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