Small Banks, Big Potential

 |  Includes: CFCP, NMIL, NREB, STSA
by: Eddy Elfenbein

Eddy Elfenbein submits: Last November I wrote about stocks flying below Wall Street's radar, meaning teeny micro-cap stocks that aren't followed by any Wall Street analysts. Investors are often surprised to learn that some of the best publicly traded companies are completely ignored by Wall Street.

In my original post, I mentioned three small banks. Today, the second one got bought out. Northern Empire Bancshares (NREB) is going to be acquired by Sterling Financial (NASDAQ:STSA) for $335 million in cash and stock.

Under the deal, approved by both companies' boards, Sterling will pay 0.805 common shares and $2.71 in cash for each share of Northern Empire. Based on Sterling's closing price of $33.04 on Friday, the offer values Northern Empire shares at $29.31 a piece, a 22 percent premium to its closing price of $23.98 the same day.

Northern Empire is puny, just 150 employees, 11 branches and zero analysts covering it. But look at NREB's earnings-per-share results for the last few years:

1999 $0.55
2000 $0.68
2001 $0.77
2002 $0.81
2003 $0.97
2004 $1.18
2005 $1.51

That stands up to any mega-cap bank. For the first half of 2006, NREB earned 82 cents share compared with 73 cents last year.

The first bank that was bought out was a thrift, NewMil Bancorp (NMIL), in April. The only one left standing is also an S&L, Coastal Financial (CFCP).

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