A

Acronyms (pdf document)

Above Par (Value):
A higher dollar amount than the face value, or par, of a security. Above par occurs when a security sells at a premium - for more than par or face value. The premium is the difference between the face value and the market price.

Accelerated Mortgage Amortization:
The restructuring of an existing mortgage loan by increasing the monthly payment to pay off the loan in a shorter time than the original maturity.

Acceleration Clause:
A clause commonly included in mortgages and bonds, it gives the holder the right to demand that the borrower pay the entire outstanding balance in the event of default or other breach of contract.

Account Analysis:
A statement, essentially an invoice for services, that a financial institution provides to its commercial customers specifying services provided, volumes of transactions processed, and charges assessed.

Accounting Research Bulletins (ARB):
Pronouncements issued by the Committee on Accounting Procedure of the American Institute of CPAs (AICPA) during the period 1939 through 1959, at which time the Accounting Principles Board replaced the Committee. Fifty-one ARBs were issued, formally establishing accounting principles on a variety of issues.

Account Resolution:
A board of directors' resolution granting authorization for the establishment of an account in the name of the company and specifying those individuals or officers authorized to transact business in relation to the account.

Accounts Payable:
Short-term liabilities incurred and amounts recorded on the books of a company or individual that are owed to a creditor for previously purchased merchandise or services rendered.

Accounts Receivable:
Amounts recorded as assets on the books of a company or individual that are due for merchandise sold or services rendered.

Accrete:
The process whereby a bond issued at a discount to par increases to face value as it approaches maturity.

Accretion:
Addition to income resulting from gradual, periodic reduction of deferred income.

Accrual Basis:
The basis of accounting under which revenues are recorded when earned and expenditures are recorded as soon as they result in liabilities for benefit received, notwithstanding that the receipt of the revenue or the payment of the expenditure may take place, in whole or in part, in another accounting period. Opposite of cash basis accounting.

Accrued Dividend:
A dividend declared by the Board of Directors and considered to be earned and payable but not yet paid on stock or other instruments of ownership of a business.

Accrued Expense:
Costs incurred during an accounting period but not paid.

Accrued Interest:
Interest earned, but not received or credited, for the period of time that has elapsed since interest was last received.

ACH Credit Transaction:
An Automated Clearing House (ACH) transaction that involves the transfer of funds from an originator's account to a receiver's account.

ACH Debit Transaction:
An Automated Clearing House (ACH) transaction that moves funds from the receiver's account to the originator's account.

ACH Operator:
An Automated Clearing House (ACH) association or Federal Reserve bank that processes and distributes ACH transactions received from an originating financial institution.

Activation:
The implementation of recovery procedures, activities, and plans in response to an emergency or disaster declaration.

Alternate Site:
An alternate operating location to be used by business functions when the primary facilities are inaccessible.

Add-on Interest:
The amount of interest the borrower will pay during the term of the loan that is added to the principal of the loan to determine the face amount of the note. The borrower signs a note promising to repay the face amount (principal plus interest), although only the principal is disbursed to the borrower. Since the interest is not yet earned at the date of closing, a contra-account to the loan is set up representing the unearned interest. This contra-account is reduced monthly and credited to interest income until at the time of maturity the contra-account is zero and the full principal is due.

Adjustable-Rate Mortgage (ARM):
A loan with an interest rate that is periodically adjusted, moving higher or lower in the same ratio as a pre-selected index, such as Treasury bill rates. ARM loans may limit interest rate increases, caps, within a given time period and over the life of the loan, and may limit the frequency of interest rate adjustments. Typically, ARM loans initially have below-market interest rates, teaser rates, in return for the borrower sharing the risk that interest rates may rise during the course of the loan.

Adjusted Basis:
Equals cost at which an asset is acquired and adjusted for certain occurrences since the day of acquisition. For example, the adjusted basis of real property is generally the purchase price plus capital improvements to the property less any depreciation taken. Adjusted basis is used in calculating gains and losses on the sale of an asset.

Adjusting Entries:
Bookkeeping entries made after the trial balance is prepared but before the closing entries. The adjusting entries are necessary to make the income and expense accounts consistent with the accrual method of accounting.

Adjustment Period:
The adjustment period is the frequency that the lender adjusts the interest rate on a variable-rate mortgage loan. For example, a 1-year ARM would have an adjustment period of one year.

Advances:
Loans the Federal Home Loan Banks issue to member savings associations.

Affiliated Company:
(1) A company that exercises control over another companies either directly or indirectly. (2) A company that has common ownership with another company.

Affiliated Person:
(1) A director, officer, or controlling person of a savings association or its holding company. (2) A member of the immediate family residing in the same household as a director, officer, or controlling person of a savings association.

Agencies:
Securities issued by an agency of the federal government, for example, Fannie Mae, Ginnie Mae, etc.

Aging Schedule:
At a given point in time, a list of the percentages and/or amounts of outstanding accounts receivable classified as current or past due in 30-day increments.

Allowance:
A reserve set aside for bad debts or for depreciation.

Allowance for Loan and Lease Losses (ALLL):
Valuation allowances established to absorb unidentified losses inherent in a savings association’s overall loan and lease portfolio. See General Valuation Allowances and Specific Valuation Allowances. Mortgage plans that differ from conventional fixed rate, fixed term, fixed monthly payment, fully amortized mortgages.

Amortization:
(1) The gradual reduction of an asset or liability by means of periodic charges to reduce income or to increase expense. (2) The repayment of a loan calculated so that the principal will be paid in full through monthly payments of principal and interest for a predetermined period of time, typically 30 years for one-to four-family residential mortgages.

Amortized Cost:
Equals the face value net of un-amortized discounts and premiums less write-offs. 

