Second Quarter FY 2011 FCS Survey

Published by the Farm Credit Administration, Office of Inspector General on 2011-06-16.

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

                   Second Quarter Fiscal Year 2011 OIG Summary Report on the Survey of FCS Institutions
                                       Regarding the Examination Function

                   Second Quarter Fiscal Year (FY) 2011 Summary Report
                              (January 1 – March 31, 2011)

   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 January 1 – March 31, 2011, the Office of Examination (OE) identified 25 FCS
institutions that were in a position to provide meaningful survey responses.

The OIG sent surveys to those 25 institutions on April 19, 2011. Of the 25 institutions surveyed,
22 submitted completed surveys. If the nonresponding institutions subsequently send a
completed survey, they will be included in the next quarterly report.

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

The survey asks respondents to rate the 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.

Survey Results – Second Quarter FY 2011

Average numerical responses to survey statements 1 - 9 were 2.0 to 2.2 (For the first quarter
FY 2011, the range averaged 1.4 to 2.1.)

The average response for all survey statements was 2.1. (For the first quarter FY 2011, the
average response was 1.7.)

There were four ratings of “4” (Disagree), i.e., one each for survey statements 2 and 3, and two
for survey statement 9. There were six ratings of “5” (Completely Disagree), i.e., one each for
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                     First Quarter Fiscal Year 2011 OIG Summary Report on the Survey of FCS Institutions
                                          Regarding the Examination Function

survey statements 1, 2, 5, and 7, and two for survey statement 4. Of the ten adverse (“4” or
“5”) numerical ratings, one institution accounted for six.

In this quarter, unlike prior quarters’ survey results, there were more negative than positive
narrative comments to survey statements 1-9. (Negative comments of any degree are color
coded in red.)

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, most were negative. However, several comments do provide a
perspective that should prove constructive.

Survey item 11 asks for any additional comments. There is a mix of negative and positive

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:           2.0 (1st Quarter 1.8)

            •       The new risk based examination process provided reasonable focus to the
                    exam activities.
                •   Appropriate focus.
                •   The re-interpretation of borrower rights by the Agency was more focused on
                    over complying versus the intent of borrower rights. Although we disagreed
                    with some of the interpretations we respect the Agency’s position.
                •   The scope of the examination was meaningless, and the frequency was
                    overbearing and burdensome. Two of the examinations mainly focused on
                    asset examination, despite our extremely high credit quality, and our
                    conservative credit culture. Our institution had FCA staff on site for three
                    separate times during the examination period totaling a three week period.
                    This much onsite activity is extremely disruptive to staff and management
                    and causes the institution to lose focus from its main goal of serving our
                    customers. In addition to the 3 weeks of onsite examinations, the staff spent
                    countless hours providing and copying information and answering clueless
                    questions from the very inexperienced FCA staff. These questions also
                    continued after the onsite visit. We received numerous questions for up to
                    two weeks or more following the site visit from lower level staff who
                    apparently were not seeking guidance from their superiors. This was highly
                    disruptive during the onsite visit and the institution had to contract with

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                     First Quarter Fiscal Year 2011 OIG Summary Report on the Survey of FCS Institutions
                                          Regarding the Examination Function

                    outside resources to ensure our business operations were handled timely
                    and effectively during the examination visit.

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

    Average Response:           2.1 (1st Quarter 1.9)

            •       Our institution maintains a keen understanding of our authorities and the
                    related laws and regulations.
                •   That’s our responsibility and there were no issues to better understand.
                •   Our disagreements are more with the interpretation of the statue and
                    regulations versus understanding our authority.
                •   The examination process did nothing to help our institution understand its
                    authorities and comply with laws and regulations. The regulations are
                    burdensome, outdated, and reactionary. They are not helpful at all in being
                    proactive and providing assistance to institutions. While we are not perfect,
                    and we have made mistakes, our institution has always abided as best we
                    can by the regulations. FCA correspondence is reviewed as it is received
                    and we share all correspondence with our Board at their monthly meetings.
                    Our regulatory compliance was rated as generally satisfactory. This has
                    been substantiated repeatedly by our internal audit examinations as well as
                    FCA examinations.

