Publications & Resources

October/November 2003
Focus: Directors Issues

The Ideal Profile of a Community Bank Director—Characteristics and Talents to Look for Today

By Richard Sprayregen and Jane Benson

Times have changed. Thirty years ago, serving on a community bank board was a most prestigious endeavor, eagerly sought after by local businessmen. Community bankers were looking to populate their boards with members who could: (1) help the bank garner more depositors; (2) help the bank find more lending opportunities; and (3) provide bank management with independent, general and diverse views of the economics affecting local businesses seeking loans. Potential board members could be unfamiliar with the mechanics of operating a bank, and yet could provide valuable guidance to bank management regarding business issues. On-the-job community bank director training was the rule.

Today, potential community bank directors must be helpful in growing the deposit and lending base, and in addition must: have familiarity with, and if possible sophistication and hands-on experience in evaluating complex credits; have more than a cursory knowledge of complex federal banking regulations; and demonstrate a heightened degree of overall “financial savvy.” Ideally, a community bank director today should possess the following characteristics, talents and attributes:

A legal or accounting background. This experience is especially important in view of the “financial expert” requirement under the Sarbanes/Oxley Act. The Sarbanes/Oxley Act had its genesis with the Federal Deposit Insurance Corporation Improvement Act (FDICIA), legislation enacted almost twenty years ago. Although the major provisions of FDICIA only apply to banks with more than $500 million in total assets, the requirement that bank management affirm the reliability of internal controls, and the integrity of financial statement information, permeates all Federal banking regulations. Executive management of both small and large community banks welcome having a “financial expert” on their board. Directors with a financial or legal background can frequently offer significant business perspective and give the board added dimension to enable it to better evaluate bank lending and operational issues.

Exceptional organizational and comprehension skill-in reading and distilling large quantities of complex information and data. . Often, many board members are overwhelmed by the detail and volume of information provided to them. Many community bank board members are operators of small closely held businesses, and have never faced the requirement that key decisions be documented. Unless they are aware of the need to understand the information, and provide the regulators with a means to indicate that important matters were well researched, and adequately considered, they cannot properly function as viable directors.

A strong economic background to decipher and critique complex small business borrower loan applications and other matters. Today, even small businesses are complex. Loan requests, and loan proposals and write-ups often involve sophisticated financial and economic concepts. Real estate loans, asset based lines of credit, SBA lending, and other mainstays of community banks involve complex underwriting decisions. Rarely, if ever are small banks presenting significant “plain vanilla” loans to their senior loan committees of the board for consideration. Moreover, board members frequently must provide advice regarding significant undertakings on behalf of the bank, including such diverse issues as: whether to build or lease a branch; providing or modifying personnel benefits; insurance negotiations for blanket bonds; key employee hiring and evaluations etc. Each of these topics requires board members to have a working knowledge of business economics.

A most visible presence or occupation in the local community that will aid the bank and enhance its credibility as a community minded lender. Some bankers call this “credibility enhancement.” Board members must feel comfortable with the notion that their positions in their community are factors that will be exploited by the bank, and will become building blocks of the of the bank’s “reputation.” A civic minded community bank board member is as valuable as, and sometimes even more valuable to, the development of the bank’s reputation than the wealthiest person in town.

The time to attend a significant number of both regularly scheduled and special circumstance meetings and the will and desire to learn new and complex concepts. The key is time and patience. Being a board member takes time in the form of board and committee meetings in addition to time to “do homework” in preparation for such meetings.

Finally, perhaps most importantly,

An appreciation of the interrelationship and the business dynamic that must exist between bank management and the Federal and State regulators. Board members must understand the delicate balance between the shareholder’s desire to operate efficiently and increase bank profitability, and the regulators requirements for “safety and soundness.”

Richard Sprayregen is director of financial institutions services for Moss Adams LLP in Los Angeles. He can be reached at 310-481-1277 or richards@mossadams.com. Jane H. Benson, JD, MSJA is marketing manager, Southern California for Moss Adams LLP. She can be reached at janebe@mossadams.com.