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Quanta Analytics. The Financial Effect On the Banking Industry For Their Misguided Ways Financial Crisis Accounting Part I Banking Industry Losses. Introduction to Banking Analysis.

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  1. Quanta Analytics The Financial Effect On the Banking Industry For Their Misguided Ways Financial Crisis Accounting Part I Banking Industry Losses For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  2. 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. 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 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 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--email: Quanta.Analytics@gmx.com

  3. 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 America’s Distressed Financial Systems And he regularly writes opinion pieces for Business Insider For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  4. Crisis Accounting Analysis of Banking Industry Losses For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  5. Crisis Accounting Showing Bank Losses By Looking at Pre-Tax Net IncomeThe First View The following graph shows the pre-tax net income for the banking industry from 2000 through 2010 (with 2010 net income annualized using the first nine months of the year results). Using the $210 Billion figure of 2006 as a Reasonable Benchmark for pre-tax net income that would have otherwise been expected without a crisis—then the bank losses associated with the “Great Financial Crisis” calculate out to be: 2007 $210 - $150 = $ 60 Billion 2008 $210 - $ 30 = $ 190 Billion 2009 $210 - $ 30 = $ 190 Billion 2010 $210 - $110 = $ 110 Billion TOTAL BANK LOSSES = $ 550 Billion For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  6. Banking Industry Pre-Tax Net Income(2000 – 2010) For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  7. Crisis AccountingShowing Bank Losses by Looking at Provision for LossesThe Second View The next graph will be used to calculate bank losses by looking at the Provision for Losses in the income statement that are accounted for each year. In this case, using the $30 Billion amount in 2006 as a pre-crisis benchmark for Provision for losses, the accounting shows: 2007 ($ 70 - $ 30) = $ 40 Billion 2008 ($180 - $30) = $ 150 Billion 2009 ($250 - $30) = $ 220 Billion 2010 ($170 - $30) = $ 140 Billion TOTAL BANK LOSSES = $ 550 Billion For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  8. Banking IndustryProvision for Losses as Part of Net Income(2000 – 2010) For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  9. Crisis AccountingShowing Bank Losses By Looking at Net Chargeoffs and Loan Loss AllowancesThe Third View The next two graphs will show the amount of assets that the banks have already written off the books (net chargeoffs) and the amount that has been subtracted from their current asset balance as loan loss allowances (LLA) for current Nonperforming Assets (NPAs) still on the books. Again, using previous crisis data somewhat as a benchmark, and thus $35 billion as an expected future amount for net chargeoffs you get: 2007 ($ 45 - $ 35) = $ 10 Billion in New Unexpected Net Chargeoffs 2008 ($100 - $ 35) = $ 65 Billion in New Unexpected Net Chargeoffs 2009 ($190 - $ 35) = $ 155 Billion in New Unexpected Net Chargeoffs 2010 ($190 - $ 35) = $ 155 Billion in New Unexpected Net Chargeoffs Total New Unexpected Net Chargeoffs = $ 385 Billion already written off the balance sheet Now if you add to that number the 2010/2006 Change in Loan Loss Allowances (LLA) on the Balance Sheet, then guess what? ($243 - $ 78) = $ 165 Billion for future losses associated with current NPA TOTAL BANK LOSSES = $ 550 Billion For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  10. Bank Industry History of Loan Net Chargeoffs(2000 – 2010) For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  11. Banking IndustryLoan Loss Allowances on Balance Sheet(2000 – 2010) For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  12. Well, uh, okay…I See What You Are SayingBut Haven’t You Forgotten Something?What About Future Bank Losses? Now let me answer your very good question in this manner. Currently, as the next graph will show you, the amount of Bank Assets that are still (1) on the books and (2) non-performing is made up of the following: Non performing assets < 90 days delinquent = $ 125 Billion Non performing assets > 90 days delinquent = $ 135 Billion and Non performing assets in the foreclosure process = $ 250 Billion TOTAL NON PERFORMING BANK ASSETS (NPA) = $ 510 Billion When considering losses associated with these NPA’s you must remember, however, that: (1) As we noted from an earlier graph, the banks have already set aside (and accounted for) $240 Billion worth of losses associated with the NPAs currently on the books; (2) Some non performing assets do in fact return to a performing status; (3) Non performing assets do usually in fact retain some of their value; and (4) The NPA graph shows that we are four years into our crisis and NPA’s are actually declining. So regardless of how much one wants to be a doomsayer, once you factor in all four of the above, you can conclude that the worst is over and the Banks have already accounted for most of the losses associated with this Great Banking Crisis—both in the past and in the future. For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  13. Amount of All Banking Industry Non-Performing Assets30 – 90 days , > 90 days, & in Foreclosure or Nonaccruing(2000 – 2010) For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  14. So if the banks lost $550 BillionHow did these losses effect their bottom line?Or in other words, their Equity Another good question. The answer is actually—not very much. The next graph will show you the Banking Industry Equity looking at it from two different perspectives: (1) Equity as reported and equal to: Total Assets Less Total Liabilities (2) Equity adjusted to account for an extreme case where all current Nonperforming Assets go belly-up and none of the NPAs retain any value. In this case Equity is calculated in the following manner: Equity as Shown by Assets Less Liabilities Less All NonPerforming Assets (NPAs) Plus the Amount of Loan Loss Allowances (LLA) For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  15. Banking Industry EquityTwo Views For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  