Umpqua Holdings Corporation Q2 2008 Earnings Call Transcript

Jul.21.08 | About: Umpqua Holdings (UMPQ)

Umpqua Holdings Corporation

Q2 2008 Earnings Call

July 17, 2008 1:00 pm ET

Executives

Ron Farnsworth - Chief Financial Officer

Raymond P. Davis - President and Chief Executive Officer

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

Dave Edson - President

Mark Wardlow - Senior Credit Officer

Analysts

Brett Rabatin – Midwest Securities Corp.

Brent Christ – Fox-Pitt Kelton

Todd Hagerman – Credit Suisse

Dustin Brumbaugh - Ragen MacKenzie Group

Matthew Clark – Keefe, Bruyette & Woods

Allan Smith

Jeff Bright – [Bright Security Group]

Kipling Peterson – [Columbia Ventures Corporation]

Operator

Welcome everyone to the Umpqua Holdings second quarter earnings release conference call. (Operator Instruction) Mr. Farnsworth, you may begin your conference.

Ron Farnsworth

Thank you for joining us today as we discuss the results of operations for the second quarter of 2008, 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; Dave Edson, President and Mark Wardlow, 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 will now turn the call over to Ray Davis.

Raymond P. Davis

This morning Umpqua Holdings reported earnings for the second quarter of $10.2 million or $0.17 per diluted share. On a year-to-date basis, the company reports earnings of $34.8 million or $0.58 per diluted share.

Here are a few highlights for the quarter. The company’s capital position remains strong with the total risk based capital at 11.06%. Our capital forecast for the rest of this year do not anticipate our capital following below our second quarter 2007 level of 10.8%. Our non-performing loans, end of the quarter at 1.61% of total loans and non-performing assets end of the quarter at 1.25% of total assets, marginally up from last quarter.

The management team at Umpqua continues to take an aggressive posture with non-performing loans which includes impairments tied to quick sale estimates, prompt downgrades of weaker credits and timely charge-offs. Ron will explain the actions we took this past quarter to eliminate any confusion with the difference in regulatory and SEC reporting of specific impairment reserves and charge-offs in past quarters.

In summary, we have charged off all recorded, specific impairments on collateral dependent loans. I am pleased to report that our 30 to 89 days past due loans have significantly decreased from totals reported for the first quarter. As of quarter end, this group of loans totals $18.9 million down 72% from the $68.2 million reported for the first quarter. This is a welcome and noticeable improvement.

Twitching the growth for this past quarter, our loan pipelines remain healthy and our net loan growth for this past quarter was a controlled $67 million while deposits roll back $153 million. We believe this downturn in deposits was temporary and in fact has started to rebound here in the third quarter.

It is important to note that virtually all of our deposit reduction is attributable to title and 1031 exchange companies as well as government agencies simply carrying lower balances. Our net interest margin ended the quarter at 4.5% for the company and 4.33% for the bank, as we forecasted last quarter. Both of these numbers reflect expansion in our margin.

As we have mentioned in past calls, our credit issues remained within our residential development portfolio which has been reduced over the last couple of quarters by more than 34%. Our problems have primarily been limited to the greater Sacramento area and then Oregon.

It is encouraging to note that recent statistics on the Sacramento housing market reflects signs of improvement, evidenced by the following: Since September of 2007, the inventory of homes for sale has dropped from 17.8 months to 5.2 months at the end of June. Home sales, which averaged about 800 units a month during 2007, have grown steadily over the last six months and have now more than doubled to over 1,800 for June.

Medium home prices have been reduced dramatically over the same period which has significantly contributed to the improvements noted. Even though it is premature to state that Sacramento has recovered, it is showing signs of improvement. That said Central Oregon is still slow while the rest of our footprint is holding steady.

I will now turn the call back over to Ron for some financial comments.

Ron Farnsworth

As mentioned, our second quarter net interest margin was 4.15% an increased 17 basis points from the first quarter. Earning asset yields declined 30 basis points this quarter, based primarily on the reductions from the prime rate. We were successful in reducing the costs of interest bearing deposits by 58 basis points this quarter, more than offsetting any earning asset yield pressure.

The interest reversals on new non-accrual loans in Q2 of $1.4 million caused the decline of nine basis points in our loan yield and eight basis points in our margin. Excluding the interest reversal, our second quarter margin would have increased by 25 basis points.

