It has been my experience over the past 35 years in advising bank boards of directors across the United States (from the perspective of both the regulator and the bank) that there are a surprising number of institutions that fail to take advantage of the opportunities and potential for positive benefits that exist in the bank examination exit review process.
This seems to be particularly true for smaller community banks with total assets of less than $200 million. This article will explore a number of suggested ideas and practices designed not only to enhance the examination exit review process itself, but also to transform the image of the managerial resources of the bank to that of a dynamic and effective business mechanism.
The vast majority of insured financial institutions in the United States are well managed and profitable, and do not pose any type of risk to the system of federal insurance of deposited funds in such institutions. Those banking entities are therefore assigned a supervisory rating of either "1" or "2" by the examining agency that has supervisory jurisdiction. Ironically, however, those are the institutions that have the highest tendency to miss the opportunities presented to their boards in respect of the exit review process. The scenario at the conclusion of examinations of institutions with satisfactory supervisory ratings frequency follows the same script, and is employed ostensibly for the purpose of "streamlining" the overall on-site bank examination process. It does so, however, at the price of eliminating the active involvement and participation of the board of directors.
The examiner-in-charge advises the chief executive officer that the examination team has completed its on-site work; that certain tentative findings and conclusions regarding the bank's financial condition and operations have been formulated; and that they want to schedule an exit meeting to review those findings and conclusions and to consider any comments or other input that might be offered on behalf of the bank. In the same breath, however, the examiner-in-charge also states that the overall findings and condition of the bank are good (and might even hint at an assigned supervisory rating of "1" or "2"), and that it will not be necessary to convene a special meeting with all members of the board of directors of the bank.
The "logic" of the examiner's suggestion is rooted in the notion that the regulatory authority only needs to meet with fully assembled boards of directors if serious operating problems or deficiencies are discovered during the examination, and that since the overall condition of the bank is good, it is unnecessary to conduct the exit review meeting with the full board of directors. (Some examiners have even made the indirect suggestion that it would be a "waste of time" for the entire board of directors to attend the exit review meeting where a satisfactory supervisory rating of "1" or "2" is assigned.) All too often, therefore, the chief executive officer accepts the examiner's invitation to conduct the exit review meeting with the examiners with a small group of senior or key executive officers of the bank. In my view, that choice is a serious mistake. For the reasons that follow, it is strongly suggested that bank management (i.e., the chief executive officer and the board of directors) never allow a full-scope regulatory examination of the bank to be concluded without their personal participation in an exit review meeting with the examiners who conducted the examination. Many bank boards have adopted such practice as a matter of formal written policy.
The exit review meeting with the examiners at the conclusion of the bank examination can and should be utilized by bank management as an effective tool to fulfill several different but related objectives that can be very beneficial to the bank. First, and perhaps most important, the exit review meeting can be used to emphasize and make clear and compelling business records showing the various successes and accomplishments that were engineered by bank management during the period covered by the examination. All too often the bank examination exit review process tends to focus on the "negatives" of the bank's operations and any resulting "problems" discovered by the examiners pertaining to capital adequacy, asset quality, earnings, etc. That can be changed.
Why not use the exit review process to focus attention on the "positive" attributes of bank management and the resulting achievements and successes that have occurred? If, for example, bank management has been successful in eliminating a previous problem or in achieving some other noteworthy goal or objective, the exit review meeting should be structured and conducted in a way that will both highlight and record such successful results. In short, bank management should view the exit review meeting with the regulators as an opportunity to reverse the traditional image of the exit review meeting by using the occasion to accent the positives. This is particularly true (or at least made easier) where all parties concerned, including the regulators themselves, agree that such positives exist. Indeed, in most instances involving banks with satisfactory supervisory ratings, they will have been documented and verified by the examiners during the course of the examination itself.
