Mountain Biking and Portfolio Management

Mountain Biking and Loan Portfolio Management

This September will be the 37th running of the Chequamegon Fat Tire 40, an annual mountain bike race between Hayward and Cable, WI. Entrants consist of both the competitive set and avid riders who consider this sort of thing fun.

I began mountain biking in college when mountain biking was considered a fringe sport. The sport includes the challenge of technical trails and time riding in the woods, which I have continued to enjoy. I have had my share of bumps and bruises (to both my pride and my body) over the years resulting from this sport.

I have participated in the Fat Tire 40 on three occasions with the most recent approximately five years ago. The ride created many fond memories. It is both the most fun I have had in an organized event yet the most challenging, both mentally and physically.

I have some neighborhood friends who also like to mountain bike. We get out on occasion to hit the local trails and enjoy this sport with all its inherent risks, especially for us old guys. I was able to convince these buddies to enter this race with me for the fall of 2019. They are a little freaked out at the thought of this ride. An event like this will require a commitment to deliberate planning and execution. The execution of this plan will build mental and physical endurance, an opportunity to achieve a successful outcome and have some fun along the way.

The event will also include many risks to the riders. There is a risk of serious injury, a risk of mechanical failure, a risk of physical and mental limitations, a risk of poor weather and riding conditions to name just a few. A prepared rider can mitigate these risks. Equipment such as a helmet and other protective gear may minimize the risk of serious injury. A small tool kit, spare tube and CO2 cartridge may assist with any bike issues. Nutrition and hydration along the ride will ensure enough calories and fluid to allow the body to perform. Finally, appropriate gear may help mitigate the risks of poor weather and riding conditions.

A study of the course map will also be critical in executing the event. The Seeley Fire Hill at mile 28 creates many walkers amongst the riders. Knowing and anticipating sections of the course will help us prepare mentally to know the tougher spots of the ride.

Similarly, planning and execution of loan portfolio management is critical to the success of a financial institution. Loan portfolio management includes the steps taken to identify and control risk throughout the credit process. Portfolio management does not include an end-point like the finish line in the Chequamegon. Portfolio management can include methods to measure performance and the success of a loan portfolio management plan. Management can also incorporate tools to look ahead to anticipate bumps in the road.

Many risks are assumed in the lending process, much like mountain biking. A sound loan portfolio management policy will identify the riskier areas of the loan portfolio and incorporate appropriate monitoring techniques. Riding further on a trail will identify additional risks to the biker much like further analysis of the loan portfolio can identify current or changing risks. A map of the trail can also help anticipate potential risks ahead. A loan portfolio management plan can serve as the map to consider both internal and external factors that can impact the portfolio today and in the near future.

Financial institutions of all sizes should have a plan and a process for loan portfolio management. These plans may vary based on the size of the institution, the complexity of the portfolio and the types of credit risks assumed. Potential and known risks can be identified in advance in both mountain biking and portfolio management. These items can be addressed early in the process to maintain appropriate risk  tolerance.

Kevin Graff is the President of Integrity Loan Review. He has significant experience with loan review and credit administration. He enjoys discussing how covenant monitoring can become an effective process for your institution. Kevin can be reached at 920-857-6225 or

Mountain Biking and Portfolio Management

Covenant Monitoring





Loan covenants are an essential part of commercial lending.  They provide a framework of understanding for the borrower to meet the requirements of the lender.  The covenants can include financial reporting requirements, performance-based covenants and operating covenants.  The first two are considered affirmative covenants while the last is generally considered a negative covenant.  The loan covenants are included within the loan agreement as a part of the overall loan documentation.  The specific requirements for the delivery of financial reporting or the testing of loan covenants should be explicitly included in the loan agreement and consistent with the approval of the credit facility.

The identification of the various covenants is one of the key steps in the loan review process.  Our loan review process will generally start with the credit approval document to identify the requirements of the borrower as a part of the credit approval.  We will then review the loan documentation to ensure the covenants are incorporated into the loan agreement or other document per the credit approval.  The next step is to locate the actual financial statements, identify covenant testing has been completed and identify if any operating covenants have been violated. If financial statements are not available or performance covenants are not tested as required under the credit approval, we will note this as an exception and review the institution’s tickler list to ensure the financial institution is tracking the missing items.

While this seems to be a straightforward process, we have had many discussions with our customers regarding performance covenants.  These discussions are generally focused on the timeframe either permitted or expected by the financial institution to complete the testing of the performance covenants, whether it be monthly, quarterly, annually or other.  The question becomes, should the performance covenants be tested upon receipt of financial statements or tested during the annual review process or other credit event.  Unlike a financial reporting requirement, most credit agreements do not include a timeframe for which a covenant should be tested.  Additionally, most loan policies do not identify an expected or required timeframe for the testing of performance covenants.

