The document discusses the outlook for US financial stocks, arguing they are historically undervalued relative to their earnings growth potential and balance sheet strength following the financial crisis. It notes banks now have more capital than any time since the 1930s, and excess capital reserves will need to be redeployed, likely driving the most aggressive reinvestment in US financial history. The document analyzes specific banks like Fifth Third Bancorp to demonstrate historically high capital levels and improving asset quality based on regulatory reports, concluding financial stocks present a major valuation opportunity.

1. BlackwallPartners
How to ride a CAMEL… March 1, 2011
“Banks have more capital as a percentage of assets since anytime since 1934”
- Dick Bove, veteran bank observer
CAMEL Race…
The financial crisis ended some time ago and the
U.S. economy has entered a new “golden age” for
financial equities not unlike the post Savings &
Loan Crisis (“SLC”) two decades ago. As we have
noted in our prior research, the recent financial
crisis was grossly exaggerated via a number of
contributing factors. Factors which have positioned
the current recovery in financials to perhaps be even
more powerful than the recovery experienced in the
nineties. The implementation of new accounting
rules (“mark-to-market”) in 2007-2008 resulted in a
“front-loading” or over-statement of the credit
problems this cycle, which has resulted in record
excess capital and reserve builds. These stores of
excessive capital and liquidity are the largest in
history and will need to be deployed in the coming
years. We anticipate this will usher-in the most
aggressive wave of capital reinvestment that U.S.
financial industry has ever deployed and
investors will be the direct beneficiaries.
Investors should recognize similar dynamics in
financial stocks today to what one would have
witnessed in the sector from 1990 to 1998. This post
SLC period was a time of stabilization,
recapitalization and re-growth in financial industry
net credit revenue as well as in earnings and book
values. This drove a substantial rally in the sector
(See Chart- top right).
The accompanying valuation table (See Chart- page
right) outlines the dramatic discounts in the
valuations of many high profile financial firms. By
our estimates, leading financial firms are priced at
<3x cash flow; 30% below equity plus adjusted loan
loss reserves; and many are currently trading at
below their net cash-on-hand.
Post S&L Crisis - Rally in Financials
0%
100%
200%
300%
400%
500%
600%
700%
800%
900%
November 1990 - April 1998
S&P Financials
S&P 500
Source: Thompson Reuters
Valuations are Absurd!
Price
Book
Value
Adj
Book1
PTPP2
Price/Adj
Book
Price/
PTPP
JP Morgan $42 $41 $51 $13 82% 3.2x
Wells Fargo 31 24 30 8 100 3.7
Citigroup 5 7 8 2 63 2.5
PNC Fin. 61 63 71 17 86 3.6
BankofAmerica 13 27 31 6 42 2.2
Capital One 42 57 66 16 64 2.6
Regions Fin. 7 11 13 3 54 2.8
Average 70% 2.9x
1
Stated book value plus loan loss reserve drawn down to 1% of loans
with excess taxed at 40% tax rate through 2012 estimated earnings
2
Pre-tax, pre-provision net earnings at normalized credit loss
provision rate
Source: Thompson Reuters

