Report of Examination Page 1 Template;

Sample Report of Examination (“Bank of Anytown”)

SCOPE OF THE EXAMINATION

[INPUT THE DATE OF THE EXAMINATION AND REVIEW PERIOD COVERED;

NAME OF EXAMINER-IN-CHARGE; TYPE AND PURPOSE OF THE
EXAMINATION; COMPLIANCE MANAGEMENT, OPERATIONAL, AND
REGULATORY AREAS REVIEWED; OFFICES VISITED; AND METHODS USED
TO CONDUCT EXAMINATION]

CONSUMER COMPLIANCE RATING

[INSERT THE APPROPRIATE COMPLIANCE AND CRA RATINGS; BRIEF

DESCRIPTION OF PRINCIPAL FACTORS SUPPORTING THE RATING; AND A
COMMENT ABOUT THE OVERALL DIRECTION OF THE COMPLIANCE
POSTURE

COMPLIANCE MANAGEMENT

Board of Directors and Senior Management Oversight

[INPUT EXAMINER COMMENTS AND CONCLUSIONS REGARDING

OVERSIGHT]

Compliance Program

[INPUT EXAMINER COMMENTS AND CONCLUSIONS REGARDING

PROGRAM]

Audit Function

[INPUT EXAMINER COMMENTSAND CONCLUSIONS REGARDING AUDIT

FUNCTION]

RECOMMENDATIONS FOR CORRECTIVE ACTION

[INPUT EXAMINER RECOMMENDATIONS FOR ADDRESSING THE

SIGNIFICANT EXAMINATION FINDINGS; AND MANAGEMENT’S RESPONSE]

ENFORCEMENT ACTIONS

[INPUT COMMENTS REGARDING ENFORCEMENT ACTIONS, IF APPLICABLE.

OTHERWISE, DELETE THIS SECTION.]
COMMUNITY REINVESTMENT ACT EXAMINATION

[INPUT BRIEF COMMENTS REGARDING RESULTS OF THE CRA

EXAMINATION, IF APPLICABLE. OTHERWISE, DELETE THIS SECTION]

MEETING WITH MANAGEMENT

[INPUT DATE AND ATTENDEES OF MEETING WITH MANAGEMENT, AND

BRIEF COMMENTS ABOUT DISCUSSION]
 April 8, 2006

Board of Directors
Bank of Anytown
123 Main Street
Anytown, Anystate

Re: Compliance Examination Report and CRA Performance Evaluation

Members of the Board:

Enclosed is a copy of the Compliance Examination Report and the Community

Reinvestment Act Performance Evaluation prepared as of the close of business March 14,
2006, by Examiner Mary A. Richards.

The results of the compliance examination, including the Consumer Compliance rating,
are subject to the confidentiality restrictions of Part 309 of the FDIC Rules and
Regulations.

Within thirty (30) business days of its receipt, the enclosed Performance Evaluation must
be placed in the institution's CRA public file. The format and content of this evaluation
may not be altered or abridged in any manner. Upon request, a copy of your current
evaluation must be provided to the public. You are authorized to charge a fee not to
exceed the cost of reproduction and mailing (if applicable).

Please review the report at an official meeting. If there are any questions, please contact
Review Examiner Brian Wilson at (555) 123-4000.

Sincerely,

Field Supervisor

Enclosures
 Bank of Anytown
Anytown Anystate

Region: Any Region Certificate Number: #####

Examiner in Charge: Mary A. Richards
Examination Date: March 14, 2006
SCOPE OF THE EXAMINATION

Examiner Mary A. Richards conducted a compliance examination of your institution as

of March 14, 2006. The examination included a risk-focused review of the bank’s
compliance management system, and included tests to assess the bank’s compliance with
applicable consumer protection and fair lending laws and regulations. The examination
focused on lending, deposit, and investment activities conducted since the January 15,
2004, FDIC compliance examination.

Examination procedures included a review of all compliance-related policies and written

procedures, Board and committee minutes, training records, internal monitoring, loan
files, general disclosures, and other bank records. Extensive interviews with senior
managers, the Compliance Officer, and front-line personnel were conducted to determine
the extent to which written and unwritten policies and procedures are implemented.
Documentation related to specific loan and deposit transactions was also reviewed to
identify operational weaknesses. On-site examination procedures were conducted at the
bank’s main office in Anytown, and at the Center Street branch office.

The bank’s performance under the Community Reinvestment Act (CRA) was also
evaluated during this examination. A review of the bank’s loan portfolio, CRA data, and
public file was performed. Interviews were held onsite with the bank’s Compliance
Officer and lending personnel.

