Banking Primer 1

E
LARGE COMMERCIAL BANKS

T H E 6 0 S E C O N D B A N K S T O C K P R I M E R
A P R I L
2 0 0 3
Andrew B. Collins Senior Research Analyst 212-284-9310 Steven M. Truong Research Analyst 212-284-9307 R. Neal Kohl Research Associate 212-284-9455
E Q U I T Y
R E S E A R C H
April 2003
LARGE COMMERCIAL BANKS
THE 60 SECOND BANK STOCK PRIMER

The Basics Of Banking Remain UnchangedOver the last 12 months we have witnessed significant turmoil within the financial services sector, primarily reflecting severe deterioration in the equities market. We can now revisit the basics of bank stock investing within the context of a completely new, lower valuation environment. The Economy Is 80% Of The Call On Bank StocksWe must make certain assumptions regarding the U.S. economy to consider investing in bank stocks, and those include that the U.S. consumer will remain somewhat healthy, while the corporate environment will slowly stabilize after wringing out the severe excesses of the late 1990s. Key economic drivers of bank stock price performance are explored. Credit Quality Can Cut Hard Both WaysUnquestionably, the biggest swing factor in bank stock earnings remains credit quality. We do not foresee a double-dipping U.S. economy; however, under such a scenario we might witness another round of corporate bankruptcies and a weakening consumer. We have provided the key dials and needles in bank stock financial statement analysis. Consolidation And Nonbanking Remain The Mega TrendsIn our assessment, consolidation has been one of the big 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 has turned increasingly detrimental to earnings over the last two years has been the single-minded focus on fee-based revenues, which dominated the mid-1990s. 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 which may result in failure to achieve our EPS estimates.
April 2003
TABLE OF CONTENTS
Viewpoint .................................................................................................................... 4 Economics And Bond Market Indicators ....................................................................... 5 Deals And Needles What Is Really Important When Modeling.................................... 8 Loans And Credit Quality .......................................................................................... 11 Revenue Components ................................................................................................. 15 Noninterest Expenses ................................................................................................. 16 Capital ..................................................................................................................... 18 Valuation Methods .................................................................................................... Price-To-Earnings ................................................................................................ PEG Ratio ........................................................................................................... Price-To-Book ..................................................................................................... Some Attractive Yield Opportunities .................................................................... Mega Trends Consolidation, Credit Quality, And Nonbanking ................................. Consolidation ...................................................................................................... Credit Quality ..................................................................................................... Nonbanking Trends ............................................................................................. Investment Banking ............................................................................................. Asset Management .............................................................................................. Processing ........................................................................................................... Credit Cards ....................................................................................................... Mortgage Banking ............................................................................................... Technology And The Evolution ............................................................................ 21 21 22 22 23 27 27 28 30 30 31 31 32 33 33
History of Banking .................................................................................................... 34 Definitions ................................................................................................................. 36 Index ......................................................................................................................... 46
| Large Commercial Banks U.S. Bancorp Piper Jaffray Equity Research
April 2003
TABLE OF CONTENTS CONTINUED
Exhibits 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. The Primer Pyramid .............................................................................................. 4 High Yield Spread Versus Bank Stock Index ........................................................... 6 Equities Fund Flows Weekly Change ................................................................... 7 Money Markets Fund Flows Weekly Change .......................................................... 7 Taxable Bond Fund Flows Weekly Change ............................................................. 7 Bank Deposit Flows Weekly Change ....................................................................... 7 Example 1: Balance Sheet ....................................................................................... 8 Example 2: Average Balance Sheet .......................................................................... 9 3-Month T-Bill Versus 10-Year U.S. Treasury Historical Spread ............................. 10 Example 3: Income Statement .............................................................................. 11 Example 4: Credit Quality ................................................................................... 12 Total Home Equity Outstanding And Committed With Growth Rates................... 14 Revolving Consumer Credit Outstanding ............................................................. 14 San Francisco Bay Area Unemployment Rate ........................................................ 15 Example 5: Noninterest Expenses ......................................................................... 17 Regulatory Capital Requirements ......................................................................... 18 Example 6: Components Of Capital ..................................................................... 19 Benchmark Averages ............................................................................................ 20 2003 Historical Consensus Estimates ................................................................... 21 Fastest And Most Consistent Earnings Growers .................................................... 22 Top-50 Banks Price To Book And ROE ............................................................... 23 Bank Stock Dividend Yield Versus 10-Year U.S. Treasury ...................................... 24 Top-50 Banks (By Market Cap) Dividend Yield .................................................... 25 Top-50 Banks (By Market Value) 2002 Dividend Payout Ratios ............................ 25 Dividend Payout Top-50 Banks ............................................................................ 26 Bank And Thrift M&A Activity ........................................................................... 27 Industry Net Charge-Off Ratios ........................................................................... 29 Large-Cap Banks 2003E Earnings Mix ................................................................. 30 State Street Investor Services Competitive Wins And Losses ................................... 31 U.S. Credit Card Industry Overview ..................................................................... 32 Top-10 Residential Servicers ................................................................................. 33 Top-10 Residential Originators ............................................................................ 33
U.S. Bancorp Piper Jaffray Equity Research Large Commercial Banks
April 2003
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, and demand levels and money flows. 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 near-term uptick in unemployment. We view this as a solid environment from 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 earnings. We also constantly monitor interest rates and loan growth as a basic function of banking profitability. In our assessment, credit quality in 2003 may finally stabilize after three years of weakness, while basic banking trends may suffer from deteriorating optics, reflecting the unique phenomenon of market rates declining too much.
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: U.S. Bancorp Piper Jaffray
April 2003
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/Es 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. We think the broader market may be subject to more severe downward earnings adjustments in 2003. 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 trends to impact commercial banking over the last 20 years. Although industry consolidation grinded to a halt in 2002, we would expect some catalyst to lead to an acceleration in activity within the next two years. Further, while the push into nonbanking business has also slowed due primarily to significant deterioration in market sensitive revenues we think banks will once again focus on fee-based businesses by 2004. 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 the global settlement with investment banks, recent initiatives to curtail the sub-prime consumer markets, and regulation of the asset-backed finance market (VIEs). Most of these moves have not severely impacted banking profitability, unlike some historical negative regulatory efforts. We are waiting for a true litmus test regulatory or legislative event.
Economics And Bond Market Indicators
We monitor seven or eight key economic/bond market data points when following bank stocks including the Treasury market rates (3-month and 10-year maturities), high-yield credit spreads, loan market aggregates, unemployment, purchasing managers index, money flows, 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 3.0% GDP growth or more, investors often become concerned with higher interest rates and seek out faster-growing areas within the investor spectrum (i.e., 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 suffered. In our view, somewhere between 1.5% and 3.0% GDP growth is optimal for bank stocks 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 Reserves significant campaign to lower the Fed funds rate by 525 basis points to its current level of 1.25% has had little impact on the corporate side to reaccelerate corporate demand and capital spending, primarily due to the massive bubble created by overinvestment in the technology sector throughout the late 1990s.
April 2003
Nevertheless, lower short-term rates probably led to lower long-term rates such as the 10year Treasury, which has declined by roughly 115 basis points over the past 27 months to a current yield of 3.94% as of March 26. And since this rate has a high correlation with mortgage rates, we have witnessed a dramatic strengthening in the housing market as many Americans have refinanced at lower interest rates. 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.
Exhibit 2
HIGH YIELD SPREAD VERSUS BANK STOCK INDEX

