Loans to Insiders Policy FIRST NATIONAL BANK OF THE GULF COAST - POLICY LOANS TO INSIDERS POLICY Board Approved: 10/29/09 Revised: Page 1 of 12
1. DIRECTOR S BRIEFING Regulatory Risk Issue(s) Insider abuse has been a major contributor to the failure of a great number of financial institutions. Without proper and sufficient policies regarding the terms and limits of loans made to insiders, an institution could be vulnerable to potential abuse. Failure to comply with Regulation O, which addresses loans to insiders, could result in civil monetary penalties of up to $1 million per day for every day the violation exists. Major Policy Elements Regulation O defines insiders as directors, executive officers, principal shareholders, and their related interests. The bank is limited in the amount it may lend to any individual insider, as well as in the amount it may lend in aggregate to all insiders. The bank must identify all extensions of credit to insiders and maintain records that specify the amount and terms of each such extension. Other Considerations To assure the board of directors, as well as the bank s regulators, of compliance with the provisions of this policy and Regulation O, certain reporting requirements apply. It is the responsibility of each director, executive officer, and principal shareholder to understand and comply with the requirements set forth. It is the responsibility of the bank to ensure that each insider is aware of the provisions and to maintain and report current and accurate information to the board of directors and the regulators regarding all extensions of credit to insiders. 2. STATEMENT OF NEED AND DEFINITION The board of directors is responsible for ensuring First National Bank of the Gulf Coast s safety and soundness and compliance with all applicable rules and regulations. Protecting the bank from insider abuse is an important and necessary duty of the board. 3. PURPOSE The purpose of this policy is twofold: To ensure that loans provided to all bank directors, executive officers, principal shareholders, and related interests (insiders) are subject to the same credit standards and terms as loans to unrelated parties To comply with all applicable regulatory limits and reporting requirements Page 2 of 12
4. GENERAL OBJECTIVES OF LOANS TO INSIDERS POLICY This policy is established to ensure safe lending practices to insiders. It should clearly and concisely identify all lending limitations regarding terms and amounts to First National Bank of the Gulf Coast s insiders. This policy also identifies all applicable reporting requirements. 5. SPECIFIC GOALS The specific goals of this policy are to: A. Identify who qualifies as an insider subject to the limitations of Regulation O. B. Determine the dollar amounts available to lend to individual insiders. C. Determine the dollar amounts available to lend to insiders in aggregate. D. Establish all applicable reporting requirements. 6. POLICY ELEMENTS Authority The board of directors is ultimately responsible for establishing specific policies to address the activities of insiders of First National Bank of the Gulf Coast. The authority to implement policy and related procedures has been assigned to the senior executive credit officer. Any policy action taken regarding loans to insiders will ultimately be reviewed and acted upon by the entire board of directors, after considering the facts, the regulatory implications, and any other related issues. Senior management, acting upon the delegated authority of the board, must ensure that all loans to directors, officers, principal shareholders, and related interests are subject to the same credit standards and terms as loans to unrelated parties. Risk Management In addressing insider s loans, the board of directors and senior management must be aware of the potential risks that arise from insider lending, regulatory violations, and subsequent market reaction. In establishing a Loan to Insiders Policy, the board has evaluated various related risks. These risks and their related management techniques include: Transaction risk. Ensuring that the transaction is properly documented, properly recorded, and appropriately expensed. Compliance risk. Maintaining legal and regulatory compliance as well as compliance with the organization s Loan Policy. Reputation risk. Developing or retaining market place confidence in handling customers financial transactions in an appropriate manner as well as protecting the safety and soundness of the institution. Definitions Regulation O governs extensions of credit to a financial institution s directors, executive officers, principal shareholders, and related interests. It is the policy of First National Bank of the Gulf Coast to monitor all loans made to insiders as defined by Regulation O. Page 3 of 12
Insider Insider means an executive officer, director, or principal shareholder of First National Bank of the Gulf Coast, and includes any related interest of such a person. Directors The following are considered directors of First National Bank of the Gulf Coast for purposes of this policy and Regulation O: Director of First National Bank of the Gulf Coast Director of a subsidiary of First National Bank of the Gulf Coast An advisory director is not considered to be a director if he or she: Is not elected by the shareholders of either the bank or a company controlling the bank. Is not an authorized voting member of the board. Serves only to provide general policy advice to the board. All of First National Bank of the Gulf Coast s directors are subject to the limitations of this policy. Executive Officers Executive officers are defined as all