NONFINANCIAL FIRM:

USING THE BALANCE SHEET AS AN

ENTERPRISE VALUATION MODEL
ORIGINAL BALANCE SHEET
Assets
Cash and marketable securities
Operating current assets
Net fixed assets
Goodwill
Total assets

Liabilities
Operating current liabilities
Debt
Equity
Total liabilities and equity

THE ENTERPRISE VALUATION BALANCE SHEET

Assets
Cash and marketable securities
Operating current assets
- Operating current liabilities
= Net working capital
Net fixed assets
Goodwill
Market value

Liabilities
Debt

Equity

Enterprise value
= PV (FCFs
discounted at WACC)

Market value

THE ENTERPRISE VALUATION "BALANCE SHEET"

A slight variation (cash netted out from debt)
Assets
Operating current assets
- Operating current liabilities
= Net working capital
Net fixed assets
Goodwill
Enterprise Value

Liabilities
Debt - cash & Mkt. securities
= Net debt
=PV(FCFs discounted
at WACC)

Equity
Enterprise Value

Note that both variations on the enterprise valuation "balance sheet"

give the same equity value.

NONFINANCIAL FIRM:
ENTERPRISE VALUATION MODEL
Cash netted out from debt
Assets
Operating current assets
- Operating current liabilities
= Net working capital
Net fixed assets
Goodwill
Enterprise value

Liabilities
Debt - cash/marketable securities

Equity

Enterprise value
= PV (FCFs
discounted at WACC)

Enterprise value

Note that both variations on the enterprise valuation "balance sheet" give the
same equity value.

Fs discounted

SUMMIT BANK
1996 and 1997, (thousand $)
ASSETS
Cash and due from banks
Federal funds sold
Investment securities
Securities Available-for-Sale, at fair value
Securities Held-to-Maturity, at cost (fair value
of $45,360,000 and $58,629,000 at
December 31, 1997 and 1996, respectively)
Total investment securities
Loans, Net of Unearned Discount
Allowance for Loan Losses
Loans, Net
Premises and equipment, net of depreciation
Accrued income receivable
Other real estate
Other assets

TOTAL ASSETS

1997

1996

30,487
35,760

28,339
20,350

60,476

58,576

45,151
141,387

58,437
137,363

276,069
-4,065
272,004

220,006
-2,972
217,034

7,916
3,442
151
4,407

7,105
3,189
166
2,052

459,794 395,248

LIABILITIES AND SHAREHOLDERS' EQUITY

1997

1996

Noninterest-bearing demand deposits

Interest-bearing deposits
Total deposits

126,398
275,326
401,724

103,695
241,328
345,023

Securities sold under agreement to repurchase

Accrued interest payable
Other liabilities
TOTAL LIABILITIES

14,689
678
1,591
418,682

13,209
638
1,298
360,168

8,127
6,251
26,491

4,041
6,136
24,675

243
41,112

228
35,080

Common Stock
Capital Surplus
Retained Earnings
Unrealized Gain on Investment Securities
Available-for-Sale, Net of Tax
Total shareholders equity

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

459,794 395,248

Years ended December 31,

--------------------- -----------1997
1996
1995

---------Summary of Earnings:
Interest Income
Interest Expense
Net Interest Income
Provision (Credit) for Loan Losses
Securities Gains (Losses)
Non-interest Income
Non-interest Expense
Earnings Before Income Taxes
Income Tax Expense
Net Income
Balance Sheet Data (at period-end):
Total Assets
Investment Securities
Loans, Net of Unearned Discount
Allowance for Loan Los ses
Demand Deposits
Total Deposits
Long-term Debt and Notes Payable
Shareholders' Equity

----------

----------

$31,972
$27,577 $22,929
11,301
9,771
8,277
---------------------20,671
17,806
14,652
-900
-819
-236
-1
-14
-10
3,266
2,990
2,764
-12,318
-10,917
-9,973
---------------------10,718
9,046
7,197
-3,678
-3,103
-2,468
---------------------7,040
5,943
4,729

