Obtain the following documents or, if appropriate, review the information with the examiner assigned to the relevant area:

• Board of directors’ minutes containing insider transaction information, including any potential or existing conflicts of interest.

• A list of executive officers, including

  • Name.

  • Title.

  • Date the person became an executive officer.

  • Related interests.

• A list of directors, including:

  • Name.

  • Date the director was elected to the board.

  • Related interests.

• A list of shareholders with more than 10 percent ownership, including:

  • Shareholder name.

  • Date the person became a principal shareholder.

  • Number of shares owned.

  • Related interests.

• A list of extensions of credit (including commitments) to directors, executive officers, principal shareholders, and their related interests, describing:

  • Complete name of obligor, co-maker, endorser, and guarantor.

  • Type of entity (individual, sole proprietorship, general partnership, limited partnership, limited liability company, corporation).

  • Name of director, officer, or principal shareholder related to the obligor.

  • Nature of obligation (signer on note, guarantor, general partner, etc.)

  • Original date, amount, and purpose of the loan or commitment.

  • Current balance.

  • Terms, including interest rate, maturity date, and any collateral.

  • Status (delinquent, restructured, renegotiated, or considered a problem loan by management).

  • Date reported to, or approved by, the board of directors, if applicable.

• A copy of the Report of Indebtedness of Executive Officers and Principal Shareholders and Their Related Interests to Correspondent Banks (FFIEC Form 004) or similar form containing identical information, if applicable.

• A report of executive officer borrowings at other institutions required by 12 CFR 215.9, if applicable.

• Any bank-generated overdraft report to ensure compliance with 12 CFR 215.4(e)(1).

• A list of deposit accounts and other vehicles not technically deposits (e.g., repurchase agreements) of directors, officers, and all other employees to ensure that they are not receiving preferential interest rates (12 USC 376).

• A list of comparable non-insider transactions.

• A report of fees or other payments made as well as any reimbursements of personal expenses (e.g., consulting or other professional services) paid to insiders and their related interests.

• A list of management officials (as defined in 12 USC 3201) of the bank, its holding company, and holding company affiliates, who are management officials of other depository institutions.

• A list of purchases or sales of assets to, or use of bank property by, an insider.

• A list of loans to third parties of which the proceeds were either directly or indirectly transferred to a bank insider or used for the tangible economic benefit of a bank insider.

From the materials gathered above, select a representative sample of insider borrowings. Review terms of extensions of credit (including renewals), such as interest rates, fees charged, and collateral. Assess compliance with laws and regulations for loans to insiders by determining whether these extensions of credit and loan renewals:

• Are made on substantially the same terms and adhere to credit underwriting practices that are no less stringent than those available at the same time to non-insiders for comparable transactions (12 USC 375a(1) and 375b(2) and 12 CFR 215.4(a)(1).

• Are made pursuant to an employee benefit or compensation plan which is widely available to employees (12 CFR 215.4(a)(2)).

• Carry no more than a normal risk of failure to repay (12 USC 375a(1) and 375b(2) and 12 CFR 215.4(a)(1)).

• Have no other unfavorable features (12 USC 375a(1), 12 USC 375b(2), and 12 CFR 215.4(a)(1)).

• Do not exceed the greater of $25,000 or 5 percent of the bank’s unimpaired capital and unimpaired surplus (12 USC 375b(3) and 12 CFR 215.4(b)). If loans exceed these limits, determine whether:

  • The extension of credit was approved in advance by a disinterested majority of the entire board of directors (12 USC 375b(3)(A) and 12 CFR 31.2(a) and 215.4(b)(1)(i)).

  • The interested party abstained from participating directly or indirectly in the deliberations and voting (12 USC 375b(3)(B) and 12 CFR 31.2(a), 215.4(b)(1)(ii) and 215.4(b)(4)).

  • The abstention was noted in the board of directors’ minutes. (Although this is not required by regulation, the OCC believes this is a prudent banking practice.)