Our balance sheet composition has not changed initially, while we have $2.0 billion in loans tied to prime and in total $3.3 billion repricing within one year. We also have $3.2 billion in interest bearing non-time deposits available for repricing. In addition, we have $800 million in time deposits maturing within 90 days and $1.8 billion maturing within a year. These time deposits are still repricing up to 100 basis points lower based on current rate.

We are also increasing risk spread pricing requirements on the loan side given the environment. We expect to continue to see easing in the cost of the deposits from time maturity repricing lower. However, we expect this will be offset by some modest increases in the short term interest rates over the summer month driving the market to price set many market accounts.

As we discussed in our last earnings call, this quarter’s performance confirms the margin has stabilized. Within the allowance for credit losses, we identified $24.2 million in reserves related to non-accrual loans which historically, were specifically reserved for as that met the potential future loss. Prior to the second quarter, you would recognize the charge-off of the impairment reserve when the loan was resolved, sold, or foreclosed and transferred to other real estate owned (OTCPK:OREO).

Starting this quarter we accelerated the charge-off of the impairment reserve and anticipated recognizing this impairment estimate as charge-off in the period when it arises. Therefore, the non-accrual loans of $94.7 million as of June 30, 2008, have already been charged down to their estimated net realizable value and they are expected to be resolved over the coming quarters with no material additional loss.

Total net charge offs was $38 million in the second quarter of 2008, as discussed $24.2 million of that were from the acceleration of the impairment reserve estimates on non-accrual loans. This, in addition to $13.8 million of other charge offs on resolved problem loans combined for the total of $38 million in charge offs for the quarter. We expect, third quarter net charge offs to be significantly lower than here in Q2.

The provision for loan losses for the second quarter of 2008 was $25.1 million. In March 31, 2008, the impairment reserve for non-accrual loans was $13.3 million which was created through charges to the provision for loan losses in previous quarters. The combined total of $38.4 million covered the net charge-offs taken this quarter.

The allowance for credit losses was 1.22% of total loans and leases as of June 30, 2008 compared to 1.45% in March 31, 2008. The reduction in the second quarter resulted directly from the immediate charge-off of the impairments reserve on non-accrual loans. Excluding the impairment reserves from March 31, 2008, the allowance for credit losses was unchanged during the quarter.

It is important to note that in previous quarters, the impairment reserves has charged-off on a regulatory report causing a difference between our GAAP and regulatory financial statement. This means the impairment reserve on previous quarters’ non-accrual loans was already charged-off in determining our risk based capital levels.

We simply accelerated those charge-offs here in the second quarter, bringing the GAAP and regulatory financial statements in line. And this is important so I am going to reiterate it. The current level of non-accrual loans have already been written down to their estimated net realizable value, based on updated appraisals of quick sale values.

Turning to non-interest income, we saw an increase in service charge revenue during the quarter of 5% from Q1 based on higher interchange and (NFFT). Mortgage banking revenue was $3.7 million in the second quarter and included the gain on the value of MSR assets of $1.8 million. This improvement in value resulted from an increase in mortgage interest rate during the quarter which reduced future pre-payment estimates.

Other non-interest income was $2.6 million for the quarter and included two significant offsetting items. First was a $3.2 million fair value increase on trust preferred borrowings, related to spreads widening on new issues to the 500 to 550 basis point range. Our new trust preferred issues in 2007 carried a cash spread of 181 basis points over the three months LIBOR. This fair value mark will increase over the coming quarters if spreads continue to widen and will decrease if spreads tighten.

Offsetting this was the loss of $2.9 million on the sale of other real estate owned during the quarter. Other non- interest income for the first quarter of 2008 included a gain of $12.6 million for a mandatory partial redemption of our Visa ownership position based on their successful IPO in March. The redemption was for 295,000 shares leaving us with 469,000 shares of Class B stocks. These remaining shares are restricted for up to three years, and are then expected to convert into approximately 335,000 shares of Class A stock. This position was valued at $27.2 million at quarter end but has not been reflected in our financial statements or our capital position.

Turning to our expense now, total non-interest expense was $51.4 million for the second quarter compared to $46.9 million for the first quarter. Included in other expense last quarter was the reversal of the $5.1 million charge we established in the fourth quarter of 2007 for Visa membership related litigation. As you may recall from Q4, we were required to recognize an estimate of Visa’s pending litigation settlement based on our ownership position prior to their IPO.

Now that their IPO is complete, they have established a litigation reserve and we were able to reverse that accrual back in Q1. Excluding this item for Q1, total non-interest expense was $52 million in Q1, compared to $51.4 million here in Q2, a reduction of $600,000 or 1%.

