Chapter Fifteen

Valuing a Bank as a Business Enterprise

Valuing a bank or bank holding company is one of the more crucial and highly visible aspects of valuation as part of a merger or acquisition. A mistake at this point can be very costly. Overestimate value, and a buyer is left with a difficult premium to earn back; underestimate value, and the seller does not realize the best price or maximize shareholder value. This chapter presents techniques that can be used to establish the value of a bank as an ongoing business entity. To examine the process, Example Bank is used to illustrate specific application of the valuation principles. The Example Bank referred to in this chapter is not a particular bank. It is a composite of several real banks with characteristics that allow illustration of a straightforward valuation. Conditions that can make a valuation more complex and difficult are addressed in Chapter 19.

Business Enterprise versus a Collection of Assets

When establishing the value of a bank as a business enterprise, the assets owned by the bank need not be valued individually except in unusual circumstances. The relevant value estimate is based on the future income-generating capabilities of the bank as a whole operating unit, not on the specific assets it happens to own. At this level of analysis, the individual assets are important only to the extent that they help explain the basis for future income. For example, understanding the overall mix and quality of loans and ...

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