Bank Primer

C O M M E RC I A L BA N K S

J U N E 2 0 0 6

I N V E S T M E N T R E S E A R C H

Andrew B. CollinsSenior Research Analyst212 [email protected]

Steven M. TruongResearch Analyst212 284-9307 [email protected]

Peter A. FroehlichResearch Analyst212 [email protected] [email protected]

A S H O R T B A N K S T O C K P R I M E R

Piper Jaffray & Co. does and seeks to dobusiness with companies covered in itsresearch reports. As a result, investors

should be aware that the firm may have aconflict of interest that could affect the

objectivity of this report. Investors shouldconsider this report as only a single factor in

making their investment decisions. Thisreport should be read in conjunction with

important disclosure information, includingan attestation under Regulation Analyst

Certification found on pages 52-54 of thisreport or at the following site:

http://www.piperjaffray.com/researchdisclosures.

Customers of Piper Jaffray in the UnitedStates can receive independent, third-party

research on the company or companiescovered in this report, at no cost to them,

where such research is available.Customers can access this independent

research by visiting piperjaffray.com or cancall 800 747-5128 to request a copy of this

research.

Piper Jaffray & Co. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decisions. This report should be read in conjunction with important disclosure information, including an attestation under Regulation Analyst Certification found on pages 52-54 of this report or at the following site: http://www.piperjaffray.com/researchdisclosures. Customers of Piper Jaffray in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research by visiting piperjaffray.com or can call 800 747-5128 to request a copy of this research.

Andrew B. Collins Senior Research Analyst 212 284-9310 [email protected] Steven M. Truong Research Analyst 212 284-9307 [email protected] Peter A. Froehlich Research Analyst 212 284-9405 [email protected] New York

C O M M E R C I A L B A N K S A Short Bank Stock Primer

• The Basics Of Banking Remain Unchanged—Over the past 12 months we have

witnessed significant pressure on the financial services sector, primarily reflecting deterioration in spreads following the sustained Fed rate campaign, which has involved 16 rate hikes in two years. We can now revisit the basics of bank stock investing within the context of a completely new economic environment as we near the end of the Fed rate hike cycle.

• The Economy Is 80% Of The Call On Bank Stocks— We must make certain

assumptions regarding the U.S. economy to consider investing in bank stocks, including that the U.S. consumer will remain somewhat healthy, while corporate profits slow only modestly after three years of good growth. Key economic drivers of bank stock price performance are explored.

• Credit Quality Can Cut Hard Both Ways—Unquestionably, the biggest swing factor

in bank stock earnings remains credit quality. We do not anticipate the U.S. economy falling into recession over the 2006-2007 time frame; however, under such a scenario we might witness increased corporate bankruptcies, as well as a weakening consumer and poor relative bank stock price performance. We have provided the key “dials and needles” in bank stock financial statement analysis.

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

consolidation has been one of the biggest trends in commercial banking for the last 15 years and may resurface as a support for stock valuations under a scenario of increased earnings stress. Another mega trend that dominated the mid-1990s that has more recently reversed itself somewhat is the single-minded focus on fee-based revenues.

• Risks—Risks to achievement of our 12-month price targets include, but are not

limited to, deterioration in the broader market; significant weakness in the U.S./global economy; or specific unforeseen fundamental company-related events that may result in failure to achieve our EPS estimates.

E Q U I T Y R E S E A R C H June 2006

June 2006

2 | Commercial Banks: A Short Bank Stock Primer Piper Jaffray Investment Research

TABLE OF CONTENTS

Viewpoint .................................................................................................................. 4 Economics And Bond Market Indicators .............................................................. 5 Dials And Needles—What Is Really Important When Modeling..........................13 Loans And Credit Quality...................................................................................16 Revenue Components .........................................................................................20 Noninterest Expenses .........................................................................................21 Capital ...............................................................................................................22

Valuation Methods ...................................................................................................25 Price-To-Earnings...............................................................................................25 PEG Ratio ..........................................................................................................27 Price-To-Book ....................................................................................................27 Some Attractive Yield Opportunities...................................................................28

Mega Trends—Consolidation, Credit Quality, And Non-Banking .............................32 Consolidation.....................................................................................................32 Branching Versus Consolidation .........................................................................33 Credit Quality ....................................................................................................34 Non-Banking Trends ..........................................................................................36 Investment Banking ............................................................................................36 Asset Management .............................................................................................37 Processing...........................................................................................................37 Credit Cards.......................................................................................................37 Mortgage Banking ..............................................................................................38 Technology And The Evolution ..........................................................................41

History of Banking....................................................................................................42 Regulatory And Legislative History—The Pendulum Swings Back ......................42

Definitions ................................................................................................................44 Important Research Disclosures.................................................................................52

June 2006

Piper Jaffray Investment Research Commercial Banks: A Short Bank Stock Primer | 3

Exhibits

1. The Primer Pyramid ............................................................................................ 4 2. Fed Funds Target Rate And Fed Funds Futures .................................................... 6 3. MBA Composite Index (Weekly) Versus 10-Year U.S. Treasury Yield (%) ........... 7 4. 10-Year Versus Three-Month U.S. Treasury Yield And Spread............................. 8 5. High Yield Spread Versus Bank Stock Index......................................................... 9 6. ISM Purchasing Managers Index.........................................................................10 7. Money Fund Flows.............................................................................................11 8. Deposits Growth Percentage Year-Over-Year Change Versus Dollar Amount .....12 9. Example Bank–Net Interest Income And Margin ................................................13 10. Example Bank–Average Balance Sheet ................................................................14 11. Three-month T-Bill Versus 10-year U.S. Treasury Historical Spread Monthly

Historical Data...................................................................................................15 12. Example Bank–Income Statement .......................................................................16 13. Example Bank–Credit Quality ............................................................................17 14. Reserve Ratio, All Banks.....................................................................................18 15. Total Home Equity Outstanding With Growth Rates..........................................19 16. Total Revolving Credit Outstandings Versus Growth Rate .................................20 17. Noninterest Expense...........................................................................................21 18. Regulatory Capital Requirements .......................................................................22 19. Components of Capital.......................................................................................23 20. Top 50 Banks Benchmark Averages, 1Q06 ..........................................................24 21. Historical 2006 Consensus Estimates...................................................................26 22. Fastest and Most Consistent Earnings Growers...................................................27 23. Top 50 Banks Relative ROE ...............................................................................28 24. Bank Stock Dividend Yield Versus 10-Year U.S. Treasury Yield (%) ...................29 25. Dividend Payout Ratio and Dividend Yield .........................................................30 26. Dividend Payout Ratio........................................................................................31 27. Bank M&A Deals...............................................................................................32 28. Branch Count and Growth..................................................................................34 29. Industry Net Charge-Off Ratios..........................................................................35 30. Large-Cap Banks 2007E Earnings Mix ................................................................36 31. Average Managed Balances – Full Year...............................................................38 32. Mortgage Originations .......................................................................................39 33. Top 10 Mortgage Originators .............................................................................40 34. Top 10 Mortgage Servicers .................................................................................40 35. Collins Industry and Company Reports ..............................................................51

June 2006


VIEWPOINT

In our judgment, investing in bank stocks is highly dependent upon a healthy understanding of U.S. economics, bank accounting, and key industry trends. Bank stock investing can entail sorting through large databases of historical and valuation benchmarks. We have attempted to simplify these investment factors into a short primer on bank stock investing (see Exhibit 1). The Economy------We think U.S. economic growth determines 80% of the success in bank stock investing. Among key economic indicators we pay particularly close attention to are the following: personal unemployment, purchasing managers index, bankruptcies, loan growth, demand levels, and inflation. Using these statistics, our current macro view on the U.S. economy includes: limited interest rate movements over the next 12 months, low single-digit GDP growth, and a continued healthy consumer, despite potential for a modest uptick in unemployment. We view this as a solid environment in which to invest in bank stocks. Fundamentals And Accounting------From a fundamental standpoint, we monitor credit quality statistics closer than any other category of fundamental analysis, given a historical tendency for credit to generate enormous swings in bank earnings. We also constantly monitor interest rates and loan growth as a basic function of banking profitability. In our assessment, credit quality in 2006-2007 may remain stable, following three years of continued improvement, while basic banking trends may suffer from deteriorating optics, reflecting the significant recent increase in short-term interest rates, limited steepening in the yield curve, and heightened competition.

Exhibit 1

THE PRIMER PYRAMID

History Regulation Legislation

Mega-Trends Consolidation Credit Quality Nonbanking

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

Fundamentals Credit Quality Investments Loans

Economy GDP Growth Interest Rates Unemployment Bankruptcies Purchasing Mgrs. Loan Aggregates

Net Interest Margin Fee Revenues

Source: Piper Jaffray

June 2006


Valuations—We view bank stock valuations primarily within the context of the broader market, focusing on relative price-to-earnings (P/E), price-to-book (P/B), and return on equity (ROE) throughout a full cycle. Although P/E and P/B ratios appear to be at the high end of relative historical ranges at 75%, ROEs are higher than normal, and a lot depends on earnings expectations for the broader market. Earnings momentum in several sectors seems to be deteriorating, while bank earnings are stabilizing to improving. Traditional bank stocks—or spread banks—tend to trade as a group based on interest rate developments, whereas the conglomerates are generally more sensitive to equity market fluctuations. Mega Trends------Consolidation, credit quality, and fee-income business developments have been the biggest fundamental trends to impact commercial banking over the last 20 years. Although industry consolidation all but ground to a halt in 2005, we would expect some catalyst to lead to an acceleration in activity within the next two years. Further, while the push into non-banking businesses has also slowed—due primarily to significant deterioration in market-sensitive revenues in the early part of this decade—we think banks will once again focus on fee-based businesses during 2006-2007. Diversity of earnings and capital has proven extremely useful during times of stress, while many larger banks attempt to cross-sell products through healthy distribution networks. History And Regulation------On a historical basis, we think regulatory and legislative oversight of the financial services space is currently in an expansionary phase, as exemplified by recent initiatives to curtail the sub-prime consumer and mortgage markets, and increased scrutiny of commercial real estate lending habits. Most of these moves have not severely impacted banking profitability, unlike some historical negative regulatory efforts. We monitor seven or eight key economic/bond market data points when following bank stocks, including the Treasury market rates (three-month and 10-year maturities), high-yield credit spreads, loan market aggregates, unemployment, purchasing managers index, consumer price index, and GDP growth. In our assessment, the state of the U.S. economy is probably 80% of the call on traditional bank stock price performance. Under a scenario of 3.5% GDP growth or more, investors often become concerned with higher interest rates and seek out faster-growing areas within the investor spectrum (e.g., technology), often ignoring financials in the process. If GDP growth drops below roughly 1.0%, investors should be concerned with slowing loan growth and potential for weakening credit quality. So far, the consumer—who makes up two-thirds of the U.S. economy—has held up remarkably well, while large corporate America has made steady progress since the slowdown earlier this decade. In our view, somewhere between 1.5% and 3.0% GDP growth is optimal for bank stock investing on a relative basis. The absolute direction of interest rates signals the level of demand for funds within the various markets. The Federal Reserve has a direct impact on the shorter end of the yield curve through the fed funds rate, which can be adjusted at each of the FOMC meetings, whereas longer-term rates are primarily a function of the markets. We think the Federal Reserve’s significant campaign to raise the fed funds rate by 400 basis points since mid-2004 to its current level of 5.00% (see Exhibit 2) has had little impact on the corporate side to decelerate corporate demand and capital spending, primarily due to significant international growth and demand.

