**OCC Annual Report, Fiscal Year 2006**

**\[MS Word text-only version\]**

Office of the Comptroller of the Currency

October 2006

*Ensuring a safe and sound national banking system for all Americans*

Contents

> **Comptroller's Viewpoint**
>
> **  Agency History and Profile**
>
> **  Operations and Accomplishments**
>
> **Fiscal Year 2006 Highlights**
>
> Strategic Goals
>
> **Strategic Goal I: A safe and sound national banking system**
>
> Supervisory Guidance
>
> Modernizing Regulatory Risk-Based Capital Standards
>
> Bank Secrecy Act/Anti-Money Laundering
>
> Enforcement
>
> ***Hurricane Katrina: OCC Helps Banks and Customers Rebound***
>
> Bank Performance
>
> ***Quantitative Risk Models Provide New Insights for Bank
> Supervision***
>
> Partnership and Outreach
>
> ***The Globalization of Banking***
>
> **Strategic Goal II: Fair access to financial services and fair
> treatment of bank customers**
>
> Identity Theft and Information Integrity
>
> Consumer Compliance Ratings
>
> Fair Treatment of Bank Customers
>
> Customer Assistance Group
>
> ***CAG Focuses on Quality Service for Consumers***
>
> Community Affairs
>
> **Strategic Goal III: A flexible legal and regulatory framework that
> enables the national\
> banking system to provide a full, competitive array of financial
> services**
>
> Legal and Regulatory Opinions
>
> Litigation
>
> Rulemakings
>
> Licensing
>
> Regulatory Efficiency
>
> **Strategic Goal IV: An expert, highly motivated, and diverse
> workforce that makes\
> effective use of OCC resources**
>
> Human Capital
>
> ***OCC's Workforce of the Future***
>
> Information Security and Emergency Preparedness
>
> Process Improvement
>
> Technology
>
> **  Looking Ahead**
>
> **  Financial Management**
>
> **Letter from the CFO**
>
> **Financial Management Discussion and Analysis**
>
> Historical Perspective
>
> Strategic Focus
>
> Goal for Financial Management
>
> Operating Strategy
>
> Future Focus
>
> Funding Sources and Uses
>
> Financial Review Balance Sheets
>
> Statements of Net Cost
>
> Statements of Changes in Net Position
>
> Statements of Budgetary Resources
>
> Statements of Financing
>
> Statements of Custodial Activities
>
> **Audits and Program Analyses**
>
> **Assurance Statement**
>
> **Independent Auditors' Report**
>
> **  Financial Statements and Notes**
>
> **Balance Sheets**
>
> **Statements of Net Cost**
>
> **Statements of Changes in Net Position**
>
> **Statements of Budgetary Resources**
>
> **Statements of Financing**
>
> **Statements of Custodial Activity**
>
> **Notes to the Financial Statements**
>
> Note 1---Organization
>
> Note 2---Significant Accounting Policies
>
> Note 3---Investments and Related Interest
>
> Note 4---Property and Equipment, net
>
> Note 5---Leases
>
> Note 6---Retirement Plans and Other Benefits
>
> Note 7---Net Position
>
> Note 8---Expenses by Budget Object Classification
>
> **  Appendices**
>
> **Appendix A---FY 2006 Performance Measures and Results**
>
> **Appendix B---Financial Performance Measures**
>
> Prompt Payment
>
> Electronic Funds Transfer
>
> Erroneous Payments

Comptroller's Viewpoint

I am pleased to report that the national banking system not only
remained strong throughout fiscal year (FY) 2006, but that both the OCC
and the system are well equipped to meet the challenges that lie ahead.

This was the second consecutive year in which no national bank failed.
Capital was strong and earnings increased, driven by strong growth in
noninterest income. Healthy loan growth helped compensate for narrowing
net interest margins. Losses and delinquencies were minimal. In short,
the picture at year-end was quite positive.

Yet as supervisors, it is our job to worry about what comes next. Are we
at the stage of the credit cycle where risks in the system begin to
increase because of less favorable macroeconomic conditions, increased
competition, and weaker underwriting standards? What must we be doing to
prepare the banking system and the OCC for the challenges ahead?

A great deal of our work during the year focused squarely on these
questions. The interagency Shared National Credit review, a detailed
assessment of large syndicated loans to major corporate borrowers,
provided one important "snapshot" of national trends in credit quality.
The review found only small increases in the number of criticized and
classified commitments---and those increases were measured against 2005
levels, which were the lowest in six years. As positive as those results
were, they did not answer the question of whether that small drop in
credit quality portends a change in direction, or merely a small
fluctuation around a high and stable level of credit quality in the
syndicated loan market.

Of greater concern to me was the evidence of credit trends provided by
the OCC's *Survey of Credit Underwriting Practices*, a detailed review
of lending standards across 18 commercial and retail product lines,
based on the professional judgment of examiners-in-charge at the 73
largest national banks. The 2006 survey results indicated that loan
standards in both commercial and retail lending had eased for a third
consecutive year under pressure from competition and optimistic
expectations for loan volume, yield, and market share. The evidence
included thinner pricing, reduced amortization, weaker covenants and
controls, pervasive structural concessions in such terms as tenor and
guarantor requirements, and increased exceptions to lending policies.

In commercial lending, the most pronounced slippage occurred in
leveraged lending and large corporate loans. Commercial real estate also
showed continued signs of net easing that, in combination with the
increased concentrations in commercial real estate loans, heightened
concerns in that area. In retail lending, there was significant easing
in residential mortgage and home equity lending standards: longer
interest-only periods, higher allowable debt-to-income and loan-to-value
ratios, and greater volumes of loans with reduced documentation
requirements. Significantly, this weakening of standards came at a time
when prices in the previously red-hot housing market were leveling off
and, in many local and regional markets, actually declining. Although
these market trends would normally trigger tighter lending standards,
all evidence suggested that standards were continuing to loosen because
of intensifying competition among lenders for a shrinking pool of
buyers.

The evidence emerging from our analysis revealed symptoms that have
historically been reliable predictors of future problems in the banking
industry, if not addressed. Our challenge was to ensure that national
banks managed this risk in an effective and timely way, while credit
quality, loan loss reserves, and the economy remain strong.

It was with that objective in mind that the OCC addressed a broad range
of risks facing the national banking system during FY 2006.

As the fiscal year drew to a close, the bank, thrift, and credit union
regulatory agencies published guidance addressing nontraditional
residential mortgages. At a time of rising house prices in many parts of
the country, some lenders introduced options that, for a limited period,
allow borrowers to forego regular principal payments ("interest-only"
loans) or even to waive a portion of the interest due, resulting in
negative amortization. Although these products clearly can benefit some
consumers, we are concerned that banks may not properly manage the risks
they entail, especially in an environment of rising interest rates and
softening real estate markets. Our guidance therefore cautions banks to
assess a borrower's ability to repay the loan at the fully amortized
rate and to ensure that the borrower understands the terms and risks of
the product before purchase.

Similar concerns lay behind this year's proposed guidance on commercial
real estate (CRE) concentrations. The guidance does not take the
position that CRE concentrations are inherently unsafe and unsound, or
that hard limits should be set on such activities. Instead, it concludes
that CRE concentrations pose special risk that can and must be managed
effectively through appropriate management controls, including strong
information systems.

Strong capital is a key element of any risk management regime---and the
bulwark of a safe and sound banking system. A year marked by significant
progress in the arduous process of writing, refining, testing, and
critiquing the Basel II capital rules culminated in the long-awaited
release of a Notice of Proposed Rulemaking that was issued for public
comment. I am committed to continuing to work closely with all concerned
parties to ensure that the Basel II capital rule that emerges from this
process is one that deserves widespread support.

We undertook lower-profile, but no less important, initiatives
throughout the year that further strengthen risk management in the
national banking system. Our Community Bank Directors Workshop program
offered a selection of one-day classes on such subjects as credit risk,
compliance risk, and the OCC's risk assessment process. In February,
more than 400 senior bank managers, academics, vendors, and regulators
attended an OCC-sponsored conference on risk modeling, reflecting the
growing importance of these sophisticated statistical tools in making
underwriting decisions, managing and pricing accounts, and mitigating
losses.

The banking system played an increasingly important role in safeguarding
our nation's physical security. The OCC takes very seriously its
responsibility to enforce the Bank Secrecy Act in a manner that is
rigorous, consistent, measured, and fair. To help bankers better
understand their responsibilities under the law and our supervisory
procedures, we continued an ambitious industry outreach program and
issued clarifying supervisory guidance. We also added a new director for
Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) Compliance and
increased the number of BSA/AML experts in our headquarters office,
which substantially augmented the OCC's existing expertise in this
critical area.

During fiscal year 2006, recovery began in earnest from the massive
damage wrought by hurricanes Katrina, Rita, and Wilma on the Gulf Coast.
National banks are playing a crucial role in that effort, beginning with
the recovery of many local banks from damage sustained during the
storms. During my several trips to the region, I was impressed by the
way that banks have put competitive considerations aside and worked
together to keep vital services flowing to citizens of the affected
communities.

OCC staff members did their part, too. They worked with our banks to
address the many regulatory issues raised by the storms and encouraged
bank officials to work with their customers to help see them through the
financial difficulties many of them faced. They also established
relationships with community organizations and helped coordinate our
outreach efforts to local citizens and governmental bodies. They helped
mobilize the financial and intellectual resources of out-of-town
bankers, many of whom attended an interagency banker forum held in New
Orleans in March---as I did.

The OCC's commitment to community development is an around-the-country
proposition. I saw the fruits of the partnerships between national banks
and community-based organizations during my visits to neighborhoods in
Chicago, Los Angeles, and Washington, D.C., during FY 2006. Small
business formation and assistance, housing construction and renovation,
financial literacy and foreclosure abatement programs---the range and
vitality of community development initiatives undertaken with the
support of national banks---are truly impressive.

Several regulatory initiatives during the fiscal year promise to make
these partnerships even more successful. For example, we provided
guidance on how small- and minority-owned business contracts that
enhance the effectiveness of a bank's small business loan program may be
considered favorably in the bank's Community Reinvestment Act
evaluation. We also proposed that Congress approve legislation
increasing the community development lending authority available to
national banks under Part 24 of our regulations, and that measure was
adopted and signed into law.

Under Part 24, national banks may make an investment in a minority-owned
bank or thrift. The OCC is committed to supporting these institutions.
Our outreach efforts this year resulted in constructive dialogue between
minority-bank CEOs and OCC's senior executives, and helped us better
understand the special issues they face.

Protecting the rights of bank consumers is one of our agency's
fundamental obligations. In FY 2006, we expanded the capabilities of our
Customer Assistance Group (CAG), located in Houston. A report this year
by the Government Accountability Office (GAO) gave CAG high marks for
the way information obtained from consumers is incorporated in the
examination process. The GAO report also contained suggestions for
improving the quality of service CAG provides to consumers---suggestions
that we are in the process of implementing.

The national bank charter continued to be a vibrant vehicle for
conducting the business of banking. This is reflected in the growth of
the national banking system: assets under OCC supervision grew from
\$5.9 trillion to \$6.5 trillion during the fiscal year, representing 67
percent of all U.S. commercial bank assets.

In a long-awaited decision, *Wachovia* v. *Schmidt,* the U.S. Supreme
Court unanimously upheld the OCC's position that a national bank is a
citizen of the one state in which its main office is located. This
seemingly arcane issue is one of significant practical importance
because it enhances the ability of national banks to have their cases
heard in federal courts.

Important legal principles affecting national banks continue to be
litigated, including the extent to which state laws are preempted by
federal law under the National Bank Act, and the scope of the OCC's
exclusive "visitorial" authority over national banks (the authority to
examine, supervise, regulate, and sanction national banks). One issue,
the question of whether state laws apply to national banks' operating
subsidiaries to the same extent as they apply to the parent bank itself,
will be considered by the Supreme Court in late 2006, and should be
decided in 2007. This case, *Watters* v. *Wachovia Bank, N.A.,* arose
from state efforts to regulate and require state licenses of mortgage
banking operating subsidiaries of several large national banks. The OCC
believes that if state law is inapplicable to a national bank because of
federal preemption, the state law also would be inapplicable to the
bank's operating subsidiary because the operating subsidiary is a
federally authorized means through which the bank exercises its
federally authorized powers.

Information security, long a focus of attention for the OCC, emerged as
a critical issue during the year, as security breaches at some
government agencies, including the loss of laptop computers, raised the
visibility of this problem. A break-in at the OCC's Phoenix office
exposed vulnerabilities even where security is high. In response to
these developments, the OCC launched an end-to-end security review from
which we expect to emerge with a strengthened security infrastructure
fully capable of confronting the world of network linkages, high-speed
transmission, and mass storage of easily portable electronic data that
our supervisory work requires.

I have said to OCC staff that it is my responsibility to make sure that
on my last day in office, the OCC is stronger than it was on my first.
To achieve that goal, we must build staff resources and expertise that
are equal to the growth in the size and complexity of the national banks
we supervise. Our success depends on the supervisory staff that
implements OCC policies: nearly 3,000 examiners, attorneys, economists,
information technology experts, and other professionals and support
staff. Directly or indirectly, they are responsible for the examination
and supervision of the more than 1,800 national banks, federal branches
of foreign banks, and uninsured national trust companies. Our front-line
examiners serve as the OCC's face to the banking industry.

During the last year, we have focused intently on our organizational and
human resource capabilities and requirements. The challenge we face is
embedded in the OCC's changing demographics: fully 30 percent of our
current employees and 50 percent of our managers will be eligible to
retire in the next five years. Recruitment, retention, and training are
thus essential to the future of our organization and our ability to
perform our important mission.

During the last year, we have made unprecedented strides in recruitment
and hiring of examination staff, bringing aboard 162 new college hires
and 37 mid-career hires from industry and other agencies. We have also
made great strides in assessing the agency's skill requirements and
laying plans for the training programs needed to meet them. This is an
advantageous moment to be tackling these challenges. The current sound
condition of the national banking system allows us to focus on our
personnel needs in a measured and orderly way. We are also well
positioned by the OCC's own financial health, which is discussed
elsewhere in this *Annual Report,* and our growing reputation as a
workplace of excellence.

The OCC placed sixth among more than 170 peer agencies and bureaus in a
survey of "The Best Places to Work in the Federal Government." Also,
*BusinessWeek* magazine named us among the 50 best places in America to
start a career. These results are not only a matter of organizational
pride, but also an asset of considerable value to us as we work to
recruit and retain the best qualified individuals to fill our evolving
personnel needs.

We are living in a time of great uncertainty and constant change, but I
am confident that we are prepared to evolve with the market, meet new
challenges, and respond to emergencies---just as the OCC has done
throughout its\
143-year history.

\[signed\]

> John C. Dugan
>
> Comptroller of the Currency
>
> October 2006

Agency History and Profile

President Abraham Lincoln established the Office of the Comptroller of
the Currency (OCC) by signing the National Currency Act of 1863, which
empowered the fledgling bureau to organize a system of nationally
chartered banks and administer a uniform national currency that
generated badly needed revenue during the Civil War.

The currency-related duties of the OCC, a bureau of the Department of
the Treasury, ended after the Banking Act of 1935 retired national bank
currency in favor of Federal Reserve notes, but the agency continues to
supervise, regulate, and charter national banks.

Much has changed during the OCC's history. Examiners once painstakingly
counted all of a bank's cash during an examination and faithfully
recorded each national bank's "resources" and liabilities in the annual
*Report of the Comptroller of the Currency*. In later years, examiners
encoded telegraph messages to headquarters using a pocket-sized "Cipher
Code" book for reference.

What has not changed during the past 143 years is the OCC's steadfast
dedication to ensuring a safe, sound, and fair national banking system
for all Americans.

Today, the OCC supervises more than 1,750 national banks, more than 80
uninsured national trust companies, and 49 federal branches of foreign
banks in the United States.

National banks represent only about a quarter of the commercial banks
nationwide, but they hold about two-thirds---\$6.4 trillion---of the
nation's total commercial banking assets. Including federal branches and
uninsured national trust companies, total assets under OCC supervision
are nearly \$6.5 trillion.

The OCC has nearly 3,000 employees, including almost 2,000 bank
examiners.

John C. Dugan is the 29th Comptroller of the Currency and the chief
officer of the OCC. An 11-member Executive Committee, comprised of
senior agency officials who lead major business units, advises the
Comptroller.

The OCC operates entirely free of taxpayer dollars. Semiannual
assessments on national banks account for about 97 percent of the OCC's
operating budget. The agency also receives interest income from
investments in U.S. Treasury securities, licensing fees, and other fees.

The agency is headquartered in Washington, D.C., and maintains a number
of offices throughout the country, including a data center in Maryland,
an Office of the Ombudsman in Houston, and district offices in Chicago,
Dallas, Denver, and New York City. The agency also has 52 field offices
and 25 satellite locations that give it a full-time presence in
two-thirds of the states, as well as examiner teams that are resident
full-time in the 22 largest national banks. An office in London
facilitates the supervision of international activities of national
banks.

Operations and Accomplishments

The Office of the Comptroller of the Currency supervises institutions
representing 67 percent of the nation's banking assets, ranging from
small agricultural banks in the farm belt to the largest banks in the
world---including some with more than a trillion dollars in assets.

Large bank supervision is accomplished in part through teams of
experienced examiners assigned full-time to individual institutions.
They are supported by all of the resources a national regulator can
bring to the task, including a strong legal staff and experts in a
variety of risk areas, such as capital markets, bank technology, credit
risk, and compliance. In addition, Ph.D. economists---the OCC's
"quants"--- work with national bank examiners to evaluate the complex
models banks use to manage risk.

Community institutions, the economic backbone of America's communities,
represent by far the largest number of banks supervised by the OCC. The
OCC has a network of field offices that examine these smaller banks in
every state in the country. Each field office oversees a portfolio of
banks, and the examiners are frequently on the road, traveling from bank
to bank for examinations.

In between are mid-size national banks that have outgrown the community
bank category and share some attributes with large banks. This bank
segment draws examiners from Large Bank Supervision as well as the ranks
of community bank examiners. Mid-size banks are key training grounds for
examiners who typically start their careers in community banks, then can
move into specialized fields in large banks as their expertise grows.

In addition, the OCC supervises credit card banks, uninsured national
trust companies, and federal branches of foreign banks.

The national banking industry is diverse, competitive, and constantly
changing, requiring the OCC to evolve with the industry. The keys to the
OCC's success as a banking regulator are the dedicated and highly
skilled professionals who work for the agency. To ensure that the agency
has the skills to keep pace with an evolving industry and to ensure
continued strong leadership as the baby boom generation reaches
retirement, the OCC has made top priorities of staff recruitment,
retention, training, and the development of a new generation of leaders.

Fiscal Year 2006 Highlights

• Issued Interagency Guidance on Nontraditional Mortgage Products, which
addressed issues raised by interest-only and payment-option mortgage
loans.

• Published the revised Federal Financial Institutions Examination
Council (FFIEC) *Bank Secrecy Act/Anti-Money Laundering (BSA/AML)
Examination Manual* to provide bankers and bank examiners with
comprehensive guidance and resources about requirements and the
agencies' expectations.

• Exceeded recruiting goals by hiring 162 entry-level bank examiners,
adding to a highly qualified and diverse pool of talent. Also brought
aboard a record number of mid-career banking specialists.

• Proposed legislation passed by Congress to raise the limit on banks'
investments in urban revitalization and rural redevelopment.

• Hosted a forum in New Orleans with other banking agencies titled "The
Future of Banking on the Gulf Coast: Helping Banks and Thrifts Rebuild
Communities." Bank executives from the Gulf Coast region and elsewhere
discussed the challenges facing banks and thrifts affected by hurricanes
Katrina and Rita and strategies for meeting the needs of local
communities.

• Filed "friend of the court" briefs in cases that affirmed federal
preemption of state law restriction of national bank activities.

• Issued for comment the interagency notice of proposed rulemaking to
implement the Basel Committee on Banking Supervision's new capital
accord (Basel II) for large, internationally active banks and an
interagency notice of proposed rulemaking on changes to the agencies'
risk-based capital standards for market risk.

• Fully implemented supervision by risk for both large and community
national banks. Effective supervision tailored examinations to risks
presented, addressing safety and soundness issues, and applicable
specialty areas. There were no national bank failures and many of the
problem banks at the beginning of the year returned to sound condition.
Overall, the national banking system remained in safe and sound
condition, with adequate capital and earnings to support future
operations.

• Completed the annual Shared National Credit review that covered 7,009
facilities (or 4,833 borrowers) with commitments totaling \$1.9
trillion, in coordination with the Board of Governors of the Federal
Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC),
and the Office of Thrift Supervision (OTS).

• Initiated more than 30 process improvement studies since beginning
such studies in FY 2005. Such projects have saved the OCC \$1.3 million,
enabled redirection of staff to higher priority needs, allowed the
agency to deploy new regulatory requirements more efficiently, and met
internal customers' expectations with service delivery.

Strategic Goals

The OCC pursues four strategic goals to achieve its mission:

• A safe and sound national banking system.

• Fair access to financial services and fair treatment of bank
customers.

• A flexible legal and regulatory framework that enables the national
banking system to provide a full, competitive array of financial
services.

• An expert, highly motivated, and diverse workforce that makes
effective use of OCC resources.

> Here are the major operations of the OCC and the most significant
> accomplishments that the agency has achieved under each of the four
> strategic goals during FY 2006.

Strategic Goal I: A safe and sound national banking system

The OCC examines banks to ensure that each national bank operates in a
safe and sound manner and complies with applicable laws, rules, and
regulations. The agency also analyzes and monitors systemic risk and
market trends in the national banking system, the financial services
industry, and the economic and regulatory environments.

The agency continuously supervises six categories of
institutions---large banks, mid-size banks, community banks, credit card
banks, uninsured national trust companies, and federal branches of
foreign banks---and develops supervisory strategies based on each bank's
risk profile and condition. Each strategy outlines the examinations and
off-site analyses that will be completed during the supervisory cycle.
To carry out this objective, the OCC employs nearly 2,000 bank
examiners, based in offices throughout the United States.

In FY 2006, the OCC's supervisory strategies focused on Bank Secrecy
Act/Anti-Money Laundering (BSA/AML) compliance, credit quality, risk
management practices, audit, internal controls, integrity of financial
statements, reliance on noninterest income, and other areas. Supervision
also concentrated on outsourcing and vendor activities; interest rate
risk models and controls; liquidity and investment portfolio practices
and holdings; concentration risk; Basel II implementation; allowance for
loan and lease losses methodology and adequacy; and corporate
governance. Many of these issues will continue to be areas of emphasis
in FY 2007 strategies.

OCC's National Risk Committee regularly briefs the Comptroller and the
Executive Committee on material and emerging risks facing the national
banking system, evolving business practices, and financial market
issues. Risk assessment and strategies to mitigate identified risks are
significant areas of focus for Executive Committee members.

When necessary, the OCC employs a range of enforcement options to help
national banks correct identified problems. These options range from
advice to informal and formal enforcement actions. Agency officials
determine the best course of action in each particular case based on the
facts of that case and reasoned judgment about how to address problems
most effectively. Informal enforcement actions include commitment
letters and memorandums of understanding, which often are effective in
correcting problems. At the next level, formal enforcement actions
include specific, formal agreements signed by a bank's board of
directors and the OCC. Cease-and-desist orders are similar to formal
agreements and may be enforced through assessment of civil money
penalties. Cease-and-desist orders may also be enforced by a request in
federal district court for injunctive relief.

Supervisory Guidance

During FY 2006, the OCC issued the following supervisory guidance,
policies, and examination handbooks on issues and risks affecting
national banks:

• *Nontraditional Mortgage Products.* American home buyers now have more
financing options than ever before. They can choose from a menu of
mortgage products that offers an array of maturities, interest rates,
and payment plans. A rapid increase in home prices in some markets and
other forces have led to increased popularity of mortgage products in
recent years, allowing borrowers to defer repayment of principal and,
sometimes, interest. Although such products, often referred to as
nontraditional mortgages, can benefit some consumers, they can pose
additional risks that bankers and borrowers must understand. In 2006,
the OCC, FRB, FDIC, OTS, and National Credit Union Administration (NCUA)
issued Interagency Guidance on Nontraditional Mortgage Products. The
guidance instructed banks to offer the consumer loan terms and
underwriting standards consistent with prudent lending practices and
clear and balanced information about a product's relative risk and
benefits before the product choice is made. To assist financial
institutions in implementing the guidance, the agencies published for
comment examples of consumer information that reflect the recommended
practices. (OCC Bulletins 2006--41, 42, and 43)

• *Guidelines for Identifying and Managing Commercial Real Estate
Concentrations.* In recent years a growing number of financial
institutions have developed high and increasing concentrations of
commercial real estate (CRE) loans on their balance sheets. These
concentrations can make institutions vulnerable to cyclical commercial
real estate markets. In response to this development, the OCC, FRB,
FDIC, and OTS issued for comment proposed guidance that reinforces the
agencies' regulations and guidelines for safe and sound real estate
lending programs. The proposal also set forth thresholds for the
agencies to use in assessing whether an institution had a CRE
concentration and would be expected to employ more robust risk
management practices. The agencies are reviewing the comments received
on the proposed guidance and expect to issue final guidelines in FY
2007. (OCC Bulletin 2006--2).

