Bank Primer PDF

I N V E S T M E N T R E S E A R C H
C O M M E RC I A L B A N K S
A SHORT BANK STOCK PRIMER
JUNE 2006
Andrew B. Collins
Senior Research Analyst
212 284-9310
andrew.b.collins@pjc.com
Steven M. Truong
Research Analyst
212 284-9307
Piper Jaffray & Co. does and seeks to do steven.m.truong@pjc.com
business with companies covered in its
research reports. As a result, investors
should be aware that the firm may have a Peter A. Froehlich
conflict of interest that could affect the
objectivity of this report. Investors should Research Analyst
consider this report as only a single factor in 212 284-9405
making their investment decisions. This
report should be read in conjunction with peter.a.froehlich@pjc.com
important disclosure information, including chad.e.klatt@pjc.com
an attestation under Regulation Analyst
Certification found on pages 52-54 of this
report or at the following site:
http://www.piperjaffray.com/research
disclosures.
Customers of Piper Jaffray in the United

States can receive independent, third-party
research on the company or companies
covered in this report, at no cost to them,
where such research is available.
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call 800 747-5128 to request a copy of this
research.
E Q U I T Y R E S E A R C H June 2006
COMMERCIAL BANKS
Andrew B. Collins A Short Bank Stock Primer

Senior Research Analyst
212 284-9310 • The Basics Of Banking Remain Unchanged—Over the past 12 months we have
andrew.b.collins@pjc.com witnessed significant pressure on the financial services sector, primarily reflecting
deterioration in spreads following the sustained Fed rate campaign, which has
Steven M. Truong involved 16 rate hikes in two years. We can now revisit the basics of bank stock
Research Analyst investing within the context of a completely new economic environment as we near
212 284-9307 the end of the Fed rate hike cycle.
steven.m.truong@pjc.com
• The Economy Is 80% Of The Call On Bank Stocks— We must make certain
Peter A. Froehlich assumptions regarding the U.S. economy to consider investing in bank stocks,
Research Analyst including that the U.S. consumer will remain somewhat healthy, while corporate
212 284-9405 profits slow only modestly after three years of good growth. Key economic drivers of
peter.a.froehlich@pjc.com bank stock price performance are explored.
New York • Credit Quality Can Cut Hard Both Ways—Unquestionably, the biggest swing factor
in bank stock earnings remains credit quality. We do not anticipate the U.S. economy
falling into recession over the 2006-2007 time frame; however, under such a scenario
we might witness increased corporate bankruptcies, as well as a weakening consumer
and poor relative bank stock price performance. We have provided the key “dials and
needles” in bank stock financial statement analysis.
• Consolidation And Nonbanking Remain The Mega Trends—In our assessment,

consolidation has been one of the biggest trends in commercial banking for the last 15
years and may resurface as a support for stock valuations under a scenario of
increased earnings stress. Another mega trend that dominated the mid-1990s that has
more recently reversed itself somewhat is the single-minded focus on fee-based
revenues.
• Risks—Risks to achievement of our 12-month price targets include, but are not
limited to, deterioration in the broader market; significant weakness in the U.S./global
economy; or specific unforeseen fundamental company-related events that may result
in failure to achieve our EPS estimates.
Piper Jaffray & Co. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decisions. This report should be read in conjunction with important disclosure information, including an attestation under Regulation Analyst
Certification found on pages 52-54 of this report or at the following site: http://www.piperjaffray.com/researchdisclosures.
Customers of Piper Jaffray in the United States can receive independent, third-party research on the company or companies covered in this report, at no
cost to them, where such research is available. Customers can access this independent research by visiting piperjaffray.com or can call 800 747-5128
to request a copy of this research.
June 2006
TABLE OF CONTENTS
Viewpoint .................................................................................................................. 4
Economics And Bond Market Indicators .............................................................. 5
Dials And Needles—What Is Really Important When Modeling..........................13
Loans And Credit Quality...................................................................................16
Revenue Components .........................................................................................20
Noninterest Expenses .........................................................................................21
Capital ...............................................................................................................22
Valuation Methods ...................................................................................................25
Price-To-Earnings...............................................................................................25
PEG Ratio ..........................................................................................................27
Price-To-Book ....................................................................................................27
Some Attractive Yield Opportunities...................................................................28
Mega Trends—Consolidation, Credit Quality, And Non-Banking .............................32
Consolidation.....................................................................................................32
Branching Versus Consolidation .........................................................................33
Credit Quality ....................................................................................................34
Non-Banking Trends ..........................................................................................36
Investment Banking ............................................................................................36
Asset Management .............................................................................................37
Processing...........................................................................................................37
Credit Cards.......................................................................................................37
Mortgage Banking ..............................................................................................38
Technology And The Evolution ..........................................................................41
History of Banking ....................................................................................................42
Regulatory And Legislative History—The Pendulum Swings Back ......................42
Definitions ................................................................................................................44
Important Research Disclosures.................................................................................52
2 | Commercial Banks: A Short Bank Stock Primer Piper Jaffray Investment Research
June 2006
Exhibits
1. The Primer Pyramid ............................................................................................ 4

2. Fed Funds Target Rate And Fed Funds Futures .................................................... 6
3. MBA Composite Index (Weekly) Versus 10-Year U.S. Treasury Yield (%) ........... 7
4. 10-Year Versus Three-Month U.S. Treasury Yield And Spread............................. 8
5. High Yield Spread Versus Bank Stock Index......................................................... 9
6. ISM Purchasing Managers Index.........................................................................10
7. Money Fund Flows .............................................................................................11
8. Deposits Growth Percentage Year-Over-Year Change Versus Dollar Amount .....12
9. Example Bank–Net Interest Income And Margin ................................................13
10. Example Bank–Average Balance Sheet ................................................................14
11. Three-month T-Bill Versus 10-year U.S. Treasury Historical Spread Monthly
Historical Data...................................................................................................15
12. Example Bank–Income Statement .......................................................................16
13. Example Bank–Credit Quality ............................................................................17
14. Reserve Ratio, All Banks.....................................................................................18
15. Total Home Equity Outstanding With Growth Rates..........................................19
16. Total Revolving Credit Outstandings Versus Growth Rate .................................20
17. Noninterest Expense...........................................................................................21
18. Regulatory Capital Requirements .......................................................................22
19. Components of Capital.......................................................................................23
20. Top 50 Banks Benchmark Averages, 1Q06 ..........................................................24
21. Historical 2006 Consensus Estimates...................................................................26
22. Fastest and Most Consistent Earnings Growers...................................................27
23. Top 50 Banks Relative ROE ...............................................................................28
24. Bank Stock Dividend Yield Versus 10-Year U.S. Treasury Yield (%) ...................29
25. Dividend Payout Ratio and Dividend Yield .........................................................30
26. Dividend Payout Ratio........................................................................................31
27. Bank M&A Deals...............................................................................................32
28. Branch Count and Growth..................................................................................34
29. Industry Net Charge-Off Ratios..........................................................................35
30. Large-Cap Banks 2007E Earnings Mix ................................................................36
31. Average Managed Balances – Full Year...............................................................38
32. Mortgage Originations .......................................................................................39
33. Top 10 Mortgage Originators .............................................................................40
34. Top 10 Mortgage Servicers .................................................................................40
35. Collins Industry and Company Reports ..............................................................51
Piper Jaffray Investment Research Commercial Banks: A Short Bank Stock Primer | 3
June 2006
VIEWPOINT
In our judgment, investing in bank stocks is highly dependent upon a healthy

understanding of U.S. economics, bank accounting, and key industry trends. Bank
stock investing can entail sorting through large databases of historical and valuation
benchmarks. We have attempted to simplify these investment factors into a short
primer on bank stock investing (see Exhibit 1).
The Economy------We think U.S. economic growth determines 80% of the success in
bank stock investing. Among key economic indicators we pay particularly close
attention to are the following: personal unemployment, purchasing managers index,
bankruptcies, loan growth, demand levels, and inflation. Using these statistics, our
current macro view on the U.S. economy includes: limited interest rate movements over
the next 12 months, low single-digit GDP growth, and a continued healthy consumer,
despite potential for a modest uptick in unemployment. We view this as a solid
environment in which to invest in bank stocks.
Fundamentals And Accounting------From a fundamental standpoint, we monitor credit

quality statistics closer than any other category of fundamental analysis, given a
historical tendency for credit to generate enormous swings in bank earnings. We also
constantly monitor interest rates and loan growth as a basic function of banking
profitability. In our assessment, credit quality in 2006-2007 may remain stable,
following three years of continued improvement, while basic banking trends may suffer
from deteriorating optics, reflecting the significant recent increase in short-term interest
rates, limited steepening in the yield curve, and heightened competition.
Exhibit 1
THE PRIMER PYRAMID
History Regulation Legislation
Mega-Trends Consolidation Credit Quality Nonbanking
Valuations Price-to-Earnings Price-to-Book PEG Ratios
Fundamentals Credit Quality Net Interest Margin Fee Revenues Investments Loans
Economy GDP Growth Interest Rates Unemployment Bankruptcies Purchasing Mgrs. Loan Aggregates
Source: Piper Jaffray
June 2006
Valuations—We view bank stock valuations primarily within the context of the
broader market, focusing on relative price-to-earnings (P/E), price-to-book (P/B), and
return on equity (ROE) throughout a full cycle. Although P/E and P/B ratios appear to
be at the high end of relative historical ranges at 75%, ROEs are higher than normal,
and a lot depends on earnings expectations for the broader market. Earnings
momentum in several sectors seems to be deteriorating, while bank earnings are
stabilizing to improving. Traditional bank stocks—or spread banks—tend to trade as
a group based on interest rate developments, whereas the conglomerates are generally
more sensitive to equity market fluctuations.
Mega Trends------Consolidation, credit quality, and fee-income business developments

have been the biggest fundamental trends to impact commercial banking over the last
20 years. Although industry consolidation all but ground to a halt in 2005, we would
expect some catalyst to lead to an acceleration in activity within the next two years.
Further, while the push into non-banking businesses has also slowed—due primarily to
significant deterioration in market-sensitive revenues in the early part of this decade—
we think banks will once again focus on fee-based businesses during 2006-2007.
Diversity of earnings and capital has proven extremely useful during times of stress,
while many larger banks attempt to cross-sell products through healthy distribution
networks.
History And Regulation------On a historical basis, we think regulatory and legislative

oversight of the financial services space is currently in an expansionary phase, as
exemplified by recent initiatives to curtail the sub-prime consumer and mortgage
markets, and increased scrutiny of commercial real estate lending habits. Most of these
moves have not severely impacted banking profitability, unlike some historical negative
regulatory efforts.
Economics And Bond We monitor seven or eight key economic/bond market data points when following
Market Indicators bank stocks, including the Treasury market rates (three-month and 10-year maturities),
high-yield credit spreads, loan market aggregates, unemployment, purchasing
managers index, consumer price index, and GDP growth.
In our assessment, the state of the U.S. economy is probably 80% of the call on
traditional bank stock price performance. Under a scenario of 3.5% GDP growth or
more, investors often become concerned with higher interest rates and seek out faster-
growing areas within the investor spectrum (e.g., technology), often ignoring financials
in the process. If GDP growth drops below roughly 1.0%, investors should be
concerned with slowing loan growth and potential for weakening credit quality. So far,
the consumer—who makes up two-thirds of the U.S. economy—has held up
remarkably well, while large corporate America has made steady progress since the
slowdown earlier this decade. In our view, somewhere between 1.5% and 3.0% GDP
growth is optimal for bank stock investing on a relative basis.
The absolute direction of interest rates signals the level of demand for funds within
the various markets. The Federal Reserve has a direct impact on the shorter end of the
yield curve through the fed funds rate, which can be adjusted at each of the FOMC
meetings, whereas longer-term rates are primarily a function of the markets. We think
the Federal Reserve’s significant campaign to raise the fed funds rate by 400 basis
points since mid-2004 to its current level of 5.00% (see Exhibit 2) has had little impact
on the corporate side to decelerate corporate demand and capital spending, primarily
due to significant international growth and demand.
June 2006
Exhibit 2
FED FUNDS TARGET RATE AND FED FUNDS FUTURES

May 2004 - December 2006
5.32%
5.32%
5.30%
5.30%
5.28%
5.20%
5.04%
5.00%
4.75%
4.75%
4.50%
4.50%
4.25%
4.00%
3.75%
3.75%
3.50%
3.25%
3.25%
3.00%
2.75%
2.75%
2.50%
2.25%
2.25%
2.00%
1.75%
1.75%
1.50%
1.25%
1.25%
1.00%
Aug-04
Apr-05
Aug-05
Apr-06
Aug-06
Nov-04
Nov-05
Nov-06
May-04
Jun-04
Jul-04
Sep-04
Oct-04
Dec-04
Jan-05
Feb-05
May-05
Jun-05
Jul-05
Sep-05
Oct-05
Dec-05
Jan-06
Feb-06
May-06
Jun-06
Jul-06
Sep-06
Oct-06
Dec-06
Mar-05
Mar-06
Source: Source: Piper Jaffray, Federal Reserve and Chicago Board of Trade. Note: Priced as of 6/8/06
Also, higher short-term rates have had minimal impact on pushing up long-term rates
such as the 10-year Treasury, which has increased by only 34 basis points over the past
24 months to a current yield of 5.00% as of May 24, partially due to foreign central
bank buying, as well as relatively lower government bond yields in most foreign
countries. Despite these somewhat stable long-term interest rates, we have witnessed a
mild slowdown in mortgage-related activity during the past two to three years and a
meaningful drop from the refinance-driven boom during the 2001-2003 time frame (see
Exhibit 3).
June 2006
Exhibit 3
MBA COMPOSITE INDEX (WEEKLY) VERSUS 10-YEAR U.S. TREASURY YIELD (%)
2,000 0.06
1,800
MBA Composite Index 0.055
1,600 10-Year U.S. Treasury Yield
10-Year U.S. Treasury Yield