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:           2.0 (1st Quarter 1.5)

            •       The results and recommendations of the exam process were focused on
                    minor issues that are trivial; and not helpful at all. After weeks in the audit
                    process, FCA made minor recommendations. It appears as though since
                    FCA could not find any issues relative to “safety and soundness” or
                    “compliance” and therefore they focused on requesting further
                •   The recommendations sometimes do not align with actual audit findings.
                •   On a couple of issues FCA was unable to provide convincing arguments that
                    linked an issue to a serious safety and soundness concern. Too much focus
                    on one area versus considering the overall strength of the company.

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                     First Quarter Fiscal Year 2011 OIG Summary Report on the Survey of FCS Institutions
                                          Regarding the Examination Function

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

    Average Response:           2.2 (1st Quarter 1.9)

            •       Pendulum is swinging in some areas as it always does with new board
                •   Generally we agree, as our disagreements were more with the interpretation
                    and application of a regulation versus the examiners’ knowledge.
                •   Some admitted they lacked complete understanding of borrowers’ rights
                    regulations. Demonstrated good knowledge of all other regulations.
                •   The examiners were rookies and for the most part clueless. Each
                    examination was filled with 8-10 new staffers that wasted a great deal of our
                    time. There is no experience level at FCA and no value added in regards to
                    the examiners present at our examination. Some of the FCA staff exhibit
                    difficult attitudes and are extremely impersonal and impede the exam
                •   Examiners were not consistent in the application of the scoring based on the
                    actual results of the institution (i.e., credit quality, earnings, capital, financial

                             Communications and Professionalism

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

    Average Response:           2.0 (1st Quarter 1.4)

            •       This area has improved significantly over the years.
            •       The communications between the Exam staff, particularly the new hires and
                    FCA’s “Second Career Specialists” and the institution were not clear or
                    timely and, in the most extreme case, bordered on harassment.
                •   Information requests significantly increased after the examiners were no
                    longer on-site. There were some complications regarding the sharing of
                    information among examiners officed in different locations.
                •   Agree except as to timeliness of the final report.
                •   Communication and application of responses to requirements and
                    recommendations was confusing and unclear. It was our understanding that
                    we were only responsible to respond on requirements. We responded on
                    both requirements and recommendation. However, we did not include the
                    level of detail on recommendations which was challenged by FCA and
                    created confusion.

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                     First Quarter Fiscal Year 2011 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:               2.0 (1st Quarter 1.7)

            •       Communication was good in both directions and allowed for a written report
                    that was on point.
                •   Provided useful information.
                •   The written response is communicated well. FCA’s verbal communications
                    are very structured, seem to follow a checklist, and were not very well done.
                    It was very clear to the Board that the newer examiners do not have the
                    depth of knowledge or understanding of the business operations to provide
                    the Board with meaningful conclusions or insight into the Board’s oversight
                •   The inconsistency of the application of the FCA scoring criteria results in
                    uncertainty for the Audit Committee.
                •   Yes, but “dense” (written like a lawyer would write).

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

    Average Response:           2.0 (1st Quarter 1.5)

            •       Those that could be conducted off site were effectively handled.
            •       Had a sound plan of action and they adhered to the plan well.
            •       Very professional.
            •       The examiners were clueless, asked ridiculous questions that no
                    respectable auditor would ask and did not focus on the main risks of the
                    company. An example of this criticism follows. When the examiners were
                    on site we were visiting about a loan that is very complex. Our COO asked
                    the examiner if she wanted to see the file and she said no. She simply
                    relied on our conversation. While everything we told her was truthful, we
                    would have thought that she at least would have verified the information by
                    looking at the file. Examiners were not well educated in the fiscal area as
                    well and we had comments from them stating they didn’t understand or have
                    knowledge about specific processes. They basically were asking questions
                    from a checklist with no understanding of the information so they could
                    respond with appropriate follow-up questions or research. Also refer to our
                    response in question #1 relative to lack of organization and efficiency. This
                    lack of efficiency and organization is driving higher regulatory costs and
                    increased Institution time away from business activities that generate profits
                    and allow us to serve our members; overall this impacts the institution’s
                    operating costs which directly impact our borrower-members. Also refer to
                    our response in question #11.
                •   The on-site work for the examination team is always hurried. Most of the
                    first and last day is cut short due to travel requirements. Many times there

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                     First Quarter Fiscal Year 2011 OIG Summary Report on the Survey of FCS Institutions
                                          Regarding the Examination Function

                    are multiple questions concerning a particular issue or a particular loan/line
                    of credit. While the exam team and our staff are readily available to discuss
                    issues, many times these discussions are rushed and there is also the
                    possibility of several unresolved issues that require follow up.
                •   We believe the information gathering organization could have improved and
                    could have avoided many of the information requests after the on-site visit.