• *Risk Management Guidance for Automated Clearing House Activities.*
Advances in technology have brought about significant changes in the
nature and volume of automated clearing house (ACH) activity. The ACH
system is a nationwide electronic payment system used by businesses,
governments, and consumers for cost savings and convenience. Common ACH
transactions include direct deposit of payrolls and government benefit
checks and direct payments of mortgages and loans. Increasingly, the ACH
system is also used for nonrecurring consumer transactions for the
purchases of goods and services. In light of these developments, the OCC
issued guidance to bankers and examiners on the risks that banks may
incur when originating, receiving, or processing ACH transactions and on
the key components of an effective ACH risk management program. (OCC
Bulletin 2006--39)

• *Sound Practices for Managing Complex, Structured Finance Activities.*
Financial markets have grown rapidly over the past decade, and
innovations in financial instruments have facilitated the structuring of
cash flows and allocation of risk among creditors, borrowers, and
investors in more efficient ways. Various financial derivatives,
asset-backed securities with customized cash flows, and specialized
finance conduits that manage pools of assets have become an essential
part of U.S. and international capital markets. The OCC, FRB, FDIC, OTS,
and the Securities and Exchange Commission (SEC) issued revised guidance
for comment to assist institutions in identifying, evaluating, managing,
and addressing the risks of complex, structured financial transactions.
(OCC Bulletin 2006--22)

• *Guidance and Examination Procedures on Community Reinvestment Act
(CRA) Activities.* The OCC, FRB, and FDIC updated examination procedures
based on FY 2005 revisions to their CRA regulations. (OCC Bulletins
2006--6, 16, 17, 21, and 29)

• *Advisory on Unsafe and Unsound Limitation of Liability Clauses in
External Audit Engagement Letters.* A properly conducted audit provides
an independent and objective view of the reliability of a financial
institution's financial statements. Limits on an external auditor's
liability could weaken the auditor's objectivity, impartiality, and
performance. In response to an increase in the types and frequency of
such provisions in financial institutions' external audit engagement
letters, the OCC, FRB, FDIC, OTS, and NCUA issued a joint advisory to
financial institutions to alert them not to enter into arrangements that
include certain limitations that the agencies deem to be unsafe and
unsound. (OCC Bulletin 2006--7)

• *Disaster Preparedness.* When the prospect of an avian flu pandemic
surfaced in FY 2006, the OCC led the interagency development of an
advisory to raise industry awareness of the threat and of the need to
plan for possible business disruptions of long durations and wide
geographic impact. The OCC and other FFIEC agencies also issued a
booklet, "Lessons Learned from Hurricane Katrina: Preparing Your
Institution for a Catastrophic Event" to document the knowledge gleaned
from the financial industry's responses to the devastation from the
hurricane. (OCC Bulletins 2006--12 and 26)

• *Gift Card Disclosures.* In August, the OCC issued guidance to
national banks and examiners on issues associated with gift cards. The
guidance focused on the need for national banks that issue gift cards to
ensure that purchasers and recipients are fully informed of the
product's terms and conditions. The OCC noted that gift cards present
special challenges because providing disclosures to a purchaser may not
suffice to inform the gift card recipient about the product. The OCC
guidance urged national bank gift card issuers to provide critical
information to recipients as well as purchasers. The OCC also advised
national banks to avoid certain practices that could be misleading to
consumers, for example, advertising a gift card with "no expiration
date" if recurring fees could consume the card balance. (OCC Bulletin
2006--34)

Modernizing Regulatory\
Risk-Based Capital Standards

Bank capital serves as a buffer against anticipated and unexpected
losses. Risk-based capital standards are designed so that if banks take
on greater risk, they must hold more capital. The current risk-based
capital framework, implemented in 1989, relies on a very crude
distinction between risks. The OCC is working with the FRB, FDIC, and
OTS to ensure that regulatory capital requirements better reflect the
risks facing the banking industry.

The agencies' capital reform efforts for the largest and most complex
banks are focused on the U.S. implementation of the Basel Committee on
Banking Supervision's revised capital accord, known as Basel II. The
Basel II framework is designed to provide a more risk-sensitive capital
process that incorporates information from advanced risk management and
measurement systems used by large banks. In September, the agencies
issued for comment the interagency notice of proposed rulemaking to
implement Basel II, an interagency notice of proposed rulemaking on
changes to the risk-based capital standards for market risk, and
proposed supervisory reporting templates to collect key data required
under the proposed Basel II framework and revised market risk standards.
The agencies also continued to work on supervisory guidance that
outlines those portions of the risk measurement and management systems
that banks subject to the Basel II framework would need to meet.

The Basel II framework is not appropriate for all banks in the United
States. Many of those banks need meaningful, but simpler, improvements
in their risk-based capital requirements to align capital more closely
with risk. To address this need, the agencies issued an advance notice
of proposed rulemaking in October 2005 that sought comment on possible
changes to improve the agencies' current capital rules for non--Basel II
banks. The agencies have reviewed those comments and are proposing
modifications to their rules. Publication of the proposed rule, known as
Basel 1A, is anticipated in early 2007.

Bank Secrecy Act/Anti-Money Laundering

Early in FY 2006, the OCC launched a comprehensive set of initiatives to
ensure that its BSA/AML supervision is not only effective, but also
measured and fair. "The post--9/11 world is profoundly different in many
ways from what it used to be, and that is certainly true in the BSA
area," Comptroller Dugan said in a speech in November 2005. "Whether we
like it or not, the traditional concerns of BSA---disrupting the money
flow of the drug trade and other illicit activity---have been joined
with concerns about combating the financing of terrorism."

Highlights include:

• Published the FFIEC's revised *BSA/AML Examination Manual* in July
2006. The FFIEC, assisted by the Financial Crimes Enforcement Network
(FinCEN), reorganized and updated the manual to reflect recent changes
to the BSA/AML regulations. The manual also offers updated supervisory
guidance for examiners when conducting risk-focused compliance
examinations related to BSA/AML and the Office of Foreign Assets Control
(OFAC). (OCC Bulletin 2006--33)

• Completed BSA/USA PATRIOT Act (USPA) examinations for mid-size banks.

• Completed BSA/USPA compliance reviews for 90 percent of non-high-risk
community banks. The agency completed these reviews for all large banks
and high-risk community banks in FY 2005.

• Developed a national pool of BSA/AML examiners, including 20 OCC
employees who earned Certified Anti-Money Laundering Specialist
credentials as of June 2006.

• Delivered BSA/AML training to all examiners-in-charge in Large Bank
Supervision and most compliance specialists.

• Doubled the number of classes in the OCC's updated BSA/AML internal
training program for examiners. During these eight classes in FY 2006,
the agency trained 187 examiners to recognize potential money laundering
risks, understand high-risk products and services, and assess the
adequacy of a bank's policies and procedures.

• Completed BSA/AML training for all examiners in the Mid-Size/Community
Bank Supervision program and all examiners performing BSA/AML work in
the Large Bank Supervision program who had not completed such training
in the past two years.

• Served as a member of the interagency working group that published the
*U.S. Money Laundering Threat Assessment*, which is the first
government-wide analysis of money laundering in the United States.

• Served as a member of the interagency working group that provided
significant assistance to the Financial Action Task Force (FATF) in its
Mutual Evaluation of the Anti-Money Laundering and Combating the
Financing of Terrorism Regime of the United States.

**BSA/AML Enforcement**

OCC is committed to ensuring that banks have adequate and effective
BSA/AML programs in place. The agency is also committed to balanced
supervisory discretion by taking supervisory actions fairly and
consistently.

The OCC investigates national banks that fail to meet BSA/AML
requirements and brings enforcement actions against them. Banks must
implement adequate BSA compliance programs in accordance with OCC
regulations, establish procedures to identify and monitor high-risk
accounts, and report suspicious transactions. The OCC coordinates with
other regulators and law enforcement authorities to ensure such
compliance and detect, track, and prevent attempts by terrorists and
other criminals to use the national banking system for their activities.

The OCC brought enforcement actions against several banks for inadequate
BSA/AML compliance programs, ordering them to develop and implement
internal controls, conduct audits, designate BSA compliance officers,
and conduct employee training programs. For example:

• A federal branch agreed to the OCC assessment of a \$3 million civil
money penalty (CMP) for deficiencies in its internal controls,
particularly in the area of BSA/AML compliance.

• The OCC issued a cease-and-desist order by consent against a bank for
failing to have an adequate BSA compliance program and for failing to
take appropriate action to determine the risk level of its customer
base.

• The OCC issued a cease-and-desist order by consent against a bank with
a large number of high-risk accounts for failing to implement an
adequate system of internal controls to identify and monitor those
accounts, and for failing to implement adequate testing of its BSA/AML
compliance.

• The OCC issued a cease-and-desist order by consent against a bank for
failing to have an adequate BSA compliance program. The order required
the bank to adhere to a strategic plan, which would be terminated in the
event of the sale, merger, or liquidation of the bank.

• The OCC issued a cease-and-desist order by consent against a bank for
an inadequate BSA/AML program and for failing on multiple occasions to
file suspicious activity reports. In addition, the bank's former
President and Chief Executive Officer (CEO) agreed to the OCC's
prohibition and cease-and-desist orders, and a \$100,000 CMP for
allegedly issuing and concealing millions of dollars' worth of unsafe or
unsound loan guarantees. The cease-and-desist order required the former
President to make restitution of \$407,000 to the bank, to reimburse the
bank \$100,000 for expenses, and to indemnify the bank for half of any
judgments against it related to the worthless guarantees.

• The OCC issued a cease-and-desist order by consent against a bank for
failure to correct previously identified deficiencies in its BSA/AML
program.

• The OCC issued a cease-and-desist order by consent against a federal
branch for deficiencies in its BSA/AML program, including inadequate
internal controls over its wire pouch activities and demand deposits,
and lack of independent testing. The bank had previously been subject to
formal enforcement action for BSA/AML deficiencies.

Enforcement

In addition to BSA/AML enforcement, the OCC takes other formal and
informal enforcement actions to support prompt detection and mitigation
of problems before they affect a bank's viability, and to ensure orderly
resolution of troubled banks. These actions address violations of laws,
rules, and regulations, unsafe or unsound banking practices, and
noncompliance with policies or procedures by national banks, their
insiders, and other affiliated parties.

During FY 2006, formal enforcement actions included temporary
cease-and-desist orders, final cease-and-desist orders, removal or
prohibition orders, CMPs, and formal agreements. The agency also took
informal actions, including supervisory letters, memorandums of
understanding, and letters of reprimand. In addition, the OCC's Fast
Track Enforcement Program helped ensure that bank insiders and employees
who committed criminal acts involving banks, but who were not being
criminally prosecuted, were banned from working in the banking system.
Table 1 summarizes enforcement actions taken in FY 2006.

**Enforcement Actions against Banks and Bank Insiders**

The OCC brought these actions to detect and mitigate problems at banks
that could affect their viability. The agency also took action against
bank insiders and other institution-affiliated parties when practices,
conduct, or breaches caused, or could have caused, harm to a bank, or
resulted in financial gain or other benefit for the insider.

• The OCC issued a prohibition order by consent and assessed a \$100,000
CMP against a former bank President accused of causing the bank to make
unauthorized payments for personal expenses totaling at least \$388,000
for himself and his family. The former President made restitution of the
unauthorized payments before the OCC's action.

• The OCC issued a prohibition order by consent against a former bank
President accused of causing the bank to make loans significantly
exceeding its legal lending limit (which led to closure of the bank),
creating false bank records, and engaging in a fraudulent wire
transaction. The OCC's supervisory office also assisted the Assistant
U.S. Attorney for the Western District of Wisconsin in criminal
proceedings. The judge in that case ordered the former bank President to
serve nine years in prison and pay \$13.4 million in restitution to the
bank.

• The OCC issued a prohibition order by consent and assessed a \$25,000
CMP against a former bank Senior Vice President accused of embezzling
about \$700,000, which he repaid to the bank in full, plus \$21,500 in
related bank costs, before the OCC's action.

• Following the issuance of a cease-and-desist order against a bank for
violations of law and regulation and for problems in its lending
program, the bank's Chairman and CEO agreed to the OCC's assessment of a
\$5,000 CMP against him for alleged violations of laws governing legal
lending limits, insider loans, and affiliate transactions. The OCC
issued a second cease-and-desist order by consent and assessed a
\$20,000 CMP against the bank for failing to maintain adequate and
accurate records, and for filing inaccurate reports on the bank's
condition.

• The OCC issued prohibition orders by consent and assessed CMPs of
\$5,000 each against two former senior bank officers accused of
embezzling bank funds and for assisting other executive officers'
misconduct. The OCC also assessed CMPs ranging from \$7,500 to \$10,000
against four bank directors for inadequate oversight of the bank's
affairs and for the bank's failure to comply with a 2002 OCC formal
agreement. The bank has been purchased by another financial institution.
Further enforcement actions are pending.

Table 1: Enforcement Actions, FY 2006

+-----------------------------------+-----------------+----------------+
| > **Type of enforcement action**  | > **FY 2006**   |                |
+-----------------------------------+-----------------+----------------+
|                                   | > **Against     | > **Against    |
|                                   | > banks**       | > institut     |
|                                   |                 | ion-affiliated |
|                                   |                 | > parties**    |
+-----------------------------------+-----------------+----------------+
| > Cease-and-desist orders         | > 13            | >  9           |
+-----------------------------------+-----------------+----------------+
| > Temporary cease-and-desist      | >  2            | >  0           |
| > orders                          |                 |                |
+-----------------------------------+-----------------+----------------+
| > 12 USC 1818 civil money         | >  6            | >  41          |
| > penalties                       |                 |                |
+-----------------------------------+-----------------+----------------+
| > 12 USC 1818 civil money         | > \$9,495,000   | > \$693,500    |
| > penalties amount assessed       |                 |                |
+-----------------------------------+-----------------+----------------+
| > Flood insurance civil money     | >  6            | >  0           |
| > penalties                       |                 |                |
+-----------------------------------+-----------------+----------------+
| > Flood insurance civil money     | > \$ 32,900     | >  0           |
| > penalties amount assessed       |                 |                |
+-----------------------------------+-----------------+----------------+
| > Restitution orders              | >  1            | >  12          |
+-----------------------------------+-----------------+----------------+
| > Amount of restitution ordered   | > \$6,800,000   | > \$545,604    |
+-----------------------------------+-----------------+----------------+
| > Formal agreements               | > 27            | >  0           |
+-----------------------------------+-----------------+----------------+
| > Memorandums of understanding    | > 16            | >  0           |
+-----------------------------------+-----------------+----------------+
| > Commitment letters              | >  7            | >  0           |
+-----------------------------------+-----------------+----------------+
| > Suspension orders               | >  0            | >  0           |
+-----------------------------------+-----------------+----------------+
| > Letters of reprimand            | >  0            | >  41          |
+-----------------------------------+-----------------+----------------+
| > 12 USC 1818 removal/prohibition | >  0            | >  42          |
| > orders                          |                 |                |
+-----------------------------------+-----------------+----------------+
| > 12 USC 1829 prohibitions        | >  0            | > 232          |
+-----------------------------------+-----------------+----------------+
| > **Total enforcement actions**   | > **78**        | > **377**      |
+-----------------------------------+-----------------+----------------+

**Actions to Enforce\
Federal Standards for Mortgage Lending**

A mortgage lending subsidiary of a national bank engaged in a pattern of
submitting loans to the U.S. Department of Housing and Urban Development
(HUD) for Federal Housing Administration insurance without proper review
and certification by appropriate underwriters, as required by HUD. The
subsidiary agreed to pay approximately \$6.8 million to HUD in
restitution, agreed not to submit insurance claims on certain FHA loans,
and was assessed a \$6.25 million CMP.

**Enforcement Investigations and\
the Right to Financial Privacy Act**

The U.S. District Court for the Northern District of Texas ruled in
favor of the OCC in a case involving enforcement of an OCC subpoena
challenged under the Right to Financial Privacy Act (RFPA). The court
found that the OCC's investigation of the plaintiff (a bank officer) for
nonpayment of wire transfer fees was conducted pursuant to the OCC's
statutory authority and necessarily qualified as a "legitimate law
enforcement inquiry" for RFPA purposes. The OCC was thereby allowed
access to the bank officer's personal financial records held at a
non-national bank, the court said. The court rejected the bank officer's
argument that the OCC must cite a specific violation of law to comply
with RFPA requirements. *Abrams* v. *OCC,* No. 3:05--CV--2242--L (N.D.
Tex. August 3, 2006)

**Actions Involving Flood Insurance**

The OCC continued to review the compliance of national banks with
federal regulations requiring flood insurance for certain properties
located in special flood hazard areas that secure loans by national
banks. The OCC assessed CMPs totaling \$32,900 against six banks for
violating flood insurance requirements in FY 2006.

(sidebar) Hurricane Katrina: OCC Helps Banks and Customers Rebound

At 3:00 a.m. on the morning before Hurricane Katrina made landfall along
the Louisiana and Mississippi coasts, a local bank executive sent an
e-mail to his examiner-in-charge. He and his employees were "up to our
ears in alligators," he said, and they had begun executing contingency
plans. The region had been through hurricanes before, but this one was
going to be different.

The unprecedented magnitude and duration of Hurricane Katrina caused
major losses that exceeded the scope of disaster response plans. A
second hit from Hurricane Rita three weeks later created an unimaginable
situation for area banks, examination teams, and their families.

Many banks had to evacuate twice and execute two separate contingency
plans. More than 600 employees of Whitney Bank evacuated from New
Orleans to Houston only to move again to avoid Rita's wrath. Hibernia
Bank, now part of Capital One, evacuated more than 1,400 employees. OCC
employees and their families also fled. Many lost much; some lost
everything.

In the days and months after the storms, the financial industry and its
regulators showed strength and resilience. Alongside bankers and other
federal regulators, OCC employees supported citizens, communities, and
banks throughout the region.

"I'm very proud of the way our banks and our team members reacted,"
Comptroller of the Currency John C. Dugan said. "OCC and the other
federal and state bank regulators have often been held up as examples of
government at its best."

As chairman of the FFIEC, a group of federal banking regulators, the
Comptroller played a central role in shaping interagency responses to
the disaster.

**Reaching Customers and Taking Care of People**

Although realistic and well-rehearsed plans for recovery and continuity
can help organizations to manage crises, Katrina showed that
institutions must improvise, adapt, and overcome obstacles as events
unfold. After Katrina, financial institutions adapted procedures to
facilitate check cashing for non-customers, shared limited workspace,
and worked cooperatively in new ways to meet customer and community
needs.

Immediately after the storm, the OCC publicly encouraged national banks
to consider helping affected customers by giving them extra time to make
loan payments, restructuring their debts, and easing credit terms for
new loans.

OCC examiners also acted as facilitators between their banks and other
federal agencies. For example, when the flow of mail slowed to a trickle
after the storms, the OCC set up meetings between bankers and
representatives of the U.S. Postal Service. Over the weeks, the decline
in calls to federal regulators signaled progress.

As banks began to reopen offices and resume operations, reconstituting
bank staffs presented significant challenges. In response to these
challenges, banks moved their back-office operations out of
storm-damaged areas, changed operating hours to accommodate employees
who were putting their lives back together, and offered pay increases to
entice new employees, as well as encourage former employees to return.
In one large bank, 90 percent of the loan processing staff had not come
back to work a year after the storms. While some employees could return
sooner than others, commutes were difficult for months.

Re-establishing communication with customers also presented a
significant challenge. More than a million people from the Gulf Coast
were displaced and spread across the nation, making it nearly impossible
for lenders to locate many customers. While regulators encouraged
lenders to work with storm victims, lenders could not assess or meet
customers' needs without direct contact.

To help solve this problem, the FFIEC sponsored a public service
advertising campaign reaching out to encourage hurricane victims to
contact their lenders. The radio and print spots began in mid-January
and reached an audience of more than 4.7 million people in fewer than 90
days.

The FFIEC later collected valuable hurricane-related lessons from
regulators and industry professionals, and documented them in "Lessons
Learned from Katrina: Preparing Your Institution for a Catastrophic
Event."

**The OCC to Employees: "Whatever you need"**

The OCC also responded to the needs of its employees and their families
who were directly affected by the storm. Like other hurricane victims,
OCC families were uprooted by the storms, their homes and lifestyles
destroyed. The agency immediately put employees displaced by the storm
on travel status, providing them with lodging, a daily stipend, access
to cash advances, and other benefits. On a personal level, employees
took up collections and made donations to support one another.

The agency explored and authorized alternative work arrangements to help
employees return to work from new locations. The OCC also provided
equipment, such as wireless handheld devices and laptop computers, to
help displaced employees reconnect.

"Getting back to work was important to all of us, so we could return to
some semblance of normalcy," said Mary Reeves, an OCC national bank
examiner displaced by the storms. "I'll never forget what the agency did
for us: 'Whatever you need,' they said."

**Enabling a Rebuilt Gulf Coast**

A year after Katrina, rebuilding the Gulf Coast has only begun. Banks
and other financial institutions play critical roles in that effort.
Early in the process, Comptroller Dugan took a direct and personal
interest in coordinating activities to support the region.

"Nothing can prepare you for a drive that takes you past mile after mile
of uprooted trees, abandoned cars, and concrete foundations that mark
the spots where homes once stood," the Comptroller said after his first
visit to the region. "It is clear that we have a long road ahead before
the region returns to normal, but however great the task, the OCC staff
and national bankers I spoke to are ready to play their part."

As FFIEC chairman, Comptroller Dugan immediately called for a special
interagency working group to coordinate and monitor activities
supporting the region. This coordination helped the FFIEC provide broad
and flexible guidance giving financial institutions more leeway to meet
the needs of their communities.

In October 2005, regulators announced exceptions to regulatory
requirements for appraisals in areas affected by hurricanes Katrina and
Rita. Waiving the requirements for appraisals allowed speedier granting
of loans for recovery from the disasters. In that same month, the OCC
announced a partnership with Operation HOPE, Inc., to provide bank
customers with information about accounts, lost financial records, ATM
cards, direct deposits, how to contact a national bank branch, and other
matters.

In December 2005, the agency expanded its presence by establishing an
additional OCC Community Affairs Officer in the region to work with
national banks, community groups, government organizations, and others
who are rebuilding the area.

The federal agencies issued guidance in February 2006 to allow financial
institutions to receive Community Reinvestment Act credit for activities
that revitalize and stabilize designated disaster areas even though the
lender may be based outside that area. The guidance also stated that
national banks could receive positive consideration for activities
benefiting people who had been displaced by the hurricanes and perhaps
had relocated to other states.

In March 2006, regulators hosted a forum, "The Future of Banking on the
Gulf Coast: Helping Banks and Thrifts Rebuild Communities." This forum
brought community groups, the federal regulatory agency leaders, and
lenders together to discuss the challenges facing communities, banks,
and thrifts operating in areas affected by the hurricanes.

OCC examiners in New Orleans reported additional signs of progress this
past summer. On August 7, the Capital One building began operating
without any external generator power. From the air, observers could see
that the blue dots of tarped roofs were slowly disappearing. Shops were
opening on streets that were once underwater, and the first "Lucky Dog"
hot dog carts returned to Jackson Square.

Hurricane Katrina was only one of the natural disasters that hit the
country in 2005. Its scope and impact tested the resolve of federal
regulators and the financial services industry. OCC employees and
bankers passed that test and showed their mettle, finding creative and
meaningful ways to meet customers' needs as they restored financial
services in the flood-torn region. (end of sidebar)

Bank Performance

Here are some of the ways the OCC analyzes national bank performance and
responds to bank inquiries and appeals of agency decisions and actions.

**National Banks with Composite CAMELS\
Rating of 1 or 2**

Bank regulatory agencies use a composite rating known as CAMELS
(**C**apital adequacy, **A**sset quality, **M**anagement, **E**arnings,
**L**iquidity, and **S**ensitivity to market risk) to determine the
overall condition of banks. The rating, which provides a framework for
evaluating significant financial, operational and compliance factors,
has a scale of 1 through 5, in which 1 is best. CAMELS ratings are
assigned at the completion of every supervisory cycle or when a
significant event leads to a change in CAMELS components. In FY 2006, 95
percent of national banks received a CAMELS rating of either 1 or 2,
showing the overall strength of the national banking system and the U.S.
economy.

**Rehabilitated National Banks**

Although problem banks sometimes reach a point beyond which
rehabilitation is no longer feasible, OCC's early identification of, and
intervention with, problem banks can lead to their successful
rehabilitation. The OCC proposes corrective actions to improve
operations at problem banks. As a result, 46 percent of banks with
composite CAMELS ratings of 3, 4, or 5 in FY 2005 improved their ratings
to either 1 or 2 in FY 2006. This is an improvement from 44 percent in
FY 2005 and 40 percent in FY 2004.

Table 2: Performance Measures, FY 2006

  ---------------------------------------------------- ------------ ------------
  **Performance Measures**                             **Target**   **Actual**

  Percentage of national banks with composite CAMELS   90%          **95%**
  rating of 1 or 2                                                  

  Rehabilitated problem national banks as a percentage 40%          **46%**
  of the problem national banks in FY 2005                          

  Percentage of national banks that are categorized as 95%          **99%**
  well capitalized                                                  
  ---------------------------------------------------- ------------ ------------

**Shared National Credit Modernization**

The Shared National Credit (SNC) program is a collaborative review and
assessment by the OCC, FRB, FDIC, and OTS of the largest and most
complex loans that are shared by multiple financial institutions. The
2006 SNC review, which covered 7,009 loan facilities with commitments
totaling \$1.9 trillion, found that overall SNC credit quality was good.
But the review noted a small increase in the level of adversely rated
credits. The bulk of this increase was associated with credits held by
nonbank entities, while problem loans at regulated institutions---most
notably those with insured deposits---grew slightly. The review also
found a continued easing of credit underwriting standards in the
syndicated market in general, particularly in non-investment-grade, or
leveraged-credit, facilities.

In FY 2006, the OCC assumed the lead of an interagency modernization
initiative to standardize and expand the data collection process to
improve the effectiveness of reviews. The initiative will continue in FY
2007.

**Well-Capitalized National Banks**

The Federal Deposit Insurance Act classifies insured depository
institutions into five categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized) based on their capital levels relative to
their risks. At the fiscal year-end, 99 percent of national banks were
categorized as well capitalized. National banks' capital has remained at
this high level for the past several years.

**National Bank Appeals**

The national bank appeals process is an avenue for the OCC and national
banks to address disagreements arising from the supervisory process that
cannot be resolved through informal discussions. National banks may
appeal OCC decisions and actions to the Office of the Ombudsman. With
the consent of the Comptroller, the Ombudsman can stay a pending
decision or action until the appeal is resolved. In FY 2006, the
Ombudsman's office received about 90 substantive appeal-related
inquiries, informal appeals, and formal appeals. Separate from the
appeals process, banks may provide confidential feedback at the end of
each supervisory cycle on the OCC supervisory process by completing an
examination questionnaire administered by the Ombudsman's office.

(sidebar) Quantitative Risk Models Provide New Insights for Bank
Supervision

An explosion of computing power is making a major impact on banking by
putting abstract economic models onto personal computers and into banks
of all sizes.

Computer modeling to perform complex risk analysis has grown rapidly
from small beginnings a dozen years ago to a central role in the
national banking system.

