To close our series on community bank valuation, we focus on concepts that arise when evaluating a controlling interest in another bank, such as arises in an acquisition scenario. 0000001675 00000 n The level of charge-offs should be assessed against the banks historical performance and the economic outlook. u5Plph]XnM`?d7BkiZ=~3jxw"=(C7 Qq}$| zH;U`V53"p9|@d"T#1ugF8A$zh!X]'n4LSOfFu%L}([ 6PTONA*7_,`\@_00bN~:F| OSNV74E?i^p{PB76;)Iviz4=-bV7YwyQ/>*\*, !#?f,5j&dW}+=90}LH NkgrE3;P$` "JvKde_|x5N0 4bNu )L^6 g,qm"[Z[Z~Q7%" The current price of the firm is $64.28. QMs*s0Rx#Qy;H#yrf}2`KpaVlo_U44}m'U6.ODr$IeP `]yUnu25L_z[>^|Ijj&H-&K?4WhHnLod+D2[tH;WnW:UTEXNJR$.$BTy]u}`(;d:D'\YE(k;K [N&DO]x((v Bank analysts are awash in data, both regarding banks financial performance but also market data regarding publicly traded banks valuation. Analysts may also consider entity-specific risk factors such as a concentration in a limited geographic market, elevated credit quality concerns, and the like that serve to distinguish the risk faced by investors in the subject institution relative to the norm for publicly traded banks from which cost of equity data is derived. In my view, given the facts, a conservative target for Bank . Put simply, this method multiplies the sales or profits of a business by an industry averaged multiplier to calculate the Market Value of the business.Current multiples include:- Historical multiples based on standardized financials for the last completed fiscal period: Last, Last Twelve Months (LTM);- Forward multiples based on consensus estimates for the current fiscal period and next ones: Next Twelve Months (NTM), FY0, FY1.Current multiples based on per-share metrics (such as earnings per share or book value per share) are calculated using the last closing price, while current multiples based on company-level metrics (such as net sales, EBIT or EBITDA) are calculated using the current market cap or EV (Enterprise Value). Multiples use relative statistics such as earnings, price per share, value per share, sales and EBITDA (earnings before interest, taxes, depreciation . An investor may assess that a bank's growth rates are exaggerated by accepting too much risk in pursuing growth. Part 1 of this community bank valuation series described various valuation metrics applicable to banks, most prominently earnings and tangible book value. Enterprise value overview as well as Community Bank System(CBU) SEC filings, reports, and corporate actions Securities transactions conducted through StillPoint Capital, Member FINRA/SIPC, Tampa, FL. 4(kK2Bq=E]TL57%f The discounted cash flow (DCF) method relies upon three primary inputs: First, a few suggestions regarding projections: In preparing a DCF analysis for a bank, the most meaningful cash flow measure is distributable tangible equity. Financial institutions are a special industry in which interest is pretty much the main operating expense. A bank investor should use as many valuation tools as they see reasonable to determine a range of values for a community bank. 0 They check one financial metric as a ratio of another. 0000006029 00000 n Outside the financial services industry, analysts most commonly employ a weighted average cost of capital (WACC) as the discount rate, which blends the cost of the companys debt and equity funding. Outside the financial services industry, analysts most commonly employ a weighted average cost of capital (WACC) as the discount rate, which blends the cost of the companys debt and equity funding. We now conclude our series by assembling these pieces into the final product, a valuation of a specific bank. Part 1 of this community bank valuation seriesdescribed various valuation metrics applicable to banks, most prominently earnings and tangible book value. A valuation multiple is a ratio that reflects a company's value in relation to a particular financial metric. Instead, this article addresses issues commonly faced in valuing minority interests in any community bank. Jan '19. For example, earnings based indications of value derived using the market approach may be more relevant in normal times, as the values are consistent with investors orientation towards earnings as the ultimate source of returns (either dividends or capital appreciation). Analysts may also consider entity-specific risk factors such as a concentration in a limited geographic market, elevated credit quality concerns, and the like that serve to distinguish the risk faced by investors in the subject institution relative to the norm for publicly traded banks from which cost of equity data is derived. . The most common multiple used in the valuation of stocks is the P/Earnings NTM multiple (Price to Earnings). Analytical consistency is created in a DCF analysis by matching a cash flow to equity investors (i.e., dividends) with a cost of equity. Saturday: Closed. In the next edition, we will move beyond the valuation of minority interests in banks, focusing