Tuesday, April 24, 2007

DSL: Risk to the Trade

On Apr 11, Sterling Financial Corporation (STSA) of Spokane, WA announced it is buying North Valley Bancorp (NOVB) of Redding, CA. Both are savings and loans.

The offer is $25.14 per share of NOVB, which was a slight premium to the market price. NOVB is much smaller than Downey, with a ~$180M market cap vs Downey $1.72B. So, the difference in size is approximately 10x.

Importantly, this offer puts the P/B at around 2.4; significantly above Downey's 1.23x. Obviously, it would blow out our Downey short if a buyer paid anywhere near 2.4x for Downey.

However, NOVB is more of a commercial lender (8-K). In fact, only 6.1% of their portfolio is residential mortgage loans.

And, although I'm sure that commercial loans will have problems in time, NOVB probably doesn't give no-doc, negative amort commercial loans.

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