Umpqua Holdings: Can the Free Cookies Last?

Free internet terminals equipped with headsets for my music listening pleasure line the wall as I enter the building. Up ahead are comfortable designer sofas with Bloomberg playing on a flat screen TV and a choice of financial newspapers and magazines to pick from. As I turn the corner, a variety of free cookies laid out in a platter greet me. No, I did not just enter the ultra chic lounge of an international airline or my local library. I was in a branch of Portland, Oregon based Umpqua Bank (UMPQ) to take care of some business. Named after the river that offers some of the best (read roughest) white water rafting in the state of Oregon, Umpqua Bank has been the subject of numerous case studies for providing its customers with an "experience" they are not likely to forget and by calling its branches "stores". The New York Times calls Umpqua "Starbucks with tellers." The company has also made its way into Fortune magazine's "100 Best Companies To Work For" list two years in a row, rising from position 34 in 2007 to rank 13 in 2008.

While discussing the paperwork required to set up a business line of credit for my software consulting business, I asked the Vice President of the branch about the health of her company and her thoughts on their stock. She was obviously quite excited about how Umpqua Bank was performing after a string of acquisitions in Washington state and Northern California and suggested that I talk to their CEO Ray Davis if I was interested in learning more about the company. Much to my surprise she explained that almost all their branches have a phone with a direct line to the CEO's office and he is very receptive to calls. This was almost nine months ago when the stock was trading at nearly $25/share and my bearish sentiments about the housing sector and financials kept me from even mentioning the stock on the SINLetter blog or the monthly newsletters.

Sifting through the hard hit financial sector a few weeks ago for gems in the rough, I once again looked up Umpqua Bank and noticed that the stock had lost almost half its value in just a few short months. With a dividend yield of 5.7% and a stock price of under $13, I was very interested in the company and decided to listen to their fourth quarter conference call on Jan 24th, before making a decision to invest in the company. The stock had lost nearly half its value because investors expected Umpqua to announce terrible results and the company did not disappoint.

Fourth quarter earnings plunged 61% to $9.5 million from $24.5 million in the fourth quarter of 2006. For the full year 2007, earnings dropped 25% to $65.3 million. The provision for loan losses in the fourth quarter was $13.8 million, down 33% from Q3 but an additional provision of $4 million was added, increasing the total to $17.8 million. For the full year 2007, provision for loan losses stands at $86.1 million or 1.42% of loans outstanding. This number is much higher than one would expect from a company like Umpqua even in this challenging environment. However the company reassured investors that their Q4 performance was impacted by $5.1 million in litigation expense related to credit card issuer Visa and a $24.7 million relationship that was placed in non-accrual late in the quarter. This $24.7 million loan is on a commercial property and Umpqua anticipates no losses from this property. Umpqua's total loan portfolio is currently $6 billion with $3.4 billion in residential loans, $1.4 billion in commercial loans and $1.2 billion in construction loans.

On the bright side organic growth rate for deposits was 5%. Including recent acquisitions deposits increased 13%. Organic loan totals also grew by 5% with 10% of the growth coming from Oregon and Washington while loans in California dropped 3%. The company anticipates proceeds from Visa IPO in 2008 will more than offset the $5.1 million litigation liability it incurred in Q4 2007.

Two issues with financial stocks that are on investor's minds these days are the amount of subprime exposure and the safety of the dividend. Umpqua Bank has no subprime exposure or stated income construction loans. In the words of their CEO Ray Davis, "The company has every intension of continuing our current dividend policy and anticipates no disruption of our cash dividends to shareholders". The company did not deviate from its standard underwriting practices during the housing bubble, has managers with an average of 30 years of experience and a CEO who built a 40 person bank into a company with over $8.3 billion in assets and a footprint that extends through much of the West Coast with 147 branches.

The company repurchased 4.01 million of its shares in 2007 at an average price of $23.73 per share. This repurchase was primarily done to offset the dilution from the all stock ($5.16 million shares were issues) acquisition of North Bay Bancorp in April 2007. Umpqua Bank is still authorized to repurchase up to 1.54 million of its shares but has decided to suspend its buyback program and preserve capital. As you can see from the very interesting article by Allan Sloan called Buy high, sell low, suspending the buyback in this environment is a wise move.

My enthusiasm for Umpqua Bank was very high as I was researching the stock two weeks ago and the price was under $13. With the recent 34% runup in the stock, the company appears fairly valued assuming single digit earnings growth in 2008. Despite being positioned in an area of the country that is expected to be the least affected by the housing bust, I believe achieving any growth at all in 2008 is going to be very challenging for Umpqua Bank. I am going to add Umpqua Holdings to the watch list for now with the intension of starting a position if the price drops from these levels.

Comments

[ballsschweaty:]

The Free Cookies can last a lot longer than you can stay liquid.

2008 Feb 09 12:47 PM

[kevintx:]

The Northwest is likely just lagging a bit in its housing price declines and debt problems. The prices there are way too high.

2008 Feb 09 05:04 PM

[ballsschweaty:]

People who complain about high housing prices are just bitter that they cannot afford them. Get over it dude.

2008 Feb 09 06:02 PM