First Western Bancorp chairman Thomas O'Shane wanted to diversify his bank's portfolio by expanding its small-business lending.

Credit scoring was an obvious tool, but it presented a challenge faced by many community banks: How could this $1.7 billion-asset institution take advantage of technology without impersonalizing its customer service?

"In an organization this size, you have to walk with one foot in the traditional past and one foot in the technological future," Mr. O'Shane said.

More than two-thirds of banks use credit scoring for small-business loans, up from half in 1996, according to the Consumer Bankers Association.

Although credit scoring can dramatically reduce the cost of making small-business loans, it can also shift decision-making from people to machines.

According to American Banker's 1997 Small-Business Banking Survey of more than 400 business owners, 53% said they would be less likely to go to a bank that used computers to make loan decisions. Only 7% said they would be more likely to go to a bank that uses computers that way. New Castle business owner James Gajda, who recently received a business credit line from First Western, said he wasn't aware the bank used credit scoring. He didn't like the idea.

"That's taking the human element out of it," said Mr. Gajda, owner of Gajda Machine, a metal parts maker.

But Mr. O'Shane, who is also the bank's president and chief executive officer, said customers who ask about the loan process usually are pleased that a bank the size of First Western is using the same technology as much larger banks.

"We explain that we are trying to service our customers with the latest and most up-to-date technology," Mr. O'Shane said.

"Most of these people are computer-literate themselves or else they would not be able to compete in business, so they understand what we are talking about."

Before First Western began using credit scoring in January on loans under $250,000, the bank's 12 commercial lenders handled small-business accounts in 40 branches scattered across the 130-mile stretch of smaller cities between Pittsburgh and Cleveland.

Commercial lenders were paid a commission based on loan size. Lenders like Ronald J. McNeely, a First Western vice president who now heads the bank's small-business division, avoided smaller loans to mom-and-pop stores.

"I thought, 'It had better be A1 credit with collateral or it wasn't worth the time and effort,'" Mr. McNeely said.

Before making the decision to buy a credit scoring system, First Western considered giving branch managers responsibility for small-business loans. But the bank concluded that credit scoring would be more efficient and could provide more consistent lending decisions.

"Many of the small-business owners already had a relationship with the branch manager and we are just adding to that," Mr. O'Shane said.

First Western spent $12,000 that year on a Fair, Isaac credit scoring system and a new computer. But the bank didn't add employees. Two of the bank's commercial credit analysts spend half their time making small- business loans and the rest on commercial loans.

First Western does not use credit scoring in the same way as larger banks like nearby PNC Corp. and KeyCorp, where the programs are used to make loan decisions in seconds.

At First Western, credit analyst Jennifer Koch inputs data each morning on entrepreneurs' personal finances and their businesses' financial data, credit reports, and collateral. The credit scoring system computes a numerical score from 120 to 400 that indicates if the loan should be approved.

Mr. McNeely is more accustomed to looking at debt ratios than scores, so Ms. Koch computes the debt ratios and writes a few sentences about why she would approve or deny the loan. She also suggests an interest rate.

Ms. Koch spends about an hour entering and analyzing information for each small-business loan. Before First Western began using credit scoring, the process took about two weeks.

Mr. McNeely then reviews all the loans, too. He looks for reasons to approve loans the credit scoring program recommends the bank reject.

For example, if a small-business owner used personal credit cards or a home equity loan from First Western for business expenses, it would reflect poorly on their score. Mr. McNeely said the bank might also make a loan if an entrepreneur had a lot of collateral or a strong relationship with the bank.

"We're a much smaller, community-oriented bank and we use all the information to make additional loans that would not qualify under the credit scoring system," Mr. McNeely said.

Mr. McNeely said the bank did not advertise its new focus on small- business lending because it wanted to be sure that its staff could handle the volume of applications they received. Word-of-mouth and suggestions by branch staff nearly doubled the number of applications received in August, compared with January volume.

That meant extra work for Ms. Koch and her co-worker, Vivian Gabriel. "We've had a huge amount of loans that came in the last month that we weren't expecting," Ms. Gabriel said.

Since January, First Western has reviewed 300 loan requests, totaling more than $20 million. Mr. McNeely said the two credit analysts will devote more of their time to small-business loans as the volume continues to grow.

Despite the challenges of balancing technology and personal service, Mr. McNeely and Mr. O'Shane said they are pleased with the bank's shift to credit scoring for small-business.

"Just the number of customers and loans we have booked show we are succeeding," Mr. O'Shane.

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