on specific valuation nuances that arise when engaging in a valuation for merger purposes. When you find yourself in the position of needing any of our services . We can navigate through the complexities of your unique financial needs faster and more reliably than other valuation firms. Price to book value is a valuation ratio that is measured by stock price / book value per share. It's a great read. A company that is attractive when long term rates are 4% might not be attractive when rates are at 8%. In this event, earnings growth expectations would be tempered as the bank realigns its growth, risk, and return objectives. The second and third editions described the analysis of bank and bank holding company financial data with an emphasis on gleaning insights that affect the valuation drivers. 113 0 obj <>stream Personal Banking KASASA Checking KASASA Savings Personal Loans Investments Business Banking Business Checking Business Savings Business Loans Treasury Management Services [] For example, analysts can compare the subject banks historical and projected EPS growth rates against the public companies EPS growth rates, with a materially lower growth outlook for the subject bank suggesting a lower pricing multiple. Trading multiples in the first several years of the analysis may be distorted by recessionary conditions, while the multiples reported for 2016 and 2017 were exaggerated by optimism regarding the potential, at that time, for tax and regulatory reform. For leveraged holding companies, a sources and uses of funds schedule is useful. P/BV, or rather P/TBV seem to be metrics that are commonly used to value financial institutions. Equity generated by the bank above this target level is assumed to be distributed to the holding company. 3R `j[~ : w! Recent Representative Transactions Mercer Capital rendered fairness opinions on behalf of Simmons First National Corporation related to the . 4 However, this is a simple arithmetic average of P/E . Conventional loans for a full spectrum of needs. The computation of pricing multiples, such as price/earnings or price/tangible book value, is facilitated by the widespread data availability regarding targets . Consequently, bank valuations dropped globally. Community Bank System Valuation (Historical Multiples) Valuation (Historical Multiples) Chart. The next edition focuses on valuation considerations applicable to controlling interests in banks that arise in acquisition scenarios. Cheers! Industry power rankings are rankings between Community Banks and all other industry U.S.-listed ETFs on certain investment-related metrics, including 3-month fund flows, 3-month return, AUM, average ETF expenses and average dividend yields. The book value is essentially the tangible accounting value of a firm . Hi Nate, great post as always. Equity Multiples. Given a range, an analyst must consider the strengths and weaknesses of each indicated value to arrive at a final concluded value. We now conclude our series by assembling these pieces into the final product, a valuation of a specific bank. A recent project yielded a price-to-book multiple of approximately 0.70 on a minority, marketable basis. 0000001384 00000 n For example, if the bank operates in a market with constrained growth prospects, then a lower than average price/earnings multiple may be appropriate. But they typically trade at a premium to book value. 0000006724 00000 n The most common multiple used in the valuation of stocks is the P/Earnings NTM multiple (Price to Earnings). For start-ups, business capital, commercial real estate, equipment, and more, Community Bank is right in there with you. A higher return on equity for a subject bank, relative to the comparable companies, often results in a higher price/tangible book value multiple. Historical Price to Book Value Data. Valuation multiples are inversely related to risk. He provides valuation and corporate advisory services to banks, thrifts, and credit unions for purposes including ESOPs, mergers and acquisitions, profit sharing plans, estate and gift Get our newsletters delivered straight to your inbox. By increasing the investor's required return, the investor increases his or her margin of safety in the event of unfavorable financial developments. Growth. Analytical consistency is created in a DCF analysis by matching a cash flow to equity investors (i.e., dividends) with a cost of equity. 91 0 obj <> endobj E.g., Share price to Earnings per share. The second and third editions described the analysis of bank and bank holding company financial data with an emphasis on gleaning insights that affect the valuation drivers. 