Trust Examiner School eBook

Trust Examiner School

September 24-October 3, 2024 Live Virtual

@ www.csbs.org ♦ @csbsnews

CONFERENCE OF STATE BANK SUPERVISORS 1300 I Street NW / Suite 700 / Washington, DC 20005 / (202) 296-2840

September 24-October 3, 2024 Trust Examiner School Live Virtual

ATTENDEES Arkansas State Bank Department Shewmaker, Kelly

kshewmaker@banking.state.ar.us

Delaware Office of the State Bank Commissioner Lewsader, Anna

anna.lewsader@delaware.gov erik.wellings@delaware.gov jeremy.wilkinson@delaware.gov vincent.picano@delaware.gov

Wellings, Erik

Wilkinson, Jeremy Picano, Vincent

Illinois Department of Financial & Professional Regulation Shadid, Gary

gary.shadid@illinois.gov

Indiana Department of Financial Institutions Delaney, Matthew Kansas Office of the State Bank Commissioner Banion, Tyler

mdelaney@dfi.in.gov

tyler.banion@osbckansas.org

Missouri Division of Finance Beckman, Amy

amy.beckman@dof.mo.gov blake.holliday@dof.mo.gov

Holliday, Blake

New Hampshire State Banking Department Andrews, Alexander

alexander.r.andrews@banking.nh.gov kathleen.s.freire@banking.nh.gov kerri.a.gentz@banking.nh.gov nicole.g.brunini@banking.nh.gov

Freire, Kathleen Gentz, Kerri Brunini, Nicole

New Jersey Department of Banking and Insurance Bhalla, Sucreet

sucreet.bhalla@dobi.nj.gov zachary.collins@dobi.nj.gov

Collins, Zachary

New Mexico Financial Institutions Division Rockett, Randall

randall.rockett@rld.nm.gov

New York State Department of Financial Services Rabayev, Anzhelika

anzhelika.rabayev@dfs.ny.gov augustine.onunaku@dfs.ny.gov eric.brennan@dfs.ny.gov ethan.fleming@dfs.ny.gov ibrar.ahmed@dfs.ny.gov john.duffy@dfs.ny.gov kaitlyn.benson@dfs.ny.gov

Onunaku, Augustine

Brennan, Eric Fleming, Ethan Ahmed, Ibrar

Duffy, John

Benson, Kaitlyn

Lambert, Loreen Anderson, Melvin

loreen.lambert@dfs.ny.gov melvin.anderson@dfs.ny.gov

Im, Nam

nam.im@dfs.ny.gov steven.hall@dfs.ny.gov

Hall, Steven

Oregon Division of Financial Regulation Pond, Sallee

sallee.t.pond@dcbs.oregon.gov

Wisconsin Department of Financial Institutions Hendricks, Wes

westley.hendricks@dfi.wisconsin.gov

INSTRUCTORS Alabama State Banking Department Scott, Andre

andre.scott@banking.alabama.gov

Indiana Department of Financial Institutions Schreiber, Kirk

kschreiber@dfi.in.gov

Michigan Department of Insurance & Financial Services Ohland, Bruce

OhlandB@michigan.gov

CSBS STAFF Richardson, Amy Romano, Chris

arichardson@csbs.org cromano@csbs.org

Trust Examiner School Live Virtual September 24 – October 3, 2024

Tuesday, September 24, 2024

Introduction & Pre-Course Review

1:00 pm – 2:30 pm 2:30 pm – 2:45 pm 2:45 pm – 4:00 pm

Break

Introduction (continued)

Wednesday, September 25, 2024 Prior Day Review

1:00 pm – 1:10 pm 1:10 pm – 2:30 pm 2:30 pm – 2:45 pm 2:45 pm – 3:15 pm 3:15 pm – 4:00 pm 1:00 pm – 1:10 pm 1:10 pm – 2:30 pm 2:30 pm – 2:45 pm 2:45 pm – 4:00 pm 1:00 pm – 1:45 pm 1:45 pm – 2:30 pm 2:30 pm – 2:45 pm 2:45 pm – 4:00 pm 1:00 pm – 1:30 pm 1:30 pm – 2:30 pm 2:30 pm – 2:45 pm 2:45 pm – 3:30 pm 3:30 pm – 4:00 pm 1:00 pm – 1:10 pm 1:10 pm – 2:30 pm 2:30 pm – 2:45 pm 2:45 pm – 3:45 pm 3:45 pm – 4:00 pm

Supervision & Organization

Break

Supervision & Organization Account Administration

Thursday, September 26, 2024 Prior Day Review

Account Administration

Break

Account Administration

Tuesday, October 1, 2024

Account Administration Exercise

Asset Management

Break

Asset Management

Wednesday, October 2, 2024 Asset Management

Operations, Internal Controls & Audit

Break

Operations, Internal Controls & Audit Exercise

Conflicts of Interest

Thursday, October 3, 2024 Prior Day Review

Conflicts of Interest

Break

Earnings

Final Assessment & Wrap Up

Internal Use Only

Trust Examiner School September 24 – October 3, 2024

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Zoom Features

Internal Use Only

Schedule Week 1

September 24: 1:00 PM – 4:00 PM ET September 25: 1:00 PM – 4:00 PM ET September 26: 1:00 PM – 4:00 PM ET Week 2 October 1: 1:00 PM – 4:00 PM ET October 2: 1:00 PM – 4:00 PM ET October 3: 1:00 PM – 4:00 PM ET