Economics And Bond Market Indicators

June 2006


Also, higher short-term rates have had minimal impact on pushing up long-term rates such as the 10-year Treasury, which has increased by only 34 basis points over the past 24 months to a current yield of 5.00% as of May 24, partially due to foreign central bank buying, as well as relatively lower government bond yields in most foreign countries. Despite these somewhat stable long-term interest rates, we have witnessed a mild slowdown in mortgage-related activity during the past two to three years and a meaningful drop from the refinance-driven boom during the 2001-2003 time frame (see Exhibit 3).

Exhibit 2

FED FUNDS TARGET RATE AND FED FUNDS FUTURES May 2004 - December 2006

1.00

% 1.25

%

1.25

% 1.50

% 1.75

%

1.75

% 2.00

% 2.25

%

2.25

% 2.50

% 2.75

%

2.75

% 3.00

% 3.25

%

3.25

% 3.50

% 3.75

%

3.75

% 4.00

% 4.25

% 4.50

%

4.50

% 4.75

% 5.00

%

5.04

%

5.20

%

5.28

%

5.30

%

5.32

%

5.32

%

5.30

%

4.75

%

May

-04

Jun-

04

Jul-0

4

Aug

-04

Sep-

04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb-

05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb-

06

Mar

-06

Apr

-06

May

-06

Jun-

06

Jul-0

6

Aug

-06

Sep-

06

Oct

-06

Nov

-06

Dec

-06

Source: Source: Piper Jaffray, Federal Reserve and Chicago Board of Trade. Note: Priced as of 6/8/06

June 2006


Further, interest rates have a significant impact on net interest revenues at U.S. commercial banks. A steep yield curve (i.e., a big difference between short-term and long-term interest rates) is usually very favorable for bank stock net interest income—and thus earnings—as banks tend to lend longer term and borrow shorter term. The yield curve has flattened steadily during the mid-2004 to present time frame to a 10-year to three-month spread of 27 basis points from 368 basis points (see Exhibit 4). Nevertheless, net interest margins have held up surprisingly well, compressing by only three basis points among the top 100 banks over the last 24 months.

Exhibit 3

MBA COMPOSITE INDEX (WEEKLY) VERSUS 10-YEAR U.S. TREASURY YIELD (%)

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000O

ct-0

0

Jan-

01

Apr

-01

Jul-0

1

Sep

-01

Dec

-01

Mar

-02

Jun-

02

Aug

-02

Nov

-02

Feb-

03

May

-03

Jul-0

3

Oct

-03

Jan-

04

Apr

-04

Jun-

04

Sep

-04

Dec

-04

Mar

-05

Jun-

05

Aug

-05

Nov

-05

Feb-

06

Apr

-06

MBA

Com

posi

te In

dex

0.03

0.035

0.04

0.045

0.05

0.055

0.06

10-Year U.S. Treasury Yield

MBA Composite Index10-Year U.S. Treasury Yield

Source: Federal Reserve and Mortgage Bankers Association

June 2006


High yield credit spreads tracked against the 10-year Treasury can often signal increased credit concerns in the marketplace and thus potential systemic disruptions. Prior to Enron declaring bankruptcy during the fall of 2001, and then again leading up to the shared national credit results in October 2002, credit spreads widened dramatically. In sum, these measures track credit fears as well as reality (see Exhibit 5).

Exhibit 4

10-YEAR VERSUS THREE-MONTH U.S. TREASURY YIELD AND SPREAD (May 2004-May 2006)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

May-04

Jun-0

4Ju

l-04

Aug-04

Sep-04

Oct-04

Nov-04

Dec-04

Jan-0

5

Feb-05

Mar-05

Apr-05

May-05

Jun-0

5Ju

l-05

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-0

6

Feb-06

Mar-06

Apr-06

10-y

r an

d 3-

mo

UST

Yiel

ds (%

)

0

50

100

150

200

250

300

350

400

Spread (bps)

10yr. UST Yield, May 2006=4.99%3mo. UST Yield, May 2006=4.72%Spread(bps), May 2006=27 bps

Source: Federal Reserve, Piper Jaffray

June 2006


We generally view consumer and corporate loan aggregate trends as early indicators of economic growth. Although corporate loan expansion remains robust, consumer loan growth has been somewhat sluggish over the last three years. In contrast, mortgage trends were extremely strong through year-end 2004 and have since declined. We are also closely tracking unemployment trends, which have a significant bearing on the levels of unsecured consumer net charge-offs. With the unemployment rates trending up, we would expect to witness an increase in credit card delinquencies and potentially net charge-offs. Nevertheless, recent credit card master trust trends (which are reported on a monthly basis) appear to have been somewhat benign with limited increases in bankruptcies and net charge-offs following the adoption of more restrictive personal bankruptcy laws in the fourth quarter of 2005.

Exhibit 5

HIGH YIELD SPREAD VERSUS BANK STOCK INDEX (Sept. 1992 - To Date)

100bps

200bps

300bps

400bps

500bps

600bps

700bps

800bps

900bps

Sep

-92

Mar

-93

Sep

-93

Mar

-94

Sep

-94

Mar

-95

Sep

-95

Mar

-96

Sep

-96

Mar

-97

Sep

-97

Mar

-98

Sep

-98

Mar

-99

Sep

-99

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Hig

h Y

ield

Spr

ead

10

20

30

40

50

60

70

80

90

100

110

Bank

Sto

ck In

dex

High Yield SpreadBank Stock Index

10-Mar-00NASDAQ reaches

record high

11-Sep-01WTC Attack

23-Sep-98LTCM Bailout

Oct-8-02SNC Results

3-Jan-01Fed 2001 rate cut campaign begins

30-Jun-04Fed 2004 rate hike campaign begins

Source: Piper Jaffray, ILX and Bloomberg

June 2006


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

Money flows include the levels of deposits, equities, and money markets on an aggregate basis, and willingness of investors to invest in each of these categories (see Exhibit 7). Many of our analyst peers wrongly anticipated that with any improvement in the equities markets we might witness a material outflow of bank deposits.

Exhibit 6

ISM PURCHASING MANAGERS INDEX (Jan 2000-May 2006)

35

40

45

50

55

60

65

Jan-0

0

May-00

Sep-00

Jan-0

1

May-01

Sep-01

Jan-0

2

May-02

Sep-02

Jan-0

3

May-03

Sep-03

Jan-0

4

May-04

Sep-04

Jan-0

5

May-05

Sep-05

Jan-0

6

Source: ISM

June 2006


Exhibit 7

MONEY FUND FLOWS Equity Fund Flows -

(4 Wk Moving Avg)

-3.00-2.00-1.000.001.002.003.004.005.006.00

Nov

-03

Dec

-03

Jan-

04

Feb-

04

Mar

-04

Apr

-04

May

-04

Jun-

04

Jul-0

4

Aug-

04

Sep-

04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb-

05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug-

05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Dec

-05

Jan-

06

Mar

-06

Mar

-06

Apr

-06

May

-06

Bill

ions

of D

olla

rs6/1/2006

Money Market Fund Flows -(4 Wk Moving Avg)

-20.00

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

20.00

Nov

-03

Dec

-03

Jan-

04

Feb-

04

Mar

-04

Apr-

04

May

-04

Jun-

04

Jul-0

4

Aug-

04

Sep

-04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb-

05

Mar

-05

Apr-

05

May

-05

Jun-

05

Jul-0

5

Aug-

05

Sep

-05

Oct

-05

Nov

-05

Dec

-05

Dec

-05

Jan-

06

Mar

-06

Mar

-06

Apr-

06

May

-06

Bill

ions

of D

olla

rs

6/1/2006

Taxables Fund Flows -(4 Wk Moving Avg)

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

Nov

-03

Dec

-03

Jan-

04

Feb-

04

Mar

-04

Apr-0

4

May

-04

Jun-

04

Jul-0

4

Aug

-04

Sep

-04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb-

05

Mar

-05

Apr-0

5

May

-05

Jun-

05

Jul-0

5

Aug

-05

Sep

-05

Oct

-05

Nov

-05

Dec

-05

Dec

-05

Jan-

06

Mar

-06

Mar

-06

Apr-0

6

May

-06

Bill

ions

of D

olla

rs

6/1/2006

Municipal Fund Flows -(4 Wk Moving Avg)

-1.00-0.80-0.60-0.40-0.200.000.200.400.600.80

Nov

-03

Dec

-03

Jan-

04

Feb-

04

Mar

-04

Apr

-04

May

-04

Jun-

04

Jul-0

4

Aug-

04

Sep-

04

Oct

-04

Nov

-04

Dec

-04

Jan-

05

Feb-

05

Mar

-05

Apr

-05

May

-05

Jun-

05

Jul-0

5

Aug-

05

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Dec

-05

Jan-

06

Mar

-06

Mar

-06

Apr

-06

May

-06

Bill

ions

of D

olla

rs

6/1/2006

Source: AMG Data Services and Piper Jaffray Fundamental Market Strategy

June 2006


Material Deposit Outflows Did Not Happen—In response, we anticipate deposit growth remaining roughly 4%-8% annually, reflecting a more modest risk appetite; however, several other events such as increased loan growth and higher rates may precede that trend. Bank deposits grew by 8.5% on average throughout the last five years versus a current growth rate of 7.8% year over year (see Exhibit 8).

