SCORING MODELS – PRO’S, CON’S, AND LEGAL CONSIDERATIONS CRAIG COMBS KYR FINANCIAL LLC Craig.Combs@KYRcredit.com SCOTT E. BLAKELEY VIRGINIA SODERMAN, Ventura Foods, LLC vsoderman@venturafoods.com SEB@Blakeleyllp.com December 11, 2014

SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS BIG PICTURE What are you trying to accomplish? Define the purpose & function of the model. How many accounts do you have? Can your credit department handle individual analysis? SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS What are you trying to accomplish? Payment predictability/collectability Ultimate solvency/insolvency Training and guiding new professionals Identify traits of Desirable Trading Partners Identify traits of Undesirable Trading Partners! Can create a database for flexible reporting Automated versions save the time of professionals SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS Creates consistency in the data gathering and decision making process. Review schedules are improved as a result of time savings When a standard such as a model is used, it is relatively easy to modify the model to either ease or restrict credit granting depending on the company’s needs. Multiple data points from multiple sources: both internal & external can be integrated for use. For companies who are required to be Sarbanes-Oxley compliant, scoring provides a sound basis for consistent processes. SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS Can create an undesirable dependency. Can lead to lack of judgment utilization. Scoring is sometimes seen as a threat, with the fear being that the “art” of credit granting will be lost. Scoring can lead to irrational business decisions, particularly for larger dollar relationships. “Garbage in…Garbage out” theory. SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

CREDIT PROFESSIONAL/ANALYST CONSIDERATIONS How widespread is the scoring? Set parameters for use Scoring should set the foundation for decision making. Flexibility to utilize the judgment of the Credit Professional Test the model and tweak if necessary! How often is the model updated? SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

CREDIT PROFESSIONAL/ANALYST CONSIDERATIONS Allows comparison of customers with similar traits Manage Risk by Segment or Characteristics In a shared services environment, can allow for varying criteria by segment or channel Ability to adjust risk by adjusting model components Interval vs. External Data Inputs Resistance from some Credit Professionals SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS DEPLOYMENT External Score D&B, PredictiveMetrics, Cortera, KYR Financial, etc. Understand the rationale for the external score What are the data inputs? Internal Score Financial Inputs (EBITDA, Leverage, Interest Coverage, etc.) Assign weights to each input How much analyst flexibility is given? Combination Use external vendor score as one component of an overall score Determine internal financial inputs Decide on weight of external score vs. internal inputs SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS Example SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

Example ACCOUNT INFORMATION RISK SCORE AND RISK ASSESSMENT Date/Credit Manager 8/15 2012 67098 Type of Business Foodservice Company Name Curly Anything   Annual Sales $150,000,000 Address Big Al's Food Store Years in Busines 17 City/State/Zip Code Chicago Il Year Started 1995 RISK SCORE AND RISK ASSESSMENT Category Score % Score Adjustment Recommended Credit Line Credit Score 80 0% +/-10% Volume $75,750 With Credit Manager Adj +/- 10% Credit Manager Credit Score Risk Level Credit Limit Adjustment 1% Total Credit Score Adj Low Risk RISK SCORING ANALYSIS AND REVIEW

SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS Anti-trust issues: Sherman Act, Robinson Patman Act Gathering information: Fair Credit Reporting Act and Privacy Laws Objective credit decisions: Equal Credit Opportunity Act Documenting the policy: E-Credit Laws and Document Retention Mitigating Credit risk through credit enhancements Privacy Laws SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

Antitrust Laws and the Credit Department The Sherman Act of 1890 Agreements between competitors to fix credit terms violates the Sherman Act Refuse to extend credit or black list customer Sharing Customer Payment Information with Industry Group Setting Price and Credit Terms Price discrimination applies to credit department as terms of sale are a part of pricing SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

Antitrust Laws and the Credit Department Robinson-Patman Act: Price Discrimination and Restraint of Trade Prevent discriminatory pricing, including credit terms, between like classes of customers Discounts offered to one customer offered to all Defenses Meeting Competition Volume Discounts Setting terms and trade concessions Quantity volume discounts Promotional allowances Prompt pay discounts Shipping discounts Credit Term Changes and Price Changes Credit Hold Terminating Credit SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

Antitrust Laws and the Credit Department Libel and Slander Statements that harm a reputation When exchanging information, must be careful to avoid damaging phrases SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

Equal Credit Opportunity Act To ensure that credit grantors do not discriminate Notification of Adverse Action SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

The Fair Credit Reporting Act Regulates the use of the individual credit reports and credit information What is a credit report? Notification if Credit is Declined Based Upon Credit Report Penalties for Violating FCRA FCRA Authorization Contained in Personal Guarantee SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS Reducing Credit Risk Letter of Credit Certificate of Deposit Guarantee Purchase Money Security Interest Junior Security Interest Consignment Credit Insurance SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

E-Credit Laws and Document Retention Digital Signature Act Digital Signature has same force as ink and paper signature E-mail policy Document Retention Policy Litigation Hold SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS Privacy Laws Information covered Compliance Encryption Policy and Notices SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS

SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS SUMMARY Scoring Models can provide a valuable function in today’s credit environment when utilized appropriately Effective Models support analytics and decision making New opportunities can be highlighted Consistency is critical Legal considerations must be adhered to CRIAG COMBS KYR Financial LLC. Craig.combs@kyrcredit.com (805) 338-5601 SCOTT E. BLAKELEY seb@blakeleyllp.com 949-260-0612 VIRGINIA SODERMAN, Ventura Foods, LLC vsoderman@venturafoods.com (714) 257-3700 SCORING MODELS – PROS, CONS & LEGAL CONSIDERATIONS