PNC Bank 2008 Annual Report Download - page 111

N OTE 6 ACCOUNTING FOR C ERTAIN L OANS
A CQUIRED IN A T RANSFER
Loans acquired with evidence of credit quality deterioration
since origination and for which it is probable at purchase that
PNC will be unable to collect all contractually required
payments are accounted for under SOP 03-3. Evidence of
credit quality deterioration as of the purchase date includes
statistics such as past due status, current borrower FICO credit
scores, geographic concentration and current loan-to-value
(LTV), some of which are not immediately available as of the
purchase date. We will continue to evaluate this information
and other credit related information as it becomes available.
SOP 03-3 addresses accounting for differences between
contractual cash flows and cash flows expected to be collected
from our initial investment in loans if those differences are
attributable, at least in part, to credit quality. SOP 03-3
requires acquired impaired loans to be recorded at fair value
and prohibits “carrying over” or the creation of valuation
allowances in the initial accounting for loans acquired in a
transfer that are within the scope of this SOP. A total of $2.6
billion of National City allowance for loan losses was not
carried over in purchase accounting. Excluded from the scope
were leases, revolving credit arrangements and certain loans
held for sale.
The fair values for loans within the scope of SOP 03-3 are
determined by discounting both principal and interest cash
flows expected to be collected using an observable discount
rate for similar instruments with adjustments that management
believes a market participant would consider in determining
fair value. We estimate the cash flows expected to be collected
at acquisition using internal and third party models that
incorporate management’s best estimate of current key
assumptions, such as default rates, loss severity and payment
speeds.
As of December 31, 2008, acquired loans within the scope of
SOP 03-3 had a carrying value of $11.9 billion and an unpaid
principal balance of $19.3 billion as detailed below:
December 31, 2008
In millions Carrying Value Outstanding Balance
Commercial $ 493 $ 1,180
Commercial real estate 1,340 2,831
Consumer 3,924 5,785
Residential real estate 6,154 9,482
Other 10 14
Total $11,921 $19,292
Acquired Loan Information
In millions
December 31,
2008
Contractually required payments including interest $23,845
Less: Nonaccretable difference 8,256
Cash flows expected to be collected 15,589
Less: Accretable yield 3,668
Fair value of loans acquired $11,921
Under SOP 03-3, the excess of cash flows expected at
acquisition over the estimated fair value is referred to as the
accretable yield and is recognized in interest income over the
remaining life of the loan using the constant effective yield
method. The difference between contractually required
payments at acquisition and the cash flows expected to be
collected at acquisition is referred to as the nonaccretable
difference. Changes in the expected cash flows from the date
of acquisition will either impact the accretable yield or result
in a charge to the provision for credit losses in the period in
which the changes become probable. Subsequent decreases to
the expected cash flows will generally result in a charge to the
provision for credit losses resulting in an increase to the
allowance for loan and lease losses, and a reclassification
from accretable yield to nonaccretable difference. Subsequent
increases in cash flows will result in a recovery of any
previously recorded allowance for loan and lease losses, to the
extent applicable, and a reclassification from nonaccretable
difference to accretable yield. There was no allowance for
loan and lease losses related to loans acquired within the
scope of SOP 03-3 as of December 31, 2008. Disposals of
loans, which may include sales of loans, receipt of payments
in full by the borrower, foreclosure, or troubled debt
restructurings result in removal of the loan from the SOP 03-3
portfolio at its carrying amount.
There were no changes in the accretable yield of loans during
2008 as the majority of SOP 03-3 loans were acquired in
connection with the National City acquisition as of
December 31, 2008.
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