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Loan committees continue to prove worth

You can’t automate creative tension and human intuition

Loan committees continue to prove worth

Loan Committees are one of the most durable of all credit quality internal controls—and there are reasons this face-to-face mechanism continues to work.

Yes, such meetings take time and effort. They consume lots of paper—maybe more is done on iPads now, but that costs too. And they are a “performance venue” for lenders to showcase their talents.

Yet there’s nothing quite like a smoothly functioning committee to keep everyone informed on a variety of things going on in the bank’s trade area; communicate themes relating to credit standards and asset quality; promote business development; and build camaraderie among the lenders and supporting staffs.

That’s an important list of positives.

In recent years, banks and bankers have been on a quest for increased productivity by shaving processing time, shrinking labor content where possible, and generally automating the process of extending credit to the maximum extent.

But in most banks, credit committees stand as institutional witnesses of disapproval to that relentless pursuit of some to depersonalize our business.

Let’s look more closely at loan committees. I’ll begin by looking back at my own experience.

A loan committee in the 1980s oil crisis

My bank in Oklahoma was the second largest in the state when I joined it in the mid-1980s. It had been under a Formal Agreement with the Comptroller’s Office several months, due primarily to the slump in oil and gas prices that had started nearly two years before. My initial job was to form and manage the bank’s Special Assets Group into which most of the bank’s criticized oil- and gas-related credits would be placed.

There were two credit committees at this bank.

• One was the Senior Credit Committee that handled the normal credit extensions above a predetermined amount—$100,000 as I recall.

• The other committee was the Loan Review Panel, that handled all major criticized loan assets. As part of the Formal Agreement process, heightened director oversight was mandated on virtually all lending-related activity.

From my first day on the job, I was a voting member of the Senior Credit Committee. Membership consisted of senior managers with extensive lending experience, including the bank’s president.

The Loan Review Panel was the committee to which my special asset colleagues and I took our problem asset credits for approvals and concurrences. Membership consisted of the very senior officers of the bank, including the bank’s chief financial officer.

I enjoyed my service on the Senior Credit Committee as it afforded me a good perspective of the bank’s credit book. It was a lot of work, reading through some of those write ups and trying to parse the meanings of sentences sometimes crafted with no apparent skill nor great care for what was not said or implied.

After about three years into my tenure at the bank and after a modest improvement in the oil and gas related portions of the portfolio, I’d pretty well worked my way out of a job and my group was folded into a relatively recent special asset group originally formed to handle real estate credits exclusively. The bank was a major real estate lender in Oklahoma and also had business with developers in contiguous states. Oil issues had gradually abated while real estate had become a new and different sort of headache for us.

From member to chairman

In the face of continuing credit quality issues, our directors forced a management change at the top. My boss, who had previously chaired the committee, was out and a new committee chairman was needed. At that point I was the credit administrator and the new president was anxious to take some things off his plate. So I was tapped to succeed him as chairman of the senior loan committee.

I was told—rather than asked, as I recall—and assumed the new duties not knowing quite what to make of my situation. Fortunately, I liked and trusted my co-committee-members so I was confident that it would turn out well.

What I’d not anticipated was the value of this additional duty in my personal learning curve that was significant even for the old and experienced hand that I was becoming.

Value of learning at the helm

The educational value of taking on this job was immeasurable:

• First, I came to the blinding flash of the obvious that every credit write-up represents a point of view.

Sometimes lenders think that they are very clever in their write-ups, but I’d become experienced enough as loan analyst, lender, and committee member that I could usually spot verbal camouflage. A good lender does this with the customer’s credit request, and the role of the committee, ultimately, is to make sure the lender doesn’t miss a potential problem.

Weekly exposure to a variety of deals, and my capacity as “first among equals” as gatekeeper, helped me realize that presenting a credit to a committee is a distinct form of salesmanship.

As lenders we’re all selling something in a credit write-up. The committee members in that sense are “customers” of the product. And that product represents the major category of risk encountered by all banks.

Second, I had to be prepared. There was no hiding among the trees.

We met once a week, first thing Friday morning, and that meant a Thursday afternoon and evening of reading. My department had to get the loan packages out before lunchtime on Thursday, earlier if possible, but human nature being what it is, earlier was a time that never came. So, individual preparation was compressed into a tight and inflexible time schedule.

After a busy week, like many middle-age professionals, I was tired by Thursday night.

I never seemed to have time to get all the way through the loan committee stack by the time I left the bank, usually well after closing. That meant a couple of more hours at home reading what I would never characterize as “light” or recreational material.

• I learned to assume that not all committee members would consistently come prepared.

The presenters did a good job with their write-ups and their oral summaries. But sometimes one or two of the committee members hadn’t read the material.

I understand that can happen once in a great while but it’s not fair to the rest of the committee and to the loan officer who has earned his moment in the sun. I also noted that a lack of preparation is usually a pretty transparent circumstance.

I came to see it as my job to maintain an overall professional and mutually respectful tone and, for the younger lenders, a learning opportunity.

That was not particularly difficult with these men and women though sometimes frustrations surfaced. One hard and fast rule was that we started on time and waited for no one.

Notes on committee etiquette and diplomacy

Occasionally, when reading the credit packages ahead of time I would not understand something and tried whenever possible to ask my question(s) of the presenters on Thursday or in the moments before the meeting began.

If I had a question, perhaps others would puzzle over the same thing and I’m convinced that was the biggest single help I could be to the presenter. I wonder how many of them ever understood what I was trying to do.

Finally, I tried to demonstrate willingness to work with Loan Review.

As a bank under a Formal Agreement, there were often things “not to like” about some credits. Loan Review attended our committee meetings without a vote.

But whenever there was anything that seemed to be an indicator of either emerging strength or weakness I would try to make a point of discussing it—and noting in the minutes.

I’ve seen over a long career enough tension between line and staff to try to diffuse it where possible and make the system work as it should.

What have been your experiences with loan committees? Please share them in the comment section below.

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. His last job before retiring was as the CEO of a regional bank headquartered in Alburquerque, N.M. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses. You can e-mail him at [email protected]. O'Leary's website can be found at

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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