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BACKGROUND
Nova is a Pennsylvania based community bank that has 13 branches across the state. The bank
has
grown has
primarily
through
acquisition
and offers
a variety ofand
different
services.
NOVA
Created
Value
through
Acquisitions
Organic
Growth
Evolution
Bank has evolved into its current form through the acquisitions of:
BankPhiladelphia with four branches in 2002
Business Credit Partners, a non-bank entity, in 2008
Pennsylvania Business Bank with four branches in 2008
Five de novo branches and two productions offices from 2004 to 2006
BankPhiladelphia
Asset = $200 million
November 2002
Nova Bank
Assets = $625
January 2011
Services
The Bank offers a broad range of financial services through its thirteen branches and two loan production offices in the
Philadelphia MSA, and it also offers electronic services to clients outside the Philadelphia MSA
Community Banking
Services
Alternative Financial
Services
Investment
Services
Insurance
Services
BWB Capital Holdings Corp has launched a private placement fund with a transaction size of
$200M
and a first closing of $100M.
23
Use of funds: BWB plans to recapitalize banks and bank holding companies in the Greater
Philadelphia, Pennsylvania market to restore growth potential, support added business lines and
fund general corporate purposes.
The recommendation is to pass the investment for the following reasons:
1. The return of 2.58x is below the PE expected return.
2. There are significant risks relating to operational efficiency of Nova Bank. Its seen from
efficiency ratio, TE/TA and NIM are below industry benchmarks.
3. Consolidation is not necessarily an advantage for community banks. Historically large
banks have proven to be more successful than smaller banks while acquiring smaller
banks. This is because large banks are able to both diversify and bring operational
efficiencies.
Performance
Relative $500m Relative
Relative
Relative
Measure
<$500m Change
$1b
Change $1b$5b Change $5b$10b Change
> $10b
1996
ROAA
NET INTEREST MARGIN
1.13
(0.01)
1.14
(0.07)
1.21
(0.05)
1.26
0.06
1.20
(percentage)
2006 ROAA
0.92
(0.08)
1.00
(0.10)
1.10
(0.06)
1.16
(0.22)
1.38
(percentage)
Novas
net interest margin is less than the average for comparable banks in the industry. The
10-year change
(0.07)margins
(0.14)for different
(0.03)
(0.11) by asset
(0.01) size.(0.10)
table
below
the interest
banks
It is also(0.28)
important0.18
to
in ROAA
(%)shows(0.21)
note
that
NIM
have
seen
a
decreasing
trend
across
the
industry
and
thus
the
already
low
NIM
for
Note: Relative Change is calculated relative to the next-largest asset size group.
Exhibit 4. Net-Interest Margin by Asset Size Group and Relative Change in Position, 19962006
Asset Size Groups
Performance
Relative $500m Relative
Relative
Relative
Measure
<$500m Change
$1b
Change $1b$5b Change $5b$10b Change
1996 NetInterest Margin
5.02
0.23
4.79
0.22
4.57
0.12
4.45
0.40
(percentage)
2006 NetInterest Margin
4.19
0.07
4.12
0.14
3.98
0.08
3.91
0.90
(percentage)
10-Year Change
in NIM
(0.83)
(0.16)
(0.67)
(0.08)
(0.59)
(0.04)
(0.54)
0.50
(percentage)
Note: Relative Change is calculated relative to the next-largest asset size group.
> $10b
4.05
3.01
1.04
Source:
Needed: A New Community Bank Model
Exhibit 5. Net Operating Expense by Asset Size Group and Relative Change in Position, 19962006
By David L. Martin
Asset Size Groups
Performance
Relative
$500m
Relative
Relative
$5bfrom
Relative
When
we compare
the above
values
with the
Net
Interest
Margin
for Nova
2008-10, we see
NOVA
has Room
for
Net
Interest
Margin
Expansion
Measure
<$500m Change
$1b
Change $1b$5b Change
$10b
Change
> $10b
that Nova is operating almost 40% below industry profitability level.
