OCC Web and Telephone SeminarREFERENCE MATERIALS

Strengthening Corporate GovernanceStrengthening Corporate Governance

at theat the

Community BankCommunity Bank

Tuesday, August 2, 2005 at 2:00 EDT

and

Wednesday, August 3, 2005 at 12:00 EDT

Board Responsibilities

Boards of directors add strength to the corporate governance of a bank when they:

• Understand their oversight role and their fiduciary “duty of loyalty” and “duty of care” to the bank and its shareholders;

• Avoid conflicts of interest, and the appearance of conflicts, in their activities with other companies and individuals;

• Recuse themselves from decisions when they have conflicts of interest that make them incapable of properly fulfilling their fiduciary duties;

• Are able to commit sufficient time and energy to fulfilling their responsibilities;

Board Responsibilities(continued)

Boards of directors add strength to the corporate governance of a bank when they:

• Are of a size that allows for efficiency and real strategic discussion;

• Continue to develop and maintain an appropriate level of collective expertise as the bank grows in size and complexity;

• Periodically assess the effectiveness of their own governance practices, determine where weaknesses exist, and make changes as necessary;

• Select, monitor and, where necessary, replace key executives, while ensuring that the bank has an appropriate plan for executive succession, and determining that any intended successor is qualified, fit, and proper to manage the affairs of the bank;

Board Responsibilities(continued)

Boards of directors add strength to the corporate governance of a bank when they:

• Serve as a checks and balances function vis-à-vis the senior management of the bank by exercising their duty and authority to question and insist upon straightforward explanations from management, and receive on a timely basis sufficient information to judge the performance of management;

• Meet regularly with senior management and internal audit to establish and approve policies, establish communication lines and monitor progress toward corporate objectives;

• Promote bank safety and soundness, understand the regulatory environment and ensure the bank maintains an effective relationship with regulators;

Board Responsibilities(continued)

Boards of directors add strength to the corporate governance of a bank when they:

• Provide sound and objective advice, and recommend sound practices gleaned from other situations;

• Contribute special expertise in overseeing a bank’s activities which might not be available in the rest of the parent or group;

• Do not participate as the board of directors in day-to-day management of the bank; and

• Exercise due diligence in the hiring and oversight of external auditors

Directors and Ethics

Ethics Policy should address:• Conflicts of interest• Bank bribery laws• Acceptance of gifts• Political contributions• Outside employment• Purchases of bank assets• Confidentiality of bank and customer info• Outside directorships• Competition for business opportunities• Dealing with auditors

Directors and Ethics

Directors can set the tone for ethical behavior by taking the following measures:

• Approving clear insider policies and ensuring that there are processes for handling insider transactions, including director salaries, fees, loans, and expenses. Such processes include how the transactions are to be reported, approved, documented, monitored, and audited.

• Encouraging the reporting of any suspected illegal or ethical behavior. This is an important aspect of any ethics policy and should be reiterated by periodic employee training.

• Consulting with bank or personal counsel before entering into or approving transactions with the bank, including transactions between the bank and the director’s business interests.

Directors and Ethics

Directors can set the tone for ethical behavior by taking the following measures (continued):

• Disclosing all real or potential conflicts to the entire board before a board decision is made on an issue.

• Making sure that a director with a potential conflict of interest on any matter refrains from discussing, voting, or having any involvement in the matter, and that such abstention is noted in the minutes.

Directors and Ethics

Directors can set the tone for ethical behavior by taking the following measures (continued):

• Making sure transactions between the bank and a director or between the bank and a director’s business interests are fully documented. Such documentation might include:

– Independent appraisals of property that the bank is considering buying, leasing, or selling to or from a director, or other documents establishing the competitiveness of the terms.

– Information showing that a proposed loan to a director or his or her business interest is comparable with specific loans made by the bank to non-insiders.

– Board minutes that reflect not only the approval of such transactions, but also the nature of the board’s deliberations regarding a conflict of interest.

NYSE Corporate Governance Guidelines

• Director qualification standards– Core competencies and personal characteristics– Independence standards– Resignation and retirement

• Change in job/residence; retirement age

– Staggered terms vs. annual reelection

• Director responsibilities– Invest necessary time and effort– Attend meetings, be adequately prepared, and actively

participatehttp://

www.nyse.com

NYSE Corporate Governance Guidelines

(continued)

• Director compensation– Annual retainer

– Meeting/committee fees

– Additional compensation for committee chairs and audit committee financial expert

• CEO compensation– Address performance-based and incentive-based

• Director orientation and continuing education

NYSE Corporate Governance Guidelines

(continued)

• Director access to management and advisors– Presentations by management

• Board Operations– Board size– Function and membership of committees– Board meetings– Agenda– Board briefing information– Executive session– Interaction with third parties

Board Operations and Processes

Has the board actively considered what core competencies and personal characteristics are desired of directors?

Has the board displayed a commitment to ongoing education on both industry-specific issues and director roles and responsibilities?

Are your loans and other transactions with the bank of high quality and in compliance with law?

Has the board considered a policy on director service on other boards, which may inhibit your ability to devote sufficient time to the bank’s affairs?

Board Operations and Processes(continued)

Has the board considered a policy on director tenure to forestall habitual or simply reactive director participation?

Has the board considered a policy in which a director submits a resignation when the director changes jobs or moves?

Is there a process for evaluating the effectiveness of directors and of the board as a whole, and does this evaluation serve as the basis for whether a director is submitted for renomination?

Has the board considered whether the roles of CEO and Chairman of the Board should be separated and, if not, whether an independent “lead director” would be beneficial?

Board Operations and Processes(continued)

Does the board have an effective and independent method of evaluating the performance of the CEO?

Are board meetings they characterized by full deliberation of important issues or are they merely perfunctory?

Do directors provide input into the board agenda, or is the agenda largely driven by the CEO?

Is director record of attendance satisfactory? Do the directors receive board meeting materials in advance

to provide you time to adequately review it and be prepared for deliberations at the meeting?

Board Operations and Processes(continued)

Do the board and committees receive the right information (not necessarily all the information)?

Is the board briefed on and does it affirm the actions of committees?

Are the board and committee minutes a complete recording of deliberations, conclusions, and actions taken?

Do the independent directors periodically meet separately?

Board Operations and Processes(continued)

Does the board have a process for accessing independent advice or for meeting periodically with senior management?

Has the board planned for management succession?Do committee chairs and members periodically rotate to

avoid complacency or a “blind spot”?Do committees have appropriate charters, i.e., not

boilerplate?

Compensation Metrics

Qualitative Metrics

Asset qualityAdvancement of corporate strategyCompliance with the highest ethical

standards and legal requirementsCustomer satisfactionCommunity relationsLeadership development and team

buildingSuccession planningWorkforce morale, diversity, and

stability

Quantitative Metrics

Revenues

Net income

ROE or ROA

Loan growth

Earnings per share

Market share

Stock price