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Attendance Policy In order to receive a certificate of completion for a CSBS virtual training, an attendee may not miss more than 1 hour throughout the duration of the training. Attendees must also participate in all training activities to receive the credit hours (CEHs) and certificate including:

1. Student Exercises 2. Final Assessment

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Introductions

NAME

STATE AGENCY

YEARS OF EXAMINATION EXPERIENCE & WITH TRUST

FUN FACT ABOUT YOU

SOMETHING YOU HOPE TO LEARN DURING THIS CLASS

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Instructor Contact Information

Kirk Schreiber

Senior Depository Analyst Indiana Department of Financial Institutions kschreiber@dfi.in.gov

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Instructor Contact Information

Bank Examinations Supervisor Alabama State Banking Department Andre.Scott@banking.alabama.gov Andre Scott

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Instructor Contact Information

Trust Activities Regional Supervisor Michigan Department of Insurance & Financial Services OhlandB@michigan.gov Bruce Ohland

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Session Learning Objectives: 1. Review Day One: Trust Examiner Training 2. Understand the role of pre-exam planning in risk scoping an exam 3. Discuss agency and/or joint exam approaches to pre-notification package

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Session Learning Objectives: 4. Understand Trust Department and Trust Company structures Companies have additional rating components 6. Understand who regulates trusts 5. Recognize Trust

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Session Learning Objectives: 7. Understand the Uniform Interagency Trust Rating System (UITRS) and other rating systems 8. Apply concepts to exam scenario exercises

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Introduction Review Day One: Trust Examiner Training

Trust Pre-Examination Planning

Trust Department VS Trust Company

Ratings

Internal Use Only

Go to www.kahoot.it

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Introduction Overview of Day One: Trust Examiner Training

Trust Pre-Examination Planning

Trust Department VS Trust Company

Ratings

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Trust Pre-Examination Planning

Prior Issues

Prior Exam & Workpapers

Call Reports & Financials

Financial Condition

Off-Site Review

Requested Information

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Trust Pre-Examination Planning

Familiarize Yourself with the Trust Department/Company • Internal and external documents • Conversations with examiners and management

Identify Key Risk Areas • Draw conclusions on risks, examination

Initial Contact with Management • Introduction • Sooner rather than later

strategy, and assignments

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Trust Pre-Examination Planning

Requesting Examination Information • Draw conclusions about risks, examination strategy, and assignments

Creation of Scope Memo • Varies by department • At a minimum, should cover • Institutional overview • Risk assessment • Discussions with Management • Prior examination findings • Financial analysis • Assignments/logistics

Determine Staffing

• Subject matter experts • Sufficient to complete a timely examination

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Pre-Notification Package

Also called: • Entrance Letter • First Day Letter • Request List

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Off-Site Review of Workpapers

• Prior examination issues • Any enforcement actions • Logistics • Information from the confidential pages

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Introduction Overview of Day One: Trust Examiner Training

Trust Pre-Examination Planning

Trust Department vs. Trust Company

Ratings

Internal Use Only

What is a Trust Company? • Stand-alone

• CAMELS ratings may be assigned • Earnings component is standardized • Regulators: • If nationally chartered, OCC • If state chartered • State & FRB if bank in org chart • State only if not

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What is a Trust Department? • Part of a bank

• Not assigned CAMELS ratings • Earnings component based on size • Regulators: • If nationally chartered, OCC • If state chartered, State & Federal agencies (FDIC, FRB)

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Trust Company •Term can be misleading •Use of “trust” in name •Can only rely on the errors & omissions insurance coverage

Trust Department •Errors & omissions insurance coverage; and •Backing of bank/bank holding company

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Trust Company

Deposits • State-chartered cannot accept, generally • Limitation distinguishes from banks • Separate charters

OCC • Charters &

Historically

• Held &

regulates limited purpose national trust banks • Fiduciary powers in all states

safeguarded client assets

• Form & act as trustee for common trust

funds & collective investment trusts

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TRUST DEPARTMENT

TRUST COMPANY

TRUST DEPARTMENT VS. TRUST COMPANY

Division of a bank

Yes

No

Typically, state and Federal agencies

Usually, state or Federal agency In accordance with either state or Federal statutes

Regulator

Examination schedule

Generally, in accordance with both state and Federal statutes

Yes Examinations subject to agency rotation No Accepts deposits and makes loans

No

Only under special circumstances

Capital requirement

Usually none

Based on state or Federal agency statutory requirements

Separate regulatory assessment

Usually none

Yes

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Introduction Overview of Day One: Trust Examiner Training

Trust Pre-Examination Planning

Trust Department VS Trust Company

Ratings

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Trust Rating System

• Uniform Interagency Trust Rating System (UITRS) • Five components of an institution’s fiduciary activities to be evaluated • An overall Composite rating considers each component

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Trust Rating Components

1. Management 2. Operations, Internal Controls & Audit 3. Earnings 4. Compliance 5. Asset Management

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Trust Rating Scale

• Scale from 1 to 5 • 1 is the best rating available • Ratings are distinguished by key words or phrases