$459,794 $395,248 $355,417

105,627
117,013 119,368
276,069
220,006 178,493
4,065
2,972
2,500
126,398
103,695
89,184
401,724
345,023 310,109
0
0
0
41,112
35,080
30,125

Per Share Data:

Net Income - Diluted
Book Value - Period-En d
Dividends Paid
Weighted Average Share s Outstanding (000)

$1.04
6.32
0.18
6,479

$0.90
5.43
0.14
6,399

$0.72
4.78
0.11
6,278

Selected Performance Ratios:

Return on Average Assets
Return on Average Shar eholders' Equity
Net Interest Margin (tax equivalent)
Efficiency Ratio

1.70%
18.49
5.47
51.5

1.60%
18.5
5.24
52.6

1.52%
17.14
5.15
57.31

0.77%
1.47

0.50%
1.35

0.55%
1.4

193
-0.08

270
0.17

252
0.09

8.89%
9.21

8.83%
8.66

8.40%
8.85

15.06
8.83

15.85
8.82

15.91
8.42

Asset Quality Ratios:

Non-Performing Loans to Total Loans - Period-End
Allowance for Loan Losses to Total Loans - Period-End
Allowance for Loan Losses to Non-Performing Loans
=- Period-End
Net Charge-Offs (Recoveries) to Average Loans-0.08

Shareholders' Equity to Total Assets - Period-End

Average Shareholders'Equity to Average Assets
Total Risk-based Capital to Risk Weighted Assets
Leverage Ratio - at Period-End*

* Calculated in accordance with Federal Reserve guidelines currently in effect.

SUMMIT BANK'S BALANCE SHEETS

IN ENTERPRISE VALUE FORM
ASSETS

1997

1996

Cash and due from banks

Total investment securities

30,487
141,387

28,339
137,363

Loans, Net

272,004

217,034

-418,682

-360,168

Minus short-term liabilities

Net fixed and other assets

ENTERPRISE VALUE

15,916

12,512

41,112

35,080

LIABILITIES AND SHAREHOLDERS' EQUITY

1997

"Permanent debt"

Common Stock
Capital Surplus
Retained Earnings
Unrealized Gain on Investment Securities
Available-for-Sale, Net of Tax
Total shareholders equity

ENTERPRISE VALUE

ed December 31,
-----------1994

1996

8,127
6,251
26,491

4,041
6,136
24,675

243
41,112

228
35,080

41,112

35,080

-----------1993

----------

---------$18,143
5,625

-------12,518
-114
-152
2,729
9,075
-------6,134
2,094
-------4,040

$17,095
5,235
-------11,860
23
3
2,855
9,155
-------5,540
1,809
-------3,731

$291,011 $280,688
114,722 112,315
138,966 127,250
2,410
2,594
72,992
61,165
259,539 254,151
250
500
25,334
22,978

$0.61
4.01
0.09
6,172

$0.57
3.68
0.054
6,192

1.43%
16.55
4.85
59.96

1.40%
17.75
4.9
61.98

0.46%
1.73

1.17%
2.04

375
0.05

174
0.19

9.04%
8.64

8.19%
7.89

18.09
8.69

17.53
8.18

1
2 Assets:
3 Cash and due from banks
4 Interest-bearing deposits
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

CULLEN FROST BANKERS INC

Balance Sheet
2005
873,015,000
6,438,000

2004
545,602,000
3,512,000

Federal funds sold and resell agreements

Total cash and cash equivalents

1,033,975,000
1,913,428,000

744,675,000
1,293,789,000

Securities held to maturity

Securities available for sale, fair value
Trading account securities

12,701,000
3,059,111,000
6,217,000

16,714,000
2,957,296,000
4,671,000

Loans, net of unearned discounts

Less: Allowance for possible loan losses
Net loans

6,085,055,000
-80,325,000
6,004,730,000

5,164,991,000
-75,810,000
5,089,181,000

Sum of cash, securities, and loans

Premises and equipment, net
Goodwill
Other intangible assets, net
Cash value of life insurance policies
Accrued interest receivable

