are going to fall through the floor. I mean it will be a very big event for us. So we’re moving very quickly on that. As far as what event took place, nothing more nothing different than any other loan to tell you the truth, you know, it went past 90 days past due during the quarter and we have a very strict rule when that happens it goes to non-accrual period and we reversed interest. No negotiations inside this bank on that. That’s the way we deal with it. Bottom line on this particular loan I will tell you there is absolutely no reason for this loan to be in non-performing status and therefore we hope for resolution here in the month to come. But it should not be here. Let’s put it that away.

Joe Morford – RBC Capital Market

Okay. And then I guess going from that, first how much of your California residential development portfolio is currently on the classified list?

Raymond P. Davis

I think we said it was 75%. 73%.

Joe Morford – RBC Capital Markets

Oh, that was the 73%. Okay. Alright and then lastly just there’s obviously been a lot of focus on the residential development portfolio but specific to Sacramento we’ve been hearing the past several months more and more commentary about weakness on the commercial real estate side, mostly office but some retail. Just kind of curious are you seeing any of that in your portfolio and has that lead to any sort of downgrades related to that? And then, also how about C&I and the non-real estate related businesses in the Sacramento area?

Raymond P. Davis

As we stated our performance in all other areas of the bank loan portfolios are outstanding. We just don’t have any notable issues to talk to you about. I will tell you this about Sacramento or maybe it’s the entire California market as far as I’m concerned. I se the same thing that you guys see on articles that are written by so called experts, by the media, the newspapers, picking up - there was an article in the Sacramento B I believe yesterday talking about, or the Business Journal talking about that the commercial office is struggling. That was the headline in this one particular article and basically what the reporter quoted was one individual’s opinion and then within the article there were two or three opinions to contradict that. So, I caution everybody to not jump on band wagons on headlines. I think that the press has done a very good job of covering this housing down turn and they’ve done it very adequately. But I think in some instances it gets exacerbated which again puts great pressure on consumer confidence in the United States and I think it does a disservice by exaggerating some of the problems.

Operator

The next question is from Jim Bradshaw with D.A. Davidson.

Jim Bradshaw – D.A. Davidson & Co.

Let’s see I heard your comments about the margin and sort of condensing and it sounds like over a year you ought to see margin rebound a bit from where it is here, but maybe in the short run there’s some pressure on it. Is that sort of a fair assessment?

Raymond P. Davis

That is a fair statement.

Jim Bradshaw – D.A. Davidson & Co.

Okay and Ronald how about floors in loans do you use those much and maybe you can quantify it if you do?

Mark Wordlow

Yes we’ve been doing more of that lately. We’ve been doing more of that lately with the precipitance drop in interest rate and so yes we do that quite frequently.

Jim Bradshaw – D.A. Davidson & Co.

And Mark I just wonder kind of last cycle when we hit floors you know, there was a pretty significant competitive forces out there that didn’t allow guys to really honor them or use them and I just wonder kind of what your early read is on competitive landscapes for floors?

Mark Wordlow

As far as I know most of our competitor banks are going to that concept if they’re not then you know, we’re not going to necessarily be following suit there. We believe it’s necessary in a lot of cases given the interest rate environment that we’re in.

Raymond P. Davis

You know I think in some cases, again I don’t mean to get on my sermon box here but I think a lot of the banks need to find their back bones a little bit. I think that there are, yes, no question about its very competitive out there there’s more money chasing fewer credits due to the dry up of the housing market. But you know, some of these banks if their going to stop some of there problems their going to have to draw a line in the sand and not cross over it. I think the same thing could be true on our cost of funds. Most of the articles I read about talk about banks can’t lower their cost of funds because they’re afraid about losing market shares. I can assure you that Umpqua Bank is not afraid of losing market share and we are aggressively lowering interest rates and we will not lose market share because of it. There’s a lot of elasticity in the marketplace that a lot of the especially the smaller banks are not picking up on and I think are losing an opportunity.

Jim Bradshaw – D.A. Davidson & Co.

Great thanks and last for me is, Ron what do you think the Q1 tax rates going to look like?

Ronald L. Farnsworth

We’re expecting something in the mid 30% range right around 35% or 36% range.

Operator

(Operator Instructions) There is a question from Mathew Clark of KBW.

Mathew Clark – Keefe, Bruyette & Woods

On the $25 million non-accrual relationship can you give us a sense as to how far along that project is? I guess what percent complete do you think it is? And maybe some additional metrics on what your loan evaluation or loan to cost there is currently?