Exhibit 8

DEPOSITS GROWTH PERCENTAGE YEAR-OVER-YEAR CHANGE VERSUS DOLLAR AMOUNT ( Jan 2001-May 2006, $ In Billions)

$3,400

$3,900

$4,400

$4,900

$5,400

$5,900

Jan-

01M

ar-0

1

May

-01

Jul-0

1

Sep-

01N

ov-0

1Ja

n-02

Mar

-02

May

-02

Jul-0

2

Sep-

02N

ov-0

2

Jan-

03A

pr-0

3Ju

n-03

Aug

-03

Oct

-03

Dec

-03

Feb-

04A

pr-0

4

Jun-

04A

ug-0

4O

ct-0

4D

ec-0

4

Feb-

05

Apr

-05

Jun-

05A

ug-0

5N

ov-0

5

Jan-

06M

ar-0

6M

ay-0

6

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%Percent changes to date:

Year-over-Year: +7.8%Year-to-Date: +3.5%

$5,942.5 Bil.on 5/10/06

8.5% avg YoY growth rate during

2001-2006

Note: Seasonally adjusted Source: Federal Reserve

June 2006


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 one to two percentage points of growth (i.e., 5%-7% loan growth) (see Exhibit 9). This general loan growth rule can also be broken down into economic and interest rate cycle assumptions. Loans can generally be slotted into four broad categories: mortgages, consumer loans, business loans, and commercial real estate.

Over the last 24 months, business loans (or commercial and industrial) have been accelerating due to increased demand, more favorable customer pricing, and more lenient underwriting standards. In contrast, demand for mortgage loans—including first and second liens—has been waning, reflecting higher U.S. interest rates. Meanwhile, rates on credit cards have remained somewhat stable. We may witness card balance growth accelerate under a scenario where consumers notice little difference between home equity and credit card interest rates. Investment securities comprise the bulk of a bank’s remaining average earning assets and are primarily composed of government and mortgage-backed bonds. Average earning asset levels are somewhat a function of loan growth, and the opportunity to leverage deposit growth and any underutilized capital. Investment securities and loans provide an asset yield, which combined with balances results in interest income, and eventually to the income statement item, net interest income, at commercial banks. Banks typically charge an upfront fee as well as ongoing interest rate to the borrower, which can range anywhere from 2%-3% on large, highly rated commercial credits to 12% on credit card loans, and can either be a fixed or floating interest rate priced off of a standardized rate. Over the last ten years, banks have securitized or packaged a large percentage of credit card and mortgage balances, thus removing them from the reported balance sheet. However, in the last two years banks have increasingly maintained consumer loans on the balance sheet, given an opportunity to fund these loans with abnormally cheap deposits.

Dials And Needles—What Is Really Important When Modeling

Exhibit 9

EXAMPLE BANK – NET INTEREST INCOME AND MARGIN (Current Year, Average Balance Sheet)

Average Yields/ Interest Average Yields/ Interest Balance Rates Income Balance Rates Expense

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

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

Earning Assets $1,800 5.58% $100.5 Bearing Liabilities $1,930 2.27% $43.7

Other Assets 300 Equity 170

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

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

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

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


June 2006


Bank deposits and wholesale funding typically provide the bulk of financing for average earning asset growth at commercial banks and are considered costs, which when combined with balances results in interest expense and eventually the income statement item, net interest income. The difference between interest income and interest expense is typically called spread income (see Exhibit 10). Over the last two years, interest yields and costs have been increasing, given a significant increase in interest rates within the U.S. market. In fact, over this period the fed funds rate has increased by 400 basis points to 5.00% currently, while the long bond has increased by 34 basis points as of May 24, 2006. The short end of the yield curve (see Exhibit 11), namely, three-month, one- and two-year money, has continued to increase. As a result, deposit rates have been escalating while short-term wholesale funding costs have increased as well.

Exhibit 10

EXAMPLE BANK – AVERAGE BALANCE SHEET

Prior Avg. Int. Inc. Current Avg. Int. Inc. Year-over-Year % ChangeYear Yield & Exp. Year Yield & Exp. Balance Yield Inc./Exp.

Securities 524$ 4.21% 22.1$ 500$ 4.50% 22.5$ -5% 29bps 2%Loans 1,200 5.34% 64.1 1,300 6.00% 78.0 8% 66bps 22%Earning Assets 1,724 5.00% 86.1 1,800 5.58% 100.5 4% 59bps 17%Other Assets 285 300 NMTotal Assets 2,009 2,100 5%Deposits 1,200 1.01% 12.1 1,300 1.61% 20.9 8% 60bps 73%Borrowings 650 2.52% 16.4 630 3.62% 22.8 -3% 110bps 39%Bearing Liabilities 1,850 1.54% 28.5 1,930 2.27% 43.7 4% 73bps 53%Equity 159 170 7%Total Liab. & Eq. 2,009 2,100 5%Net Interest Margin& Net Interest Income

-19bps -2%57.6$ 56.8$ 3.34% 3.15%


June 2006


An income statement item, net interest income, is a function of the level of average earning assets multiplied by the net interest margin (see Exhibit 12 for calculation). The net interest margin is a function of balance sheet balances, yields, and costs. Historically, net interest margins have demonstrated a significant correlation to the steepness of the yield curve, as well as to absolute levels of interest rates. Banks have traditionally lent out funds on a longer-term basis and borrowed funds at short-term rates, benefiting from the spread or a steep yield curve. The yield curve at 33 basis points is currently relatively flat (i.e., unfavorable) versus a historical 131 basis point average, meaning banks are now lending out at rates relatively closer to the rates being paid out on deposits, resulting in tighter incremental spreads. However, banks could stand to benefit under a scenario where the yield curve returns to a more historically normal steepness. A bank’s ability to manage through fluctuations in interest rates is called asset-liability or interest rate risk management. Larger banks often use off-balance sheet instruments such as swaps to more effectively manage rate risks.

Exhibit 11

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

(100)

(50)

0

50

100

150

200

250

300

350

400

1/1/

1990

8/1/

1990

3/1/

1991

10/1

/199

1

5/1/

1992

12/1

/199

2

7/1/

1993

2/1/

1994

9/1/

1994

4/1/

1995

11/1

/199

5

6/1/

1996

1/1/

1997

8/1/

1997

3/1/

1998

10/1

/199

8

5/1/

1999

12/1

/199

9

7/1/

2000

2/1/

2001

9/1/

2001

4/1/

2002

11/1

/200

2

6/3/

2003

1/3/

2004

8/4/

2004

3/5/

2005

10/5

/200

5

5/31

/200

6

Basis Points

50-Year Average of

131 basis points

Dec-00 LowNegative 70 basis points

May-04 Recent High 360 basis points

May-0633 basis points

Source: Federal Reserve and ILX

June 2006


Net interest income often contributes between 20% and 60% of a bank’s total revenues, with smaller banks usually experiencing the higher percentages of net interest income. During the 1990s many larger banking organizations sought to diversify away from spread-based revenues by acquiring investment banks, asset managers, and processing, given concern over the competitive nature of traditional spread-based banking. 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 borrower’s ability to repay loan balances and make interest payments on an ongoing basis. Under a scenario in which a borrower’s ability to meet future obligations is questioned, a loan might be placed on an internal credit watch list. These loans might then fall delinquent on payment of interest and at some point be placed on non-accrual status, which is to stop accruing interest payments and is usually 90 days or more past due. Management must make a judgment at some point regarding how collateral for the loan might cover claims in a situation in which the borrowing company ceases to be an ongoing entity. For instance, if collateral in a building is worth $125,000 and the loan is for $150,000, there is a chance the bank may provision $25,000 for this loan. When the borrower ceases to make payments on the loan, this could result in net charge-offs, or a write-down on the $25,000 difference. However, since the bank has already provisioned for this $25,000 write-down, no additional impact is recognized.

Exhibit 12

EXAMPLE BANK – INCOME STATEMENT Prior Current %Year Year Chg.

+ Net Interest Income $57.6 $56.8 -2%- Loan Loss Provision 3.0 4.0 33%+ Noninterest Income 45.0 50.0 11%- Noninterest Expense 65.0 70.0 8%= Income before Taxes 34.6 32.8 -5%- Taxes (35%) 12.1 11.5 -5%= Net Income $22.5 $21.3 -5%

Total Revenue $102.6 $106.8 4%

Average Earning Assets $1,800x Net Interest Margin (annualized) 3.15%= Net Interest Income (NII) $56.8

Source: Piper jaffray

Loans And Credit Quality

June 2006


Nonperforming Assets, Delinquencies And Charge-Offs------When analyzing publicly available financial statements, we often focus on levels and growth in nonperforming assets, or those assets which are no longer accruing interest and/or more than 90 days delinquent. We also review delinquency trends within the portfolio, or when a borrower becomes past due on the loan payments. And finally, we analyze net charge-off trends within the portfolio, or those loans that are written down and off the balance sheet. Another indicator of problem loans that banks will sometimes discuss with investors is the watch list, which is a broader definition of troubled loans than nonperforming assets and is an early indicator of potential credit problems.

The accounting methodology for loan loss reserves is somewhat complicated (see Exhibit 13). The allowance for loan loss reserves is a contra-asset account, similar to an allowance for bad debt account. Provisions for loan losses are run through the income statement to establish this account. Banks usually begin to reserve for losses when there is some potential for loss, and then begin to charge them off (remove them from the balance sheet) when there is a reasonable doubt of collection in full. Banks often match provisions and net charge-offs to maintain a constant level of loan loss reserves.

To analyze reserve adequacy, we focus on reserves as a percentage of total loans—the reserve ratio------for consumer banks, and reserves-to-nonperforming loans when reviewing commercial loan losses. The reserve ratio is more crucial for consumer-oriented portfolios because these loans are generally underwritten with some anticipation of loss and can be fully charged off (e.g., credit cards) without first being placed on nonperforming status. In contrast, commercial loans usually have some collateral support and are much lumpier in nature. Commercial loans, or business loans, have been the source of the biggest credit problems through the last three banking cycles. Commercial loans and unused credit lines can be used for a variety of purposes but are often used to support working capital and capital investment needs. Over the past two years, levels of commercial loans have increased significantly on a national basis, given increasing supply and demand by borrowers.

Exhibit 13

EXAMPLE BANK – CREDIT QUALITY Current Calculations:

Year Net Charge-Off Ratio = Net Charge-Offs / Avg. LoansBeginning Reserves $25 NPAs-to-Assets = Nonperforming Assets / End of Period Assets Charge-offs 10 Recoveries 1 Reserves Ratio = Reserves / End of Period Loans - Net Charge-offs $9 Reserves-to-NPAs = Reserves / Nonperforming Assets+ Loan Loss Provision 4 Ending Reserves $20 Key Credit Quality Ratios*:

Net Charge-Off Ratio = $10 / $1,300 = 0.69% Good when Nonperforming Loans (NPLs) $13 NPAs-to-Assets = $14 / $2,100 = 0.67% Relatively LOW+ OREO (other real estate owned) 1 = Nonperforming Assets (NPAs) $14 Reserves Ratio = $20 / $1,300 = 1.54% Good when

Reserves-to-NPAs = $20 / $14 = 143% Relatively HIGH

*Note: For illustration purposes, average balances used for period end balances. Source: Piper Jaffray.