1996 NOE
(percentage)
2.60
(0.30)
2006 NOE
(percentage)
2.35
10-year change
in thousands)
in($sNOE
(percentage)
0.25
2.30
(0.30)
$403,328
$26,390
6.54%
31,130
6,053
571,754
35
0.11%
0.00%
5.52%
2.00
(0.23)
1.77
(0.68)
1.09
1.71
(0.18)
For the Year
Ending
1.53
(1.08)
0.45
For
the Year Ending
December 31, 2009
December 31, 2008
Average
Average
0.29
0.05 Average0.24 Average
(0.40)
0.64
Balance Interest
Yield
Balance Interest
Yield
$418,355
$26,536
6.34%
$318,059 $21,521
6.77%
175,058
9,449
5.40%
9
0.11%
4,771
81
1.70%
1
0.02%
5,731
215
3.75%
the
entry5.74%
of nonbank
financial
institu33,715
503,619
31,266
6.21%
Note:
Relative Change is calculated
relative 5,153
to the next-largest
asset
size group.
Investments
130,913
3.94%
153,811
7,169
4.66%
Interest bearing deposits
FHLB stock
Total earning assets
Legislation
31,578
35
$16,222
2.67%
2.84%
8,559
6,149
prevented
586,874
2.20%
BANK ACCOUNTING &$11,975
FINANCE
2.44%
2.30%
23
2.38%
PROJECTED PROFITABILITY
Novas projected profitability is below the industry level. The table below shows projected
performance from Nova.
Financial Highlights
PROFITABILITY
ROAA
ROAE
Net Interest Margin
Efficiency Ratio
Efficiency Ratio (Bank Only)
Net Interest Income/Avg Assets
Non Interest Income/Avg Assets
Non Interest Expense/Avg Assets
Loans/Assets
Loans/Deposits
Reserves/Loans
Year 1
-2.56%
-93.66%
2.84%
96%
0.29%
2.98%
3.22%
80%
90%
2.59%
0.99%
2.88%
59%
72%
1.25%
2.59%
0.58%
2.90%
47%
59%
1.25%
Year 2
Year 3
0.78%
7.78%
3.74%
67%
73%
3.27%
1.24%
3.01%
63%
76%
1.35%
Year 4
1.17%
11.39%
3.94%
59%
65%
3.56%
1.41%
2.95%
66%
77%
1.33%
Year 5
1.31%
12.33%
4.16%
54%
59%
3.83%
1.53%
2.88%
68%
79%
1.65%
1.63%
14.51%
4.27%
50%
56%
3.97%
1.62%
2.81%
69%
81%
1.66%
8.68%
9.16%
9.30%
9.77%
10.26%
The table below shows profitability numbers from
comparable
Thrift
and Mortgage
Finance
8.75%
9.14%
9.38%
9.86%
10.36%
15.26%
13.43%
12.98%
13.21%
13.70%
institutions.
15.26%
16.30%
13.43%
14.52%
12.98%
14.18%
13.21%
14.40%
13.70%
14.96%
Pennsylvania,
and Mortgage Finance > Key Stats & RatiosKey Stats & Ratios
SHAREThrifts
DATA / RETURNS
Trading Multiples
CY2011
Tangible book value per share (Diluted)
$
0.04 $
0.04 $
0.04 $
0.05Count
$
Earnings per share (Diluted)
Profitability
Return on Assets
%
Total Shares
Outstanding (000's) (Diluted)
Return on Equity %
at 1.5 x tang. book
ShareholdersTarget
ValuePrice
Added
$
1,527,440
$
(0.04)
Source: Capital IQ
0.00 $
1,533,549
0.00 $
0.01 $
1,547,1110.5% 1,568,078
10.6%
-211.3
0.05 $
0.01 $
0.06
0.01
12
1,594,591
1,625,954
13
$
0.09
12
(0.04)
18%
Novas current profitability is far below industry average and the projections for future look
over-optimistic.
48
10.94%
11.06%
14.50%
14.50%
15.76%
0.12
25%
Note: Analysis assumes a management incentive at 10% of the share pool granted in restricted stock over the five year period
with a 5 year vesting period.
RATIOS
Efficiency Ratio
Novas efficiency ratio has been around 90 over the past five years. This is too high as the
desired ratio is around 50.
