Quanta Analytics The Financial Effect On the Banking Industry For Their Misguided Ways Financial...

Quanta AnalyticsQuanta Analytics

The Financial Effect On the Banking IndustryThe Financial Effect On the Banking IndustryFor Their Misguided WaysFor Their Misguided Ways

Financial Crisis AccountingFinancial Crisis AccountingPart IIPart II

Banking Industry Loan PerformanceBanking Industry Loan Performance

Introduction to Banking AnalysisIntroduction to Banking Analysis

There are many myths surrounding the “banking industry” as it relates to the current Great Recession that There are many myths surrounding the “banking industry” as it relates to the current Great Recession that we are living through. In that regard, the banking analysis provided herein is an attempt to bring clarity and we are living through. In that regard, the banking analysis provided herein is an attempt to bring clarity and

reason to what really has taken place in the banking environment over the last several years. reason to what really has taken place in the banking environment over the last several years.

As the wise Admiral Hyman Rickover once said: “Sit down before fact with an open mind. Be prepared to As the wise Admiral Hyman Rickover once said: “Sit down before fact with an open mind. Be prepared to give up every preconceived notion. Follow humbly wherever and to whatever abyss Nature leads, or you give up every preconceived notion. Follow humbly wherever and to whatever abyss Nature leads, or you

learn nothing. Don’t push out figures when facts are going in the opposite direction.”learn nothing. Don’t push out figures when facts are going in the opposite direction.”

The facts as displayed in this presentation provides an eighteen-year perspective of the banking industry The facts as displayed in this presentation provides an eighteen-year perspective of the banking industry between the end of 1992 to the end of 2010. This period was chosen because it reflects information that between the end of 1992 to the end of 2010. This period was chosen because it reflects information that provides a view of the banking industry as it stood (1) at the end of the S&L Crisis as things were returning provides a view of the banking industry as it stood (1) at the end of the S&L Crisis as things were returning

to normal shortly after the problem peak of that particular crisis; (2) a long period of what can be viewed as to normal shortly after the problem peak of that particular crisis; (2) a long period of what can be viewed as a more normal steady-state period of operations; and (3) the beginning of the Great Recession as it has a more normal steady-state period of operations; and (3) the beginning of the Great Recession as it has

peaked and now is starting to show signs of recovery.peaked and now is starting to show signs of recovery.

For Questions Contact Jim Boswell Email: Quanta.For Questions Contact Jim Boswell Email: [email protected]@gmx.com

Introduction to Banking AnalysisIntroduction to Banking Analysis

The financial information appearing in this presentation is obtained primarily from the Federal Financial The financial information appearing in this presentation is obtained primarily from the Federal Financial Institution Examination Council (FFIEC) Call Reports and the Office of Thrift Supervision (OTS) Thrift 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 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 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. 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 systems used 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.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 Distressed Jim is the author of Crush Depth Alert, subtitled Solutions for Supplying Power to America’s Distressed

Financial SystemsFinancial SystemsAnd he regularly writes opinion pieces for Business InsiderAnd he regularly writes opinion pieces for Business Insider

Quanta AnalyticsQuanta AnalyticsCrisis AccountingCrisis Accounting

Part TwoPart Two

Analysis of Banking IndustryAnalysis of Banking Industry

Loan PerformanceLoan Performance


Crisis Accounting – Part TwoCrisis Accounting – Part TwoHistory of Banking Industry Loan AssetsHistory of Banking Industry Loan Assets

1992 - 20101992 - 2010

Loan Assets make up approximately 60 Percent of all Bank Assets.Loan Assets make up approximately 60 Percent of all Bank Assets.

This Part Two of Quanta Analytics Analysis of the Banking Industry is going to look at those loan This Part Two of Quanta Analytics Analysis of the Banking Industry is going to look at those loan assets and their performance between 1992 and 2010.assets and their performance between 1992 and 2010.