Strong and favorable bank performance activities and the achievements of bank management in a well-run institution should be memorialized in the business records of the bank as well as those compiled by the regulatory agency. Such records need not be limited to sterile operating statistics, but should be reflected in a written and meaningful narrative format. Again, the bank examination exit review meeting provides a model opportunity to do that if five simple steps are followed:
1. Set a meeting with the full board
When the exit review meeting is scheduled with the examiner-incharge, make it clear that the entire board of directors wants to participate (this should be a written board policy), and that the board wants certain items included on the agenda of topics for discussion.
2. Establish an agenda for the bank
The primary items on the bank's agenda, of course, will be the accomplishments and other significant "positives" that have occurred. The bank's agenda should be coordinated with the examiner-in-charge so that they dovetail with each other. The bank's agenda should include only the top three positive developments; however, care should be taken to also include any affirmative action plan designed to address any problems or related issues.
3. Prepare for the exit review meeting
A specific effort should be made by the chief executive officer and the bank's directorate to prepare for the exit review meeting so that everyone has a clear understanding of the bank's objectives and what representations will be made (and by whom) during the meeting to attain those goals. In effect, bank management should conduct a mock "rehearsal" of the exit review meeting. Management should anticipate the findings and conclusions of the examiners and be prepared with constructive responses. Similarly, if bank management wants to emphasize certain positive developments that have occurred, it will be much more effective if the presentation is prepared in advance.
4. Compile a detailed minute record
When a positive development on the bank's agenda is discussed during the course of the exit review meeting, ask that the examiner-incharge (or other agency representative) acknowledge (or better, confirm) and possibly characterize (e.g., "outstanding," "surprisingly good," etc.) the development or circumstance in question. At the same time, compile a comprehensive minute record of the discussions, taking special measures to quote any favorable comments made by any of the examiners. Special care should be taken to be as accurate (and balanced) as possible. Some banks use more than one person to take minute notes; others have made electronic tape recordings of exit review meetings to check and ensure the accuracy of the minute record of such meetings.
5. Prepare summary report to regulatory agency
Following the bank examination exit review meeting, the chief executive officer should prepare a written report addressed to the examining agency that summarizes the major findings and conclusions covered during the exit review meeting with the examiners, including a comprehensive narrative description of the positive developments on the bank's agenda. The bank's report to the agency should be supported by attaching a copy of the bank's minute record of the exit review meeting as well as copies of the agendas of the examiners and the bank. Most importantly, the bank's report should be sent to the agency well before the agency's final report of examination is received.
Time and space here do not permit a full discussion of suggested "do's" and "don'ts" in respect of the foregoing actions, or a review of certain other ancillary actions that can be undertaken by the bank as part of the exit review process. Further, while it may be noted that the suggestions outlined in this article have been addressed largely to the well managed institutions with satisfactory supervisory ratings, the principle theme of utilizing the exit review process as a mechanism to produce positive benefit to the bank is also applicable to the so-called problem institution with a supervisory rating of "3" or worse. In fact, it has been my experience that in situations where a bank's rating is in danger of slipping to an unsatisfactory level, the failure of bank management to prepare properly for the exit review meeting often results in the institution of a formal enforcement action that could have been avoided if certain procedures were followed. In such situations, therefore, it is absolutely critical that bank management undertake aggressive, proactive measures in preparing for the exit review meeting with the examiners and attending agency representatives.
The bank examination exit review meeting with the examiners is an opportune event for bank management, and it should be the formal policy of every board of directors to actively participate in that event with proper preparation, the discussions at the exit review meeting can be structured and conducted in a manner that can be very beneficial to the bank. The only requirement is a desire and a proactive effort on the part of management to use the process to emphasize the positives.
[Author Affiliation]
by Stephens B. Woodrough
[Author Affiliation]
Stephens B. Woodrough served with the FDIC legal division for 25 years, including 15 years as regional counsel in Atlanta from 1973-88. His nationwide banking practice, based in St. Petersburg, Fla., specializes in regulatory and enforcement matters (including litigated actions) before the federal regulatory agencies.
No comments:
Post a Comment