2. 2
Anatomy of Under Ownership
SEC filings by large funds indicate that portfolio
managers are grossly under invested in U.S.
financial stocks. In part, we believe this is
attributable to the struggle and hesitancy that
generalists have with the complexities of financial
firm accounting. Naturally, a factor greatly
exacerbated by the financial crisis and reflected in
the ‘jaw-dropping’ valuations previously shown.
Again, this mirrors what we saw coming out of the
SLC.
Extreme under weights in portfolios and
subsequent low valuations now place financials
at their lowest weighting in the S&P 500 in
nearly forty years. The financial sector,
excluding insurers, currently represents only 9%
of the S&P 500, yet is responsible for more than
1/3 of the earnings or economic contribution to
the S&P. It’s simply a blinding fundamental
disconnect.
This marked inefficiency also is evident in
valuations where we calculate the typical larger
U.S. bank trading at 3x free cash flow (“PTPP”),
while the S&P 500 trades closer to 11x cash flow.
This is despite the fact that non- financial firms are
more heavily CapEx intensive and therefore
arguably less “free.” The historic relative multiple
of cash flow for financials relative to the broader
market ranges from 60% to 80% versus today’s
27% [3x / 11x = 27%]. Therefore, both the
absolute values across financials as well as their
relative valuation signal an historic under
valuation opportunity.
A good example of current market disequilibrium
can be found amongst the largest mutual funds. Our
review of SEC filings indicate that a large
(unnamed) Fidelity Investments fund is carrying
twice the S&P 500’s weighting in industrial
materials stocks; less than one-third the weight in
technology; half the weight of consumer services;
and half the already well below normal weight of
financial services. This is astonishing empirically
on several levels. For starters, the U.S. economy is
approximately 85% services related as we are a
services and information technology-driven
economy; not an industrial/manufacturing driven
one. There is nothing wrong with such a fund
weighting per se. In fact, it’s the most common
weighting (by sector) among funds where we
canvassed their regulatory filings. Clearly, the
aforementioned fund’s management team believes
that they see more opportunity in the copiously
heavy industrial and commodity-laden emerging
markets than in any potential recovery in America.
Undoubtedly, this is a sizable bet on a continued
global disequilibrium. However, inferential
statistics and the inevitable reversion to the mean
greatly favor a more dominant domestic services
sector recovery as it has for economic cycles over
the past 40 years. So, the “mechanics” of a
sustained advance in domestic financial and
services economy stocks is in place, in part,
because nobody owns them and Americans have
forgotten what we do best.
Under ownership and subsequent depressed
multiples in the financials are despite tremendous
improvement in credit (the main driver of earnings
recovery) and earnings visibility. This is in addition
to the industry sitting atop record levels of both
liquidity and capital, the driver of earnings
acceleration.
Estimated Earnings Growth
Sector 4Q10 2010 2011
Consumer Discretionary 13% 44% 15%
Consumer Staples 2% 6% 11%
Energy 25% 49% 14%
Financials >200% 158% 37%
Health Care 5% 10% 7%
Industrials 10% 24% 18%
REITs 7% 6% 1%
Technology 13% 41% 10%
Telecom 13% 0% 13%
Utilities -3% 4% -1%
S&P 5003
12% 28% 9%
3
Excludes financials
Source: Thompson Reuters
As we have referenced in recent musings, the table
above illustrates that the financials have the
strongest prospects for earnings growth over the
next several years. In addition to growth, higher

3. 3
“visibility” will be present due to clear credit cost
abatement. This makes the dramatic and ubiquitous
under-weight of the financial sector via fund
managers all the more curious to even the most
casual market observer…disconnects often are.
Credit abatement will drive initial out sized
growth - While securitized loans across all credit
types were mauled by M2M inaccuracies, banks
with more traditional “portfolio” lending or “whole
loan” accounting also were trampled inefficiently as
the credit panic overshot reality.
The accompanying chart courtesy of the Federal
Reserve Bank of St. Louis illustrates the “real” peak
in problem loans. And though potentially
startling to some, this most recent credit cycle
has produced non-performing loans peaking at
70% of the SLC. Thus, it was an unnecessary
panic in 2007-2009. The resulting excessive build-
up of capital and reserves now is a benefit to
financial stock investors.
Nonperforming Loans4
4
Federal Reserve Bank of St. Louis study of all U.S. commercial
banks; Loans past due 90 days plus nonaccrual loans to total loans.
Source: Federal Reserve Bank of St. Louis
The following chart (top right) illustrates the
excessive levels of capital and reserve builds
generated as a function of the traditional capital and
reserve over-builds that typically accompany any
credit crisis.
Common Tier 1 Capital (“CT1”) is
Inordinately High for U.S. Banks
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
AXP STT NTRS C KEY PNC STI USB RF WFC BAC JPM COF
CT1 less Buybacks CT1
B3M5
= Basel III Minimum risk-based capital standard expected to
be implemented by a global regulators roundtable known as the Basel
Committee on Banking Supervision.
Source: Company reports; Blackwall Partners LLC estimates
US banks hold capital levels that materially exceed
even the future expected higher minimums for “well
capitalized” institutions (See above: B3M5
).
International bank regulators are debating these
levels in the Basel III accords (not expected to be
implemented until at least 2020 BTW).
The perception by many is that U.S. banks are ill-
prepped for B3M and this is patently false. Of
course, we also recently saw a Rasmussen poll that
suggested most Americans were unaware that the
United States was the largest economy in the world,
let alone three times the size of the second largest.
So, it would appear there is plenty of room for folks
that do fundamental research to find market
dislocations.
B3M5

