oversight

Fourth Quarter and FY 2008 Summary, FCS Survey

Published by the Farm Credit Administration, Office of Inspector General on 2008-12-01.

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

               Fourth Quarter and Fiscal Year 2008 OIG Summary Report on the Survey of FCS Institutions
                                          Regarding the Examination Function
_______________________________________________________________________________________________________

                         Fourth Quarter (July 1 – September 30, 2008)
                              and Fiscal Year Summary Report

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

                                                2008

Introduction

Based on the interface FCS institutions had with the Agency's examination function during the
period July 1 – September 30, 2008, OE identified seven FCS institutions that were in a
position to provide meaningful survey responses. (Institutions are surveyed no less frequently
than every 18 months and, generally, no more frequently than every 12 months.)

The OIG sent surveys to those seven institutions on October 29. A follow-up e-mail was sent
to nonresponding institutions on December 1. Of the seven institutions surveyed, all submitted
completed surveys.

Four responses to the survey issued for the 3rd quarter were received subsequent to the 3rd
quarter report being issued and one survey response from the 1st quarter are included in this 4th
quarter report. As a result, this report covers a total of twelve responding institutions.

The OIG will continue to provide an e-mail report to you based on each fiscal year 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 September 30 report will
continue to include fiscal year summary data.

The survey asks 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 “6” (Does Not Apply) for each survey statement.

Narrative responses are provided verbatim, except that any identifying information has been
removed and any grammatical or punctuation errors may have been corrected. Narrative in
“brackets” is explanatory information provided by the OIG based on communication with the
institution.




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                   Fourth Quarter and Fiscal Year 2008 OIG Summary Report on the Survey of FCS Institutions
                                              Regarding the Examination Function
   _________________________________________________________________________________________________________



   Survey Results – 4th Quarter FY 2008

   1. Average numerical responses to survey statements 1 - 10 ranged from 1.8 to 2.3


                            Average Numerical Responses to Survey Statements 1 - 10
             4th Qtr                  3rd Qtr                 2nd Qtr                     1st Qtr
            1.8 – 2.3                     1.7 – 2.3            1.7 – 2.2                 1.9 – 2.2
   FY 2007 average numerical response was 1.7 – 2.2.


2. The average response for all survey statements was 2.0


                                   Average Response for all Survey Statements
              th
             4 Qtr                       3rd Qtr                 2nd Qtr                  1st Qtr
               2.0                           1.9                  1.9                      2.0
   FY 2007 average response was 1.9.


   Two institutions rated five survey statements as a "4" (Disagree) and two as a “5” (Completely
   Disagree). The corresponding comments to the “4” (Disagree) and “5” (Completely Disagree)
   ratings are shaded in yellow and green, respectively.

   The majority of narrative comments to survey statements 1 - 10 were positive. However, there
   were several negative comments that should provide opportunities for you to refine
   examination methodology and communications, and examiner training.

   Survey item 11a asks for feedback on the most beneficial aspects of the examination process.
   Consistent with prior quarters’ survey responses to this survey item, many very positive
   comments were provided about the examiners and the examination process.

   Survey item 11b asks for feedback on the least beneficial aspects of the examination process.
   Many of these comments should also provide opportunities for you to refine examination
   methodology and communications, and examiner training.

   Survey item 12 asks for any other comments. There were more negative comments than
   normal in response to this survey item.

   Survey Results – Fiscal Year 2008 Summary

   For fiscal year 2008, the OIG issued 78 surveys and received 70 completed surveys (plus three
   from the fourth quarter of fiscal year 2007). This is a 90 percent response rate, which is very
   favorable. The response rate for 2005, the last full year the OIG surveyed prior to updating the
   survey, was only 63 percent. The improvement is due to the revised format of the survey; the
   survey’s ease of completion and submission, i.e., all electronic; and our new follow-up process
   on surveys distributed.

   See the Appendix summarizing numerical responses to all ten survey statements for all 73
   responding institutions.

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                Fourth Quarter and Fiscal Year 2008 OIG Summary Report on the Survey of FCS Institutions
                                           Regarding the Examination Function
_________________________________________________________________________________________________________



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:            2.1 (1.7 third quarter, 1.8 second quarter, 2.0 first quarter)

   Comments:

                • The exam team focused on the largest credits both in terms of how well the
                  institution performed its due diligence and reporting to the board and the
                  quality of the credits. We feel the management team and board benefitted
                  from the exam team insight. The specific policy review areas were adequate
                  and we understand the necessity, but in terms of impact the credit and
                  operations review is of most significance to us.
                • For our size and risk profile it was overkill.

