How do you prepare for an annual credit review?
Start 90 days before the review date. Request the borrower's year-end financial statements, tax returns and guarantor information, spread them, test covenants, update collateral values and total exposure, check payment history, then reassess the risk grade and write a short review memo for approval. Most delays come from late borrower documents.
The annual review asks one question: is this relationship still what the bank approved, and is the risk grade still right? Everything in the preparation exists to answer that question with current evidence, and to record the answer so the next reviewer can see what changed.
What is an annual credit review?
An annual credit review is a periodic reassessment of a borrower relationship, usually done once a year after the borrower's fiscal year-end statements are available. It covers financial performance, covenant compliance, collateral, guarantor support and the risk grade, and ends with a decision to continue as is, change the grade, change the terms or take further action.
It is different from the work of an independent loan review function, which samples files across the portfolio to test whether grades and underwriting are sound. The annual review is done on the relationship by the credit team. A well-prepared annual review makes the independent review much easier, because the reasoning is already on file.
What is a good timeline for annual review preparation?
The timeline below is an example only. Adjust it to the reporting requirements in your loan agreements, which often give borrowers 90 to 120 days after year-end to deliver statements, and to your institution's policy.
| When | What happens | Who |
|---|---|---|
| 90 days before review date | Send document request to borrower and guarantors | Relationship manager or credit administration |
| 60 days before | Follow up on missing documents; order collateral updates if needed | Relationship manager |
| 45 days before | Spread statements and tax returns; run tie-outs | Credit analyst |
| 30 days before | Test covenants, update exposure, collateral and guarantor analysis | Credit analyst |
| 15 days before | Propose risk grade and draft review memo | Credit analyst with relationship manager |
| Review date | Approve review, confirm grade, set follow-ups | Credit officer with delegated authority |
What documents do you need for the review file?
Use the loan agreement's reporting requirements as the starting list, then add what policy requires for the review. Tracking what has arrived against what was required also tells you whether the borrower is in compliance with its reporting covenants.
- Year-end financial statements at the level the agreement requires (audited, reviewed, compiled or company-prepared).
- Business tax returns for the same year, with all schedules.
- Interim statements, if the review falls well after year-end.
- Accounts receivable and payable agings and a borrowing base certificate, for asset-based lines.
- Compliance certificates for each covenant test date in the year.
- Personal financial statements and tax returns for guarantors.
- A current debt schedule covering all lenders.
- Insurance certificates and, where needed, updated collateral valuations or inspections.
How do you run the review once the documents arrive?
Work through the file in the same order every time, so nothing is skipped and each review can be compared with the last one.
- 1Spread the new statements and tax returns, and run the standard tie-outs.
- 2Compare results with the prior year and with any projections in the original approval.
- 3Test every financial covenant using the agreement's definitions and the level in force on each test date.
- 4Update total exposure for the borrower and related parties, and check against limits.
- 5Review payment history, overdrafts and any past-due episodes over the year.
- 6Update collateral values and coverage, and confirm insurance and lien positions.
- 7Update guarantor liquidity, net worth and contingent liabilities.
- 8Reassess the risk grade against the bank's rating definitions.
- 9Write the review memo with findings, the proposed grade and any follow-up actions.
- 10Route for approval and set ticklers for the next reporting dates.
What does a finished annual review look like?
Example only, with made-up round numbers. A manufacturing borrower has $3,100,000 in total exposure: a $2,300,000 term loan and an $800,000 line. Last year's review showed debt service coverage of 1.55x. This year revenue fell 6% and margins narrowed after a materials price increase, so EBITDA dropped from $1,450,000 to $1,180,000. Coverage is now 1.28x against a 1.20x covenant, which is about 6.7% headroom.
The review memo should say this plainly: the borrower passes, but headroom is thin and falling. It should explain the cause (input costs, and whether the borrower has passed them on), state that the guarantor still holds $500,000 in liquid assets, and propose whether the grade moves from pass to watch. It should also set specific follow-ups, such as quarterly interim statements and a re-estimate of coverage after the second quarter, rather than waiting another full year.
How should you reassess the risk grade?
Start from the bank's rating definitions, not from last year's grade. Score the factors the definitions name, such as repayment capacity, leverage, liquidity, collateral, guarantor support and management, using this year's figures, and see where the borrower lands. Then compare with last year's grade and explain any difference.
Be careful with grades that never move. A grade that has stayed the same for several years while coverage fell steadily is a common finding in independent loan reviews. If the evidence points to a downgrade, propose it and record the reasons, and if the reviewer decides to keep the grade, record why.
What should a borrower do to prepare for a bank's annual review?
If you are the borrower, the annual review is how your lender confirms the loan is still sound. A smooth review mostly comes down to sending complete documents on time and explaining anything unusual before the lender has to ask.
- Check your loan agreement for what you must deliver and by when, and put the dates on your calendar.
- Send the full package at once: statements, tax returns with all schedules, a debt schedule and guarantor documents.
- Run your own covenant calculations using the agreement's definitions, and flag any test that is close.
- Write a short note on what changed during the year, such as a lost customer, a large purchase or a one-time cost.
- Tell your lender early if results are weaker than expected. Lenders have more options when they hear about a problem before a covenant breaks.
What are the common gaps in annual review files?
Most weak annual reviews have the same few problems. They are easy to avoid with a standard checklist and a reviewer who reads the memo against it.
- Reviews completed months late because borrower documents were not chased.
- Covenants tested against the original levels after a step-down or amendment.
- Memo text that restates the spread without explaining why results changed.
- Exposure to related parties or guarantors' other debts left out.
- Collateral values carried forward for years without an update.
- Risk grade unchanged without any stated reasoning.
- No follow-up actions, even when headroom is thin.
How Aarvion helps
Aarvion Risk OS Commercial Credit tracks reporting ticklers and document receipt for every relationship, spreads new statements into the bank's template with figures linked to their source, tests covenants against the levels in force, and drafts the annual review memo from that work under the bank's own credit rules.
A credit analyst edits the draft, a named credit officer approves the review and assigns the grade, and every step is recorded with who did it and which rule applied. Customers start with a 90-day pilot on one workflow.
