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October 27, 2009

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

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.

PNC Report 050508 revised 2008-08-30 06:38:42 711.95 Kb
PNC Report_update final - Pro 2008-10-15 13:21:22 590.98 Kb
PNC Report_update final - Retail 2008-10-15 13:21:38 337.21 Kb
PNC SCAP Results recast using FDIC and NY Fed data - Pro 2009-05-15 07:31:21 455.37 Kb
PNC SCAP Results recast using FDIC and NY Fed data - Retail 2009-05-15 07:30:25 395.18 Kb
PNC Simulated Government Stress Test 2009-05-01 13:09:19 664.87 Kb
PNC Stress Test Pro 2009-04-13 02:10:17 3.11 Mb
PNC Stress Test Retail 2009-04-13 02:11:08 323.51 Kb
PNC Stress Test update - Professional 2009-04-21 15:55:56 3.00 Mb
PNC Stress Test update - Retail 2009-04-21 15:53:52 777.50 Kb
PNC stress test write up - public lite 2009-07-27 02:37:11 995.30 Kb

Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Visit his blog Boom Bust Blog.