Bank Management,

Management 6th edition.

Timothy W. Koch and S. Scott MacDonald
Copyright © 2006 by South-Western, a division of Thomson Learning

ANALYZING BANK
PERFORMANCE:
USING THE UBPR

Chapter 2

William Chittenden edited and updated the PowerPoint slides for this edition.
Balance Sheet
 Assets = Liabilities + Equity
 Balance sheet figures are calculated at
a particular point in time and thus
represent stock values.
Bank Assets
http://www2.fdic.gov/ubpr/UbprReport/SearchEngine/Default.as
p
 Cash and due from banks
 Vault cash, deposits held at the Fed and other
financial institutions, and cash items in the process
of collection.
 Investment Securities
 Securities held to earn interest and help meet
liquidity needs.
 Loans
 The major asset, generate the greatest amount of
income, exhibit the highest default risk and are
relatively illiquid.
 Other assets
 Bank premises and equipment, interest receivable,
prepaid expenses, other real estate owned, and
customers' liability to the bank
Balance Sheet (assets): PNC and Community National Bank
PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK
Dec-03 % of Dec-04 % of Dec-03 % of Dec-04 % of
BALANCE SHEET % Cha 1,000 Total % Cha 1,000 Total % Cha 1,000 Total % Cha 1,000 Total
ASSETS
Loans:
Real estate loans 1.2% 15,639,089 25.2% 32.4% 20,701,904 28.0% 4.0% 75,324 39.1% 12.9% 85,050 40.5%
Commercial loans -8.4% 11,879,285 19.2% 23.8% 14,707,458 19.9% -5.8% 34,288 17.8% 12.9% 38,716 18.4%
Individual loans -4.4% 2,501,847 4.0% 52.6% 3,816,861 5.2% 26.7% 8,454 4.4% -5.2% 8,011 3.8%
Agricultural loans 9.2% 984 0.0% 57.0% 1,545 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Other LN&LS in domestic off. -20.5% 3,022,795 4.9% -0.8% 2,999,113 4.1% 13.0% 26 0.0% 284.6% 100 0.0%
LN&LS in foreign off. 15.6% 1,190,025 1.9% 2.8% 1,222,904 1.7% 0.0% 0 0.0% 0.0% 0 0.0%
Gross Loans & Leases -4.6% 34,234,025 55.2% 26.9% 43,449,785 58.9% 2.2% 118,092 61.3% 11.7% 131,877 62.8%
Less: Unearned Income 8.0% 44,867 0.1% 0.2% 44,949 0.1% 0.0% 0 0.0% 0.0% 0 0.0%
Memo: Total loans -4.6% 34,189,158 55.1% 27.0% 43,404,836 58.8% 2.2% 118,092 61.3% 11.7% 131,877 62.8%
Loan & Lease loss Allowance -5.8% 606,886 1.0% -3.8% 583,915 0.8% 6.7% 1,258 0.7% 28.5% 1,617 0.8%
Net Loans & Leases -4.5% 33,582,272 54.1% 27.5% 42,820,921 58.0% 2.2% 116,834 60.6% 11.5% 130,260 62.0%
Investments:
U.S. Treasury & Agency securities 90.6% 5,574,108 9.0% 15.9% 6,460,936 8.8% 73.9% 34,937 18.1% 24.8% 43,591 20.7%
Municipal securities -46.9% 7,719 0.0% 1606.0% 131,685 0.2% -0.5% 613 0.3% -0.5% 610 0.3%
Foreign debt securities -100.0% 0 0.0% 0% 0 0.0% 0.0% 0 0.0% 0% 0 0.0%
All other securities 1.1% 8,804,028 14.2% 3.0% 9,064,146 12.3% #N/A 2,104 1.1% -2.2% 2,057 1.0%
Interest bearing bank balances 16.4% 259,318 0.4% 51.8% 393,713 0.5% #N/A 4,428 2.3% -57.5% 1,881 0.9%
Fed funds sold & resales -54.6% 1,106,733 1.8% 56.2% 1,728,372 2.3% 175.0% 7,000 3.6% -21.4% 5,500 2.6%
Trading account assets -9.1% 935,042 1.5% 78.3% 1,667,330 2.3% 0.0% 0 0.0% 0.0% 0 0.0%
Total Investments 8.7% 16,686,948 26.9% 16.5% 19,446,182 26.3% 111.1% 49,082 25.5% 9.3% 53,639 25.5%
Total Earning Assets -0.5% 50,269,220 81.1% 23.9% 62,267,103 84.4% 20.6% 165,916 86.1% 10.8% 183,899 87.5%
Nonint Cash & Due from banks -6.9% 2,926,330 4.7% 8.5% 3,174,493 4.3% -16.6% 13,083 6.8% -10.7% 11,682 5.6%
Premises, fixed assets & capital leases
24.4% 1,039,603 1.7% 2.5% 1,066,028 1.4% 12.2% 5,642 2.9% 2.2% 5,768 2.7%
Other real estate owned 21.8% 14,208 0.0% 0.7% 14,301 0.0% -84.3% 325 0.2% -100.0% 0 0.0%
Investment in unconsolidated subs. 252.4% 17,386 0.0% -12.4% 15,223 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Acceptances and other assets 51.8% 7,754,149 12.5% -6.2% 7,272,017 9.9% 259.8% 7,761 4.0% 13.2% 8,783 4.2%
Total Assets 4.0% 62,020,896 100.0% 19.0% 73,809,165 100.0% 18.6% 192,727 100.0% 9.0% 210,132 100.0%
Average Assets During Quarter 6.8% 62,719,462 101.1% 17.0% 73,391,052 99.4% 17.5% 191,480 99.4% 9.4% 209,525 99.7%
Adjustments to total loans
…three adjustments are made to obtain a
net loan figure.

1. Leases are included in gross loans.

2. Unearned income is deducted from
gross interest received.
3. Gross loans are reduced by the
dollar magnitude of a bank's loan-
loss reserve, which exists in
recognition that some loans will not
be repaid.
 Provisions for loan losses

Recoveries

Provisions for loan losses

Reserve for Loan Losses Charge offs

Bank investments and FASB 115
 Following FASB 115 a bank, at purchase, must
designate the objective behind buying investment
securities as either:
 Held-to-maturity securities are recorded on the balance
sheet at amortized cost.
 Trading account securities are actively bought and sold,
so the bank marks the securities to market (reports them
at current market value) on the balance sheet and
reports all gains and losses on the income statement.
 Available-for-sale, all other investment securities, are
recorded at market value on the balance sheet with a
corresponding change to stockholders’ equity as
unrealized gains and losses on securities holdings; no
income statement impact .
 Average assets, capital and loan loss data: PNC and Community NB
PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK
Enter analysts name here Dec-03 % of Dec-04 % of Dec-03 % of Dec-04 % of
SUPPLEMENTAL DATA Pg # % Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total
Average Assets 1 2.36% 60,890,137 14.30% 69,596,163 11.59% 176,531 13.45% 200,271
Domestic Banking offices 3 0.59% 684 7.75% 737 0.00% 5 20.00% 6
Foreign Branches 3 0.00% 8 0.00% 8 0.00% 0 0.00% 0
Number of equivalent employees 3 -1.72% 15,147 3.49% 15,675 -3.02% 64 9.85% 71

SUMMARY OF RISK BASED CAPITAL

Net Tier One 11A -0.49% 5,134,748 9.9% -0.90% 5,088,306 8.4% 14.19% 14,005 10.7% 9.09% 15,278 10.3%
Net Eligible Tier Two 11A -9.20% 1,566,924 3.0% 28.12% 2,007,618 3.3% 6.70% 1,258 1.0% 28.54% 1,617 1.1%
Tier Three 11A 36.19% (12,269) 0.0% 408.06% (62,334) -0.1% 0.00% 0 0.0% 0.00% 0 0.0%
Deductions 11A -2.73% 6,689,403 12.9% 5.15% 7,033,591 11.5% 13.53% 15,263 11.7% 10.69% 16,895 11.4%
Total-risk-based-capital 11A -2.73% 13,378,806 25.8% 5.15% 14,067,181 23.1% 13.53% 30,526 23.4% 10.69% 33,790 22.7%
Total Risk-Weighted Assets 11A -1.95% 51,908,044 100.0% 17.32% 60,897,630 100.0% 12.72% 130,506 100.0% 14.03% 148,814 100.0%