Loan Assets as Analyzed herein fall within five categories:Loan Assets as Analyzed herein fall within five categories: (1) Real Estate Loans(1) Real Estate Loans (2) Commercial Loans(2) Commercial Loans (3) Individual Loans (including Credit Card Loans)(3) Individual Loans (including Credit Card Loans) (4) Farm Loans;(4) Farm Loans; (5) Other loans (foreign and domestic)(5) Other loans (foreign and domestic)

The next graph shows the share of loan assets in relation to total Banking AssetsThe next graph shows the share of loan assets in relation to total Banking Assets


History of Banking Industry Loans and Other AssetsHistory of Banking Industry Loans and Other Assets(1992 – 2010)(1992 – 2010)

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Ban

k A

sset

s in

Tril

lions

Loans Assets Other Assets


Growth of Bank and Loan AssetsGrowth of Bank and Loan Assetsin Relation to U.S. GDPin Relation to U.S. GDP

The previous graph clearly shows banking assets (including loan assets) growing over The previous graph clearly shows banking assets (including loan assets) growing over the past eighteen years, but solely by the graph itself, it is difficult to measure that the past eighteen years, but solely by the graph itself, it is difficult to measure that growth.growth.

The following graph compares the level of bank assets against the U.S. GDP. The following graph compares the level of bank assets against the U.S. GDP. Considering that much of the banking activity represents Debt, it is worthwhile to Considering that much of the banking activity represents Debt, it is worthwhile to view it against GDP.view it against GDP.

The relative growth in bank assets can be seen throughout but becomes especially The relative growth in bank assets can be seen throughout but becomes especially distinct over this most recent decade after the stock market crash of 2000 —at distinct over this most recent decade after the stock market crash of 2000 —at least until the “financial crisis”.least until the “financial crisis”.


Growth in Bank Assets in Relation Growth in Bank Assets in Relation to U.S. GDPto U.S. GDP

0%

20%

40%

60%

80%

100%

120%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Ass

et R

ela

tion

ship

to U

.S. G

DP

Bank Assets/U.S. GDP Bank Loan Assets/U.S. GDP


Growth of Bank Loan AssetsGrowth of Bank Loan Assetsby Categoryby Category

Real Estate, Commercial, Individual, Farm, and OtherReal Estate, Commercial, Individual, Farm, and Other

The next two graphs show the amount of Banking Industry loans in five fundamental categories The next two graphs show the amount of Banking Industry loans in five fundamental categories and how their relative loan percentages have changed over time:and how their relative loan percentages have changed over time:

At the end of the third quarter of 2010 the amount in each loan category were:At the end of the third quarter of 2010 the amount in each loan category were:

Real Estate Loans $ 4.3 TrillionReal Estate Loans $ 4.3 Trillion Individual Loans $ 1.3 TrillionIndividual Loans $ 1.3 Trillion Commercial Loans $ 1.2 TrillionCommercial Loans $ 1.2 Trillion Farm Loans $ 0.1 TrillionFarm Loans $ 0.1 Trillion Other foreign/domestic Other foreign/domestic $ 0.5 Trillion$ 0.5 Trillion Total Banking Loan Assets $ 7.4 TrillionTotal Banking Loan Assets $ 7.4 Trillion

The relative growth in real estate loans and the drop off in commercial loans during the 2000s is The relative growth in real estate loans and the drop off in commercial loans during the 2000s is worth noting. Fannie Mae and Freddie Mac had been taking market share from the banks worth noting. Fannie Mae and Freddie Mac had been taking market share from the banks during the 1990s, so after the stock market crash in 2000, the banks decided to get into the during the 1990s, so after the stock market crash in 2000, the banks decided to get into the mortgage game big time, too. The results of that decision will become clear when we look at mortgage game big time, too. The results of that decision will become clear when we look at loan performance later.loan performance later.


History of Bank Loan AssetsHistory of Bank Loan AssetsReal Estate, Commercial, Individual, Farm and OtherReal Estate, Commercial, Individual, Farm and Other

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$9.0

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Lo

an

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ets

in T

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ns

Real Estate Commercial Individuals Other Farm


History of Bank Loan AssetsHistory of Bank Loan AssetsReal Estate, Commercial, Individual, Farm and OtherReal Estate, Commercial, Individual, Farm and Other

0%

10%

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30%

40%

50%

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70%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Lo

an

Pe

rce

nt

Real Estate Commercial Individual Other Farm


Performance of Bank Loan AssetsPerformance of Bank Loan Assetsby Categoryby Category


The next five graphs show the loan performance for each of the five loan categories that we have been The next five graphs show the loan performance for each of the five loan categories that we have been discussing for the period between 1992 and 2010.discussing for the period between 1992 and 2010.