Anniversary Date:
Anniversary date is the periodic date, usually once a year, that the interest rate is reset on an adjustable-rate mortgage.

Annual Percentage Rate (APR):
A requirement of Truth in Lending laws designed to show consumers the total cost of credit, including the effective interest rate plus certain finance and service charges, points.

Annual Percentage Yield (APY):
The effective annual rate of income expressed as a percentage of the price originally paid. This calculation assumes that interest earned is reinvested.

Annuity:
(1) A series of equal payments at fixed intervals, such as monthly or annually. (2) An investment yielding fixed payments during the holder’s lifetime or for a stated number of years.

Anticipatory Hedge:
(1) A long anticipatory hedge is initiated by buying futures contracts to protect against a rise in the price of an asset to be purchased at a later date. (2) A short anticipatory hedge is initiated by selling futures contracts to protect against the decline in price of an asset to be sold at a future date, or to protect against a rise in interest rates of a fixed-rate liability or a future repricing on a variable-rate liability.

Appraisal Value:
Appraisal value is the market value of an asset that is derived from the appraisal process. Depending on the asset, the method used to appraise the asset will differ. For homes, appraisers often use a method that includes recent sales data of comparable homes. They may also use the replacement method, which is the cost to replace the home at today's prices.

Appreciation Rate:
Appreciation rate is the yearly percentage rate that an asset increases in value. For example, a home that you paid $150,000 three years ago that is almost worth $200,000 today had an average appreciation rate of 10%. After the first year, the home was worth $165,000. After the second year, the home was worth $181,500. And after the third year, the home is worth just a little under $200,000.

Arbitrage:
A transaction that involves buying a commodity in one market and simultaneously selling it in another market to profit from a disparity in prices between two markets. In a true arbitrage, the timing of the transactions must be simultaneous, thus imposing no risk to the investor.

Arm’s-length Transaction:
(1) A transaction negotiated by unrelated parties, each acting in his or her own best interest. (2) The basis for a fair market value determination.

Arrears:
A payment not made when due. Frequently used in connection with installment notes, mortgages, rent, and other obligations due and payable on a certain specified date.

Asked Price:
The price at which a security is offered for sale.

Assessment:
(1) An estimate of the value of real property for levying taxes; also called assessed valuation. (2) A charge against real property levied by a public governing body for a local improvement, such as a sewer repair or street paving.

Asset:
Anything owned by an individual or company that has commercial usefulness or value if sold. An asset may be physical property, enforceable claims against others, including loans and accounts receivable, and deferred expenses. An asset may be tangible or intangible.

Asset/Liability Management:
A planning and control process, the key concept of which is the integrated approach to matching the mix and maturities of assets and liabilities to achieve a favorable and even flow of “net interest margin.”

Asset-Based Borrowing:
Lending based on the pledging of accounts receivable, inventory, or other assets as loan collateral.

Assets-Backed Securities:
Corporate debt obligations secured by specific assets, such as accounts receivable.

Assisted Merger:
The takeover of a troubled savings association by another depository institution with financial assistance provided from a federal deposit insurance fund.

At-the-Money Option:
An option with a strike price equal to the current market price of the underlying cash or futures contract. In this instance, the intrinsic value is zero and the value of the option reflects a premium paid for: (1) the time the holder has to decide whether or not to exercise the option, and (2) the expected price volatility. The value of this premium declines over time.

Automated Teller Machine (ATM):
A machine that permits customers to gain access to their accounts through the use of a magnetically encoded plastic card and by pushing appropriate buttons on a computer terminal. ATMs dispense cash, accept deposits, transfer funds from one account to another, and perform other functions.

Average Rate of Return:
The return of an investment calculated by totaling the cash flow over the years divided by the amount of the investment, and dividing that amount by the number of years (or months) that the investment is outstanding.

Availability Float:
The time interval or dollar amount outstanding between the time a check is deposited and the time the company's account is credited with collected funds.

Availability Schedule:
A schedule that specifies when a bank or the Federal Reserve grants credit for deposited checks in the form of an increase in the depositor's available or collected balance.

Available Balances:
The amount of funds available for withdrawal from an account.

B

Bad Debt Reserve:
A valuation allowance that savings associations maintain for income tax purposes to offset losses from foreclosed or un-collectable loans.

Balance and Transaction Activity:
Information on current ledger and collected balances, one-, and two-day float, debit and credit detail, and adjustment items. Average balances and a balance history may also be reported.

Balance Sheet:
One of the standardized financial statements that companies and individuals use to show assets, liabilities, and equity (or net worth) at a given point in time.

Balance Sheet Matching:
The matching of interest-sensitive assets with interest-sensitive liabilities eliminating the exposure to interest rate changes.

Balloon Loan:
A loan that does not fully amortize by the end of the loan term. Periodic payments may be for principal and interest, or for interest only. At maturity, the unpaid principal is due in a lump sum.

Bank Check:
A check that a bank draws on itself then has it signed by an authorized bank officer.

Bank Insurance Fund (BIF):
A fund, administered by the FDIC, that insures deposits of member banks (primarily commercial banks) up to $100,000 per depositor.

Bank Investment Contract (BIC):
Investment contract issued by a bank where interest is guaranteed by the bank in a portfolio over a specific time frame with a specific yield. Unlike guaranteed investment contracts (GICs), BICs do not include annuity provisions.

Banker’s Acceptance:
A draft drawn on a depository institution by another, which when accepted by the depository institution, obligates the depository institution to pay specific obligations of the draft writer when due. Acceptance converts a depositor’s “order to pay” into an unconditional “promise to pay” by the accepting depository institution. Bankers acceptances are effectively a guaranty of payment for a purchase and are generally used in financing the import, export, transfer or storage of goods.