0000001303 00000 n This makes explicit the relationships between the two entities, such as the holding companys reliance on the bank for cash flow. Valuation multiples are inversely related to risk. There are many valuation issues that remain untouched by this article in the interest of brevity, such as the valuation treatment of S corporations and the discount for lack of marketability applicable to minority interests in banks with no active trading market. Chickasaw Community Bank, a wholly owned subsidiary of the Chickasaw Nation, is a full service community bank offering checking accounts that pay interest, savings and money market accounts, Certificates of Deposit and IRAs. It is important to reiterate that while bankers and analysts often reference price/tangible book value multiples, the earning power of the institution drives its value. Part 1 of this community bank valuation series described various valuation metrics applicable to banks . The price-to-book (P/B) ratio is applied with a bank's stock price compared to equity book value per share, meaning that the ratio . Southard Financial has been serving community banks across the United States since 1986and we have a great reputation for community bank valuations. . Today, Community Bank has grown from $200 million in assets and a couple of offices to more than $4.5 billion in assets, 53 offices, and over 850 staff-owners in four states. The company valuation of Community Bank System Inc. according to these metrics is way above the market valuation of its peer group.The P/Earnings NTM ratio of Community Bank System Inc. is significantly higher than the average of its sector (Banks): 8.40. COVID-19 did create uncertainty in the deal making . At this time, the firm appears to be undervalued.Our model approximates the value of Community Bank System from analyzing the firm fundamentals such as Current Valuation of 3.51 B, profit margin of 27.60 %, and Return On Equity of 10.15 % as well as examining its technical . 0000007813 00000 n Mercer Capital and StillPoint Capital, LLC are not affiliated entities. The company valuation of Community Bank System Inc. according to these metrics is way above the market valuation of its peer group. For a financial institution, projecting an income statement without a balance sheet usually is inadvisable, as this obscures important linkages between the two financial statements. to-earnings multiples of 12 to over 20 and price-to-book multiples of 120% to 160%. First, the Gordon Growth Model develops an earnings multiple using (a) the discount rate and (b) a long-term, sustainable growth rate. A company with a high P/Earnings NTM is considered to be . Therefore, a significant theoretical underpinning for using a WACC that the cost of debt increases along with the entitys risk of default is undermined for a bank. You Need an Investing System (Heres Mine). To narrow this surfeit of comparable company data, analysts often screen the publicly traded bank universe based on characteristics such as the following: Even after applying screens similar to the preceding, it remains doubtful that the publicly traded banks will exactly mirror the subject banks characteristics. The analyst sets a threshold ratio of tangible common equity/tangible assets or another regulatory capital ratio based on managements expectations, regulatory requirements, and/or peer and publicly traded comparable company levels. After determining the holding companys expenses and debt service requirements, the remaining amount represents shareholder cash flow, which then is captured in the DCF valuation analysis. 0000000756 00000 n They are the proportion of different financial metrics. In depth view into Community Bank System Valuation (Historical Multiples) including historical data from 1985, charts and stats. hX]}SH4)>zuR;3]%L$x)BU?# (rwO6%s/mfvZnVEc/YF[g28g^S?yv0|Vei 1w! The first segment introduced key valuation drivers: various financial metrics, growth, and risk. 0000006997 00000 n For more information on Registered Representatives or Broker Dealers please visit FINRA Broker Check. The terminal value is a function of a financial metric at the end of the forecast period, such as net income or tangible book value, and an appropriate valuation multiple. For a financial institution, the discount rate represents the entitys cost of equity. Mon - Fri: 8:00am - 6:00pm. Mercer Capital is not affiliated with Mercer (US) Inc., Mercer LLC, Mercer Investments or the Marsh and McLennan Companies. I enjoy studying small community banks and read the full version of David Moore's book. This makes different companies more comparable. $O./ 'z8WG x 0YA@$/7z HeOOT _lN:K"N3"$F/JPrb[}Qd[Sl1x{#bG\NoX3I[ql2 $8xtr p/8pCfq.Knjm{r28?. Quick Links. Trading multiples in the first several years of the analysis may be distorted by recessionary conditions, while the multiples reported for 2016 and 2017 were exaggerated by optimism regarding the potential, at that time, for tax and regulatory reform. To view or add a comment, sign in, Part 1 of this community bank valuation series, Size, such as total assets or market capitalization, Profitability, such as return on assets or return on equity, Revenue mix, such as the proportion of revenue from loan sales or asset management fees, Balance