This excerpt taken from the PNC 10-K filed Mar 2, 2009.
NOTE 6 ACCOUNTING FOR CERTAIN LOANS ACQUIRED IN A TRANSFER
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 managements 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: