Memorandum

Background: Several ratios in the UBPR support analysis of profits, income, expense and loan losses. Examples include Net Income to Average Assets, Yield on Loans, Cost of Interest Bearing Deposits and Net Losses on Real Estate Loans. The calculation of each ratio is similar: The year-to-date income or expense is divided by the related asset or liability. To facilitate comparison of ratios between different reporting periods, the UBPR also annualizes each underlying income or expense item. Each income or expense item is annualized by multiplying it by a standard factor (4 in March, 2 in June, 1.3334 in September). The current procedure works very well for most banks because income and expense are reported from the beginning of the year. However, it understates earnings based ratios for the 100 De Novo banks that open during each year or the 200 banks that close off and reopen their income statements prior to year-end because of a transaction that requires push down accounting.

Changes: Effective with the September 30, 2003 UBPR the annualization algorithm will be revised to reflect the actual number of days a De Novo bank has been open and the number of days that have elapsed since a push down transaction was reported. This revision will permit earnings-based ratios to be annualized correctly when the reporting period begins on a day other than the first of the year. The algorithm will divide the number of days in the year by the number days a De Novo Bank has been open or by the number of days since a push down transaction was reported. For affected banks the custom factor will replace the standard annualization factor. This change will be retroactive for all periods displayed in the UBPR.

Effect on Ratios: When this change is implemented it is expected that the comparability of earnings-based ratios will be improved for the 300 or so affected banks in each reporting year. It should be noted that earnings-based ratios that are positive will increase in value and those that are negative will become decline further when compared to ratios calculated the old way.

For example a bank that reported a pushdown transaction as of 12/1/02 will see its Net Income to Average Assets Ratio for the year 2002 change from .11% to 1.24%

Similarly a De Novo bank that opened in the second quarter of 2002 will see the Noninterest Expense to Average Assets ratio for the year 2002 change from 5.02% to 7.01%

If you have any questions please contact John Smullen at jsmullen@fdic.gov .