Financial institutions largely prefer a historical loss rate method when reserving against pools of commercial and industrial (C&I) loans, Sageworks said in a recent survey.

Sageworks surveyed 337 professionals during a webinar C&I loan loss calculations in preparation for the roll out of CECL, the FASB’s current expected credit losses model rule. Sixty-eight percent said they preferred the historical loss model, while 23 percent said migration analysis was the most applicable method. Just 5 percent preferred to use a vintage analysis on C&I pools.

“It’s no surprise that a majority of institutions are utilizing a historical loss rate method, which is calculated by dividing average annual losses by average balance. This method is a good approach to accommodating current GAAP,” Neekis Hammond, a principal with Sageworks Advisory Services, said in a statement.  “However, there is little use for this methodology under [CECL].

“The new standard does not require, nor allow, institutions to record reserves on loans that do not exist or will originate in the future,” he said. “Yet, the numerator in this calculation does just that; it is impossible to determine if the losses are associated to loans that existed as of any particular point-in-time. Additionally, this approach can have the inverse effect of driving down loss experience by including future exposure in the denominator, thus understating loss experience relative to existing loans.”

Sageworks said the majority of the survey respondents, or 73 percent, represented management and c-suite positions at their institution.