Estimate of Current Expected Credit Losses (CECL)
The Company uses a vintage loss model as the approach to estimate and measure
its expected credit losses for all portfolio segments
and for all pools, primarily because the timing of the losses realized has been
consistent across historical vintages, such that the
company is able to develop a predictable and reliable loss curve for each separate
portfolio segment.
The vintage model assigns loans
to vintages by origination date, measures our historical average actual
loss and recovery experience within that vintage, develops a
loss curve based on the averages of all vintages, and predicts (or forecasts) the
remaining expected net losses of the current portfolio
by applying the expected net loss rates to the remaining life of each open vintage.
Additional detail specific to the measurement of each portfolio segment
as of
March 31,June 30, 2021, is summarized below.
Equipment Finance:
Equipment Finance consists of Equipment Finance Agreements, Installment
Purchase Agreements and other leases and loans.
The risk characteristics referenced to develop pools of
EquipmentEquipme
nt Finance leases and loans are based on internally developed
credit score ratings, which is a measurement that combines many
risk characteristics, including loan size, external credit
scores, existence of a guarantee, and various characteristics of the borrower’s
business.
In addition, the Company separately
measured a pool of true leases so that any future cashflows from residuals
could be used to partially offset the allowance for
The Company’s measurement
of Equipment Finance pools is based on its own historical loss experience.
The Company
analyzed the correlation of its own loss data from 2004 to 2019 against various
economic variables in order to determine an
approach for reasonable and supportable forecast.
The Company then selected certain economic variables to reference for
its
forecast about the future, specifically the unemployment rate and growth
in business bankruptcy.
The Company’s
methodology reverts
from the forecast data to its own loss data adjusted for
the long-term average
of the referenced economic
variables, on a straight-line basis.
At each reporting date, the Company
considers current conditions, including
changes in portfolio composition or the
business
environment, when determining the appropriate measurement
of current expected credit losses for the remaining life of its
portfolio.
As of the January 1, 2020 adoption date, the Company utilized a 12-month forecast period
and 12-month straight-
line reversion period, based on its initial assessment of the appropriate timing.
However, starting with the March 31, 2020
measurement,
the Company adjusted its model to reference a 6-month forecast
period and 12-month straight line reversion period.
The change in the length
of the reasonable and supportable forecast was
based on observed market volatility in March 2020.
During the first quarter
of 2021,
the Company reverted
back to the pre-
COVID 12-month forecast period and 12-month straight line reversion
period
asand continued using this forecast in the secondquarter of 2021as uncertainty of the duration and level of
impact of the COVID-19 virus onin the macroeconomic environment
has lessened and
the Company’s
portfolio, including
uncertainty about theportfolio has stabilizedforecasted impact of COVID-19,with low net charge-offs and delinquencies
was reduced..
The
continued positive economic forecast resulted in provision
impact from improving economic forecasts was partially offsetbenefits forby the reversion to a 12-month forecast, additional provision for new originations,continued residual performance, and betterthan expected net charge-offs, contributingto first quarter provision benefit for Equipment Finance of $
3.19.0
12.0
million for the three and six-months ended June 30, 2021, respectively,as compared to provisions of $
16.5
31.5
million for the same periods in 2020 during the height of the COVID-19 Working Capital:
The risk characteristics referenced to develop pools of Working
Capital loans is based on origination channel, separately
considering an estimation of loss for direct-sourced loans versus loans that were
sourced from a broker. The Company’s
historical relationship with its direct-sourced customers typically results in
a lower level of credit risk than loans sourced
from brokers where the Company has no prior credit relationship with the
customer.
The Company’s measurement
of Working
Capital pools is based on its own historical loss experience.
The Company’s
Working
Capital loans typically range from 6 – 12 months of duration. For this portfolio segment,
due to the short contract
duration, the Company did not define a standard methodology to adjust
its loss estimate based on a forecast of economic
conditions.
However, the Company will continually assess through
a qualitative adjustment whether there are changes in
conditions and the environment that will impact the performance of
these loans that should be considered for qualitative
adjustment.