sheet composition, such as the proportion of loans or dependence on wholesale funding, A projection of cash flows distributable to investors over a finite time period A terminal, or residual, value representing the value of all cash flows occurring after the end of the finite forecast period, A discount rate to convert the discrete cash flows and terminal value to present value. The first segment introduced key valuation drivers: various financial metrics, growth, and risk. %%EOF The image above is an example of Comparable Company Valuation Multiples from CFI's Business Valuation Course. Investment decisions make use of equity multiples especially when investors look to acquire minor positions in companies. The first segment introduced key valuation drivers: various financial metrics, growth, and risk. Including a roll-forward of the loan loss reserve illustrates key asset quality metrics, such as the ratios of loan charge-offs to loans and loan loss reserves to loans. Valuation multiples are tools used to calculate the value of a company by comparing multiple financial factors. 270.00. 0000002435 00000 n In most analyses, the values derived using the market and income approaches will differ. Originally published inBank Watch,November 2019. Valuation specialists identify three broad valuation approaches within which several valuation methods exist: The following discussion focuses on the valuation methodologies used most commonly for banks, the comparable company method and the discounted cash flow method. Community Bank System is number one stock in market capitalization category among related companies. 0000101149 00000 n Well, the banking sector as a whole had a P/E ratio of approximately 13.50 and compares with an overall market average P/E ratio of 36.7. Article Reprints from S&P Global Market Intelligence, Family Law Valuation and Forensic Insights, Part 1 of this community bank valuation series, Size, such as total assets or market capitalization, Profitability, such as return on assets or return on equity, Revenue mix, such as the proportion of revenue from loan sales or asset management fees, Balance sheet composition, such as the proportion of loans or dependence on wholesale funding, A projection of cash flows distributable to investors over a finite time period A terminal, or residual, value representing the value of all cash flows occurring after the end of the finite forecast period, A discount rate to convert the discrete cash flows and terminal value to present value. Valuation multiples are financial measurement tools. The metric calculations are based on U.S.-listed ETFs that are classified by ETF Database as being mostly . A well-reasoned valuation of a community bank requires understanding the valuation conventions applicable to banks, such as pricing multiples commonly employed or the appropriate source of cash flow in a DCF analysis, but within a risk and growth framework that underlies the valuation of all equity instruments. View and export this data back to 1990. . Instead, this article addresses issues commonly faced in valuing minority interests in any community bank. 91 23 ?YMEBLo; ck\IH H[|nBJ(qt^+0; We prefer to assign quantitative weights to each indication of value, which provide transparency into the process by which value is determined. 0000003056 00000 n startxref Certain members of Mercer Capital are Registered Representatives of the broker dealer StillPoint Capital, LLC. The next edition focuses on valuation considerations applicable to controlling interests in banks that arise in acquisition scenarios. Community Bank System Price to Book Value: 2.282 for Dec. 7, 2022. P/E relates the current share price with the market expectations in terms of Earnings Per Share. The analyst sets a threshold ratio of tangible common equity/tangible assets or another regulatory capital ratio based on managements expectations, regulatory requirements, and/or peer and publicly traded comparable company levels. The (current) company valuation of Community Bank System Inc. is therefore way above its valuation average over the last five years. Andrew K. Gibbs leads Mercer Capital's Depository Institutions practice. In the June 2019 BankWatch we began a multi-part series exploring the valuation of community banks. Looking for value in the overlooked margins of the market. }2SU23?vq?y_27==kI[v? An investor may assess that a bank's growth rates are exaggerated by accepting too much risk in pursuing growth. Two techniques exist to determine a terminal value multiple. 