The savings experienced in Q2 were related to salaries and benefits, and extension of the cost-saving initiatives we put in place during the fourth quarter of 2007. Our cost-saving initiatives have resulted in reduction of salaries and benefits of 4% when compared to the same quarter a year ago. But keep in mind, Q2, 2007 did not include a full quarter of our acquisition in North Bay Bancorp, which occurred in late April last year. Adjusting to this, salaries and benefits were down approximately 7% year-over-year. The effect of income tax rate was 28% this quarter, lower base on the impact of tax credit investments and reduced earnings. We expect it to be in the 31% to 33% range for all of 2008.

To summarize our second quarter income, we report a $0.17 of earnings per share. This included gains of $0.03 on the fair value of trust preferred borrowing, $0.02 from the MSR value improvement, and $0.02 from the lower effect of tax rate.

Offsetting this were cost of $0.25 for the provision for loan losses, $0.03 for loss on sale of OREO, and $0.01 for interest reversals on new non-accrual loans. Backing these items out are pre-loan loss provision earnings with $0.39 per share, an increase of $0.02 from the first quarter. I am laying this out so that I can make sure we are all starting from the same spot. As I know everyone has their own prediction for future provisions for loan losses.

On the capital front, our total risk based capital is 11.06% at June 30 down slightly from 11.15% last quarter. The reduction during the quarter related to the growth on loans. At this capital level we have $125 million of excess pre-tax capital above the 10% well-capitalized threshold.

We expect the total risk based capital level to be in the 10.8% to 11% range for the balance of the year, based on controlled growth of assets, reduced charge-offs, and a consistent dividend policy.

Our tangible equity to assets ratio decreased slightly this quarter from 6.5% to 6.36 %. This decline related solely to unrealized losses on the investment portfolio as market rates in spreads on bonds have increased for March. And there are no stock repurchases planned in the near-term and our liquidity remains strong with $1.6 billion in available borrowing lines.

I now turn the call over to Brad Copeland to cover credit.

Brad F. Copeland

Economic headwinds continued to adversely impact our credit quality metrics for the quarter. As stated in previous calls, we believe we have identified the majority of our problem loans. In the past several quarters, our efforts have been focused on implementing strategies to address them and bring them to resolution as quickly as possible. Since we are currently engaged in a variety of discussions with borrowers we will be unable to address details on specific credits during today’s call.

During the quarter, non-performing loans increased to $99 million which translates to 1.61% of total loans. Non-performing assets increased to $104 million which is 1.25% of total assets. The increase in non-performers was centered in three relationships totaling $21.5 million, all of which are residential development projects in Northern California.

We ended the quarter with other real estate owned to $5.8 million; a decrease from $13.3 million at the end of Q1, 97% of this amount consists of residential development properties. Restructured loans increased from $30.2 million at March 31, 2008 to $44.5 million at June 30, 2008. This represents six borrowing relationships, 98% of this total or $40 million are residential development projects.

We believe restructuring these loans which included re-margining the collateral is in the best interest of the borrowers and the bank. By June 30, our total loan portfolio stood at $6.1 billion, of this commercial and residential real estate was $3.6 billion. Commercial was $1.4 billion and the balance of $1.1 billion was in construction. Of our $1.1 billion construction portfolio, $568 million are commercial construction loans performing with no notable issues.

The balance of $502 million is residential development loans which include land acquisition and development and single family construction. This amount is split between California with $210 million and Oregon/Washington at $292 million with an average loan amount of $886,000.

The overall total is down, $80 million or 40% from last quarter and down $263 million or 34% over the last 3 quarters. The non-accrual loans are removed from this total. The portfolio stands at $430 million with $275 million in Oregon/Washington, and $155 million in California. The remaining average loan size is $842,000. During the past quarter we completed a comprehensive fourth quarter forecast of the remaining residential development loans. Our analysis of this data indicates this portfolio will continue to run off at the current rate.

In addition, there are several other positives on the credit front I would like to report to you. We successfully resolved nearly $40 million in non-performing assets during the past quarter. The delinquency ratios in our C&I and residential real estate portfolios remain low at 0.38% and 0.60% respectively. Loans past due, 30 to 89 days, fell from $68 million at March 31, 2008 to $19 million at June 30, 2008, a 72% reduction. Excluding non-performing loans, our overall delinquency ratio is 0.31%, the lowest level since March 2007.

The wine industry group we mentioned during our last earning call continues to ramp up with over $20 million in new loan bookings in Q2. In addition during the second quarter, we added a season team of six professionals which will allow us to further increase our penetration in the C&I segments. Our pipelines remain healthy across all markets. It is important to mention that approximately 46% of the pipelines are C&I loans.