Negative 0.6 Correlation Coefficient High Yield Spread Bank Stock Index May-21 Merrill settles $100 million Oct-8 SNC Results 1000 950 900 850 800 750 700 650 600 17-Aug-00 29-Sep-00 19-Sep-01 29-Apr-02 10-May-01 11-Sep-02 6-Aug-01 15-Mar-02 31-Jan-02 28-Mar-01 13-Feb-01 22-Jun-01 13-Jun-02 30-Jul-02 29-Dec-00 13-Nov-00 14-Dec-01 21-Jan-03 5-Jul-00 31-Oct-01 24-Oct-02 5-Dec-02 Bank Stock Index
900bps 850bps 800bps High Yield Spread 750bps 700bps 650bps 600bps 550bps 500bps 450bps
Jan-3 Fed 2001 rate cut campaign begins
Dec-2 Enron files Ch.11
Sep-11 WTC Attack Avg. Spread 616 bps
Source: U.S. Bancorp Piper Jaffray, ILX and Bloomberg Note: As of March 13, 2003.
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 of 2002, credit spreads widened dramatically. In sum, these measures track credit fears as well as reality (see Exhibit 2). We generally view consumer and corporate loan aggregate trends as early indicators of economic growth. Although corporate loan shrinkage appears to finally be slowing after several quarters of deterioration, consumer loan growth has continued to expand, albeit at much slower rates over the past six months.
April 2003
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. Purchasing managers index remains important to gauging potential expansion within the business sector and thus the potential for increased loan demand. In our assessment, overcapacity remains high within the corporate sector, thus corporate demand is hard to recognize. The most recent ISM Manufacturing data was very weak at 46.2, indicating corporate contraction.
Exhibits 3,4,5,6
MARKET FLOWS
Bank Deposit Flows Weekly Change 4 Week Moving Average (Billions)
$150 $3.5 $3.0 $100 $2.5 $2.0 $50 $1.5 $1.0 $0 $0.5 ($50) $0.0 ($0.5) ($100)
2/2/00 4/2/00 6/2/00 8/2/00 2/2/01 4/2/01 6/2/01 8/2/01 2/2/02 4/2/02 6/2/02 8/2/02 10/2/00 12/2/00 10/2/01 12/2/01 10/2/02 12/2/02 2/2/03
Taxable Bond Fund Flows Weekly Change 4 Week Moving Average (Billions)
($1.0)
8/ 2/00 10/2/00 12/2/00 2/ 2/01 4/ 2/01 6/ 2/01 8/ 2/01 10/2/01 12/2/01 2/ 2/02 4/ 2/02 6/ 2/02 8/ 2/02 10/2/02 12/2/02 2/ 2/03
Source: U.S. Bancorp Piper Jaffray and Federal Reserve. As of February 26, 2003.
Source: U.S. Bancorp Piper Jaffray Fundamental Market Strategy Group and AMG Data. As of March 5, 2003.
Money Markets Fund Flows Weekly Change 4 Week Moving Average (Billions)
$50 $40
$6 $10 $8
Equities Fund Flows - Weekly Change 4 Week Moving Average (Billions)
$30
$4
$20 $10 $0 ($10)
$2 $0 ($2) ($4) ($6)
($20) ($30) 1/26/00 2/26/00 3/26/00 4/26/00 5/26/00 6/26/00 7/26/00 8/26/00 9/26/00 10/26/00 11/26/00 12/26/00 1/26/01 2/26/01 3/26/01 4/26/01 5/26/01 6/26/01 7/26/01 8/26/01 9/26/01 10/26/01 11/26/01 12/26/01 1/26/02 2/26/02 3/26/02 4/26/02 5/26/02 6/26/02 7/26/02 8/26/02 9/26/02 10/26/02 11/26/02 12/26/02 1/26/03 2/26/03
($8) ($10) 1/26/00 2/26/00 3/26/00 4/26/00 5/26/00 6/26/00 7/26/00 8/26/00 9/26/00 10/26/00 11/26/00 12/26/00 1/26/01 2/26/01 3/26/01 4/26/01 5/26/01 6/26/01 7/26/01 8/26/01 9/26/01 10/26/01 11/26/01 12/26/01 1/26/02 2/26/02 3/26/02 4/26/02 5/26/02 6/26/02 7/26/02 8/26/02 9/26/02 10/26/02 11/26/02 12/26/02 1/26/03 2/26/03
April 2003
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 Exhibits 3-6). Many bank stock investors anticipate that with any improvement in the equities markets we may witness a material outflow of bank deposits. In response, we would anticipate deposit growth slowing to around 3.0%-4.0% when retail equity dollars flow back into the stock market; however, several other events such as increased loan growth and higher rates may precede that trend. Bank deposits grew by 5.5% on average throughout the last ten years versus a current growth rate of 5.9% year over year.
Dials And Needles What Is Really Important When Modeling
We usually begin a commercial banking model with assumptions regarding loan and asset growth. Our loan growth assumptions rely somewhat on historical economic growth levels within a given marketplace, plus an additional 1-2 percentage points of growth (i.e., 5%-7% loan growth) (see Exhibit 7). 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 including mortgages, consumer loans, business loans, and commercial real estate.
Exhibit 7
EXAMPLE 1: BALANCE SHEET

Investment Securities Loans Other Assets Total Asset 2002 $130.0 150.0 20.0 $300.0 2003E % Chg $136.5 5.0% 159.0 6.0% 20.4 2.0% 5.3% $315.9 Deposits Borrowings Equity Capital Total Liab. & Eq. 2002 $170.0 110.0 20.0 $300.0 2003E % Chg. $179.4 5.5% 115.5 5.0% 21.1 5.2% 5.3% $315.9
Source: U.S. Bancorp Piper Jaffray Note: Some figures may not add up due to rounding.
Over the last 18 months business loans (or commercial and industrial) have been declining due to limited demand and tighter underwriting standards. In contrast, mortgage loans including first and second liens have been expanding rapidly, reflecting much lower U.S. interest rates. We would anticipate these trends to reverse themselves at some point over the next 12 to 18 months. Investment securities comprise the bulk of a banks remaining average earning assets and are primarily composed of government and mortgaged-backed bonds. Average earning asset levels are somewhat a function of loan growth, and the opportunity to leverage deposit growth and any underutilized capital.
April 2003
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 recent months banks have temporarily reversed this trend, maintaining loans on the balance sheet, given an opportunity to fund these loans with abnormally cheap deposits.
Exhibit 8
EXAMPLE 2: AVERAGE BALANCE SHEET

Average Balance $50 180 $230 10 $240 $7.6 3.30% 3.23% Yields/ Interest Rates Income 5.00% $2.5 7.00% 12.6 6.57% $15.1 Average Balance $150 75 $225 15 $240 Yields/ Interest Rates Expense 3.00% $4.5 4.00% 3.0 3.33% $7.5
Securities Loans Earning Assets Other Assets Total Assets
Deposits Borrowings Bearing Liabilities Equity Total Liab. & Eq.
Net Interest Income (NII) Net Interest Margin (NIM) Interest Rate Spread Calculations:
$15.1 - $7.5 = $7.6 $7.6 / $230 = 3.30% 6.57% - 3.33% = 3.23%
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 8). Over the last two years, interest yields and costs have been declining rapidly, given a significant reduction in interest rates within the U.S. market. In fact, over this period the Fed funds rate has declined by 525 basis points to 125 basis points currently, while the long bond has declined by 115 basis points as of March 26. The short end of the yield curve (see Exhibit 9), namely, 3-month, one- and two-year money, has reached 40-year historical lows. As a result, deposit rates have hit near historical lows, while short-term wholesale funding has declined as well.
April 2003
Exhibit 9
3-MONTH T-BILL VERSUS 10-YEAR U.S. TREASURY HISTORICAL SPREAD

Basis Points
Monthly Historical Data
400 350 300 250 200 150 100 50 0 (50) (100) Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Dec-00 Low Negative 70 basis points 50-year average of 131 basis points Mar-03 Latest 251 basis points Aug-00 Recent Low 153 basis points
Source: Federal Reserve and ILX Note: As of March 12, 2003.
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 10 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, allowing them to benefit from the spread or a steep yield curve. And although the yield curve is still relatively steep (i.e., favorable) by historical standards, rates have fallen so significantly that banks are unlikely to benefit from further rate reductions. A banks 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.
10
April 2003
Exhibit 10
EXAMPLE 3: INCOME STATEMENT Average Earning Assets x Net Interest Margin (NIM) = Net Interest Income (NII)
+ Net Interest Income - Loan Loss Provision + Noninterest Income - Noninterest Expense = Income before Taxes - Taxes (35%) = Net Income Key Income Statement Stats: Total Revenue = NII + Nonint. Inc. Nonint. Inc. / Total Revenue Efficiency = Nonint. Exp. / Ttl. Rev.
$250 3.60% $9.0 $9.0 1.0 5.0 7.0 6.0 2.1 $3.9
= = =
$14.0 35.7% 50.0%
Net interest income often contributes between 20% and 60% of a banks 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 Quality
Historically, credit quality (or asset quality) has been the biggest area of potential risks 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 borrowers ability to repay loan balances and make interest payments on an ongoing basis. Under a scenario in which a borrowers 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 nonaccrual 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 of the 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.
11
April 2003
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.
Exhibit 11
EXAMPLE 4: CREDIT QUALITY