CONSUMER COMPLIANCE RATING

A Consumer Compliance Rating of "2" is assigned. An institution in this category is in a

generally strong compliance position. While the bank’s compliance program is effective,
lax monitoring in certain regulatory areas resulted in significant violations. Although the
bank has a strong Compliance Officer, senior management and the Board of Directors
have not devoted sufficient attention to consumer compliance. Several areas of
improvement were noted since the prior examination, including an increased emphasis on
training and the further development of an audit program. Overall, the compliance
posture of the bank has improved since the last examination.

COMPLIANCE MANAGEMENT

Board of Directors and Senior Management Oversight

Board and senior management oversight is adequate.

The Board and senior management designated a Compliance Officer, and provided him
with the necessary resources to be effective. Compliance Officer Grand is
knowledgeable, committed to maintaining a strong compliance management system, and
demonstrates a positive attitude toward compliance issues. However, the Board’s and
President Smith’s compliance knowledge and commitment is somewhat low relative to
their responsibilities. For example, although the Board is scheduled to review and
approve compliance policies annually, these policies were last approved in January 2003.
In addition, according the bank’s Compliance Policy, the Compliance Officer is supposed
to present a quarterly compliance report to the bank management and the Board;
however, for the last six calendar quarters no such report has been documented in the
Board minutes.

Compliance Program

The existing compliance program is adequate, but some significant deficiencies were
noted.

Policies and Procedures

The bank’s informal approach to documenting bank procedures in the form of policies
has proven adequate in the past largely due to Compliance Officer Grand’s knowledge of
applicable regulations and his organizational abilities, as well as the limited turnover of
key personnel. However, the combination of written and unwritten policies which serves
as the bank’s compliance program has become inadequate given the growth in the bank’s
size and complexity. Examiners discovered several differences in compliance processes
at the various bank facilities. The lack of a uniform approach to compliance throughout
the bank has resulted in significant violations. For example, difference in procedures at a
branch office resulted in home equity loans at that branch not receiving the appropriate
rescission notice, which is a repeat violation of Regulation Z.

Monitoring
Monitoring is performed by bank personnel on most transactions subject to consumer
compliance regulations and is credited with alerting them and Compliance Officer Grand
to potential violations on numerous occasions. The checklists implemented by
Compliance Officer Grand cover several areas and have had a positive impact on internal
operating procedures. However, during the examination four regulatory areas were
identified that were not subject to monitoring: Flood Insurance, Truth in Savings,
Advertising, and Privacy. Significant violations of the Flood Insurance regulations
occurred when the bank originated and extended loans without the required flood
insurance coverage in place; appropriate monitoring could have prevented the violations.
Additional instances of this significant violation could have resulted in the assessment of
civil money penalties against the bank.

Training
The bank’s training manuals are current, accurate, and comprehensive. While the bank’s
training efforts have generally been effective, the loan officers’ knowledge of the fair
lending laws and regulation is weak. The bank’s training records indicate that loan
officers have not received formal training on all regulations applicable to their job
responsibilities, including fair lending.

Audit Function
The bank does not currently have an internal or external audit function in place for any
areas other than Truth in Lending, but is working on a system of internal audits to be
implemented soon. The lack of an audit function has not hampered the bank’s
compliance performance primarily because of the existence of a generally strong
monitoring system. Due to the previously mentioned gaps in the bank’s monitoring
system, management was counseled that all areas need to be covered by either internal
monitoring or by an internal or external audit. The bank’s proposed audit structure is
limited in scope, but appears to adequately address the areas of highest risk.

Please refer to the Significant Violations pages for further details on all significant
violations found during the compliance examination.

RECOMMENDATIONS

As noted in the sections above, while the compliance management system is adequately
managed, the board should take action in the following areas to address the noted
weaknesses:
¾ Discuss significant compliance issues and receive compliance training at least semi-
annually, documenting those activities in the board minutes.
Management’s Response: President Smith committed to having Compliance Officer
Grand provide brief, semi-annual compliance presentations to the board. The
presentations will include a general status report, the results of the bank’s monitoring
efforts, and overview-type compliance training.
¾ Develop a compliance program that ensures uniform procedures and practices at all
facilities.
Management’s Response: Mr. Grand agreed to develop a written compliance
program within the next six months.
¾ Implement expanded monitoring procedures for the four areas discussed above, with
a priority placed on ensuring that the requirements of the Flood Insurance regulation
are met.
Management’s Response: Mr. Grand committed to developing and implementing
monitoring procedures for these areas in the next three months.
¾ At a future date, conduct a follow-up discussion on the deficiencies noted during this
examination and ensure that corrective action was taken and was effective.
Management’s Response: President Smith stated that the Board would have such a
discussion.