I would like to close with a few comments regarding our problem resolution efforts for the second quarter. This quarter’s non-performing asset resolutions occurred in large part because of the expertise, hard work and dedication of our credit professionals. Although we still have some work ahead of us, we are confident our problems have been identified and are well within the capacity of our credit teams to manage effectively.

I will now turn the call back to Ray for our summary comments.

Raymond P. Davis

As both Ron and Brad have indicated, we are clearly on top of the financial status of the company and working diligently to return to normalized earnings. Our profound thanks to our shareholders who continue to send email, telephone and/or write in indicating their support of management, the Board of Directors and the company. We appreciate your comments. Thank you.

In spite of the troubled financial markets, be assured that your company, Umpqua Holdings, is strong, viable, and well-capitalized. As Ron mentioned earlier, we will continue to evaluate our capital levels on a perspective basis. As all of America is aware, the financial industry has been facing difficult times and leadership is needed now more than ever.

I believe leaders can only be successful if they remain optimistic about their prospects and capable of making decisions without being influenced by perpetual negative reports. Umpqua has always welcomed healthy debates about our performance and respect differences of opinion.

However, we will comment on reports that are factually incorrect. For example, this morning there was a report issued on Umpqua that stated we created profitability by the release of dollars in our reserve. This report is not only factually incorrect. It is misleading to investors and flat out wrong. The discussion that we have had on our reserve this morning should clearly support this.

In many ways, what is happening to many banks is almost a self-fulfilling prophecy. If you heard bad things enough times, unfortunately, you may start to believe them. We will not. We choose to operate differently with the positive attitude centered with the healthy doze of reality on a regular basis.

To the many shareholders that are listening to this call, I want to thank you again for the support. As always, we appreciate your interest in Umpqua Holdings Corporation and we will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions)Your first question comes from Brett Rabatin – Midwest Securities Corp.

Brett Rabatin – Midwest Securities Corp.

Can you walk through how much of the residential portfolio remains in land and the residential overall? Can you just walk us through this numbers?

Mark Wardlow

The breakdown is 30% land, 36% acquisition and development, 19% single-family construction, and approximately 15% in condos.

Brett Rabatin – Midwest Securities Corp.

I didn’t know if you might have available the actual dollar amount you asked for tier one capital, total risk base capital, and total risk based assets?

Mark Wardlow

Brett, these are estimates as were finalized in the regulatory board for the close. Tier one capital, $711.4 million, total risk based capital, $786.2 million, and risk weighted assets of $7.1 billion.

Brett Rabatin – Midwest Securities Corp.

As it relates to the risk weighted assets, I know you got about a billion of unused commitments and so that is about half a billion to your total risk based assets. I am curious if, I know you are going to have control growth in the next few quarters but I am assuming one way you can control the risk based assets number is having a slightly lower commitment level outstanding in the next couple of quarters.

Mark Wardlow

Actually, Brett, there’s quite a few ways we can reduce the risk weighted assets position of the bank. One of them is with unused commitments greater within the year. Another is with restructuring of the bond portfolio from 20% risk graded down to zero. No. Maybe with the penny [Inaudible] change I might have to force over the coming quarter.

Brett Rabatin – Midwest Securities Corp.

So, no thoughts on whether you might be doing that or any securities portfolio redeployment, so to speak.

Mark Wardlow

Brett, those are reviewed on a regular basis and we continue to review those and if we see the need for restructuring, we will do that.

Brett Rabatin – Midwest Securities Corp.

Ray you indicated, I think early in the comments that you said it was premature to say Sacramento has recovered. Was that the phrase you used?

Raymond P. Davis

Yes. It was, Brett.

Brett Rabatin – Midwest Securities Corp.

I am curious and I think that it is great that you were aggressive in the charge-offs this quarter but I am curious as what would be really positive for the shareholders just to have some additional clarity on why you think there will not be any additional write downs and the non-accruals that you have and so I am curious if you can walk us through and particular as it relates to the California portfolio and your process of writing those NPAs down. What the net values are today in relation to whether it be a appraisals or current market bids in the area or some additional color on why the NPA list is at the quote?

Raymond P. Davis

That’s a great question and a very appropriate question. I will tell you and Mark can jump in here when I finish with my comment. Yes, obviously there are some…, we want to make sure that once we take our charge-offs, we want to be as close as possible to whatever those new net realized values are and our fellows have been instructed that once a non-performing asset is appraised and you know that you get multiple values on the appraisals, we always take the low, quick sale value and write those assets down to a lowest value that we have. Could there be minor differences on the go for basis? Sure, but clearly we have picked up and charged-off the vast, vast majority of any potential charge-offs in the future.

