2010 SBK Business Loan Risk Rating System by Qb64IH

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									                        A                           B                       C                                 D
  The following matrix outlines the Risk Rating system. Each risk area (Operating Margins and Cash Flow, Balance Sheet
  weighted risk areas indicates the risk rating for the loan. The Loan Officer or Risk Manager should then consider any o
  The loan may be risk rated based on projections at the inception of the loan; when a loan has been in the portfolio fo
1 (continued use of projections on a case by case approved by the Risk Manager).
                                               Note: for those borrowers who business and personal financials are co-mingled (e.g. business debt on person
                                               "professionally" managed or where the entrepreneur has not co-mingled assets or debts, the calculations ma
2                                              the financial ratios are calculated.
3                                                Weight                      2                                3
     Operating Margins/Cash Flow
     DSC = debt service coverage
     calculations are based on 12 months                   DSC is 1.6x or greater based on   DSC is 1.3x to 1.59x based on
     historical financial information or         20.0%     historical cash flows.            historical cash flows.       (Based
     projections that include our loan using               (Based on the most recent FYE)    on the most recent FYE)
     EBITDA and 12 months of full loan
4    payments
5                                                                            2                                3
     Balance Sheet: Tangible Net
     Worth                                                 Equity to Assets .25 or better    Equity to Assets .20 > .24
                                                 12.5%
     (Based on the proforma after our loan                 (Debt:Tangible Worth <3:1)        (Debt:Tangible Worth <4:1)
6    closes)
     Balance Sheet: Working
     Capital                                     12.5%     Current Ratio 2:1 or greater      Current Ratio 1.5:1 to 1.99:1
     (Based on the proforma after our loan
7    closes)
8                                                                            2                                3
     Management/
     Credit History - highest Score of           10.0%     "2" is not an option              FICO > 750
9 principal(s)
                                                                                             • Proven experience in the same
                                                                                             business. • The CEO recognizes the
                                                                                             value of a quality workforce and
                                                                                             provides employee training and
                                                                                             benefits, including retirement plans.
     Management                         (to                                                  • CEO has good financial systems
     choose rating – all of                      15.0%     "2" is not an option              and can and does submit required
     descriptor must be true)                                                                financials with minimal to know
                                                                                             prompting from us. • Financial
                                                                                             trends are positive.


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11                                                                           2                                3
     Collateral/Secondary Source
     of RepaymentCollateral
     analysis, calculated as follows: Loan
     to Value (LTV): Total loans (including                LTV is 50% or lower               LTV is 51% to 75%
                                                 15.0%
     the our loan)/Collateral Value                        CCR 2:1                           CCR 1.9 < 1.3
     orCollateral Coverage Ratio (CCR):
     Collateral Value/Total Loans (including
12   our loan)
13                                                                           2                                3
                   A                      B                       C                                 D


     Industry, Market, Competitive                                                 Niche market - high barriers to entry
                                       15.0%     "2" is not an option
     Advantage                                                                     results in mild competition.

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     Financial Statements and        The Credit Memo must discuss Borrower's ability to produce timely and reliable internal financial statemen
     Accounting Systems              where the source of repayment is rent or the sale of real estate, the borrower may submit rent rolls, and/or m
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24
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26
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28
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30
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32
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34
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     The loan should be downgraded: • as a result of the above risk rating system, • the borrower's financial condition deterioriates
     concern that the loan may not be paid within the stated terms of the note even after a reasonable modification of the loans, • t
     periods (18 months for those reporting annually), • the borrower has not been able to make P&I (calculated on a reasonable am
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     When a loan is being downgraded to a 6 or 7, a new credit report will be pulled on the principal(s) and the guarantors. Lien se
     or Watch Listed credits, business searches should be conducted annually and documented to the file.
37

