Keeping Your Board of Directors Informed
Patten, Leslie A., Independent Banker
Numerous legislative initiatives over the past five years, including the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and the Federal Deposit Insurance Corporation Improvement Act of 1991, have subjected the activities of financial institution boards to ever-increasing regulatory scrutiny.
In turn, management has increased responsibility for providing meaningful information to permit directors to fulfill their legally mandated obligations.
Beyond the regulatory issues, bank directors have the normal business function of setting the policies by which the institution is to be managed. Thus, management also has the duty to provide information that assists the board of directors in monitoring compliance with the policies it has established.
In meeting its obligation to provide information to the board, management typically decides what information will be provided, how it will be presented and how frequently it is provided. Because of management's control and discretion in deciding what information is provided, the obvious question is, "Is i the right information?"
Historically, many smaller financial institutions provided only the barest of information. This, in some instances, was due to inadequate general ledger and application software. In other circumstances, it was due to a lack of critical analysis by management as to what the directors should have to evaluate operations results.
Many of these historical circumstances have been mitigated by virtue of the more detailed reporting now required by the quarterly Reports of Condition and Income.
However, many institutions have not taken the next step by providing this more detailed information to their directors. The most basic analysis would suggest that if the regulators need it, then the directors probably do also.
With the heightened standard of care imposed on financial institution directors, the quantity and quality of information provided should be comprehensively reviewed with the objective of developing an information package that permits directors to understand the institution's financial condition and compliance with regulatory requirements.
All institutions are not equally complex in their operations and need not have the same level of reporting and detail. However, there are some fundamental information basics that can be broadly categorized as follows.
Financial reporting basics
Balance sheet. The balance sheet should present both end-of-month balances as well as monthly averages. Sufficient account-level detail should be provided in support of the primary balance sheet classifications. Averages are a necessary tool to evaluate yields and accrued interest levels.
Comparative information with prior month, prior year and budget allows top-level trend analysis. Often, comparative information is best presented graphically to provide for interpretive analysis.
Income statement. As with the balance sheet, sufficient account detail should be provided to allow for adequate analysis and review. The detail may be presented in supporting schedules, as opposed to within the income statement itself. Comparative information is useful for analytical purposes and, again, may be best presented graphically.
Ratio analysis. Because of the standardized regulatory reporting requirements for financial institutions and the availability of regulatory publications such as the Uniform Bank Performance Report, ratio analysis is particularly useful in evaluating the performance of the institution. However, it is incumbent on management to provide directors with definitions and an understanding of the operating significance of various ratios.
Activity analysis. Current-month activity in key balance sheet categories, such as investments, new and renewed loans, and opened and closed depository accounts should be detailed to facilitate review by the directors. Beyond the credit risk aspects, outside directors frequently have knowledge about new loan and deposit customers that can assist in overall risk assessment. …