In each case it is worth noting that the beginning point of the graph (1992) reflects loan performance toward In each case it is worth noting that the beginning point of the graph (1992) reflects loan performance toward the tail end of the Savings & Loan Crisis when peak delinquencies occurred in the late 1990/early1991 the tail end of the Savings & Loan Crisis when peak delinquencies occurred in the late 1990/early1991 period. BTW, it is not just a coincidence that the Government started collecting their data in 1992.period. BTW, it is not just a coincidence that the Government started collecting their data in 1992.

Another thing that you should realize by looking at the following graphs is that the negative loan performance Another thing that you should realize by looking at the following graphs is that the negative loan performance of this current crisis has just recently peaked and is likely to come down over the next couple of years. of this current crisis has just recently peaked and is likely to come down over the next couple of years. Over time bad loan performance curves tend to look like “normal curves”—what goes up does eventually Over time bad loan performance curves tend to look like “normal curves”—what goes up does eventually come down.come down.

The bar charts are structured so that the bottom bar reflects the loans in the worst delinquency status The bar charts are structured so that the bottom bar reflects the loans in the worst delinquency status (nonaccruals), then the next worse delinquency status (loans > 90 days), and thirdly loans in the least (nonaccruals), then the next worse delinquency status (loans > 90 days), and thirdly loans in the least problem status (< 90 days delinquent)problem status (< 90 days delinquent)

It is also important to look at the different magnitudes of the various category loan performances by looking at It is also important to look at the different magnitudes of the various category loan performances by looking at the “y” axis of each graph. Especially if you are looking for another shoe to drop other than Real Estate.the “y” axis of each graph. Especially if you are looking for another shoe to drop other than Real Estate.


Banking History Showing PercentBanking History Showing Percentof Real Estate Loan Assets of Real Estate Loan Assets

in Delinquent Statusin Delinquent Status

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1%

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7%

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9%

10%

1992

1993

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2010

Pe

rce

nt

of

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an

s D

elin

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en

t

NonAccruing Delinq > 90 Days Delinq < 90 Days


Banking History Showing PercentBanking History Showing Percentof Commercial Loan Assets of Commercial Loan Assets


0%

1%

1%

2%

2%

3%

3%

4%

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5%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

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cent

of C

omm

erci

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oans

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Banking History Showing PercentBanking History Showing Percentof Individual Loan Assets of Individual Loan Assets


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

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4.5%

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1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Per

cent

of I

ndiv

idua

l Loa

ns D

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Banking History Showing PercentBanking History Showing Percentof Farm Loan Assets of Farm Loan Assets in Delinquent Statusin Delinquent Status

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Per

cent

of F

arm

Loa

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elin

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Banking History Showing PercentBanking History Showing Percentof Other Loan Assets of Other Loan Assets in Delinquent Statusin Delinquent Status

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

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4.5%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Per

cent

of O

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Loa

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Performance of Bank Credit Card Loan AssetsPerformance of Bank Credit Card Loan Assets(part of the Individual Loan category shown previously)(part of the Individual Loan category shown previously)

Bank Credit Card Loans account for just a little over half of the $1.3 Trillion of Bank Credit Card Loans account for just a little over half of the $1.3 Trillion of Individual Loans in 2010.Individual Loans in 2010.

As a bonus breakout just for Bank Credit Card Loans, the following graph shows how As a bonus breakout just for Bank Credit Card Loans, the following graph shows how Credit Card loans have performed over the last eighteen years.Credit Card loans have performed over the last eighteen years.

BTW, the net interest spread that the banks make on credit card loans is significantly BTW, the net interest spread that the banks make on credit card loans is significantly greater than the spread that they get on all their other loans.greater than the spread that they get on all their other loans.


Banking History Showing PercentBanking History Showing Percentof Credit Card Loan Assets of Credit Card Loan Assets


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1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

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Putting Them All TogetherPutting Them All TogetherPerformance of Bank Loan Assets by CategoryPerformance of Bank Loan Assets by Category


The next graph simply puts the performance of all five loan categories together in one graph.The next graph simply puts the performance of all five loan categories together in one graph.

