Annual reviews, as opposed to loans reviewed by your independent loan review function, are reviews conducted by the bank's internal credit team on existing loans. These are normally completed as new financial statements are received. With limited resources, annual reviews usually take a back seat to new loan originations or line renewals. Nevertheless, annual reviews are extremely important in identifying early warning signs that a borrower may be struggling. In addition, annual reviews will confirm Management's risk rating assigned to the loan.
Making sure loans are accurately risk rated is the first step in monitoring and controlling credit risk.
The review done by the bank's independent loan review function CANNOT replace this requirement for Management to do annual reviews in accordance with safe and sound banking practices.
So with limited resources, which loans MUST you review on at least an annual basis? Here are our suggestions:
1. Loans rated Special Mention, Substandard, and Doubtful (regardless of size) need to be reviewed on a quarterly basis.
2. Relationships comprising 50% or more of the Allowance for Loan & Lease Losses (ALLL) need to be reviewed annually, regardless of the risk rating assigned.
3. Relationships comprising 25% - 50% of ALLL need to be reviewed on an annual basis if they are rated in the Pass/Watch risk rating (bank’s highest pass risk rating).
4. Any relationship comprising less than 25% of the ALLL may be reviewed on an annual basis, if workload permits, unless the relationship has a loan that is more than 30 days past due, in which case it will need to be reviewed. Priority should be given to those relationships that are risk rated Pass/Watch first.
By focusing on the above, you will have covered the riskiest loans that have the greatest impact on the ALLL and bank's earnings/capital. If you can't meet the above requirements after working on new loan originations and line renewals, then it's time to add more resources to your credit team. If you are having difficulty getting additional resources,
we can help you meet the above requirements.