Mark Wardlow

That is correct and I would not add much to that other than say that the – now that we charged-off the impairment reserve at the end of the second quarter was, as Ray indicated, was based on quick sale value, current appraisals on each and everyone of those assets and we wrote them down to the net realizable value and it is good.

Brett Rabatin – Midwest Securities Corp.

Was the decision to write off the impairment reserve, was that something you did internally or did the regulators asked you to do that or how is that decision raised?

Raymond P. Davis

No regulator involvement, whatsoever, this was a decision that we made at the management team. We feel it is the appropriate way to handle this as we work into the future. We also think it is the most conservative way of dealing with it and hopefully it eliminates any confusion with the wrap GAAP reporting. But, Brett, absolutely, absolutely no involvement with regulators at all in that decision.

Operator

Your next question comes from Mathew Clark – Keefe, Bruyette & Woods.

Matthew Clark – Keefe, Bruyette & Woods

Can you give us a sense for why you saw a reduction in the 30 to 89 day bucket; obviously it was a material increase. Was there anything there? Can you give us maybe some inflow/outflow color and whether some of that moved in to that restructured bucket?

Mark Wardlow

I think it was a combination of two or three things. One it was our credit team working very hard to try to minimize that number as much as possible. Day in and day out, it is a lot of hard work, I think. Some of that, yes, some of the deals that we’re showing as past dues at the end of the first quarter were deals we had pending for restructure, renegotiation, and those restructures or renegotiations were completed in the second quarter. So, it is a combination of two or three things, I think the bottom line was just a lot of hard work to drive that number down as far as we could.

Raymond P. Davis

I think it’s also an accurate statement, in fact I know it is an accurate statement that we did not have a large influx of new loans going into that hopper.

Matthew Clark – Keefe, Bruyette & Woods

The pace at which your ratio development exposure is your outstanding loans here are declining in Northern California and greater Sacramento slowed some and I am just curious as to why that might be whether or not you think that the spreads are still out there, is fairly wide and that there might be not an appetite to unload some of the stuff. That you are just going to continue to see run off to that phase, continue at 7%, lets say, and 14%, 15% in northern California or do you think that pace will continue as well?

Mark Wardlow

No. I think if you look back when we started in Sacramento at the end of the third quarter last year we were $225 million in the Sacramento area, we are down to $135 million at this point in time and so we have made good progress there. Yes. To answer your question, it is obvious that most lenders in this environment do not have an appetite to do this type of financing. So, we are working through them, deal by deal but we do forecast, we did – as we mentioned in our comments, we did a four quarter forecast for every – each every residential development loan in the portfolio and we forecast at this point that the run off will continue to be the same rate that we have had in the last three quarters.

Matthew Clark – Keefe, Bruyette & Woods

Your largest non-performers as I would guess, is still in that non-performing bucket. I think it was about $25 million last quarter. I might have been correct at some but is that loan still accruing interest or not if you set aside any specific reserves on that, large non- performer.

Mark Wardlow

No, still the same balance, your balance is approximately correct. We are still working through that on a collection basis and at this point, no, we did not have or expect any loss on that deal.

Ron Farnsworth

We are not accruing interests on that one.

Mark Wardlow

We have not been accruing interests on that loan for a couple of quarters now.

Operator

Your next question comes from Brent Christ – Fox-Pitt Kelton.

Brent Christ – Fox-Pitt Kelton

Just to follow up on the capital question with the risk based capital ratio is expected to trend a little bit lower over the remainder of the year. What underlying balance sheet growth is that predicated on?

Mark Wardlow

We are looking at controlled growth, low single digit on assets and pretty consistent mix so in the range of a $100 million to a $150 million of increase in risk weighted assets between now and the end of the year. Initially lower charge-offs to the third and fourth quarters then a consistent dividend policy.

Brent Christ – Fox-Pitt Kelton

On the run off on the construction portfolio and is that expected to be more heavily weighted towards some of the Oregon areas, just given the difficulty of moving some of the California credits or how should we think about that in terms of, where the balance is or that the way things may shake out at the end of the year?

Raymond P. Davis

Brent, it is hard to speculate what that will be but I will say this to you that, first of all, the ability for us to unload California properties has not been any more of an issue anywhere else. We are moving those properties straight through the system. I think one of the nice things about this company is that we have shown over the last three or four quarters, a very steady flow of any non-performing assets that do show up. There is process that gets them out of here or gets them resolved very quickly.

