Quanta Analytics Financial Crisis Accounting of the Banking Industry Part IV Analysis of Banking...

Quanta AnalyticsQuanta Analytics

Financial Crisis Accounting of the Financial Crisis Accounting of the Banking IndustryBanking Industry

Part IVPart IV

Analysis of Banking IndustryAnalysis of Banking Industry

Net Loan Charge-offsNet Loan Charge-offs


Introduction to Banking AnalysisIntroduction to Banking Analysis

The financial information appearing in this presentation is obtained from the Federal Financial 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) 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 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 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. 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.The analysis herein is the work of a single individual, Jim Boswell.

Jim is the Executive Director of Quanta Analytics.Jim is the Executive Director of Quanta Analytics.He has an M.B.A. from the University of Pennsylvania, The Wharton School, 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 An M.P.A. from Indiana University, School of Public and Environmental Affairs; and a B.A. in mathematics from Hanover CollegeB.A. in mathematics from Hanover College

Jim is a veteran, who served as a junior officer on a fleet ballistic missile submarineJim is a veteran, who served as a junior officer on a fleet ballistic missile submarineHe worked for PricewaterhouseCoopers LLP for 15 years prior to starting his own “think tank”.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 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.systems used by Ginnie Mae to monitor the risk of their portfolio.

Jim was integrally involved in analyzing data and developing solutions throughout the S&L crisis.Jim was integrally involved in analyzing data and developing solutions throughout the S&L crisis.Jim is the author of Crush Depth Alert, subtitled Solutions for Supplying Power to America’s Jim is the author of Crush Depth Alert, subtitled Solutions for Supplying Power to America’s

Distressed Financial SystemsDistressed Financial SystemsAnd he has regularly written opinion pieces for Business InsiderAnd he has regularly written opinion pieces for Business Insider


History of Banking IndustryHistory of Banking IndustryNet Loan “Charge-offs”Net Loan “Charge-offs”

Earlier parts to the Quanta Analytics analysis of the financial crisis and banking industry looked at: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); (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); (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); (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 In this Part IV of our analysis QA looks at the trend of banking industry loan “charge-offs” which clear the banking industry’s balance sheet of “toxic assets”. This analysis supports the conclusions made in Part I banking industry’s 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 regarding total current and future “crisis losses” to be in the range of $550 Billion, and clearly demonstrates that:demonstrates that:

(1) loan charge-offs began rising noticeably during, if not earlier, than the fourth quarter of 2007 (nearly nine (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);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 (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.Credit loans; (3) and Commercial Loans.

(3) quarterly loan charge-offs “HAVE PEAKED” in all loan categories—and in most cases five to seven quarters (3) quarterly loan charge-offs “HAVE PEAKED” in all loan categories—and in most cases five to seven quarters ago.ago.

QA believes it is important to point out that many of the graphs presented take on the “general shape” of a 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 S&L crisis). What goes up (in this case charge-offs), does normal type curve (same as we saw during the S&L 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 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-offs”—probably more than enough to fill in the “future” in loan loss allowances to cover future “charge-offs”—probably more than enough to fill in the “future” right hand tail of the developing curve as the remaining “toxic loans” get cleaned up.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 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). since the beginning of the financial crisis (assumed to be the fourth quarter 2007).


Quarterly History of Banking IndustryQuarterly History of Banking Industry Net Charge-offs Net Charge-offs

(4(4thth Quarter 2005 thru 1 Quarter 2005 thru 1st st Quarter 2011) Quarter 2011)

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Real Estate Agricultural Commercial/Industrial Individuals Other Column 6


Cumulative History of Total Banking IndustryCumulative History of Total Banking Industry Net Charge-offs Net Charge-offs

(From the 4(From the 4thth Quarter of 2007 thru the 1 Quarter of 2007 thru the 1st st Quarter 2011) Quarter 2011)

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Cumlative Writeoff Total = $540.3 B

Cumulative Writeoffs If Accrued at Pre-Crisis Norms = $113.6 B

Cumulative Above Pre-Crisis Norms = $426.7 B


History of Banking IndustryHistory of Banking Industry

From the previous graphs it should be clear that quarterly “total banking industry loan charge-offs” peaked 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.nearly eighteen months ago and have been declining ever since.

