The New Credit Variant – Loan Review and Internal Credit Servicing

How Financial Institutions Can Reduce Credit Risk in their Loan Portfolios

The pandemic had a multi-faceted impact on borrowers as well as credit monitoring and servicing for most financial services organizations. DHG’s Credit Risk Management loan review team has observed examples of both deteriorating credit quality and credit servicing during this period. The uncertainty of future income with investment in commercial real estate can negatively impact cash flows and the collateral value of these property types. DHG’s Credit Risk Management shares the following observations and recommendations.

Credit Quality
  • The pandemic has impacted multiple industries, creating questions regarding the sufficiency of future cash flow for debt service and past reliance on the no-longer-available Paycheck Protection Program (PPP) funds to support the businesses.
  • There is uncertainty over whether a borrower’s revenue and cash flow will return to historical levels once the business reopens and customers return given the customers’ shifting familiarity with and preference toward non-client facing transactions.
  • The long-range projections and viability of a given business may be challenged after a period of decreased revenues and net income.            
Credit Servicing/Monitoring
  • Financial institutions have less time for ongoing credit monitoring as staff levels became stretched with processing loan payment deferrals and modifications to help clients through the pandemic.
  • Underwriting and administering PPP loans has cut into the ability to adequately service other loans.
  • Financial Institutions’ staff adapted to working from home and learning to manage time differently.

In a period where increased credit portfolio monitoring and servicing have been needed, both have been decreasing.


As it relates to loan portfolio monitoring, DHG’s Credit Risk Management loan review team has recently observed the following:

  1. Annual reviews are being delayed or abbreviated with limited value to the bank.
  2. Financial statements are not being received as contractually required. Financial statement tracking has received less emphasis from financial institutions during this period.
  3. Financial institutions are not adjusting risk grades based on current financial information but maintaining existing risk grades based on the borrower’s historical financial performance with the assumption that financial performance will improve once the economy reopened.
  4. Loan covenant monitoring is often being delayed, and covenant violations are not being enforced as presented at origination.
  5. Revenue and income projections used in the original underwriting of loans before and during the early stages of the pandemic have not been updated.
What Are the Results of This?

The risk is unknown from a cash flow perspective and possibly even from a collateral perspective as loan modifications, allowed deferrals and PPP loans could have contributed to or masked undetected credit issues leading to  loans currently graded as pass that should be downgraded to non-pass.        

Industries such as hospitality, restaurants and tourism were hit very hard by the economic impact of the pandemic and while some may be recovering, many are not. Commercial real estate and construction loans remain an area of concern as the lingering impact of working from home is expected to have an adverse and prolonged impact on the need for office space, and the acceleration of online purchasing may permanently reduce the need for brick-and-mortar retail locations. 

What Does DHG Recommend?
  • Identify the industries with the highest risk profiles and focus efforts on loans within these industries.
  • Identify individual borrowers within each identified high-risk industry who should be reviewed to distinguish between the stronger borrowers and those most likely to be impacted by the pandemic.
  • A review of revenue trends, cash flow trends, liquidity, equity and guarantor support should be a key part of this analysis.
  • Identify borrowers in financial distress as soon as possible and develop action plans for these borrowers.
  • Use analytical tools and trend analysis to identify troubled or weakening credits.
  • Develop and/or adopt alternative credit servicing protocols and processes for the targeted industries and subsets within those industries.
  • Place a renewed focus on obtaining updated financial information and conducting a detailed annual review documenting, at a minimum, revenue, cash flow and debt service coverage ratio.
  • Base loan grades on “as is” per current financial analysis. Do not assign a risk grade based on an expected return to normalcy. The assigned risk grade should reflect the current level of risk in the loan.
  • Place a renewed focus on setting proper covenants and monitoring those covenants.
  • Update credit policies for these loans to proactively address and monitor the increased level of risks in these loans. Develop and write your script for a targeted and specific credit servicing policy for loans to those borrowers in the industries/subsets most affected by the pandemic.
  • Take ownership and become the experts of your credit portfolio and credit servicing. Be forward-thinking in monitoring these credit risks. Do not wait for regulators to direct you in the best way to manage the pandemic problem loans in your portfolio.

In these unprecedented times, it is important for financial institutions to take heightened measures when it comes to credit portfolio monitoring/loan reviews and credit servicing monitoring. Contact DHG’s Credit Risk Management group at to discuss your institution’s strategies to monitor risk in the loan portfolio.


Dave Niles
Partner, DHG Financial Services

Ron Coleman
Manager, Loan Review

Matt Orr
Manager, Loan Review


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