Internal Control Questionnaires and Verification Procedures

Internal Control Questionnaire

1. Has the board of directors, consistent with its duties and responsibilities, adopted written loan portfolio management policies and objectives that:

   1. Establish suggested guidelines for distribution of loans in commercial, real estate, and installment categories?

   2. Establish geographic (including country) limits for loans?

   3. Establish suggested guidelines for aggregate outstanding loans in relation to other balance sheet categories?

   4. Establish loan authority of committees and individual lending officers?

   5. Define acceptable types of loans?

   6. Establish maximum maturities for various types of loans?

   7. Establish loan pricing?

   8. Establish appraisal policy?

   9. Establish minimum financial information required at inception of credit?

   10. Establish limits and guidelines for purchasing paper?

   11. Establish guidelines for loans to bank directors, officers, principal shareholders, and their related interests?

   12. Establish collection procedures?

   13. Define the duties and responsibilities of loan officers and loan committees?

   14. Outline loan portfolio management objectives that acknowledge:

       • Concentrations of credit within specific industries and pertaining to country credits?

       • The need to employ personnel with specialized knowledge and experience?

       • Community service obligations?

       • Possible conflicts of interests?

2. Are loan portfolio management policies and objectives reviewed at least annually to determine if they are compatible with changing market conditions?

3. Are the following reported to the board of directors or its committees (indicate which) at their regular meetings (at least monthly):

   1. Past-due single payment notes (if so. indicate the minimum days past due for them to be included )?

   2. Notes on which interest only is past-due (if so, indicate the minimum days past due for them to be included )?

   3. Term loans on which one installment is past due (if so, indicate the minimum days past due for them to be included )?

   4. Outstandings under canceled advance (overdraft) facilities that are unpaid (if so, indicate the minimum days past due for them to be included )?

   5. Discounted (purchased) outgoing foreign bills matured and unpaid (or advances collateralled by pledged delinquent foreign bills) (if so, indicate the minimum days past due for them to be included )?

   6. Overdrafts resulting from a customer not paying the bank for bankers’ acceptances or drafts it paid (if so, indicate minimum days past due for them to be included )?

   7. Total outstanding loan commitments?

   8. Loans requiring special attention?

   9. New loans and loan renewals or restructured loans?

4. Are reports submitted to the board or its committees rechecked by a designated individual for possible omissions prior to their submission?

5. Are written applications required for all loans?

6. Does the bank maintain credit files for all borrowers?

7. Does the credit file contain information on:

   1. The purpose of the loan?

   2. The planned repayment schedule?

   3. The disposition of loan proceeds?

8. Does the bank require periodic submission of financial statements by all borrowers whose loans are not fully secured by readily marketable collateral?

9. Is a tickler file maintained to ensure that current financial information is requested and received?

10. Does the bank require submission of audited financial statements based on dollar amount of commitment (if so, state the dollar minimum for requiring $ )?

11. Does the bank perform a credit investigation on proposed and existing borrowers for new loan applications?

12. Is it required that all loan commitments be in writing?

13. Are lines of credit reviewed and updated at least annually?

14. Are borrowers’ outstanding liabilities checked to appropriate lines of credit prior to granting additional advances?

15. Does the bank employ a procedure for disclosure of a loan or combination of loans that are or will be secured by 25 percent of another insured financial institution’s stock?

16. Is there an internal review system (it may be a function of the internal audit department) which covers each department and:

    1. Rechecks interest, discount, and maturity date computations?

    2. Re-examines notes for proper execution, receipt of all required supporting papers, and proper disclosure forms?

    3. Determines that loan approvals are within the limits of the bank’s lending authorities?

    4. Determines that notes are being initial-approved by the loan officer?

    5. Ascertains that new loans are within the limitations set for the borrower by corporate resolution?

    6. Rechecks liability ledger to determine that new loans have been accurately posted?

    7. Rechecks the preparation of maturity and interest notices?

    8. Examines entries to various general ledger loan controls?

    9. Confirms collateral, loans, and discounts with customers on a test basis?

17. Does the bank have a loan review section or the equivalent?

18. Is the loan review section independent of the lending function?

19. Are the initial results of the loan review process submitted to a person or committee who is also independent of the lending function?

20. Are all loans exceeding a certain dollar amount selected for review?

21. Do lending officers recommend loans for review?

22. Is a method, other than those detailed in steps 20 or 21, used to select loans for review (if so, provide details)?

23. Are internal reviews conducted at least annually for all lending areas?

24. In an officer identification system, are guidelines in effect which define the consequences of an officer withholding a loan from the review process?

25. Is the bank’s problem loan list periodically updated by the lending officers?

26. Does the bank maintain a list of loans reviewed, indicating the date of the review and the credit rating?

27. Does the loan review section prepare summations to substantiate credit ratings, including pass loans?

28. Are loan review summations maintained in a central location or in appropriate credit files?

29. Evaluation of country risk:

    1. Are significant changes in country conditions and/or levels of exposure brought to the attention of the board of directors or its designated committee promptly?

    2. Are country limits revised in response to substantive changes in economic, political, and social conditions within particular countries?

    3. Are country limits reviewed and updated at least annually?

    4. Prior to granting additional advances or commitments, are outstandings checked to appropriate country limits?

    5. Are lending officers cognizant of specific country limitations?

    6. Are procedures for exceeding country limits clearly defined?

    7. Does the bank have a periodic lending officer call program for countries?

    8. Is there an internal review system which determines that risk assets outstanding and committed are within the bank’s foreign country exposure limits?

    9. Are country risk factors (economic, political, and social) and other factors in a particular country considered in the bank’s internal periodic review of its risk assets?

    10. Does the bank’s system for maintaining adequate and current country analysis information include:

        • A review of country conditions on a regular basis (state frequency and indicate who performs analyses )?

        • A continuing review of current country data obtained from internal and external sources?

        • An analysis of economic, political, social, and other factors affecting country risk?

    11. Does the bank have a formal reporting system on country risk?

    12. Does the bank’s country risk evaluation system accurately recognize exposure from country to country on the basis of legally binding guarantees, collateral, or reallocation by office of responsibility?

    13. Does the reporting system provide complete exposure data quickly and in sufficient detail to assess particular risks?

30. Are follow-up procedures in effect for internally classified loans, including an update memorandum to the appropriate credit file?

31. Are officers and employees prohibited from holding blank signed notes in anticipation of future borrowings?

32. Are paid and renewed notes canceled and promptly returned to customers?

33. Do loan proceeds disbursed in cash require a customer receipt?

34. Are loan records retained in accordance with record retention policy and legal requirements?

35. Are new notes microfilmed daily?

36. Is a systematic and progressively stronger follow-up notice procedure utilized for delinquent loans?

37. Does the bank maintain loan interest rate schedules for various types of loans?

38. Does the bank periodically update interest rate schedules (if so, state normal frequency )?

39. Does the bank periodically update interest rate schedules (if so, state normal frequency )?

    1. The cost of funds loaned?

    2. The cost of servicing loans, including overhead?

    3. The cost factor of probable losses?

    4. The cost factor of probable losses?

40. Has the bank conducted industry studies for those industries in which it is a substantial lender?

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