persons authorized to perform major policy making functions. For purposes of this policy, the following persons are considered executive officers of First National Bank of the Gulf Coast: The chairman of the board, the president, all the vice-presidents, the executive secretary, the cashier, and the treasurer are considered First National Bank of the Gulf Coast s executive officers. Annually the board of First National Bank of the Gulf Coast and the boards of its affiliate or holding company will adopt a resolution prohibiting certain executive officers of these entities from performing major policy making functions of the bank or holding company. When an exclusionary resolution is passed regarding one or more of the executive officers named above, those individuals would be exempt from the reporting requirements of Regulation O for the calendar year after the resolution is adopted. Lending Limit. The lending limit is an amount equal to the limit of loans to a single borrower. This amount is 15 percent of the bank's unimpaired capital and unimpaired surplus in the case of loans that are not fully secured, and an additional 10 percent of the bank's unimpaired capital and unimpaired surplus in the case of loans that are fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations, at least equal to the amount of the loan. The lending limit also includes any higher amounts that are permitted by section 5200 of the Revised Statutes for the types of obligations listed therein as exceptions to the limit. A member bank's unimpaired capital and unimpaired surplus equals: (1) The bank's Tier 1 and Tier 2 capital included in the bank's risk-based capital under the capital guidelines of the Comptroller of the Currency, based on the bank's most recent consolidated report of condition; and (2) The balance of the bank's allowance for loan and lease losses not included in the bank's Tier 2 capital for purposes of the calculation of risk-based capital by the Comptroller of the Currency, based on the bank's most recent consolidated report of condition. Page 4 of 12
Principal Shareholders A principal shareholder is defined as anyone who directly or indirectly owns, controls, or has the power to vote 10 percent or more of the outstanding shares of any class of voting stock of First National Bank of the Gulf Coast. The following are considered principal shareholders of First National Bank of the Gulf Coast for purposes of this policy: Principal shareholder of First National Bank of the Gulf Coast, Principal shareholder of any subsidiary of First National Bank of the Gulf Coast Related Interest Any related interest of the individuals or companies defined in this policy as directors, executive officers, and principal shareholders is also subject to this policy. A related interest is defined as: Company that is controlled by that person Political campaign that is controlled by that person, or the funds or services of which will benefit that person Definition of Extension of Credit An extension of credit, for purposes of this policy and compliance with Regulation O, includes any making or renewing of a loan or any granting of a line of credit. Other practices considered extensions of credit include: Purchases under repurchase agreements of securities, other assets, or obligations Advances of cash, including overdrafts Standby letters of credit Credit Cards Acquisitions of any notes, drafts, bills of exchange, or other indebtedness (by discount, purchase, exchange, or any other means) on which an insider may be liable as maker, drawer, endorser, guarantor, or surety Discounts of promissory notes, bills of exchange, conditional sales contracts, or similar paper, with recourse Increases of existing indebtedness, with the exception of funds advanced by the bank for its own protection for accrued interest, taxes, insurance, or other expenses incidental to the existing indebtedness Advances of unearned salary or other unearned compensation for a period of more than 30 days Any other similar transactions that obligate an insider to pay money (or its equivalent) to the bank Insider credit card debt up to $15,000 is exempt from the definition of extension of credit. The credit must be granted on market terms and without prior individual approval (except to determine eligibility and compliance with the credit limit). Tangible Economic Benefit Rule When the proceeds of an extension of credit are transferred to an insider or used for the tangible economic benefit of an insider, the credit is considered an extension of credit to the insider subject to insider lending limits. Page 5 of 12
However, if the credit is extended on an arm s-length basis and the proceeds of the credit are used to finance the bona fide acquisition of property, goods, or services from an insider or an insider s related interest, the credit is not considered an insider loan and is not subject to the insider lending limits. Prior Approval Any extension of credit must be approved in advance by a majority vote of First National Bank of the Gulf Coast s entire board of directors to any insider defined in this policy if the aggregate of all extensions of credit to that insider and his or her related interests exceeds $25,000 or 5 percent of the bank s unimpaired capital and surplus, whichever is greater. The interested party must not participate either directly or indirectly in the voting on such an extension of credit. Prior approval of the board of directors is not required for an extension of credit made pursuant to a line of credit that was approved within 14 months of the date of the extension. Prior approval is required, however, for all extensions