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Glossary of Selected Financial
Terms
Allowance for Loan Losses - The reserve established to cover
credit losses inherent in loans held-in-portfolio.
Efficiency Ratio - Non-interest expense divided by net interest
income plus recurring non-interest income.
Asset Securitization - The process of converting receivables
and other assets that are not readily marketable into securities
that can be placed and traded in capital markets.
Effective Tax Rate - Income tax expense divided by income
before taxes.
Basis Point - Equals to one-hundredth of one percent. Used to
express changes or differences in interest yields and rates.
Book Value Per Common Share - Total common shareholders’
equity divided by the total number of common shares outstanding.
Brokered Certificate of Deposit - Deposit purchased from a
broker acting as an agent for depositors. The broker, often a
securities broker-dealer, pools CDs from many small investors
and markets them to financial institutions and negotiates a higher
rate for CDs placed with the purchaser.
Cash Flow Hedge - A derivative designated as hedging the
exposure to variable cash flows of a forecasted transaction.
Common Shares Outstanding - Total number of shares of
common stock issued less common shares held in treasury.
Core Deposits - A deposit category that includes all non-interest
bearing deposits, savings deposits and certificates of deposit
under $100,000, excluding brokered certificates of deposit with
denominations under $100,000. These deposits are considered a
stable source of funds.
Derivative - A contractual agreement between two parties to
exchange cash or other assets in response to changes in an external
factor, such as an interest rate or a foreign exchange rate.
Dividend Payout Ratio - Dividends paid on common shares
divided by net income applicable to shares of common stock.
Duration - Expected life of a financial instrument taking into
account its coupon yield / cost, interest payments, maturity and
call features. Duration attempts to measure actual maturity, as
opposed to final maturity. Duration measures the time required to
recover a dollar of price in present value terms (including principal
and interest), whereas average life computes the average time
needed to collect one dollar of principal.
Earning Assets - Assets that earn interest, such as loans,
investment securities, money market investments and trading
account securities.
Fair Value Hedge - A derivative designated as hedging the
exposure to changes in the fair value of a recognized asset or
liability or a firm commitment.
Gap - The difference that exists at a specific period of time
between the maturities or repricing terms of interest-sensitive
assets and interest-sensitive liabilities.
Goodwill - The excess of the purchase price of net assets over
the fair value of net assets acquired in a business combination.
Interest-only Strip - The holder receives interest payments
based on the current value of the loan collateral. High prepayments
can return less to the holder than the dollar amount invested.
Interest Rate Caps / Floors - An interest rate cap is a
contractual agreement between two counterparties in which the
buyer, in return for paying a fee, will receive cash payments from
the seller at specified dates if rates go above a specified interest
rate level known as the strike rate (cap). An interest rate floor is a
contractual agreement between two counterparties in which the
buyer, in return for paying a fee, will receive cash payments from
the seller at specified dates if interest rates go below the strike
rate.
Interest Rate Swap – Financial transactions in which two
counterparties agree to exchange streams of payments over time
according to a predetermined formula. Swaps are normally used to
transform the market exposure associated with a loan or bond
borrowing from one interest rate base (fixed-term or floating rate).
Interest-Sensitive Assets / Liabilities - Interest-earning
assets / liabilities for which interest rates are adjustable within a
specified time period due to maturity or contractual arrangements.
Internal Capital Generation Rate - Rate at which a bank
generates equity capital, computed by dividing net income (loss)
less dividends by the average balance of stockholder’s equity for
a given accounting period.