MBA Composite Index
1,400 0.05
1,200
0.045
1,000
800 0.04
600
0.035
400
200 0.03
Nov-02
Nov-05
Jan-01
Jul-01
Jun-02
Jul-03
Jan-04
Jun-04
Jun-05
Oct-00
Apr-01
Sep-01
Dec-01
Mar-02
Aug-02
Feb-03
May-03
Oct-03
Apr-04
Sep-04
Dec-04
Mar-05
Aug-05
Feb-06
Apr-06
Source: Federal Reserve and Mortgage Bankers Association
Further, interest rates have a significant impact on net interest revenues at U.S.
commercial banks. A steep yield curve (i.e., a big difference between short-term and
long-term interest rates) is usually very favorable for bank stock net interest income—
and thus earnings—as banks tend to lend longer term and borrow shorter term. The
yield curve has flattened steadily during the mid-2004 to present time frame to a 10-
year to three-month spread of 27 basis points from 368 basis points (see Exhibit 4).
Nevertheless, net interest margins have held up surprisingly well, compressing by only
three basis points among the top 100 banks over the last 24 months.
June 2006
Exhibit 4
10-YEAR VERSUS THREE-MONTH U.S. TREASURY YIELD AND SPREAD

(May 2004-May 2006)
6.00 400
10yr. UST Yield, May 2006=4.99%
3mo. UST Yield, May 2006=4.72%
10-yr and 3-mo UST Yields (%)
350
5.00 Spread(bps), May 2006=27 bps
300
4.00
Spread (bps)
250
3.00 200
150
2.00
100
1.00
50
0.00 0
c 4
c 5
Ju -0 4
Fe -0 5
Ju -0 5
Fe -0 6
M - 05
Ap - 05
M 06
Ap - 06
g 4
Au l-05
Se - 04
O - 04
Ja -0 4
p 5
O - 05
Ja -0 5
ay 5
6
Ju -04
Ju -05
No - 04
No t- 05
De v-0
De v-0
Au l-0
Se - 0
M r- 0
r- 0
b-
n
n
ar
ar
b
p
g
ay
ct
c
M
Source: Federal Reserve, Piper Jaffray
High yield credit spreads tracked against the 10-year Treasury can often signal
increased credit concerns in the marketplace and thus potential systemic disruptions.
Prior to Enron declaring bankruptcy during the fall of 2001, and then again leading up
to the shared national credit results in October 2002, credit spreads widened
dramatically. In sum, these measures track credit fears as well as reality (see Exhibit 5).
June 2006
Exhibit 5
HIGH YIELD SPREAD VERSUS BANK STOCK INDEX

(Sept. 1992 - To Date)
30-Jun-04
Oct-8-02 Fed 2004 rate hike
SNC Results campaign begins
900bps 3-Jan-01 110
Fed 2001 rate cut
campaign begins
100
800bps
High Yield Spread 90
700bps Bank Stock Index
80
High Yield Spread
Bank Stock Index

600bps
70
500bps 60
11-Sep-01
WTC Attack 50
400bps
40
10-Mar-00
300bps
23-Sep-98 NASDAQ reaches
30
LTCM Bailout record high
200bps
20
100bps 10
Sep-92
Mar-93
Sep-93
Mar-94
Sep-94
Mar-95
Sep-95
Mar-96
Sep-96
Mar-97
Sep-97
Mar-98
Sep-98
Mar-99
Sep-99
Mar-00
Sep-00
Mar-01
Sep-01
Mar-02
Sep-02
Mar-03
Sep-03
Mar-04
Sep-04
Mar-05
Sep-05
Mar-06
Source: Piper Jaffray, ILX and Bloomberg
We generally view consumer and corporate loan aggregate trends as early indicators
of economic growth. Although corporate loan expansion remains robust, consumer
loan growth has been somewhat sluggish over the last three years. In contrast,
mortgage trends were extremely strong through year-end 2004 and have since declined.
We are also closely tracking unemployment trends, which have a significant bearing
on the levels of unsecured consumer net charge-offs. With the unemployment rates
trending up, we would expect to witness an increase in credit card delinquencies and
potentially net charge-offs. Nevertheless, recent credit card master trust trends (which
are reported on a monthly basis) appear to have been somewhat benign with limited
increases in bankruptcies and net charge-offs following the adoption of more restrictive
personal bankruptcy laws in the fourth quarter of 2005.
June 2006
Purchasing managers index remains important to gauging potential expansion within

the business sector and thus the potential for increased loan demand. In our
assessment, capacity remains somewhat tight within the corporate sector, implying
healthy corporate demand. The most recent ISM purchasing managers index was 57.3
at April 2006, indicating corporate growth (see Exhibit 6).
Exhibit 6
ISM PURCHASING MANAGERS INDEX

(Jan 2000-May 2006)
65
60
55
50
45
40
35
M 00
M 01
M 02
M 03
M 04
M 05
06
Se 00
Se 01
Se 02
Se 03
Se 04
Se 05
Ja 0
Ja 1
Ja 2
Ja 3
Ja 4
Ja 5
0
0
n-
n-
n-
n-
n-
n-
n-
-
-
p-
p-
p-
p-
p-
p-
ay
ay
ay
ay
ay
ay
Ja
Source: ISM
Money flows include the levels of deposits, equities, and money markets on an
aggregate basis, and willingness of investors to invest in each of these categories (see
Exhibit 7). Many of our analyst peers wrongly anticipated that with any improvement
in the equities markets we might witness a material outflow of bank deposits.
Exhibit 7
Billions of Dollars Billions of Dollars Billions of Dollars Billions of Dollars
-3.00
-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
-1.00
-0.80
-0.60
-0.40
-0.20
0.00
0.20
0.40
0.60
0.80
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
15.00
20.00
Nov-03 Nov-03 Nov-03
Nov-03
MONEY FUND FLOWS
Dec-03 Dec-03 Dec-03

Dec-03
Jan-04 Jan-04 Jan-04
Jan-04
Feb-04 Feb-04 Feb-04
Feb-04
Mar-04 Mar-04 Mar-04
Mar-04
Apr-04 Apr-04 Apr-04 Apr-04
May-04 May-04 May-04 May-04
Jun-04 Jun-04 Jun-04 Jun-04
Jul-04 Jul-04 Jul-04 Jul-04
Aug-04 Aug-04 Aug-04 Aug-04
Sep-04 Sep-04 Sep-04 Sep-04
Oct-04 Oct-04 Oct-04
Source: AMG Data Services and Piper Jaffray Fundamental Market Strategy
Oct-04
Nov-04 Nov-04 Nov-04 Nov-04
Dec-04 Dec-04 Dec-04 Dec-04
Jan-05 Jan-05 Jan-05 Jan-05
Feb-05 Feb-05 Feb-05 Feb-05
(4 Wk Moving Avg)
(4 Wk Moving Avg)
(4 Wk Moving Avg)
(4 Wk Moving Avg)
Mar-05 Mar-05 Mar-05 Mar-05
Piper Jaffray Investment Research

Equity Fund Flows - 6/1/2006
Jun-05 Jun-05 Jun-05 Jun-05
Taxables Fund Flows - 6/1/2006
Municipal Fund Flows - 6/1/2006

Jul-05 Jul-05 Jul-05 Jul-05
Money Market Fund Flows - 6/1/2006
Aug-05 Aug-05 Aug-05 Aug-05

Sep-05 Sep-05 Sep-05 Sep-05
Oct-05 Oct-05 Oct-05 Oct-05
Nov-05 Nov-05 Nov-05 Nov-05
Jan-06 Jan-06 Jan-06 Jan-06
Commercial Banks: A Short Bank Stock Primer | 11

June 2006
June 2006
Material Deposit Outflows Did Not Happen—In response, we anticipate deposit

growth remaining roughly 4%-8% annually, reflecting a more modest risk appetite;
however, several other events such as increased loan growth and higher rates may
precede that trend. Bank deposits grew by 8.5% on average throughout the last five
years versus a current growth rate of 7.8% year over year (see Exhibit 8).
Exhibit 8
DEPOSITS GROWTH PERCENTAGE YEAR-OVER-YEAR CHANGE VERSUS DOLLAR AMOUNT

( Jan 2001-May 2006, $ In Billions)
$5,942.5 Bil.
on 5/10/06 18%
$5,900 Percent changes to date:
Year-over-Year: +7.8% 16%
Year-to-Date: +3.5%
$5,400 14%
12%
$4,900 10%
8%
$4,400
6%
8.5% avg YoY 4%

$3,900 growth rate during
2001-2006
2%
$3,400 0%
Apr-03
Aug-03
Apr-04
Aug-04
Apr-05
Aug-05
May-01
May-02
May-06
Nov-01
Nov-02
Nov-05
Mar-01
Mar-02
Jul-01
Sep-01
Jul-02
Sep-02
Oct-03
Mar-06
Jan-01
Jan-02
Jan-03
Jun-03
Dec-03
Oct-04
Feb-04
Jun-04
Dec-04
Feb-05
Jun-05
Jan-06
Note: Seasonally adjusted

Source: Federal Reserve
June 2006
Dials And Needles— We usually begin a commercial banking model with assumptions regarding loan and
What Is Really asset growth. Our loan growth assumptions rely somewhat on historical economic
Important When growth levels within a given marketplace, plus an additional one to two percentage
Modeling points of growth (i.e., 5%-7% loan growth) (see Exhibit 9). This general loan growth
rule can also be broken down into economic and interest rate cycle assumptions.
Loans can generally be slotted into four broad categories: mortgages, consumer loans,
business loans, and commercial real estate.
Exhibit 9
EXAMPLE BANK – NET INTEREST INCOME AND MARGIN
(Current Year, Average Balance Sheet)
Average Yields/ Interest Average Yields/ Interest
Balance Rates Income Balance Rates Expense
Securities $500 4.50% $22.5 Deposits $1,300 1.61% $20.9
Loans 1,300 6.00% 78.0 Borrowings 630 3.62% 22.8
Earning Assets $1,800 5.58% $100.5 Bearing Liabilities $1,930 2.27% $43.7
Other Assets 300 Equity 170
Total Assets $2,100 Total Liab. & Eq. $2,100
Calculations: $100.5 - $43.7 = $56.8 Net Interest Income (NII) $56.8
$56.8 / $1,800 = 3.15% Net Interest Margin (NIM) 3.15%
5.58% - 2.27% = 3.32% Interest Rate Spread 3.32%
Over the last 24 months, business loans (or commercial and industrial) have been
accelerating due to increased demand, more favorable customer pricing, and more
lenient underwriting standards. In contrast, demand for mortgage loans—including
first and second liens—has been waning, reflecting higher U.S. interest rates.
Meanwhile, rates on credit cards have remained somewhat stable. We may witness
card balance growth accelerate under a scenario where consumers notice little
difference between home equity and credit card interest rates.
Investment securities comprise the bulk of a bank’s remaining average earning assets
and are primarily composed of government and mortgage-backed bonds. Average
earning asset levels are somewhat a function of loan growth, and the opportunity to
leverage deposit growth and any underutilized capital.
Investment securities and loans provide an asset yield, which combined with balances
results in interest income, and eventually to the income statement item, net interest
income, at commercial banks. Banks typically charge an upfront fee as well as ongoing
interest rate to the borrower, which can range anywhere from 2%-3% on large, highly
rated commercial credits to 12% on credit card loans, and can either be a fixed or
floating interest rate priced off of a standardized rate. Over the last ten years, banks
have securitized or packaged a large percentage of credit card and mortgage balances,
thus removing them from the reported balance sheet. However, in the last two years
banks have increasingly maintained consumer loans on the balance sheet, given an
opportunity to fund these loans with abnormally cheap deposits.
June 2006
Exhibit 10
EXAMPLE BANK – AVERAGE BALANCE SHEET
Prior Avg. Int. Inc. Current Avg. Int. Inc. Year-over-Year % Change
Year Yield & Exp. Year Yield & Exp. Balance Yield Inc./Exp.
Securities $ 524 4.21% $ 22.1 $ 500 4.50% $ 22.5 -5% 29bps 2%
Loans 1,200 5.34% 64.1 1,300 6.00% 78.0 8% 66bps 22%
Earning Assets 1,724 5.00% 86.1 1,800 5.58% 100.5 4% 59bps 17%
Other Assets 285 300 NM
Total Assets 2,009 2,100 5%
Deposits 1,200 1.01% 12.1 1,300 1.61% 20.9 8% 60bps 73%
Borrowings 650 2.52% 16.4 630 3.62% 22.8 -3% 110bps 39%
Bearing Liabilities 1,850 1.54% 28.5 1,930 2.27% 43.7 4% 73bps 53%
Equity 159 170 7%
Total Liab. & Eq. 2,009 2,100 5%
Net Interest Margin
3.34% $ 57.6 3.15% $ 56.8 -19bps -2%
& Net Interest Income
Bank deposits and wholesale funding typically provide the bulk of financing for
average earning asset growth at commercial banks and are considered costs, which
when combined with balances results in interest expense and eventually the income
statement item, net interest income. The difference between interest income and
interest expense is typically called spread income (see Exhibit 10).
Over the last two years, interest yields and costs have been increasing, given a
significant increase in interest rates within the U.S. market. In fact, over this period the
fed funds rate has increased by 400 basis points to 5.00% currently, while the long
bond has increased by 34 basis points as of May 24, 2006. The short end of the yield
curve (see Exhibit 11), namely, three-month, one- and two-year money, has continued
to increase. As a result, deposit rates have been escalating while short-term wholesale
funding costs have increased as well.
June 2006
Exhibit 11
THREE-MONTH T-BILL VERSUS 10-YEAR U.S. TREASURY HISTORICAL SPREAD

