This excerpt taken from the BNCN DEF 14A filed May 15, 2006.


Smith Capital measured the impact of the Merger on the combined company’s operating results and financial condition. In calculating proforma earnings, Smith Capital assumed additional earnings from the merger annually of $950,000 pretax commencing in 2007. The assumptions also included $19.7 million in goodwill and $3.5 million in core deposit intangibles. Smith Capital assumed exchange ratios of 1.21056 and 1.113 and that either, 100%, 0% or 50% of SterlingSouth’s warrants were cashed out by BNC. Smith Capital calculated dilution or accretion in earnings per share for SterlingSouth and BNC as a result of the Merger at the different exchange rates and with the different warrant assumptions.

Over the period from 2006 to 2009, SterlingSouth’s equivalent earnings per share in BNC (i.e. combined earnings per share multiplied by the exchange ratio) would be accretive compared to SterlingSouth stand alone earnings per share by 12.37% to 40.61%. BNC earnings per share in the combined companies show maximum accretion of 1.2 % and maximum dilution of -10%.

Smith Capital also calculated dilution in book value per share and tangible book value per share using the same assumptions as for earnings per share dilution or accretion.

Between 2006 and 2009 the range of accretion/dilution to SterlingSouth stated book value per share was 0.4% to -5.97%, and to tangible book value per share dilution ranged from -41.59% to -26.99%.

The range of accretion to BNC’s stated book value per share was 14.28% to 29.97%. The dilution to BNC tangible book value per share ranged from -5.72% to -17.62%.

Smith Capital calculated the contribution of SterlingSouth in terms of assets, loans, deposits, and 2006 estimated proforma earnings to the combined companies and found SterlingSouth’s respective contribution to be 24.04%, 21.98%, 22.34% and 23.18%. Smith Capital compared these amounts to the percentage ownership SterlingSouth would have in the combined companies. The ownership ranged between 26.34% and 31.01% depending on whether all or none of the warrants and options were cashed out.

Finally Smith Capital calculated the BNC offer as a premium over the various SterlingSouth values calculated. This is shown in the table below. In the instances below the consideration (at the floor of $20.24) payable does not represent a premium over the maximum price derived from the dividend discount model of $20.35, and at the maximum acquisition and control premium values. However, as the dividend discount model depends on a wide range of projection assumptions, and acquisition pricing represents guideline ranges only and all the other valuation methods show the consideration represents a premium, it is Smith Capital’s opinion that the consideration is fair from a financial standpoint to SterlingSouth’s shareholders.



Table of Contents

Premium Analysis

   Based on BNC
1/27/06 of $18.50
$22.63 to SSBT

Market Comparison Minimum

   $ 14.03    59.57 %   44.22 %

Market Comparison Maximum

   $ 17.01    31.66 %   18.99 %

Dividend Discount Method Maximum Value

   $ 20.35    10.05 %   -0.54 %

Dividend Discount Method Minimum Value

   $ 12.26    82.66 %   65.08 %

Control Premium Value



   $ 28.31    -20.88 %   -28.50 %


   $ 19.04    17.59 %   6.28 %

Acquisition Comparison Value



   $ 29.58    -24.29 %   -31.58 %


   $ 18.40    21.70 %   9.99 %

The summary above shows that the consideration payable exceeds all the valuation measures of SterlingSouth described in the analysis. This supports Smith Capital’s conclusion that the consideration payable to SterlingSouth was fair from a financial viewpoint to the shareholders of SterlingSouth.

This summary does not purport to be a complete description of the analyses or data presented by Smith Capital. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Smith Capital believes that one must consider its opinion, the summary and its analyses as a whole. Selecting portions of the summary and these analyses, without considering the analyses as a whole, would create an incomplete view of the processes underlying the analyses and opinion.

Smith Capital based its analyses on assumptions that it deemed reasonable, including those concerning general business and economic conditions ands industry specific factors. Smith Capital’s analyses are not necessarily indicative of actual values or actual future results that either company or the combined entities might achieve, which values may be higher or lower than those indicated. Analyses based on forecasts of future results are inherently uncertain, as they are subject to numerous factors or events beyond the control of the parties and their advisors. Therefore, none of Smith Capital, SterlingSouth, BNC or any other person assumes responsibility if future results are materially different from those forecast. Moreover, Smith Capital’s analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which businesses could actually be bought or sold.

Smith Capital is engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, estates, corporate and other purposes.

SterlingSouth paid Smith Capital $18,000 for its advice on the Merger, a fee of $25,000 for its fairness opinion and $10,000 for a deposit study. SterlingSouth has also agreed to pay Smith Capital’s out of pocket expenses in connection with the engagement. In addition, SterlingSouth has agreed to indemnify Smith Capital and its officers, directors, affiliates and employees against various liabilities and expenses that Smith Capital may incur as a result of its engagement.

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