Risks v. rewards of directorship

Serving on the board of a community bank is a rewarding experience. Over nearly 40 years I have traveled the country to meet with community banks’ boards and senior officers, and I have discovered that community bank directors and officers are generally the pillars of their community. They are the business leaders, the philanthropists, the not-for-profit board members, and the like.

Being a community bank director and being involved in your community is certainly a rewarding experience.

Being a community bank director, however, is not without its risks.

Looking rationally at risk

Keep in mind, this blog is written by the first head of the division at the FDIC that sued bank directors and officers when their banks failed. Notwithstanding that, I have always assessed the risk of being on a community bank board as one worth taking.

What are the risks? They generally fit into three main categories:

• Suit by the FDIC as receiver if the bank fails.

• Suit by your shareholders.

• Assessment of civil money penalties by the regulators.

What is the likelihood that your community bank is going to fail?  For most boards, it’s as close to zero as it can get.

Although many community banks did not survive the Great Recession, the industry is currently exhibiting significant health. A number of CAMELS 4- and 5-rated banks remain in the country. However, for most directors and trustees, the likelihood of your bank failing and having to deal with FDIC as receiver is remote.

What about a suit by your bank or bank holding company shareholders?  My assessment has always been that if the shareholders are going to sue you, that is what you have directors’ and officers’ insurance coverage for.

Although the suit would be an aggravation (and it rarely happens in community banks for reasons that are fairly obvious), the D&O policy covers your attorneys’ fees. It also, as a practical matter, covers any judgment or settlement that was reached with respect to the suit—as a practical matter. Therefore, from shareholder action, there’s no personal financial risk.

Where you can really get stuck

Where does the real risk lie in being a bank director?

In my opinion, it lies with a potential for civil money penalties. These can be levied even for inadvertent actions. The Federal Deposit Insurance Act, which authorizes the Federal Reserve, FDIC, and the Comptroller’s Office to assess civil money penalties, provides that a penalty can be assessed for violation of any law or regulation. Don’t worry, however, because the maximum civil money penalty per day of violation is $1,425,000.

Historically, there really has not been much in the way of civil money penalties. Coming out of the recession, however, if the recent release by the bank regulators is any indication, civil money penalties are back in a big way.

In the most recent release, the penalties range for individuals from $2,500 to $175,000. For the higher end of the spectrum, the conduct was pretty egregious for the most part.

For example, one civil money penalty recipient entered into a “streamlined” system for funding loans. (Translation: The bank did not perform its own due diligence of the loans.) Ultimately, according to the regulators, the individual used the funds for personal purposes or for the benefit of individuals other than the purported borrower.

In another situation, a group of directors allegedly approved a series of loans to existing bank customers conditioned on those customers purchasing holding company stock. Not only is such conduct, if proven, in violation of Regulation W and Sections 23A and 23B, but the bank customers in question were already indebted to the bank beyond their ability to repay the existing debts .

Keep in mind that, fortunately, we still live in America. So the bank regulatory agencies cannot simply “assess” a civil money penalty without giving the target an opportunity for a hearing before an Administrative Law Judge. Virtually all civil money penalty cases get settled, but there is an avenue for an impartial third-party hearing.

Being a community bank director is certainly rewarding and, in my opinion, the risk is manageable.