Don't Bank On Strong Governance: Observations On Corporate Governance In U.S. Banks

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1 Special Comment August 2005 Contact Phone New York Mark Watson Gregory W. Bauer Don't Bank On Strong Governance: Observations On Corporate Governance In U.S. Banks Summary Opinion The quality of corporate governance has become an increasingly important consideration for banks' ratings in recent years, principally as a result of control failures. In some cases, control failures have had a significant effect on the rating - either leading to downward movement in the rating or outlook or creating a constraint on future rating improvements. Conversely, improved corporate governance in certain companies (either internally initiated by the bank or initiated by regulatory action) led to positive rating actions or, at least, resulted in Moody's sustaining current rating levels in the expectation that corporate governance would improve. In all cases, the failures of corporate governance have led to rating committee discussions-often with a focus on the short-term financial impact, if any (for example, fines and litigation costs) and the potential long-term consequences (for example, damage to the bank's reputation or its relations with regulators). Moody's views the manner in which the board and management react to these control problems as a litmus test of the quality of inherent corporate governance within the bank. Within this context, Moody's now reviews corporate practices in U.S. banks more systemically than in the past. This special comment highlights the distinct features of governance within U.S. banking. We draw heavily on the insights we have accrued in reviewing 27 major U.S. banks over the last few years. 1 In addition to strong regulation, governance improvements are visible Strong regulation mitigates concerns on corporate governance Relatively strong board or committee focus on key exposures is critical Compensation practices are becoming more creditor-friendly Succession planning and performance evaluations are becoming more formal but regulation does not preclude governance challenges Despite strong regulation, control failures still prevail Bank board composition is far from optimal A potent board within a board could be a concern Mergers create oversight challenges Risk oversight provides a distinct challenge to bank boards, particularly in light of Basel II Internal audits may have failed in some banks 1. As part of our Enhanced Analysis Initiative, Moody's has published over 350 corporate governance assessments on North American issuers. This includes 27 large U.S. banks. See appendix two.

2 In Addition To Strong Regulation, Governance Improvements Are Visible Strong regulation mitigates concerns on varied quality of corporate governance. Banking regulators provide an additional supportive layer to corporate governance, acting as a strong safety net when failures occur. Moody's believes the existence of a robust regulatory environment in the U.S. mitigates the likelihood of control failures within banks. We view the regulatory focus on depositors' interests as a key positive because their interests are more aligned with creditors' interests than those of shareholders. Compared with many other U.S. financial-service regulators, banking regulators have the following characteristics: More detailed regulations focused on governance, controls, and risk management. More direct exposure to their regulated institutions. Often, regulators work onsite throughout the year and sometimes meet directly with bank audit committees to discuss annual review findings. Stronger enforcement capabilities. The Federal Reserve, OCC, and FDIC have an array of enforcement tools, including cease-and-desist orders, powers to remove officers and directors, powers to force prompt corrective action, and the ability to apply civil monetary fines. Tough enforcement creates an important safety net should failures occur and helps speed the remediation process. Subsequent control improvements typically create more robust banking institutions in the long run. Relatively strong board or committee focus on key exposures. Most corporate boards focus on customer issues as part of the organization's strategy. These issues include types of customers targeted by the organization, as well as which types are most profitable and growing the fastest. Bank boards certainly discuss customers in this way, but in addition they consider the bank's key customers with a particular view to risks: what are the main exposures and the most significant nonperforming loans? Often, credit or risk committees have been established-or the role of the audit committee formally extended-to ensure that sufficient time is spent on these exposures and that management's actions are reviewed. Thirteen of the 27 bank holding companies we have studied have such committees (in practice, the number may be higher because some risk committees are established at the bank level, not at the holding company's). These committees routinely do