Beginning Reserves Charge-offs Recoveries - Net Charge-offs + Loan Loss Provision Ending Reserves Nonperforming Loans (NPLs) + OREO (other real estate owned) = Nonperforming Assets (NPAs) $25 5 1 $4 4 $25 $195 1 $196
Key Credit Quality Ratios: Net Charge-Off Ratio = Net Charge-Offs / Avg. Loans Reserves Ratio = Reserves / End of Period Loans
The accounting methodology for loan loss reserves is somewhat complicated (see Exhibit 11). 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. 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 (i.e., credit cards) without being placed on nonperforming status. In contrast, commercial loans usually have some collateral support and are much lumpier in nature.
12
April 2003
Commercial loans, or business loans, have been the source of the biggest credit problems within the banking space over the last three years. 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 declined significantly on a national basis, given both lack of supply and demand by borrowers. In our assessment, supply has been constricted as many larger banks pulled back after experiencing significantly higher-than-normal net charge-offs on large credits. 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. Currently, the SNC market is very weak with few participants willing to accept risk without a significantly higher-than-normal reward, i.e., interest rate or collateral support. 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. Although certainly the syndicate market is damaged near term, we do not believe the impact is permanent; and when lending does reaccelerate there will be opportunities for growth at more reasonable returns. Many larger banks including FleetBoston, J.P. Morgan Chase, Citigroup, Bank One, and Bank of America are experiencing commercial net charge-off ratios as a percentage of loans in the 1.00% to 2.00% range versus a more normal 40 to 60 basis points. In our judgment, most of the commercial loan weakness at large banks over the last two years has been associated with the large new economy exposures, such as telecom, technology, cable, and merchant energy loans. Going forward, we would also 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 have not experienced the same levels of credit quality deterioration and appear to be recovering somewhat from weak demand levels. Consumer loans include a broad variety of credits including home mortgages, home equity, credit cards, and personal loans (i.e., purchase of boats, cars, etc.). Most banks have been significantly increasing exposure to the consumer (see Exhibits 12 & 13), 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 welldeveloped securitization market for mortgages and credit cards. In addition, the regulators require less capital be placed against mortgages remaining on the books.
13
April 2003
Exhibits 12,13
Total Home Equity Outstanding And Committed With Growth Rates, 1991 - 2003E
500,000 450,000 400,000 30% 350,000 Total HE Lines (Mil.) 300,000 20% 250,000 200,000 150,000 10% 100,000 50,000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 09/02 2003E
Note: Estimated historic data for Charter One pre-97 and TCF Financial pre-96. Source: Regulatory data from SNL DataSource and U.S. Bancorp Piper Jaffray estimates.
40% Total Home Equity Y/Y Growth Rate 38% 35%
25%
25% 23%
25%
25%
Growth Rate (%)
25% 20%
19%
18% 16% 20% 20%
15%
5% 0%
Revolving Consumer Credit Outstanding Monthly Data, 1990 To Date

$800 Revolving Consumer Credit Outstanding ($ Bn) Year-Over-Year Growth Rate 25%
20% $600
15% $400 10%
$200
Jan-03 $729 Bn YoY %chg. 2.3%
5%
$Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03
0%
Source: Federal Reserve.
Consumer loan growth has continued somewhat unabated throughout the last decade. Mortgage lending in particular has expanded dramatically in the last two years, 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 (see report published in April 2003, Bank Stocks and the Housing Bubble).
14
April 2003
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 (dated January 8, 2003) in which all loans with a FICO score of under 660 are considered sub-prime. Although we view this as a somewhat arbitrarily determined high hurdle, it effectively dampens growth of exposures to this sector of the market. We are closely monitoring developments in the San Francisco Bay Area housing market, as perhaps a barometer for how higher unemployment (see Exhibit 14), reductions in personal income, and interest rates may negatively impact housing values. So far, housing values have held up reasonably well since 2001, despite a 400 basis point increase in unemployment on average, and pressure in personal income within that market.
Exhibit 14
SAN FRANCISCO BAY AREA UNEMPLOYMENT RATE

7.5% 5.9%6.1% 4.4% 3.6% 3.7% 6.3% 6.1% 5.3% 4.9% 5.2% 5.2% 4.5% 4.4% 4.2% 3.4% 3.4% 2.8%
San San Mateo Francisco
Santa Clara
Alameda
Contra Costa
Marin
Sonoma
Napa
Solano
December-01
Source: Grubb & Ellis Research & Advisory Services.
December-02
Revenue Components
Total revenue, which is the sum of net interest income and noninterest income, typically grows anywhere from 4%-9%. 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. In fact, improving customer service has recently resulted in service-charge growth outstripping deposit growth.
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April 2003
Investment banking fees, or noninterest income, is highly reliant upon the type of investment banking done at an individual organization. Loan syndications are a big part of a commercial banks 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. 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. Securities gains and loan sales have been contributing a larger percentage of total revenues over the last few years, which could be construed as poor quality; however, most organizations still have ample capital and securities gains to address any shortfalls. In fact, we estimate that the top 10 banks could boost EPS by between 1% and 52% by taking securities gains as of December 31, 2002. Most of these gains are attributable to the extended rally in the 10-year Treasury, when many banks have significant government bond portfolios.
Noninterest Expenses
Expense management usually takes on two different dimensions at commercial banks including synergies related to merger savings, or improvement of processes/six sigma efforts. The typical banks nonintrust expense base expands by 3%-6% 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%.
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April 2003
Exhibit 15
EXAMPLE 5: NON-INTEREST EXPENSES

Net Interest Income Noninterest Income Total Revenues Noninterest Expenses Key I/S Ratios: Efficiency Ratio Operating Leverage 2002 $50.0 50.0 $100.0 $50.0 2003E $54.0 55.0 $109.0 $52.5 % Chg 8.0% 10.0% 9.0% 5.0%
50.0% NA
48.2% 400bps
Calculations 2003E: Efficiency = Nonint. Exp. / Ttl. Rev. = 48.2% Operating Leverage = Rev.-Exp. Growth Spread = 9.0% - 5.0% = 400bps
The efficiency ratio, or overhead ratio, is one of the analyst communitys 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 15). 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. As an example of banks relatively conservative accounting, a majority of the banks we follow have decided to begin expensing stock options and conservatively adjusting pension plan return assumptions for 2003 and beyond. In fact, S&P estimates only a 7% negative impact to EPS for financial services companies from adjustments, while the adjustments for Corporate America are an average of 31%. 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.
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April 2003
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 deteration to be the result of a somewhat poor calculation of the riskiness of selected assets on the balance sheet combined with insufficient capital.
Exhibit 16
REGULATORY CAPITAL REQUIREMENTS

Ttl. Capital Well Capitalized Adequately Capitalized Undercapitalized
Source: FDIC.
Tier 1 >=6% >=4%
Leverage >=5% >=4%
>=10% >=8%
Neither Well nor Adequately Capitalized
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 17). There is significant excess capital within the banking system estimated at almost $60 billion, using a tangible common equity cutoff of 5.5%. 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.
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April 2003
Exhibit 17
EXAMPLE 6: COMPONENTS OF CAPITAL

Total Assets (TA) Risk-Weight Risk-Weighted Assets (RWA) Common Equity (CE) - Goodwill & Other Adj. (GW) Tier 1 Capital + Tier 2 Capital Total Capital Key Capital Ratios: Common Equity Tangible Common Equity Tier 1 Ratio Total Capital Leverage Ratio $1,100 64% $700 $85 25 $60 20 $80
7.73% 5.58% 8.57% 11.43% 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 riskweighted 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.
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April 2003
Exhibit 18
TOP 50 BANKS BENCHMARK AVERAGES FOURTH QUARTER 2002

Growth Loan Growth Deposit Growth Revenue Growth Non-Int Exp. Growth EPS Growth Avg. Seq. 2% 4% 4% 4% 4% Avg. 12/01 Q 4.07 55.45 1.37 15.51 0.56 0.90 7.08 7.72 Avg. Y/Y 5% 9% 10% 7% 1% Avg. 09/02 Q 4.04 55.94 1.50 16.40 0.61 0.78 7.26 7.97 Avg. 12/02 Q 3.93 56.86 1.49 16.83 0.57 0.69 7.13 7.70 BP Chg. BP Chg. Seq. Y/Y -0.11 -0.13 0.92 1.42 -0.01 0.11 0.43 1.32 -0.04 0.01 -0.09 -0.21 -0.13 0.05 -0.27 -0.01 4Q02 Results High Low 5.43 1.22 31.82 79.82 3.20 -0.20 42.75 -3.60 0.01 1.82 -0.09 2.88 3.57 12.31 11.96 5.10
Avg. Stats. (%) NIM Efficiency Ratio ROAA ROAE NPAs/Assets NCOs/Avg. Loans T. Equity/T. Assets Leverage Ratio
Source: SNL DataSource
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April 2003
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, priceto-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 1970s fed this growth.
Price-To-Earnings
In our assessment, the price-to-earnings (P/E) ratio continues 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 18).
Exhibit 19
2003 HISTORICAL CONSENSUS ESTIMATES, MARCH 2001-MARCH 2003