This is consistent with QA’s earlier findings and reflects the point that more than three-fourths ($427 B) of the This is consistent with QA’s 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 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 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 . 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: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; (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 3The accumulated total of bank loan charge-offs since the end of the 3rdrd Quarter 2007 are $540.3 Billion. This 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 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”.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 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 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 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 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 normal” values as reflected in the first eight quarters of the graphs, which QA uses to evaluate the “true impact” of the crisis. impact” of the crisis.


Quarterly History of Banking Industry Quarterly History of Banking Industry “Real Estate Loan” Net Charge-offs“Real Estate Loan” Net Charge-offs

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Real Estate


Quarterly History of Banking Industry Quarterly History of Banking Industry Commercial Loan Net Charge-offsCommercial Loan Net Charge-offs

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Commercial/Industrial


Quarterly History of Banking IndustryQuarterly History of Banking Industry“Individual Loan” Net Charge-offs“Individual Loan” Net Charge-offs

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Individuals


History of Banking IndustryHistory of Banking IndustryNet Charge-offsNet Charge-offs

Assuming the 4Assuming the 4thth Quarter 2007 reflects the beginning of the current crisis, the previous graphs show: Quarter 2007 reflects the beginning of the current crisis, the previous graphs show:

Bank charge-offs for Real Estate Loans:Bank charge-offs for Real Estate Loans: (1) peaked at $30 Billion during the 4(1) peaked at $30 Billion during the 4thth Quarter of 2009—(six quarters ago) Quarter of 2009—(six quarters ago) (2) with the latest quarter down 51% from the peak less pre-crisis expected value(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 (3) the total amount of Real Estate charge-offs (above pre-crisis levels) has been $242 Billion$242 Billion..

Bank charge-offs for Commercial/Industrial LoansBank charge-offs for Commercial/Industrial Loans (1) peaked at $9 Billion during the 3(1) peaked at $9 Billion during the 3rdrd Quarter 2009—(seven quarters ago) Quarter 2009—(seven quarters ago) (2) with the latest quarter down 70% from the peak less pre-crisis expected value(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 (3) the amount of Commercial/Industrial loan charge-offs above pre-crisis levels has been $60 B$60 B

Bank charge-offs to IndividualsBank charge-offs to Individuals (1) peaked at $23 Billion during the 1(1) peaked at $23 Billion during the 1stst Quarter of 2010—(five quarters ago) Quarter of 2010—(five quarters ago) (2) with the latest quarter = 51% from the peak less pre-crisis expected value(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 (3) the total amount of Individual Loan charge-offs above pre-crisis levels has been $117 Billion$117 Billion..

QA will now provide more specific detail on the losses associated with real estate and individual loans.QA will now provide more specific detail on the losses associated with real estate and individual loans.


Quarterly History of Banking IndustryQuarterly History of Banking Industry“Real Estate Loan” charge-offs“Real Estate Loan” charge-offs

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Single Family Construction Commercial Multifamily Foreign Farmland


Quarterly History of Banking Industry Quarterly History of Banking Industry “Real Estate Loan” charge-offs“Real Estate Loan” charge-offs

“Single Family”“Single Family”

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Single Family



“Construction and Land Improvement”“Construction and Land Improvement”

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Construction and Land Improvement



“Commercial/Industrial”“Commercial/Industrial”

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History of Banking IndustryHistory of Banking IndustryShowing More Detail of Net charge-offs for Real EstateShowing More Detail of Net charge-offs for Real Estate

Single Family, Construction and Land Improvement, and CommercialSingle Family, Construction and Land Improvement, and Commercial

From the previous three graphs regarding “Real Estate Loans” we can concludeFrom the previous three graphs regarding “Real Estate Loans” we can conclude

Bank charge-offs for Real Estate “Single Family” Loans:Bank charge-offs for Real Estate “Single Family” Loans: (1) peaked at $16 Billion at the end of the 4(1) peaked at $16 Billion at the end of the 4thth Quarter of 2009—six quarters ago Quarter of 2009—six quarters ago (2) with the latest quarter down 42% from the peak less pre-crisis expected value;(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 = (3) the total amount of Real Estate “Single Family” charge-offs above pre-crisis levels = $139 Billion$139 Billion