MONTHLY HISTORICAL DATA
Basis Points
May-04 Recent High
400 360 basis points
350
300
250
200
50-Year
150 Average of
131 basis points
100 May-06
33 basis points
50
0 Dec-00 Low
Negative 70 basis points
(50)
(100)
1/1/1990
8/1/1990
3/1/1991
10/1/1991
5/1/1992
12/1/1992
7/1/1993
2/1/1994
9/1/1994
4/1/1995
11/1/1995
6/1/1996
1/1/1997
8/1/1997
3/1/1998
10/1/1998
5/1/1999
12/1/1999
7/1/2000
2/1/2001
9/1/2001
4/1/2002
11/1/2002
6/3/2003
1/3/2004
8/4/2004
3/5/2005
10/5/2005
5/31/2006
Source: Federal Reserve and ILX
An income statement item, net interest income, is a function of the level of average
earning assets multiplied by the net interest margin (see Exhibit 12 for calculation).
The net interest margin is a function of balance sheet balances, yields, and costs.
Historically, net interest margins have demonstrated a significant correlation to the
steepness of the yield curve, as well as to absolute levels of interest rates. Banks have
traditionally lent out funds on a longer-term basis and borrowed funds at short-term
rates, benefiting from the spread or a steep yield curve.
The yield curve at 33 basis points is currently relatively flat (i.e., unfavorable) versus a
historical 131 basis point average, meaning banks are now lending out at rates
relatively closer to the rates being paid out on deposits, resulting in tighter incremental
spreads. However, banks could stand to benefit under a scenario where the yield curve
returns to a more historically normal steepness. A bank’s ability to manage through
fluctuations in interest rates is called asset-liability or interest rate risk management.
Larger banks often use off-balance sheet instruments such as swaps to more effectively
manage rate risks.
June 2006
Exhibit 12
EXAMPLE BANK – INCOME STATEMENT

Prior Current %
Year Year Chg.
+ Net Interest Income $57.6 $56.8 -2%

- Loan Loss Provision 3.0 4.0 33%
+ Noninterest Income 45.0 50.0 11%
- Noninterest Expense 65.0 70.0 8%
= Income before Taxes 34.6 32.8 -5%
- Taxes (35%) 12.1 11.5 -5%
= Net Income $22.5 $21.3 -5%
Total Revenue $102.6 $106.8 4%
Average Earning Assets $1,800

x Net Interest Margin (annualized) 3.15%
= Net Interest Income (NII) $56.8
Source: Piper jaffray
Net interest income often contributes between 20% and 60% of a bank’s total
revenues, with smaller banks usually experiencing the higher percentages of net interest
income. During the 1990s many larger banking organizations sought to diversify away
from spread-based revenues by acquiring investment banks, asset managers, and
processing, given concern over the competitive nature of traditional spread-based
banking.
Loans And Credit Historically, credit quality (or asset quality) has been the biggest area of potential risks
Quality at U.S. commercial banks. And unfortunately, investors have few ways in which to
analyze the quality of an individual loan portfolio other than to rely on bank examiners
and rating agencies. The regulatory statements, including the FRY-9C, Call Report,
and SEC quarterly filings, are often the best source of credit-related information. Banks
seldom willingly discuss specific credits within their portfolio, given requirements of
client confidentiality.
The Loan Review Process------What Is Behind The Scenes. A commercial loan is

usually reviewed by an internal review committee to determine a borrower’s ability to
repay loan balances and make interest payments on an ongoing basis. Under a scenario
in which a borrower’s ability to meet future obligations is questioned, a loan might be
placed on an internal credit watch list. These loans might then fall delinquent on
payment of interest and at some point be placed on non-accrual status, which is to
stop accruing interest payments and is usually 90 days or more past due.
Management must make a judgment at some point regarding how collateral for the
loan might cover claims in a situation in which the borrowing company ceases to be an
ongoing entity. For instance, if collateral in a building is worth $125,000 and the loan is
for $150,000, there is a chance the bank may provision $25,000 for this loan. When the
borrower ceases to make payments on the loan, this could result in net charge-offs, or a
write-down on the $25,000 difference. However, since the bank has already
provisioned for this $25,000 write-down, no additional impact is recognized.
June 2006
Nonperforming Assets, Delinquencies And Charge-Offs------When analyzing publicly

available financial statements, we often focus on levels and growth in nonperforming
assets, or those assets which are no longer accruing interest and/or more than 90 days
delinquent. We also review delinquency trends within the portfolio, or when a
borrower becomes past due on the loan payments. And finally, we analyze net charge-
off trends within the portfolio, or those loans that are written down and off the
balance sheet. Another indicator of problem loans that banks will sometimes discuss
with investors is the watch list, which is a broader definition of troubled loans than
nonperforming assets and is an early indicator of potential credit problems.
The accounting methodology for loan loss reserves is somewhat complicated (see
Exhibit 13). The allowance for loan loss reserves is a contra-asset account, similar to an
allowance for bad debt account. Provisions for loan losses are run through the income
statement to establish this account. Banks usually begin to reserve for losses when there
is some potential for loss, and then begin to charge them off (remove them from the
balance sheet) when there is a reasonable doubt of collection in full. Banks often match
provisions and net charge-offs to maintain a constant level of loan loss reserves.
Exhibit 13
EXAMPLE BANK – CREDIT QUALITY

Current Calculations:
Year Net Charge-Off Ratio = Net Charge-Offs / Avg. Loans
Beginning Reserves $25 NPAs-to-Assets = Nonperforming Assets / End of Period Assets
Charge-offs 10
Recoveries 1 Reserves Ratio = Reserves / End of Period Loans
- Net Charge-offs $9 Reserves-to-NPAs = Reserves / Nonperforming Assets
+ Loan Loss Provision 4
Ending Reserves $20 Key Credit Quality Ratios*:
Net Charge-Off Ratio = $10 / $1,300 = 0.69% Good when
Nonperforming Loans (NPLs) $13 NPAs-to-Assets = $14 / $2,100 = 0.67% Relatively LOW
+ OREO (other real estate owned) 1
= Nonperforming Assets (NPAs) $14 Reserves Ratio = $20 / $1,300 = 1.54% Good when
Reserves-to-NPAs = $20 / $14 = 143% Relatively HIGH
*Note: For illustration purposes, average balances used for period end balances.
Source: Piper Jaffray.
To analyze reserve adequacy, we focus on reserves as a percentage of total loans—the

reserve ratio------for consumer banks, and reserves-to-nonperforming loans when
reviewing commercial loan losses. The reserve ratio is more crucial for consumer-
oriented portfolios because these loans are generally underwritten with some
anticipation of loss and can be fully charged off (e.g., credit cards) without first being
placed on nonperforming status. In contrast, commercial loans usually have some
collateral support and are much lumpier in nature.
Commercial loans, or business loans, have been the source of the biggest credit
problems through the last three banking cycles. Commercial loans and unused credit
lines can be used for a variety of purposes but are often used to support working
capital and capital investment needs. Over the past two years, levels of commercial
loans have increased significantly on a national basis, given increasing supply and
demand by borrowers.
June 2006
In our assessment, supply has improved at many larger banks reflecting a lack of
adequate returns on most asset classes. Shared national credits (SNC), or those large
loans originated by a lead lender and then syndicated to a group of participants—
usually to either other domestic and foreign banks or insurance companies—have
experienced the most deterioration. The SNC market has bounced back significantly
over the last 24 months. Over the next year, most large banks plan on further reducing
their exposure to the large corporate loan market.
We view the SNC market as increasingly synonymous with the fixed income, or bond
market, in both maturity and interest rates charged. Many of the larger banks are
active in providing both services to their customers. Many larger banks including
SunTrust, Wachovia, and Colonial are experiencing exceptionally low net charge-off
ratios as a percentage of loans of only 0.07%-0.24% range versus a more normal 40-60
basis points. These low ratios reflect recoveries relative to significant losses during the
2002-2003 time frame.
Over the last few years, the SEC has increasingly been cautioning banks regarding
maintaining potentially too high reserve levels, given a low level of credit losses. Partly
in reaction to this, banks have been reducing reserve ratios somewhat consistently
during the past nine years from a peak of 276 basis points in 1987 to an estimated 120
basis points by 2007 (see Exhibit 14).
Exhibit 14
RESERVE RATIO, ALL BANKS

(1959-2007E)
3.00% 1987
2.75% 2.76%
2.50%
2.25%
2.00%
Average
1.75% 1.86%
1.50%
1.25%
2007E
1.00% 1.20%
0.75%
2005E
2007E
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Source: FDIC, Piper Jaffray estimates
Going forward, we would be somewhat cautious on large automobile, trucking, and

airline industry exposures, reflecting a slight slowing in the broader economy. In
contrast, the small and middle market loan environments could experience elevated
losses associated with commercial real estate as loan standards in that area have
weakened. Nevertheless, banks have increasingly been using the securitization markets
(i.e., CDOs, CLOs, and CMBS) to address exposures in these areas.
June 2006
Consumer loans include a broad variety of credits including home mortgages, home
equity, credit cards, and personal loans (e.g., purchase of boats, cars, etc.). Most banks
have been significantly increasing exposure to mortgages and home equity (see Exhibits
15 and 16) over the last five years, given what have historically been more benign loss
characteristics and a more annuity-like loss pattern, which is dissimilar to generally
lumpy commercial loan losses. Further, there is a well-developed securitization market
for mortgages and credit cards. In addition, the regulators require less capital be placed
against mortgages remaining on the books.
Exhibit 15
TOTAL HOME EQUITY OUTSTANDING WITH GROWTH RATES

(1991-2005)
500 70%
450 62%
60%
400
Total HEQ Outstanding
350 50%
Growth Rate
300
39% 40%
250
32% 32%
30%
200
21%
150 19% 18%
19% 19% 19% 20%
18% 15%
100 13%
10%
50 6%
0 0%
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
Source: SNL DataSource
June 2006
Exhibit 16
TOTAL REVOLVING CREDIT OUTSTANDINGS VERSUS GROWTH RATE

900 16%
850 14%
Amount Outstanding ($mil)

800 12%
750 10%
700 8%
650 6%
600 4%
550 2%
500 0%
Jan-00
Apr-00
Jul-00
Oct-00
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Source: Federal Reserve
Mortgage lending in particular expanded dramatically during the 2001-2004 time

frame, given a significant decline in mortgage rates. Although levels of personal debt as
a percentage of income have increased dramatically, debt-servicing costs have remained
steady given lower interest rates and increased income.
Nevertheless, consumer loans are not without risk. We generally watch personal
income, unemployment trends, and housing values within specific markets to judge
potential for deterioration in loan quality. Additionally, we believe regulators may be
somewhat uncomfortable with recent growth in sub-prime loan exposures. In
response, the FFIEC released guidelines on exotic mortgage instruments.
Revenue Total revenue, which is the sum of net interest income and non-interest income,
Components typically grows anywhere from 4%-9% annually. We expect net interest revenues to
expand by 2%-4% in most cases on a normal basis, while fee-based revenues expand
by 8%-12%. Overall, fees as a percentage of total revenues expanded to a peak of 56%
of revenues in 1999 for the top 10 banks, up from only 41% of total revenues in 1990,
partially reflecting a significant drive to exit low-return, high-risk traditional banking
and expand in fee-based businesses.
Usually the biggest component of fee-based revenue at commercial banks is service

charges on deposits, which include checking account fees, overdraft fees, monthly
service fees, usage fees, etc. In general, service charge fee growth has kept up with
accelerated deposit growth over the last three to five years.
Investment banking fees, or non-interest income, is highly reliant upon the type of
investment banking done at an individual organization. Loan syndications are a big
part of a commercial bank’s revenue stream as well as fixed income issuance and M&A
activity. Citigroup remains the only large bank with meaningful exposure to the
equities issuance business.
June 2006
Trading fees at commercial banks have been highly geared toward foreign exchange,
derivatives, and fixed income. These products can often be cross-sold easily to larger
corporate banking clients.
Asset management fees are usually somewhat related to aggregate investment levels,
including equity prices. These fees can either be coincident in revaluation against the
market or lag the market impact, depending upon the asset management pricing
structures at these organizations. Over the last two years, we have witnessed a steady
outflow from the higher-margin equity products and into lower-yielding fixed income
portfolios at many of the commercial banks we follow.
Commercial banks have also aggressively entered the insurance agency business over
the last few years, recognizing a consolidation opportunity as well as cross-selling
primarily for the corporate client base. The biggest insurance agencies within the
banking space include Wells Fargo and BB&T.
Noninterest Expense management usually takes on two different dimensions at commercial banks
Expenses including synergies related to merger savings, or improvement of processes/six sigma
efforts. The typical bank’s noninterest expense base expands by 3%-6% per year with
most variation tied to incentive compensation structures in the capital markets and
investment management business, as well as any acceleration in branch office openings
or technology expenditures. Typically, salaries and compensation expands by 4%-5%
per year, occupancy by 2%-3%, and technology by 7%-10%.
Exhibit 17
NONINTEREST EXPENSE
($ In Millions)
Prior Current
Year Year % Chg
Net Interest Income $50.0 $54.0 8.0%
Noninterest Income 50.0 55.0 10.0%
Total Revenues $100.0 $109.0 9.0%
Noninterest Expenses $50.0 $52.5 5.0%
Key I/S Ratios:

Efficiency Ratio 50.0% 48.2%
Operating Leverage NA 400bps
Current Year Calculations:

Efficiency = Nonint. Exp. / Ttl. Rev. = 48.2%
Operating Leverage =
Rev.-Exp. Growth Spread = 9.0% - 5.0% = 400bps
June 2006
The efficiency ratio, or overhead ratio, is one of the analyst community’s standard
expense management measurements and is defined as expenses as a percentage of total
revenues. We tend to focus on any declining trend in this ratio as a positive contributor
to earnings leverage (see Exhibit 17). Among those businesses with the highest—or
worst—efficiency ratios are asset managers (70%-90%), followed in descending order
by investment banking (70%-75%), retail (60%-65%), commercial (45%-50%),
thrifts/mortgage banking (40%-50%), and credit cards (30%-40%). The discrepancy in
these ratios has very little to do with pretax profit margins or returns on equity, given
differences in compensation as well as required regulatory capital to conduct various
businesses.
Historically, many banks have posted significant restructuring and merger-related

charges throughout the last 10 years, which have been steadily increasing as a
percentage of earnings among the top 50 banks.
Capital Risk-based capital guidelines were created during the early ’90s, primarily as a result
of concerns over safety and soundness within the U.S. banking system. Many savings
and loans defaulted and were taken over by the government, due to excessive exposure
to real estate. Congress and regulators considered this deterioration to be the result of a
somewhat poor calculation of the riskiness of selected assets on the balance sheet
combined with insufficient capital.
In our judgment, the two most important capital ratios to focus on at U.S. commercial
banks are the tangible common equity and tier 1 capital ratio. Failure to meet certain
minimum capital requirements (see Exhibit 16) can trigger corrective regulatory action.
Rating agencies usually pay close attention to tier 1 capital for the larger banks and
tangible common equity for the smaller banks (see Exhibit 18).
Exhibit 18
REGULATORY CAPITAL REQUIREMENTS

