This section focuses on how concepts explored in this module apply to actual FCA documents. Presented here are sections from sample reports and tactics for applying the deductive framework while report writing.
Carefully review the presentation below. Core details on the above content is explained in further detail, along with relevant examples.
Carefully review the presentation below. Core details on the above content are explained in further detail, along with relevant examples.
Shortly, you will view the same section of an examination report you saw earlier, but this time the elements of a finding are identified. Take note that:
• The charge paragraph states the conclusion
• The 2 supporting paragraphs develop the predominant findings supporting the conclusion.
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.
The ultimate goal of an FCA examination is to convince the institution’s board and management to act on FCA’s analysis and recommendations. Before readers will act, however, they need (1) to understand and (2) to be convinced. For readers to understand, we must make the material accessible by using a deductive structure, writing topic sentences, using headings, including graphics, and writing clear and emphatic sentences. Once readers understand the message, they must be convinced that the message is significant, accurate, and logical; and you do that by providing sufficient evidence, following the elements of a finding framework, establishing clear a connection between cause and effect, and using sound logic.
You collect data to analyze it; you analyze data to reach conclusions and recommendations; and you write letters and reports to convince the board and management to act on the recommendations. The basic pattern is:
Analysis ⇒ Communication ⇒ Action
In this module, we reviewed the construct of deductive writing—that is, writing that starts off by making a major point and uses subsequent material to prove that point.
We also reviewed how to integrate FCA’s elements-of-a-finding framework with a deductive structure. FCA’s framework begins with an objective, cites criteria, establishes conditions, identifies causes of the condition, gives the effects, and then presents a conclusion, which answers the question posed in the objective. To adapt this inductive, analytic framework into a deductive, communication framework, we start with the conclusion and then present condition, criteria, cause, effect, and recommendation.
As you start to write your next letter or report of examination, do your best to follow these three guidelines:
– Move important ideas to the beginning
– Provide a map of the document’s organization
– Draft concise topic sentences.
If you do, your writing will achieve greater clarity, conciseness, and emphasis. Now, test your knowledge by completing the Deduction Self Check.
