Preferred Bank : Audit Committee Charter (Opens in a new Window)

PREFERRED BANK

AUDIT COMMITTEE CHARTER

Approved by the Board of Directors on November 17, 2020

1. PURPOSE
2. 1. The Audit Committee (the "Committee") is a standing committee of the Board of Directors (the "Board") of Preferred Bank (the "Bank"). The purpose of the Committee is to act on behalf of the Board in fulfilling the following responsibilities: (1) the quality and integrity of the Bank's financial statements; (2) the Bank's compliance with legal and regulatory requirements inclusive of the Bank Secrecy Act and Anti-Money Laundering laws, regulations, and requirements; (3) the independent auditor's qualifications and independence; (4) the performance of the Bank's independent auditor and the Bank's internal audit function; and (5) the preparation of the disclosure required by Item 407(d)(3)(i) of U.S. Securities and Exchange Commission Regulations S - K, Corporate Governance.
   2. In addition to the powers and responsibilities expressly delegated to the Committee in this Charter, the Committee may exercise any other powers and carry out any other responsibilities delegated to it by the Board from time to time consistent with the Bank's bylaws. The powers and responsibilities delegated by the Board to the Committee in this Charter or otherwise shall be exercised and carried out by the Committee as it deems appropriate without requirement of Board approval, and any decision made by the Committee (including any decision to exercise or refrain from exercising any of the powers delegated to the Committee hereunder) shall be at the Committee's sole discretion. While acting within the scope of the powers and responsibilities delegated to it, the Committee shall have and may exercise all the powers and authority of the Board.
   3. The Committee's function is oversight. Management of the Bank is responsible for the preparation, presentation and integrity of the Bank's financial statements as well as the Bank's financial reporting process, accounting policies, internal audit function, risk management, ethical compliance, regulatory compliance functions, internal accounting controls and disclosure controls and procedures. The independent auditor is responsible for planning and performing an audit of the Bank's annual financial statements, expressing an opinion as to the conformity of such annual financial statements with generally accepted accounting principles and reviewing the Bank's quarterly financial statements in accordance with Statement on Auditing Standards No. 100. The independent auditor for the Bank is accountable to the Board and the Committee as representatives of the stockholders. Each member of the Committee shall be entitled to rely on the integrity of those persons within the Bank and of the professionals and experts, including the Bank's internal auditor or others responsible for the internal audit function, including contracted non-employee or audit or accounting firms engaged to provide internal auditor services (the "internal auditor"), and the Bank's independent auditor, from which the Committee receives information and, absent actual knowledge to the contrary, the accuracy of the financial and other information provided to the Committee by such persons or professionals.

1. COMMITTEE STRUCTURE
   A. The Committee shall consist of at least three (3) independent directors.

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1. 1. Each member of the Committee must be a director and must:
   2. 1. be independent as defined under both Nasdaq Stock Market Rule 5605(a)(2) and Federal Deposit Insurance Corporation Regulation 363.5;
      2. meet the criteria for independence set forth in Rule 10A-3(b)(1) of the Securities Exchange Act of 1934, as amended (the "Exchange Act");
      3. not have participated in the preparation of the financial statements of the Bank at any time during the past three years; and
      4. be able to read and understand fundamental financial statements, including the Bank's balance sheet, income statement and cash flow statement.
   3. At least one (1) member of the Committee must have past employment experience in finance or accounting, requisite professional certification in accounting or any other comparable experience or background which results in the individual's financial sophistication, including being or having been a chief executive officer, chief financial or other senior officer with financial oversight responsibilities.
   4. At least one (1) member of the Committee must be an "audit committee financial expert" as defined in Item 407(d)(5)(ii) of Regulation S-K. A person who satisfies this definition of audit committee financial expert will also be presumed to have financial sophistication.
   5. The members of the Committee shall be appointed by the Board. The Board may, at any time and in its complete discretion, but subject to the criteria set forth above, replace a member of the Committee. In the event when a member of the Committee is unable to serve, the Board shall fill the vacant position through the recruitment of a new member, or the appointment of an existing member, to the Committee within ninety (90) days following the vacancy. A notice of such event should be provided to Nasdaq in accordance with Nasdaq Stock Market Rule 5605(c)(4)(B). All appointments to the Committee by the Board shall be based on nominations recommended by the Bank's Nominating and Corporate Governance Committee.
2. MEETINGS
3. 1. The Committee shall meet at least quarterly and additionally to the extent it deems necessary or appropriate.
   2. The Committee shall convene periodically in an executive session, without management present, to meet with the internal audits and with the independent auditors; and to discuss any other matters which the Committee feels are appropriate.
   3. The Committee may request that any directors, officers or employees of the corporation, or other persons whose advice and counsel are sought by the Committee, attend any meeting of the Committee to provide such pertinent information as the Committee requests.
   4. The Committee shall keep written minutes and other relevant documentation of its meetings, which minutes and documentation shall be maintained with the books and records of the

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Bank. Following each of its meetings, the Committee shall deliver the minutes to the Board and make recommendations to the Board as appropriate.

