Being an Effective Board Member

Observations from Seasoned State Bank Examiners
CSBS Deputy Seminar
August 18-21, 2002

  • You are personally liable for all activities approved contrary to law...and for activities contrary to common sense.
  • Common sense and fundamentals rule.
  • Instill a corporate culture where problems are identified internally and acted upon.
  • Beware of any insider transaction, such as:
    • Loans
    • Purchase of repossessed collateral
    • Transactions with affiliates
    • Officer dealings with customers.
  • Credit risk is likely the largest exposure
    • Do not permit the combining of officer lending authorities.
    • Insist on a list of loans made with exceptions to policy guidelines.
    • Watch officer expenses. The looser they are with their expenses, the looser they lend.
    • Know the largest problems credits, why they are a problem, and what is being done to collect or improve.
    • Determine if loans are being kept current with liberal extensions, capitalization of interest, or additional loans, especially if delinquencies are low.
    • Beware of industry and risk concentrations.
    • Do not get into any business lines or loan programs unless the bank has the demonstrated expertise ("a loan is a loan is a loan" is not true).
  • Audit and internal control are vitally important functions in the bank
    • Make sure you understand what is covered and what is not covered in the audit program.
    • Correspondent bank accounts must be reconciled with supervisory review.
    • Segregation of duties and dual control are a must. Get certification from an independent party.
    • Enforce a two-week leave policy.
  • Maintain detailed records of the board's decision making processes.
  • Take every opportunity to learn more about banking, including: credit risk, liquidity, interest rate risk, and financial reporting.
  • The relationship between the board and bank management
    • Your job is to ensure that bank management is following the directions of Board approved policies and goals.
    • Insist on regular compliance reports that evaluate compliance with policies and regulations.
    • Management information reports must be accurate and understandable.
    • Do not get lost in the charts and fancy presentations. Insist that bank officers tell you what they mean in 10 words or less.
    • Know the management of the bank, their personality, thoroughness & honesty. What motivates them in daily functions?
    • The board manages the CEO. The CEO should not manage the board.
  • The relationship between the board and the bank examiners
    • Meet with the examiners regardless of the bank's rating.
    • Be open and honest as examiners and directors have the same goals: safety & soundness, protection of the depositors, and a fair return to investors.
    • Use examiners and auditors as a tool for learning.
    Read the examination report. Where it says "bank management said..." Ask yourself: "is it true and did I know it?
  • Review and approve management's response to the examination report.
  • Be wary of dominate personalities on the board.
  • Arguing with an examiner is like wrestling in the mud with a pig. Eventually, you figure out that the pig enjoys it.