ATTACHMENT_4_-_Exhibit_3_Sample_Report_of_Examination.docx

Exhibit #3

U.S. Small Business Administration Office of Credit Risk Management

7(a) Loan Program Safety & Soundness Examination

FY 2016

Lender Name and Address On-Site: Date

Table of Contents

EXECUTIVE SUMMARY

Introduction This Safety & Soundness Report of Examination (ROE) conveys the Small Business Administration’s (SBA) analysis and assessment of Lender’s SBA 7(a) lending operations. It is a result of an onsite risk-based examination conducted the week of [ ] and addresses quantitative as well as qualitative risks identified by the SBA. The qualitative factors include, but are not limited to compliance with SBA Loan Program Requirements, loan policies and procedures, management reports, management and staff capabilities; and other aspects of the Lender’s SBA program. The examination included a review of [ ] loan files, with an outstanding gross balance of [ ] million, representing approximately [ ] of the [ ] million total gross SBA loan dollars outstanding. The Scope of the Examination is included in Appendix E.

Results of the Examination

Overall Assessment:

SBA Supervised Lender Components Assessment

PARRiS Components Assessments

Performance

Asset Management

Regulatory Compliance

Risk Management

Special Items

Summary Examination Assessment

Program Contact:

Name:

Title:

Phone:

E-mail:

Report Prepared by

Reviewer In-Charge

Date

Report Reviewed by

Supervisory Financial Analyst

Date

Report Concurrence

Director, Office of Credit Risk Management

Date

EXECUTIVE OVERVIEW

SBA Balance Sheet

Total SBA Exposure

Gross Committed

Gross Loans

Active Loans*

SBA Guaranteed Portion

Current Balance**

Stressed Balance**

Past Due Balance

Delinquent Balance

Deferred Balance

Active Defaults***

Liquidation Balance

Active Purchases

* Active Loans = Current Balance + Stressed Balance

** As a percentage of Active Loans

*** As a percentage of Gross Loans

Summary Lender Balance Sheets

Assets

Cash

Other current assets

Net loans receivable

Other assets

Total Assets

Liabilities and Stockholders' Equity

Total loans payable

Other liabilities

Total Liabilities

Stockholders’ Equity

Total Stockholders' Equity

Total Liabilities &Stockholders' Equity

Background

Corporate Structure

Examination Findings and Corrective Actions

SBA SUPERVISED LENDER EXAMINATION

Examination Objective and Procedure Each examination consists of two parts. The first part is specific to SBA Supervised Lenders, and the second part, referred to as the PARRiS Review, is applicable to all 7(a) lenders. The objective of the SBA Supervised Lender-specific part of the examination is to assess the SBLC’s performance on measures that are required for SBA Supervised Lenders only. The PARRiS Review assessment is included in the next section of this Report.

As a regulator of SBLCs, OCRM performs a more comprehensive examination of NFRLs than other 7(a) lenders, which includes an evaluation and assessment of the following additional components:

· Financial Condition: Capital, Earnings, Liquidity, and Sensitivity analyses

· SBA Supervised Lender-specific management requirements

· SBA Supervised Lender-specific regulatory requirements

· SBA Financing Requirements

FINANCIAL CONDITION

Capital Capital

Total equity

Net loans receivable

Total assets

Ratio of equity to net loans

Ratio of equity to total assets

Evaluation of Servicing Asset

Earnings Income Statement

Expenses

Net income

Liquidity

Sensitivity to Secondary Market Sales & Premium, Interest rates & Ability to Securitize

SBA SUPERVISED LENDER MANAGEMENT REQUIREMENTS

SBA Clearance of Officers and Directors

Internal Control Policy

Loan Policies and Procedures

SBA SUPERVISED LENDER REGULATORY REQUIREMENTS

Regulatory Capital

Fidelity Insurance

Annual and Quarterly Condition Reporting Requirements

Audited Financial Statements Requirements

Required Reserves (CA Lender)

Organizational Eligibility Requirements (CA Lender)

Underserved Markets Requirements (CA Lender)

SBA SUPERVISED LENDER FINANCING REQUIREMENTS

Warehouse Lines

Securitizations

Participations

Assessment

PARRiS REVIEW

PERFORMANCE

Review Objective and Procedure The objective of the Portfolio Performance review is to assess the degree of financial and program integrity risk to the SBA, largely based upon the Lender’s quantitative metrics in comparison to peer group and 7(a) portfolio averages. For financial risk, the metrics are the Lender Purchase Rating from the Loan and Lender Monitoring System, and the Cumulative Net Yield, which measures the cash impact to SBA of the Lender’s activity. This assessment includes an analysis of portfolio characteristics and comparisons of SBA, Lender and industry data, as applicable.

12 Month Actual Purchase Rate

12 Month Purchase Rate*

Lender Rate

Peer Group Rate

SBA 7(a) Portfolio Rate

Cumulative Net Yield

Cumulative Net Yield*

Mar Dec Sept Jun Mar Dec

LENDER

Peer Group Average

7(a) Portfolio Average

Gross Outstanding Balance by Delivery Method Gross Balance by Delivery Method*

PLP

CLP

Other 7(a)

Rural Lender Advantage

Small Loan Advantage

SBA LowDoc

Total

Gross Outstanding Performance by Delivery Method A breakdown of all Past Due, Delinquent, and Active Defaults is detailed in the following table.

