Glossary of Industry Terms

A

Allowance for Loan Losses

A valuation reserve to provide for possible losses on loans. The reserve is a contra-asset which is subtracted from total loans to determine the net carrying value of loans for a bank's statement of condition. Also referred to as reserve for loan & lease loss.

Asset Quality Risk

The potential loss of cash flows due to poor quality borrowers or counterparties; low investment grades of securities; or excessive concentration of similar assets and contracts.

B

Balance Measure

See Growth Rate - Balance Measure

Balance Sheet Mix

Asset, liability, and equity accounts all stated as a percentage of total assets on the balance sheet date (EOP).

Book Value

The amount for an item shown on the statement of condition which follows generally accepted accounting principles (GAAP). In many instances, book value is the original transaction value, plus or minus any premium, discount, or other amortization adjustment. For some items, however, GAAP now requires the use of fair value such as is the case for investment securities classified as available-for-sale.

Borrowed Funds

Includes all funds acquired from creditors in the form of debt, payable in less than one year and usually at money market interest rates.

C

Capital Adequacy

The level of capital funds required to support the institutional structure and to provide protection against unanticipated and excessive losses. In the A/L BENCHMARKS Peer Information a balanced growth of loans, assets, deposits, and capital; acceptable leverage; and risk-based capital of 10% or better (well capitalized) are indications of adequate capital.

Cash

In the A/L BENCHMARKS Peer Information, cash includes till cash, cash reserve balances, deposits with other banks, and items in process of collection.

Charge-offs

Loans which have been written off the books and charged against the allowance for loan losses.

Commercial Loans

See Loans.

Consumer Loans

See Loans.

Core Deposits

Includes Non-interest Deposits, NOW and Savings Deposits, and Money Market Deposits.

Cost of Funds

The cost of funds percentage is total annualized interest expense divided by total average interest-bearing funds, including deposits and all borrowed funds.

D

Deposit Present Value Premium

The amount by which the book value of total deposits exceeds the computed present value (market value) of total deposits.
For purposes of the A/L BENCHMARKS Peer Information, the present values of the various deposits were computed using the discounted cash flow method. The maturity assumptions for non-maturing deposits (decay factors) are indicated by the duration estimates (IRE) for each deposit classification.

Duration

See Interest Rate Elasticity

E

Earnings at Risk

See Net Earnings at Risk and Net Interest Earnings at Risk

Equity Value at Risk

The potential adverse change in the present value (market value) of total equity (MVPE) arising from an assumed change in interest rates.
For the A/L BENCHMARKS Peer Information, the base MVPE is determined by subtracting the present value (market value) of total liabilities from the present value (market value) of total assets. Present values for assets and liabilities are either current quoted market prices or discounted cash flows using current market rates. The potential adverse impact on present value of equity is calculated by using a +/-200 basis point change in interest rates; assuming a parallel shift in the treasury yield curve; and simulating changes in repricing, prepayments and other rate-driven parameters which effect the level and timing of cash flows.

F

G

Growth Rate (Annual growth rate)

The year-to-year change in the account balance expressed as a percentage of the prior year’s balance.

Growth Rate - Balance Measure

A measure of the difference between the highest and lowest of four growth rates (loans, assets, deposits, and equity). The smaller the difference, the better the balance among the four growth rates.

For example, if all four of the growth rates were exactly 3.76%, then the difference between the high and low percentage is zero and the growth rates are in perfect balance. Alternatively, if the four growth rates were 23.5, 18.2, 9.8, and 2.3, the difference between the high and the low percentage is 21.2.

H

I

Interest Margin ($)

See Net Interest Income

Interest Margin (%)

Annualized net interest income on a taxable equivalent basis divided by average earning assets.

Interest Rate Elasticity (IRE)

IRE is a measure of interest rate sensitivity. It is the expected percentage change in the present value (market value) of a financial instrument or portfolio of financial instruments if market yields increase 100 basis points.

In addition, IRE can be used to estimate Macaulay’s duration. Macaulay’s duration is the present value weighted average time until all the cash flows from a financial instrument or portfolio will be received or repriced to current market rates. As a measure of Macaulay’s duration, the IRE percentage is used to express the number of years to receive or reprice cash flows.

Interest Rate Risk

The potential economic losses due to future interest rate changes. Economic losses can be reflected as a loss of future net interest income (earnings at risk); a loss of current fair market values (value at risk); or both.

J

K

L

Liquidity Risk

The potential shortage of cash funds to meet deposit withdrawals, loan disbursements, or other obligations on a timely basis.

Loan Loss Provision

The expense item on a bank's statement of income that reflects both current and anticipated loan loss experience (sometimes referred to as provision for loan loss).

Loans

For the A/L BENCHMARKS Peer Information, loan definitions are consistent with call report definitions as follows:

• Loans is total loans.

• Total Loans is gross loans and leases without offset by the allowance for loan losses.

• Net Loans is total loans less the allowance for loan losses.

• Commercial Loans includes commercial loans, foreign loans, agriculture loans, and lease contracts.

• Consumer Loans includes consumer installment loans, credit cards loans, and all other consumer loans except real estate loans.

• Real Estate Loans includes commercial, residential, construction, multi-family, agriculture real estate, home equity, and all other loans secured by real estate collateral.

M

Mean

The sum of a group or sample of values divided by the number of observations in the group or sample.

Median

The value of the middle or center-most item within a group or sample.