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Rating the Component: Management • Capability of Board & management

• Level & quality of oversight • Risk monitoring systems • Responsiveness • Experience & competence

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Rating the Component: Operations, Internal Controls & Audit • Adequacy of systems & internal controls • Reconciliation processes • Independence, frequency, quality & scope of audit

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Rating the Component: Earnings • Profitability • Budgets • Rating only required when total trust assets are over $100 million or if non depository trust company

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Rating the Component: Compliance • Overall compliance with: • Laws • Regulations • Standards of conduct • Governing instruments • Policies & procedures • Evaluation of self-dealing & conflicts of interest

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Rating the Component: Asset Management • Risks associated with managing assets

• Portfolio management • Evaluation of processes • Committee review & approval • Periodic reviews of investment performance

Internal Use Only

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Resources • FDIC Trust Examination Manual https://www.fdic.gov/regulations/examinations/trustmanual/index.html

• UITRS Update Letter – 10/7/1998 https://www.fdic.gov/news/inactive-financial-institution-letters/1998/fil98115.html

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Exercise

Internal Use Only

Supervision & Organization

Internal Use Only

Session Learning Objectives: 1. Understand the role of the Statement of Principles 2. Discuss evaluation of staffing and organization 3. Provide examples of areas to review related to Board oversight

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Session Learning Objectives: 4. Understand the role of the Trust Committee 5. Discuss the role of policies and procedures 6. Apply concepts to exam scenario exercises

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Statement of Principles of Trust Department Management

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Statement of Principles of Trust Department Management

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Statement of Principles of Trust Department Management

Designate Officer

Trust Committee

Legal Counsel

Policies

Internal Controls

Examination Reports

Audit

Reports

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Statement of Principles of Trust Department Management

Designate Officer

• Qualified & competent • Define officer’s duties

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Statement of Principles of Trust Department Management

Trust Committee

• At least 3 directors • One or more who are not active officers of bank

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Statement of Principles of Trust Department Management

• Comprehensive written policies

Policies

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Statement of Principles of Trust Department Management

• Competent • Advise trust officers & trust committee

Legal Counsel

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Statement of Principles of Trust Department Management

Internal Controls

• Adequate internal controls • Controls over trust assets

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Statement of Principles of Trust Department Management

• Adequate audit • Minutes record the findings

Audit

Internal Use Only

Statement of Principles of Trust Department Management

• Receive reports • Record actions taken in minutes

Reports

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Statement of Principles of Trust Department Management

Examination Reports

• Review reports • Record actions taken in minutes

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Staffing & Organization

Internal Use Only

Board Duties

• Trust Committee • Overall responsibility

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Committee Duties

• At least 3 directors • Items to note when reviewing minutes

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Management

• Key roles • Questions to consider

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Policies & Procedures

• Trust Committee • Overall responsibility

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Staffing & Organization

• Evaluate adequacy • Indicators of weaknesses

Internal Use Only

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Resources • Statement of Principles of Trust Department Management https://www.fdic.gov/bank-examinations/section-1-management#bstate

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Key Takeaways The Statement of Principles of Trust Department Management (Statement of Principles) outlines the minimum requirements for sound practices in the supervision and operation of a trust department or Non-Depository Trust Company.

The adequacy of departmental staffing and organization can be evaluated during the examination by observation and interviewing of staff.

The Board has overall responsibility for the trust department/company.

The Trust Committee should consist of a least three directors, at least one of whom should not be an officer of the bank

Internal Use Only

Account Administration

Internal Use Only

Session Learning Objectives: 1. Discuss types of accounts 2. Discuss custodian responsibilities 3. Discuss ERISA and employee benefit accounts

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Session Learning Objectives: 4. Discuss self-directed IRAs 5. Understand special need trusts 6. Discuss stale estates

Internal Use Only

Session Learning Objectives: 7. Understand the differences between discretionary and non discretionary investment authority 8. Discuss unique and hard to-value assets

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Session Learning Objectives: 9. Understand the nuances of co-fiduciary accounts 10. Review compliance and related issues 11. Discuss guidelines for selecting accounts for review

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Session Learning Objectives: 12. Discuss account review line sheet procedures, best practices, and common issues 13. Apply concepts to an examination scenario

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Discussion Topics

Account Line Sheets

Selection of Accounts

Discretionary / Non Discretionary

Types of Accounts

File Review

Custodian ERISA

Internal Use Only

Discussion Topics

Unique & Hard-to Value Assets

Self Directed IRAs

Special Needs Trust

Co Fiduciary Accounts

Stale Estates

Compliance

Internal Use Only

Types of Accounts

Court Appointed

Charitable Trusts

Personal Trusts

Corporate Trusts

SNTs

ILITS

Internal Use Only

Types of Accounts

Investment Management

Agencies

Estates

Employee Benefits

ESOPs

IRAs

Internal Use Only

Custodian Responsibilities Custody Account: An agency account concerning which the main duties of the custodian (agent) are to keep safe and preserve the property and to perform ministerial acts with respect to the property as directed by the principal. The agent has no investment or managerial responsibilities. To be distinguished from managing agency account and safekeeping account. Agent: A person who acts for another person by the latter's authority. The distinguishing characteristics of an agent are (1) that he acts on behalf and subject to the control of his principal, (2) that he does not have title to the property of his principal, and (3) that he owes the duty of obedience to his principal's orders. https://www.fdic.gov/regulations/examinations/trustmanual/appendix_h/appendix_h.html