0000007557 00000 n Upgrade now. The diminished multiples at yearend 2018 and September 30, 2019 reflect a challenging interest rate environment, marked by a flat to inverted yield curve, and the possibility for rising credit losses in a cooling economy. For a financial institution, the discount rate represents the entitys cost of equity. In this event, earnings growth expectations would be tempered as the bank realigns its growth, risk, and return objectives. Valuation in finance refers to estimating the current or future worth of a company. +nOq44I+*P/4e04>x Community Bank System shows a prevailing Real Value of $70.0 per share. In the June 2019 BankWatch we began a multi-part series exploring the valuation of community banks. Multiples charts provide an effective way to quickly analyze a company's valuation over a period of time, and compare it against the valuation of another company, a personal list, or a market index. However, in more distressed times when earnings are depressed, indications of value using book value assume more relevance. For a financial institution, projecting an income statement without a balance sheet usually is inadvisable, as this obscures important linkages between the two financial statements. 8S=)pWq lfeZM*gBw0]M7H,^x!-yCrU&/^3%U?7_y]+TqXfa?S9dQRj'EltwbK#&WpZP^ Bank analysts are awash in data, both regarding banks financial performance but also market data regarding publicly traded banks valuation. tqX)I)B>== 9. One of the most widely used quantitative methods is the market multiples method. 0000006454 00000 n f\~ W~( w:WVF\?dR r3((::E#DHr:R(2 UPQ bE@PPJ@x.`z* D))F200EX, ZB'h-]t%R"x9-i#/fb[ b`Q b0 _ Since banking is a more mature industry, bank price/earnings multiples tend to vary within a relatively tight range. This is especially true when valuing smaller community banks, as a relatively limited number of publicly traded banks exist with assets of lessthan $500 million that trade in more liquid markets. Most investors are familiar with the valuation techniques used to value non-financial companies. If a bank has completed a recent acquisition or is in the midst of a strategic overhaul, then the discounted cash flow method may deserve greater emphasis. xb```"WV Ab,h,!4;U:1fA fWfLgjE|`=m.Ga$#K?\4wo9\)>!E'Z\+c-17QVq7siDg.6%b";G2Lz-`hiZTW{6 Two techniques exist to determine a terminal value multiple. &8ZuGRXYIqA"kYuODAcow|k'$7u3 d@ef Rd Q;ONd YAX{thNv|j F^E!aJ{PU3%N2Kmi\\==/ L-'vqAmV8lq*\Z9Jg{c^@@k>Jv} By increasing the The level of charge-offs should be assessed against the banks historical performance and the economic outlook. trailer In any case, even giving Community Bank System a large valuation benefit . First, the Gordon Growth Model develops an earnings multiple using (a) the discount rate and (b) a long-term, sustainable growth rate. For example, the banks projected net interest income growth may require a level of loan growth not permitted by the banks capital resources. A banks cost of equity can be estimated based on the historical excess returns generated by equity investments over Treasury rates, as adjusted by a beta metric that captures the volatility of bank stocks relative to the broader market. Sep '18. Relating these valuation parameters to a comprehensive analysis of a banks financial performance, risk factors, and strategic outlook results in a rigorous and convincing determination of value. If a bank has completed a recent acquisition or is in the midst of a strategic overhaul, then the discounted cash flow method may deserve greater emphasis. (EI=H,+cfetk1ygqb+0 However, banks are unique in that mostof their funding comes from deposits, and the cost of deposits does not rise along with the entitys risk of financial distress (because of FDIC insurance). This makes explicit the relationships between the two entities, such as the holding companys reliance on the bank for cash flow. Relating these valuation parameters to a comprehensive analysis of a banks financial performance, risk factors, and strategic outlook results in a rigorous and convincing determination of value. Chart 1 illustrates this point, showing that price/tangible book value multiples rise along with the core return on tangible common equity. May '19 . Chickasaw Community Bank is what you want a locally-owned, community-focused bank to be. 0000010507 00000 n 0000000016 00000 n P/E relates the current share price with the market expectations in terms of Earnings Per Share. It is crucial to compare the valuation multiples implied by the concluded value, such as the effective price/earnings and price/tangible book value multiples, against those reported by publicly traded banks. $E}kyhyRm333: }=#ve Do you take into consideration return on equity? xref %PDF-1.4 % <<9B217D4D2309F445BD214F2FE3459B7C>]>> A higher return on equity for a subject bank, relative to the comparable companies, often results in a higher price/tangible book value multiple. 