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What does it all mean? Glossary of Bank Risk and Failure terms…

Are you having any trouble at all keeping up with all the terms and acronyms related to bank challenges and failures? Is it hard to be that knowledgeable banker at the cocktail party or the business meeting when you stumble over terms and acronyms?

Here is the glossary of terms and the acronym list from the Material Loss Review Report on ‘my’ failed bank. I was a shareholder in the 92nd bank to fail and found the 43 page report interesting reading. Okay, I didn’t read it, I skimmed it.

Adversely Classified Assets
Assets subject to criticism and/or comment in an examination report. Adversely classified assets are allocated on the basis of risk (lowest to highest) into three categories:

  • Substandard
  • Doubtful
  • Loss

Allowance for Loan and Lease Losses (ALLL)
Federally insured depository institutions must maintain an ALLL that is adequate to absorb the estimated loan losses associated with the loan and lease portfolio (including all binding commitments to lend). To the extent not provided for in a separate liability account, the ALLL should also be sufficient to absorb estimated loan losses associated with offbalance sheet loan instruments such as standby letters of credit.

Call Report Consolidated Reports of Condition and Income
Also known as the Call Reports, these are reports that are required to be filed by every national bank, state member bank, and insured nonmember bank pursuant to the Federal Deposit Insurance Act. These reports are used to calculate deposit insurance assessments and monitor the condition, performance, and risk profile of individual banks and the banking industry.

Cease and Desist Order (C&D)
A formal enforcement action issued by financial institution regulators to a bank or affiliated party to stop an unsafe or unsound practice or violation. A C&D may be terminated when the bank’s condition has significantly improved and the action is no longer needed or the bank has materially complied with its terms.

Collateralized Debt Obligation (CDO)
CDOs are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. CDO securities are split into different risk classes, or tranches, whereby “senior” tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk.

Collateralized Mortgage Obligation (CMO)
CMOs are created when individual mortgage loans are packaged or pooled by issuers and offered to sale to investors. There are two types of issuers – agency and private label. Agency-issued mortgage-backed securities meet specific underwriting criteria whereas private label issues generally comprise nonconforming loans.

Concentration
A concentration is a significantly large volume of economically related assets that an institution has advanced or committed to a certain industry, person, entity, or affiliated group. These assets may, in the aggregate, present a substantial risk to the safety and soundness of the institution.

Investment Grade
Investment grade generally means a security that is rated in one of the four highest rating categories by two or more nationally recognized statistical rating organizations.

Other Than Temporary Impairment (OTTI)
An impairment of a debt instrument occurs when the fair value of the security is less than its amortized cost basis. According to accounting standards, when the impairment is judged to be other than temporary, the cost basis of the individual security must be written down to fair value, thereby establishing a new cost basis for the security and the amount of the write-down must be included in earnings as a realized loss.

Prompt Corrective Action (PCA)
The purpose of PCA is to resolve the problems of insured depository institutions at the least possible long-term cost to the DIF. Part 325 of the FDIC Rules and Regulations, 12 Code of Federal Regulations, section 325.101, et seq, implements section 38, Prompt Corrective Action, of the FDI Act, 12 United States Code section 1831o, by establishing a framework for taking prompt corrective supervisory actions against insured nonmember banks that are less than adequately capitalized. The following terms are used to describe capital adequacy:
 

  • Well Capitalized
  • Adequately Capitalized
  • Undercapitalized
  • Significantly Undercapitalized
  • Critically Undercapitalized.

Tranches
Multiple classes of equity and debt that are set in a senior or subordinate position to one another based upon seniority in bankruptcy and timing of repayment. The tranches are divided into three general categories:
 

  1. Senior tranche
  2. Mezzanine tranche
  3. Equity tranche

Uniform Bank Performance Report (UBPR)
The UBPR is an analysis of financial institution financial data and ratios that includes extensive comparisons to peer group performance. The report is produced by the Federal Financial Institutions Examination Council for the use of banking supervisors, bankers, and the general public and is produced quarterly from Call Report data submitted by banks.

Acronyms:
ADC Acquisition, Development, and Construction
ALLL Allowance for Loan and Lease Losses
ARD Assistant Regional Director
BOLI Bank-Owned Life Insurance
BSA Bank Secrecy Act
C&D Cease and Desist Order
CAMELS Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk
CD Certificate of Deposit
CDO Collateralized Debt Obligation
CMO Collateralized Mortgage Obligation
CRE Commercial Real Estate
DIF Deposit Insurance Fund
DRR Division of Resolutions and Receiverships
DSC Division of Supervision and Consumer Protection
EIC Examiner-in-Charge
FDI Federal Deposit Insurance
FHLB Federal Home Loan Bank
FHLMC Freddie Mac – Federal Home Loan Mortgage Corp
FIL Financial Institution Letter
FNMA Fannie Mae – Federal National Mortgage Association
GAGAS Generally Accepted Government Auditing Standards
GSE Government Sponsored Enterprise
LTV Loan to Value
OIG Office of Inspector General
ORL Off-site Review List
OTTI Other Than Temporary Impairment
PCA Prompt Corrective Action
RO Regional Office
ROE Report of Examination
SEC Securities and Exchange Commission
UBPR Uniform Bank Performance Report
UFIRS Uniform Financial Institutions Rating System

Got that? No, there won’t be a quiz!

Do you have any to add to the list?

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.