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Custodian Responsibilities

Safekeeping

Annual reconciliation of holdings

Statements provided to appropriate parties

Internal Use Only

ERISA/Employee Benefit Accounts

ERISA: An acronym for the Employee Retirement Income Security Act of 1974 which set up federal minimum standards for employee benefit plans, including standards regulating the conduct of plan fiduciaries and trustees. The Act also established an insurance program designed to guarantee workers receipt of pension benefits if their defined benefit pension plan should terminate.

https://www.fdic.gov/regulations/examinations/trustmanual/appendix_h/appendix_h.html

Internal Use Only

ERISA/Employee Benefit Accounts

https://www.fdic.gov/regulations/examinations/trustmanual/section_5/section_v.html

Internal Use Only

ERISA/Employee Benefit Accounts Conformance with ERISA

Plan document: •What type is it? •What is trust company/department’s role? •Original plan date •Has there been a restatement of the plan?

Internal Use Only

ERISA/Employee Benefit Accounts Important to look at: •Participant loans •Employer securities or real property •IRS favorable determination letters •Summary plan description •Form 5500 •Pension Benefit Guarantee Corporation (PBGC) filing •Prohibited transactions

Internal Use Only

Self-Directed IRAs Regional Director Memorandum 98-058 June 23, 1998

Three minimum disclosures: • Not insured by the FDIC

• Not a deposit or obligation of, or guaranteed by, the institution • Subject to investment risks, including possible loss of principal

Internal Use Only

• If the accounts are not trust accounts, they should be reviewed as part of the Nondeposit Products under the above RD Memo Self-Directed IRAs Regional Director Memorandum 01-035 September 5, 2001

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Self-Directed IRAs – Exam Concerns Account Documentation

Assets & Asset Valuations

Accounting Records

Internal Use Only

Self-Directed IRAs – Exam Concerns Investment Advice

Illegal Investments

Recordkeeping

Internal Use Only

Self-Directed IRAs – Exam Concerns Audit/Independent Review

Insurance

Internal Use Only

Special Needs Trust • A legal arrangement that provides access to funding for someone who is physically or mentally disabled or chronically ill • To help pay for expenses such as education, housing, transportation, and health care not covered by insurance • Are irrevocable and created by a grantor typically who is the parent or guardian

Internal Use Only

Special Needs Trust • Account investments and earnings will not disqualify the individual’s eligibility for the public assistance disability benefit such as SS and Medicaid • Accounts are FDIC insured up to $250,000

Internal Use Only

Special Needs Trust Review:

• Governing document • Any court orders • Policies & procedures • Volume of accounts • Distributions

Internal Use Only

Stale Estates

18 months or older

Court accounting records

Officer’s Questionnaire

Internal Use Only

Discretionary/Non-Discretionary

Definitions: •Discretionary - fiduciary makes investment decisions at their discretion for a clients account without the client’s consent for each trade •Non-Discretionary - investment decisions are directed by the client before the transaction takes place

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Discretionary/Non-Discretionary

Discretionary: •Appropriate investment reviews required •Include more in account review sample •Distribution approvals •Investments within stated objectives

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Discretionary/Non-Discretionary

Non-Discretionary: •Annual investment reviews not required •Include a few in account review sample

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Unique & Hard-to-Value Assets

Policies & Procedures Evaluations – timing & frequency Letters of Retention Assets booked & valued

Internal Use Only

Unique & Hard-to-Value Assets

Consistency Safekeeping Secure & inventoried Insurance

Internal Use Only

Co-Fiduciary Accounts

Shared administration of an account with another fiduciary

Guardian of the Person

Family interests

Corporate fiduciary

Internal Use Only

Co-Fiduciary Accounts

Act in unison

Reasonable care

Responsibilities

Standards of care

Internal Use Only

Co-Fiduciary Accounts

Documentation is key

Physical control of account assets

Joint responsibility for administration

Disinterested or uncooperative co-fiduciary

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Co-Fiduciary Accounts Review:

• Governing document or court appointed • Proper approvals for all activity • Loan activity

Internal Use Only

Compliance In reviewing and rating the Compliance component, the following factors should be considered… • Compliance with laws & regulations, including BSA/AML • Compliance with terms of governing document(s) • Adequacy of account administration policies & procedures • Effectiveness of policies & controls to identify actual or potential conflicts of interest • Decision making process to accept, review, and terminate accounts

Internal Use Only

Guidelines for Selection of Accounts Non-Approved Assets High Cash Balances Asset Concentrations Recently Opened or Closed Prior Exam Issues

Internal Use Only

Guidelines for Selection of Accounts Variety of Each Capacity Trustee & Co Trustee Agent, Custodian, etc. Riskier Account Types Accounts with Unique Assets

Internal Use Only

Account Line Sheets

Approach varies •Regulatory Agency •Account type

Internal Use Only

Account Line Sheets

Information on the line sheet •Confirms what is on synoptic record • Examples: • Date & type of governing document • Investment objective • Dates of annual reviews • Asset allocation • Discretionary distributions

Internal Use Only

Account Line Sheets

Issues at prior exams •Review at current exam to determine if corrected

Internal Use Only

Account Line Sheets

Investment authority •Is the trust company/department managing the investments? •Is an external company involved?

