The loan committee: up close & personal

RMA Journal, The, April, 2004 by Beverly J. Foster

Entrepreneurs recognize them as a necessary evil, while banks may succeed or fail by their decisions. The need for fast, efficient response while retaining sound judgment has led many banks to employ automation, move to a signature system, and in other ways transform the traditional loan committee, where individuals representing various areas of the bank come together to talk over loan requests. Here is what's been happening at six RMA member institutions.

U.S. banking turns 220 this year. Robert Morris--then Superintendent of Finance under the Articles of Confederation in the fledgling nation--in 1784 proposed establishing the Bank of North America as America's first commercial bank. More than 75 years later, in 1863, the National Bank Act allowed banks to be established through means other than legislative act. But ever since, loan policies and loan committees have been developing and evolving. Institutions' methods of commercial loan decisioning run the gamut from a few people meeting periodically to discuss repayment history, collateral, character of the principals, purpose of the loan, and so forth, to the e-mail "virtual loan committee," (1) to the totally automated or outsourced decision process.

The Editorial Advisory Board of The RMA Journal had a few questions about loan committees at today's small institutions, and John Anderson, David Dohmen, George Bruns, Carolyn O'Leary, Jack Barrett, and Mikkalya Murray responded by e-mail to nine questions about their institutions' loan committees.

Growth, regulatory changes, increased problem loans, mergers, technology, and more contribute to a bank's decision to make changes in its loan committee structure and process. As Jack Barrett, president and CEO of First Citrus Bank of Tampa, Florida, says in his interview in this issue (pages 8-14), his bank has grown significantly, and rudimentary, informal methods that may have sufficed for a $15 million bank had to develop further. "As we've grown to more than $120 million, underwriting and approval processes have deepened to include greater detail and more comprehensive analysis," he says. First Citrus Bank now has a lending template, and the committee itself has added experts in a greater variety of professions.

Following its regulator's recommendation, Equitable Federal Savings Bank of Grand Island, Nebraska, established within the past five years a loan committee to review and approve agricultural and commercial loan credits, as well as mortgage and consumer as needed. As the bank developed its commercial department, it saw the need for a more formal and higher-quality underwriting process to reduce the bank's risk. "The loan committee also reviews risk ratings, delinquent loan reports, and other loan business as necessary," says David Dohmen, SVP and chief lending officer for the bank. As a checks-and-balance measure, Equitable's executive board committee reviews and ratifies the loan committee's operations.

With the introduction of a new credit policy manual in 2000, Banknorth's loan committee, purview, written policy, organization and membership, authority, and responsibilities have changed as well. "We start with signing authorities for smaller exposures, and we have four types of committees for larger exposures," says George Bruns, SVP and senior corporate credit administration manager. "There is a management loan committee, senior credit committee, specialty loan committee, and board risk committee. Each committee has defined responsibilities by aggregate exposure, risk rating, type of business, and specific credit conditions. Generally, as credits become larger, they are presented successively to higher-level committees."

Despite these changes, neither Banknorth nor First Citrus has changed from a loan committee to a signature system, while other banks are doing so, at least to some degree. Annapolis Banking & Trust Company (AB&T) has had "no material change" in the past five years, says Carolyn O'Leary, EVP, although the bank's credit policy provides for a signature system under certain conditions, with the approved loans then reported to and reviewed by the loan committee.

The signature system is employed as well at technology-savvy Harleysville National Bank for smaller, less complex credits, reports Mikkalya Murray, EVP/CCO. Harleysville's loan committee rarely comes together to meet face-to-face. Instead, "the committee sees fewer credits than do individual and matrix authorities as the bank has grown," she says. "We still require three voting members for a quorum, and we meet electronically by e-mail. We retain fairly detailed minutes and documentation of the materials presented. All files are electronic, so they can be shared with the board of directors, our auditors, and the OCC."

The loan committee at Dollar Bank has not seen that much change either, says John Anderson, SVP for Corporate Banking, although his name for it is credit committee. "And we have very little signature authority," he says, "although three members of the credit committee can approve certain loans without going through the committee process." (Dollar Bank may be one of the very few banks to share information on loan committees and other bank functions with its current and prospective customers through its Web site--see www.dollarbankbusiness center.com/resources/LoanCommi ttee.html.)