Oct 18, 2007
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
Operator
Good afternoon. My name is Laticia, and I will be yourconference operator today.
At this time, I would like to welcome everyone tothe Umpqua Holdings Third Quarter Earnings Release Conference Call. All lineshave been placed on mute to prevent any background noise.
After the speakers'remarks, there will be a Question and Answer session (Operator Instructions). Iwould now like to turn the call over to Mr.
Farnsworth, Senior Vice Presidentof Finance. Sir, you may begin.
Ronald Farnsworth
Excellent. Thank you.
Good morning. And thank you forjoining us today as we discuss the results of operations for the Third Quarterof 2007 for Umpqua Holdings Corporation.
In reviewing the Company's prospectstoday, we will make forward-looking statements, which are provided under the Safe Harbor provisions of the PrivateSecurities 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 andpredict today.
We encourage you to review the risk factors stated in theCompany's 10-K, 10-Qs, and other reports filed with the SEC. And we caution younot to place undue reliance on forward-looking statements.
The Company does notintend to correct or update any of the forward-looking statements that we maketoday. With us this morning are Ray Davis, President and CEO ofUmpqua Holdings Corporation, and Brad Copeland, our Chief Credit Officer.
DavidEdson, President of Northwest region, Bill Fike, President of our California region, and Mark Wardlow, our EVPand Senior Credit Officer are here for the question and answer session. Atwo-week rebroadcast of this call will be available two hours after the call bydialing 800-642-1687.
This number is also noted in the earnings release weissued this morning. I'll now turn the call over to Ray Davis.
Ray Davis
Good morning. Earlier today, the Company announced ThirdQuarter Earnings well below expectations.
This shortfall is related toincreased provision for losses in the Residential Development segment of ourloan portfolio. This segment deteriorated during the Third Quarter based on a housingmarket downturn.
The majority of issues are in our northern California markets where the housingdownturn has been the most significant. In a minute, I will ask Brad Copeland to provide specificson our loan portfolio, but you may be assured that management has taken anaggressive stance in risk rating these problem credits and has taken thenecessary valuation impairments to protect the income prospects of the Companyfor the future.
Before Brad comments in more detail, let me share othersignificant achievements for the quarter. Our loans grew $97 million, splitevenly 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 dueto the current environment.
Overall, Non-interest Checking Accounts still remain above20%. The recent FDIC deposit market share report for Oregon shows Umpqua increased total market share from6.8% 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 fourpositions.
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, ourChief Credit Officer.
Brad Copeland
Thanks, Ray. The housing industry slowdown persiststhroughout the country and has been amplified in our northern California region, leading to a decline inour key credit quality indicators.
Our total loan portfolio is $6.1 billion; ofthis, $764 million are residential development loans, which include land,acquisition and development and single-family construction. Of this total, $424million are in our Oregon/Washington region, while $340 million are in California.
To break this down further, thetwo largest components consist of Land Loans of $246 million and Acquisitionand Development Loans of $315 million. Total Non-performing loans increased $21million 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 fiverelationships. Of the total Non-performing Loans, 83% are within the ResidentialDevelopment segment, and 82% of these loans are in California.
It is obvious that thedeterioration of this segment is being driven by economic conditions. Like others in our industry, the current housing marketdownturn is primarily responsible for our current credit issues.
To report toyou on the actions our credit teams have taken over the last several months, wehave completed the review of every loan in this segment of the portfolio. Wehave 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 Impairmentincrease, led to the $20.4 million provision for loan loss - and we areactively working with each borrower to resolve problem credits. For example, wehave already sold $10 million of our Oreo this past week at no loss.
This credit originated in Central Oregon and was included innon-performing loans during the Second Quarter. Since we are currently engagedin resolution discussions, we will be unable to address or discuss details onspecific credits during today's call.
Looking forward, we forecast the following; we expect upto another $20 million of Non-performing Loans to be resolved during the FourthQuarter. We anticipate charge-offs in Q4 to be less than the provision for loanlosses taken this year to date.
We don't expect further provision on thesenon-performing loans, as they currently have impairment reserves set asidewithin 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 realestate 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 ourfootprint. Despite the pressures on credit quality, there are severalpositives on the credit front.