June 2006


In our assessment, supply has improved at many larger banks reflecting a lack of adequate returns on most asset classes. Shared national credits (SNC), or those large loans originated by a lead lender and then syndicated to a group of participants—usually to either other domestic and foreign banks or insurance companies—have experienced the most deterioration. The SNC market has bounced back significantly over the last 24 months. Over the next year, most large banks plan on further reducing their exposure to the large corporate loan market. We view the SNC market as increasingly synonymous with the fixed income, or bond market, in both maturity and interest rates charged. Many of the larger banks are active in providing both services to their customers. Many larger banks including SunTrust, Wachovia, and Colonial are experiencing exceptionally low net charge-off ratios as a percentage of loans of only 0.07%-0.24% range versus a more normal 40-60 basis points. These low ratios reflect recoveries relative to significant losses during the 2002-2003 time frame. Over the last few years, the SEC has increasingly been cautioning banks regarding maintaining potentially too high reserve levels, given a low level of credit losses. Partly in reaction to this, banks have been reducing reserve ratios somewhat consistently during the past nine years from a peak of 276 basis points in 1987 to an estimated 120 basis points by 2007 (see Exhibit 14).

Going forward, we would be somewhat cautious on large automobile, trucking, and airline industry exposures, reflecting a slight slowing in the broader economy. In contrast, the small and middle market loan environments could experience elevated losses associated with commercial real estate as loan standards in that area have weakened. Nevertheless, banks have increasingly been using the securitization markets (i.e., CDOs, CLOs, and CMBS) to address exposures in these areas.

Exhibit 14

RESERVE RATIO, ALL BANKS (1959-2007E)

0.75%1.00%1.25%1.50%1.75%2.00%2.25%2.50%2.75%3.00%

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

E

2007

E

19872.76%

Average1.86%

2007E1.20%

Source: FDIC, Piper Jaffray estimates

June 2006


Consumer loans include a broad variety of credits including home mortgages, home equity, credit cards, and personal loans (e.g., purchase of boats, cars, etc.). Most banks have been significantly increasing exposure to mortgages and home equity (see Exhibits 15 and 16) over the last five years, given what have historically been more benign loss characteristics and a more annuity-like loss pattern, which is dissimilar to generally lumpy commercial loan losses. Further, there is a well-developed securitization market for mortgages and credit cards. In addition, the regulators require less capital be placed against mortgages remaining on the books.

Exhibit 15

TOTAL HOME EQUITY OUTSTANDING WITH GROWTH RATES (1991-2005)

13%

19%

32%

19%

39%

32%

15%

62%

19%18%

18%

6%

21%19%

0

50

100

150

200

250

300

350

400

450

500

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Tota

l HE

Q O

utst

andi

ng

0%

10%

20%

30%

40%

50%

60%

70%

Grow

th Rate

Source: SNL DataSource

June 2006


Mortgage lending in particular expanded dramatically during the 2001-2004 time frame, given a significant decline in mortgage rates. Although levels of personal debt as a percentage of income have increased dramatically, debt-servicing costs have remained steady given lower interest rates and increased income. Nevertheless, consumer loans are not without risk. We generally watch personal income, unemployment trends, and housing values within specific markets to judge potential for deterioration in loan quality. Additionally, we believe regulators may be somewhat uncomfortable with recent growth in sub-prime loan exposures. In response, the FFIEC released guidelines on exotic mortgage instruments. Total revenue, which is the sum of net interest income and non-interest income, typically grows anywhere from 4%-9% annually. We expect net interest revenues to expand by 2%-4% in most cases on a normal basis, while fee-based revenues expand by 8%-12%. Overall, fees as a percentage of total revenues expanded to a peak of 56% of revenues in 1999 for the top 10 banks, up from only 41% of total revenues in 1990, partially reflecting a significant drive to exit low-return, high-risk traditional banking and expand in fee-based businesses. Usually the biggest component of fee-based revenue at commercial banks is service charges on deposits, which include checking account fees, overdraft fees, monthly service fees, usage fees, etc. In general, service charge fee growth has kept up with accelerated deposit growth over the last three to five years. Investment banking fees, or non-interest income, is highly reliant upon the type of investment banking done at an individual organization. Loan syndications are a big part of a commercial bank’s revenue stream as well as fixed income issuance and M&A activity. Citigroup remains the only large bank with meaningful exposure to the equities issuance business.

Exhibit 16

TOTAL REVOLVING CREDIT OUTSTANDINGS VERSUS GROWTH RATE

500

550

600

650

700

750

800

850

900

Jan-

00Ap

r-00

Jul-0

0O

ct-0

0Ja

n-01

Apr-

01Ju

l-01

Oct

-01

Jan-

02Ap

r-02

Jul-0

2O

ct-0

2Ja

n-03

Apr-

03Ju

l-03

Oct

-03

Jan-

04Ap

r-04

Jul-0

4O

ct-0

4Ja

n-05

Apr-

05Ju

l-05

Oct

-05

Jan-

06

Am

ount

Out

stan

ding

($m

il)

0%

2%

4%

6%

8%

10%

12%

14%

16%

Source: Federal Reserve

Revenue Components

June 2006


Trading fees at commercial banks have been highly geared toward foreign exchange, derivatives, and fixed income. These products can often be cross-sold easily to larger corporate banking clients. Asset management fees are usually somewhat related to aggregate investment levels, including equity prices. These fees can either be coincident in revaluation against the market or lag the market impact, depending upon the asset management pricing structures at these organizations. Over the last two years, we have witnessed a steady outflow from the higher-margin equity products and into lower-yielding fixed income portfolios at many of the commercial banks we follow. Commercial banks have also aggressively entered the insurance agency business over the last few years, recognizing a consolidation opportunity as well as cross-selling primarily for the corporate client base. The biggest insurance agencies within the banking space include Wells Fargo and BB&T. 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 bank’s noninterest expense base expands by 3%-6% per year with most variation tied to incentive compensation structures in the capital markets and investment management business, as well as any acceleration in branch office openings or technology expenditures. Typically, salaries and compensation expands by 4%-5% per year, occupancy by 2%-3%, and technology by 7%-10%.

Noninterest Expenses

Exhibit 17

NONINTEREST EXPENSE ($ In Millions)

Prior CurrentYear Year % Chg

Net Interest Income $50.0 $54.0 8.0%Noninterest Income 50.0 55.0 10.0%Total Revenues $100.0 $109.0 9.0%

Noninterest Expenses $50.0 $52.5 5.0%

Key I/S Ratios:Efficiency Ratio 50.0% 48.2%Operating Leverage NA 400bps

Current Year Calculations:Efficiency = Nonint. Exp. / Ttl. Rev. = 48.2%Operating Leverage = Rev.-Exp. Growth Spread = 9.0% - 5.0% = 400bps


June 2006


The efficiency ratio, or overhead ratio, is one of the analyst community’s standard expense management measurements and is defined as expenses as a percentage of total revenues. We tend to focus on any declining trend in this ratio as a positive contributor to earnings leverage (see Exhibit 17). Among those businesses with the highest—or worst—efficiency ratios are asset managers (70%-90%), followed in descending order by investment banking (70%-75%), retail (60%-65%), commercial (45%-50%), thrifts/mortgage banking (40%-50%), and credit cards (30%-40%). The discrepancy in these ratios has very little to do with pretax profit margins or returns on equity, given differences in compensation as well as required regulatory capital to conduct various businesses. Historically, many banks have posted significant restructuring and merger-related charges throughout the last 10 years, which have been steadily increasing as a percentage of earnings among the top 50 banks. Risk-based capital guidelines were created during the early ’90s, primarily as a result of concerns over safety and soundness within the U.S. banking system. Many savings and loans defaulted and were taken over by the government, due to excessive exposure to real estate. Congress and regulators considered this deterioration to be the result of a somewhat poor calculation of the riskiness of selected assets on the balance sheet combined with insufficient capital. In our judgment, the two most important capital ratios to focus on at U.S. commercial banks are the tangible common equity and tier 1 capital ratio. Failure to meet certain minimum capital requirements (see Exhibit 16) can trigger corrective regulatory action. Rating agencies usually pay close attention to tier 1 capital for the larger banks and tangible common equity for the smaller banks (see Exhibit 18).

There is significant excess capital within the banking system estimated at almost $19.5 billion among the top 50 banks, using a tangible common equity cutoff of 5.0%. Consequently, we have not witnessed a significant round of capital raising for commercial banks since the 1990-1992 time frame, when many banks were emerging from severe commercial real estate-related credit problems.

Capital

Exhibit 18

REGULATORY CAPITAL REQUIREMENTS

Tot. Capital Tier 1 Cap. LeverageWell Capitalized >+10% >=6% >=5%Adequately Capitalized >+8% >=4% >=4%Undercapitalized Neither Well nor Adequately Capitalized

Source: FDIC

June 2006


Tier 1 capital------which is a regulatory definition—includes common stockholders’ equity, qualifying preferred stock, and trust preferred securities, less goodwill and certain other deductions. Tier 2 capital includes preferred stock not qualifying as Tier 1 capital, subordinated debt, the allowance for loan losses, and net unrealized gains on marketable securities. Total capital includes Tier 1 and Tier 2 capital. Risk-Weighted Assets------used when calculating Tier 1 and total capital ratios—measures the risk included in the balance sheet, as one of four risk weights (0%, 20%, 50%, 100%) is applied to the different balance sheet and off-balance sheet assets based on the credit risk of the counterparty. For instance, claims guaranteed by the U.S. government are risk weighted at 0%, while commercial real estate loans are weighted at 100%. The Leverage Ratio------somewhat considered similar to the tangible common equity ratio—consists of Tier 1 capital divided by quarterly average total assets, excluding goodwill and certain other items.

