oversight

Second Quarter FY 2010 FCS Survey

Published by the Farm Credit Administration, Office of Inspector General on 2010-06-11.

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

                   Second Quarter FY 2010 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_______________________________________________________________________________________________________



                              Second Quarter Fiscal Year (FY) 2010
                                  (January 1 – March 31, 2010)

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

Introduction

Based on the interface FCS institutions had with the Agency's examination function during the
period January 1 – March 31, 2010, the Office of Examination (OE) identified 20 FCS
institutions that were in a position to provide meaningful survey responses.

The OIG sent surveys to those 20 institutions on April 20. A follow-up email was sent to
nonresponding institutions on May 17. Of the 20 institutions surveyed, 18 submitted
completed surveys. If the nonresponding institutions subsequently send a completed survey, it
will be included in the next quarterly report.

One response to the survey issued for the fourth quarter of FY 2009 was received subsequent to the
fourth quarter report and is included in this report. As a result, this report covers 19 responding
institutions.

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
institution.

Survey Results – Second Quarter FY 2010

Average numerical responses to survey statements 1 - 9 ranged from 1.8 to 2.4. (For the first
quarter FY 2010, the range averaged 1.8 to 2.1.)

The average response for all survey statements was 2.1. (For the first quarter FY 2010, the
average response was 1.9.)

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                   Second Quarter FY 2010 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


While the above represents only a slight decline in the average numerical ratings this quarter,
two banks and eight associations provided “3” (Neither Agree nor Disagree) ratings to survey
statements 21 times, and five associations provided “4” (Somewhat Disagree) ratings to survey
statements eight times and “5” (Completely Disagree) ratings to survey statements five times.
While the “3” ratings to survey statements are neither negative nor positive, they do reduce the
average numerical response and may essentially reflect a less than positive commentary on
the survey statement.

While normally the majority of comments on the examiners and the examination process are
positive, this quarter 60 percent of narrative comments to survey statements 1 - 9 were
negative. Several were very negative. All negative comments of any degree are color coded
in red and should provide opportunities for you to refine examination methodology and
communications, and examiner training.

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.
There were a number of comments that were more negative than normally received to this
question. These comments should also provide opportunities for you to refine examination
methodology and communications, and examiner training.

Survey item 11 asks for any other comments. Normally comments provided to this question
are positive. However, this survey contains several very negative comments to this question.

While there was only a slight downturn in the average numerical scores, the number and depth
of negative comments was spread among many institutions. Eleven associations provided a
range of from one to eight negative comments each, and two banks provided two and four
negative comments, respectively.

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:           1.8

    Comments:
            •       The focus and quality of examination has been much better since our
                    institution was transferred to the large Association/Bank group of examiners.
                    Our EIC was very refreshing to work with – his candor, openness and
                    straight forward approach were both refreshing and greatly appreciated. He
                    and his examiners were a pleasure to work with.
                •   We thought their credit risk review was appropriate, but non-credit risk items
                    seemed to have far more focus.
                •   The scope and frequency were fine.

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                   Second Quarter FY 2010 OIG Summary 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:           2.2

    Comments:
            •       This was already occurring. Exam did not elevate or reduce this.
            •       This review team had a different interpretation of the regulations than we
                    have had before in other exams.
                •   Comments were very general and critical, with little clear explanation of
                    reported weaknesses. These distracted from real safety and soundness
                    issues. We know our authorities, laws, in most cases regulations.
                •   We were already aware of all FCA Regulations and laws prior to the FCA
                    review team completing their work.
                •   The board is helped the more it understands what FCA expects from it.

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

    Comments:
            •       Examinations are much more thorough and bring more value than at times
                    in the past.
                •   They focused on material issues much more than past examinations – a fact
                    that was greatly appreciated.
                •   Their views of matters of safety and soundness differ from ours on non-
                    credit issues.
                •   Yes, in general, it did.
                •   The review team struggled with materiality when identifying deficiencies.

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

    Average Response:           2.1

    Comments:
            •       Experienced examiners are key for FCA. Must keep your experienced and
                    knowledgeable staff.
                •   Very professional staff.
                •   Due to the variations in the years of reviewers’ experience, some were put in
                    situations that they were not prepared to handle.
                •   Some were very experienced, some were not. Opinions, conclusions, of
                    both impacted report.
                •   The EIC was fine, but the rest of the team was inexperienced.
                •   We agree that examiners are knowledgeable. However, the application of
                    that knowledgeable is different from different examiners. We have been told

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                   Second Quarter FY 2010 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


                    to have certain policies that others have never been told to create or the
                    guidance given to our institution for dealing with participation loans was not
                    the same guidance given to other institutions. The inconsistency does
                    create problems.