SUMMARY OF LOAN LOSS ACCOUNT

Balance at beginning of period 7 6.92% 644,475 1.8% -5.83% 606,886 1.5% 38.87% 1,179 1.0% 6.70% 1,258 1.0%
Gross Credit Losses 7 2.40% 255,377 0.7% -36.75% 161,537 0.4% 277.91% 616 0.5% -57.79% 260 0.2%
Memo: Loans HFS Writedown 7 14.01% 26,060 0.1% -67.16% 8,558 0.0% 0.00% 0 0.0% 0.00% 0 0.0%
Recoveries 7 11.29% 47,453 0.1% 5.05% 49,849 0.1% -15.38% 11 0.0% 72.73% 19 0.0%
Net Credit Losses 7 0.56% 207,924 0.6% -46.28% 111,688 0.3% 303.33% 605 0.5% -60.17% 241 0.2%
Provisions for Credit Losses 7 -39.11% 176,612 0.5% -70.81% 51,553 0.1% 42.50% 684 0.6% -12.28% 600 0.5%
Other Adjustments 7 -84.91% (6,277) 0.0% -692.07% 37,164 0.1% 0.00% 0 0.0% 0.00% 0 0.0%
Balance at end of period 7 -5.83% 606,886 1.7% -3.79% 583,915 1.5% 6.70% 1,258 1.1% 28.54% 1,617 1.3%
Average Total Loans & Leases 7 -8.74% 35,193,158 100.0% 13.55% 39,960,849 100.0% 5.43% 114,953 100.0% 7.38% 123,431 100.0%

NON-CURRENT LN&LS
90 days and over past due 8 -53.71% 72,963 0.2% -20.54% 57,979 0.1% -38.05% 184 0.2% -100.00% 0 0.0%
Total Nonaccrual Ln&LS 8 -21.98% 270,782 0.8% -47.60% 141,887 0.4% -42.61% 229 0.2% -9.17% 208 0.2%
Total Non-current LN&LS 8 -31.89% 343,745 1.0% -41.86% 199,866 0.5% -40.66% 413 0.4% -49.64% 208 0.2%
Ln&Ls 30-89 Days Past Due 8 -49.74% 126,455 0.4% -25.05% 94,779 0.2% -68.98% 844 0.7% 167.89% 2,261 1.8%
Restructured LN&LS 90+ Days P/D 8 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Restructured LN&LS Nonaccrual 8 -65.1% 424 0.0% -100.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Current Restructured LN&LS 8 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
All other real estate owned 8 21.8% 14,208 0.0% 0.7% 14,301 0.0% -84.3% 325 0.3% -100.0% 0 0.0%
Bank liabilities
 Demand deposits
 Transactions accounts that pay no interest
 Negotiable orders of withdrawal (NOWs) and
automatic transfers from savings (ATS)
accounts
 Pay interest set by each bank without federal
restrictions
 Money market deposit accounts (MMDAs)
 Pay market rates, but a customer is limited to no
more than six checks or automatic transfers each
month
 Savings and time deposits represent the bulk of
interest-bearing liabilities at banks.
 Bank liabilities (continued)
 Two general time deposits categories exist:
 Time deposits in excess of $100,000, labeled
jumbo certificates of deposit (CDs).
 Small CDs, considered core deposits which
tend to be stable deposits that are typically not
withdrawn over short periods of time.
 Deposits held in foreign offices
 Balances issued by a bank subsidiary located
outside the U.S.
 Purchased liabilities, (rate-sensitive
borrowings):
 Federal Funds purchased
 Repos
 Other borrowings less than one year
 Core versus volatile funds
 Core deposits are stable deposits that are not highly interest
rate-sensitive.
 More sensitive to the fees charged, services rendered, and
location of the bank.
 Includes: demand deposits, NOW accounts, MMDAs, and small
time deposits.
 Large, or volatile, borrowings are liabilities that are highly
rate-sensitive.
 Normally issued in uninsured denominations
 Ability to borrow is asset quality sensitive
 Includes: large CDs (over 100,000), deposits in foreign offices,
federal funds purchased, repurchase agreements, and other
borrowings with maturities less than one year.*
*The UBPR also includes brokered deposits less than $100,000 and maturing
within one year in the definition of net non-core liabilities.
 Balance Sheet (liabilities): PNC and Community National Bank
PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK
Dec-03 % of Dec-04 % of Dec-03 % of Dec-04 % of
BALANCE SHEET % Cha 1,000 Total % Cha 1,000 Total % Cha 1,000 Total % Cha 1,000 Total

LIABILITIES
Demand deposits 2.6% 7,070,434 11.4% 20.1% 8,488,607 11.5% 12.6% 72,500 37.6% 12.4% 81,514 38.8%
All NOW & ATS Accounts 9.9% 1,529,861 2.5% 8.9% 1,666,003 2.3% 15.5% 12,478 6.5% 39.7% 17,437 8.3%
Money market deposit accounts 6.8% 24,502,371 39.5% 8.8% 26,665,024 36.1% 56.7% 46,458 24.1% 5.3% 48,908 23.3%
Other savings deposits 5.0% 2,055,659 3.3% 35.4% 2,782,931 3.8% 7.3% 7,812 4.1% 26.7% 9,896 4.7%
Time deposits under $100M -15.9% 6,242,628 10.1% 13.1% 7,063,499 9.6% 4.0% 24,469 12.7% -14.4% 20,949 10.0%
Core Deposits 2.0% 41,400,953 66.8% 12.7% 46,666,064 63.2% 20.7% 163,717 84.9% 9.2% 178,704 85.0%
Time deposits of $100M or more -17.6% 1,775,943 2.9% 80.5% 3,205,331 4.3% 4.9% 13,572 7.0% 8.4% 14,714 7.0%
Deposits held in foreign offices 71.5% 2,371,548 3.8% 26.3% 2,994,623 4.1% 0.0% 0 0.0% 0.0% 0 0.0%
Total deposits 3.2% 45,548,444 73.4% 16.1% 52,866,018 71.6% 19.3% 177,289 92.0% 9.1% 193,418 92.0%
Fed funds purchased & resale 25.2% 499,232 0.8% 221.8% 1,606,647 2.2% 0.0% 1,000 0.5% 0.0% 1,000 0.5%
FHLB borrowings < 1 Yr 898.2% 1,000,000 1.6% -100.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Other borrowings inc mat < 1 yr 99.4% 2,264,921 3.7% 34.5% 3,046,632 4.1% 0.0% 0 0.0% 0.0% 0 0.0%
Memo: S.T. non core funding 73.5% 7,111,124 11.5% 25.7% 8,936,809 12.1% 0.1% 7,901 4.1% 28.7% 10,169 4.8%
Memo: S.T. Volatile liabilities 36.2% 6,911,644 11.1% 57.0% 10,853,233 14.7% 4.5% 14,572 7.6% 7.8% 15,714 7.5%
FHLB borrowings > 1 Yr -90.0% 115,406 0.2% -23.3% 88,508 0.1% 0.0% 0 0.0% 0.0% 0 0.0%
Other borrowings inc mat > 1 yr -2.9% 1,765,851 2.8% 105.2% 3,624,223 4.9% 0.0% 0 0.0% 0.0% 0 0.0%
Acceptances & other liabilities -0.1% 3,864,388 6.2% 18.7% 4,585,994 6.2% -11.0% 395 0.2% 31.6% 520 0.2%
Total Liabilities before Sub. Notes 4.6% 55,058,242 88.8% 19.5% 65,818,022 89.2% 19.1% 178,684 92.7% 9.1% 194,938 92.8%
Sub. Notes & Debentures 16.2% 1,340,133 2.2% 41.4% 1,895,482 2.6% 0.0% 0 0.0% 0.0% 0 0.0%
Total Liabilities 4.9% 56,398,375 90.9% 20.1% 67,713,504 91.7% 19.1% 178,684 92.7% 9.1% 194,938 92.8%
All common and preferred capital -4.1% 5,622,521 9.1% 8.4% 6,095,661 8.3% 12.0% 14,043 7.3% 8.2% 15,194 7.2%
Total Liabilities & Capital 4.0% 62,020,896 100.0% 19.0% 73,809,165 100.0% 18.6% 192,727 100.0% 9.0% 210,132 100.0%
Memoranda:
Officer, Shareholder Loans (#) 0.0% 2 0.0% 50.0% 3 0.0% -50.0% 1 0.0% 0.0% 1 0.0%
Officer, Shareholder Loans ($) -19.4% 14,211 0.0% 58.0% 22,449 0.0% 31.7% 1,852 1.0% 22.2% 2,263 1.1%
Non-investment ORE 21.8% 14,208 0.0% 0.7% 14,301 0.0% -84.3% 325 0.2% -100.0% 0 0.0%
Loans Held for Sale -10.2% 1,378,603 2.2% 20.9% 1,667,154 2.3% 0.0% 0 0.0% 0.0% 0 0.0%
Held-to Maturity Securities #N/A 2,114 0.0% -100.0% 0 0.0% 36.7% 4,073 2.1% -56.2% 1,785 0.8%
Available-for-Sale-Securities 23.4% 14,383,741 23.2% 8.9% 15,656,767 21.2% 89.4% 33,581 17.4% 32.4% 44,473 21.2%
Total Securities 23.4% 14,385,855 23.2% 8.8% 15,656,767 21.2% 81.8% 37,654 19.5% 22.9% 46,258 22.0%
All Brokered Deposits 14.2% 1,533,123 2.5% 49.3% 2,289,151 3.1% 0.0% 0 0.0% 0.0% 0 0.0%
Stockholders equity
 Subordinated notes and debentures:
 Notes and bonds with maturities in excess
of one year.
 Stockholders' equity
 Ownership interest in the bank.
 Common and preferred stock are listed at par
 Surplus account represents the amount of
proceeds received by the bank in excess of
par when it issued the stock.
 Retained earnings equals accumulated net
income not paid out as cash dividends
The income statement
 Interest income (II)
 Interest expense (IE)
 Interest income less interest expense equals
net interest income (NII)
 Loan-loss provisions (PL)
 represent management's estimate of potential lost
revenue from bad loans
 Noninterest income (OI)
 Noninterest expense (OE)
 noninterest expense usually exceeds noninterest
income such that the difference is labeled the bank's
burden
 Securities gains or losses (SG)
 Taxes
 Income statement (interest): PNC and Community National Bank
PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK
Dec-03 % of Dec-04 % of Dec-03 % of Dec-04 % of
Income Statement % Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total
Interest Income:
Interest and fees on loans -17.5% 1,730,575 37.5% 8.3% 1,875,058 38.4% 0.0% 7,923 73.6% 7.5% 8,521 72.1%
Income from lease financing -20.6% 189,910 4.1% -30.1% 132,839 2.7% 0.0% 0 0.0% 0.0% 0 0.0%
Memo: Fully taxable -17.7% 1,905,782 41.3% 4.6% 1,993,668 40.8% 0.0% 7,923 73.6% 7.5% 8,521 72.1%
Tax-exempt -25.7% 14,703 0.3% -3.2% 14,229 0.3% 0.0% 0 0.0% 0.0% 0 0.0%
Estimated tax benefit -27.7% 7,347 0.2% -22.3% 5,711 0.1% 0.0% 0 0.0% 0.0% 0 0.0%
Income on Loans & Leases (TE) -17.8% 1,927,832 41.7% 4.4% 2,013,608 41.2% 0.0% 7,923 73.6% 7.5% 8,521 72.1%

