Quanta Analytics The Financial Effect On the Banking Industry For Their Misguided Ways Financial Crisis Accounting Part II Banking Industry Loan Performance

Introduction to Banking Analysis 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 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 give up every preconceived notion. Follow humbly wherever and to whatever abyss Nature leads, or you learn nothing. Dont 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 between the end of 1992 to the end of 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 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 peaked and now is starting to show signs of recovery.

For Questions Contact Jim Boswell Introduction to Banking Analysis 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 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 S&L crisis. Jim is the author of Crush Depth Alert, subtitled Solutions for Supplying Power to Americas Distressed Financial Systems And he regularly writes opinion pieces for Business Insider

Quanta Analytics Crisis Accounting Part Two Analysis of Banking Industry Loan Performance

For Questions Contact Jim Boswell Crisis Accounting – Part Two History of Banking Industry Loan 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 assets and their performance between 1992 and 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 Assets

For Questions Contact Jim Boswell History of Banking Industry Loans and Other Assets (1992 – 2010)

For Questions Contact Jim Boswell Growth of Bank and Loan Assets in Relation to U.S. GDP 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 growth. 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 view it against GDP. 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 least until the financial crisis.

For Questions Contact Jim Boswell Growth in Bank Assets in Relation to U.S. GDP

For Questions Contact Jim Boswell Growth of Bank Loan Assets by Category Real Estate, Commercial, Individual, Farm, and Other 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: At the end of the third quarter of 2010 the amount in each loan category were: Real Estate Loans $ 4.3 Trillion Real Estate Loans $ 4.3 Trillion Individual Loans $ 1.3 Trillion Individual Loans $ 1.3 Trillion Commercial Loans $ 1.2 Trillion Commercial Loans $ 1.2 Trillion Farm Loans $ 0.1 Trillion Farm Loans $ 0.1 Trillion Other foreign/domestic $ 0.5 Trillion Other foreign/domestic $ 0.5 Trillion Total Banking Loan Assets $ 7.4 Trillion Total Banking Loan Assets $ 7.4 Trillion 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 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 loan performance later.

For Questions Contact Jim Boswell History of Bank Loan Assets Real Estate, Commercial, Individual, Farm and Other

For Questions Contact Jim Boswell History of Bank Loan Assets Real Estate, Commercial, Individual, Farm and Other

For Questions Contact Jim Boswell Performance of Bank Loan Assets by Category Real Estate, Commercial, Individual, Farm, and Other 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 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 period. BTW, it is not just a coincidence that the Government started collecting their data in 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. Over time bad loan performance curves tend to look like normal curveswhat goes up does eventually come down. 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 problem status ( 90 days), and thirdly loans in the least problem status (< 90 days delinquent) 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.

For Questions Contact Jim Boswell Banking History Showing Percent of Real Estate Loan Assets in Delinquent Status

For Questions Contact Jim Boswell Banking History Showing Percent of Commercial Loan Assets in Delinquent Status

For Questions Contact Jim Boswell Banking History Showing Percent of Individual Loan Assets in Delinquent Status

For Questions Contact Jim Boswell Banking History Showing Percent of Farm Loan Assets in Delinquent Status

For Questions Contact Jim Boswell Banking History Showing Percent of Other Loan Assets in Delinquent Status

For Questions Contact Jim Boswell Performance of Bank Credit Card Loan Assets (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 Individual Loans in 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. 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.

For Questions Contact Jim Boswell Banking History Showing Percent of Credit Card Loan Assets in Delinquent Status

For Questions Contact Jim Boswell Putting Them All Together Performance of Bank Loan Assets by Category Real Estate, Commercial, Individual, Farm, and Other 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: (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.

For Questions Contact Jim Boswell Bank History of Loan Delinquencies NonAccruing and > 90 Days Delinquent by Asset Category

For Questions Contact Jim Boswell Quanta Analytics Conclusion 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 dropnot commercial, credit card, nor any other loan type; (3) No other shoe is going to dropnot 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.

For Questions Contact Jim Boswell Thought We Were DoneDidnt You Here Is Some More Detail 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 Estate Loans. 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: (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 $ 0.06 Trillion (6) Other Real Estate $ 0.06 Trillion Total Banking Real Estate Loans $ 4.31 Trillion Total Banking Real Estate Loans $ 4.31 Trillion

For Questions Contact Jim Boswell History of Bank Real Estate Loan Assets Single Family, Commercial, Construction, Multifamily, Farmland, and Other

For Questions Contact Jim Boswell History of Bank Real Estate Loan Assets Single Family, Commercial, Construction, Multifamily, Farmland, and Other

For Questions Contact Jim Boswell Performance of Bank Real Estate Loan Assets by Category Single 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 (farmland and other not being all that relevant) for the period between 1992 and 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 late 1990/early1991 period. 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. Over time bad loan performance curves tend to look like normal curveswhat goes up does eventually come down. 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 problem status ( 90 days), and thirdly loans in the least problem status (< 90 days delinquent) 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.

For Questions Contact Jim Boswell Banking History of Real Estate Loans Showing Percent of Single Family Loan Assets in Delinquent Status

For Questions Contact Jim Boswell Banking History of Real Estate Loans Showing Percent of Commercial Loan Assets in Delinquent Status

For Questions Contact Jim Boswell Banking History of Real Estate Loans Showing Percent of Construction and Land Development Loan Assets in Delinquent Status

For Questions Contact Jim Boswell Banking History of Real Estate Loans Showing Percent of Multifamily Loan Assets in Delinquent Status

For Questions Contact Jim Boswell Quanta Analytics Conclusion 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 Residential loans being much worse off in this crisis than in the S&L crisis; (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; (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 crisisthank goodness for those homeowners who had jobs and kept making their mortgage payments despite all the PANIC; and Savings & Loan crisisthank goodness for those homeowners who had jobs and kept making 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 Later in Crisis Accounting Part Three (including looking at Other Non-Loan Bank Assets)