oversight

First Quarter FY 2007 FCS Survey

Published by the Farm Credit Administration, Office of Inspector General on 2007-03-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

            First Quarter FY 2007 OIG Report on the Survey of FCS Institutions
                      Regarding the Agency’s Examination Function
                                      for the Period
                              October 1 - December 31, 2006

Introduction

Based on the nature and degree of interface FCS institutions had with the Agency's examination
function in the months leading up to December 31, 2006, OE identified 30 FCS institutions that
were felt to be in a position to provide meaningful survey responses. (Institutions will be
surveyed no less frequently than every 18 months and, generally, no more frequently than every
12 months.)

The OIG sent surveys to those 30 institutions on February 1, 2007. A follow-up e-mail was sent
to nonresponding institutions on March 5. Of the 30 institutions surveyed for the quarter ended
December 31, 2006, there were 21 completed surveys received as of March 19. Some of the
nonresponding institutions will likely yet send a completed survey. If so, they will be included in
the next quarterly report.

The OIG will provide an e-mail report to you at each fiscal year quarter-end, i.e., December 31,
March 31, and June 30, so that you may timely take whatever action you deem necessary to
address the responses. A detailed summary report will be issued to you covering aggregate
survey results for each fiscal year ended September 30.

The survey asked respondents to rate each survey statement from "1" (Completely Agree) to "5"
(Completely Disagree). The rating options are as follows:

       Completely Agree 1
       Agree 2
       Neither Agree nor Disagree 3
       Disagree 4
       Completely Disagree 5

There is also an available response of "Does Not Apply" for each survey statement.

Narrative responses are provided verbatim, except that any identifying information has been
removed.

Survey Results - First Quarter FY 2007

   •   Average numerical responses to survey statements 1 - 10 range from 1.7 to 2.2.
   •   The average response for all survey statements is 1.9.

Two institutions responded to one or more survey statements with "Does Not Apply." One so
responded to survey statements 7 [The examiners were organized and efficiently conducted
examination activities.] and 8 [Examiners fairly considered the views and responses of the
board and management in formulating conclusions and recommendations.]. I spoke to the CEO
regarding their responses. He indicated that they had relatively little interface with the examiners
                          First Quarter FY 2007 OIG Report on the Survey of FCS Institutions
                                          Regarding the Examination Function
_________________________________________________________________________________________________


and did not feel capable of providing a rating for either survey statement. The other institution so
responded to survey statement 10 [FCS-wide guidance from the Office of Examination (e.g.,
bookletters, informational memoranda, etc.) was timely, proactive and helpful.]. Their
accompanying comment is the last bullet under "Comments" for survey statement 10.

Two institutions rated a survey statement below a "3" (Neither Agree nor Disagree). One
institution rated survey statement 8 [Examiners fairly considered the views and responses of the
board and management in formulating conclusions and recommendations.] as a "4" (Disagree).
I called the CEO to inquire as to the reason(s). He indicated that over the examination cycles for
2005 and 2006, he and his board felt the examiners, particularly the lead examiner, were not
listening effectively and, as a result, formulated conclusions based on incomplete information.
The other institution rated survey statement 9 [The results and recommendations of the Office of
Examination's national examination activities (e.g., information technology, finance, credit, etc.)
and its reports on identified best practices have assisted your institution.] as a "4" (Disagree).
The explanatory comment is listed as the last bullet under "Comments" for survey statement 9.

Nevertheless, positive narrative responses predominate in the comments on survey statements.
This would appear to reinforce the methodology that OE is applying to the examination of
institutions. However, there are some comments in response to survey statements 5 through 10,
11b, and 12 that may provide opportunities for you to reassess or refine examination
methodology and communications.

Additionally, there are two comments in response to survey item 12 that are of particular
interest. The first has to do with the respondent's concern that a "best practice" resulting from a
national examination activity may evolve into a regulatory requirement, which in the view of the
respondent, may not be cost effective for a small institution.

The other comment, which has primary import for the Office of Regulatory Policy, has to do with
the same respondent's perspective that "...sometimes important distinctions between the
System and other regulated companies are ignored when FCA considers new regulations and
policies. Case in point was the “insider” designation that was included in the proposed
governance regulations. The System has no directors that would be classified as “insiders” as
they are all independent from management."

Responses to Survey Statements 1–10

                                 Risk-Based Examination Process

Survey Statement 1:                 The scope and depth of examination activities focused on
                                    areas of risk to the institution and were appropriate for the
                                    size, complexity, and risk profile of the institution.