1-Yr. 2-Yr. Ticker Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 % Chg. % Chg. Large-Cap Banks WFC (#=) $3.90 $3.75 $3.58 $3.55 $3.64 $3.67 $3.69 $3.64 $3.64 0% -7% BAC (#=) 5.50 5.65 5.84 6.13 6.27 6.30 6.27 6.21 6.19 -1% 13% ONE (#>=) NA 3.53 3.12 3.13 3.13 3.14 3.14 3.07 3.06 -2% NA WB (#@=) 3.08 3.05 3.33 3.18 3.13 3.14 3.10 3.03 3.00 -4% -3% C (#@>) NA NA 3.70 3.76 3.75 3.73 3.42 3.30 3.25 -13% NA STT (#=) 2.80 2.76 2.72 2.53 2.56 2.52 2.47 2.36 2.00 -22% -29% NTRS (#) NA NA 2.92 2.77 2.72 2.61 2.43 2.16 1.93 -29% NA BK (#=) 2.81 2.80 2.57 2.64 2.47 2.35 2.26 1.86 1.75 -29% -38% FBF (#) NA NA 3.77 3.56 3.54 3.33 2.69 2.50 2.43 -31% NA JPM (#>) NA NA 3.44 3.62 3.41 3.41 2.64 2.44 2.16 -37% NA Small-Cap Banks CBH (#>) NA NA NA $2.02 $2.13 $2.24 $2.35 $2.37 $2.43 14% NA WTFC (#@>) NA NA NA 1.61 1.72 1.75 1.81 1.81 1.82 6% NA TCB (#>=) NA NA NA NA 3.50 3.49 3.54 3.49 3.48 -1% NA CFBX (#@>) 2.05 2.05 2.05 2.05 2.15 2.16 2.16 2.14 2.12 -1% 3% SWBT (#>) 2.02 2.00 1.95 2.05 2.00 2.00 2.08 1.94 1.93 -3% -4% GBBK (#>=) NA NA NA 2.31 2.48 2.58 2.58 2.34 1.95 -21% NA BPFH (#>) NA NA NA NA 1.29 1.29 1.27 1.18 0.99 -23% NA Brokers MWD (#=) NA NA NA $4.08 $4.06 $3.85 $3.29 $3.06 $3.13 -23% NA MER (#+=) NA NA NA NA 3.80 3.56 3.26 2.99 2.68 -29% NA S&P 500 Index SPX NA NA 62.50 59.59 56.04 57.32 54.39 52.80 51.82 -8% NA
Source: FactSet and Baseline
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April 2003
Historically, investors have begun to trade on a banks forward-year earnings sometime during June or July of the current year. However, in recent years trading on forward-year earnings has come earlier and earlier. In our judgment, this trend has been somewhat a function of the broader market having little confidence in current year earnings. Last year, the banks began trading on 2003 sometime in February/March.
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 (see Exhibit 19).
Exhibit 20
FASTEST AND MOST CONSISTENT EARNINGS GROWERS

Based on Core EPS Growth, 1990-2002
Avg. Annual Growth (%) 17.5 16.4 15.1 12.7 14.5 14.4 16.8 16.4 12.5 15.8 12.8 12.7 11.8 12.0 15.3 11.6 20.0 35.7 13.2 13.9 11.4 Avg. Chg. in Growth Rate (bps) (24.7) (57.2) (69.1) (73.8) (96.1) (104.3) 140.5 177.7 191.3 (202.8) (204.2) (210.6) 229.2 231.6 238.4 279.4 314.7 486.3 (518.9) (598.3) 3.4 2004E PEG 0.54x 0.75x 0.86x 0.81x 0.71x 0.65x 0.74x 0.84x 0.88x 0.54x 0.71x 0.69x 0.84x 0.91x 0.74x 1.12x 0.48x 0.40x 0.70x 0.73x 1.18x
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Company TCF Financial Corporation (#>=) Synovus Financial Corp. State Street Corporation (#=) Compass Bancshares, Inc. City National Corporation Zions Bancorporation M&T Bank Corporation Fifth Third Bancorp SouthTrust Corporation Banknorth Group, Inc. Union Planters Corporation Citigroup, Inc. (#@>) BB&T Corporation (#) Wells Fargo & Company (#=) National Commerce Financial Corp. Commerce Bancorp, Inc. (#>) North Fork Bancorporation, Inc. Investors Financial Services Corp. Charter One Financial, Inc. (#) Bank of New York Company, Inc. (#=) Average Top 50 Banks by Mkt. Cap.
Ticker TCB SNV STT CBSS CYN ZION MTB FITB SOTR BNK UPC C BBT WFC NCF CBH NFB IFIN CF BK
Source: U.S. Bancorp Piper Jaffray, ILX, Baseline, and SNL DataSource
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 2 to 3 times for the regional banks and 4 to 5 times for the processing banks during the 1999-2000 time frame.
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April 2003
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 20).
Exhibit 21
TOP-50 BANKS PRICE TO BOOK AND ROE

160% 160% 140% 120% 100% 80% 60% 60% 40% 40% 20% 20% 0% 0% Rel. ROE Rel. Bank P/B
Oct-02: 88%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Source: U.S. Bancorp Piper Jaffray and Baseline
Some Attractive Yield Opportunities
The spread between bank stock dividend yields and the 10-year U.S. Treasury are currently as narrow as they have been at any time over the last 13 years, reaching a recent historical low of 50 basis points versus 102 basis points in October of 2002 and 167 basis points in October of 1990 (see Exhibit 21).
2002
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April 2003
Exhibit 22
BANK STOCK DIVIDEND YIELD VERSUS 10-YEAR U.S. TREASURY