Bank Notes:
Subordinated debt instruments with yields that are close to those of similarly rated commercial paper that banks issue.

Basis Point:
A measurement of yields or changes in prices or yields for securities. One basis point equals one one/hundredth of one percent. One hundred basis points equal one percent.

Base Rate:
A widely recognized and quoted interest rate-such as the Fed funds rate, the prim rate, or the London InterBank Offered Rate (LIBOR)-on which a rate of interest is based.

Bear Market:
(1) A period of falling prices. (2) A condition of a stock market characterized by a selling trend and declining prices. (3) Opposite of a bull market.

Bearer Bond:
A bond that does not have the owner’s name registered on the books of the issuing agency or company, and is payable to whomever holds the bond.

Before-tax Income:
Gross income less all expenses except for income tax expense.

Below Market:
A price that is lower than the prevailing level at which a security is currently quoted or traded.

Below-market Interest Rate:
A lower interest rate than the current rate for conventional financing in a given geographical area. Programs with below-market rates may be used to assist low or moderate income buyers.

Below Par:
A price lower than par or face value. The difference between the price and the face value is the discount.

Bid:
(1) The price that a potential buyer is willing to pay for a security. (2) An offer to purchase something.

Bilateral Netting: System in which purchases between two subsidiaries of the same company are netted against each other so that over time, typically one month, only the difference is transferred.

Blanket Mortgage Loan:
A loan made to developers or contractors to purchase one or more tracts of land with the intention of dividing the land into smaller parcels for resale or development.

Board of Governors of the Federal Reserve System:
The seven-member body that oversees the U.S. Federal Reserve and supervises the U.S. banking system.

Bond:
A certificate that evidences a debt. The debt is initiated when the issuer sells the bond to the holder for a specific amount of cash. The issuer is obligated to pay the holder of the bond a fixed sum (the bond’s face value) at a stated future date and to pay interest (usually twice a year) at a specified rate during the life of the bond. Corporations, the federal government, and state and local governments may issue bonds as a means of raising funds in the capital markets. Bonds may be issued in registered form, in which the name of the holder is on record with the issuer, or in bearer form, in which the name of the owner is not registered and the bond is payable to whomever bears or presents the bond to the issuer for redemption.

Bond Discount:
The difference between the purchase price and face value of a bond when the face value exceeds the purchase price. Normally a bond sells at a discount when the stated interest rate of the bond is less than the current market interest rate. The discount is accreted to interest income over the life of the bond, increasing the stated interest rate of the bond to the market interest rate at the time of purchase.

Bond Equivalent:
A yield based on a 365-day year with two semiannual coupon payments.

Bond Premium:
The difference between the purchase price and the face value of a bond when a bond sells above par. Normally a bond sells at a premium when the stated interest rate is greater than the current market interest rate. The premium is amortized to interest income over the life of the bond, decreasing the stated interest rate of the bond to the market interest rate at the time of purchase.

Bond, Debenture:
A bond for which there is no specific security, collateral, set aside or allocated for repayment of the principal.

Bond, Interim:
Sometimes used before the issuance of permanent bonds to raise funds needed only temporarily.

Bond, Junk:
Bonds rated lower than investment grade that yield higher rates of interest than the current investment grade bond market.

Bond, Par:
A bond selling at par, whose interest rate is in line with prevailing market interest rates.

Bond, Stripped:
Bonds whose coupons have been clipped off. The principal and interest (coupons) are sold to separate groups of investors. Those seeking current income buy the strip of coupons, and those wanting a lump sum at maturity buy the principal or “corpus” portion. Because each portion is worth less than its whole, both are sold at a deep discount from their face values.

Bond, Treasury:
A U.S. Government long-term security sold to the public with a maturity of longer than five years.

Bond, Zero-Coupon:
A security sold at a deep discount from its face value and redeemed at the full amount at maturity. The difference between the cost of the bond and its value when redeemed is the investor’s return. These notes provide no interest payments to holders.

Book Value:
(1) The amount at which a business carries an asset on the accounting books. (2) Book value is equal to face value less un-amortized discounts, plus un-amortized premiums, plus accrued interest, less depreciation, valuation allowances, and write-offs. (3) Equivalent to Carrying Value.

Broker:
An agent or middleman who does not actually own the securities or property he sells or buys. A broker, as opposed to a dealer, is always acting on behalf of another individual.

Broker-originated Deposit:
Any deposit placed in a savings association by or through a deposit broker.

Brokerage Fee:
A fee, usually referred to as a commission fee, charged by a broker for execution of a transaction. The broker may base the fee on an amount per transaction or a percentage of the total value of the transaction.

Bullet Maturity:
A loan where the entire principal amount is due on the final maturity date.

Buy-back Agreement:
A provision in a sales contract stating that the seller will repurchase the asset sold within a specified period of time, usually for the selling price, if certain stated conditions exist.

Buying Hedge:
Buying futures contracts to protect against possible increased cost of commodities or financial instruments that will be needed in the future. Also referred to as a long hedge.

Buying Long:
Buying stocks, bonds, or commodities outright with the expectation of holding them for a rise in price and then selling.

Break-even Point:
When you refinance a mortgage, the decision is profitable if you are able to pass the break-even point. At the break-even point, the savings you receive from refinancing equal the costs. A common break-even analysis is to calculate how long you must live in a home after you refinance in order to recover the closing costs you paid to refinance. For investing in stocks and mutual funds, break-even analysis is used to calculate the minimum sale price that allows the buyer to recover the transaction costs from buying the shares. For business operations, a business reaches its break-even point when it generates enough sales to pay for all its fixed costs. For each additional dollar of sales, variable costs should be less than a dollar. As a result, each dollar of sales past the break-even point generates some profit.

