M E M O R A N D U M

 

To:                  Chairman of the Board

All State Chartered Banks

 

From:              Frank White,  Bank Commissioner

 

Re:                  Board of Director Responsibility and Liability

 

Date:               July 5, 2002

                                                                                                                                                           

 

State and federal examinations conducted in 2001 and 2002 revealed rapid and significant deterioration in the overall condition of several state banks.  In some cases, examination findings resulted in a bank’s CAMELS rating declining from a one or two composite rating to a composite four rating over a period of less than 18 months.  A common deficiency noted in these instances has been a failure by the bank’s board of directors to provide adequate oversight of management; failure to implement appropriate risk management policies and procedures to govern activities; and/or failure to initiate timely and effective corrective actions when weaknesses are identified by auditors and regulatory personnel.

 

Changes in the banking industry coupled with stagnate/declining economic conditions have created a very competitive and challenging environment for all financial institutions. As a consequence, the role of the financial institution board member has grown in importance and complexity.  The bank’s board of directors has the ultimate responsibility to oversee the conduct of the institution’s business and ensure safe and sound operation. Individual board members also have personal liability if their fiduciary failures result in the bank’s conditions becoming unsatisfactory. The board of directors should:

 

• select and retain competent management;
• establish, with management, the institution’s long- and short-term business objectives, and adopt operating policies to achieve these objectives in a legal and sound manner;
• monitor operations to ensure that they are controlled adequately and are in compliance with laws and policies (management reports, internal/external auditors’ findings, regulatory examinations);
• oversee the institution’s business performance; and
• attend training and educational sessions to stay abreast of industry trends and changes in statutory and regulatory issues.

 

I am very concerned about the shock shown by some board members when our examiners reveal a bank has serious asset quality problems and a deteriorating financial condition.  I believe the prosperous economy of the 1990’s has caused some directors, and executive officers, to become complacent in the fulfillment of their duties.  I strongly recommend that you reevaluate the “systems and procedures” currently utilized by your bank to ensure that all directors are well-informed, active participants in the oversight of bank activities.   I believe appropriate “systems and procedures” for an effective board should include the following items.

All State Chartered Banks

July 5, 2002

Page 2

 

 

 

1. Ensure the board reviews relevant information on a regular basis (accurate financial statements and budgets, internal loan review analysis, adequacy of the reserve for loan loss account, audit reports, liquidity and funds management, rate sensitivity, insider transactions, etc…).  Specifically, the board should review monthly reports for all loans over 30, 60 and 90 days past due identified by loan officer, nonaccrual loans and restructured debt, and reports of capitalized interest.
2. Ensure that exceptions to board approved policies are approved by or presented to the board.  Specifically, the interest rate or maturity date for existing loans should not be modified without the prior approval of the board, i.e. no capitalized interest without board approval.
3. Adoption of appropriate risk management procedures, including the audit program, and internal controls to identify problem assets, operational weaknesses and suspicious activities.  Specifically, the internal loan review officer should report directly to the board regarding their findings, and the actions of loan officers that do not comply with established policies or board decisions.
4. Initiate timely and effective corrective actions when auditors or examiners identify deficiencies.  The Bank Department and federal regulatory agencies have adopted a “zero tolerance” for inaction by management and directors when weaknesses have been clearly identified.

 

We believe that in the current economic environment for Arkansas, banks will experience a very slow recovery.  Therefore, it is imperative that management and directors be proactive in addressing identified weaknesses and problem assets.  An active well-informed board is the best safeguard we have for safe and sound bank operations.

 

In addition to oversight of the safety and soundness issues discussed in the preceding comments, I am also concerned about the number of banks that have failed to address the standards for safeguarding customer information as required by the Gramm-Leach-Bliley Act (GLBA).  I am enclosing a copy of a memorandum issued by the FDIC regarding this topic.  The “guidelines” referenced in the attached memorandum can be obtained at this website, http://www.fdic.gov/news/financial/2001/fil0122a.html.  Additional information is also outlined in the FDIC Financial Institution Letter, FIL-68-2001, dated August 24, 2001.  Also, you may contact Supervisor Bob Carr for additional information at 501/324-9019.

 

Please present this correspondence to your bank’s board of directors at the next scheduled meeting.  A copy of this document and any related discussion should also be made a part of the minutes of that meeting.

 

Ninety percent of the 130 state chartered banks are well run and well managed; our desire is to see 100% meet that goal.

 

 

 

 

 

Frank White

Bank Commissioner