Excluding non-performing loans, other past dueloans were less than 1% of total loans at quarter end. Delinquency Ratios inour C&I and commercial real estate portfolios were 0.23% and 0.24%.
Thewine industry group, we mentioned during our last earnings call, is up andrunning with approximately $50 million of deals in the pipeline. Our pipelines remain healthy across all markets.
We arehaving success in changing the composition of our California loan portfolio, increasingC&I loans from 14% to 22% year over year. Also, the mix of new loansgenerated year to date has changed dramatically, with 45% of new loan volumeconsisting of C&I loans.
We have been successful in targeting two additional newsegments for generating loan growth, Municipal and Educational entities. Todate, we have booked $50 million in new loans to borrowers in these categorieswith another $20 million in the pipeline.
And we have upgraded our California front line lending and managementstaff considerably during the past several months. This has been accomplishedby hiring several seasoned banking professionals with well-rounded backgroundsin 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 InterestMargin declined 14 Basis Points with nine Basis Points coming from reducedearnings asset yields, and three Basis Points related to increased costs ofinterest-bearing liabilities.
Mix changes account for the last two Basis Points. During the Third Quarter, we reversed $1.3 million ofinterest income on new nonaccrual loans.
This reversal reduced loan yields bynine Basis Points, and the Net Interest Margin by seven Basis Points, or halfof the overall margin decline. While the costs of interest-bearing deposits increasedthree Basis Points during the quarter, it actually declined ten Basis Points inthe month of September.
This resulted from reductions made to several productsin anticipation of Fed funds rate decreases. Given these moves, we believe themargin is stabilized.
Within non-interest income, the largest changes were in Mortgage-bankingRevenue and other income. While Mortgage-banking Revenue declined $1.2 millionfrom the Second Quarter, $900,000 related to a swing in the fair value ofmortgage servicing rights.
We're very pleased with the balance of Production Revenueachieved this quarter given the slowdown in the mortgage market. Our mortgage team projects a stable pipeline for thebalance of the year.
We plan to start hedging the fair value change of the MSRportfolio starting in Q4 with a goal to minimize the volatility to earningsfrom this asset going forward. Other income includes a $4.1 million fair value increaseon Trust Preferred Borrowings.
Earlier this year, we elected fair valuemeasurement on new Trust Preferred issues, and the favorable spreads weachieved in Q3 compared to current market spreads resulted in those fair valuegains. Also, Strand, Atkinson, Williams & York, our retail brokeragesubsidiary, reported record quarterly net income.
Total Non-interest expense,excluding merger expense, increased $1.1 million during the quarter. Occupancy Expenseand Intangible Amortization increased due to a full three months of North Bay included here in the ThirdQuarter.
Other Expense increased $1.3 million, comprised ofincreases in Marketing, Services, and other expense categories related toongoing growth initiatives, promotions, and new store R&D costs. And finally, compensation declined $900,000, resultingfrom further realization of cost savings announced in the Second Quarter.
Management continues to focus on controlling costs in thisdifficult environment, with specific achievements this year including North Baycost 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 BasisPoints from a year ago. As expected last quarter, we had $263,000 of mergerrelated expense for the North Bay acquisition, with no furthermerger expense related to this deal expected in the future.
The Effective IncomeTax Rate declined to 31% this quarter related to greater efficiency of taxcredit investments. We expect the full year Effective Tax Rate to beapproximately 35% consistent with the year-to-date September rates.
To touch oncapital matters, of the $60 million in New Trust Preferred Issuance in Q3, weused $25 million of those proceeds in September to redeem an existing Trust Preferredcarrying a higher spread. The balance of $35 million was used to repurchase 1.65million 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 the6.25% Tangible Equity Ratio at the end of Q3. Our previously announced plan to issue another $70 millionof Trust Preferred Borrowings in the Fourth Quarter is on hold at least foranother quarter, until we see improvement in the credit markets.
While ourrecently increased authorization leaves us with 1.5 million more shares torepurchase, we do not expect significant repurchase activity in the FourthQuarter, but will reassess as funding opportunities arise. Finally, ourliquidity 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 alot of details on the status of our residential development loan portfolio, andto conclude, I will comment that management believes strongly that our issuesare manageable, and we do look forward to getting back to a more normalizedearnings rate soon. Another point; we will be opening our new South Waterfrontstore in Portland, Oregon on November 5th.
