Former Commissioner of the Texas Department of Savings and Mortgage Lending, Danny Payne, has been advising community bank boards of directors and what he's finding during his educational sessions is disconcerting.
In banks that have been hit with a cease and desist order, memorandum of understanding, or agreed orders involving significant capital depletion or the removal of management, Payne often finds board members listening to what he has to say with an intense focus. "On the other hand, when I give the presentation to a healthy bank, the board seems bored, doesn't ask questions and is not focused," he said. "It is indeed scary that they seem to think they have no worries and things won't ever get that bad for them."
The community leader and/or local business director simply does not comprehend their role and liability in banking," he said. "That is exactly what I have found."
As Payne points out, this lack of comprehension can have serious adverse consequences for the financial institution and, eventually, the director.
He said directors often fail to realize that the FDIC may sue the board members to recover losses if the bank fails.
The bank's primary federal regualtor can also hit directors with civil money penalties and other enforcement action if they breach their fiduciary duties.
I've been speaking to bank and credit union groups over the past couple of years about the lessons good banks can learn from bad banks, and one of the off-the-cuff basic lessons I try to convey is that for a bank director, espousing the philosophy of "What, Me Worry?" is a great way to embrace a lifetime vow of poverty, which is just fine if you plan to become a Cistercian monk, but simply disastrous if you plan to remain financially solvent. Like Danny, I find too many audience members focused more on daydreams of sexual congress with Tyra Banks than fulfilling their fiduciary duties to community banks.
Payne, and other experts quoted in the linked article from SNL's "Community Pulse, make some additional important points, among them:
- Because of increasing regulatory demands placed on bank directors, it is "advantageous to have board members who have strong backgrounds in audit, executive compensation, and risk management." (David Baris, executive director of the American Association of Bank Directors).
- It is important to have the support of a diverse group of successful and engaged leaders, each of whom brings unique strengths to the bank's governance, and it is also critically important that they all have a strong grasp of financial statements while coming from diverse backgrounds (G. Kent Cleaver, president and COO of Avenue Bank, Nashville, Tennessee).
- New and increased regulation is not only significantly affecting community banks' bottom lines but is causing confusion and fear simply because of the complexities. The lack of management experience with this heightened regulatory oversight and numerous new mandates are causing serious concerns at the senior management level as well (Payne).
The bottom line, Payne said, is that management teams and boards need to solicit outside expertise and advice before acting. "The traps are too numerous and deep not to," he said.
I'm not certain how many more lawsuits and enforcement actions it's going to take to get the point across that being the director of a community bank is no longer simply an honor, it's a serious, full-time occupation. It's also not necessarily any less less dangerous than than being an IED disposal expert in Kandahar Province, although instead of blowing up your physical body, it's your net worth, reputation, and emotional well being that are at risk.
I hope Danny has success in getting through to his audience. However, I won't hold my breath.