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At What Point Does Accounting Gimmickery Become an Outright Lie? Let's Ask PNC
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.
Click to expand
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
thanks for the analysis, reggie. perpetrating and perpetuating the notion that the majority of the large banks are healthy will be looked back upon and recognized as one of the greatest hoaxes of all time. this is yet another data point of proof.
I think you're trying to make this into a bigger deal than it actually is. Accounting restatements happen, and the "90 days past due" is not an accounting entity, so there are no GAAP rules that judge it. What PNC says it is vs GS vs JPM vs COF is entirely up to them, including including or excluding loans acquired at fair value under SOP 03-3. I promise you that the Q discloses the losses on those loans; the important point is that they restated the Q209 report so that it would not be misleading investors to think they all of a sudden had a 3B drop in that management-defined category. Moving the data to its proper place and restating the prior period results is not a gotcha, it is proper accounting.
Strange how this topic and your lucid explanation was not even broached in the PR material, which clearly leads investors to believe that 90 day lates and charge offs have dropped precipitously.
Hey man look, I'm not saying the PR people aren't complete flacks, I am pretty sure they are all dishonest bastards; I'm just saying that the accounting treatment of this particular issue is in line with what is supposed to be done, and, as evidenced by your ability to recognize it almost immediately, is not misleading.
If that's the case, then why am I the only one who has written that they recognized it? I haven't read a peep about this anywhere else. Have you?
I seriously doubt you're the only one who recognized it. I would hope that any competent financial analyst would recognize that instance fairly quickly. It's not like most in-depth analysis is publicly disseminated to begin with.
Lies, damn lies and statistics.
And why not when it appears that the US Gvt and Fed appear to have placed every bank on the "pass" line. It's not cheating unless you're prosecuted and lose. Otherwise it's just "bidness".
As for “Lies, damn lies and statistics” and the MSM, the AP says U.S. newspaper circulation is declining at an accelerating rate.
According to AP, “Figures from the Audit Bureau of Circulations show that average daily circulation dropped 10.6 percent in the April-to-September period from the same six-month span in 2008. That was greater than the 7.1 percent decline in the October 2008-March 2009 period and the 4.6 percent drop in the April-September period of 2008.
“Sunday circulation fell 7.5 percent in the latest six-month span.”
…"Newsday, a Long Island daily, said last week that it plans to start charging people who don’t subscribe to its print edition $5 a week for access to its Web site."
"At What Point Does Accounting Gimmickery Become an Outright Lie?"
Is this a trick question?
Many scams to keep track of these days. Hoi polloi are grateful for access to this kind of analysis. Hoi oligoi can do nothing to stop it under current law.
Lying is just a weaker way of getting what you want. When will they ever learn?
"The force is strong in this one"
Court: Do you swear to tell the truth, the whole truth and nothing but the truth?
Defendant: To a point.
Court: To what point?
Defendant: To the point I start to lie.
Maybe they moved the crap to an SIV.
Got that covered: http://boombustblog.com/Reggie-Middleton/1178-If-a-Bubble-Bubble-Bursts-Off-Balance-Sheet-Will-Anyone-Be-There-to-Hear-It-Pt-5-PNC-Bank.html
PNC is a company, a non-sentient entity. I have absolutely nothing against them. Actually, they are better off than many of the annointed 19 banks. That doesn't mean they are in good shape, though.
What about GS? Definitely Sentient.
Only their marketing and lobbying arms are sentient!!!
...and their High Frequency Trading 'desk'/IBM Mainframe.
You're not fond of PNC are ya...
You know what they say. It's business, not personal...
Or in the words of Sonny Crockett -- "when it gets personal, it gets messy. And when it when it gets messy, the wrong people end up getting killed...."