Performance by Delivery Method*

PLP

CLP

Other 7(a)

Rural Lender Advantage

Small Loan Advantage

SBA LowDoc

LENDER Total

Peer Group Average

SBA Portfolio Average

SBA Loan Production Vintage Analysis by Fiscal Year of Disbursement*

ASSET MANAGEMENT

Review Objective and Procedures The objective of the Asset Management review is to assess the quality of origination, servicing, and workout practices of the Lender’s SBA portfolio. This assessment considers both qualitative and quantitative factors to assess the Lender’s ability to manage SBA loans through the origination, servicing, and resolution stages of the lending lifecycle. It also includes an assessment of the effectiveness of the management and staff in managing these risks related to the Lender’s SBA program. The review procedures utilize the Lender’s loan policies, procedures and individual file reviews to determine if loan originations, loan monitoring and collection activities are in accordance with the Lender’s discretionary policy, SBA policy and prudent lending practice.

Loan File Analysis

Origination Risk

The table below provides a comparison of LENDER’s High Risk Origination, Early Problem, and Early Default Rates to Peer Group Rate. High Risk Originations are those loans less than 36 months on book, with an original Small Business Predictive Score (SBPS) score of less than 160. Early problem loans are loans less than 36 months on book that have been deferred or are in delinquent status, liquidated, purchased or charged off within 18 months of disbursement. Early defaults are those loans less than 36 months on book that defaulted within 18 months from the date of first disbursement.

Origination Risk*

High Risk Originations

Early Problem

Early Default

Trends & Behavioral Considerations -- Disbursed Loans*

Avg. Loan Size at Approval

Weighted Avg. SBPS Current Score for all disbursed loans

Delegated

# Loans over $2 Million

Collateral Servicing Risk Servicing Risk Indicators*

Past Due

Delinquency

Deferred

Stressed

Projected Purchase

Resolution Risk

Resolution Risk Indicators*

12 Month Purchase

Average Time of Loans In Liquidation

Average Time of Loans in Active Purchase

Average Time of Loans in Active Default

Recovery Rate

REGULATORY COMPLIANCE

Review Objective The objective of the Regulatory Compliance review is to assess the Lender’s compliance with SBA Loan Program Requirements. The assessment focuses on the Lender’s ability to underwrite eligible SBA loans in compliance with SBA Loan Program Requirements. This assessment also considers the Lender’s 1502 reporting, payment of SBA fees, and Form 172 payments to SBA. The review procedures may include an assessment of sample loan files reviewed for compliance issues.

Borrower Eligibility

1502 Reporting

Payment of SBA Fees

Form 159 Submission

Recoveries Remittance (SBA Form 172 Payments)

Compliance with Prior Corrective Actions

Assessment

RISK MANAGEMENT

Review Objective The objective of the Risk Management review is to assess the Lender’s use of an effective governance model to identify, understand, and mitigate risk exposure to the SBA, including the Lender’s corporate governance structure, SBA business plan, and internal controls. This assessment is conducted through a review and analysis of the Lender’s corporate governance documents; structure of SBA program governance; operational and management policies and procedures; underwriting and loan monitoring policies and procedures; and exception to policy processes. This assessment is then tested through observations and interviews with the Lender’s SBA program management staff.

Organization Chart

Operating Plan

Internal Reporting

3rd Party Review of Loans

Risk Classification System

Allowance for Loan Losses

Industry Concentrations

Geographic Concentrations

Franchise Lending

Lender Purchase Rating The Lender Purchase Rating (LPR) aggregates the predicted purchase rate of loans within the Lender’s portfolio, assigning a single numeric value from a “1” to “5,” with “1” representing the lowest risk. LENDER’s overall rating is “3” indicating Moderate Risk.

LPR by Portfolio Segment*

LPR - Overall

LPR - Legacy (Pre-Jan 1, 2009)

LPR - Emerging (Jan 1, 2009 On)

LPR - Over $350K Loans

LPR - Under $350K Loans

LPR – Original

LPR – Acquired

SPECIAL ITEMS

Review Objective The objective of the Special Items review is to identify and assess any additional high risk lender behaviors or other areas of interest to the SBA. This assessment is a consolidation point for specific risks/activities/situations that do not fall into one of the other four categories. Special items include, but are not limited to, use of lender service providers and loan agents, secondary market sales, portfolios by originating bank, and delegated authorities.

Secondary Market Sales

Trust Account for Secondary Market Payments

Use of Loan Agents

Use of Lender Service Providers

APPENDIX A - Credit Administration and Compliance Weaknesses in the Review Sample

Total Sample

Loans with Credit Administration Weakness

Specific Weakness by Category:

Gathering

Verification

Documentation

Eligibility

Analysis

Controls

APPENDIX B - Individual Loans Examined

Credit Administration and Compliance Weaknesses

APPENDIX C – Balance Sheet

APPENDIX D – Income Statement

APPENDIX E – Scope of Examination

THIS DOCUMENT IS STRICTLY CONFIDENTIAL

This Report is the property of the U.S. Small Business Administration, Office of Credit Risk Management. Under no circumstances shall any recipient of this document disclose or make public this document or any portion thereof. Unauthorized disclosure of any of the contents of this document is subject to the penalties in 18 USC 641. The Office of Credit Risk Management must be notified immediately if the examined entity receives a subpoena or other legal process calling for the production of this document.