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Tax Return Analysis: When the Numbers say ‘No’ but Good Judgment says ‘Yes’

September 14, 2012
Read Time: 0 min

This guest post by Linda Keith, CPA and trainer to hundreds of credit unions and banks across the United States summarizes her recent presentation in the Sageworks 2012 Webinar Series. The series is an offering of free, educational webinars led by consultants and leaders in the banking industry who share best practices for financial institutions. The webinar, “When the numbers say ‘No’ but good judgement says ‘Yes’ can be accessed here.

Convincing a loan committee to make the loan when the most recent tax return and perhaps an interim statement say yes but there were some difficult years during the recession can be a challenge. And rightly so, lending management is wondering how the regulators will second-guess them when that file is pulled.

Do the numbers really say no?

I caution the lenders, first, to be sure the numbers really say no. There are three common mistakes in coming up with qualifying income from a tax return that can make it look like ‘no’ when the numbers really do say ‘yes’. Are your guidelines current? Is your software/spreadsheet up to the task? Are you or your lenders going beyond the formula to understand the borrower and his/her business?

Does good judgment really say yes?

We covered 7 ways the lenders can go off track in applying judgment, all the way from seasonality in interim financial statements to the confusion caused by cash-basis tax returns when combined with accrual-basis financial statements in one analysis. Are you or your lenders suspending judgment until enough work is done to form a conclusion? Are you getting fooled by improving top- or bottom-lines that include misleading numbers?

What to ask…and listen for:

If you are confident that the numbers really say ‘no’ and good judgment really says ‘yes,’ here are some ideas for what to ask, listen for, and write about to justify the loan. These insights are formed by my conversations with regulators and senior lenders as well as from the training sessions I do with lending personnel to find and make performing loans.

ASK: The borrower’s story is critical to understanding the business and the risk in the loan. These questions for the business management or owner will help you fill out the story:

  • To what do you attribute the turnaround?
  • What are you doing differently?
  • What worked?
  • What did not work?

LISTEN: And as you listen, listen for evidence that the business turnaround is a trend and not a fluke. Such evidence can include:

  • Strategic shifts
  • Action
  • Course Correction
  • Positive outcomes that will continue
  • Documentable evidence

WRITE: The regulators cannot know what you are thinking if you do not write it down. Heck, by next week you won’t remember what you were thinking. Address these things in your write-up:

  • The concern (don’t hope no one will notice)
  • The borrower’s story, as evidenced by the numbers and the discussion
  • Why and how the risk uncovered by the concern is mitigated
  • What your judgment is based on (do not assume it will be obvious)

For more details on 1) how to assess if your numbers really say no, 2) how to decide if your judgment should really say yes, and 3) what to ask, listen, and write about to get the loan approved, you can access the recording of the webinar. There are also free resources included for lending management and the front-lines lenders, analysts, underwriters and others tasked with spotting, analyzing, and pitching performing loans.

Linda Keith CPA has a niche practice working with financial institutions on guidelines and procedures to pull qualifying income from tax returns when lending to businesses and their owners. She is the founder of, the author of the Tax Return Analysis Self-Study and Resource Manuals and presents live training for banks and credit unions throughout the country on Tax Return Analysis in a Tough Lending Environment.

For more information on making wise decisions and gathering accurate information on borrower scenarios, check out this free whitepaper: The Definitive Guide to Global Cash Flow

Sageworks, a financial information company that provides risk management solutions to financial institutions, hosts monthly webinars in its 2012 webinar series. These free, educational webinars are led by consultants and leaders in the banking industry who share best practices for financial institutions. Webinar topics include issues that are getting the most focus in banking today and advice to help institutions.

Access archived webinar recordings and sign up for future webinars here.

About the Author


Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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