Exhibit 19

COMPONENTS OF CAPITAL

Total Assets (TA) $1,100Risk-Weight 64%Risk-Weighted Assets (RWA) $700

Common Equity (CE) $85- Goodwill & Other Adj. (GW) 25 Tier 1 Capital $60+ Tier 2 Capital 20 Total Capital $80

Key Capital Ratios:Common Equity 7.73%Tangible Common Equity 5.58%Tier 1 Ratio 8.57%Total Capital 11.43%Leverage Ratio 5.58%

Calculations:Common Equity = CE / TATangible CE = (CE - GW) / (TA - GW)Tier 1 Ratio = Tier 1 Capital / RWATotal Capital = Tier 1 and Tier 2 / RWAEst. Leverage Ratio = Tier 1 Capital / (TA - GW)


June 2006


Exhibit 20

TOP 50 BANKS BENCHMARK AVERAGES, 1Q06 (Excluding BAC, And Processors BK, IFIN, MEL, NTRS, STT)

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

Statistics(%) 1Q05 4Q05 1Q06 Qtr./Qtr. Yr./Yr. High LowNet Interest Margin (reported) 3.81 3.75 3.75 -0.2 -6.1 5.02 2.17Efficiency Ratio 56.31 57.00 57.49 49.2 118.0 83.08 38.90ROAA 1.40 1.41 1.42 1.3 1.7 2.28 0.77ROAE 15.60 15.52 15.64 12.5 3.6 36.83 4.01NPAs / Total Assets 0.31 0.28 0.29 0.7 -2.8 1.37 0.06NCOs / Average Loans 0.26 0.32 0.21 -10.5 -4.7 1.07 -0.11Equity/Assets 9.31 9.48 9.52 3.3 20.6 19.97 5.94Leverage Ratio 7.62 7.63 7.71 7.6 9.2 10.45 5.22

Growth

Bps Change 1Q06 Results


June 2006


VALUATION METHODS

The methods for valuing stocks within the broader sell-side analytical community have gone through a major change throughout the last 10 years with little impact on how we value bank stocks. More specifically, we have consistently utilized price-to-earnings, price-to- book, P/E to secular growth, and dividend yield measurements as a way to determine relative value against the market and against peer commercial banks. Counting eyeballs and forecasting web hits—or even measuring price to revenues for that matter—have seldom proven to be useful exercises within the bank stock investing space. During the mid-1990s, traditional commercial banks sold at higher P/Es and P/Bs than brokers and asset managers; however, that changed dramatically throughout the late 1990s as the market rewarded significant growth and higher returns on equity with bigger P/Es and P/Bs. The bubble in the equity markets throughout the late 1990s fed this growth. In our assessment, the price-to-earnings (P/E) and price-to-tangible book ratios continue to be the primary method by which to value traditional bank stocks. We can use the price-to-earnings ratio fairly freely, adjusting for some level of uncertainty in future earnings. Banks that have experienced the most significant reductions to consensus earnings throughout the last two years—and may experience further reductions—should sell at a discount, while those that have experienced limited impact should sell at a premium (see Exhibit 21).

Price-To-Earnings

June 2006


Exhibit 21

HISTORICAL 2006 CONSENSUS ESTIMATES (January 2004 - May 2006)

Rank Company Ticker Chg.1 East West Bancorp, Inc. EWBC 28%2 Colonial BancGroup, Inc. CNB 16%3 Bank of Hawaii Corporation BOH 6%4 Cullen/Frost Bankers, Inc. CFR 5%5 Zions Bancorporation ZION 5%6 PNC Financial Services Group, Inc. PNC 5%7 Comerica Incorporated CMA 5%8 Synovus Financial Corp. SNV 5%9 Compass Bancshares, Inc. CBSS 4%10 KeyCorp KEY 4%11 Mercantile Bankshares Corporation MRBK 3%12 Northern Trust Corporation NTRS 2%13 Bank of America Corporation BAC 1%14 City National Corporation CYN 1%15 Wilmington Trust Corporation WL 0%16 U.S. Bancorp USB -1%17 Cathay General Bancorp, Inc. CATY -2%18 Wachovia Corporation WB -2%19 Marshall & Ilsley Corporation MI -2%20 Associated Banc-Corp ASBC -2%21 M&T Bank Corporation MTB -3%22 SunTrust Banks, Inc. STI -3%23 AmSouth Bancorporation ASO -4%24 BOK Financial Corporation BOKF -4%25 Wells Fargo & Company WFC -4%26 UnionBanCal Corporation UB -5%27 Huntington Bancshares Incorporated HBAN -6%28 Investors Financial Services Corp. IFIN -6%29 State Street Corporation STT -7%30 Fulton Financial Corporation FULT -7%31 Commerce Bancorp, Inc. CBH -8%32 Bank of New York Company, Inc. BK -9%33 Mellon Financial Corporation MEL -11%34 Commerce Bancshares, Inc. CBSH -11%35 TD Banknorth Inc. BNK -11%36 JPMorgan Chase & Co. JPM -11%37 BB&T Corporation BBT -12%38 Citigroup Inc. C -12%39 TCF Financial Corporation TCB -13%40 Sky Financial Group, Inc. SKYF -13%41 Regions Financial Corporation RF -13%42 National City Corporation NCC -14%43 Valley National Bancorp VLY -15%44 North Fork Bancorporation, Inc. NFB -17%45 FirstMerit Corporation FMER -21%46 Webster Financial Corporation WBS -25%47 Popular, Inc. BPOP -25%48 First Horizon National Corporation FHN -30%49 South Financial Group, Inc. TSFG -31%50 Fifth Third Bancorp FITB -38%

Average -6% Source: FactSet

June 2006


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

Source: SNL DataSource, Baseline

In our assessment, price-to-book (P/B) is usually the last backstop valuation measurement for bank stocks when all other methods fail. Under such a scenario, investors must develop a comfort level in which the assets on the books are worth stated levels according to GAAP. This is typically a very difficult process, given that public values for loan and venture capital portfolios are usually difficult to determine. Historically, price-to-book values for the banking industry have ranged from lows of close to book value during the 1991-1992 time frame, to highs of two to three times for the regional banks, and four to five times for the processing banks during the 1999-2000 time frame.

PEG Ratio

Exhibit 22

FASTEST AND MOST CONSISTENT EARNINGS GROWERS (20 Highest Among Top 50 Banks as Ranked by Average Annual Growth)

Average Avg. Chg. In 2007ERank Company Name Ticker Annual Gr. Gr. Rate (bps) PEG

1 Investors Financial Services Corp. IFIN 35.7 -596.3 50%2 East West Bancorp, Inc. EWBC 33.6 202.5 80%3 Commerce Bancorp, Inc. CBH 17.4 110.0 70%4 City National Corporation CYN 17.1 -180.0 130%5 U.S. Bancorp USB 15.9 -607.5 100%6 North Fork Bancorporation, Inc. NFB 15.9 54.0 100%7 Zions Bancorporation ZION 15.8 -138.0 110%8 Synovus Financial Corp. SNV 15.5 -85.0 110%9 State Street Corporation STT 14.4 51.0 100%

10 TCF Financial Corporation TCB 14.3 -269.0 110%11 M&T Bank Corporation MTB 13.9 112.0 130%12 Popular, Inc. BPOP 13.7 -83.0 -13 BOK Financial Corporation BOKF 13.6 144.0 -14 Marshall & Ilsley Corporation MI 13.5 -152.0 120%15 Fifth Third Bancorp FITB 13.1 -305.0 100%16 First Horizon National Corporation FHN 12.7 -215.0 110%17 Citigroup Inc. C 12.5 -277.5 80%18 Wells Fargo & Company WFC 12.5 24.0 90%19 UnionBanCal Corporation UB 12.2 150.0 120%20 Northern Trust Corporation NTRS 12.2 24.0 -

AVERAGE TOP 50 BANKS 11.3 -80.9 116% Note: outliers excluded from calculations

Price-To-Book

June 2006


Currently price-to-book values range from 1.0-2.0 times for most banks, while processor price-to-books are rather high at 2.3-2.5 times. We must also weigh these ratios within the context of the broader market. Although price-to-books are still rather high for many banks, so are returns on equity (see Exhibit 23).

The spread between bank stock dividend yields and the 10-year U.S. Treasury is currently 235 basis points, as compared to a recent historical low of 70 basis points in June 2003, while still relatively narrow versus what we have typically witnessed during the last 15 years (see Exhibit 24).

Exhibit 23

TOP 50 BANKS RELATIVE ROE (1990-2005)

0%

20%

40%

60%

80%

100%

120%

140%

160%

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

104% Average

Source: Baseline

Some Attractive Yield Opportunities

June 2006


0% We think these high yields represent a good opportunity to purchase bank stocks, particularly those for which we feel relatively comfortable with the intermediate-term earnings growth outlook. For instance, Bank of America is currently yielding 4.13% as of June 6 versus the 10-year Treasury at 5.01%, while TCF Financial is yielding 3.47%, and Wachovia is yielding 3.85% (see Exhibit 25).

Exhibit 24

BANK STOCK DIVIDEND YIELD VERSUS 10-YEAR U.S. TREASURY YIELD (%)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

03/1

991

11/1

991

07/1

992

03/1

993

11/1

993

07/1

994

03/1

995

11/1

995

07/1

996

03/1

997

11/1

997

07/1

998

03/1

999

11/1

999

07/2

000

03/2

001

11/2

001

07/2

002

03/2

003

11/2

003

07/2

004

03/2

005

11/2

005

Avg. Div. Yld, Top 50 Banks10-Year UST Yield

Source: FactSet, Federal Reserve

June 2006


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

Exhibit 25

DIVIDEND PAYOUT RATIO AND DIVIDEND YIELD (Top 50 Banks, LTM As Of 1Q06, As Ranked By Payout Ratio)

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

June 2006


Exhibit 26

DIVIDEND PAYOUT RATIO ( Top 50 Banks, 1990-1Q06 LTM)

51%

43%

32%29%

35% 36% 35% 36%40%

37%

44%47%

40% 39%41% 42% 41%

10%

15%20%

25%

30%35%

40%45%50%

55%

1990

Y

1991

Y

1992

Y

1993

Y

1994

Y

1995

Y

1996

Y

1997

Y

1998

Y

1999

Y

2000

Y

2001

Y

2002

Y

2003

Y

2004

Y

2005

Y

LTM

1Q

06


June 2006


MEGA TRENDS—CONSOLIDATION, CREDIT QUALITY, AND NON-BANKING

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

Consolidation

Exhibit 27

BANK M&A DEALS (Target Asset Size > $10 Billion, 1991-2006)

5

12

1

10

3

67

56

5

12

7

1

3

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

YTD

Source: SNL DataSource, Piper Jaffray

June 2006


At the same time, the basic business of banking has experienced relative strength over the last two years, posting double-digit earnings growth per year for the industry. In our judgment, we would have to experience a significant catalyst to encourage managements to sell out, before takeout activity accelerates. This could include continued net interest margin-related pressure and slowing retail banking growth. Additionally, banks must now utilize a purchase method of accounting for consolidation versus a historical performance for pooling-of-interest method. First Union’s 2001 combination with Wachovia was the first major deal in the new environment. 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. Then, as the Internet came of age, many analysts increasingly believed that the branch was dead and that the Internet would supplant the branch infrastructure as the preferred method of banking. We have now come full circle, with many banks building out branch networks by opening up new offices or on a de novo basis. Recent merger transactions within the New York marketplace, such as Capital One’s announced acquisition of North Fork and JPMorgan’s announced asset swap for Bank of New York’s branches, symbolize the increasing battle for market share in that region. Several other banks have aggressively expanded in New York during the last four years through de novo efforts, including Wachovia, Commerce Bancorp, and Bank of America. Among additional recent deals, Wachovia has announced the $26 billion acquisition of Golden West, expected to close in the fourth quarter of 2006. As part of the transaction, the company is expanding into faster growth regions in California, namely Los Angeles and San Francisco, while increasing total branches by 9%, or 285, to 3,503. In our assessment, Wachovia also improves its retail product breadth particularly in mortgages, establishing a pro forma No.7 mortgage banking market share. Nevertheless, the opportunities for bank acquisition-related growth in the southwestern and western United States remain limited, with many banks choosing instead to expand through de novo branching efforts in those markets. United States-based banks with the most aggressive de novo plans in 2006 include Wintrust, Commerce Bancorp, and AmSouth (see Exhibit 28).