38 Other Factors Affecting the Risk Rating:

39 – Startups can be rated no higher than a 5
   – The following are indicators that a loan should be on the Watch/Problem Asset list: • Material non-compliance with the terms
   financial condition, • Any occurrence(s) that may lead us to believe a loan has developed unacceptable risk, • Loans criticized by
40 higher based on the system above or • if the borrower has not submitted financials in over a year (exceptions only for those bor
   – A loan should be downgraded to a Watch List asset (Risk Rated 6) if it is regularly on the 30+ past due list or becomes more tha
41 120 days past due.
   – A loan is considered a “Problem” asset (Risk Rated 7) if • the borrower’s primary source of repayment capacity is impaired to
42 SED has negotiated a voluntary liquidation plan or • it is more than 120 days past due unless there is a realistic plan for the loan

43 – Loans which are restructured, modified or follow on financing was approved due to cash flow issues may not be rated lower th
   – Loans which are restructured, modified or follow on financing was approved twice in 12 months but the borrower has not dem
44 the issues.
                    A                      B                       C                              D
45 Upgrades                                                                        In all cases referencing P&I, the payments must be on a reaso

46 When will loan be upgraded off the problem or watch list? Unless there are other outstanding issues, generally:
     For businesses or not for profits providing services to individuals whose     When the borrower is current on providing financial informatio
     outstanding (aggregate) is over $50,000:                                      Risk Rating criteria for an upgrade.
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                                                                                   When the borrower is 1. the borrower has made 12+ consecut
     For businesses or not for profits providing services to individuals whose
                                                                                   indicates that the borrower is current on all personal debt and
     outstanding (aggregate) is less than $50,000:
48                                                                                 problems in the past 12 months.
                                                                                   When borrower provides evidence of cash flow stabilization, b
     For R/E loans where the source of repayment is rental income:                 has submitted current financial information (business tax retur
49                                                                                 properties)

     For R/E loans where the source of repayment is either take out financing or   When the borrower is current on providing financial informatio
     the liqudation of real estate.                                                repayment is on track with original expectations or a viable, re
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                            E                                      F                                    G                                       H
ns and Cash Flow, Balance Sheet..) is rated independently. Each risk area is then weighted and the sum of the
nager should then consider any other risk factors present in the loan and/or borrower and assign the final Risk Rating.
 loan has been in the portfolio for 12 months, the risk rating will be based on the interim and year end financials
        1
o-mingled (e.g. business debt on personal credit cards), the calculation below should be global (personal and business combined). For
 led assets or debts, the calculations may be completed on the business alone. The lender should explain in the body of the credit memo how
        2
        3                   4                                 5                                6                               7

                                                                                                                           DSC is .49x or less.
                                                 Historic DSC 1.09x to.80x. (Based Historic DSC .79x to .50x. (Based
           Historic DSC 1.1x to 1.29x. (Based                                                                              (Based on either the most recent
                                                 on either the most recent FYE or the on either the most recent FYE or the
           on the most recent FYE)                                                                                         FYE or the projected, stabilized
                                                 projected, stabilized year)          projected, stabilized year)
                                                                                                                           year)
       4
       5                    4                                      5                                     6                                      7
                                                                                                                              Equity to Assets less than .09
           Equity to Assets .17 > .19            Equity to Assets .13 > .16            Equity to Assets .10 > .12
                                                                                                                              (Debt:Tangible Worth over 10:1) or
           (Debt:Tangible Worth 5:1)             (Debt:Tangible Worth 7:1)             (Debt:Tangible Worth 9:1)
                                                                                                                              negative equity
       6

           Current Ratio 1:1 to 1.49:1           Current Ratio .9:1 to .99:1           Current Ratio .75:1 to .89:1           Current Ratio .74:1 or lower
       7
       8                    4                                      5                                     6                                      7