Tot. Capital Tier 1 Cap. Leverage
Well Capitalized >+10% >=6% >=5%
Adequately Capitalized >+8% >=4% >=4%
Undercapitalized Neither Well nor Adequately Capitalized
Source: FDIC
There is significant excess capital within the banking system estimated at almost $19.5
billion among the top 50 banks, using a tangible common equity cutoff of 5.0%.
Consequently, we have not witnessed a significant round of capital raising for
commercial banks since the 1990-1992 time frame, when many banks were emerging
from severe commercial real estate-related credit problems.
June 2006
Exhibit 19
COMPONENTS OF CAPITAL
Total Assets (TA) $1,100
Risk-Weight 64%
Risk-Weighted Assets (RWA) $700
Common Equity (CE) $85

- Goodwill & Other Adj. (GW) 25
Tier 1 Capital $60
+ Tier 2 Capital 20
Total Capital $80
Key Capital Ratios:

Common Equity 7.73%
Tangible Common Equity 5.58%
Tier 1 Ratio 8.57%
Total Capital 11.43%
Leverage Ratio 5.58%
Calculations:
Common Equity = CE / TA
Tangible CE = (CE - GW) / (TA - GW)
Tier 1 Ratio = Tier 1 Capital / RWA
Total Capital = Tier 1 and Tier 2 / RWA
Est. Leverage Ratio = Tier 1 Capital / (TA - GW)
Tier 1 capital------which is a regulatory definition—includes common stockholders’

equity, qualifying preferred stock, and trust preferred securities, less goodwill and
certain other deductions. Tier 2 capital includes preferred stock not qualifying as Tier 1
capital, subordinated debt, the allowance for loan losses, and net unrealized gains on
marketable securities. Total capital includes Tier 1 and Tier 2 capital.
Risk-Weighted Assets------used when calculating Tier 1 and total capital ratios—

measures the risk included in the balance sheet, as one of four risk weights (0%, 20%,
50%, 100%) is applied to the different balance sheet and off-balance sheet assets based
on the credit risk of the counterparty. For instance, claims guaranteed by the U.S.
government are risk weighted at 0%, while commercial real estate loans are weighted
at 100%.
The Leverage Ratio------somewhat considered similar to the tangible common equity

ratio—consists of Tier 1 capital divided by quarterly average total assets, excluding
goodwill and certain other items.
June 2006
Exhibit 20
TOP 50 BANKS BENCHMARK AVERAGES, 1Q06

(Excluding BAC, And Processors BK, IFIN, MEL, NTRS, STT)
Balance Sheet and P&L Growth

($000 except EPS) 1Q05 4Q05 1Q06 Qtr./Qtr. Yr./Yr.
Total Loans 62,180,271 66,564,698 68,067,516 2.3% 9.5%
Total Deposits 64,580,111 69,060,464 70,945,847 2.7% 9.9%
Total Revenues 1,673,497 1,703,672 1,783,632 4.7% 6.6%
Non-Interest Expense 974,363 997,951 1,083,274 8.5% 11.2%
Core EPS $0.70 $0.74 $0.74 0.4% 5.0%
Statistics Bps Change 1Q06 Results

(%) 1Q05 4Q05 1Q06 Qtr./Qtr. Yr./Yr. High Low
Net Interest Margin (reported) 3.81 3.75 3.75 -0.2 -6.1 5.02 2.17
Efficiency Ratio 56.31 57.00 57.49 49.2 118.0 83.08 38.90
ROAA 1.40 1.41 1.42 1.3 1.7 2.28 0.77
ROAE 15.60 15.52 15.64 12.5 3.6 36.83 4.01
NPAs / Total Assets 0.31 0.28 0.29 0.7 -2.8 1.37 0.06
NCOs / Average Loans 0.26 0.32 0.21 -10.5 -4.7 1.07 -0.11
Equity/Assets 9.31 9.48 9.52 3.3 20.6 19.97 5.94
Leverage Ratio 7.62 7.63 7.71 7.6 9.2 10.45 5.22
June 2006
VALUATION METHODS
The methods for valuing stocks within the broader sell-side analytical community have
gone through a major change throughout the last 10 years with little impact on how we
value bank stocks. More specifically, we have consistently utilized price-to-earnings,
price-to- book, P/E to secular growth, and dividend yield measurements as a way to
determine relative value against the market and against peer commercial banks.
Counting eyeballs and forecasting web hits—or even measuring price to revenues for
that matter—have seldom proven to be useful exercises within the bank stock investing
space.
During the mid-1990s, traditional commercial banks sold at higher P/Es and P/Bs than
brokers and asset managers; however, that changed dramatically throughout the late
1990s as the market rewarded significant growth and higher returns on equity with
bigger P/Es and P/Bs. The bubble in the equity markets throughout the late 1990s fed
this growth.
Price-To-Earnings In our assessment, the price-to-earnings (P/E) and price-to-tangible book ratios
continue to be the primary method by which to value traditional bank stocks. We can
use the price-to-earnings ratio fairly freely, adjusting for some level of uncertainty in
future earnings. Banks that have experienced the most significant reductions to
consensus earnings throughout the last two years—and may experience further
reductions—should sell at a discount, while those that have experienced limited impact
should sell at a premium (see Exhibit 21).
June 2006
Exhibit 21
HISTORICAL 2006 CONSENSUS ESTIMATES

(January 2004 - May 2006)
Rank Company Ticker Chg.
1 East West Bancorp, Inc. EWBC 28%
2 Colonial BancGroup, Inc. CNB 16%
3 Bank of Hawaii Corporation BOH 6%
4 Cullen/Frost Bankers, Inc. CFR 5%
5 Zions Bancorporation ZION 5%
6 PNC Financial Services Group, Inc. PNC 5%
7 Comerica Incorporated CMA 5%
8 Synovus Financial Corp. SNV 5%
9 Compass Bancshares, Inc. CBSS 4%
10 KeyCorp KEY 4%
11 Mercantile Bankshares Corporation MRBK 3%
12 Northern Trust Corporation NTRS 2%
13 Bank of America Corporation BAC 1%
14 City National Corporation CYN 1%
15 Wilmington Trust Corporation WL 0%
16 U.S. Bancorp USB -1%
17 Cathay General Bancorp, Inc. CATY -2%
18 Wachovia Corporation WB -2%
19 Marshall & Ilsley Corporation MI -2%
20 Associated Banc-Corp ASBC -2%
21 M&T Bank Corporation MTB -3%
22 SunTrust Banks, Inc. STI -3%
23 AmSouth Bancorporation ASO -4%
24 BOK Financial Corporation BOKF -4%
25 Wells Fargo & Company WFC -4%
26 UnionBanCal Corporation UB -5%
27 Huntington Bancshares Incorporated HBAN -6%
28 Investors Financial Services Corp. IFIN -6%
29 State Street Corporation STT -7%
30 Fulton Financial Corporation FULT -7%
31 Commerce Bancorp, Inc. CBH -8%
32 Bank of New York Company, Inc. BK -9%
33 Mellon Financial Corporation MEL -11%
34 Commerce Bancshares, Inc. CBSH -11%
35 TD Banknorth Inc. BNK -11%
36 JPMorgan Chase & Co. JPM -11%
37 BB&T Corporation BBT -12%
38 Citigroup Inc. C -12%
39 TCF Financial Corporation TCB -13%
40 Sky Financial Group, Inc. SKYF -13%
41 Regions Financial Corporation RF -13%
42 National City Corporation NCC -14%
43 Valley National Bancorp VLY -15%
44 North Fork Bancorporation, Inc. NFB -17%
45 FirstMerit Corporation FMER -21%
46 Webster Financial Corporation WBS -25%
47 Popular, Inc. BPOP -25%
48 First Horizon National Corporation FHN -30%
49 South Financial Group, Inc. TSFG -31%
50 Fifth Third Bancorp FITB -38%
Average -6%
Source: FactSet
June 2006
Historically, investors have begun to trade on a bank’s forward-year earnings

sometime during May, June, or July of the current year. However, in recent years
trading on forward-year earnings has come earlier. In our judgment, this trend has been
somewhat a function of the broader market having little confidence in current-year
earnings. This year, the banks began trading on 2007 sometime in March/April.
PEG Ratio Generally speaking, we can also use a P/E-to-secular growth ratio for banks,
particularly for those that have been consistent earnings growth performers over
several years. This ratio is particularly important for smaller banks because using a
simple P/E ratio may not make much sense. In select cases, some banks should be
selling higher than the market, in our opinion (see Exhibit 22).
Exhibit 22
FASTEST AND MOST CONSISTENT EARNINGS GROWERS

(20 Highest Among Top 50 Banks as Ranked by Average Annual Growth)
Average Avg. Chg. In 2007E
Rank Company Name Ticker Annual Gr. Gr. Rate (bps) PEG
1 Investors Financial Services Corp. IFIN 35.7 -596.3 50%
2 East West Bancorp, Inc. EWBC 33.6 202.5 80%
3 Commerce Bancorp, Inc. CBH 17.4 110.0 70%
4 City National Corporation CYN 17.1 -180.0 130%
5 U.S. Bancorp USB 15.9 -607.5 100%
6 North Fork Bancorporation, Inc. NFB 15.9 54.0 100%
7 Zions Bancorporation ZION 15.8 -138.0 110%
8 Synovus Financial Corp. SNV 15.5 -85.0 110%
9 State Street Corporation STT 14.4 51.0 100%
10 TCF Financial Corporation TCB 14.3 -269.0 110%
11 M&T Bank Corporation MTB 13.9 112.0 130%
12 Popular, Inc. BPOP 13.7 -83.0 -
13 BOK Financial Corporation BOKF 13.6 144.0 -
14 Marshall & Ilsley Corporation MI 13.5 -152.0 120%
15 Fifth Third Bancorp FITB 13.1 -305.0 100%
16 First Horizon National Corporation FHN 12.7 -215.0 110%
17 Citigroup Inc. C 12.5 -277.5 80%
18 Wells Fargo & Company WFC 12.5 24.0 90%
19 UnionBanCal Corporation UB 12.2 150.0 120%
20 Northern Trust Corporation NTRS 12.2 24.0 -
AVERAGE TOP 50 BANKS 11.3 -80.9 116%
Note: outliers excluded from calculations

Source: SNL DataSource, Baseline
Price-To-Book In our assessment, price-to-book (P/B) is usually the last backstop valuation
measurement for bank stocks when all other methods fail. Under such a scenario,
investors must develop a comfort level in which the assets on the books are worth
stated levels according to GAAP. This is typically a very difficult process, given that
public values for loan and venture capital portfolios are usually difficult to determine.
Historically, price-to-book values for the banking industry have ranged from lows of
close to book value during the 1991-1992 time frame, to highs of two to three times for
the regional banks, and four to five times for the processing banks during the 1999-
2000 time frame.
June 2006
Currently price-to-book values range from 1.0-2.0 times for most banks, while
processor price-to-books are rather high at 2.3-2.5 times. We must also weigh these
ratios within the context of the broader market. Although price-to-books are still
rather high for many banks, so are returns on equity (see Exhibit 23).
Exhibit 23
TOP 50 BANKS RELATIVE ROE

(1990-2005)
160%
140%
104% Average
120%
100%
80%
60%
40%
20%
0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: Baseline
Some Attractive Yield The spread between bank stock dividend yields and the 10-year U.S. Treasury is
Opportunities currently 235 basis points, as compared to a recent historical low of 70 basis points in
June 2003, while still relatively narrow versus what we have typically witnessed during
the last 15 years (see Exhibit 24).
June 2006
Exhibit 24
BANK STOCK DIVIDEND YIELD VERSUS 10-YEAR U.S. TREASURY YIELD (%)
9.00
8.00 Avg. Div. Yld, Top 50 Banks

10-Year UST Yield
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
03/1991
11/1991
07/1992
03/1993
11/1993
07/1994
03/1995
11/1995
07/1996
03/1997
11/1997
07/1998
03/1999
11/1999
07/2000
03/2001
11/2001
07/2002
03/2003
11/2003
07/2004
03/2005
11/2005
Source: FactSet, Federal Reserve
0%
We think these high yields represent a good opportunity to purchase bank stocks,
particularly those for which we feel relatively comfortable with the intermediate-term
earnings growth outlook. For instance, Bank of America is currently yielding 4.13% as
of June 6 versus the 10-year Treasury at 5.01%, while TCF Financial is yielding 3.47%,
and Wachovia is yielding 3.85% (see Exhibit 25).
June 2006
Exhibit 25
DIVIDEND PAYOUT RATIO AND DIVIDEND YIELD

(Top 50 Banks, LTM As Of 1Q06, As Ranked By Payout Ratio)
Dividends Declared Core EPS Dividend Payout Dividend