Bank charge-offs for Real Estate “Construction and Land Improvement” LoansBank charge-offs for Real Estate “Construction and Land Improvement” Loans (1) peaked at $9 Billion at the end of the 4(1) peaked at $9 Billion at the end of the 4thth Quarter 2009—six quarters ago Quarter 2009—six quarters ago (2) with the latest quarter down 71% from the peak less pre-crisis expected value;(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 = (3) total amount of Construction/Land Improvement charge-offs above pre-crisis levels = $71 Billion$71 Billion

Individual charge-offs for Real Estate “Commercial” LoansIndividual charge-offs for Real Estate “Commercial” Loans (1) peaked at $3.5 Billion at the end of the 4(1) peaked at $3.5 Billion at the end of the 4th th Quarter of 2010—two quarters ago Quarter of 2010—two quarters ago (2) with the lastest quarter down 39% from the peak less pre-crisis expected value; (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 = (3) the total amount of Individual Loan charge-offs above pre-crisis levels = $26 Billion$26 Billion..

The next set of graphs will now break down the non-real estate “Individual” loan category further.The next set of graphs will now break down the non-real estate “Individual” loan category further.


Quarterly History of Banking Industry Quarterly History of Banking Industry “Individual Loan” Net Charge-offs“Individual Loan” Net Charge-offs

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Credit Card LoansCredit Card Loans

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Non-Credit CardNon-Credit Card

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Other Individual


History of Banking IndustryHistory of Banking IndustryIndividual Loan Net Charge-offs forIndividual Loan Net Charge-offs for

Credit Card and non-Credit Card LoansCredit Card and non-Credit Card Loans

From the previous three graphs regarding “Individual Loans” we can concludeFrom the previous three graphs regarding “Individual Loans” we can conclude

Bank charge-offs for Individual “Credit Card” Loans:Bank charge-offs for Individual “Credit Card” Loans: (1) peaked at $18.7 Billion at the end of the 1st Quarter of 2010—five quarters ago(1) peaked at $18.7 Billion at the end of the 1st Quarter of 2010—five quarters ago (2) with the latest quarter down 49% from the peak less pre-crisis expected value(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 (3) the amount of Credit Card charge-offs above pre-crisis levels has been $ 88 Billion$ 88 Billion..

Bank charge-offs for Individual “non-Credit Card” (other consumer) Loans:Bank charge-offs for Individual “non-Credit Card” (other consumer) Loans: (1) peaked at the end of the 2nd Quarter of 2009—eight quarters ago(1) peaked at the end of the 2nd Quarter of 2009—eight quarters ago (2) with the latest quarter down 76% from the peak less pre-crisis expected value and(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 (3) the amount of Credit Card charge-offs above pre-crisis levels has been $ 29 Billion.$ 29 Billion.

Now in conclusion, the following chart displays in summary the total charge-offs since the fourth 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 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. pre-crisis levels versus the actual cumulative amount of charge-offs by major loan category.


Quarterly History of Banking IndustryQuarterly History of Banking Industry Net charge-offs Above and at Precrisis Expected Levels Net charge-offs Above and at Precrisis Expected Levels

(Fourth Quarter 2007 thru the 1(Fourth Quarter 2007 thru the 1stst Quarter 2011) Quarter 2011)

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Net Writeoffs Since Fourth Quarter 2007 Above Precrisis Levels

Net Writeoffs Expected If at Precrisis Levels Prior to Fourth Quarter 2007


Quanta Analtics’ Final CommentsQuanta Analtics’ Final CommentsRegarding the “charge-offs” Taking Place in the Banking IndustryRegarding 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 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 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 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, 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 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 to assets that have survived the test of time through one of the most financially confusing periods in the last sixty years.last sixty years.

In its review of Banking Industry “charge-offs”, Quanta Analytics sees no reason to change its rather upbeat 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.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 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 Industry’s previous mistakes.is the necessary “cleanup” of the Banking Industry’s previous mistakes.

QA also feels the banks are in somewhat the same position as the whole of U.S. business. Overall things might 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 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 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 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.of the world. As onward and upward we charge ahead.

Address Any Questions to Jim BoswellAddress Any Questions to Jim BoswellQuanta AnalyticsQuanta Analytics

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Quanta Analytics Financial Crisis Accounting of the Banking Industry Part IV Analysis of Banking...

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