Examination vs. Reporting
Conducting an examination is an inductive process: you collect information, analyze those data, and then draw conclusions.
However, FCA uses a deductive approach to report those findings. That is, instead of starting with data and moving to conclusions, we put the main ideas first in a report, a section, or a paragraph.
Why? Because deductive structure best serves the needs of the reader, who wants major points first with specific facts to follow.
Report writing at FCA is organized around a deductive framework that includes gathering information, reviewing that information, drawing a conclusion, and then reporting on the conclusion. The graphic below illustrates the major elements of the framework.
The graphic referred to is described below. Read from top down to visualize the ordering of events for report writing at FCA.
Gathering information (happens first) – appears at the top
Specific facts
General conclusions
Reporting information (happens next) – appears at the bottom
General conclusions
Specific facts
Financial reports—whether Reports of Examination (ROEs), activity letters, Financial Institution Rating System (FIRS) letters, or something else—should employ a deductive structure for several reasons. The first reason is emphasis.
To illustrate this point, review this list of 10 words below. Read over once or twice, but don’t write anything down. Your goal is to try to remember as many of the 10 words in this list as you can.
Car
Data
Chair
Tissue
Sex
Chalk
Hope
Tie
Age
Budget
Now, write down as many as you can remember.
OK, how many words did you write down? 6? 7? 8? All 10?
Here are the 10 words, in order:
Car
Data
Chair
Tissue
Sex
Chalk
Hope
Tie
Age
Budget
Of the words above, you probably got 5 or so and most likely got these 3: car, sex, and budget. You probably missed at least one of these 3: tissue, chalk, and hope. Is that right?
This little exercise demonstrates the principles of primacy and recency. Primacy means that whatever comes first is emphasized most and therefore is most likely to be remembered. Recency means that whatever comes last is most likely to be remembered as well—because it is the most recent. Anything in between is de-emphasized. We seldom can recall items buried in the middle—whether it’s in the middle of a sentence, a paragraph, a report, or a book. The only way we recall anything in the middle is if it’s somehow extraordinary or shocking—like the word “sex” was in this list.
Deductive Structure For Emphasis
Remember that one of the criteria for effective writing is emphasis: —correctness, clarity, conciseness, convincingness, emphasis. The amount of emphasis a statement receives in a document depends to a large extent on where that statement occurs in the document. The most emphatic position in any written communication–whether it’s a paragraph or a report–is the first position. So a major reason to open a paragraph with a topic sentence, or start a report with the findings, is that the opening position is the most emphatic. Deductive structure highlights and emphasizes the main message, which is why all FCA documents beyond the workpaper stage should use a deductive structure.
In addition to providing emphasis by highlighting the most important information, deductive structure has several other advantages:
Advantages of deductive structure:
– Aids reader comprehension and retention of material
– Provides readers with an overview so they can then place details in a context
– Provides readers with a map of the section.
In a document that has several parts, the deductive structure helps readers to understand the bottom line quickly and to see the structure of the entire document. Here is a graphic showing the charge paragraph—that is, an overview paragraph–at the beginning of a section. The charge paragraph lays out the key finding of the section, and then the overview paragraph is followed by secondary paragraphs that support the main message.
This “T” shape visually shows that the broadest statement should always come first in any type of report document.
A charge paragraph not only highlights the main ideas, but also indicates in what order you will present those ideas in the support paragraphs that follow. The graphic that follows illustrates this progression.
The charge paragraph forecasts the sequence of subsequent paragraphs. It lays out the high-level messages of the section, and then the writer uses the main ideas from the charge paragraph as topic sentences in the following support paragraphs.
Coming up is a section of an examination report that does exactly that. It opens with a charge paragraph and develops points made in the charge paragraph in subsequent paragraphs. In fact, ideas stated in the charge paragraph evolve into topic sentences in the support paragraphs.
Excessive levels of Nonperforming loans constitute a significant threat to the association’s earnings and long term viability. Unsatisfactory identification and reporting of loan performance status added to the risk in this area. Examination findings indicated that management relied on financial reserves and collateral strength in identifying and servicing “Nonperforming” loans, rather than ongoing repayment capacity and clearly defined collection plans.
Nonaccrual and other Nonperforming loan levels represent an excessive portion of the ACA’s portfolio. Appendix I, exhibit 3, shows that Nonperforming loan levels were reduced slightly since yearend 2005, but still totaled 19 percent of total loans as of the examination date. Nonaccrual loans increased 13 percent of total loans, after adjusting for examination results. These Nonperforming and Nonaccrual loan ratios far exceed satisfactory levels.
Also, loan performance identification and reporting were unsatisfactory. FCA downgraded three loans to Nonaccrual. These downgrades equaled $3.2 million, or 23 percent of the volume sampled (see appendix II, exhibit 5). As a result, ACA financial statements and reports to FCA overstated accrual loan volume and earnings (see Earnings and Regulatory Reporting).
Collection plan weaknesses and reliance on financial reserves and collateral strength caused the inaccurate performance identification. In loans transferred to Nonaccrual, planned actions to restore adequate repayment capacity were either uncertain or lacked clear timeframes for when projected actions would be completed, as required by FCA Regulation 621.2. Management believed the collection plans were adequate and the borrower’s remaining financial reserves and collateral margins provided assurance of debt collection. Loan comments in appendix III, exhibits 1 through 4, provide details on these loans.
The Nonaccrual volume represents a significant threat to the ACA since these volumes substantially reduce the ability to generate operating income and build capital (see Earnings and Capital for details). The ACA must reduce the excessive level of Nonperforming loans to improve earnings ability and capital growth. The board and management must also improve the accuracy of loan performance identification by increasing emphasis on ongoing repayment capacity and clearly defined collection plans. Such plans would assist the ACA in restoring ongoing repayment ability or collecting nonaccrual loans in a timely manner.