Company Name Ticker LTM ($) LTM ($) Ratio LTM (%) Yield (%)
South Financial Group, Inc. TSFG $0.66 $1.60 66% 2.46%
Regions Financial Corporation RF $1.37 $2.45 60% 3.94%
Whitney Holding Corporation WTNY $1.02 $1.75 59% 2.99%
Valley National Bancorp VLY $0.84 $1.44 59% 3.52%
Fifth Third Bancorp FITB $1.49 $2.68 55% 3.98%
Fulton Financial Corporation FULT $0.55 $1.01 54% 3.81%
JPMorgan Chase & Co. JPM $1.36 $2.90 52% 3.23%
U.S. Bancorp USB $1.26 $2.49 51% 4.26%
BancorpSouth, Inc. BXS $0.76 $1.46 50% 3.12%
BB&T Corporation BBT $1.52 $3.11 50% 3.63%
Huntington Bancshares Incorporated HBAN $0.90 $1.84 50% 4.27%
TD Banknorth Inc. BNK $0.86 $1.96 49% 3.07%
AmSouth Bancorporation ASO $1.02 $1.97 49% 3.60%
North Fork Bancorporation, Inc. NFB $0.94 $1.90 49% 3.42%
Sky Financial Group, Inc. SKYF $0.90 $1.85 48% 3.68%
Bank of America Corporation BAC $1.95 $4.03 48% 4.13%
Wilmington Trust Corporation WL $1.20 $2.47 48% 3.00%
KeyCorp KEY $1.32 $2.78 47% 3.83%
National City Corporation NCC $1.46 $3.04 47% 3.98%
Wachovia Corporation WB $1.99 $4.20 47% 3.85%
Mellon Financial Corporation MEL $0.80 $1.94 45% 2.46%
PNC Financial Services Group, Inc. PNC $2.00 $4.73 44% 3.20%
Associated Banc-Corp ASBC $1.08 $2.38 44% 3.52%
Mercantile Bankshares Corporation MRBK $1.02 $2.30 44% 2.85%
Wells Fargo & Company WFC $2.04 $4.46 44% 3.10%
Comerica Incorporated CMA $2.24 $4.98 44% 4.29%
Compass Bancshares, Inc. CBSS $1.44 $3.38 44% 2.86%
TCF Financial Corporation TCB $0.87 $1.89 44% 3.47%
Synovus Financial Corp. SNV $0.74 $1.71 43% 2.95%
First Horizon National Corporation FHN $1.76 $2.72 43% 4.47%
Bank of Hawaii Corporation BOH $1.40 $3.40 41% 2.88%
SunTrust Banks, Inc. STI $2.26 $5.70 41% 3.20%
Colonial BancGroup, Inc. CNB $0.63 $1.52 40% 2.64%
Bank of New York Company, Inc. BK $0.83 $1.98 39% 2.57%
Cullen/Frost Bankers, Inc. CFR $1.20 $3.16 38% 2.40%
Citigroup Inc. C $1.81 $3.64 37% 4.03%
Popular, Inc. BPOP $0.64 $1.78 36% 3.35%
City National Corporation CYN $1.49 $4.61 32% 2.28%
Northern Trust Corporation NTRS $0.88 $2.93 32% 1.64%
Marshall & Ilsley Corporation MI $0.96 $2.94 31% 2.37%
Webster Financial Corporation WBS $1.00 $3.33 30% 2.27%
Commerce Bancorp, Inc. CBH $0.46 $1.61 29% 1.23%
Commerce Bancshares, Inc. CBSH $0.93 $3.20 29% 1.96%
UnionBanCal Corporation UB $1.64 $5.20 28% 2.77%
Zions Bancorporation ZION $1.44 $5.32 28% 1.78%
State Street Corporation STT $0.74 $2.97 27% 1.23%
M&T Bank Corporation MTB $1.80 $7.04 26% 2.08%
BOK Financial Corporation BOKF $0.40 $3.05 13% 1.26%
East West Bancorp, Inc. EWBC $0.20 $2.02 10% 0.51%
Investors Financial Services Corp. IFIN $0.08 $2.19 4% 0.20%
AVERAGE TOP 50 BANKS $1.16 $2.90 41% 2.95%
Note: dividend yield as of 6/6/06

Source: SNL DataSource, ILX
Dividend payout ratios are currently averaging 41% for the bank group, down from
47% in 2001 (see Exhibit 26). A scenario of a 10% increase in the dividend payout ratio
could imply immediate 15% to 20% appreciation in bank stock values when utilizing a
dividend discount model.
June 2006
Exhibit 26
DIVIDEND PAYOUT RATIO

( Top 50 Banks, 1990-1Q06 LTM)
55% 51%
50% 47%
44%
45% 43%
41% 42% 41%
40% 40% 39%
40% 37%
35% 36% 35% 36%
35% 32%
29%
30%
25%
20%
15%
10%
LTM 1Q06
1990 Y
1991 Y
1992 Y
1993 Y
1994 Y
1995 Y
1996 Y
1997 Y
1998 Y
1999 Y
2000 Y
2001 Y
2002 Y
2003 Y
2004 Y
2005 Y
June 2006
MEGA TRENDS—CONSOLIDATION, CREDIT QUALITY,

AND NON-BANKING
In our assessment, three major trends impact investing in bank stocks: consolidation,
credit quality, and exposure to non-banking businesses. In our assessment, the
expansions into non-banking businesses and consolidation throughout the 1990s have
recently slowed but could reaccelerate with any meaningful improvement in the
economy. Credit quality is also likely to improve with an accelerating economy.
Consolidation Large mergers within the banking industry have been commonplace throughout the last
75 years, with the most recent waves of activity occurring in the 1994-1997 and 1998
time frames. The rationale for the first waves of merger activity in the 1990s was to
create economies of scale and reduce overcapacity within the banking system.
Combinations in the first wave of mergers often included an initial year of dilution
with an anticipated cost savings (20%-50% of acquired organization’s expenses taken
out) in the second year due to combining technology systems and reducing branch
office overlaps. The mega-mergers of 1998 generally involved fewer expected cost
savings and were often billed as mergers of equals (or MOEs) in which the senior
managers of both firms played nearly an equal role in the new organization. The MOE
concept often proved more difficult to execute than expected, given cultural
differences.
We have witnessed six years of weak M&A within the financial services space (see
Exhibit 27) primarily due to lack of willing sellers at reasonable prices. The takeout
multiples–namely, price-to-book and price-to-earnings–have remained exceptionally
high.
Exhibit 27
BANK M&A DEALS

(Target Asset Size > $10 Billion, 1991-2006)
10
7 7
6 6
5 5 5
3 3
2 2
1 1 1 1
2006 YTD
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Source: SNL DataSource, Piper Jaffray
June 2006
At the same time, the basic business of banking has experienced relative strength over
the last two years, posting double-digit earnings growth per year for the industry. In
our judgment, we would have to experience a significant catalyst to encourage
managements to sell out, before takeout activity accelerates. This could include
continued net interest margin-related pressure and slowing retail banking growth.
Additionally, banks must now utilize a purchase method of accounting for

consolidation versus a historical performance for pooling-of-interest method. First
Union’s 2001 combination with Wachovia was the first major deal in the new
environment.
Branching Versus For several years branch closings were viewed as potential cost-saving opportunities for
Consolidation larger banks acquiring smaller banks with overlapping infrastructures. This worked
exceptionally well throughout the 1990s as the acquisition environment heated up to a
frenzied state in 1998. Then, as the Internet came of age, many analysts increasingly
believed that the branch was dead and that the Internet would supplant the branch
infrastructure as the preferred method of banking. We have now come full circle, with
many banks building out branch networks by opening up new offices or on a de novo
basis.
Recent merger transactions within the New York marketplace, such as Capital One’s
announced acquisition of North Fork and JPMorgan’s announced asset swap for Bank
of New York’s branches, symbolize the increasing battle for market share in that
region. Several other banks have aggressively expanded in New York during the last
four years through de novo efforts, including Wachovia, Commerce Bancorp, and Bank
of America.
Among additional recent deals, Wachovia has announced the $26 billion acquisition of
Golden West, expected to close in the fourth quarter of 2006. As part of the
transaction, the company is expanding into faster growth regions in California, namely
Los Angeles and San Francisco, while increasing total branches by 9%, or 285, to 3,503.
In our assessment, Wachovia also improves its retail product breadth particularly in
mortgages, establishing a pro forma No.7 mortgage banking market share.
Nevertheless, the opportunities for bank acquisition-related growth in the

southwestern and western United States remain limited, with many banks choosing
instead to expand through de novo branching efforts in those markets. United States-
based banks with the most aggressive de novo plans in 2006 include Wintrust,
Commerce Bancorp, and AmSouth (see Exhibit 28).
June 2006
Exhibit 28
BRANCH COUNT AND GROWTH

(As Ranked by 2006 New as % of Total)
12/03 Q 12/04 Q 12/05 Q 04-05 03-05 2006 2006 New

Company Name Ticker (Actual)* (Actual) (Actual) Growth Growth Planned as % of Tot.
Wintrust Financial WTFC 36 50 62 24.0% 72.2% 11 17.7%
Commerce Bancorp CBH 270 319 373 16.9% 38.1% 65 17.4%
AmSouth ASO 611 688 684 -0.6% 11.9% 64 9.4%
Washington Mutual WM 1,680 1,930 2,140 10.9% 27.4% 175 8.2%
Synovus SNV 272 281 284 1.1% 4.4% 17 6.0%
Colonial BancGroup Inc. CNB 274 292 301 3.1% 9.9% 18 6.0%
JPMorgan Chase^^^ JPM 2,471 2,508 2,641 5.3% 6.9% 150 5.7%
TCF Financial TCB 401 430 453 5.3% 13.0% 25 5.5%
Fifth Third FITB 952 1,011 1,119 10.7% 17.5% 50 4.5%
BB&T BBT 1,359 1,413 1,404 -0.6% 3.3% 60 4.3%
Compass CBSS 376 382 384 0.5% 2.1% 15 3.9%
Webster Financial WBS 119 152 157 3.3% 31.9% 6 3.8%
Wells Fargo WFC 3,000 3,112 3,146 1.1% 4.9% 100 3.2%
Zions Bancorp. ZION 412 386 473 22.5% 14.8% 15 3.2%
First Citizens FCNCA 379 386 391 1.3% 3.2% 12 3.1%
Regions Financial RF 681 1,322 1,311 -0.8% 92.5% 40 3.1%
PNC PNC 719 776 840 8.2% 16.8% 25 3.0%
National City NCC 1,114 1,222 1,220 -0.2% 9.5% 35 2.9%
Wachovia^^ WB 3,314 3,344 3,131 -6.4% -5.5% 85 2.7%
TD Banknorth BNK 359 386 396 2.6% 10.3% 10 2.6%
SunTrust STI 1,183 1,676 1,657 -1.1% 40.1% 35 2.1%
U.S. Bancorp USB 2,243 2,370 2,419 2.1% 7.8% 50 2.1%
Bank of America^ BAC 5,594 5,885 5,873 -0.2% 5.0% 100 1.7%
KeyCorp KEY 906 935 947 1.3% 4.5% 13 1.4%
M&T Bank MTB 684 663 658 -0.8% -3.8% 5 0.8%
Citigroup C 816 817 896 9.7% 9.8% 70-100# na
Note: midpoint used when company gives range

*June 2003 at BAC, WFC, WB, C
încludes FBF; ^încludes SOTR; ^^încludes ONE
# global new branch openings
BOLD denotes acquisition
Source: SNL DataSource, company reports, Piper Jaffray estimates
As deposits have become an increasingly valuable source of funding, many banks have
increased the focus on customer retention. Historically, banks have experienced
customer turnover of anywhere between 10% and 20% of the deposit base annually,
primarily reflecting poor customer service as well as perhaps some rate shopping by the
depositors. In recent years, many of the larger banks have attempted to stop this
normal outflow by offering more competitive rates, reduced error rates, and extended
branch hours
Credit Quality Credit quality has been one of the biggest determinants of bank stock earnings—or
lack thereof—throughout the last 20 years, often causing earnings shortfalls for the
industry. In contrast, prior to the 1970s, credit quality was virtually a non-event. In
fact, the term non-performing assets did not surface until shortly thereafter. We view
the surfacing of credit problems as a function of increased competition to bank lending,
and thus the compromise of otherwise healthy credit standards and spreads.
Perhaps one of the largest credit-related challenges for the U.S. banking industry came
during the early 1990s, when many banks were overexposed to weakening commercial
real estate. Real estate concentrations were cited for bank failures in the southwestern
and the northeastern United States. The ratio of net charge-offs to total loans increased
to 1.57% in 1991 versus current levels of roughly 0.60% (see Exhibit 29).
June 2006
Exhibit 29
INDUSTRY NET CHARGE-OFF RATIOS

(1960-2007E)
1991
1.57%
1.60%
1.40%
2002
1.20% 1.11%
1.00%
0.80%
Average
0.60% 0.58%
0.40% 2007E
0.20% 0.62%
0.00%
2006E
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Source: Piper Jaffray, FDIC
Several of the nation’s largest banks, including Citicorp, were on the verge of failure in
1991, given excessive real estate concentrations. Collateral values were often well
below loan amounts as office vacancy rates soared. Several banks were taken over by
the federal government, restructured, and sold at open bid. NationsBank and Fleet
(both now under Bank of America) were two of the early beneficiaries of these
government-assisted transactions.
During the late 1980s, large U.S. multinational banks also suffered through an LDC
(less developed country) debt problem. Many of these weaknesses arose from a Latin
American sovereign debt binge, in which countries took on massive levels of debt to
finance fiscal programs, and then revenues failed to materialize. These issues were
primarily with governments and country restructurings as opposed to corporate or
consumer borrowers, unlike the recent shortfalls in Argentina during 2001-2002 when
the government effectively defaulted, many companies went out of business, and
unemployment soared.
The most pronounced weakening during the 2001-2003 time frame was overexposure
to telecom, technology, and merchant energy businesses. In our assessment, these credit
losses were due primarily to loans made with inadequate collateral support, excessive
exposure concentrations, and a weakening in the equities markets. Many banks that
sought to lend to the “new economy” companies during the late 1990s have
experienced serious loan losses during 2001-2003. We are currently focused on
automobiles, airlines, and asset-based lending exposure as potential areas of weakness
in 2006-2007.
Unlike commercial lending, which has gone through two or three distinct cycles during
the last 20 years, we have yet to go through an applicable consumer-based credit cycle.
In fact, it is difficult to get applicable historical consumer loss trends when we are
operating in a significantly different environment. The U.S. consumer debt has
expanded to 104% of income from 85% in 1990. We would expect consumer loan
losses to peak at a higher rate if unemployment increases significantly.
June 2006
Non-Banking Trends Among the top 10 major U.S. banks, fee-related businesses generate 38% of total
earnings at U.S. commercial banks, including investment banking at 13%, processing at
10%, asset management at 8%, and credit cards at 7% (see Exhibit 30). The traditional
commercial and consumer banking businesses contribute 62% of total earnings.
Exhibit 30
LARGE-CAP BANKS 2007E EARNINGS MIX
Non-
Traditional Cards, 7%
Asset Mgmt, 8%
Processing, Retail, 37%

