Quanta Analytics

1
Quanta Analytics

• Financial Crisis Accounting of the Banking
  Industry
• Part IV
• Analysis of Banking Industry
• Net Loan Charge-offs

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Introduction to Banking Analysis

• The financial information appearing in this
  presentation is obtained from the Federal
  Financial Institution Examination Council (FFIEC)
  Call Reports and the Office of Thrift Supervision
  (OTS) Thrift Financial Reports submitted by all
  FDIC-insured depository institutions. All data
  presented reflect the highest level of
  consolidation (e.g., domestic and foreign
  operations). This information is stored on and
  retrieved from the FDIC's Research Information
  System database.
• The analysis herein is the work of a single
  individual, Jim Boswell.
• Jim is the Executive Director of Quanta
  Analytics.
• He has an M.B.A. from the University of
  Pennsylvania, The Wharton School,
• An M.P.A. from Indiana University, School of
  Public and Environmental Affairs and a
• B.A. in mathematics from Hanover College
• Jim is a veteran, who served as a junior officer
  on a fleet ballistic missile submarine
• He worked for PricewaterhouseCoopers LLP for 15
  years prior to starting his own think tank.
• In 1995 Jim was awarded a Vice-Presidential
  Hammer Award for his work designing the primary
  systems used by Ginnie Mae to monitor the risk of
  their portfolio.
• Jim was integrally involved in analyzing data and
  developing solutions throughout the SL crisis.
• Jim is the author of Crush Depth Alert, subtitled
  Solutions for Supplying Power to Americas
  Distressed Financial Systems
• And he has regularly written opinion pieces for
  Business Insider
•  

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History of Banking IndustryNet Loan Charge-offs

• Earlier parts to the Quanta Analytics analysis of
  the financial crisis and banking industry looked
  at
• (1) the amount of losses the banks have
  absorbed due to their lending mistakes (Part I)
• (2) how the portfolio of banking industry
  loans have and are currently performing (Part
  II)
• (3) how the portfolio of banking assets have
  changed since the start of the financial crisis
  (Part III)
• In this Part IV of our analysis QA looks at the
  trend of banking industry loan charge-offs
  which clear the banking industrys balance sheet
  of toxic assets. This analysis supports the
  conclusions made in Part I regarding total
  current and future crisis losses to be in the
  range of 550 Billion, and clearly demonstrates
  that
• (1) loan charge-offs began rising noticeably
  during, if not earlier, than the fourth quarter
  of 2007 (nearly nine months prior to the
  initiation of the TARP program)
• (2) the greatest amount of loan charge-offs (in
  order of significance) are in (1) Real Estate
  (2) Individual Credit loans (3) and Commercial
  Loans.
• (3) quarterly loan charge-offs HAVE PEAKED in
  all loan categoriesand in most cases five to
  seven quarters ago.
• QA believes it is important to point out that
  many of the graphs presented take on the general
  shape of a normal type curve (same as we saw
  during the SL crisis). What goes up (in this
  case charge-offs), does eventually come down. QA
  would also like to mention that the Banking
  Industry has set aside 218 billion in loan loss
  allowances to cover future charge-offsprobably
  more than enough to fill in the future right
  hand tail of the developing curve as the
  remaining toxic loans get cleaned up.
• Now we will begin by showing a graph of Banking
  Industry total loan charge-offs over the past
  five years and since the beginning of the
  financial crisis (assumed to be the fourth
  quarter 2007).

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Quarterly History of Banking Industry Net
Charge-offs(4th Quarter 2005 thru 1st Quarter
2011)
5
Cumulative History of Total Banking Industry Net
Charge-offs(From the 4th Quarter of 2007 thru
the 1st Quarter 2011)
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History of Banking Industry

• From the previous graphs it should be clear that
  quarterly total banking industry loan
  charge-offs peaked nearly eighteen months ago
  and have been declining ever since.
• This is consistent with QAs earlier findings and
  reflects the point that more than three-fourths
  (427 B) of the expected total amount of crisis
  charge-offs (550 B) have already been cleared
  from the banking industry balance sheet with
  enough additional funds set aside in the form of
  loan loss allowances (218 Billion) to cover
  the remaining portion of expected future loan
  charge-offs .
• The previous graphs also clearly show that the
  greatest impact of the financial crisis is
  reflected in
• (1) Real Estate Loans (2) Commercial and
  Industrial Loans and (3) Individual Loans
• The accumulated total of bank loan charge-offs
  since the end of the 3rd Quarter 2007 are 540.3
  Billion. This reflects a 375 increase (or 427
  Billion) over the 114 Billion amount which would
  have been expected if charge-offs had continued
  at the rate of the 8 quarters prior to the
  crisis.
• The next three graphs will look at the trend of
  loan charge-offs in each of the above mentioned
  loan categories. QA would like to remind the
  reader to check the scale of the y axis because
  although the graphs may tend to look similar in
  shape, the magnitude or degree of losses are
  significantly different between categories. It
  is also relevant to notice how the peak value
  differs from the better or more normal values
  as reflected in the first eight quarters of the
  graphs, which QA uses to evaluate the true
  impact of the crisis.