1. The Board shall designate a member of the Committee as Chairperson. The Committee shall be governed by the same rules regarding meetings (including meetings in person or by telephone or other similar communications equipment), action without meetings, notice, waiver of notice, and quorum and voting requirements as are applicable to the Board.

IV. COMMITTEE AUTHORITY AND RESPONSIBILITIES

1. Interaction with the Independent Auditor
2. 1. Appointment and Oversight. The Committee shall directly appoint, retain and compensate the Bank's independent auditor. The Committee shall oversee the work of the independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services. The independent auditor shall report directly to the Committee. The Committee shall have the power to dismiss the Bank's independent auditor, if it deems it necessary.
   2. Pre-Approvalof Services.
   3. 1. The Committee shall pre-approve all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for the Bank by its independent auditor or other registered public accounting firms, subject to the de minimis exception for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act, which are approved by the Committee prior to completion of the audit. The Committee may form and delegate authority to a subcommittee consisting of one (1) or more members of the Committee who are independent directors of the Board to grant preapprovals of audit and permitted non-audit services, provided that decisions of such subcommittee to grant preapprovals shall be presented to the full Committee at its next scheduled meeting.
      2. The engagement of the independent auditor may be entered into pursuant to pre-approved policies and procedures established by the Committee, provided that the policies and procedures are detailed as to the particular services and the Committee is informed of each service.
   4. Independence of Independent Auditor. The Committee shall, at least annually, obtain an Auditor's statement as required by Auditing Standards No. 16, review and discuss with the independent auditor the independence and internal quality control procedures of the independent auditor and the experience and qualifications of the independent auditor's senior personnel, including the independent auditor's lead engagement partner and concurring review partner, that are providing audit services to the Bank. In conducting its review:
   5. 1. The Committee shall obtain and review a report prepared by the independent auditor describing (i) the auditing firm's internal quality control procedures and (ii) any material issues raised by the most recent internal quality-control review, peer review, or Public Company Accounting Oversight Board review or inspection of the auditing firm, or by any other

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inquiry or investigation by governmental or professional authorities or in any litigation to which the auditing firm is a party, within the preceding five years, respecting one or more independent audits carried out by the auditing firm, and any steps taken to deal with such issues.

1. 1. 1. The Committee shall ensure that the independent auditor prepares and delivers, at least annually, a written statement delineating all relationships between the independent auditor and the Bank and any of its subsidiaries consistent with applicable requirements of the Public Company Accounting Oversight Board regarding the independent auditor's communications with the Committee concerning independence. The Committee shall actively engage in a dialogue with the independent auditor with respect to any disclosed relationship or services that, in the view of the Committee, may impact the objectivity and independence of the independent auditor. If the Committee determines that further inquiry is advisable, the Committee shall take or recommend that the full board take appropriate action in response to the independent auditor's report to satisfy itself of the auditor's independence.
      2. The Committee shall confirm with the independent auditor that the independent auditor is in compliance with the lead audit partner and reviewing partner rotation requirements as required by Section 10A(j) of the Exchange Act.
      3. The Committee shall review with the independent auditor any audit problems or difficulties and management's response.
   2. The Committee shall review and approve or disapprove all proposed hiring by the Bank of employees or former employees of the current independent auditor with such approval or disapproval to be consistent with Section 10A(l) of the Exchange Act.
2. Compliance and Regulatory Oversight Responsibilities
3. 1. The Committee shall review and approve all related party transactions of the Bank. The term "related party transaction" shall refer to transactions required to be disclosed pursuant to Securities and Exchange Commission ("SEC") Regulation S-K, Item 404. Review of such related party transactions in conjunction with review by the full board of directors will constitute such review.
   2. The Committee shall establish procedures for the receipt, retention and treatment of complaints received by the Bank regarding accounting, internal accounting controls, and auditing matters and the confidential, anonymous submission by employees of the Bank of concerns regarding questionable accounting or auditing matters.
   3. The Committee shall ascertain annually from the independent auditor whether the Bank has issues under Section 10A(b) of the Exchange Act and shall monitor the disposition of all such issues.
   4. The Committee shall review with management and the independent auditor any correspondence with regulators and any published reports that raise material issues regarding the Bank's accounting policies. Review of such correspondence and reports in conjunction with review by the full board of directors will constitute such review.

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