ANALYZING BANK PERFORMANCE
Balance Sheet
 Bank Assets:
 Cash and due from banks


Investment Securities


Securities held to earn interest and help meet liquidity
needs.
Loans


Vault cash, deposits held at the Fed and other financial
institutions, and cash items in the process of collection.
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
BALANCE SHEET
ASSETS
% Cha
Loans:
Real estate loans
1.2%
Commercial loans
-8.4%
Individual loans
-4.4%
Agricultural loans
9.2%
Other LN&LS in domestic off.
-20.5%
LN&LS in foreign off.
15.6%
Gross Loans & Leases
-4.6%
Less: Unearned Income
8.0%
Memo: Total loans
-4.6%
Loan & Lease loss Allowance
-5.8%
Net Loans & Leases
-4.5%
Investments:
U.S. Treasury & Agency securities 90.6%
Municipal securities
-46.9%
Foreign debt securities
-100.0%
All other securities
1.1%
Interest bearing bank balances
16.4%
Fed funds sold & resales
-54.6%
Trading account assets
-9.1%
Total Investments
8.7%
Total Earning Assets
Dec-03
1,000
% of
Total
% Cha
COMMUNITY NATIONAL BANK
% of
Total
15,639,089
11,879,285
2,501,847
984
3,022,795
1,190,025
34,234,025
44,867
34,189,158
606,886
33,582,272
25.2%
19.2%
4.0%
0.0%
4.9%
1.9%
55.2%
0.1%
55.1%
1.0%
54.1%
20,701,904
14,707,458
3,816,861
1,545
2,999,113
1,222,904
43,449,785
44,949
43,404,836
583,915
42,820,921
28.0%
19.9%
5.2%
0.0%
4.1%
1.7%
58.9%
0.1%
58.8%
0.8%
58.0%
5,574,108
7,719
0
8,804,028
259,318
1,106,733
935,042
16,686,948
9.0%
15.9% 6,460,936
0.0% 1606.0%
131,685
0.0%
0%
0
14.2%
3.0% 9,064,146
0.4%
51.8%
393,713
1.8%
56.2% 1,728,372
1.5%
78.3% 1,667,330
26.9%
16.5% 19,446,182
8.8%
0.2%
0.0%
12.3%
0.5%
2.3%
2.3%
26.3%
81.1%
84.4%
-0.5% 50,269,220
32.4%
23.8%
52.6%
57.0%
-0.8%
2.8%
26.9%
0.2%
27.0%
-3.8%
27.5%
Dec-04
1,000
23.9% 62,267,103
% Cha
Dec-03
1,000
4.0% 75,324
-5.8% 34,288
26.7%
8,454
0.0%
0
13.0%
26
0.0%
0
2.2% 118,092
0.0%
0
2.2% 118,092
6.7%
1,258
2.2% 116,834
% of
Total
% Cha
Dec-04
1,000
% of
Total
39.1% 12.9% 85,050
17.8% 12.9% 38,716
4.4%
-5.2%
8,011
0.0%
0.0%
0
0.0% 284.6%
100
0.0%
0.0%
0
61.3% 11.7% 131,877
0.0%
0.0%
0
61.3% 11.7% 131,877
0.7% 28.5%
1,617
60.6% 11.5% 130,260
40.5%
18.4%
3.8%
0.0%
0.0%
0.0%
62.8%
0.0%
62.8%
0.8%
62.0%
34,937
613
0
2,104
4,428
7,000
0
49,082
18.1%
0.3%
0.0%
1.1%
2.3%
3.6%
0.0%
25.5%
24.8% 43,591
-0.5%
610
0%
0
-2.2%
2,057
-57.5%
1,881
-21.4%
5,500
0.0%
0
9.3% 53,639
20.7%
0.3%
0.0%
1.0%
0.9%
2.6%
0.0%
25.5%
20.6% 165,916
86.1%
10.8% 183,899
87.5%
73.9%
-0.5%
0.0%
#N/A
#N/A
175.0%
0.0%
111.1%
Nonint Cash & Due from banks
-6.9% 2,926,330
4.7%
Premises, fixed assets & capital leases
24.4% 1,039,603
1.7%
Other real estate owned
21.8%
14,208
0.0%
Investment in unconsolidated subs. 252.4%
17,386
0.0%
Acceptances and other assets
51.8% 7,754,149 12.5%
Total Assets
4.0% 62,020,896 100.0%
8.5% 3,174,493
4.3% -16.6% 13,083
6.8% -10.7% 11,682
5.6%
2.5% 1,066,028
1.4% 12.2%
5,642
2.9%
2.2%
5,768
2.7%
0.7%
14,301
0.0% -84.3%
325
0.2% -100.0%
0
0.0%
-12.4%
15,223
0.0%
0.0%
0
0.0%
0.0%
0
0.0%
-6.2% 7,272,017
9.9% 259.8%
7,761
4.0% 13.2%
8,783
4.2%
19.0% 73,809,165 100.0% 18.6% 192,727 100.0%
9.0% 210,132 100.0%
Average Assets During Quarter
17.0% 73,391,052
6.8% 62,719,462 101.1%
99.4%
17.5% 191,480
99.4%
9.4% 209,525
99.7%
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 .
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.
 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.
Balance Sheet (liabilities): PNC and Community National Bank
PNC BANK, NATIONAL ASSOCIATION
BALANCE SHEET
% Cha
Dec-03
1,000
% of
Total
% Cha
Dec-04
1,000
COMMUNITY NATIONAL BANK
% of
Total
% Cha
Dec-03
1,000
% of
Total
% Cha
Dec-04
1,000
% of
Total
LIABILITIES
Demand deposits
All NOW & ATS Accounts
Money market deposit accounts
Other savings deposits
Time deposits under $100M
Core Deposits
2.6% 7,070,434
9.9% 1,529,861
6.8% 24,502,371
5.0% 2,055,659
-15.9% 6,242,628
2.0% 41,400,953
11.4%
2.5%
39.5%
3.3%
10.1%
66.8%
20.1% 8,488,607
8.9% 1,666,003
8.8% 26,665,024
35.4% 2,782,931
13.1% 7,063,499
12.7% 46,666,064
11.5%
2.3%
36.1%
3.8%
9.6%
63.2%
12.6% 72,500
15.5% 12,478
56.7% 46,458
7.3%
7,812
4.0% 24,469
20.7% 163,717
37.6%
6.5%
24.1%
4.1%
12.7%
84.9%
12.4% 81,514
39.7% 17,437
5.3% 48,908
26.7%
9,896
-14.4% 20,949
9.2% 178,704
38.8%
8.3%
23.3%
4.7%
10.0%
85.0%
Time deposits of $100M or more
Deposits held in foreign offices
Total deposits
-17.6% 1,775,943
71.5% 2,371,548
3.2% 45,548,444
2.9%
3.8%
73.4%
80.5% 3,205,331
26.3% 2,994,623
16.1% 52,866,018
4.3%
4.1%
71.6%
4.9% 13,572
0.0%
0
19.3% 177,289
7.0%
0.0%
92.0%
8.4% 14,714
0.0%
0
9.1% 193,418
7.0%
0.0%
92.0%
Fed funds purchased & resale
FHLB borrowings < 1 Yr
Other borrowings inc mat < 1 yr
Memo: S.T. non core funding
Memo: S.T. Volatile liabilities
25.2%
898.2%
99.4%
73.5%
36.2%
0.8% 221.8% 1,606,647
1.6% -100.0%
0
3.7%
34.5% 3,046,632
11.5%
25.7% 8,936,809
11.1%
57.0% 10,853,233
2.2%
0.0%
4.1%
12.1%
14.7%
1,000
0
0
7,901
14,572
0.5%
0.0%
0.0%
4.1%
7.6%
0.2%
2.8%
6.2%
88.8%
2.2%
90.9%
0.1%
0.0%
0
4.9%
0.0%
0
6.2% -11.0%
395
89.2% 19.1% 178,684
2.6%
0.0%
0
91.7% 19.1% 178,684
0.0%
0.0%
0.2%
92.7%
0.0%
92.7%
499,232
1,000,000
2,264,921
7,111,124
6,911,644
FHLB borrowings > 1 Yr
-90.0%
115,406
Other borrowings inc mat > 1 yr
-2.9% 1,765,851
Acceptances & other liabilities
-0.1% 3,864,388
Total Liabilities before Sub. Notes 4.6% 55,058,242
Sub. Notes & Debentures
16.2% 1,340,133
Total Liabilities
4.9% 56,398,375
All common and preferred capital
Total Liabilities & Capital
Memoranda:
Officer, Shareholder Loans (#)
Officer, Shareholder Loans ($)
Non-investment ORE
Loans Held for Sale
Held-to Maturity Securities
Available-for-Sale-Securities
Total Securities
All Brokered Deposits
-4.1% 5,622,521
9.1%
4.0% 62,020,896 100.0%
0.0%
2
-19.4%
14,211
21.8%
14,208
-10.2% 1,378,603
#N/A
2,114
23.4% 14,383,741
23.4% 14,385,855
14.2%
1,533,123
-23.3%
88,508
105.2% 3,624,223
18.7% 4,585,994
19.5% 65,818,022
41.4% 1,895,482
20.1% 67,713,504
8.4% 6,095,661
8.3%
19.0% 73,809,165 100.0%
0.0%
50.0%
3
0.0%
58.0%
22,449
0.0%
0.7%
14,301
2.2%
20.9% 1,667,154
0.0% -100.0%
0
23.2%
8.9% 15,656,767
23.2%
8.8% 15,656,767
2.5%
49.3%
2,289,151
0.0%
0.0%
0.0%
0.1%
4.5%
12.0% 14,043
7.3%
18.6% 192,727 100.0%
0.0% -50.0%
0.0% 31.7%
0.0% -84.3%
2.3%
0.0%
0.0% 36.7%
21.2% 89.4%
21.2% 81.8%
3.1%
0.0%
1
1,852
325
0
4,073
33,581
37,654
0
0.0%
0.0%
0.0%
28.7%
7.8%
1,000
0
0
10,169
15,714
0.5%
0.0%
0.0%
4.8%
7.5%
0.0%
0
0.0%
0
31.6%
520
9.1% 194,938
0.0%
0
9.1% 194,938
0.0%
0.0%
0.2%
92.8%
0.0%
92.8%
8.2% 15,194
7.2%
9.0% 210,132 100.0%
0.0%
0.0%
1.0% 22.2%
0.2% -100.0%
0.0%
0.0%
2.1% -56.2%
17.4% 32.4%
19.5% 22.9%
0.0%
0.0%
1
2,263
0
0
1,785
44,473
46,258
0.0%
1.1%
0.0%
0.0%
0.8%
21.2%
22.0%
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)
1.
2.
3.
Loans and leases
Deposits held at other institutions,
Investment securities

