BA441 – 1/14/08BA441 – 1/14/08

Dean’s Lecture SeriesDean’s Lecture Series– January 10January 10– Hand in notes (put name on paper)Hand in notes (put name on paper)

BA441 – 1/14/08BA441 – 1/14/08

Current EventsCurrent Events

– Earnings warningsEarnings warnings

– Mergers and acquisitionsMergers and acquisitions

Current EventsCurrent Events Large LLR provisions announced…Large LLR provisions announced…

– West Coast - $27.8 millionWest Coast - $27.8 million– Bank of the Cascades - $7.5 millionBank of the Cascades - $7.5 million– Sterling Savings - $13 millionSterling Savings - $13 million– Umpqua Bank - $18 millionUmpqua Bank - $18 million– Washington Mutual - $806 millionWashington Mutual - $806 million– Merrill Lynch - $15 billionMerrill Lynch - $15 billion– Citigroup - $14 billionCitigroup - $14 billion

Stock AffectsStock Affects

WFC WFC USB USB BACBAC KEYKEY WCBO WCBO UMPQ UMPQ CACBCACB

STOCK PRICESTOCK PRICE

CurrentCurrent 28.20 29.85 38.50 23.23 13.00 12.99 12.81 28.20 29.85 38.50 23.23 13.00 12.99 12.81

52 wk hi52 wk hi 37.99 36.84 54.21 39.90 34.26 29.50 30.80 37.99 36.84 54.21 39.90 34.26 29.50 30.80

52 wk low52 wk low 25.79 27.86 37.16 21.04 12.85 12.90 11.61 25.79 27.86 37.16 21.04 12.85 12.90 11.61

PEPE 10.60 11.40 8.70 8.90 6.53 9.90 9.20 10.60 11.40 8.70 8.90 6.53 9.90 9.20

EPSEPS 2.65 2.61 4.41 2.61 1.99 1.31 1.40 2.65 2.61 4.41 2.61 1.99 1.31 1.40

AcquisitionAcquisition

B of A buys CountrywideB of A buys Countrywide

Countrywide gets…Countrywide gets… $4 billion B of A stock$4 billion B of A stock Escapes bankruptcyEscapes bankruptcy

AcquisitionAcquisition

B of A gets…B of A gets… 1000+ new offices1000+ new offices 15,000 added sales force15,000 added sales force Loan origination officesLoan origination offices Servicing capacityServicing capacity $408 billion originations in 2007$408 billion originations in 2007 $1.5 trillion in servicing$1.5 trillion in servicing 9 million loans9 million loans High tech mortgage platformHigh tech mortgage platform

AcquisitionAcquisition

““affirms our position as the nation’s affirms our position as the nation’s premier lender to consumers”premier lender to consumers”

Ken Lewis, Chairman & CEO, BACKen Lewis, Chairman & CEO, BAC

Cost of FundsCost of Funds

Pacific Coast Bankers’ BankPacific Coast Bankers’ Bank

Why deposit specials?Why deposit specials?– Rates decreasingRates decreasing– MaturitiesMaturities– Adjust liability rate sensitivityAdjust liability rate sensitivity

Klamath Falls Special??Klamath Falls Special??

Fundamental Analysis: Fundamental Analysis: RatiosRatios

Ratio AnalysisRatio Analysis

G&K: Chp. 3 (Skip RAROC & EVA)G&K: Chp. 3 (Skip RAROC & EVA)

http://www2.fdic.gov/ubpr/– ““View Reports”View Reports”– ““Uniform Bank Performance Reports”Uniform Bank Performance Reports”– Enter Bank NameEnter Bank Name

www.ffiec.gov– Handbooks & CatalogsHandbooks & Catalogs– UBPR HandbookUBPR Handbook

UBPR -- CAMELS RatingsUBPR -- CAMELS Ratings

Corporate vs. Fin’l InstitutionCorporate vs. Fin’l Institution

CorporateCorporate– LiquidityLiquidity– Asset UtilizationAsset Utilization– LeverageLeverage– ProfitabilityProfitability

Concentration on Concentration on use of assets to use of assets to provide return and provide return and continuationcontinuation

BanksBanks– ProfitabilityProfitability– Capital/RisksCapital/Risks– LiquidityLiquidity

Concentration on Concentration on risks to provide risks to provide return, stability return, stability and continuationand continuation

Areas of ConcentrationAreas of Concentration

Credit RiskCredit Risk Loans and Secs quality & type Loans and Secs quality & type Liquidity RiskLiquidity Risk S/T to L/T composition of S/T to L/T composition of

Assets and LiabsAssets and Liabs Market RiskMarket Risk Int Rate sensitivity of Assets Int Rate sensitivity of Assets

& Liabs (GAP)& Liabs (GAP) Operating RiskOperating Risk Employee usage and Employee usage and

efficiency (A/#Emps, efficiency (A/#Emps, EmpExp/#Emps) EmpExp/#Emps)

Legal RiskLegal Risk Lawsuits, Contract Exposure, Lawsuits, Contract Exposure, negative publicitynegative publicity

Capital/Solvency RiskCapital/Solvency Risk Eq Capital used and Eq Capital used and avail vs. Risk categories of usage avail vs. Risk categories of usage

Main ModelMain Model ROE (return on equity)ROE (return on equity)