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

     Average Response:          2.0 (1st Quarter 1.8)

            • Good dialogue resulted in agreement on the areas where findings indicated
               needed action by our institution.
            • No real issues to discuss.
            • The examiners listened to our views and responses, but we have no way of
               determining whether or not the institution’s views were considered in the
               FCA exam conclusions.
            • Once again, the FCA scoring criteria is heavily weighted toward the
               “subjective” versus the objective and actual results of the institution.
            • In some areas we feel views and responses were fairly considered and in
               some other areas they were not.
            • Overall we would agree, however FCA did not fairly represent our pricing
               survey in their final report.

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:          2.1 (1st Quarter 2.1)

            • The FCS-wide exam guidance (bulletins and information memoranda) is
               helpful. Additionally, FCA’s attendance and presentations at specific
               CCO/CFO meetings was helpful in interpreting new guidance and FCA’s
               intent and expectations.
            • Some is, much is about giving everyone the same treatment. We realize
               difficult to differentiate, but some of it is going beyond regulation and safety
               and soundness in the past year.
            • System wide guidance has certainly increased over the years; appropriately
            • Appropriate for the current business environment.
            • There has been a LOT of guidance, and it seems like it is sometimes more
               legalistic than necessary.
            • The Loan Portfolio Management Examination Modules and the National
               Oversight Informational Memorandum are helpful; however, there is
               significant redundancy. Further, the overall quantity of guidance information

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                     First Quarter Fiscal Year 2011 OIG Summary Report on the Survey of FCS Institutions
                                          Regarding the Examination Function

                    being sent, combined with the level/depth of management practices
                    addressed, may in some instances go beyond a safety and soundness role.
                •   It would have been appreciated if the first two portfolio management
                    modules had been sent to us prior to a few days before the examination.

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

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

                •   We have experienced much financial stress but our greatest challenge is with
                    lack of human capital. FCA, by putting stronger pressure on Boards has
                    helped us as a wholesale bank get more traction to get replacement of
                    management teams we knew for some time needed to be upgraded.
                •   Our lead examiner took time and made an extra effort to explain FCA’s
                    position on most items and was most helpful in offering suggestions for ways
                    for us to improve several areas of our operation and we appreciate this
                •   Interaction with EIC on reg interpretation.
                •   The combination of on-site and off-site examination worked well for our staff.
                •   We appreciated the EIC sharing some of the “best practices” observed at
                    other institutions.
                •   Board and management believe audits and examinations provide great
                    value to the institution. We take seriously the responsibility to operate the
                    institution in a safe and sound manner. Examinations provide insight into
                    the quality and effectiveness of our operations, controls, and processes.
                •   Quality validation—assets observations.
                •   Confirms our institution is well managed with appropriate governance. The
                    offsite exam results in less disruption of the institution staff.
                •   Examiners provided good information on many current issues.
                •   Good feedback on best practices.
                •   The examiner-in-charge did a fine job coordinating the expectations, and
                    provided accurate feedback of the findings that were to be in our report.
                •   In-person meetings. The written report was more critical than previous
                    reports. The in-person meetings both during and after the examination help
                    put the report findings in context.
                •   Interaction with examination staff regarding borrower rights compliance.
                •   The close out dialog with FCA, Management, and our Audit Chairman.
                •   The face to face meeting with the Board was beneficial.
                •   Overall knowledge of the most recent exam team was very good and they
                    did offer suggestions in some areas.
                •   The final close out was handled very professionally. The discussion of
                    “safety and soundness” areas was also informative.
                •   They were very professional and helped us better understand risk
                •   We did not find any aspects of the exam process beneficial.

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                     First Quarter Fiscal Year 2011 OIG Summary Report on the Survey of FCS Institutions
                                          Regarding the Examination Function

