Friday, June 15, 2018

How to Order Commercial Loan Analysis: Principles and Techniques for Credit Analysts and Lenders

There are a couple of ways to obtain my book, Commercial Loan Analysis: Principles and Techniques for Credit Analysts and Lenders.

You can order an electronic version by contacting me directly or by leaving a comment to this post.  Your comment will not appear on the website.

You can also order on Amazon.  I am currently out of new copies of the first edition; although, I do have a used copy available.  I am working to get the second edition completed soon.

Finally, you can check out the Financial Statement Analysis section of this website.  You will find that selected sections of the book (particularly financial ratios) are presented there.

Thanks for reading!

Ken Pirok

How Does Your Bank Calculate NOI?

When analyzing commercial real estate, most banks present columns with NOI listed for historical periods along with a column of pro forma or "underwriting" NOI.  Pro forma NOI is often calculated using “Potential Gross Income” (representing gross rents as if the property were 100% leased) less a vacancy factor.

In pro forma analyses, appraisers and banks often apply replacement reserve factors as well.  Recent appraisals may contain an appropriate vacancy factors, management fees, and replacement reserve assumptions to use in your analysis.

Your bank’s loan policy may also dictate standard amounts to use for vacancy, bad debt, replacement reserves, and management fees in the pro forma analyses.  If your bank has a policy on how to calculate pro forma or "underwriting" NOI, then I'd like to hear about it.  Feel free to leave a comment about how you make the calculation and which expenses are included and excluded.

Thursday, June 7, 2018

Current and Non-Current Assets and Liabilities

There are two types of assets and liabilities, “current” and “non-current.”  Current assets are those that are expected to be converted to cash in one year or less, and current liabilities are those that will come due in one year or less.  So, cash, marketable securities, accounts receivable, and inventory are all considered current assets, while accounts payable and the principal amounts of loans due within a year are considered current liabilities.

Non-current assets and non-current liabilities are due or converted to cash in more than a year.  Fixed assets and intangible assets are considered non-current, and loan amounts which are due in more than a year are also considered non-current.

Updated: OCC: Semiannual Risk Perspective

The OCC just released another Semiannual Risk Perspective.  The link below will take you right to the report.  Their page is always updated with the most recent report at the top and with previous reports available below.

Thursday, January 12, 2017

OCC: Semiannual Risk Perspective

The OCC has just recently released a new Risk Perspective report (covering the Fall of 2016).  You may find it here.

Tuesday, January 3, 2017

Days Receivables Outstanding

Another way to look at accounts receivable turnover is in days:

Days Receivables Outstanding=                       365             
                                                        accounts receivable turnover

This ratio expresses the average length of time in number of days between sales and the cash collection of receivables.  The average number of days that receivables are outstanding can seem like a more intuitive measure than turnover expressed in number of times per year.  In this case, a lower value (or fewer days) is favorable because it represents more rapid turnover.

Accounts Receivable Turnover

Accounts Receivable Turnover=     annual net revenue
                                                            accounts receivable

Accounts receivable turnover represents the average number of times per year that trade receivables "turn over" or are converted to cash.  Higher, more rapid turnover is favorable, since sales on credit are being converted to cash more quickly.  Lower, less rapid turnover is unfavorable since default becomes more likely as receivables remain uncollected, and since conversion to cash is necessary to service obligations or to earn interest.

A problem with this ratio is the fact that it compares accounts receivable at a single point in time to an entire year of sales.  If the accounts receivable balance is unusually high or low on the date of the financial statements due to seasonal variations or other factors, then this measurement may not provide an accurate picture.  Substituting average receivable balances over the year in the denominator, may help correct this.