Texas Ratio
Novas Texas ratio is 172, which is too high compared to the desired level of 100.
INDUSTRY
The banking industry is witnessing multiple challenges and heightened expectations from different
stakeholders. These are interesting days for bankers and their banks. Customers are demanding
ever more at lesser cost. Competition is coming from all points on the financial services compass
(Ho and Huang, 2007). Shareholders are seeking increased returns on their investment in bank
equities (Consuegra et al., 2008). In addition, the financial regulators are demanding that capital
be increased thus putting pressure to increase earnings.
Community banks are locally-owned and operated banking institutions that offer traditional
banking services. A community bank is defined as a bank with total assets of $1 billion or less by
the Federal Deposit Insurance Corporation (FDIC). The number of community banks in US fell
from about 9,200 at the end of 1989 to 5,900 at the end of 2006, a 36 percent decline. The share
of community banks in total domestic banking as- sets also declined significantly over the period,
from 18.5 to 10.5 per- cent. Mergers were the primary reason for the decline in the number and
asset share of community banks during the period 1990-2006. Most of the acquirers of community
banks since 1990 have them- selves been community banks. In fact, more than 2,000 community
banks were acquired
by other community FEDERAL
banks during
1990-2006,
representing
a little more than
{
RESERVE
BANK OF
KANSAS CITY
half of all the acquisitions of community banks.
/>Li
<$1
$1-$10
> $10
All
<$1
$1-$10
>$10
All
1990-1994
684
392
223
1,299
30.8
49.4
38.1
118.3
1995-1999
687
454
243
1,384
49.2
73.2
52.1
174.5
2000-2004
454
249
81
784
39.7
52.9
29.7
122.3
2005
123
67
16
206
14.1
14.0
5.5
33.6
2006
128
81
16
225
14.9
21.7
6.2
42.8
Total
2,076
(53%)
1,243
(32%)
579
(15%)
3,898
(100%)
148.7
(30%)
211.2
(43%)
131.6
(27%)
491.5
(100%)
Note: Banking organizations include bank holding companies and independent commercial banks.
Community banks are defined as banking organizations with less than $1 billion in assets. Size
thresholds are adjusted for inflation by using assets measured in 2006 prices. Data include only
Source:
Understanding
the oreffect
of was
Merger
ontraded.
Community Banks by Julapa Jagtiani
those
mergers
in which the target
acquirer
publicly
Source: SNL database
Even though thousands of community banks have disappeared through mergers, many new
banks have been
chartered
same time.
The continued willingness
investors and
III.
WHATat the
TYPES
OF COMMUNITY
BANKS ofMERGE
entrepreneurs to startWITH
new banks,
most
of
which
begin
very
small,
suggests
that community
EACH OTHER AND WHY?
banking is still a viable line of business.
It has been shown that more than half of the acquirers of community banks during 1990-2006 were other community banks and
that these acquisitions accounted for a substantial share of total acquisitions of community bank assets. Have these community bank mergers
strengthened the community banks that remain in business? To help
answer this question, this section first discusses some of the ways in
Market
The community banking/small business market in Philadelphia MSA is quite fragmented. The
characteristics include the following:
Top 5 banks command greater than 65% market share and focus on large corporate
relationships
97 community banks (assets < $1B) control only 16% market share
Deposit per branch exceed $100 M, $30 M above national average
RISKS
MARKET SHARE NEED NOT BRING PROFITABILITY
Market share in the community banking industry is not always an indicator of profitability.
Bank market share is typically defined by the banks share of the deposit market.
Deposits are a low-cost source of funds for banks and deposit market share is critical to a banks
viability in a highly competitive environment, although more so for community banks than larger
banks. Superior service is often cited as a key to deposit market share growth. Community banks
often distinguish themselves based on relationships with customers and on the service they
provide.
While consolidation allows a bank such as Nova to gain deposit market share via mergers and
acquisitions this does not allow it to improve service. In fact by expanding without having the
necessary resources Novas service may actually worsen. This can have a negative impact on
profitability.
