At What Point Does Accounting Gimmickery Become an Outright Lie? Let's Ask PNC

By: Reggie Middleton | Tue, Oct 27, 2009
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You know, I happen to really, really appreciate the blogoshpere. There are a select handful of blogs that offer unique, insightful and very difficult to come by expertise, opinion and commentary. Much more so than the mainstream media and even more so than the more specialized media. Despite this, there are certain components of the MSM and corporate America that still do not respect the blogs. Now, why is that? Well, I dare you - no, I double dare you - to find an MSM outlet that performs investigative analysis at the level of the top blogs. I'm not even going to bother to mention who those blogs are (hint, hint), but just want to throw the challenge out there as I show how PNC may have possibly pulled the wool over the collective media, sell side and market's eyes.

Just a few hours ago, I posted my review of PNC's 3rd quarter earnings for 2009 (please look here to see the media, sell side brokerage and equity market's accolades for said results as well as my opinion -For those that didn't notice - Reggie Middleton on PNCl Q3-09 Results). In that review, I actually gave management kudos what appeared to be operational excellence. While typing the review and pondering the data trends, that annoying thing called common sense kept nagging me. I thought to myself, how can their 90 day late loans and charge offs trend downwards after just buying one of the largest junk loan manufacturers in the country amid near record (and rising) unemployment? Even more to the point, why the hell didn't anyone else press this point? Well, I asked my analytical team to dig in a little deeper, and it didn't take long to come up with an answer...

First, look at the trend graphed below. You see non-performing loans and non-performing assets spiking sharply as of a year ago with absolutely no respite, with net charge-offs and accruing 90 day lates following suit, and actually increasing at a faster rate two quarters later. Then, out of the blue, BAM! Late loans and charge-offs magically reverse as non-performing loans and assets keep flying through the roof.

Reason for decline in 90 days past due loans and charge-offs

As per the company's latest 3Q2009 results, the 90 days past due loans decreased from $1,030 million in 2Q2009 to $875 million in 3Q2009. If we look at 2Q209 filing, the similar figure for 2Q2009 was at considerably higher level of $4,939 million versus $3,949 million in 1Q2009. During the quarter 3Q2009, the bank has excluded loans acquired from National City (which were earlier included for 2Q2009 reported figures) from the figures reported for "90 days past due loans" as they are being now considered performing loans. These loans were recorded at estimated fair value when acquired and are currently considered performing due to accretion of interest in purchase accounting under SOP -03-3.

As a result, the 90 day past due loan amount for 2Q2009 (after restatement) includes only $0.8 million of loans of National City, the subprime and option ARM loan specialist recently acquired by PNC (as per 3Q2009 filing) compared to $2.9 billion in last filing (2Q2009).

The detailed information on reasons for above reclassification is not yet available and we may have to wait for 10Q release. However, it seems that the company has removed these loans (probably only a part of the pool - the other part may have been adjusted against 'purchase price excess over fair value' amount) from category of 'loans 90 days past due' due to accretion of interest as per under SOP 03-03.

So long story short - did the credit loss trend in the bank's loan portfolio actually improve, as the market, the sell side analysts and the media (all of whom fail to ask the basic, yet obvious questions) seem to believe or did PNC simply change the way they accounted for said credit losses. Inquiring minds want to know....

BoomBustBlog PNC Research

I would also like to note that I have reopened the monthly retail subscription option and will start allowing analysts to comment (on a limited basis) on the professional subscribers discussion and comment forums. Basically, some of our private analytical banter will be done in the semi-private professional forums so subscribers may interact.

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Reggie Middleton

Author: Reggie Middleton

Reggie Middleton

Reggie Middleton

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