Making it Through a Year of Annual Reviews: A Strategic Approach

Posted on February 1, 2024 Published by

Annual reviews play a critical role in assessing the creditworthiness of borrowers and managing credit risk. As we enter a new year with financial statements rolling in, it is essential to plan a well-structured strategy to effectively conduct these reviews. This article, Making it Through a Year of Annual Reviews: A Strategic Approach, outlines a step-by-step approach to prioritize, streamline, and execute annual reviews, ensuring a robust risk management program.

Step 1: Prioritize Borrowing Relationships

To begin, categorize your borrowing relationships into groups based on risk exposure. This classification helps determine the level of attention and resources required for each review. Here’s a suggested tier system:

  • Tier A: Top priority – Loans with the highest risk exposure and risk rating.
  • Tier B: Next priority – Loans with slightly lower risk exposure and a higher risk rating.
  • Tier C: Lower priority – Loans with less risk exposure and a moderate risk rating.
  • Tier D: Least priority – Loans with minimal risk exposure and a low-risk rating.

Step 2: Plan Reviews Based on Priority

Once you have categorized your loans, plan when to conduct each review based on priority. As financial statements become available, focus on reviewing the loans in the next priority tier. It’s impractical to conduct a comprehensive analysis of your entire portfolio, so consider leveraging standard credit actions like renewals and quarterly asset analyses to cover a portion of your portfolio’s risk exposure.  Those loans not covered by credit actions should be part of the annual loan review process.

Step 3: Streamline the Review Process

To streamline the annual review process, consider adopting a two-part approach:

Part 1: Abbreviated Annual Review

Upon receiving borrower financial information, start with an abbreviated annual review. This involves spreading financial statements, conducting a cash flow analysis, and testing covenants. If the borrower’s financial performance is stable or improving, and they are compliant with covenants, they pass this initial review.

Part 2: Detailed Analysis (if needed)

If the abbreviated review raises concerns such as deteriorating financial trends, payment issues, covenant violations, or delinquent property taxes, proceed with a more detailed analysis. This in-depth assessment will help determine the borrower’s risk rating and provide insights into potential mitigating actions.

Regardless of the review approach, it is crucial to prioritize high-risk loans as part of a comprehensive risk management program. By addressing the loans with the highest risk exposure early on, you can proactively manage potential credit risks and implement necessary risk mitigation measures.


Effective annual reviews are essential for maintaining a healthy credit portfolio and managing credit risk. By prioritizing loans, planning reviews, and streamlining the process, financial institutions can enhance their risk management practices. Enlighten Financial can help! Our team of consultants and underwriters can assist you in developing your annual review program or completing your annual reviews. Contact us, and we’ll provide a thorough consultation on Making it Through a Year of Annual Reviews: A Strategic Approach.

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