4.

2.
3.
4.
5.
6.
7.
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)
Noninterest expense (OE)



represent management's estimate of potential lost revenue from bad loans
Noninterest income (OI)
1.

Interest income less interest expense equals
net interest income (NII)
Loan-loss provisions (PL)


Trading account securities
Interest expense (IE)


Taxable and municipal securities
noninterest expense usually exceeds noninterest income such that the difference
is labeled the bank's burden
Securities gains or losses (SG)
Taxes
Provisions for loan losses
Recoveries
Provisions for loan losses
Reserve for Loan Losses
Charge offs
Income statement (interest): PNC and Community National Bank
Income Statement
PNC BANK, NATIONAL ASSOCIATION
Dec-03
% of
Dec-04
% Cha $ 1,000
Total % Cha
$ 1,000
% of
Total
Interest Income:
Interest and fees on loans
Income from lease financing
Memo: Fully taxable
Tax-exempt
Estimated tax benefit
Income on Loans & Leases (TE)
-17.5% 1,730,575
-20.6% 189,910
-17.7% 1,905,782
-25.7%
14,703
-27.7%
7,347
-17.8% 1,927,832
Other security inc. (data prior to 12/31/00) 0.0%
U.S. Treasury & Agency securities
48.2%
Mortgage Backed Securities
-0.7%
Estimated tax benefit
1.0%
All other securities income
-15.4%
Memo: Tax-Exempt Securities Income
3.7%
Investment Interest Income (TE)
-2.4%
Interest on due from banks
Interest on Fed funds sold & resales
Trading account income
Other interest income
Total interest income (TE)
Interest Expense:
Int on Deposits held in foreign offices
Interest on CD's over $100M
Interest on All Other Deposits:
All NOW & ATS Accounts
Money market deposit accounts
Other savings deposits
Time deposits under $100M
Total interest exp. on deposits
0
34,418
366,877
504
117,866
1,008
519,665
43.8%
4,835
-32.4%
18,682
216.9%
805
127.2%
39,447
-14.2% 2,511,266
% Cha
COMMUNITY NATIONAL BANK
Dec-03 % of
Dec-04
$ 1,000 Total % Cha $ 1,000
% of
Total
37.5%
4.1%
41.3%
0.3%
0.2%
41.7%
8.3% 1,875,058
-30.1% 132,839
4.6% 1,993,668
-3.2%
14,229
-22.3%
5,711
4.4% 2,013,608
38.4%
2.7%
40.8%
0.3%
0.1%
41.2%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
7,923
0
7,923
0
0
7,923
73.6%
0.0%
73.6%
0.0%
0.0%
73.6%
7.5%
0.0%
7.5%
0.0%
0.0%
7.5%
8,521
0
8,521
0
0
8,521
72.1%
0.0%
72.1%
0.0%
0.0%
72.1%
0.0%
0.7%
7.9%
0.0%
2.6%
0.0%
11.2%
0.0%
221.4%
-8.1%
565.1%
-31.2%
728.4%
2.4%
0
110,614
337,110
3,352
81,129
8,350
532,205
0.0%
2.3%
6.9%
0.1%
1.7%
0.2%
10.9%
0.0%
-6.2%
-12.6%
23.5%
28.1%
28.1%
-7.4%
0
427
368
21
41
41
857
0.0%
4.0%
3.4%
0.2%
0.4%
0.4%
8.0%
0.0%
28.3%
62.8%
81.0%
80.5%
80.5%
46.9%
0
548
599
38
74
74
1,259
0.0%
4.6%
5.1%
0.3%
0.6%
0.6%
10.7%
0.1% -24.8%
3,638
0.4%
57.9%
29,503
0.0% 2455.9%
20,575
0.9% -47.2%
20,847
54.4%
4.3% 2,620,376
0.1%
0.6%
0.4%
0.4%
53.6%
164.3%
-7.0%
0.0%
0.0%
-0.6%
37
133
0
15
8,965
0.3%
1.2%
0.0%
0.1%
83.3%
21.6%
-23.3%
0.0%
13.3%
10.9%
45
102
0
17
9,944
0.4%
0.9%
0.0%
0.1%
84.1%
-14.7%
-29.5%
-30.5%
0.0%
0.0%
0.0%
0.0%
-29.8%
17,335
67,714
369,702
0
0
0
0
454,751
0.4%
1.5%
8.0%
0.0%
0.0%
0.0%
0.0%
9.8%
144.0%
6.4%
1.8%
0.0%
0.0%
0.0%
0.0%
7.9%
42,290
72,032
376,244
0
0
0
0
490,566
0.9%
1.5%
7.7%
0.0%
0.0%
0.0%
0.0%
10.0%
0.0%
-19.2%
-20.5%
0.0%
0.0%
0.0%
0.0%
-20.2%
0
375
1,060
0
0
0
0
1,435
0.0%
3.5%
9.8%
0.0%
0.0%
0.0%
0.0%
13.3%
0.0%
6.4%
3.6%
0.0%
0.0%
0.0%
0.0%
4.3%
0
399
1,098
0
0
0
0
1,497
0.0%
3.4%
9.3%
0.0%
0.0%
0.0%
0.0%
12.7%
Interest on Fed funds purchased & resale 2.2%
Interest on Trad Liab & Oth Borrowings -59.0%
Interest on mortgages & leases
0.0%
Interest on Sub. Notes & Debentures
-17.9%
Total interest expense
-30.6%
13,260
26,001
0
55,449
549,461
0.3%
0.6%
0.0%
1.2%
11.9%
204.9%
429.4%
0.0%
52.1%
37.0%
40,432
137,637
0
84,340
752,975
0.8%
2.8%
0.0%
1.7%
15.4%
-52.2%
0.0%
0.0%
0.0%
-20.6%
11
0
0
0
1,446
0.1%
0.0%
0.0%
0.0%
13.4%
90.9%
0.0%
0.0%
0.0%
5.0%
21
0
0
0
1,518
0.2%
0.0%
0.0%
0.0%
12.8%
-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%
