PNC Bank 2013 Annual Report Download - page 152

commercial, commercial real estate, equipment lease
financing, and commercial purchased impaired loan classes.
The consumer segment is comprised of the home equity,
residential real estate, credit card, other consumer, and
consumer purchased impaired loan classes. Asset quality
indicators for each of these loan classes are discussed in more
detail below.
C OMMERCIAL L ENDING A SSET C LASSES
C OMMERCIAL L OAN C LASS
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 on a risk-adjusted basis, generally at least once per
year. Additionally, no less frequently than on an annual basis,
we update PD rates related to each rating grade based upon
internal historical data, augmented by market data. 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, which tend to have a higher likelihood of
loss. The loss amount also considers 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. On a quarterly basis, 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.
C OMMERCIAL R EAL E STATE L OAN C LASS
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 performed to also 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.
E QUIPMENT L EASE F INANCING L OAN C LASS
We manage credit risk associated with our equipment lease
financing 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 on a quarterly basis, 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.
C OMMERCIAL P URCHASED I MPAIRED L OAN C LASS
The credit impacts of purchased impaired loans are primarily
determined through the estimation of expected cash flows.
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 6 Purchased Loans for additional information.
134 The PNC Financial Services Group, Inc. – Form 10-K