|FCA Examination Manual|
|Module||Planning and Monitoring |
Monitoring consists of the activities associated with ongoing surveillance of Farm Credit System (FCS) institutions to keep abreast of significant changes in risk. Monitoring activities should be tailored to the condition of the institution and its operating environment. Follow-up that may result from monitoring should be appropriate and timely. Monitoring activities typically consist of reviewing financial information and various other information and documents obtained from a myriad of sources. The depth of review can and oftentimes will cross over into the realm of examination analysis. This usually occurs when the information submitted is sufficient enough to allow for a thorough examination from which conclusions can be reached. Since examiners have the latitude to perform most examination activities off site, monitoring and off-site examination are complementary activities that facilitate the efficient and effective use of resources while providing regulatory oversight of FCS institutions. Insights gained through monitoring and off-site examination activities are also incorporated into ongoing institutional examination planning, thereby enhancing that portion of the examination process.
The objectives of monitoring are to provide timely recognition of changing risk in an institution and gain efficiencies by facilitating off-site examination activities. These objectives are commonly accomplished through:
- Identifying concerns early enough to initiate corrective action before serious problems result;
- Determining if appropriate and timely corrective actions are being taken;
- Providing input to institutional examination planning; and
- Enhancing communication between individual institutions and FCA.
Each Associate Regional Director (ARD) is responsible for establishing a monitoring program that identifies specific responsibilities, reporting, and controls. The Annual Operating Plan (AOP) provides general monitoring strategies and guidelines after considering risks such as macro- and micro-economic conditions and the institution's size, condition, and management effectiveness. Monitoring of each institution is assigned to a specific examiner(s) who is accountable for ensuring these activities are carried out. Individual institutional assignments for monitoring are documented by each field office either as a part of its AOP or a supplement thereto. Monitoring examiners should be cognizant of prior Reports of Examination, off-site activity reports, monitoring strategies documented in the field office's AOP, external conditions, and the most recent resource recommendations made on form FCA 1000.
The use of information from various sources is necessary for an effective and efficient monitoring process. Information is available to examiners in three primary forms: FCA-generated, FCS-reported, and external sources.
FCA-Generated--A wide range of information is available through various resources within FCA. Some of these sources are:
- Institution Permanent Files--Permanent files provide the main source of background information on an institution. FCA's past evaluations of the institution, including planning documents, Reports of Examination, FCA Rating System Summaries, off-site activity reports, and related correspondence, are available in the permanent files.
- Enforcement Action Files--Enforcement files are maintained for institutions under enforcement actions. These documents are available for review by examiners as needed. Many of the documents in the enforcement files are forwarded to the respective field offices for informational purposes on a routine basis.
- Consolidated Reporting System (CRS)CRS provides examiners with detail and summary information on institutions' financial condition and performance. The information in CRS is developed from Call Reports submitted by FCS institutions. Examiners can electronically obtain all schedules of the Call Reports as submitted quarterly by the FCS institutions. Consolidated and peer group information are also available. Examiners should refer to the Analytical Review section for examples of summary reports.
- Special Studies/Analyses--The agency performs agricultural economic studies on FCS districts. These studies and reports provide useful information on such issues as real estate value trends, commodity prices, product yields, etc., for a district or other geographic area.
FCS-Reported--FCS institutions routinely supply various documents and reports to FCA. These items represent important sources of information for the monitoring process. Examples of FCS-reported information include:
- Quarterly Call Reports--These reports present detailed information on the institution's condition and performance, along with summary information on loan performance status, commitments and contingencies, reconciliation of capital, etc. This information is also available electronically to examiners through FCA's CRS as indicated above.
- Annual and Quarterly Stockholder Reports These reports present the financial condition and performance of the institution on a certain date and compare them to the comparable previous reporting period. In addition, the reports provide background information and disclose material conditions affecting the institution.
- Business and Financial Plans--These plans provide the institution's operating and business philosophy as well as budget information. They are also useful for comparing operating performance to projections.
Internal Audit Reports--Each institution has an internal control function. Periodically, reports are prepared on the adequacy and effectiveness of controls. Upon request, institutions provide internal audit reports to field offices for review and analysis.
- Other Information--Additional information and reports are available; however, they will vary in format and content from institution to institution. These include, but are not limited to:
- Monthly board and related committee meeting minutes;
- Monthly report of operations (board report);
- Credit reviews and financial evaluations;
- Policy or procedural changes (manual updates);
- Organizational or personnel changes;
- Districtwide correspondence and guidance letters; and
- Newsletters and correspondence to stockholders.
External Sources--In addition to FCA-generated and FCS-reported data, external sources can provide useful information to assist examiners in the oversight of an institution. Significant external sources include:
- Audit Reports and Management Letters--These documents from the institution's independent accounting firm outline material deficiencies or qualifications noted during the audit. Additionally, any significant weaknesses in the institution's internal controls should be noted. It is important to conduct a timely review and analysis of these documents to follow up on the deficiencies cited.