4. 4
1.5%
2.0%
2.5%
3.0%
3.5%
4.0% 1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10e
1Q11e
2Q11e
3Q11e
4Q11e
1Q12e
Net Charge-Offs6
6
Morgan Stanley bank research coverage universe; average net-charge-offs to
average loans
Source: Morgan Stanley & Company
We anticipate material improvement in credit in
2011 and near zero credit costs in 2012 (See-
above). We fully expect to see banks and other
financial firms continue to “release” excess loan
loss reserves back into their earnings at an
accelerated pace in 2011-2014. In addition to
providing significant earnings re-acceleration, this
makes substantial capital available for
dividends, stock buy-backs and acquisitions,
which will help drive-up valuation multiples. The
combination of a strong rise in earnings coupled
with multiple-expansion is the same recipe that
drove the material outperformance for financials in
the post SLC period.
That being noted, how does Blackwall Partners
analyze and value financial firms? What gives
us the “edge” that drives our confidence that we
not only are correct on the fundamentals, but
can move-in early on opportunities? We ride a
slightly different looking horse.
How to ride a CAMEL
Blackwall Partners relies more heavily on financial
regulatory reporting or (RAAP) much more so
than generally accepted accounting principles
known as GAAP. RAAP reports provide to bank
regulators more granular information, which we use
for our proprietary safety and soundness rating
system. This is integral in Blackwall’s selection
process of traditional financial stocks.
$0
$50
$100
$150
$200
$250
Pre-Tax, Pre-Provision
Pre-Tax GAAP
Bank Earnings “Power” v. GAAP
Widest on Record (1980-Present)
Mark-to-Market Accounting
Overstatement
of Losses
Source: Keefe, Bruyette & Woods; Blackwall Partners LLC
In prior writings, we have referenced the chart
above as it speaks volumes relating to this most
recent financial crisis. The chart tracks reported
earnings (GAAP) versus RAAP’s pre-tax, pre-
provision (“PTPP”) or “free cash flow” from 1980-
2010. The dramatic gap in recent years between the
black and blue lines illustrates the reality of the
“non-cash hole” that mark-to-market accounting
(GAAP) blew through the earnings (and capital) of
financial firms during the financial crisis. This also
illustrates the inevitable earnings reacceleration
that we not only can predict, but guarantee. It is
RAAP after-all that the Federal Reserve used to
“stress test” the banks in 2009 under the
Supervisory Capital Assessment Program
(“SCAP”).
This is the very same test the Fed is performing
right now to determine which banks can start
returning excess capital to investors. The “test”
criteria studies five core fundamental factors from
which it gets its acronym – CAMEL
C - Capital Adequacy
A - Asset Quality
M - Management
E - Earnings
L - Liquidity