double-duty, by also reviewing the bank's overall approach to market, interest-rate, and operational risks. Given the damage that poor credit decisions or mismanagement of problematic exposures can do to bank financials, we view the detailed focus on customers as a positive. However, we do have concerns when the credit or risk committees are drawn into approving key customer transactions, other than under extreme circumstances. Credit approval and work-out decisions, for example, should be taken by management; management can then be held to account for their actions and compensated accordingly. Drawing directors into the approval process can blur lines of accountability and can impair the board's ability to provide independent, objective oversight. Compensation practices are becoming more creditor-friendly. In the 1980s and 1990s, banking-sector executive pay tended to be very shareholder-focused, with substantial use of stock options as the key component of long-term pay, as well as a strong focus on earnings-per-share performance in setting bonus payouts. As in many financial service sectors, the magnitude of pay-and hence the size of option awardshas also been high, at least compared with pay in a broader set of companies. Average 2004 total CEO pay for the 27 banks Moody's has reviewed was $9.2 million compared to $5.7 million for a broader sample of U.S. companies. 2 Average stock option awards to bank CEOs in 2000 were valued at $11.9 million, compared to $4.5 million for CEOs at a broader set of companies. In 2004, the size of these awards had fallen significantly, albeit awards to bank CEOs still remain higher ($3.2 million and $2.2 million, for banks and the broader universe, respectively). Options can be an effective component of pay for management, but they can also create pay structures that are, from a creditor's perspective, highly leveraged. To the extent that bondholder and shareholder interests diverge, such leverage could induce behaviors that are more short-term in nature or, at least, ones that are less creditor-friendly. As such, we view positively moves away from stock options towards the use of other long-term pay, such as restricted stock or longterm incentive programs tied to transparent performance criteria. Restricted stock in 2004 accounted for 35% of bank CEO total pay, up from 5% in We see a trend in this direction in various sectors, but the impact in banks is more pronounced than in many sectors because of the past dependence on high options awards. 2. Pay data, which is drawn from Execucomp, compares 27 U.S. banks with a broader universe of 1,042 U.S. companies. 2 Moody s Special Comment

3 A factor in this trend may have been the leadership of the banking sector in moving to expense options on a fair value basis beginning in mid Fair value expensing tends to put options on an even playing field with other compensation alternatives, in the view of Moody's. This tends to discourage over-reliance on options, which before 2002 were treated by most companies, including banks, as having no earnings impact. When companies began changing that approach in 2002, banking was the sector with the most corporations that moved quickly to expensing. Short-term bonus performance metrics in the banking sector traditionally have been shareholder-friendly. Earnings per share (EPS) or total shareholder return have been mainstay performance metrics for a number of years. This short-term focus is significant because annual bonuses still remain a more significant part of total bank CEO pay than is the case more generally in the U.S.: 28% compared to 21%. However, an increasing number of banks now tie annual bonus pay to more creditor-friendly performance criteria, for example, asset quality or capitalization. Few use such metrics as the main, or even the dominant, metrics: EPS remains dominant. Nevertheless, the adoption of other metrics helps to encourage a better balance, including the need to balance creditor and shareholder interests. The banking sector has been at the forefront of adopting stockholding requirements for management (and sometimes directors), ahead of a broader trend towards such requirements in the U.S. Often, the requirements are onerous: Typically, the standards require managers to hold stock that is a relatively high multiple of their base salary (sometimes up to 10 times base salary for the CEO, with five times being more standard in the corporate sector). In some cases, executives must hold a high proportion of stock received from the company or brought on the open market while they remain at the company (Citigroup adopted a requirement to retain 75% of shares, after tax and fees, that others banks have now emulated). Moody's views these requirements as a positive because they help bring greater alignment between management and long-term shareholder interests. Succession planning and performance evaluations are becoming more formal in light of potential leadership changes. Banks, like many other organizations, have strengthened succession-planning processes in recent years. Moody's