of credit to any insider if the aggregate of all other extensions to that person and related interests exceeds $500,000, regardless of its percentage of capital. Terms and Conditions Any and all loans to the insiders defined in this policy must be made on substantially the same terms, including interest rates and collateral, as a loan made to an unrelated party. Loans to insiders must also be subject to the same credit underwriting procedures as comparable transactions made between First National Bank of the Gulf Coast and persons not subject to Regulation O and who are not employed by First National Bank of the Gulf Coast. Overdrafts First National Bank of the Gulf Coast may not pay any overdrafts of an insider s account unless payment is made in accordance with either of the following: Written, preauthorized interest-bearing extension of credit plan that specifies a method of repayment Written, preauthorized transfer of funds from another account of the accountholder at the bank The payment of inadvertent overdrafts of $1,000 or less is permitted if the account is not overdrawn more than five days and commensurate fees are charged on the overdraft. Individual Lending Limits The aggregate of all loans made by First National Bank of the Gulf Coast to any insider and his or her related interests may not exceed the following limits: Fifteen percent of First National Bank of the Gulf Coast s unimpaired capital and unimpaired surplus, for loans that are not fully secured An additional 10 percent of First National Bank of the Gulf Coast s unimpaired capital and unimpaired surplus for loans that are fully secured by readily marketable collateral having a market value at least equal to the amount of the loan Limits on Loans to Executive Officers First National Bank of the Gulf Coast may lend to executive officers as follows: Any loan amount used to finance the education of an executive officer s child Page 6 of 12
Any amount to finance or refinance the purchase, construction, maintenance, or improvement of the officer s residence, if secured by a first lien on the residence. Any amount if the loan is secured by U.S. government obligations, unconditional take-out commitments or guarantees of any U.S. government agency, or segregated deposits in the bank For any other purpose, amounts up to the higher of 2.5 percent of the bank s capital and unimpaired surplus or $25,000, but not to exceed $100,000 Before approving any loan to an executive officer of First National Bank of the Gulf Coast, the bank must secure a recent personal financial statement from the applicant. Must place a provision in the loan documents that the loan is payable on demand if the executive officer becomes indebted to any other bank or banks in an aggregate amount greater than the amount the officer could borrow from his or her own bank under Regulation O These limits also apply to loans to partnerships where one or more executive officers are partners who, either separately or together, hold at least a majority interest in the partnership. Aggregate Lending Limit Attachment B depicts a sample worksheet for recording loans to executive officers. First National Bank of the Gulf Coast may not extend credit to any insider and their related interests unless the extension of credit is in an amount that, when aggregated with the amount of all outstanding extensions of credit by the bank, does not exceed the bank's unimpaired capital and unimpaired surplus as defined above. There are four exceptions to this limit, which apply to certain categories of loans that pose a minimal risk of loss to a bank, due to the manner in which they are collateralized: Extensions of credit secured by obligations of the United States or other obligations fully guaranteed as to principal and interest by the United States Extensions of credit to or secured by unconditional takeout commitments or guarantees of a department or agency of the United States Extensions of credit secured by a perfected security interest in a segregated deposit account with the lending bank Extensions of credit arising from the discount of negotiable or nonnegotiable consumer installment paper acquired from an insider and carrying a full or partial recourse endorsement or guarantee by the insider, provided: The financial condition of each maker of the consumer paper is documented in the bank s files or known to its officers. An officer of the bank certifies that the bank is relying primarily on the responsibility of each maker for payment of the obligation and not on any endorsement or guarantee by the insider. The maker of the instrument is not an insider. Although loans in these four categories are exempt from the bank s aggregate lending limit, they remain subject to the general prohibitions of Regulation O as discussed in this policy. See Attachment C for a sample worksheet for recording aggregate loans to insiders. Page 7 of 12