                         Communications and Professionalism

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

    Average Response:           2.3

    Comments:
            •       EIC was very candid and straight forward – that made him a pleasure to
                    work with. We may not have always agreed, but we always knew where
                    each other stood.
                •   Clear and mostly accurate but could have been more timely.
                •   While overall communications were thorough and professional, management
                    expressed concerns over report presentation and expectations from FCA
                    examiners. The message at times seemed to be inconsistent.
                •   Conflicts between our EIC and his boss put us in the middle of an
                    uncomfortable situation. In the end, we didn’t know who wrote the exam.
                •   The review timing extended for several months. We discussed the same
                    topics multiple times with multiple reviewers.

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:           2.1

    Comments:
            •       Conversation with the Board was candid and insightful.
            •       Senior members of examination division and audit team met with the Audit
                    committee and later the full board. During those meetings, there was a frank
                    exchange of ideas and observations regarding risks, operations, safety and
                    soundness.
                •   Good communication and follow-up on issues raised by board and
                    management.
                •   Brief and incomplete. Not much listening, not enough detail.
                •   The Institution really didn’t learn anything as a result of the review.
                •   Close-out comments were concise, informative, and provided appropriate
                    insight.




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                   Second Quarter FY 2010 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


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

    Average Response:           2.4

    Comments:
            •       We believe this group that focuses on the larger Associations and Banks
                    was much more organized and efficient than the group of examiners that we
                    had previously worked with.
                •   FCA is in the process of transition of exam responsibilities. The new plan is
                    to better match skill and experience of examiner with the complexity of the
                    business units. During the transition, on occasion, there was redundancy
                    and lack of clarity on responsibilities of their staff.
                •   Production of the final written report seemed to take much longer than
                    previous reports have taken. This may be due to the multiple levels of
                    review that reports must go through prior to issuance. Management and the
                    Board do believe that thorough discussion of complex issues is helpful when
                    balancing the reporting deadlines for system institutions.
                •   The exam was completed in two separate trips; due to what I understand
                    was scheduling and timing difficulties. This problem is understandable, but
                    is still two separate disruptions to the normal activities of the institution.
                    Completing the review during one trip is much preferred.
                •   We had two on-site reviews in 6 months with a moving review date. Then
                    we started again with another reviewer answering the same questions that
                    we answered on the two on-site reviews.
                •   A disjointed team. Came from all over the country. The report seemed to
                    be written that way.
                •   As mentioned earlier, the review dragged on for several months. We had to
                    keep addressing the same topics that were resolved days earlier.

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

     Average Response:          2.2

     Comments:
            • Candor and fairness was their hallmark. We may not always have agreed,
               but we knew where each other was coming from and had respect for each
               other’s views.
            • The FCA and system institutions are facing issues related to credit quality
               that have not been experienced in over 25 years. These credit quality
               issues will require a significant period of time to demonstrate marked
               improvement. Additional discussion is needed between FCA and the
               institutions to reach consensus as to a reasonable time frame needed to
               demonstrate credit quality.
            • One of the reviewers onsite seemed to have a much different tone of
               behavior than the rest of the group. This examiner was very condescending,
               argumentative and opinionated with little willingness to consider other view
               points. He was not a good representative for FCA with this approach. Our

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                   Second Quarter FY 2010 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


                    EIC was very understanding of our differences with the other reviewer. This
                    issue was even commented on by the EIC in the close-out.
                •   The EIC’s boss was not interested in our opinions.
                •   Examiners did not, during the course of the review, or since, clearly define
                    their basis for criticism or weaknesses to enable the board or staff to
                    properly address weaknesses or recommendations. Comments in the ROE
                    suggest some of the examiners did not understand institution processes.
                    And, based on input from institution staff little detail was provided by
                    examiners.
                •   The reviewers did listed[n] to the Board and staff. The team was
                    inexperienced.
                •   A mutual respect is demonstrated from both sides and we appreciate the
                    opportunity to always provide our views.

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:          2.2

     Comments:
            • Some bulletins too general in nature. Raises more questions than answers.
            • Could be more anticipatory and proactive. For example, guidance on
               “Lands in Transition” came after the market collapsed.
            • IM’s and informational correspondence allows us to stay abreast of related
               issues in the system and ensure that we understand and address in an
               appropriate and sound manner. Please continue the communication.
            • Board members expressed appreciation to FCA informational memoranda.
            • This guidance is good; FCA must remember however that one size does not
               fit all. FCA must ensure that the institutions currently not having issues are
               not treated exactly like those that are having problems. It may be luck or
               timing or it could be the management of the institutions and its willingness to
               not take undue risks.
            • The guidance provides some input into what FCA will be reviewing, but
               overall there was little benefit to the publication.


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


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

                •   Our EIC and tenured members of the exam team were professional and did
                    listen to management’s concerns. Their experience resulted in a rational
                    approach to the regulatory process by not over reacting to a downturn in credit
                    quality in a few industry segments and loans.
                •   Working with knowledgeable examiners and EIC was refreshing!
                •   Suggestions from Portfolio Review process.
                •   Professional and well trained examination team.