Total assets
Liabilities:
Deposits:
Non-interest-bearing demand deposits
Interest-bearing deposits
Total deposits

Federal funds purchased and repurchase

31 agreements
Subordinated notes payable and other
32 borrowings
Junior subordinated deferrable interest
33 debentures
Accrued interest payable and other
34 liabilities
35 Total liabilities
36
37 Shareholders Equity:
38 Common stock
39 Additional paid-in capital
40 Retained earnings
41 Deferred compensation
Accumulated other comprehensive loss,
42 net of tax
43 Treasury stock
44 Total shareholders equity

10,996,187,000
182,356,000
168,983,000
14,903,000
102,604,000
276,404,000

11,741,437,000
2005
3,484,932,000
5,661,462,000
9,146,394,000

9,361,651,000 <-- =C14+C10+C9+C8+C6

170,026,000
102,367,000
14,149,000
105,223,000
199,371,000

9,952,787,000 <-- =C16+SUM(C18:C22)

2004
2,969,387,000
5,136,291,000
8,105,678,000 <-- =SUM(C27:C28)

740,529,000

506,342,000

188,617,000

150,872,000 <-- Longer-term borrowing

226,805,000

226,805,000 <-- Longer-term borrowing

456,856,000
10,759,201,000

140,695,000
9,130,392,000 <-- =SUM(C31:C34)+C29

550,000
285,802,000
776,193,000
-6,175,000

536,000
212,910,000
697,872,000
-5,567,000

-50,442,000
-23,692,000
982,236,000

-10,784,000
-72,572,000
822,395,000 <-- =SUM(C38:C43)

Total liabilities and

45 shareholders equity

11,741,437,000

9,952,787,000 <-- =C44+C35

1
2
3
4
5
6
7
8
9
10
11
12

CULLEN FROST BANKERS INC

Enterprise Value Balance Sheet
Assets:
Short-term assets
Short-term liabilities
Net working capital
Other assets

Enterprise value
Debt
Equity

Enterprise value

2005
10,996,187,000
10,343,779,000
652,408,000
745,250,000

1,397,658,000
415,422,000
982,236,000

1,397,658,000

2004
9,361,651,000
8,752,715,000 <-- ='Page 184'!C35-SUM('Page 184'!C32:C33)
608,936,000 <-- =C3-C4
591,136,000 <-- =SUM('Page 184'!C18:C22)

1,200,072,000 <-- =SUM(C5:C7)

377,677,000 <-- =SUM('Page 184'!C32:C33)
822,395,000 <-- ='Page 184'!C44
1,200,072,000 <-- =C11+C10

CULLEN FROST BANKERS INC.

Computing the Free Cash Flow from the Consolidated Statement of Cash Flows

1
2 Operating Activities:
3 Net income
Adjustments to reconcile net income to net cash
4 from operating activities:
5 Provision for possible loan losses
6 Deferred tax expense (benefit)
7 Accretion of loan discounts
Securities premium amortization (discount
8 accretion), net
9 Net (gain) loss on securities transactions
10 Depreciation and amortization
Origination of loans held for sale, net of principal
11 collected
12 Proceeds from sales of loans held for sale
Net gain on sale of loans held for sale and other
13 assets
14 Net proceeds from settlement of legal claims
15 Tax benefit from stock compensation
16 Amortization of deferred compensation
17 Earnings on life insurance policies
18 Net change in:
19 Trading account securities
20 Accrued interest receivable and other assets
21 Accrued interest payable and other liabilities
22 Net cash from operating activities
23
24 Investing Activities:
25 Securities held to maturity:
26 Purchases
27 Maturities, calls and principal payments
28 Securities available for sale:
29 Purchases
30 Sales
31 Maturities, calls and principal payments
32 Net change in loans
33 Net cash paid in acquisitions
34 Proceeds from sales of premises and equipment
35 Purchases of premises and equipment
36 Benefits received on life insurance policies
37 Proceeds from sales of repossessed properties
38 Net cash from investing activities
39
40 Financing Activities:
41 Net change in deposits
42 Net change in short-term borrowings
Principal payments on notes payable and other
43 borrowings
Proceeds from junior subordinated deferrable
44 interest debentures
45 Proceeds from stock option exercises
46 Purchase of treasury stock
47 Cash dividends paid
48 Net cash from financing activities
49
50 Free cash flow (FCF)