5. 5
For partners and prospective investors to get a more
thorough understanding of how Blackwall evaluates
potential investments, we illustrate a few examples
of the CAMEL process.
Disclosure: Blackwall Partners LLC chose the
institutions outlined here randomly to show a range
between the controversial to the beloved and how our
use of CAMEL is applied consistently therein. This is
NOT necessarily a representation of the portfolio. The
information is used exclusively for informational
purposes only.
Fifth-Third Bancorp (FITB)
Capital Adequacy
CT1 at 7.5% already exceeds the expected
B3M minimum to rank as “well capitalized”
of 7% and could be as much as 150bp above
this level.
Equally as important, FITB’s CT1 is
steadily growing and will significantly
exceed B3M long before any new standards
are implemented
6.8
7.0
7.2
7.4
1Q10 2Q10 3Q10 4Q10
Common Tier 1 Capital (%)
Source: FITB Corporate Reports
9.4% Tier 1 risk-based capital exceeds
regulatory “well capitalized” by over 50%;
9.7% Tier 1 under B3M tops all regional
bank peers
Capital levels which are strong and rising
are supplemented by high loan loss reserve
levels near 4% which cover current non-
performing loan levels by roughly 1.8x
FITB repaid TARP in full to the U.S.
Treasury in February 2011 and completed a
successful follow-on equity offering
Asset Quality
Severe delinquent loans have fallen by 72%
since 3Q09 and net-charge-offs have fallen
below 2% in 4Q10 for the first time since
before the financial crisis. Early-stage
delinquencies have dropped below 1% for
the first time since 2007. So, we have passed
the peak in problem loans at FITB
Early Stage Delinquency (%)7
0.5
1.0
1.5
2.0
3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10
FITB Peers
7
Loans 30-89days past due
Source: FITB Corporate Reports
New nonaccrual loans have fallen by nearly
50% between 1Q09 and 4Q10. They have
steadily declined for five consecutive
quarters and 4Q10 additions represented just
0.6% of total loans
The loan loss reserve (LLR) covers non-
performing loans (NPLs) now by
approximately 200% and PTPP (cash flow)
covers NPLs by 1.6x. So, FITB has returned
to cash flow growth since 1Q10-2Q10 and is
comfortably absorbing remaining loan loss
recognitions

6. 6
0
25
50
75
100
125
150
175
4Q09 1Q10 2Q10 3Q10 4Q10
PTPP/ NCOs (%)
Source: FITB Corporate Reports
Overall, NPLs have declined by 43% since
4Q09
1.5
2.0
2.5
3.0
3.5
4.0
4Q09 1Q10 2Q10 3Q10 4Q10
NPLs / Loans (%)
Source: FITB Corporate Reports
CT1 plus LLR at 12.3% is the second largest
among FITB’s regional bank peer group
Mortgage repurchase claims represent <1%
of loans and the repo reserve of 63% greatly
exceeds any risk, even if required to buy-in
the loans (assumes all repo claims valid and
home loan-to-value is 63%)
Per regulatory bank exams; the total
regulatory criticized assets (“substandard” or
“doubtful”) are down 16% in 2010 and
represent 6% of existing loans, however
only 0.3% represent a “doubtful” regulatory
classification. This suggests that bank
examiners are just being overly persnickety,
sighting few losses (“doubtful”) but higher
levels of scrutiny (“substandard”); overall
indicative of FITB having been “scrubbed”
Management
The historically stalwart FITB, which once
coveted the highest valuation ratios among
any of the major banks, stumbled in this
recent credit mess
The company has since re-tooled its risk
appetite and accomplished a great deal in a
relatively short time. All signs pointing
toward a clear recovery are underway
But, they are on notice from investors to
keep moving in its current highly positive
fundamental trajectory or we would
anticipate that FITB would get acquired in
the coming M&A cycle
Earnings
FITB has returned to profitability quite
quickly with three consecutive quarters of
reported profits (though free cash flow has
been positive now for five quarters)
The return on assets (ROA) reached 1.2% in
4Q10. This remains subdued due to
excessive liquidity and remaining loan loss
recognition
The 4Q10 return on equity (ROE) was 10%
or equally unacceptable if the stock should
attain its once high valuation among its
peers again
Increasingly both the ROA and ROE will
require significant redeployment of excess
liquidity and capital into an economic
recovery. The evidence would now suggest
that both are highly likely; PTPP as a
percentage of risk-weighted assets rose to
2.3% in 4Q10. This demonstrates the
improving ROA and ROE to come or to be
monetized by an acquirer

