In the Boardroom: Touchy Transaction:When a Director Sells Stock

Directors show confidence in a bank by owning a big chunk of its stock. So what does it mean when they dump some or all of it?

"I know it can send the wrong signal, but you have to do what you have to do," said Richard Gordley, chief executive of Wood Bancorp in Bowling Green, Ohio. "People's needs vary from time to time."

Mr. Gordley should know. Last spring, a director at his bank sold 5,000 shares of the company's stock to generate cash.

Though few banks have formal stock ownership policies for directors, many banks expect their directors to be significant shareholders. Federal law also requires directors to own at least $1,000 of their institution's stock; state laws vary.

Such a requirement not only sends a positive message to the investment community but also keeps more stock in friendly hands - and out of the hands of hostile takeover artists.

"It's a put-your-money-where-your-mouth-is kind of approach," said Mr. Gordley. "It's a way of leading by example."

That's why banks are so sensitive to managers' or directors' selling off their stock.

"Senior management watches who sells their stock very carefully, and it doesn't always look so good when it's one of their directors," said William H. Strunk, president of Strunk & Associates Inc., a Houston-based financial services consulting firm.

Mr. Strunk said a director selling stock in the company he or she directs can mean any of several things: For example, the director has a sudden need for cash flow to help pay for a new house or medical treatments; the director and family are doing estate planning; or, the director has lost confidence in management and wants to "get the hell out."

The last scenario can be damaging because the director, of course, knows much more about the health of a company than does the average shareholder. A director's selloff could cause a run on the stock.

Last week SJNB Financial Corp. of San Jose, Calif., reported that its founding chairman, Arthur Lund, had registered 8,316 shares to be sold. He ended up selling 4,000 shares, he said.

"I hate to sell, but I hate debt as well," Mr. Lund said.

The prospects for the $270 million-asset bank have never been better, he stressed. He needed the cash for some property he recently bought, he said.

SJNB directors report all their purchases and sales at each board meeting, Mr. Lund said. But the bank, like most, has no formal policies regarding stock ownership by its board.

York Financial Corp. in York, Pa., recently had two directors selling stock. In one case, the stock - 20,579 shares - had been owned by the recently deceased father of a director, and she was reorganizing his estate. In the second case, the director, Paul Mills, is retiring and reorganizing his investment portfolio to provide more income, said Robert W. Pullo, York Financial's chief executive.

The other concern with a director selling off stock is the appearance of illegal insider trading, or trading on information not privy to the general public. For this reason, the Securities and Exchange Commission requires stock sales by directors to occur during a ten-day window period commencing three days after the bank releases its quarterly earnings.

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