PNC Bank 2015 Annual Report Download - page 147

attributes and the manner in which we monitor and assess
credit risk. The Commercial Lending segment is comprised of
the commercial, commercial real estate, equipment lease
financing, and commercial purchased impaired loan classes.
The Consumer Lending segment is comprised of the home
equity, residential real estate, credit card, other consumer, and
consumer purchased impaired loan classes.
Commercial Lending Asset Classes
Commercial Loan Class
For commercial loans, we monitor the performance of the
borrower in a disciplined and regular manner based upon the
level of credit risk inherent in the loan. To evaluate the level
of credit risk, we assign an internal risk rating reflecting the
borrower’s PD and LGD. This two-dimensional credit risk
rating methodology provides granularity in the risk monitoring
process on an ongoing basis. These ratings are reviewed and
updated, generally at least once per year. Additionally, no less
frequently than on an annual basis, we review PD rates related
to each rating grade based upon internal historical data. These
rates are updated as needed and augmented by market data as
deemed necessary. For small balance homogenous pools of
commercial loans, mortgages and leases, we apply statistical
modeling to assist in determining the probability of default
within these pools. Further, on a periodic basis, we update our
LGD estimates associated with each rating grade based upon
historical data. The combination of the PD and LGD ratings
assigned to a commercial loan, capturing both the combination
of expectations of default and loss severity in event of default,
reflects the relative estimated likelihood of loss for that loan at
the reporting date. In general, loans with better PD and LGD
tend to have a lower likelihood of loss compared to loans with
worse PD and LGD. The loss amount also considers an
estimate of exposure at date of default, which we also
periodically update based upon historical data.
Based upon the amount of the lending arrangement and our
risk rating assessment, we follow a formal schedule of written
periodic review. Quarterly, we conduct formal reviews of a
market’s or business unit’s entire loan portfolio, focusing on
those loans which we perceive to be of higher risk, based upon
PDs and LGDs, or loans for which credit quality is weakening.
If circumstances warrant, it is our practice to review any
customer obligation and its level of credit risk more
frequently. We attempt to proactively manage our loans by
using various procedures that are customized to the risk of a
given loan, including ongoing outreach, contact, and
assessment of obligor financial conditions, collateral
inspection and appraisal.
Commercial Real Estate Loan Class
We manage credit risk associated with our commercial real
estate projects and commercial mortgage activities similar to
commercial loans by analyzing PD and LGD. Additionally,
risks connected with commercial real estate projects and
commercial mortgage activities tend to be correlated to the
loan structure and collateral location, project progress and
business environment. As a result, these attributes are also
monitored and utilized in assessing credit risk.
As with the commercial class, a formal schedule of periodic
review is also performed to assess market/geographic risk and
business unit/industry risk. Often as a result of these
overviews, more in-depth reviews and increased scrutiny are
placed on areas of higher risk, including adverse changes in
risk ratings, deteriorating operating trends, and/or areas that
concern management. These reviews are designed to assess
risk and take actions to mitigate our exposure to such risks.
Equipment Lease Financing Loan Class
We manage credit risk associated with our equipment lease
financing loan class similar to commercial loans by analyzing
PD and LGD.
Based upon the dollar amount of the lease and of the level of
credit risk, we follow a formal schedule of periodic review.
Generally, this occurs quarterly, although we have established
practices to review such credit risk more frequently if
circumstances warrant. Our review process entails analysis of
the following factors: equipment value/residual value,
exposure levels, jurisdiction risk, industry risk, guarantor
requirements, and regulatory compliance.
Commercial Purchased Impaired Loan Class
Estimates of the expected cash flows primarily determine the
valuation of commercial purchased impaired loans.
Commercial cash flow estimates are influenced by a number
of credit related items, which include but are not limited to:
estimated collateral value, receipt of additional collateral,
secondary trading prices, circumstances of possible and/or
ongoing liquidation, capital availability, business operations
and payment patterns.
We attempt to proactively manage these factors by using
various procedures that are customized to the risk of a given
loan. These procedures include a review by our Special Asset
Committee (SAC), ongoing outreach, contact, and assessment
of obligor financial conditions, collateral inspection and
appraisal.
See Note 4 Purchased Loans for additional information.
The PNC Financial Services Group, Inc. – Form 10-K 129