Fourth Quarter and FY 2010 Summary, FCS Survey

Published by the Farm Credit Administration, Office of Inspector General on 2010-12-14.

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

                  Fourth Quarter and Fiscal Year 2010 OIG Summary Report on the Survey of FCS Institutions
                                         Regarding the Examination Function

                          Fourth Quarter (July 1 – September 30, 2010)
                           and Fiscal Year (FY) 2010 Summary Report

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


Based on the interface FCS institutions had with the Agency's examination function during the
period July 1 – September 30, 2010, the Office of Examination (OE) identified 15 FCS
institutions that were in a position to provide meaningful survey responses.

The OIG sent surveys to those 15 institutions on October 29. All 15 institutions submitted
completed surveys.

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 nine 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.

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 communication with the

December 14, 2010
                    Fourth Quarter and Fiscal Year 2010 OIG Summary Report on the Survey of FCS Institutions
                                           Regarding the Examination Function

  Survey Results – Fourth Quarter FY 2010

          Average numerical responses to survey statements 1 - 9 ranged from 1.7 to 2.4.

                        Average Numerical Responses to Survey Statements 1 – 9
             th                        rd                        nd                        st
            4 Qtr                     3 Qtr                     2     Qtr                 1 Qtr
          1.7 – 2.4                 1.5 – 2.0                  1.8 – 2.4                 1.8 – 2.1

                       The average response for all survey statements was 2.0.

                               Average Response for all Survey Statements
             th                        rd                        nd                        st
            4 Qtr                     3 Qtr                     2     Qtr                 1 Qtr
             2.0                       1.8                          2.1                     1.9

  The above represents a slight decline in the average numerical ratings this quarter. However,
  for the year, the 2.0 is consistent with the average response to all survey statements in prior

  In the fourth quarter results, there was one “5” (Completely Disagree) rating (see the first bullet
  under the survey statement 9) and eight ratings of “4” (Somewhat Disagree) spread among
  survey statements 1 – 4 and 8.

  In this fourth quarter, unlike most prior quarters, more than half of the comments to survey
  statements 1-9 were negative, albeit only very slightly. (All negative comments of any degree
  are color coded in red.) There were a number of very negative comments, i.e., the first bullets
  under survey statements 3, 4, 5, 8, and 9. The first two bullets under survey statement 7 were
  slightly less negative.

  Survey item 10a asks for feedback on the most beneficial aspects 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 10b asks for feedback on the least beneficial aspects of the examination process.
  As would be expected by what the question asks for, all comments are negative. However, the
  first two bullets under this survey item seem particularly so.

  Survey item 11 asks for any additional comments. Of the three comments received, two were
  positive and one was negative.

  Survey Results – FY 2010 Summary

  For FY 2010, the OIG issued 61 surveys and received 58 completed surveys. This is a very
  favorable 95 percent response rate. An additional survey from the fourth quarter of FY 2009
  was received during the second quarter of FY 2010 and included in that quarter’s report. As a
  result, a total of 59 surveys are represented in the FY 2010 Summary Report on page 7.

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                    Fourth Quarter and Fiscal Year 2010 OIG Summary Report on the Survey of FCS Institutions
                                           Regarding the Examination Function

  Responses to Survey Statements 1–9

                                          Examination Process

  Survey Statement 1:              The scope and frequency 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 (3rd quarter was 1.9, 2nd and 1st quarters were 1.8)

              •         The exam became involved and detailed into some very minor risk issues.
              •         We agree that an 18 month cycle is appropriate and the scope
                        encompasses the major risks.

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

      Average Response:            2.3 (3rd quarter was 1.7, 2nd quarter was 2.2, 1st quarter was 1.9)

              •         The dialogue with management and staff is always a good reminder of laws
                        and regulations and the perspective of the regulator.

  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:            1.9 (3rd, 2nd, and 1st quarters were 1.9)

              •         The Board believes the examiners had an agenda and disregarded the
                        safety, soundness, and experience of management and Board in the
                        analysis process.