Even smaller banks are now using computer models to manage areas of
business, such as loan underwriting, credit risk, and asset-liability
management. In large banks, the modeling that began in derivatives
eventually spread to all lines of business.

To gauge the effectiveness of increasingly pervasive modeling, the OCC
employs quantitative modeling experts, who work with members of
examination teams in large banks.

What began as a two-person shop in 1994 has grown into a 30-person Risk
Analysis Division (RAD), working hand-in-glove with examiners to assess
the safety and soundness of national banks' quality controls for
computer risk analysis modeling and to assess national banks' fair
lending performance.

These experts not only help examiners evaluate the modeling activities
of banks, but offer expert advice on best practices in quantitative
modeling. The OCC modeling experts have also been busy assessing the
quantitative risk systems that would provide inputs for banks to use
under the proposed Basel II capital rule.

The agency has sponsored two conferences on computer modeling. The
first, on how to build credit rating-and-scoring models, featured
experts from the industry and the OCC.

At a follow-up conference in February 2006, OCC experts provided
guidance on how to validate those models and develop quality controls to
make sure they work as intended. Interest in the conference ran high and
organizers had to limit the number of attendees to 400.

"If a bank relies on models in ways that are integral to its business
processes, then the soundness of the organization is likely to depend on
the validity of those models," Comptroller Dugan told the audience of
bankers and officials of other regulatory agencies during the conference
luncheon speech. "Models and validation become integral to the way we
supervise the bank, making model validation very much our concern. The
more central the uses of models are to a bank's business, the more
central this aspect becomes to our assessment of that bank's soundness."

Although the OCC has supervised federally chartered banks since the
creation of the national banking system more than 140 years ago, its
supervision is anything but old-fashioned. The RAD team is only one
example of how the world-class expertise of the OCC workforce positions
the agency well for its next century of challenges. (end of sidebar)

Partnership and Outreach

The OCC maintains ties to other financial regulators and the banking
industry.

**Industry Outreach**

Industry outreach programs are key vehicles for the Comptroller and
other senior OCC officials to exchange information with bank executives
and trade association representatives. The Comptroller is a frequent
speaker at major industry conferences and events.

The OCC offers programs and conferences to provide information to
bankers and bank directors on emerging issues and regulatory
requirements. Periodic seminars are offered on the Web and by telephone
so bankers can hear agency experts discuss their experiences and
regulatory expectations, and can directly ask the experts questions.

The OCC, other federal banking agencies, FinCEN, and OFAC hosted four
well-attended conference calls for examiners and bankers about the
revised FFIEC *BSA/AML Examination Manual.* More than 10,000 callers
listened and participated in an extensive question-and-answer session.

Another 2006 highlight was a program covering "The New CRA Perspective
for You and Your Bank." Approximately 2,000 listeners participated from
more than 400 sites.

The OCC sponsors programs each year to foster dialogue between the
Comptroller and groups of chief executive officers of national banks.
Discussion focuses on the nuts and bolts of OCC supervision, economic
and community development trends, and broad issues of public policy. In
2006, the agency hosted about 240 CEOs at programs in Tampa, Dallas,
Chicago, Los Angeles, and New York City.

The OCC also conducted 15 workshops for about 750 community bank
directors that addressed topics such as credit risk, compliance risk,
and the OCC's risk assessment process.

**Working with Other Financial Regulators**

The dynamic and global nature of today's financial services industry
presents issues that cut across regulatory and legal boundaries. Banks,
securities, and insurance firms participate actively in the credit and
capital markets and are often counterparties to each other's
transactions; electronic payment systems span the globe; and national
banks have offices and customers in countries throughout the world.

Primarily through the FFIEC, the OCC works with the other federal
financial agencies (FRB, FDIC, OTS, and NCUA) to coordinate supervisory
policies, regulations, regulatory reporting requirements, and examiner
training. The agencies also coordinate to supervise institutions that
are subject to multiple regulators and perform joint examinations when
necessary. Joint supervisory programs include the FFIEC's examination
program for multi-regional data processing servicers and the SNC
program.

The OCC also works with the SEC on issues such as securities, brokerage,
accounting, and disclosure, and with the Federal Trade Commission (FTC)
on consumer protection and privacy. In particular the OCC worked with
the SEC in developing its "Reg B" rule to define when bank securities
activities will be regulated as brokerage. The OCC has agreements with
49 state insurance departments and the District of Columbia to share
information about insurance-related supervision and consumer complaints.

The OCC is a member of the administration's Financial and Banking
Infrastructure Information Committee (FBIIC) and works with FBIIC, the
Department of Homeland Security, and other agencies to combat money
laundering and terrorist financing, and to prepare the nation's
financial sector for catastrophic events.

The OCC is a member of the National Interagency Bank Fraud Working Group
and the Bank Secrecy Act Advisory Group to combat fraud and money
laundering in the financial services industry. These groups include
representatives of the Department of Justice, the FBI, other law
enforcement agencies, the Treasury Department, FinCEN, and the federal
banking agencies.

The globalization of the financial marketplace has accentuated the need
for OCC to work with financial supervisors around the world. This
coordination takes place through formal supervisory groups, such as the
Basel Committee on Banking Supervision, the Financial Action Task Force,
and the Joint Forum of banking, securities, and insurance regulators. It
also occurs through direct meetings and agreements with foreign bank
regulators. In addition, the OCC provides technical assistance and
classroom training for foreign supervisors across the globe to
strengthen their domestic supervisory programs.

As noted throughout this report, the OCC continued to work with other
regulators during the fiscal year to respond to emerging risks and
issues facing the industry.

(sidebar) The Globalization of Banking

In Cairo, OCC officials joined bankers and bank supervisors from North
Africa and the Middle East to discuss anti-money laundering issues. In
Washington, Russian bank supervisors met with OCC officials about
recruiting, commissioning, and retaining bank examiners.

In Turkey, OCC officials met with Turkish supervisors to establish a
program for Turkish examiners to attend OCC conferences to enhance their
skills and strengthen the collaborative relationship on banking
supervisory and analytical issues.

Banking is becoming an increasingly global enterprise, especially for
the largest national banks, and as banking has become more
international, so has the OCC.

"The increasing global integration of economic and financial markets and
ever-expanding breadth and complexity of operations of banks heighten
the importance of regular and effective communication with our
international counterparts," said Nancy Wentzler, Deputy Comptroller for
Global Banking.

OCC has developed excellent relationships over the years with many
international bank supervisors. For example, the OCC has a valuable
working relationship with the China Banking Regulatory Commission,
sharing analytical tools, early warning techniques, supervisory
procedures for complex products, methods to assess and provide better
incentives for management and corporate governance, techniques for
improved data structure and management, and programs for general
employee training and performance evaluation.

The OCC also collaborates regularly with the Reserve Bank of India to
exchange ideas and supervisory information. More recently, the OCC
actively participated in shaping the annual banking supervisory program
for the South East Asian Central Banks (SEACEN) and held seminars on
stress testing techniques for this group and for bank supervisors in
Latin America.

Under the agency's Foreign Technical Assistance program, the OCC
establishes, builds, and maintains relationships with foreign
supervisory organizations to improve bank supervision around the world.

The program increases the international expertise of OCC employees,
provides a platform for OCC to present its supervisory philosophy and
views to the international supervisory community, and enhances the
global reputation of the agency.

"We have a good reputation around the world for supervising banks,"
noted Jeffrey A. Brown, Senior Deputy Comptroller for International and
Economic Affairs.

In FY 2006, OCC examiners taught one-week schools in Egypt on problem
bank supervision; in Colombia, Kuwait, and Egypt on evaluating bank
management; in Turkey on credit risk management; and in Malaysia on
economic stress testing.

The OCC also hosted interns last year from Japan, Korea, Singapore, and
China. Turkey and Lebanon each sent a small team to join OCC examiners
on bank examinations.

**International Exchanges**

The Foreign Technical Assistance program is just one example of the
OCC's participation in the international financial arena.

OCC officials also meet with foreign supervisors about bank activities
in foreign countries or other issues of supervisory concern. In 2006,
OCC officials met with banking supervisors from India, China, Brazil,
Russia, and Canada to discuss anti-money laundering, Basel II capital
requirements, regulatory changes, and other issues.

These international exchanges help OCC officials measure the "country
risks" that internationally active national banks encounter doing
business overseas.

International collaboration on the Basel II capital accord has provided
an important forum for banking supervisors from across the world to
interact, exchange information about common issues, lay groundwork for
information-sharing agreements, and set principles for cross-border
supervision.

These information exchanges are also more important than ever to combat
the global threat from terrorism by blocking the country-to-country flow
of financing for terrorist enterprises. A bank can no longer be sure of
avoiding supervisory scrutiny by moving assets from one nation to
another.

As the banking world shrinks and international contacts among banking
supervisors become commonplace, banking regulation around the globe is
trending toward greater similarity. For example, supervisory authorities
around the world are following the lead of U.S. bank regulators by
increasingly emphasizing supervision-by-risk policies and procedures.

Although the U.S. national banking industry is enjoying excellent
health, the Comptroller likes to point out that the OCC's job is to "see
around corners," to look beyond the good times for signs of trouble and
spot problems early before they can grow. As OCC officials develop and
refine contingency plans for the possibility of a confluence of downward
economic trends, they must now look not only in this country, but also
beyond U.S. shores to a global system of banking. (end of sidebar)

Strategic Goal II: Fair access to financial services and fair treatment
of bank customers

The OCC has a fundamental responsibility to ensure compliance with fair
lending laws, the Community Reinvestment Act, and other consumer laws
and regulations.

The OCC also strongly supports the community development efforts of
national banks. Recognizing the importance of bank investment in
America's communities, the Comptroller successfully urged Congress to
increase the authority of banks and thrifts to invest in projects that
provide housing, community services, and jobs for low- and
moderate-income communities and families across the nation.

The Comptroller pressed for adoption of this provision in meetings with
lawmakers, banker groups, and community organizations. He also visited
community development projects to draw attention to the benefits of the
program. These investments have a solid record of profitability and have
fostered \$16 billion in such investments by national banks in all 50
states in the last decade.

The agency publishes periodic *Community Development Insights* papers on
products, services, and initiatives related to community development and
consumer banking.

The OCC continued its work with the other federal banking agencies in FY
2006 to improve privacy notices that banks are required to send to their
customers. Simple, easy-to-understand language---not tangled legalese in
fine print---is the goal. In March, the agencies released "Evolution of
a Prototype Financial Privacy Notice," a report summarizing research on
making these notices easier for consumers to understand. The agencies
have also commissioned the use of focus groups and one-on-one interviews
with consumers to test samples of such notices.

During FY 2006, the OCC and other federal banking agencies not only
issued examination procedures for assessing how banks complied with 2005
revisions to Community Reinvestment Act regulations, but also:

• Issued interagency questions and answers about the revisions.

• Updated lists of distressed or underserved non-metropolitan,
middle-income geographic areas where bank revitalization or
stabilization activities would receive CRA consideration.

• Updated median family income levels used in CRA performance
evaluations.

Federal banking agencies joined HUD in releasing updated answers to
questions regarding 2005 home loan data to be disclosed under the Home
Mortgage Disclosure Act. The OCC also updated its consumer compliance
booklet, "Fair Lending Examination Procedures."

Identity Theft and Information Integrity

Identity theft and the accuracy of consumer information reported to, and
used by, credit bureaus also were major concerns to consumers, bankers,
and regulators. In July 2006, the OCC, other FFIEC-member agencies, and
the FTC issued proposed rules to require financial institutions and
creditors to develop and implement identity theft prevention programs.
The proposal included guidelines about patterns, practices, and
activities that signal risks of identity theft. The agencies also
published for comment proposed procedures to enhance the accuracy and
integrity of information furnished to consumer reporting agencies.

The security of banks' systems and operations is essential to
maintaining the privacy of customer information. In FY 2006, the FFIEC
issued a revised "Information Security Booklet" that describes how a
bank should protect the systems and facilities that process and maintain
information. The revisions include updated information on
authentication, monitoring programs, and software trustworthiness.

The OCC issued prohibition orders and, in several cases, ordered
restitution or assessed CMPs against bank employees in six cases. These
cases involved losses to bank customers because of identity theft
committed by bank employees, or by third parties who received
confidential customer information from bank employees.

Consumer Compliance Ratings

To ensure fair access to financial services and fair treatment of bank
customers, the OCC evaluates banks' compliance with consumer laws and
regulations. Bank regulatory agencies use the Uniform Interagency
Consumer Compliance Rating System to provide a general framework for
assimilating and evaluating significant consumer compliance factors at a
bank. Each bank receives a consumer compliance rating based on an
evaluation of its compliance with consumer protection and civil rights
statutes and regulations, and the adequacy of its systems for continued
compliance. Ratings are on a scale of 1 through 5, in increasing order
of supervisory concern. National banks continued to show strong
compliance in FY 2006 with consumer protection regulations, with 94
percent earning a consumer compliance rating of either 1 or 2.

Fair Treatment of Bank Customers

The OCC has a long history of responding aggressively in cases when it
finds business practices that are predatory, abusive, unfair, or
deceptive.

The OCC entered into a formal agreement in November 2005 with a national
bank and its mortgage lending subsidiary requiring the bank to establish
a \$14 million fund to reimburse consumers harmed by the lack of
appropriate controls in the bank's mortgage lending operations.
Consumers entitled to restitution had: (1) paid origination fees and/or
interest rates substantially different from those indicated on good
faith estimates; (2) not had their creditworthiness adequately
considered; (3) held subsidized loans that were refinanced with
higher-cost loans, which did not appear to provide the consumers with a
tangible benefit; or (4) applied for mortgage loans and were denied
after receiving "preapproved" direct mail solicitations.

The agreement also required the bank to:

• Ensure that its advertising materials adequately disclosed limitations
or conditions on various products and complied with the Truth in Lending
Act.

• Develop a detailed consumer program for compliance with the FTC Act,
the Real Estate Settlement Procedures Act, the OCC's Part 30 Guidelines,
and the OCC's other issuances regarding abusive, predatory, unfair, or
deceptive practices.

• Provide disclosures to consumers explaining certain product options.

• Adopt a compliance audit program.

• Develop a staffing plan to ensure a sufficient number of adequately
trained personnel to support compliance and audit functions.

**Customer Assistance Group**

The OCC Customer Assistance Group (CAG) in Houston assists consumers who
have questions or complaints about national banks or their operating
subsidiaries. CAG refers complaints to the agency's law department if
they (1) allege or raise concerns about possible unfair or deceptive
practices, predatory lending practices, or fair lending law violations
or other discriminatory practices; and (2) involve possible violations
of consumer protection laws, or inconsistencies with OCC regulations or
guidance.

CAG published a brochure in Spanish to assist Spanish-speaking bank
customers.

Upon request from Congress, the Government Accountability Office (GAO)
conducted an assessment of CAG in FY 2006. The GAO subsequently released
a favorable report, noting that the OCC handles more complaints than any
other federal banking agency.

The report also noted that OCC's bank examiners use consumer complaint
information collected by CAG to plan or adjust examinations. CAG
employees and OCC examiners regularly discuss specific complaints and
complaint numbers for individual banks, and they coordinate in
communicating consumer-related issues to bank officials.

"We are very proud of the work of our Customer Assistance Group,"
Comptroller Dugan said after the report's release. "Not only does the
CAG assist customers with questions or complaints, but it helps national
banks improve their customer service and it provides invaluable feedback
that helps our examiners focus on problem areas."

The OCC is implementing three improvements recommended by the report:
that the OCC measure customer satisfaction; revise the way it measures
and reports on timeliness in resolving customer complaints; and find
better ways to inform the public, state officials, and others about the
OCC's role in handling consumer questions and complaints.

(sidebar) CAG Focuses on Quality Service for Consumers

Over the last 12 months, nearly 70,000 telephone conversations began the
same way: "Hello, thank you for calling the Office of the Comptroller of
the Currency's Customer Assistance Group. How can I help you today?"

At one end of the phone line, a customer had turned to the OCC for help.
On the other end, a member of OCC's Customer Assistance Group responded.

While the volume of calls, e-mails, and written inquiries is large, the
specialists who staff CAG's Houston facility never seem to tire of the
work.

Serving consumers is "just where I get my kicks," said Rayburn Johnson,
a 20-year OCC veteran with seven years experience in customer
assistance. "It's what I was called to do in this life."

Added OCC Ombudsman Samuel P. Golden, whose office operates the CAG in
Houston: "Customer service is not difficult if your heart is in it."

Callers' emotions vary, but the quality of service from CAG team members
remains constant. "It's about trying to help as much as you can," said
Vonda King, a Customer Assistance Specialist.

"Lots of times, folks just want to tell you the whole story and that's
part of the process," Mr. Johnson added.

During the year, the OCC improved CAG service by expanding its hours.
Under "Project Daylight," CAG now operates from 9 a.m. to 5 p.m. CST.
Hours will soon expand further to 7 a.m. to 7 p.m.

Just as important, Project Daylight also initiated a tiered-service
approach. That means call-center operators field initial calls, answer
basic questions, and take basic information. More complex questions,
unique issues, and Spanish-language inquiries, however, can be referred
to more experienced OCC staff members.

"I really like this new approach," said Alicia Loya, Customer Assistance
Specialist. "It gives us more time to speak with customers."

**Having an Impact**

The CAG team views every complaint as an opportunity, according to
Deputy Ombudsman Craig D. Stone. Some calls are an opportunity to
educate consumers about applicable banking laws and to advise them of
their rights. Other calls involve researching complaints about billing,
credit card terms, checking accounts, mortgage loans, and other retail
banking matters.

In the 12-month period ending in August 2006, the CAG team facilitated
the return of nearly \$7 million to consumers and, in the last five
years, nearly \$30 million. The vast majority of those cases involved
less than \$200. In many cases, good will---not bank errors---prompted
the return of funds.

"At the end of the day, there's a lot of satisfaction because the
consumers appreciate the effort," said Howard Greene, a CAG Customer
Assistance Specialist.

**Improving the Supervisory Process**

Although customer service is its primary mission, the CAG team also
evaluates the data gained through the volume of calls for insights on
improving the OCC's bank supervisory process.

Analyses of the numbers of calls and categories of those calls point to
areas of focus for bank examiners, such as compliance and managing the
risks to bank reputation, according to Ombudsman Golden.

"Our systems give us the capability to look at data over time and
identify trends and issues by product or banking regulation," he said.

Over the past few years, several important pieces of bank guidance
originated from complaint data, including guidance related to predatory
lending, unfair or deceptive practices, credit card rates, and overdraft
protection.

Through this complaint analysis and follow-up action, the OCC leverages
its authority as the primary regulator of national banks to achieve its
goals of ensuring the safety and soundness of the financial system,
while ensuring equal access and fair treatment for bank customers.

**Feedback from customers:**

> Thank you very much for getting involved in my case about the bank
> unfairly raising my credit card interest rate. They have now corrected
> the problem and there is no question it is only because your
> organization became involved. Thank you again, you are so important to
> the "little guy" in these situations. *---John D.*

Thank you for the prompt attention your agency gave the matter. In
addition not only was my issue taken seriously by your agency, but you
\[also\] kept me informed of the progress. *---Daniel M.*

My sincere thanks to you for achieving in a week, what I was unable to
accomplish in almost a year. For you and \[your\] staff, please accept
my deepest appreciation for the fine work you do everyday for others
like me. *---Sally B.*

**Community Affairs**

The OCC is a strong supporter of national banks' investments to
revitalize neighborhoods and highly values its relationships with
community groups and organizations dedicated to community development.

Throughout the fiscal year, OCC officials met with community groups and
consumer organizations on issues of interest, including credit card fees
and disclosures, nontraditional mortgages, fair lending, electronic
check cashing fees, and predatory appraisals.

The Comptroller saw firsthand how banks can make a positive impact on
communities when he visited Chicago's West Side in May to tour housing
and community development projects that are contributing to the economic
well-being of neighborhoods. The OCC's authority to approve national
banks' investments in community development projects comes from a
provision in federal law known as "Part 24."

"The trip highlighted in a very visible way the important role that
national bank Part 24 public welfare investment authority plays in local
communities," Mr. Dugan said at the end of that tour. "Community-based
organizations have partnered with national banks in a number of key
projects in the Near West Side to create affordable housing using
low-income housing tax credits in which banks are major investors."

The Comptroller and members of his family also joined other OCC
employees and their families in sprucing up apartments for families
participating in a NeighborWorks America housing program in Northeast
Washington, D.C.

The OCC produces publications to help banks meet their obligations under
the CRA. Agency officials also held more than 300 consultations with
bank executives during the year on strategies for fulfilling those
obligations.

Other agency publications provide information about bank-owned community
development corporations, financial literacy, hurricane recovery
assistance, rural economic development, and low-income housing tax
credits.

The OCC also produces an electronic newsletter with information about
agency work in the area of fair treatment and fair access to financial
services.

The OCC helped to organize and participated in the first of several
regional conferences on the "unbanked"---consumers who have no accounts
or loans with banks. The OCC and other financial regulators also
sponsored a National Reinvestment Conference that brought together
experts on strategies for revitalizing distressed communities. More than
500 bankers, government officials, and community representatives
attended.

The OCC participates in the interagency Financial Literacy and Education
Commission (FLEC) established to improve financial literacy and
education in the U.S. In FY 2006, FLEC issued a strategy paper and
launched MyMoney.gov, a Web site dedicated to teaching Americans the
basics of financial education.

Strategic Goal III: A flexible legal and regulatory framework that
enables the national banking system to provide a full, competitive array
of financial services

The national bank charter is a unique and powerful instrument for
carrying on the competitive business of banking. This charter offers
national banks a legal framework that enables them to compete
effectively and meet the evolving business needs of their customers,
under a flexible and responsive system of supervision.

To set the bounds of activities permissible under the charter, the OCC
establishes regulations, policies, operating guidance, and
interpretations that set standards for the national banking system,
define acceptable banking practices, provide guidance on risks and
responsibilities facing national banks, and prohibit or restrict banking
practices deemed imprudent or unsafe. The OCC also represents and
defends its regulatory authorities and interpretations in
administrative, judicial, and congressional hearings.

Legal and Regulatory Opinions

In response to inquiries from national banks, the OCC writes legal and
regulatory opinions on a wide variety of banking-related topics,
including the following:

**Regulatory Capital**

Regulatory capital requirements include risk-based capital, in which
risk weights are assigned to specific types of assets and
off-balance-sheet items to ensure that banks have adequate capital
levels.

• The OCC issued several opinions addressing the appropriate factors to
apply in calculating risk-based capital for multipurpose loan
commitments, structured second mortgages, and securities lending
transactions. OCC Interpretive Letters No. 1049 (January 17, 2006), No.
1057 (June 14, 2005), No. 1058 (April 20, 2005), and No. 1066 (November
8, 2005)

**Investments**

• Complex Structure with Indirect Credit Default Swap Index Exposure.
OCC Interpretive Letter No. 1047 (December 20, 2005)

**Derivatives**

These permissible derivatives activities are subject to supervisory
nonobjection based on the adequacy of the national bank's risk
management and measurement systems and controls and other supervisory
considerations relevant to the particular proposal. Derivatives and
hedging provide banks and their customers with a mechanism to reduce
risks associated with financial holdings and transactions.

• *Hedging.* National banks may purchase and hold below-investment-grade
debt to hedge the counterparty credit risk exposures arising from the
bank's derivatives activities, and to hedge risks arising from
permissible customer-driven derivative transactions. OCC Interpretive
Letter No. 1051 (February 15, 2006)

• *Customer-Driven Derivative Transactions.* National banks may engage
in certain customer-driven derivative transactions based on a number of
underlying commodities, such as frozen juice concentrate, polypropylene,
and cardboard products. The agency issued a more comprehensive opinion
in July 2006 identifying 11 categories of reference assets indices. OCC
Interpretive Letters No. 1064 (July 13, 2006), No. 1039 (September 13,
2005), No.1056 (March 29, 2006), No. 1059 (April 13, 2006), No. 1060
(April 26, 2006), No. 1063 (June 1, 2006), and No. 1065 (July 24, 2006)

**Bank Premises**

• *Retail, Office, Lodging, and Residential Space.* A bank may hold, as
permissible bank premises under 12 USC 29, a building containing retail
and office space and commercial facilities for lodging out-of-town bank
visitors, provided that the lodging space is operated by an independent,
third-party company. Office and lodging space not used by the bank may
be made available to the general public. The building may also include a
certain number of residential condominiums that will be sold to the
public by an unaffiliated real estate broker, because such mixed use is
necessary for the project to be economically viable in the market where
it is located. OCC Interpretive Letter No. 1044 (December 5, 2005). The
rationale for this letter was further explained in OCC Interpretive
Letter No. 1053 (January 31, 2006)

• *Lodging for Out-of-Town Bank Visitors.* A bank may hold, as
permissible bank premises under 12 USC 29, commercial facilities for
lodging out-of-town bank visitors, provided that the lodging space is
operated by an independent, third-party company. Excess lodging space
may be made available to the general public. OCC Interpretive Letter No.
1045 (December 5, 2005). The rationale for this letter was further
explained in OCC Interpretive Letter No. 1053 (January 31, 2006)

**Interstate Branching**

• *Branching by Out-of-State Industrial Loan Companies.* Laws recently
enacted in some states prohibit or restrict branching by out-of-state
industrial loan companies. Those laws have the effect of defeating those
states' laws that previously permitted interstate de novo branching into
those states by banks generally. Therefore, the OCC, FDIC, and the FRB
concluded that they cannot approve the establishment of de novo branches
in such states by any out-of-state bank. OCC Interpretive Letter No.
1068 (July 28, 2006)

**Lending**

• *Wind Energy Project Financing.* A national bank may provide financing
for a wind energy project by making an equity investment in the project.
Because the transaction is structured to be the functional equivalent of
a secured financing, it is permissible under 12 USC 371 and consistent
with the purposes of 12 USC 29. Structuring the transaction in this
manner permits the bank to capture tax benefits enacted to promote the
flow of capital to renewable sources of energy. OCC Interpretive Letter
No. 1048 (December 21, 2005). The rationale for this letter was further
explained in OCC Interpretive Letter No. 1048a (February 27, 2006) and
Interpretive Letter No. 1053 (January 31, 2006).