Net interest income (TE)
Income statement (noninterest): PNC and Community National Bank
Income Statement
PNC BANK, NATIONAL ASSOCIATION
Dec-03
% of
Dec-04
% Cha
$ 1,000
Total
% Cha
$ 1,000
% of
Total
Noninterest Income:
Fiduciary Activities
Deposit service charges
Trading rev, 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
Total noninterest income
-5.4%
291,582
4.8%
422,100
61.8%
88,985
3.5%
562,482
-74.8%
(660)
-7.9%
35,245
-13.4%
134,969
-39.1%
10,036
10.5%
474,040
3.7% 2,018,779
6.3%
9.1%
1.9%
12.2%
0.0%
0.8%
2.9%
0.2%
10.3%
43.7%
1.6%
296,226
2.1%
431,169
-24.4%
67,267
32.7%
746,475
-1896%
11,856
45.3%
51,212
-3.0%
130,953
-88.8%
1,124
1.3%
479,982
9.8% 2,216,264
6.1%
8.8%
1.4%
15.3%
0.2%
1.0%
2.7%
0.0%
9.8%
45.4%
0.0%
16.7%
0.0%
0.0%
-66.7%
0.0%
-100.0%
-1012.5%
-31.9%
-16.6%
Adjusted Operating Income (TE)
-2.5% 3,980,584
86.2%
2.6% 4,083,665
83.6%
5.7% 1,112,208
11.8%
352,506
0.0%
0
-4.6%
4,006
10.9%
956,533
8.6% 2,425,253
24.1%
7.6%
0.0%
0.1%
20.7%
52.5%
27.8% 1,421,341
-0.6%
350,550
0.0%
0
186.5%
11,476
3.9%
994,122
14.5% 2,777,489
Provision: Loan & Lease Losses
Pretax Operating Income (TE)
-39.1%
176,612
-11.5% 1,378,719
3.8%
29.8%
Realized G/L Hld-to-Maturity Sec.
Realized G/L Avail-for-Sale Sec.
Pretax Net Operating Income (TE)
0.0%
0
12.6%
89,786
-10.4% 1,468,505
Applicable Income Taxes
Current Tax Equivalent Adjustment
Other Tax Equivalent Adjustments
Applicable Income Taxes (TE)
-13.4%
-26.4%
0.0%
-13.6%
Net Operating Income
Net Extraordinary Items
Net Income
Non-Interest Expenses:
Personnel expense
Occupancy expense
Goodwill impairment
Other Intangible Amortization
Other Oper Exp (Incl intangibles)
Total Noninterest Expenses
Cash Dividends Declared
Retained Earnings
Memo: Net International Income
Memo: Total operating income
Memo: Net operating income
% Cha
COMMUNITY NATIONAL BANK
Dec-03 % of
Dec-04
$ 1,000 Total % Cha $ 1,000
0
1,070
0
0
1
0
0
(73)
590
1,588
0.0%
0.0%
9.9%
30.5%
0.0%
0.0%
0.0%
0.0%
0.0% 100.0%
0.0%
0.0%
0.0%
0.0%
-0.7% -75.3%
5.5% -15.8%
14.7%
18.2%
0.1%
9,107
84.6%
29.1%
7.2%
0.0%
0.2%
20.3%
56.8%
-2.4%
4.5%
0.0%
0.0%
-2.8%
-1.4%
4,202
1,256
0
11
2,064
7,533
39.0%
11.7%
0.0%
0.1%
19.2%
70.0%
-70.8%
51,553
-9.0% 1,254,623
1.1%
25.7%
42.5%
-8.9%
0.0%
1.9%
31.8%
0.0%
0
-44.5%
49,792
-11.2% 1,304,415
0.0%
1.0%
26.7%
490,376
7,851
0
498,227
10.6%
0.2%
0.0%
10.8%
-22.1%
15.4%
0.0%
-21.5%
381,926
9,063
0
390,989
-8.6%
970,278
21.0%
-5.9%
0.0%
-8.6%
0
970,278
0.0%
21.0%
87.5%
-66.7%
0.0%
750,000
220,278
0
16.2%
4.8%
0.0%
-6.7% 4,619,831 100.0%
-2.5% 3,980,584 86.2%
0
1,396
0
0
2
0
0
(18)
497
1,877
13.1% 10,303
% of
Total
0.0%
11.8%
0.0%
0.0%
0.0%
0.0%
0.0%
-0.2%
4.2%
15.9%
87.2%
3.2%
2.2%
0.0%
0.0%
3.3%
3.1%
4,335
1,284
0
11
2,133
7,763
36.7%
10.9%
0.0%
0.1%
18.0%
65.7%
684
890
6.4% -12.3%
8.3% 118.0%
600
1,940
5.1%
16.4%
0.0%
110.8%
2.4%
0
215
1,105
0.0%
0.0%
2.0% -100.0%
10.3%
75.6%
0
0
1,940
0.0%
0.0%
16.4%
7.8%
0.2%
0.0%
8.0%
-2.2%
23.5%
0.0%
-1.1%
355
21
0
376
3.3%
0.2%
0.0%
3.5%
80.6%
81.0%
0.0%
80.6%
641
38
0
679
5.4%
0.3%
0.0%
5.7%
913,426
18.7%
4.3%
729
6.8%
73.0%
1,261
10.7%
0.0%
-5.9%
0
913,426
0.0%
18.7%
0.0%
4.3%
0
729
0.0%
6.8%
0.0%
73.0%
0
1,261
0.0%
10.7%
6.7%
-48.5%
0.0%
800,000
113,426
0
16.4%
2.3%
0.0%
-100.0%
58.8%
0.0%
0
729
0
0.0%
6.8%
0.0%
0.0%
73.0%
0.0%
0
1,261
0
0.0%
10.7%
0.0%
5.8% 4,886,432 100.0%
2.6% 4,083,665 83.6%
-2.3% 10,768 100.0%
0.1% 9,107 84.6%
9.8% 11,821 100.0%
13.1% 10,303 87.2%
Bank Performance Model
Returns to
Shareholders
ROE = NI / TE
Interest
Rate
Composition (mix)
Volume
INCOME
Fees and Serv Charge
Non Interest
Trust
Other
Return to the Bank
ROA = NI / TA
Rate
Interest
Composition (mix)
Volume
EXPENSES
Overhead
Salaries and Benefits
Occupancy
Degree of Leverage
EM =1 / (TE / TA)
Prov. for LL
Taxes
Other
Return on equity (ROE = NI / TE)
… the basic measure of stockholders’ returns
 ROE is composed of two parts:
 Return

represents the returns to the assets the
bank has invested in
 Equity

on Assets (ROA = NI / TA),
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.
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.)
UBPR for PNC
Financial ratios
…PNC and Community National Bank
PNC BANK, NATIONAL ASSOCIATION
RISK RATIOS
Pg #
ROE: Net Income / Average total equity
11
ROA: Net Income / aTA
1
AU: Total Revenue / aTA
1 calc
ER: Total expenses (less Taxes) / aTA 1 calc
EM: aTA / Avg, Total Equity
6 calc
EB: Earning Assets / aTA
6
NIM: Net interest margin (te)
1
Spread (te)
3 calc
Efficiency Ratio
3
Burden / aTA
1 calc
Non Interest Income / Noninterest exp.
1 calc
EXPENSES:
ER*: Expense ratio (Expense components)
Total Interest expense / aTA
1
Memo: Interest expense / Avg. Earn assets
1
Noninterest Expenses / aTA
1
Personnel expense
3
Occupancy expense
3
Other Oper Exp (Incl intangibles)
3
Provision: Loan & Lease Losses / aTA 1
Income Taxes / aTA
#N/A
INCOME:
AU: Asset Utilization (Income components):
Interest income / aTA
1
Memo: Avg, yield on earning assets
1
Noninterest income / aTA
1
Realized security gains (losses) / aTA
1
Dec-03
CALC BANK
PG 1
Dec-04
CALC BANK
PG 1
COMMUNITY NATIONAL BANK
Dec-03
CALC BANK
PG 4
Dec-04
CALC BANK
PG 4
16.90%
1.59%
7.59%
5.18%
10.59x
82.86%
3.89%
3.74%
60.93%
0.67%
83.24%
16.56%
1.59%
7.59%
5.17%
10.48x
82.60%
3.82%
3.62%
60.86%
0.66%
83.42%
14.41%
1.28%
6.45%
4.51%
11.20x
89.84%
3.51%
3.36%
57.73%
1.12%
62.03%
15.59%
1.31%
7.02%
5.15%
11.59x
82.85%
3.32%
3.15%
68.01%
0.81%
79.79%
15.26%
1.31%
7.02%
5.14%
11.47x
82.92%
3.18%
3.02%
67.97%
0.81%
79.70%
14.55%
1.31%
6.21%
4.23%
10.65x
90.08%
3.52%
3.37%
57.92%
1.16%
59.86%
5.48%
0.41%
6.10%
5.47%
13.37x
85.43%
4.95%
4.39%
82.72%
3.37%
21.08%
5.56%
0.41%
6.10%
5.48%
13.76x
86.74%
4.80%
4.25%
82.75%
3.37%
21.08%
11.56%
1.07%
6.50%
5.01%
10.85x
91.45%
4.33%
3.97%
66.06%
2.33%
29.18%
8.63%
0.63%
5.90%
4.93%
13.78x
86.83%
4.82%
4.30%
75.35%
2.94%
24.18%
8.67%
0.63%
5.91%
4.94%
13.97x
86.98%
4.74%
4.25%
75.34%
2.94%
24.23%
11.72%
1.09%
6.23%
4.73%
10.67x
91.76%
4.36%
4.04%
65.99%
2.39%
26.23%
5.18%
0.00%
0.90%
1.09%
3.98%
1.83%
0.58%
1.57%
0.29%
0.82%
5.17%
0.90%
1.07%
3.98%
1.83%
0.58%
1.58%
0.29%
0.83%
4.51%
1.29%
1.41%
2.95%
1.37%
0.38%
1.13%
0.27%
0.66%
5.15%
0.00%
1.08%
1.34%
3.99%
2.04%
0.50%
1.43%
0.07%
0.56%
5.14%
1.08%
1.28%
3.99%
2.04%
0.50%
1.44%
0.07%
0.57%
4.23%
1.20%
1.31%
2.89%
1.38%
0.36%
1.08%
0.14%
0.67%
5.47%
0.00%
0.82%
0.95%
4.27%
2.38%
0.71%
1.17%
0.39%
0.21%
5.48%
0.82%
0.92%
4.27%
2.38%
0.71%
1.18%
0.39%
0.21%
5.01%
1.50%
1.61%
3.29%
1.79%
0.48%
1.00%
0.22%
0.42%
4.93%
0.00%
0.76%
0.87%
3.88%
2.16%
0.64%
1.07%
0.30%
0.34%
4.94%
0.76%
0.85%
3.88%
2.16%
0.64%
1.07%
0.30%
0.34%
4.73%
1.31%
1.41%
3.24%
1.78%
0.47%
0.98%
0.18%
0.41%
7.59%
4.12%
4.98%
3.32%
0.15%
7.59%
4.12%
4.89%
3.32%
0.15%
6.45%
4.57%
4.98%
1.83%
0.05%
7.02%
3.77%
4.66%
3.18%
0.07%
7.02%
3.77%
4.46%
3.18%
0.07%
6.21%
4.46%
4.88%
1.73%
0.02%
6.10%
5.08%
5.91%
0.90%
0.12%
6.10%
5.08%
5.73%
0.90%
0.12%
6.50%
5.52%
5.95%
0.96%
0.02%
5.90%
4.97%
5.69%
0.94%
0.00%
5.91%
4.97%
5.59%
0.94%
0.00%
6.23%
5.37%
5.78%
0.85%
0.01%
Interest expense
…composition, rate and volume effects for
PNC and Community National Bank
PNC BANK, NATIONAL ASSOCIATION
RISK RATIOS
Dec-03
Pg # CALC BANK
Interest Expense: Composition, Rate and Volume Effects
Rate: Avg, interest cost of interest bearing liabilities
3
1.24%
Memo: Interest expense / Earning assets
1
1.09%
Volume: All Interest bearing debt (avg.) / aTA 1
72.73%
Mix and Cost of Individual Liabilities:*
Total deposits (avg.) / aTA:
6
73.72%
Cost (rate): Int bearing Total deposits
3
1.20%
Core deposits (avg.) / aTA
6
67.41%
All other deposits (avg.) / aTA
6-calc 55.93%
Trans (NOW&ATS) Accts (avg.) / aTA
6
2.40%
Cost (rate): Trans (NOW&ATS) Acts
3
#N/A
MMDA's and other sav. Accts (avg) / aTA 6-calc 42.29%
Cost (rate): Other savs deposits*
3
#N/A
Time deposits under $100M (avg.) / aTA
6
11.24%
Cost (rate): All oth time dep. (CD<100M) 3
#N/A
Volatile (S.T non core) liab (avg.) / aTA
10
9.85%
Large CDs (inc. brokered) (avg.) / aTA
6
3.23%
Cost (rate): CD's over $100M
3
3.44%
Fed funds purchased & resale (avg.)/ aTA 6
0.74%