            Average Response: 1.8

            Comments:

            •   This has been adjusted somewhat in recent years by FCA and is much more
                appropriate now.
            •   Farm incomes have been good and are increasing. Our institution is profitable
                and our loan risk is low.

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                          First Quarter FY 2007 OIG Report on the Survey of FCS Institutions
                                          Regarding the Examination Function
_________________________________________________________________________________________________


Survey Statement 2:                 The examination process helped the institution understand its
                                    authorities and comply with laws and regulations.

            Average Response: 2.0

            Comments:

            •   The institution has processes in place to understand and review our regulatory
                compliance.
            •   Our past two lead examiners have done a good job of assisting us to know what
                was expected and be prepared for compliance.

Survey Statement 3:                 The results and recommendations of the examination process
                                    covered matters of safety and soundness, and compliance
                                    with laws and regulations.

            Average Response: 1.8

            Comments: None

Survey Statement 4:                 Examiners were knowledgeable and appropriately applied
                                    laws, regulations, and other regulatory criteria.

            Average Response: 1.9

            Comments:

            •   To our knowledge, the examiners that produced our streamlined document were
                knowledgeable and appropriately applied laws.
            •   We’ve worked with two lead examiners in the recent past and both have been
                good in this area.


                              Communications and Professionalism

Survey Statement 5:                 Communications between the Office of Examination staff and
                                    the institution were clear, accurate, and timely.

            Average Response: 1.7

            Comments:

            •   It was difficult to determine from the generalized nature of the exam findings
                across the streamlined group as to whether they applied to our institution or not.
            •   No problems, the use of electronic communication has helped significantly.
            •   More proactive communication to the appropriate levels of the institution,
                especially where FCA is not getting needed information or analysis, would greatly
                benefit the efficiency of the exam process for both examiners and the institution.



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                          First Quarter FY 2007 OIG Report on the Survey of FCS Institutions
                                          Regarding the Examination Function
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            •   Thorough communications before the exam provided clarity of exam focus, which
                resulted in better preparation by our institution, and a more fruitful onsite
                exchange.

Survey Statement 6:                 Examination communications included the appropriate amount
                                    and type of information to help the board and audit committee
                                    fulfill their oversight responsibilities.

            Average Response: 1.8

            Comments:

            •   It may have been beneficial to note those issues our institution should be
                addressing specifically vs. wondering if the general comments applied.
            •   The Audit Committee had a very informative meeting with the examiners as well
                as an executive session without management.

Survey Statement 7:                 The examiners were organized and efficiently conducted
                                    examination activities.

            Average Response: 1.7

            Comments:

            •   Received letter day of call—no time to review prior to call.
            •   Most of the work has been done on a quarterly basis instead of all at one time.
                This has been a benefit to the institution.
            •   We do not have “trainees” which require more time to interact with. Primary
                examiner continued relationship with the organization and provided continuity
                even after the FCA reorganization. Auditors saved organization time by reviewing
                loan folders in the branch offices which was appreciated.
            •   Given the short time onsite, the communications before and after onsite was
                organized and did not disrupt the institution.

Survey Statement 8:                 Examiners fairly considered the views and responses of the
                                    board and management in formulating conclusions and
                                    recommendations.

            Average Response: 2.0

            Comments:

            •   The two lead examiners we have been working with excelled in this area.
            •   Agree at the most senior levels of the exam team. At lower levels, examiners
                don’t always seem to consider our responses.




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                          First Quarter FY 2007 OIG Report on the Survey of FCS Institutions
                                          Regarding the Examination Function
_________________________________________________________________________________________________


                            Best Practices and Regulatory Guidance

Survey Statement 9:                 The results and recommendations of the Office of
                                    Examination’s national examination activities (e.g., information
                                    technology, finance, credit, etc.) and its reports on identified
                                    best practices have assisted your institution.

            Average Response: 2.2

            Comments:

            •   The information included in the report was helpful, except we did not know for
                certain if it applied to us.
            •   We very much support the cross-institution exam approach and the
                recommendations and observations that result.
            •   The recently received National Examination Business Continuity and Information
                Security report based its findings (suggested enhancements) on dated
                information. FCA examiners were aware our policies and practices were being
                upgraded, but did not inquire about current status prior to report release.
                Communication could have been improved, and resulted in an inaccurate
                message being conveyed to our Board.

Survey Statement 10:                FCS-wide guidance from the Office of Examination (e.g.,
                                    bookletters, informational memoranda, etc.) was timely,
                                    proactive and helpful.