  • There is prior approval for any aggregate extension of credit to the insider and all related interests of the insider exceeding $500,000 (12 USC 375b(3) and 12 CFR 215.4(b)(2) and (3)).

Using bank reports and other materials gathered, determine whether aggregate loans to any individual and related interests exceed the limit on loans to a single borrower established by 12 USC 84 (which includes any higher limits permitted by section 84, 12 USC 375b(4), and 12 CFR 215.4(c)).

Using bank reports and other materials gathered, determine whether aggregate extensions of credit to executive officers, directors, and principal shareholders and their related interests exceed the bank’s unimpaired capital and unimpaired surplus. If loans exceed that limit, determine whether the bank has total deposits of less than $100 million (12 USC 375b(5)(A) and 12 CFR 215.4(d)(1)). If the bank has total deposits of less than $100 million, determine whether:

• Total extensions to insiders do not exceed two times the bank’s unimpaired capital and unimpaired surplus (12 CFR 215.4(d)(2)).

• The board determined the higher limit is consistent with safe and sound banking practices and is necessary to attract or retain directors or prevent restricting credit availability in small communities (12 USC 375b(5)(C) and 12 CFR 215.4(d)(2)(i)(A)).

• The board’s annual resolution sets forth the facts and reasoning of the resolution, including the amount of the bank’s lending to its insiders as a percentage of the bank’s unimpaired capital and unimpaired surplus as of the date of the resolution (12 CFR 215.4(d)(2)(i)(B)).

• The bank meets or exceeds all applicable capital requirements (12 CFR 3, 12 CFR 215.4(d)(2)(i)(C)).

• The bank received at least a satisfactory composite rating on its most recent examination (12 CFR 215.4(d)(2)(i)(D)).

• If the bank subsequently failed to qualify for the higher limit, it did not extend additional credit that would maintain insider lending in excess of 100 percent of unimpaired capital and surplus (12 CFR 215.4(d)(2)(ii)).

• Any exceptions are consistent with the requirements in 12 CFR 215.4(d)(3).

Determine whether the proceeds of any loans to third parties were transferred to, or used for the benefit of, any insider and, if so, whether such transfer or benefit qualifies for an exception to the "tangible, economic benefit" rule. (12 CFR 215.3(f))

With respect to principal shareholders, determine whether any loans were made to members of that shareholder’s "immediate family," as that term is defined in 12 CFR 215.2(g).

Determine whether any executive officer, director, or principal shareholder knowingly received or knowingly permitted any of that person’s related interests to receive from any member bank, directly or indirectly, an extension of credit (as defined in 12 CFR 215.3) not authorized by 12 USC 375a, 375b or Regulation O (12 CFR 215.6).

Determine whether a mortgage or a home equity loan to an executive officer:

• Is to finance or refinance the purchase, construction, maintenance, or improvement of a residence of the executive officer (12 USC 375a(2)(A) and 12 CFR 215.5(c)(2)).

• Is secured by a first lien on the residence the executive officer owns or expects to own after the extension of credit (12 USC 375a(2)(A) and 12 CFR 215.5(c)(2)(i)).

• Is a refinancing and, if so, whether the amount used to repay the original extension of credit, together with closing costs and any other additional amount used, reflect permissible purposes (12 CFR 215.5(c)(2)(ii)).

• Is the only such loan outstanding (12 USC 375a(2)(B)).

Determine whether loans to any executive officer for purposes other than first-lien mortgages or children’s educations, at any one time, do not aggregate to more than $25,000 or 2.5 percent of the bank’s unimpaired capital and unimpaired surplus (limited to $100,000), whichever is greater (12 USC 375a(4) and 12 CFR 31.2(a) and 215.5(c)(4)).

Determine whether exceptions to the limits outlined in 12 CFR 215.4(d)(1) are secured, consistent with 12 CFR 31.2(a) and 12 CFR 215.4(d)(3).