From here, there are two additional issues for a loan review professional: 1.) what is a reasonable time frame to allow for performance covenant testing and 2.) if the necessary financial statement has not been provided per the credit approval and therefore the covenant is not able to be tested, is the lack of performance covenant testing an exception?

Loan covenants are in place to manage the perceived risk with the credit relationship.  They serve the purpose to monitor the performance of the borrower.  Therefore, we believe performance covenant testing should occur as the required financial statements are received.  A memo or other document should then be added to the credit file to indicate the date of testing, the specific covenants tested and if the borrower passed the required covenants.  Most performance covenants in community banking are tested on an annual basis.  This means year-end financial statements are used to test the covenants.  Many community-based financial institutions rely on the annual review process to update financials and test covenants.  Often, the annual reviews are not closely aligned with the annual financial reporting requirements and therefore weeks or months may pass before the covenant testing occurs.  This potential delay can create incremental risk in the credit relationship should there be a deterioration in the financial performance of the borrower.  Additionally, the significance of the covenant may be eroded if the borrower is notified of a covenant default months after the financial statements have been delivered.

Our loan review position, therefore, is to expect covenant testing to occur and be documented within 30 days of receipt of financial statements.  If not, we generally identify the lack of testing as an exception.  In addition, if a required financial statement has not been received, and as a result a performance covenant is not tested, we would also identify this as an exception.  Two exceptions would then be noted, one for the missing financial statement and one for the performance covenant test.  While it may seem overly critical to identify both as exceptions, the missing financial statement and untested covenant may reflect risk in the relationship and the borrower’s willingness or ability to adhere to the loan covenants.  We do find most financial institutions will include performance covenants on their tickler list, however, we do not often see un-tested covenants on exception lists.  In this prolonged banking cycle, accurate exception lists can identify trends regarding the level and types of exceptions and can be a meaningful tool in the overall loan portfolio management.

There may be a solution to address the timeliness of the testing of the performance covenants.  Most institutions require financial reporting from the borrow and leave the covenant testing to the financial institution’s staff.  This method can lead to significant delays in the testing of the covenants.  An alternative to this dilemma; a covenant compliance certificate requirement.  A covenant compliance certificate could be included as a part of the credit approval and incorporated into the loan agreement.  This is a form submitted by the borrow attesting to the compliance/non-compliance with their covenants.  A standard form or template can be provided to the borrower specific to their covenant requirements to facilitate future reporting.

A compliance certificate will not only expedite the covenant testing process but also further engage the borrower in a clear understanding of their performance expectations by the financial institution and how they are performing against these requirements.  Little additional time may be required by the borrower to complete these certificates on a regular basis as most covenants are formula driven included within a template provided by the financial institution.

We would anticipate compliance certificates to be verified by the financial institution.  This process will not only confirm the result of the covenant test but ensure the borrower is accurately calculating the performance covenant.

Covenant compliance certificates have been a long-standing practice for corporate banking and large financial institutions.  A greater adoption by community based financial institutions may provide for a  more timely and effective covenant management process thereby enhancing the overall risk management process for the institution.

Kevin Graff is the President of Integrity Loan Review. He has significant experience with loan review and credit administration.  He is happy to discuss with you how covenant monitoring can become more effective for your institution.  Kevin can be reached at 920-857-6225 or

Covenant Monitoring


Time to incorporate a remote loan file review?

Third-party independent loan review is a staple of loan portfolio risk management for many community-based financial institutions.  Traditionally, loan reviews were performed on-site at the financial institution to provide access to both the files and staff. This traditional approach is changing as regulatory agencies are now driving more procedures of their field work that can be completed remotely and as more financial institutions are better leveraging the continuing improvements in imaging technology and data security.  This combination can provide for greater opportunities for remote loan reviews.

Most of our current loan reviews involve an imaged-based or other electronic file system.  Although the credit file information is electronic, many of the loan reviews we perform remain on-site.   In theory, there are few reasons these on-site reviews should remain as an on-site review.  We are, however, beginning to see an increasing trend toward remote loan file reviews.

The Federal Reserve’s Commercial Bank Examination Manual, October 2018 (Supplement 45 -April 2016, section 2088.1) provides for the inclusion of remote loan file reviews as part of their examination procedure for community banks.

The Federal Reserve may use the off-site loan review program when leading examinations of State Member Banks with less than $50 Billion in assets and where the Bank has communicated its’ willingness to participate in a remote loan review program.

The Reserve Bank will consider the following when determining whether an off-site review of loan files is appropriate for an institution:

  • Will the institution submit the loan file data using a secure transmission method such as cloud-based collaboration products, secure email services, encrypted removable media, virtual private networks, or remote desktop control services?
  • Up-front technical preparation is necessary to ensure the data is made available in a secure method, typically a VPN, secure portal or other secure options.
  • Is the institution able to provide loan data and imaged loan documents that are legible, easily viewable, and properly organized to allow for timely review by examiners?
  • Image quality must be sufficient for easy reading with images sorted and labeled in a consistent method to allow for accurate searches.
  • Are the loan files comprehensive to allow an examiner to conclude an appropriate rating of a credit without having to request additional information from the institution?