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Account Review Procedures & Best Practices Start with synoptic record

Review statement preparation

Verify fee calculations

Court documentation

Internal Use Only

Account Review Procedures & Best Practices Account holdings as of review date

Account activity since prior exam

Partner with experienced trust examiner

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Account Review – Common Issues Investments not within stated objective

Annual reviews

Account opening information

Internal Use Only

Account Review – Common Issues

Non-compliance with governing document

Written direction

Internal Use Only

Key Personal Trust Documents Walk-Through • Synoptic Record • Trust Agreement • Investment Policy Statement

Internal Use Only

Personal Trust Line Sheet Exercise • Instructions • Independent work

• Breakout group • Class discussion

Internal Use Only

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Resources • FDIC: Compliance/Account Administration - Personal and Charitable Accounts https://www.fdic.gov/bank-examinations/section-4-complianceaccount-administration-personal-and charitable-accounts • FDIC: Compliance/Account Administration – Employee Benefit Accounts https://www.fdic.gov/bank-examinations/section-5-complianceaccount-administration-employee benefit-accounts

Internal Use Only

Resources • FDIC: Account Administration – Corporate Trust Accounts https://www.fdic.gov/bank-examinations/section-6-account-administration-corporate-trust-accounts • FDIC: Compliance – Pooled Investment Vehicles https://www.fdic.gov/bank-examinations/section-7-compliance-pooled-investment-vehicles

Internal Use Only

Resources • FDIC: ERISA – Prohibited Transactions https://www.fdic.gov/bank-examinations/appendix-e-employee-benefit-law#h2sec406 • Department of Labor – ERISA Advisory Opinions https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/advisory-opinions • OCC Handbook – Unique and Hard-to-Value Assets https://www.occ.treas.gov/publications-and-resources/publications/comptrollers handbook/files/unique-hard-to-value-assets/index-unique-hard-to-value-assets.html

Internal Use Only

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Key Takeaways

There is great variation in types of trust accounts. Examples include court appointed, personal, charitable, and corporate trusts as well as estates, employee benefits, and IRAs. Custodian responsibilities focus on safekeeping and preservation of property by an agent who acts at the direction of a principal’s authority. Employee benefit accounts are subject to ERISA which includes a standards of conduct for plan fiduciaries and trustees. Self-directed IRAs should be reviewed during examinations when they are offered and booked as trust accounts.

Internal Use Only

Key Takeaways Special needs trusts are typically created by a grantor who is a parent or guardian to provide access to funding for someone who is physically or mentally disabled or chronically ill, and to help ensure eligibility for disability benefits (e.g., Social Security, Medicaid).

Stale estates are generally 18 months or older and should prompt some analysis as to why they is taking so long to settle.

Discretionary authority allows the fiduciary to make investment decisions for a client without the client’s consent for each trade. An annual investment review of the account is required given this level of authority.

Unique and hard to value assets must be consistently safeguarded, appropriated valued, and periodically inventoried and audited.

Internal Use Only

Key Takeaways

Co-fiduciary accounts require shared administration, and it is generally held under common law that co fiduciaries act in unison.

In reviewing and rating the Compliance component, the following factors should be considered; compliance with laws/regulations and governing documents, adequacy of account administration policies and procedures, and effectiveness of control to identify conflicts of interest. When selecting account files examiners should prioritize having variety from each capacity, riskier account types, files with litigation, accounts with unique assets, recently opened or closed accounts, and accounts with prior examination issues.

Examination line sheets should be used to confirm what is on the synoptic record and review whether corrective action was taken to address prior exam issues.

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Exercise

For Training Purposes Only

For Training Purposes Only

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LIVING TRUST

G

•

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For Training Purposes Only

Personal Trust Line Sheet

Account Name : Henry F. Potter Trust

Bank Name : BB&L Trust Company Examiner : Mr. Carter Exam Start Date : 5/8/2023 Reviewed as of date : 3/30/2023

Account Number : 120000

Administrative Officer : George Bailey Total Assets (MV) : $1,142,034 Date of last administrative review : 1/22/2023 Reviewer Name : Uncle Billy Bailey

Date of last investment review : George Bailey

Reviewer Name : 1/22/2023

Governing Instrument: ☐ Revocable/Grantor ☒ Irrevocable

Trust Department Capacity: ☐ Trustee ☒ Co-trustee w/Martha C. Potter, wife ☐ Successor Trustee

Other Parties to Agreement: ☐ Directed Trust ☐ Trust Protector ☒ N/A

Date of Governing Instrument :

Date of Amendments/Revisions :

12/12/97

Purpose of Governing Instrument : Establish a living trust. Settlor died 11/18/99.

