Challenges have grown for the directors of small banks.

Being a community bank director used to be far less demanding.

It wasn't too long ago that directors' biggest concerns and interests were often limited to ensuring that their institution was obtaining its fair share of deposits and loans, had positive earnings, reflected an increased asset base, and had enough capital to survive. Comparison to industry and peer averages was to a large extent an afterthought - or not an issue at all.

Any mention of director liability was usually related to an institution's balance sheet, not to the potential risk exposure of board membership.

While considerable attention has focused on how the regulations and other controls of the last few years have changed the roles and responsibilities of financial institution directors, additional significant changes face the board members of institutions converting to public ownership.

Conversion requires major adjustments on the part of board members, officers, and others. Having previously served as the president and a director of a mutual institution that went through a stock conversion in 1986 and a merger in 1989, I can say that little of the preconversion information we discussed at our board meetings had to be shared publicly.

Public Company Obligations

When the institution became a public company, however, the cloak of mutuality was stripped away and the reality of open disclosure immediately became a major director issue.

Going public carries the obligation to be open about an institution's business performance, operations, and compensation.

Items such as executive pay and "perks" must be matters of public record. That also applies to insider transactions involving directors, officers, and others.

With a new constituency of shareholders seeking to ring up the greatest returns possible from their investments, board members and management experience intensive pressure to keep their institutions profitable but must remain ever mindful of the need to ensure that the institution is managed in a safe and sound manner and stays out of supervisory trouble.

Since investors place the greatest value on institutions that generate above-average earnings at minimal risk, directors have to keep an especially watchful eye on capital adequacy and such key ratios as returns on equity, returns on average assets and nonperforming assets, and the general comparative financial performance of institutions of similar size and characteristics.

Directors also owe shareholders a fiduciary duty of loyalty and due care. Board members must continue to be mindful of their responsibilities to other constituencies as well, such as depositors and other customers, employees, and the communities which the institution serves.

Whatever an institution's form of charter, the roles of directors have changed dramatically since the Financial Institutions Reform, Recovery and Enforcement Act of 1989 became law.

Major Changes

In my view, here are just a few ways in which these roles have been changed in the wake of the reform act:

* Directors must now be more knowledgeable about the financial condition of their institutions. Many of the financial institution failures of recent years may well have been averted or at least delayed had boards of directors been informed on a timely basis of facts and trends, and had they been adequately educated on matters germane to the business of banking.

Today's directors must be able to devote the time required to understand trends and changes in their institution's financial status and business performance.

The Office of Thrift Supervision says every board has the responsibility to "establish a schedule for reviewing" such concerns as key financial ratios, capital adequacy, asset quality and asset-liability management performance.

The Federal Deposit Insurance Corp. holds much the same expectations.

* Directors must play a more vigilant role in evaluating, overseeing and, when appropriate, questioning the business activities and objectives of their institutions. Board members must ensure that management provides the type and quantity of information needed to carry out this role.

* Directors must be more careful to guard against engaging in preferential insider transactions. New, more stringent regulations now apply to an institution's credit extensions to board members and other insiders.

Loan terms and credit underwriting procedures must be essentially the same as those the institution applies in dealing with the public at large.

* Directors must ensure that their institution has an adequate set of internal control procedures.

Recent regulatory standards advise that the appropriate duties of board audit committees include reviewing with management and the independent public accountant the adequacy of internal controls, how certain weaknesses in these controls will be resolved, and the degree of compliance with laws and regulations.

* Directors must be more careful to steer clear of incurring possible regulatory sanctions. Federal regulators can now impose costly civil money penalties for violations of laws or regulations, temporary or final cease and desist orders, suspension and removal orders, or any written agreements.

* Directors must keep executive pay practices under closer scrutiny. Certain "golden parachute" and other arrangements that could lead to material financial losses are now prohibited by law.

Employment contracts may be renewed or extended only after explicit board review and approval.

Bigger Task at Smaller Banks

Though other changes in the roles and responsibilities of board members could be added to this list, the point to be emphasized is that the changes of the last few years have brought far greater challenges to community bank directors.

Franklin First Savings Bank, with which I became affiliated in 1990, was recently acquired by Onbanc Corp., a bank holding company based in Syracuse, N.Y.

Once again, I anticipate significant changes in my role as a bank director, both as a member of the Franklin board and of the holding company board.

Directors of wholly owned subsidiaries must be cognizant of their responsibilities and liabilities related to the subsidiary. Issues must be viewed and voted upon with full knowledge of the specific separate roles as a director of both the parent and the subsidiary.

Decisions must be made within the context of the absolute need to maintain the safety and soundness of the respective institutions while being watchful to ensure high ethical standards and compliance with all regulations.

Much the same thing can be said about the obligations of all financial institution directors. Ensuring safety and soundness, acting ethically, and staying in regulatory compliance are roles that haven't changed. One thing that has changed is that the director's position can no longer be considered a sinecure.

Mr. Van Arsdale is president and chief executive of Franklin First Savings Bank, Wilkes-Barre, Pa. He also is a director of Savings and Community Bankers of America.

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