10%
Traditional
Banking, 62%
Investment
Banking, 13%
Corporate, 12%
Investment Banking During the 1990s, commercial banks increasingly became involved in investment
banking through a loophole in the bank holding company act known as Section 20,
which allowed up to 10% of total revenues from a subsidiary to be derived from
securities activity (this limit was later raised to 25%). Upwards of 25 domestic banking
organizations had some authority to underwrite and deal in ineligible securities
activities by 1995. Those organizations at the forefront of transformation were
JPMorgan and Bankers Trust, which had pushed into investment banking products in
the early 1990s. Several regional banks also acquired small investment bank boutiques
in 1997-1998, including NationsBank’s acquisition of Montgomery, Bank of America’s
purchase of Robertson Stephens, and U.S. Bancorp’s acquisition of Piper Jaffray. In
addition, many foreign banks acquired U.S. investment banks including Credit Suisse’s
purchase of DLJ Securities in the summer of 2000, UBS’s acquisition of Paine Webber,
and Chase Manhattan’s acquisition of JPMorgan in the summer of 2000.
Many of the biggest investment banks have increasingly expanded into trading in
commodities, foreign exchange, and derivatives, ignoring historical drivers such as
equity issuance and mergers and acquisitions. In fact, we estimate the top four pure-
play investment banks generated roughly 2/3 of total revenues from trading in various
instruments during 2005. In contrast, traditional commercial banks such as JPMorgan
Chase and Citigroup have attempted to expand in all areas of investment banking with
particular success in equity, fixed income, and international M&A.
June 2006
Asset Management During the 1990s, banks became increasingly active in selling investment products or
revamping existing trust organizations. Mellon acquired Dreyfus and PNC purchased
Blackrock. These two deals, along with an effort to cross-sell investment products
including mutual funds and annuities, were prompted by concerns that investors would
increasingly shun traditional bank savings and deposit accounts for faster growth
opportunities in the public markets. Ironically, deposit growth never slowed materially,
while investment outflows and weak equities market performance have impaired some
banking organizations’ ability to post up earnings quarters.
Asset management remains a potentially very attractive business for banks as they
cross-sell deposit clients a broad array of products and services. Banks were heavily
involved in providing trust-related services during the early 1990s, but have tried to
develop groups of mutual fund families to address the needs of the retail investor.
Processing Banks have increasingly sought out processing-related acquisitions to expand fee-based
businesses. Processing is primarily the function of handling transactions for asset
managers, money managers, pension funds, and corporations. Securities clearance,
custody, wire transfer, corporate trust, and ADRs are the most common types of
processing. And processing banks have typically attempted to cross-sell additional fee-
based products to their customers, including foreign exchange and analytical support
tools.
During the 1990s, the U.S. processing business went through a significant consolidation
phase in which several banks recognized they could not compete from an economies-
of-scale perspective and thus sold out to larger players. Today, Bank of New York,
State Street, and Northern Trust are among the major players in this business, while
Citigroup and JPMorgan Chase are also well represented. The major processing
companies continue to acquire new contracts from other financial services players,
while also competing heavily amongst each other for existing books. We view the
processing environment as exceptionally competitive with State Street, Northern Trust,
and Bank of New York recently paying very high prices for acquisitions.
Processing revenues are highly dependent upon equity market values and volumes
across several markets; thus with a generally improving capital markets environment,
we would expect revenues to increase also.
Credit Cards The competitive environment within the U.S. card market has become increasingly
economies-of-scale driven, with a focus on unit cost reduction and portfolio
diversification. As a result, we have witnessed significant card industry consolidation
over the last ten years, as the top ten players now control 85% of the U.S. credit card
market, up from 55% in 1996.
Perhaps more surprisingly, the share of the top three players—namely Bank of
America, Citigroup, and JPMorgan Chase—has nearly doubled to 53% of industry
outstandings from 27% for the top three in 1996. The recent combinations of
JPMorgan Chase and Bank One, as well as Bank of America and MBNA, have created
two additional credit card behemoths to compete with Citigroup, with roughly $140
billion in U.S. outstandings each, as of year-end 2005 (see Exhibit 31).
June 2006
Exhibit 31
AVERAGE MANAGED BALANCES – FULL YEAR

03-05 04-05
2003 2004 2005 % chg % chg
BAC* $137,638 $139,324 $140,004 0.9% 0.5%
JPM*** $128,692 $135,370 $138,389 3.7% 2.2%
C ** $143,700 $136,800 $136,500 -2.5% -0.2%
AXP $41,600 $45,400 $48,900 8.4% 7.7%
MS $50,864 $47,387 $47,330 -3.5% -0.1%
COF $41,308 $45,813 $46,827 6.5% 2.2%
HSBC $35,288 $38,253 $25,642 -14.8% -33.0%
WM $17,640 $17,204 $18,537 2.5% 7.7%
WFC $7,640 $8,878 $10,663 18.1% 20.1%
USB $5,525 $6,090 $6,615 9.4% 8.6%
Total $609,895 $620,519 $619,407 0.8% -0.2%
* Pro-forma MBNA, including foreign
** Including Sears addition of $27 billion in 2003E & foreign
***Includes ONE in 2003
Source: Company reports, Piper Jaffray
In our assessment, managed credit card balance growth has been anemic over the last
few years. Card economics could certainly improve with a steepening in the yield curve.
Additionally, we may witness card balance growth accelerate under a scenario in which
consumers notice little difference between home equity and credit card interest rates.
Home equity has clearly supplanted card growth during the last five years.
Mortgage Banking Overall, mortgage originations in the United States fell to $2.76 trillion in 2005, down
from $2.77 trillion in 2004. Mortgage Bankers Association estimates $2.37 billion in
originations during 2006 (see Exhibit 32). Expectations for the mortgage market
beyond 2006 seem to be somewhat mixed, since sales and prices of single family homes
reached a peak in July 2005.
June 2006
Exhibit 32
MORTGAGE ORIGINATIONS
(1990-2008E)
$ Bn
$4,500
$4,000
$3,500
Refinance Originations
$3,000
Purchase Originations
$2,500
$2,000
$1,500
$1,000
$500
$-
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006E
2007E
2008E
Source: Mortgage Bankers Association
We think rising short-term interest rates will continue to have a modest dampening
impact on demand for housing and thus mortgages, as evidenced by increasing
inventory and modest pricing pressure—particularly in the western United States.
Although some of this decline may be attributable to seasonality, home sales in the
west have dropped somewhat steadily by 12% year over year to a 1.43 million monthly
rate in March. In contrast, monthly home sales have been increasing in the northeast
and southern U.S. markets over this same time frame.
Countrywide and Wells Fargo have continued to take mortgage market share from the
competition with leading positions in the traditional one- to four-family mortgage
origination and servicing markets. These two generated 4% of total origination
volumes during 2005, with respectable results also at Washington Mutual, JPMorgan
Chase, and Bank of America (see Exhibits 33 and 34).
June 2006
Exhibit 33
TOP 10 MORTGAGE ORIGINATORS

($ In Billions)
Countrywide $1,111.1
Financial $838.3
Wells Fargo Home $1,005.4

Mtg. 782.4
$746.8
Washington Mutual 727.6
Chase Home $604.2

Finance 562.7
$403.2
CitiMortgage, Inc. 364.3
$368.4 Dec-05
Bank of America 332.5
$288.8 Dec-04
GMAC Residential 231.8
$206.0
ABN Amro Mortgage 201.2
National City $169.6

Mortgage 165.1
$157.3
PHH Mortgage 145.7
Source: National Mortgage News and SourceMedia Inc.
Exhibit 34
TOP 10 MORTGAGE SERVICERS

($ In Billions)
$133.1
Countrywide $95.3
$116.5
Wells Fargo 69.1
$60.0
Washington Mutual 59.0
Chase Home $44.5

Finance 44.4
$40.2
Bank of America 34.6
$32.0 4Q05
CitiMortgage 25.4
$23.2 4Q04
EMC Mortgage 16.2
$20.9
GMAC-RFC 10.9
$19.4
GMAC Residential 24.1
$18.0
IndyMac 11.2
Source: National Mortgage News and SourceMedia Inc.
June 2006
In our assessment, strong retail distribution networks appear to generate healthier

margins and more limited reliance on gain on sale accounting. Offsetting any higher
rate-related downturn in originations could be significant increases in mortgage
servicing income, as the value of servicing portfolios generally reacts favorably to
higher rate environments.
Technology And The Banks have traditionally spent anywhere from 10%-15% of total expenses on
Evolution technology each year with the bulk of the investment in maintaining existing IT
systems. The opportunity has always been to transition from spending on maintenance
to spending on R&D and enhancing the customer experience. For instance, banks are
currently investing incremental dollars in data warehousing and intelligence software.
Some have recently outsourced technology programs to such companies as IBM and
EDS.
Turning back the clocks to 1999, there was a time when the Internet was the dominant
investment theme within the equity markets that some banks were quick to adopt. For
instance, Bank One developed a stand-alone Internet channel—called Wingspan—
given fears that the Internet might disintermediate existing pricing for bank customers.
In contrast, better-run organizations such as Wells Fargo continually stressed the
Internet as just one more distribution channel used to enhance the customer experience.
Today, roughly a third of Wells Fargo’s customers are using online banking services, of
which about 30% pay bills online. In our assessment, those customers with bill
payment capabilities are less likely to leave the bank.
June 2006
HISTORY OF BANKING
Regulatory And In our assessment, banks are once again becoming subjected to increased levels of
Legislative History— scrutiny by regulators and legislators after experiencing several years of positive
The Pendulum regulatory developments. On the national level, the regulators have recently created
Swings Back “tactical” rules, such as increased scrutiny of those banks with high levels of
commercial real estate exposure relative to capital and disclosure of exotic mortgage
lending totals.
Throughout the last 100 years, legislators have sought to improve the safety and
soundness of the banking system by enhancing regulations. Occasionally, these
regulatory efforts have gone beyond reasonable, resulting in overly burdensome
hindrances to free market activity.
In exchange for a commercial bank’s sole ability to collect deposits comes a social
responsibility as well as immense regulatory infrastructure. The banking organization
is usually examined by at least three regulatory entities including the Federal Reserve as
the holding company inspector, the FDIC, and either the state or Office of Comptroller
of the Currency (OCC) examiners. The Federal Reserve will also usually examine state-
member banks as well.
During the early years of modern banking, significant bank failures such as those at the
turn of the twentieth century were somewhat commonplace, and depositors typically
lost their entire savings. Legislators sought to add stability to both the U.S. banking
system and the domestic economy through increased regulation. The Federal Reserve
System was formed in 1913 to regulate banks, act as a lender of last resort, and create a
more formal monetary/liquidity system.
The next significant legislation was the Pepper-McFadden Act of 1927, which
prohibited national banks from establishing interstate branching networks. This act
somewhat allowed both small and large banks to flourish within their local markets
without fear of large-scale competition.
The stock market crash of 1929 was followed by numerous bank failures and the great
depression. In 1930, security affiliates of banks were sponsoring 54.4% of all new
securities issuances. There were several incidences of individual excess and fraud
leading up to the stock market crash, which resulted in creation of the somewhat
misguided Glass Steagall Act of 1933. This legislation sought to separate and limit
banks’ investing activities in an attempt to stabilize the banking industry. Recurring
and stable returns became significantly more important.
After several years, regulatory barriers began to slowly fade away during the second
half of the twentieth century, punctuated by the Bank Holding Company Act of 1956,
the Bank Holding Company Act of 1970, and finally, perhaps the most important
development, the Depository Institutions Deregulation and Monetary Control Act of
1980. The Control Act phased out Regulation Q interest rate ceilings and introduced
negotiable-order-of-withdrawal (NOW) accounts so banks could compete with money
market funds for deposits.
June 2006
Throughout the 1970s and 1980s, banks found it increasingly difficult to compete with
non-banks as regulatory barriers were lifted. Funding cost advantages narrowed and
asset securitization became more typical. Banks became unsheltered from non-bank
competition during the 1980s, reducing profitability and spreads in traditional
corporate and consumer businesses.
In the late 1980s, U.S. commercial banks were beset by a number of high-profile
difficulties, as loan concentrations in LDC debt and commercial real estate negatively
impacted many of the largest players in the industry. Citicorp was on the verge of
failure and was under constant regulatory watch in 1990-1991. In some ways these
severe problems may have been a function of increased competition from non-banks
and a resultant stretch for profitability. Risk-based capital guidelines were established
in January 1987 to address banks’ responsibility to apply certain risk weightings (or
levels of capital) to selected activities.
Also, throughout the 1990s regulatory barriers to bank consolidation began to fall. The
Riegle-Neil Interstate Banking Act of 1995 allowed banks to buy other banks across the
nation, while also phasing out banks’ restrictions against branching across state lines.
NationsBank went on an acquisition binge, buying Barnett Banks, Boatmens Bank, and
finally, Bank of America, to become the first truly nationwide commercial bank. The
nationwide deposit cap remains at 10%.
The year 1998 was the year of the mega-merger with combinations between
NationsBank/ Bank of America, Bank One/First Chicago NBD, Citicorp/Travelers, and
Wells Fargo/ Norwest. The Financial Modernization Act was passed in 2000,
essentially eliminating the walls of Glass Steagall and rubber stamping the
Citicorp/Travelers merger, which included commercial banking, investment banking,
and insurance.
More recent regulatory measures include guidance on home mortgage exposure,

particularly exotic mortgages, and commercial real estate exposure relative to risk-
based capital. Under a scenario of increased economic weakness, we would expect
some more overt moves by legislators and regulators to ensure safety and soundness
within the banking system.
June 2006
DEFINITIONS
Basic Analysis
Net Interest Margin Net Interest Income/Average Earning Assets
Yield/ Cost Spread Yield on Earning Assets (Total Interest & Dividend Income/Avg. Earning Assets)
minus Cost of Funds (Total Interest Expense/ Average Interest-Bearing Liabilities)
Total Equity Capital The total of perpetual preferred stock, common stock, surplus, undivided profits and
capital reserves (net), and cumulative foreign currency translation adjustments.
Tier 1 Capital Total equity capital - Net unrealized gains on AFS Securities - Net unrealized loss on
AFS Equity Securities - Accumulated net gains (losses) on cash flow hedges
Nonqualifying perpetual preferred stock + Qualifying minority interests in
consolidated subsidiaries - Disallowed goodwill & other intangible assets - Disallowed
servicing assets & purchased credit card relationships – Disallowed deferred tax assets
+ Other additions to (deductions from) Tier 1 capital
Equity/ Assets Total Equity (Perpetual Preferred Stock&Surplus+Common Stock&Surplus+Retained