Dec 2016 documents: Resignation of Co-Trustee; Declination of Nominated Successor Trustee; Acceptance of Alternate Successor Trustee; Trustee Change Form for Schwab Brokerage

Adequate CIP/BSA/AML/OFAC ☒ Yes ☐ No ☐ N/A

Fee: ☒ Adopted Fee Schedule ☐ Other (Negotiated) Fee Charged: ☒ Monthly ☐ Quarterly ☐ Annually

Provisions for Distribution of Income : Quarterly to Settlor’s wife (Article 7)

Provisions for Principal Invasions or Distributions : health, education, maintenance, and support and consistent with accustomed standard of living. For health ins premiums for wife. And/or through wife’s last will and testament and/or inter vivas instrument (Article 7) Is the bank complying with requirements for distribution of principal ? ☒ Yes ☐ No ☐ N/A If no, please explain: If closed, were appropriate closing procedures followed ? ☐ Yes ☐ No ☒ N/A

Is the bank complying with requirements for distribution of income ? ☒ Yes ☐ No ☐ N/A If no, please explain:

Date trust was terminated ? (if applicable) N/A

System Records (please explain any ‘no’ answer) 1. Is the synoptic record accurate? ☒ Yes ☐ No 2. Is the account coded correctly? ☒ Yes ☐ No 3. Are there appropriate ticklers? ☒ Yes ☐ No 4. Shareholder Communication Act Disclosure A. Proxy Voting /Proxy Material ☒ Bank ☐ Client ☐ Client option B. Share Client’s Name with Issuer ☒ OBO ☐ NOBO ☐ Client option

Documentation of Client Contact (please explain any ‘no’ answer) 1. When was the last formally documented contact with client? 1/26/2023 2. Does this conform to department policy? ☒ Yes ☐ No ☐ N/A 3. Does documentation of client directions for disbursements conform to policy/agreement? ☒ Yes ☐ No ☐ N/A

Internal Use Only

Conflicts of Interest (please explain any ‘no’ answer) 1. Are the following fees adequately disclosed to clients? A. Shareholder Service Fees (sweep fees) B. 12b-1 fees ☐ Yes ☐ No ☒ N/A 2. Is the use of Own-bank Savings and Time Deposits appropriate? ☐ Yes ☐ No ☒ N/A 3. Are the receipt and use of Soft Dollars adequately disclosed to clients? ☐ Yes ☐ No ☒ N/A Comments: • Investments (Attach printout) – Applicable for Investment Management Agency Investment Objective : Aggressive - 80% equities, 20% fixed Investment Authority : ☒ Sole ☐ None ☐ Shared with Investment Officer : Uncle Billy Bailey Portfolio Composition – show as % of total Asset Class Target or Model Current Allocation

Comments (Ex: how assets are valued, unique asset class compositions, special characteristics, etc.)

Cash and Equivalents

0.0%

0.6%

Equities

80%

81.5%

Fixed Income

20%

17.9%

Real Estate Non-Traditional

Overdrafts Other Liabilities

1. Investment Objective

a. Is there support for the initial allocation on file? ☒ Yes ☐ No If no, please explain: b. Does management update and document the client’s objective each year? ☒ Yes ☐ No If no, please explain: c. Is the portfolio consistent with the current investment objective? ☒ Yes ☐ No If no, please explain: d. If not, is management executing a plan to remedy the inconsistency? ☐ Yes ☐ No If no, please explain:

Internal Use Only

2. Client Directions

a. Purchase specific assets? Exclude specific assets or classes? ☐ Yes ☒ No If yes, please explain: b. Retain specific assets? ☐ Yes ☒ No If yes, please explain: c. Maintain a concentration in a specific asset or asset class? ☐ Yes ☒ No If yes, please explain: d. If yes to any of the above, is there sufficient documentation to protect the bank? ☐ Yes ☐ No ☒ N/A If no, please explain: a. Is transaction volume reasonable? ☒ Yes ☐ No If no, please explain: b. Are there assets in the account that are prohibited by the grantor or not on approved lists? ☐ Yes ☒ No If yes, please explain: c. If yes, has management approved and is management monitoring those assets? ☐ Yes ☐ No ☒ N/A If no, please explain: d. If management is not monitoring, was proper disclosure made to the client? ☐ Yes ☐ No ☒ N/A If no, please explain: e. Are all assets priced, and if not, is this disclosed to the client? ☒ Yes ☐ No If no, please explain:

3. Asset Review

Comments • Mr. Potter was formerly a partner of a subsidiary, The FIRM; fee discounted 35 bps and the minimum fee waived • Living children: Jackson W. Potter, Elizabeth A. Potter Documentation Exceptions • None noted

Internal Use Only

Asset Management

Internal Use Only

Session Learning Objectives: 1. Discuss different types of investments and securities used by trust departments and trust companies 2. Understand the role of policies, procedures, and practices

Internal Use Only

Session Learning Objectives: 3. Discuss how to approach asset review & how to assess asset quality 4. Understand the key factors to review related to asset management

Internal Use Only

Session Learning Objectives: 5. Discuss what is required for investment reviews 6. Apply concepts to exam scenario exercises.

