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Planning For Your Bank Examination
Eight tips to make it run smoothly
By August A. Oliveira
A bank examination can set community bank executives on edge as its policies and past activities are scrutinized. Even those bankers who have established and implemented a clear set of policies and who follow strict banking and accounting practices are wary when the examiners begin their work.
While all bankers will feel some stress before and during an examination, it is even more pronounced for those who see it as something to "get past." On the other hand, for banks that use the examination report as a guidepost that is part of an ongoing self-improvement process, the examination becomes an opportunity to measure progress.
There are steps that every bank can take before, during, and after its examination that will help it to work cooperatively with the examiners. Here are some key points to assist a bank in achieving that goal:
1. Establish a relationship. When bank management and the examination team have an established relationship, it can only help the entire process. The bank's senior management team should establish a rapport with the examiners, reaching out to them and discussing any potential issues with them. Open lines of communications should be ongoing, courteous, professional and candid. A key goal is to establish credibility and eliminate the unexpected. This is especially worthwhile when the bank discovers a problem. Rather than waiting for the examiners to come on site and discover an issue, a member of senior management should call an examiner in advance, explain the situation, and how it was or is being resolved. Not only does this prevent a surprise at the examination, but the examiner will appreciate the advanced notification.
For example, a bank finds out that it has made an excessive loan because the source of payment for several notes is essentially from the same business. Upon discovery of such a violation, a banker should call the examiner and make him aware of the situation. The banker should provide an explanation and the steps that have been taken to correct the error. Such a proactive conversation may lessen the chance of being cited for a violation because examiners, in certain circumstances and situations, may exercise a degree of discretion.
2. Be thorough in responding to pre-exam requests. Here is an opportunity to make a good first impression on the examination team. Respond to such requests quickly, but be certain that responses are comprehensive and accurate. It is recommended that the response material be organized in a binder that is indexed to each request letter item. This will greatly facilitate the examiners' review and subsequent examination. Keep in mind that the request letter provides an indication of areas that the examiners will be reviewing. Don't send last year's report with updated figures. Examiners want to see that your bank is taking the examination seriously. Remember, the more that examiners can do off-site, the less time they need to spend at the bank.
3. Assign a coordinator. This task should be done in conjunction with the pre-examination request. A coordinator should be responsible for making sure there is a smooth flow of data to the examiners and that all of their administrative needs are met when they are on-site. The coordinator should develop a contact list so that examiners talk to the right people. The contact list should include names, titles, phone numbers, and locations.
All bank personnel who will be impacted by the examination should be contacted and notified about the upcoming examination. It is very important to ensure the availability of management and other personnel for meetings/examiner discussions, particularly for the areas being reviewed. If a targeted area manager/supervisor will be out of the bank, make plans for a backup to meet/work with the examiners.
4. Review the previous examination report. The examiners' first order of business will be to look at last year's report. It should be every bank's first priority as well. Did your bank follow through on areas of concern that the examiners identified? The examination team will go through the report and expect to see how cited issues were resolved. This includes the items that required board attention as well as those items within individual departments. Examiners don't write up issues casually. They have identified and documented issues, all of which require attention.
5. Establish a tracking system. Ideally, such a system should be put into place as soon as the examination team issues its report. All items, from those that require board attention on down, should be centralized into a tracking system. Hold individuals responsible for taking corrective action and establish a timetable as to when they will be fixed. Matters requiring board attention must be presented to the board and recorded in the board minutes. As corrective action is taken, these must also be noted in the minutes.
6. Address concerns of auditors, loan reviews and consultants. The examination is not the only forum for noting issues within the bank . Consultants and external/internal auditors who work with the bank may identify red flags. Such red flags will be noted by the examination team. They will examine the bank's procedures for bringing concerns of auditors and consultants to the board and look to see if these issues have been corrected. Specifically, they will want to make sure that any concerns have been brought before the board and recorded in the minutes. Follow-up actions should also be recorded in the minutes.
7. Be aware of new regulatory concerns and hot issues. Community banks are more adept than ever at following established loan review processes. With such processes firmly in place, examiners are turning their attention to regulatory compliance, focusing on anti-money laundering provisions within the Bank Secrecy Act, OFAC and the U.S. Patriot Act. As part of this effort, new FFIEC BSA exam procedures are being developed for examination use in the second half of 2005 . Banks that suspect illegal activity among accounts are required to file a Suspicious Activity Report with the federal government. Make certain that your bank's policies are updated to meet the rules within these guidelines. Examiners will continue to focus on corporate governance, accounting and internal controls for the foreseeable future.
8. Begin preparation for the next exam immediately. As the examination wraps up, make sure senior management meets with the examination team and discusses their timetable. In some cases, the team has a sense of when the next examination will be and which type it will be. Knowing this well in advance can help your bank begin its preparation. It also sends a positive signal to the examination team that you want to be proactive and work with them.
While these eight points address different aspects of the examination process, there are some common themes, namely, cooperation and communication. When the relationship between examiner and banker extends beyond the examination itself, there are greater opportunities for a positive working relationship. After all, both sides are working towards the best interest of the bank.
August A. Oliveira is the Bankers' Bank Northeast's Vice President/Relationship Manager for Northern New England. He is a former senior official with the federal Office of the Comptroller of the Currency (OCC). He began his career with the OCC as a bank examiner and held various managerial and executive positions over a 30-year period. The Bankers' Bank Northeast is based in Glastonbury, CT and provides correspondent products and services to more than 135 community banks in New England and New York. The Bankers' Bank Northeast is a state-chartered institution that is FDIC insured and a member of the Federal Reserve System and the Federal Home Loan Bank of Boston. Oliveira can be reached at firstname.lastname@example.org.