FINANCIALS
Novas net loss for 2010 was $15.2 million with $16.2 million in provision expense and chargeoffs and $1.7 million realized loss on securities. The Bank expects to be profitable in 2011 after
the non-performing loan sale.
2009: Impairment of $13.8 million in the securities investment portfolio, loan loss provision and
charge-offs of $8.3 million and goodwill impairment of $5.8 million
2008: Impairment of $4.2 million in the securities investment portfolio and loan loss provision
and charge-offs of $2.3 million
2007: No impairment, instead realized gain on securities of $287,000 and loan loss provision of
$666,000.
The table below shows Novas financial results over the past five years
Financial Results
12/31/06
12/31/07
12/31/08
($ in millions)
Balance Sheet
Assets
Net Loans
Deposits
Tang. Common Equity
Profitability
Net Income
ROAA
NIM
Effeciency Ration
Capital & Asset Quality
TCR
Texas Ratio
NPAs/Assets
Reserves/NPAs
NCOs/Avg Loans
12/31/10
12/31/09
430
497.0
541
601
625.0
216
272.0
323
419
373.0
286
344.0
406
483
532.0
30
25.0
19
17
11.0
(0.2)
(0.3)
(4.7)
(25.7)
(15.2)
-0.04%
-0.07%
-0.92%
-4.37%
-2.40%
2.3
2.28
2.55
2.82
2.98
96.3
93.9
84.6
93.1
87.2
4.81%
5.16%
3.59%
2.93%
1.86%
9.1
3.30
20.7
94.7
172.7
0.48
0.15
0.86
3.7
5.16
107.0
365.00
72
35
30
(0.01)
0.05
0.55
1.43
3.42
VALUATION
Assumptions - Standalone
Balance Sheet
Total Cash
Total Investments
Total Investments
Total Loans (Gross)
Loans
Other Assets / Liabilities
Total Assets
Total Deposits
Total Liabilities
Loan to Deposit Ratio
Year 1
8%
25%
6%
59%
8%
3%
-2%
1%
-3%
72%
Year 2
7%
24%
6%
63%
8%
3%
7%
9%
7%
76%
Year 3
6%
24%
6%
66%
8%
3%
8%
11%
7%
77%
Year 4
6%
23%
6%
68%
8%
3%
9%
9%
8%
79%
Year 5
6%
23%
6%
69%
8%
3%
9%
9%
9%
81%
1.25%
1.35%
1.33%
1.65%
1.66%
6.00%
10.00%
5.00%
6.00%
4.00%
2.75%
0.25%
0.25%
6.00%
10.00%
5.00%
6.00%
4.00%
2.75%
0.25%
0.25%
6.00%
10.00%
5.00%
6.00%
4.00%
2.75%
0.25%
0.25%
6.00%
10.00%
5.00%
6.00%
4.00%
2.75%
0.25%
0.25%
6.00%
10.00%
5.00%
6.00%
4.00%
2.75%
0.25%
0.25%
Cost
Interest Bearing Deposits
Time Deposits
Other Short Term Debt
FHLB Advances
Loan Loss Provision / Total Loans
Cost of Funds
0.40%
1.75%
5.22%
3.00%
0.44%
1.44%
0.40%
1.70%
5.22%
3.00%
0.46%
1.33%
0.40%
1.65%
5.22%
3.00%
0.33%
1.24%
0.40%
1.60%
5.22%
0.00%
0.65%
1.08%
0.40%
1.55%
5.22%
0.00%
0.38%
1.01%
3.22%
3.74%
3.94%
4.16%
4.27%
% of Assets
% of Total Assets
Growth Rate
% of Total Assets
Organic Growth Rate*
Growth Rate
Growth Rate
Growth Rate
Growth Rate
% of Avg Assets
% of Avg Assets
Fee Income
AFS Income
Non Interest Income
Salaries & Benefits
Occupancy Expense
Non Interest Expense
Efficiency Ratio
Growth
Growth
Growth
Growth
