Loan losses: are they lurking where you're looking? Credit officers discuss the issues

RMA Journal, The, Feb, 2005 by Beverly J. Foster

"Regardless, at least a third, maybe half, of my time now is spent on Sarbanes-Oxley, Patriot Act, BSA, and other operational risk compliance issues," said Chalk, echoing the thoughts of many chief credit officers. "I used to come to work every day to address one main question: Are we making good loans? Now a tremendous amount of time is devoted to compliance, although there is no choice but to do it, so it's just part of the job. My concern, though, is that this shifts our attention from economic risks, which most certainly are risks to your shareholders as well."

"Compliance checks require far greater scrutiny now," said Henry. "Our compliance people posted the bank's first intranet compliance check-off list; I completed it and sent it in, only to had to include a comment on every line item.

This list had been developed for us--at no small expense--by consultants for our CPAs to sign off on, but it's not what's needed for SOX. So we have a relatively useless document, one that I do not feel comfortable signing off on."

Compensation and Incentives

For better or worse, it's fairly uniform for institutions to pay credit officers less than they pay line lenders, noted Chalk. He believes part of that is because banks had few lenders on board during the recession and then had to scramble to get talent. Many institutions cut back on training and on hiring in 2000-2001 and are spending that money and more in incentives. "There are not enough qualified commercial lenders, so the industry is adding more and more incentive compensation for the line lenders," said Chalk. "The challenge is to have a balance between discipline and incentives. So part of BB&T's incentive matrix is related to growth and production, but we're keeping a component that's related to loan pricing and profitability, and a third component that's related to asset quality."

KeyCorp has recently begun a program called DHP--Designated High Performer. Key begins with an incentive pool driven 50% by performance of the line of business and 50% by performance of the corporation itself. Once the size of the pool has been determined, the DHP process numerically rates people on a variety of criteria, including teamwork for credit people and relationships for lenders, credit quality, the performance of the line of business, and so forth.

Their peers, bosses, and the line rate credit staffs. Peers, supervisors, and credit staffs like wise rate lenders. "If you're a lender or a credit officer, your numeric score ranks you according to everybody else," explained Blakely. "If you're at the top end of the score bracket, you get a greater share of the overall pool; if you're at the bottom end of that bracket, you're quite likely going to get nothing. In fact, it's part of the plan that the bottom 10% won't get anything." Blakely agreed with Chalk that credit people routinely believe they are paid less than lenders, but noted that both groups believe they are paid less than investment bankers.

Syndicated Lending