2005
165,423,000

2004
141,325,000

2003
130,501,000

10,250,000
555,000
-10,124,000

2,500,000
5,319,000
-6,102,000

10,544,000
-3,778,000
-4,127,000

329,000
-19,000
24,357,000

1,815,000
3,377,000
24,482,000

1,167,000
-40,000
25,751,000

-60,839,000
76,431,000

-61,035,000
58,139,000

-63,828,000
50,813,000

-3,418,000
-2,389,000
11,371,000
1,986,000
-3,934,000

-2,274,000
0
11,524,000
1,377,000
-4,128,000

-3,465,000
0
3,638,000
833,000
-4,624,000

-1,546,000
-52,150,000
-23,847,000

918,000
-30,480,000
-17,976,000

-594,000
25,334,000
34,237,000

132,436,000

128,781,000

202,362,000 <-- =SUM(D3:D21)

2005

2004

2003

4,004,000

8,466,000

-1,000,000
12,023,000

-10,763,788,000
19,812,000
10,944,589,000
-605,415,000
-13,297,000
465,000
-18,098,000
6,553,000
3,457,000

-8,518,256,000
597,369,000
7,873,115,000
-581,043,000
-7,063,000
276,000
-15,398,000
4,883,000
4,247,000

-8,603,817,000
6,768,029,000
1,272,290,000
-65,555,000
-750,000
1,070,000
-12,512,000
3,296,000
7,211,000

-421,718,000

-633,404,000

-619,715,000 <-- =SUM(D26:D37)

2005
721,655,000
234,187,000

2004
36,821,000
84,541,000

2003
440,714,000
-389,417,000

955,842,000

121,362,000

51,297,000 <-- =SUM(D41:D47)

666,560,000

-383,261,000

-366,056,000 <-- =D22+D38+D48

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116

SMALL BANK
Pro forma model
Cash as percent of deposits
Interest on cash
Interest on other investment securities
Interest on mortgages
Interest on other earning assets
Interest on loans

5.0%
0.0%
6.19%
8.13%
6.71%
8.77%

Interest on deposits
Interest on short-term borrowing
Interest on long-term debt

3.51%
4.72%
6.38%

Loan loss as % of outstanding loans

Noninterest income as % of interest income
Noninterest expense as % of net interest income
Growth rate of net loans
Growth rate of deposits
Depreciation rate
Income tax rate
Dividend payout ratio

Balance sheets
thousand $

25
26 Cash

27
28
29
30
31
32
33
34
35
36
37
38
39
40

3.60%

3.80%

3.90%

4.00%

4.20%

0.30%
25.30%
70.00% <-- was 74.35%, but Large Bank analyst thinks this will go down to 70%
6%
5%
10%
35%
60%

2006
Financial
statements
386,832

2007

2008

2009

2010

2011

400,042

420,044

441,046

463,098

2,190,106

942,851

949,564

952,879

952,403

18,953
21,444
5,869,914

18,953
21,444
6,222,109

18,953
21,444
6,595,435

18,953
21,444
6,991,161

18,953
21,444
7,410,631

38,099
282,956
156,754
164,301

38,099
356,728
192,427
164,301

38,099
396,364
232,063
164,301

38,099
440,405
276,104
164,301

38,099
489,339
325,038
164,301

Other assets
Total Assets

360,087
9,011,637

360,087
8,129,786

360,087
8,529,828

360,087
8,949,872

360,087
9,390,918

360,087 <-- =F37

9,854,016 <-- =G37+G35+SUM(G26:G30)

Deposits
Short-term borrowings
[balance sheet plug]
Long-term indebtedness
Shareholders' equity
Stock
Accumulated retained earnings
Total Liabilities and Shareholders' Equity

