In this webinar, Sageworks looks at methodologies that banks and credit unions will likely use for commercial and industrial loans when calculating the ALLL under CECL. See the recording at http://web.sageworks.com/cecl-methodology-webinar-series/
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February 9, 2017
Garver Moore
Principal - Advisory Services
Neekis Hammond, CPA
Principal - Advisory Services
CECL Methodology Series
Commercial & Industrial
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About the Webinar
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Disclaimer
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This presentation may include statements that constitute “forward-looking statements” relative to
publicly available industry data. Forward-looking statements often contain words such as “believe,”
“expect,” “plans,” “project,” “target,” “anticipate,” “will,” “should,” “see,” “guidance,” “confident” and
similar terms. There can be no assurance that any of the future events discussed will occur as
anticipated, if at all, or that actual results on the industry will be as expected. Sageworks is not
responsible for the accuracy or validity of this publicly available industry data, or the outcome of the use
of this data relative to business or investment decisions made by the recipients of this data. Sageworks
disclaims all representations and warranties, express or implied. Risks and uncertainties include risks
related to the effect of economic conditions and financial market conditions; fluctuation in commodity
prices, interest rates and foreign currency exchange rates. No Sageworks employee is authorized to
make recommendations or give advice as to any course of action that should be made as an outcome
of this data. The forward-looking statements and data speak only as of the date of this presentation
and we undertake no obligation to update or revise this information as of a later date.
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Commercial & Industrial
Loans for commercial and industrial purposes to sole proprietorships, partnerships, corporations, and
other business enterprises, whether secured or unsecured, single-payment or installment.
• Mining, oil and gas producing, and quarrying companies
• Manufacturing companies of all kinds
• Construction companies
• Transportation and communications companies and public utilities
• Wholesale and retail trade enterprises
• Cooperative associations
• Service Enterprises; hotels, laundries, automotive, nursing homes, hospitals, etc.
• Insurance agents
• Practitioners of law, accounting, and medicine
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https://www.fdic.gov/regulations/resources/call
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Commercial & Industrial
Loans for commercial and industrial purposes to sole proprietorships, partnerships, corporations, and
other business enterprises, whether secured or unsecured, single-payment or installment.
• Mining, oil and gas producing, and quarrying companies
• Manufacturing companies of all kinds
• Construction companies
• Transportation and communications companies and public utilities
• Wholesale and retail trade enterprises
• Cooperative associations
• Service Enterprises; hotels, laundries, automotive, nursing homes, hospitals, etc.
• Insurance agents
• Practitioners of law, accounting, and medicine
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https://www.fdic.gov/regulations/resources/call
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Loans for commercial and industrial purposes to sole proprietorships, partnerships, corporations, and
other business enterprises, whether secured or unsecured, single-payment or installment.
• Capital expenditures
• Up-fitting
• Vehicles
• Equipment
• Current operations
• Bridge loans (seasonal)
• Working capital
• Accounts receivable
• Inventory
• Construction
• Excludes loans that meet the definition of a “loan secured by real-estate”
Commercial & Industrial
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https://www.fdic.gov/regulations/resources/call
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Loans for commercial and industrial purposes to sole proprietorships, partnerships, corporations, and
other business enterprises, whether secured or unsecured, single-payment or installment.
• Loans to business enterprises guaranteed by the Small Business Administration (SBA)
• Provided the loan is for commercial and industrial purposes
• Include SBA “Guaranteed Interest Certificates”
• represent a beneficial interest in the entire SBA-guaranteed portion of an individual loan
• Credit cards or similar structures that are in the name of a commercial or industrial enterprise
• Dealer flooring or floor-plan loans
Commercial & Industrial
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https://www.fdic.gov/regulations/resources/call
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Considerations for initial segmentation (ASU 326-20-55-5,12,15)
• Purpose
• Capital expenditures
• Current Operations
• Construction
• Excludes loans that meet the definition of a “loan secured by real-estate”
• Industry
• Loan Structure
• Typically, this is inherently captured in “Purpose” elections. Use when purpose data is be unreliable, unavailable, or
otherwise less meaningful
• Type
• SBA, dealer-floor plans, etc.
Commercial & Industrial
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http://www.fasb.org/jsp/FASB/FASBContent_C/CompletedProjectPage&cid=1176168232014
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Considerations for secondary (sub) segmentation (ASU 326-20-55-5,12,15)
• Risk Rating
• Originated risk rating
• Most recent risk rating
• Classification
• Pass, special mention, substandard, doubtful, loss, etc.
• Risk Score
• An internal matrix based score determined by evaluating multiple data points
• Typically used when historical risk ratings, or any risk identifiers, are unavailable
• Geography
• MSA, zip code, branch, region, etc.
• Days Past Due
• Typically only worthwhile on shorter-lived assets
Commercial & Industrial
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http://www.fasb.org/jsp/FASB/FASBContent_C/CompletedProjectPage&cid=1176168232014
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Considerations from the Guidance (ASU 326-20-55-6,7)
“Estimating expected credit losses is highly judgmental and generally will require an entity to make
specific judgments. Those judgments may include any of the following”:
• Evaluating similar risk characteristics
• Life-of-loan/contract
• Loss experience
• Structural risk/amortizing, interest only, etc.
• Forecasting
• Approach to determining appropriate historical period to analyze
• External and internal factors that influence future losses
Methodology
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http://www.fasb.org/jsp/FASB/FASBContent_C/CompletedProjectPage&cid=1176168232014
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• Vintage
• Equipment
• Various installment cap-ex
• Migration/PD&LGD
• Current Operations
• Credit Cards
• Construction
• DCF (Discounted Cash Flow)
• Current Operations
• Forecasting
• Approach to determining appropriate historical period to analyze
• External and internal factors that influence future losses
Methodology
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http://www.fasb.org/jsp/FASB/FASBContent_C/CompletedProjectPage&cid=1176168232014