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                   Second Quarter FY 2010 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


                •   The exam teams and their examiner in charge had frequent contact with Bank
                    staff and CEO. They were effective and thorough but were understanding and
                    flexible with staff demands. They maintained an open dialogue and discussed
                    findings openly and fairly. They made appropriate and fair consideration to
                    board and management comments.
                •   EIC, examiners and supervisors were open to understand our point of view and
                    the direction/thought process we held in the various functions. Communication
                    and common goals were the most beneficial.
                •   The ongoing communications with the Examiner-in-Charge were very
                    beneficial.
                •   We had two on-site exams reviewing credit, capital, and earnings and found no
                    issues.
                •   Some comments, suggestions from different examiners.
                •   FCA helping the board to understand its role and ways to improve its
                    effectiveness.
                •   Comments during close-out with the board.
                •   Open dialogue.
                •   Open communication with Special Supervision.


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

                •   YBS.
                •   We had in depth discussion with our examination team around vaguely
                    worded requirements and recommendations that, in our opinion, added little
                    to the institution’s management of risk. We would encourage future
                    requirements be more specific in order for the institution’s board and
                    management to ensure compliance.
                •   We believe that there was some inconsistency in our discussions and
                    agreements regarding oversight of institutions and our actions regarding
                    those institutions.
                •   Exam(s) were relatively easy and undisturbing of institution function. Can
                    not think of anything of issue or least beneficial.
                •   FCA examiners met with management to discuss the examination report
                    prior to their meeting with the Board of Directors. The message
                    communicated to management in the initial meeting seemed to indicate that
                    the FCA felt management was well aware of the risks and was already
                    implementing the proper actions in response. However, when examiners
                    met in executive session with the Board, it appears that the examiners
                    expressed a much higher level of concern. This type of mixed message is
                    confusing and misleading to both management and the board.
                •   The time period that it took for the final report to be written. Nine months of
                    constant exam answering the same questions to the same or different
                    reviewers left the staff totally exhausted and frustrated with the exam
                    process. We also had a conference call with the board chairman and the
                    audit chairman concerning our internal reviews. We received the
                    information to be reviewed 40 minutes before our conference call. The
                    treatment of our audit chairman was totally unprofessional. As a result of
                    that call, he almost resigned.


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                   Second Quarter FY 2010 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function
_________________________________________________________________________________________________________


                •   Very little detailed communication during the examination. No details of
                    credit administration weaknesses make it difficult to properly address,
                    correct, or track improvement. The way the ROE was written distracted
                    attention from the real concern, the financial condition of the institution and
                    its future. What happened to our ability to constructively address issues?
                •   The inconsistency in communication that occurs from one exam team to
                    another.
                •   Areas regarding compliance of technical areas that have little impact on the
                    business, the risk associated with our loans, or the way in which we serve
                    our customers (i.e., the income producing capability of the collateral.)

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

                •   Good communication, knowledgeable staff is appreciated.
                •   Tone of the report and lack of urgency to meet with the board did not
                    correlate. Exam started in September 2009, as of date was December 31,
                    2009, report letter dated March 22, 2010, and meeting to present report was
                    April 26, 2010.
                •   Timely receipt of the report by the board prior to meeting with FCA
                    examiners is vital to a clear understanding of the issues. The report was
                    sent to board members less than one week prior to the meeting with FCA
                    and not all board members received the report in time to adequately review
                    it.
                •   During the last week of the review, the Institution Board Chairman, Audit
                    Chairman and staff also met with the EIC and his supervisor to visit about
                    the review and the just issued Informational Memorandum – National
                    Oversight Plan for Fiscal Year 2010. This was a good meeting with good
                    dialog between the parties.
                •   We felt like we were caught in the middle between our EIC and his boss and
                    there was no way to satisfy either. We witnessed a conflict starting when
                    they were first on-site. It became an unprofessional exam. We were
                    thankful that (name removed) took the time to come to the review closeout
                    with our directors and intervened between the individuals. We have always
                    enjoyed an open discussion with our EIC about institution issue and trusted
                    his opinions. We do not see that relationship going forward. Our board and
                    management will correct the exam deficiencies in a proactive and timely
                    manner. We recognize some things need our attention.
                •   Our board is made up of very astute, successful, and dedicated
                    businessmen. Our management team is experienced and dedicated. Both
                    the board and management understand the difficult conditions we are in,
                    and take our responsibilities very seriously. We know the buck stops here.
                    We would welcome difficult questions, opinions, good exchanges of ideas,
                    and action plans to protect the integrity of our institution and our System.
                    This ROE did none of that.




June 11, 2010                                                                                        8