State National Bancshares, Inc.

Charter of the Audit Committee of the Board of Directors

 

      i.         Purpose

 

The role of the Audit Committee is to oversee the accounting and financial reporting processes of the Company and the audits of the financial statements of the Company. 

 

The Audit Committee shall also prepare the report required by the rules of the Securities and Exchange Commission (the “SEC”) to be included in the Company’s annual proxy statement.

 

Further, the Committee is to assist the Board of Directors of State National Bancshares, Inc. (the Company) in fulfilling its oversight responsibilities by reviewing and appraising:

 

·         the financial reports and other financial information provided by the Company to shareholders, potential shareholders, and the investment community;

·         reports resulting from the performance of audits by the external and internal auditors concerning the Company’s systems of internal controls regarding finance and accounting that management and the Board of Directors have established;

·         the integrity of the Company’s financial statements;

·         the Company’s compliance with legal and regulatory requirements;

·         the external auditor’s qualifications and independence, as well as the qualifications and independence of the internal auditor;

·         the performance of the Company’s internal audit function and external auditor; and

·         the Company’s auditing, accounting and financial reporting processes in general.

 

Consistent with its function, the Committee shall encourage continuous improvement of, and foster adherence to, the Company’s policies, procedures and practices at all levels.  The Committee’s primary duties and responsibilities are to:

 

  • Serve as an independent and objective party to monitor the Company’s financial reporting, auditing and accounting processes and the systems of internal controls regarding finance and accounting compliance;
  • Be directly responsible for the appointment, compensation, oversight and, where appropriate, replacement of the Company’s external auditor;
  • Be directly responsible for the appointment, compensation, oversight and where appropriate, replacement of the Company’s internal auditor, including review and appraisal of the audit efforts of said internal auditor;
  • Be directly responsible for the appointment, compensation, oversight and where appropriate, replacement of the Company’s Compliance Manager and it’s Loan Review Manager;
  • Provide an open avenue of communication among the external auditor, executive Company management, the internal auditor and the Board of Directors.

 

In fulfilling its responsibilities, the Committee shall have direct access to the external auditor as well as anyone within the Company.  The Internal Auditor, Compliance Manager and Loan Review Manager shall report directly to the Committee.  The Committee shall have the ability to retain, at the Company’s expense, special legal, accounting, or other consultants or experts it deems necessary or appropriate in the performance of its duties.  The Committee will primarily fulfill its responsibilities by carrying out the activities outlined in Section IV of this charter.

 

    ii.         Composition

 

            Independence

 

The Audit Committee shall consist of three or more members of the Board, each of whom is determined by the Board to be “independent” under Section 10A(m)(3) of the Securities Exchange Act of 1934 (the “Exchange Act”), the rules and regulations of the NASDAQ Stock Market, the Office of the Comptroller of the Currency, and the rules and regulations of the SEC.

 

            Financial Expertise

 

All members of the Audit Committee must be able to read and understand financial statements at the time of their appointment. 

 

            Appointment and Removal

 

The members of the Audit Committee shall be appointed by the Board upon the recommendation of the Nominating/Corporate Governance Committee and shall serve until such member’s successor is duly elected and qualified or until such member’s earlier resignation or removal.  The members of the Audit Committee may be removed, with or without cause, by a majority vote of the Board.

 

            Chairperson

 

Unless a Chairperson is elected by the full Board upon recommendation of the Nominating/Corporate Governance Committee, the members of the Audit Committee shall designate a Chairperson by the majority vote of the full Audit Committee membership.  The Chairperson will chair all regular sessions of the Audit Committee and set the agenda for Audit Committee meetings.

 

            Delegation to Subcommittees

 

In fulfilling its responsibilities, the Audit Committee shall be entitled to delegate any or all of its responsibilities to a subcommittee of the Audit Committee.

 

 

  iii.         Meetings

 

The Committee shall meet as often as it determines but no less than once per quarter, either in person or telephonically, and at such times as the Audit Committee shall determine.  As part of its job to foster open communication, the Committee shall meet regularly with executive management, the internal auditor, the external auditor, as well as the Compliance Manager and Loan Review Manager in executive sessions to discuss any matters that the Audit Committee or either of these groups believe should be discussed privately.  In addition, the Audit Committee or its chairperson should meet with the independent auditors and management quarterly to review the Company’s financial statements.

