Our first Best Suggestion contest has had decent response, and we have picked three winners of the award plaques appointing them as president-for-a-day at Schmidlap National Bank. The plaques go to:

* Gary H. Tharpe, a management training consultant whose firm, Tharpe & Associates, is in San Pedro, Calif.

* Christian H. Riebesell, VP of Tinton Falls State Bank in New Jersey.

* John Nunes of Morris Plains, N.J.

Our problem was this:

A midwestern bank had hired a local young man with considerable family contacts in the community, sent him to a Chicago correspondent for training and then made him a lending officer.

When he made some poor loans, instead of firing him out-right the bank gave him six weeks to get his affairs in order because of his community connections. But during that time he did more damage through new loans that went sour than he had done originally.

What to do ?

Two of our answers -- those of Dick Doolittle, president and CEO of the Graduate School of Banking in Madison, Wis., and Carl Stern, CEO of Provident Bank of Maryland -- stressed the need for more training.

Mr. Doolittle suggested training the lender and then monitoring him closely until confident in his skills and judgment,

Mr. Stern took a different tack: "I recommend extensive training for the dumbbell who continued to allow a fired employee to make unsupervised financial decisions."

Mr. Tharpe's answer was far more extensive:

"It appears that the community banker realizes now the problem with the employee was handled improperly from the beginning. My approach will be to address the key phrases of mismanagement as I see them:

"* The employee was trained by a Chicago correspondent, then came home to work as a lending officer for the bank. Even though the employee trained in Chicago as a correspondent, an observation period established up front to determine the knowledge represented by the employee's credentials is acceptable.

"* In a short period of time, he made a few disastrous loans that cost the bank a substantial part of its capital. A new employee's work should be reviewed to prevent such an occurrence. The delegation of authority to an employee, without monitoring and with capital at risk, is unacceptable in today's environment.

"* Since he and his family were well known in the community, the bank gave him six weeks to get his affairs in order find another job, and leave the bank. The employee was hired for his experience and represented himself as knowledgeable in the field of loan origination. This appears to have been a misrepresentation on his part. Therefore, to give him six weeks to get his affairs in order is not required under the terms of his hiring.

"* He became resentful and went out and made even more loans so that the bank was far worse off when the six weeks ended than it was when the decision to fire him was made.

"Rule No. 1 of involuntary termination: The relationship ends now! An involuntary termination can be enforced courteously without causing undue stress to both parties, with proper planning.

Any and all authority is relinquished at the time of termination, without question or discussion. It is not fair to the employee or the company to retain an individual notified of incompetence. The resentment is expected and a natural reaction.

"* The CEO was concerned over the perceived behavior of the bank by a long-standing family in the community.

"If the employment was solely based on the family name to draw customers, without regard for abilities of the individual, it was a demonstration of poor judgment on the part of management.

"If the perception of the termination, was a major concern at the time, then there were alternatives to the end result:

"1. The employee could have been given the option of immediate resignation.

"2. The CEO could have cut his losses and terminated the young individual with six weeks' severance pay and still been ahead.

"The apparent management mistake was to confuse employee relations with customer relations. This is always a challenge to community bankers.

Mr. Nunes wrote:

"I sure do have some suggestions for your Oct. 17 problem received from the community banker in Indiana.

"There are similarities between lending in a big city and in a small one, but there are also differences. The differences probably led to the poor judgment that the young banker exercised at the community bank.

"As soon it was noted that the young banker had made a few disastrous loans, and as soon as management determined the cause to be his poor judgment, two alternative strategies could have been followed:

"The more direct strategy: Have him report to a senior lender, clearly indicating what decisions the young man could make and what he had to take to his supervisor.

"Needless to say, the young banker should only have been given the opportunity to oversee or manage (with the guidance of a senior lender) the existing poor loans he had made. He should not have been given the authority to make new loans. At best, he should have been given a only limited authority -- i.e., a reduced credit limit, so that he could not make any large loans that could significantly impair the banks capital or liquidity.

