Annual reviews of commercial lending take center stage as Mark Ritter hosts Kristina Paulson on Credit Union Conversations. This MBFS Quick Hits episode tackles year-end commercial loan annual reviews and the persistent debate over K-1 documentation. Kristina, AVP of Credit Services at MBFS, shares practical strategies for managing unresponsive borrowers and explains why tax return analysis alone isn't sufficient. The conversation explores improvements to the credit analysis process, portfolio risk assessment techniques, and how commercial loan policy updates can reduce low-value activities. Learn why cash flow calculation requires K-1 forms and discover relationship-building opportunities hidden within the annual review process.

WHAT YOU WILL LEARN IN THIS EPISODE:

✅ How to handle uncooperative borrowers during the annual review season, including escalation strategies like formal demand letters and default rate implementation when borrower financial statements aren't provided.

✅ Why K-1 forms are essential for accurate cash flow calculation and how they reveal distributions and contributions that standard tax returns cannot show, making them critical for proper credit analysis.

✅ How to update your commercial lending compliance policies to focus resources on high-risk loans rather than reviewing every small business loan in your portfolio, improving efficiency while maintaining regulatory standards.

✅ How annual reviews create sales opportunities to identify needs like lines of credit or refinancing options while monitoring portfolio health and strengthening business services relationships.

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TIMESTAMPS:  

00:00 Kristina shares her commercial lending career path and role as AVP of Credit Services at MBFS

03:12 Year-end annual review challenges and common borrower communication issues discussed

05:15 Red flags when borrowers avoid providing financial statements and potential underlying problems

06:05 Enforcement strategies and why credit unions must establish consequences for non-compliance and sales opportunities within annual reviews, including lines of credit and refinancing options

09:01 Commercial loan policy updates to focus on high-risk loans versus low-value activities

10:54 K-1 documentation importance explained, and why tax returns alone are insufficient for cash flow analysis

KEY TAKEAWAYS:  

✅ Unresponsive borrowers during annual review season often signal deeper financial problems—lack of cooperation after multiple attempts should trigger escalation, including formal demand letters and potential default rates to enforce loan agreement requirements.

✅ K-1 forms are non-negotiable for accurate commercial lending analysis because they reveal distributions and contributions that impact cash flow, information that standard tax returns simply cannot provide to lenders.

✅ Modern commercial loan policies should be risk-based rather than reviewing every loan—focus credit analyst resources on larger, higher-risk transactions. In contrast, smaller loans, such as vehicle financing, require minimal oversight for efficient portfolio management.

RESOURCES MENTIONED: 

Mark Ritter - Website

Mark Ritter - LinkedIn

MBFS Website

SEO KEYWORDS: 

Credit Union Conversations, Mark Ritter, MBFS, Credit Unions, CUSO, Annual Reviews, Commercial Lending, Commercial Loan Annual Reviews, K-1 Documentation, Tax Return Analysis, Credit Analysis Process, Portfolio Risk Assessment, Commercial Loan Policy, Cash Flow Calculation, Default Rate, Borrower Financial Statements

[00:00:25] Uh, please hit the subscribe button so we come up in your feed on a weekly basis as we drop every Tuesday now. So joining me today on a quick episode here is a repeat guest, Christina Paulson. Christina, how are you doing today?

[00:00:43] Mark Ritter: I am doing akay, uh, getting over 'em, a little bit of my sniffles.

[00:01:05] Kristina Paulson: Sure. So, uh, as Mark said, my name's Christina. I'm the a VP of credit services here at MBFS.

[00:01:32] Um, thankfully the community bank that I worked at gave me a shot. I started as a commercial loan administrator. I pretty quickly moved into a small business lender role. Um, and back then it really wasn't unusual for a lender to kind of be the analyst as well. So that's when I realized I actually really liked the analyst role, and I've kind of stayed in that lane ever since.

[00:02:12] In my role day to day, I oversee 19 analysts who underwrite both new loans and annual reviews, plus it manage a a bunch of general portfolio monitoring tasks.

[00:02:38] So, but most people say, we went to college and I needed a job, and it just sort of went on from there.

[00:02:55] That looks interesting. But otherwise, everyone fell into the role.

[00:03:10] Kristina Paulson: yeah, exactly.

