Loan review and credit issues: Best-practices checklist

• Look to the long term
  For starters, consider looking ahead at a longer period of time for maturing loans, focusing on those maturing over the next nine to 12 months. Start talking with customers early and often about the strategy behind those loans, knowing that customers will have a much higher debt service payment. Also, focus on some of those loans with lower interest rates. In addition, look more closely at concentration reporting, consider new products or expansions, and flag weaker transactions in the loan review process.
• Understand your portfolio, lenders, and products
  Now is a great time to get a better understanding of the portfolio through technology. And the technology doesn’t need to be expensive. Cost-effective programs exist that could allow a bank to visually understand its loan portfolio and identify pockets of risks in this environment. Also, take the time to determine if the right lenders are managing credits. For example, an uptick in problem loans could be an indication that staffing should be reconsidered. Finally, consider products that might be safer for the bank – even if they’re not customer favorites.
• Think ahead
  The interest-rate environment will pivot at some point, so be prepared for a reversal to a decreasing-rate environment. Develop a plan for scenarios involving gradual rate adjustments, rates remaining flat, and rapidly changing rates. Don’t be afraid to consider potential merger opportunities and pull out your stagflation playbook if needed.
• Use reviews to your advantage
  Keep annual reviews up to date. As part of the annual review process, consider focusing on deals that are maturing over the next 12 to 18 months and identifying loans that might be problems. In addition, look hard at independent loan review results, taking the time to really understand the observations.
• Review covenant processes
  Take a look at the bank’s covenant process. Is everything being tested, and are covenant violations being addressed? As covenant trips are identified, banks might want to use them as opportunities to talk to their customers and understand the challenges they are facing to make timely payments under current loan terms.
• Examine policy exceptions
  Banks shouldn’t be afraid to tweak monitoring of approved policy exceptions, especially on renewing loans that now face a higher interest rate compared with when they were originally underwritten. If, for example, the deal was done a couple of years ago, the renewal might reveal that the debt service doesn’t fit in the current policy. These cases are likely going to become more frequent, so be proactive and try to understand them at a deeper level.
• Get fresh information as often as possible
  In this fluid environment, it’s vital to get the freshest information possible from bank customers. When seeking out this information, make construction, office, nursing and assisted living, and leverage borrowers top priorities in loan portfolio reviews, as these are areas where the Crowe credit review team has seen an increase in strain over the past 12 months. Also, take a hard look at rent rolls and interim numbers. During a bank exam, regulators are likely to look more closely at rent rolls than they are at financial statements when they review asset quality in order to better understand the profile of the individual credits. Now also might be a great time to dive deep into true concentrations and to determine if the bank is equipped to assess valuations and identify strained credit.
• Look for outside opinions when needed
  Financial institutions should consider seeking outside opinions on liquidity and balance sheet management. “Interagency Guidance on Credit Risk Review Systems,” which came out in 2020, speaks to the importance of sound credit risk management as well as a system of independent review. Depending on the balance sheet makeup, independent review can be more drastic for some institutions than others, but it’s important to have an independent review of credit risk, whether it’s done by a loan review function team member, an internal auditor, or an outside party.

Above all, financial institutions shouldn’t let volatility in the market deter them from new opportunities. It’s important to look ahead and try to identify new products and acquisition targets, even in the current environment.