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Second, he argued that FNBW’s loan loss reserve (which is a
liability reducing stockholder equity) of $492,000 was too large;
i.e., larger than reasonably necessary given FNBW’s historical
experience. During the 5-year period ending in 1992, FNBW
charged off an average of only .4 percent of unpaid loans. Thus,
in Mr. Haywood’s view, FNBW needed a loan-loss reserve equal to
only .4 percent of total loans ($33,401,000, according to Mr.
Haywood), or $133,604 (.4% x $33,401,000). The remaining
“excess” loan loss reserve (rounded to $358,000) was treated as
an increase to stockholder equity by Mr. Haywood.
Mr. Haywood’s two increases to stockholder equity totaled
$1,156,000, which was a pretax adjustment. After tax, according
to Mr. Haywood, the increase to stockholder equity would be
$832,000. Adding this amount to stockholder equity, Mr. Haywood
computed the net asset value of FNBW as $12,081,000, or $120.81
per share.
Earnings-Based Value
Mr. Haywood also used the same basic approach used by the
other experts of comparing the P/E ratio of FNBW with the P/E
ratios of comparable entities. For comparables, Mr. Haywood
began with a list of 26 large, publicly traded banking
organizations in the Midwest.22 Ten of the twenty-six banks were
based in Ohio. According to him, the average P/E ratio of all 26
22 His sources were Value Line Investors Services and
American Banker newspaper’s list of top 225 banks.
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