Mark Wardlow

We don’t see that changing. I think that perhaps you could be right and again I am speculating a little bit here that Oregon could see, perhaps, a little bit steeper decline only because there’s bigger, there’s larger balances there. That will be the only reason.

Brent Christ – Fox-Pitt Kelton

Just with respect to the margin, you have a nice lift this quarter, you mentioned the potential for some downward repricing of CDs and how do you think about that in terms of [Inaudible] into your margin assumptions over the next couple of quarters. Should we still continue to see this upward trajectory with the Feds seemingly on hold there?

Raymond P. Davis

I think we are going to be anywhere from downside upside. I think we are going to see pressure on the cost of fund over the summer months. Especially with some of the recent news events, how it affects large competitors and I think we are going to be downside, upside over the next quarter.

Operator

Your next question comes from Todd Hagerman – Credit Suisse.

Todd Hagerman – Credit Suisse

Ron, just to circle back on the wrap GAAP reconciliation, if I look at your non-accrual bucket of $95 million or so, and again, as I look at your 10-Q disclosure, what is the amount of impaired loans in that bucket?

Ron Farnsworth

Well, they are all impaired. But they’ve been charged down to a net realizable value.

Mark Wardlow

You are looking back at the first quarter 10-Q?

Todd Hagerman – Credit Suisse

Yes

Mark Wardlow

In the first quarter, those numbers were growth of $13.3 million of impairment reserves that we have allocated within our allowance for loan loss. So if $13 million is set aside as loss on those non-accrual loans at the quarter and what we have done in this quarter is we basically written those loans down to the net realizable values. So, there is no longer an impairment reserve.

Todd Hagerman – Credit Suisse

You reference in the 10-Q, you have $26 million of impaired loans that were not on non-performing, I am just wondering how that reconciles to the second quarter number of $95 million.

Ron Farnsworth

That $26 million at the end of the first quarter was not on non-accrual. Those were troubled debt restructurings, as Brad talked about earlier, that would total $40 million for six relationships at the end of June.

Todd Hagerman – Credit Suisse

Not considered non-performing? It is considered impaired?

Ron Farnsworth

But as a performing assets.

Todd Hagerman – Credit Suisse

In terms of your policy?

Ron Farnsworth

Correct

Todd Hagerman – Credit Suisse

So that $26 million is now $40 million?

Ron Farnsworth

At the end of June we have a total $40 million in troubled debt restructuring.

Todd Hagerman – Credit Suisse

As of March, that number was $30 million?

Ron Farnsworth

That was $26 million within the market.

Todd Hagerman – Credit Suisse

Net the [inaudible] that was on non-accrual?

Ron Farnsworth

No, out of the non-accrual bucket that does not include troubled debt restructuring.

Todd Hagerman – Credit Suisse

We do not consider troubled debt restructurings to be non-accrual.

Ron Farnsworth

They have been restructured; they are accruing according to terms. We followed the strict regulatory definition of what constitutes a trouble debt restructure when we put this bill together and so we would like to mention in the press release or in the earnings script, we re-margin the collateral, borrowers paying interest it is on accrual at this point.

Raymond P. Davis

One comment just to clear up. It is not our policy. It is the policy of SEC and that is what we are adhering to strictly.

Todd Hagerman – Credit Suisse

I am not disputing that, whatsoever. I am just trying to clarify in the non-accrual bucket of $95 million what is considered to be impaired versus non-impaired under the GAAP rules?

Ron Farnsworth

The entire $95 million is considered impaired. Correct.

Todd Hagerman – Credit Suisse

Because then the next question would be, if I think about your reserve coverage, the coverage now is trended down towards 79% of non-performing loan.

Ron Farnsworth

Right that specific ratio is less meaningful with companies that write down their non-performing assets or charge them down to the net realizable value. So, net charge-offs to $24 million on this which reduces the reserve and reduces the balance of non-accrual loans.

Operator

Your next question comes from Allan Smith.

Allan Smith

Could you give me a little history on core earnings and from a year ago to where we are today?

Ron Farnsworth

If we go back a year ago to the second quarter 2007. Earnings per share, operating earnings were $0.35, net income was $0.32, between then and now the single largest moving part has been in the provision for [LOMA], so for example this quarter we had $25.1 million supervision, a year ago we had $3.4 million supervision, so that differential has really been the driver.