           FICO 749 > 725                        FICO 724 > 660                        FICO 659 > 620                         FICO < 619
       9
           • Proven experience, but perhaps in   • CEO's ability to manage firms of    • CEO has not demonstrated             • Management struggling to
           a different business. • The company   this type is unproven. • CEO has      adequate knowledge or acquired         demonstrate he/she has a viable
           provides employee training and        demonstrated he/she understands       adequate resources to help the         business model.
           benefits. • CEO has good financials   the need for good financial systems   company become more profitable         • Management does not have
           systems and can and does submit       and required financials are           or the company is a start up.          financials systems in place and
           required financials, sometimes with   submitted, but are sometimes late.    • CEO's financial systems are not      cannot produce reliable statements.
           prompting from us.              •     • Financial trends may be negative,   adequate, financials not reliable or
           Financial trends are stable.          but CEO has demonstrated that         required financials are not
                                                 he/she understands what it takes to   submitted regularly.
                                                 realize better financial results.


      10
      11                    4                                      5                                     6                                      7


                                                                                                                              LTV is 150.01% or greater.
           LTV is 76% to 100%                    LTV is 100.1% to 120%                 LTV is 120.01% to 150%                 CCR < .69
           CCR 1.29 < 1.0                        CCR .9 < .8                           CCR .79 < .7                           Loan is, for all practical purposes,
                                                                                                                              unsecured.

      12
      13                    4                                      5                                     6                                      7
                            E                                    F                                    G                                    H

                                                Very tough competitors, reliance on
           Competitive industry but firms can                                       Significant deterioration in market   Deterioration in markets has
                                                commodity prices, difficult to
           control costs so can manage                                              conditions; borrower struggling to    manifested itself in severe weakness
                                                control costs so downturns
           downturns in market.                                                     manage changes in industry.           in the borrower.
                                                significantly impact bottom line.
      14
and reliable internal financial statements, including a budget, which can be analyzed post closing. In the case of loans financing real estate
orrower may submit rent rolls, and/or montly updates on the status of the sale of real estate in lieu of interim financial statements.
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 r's financial condition deterioriates significantly and the borrower has not presented a plan for reversing the trends, • if there is
onable modification of the loans, • the borrower has not provided reliable financial information in more than two reporting
e P&I (calculated on a reasonable amortization based on the collateral or the original purpose of the loan).
      36
 cipal(s) and the guarantors. Lien searches (R/E and UCC) will be conducted. Collateral valuations must be verified. For Problem
 to the file.
      37

      38

      39
erial non-compliance with the terms and conditions of the borrower’s loan agreement, • Marked deterioration in the borrower’s
acceptable risk, • Loans criticized by examining authorities, • Loans placed on non-accrual, • Loans resulting in a risk rating of 6 or
       (exceptions only for those borrowers on annual reporting).
 year 40
 + past due list or becomes more than 60 days past due unless there is a realistic plan for the loan to become current before it hits
      41
 repayment capacity is impaired to where borrower’s payments do not cover principal payments on a reasonable amortization, •
 there is a realistic plan for the loan to become current before it hits 180 days past due.
      42

ow issues may not be rated lower than a 5.
      43
onths but the borrower has not demonstrated improved cash flow must be downgraded to a 6 or 7 depending on the severity of
      44
                           E                                  F                                 G                                 H
 P&I, the payments must be on a reasonable amortization based on the collateral or original purpose of the loan
       45
s, generally:
      46
 urrent on providing financial information (interim business financials & tax returns, PFS less than 1 year & personal taxes) and the loan meets
an upgrade.
      47
1. the borrower has made 12+ consecutive P&I monthly payments with none over 30 days, 2. a credit report pulled within the past 90 days
ower is current on all personal debt and 3. the loan has not had been restructured, modified or follow on financing approved due to cash flow
2 months.
       48
es evidence of cash flow stabilization, borrower has made 12+ consecutive P&I monthly payments with none over 30 days, and when borrower
inancial information (business tax returns if applicable, PFS less than 1 year & personal taxes, current rent roll - our collateral plus all other
       49