"The less direct (but probably more effective) strategy: Use a little psychology.

"The CEO should speak to the young banker, telling him that in an attempt to grow, the bank would like him to concentrate on business development rather than in the lending area. That would imply that he would be operating in an advisory. capacity, rather than in a decision-making capacity.

"Given that the family was well known in the community, it would be to the bank's advantage for him to be involved in business development.

"The advantage in this strategy is that by refocusing his efforts we are making him not only less harmful to the institution, but probably more useful. He can now get all the poor deals he wants into the bank, but the credit committee could refuse to approve it.

"Finally, if the CEO really wanted him out, the young banker, realizing that his efforts are not getting him anywhere (given that he keeps getting bad loan proposals to the bank which never get approved), will leave the community bank.

"One more thought came to mind when I read you article: How could one individual be responsible for making disastrous loans? Doesn't the bank not have a credit committee, and shouldn't it be held responsible? Or did the young banker mislead the credit committee, by avoiding mention of facts about the loan that would have altered their decision.

"I believe that if one individual could make a few substandard loans that could affect the bank's capital significantly, this bank ought to look into better control measures.

"One of the strategies I have mentioned -- especially the second one -- should work."

Mr. Riebesell sent the following memo:

"The solution to the problem would be to immediately relieve the lender of his lending authority and other functional duties. This would prevent him from approving future loans and perhaps damaging the morale of the staff and/or damaging the computer systems.

"I would allow him the use of his telephone, and would assign a secretary to take his calls and messages, answering his phone as if he were still actively employed. This would give him the opportunity to seek employment elsewhere while maintaining the illusion that he was still employed. The secretary would answer his calls: 'Mr. Golden Boy is not available at present but will return your call upon his return.'

"This would also give the secretary the opportunity to screen his calls and determine which are customer calls, as opposed to job-seeking interview calls.

"Keeping the golden boy on the payroll for six weeks is a generous offer and should be recognized as such by his family and friends.

"Obviously, this would allow him to bow out gracefully without embarrassment to the bank or his family.

"In conclusion: The bank's assets and protection of the customers' deposited funds and the stockholders' investment must be the first and foremost considerations.

"The so-called golden boy made his bed; let him sleep in it."

While all responses to this contest suggested firing the individual as soon as possible, community bankers should also be advised of the Wall Street Journal article on Oct. 24 that indicated that an abrupt firing that is humiliating to the employee -- such as being forced to leave personal belongings in a plastic bag and being escorted from the premises by a security officer in front of co-workers -- can lead to a lawsuit the employer is likely to lose.

That is why all three of the respondents we have quoted at length wanted to present the viewpoint that by the time the issue was "do we fire now or later" it was far too late. Training and monitoring should have avoided the problem in the first place.

CONTEST NO. 2

A CEO we know had this problem:

His secretary was his eyes and ears in the bank. She was "one of the gang" and learned all the happenings that no one wanted to tell the CEO. However, she was a good enough friend of the CEO that they talked everything over, and he learned what was going on through her. (There is no innuendo here -- the CEO was a happily married and monogamous man.)

One day his secretary reported about an affair going on between two married people, both bank employees, with encounters even taking place in secluded parts of the bank. What should the CEO do ? Should he fire them? If he did so, he would be letting everyone know that he had an inside source of information,

It is certain the staff would know who this was, and she would no longer be included in the grapevine of bank gossip and information. This would be major rupture in the CEO's knowledge of important information.

But to let the affair continue on bank premises would also do serious damage to the bank and its culture, since most employees knew of the situation.

Suggestions mailed to me at the address in the accompanying box or faxed to 908-273-7309 will be considered for discussion in a future column and, of course, will make the submitter a candidate for president for a day of our Schmidlap National Bank, member FDIC (Ficticious Depository Important for Column).

Mr. Nadler is a contributing editor of American Banker and professor of finance at the Rutgers University Graduate School of Management.

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