DINKS Buy Umpqua Bank

by James & Miel on August 19, 2008 · 0 comments

Hello All,

When we DINKs make a new stock purchase, we like to blog about it. Well, just today we’ve take a position in Umpqua Bank (UMPQ). Over the past couple of days, I’ve been kicking the tires by checking out their financials, listening to their conference calls and poking around on-line.

Here are my thoughts on the company:

What is Umpqua? Umpqua bank is a regional commercial bank located in the pacific northwest. Its got approximately 147 branches and 1,744 staff. The company is classified as a “small cap”, which means that its a junior member of the banking community relative to bigger outfits like Wachovia or Citibank. The bank makes money primarily from lending to businesses, selling checking accounts and managing investments for rich people.

Why did we make the investment decision?

1) Healthy financials. Relative to its peers in the banking industry, UMPQ is making money. Earnings for 2008 are down relative to 2007, but the .59 cents the company earned in the first quarter are far better than $1.02 loss at Citigroup or .39 cent loss at Wachovia. The company also has a 5.59% dividend, which appears sustainable.

To be entirely fair, the Umpqua’s financial situation has weakened over the past year. For example, its year over year cash situation declined from 335 million to about 192 million in the the second quarter. Also, Schwab investment research projects that next years earnings will be soft and the effects of the recession and subprime crisis mean that banking stocks are out of favor.

However, Umpqua has no exposure to the subprime market and most of its lending has been to businesses, rather than to individual homeowners. Its also recently shown some organic growth in the number of checking accounts its signed up, 5% more in the second quarter. So the soft earnings are balanced by the fact that its business is primarily in sectors that haven’t been hit as hard by the subprime crisis.

2) Management: The current management has done an excellent job growing the company from a single branch with 8 employees in 1953 to the 147 branches it has today. It has recently acquired a couple of smaller regional banks in Oregon and California. Plus, the company has been the subject of several case studies examining its innovative interior design and branch layout. UMPQ was recently ranked 13th by Fortune Magazine’s survey of the best American companies to work for. – All of this suggests that management is on top of core businesses fundamentals like growth and user friendliness.

3) Investor Sentiment: Umpqua is primarily owned by big investors, with fully 61% of its outstanding shares being owned by mutual funds or other institutional players. This indicates that “smart money” likes the company. Also, if threads on google finance are any account, small investors feel optimistic about the company as well.

Its true that bank stocks are out of favor at the moment, its also true that the nation is experiencing a recession, but – that said – at our buy price of $13.03 UMPQ looks to be a promising long term investment.

Our trade executed this morning, so we’ll see how it works out in the coming months.

Best,

James

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