Litigation

The OCC was a party to, or prepared "friend of the court" briefs for,
several cases that affirmed federal preemption of state law restricting
national bank activities, including:

• *Four decisions upheld on appeal that federal law preempts state law
restrictions on the activities of national bank mortgage operating
subsidiaries.* U.S. courts of appeal for four circuits have upheld
decisions by district courts in California, Connecticut, Maryland, and
Michigan that granted national banks declaratory and injunctive relief
in suits challenging states' efforts to license and exercise visitorial
powers over the operating subsidiaries of national banks. In each case,
the U.S. courts of appeal affirmed district court decisions that the
National Bank Act and OCC regulations preempt state licensing and
enforcement authority over the real estate lending activities of
national bank operating subsidiaries. Connecticut and Michigan have
asked the U.S. Supreme Court to review the decisions of the Second and
Sixth Circuits, respectively. The Supreme Court granted Michigan's
request for review of the Sixth Circuit's decision and is expected to
issue a decision in that case in early 2007.[^1]

• *Federal district court rules that the New York state attorney general
may not enforce subpoena for mortgage loan records of national banks to
enforce state fair lending statute.* The U.S. District Court for the
Southern District of New York issued two decisions on October 12, 2005,
in response to separate suits by the New York Clearing House Association
and the OCC. These suits challenged the authority of the New York state
attorney general to demand mortgage loan records of national banks and
their operating subsidiaries as part of an investigation into real
estate lending. In the first decision, the Court granted declaratory and
injunctive relief to the OCC. This decision enjoined the New York
attorney general from:\
1) issuing subpoenas or demanding inspection of the books and records of
any national banks for his investigation into residential lending
practices, 2) instituting any enforcement actions to compel compliance
with existing information demands, and 3) instituting actions in court
to enforce state fair lending laws.[^2] In the second decision, the
Court granted the same injunctive relief granted in *Comptroller of the
Currency* v. *Spitzer* and further enjoined the New York attorney
general from instituting a parens patriae action to enforce the federal
Fair Housing Act.[^3] An appeal of both decisions is pending in the
Second Circuit Court of Appeals.

• *Supreme Court rules that each national bank is a citizen of a single
state.* The Supreme Court issued a decision on January 16, 2006, holding
that a national bank is a citizen of the one state in which it maintains
its main office, under the National Bank Act. The Supreme Court's
decision reversed a decision by the Fourth Circuit Court of Appeals that
had interpreted 28 USC 1348, containing the special jurisdiction
provision for national banks, as providing that a national bank is a
citizen of each state in which the bank has a branch or other physical
presence.[^4]

• *Fair Credit Reporting Act preempts California statute that restricts
information-sharing among affiliates.* The Ninth Circuit Court of
Appeals held that the Fair Credit Reporting Act preempts those
provisions of the California Financial Information Privacy Act (commonly
known as SB1) that condition or prohibit affiliates from sharing
information bearing on a consumer's creditworthiness, credit standing,
credit capacity, character, or other factor used to establish the
consumer's eligibility for credit or insurance. The appeals court
directed the district court to determine whether any part of the state
statute survived preemption and was severable.[^5] On remand, the
district court concluded that no part of the state law's
affiliate-sharing prohibitions survives and that the statute was not
severable.[^6]

Rulemakings

Significant rulemakings completed in FY 2006 included:

• *Fair Credit Reporting Medical Information Regulations (12 CFR 41) 70
FR 70664 (November 22, 2005).* The OCC and other financial regulators
issued a final rule to implement a provision of the Fair and Accurate
Credit Transactions Act of 2003 (FACT Act) pertaining to the use of
medical information in determining eligibility for credit. As authorized
by the statute, the final rule creates exceptions to the FACT Act's
general prohibition on creditors obtaining or using medical information
for any determination of the consumer's eligibility for credit. The
exception permits creditors to obtain or use medical information for
credit eligibility determinations under certain circumstances. The rule
also creates other, limited exceptions to permit affiliates to share
medical information without becoming consumer-reporting agencies for
purposes of the Fair Credit Reporting Act.

• *One-Year Post-Employment Restrictions for Senior Examiners (12 CFR 4)
70 FR 69637 (November 15, 2005).* This final rule, issued jointly with
the FRB, the FDIC, and the OTS, implements a section of the Intelligence
Reform and Terrorism Prevention Act of 2004. For one year after leaving
federal service, an examiner who served as the senior examiner in a
national bank for at least two months of the preceding 12 months is
barred from accepting compensation as an employee, officer, director, or
consultant in that national bank or a company (including a bank holding
company) that controls that bank. For violations, the act requires the
OCC to seek removal from the relevant bank of the former examiner or a
prohibition order for up to five years. The OCC also may seek a CMP of
up to \$250,000.

• *Risk-Based Capital---Securities Borrowing Transactions: Final Rule
(12 CFR 3) 71 FR 8932 (February 23, 2006).* The OCC, FRB, FDIC, and OTS
issued a final rule applying to banks that are subject to a separate
capital charge for market risk under risk-based capital rules. The rule
permits the banks to include in risk-weighted assets an amount based on
the difference between the amount of cash collateral posted and the
market value of the borrowed security, subject to certain conditions.
Because of changes in the final rule, banks borrowing securities from
counterparties that are not exempted from U.S. federal bankruptcy
treatment or receivership law may receive this capital treatment.

Licensing

The OCC grants national bank charters and approves the establishment or
expansion of banking activities of existing national banks. The
*Comptroller's Licensing Manual* outlines OCC procedures for handling
licensing applications; the agency revised six booklets from the manual
in FY 2006.

The OCC has several initiatives to evaluate and enhance its licensing
programs, including a quality control program to improve procedures for
processing bank applications for branches and de novo charters.

**Licensing Decisions**

The OCC made several significant licensing decisions in FY 2006:

• Conditional approval was given for several types of applications
imposing a "significant deviation" condition. This condition requires
the bank to notify the supervisory office at least 60 days before making
a significant change or deviation to its business plan. OCC Conditional
Approvals No. 705, 712, 714, 716, and 717

• The OCC approved an operating subsidiary to offer services for
customers to engage in capital gains tax-deferred exchanges of business
and investment property under the Internal Revenue Code. Such
transactions are called like-kind exchanges. OCC Conditional Approval
No. 706 (October 6, 2005)

• The OCC approved a limited federal branch to be located in Florida. A
limited federal branch is a branch of a foreign bank that can accept
deposits from foreign states or individuals, but not U.S. citizens or
corporations. OCC Conditional Approval No. 727 (January 3, 2006)

• A bank received approval to establish a wholly owned operating
subsidiary to provide Internet access, including dial-up Internet
service provider (ISP) service, to its customers and nonbank customers
as part of its package of Internet banking services. It may not sell ISP
services to new nonbank customers unless it demonstrates compliance with
12 CFR 7.5004 and obtains the OCC's prior approval. OCC Conditional
Approval No. 733 (February 16, 2006)

• The OCC approved the expansion of a limited bank charter to a
full-service charter. Such requests to expand powers are infrequent and
are evaluated in a similar manner as an application for a de novo
charter. OCC Conditional Approval No. 707 (October 14, 2005)

Table 3: Corporate Application Activity, FY 2005 and 2006

+--------------+-------+--------+--------+---------------+-----+-----+
|              | *Ap   |        | *FY    |               |     |     |
|              | plica |        | 2006   |               |     |     |
|              | tions |        | Deci   |               |     |     |
|              | rece  |        | sions* |               |     |     |
|              | ived* |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+
|              |       |        | **Appr | **            | *   | **T |
|              |       |        | oved** | Conditionally | *De | ota |
|              |       |        |        | approved^4^** | nie | l** |
|              |       |        |        |               | d** |     |
+--------------+-------+--------+--------+---------------+-----+-----+
|              | **FY  | **FY   |        |               |     |     |
|              | 2     | 2006** |        |               |     |     |
|              | 005** |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+
| Branches     | 1,645 | 1,872  | 1783   | 2             | 2   | 1,  |
|              |       |        |        |               |     | 790 |
+--------------+-------+--------+--------+---------------+-----+-----+
| Capital/sub  | 141   | 167    | 50     | 5             | 0   | 55  |
| debt         |       |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+
| Change in    | 17    | 9      | 4      | 0             | 0   | 8   |
| Bank Control |       |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+
| Charters     | 26    | 47     | 4      | 30            | 0   | 34  |
+--------------+-------+--------+--------+---------------+-----+-----+
| Co           | 15    | 15     | 5      | 7             | 0   | 12  |
| nversions^1^ |       |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+
| Federal      | 2     | 3      | 0      | 2             | 0   | 2   |
| branches     |       |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+
| Fiduciary    | 22    | 30     | 13     | 1             | 0   | 14  |
| powers       |       |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+
| Mergers^2^   | 69    | 62     | 61     | 3             | 0   | 64  |
+--------------+-------+--------+--------+---------------+-----+-----+
| Relocations  | 259   | 274    | 269    | 0             | 0   | 271 |
+--------------+-------+--------+--------+---------------+-----+-----+
| Reo          | 116   | 123    | 122    | 10            | 0   | 132 |
| rganizations |       |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+
| Stock        | 2     | 0      | 0      | 0             | 0   | 2   |
| appraisals   |       |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+
| Sub          | 23    | 27     | 30     | 4             | 0   | 35  |
| sidiaries^3^ |       |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+
| 12 CFR 5.53  | 4     | 3      | 0      | 5             | 0   | 5   |
| Change in    |       |        |        |               |     |     |
| Assets       |       |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+
| LTD NB       | NA    | 5      | 0      | 1             | 0   | 1   |
| upgrade      |       |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+
| Total        | 2,341 | 2,637  | 2,341  | 70            | 2   | 2,  |
|              |       |        |        |               |     | 425 |
+--------------+-------+--------+--------+---------------+-----+-----+
| ^1^          |       |        |        |               |     |     |
| Conversions  |       |        |        |               |     |     |
| are          |       |        |        |               |     |     |
| conversions  |       |        |        |               |     |     |
| to national  |       |        |        |               |     |     |
| bank         |       |        |        |               |     |     |
| charters.    |       |        |        |               |     |     |
|              |       |        |        |               |     |     |
| ^2^ Mergers  |       |        |        |               |     |     |
| include      |       |        |        |               |     |     |
| failure      |       |        |        |               |     |     |
| transactions |       |        |        |               |     |     |
| when the     |       |        |        |               |     |     |
| national     |       |        |        |               |     |     |
| bank is the  |       |        |        |               |     |     |
| resulting    |       |        |        |               |     |     |
| institution. |       |        |        |               |     |     |
|              |       |        |        |               |     |     |
| ^3^ This     |       |        |        |               |     |     |
| count does   |       |        |        |               |     |     |
| not include  |       |        |        |               |     |     |
| 128          |       |        |        |               |     |     |
| Af           |       |        |        |               |     |     |
| ter-the-Fact |       |        |        |               |     |     |
| notices      |       |        |        |               |     |     |
| received in  |       |        |        |               |     |     |
| FY 2005 and  |       |        |        |               |     |     |
| 93           |       |        |        |               |     |     |
| Af           |       |        |        |               |     |     |
| ter-the-Fact |       |        |        |               |     |     |
| notices      |       |        |        |               |     |     |
| received in  |       |        |        |               |     |     |
| FY 2006.     |       |        |        |               |     |     |
|              |       |        |        |               |     |     |
| ^4^ On April |       |        |        |               |     |     |
| 14, 2000,    |       |        |        |               |     |     |
| the          |       |        |        |               |     |     |
| Licensing    |       |        |        |               |     |     |
| department   |       |        |        |               |     |     |
| issued       |       |        |        |               |     |     |
| guidance     |       |        |        |               |     |     |
| imposing     |       |        |        |               |     |     |
| special      |       |        |        |               |     |     |
| conditional  |       |        |        |               |     |     |
| approval for |       |        |        |               |     |     |
| all bank     |       |        |        |               |     |     |
| charters     |       |        |        |               |     |     |
| requiring    |       |        |        |               |     |     |
| the OCC to   |       |        |        |               |     |     |
| be notified  |       |        |        |               |     |     |
| before a     |       |        |        |               |     |     |
| significant  |       |        |        |               |     |     |
| deviation or |       |        |        |               |     |     |
| change in    |       |        |        |               |     |     |
| the          |       |        |        |               |     |     |
| operating    |       |        |        |               |     |     |
| plan during  |       |        |        |               |     |     |
| the first    |       |        |        |               |     |     |
| three years  |       |        |        |               |     |     |
| of           |       |        |        |               |     |     |
| operation.   |       |        |        |               |     |     |
+--------------+-------+--------+--------+---------------+-----+-----+

Table 4: OCC Licensing Actions and Timeliness, FY 2005 and 2006

+------------+----------+---------+-------+---+---------+------+----+
|            | ***FY    |         |       |   | ***FY   |      |    |
|            | 2005***  |         |       |   | 2006*** |      |    |
+------------+----------+---------+-------+---+---------+------+----+
|            |          |         | **W   |   |         | **Wi |    |
|            |          |         | ithin |   |         | thin |    |
|            |          |         | Tar   |   |         | targ |    |
|            |          |         | get** |   |         | et** |    |
+------------+----------+---------+-------+---+---------+------+----+
| **A        | **Target | *       | **Num | * | *       | **   | *  |
| pplication | time     | *Number | ber** | * | *Number | Numb | *% |
| type**     | frames   | of      |       | % | of      | er** | ** |
|            | in       | deci    |       | * | deci    |      |    |
|            | d        | sions** |       | * | sions** |      |    |
|            | ays^1^** |         |       |   |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| **         | 45 / 60  | 1,550   | 1,519 | 9 | 1,790   | 1    | 96 |
| Branches** |          |         |       | 8 |         | ,721 |    |
+------------+----------+---------+-------+---+---------+------+----+
| **Capital  | 30 / 45  | 57      | 48    | 8 | 55      | 48   | 87 |
| / sub      |          |         |       | 4 |         |      |    |
| debt**     |          |         |       |   |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| **Change   | NA / 60  | 17      | 17    | 1 | 8       | 8    | 1  |
| in Bank    |          |         |       | 0 |         |      | 00 |
| Control**  |          |         |       | 0 |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| **Cha      | See      | 20      | 17    | 8 | 34      | 21   | 62 |
| rters^2^** | footnote |         |       | 5 |         |      |    |
|            | 2        |         |       |   |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| **Con      | 30 / 90  | 16      | 7     | 4 | 12      | 9    | 75 |
| versions** |          |         |       | 4 |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| **Federal  | NA / 120 | 0       | 0     | N | 2       | 1    | 50 |
| branches** |          |         |       | A |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| *          | 30 / 45  | 11      | 6     | 5 | 14      | 9    | 64 |
| *Fiduciary |          |         |       | 5 |         |      |    |
| powers**   |          |         |       |   |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| *          | 45 / 60  | 63      | 53    | 8 | 64      | 54   | 84 |
| *Mergers** |          |         |       | 4 |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| **Rel      | 45 / 60  | 242     | 237   | 9 | 271     | 267  | 99 |
| ocations** |          |         |       | 8 |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| **Reorgan  | 45 / 60  | 107     | 88    | 8 | 132     | 100  | 76 |
| izations** |          |         |       | 2 |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| **Stock    | NA / 90  | 0       | 0     | N | 2       | 2    | 1  |
| ap         |          |         |       | A |         |      | 00 |
| praisals** |          |         |       |   |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| **Subs     | 30 / 60  | 43      | 43    | 1 | 35      | 35   | 1  |
| idiaries** |          |         |       | 0 |         |      | 00 |
+------------+----------+---------+-------+---+---------+------+----+
| **12 CFR   | NA / 60  | 2       | 1     | 5 | 5       | 4    | 80 |
| 5.53       |          |         |       | 0 |         |      |    |
| Change in  |          |         |       |   |         |      |    |
| Assets**   |          |         |       |   |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| **LTD NB   | See      | 0       | 0     | N | 1       | 0    | 0  |
| up         | footnote |         |       | A |         |      |    |
| grade^2^** | 2        |         |       |   |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+
| **Total**  | NA       | 2,128   | 2,036 | 9 | 2,425   | 2    | 94 |
|            |          |         |       | 6 |         | ,279 |    |
+------------+----------+---------+-------+---+---------+------+----+
| **Note:**  |          |         |       |   |         |      |    |
| Most       |          |         |       |   |         |      |    |
| decisions  |          |         |       |   |         |      |    |
| (99        |          |         |       |   |         |      |    |
| percent in |          |         |       |   |         |      |    |
| 2005 and   |          |         |       |   |         |      |    |
| 98 percent |          |         |       |   |         |      |    |
| 2006) were |          |         |       |   |         |      |    |
| decided in |          |         |       |   |         |      |    |
| the        |          |         |       |   |         |      |    |
| district   |          |         |       |   |         |      |    |
| offices    |          |         |       |   |         |      |    |
| and Large  |          |         |       |   |         |      |    |
| Bank       |          |         |       |   |         |      |    |
| Licensing  |          |         |       |   |         |      |    |
| under      |          |         |       |   |         |      |    |
| delegated  |          |         |       |   |         |      |    |
| authority. |          |         |       |   |         |      |    |
| Decisions  |          |         |       |   |         |      |    |
| include    |          |         |       |   |         |      |    |
| approvals, |          |         |       |   |         |      |    |
| c          |          |         |       |   |         |      |    |
| onditional |          |         |       |   |         |      |    |
| approvals, |          |         |       |   |         |      |    |
| and        |          |         |       |   |         |      |    |
| denials.   |          |         |       |   |         |      |    |
|            |          |         |       |   |         |      |    |
| ^1^ Those  |          |         |       |   |         |      |    |
| filings    |          |         |       |   |         |      |    |
| that       |          |         |       |   |         |      |    |
| qualify    |          |         |       |   |         |      |    |
| for the    |          |         |       |   |         |      |    |
| "expedited |          |         |       |   |         |      |    |
| review"    |          |         |       |   |         |      |    |
| process    |          |         |       |   |         |      |    |
| are        |          |         |       |   |         |      |    |
| subject to |          |         |       |   |         |      |    |
| the        |          |         |       |   |         |      |    |
| shorter of |          |         |       |   |         |      |    |
| the time   |          |         |       |   |         |      |    |
| frames     |          |         |       |   |         |      |    |
| listed.    |          |         |       |   |         |      |    |
| The longer |          |         |       |   |         |      |    |
| time frame |          |         |       |   |         |      |    |
| is the     |          |         |       |   |         |      |    |
| standard   |          |         |       |   |         |      |    |
| benchmark  |          |         |       |   |         |      |    |
| for more   |          |         |       |   |         |      |    |
| complex    |          |         |       |   |         |      |    |
| app        |          |         |       |   |         |      |    |
| lications. |          |         |       |   |         |      |    |
| New time   |          |         |       |   |         |      |    |
| frames     |          |         |       |   |         |      |    |
| commenced  |          |         |       |   |         |      |    |
| in 1997    |          |         |       |   |         |      |    |
| with the   |          |         |       |   |         |      |    |
| adoption   |          |         |       |   |         |      |    |
| of the     |          |         |       |   |         |      |    |
| revised    |          |         |       |   |         |      |    |
| Part 5.    |          |         |       |   |         |      |    |
| The target |          |         |       |   |         |      |    |
| time frame |          |         |       |   |         |      |    |
| may be     |          |         |       |   |         |      |    |
| extended   |          |         |       |   |         |      |    |
| if the OCC |          |         |       |   |         |      |    |
| needs      |          |         |       |   |         |      |    |
| additional |          |         |       |   |         |      |    |
| i          |          |         |       |   |         |      |    |
| nformation |          |         |       |   |         |      |    |
| to reach a |          |         |       |   |         |      |    |
| decision,  |          |         |       |   |         |      |    |
| permits    |          |         |       |   |         |      |    |
| additional |          |         |       |   |         |      |    |
| time for   |          |         |       |   |         |      |    |
| public     |          |         |       |   |         |      |    |
| comment,   |          |         |       |   |         |      |    |
| or         |          |         |       |   |         |      |    |
| processes  |          |         |       |   |         |      |    |
| a group of |          |         |       |   |         |      |    |
| related    |          |         |       |   |         |      |    |
| filings as |          |         |       |   |         |      |    |
| one        |          |         |       |   |         |      |    |
| tr         |          |         |       |   |         |      |    |
| ansaction. |          |         |       |   |         |      |    |
|            |          |         |       |   |         |      |    |
| ^2^ For    |          |         |       |   |         |      |    |
| i          |          |         |       |   |         |      |    |
| ndependent |          |         |       |   |         |      |    |
| charter    |          |         |       |   |         |      |    |
| app        |          |         |       |   |         |      |    |
| lications, |          |         |       |   |         |      |    |
| the target |          |         |       |   |         |      |    |
| time frame |          |         |       |   |         |      |    |
| is 120     |          |         |       |   |         |      |    |
| days. For  |          |         |       |   |         |      |    |
| holdi      |          |         |       |   |         |      |    |
| ng-company |          |         |       |   |         |      |    |
| -sponsored |          |         |       |   |         |      |    |
| app        |          |         |       |   |         |      |    |
| lications, |          |         |       |   |         |      |    |
| the target |          |         |       |   |         |      |    |
| time frame |          |         |       |   |         |      |    |
| is 45 days |          |         |       |   |         |      |    |
| for        |          |         |       |   |         |      |    |
| ap         |          |         |       |   |         |      |    |
| plications |          |         |       |   |         |      |    |
| eligible   |          |         |       |   |         |      |    |
| for        |          |         |       |   |         |      |    |
| expedited  |          |         |       |   |         |      |    |
| review,    |          |         |       |   |         |      |    |
| and 90     |          |         |       |   |         |      |    |
| days for   |          |         |       |   |         |      |    |
| all        |          |         |       |   |         |      |    |
| others.    |          |         |       |   |         |      |    |
+------------+----------+---------+-------+---+---------+------+----+

Table 5: Change in Bank Control Act^1^ CY 2002-FY2006

+----------+---------+----------+---------------+----------+---------+
| *Year*   | *Re     | *Acted   | *Not          | *Disa    | *Wit    |
|          | ceived* | On*      | Disapproved*  | pproved* | hdrawn* |
+----------+---------+----------+---------------+----------+---------+
| FY 2006  | 9       | 8        | 4             | 0        | 4       |
+----------+---------+----------+---------------+----------+---------+
| FY 2005  | 17      | 17       | 17            | 0        | 0       |
+----------+---------+----------+---------------+----------+---------+
| FY 2004  | 16      | 14^2^    | 13            | 0        | 0       |
+----------+---------+----------+---------------+----------+---------+
| FY       | 16      | 10       | 9             | 1        | 0       |
| 2003\*   |         |          |               |          |         |
+----------+---------+----------+---------------+----------+---------+
| CY 2002  | 10      | 10       | 9             | 1        | 0       |
+----------+---------+----------+---------------+----------+---------+
| \*       |         |          |               |          |         |
| R        |         |          |               |          |         |
| eporting |         |          |               |          |         |
| changed  |         |          |               |          |         |
| from     |         |          |               |          |         |
| calendar |         |          |               |          |         |
| year to  |         |          |               |          |         |
| fiscal   |         |          |               |          |         |
| year,    |         |          |               |          |         |
| starting |         |          |               |          |         |
| October  |         |          |               |          |         |
| 1, 2002  |         |          |               |          |         |
| (FY      |         |          |               |          |         |
| 2003).   |         |          |               |          |         |
|          |         |          |               |          |         |
| ^1^      |         |          |               |          |         |
| Notices  |         |          |               |          |         |
| p        |         |          |               |          |         |
| rocessed |         |          |               |          |         |
| with     |         |          |               |          |         |
| disp     |         |          |               |          |         |
| osition. |         |          |               |          |         |
|          |         |          |               |          |         |
| ^2^      |         |          |               |          |         |
| Includes |         |          |               |          |         |
| one      |         |          |               |          |         |
| notice   |         |          |               |          |         |
| with no  |         |          |               |          |         |
| a        |         |          |               |          |         |
| ctivity. |         |          |               |          |         |
| The OCC  |         |          |               |          |         |
| co       |         |          |               |          |         |
| nsidered |         |          |               |          |         |
| it       |         |          |               |          |         |
| ab       |         |          |               |          |         |
| andoned. |         |          |               |          |         |
+----------+---------+----------+---------------+----------+---------+

**Change in Bank Control**

The OCC administers the Change in Bank Control Act (CBCA) to prevent
adverse effects from anti-competitive mergers, acquisitions,
consolidations, or other business combinations; inadequate financial
support; or unsuitable management of national banks. The OCC reviews
each CBCA notice and disapproves transactions that could have serious
harmful effects. When the notice raises fundamental supervisory or other
issues that cannot be mitigated through an agreement, the OCC
disapproves the proposal. The OCC is coordinating with Federal Reserve
banks on CBCA applications so the OCC can seek certain safeguards from
acquiring holding companies of national banks.

The OCC received adverse comments from the public and subsequently
rendered decisions on the following 10 CRA-covered applications during
the year.

Table 6: Applications Decided That Presented Community Reinvestment Act
Issues, FY 2006

  ------------------------------- --------------------- ------------------
  **Bank, City, State**           **Interpretations and **Document
                                  Actions**             Number**

  Citibank, NA, New York, NY      October 2005          CRA Decision No.
                                                        126

  Associated Bank, NA, Green Bay, November 2005         CRA Decision No.
  WI                                                    127

  JPMorgan Chase Bank, NA,        December 2005         CRA Decision No.
  Columbus, OH                                          128

  HSBC Bank Nevada, NA, Las       November 2005         CRA Decision No.
  Vegas, NV                                             129

  NBT Bank, NA, Norwich, NY       January 2006          CRA Decision No.
                                                        130

  TD Banknorth, NA, Portland, ME  December 2005         CRA Decision No.
                                                        131

  Harris, NA, Chicago, IL         February 2006         CRA Decision No.
                                                        132

  Huntington National Bank,       February 2006         CRA Decision No.
  Columbus, OH                                          133

  Rabobank, NA, EL Centro, CA     May 2006              CRA Decision No.
                                                        134

  Trustmark National Bank,        September 2006        CRA Decision No.
  Jackson, MS                                           135
  ------------------------------- --------------------- ------------------

Regulatory Efficiency

The OCC and the other FFIEC-member agencies have participated in a
comprehensive multi-year review of the agencies' regulations, as
required by the Economic Growth and Regulatory Paperwork Reduction Act
of 1996 (EGRPRA). The purpose of the review is to identify and, as
appropriate, eliminate unnecessary regulations. In FY 2006, the agencies
completed the process of publishing their regulations in the *Federal
Register* for public comment and concluded a series of outreach meetings
in conjunction with the requests for written comment. As required by the
statute, the agencies plan to submit a report to Congress in FY 2007 on
the results of their review. In addition, the OCC is considering what
revisions to its regulations are appropriate in light of the results of
the EGRPRA review.