10.0 10-yr. UST 9.0 8.0 7.0 6.0 Yields in % 5.0 4.0 3.0 2.0 1.0 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Jun-90 Jun-91 Jun-92 Jun-93 Jun-94 Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Avg. Dividend Yield Top 50 Banks Current Spread 50 bps Historical Average Spread 327 bps
Source: U.S. Bancorp Piper Jaffray, Federal Reserve, and FactSet Note: As of March 14, 2003.
Over the last three years, credit spreads on large bank bonds with 10-year maturities have narrowed somewhat against the 10-year Treasury to between 60 and 122 basis points, currently from 100 and 170 basis points in December of 1999. Clearly, the implied riskiness to bank stock capital has declined significantly. 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 3.80% as of March 14, 2003 versus the 10-year Treasury at 3.70%, TCF Financial is yielding 3.40%, and Wachovia is yielding 3.10% (as of March 14, 2003) (see Exhibit 22).
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April 2003
Under a scenario in which the Presidents tax bill is passed and elimination of the double taxation of dividends is supported, we would expect several banks to raise their dividend payout ratio meaningfully. We think passage of this bill partially depends on length of war with Iraq and the resultant deficit associated with financing it. Dividend payout ratios are currently averaging 39% for the bank group, down from 44% in 2001 (see Exhibit 24). 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.
Exhibits 23 & 24
TOP-50 BANKS (BY MARKET VALUE) DIVIDEND YIELD AND 2002 DIVIDEND PAYOUT RATIOS
Ticker JPM FBF CMA KEY UPC ASO NCC PNC USB BAC RF WL ASBC MRBK VLY BK BBT CBSS NFB HIB HBAN SNV TCB FULT SOTR STI FTN CF WB BNK NCF FVB UB WFC BOH MI ONE C MEL BPOP NTRS FITB ZION CYN CBSH CBH DRL MTB STT IFIN Average: Dividend Yield (%) 6.30 6.00 5.20 5.20 5.00 4.50 4.40 4.40 4.00 3.80 3.80 3.80 3.70 3.70 3.70 3.60 3.60 3.60 3.60 3.50 3.50 3.40 3.40 3.30 3.30 3.30 3.20 3.10 3.10 3.00 2.90 2.80 2.80 2.60 2.50 2.50 2.40 2.40 2.40 2.40 2.30 2.10 2.00 1.90 1.80 1.70 1.70 1.50 1.50 0.30 3.21
Company Name J.P. Morgan Chase & Co. FleetBoston Financial Corporation Comerica Incorporated (#) Huntington Bancshares Incorporated Valley National Bancorp Bank of New York Company, Inc. AmSouth Bancorporation Union Planters Corporation Wilmington Trust Corporation Synovus Financial Corp. PNC Financial Services Group, Inc. Charter One Financial, Inc. Fulton Financial Corporation National City Corporation (#) Regions Financial Corporation BB&T Corporation U.S. Bancorp Mercantile Bankshares Corporation Associated Banc-Corp First Virginia Banks, Inc. Bank of America Corporation National Commerce Financial Corporation Compass Bancshares, Inc. SunTrust Banks, Inc. KeyCorp (#) Bank of Hawaii Corporation North Fork Bancorporation, Inc. Fifth Third Bancorp TCF Financial Corporation Wachovia Corporation SouthTrust Corporation First Tennessee National Corporation Hibernia Corporation Mellon Financial Corporation Northern Trust Corporation Wells Fargo & Company UnionBanCal Corporation (#) Bank One Corporation Popular, Inc. Commerce Bancorp, Inc. Marshall & Ilsley Corporation Banknorth Group, Inc. Citigroup, Inc. State Street Corporation Zions Bancorporation City National Corporation Commerce Bancshares, Inc. M&T Bank Corporation Doral Financial Corporation Total: Average: Ticker JPM FBF CMA HBAN VLY BK ASO UPC WL SNV PNC CF FULT NCC RF BBT USB MRBK ASBC FVB BAC NCF CBSS STI KEY BOH NFB FITB TCB WB SOTR FTN HIB MEL NTRS WFC UB ONE BPOP CBH MI BNK C STT ZION CYN CBSH MTB DRL Dividend Declared $1.36 1.40 1.92 0.64 0.89 0.76 0.89 1.33 1.01 0.59 1.92 0.83 0.59 1.20 1.16 1.13 0.78 1.18 1.21 1.09 2.44 0.64 1.00 1.72 0.90 0.73 1.01 0.98 1.15 1.00 0.68 1.05 0.57 0.49 0.68 1.10 1.09 0.84 0.80 0.62 0.63 0.58 0.70 0.48 0.80 0.78 0.62 1.05 0.42 $47.42 $0.97 Core EPS $1.14 1.50 3.25 1.09 1.60 1.39 1.66 2.53 1.99 1.19 3.94 1.73 1.23 2.55 2.57 2.52 1.74 2.71 2.79 2.55 5.70 1.53 2.41 4.23 2.26 1.84 2.55 2.56 3.03 2.70 1.85 2.95 1.61 1.43 2.04 3.37 3.46 2.67 2.61 2.04 2.20 2.05 2.58 1.97 3.53 3.57 2.85 5.07 2.63 $120.96 $2.47 Dividend Payout 119% 93% 59% 59% 55% 55% 54% 53% 51% 50% 49% 48% 48% 47% 45% 45% 45% 44% 43% 43% 43% 42% 41% 41% 40% 40% 40% 38% 38% 37% 37% 36% 35% 34% 33% 33% 32% 31% 31% 30% 28% 28% 27% 24% 23% 22% 22% 21% 16% 39% 42%
Source: FactSet, Baseline, and SNL DataSource Note: As of March 14, 2003.
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April 2003
Exhibit 25
DIVIDEND PAYOUT TOP-50 BANKS

60% 54% 51% 50% 44% 42% 40% 38% 35% 35% 39% 37% 37% 37% 38% 39%
30%
20%
10%
0% 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
Source: SNL Datasource
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April 2003
MEGA TRENDS CONSOLIDATION, CREDIT QUALITY, AND NONBANKING
In our assessment, three major trends impact investing in bank stocks include consolidation, credit quality, and exposure to nonbanking businesses. In our assessment, the expansions into nonbanking 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 organizations 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 now witnessed four years of declining M&A within the financial services space (see Exhibit 25) primarily due to lack of willing sellers at reasonable prices. The takeout multiples, namely, price-to-book and price-to-earnings, have been declining meaningfully.
Exhibit 26
BANK AND THRIFT M&A ACTIVITY

600 565 M&A Deals 500 41.2% 30.5% Number Of Deals Per Year 398 400 20.6% 305 300 216 200 -1.3% 1.1% 189 -7.5% -18.1% -21.3% -29.2% 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 YTD -27.3% -30% -40% -10% -20% 9.1% 281 260 0% 357 17.7% 10% 20% 504 480 463 457 462 M&A Growth 40% 30% Year-Over-Year Growth Rate 50%
100
Source: SNL DataSource
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April 2003
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 a rapid rise in interest rates or deteriorating credit quality. Additionally, banks must now utilize purchase method of accounting for consolidation versus a historical performance for pooling-of-interest method. First Unions 2001 combination with Wachovia was the first major deal in the new environment. Branching Versus Consolidation - For several years branch closings were viewed as potential cost-saving opportunities for 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. And 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 their branch networks by opening up new offices or on a de novo basis. In Chicago alone, Bank One plans for at least 30 new branch openings over the next two years. As deposits have become an increasingly valuable source of funding, many banks have increased their 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 nonperforming assets did not surface until shortly there after. 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 (see Exhibit 26). Real estate concentrations were cited for bank failures in the southwestern and the northeastern United States. Nonperforming assets to total assets increased to more than 2.2% in 1991 versus current weak levels of 0.75%.
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April 2003
Exhibit 27
INDUSTRY NET CHARGE-OFF RATIOS

y g in basis points 1-4 Family Commercial RE Commercial Consumer Credit Cards Other Consumer Other Total Loans and Leases FY91 23 193 152 180 444 150 57 124 FY92 18 121 144 159 297 128 2 98 FY93 29 79 83 114 252 76 42 61 FY94 13 47 32 70 178 36 53 34 FY95 8 18 13 115 247 56 28 32 FY96 7 2 20 160 363 84 31 38 FY97 7 3 29 193 477 93 19 43 FY98 7 1 35 183 450 104 21 43 FY99 10 1 44 154 406 108 27 39 FY00 12 7 56 129 521 97 19 41 FY01 17 18 114 141 603 110 65 62 9M02 16 11 119 142 521 110 74 65 Avg. 14 42 70 145 396 96 37 57
Note: Top 50 banks by market cap. Source: U.S. Bancorp Piper Jaffray and SNL DataSource (Common Regulatory Fins.)
Several of the nations 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 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 2001-02 when the government effectively defaulted, many companies went out of business, and unemployment soared. The most pronounced weakening in recent times has been due to overexposure to telecom, technology, and merchant energy business. In our assessment, recent credit losses have been 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 since 2000. We are currently focused on airlines and merchant-energy-related exposure as potential areas of weakness in 2003. 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.
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April 2003
Nonbanking Trends
Among the top 10 major U.S. banks, fee-related businesses generate 41% of total earnings at U.S. commercial banks, including processing at 13%, credit cards at 11%, investment banking at 10%, and asset management at 7% (see Exhibit 27). The traditional commercial and consumer banking businesses contribute 59% of total earnings.
Exhibit 28
LARGE-CAP BANKS 2003E EARNINGS MIX
Non-Traditional Banking 41%
Asset Mgmt 7% Processing 13%
Cards 11% Traditional Banking 59%
Retail 44%
Investment Banking 10%
Corporate 15%
Source: U.S. Bancorp Piper Jaffray
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 J.P. Morgan and Bankers Trust, which had pushed into investment banking products in the early 1990s. Several regional banks also acquired small investment bank boutiques in 1997-98, including NationsBanks acquisition of Montgomery, Bank of Americas purchase of Robertson Stephens, and U.S. Bancorps acquisition of Piper Jaffray. In addition, many foreign banks acquired U.S. investment banks including Credit Suisses purchase of DLJ Securities in the summer of 2000, UBSs acquisition of Paine Webber, while Chase Manhattan acquired J.P. Morgan in the summer of 2000 as well. Since the summer of 2000 when the global equities market began to deteriorate, several foreign banks have abandoned their U.S. capital markets efforts, while others have started massive downsizing programs. We estimate J.P. Morgan Chase has cut roughly 45% of its investment banking staff since the peak, while Merrill Lynch has reduced personnel by 30%. Nevertheless, securities industry employment remains somewhat high, down only 10% since reaching a peak in 2000. In our assessment, many investment banks chased a technology issuance bubble, where tech and telecom issuance activity during 1996-2001 was nearly four times what it was compared to the previous six years.
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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 crosssell their 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 their feebased 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 feebased 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 J.P. Morgan 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 (see Exhibit 28) with State Street, Northern Trust, and Bank of New York recently paying very high prices for acquisitions.
Exhibit 29
STATE STREET INVESTOR SERVICES COMPETITIVE WINS AND LOSSES