Branching Versus Consolidation

June 2006


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

Exhibit 28

BRANCH COUNT AND GROWTH (As Ranked by 2006 New as % of Total)

12/03 Q 12/04 Q 12/05 Q 04-05 03-05 2006 2006 NewCompany Name Ticker (Actual)* (Actual) (Actual) Growth Growth Planned as % of Tot.Wintrust Financial WTFC 36 50 62 24.0% 72.2% 11 17.7%Commerce Bancorp CBH 270 319 373 16.9% 38.1% 65 17.4%AmSouth ASO 611 688 684 -0.6% 11.9% 64 9.4%Washington Mutual WM 1,680 1,930 2,140 10.9% 27.4% 175 8.2%Synovus SNV 272 281 284 1.1% 4.4% 17 6.0%Colonial BancGroup Inc. CNB 274 292 301 3.1% 9.9% 18 6.0%JPMorgan Chase^^^ JPM 2,471 2,508 2,641 5.3% 6.9% 150 5.7%TCF Financial TCB 401 430 453 5.3% 13.0% 25 5.5%Fifth Third FITB 952 1,011 1,119 10.7% 17.5% 50 4.5%BB&T BBT 1,359 1,413 1,404 -0.6% 3.3% 60 4.3%Compass CBSS 376 382 384 0.5% 2.1% 15 3.9%Webster Financial WBS 119 152 157 3.3% 31.9% 6 3.8%Wells Fargo WFC 3,000 3,112 3,146 1.1% 4.9% 100 3.2%Zions Bancorp. ZION 412 386 473 22.5% 14.8% 15 3.2%First Citizens FCNCA 379 386 391 1.3% 3.2% 12 3.1%Regions Financial RF 681 1,322 1,311 -0.8% 92.5% 40 3.1%PNC PNC 719 776 840 8.2% 16.8% 25 3.0%National City NCC 1,114 1,222 1,220 -0.2% 9.5% 35 2.9%Wachovia^^ WB 3,314 3,344 3,131 -6.4% -5.5% 85 2.7%TD Banknorth BNK 359 386 396 2.6% 10.3% 10 2.6%SunTrust STI 1,183 1,676 1,657 -1.1% 40.1% 35 2.1%U.S. Bancorp USB 2,243 2,370 2,419 2.1% 7.8% 50 2.1%Bank of America^ BAC 5,594 5,885 5,873 -0.2% 5.0% 100 1.7%KeyCorp KEY 906 935 947 1.3% 4.5% 13 1.4%M&T Bank MTB 684 663 658 -0.8% -3.8% 5 0.8%Citigroup C 816 817 896 9.7% 9.8% 70-100# na

Note: midpoint used when company gives range *June 2003 at BAC, WFC, WB, C încludes FBF; ^încludes SOTR; ^^încludes ONE # global new branch openings BOLD denotes acquisition Source: SNL DataSource, company reports, Piper Jaffray estimates

Credit Quality

June 2006


Several of the nation’s largest banks, including Citicorp, were on the verge of failure in 1991, given excessive real estate concentrations. Collateral values were often well below loan amounts as office vacancy rates soared. Several banks were taken over by the federal government, restructured, and sold at open bid. NationsBank and Fleet (both now under Bank of America) were two of the early beneficiaries of these government-assisted transactions. During the late 1980s, large U.S. multinational banks also suffered through an LDC (less developed country) debt problem. Many of these weaknesses arose from a Latin American sovereign debt binge, in which countries took on massive levels of debt to finance fiscal programs, and then revenues failed to materialize. These issues were primarily with governments and country restructurings as opposed to corporate or consumer borrowers, unlike the recent shortfalls in Argentina during 2001-2002 when the government effectively defaulted, many companies went out of business, and unemployment soared. The most pronounced weakening during the 2001-2003 time frame was overexposure to telecom, technology, and merchant energy businesses. In our assessment, these credit losses were due primarily to loans made with inadequate collateral support, excessive exposure concentrations, and a weakening in the equities markets. Many banks that sought to lend to the “new economy” companies during the late 1990s have experienced serious loan losses during 2001-2003. We are currently focused on automobiles, airlines, and asset-based lending exposure as potential areas of weakness in 2006-2007. Unlike commercial lending, which has gone through two or three distinct cycles during the last 20 years, we have yet to go through an applicable consumer-based credit cycle. In fact, it is difficult to get applicable historical consumer loss trends when we are operating in a significantly different environment. The U.S. consumer debt has expanded to 104% of income from 85% in 1990. We would expect consumer loan losses to peak at a higher rate if unemployment increases significantly.

Exhibit 29

INDUSTRY NET CHARGE-OFF RATIOS (1960-2007E)

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

E

19911.57%

2007E0.62%

Average0.58%

20021.11%

Source: Piper Jaffray, FDIC

June 2006


Among the top 10 major U.S. banks, fee-related businesses generate 38% of total earnings at U.S. commercial banks, including investment banking at 13%, processing at 10%, asset management at 8%, and credit cards at 7% (see Exhibit 30). The traditional commercial and consumer banking businesses contribute 62% of total earnings.

During the 1990s, commercial banks increasingly became involved in investment banking through a loophole in the bank holding company act known as Section 20, which allowed up to 10% of total revenues from a subsidiary to be derived from securities activity (this limit was later raised to 25%). Upwards of 25 domestic banking organizations had some authority to underwrite and deal in ineligible securities activities by 1995. Those organizations at the forefront of transformation were JPMorgan and Bankers Trust, which had pushed into investment banking products in the early 1990s. Several regional banks also acquired small investment bank boutiques in 1997-1998, including NationsBank’s acquisition of Montgomery, Bank of America’s purchase of Robertson Stephens, and U.S. Bancorp’s acquisition of Piper Jaffray. In addition, many foreign banks acquired U.S. investment banks including Credit Suisse’s purchase of DLJ Securities in the summer of 2000, UBS’s acquisition of Paine Webber, and Chase Manhattan’s acquisition of JPMorgan in the summer of 2000. Many of the biggest investment banks have increasingly expanded into trading in commodities, foreign exchange, and derivatives, ignoring historical drivers such as equity issuance and mergers and acquisitions. In fact, we estimate the top four pure-play investment banks generated roughly 2/3 of total revenues from trading in various instruments during 2005. In contrast, traditional commercial banks such as JPMorgan Chase and Citigroup have attempted to expand in all areas of investment banking with particular success in equity, fixed income, and international M&A.

Non-Banking Trends

Exhibit 30

LARGE-CAP BANKS 2007E EARNINGS MIX

Retail, 37%

Corporate, 12%

Investment Banking, 13%

Processing, 10%

Asset Mgmt, 8%

Cards, 7%Non-Traditional

Traditional Banking, 62%


Investment Banking

June 2006


During the 1990s, banks became increasingly active in selling investment products or revamping existing trust organizations. Mellon acquired Dreyfus and PNC purchased Blackrock. These two deals, along with an effort to cross-sell investment products including mutual funds and annuities, were prompted by concerns that investors would increasingly shun traditional bank savings and deposit accounts for faster growth opportunities in the public markets. Ironically, deposit growth never slowed materially, while investment outflows and weak equities market performance have impaired some banking organizations’ ability to post up earnings quarters. Asset management remains a potentially very attractive business for banks as they cross-sell deposit clients a broad array of products and services. Banks were heavily involved in providing trust-related services during the early 1990s, but have tried to develop groups of mutual fund families to address the needs of the retail investor. Banks have increasingly sought out processing-related acquisitions to expand fee-based businesses. Processing is primarily the function of handling transactions for asset managers, money managers, pension funds, and corporations. Securities clearance, custody, wire transfer, corporate trust, and ADRs are the most common types of processing. And processing banks have typically attempted to cross-sell additional fee-based products to their customers, including foreign exchange and analytical support tools. During the 1990s, the U.S. processing business went through a significant consolidation phase in which several banks recognized they could not compete from an economies-of-scale perspective and thus sold out to larger players. Today, Bank of New York, State Street, and Northern Trust are among the major players in this business, while Citigroup and JPMorgan Chase are also well represented. The major processing companies continue to acquire new contracts from other financial services players, while also competing heavily amongst each other for existing books. We view the processing environment as exceptionally competitive with State Street, Northern Trust, and Bank of New York recently paying very high prices for acquisitions. Processing revenues are highly dependent upon equity market values and volumes across several markets; thus with a generally improving capital markets environment, we would expect revenues to increase also. The competitive environment within the U.S. card market has become increasingly economies-of-scale driven, with a focus on unit cost reduction and portfolio diversification. As a result, we have witnessed significant card industry consolidation over the last ten years, as the top ten players now control 85% of the U.S. credit card market, up from 55% in 1996. Perhaps more surprisingly, the share of the top three players—namely Bank of America, Citigroup, and JPMorgan Chase—has nearly doubled to 53% of industry outstandings from 27% for the top three in 1996. The recent combinations of JPMorgan Chase and Bank One, as well as Bank of America and MBNA, have created two additional credit card behemoths to compete with Citigroup, with roughly $140 billion in U.S. outstandings each, as of year-end 2005 (see Exhibit 31).

Asset Management

Processing

Credit Cards

June 2006


Source: Company reports, Piper Jaffray In our assessment, managed credit card balance growth has been anemic over the last few years. Card economics could certainly improve with a steepening in the yield curve. Additionally, we may witness card balance growth accelerate under a scenario in which consumers notice little difference between home equity and credit card interest rates. Home equity has clearly supplanted card growth during the last five years. Overall, mortgage originations in the United States fell to $2.76 trillion in 2005, down from $2.77 trillion in 2004. Mortgage Bankers Association estimates $2.37 billion in originations during 2006 (see Exhibit 32). Expectations for the mortgage market beyond 2006 seem to be somewhat mixed, since sales and prices of single family homes reached a peak in July 2005.