Determine whether extensions of credit to executive officers are:

• Promptly reported to the board of directors (12 USC 375a(1) and 12 CFR 215.5(d)(1)).

• Made on substantially the same terms as, and adhere to credit underwriting practices that are no less stringent than, those prevailing at the time for other persons (12 USC 375a(1)(B) and 12 CFR 215.4(a) and 215.5(d)(2)).

• Preceded by the submission of a detailed current financial statement of the executive officer (12 USC 375a(1)(C) and 12 CFR 215.5(d)(3)).

• Made under the written condition that the extension of credit shall become due and payable on demand at any time that the officer is indebted to any other bank(s) in an aggregate amount greater than the amount specified for a category of credit in section 215.5(c), 12 USC 375a(1)(D) and 12 CFR 215.5(d)(4)).

Determine whether bank records on insider borrowings satisfy the record keeping requirements of 12 CFR 215.8, including:

• Identifying all insiders of the bank and their related interests, annually (12 CFR 215.8(b)(1)).

• Specifying the amount and terms of each extension of credit to insiders of the bank (12 CFR 215.8(b)(2)).

• Maintaining records of extensions of credit to insiders of the bank’s affiliates using one of the methods specified in 12 CFR 215.8(c).

• Employing a record keeping method the OCC determines is effective (12 CFR 215.8(c)(3)).

Determine whether executive officers and principal shareholders have made written reports to the board of directors of their bank on borrowings from other banks (12 USC 375a(6) and 1972(2)(G)(i) and 12 CFR 215.9 and 215.22(a)) in sufficient detail to determine the existence of any quid pro quo arrangements, including:

• Reports, made within 10 days, of indebtedness to other banks in an aggregate amount greater than they could borrow from their own bank (12 CFR 215.9).

• Reports of indebtedness of the executive officer or principal shareholder and their related interests outstanding to each correspondent bank (12 CFR 215.22(b)(2)).

Determine whether the bank’s most recently filed call report included:

• A report of all extensions of credit made by the bank to its executive officers since the previous call report. Coordinate your efforts with the examiners reviewing regulatory reports and loan portfolio management to avoid duplication (12 USC 375a(9) and 12 CFR 215.10)).

• An accurate reporting of extensions of credit to executive officers, directors, principal shareholders and their related interests (12 USC 161 and 1817(a)(3) and 12 CFR 215.10).

Determine whether, upon written request from the public, the bank makes available the names of insiders to whom the bank had extended credit, aggregate extensions of credit, and other required information (12 CFR 215.11(b)).

Determine whether each executive officer and director of a national bank that is not publicly traded reports the outstanding amount of any credit extended to him or her based on the security of shares of the bank, to the board of directors annually (12 CFR 215.12).

Using bank reports and other materials, determine whether all loans by the bank to insiders of its correspondent banks:

• Are on terms no more favorable than those available at the same time to non-insiders for comparable transactions (12 USC 1972(2)).

• Carry no more than the normal risk of failure to repay (12 USC 1972(2)).

• Have no other unfavorable features (12 USC 1972(2)).

Review purchases and sales of securities and other property to or from directors or to a director’s firm and determine whether they are on terms that are no less favorable to the bank than those available to other parties or, alternatively, whether the bank’s board of directors has approved the sale or purchase (12 USC 375).

Review fees paid to insiders and determine whether they have a direct relationship to, and are based solely upon, the fair value of goods and services received and compensate the insider only for providing goods and services that meet the legitimate needs of the bank (and do not place the insider in a conflict of interest relative to his or her duties at the bank).

Review a sample of deposit accounts of executive officers, directors, principal shareholders, and their related interests and identify any:

• Exceptions to standard policies on service charges and interest paid.

• Self-dealing or preferential treatment (12 USC 376).

• Cash items being held by the bank to prevent an overdraft (12 USC 375b(6) and 12 CFR 215.3(b)(2)).