 

 iv.         Responsibilities

 

In carrying out its responsibilities, the Committee believes its policies and procedures should remain flexible in order to effectively react to changing conditions.  The Committee shall take all appropriate actions to set the overall corporate tone for quality financial reporting, sound business risk practices, and ethical behavior.  To fulfill its responsibilities, the Committee shall obtain the approval of the Board of Directors for the adoption of this Charter and review and reassess this Charter on an annual basis.  The Committee shall also annually review its own performance.  More specifically, the Committee shall:

 

Financial Reporting Processes and Documents/Reports Review

 

·         Review and discuss with the outside auditing firm:  (A) the scope of the audit, the results of the annual audit examination by the auditor and any accompanying management letters, (B) any audit problems or difficulties the auditor encountered in the course of their audit work, including any restrictions on the scope of the outside auditing firm’s activities or on access to requested information, and any significant disagreements with management and management’s response to such audit problems or difficulties, and (C) any reports of the outside auditing firm with respect to interim periods.

 

·         Review and discuss with management and the outside auditing firm the annual audited and quarterly un-audited financial statements of the Company, including  (A) analyses of management and/or the outside auditor setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements, (B) the Company’s disclosures under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including the development, selection and reporting of accounting policies that may be regarded as critical, and (C) major issues regarding the Company’s accounting principles and financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles and financial statement presentations.

 

·         Recommend to the Board whether the financial statements should be included in the Annual Report on Form 10-K.

 

·         Periodically review and discuss the adequacy of the Company’s internal controls, any significant deficiencies in internal controls (and any special audit steps adopted in light of material control deficiencies), and significant changes in such controls; and review and discuss with the principal internal auditor of the Company and such others as the Audit Committee deems appropriate, the scope and results of the internal audit program.

 

·         Periodically review and discuss the adequacy and effectiveness of the Company’s disclosure controls and procedures and management reports thereon.

 

·         Review disclosures made to the Audit Committee by the Company’s Chief Executive Officer and Chief Financial Officer during their certification process for the Form 10-K and 10-Q about any significant deficiencies in the design or operation of internal controls or material weaknesses therein and any fraud involving management or other employees who have a significant role in the Company’s internal controls.

 

·         Review and timely discuss with management and the outside auditors the effect of regulatory and accounting initiatives, as well as any material financial or non-financial arrangements of the Company which do not appear on the financial statements of the Company.

 

·         Review and discuss with the independent auditors their report regarding (A) all critical accounting policies and practices to be used, (B) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the Company, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditors, and (C) other material written communications between the outside auditing firm and Company management, including a schedule of unadjusted differences.

 

·         Review with financial management and the independent accountants the Company’s filings with the SEC prior to their filing or prior to the release of earnings reports.  The Chair of the Audit Committee may represent the entire Audit Committee for purposes of this review.

 

·         Prepare all reports required to be included in the Company’s proxy statement, pursuant to and in accordance with applicable rules and regulations of the SEC.

 

·         Discuss and review earnings press releases, including the type and presentation of information to be included in earnings press releases, in particular the use of “pro forma” or “adjusted” non-GAAP information.

 

·         Discuss and review financial information and earnings guidance provided to analysts and rating agencies.

 

·         Discuss policies with respect to risk assessment and risk management.

 

The External Auditor

 

·         The Audit Committee shall be directly responsible, in its capacity as a committee of the Board, for the appointment, compensation, retention and oversight of the outside auditing firm.  In this regard, the Audit Committee shall have the sole authority to (A) appoint and retain, (B) determine funding for, and (C) when appropriate, terminate, the outside auditing firm, which shall report directly to the Audit Committee.  The Audit Committee will be responsible for resolving any disputes between the independent accountants and the Company’s management.

 

·         Meet with the external auditor of the Company to review and approve in advance for the current year the engagement of the external auditor to audit the financial statements of the Company and its divisions and subsidiaries, including timely quarterly reviews.  In addition, the Committee shall review procedures to be utilized by the external auditor (including planning and staffing of the audit), and at the conclusion of such engagement, any comments or recommendations of the external auditor.  The engagement of the external auditor shall comply with applicable requirements of securities and other law and regulation, including but not limited to the following:

 

o        The Committee shall establish policies and procedures for the engagement of the outside auditing firm to provide permissible non-audit services, which shall require preapproval by the Audit Committee (other than with respect to de minimis exceptions described in Section 10A(i)(1)(B) of the Exchange Act that are approved by the Audit Committee prior to the completion of the audit).  Ensure that approval of non-audit services are disclosed to investors in periodic reports required by Section 13(a) of the Exchange Act.

