Consistency and Oversight Critical in Financial Spreading

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.

Close-up of a dial showing high risk

Managing Risk After the Business Loan is Made

By Larry Middleman, President/CEO, CU Business Group, LLC

The business loan documents are signed and the funds distributed. That means your job is done, right?

Wrong. Due diligence and risk management are crucial steps after the business loan is made. Proper risk monitoring over the life of the loan is essential to identifying potential problems before they occur and early detection is the best way to fend off problems before they become big issues. 

Effective risk management practices also allow for frequent ‘touches’ of the loan in an efficient and cost-effective manner.  The days of simply doing an annual review on a business loan are long past.  As the late-2000s financial crisis amply demonstrated, conditions can change rapidly.

A Scaled Approach

In our work with credit unions across the country, we see many examples of excellent business lending risk management practices.  We also see credit unions where risk monitoring is non-existent.  In recent years, regulators have stepped up their oversight in this area, so be prepared for a rigorous review of your risk management practices in your next exam.

My view is that monitoring activities should scale depending on the general riskiness of the loan.  Important factors include the dollar amount of the loan, the type of loan, and the borrower’s industry.  Higher risk loans include lines of credit secured by accounts receivable or inventory.  Certain industries, such as retail and hospitality, often carry higher than average risk.

Many credit unions take an all-or-nothing approach to risk monitoring, e.g. “we only monitor loans over $250,000”.  While this attempts to balance monitoring efforts with the associated cost, in most cases a more thorough approach is warranted. 

I believe the right framework for credit unions is to adopt a risk management system for their business lending portfolio.  This holistic view encompasses all the key elements of risk monitoring, both on an individual loan basis and on the entire business loan portfolio.  Here are the fundamental steps in establishing a risk management system in business lending.


Management must put a process or system in place for timely and effective follow-up.  A ‘tickler system’ is the best tool for setting key follow-up dates.  A typical follow-up activity would be sending a letter to the borrower requesting updated insurance records.  The trick is to re-set another tickler for two weeks later to ensure the insurance information has been received.  Simply sending the letter is not effective risk monitoring – actually receiving the information and analyzing it is true risk management.

Today, with the advent of cloud-based loan operation systems, tracking and follow-up is easier than ever. Automated tickler alerts can be set up that will email a notification to the loan officer, or even directly to the borrower.

Analyzing the Borrower’s Financial Condition

The fundamental activity in risk monitoring is reviewing the borrower’s financial situation. This will identify changes in condition as compared to the original underwriting and subsequent reviews of the loan, a key to identifying potential problems before they arise. You may notice that a borrower has had a decrease in sales or unusually high expenses, and that is the time to talk with your borrower. 

Global Cash Flow Analysis

It is critical to understand your borrower’s other obligations.  Other projects or commitments that go bad may drag down the performance of your good loan.  This takes expertise and resources, but again – early detection and fast action are the best methods of warding off loan losses.

Monitoring Industry and Market Conditions

When dealing with commercial real estate, look at the market conditions for the property. Are rents in the area rising or declining?  What are the occupancy trends of comparable buildings?

Consider the macro view of your member’s business. Will industry-related government regulations affect the company? Will potential state or federal taxes increase the price of the firm’s product or service?

Stress Testing

Stress testing is a tried-and-true method of identifying the key areas to watch for during the life of the loan.  At what point would the debt coverage be less than sufficient to support your loan payments?  How low can the lease income or occupancy rate go before there are potential problems with the cash flow of the property?

Multiple Touches

Automated risk monitoring solutions exist which allow for cost-effective loan monitoring between annual reviews.  We recommend at least two ‘touches’ of the loan in addition to the in-depth annual review.  These touches might identify certain situations, such as: Has the borrower’s or guarantor’s credit score recently decreased?  Are there any environmental issues with a property adjacent or near to your collateral?

Monitoring the Overall Portfolio

Credit unions must also step back and view the forest (the business loan portfolio) and not just the trees (the loans).  Does your portfolio have excessive concentrations in one loan type or industry?  What is the weighted-average risk rating of your portfolio?  What is your exposure relative to the credit union’s net worth?  Management must take the macro view to complement individual loan monitoring.


I see it all the time…management believes the right things are being done, but they really don’t know – and sometimes they only find out when it is too late.  Proper management and board oversight is only accomplished with thorough and complete reporting from the business lending area of the credit union.  An effective risk management system includes a continuous feedback loop to keep everyone apprised of both the positive and negative aspects of the business loan portfolio.

As with individual loan tracking, systems exist today that take much of the manual effort out of portfolio monitoring and management reporting. Operational managers as well as senior executives and board members can have real-time access to detailed, easy-to-read dashboard reporting. Such reports can display information as varied as industry concentrations, portfolio profitability, and even average time-to-close.

I once heard a gem of wisdom that rings true: “The best way to make money in commercial lending is not to lose money.”  Implementing a risk management system will dramatically increase your odds of not losing money and being successful in business lending.

Larry Middleman is the President/CEO of CU Business Group, LLC, the largest business services CUSO in the industry, serving more than 580 credit unions in 47 states.  He can be reached at 866-484-2876 or