C

Call:
(1) An option to buy a specific security at a specified price within a designated period. (2) A demand by a lender for payment of a loan because of the failure of the borrower to comply with the terms of the loan. (3) A demand by the issuer of the redemption of stocks or bonds.

Call Option:
An option that gives the option buyer the right to purchase - go long - the underlying futures contract at the strike price on or before the expiration date.

Call Price:
The price at which a callable bond is redeemable. It is used in connection with preferred stocks and debt securities having a fixed claim. It is the price that an issuer must pay to voluntarily retire such securities. This often exceeds the par or liquidating price to compensate the holder of the called security for his or her loss of income and investment position resulting from the call.

Callable Bond:
A bond that is redeemable by the issuer prior to maturity; for example, most Treasury bonds are callable five years before maturity at a specific price.

CAMELS:
A depository financial institution rating system. CAMELS is an acronym for capital adequacy, asset quality, management capability, earnings, liquidity and susceptibility to market risk.

Cap:
(1) The maximum rate to which an ARM may adjust also referred to as a ceiling. (2) A contractual agreement, akin to an insurance policy, in which a third party limits the interest that will be received or paid if interest rates increase by a predetermined number of percentage points, also referred to as an interest-rate cap.

Capital:
Generally represents the owners’ interest in the company’s net assets. It is also called equity capital, stockholders’ equity, and net worth. The capital of a company includes capital contributed by the owners’ plus the retention of earnings over time.

Capital Asset:
(1) An asset with an expected life of over one year and one that is not bought and sold in the normal course of business. (2) A fixed asset.

Capital Expenditure:
Money spent for additions or improvements to structures or equipment used to carry on the activities of an organization or individual.

Capital Gain or Loss:
The gain or loss incurred from the sale or disposition of assets other than inventory, such as investment securities, and real estate.

Capitalize:
The treatment of large expenses as part of a firm’s assets. Thus, rather than treating an expenditure as a deduction from the income statement, it is treated as an asset.

Capitalized Interest:
Interest not expensed, but added to the carrying value of an asset. The purpose of capitalizing interest is to obtain a measure of acquisition cost that reflects the total investment in the asset. Interest is typically capitalized for assets that are constructed for a business’s own use or for assets intended for sale or lease that are constructed as a discrete project.

Capitalized Loan:
A loan to which all amounts due are added to the balance of the loan and all payments received are deducted from the balance of the loan. For example, each month as interest is earned and escrow payments become due, these amounts are added to the loan balance; when payment is received it is deducted from the loan balance. Any unpaid amounts become part of the loan principal.

Captive Insurance Company:
An insurance company in which an association is required to purchase stock in order to receive insurance.

Carrying Amount of Loan:
Recorded investment in the loan minus valuation allowances.

Carrying Value:
(1) The amount at which an asset is carried on the books of a business. (2) Amortized cost - face value adjusted for un-amortized discounts and premiums, accrued interest, depreciation, valuation allowances, and write-offs. (3) Equivalent to Book Value.

Cash Basis Accounting:
(1) A method of accounting in which income and expense items are recorded and recognized when cash is received or disbursed. (2) Opposite of accrual basis accounting.

Cash Market:
A market in which securities are traded for immediate delivery for a cash payment.

Cash Price:
The price that a specific financial instrument is presently selling in the open market.

Cashier Checks:
A check drawn by a financial institution on itself, signed by an institution’s authorized officer and payable to a third party named by a customer making the withdrawal. See Official Checks.

Cash Concentration:
The movement of funds from outlying depository locations to a central bank account where they can be utilized and managed most effectively.

Cash Concentration or Disbursement (CCD):
An Automated Clearing House (ACH) payment format for concentration and disbursement of funds within a company or between companies.

Cash Concentration or Disbursement Plus Addendum (CCD+):
An Automated Clearing House (ACH) format used for U.S. Treasury Vendor Express Program and company-to-company payments.

Cash Letter:
A bundle of checks accompanied by a list of individual items and control documents.

Cease and Desist Order (C & D):
A demand from the courts or government agency that an entity cease an activity.

Certificate of Deposit (CD):
A written document a financial institution issues to a depositor as evidence of its deposit. It includes the institution’s promise to return the deposit at a specified future date with earnings at a specified rate of interest. It may be negotiable (transferable to another party) or nonnegotiable. The interest specified may adjust periodically according to a predetermined formula or index or may be fixed for the term of the deposit.

Certificate of Deposit (demand):
A negotiable or transferable receipt issued for funds deposited with a financial institution and payable on demand to the holder. These receipts normally do not bear interest and are used principally by contractors and others as a guarantee of performance of a contract or as evidence of good faith when submitting a bid. They may also be used as collateral.

Chattel Mortgage:
A mortgage on personal property, such as an automobile or furniture, that is given as security to pay an obligation.

Charge-off:
The amount of loss to an asset that, when recorded, directly reduces the balance of an asset. Consequently, the loss is not established separately as a valuation allowance.

Check Retention:
Also known as check safekeeping, a service financial institutions perform by retaining paid checks for periods that typically range from one to six months. Companies can receive microfilm, microfiche, or CD-ROM image records of the checks.

Check Truncation:
The process by which essential information contained on a conventional paper check is captured electronically and the electronic information, not the paper check, is sent through the clearing system.

Classified Assets:
Assets, generally loans, whose value may not be recoverable. Such assets are classified as substandard, doubtful, or loss.

Clear Title:
A title to real or personal property that has no liens recorded against it and that is transferable to another party. Synonymous with good title, just title, and marketable title.

Clearing House Automated Payment System (CHAPS):
A U.K.-based payment system for high-value, same-day settlement of transactions.

Clearing House Interbank Payment System (CHIPS):
An independent message-switching system that permits international financial transactions to be settled among New York banks. CHIPS is operated by the New York Clearing House Association.

