CECL Methodology Series for C&I Loan Pools

Sageworksanalyst.com 1
February 9, 2017
Garver Moore
Principal - Advisory Services
Neekis Hammond, CPA
CECL Methodology Series
Commercial & Industrial

Sageworksanalyst.com
About the Webinar
• We will address as many questions as we can
throughout the presentation or through
direct communication via follow-up email
• Ask questions throughout the session using
the GoToWebinar control panel
2

Sageworksanalyst.com 3
• Risk management thought leader
for institutions and examiners
• Regularly featured in national and
trade media
• Loan portfolio and risk
management solutions
• More than 1,000 financial
institution clients
• Founded in 1998

Disclaimer
4
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.

About Today’s Presenters
5
Garver Moore
Neekis Hammond, CPA

Agenda
• Series Overview
• C&I Segmentation Principles
• C&I Sub-segmentation Principles
• Methodologies and Calculations
• Guidance Considerations
• Vintage
• Migration
• PD/LGD (Probability of Default/Loss Given Default)
• DCF (Discounted Cash Flow)
• Questions
6

Series Overview
• Thursday, February 9, 2017, 2-3 p.m.: C&I Pool CECL Methodologies
• Thursday, February 16th, 2017, 2-3 p.m.: CECL Methodology Q&A
• Thursday, February 23, 2017, 2-3 p.m.: Unfunded Commitments & Construction Loan CECL
Methodologies
• Thursday, March 9, 2017, 2-3 p.m.: Forecasting with CECL
• Thursday, March 16th, 2017, 2-3 p.m.: CECL Calculations in a Software Environment
• Thursday, March 23, 2017, 2-3 p.m.: Disclosures with CECL
Sign up at: web.sageworks.com/cecl-methodology-webinar-series/
7

0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
3/31/2004
6/30/2004
9/30/2004
12/31/2004
3/31/2005
6/30/2005
9/30/2005
12/31/2005
3/31/2006
6/30/2006
9/30/2006
12/31/2006
3/31/2007
6/30/2007
9/30/2007
12/31/2007
3/31/2008
6/30/2008
9/30/2008
12/31/2008
3/31/2009
6/30/2009
9/30/2009
12/31/2009
3/31/2010
6/30/2010
9/30/2010
12/31/2010
3/31/2011
6/30/2011
9/30/2011
12/31/2011
3/31/2012
6/30/2012
9/30/2012
12/31/2012
3/31/2013
6/30/2013
9/30/2013
12/31/2013
3/31/2014
6/30/2014
9/30/2014
12/31/2014
3/31/2015
6/30/2015
9/30/2015
12/31/2015
3/31/2016
6/30/2016
9/30/2016
12/31/2016
C&I AVERAGE ANNUAL LOSS RATE – INSTITUTIONS > 5% C&I CONCENTRATION
Evaluating Risk Characteristics
8

0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
3/31/2004
6/30/2004
9/30/2004
12/31/2004
3/31/2005
6/30/2005
9/30/2005
12/31/2005
3/31/2006
6/30/2006
9/30/2006
12/31/2006
3/31/2007
6/30/2007
9/30/2007
12/31/2007
3/31/2008
6/30/2008
9/30/2008
12/31/2008
3/31/2009
6/30/2009
9/30/2009
12/31/2009
3/31/2010
6/30/2010
9/30/2010
12/31/2010
3/31/2011
6/30/2011
9/30/2011
12/31/2011
3/31/2012
6/30/2012
9/30/2012
12/31/2012
3/31/2013
6/30/2013
9/30/2013
12/31/2013
3/31/2014
6/30/2014
9/30/2014
12/31/2014
3/31/2015
6/30/2015
9/30/2015
12/31/2015
3/31/2016
6/30/2016
9/30/2016
12/31/2016
C&I MAXIMUM ANNUAL LOSS RATE – INSTITUTIONS > 5% C&I CONCENTRATION
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
3/31/2004
6/30/2004
9/30/2004
12/31/2004
3/31/2005
6/30/2005
9/30/2005
12/31/2005
3/31/2006
6/30/2006
9/30/2006
12/31/2006
3/31/2007
6/30/2007
9/30/2007
12/31/2007
3/31/2008
6/30/2008
9/30/2008
12/31/2008
3/31/2009
6/30/2009
9/30/2009
12/31/2009
3/31/2010
6/30/2010
9/30/2010
12/31/2010
3/31/2011
6/30/2011
9/30/2011
12/31/2011
3/31/2012
6/30/2012
9/30/2012
12/31/2012
3/31/2013
6/30/2013
9/30/2013
12/31/2013
3/31/2014
6/30/2014
9/30/2014
12/31/2014
3/31/2015
6/30/2015
9/30/2015
12/31/2015
3/31/2016
6/30/2016
9/30/2016
12/31/2016
C&I UPPER ½ ANNUAL LOSS RATE – INSTITUTIONS > 5% C&I CONCENTRATION
9

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
10
https://www.fdic.gov/regulations/resources/call

• 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
11

• 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”
12

• 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
13

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.
14
http://www.fasb.org/jsp/FASB/FASBContent_C/CompletedProjectPage&cid=1176168232014

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
15

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
16

• Vintage
• Equipment
• Various installment cap-ex
• Migration/PD&LGD
• Credit Cards
• Construction
• DCF (Discounted Cash Flow)
• Forecasting
• Approach to determining appropriate historical period to analyze
• External and internal factors that influence future losses
Methodology
17