This criterion works well to determine if a third-party remote loan review would be an opportunity for your financial institution.  This determination may involve input from the institution’s information technology department along with their credit administration to determine the institution’s capability to both deliver complete loan files along with the quality and current condition of the credit files.

Financial institutions should consider the many reasons a remote loan file review can be a part of their approach to third-party loan reviews.  The remote loan review process can:

  • be more efficient by minimizing the day to day disruption for the staff of the financial institution.
  • be less intrusive to the staff of the financial institution by reducing the number of reviewers the institution needs to create on-site space.
  • be more cost effective by reducing travel time and expenses.
  • provide for greater flexibility in the scheduling of the loan file review.
  • provide for a broader geographic selection of qualified loan review firms.

A remote loan review does not reduce the value of the review in assessing asset quality and the credit risk management process of the financial institution.  Key components of a loan review such as the review of credit files for quality, documentation, and compliance with bank policy and laws and regulations can be efficiently and effectively accomplished through a remote loan file review.

Communication throughout the review between the review firm, management and loan officers is key to discuss any findings that may arise in the course of the file review.  Effective communication will also help the reviewer identify any current concerns with the financial institution. Changes to the lending or credit staff, policy or procedures which may create additional risk for the institution, may also be revealed.  The financial institution may prefer to schedule touch points throughout the engagement and a structure exit meeting for the end of the review.

A blended approach to remote loan file review may be a good way to develop the expertise and comfort to achieve for those institutions that are interested but have not yet engaged a remote review.  A blended approach would involve a portion of the review to be completed remotely while a portion of the review would be completed on-site.  A blended approach can still minimize the disruption but allow for face-to-face dialogue as part of the review.  The effective use of technology can be a key tool in minimizing disruption and reducing costs with respect to a third-party loan review.

Kevin Graff is the President of Integrity Loan Review. We have significant experience with numerous imaged and other electronic loan file systems for both remote and on-site loan reviews.  We are happy to discuss with you how a remote review or a blended review can be designed and structured to fit into your loan portfolio risk management needs.  Kevin can be reached at 920-857-6225 or

Remote Loan File Review

Loan Policy – A Cultural Evolution

Every financial institution has a culture and more specifically, a credit culture.  This culture can be arrived at in many ways, through the leadership, policies, practices and other intangibles that employees may not even be aware of.  Interestingly, culture is rarely documented as a specific item but rather it is a collaboration of the various policies and procedures and undocumented practices the financial institution has in place to run their business.    It is the culture that sets the tone for how things get done in the financial institution, how customers are treated, how employees are treated and how the financial institution is managed.  It is my experience that separate from their policies and procedures, high performing financial institutions have created a culture where everyone knows what the expectations are, and everyone works to achieve them for the betterment of the financial institution.

The loan policy is a key document that has a substantial impact on the nature of the credit culture.  The loan policy survives the natural turn-over of employees to provide for a consistent approach to credit.  As new employees are added, and more tenured employees leave, long-standing institutional knowledge may disappear.  An evolution of the loan policy may influence a shift in the nature of the credit culture within the organization.  Long understood staples of the credit culture may become less pronounced over time.  Loosening or modifying requirements in a loan policy that may seem subtle at first, may have a broad and profound effect on the credit culture of a financial institution.  I have received direct feedback from customers that have made changes to the loan policy that were influenced by recent regulatory examinations.  Many times, these changes improved the loan policy as loopholes may be addressed or items in policy are be clarified.  Recently however, it seems these changes have provided a larger box for the financial institution to work within.  A financial institution that is criticized in a regulatory exam for their exception monitoring and tracking may look to reduce the number of items that are considered exceptions within the loan policy.  Some financial institutions have addressed the level of exceptions through changes to their loan policy.  In recent months, I have observed financial institutions that have removed long standing industry practices from the loan policy.  In one example, the explicit requirement to obtain a personal guaranty from the owner(s) has been eliminated from the loan policy.  The financial institution continues to expect the credit structure to include the personal guaranty however if the guaranty is not obtained, an exception to the loan policy is not created.  I have also recently observed a similar type modification to the loan policy through the omission of amortization periods, specifically for C&I deals where the amortization may not be aligned with the useful life of the asset.  Again, an exception is not created if the amortization parameters are not in the loan policy.

As this calendar fiscal year ends, many financial institutions are reviewing and updating policies.  Take a moment to consider if the proposed changes are in-line with the culture and the long-term strategic vision of the financial institution.

Kevin Graff is the President of Integrity Loan Review.  He can be reached at 920-857-6225 or

Loan Policy – A Cultural Evolution