COMMUNITY REINVESTMENT ACT

A CRA rating of "Satisfactory" is assigned. An institution in this group has a satisfactory

record of helping to meet the credit needs of its assessment area, including low- and
moderate-income neighborhoods, in a manner consistent with its resources and
capabilities. Please refer to the enclosed Public Evaluation for a discussion of the bank’s
CRA performance.
MEETING WITH MANAGEMENT

On March 23, 2006, Examiner-in-Charge Richards, Field Supervisor Lou B. Grant, and
Compliance Examiner David C. Jones met with management and two outside directors to
discuss the results and the recommended Compliance and CRA ratings. Representing the
bank were President Michele J. Smith, Compliance Officer Douglas F. Grand, and
Directors Neil S. Sharp and Jim L. Steele. During the meeting, each attendee received a
list of the violations cited during the examination. That list will serve as the institution’s
record of violations identified during the examination.

The Compliance Examination findings and CRA performance were discussed in detail.
The scope of the examination, strengths and weaknesses in the compliance management
system, and noted violations, including significant, technical and isolated violations, were
discussed at length. In addition, the recommendations stated in this report were discussed
at length. Management displayed an interest in the topics being addressed and was
receptive to the recommendations made. The proposed ratings for compliance and CRA
were disclosed.
Significant Violations #####

Violations cited below are of supervisory concern due to their serious nature, recurrent pattern,
or system-wide impact. Individually or collectively these violations reflect deficiencies requiring
prompt corrective action by the financial institution.

The bank originated seven loans secured by property in a special flood hazard area since
the prior examination. The bank also extended loans secured by property in a special
flood hazard area a total of ten times since the previous examination. Violations of three
different sections of the flood insurance regulations were found during the examination.

FLOOD INSURANCE

Section 339.3(a) of FDIC regulations prohibits a financial institution from making,

increasing, extending, or renewing a designated loan secured by a building, a mobile
home, or personal property unless the underlying security is covered by flood
insurance. [150101]

The bank violated this section because loan officers either originated or extended credit
without flood insurance in 5 of 17 instances. This violation is attributed to a lack of
sufficient monitoring and to errors in the training provided to loan officers. The affected
loans are detailed below.

Origination
Borrower Name Loan Number Loan Balance
/Extension Date
Fielding, Chris 28161 2/01/2004 $9,179
Fielding, Chris 28161 09/19/2004 $5,596
B & B Appliance, 40121 12/01/2003 $25,000
LLC
Braymore, Matt 42409 08/30/2004 $41,809
Crocker, James 42219 08/09/2004 $26,215

Management has taken or will take the following corrective actions:

¾ Fielding – Flood insurance expired on October 26, 2001 at which time the loan
balance was $9,592 and the value of improvements was $35,000. The loan officer
believed that flood insurance was no longer needed since the value of the land was
greater than the loan balance. The loan balance is now less than $1,000. Since the
balance of the loan is less than $5,000, the bank will not be required to ensure a
policy is in force.
¾ B & B Appliance – The borrower purchased an appropriate amount of flood
insurance as of April 3, 2004, and it remains sufficient.
¾ Braymore – Bank personnel sent the borrower a notice on February 17, 2005, and
informed him that the bank will force-place flood insurance if he does not purchase it
within 45 days.
¾ Crocker – The borrower purchased flood insurance on August 27, 2004, and paid the
loan in full on January 17, 2005.

Compliance Officer Grand noted similar issues in an audit he conducted as of March 28,
2004. Training was provided to the loan officers at that time and again during this
examination. Mr. Grand stated that future violations would be prevented through
additional training and new monitoring procedures. In an exit meeting with examiners on
March 23, 2005, President Smith stated that the Board of Directors would fully support
ongoing training, transaction monitoring and internal audits of the flood insurance
regulations.

