Section 600.1

Comment Section

banks where examination procedures have

been extended beyond the minimum). Those examples may be modified to fit a particular examination. However, the examiner should avoid a long detailed listing of various departments and areas where verification procedures were pertormed. Significant Matters Requiring Attention Immediately following the paragraph on examination scope, the examiner should present in paragraph form those matters which require the attention of the board. They should be arranged in order of importance. All criticisms and comments pertaining to conditions that have resulted or that may result in problems or deficiencies should be positive, objective and fully supported by information contained else. where in the report as well as in the working papers. The letter should be a summation, and not a duplication, of comments contained in the various areas of the Comment section where criticism of a department or function may have been made. The examiner should identity the probable causes of the unsatistactory conditions. Persons within the bank with whom the criticized areas were reviewed should be identified. Remedial action, discussed or promised, should also be included in the narrative. Weaknesses in the management of the bank as a whole or in its important principals should be noted in this section. The comments must be objective and based on facts clearly displayed in the comment sec. tion and supported in the working papers. Subjective comments should be contained in the confidential section.

Supervision and Administration by Directors and
Managernent
This page contains the examiner's appraisal of the
quality and ettectiveness of supervision and adminis-
tration by the directors and management. In general,
the examiner will discuss the management process in
the bank. When comments on management and the
directorate appear throughout the report, they relate
to functions or departments such as loan portfolio
investment porttolio and funds management.
Whereas, this page is geared to supervision at the
board and executive officer level. Comments should
be both positive and negative with major criticisms
brought forward to the letter to the board of directors.
In discussing the board's. role, the examiner might
begin with the frequency and effectiveness of meet-
ings, followed by a discussion of the committee
structure and its effectiveness. Comments should be
included on the director's role in establishing objec-
tives and policy. The examiner might also discuss
how policies have been implemented to achieve
bank objectives, being certain to note any major in-
consistencies in policy. Finally, the examiner should
discuss whether reports received by directors contain
enough information for them to remain informed and
make knowledgeable decisions. The procedures in
Section 501 of this handbook will assist in prepara-
tion of comments for this portion of the page.
In discussing management, examiners might include
brief background information on executive officers.
However, the thrust of the comments should be di-
rected toward what the executive officers do and how
well they do it. The examiner's remarks should give
the reader an understanding of:

The organization structure.
Whether the decision process is centralized or
departmentalized.
How quickly problems surtace and are re-
solved.
The effectiveness of planning and budgeting.

Overall Conclusions The final portion of the letter should consolidate information received from the various departments in addition to the important matters requiring attention, to arrive at a final conclusion about the overall condition of the bank. The examiner-in-charge should sign the letter at the end of the last paragraph. If continuation pages are needed, the page containing the signature should be the last page.

.

Comptroller's Handbook for National Bank Examiners February 1983

Section 600.1

Computation of Capital and Unimpaired Surplus The page provides a calculation of capital accounts for the benefit of the reader, a reference for numer. ous limitations imposed by various laws and regulations, and guidance to management in the format of the calculation. The schedule also is intended to lessen the necessity of duplicating the calculation for violations of law relating to capital limitations. In addition to the capital structure as of examination date, the schedule can reflect the capital calculations as of three violation dates, if necessary. When the space is not sufficient, the capital structure for a particular date should be embodied in the violations of law and regulation section. Violations of Law and Regulation The examiner will itemize all violations involving limitations imposed by the above calculated capital and unimpaired surplus under (a). All other violations will be detailed under (b). The violations in both sections should be listed in numerical sequence. United States Codes should be listed first followed by regulations, Federal Reserve regulations, and any other violations. Supporting information will be consistent with existing instructions. The examiner should properly detail the violation using name, amount, date of violation, dura. tion, description and approving directors, where appropriate. Remarks should be made regarding recur. ring violations or developing trends, concentrations of intractions pertaining to one individual or a small group, whether those acts appear intentional, and remedial action taken to prevent recurrence. If any loss has been incurred, so state, and comment as to whether restitution has been made.

The examiner should also state it no violations were discovered. Comments should be made if the policies, practices and procedures in any area are deficient and could lead to violations, such as the failure of directors to obtain total borrower's liability to the bank before approving new advances. For the reporting of transactions for 12 USC 375(b) and 12 USC 1972, non-conforming loans should be listed as violations of law only if the loans are granted or renewed after March 10, 1979. Extensions of credit made prior to March 10 should be shown as "Non-conforming Assets", and the banks should be encouraged to restructure or eliminate them. Examiners should consult the implementing regulations to 12 USC 375(b) for timetables to bring older extensions of credit into compliance. Summary of Assets Subject 10 Criticism All criticized assets exceeding the cutoff should be detailed on this page. When additional space is necessary. Ioans should be presented first followed by a listing of other assets subject to criticism. Criticized assets, including loans, that are less than the cutoff are not required to be detailed on this page. However, they may be detailed if, in the judgment of the examiner, their inclusion is appropriate. All criticized loans must be supported by a writeup or included in the miscellaneous criticized assets page in the appendix, except for small loans classified loss and included on a detailed list given to management. The aggregate of these small loss items should be reflected in the appendix, and a copy of the listing should be placed in the working papers. This page and the supporting material in the appen. dix can be structured by branch, division or any method which will clearly reflect the specific department or division that is accountable for the asset. Assets should be listed alphabetically within categories. Criticized contingent amounts should be followed by a (c) and separate totals should be made for outstandings and contingents. Aggregates for each area + also should be used to assist the reader in following the report content. Other assets, such as investments, other real estate, cash items and overdrafts should be listed in a similar manner. The flow of de. tail should not be broken by referring to subsequent pages.