[00:03:21] You get calls, and we're gonna be talking some techie commercial lending here for, for a few minutes in this episode. So bear with us here. So if you are involved in business lending, annual reviews seem to be the hot button topic of the day with NCUA, every auditor and regulator and, and I'm a big fan of Spinal Tap, so I always tell people, you have to turn it up to 11.

[00:04:16] You know what? What's your guidance to people who just don't want to cooperate?

[00:04:32] 2024 tax returns were on extension. Now they're not. So that's no longer an excuse or reason. Um, if you've worked in commercial lending, you've definitely experienced those borrowers who really disappear into the abyss. The moment you ask for those updated financials, it really happens to all of us. I'm sure you've all seen it.

[00:05:15] To me, that's when it becomes a red flag. Um, I'm curious if you agree. Uh, in my experience, the lack of cooperation is often a sign of deeper if issues. Maybe we find out cash flow's tight, tight, maybe their bookkeeping's a mess, um, maybe they don't know if the numbers are going to look great. They're trying to delay that conversation.

[00:05:37] Kristina Paulson: Yeah, we, we have that. Um, there are the rare instances, I guess with, with, uh, tax filings. Maybe the IRS allowed special extensions. Um, but those borrowers are, are few and far between. Um, but at this point, maybe you think about escalation, uh, whether it's a reminder that the requirements in the loan agreement, maybe you send a formal demand letter.

[00:06:05] Mark Ritter: I always like to tell people you really only have to be a complete and total jerk once because if it's not your culture at the credit union to crack down and tell people it's important, it's not important to the borrower.

[00:06:37] Mark Ritter: Yeah. And, and, and it, and what people don't realize is it's not just a perfunctory exercise that we go to through there, there's actually value in this.

[00:07:10] Uh, we have some issues here, but it's also a opportunity. It's a, it's a sales opportunity, it's a relationship opportunity, and, and you probably see that on the credit side of, wow, okay, these people could use a, a line of credit. They're have other things going on. You may find that they bought a new business or a location and you don't even know about it.

[00:07:51] Mark Ritter: Since I'm an old person, not like you. I remember when I first started, the regulations [00:08:00] were if you had a commercial loan on the book, you had to do an annual review. And it was entirely idiotic. And what I find is that a lot of credit unions spend a lot of time on low value activity. And what I mean by that is it's a relatively small loan's been on the books, everything's moving along, and you're doing the same amount of work for your $5 million borrower.

[00:08:54] It makes sense for you. I mean, what, what do you see in, in your world? 'cause you're the one who talks with people about [00:09:00] their policies.

[00:09:14] Do you really need to review every $60,000 commercial vehicle loan? No. Should you be reviewing that $8 million office loan at this point? Yeah. Um, but again, it could really vary on your portfolio size too. So credit unions with really small portfolios, maybe it is, um, risk, a risk. Um. Base assessment to try to look at the smaller loans too, because they are a large scope of your portfolio, uh, percentage wise.

[00:09:49] Mark Ritter: Absolutely. So I was out with dinner with a friend of mine who he, he has a business owner for years, he had several [00:10:00] retail locations and sold them and now has a lot of real estate investment property.

[00:10:38] Don't worry about all the other stuff. Just look at my tax returns, which is well-meaning. Uh, the floor is yours. Give people your rant on why they actually have to collect K ones for the ongoing and initial loan.

[00:11:00] I mean, even well beyond that, um, it's a favorite topic of debate. Borrowers really have difficulty collecting them or sending them. Lenders always need them. Uh, I always say the K ones. Show the ownership share of income, losses, distributions. The tax return's only going to show you what impacted taxes. So if you want us to give you credit for money that you may have received from, uh, that various entity that you own, we really should have the K one so that we could see distributions.

[00:11:49] Something that makes it easier for lenders. Um, but that's not the reality. So we really need the K one document.

[00:12:12] Kristina Paulson: That's exactly right. We need it.

[00:12:33] It's fun, it's educational. Uh, not everybody can be an expert on everything, so, so yeah, that was, uh, so that was quite the, uh, the, the, hopefully you got the pick up some tips as a listener on what we need. And if you still, uh, think we don't need K ones for your cash flow, we do. So Christina, thanks for joining me today.

[00:13:06] Kristina Paulson: All right. Thank you, mark. Thanks for having me.