Growth
Growth
0.99%
2.88%
1.24%
3.01%
1.41%
2.95%
1.53%
2.88%
1.62%
2.81%
NM
-1.05%
105.84%
0.62%
-9.06%
-6.52%
80%
6.43%
20.00%
16.48%
0.63%
-2.00%
1.24%
67%
15.04%
20.00%
18.82%
2.00%
3.00%
2.92%
59%
15.30%
20.00%
18.92%
2.00%
3.00%
3.83%
54%
15.55%
20.00%
19.01%
2.00%
3.00%
3.98%
50%
Year 1
Year 2
Year 3
Year 4
Year 5
3,300
3,960
4,752
5,702
6,843
617
926
936
945
954
$ 2,683 $ 3,034 $ 3,816 $ 4,757 $ 5,888
Year 1
Year 2
Year 3
Year 4
Year 5
28,000
32,000
35,000
39,000
43,000
7,000
15,000
23,750
33,500
44,250
21,000
24,000
26,250
29,250
32,250
420
660
1,163
1,718
2,333
350
400
438
488
538
140
220
388
573
778
1,050
1,200
1,313
1,463
1,613
210
240
263
293
323
375
422
463
588
775
250
200
250
313
391
$
565 $
858 $ 1,200 $ 1,513 $ 1,787
Year 1
Year 2
Year 3
Year 4
Year 5
56,000 120,000 170,000 200,000 220,000
1,400
3,000
4,250
5,000
5,500
28
88
145
185
210
14
44
73
93
105
840
1,800
2,550
3,000
3,300
375
563
675
810
1,013
100
420
595
600
602
$
379 $
862 $ 1,353 $ 1,683 $ 1,791
Assumptions
30.0%
4.0%
2.0%
1.5%
Assumptions
10.0%
4.0%
2.0%
25.0%
Year 1
Year 2
Year 3
Year 4
Year 5
21,000
26,000
32,000
36,000
40,000
1,050
2,350
2,900
3,400
3,800
840
200
240
160
160
210
470
580
680
760
275
415
427
440
453
344
519
534
550
567
150
168
188
211
236
$ (494) $
993 $ 1,358 $ 1,799 $ 2,077
Year 1
Year 2
Year 3
Year 4
Year 5
20,000
35,000
45,000
54,000
64,800
500
1,375
2,000
2,475
2,970
200
150
100
90
108
50
138
200
248
297
219
355
461
599
779
100
130
169
220
286
$
(69) $
603 $ 1,070 $ 1,318 $ 1,500
44
Recapped
Inst.
$81,576
45,708
56,500
153,192
312,791
312,791
3,910
$308,881
4,399
5,614
16,031
$671,901
Year 1
$42,100
10,525
33,679
162,383
1,400
7,000
21,000
20,000
339,347
387,347
4,842
$382,505
4,487
5,614
16,512
$657,805
Year 2
$37,206
9,302
20,670
172,126
3,000
15,000
26,000
35,000
368,158
444,158
5,996
$438,162
4,577
5,614
17,007
$704,663
Year 3
$33,373
8,343
13,005
182,454
4,250
23,750
32,000
45,000
399,414
500,164
6,656
$493,508
4,668
5,614
17,518
$758,483
Year 4
$36,269
9,067
9,510
193,401
5,000
33,500
36,000
54,000
433,325
556,825
9,188
$547,637
4,762
5,614
18,043
$824,303
Year 5
$39,638
9,910
8,385
205,005
5,500
44,250
40,000
64,800
470,114
619,164
10,289
$608,875
4,857
5,614
18,584
$900,867
78,583
102,601
350,327
$531,511
25,000
47,614
4,337
$608,462
63,439
$671,901
57,825
1,527,440
$0.04
90,299
114,610
333,073
$537,982
25,000
25,000
4,467
$592,449
65,356
$657,805
59,742
1,533,549
$0.04
109,782
136,191
338,445
$584,418
25,000
20,000
4,601
$634,019
70,644
$704,663
65,030
1,547,111
$0.04
135,011
164,363
350,190
$649,564
25,000
4,739
$679,303
79,180
$758,483
73,566
1,568,078
$0.05
160,597
192,447
351,797
$704,841
