Flush with capital and newly liberated from the Treasury's Tarp restrictions, Umpqua Holdings Corp. is embarking on a consolidation quest in the Pacific Northwest.

Umpqua should have no shortage of acquisition targets. Souring construction loans have increased the likelihood of failures in the region, industry watchers say, just as the $9.4 billion-asset company is putting its problems behind it.

"They have been one of the most aggressive companies in addressing problem loans," said Joe Gladue, an analyst at B. Riley & Co. Inc. "Umpqua has been trying to put as much behind them as they can. I am expecting the net chargeoffs and provisioning have peaked and [that] they will slowly recede from this point on."

Ron Farnsworth, the Portland, Ore., company's chief financial officer, said in an interview that it aggressively worked through its problems earlier than many other banks in the region by starting to identify questionable loans in 2007. As a result, he said, he thinks Umpqua is positioned to be a regional leader.

"Everything we are doing is setting ourselves up for post-recovery," he said. "We fully expect to come out of this faster than peers in the Pacific Northwest."

After a capital-raising effort this month that netted $287.9 million and buying back preferred shares issued to the Treasury under the Troubled Asset Relief Program, Umpqua had a total risk-based capital ratio of about 18%, a leverage ratio of 13% and a tangible common equity ratio of 10.9%.

Umpqua also raised $259 million in August, which under Tarp's terms cut the amount of warrants held by the Treasury in half. The remaining warrants are still outstanding.

Farnsworth estimated that Umpqua could expand by as much as $3.5 billion to $4.5 billion of assets through failed-bank acquisitions, though he said the company has not specified a growth target.

"The only thing we have control over is what our bid is when an opportunity is presented," he said. "I can't determine the timing or which troubled bank is on deck next."

Umpqua has bought two failed banks in a little more than a year. In January, it bought Evergreen Bank in Seattle, and in January 2009 it purchased Bank of Clark County in Vancouver, Wash.

John Hecht, an analyst at JMP Securities, said he expects Umpqua will not lack banks on which to bid.

"There are a ton of banks that are going to fail," he said. "There are a lot of potential failures and few consolidators."

Many banks in the Pacific Northwest continue to focus on asset-quality issues. For example, AmericanWest Bancorp in Spokane said Friday that nonperforming assets had led it to report a $17.7 million fourth-quarter loss, though this was roughly a 70% improvement from the year earlier.

As at many banking companies in the region, nonperforming assets keep piling up in AmericanWest's portfolio. It reported nonperforming loans grew 71 basis points in the quarter, to 9.58% of total assets, compared to the third quarter.

Umpqua can empathize. Struggles with nonperforming construction loans will probably keep it from reporting a profit until late this year — at the earliest. Also, a large part of its loan portfolio is allocated to commercial real estate, which is expected to weaken this year.

In the fourth quarter, the bank's ratio of nonperforming assets to total assets rose 68 basis points, to 2.38%, from the third quarter.

Problem loans were behind Umpqua's announcement of its fourth consecutive quarterly loss. The $29.9 million loss to shareholders in the quarter brought the company's net loss for 2009 to $166.3 million. It earned $49.3 million, by comparison, in 2008.

Farnsworth said Umpqua expects to report big loan-loss provisions for a couple of quarters. And though the company sees the proverbial light at the end of the tunnel for construction loan woes, commercial real estate is now starting to display problems, he said.

"I fully expect more commercial real estate loan problems — more one-off issues, not systemic, given the structure of our portfolio," he said. "We expect nonperforming assets to level off this year."

Jeff Rulis, an analyst at D.A. Davidson & Co., agreed that Umpqua's commercial real estate portfolio will be a headache but not nearly as much so as construction loans have been — at least in the short run.

"The maturities of the commercial loan book are pretty spaced out," he said. "Close to three-fourths of the CRE loan book matures beyond 2012. Granted, CRE can go bad before maturity … . It will be a more stretched-out credit issue."

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