believes this increased focus on succession is important because many major U.S. banks face significant leadership changes in the next five years. Of the 27 banks Moody's has reviewed in terms of the quality of corporate governance over the last three years, the average age of bank CEOs is 59; 11 banks have CEOs over the age of 60. For some banks, the change in CEO will be coupled with a generational shift in management as the CEO's peers also retire. Within this context, bank boards are spending more time talking about potential future leaders with the CEO, in part to ensure that they are fully prepared for emergency situations, including those in which the incumbent CEO is temporarily or permanently incapacitated or where for other reasons unplanned change in leadership is required. Beyond CEO succession planning, bank management teams have spent more time identifying the key positions across the organization and, in so doing, identifying the most likely successors for each position. In an industry where movement among institutions is common, banks are typically very open to back-filling positions with outsiders. Boards have requested more frequent access to talent below the CEO direct-report level to ensure directors have a better sense of the future leadership pool. Moody's remains aware of those banks, like TD Banknorth, that have not upgraded succession-planning processes in recent years, particularly those facing major leadership changes. We believe management performance evaluations have become more structured within the context of upgrading talent-development efforts. CEOs are now more formally evaluated than in the past. Compensation committees spend more time assessing the evaluations of senior managers, typically (but not always) in the context of compensation-setting discussions. Moody's believes that the performance criteria used to assess CEOs and their teams have become more formal and quantifiable in many banks. Financial metrics remain dominant, but a greater effort is being made to select nonfinancial performance metrics that are more quantifiable and less susceptible to subjectivity. Arguably, the nature of work in banks, like many other financial institutions, lends itself more to quantifiable metrics, at least in contrast to the corporate sector's. Moody s Special Comment 3

4 Regulation Does Not Preclude Governance Challenges Despite strong regulation, control failures still prevail. There has been ample evidence in recent years that-despite strong regulation-control failures occur in banks (see appendix one). 3 Moody's focuses heavily on the level of board involvement in shaping the response to control failures or regulatory missteps. The board plays a critical role in ensuring management works openly with regulators in addressing control failures and shortcomings. The board also sets the tone, along with the CEO. If the board is lax, management may simply plaster over failures and adopt a minimalist approach to rectifying the problems rather than unearthing the underlying causes and ensuring that these are remedied. Moody's has witnessed both approaches, and our analysts have acted accordingly, factoring the bank's attitude toward dealing with setbacks into our rating discussions. For example, PNC's rating was placed under review twice, in 2002 and 2003, due to significant control failures and the relatively slow response by the board and management to take broad, corrective action; we held the rating on both occasions because the business franchise remained strong throughout. Moody's believes that some boards are better than others at considering the broader reputational issues that arise from control failures. Brand capital can be badly tarnished by control failures and more active, insightful boards recognize that the manner in which managements respond can greatly influence the way the brand is perceived. Bank board composition is far from optimal. The composition of bank boards often creates governance concerns in Moody's view, particularly the manner in which directors are selected. Financial service experience tends to be very low. To a great extent, this reflects a desire to avoid appointing directors who may have potential conflicts of interest associated with competitor financial-service companies. Bank regulatory rules bar large U.S. banks from appointing directors from other U.S. banks. Too few banks have not adopted the approach in other financial service sectors of appointing retired industry executives or advisers with industry experience, such as accountants or consultants. Relatively high numbers of corporate clients on boards. Historically, many banks have appointed major corporate clients to their boards, often local or regional businessmen. This can reflect a mentality to building a board that represents a core client constituency-one that we believe can result in poor governance. We believe the board should be optimized as a decision-making body. Moody's believes there has been movement away from appointing individuals as directors simply because of their banking