1. Quanta Analytics Financial Crisis Accounting of the Banking Industry Part IV Analysis of Banking Industry Net Loan Charge-offs

2. Quanta Analytics 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 S&L crisis. Jim is the author of Crush Depth Alert, subtitled Solutions for Supplying Power to America’s Distressed Financial Systems And he has regularly written opinion pieces for Business Insider

3. Quanta Analytics History of Banking Industry Net 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); (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 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 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); (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. (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 categories—and in most cases five to seven quarters ago. (3) quarterly loan charge-offs “HAVE PEAKED” in all loan categories—and 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 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 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. 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).

4. Quanta Analytics Quarterly History of Banking Industry Net Charge-offs (4 th Quarter 2005 thru 1 st Quarter 2011)

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

6. Quanta Analytics 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 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 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; (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 3 rd 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.

7. Quanta Analytics Quarterly History of Banking Industry “Real Estate Loan” Net Charge-offs

8. Quanta Analytics Quarterly History of Banking Industry Commercial Loan Net Charge-offs

9. Quanta Analytics Quarterly History of Banking Industry “Individual Loan” Net Charge-offs

10. Quanta Analytics History of Banking Industry Net Charge-offs Assuming the 4 th 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 4 th Quarter of 2009—(six quarters ago) (1) peaked at $30 Billion during the 4 th 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 $242 Billion. (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 3 rd Quarter 2009—(seven quarters ago) (1) peaked at $9 Billion during the 3 rd 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 $60 B (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 1 st Quarter of 2010—(five quarters ago) (1) peaked at $23 Billion during the 1 st 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 $117 Billion. (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.

11. Quanta Analytics Quarterly History of Banking Industry “Real Estate Loan” charge-offs With More Detail

12. Quanta Analytics Quarterly History of Banking Industry “Real Estate Loan” charge-offs “Single Family”

13. Quanta Analytics Quarterly History of Banking Industry “Real Estate Loan” charge-offs “Construction and Land Improvement”

14. Quanta Analytics Quarterly History of Banking Industry “Real Estate Loan” charge-offs “Commercial/Industrial”

15. Quanta Analytics History of Banking Industry Showing More Detail of Net charge-offs for Real Estate Single 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 4 th Quarter of 2009—six quarters ago (1) peaked at $16 Billion at the end of the 4 th 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 = $139 Billion (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 4 th Quarter 2009—six quarters ago (1) peaked at $9 Billion at the end of the 4 th 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 = $71 Billion (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 4 th Quarter of 2010—two quarters ago (1) peaked at $3.5 Billion at the end of the 4 th 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 = $26 Billion. (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.

16. Quanta Analytics Quarterly History of Banking Industry “Individual Loan” Net Charge-offs With More Detail

17. Quanta Analytics Quarterly History of Banking Industry “Individual Loan” Net Charge-offs Credit Card Loans

18. Quanta Analytics Quarterly History of Banking Industry “Individual Loan” Net Charge-offs Non-Credit Card

19. Quanta Analytics History of Banking Industry Individual Loan Net Charge-offs for Credit 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 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 $ 88 Billion. (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 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 $ 29 Billion. (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.

20. Quanta Analytics Quarterly History of Banking Industry Net charge-offs Above and at Precrisis Expected Levels (Fourth Quarter 2007 thru the 1 st Quarter 2011)

21. Quanta Analytics Quanta Analtics’ Final Comments Regarding 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 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 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.

22. Address Any Questions to Jim Boswell Quanta Analytics 252-676-0619