25,000
4,881
$734,723
89,580
$824,303
83,966
1,594,591
$0.05
190,160
201,813
375,270
$767,242
25,000
5,028
$797,269
103,598
$900,867
97,984
1,625,954
$0.06
CAGR
6.00%
40.79%
58.56%
17.48%
34.16%
8.49%
12.44%
20.74%
12.32%
2.00%
3.00%
8.18%
20.46%
15.19%
3.03%
9.28%
3.00%
7.71%
12.21%
8.18%
46
Year 1
$21,324
28
4,339
113
70
$25,874
434
5,980
1,305
931
$8,649
17,225
1,707
$15,518
600
500
3,300
56
1,260
840
$6,556
10,488
2,500
6,137
$19,125
2,949
1,032
$1,917
Year 5
$36,206
210
5,478
22
24
$41,940
789
5,635
1,305
$7,728
34,212
2,340
$31,872
1,123
732
6,843
30
1,935
3,300
$13,963
14,162
2,677
7,430
24,270
21,565
7,548
$14,018
CAGR
14.15%
65.49%
6.00%
-33.26%
-23.78%
12.83%
16.07%
-1.47%
-2.78%
18.71%
8.21%
19.71%
16.97%
10.00%
20.00%
-14.34%
11.32%
40.79%
20.81%
7.80%
1.73%
4.90%
6.14%
64.44%
64.44%
47
Based on these financial projections I have valued using both Precedent transaction and
Comparables.
PRECEDENT TRANSACTION
Regional Market Context Bank & Thrift M&A
In this case I have taken the precedent transaction post the 2008 crash. These include the
following:
During normal market conditions, transactions typically price in the 2.0x to 3.0x tangible book
range
Target Financials
Target City
Assets
($MM)
NPAs /
Assets TE / TA
(%)
(%)
ROAA
(%)
Deal
Value
($MM)
PA
01/26/2011 Jenkintown
$1,247
3.18%
0.61%
$274
1.29x
MD
348
5.19
8.73
-0.55
20
NJ
383
5.45
3.88
-3.68
15
04/19/2010 Lancaster
502
2.79
6.08
-0.40
NJ
05/25/2010 Oakhurst
571
1.60
9.79
PA
642
3.89
PA
11/03/2009 Media
525
NJ
06/29/2009 Bayonne
592
PA
PA
PA
Buyer Announce
State Date
Buyer / Target
2011
Susquehanna Bancshares, Inc./ Abington Bancorp, Inc.
16.99%
NA
33.44x
0.65
NM
NM
1.00
-0.01
NM
25
0.90
-0.90
NM
0.52
72
1.29
4.51
NM
8.31
-0.82
68
1.27
2.97
NM
0.58
6.22
-0.33
33
1.00
NA
NM
1.29
9.19
0.29
47
NM
NM
NM
1,307
2.72
5.64
-0.35
65
0.88
-1.04
NM
02/14/2008 Pittsburgh
300
0.44
12.44
1.15
88
2.35
28.57
NA
11/12/2008 Greencastle
550
NA
10.36
0.95
46
NM
NM
NM
2010
2009
2008
NJ
12/14/2008 Bloomfield
629
0.30
14.70
0.36
98
1.06
NA
47.84
NJ
03/19/2008 Totowa
976
0.21
6.31
0.91
167
2.75
15.69
19.85
2007
CCFNB Bancorp, Inc./ Columbia Financial Corporation
PA
11/29/2007 Bloomsburg
315
0.39
5.34
0.43
26
NM
NM
NM
PA
05/15/2007 Emmaus
451
0.06
5.64
0.82
93
3.65
19.84
26.85
MD
12/02/2007 Bethesda
452
1.06
6.61
-1.64
49
1.37
5.72
NA
NJ
07/26/2007 Linwood
454
0.25
11.10
0.04
101
2.00
24.32
62.16
774
NA
8.13
1.06
174
2.76
22.52
22.40
967
NA
10.25
0.35
168
1.70
13.15
39.40
571
0.00
6.65
0.26
124
3.28
18.74
36.16
For the
precedent
transactions:
Eagle Bancorp,
Inc./ Fidelity & Trust
Financial Corporation
1.S&T Bancorp,
Average TE/TA = 8.95%
Inc./ IBT Bancorp, Inc.