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Quarterly History of Banking Industry Real
Estate Loan Net Charge-offs
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Quarterly History of Banking Industry Commercial
Loan Net Charge-offs
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Quarterly History of Banking IndustryIndividual
Loan Net Charge-offs
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History of Banking IndustryNet Charge-offs

• Assuming the 4th Quarter 2007 reflects the
  beginning of the current crisis, the previous
  graphs show
• Bank charge-offs for Real Estate Loans
• (1) peaked at 30 Billion during the 4th
  Quarter of 2009(six quarters ago)
• (2) with the latest quarter down 51 from the
  peak less pre-crisis expected value
• (3) the total amount of Real Estate
  charge-offs (above pre-crisis levels) has been
  242 Billion.
• Bank charge-offs for Commercial/Industrial Loans
• (1) peaked at 9 Billion during the 3rd
  Quarter 2009(seven quarters ago)
• (2) with the latest quarter down 70 from the
  peak less pre-crisis expected value
• (3) the amount of Commercial/Industrial loan
  charge-offs above pre-crisis levels has been 60
  B
• Bank charge-offs to Individuals
• (1) peaked at 23 Billion during the 1st
  Quarter of 2010(five quarters ago)
• (2) with the latest quarter 51 from the
  peak less pre-crisis expected value
• (3) the total amount of Individual Loan
  charge-offs above pre-crisis levels has been 117
  Billion.
• QA will now provide more specific detail on the
  losses associated with real estate and individual
  loans.

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Quarterly History of Banking IndustryReal
Estate Loan charge-offsWith More Detail
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Quarterly History of Banking Industry Real
Estate Loan charge-offsSingle Family
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Quarterly History of Banking Industry Real
Estate Loan charge-offsConstruction and Land
Improvement
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Quarterly History of Banking Industry Real
Estate Loan charge-offsCommercial/Industrial
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History of Banking IndustryShowing More Detail
of Net charge-offs for Real EstateSingle Family,
Construction and Land Improvement, and Commercial

• From the previous three graphs regarding Real
  Estate Loans we can conclude
• Bank charge-offs for Real Estate Single Family
  Loans
• (1) peaked at 16 Billion at the end of the
  4th Quarter of 2009six quarters ago
• (2) with the latest quarter down 42 from the
  peak less pre-crisis expected value
• (3) the total amount of Real Estate Single
  Family charge-offs above pre-crisis levels
  139 Billion
• Bank charge-offs for Real Estate Construction
  and Land Improvement Loans
• (1) peaked at 9 Billion at the end of the 4th
  Quarter 2009six quarters ago
• (2) with the latest quarter down 71 from the
  peak less pre-crisis expected value
• (3) total amount of Construction/Land
  Improvement charge-offs above pre-crisis levels
  71 Billion
• Individual charge-offs for Real Estate
  Commercial Loans
• (1) peaked at 3.5 Billion at the end of the
  4th Quarter of 2010two quarters ago
• (2) with the lastest quarter down 39 from the
  peak less pre-crisis expected value
• (3) the total amount of Individual Loan
  charge-offs above pre-crisis levels 26
  Billion.
• The next set of graphs will now break down the
  non-real estate Individual loan category
  further.

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Quarterly History of Banking Industry
Individual Loan Net Charge-offsWith More
Detail
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Quarterly History of Banking Industry
Individual Loan Net Charge-offsCredit Card
Loans
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Quarterly History of Banking Industry
Individual Loan Net Charge-offsNon-Credit Card
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History of Banking IndustryIndividual Loan Net
Charge-offs forCredit Card and non-Credit Card
Loans

• From the previous three graphs regarding
  Individual Loans we can conclude
• Bank charge-offs for Individual Credit Card
  Loans
• (1) peaked at 18.7 Billion at the end of the
  1st Quarter of 2010five quarters ago
• (2) with the latest quarter down 49 from the
  peak less pre-crisis expected value
• (3) the amount of Credit Card charge-offs
  above pre-crisis levels has been 88 Billion.
• Bank charge-offs for Individual non-Credit Card
  (other consumer) Loans
• (1) peaked at the end of the 2nd Quarter of
  2009eight quarters ago
• (2) with the latest quarter down 76 from the
  peak less pre-crisis expected value and
• (3) the amount of Credit Card charge-offs
  above pre-crisis levels has been 29 Billion.
• Now in conclusion, the following chart displays
  in summary the total charge-offs since the fourth
  quarter 2007 to date, showing the amount of
  charge-offs that would have been expected at
  pre-crisis levels versus the actual cumulative
  amount of charge-offs by major loan category.

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Quarterly History of Banking Industry Net
charge-offs Above and at Precrisis Expected
Levels(Fourth Quarter 2007 thru the 1st Quarter
2011)
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Quanta Analtics Final CommentsRegarding the
charge-offs Taking Place in the Banking Industry

• Some people may question the value of even
  looking at the book accounting of the banks
  because they feel that the books do not represent
  true or real value. QA does not carry that same
  view. QA feels that its review of the Banking
  Industry books, based upon the summary
  compilation of standardized financial reports
  that have been regularly submitted by more than
  7,700 banking institutions over a period of
  years, is consistent with good financial
  analysis. Neither is QA concerned about
  mark-to-market issues relating to assets that
  have survived the test of time through one of the
  most financially confusing periods in the last
  sixty years.
• In its review of Banking Industry charge-offs,
  Quanta Analytics sees no reason to change its
  rather upbeat opinion regarding the future of the
  Banking Industry and the U.S. Economy.
• QA views the charge-offs that are taking place
  within the Banking Industry are consistent with
  what QA feels is the necessary cleanup of the
  Banking Industrys previous mistakes.
• QA also feels the banks are in somewhat the same
  position as the whole of U.S. business. Overall
  things might be better for the banks, but the
  banks are far from being in critical condition.
  Based upon the data, QA feels that no other shoe
  is going to drop and that there is no reason to
  wait or any time better than the present to start
  investing again in American business, supplying
  valued products and services to the rest of the
  world. As onward and upward we charge ahead.

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Address Any Questions to Jim BoswellQuanta
Analytics252-676-0619