Closed-end Credit:
A loan where the entire amount is disbursed to the borrower. Overdraft privileges, credit cards, most home equity loans, and lines of credit are open-end rather than closed-end loans because, although they have a fixed ceiling, the association will not necessarily disburse the full amount of the line of credit.

Closed-end Mortgage:
A mortgage with a prohibition against additional borrowing using the same lien. The prohibition against additional borrowing protects the existing creditors from having the security diluted.

Closing:
Consummating a financial transaction. In mortgage lending, closing is the process of the delivery of a deed, the signing of loan documents, and the advancing of funds by the lender.

Closing Costs:
Closing costs are the total expenses that the buyer pays at the time a real estate transaction is completed. This stage of the transaction is called "closing." Closing costs include application, underwriting and loan-origination fees; mortgage points; title search and insurance; fees for related legal services; and costs to fund an escrow account. For home mortgage loans, closing costs generally range between 3 and 6 percent of the home purchase price.

Closing Price:
The price at which transactions are made just before the end of trading on a given day.

Closing Transaction:
(1) The final transaction for a particular security during a trading day. (2) An option order that will eliminate or decrease the size of an existing option position.

Co-borrower:
A co-borrower/co-maker is someone who applies for credit with another person(s) and they both directly benefit from and receive loan proceeds. Both borrowers are responsible for repaying the loan.

Cold-Site:
One or more data center or office space facilities equipped with sufficient pre-qualified environmental conditioning, electrical connectivity, communications access, configurable space and access to accommodate the installation and operation of equipment by critical staff required to resume business operations.

Collar:
A maximum and minimum rate of interest that will be paid on the par value of a floating-rate note.

Collateral:
Something of value pledged as security for a loan. The lender can repossess the collateral if the loan is not repaid.

Collateral Loan:
A loan for which the borrower deposits certain property with the lender as a pledge of payment. The lender usually has the right to sell the property to pay off the debt if the borrower does not pay according to its term.

Collateral Mortgage:
A document used with a loan that effects a lien on real estate, where the loan is not a purchase-money mortgage.

Collateralized Mortgage Obligation (CMO):
A multiclass, mortgage-backed security. An underlying pool of mortgages held by the issuer serves as collateral for the debt obligation, and principal and interest payments from the pool of mortgages are used to retire the CMOs. Typically, a single issue of CMOs contains three or more classes, trenches, of bonds having fixed or floating interest rates, and different lengths of maturity for each class of bond that provides a form of call protection to the holder of a CMO.

Collateral Trust Notes:
Bonds secured by the deposit of other bonds or stocks, usually issued by holding companies, investment trusts, and railroads.

Collective Investment Fund (CIF):
The collective investment of fiduciary accounts. Generally includes accounts held by a trustee, executor, administrator or guardian. Used primarily to describe the collective investment of tax-qualified retirement plans.

Combined Construction-Permanent Loan:
Loans used to finance construction and that are converted to permanent loans upon completion of construction. Typically, the borrower makes no principal payments during the construction period, and upon conversion to a permanent loan begins to make both interest and principal payments.

Commercial Letter of Credit:
An instrument by which a financial institution lends its credit to a customer to enable him to finance the purchase of goods. Addressed to the seller, the letter authorizes him to draw drafts on the financial institution under the terms stated.

Commercial Loan:
Loans made to businesses for the financing of inventory purchases and operating expenses, as distinguished from personal loans or consumer credit loans. Commercial loans are typically short-term loans or acceptances.

Commercial Mortgage:
A loan secured by real estate that is used, zoned, or intended for business purposes or multi-unit dwellings, or is part of a real estate investment portfolio.

Commercial Paper:
An unsecured debt instrument issued by a corporation with a fixed maturity, typically for a short-term period (30, 45, 60, or 90 days). It is generally priced at a discount from par and is redeemable at par on the maturity date. Individual and corporate investors buy, sell, and trade commercial paper. 

Commissions:
(1) A fee for services rendered. (2) The fees that a broker charges a customer for executing a trade.

Commitment:
An advance agreement to perform in the future, such as to provide funds for a mortgage loan or to buy or sell securities. Commitments may be at a fixed interest rate or price determined on the commitment date or at a rate or price to be determined at closing date. Commitments may be in the form of a commitment letter or may be verbal.

Commitment Fee:
(1) A fee paid by a borrower to a lender for the lender’s promise to loan money at a future date. (2) In the secondary market, a commitment fee is a payment by a financial institution to a mortgage buyer, such as Freddie Mac, Fannie Mae, etc., for the buyer’s promise to buy loans at a future date.

Common Stock:
Securities that are evidence of proportionate equity or ownership of a corporation. They give the holder an unlimited proportionate interest in the corporation’s earnings and assets after satisfaction of claims from creditors and the holders of preferred stock.

Common Trust Fund:
The collective investment of fiduciary accounts. Generally includes accounts held by a trustee, executor, administrator or guardian.

Community Reinvestment Act of 1977 (CRA):
Legislation that requires financial institutions to meet the credit needs of all segments of their communities, including low- and moderate-income neighborhoods.

Compensating Balance:
A dollar amount equal to the lowest percentage of a line of credit that the customer of a financial institution is expected to maintain, usually in a demand deposit account, as a condition for being granted a line of credit.

Compound Interest:
The interest that accrues when earnings for a specified period of time are added to the principal, so that interest during subsequent periods is computed on the principal plus all accumulated interest.

Compounding periods:
The compounding period determines how often interest is computed. It is the period (from one day to one year) after which interest is computed and added to principal. This is done for normal (compound interest) and Rule of 78 interest. Unpaid interest under U.S. Rule does not compound but is computed at each payment date and added to a special non-interest-bearing account.