Allan, its right if you try to reconcile. That’s everything else pretty much going to negate out, that is the way to do it.

Allan Smith

I’m just concerned as a share holder how much longer are you going to be able to continue to keep your dividends up at around 6% or 7 %.

Ron Farnsworth

As we have stipulated and said many times that we continue to evaluate our capital position on a regular basis and right we don’t have plans to adjust dividends.

Allan Smith

The other question I had was is true that your institutional investors and neutral funds constitute about 70 to 75% of the stockholders of this company?

Ron Farnsworth

As of today it’s around 65%

Allan Smith

Does that cause you any concern?

Ron Farnsworth

No, it doesn’t.

Allan Smith

The cost savings that you talked about, salary wise and advertising was due to run out, as I have believed sometime around July or August of this year, are you planning on continuing that over the next couple of quarters or?

Ron Farnsworth

I tell you, in this environment Allan we better be focused on cost savings and we have got the Department heads, the Divisional heads, Senior Executive Vice Presidents looking at all different types of ways that we can become as efficient as we can and we will continue to do that.

Allan Smith

Ray would you care to comment on the stock price from what’s going on. I see its doing pretty well today in the last couple of days but I know all financial institutions are suffering but it seems to me that Umpqua suffered a lot more of, when the stock at 30 just over a year ago and then it cut down to 8 ½ couple of days ago.

Raymond P. Davis

Well, it’s interesting. I think you just answered your own question Allan I’ll be rash with you but I will tell you that, if you look at us for the pier banks that we compare ourselves to since the first of the year, we actually, the stock price actually performed, if not better and certainly at the top handful of bank. It doesn’t make us feel any better but until we start seeing some economic news, as soon as the media starts picking up on some of the positive things that we reported on our call today. For example, in Sacramento and other parts of the country that has been decimated by the housing market that is also starting to show signs of life. It is going to be a while before everybody comes out.

I think the challenge for an institution like Umpqua bank is to do exactly what we have said we are going to do and that is to do everything we can to deal with, resolve, identify, any problem loans that we have and deal with it aggressively so we can get this company back to a more normalized earnings rate and the best way to judge that of course is one step provision comes back down to more normalized earnings, then hopefully we get back on our feet.

Operator

Your next question Jeff Bright.

Jeff Bright – [Bright Security Group].

At this point in time, are dividends secured?

Raymond P. Davis

Yes, right now they are.

Operator

Your next question comes from Kippling Peterson – [Columbia Ventures Corporation].

Kipling Peterson – [Columbia Ventures Corporation]

I realized that the majority of the callers are addressing and trying to work through a difficult loan reserves and non-performing assets but I’m wondering with so many banks shrinking their balance sheets and a lot of your competitors going out of business, less securitizing, are you seeing that you have the opportunity where perhaps before you are writing loans at 500 or 600 basis points over LIBOR but now you are able to supply liquidity at 700 to 800 points over LIBOR. Are you taking advantage of the shortage of liquidity on the market?

Raymond P. Davis

I tell you what, Kippling, I wish I knew what market you are competing in, it’s 700 basis points over LIBOR, I like a whole bunch of that, but we are saying, I can’t tell you this as Ron alluded to, that we are definitely seeing some upward movement in pricing on loans in this environment

Kipling Peterson – [Columbia Ventures Corporation]

And you see that perhaps, I know there’s been some thought that the banks are going to have to keep more of their loans on their balance sheet and thus they will want a bigger margin are you seeing that perhaps a secular change is going to happen in the industry?

Raymond P. Davis

For the industry, yes but in terms of Umpqua, we have never been involved with the securitization game.

Kipling Peterson – [Columbia Ventures Corporation]

But do you think that overall your margins will improve when you come out of this?

Raymond P. Davis

I think risk spreads are increasing; I think that’s the natural outcome of this set of cycle.

Kipling Peterson – [Columbia Ventures Corporation]

On the secular basis rather than just for the next little while?

Raymond P. Davis

I think you crossed the board, yes.

Operator

Your next question comes from Dustin Brumbaugh – Ragen MacKenzie Group.

Dustin Brumbaugh - Ragen MacKenzie Group

Just to appreciate the comments on your total capital and the expectation for the rest of the year staying above 10/80, I’m just wondering if you can give a flavor for the current conversation with regulators around capital cushion given the current environment. I can understand the well capitalized minimum at 10% but our regulators is being a little bit more aggressive in the current environment.