• Overdrafts being paid for executive officers and/or directors on an account at the bank (12 USC 375b(6) and 12 CFR 215.4(e)). For any such overdrafts, determine whether the overdraft:

  • Was in accordance with a written, pre-authorized interest-bearing extension-of-credit plan that specifies a method of repayment (12 USC 375b(6)(B)(i) and 12 CFR 215.4(e)(1)(i)); or

  • Was in accordance with a written, pre-authorized transfer of funds from another account of the account holder at the bank (12 USC 375b(6)(B)(ii) and 12 CFR 215.4(e)(1)(ii)); or

  • Was inadvertent, and aggregated $1,000 or less (12 CFR 215.4(e)(2)). If overdrafts were inadvertent, determine whether the overdraft status continued no more than five business days and the executive officer or director paid the same fee charged any other customer of the bank in similar circumstances (12 CFR 215.4(e)(2)(i) and (ii)).

    Note that in steps 2 through 20, any violation of Regulation O (12 CFR 215) will also be a violation of 12 CFR 31.2(a), Extensions of Credit to Insiders and Transactions with Affiliates.

Determine, through discussion with the examiner assigned insurance, whether directors and officers liability insurance is in effect. If so:

• Determine whether any reviews have been performed of the insider area.

• Determine whether insurance policies include any insider exclusions.

If the bank sells credit life, or accident and health insurance, prepare a description of the program(s), including:

• A list of insiders who are licensed insurance agents.

• Any bonus or incentive compensation programs.

• The disposition of commission payments.

For banks that sell credit life or accident and health insurance, test for compliance with 12 CFR 2. Determine that:

• The bank has not structured its bonus or incentive plan in a manner that could create incentives for persons selling credit life insurance to make inappropriate recommendations or sales of credit life insurance to bank customers (12 CFR 2.3(b)).

• In any bonus or incentive plan for bank employees or officers based on credit life insurance sales (12 CFR 2.4(a)),

  • Payments are in amounts that do not exceed 5 percent of the recipient’s annual salary; or

  • Payments to any one individual during a year do not exceed 5 percent of the average salary of all loan officers participating in the plan.

• Income is not being improperly retained by an employee, officer, director, or principal shareholder, or by an entity in which such persons have more than a 10 percent interest (12 CFR 2.3(c)).

• When an affiliate receives credit life insurance income, the bank is properly reimbursed for the use of its premises, personnel, and goodwill and that reimbursement is equal to at least 20 percent of the affiliate’s net income attributable to the bank’s credit life insurance sales (12 CFR 2.5(b)).

If insiders receive payment of commissions or fees from the bank derived from services they or their related interests provide to bank customers, determine whether:

• The insider is directly or indirectly involved in the approval of a loan or other transaction at the bank for which they are receiving the commission or fees.

• Insiders who receive payment of commissions or fees directly or indirectly related to a loan or other bank transaction in which they have an interest have fully disclosed their interest and abstained from participating in the approval or that transaction.

Determine whether any management official of the bank or its holding company or affiliates of the holding company is also a management official of an unaffiliated depository institution or depository institution holding company and evaluate whether the relationship complies with the Depository Institution Management Interlocks Act (12 USC 3201 and 12 CFR 26).

Determine whether the purchase or sale of assets to insiders and their related interests was reported to the board and the bank obtained an independent appraisal of the asset.

Determine whether the use of bank property by insiders and their related interests was reported to the board, a determination was made as to reasonableness of ownership, tax implications were evaluated, and the bank’s tax accountant was consulted with regard to the use of the property and is in compliance with bank policy.

Determine whether any payments to insiders have been reported to the board and an independent assessment of the value of services have been performed in relation to the bank’s need for them.

Determine whether reimbursement of personal expenses to insiders is of a legitimate nature, is legal, is reasonable, and, when necessary, is reported to the board. Examiners should consider testing vouchers and reimbursable/payable transactions if controls are weak, and should consider tracing loan funds if suspicious loans or activities are identified.