Condominium:
(1) A single dwelling unit in a multi-unit structure in which each unit is individually owned. (2) A form of real estate ownership in which the purchaser receives title to a particular unit in a project and proportionate interest in common areas.

Conforming Loan:
A mortgage loan that conforms to specified limits such as loan-to-value ratio, term, interest rates, or other characteristics. Typically these conform to guidelines established by Freddie Mac, Fannie Mae, or Ginnie Mae.

Conservator/Conservatorship:
An individual or institution the Court or the FDIC appoints to protect and conserve the assets of a troubled financial institution to facilitate liquidation, merger, or replacement of management. A conservatorship affects the control and operation of an institution or company but does not alter its ownership.

Consolidation:
The results obtained when the accounts of a parent company and its majority-owned subordinate organizations are combined to reflect the financial position and results of operations of the group as if operated as a single entity. This involves intercompany eliminations and minority interest adjustments.

Consolidation Loan:
A loan that combines several debts into one loan, usually to reduce the annual percentage rate or dollar amount of payments made each month, by extending them over a longer period of time.

Constant Prepayment Rate (CPR):
The percentage of principal amount of a pool of mortgages that have been or are expected to be prepaid on an annual basis over the life of a pool.

Construction Loan:
A short-term interim loan for financing the cost of construction. The lender makes payments to the builder at periodic intervals upon completion of certain phases of construction as provided in the loan contract.

Consumer Loan:
Loans to individuals or families where the proceeds are used for consumer purposes, versus business or investment.

Contingency Fund:
Assets or other resources placed aside for unexpected expenditures, or for anticipated expenditures of an uncertain amount.

Contra Account:
An account offset against another account. A contra account to an asset, contra-asset, has a credit balance and a contra account to a liability, contra-liability, has a debit balance. A contra account has no value in its own right and can only be stated in terms of the asset or liability to which it applies. Examples of contra-assets are discounts, deferred loan fees, and accumulated depreciation. An example of a contra-liability is a discount paid for deposits.

Contract Month:
The month in which the futures contract may be fulfilled by making or taking delivery. Most interest rate futures contracts are liquidated prior to the contract month.

Conventional Mortgage:
A mortgage originated by a financial institution without government insurance or guarantee.

Cooperative:
A system of indirect ownership of a single unit in a multi-unit structure. The individual owns shares in a nonprofit corporation that holds title to the building. In turn, the corporation gives the owner a long-term proprietary lease on the unit. Also called a co-op.

Core Capital:
One of three capital standards established for savings associations in 1989. Also known as Tier 1 Capital.

Correspondent Bank:
A bank that is the depository for another depository institution, typically located in another city or marketing area. The correspondent bank provides services such as accepting deposits and collection of loan payments for the other depository institution.

Cost of Capital:
The rate of interest that an association must pay to a third party to borrow money or raise equity capital.

Co-signer:
A person signs a promissory note in addition to the maker, thus becoming responsible for the obligation if the maker should default. A cosigner assumes the liability on a consumer loan without receiving goods, services, or money in return for the obligation.

Cost of Funds:
The interest paid or accrued on savings and borrowings, expressed as a percent of the average total savings and borrowings during a given accounting period.

Coupon:
A tab attached to a bond, which can be torn off and presented to collect an interest payment at a given date.

Coupon Rate:
The rate of interest paid on a particular security. For mortgage-backed securities, the word coupon is customarily used to describe the stated contract interest rate.

Coupon Strips:
Ordinary bonds, typically, U.S. Treasury bonds, purchased and then repackaged so that the rights to interest and principal payments are sold separately. The effect is to transform a regular interest-paying security into zero-coupon securities.

Covered Interest Arbitrage:
Investing dollars in an instrument denominated in a foreign currency and hedging the resulting foreign exchange risk by selling the proceeds of the investment forward for dollars.

Credit:
Any amount that, when posted, will increase the balance of a liability, income, or capital account or decrease the balance of an asset or expense account. Liability, capital, and income accounts normally have credit balances, and asset and expense accounts normally have debit balances.

Credit Enhancement:
Use of an indemnity bond or letter of credit to back a debt issue, thereby substituting the creditworthiness of the guarantor for the borrower's creditworthiness.

Credit Facility:
Any type of loan or credit arrangement.

Credit Rating:
A standardized assessment, expressed in alphanumeric characters, of a company's or individual's creditworthiness.

Credit Risk:
The potential for a borrower to default on all or part of a loan and, consequently, the potential for the value of the loan held by a savings association to decrease.

Credit Scoring:
Statistical analysis used to estimate the creditworthiness of credit applicants.

Cross-hedge:
A hedge transaction whereby the correlation between the two items being hedged is similar but not perfect. For example, hedging a commercial loan with a Ginnie Mae futures contract.

CUSIP Number:
CUSIP stand for the Committee on Uniform Securities Identification Procedures. A CUSIP number identifies most securities, including stocks of all registered U.S. and Canadian companies, and U.S. government and municipal bonds. CUSIP numbers and standardized descriptions are used by virtually all sectors of the financial industry, and are critical for the accurate and efficient clearance and settlement of securities and other financial instruments as well as back-office processing. The CUSIP system is owned by the American Bankers Association and operated by Standard & Poor’s who facilitates the clearing and settlement process of securities. The number consists of nine characters (including letters and numbers) that uniquely identify a company or issuer and the type of security. A similar system is used to identify foreign securities (CUSIP International Numbering System).

D

Damage Assessment:
The post-incident appraisal or determination of actual effects on human, physical, economic, and natural resources.

Data Security:
The securing of safeguarding of electronic information owned by an organization using technology such as security software packages and data encryption devices.