7,619,842

8,000,834

8,400,876

8,820,920

9,261,966

9,725,064 <-- =F40*(1+$B$18)

<-- =IF(G38>G40+SUM(G42:G45),G380
G40-SUM(G42:G45),0)
128,952 <-- =F42

Other investment securities, including

money market instruments
[balance sheet plug]
Mortgage loans held for sale
Other earning assets
Loans, net
Land
Other fixed assets
Accumulated depreciation
Net fixed assets and land

251,687

128,952

128,952

128,952

128,952

128,952

489,322
521,834
9,011,637

489,322
575,904
8,129,786

489,322
626,029
8,529,828

489,322
677,048
8,949,872

489,322
729,598
9,390,918

Income statements
thousand $

2007

Interest income
Interest on cash balances
Interest on other investment securities
Interest on mortgage loans
Interest on other earning assets
Interest on net loans
Total interest income

2008

2009

2010

486,253 <-<-- =$B$2*G40

=IF(G26+G28+G29+G30+G35+G37>G4
947,709 6,0,G46(G26+G28+G29+G30+G35+G37))
18,953 <-- =F28
21,444 <-- =F29
7,855,269 <-- =F30*(1+$B$17)
38,099
543,709 <-- =G34+G35
379,408 <-- =F34-G68
164,301 <-- =F35

489,322
783,656 <-- =F45+G73
9,854,016 <-- =SUM(G40:G43)

2011

0
96,965
1,541
1,439
530,235
630,180

0
58,570
1,541
1,439
562,049
623,599

0
58,881
1,541
1,439
595,772
657,633

0
58,968
1,541
1,439
631,519
693,467

0
58,808
1,541
1,439
669,410
731,198

<-<-<-<-<-<--

=$B$3*(G26+F26)/2
=$B$4*(G27+F27)/2
=$B$5*(G28+F28)/2
=$B$6*(G29+F29)/2
=$B$7*(G30+F30)/2
=SUM(G51:G55)

Interest expense
Interest on deposits
Interest on short-term borrowings
Interest on long-term borrowing
Total interest expense

-280,829
0
-8,227
-289,056

-302,432
0
-8,227
-310,659

-335,195
0
-8,227
-343,422

-361,217
0
-8,227
-369,444

-389,003
0
-8,227
-397,230

<-<-<-<--

=-F9*G40
=-$B$10*G41
=-$B$11*G42
=SUM(G59:G61)

Net interest income

Provision for loan loss
Noninterest income
Noninterest expenses
Depreciation and amortization
Income before income tax
Provision for income tax
Net income
Dividends
Retained earnings

341,124
-18,138
159,436
-238,786
-35,673
207,962
72,787
135,175
81,105
54,070

312,941
-19,226
157,771
-219,058
-39,636
192,790
67,477
125,314
75,188
50,125

314,211
-20,380
166,381
-219,947
-44,040
196,224
68,678
127,546
76,527
51,018

324,023
-21,603
175,447
-226,816
-48,934
202,117
70,741
131,376
78,826
52,551

333,968
-22,899
184,993
-233,778
-54,371
207,914
72,770
135,144
81,086
54,058

<-<-<-<-<-<-<-<-<-<--

=G56+G62
=-$B$13*(G30+F30)/2
=$B$14*G56
=-$B$15*G64
=-$B$20*G33
=SUM(G64:G68)
=$B$21*G69
=G69-G70
=$B$22*G71
=G71-G72

Free Cash Flow Calculations

2007
135,175
35,673
5,348

2008
125,314
39,636
5,348

2009
127,546
44,040
5,348

2010
131,376
48,934
5,348

2011
135,144 <-- =G71
54,371 <-- =-G68
5,348 <-- =-(1-$B$21)*G61

-13,210
-73,772
89,214

-20,002
-39,636
110,659

-21,002
-44,040
111,891

-22,052
-48,934
114,672

-23,155 <-- =F26-G26

-54,371 <-- =F33-G33
117,337 <-- =SUM(G77:G82)

Profit after taxes

Add back depreciation
Add back after-tax interest on permanent debt
Changes in operating Net Working Capital
Subtract increases in Cash
Subtract increases in Fixed Assets at Cost
Free cash flow

