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Where will the next generation of smart lenders come from?

How close are your credit stars to retirement? Who steps in?

Where will the next generation of smart lenders come from?

There was an interesting article this week in The Wall Street Journal regarding the continued use of a controversial employee evaluation format called “stacking.”

This is a process where each employee is rated on a numerical scale, usually 1 through 5, 5 being the highest. Raters produce winners and losers as a byproduct of the process. The top performers become “high potential,” while those arbitrarily relegated to the bottom rung are eliminated from the company.

Practitioners of employee “stacking” rating methods include Microsoft and General Electric. Generally, employers who use the system favor it highly, while employees almost universally detest it.

What do lenders do today?

The debate I read of got me to thinking about what we really expect lenders to do. What should lender job descriptions emphasize?

• Are we looking at the world as we expect it to be?

• Or as we understand what it has been? 

• Is legacy thinking superseding or obstructing strategic thinking and analysis?

As we look forward to a more normal business environment after the long and deep recession and adjust to the competitive reality of our industry in the post Dodd-Frank environment, what are we really expecting lenders to do?

If we’re not clear on that basic question, then how we can we attract the right talent and evaluate it?

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Not to mention retain, incent, and promote the incumbent employees. Absent a core sense of what we need for the future, our human resource management will be essentially incoherent.

And here’s another issue to ponder: Have community and small regional banks largely stopped doing formal credit training? 

There’s anecdotal evidence that community bankers are having difficulty finding well-trained young lenders. The training programs that existed almost universally a generation ago seem to have largely been shut down. Alternatively, they’ve morphed into much shorter periods of training or perhaps merely now perform the function of staff orientation.

Considering the training link to credit quality

Starting 20 or so years ago, banks began to seriously work at eliminating the heavy  salary component of the credit underwriting function. There are two short cuts to this process.

The first is to view small to medium sized commercial lending transactions as retail products, owing to the manner in which the product is delivered.

Sales people, steeped in a sales but not necessarily a credit culture, and incented generously, steer prospects to the nearest branch. Credits are then underwritten centrally. It’s hard to argue that the process isn’t less labor-intensive than the old-fashioned way. And that there are some specific advantages that accrue as well, principally that documents are drawn concurrently with the underwriting process and credit and collateral exceptions are less numerous.

Second, the use of computer technology and the relatively high degree of reliability of credit scoring models acquired over the years applied to retail lending transactions has been harnessed to process small commercial credit transactions. The predictive value of past behaviors has been demonstrated to be quite reliable and certainly more cost-efficient in the labor component of total underwriting cost.

The long-term consequence of these two developments is the relatively fewer formally trained credit analysts who work for banks. They are simply not needed in the numbers they were years ago. The likelihood of turning back the clock is pretty low but there are unintended consequences and they are not trivial.

• For instance, do branch staffs have the ability (and the opportunity) to spot credit selling opportunities? 

• Can they read a business borrower’s balance sheet and income statement and recognize a likely prospect? Or spot a specific problem that the bank might help with?

• How well served is the community, when there are many fewer knowledgeable staffers with specific credit skills to apply to local opportunities to finance and build infrastructure?

Successful lending is the blending of components of art and science. The process is artful in the sense that the banker recognizes an unmet need and attempts to bridge the gap. It’s science in that lending requires the careful and thorough application of lending principles. Too much science and too little imagination leaves opportunities unfilled. Too much art and not enough science leads to a loan portfolio without a thorough assessment of credit risk.

We need both and that means we need people capable of doing both, of being both mechanic and artisan.

Can we still produce “classic bankers”?

We need how to figure out the behavioral traits that are inclusive of the best of both.

To my way of thinking, we used to do a pretty good job of this. Banks and bankers were described generally as conservative, thoughtful, helpful, analytical, and serious about building both their local communities and the financial integrity of their customers.

That’s what attracted me and most of my contemporaries into the business years ago.

Community bankers still talk about such things a great deal. I sense that at some banks, this mindset still exists. Training is formal, thorough, ongoing, and systemic through a series of planned workflows (credit analysis, formal class room opportunities, credit committees, etc.). Generally though, these tend to exist in greater numbers at larger banks. Smaller banks—and that can include some pretty big banks with total footings into low eight figures—are, consciously or otherwise, simply not training a replacement generation for their late career lenders.

If no one is training them, where will they come from?

Banks face a graying in the workforce far beyond the C-suite. Yet there isn’t much being said about succession beyond the corner office.

Where are the new lenders going to come from? 

Big bank training programs—where they still exist—cannot turn out the numbers that the industry of all-sized banks will need 10 and 15 years from now.

Then what? Does the credit function shut down for lack of talent and experience?

No, that’s not likely.

Instead two things will likely develop.

First will be a dearth of lending talent and that’s a scary prospect for an industry where the principal risks have always resided in the lending function. We will become in part an industry that doesn’t know what it doesn’t know. Maybe we’ve looking at the tip of that iceberg for a while now.

Or, we’ll create a bubble of demand for formally trained credit people. (Think of how hot compliance people have been for the last few years.) Will these people become a sort of “royal class” among bankers for the skills they have acquired?  Will that attract imitation and result in quality growth of loan talent fed by properly drawn economic incentives? Or will we stumble along and not really sense who we are or what we need to succeed?

Is the solution to be found at the bottom?

This is not a very optimistic outlook and based on the experience since 2007, maybe that’s justified.

But the glass may in fact be half full.

Community bankers are an imaginative and adaptive bunch. If the basic economy will support significant lending opportunities that are profitable and sound, then we’ll find a way. Initially it may have to be partially self taught. But eventually we’ll catch on and catch up. The real opportunities lie in sensing the future sooner than later.

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. 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 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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