1.25
3.25
3.75
2.15
1.75
4.25
WORKING CAPITAL
LOC
EQUIPMENT VEHICLE CREDIT CARD CONSTRUCTION SBA
AVERAGE LIFE
18

0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
ANNUAL LOSS RATE & EXPECTED LOSS RATE RELATIVE TO AVERAGE LIFE
Annual Loss Rate Expected Loss
19

Vintage Analysis
20

Vintage Analysis
21

Migration Analysis
22

Migration Analysis
23

Migration Analysis
24

Migration Analysis
25
-0.10%
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
LOSS RATE TREND COMPARISON – 1 YEAR VS. 2 YEAR (PASS RATED CREDITS)
1 Year 2 Year

PD & LGD Analysis
26

PD & LGD Analysis
27
All Loans 25.438%

DCF Analysis
28
LOAN NUMBER 4.A CAPITAL EXPENDITURES
GL Balance 115,000,000.00
Segment 4.a CapEx
Subsegment Pass
Date 12/31/2015
Interest Rate 5.50%
Discount Rate 1.53%
Payment Type Balloon
Payment Amt 3,472,528.71
Mat Date 1/31/2020
Nper 36
Renewal Assumption (months) -
CPR (Conditional Prepayment Rate) 33.00%
SMM (Standard Monthly Mortality) 3.28%
PD (Probability of Default) 2.47%
CDR (Constant Default Rate) 0.21%
LGD (Loss Given Default) 25.44%
Recovery Delay (Foreclosure Lag) 12

115,000,000
113,830,961
123,022,127
GL BALANCE PV CASH FLOW
DISCOUNTED CASH FLOW RESULTS
DCF Analysis
29

DCF Analysis
30
115,000,000
113,830,961
1,169,039
123,022,127
GL BALANCE PV RESERVE CASH FLOW

115,000,000
113,830,961
4,129,933
108,090,635
9,072,700
2,779,432
1,050,572
3,079,361
123,022,127
GL BALANCE PV DEFAULTED
PRINCIPAL
PRINCIPAL INTEREST PREPAYMENT ESTIMATED
LOSS
ESTIMATED
RECOVERY
CASH FLOW
DCF Analysis
31

0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
Q12004
Q22004
Q32004
Q42004
Q12005
Q22005
Q32005
Q42005
Q12006
Q22006
Q32006
Q42006
Q12007
Q22007
Q32007
Q42007
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
Q32009
Q42009
Q12010
Q22010
Q32010
Q42010
Q12011
Q22011
Q32011
Q42011
Q12012
Q22012
Q32012
Q42012
Q12013
Q22013
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Q32015
Q42015
Q12016
Q22016
Q32016
Q42016
Q12017
Q22017
Q32017
Q42017
Q12018
Q22018
Q32018
Q42018
Q12019
BASELINE FORECAST
12 Month Average (Commercial & Industrial (C&I) Loans - Charge-Offs (% of Average Loans)) Max Standard Error Multi Regression Estimate
Forecasting
32

Forecasting
33
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
Q12004
Q22004
Q32004
Q42004
Q12005
Q22005
Q32005
Q42005
Q12006
Q22006
Q32006
Q42006
Q12007
Q22007
Q32007
Q42007
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
Q32009
Q42009
Q12010
Q22010
Q32010
Q42010
Q12011
Q22011
Q32011
Q42011
Q12012
Q22012
Q32012
Q42012
Q12013
Q22013
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Q32015
Q42015
Q12016
Q22016
Q32016
Q42016
Q12017
Q22017
Q32017
Q42017
Q12018
Q22018
Q32018
Q42018
Q12019
ADVERSE FORECAST

Forecasting
34
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
Q12004
Q22004
Q32004
Q42004
Q12005
Q22005
Q32005
Q42005
Q12006
Q22006
Q32006
Q42006
Q12007
Q22007
Q32007
Q42007
Q12008
Q22008
Q32008
Q42008
Q12009
Q22009
Q32009
Q42009
Q12010
Q22010
Q32010
Q42010
Q12011
Q22011
Q32011
Q42011
Q12012
Q22012
Q32012
Q42012
Q12013
Q22013
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Q32015
Q42015
Q12016
Q22016
Q32016
Q42016
Q12017
Q22017
Q32017
Q42017
Q12018
Q22018
Q32018
Q42018
Q12019
SEVERLEY ADVERSE FORECAST

35
External Factor (National Data) R Square * Slope ** Lead (months)
Real GDP growth 20.51% -0.02% 18
Nominal GDP growth 27.45% -0.02% 18
Real disposable income growth 0.85% 0.00% 18
Nominal -disposable income growth 2.51% 0.00% 18
Unemployment rate 54.64% 0.05% 3
CPI inflation rate 0.12% 0.00% 6
3-month Treasury rate 9.56% -0.02% 6
5-year Treasury yield 0.62% -0.01% 6
10-year Treasury yield 2.45% 0.02% 6
BBB corporate yield 42.89% 0.07% 12
Mortgage rate 0.59% 0.01% 6
Prime rate 10.71% -0.02% 6
Dow Jones Total Stock Market Index (Level) 31.62% 0.00% 18
House Price Index (Level) 39.44% 0.00% 6
Commercial Real Estate Price Index (Level) 44.19% 0.00% 6
Market Volatility Index (Level) 37.21% 0.01% 18
Multi-Regression Statistics Result
Adjusted R Square 79.65%
Standard Error 0.05%
Observations 49
Regression Utilization Coefficients ***
Intercept 0.04%
Commercial Real Estate Price Index (Level) 0.00%
Unemployment rate 0.03%
BBB corporate yield 0.04%
Market Volatility Index (Level) 0.00%

CECL Methodology Series for C&I Loan Pools

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