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

                •   There were several trainees in our group of examiners and that took extra
                    time for us, but we didn’t mind having them here and hopefully we were
                    helpful in furthering their training.
                •   All was beneficial.
                •   We didn’t have any negatives with the examination process.
                •   Initially the EIC was going to delay the meeting with the Board. A more
                    timely meeting was deemed to be better.
                •   There still seems to be some overlap in the process where shared assets
                    are concerned.
                •   The least beneficial aspect of the exam process is dealing with incompetent
                    FCA staff.
                •   Financial
                •   Examination and FCA review and overview processes add nearly one full
                    time staff person to our staffing requirements. Additional stress testing from
                    what our institution does (given size of institution) appears unreasonable.
                    Once again actual institution results or objective criteria appear not to be
                    considered by the FCA examination process.
                •   The lack of explanation as where and why FCA came up [with] the top ten
                    relationships not to exceed 75% of risk funds. When explaining change to
                    staff it helps to have a full understanding as to why our regulator is making
                    the change.
                •   Timeliness of the final report as to date of findings. Significant change had
                    occurred in the interim time period.
                •   Recommendations that don’t fully evaluate both sides of the issue or
                    adequately consider the overall strength of the company.

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

                •   Professional, reasonable and fair.
                •   Well communicated, professional, and constructive; provided appropriate
                    information and feedback for our Team to improve and strengthen our
                •   Appreciated the professionalism of our EIC and his team.
                •   Overall, we are satisfied with the examination process and results.
                •   Considering the overall financial industry, the Ag segment continues to
                    perform well. FCA needs to make sure they are not unduly influenced by
                    the non-ag sector in their review process.
                •   Overall we believe the exam was professionally conducted. We would
                    recommend that FCA consider completing a cost/benefit analysis in making
                    their required and/or recommended actions.
                •   More off-site work prior to coming to the institution.
                •   No Value Added by FCA: There is absolutely no way that we can justify the
                    expense that we pay FCA to our stockholders. There is no “value added”
                    component that we can find that offsets their cost. In fact, there is a
                    substantial negative impact on the institution due to the additional time that
                    we spend preparing, cooperating and reporting before, during, and after their

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                     First Quarter Fiscal Year 2011 OIG Summary Report on the Survey of FCS Institutions
                                          Regarding the Examination Function

                    audits. As the costs of FCA continue to escalate, the burden on the
                    institutions has risen to the point that something needs to change. We
                    strongly support a diligent, third party examination process for our institution
                    and for all other FCS institutions; but FCA has proven for years that they are
                    incapable and it is getting worse. FCA’s Biggest Problem: The Agency has
                    very few qualified people in the field; they fill our office with rookies during
                    the audits that are clueless and completely inexperienced. We have had up
                    to (10) new FCA staff members in our office at once. They waste a great
                    deal of our time. Due to constant turnover at FCA, individuals that were too
                    insecure to speak in their first audit become supervisors of our next audit!
                    There is no wealth of experience remaining with FCA, that is apparent to the
                    field and thus there is no value added. The Agency’s attempt to shore up
                    their ranks in the field with “Second Career Specialists” is completely
                    ineffective, as these individuals are usually drop-outs from the commercial
                    banking and other industries that can’t find a job, and have little to add
                    except a difficult attitude and frustrated egos. They have proven to be an
                    impediment to the examination process. FCA is not fulfilling their role in risk
                    assessment: FCA examines the results of the in-house institution reviews
                    and “spot checks” random loans. The internal reviews are either conducted
                    by in-house reviewers or independent contractors. We will not speak to the
                    accuracy of the in-house reviewers except to point out that their
                    independence and objectivity is suspect as the reviewers are employees of
                    the institution that they review. In our view, this is a direct conflict of interest
                    that will, in some cases result in assessment of loan classifications and risk
                    that are inaccurate. The independent contractors reviewing institutions
                    follow the age-old System practice wherein reviews are conducted based on
                    the policies and procedures of each institution that they examine, some of
                    which are very liberal and some are not; which completely discredits the roll
                    up of credit quality, credit administration and System risk. This practice also
                    misleads institution Boards who conclude that their performance results
                    compare with other, well managed institutions, when they do not. While this
                    process is politically expedient, it results in data that is not truly
                    representative of the actual risk. We have not observed FCA staff in the
                    field that are capable of interpreting the data from either in-house reviewers
                    or independent contractors, or making value judgments relative to the work
                    performed by the internal reviewers or the performance of the members.
                    Most of the FCA staff is clueless relative to evaluating loan performance,
                    structure or risk management. Bottom line, FCA is of no value to either the
                    institution or the System in this critical area. The System would be much
                    better served if the Office of the Controller reviewed and examined the
                    institutions based on uniform standards that are generally acceptable in the
                    banking industry. This would remove the internal Farm Credit System
                    politics from the review and examination process and greatly improve the
                    safety and soundness of the System.
                •   Final report was delivered four months after exit interview.

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