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

   Average Response:            1.9 (2.1 third quarter, 2.0 second quarter, 2.1 first quarter)

   Comments:

                •   Verbal presentation, particularly in Executive Session, did not match the
                    tone of the written report. The verbal comments in the Executive Session
                    seemed condescending. There did not seem to be complete agreement on
                    all issues between the EIC and the other FCA representative.
                •   The EIC went out of their way to explain the other Credit Needs regulation
                    and its use in the YBS program.
                •   The exam team and EIC reviewed compliance with regulations and had
                    suggestions for improvements/additions/edits to the institution’s current
                    policies.
                •   Exam resulted in discouraging any type of innovation. Demoralizing for
                    staff. I felt we knew answers to certain areas better than examiners. We
                    spent time getting them to understand.
                •   Examiners assisted in interpretation of regulations on issue discovered in
                    internal credit review.




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                Fourth Quarter and Fiscal Year 2008 OIG Summary Report on the Survey of FCS Institutions
                                           Regarding the Examination Function
_________________________________________________________________________________________________________



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 (1.9 third quarter, 1.8 second quarter, 2.0 first quarter)

   Comments:
           •        Very thorough.


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

   Average Response:            1.9 (1.9 third and second quarters, 2.1 first quarter)

   Comments:

               •    If the regulator has very specific ideas about what constitutes appropriate
                    scope and eligibility standards, why do they not make those clear rather than
                    have the board establish policies that are later found to be unacceptable?
               •    We have the benefit of an experienced EIC and the exam team appeared
                    knowledgeable and appropriate in how they applied the laws, regulations,
                    and other regulatory criteria.
               •    Loan participations very common in our state but examiners from other
                    districts not familiar with it.
               •    Very professional.


                         Communications and Professionalism

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

   Average Response:            1.9 (1.9 third quarter, 1.8 second quarter, 2.0 first quarter)

   Comments:

                •   After hearing that the association planned to ask for a reconsideration of
                    removal from discount of one loan, the EIC said not to bother. EIC asserted
                    there was no way the examiners’ conclusions could be challenged or
                    reversed.
                •   Communication was extremely thorough and complete.
                •   Professional staff that communicate well.
                •   Good clear communications.




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                Fourth Quarter and Fiscal Year 2008 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:            2.3 (1.9 third quarter, 1.7 second quarter, 2.1 first quarter)

   Comments:

               •    Verbal communication was flawed. There was extensive discussion with the
                    board in executive session on matters that could only be understood and
                    dealt with by management. Later discussion with management disputes
                    much of what was said in executive session. Management should have been
                    present. Also, EIC should assume report has been read and understood
                    ahead of time by board members. There was too much rehashing of what
                    was in the written report.
               •    We agree that the information was good. We felt like the conference call with
                    the Audit committee and Board Chairman and later the formal closeout with
                    the board took more time than needed. Even though the EIC remarked that a
                    particular exam issue was not found in our institution, the EIC took
                    considerable time to share what had been seen in other parts of the country
                    that the EIC thought was inappropriate and encouraged our board not to
                    venture into those areas of lending.
               •    Annual Board/Audit Committee review sessions are helpful.

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

   Average Response:            2.1 (1.9 third quarter, 2.2 second quarter, 1.9 first quarter)

   Comments:
           •        The onsite examination and examiners were organized and efficient but the
                    offsite process moves a major portion of the time requirements and workload
                    to institution staff. This may benefit FCA but it certainly does not benefit the
                    institution.
                •   Well organized. Again, we would like to get to the “meat” of the discussion
                    sooner. The executive session was good with the board and it would be
                    beneficial if the opening portion of the closeout had moved through the exam
                    more quickly. All the board members had read the report and were
                    prepared to ask questions.
                •   They were organized but being from different districts created different
                    feedback on similar issues.
                •   Examiners were courteous and respectful of staff time commitments.




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                Fourth Quarter and Fiscal Year 2008 OIG Summary Report on the Survey of FCS Institutions
                                           Regarding the Examination Function
_________________________________________________________________________________________________________



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

    Average Response:           2.0 (2.0 third quarter, 1.7 second quarter, 2.2 first quarter)

    Comments:

                •    Verbal presentation misrepresented and quoted management’s views out of
                     context, which disappointed and surprised the board.
                •    Onsite examiners were very willing to have an open dialogue on issues.
                •    FCA did not meet with the board prior to the exam conclusion.
                •    We have good rapport and mutual respect with the EIC and feel EIC and
                     examiners were open to considering board and management input.


                        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:           2.1 (2.3 third quarter, 2.0 second and first quarters)

    Comments:

                •    Required actions do not deal with best practices.
                •    Although the recommendations were relatively minor we can always
                     improve. Observations on credit and institution risk profile were appropriate.
                •    Reg. Compliance NEA in 2008 included a couple good recommendations to
                     update our policies.


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 (2.0 third quarter, 1.8 second quarter, 1.9 first quarter)

    Comments:

                 •   Yes, they are appropriate.
                 •   The Board would appreciate early notice of issues being experienced by
                     other institutions in their audits. However, the Board is not seeking
                     confidential specific information from other institutions.




