Loan Review Essentials

When bank examiners walk through your door, one of their first requests may be for the bank’s loan review report. Examiners expect the loan portfolio risk to be accurately assessed and documented. When expectations aren’t met, the repercussions can be significant. Whether conducted by in-house staff or externally contracted, a loan review must be independent from the bank’s origination and portfolio management functions and give an unbiased assessment of credit and quality.

As one of the institution’s largest financial assets, it is vital that the loan portfolio is on track with the direction set by the bank’s senior management and board of directors. Instituting a sound and objective independent loan review program puts your bank in the position to proactively manage the portfolio for risk and overall direction. Even larger banks with internal loan review staff can benefit from an independent loan review to validate its own findings and create efficiencies.

Regardless of bank size, an effective loan review program safeguards the board of directors and management. Below we’ve outlined some points for your board to consider when contracting with an independent firm to conduct a loan review.

A collaborative loan review approach provides the best results.

Open, ongoing communication between the review team and the on-site lending staff is instrumental in establishing an ongoing relationship built on trust and respect. Engaging competent, experienced loan review professionals that understand diverse lending types and approaches will help ensure results that have credibility with lending staff and management.

Hire professionals who solely specialize in loan reviews.

Examiners rely greatly on the independent loan review report because it represents an objective analysis of the quality of the bank’s loan portfolio. The professional conducting the loan review should have a deep knowledge of the examination process from a banker’s standpoint.

It’s not all about the fees.

When searching for the right independent loan review consultant, finding a good value is important, but equally important are the deliverables and protocols for the process. An effective loan review is not a rehash of what your bank already knows. It warns of problems that could happen and recommends proactive adjustments to mitigate potential losses.

Reports should be clear and concise and include industry trends and benchmarks against similar institutions.

The loan review report should provide management with a thorough assessment of credit quality and provide recommendations to help the bank maintain a comprehensive risk management practice. In addition, the bank should receive current information about ongoing and emerging market trends that might affect collectability of the loan portfolio; how the institution falls relative to similar institutions around the state; and developing areas of regulatory focus.

The loan review process helps the board manage all aspects of a bank’s credit quality and processes.

A loan review will assess the adequacy of the bank’s loan policy and procedures to ensure compliance with State and Federal regulations. Actionable insight from the loan review process provides portfolio-wide exception levels that can be drilled down to specific portfolio segments and lenders, if needed. The report should also include an effective action plan for troubled loans and establish a reporting mechanism for assets to watch.

Todd Schoenhofer is the manager of the credit review services at Bankers’ Bank of Kansas and a former bank examiner. He can be reached at 316-681-9236 or