Can a small-town Virginia banker fix Wells Fargo's board?

By Dan Freed

(Reuters) - Wells Fargo & Co (WFC.N) will likely turn to a former community banker and Fed official to head its board as the scandal-ridden bank tries to restore its former reputation as a solid, plain-vanilla lender, people familiar with the matter told Reuters.

Betsy Duke, who only joined the board of the third-largest U.S. lender in 2015, will be promoted as Wells tries to repair damage caused by widespread sales abuses against customers. Shareholders gave the board a very thin endorsement at the bank's annual meeting in the spring, and Duke is likely to become the next chairwoman, said investors, analysts and two people with knowledge of board discussions.

Chairman Stephen Sanger reaches the mandatory retirement age of 72 in April, ahead of the next annual shareholder meeting. On Thursday, the Wall Street Journal reported Sanger would now step down in early September.

That step would likely speed the ascension of Duke, a former small town banker from Virginia Beach.

Wells Fargo declined to comment. Sanger and Duke did not respond to requests for comment on Thursday.

Some board members discussed making Duke Wells Fargo's chairwoman last October, when then-Chairman and Chief Executive Officer John Stumpf stepped down and the board decided to split the two roles, a person familiar with the matter said. However, Duke told colleagues she was not ready, said the person, who was not authorized to speak publicly. Instead, Duke was elevated to vice chair under Sanger.

Pressure on Wells Fargo to make changes has intensified as new problems have surfaced in recent days. Revelations last month that the bank enrolled unknowing borrowers in costly auto insurance prompted New York City Comptroller Scott Stringer, who oversees public pension funds that hold roughly 11.6 million Wells Fargo shares, to call for Sanger's replacement.

The bank said it may have charged as many as 570,000 auto borrowers for insurance they did not want, leading to an estimated 20,000 wrongful repossessions.

Early this month, the bank agreed to pay $108 million to settle a whistleblower lawsuit over hidden mortgage fees to U.S. military veterans. Also, in its latest quarterly financial report, Wells Fargo said it was examining whether it had caused unnecessary financial harm to customers through mortgage fees, frozen deposit accounts and "add-on" products like identity theft protection.

Last September, the bank settled with regulators over opening accounts for up to 2.1 million customers without their knowledge.

A MAIN STREET BANKER

Several people who have worked with Duke ticked off multiple reasons they believe she will replace Sanger. They noted that she comes from small-town lenders rather than large Wall Street institutions, making her the ideal leader for Wells Fargo's board at this time.

Anne Conner, president of TowneBank, where Duke had been chief operating officer, said Duke encouraged her to focus on substantive matters that mattered to a bank's bottom line.

"She cares about me as a woman executive in an industry that's largely dominated by men," said Conner.

Former colleagues at the Fed, where Duke served as a governor from 2008-2013, said they gained valuable insights from her practical knowledge of banking.

As Fed officials discussed how to implement the Dodd-Frank banking reforms passed after the financial crisis, Duke voiced concerns excessive regulations would put small banks at a disadvantage, said one former colleague who asked not to be identified.

"She brought a deep knowledge of banking and credit to our deliberations on monetary policy and the response to the crisis at a time when that perspective was critical" to the Fed's planning, said former Fed Vice Chairman Donald Kohn, who worked with Duke while she was a governor from 2008-2013.

"A LOT OF LEADERSHIP AND EFFORT"

After Wells Fargo's accounts scandal came to light, one person close to the board said Duke used her Fed experience to take the lead in explaining to fellow directors how regulators would view the bank's actions.

Duke "has put a lot of leadership and effort into helping us manage" implementation of regulatory reforms, Wells Fargo Chief Financial Officer John Shrewsberry told Reuters in an interview, adding she has become "more heavily involved" in those reforms.

Shareholders who spoke about voting against Sanger supported Duke on the grounds that her relatively short tenure on the board gave her less responsibility for Wells Fargo's scandals.

"This is welcome news," Stringer said in a statement.

(Reporting by Dan Freed in New York; additional reporting by Ross Kerber in Boston and Aparajita Saxena in Bengaluru, writing by Lauren Tara LaCapra; editing by Jonathan Oatis and David Gregorio)