0000038769 00000 n (Bank G's P/E multiple) and 14.0x estimated 2003 EPS (the average of Bank X's peers). Chart 1 illustrates this point, showing that price/tangible book value multiples rise along with the core return on tangible common equity. View Valuation (Historical Multiples) for CBU. 0000001515 00000 n In most analyses, the values derived using the market and income approaches will differ. Many methods can be used to value a company. Valuation multiples are inversely related to risk. Table 1 presents a breakdown by trading market of the number of listed banks in November 2019. Our Story. The discounted cash flow (DCF) method relies upon three primary inputs: First, a few suggestions regarding projections: In preparing a DCF analysis for a bank, the most meaningful cash flow measure is distributable tangible equity. We prefer to assign quantitative weights to each indication of value, which provide transparency into the process by which value is determined. 0000002978 00000 n saGbM F?i"8i]gEd3r'_DjE,!|2o%l[ijFoSVj/gN:*BewQb,LvJw%+3 ^;a6( Z?t 5I|QKlw^2P e ]bTI~=Itz.u7@8xvZm{;3ONOafeAllgTl+@s Second, as illustrated in Chart 2, bank pricing multiples tend to vary within a relatively tight range, and a historical average trading multiple can inform the terminal value multiple selection. Originally published inBankWatch,November 2019. A company's valuation can change depending on market circumstances, management circumstances, or owner circumstances. . hwTTwz0z.0. Chart 2 provides some perspective on historical price/earnings and price/tangible book value multiples, which includes banks traded on the NASDAQ, NYSE, or NYSEAM with assets between $1 and $10 billion and a return on core tangible common equity between 5% and 15%. There are many valuation issues that remain untouched by this article in the interest of brevity, such as the valuation treatment of S corporations and the discount for lack of marketability applicable to minority interests in banks with no active trading market. The market valuation is utilized generally as a primary market input, to provide an objective starting point for the valuation. Instead, more than one hundred years ago, we chose a small timber community in east central Mississippi to first plant our roots. Building Better Lives For Everyone When we share a community, we share values. Simply put, it is a ratio that is calculated by dividing the market or estimated value of an asset by a specific item on the financial statements. Key financial metrics, both for the balance sheet and income statement, should be assessed against the banks historical performance and peer banks. 0000002735 00000 n 1. A well-reasoned valuation of a community bank requires understanding the valuation conventions applicable to banks, such as pricing multiples commonly employed or the appropriate source of cash flow in a DCF analysis, but within a risk and growth framework that underlies the valuation of all equity instruments. This paper focuses on the valuation of community bank stocks (herein just "bank stocks" for purposes of simplicity) as opposed to the stocks of "regional" and "money center" banks. To a beginning investor these techniques seem foreign and complicated, but after some use they become accepted and familiar. For leveraged holding companies, a sources and uses of funds schedule is useful. Therefore, multiples reflect short-term rather than long-term values. 0000069458 00000 n Similarly, homes are often expressed in terms of sq. The best case with respect to F.N.B.'s valuation multiples suggests Community Bank System is overvalued by around 47%. For example, analysts can compare the subject bank's historical and projected EPS growth rates against the public companies' EPS growth rates, with a materially lower growth outlook for the subject bank suggesting a lower pricing multiple. While projections can be prepared on a consolidated basis, we prefer developing separate projections for the bank and its holding company. This edition of the series focuses on the valuation of minority interests in banks, which do not provide the ability to dictate control over the banks operations. Instead, valuation is context dependent. A number of different models are used from relative valuation, to discounted cash flows, multiples comparison, dividend yield, and others. Chart 2 provides some perspective on historical price/earnings and price/tangible book value multiples, which includes banks traded on the NASDAQ, NYSE, or NYSEAM with assets between $1 and $10 billion and a return on core tangible common equity between 5% and 15%. Equity generated by the bank above this target level is assumed to be distributed to the holding company. 3. Price/Book Ratio (P/B) Note that the denominator in these valuation multiples is what standardizes the absolute valuation (enterprise value or equity value). @j~ka@Elx5}T?FkZ]~` 1OV>++-u;M{= (D&ZCcKx}+v?