Earnings+Gain<Loss>AFS Securities+Cumulative Foreign Currency Translation)/
Total Assets
Tangible Equity/ Total Equity-Intangible Assets (excluding Mtg Serv Rights)/ Total Assets-Intangible
Tangible Assets Assets (excluding Mtg Serv Rights)
Risk-Based Capital Total Risk-Based Capital Ratio: Total Capital (Tier 1 Core Capital + Tier 2
Ratio Supplemental Capital)/ Risk- Adjusted Assets
Tier 1 Risk-Based Tier 1 Risk Ratio: Core Capital (Tier 1)/ Risk-Adjusted Assets
Ratio
Leverage Ratio Leverage Ratio: Core Capital (Tier 1)/ Adjusted Tangible Assets
Yield on Loans Total Interest Income on Loans (Excludes Lease Income)/ Average Consolidated Loans
(Domestic and Foreign Office)
Yield on Total Total Interest & Dividend Income on Securities/ (Debt+Eq) Average Total Securities
Securities (Debt & Equity)
Yield on Earning Total Interest & Dividend Income/ Average Earning Assets (Bal Due+Securities+Fed
Assets Funds & Repos+Loans+Trade Assets)
Cost of Interest- Total Interest Expense on Deposits (Domestic & Foreign Office)/ Average Interest
Bearing Deposits Bearing Deposits (Domestic & Foreign Office)
Cost of Borrowings Total Interest Expense on Borrowings/ Average Borrowings (Avg Interest-bearing
(Non Deposits) Liabilities – Average Interest-bearing Deposits)
Cost of Funds Total Interest Expense/ Average Interest-Bearing Liabilities (Deposits + Fed Funds
Purchased & Repos + Commercial Paper + Mortgage Debt + Sub Debt + Other
Borrowed Money)
June 2006
Income Statement Analysis
Total Interest Income The total of interest and fee income on loans; income from lease financing receivables;
interest income on balances due from depository institutions; interest and dividend
income on securities; interest income from assets held in trading accounts; and interest
income on federal funds sold and securities purchased under agreements to resell in
domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs.
Total Interest Total of interest expenses. Includes interest expense on deposits; interest expense on
Expense Federal funds purchased and securities sold under agreements to repurchase in
domestic offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs;
interest expense on demand notes issued to the U.S. Treasury and on other borrowed
money; interest expenses on mortgage indebtedness and obligations under capitalized
leases; and interest expense on notes and debentures subordinated to deposits.
Net Interest Income Total interest income less total interest expense.
Total Provision The amount needed to make the allowance for loan and lease losses adequate to absorb
Expense expected loan and lease losses, based upon management's evaluation of the bank's
current loan and lease portfolio and the amount of the provision for allocated transfer
risk, if the bank is required to maintain an allocated transfer reserve by the
International Lending Supervision Act of 1983.
Total Non-Interest The total of income from fiduciary activities; service charges on deposit accounts in
Income domestic offices; trading gains (losses) from foreign exchange transactions; other
foreign transaction gains (losses); gains (losses) and fees from assets held in trading
accounts; and other non-interest income.
Total Realized The net gain or loss realized during the calendar year-to-date from the sale, exchange,
Gs(Ls)-Securities redemption, or retirement of all securities reported as held to maturity securities and
available-for-sale securities. The realized gain or loss on a security is the difference
between the sales price (excluding interest at the coupon rate accrued since the last
interest payment date, if any) and its amortized cost.
Total Non-Interest The total of salaries, employee benefits, and expenses of premises and fixed assets and
Expense other non-interest expense.
Income Before The bank's pretax operating income: Net interest income less provisions for loan and
Income Tax & Extra lease losses and provision for allocated transfer risk and total non-interest income plus
Items or minus gains (losses) on securities not held in trading accounts less total non-interest
expense.
Income Taxes The total estimated federal, state, and local, and foreign income tax expense applicable
to income (loss) before income taxes and extraordinary items and other adjustments,
including the tax effects of gains (losses) on securities not held in trading accounts.
Includes both the current and deferred portions of these income taxes and tax benefits
from operating loss carrybacks realized during the reporting period. Applicable income
taxes include all taxes based on a net amount of taxable revenues less deductible
expenses.
Income Before Income (loss) before income taxes and extraordinary items and other adjustments less
Extraordinary applicable income taxes to such income (loss).
June 2006
Extraordinary Items, Extraordinary items and other adjustments, gross of income taxes less applicable
Net Tax income taxes on extraordinary items and other adjustments.
Net Income (Loss) The sum of income (loss) before extraordinary items and other adjustments and
extraordinary items; and other adjustments, net of income taxes.
Capital Analysis Total Equity Capital/ Average Total Assets
Tier 1 Capital Qualifying subordinated debt and redeemable preferred stock + Cumulative perpetual
preferred stock includible in Tier 2 capital + Allowance for loan and lease losses
includible in Tier 2 capital + Unrealized gains on AFS equity securities includible in
Tier 2 capital + Other Tier 2 capital components.
Tier 2 Capital The amount of the bank's total risk-based capital. The amount reported in this item is
the numerator of the bank’s total risk-based capital ratio. Total risk-based capital is
the sum of Tier 1 and Tier 2 capital net of all deductions. Deductions are made for
investments in banking and finance subsidiaries that are not consolidated for
regulatory capital purposes, intentional reciprocal cross-holdings of banking
organizations' capital instruments, and other deductions as determined by the reporting
bank's primary federal supervisory authority.
Total Capital The amount of the institution's risk-weighted assets net of all deductions. The amount
reported in this item is the denominator of the institution's risk-based capital ratio.
Risk Weighted Assets Leverage Ratio: Core Capital (Tier 1)/ Adjusted Tangible Assets
Leverage Ratio Tier 1 Risk Ratio: Core Capital (Tier 1)/ Risk-Adjusted Assets
Tier 1 Risk-Based Total Risk-Based Capital Ratio: Total Capital (Tier 1 Core Capital + Tier 2
Ratio Supplemental Capital)/ Risk-Adjusted Assets
Risk-Based Capital Tangible Common Equity/ Tangible Assets

Ratio
June 2006
Balance Sheet
Cash & Balances Due The total of all non-interest-bearing balances due from depository institutions,
currency and coin, cash items in process of collection, and unposted debits. Includes
balances due from banks in the United States, banks in foreign countries and foreign
central banks, foreign branches of other U.S. banks, Federal Home Loan Banks, and
Federal Reserve Banks; and the total of all interest-bearing balances due from
depository institutions and foreign central banks that are held in offices of bank
holding company or its consolidated subsidiaries.
Fed Funds Sold & The gross dollar amounts outstanding of Federal funds sold and securities purchased
Repos under agreements to resell.
Cash & Equivalents Total balances due from depository institutions; plus Fed funds sold and securities
purchased under agreements to resell.
U.S. Treasury All available-for-sale (AFS) and held-to-maturity (HTM) U.S. Treasury Securities not
Securities held for trading. AFS securities are reported at fair value while HTM Securities are
reported at amortized cost. Includes all bills, certificates of indebtedness, notes, and
bonds, including those issued under the Separate Trading of Registered Interest and
Principal of Securities (STRIPS) program and those that are "inflation indexed."
Mortgage-Backed All held-to-maturity (at amortized cost) and available-for-sale (at fair value) holdings
Securities of certificates of participation in pools of residential mortgages, i.e., single-class pass-
through securities. A certificate of participation in a pool of residential mortgages
represents an undivided interest in a pool that provides the holder with a pro rata share
of all principal and interest payments on the residential mortgages in the pool.
Other Investment Total securities minus U.S. Treasury Securities and Mortgage-Backed securities.
Securities
Total Securities The total book value of all securities. Includes U.S. Treasury securities, U.S.
government agency and corporation obligations, securities issued by states and political
subdivisions in the United States, mortgage-backed securities, other domestic and
foreign debt securities, and all equity securities.
Total Cash & Total balances due from depository institutions; plus securities; plus fed funds sold and
Securities securities purchased under agreements to resell.
Gross Loans & Total loans and leases plus unearned income on loans.
Leases
Unearned Income Unearned income on consolidated loans.
Total Loans & Leases The total of loans and lease financing receivables, net of unearned income. Includes
loans secured by real estate; loans to depository institutions; loans to finance
agricultural production and other loans to farmers; commercial and industrial loans;
acceptances of other banks (both U.S. and foreign); loans to individuals for household,
family, and other personal expenditures; loans to foreign governments and official
institutions; obligations of states and political subdivisions in the United States; other
loans (e.g., for purchasing or carrying securities, and not including consumer loans);
lease financing receivables (net of unearned income); and less any unearned income on
loans reflected in items above.
June 2006
Total Reserves The total of the loan loss reserve and the transfer risk reserve.
Net Loans & Leases Loans and leases, net of unearned income, less: the allowance for loan and lease losses
and less: the allocated transfer risk reserve.
Trade Account Assets The fair value of assets used to (a) regularly underwrite or deal in securities, interest
rate contracts, foreign exchange rate contracts, other offbalance sheet commodity and
equity contracts, other financial instruments, and other assets for resale, (b) acquire or
take positions in such items principally for the purpose of selling in the near term or
otherwise with the intent to resell in order to profit from short-term price movements,
or (c) acquire or take positions in such items as an accommodation to customers or for
other trading purposes.
Premises & Fixed The book value, less accumulated depreciation or amortization, of all premises,
Assets equipment, furniture, and fixtures purchased directly or acquired by means of a capital
lease. Includes premises that are actually owned and occupied by the bank, its
branches, or its consolidated subsidiaries; leasehold improvements, vaults, and fixed
machinery and equipment; remodeling costs to existing premises; real estate acquired
and intended to be used for future expansion; parking lots that are used by customers
or employees of the bank, its branches, and its consolidated subsidiaries; furniture,
fixtures, and movable equipment of the bank, its branches, and its consolidated
subsidiaries; automobiles, airplanes, and other vehicles owned by the bank and used in
the conduct of its business; the amount of capital lease property; and stocks and bonds
issued by non-majority-owned corporations whose principal activity is the ownership
of land, buildings, equipment, furniture, etc., occupied or used by the bank.
OREO (Including The book value, less accumulated depreciation, if any, of all real estate other than bank
Real Estate Held for premises owned or controlled by the bank and its consolidated subsidiaries. Mortgages
Investment) and other liens on such property are not deducted. Amounts are reported net of any
applicable valuation allowances. Any property necessary for conducting banking
business is excluded.
Investments in The total amount of the institution's investments in all subsidiaries that have not been
Subsidiaries consolidated; associated companies; and those corporate joint ventures,
unincorporated joint ventures, general partnerships, and limited partnerships over
which the institution exercises significant influence. Includes loans and advances to
investees and holdings of their bonds, notes, and debentures; and the amount of the
consolidated bank's investments in real estate joint ventures and all loans and other
extensions of credit to such joint ventures.
Mortgage Servicing The carrying value of mortgage servicing rights, i.e., the unamortized cost of acquiring
Rights the rights to provide servicing for mortgage loans that have been securitized or are
owned by another party, net of any related valuation allowances.
Goodwill & Other The amount (book value) of unamortized goodwill. This asset represents the excess of
Intangible the cost of a company over the sum of the fair value of the tangible and identifiable
intangible assets acquired not including the fair value of liabilities assumed in a
business combination accounted for as a purchase. The amount of goodwill reported in
this item should not be reduced by any negative goodwill. Any negative goodwill
arising from a business combination accounted for as a purchase must also be reported.
Include the unamortized amount of identifiable intangible assets other than purchased
mortgage servicing rights.
June 2006
Other Assets The total amount of income earned, not collected on loans; net deferred tax assets;
interest-only strips receivable (not in the form of a security) on mortgage loans;
customers liability to the institution on acceptances outstanding; and other financial
assets.
Total Assets The total of cash and balances due from depository institutions; interest and non-
interest-bearing balances and currency and coin; securities; federal funds sold and
securities purchased under agreements to resell; loans and lease financing receivables,
net of unearned income, allowance for loan and lease losses, and allocated transfer risk
reserve; assets held for trading; premises and fixed assets; other real estate owned;
investments in unconsolidated subsidiaries and associated companies; customers'
liability to the reporting bank on acceptances outstanding; intangible assets; other
assets.
Total Deposits All unpaid balances of money or its equivalent received or held by a bank in the usual
course of business and for which it has given or is obligated to give credit to a
commercial checking, savings, time, or thrift account, or which is evidenced by a
deposit, thrift, investment, or indebtedness certificate; checks or drafts drawn against
deposit accounts and certified by the bank, or letters of credit or traveler's checks on
which the bank is primarily liable; trust funds received or held in any department of the
bank; money received or held by a bank, or the credit given for money or its equivalent
received or held by a bank, in the usual course of business for a special or specific
purpose, including but not limited to escrow funds; outstanding drafts, cashier's
checks, money orders, or other officer's checks issued; other obligations of a bank as
the board of directors, after consultation with the Comptroller of Currency and the
Board of Governors of the Federal Reserve System.
Fed Funds Purchase The dollar amount outstanding of Federal funds purchased and securities sold under
& Repos agreements to repurchase in domestic offices of the bank and of its Edge and
Agreement subsidiaries, and in IBFs.
Commercial Paper The total amount outstanding of commercial paper issued by the reporting bank
holding company or its subsidiaries.
FHLB Advances Advances from the Federal Home Loan Bank. Includes advances used to purchase As-
Agent CDs; reverse repurchase agreements with the FHLB; and deferred commitment
fees paid on FHLB advances. Does not include accrued interest, and FHLB advances
that have decreased in-substance in accordance with GAAP.
Other Borrowings Includes Demand notes issued to the U.S. Treasury; mortgage indebtedness and
obligations under capitalized leases; and the total dollar amount borrowed by the
consolidated bank: (1) on its promissory notes; (2) on notes and bills rediscounted; (3)
on loans sold under repurchase agreements that mature in more than one business day
and sales of participations in pools of loans that mature in more than one business day;
(4) on loans or other assets sold with recourse or sold in transactions in which risk of
loss or obligation for payment of principal or interest is retained by, or may fall back
upon, the seller that must be reported as borrowings; (5) by the creation of due bills
representing the bank's receipt of payment and similar instruments, whether
collateralized or uncollateralized; (6) from Federal Reserve Banks and Federal Home
Loan Banks; (7) by overdrawing "due from" balances with depository institutions,
except overdrafts arising in connection with checks or drafts drawn by the reporting.
Total Other Commercial Paper + Advances from FHLB + All Other Borrowings
Borrowings
June 2006
Trading Liabilities The dollar amount of liabilities from the bank's trading activities. Include liabilities
resulting from sales of assets that the bank does not own and revaluation losses from
the "marking to market" (or the lower of cost or market") of interest rate, foreign
exchange rate, and other off-balance sheet commodity and equity contracts into which
the bank has entered for trading, dealer, customer accommodation, and similar
purposes.
Subordinated Debt & The amount of outstanding subordinated notes and debentures (including mandatory
Mandatory convertible debt).
Convertible Security
Other Liabilities The total of all other liabilities not elsewhere classified. Includes interest accrued and
unpaid on deposits in domestic offices; other expenses accrued and unpaid; net
deferred income taxes, if credit balance; and liability on acceptances executed and
outstanding. Excludes minority interest in consolidated subsidiaries.
Total Liabilities Includes non-interest-bearing and interest-bearing deposits held in both domestic and
foreign offices; federal funds purchased and securities sold under agreements to
repurchase in domestic offices of the bank and of its Edge and Agreement subsidiaries,
and IBFs; demand notes issued to the U.S. Treasury; other borrowed money; mortgage
indebtedness and obligations under capitalized leases; the bank's liability on
acceptances executed and outstanding; notes and debentures subordinated to deposits;
and other liabilities.
June 2006
COLLINS INDUSTRY AND COMPANY REPORTS

