Case 1.

Stock Valuation of Northwest Savings Bank

1. Prepare a 3-5 page, written case analysis following the case-grading rubric. Make sure your written analysis has all the required elements specified in the case grading rubric! 2. In your written case analysis, answer the following case questions in your analysis:

You are a financial advisor in Erie and you have a wealthy rock-star client who is asking for your professional assistance about investing in a local bank, Northwest Savings Bank (Ticker Symbol NWBI). Since this is a small regional bank, no Wall Street analysts cover the stock. Consequently, you will need to do your own valuation analysis for your client. Remembering your Financial Management I course, you can value the stock of Northwest Savings Bank by ratio analysis and by valuation analysis using dividend discount models.

Valuation Ratio Analysis To value Northwest Savings Bank by ratio analysis, you recall that you need a benchmark so you gather financial data on competitors PNC Bank (Ticker Symbol PNC), First Niagara Bank (Ticker Symbol FNFG), and Erie Bank (a division of CNB Bank, Ticker Symbol CCNE). You prepare the following data table: Northwest NWBI $3.31 $0.73 $0.52 $12.28 5.84% $14.78 Benchmark FNFG $3.86 $0.75 $0.32 $13.34

Sales per Share Earnings Per Share Dividends Per Share Book Value Per Share Return on Equity Price (12/31/13)

PNC $28.98 $7.40 $1.72 $72.17

CCNE $5.19 $1.29 $0.66 $11.48 10.75% $19.00

9.85% 5.95% $77.58 $10.62 (Data from yahoo.finance)

What Prices would you estimate for Northwest Savings Bank based on the Benchmark average P/S, P/E, and Market/ Book ratios? (Hint: Compute valuation ratios of competitors and then average for Benchmark Averages). Dividend Discount Model Valuation

You remember that it is easy to compute a constant dividend growth model so that is your first approach. From some analysis, you decide that the required return for Northwests stock is 9%. For the constant dividend growth rate, you compute the sustainable growth rate for the competitors, compute the average, and assume that Northwest Savings Bank will perpetually grow their future dividends at the benchmark average sustainable growth rate. Based on the constant dividend growth model, what price do you estimate for Northwest Savings Bank? You realize that that Northwest has been growing their dividends by a constant amount, not a constant rate. Based on this you develop a forecast for Northwests future dividends. Dividend Forecast Time Year -2 -1 0 1 2 3 4 5 2011 2012 2013 2014 2015 2016 2017 2018 Dividend $0.44 $0.48 $0.52 $0.56 $0.60 $0.64 $0.68 $0.72 Actual Actual Actual (Assume we are at the end of 2013) Forecast Forecast Forecast Forecast Forecast

After 2018, you forecast that Northwest Savings Bank will perpetually grow their future dividends at the benchmark average sustainable growth rate. Based on this non-constant dividend growth model, what price do you estimate for Northwest Savings Bank? What do you tell your client about the value of Northwest Savings Banks shares? What do the different valuation models tell you? Do you recommend investing in Northwest Savings Bank shares? Why or Why not? REMEMBER: Your client is a rock-star, NOT a finance major. Make sure that you explain your analysis so a that rock-star could understand. Provide enough discussion detail so that you support your case analysis, but do not discuss every discounting calculation. Include your detailed calculations in an Appendix of Calculations.