This store isthe next evolution in our delivery systems and will include new technology thatwill continue to enhance Umpqua's customer experience. We’re also pleased to report that the rollout of our NeighborhoodStore concept continues to gain momentum.
Our first store in Bend, Oregon opened in March of 2004 and hasreached $92 million in deposits. Our four other neighborhood stores areexceeding deposit growth expectations as well.
The Umpqua customer loyalty program, which we kicked off lastquarter, has moved the company's retention rate up to 92% compared to anindustry average of around 80%. Our cross-sell rate to new customers continuesto increase, with our year-to-date cross-sell ratio at 4.7.
Products per householdis now up to 3.9. I want to express my appreciation to our lendingprofessionals for the incredible hard work and dedication they havedemonstrated over the last several months.
I am proud to work alongside them. For the last fourteen years, we have focused on growingthrough quality service, innovation, and delivering long-term shareholdervalue.
We're not pleased with this quarter's performance. However, in today's difficult operating environment forbanks, I want to assure you that we are committed to enhancing shareholdervalue, and that will remain as our primary strategic focus.
As always, we appreciate your interest in Umpqua HoldingsCorporation. We will now take your questions.
Operator
(Operator Instructions) Your first question comes fromMatthew 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 Reserveof $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 aboutthat and whether that's enough for, I guess, the Northern California marketthat 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 arelooked at on an individual basis, and Impairments, depending on the size of Impairmentrange, we don't look at it as a group, nor do we make conclusions from what theoverall percentage is, up or down.
We look at them on a loan-by-loan basis, and that's theway this has been computed.
Matthew Clark - KBW
Okay. And then as it relates to reserving going forward, Iwill assume, as you guys negotiate and take write-downs on -- or write off someof these problem loans, it's going to bleed the reserve back down.
I guess, can you talk about how you think about reservingfrom here? And I would assume we wouldn't return to the 115 that we saw lastquarter, 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 increasingthe 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 alreadyaddressed, will not impact earnings. It will be an allowance adjustment.
It will -- I'm sure that, yes, the answer to the questionis, I'm sure it will come down, but I don't believe it will be a steepdecrease.
Matthew Clark - KBW
Okay. And then finally, can you just talk about yourability to grow C&I here this quarter?
Looks like a 56% annualized rate in California. I'm just curious as to howyou're able to do that.
I know it's a competitive product that everybody wants togrow 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&Iportfolio about a year-and-a-half ago by bringing on some folks -- a team froma competitor that really gave us the focus on that. And in addition to their efforts, we have really tried toget away from the real estate emphasis that we've had in the California market since we really enteredthat.
As you know, relationship building takes a long time, and C&Ibusinesses are much more difficult to move than our traditional real estateborrowers. We've had some great success, and the last quarter, we hadthe largest growth in the C&I portfolio that we've had in the lastyear-and-a-half.
We had 45% of our new loans year to date have been C&Iversus 30% last year, 2006. Our portfolio mix has changed now to where our C&Iportfolio was 14% a year ago and now it's up to 22%, so we're making someheadway in moving the composition of the portfolio.
It is a slow process, but I'm very optimistic that thestrides we've made will continue. Our pipeline is down a little bit in theC&I side now just because we've had so much success over the last quarterin 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 howyou're thinking about capital these days? We heard about the buyback.
We heardabout the TRUP. But with MPAs at the kind of an elevated level here, just talkabout how you think about the buyback, how you think about potentialacquisitions and even dividend increases from here?
Ronald Farnsworth
Matt, this is Ron Farnsworth. From a capital standpointwe've got our capital levels down to levels we feel are valid, and give usenough cushion for potential reductions in the reserve as these loans arecharged off over the coming quarter.
In terms of Dividends, we feel very strong that our Dividendwill continue - no plans to change the Dividend. We reassess that on an annualbasis 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 inour comments on that, and I don't think they really have changed.
Clearly, withall of the bank industry stocks being depressed, it makes it a little moredifficult. But we'll remain opportunistic, if it makes sense, but that's notour priority right now.
