oversight

Fourth Quarter and FY 2013 Summary, FCS Survey

Published by the Farm Credit Administration, Office of Inspector General on 2013-12-19.

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

                  Fourth Quarter and Fiscal Year 2013 OIG Summary Report on the Survey of FCS Institutions
                                         Regarding the Examination Function
_________________________________________________________________________________________________________



                          Fourth Quarter (July 1 – September 30, 2013) 

                           and Fiscal Year (FY) 2013 Summary Report 


 OFFICE OF INSPECTOR GENERAL’S (OIG) SURVEY OF FARM CREDIT SYSTEM (FCS) 

       INSTITUTIONS REGARDING THE AGENCY’S EXAMINATION FUNCTION 



Introduction

During the period July 1 – September 30, 2013, the Office of Examination (OE) identified 14
Farm Credit System institutions that were in a position to provide meaningful survey responses.

The OIG sent surveys to those 14 institutions on October 24, 2013. Of the 14 institutions
surveyed, 12 submitted completed surveys. When outstanding responses from prior quarters
are received, they are included in the next quarterly report. Two responses to the survey issued
for the third quarter of FY 2013 were received and are included in this 4th quarter report.
Therefore, this report includes a total of 14 responses.

The OIG will continue to provide an email 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 fourth quarter report as
of September 30 will continue to include fiscal year 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 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.

Survey Results – Fourth Quarter FY 2013

Average numerical responses to survey statements 1 - 8 were 1.9 to 2.3.

               FY 2013 Average Numerical Responses to Survey Statements 1 – 8
         th
       4 Quarter             3rd Quarter           2nd Quarter            1st Quarter
        1.9 – 2.3                 1.4 – 1.9                  1.3 – 2.4                 1.5 – 2.6



December 19, 2013
                  Fourth Quarter and Fiscal Year 2013 OIG Summary Report on the Survey of FCS Institutions
                                         Regarding the Examination Function
_________________________________________________________________________________________________________



The average response for all survey statements was 2.1.

                        FY 2013 Average Response for all Survey Statements
         th
       4 Quarter                  3rd Quarter               2nd Quarter               1st Quarter
              2.1                    1.7                        1.7                       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.)

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. It elicited a
number of thoughtful responses from full Boards, which was the objective of the question.

Survey Results – FY 2013 Summary
For FY 2013, the OIG issued 55 surveys and received 45 completed surveys. An FY 2013
Summary Report is on page 8.



Responses to Fourth Quarter 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 (third quarter 1.9, second quarter 1.7, first quarter 2.0)

    Comments:
            	 There was a lot of learning for both the examiners and for us. Appropriate
               focus was placed on corporate governance structure, board policies,
               reporting processes, security, etc. A lot of focus was placed on technology,
               which is completely outsourced. Examiners spent time on the details of our
               vendors’ infrastructure, which is not within our or FCA’s control. Two of the
               on-site examiners were here because they are technology experts – this
               seemed out of proportion with the nature of our business.




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                  Fourth Quarter and Fiscal Year 2013 OIG Summary Report on the Survey of FCS Institutions
                                         Regarding the Examination Function
_________________________________________________________________________________________________________



                	 A suggestion is to separate the evaluation and rating of management from
                   board governance. Since the current evaluation is grouped into one
                   numerical rating, it is difficult to address any problems. It is important to
                   understand the areas of weakness – at the management level or board
                   level, or both. Otherwise, it leaves management and board to speculate
                   where FCA believes the real concerns lie.


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

    Average Response:           2.3 (third quarter 1.8, second quarter 1.6, first quarter 1.9)

    Comments:
            	 Examiners first attempted to apply expectations regarding standards of conduct
               relative to “agents” which far exceeded the regulatory requirements. Only after
               numerous discussions did the examiners acknowledge this overreach.
            	 The examiners took their time/attention to arrive at the correct interpretation for
               our situation. It wasn’t a one size fits all approach. They were thorough.
               Standards of Conduct findings in report of examination would be hard to
               support in a legal interpretation of the bylaws. Agency appeared to make the
               decision based upon the possibility of a future vote or issues that did not
               currently exist. This has damaged a long term relationship with an outstanding
               director.
            	 The exception to “AGREE” is regarding the regulations concerning concurrence
               and notifications. These regs are not enforced. With the level of over-
               chartered institutions in the district, there is much competition among system
               institutions and consequently has led to much dysfunction and little respect for
               territorial boundaries.