Internal Use Only

Discussion Topics

Investments & Securities

Asset Quality

Policies, Procedures & Practices

Investment Reviews

Asset Review

Internal Use Only

Investments & Securities

Internal Use Only

Investments & Securities

Types of Investments: Cash Management

Fixed Income Products

Equity Securities

Unique or Hard-to-Value Assets

Mutual Funds

Internal Use Only

Investments & Securities

Examples of Investments: Money Market Funds

Municipal Bond Issues

Exchange Traded Funds

Limited Partnerships

Real Estate

Internal Use Only

Investments & Securities

Asset Allocation Models: Range from conservative to aggressive

• Conservative = less risky • Aggressive = more risky Approach to allocation models & percentages vary, but must be documented

Internal Use Only

Investments & Securities

Examples of Asset Allocations:

Capital Preservation

Income/Modest Growth

Balanced

Growth/Modest Income

Other Asset Mix

Growth

Internal Use Only

Policies, Procedures & Practices

Internal Use Only

Policies, Procedures & Practices

Trust Company or Department Practices

Policies & Procedures

Internal Use Only

Policies, Procedures & Practices

Review & Approval

Policy Exceptions

Unique Assets

Internal Use Only

Asset Review

Internal Use Only

Asset Review

Review

Determine

Consider

Internal Use Only

Asset Review

Size or Circumstance

Titles

Risk

Internal Use Only

Asset Quality

Internal Use Only

Asset Quality Are holdings in line with investment objectives?

How often are unique assets being valued?

Are letters of retention obtained?

Annual reviews of Irrevocable Life Insurance Trusts (ILITs)?

Internal Use Only

Asset Quality

Compliance with governing document?

Written authorizations obtained?

How are worthless assets tracked & addressed?

Internal Use Only

Investment Reviews

Internal Use Only

Investment Reviews

 Annual  Documented  Reported  Follow up  Independence

Internal Use Only

Investment Reviews

 Explain the process  Benchmarking  Statement of Principles of Trust Department Management

Internal Use Only

Internal Use Only

Resources • FDIC Trust Examination Manual – Asset Management https://www.fdic.gov/bank-examinations/section-3-asset-management part-i-investment-principles-policies-and-products

Internal Use Only

Internal Use Only

Key Takeaways Every trust department/company should have their approach & allocations of investments and securities documented . Examiners should make sure the trust company/department is doing what the policies & procedures state they will do and that what they are doing is documented within the policies & procedures.

Asset Review includes reviewing the requested info, determining if there are any assets that warrant further review, and considering the new & closed account report.

Investment reviews should be annual, documented, reported, followed-up, and independent.

Internal Use Only

Exercise

Internal Use Only

Operations, Internal Controls & Audits

Internal Use Only

Session Learning Objectives: 1. Understand the importance of recordkeeping related to trust accounts, as well as the trust company/ department 2. Discuss the importance of internal routines & controls

Internal Use Only

Session Learning Objectives: 3. Understand audit requirements under the Statement of Principles of Trust Department Management 4. Discuss what factors are included in the evaluation of the audit function

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Session Learning Objectives: 5. Discuss aspects of an effective audit program 6. Understand what

elements should be in the scope of audit coverage

Internal Use Only

Session Learning Objectives: 7. Discuss call report requirements, frequency, and accuracy 8. Apply concepts to an exam scenario exercise

Internal Use Only

Operations, Internal Controls & Audits

Recordkeeping

Internal Routines & Controls

Audit Function

Call Reports

Internal Use Only

Recordkeeping Operation of the trust department separate and apart from every other department of the bank, with trust assets separated from other assets owned by the bank, and the assets of each trust account separately from unrelated accounts

Maintain records in sufficient detail to properly reflect all activities

Account for principal and income according to the governing agreement

Internal Use Only

Operations, Internal Controls & Audits

Recordkeeping

Internal Routines & Controls

Audit Function

Call Reports

Internal Use Only

Internal Routines & Controls

Segregation of Duties

Reconcilements Vault Control Procedures

Dormant/ Unclaimed Funds

Blank Check Control

Hold-Mail Procedures

Vacation Policies

Internal Use Only

Internal Routines & Controls

• Timeliness • In balance • Stale-dated items • Signatures • Independence

Reconcilements

Internal Use Only

Internal Routines & Controls

• Dual control • Vault log/verification • Periodic audit • Location

Vault Control Procedures

Internal Use Only

Internal Routines & Controls

• Most fundamental I/C • Not one individual • Administrative separate from operations

Segregation of Duties

Internal Use Only

Internal Routines & Controls

• Pre-numbered • Signatures/approvals • Controls

Blank Check Control

Internal Use Only

Internal Routines & Controls

• Written procedures/forms • Frequency of physical mailings

Hold and Return Mail Procedures

Internal Use Only

Internal Routines & Controls

• Everyone • Time away from job

Vacation Policies

Internal Use Only

Internal Routines & Controls

• Effective controls • Monitoring • Escheated timely

Dormant/ Unclaimed Funds

Internal Use Only

Operations, Internal Controls & Audits

Recordkeeping

Internal Routines & Controls

Audit Function

Call Reports

Internal Use Only

Statement of Principles of Trust Department Management

Provide for an adequate audit (by internal or external auditors or a combination thereof) of all fiduciary activities, annually. Trust committee minutes should record the findings of the audit, including actions taken as a result of the audit.