Our priority right now is to work through these issues to getback to normalized earnings.
Matthew Clark - KBW
Great. Thanks, guys.
Operator
Your next question comes from Brett Rabatin with FTNMidwest.
Brett Rabatin - FTNMidwest
Hello, everyone.
Ray Davis
Good morning.
Brett Rabatin - FTNMidwest
Wanted to first address the Margin; I'm curious Ray, if Iunderstood correctly in the guidance that you guys think the margin hasstabilized, and I'm curious, at least from the regulatory filing perspective, Iknow 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 assumesthat the asset yields are equivalent to 3Q levels or similar? Could you just talk some more about the margin and why youthink it's stabilized?
Brad Copeland
Sure thing, Brett. And just as a way of the numbers, forevery 25 Basis Point change in the Fed funds rate, we're going to see about afive Basis Point change in our loan yields, which is four to five Basis Pointson the Margins.
And in the month of September, we did have the Fed dropabout 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 BasisPoint drop in loan yields.
We feel pretty good about being able to get ahead ofthat on the deposit side going forward.
Brett Rabatin - FTNMidwest
Does the TRUP that you issued not offset some of the -- Isaw the press release indicated the September 10 Basis Point declineinterest-bearing costs. I guess I'm looking at the potential for that tosomewhat offset the funding cost decreases that you were able to achieve.
And then just assuming that the construction portfoliodoes decline in size over the next year, and sort of asset yields seem likethey could be lower going forward.
Brad Copeland
Well, on the Trust Preferred side, we do expect a benefitto the margin based on the -- the $60 million we added in Q3 carried a weightedaverage rate of 182 over a three-month LIBOR, and that three-month LIBOR ispretty 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 - FTNMidwest
Okay. Let me go in a different direction.
I'm curious, inthe press release and in the comments you talked about instructing the creditprofessionals to take a close look at stuff, and I think we had this discussionalso last quarter, so I guess I'm hoping for some color around what changeshave been made in the past month or two in relation to identifying credits andlooking closely at problem potential loans?
Mark Wardlow
This is Mark Wardlow. Pretty much we are continuing onwith what I outlined on the last call.
We are continually looking at every loanin this segment of the portfolio. We have required additional reporting aroundthese loans.
And we mentioned in the earnings call, we haveaggressively downgraded any deals that we anticipate any problems with, andthen those deals are also being managed through our special assets divisionvery aggressively. So, at this point we believe we've identified all theproblems in that segment of the portfolio.
Brett Rabatin - FTNMidwest
Okay. And then for additional color, can you talk aboutthe 30 to 89 past due - not that it is a great indicator of non-accrualpotential 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-performingloans, our delinquency ratio is under 1% for the rest of the portfolio, andthat's spread evenly pretty much throughout our footprint in a variety ofdifferent loan types.
Brett Rabatin - FTNMidwest
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 zerothrough 80 or 90 days?
Is that what you're looking for?
Brett Rabatin - FTNMidwest
Correct.
Mark Wardlow
Okay. We have $38 million in total past dues up to 60days, 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 - FTNMidwest
Okay, so $38 million that's under 60 days and $21 millionthat's 60 days to 90 days?
Mark Wardlow
Yes.
Brett Rabatin - FTNMidwest
Okay.
Mark Wardlow
And $1.5 million for over 90 days that’s not on non-accrual.
Brett Rabatin - FTNMidwest
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 yougave for expectations at the end of the Fourth Quarter in terms of NPAs itsounds like you have some stuff that you're hoping to move off the books, butthere's also going to be some back-filling that and replacing it. I'm just curious in terms of -- if you think you may haveto take some additional provisioning or build reserves related to some of thosenew loans that are migrating towards NPA, or if that was fully contemplated inthe reserve build this quarter?
Ray Davis
Yeah. I think we went through the forecast that weoutlined Brent - that we stand by.
We feel that that's really going to be theflow for the rest of the year.
Brent Christ -Fox-Pitt
And then just in terms of thinking about the reserveobviously, the ratio will probably come down as it had some losses on a few ofthese non-performers. But if you back out the specific Impairment Reserve, itlooks like from both the second and Third Quarter, it looks like you areobviously building the core reserve ex the Impairment a little bit.