 

o        With respect to non-audit services, the external auditor shall not perform any such services that are prohibited or discouraged by the Sarbanes-Oxley Act of 2002, or the OCC or Federal Reserve Bank, or any rule or regulation promulgated thereunder-.

 

      • The Committee may delegate to one or more of its designated members the authority to grant pre-approvals of non-audit services.  The decisions of any designee to pre-approve a non-audit service shall be presented to the full Committee at its next scheduled meeting.

 

      • Each of the lead (or coordinating) audit partners (having primary responsibility for the audit) and the audit partners responsible for reviewing the audit shall not have performed audit services for the Company in each of the 5 previous fiscal years of the Company.

 

·         Maintain a clear understanding with the external auditor that it is ultimately accountable to the Committee as representatives of the shareholders, and that the Committee has the ultimate authority and is directly responsible for the appointment, compensation, oversight and where appropriate, replacement of the external auditor.

 

·         Review, at least annually, a report by the outside auditor describing (A) the firm’s internal quality-control procedures, (B) any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the last five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues, and (C) all relationships between the independent auditor and the Company.

 

·         In connection with the report review described in the previous paragraph, review and evaluate the lead partner of the outside auditor and present to the Board Audit Committee conclusions with respect to the qualifications and performance of the outside auditing firm.

 

·         Consider, at least annually, the independence of the outside auditing firm, including whether the outside auditing firm’s performance of permissible non-audit services is compatible with the auditor’s independence; obtain and review the report by the outside auditing firm describing any relationships between the outside auditing firm and the Company referred to in paragraph four above or any relationships between the outside auditing firm and the Company or any other relationships that may adversely affect the independence of the auditor; discuss with the outside auditing firm any disclosed relationship or services that may impact the objectivity and independence of the auditor; and present to the Board the Audit Committee’s conclusions with respect to the independence of the outside auditing firm.

 

·         Establish procedures for:

 

o        The receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls, or auditing matters; and

o        The confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.

 

·         On an annual basis, review with the external auditor (a) the external auditor’s internal quality-control procedures, and (b) all relationships between the external auditor and the Company.  Also, obtain and review reports from the external auditor as required by applicable law and regulations.  Taking into account the opinions of management and the internal auditor, evaluate the qualifications, performance and independence of the external auditor, including the nature and scope of any disclosed relationships or professional non-audit services provided to the Company by the external auditor.  The Committee shall take, or recommend the Board of Directors take, appropriate action to ensure high-quality level audits by, and the continuing independence of, the external auditor.

 

·         In connection with each periodic report of the Company, review a report from senior management containing an evaluation of the effectiveness of the Company’s disclosure controls and procedures, which shall include the report of the Chief Executive Officer and Chief Financial Officer to be included in each Quarterly Report on Form 10-Q regarding the Company’s disclosure controls and procedures, and the report of management to be included in each Annual Report on Form 10-K regarding the effectiveness of the Company’s internal control structure and procedures for financial reporting.  In addition, these reports shall be reviewed considering the requirements for internal control structure contained within the Federal Deposit Insurance Company Improvement Act (FDICIA).

 

·         Recommend to the Board of Directors policies for the Company’s hiring of employees or former employees of the external auditor who are or were engaged on the Company’s account.

 

Outside Advisors

 

The Audit Committee shall have the authority to retain such outside counsel, accountants, experts and other advisors as it determines appropriate to assist the Audit Committee in the performance of its duties.  The Audit Committee shall have sole authority to approve related fees and retention terms.

 

The Internal Auditor

 

·         Receive prior to each meeting a summary of significant findings from completed internal audits and the status of implementation of related recommendations.

 

·         Receive a progress report on the proposed internal audit plan, with explanations for any deviations from the original plan.

 

·         Meet with the internal auditor of the Company to review and approve in advance for the current year the engagement of the internal auditor to audit the internal controls of the Company and its divisions and subsidiaries.  The Committee may meet with management of the Company and solicit its views as to the engagement of the internal auditor, but the Committee shall retain the ultimate authority and responsibility for such engagement.  In addition, the Committee shall review procedures to be utilized by the internal auditor (including planning and staffing of the audit, the overall audit plan) the amount of the internal auditor’s compensation, coordination with the external auditor, and at the conclusion of such engagement, any comments or recommendations of the internal auditor.  The engagement of the internal auditor shall comply with applicable requirements of law and regulation, including but not limited to the following:

 

o        The Committee shall approve all non-audit services to be performed by the internal auditor.