Raymond P. Davis

I think that’s a fair statement and I have not talked with the regulator recently but I would assume that everybody is on heightened alert for capital. I think that’s the biggest aspect of anybody looking safety zone .Make sure the bank is well capitalized and Umpqua certainly is and we have every intention to make sure that we remain that way. We are very pro-active in evaluating our capital needs on a perspective basis which we will continue to do so. My guess would be that the regulators are looking very closely at the banks. I think they have to be, and we are in very good shape.

Dustin Brumbaugh - Ragen MacKenzie Group

On the Sacramento housing supply I just want to make sure I have numbers right. You said that going from 17 months to 5 months, was that a year-over-year comparison?

Raymond P. Davis

That was from September of last to end of June.

Dustin Brumbaugh - Ragen MacKenzie Group

I know there’s a numerator and denominator to that calculation. What are the months around that five month data point looked like? Was that kind of anomaly with just a jumped-up sales phase in one month or just trying to get some color there?

Raymond P. Davis

No, in fact, over the five or six months has been a very steady increase or decrease in the inventory and an increase in the number of sales. What is encouraging about that, I believe not only that is happening which is great. It is absorbing the inventory down there because there is very little building going on but, I also think that has repercussions for other parts of our market as well.

When California goes better, Oregon seems to benefit from some of that as well and we are looking forward to rub-off on that in the Bend, Central Oregon area as well, but it has been a very steady increase and what is encouraging, as I was going to say, is that we really just now entered the selling season.

June, July, August, September maybe, where most homes are sold and if this continues, Sacramento has a chance to and I think they are one of the first markets in California to go into this and in fact I had always labeled them ‘the epicenter of the housing market in California’, the down turn and I really do believe that has changed. I don’t believe that is the case anymore and I do believe within a year or so that market has got pretty good prospects.

Operator

Your next question comes from Brett Rabatin – Midwest Securities Group.

Brett Rabatin – Midwest Securities Corp.

I just have a follow-up on wanting to discuss the construction book outside of California just given that most of the NPAs are actually in California and you have motioned earlier Ray, Bend, Oregon being pretty soft and so, I’m just curious as to the portfolio particularly in Bend, just how you have been able to keep it from being more distressed and generally the projects you have there have been able to get more collateral and the [positive speaker] what’s been going on in the Bend’s area?

Mark Wardlow

Our Bend exposure, first of all, tour Bend exposure is not that great. We have a total of about $50 million there in residential development credit and you are correct those credits are hold enough even in the face of a down market nobody disputes that. They are holding out and I think it’s because we have fairly strong sponsors behind most of those deals. So it’s a relatively small portion of our overall residential development portfolio.

Brett Rabatin – Midwest Securities Corp.

As you evaluate these markets that it had a better sales particularly Sacramento. Do you have anybody on the ground locally who’s doing work on the foreclosures that might be coming to market or just looking at the backlog or what might be the inventory of stock on the market yet?

Mark Wardlow

We worked that through our special assets department. We have several specialists in that department that handle foreclosed properties for us and they are on the ground in the various market looking at the market pretty much continually and that’s basically what gives us our feel for what the prices should be on these foreclosed properties.

Raymond P. Davis

I think that’s one of the attribute of the company that should give people some comfort as we have a extremely professional staff of around 20 people both scattered throughout the foot print California and Oregon who are working through Brad and in conjunction with Mark on all of our all of the troubled assets that’s go through an impact. I gave them great credit for the success we have had and going through as much as we have and they keep that flow very, very steady but we do have the executives on the ground, you better believe it, down in our major market.

Operator

Your next question comes from Mathew Clark – Keefe, Bruyette & Woods

Matthew Clark – Keefe, Bruyette & Woods

On the $25 million loan is a non-performing, have you received an updated approved loan on that.

Mark Wardlow

Yes, we have.

Matthew Clark – Keefe, Bruyette & Woods

How does that compare to the current value against the $25 million today is it below the current value now?

Mark Wardlow

We can’t get into specifics of that, Matt because of where it is and bankruptcy and you can imagine the difficulties of going through this but let me say unequivocally that we feel very solid and strong on that particular credit.

Matthew Clark – Keefe, Bruyette & Woods

Is that you have a personally guarantee there? That’s how you planned to get the out made hole?

Mark Wardlow

No, not necessarily, I don’t want to go on the specifics but there are lot of ways to get out of that and we are again, we love to see that one go and make no mistake about it because it’s a big chunk of a number but the good news is that we are in very good shape and our are managing it beautifully.

Operator

There are no further questions at this time.

Mark Wardlow

Thank you for your interest on Umpqua Holdings and your attendance today that wraps up the call.

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