Is that theexpectation 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 allof 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. Everysingle 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 callthey range between 50% and 75% depending on the transaction, with our borrowershaving a pretty substantial cash position in these deals. But the values of properties in California, it's not -- thisis not isolated to Umpqua Bank; it is virtually every bank in the Californiamarket, not just California, other parts of the United States as well are goingthrough some pretty interesting steep slopes of a line, if you will, on howfast 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 theincrease and it sounds like you are in the process or have divested the largeOregon Credit, but any updates in terms of the other three? Are they still onnon-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 deepinto resolution discussions, and obviously don't want to talk specificallyabout those to foul those up. But we are aggressively pursuing the resolutionof 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 JoeMorford with RBC Capital.
Joe Morford - RBCCapital Markets
Good morning, everyone.
Ray Davis
Good morning.
Joe Morford - RBCCapital Markets
I guess, just a follow up on Matthew's question in termsof the reserving -- I know you look at each project individually to determine ImpairmentReserve. But I guess if you could just talk a little bit more about just howyou go about getting comfortable that you are adequately reserved for theproblems you've identified?
How current are these appraisals and how can theyadequately keep up in terms of the drop in values when there's just not a lotof bids for properties or sales being done?
Mark Wardlow
MarkWardlow
We use that as a basis to establish what our Impairment Reservesare; individual loans, individual appraisals, compared to the individual loanbalances.
Joe Morford - RBCCapital Markets
Okay. So, all of these appraisals have been updated in thelast couple of months then it sounds like?
Mark Wardlow
Yes. On our stress deals, yes.
Joe Morford - RBCCapital Markets
And I know you're not really talking about specifics, butjust in general can you tell us a little bit more about the types of projectsthat you're seeing having problems? Are they condo developments, single-familyhomes?
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 area variety of deals.
Most of them are either Acquisition and Development Loans forresidential construction, or they are single-family residential constructionloans, that due to the slowing market conditions have been slow to absorb. Andthey're pretty much centralized again in the Northern California region, more specifically in Sacramento.
Joe Morford - RBCCapital Markets
Okay. And then I guess just lastly, where are you all inyour 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 sensitiveto what we say or don't say.
Joe Morford - RBCCapital 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 - RBCCapital Markets
Okay. Raymond Davis Okay?
Joe Morford - RBCCapital 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 Iwould have guessed. I assume you had slower prepaid speeds, but were there anyother 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 $900,000swing.
Jim Bradshaw - D.A.Davidson
Okay. Good.
Ronald Farnsworth
No change in assumptions, no change in models this pastquarter.
Jim Bradshaw - D.A.Davidson
The $10 million OREO sale that you just completed, did youguys finance that and did you get cash into it if you did?
Ronald Farnsworth
We did finance it and it's under our standard underwritingrates, 80% Loan to Value.
Jim Bradshaw - D.A.Davidson
Okay. And then the sort of the new wave of things goinginto OREO in the Fourth Quarter, I think you said that was $10 million to $29million or something like that.
Are there substantial cash carry costs that youguys have for those?
Brad Copeland
It won't be substantial. There are some land deals inthere, so it's going to be fairly routine on the cost to carry.
And they areproperties 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 selland absorption's just slow or are there curbs in the streets and electricityand things like that to put in still?
Brad Copeland
Most of them, the infrastructure is in and could be soldas is.
Jim Bradshaw - D.A.Davidson
Okay. And then the last question I had is, I just wonderwhat 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 tothat Goodwill carry number you have?
Ronald Farnsworth
Good question, Jim. Yes, we actually test that quarterlyand keep an eye on it, obviously throughout the quarter.
We see comfortablemargin on that for any impairment here at the end of Q3 and then in Q4. Wedon'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 CreditSuisse.
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 housingportfolio if you will.
Again, with the specific reserves that you recognize inthe current quarter, I'm assuming, with the individual projects or propertiesif you will, that every one of those properties is now in conformance withexisting 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 constructionportfolio growth that you did recognize in the quarter, although it does looklike it's skewed towards the Oregon Washington market.