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:           2.2 (third quarter 1.8, second and first quarters 2.0)

    Comments:
            	 Recommendations made added little value.
            	 The reporting requirements are excessive and a burden on the board,
               management, and staff over an extended period of time. Both FCA and the
               institution should re-evaluate the reporting requirements and determine if
               they continue to provide value to the board, the FCA, and management.
            	 The examiners met with us to explain their findings and make sure we
               understood the premise of their comments. The Audit Committee, board,
               and management have discussed the report. A Corrective Action Plan has
               been prepared that we feel is appropriate and consistent with the report. We
               feel the examination helped to appropriately improve our institution’s risk
               profile.

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                  Fourth Quarter and Fiscal Year 2013 OIG Summary Report on the Survey of FCS Institutions
                                         Regarding the Examination Function
_________________________________________________________________________________________________________




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

    Average Response:           2.0 (third quarter 1.4, second quarter 1.3, first quarter 1.5)

    Comments:
            	 Examiners were very professional. Resources devoted to exit meeting (with
               senior management and two directors) were excessive considering the lack
               of any material findings.
            	 Examiners were very professional.
            	 The Examiner in Charge and the examiners were professional, laid out a
               timeline and followed through as promised. They were helpful in explaining
               what they were doing and why, took more time when it was warranted, and
               doubled back on items as needed. It was apparent that, at times, the
               material we uploaded to the FCA site in advance had not been reviewed and
               we would be requested to provide information we had already sent.
               Professionalism – one examiner lacked professionalism, in our view, when
               she commented to the board that we needed between [dollar amounts
               removed] in our allowance account with no solid basis for her statement.
               Efficiency – the review team did their best to conduct an efficient review.
               The institution did not have timely collateral valuation information on two
               substandard non-accrual loans, which slowed progress and delayed the final
               report.
             Most all were professional. One examiner is very unprofessional.

                                          Communications

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

    Average Response:           2.1 (third quarter 1.4, second quarter 1.5, first quarter 1.9)

    Comments:
            	 The examiners communicated well with the institution management.
            	 All communications were professional, timely, accurate and clear. The
               examination team seemed to be well coordinated in their communications
               with us.
            	 During the period leading up to the examination the institution had several
               interim EIC’s which complicated examination scheduling.
            	 Clear communication is sometimes difficult because of differing styles of
               communication between FCA and institution staff.
            	 Timeliness of the final report could be improved.
            	 Institution staff was clear, accurate, and timely.
            	 [Three names removed] were all very professional, fair, and effective in their
               roles.



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                  Fourth Quarter and Fiscal Year 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:           1.9 (third quarter 1.6, second quarter 1.6, first quarter 1.7)

    Comments:
            	 The management team was able to take action based on information from
               the examiners. The Audit Chair and Board Chair appreciated the
               conference call with FCA examiners explaining the preliminary report. The
               examiners were responsive to their questions, and were open to feedback
               and discussion. This resulted in “reframing” a couple of items in the report,
               which was appreciated. The Board and Audit Committee felt the report
               provided the appropriate amount of detail and explanation.


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

     Average Response:          2.0 (third quarter 1.6, second quarter 1.6, first quarter 1.8)

     Comments:
            	 The examiners asked good questions to clarify how our institution is different
               than other Farm Credit institutions. They tested their conclusions and
               recommendations with management in order to fully understand and
               reconcile the application of the regulations. The Examiner in Charge was
               experienced and was thorough in making sure the examiner team
               understood our situation and any nuances.
            	 We had some issues that were favorably resolved.
            	 Recommendations by examination staff on certain loans were believed to be
               overreaching.


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

     Average Response:          2.1 (third quarter 1.9, second quarter 2.4, first quarter 2.6)

     Comments:
             Annual National Oversight Plan is very helpful. 

             Guidance was timely and useful. 

             Information on Collateral Risk Management and Standard of Conduct was 

               helpful.




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                  Fourth Quarter and Fiscal Year 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?