Valuation of FCFs and terminal value

Equity beta
Risk-free rate
Market risk premium
Cost of equity, rE
Cost of debt, rD
Current market value/share of Small Bank
Number of shares of Small Bank
Equity value
Debt value
Percentage of equity in capital structure
Percentage of debt in capital structure
Tax rate
Discount rate, WACC
Terminal growth rate of FCF

0.9
5.80%
8.00%
10.97% <-- =B87*(1-B21)+B86*B88
6.38% <-- =B11
51.00
32,406,000
1,652,706,000
128,952
99.99%
0.01%
35%

<-- This is the current market value of Small Bank shares

<-- =B92*B93
<-- =B94/(B94+B95)
<-- =1-B96
<-- =B21

10.97% <-- =B89*B96+B97*(1-B98)*B90

5.00%

Free Cash Flow

Terminal value
Total
Value of Small Bank
Long-term debt
Implied equity value
Number of Small Bank shares
Imputed per-share value of Small Bank

Number of Large Bank shares

Value of Large Bank share
Market value of Large Bank equity, before merger
Exchange ratio (number of shares of Large Bank
117 offered per share of Small Bank), x
118
119 Check
120 Number of shares, new entity
121 Value of equity, new entity
122 Total value of Large Bank ex-shareholders
123 Total value of Small Bank ex-shareholders
124

1,710,635,917
128,952,000
1,581,683,917
32,406,000
48.81

2007
89,214

2008
110,659

2009
111,891

2010
114,672

89,214

110,659

111,891

114,672

2011
117,337 <-- =G83
2,063,710 <-- =G104*(1+B101)/(B89-B101)
2,181,047 <-- =G104+G105

<-- =NPV(B100,C106:G106)*(1+B100)^0.5*1000
<-- =B42*1000
<-- =B108-B109
<-- =B110/B111

294,330,960
58.00
############ <-- =B115*B114
0.84 <-- =B112/B115

321,601,372
############
############
1,581,683,917

<-<-<-<--

=B114+B117*B111
=B114*B115+B110
=B115*B114
=B115*B111*B117

Sensitivity analysis of Small Bank's value as function of its WACC and long-term growth
125 Noninterest expense as % of net interest income (cell B15): 70.00%
126
127
Data table header: =B112 -->
48.81
0%
128
8.0%
33.17
129
8.5%
32.53
130
9.0%
31.91
131
9.5%
31.31
132
10.0%
30.71
133
10.5%
30.14
134
11.0%
29.57
135
11.5%
29.02
136
12.0%
28.48
137
138
139
140
141
142
B

2%
38.95
38.19
37.45
36.73
36.03
35.35
34.68
34.02
33.38

3%
42.92
42.08
41.27
40.47
39.69
38.93
38.19
37.47
36.76

5%
54.87
53.78
52.73
51.70
50.69
49.71
48.75
47.81
46.90

6%
64.44
63.17
61.92
60.70
59.51
58.35
57.22
56.11
55.03

VALUING ROSARIO BANK

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48

A model using residual equity cash flow

Cash as percent of deposits
Deposit growth
Loan growth
Interest paid on deposits
Interest earned on loans
Interest paid on borrowing
General, selling, administrative expenses, growth
Fixed assets at cost, growth
Depreciation rate
Equity as percentage of loans

20%
10%
12%
1%
11%
6%
3%
10%
8%
15% <-- Capital adequacy ratio

Balance sheet
Assets
Cash
Loans

2006
2007
2008
2009
740,000 814,000 895,400 984,940
4,000,000 4,480,000 5,017,600 5,619,712

Fixed assets at cost

Depreciation
Net fixed assets
Total Assets

400,000 440,000 484,000 532,400

100,000 133,600 170,560 211,216
300,000 306,400 313,440 321,184
5,040,000 5,600,400 6,226,440 6,925,836

Liabilities and equity

Deposits
Borrowing
Shareholders' equity
Stock
Accumulated retained earnings
Total Liabilities and Shareholders' Equity