- Publications and Periodicals--Federal Reserve Bulletins, Extension Service publications, banking publications, newspapers, university research studies, and other industry studies can provide important information on factors such as climatic conditions, commodity prices, production costs, the competitive lending environment, and real estate value trends. Familiarity with external factors and their potential effect on FCS institutions is important to understanding the operating environment of the institutions.
Information obtained should be reviewed and analyzed on a timely, periodic basis and in accordance with the institution's risk. From the various sources of information available, examiners conduct periodic analyses to organize and present the information in a factual and logical format for subsequent use. The financial condition of the institution, prior Reports of Examination, overall economic condition, and the effectiveness of institution management generally determine the scope and frequency of examination analysis to be performed. To facilitate efficient resource usage, examination activities should be performed in the field office when the available information is sufficient to conduct analysis work and/or form conclusions.
Listed below are several activities to consider in developing a schematic approach to monitoring. A number of the following activities are analytical in nature and, as such, typically go beyond monitoring and into an examination activity:
- Review board and related committee minutes, policy and procedural changes, and guidance letters for information relevant to specific institutions or districtwide issues;
- Review and evaluate the business plan and any revisions thereto, and compare institution results to financial plans, goals, and objectives;
- Analyze CRS-generated reports to build a financial profile of the institution and identify significant trends;
- Evaluate and determine the appropriateness of institution responses and/or action plans resulting from requirements in the Report of Examination or enforcement document;
Review correspondence and hold discussions with enforcement examiners regarding any applicable enforcement actions;
- Review periodic credit reports and evaluations prepared by the institution or by the district bank which detail portfolio quality trends, and identify potential weaknesses and causes thereof;
- Review quarterly allowance for loss studies;
- Review internal or external audit reports and their determination of the reliability of the institution's internal controls;
- Review annual and quarterly stockholder reports as well as the Annual Meeting Information Statement and evaluate compliance with disclosure regulations;
- Research and evaluate economic, industry, or climatic conditions affecting an institution's portfolio; and
- Communicate or correspond with institution management and boards to gain insight into significant trends, policy or procedural changes, managerial changes, etc.
While this list is not all inclusive, it illustrates that monitoring can encompass a wide range of activities in a dynamic environment. It also depicts items which could be examined while off site, allowing examiners to concentrate on-site examination efforts in areas most needed.
Documentation and Reporting
Documentation and prompt reporting of monitoring activities are necessary to ensure identified concerns are addressed. A well-documented file is important for an effective monitoring program. However, emphasis is placed on identifying and concisely reporting deteriorating trends, with a focus on the underlying factors and conditions causing those trends, rather than producing a grandiose document with inconsequential historical data.
The nature and extent of documentation required for monitoring activities are determined by the ARD. Reporting can be as simple as retrieving documents from the various sources listed above and making notations thereon where no significant findings are evident. Typically, however, a brief memorandum to the file or specific workpapers are required by field office or region directives to properly organize and document the examiner's analysis of the information received. In all cases, internal correspondence or documentation is generated when monitoring requires a follow-up contact or activity.
Off-site activity reports are used to summarize the results of monitoring efforts and/or off-site examination work. Activity reports are generally provided to the ARD with copies forwarded to the respective regional office and enforcement examiner for institutions under enforcement action. In addition, copies of off-site activity reports on institutions with a CAMEL rating of "3," "4," or "5" are forwarded to the Farm Credit System Insurance Corporation. The ARD determines if further distribution is required. The ARD is also responsible for informing the Regional Director and Chief Examiner of issues that have a potential for districtwide or Systemwide impact. Additional guidance on reporting is detailed in the Reports and Conferences module of this manual.
Monitoring results determine whether or not additional contacts or correspondence with the institution are required. Although contacts may be oral, they should be documented to ensure FCA's file integrity. Each field office establishes delegated authorities and responsibilities for contacting and requesting information from institutions. If an examiner detects noncompliance with a formal enforcement requirement, or if an enforcement action is imminent, the EIC coordinates with the enforcement examiner.
Reports of Examination often require a response from the institution to the appropriate field office. Upon receipt, responses are analyzed and a determination is made as to their appropriateness. The institution is notified of their receipt and FCA's conclusions, particularly any exceptions found.
Material weaknesses or adverse trends identified through monitoring or off-site examination activities should be addressed when discovered. The cause of these weaknesses or trends should be determined and the institution contacted, if necessary. Any significant problems or deterioration should be a matter of record and additional follow-up action, if needed, should be taken in a timely manner.
Monitoring is designed to contribute to the agency's oversight and examination effectiveness while allowing efficiencies to be gained where inherent institutional risk allows. Monitoring activities are, therefore, an integral part of the agency's examination process and regulatory oversight. ARDs are responsible for establishing an appropriate monitoring program for institutions under their responsibility. Frequent coordination and communication between Office of Examination examiners and enforcement examiners are expected for institutions operating under agency enforcement documents. Substantial information is available from a multitude of sources so that periodic monitoring activity or actual off-site examination of certain functions can be performed on individual institutions. Specific monitoring assignments are made to examiners for accountability purposes. Follow-up necessitated by monitoring activities should occur as appropriate. The type, frequency, and documentation required from the monitoring activities should be tailored to the degree of risk present in the institution and the type of activity performed.
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