DuPont: NI/S * S/A * A/EqDuPont: NI/S * S/A * A/Eq

PM * ATO * LevPM * ATO * Lev

ROA * LevROA * Lev

Banks: NI / (Inc Before Tax, Sec G/L) Banks: NI / (Inc Before Tax, Sec G/L) *(Inc Before Tax, Sec G/L) / *(Inc Before Tax, Sec G/L) /

Tot Optg Rev * Tot Optg Rev / A Tot Optg Rev * Tot Optg Rev / A

* A / Eq* A / Eq

Tax Eff * Exp Eff * Asset Eff * Fund’g EffTax Eff * Exp Eff * Asset Eff * Fund’g Eff

Main Model: StandardsMain Model: Standards

Corporate: ROE = ROA * LevCorporate: ROE = ROA * Lev

10-20% = 5-10% * 210-20% = 5-10% * 2 Banks:Banks:

10-20% = .7 – 1.4% * 1410-20% = .7 – 1.4% * 14

Return on AssetsReturn on Assets

ROA = NI / AROA = NI / A

NI = NII + NNonII - Other Things (OT)NI = NII + NNonII - Other Things (OT) ROA =ROA =

NII / A + NNonII / A – OT / ANII / A + NNonII / A – OT / A

Spread + Burden - OTSpread + Burden - OT

+4%+4% + -2% - +1% (Roughly) + -2% - +1% (Roughly)

Spread = Better credit than customersSpread = Better credit than customers

Burden = Return from providing Svcs.Burden = Return from providing Svcs.

Leverage/Credit RiskLeverage/Credit Risk

Asset QualityAsset Quality Loan Quality/QuantityLoan Quality/Quantity Credit RiskCredit Risk Market (Interest-Rate) RiskMarket (Interest-Rate) Risk

(Later in Gap Analysis)(Later in Gap Analysis)

Leverage/Credit RiskLeverage/Credit Risk

Asset QualityAsset Quality– Provision for Loan Losses / Loans (<.8%)Provision for Loan Losses / Loans (<.8%)– Non-Accruals / Loans (< 1%)Non-Accruals / Loans (< 1%)– Charge-Offs / Loans (Hopefully < ProvLL)Charge-Offs / Loans (Hopefully < ProvLL)

Loan RatiosLoan Ratios– Loans / AssetsLoans / Assets (60-80%)(60-80%)– Loans / Deposits Loans / Deposits (70% Small,(70% Small,

100+% Big) 100+% Big)

Credit RiskCredit Risk

Capital Note Rate vs. Gov’t Sec YldCapital Note Rate vs. Gov’t Sec Yld– Should be of same maturityShould be of same maturity– Time Series trend, widening Time Series trend, widening More risk More risk

LiquidityLiquidity

Temporary Investments:Temporary Investments:

FF sold+T-Bills+DueFrom / AFF sold+T-Bills+DueFrom / A Volatile Liability Dependency: Volatile Liability Dependency:

– 1) JumboCDs -TempInvmts / Loans1) JumboCDs -TempInvmts / Loans– 2) Jumbos+FFPurch / Assets2) Jumbos+FFPurch / Assets– 3) Jumbos+FFPurch / Total Liabs 3) Jumbos+FFPurch / Total Liabs

(% of funding)(% of funding)

Selected UBPR Ratios Selected UBPR Ratios 9/30/079/30/07

WFC USB BAC KEY WFC USB BAC KEY WCBO WCBO UMPQ CACB CZBCUMPQ CACB CZBC

ROAROA 1.54 2.00 1.16 1.15 1.37 1.00 2.00 1.69 1.54 2.00 1.16 1.15 1.37 1.00 2.00 1.69

ROEROE 15.76 21.03 13.37 14.88 14.29 5.61 13.76 13.76 15.76 21.03 13.37 14.88 14.29 5.61 13.76 13.76

Net IntNet Int

MarginMargin 4.40 5.56 2.46 3.55 5.12 4.59 5.53 5.47 4.40 5.56 2.46 3.55 5.12 4.59 5.53 5.47

Prov/Prov/

LoansLoans 0.86 1.28 0.60 1.30 1.26 1.18 1.21 0.99 0.86 1.28 0.60 1.30 1.26 1.18 1.21 0.99

Lns/ALns/A 66.42 65.25 51.06 77.96 81.65 73.20 84.06 77.60 66.42 65.25 51.06 77.96 81.65 73.20 84.06 77.60

Lns/Lns/

DepDep 89.76 110.71 85.34 111.99 101.83 91.82 112.59 99.54 89.76 110.71 85.34 111.99 101.83 91.82 112.59 99.54

EffEff

RatioRatio 60.27 46.27 53.26 61.95 55.82 56.20 44.34 52.50 60.27 46.27 53.26 61.95 55.82 56.20 44.34 52.50

Net non core fund dependencyNet non core fund dependency

30.40 44.28 44.21 31.33 21.53 16.57 21.90 6.92 30.40 44.28 44.21 31.33 21.53 16.57 21.90 6.92

CAMELS RatingsCAMELS Ratings

CC - - Capital AdequacyCapital Adequacy AA - - Asset QualityAsset Quality MM - - Mgmt Quality, Mgmt & BofD ability Mgmt Quality, Mgmt & BofD ability

and systems (policies & procedures)and systems (policies & procedures) EE - - Earnings, not just quantity, but Earnings, not just quantity, but

quality, sustainabilityquality, sustainability LL - - LiquidityLiquidity SS - - Sensitivity to market fluctuations, IntSensitivity to market fluctuations, Int

rates, FX, Commod prices (thru rates, FX, Commod prices (thru loans)loans)