01/01/2001 03/31/2002 Assets Won From ($US billions) Bank of New York (#=) Citibank (#@>) Deutsche J.P. Morgan Chase (#>) Northern Trust (#) Mellon PFPC All Others Totals 67 5 86 123 5 20 161 181 648 Assets Lost To ($US billions) 56 83 3 12 4 9 0 15 182 04/01/2002 09/30/2002 Assets Won From ($US billions) 8 40 7 21 81 3 1 40 201 Assets Lost To ($US billions) 28 1 0 7 2 25 1 40 104
Source: Company report
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April 2003
Processing revenues are highly dependent upon equity market values and volumes across several markets; thus with a generally deteriorating capital markets environment, we would expect revenues to decline also. We have significantly below-consensus estimates on all the processor banks in 2003 and expect revenue growth to be 12% in 2003.
Credit Cards
In our assessment, the credit card market is becoming increasingly competitive with fewer and fewer players each year. Over the last five years there has been significant consolidation with 10 players now controlling 80% of the overall market, up from 55% in 1995 (see Exhibit 29). We think some of the monoline credit card companies could potentially be acquired, while many marginal players continue to exit the business. In times of economic stress, monolines have suffered as the markets become less willing to support increased funding costs given the potential for higher credit costs.
Exhibit 30
U.S. CREDIT CARD INDUSTRY OVERVIEW

End Of Period Outstandings ($ In Billions)
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Company Citibank (#@>) Discover MBNA (#) First Chicago First USA AT&T Household (#>) Chase (#>) Chemical Capital One (#>) Advanta Banc One (#>=) Bank America (#=) Bank of New York (#=) NationsBank First Union Wells Fargo (#=) Wachovia (#@=) Providian (#>) Chevy Chase Industry Total * 1995 44.8 27.8 25.2 17.5 17.4 14.1 12.9 12.8 10.8 10.4 10.0 9.7 9.2 8.6 7.4 5.4 4.9 4.5 4.5 4.3 $ 348.6 55% Company Citibank MBNA Bank One Chase Discover * Capital One Bank of America Providian Household Fleet Sears (#) Metris (#>=) Wells Fargo U.S. Bancorp (~+) USAA Federal First National * Target (#>=) Advanta Cross Country CompuCredit 4Q02 $ 116.6 79.5 74.0 50.7 49.4 43.2 30.7 19.6 17.0 16.2 12.4 11.3 11.3 9.7 5.4 3.4 3.3 2.6 1.9 1.9 $ 560.1 80%
Top 10 Market Share
*Note: Includes Visa, MasterCard and Discover Source: Company reports and The Nielson Report (U.S. bankcard only)
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April 2003
Mortgage Banking
Similar to credit cards, the mortgage banking business has increasingly become concentrated among a few large players (see Exhibit 30 & 31). This involves both the origination of loans and servicing of mortgage portfolios. And ideally, there is an offset between these two functions. There is a natural hedge between mortgage origination and servicing. When the economy begins to accelerate and interest rates increase, that generally translates into lower origination levels and higher servicing values.
Exhibits 31, 32
TOP 10 - RESIDENTIAL SERVICERS AND ORIGINATORS