 urrent on providing financial information (business financials & tax returns, PFS less than 1 year & personal taxes) and original source of
with original expectations or a viable, reasonable replacement source of repayment has been identified.
       50
                                                                                                  Weighted
Scoring                                                                 Rating         Weight      Rating
1. Operating Margins and Cash Flow (2-7)                                   5           20.0%            1
2a. Balance Sheet (2-7): Equity to Assets                                  6           12.5%        0.75
2b. Balance Sheet (2-7: Working Capital                                    5           12.5%       0.625
3a. Management - Personal Credit History (3-7)                             3           10.0%        0.3
3b. Management - Capacity (3-7)                                            6           15.0%        0.9
4. Collateral and Secondary Source of Repayment (2-7)                      3           15.0%        0.45
5. Industry and Market and Competitive Advantage (3-7)                     6           15.0%        0.9


If the loan has not been past due in the previous 12 months and there is has been no
modifications of their repayment terms or new loans to enhance cash flow

                                                     Combined Weighted Numerical Rating             5.43


                                                                                 4          3.5         >
                                                                                 5          4.5     <       >   5.4
                                                                                 6          5.5     <       >   6.4
                                                                                 7          6.5      <
                                                                      Calculated Risk Rating
                         2            3            4            5            6          7




Assets                $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
Liabilities            $75,000 $80,000 $83,334 $87,500 $90,000 $110,000
Equity                 $25,000 $20,000 $16,666 $12,500 $10,000 -$10,000

Debt:Worth                   3.00         4.00         5.00         7.00         9.00   -11.00
Equity:Assets                0.25         0.20         0.17         0.13         0.10    -0.10


Current Assets         $50,000 $50,000 $50,000 $50,000 $50,000 $50,000
Fixed Assets           $50,000 $50,000 $50,000 $50,000 $50,000 $50,000
Total Assets          $100,000 $100,000 $100,000 $100,000 $100,000 $100,000

Current Liabilities    $25,000      $28,500      $33,334      $50,000      $62,500 $71,000
LTD                    $50,000      $51,500      $50,000      $37,500      $27,500 $39,000
Total Liabilities      $75,000      $80,000      $83,334      $87,500      $90,000 $110,000

Equity                 $25,000      $20,000      $16,666      $12,500      $10,000 -$10,000

Current Ratio                2.00         1.75         1.50         1.00         0.80       0.70
                      2                   3            4           5            6           7
Collateral/S
                                                               LTV is       LTV is     LTV is
econdary                          LTV is 51% to   LTV is 76%
             LTV is 50% or lower.                              100.1% to    120.01% to 150.01% or
Source of                         75% lower.      to 100%.
                                                               120%.        150%.      greater.
Repayment

Loan                  $100,000         $100,000 $100,000 $100,000 $100,000                $100,000
Collatera             $200,000         $134,000 $100,000 $83,000 $66,500                   $50,000

LTV                           50%           75%     100%            120%        150%
CCR                          $2.00         $1.34    $1.00           $0.83       $0.67         $0.50
                     > 2:1           1.9 < 1.3   1.29 < 1        .9 < .8     .79< .7       < .69
                                                        Strong                   Medium                       Weak
Operating Margins/Cash Flow
DSC for terms loan/cash flow projections for
LOC's




Balance Sheet: Tangible Net Worth
(Based on the proforma after our loan closes)




Balance Sheet: Working Capital
(Based on the proforma after our loan closes)



Management/Credit History




Management




Collateral/Secondary Source of
Repayment




Industry, Market, Competitive
Advantage




Management                                      Management's ability to manage company
                                                Management understands and demonstrates ability to produce financials
                                                Management understands financial trends and reacts to negative trends
                                                Management knows what it takes to generate a profit

Industry                                        What is happening in the industry
                                                The effect of industry trends on the company
                                                Management understanding of the industry
                                                Management understands industry and how to keep customers and grow company

								
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