Comptroller's Handbook for Nanonal Bank Examiners

February 1983

Section 600.1

For a specialized examination, the examiner should discuss relevant points based on the scope of the examination. The standard page forms are used in the specialized examination as appropriate. In most cases, the scope of a specialized examination would generate information on the following topics:

Loan Portfolio Management.
Reserve for Possible Loan Losses.
Extensions of Credit to Insiders and Their Inter-

ests.
• Investment Portfolio Management.

Liquidity, Assets and Liability Management.
Earnings and Capital.

Future Prospects. It is likely that the discussion of those topics will be less detailed than in a general examination. This occurs since the primary objective of a specialized ex. amination is to determine changes taking place in the policies and operations of the bank. Loan Portfolio Management The narrative for this section is developed by completing the work programs for the various lending areas and reaching an overall conclusion in the section "Loan Portfolio Management." This section of the report should include the following:

a. Scope of the examination of the lending area.
6. Evaluation of and general level of adherence to

policies, practices, procedures and controls

over the lending function. c. Quality of the loan portfolio. d. Quality of management with respect to the

lending function. e. Management's awareness of problem loans in

the portfolio. f. Causes of existing problems. g. Remedial actions agreed to by management for

correction of deficiencies. For purposes of illustration, the scope of the examination could read as follows:

The examination of the lending area included an analysis of a sample of all loans, check credit and credit card, through the use of statistical sampling. In addition to the sample items, loans exhibiting an indication of credit weakness were analyzed.

When problems exist in the loan portfolio, the matters detailed within this section should be summarized in the letter to the board. Loan write-ups, credit data and collateral exceptions should be included in the appendix to the report. Additional schedules should also be included in the appendix, if they lend additional support to the narrative. Reserve for Possible Loan Losses The schedule serves as a point of reference for the reader. It summarizes activity in the account for the most recent fiscal period as well as the year-to-date, most recent quarter or month-end date. The comments presented in this section should summarize the conclusions obtained from completing the work programs, pro forma working papers and reviewing the NBSS report. Such comments should include an assessment of the adequacy of the procedures followed by management in determining the provision for possible loan losses and the related reserve necessary. A conclusion that the reserve is not significantly in error need not be expressed. If, however, the examiner-in-charge believes that the reserve is significantly under or overstated, management should be requested to make an appropriate adjustment to correct the situation. The adjustment requested and the reasons therefor also should be included in this section. The working paper. used to arrive at the decision may be included in the appen. dix of the report. Comments also should be made regarding the charge-off policy, collection efforts and any other matters which affect the reserve. NBSS peer group statistics may be used, where appropriate. Extensions of Credit to Insiders and Their Interests This page should contain aggregate totals for the four listed categories for directors, officers, employees and any shareholders who directly or indirectly control 10 percent or more of the outstanding stock of the bank or any individual controlling 10

cent of a corporation holding control of the bank. The page also requires calculation of the percentage of criticized insider loans to total criticized loans. A listing of all obligations, direct and indirect, should be included in the appendix with the following exceptions:

Loans to employees.

Comptroller's Handbook for National Bank Examiners September 1979

Section 600.1

• Loans for residential property not exceeding

$60.000, provided such property is used by the
director or officer.
Educational loans not exceeding the aggregate
amount of $20,000.
All other loans not exceeding the aggregate

amount of $10,000. If no such loans are booked, the comment should be made on this page and no page is needed in the appendix A comment should be made in every report regarding interest rates on loans to insiders. Where rates are comparable to rates for similar loans to outsiders of comparable credit standing it should be stated on the pages. When some degree of self-dealing is committed in the form of preferential rates or loans granted on an unsound basis, comments should be made and appropriate facts included or referenced here. Appropriate comments also should be made in the letter to the board of directors. Concentrations The page lists for information purposes only, unless stated otherwise in the accompanying comments, obligations direct or indirect of the same or affiliated interesis, which represent 25 percent or more of the bank's capital structure. (The sum of total equity capiral and subordinated notes and debentures as de. fined in Instructions for Preparation of Consolidated Repons of Condition and Reports of Income.) The listing consists of: all types of loans, including overdrafts; cash items; suspense resources; securities; leases; acceptances; advances; letters of credit; all other obligations due to the bank; and loans endorsed, guaranteed or cosigned by related individuais. Concentrations by industry, product line, type of collateral, etc., are detailed where appropriate. The listing also includes due from banks time and demand accounts, federal funds sold and other assets carried on the books of the bank where payment is dependent on one financial institution or affiliated grouò and the aggregate totals represent 25 percent or more of the bank's capital structure. U.S. Treasury securities, U.S. government corporations and agencies and any assets collateralized by same are not scheduled Various other concentrations are listed in the handbook section. When concentrations exist in one general class of borrower and this condition is inherent

