Goldman Sachs 2015 Annual Report Download - page 169

THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Loans receivable includes Purchased Credit Impaired (PCI)
loans. PCI loans represent acquired loans or pools of loans
with evidence of credit deterioration subsequent to their
origination and where it is probable, at acquisition, that the
firm will not be able to collect all contractually required
payments. Loans acquired within the same reporting
period, which have at least two common risk
characteristics, one of which relates to their credit risk, are
eligible to be pooled together and considered a single unit of
account. PCI loans are initially recorded at acquisition price
and the difference between the acquisition price and the
expected cash flows (accretable yield) is recognized over the
life of such loans or pools of loans on an effective yield
method. Expected cash flows on PCI loans are determined
using various inputs and assumptions, including default
rates, loss severities, recoveries, amount and timing of
prepayments and other macroeconomic indicators. As of
December 2015, the carrying value of such loans was
$2.12 billion (including $1.16 billion, $941 million and
$23 million related to loans backed by commercial real
estate, residential real estate and other consumer loans,
respectively). The outstanding principal balance and
accretable yield related to such loans was $5.54 billion and
$234 million, respectively, as of December 2015. The fair
value, related expected cash flows, and the contractually
required cash flows of PCI loans at the time of acquisition
was $2.27 billion, $2.50 billion and $6.47 billion,
respectively. The firm did not have any PCI loans as of
December 2014.
Credit Quality
The firm’s risk assessment process includes evaluating the
credit quality of its loans receivable. For loans receivable
(excluding PCI loans), the firm performs credit reviews
which include initial and ongoing analyses of its borrowers.
A credit review is an independent analysis of the capacity and
willingness of a borrower to meet its financial obligations,
resulting in an internal credit rating. The determination of
internal credit ratings also incorporates assumptions with
respect to the nature of and outlook for the borrower’s
industry, and the economic environment. The firm also
assigns a regulatory risk rating to such loans based on the
definitions provided by the U.S. federal bank regulatory
agencies. Such loans are determined to be impaired when it is
probable that the firm will not be able to collect all principal
and interest due under the contractual terms of the loan. At
that time, loans are placed on non-accrual status and all
accrued but uncollected interest is reversed against interest
income, and interest subsequently collected is recognized on
a cash basis to the extent the loan balance is deemed
collectible. Otherwise, all cash received is used to reduce the
outstanding loan balance. As of December 2015 and
December 2014, impaired loans receivable (excluding PCI
loans) in non-accrual status were $223 million and
$59 million, respectively.
For PCI loans, the firm’s risk assessment process includes
reviewing certain key metrics, such as delinquency status,
collateral values, credit scores and other risk factors. When
it is determined that the firm cannot reasonably estimate
expected cash flows on the PCI loans or pools of loans, such
loans are placed on non-accrual status.
The table below presents gross loans receivable (excluding
PCI loans of $2.12 billion, which are not assigned a credit
rating equivalent) and related lending commitments by the
firm’s internally determined public rating agency equivalent
and by regulatory risk rating. Non-criticized/pass loans and
lending commitments represent loans and lending
commitments that are performing and/or do not
demonstrate adverse characteristics that are likely to result
in a credit loss.
$ in millions Loans
Lending
Commitments Total
Credit Rating Equivalent
As of December 2015
Investment-grade $19,459 $64,898 $ 84,357
Non-investment-grade 24,241 29,021 53,262
Total $43,700 $93,919 $137,619
As of December 2014
Investment-grade $ 8,090 $48,112 $ 56,202
Non-investment-grade 21,076 18,106 39,182
Total $29,166 $66,218 $ 95,384
Regulatory Risk Rating
As of December 2015
Non-criticized/pass $40,967 $92,021 $132,988
Criticized 2,733 1,898 4,631
Total $43,700 $93,919 $137,619
As of December 2014
Non-criticized/pass $27,538 $65,141 $ 92,679
Criticized 1,628 1,077 2,705
Total $29,166 $66,218 $ 95,384
Goldman Sachs 2015 Form 10-K 157