7. 7
Liquidity
FITB is awash in liquidity
The loan-to-deposit ratio has fallen to 94%
meaning the bank is under “lent out”; 88%
of FITB’s deposits are cheap “core” funding
or non-time related; deposit growth is
double digits while loan growth is just
starting to turn up slightly
FITB’s balance sheet now carries more net
cash and cash equivalents than market value
Conclusion – 1 2 3 2 1 / Overall 2
With improving fundamentals across all categories,
we rank FITB with an overall CAMEL rating of 2.
This clearly is not reflected in the stock’s current
depressed valuations including but not limited to a
mere 4x run-rate free cash flow (PTPP); 1x book
value (which assumes no franchise value or
“deposit premium”); and 7.8x our 2012 reported
earnings estimate.
At 1x book (<1x forward book value), FITB trades
with no franchise value. For example, with
approximately $90 billion in core deposits and
applying a reasonable private market value
premium of 15%; FITB is intrinsically worth as
much as $29 per share or 109% above prevailing
market...and this assumes no future growth.
If FITB remains independent, we anticipate $2.50 in
EPS by 2013 and a $38 stock price discounted in
advance.
Recent prevailing market for the shares is $13-$14
per share.
Capital One Financial (COF)
Capital Adequacy
CT1 at 8.8% greatly exceeds the SCAP
minimum and illustrates why COF was
among the first banks to repay TARP in full
in the spring of 2009. COF’s ability to
generate excess capital internally has
facilitated the maintenance of very high
capital ratios throughout the crisis
Strong Capital Generation
Source: COF Corporate Reports
CTI plus LLR is 13.2% or among the
highest of any consumer-heavy bank, while
COF’s ability to “cash flow” credit costs due
to high yield assets differentiates the
company from the ‘garden variety’ bank

8. 8
Asset Quality
Credit improvement continues to ‘front-run’
broader economic indicators as net charge-
offs (NCOs) have rapidly declined
Domestic Credit Card (%)
Source: COF Corporate Reports
International Credit Card (%)
Source: COF Corporate Reports
Earliest stage delinquencies in the highest
risk (unsecured) credit card portfolios also
are declining rapidly, forecasting continued
material lower credit costs for COF in the
coming quarters/years despite perceived
risks to persistent high unemployment
Commercial Real Estate (%)
1.0
1.5
2.0
2.5
3.0
3.5
4.0
3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
NPAs
NCOs
Source: COF Corporate Reports
As a regional commercial bank, COF is also
seeing steady improvement in commercial
real estate credit
Net Charge-Offs (%)
Source: COF Corporate Reports
COF also is experiencing low credit costs
which have improved and are now stable in
both mortgages and auto lending as well
Management
COF has among the most well respected
management teams in the financial industry;
the firm is a perennial member of
FORTUNE’s best companies to work for
CEO takes all of his compensation in stock
and the senior management team also takes
a substantial portion of their compensation
in company stock

9. 9
Took a fledgling credit card business of a
small Virginia bank (Signet) and created one
of the world’s five largest credit card firms
with global branding
Earnings
COF is among the most profitable banks in
the world due, in large part, to being very
adept at underwriting high yield credit
(credit cards). The bank’s net interest
margin has consistently been twice that of
its regional banking peers
Net Interest Margin (%)
Source: COF Corporate Reports
COF’s strong and consistent PTPP enables it
to absorb credit storms with greater ease
than traditional banks. Also, the bank is
among the first to see earnings re-accelerate
in an economic recovery as a result of its
high, price inelastic earning asset yields
Liquidity
Like most of its peers, COF has more
liquidity than would be normal given the
economic environment we are exiting;
COF’s cash and equivalents represent nearly
30% of the bank’s assets
A consistent shift to lower costs and core
funding also has positioned COF in a
uniquely strong position coming out of this
crisis; the loan-to-deposit ratio is 100%
(unlevered) and COF’s blended cost of
funding has fallen to as low as 1.5% in 4Q10
COF currently has more net cash and
equivalents than market value
Conclusion – 1 1 1 1 1 / Overall 1
Like a slot machine hitting all cherries, we rate COF
an across the board CAMEL 1 with no regulatory
fundamental weaknesses in our view. And COF is
witnessing improved fundamentals across each of
these categories.
The disconnect between the fundamentals and the
current valuation are stark with COF.
In addition to trading below net cash-on-hand, COF
currently trades hands at just 2.5x free cash flow
(PTPP); <70% of book value (which assumes no
franchise value or “deposit premium”); and 7.0x our
2012 reported earnings estimate, which we believe
is quite conservative.
A 15x P/E multiple on 2012-2013 earnings per
share of $8 renders a target price of $120 or 2.5x
prevailing market prices.
Citigroup (C)
Capital Adequacy
CT1 is now the highest among ALL multi-
national banks in the world at 11% or nearly
60% higher than the rumored Basel III
minimum for “well capitalized” and 78%
above the SCAP test level
1
3
5
7
9
11
2007 2008 2009 2010
CT1 (%)
Source: Citigroup Corporate Reports