Other security inc. (data prior to 12/31/00) 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
U.S. Treasury & Agency securities 48.2% 34,418 0.7% 221.4% 110,614 2.3% -6.2% 427 4.0% 28.3% 548 4.6%
Mortgage Backed Securities -0.7% 366,877 7.9% -8.1% 337,110 6.9% -12.6% 368 3.4% 62.8% 599 5.1%
Estimated tax benefit 1.0% 504 0.0% 565.1% 3,352 0.1% 23.5% 21 0.2% 81.0% 38 0.3%
All other securities income -15.4% 117,866 2.6% -31.2% 81,129 1.7% 28.1% 41 0.4% 80.5% 74 0.6%
Memo: Tax-Exempt Securities Income 3.7% 1,008 0.0% 728.4% 8,350 0.2% 28.1% 41 0.4% 80.5% 74 0.6%
Investment Interest Income (TE) -2.4% 519,665 11.2% 2.4% 532,205 10.9% -7.4% 857 8.0% 46.9% 1,259 10.7%
Interest on due from banks 43.8% 4,835 0.1% -24.8% 3,638 0.1% 164.3% 37 0.3% 21.6% 45 0.4%
Interest on Fed funds sold & resales -32.4% 18,682 0.4% 57.9% 29,503 0.6% -7.0% 133 1.2% -23.3% 102 0.9%
Trading account income 216.9% 805 0.0% 2455.9% 20,575 0.4% 0.0% 0 0.0% 0.0% 0 0.0%
Other interest income 127.2% 39,447 0.9% -47.2% 20,847 0.4% 0.0% 15 0.1% 13.3% 17 0.1%
Total interest income (TE) -14.2% 2,511,266 54.4% 4.3% 2,620,376 53.6% -0.6% 8,965 83.3% 10.9% 9,944 84.1%
Interest Expense:
Int on Deposits held in foreign offices -14.7% 17,335 0.4% 144.0% 42,290 0.9% 0.0% 0 0.0% 0.0% 0 0.0%
Interest on CD's over $100M -29.5% 67,714 1.5% 6.4% 72,032 1.5% -19.2% 375 3.5% 6.4% 399 3.4%
Interest on All Other Deposits: -30.5% 369,702 8.0% 1.8% 376,244 7.7% -20.5% 1,060 9.8% 3.6% 1,098 9.3%
All NOW & ATS Accounts 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Money market deposit accounts 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Other savings deposits 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Time deposits under $100M 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Total interest exp. on deposits -29.8% 454,751 9.8% 7.9% 490,566 10.0% -20.2% 1,435 13.3% 4.3% 1,497 12.7%
Interest on Fed funds purchased & resale 2.2% 13,260 0.3% 204.9% 40,432 0.8% -52.2% 11 0.1% 90.9% 21 0.2%
Interest on Trad Liab & Oth Borrowings -59.0% 26,001 0.6% 429.4% 137,637 2.8% 0.0% 0 0.0% 0.0% 0 0.0%
Interest on mortgages & leases 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Interest on Sub. Notes & Debentures -17.9% 55,449 1.2% 52.1% 84,340 1.7% 0.0% 0 0.0% 0.0% 0 0.0%
Total interest expense -30.6% 549,461 11.9% 37.0% 752,975 15.4% -20.6% 1,446 13.4% 5.0% 1,518 12.8%
Net interest income (TE) -8.1% 1,961,805 42.5% -4.8% 1,867,401 38.2% 4.5% 7,519 69.8% 12.1% 8,426 71.3%
Income statement (noninterest): PNC and Community National Bank
PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK
Dec-03 % of Dec-04 % of Dec-03 % of Dec-04 % of
Income Statement % Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total % Cha $ 1,000 Total
Noninterest Income:
Fiduciary Activities -5.4% 291,582 6.3% 1.6% 296,226 6.1% 0.0% 0 0.0% 0.0% 0 0.0%
Deposit service charges 4.8% 422,100 9.1% 2.1% 431,169 8.8% 16.7% 1,070 9.9% 30.5% 1,396 11.8%
Trading rev, venture cap., securitize inc. 61.8% 88,985 1.9% -24.4% 67,267 1.4% 0.0% 0 0.0% 0.0% 0 0.0%
Investment banking, advisory inc. 3.5% 562,482 12.2% 32.7% 746,475 15.3% 0.0% 0 0.0% 0.0% 0 0.0%
Insurance commissions & fees -74.8% (660) 0.0% -1896% 11,856 0.2% -66.7% 1 0.0% 100.0% 2 0.0%
Net servicing fees -7.9% 35,245 0.8% 45.3% 51,212 1.0% 0.0% 0 0.0% 0.0% 0 0.0%
Loan & lease net gains (losses) -13.4% 134,969 2.9% -3.0% 130,953 2.7% -100.0% 0 0.0% 0.0% 0 0.0%
Other net gains (losses) -39.1% 10,036 0.2% -88.8% 1,124 0.0% -1012.5% (73) -0.7% -75.3% (18) -0.2%
Other noninterest income 10.5% 474,040 10.3% 1.3% 479,982 9.8% -31.9% 590 5.5% -15.8% 497 4.2%
Total noninterest income 3.7% 2,018,779 43.7% 9.8% 2,216,264 45.4% -16.6% 1,588 14.7% 18.2% 1,877 15.9%
Adjusted Operating Income (TE) -2.5% 3,980,584 86.2% 2.6% 4,083,665 83.6% 0.1% 9,107 84.6% 13.1% 10,303 87.2%
Non-Interest Expenses:
Personnel expense 5.7% 1,112,208 24.1% 27.8% 1,421,341 29.1% -2.4% 4,202 39.0% 3.2% 4,335 36.7%
Occupancy expense 11.8% 352,506 7.6% -0.6% 350,550 7.2% 4.5% 1,256 11.7% 2.2% 1,284 10.9%
Goodwill impairment 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Other Intangible Amortization -4.6% 4,006 0.1% 186.5% 11,476 0.2% 0.0% 11 0.1% 0.0% 11 0.1%
Other Oper Exp (Incl intangibles) 10.9% 956,533 20.7% 3.9% 994,122 20.3% -2.8% 2,064 19.2% 3.3% 2,133 18.0%
Total Noninterest Expenses 8.6% 2,425,253 52.5% 14.5% 2,777,489 56.8% -1.4% 7,533 70.0% 3.1% 7,763 65.7%
Provision: Loan & Lease Losses -39.1% 176,612 3.8% -70.8% 51,553 1.1% 42.5% 684 6.4% -12.3% 600 5.1%
Pretax Operating Income (TE) -11.5% 1,378,719 29.8% -9.0% 1,254,623 25.7% -8.9% 890 8.3% 118.0% 1,940 16.4%
Realized G/L Hld-to-Maturity Sec. 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Realized G/L Avail-for-Sale Sec. 12.6% 89,786 1.9% -44.5% 49,792 1.0% 110.8% 215 2.0% -100.0% 0 0.0%
Pretax Net Operating Income (TE) -10.4% 1,468,505 31.8% -11.2% 1,304,415 26.7% 2.4% 1,105 10.3% 75.6% 1,940 16.4%
Applicable Income Taxes -13.4% 490,376 10.6% -22.1% 381,926 7.8% -2.2% 355 3.3% 80.6% 641 5.4%
Current Tax Equivalent Adjustment -26.4% 7,851 0.2% 15.4% 9,063 0.2% 23.5% 21 0.2% 81.0% 38 0.3%
Other Tax Equivalent Adjustments 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Applicable Income Taxes (TE) -13.6% 498,227 10.8% -21.5% 390,989 8.0% -1.1% 376 3.5% 80.6% 679 5.7%
Net Operating Income -8.6% 970,278 21.0% -5.9% 913,426 18.7% 4.3% 729 6.8% 73.0% 1,261 10.7%
Net Extraordinary Items 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Net Income -8.6% 970,278 21.0% -5.9% 913,426 18.7% 4.3% 729 6.8% 73.0% 1,261 10.7%
Cash Dividends Declared 87.5% 750,000 16.2% 6.7% 800,000 16.4% -100.0% 0 0.0% 0.0% 0 0.0%
Retained Earnings -66.7% 220,278 4.8% -48.5% 113,426 2.3% 58.8% 729 6.8% 73.0% 1,261 10.7%
Memo: Net International Income 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0% 0.0% 0 0.0%
Memo: Total operating income -6.7% 4,619,831 100.0% 5.8% 4,886,432 100.0% -2.3% 10,768 100.0% 9.8% 11,821 100.0%
Memo: Net operating income -2.5% 3,980,584 86.2% 2.6% 4,083,665 83.6% 0.1% 9,107 84.6% 13.1% 10,303 87.2%
Interest income
…the sum of interest and loan fees earned
on all of a bank's assets.