In this case the measurement used for loan performance is the percentage of loan assets that are either:In this case the measurement used for loan performance is the percentage of loan assets that are either: (1) in a nonaccrual or foreclosure condition, or(1) in a nonaccrual or foreclosure condition, or (2) delinquent > 90 days.(2) delinquent > 90 days.

In this case loans < 90 days delinquent are not factored into the equation.In this case loans < 90 days delinquent are not factored into the equation.


Bank History of Loan DelinquenciesBank History of Loan DelinquenciesNonAccruing and > 90 Days DelinquentNonAccruing and > 90 Days Delinquent

by Asset Categoryby Asset Category

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1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Real Estate Farm Commercial Individual Other


Quanta Analytics ConclusionQuanta Analytics Conclusion

Quanta Analytics interpretation of this information.Quanta Analytics interpretation of this information.

(1) Loan performance delinquencies for our current crisis have peaked;(1) Loan performance delinquencies for our current crisis have peaked;

(2) Real Estate loans were the primary driver for this crisis;(2) Real Estate loans were the primary driver for this crisis;

(3) No other shoe is going to drop—not commercial, credit card, nor any other loan type;(3) No other shoe is going to drop—not commercial, credit card, nor any other loan type;

(4) Loan performance has been bad, but in reality, not all that much worse than during the(4) Loan performance has been bad, but in reality, not all that much worse than during the Savings & Loan crisis;Savings & Loan crisis;

(5) The banks will once again survive a crisis of their own making.(5) The banks will once again survive a crisis of their own making.


Thought We Were Done—Didn’t YouThought We Were Done—Didn’t YouHere Is Some More DetailHere Is Some More Detail

Since it is clear that Bank Real Estate loans were at the dead center of our most recent banking Since it is clear that Bank Real Estate loans were at the dead center of our most recent banking crisis, Quanta Analytics thought you might be interested in a little more detail on those Real crisis, Quanta Analytics thought you might be interested in a little more detail on those Real Estate Loans.Estate Loans.

As of the end of the third quarter of 2010, the Real Estate loans that make up the $4.3 Trillion as As of the end of the third quarter of 2010, the Real Estate loans that make up the $4.3 Trillion as reported fall into the following six subcategories:reported fall into the following six subcategories:

(1) Single Family Residential $ 2.53 Trillion(1) Single Family Residential $ 2.53 Trillion (2) Commercial Non-Farm $ 1.07 Trillion(2) Commercial Non-Farm $ 1.07 Trillion (3) Construction & Land Development $ 0.35 Trillion(3) Construction & Land Development $ 0.35 Trillion (4) Multifamily Residential $ 0.22 Trillion(4) Multifamily Residential $ 0.22 Trillion (5) Farmland $ 0.07 Trillion(5) Farmland $ 0.07 Trillion (6) Other Real Estate (6) Other Real Estate $ 0.06 Trillion$ 0.06 Trillion Total Banking Real Estate Loans $ 4.31 TrillionTotal Banking Real Estate Loans $ 4.31 Trillion


History of Bank Real Estate Loan AssetsHistory of Bank Real Estate Loan AssetsSingle Family, Commercial, Construction, Multifamily, Farmland, and OtherSingle Family, Commercial, Construction, Multifamily, Farmland, and Other

-$1.0

$0.0

$1.0

$2.0

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$6.0

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

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an

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Single Family Commercial Construction Multifamily Farmland Other


History of Bank Real Estate Loan AssetsHistory of Bank Real Estate Loan AssetsSingle Family, Commercial, Construction, Multifamily, Farmland, and OtherSingle Family, Commercial, Construction, Multifamily, Farmland, and Other

0%

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1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Real

Est

ate

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gory

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rcen

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Single Family Commercial Construction Multifamil Farmland Other


Performance of Bank Real Estate Loan AssetsPerformance of Bank Real Estate Loan Assetsby Categoryby Category

Single Family, Commercial, Construction, Multifamily, Farmland, and OtherSingle Family, Commercial, Construction, Multifamily, Farmland, and Other

The next four graphs show the loan performance for the four largest of the six real estate loan categories The next four graphs show the loan performance for the four largest of the six real estate loan categories (farmland and other not being all that relevant) for the period between 1992 and 2010.(farmland and other not being all that relevant) for the period between 1992 and 2010.