Industry Reports
June-06 The Zing In Consumer Banking: Bankruptcies, Customer Service & The Internet
May-06 U.S. Card Industry In Transition: From Borrower to Transactor
May-06 Retail Banking: The Next Industry Consolidation Catalyst?
April-06 A Seismic Shift In Loan Profitability
March-06 Regulators Sharpen Pencils On CRE
November-05 Competing For Deposit Market Share
November-05 Spanning the Lone Star State
October-05 Bank Stock Investing Strategies for 2006-2007
October-05 Competitive State of the U. S. Personal Wealth Business
October-05 Exploring The Banking Opportunity In Asia
July-05 Housing Market & Bank Stocks
June-05 Watching The Dividend Calendar
May-05 Farewell to Deposit Fee Golden Goose?
May-05 Middle-Office Outsourcing
April-05 Deposit Competition And The Fed
March-05 Simulating For A 'Bear' Rate Flattening
February-05 Outlook for Pension Restatements
January-05 Myths & Realities of Retail Banking
Company Reports
April-06 OSBC Healthy Long-Term Fundamentals, But Near-Term Headwinds
March-06 WFC A Consistent Growth Story; Reiterate Outperform
March-06 TCB Dark Cloud Lifting, Attractive Valuation
March-06 ZION A Well-Prepared Game Plan In High-Growth Markets
February-06 SNV Initiated Coverage With Outperform Rating; $30 Price Target
January-06 BAC A Look At The 2005-2007 Growth Drivers
January-06 CNB Initiated Coverage With Market Perform; $26 Price Target
January-06 WTFC A Great Little Customer Service-Focused Franchise; Reiterate Outperform
September-05 C Continued Work In Progress; Maintain Market Perform
September-05 BAC Addressing Investor Concerns; Reiterate Outperform
June-05 C The Dark Cloud Begins To Dissipate
May-05 MEL Initiated Coverage With Market Perform
May-05 NTRS A Day With Customer-Service-Focused Northern Trust
March-05 WFC Managing For Higher Growth; Reiterate Outperform
Periodicals
May-06 1Q06 Earnings Wrap-Up
April-06 1Q06 Earnings Preview
April-06 Growth Banks 1Q06 Earnings Preview
February-06 4Q05 Earnings Wrap-up
January-06 4Q05 Earnings Preview
January-06 Smid-cap 4Q05 Earnings Preview
November-05 3Q05 Earnings Wrap-Up
October-05 3Q05 Earnings Preview
October-05 Smid-cap 3Q05 Earnings Preview
July-05 2Q05 Earnings Wrap-Up/Model Update
July-05 2Q05 Smid-Cap Earnings Preview
July-05 Second Quarter 2005 Earnings Preview
April-05 1Q05 Earnings Wrap-Up/Model Update
April-05 1Q05 Smid-Cap Earnings Preview
April-05 1Q05 Large-Cap Earnings Preview
February-05 4Q04 Earnings Wrap-Up/Model Update
January-05 4Q04 Smid-Cap Earnings Preview
January-05 4Q04 Earnings Preview
June 2006
Important Research Disclosures
Note: Distribution of Ratings/IB Services shows the number of companies in each rating category from which Piper
Jaffray and its affiliates received compensation for investment banking services within the past 12 months. NASD and
NYSE rules require disclosure of which ratings most closely correspond with "buy," "hold," and "sell" recommendations.
Accordingly, Outperform corresponds most closely with buy, Market Perform with hold, and Underperform with sell.
Outperform, Market Perform and Underperform, however, are not the equivalent of buy, hold or sell, but instead
represent indications of relative performance. See Rating Definitions below. An investor's decision to buy or sell a security
must depend on individual circumstances.
Analyst Certification – Andrew B. Collins, Senior Research Analyst

The views expressed in this report accurately reflect my personal views about the subject company and the subject
security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific
recommendations or views contained in this report.
Affiliate Disclosures: This report has been prepared by Piper Jaffray & Co. or its affiliate Piper Jaffray Ltd., both of which
are subsidiaries of Piper Jaffray Companies (collectively “Piper Jaffray”). Piper Jaffray & Co. is regulated by the NYSE,
NASD and the United States Securities and Exchange Commission, and its headquarters is located at 800 Nicollet Mall,
Minneapolis, MN 55402. Piper Jaffray Ltd. is incorporated under the laws of the England and Wales and is authorised and
regulated by the UK’s Financial Services Authority, and is a member of the London Stock Exchange, and is located at 18
King William Street, London, EC4N 7US. Disclosures in this section and in the Other Important Information section
referencing Piper Jaffray include all affiliated entities unless otherwise specified.
Piper Jaffray research analysts receive compensation that is based, in part, on overall firm revenues, which include
investment banking revenues.
Complete disclosure information, price charts and ratings distributions on companies covered by
Piper Jaffray Equity Research can be found on the Piper Jaffray website:
http://piperjaffray.com/researchdisclosures
or by writing to Piper Jaffray, Equity Research Department, 800 Nicollet Mall, Minneapolis, MN 55402
June 2006
Rating Definitions
Investment Opinion: Investment opinions are based on each stock’s return potential relative to broader market indices,
not on an absolute return. The relevant market indices are the S&P 500 and Russell 2000 for U.S. companies and the
FTSE Techmark Mediscience index for European companies.
• Outperform (OP): Expected to outperform the relevant broader market index over the next 12 months.
• Market Perform (MP): Expected to perform in line with the relevant broader market index over the next 12 months.
• Underperform (UP): Expected to underperform the relevant broader market index over the next 12 months.
• Suspended (SUS): No active analyst investment opinion or no active analyst coverage; however, an analyst
investment opinion or analyst coverage is expected to resume.
Volatility Rating: Our focus on growth companies implies that the stocks we recommend are typically more volatile than
the overall stock market. We are not recommending the “suitability” of a particular stock for an individual investor.
Rather, it identifies the volatility of a particular stock.
• Low: The stock price has moved up or down by more than 10% in a month in fewer than 8 of the past 24 months.
• Medium: The stock price has moved up or down by more than 20% in a month in fewer than 8 of the past 24
months.
• High: The stock price has moved up or down by more than 20% in a month in at least 8 of the past 24 months. All
IPO stocks automatically get this volatility rating for the first 12 months of trading.
June 2006
Other Important Information

The material regarding the subject company is based on data obtained from sources deemed to be reliable; it is not
guaranteed as to accuracy and does not purport to be complete. This report is solely for informational purposes and is
not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it is not,
and it should not be construed as, advice designed to meet the particular investment needs of any investor. This report is
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mentioned in this report is the market closing price as of the end of the prior business day. Piper Jaffray does not
maintain a predetermined schedule for publication of research and will not necessarily update this report. Piper Jaffray
policy generally prohibits research analysts from sending draft research reports to subject companies; however, it should
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This report is published in accordance with a conflicts management policy, which is available at
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Additional information is available upon request.
© 2006 Piper Jaffray & Co. and/or Piper Jaffray Ltd. All rights reserved.
June 2006
NOTES
June 2006
Equity Research
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I N V E S T M E N T R E S E A R C H

Customers of Piper Jaffray in the United

Andrew B. Collins A Short Bank Stock Primer

• Consolidation And Nonbanking Remain The Mega Trends—In our assessment,

1. The Primer Pyramid ............................................................................................ 4

In our judgment, investing in bank stocks is highly dependent upon a healthy

Fundamentals And Accounting------From a fundamental standpoint, we monitor credit

THE PRIMER PYRAMID

History Regulation Legislation

Mega-Trends Consolidation Credit Quality Nonbanking

Valuations Price-to-Earnings Price-to-Book PEG Ratios

Source: Piper Jaffray

Mega Trends------Consolidation, credit quality, and fee-income business developments

History And Regulation------On a historical basis, we think regulatory and legislative

FED FUNDS TARGET RATE AND FED FUNDS FUTURES

10-Year U.S. Treasury Yield

10-YEAR VERSUS THREE-MONTH U.S. TREASURY YIELD AND SPREAD

Source: Federal Reserve, Piper Jaffray

HIGH YIELD SPREAD VERSUS BANK STOCK INDEX

Bank Stock Index

Purchasing managers index remains important to gauging potential expansion within

ISM PURCHASING MANAGERS INDEX

Billions of Dollars Billions of Dollars Billions of Dollars Billions of Dollars

Dec-03 Dec-03 Dec-03

Mar-05 Mar-05 Mar-05 Mar-05

Piper Jaffray Investment Research

Jun-05 Jun-05 Jun-05 Jun-05

Taxables Fund Flows - 6/1/2006

Municipal Fund Flows - 6/1/2006

Aug-05 Aug-05 Aug-05 Aug-05

Commercial Banks: A Short Bank Stock Primer | 11

Material Deposit Outflows Did Not Happen—In response, we anticipate deposit

DEPOSITS GROWTH PERCENTAGE YEAR-OVER-YEAR CHANGE VERSUS DOLLAR AMOUNT

8.5% avg YoY 4%

Note: Seasonally adjusted

Securities $500 4.50% $22.5 Deposits $1,300 1.61% $20.9

Loans 1,300 6.00% 78.0 Borrowings 630 3.62% 22.8

Other Assets 300 Equity 170

Total Assets $2,100 Total Liab. & Eq. $2,100

Calculations: $100.5 - $43.7 = $56.8 Net Interest Income (NII) $56.8

$56.8 / $1,800 = 3.15% Net Interest Margin (NIM) 3.15%

5.58% - 2.27% = 3.32% Interest Rate Spread 3.32%

Source: Piper Jaffray

Source: Piper Jaffray

THREE-MONTH T-BILL VERSUS 10-YEAR U.S. TREASURY HISTORICAL SPREAD

EXAMPLE BANK – INCOME STATEMENT

+ Net Interest Income $57.6 $56.8 -2%

Total Revenue $102.6 $106.8 4%

Average Earning Assets $1,800

Source: Piper jaffray

The Loan Review Process------What Is Behind The Scenes. A commercial loan is

Nonperforming Assets, Delinquencies And Charge-Offs------When analyzing publicly

EXAMPLE BANK – CREDIT QUALITY

To analyze reserve adequacy, we focus on reserves as a percentage of total loans—the

RESERVE RATIO, ALL BANKS

Source: FDIC, Piper Jaffray estimates

Going forward, we would be somewhat cautious on large automobile, trucking, and

TOTAL HOME EQUITY OUTSTANDING WITH GROWTH RATES

TOTAL REVOLVING CREDIT OUTSTANDINGS VERSUS GROWTH RATE

Amount Outstanding ($mil)

Mortgage lending in particular expanded dramatically during the 2001-2004 time

Usually the biggest component of fee-based revenue at commercial banks is service

Noninterest Expenses $50.0 $52.5 5.0%