On October 13, 2006, the President signed into law the Financial
Services Regulatory Relief Act. This legislation contains provisions
that contribute to the reduction of unnecessary regulatory burden for
national banks, including provisions that:

• Simplify national banks' statutory authority to pay dividends and
reduce capital.

• Increase, from \$250 million to \$500 million, the asset-size
threshold enabling banks that are well capitalized, well managed, and
satisfy certain other statutory requirements to have a full-scope,
on-site examination once every 18 months, rather than once every 12
months.

• Clarify that a bank does not waive any applicable privilege if it
discloses information to a federal, state, or foreign bank supervisor as
part of a supervisory or regulatory process. (The bank may not assert
that privilege against its supervisor, however.)

• Require the OCC and certain other federal agencies to develop jointly
a proposed model for a more user-friendly privacy disclosure notice.

Strategic Goal IV: An expert, highly motivated, and diverse workforce
that makes effective use of OCC resources

The OCC pursued an array of management initiatives in FY 2006 to achieve
its goals for human capital, security, process improvement, and
technology.

Human Capital

The OCC supervises a remarkably diverse group of institutions, ranging
from small community banks to the world's largest financial
institutions. To carry out the agency's supervisory mission, the
Comptroller and the Executive Committee have made a top priority of
maintaining a diverse, highly skilled, and strategically deployed
workforce.

In response to challenges posed by impending civil service retirements
and the need to foster the evolution of the agency's future leadership
team, the OCC has mounted a broad initiative to recruit, retain, and
develop employees with the necessary skills and qualities.
*BusinessWeek* magazine recognized the quality of the OCC work
environment during this fiscal year by naming the OCC one of the "50
best places to launch a career."

In executing its comprehensive strategy, the agency is recruiting both
highly experienced and entry-level employees, and shifting internal
expertise to where it is needed most. During the fiscal year, the OCC
hired an unprecedented number of industry specialists for Large Bank
Supervision. These specialists are seasoned experts from banks and
elsewhere in the financial world who want to steer their career paths
toward public service. By continually introducing new expertise to its
workforce, the OCC enjoys the benefits of a stream of fresh ideas that
keep the OCC at the forefront of the banking industry. Most of these
highly experienced new employees work in key financial centers, such as
New York and Charlotte.

After hiring employees, the agency moves its focus to training and
retaining them. On large bank teams, the OCC recently established a
program for bringing the newly hired industry specialists on board,
assigning a highly skilled advisor to each of them, teaching them about
the culture and policies of the agency, providing regular feedback on
performance, and soliciting their comments on their initial experiences
at the OCC.

Internal recruitment in FY 2006 concentrated on redeploying examiner
expertise to the supervision policy group led by the Chief National Bank
Examiner and to large banks in high-cost cities. To attract internal
candidates, the OCC emphasized the importance of these assignments to
career advancement and provided incentives, including relocation
bonuses, mortgage subsidies, financial assistance for renters, and
transitional cost-of-living reimbursements.

The OCC also continued its nationwide program to recruit and train
entry-level bank examiners. Building on the relationships reestablished
three years ago with colleges across the nation, the agency competed for
the best talent and hired 162 entry-level examiners in FY 2006. This
pool of examiners was distinctive not only for the high quality of the
individuals hired, but for the diversity of the pool as a whole.
Fifty-one percent of these new examiners are women and 29 percent are
minorities.

Since the inception of this program in 2003, the agency has brought
aboard about 430 entry-level examiners. The agency also instituted an
aggressive retention program to keep these new employees after their
critical first five years, when many examiners make a decision about
whether to continue their careers with the OCC.

For an examiner out of college, a near-term goal is to pass the Uniform
Commission Examination to become a National Bank Examiner, a title that
carries high credibility at the OCC and throughout the financial
industry. Once the OCC instills basic skills in a new bank examiner, the
emphasis often turns toward identifying and developing skills in key
specialty areas. This skill development feeds the pipeline from
community bank supervision to jobs in large banks or Headquarters.

The agency's Committee on Bank Supervision, made up of three Senior
Deputy Comptrollers, is undertaking a major project centered on those
key specialty skills: Asset Management, Bank Information Technology,
Capital Markets, Compliance, Commercial Lending, Retail Lending,
Mortgage Banking, and Operational Risk. A project team of managers and
subject matter experts from those eight critical business lines
developed a Specialty Skills Assessment framework that, when fully
implemented, will help bank supervision managers identify resource needs
and available expertise with greater precision. That will allow the
agency to maximize its use of existing resources and to develop
strategic plans to meet future staffing needs.

FY 2006 also marked the establishment of the Office of Leadership,
Learning, and Workplace Fairness (LLWF), which supports OCC's commitment
to equal employment opportunity, succession planning, and high-quality
learning.

The OCC has strengthened its leadership programs, recognizing that
strong leaders are the key to maintaining the strategic direction of the
agency and effective bank supervision in the future. The agency built a
leadership development framework and wrote a strategic plan for a
comprehensive program to train current and future leaders. This program
includes a leadership development advisory board, five pilot leadership
development courses focusing on key competencies, an executive coaching
program, and a manager forum to enhance knowledge-sharing, learning, and
skill development.

The OCC also introduced the "LeaderTRACK" program during the fiscal year
to manage succession and prepare leaders for bank supervision. The
program, which will be piloted for 18 months beginning in FY 2007,
offers six participants a series of assignments with significant
managerial and supervisory roles.

For its employees to have the knowledge and skills to meet agency
challenges, OCC delivered its training in FY 2006 through hundreds of
classes and events. The OCC's online learning management system
continues to be the primary vehicle to administer, track, and report on
internal training for employees.

A fair workplace helps to ensure that OCC will retain the talent it
needs to meet the demands of supervising the national banking system.
OCC continued its commitment to a fair workplace by:

• Conducting online briefings about employees' rights under employment
discrimination laws, the "No Fear Act," and whistleblower protection.

• Adding facilitation to its menu of alternative dispute resolution
options and training a cadre of facilitators.

• Participating in the Federally Employed Women's conference and the
Equal Employment Opportunity (EEO) Commission's national conference.

• Making a presentation on workplace fairness and the future of EEO
during OCC's four district conferences for employees.

The OCC has continued to demonstrate its commitment to workplace
diversity by supporting four affinity groups, which are special-interest
organizations of employees who meet to discuss workplace issues and
communicate with agency leaders to improve agency operations, personnel
management, and employee effectiveness.

For the OCC, meeting the challenge of hiring, retaining, and developing
a highly effective workforce is imperative, now and for the future.

(sidebar) OCC's Workforce of the Future

Green and blue lines on charts tell a compelling story in an annual
"State of the Workforce" presentation for the Comptroller and the
Executive Committee.

The story is about significant challenges---and significant
opportunities---that have prompted agency leaders to design and execute
a detailed strategy for hiring, retaining, and developing employees for
the workforce of the future to supervise the national banking system.

The charts show a shrinking pool of potential successors to OCC
supervisors who retire over the next several years, a sharp increase in
recent years of bank examiners over age 50, and a sharp drop of
examiners in their thirties.

The challenge is to prepare for the succession to OCC leadership. The
opportunities are for all employees who are poised and eager for
advancement.

To John G. Walsh, Chief of Staff and Public Affairs, the message of
opportunity is clear for employees who are beginning their careers with
the OCC. "Look at the place and think about what you'd like to do," he
said. "Chances are, you'll be able to do it."

**Baby Boomers Retiring**

The agency is subject to the same demographic trends facing employers
across the nation. The baby boom generation has reached retirement age.
"OCC is essentially in the same boat as everyone else," noted Pat
Pointer, Deputy Comptroller for Workforce Effectiveness.

Yet, as she also pointed out, the OCC has unique flexibilities and
resources to meet the challenge and is moving with dispatch to develop
future agency leaders.

In five years, almost a third of the OCC workforce will be eligible for
retirement. The potential impact is most acute in Large Bank
Supervision, which has a highly experienced, senior-level workforce.

**Changes in Hiring**

Aside from nationwide demographics, trends unique to the U.S. banking
industry have influenced the makeup of the labor force of the OCC and
other federal banking regulators.

Although national bank assets have climbed steadily in the last decade,
the number of national banks declined as the industry consolidated.
Since 1993, those assets have doubled, while the number of national
banks dropped by almost half. Spurred by the reduction in bank numbers,
the OCC cut its workforce in the mid-1990s by almost one-third. When
hiring resumed in 1997, it centered on seasoned experts from the banking
industry. The agency resumed hiring entry-level examiners in 1999 but
the emphasis on experience continued until 2003. Since then, more than
80 percent of new OCC employees have been at the entry level.

These hiring patterns have contributed to the composition of an OCC
workforce that has two-and-a-half times as many examiners over age 40 as
under age 40.

Retirement-eligible baby boomers might be more apt than workers in
earlier generations to stay on the job beyond retirement age. At the
OCC, employees stay on the job for an average of three years past
retirement eligibility. Still, the situation has created the imperative
for the OCC to establish initiatives to develop the next class of agency
leaders.

Although many of these leaders will no doubt continue to come from the
more seasoned portion of the workforce, the rise in retirement
eligibility also provides an incentive for younger employees to remain
at the OCC to pursue expanded career opportunities. These workers may be
more mobile and less likely than older colleagues to remain with a
single employer for their entire careers, but opportunities to grow
toward leadership roles are keys to retaining them.

Younger workers must be able to see a promising future. At the OCC, the
expected decline in the average age of supervisors in coming years
spells a surge of opportunity. (end of sidebar)

Information Security and Emergency Preparedness

Ensuring the security of sensitive information entrusted to the custody
of the OCC is critical to performing the agency's mission safely and
effectively.

The OCC has multiple layers of security to protect the integrity of
sensitive information and to prevent unauthorized access to that
information. To evaluate the effectiveness of those security controls
and recommend improvements, the agency hired an external consultant in
late FY 2006 to conduct an end-to-end security review. As the evaluation
proceeds, the OCC will consider and implement recommended changes
immediately. The project will conclude during the second quarter of FY
2007.

The agency took several other steps during the fiscal year to improve
its information security environment. These included:

• Continuing the information security awareness training program for all
employees and contractors.

• Completing vulnerability assessments of the OCC computer network.

• Improving the OCC network infrastructure to detect unauthorized access
from outside the OCC network, to detect unauthorized behavior inside the
network, and to analyze security incidents after the fact.

• Working with other bank regulatory agencies to implement
cost-effective approaches to exchanging encrypted e-mail with banks and
each other.

• Implementing an integrated personal identity verification process to
comply with federal requirements.

• Implementing digital fingerprinting systems, document verification
software, and a system to exchange secure information on a real-time
basis with the Office of Personnel Management.

The OCC's emergency management program prepares the agency for
emergencies that disrupt operations. The OCC tested its Continuity of
Operations Plan (COOP) during FY 2006, participated in the
government-wide Forward Challenge '06, and updated its strategies for
maintaining management capability and using internal communications in
an emergency.

Process Improvement

Programs are continually reviewed to minimize burden on the OCC and
national banks, and to improve their effectiveness and productivity.
During the fiscal year, the OCC:

• Reengineered its processes for collecting assessments from banks to
reduce effort by national banks and the agency's financial staff.

• Developed the Office of Management's "OM At-A-Glance" on the OCC
intranet to reduce time staff spends finding information about salaries,
benefits, travel, and other administrative matters.

• Received delegated authority for investigating EEO complaints and
implemented a cost-effective program to ensure compliance during EEO
investigations.

For some reengineering projects, the OCC uses a methodology for
analyzing its business processes to improve quality and efficiency. This
approach improves those business processes, eliminates waste, reduces
the burden of compliance with statutory and regulatory requirements, and
delivers more value to customers. Since FY 2005, more than 30 of these
projects have produced \$1.3 million in savings and allowed the OCC to
make more effective use of its employees.

Technology

The OCC provides timely, high-quality technology solutions to its
employees. The agency's information technology professionals develop
enterprise information strategies, policies, and standards; oversee
information technology investments; and create a secure and efficient
information management environment.

Throughout its history, OCC has dealt primarily with information about
banks and the national banking system. The agency has made significant
investments in several vital projects that are under way to apply the
latest technology to manage this information in ways not possible in the
past.

The most wide-ranging of these projects will automate information
management in examinations of large national banks. Bank examiners and
their managers will use the new system to develop exam documents
collaboratively, store documents securely, search for information
effectively, and share documents easily.

Another large project is building an electronic system for OCC employees
to receive, process, and monitor licensing applications that banks file
online for activities such as establishing branches, relocating offices,
and obtaining charters to become national banks.

Two other projects are teaming up to improve important agency
information---and the delivery of that information---for bank examiners,
other OCC employees, national banks, and members of the public. One of
them is overhauling the agency's outmoded, print-based publishing
process to produce mission-critical publications, such as bank
examination handbooks, that are more timely, accessible, and searchable.
The other is redeveloping the OCC's employee intranet, public Web site,
and National BankNet, a private site for bankers, into state-of-the-art
Web sites.

Underpinning each of these projects is an initiative to develop a secure
electronic repository to store the agency's essential records. Each of
the projects will be sending records to this electronic records
management system for safekeeping.

To enhance its ability to manage these crucial projects, the agency
established program management offices in two of its major business
units---the Office of Management and Large Bank Supervision. These
offices provide expertise in project management, planning, and
implementation to ensure that technology solutions meet business unit
requirements.

Looking Ahead

To meet demands on OCC resources from large, highly complex national
banks and from a nationwide network of offices serving community banks,
the OCC must set bank supervision priorities that maximize efficiency in
using and allocating resources. Attracting and retaining qualified new
employees, developing and maintaining OCC staff expertise, embracing and
supporting the OCC's diversity initiatives, and enhancing the OCC's
leadership skills will continue to be priorities for the agency.

Large national banks will remain at the leading edge of developing new
banking products and services, requiring that the OCC be at the
forefront of the supervisory community in developing and maintaining
expertise in assessing such products and determining associated risks.
The OCC and national banks must interact effectively with one another,
with other federal regulators, and with international regulators.
Concerns about regulatory burden, especially among community bankers,
will accentuate the need to ensure that the OCC's policies and
expectations for its lines of business are balanced, clear, and
appropriately implemented. BSA/AML, consumer disclosures, and Home
Mortgage Disclosure Act reporting will continue to require OCC resources
and responses.

The OCC will be operating in a new legislative environment in FY 2007,
with leadership changes in the Congress, including in the two committees
with oversight of the agency. OCC officials also will be watching for
the Supreme Court's decision in *Watters* v. *Wachovia*, a case that
involves the extent to which states may exercise authority over national
bank mortgage lending activities conducted in operating subsidiaries.

To continue to strengthen its workforce, the agency plans to hire 70
entry-level bank examiners in early FY 2007. They will begin on-the-job
training and join field offices by mid-year.

The agency will maintain its focus on internal information security as
its end-to-end security review unfolds, and OCC officials evaluate
findings and implement improvements. The agency will also continue to
focus on assisting consumers, as the hours of operation of its Customer
Assistance Group further expand for answering questions and receiving
complaints from customers of national banks.

Uncertainties in the financial and commodities markets and in the global
political landscape are likely to continue and may result in a more
volatile operating environment for the banking industry. Continued
loosening of standards for credit underwriting and pricing, and the
increased involvement of hedge funds in syndicated bank loans, heighten
concerns about credit quality and may escalate problem credits and
losses in the event of unfavorable market developments. Slowdowns in
housing, construction, and real estate development may adversely affect
banks' balance sheets and earnings streams. Many banks and
over-leveraged consumers remain vulnerable if interest rates rise.
Pressures on net interest margins are likely to continue. Merger and
acquisition activity has fostered a growing concentration of banking
assets in the largest national banks and reduced the number of major
dealers in key money market and derivatives markets.

Risks facing the banking industry and the OCC are increasingly
interdependent, cutting across traditional disciplines and business
lines. Operational and compliance risks are becoming more prominent, and
traditional distinctions between credit and capital markets activities
and risk management tools are eroding. Corporate governance, accounting,
compliance, and customer information security continue to be
high-visibility issues for the banking industry and for large, publicly
traded banks in particular, accentuating the need for strong corporate
governance, accounting transparency, internal controls, and audit and
compliance programs.

The rapid pace of financial innovation and growing concentrations---both
within individual bank's portfolios and across industry segments---pose
additional challenges and require improved risk management and
information systems. Quantitative risk measurement systems will continue
to become more prominent in banks' risk management processes.

The Comptroller, the Executive Committee, and other agency officials
will continue to monitor these risks closely in FY 2007 and to develop
and refine strategies for the agency's workforce to address them through
supervisory and regulatory programs of onsite supervision, timely
examination and policy guidance, and balanced regulatory actions. The
OCC also will work with other international, federal, and state
supervisors to respond to the myriad of cross-cutting issues that face
the financial services industry.

The OCC will continue its efforts to ensure fair access to financial
services and fair treatment of bank customers through its consumer
compliance supervisory activities, community development programs, and
outreach efforts.

Financial Management

Letter from the CFO

I am pleased to present the OCC's financial statements for the FY 2006
Annual Report. I am also pleased to note that for FY 2006 our
independent auditors rendered an unqualified opinion with no material
internal control weaknesses. The OCC's commitment to effective financial
management continues to be my highest priority, as the following key
initiatives show:

• *Implementation of OMB Circular A-123---Management's Responsibility
for Internal Control (A-123).* During the past year we completed our
A-123 implementation. The Financial Management staff documented our
financial processes, performed a risk assessment, and tested all of our
critical processes. The testing showed no material internal control
weaknesses, and we have developed plans to strengthen our internal
controls. A communications strategy is an essential element in our A-123
program. We sent regular messages to OCC employees highlighting this
effort and reminding them of their responsibilities to maintain an
effective internal control environment. Though significant resources
were required, we firmly established a stronger internal control
environment. I look forward to the evolving benefits that this process
will offer.

• *Migration of OCC Financial Platform to the Bureau of Public Debt
(BPD).* OCC has signed a letter of intent to migrate its financial and
acquisition systems to the Administrative Resource Center (ARC) at BPD.
This decision will enhance financial reporting and yield long-term
financial benefits from the expertise of an established service
provider. The expected conversion to the new platform is October 2007.

• *Financial Management Restructuring.* After analyzing the organization
of the Financial Management department, we determined that structural
changes would serve the financial needs of the OCC more effectively and
efficiently. Highlights of the restructuring include consolidation of
accounting processes into two groups, one focused on operational
accounting and the other on financial accounting. We also created an
internal control unit focused on A-123 and process reengineering.

I would also like to update you on the continued success of our process
reengineering initiatives. After embracing the Lean Six Sigma
methodology, the Office of Management turned its focus to reengineering
core processes in FY 2006. We completed 15 new reengineering projects
during the fiscal year. Because Lean Six Sigma stresses the "voice of
the customer," internal customer participation in these projects has
been vital for success. As measured by the Office of Management
"balanced scorecard," the OCC has saved approximately \$1.3 million
through these efforts since FY 2005, but more importantly, our processes
more efficiently address the needs of the OCC.

The Budget and Finance Subcommittee, which I chair, had a full agenda
during the past year. Responsible for managing the financial performance
of the agency, the subcommittee continued to oversee the budgeting
process and made key recommendations to establish the direction of the
FY 2007 budget. The goal of the subcommittee is to ensure that the
budget is not only prudent, but also links directly with the agency's
strategic goals and objectives. The subcommittee also serves as an
investment review board for non-information-technology investments, such
as leasing arrangements. One area of subcommittee focus was the OCC's
need for additional office space to accommodate increased staffing
levels. The panel reviewed and analyzed options and recommended an
office space plan that is being implemented.

Finally, I would like to take a few moments to review the overall
financial condition of the OCC. In FY 2006, the OCC has seen an increase
in its balance-sheet assets, reflecting the overall growth of assets in
the national banking system. As the agency responds to that growth
through its primary programs, we expect to deploy our financial assets
to increase staffing levels, increase staff expertise through hiring
experienced employees and training, investing in sophisticated
enterprise-wide system solutions, and making long-overdue upgrades to
our technical infrastructure. These investments are designed to maintain
our strong regulatory presence.

While FY 2006 has been a year of significant accomplishments, we do not
intend to rest on our laurels. We plan to continue to meet our financial
responsibilities and contribute to the overall strength of financial
management in the federal government. In closing, I would like to repeat
my commitment from last year---to ensure we have the finest people and
resources dedicated to managing and monitoring the effective and
efficient use of agency resources.

\[signed\]

Thomas R. Bloom, Chief Financial Officer

Financial Management Discussion and Analysis

Historical Perspective

In FY 2006, the Office of Management's Financial Management department
(FM) employed an operating strategy focused on achieving and maintaining
data integrity across its organization. During the previous year, FM
began improving its business processes and further refining the
department's alignment with strategic goals through the use of the
"balanced scorecard." The scorecard measures performance and initiatives
in four operational areas. As a result of these efforts, the department
began FY 2006 in a much stronger position to provide consistently
reliable information to OCC decision-makers for managing their programs
effectively, and the department was poised to meet the agency's emerging
needs.

Strategic Focus

Last year, Financial Management continued to demonstrate its commitment
to customer service, stewardship, and continuous improvement. Managing
for results and using widely recognized best practices, such as the
"balanced scorecard" and business process improvement, FM made
significant progress toward achieving key business goals. The
department's strategic focus has been to prepare for implementing new
systems for financial management and acquisitions, and to meet
significant new internal control requirements for federal agencies. The
department adopted a new organizational structure, ensuring that units
are better aligned for efficient processes and valued customer service.
FM has focused heavily on staff and leadership development, and on
increasing employee engagement as measured through the Gallup employee
engagement survey.

Goal for Financial Management

The goal for FM is to be an efficient organization that reflects:

• An engaged workforce committed to the business strategy of operational
excellence.

• A solid understanding of customer needs and expectations.

• Efficient processes that take advantage of system capabilities.

• A focus on developing staff competencies for the evolving
organization.

• An effective management of projects and programs.

Figure 1: FY 2006 FM Operating Strategy

![](media/image1.jpeg){width="3.7597222222222224in"
height="2.4368055555555554in"}

Operating Strategy

The FM operating strategy for FY 2006 is shown in Figure 1. The strategy
emphasized FM's most important business objectives. Business process
improvement will be used throughout the department's preparation for
implementing the new systems for financial management and acquisitions
that are scheduled for deployment in early FY 2008. FM fully adopted the
new process documentation and internal control testing requirements
outlined in OMB Circular A-123, Appendix A, "Internal Control over
Financial Reporting," and has begun to refine its internal control
program to ensure that it is effective in all FM business processes.
Implementing the requirements of Circular A-123 required significant
participation and support from staff and management across all FM units.
This first year effort required a proactive approach that included
visible senior management support, a strong communication strategy
throughout the agency, and the on-going involvement of a strong agency
governance team. The comprehensive assessment resulted in the
Comptroller's ability to provide reasonable assurance that the OCC has
effective internal controls over financial reporting.

Additional major accomplishments include the use of the redesigned
process for collecting annual OCC operating funds from the national
banks and negotiating more than 7 percent, or approximately \$5 million,
in contractual savings for annual contracts awarded.

The FM organization was restructured this year to ensure that
responsibilities are aligned to enhance efficiency, facilitate
implementation of new automated systems, and improve customer-service
delivery. FM concentrated on employee development through specific
training and developmental assignments for staff at all levels.

**The Balanced Scorecard**

The FM "balanced scorecard" measures performance and initiatives from
these four perspectives:

• Customer

• Financial management

• Internal processes

• Learning and growth

The customer perspective ensures that FM's products and services reflect
an accurate identification of its customers and their needs. During FY
2006, FM carried out a customer service action plan to ensure that the
"voice of the customer" was integrated into all FM products and
services. Using valuable input received from OCC customers through the
2005 annual customer satisfaction survey, FM engaged in on-going
dialogue with key customers and is working to improve the delivery of
guidance and information on the agency's intranet. In August 2006, FM
participated again in the annual OM OCC-wide customer satisfaction
survey. FM management and staff will use the results of this year's
survey to plan FY 2007 and later customer-focused initiatives.

The financial management perspective ensures that FM is using the OCC's
financial resources to support the agency's overall strategic financial
goals and objectives. It serves as a mechanism to help FM use financial
resources to produce the best value for the OCC. In FY 2006, FM met the
target of maintaining its costs at or below 1.9 percent of total planned
OCC operating costs, even with the increased costs of its expanded
responsibilities for OMB A-123.

The internal processes perspective ensures that FM focuses on improving
the processes that are most critical to achieving its business goals. As
reflected in the FY 2006 operating and strategic business strategies, FM
devoted the most attention and effort this fiscal year to processes that
had known inefficiencies or would be significantly affected by the
implementation of a new system for financial management and
acquisitions. FM carried out several business process reengineering
projects for key areas, such as acquisitions and file planning, contract
closeouts, federal records retention scheduling, and file room
management.

The learning and growth perspective ensures that FM identifies the
critical staff skills needed to achieve its business goals and that
management works with staff to ensure that those skills are fully
developed. Each unit of FM worked on action plans in response to the
Gallup employee engagement survey. FM hired several new employees during
FY 2006 and began focusing on developing the next generation of leaders.
The department also augmented its workforce by hiring several
undergraduate and graduate-level financial interns, who introduced fresh
perspectives and the latest learning in various disciplines to the work
environment.

Future Focus

Financial Management will continue to focus on achieving strategic
business goals and on measuring progress by using the "balanced
scorecard" and business process improvement. The department will
benchmark performance through key business metrics. The department will
continue to explore the latest business models, such as outsourcing and
e-commerce, and will focus on modernizing internal controls, ensuring
that the agency is up-to-date with the current guidance in financial
management policies.

