Footnote 1: According to the Manual of Examination Policies, issued by the FDIC's Division of Supervision and Consumer Protection, a composite rating is based on a careful evaluation of an institution's managerial, operational, financial, and compliance performance. The six key components used to assess an institution's financial condition and operations are: Capital adequacy, Asset quality, Management capability, Earnings quantity and quality, adequacy of Liquidity, and Sensitivity to Market Risk, which together form the CAMELS rating. The rating scale ranges from 1 to 5, with a rating of 1 indicating the strongest performance and risk management practices relative to the institution's size, complexity, and risk profile and the level of least supervisory concern. A 5 rating indicates the most critically deficient level of performance; inadequate risk management practices relative to the institution's size, complexity, and risk profile; and the greatest supervisory concern.

Footnote 2: As of April 30, 2004, the six banks we selected for review remain open. To protect the identity of these open institutions, they are referred to as banks A, B, C, D, E, and F. For a profile of the six banks see Appendix IV.

Footnote 3: The Sarbanes-Oxley Act of 2002, Public Law 107-204, enacted July 30, 2002, contains new requirements for public companies and established a new regulatory body for public accounting firms.

Footnote 4: Institutions that have $500 million or more in total assets as of the beginning of their fiscal year are subject to the annual audit and reporting requirements of Section 36 of the Federal Deposit Insurance Act (FDI Act), as implemented by Part 363 of the FDIC's Rules and Regulations (12 Code of Federal Regulations § 363). Part 363 states that each insured depository institution (with $500 million or more in total assets) shall prepare annual financial statements, in accordance with generally accepted accounting principles, which shall be audited by an independent public accountant.

Footnote 5: Section 38(k) of the FDI Act, codified to 12, United States Code 1831o, provides that if a deposit insurance fund incurs a material loss with respect to an insured depository institution, on or after July 1, 1993, the Inspector General of the appropriate federal banking agency shall prepare a report to that agency reviewing the agency's supervision of the institution. A material loss is defined by Section 38 of the FDI Act, in general, as a loss that exceeds the greater of $25 million or 2 percent of the institution's total assets at the time the FDIC was appointed receiver.

Footnote 6: From the Office of Inspector General Audit Report No. 04-004, FDIC OIG Material Loss Reviews Conducted 1993 through 2003, dated January 22, 2004.

Footnote 7: DSC instructions state, "The Examination Modules are an examination tool that focuses on risk management practices and guides examiners to establish the appropriate examination scope. The modules incorporate questions and points of consideration into examination procedures to specifically address a bank's risk management strategies for each of its major business activities. The modules direct examiners to consider areas of potential risk and associated risk control practices, thereby facilitating a more effective supervisory program."

Footnote 8: DSC uses 10 primary ED modules that focus examiner attention on risk management practices at banks.

Footnote 9: The DSC Manual defines internal control as "the plan of organization and all coordinate methods and measures adopted within the bank to safeguard its assets, check the accuracy and reliability of accounting data, promote operational efficiency, and encourage adherence to prescribed managerial policies."

Footnote 10: The DSC Manual describes a segregation of duties as a function in which "The participation of two or more persons or departments in a transaction causes the work of one to serve as proof for the accuracy of another."

Footnote 11: The Dictionary of Accounting Terms defines a financial audit as an examination of a client's accounting records by an independent certified public accountant to formulate an audit opinion. The auditor must follow generally accepted auditing procedures.

Footnote 12: The Interagency Policy Statement External Auditing Programs of Banks and Savings Associations defines an audit committee as "A committee of the board of directors, whose membership should, to the extent possible, be knowledgeable about accounting and auditing. The committee should be responsible for reviewing and approving the institution's internal and external auditing programs or recommending adoption of these programs to the full board."

Footnote 13: This control area is not addressed in DSC's policies and procedures. DSC's policies and procedures discuss the need for bank policies, the disclosure of potential conflicts of interests, and the review and approval of applicable transactions. However, DSC's guidance does not address the establishment of an annual conflicts of interest and ethics review program at the bank.

Footnote 14: The FDIC issues Financial Institution Letters (FILs) to FDIC-supervised institutions to announce, for example, new regulations and policies, new FDIC publications, and a variety of other matters of principal interest to those responsible for operating a bank or savings association.

Footnote 15: The FDIC, in cooperation with the various state banking departments, provides training to bankers through the "Directors' College" program. The FDIC's goals are to improve corporate governance and educate bank directors on the latest changes in the regulatory environment.

Footnote 16: A holding company is a corporation that exercises control over another company, by owning enough voting shares of outstanding common stock, or that controls several related companies.