relationships. However, significant clients continue to be appointed to some boards, particularly at local and regional banks, if only because of the difficulty of avoiding such relationships. Banks only disclose these relationships to the FDIC, but do not provide specific information to the public (see "Insider loans-the sign of a constituency board?"). The regulatory focus is on ensuring that no transactions occur on preferential terms. Moody's concern, in contrast, is on the potential adverse affect that a client relationship can have on a director's independence, particularly when the director's own organization relies heavily on the bank for financial services. Without considering banking relationships, bank board independence is in line with the average of all companies that Moody's has reviewed, i.e. 72%. 4 However, if banking relationships were taken into account, bank board independence would be significantly lower. Boards can be too local. Boards often appoint a disproportionate number of directors from their home state-in part, another reflection of an outmoded view of boards as serving constituency functions. Although this helps build strong community ties, it can reflect a provincial focus that does not keep pace with a bank's, often fast-expanding, footprint. Such as focus may make boards less likely to challenge management because of the web of connections between directors and senior executives. The local nature of U.S. bank boards is true of some large, national banks, as well as of large regional or supraregional banks. Good examples of relatively local boards are Bank of America, BancorcorpSouth and Comerica. Director selection is often driven by merger activity. The membership of a number of U.S. bank boards reflects the legacy directors from past merger and acquisitions partners, and in some cases, current membership appears to be more the result of short-term merger considerations than longer-term optimization of board membership. Typically, this means that directors are not selected for their fit with the board's needs; rather, they were picked as part of the deal-negotiation process. It also means that directors' tenures are understated in proxy statements because the focus is on tenure on the main company board, not on boards of predecessor banks-this can hide the fact that too few new, unaffiliated independent directors have been added to the board in recent years 3. See Banking System Outlook, June 2005 (92782) 4. This is the average independence level, based on Moody's criteria, at the first 300 U.S. and Canadian public companies for which Moody's has published corporate governance assessments. 4 Moody s Special Comment

5 Boards are too large. The most striking feature of U.S. bank boards is their size. They average 15 members, compared with 11 for the other companies that Moody's has evaluated. For some, the number can be 18 or above. 5 So many directors helps staff committees, because the average U.S. bank board has five committees. However, in Moody's view, smaller boards (of approximately 9-12 members) enhance active discussion, enable a more detailed review of key issues and also allow for the active participation of all directors. Some large banks, notably JPMorgan and Bank One prior to their 2004 merger, have been able to maintain boards within this range. "Insider" loans: the sign of a constituency board? The FDIC publishes periodic data on each bank's outstanding "insider loans", that is loans made to executive officers, directors, firms at which bank directors are executive officers, or shareholders that own over 10% of the shares of the bank or its parent holding company. The data does not identify to whom these loans are made directly. However, Moody's believes that the data can highlight a predisposition to appoint bank customers to bank boards; the so-called constituency board, noted above. Below is the data, aggregated by parent company where necessary, for those banks with more than $1bn in assets that have outstanding loans to insiders that are at least one standard deviation from the average for one or more of the following metrics: Dollar value of these loans. As a percentage of tangible common equity As a percentage of gross loans outstanding (data ranked by this metric) 03/05 Q Total insider loans Aggregate insider loans as % of TCE Aggregate insider loans as % of gross loans Parent Name ($000) UMB Financial Corporation 324, Intrust Financial Corporation 94, Commerce Bancshares, Inc. 348, Synovus Financial Corp. 411, BancorpSouth, Inc. 246, Whitney Holding Corporation 188, Trustmark Corporation 169, Amegy Bancorporation, Inc. 137, Fulton Financial Corporation 146, Bank of New York Company, Inc. 749, Marshall & Ilsley Corporation 468, Huntington Bancshares Incorporated 314, Comerica Incorporated 525, Wachovia Corporation 1,348, SunTrust Banks, Inc. 387, JPMorgan Chase & Co. 1,166, Average 148, Average, plus one standard deviation 375, Source: FDIC A potent board within a board could be a concern. Many U.S. bank boards have established executive committees of the board so that