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During our review, we found that two consecutive examination reports—a January 2011 target examination report issued by FRB Richmond and a July 2011 joint examination report issued by the State—contained inaccurate information related to an asset swap transaction completed in December 2010. FRB Richmond conducted the January 2011 target examination and participated in the latter joint examination. FRB Richmond examiners attributed the factual inaccuracies contained in both reports to oversights during the report review process and acknowledged that the correct information should have been included. Inaccurate information in examination reports presents reputation risk to the relevant Reserve Bank and may impact work products that rely on such information.
During our review, we found two consecutive examination reports that inaccurately described the circumstances and supervisory activities surrounding the asset swap transaction completed by Waccamaw in December 2010. The first examination report, issued on January 28, 2011, detailed the results of the FRB Richmond’s September 2010 examination. A brief discussion of the transaction in that report incorrectly stated that the asset swap transaction totaled $56 million rather than the actual amount of the transaction, which was $110 million. FRB Richmond became aware of the full details of the asset swap transaction and subsequent capital infusion at a January 19, 2011, meeting with Waccamaw management.17
The second examination report, issued on July 5, 2011, detailed the results of a March 2011 examination. In this instance, the State led the joint examination; State examiners drafted the report, and FRB Richmond examiners reviewed the report prior to its issuance. This report accurately described the terms of the deal but inaccurately stated that Waccamaw had failed to request regulatory approval to perform the asset swap transaction. As part of our review, we concluded that Waccamaw management requested approval for the transaction on September 24, 2010, in a letter addressed to the State and FRB Richmond describing the transaction at a conceptual level. Specifically, Waccamaw requested approval for the issuance of $3 million in subordinated debt and other aspects of the asset swap transaction.
Interviews with certain FRB Richmond senior officials responsible for supervising Waccamaw prior to its failure led us to believe that Waccamaw completed the capital-raise transaction without seeking prior approval from FRB Richmond. However, during an interview with another FRB Richmond examiner, we learned that FRB Richmond issued a response to Waccamaw’s September 2010 request letter describing the transaction on September 29, 2010. A review of this letter indicated that FRB Richmond officials approved the debt issuance but explicitly stated that “we are not opining on the other transactions around the issuance of th[is] subordinated debt” as discussed in the September 24, 2010, letter.
The subsequent October 2011 examination report issued by FRB Richmond accurately noted the details of the transaction. However, it did not mention the September 29, 2010, letter sent by FRB Richmond. An FRB Richmond official who supervised Waccamaw told us that the information surrounding the requested approval should have been included in the prior reports. Another FRB Richmond examiner verified that the January 2011 and July 2011 examination reports included inaccurate statements and noted that their inclusion was an oversight. This examiner also noted that he did not see the July 2011 report but acknowledged that FRB Richmond had an opportunity to review the State’s report for the joint examination. When issuing a joint report, FRB Richmond should ensure the accuracy of the information contained in the report. Inaccurate information contained in an examination report can affect assessments performed by other regulators and presents reputation risk to the Reserve Bank.
As part of its response to a prior finding and recommendation associated with our Material Loss Review of the Bank of the Commonwealth, FRB Richmond recently completed a Six Sigma review designed to enhance the effectiveness of its report review process.18 While we recently closed out the recommendation associated with the prior review, we emphasize that factual accuracy should be an important aspect of the updated report review process. According to FRB Richmond, some of the improvements to its review process include holding meetings with all examiners and FRB Richmond officials who supervise a bank to ensure that the information in an examination report is accurate prior to its issuance and taking into account ongoing deliberations held outside the examination process. In addition, FRB Richmond noted that the updated process includes performing a quality control check on numerical data listed in examination reports. FRB Richmond described its three-step report review process conducted by the lead examiner and senior FRB Richmond officials prior to issuance. Because of the corrective actions outlined above, we are not making any additional recommendations regarding this finding.