># )B Qegl}BiNl^* dR6_H=k#a The P/Earnings NTM ratio of Community Bank System Inc. is significantly higher than the average of its sector (Banks): 8.68. It is important to reiterate that while bankers and analysts often reference price/tangible book value multiples, the earning power of the institution drives its value. At a regional level, North American and ASPAC banks are still trading at P/TBV equal to an average of 1.8x respectively, while European banks are currently trading at significant discount levels with average P/TBV at 0.8x as of November 2020. Key financial metrics, both for the balance sheet and income statement, should be assessed against the banks historical performance and peer banks. The terminal value is a function of a financial metric at the end of the forecast period, such as net income or tangible book value, and an appropriate valuation multiple. In theJune 2019BankWatchwe began a multi-part series exploring the valuation of community banks. In the next edition, we will move beyond the valuation of minority interests in banks, focusing on specific valuation nuances that arise when engaging in a valuation for merger purposes. bank valuation multiples and stock price performance will underperform historic levels, especially for those banks that are in areas that are underperforming . The analysis is not complete, however, when a correlated value is obtained. Qf Ml@DEHb!(`HPb0dFJ|yygs{. Valuation specialists identify three broad valuation approaches within which several valuation methods exist: The following discussion focuses on the valuation methodologies used most commonly for banks, the comparable company method and the discounted cash flow method. Book value per share is a good measure to value bank stocks. For example, if the bank operates in a market with constrained growth prospects, then a lower than average price/earnings multiple may be appropriate. A company with a high P/Earnings NTM is considered to be overvalued; a company with a low P/Earnings NTM is considered to be undervalued.The P/Earnings NTM ratio of Community Bank System Inc. is significantly higher than the median of its peer group: around 11.00. Community Bank Valuation (Part 1) . There are some small banks like ANCX and SBSI with comparable ROE to the likes of USB and WFC. As another reference point, the effective pricing multiples may be benchmarked against bank merger and acquisition pricing to ensure that an appropriate relationship exists between the subject minority interest value and a possible merger value. This edition of the series focuses on the valuation of minority interests in banks, which do not provide the ability to dictate control over the banks operations. For example, analysts can compare the subject banks historical and projected EPS growth rates against the public companies EPS growth rates, with a materially lower growth outlook for the subject bank suggesting a lower pricing multiple. 285.00. The company valuation of Community Bank System Inc. according to these metrics is way above the market valuation of its sector.The P/Earnings NTM ratio of Community Bank System Inc. is significantly higher than its historical 5-year average: 0.2. To narrow this surfeit of comparable company data, analysts often screen the publicly traded bank universe based on characteristics such as the following: Even after applying screens similar to the preceding, it remains doubtful that the publicly traded banks will exactly mirror the subject banks characteristics. 4S <5Sv>gain'>o|F^L>r0C#dpbP`MCNr=D\ :nO2FXj\V^?]@N{! They also offer the Business Checking Accounts as well as consumer . Second, as illustrated in Chart 2, bank pricing multiples tend to vary within a relatively tight range, and a historical average trading multiple can inform the terminal value multiple selection. TBV is subject to less pronounced volatility than net income; thus, valuation multiples computed using TBV may be less prone to exaggeration when, for example . Apply For a Home Loan How Can We Help? Instead, valuation is context dependent. endstream endobj 92 0 obj <> endobj 93 0 obj <> endobj 94 0 obj <>/Font<>/ProcSet[/PDF/Text]/ExtGState<>>> endobj 95 0 obj <> endobj 96 0 obj <> endobj 97 0 obj [/ICCBased 108 0 R] endobj 98 0 obj <> endobj 99 0 obj <> endobj 100 0 obj <> endobj 101 0 obj <>stream This chart includes banks traded on the NASDAQ, NYSE, or NYSEAM with assets between $1 and $10 billion. Table 1 presents a breakdown by trading market of the number of listed banks in November 2019. Based on the circumstances at hand, industry-specific multiples can . Since banking is a more mature industry, bank price/earnings multiples tend to vary within a relatively tight range. While projections can be prepared on a consolidated basis, we prefer developing separate projections for the bank and its holding company. Therefore, a significant theoretical underpinning for using a WACC that the cost of debt increases along with the entitys risk of default is undermined for a bank. Including a roll-forward of the loan loss reserve illustrates key asset quality metrics, such as the ratios of loan charge-offs to loans and loan loss reserves to loans. This multiple is used to compare a company's market value with its earnings. However, in more distressed times when earnings are depressed, indications of value using book value assume more relevance. Ultimately, the analyst must determine an appropriate valuation multiple based on the