Ronald L. Farnsworth

Yes. It’s we’re not going to get into specifics on it. I can tell you though that it’s the commercial side is virtually complete and the residential stuff is ready to go vertical. There’s nothing on it now. But that’s the extent, that’s all I can tell you at this point.

Mathew Clark – Keefe, Bruyette & Woods

Okay and it sounds like there’s a personal guarantee here? Is there anything else, is there real estate or not as part of the collateral?

Ronald L. Farnsworth

Matt, all of our, yes, all of our [inaudible] real estate loans have got real estate behind them and so there’s very strong real estate on this property that the appraised value collaborate as well as strong guarantors but understand something that, you know, our standard practice at Umpqua Bank is I’m sure most of you are aware, is that we get personal guarantees on our loans. It’s a very infrequent case when we don’t.

Mathew Clark – Keefe, Bruyette & Woods

Okay great. And then, on the $674 million of private land development exposure split between the Washington, Oregon and California footprint, can you give us a sense as to and I apologize if you’ve already answered this question, I’m not sure if that’s the 73% answer or not. But you know what percent splitting the two geographic areas apart, what percent of each of those portfolios is I guess considered criticized, classified?

Mark Wordlow

Of our, this is Mark again of our total criticized classified 73% of it represents California residential development financing. So there’s very few projects that are classified you know you know Oregon, Washington footprint in that category.

Mathew Clark – Keefe, Bruyette & Woods

Okay and then can you just give us an update maybe a more recent update as to what you’re seeing in the greater Portland market for example where those recent home auction? And just curious as to what you’re seeing on the sales side as well as the price side?

Ronald L. Farnsworth

Sure. First of all Portland and the entire Northwest actually doing very well. I think it was three city’s that were announced about a month ago. There were only three cities in the United States where home prices are still appreciating Portland, Charlotte and Seattle. So were fortunate to have the majority of our assets located up here in the Northwest so that part is very well. As far as the auction you referred to, Matt, that had nothing to do with us. That was a marketing ploy by a very creative developer, which, more power to him, but that had nothing to do with any any indication of the quality of this market up here nor did Umpqua have anything to do with it.

Mathew Clark – Keefe, Bruyette & Woods

No. I understand but it just you know, gives people the wrong perception and expectation that they should be getting discounts that’s all. It’s just not a good thing for prices.

Ronald L. Farnsworth

I agree, I agree with you and that’s why I say don’t believe everything that you read.

Mathew Clark – Keefe, Bruyette & Woods

Fair. Okay, I think everything else has been asked. Thanks.

Operator

The next question is from Jeff Manning with Oregonian Newspaper.

Jeff Manning – Oregonian Newspaper

I wanted to ask you, you mentioned a $500,000 charge for I think down sizing employment. Can you tell me how much you have down sized and what parts of the bank?

Ronald L. Farnsworth

First of all, we, this has nothing to do, this is something that we’ve been working on for the last year Jeff. What we’ve gone through is the consolidation of many of our back room functions just to make the bank more efficient and this is the net result of what that has meant.

Jeff Manning – Oregonian Newspaper

Can you quantify it at all?

Ronald L. Farnsworth

$500,000 is severance pay.

Jeff Manning – Oregonian Newspaper

I mean in terms of people.

Ronald L. Farnsworth

In number of people I cannot. I don’t measure the success or failure on how many people or positions are eliminated in the company. I really do believe it’s a matter of efficiency and being able to enhance our customer experience in our stores and where we can use technology to help us in both those categories we're going to continue to do that. We have no plans let me answer this question in case it’s on your mind, we have no plans for any mass lay-offs, job terminations, there is no bad news coming out of Umpqua Bank regarding our staff.

Jeff Manning – Oregonian Newspaper

Let me ask you just one other quick question then in your third quarter Q there was some mortgage bank bonds that you listed $400 plus million worth. Can you tell me what sort of mortgages back up those bonds and whether these are sub-prime or Alt-A or in any way trouble?

Ronald L. Farnsworth

Sure Jeff they’re traditional, they’re vanilla bonds, they’re Fannie Mae, Freddie Mac backed mortgage back securities. All AAA rated, no sub-prime, no hold loans, no Alt-A

.

Jeff Manning – Oregonian Newspaper

Okay.

Ronald L. Farnsworth

Jeff we don’t have any exposure to any sub-prime lending investments or loans.

Operator

There are no further questions at this time.

Ronald L. Farnsworth

Okay, well thank you very much have a good day.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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