As bigger rivals move toward consumer-style automation and credit scoring of small business loans, community bankers cling to the human touch that has been their hallmark.

Though a new survey by the American Banker indicates a resistance to change, several experts predict that competitive forces and regulatory concerns will push small banks to accept business loan scoring.

The survey, which drew 150 responses from a broad range of banks nationally, showed that a scant 8% of banks with $5 billion of assets or less used any type of scoring system for small-business loan decisions. By comparison, 23% of regional banks said they used scoring.

"Nobody likes to think software is as good as human common sense, but there is no way to introduce the volumes of loans without it," said Martin "Dev" Strischek, president of Robert Morris Associates, a trade group of credit analysts and loan officers. "There's an educational process for everybody."

The survey, which was underwritten by San Rafael, Calif.-based Fair, Isaac & Co., a credit scoring company, indicated that smaller banks are more reluctant to embrace this change than many had believed.

"I think the community banks are a more conservative group. They are loath to change," said Latimer Asch, manager of commercial products at Fair, Isaac. "One of the reasons they are sticking with the judgmental process is that it is the devil they know."

Perhaps most telling is the fact that 70% of banks with $500 million of assets or less said they had no plan to use a credit scoring system. By comparison, 44% of banks with $500 million to $5 billion of assets said they had no such plan, while an equal portion said they would use scoring.

Fifty-five percent of banks with more than $5 billion of assets said they planned to install such a credit application system in the next two years. Indeed, larger banks said such automation is needed not only to speed approvals but also to reduce costs and improve the profit on increasingly low-margin business loans.

"We think it's too expensive to service most of that market profitably without the automation," said Ron Bashore, a senior vice president at Meridian Bank, Reading, Pa.

Though loan volume is a leading reason regional banks have embraced credit scoring, the survey found that community banks did not cite their smaller number of loans as a reason to shun the technology.

Indeed, only 7% cited small loan volumes as a reason, and only 2% said cost was an issue. More importantly, 44% of community bankers said they were not going to change because they were happy with their manual loan approval process - which often involved using credit reports.

Rhonda Wills, senior vice president at Bank of Astoria, a $60 million- asset Oregon community bank, said she continues to look at how credit scoring works. She mentioned a common concern over loss of the human touch her eight-person loan department tries to deliver.

"You want to be able to give each person the benefit of the doubt," she said. Credit scoring "is something I am looking at, but I haven't made up my mind yet."

Responded Meridian's Mr. Bashore: "I don't think you lose the human touch if you do it right. We'll have people looking at these applications at several points."

Some bankers say they believe that scoring can deliver judgmental consistency that results in more good loans being made. Consider the case of Norwest Bank in Indianapolis.

The subsidiary of Minneapolis-based Norwest Corp. is preparing to score commercial loans up to $35,000. In testing the system, bank officials have run 50 loans approved the old-fashioned way on the new scoring system.

Tim Rice, manager of the loan documentation and administration department, said 60% of the loans rejected after the fact by the automated scorecard are currently on the bank's watch list. In addition, one such loan has been charged off.

"I think it will work in helping us improve credit quality," Mr. Rice said.

That view is common. The survey found lower average delinquencies among regional banks that commonly use scoring. When asked what percentage of their small business loans became 90 days or more delinquent, the average for all respondents was 4.6%.

The contrast between large and small was stark. Big banks reported an average delinquency rate of 2.6%, but banks with less than $500 million of assets averaged 4.4%. At the same time, delinquencies at supercommunity banks, those with up to $5 billion of assets, averaged 5.9%.

"We believe that scoring will give us more consistency that will lead to an improved risk profile," said Sandra Maltby, senior vice president for small business at Cleveland-based Keycorp, which will install a central scoring process by yearend.

Some community banks are looking to scoring for the same reason. Officials at the $105 million-asset, Taylor, Tex.-based City National Bank installed a scoring system this month. The objectives: to help monitor existing loans and position the bank to compete for loans on the outskirts of the state capital, Austin.

Jim Jirasek, vice president for lending at City National, said an increasing number of businesses can choose between a small bank or a big player like NationsBank Corp. or Banc One Corp.

"We wanted to equip ourselves to be on the same plateau as our competition," Mr. Jirasek said. "I think it would be helpful, and we want to be confident that if we expand it will give us some confidence about pursuing new types of loans in a new area."

Fair, Isaac's Mr. Asch says that other community banks will eventually use scoring for similar reasons.

"The efficiency argument won't work as well with them," he said. "I think compliance concerns are going to be the major issue - and the competitive issue as more of the big boys come to their towns."

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