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PNC » Topics » N OTE 6 L OANS A CQUIRED IN A T RANSFER

This excerpt taken from the PNC 10-Q filed May 11, 2009.

NOTE 6 LOANS ACQUIRED IN A TRANSFER

At December 31, 2008, PNC identified certain loans related to the National City acquisition, for which there was evidence of credit quality deterioration since origination and it was probable that PNC would be unable to collect all contractually required principal and interest payments. These loans are accounted for under SOP 03-3. Evidence of credit quality deterioration includes statistics such as past due status, declines in current borrower FICO credit scores, geographic concentration and declines in current loan-to-value ratios. SOP 03-3 requires these loans to be recorded at fair value at acquisition date and prohibits the “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.

During the first quarter of 2009, additional information was obtained about the credit quality of acquired loans as of the acquisition date. As a result, an additional $1.9 billion of acquired loans were deemed SOP 03-3 impaired as of December 31, 2008 and the carryover allowance for loan losses attributable to these loans of $83 million was released. Adjustments to the fair value of SOP 03-3 impaired loans of $1.2 billion were also recognized. The related accretable yield was also decreased during the quarter to reflect this activity.

At both March 31, 2009 and December 31, 2008, acquired loans within the scope of SOP 03-3 had a carrying value of $11.9 billion. During the first quarter of 2009, the amount of SOP 03-3 impaired loans was increased by $0.7 billion, as a result of the purchase accounting adjustments described above, and from accretion of purchase accounting discount of $0.2 billion. These increases were offset by payments of $0.9 billion. The unpaid principal balance of these loans was $19.6 billion at March 31, 2009 and $19.3 billion at December 31, 2008, as detailed below:

SUMMARY OF SOP 03-3 IMPAIRED LOANS

 

      March 31, 2009    December 31, 2008
In millions    Carrying
Value		    Outstanding
Balance		    Carrying
Value		    Outstanding
Balance

Commercial

    $ 744    $ 1,916    $ 503    $ 1,194

Commercial real estate

      1,668      3,405      1,340      2,831

Consumer

      3,609      5,978      3,924      5,785

Residential real estate

      5,831      8,269      6,154      9,482

Total

    $ 11,852    $ 19,568    $ 11,921    $ 19,292

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


 

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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. Prepayments are treated as a reduction of cash flows expected to be collected and a reduction of projections of contractual cash flows such that the nonaccretable difference is not affected. Thus, for decreases in cash flows expected to be collected resulting from prepayments, the effect will be to reduce prospectively the yield recognized.

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. During the first quarter of 2009, decreases in the expected cash flows of acquired

SOP 03-3 impaired loans resulted in a provision for credit losses of $183 million. This resulted in an allowance for loan and lease losses on $3.3 billion of the SOP 03-3 impaired loans while the remaining $8.6 billion of SOP 03-3 impaired loans required no allowance as expected cash flows improved or remained the same. As of March 31, 2009, the allowance for loan losses on acquired SOP 03-3 impaired loans was $183 million. There was no such allowance on any of these loans at December 31, 2008.

 

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. During the first quarter of 2009, increases in the expected cash flows of acquired SOP 03-3 impaired loans resulted in an increase in accretable yield of $268 million. 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.

The following table displays activity for the accretable yield of these loans for the three months ended March 31, 2009.

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