Internal Use Only

Statement of Principles of Trust Department Management

Continuous Audit Process

Annual Audit Process

Internal Use Only

Statement of Principles of Trust Department Management

• Activity-by-activity basis • Internal audit staff or independent third-party • Should cover all areas within 3-5 years

Continuous Audit Process

Internal Use Only

Statement of Principles of Trust Department Management

• Typically, smaller institutions • Internal audit staff or independent third-party • Intervals must be supported & reassessed to ensure appropriate

Annual Audit Process

Internal Use Only

Factors Evaluated

Internal Use Only

Factors Evaluated

Independence

Quality

Scope

Frequency

Staff experience & competence

Volume and/or severity of exceptions

Internal Use Only

Audit Program

Aspects/Features of an effective audit program: • Written policy • Audit Committee Charter • Audit risk assessment • Written audit program approved by Audit Committee and/or Board • The findings of the audit, including actions taken as a result of the audit, should be recorded in Audit Committee and/or Board minutes

Internal Use Only

Audit Program

Internal Use Only

Audit Program

Audit Risk Assessment: • Auditable areas • Inherent risk • Mitigating controls • Residual risk • Risk trend • Audit frequency • Audit Risk Assessment Example

Internal Use Only

Scope of Audit Coverage

• The accuracy and validity of transactions • Fee calculations, collections, and waivers • Compliance with governing instruments, internal policies, statutory and regulatory requirements • Internal routines and controls

Internal Use Only

Scope of Audit Coverage

Account administration practices, such as documentation of: • Trust agreements and court orders • Income receipts and distributions; • Principal invasions such as appropriate approvals; • Receipt of assets; • Co-fiduciary and grantor approvals; • Beneficiary and third-party approvals; • Unique assets; and • Annual administrative and investment reviews

Internal Use Only

Scope of Audit Coverage

• Management information systems • Verification of assets • Trust committee minutes • Trading activities • Assessment of management's corrective actions

Internal Use Only

Scope of Audit Coverage

Internal Use Only

Operations, Internal Controls & Audits

Recordkeeping

Internal Routines & Controls

Audit Function

Call Reports

Internal Use Only

Call Reports

FFIEC Call Report

State Specific Requirements

Internal Use Only

Internal Use Only

Resources • FDIC: Audits & Accounting Issues https://www.fdic.gov/bank-examinations/section-2-operations-controls-and auditing#saudit

• FFIEC Call Report Requirements https://www.ffiec.gov/forms041.htm

Internal Use Only

Internal Use Only

Key Takeaways Operations of the trust department must be completely separate than every other department within the bank. The Board should provide for adequate internal controls including appropriate controls over trust assets. The Board should provide for an adequate audit (by internal or external auditors or a combination thereof) of all fiduciary activities, annually. Trust Departments generally follow the call report requirements through the bank using form FFIEC 031, FFIEC 041, or FFIEC 051 for quarterly filing.

Internal Use Only

Exercise

Internal Use Only

Conflicts of Interest

Internal Use Only

Session Learning Objectives: 1. Understand the importance of evaluating investments in own bank, affiliates, or obligations of insiders 2. Discuss broker relationships 3. Review what is permitted related to investments in 12b-1 mutual funds

Internal Use Only

Session Learning Objectives: 4. Discuss what constitutes material inside information 5. Apply concepts to exam scenario exercises

Internal Use Only

Introduction

Internal Use Only

Conflict of Interest

Occurs when a fiduciary's duty of loyalty to its trust customers clashes with other interests which the fiduciary may be subject to.

Internal Use Only

Self-Dealing

• Self-dealing activities always involve conflicts of interest • Not all conflicts of interest involve self-dealing • Limited to a trustee dealing with itself or an affiliate

Internal Use Only

Contingent Liabilities

• An estimation of the gross possible liability • Whether liability transfers to an actual liability depends upon the actions of the interested parties

Internal Use Only

Contingent Liabilities - Types

• Contravention of Trust • Commingling • Prudent Investor Rule • Real Estate & Mortgages • Deposits with Self • Acts without Consent/Approval • Failure to Invest

Internal Use Only

Interest Bearing Deposits

• Use of own-bank or affiliate interest bearing deposits • Written policies and procedures

Internal Use Only

Interest Bearing Deposits

• Written policy • Establishes a point spread to determine when competitors' deposits are used

Internal Use Only

Interest Bearing Deposits

• Assure competitiveness • Retain documentation • Conformance with policy

Internal Use Only

Interest Bearing Deposits

• Must be fully insured by the FDIC • ERISA Section 408 prohibition

Internal Use Only

Stocks or Obligations

• Written policy should address criteria for investment & retention • Review the policies & actual practices to determine conformance

Internal Use Only

Stocks or Obligations

Specific authorization is: a) Specific authority for retention within the governing document b) Retention based upon a written opinion c) Specific written direction from ALL interested parties of the account

Internal Use Only

Stocks or Obligations

• Perform & document a separate annual review • Prudence of retaining • Evidence specific authorization

Internal Use Only

Insider Investments

• Consist of stock or obligations of an entity in which directors, officers, employees, or other insiders have a material interest • Policy addressing the criteria for purchasing & retaining

Internal Use Only

Insider Investments

• Reviewed annually • Reason for retention fully documented • List of these investments part of the request list

Internal Use Only

Broker Relationships

• Analyze policies & procedures • Selection criteria should be based on “best execution” • Use of an “approved list” • Soft-dollar arrangements