 Interest income includes interest from:

1. Loans and leases
2. Deposits held at other institutions,
3. Investment securities
 Taxable and municipal securities
4. Trading account securities
Noninterest income
…has increased significantly and consists
of fees & other revenues for services
 Fiduciary activities
 Deposit service charges
 Trading revenue, venture cap., securitize inc.
 Investment banking, advisory inc.
 Insurance commissions & fees
 Net servicing fees
 Loan & lease net gains (losses)
 Other net gains (losses)
 Other noninterest income
Noninterest expense
…composed primarily of:
 Personnel expense:
 Salaries
and fringe benefits paid to
bank employees
 Occupancy expense :
 Rentand depreciation on equipment
and premises, and
 Other operating expenses:
 Utilities
 Deposit insurance premiums
Noninterest expense
 Expenses and loan losses directly
affect the balance sheet.
 The greater the size of loan portfolio,
the greater is operating overhead and
PLL.
 Consumer loans are usually smaller
and hence more costly (non-interest)
per dollar of loans.
Return on equity (ROE = NI / TE)
… the basic measure of stockholders’ returns

 ROE is composed of two parts:

 Return on Assets (ROA = NI / TA),
 represents the returns to the assets the
bank has invested in
 Equity Multiplier (EM = TA / TE),
 the degree of financial leverage
employed by the bank
Return on assets (ROA = NI / TA)
…can be decomposed into two parts:
 Asset Utilization (AU) → income generation
 Expense Ratio (ER) → expense control

 ROA = AU - ER
= (TR / TA) - (TE / TA)
Where:
TR = total revenue or total operating income
= Int. inc. + Non-int. inc. + SG and
TE = total expenses
= Int. exp. + Non-int. exp. + PLL + Taxes
ROA is driven by the bank’s ability to:
…generate income (AU) and control expenses (ER)

 Income generation (AU) can be found on

the UBPR (page 1) as:
Int. Inc. Non. int. Inc. Sec gains (losses)
AU   
TA TA TA
 Expense Control (ER) can be found on the
UBPR (page 1) as:
* Int. Exp. Non  int . Exp. PLL
ER   
TA TA TA
 Note, ER* does not include taxes.
 Bank Rate
BankPerformance
PerformanceModel
Model
Composition (mix)
Interest
Returns
Returnstoto
Shareholders Volume
Shareholders
ROE INCOME
ROE==NINI//TE
TE Fees and Serv Charge
Non Interest Trust
Other
Return to the Bank
ROA = NI / TA
Rate
Interest
Composition (mix)
Volume
EXPENSES
Salaries and Benefits
Overhead
Occupancy
Degree of Leverage
Prov. for LL Other
EM =1 / (TE / TA)
Taxes
 Expense ratio (ER = Exp / TA)
… the ability to control expenses.
 Interest expense / TA
 Cost per liability (avg. rate paid)
 Int. exp. liab. (j) / $ amt. liab. (j)

 Composition of liabilities
 $ amt. of liab. (j) / TA

 Volume of int. bearing debt and equity

 Non-interest expense / TA
 Salaries and employee benefits / TA
 Occupancy expense / TA
 Other operating expense / TA
 Provisions for loan losses / TA
 Taxes / TA
 Asset utilization (AU = TR / TA):
… the ability to generate income.
 Interest Income / TA
 Asset yields (avg. rate earned)
 Interest income asset (i) / $ amount of asset (i)

 Composition of assets (mix)

 $ amount asset (i) / TA

 Volume of Earning Assets

 Earning assets / TA

 Noninterest income / TA
 Fees and Service Charges
 Securities Gains (Losses)
 Other income
 Aggregate profitability measures
 Net interest margin
 NIM = NII / Earning Assets (EA)
 Spread
 Spread = (Int Inc / EA)  (Int Exp / Int bear. Liab.)
 Earnings base
 EB = EA / TA
 Burden / TA
 (Noninterest Exp. - Noninterest Income) / TA
 Efficiency ratio
 Non int. Exp. / (Net int. Inc. + Non-int. Inc.)
 Financial ratios UBPR for PNC
…PNC and Community National Bank

PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK

Dec-03 Dec-04 Dec-03 Dec-04
RISK RATIOS Pg # CALC BANK PG 1 CALC BANK PG 1 CALC BANK PG 4 CALC BANK PG 4
ROE: Net Income / Average total equity 11 16.90% 16.56% 14.41% 15.59% 15.26% 14.55% 5.48% 5.56% 11.56% 8.63% 8.67% 11.72%
ROA: Net Income / aTA 1 1.59% 1.59% 1.28% 1.31% 1.31% 1.31% 0.41% 0.41% 1.07% 0.63% 0.63% 1.09%
AU: Total Revenue / aTA 1 calc 7.59% 7.59% 6.45% 7.02% 7.02% 6.21% 6.10% 6.10% 6.50% 5.90% 5.91% 6.23%
ER: Total expenses (less Taxes) / aTA 1 calc 5.18% 5.17% 4.51% 5.15% 5.14% 4.23% 5.47% 5.48% 5.01% 4.93% 4.94% 4.73%
EM: aTA / Avg, Total Equity 6 calc 10.59x 10.48x 11.20x 11.59x 11.47x 10.65x 13.37x 13.76x 10.85x 13.78x 13.97x 10.67x
EB: Earning Assets / aTA 6 82.86% 82.60% 89.84% 82.85% 82.92% 90.08% 85.43% 86.74% 91.45% 86.83% 86.98% 91.76%
NIM: Net interest margin (te) 1 3.89% 3.82% 3.51% 3.32% 3.18% 3.52% 4.95% 4.80% 4.33% 4.82% 4.74% 4.36%
Spread (te) 3 calc 3.74% 3.62% 3.36% 3.15% 3.02% 3.37% 4.39% 4.25% 3.97% 4.30% 4.25% 4.04%
Efficiency Ratio 3 60.93% 60.86% 57.73% 68.01% 67.97% 57.92% 82.72% 82.75% 66.06% 75.35% 75.34% 65.99%
Burden / aTA 1 calc 0.67% 0.66% 1.12% 0.81% 0.81% 1.16% 3.37% 3.37% 2.33% 2.94% 2.94% 2.39%
Non Interest Income / Noninterest exp. 1 calc 83.24% 83.42% 62.03% 79.79% 79.70% 59.86% 21.08% 21.08% 29.18% 24.18% 24.23% 26.23%
EXPENSES:
ER*: Expense ratio (Expense components) 5.18%
0.00% 5.17% 4.51% 5.15%
0.00% 5.14% 4.23% 5.47%
0.00% 5.48% 5.01% 4.93%
0.00% 4.94% 4.73%
Total Interest expense / aTA 1 0.90% 0.90% 1.29% 1.08% 1.08% 1.20% 0.82% 0.82% 1.50% 0.76% 0.76% 1.31%
Memo: Interest expense / Avg. Earn assets1 1.09% 1.07% 1.41% 1.34% 1.28% 1.31% 0.95% 0.92% 1.61% 0.87% 0.85% 1.41%
Noninterest Expenses / aTA 1 3.98% 3.98% 2.95% 3.99% 3.99% 2.89% 4.27% 4.27% 3.29% 3.88% 3.88% 3.24%
Personnel expense 3 1.83% 1.83% 1.37% 2.04% 2.04% 1.38% 2.38% 2.38% 1.79% 2.16% 2.16% 1.78%
Occupancy expense 3 0.58% 0.58% 0.38% 0.50% 0.50% 0.36% 0.71% 0.71% 0.48% 0.64% 0.64% 0.47%
Other Oper Exp (Incl intangibles) 3 1.57% 1.58% 1.13% 1.43% 1.44% 1.08% 1.17% 1.18% 1.00% 1.07% 1.07% 0.98%
Provision: Loan & Lease Losses / aTA 1 0.29% 0.29% 0.27% 0.07% 0.07% 0.14% 0.39% 0.39% 0.22% 0.30% 0.30% 0.18%
Income Taxes / aTA #N/A 0.82% 0.83% 0.66% 0.56% 0.57% 0.67% 0.21% 0.21% 0.42% 0.34% 0.34% 0.41%
INCOME:
AU: Asset Utilization (Income components): 7.59% 7.59% 6.45% 7.02% 7.02% 6.21% 6.10% 6.10% 6.50% 5.90% 5.91% 6.23%
Interest income / aTA 1 4.12% 4.12% 4.57% 3.77% 3.77% 4.46% 5.08% 5.08% 5.52% 4.97% 4.97% 5.37%
Memo: Avg, yield on earning assets 1 4.98% 4.89% 4.98% 4.66% 4.46% 4.88% 5.91% 5.73% 5.95% 5.69% 5.59% 5.78%
Noninterest income / aTA 1 3.32% 3.32% 1.83% 3.18% 3.18% 1.73% 0.90% 0.90% 0.96% 0.94% 0.94% 0.85%
Realized security gains (losses) / aTA 1 0.15% 0.15% 0.05% 0.07% 0.07% 0.02% 0.12% 0.12% 0.02% 0.00% 0.00% 0.01%
 Interest expense
…composition, rate and volume effects for
PNC and Community National Bank

PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK

Dec-03 Dec-04 Dec-03 Dec-04
RISK RATIOS Pg # CALC BANK PG 1 CALC BANK PG 1 CALC BANK PG 4 CALC BANK PG 4
Interest Expense: Composition, Rate and Volume Effects
Rate: Avg, interest cost of interest bearing liabilities
3 1.24% 1.27% 1.62% 1.50% 1.44% 1.51% 1.51% 1.48% 1.98% 1.39% 1.34% 1.74%
Memo: Interest expense / Earning assets 1 1.09% 1.07% 1.41% 1.34% 1.28% 1.31% 0.95% 0.92% 1.61% 0.87% 0.85% 1.41%
Volume: All Interest bearing debt (avg.) / aTA 1 72.73% 70.78% 80.81% 73.70% 74.97% 80.65% 53.76% 55.17% 75.51% 54.29% 56.69% 74.88%
Mix and Cost of Individual Liabilities:*
Total deposits (avg.) / aTA: 6 73.72% 73.84% 67.79% 72.45% 72.30% 68.32% 91.72% 91.94% 85.07% 92.02% 91.96% 84.46%
Cost (rate): Int bearing Total deposits 3 1.20% 1.22% 1.39% 1.18% 1.14% 1.25% 1.52% 1.49% 1.90% 1.38% 1.33% 1.66%
Core deposits (avg.) / aTA 6 67.41% 68.16% 53.90% 64.84% 64.29% 54.64% 84.26% 84.50% 72.07% 85.00% 84.90% 71.52%
All other deposits (avg.) / aTA 6-calc 55.93% 55.41% 42.13% 53.38% 53.19% 43.03% 45.73% 45.52% 54.88% 46.77% 47.73% 53.88%
Trans (NOW&ATS) Accts (avg.) / aTA 6 2.40% 2.23% 1.81% 2.35% 2.15% 1.92% 6.55% 6.58% 10.37% 7.43% 7.02% 10.60%
Cost (rate): Trans (NOW&ATS) Acts 3 #N/A 0.90% 0.60% #N/A 0.86% 0.62% #N/A 0.29% 0.63% #N/A 0.28% 0.59%
MMDA's and other sav. Accts (avg) / aTA 6-calc 42.29% 42.15% 30.73% 41.23% 41.28% 32.75% 25.67% 25.71% 22.70% 28.07% 29.57% 22.85%
Cost (rate): Other savs deposits* 3 #N/A 0.57% 0.70% #N/A 0.60% 0.69% #N/A 0.90% 1.08% #N/A 0.98% 1.00%
Time deposits under $100M (avg.) / aTA 6 11.24% 11.03% 9.59% 9.80% 9.76% 8.36% 13.51% 13.23% 21.81% 11.27% 11.14% 20.43%
Cost (rate): All oth time dep. (CD<100M)3 #N/A 3.12% 2.41% #N/A 2.78% 2.03% #N/A 2.51% 2.80% #N/A 2.01% 2.43%
Volatile (S.T non core) liab (avg.) / aTA 10 9.85% 11.47% 23.24% 13.08% 12.11% 23.42% 8.03% 4.10% 11.90% 7.52% 4.84% 12.21%
Large CDs (inc. brokered) (avg.) / aTA 6 3.23% 3.14% 9.02% 3.67% 3.76% 8.99% 7.46% 7.44% 12.41% 7.02% 7.06% 12.39%
Cost (rate): CD's over $100M 3 3.44% 3.66% 2.38% 2.89% 2.81% 2.17% 2.83% 2.79% 2.72% 2.82% 2.78% 2.40%
Fed funds purchased & resale (avg.)/ aTA 6 0.74% 0.99% 8.16% 1.55% 3.18% 8.00% 0.56% 0.55% 1.05% 0.50% 0.55% 1.07%
Cost (rate): Fed funds pur & resale 3 2.95% 1.10% 1.15% 3.84% 1.37% 1.41% 1.10% 1.10% 0.82% 2.10% 1.75% 0.98%
Memo: All brokered deposits (avg.) / aTA 6 2.36% 2.19% 2.29% 2.81% 3.00% 2.81% 0.00% 0.00% 0.51% 0.00% 0.11% 0.84%
All common and preferred capital (avg.) / aTA 6 9.44% 9.54% 8.93% 8.63% 8.72% 9.39% 7.48% 7.27% 9.22% 7.26% 7.16% 9.37%
 Interest income
…composition, rate and volume effects for
PNC and Community National Bank

PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK

Dec-03 Dec-04 Dec-03 Dec-04
RISK RATIOS Pg # CALC BANK PG 1 CALC BANK PG 1 CALC BANK PG 4 CALC BANK PG 4
Interest Income: Composition, Rate and Volume Effects
Rate: Avg, yield on aTA
Memo: Avg. yield on earn. assets (rate) 1 4.98% 4.89% 4.98% 4.66% 4.46% 4.88% 5.91% 5.73% 5.95% 5.69% 5.59% 5.78%
Volume: Earn assets (avg.) / aTA 6 82.86% 82.60% 89.84% 82.85% 82.92% 90.08% 85.43% 86.74% 91.45% 86.83% 86.98% 91.76%
Non earning assets (avg.) / aTA 6-calc 17.14% 17.39% 9.75% 17.15% 17.07% 9.64% 14.57% 13.27% 8.25% 13.17% 13.03% 7.93%
Mix and Yield on Individual Assets:*
Total Loans (Gross loans - unearn inc.) (avg.) / 6aTA 57.55% 57.17% 57.69% 57.13% 57.25% 58.22% 65.76% 64.10% 66.45% 62.05% 61.33% 67.80%
Yield (rate): Total Loans & Leases (te) 3 5.48% 5.48% 5.66% 5.04% 5.04% 5.47% 6.89% 6.89% 6.91% 6.90% 6.90% 6.58%
Total Investments (avg.) / aTA: 6-calc 26.33% 26.46% 26.43% 26.60% 26.52% 26.50% 20.36% 23.28% 21.82% 25.50% 26.35% 20.98%
Total investment securities (avg.) / aTA 6-calc 21.41% 21.90% 22.56% 22.12% 22.03% 23.03% 16.43% 14.97% 17.89% 20.83% 20.78% 17.81%
Yield (rate): Total invest secs. (TE) 3 3.99% 3.81% 4.18% 3.54% 3.51% 3.98% 2.94% 3.32% 4.08% 3.00% 2.92% 3.91%
Yield (rate): Total invest secs. (Book) 3 3.99% 3.81% 4.00% 3.52% 3.48% 3.84% 2.86% 3.24% 3.75% 2.91% 2.83% 3.61%
Trading account assets (avg.) / aTA 6 1.61% 1.63% 0.39% 1.92% 2.09% 0.34% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Fundamental risks :
 Credit risk
 Liquidity risk
 Market risk
 Operational risk
 Capital or solvency risk
 Legal risk
 Reputational risk
Credit risk
…the potential variation in net income and
market value of equity resulting from
nonpayment or delayed payment on loans
and securities
 Three Question need to be addressed:
1. What has been the loss experience?
2. What amount of losses do we expect?
3. How prepared is the bank?
Credit ratios to consider
 What has been the loss experience?
 Net loss to average total LN&LS
 Gross losses to average total LN&LS
 Recoveries to avg. total LN&LS
 Recoveries to prior period losses
 Net losses by type of LN&LS
 What amount of losses do we expect?
 Non-current LN&LS to total loans
 Total Past/Due LN&LS - including nonaccrual
 Non-current & restruc LN&LS / Gross LN&LS
 Current - Non-current & restruc/ Gr LN&LS
 Past due loans by loan type
Credit ratios to consider (continued)
 How prepared are we?
 Provision for loan loss to: average
assets and average total LN&LS
 LN&LS Allowance to: net losses and
total LN&LS
 Earnings coverage of net loss
 Credit risk ratios :
PNC and Community National

PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK

Dec-03 Dec-04 Dec-03 Dec-04
RISK RATIOS Pg # CALC BANK PG 1 CALC BANK PG 1 CALC BANK PG 4 CALC BANK PG 4
Credit Risk
Gross loss / Avg. tot LN&LS 7 0.73% 0.73% 0.53% 0.40% 0.40% 0.36% 0.54% 0.54% 0.26% 0.21% 0.21% 0.20%
Net loss / Avg. tot LN&LS 7 0.59% 0.59% 0.41% 0.28% 0.28% 0.25% 0.53% 0.53% 0.21% 0.20% 0.20% 0.16%
Recoveries / Avg. tot LN&LS 7 0.13% 0.13% 0.12% 0.12% 0.12% 0.11% 0.01% 0.01% 0.06% 0.02% 0.02% 0.05%
Recoveries to prior credit loss 7 19.0%
0.00% 19.03% 22.26%
#NA 19.5%
0.00% 19.52% 23.76%
#NA 6.7%
0.00% 6.75% 29.21% 3.1% 3.08%
#NA 0.00% 24.53%
#NA
90 days past due / EOP LN&LS 8A 0.21% 0.21% 0.13% 0.13% 0.13% 0.10% 0.16% 0.16% 0.13% 0.00% 0.00% 0.10%
total Nonaccrual LN&LS / EOP LN&LS 8A 0.79% 0.79% 0.66% 0.33% 0.33% 0.46% 0.19% 0.19% 0.47% 0.16% 0.16% 0.41%
total Noncurrent / EOP LN&LS 8A 1.00% 1.00% 0.83%
#NA 0.46% 0.46% 0.59%#NA 0.35% 0.35% 0.66%
#NA 0.16% 0.16% 0.55%
#NA
LN&LS Allowance to total LN&LS 7 1.77% 1.78% 1.44% 1.34% 1.35% 1.27% 1.07% 1.07% 1.25% 1.23% 1.23% 1.20%
LN&LS Allowance / Net losses 7 2.9x 2.92x 4.18x 5.2x 5.23x 7.51x 2.1x 2.08x 11.89x 6.7x 6.71x 14.52x
LN&LS Allowance / total nonaccural LN&LS7 1.77x 2.24x 2.73x 2.92x 4.12x 3.73x 3.05x 5.49x 4.35x 7.77x 7.77x 5.63x
Earn Coverage of net losses 7 7.44x 7.44x 10.92x 11.61x 11.61x 19.94x 2.57x 2.57x 23.89x 10.38x 10.38x 30.80x
Net Loan and lease growth rate 1 -4.55%
0.00% -4.55% 10.14% 27.51%
0.00% 27.51% 17.96% 2.16%
0.00% 2.16% 11.61% 11.49%
0.00% 11.49% 14.24%
Liquidity risk
…the variation in net income and market value of
equity caused by a bank's difficulty in obtaining cash
at a reasonable cost from either the sale of assets or
new borrowings
 Banks can acquire liquidity in two distinct ways:
1. By liquidation of assets
 Composition of loans & investments
 Maturity of loans & investments
 Percent of loans and investments pledged as
collateral
2. By borrowing
 Core deposits
 Volatile deposits
 Asset quality & stockholders’ equity
 Liquidity risk ratios :
PNC and Community National

PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK

Dec-03 Dec-04 Dec-03 Dec-04
RISK RATIOS Pg # CALC
0.00% BANK PG 1 CALC
0.00% BANK PG 1 CALC
0.00% BANK PG 4 CALC
0.00% BANK PG 4
Liquidity Risk
%Total (EOP) Assets (except where noted)
Total equity 11 9.07% 9.07% 8.95% 8.26% 8.26% 9.74% 7.29% 7.29% 9.28% 7.23% 7.23% 9.42%
Core deposits 10 67.41% 66.75% 53.75% 64.84% 63.23% 54.19% 84.26% 84.95% 71.85% 85.00% 85.04% 71.10%
S.T Non-core funding 10 #N/A 11.47% 23.24% #N/A 12.11% 23.42% #N/A 4.10% 11.90% #N/A 4.84% 12.21%
Net loans & leases / Total Deposits 10 73.73% 73.73% 87.72% 81.00% 81.00% 88.28% 65.90% 65.90% 78.94% 67.35% 67.35% 81.42%
Net loans & leases / Core Deposits 10 81.11% 81.11% 115.16% 91.76% 91.76% 116.10% 71.36% 71.36% 93.85% 72.89% 72.89% 97.58%
Avg. Available for sale securities / aTA 6 21.41% 21.90% 21.11% 22.12% 22.03% 21.00% 14.44% 13.39% 15.88% 19.38% 19.04% 15.80%
Short-term investments 10 #N/A 2.73% 6.25% #N/A 3.02% 5.23% #N/A 5.99% 5.41% #N/A 5.72% 5.26%
Pledged securities 10 #N/A
0.00% 46.50% 49.08% #N/A
0.00% 51.76% 54.78% #N/A
0.00% 29.25% 40.34% #N/A
0.00% 28.49% 41.20%
Market risk
…the risk to a financial institution’s
condition resulting from adverse movements
in market rates or prices

 Market risk arises from changes in:

 Interest rates
 Foreign exchange rates
 Equity, commodity and security prices
Interest rate risk
…the potential variability in a bank's net
interest income and market value of equity
due to changes in the level of market interest
rates
Example: $10,000 Car loan
4 year fixed-rate car loan at 8.5%
1 year CD at 4.5%
Spread 4.0%
But for How long?
 Funding GAP
GAP = $RSA - $RSL,
where $RSA = $ amount of assets expected to reprice in a give period
of time.
 In this example:
GAP1yr = $0 - $10,000 = - $10,000
This is a negative GAP.
Foreign exchange risk
… the risk to a financial institution’s
condition resulting from adverse movements
in foreign exchange rates

 Foreign exchange risk arises from changes in

foreign exchange rates that affect the values
of assets, liabilities, and off-balance sheet
activities denominated in currencies different
from the bank’s domestic (home) currency.
 This risk is also often found in off-balance
sheet loan commitments and guarantees
denominated in foreign currencies; foreign
currency translation risk
Equity and security price risk
…change in market prices, interest rates and
foreign exchange rates affect the market values of
equities, fixed income securities, foreign currency
holdings, and associated derivative and other off-
balance sheet contracts.
 Large banks must conduct value-at-
risk analysis to assess the risk of loss
with their trading account portfolios.
Operational risk
…measures the cost efficiency of the bank's
activities; i.e., expense control or productivity;
also measures whether the bank has the proper
procedures and systems in place .
 Typical ratios focus on:
 total assets per employee
 total personnel expense per employee
 Non-interest expense ratio

 There is no meaningful way to estimate the likelihood

of fraud or other contingencies from published data.
 A bank’s operating risk is closely related to its
operating policies and processes and whether is has
adequate controls.
 Operational risk ratios:
PNC and Community National

PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK

Dec-03 Dec-04 Dec-03 Dec-04
RISK RATIOS Pg # CALC
0.00% BANK PG 1 CALC 0.00% BANK PG 1 CALC
0.00% BANK PG 4 CALC
0.00% BANK PG 4
Operational Risk
Total Assets / Number of employees 3 $4.09 $ 4.02 $ 5.17 $4.71 $ 4.44 $ 6.09 $3.00 $ 2.75 $ 2.95 $2.98 $ 2.84 $ 3.08
Personnel expense / number of employees 3 73.43x 72.06x 60.48x 90.68x 85.48x 65.26x 65.46x 60.03x 48.27x 61.47x 58.58x 50.10x
Efficiency ratio 3 60.93% 60.86% 57.73% 68.01% 67.97% 57.92% 82.72% 82.75% 66.06% 75.35% 75.34% 65.99%
Capital risk
… closely tied to asset quality and a bank's
overall risk profile
 The more risk taken, the greater is the
amount of capital required.
 Appropriate risk measures include all the
risk measures discussed earlier as well as
ratios measuring the ratio of:
 Tier 1 capital and total risk based capital to
risk weighted assets
 Equity capital to total assets
 Dividend payout, and growth rate in tier 1
capital
Definitions of capital
 Tier 1 capital is:
 Total common equity capital plus
noncumulative preferred stock, plus minority
interest in unconsolidated subsidiaries, less
ineligible intangibles.
 Risk-weighted assets are:
 The total of risk-adjusted assets where the
risk weights are based on four risk classes
of assets.
 Importantly, a bank's dividend policy affects
its capital risk by influencing retained
earnings.
 Capital risk ratios :
PNC and Community National

PNC BANK, NATIONAL ASSOCIATION COMMUNITY NATIONAL BANK

Dec-03 Dec-04 Dec-03 Dec-04
RISK RATIOS Pg # CALC
0.00% BANK PG 1 CALC 0.00% BANK PG 1 CALC
0.00% BANK PG 4 CALC
0.00% BANK PG 4
Capital Risk
Tier 1 Leverage Capital / Total Assets 11A 8.28% 8.37% 7.67% 6.89% 7.14% 7.71% 7.27% 7.31% 8.97% 7.27% 7.29% 9.11%
Tier 1 Capital / Risk-weighted assets 11A 9.91% 9.89% 11.13% 8.65% 8.36% 11.17% 10.73% 10.73% 12.64% 10.27% 10.27% 12.64%
Total RBC / Risk weighted Assets 11A 12.91% 12.89% 13.08% 11.95% 11.55% 12.98% 11.70% 11.70% 13.80% 11.35% 11.35% 13.76%
Equity Capital / Total Assets 11 9.07% 9.07% 8.95% 8.26% 8.26% 9.74% 7.29% 7.29% 9.28% 7.23% 7.23% 9.42%
Dividend Payout 11 77.30% 77.30% 57.26% 87.58% 87.58% 46.73% 0.00% 0.00% 30.77% 0.00% 0.00% 29.34%
Growth rate in total equity capital 11 -4.09% -4.09% 10.34% 8.42% 8.42% 20.28% 11.99% 11.99% 10.99% 8.20% 8.20% 11.32%
Equity growth less asset growth 11 -8.09%
0.00% -8.09% 0.59% -10.59%
0.00% -10.59% 4.55% -6.56%
0.00% -6.56% 0.41% -0.83%
0.00% -0.83% 0.28%
Legal risk
…the potential that unenforceable contracts,
lawsuits, or adverse judgments can disrupt or
otherwise negatively affect the operations or
condition of the banking organization
 Legal risk includes:
 Compliance risks
 Strategic risks
 General liability issues
Reputational risk
 Reputational risk is the potential that
negative publicity regarding an
institution’s business practices,
whether true or not, will cause a
decline in the customer base, costly
litigation, or revenue reductions.
Strategies for Maximizing
Shareholder Wealth
 Asset Management
 Composition and Volume
 Liability Management
 Composition and Volume
 Management of off-balance sheet activities
 Net interest margin management
 Credit risk management
 Liquidity management
 Management of non-interest expense
 Securities gains/losses management
 Tax management
CAMELS
 Capital Adequacy
 Measures bank’s ability to maintain
capital commensurate with the bank’s
risk
 Asset Quality
 Reflectsthe amount of credit risk with
the loan and investment portfolios
 Management Quality
 Reflects management’s ability to
identify, measure, monitor, and control
risks
CAMELS (continued)
 Earnings
 Reflectsthe quantity, trend, and quality of
earnings
 Liquidity
 Reflects
the sources of liquidity and
funds management practices
 Sensitivity to market risk
 Reflectsthe degree to which changes in
market prices and rates adversely affect
earnings and capital
CAMELS Ratings
 Regulators assign a rating of 1 (best)
to 5 (worst) in each of the six
categories and an overall composite
rating
1 or 2 indicates a fundamentally sound
bank
 3 indicates that a bank shows some
underlying weakness that should be
corrected
 4 or 5 indicates a problem bank
Average Performance Characteristics of
Banks by Business Concentration and Size
 ROE and ROA (up to $10 billion in assets)
increases with bank size
 Employees per dollar of assets decreases
with bank size
 Larger banks have lower efficiency ratios
than smaller banks
 Smaller banks:
 have proportionately more core deposits and
fewer volatile liabilities than larger banks
 have a proportionately larger earnings base
than larger banks
 have proportionately lower charge-offs than
larger banks
 Bank Performance Measure by Size
All
$100M - $1B - Trend Commercial
Assets Size < $100M $1B $10B > $10B with Size Banks
Number of institutions reporting 3,655 3,530 360 85  7,630
% of unprofitable institutions 9.80 2.00 1.90 1.20  5.70
% of institutions with earn gains 59.30 70.70 71.90 68.20  then   65.30
Performance ratios (%) 
Return on equity 8.46 12.88 13.48 14.24 generally 13.82
Return on assets 0.99 1.28 1.46 1.30  then   1.31
Pretax ROA 1.24 1.73 2.21 1.93  then   1.92
Equity capital ratio 11.52 10.00 10.90 9.95  10.10
Net interest margin 4.18 4.22 4.00 3.43  3.61
Yield on earning assets 5.65 5.73 5.39 4.83  5.02
Cost of funding earn assets 1.47 1.51 1.39 1.40  1.41
Earning assets to total assets 91.86 91.93 91.01 84.39  86.18
Efficiency ratio 69.54 62.22 55.54 57.42  57.96
Burden ratio 2.60 2.07 1.21 0.82  1.06
Noninterest inc to earn assets 1.03 1.54 2.46 2.93  2.66
Noninterest exp to earn assets 3.63 3.61 3.67 3.75  3.72
Net charge-offs to LN&LS 0.27 0.31 0.43 0.73  0.63
LN&LS loss provision to assets 0.22 0.26 0.34 0.34  0.33
 Bank Risk Measures by Size