Section 339.9(a) of FDIC regulations requires a financial institution to furnish a

written notice to the borrower and to the servicer in all cases whether or not flood
insurance is available under the Act for the collateral securing the loan when
making, increasing, extending, or renewing a loan secured by a building or a mobile
home located or to be located in a designated special flood hazard area. [150501]

The bank violated this section because in one of seven loan originations and in four of ten
loan extensions, it did not provide the required written notice. Compliance Officer
Grand, who noted similar violations in his audit dated March 28, 2004, attributed this
violation to a misunderstanding of the requirements for extensions. A speaker at a
compliance seminar he attended mistakenly told him that the notices required by this
section were not necessary for extensions because the bank had already provided the
notice at origination. After this seminar, Compliance Officer Grand informed the loan
officers that the notices were no longer required for extensions. At the March 23, 2005,
exit meeting with examiners, he stated that lending personnel had been informed that
these notices are required for extensions as well as increases, renewals, and originations.

Origination
Borrower Name Loan Number
/Extension Date
B & B Appliance, LLC 40121 06/01/2004 (extension)
B & B Appliance, LLC 40121 12/01/2004 (extension)
Goodman, David 44567 08/31/2004 (extension)
Goodman, David 44567 11/30/2004 (extension)
Braymore, Matt 42409 08/30/2004 (origination)

Section 339.9(c) of FDIC regulations requires that the financial institution provide
the notice required by paragraph (a) of this section to the borrower within a
reasonable time before the completion of the transaction, and to the servicer as
promptly as practicable after the financial institution provides notice to the
borrower and in any event no later than the time the bank provides other similar
notices to the servicer concerning hazard insurance and taxes. [150502]
This section was violated because in three of seven originations, the bank did not provide
the required notice within a reasonable time before the completion of the transaction.
This violation is attributed to gaps in the bank’s monitoring system. Mr. Grand promised
future compliance. Details are listed in the following table.

Origination or Date Notice

Borrower Name Loan Number
Extension Date Provided
B & B Appliance,
40121 12/01/2003 03/16/2004
LLC
Paulson, James 42226 08/10/2003 08/13/2003
Crocker, James 42219 08/09/2004 08/13/2004

TRUTH IN LENDING

Section 226.23(b)(1) of Regulation Z requires the creditor to furnish each consumer

entitled to rescind with two copies of the notice on a separate document which
identifies the transaction and clearly makes the disclosures required by this section.
[089301]

A review of nine rescindable loans revealed that the bank did not provide the appropriate
rescission notices to three home equity loan customers. This is a repeat violation. The
review included three loans from each of the bank’s three facilities. The transactions in
violation were all originated at the Center Street branch in Othertown. Discussions with
Compliance Officer Grand and Center Street Branch Manager Naomi Parker indicated
that the cause of the violation was that the Center Street facility uses the same internal
loan code for home purchase and home equity loans. As a result, the loan disclosures
generated at the main office for the branch’s home equity loans did not include rescission
notices. The loan code issue was discussed at the prior examination. However, each
branch operates somewhat independently with respect to compliance procedures and the
Center Street branch failed to take the appropriate corrective action. Examiners
discussed with management the potential ramifications of the violation. Ms. Parker
performed a file search during the examination and determined the number of affected
borrowers to be 20. Compliance Officer Grand committed to formalizing compliance
procedures in a written compliance program that will guide actions at all facilities. The
three loans initially identified by examiners are detailed below.

Borrower Name Loan Number Origination Date Loan Amount

Clinton, Charles 19295 12/16/03 $ 6,000
Dunlop,
19252 11/19/03 9,500
Horace/Martha
Valentine, R. J. 19751 11/14/03 12,600
HOMEOWNERSHIP COUNSELING

Section 106(c)(5) of the Housing and Urban Development Act requires the creditor
to inform borrowers, within 45 days of initial loan default, of the availability of
homeownership counseling.

The bank is in system-wide violation of this section for not informing delinquent
borrowers of the availability of homeownership counseling. Discussions with
Compliance Officer Grand and President Smith revealed that management was unaware
of the November 26, 2001, reinstatement of this requirement. President Smith stated that
she is certain that some borrowers have been 45 days delinquent over the past several
years and would have been eligible for counseling, but were not provided a notice
informing them of the available options. Due to management’s admission of this
violation, a transaction review was not performed. During the examination, a suitable
notice was drafted and procedures were established to ensure future compliance with this
section. Compliance Officer Grand also committed to performing a file search to identify
currently delinquent customers and provide the appropriate notice to them.
COMPLIANCE SUPERVISORY COMMENTS

BANK NAME: Bank of Anytown

CITY, STATE: Anytown, Anystate
CERT. # #####

President Smith notified the examiner-in-charge in confidence that she plans to retire
later this year. She indicated that CLO Jones will take her place. CLO Jones has always
been a strong supporter of the bank’s consumer compliance and CRA efforts.