oversight

First Quarter FY 2013 FCS Survey

Published by the Farm Credit Administration, Office of Inspector General on 2013-03-19.

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

                        First Quarter FY 2013 OIG Summary Report on the Survey of FCS Institutions
                                        Regarding the Examination Function
_________________________________________________________________________________________________________



                     First Quarter Fiscal Year (FY) 2013 Summary Report
                               (October 1 – December 31, 2012)

   Office of Inspector General’s (OIG) Survey of Farm Credit System (FCS) Institutions
                      Regarding the Agency’s Examination Function

Introduction

During the period October 1 – December 31, 2012, the Office of Examination (OE) identified 12
FCS institutions that were in a position to provide meaningful survey responses.

The OIG sent surveys to those 12 institutions on January 28. Of the 12 institutions surveyed,
11 submitted completed surveys. If the outstanding response is received, it will be included in
the next quarterly report.

The OIG will continue to provide an email report to you based on each FY quarter-end, i.e.,
December 31, March 31, June 30, and September 30, so that you may timely take whatever
action you deem necessary to address the responses. The fourth quarter report as of
September 30 will continue to include FY summary data.

The survey asks respondents to rate the eight survey statements 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 “6” (Does Not Apply) for each survey statement. These
responses are not included in averages.

Narrative responses are provided verbatim, except that any identifying information has been
removed and any grammatical or punctuation errors may have been corrected. Any narrative
in “brackets” is explanatory information provided by the OIG based on conversations with
institution management. This quarter, there were no conversations held with institution
management.

Survey Result – First Quarter FY 2013

Average numerical responses to survey statements 1 - 8 ranged from 1.5 to 2.6.

The average response for all survey statements was 1.9.

In this quarter, there were more positive than negative narrative comments to survey
statements 1 - 8. (Negative comments of any degree are color coded in maroon.)




March 19, 2013
                        First Quarter FY 2013 OIG Summary Report on the Survey of FCS Institutions
                                        Regarding the Examination Function
_________________________________________________________________________________________________________


Survey item 9 asks for feedback on the most beneficial aspect of the examination process.
Consistent with prior quarters’ responses to this survey item, many very positive comments
were provided about the examiners and the examination process.

Survey item 10 asks for feedback on the least beneficial aspect of the examination process.
While most were negative, as would be expected, several comments provide a perspective that
should prove constructive.

Survey item 11 asks for any additional comments from the Board as a whole. This is a new
survey item inserted at the request of OE. It elicited a number of thoughtful responses from full
Boards, which was the objective of the question.

Responses to Survey Statements 1–8

                                       Examination Process

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

    Average Response:           2.0

    Comments:
            •       The 2012 examinations included some of our higher risk areas such as the
                    Capital Markets Group and newer regions through mergers.
                •   Focus areas have changed appropriately with the growth of our institution
                    and changes in risk profile.


Survey Statement 2:             Examiners appropriately applied laws, regulations, and other
                                regulatory criteria to examination findings and conclusions.

    Average Response:           1.9

    Comments:
            •       Using “safety and soundness” to force system institutions to set a FLCA loan
                    to value requirement of 75% or less stretches the regulations and sets a
                    dangerous precedent, allowing the Agency to put in place de facto changes
                    to regulations without going through the process for amending regulations.
                    Our board and management are concerned more with this precedent than
                    with the loan to value requirement itself.




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                        First Quarter FY 2013 OIG Summary Report on the Survey of FCS Institutions
                                        Regarding the Examination Function
_________________________________________________________________________________________________________


Survey Statement 3:             The recommendations, required actions, and any supervisory
                                agreement with FCA assisted the board and management in
                                addressing the risks of the institution.

    Average Response:           2.0

    Comments:
            •       Comments by examiners regarding commodity classifications/SIC
                    codes/etc., were helpful.
                •   While the recommendations and required actions were minimal, the
                    board/management welcomes recommendations that will strengthen our
                    operations.
                •   The recommendations will be considered and utilized where appropriate.
                •   Recommendations are generally sound and appropriate.
                •   The one required action really had no bearing on risk. Recommendations
                    were questionably useful.


Survey Statement 4:             The examiners were professional and efficiently conducted
                                examination activities.

    Average Response:           1.5

    Comments:
            •       Seemed just a little slow with results.
            •       The examiners generally kept the Management team informed of the
                    examination status throughout the year.
                •   Examination staff was excellent.

                                          Communications

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

    Average Response:           1.9

    Comments:
            •       Additional clarity regarding FCA’s expectations regarding annual report
                    director bio’s would be appreciated.
                •   Clarity of communications was good, timeliness was not always so good.