16. Wow, I Think I Hear You, But I Still Cannot Believe What I Think You Are Trying to Tell Me.Are You Saying That There Is No More Beef than $550 Billion to the Banking Crisis? Well, yes and no. Now how is that for an answer. Yes, I am telling you $550 Billion is the Bill the Banks Will Have to Pay for their significant role in the financial debacle. But no, there is more to the crisis than just the banks. Don’t forget the Government’s portion (i.e., Fannie, Freddie, FHA, VA, Ginnie Mae, the FDIC, AIG Bailout, etc.). You also have to take into account all the Household Equity that was lost as a result of the PANIC, including losses from stocks, bonds, and home devaluation. But I am saying much of that lost wealth will come back when people realize that things might not be as bad as the doomsayers would like you to believe. In other words, let’s move on and fix our real problems and quit worrying about the banks, foreclosures, and other things that have already been taken care of. For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  17. Banking Industry Equity to Asset RatioTwo Views For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  18. How the Banking Industry Paid Their $550 Billion Bill Since we have gone to all the trouble of explaining the bill the Banking Industry had to pay for the misguided activities, it is also probably worthwhile to explain how the Banking Industry paid the bill without greatly affecting Bank Equity. The following graphs will pretty much tell the story. We will be using the Banking Industry’s composite Income Statement to look at: (1) Interest Income Less Interest Expense; (2) Dividends Paid to Stockholders; and (3) Taxes Paid I believe you will find this quite interesting For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  19. Banking Industry Interest IncomeInterest Income Less Interest Expense One source of income for the Banking Industry is the interest rate spread between what they borrow their money at (or the rate the pay depositors for holding their money) and the rate which they charge borrowers to use that same money. The banking industry accounts for this in two different accounts: (1) an interest income account and (2) an interest expense account. Part of the way the Banking Industry paid for their $550 Bill was to take a larger spread on the interest rate they borrowed versus the interest rate they lent. Like before, using a 2006 Benchmark number of $330 Billion number for interest income, we see: 2007 ($353 - $330) = $ 23 Billion increase in net interest income 2008 ($354 - $330) = $ 24 Billion increase in net interest income 2009 ($396 - $330) = $ 66 Billion increase in net interest income 2010 ($431 - $330) = $ 101 Billion increase in net interest income Total Industry Net Interest Income Increase = $ 214 Billion For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  20. History of Banking Industry Net Interest IncomeInterest Income Less Interest Expense For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  21. Banking Industry HistoryDividends to Stockholders The banking industry has a history of paying out Dividends to the stockholders (or owners) of the banks. So considering that these owners are partly responsible for the misguided activities of the banks themselves, it seems only fair that they should pay some of the bill. And they have: Again, using the 2006/2007 Dividend figure ($110 Billion) as a benchmark, then the part of the $550 Billion banking bill paid by the stockholders is: 2007 ($110 - $110) = $ 0 Billion 2008 ($110 - $ 51) = $ 59 Billion 2009 ($110 - $ 47) = $ 63 Billion 2010 ($110 - $ 41) = $ 69 Billion Smaller Amount of Dividends to Stockholders = $ 191 Billion For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  22. History of Banking IndustryDividends to Stockholders For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  23. Banking Industry Historyof Taxes Paid Well, of course if the banking industry made less pre-tax net income as a result of their misguided ways, it also means that they paid less “taxes” on their income. Again, using 2006 as a pre-crisis benchmark for taxes, we see that 2007 ($ 68 - $ 46) = $ 20 Billion less taxes paid 2008 ($ 68 - $ 6) = $ 62 Billion less taxes paid 2009 ($ 68 - $ 6) = $ 62 Billion less taxes paid 2010 ($ 68 - $ 39) = $ 29 Billion less taxes paid Total Amount of Less Taxes Paid = $137 Billion less taxes paid For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  24. Banking Industry Historyof Taxes Paid For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  25. So Totaling Everything UpWe Find Now if we total our previous findings up, it should pretty well explain why Banking Industry Equity was affected very little by: Passing less of the interest spread to their customers: $214 Billion Distributing less Dividends to stockholder/owners: $191 Billion Paying Fewer Taxes to the Government: $137 Billion TOTAL For THE ABOVE THREE: $542 Billion Interesting—isn’t it? Who Said Bankers Were Stupid? Just in Case You Are Curious We Will Use Are Same Methodology Now to Look at Banking Industry Salaries and Benefits For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  26. History of Banking Industry Expenses to CoverEmployee Salaries, Benefits and Bonuses The following graph shows the amount of banking industry expenses needed to cover employee salaries, benefits, and , bonuses to executive management. Using our benchmark methodology (and thus a $160 Billion for pre-crisis salaries/benefits) the following table shows how those expenses have changed as a result of the Banking Financial Crisis: 2007 ($160 - $160) = $ 0 Billion change in salaries/benefits 2008 ($152 - $160) = ($ 7) Billion change in salaries/benefits 2009 ($163 - $160) = $ 3 Billion change in salaries/benefits 2010 ($168 - $160) = $ 8 Billion change in salaries/benefits Change in Salaries/Benefits to Employees = $ 4 Billion I know this is a “cheap shot” and that the Banking Industry does need to keep Operating As Smartly, Efficiently, and Effectively As They Have in the Past I Just Thought You Might Have Wanted to Know Just the Same For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  27. History of Bank Industry Expenses to CoverEmployee Salaries and Benefits For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

  28. More to Come Later For Questions contact Jim Boswell--email: Quanta.Analytics@gmx.com

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