Footnote 17: In this regard, the FDIC has taken action in implementing the Economic Growth and Regulatory Paperwork Reduction Act, Public Law 104-208, Section 2222, which requires the Federal Financial Institutions Examination Council and each of its member agencies to review their regulations at least once every 10 years, in an effort to eliminate any regulatory requirements that are outdated, unnecessary or unduly burdensome.

Footnote 18: Members of the Interagency ED Module Maintenance Committee are from the FDIC, Board of Governors of the Federal Reserve, and state banking departments.

Footnote 19: The Uniform Bank Performance Report (UBPR) is an analytical tool created for bank supervisory, examination, and bank management purposes. The UBPR shows the impact of management decisions and economic conditions on a bank's performance and balance-sheet composition.

Footnote 20: The purpose of the SAER Reports is to collect data from the examination for entry onto the FDIC's data base.

Footnote 21: The Government Accountability Office (formerly titled the General Accounting Office): Standards for Internal Control in the Federal Government, issued November 1999, provides a standard for the segregation of duties: "Key duties and responsibilities needed to be divided or segregated among different people to reduce the risk or error or fraud. This should include separating the responsibilities for authorizing transactions, processing and recording them, reviewing the transactions, and handling any related assets. No one individual should control all key aspects of a transaction or event."

Footnote 22: Comments included in the confidential-supervisory section of the ROE should be of interest primarily to supervisory agencies and should not be duplicative of information contained in the open section of the ROE. This information is not shared with the bank's management.

Footnote 23: An MOU and a NOD are informal corrective administrative actions related to issues considered to be of supervisory concern but which have not deteriorated to the point where they warrant formal administrative action.

Footnote 24: Part 363 of the FDIC's Rules and Regulations, codified to Title 12 of the Code of Federal Regulations, states, in part, that in determining whether an outside director is independent of management, the board should consider all relevant information. This would include considering whether the director is or has been an officer or employee of the institution or its affiliates; serves or has served as a consultant, advisor, promoter, underwriter, legal counsel, or trustee of or for the institution or its affiliates; is a relative of an officer or other employee of the institution or its affiliates; holds or controls, or has held or controlled, a direct or indirect financial interest in the institution or its affiliates; and has outstanding extensions of credit from the institution or its affiliates. An outside director should not be considered independent of management if such director is, or has been within the preceding year, an officer or employee of the institution or any affiliate, or owns or controls, or has owned or controlled within the preceding year, assets representing 10 percent of more of any outstanding class of voting securities of the institution.

Footnote 25: FDIC's Statement of Policy, Interagency Policy Statement on External Auditing Programs of Banks and Savings Associations, states that Agreed-Upon Procedures/State-Required Examinations (directors' examinations) are specified procedures required by some state statutes or regulations and are performed annually by an institution's directors or independent persons. The policy statement defines specified procedures as "Procedures agreed-upon by the institution and the auditor to test its activities in certain areas. The auditor reports findings and test results, but does not express an opinion on controls or balances."

Footnote 26: If a regulatory agency determines that an institution fails to meet any standard established under subsection (a) or (b) of section 39 of the Federal Deposit Insurance Act (12 U.S.C. 1831p-1), the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. In the event that an institution fails to submit an acceptable plan within the time allowed by the agency or fails in any material respect to implement an accepted plan, the agency must, by order, require the institution to correct the deficiency.

Footnote 27: Informal administrative actions, such as Board Resolutions, Commitment Letters or Memorandums of Understanding, are normally handled through written correspondence with a bank's BOD.

Footnote 28: The FDIC's Statement of Policy, Interagency Policy Statement on External Auditing Programs of Banks and Savings Associations, defines a Financial Statement Audit by an Independent Public Accountant as "An examination of the financial statements, accounting records, and other supporting evidence of an institution performed by an independent certified or licensed public accountant in accordance with generally accepted auditing standards (GAAS) and of sufficient scope to enable the independent public accountant to express an opinion on the institution's financial statements as to their presentation in accordance with generally accepted accounting principles (GAAP)."

Footnote 29: Federally insured depository institutions must maintain an ALLL at a level that is adequate to absorb the estimated credit losses associated with the loan and lease portfolio.

Footnote 30: The DSC Manual states, "The term loan review system refers to the responsibilities assigned to various areas such as credit underwriting, loan administration, problem loan workout, or other areas. Responsibilities may include assigning initial credit grades, ensuring grade changes are made when needed, or compiling information necessary to assess the adequacy of the ALLL."

Footnote 31: The DSC Manual states, "Credit grading involves an assessment of credit quality, the identification of problem loans, and the assignment of risk ratings."

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