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

      Average Response:            2.1 (3rd quarter was 1.8, 2nd quarter was 2.1, 1st quarter was 1.9)

              •         Two young examiners had difficulty analyzing credit. They wanted a
                        detailed written narrative on every loan to enable them to understand the
                        credit without analyzing it.
                    •   New examiners are not knowledgeable of business operations and have
                        limited practical application. There is an overwhelming desire to have
                        everything written down and documented. If life were only that easy!

December 14, 2010                                                                                          3
                    Fourth Quarter and Fiscal Year 2010 OIG Summary Report on the Survey of FCS Institutions
                                           Regarding the Examination Function

                    •   There were several trainees on the exam team, and they were not as
                        knowledgeable or efficient as the more tenured examiners (as would be
                    •   EIC was very knowledgeable and 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 (3rd quarter was 1.6, 2nd quarter was 2.3, 1st quarter was 1.9)

              •         One examiner on site was completely inaccurate and made numerous
                        inappropriate statements and conclusions. The remainder of team met all of
                        these criteria.
                    •   Examination staffers were very professional in their communications with
                        institution staff.
                    •   Lead examiners established an open channel of communications to identify
                        a mutually agreeable date for the exam and to telegraph the scope of the

  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 (3rd quarter was 1.5, 2nd quarter was 2.1, 1st quarter was 1.9)

              •         There was a good exchange between Examination Group and the institution
                        Board during the final presentation of findings.

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

      Average Response:            1.7 (3rd quarter was 1.8, 2nd quarter was 2.4, 1st quarter was 2.0)

              •         All examiners except one handled themselves in a very professional
                    •   We had too many trainees present for the onsite review.
                    •   As stated earlier, EIC was very professional. He kept the examiners
                        focused and the process was less intrusive than in the past.
                    •   The process for obtaining requested documents is very efficient. Lead
                        examiners were sensitive to minimizing the disruption to our daily work.

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                    Fourth Quarter and Fiscal Year 2010 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

       Average Response:           2.1 (3rd quarter was 1.5, 2nd quarter was 2.2, 1st quarter was 2.0)

              • They listened politely yet comments made by the Board fell on deaf ears.
              • Examination team supervisors met with Board and management and made
                 demands which could have been considered threats without any regard to
                 the views and response of Board and management.
              • Examiner-in-Charge provided opportunity for institution to respond to
                 identified weaknesses prior to formulation of opinions and development of
                 review conclusions.
              • Concerns and recommendations were appropriately discussed with
                 management to capture management’s perspective.

  Survey Statement 9:              FCS-wide examination guidance from the Office of Examination
                                   (e.g., examination bulletins, informational memoranda, etc.) was
                                   timely, proactive and helpful.

       Average Response:           2.4 (3rd quarter was 2.0, 2nd quarter was 2.2, 1st quarter was 2.1)

              • Much of information was not timely or useful in solving current issues. Had
                 FCA created these before the economic downturn they would have met the
                 objective. As it was, they only created much additional work load for an
                 already overstressed staff and Board. (First bullet under Survey Item 10b.
                 submitted by same commenter.)
              • While some bookletters have been useful others have lacked clarity and
              • Getting so many memos from FCA that it is hard to keep up.

                    Responses to Additional Survey Items 10a, 10b, and 11

  Survey Item 10a:         What aspects of the examination process did you find most beneficial?

                    •   Loan Portfolio Management Allowance for Loan Loss.
                    •   Having the opportunity to have an “entrance meeting” with the exam team to
                        discuss issues specific to our institution.
                    •   Discussions with the experienced staff.
                    •   The openness that the examiners had in answering questions.
                    •   On site reviews are always helpful as they give another view to the institution
                    •   Non-disruptive; efficient and organized; very knowledgeable.
                    •   Observations and recommendations related to Loan Portfolio Management.