subject banks perceived growth opportunities and risk attributes relative to the public companies. Risk. As another reference point, the effective pricing multiples may be benchmarked against bank merger and acquisition pricing to ensure that an appropriate relationship exists between the subject minority interest value and a possible merger value. It is the top company in current valuation category among related companies reporting about 0.54 of Current Valuation per Market Capitalization. In reality, business valuation is often a combination of these different approaches. endstream endobj 102 0 obj <> endobj 103 0 obj <> endobj 104 0 obj <> endobj 105 0 obj <> endobj 106 0 obj <> endobj 107 0 obj <> endobj 108 0 obj <>stream We are full-service business valuation and financial advisory firm offering a broad range of services, including corporate valuation, financial institution valuation, financial reporting valuation, gift and estate tax valuation, M&A advisory, fairness opinions, ESOP and ERISA valuation services, and litigation and expert testimony consulting. For example, earnings based indications of value derived using the market approach may be more relevant in normal times, as the values are consistent with investors orientation towards earnings as the ultimate source of returns (either dividends or capital appreciation). Risk. A banks cost of equity can be estimated based on the historical excess returns generated by equity investments over Treasury rates, as adjusted by a beta metric that captures the volatility of bank stocks relative to the broader market. Investors also refer to the multiples approach as multiples analysis or valuation multiples. footage, which helps standardize value for differently sized homes. 0000002150 00000 n Any divergences should be explainable. When you're dreaming big - like wanting to start your own business - you'll probably need a loan. Price to Book Value Chart. When industry earnings are depressed and loan losses are high, the value of all banks . As a natural consequence, EBIT is a poor operating metric because it is pre-interest, and does not account for that operating expense. If we switch our focus to the prices being paid for publicly traded banks, we see price-to-book multiples at near historic lows. We can help. It is an easy way to compute a firm's value. The ratio of Market Capitalization to Current Valuation for Community Bank System is roughly 1.85 . After determining the holding companys expenses and debt service requirements, the remaining amount represents shareholder cash flow, which then is captured in the DCF valuation analysis. Community Bank Valuation. 0000002471 00000 n To view or add a comment, sign in This multiple is used to compare a company's market value with its earnings. Ultimately, the analyst must determine an appropriate valuation multiple based on the subject banks perceived growth opportunities and risk attributes relative to the public companies. Any divergences should be explainable. While it would streamline the valuation process, there is no single value for a bank that is applicable to every conceivable scenario giving rise to the need for a valuation. The diminished multiples at yearend 2018 and September 30, 2019 reflect a challenging interest rate environment, marked by a flat to inverted yield curve, and the possibility for rising credit losses in a cooling economy. The Arkansas Banker l March 2012 l arkbankers.org 15 value of even the smallest community bank. This is especially true when valuing smaller community banks, as a relatively limited number of publicly traded banks exist with assets of lessthan $500 million that trade in more liquid markets. 0000005496 00000 n For example, the banks projected net interest income growth may require a level of loan growth not permitted by the banks capital resources. This chart includes banks traded on the NASDAQ, NYSE, or NYSEAM with assets between $1 and $10 billion. However, banks are unique in that mostof their funding comes from deposits, and the cost of deposits does not rise along with the entitys risk of financial distress (because of FDIC insurance). While it would streamline the valuation process, there is no single value for a bank that is applicable to every conceivable scenario giving rise to the need for a valuation. The analysis is not complete, however, when a correlated value is obtained. Given a range, an analyst must consider the strengths and weaknesses of each indicated value to arrive at a final concluded value. It is crucial to compare the valuation multiples implied by the concluded value, such as the effective price/earnings and price/tangible book value multiples, against those reported by publicly traded banks. Entitys cost of equity multiples especially when investors look to acquire minor in. Stock price / book value: 2.282 for Dec. 7, 2022 financial institutions a firm & # x27 s... 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