By Nick Reynolds, Vice President/Credit Services Manager of CU Business Group, LLC
The use of spreadsheets is standard practice in the analysis of any business loan. Spreadsheets allow for the presentation of financial information in a consistent, standardized way within your credit union, so that all persons associated with the approval and review of loans are on the same page. In addition, the use of spreadsheets is fundamental to a full and complete analysis of your borrowers, since they provide uniform treatment of ratios, as well as a consistent presentation among years for an individual borrower. This year to year presentation is imperative for tracking all developing trends and changes in business conditions.
Today, there are a number of automated spreading tools available through cloud-based end-to-end commercial loan origination systems. Several of these tools are excellent, and provide a level of consistency and efficiency that is missing from traditional, manual spreadsheets. However, regardless of which tools are used it is critical that personnel have a solid understanding of the process.
Often, business lending shops will assign the spreading or credit analysis function to the newer members of the team, and as such it is valuable as a training tool. But because spreading represents the foundation of the entire analysis, it is important to get it right. This does not necessarily mean that figures from the tax returns should be transferred directly into the same line on the spreadsheet every time. It should not be simply a mechanical process done by rote. Spreading should utilize the same thoughtful input as underwriting.
Take for example, so-called “unusual items” on the borrower’s income statement, which may include items such as a large distribution or the gain on sale of an asset. Such items are typically non-recurring, and the analysis should take that into account. The best way to do that is to adjust it in the base spreadsheet, so that it will automatically translate to all down-process derivative spreadsheets and calculations. But to do this, the entry-level spreading analyst must be on the same wavelength as your underwriting staff, which means the analyst needs to think like an underwriter.
Similarly, consistency is the hallmark of a good spread. Experienced underwriters would rather see a statement spread incorrectly but consistently than correctly but inconsistently. Changes in the analysis of a borrower that are due solely to the inconsistent application of varying spreading methodologies are not acceptable. For example, examiners look askance if a relationship is downgraded simply because this year a “Due from Related Party” account was categorized correctly as an intangible asset, whereas it was incorrectly categorized in prior years. For all adjustments, the analyst needs to decide if leaving the spread incorrect is not material to the analysis, or if it needs to be re-categorized because it has a significant impact on the analysis.
The proper spreading of financial statements is a learned skill that takes time and experience to master. However, reality dictates that most credit unions have their spreads done by newer, less experienced analysts. Because of this, it is critical to employ regular, engaged oversight of the spreading function, to ensure that this critical role is being performed in a consistent and high-quality manner.