Cost (rate): Fed funds pur & resale
3
2.95%
Memo: All brokered deposits (avg.) / aTA
6
2.36%
All common and preferred capital (avg.) / aTA 6
9.44%
PG 1
Dec-04
CALC BANK
PG 1
COMMUNITY NATIONAL BANK
Dec-03
CALC BANK
PG 4
Dec-04
CALC BANK
PG 4
1.27% 1.62% 1.50% 1.44% 1.51% 1.51% 1.48% 1.98% 1.39% 1.34% 1.74%
1.07% 1.41% 1.34% 1.28% 1.31% 0.95% 0.92% 1.61% 0.87% 0.85% 1.41%
70.78% 80.81% 73.70% 74.97% 80.65% 53.76% 55.17% 75.51% 54.29% 56.69% 74.88%
73.84%
1.22%
68.16%
55.41%
2.23%
0.90%
42.15%
0.57%
11.03%
3.12%
11.47%
3.14%
3.66%
0.99%
1.10%
2.19%
9.54%
67.79%
1.39%
53.90%
42.13%
1.81%
0.60%
30.73%
0.70%
9.59%
2.41%
23.24%
9.02%
2.38%
8.16%
1.15%
2.29%
8.93%
72.45%
1.18%
64.84%
53.38%
2.35%
#N/A
41.23%
#N/A
9.80%
#N/A
13.08%
3.67%
2.89%
1.55%
3.84%
2.81%
8.63%
72.30%
1.14%
64.29%
53.19%
2.15%
0.86%
41.28%
0.60%
9.76%
2.78%
12.11%
3.76%
2.81%
3.18%
1.37%
3.00%
8.72%
68.32%
1.25%
54.64%
43.03%
1.92%
0.62%
32.75%
0.69%
8.36%
2.03%
23.42%
8.99%
2.17%
8.00%
1.41%
2.81%
9.39%
91.72%
1.52%
84.26%
45.73%
6.55%
#N/A
25.67%
#N/A
13.51%
#N/A
8.03%
7.46%
2.83%
0.56%
1.10%
0.00%
7.48%
91.94%
1.49%
84.50%
45.52%
6.58%
0.29%
25.71%
0.90%
13.23%
2.51%
4.10%
7.44%
2.79%
0.55%
1.10%
0.00%
7.27%
85.07%
1.90%
72.07%
54.88%
10.37%
0.63%
22.70%
1.08%
21.81%
2.80%
11.90%
12.41%
2.72%
1.05%
0.82%
0.51%
9.22%
92.02%
1.38%
85.00%
46.77%
7.43%
#N/A
28.07%
#N/A
11.27%
#N/A
7.52%
7.02%
2.82%
0.50%
2.10%
0.00%
7.26%
91.96%
1.33%
84.90%
47.73%
7.02%
0.28%
29.57%
0.98%
11.14%
2.01%
4.84%
7.06%
2.78%
0.55%
1.75%
0.11%
7.16%
84.46%
1.66%
71.52%
53.88%
10.60%
0.59%
22.85%
1.00%
20.43%
2.43%
12.21%
12.39%
2.40%
1.07%
0.98%
0.84%
9.37%
Interest income
…composition, rate and volume effects for
PNC and Community National Bank
PNC BANK, NATIONAL ASSOCIATION
RISK RATIOS
Pg #
Dec-03
CALC BANK PG 1
Interest Income: Composition, Rate and Volume Effects
Rate: Avg, yield on aTA
Memo: Avg. yield on earn. assets (rate)
1
4.98%
Volume: Earn assets (avg.) / aTA
6
82.86%
Non earning assets (avg.) / aTA
6-calc 17.14%
Mix and Yield on Individual Assets:*
Total Loans (Gross loans - unearn inc.) (avg.) / 6aTA 57.55%
Yield (rate): Total Loans & Leases (te)
3
5.48%
Total Investments (avg.) / aTA:
6-calc 26.33%
Total investment securities (avg.) / aTA
6-calc 21.41%
Yield (rate): Total invest secs. (TE)
3
3.99%
Yield (rate): Total invest secs. (Book)
3
3.99%
Trading account assets (avg.) / aTA
6
1.61%
Dec-04
CALC BANK PG 1
COMMUNITY NATIONAL BANK
Dec-03
CALC BANK PG 4
Dec-04
CALC BANK PG 4
4.89% 4.98% 4.66% 4.46% 4.88% 5.91% 5.73% 5.95% 5.69% 5.59% 5.78%
82.60% 89.84% 82.85% 82.92% 90.08% 85.43% 86.74% 91.45% 86.83% 86.98% 91.76%
17.39% 9.75% 17.15% 17.07% 9.64% 14.57% 13.27% 8.25% 13.17% 13.03% 7.93%
57.17%
5.48%
26.46%
21.90%
3.81%
3.81%
1.63%
57.69%
5.66%
26.43%
22.56%
4.18%
4.00%
0.39%
57.13%
5.04%
26.60%
22.12%
3.54%
3.52%
1.92%
57.25%
5.04%
26.52%
22.03%
3.51%
3.48%
2.09%
58.22%
5.47%
26.50%
23.03%
3.98%
3.84%
0.34%
65.76%
6.89%
20.36%
16.43%
2.94%
2.86%
0.00%
64.10%
6.89%
23.28%
14.97%
3.32%
3.24%
0.00%
66.45%
6.91%
21.82%
17.89%
4.08%
3.75%
0.00%
62.05%
6.90%
25.50%
20.83%
3.00%
2.91%
0.00%
61.33%
6.90%
26.35%
20.78%
2.92%
2.83%
0.00%
67.80%
6.58%
20.98%
17.81%
3.91%
3.61%
0.00%
Issues in Interest Income and Interest
Expense
 Deregulation in the 1990s lead to an
increase in competition
 Average NIM fell since 1992 due to this
increased competition
Net Interest Margin over Time
1992
4.32%
4.50%
4.00%
3.50%
2004
3.61%
3.00%
2.50%
2.00%
1.50%
1945
1.46%
1.00%
'34
'39
'44
'49
'54
'59
'64
'69
'74
'79
'84
'89
'94
'99
'04
Net Interest Margins by Bank Asset Size,
1992–2004
5.0%
Net Interest Margins
4.8%
4.6%
$100M - $B
4.4%
< $100M
4.2%
4.0%
> $1B
3.8%
3.6%
3.4%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Issues in Interest Income and Interest
Expense
 Core deposit growth has slowed due
to “disintermediation”
 Loan yields have fallen on a relative
basis due to credit scoring and
increased competition among lenders
 NIM is being squeezed, so banks must
concentrate more on non-interest
income to grow profits.
Issues in Non-Interest Income and
Non-Interest Expense
 Banks must rely less on net interest income and
more on non-interest income to be more successful