10. 10
CT1 plus its loan loss reserve (LLR) makes
C the most heavily capitalized large bank in
the world
CT1 plus LLR (%)
Source: Citigroup Corporate Reports
Asset Quality
C has started to “release” reserves as mark-
downs on assets via M2M accounting rules
in 2008-2009 proved to be far too large and
resulted in a loan loss reserve over-build
1.5
2.5
3.5
4.5
5.5
6.5
7.5
2007 2008 2009 1Q10 2Q10 3Q10 4Q10
LLR (%)
Source: Citigroup Corporate Reports
Consequently, the managed loan loss
provision is steadily declining, fueling C’s
(surprising to some) profits recovery
5
10
15
2007 2008 2009 2010
Managed Credit Costs $B
Source: Citigroup Corporate Reports
C’s problem portfolio was in residential
mortgages (of course) and a large part of the
improving credit and falling credit costs
story is the “run-off” in the levered
mortgage portfolio
North America EOP Mortgages $B
Source: Citigroup Corporate Reports
C now has repositioned itself into two
companies – CitiFinancial, which looks like
a levered bond hedge fund (which is in run-
off), and the other entity which is the old
core “Citibank”; both entities are seeing
excessive reserve builds into peak credit
losses, putting the former behind the
company and the latter back into focus for
global “core” banking growth

11. 11
Management
This is likely the most controversial issue at
present. We believe management has done a
very good job of re-tooling itself and has the
right talent to run the old new “Citibank”
Equally critical, we are very impressed with
additions to C’s board of directors which
have taken place post-financial crisis which
nearly crippled the franchise (and should
have); for example, we like the addition of
our old friend Jerry Grundhofer to the
Citibank board; Jerry made us money at
both Cincinnati’s Star Bank as well as thru
his great success at putting together a top
tier franchise in US Bancorp (USB)
Should the current senior management not
deliver on the promise of this franchise, we
believe the right person to step-up already is
in place. This gives us uber confidence in
Citi’s leadership relative to the generally
pessimistic investor perceptions
Earnings
A discussion of C isn’t complete without
acknowledging its unmatched global
presence, a strength of past management and
a focus on the current leadership
Global Banking by Region
0%
20%
40%
60%
80%
100%
EEMA
Latin America
Asia
North America
Source: Citigroup Corporate Reports
C’s earnings power across multiple
geographies is incredible and cannot be
easily replicated by any bank globally
International Banking Growth
95
105
115
125
135
145
155
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
Loans
Deposits
Source: Citigroup Corporate Reports
While C’s international bank continues to
grow rapidly, its U.S. bank has turned the
corner and thus the realization of a very
substantial earnings turnaround is
developing quickly as domestic credit
expenses continue declining
Revenue Stability $B
Source: Citigroup Corporate Reports
5
10
15
2007 2008 2009 2010
Managed Credit Costs $B
Source: Citigroup Corporate Reports