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                    Fourth Quarter and Fiscal Year 2010 OIG Summary Report on the Survey of FCS Institutions
                                           Regarding the Examination Function

                    •   Dialogue with the Office of Examination is always constructive and welcome.
                        Our experience is that concerns can usually be addressed quickly and to the
                        satisfaction of both parties.
                    •   On site team was thorough and pointed out our omissions and errors by
                        management and Board.
                    •   The ongoing dialog that takes place vs. the old model that focused on one 2-
                        week onsite exam visit.
                    •   We feel the entire examination process was beneficial.

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

                    •   Trying to close barn door after horse is already gone. As stated above (First
                        bullet under Survey Statement 9 submitted by same commenter.), many of
                        issues would have been beneficial if created timely (prior to problems). What
                        actually happened, huge demands were made in very short timeframes which
                        did nothing to cure current problems and in fact deterred the efforts to fix
                        existing issues. FCA believes institution should have had foresight to protect
                        itself and we agree. We also believe FCA should have had foresight to
                        implement its practices early enough to benefit the institution rather than when
                        they were a detriment. Alternatively, much of the demands of FCA could have
                        been on a much longer timeframe as they had no bearing on current issues.
                        This would have increased institution staff dedication to current problems.
                    •   We had two examiners who were not experienced enough to hold the
                        positions they had and too much emphasis was placed on their analysis.
                    •   Examiners with no or limited business experience.
                    •   Loan Pricing Programs, Compensation Plans.
                    •   Due to the number of trainees present during the onsite examination too
                        much time was spent answering their questions.
                    •   Disruption of daily operations, while not material, does cause additional
                        duties for the staff during the onsite review.
                    •   Continual checking and re-checking of individual loans.

  Survey Item 11:          Please provide any additional comments about the examination process
                           and related communications.

                    •   There was a rather lengthy delay between the completion of the examination
                        and the delivery of the final report.
                    •   The FCA practice of bringing in a large group of examiners to complete the
                        onsite work in a timely manner is helpful to the institution in its scheduling
                        and time management.
                    •   Communications were timely, clear and professional.

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                           Fourth Quarter and Fiscal Year 2010 OIG Summary Report on the Survey of FCS Institutions
                                                  Regarding the Examination Function

                                                  FY 2010 Summary Report

                                       Numeric Responses to Survey Statements 1-9

                                                 Percentage of Total Responses

                                                   Neither                                                        Total No.        Average
               Completely                         Agree nor                         Completely                   Responses        Response
                 Agree               Agree        Disagree            Disagree       Disagree      Does Not
                  (1)                 (2)            (3)                 (4)            (5)       Apply * (6)
     1        14       23.7%   40        67.8%   3       5.1%    2           3.4%   0     0.00%   0       0.0%      59              1.9
     2        12       20.3%   34        57.6%   10     16.9%    3           5.1%   0     0.00%   0       0.0%      59              2.0
     3        13       22.0%   40        67.8%   4       6.8%    2           3.4%   0     0.00%   0       0.0%      59              1.9
     4        14       23.7%   36        61.0%   5       8.5%    4           6.8%   0     0.00%   0       0.0%      59              2.0
     5        20       33.9%   27        45.8%   8      13.6%    2           3.4%   2     3.39%   0       0.0%      59              1.9
     6        14       23.7%   41        69.5%   2       3.4%    2           3.4%   0     0.00%   0       0.0%      59              1.8
     7        18       30.5%   29        49.2%   8      13.6%    2           3.4%   2     3.39%   0       0.0%      59              2.0
     8        17       28.8%   31        52.5%   6      10.2%    4           6.8%   1     1.69%   0       0.0%      59              2.0
     9        10       16.9%   32        54.2%   13     22.0%    2           3.4%   1     1.69%   1       1.7%      59              2.2
 Responses    132              310               59              23                 6             1                 531             2.0

The total number of completed surveys represented in this table is 59.

     December 14, 2010                                                                                                        7