Can you just talk alittle bit about -- again, what type of construction growth that is, and if youhave done anything in terms of your underwriting standards as it relates toconstruction in general?
Mark Wardlow
This is Mark. I'll take this and then maybe Dave and/orBill want to fill in a little bit.
But as we mentioned, I think on the lastcall, we have significantly -- over a year ago significantly tightened up ourunderwriting on any new land A&D single-family construction. So any new originations in that category for about thelast year have been very little.
The growth you see in the portfolio forconstruction activity is spread throughout the footprint and it consists ofdeals 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'syour current policy in terms of collateral in terms of any prospective deal?
Mark Wardlow
As I mentioned, effectively we have not originated any newdeals in this product type for over a year. If we do entertain a request to doone of these deals, it's got to be very solid from an LTV loan to cost, cashequity, secondary support from the borrower’s perspective.
And effectively, Ithink most of our developers have pulled back realizing the market conditionsand 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 orbelow that number?
Mark Wardlow
On our land loans that are performing, yes. If the LTVsare higher or they have been identified as problems that are being managedthrough special assets with the appropriate reserves.
Todd Hagerman -Credit Suisse
Okay. And then just -- lastly, just Ron, in terms of theMSR hedge that you mentioned for the Fourth Quarter, I'm assuming -- will thatbe more of a balance sheet hedge, natural balance sheet hedge on that or justsomething more specific that you have in mind?
Ronald Farnsworth
No. It'll be mortgage TBAs, just basically hedging thedownside risk of the asset as opposed to earnings.
So rates drop, MSRs that areunhedged tend to drop in value, end up with a decline in earnings. We want tonegate 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 MSRasset.
Todd Hagerman -Credit Suisse
Okay, terrific. Thank you.
Ronald Farnsworth
Thank you.
Operator
(Operator Instructions) Your next question comes fromMatthew Clark with KBW.
Matthew Clark - KBW
Hey, guys. Just a couple of quick follow-ups.
Can yousuggest, or is it realistic to suggest with a fair amount of confidence thatall of these updated appraisals have considered the season up of the secondarymarket in August and the fact that sales activity in the month of Septemberjust fell off the map?
Brad Copeland
Yes. I mean if we've obtained an appraisal, our appraisersare looking at that very carefully, and our review appraisers are looking at thatvery 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 updatedappraisals. But as you know, the market is moving very quickly.
All right, okay. And then lastly, Ray, you mentioned inyour comments about I guess your expectation or hope to return towardnormalized earnings soon.
Can you maybe give us a sense as to what you mean bynormalized and what you mean by soon?
Ray Davis
Well, we don't give guidance, so I'm not going to predictwhen that's going to take place, but you can rest assured as I mentioned thatwe're moving as fast as possible. That's one of the reasons why we've been veryaggressive in the way we've classified and valued these loans to take as muchreserve as was necessary, and as much reserve that we could take.
So we can get as many of these problems behind us aspossible and get back to our more normalized earnings rate. The one way to lookat it Matt is, for the last couple of quarters we've had some spikes in theprovisions that even going back -- you can go back as far as you want to goback, or they stand out as exceptional spikes, and obviously, we want to getthe number back down to something that we can predict and get our earnings backup to our overall market value of the company… Matthew Clark- KBW Okay.
Thank you.
Operator
Your next question comes from K.C. Ambrecht withMillennium.
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, interms of your construction book?
Ray Davis
K.C., that's hard to predict. That's a crystal ballnumber.
I hate to speculate. I'm going to pass on that.
I think to speculate onthat is very dangerous for anybody, and it has no meaning, so I think I have toskip 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, andthen we walk in this quarter and you take a monster provision.
So I'm justtrying to get a sense whether we're going to have this for the next fewquarters?
Ray Davis
As we went through the call, we gave you some -- for thefirst time actually, we don't normally even do this, but we have given you aguidance on our credit portfolio metrics and quality standards for the nextquarter, 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 haveany closing remarks?
Ray Davis
Yes. Okay.
We'll go ahead and wrap it up. Thank you foryour interest in Umpqua Holdings and your attendance today.
Have a good day.
Operator
This concludes today's conference call. You may nowdisconnect.