(In $ Billions)
Rank 1 2 3 4 5 6 7 8 9 10 Servicer Washington Mutual (#>+) Wells Fargo Home Mtg. Countrywide Credit Ind. Chase Manhattan Mtg. Bank of America CFG RE GMAC Mortgage ABN Amro Mtg. National City Mortgage Cendant Mortgage CitiMortgage, Inc. TOP 10 Total 4Q02 Y/Y Chg. 4Q01 723.15 45.6% $ 496.70 570.32 16.9% 487.82 452.41 34.4% 336.63 429.02 -0.2% 429.84 264.52 -11.6% 299.09 198.64 3.5% 191.99 184.46 25.9% 146.48 123.10 38.4% 88.92 115.85 17.3% 98.80 115.40 11.5% 103.51 $ 3,176.87 6.8% $ 2,973.31 $ Rank 1 2 3 4 5 6 7 8 9 10 Originator Wells Fargo Home Mtg. Washington Mutual Countrywide Credit Ind. Chase Manhattan Mtg. ABN Amro Mtg. Bank of America Cons. RE National City Mtg. GMAC Mtg. Cendant Mortgage Homecoming/GMAC-RFC TOP 10 Total 4Q02 Y/Y Chg. 4Q01 $ 112.58 56.4% $ 71.97 108.60 97.7% 54.94 102.10 106.5% 49.44 60.86 20.8% 50.40 40.58 42.8% 28.42 31.88 39.6% 22.84 29.49 43.4% 20.57 25.14 64.9% 15.25 19.20 38.6% 13.85 17.20 48.9% 11.55 $ 547.63 54.3% $ 354.96
Source: National Mortgage News
Technology And The Evolution
Banks have traditionally spent anywhere from 10%-15% of total expenses on 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 Fargos 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.
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April 2003
HISTORY OF BANKING
Regulatory And Legislative History The Pendulum Swings Back
In our assessment, banks are once again becoming subjected to increased levels of scrutiny by regulators and legislators after experiencing several years of positive regulatory developments. More specifically, increased attention has come from state attorney general offices in New York and California, while the state of Massachusetts attempts to retroactively tax banks located in that state. On the national level, the regulators have recently created tactical rules, such as curtailing marketing programs to sub-prime credit card clients. 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 banks 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 one 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.
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April 2003
Throughout the 1970s and 1980s banks found it increasingly difficult to compete with nonbanks as regulatory barriers were lifted. Funding cost advantages narrowed and asset securitization became more typical. Banks became unsheltered from nonbank 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 nonbanks 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. In our judgment, regulator influence in recent years has been more tactical in nature. We would cite the FFIECs draconian guidance on what is considered as a sub-primeborrowing program (targeting borrowers with an FICO score below 660, which is still relatively high) placed on credit card companies. Other measures include behind-thescenes criticism of technology and telecom exposure at the major banks (leading to several third quarter preannouncements). Under a scenario of continued economic weakness, we would expect some more overt moves by legislators and regulators to ensure safety and soundness within the banking system.
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April 2003
DEFINITIONS
Basic Analysis Net Interest Margin Net Interest Margin: Net Interest Income/ Average Earning Assets Yield on Earning Assets (Total Interest & Dividend Income/Avg Earning Assets) minus Cost of Funds (Total Interest Expense/ Average Interest-Bearing Liabilities) The total of perpetual preferred stock, common stock, surplus, undivided profits and capital reserves (net), and cumulative foreign currency translation adjustments. 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 Total Equity (Perpetual Preferred Stock&Surplus+Common Stock&Surplus+Retained Earnings+Gain<Loss>AFS Securities+Cumulative Foreign Currency Translation)/ Total Assets Total Equity-Intangible Assets (excluding Mtg Serv Rights)/ Total Assets-Intangible Assets (excluding Mtg Serv Rights) Total Risk-Based Capital Ratio: Total Capital (Tier 1 Core Capital + Tier 2 Supplemental Capital)/ RiskAdjusted Assets Tier 1 Risk Ratio: Core Capital (Tier 1)/ RiskAdjusted Assets Leverage Ratio: Core Capital (Tier 1)/ Adjusted Tangible Assets
Yield/ Cost Spread
Total Equity Capital
Tier 1 Capital
Equity/ Assets
Tangible Equity/ Tangible Assets
Risk-Based Capital Ratio
Tier 1 Risk-Based Ratio
Leverage Ratio
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April 2003
Yield on Loans
Total Interest Income on Loans (Excludes Lease Income)/ Average Consolidated Loans (Domestic and Foreign Office) Total Interest & Dividend Income on Securities/ Average Total Securities (Debt & Equity) Total Interest & Dividend Income/ Average Earning Assets (Bal Due+Securities+Fed Funds & Repos+Loans+Trade Assets) Total Interest Expense on Deposits (Domestic & Foreign Office)/ Average Interest-Bearing Deposits (Domestic & Foreign Office)
Yield on Total Securities (Debt+Eq) Yield on Earning Assets
Cost of Interest-Bearing Deposits
Cost of Borrowings (Non Deposits) Total Interest Expense on Borrowings/ Average Borrowings (Avg Interest-bearing 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)
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 of interest expenses. Includes interest expense on deposits; interest expense on 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. Total interest income less total interest expense.
Total Interest Expense
Net Interest Income
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April 2003
Total Provision Expense
The amount needed to make the allowance for loan and lease losses adequate to absorb 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. The total of income from fiduciary activities; service charges on deposit accounts in 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 noninterest income. The net gain or loss realized during the calendar yearto-date from the sale, exchange, 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. The total of salaries, employee benefits, and expenses of premises and fixed assets and other noninterest expense. The bank's pretax operating income: Net interest income less provisions for loan and lease losses and provision for allocated transfer risk and total noninterest income plus or minus gains (losses) on securities not held in trading accounts less total noninterest expense. 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.
Total Noninterest Income
Total Realized Gs(Ls)-Securities
Total Noninterest Expense
Income Before Income Tax & Extra Items
Income Taxes
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April 2003
Income Before Extraordinary Items
Income (loss) before Income taxes and extraordinary items and other adjustments less applicable income taxes to such income (loss). Extraordinary items and other adjustments, gross of income taxes less applicable income taxes on extraordinary items and other adjustments. The sum of income (loss) before extraordinary items and other adjustments and extraordinary items; and other adjustments, net of income taxes. Total Equity Capital/ Average Total Assets 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. The amount of the bank's total risk-based capital. The amount reported in this item is the numerator of the banks total risk-based capital ratio. Total riskbased 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. 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. Leverage Ratio: Core Capital (Tier 1)/ Adjusted Tangible Assets Tier 1 Risk Ratio: Core Capital (Tier 1)/ RiskAdjusted Assets Total Risk-Based Capital Ratio: Total Capital (Tier 1 Core Capital + Tier 2 Supplemental Capital)/ RiskAdjusted Assets Tangible Common Equity/ Tangible Assets
Extraordinary Items, Net Tax
Net Income (Loss)
Capital Analysis Tier 1 Capital
Tier 2 Capital
Total Capital
Risk Weighted Assets
Leverage Ratio
Tier 1 Risk-Based Ratio
Risk-Based Capital Ratio
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April 2003
Balance Sheet Cash & Balances Due The total of all noninterest-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. The gross dollar amounts outstanding of Federal funds sold and securities purchased under agreements to resell. Total balances due from depository institutions; plus Fed funds sold and securities purchased under agreements to resell. All available-for-sale (AFS) and held-to-maturity (HTM) U.S. Treasury Securities not 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 "inflationindexed." All held-to-maturity (at amortized cost) and available-for-sale (at fair value) holdings 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. Total securities minus U.S. Treasury Securities and Mortgage-backed 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, mortgagebacked securities, other domestic and foreign debt securities, and all equity securities.
Fed Funds Sold & Repos
Cash & Equivalents
U.S. Treasury Securities
Mortgage-Backed Securities
Other Investment Securities
Total Securities
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April 2003
Total Cash & Securities
Total balances due from depository institutions; plus securities; plus Fed funds sold and securities purchased under agreements to resell. Total loans and leases plus unearned income on loans. Unearned income on consolidated loans. 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. The total of the loan loss reserve and the transfer risk reserve. Loans and leases, net of unearned income, less: the allowance for loan and lease losses and less: the allocated transfer risk reserve. 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 shortterm price movements, or (c) acquire or take positions in such items as an accommodation to customers or for other trading purposes. The book value, less accumulated depreciation or amortization, of all premises, 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
Gross Loans & Leases
Unearned Income Total Loans & Leases
Total Reserves
Net Loans & Leases
Trade Account Assets
Premises & Fixed Assets
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April 2003
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 nonmajority-owned corporations whose principal activity is the ownership of land, buildings, equipment, furniture, etc., occupied or used by the bank. OREO (Including Real Estate Held for Investment) The book value, less accumulated depreciation, if any, of all real estate other than bank premises owned or controlled by the bank and its consolidated subsidiaries. Mortgages 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. The total amount of the institution's investments in all subsidiaries that have not been 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. The carrying value of mortgage servicing rights, i.e., the unamortized cost of acquiring the rights to provide servicing for mortgage loans that have been securitized or are owned by another party, net of any related valuation allowances. The amount (book value) of unamortized goodwill. This asset represents the excess of 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.
Investments in Subsidiaries
Mortgage Servicing Rights
Goodwill & Other Intangible
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April 2003
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. The total of cash and balances due from depository institutions; interest and noninterest-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. 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. The dollar amount outstanding of 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. The total amount outstanding of commercial paper issued by the reporting bank holding company or its subsidiaries.
Total Assets
Total Deposits
Fed Funds Purchase & Repos
Commercial Paper
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April 2003
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. 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. Commercial Paper + Advances from FHLB + All Other Borrowings 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. The amount of outstanding subordinated notes and debentures (including mandatory convertible debt). The total of all other liabilities, not elsewhere classified. Includes interest accrued and unpaid on deposits in domestic offices; other expenses accrued
Other Borrowings
Total Other Borrowings
Trading Liabilities
Subordinated Debt & Mandatory Convertible Security Other Liabilities
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April 2003
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 noninterest-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.
Source: SNL DataSource.
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April 2003
INDEX
PAGE NUMBERS
Asset-Liability ............................................................................................................ 10 Asset Management Fees ............................................................................................. 16 Call Report ................................................................................................................ 11 Charge-Off ................................................................................................................ 12 Commercial Loans ..................................................................................................... 13 Consumer Loans ........................................................................................................ 13 Costs ....................................................................................................................... 9 Delinquencies ............................................................................................................. 12 Delinquency ............................................................................................................... 12 Direction of Interest Rates ............................................................................................ 5 Dividend Payout Ratio ............................................................................................... 25 Economic and Interest Rate Cycle ................................................................................. 8 Efficiency Ratio ......................................................................................................... 17 Fed Funds .................................................................................................................... 5 Fixed Income ............................................................................................................. 13 FRY-9C ..................................................................................................................... 11 High Yield Credit Spread ............................................................................................. 6 Housing Values .......................................................................................................... 15 Insurance Agency ....................................................................................................... 16 Interest Expense ......................................................................................................... 16 Interest Income ............................................................................................................ 9 Interest Rate Risk ....................................................................................................... 10 Investment Securities .................................................................................................... 8 Leverage Ratio ........................................................................................................... 19 Loan Aggregate Trends ................................................................................................ 6 Loan And Asset Growth ............................................................................................... 8 Loan Loss Reserves .................................................................................................... 12 Master Trust ................................................................................................................ 7 Money Flows ............................................................................................................... 8 Net Charge-Off Ratio ................................................................................................ 13 Net Interest Income ...................................................................................................... 9 Net Interest Margin ................................................................................................... 10 Nonaccrual Status ...................................................................................................... 11 Noninterest Expense .................................................................................................. 16 Nonperforming Assets ................................................................................................ 12 P/E to Secular Growth ................................................................................................ 22 Personal Income ......................................................................................................... 15 Price-to-Book ............................................................................................................. 22 Price-to-Earnings Ratio .............................................................................................. 21 Provisions .................................................................................................................. 12 Purchasing Managers Index .......................................................................................... 7 Risk-Based Capital ..................................................................................................... 18 Risk-Weighted Assets ................................................................................................. 19 SEC ..................................................................................................................... 11 Securitization Market ................................................................................................. 13 Securities Gains .......................................................................................................... 16 Service Charges On Deposits ...................................................................................... 15 Shared National Credits (SNC) .................................................................................. 13 Small and Middle Market .......................................................................................... 13
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INDEX
PAGE NUMBERS
Spread Income ............................................................................................................. 9 Sub-Prime .................................................................................................................. 15 The Reserve Ratio ...................................................................................................... 12 The Watch List .......................................................................................................... 12 Tier 1 Capital ............................................................................................................ 19 Total Revenue ............................................................................................................ 15 Trading Fees .............................................................................................................. 16 Unemployment ...................................................................................................... 7, 15 Unused Credit Lines ................................................................................................... 13 Watch List ................................................................................................................. 12 Yield ....................................................................................................................... 9 Yield Curve ................................................................................................................. 9
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RATING DEFINITIONS
Investment opinions are based on each stocks return potential relative to the overall market*, not on an absolute return. Strong Buy: Expected to outperform the relevant broader market index over the next 6 to 12 months. An identifiable catalyst is present to drive appreciation. Outperform: Expected to outperform the relevant broader market index over the next 12 to 18 months. Market Perform: Expected to perform in line with the relevant broader market index over the next 6 to 12 months. Underperform: Expected to underperform the relevant broader market index over the next 6 to 12 months.
Investment Opinion:
* Broader market indices = Russell 2000 and S&P 500 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.
Volatility Rating:
(#) U.S. Bancorp Piper Jaffray (USBPJ) was making a market in the Companys securities at the time this research report was published. USBPJ may buy and sell the Companys securities on a principal basis. (^) A USBPJ analyst who follows this Company or a member of the analysts household has a financial interest (a long equity position) in the Companys securities. (@) Within the past 12 months, USBPJ was a managing underwriter of an offering of, or dealer manager of a tender offer for, the Companys securities or the securities of an affiliate. (>) USBPJ has either received compensation for investment banking services from the Company within the past 12 months or expects to receive or intends to seek compensation within the next three months for investment banking services. (~) A USBPJ analyst who follows this Company, a member of the analysts household, a USBPJ officer, director, or other USBPJ employee is a director and/or officer of the Company. (+) USBPJ and its affiliates, in aggregate, beneficially own 1% or more of a class of common equity securities of the subject Company. (=) One or more affiliates of U.S. Bancorp, the ultimate parent company of USBPJ, provided commercial banking services (including, without limitation, loans) to the Company at the time this research report was published.
The following disclosures apply to stocks mentioned in this report if and as indicated:
Nondeposit investment products are not insured by the FDIC, are not deposits or other obligations of or guaranteed by U.S. Bank National Association or its affiliates, and involve investment risks, including possible loss of the principal amount invested. USBPJ research analysts receive compensation that is, in part, based on revenues of USBPJ Equity Capital Markets which include investment banking revenues. USBPJ research analysts who follow this Company report to the Head of Equity Research who, in turn, reports only to the Head of Equity Capital Markets. This material is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This information is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it should not be construed as advice designed to meet the particular investment needs of any investor. It is not a representation by us or an offer or the solicitation of an offer to sell or buy any security. Further, a security described in this release may not be eligible for solicitation in the states in which the client resides. U.S. Bancorp and its affiliated companies, and their respective officers or employees, or members of their families, may have a beneficial interest in the Companys securities and may purchase or sell such positions in the open market or otherwise. This report is a communication made in the United Kingdom by U.S. Bancorp Piper Jaffray to market counterparties or intermediate customers and is exclusively directed at such persons; it is not directed at private customers and any investment or services to which the communication may relate will not be available to private customers. In the United Kingdom, no persons other than a market counterparty or an intermediate customer should read or rely on any of the information in this communication. Securities products and services offered through U.S. Bancorp Piper Jaffray, member SIPC and NYSE, Inc., a subsidiary of U.S. Bancorp.
Gotoanalysts.com
2003 U.S. Bancorp Piper Jaffray, 800 Nicollet Mall, Suite 800, Minneapolis, Minnesota 55402-7020 Additional information is available upon request.
48
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NOTES
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NOTES
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NOTES
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Equity Capital Markets Equity Research