12. 12
-20
-10
0
10
2007 2008 2009 2010
Net Income $B
Source: Citigroup Corporate Reports
With C’s international bank continuing to
grow; overall corporate revenue remains
stable and strong. With credit costs falling
C’s earnings power rises very quickly; the
current run-rate cash flow (PTPP) exceeds
analysts estimates for reported earnings this
coming year by 150%
Liquidity
C too is awash in liquidity
Loans-to-deposits at 72% reflect C being
grossly under loaned. This signals a large
opportunity in C for strong earning asset
growth into an economic recovery
C also has more net cash-on-hand than
market value by almost two-fold
Conclusion – 1 2 2 2 1 / Overall 2
With improving fundamentals across all categories,
we rate C an overall CAMEL 2.
So how this conclusion washes with C’s current
depressed stock price is a question for psychologists
perhaps. This is a stock trading at half its net cash-
on-hand; a mere 2.5x run-rate free cash flow
(PTPP); and half its book value (no franchise value
for this global juggernaut?)
We see this as a $12 stock inside of a few years.
__________________________________________
JP Morgan (JPM)
Capital Adequacy
CT1 of 9.8% is well above the current
regulatory minimum for “well capitalized”
and JPM is already at the pro forma B3M
CT1 “well capitalized” threshold years
before its potential implementation
The addition of a loss coverage ratio of
4.5% (of loans) creates an incredibly strong
double digit “risk buffer” of nearly 15%
JPM carries a global liquidity reserve of
over $260 billion or >22% of total risk-
weighted assets; amazing
Therefore, JPM enjoys enormous capital and
liquidity strength for a large, multi-national
bank; internal CT1 capital generation is near
10% annually
Asset Quality
Loan loss reserve at a strong 190% of
nonperforming loans already has started to
come down as the level of problem loans has
peaked and has begun to decline noticeably
Huge Reserve Coverage $B
Source: JP Morgan Corporate Reports
Early-Stage delinquency also showing clear
signs of “post peak” for this credit cycle and
this bodes well for more of JPM’s excess
LLR to be “released” back into reported
capital (book value). We calculate JPM’s

13. 13
book value to be understated by a
conservative $10 to $12 per share or 20%-
25%
Early-Stage Delinquency $B
Source: JP Morgan Corporate Reports
Management
Known as the “second Federal Reserve”
during the financial crisis (aiding in the
unwinding of rivals Bear Stearns, Lehman
Bros. and Washington Mutual); we believe
JPM’s management team has more than
proven itself
“Scarlet Letters” and “Half Bankers; Half
Lawyers” are the persnickety words of a
very high quality management team just
frustrated with the government and
investors; JPM’s management team has
earned the right to shout loudly at both
Earnings
The acquisition of Washington Mutual alone
adds huge earnings power to JPM as they
acquired the beleaguered bank at “fire sale”
prices including massive discounts on
troubled assets
JPM remained profitable throughout the
crisis and throws-off the largest free cash
flow (PTPP) among any multi-national
bank. The current run-rate (PTPP) represents
almost 30% of the market value of the stock
which also is the book value; astonishing
JPM recorded record revenue in 2010, up
15% from the prior year while expenses rose
only 2%. This illustrates the profit
scalability of this impressive multi-strategy
financial franchise
Reported earnings in core commercial
banking rose nearly 100% in 2010 and the
return on common equity (ROE) already is
back to 16% with huge excess liquidity and
capital which is yet to be redeployed into
higher return investments
Further earnings power is demonstrated in
JPM’s “league table” position in investment
banking - #1 in global investment banking
fees; #1 in global debt and equity
underwriting; and #1 in global loan
syndication. Yet, despite leading the league,
JPM’s average market share is under 10% in
total investment banking globally, thus
significant market share opportunity remains
Liquidity
With a liquidity reserve equal to >20% of
risk-weighted assets and twice common
equity capital, JPM is inordinately liquid
JPM also holds net cash 1.5x that of its
market value and the loan-to-deposit ratio is
a materially under loaned out 66%
JPM’s biggest problem is that it is too
liquid, a classic “high class” problem to
have
Conclusion – 1 1 1 1 1 / Overall 1
With strong fundamentals and excess capacity
across all categories from capital to credit to
earnings power and liquidity, we rate JPM a
CAMEL 1.
How the stock of this impressive franchise trades
hands at approximately 3x run-rate free cash flow
(PTPP); below net cash-on-hand; and at book value
is inexplicable.

14. 14
We expect investors will look back at these
valuations and wonder why they didn’t take more
advantage…
To be conservative, we see at least $8 per share in
EPS by 2013-2014. At 80% of the long-term
market multiple (well deserved), we believe that
this is a $120 stock inside of two years
The untapped historic capital, liquidity and earnings
power of the U.S. financial industry coupled with
near all-time low absolute and relative valuations is
excessive “dry powder” for the sector’s out-
performance.
When considering the recent macro events in the
Middle East, we would anticipate that any tailing-
off of these global headwinds would again be a
“green light” for financials to move aggressively
higher.
It’s all there in the CAMELs. It’s just a matter of
time.
Regards,
Michael P. Durante
Managing Partner
Blackwall Partners LLC