Banks must grow their non-interest income relative to
non-interest expense if they want to see net income
grow.
 The highest earning banks will be those that
generate an increasing share of operating revenue
from non-interest sources, like fee income

All fees are NOT created equal
 Some fees are stable and predictable over time, while
others are highly volatile because they are cyclical
 Consider NSF charges on checkwriting
 Largest contributors are deposit service charges
and other non-interest income
 Largest banks rely more on non-interest income
than their smaller counterparts
0.0%
Other
noninterest
income
Net gains
(losses) on
other assets
< $100M
>$1B
Investment
banking,
advisory,
brokerage,
Net gains
(losses) on
sales of loans
and other
Net servicing
fees
0.6%
Trading,
venture cap.
and
securitizations
Fiduciary
activities
Deposit
service
charges
Composition of Noninterest Income by Bank
Size as a Percentage of Total Assets, 2004
0.8%
0.7%
$100M-$1B
All Comm. Banks
0.5%
0.4%
0.3%
0.2%
0.1%
Non-Interest income is increasing as a
proportion of net operating revenue
Trends in Net Interest Income and Non-interest Income
90%
90%
80%
80%
70%
60%
70%
Net Interest Income
60%
50%
50%
40%
40%
30%
20%
Noninterest Income
Actual Data
Predicted
30%
10%
20%
0%
10%
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Non-Interest Expense: Key Ratios
 Burden
Burden Non - InterestExpense - Non - InterestIncome
 Lower
is better (Burden > 0)
 Net Non-Interest Margin
Burden
Net Non - Interest Margin 
Average Total Assets
 Lower
is better
Non-Interest Expense: Efficiency Ratio
 Efficiency Ratio
Non - Interest Expense
Efficiency Ratio 
Net Interest Income  Non - Interest Income
 Larger
banks tend to have lower
(better) efficiency ratios because they
generate more non-interest income
 Low efficiency ratios do not always
lead to higher ROEs
Efficiency Ratios of U.S. Commercial
Banks, 1992–2004
75.0%
70.0%
<$100M
60.0%
$100M-$1B
55.0%
>$1B
Dec-04
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Dec-98
Dec-97
Dec-96
Dec-95
Dec-94
Dec-93
50.0%
Dec-92
Efficiency Ratio
65.0%
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:
What has been the loss experience?







What amount of losses do we expect?