urgent decisions can be taken between board meetings. For the majority, the committee's role is latent, and is used sparingly, if at all, during the year or purely for administrative actions. However, some banks, like SunTrust, employ their executive committee to review credit issues. Moody's views this arrangement as being problematic because executive committees are typically charged with much broader powers than other committees. Indeed, other than matters reserved for the full board by state law, such committees routinely have the board's full powers at their discretion. Using executive committees in this way can create the appearance of a "board within a board", with committee members more influential than other board members, particularly where the executive committee meets as often, or more frequently, than the full board. Executive committees also typically have a significantly higher proportion of non-independent directors than boards overall. Moody's has raised this concern in four banks, including Bancorp- South and SunTrust. 5. Banks with 18 or more members are: Marshall & Ilsley, M&T, Regions Financial, SunTrust and Wachovia. Moody s Special Comment 5

6 Mergers create oversight challenges. The banking sector has been a consolidating sector over the last decade. Active banks have aggregated local and regional banks in a race for asset accumulation and economies of scale. Yet, as acquisitions become larger, integration risks grow, for example, in systems integration. Some management teams have developed their expertise over the years in managing integration issues, but the increased scale of mergers creates significant oversight challenges for the board. There have been numerous high-profile merger mishaps over the last decade: for example, Bank One/First Chicago NBD (now JPMorgan), Wells Fargo/First Interstate, and First Union/Corestates (now Wachovia). Moody's believes that, as the scale of M&A transactions increases, boards have three key roles: Probing the strategic rationale. U.S. bank boards are participating more in annual strategy discussions with management. These discussions include management's view on the likely consolidation trends in the industry and the manner in which their bank will participate. Good boards probe hard to ensure that the acquisition strategy fits well within the overall bank strategy and does not just represent management's push to grow for growth's sake. Reviewing M&A candidates. The focus on corporate governance in recent years has made directors concerned with performing their duties with more care. One area where this change has been most pronounced in banks is the time spent by directors on reviewing each significant acquisition candidate with greater care, as part of the due diligence process. We view this trend as a positive. Integration oversight. Boards, or more often their audit committees, have a major role to play in overseeing the integration process. Many bank management teams have honed their integration skills through successive acquisitions, but problems still occur. Some bank boards have set constraints on management's ability to acquire, either by slowing the overall pace of acquisitions or by insisting on the completion of one major acquisition before another begins. Moody's views this as an appropriate role for the board, given the mistakes that can occur. Risk oversight provides a distinct challenge to bank boards, particularly in light of Basel II. We note above that many U.S. bank boards have significant visibility into bank major exposures and their nonperforming assets. The quality of oversight of broader risk management practices is, however, more varied. In Moody's view, the board is instrumental in designing a risk management policy that outlines the objectives of risk management and its own key responsibilities in the risk process, as well as the mechanisms to delegate responsibilities and to elevate issues and conflicts. Certainly, for many banks, Basel II has focused boards on management's efforts to upgrade their risk management mechanisms so they are better able to identify, evaluate, monitor, and-where possible-mitigate key risks, including operational risks. This task is becoming harder as the pace of innovation in financial instruments quickens. Our review of risk practices leads Moody's to believe that bank boards are more involved than ever in discussions with management on the firm's risk appetite, as part of broader, often more systematic, reviews of strategy. Discussions on strategy and risk appetite remain in the realm of the full board. Nonetheless, given the technical nature of risk oversight, some boards have specific risk-focused committees, such as the Bank of New York and JPMorgan. These committees receive routine updates on the firm's risk profile and the firm's adherence to its risk policies. Nonetheless, a key area for improvement for many banks is the quality of risk-reporting to the board and its committees; we believe this stems from sub-optimal, although improving risk-reporting across the organization. Moody's also