Community bankers are defending their methods of using local knowledge rather than formulas to determine lending risk.

Bankers gathered here for Robert Morris Associates' annual credit conference were responding to survey results released Monday, which found that only 12% of community banks used risk-rating commercial lending models.

Though the bankers did not dispute the findings, they said by no means are they courting disaster. They argue that the "black box"-industry jargon for credit-scoring-simply does not work well in many communities.

"That black box is a subjective thing," said William C. Scholl, president and chief executive officer at $256 million-asset Pulaski Bank in Little Rock, Ark. "Empirical models don't work as well in a small town."

"The box works in situations with large numbers but it doesn't know the customers the way I do," said Jeffrey W. Leeds, chief lending officer of $345 million-asset Lawrence Savings Bank in North Andover, Mass.

Community bankers say credit-rating models require a large sample size to draw conclusions, and that this is impossible for many small banks. Knowing their customers and the communities in which they do business, they say, is a more effective gauge of whether a business borrower will be able to repay.

"Lending in small towns is qualitative, not quantitative," said Rick L. Harbaugh, president and chief executive officer of $143 million-asset Overland National Bank in Grand Isle, Neb.

In recent years, credit models have grown more popular at banks. More than two-thirds of banks said they use credit scoring for small-business loans, according to the Consumer Banking Association. That's up from half in 1996.

With lending volumes so high at big banks, there is no way for top management to review each loan. Applying set formulas to determine risk is supposed to minimize the potential for human error.

The survey asked 126 banks with assets of $200 million to $1.5 billion about their lending policies. In addition to the findings on credit models, it suggested that small banks need to boost the number of risk grades they use in commercial lending.

Many small banks use only five grades to assess would-be borrowers, of which three indicate creditworthiness. Richard Verrone, a consultant who conducted the study for Robert Morris Associates, suggested that banks as much as double the number of grades they use.

With more grades, banks can more easily determine and prepare for possible defaults, he said.

Community bankers still say, however, that the buck stops with them.

"I know the address of everyone on my watch list," Mr. Harbaugh said. "I know how to find them if I suspect a problem."

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