Non-current LN&LS to total loans





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
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
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
RISK RATIOS
Pg #
Credit Risk
Gross loss / Avg. tot LN&LS
7
Net loss / Avg. tot LN&LS
7
Recoveries / Avg. tot LN&LS
7
Recoveries to prior credit loss
7
90 days past due / EOP LN&LS
8A
total Nonaccrual LN&LS / EOP LN&LS
8A
total Noncurrent / EOP LN&LS
8A
LN&LS Allowance to total LN&LS
7
LN&LS Allowance / Net losses
7
LN&LS Allowance / total nonaccural LN&LS7
Earn Coverage of net losses
7
Net Loan and lease growth rate
1
PNC BANK, NATIONAL ASSOCIATION
Dec-03
Dec-04
CALC BANK PG 1 CALC BANK PG 1
0.73% 0.73% 0.53% 0.40% 0.40% 0.36%
0.59% 0.59% 0.41% 0.28% 0.28% 0.25%
0.13% 0.13% 0.12% 0.12% 0.12% 0.11%
19.0%
0.00% 19.03% 22.26%
#NA 19.5%
0.00% 19.52% 23.76%
#NA
0.21% 0.21% 0.13% 0.13% 0.13% 0.10%
0.79% 0.79% 0.66% 0.33% 0.33% 0.46%
1.00% 1.00% 0.83%
#NA 0.46% 0.46% 0.59%
#NA
1.77% 1.78% 1.44% 1.34% 1.35% 1.27%
2.9x 2.92x 4.18x
5.2x 5.23x 7.51x
1.77x 2.24x 2.73x 2.92x 4.12x 3.73x
7.44x 7.44x 10.92x 11.61x 11.61x 19.94x
-4.55%
0.00% -4.55% 10.14% 27.51%
0.00% 27.51% 17.96%
CALC
0.54%
0.53%
0.01%
6.7%
0.00%
0.16%
0.19%
0.35%
1.07%
2.1x
3.05x
2.57x
2.16%
0.00%
COMMUNITY NATIONAL BANK
Dec-03
Dec-04
BANK PG 4 CALC BANK
0.54%
0.53%
0.01%
6.75%
0.16%
0.19%
0.35%
1.07%
2.08x
5.49x
2.57x
2.16%
0.26% 0.21% 0.21%
0.21% 0.20% 0.20%
0.06% 0.02% 0.02%
29.21%
3.1% 3.08%
#NA 0.00%
0.13% 0.00% 0.00%
0.47% 0.16% 0.16%
0.66%
#NA 0.16% 0.16%
1.25% 1.23% 1.23%
11.89x
6.7x 6.71x
4.35x 7.77x 7.77x
23.89x 10.38x 10.38x
11.61% 11.49%
0.00% 11.49%
PG 4
0.20%
0.16%
0.05%
24.53%
#NA
0.10%
0.41%
0.55%
#NA
1.20%
14.52x
5.63x
30.80x
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



2.
Composition of loans & investments
Maturity of loans & investments
Percent of loans and investments pledged
as collateral
By borrowing



Core deposits
Volatile deposits
Asset quality & stockholders’ equity
Liquidity risk ratios :
PNC and Community National
RISK RATIOS
PNC BANK, NATIONAL ASSOCIATION
Dec-03
Dec-04
Pg # CALC
0.00% BANK PG 1 CALC
0.00% BANK PG 1
Liquidity Risk
%Total (EOP) Assets (except where noted)
Total equity
11
Core deposits
10
S.T Non-core funding
10
Net loans & leases / Total Deposits
10
Net loans & leases / Core Deposits
10
Avg. Available for sale securities / aTA 6
Short-term investments
10
Pledged securities
10
9.07%
67.41%
#N/A
73.73%
81.11%
21.41%
#N/A
#N/A
0.00%
9.07%
66.75%
11.47%
73.73%
81.11%
21.90%
2.73%
46.50%
8.95%
53.75%
23.24%
87.72%
115.16%
21.11%
6.25%
49.08%
8.26%
64.84%
#N/A
81.00%
91.76%
22.12%
#N/A
#N/A
0.00%
8.26%
63.23%
12.11%
81.00%
91.76%
22.03%
3.02%
51.76%
9.74%
54.19%
23.42%
88.28%
116.10%
21.00%
5.23%
54.78%
COMMUNITY NATIONAL BANK
Dec-03
Dec-04
CALC
0.00% BANK PG 4 CALC
0.00% BANK
7.29%
84.26%
#N/A
65.90%
71.36%
14.44%
#N/A
#N/A
0.00%
7.29%
84.95%
4.10%
65.90%
71.36%
13.39%
5.99%
29.25%
9.28%
71.85%
11.90%
78.94%
93.85%
15.88%
5.41%
40.34%
7.23%
85.00%
#N/A
67.35%
72.89%
19.38%
#N/A
#N/A
0.00%
7.23%
85.04%
4.84%
67.35%
72.89%
19.04%
5.72%
28.49%
PG 4
9.42%
71.10%
12.21%
81.42%
97.58%
15.80%
5.26%
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
 …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
Foreign exchange rates
 … the risk to a financial institution’s condition resulting
from adverse movements in foreign exchange rates
Equity, commodity and security prices

…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.
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
RISK RATIOS
PNC BANK, NATIONAL ASSOCIATION
Dec-03
Dec-04
Pg # CALC
0.00% BANK PG 1 CALC
0.00% BANK PG 1
Operational Risk
Total Assets / Number of employees
3
Personnel expense / number of employees 3
Efficiency ratio
3
COMMUNITY NATIONAL BANK
Dec-03
Dec-04
CALC
0.00% BANK PG 4 CALC
0.00% BANK
PG 4
$4.09 $ 4.02 $ 5.17
$4.71 $ 4.44 $ 6.09
$3.00 $ 2.75 $ 2.95
$2.98 $ 2.84 $ 3.08
73.43x 72.06x 60.48x 90.68x 85.48x 65.26x 65.46x 60.03x 48.27x 61.47x 58.58x 50.10x
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
RISK RATIOS
PNC BANK, NATIONAL ASSOCIATION
Dec-03
Dec-04
Pg # CALC
0.00% BANK PG 1 CALC
0.00% BANK PG 1
COMMUNITY NATIONAL BANK
Dec-03
Dec-04
CALC
0.00% BANK PG 4 CALC
0.00% BANK
Capital Risk
Tier 1 Leverage Capital / Total Assets
Tier 1 Capital / Risk-weighted assets
Total RBC / Risk weighted Assets
Equity Capital / Total Assets
Dividend Payout
Growth rate in total equity capital
Equity growth less asset growth
11A 8.28% 8.37% 7.67% 6.89% 7.14% 7.71% 7.27% 7.31%
11A 9.91% 9.89% 11.13% 8.65% 8.36% 11.17% 10.73% 10.73%
11A 12.91% 12.89% 13.08% 11.95% 11.55% 12.98% 11.70% 11.70%
11
9.07% 9.07% 8.95% 8.26% 8.26% 9.74% 7.29% 7.29%
11 77.30% 77.30% 57.26% 87.58% 87.58% 46.73% 0.00% 0.00%
11
-4.09% -4.09% 10.34% 8.42% 8.42% 20.28% 11.99% 11.99%
11
-8.09%
0.00% -8.09% 0.59% -10.59%
0.00% -10.59% 4.55% -6.56%
0.00% -6.56%
PG 4
8.97% 7.27% 7.29% 9.11%
12.64% 10.27% 10.27% 12.64%
13.80% 11.35% 11.35% 13.76%
9.28% 7.23% 7.23% 9.42%
30.77% 0.00% 0.00% 29.34%
10.99% 8.20% 8.20% 11.32%
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

Reflects the amount of credit risk with the loan and
investment portfolios
 Management Quality