Dealer Reserve Accounts:
Refundable amounts held as collateral in the purchase of installment notes from a dealer. For example, a bank purchases $100,000 in installment notes from a dealer for the full face amount for which it pays $90,000 to the dealer and holds the remaining $10,000 as collateral. The $10,000 held as collateral is a dealer reserve account.

Debenture:
A debt instrument secured only by the general credit of the issuer. A corporate obligation sold as an investment.

Debit:
Any amount that, when posted, will increase the balance of an asset or expense account and decrease the balance of a liability, income, or capital account. Asset and expense accounts normally have debit balances; and liability, capital, and income accounts normally have credit balances.

Debit Card:
An instrument that allows a transaction to post to bank deposit accounts as a withdrawal. On-line settlement requires a Personal Identification Number (PIN) to initiate the transaction.

Debt Securities:
A security representing borrowed funds that must be repaid. Examples of debt securities include bonds, certificates of deposit, commercial paper, and debentures.

Daylight Overdraft:
An intra-day exposure of a bank when an account is in an overdraft position at any time during the business day.

Deed:
A written agreement in proper legal form that conveys title to, or an interest in, real property.

Deed in Lieu:
A deed given by a borrower to a lender to repay a mortgage loan and avoid foreclosure. A deed given in lieu of foreclosure.

Default:
Failure to do what the law requires or to carry out the terms of a contract.

Deferred Expense:
An expense paid before the corresponding benefit is fully received, such as a prepaid insurance premium. For accounting purposes, the expense is recorded as an asset until benefit is obtained, and may be prorated over a number of subsequent accounting periods.

Deferred Income:
Any income received before it is due or before it is earned. Rent paid in advance is an example of deferred income received during one accounting period but earned in a later accounting period. Deferred income is generally recorded as a liability until it is earned, at which time it is taken into income. Interest received in advance is also deferred income; however, instead of being recorded as a liability, interest received in advance offsets the balance of the loan to which it applies.

Deferred Loan Fee:
A loan fee, also referred to as points, typically received at loan closing. Deferred loan fees are considered interest paid in advance. Once the loan is disbursed, the deferred loan fee is reported on the balance sheet as a contra-asset to the loan and is accreted to interest income.

Deficiency Judgment:
A court order that authorizes the collection from the debtor of the part of the debt remaining unsatisfied after foreclosure and sale of collateral.

Delinquency:
Failure to make payment on a debt when due.

Demand Deposit Account:
A noninterest-bearing account from which a depositor may withdraw funds immediately without prior notice. Since funds may be withdrawn on demand in person or by presentation of a check, the account has many of the liquid characteristics of circulating currency.

De Novo Association:
A newly chartered savings association.

Deposit:
Money placed in a depository institution for safekeeping. Includes demand - usually checking - accounts, savings - passbook - accounts, time deposits, negotiable certificates of deposit, money market accounts, etc.

Deposit Broker:
A person or entity engaged in the business of placing funds or facilitating the placement of funds of third parties in accounts issued by a depository institution.

Depository Transfer Checks (DTCs):
A pre-printed, unsigned, restricted-payee instrument used by a company to transfer funds from one of its outlying depository locations to its concentration account.

Depreciation:
The gradual decline in the value of a property over its useful life. Depreciation is recognized through a systematic charge-off of the cost less salvage value over the estimated useful life. It is a bookkeeping entry that does not involve any cash outlay.

Direct Investment:
Investment by banks directly in the equity of a venture, as opposed to investment in a debt instrument. With direct investment, an association actually owns all or part of a venture, rather than loaning money to finance the venture.

Derivative:
A security whose value depends on that of another security or index.

Discharge of Lien:
The recorded release of a lien when debt has been repaid.

Discount:
The difference between the purchase price and face value of a security when the face value exceeds the purchase price. Normally a security sells at a discount when the stated interest rate of the security is less than the current market interest rate. The discount is accreted to interest income over the life of the security, increasing the stated interest rate of the security to the market interest rate at the time of purchase.

Discount Loan:
A loan on which the amount disbursed at closing equals the face amount of the loan less interest that will be earned over the life of the loan, and sometimes miscellaneous charges. The borrower must repay the full-face amount of the loan.

Discount Paper:
Short-term non-interest-bearing securities issued at a price below par. The difference between the purchase price and the amount redeemed at maturity is accreted to interest income over the life of the security.

Discount Rate:
(1) The rate representing the amount of money deducted from the face value of a note. (2) The add-on rate of interest charged to Federal Reserve System member banks for borrowing at the discount window.

Discount Securities:
Short-term noninterest-bearing debt instruments issued at a price below par and redeemed at maturity for full face value; usually short-term such as Treasury bills.

Discount Window:
A “window” available to Federal Reserve System members that allows them to borrow against collateral.

Discounted Cash Flows:
Anticipated net cash receipts from an investment discounted to present value under the theory that cash received in the future has a lesser value than the same amount of cash received today. Several assumptions must be made in this calculation: estimated cash flows, timing of the cash flows, and the discount rate used.

Dividend:
A portion of the net profits the Board of Directors officially declares for distribution to the shareholders. A dividend is paid at a certain rate for each share of stock held by each stockholder, such as, at ten cents per share.

Dividend, Extra:
Distribution of excess profits over and above the regular dividend.

Dividend, Scrip:
A promissory dividend payable in the future. The directors vote to withhold actual cash dividend until a certain future event has taken place.

Dividend, Stock:
A payment of stock in lieu of a cash dividend on a pro rata basis according to the amount of stock held by each stockholder.

Docket Number:
A five-digit number the OTS assigns to each savings association it regulates. The number is used to file and retrieve all financial, organizational, and regulatory data regarding that institution.