2006
2007
2008
2009
3,700,000 4,070,000 4,477,000 4,924,700
700,000 858,400 996,800 1,158,179

Income statement
Interest income
Interest expense
Paid on deposits
Paid on loans
GSA expense
Depreciation
Net income

200,000 200,000 200,000 200,000

440,000 472,000 552,640 642,957
5,040,000 5,600,400 6,226,440 6,925,836
2006
440,000

2007
466,400

2008
522,368

2009
585,052

-37,000
-42,000
-200,000
-30,000
131,000

-38,850
-46,752
-200,000
-33,600
147,198

-42,735
-55,656
-200,000
-36,960
187,017

-47,009
-64,649
-200,000
-40,656
232,738

2007
147,198
33,600
180,798
-32,000
329,596

2008
187,017
36,960
223,977
-80,640
367,314

2009
232,738
40,656
273,394
-90,317
456,472

Cash flow to equity

Net income
Add back depreciation
Free cash flow
Subtract increase in accumulated retained earnings
Equity cash flow

Valuing Rosario Bank

Cost of equity, rE

16.00%

49
50
51
52
53
54
55
56

A
Long term equity cash flow growth

Equity cash flow

Bank terminal value
Total equity cash flow + terminal value
Valuation, using mid-year discounting

B
8.00%

2007
329,596

2008
367,314

2009
456,472

329,596

367,314

456,472

6,198,542 <-- =NPV(B48,C54:G54)*(1+B48)^0.5

LUING ROSARIO BANK

using residual
1 equity cash flows
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48

2010
1,083,434
6,294,077

2011
1,191,777 <-- =G24*$B$2
7,049,367 <-- =F16*(1+$B$4)

585,640
255,938
329,702
7,707,214

644,204
305,131
339,073
8,580,217

2010
5,417,170
1,345,932

2011
5,958,887 <-- =F24*(1+$B$3)
1,563,925 <-- =IF(G21>G24+SUM(G26:G28),G21-G24-SUM(G26:G28),0)

200,000
744,112
7,707,214

200,000
857,405 <-- =$B$11*G16-G27
8,580,217 <-- =SUM(G24:G28)

2010
655,258

<-<-<-<--

-51,709
-75,123
-200,000
-44,722
283,704

2011
733,889 <-<--56,880 <--87,296 <--200,000
-49,194
340,520 <--

2010
283,704
44,722
328,426
-101,155
555,697

2011
340,520
49,194
389,713
-113,293
666,133

<-<-<-<-<--

=F18*(1+$B$9)
=F19+$B$10*AVERAGE(F18:G18)
=G18-G19
=G20+G16+G15

=$B$6*AVERAGE(F16:G16)
=-$B$5*AVERAGE(F24:G24)
=-$B$7*AVERAGE(F25:G25)

=SUM(G32:G37)

=G38
=-G37
=SUM(G41:G42)
=F28-G28
=SUM(G41:G44)

F
49
50
51
2010
52
555,697
53
54
555,697
55
C54:G54)*(1+B48)^0.5
56

2011
666,133 <-- =G45
8,992,802 <-- =G52*(1+B49)/(B48-B49)
9,658,935 <-- =SUM(G52:G53)

Pages 199-201

FIRST FEDERAL SAVINGS BANK

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41

Basic data about Fairmont National Bank (our client), First Federal Savings Bank (the targe
National Bank (the competitor)
Fairmont
First Federal
796,866,000
493,466,000
245,767,000
194,792,000
150,332,000
208,429,000
341,156,000
73,667,000
74,500,000
10,065,000
195,446,000
69,644,000
195,473,000
239,247,000
545,111,000
276,732,000
12,941,000
3,538,000
86,579,000
37,329,000

Assets
Securities
Residential loans
Other loans
Demand deposits
Passbook savings accounts
Certificates of deposit
Total deposits
Net income
Shareholders' equity
Shares outstanding
Net interest income/Average assets
Non-interest income/Average assets
Non-interest expense/Average assets
Net income/Average assets
Branch offices
Share price on February 2, 2007
Estimated cost savings from branch consolidations
Price/earnings (P/E) ratio