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                Fourth Quarter and Fiscal Year 2008 OIG Summary Report on the Survey of FCS Institutions
                                           Regarding the Examination Function
_________________________________________________________________________________________________________



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

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

       •    Good communications with Lead Examiner; Opportunity to pull together
            documentation and respond to some questions just prior to on-site visit saved time
            and was very effective.
       •    Written report.
       •    Even though the examination did not warrant it, the EIC came onsite for a Board
            closeout that was informative and helpful. During the exam the examiners were
            very open in their discussion of issues.
       •    Financial aspects.
       •    The process was well balanced and beneficial in all aspects.
       •    The report was good and the executive session provided an opportunity for good
            interaction between the board and EIC.
       •    Access to examiners was positive.
       •    Regulatory compliance issues.
       •    Feedback on scope and eligibility questions.
       •    The communication in both the planning and reporting phases of the exam has
            been very good.


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

       •    Generally, regulatory requirements (administrative) vary between examiners based
            upon their individual review. For example, we have never included a specific target
            amount for surplus in our business plan because we target the capital ratios, but
            this time we were written up for not having a target amount.
       •    Verbal presentation was flawed. There was extensive discussion with the board in
            executive session on matters that could only be understood and dealt with by
            management. Later discussion with management disputes much of what was said
            in executive session. Management should have been present. Also, EIC should
            assume report has been read and understood ahead of time by board members.
            There was too much rehashing of what was in the written report.
       •    The offsite work shift to the institution does not benefit us.
       •    Discussion and findings on loans that FCA considered development loans.
       •    We would have liked to get to the “meat” of the report and Q&A quicker.
       •    Examiner doing a 6-7 hr interview with VP of Ops on Technology area.
       •    Issue regarding governance – Compliance to regulations – appears to be personal
            “wording” preferences rather than substance.




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                Fourth Quarter and Fiscal Year 2008 OIG Summary Report on the Survey of FCS Institutions
                                           Regarding the Examination Function
_________________________________________________________________________________________________________



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

       •    Examiners were efficient and got in and out in a short amount of time and were
            respectful of staff time constraints.
       •    Verbal report was emotional and inaccurate.
       •    There is no consistency within FCA on what kind of loans the agency sees as
            acceptable. Anything that looks like a development loan is out while other
            institutions can come into our territory and make a $1,000,000 rural investment
            bond to a hospital or a dentist office. I would love to have further discussions on
            this.
       •    I feel examiners are not all on the same page. Some examiners are familiar with
            certain practices while others have limited knowledge. Institution management
            spends days working with them trying to get them to understand something that has
            been occurring for years in other institutions.
       •    Very good process.
       •    Some aspects of the examination on the nominating and election policies seemed
            to have gone beyond safety and soundness issues and been more operational in
            nature. The timing of some of the communications on the nominating policies was
            not ideal. However, the subsequent meetings which FCA initiated on the subject
            were effective in allowing concerns and issues to be presented.
       •    We based our survey responses on the national examination process and our
            ongoing working relationship with the Office of Examination.




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                          Fourth Quarter and Fiscal Year 2008 OIG Summary Report on the Survey of FCS Institutions
                                                     Regarding the Examination Function
          _________________________________________________________________________________________________________


                                                              APPENDIX

                              Results for FY 2008 of Numeric Responses to Questions 1-10



                                                   PERCENTAGE OF TOTAL RESPONSES 
                                                                                                                       Total No.    Average 
Question 
              Completely                              Neither Agree                     Completely      Does Not      Responses     Response 
                Agree                 Agree           nor Disagree       Disagree        Disagree        Apply* 
                 (1)                   (2)                 (3)              (4)             (5)            (6) 
   1         17     23.29%     52        71.23%        1      1.37%    3       4.11%     0    0.00%    0     0.00%        73          1.90 
   2         12     16.44%     49        67.12%        9     12.33%    3       4.11%     0    0.00%    0     0.00%        73          2.00 
   3         15     20.55%     55        75.34%        2      2.74%    1       1.37%     0    0.00%    0     0.00%        73          1.80 
   4         18     24.66%     45        61.64%        5      6.85%    5       6.85%     0    0.00%    0     0.00%        73          2.00 
   5         26     35.62%     37        50.68%        4      5.48%    4       5.48%    2     2.74%    0     0.00%        73          1.90 
   6         15     20.55%     51        69.86%        2      2.74%    1       1.37%    2     2.74%    2     2.74%        73          1.90 
   7         20     27.40%     39        53.42%        8     10.96%    5       6.85%    1     1.37%    0     0.00%        73          2.00 
   8         18     24.66%     44        60.27%        6      8.22%    1       1.37%    2     2.74%    2     2.74%        73          1.90 
   9          8     10.96%     52        71.23%        10    13.70%    3       4.11%     0    0.00%    0     0.00%        73          2.10 
   10        13     17.81%     53        72.60%        7      9.59%     0      0.00%     0    0.00%    0     0.00%        73          1.90 
 Total       162               477                     54              26               7              4                              2.00 
                                                                                                                



* “Does Not Apply” responses not used in percentage calculations.
Total Number of Surveys Sent to Institutions: 78
Total Number of Surveys Received: 70 (plus 3 from FY 07)




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