PA
12/16/2007 Irwin
New York Community Bancorp, Inc./ Synergy Financial Group, Inc.
NY
05/13/2007 Cranford
2.2006 Average Price/Tang Book = 1.038 (B)
Provident Financial Services, Inc./ First Morris Bank & Trust
NJ
10/15/2006 Morristown
In USD 000s
No. 19of Shares (000s)
TBV per share ($)
Tangible Assets (in
$M)
Tangible Equity (in $
M)
TE/TA
Comparison
P/TBV
Valuation (in $M)
Mean
$638
1.51%
8.47%
-0.06%
0.55
8.04
0.35
$91
1.79x
12.00%
34.85x
72
1.37
13.15
32.63
Recapped
Inst
1,527,440
0.04
Year 1
1,533,549
0.04
Year 2
1,547,111
0.04
Year 3
1,568,078
0.05
61.10
61.34
61.88
5.30
8.68%
8.95%
1.038
63.41
5.62
9.16%
1.038
63.66
Median
562
Year 4
1,594,591
0.05
Year 5
1,625,954
0.06
78.40
79.73
97.56
5.76
9.30%
7.66
9.77%
8.18
10.26%
10.67
10.94%
1.038
64.22
1.038
81.37
1.038
82.74
1.038
101.24
COMPARABLE VALUATION
In order to do comparable valuation I used the Pennsylvania Thrifts and Mortgage Finance
institutions for the year 2011. Average trading multiples are as below:
Pennsylvania, Thrifts and Mortgage Finance > Key Stats & RatiosKey Stats & Ratios
Trading Multiples
CY2011
Count
P/BV
P/TangBV
Market Cap / Total Revenue
Market Cap / EBT Excl. Unusual Items
Profitability
Return on Assets %
Return on Equity %
Shareholders Value Added
1.6x
1.8x
4.2x
19.9x
13
13
14
13
0.5%
10.6%
-211.3
12
13
12
Source: CapitalIQ
Using P/TBV from the above table we get a valuation of $97.8 M at present and a valuation in
years 5 of $ 156.1M
In USD 000s
No. of Shares (000s)
TBV per share ($)
Tangible Assets (in $M)
Tangible Equity (in $ M)
TE/TA
Comparison
P/TBV
Valuation (in $M)
Recapped
Inst
1,527,440
0.04
61.10
5.30
8.68%
0.00%
1.600
97.76
Year 1
Year 2
Year 3
Year 4
Year 5
1,533,549
0.04
61.34
5.62
9.16%
1,547,111
0.04
61.88
5.76
9.30%
1,568,078
0.05
78.40
7.66
9.77%
1,594,591
0.05
79.73
8.18
10.26%
1,625,954
0.06
97.56
10.67
10.94%
1.600
98.15
1.600
99.02
1.600
125.45
1.600
127.57
1.600
156.09
From the two methods we get a present valuation in the range of $63.4 M to $97.8 M and a
valuation in Year 5 in the range of $101.24M to $156.09M.
We would generally expect the valuation from precedent transaction to be higher however in this
case we see that the reverse is true. This could be because of the negative sentiment and low
valuation after the 2008 crash. Also Nova Banks TE/TA ratio is lover than similar banks that
had seen M&A activity. This can be the reason we are getting a discount on present valuation.
Thus if we take an average of the two exit valuations, we get a valuation of $128.7 M in year 5.
The income before tax in year 1 is $2.9M so assuming an interest of 10% we can raise a
maximum of $29M as debt and need to put $31M of our money. This gives us a return of 2.58x.
This is below the PE expected return.
EXIT STRATEGY
In light of the merger and acquisitions taking place in the banking industry, our best alternative
will be to sell Nova to a larger bank. This will allow us to get a premium on the investment.
INVESTMENT RECOMMENDATION
Recommendation is to not invest in the fund following reasons:
1. The possible return of 2.58x is below par from a PE stand-point
2. Community banks are struggling to give profitable returns and Nova is performing at
below the industry levels.
3. BWBs proposition of using Nova as the vehicle to consolidate in the industry isnt
attractive as operational efficiency is more important than market share.
10