869,364

4.44%
1.05%
2.66%
1.67%

2.71%
0.37%
1.91%
0.74%

24

35.00

450,000

nmf

17.04

Valuation of First Federal using P/E ratios

P/E ratio
Value of First Federal at each bank's P/E ratio
Capitalized savings @ 10%
Valuation of First Federal

Valuation using earnings/assets ratios

Fairmont
17.04
60,283,518
4,500,000
64,783,518
Fairmont
8,240,882
140,415,310

Potential earnings on FF's assets at acquiror's ratio

Valuation of First Federal

Computing the exchange ratio

42
43
Based on valuation using
44 Acquiror's valuation of First Federal
45 Acquiror's market value
46 Value of combined entity

6,300,000

P/E

Fairmont
64,783,518
220,500,000
285,283,518

Page 17

Pages 199-201

47
Exchange ratio: Maximum shares of acquiror offered
48 per share of First Federal
49 First Federal shareholders' portion of combined firm
50 Check: Valuation of First Federal in combined firm
51
"Valuation" of First Federal shares at acquiror's
52 pre-acquisition share price
53
54

Based on valuation using

earnings/assets ratios

55
56 Acquiror's valuation of First Federal
57 Acquiror's market value
58 Value of combined entity
59
Exchange ratio: Maximum shares of acquiror offered
60 per share of First Federal
61 First Federal shareholders' portion of combined firm
62 Check: Valuation of First Federal in combined firm
63
"Valuation" of First Federal shares at acquiror's
64 pre-acquisition share price

Page 18

2.13
22.71%
64,783,518

74.52

Fairmont
140,415,310
220,500,000
360,915,310

4.61
38.91%
140,415,310

161.51

Pages 199-201

SAVINGS BANK

rst Federal Savings Bank (the target), and Clarksburg

he competitor)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41

Clarksburg
913,480,000
280,010,000
123,235,000
443,257,000
93,080,000
155,127,000
390,263,000
703,266,000
9,510,000
79,428,000
6,900,000
3.87%
0.96%
3.09%
1.06%
25
37.25
1,000,000
27.03 <-- =D23*D14/D11

Clarksburg
27.03
95,620,868 <-- =D31*$C$11
10,000,000 <-- =D25/0.1
105,620,868 <-- =D33+D32
Clarksburg
5,230,740 <-- =$C$3*D19
141,370,226 <-- =D31*D37

exchange 42
ratio
43
44
45
46

Clarksburg
105,620,868 <-- =D34
257,025,000 <-- =D23*D14
362,645,868 <-- =D44+D45

x
Page 19

N Acquiror *VFF
N FF *VAcquiror

Pages 199-201

47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64

3.26 <-- =D14*D44/($C$14*D45)

29.13% <-- =$C$14*D48/($C$14*D48+D14)
105,620,868 <-- =D49*D46

121.49 <-- =D48*D23

Clarksburg
141,370,226 <-- =D38
257,025,000 <-- =D45
398,395,226 <-- =D56+D57

4.37 <-- =D14*D56/($C$14*D57)

35.48% <-- =D60*$C$14/(D60*$C$14+D14)
141,370,226 <-- =D61*D58

162.61 <-- =D60*D23

Page 20

I N Acquiror *VFF

N FF *VAcquiror

Pages 199-201

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42

43
44
45
N46
Acquiror *VFF

N FF *VAcquiror
Page 21

Pages 199-201

N Acquiror *JVFF
x 47
N FF *VAcquiror
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64

Page 22

RESIDUAL APPROACH TO BANK EQUITY CASH FLOW

Assets
Cash and marketable securities
Loan portfolio
Net fixed assets
Total assets

Liabilities
Operating current liabilities--borrowed funds
Debt
Equity
Total liabilities and equity

Next year's equity =

Year t equity
+ % reserve against increase in loan portfolio
+ % margin for business expansion, prudence, etc.

==> Determines maximum payout to equity