notes that too few banks use risk-adjusted metrics for motivating senior management. Internal audit may have failed in some banks. In Moody's view, some U.S. banks have found it difficult to maintain strong, effective internal audit functions within their organizations. The fact that the banking sector had a disproportionate number of material weaknesses reported under Sarbanes-Oxley (SOX) 404 internal control requirements, in 2005, at least when compared to other industries, may reflect this challenge, as might the prevalence of other control problems. For example, the control problems faced by Fifth Third, PNC or SunTrust suggest failures in internal audit, in our view. There appear to be two main causes of these problems: Maintaining consistency and quality internal audit through multiple acquisitions, with constantly changing personnel and systems. A preference by some banks to outsource their internal audit functions. Prior to the passing of SOX, many actually outsourced this function to their external auditor. This practice is now banned. Audit committees have a particularly important role to play in ensuring that banks become better at leveraging their internal audit functions. 6 Moody s Special Comment

7 Appendix One: Examples of Bank Control Failures In many cases, the failures led to banks to settle with regulators or plaintiffs and several entered into written agreements with regulators focused on the improvement steps required. In all cases, remedial action was taken by management. As is the normal practice, those banks listed below that reached settlements neither admitted nor denied any wrongdoing. Data as of 07/20/05. Led to changes in rating/outlook Bank Problem Status Rating or outlook impact Doral Announced write-down in IO strip valuations due to faults in valuation model. A restatement of past financial statements will take place. Internal investigation ongoing. SEC informal investigation ongoing. Placed on review for downgrade in Apr Senior debt downgraded to Baa3 from Baa2 in June 2005, and remains under review for downgrade. Fifth Third Failure in accounts reconciliation and account settlements. Entered into written agreement with OCC/Federal Reserve, which ended in March Outlook moved from positive to stable (issuer-aaa2). Apr Riggs National Deficiencies in bank's reporting of suspicious activities under the Bank Secrecy Act. Noncompliance with consent order. Paid $40mn. Entered into written agreement with DOJ in March Admitted guilt. OCC still considering civil penalties. Changed outlook to negative from stable (sub-ba2). Apr The rating was subsequently upgraded as a result of the bank's acquisition by PNC. Reported 404 material weakness relating to the lack of experienced financial reporting personnel. SunTrust Reported 404 material weakness relating to allowance for loan and loan losses calculations. In remediation stage. Informal SEC investigation is ongoing. Changed outlook to negative from stable (senior Aaa3). Nov Moody s Special Comment 7

8 Acted as constraint on rating Bank Problem Status Rating or outlook impact Bank of America Settled class-action suit charging that the bank failed in its due diligence work on an $11 bn WorldCom bond offering ($460mn) Settled accusations with SEC that mutual fund operations had engaged in late trading and market timing ($375mn). Parmalat administrator filed lawsuit against bank for their alleged role in its bankruptcy. Parmalat litigation outstanding. Litigation uncertainty could act as constraint on rating (issuer-aa2, stable). Citigroup Took significant 2004/2005 charge ($4.95bn after-tax) that covered: Settled major Enron class action litigation on structured finance deals Class-action suit charging that the bank failed in its due diligence work on an $11 bn WorldCom bond offering Largest part of global settlement for equity research conflicts-of-interest Federal Trade Commission settlement on predatory lending suit Non-disclosure of commercial relations with unaffiliated transfer agents in mutual fund business Fine for structured finance transactions with Enron and Dynergy Fine for mutual fund mis-selling with Putnam Investments Privileged access to IPO allotments Japanese private banking division closed. Parmalat administrator filed lawsuit against bank for their alleged role in its bankruptcy. Parmalat and some Enron litigation outstanding. Condition in approval by Federal Reserve of First American Bank acquisition that company will not undertake major acquisition that distracts management attention from 5-point plan. Concerns on control environment and culture still act as a constraint on rating improvement (senior Aa1, stable) JPMorgan Took significant 2004/2005 charges ($2.9bn after-tax) that covered: Settled major Enron class action litigation on structured finance deals Class-action suit charging that the bank failed in its due diligence work on an $11 bn WorldCom bond offering Largest fine for structured finance transactions with Enron and Dynergy Global settlement for equity research conflicts-of-interest Privileged access to IPO allotments Some Enron litigation outstanding. Prior to Enron and other settlements, acted as a constraint (senior-aa2, stable) 8 Moody s Special Comment