Again, in each case it is worth noting that the beginning point of the graph (1992) reflects loan performance Again, in each case it is worth noting that the beginning point of the graph (1992) reflects loan performance toward the tail end of the Savings & Loan Crisis after peak delinquencies occurred two years earlier in the toward the tail end of the Savings & Loan Crisis after peak delinquencies occurred two years earlier in the late 1990/early1991 period. late 1990/early1991 period.

Another thing that you should realize by looking at the following graphs is that the negative loan performance Another thing that you should realize by looking at the following graphs is that the negative loan performance of this current crisis has just recently peaked and is likely to come down over the next couple of years. of this current crisis has just recently peaked and is likely to come down over the next couple of years. Over time bad loan performance curves tend to look like “normal curves”—what goes up does eventually Over time bad loan performance curves tend to look like “normal curves”—what goes up does eventually come down.come down.

The bar charts are structured so that the bottom bar reflects the loans in the worst delinquency status The bar charts are structured so that the bottom bar reflects the loans in the worst delinquency status (nonaccruals), then the next worse delinquency status (loans > 90 days), and thirdly loans in the least (nonaccruals), then the next worse delinquency status (loans > 90 days), and thirdly loans in the least problem status (< 90 days delinquent)problem status (< 90 days delinquent)

It is also important to look at the different magnitudes of the various category loan performances by looking at It is also important to look at the different magnitudes of the various category loan performances by looking at the “y” axis of each graph. Especially if you are looking for another shoe to drop other than Real Estate.the “y” axis of each graph. Especially if you are looking for another shoe to drop other than Real Estate.


Banking History of Real Estate Loans Showing PercentBanking History of Real Estate Loans Showing Percentof Single Family Loan Assets of Single Family Loan Assets


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4%

6%

8%

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12%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Pe

rce

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of

Sin

gle

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mily

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Banking History of Real Estate Loans Showing PercentBanking History of Real Estate Loans Showing Percentof Commercial Loan Assets of Commercial Loan Assets


0%

1%

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1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Perc

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Banking History of Real Estate Loans Showing PercentBanking History of Real Estate Loans Showing Percentof Construction and Land Development Loan Assets of Construction and Land Development Loan Assets


0%

2%

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6%

8%

10%

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16%

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20%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Perc

ent o

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stru

ction

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Banking History of Real Estate Loans Showing PercentBanking History of Real Estate Loans Showing Percentof Multifamily Loan Assets of Multifamily Loan Assets


0%

1%

2%

3%

4%

5%

6%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Perc

ent o

f Mul

tifam

ily L

oans

Del

inqu

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Quanta Analytics ConclusionQuanta Analytics Conclusion

Quanta Analytics interpretation of this last information.Quanta Analytics interpretation of this last information.

(1) Loan performance delinquencies for our current crisis have peaked;(1) Loan performance delinquencies for our current crisis have peaked;

(2) Single Family Real Estate loans were the primary driver for this crisis;(2) Single Family Real Estate loans were the primary driver for this crisis;

(3) The primary difference between the S&L Crisis and the current one is due to Single Family (3) The primary difference between the S&L Crisis and the current one is due to Single Family Residential loans being much worse off in this crisis than in the S&L crisis;Residential loans being much worse off in this crisis than in the S&L crisis;

(4) Loan performance has been bad, but in reality, not all that much worse than during the(4) Loan performance has been bad, but in reality, not all that much worse than during the Savings & Loan crisis—thank goodness for those homeowners who had jobs and kept Savings & Loan crisis—thank goodness for those homeowners who had jobs and kept

making their mortgage payments despite all the PANIC; andmaking their mortgage payments despite all the PANIC; and

(5) The banks will once again survive a crisis of their own making.(5) The banks will once again survive a crisis of their own making.

More to Come LaterMore to Come Laterin Crisis Accountingin Crisis Accounting

Part ThreePart Three

(including looking at Other Non-Loan Bank Assets)(including looking at Other Non-Loan Bank Assets)

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