Reporting Requirements Responsibilities of the Regulation O Officer The Regulation O Officer will maintain records that specify the amounts and terms of all extensions of credit to insiders of First National Bank of the Gulf Coast. Executive officers who receive extensions of credit from banks other than their own in amounts greater than could be borrowed from their own bank under Regulation O must file a written report to the board of directors within 10 days of obtaining the credit and must include the amount of the credit, collateral, name of lender, date and purpose of loan Inasmuch as the shares of First National Bank of the Gulf Coast are not publicly traded, each officer and director must report annually to the board of directors the outstanding amount of loans that are secured by shares of First National Bank of the Gulf Coast or its holding company. The Regulation O Officer will maintain a written list of all of First National Bank of the Gulf Coast s directors, executive officers, principal shareholders, and related interests. This list will be updated at least annually and distributed to lending personnel. The Regulation O Officer will retain information regarding the insiders of First National Bank of the Gulf Coast s affiliates, using the borrower inquiry method. As part of each extension of credit made by First National Bank of the Gulf Coast, the borrower will be requested to indicate whether he or she is an insider of an affiliate of First National Bank of the Gulf Coast. The Regulation O Officer will maintain records that specify the amounts and terms of all extensions of credit to insiders of First National Bank of the Gulf Coast s affiliates identified through the borrower inquiry method. On written request from the public, the Regulation O Officer will provide the names of all executive officers and principal shareholders who received loans (either personally or through a related interest) that in aggregate equaled or exceeded the lesser of 5 percent of First National Bank of the Gulf Coast s unimpaired capital and surplus or $500,000. This disclosure will not identify specific amounts of individual extensions of credit. The Regulation O Officer will maintain a record of all such public requests and his or her response to such requests. These records will be maintained for two years from the date of the request. The Regulation O Officer will request, through an annual survey, a written report from each director, executive officer, and principal shareholder, identifying his or her related interests as defined in this policy. A summary of policy elements and considerations related to Regulation O appears on the policy implementation information worksheet in Appendix A. 7. MANAGEMENT ASSESSMENT Management will annually assess First National Bank of the Gulf Coast s compliance with insider lending laws and any additional limitations set forth in regulatory supervisory agreements, orders, or resolutions. The internal audit staff will annually perform an independent review of management s assessment and will review the following documents to verify the assessment: Minutes of the board of directors meetings Examination reports Supervisory agreements, orders, or resolutions Page 8 of 12
Public documents filed under the Securities Exchange Commission Act of 1934 with First National Bank of the Gulf Coast s primary regulator Annual reports filed by insiders Management s calculation of the greater of 5 percent of year-end capital and unimpaired surplus or $25,000 First National Bank of the Gulf Coast s policy and procedures regarding insider lending First National Bank of the Gulf Coast s list of insiders and their transactions reported on or before January 31st, annually Written overdraft history of each of First National Bank of the Gulf Coast s insiders First National Bank of the Gulf Coast s internal audit staff will follow the procedures set forth in 12 CFR 215, Regulation O. 8. TRAINING Each director, executive officer, and principal shareholder will be provided with a copy of this policy and Regulation O. The compliance officer will counsel each of these insiders regarding the limitations set forth therein, the reporting responsibilities of insiders, and the disclosure requirements of the bank. Each First National Bank of the Gulf Coast employee involved with extending credit will be provided with a copy of this policy and Regulation O. These employees, under the direction of the compliance officer, will attend annual training seminars regarding the limitations set forth in this policy. Each newly hired employee whose work will involve extending credit will be provided with a copy of this policy and Regulation O. They will also be counseled on the limitations of this policy and will attend the next scheduled training seminar. Page 9 of 12
Attachment A Loans to Executive Officers Name: Position: Director Principal Shareholder As of: Date Amount Purpose Security S/U* $40,000 Personal S $15,000 Education U Prior Board Approval Comments $100,000 Business U Related interest 100% owned by director Total $155,000 Borrowing Summary: Unsecured $115,000 Secured $40,000 Total $155,000 Borrowing Limit Calculation: $2,000,000 Total unimpaired capital and surplus as of xx/xx/xx $300,000 Individual unsecured limit (15% of $2,000,000) $500,000 Total individual limit (individual unsecured limit plus 5 of capital) * S secured, U unsecured Page 10 of 12
Attachment B Loans to Insiders Name: Position: Executive Officer As of: Date Amount Purpose Security S/U/E* $10,000 Personal S $15,000 Education E Total $25,000 Borrowing Summary: Unsecured $0 Secured $10,000 Total $155,000 Borrowing Limit Calculation: $2,000,000 Total unimpaired capital and surplus as of xx/xx/xx $50,000 Individual unsecured limit (2.5% of $2,000,000) $50,000 Total individual limit (2.5% of $2,000,000) $500,000 Total exempt limit (secured) Prior Board Approval Comments * S secured, U unsecured Page 11 of 12
Attachment C Loans to Insiders Aggregate As of: Insider Class* Total Loans Total Exceptions Net Total B. Jones D $120,000 $ 0 $120,000 C. Smith EO $ 25,000 $ 5,000 $ 20,000 D. Green PS $175,000 $10,000 $165,000 Total $320,000 $15,000 $305,000 Borrowing Limit Calculation: $2,000,000 Total unimpaired capital and surplus as of xx/xx/xx $2,000,000 Aggregate lending limit to all insiders * D director, EO executive officer, PS principal shareholder Page 12 of 12