Exhibit 31

AVERAGE MANAGED BALANCES – FULL YEAR

03-05 04-052003 2004 2005 % chg % chg

BAC* $137,638 $139,324 $140,004 0.9% 0.5%JPM*** $128,692 $135,370 $138,389 3.7% 2.2%C ** $143,700 $136,800 $136,500 -2.5% -0.2%AXP $41,600 $45,400 $48,900 8.4% 7.7%MS $50,864 $47,387 $47,330 -3.5% -0.1%COF $41,308 $45,813 $46,827 6.5% 2.2%HSBC $35,288 $38,253 $25,642 -14.8% -33.0%WM $17,640 $17,204 $18,537 2.5% 7.7%WFC $7,640 $8,878 $10,663 18.1% 20.1%USB $5,525 $6,090 $6,615 9.4% 8.6%Total $609,895 $620,519 $619,407 0.8% -0.2%

* Pro-forma MBNA, including foreign ** Including Sears addition of $27 billion in 2003E & foreign ***Includes ONE in 2003

Mortgage Banking

June 2006


We think rising short-term interest rates will continue to have a modest dampening impact on demand for housing and thus mortgages, as evidenced by increasing inventory and modest pricing pressure—particularly in the western United States. Although some of this decline may be attributable to seasonality, home sales in the west have dropped somewhat steadily by 12% year over year to a 1.43 million monthly rate in March. In contrast, monthly home sales have been increasing in the northeast and southern U.S. markets over this same time frame. Countrywide and Wells Fargo have continued to take mortgage market share from the competition with leading positions in the traditional one- to four-family mortgage origination and servicing markets. These two generated 4% of total origination volumes during 2005, with respectable results also at Washington Mutual, JPMorgan Chase, and Bank of America (see Exhibits 33 and 34).

Exhibit 32

MORTGAGE ORIGINATIONS (1990-2008E)

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

E

2007

E

2008

E

$ Bn

Refinance OriginationsPurchase Originations

Source: Mortgage Bankers Association

June 2006


Exhibit 33

TOP 10 MORTGAGE ORIGINATORS ($ In Billions)

$1,111.1

$1,005.4

$746.8

$604.2

$403.2

$368.4

$288.8

$206.0

$169.6

$157.3

$838.3

782.4

727.6

562.7

364.3

332.5

231.8

201.2

165.1

145.7

CountrywideFinancial

Wells Fargo HomeMtg.

Washington Mutual

Chase HomeFinance

CitiMortgage, Inc.

Bank of America

GMAC Residential

ABN Amro Mortgage

National CityMortgage

PHH Mortgage

Dec-05

Dec-04

Source: National Mortgage News and SourceMedia Inc.

Exhibit 34

TOP 10 MORTGAGE SERVICERS ($ In Billions)

$133.1

$116.5

$60.0

$44.5

$40.2

$32.0

$23.2

$20.9

$19.4

$18.0

$95.3

69.1

59.0

44.4

34.6

25.4

16.2

10.9

24.1

11.2

Countrywide

Wells Fargo

Washington Mutual

Chase HomeFinance

Bank of America

CitiMortgage

EMC Mortgage

GMAC-RFC

GMAC Residential

IndyMac

4Q05

4Q04

Source: National Mortgage News and SourceMedia Inc.

June 2006


In our assessment, strong retail distribution networks appear to generate healthier margins and more limited reliance on gain on sale accounting. Offsetting any higher rate-related downturn in originations could be significant increases in mortgage servicing income, as the value of servicing portfolios generally reacts favorably to higher rate environments. 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 Fargo’s customers are using online banking services, of which about 30% pay bills online. In our assessment, those customers with bill payment capabilities are less likely to leave the bank.

Technology And The Evolution

June 2006


HISTORY OF BANKING

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. On the national level, the regulators have recently created “tactical” rules, such as increased scrutiny of those banks with high levels of commercial real estate exposure relative to capital and disclosure of exotic mortgage lending totals. Throughout the last 100 years, legislators have sought to improve the safety and soundness of the banking system by enhancing regulations. Occasionally, these regulatory efforts have gone beyond reasonable, resulting in overly burdensome hindrances to free market activity. In exchange for a commercial bank’s sole ability to collect deposits comes a social responsibility as well as immense regulatory infrastructure. The banking organization is usually examined by at least three regulatory entities including the Federal Reserve as the holding company inspector, the FDIC, and either the state or Office of Comptroller of the Currency (OCC) examiners. The Federal Reserve will also usually examine state-member banks as well. During the early years of modern banking, significant bank failures such as those at the turn of the twentieth century were somewhat commonplace, and depositors typically lost their entire savings. Legislators sought to add stability to both the U.S. banking system and the domestic economy through increased regulation. The Federal Reserve System was formed in 1913 to regulate banks, act as a lender of last resort, and create a more formal monetary/liquidity system. The next significant legislation was the Pepper-McFadden Act of 1927, which prohibited national banks from establishing interstate branching networks. This act somewhat allowed both small and large banks to flourish within their local markets without fear of large-scale competition. The stock market crash of 1929 was followed by numerous bank failures and the great depression. In 1930, security affiliates of banks were sponsoring 54.4% of all new securities issuances. There were several incidences of individual excess and fraud leading up to the stock market crash, which resulted in creation of the somewhat misguided Glass Steagall Act of 1933. This legislation sought to separate and limit banks’ investing activities in an attempt to stabilize the banking industry. Recurring and stable returns became significantly more important. After several years, regulatory barriers began to slowly fade away during the second half of the twentieth century, punctuated by the Bank Holding Company Act of 1956, the Bank Holding Company Act of 1970, and finally, perhaps the most important development, the Depository Institutions Deregulation and Monetary Control Act of 1980. The Control Act phased out Regulation Q interest rate ceilings and introduced negotiable-order-of-withdrawal (NOW) accounts so banks could compete with money market funds for deposits.

Regulatory And Legislative History—The Pendulum Swings Back

June 2006


Throughout the 1970s and 1980s, banks found it increasingly difficult to compete with non-banks as regulatory barriers were lifted. Funding cost advantages narrowed and asset securitization became more typical. Banks became unsheltered from non-bank competition during the 1980s, reducing profitability and spreads in traditional corporate and consumer businesses. In the late 1980s, U.S. commercial banks were beset by a number of high-profile difficulties, as loan concentrations in LDC debt and commercial real estate negatively impacted many of the largest players in the industry. Citicorp was on the verge of failure and was under constant regulatory watch in 1990-1991. In some ways these severe problems may have been a function of increased competition from non-banks and a resultant stretch for profitability. Risk-based capital guidelines were established in January 1987 to address banks’ responsibility to apply certain risk weightings (or levels of capital) to selected activities. Also, throughout the 1990s regulatory barriers to bank consolidation began to fall. The Riegle-Neil Interstate Banking Act of 1995 allowed banks to buy other banks across the nation, while also phasing out banks’ restrictions against branching across state lines. NationsBank went on an acquisition binge, buying Barnett Banks, Boatmens Bank, and finally, Bank of America, to become the first truly nationwide commercial bank. The nationwide deposit cap remains at 10%. The year 1998 was the year of the mega-merger with combinations between NationsBank/ Bank of America, Bank One/First Chicago NBD, Citicorp/Travelers, and Wells Fargo/ Norwest. The Financial Modernization Act was passed in 2000, essentially eliminating the walls of Glass Steagall and rubber stamping the Citicorp/Travelers merger, which included commercial banking, investment banking, and insurance. More recent regulatory measures include guidance on home mortgage exposure, particularly exotic mortgages, and commercial real estate exposure relative to risk-based capital. Under a scenario of increased economic weakness, we would expect some more overt moves by legislators and regulators to ensure safety and soundness within the banking system.

June 2006


DEFINITIONS

Basic Analysis Net Interest 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)/ Risk- Adjusted Assets Tier 1 Risk Ratio: Core Capital (Tier 1)/ Risk-Adjusted Assets Leverage Ratio: Core Capital (Tier 1)/ Adjusted Tangible Assets Total Interest Income on Loans (Excludes Lease Income)/ Average Consolidated Loans (Domestic and Foreign Office) Total Interest & Dividend Income on Securities/ (Debt+Eq) 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) Total Interest Expense on Borrowings/ Average Borrowings (Avg Interest-bearing Liabilities – Average Interest-bearing Deposits) Total Interest Expense/ Average Interest-Bearing Liabilities (Deposits + Fed Funds Purchased & Repos + Commercial Paper + Mortgage Debt + Sub Debt + Other Borrowed Money)

Net Interest Margin

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

Yield on Loans

Yield on Total Securities

Yield on Earning Assets

Cost of Interest-Bearing Deposits

Cost of Borrowings (Non Deposits)

Cost of Funds

June 2006


Income Statement Analysis 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. 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 non-interest income. The net gain or loss realized during the calendar year-to-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 non-interest 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 non-interest income plus or minus gains (losses) on securities not held in trading accounts less total non-interest 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. Income (loss) before income taxes and extraordinary items and other adjustments less applicable income taxes to such income (loss).

Total Interest Income

Total Interest Expense

Net Interest Income

Total Provision Expense

Total Non-Interest Income

Total Realized Gs(Ls)-Securities

Total Non-Interest Expense

Income Before Income Tax & Extra Items

Income Taxes

Income Before Extraordinary

June 2006


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 bank’s total risk-based capital ratio. Total risk-based capital is the sum of Tier 1 and Tier 2 capital net of all deductions. Deductions are made for investments in banking and finance subsidiaries that are not consolidated for regulatory capital purposes, intentional reciprocal cross-holdings of banking organizations' capital instruments, and other deductions as determined by the reporting bank's primary federal supervisory authority. 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)/ Risk-Adjusted Assets Total Risk-Based Capital Ratio: Total Capital (Tier 1 Core Capital + Tier 2 Supplemental Capital)/ Risk-Adjusted 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

June 2006


Balance Sheet The total of all non-interest-bearing balances due from depository institutions, currency and coin, cash items in process of collection, and unposted debits. Includes balances due from banks in the United States, banks in foreign countries and foreign central banks, foreign branches of other U.S. banks, Federal Home Loan Banks, and Federal Reserve Banks; and the total of all interest-bearing balances due from depository institutions and foreign central banks that are held in offices of bank holding company or its consolidated subsidiaries. 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 "inflation indexed." 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, mortgage-backed securities, other domestic and foreign debt securities, and all equity 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.

Cash & Balances Due

Fed Funds Sold & Repos

Cash & Equivalents

U.S. Treasury Securities

Mortgage-Backed Securities

Other Investment Securities

Total Securities

Total Cash & Securities

Gross Loans & Leases

Unearned Income

Total Loans & Leases

June 2006


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 short-term 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 expansion; parking lots that are used by customers or employees of the bank, its branches, and its consolidated subsidiaries; furniture, fixtures, and movable equipment of the bank, its branches, and its consolidated subsidiaries; automobiles, airplanes, and other vehicles owned by the bank and used in the conduct of its business; the amount of capital lease property; and stocks and bonds issued by non-majority-owned corporations whose principal activity is the ownership of land, buildings, equipment, furniture, etc., occupied or used by the bank. 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.