Reflects management’s ability to identify, measure, monitor,
and control risks
 Earnings

Reflects the quantity, trend, and quality of earnings
 Liquidity

Reflects the sources of liquidity and funds management
practices
 Sensitivity to market risk

Reflects the 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
Assets Size
Number of institutions reporting
% of unprofitable institutions
% of institutions with earn gains
Performance ratios (%)
Return on equity
Return on assets
Pretax ROA
Equity capital ratio
Net interest margin
Yield on earning assets
Cost of funding earn assets
Earning assets to total assets
Efficiency ratio
Burden ratio
Noninterest inc to earn assets
Noninterest exp to earn assets
Net charge-offs to LN&LS
LN&LS loss provision to assets
< $100M
$100M $1B
$1B $10B
> $10B
3,655
9.80
59.30
3,530
2.00
70.70
360
1.90
71.90
85
1.20
68.20
8.46
0.99
1.24
11.52
4.18
5.65
1.47
91.86
69.54
2.60
1.03
3.63
0.27
0.22
12.88
1.28
1.73
10.00
4.22
5.73
1.51
91.93
62.22
2.07
1.54
3.61
0.31
0.26
13.48
1.46
2.21
10.90
4.00
5.39
1.39
91.01
55.54
1.21
2.46
3.67
0.43
0.34
14.24
1.30
1.93
9.95
3.43
4.83
1.40
84.39
57.42
0.82
2.93
3.75
0.73
0.34
Trend
with Size


 then 

generally
then 
then 











All
Commercial
Banks
7,630
5.70
65.30
13.82
1.31
1.92
10.10
3.61
5.02
1.41
86.18
57.96
1.06
2.66
3.72
0.63
0.33
Bank Risk Measures by Size
Assets Size
Asset Quality
Net charge-offs to LN&LS
Loss allow to Noncurr LN&LS
LN&LS provision to net charge-offs
Loss allowance to LN&LS
Net LN&LS to deposits
Capital Ratios
Core capital (leverage) ratio
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Structural Changes
New Charters
Banks absorbed by mergers
Failed banks
< $100M
$100M $1B
$1B $10B
Trend
with Size
> $10B
0.27
151.5
134.2
1.44
72.67
0.31
196.2
125.7
1.39
82.11
0.43
206.0
125.5
1.47
92.82
0.73
168.0
83.0
1.53
86.68
11.31
16.83
17.93
9.47
12.85
14.06
9.36
12.34
13.92
7.23
9.11
12.07
118
102
3
2
125
0
1
30
0
1
7
0


 then 


 then 








All
Commercial
Banks
0.63
174.6
89.9
1.50
86.38
7.83
10.04
12.62
122
264
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
All
Institu
# of institutions reporting
Commercial banks
Savings institutions
Performance ratios (%)
Return on equity
Return on assets
Pretax ROA
Equity capital ratio
Net interest margin
Yield on earning assets
Cost of funding earn assets
Earning assets to total assets
Efficiency ratio
Burden
Noninterest inc to earn assets
Noninterest exp to earn assets
LN&LS loss provision to assets
Credit
Card
Inter national
8,975
7,630
1,345
34
30
4
5
5
0
13.28
1.29
1.90
10.28
3.53
5.02
1.49
87.13
58.03
0.97
2.13
3.10
0.30
22.16
4.01
6.21
20.52
9.05
11.25
2.20
82.95
45.29
-2.15
11.18
9.03
3.96
10.35
0.76
1.09
8.05
2.50
4.02
1.52
81.47
70.16
0.75
2.51
3.26
0.25
Asset Concentration Groups
CommCon –
Other
All
Ag.
Mort ercial
summer spec. < Other
Lending
gage
Lending
Lending
$1B
<$1B
1,730
4,424
990
132
465 1,120
1,725
4,019
250
101
414 1,026
5
405
740
31
51
94
11.45
1.23
1.51
10.79
4.07
5.68
1.61
91.91
62.07
2.08
0.69
2.77
0.16
13.48
1.30
1.89
10.09
3.86
5.26
1.40
90.18
57.10
1.40
1.51
2.91
0.22
11.61
1.18
1.81
10.55
3.05
4.80
1.75
92.17
56.46
1.07
1.20
2.27
0.08
16.81
1.66
2.56
11.36
4.71
6.88
2.17
90.73
45.53
0.78
2.26
3.04
1.05
10.03
1.66
2.43
16.94
3.20
4.54
1.33
88.93
72.42
0.34
6.55
6.89
0.11
10.18
1.10
1.41
10.79
3.86
5.40
1.53
92.11
66.92
2.01
1.16
3.17
0.17
All
Other
> $1B
75
60
15
13.69
1.35
1.98
10.25
3.27
4.54
1.27
84.36
57.71
0.84
1.96
2.80
0.07
Risk Measures of Banks by Business
Concentration
All
Institu
Credit
Card
Asset Concentration Groups
CommCon –
Other
Inter Ag.
Mort ercial
summer spec. <
national Lending
gage
Lending
Lending
$1B
Asset Quality
Net charge-offs to LN&LS
0.56
4.67
0.91
0.21
0.30
0.12
Loss allow to Noncurr LN&LS
167.8
215.8
135.3
156.7
206.3
97.1
LN&LS provs. to net charge-offs
90.6
108.8
63.1
118.3
105.2
100.2
Loss allowance to LN&LS
1.34
4.27
1.74
1.43
1.30
0.53
Net LN&LS to deposits
91.69 239.79
69.91
76.64
93.90 120.82
Capital Ratios
Core capital (leverage) ratio
8.12
16.64
6.05
10.37
8.29
9.10
Tier 1 risk-based capital ratio
10.76
14.59
8.38
14.71
10.14
15.36
Total risk-based capital ratio
13.19
17.34
12.03
15.82
12.18
16.86
Structural Changes
New Charters
128
0
0
5
35
4
Banks absorbed by mergers
322
1
2
24
210
26
Failed institutions
4
0
0
0
3
0
SOURCE: FDIC Quarterly Banking Profile, http://www.fdic.gov/, http://www2.fdic.gov/qbp.
All
Other
<$1B
All
Other
> $1B
1.57
259.4
85.5
1.66
135.96
0.59
168.4
67.3
1.66
33.54
0.31
155.3
99.4
1.34
67.56
0.25
156.3
52.0
1.16
80.51
8.82
13.07
14.62
15.17
34.70
35.95
10.38
17.32
18.55
7.20
9.45
12.12
1
13
0
77
6
0
5
20
1
1
20
0
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

Meets capital requirements but causes NIM, NI, ROE, and ROA to be
overstated
 Non-performing loans

Banks may 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
 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

This type of transaction is not part of the bank’s daily activities and
typically cannot be repeated; thus it overstates earnings