Each depositor insured to at least $250,000 per insured bank

• Plan for and oversee operations - This includes funding strategies, portfolio management, compliance, information technology, new business activities, etc. The best managed banks have an active and fully informed board that is encouraged to ask questions during board meetings and requires management to fully assess operations when doing their strategic planning. Also, make sure the board packages provide you with enough information for you to make independent and objective decisions.



• Identify, measure, monitor, and control risks - Examiners will consider management practices when rating all of the CAMELS components; however, the management component rating encompasses our assessment of risk management practices throughout all operational areas.



• Establish and implement adequate policies, procedures, and controls - Policies can be effective tools for the board, senior officers, and employees, but only if they truly reflect the needs of your bank. These policies communicate your risk tolerances to management and set the operational tone for your bank. The board is ultimately responsible for the institution, so make sure that you are sharing your perspective with the staff through well-written policies, procedures and controls.



• Provide for an effective audit program - An effective audit program is one that is comprehensive, independent, objective, and overseen by an audit committee comprised of outside directors. These audits are your opportunity to validate management's procedures and to ensure that the information that management provides you is accurate. Make sure that the audit committee is the primary contact with auditors and that management does not have an overwhelming influence on those auditors.



• Avoid dominant influence or concentration of authority - Allowing an officer or director to have a dominant influence can overwhelm even the best control systems. This can be a leading cause of poor bank performance and one that has contributed to several bank failures. This issue is a critical component to the examination exercise in this program.



• Provide for management depth and succession - The loss of key officers will disrupt any bank's operations, so prepare for this loss by identifying and grooming key individuals.



• Avoid self-dealing - All of the regulatory agencies have regulations that govern transactions between financial institutions and their insiders and affiliates. The Federal Reserve Board's Regulation O and Parts 23A and 23B establish limitations and reporting requirements for insider and affiliate transactions. Essentially, these laws require that you put the interests of the bank first, that you fully disclose all of your interests in any transaction with the bank, and that you make sure that all transactions are comparable to third-party terms.

Again, directors should not be performing day-to-day management tasks. Their work should be in setting strategic direction and ensuring that policy-defined objectives are met. Directors who keep abreast of basic facts and statistics such as asset growth, capital growth, loan-to-deposit ratios, deposit mix, liquidity, portfolio composition, loan losses, delinquencies, etc., have taken a critical step in performing their responsibilities. Directors need to ensure that board meetings are conducted in a businesslike manner and effective directors will plan for regular attendance. A director's attendance should be an informed, intelligent, and diligent one, and the board minutes should show involvement. The example noted in First State Bank is clearly an extreme example, albeit one that most experienced examiners have come across many times. Note how many of these basic principles are not being adhered to as you read the management comment in the Report of Examination.

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