MVPE (Market Value of Portfolio Equity)

The present value (market value) of total assets, less the present value (market value) of total liabilities.
For purposes of the A/L BENCHMARKS Peer Information, market values of assets and liabilities are quoted market prices or calculated present values for all financial instruments. For non-financial instruments, the book or carrying value is assumed to be market value.

N

Net Borrowed Funds

Short-term borrowed funds less short-term investments. A negative value represents net funds sold. When used in the ratio of net borrowed funds to equity, the average net borrowed funds (either positive or negative) is divided by average equity.

Net Charge-Offs

Charge-offs less recoveries. When used in the ratio of net charge-offs to total loans, net charge-offs is divided by average total loans.

Net Earnings at Risk

The potential adverse change in net income arising from a change in interest rates, measured over a one-year forecast horizon.For the A/L BENCHMARKS Peer Information, the base net income is computed using a current or constant forecast of statement of condition balances, market interest rates, and non-interest items. The potential adverse net income is calculated by using a +/-200 basis point change in interest rates; assuming a parallel shift in the treasury yield curve; simulating changes in repricing, prepayments and other rate-driven parameters which impact cash flows; and assuming all non-interest items will not change.

Net Interest Earnings at Risk

The potential adverse change in neat interest income arising from a change in interest rates, measured over a one-year forecast horizon.For the A/L BENCHMARKS Peer Information, the base net interest income is computed using a current or constant forecast of statement of condition balances, market interest rates, and non-interest items. The potential adverse net interest income is calculated by using a +/-200 basis point change in interest rates; assuming a parallel shift in the treasury yield curve; and simulating changes in repricing, prepayments and other rate-driven parameters which impact cash flows.

Net Interest Income

Interest income from all earning assets less interest expense on all interest bearing deposits and liabilities. Generally, interest income includes fees on loans, amortization of premiums on securities, and accretion of discounts on securities.

Net Overhead

Non-interest expense minus non-interest income, exclusive of security gains/losses. When expressed as a percentage, the annualized dollar amount of net overhead is divided by average earning assets.

Non-Core Funding Dependence %

A measure which shows the relationship between long-term earning assets and non-core liabilities net of short-term investments. Long-term earning assets are investment securities which mature beyond one year, other real estate owned, and net loans reduced by acceptances from other banks and commercial paper. Non-core liabilities are time CDs and open account time deposits greater than $100K, other borrowed money, foreign office deposits, brokered CDs less than $100K, securities sold under agreement to repurchase, federal funds purchased, and demand notes issued to the U.S. Treasury. Short-term investments are interest bearing bank balances, federal funds sold, securities purchased under agreement to resell, debt securities with remaining maturity less than one year, acceptances from other banks, and commercial paper.

Non-Performing Assets

Includes non-accruing, renegotiated, and 90-days or more past due loans. Non-Performing assets also includes other real estate owned and other foreclosed loan collateral.

O

Operating Efficiency Ratio

Non-interest expense divided by bank revenue.
For the A/L BENCHMARKS Peer Information, bank revenue is net interest income (tax equivalized) plus noninterest income, exclusive of security gains/losses.

P

Purchased Funds

Includes all short-term borrowed funds plus all large deposits. Purchased funds are considered highly sensitive to money market interest rates.

Q

R

Recoveries

Loans recovered which had been written off the books and charged against the allowance for loan losses.

Reserve for Loan & Lease Loss

See Allowance for Loan Losses

Real Estate Loans

See Loans

Return on Assets

Annualized net income divided by average total assets.

Return on Equity

Annualized net income divided by average total equity.

Risk-Weighted Assets

Those bank assets and off-balance sheet financial instruments which are included by federal banking regulations in the calculation of risk-based capital ratios.

S

Short-Term Non-Core Funding Dependence %

A measure which shows the relationship between long-term earning assets and short-term non-core liabilities net of short-term investments.
Long-term earning assets are investment securities which mature beyond one year, other real estate owned, and net loans reduced by acceptances from other banks and commercial paper.
Short-term non-core liabilities are the portion of time CDs and open account time deposits greater than $100K, other borrowed money, foreign office deposits and brokered CDs less than $100K which mature within one year, plus securities sold under agreement to repurchase, federal funds purchased, and demand notes issued to the U.S. Treasury. Short-term investments are interest bearing bank balances, federal funds sold, securities purchased under agreement to resell, debt securities with remaining maturity less than one year, acceptances from other banks, and commercial paper.

T

Tier 1 Risk-based Capital

Tier 1 capital divided by risk-weighted assets. Tier 1 capital consists of total common equity adjusted for cumulative preferred stock and goodwill.

Total Risk-based Capital

Total capital divided by risk-weighted assets. Total capital is tier 1 capital plus a defined portion of the allowance for loan losses, subordinated long-term debt, and miscellaneous other qualifying equity or near equity items.

Total Loans

See Loans.

Treasury Yield Curve

The treasury yield curve represents the relationship of yields on U.S. Government debt instruments of various maturities at a point in time. The treasury yield curve, also known as the term structure of interest rates, is charted daily in The Wall Street Journal and other business publications.

U

V

Volatile Liability Dependence %

A measure which shows the relationship between long-term earning assets and net short-term funds.
Long-term earning assets are investment securities which mature beyond one year and all loans. Short-term funds are large time deposits, foreign office deposits, federal funds purchased, securities sold under repurchase agreements, trading liabilities net of revaluation losses, and other borrowings maturing within a year. Net short-term funds are net of short-term investments.

W

X

Y

Yield on Earning Assets

Annualized and taxable equivalent gross interest income on all earning assets (loans and investments) divided by average earning assets.

Z