Funding Sources and Uses

**Funding Sources**

The OCC does not receive appropriations. The OCC's operations are funded
primarily by assessments collected from national banks and other income,
including interest on investments in U.S. Treasury securities. The
Comptroller, in accordance with 12 USC 482, establishes budget authority
for a given fiscal year. The total budget authority available for use by
the OCC in FY 2006 was \$579.4 million, which represents an increase of
\$60 million, or 11.6 percent, over the \$519.4 million budget in FY
2005.

Table 7: Components of Total Revenue, FY 2006 and 2005 (in millions)

  ---------------- ----------------- ------------------ ------------------
                   **FY 2006**       **FY 2005**        **Change**

  Assessments      \$609.5           \$557.8            \$51.7

  Investment       \$20.5            \$17.0             \$3.5
  Income                                                

  Other^1^         \$3.6             \$2.9              \$0.7

  Total Revenue    \$633.6           \$577.7            \$55.9

  ^1^ Other                                             
  sources of                                            
  revenue include                                       
  bank licensing                                        
  fees, revenue                                         
  received from                                         
  the sale of                                           
  publications,                                         
  and other                                             
  miscellaneous                                         
  sources.                                              
  ---------------- ----------------- ------------------ ------------------

Total FY 2006 revenue of \$633.6 million is a \$55.9 million, or 9.7
percent, increase over FY 2005 revenues of \$577.7 million. The increase
is primarily attributed to a rise in bank assessment revenue stemming
from the overall increase in the assets of the national banking system
and the growth of investment income from an expanded investment
portfolio in a rising interest-rate environment. Table 7 depicts the
components of total revenue for FY 2006 and FY 2005.

Investment income is earned on investments in U.S. Treasury securities.
The OCC increased its investments by \$102.3 million during the fiscal
year by investing its increased assessment revenue and earning interest.
The book value of the OCC's portfolio on September 30, 2006 was \$709.6
million, compared to \$607.3 million a year earlier. The portfolio
earned an annual yield for 2006 of 3.94 percent. The OCC's annual
portfolio yield is calculated by dividing the total interest earned
during the year by the average ending monthly book value of investments.

**Bank Assets and Assessment Revenue**

Total assets under OCC supervision increased during FY 2006 from \$5.9
trillion to \$6.5 trillion; of this total, 86 percent (\$5.6 trillion)
is attributable to large national banks. Large banks' share of total OCC
assessment revenue remains at almost 70 percent, followed by community
banks 19 percent, mid-size banks 8 percent, and federal branches 3
percent. Strong national bank asset growth combined with the movement of
assets into the national banking system resulted in the higher total
assets of national banks in FY 2006. Figure 2 shows the composition of
national bank assets by large banks, mid-size banks, community banks,
and federal branches for FY 2006 and FY 2005.

![](media/image2.jpeg){width="4.751388888888889in"
height="1.988888888888889in"}

**Funding Uses**

The OCC classifies its funding uses as pay, discretionary, and fixed.
Pay encompasses payroll-related costs; discretionary reflects all other
funding uses, such as contractual services, travel, training, and
capital projects; and fixed primarily includes rent, utilities, and
office maintenance. In FY 2006, the OCC's total funds used were \$553.0
million, an increase of 10.6 percent over the FY 2005 level. Of the
total funds used in FY 2006, \$370.6 million was categorized as pay,
\$146.3 million as discretionary, and \$36.1 million as fixed. The OCC's
operations are service-intensive; therefore, the majority of funds are
used for pay. The OCC experienced a \$17.8 million increase in non-pay
funds used primarily for training, travel, relocations, contractual
services and the capital investment program. Figure 3 depicts the uses
of the OCC's funding for FYs 2006 and 2005.

While the influx of assets into the national banking system has
increased assessment revenue, corresponding costs of supervising the
increased asset base, along with the increased complexity of those
assets also have risen, a trend expected to continue. Supervision costs
during FY 2006 related to staffing, training, and travel increased by
\$60.5 million, or 14.4 percent, compared with FY 2005.

Financial Review

The OCC received an unqualified opinion on its FY 2006 and FY 2005
financial statements. The financial statements include Balance Sheets
and Statements of Net Cost, Changes in Net Position, Budgetary
Resources, Financing, and Custodial Activities. The financial statements
and notes are presented on a comparative basis, providing financial
information for FYs 2006 and 2005. These financial statements summarize
the OCC's financial activity and position. Highlights of information
presented on the financial statements follow.

Balance Sheets

The Balance Sheets, as of September 30, 2006 and 2005, present the
resources that are owned by the OCC and available for use (assets), the
resources due to others or held for future recognition (liabilities),
and the resources that comprise the residual (net position). For clarity
in presentation, assets and liabilities are differentiated between those
resulting from transactions between the OCC and other federal entities
(intragovernmental) and transactions between the OCC and nonfederal
entities (with the public).

![](media/image3.jpeg){width="4.164583333333334in"
height="1.8694444444444445in"}

**Composition of OCC Assets**

The Balance Sheets show that total assets as of September 30, 2006,
increased by \$104.3 million or 15.8 percent from their level at
September 30, 2005, which is primarily attributable to the changes in
investments and accrued interest. The increase of \$101.3 million in
investments and accrued interest was attributed to a rise in assessment
collections during FY 2006. Figure 4 shows the composition of the OCC's
assets.

**Composition of OCC Liabilities**

Total liabilities, as of September 30, 2006, increased by a net of
\$20.3 million, or 9.0 percent, over their level on September 30, 2005.
The OCC's liabilities are largely comprised of deferred revenue, accrued
liabilities, and accounts payable. Deferred revenue represents the
unearned portion of semiannual assessments that have been collected but
not yet earned. The increase of \$12.8 million in deferred revenue was
due to a rise in assessment collections during FY 2006. The increase of
\$6.1 million in accounts payable and accrued liabilities was due
primarily to an increase in payroll and employee benefits over last year
and to disbursement timing differences. Figure 5 illustrates the
composition of the OCC's liabilities.

![](media/image4.jpeg){width="3.678472222222222in" height="4.04375in"}

**Composition of OCC Net Position**

The OCC's net position of \$518.4 million as of September 30, 2006, and
\$434.4 million as of September 30, 2005, represent the cumulative net
excess of the OCC's revenues over its cost of operations since
inception. This represents an increase of \$84.0 million, or 19.3
percent. The majority of this increase is directly related to increases
in assessment revenue, which has been allocated to the OCC's asset
replacement reserve.

The net position is presented on both the Balance Sheets and the
Statements of Changes in Net Position. As discussed in the next section,
the OCC reserves a significant portion of its net position to supplement
resources made available to fund the OCC's annual budget and to cover
foreseeable but rare events. The OCC also earmarks funds for on-going
operations to cover undelivered orders, the consumption of assets, and
capital investments. Figure 6 shows the composition of the OCC's net
position.

**Reserves**

The establishment of financial reserves is integral to the effective
stewardship of the OCC's resources, particularly because the agency does
not receive congressional appropriations. The contingency reserve is for
foreseeable but rare events that are beyond the control of the OCC, such
as a major change in the national banking system or for instance, a
fire, flood, or significant impairment to the OCC's information
technology network that interferes with the OCC's ability to accomplish
its mission. The asset replacement reserve is for the replacement of IT
equipment, leasehold improvements, and furniture replacements for future
years. The target level in the replacement reserve is established
annually based on the gross value of existing property and equipment
plus a growth rate factor and a margin for market cost adjustments. The
Special Reserve reduces the effect of unforecasted shortfalls, or
unbudgeted and unanticipated requirements.

![](media/image5.jpeg){width="4.083333333333333in"
height="2.2604166666666665in"}

Statements of Net Cost

The Statements of Net Cost present the full cost of operating the OCC's
programs for the years ended September 30, 2006, and 2005. The net cost
of operations is reported on the Statements of Net Cost, the Statements
of Changes in Net Position, and on the Statements of Financing. The OCC
uses an activity-based time allocation process to allocate costs between
the programs. Costs are further differentiated between those resulting
from transactions between the OCC and other federal entities
(intragovernmental) and transactions between the OCC and non-federal
entities (with the public). The full cost includes contributions made by
the Office of Personnel Management (OPM) on behalf of the OCC to cover
the cost of the Federal Employees Retirement System (FERS) and Civil
Service Retirement System (CSRS) plans, totaling \$24.5 million in FY
2006 and \$22.9 million in FY 2005. The full program cost increased by
\$72.5 million, primarily due to increases in pay and benefits,
resulting from increases to full-time equivalents to 2,827.4 in FY 2006,
from 2,680.9 in FY 2005, and additions to or improvements in benefit
programs in FY 2006. Additional contributing factors include increases
to contractual services supporting maintenance and non-capitalized IT
investments, loss on the write-off of internal use software assets, and
imputed costs. The full cost is reduced by earned revenues to arrive at
net cost. Earned revenues increased by \$55.9 million because of a rise
in assessments collected during FY 2006. The increases in assessments
are a direct result of the addition of new charters and increases in
bank assets of existing charters.

Statements of Changes in Net Position

The Statements of Changes in Net Position present the change in the
OCC's net position resulting from the net cost of the OCC's operations
and financing sources other than exchange revenues for the years ended
September 30, 2006, and 2005. Imputed financing from costs absorbed by
others increased by \$1.6 million. The OCC's financing source resulted
from a contribution of \$24.5 million in FY 2006 and \$22.9 million in
FY 2005 by the OPM toward the OCC's FERS and CSRS retirement plans.

Statements of Budgetary Resources

The Statements of Budgetary Resources, designed primarily for
appropriated fund activities, present the budgetary resources available
to the OCC for the year, the status of these resources at the end of the
year, and the net outlay of budgetary resources at the end of the year.
The OCC, which is a non-appropriated agency, executed \$553.0 million or
95.4 percent of its FY 2006 budget of \$579.4 million, with the
remaining funding being applied to its asset replacement and contingency
reserves.

Statements of Financing

The Statements of Financing demonstrate the relationship between the
OCC's proprietary (net cost of operations) and budgetary accounting (net
obligations) information. For FY 2006, the statements show \$66.6
million in excess resources available to finance activities, a net
decrease of \$18.5 million over September 30, 2005. This net decrease
resulted from a \$52.8 million increase in resources available netted
against the increase of \$69.7 million in resources used (obligations
incurred) and the \$1.6 million increase in imputed financing. The
increase in net resources available is due primarily to increased
assessments and imputed financing, while the increase in resources used
results primarily from various office space and IT investments as well
as pay and employee benefits.

Statements of Custodial Activities

The Statements of Custodial Activities identify revenues collected by
the OCC on behalf of others. These revenues result primarily from CMPs
that are assessed through court-enforced legal actions against a
national bank and/or its officers. CMP collections are transferred to
the Department of the Treasury's General Fund.

***Audits and Program Analyses***

Enhanced OCC's Effectiveness through Audits and Program Analyses

The OCC's management control program involves OCC's major programs and
all Executive Committee members. OCC relies in part on the work of the
GAO, OIG, and independent auditors for an assessment of OCC's annual
statement of assurance. Internally, OCC relies on a two-tier,
enterprise-level assurance framework.

The first tier is the general requirement that all Executive
Committee-level department heads establish satisfactory quality
assurance programs in their respective areas of responsibility and
annually certify their level of assurance. Executive Committee members
design quality assurance processes that are tailored to their operations
and work best for them. However, those quality assurance program
frameworks must provide reasonable assurance to those department heads
that:

• OCC programs are achieving their intended results.

• Resources are aligned with our mission and strategic plan.

• Resources are protected from waste, fraud, and abuse.

• Laws and regulations that apply to OCC operations are being followed.

• Reliable and timely management information systems support decisions.

The Executive Committee members must provide annual written
certifications on these five areas to the Comptroller.

The Program and Management Accountability (P&MA) office administers the
second tier of the enterprise-level assurance framework---validation,
testing, and analysis.

To ensure that identified weaknesses are responded to appropriately, the
Executive Committee's Audit Subcommittee provides a forum for monitoring
progress, resolving problems, and developing consensus recommendations
on issues that arise from the Executive Committee member
self-assessments, quality assurance activities, and audits.

For FY 2006, P&MA completed six reviews and has two under way. In
addition, the unit administered management control self-assessments from
OCC line managers and senior managers.

Audit and program analysis during the year continued to enhance the
effectiveness of the OCC workforce and strengthen its organization
performance and corporate governance. With guidance provided by the
chief of staff and the Audit Subcommittee, this year's initiatives
included:

• *Matters requiring attention (MRA) diligence:* Assessed examiner
diligence with matters requiring attention (contrasted the operational
use of MRA against the standards that apply).

• *Pay flexibility:* Concluded that all Executive Committee areas are
using some of OCC's pay flexibility tools for recruiting or retention.
Recommended Workforce Effectiveness report pay flexibility usage
semiannually to the Executive Committee.

• *Supervision of novel bank activities authorized by Licensing:*
Completed a review of a sample of large banks and mid-size/community
banks.

• *Implementation of internal controls:* Completed assessing test
results of OCC's internal controls, under a requirement from the Office
of Management and Budget for federal agencies to establish and maintain
effective internal controls over financial reporting, and to submit an
annual assurance statement on the effectiveness of those controls.

• *Review of OCC's exit interview process:* Provided findings to
management on opportunities to improve the usefulness of exit
interviews.

• *Safeguarding personal employee information:* Completed phase 1 of the
project to collect best-practice information from private and public
sector organizations.

In addition, the unit assisted business units with process improvement
projects involving: Web content, external outreach to bankers, records
management, and communications processes.

Three audit reports issued by the U.S. Government Accountability Office
(GAO) during the year addressed various aspects of the OCC's preemption
and visitorial powers rulemaking. Congress asked GAO to look at the
rulemaking process, the OCC's assistance to consumers, and the
applicability of state consumer protection laws to national banks. The
OCC implemented the GAO's suggestions to improve the rulemaking process,
and we are in the process of implementing GAO's recommendations to
improve outreach to consumers and to clarify the applicability of state
consumer protection laws to national banks.

Both the GAO and the Treasury Department Office of Inspector General
(OIG) issued reports to the OCC that contained recommendations for
improving bank supervision for compliance with laws and regulations
focused on anti-money laundering and the deterrence of terrorist
financing activities. The OIG also recommended improvements to systems
security and disaster recovery.

OCC is required to implement controls and periodically submit
information to the Department of the Treasury in support of various
department-wide compliance initiatives. Specific examples include
compliance under FISMA (Federal Information Security Management Act of
2002), IPIA (Improper Payments Information Act), the Erroneous Payments
Recovery Act of 2002, and GPRA (Government Performance and Results Act).
The OCC continues to monitor its performance under these acts and has
been responsive to each related data call from the Department of the
Treasury.

Assurance Statement

The Office of the Comptroller of the Currency (OCC) has made a
conscientious effort during fiscal year (FY) 2006 to meet the internal
control requirements of the Federal Managers' Financial Integrity Act
(FMFIA), the Federal Financial Management Improvement Act (FFMIA), and
Office of Management and Budget (OMB) Circular A-123.

OCC systems of management control are designed to ensure that:

a\) Programs achieve their intended results;

b\) Resources are used in accordance with the agency's mission;

c\) Programs and resources are protected from waste, fraud, and
mismanagement;

d\) Laws and regulations are followed;

e\) Controls are sufficient to minimize improper or erroneous payments;

f\) Performance information is reliable;

g\) Systems security is in substantial compliance with relevant
requirements;

h\) Continuity of operations planning in critical areas is sufficient to
reduce risk to reasonable levels; and

i\) Financial management systems are in compliance with Federal
financial systems standards, *i.e*., FMFIA Section 4 and FFMIA.

I am providing reasonable assurance that the above listed management
control objectives were achieved by the OCC without material weakness
during FY 2006. Specifically, this assurance is provided relative to
Sections 2 and 4 of the Federal Managers' Financial Integrity Act
(FMFIA). However, control deficiencies in our financial management
systems were identified by external auditors requiring improvements in
information technology controls, and the Inspector General criticized
certain network and information security practices. Accordingly, I am
reporting a lack of substantial compliance with the requirements imposed
by the Federal Financial Management Improvement Act (FFMIA). As
discussed below, these areas are receiving heightened management
attention, and plans of corrective action have been developed for
resolving both by mid-year 2007.

The OCC also conducted its assessment of the effectiveness of internal
control over financial reporting, which includes the safeguarding of
assets and compliance with applicable laws and regulations, in
accordance with the requirements of Appendix A of OMB Circular
A-123. Based on the results of this evaluation, the OCC can provide
reasonable assurance that its internal control over financial reporting
as of June 30, 2006, was operating effectively, and no material
weaknesses were found in the design or operation of the internal control
over financial reporting.

**Reportable Condition**

External auditors found that the OCC needs to improve its information
technology (IT) controls over financial management systems.
Specifically, they identified IT deficiencies related to security
program planning and management, service continuity, and selected access
controls.

These deficiencies are based on a certification and accreditation
methodology that was found to be inconsistent with the latest National
Institute of Standards and Technology guidance. A revised methodology
will allow OCC to identify appropriate access controls consistent with
sensitivity ratings.

Other access control deficiencies are due to a lack of clear policy and
procedures for confirming employee awareness training, acknowledgement
of information systems responsibilities, and management of computer
system accounts.

Additionally, certain security settings were not configured properly,
and there is no process to promptly detect and remove unauthorized
personal and public domain software. A plan of corrective actions has
been developed to address all of these issues by March 31, 2007.

**Other Control Deficiency**

I am also bringing to your attention physical and computer security
issues that are receiving heightened management attention. These
internal control deficiencies do not rise to the level of materiality,
and we are not aware of any management control weakness or
non-conformance that significantly impairs our ability to fulfill our
mission, or otherwise significantly weakens established safeguards
against waste, fraud, or mismanagement.

On June 24, 2006, a breach of multiple layers of physical security at
our Phoenix Field Office resulted in the theft of two server hard drives
and a router. OCC took the appropriate steps to contain and control the
incident. Subsequently, but unrelated to the Phoenix incident, OCC also
received Office of the Inspector General audit findings critical of
certain OCC network and information security practices. Where possible,
device or software specific vulnerabilities cited in the report have
been corrected. In other cases, a plan of corrective actions has been
developed to address these issues by June 30, 2007.

These actions highlight the risks facing the agency in safeguarding
sensitive information. I have initiated a comprehensive end-to-end
review of our physical and computer security processes and procedures to
identify opportunities to improve and further strengthen our management
controls in this area. The evaluation will be completed in the first
half of FY 2007.

**Analytical Basis of Assurance Statement**

OCC evaluated its management controls in accordance with the FY 2006
Secretary's Assurance Statement Guidance of July 19, 2006, signed by
Richard Holcomb, Deputy Chief Financial Officer, and also considered the
following guidance:

• Office of Management and Budget (OMB) Circular A-123, Management
Accountability and Control;

• OMB Circular A-127, Financial Management Systems;

• OMB Circular A-130, Management of Federal Information Systems
Resources; and

• Treasury Directive 40-04, Treasury Internal Control Program.

Information considered in our control assessment included the following:

• FMFIA certifications submitted by each Executive Committee member;

• OCC's risk assessment analysis for FY 2006;

• Results of internal control testing under OMB Circular A-123, Appendix
A;

• Executive Committee descriptions of business unit quality assurance
programs;

• Results of internal audits and reviews;

• Results of control self-assessments completed by OCC managers in FY
2006;

• Audit reports and evaluations issued by the Government Accountability
Office and the Office of the Inspector General;

• Completion of risk assessment materials related to the Improper
Payments Information Act by our Deputy Chief Financial Officer, which
was submitted to the Department in May 2006;

• Program information submitted by OCC's Chief Information Security
Officer, Deputy Chief Financial Officer, and Office of Critical
Infrastructure Protection and Security;

• Completion of GAO's Core Financial System Requirements Checklist;

• Unqualified and timely audit opinion on FY 2005 financial statements;
and

• CPA's Gardiner, Kamya and Associates' status report of October 20,
2006 on the FY 2006 financial statement audit.

\[signed\]

> John C. Dugan
>
> Comptroller of the Currency

Independent Auditors' Report

[Independent Auditors' Report on Financial Statements]{.underline}

The Inspector General, Department of the Treasury, and\
the Comptroller of the Currency:

We have audited the accompanying balance sheets of the Office of the
Comptroller of the Currency (OCC) as of September 30, 2006 and 2005, and
the related statements of net cost, changes in net position, budgetary
resources, financing, and custodial activity for the years then ended.
These financial statements are the responsibility of the management of
OCC. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America; the standards applicable to
financial audits contained in *Government Auditing Standards*, issued by
the Comptroller General of the United States; and the Office of
Management and Budget Bulletin No. 06-03, *Audit Requirements for
Federal Financial Statements.* Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the OCC as
of September 30, 2006 and 2005, and its net costs, changes in net
position, budgetary resources, the reconciliation of budgetary
obligations to net costs, and custodial activities for the years then
ended in conformity with accounting principles generally accepted in the
United States of America.

The information in Sections II through V of OCC's fiscal year 2006
Annual Report is not a required part of the financial statements but is
supplementary information required by accounting principles generally
accepted in the United States of America. We have applied certain
limited procedures, which consisted principally of inquiries of
management regarding the methods of measurement and presentation of this
information. However, we did not audit this information and accordingly,
we express no opinion on it.

Our audits were conducted for the purpose of forming an opinion on the
financial statements taken as a whole. The information included in
Sections I and VII of OCC's fiscal year 2006 Annual Report is presented
for purposes of additional analysis and is not a required part of the
financial statements. We did not audit this information and,
accordingly, we express no opinion on it.

In accordance with *Government Auditing Standards*, we have also issued
reports dated October 31, 2006, on our consideration of the OCC's
internal control over financial reporting, and on our tests of its
compliance with certain provisions of applicable laws, regulations and
contracts. These reports are an integral part of an audit performed in
accordance with *Government Auditing Standards*, and these reports
should be read in conjunction with this report in considering the
results of our audits.

\[signed\]

Gardiner Kamya & Associates

October 31, 2006

#### [Independent Auditors' Report on Internal Control over Financial Reporting]{.underline}

The Inspector General, Department of the Treasury, and\
the Comptroller of the Currency:

We have audited the balance sheets of the Office of the Comptroller of
the Currency (OCC) as of September 30, 2006 and 2005, and the related
statements of net cost, changes in net position, budgetary resources,
financing, and custodial activity for the years then ended, and have
issued our report thereon dated October 31, 2006. We conducted our
audits in accordance with auditing standards generally accepted in the
United States of America; the standards applicable to financial audits
contained in *Government Auditing Standards*, issued by the Comptroller
General of the United States; and Office of Management and Budget (OMB)
Bulletin No. 06-03, *Audit Requirements for Federal Financial
Statements.*

In planning and performing our audits, we considered the OCC's internal
controls over financial reporting by obtaining an understanding of the
OCC's internal controls, determined whether internal controls had been
placed in operation, assessed control risk, and performed tests of
controls in order to determine our auditing procedures for the purpose
of expressing our opinion on the financial statements. We limited our
internal control testing to those controls necessary to achieve the
objectives describes in OMB Bulletin No. 06-03 and *Government Auditing
Standards*. We did not test all internal controls relevant to operating
objectives as broadly defined by the Federal Managers' Financial
Integrity Act of 1982, such as those controls relevant to ensuring
efficient operations. The objective of our audits was not to provide
assurance on internal control over financial reporting. Consequently, we
do not provide an opinion on internal control over financial reporting.

Our consideration of internal control over financial reporting would not
necessarily disclose all matters in the internal control over financial
reporting that might be reportable conditions. Under standards issued by
the American Institute of Certified Public Accountants, reportable
conditions are matters coming to our attention that, in our judgment,
should be communicated because they represent significant deficiencies
in the design or operation in internal control, which could adversely
affect OCC's ability to meet the objectives of internal control.
Material weaknesses are reportable conditions in which the design or
operation of the internal control does not reduce to a relatively low
level the risk that errors, fraud or noncompliance in amounts that would
be material in relation to the financial statements being audited, or
material to a performance measure or aggregation of related performance
measures, may occur and not be detected within a timely period by
employees in the normal course of performing their assigned functions.
Because of inherent limitations in internal controls, misstatements due
to error or fraud may occur and not be detected. However, we noted a
certain matter discussed in Exhibit 1 involving the internal control
over financial reporting and its operation that we consider to be a
reportable condition. However, this reportable condition is not believed
to be a material weakness.

Finally, with respect to internal control related to performance
measures determined by management to be key and reported in Sections III
and VII of the OCC's fiscal year 2006 Annual Report, we obtained an
understanding of the design of significant internal controls relating to
the existence and completeness assertions and determined whether they
have been placed in operation, as required by OMB Bulletin No. 06-03.
Our procedures were not designed to provide assurance on internal
controls over reported performance measures, and, accordingly, we do not
provide an opinion on such controls.

This report is intended solely for the information and use of the OCC's
management, the Department of the Treasury Office of Inspector General,
OMB, and Congress, and is not intended to be and should not be used by
anyone other than these specified parties. However, this report is
available as a matter of public record.

\[signed\]

Gardiner Kamya & Associates

October 31, 2006

**EXHIBIT 1**

**REPORTABLE CONDITION**

## Improvements Needed in Information Technology General Controls over OCC's Financial Systems.

In our fiscal year 2005 audit, we identified weaknesses in the area of
security program planning and management and access controls. We
reported these weaknesses to management in a separate letter. Since
these weaknesses were identified, OCC has made significant progress by
devoting the necessary resources for resolving these weaknesses within
its information technology (IT) environment as evidenced in OCC's Plan
of Actions and Milestones (POAM) and our verification of correction of
prior year issues. However in our review this year, we noted certain
weaknesses in OCC's IT general controls. These weaknesses related to the
entity-wide security program planning and management, access controls,
service continuity, and application software development and change
control and are summarized below.

## [Entity-Wide Security Program Planning and Management]{.underline}

Entity-wide security program planning and management provides a
framework and continuing cycle of activity for managing risk, developing
security policies, assigning responsibilities, and monitoring the
adequacy of the entity's computer-related controls. We noted that OCC's
(a) procedures for risk assessment, (b) fiscal management security plan,
and (c) Certification and Accreditation methodology related to its
Fiscal Management System need improvement. In addition, OCC lacked an
updated General Support System Risk Assessment, and a Memorandum of
Understanding (MOU) or Interconnection Security Agreement (ISA) with
external entities it shared data with or whose systems were
interconnected with OCC systems. We also noted that new employees were
not always given security awareness training before granting access to
information resources and that OCC does not require all employees to
sign Non-Disclosure agreements. As a result, OCC was vulnerable to the
loss of integrity and confidentiality of its financial data.