Total Reserves

Net Loans & Leases

Trade Account Assets

Premises & Fixed Assets

OREO (Including Real Estate Held for Investment)

Investments in Subsidiaries

Mortgage Servicing Rights

Goodwill & Other Intangible

June 2006


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 non-interest-bearing balances and currency and coin; securities; federal funds sold and securities purchased under agreements to resell; loans and lease financing receivables, net of unearned income, allowance for loan and lease losses, and allocated transfer risk reserve; assets held for trading; premises and fixed assets; other real estate owned; investments in unconsolidated subsidiaries and associated companies; customers' liability to the reporting bank on acceptances outstanding; intangible assets; other assets. 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. 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

Other Assets

Total Assets

Total Deposits

Fed Funds Purchase & Repos

Commercial Paper

FHLB Advances

Other Borrowings

Total Other Borrowings

June 2006


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 and unpaid; net deferred income taxes, if credit balance; and liability on acceptances executed and outstanding. Excludes minority interest in consolidated subsidiaries. Includes non-interest-bearing and interest-bearing deposits held in both domestic and foreign offices; federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge and Agreement subsidiaries, and IBFs; demand notes issued to the U.S. Treasury; other borrowed money; mortgage indebtedness and obligations under capitalized leases; the bank's liability on acceptances executed and outstanding; notes and debentures subordinated to deposits; and other liabilities.

Trading Liabilities

Subordinated Debt & Mandatory Convertible Security

Other Liabilities

Total Liabilities

June 2006


COLLINS INDUSTRY AND COMPANY REPORTS

Industry ReportsJune-06 The Zing In Consumer Banking: Bankruptcies, Customer Service & The InternetMay-06 U.S. Card Industry In Transition: From Borrower to TransactorMay-06 Retail Banking: The Next Industry Consolidation Catalyst?April-06 A Seismic Shift In Loan ProfitabilityMarch-06 Regulators Sharpen Pencils On CRENovember-05 Competing For Deposit Market ShareNovember-05 Spanning the Lone Star StateOctober-05 Bank Stock Investing Strategies for 2006-2007 October-05 Competitive State of the U. S. Personal Wealth Business October-05 Exploring The Banking Opportunity In Asia July-05 Housing Market & Bank StocksJune-05 Watching The Dividend CalendarMay-05 Farewell to Deposit Fee Golden Goose?May-05 Middle-Office OutsourcingApril-05 Deposit Competition And The FedMarch-05 Simulating For A 'Bear' Rate FlatteningFebruary-05 Outlook for Pension RestatementsJanuary-05 Myths & Realities of Retail Banking

Company ReportsApril-06 OSBC Healthy Long-Term Fundamentals, But Near-Term HeadwindsMarch-06 WFC A Consistent Growth Story; Reiterate OutperformMarch-06 TCB Dark Cloud Lifting, Attractive ValuationMarch-06 ZION A Well-Prepared Game Plan In High-Growth MarketsFebruary-06 SNV Initiated Coverage With Outperform Rating; $30 Price TargetJanuary-06 BAC A Look At The 2005-2007 Growth DriversJanuary-06 CNB Initiated Coverage With Market Perform; $26 Price TargetJanuary-06 WTFC A Great Little Customer Service-Focused Franchise; Reiterate OutperformSeptember-05 C Continued Work In Progress; Maintain Market PerformSeptember-05 BAC Addressing Investor Concerns; Reiterate OutperformJune-05 C The Dark Cloud Begins To DissipateMay-05 MEL Initiated Coverage With Market PerformMay-05 NTRS A Day With Customer-Service-Focused Northern TrustMarch-05 WFC Managing For Higher Growth; Reiterate Outperform

PeriodicalsMay-06 1Q06 Earnings Wrap-UpApril-06 1Q06 Earnings PreviewApril-06 Growth Banks 1Q06 Earnings PreviewFebruary-06 4Q05 Earnings Wrap-upJanuary-06 4Q05 Earnings PreviewJanuary-06 Smid-cap 4Q05 Earnings PreviewNovember-05 3Q05 Earnings Wrap-Up October-05 3Q05 Earnings PreviewOctober-05 Smid-cap 3Q05 Earnings PreviewJuly-05 2Q05 Earnings Wrap-Up/Model Update July-05 2Q05 Smid-Cap Earnings PreviewJuly-05 Second Quarter 2005 Earnings PreviewApril-05 1Q05 Earnings Wrap-Up/Model UpdateApril-05 1Q05 Smid-Cap Earnings PreviewApril-05 1Q05 Large-Cap Earnings PreviewFebruary-05 4Q04 Earnings Wrap-Up/Model UpdateJanuary-05 4Q04 Smid-Cap Earnings PreviewJanuary-05 4Q04 Earnings Preview


June 2006


Important Research Disclosures

Note: Distribution of Ratings/IB Services shows the number of companies in each rating category from which Piper Jaffray and its affiliates received compensation for investment banking services within the past 12 months. NASD and NYSE rules require disclosure of which ratings most closely correspond with "buy," "hold," and "sell" recommendations. Accordingly, Outperform corresponds most closely with buy, Market Perform with hold, and Underperform with sell. Outperform, Market Perform and Underperform, however, are not the equivalent of buy, hold or sell, but instead represent indications of relative performance. See Rating Definitions below. An investor's decision to buy or sell a security must depend on individual circumstances. Analyst Certification – Andrew B. Collins, Senior Research Analyst The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Affiliate Disclosures: This report has been prepared by Piper Jaffray & Co. or its affiliate Piper Jaffray Ltd., both of which are subsidiaries of Piper Jaffray Companies (collectively “Piper Jaffray”). Piper Jaffray & Co. is regulated by the NYSE, NASD and the United States Securities and Exchange Commission, and its headquarters is located at 800 Nicollet Mall, Minneapolis, MN 55402. Piper Jaffray Ltd. is incorporated under the laws of the England and Wales and is authorised and regulated by the UK’s Financial Services Authority, and is a member of the London Stock Exchange, and is located at 18 King William Street, London, EC4N 7US. Disclosures in this section and in the Other Important Information section referencing Piper Jaffray include all affiliated entities unless otherwise specified. Piper Jaffray research analysts receive compensation that is based, in part, on overall firm revenues, which include investment banking revenues.

Complete disclosure information, price charts and ratings distributions on companies covered by Piper Jaffray Equity Research can be found on the Piper Jaffray website:

http://piperjaffray.com/researchdisclosures or by writing to Piper Jaffray, Equity Research Department, 800 Nicollet Mall, Minneapolis, MN 55402

June 2006


Rating Definitions

Investment Opinion: Investment opinions are based on each stock’s return potential relative to broader market indices, not on an absolute return. The relevant market indices are the S&P 500 and Russell 2000 for U.S. companies and the FTSE Techmark Mediscience index for European companies. • Outperform (OP): Expected to outperform the relevant broader market index over the next 12 months. • Market Perform (MP): Expected to perform in line with the relevant broader market index over the next 12 months. • Underperform (UP): Expected to underperform the relevant broader market index over the next 12 months. • Suspended (SUS): No active analyst investment opinion or no active analyst coverage; however, an analyst

investment opinion or analyst coverage is expected to resume. Volatility Rating: Our focus on growth companies implies that the stocks we recommend are typically more volatile than the overall stock market. We are not recommending the “suitability” of a particular stock for an individual investor. Rather, it identifies the volatility of a particular stock. • Low: The stock price has moved up or down by more than 10% in a month in fewer than 8 of the past 24 months. • Medium: The stock price has moved up or down by more than 20% in a month in fewer than 8 of the past 24

months. • High: The stock price has moved up or down by more than 20% in a month in at least 8 of the past 24 months. All

IPO stocks automatically get this volatility rating for the first 12 months of trading.

June 2006


Other Important Information The material regarding the subject company is based on data obtained from sources deemed to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This report is solely for informational purposes and is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it is not, and it should not be construed as, advice designed to meet the particular investment needs of any investor. This report is not an offer or the solicitation of an offer to sell or buy any security. Unless otherwise noted, the price of a security mentioned in this report is the market closing price as of the end of the prior business day. Piper Jaffray does not maintain a predetermined schedule for publication of research and will not necessarily update this report. Piper Jaffray policy generally prohibits research analysts from sending draft research reports to subject companies; however, it should be presumed that the analyst(s) who authored this report has had discussions with the subject company to ensure factual accuracy prior to publication, and has had assistance from the company in conducting diligence, including visits to company sites and meetings with company management and other representatives. This report is published in accordance with a conflicts management policy, which is available at http://www.piperjaffray.com/researchdisclosures. Notice to customers in Europe: This material is for the use of intended recipients only and only for distribution to professional and institutional investors, i.e. persons who are authorised persons or exempted persons within the meaning of the Financial Services and Markets Act 2000 of the United Kingdom, or persons who have been categorised by Piper Jaffray Ltd. as intermediate customers under the rules of the Financial Services Authority. Notice to customers in the United States: This report is distributed in the United States by Piper Jaffray & Co., member SIPC and NYSE, Inc., which accepts responsibility for its contents. The securities described in this report may not have been registered under the U.S. Securities Act of 1933 and, in such case, may not be offered or sold in the United States or to U.S. persons unless they have been so registered, or an exemption from the registration requirements is available. Customers in the United States who wish to effect a transaction in the securities discussed in this report should contact their Piper Jaffray & Co. sales representative. This material is not directed to, or intended for distribution to or use by, any person or entity if Piper Jaffray is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to such person or entity. This report may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose without the written consent of Piper Jaffray. Additional information is available upon request. © 2006 Piper Jaffray & Co. and/or Piper Jaffray Ltd. All rights reserved.

June 2006


N O T E S

June 2006

Equity Research MINNEAPOLIS CHICAGO 800 Nicollet Mall Hyatt Center, 24th Floor Suite 800 71 South Wacker Drive Minneapolis, MN 55402 Chicago, IL 60606 612 303-6000 312 920-3200 800 333-6000 800 973-1192 SAN FRANCISCO EAST PALO ALTO 345 California Street 1950 University Avenue Suite 2200 Suite 200 San Francisco, CA 94104 East Palo Alto, CA 94303 415 277-1500 650 838-1300 800 214-0540 800 981-1203 NEW YORK LONDON 245 Park Avenue, 33rd Floor 18 King William Street New York, NY 10167 London EC4N 7US 212 284-9300 +44 20 7743 8700 800 982-0419 Web Site: http://www.piperjaffray.com 06-0063

Since 1895. Member SIPC and NYSE.

Documents

Bank Primer