9 No effect on rating Bank Problem Status Rating or outlook impact AmSouth Deficiencies in bank's reporting of suspicious activities under the Bank Secrecy Act. Paid $50mn. Cease and desist order restricts AmSouth's expansion activities. Entered into written agreement with DOJ in Oct Affirmed rating, Oct 2004 (issuer-a2). Bank One Settled accusations that mutual fund operations had engaged in late trading ($90mn). No major litigation outstanding. None (deposits-aa2) Comerica In July 2005 settled SEC charge that the bank had not established an appropriate loan-loss reserve for its Californian subsidiary in Agree to a cease and desist. None (deposits-a1) Commerce Bancorp. Executives accused of bribing local government officials in return for new business. Two executives found guilty. SEC investigation ongoing. None (issuer-a3). First Midwest Bancorp, Inc. Deficiencies in bank's reporting of suspicious activities under the Bank Secrecy Act. Entered into written agreement Federal Reserve/Illinois Office of Banks and Real Estate in July Greater Bay Bancorp Failures in risk management processes. Entered into written agreement with Federal Reserve, which ended in July Hudson United Bancorp. Deficiencies in bank's reporting of suspicious activities under the Bank Secrecy Act. Entered into written agreement with FDIC in Affirmed rating, July 2004 (issuer-baa1). None (issuer - Baa3). None (issuer - Baa2). Huntington Bancshares Inappropriate accounting (incl. auto loan and lease origination fees and costs). Former and current (incl. current CEO) agreed to repay some 2002 bonuses. Paid $7.5mn. Entered into written agreement with OCC/Federal Reserve in March Affirm rating, Mar 2005 (holding company-a3). New York Community Bankcorp. Reported 404 material weakness relating to the lack of experienced financial reporting personnel and ineffective controls on income tax accounting and related recordkeeping activities None (issuer-baa1). Ratings confirmed, in June 2005, following a review for downgrade announced in Feb Review was not premised on 404 weaknesses. Pacific Capital Bancorp. Reported 404 material weaknesses relating leasing and other non-routine transactions, and approval and reconciliation of general lodger journal entries. Affirmed rating, Mar 2005 (deposits-a3). Popular Inc. Deficiencies in bank's reporting of suspicious activities under the Bank Secrecy Act. Forfeited $21.6mn. Entered into written agreement with Federal Reserve, which ended in January Entered into a 12 month deferred prosecution. Affirmed rating, Jan 2003 (issuer - A2). PNC Financial Services Inappropriate accounting of certain offbalance sheet special purpose entities valued at $700mn. Paid $120mn. Discovered $50mn fraud in asset-backed commercial paper conduit Entered into written agreement with OCC/Federal Reserve, which ended in Sep Placed on review for downgrade twice (issuer-a2), Apr 2002 and Oct Ratings confirmed each time. Management's plan for remediation deemed credible. UCBH Reported 404 material weakness relating to the lack of experienced financial reporting personnel. Affirmed rating, Mar (deposits, Baa2). Wachovia Disclosed that its wealth management business had referred clients to the company's external auditor. SEC investigation is ongoing. None (issuer-aa3). Moody s Special Comment 9

10 Appendix Two: List of U.S. Bank Corporate Governance Assessments (CGAs) Published, as of 07/15/05 Bank Date last CGA published AmSouth Bancorporation August 2004 BankcorpSouth, Inc June 2005 Bank of America Corporation January 2005 Bank of New York Company, Inc. (The) April 2005 BB&T Corporation June 2005 Citigroup Inc. August 2003 Comerica Incorporated December 2004 Commerce Bancorp, Inc June 2005 Compass Bancshares, Inc November 2004 Fifth Third Bancorp February 2005 First Horizon National Corporation February 2005 Golden West Financial Corporation June 2005 JPMorgan Chase & Co. June 2005 KeyCorp July 2005 M&T Bank Corporation October 2004 Marshall & Ilsley Corporation August 2004 Mellon Financial Corporation June 2004 National City Corporation January 2005 PNC Financial Services Group, Inc. January 2005 Regions Financial Corporation December 2004 Sovereign Bancorp, Inc. May 2005 SunTrust Banks, Inc. October 2004 TD Banknorth Group, Inc. May 2005 U.S. Bancorp November 2004 Wachovia December 2004 Washington Mutual, Inc. January 2005 Wells Fargo & Company November Moody s Special Comment

11 Related Research Rating Methodology: U.S. and Canadian Corporate Governance Assessment, July 2003 (78666) Special Comments: Moody's Findings on Corporate Governance in the United States and Canada, October 2004 (89113) CEO Compensation and Credit Risk, July 2005 (93592) Takeover Defenses and Credit Risk, December 2004 (89713) Banking System Outlook: United States, June 2005 (92782) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. Moody s Special Comment 11

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