***Access Controls***

Access controls limit or detect access to computer resources (data,
programs, equipment and facilities), thereby protecting these resources
against unauthorized modification, loss and disclosure. We noted that
OCC does not have (a) security parameters (i.e. password configuration)
for certain systems identified during the audit, (b) adequate
documentation to support the recent change in the sensitivity rating for
the Fiscal Management System, and (c) adequate account management
procedures for managing information system accounts. We also noted that
OCC could not provide signed Employee Acknowledgement of Information
Systems Responsibility (EAISR) forms for a sample of new employees.
These access control weaknesses may diminish the reliability of
computerized data and increase the risk of destruction or inappropriate
disclosure of information.

***[Service Continuity]{.underline}***

Service continuity controls ensure that when unexpected events occur,
critical operations continue without interruption or are promptly
resumed and critical and sensitive data are protected. We noted that (a)
OCC has not developed and implemented a Business Impact Analysis (BIA)
for its Fiscal Management System as part of its contingency planning
activities, (b) the current OCC Contingency Plan, which is currently in
development, for the Fiscal Management System does not meet the
requirements of NIST Special Publication 800-34, and (c) testing of
off-site storage backup tapes are not regularly performed. We also noted
that the offsite storage facility currently used for storing backup
tapes associated with the Fiscal Management System, is subject to the
potential risk of being affected by the same natural disaster as the
main Fiscal Management System application process facility because of
their close proximity to each other. As a result, OCC may be unable to
implement effective contingency procedures for the Financial Management
System in the event of a disaster or disruption in processing.

***[Application Software Development and Change Control]{.underline}***

Application software development and change controls prevent
unauthorized programs or modifications to an existing program from being
implemented. We noted that OCC has not implemented a mechanism for
promptly detecting and removing unauthorized software from OCC systems
(desktops). The lack of monitoring of OCC systems for the use of
unauthorized software could result in the introduction of non-approved
software in OCC's networking environment, which could negatively impact
processing operations, introduce harmful viruses, and/or cause the loss
of data.

**RECOMMENDATIONS:**

We recommend that the Chief Information Officer ensure that OCC:

1.  Documents its risk assessment activities in a form that will make
    them verifiable and in accordance with NIST Special Publication
    800-30.

2.  Adheres to its current plans for finalizing the security plans for
    the Fiscal Management System and Network Infrastructure Security
    Plans and their corresponding certifications and accreditations in
    accordance with NIST Special publications 800-18 and 800-37.

3.  Finalizes its MOUs and ISAs with the National Finance Center,
    Federal Deposit Insurance Corporation and Federal Reserve Board.

4.  Continues implementing its new processes to ensure that new
    employees complete their initial Security Awareness Training in a
    timely manner.

5.  Requires all new employees and contractors to complete and sign all
    access agreements (e.g. Non-Disclosure Agreements).

6.  Implements password configuration settings for certain systems
    identified during the audit in accordance with NIST Special
    Publication 800-12.

7.  Continues its effort to improve documentation for "security impact
    ratings" of its Federal Information Security Management Act (FISMA)
    systems in accordance with NIST Special Publication 800-60, Volume
    1.

8.  Develops and implements a policy that requires user accounts to be
    disabled and removed when they are no longer needed in accordance
    with NIST Special Publication 800-53.

9.  Requires employees to sign the EAISR forms in a timely manner in
    accordance with OCC Information Security Handbook, Section 3.3, and
    maintains adequate documentation of signed forms.

10. Develops and implements a BIA for its Fiscal Management System in
    accordance with NIST Special Publication 800-34.

11. Completes the Contingency Plan that is currently under development
    in accordance with NIST Special Publication 800-34.

12. Develops and implements a policy for regular testing of off-site
    storage backup tapes.

13. Expands the existing offsite tape storage contract to include a
    secondary rotation of tapes on a regular basis to a remote facility,
    if it is cost-beneficial, in accordance with NIST Special
    Publication 800-34, Section 3.4.1.

14. Develops and implements a process for the active and systematic
    detection, notification, and prompt removal of unauthorized personal
    and public domain software in accordance with NIST Special
    Publication 800-53.

**MANAGEMENT RESPONSE:**

OCC management concurs with the reportable condition that is described
in this report. Corrective actions are underway to address each
recommendation and they are confident that they will be able to rectify
these deficiencies before the next annual report cycle is completed.

## 

## [Independent Auditors' Report on Compliance with Laws and Regulations]{.underline}

The Inspector General, Department of the Treasury, and\
the Comptroller of the Currency:

We have audited the balance sheets of the Office of the Comptroller of
the Currency (OCC) as of September 30, 2006 and 2005, and the related
statements of net cost, changes in net position, budgetary resources,
financing, and custodial activity, for the years then ended, and have
issued our report thereon dated October 31, 2006. We conducted our
audits in accordance with auditing standards generally accepted in the
United States of America; the standards applicable to financial audits
contained in *Government Auditing Standards*, issued by the Comptroller
General of the United States; and, Office of Management and Budget (OMB)
Bulletin No. 06-03, *Audit Requirements for Federal Financial
Statements*.

The management of the OCC is responsible for complying with laws,
regulations and contracts applicable to the OCC. As part of obtaining
reasonable assurance about whether the financial statements are free of
material misstatement, we performed tests of the OCC's compliance with
certain provisions of laws, regulations and contracts, noncompliance
with which could have a direct and material effect on the determination
of financial statement amounts, and certain provisions of other laws and
regulations specified in OMB Bulletin No. 06-03, including certain
requirements referred to in the Federal Financial Management Improvement
Act (FFMIA) of 1996. We limited our tests of compliance to the
provisions described in the preceding sentence, and we did not test
compliance with all laws, regulations and contracts applicable to the
OCC. However, our objective was not to provide an opinion on overall
compliance with laws, regulations and contracts. Accordingly, we do not
express such an opinion.

The results of our tests of compliance with laws, regulations and
contracts described in the preceding paragraph, exclusive of FFMIA,
disclosed no instances of noncompliance that are required to be reported
under *Government Auditing Standards* and OMB Bulletin No. 06-03.

Under FFMIA, we are required to report whether the OCC's financial
management systems substantially comply with (1) Federal financial
management systems requirements, (2) applicable federal accounting
standards, and (3) the United States Government Standard General Ledger
at the transaction level. To meet this requirement, we performed tests
of compliance with FFMIA Section 803(a) requirements.

The results of our tests of FFMIA Section 803(a) requirements disclosed
one instance in which OCC's financial management systems did not
substantially comply with federal financial management system
requirements related to information technology general controls, which
is described in Exhibit 1 of our Report on Internal Control over
Financial Reporting dated October 31, 2006.

[]{.mark}

The results of our tests disclosed no instances in which OCC's financial
management systems did not substantially comply with applicable Federal
accounting standards and the United States Government Standard General
Ledger at the transaction level.

[]{.mark}

This report is intended solely for the information and use of the OCC's
management, the Department of the Treasury Office of Inspector General,
OMB, and Congress, and is not intended to be and should not be used by
anyone other than these specified parties. However, this report is
available as a matter of public record.

\[signed\]

Gardiner Kamya & Associates

October 31, 2006

Financial Statements and Notes

**Office of the Comptroller of the Currency**

Balance Sheets

As of September 30, 2006 and 2005

  ------------------------------ -------- ----------------- -------- -----------------
                                          **FY 2006**                **FY 2005**

  **Assets**                                                         

  **Intragovernmental:**                                             

  Fund balance with Treasury     \$       9,104,809         \$       1,724,161

  Investments and related                 713,281,888                611,975,767
  interest (Note 3)                                                  

  Accounts receivable                     \-                         13,300

  **Total intragovernmental**             **722,386,697**            **613,713,228**

                                                                     

  Cash                                    12,256                     12,584

  Accounts receivable, net                7,222                      270,556

  Property and equipment, net             43,165,142                 46,190,939
  (Note 4)                                                           

  Advances and prepayments                39,031                     1,145,419

  **Total assets**               **\$**   **765,610,348**   **\$**   **661,332,726**

  **Liabilities**                                                    

  **Intragovernmental:**                                             

  Other accrued liabilities      \$       275,033           \$       1,405,550

  **Total intragovernmental**             **275,033**                **1,405,550**

                                                                     

  Accounts payable                        10,005,032                 7,960,357

  Accrued payroll and other               18,050,476                 17,555,891
  employee benefits                                                  

  Accrued annual leave                    27,533,285                 24,942,021

  Other accrued liabilities               19,129,317                 17,030,393

  Deferred revenue                        159,421,459                146,664,373

  Post retirement benefits (Note          12,839,288                 11,352,850
  6)                                                                 

  **Total liabilities**                   **247,253,890**            **226,911,435**

  **Net position (Note 7)**               **518,356,458**            **434,421,291**

  **Total liabilities and net    **\$**   **765,610,348**   **\$**   **661,332,726**
  position**                                                         
  ------------------------------ -------- ----------------- -------- -----------------

***The accompanying notes are an integral part of these financial
statements.***

Office of the Comptroller of the Currency

Statements of Net Cost

For the Years Ended September 30, 2006 and 2005

  ------------------------------- -------- ------------------ -------- ------------------
                                           **FY 2006**                 **FY 2005**

  **Program Costs**                                                    

                                                                       

  **Supervise National Banks**                                         

  Intragovernmental               \$       68,025,152         \$       57,553,452

  With the public                          418,553,951                 362,769,983

  **Subtotal - Supervise National **\$**   **486,579,103**    **\$**   **420,323,435**
  Banks**                                                              

                                                                       

  **Regulate National Banks**                                          

  Intragovernmental               \$       10,459,084         \$       9,279,718

  With the public                          62,743,342                  56,650,420

  **Subtotal - Regulate National  **\$**   **73,202,426**     **\$**   **65,930,138**
  Banks**                                                              

                                                                       

  **Charter National Banks**                                           

  Intragovernmental               \$       2,119,060          \$       2,232,906

  With the public                          12,267,183                  13,228,352

  **Subtotal - Charter National   **\$**   **14,386,243**     **\$**   **15,461,258**
  Banks**                                                              

                                                                       

  **Total Program Costs**         **\$**   **574,167,772**    **\$**   **501,714,831**

  Less: Earned revenues not                (633,598,176)               (577,742,644)
  attributed to programs                                               

  **Net Cost of Operations**      **\$**   **(59,430,404)**   **\$**   **(76,027,813)**
  ------------------------------- -------- ------------------ -------- ------------------

***The accompanying notes are an integral part of these financial
statements.***

Office of the Comptroller of the Currency

Statements of Changes in Net Position

For the Years Ended September 30, 2006 and 2005

  ------------------------------ -------- ----------------- -------- -----------------
                                          **FY 2006**                **FY 2005**

  **Beginning Balances**         \$       434,421,291       \$       335,459,615

                                                                     

  **Other Financing Sources:**                                       

  Imputed financing from costs            24,504,763                 22,933,863
  absorbed by others (Note 6)                                        

  **Net Cost of Operations**              59,430,404                 76,027,813

  **Net Change**                          83,935,167                 98,961,676

  **Ending Balances**            **\$**   **518,356,458**   **\$**   **434,421,291**
  ------------------------------ -------- ----------------- -------- -----------------

***The accompanying notes are an integral part of these financial
statements.***

Office of the Comptroller of the Currency

Statements of Budgetary Resources

For the Years Ended September 30, 2006 and 2005

  --------------------------------- -------- ------------------- -------- -------------------
                                             **FY 2006**                  **FY 2005**

  **Budgetary Resources:**                                                

  Unobligated balance:                                                    

  Beginning of period               \$       506,623,014         \$       398,535,082

  Spending authority from                                                 
  offsetting collections:                                                 

  Earned                                                                  

  Collected                                  649,009,263                  596,213,085

  Receivable from Federal sources            (1,034,307)                  (1,011,814)

  Subtotal                                   647,974,956                  595,201,271

  **Total Budgetary Resources**     **\$**   **1,154,597,970**   **\$**   **993,736,353**

  **Status of Budgetary Resources**                                       

  Obligations incurred              \$       556,825,650         \$       487,113,339

  Unobligated balance available              597,772,320                  506,623,014

  **Total Status of Budgetary       **\$**   **1,154,597,970**   **\$**   **993,736,353**
  Resources**                                                             

  **Relationship of Obligations to                                        
  Outlays**                                                               

  Obligated balance, net, beginning          94,271,481                   80,658,172
  of period                                                               

  Obligated balance, net, end of                                          
  period:                                                                 

  Accounts receivable                        (3,644,462)                  (4,678,768)

  Undelivered orders                         30,068,275                   18,703,188

  Accounts payable and accruals,             87,832,431                   80,247,061
  net of assessments refunds                                              

  Outlays:                                                                

  Disbursements                     \$       537,875,194         \$       474,511,844

  Collections                                (649,009,263)                (596,213,085)

  **Net Outlays**                   **\$**   **(111,134,069)**   **\$**   **(121,701,241)**
  --------------------------------- -------- ------------------- -------- -------------------

***The accompanying notes are an integral part of these financial
statements.***

Office of the Comptroller of the Currency

Statements of Financing

For the Years Ended September 30, 2006 and 2005

+----------------------------------+---+------------+---+---------------+
|                                  |   | **FY       |   | **FY 2005**   |
|                                  |   | 2006**     |   |               |
+----------------------------------+---+------------+---+---------------+
| **Resources Used to Finance      |   |            |   |               |
| Activities:**                    |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| Budgetary Resources Obligated    |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| Obligations incurred             | \ | 5          | \ | 487,113,339   |
|                                  | $ | 56,825,650 | $ |               |
+----------------------------------+---+------------+---+---------------+
| Less: Spending authority from    |   | (64        |   | (595,201,271) |
| offsetting collections           |   | 7,974,956) |   |               |
+----------------------------------+---+------------+---+---------------+
| Net obligations                  |   | (9         |   | (108,087,932) |
|                                  |   | 1,149,306) |   |               |
+----------------------------------+---+------------+---+---------------+
| Other Resources                  |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| Imputed financing from costs     |   | 24,504,763 |   | 22,933,863    |
| absorbed by others (Note 6)      |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| **Total resources used to        |   | **(66,     |   | **(           |
| finance activities**             |   | 644,543)** |   | 85,154,069)** |
+----------------------------------+---+------------+---+---------------+
|                                  |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| > **Resources Used to Finance    |   |            |   |               |
| > Items not Part of the Net Cost |   |            |   |               |
| > of Operations:**               |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| Change in budgetary resources    |   | (1         |   | (2,278,023)   |
| obligated for goods, services    |   | 0,258,699) |   |               |
| and benefits ordered but not yet |   |            |   |               |
| provided                         |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| Resources that finance the       |   | (1         |   | (17,874,784)  |
| acquisition of assets            |   | 3,105,666) |   |               |
+----------------------------------+---+------------+---+---------------+
| Other resources or adjustments   |   | 263,333    |   | (158,355)     |
| to net obligated resources that  |   |            |   |               |
| do not affect net cost of        |   |            |   |               |
| operations                       |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| > **Total resources used to      |   | **(23,     |   | **(           |
| > finance items not part of the  |   | 101,032)** |   | 20,311,162)** |
| > net cost of operations**       |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| **Total resources used to        |   | **(89,     |   | **(1          |
| finance the net cost of          |   | 745,575)** |   | 05,465,231)** |
| operations**                     |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
|                                  |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| > **Components of the Net Cost   |   |            |   |               |
| > of Operations that will not    |   |            |   |               |
| > Require or Generate Resources  |   |            |   |               |
| > in the Current Period:**       |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| Components Requiring or          |   |            |   |               |
| Generating Resources in Future   |   |            |   |               |
| Periods:                         |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| Change in deferred revenue       |   | 12,757,084 |   | 21,648,766    |
+----------------------------------+---+------------+---+---------------+
| Total components that will       |   | 12,757,084 |   | 21,648,766    |
| require or generate resources in |   |            |   |               |
| future periods                   |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
|                                  |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| Components not Requiring or      |   |            |   |               |
| Generating Resources:            |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| Depreciation and amortization    |   | 12,147,307 |   | 11,203,799    |
+----------------------------------+---+------------+---+---------------+
| Net (increase) decrease in bond  |   | 1,426,622  |   | (4,043,186)   |
| premium                          |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| Other                            |   | 3,984,158  |   | 628,039       |
+----------------------------------+---+------------+---+---------------+
| Total components that will not   |   | 17,558,087 |   | 7,788,652     |
| require or generate resources    |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
|                                  |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| > **Total components of net cost |   | **30       |   | *             |
| > of operations that will not    |   | ,315,171** |   | *29,437,418** |
| > require or generate resources  |   |            |   |               |
| > in the current period**        |   |            |   |               |
+----------------------------------+---+------------+---+---------------+
| **Net Cost of Operations**       | * | **(59,     | * | **(           |
|                                  | * | 430,404)** | * | 76,027,813)** |
|                                  | \ |            | \ |               |
|                                  | $ |            | $ |               |
|                                  | * |            | * |               |
|                                  | * |            | * |               |
+----------------------------------+---+------------+---+---------------+

***The accompanying notes are an integral part of these financial
statements.***

Office of the Comptroller of the Currency

Statements of Custodial Activity

For the Years Ended September 30, 2006 and 2005

  ----------------------------------- -------- ------------- -------- --------------
                                               **FY 2006**            **FY 2005**

  **Revenue Activity:**                                               

  Sources of Cash Collections                                         

  Civil Money Penalties               \$       4,127,008     \$       31,264,157

  Accrual Adjustments                          (104,325)              234,072

  Total Custodial Revenue                      4,022,683              31,498,229

                                                                      

  Disposition of Custodial Revenue                                    

  Transferred to Treasury                      (3,870,483)            (31,117,164)

  (Increase)/Decrease in Amounts Yet           (152,200)              (381,065)
  to be Transferred                                                   

  Total Disposition for Custodial              (4,022,683)            (31,498,229)
  Revenue                                                             

  **Net Custodial Activity**          **\$**   **-**         **\$**   **-**
  ----------------------------------- -------- ------------- -------- --------------

***The accompanying notes are an integral part of these financial
statements.***

Notes to the Financial Statements

Note 1---Organization

The OCC was created as a bureau within the U.S. Department of the
Treasury by an act of Congress in 1863. The OCC was created to establish
and regulate a system of federally chartered national banks. The
National Currency Act of 1863, rewritten and reenacted as the National
Bank Act of 1864, authorized the OCC to supervise national banks and to
regulate the lending and investment activities of federally chartered
institutions.

The OCC's revenue is derived primarily from assessments and fees paid by
national banks and income on investments in U.S. government securities.
The OCC does not receive congressional appropriations to fund any of its
operations. Therefore, the OCC does not have any unexpended
appropriations.

By federal statute 12 USC 481, the OCC's funds are maintained in a U.S.
government trust revolving fund. The funds remain available to cover the
annual costs of the OCC's operations in accordance with policies
established by the Comptroller.

Note 2---Significant Accounting Policies

**2A. Basis of Accounting**

\(1\) The OCC's financial statements are prepared from its accounting
records in conformity with the generally accepted accounting principles
(GAAP) in the United States of America. The financial statements consist
of Balance Sheets, and the Statements of Net Cost, Changes in Net
Position, Budgetary Resources, Financing, and Custodial Activity. These
financial statements are presented on a comparative basis providing
information for FYs 2006 and 2005.

\(2\) The financial statements reflect both the accrual and budgetary
bases of accounting. Under the accrual method, revenues are recognized
when earned, and expenses are recognized when a liability is incurred,
without regard to cash receipt or payment. The budgetary method
recognizes the obligation of funds according to legal requirements,
which in many cases, is made prior to the occurrence of an accrual-based
transaction. Budgetary accounting is essential for compliance with legal
constraints and controls over the use of federal funds.

\(3\) In accordance with GAAP, the preparation of financial statements
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting period.
Such estimates and assumptions could change in the future as more
information becomes known, which could affect the amounts reported and
disclosed herein.

**2B. Revenues and Other Financing Sources**

\(4\) The OCC's revenue is derived primarily from assessments and fees
paid by national banks and income on investments in U.S. government
securities. The OCC does not receive congressional appropriations to
fund any of its operations. Therefore, the OCC does not have any
unexpended appropriations.

\(5\) By federal statute 12 USC 481, the OCC's funds are maintained in a
U.S. government trust revolving fund. The funds remain available to
cover the annual costs of the OCC's operations in accordance with
policies established by the Comptroller.

\(6\) The OCC collects CMPs due to the federal government that are
assessed through court-enforced legal actions against a national bank
and/or its officers. Outstanding CMPs at September 30, 2006, and 2005,
amounted to \$1,619,114 and \$1,514,789, respectively.

**2C. Earmarked Funds**

\(7\) Earmarked funds are financed by specifically identified revenues,
often supplemented by other financing sources, which remain available
over time. These specifically identified revenues and other financing
sources are required by statute to be used for designated activities,
benefits, or purposes, and must be accounted for separately from the
government's general revenues. In accordance with SFFAS 27, Earmarked
Funds, all of the OCC's revenue meets this criteria and constitutes an
earmarked fund.

\(8\) The federal government does not set aside assets to pay future
benefits or other expenditures associated with earmarked funds. Treasury
securities are an asset to the OCC and a liability to the U.S. Treasury.
Because the OCC and U.S. Treasury are both parts of the government,
these assets and liabilities offset each other from the standpoint of
the government as a whole. For this reason, they do not represent an
asset or a liability in the U.S. government-wide financial statements.

\(9\) Treasury securities provide the OCC with authority to draw upon
the U.S. Treasury to make future payments or expenditures. When the OCC
requires redemption of these securities to make expenditures, the
government finances those expenditures out of accumulated cash balances,
by raising taxes or other receipts, by borrowing from the public or
repaying less debt, or by curtailing other expenditures. This is the
same way that the government finances all other expenditures.

**2D. Basis of Consolidation**

The OCC's financial statement amounts are included in the consolidated
financial statements of the U.S. Department of the Treasury (Treasury).
Transactions and balances among the OCC and other Treasury entities are
eliminated from the Treasury consolidated financial statements.

**2E. Fund Balance with Treasury**

The OCC's cash receipts and disbursements are processed by the U.S.
Treasury. Sufficient funds are maintained in a U.S. government trust
revolving fund and are available to pay current liabilities. The OCC
invests available funds in U.S. government securities (Note 3). In
accordance with SFFAS 1, *Accounting for Selected Assets and
Liabilities,* the OCC has the ability and the intent to hold its
government securities until maturity. Accordingly the OCC accounts for
its government securities at acquisition cost adjusted for amortized
premium or discount.

**2F. Accounts Receivable**

Accounts Receivable represent monies owed to the OCC for services and
goods provided. If applicable, Accounts Receivable from the public are
reduced by an Allowance for Doubtful Accounts. In accordance with SFFAS
1, the OCC updates its allowance for doubtful accounts annually or as
needed to reflect the most current estimate of accounts that are more
likely than not to be uncollectible.

**2G. Property and Equipment**

Property, equipment, and internal use software (Note 4) are accounted
for in accordance with SFFAS 6, *Accounting for Property, Plant, and
Equipment,* and SFFAS 10, *Accounting for Internal Use Software.*

**2H. Liabilities**

\(10\) Liabilities represent the amounts owing or accruing under
contractual or other arrangements governing the transactions, including
operating expenses incurred but not yet paid. Payments are made in a
timely manner in accordance with the Prompt Payment Act. Interest
penalties are paid when payments are late. Discounts are taken when cost
effective, and the invoice is paid within the discount period. The OCC
accounts for liabilities in accordance with SFFAS 5, *Accounting for
Liabilities of the Federal Government.* In accordance with SFFAS 5,
annual leave is accrued and funded by the OCC as it is earned, and the
accrual is reduced as leave is taken or paid. Each year, the balance in
the accrued annual leave account is adjusted to reflect current pay
rates. Sick leave and other types of leave are expended as taken.

\(11\) The OCC's activities are primarily financed by assessments on
assets held by national banks and the federal branches of foreign banks.
These assessments are due March 31 and September 30 of each year based
on asset balances as of call reports dated December 31 and June 30,
respectively. Assessments are paid in mid-cycle and are recognized as
earned revenue on a straight-line basis over the six months following
the call date. The unearned portions are reduced accordingly.

**2I. Effects of Recent Accounting Pronouncements**

Presentation of the OCC's financial statement disclosures was affected
by the publication of SFFAS 27, *Earmarked Funds.* All of the OCC's
sources of revenue are characteristic of earmarked funds as outlined in
SFFAS 27. Accordingly, Significant Accounting Policies Note 2C and its
subparagraphs include the appropriate disclosures effective for FY 2006.

Note 3---Investments and Related Interest

Investments are U.S. Treasury securities stated at amortized cost and
the related accrued interest. The OCC plans to hold these investments
until maturity. Premiums and discounts are amortized over the term of
the investment using the straight-line method, which approximates the
effective yield method. The fair market value of investment securities
was \$703,712,750 at September 30, 2006, and \$603,096,812 at September
30, 2005.