                	 [Name removed] is a significant asset to FCA and provides insightful regulatory
                   oversight to the institution.
                 The discussions during exit conferences.
                 Examiners were very easy to communicate with.
                 The “common sense” approach of the examiner-in-charge, and his ability to
                   focus on the material issues.
                 The line of communication between FCA and the institution, Board, and staff
                   has improved and is beneficial.
                	 Understanding the examination process itself and having experienced FCA
                   staff. Understanding how the regulations apply and having an examination
                   team that was willing to interact fully with us so that both sides had a consistent
                   understanding of issues.
                 Review and discussion of risk management and best practices.
                 Insight into the Agency’s future direction around the Standard of Conduct
                   process.
                 Followup discussion.
                 Followup session with the board.
                 The examination team provided helpful recommendations and allowed the
                   institution additional time to finalize information related to two substandard non-
                   accrual loans.
                	 Directors find the final report presentation and interaction on a face-to-face
                   basis beneficial. The management team finds the onsite exit conference the
                   most beneficial.
                	 Credit quality validation.


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

                    Over auditing of standards of conduct.
                    Some areas of the examination process cover areas of lending that do not
                     pertain to our institution.
                    The attempt to expand standards of conduct requirements through the
                     examination process.
                    The burdensome reporting requirements.
                    Given that we outsource all technology, there was a lot of time spent on
                     understanding things that are under the control of and the business
                     responsibility of our technology vendors, not our institution or FCA.
                    Review and discussion of non-Traditional Agricultural Markets. 

                    Not much help on the issues raised – not meaningful. 

                    The overall impact to the final report based upon a late reporting violation. We 

                     are not disagreeing with the fact that we were late and should have received
                     criticism. However, it appeared to dominate the report.




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                  Fourth Quarter and Fiscal Year 2013 OIG Summary Report on the Survey of FCS Institutions
                                         Regarding the Examination Function
_________________________________________________________________________________________________________


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

                	 Board and FCA group interaction was very open and constructive. There was
                   ample time for interaction on all pertinent subjects.
                	 The examination process was helpful and educational for management. The
                   Audit Committee and Board were satisfied with the level of detail and the
                   opportunity to interact with the Examiner in Charge and the Program
                   Manager/Operations Risk Program officer.
                	 The examiners were professional and engaged in constructive discussions with
                   the Board and Management.
                	 We appreciate FCA working with us and understanding the unique aspects of
                   our institution and the territory we serve.
                	 The Agency continues to raise the bar on Board activities, requirements, and
                   time commitments needed to oversee institution activities. The Board feels the
                   Agency should consider the difference between a privately held financial
                   institution and an Agricultural Credit Association. The Directors sitting at the
                   Board table are there to support the mission of the FC System as compared to
                   the financial impact of decisions made to individual shareholders in a
                   commercial bank. We are different and the Agency should not apply the same
                   banking rules to FC.




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                            Fourth Quarter and Fiscal Year 2013 OIG Summary Report on the Survey of FCS Institutions
                                                   Regarding the Examination Function
          _________________________________________________________________________________________________________


                                                       FY 2013 Summary Report

                                       Numeric Responses to Survey Statements 1-8



                                                   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         10     22.2%    30        66.7%         4       8.9%    1       2.2%    0     0.00%    0          0.0%         45         1.9 
     2         11     24.4%    30        66.7%         1       2.2%    3       6.7%    0     0.00%    0          0.0%         45         1.9 
     3         10     22.2%    23        51.1%         7      15.6%    2       4.4%    0     0.00%    3          6.7%         45         2.0 
     4         25     55.6%    14        31.1%         6      13.3%    0       0.0%    0     0.00%    0          0.0%         45         1.6 
     5         16     35.6%    24        53.3%         5      11.1%    0       0.0%    0     0.00%    0          0.0%         45         1.8 
     6         16     35.6%    26        57.8%         3       6.7%    0       0.0%    0     0.00%    0          0.0%         45         1.7 
     7         14     31.1%    26        57.8%         4       8.9%    0       0.0%    0     0.00%    1          2.2%         45         1.8 
     8          6     13.3%    22        48.9%         16     35.6%    1       2.2%    0     0.00%    0          0.0%         45         2.3 
 Total 
 Responses     108             195                     46              7               0              4                                  1.9 



 “Does Not Apply” not calculated in percentages.




           December 19, 2013                                                                                                              8