SMALL BANK
Pro forma model
Cash as percent of deposits 5.0%
Interest on cash 0.0%
Interest on other investment securities 6.19%
Interest on mortgages 8.13%
Interest on other earning assets 6.71%
Interest on loans 8.77%
Interest on deposits 3.51% 3.60% 3.80%
Interest on short-term borrowing 4.72%
Interest on long-term debt 6.38%
Loan loss as % of outstanding loans 0.30%
Noninterest income as % of interest income 25.30%
Noninterest expense as % of net interest income 70.00% <-- was 74.35%, but Large Bank analyst thinks this will g
Growth rate of net loans 6%
Growth rate of deposits 5%
Depreciation rate 10%
Income tax rate 35%
Dividend payout ratio 60%
2006
Balance sheets
Financial 2007 2008
thousand $ statements
Cash 386,832 400,042 420,044
Other investment securities, including
money market instruments 2,190,106 2,626,447 2,143,318
[balance sheet plug]
Mortgage loans held for sale 18,953 18,953 18,953
Other earning assets 21,444 21,444 21,444
Loans, net 5,869,914 6,222,109 6,595,435
Land 38,099 38,099 38,099
Other fixed assets 282,956 282,956 282,956
Accumulated depreciation 156,754 185,050 213,345
Net fixed assets and land 164,301 136,005 107,710
Other assets 360,087 360,087 360,087
Total Assets 9,011,637 9,785,087 9,666,991
Deposits 7,619,842 8,000,834.10 8,400,875.81
Short-term borrowings
251,687 582,226 0
[balance sheet plug]
Long-term indebtedness 128,952 128,952 128,952
Shareholders' equity
Stock 489,322 489,322 489,322
Accumulated retained earnings 521,834 583,752 647,841
Total Liabilities and Shareholders' Equity 9,011,637 9785086.783699 9,666,990.89
Income statements
thousand $
Interest income
Interest on cash balances - -
Interest on other investment securities 149,072.31 147,624
Interest on mortgage loans 1,541 1,541
Interest on other earning assets 1,439 1,439
Interest on net loans 530,235 562,049
Total interest income 682,287 712,653
Interest expense
Interest on deposits (281,172) (311,632)
Interest on short-term borrowings (19,680.36) (13,740.54)
Interest on long-term borrowing (8,227.14) (8,227.14)
Total interest expense (309,080) (333,600)
Net interest income 373,208 379,053
Provision for loan loss (18,138) (19,226)
Noninterest income 172,619 180,301
Noninterest expenses (261,245) (265,337)
Depreciation and amortization (28,296) (28,296)
Income before income tax 238,147 246,495
Provision for income tax (83,352) (86,273)
Net income 154,796 160,222
Dividends (92,877) (96,133)
Retained earnings 61,918 64,089
Free Cash Flow Calculations
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 0.9
Risk-free rate 5.80%
Market risk premium 8.00%
Cost of equity, rE 10.97%
Cost of debt, rD 6.38%
Current market value/share of Small Bank 51.00
Number of shares of Small Bank 32,406,000
Equity value 1,652,706,000
Debt value 128,952
Percentage of equity in capital structure 99.99%
Percentage of debt in capital structure 0.01%
Tax rate 35%
Discount rate, WACC 10.97%
Terminal growth rate of FCF 5.00%
Free Cash Flow
Terminal value
Total
Value of Small Bank 2,210,090,780
Long-term debt 128,952,000
Implied equity value 2,081,138,780
Number of Small Bank shares 32,406,000
Imputed per-share value of Small Bank 64.22
Number of Large Bank shares 294,330,960
Value of Large Bank share 58.00
Market value of Large Bank equity, before merger 17,071,195,680
Exchange ratio (number of shares of Large Bank
offered per share of Small Bank), x 1.11
Check
Number of shares, new entity 330,212,663
Value of equity, new entity 19,152,334,460
Total value of Large Bank ex-shareholders 17,071,195,680
Total value of Small Bank ex-shareholders 2,081,138,780
ANK
model
3.90% 4.00% 4.20%
rge Bank analyst thinks this will go down to 70%
2009 2010 2011
441,046 463,098 486,253
2,241,036 2,338,639 2,435,106
18,953 18,953 18,953
21,444 21,444 21,444
6,991,161 7,410,631 7,855,269
38,099 38,099 38,099
282,956 282,956 282,956
241,641 269,936 298,232
79,414 51,119 22,823
360,087 360,087 360,087
10,153,142 10,663,971 11,199,936
8,820,919.60 9,261,965.58 9,725,063.85
0 0 0
128,952 128,952 128,952
489,322 489,322 489,322
713,948 783,731 856,598
10,153,141.89 10,663,970.99 11,199,935.53
- - -
135,696 141,741 147,747
1,541 1,541 1,541
1,439 1,439 1,439
595,772 631,519 669,410
734,448 776,239 820,137
(335,825) (361,658) (398,728)
(0.00) - -
(8,227.14) (8,227.14) (8,227.14)
(344,052) (369,885) (406,955)
390,396 406,354 413,182
(20,380) (21,603) (22,899)
185,815 196,389 207,495
(273,277) (284,448) (289,228)
(28,296) (28,296) (28,296)
254,258 268,397 280,255
(88,990) (93,939) (98,089)
165,268 174,458 182,166
(99,161) (104,675) (109,299)
66,107 69,783 72,866
