Keep Constant Tabs on Your Bank’s Loan Portfolio

The quality of the assets held in your bank’s loan portfolio is constantly changing, which means it is crucial that you closely monitor overall asset quality by setting up effective loan review mechanisms.

Regulators require this for many reasons. Failure to closely watch asset quality can turn small problems into large ones that can eventually turn into losses. An independent review of loans and policies can accomplish several important goals. One of these it to confirm that your bank’s lending practices are consistent with the objectives of senior management and the board of directors

Other benefits of an independent audit include:

Finding problems before they find you. A loan in good standing today may not be healthy tomorrow. Without robust reviews, it’s difficult to detect all the warning signs of declining asset quality. An outside review brings a fresh set of eyes to existing loans and can uncover potentially troubling trends before borrowers default.

It is better to get ahead of a problem loan than to be forced to respond to one. Assessing your bank’s loan portfolio and identifying problems quickly can give ample notice to your bank’s “Special Assets Division” or troubled loans department that some loans require attention. Fast response is critical when attempting to limit exposure to losses, especially when customers maintain lending relationships with other banks.

Ensuring policies are enforced across the board. Your institution expends a great deal of time and effort to ensure that its loan policies are competitive and protect the bank from undue risk. However well-intentioned and detailed those policies are, their effectiveness depends on being consistently applied across the organization’s entire loan portfolio.

An independent review can be tailored to assess the degree of policy compliance and provide results for senior management to review. This can help uncover lending exceptions that were not appropriately identified and documented, providing an opportunity to tighten procedures.

Avoiding regulatory surprises. Don’t wait until regulators suddenly present your bank with a list of areas where compliance has been lax. This could result in tighter regulatory oversight.

A loan review can assess your bank’s compliance with a specific regulation or with all lending regulations. A broad review will be more expensive and time-consuming, but when it is done, regulators are less likely to find fault with your institution’s procedures.

Reviewing and assessing underwriting. Analyzing the underwriting process is your primary method of determining that your bank’s loans are structured and priced correctly and rejected when appropriate. The underwriting process has several “moving parts.” They range from identifying primary and secondary sources of repayment to ensuring that collateral is accurately identified and valued.

Each element plays an important role in ensuring that your bank maintains superior asset quality. An independent review will not only assess your bank’s ability to comply with its own guidelines, it will also evaluate how well loan applications are examined before they are approved.

Improving control. A review of loan origination and administration policies and procedures will help highlight where your bank may be over controlling processes and where control is not sufficient. Their process auditors can also share best practices they have discovered in working with other banks.

Your bank’s loan origination and administration program is focused on ensuring that loans are initiated, financed and managed profitably. However, as with any complex set of procedures, it is possible to impose more control than necessary for risks that are less significant than perceived. For example, your lending officers may not need to require as many steps when increasing a line of credit for a credit-worthy borrower than they would when reviewing a request from a customer with a poorer payment record.

Applying metrics to portfolio management. Financing a loan is just the beginning of the process. To generate consistent performance, your bank’s loan portfolio must be managed with accurate and timely performance metrics.

These metrics are best monitored using a scorecard that summarizes overall portfolio management. That scorecard can include the number of lending arrangements that have undergone a credit relationship review over the past 12 months. It can also include an analysis of the composition of the portfolio, such as the percentage of commercial loans, investment real estate, construction loans and so forth.

Tracking loans in default and estimating losses also helps maintain strong portfolio management. Outside auditors will be able to share ideas on metrics appropriate to your institution as well as how those measurements should be analyzed and presented to senior management.

While a review can help calibrate current processes, it can also help identify best practices that can benefit your bank as a whole. For instance, commercial loan officers at one community bank installed an “add on” in Microsoft Outlook that allowed them to add client email messages to the bank’s customer relationship management software. This not only ensured that the bank had an accurate record of all client email communications, it also helped the bank identify additional products that might be able to help clients meet their business needs.

Contact Us
For more information on how we can help your community bank, please contact Sonny MacArthur at smacarthur@pkm.com or 404-420-5631.