All
$100M - $1B - Trend Commercial
Assets Size < $100M $1B $10B > $10B with Size Banks
Asset Quality 
Net charge-offs to LN&LS 0.27 0.31 0.43 0.73  0.63
Loss allow to Noncurr LN&LS 151.5 196.2 206.0 168.0  then   174.6
LN&LS provision to net charge-offs 134.2 125.7 125.5 83.0  89.9
Loss allowance to LN&LS 1.44 1.39 1.47 1.53  1.50
Net LN&LS to deposits 72.67 82.11 92.82 86.68  then   86.38
Capital Ratios 
Core capital (leverage) ratio 11.31 9.47 9.36 7.23  7.83
Tier 1 risk-based capital ratio 16.83 12.85 12.34 9.11  10.04
Total risk-based capital ratio 17.93 14.06 13.92 12.07  12.62
Structural Changes
New Charters 118 2 1 1  122
Banks absorbed by mergers 102 125 30 7  264
Failed banks 3 0 0 0  3

Performance Characteristics of Banks
by Business Concentration and Size
 Wholesale Banks
 Focus on loans for the largest
commercial customers and purchase
substantial funds from corporate and
government depositors
 Retail Banks
 Focus on consumer, small business,
mortgage, and agriculture loans and
obtain deposits form individuals and
small businesses
 Profitability Measures of Banks by
Business Concentration
Asset Concentration Groups
All Comm- Con – Other All All
Credit Inter - Ag. Mort -
Institu ercial summer spec. < Other Other
Card national Lending gage
Lending Lending $1B <$1B > $1B
# of institutions reporting 8,975 34 5 1,730 4,424 990 132 465 1,120 75
Commercial banks 7,630 30 5 1,725 4,019 250 101 414 1,026 60
Savings institutions 1,345 4 0 5 405 740 31 51 94 15
Performance ratios (%)
Return on equity 13.28 22.16 10.35 11.45 13.48 11.61 16.81 10.03 10.18 13.69
Return on assets 1.29 4.01 0.76 1.23 1.30 1.18 1.66 1.66 1.10 1.35
Pretax ROA 1.90 6.21 1.09 1.51 1.89 1.81 2.56 2.43 1.41 1.98
Equity capital ratio 10.28 20.52 8.05 10.79 10.09 10.55 11.36 16.94 10.79 10.25
Net interest margin 3.53 9.05 2.50 4.07 3.86 3.05 4.71 3.20 3.86 3.27
Yield on earning assets 5.02 11.25 4.02 5.68 5.26 4.80 6.88 4.54 5.40 4.54
Cost of funding earn assets 1.49 2.20 1.52 1.61 1.40 1.75 2.17 1.33 1.53 1.27
Earning assets to total assets 87.13 82.95 81.47 91.91 90.18 92.17 90.73 88.93 92.11 84.36
Efficiency ratio 58.03 45.29 70.16 62.07 57.10 56.46 45.53 72.42 66.92 57.71
Burden 0.97 -2.15 0.75 2.08 1.40 1.07 0.78 0.34 2.01 0.84
Noninterest inc to earn assets 2.13 11.18 2.51 0.69 1.51 1.20 2.26 6.55 1.16 1.96
Noninterest exp to earn assets 3.10 9.03 3.26 2.77 2.91 2.27 3.04 6.89 3.17 2.80
LN&LS loss provision to assets 0.30 3.96 0.25 0.16 0.22 0.08 1.05 0.11 0.17 0.07
 Risk Measures of Banks by Business
Concentration
Asset Concentration Groups
All Comm- Con – Other All All
Credit Inter - Ag. Mort -
Institu ercial summer spec. < Other Other
Card national Lending gage
Lending Lending $1B <$1B > $1B
Asset Quality
Net charge-offs to LN&LS 0.56 4.67 0.91 0.21 0.30 0.12 1.57 0.59 0.31 0.25
Loss allow to Noncurr LN&LS 167.8 215.8 135.3 156.7 206.3 97.1 259.4 168.4 155.3 156.3
LN&LS provs. to net charge-offs 90.6 108.8 63.1 118.3 105.2 100.2 85.5 67.3 99.4 52.0
Loss allowance to LN&LS 1.34 4.27 1.74 1.43 1.30 0.53 1.66 1.66 1.34 1.16
Net LN&LS to deposits 91.69 239.79 69.91 76.64 93.90 120.82 135.96 33.54 67.56 80.51
Capital Ratios
Core capital (leverage) ratio 8.12 16.64 6.05 10.37 8.29 9.10 8.82 15.17 10.38 7.20
Tier 1 risk-based capital ratio 10.76 14.59 8.38 14.71 10.14 15.36 13.07 34.70 17.32 9.45
Total risk-based capital ratio 13.19 17.34 12.03 15.82 12.18 16.86 14.62 35.95 18.55 12.12
Structural Changes
New Charters 128 0 0 5 35 4 1 77 5 1
Banks absorbed by mergers 322 1 2 24 210 26 13 6 20 20
Failed institutions 4 0 0 0 3 0 0 0 1 0
SOURCE: FDIC Quarterly Banking Profile, http://www.fdic.gov/, http://www2.fdic.gov/qbp.
Financial Statement Manipulation

 Off-balance sheet activities

 Enron and “Special-Purpose Vehicles”
 Window dressing
 Eliminate Fed borrowing prior to
financial statement reporting date
 Increase asset size prior to year-end

 Preferred stock
 Meetscapital requirements but causes
NIM, NI, ROE, and ROA to be
overstated
Financial Statement Manipulation
(continued)
 Non-performing loans
 Banksmay lend borrower funds to
make payments on past due loans,
understating non-performance status
 Allowance for loan losses
 Management discretion and IRS
regulations may be in conflict
Financial Statement Manipulation
(continued)
 Securities gains and losses
 Banks often classify all investment
securities as “available for sale,”
overstating any true “gains or losses”
 Non-recurring sales of assets
 Thistype of transaction is not part of
the bank’s daily activities and typically
cannot be repeated; thus it overstates
earnings
 Bank Management,
Management 6th edition.
Timothy W. Koch and S. Scott MacDonald
Copyright © 2006 by South-Western, a division of Thomson Learning

ANALYZING BANK
PERFORMANCE:
USING THE UBPR

Chapter 2

William Chittenden edited and updated the PowerPoint slides for this edition.