in the economy of the community or area where the bank is located, the concentration need not be included on this page, but rather on the loan portfolio management page. Investment Portfolio Management This section is prepared in the same manner as loan portfolio management. Information comes from conclusions reached in the investment securities work programs. The examiner should always corrment on the quality of the portfolio, maturity distribution, significant appreciation or depreciation in categories or the entire porttolio and whether the bank is complying with related laws and regulations. Bank dealer activities should be included if the bank is engaging in those types of transactions. Liquidity. Asset and Liability Management Comments should be made, whether favorable or unfavorable, regarding the present liquidity position and future liquidity requirements, based on information developed during an examination. When liquidity is deemed marginal or inadequate, the liquidity analysis sheet should be included in the appendix. Policies, practices and procedures should be commented on with emphasis placed on adequacy, compliance and inconsistencies. The examiner should evaluate the overall effectiveness of management's implementation of formal and/or implicit policies of the board of directors. Analysis of Earnings and Capital Comments on this page will be similar to those required in the general remarks section of the previous report. Data generated by NBSS will be beneficial to the examiner in commenting on peer group comparisons and developing trends. The examiner also should comment on any policy changes, made or proposed, that have or are anticipated to have an adverse effect on earnings and/or capital. Internal Control The findings of internal control considerations and questions contained in the internal control questionnaire should be consolidated in this section and an overall conclusion regarding internal control should be reached. The section should contain significant deficiencies and not be a listing of each internal control question which received a negative answer. The evaluation of internal controls necessitates consider

Comptroller's Handbook for National Bank Examiners

September 1979

Section 600.1

cuss the bank's budgeting and planning process and evaluate management's ability to achieve budgeted earnings and maintain adequate capital levels. Comments on the bank's asset and liability mix and on the existence and cause of any variances between actual and expected results may be appropriate. The examiner should also review management's ability to maintain adequate earnings regardless of economic and regulatory changes. Internal Control The findings of internal control considerations and questions contained in the internal control questionnaire should be consolidated in this section and an overall conclusion regarding internal control should be reached. The section should contain significant deficiencies and not be a listing of each internal control question which received a negative answer. The evaluation of internal controls necessitates considering other existing controls that may counteract or mitigate an apparent weakness. For this reason, examiners must use judgment in developing comments regarding internal control deficiencies. M the examiner considers overall deficiencies minor and has discussed such deficiencies with management, the following comment might be made:

Internal controls are good except for minor deficiencies listed in the appendix section (or except for deficiencies noted in the check credit department which have been discussed with bank

management). When significant deficiencies are noted, the examiner should clearly state the magnitude of the situation, individuals with whom the matters were discussed. and remedial action taken or promised. Internal and External Audit Activities Comments should be made on the scope and frequency of internal audits, adequacy of working papers and reports, presentation of findings and followup of remedtal-action recommended. Major factors to be considered by the examiner in evaluating the internal audit function are the competence and indepen. dence of the internal auditors and the adequacy and ettectiveness of the audit program. In banks lacking internal audit, the examiner should evaluate the size and scope of bank operations and comment on the need for developing a program of internal audit. In some banks, the designation of a

full-time internal auditor may be impractical. How-
ever, if internal and external audit activities are unsat-
isfactory, the examiner should recommend that the
directorate increase the audit activities to reasonable
levels.
The section should contain the major areas where
verification procedures were performed and for what
reasons. It isolated verification procedures were per-
formed because of a deficiency in the audit program,
a listing of those procedures should be contained in
the appendix. If extensive procedures were per-
formed, the examiner does not need to list all the
procedures but rather to refer to the department or
area which is deficient or make a general comment
on the bank, as a whole.
If the bank employs an external auditor, the examiner
should comment on the type and scope of the audit
and the reliance placed thereon in determining the
scope of the examination. If the audit was limited, ad.
equacy should be considered and recommendations
made, where appropriate.
Future Prospects
This section should be developed primarily from find. ty
ings in the "Overall Conclusions Regarding the Con-
dition of the Bank." The report comment should as-
sess the bank's probable future condition by relating
conclusions reached in the other areas of the exami-
nation with the bank's market environment and the
political and economic climate. Conclusions should
include such factors as:
• The level of future earnings.

Quality of capital and strategic planning.
The projected rate of growth for earning as-
sets, deposits and premises.
Intensity of competition.
Quality of new services.

Capacity of management.
They should be evaluated on this page in light of their
anticipated ettect on the bank's condition over the
next three to five years. The conclusions reached in
the letter to the board will summarize, in most cases,
comments in this section.

Other Matters This section should include appropriate comments relating to other sections in the handbook which are

Comptroller's Handbook for National Bank Examiners August 1981