Troubled loans rise, but Umpqua says it can cope

But bank executives voiced confidence they have successfully found ways to minimize the bank's loan losses.

Umpqua Holdings Corp., parent of Umpqua Bank, earned $9.6 million, 16 cents a diluted share, in the fourth quarter, a significant decline from the same period last year, when it earned $24.8 million, 42 cents a share.

Umpqua's provision for loan losses jumped to $41.7 million, up from $2.6 million 12 months earlier.

The bank's total nonperforming assets soared from $9 million a year ago to $98 million at the close of 2007.

The collapse of the housing bubble has taken a significant toll on Oregon banks, where loan loss provisions in the fourth quarter alone are approaching $80 million.

Despite those numbers, Ray Davis, Umpqua chief executive officer, remains bullish about the bank's future. "We understand and have identified our issues," Davis said.

Umpqua was one of the first Oregon banks to signal that credit quality may be deteriorating in October when it took a $20.4 million provision for loan losses in its third quarter.

Banks establish provisions for losses on loans it deems to be in trouble. It continues to try to collect the debt or foreclose on the collateral.

The growth of troubled loans at Umpqua illustrates how the problems that first surfaced in the outer fringes of the mortgage industry have invaded the mainstream.

Umpqua officials said Thursday that the bank has never gotten into the business of offering subprime or stated-income loans -- two of the riskiest kinds of mortgage loans that have gone bad in enormous numbers.

Subprime loans are those extended to borrowers with bad credit.

"We have never deviated from our standard underwriting practices," said Brad Copeland, Umpqua's chief credit officer.

Yet, as the economy slowed this fall, Umpqua's credit problems grew.

Similar to other banks, most of Umpqua's credit problems have come in the residential sector. About 75 percent of the loans now lumped in the troubled category as "nonperforming assets" are loans to residential developers, said Ron Farnsworth, Umpqua's senior vice president for finance.

Umpqua's performance has been hurt by an ill-timed expansion into Northern California, which has been much harder hit than the Northwest by the housing troubles. Umpqua bought three banks in Northern California over the last three years, the most recent in April 2007.

About 73 percent of the bank's troubled loans are in California, Farnsworth said.