MINNEAPOLIS 800 Nicollet Mall Suite 800 Minneapolis, MN 55402 612-303-6000 800-333-6000 SAN FRANCISCO 353 Sacramento Street Suite 1600 San Francisco, CA 94111 415-277-1500 800-214-0540 NEW YORK The Chrysler Center 58th Floor 405 Lexington Ave. New York, NY 10174 212-284-9300 800-982-0419 LONDON First Floor, Phoenix House 18 King William Street London EC4N 7US England 011-44-20-7743-8700 Regulated by the FSA CHICAGO 233 South Wacker Drive Suite 3620 Chicago, IL 60606 312-755-3200 800-973-1192 MENLO PARK 275 Middlefield Road Suite A-100 Menlo Park, CA 94025 650-838-1300 800-981-1203
Web Site: http://www.gotoanalysts.com | http://www.piperjaffray.com Institutional/Corporate Clients: http://clientaccess.pjc.com Individual Investors: https://online.piperjaffray.com Securities products and services are offered through U.S. Bancorp Piper Jaffray Inc., member SIPC and NYSE, Inc., and a subsidiary of U.S. Bancorp.
(c)2003 U.S. Bancorp Piper Jaffray Inc., 800 Nicollet Mall, Suite 800, Minneapolis, Minnesota 55402-7020 03-0091
Equity Capital Markets Equity Research
MINNEAPOLIS SAN FRANCISCO NEW YORK LONDON CHICAGO MENLO PARK
Web Site: http://www.gotoanalysts.com | http://www.piperjaffray.com Institutional/Corporate Clients: http://clientaccess.pjc.com Individual Investors: https://online.piperjaffray.com Securities products and services are offered through U.S. Bancorp Piper Jaffray Inc., member SIPC and NYSE, Inc., and a subsidiary of U.S. Bancorp.
04/03-0091 GLS

Banking Primer 1

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Banking Primer 1

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LARGE COMMERCIAL BANKS

LARGE COMMERCIAL BANKS

THE 60 SECOND BANK STOCK PRIMER

| Large Commercial Banks U.S. Bancorp Piper Jaffray Equity Research

TABLE OF CONTENTS CONTINUED

U.S. Bancorp Piper Jaffray Equity Research Large Commercial Banks

THE PRIMER PYRAMID

Net Interest Margin

Source: U.S. Bancorp Piper Jaffray

| Large Commercial Banks U.S. Bancorp Piper Jaffray Equity Research

Economics And Bond Market Indicators

HIGH YIELD SPREAD VERSUS BANK STOCK INDEX

Jan-3 Fed 2001 rate cut campaign begins

Dec-2 Enron files Ch.11

Sep-11 WTC Attack Avg. Spread 616 bps

| Large Commercial Banks U.S. Bancorp Piper Jaffray Equity Research

Equities Fund Flows - Weekly Change 4 Week Moving Average (Billions)

$20 $10 $0 ($10)

$2 $0 ($2) ($4) ($6)

U.S. Bancorp Piper Jaffray Equity Research Large Commercial Banks

Dials And Needles What Is Really Important When Modeling

EXAMPLE 1: BALANCE SHEET

| Large Commercial Banks U.S. Bancorp Piper Jaffray Equity Research

EXAMPLE 2: AVERAGE BALANCE SHEET

Securities Loans Earning Assets Other Assets Total Assets

Deposits Borrowings Bearing Liabilities Equity Total Liab. & Eq.

$15.1 - $7.5 = $7.6 $7.6 / $230 = 3.30% 6.57% - 3.33% = 3.23%

U.S. Bancorp Piper Jaffray Equity Research Large Commercial Banks

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

Monthly Historical Data

Source: Federal Reserve and ILX Note: As of March 12, 2003.

| Large Commercial Banks U.S. Bancorp Piper Jaffray Equity Research

$14.0 35.7% 50.0%

Loans And Credit Quality

U.S. Bancorp Piper Jaffray Equity Research Large Commercial Banks

EXAMPLE 4: CREDIT QUALITY

| Large Commercial Banks U.S. Bancorp Piper Jaffray Equity Research

U.S. Bancorp Piper Jaffray Equity Research Large Commercial Banks

40% Total Home Equity Y/Y Growth Rate 38% 35%

Growth Rate (%)

18% 16% 20% 20%

Revolving Consumer Credit Outstanding Monthly Data, 1990 To Date

15% $400 10%

Source: Federal Reserve.

| Large Commercial Banks U.S. Bancorp Piper Jaffray Equity Research

SAN FRANCISCO BAY AREA UNEMPLOYMENT RATE

San San Mateo Francisco

| Large Commercial Banks U.S. Bancorp Piper Jaffray Equity Research

EXAMPLE 5: NON-INTEREST EXPENSES

U.S. Bancorp Piper Jaffray Equity Research Large Commercial Banks

REGULATORY CAPITAL REQUIREMENTS

Tier 1 >=6% >=4%

Leverage >=5% >=4%

Neither Well nor Adequately Capitalized

| Large Commercial Banks U.S. Bancorp Piper Jaffray Equity Research

EXAMPLE 6: COMPONENTS OF CAPITAL

7.73% 5.58% 8.57% 11.43% 5.58%

U.S. Bancorp Piper Jaffray Equity Research Large Commercial Banks

TOP 50 BANKS BENCHMARK AVERAGES FOURTH QUARTER 2002

| Large Commercial Banks U.S. Bancorp Piper Jaffray Equity Research

2003 HISTORICAL CONSENSUS ESTIMATES, MARCH 2001-MARCH 2003

U.S. Bancorp Piper Jaffray Equity Research Large Commercial Banks

FASTEST AND MOST CONSISTENT EARNINGS GROWERS