The boards of Georgia's small, community-based banks are filled with a virtual Who's Who of Main Street: Car dealers, doctors, business owners, real estate developers and the like.
Sitting on a small bank's board has long been viewed as a plum post, a career-capper that offers little pay but plenty of prestige.
That's all changed for board members at the dozens of banks across the state that have slid into serious financial trouble. They're scrambling to raise cash to shore up their banks, dealing with heightened regulatory scrutiny and in some cases working overtime to try to stave off foreclosure.
It's not just reputations that are on the line. Board members, also known as directors, could be held personally liable for a bank's demise.
Experts are expecting a wave of lawsuits against directors to be filed in Georgia over the next year or two as regulators and shareholders seek someone to blame — and someone to pay — for the state's bank failures.
Eleven Georgia banks have failed in the past eight months, the most in the country, and experts say many more troubled institutions are in danger of being shut down.
"It's coming. It's sort of like a silent killer," Bobby Schwartz, a banking attorney at Smith, Gambrell & Russell in Atlanta, said of board lawsuits.
Board members on the losing end of a trial or settlement could face penalties and legal fees rising into the hundreds of thousands of dollars, Schwartz said. Most bank board members carry liability insurance, but policies have a deductible and total coverage at many small banks is often not that high.
"It will not surprise anyone who has handled these kinds of cases if there are some lawsuits that get filed," said Rebecca Lamberth, an Atlanta attorney who has spent more than 20 years defending bank boards and officers.
"There are likely to be some meritorious lawsuits, and there are likely to be a number of lawsuits not worth the price of the paper they are written on."
Board members play a critical, though somewhat limited, role at banks. They aren't supposed to be involved in daily operations, but they hire and fire top management, set bank policy and approve sizable loans.
It's a job that Neal Reynolds loved, until his bank — Alpharetta's Integrity Bank — failed late last summer amid a fast-rising tide of bad real estate loans.
"Of course, you never dreamed it," said Reynolds, owner of the Ad Shop, a small advertising and marketing firm. "When we started the bank, everybody talked about banks just don't go under."
Reynolds ultimately lost his initial $3 million investment but said he enjoyed his nine years on the board and made money when times were good. He was able to meet interesting business owners, help deals get done and build his community.
In retrospect, it's easy to see how the bank's problems began. Integrity's loan portfolio was heavily concentrated in residential construction and development, making the bank vulnerable when that sector turned.
But Reynolds said he doesn't feel personally responsible for the bank's failure. Federal and state regulators regularly inspected the bank's operations, he said, as did internal and external auditors.
The bank earned robust profits until the housing market suddenly collapsed, to almost everyone's surprise.
"Let's just say [regulators] looked at what we did," Reynolds said. "They're trained, I'm a businessman. I'm just a director. I'm not there full time. If they didn't find any problems, how can you expect a director to catch these problems?"
Reynolds said he's been told by regulators at the Federal Deposit Insurance Corp. not to worry about legal action, that the board didn't do anything wrong.
David Barr, a spokesman with the FDIC, declined to comment about Reynolds, but he said regulators will spend months combing through each failed bank's records before determining whether to bring legal action against boards and officers. The agency has not yet brought any lawsuits tied to the current banking crisis, he said.
While most bank directors are successful professionals, few have banking and finance experience. For example, the board at First Georgia Community Bank in Jackson, which failed late last year, included a building supply company owner, retired doctor and a former school principal who now runs a gasoline wholesale company.
In general, lawsuits are brought against bank boards for negligence, though more serious cases may involve board members doling out loans to family members or using the bank's capital as a personal cash kitty.
Negligence lawsuits typically claim board members failed to properly perform their duties — they approved policies that allowed the bank to take on too much risk, they didn't properly monitor the actions of bank management or were otherwise asleep at the wheel.
Some banking attorneys say it's unfair to hold board members liable for Georgia's failed banks. The root cause of the failures — the total collapse of the local housing market — could not have been foreseen by anyone, said Walt Moeling, a banking attorney at Brian Cave Powell Goldstein in Atlanta.
"It's tempting to say a bank suffered all these losses, therefore directors are liable," Moeling said. "But the losses are because we've had the worst economic downturn in our lifetime. I don't think directors have to plan for that."
Schwartz, the Smith, Gambrell & Russell attorney, disagrees.
"You can't blame the failure of a bank, if you are a director, on just economic forces," he said. "Generally, what you have is poor board oversight which allowed for poor management decisions."
In many cases, Schwartz said, "I think you should anticipate the FDIC will find some evidence of board failure to adhere to safe and sound banking practices."
Until last year, bank failures in Georgia were extremely rare. The last wave came during the savings and loan crisis of the late 1980s and early 1990s. Regulators went after bank boards then, sometimes unfairly, said Lamberth, the bank board defense attorney.
She recalled a case in which a Georgia director was sued by the Resolution Trust Corp., the government entity created to clean up the S&L crisis, on grounds his bank made imprudent loans. No illegal activity was alleged.
Lamberth's client, a member of the board, "could never understand why his government was suing him, and I couldn't ever answer that question in a satisfactory manner."
"That man was no Charles Keating," she said, referring to a central figure in the S&L scandal.
The risk to board members in the current crisis is very real, said Bob Calvert, a former metro Atlanta banker who now runs a bank consulting firm in Florida.
"The liability, of course, is tremendous," Calvert said. "The buck stops at the board."
That's not to say every board of a failed bank should be concerned, he added.
"You're not exposed unless you have not been doing the things [regulators] want you to do, which is due diligence — making sure management is doing what they are supposed to be doing," he said. "If they have rubber-stamped what management has done, it will be a problem for the directors."
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