  ------------------------ -------- --------------------- -------- ----------------- -----
  **Investments and                                                                  
  Related Interest                                                                   
  Receivable**                                                                       

                                    **FY 2006**                    **FY 2005**       

  Par Value                \$       705,164,000           \$       600,379,000       

  Net Unamortized                   4,473,426                      6,931,298         
  Discount/Premium                                                                   

  Net Unamortized Value             709,637,426                    607,310,298       

  Interest Receivable               3,644,462                      4,665,469         

  **Total**                **\$**   **713,281,888**       **\$**   **611,975,767**   
  ------------------------ -------- --------------------- -------- ----------------- -----

  -------------------- -------- ----------------------- ----------------------
  **FY 2006 Investment                                  
  Portfolio**                                           

  **Maturity**                  **Par Value**           **Coupon Rate**

  Overnight            \$       327,164,000             5.030%

  During 2006                   30,000,000              3.500%

  During 2007                   30,000,000              4.380%

                                50,000,000              3.250%

                                30,000,000              3.000%

  During 2008                   30,000,000              2.630%

                                21,000,000              3.380%

  During 2009                   21,000,000              3.880%

                                35,000,000              3.500%

  During 2010                   35,000,000              5.750%

  During 2011                   32,000,000              5.000%

                                32,000,000              5.000%

  During 2012                   32,000,000              4.880%

  **Total**            **\$**   **705,164,000**         
  -------------------- -------- ----------------------- ----------------------

  ------------------- -------- -------------------------- ----------------
  **FY 2005                                               
  Investment                                              
  Portfolio**                                             

  **Maturity**                 **Par Value**              **Coupon Rate**

  Overnight           \$       218,379,000                3.460%

  During 2006                  29,000,000                 5.750%

                               25,000,000                 6.875%

  During 2007                  30,000,000                 3.500%

                               30,000,000                 4.375%

  During 2008                  30,000,000                 3.000%

                               30,000,000                 2.625%

  During 2009                  21,000,000                 3.375%

                               21,000,000                 3.875%

  During 2010                  35,000,000                 3.500%

                               35,000,000                 5.750%

  During 2011                  64,000,000                 5.000%

  During 2012                  32,000,000                 4.875%

  **Total**           **\$**   **600,379,000**            
  ------------------- -------- -------------------------- ----------------

Note 4---Property and Equipment, net

Property and equipment purchased at a cost greater than or equal to the
noted thresholds below with useful lives of five years or more are
capitalized at cost and depreciated or amortized, as applicable.
Leasehold improvements are amortized on a straight-line basis over the
lesser of the terms of the related leases or their estimated useful
lives. All other property and equipment are depreciated or amortized, as
applicable, on a straight-line basis over their estimated useful lives.
During FY 2006, a comprehensive review of the Internal Use Software
program, internal controls, and assets was accomplished to validate the
proper identification, capture, and capitalization or expensing of costs
related to software development. Significant development costs were
subsequently expensed, along with an impaired software asset written off
during FY 2006. The tables presented below summarize property and
equipment balances as of September 30, 2006, and 2005.

  ------------------ ------------------ -------- ---------------- -------- ------------------ -------- ---------------- ----
  **FY 2006 Property                                                                                                    
  and Equipment,                                                                                                        
  net**                                                                                                                 

  **Class of         **Capitalization            **Cost**                  **Accumulated               **Net Book       
  Assets**           Threshold/\                                           Depreciation**              Value**          
                     Useful Life**                                                                                      

  Leasehold          \$ 50,000 5-20     \$       27,794,731       \$       (20,971,319)       \$       6,823,412        
  Improvements                                                                                                          

  Equipment          \$ 50,000 5-10              20,615,740                (12,885,585)                7,730,155        

  Furniture and      \$ 50,000 5-10              1,336,778                 (1,035,196)                 301,582          
  Fixtures                                                                                                              

  Internal Use       \$500,000 5                 38,631,354                (20,764,024)                17,867,330       
  Software                                                                                                              

  Internal Use       \$500,000 N/A               9,298,819                 \-                          9,298,819        
  Software-Dev                                                                                                          

  Leasehold          \$ 50,000 N/A               1,143,844                 \-                          1,143,844        
  Improvements-Dev                                                                                                      

  **Total**                             **\$**   **98,821,266**   **\$**   **(55,656,124)**   **\$**   **43,165,142**   
  ------------------ ------------------ -------- ---------------- -------- ------------------ -------- ---------------- ----

  ------------------ ------------------ -------- ---------------- -------- ------------------ -------- ----------------
  **FY 2005 Property                                                                                   
  and Equipment,                                                                                       
  net**                                                                                                

  **Class of         **Capitalization            **Cost**                  **Accumulated               **Net Book
  Assets**           Threshold/\                                           Depreciation**              Value**
                     Useful Life**                                                                     

  Leasehold          \$ 50,000 5-20     \$       26,429,648       \$       (19,271,689)       \$       7,157,959
  Improvements                                                                                         

  Equipment          \$ 50,000 5-10              15,075,850                (9,379,463)                 5,696,387

  Furniture and      \$ 50,000 5-10              1,336,778                 (971,877)                   364,901
  Fixtures                                                                                             

  Internal Use       \$500,000 5                 31,383,723                (14,199,259)                17,184,464
  Software                                                                                             

  Internal Use       \$500,000 N/A               15,317,047                \-                          15,317,047
  Software-Dev                                                                                         

  Leasehold          \$ 50,000 N/A               470,181                   \-                          470,181
  Improvements-Dev                                                                                     

  **Total**                             **\$**   **90,013,227**   **\$**   **(43,822,288)**   **\$**   **46,190,939**
  ------------------ ------------------ -------- ---------------- -------- ------------------ -------- ----------------

Note 5---Leases

The OCC leases office space for headquarters operations in Washington,
D.C., and for district and field operations. The lease agreements expire
at various dates. In FY 2006, the OCC entered into a 54-month occupancy
agreement with the General Services Administration for headquarters
expansion and a 2-year lease for temporary office space for the
headquarters staff. These leases are treated as operating leases. As
part of the extensive A-123 review of internal controls and processes,
all OCC leases were reviewed and tested, and it was determined that all
leases are properly classified as operating leases.

  --------------------------------------- ---------- ---------------------
  **FY 2006 Future Lease Payments**                  

  **Year**                                           **Amount**

  2007                                    \$         25,665,528

  2008                                               25,887,021

  2009                                               24,739,474

  2010                                               24,060,079

  2011                                               18,921,229

  2012 and beyond                                    18,905,173

  **Total**                               **\$**     **138,178,504**
  --------------------------------------- ---------- ---------------------

  --------------------------------------- ---------- ---------------------
  **FY 2005 Future Lease Payments**                  

  **Year**                                           **Amount**

  2006                                    \$         22,789,699

  2007                                               24,954,737

  2008                                               23,774,977

  2009                                               22,589,732

  2010                                               21,751,178

  2011 and beyond                                    34,436,469

  **Total**                               **\$**     **150,296,792**
  --------------------------------------- ---------- ---------------------

Note 6---Retirement Plans and Other Benefits

**Retirement**

OCC employees are eligible to participate in one of two retirement
plans. Employees hired prior to January 1, 1984, are covered by the
CSRS, unless they elected to join the FERS and Social Security during
the election period. Employees hired after December 31, 1983, are
automatically covered by FERS and Social Security. The distribution of
the OCC's workforce by retirement plan is 72 percent FERS and 27 percent
CSRS. The remaining 1 percent of employees qualifies only for Social
Security benefits. For employees covered by CSRS, the OCC contributes 7
percent of their adjusted base pay to the plan. OCC contributions to
CSRS were \$6,942,291 in FY 2006 and \$6,219,879 in FY 2005. For
employees covered by FERS, the OCC contributes 11.2 percent of their
adjusted base pay. OCC contributions totaled \$19,368,843 in FY 2006 and
\$17,001,247 in FY 2005.

Furthermore, OPM contributed an additional \$24,504,763 toward these
retirement plans during FY 2006, and \$22,933,863 in FY 2005. The OCC
recognized these contributions as "Imputed costs absorbed by others" and
an offset in equal amount to "Imputed financing from costs absorbed by
others" as a result of not having to reimburse OPM.

The OCC does not report in its financial statements information
pertaining to the retirement plans covering its employees. Reporting
amounts, such as plan assets, accumulated plan benefits, or unfunded
liabilities, if any, are presently the responsibility of the OPM.

**Other Benefits**

***Thrift Savings Plan***

OCC employees are eligible to participate in the Federal Thrift Savings
Plan (TSP). For those employees under FERS, a TSP account is
automatically established, and the OCC contributes a mandatory 1 percent
of adjusted base pay to this account. In addition, the OCC matches
employee contributions up to an additional 4 percent of pay, for a
maximum OCC contribution amounting to 5 percent of adjusted base pay.
Employees under CSRS may participate in the TSP, but do not receive the
automatic (1 percent) and matching employer contributions. TSP
contributions by the OCC totaled \$7,633,767 in FY 2006 and \$6,890,694
in FY 2005. The OCC also contributed a total of \$14,495,366 for Social
Security and Medicare benefits for all eligible employees in FY 2006,
and \$12,632,597 in FY 2005.

***OCC 401(k) Plan***

Employees can elect to contribute up to 10 percent of their adjusted
base pay in the OCC 401(k) Plan, subject to Internal Revenue
regulations. Prudential Financial Incorporated administers the plan.
Currently, the OCC contributes a fixed 2 percent of the adjusted base
pay to the plan for all qualified employees, regardless of whether they
contribute to the plan or not. In addition, the OCC matches the first 1
percent of an employee's contribution to the Plan, for a total agency
contribution of 3 percent. Approximately 2,503 employees receive the
maximum of 3 percent contribution and 383 employees benefit from the
basic 2 percent contribution. In both FY 2005 and FY 2006, the OCC
funded a special lump sum contribution of \$1,000 to be deposited in the
401(k) accounts of all permanent employees. The total cost of the OCC's
employer biweekly and special lump sum contributions plus associated
administration fees amounted to \$10,840,966 during FY 2006, and
\$9,227,442 in FY 2005. The OCC contracted with the independent audit
firm of Clifton, Gunderson, LLP to perform an audit of the plan and
related financial statements for the year ended December 31, 2005. The
financial statements for the plan received an unqualified opinion.

***Post-Retirement Life Insurance***

The OCC sponsors a life insurance benefit plan for current and retired
employees. This plan is a defined benefit plan. Premium payments made
during FY 2006 totaled \$297,121 and \$289,348 in FY 2005.

The weighted-average discount rate used in determining the accumulated
post-retirement benefit obligation was 5.75 percent. Gains or losses due
to changes in actuarial assumptions are amortized over the service life
of the plan.

***Federal Employees Health Benefits\
and Federal Employees Group Life Insurance***

Employees and retirees of the OCC are eligible to participate in Federal
Employees Health Benefits (FEHB) and Federal Employees Group Life
Insurance (FEGLI) plans that involve a cost sharing of bi-weekly
coverage premiums by employee and employer. Both of these employee
benefit plans are administered by OPM. Total OCC contributions for
active employees who participate in the FEHB plans were \$17,088,453 for
FY 2006, and \$14,567,345 for FY 2005. OCC contributions for active
employees who participate in the FEGLI plan were \$256,700 for FY 2006,
and \$213,267 for FY 2005.

***Federal Employees' Compensation Act***

The Federal Employees' Compensation Act (FECA) provides income and
medical cost protection to covered federal civilian employees injured on
the job, employees who have incurred a work-related occupational
disease, and beneficiaries of employees whose death is attributable to a
job-related injury or occupational disease. Claims incurred for benefits
for OCC employees under FECA are administered by the U.S. Department of
Labor (DOL) and later billed to the OCC. The OCC accrued \$4,316,129 of
workers' compensation costs as of September 30, 2006, and \$5,260,569 as
of September 30, 2005. These amounts include unbilled costs of \$168,585
in FY 2006 and \$280,603 in FY 2005 and an actuarial estimated liability
of \$4,147,544 in FY 2006 and \$4,979,966 in FY 2005 based on
calculations provided by the DOL at year-end.

  -------------------------------- -------- ------------------ -------- ------------------
  **Accrued Post-Retirement                                             
  Benefit Cost and Net Periodic                                         
  Post-Retirement Benefit Cost**                                        

  **Component**                             **FY 2006**                 **FY 2005**

  Accumulated Post-Retirement      \$       (17,354,262)       \$       (16,272,887)
  Benefit Obligation                                                    

  Unrecognized Transition                   1,037,034                   1,209,871
  Obligation                                                            

  Unrecognized Net Gain                     3,477,940                   3,710,166

  **Total**                        **\$**   **(12,839,288)**   **\$**   **(11,352,850)**

                                                                        

  Service Cost                     \$       583,972            \$       509,425

  Interest Cost                             923,884                     844,237

  Amortization of Transition                172,837                     172,837
  Obligation                                                            

  Amortization of Unrecognized              273,864                     186,069
  Loss                                                                  

  **Total**                        **\$**   **1,954,557**      **\$**   **1,712,568**
  -------------------------------- -------- ------------------ -------- ------------------

Note 7---Net Position

The OCC sets aside a portion of its net position as contingency, asset
replacement, and special reserves to be used at the discretion of the
Comptroller. In addition, funds are set aside to cover the cost of
on-going operations.

The contingency reserve supports the OCC's ability to accomplish its
mission in the case of foreseeable but rare events. Foreseeable but rare
events are beyond the control of the OCC, such as a major change in the
national banking system or for instance, a fire, flood, or significant
impairment of its information technology systems.

The asset replacement reserve funds the replacement of IT equipment,
leasehold improvements, and furniture replacements for future years. The
target level in the replacement reserve is established annually based on
the gross value of existing property and equipment plus a growth rate
factor and a margin for market cost adjustments.

The special reserve supplements revenue from assessments and other
sources that are made available to fund the OCC's annual budget. The
special reserve reduces the effect on operations of unforecasted revenue
shortfalls or unbudgeted and unanticipated requirements or
opportunities.

  ---------------------------- -------- ----------------- -------- -----------------
  **Net Position                                                   
  Availability**                                                   

  **Components**                        **FY 2006**                **FY 2005**

  Contingency Reserve          \$       291,689,618       \$       280,828,551

  Asset Replacement Reserve             104,000,000                38,709,695

  Special Reserve                       15,000,000                 15,000,000

  Earmarked for On-going                                           
  Operations:                                                      

  Undelivered Orders                    30,068,275                 18,703,188

  Consumption of Assets                 49,930,100                 55,488,907

  Capital Investments                   27,668,465                 25,690,950

  **Net Position**             **\$**   **518,356,458**   **\$**   **434,421,291**
  ---------------------------- -------- ----------------- -------- -----------------

**Note 8---Expenses by Budget Object Classification**

The following table illustrates the OCC's costs by major budget object
class for FYs 2006 and 2005.

  ----------------------------- -------- ----------------- -------- -----------------
  **Budget Object Class**                **FY 2006**                **FY 2005**

  Personnel Compensation        \$       282,267,100       \$       256,653,020

  Personnel Benefits                     94,091,970                 85,542,831

  Benefits to Former Employees           191,232                    626,059

  Travel and Transportation of           35,570,767                 31,160,567
  Persons                                                           

  Travel and Transportation of           1,992,797                  1,446,824
  Things                                                            

  Rent, Communication, and               34,417,329                 33,530,892
  Utilities                                                         

  Printing and Reproduction              880,900                    859,851

  Other Contractual Services             70,932,468                 44,696,702

  Supplies and Materials                 5,236,152                  3,382,594

  Equipment                              5,247,447                  5,452,810

  Land and Structures -                  2,281,116                  3,521,380
  Leasehold Improvements                                            

  Insurance Claims and                   422,267                    75,601
  Indemnities                                                       

  Depreciation                           12,147,306                 11,203,799

  Loss on Asset Disposal                 3,984,158                  628,038

  Imputed Costs                          24,504,763                 22,933,863

  **Total**                     **\$**   **574,167,772**   **\$**   **501,714,831**
  ----------------------------- -------- ----------------- -------- -----------------

Appendices

Appendix A---FY 2006 Performance Measures and Results

The OCC's FY 2006 performance measures, workload indicators, customer
service standards, and results are presented below.

  ----------------------------------------------------------------------------------------------------
  **Strategic   **Performance Measure Workload  **FY     **FY     **FY     **FY 2006**  
  Goal**        Indicator Customer Service      2003**   2004**   2005**                
                Standard**                                                              
  ------------- ------------------------------- -------- -------- -------- ------------ --------------
                                                                           **Target**   **Actual
                                                                                        \[1\]**

  I. A safe and                                                                         
  sound                                                                                 
  national                                                                              
  banking                                                                               
  system                                                                                

                Percentage of national banks    94%      94%      94%      90%          ***95%***
                with composite CAMELS rating of                                         
                1 or 2                                                                  

                Rehabilitated problem national  32%      40%      44%      40%          ***46%***
                banks as a percentage of the                                            
                problem national banks one year                                         
                ago (CAMELS 3, 4 or 5)                                                  

                Percentage of national banks    99%      99%      99%      95%          ***99%***
                that are categorized as well                                            
                capitalized                                                             

                Percentage of critically        100%     100%     N/A      100%         100%
                undercapitalized banks on which                   \[2\]                 
                responsible action is taken                                             
                within 90 calendar days after                                           
                they become critically                                                  
                undercapitalized                                                        

                Average survey response that    1.26     1.30     1.28     ≤ 1.75       1.30
                the report of examination                                               
                clearly communicated                                                    
                examination findings,                                                   
                significant issues and the                                              
                corrective actions management                                           
                needed to take \[3\]                                                    

  II\. Fair                                                                             
  access to                                                                             
  financial                                                                             
  services and                                                                          
  fair                                                                                  
  treatment of                                                                          
  bank                                                                                  
  customers                                                                             

                Percentage of national banks    96%      96%      94%      94%          ***94%***
                with consumer compliance rating                                         
                of 1 or 2                                                               

                Percentage of qualified         100%     100%     100%     100%         100%
                intermediate small banks to                                             
                which the OCC offers to provide                                         
                consultation on the Community                                           
                Reinvestment Act and community                                          
                development opportunities                                               

                Percentage of consumer          N/A      N/A      N/A      Baseline     36%
                complaints closed within 60                                             
                calendar days of receipt \[4\]                                          

                Number of consumer complaints   N/A N/A  N/A N/A  N/A N/A  Baseline     31,827 32,945
                opened/closed during the fiscal                            Baseline     
                year \[4\]                                                              

  III\. A                                                                               
  flexible                                                                              
  legal and                                                                             
  regulatory                                                                            
  framework                                                                             
  that enables                                                                          
  the national                                                                          
  banking                                                                               
  system to                                                                             
  provide a                                                                             
  full,                                                                                 
  competitive                                                                           
  array of                                                                              
  financial                                                                             
  services                                                                              

                Percentage of external legal    87%      87%      86%      86%          89%
                opinions issued within                                                  
                established time frames                                                 

                Number of external legal        92       119      119      120          70
                opinions issued during the                                              
                fiscal year                                                             

                Percentage of licensing         8%       34%      38%      40%          36% \[5\]
                applications and notices filed                                          
                electronically                                                          

                Number of licensing             182      893      1,256    1,600        1,367
                applications and notices filed                                          
                electronically during the                                               
                fiscal year                                                             

                Percentage of licensing         97%      96%      96%      95%          94% \[6\]
                applications and notices                                                
                completed within established                                            
                time frames                                                             

                Number of licensing             1,918    2,477    2,128    2,000        2,425
                applications and notices                                                
                completed during the fiscal                                             
                year                                                                    

                Average survey rating of the    1.14     1.20     1.19     ≤ 1.5        1.2
                overall licensing services                                              
                provided by OCC \[7\]                                                   

  IV\. An                                                                               
  expert,                                                                               
  highly                                                                                
  motivated,                                                                            
  and diverse                                                                           
  workforce                                                                             
  that makes                                                                            
  effective use                                                                         
  of OCC                                                                                
  resources                                                                             

                Total OCC costs relative to     N/A      N/A      N/A      Baseline     ***\$8.84***
                every \$100,000 in bank assets                                          
                regulated                                                               
  ----------------------------------------------------------------------------------------------------

\[1\] FY 2006 performance numbers shown in bold italics are estimates.
Some performance data is obtained from quarterly call reports from
banks. The September 30, 2006 call reports are not due until 30 or 45
days after the end of the period. Additionally, examinations concluded
late in the fiscal year are not finalized for another 30 to 60 days. As
a result, complete fiscal year data is not yet available, therefore,
estimates have been reported.

\[2\] There were no critically undercapitalized national banks in FY
2005.

\[3\] The examination survey is based on a five-point scale, in which 1
indicates complete agreement and 5 indicates complete disagreement.

\[4\] In FY 2006 OCC revised reporting on the consumer complaints
measure and related workload indicators to exclude inquiries and appeals
at the recommendation of the General Accountability Office. As such,
prior year reporting is no longer presented because the data is not
comparable and FY 2006 is shown as the baseline year.

\[5\] The OCC did not meet the target of receiving 40 percent of all
licensing application and notice filings electronically (36 percent
actual) because of the unexpected filing of 208 branch applications from
a single national bank that preferred paper filings over electronic
filings. These 208 branch application filings contributed to a 40
percent increase in branch application filings for the district
licensing unit responsible for this bank, compared with branch
application filings during the previous year.

\[6\] This year, several applications that initially appeared to be
routine in nature required additional processing time due to unique
circumstances that became apparent in the course of application review,
for example, branch applications with historical preservation issues.
This caused the OCC performance on this measure to be marginally below
target.

\[7\] The licensing survey is based on a five-point scale, in which 1
indicates outstanding and 5 indicates significantly deficient.

Appendix B---Financial Performance Measures

The following is a discussion of OCC's financial performance measures
and the results achieved during FY 2006.

Prompt Payment

The Prompt Payment Act and the OMB Circular A-125 require agencies to
make payments on time, pay interest penalties when payments are late,
and take discounts only when payments are made on or before the discount
date. The OMB's goal is a prompt payment rate of greater than 98
percent. The OCC's prompt pay rate was 99.9 percent in FY 2006 as
compared to 99.6 percent in FY 2005. In FY 2006, the OCC was offered 96
vendor discounts for a total of \$63,176. The OCC took 92 percent of the
discounts offered saving a total of \$57,809. Table 9 summarizes the
OCC's prompt payment performance for FYs 2006 and 2005.

Table 8: Prompt Payment Performance, FY 2006 and 2005

  ---------------------- --------------- -------------- ----------- ---------------
                         **FY 2006       **FY 2005      **FY 2006   **FY 2005
                         Amount**        Amount**       Number**    Number**

  Invoices paid          \$114,074,064   \$81,266,691   28,869      22,472

  Invoices paid late     \$698,940       \$2,247,318    36          81

  Interest penalties     \$221           \$1,198        23          53
  paid                                                              
  ---------------------- --------------- -------------- ----------- ---------------

Electronic Funds Transfer

The use of Electronic Funds Transfer (EFT) rather than a paper check for
payments provides greater control over payment timing and reduces
payment cost. During FY 2006, the OCC continued to maximize the use of
payment mechanisms as required by the Debt Collection Improvement Act of
1996. Table 10 summarizes EFT usage for FYs 2006 and 2005.

Table 9: Electronic Funds Transfer Performance, FY 2006 and 2005

  --------------------------- -------------------- -----------------------
                              **FY 2006**          **FY 2005**

  Vendor payments             99.6%                99.5%

  Employee payments           100.0%               100.0%
  --------------------------- -------------------- -----------------------

Erroneous Payments

The erroneous payments program meets the criteria of IPIA to support the
Department of the Treasury's strategic goal, "Ensure Professionalism,
Excellence, Integrity and Accountability in the Management and Conduct
of the Department of the Treasury." The OCC analyzed payments (excluding
payroll) made during FY 2006 and identified 89 erroneous payments
totaling \$140,120. Erroneous payments are identified and monitored
daily to ensure prompt recovery. The underlying causes and contributing
factors are identified quickly, and control measures are implemented to
prevent additional erroneous payments. The OCC corrected and recovered
all erroneous payments made during the year.

**Methodology for Identifying Improper Payments**

The OCC conducts both pre-payment reviews and post-payment audits to
identify improper or erroneous payments. The OCC conducts a 100 percent
pre-payment review of all supplier invoices and payment files prior to
transmission to Treasury. As part of its sensitive payments program, the
OCC conducts a 100 percent pre-payment review of executive and
international travel vouchers and relocation payments, thereby helping
to prevent erroneous payments. The OCC uses a sampling approach to audit
travel vouchers and data-mining techniques to detect potential erroneous
payments for post-payment audit activities. Immediately upon their
identification, the OCC initiates collection activity to ensure recovery
of funds. Also, the OCC is conducting a business process improvement
review of the non-payroll process to bring about efficiencies and to
determine the need for additional controls.

Based on the analyses, the OCC has concluded that erroneous payments do
not exceed the Treasury threshold, which is both 2.5 percent of
non-payroll payments and \$10 million. The OCC is compliant with the
Erroneous Payments and Recovery Act of 2001 and the IPIA.

**Other Significant Financial Management Measures**

The OCC continued to meet the Treasury-mandated monthly 3-day close
requirement throughout FY 2006. Financial Management reconciled all
accounts each month, completing 98.4 percent within 7 workdays,
supporting the delivery of the monthly Financial Status Reports to
management within 8 workdays. In addition, the OCC's delinquency rate
for individually billed government travel cards continued to be less
than 1 percent of the total balance outstanding.

[^1]: *Wachovia Bank, N.A.* v. *Burke,* 414 F.3d 305 (2nd Cir.)
    *petition for cert. filed;* 74 U.S.L.W. 3223 (U.S. September 30,
    2005) (No. 05-431); *Wells Fargo Bank, N.A.* v. *Boutris,* 419 F.3d
    949 (9th Cir. 2005); *Wachovia Bank, N.A.* v. *Watters*, 431 F.3d
    556 (6th Cir. 2005), *cert. granted* 75 U.S.L.W. 3019 (U.S. June 19,
    2006) (No. 05-1342); and *Nat'l City Bank of Ind.* v.
    *Turnbaugh,*\_\_\_\_F.3d \_\_\_\_\_ (4th Cir. 2006).

[^2]: *Comptroller of the Currency* v. *Spitzer,* 396 F.Supp.2d 383
    (S.D.N.Y. 2005) *appeal docketed* (November 8, 2005).

[^3]: *Clearing House Association, LLC* v. *Spitzer,* 394 F.Supp.2d 620
    (S.D.N.Y. 2005), *appeal docketed,* No. 05-5996 (2nd Cir. November
    8, 2005).

[^4]: In earlier decisions, the Seventh and Fifth Circuits had
    interpreted 28 USC 1348 as providing that national banks, in parity
    with state banks, are citizens of at most two states: the state
    where the bank has its main office, and the state where the bank has
    its principal place of business. *Wachovia* v. *Schmidt,* \_\_\_\_
    U.S. \_\_\_\_, 126 S.Ct. 941, 74 U.S.L.W. 4085 (2006).

[^5]: *American Bankers Ass'n* v. *Gould,* 412 F.3d 1081 (9th Cir.
    2005).

[^6]: *ABA* v. *Lockyer,* 2005 WL 2452798 (E.D. Cal. October 5, 2005),
    appeal docketed No. 05-517163 (9th Cir. November 9, 2005).