            Average Response: 1.9

            Comments:

            •   The latest group of bookletters and informational memorandum have been very
                helpful in establishing direction.
            •   The information received is typically useful; however, many areas aren’t
                addressed.
            •   There was no guidance issued by the Office of Examination during the exam
                period that applied to our institution.

                Responses to Additional Survey Items 11a, 11b, and 12

Survey Item 11a: What aspects of the examination process did you find most beneficial?

            •   Discussion, interpretation, information exchange, on regulations, laws, and
                policies.
            •   Capital adequacy discussion.
            •   The fact the exam teams were not on-site and did not disrupt staff was very
                beneficial. Also the process was completed efficiently.
            •   The cooperative attitude and approach by the examiners. There was not a feeling
                of looking for something wrong. Good discussion on governance issues.
            •   Minimal staff disruption by the offsite examination process.


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                          First Quarter FY 2007 OIG Report on the Survey of FCS Institutions
                                          Regarding the Examination Function
_________________________________________________________________________________________________


            •   We haven’t had a normal full examination since the fall of 2005. We have been
                working since that time on an “on going” process of providing information and
                getting feedback. That seems to work very well for us.
            •   Communication of results.
            •   The dialogue with examiner on technical aspects of regulatory issues.
            •   The look across institutions and the opportunity to share best practices.
            •   All
            •   Extended audit timeframe. Less frequent onsite exams unless business
                conditions warrant.
            •   As an Audit Committee, meeting with the examiners was very informative.
            •   The new scope seems more appropriate for a safety and soundness regulator.
            •   FCA’s examination team made some suggestions on management reports that
                the institution’s management felt were helpful.
            •   Dialog of examiners and officers and directors resulted in mutual respect and
                understanding.
            •   We were given the opportunity to respond to issues before the final report was
                prepared.
            •   More offsite work, which allows for an ongoing exam process with better
                communication and no surprises.
            •   Our lead examiner's tone and approach to the exam was clear, constructive and
                open, which effectively eliminated the possibility of frustrations caused by
                misunderstandings.

Survey Item 11b: What aspects of the examination process did you find least beneficial?

            •   Nothing material.
            •   The lack of specificity in the exam results and wondering if they applied to us or
                not.
            •   None.
            •   Cost to our stockholders.
            •   We’ve just changed lead examiners again due to an unexpected retirement.
            •   Actually with more offsite work being done the interference with daily routine is
                drastically reduced.
            •   Nothing.
            •   N/A
            •   N/A
            •   This was an offsite exam and we believe it worked very well as disruption to the
                office was minimal and lowered the cost of the exam.

Survey Item 12: Please provide any additional comments about the examination process and
related communications.

            •   When clean examinations occur, final presentation of results could be held by
                conference call with board or audit committees.
            •   Our experience over the past few years has been good, significantly due to the
                quality and willingness of the Lead Examiners to work with us and try to
                understand our situation, processes and approaches to problem solving. They
                have also been very willing to offer guidance and input in a constructive manner
                instead of just looking for ways to criticize.
            •   Have noticed the gradual increase in overall talent within the examination teams.

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                          First Quarter FY 2007 OIG Report on the Survey of FCS Institutions
                                          Regarding the Examination Function
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            •   Am concerned that “best practices” recommendations made today will translate
                into future regulatory requirements. Some “Best Practices” may not be necessary
                or cost effective for a small institution. Reasonableness must also be considered.
                It seems that sometimes important distinctions between the System and other
                regulated companies are ignored when FCA considers new regulations and
                policies. Case in point was the “insider” designation that was included in the
                proposed governance regulations. The System has no directors that would be
                classified as “insiders” as they are all independent from management.
            •   Ongoing discussions with the EIC during the year are beneficial to the institution
                and we hope the ongoing dialogue enables the examiners to complete the
                examination of the institution in a timely manner.
            •   The examination team obtained and reviewed some information prior to coming
                to and after leaving the institution thus reducing the amount of time spent at the
                institution. The institution management felt this was an efficient and effective use
                of time for both the examination team and the institution.
            •   Examiners conducted the examination in an efficient, courteous and professional
                manner.
            •   We think the examination process has evolved from a very hands on process to
                a more review process which is good in our opinion. We feel that communication
                between the institution and FCA has evolved to one that is more timely and
                constructive.
            •   N/A
            •   FCA's focus on risk rather than procedures is very positive. Our lead examiner's
                communications prior to, during, and after the exam were very good.




                   




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