Is it o.k. to hire an accounting firm to perform an audit of a bank if that firm has borrowed money from the bank (and the loan is not yet paid in full)?

I think I would question this. I think it could be a conflict of interest on the CPA firm's part, and I would question the "independence" of the audit. This is strictly an opinion.

IMHO, I would not want to take that risk. I think you create a conflict of interest, particularly if the relationship is rather significant. I imagine that many accounting firms try to avoid that if possible. I am not sure if there is a legal prohibition against it, but if there isn't, I bet there will be soon thanks to all the corporate scandals.

There is a certain code of ethics involved with auditors and the CPA firm should not be bidding on the job if they have an outstanding loan with you. Just my opinion.

I believe that the OCC (in one of their guidelines booklets) has some rule that discourages this. Not an OCC bank, but in my past life I seem to remember that this is not looked upon very favorably...cite-conflict of interest. I would encourage you to review your audit policy and regulator's guidelines, then make it very clear to your BOD.

CPA's are required to be independent of the companies that they audit. The fact the firm has a loan with an institution they are auditing would result in a violation of CPA's rules on independence. In other words, they can't audit you if they have a loan with you.