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                        First Quarter FY 2013 OIG Summary Report on the Survey of FCS Institutions
                                        Regarding the Examination Function
_________________________________________________________________________________________________________


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:           1.7

    Comments:
            •       Outstanding communication with audit chairman and audit committee.
            •       The chair of the audit committee agrees with this statement.
            •       Communications were clear and appropriate.
            •       Rationale supporting requirements and recommendations was generally
                    helpful and appropriate, although in some cases potential risk exposures
                    associated with findings appear to be over-stated, presumably to add weight
                    to the findings. The institution would be better served with accurate risk
                    assessments as over-reaction to relatively minor issues can effectively
                    increase risk.


Survey Statement 7:             Examiners fairly considered the views and responses of the
                                board and management in formulating conclusions and
                                recommendations.

     Average Response:          1.8

     Comments:
            • Findings were discussed professionally and examiners were always willing
               to receive comments.


Survey Statement 8:             FCS-wide guidance from the Office of Examination was proactive
                                and helpful.

     Average Response:          2.6

     Comments:
            • The Collateral Risk module refers to “raw land” meaning “land to be
               developed” without once explaining that it doesn’t refer to “crop land” or
               “pasture land.” This should be corrected.
            • Say on pay regs were inappropriate for Farm Credit institutions as currently
               structured and governed.
            • Communications dealing with technical issues (i.e., application of regulations
               or law) are generally adequate. There appears to be a growing tendency to
               regulate via bookletter or other guidance versus through the regulatory
               process. This practice, sometimes characterized as “proactive,” may
               increase the risk of ill-conceived regulation and confusion among
               institutions.
            • Information was useful in understanding FCA’s expectations.




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                        First Quarter FY 2013 OIG Summary Report on the Survey of FCS Institutions
                                        Regarding the Examination Function
_________________________________________________________________________________________________________


                             General Questions 9, 10, and 11

Survey Item 9:          What aspect of the examination process did you find most beneficial?

                •   The EIC was helpful in guidance.
                •   Exit interview with staff, board chair, and audit chair.
                •   Transition to a competent new EIC has gone well. We appreciate the sharing
                    of best practices to improve management of the institution.
                •   Overall results appear to validate that the institution is operating in a safe and
                    sound manner.
                •   Actual credit review and credit admin review.
                •   Our institution most benefited from interaction by our senior staff with the senior
                    examiners. Each provided valuable insights and advice based on their years of
                    experience in the system. Assistance in understanding the Collateral Risk
                    module and its reporting requirements may have been the single most valuable
                    aspect.
                •   Open and frequent communications with examination leadership is very
                    beneficial.
                •   The interaction with the examiners was the most beneficial aspect.
                •   Clear communications including IMs from FCA related to regulation
                    interpretation is very helpful.
                •   Having a third party evaluation of conditions and practices.

Survey Item 10:         What aspect of the examination process did you find least beneficial?

                •   The exam isn’t the problem – it’s the heavy regulatory burden on time and
                    resources that is least beneficial for a small institution.
                •   As in the past, while we are happy to provide space in our facility to bring “new
                    examiners” into our institution for training purposes, it appears that many if not
                    all 2012 examinations were for training.
                •   The physical security review – it was unnecessary and out of FCA’s scope of
                    responsibility.
                •   Our exam team included a number of trainees. While we recognize that
                    training is as necessary for the Agency as it is for our institution, our staff spent
                    a good deal of time responding to questions that more experienced staff would
                    not have asked.
                •   In this case, the presentation of the Report of Examination to the board was not
                    useful. The absence of critical findings did not make a formal presentation
                    necessary.


Survey Item 11:         Please provide any comments from the Board as a whole regarding the
                        examination process not provided in the preceding responses.

                •   Felt good about the openness and honesty from the staff of FCA, have not
                    always felt that way.
                •   The board found the examiners and process helpful and informative.



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                        First Quarter FY 2013 OIG Summary Report on the Survey of FCS Institutions
                                        Regarding the Examination Function
_________________________________________________________________________________________________________


                •   The board as a whole takes the examinations seriously and sees the benefits
                    of having such examinations. Any recommendations resulting from such
                    examinations are considered and welcomed if they help to improve our
                    operations and strengthens our internal controls.
                •   As a whole, the exam was very fair.
                •   To our knowledge and as we observed, the exam team conducted themselves
                    in a professional manner while fulfilling their obligation to the institution and the
                    system for oversight during the exam, in their report, and during their
                    presentation to the board.
                •   The process was well received and helpful.
                •   FCA has expressed concern that some institutions’ boards need to be better
                    engaged. While we agree that board engagement is necessary, we have
                    observed instances in which boards are being driven to a depth of detail that
                    goes well beyond governance and into management. While well-intentioned,
                    this could have some very unfavorable consequences. Institutions need strong
                    governance and effective professional management. Blurring the two could
                    compromise both the effectiveness of governance and management.
                •   The Audit Committee and the board as a whole will use the
                    required/recommended actions to strengthen our institution’s operations.
                •   Additional clarity regarding FCA’s expectations regarding annual report director
                    bio’s would be appreciated.
                •   The Board of Directors was satisfied with the process.




  March 19, 2013                                                                                            6