 

o        With respect to non-audit services, the internal auditor shall not perform any such services that are prohibited or discouraged by the Sarbanes-Oxley Act of 2002, or the OCC or Federal Reserve Bank, or any rule or regulation promulgated thereunder.

 

o        The Committee shall approve in advance as required by law any non-audit services that may be performed by the internal auditor.  The Committee may delegate to one or more of its designated members the authority to grant pre-approvals of non-audit services.  The decisions of any designee to pre-approve a non-audit service shall be presented to the full Committee at its next scheduled meeting.

 

·         Maintain a clear understanding with the internal auditor that it is ultimately accountable to the Committee, and that the Committee has the ultimate authority and is directly responsible for the appointment, compensation, oversight and where appropriate, replacement of the internal auditor.

 

·         On an annual basis, review with the internal auditor (a) the internal auditor’s internal quality-control procedures, and (b) all relationships between the internal auditor and the Company.  Taking into account the opinions of management and the external auditor, evaluate the qualifications, performance and independence of the internal auditor, including the nature and scope of any disclosed relationships or professional non-audit services provided to the Company by the internal auditor.  The Committee shall take, or recommend the Board of Directors take, appropriate action to ensure high-quality level audits by, and the continuing independence of, the internal auditor.

 

·         Recommend to the Board of Directors policies for the Company’s hiring of employees or former employees of the internal auditor who are or were engaged on the Company’s account.

 

Committee Reporting

 

·         Report regularly to the Board of Directors

 

·         When required, review, approve and include a report in the proxy statement for the Company’s annual meeting of shareholders disclosing whether the Committee has (1) reviewed and discussed the audited financial statements with management and the external auditor; (2) discussed with the external auditor the matters required to be discussed by SAS No. 61; and (3) received from the external auditor disclosures regarding its independence required by Independence Standards Board (“ISB”) Standard No. 1, Independence Discussions with Audit Committees, and discussed with the external auditor its independence.  In addition, the report shall include a statement whether, based on the review and discussions conducted pursuant to the previous sentence, the Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report of Form 10-K for the last fiscal year for filing with the Securities and Exchange Commission.

 

·         When required, include a copy of this Charter in the proxy statement for the Company’s annual meeting shareholders at least triennially or the year after any significant amendment to the Charter.

 

·         Submit the minutes of all meetings of the Committee to the Board of Directors.

 

Other Compliance

 

·         The Company shall provide for appropriate funding, as determined by the Committee, in its capacity as a committee of the Board of Directors, for payment of compensation to the external auditor, internal auditor, and any advisers employed by the Committee.

 

·         Review and concur with management’s appointment, termination or replacement of the Compliance Manager and Loan Review Manager.

 

·         Review the compliance management and loan review functions of the Company, including the independence and authority of its reporting obligations and the responsibilities, budget and staffing of the functions.

 

·         Perform any other activities consistent with the Charter and the Company’s By-Laws as the Committee or the Board of Directors deem necessary or appropriate.

 

·         The Committee shall be responsible for approving related-party transactions as defined by various regulatory authorities, unless full Board of Directors authority and approval is required by another regulation or law.

 

   v.         Ethical and Legal Compliance

 

It shall be the responsibility of the Audit Committee to:

 

  • Establish, review and update periodically a code of business ethics and conduct that applies to the Company’s employees and directors, and ensure that management has established a system to enforce the code of ethics.  The code must be publicly available and waivers for executive officers and directors granted and disclosed in accordance with applicable law.

 

  • Review and approve, if the duty is not delegated to a comparable body of the Board, all related party transactions in accordance with the regulations of NASDAQ.

 

  • Review, with the Company’s counsel, any legal matter that could have a significant impact on the Company’s financial statements.

 

  • Establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, including procedures for confidential, anonymous submission of concerns by employees regarding accounting and auditing matters.

 

·         Perform any other activities consistent with this Charter, the Company’s bylaws and governing law, as the Audit Committee or the Board deems necessary or appropriate.

 

 vi.         Reports and Performance Review

 

The Audit Committee shall review at least annually the adequacy of this Charter and recommend any proposed changes to the Board for approval.

 

vii.         Limitations of Committee’s Role

 

While the Committee has responsibilities and powers set forth in this Charter, it is not the Committee’s duty to audit the Company’s financial statements or to determine that the Company’s financial statements are complete and accurate or in accordance with GAAP.  These are the responsibilities of management and the external auditor.

 

 

 

                                                            Adopted by Resolution of the Board of Directors

                                                            ___________________, 2005