Dollar Reverse Repurchase Agreement:
A financial transaction similar to a reverse repurchase agreement in which a dealer loans money by buying a security and agreeing to sell it back to the customer at a higher price at a later date. In a dollar reverse repurchase agreement (dollar reverse repo) the dealer does not sell back the exact same security but another, substantially identical security.

Domestic Building and Loan Association (DBLA):
Defined in the IRS Tax Code as a domestic or federal savings and loan association whose principal business is acquiring savings deposits from the public and investing in loans.

Doubtful Assets:
Those assets that will probably not bring full value upon liquidation.

Down Payment:
A down payment is the cash you deposit towards the purchase of a home, business property, or vehicle. The larger the down payment, the less you need to borrow. For home loans, a down payment of 20% of the home purchase price is generally required to avoid private mortgage insurance. The value of a trade-in vehicle is often used instead of a down payment for purchasing a vehicle.

Dutch Auction:
An auction process in which the price of the goods being sold is lowered in increments until it prompts a bid; used by the U.S. Treasury for pricing new issues.

Duration:
(1) The number of years required to receive the present value of future payments, both interest and principal, from a bond. To determine duration, calculate the present value of the principal and each coupon, and then multiply each result by the period of time before payment is to occur. (2) The concept of duration relates the sensitivity of bond price changes to changes in interest rates.

Drawdown:
A request sent by a company to a bank to initiate a wire transfer from its own or another party's account.

Dwelling Unit
(1) A unified combination of rooms, whether existing or under construction, designed for residence by one family. (2) Living quarters consisting of contiguous rooms providing complete independent facilities for living, eating, cooking, sleeping, and sanitation.

Dwelling Units, One-to-Four:
(1) Single-family dwellings in detached or semidetached structures including manufactured housing. (2) Permanently financed units in a condominium or cooperative arrangement, where the owner of each unit has an undivided proportional interest in the underlying real estate and common elements of the structure. (3) Structures consisting of two- to four-dwelling units.

Dwelling Units, Five or More:
A structure, or structures, containing five or more dwelling units; also referred to as multi-family residential property. This mortgage classification includes:

A single mortgage secured by five or more dwelling units in one structure, or in semi-detached or detached structures.

The construction financing of condominium or cooperative apartments until the construction phase is complete because the units are in structures containing five or more units and are covered by one mortgage.

Fraternity/sorority houses offering sleeping accommodations, living accommodations for students or staff of a college or hospital, and retirement homes with sleeping and eating accommodations that are not condominiums or cooperatives. In these cases, the number of bedrooms in the structure will be the number of dwelling units.

E

Education Loan:
An advance of funds for the purpose of financing a college or vocational education.

Edge Act (1919):
A federal law that permits U.S. banks to invest in corporations located in other geographic areas that engage solely in international banking and finance.

Effective Annual Yield:
Annual yield calculation based on a 365-day year that includes the effect of compounding of interest payments.

Effective Rate:
The actual yield of interest as opposed to the stated rate. For deposits, the effective rate of interest is based on the accounting method used to compute interest and the frequency of compounding. For loans, the effective rate is the stated interest rate plus fees and charges prorated over the life of the mortgage.

Electronic Benefit Transfers:
Government-sponsored programs that distribute benefit payments through Automated Teller Machines (ATMs) and Point of Sale (POS) terminals.

Electronic Check Presentment (ECP):
Electronic transmission of data captured by a check reader/sorter to a drawee bank to effect settlement of a check.

Electronic Commerce (EC):
The exchange of business information from one organization to another in an electronic format in some mutually agreed standard. EC includes unstructured electronic messaging such as facsimile (fax) or electronic mail (E-mail) as well as Electronic Data Interchange (EDI) formats.

Electronic Data Interchange (EDI):
The movement of business data electronically between or within companies (including their agents or intermediaries) in a structured computer-processable data format that permits data to be transferred without re-keying.

Electronic Depository Transfer (EDT):
An ACH transaction used for concentration of funds.

Electronic Federal Tax Payment System:
The primary method that the U.S. government uses to collect taxes.

Electronic Funds Transfer (EFT):
The movement of funds by non-paper means (i.e., electronically), usually through a payment system such as the ACH network or Fedwire.

Electronic Funds Transfer Act (EFTA) (1978):
A federal law that defined the rights and responsibilities of individuals using EFT services.

Electronic Lockbox:
A collection service that records the receipt of incoming wire transfer and ACH payments, reformats the data, and transmits it to the company in whatever format it desires.

Eligible Banker's Acceptance (BA):
A BA with a term of 180 days or less that may be discounted at the U.S. Federal Reserve Bank.

Employee Stock Option Plan (ESOP):
An employee benefit where employees receive as compensation equity shares (stock) of the employer. Stock acquired for this purpose by a loan or guarantee of the employer is transferred to a trust. The loan is then typically paid off through dividends received on the stock and through additional contributions from the employer.

Encryption:
A process which electronically scrambles a message so that only persons who have compatible decryption hardware and/or software can interpret the message.

Equity Investment:
Investment in the ownership of property or a business where the investor’s profit depends on the profit of the underlying investment. The investor may receive a specified rate of return dependent on the profit of the underlying investment.

Equity Kicker:
Added to a stated rate of return, the investor participates in the profits of the underlying investment.

Equity Loan:
A loan that uses the borrower’s equity in real property as collateral; also called a home equity loan. The loan may be for a variety of purposes. It is typically an open-ended second or junior mortgage loan.

Equity Method:
A method of accounting for an equity investment in another company or joint venture. The carrying value of the investment reflects a share of the acquired firm’s increases (or decreases) in retained earnings. Example: If bank (A) purchases 20% of bank (B’s) stock and bank (B) earns $3 million after taxes during the next year, bank (A) will increase the carrying value of its investment by 20% of $3 million, or $600,000. If bank (B) pays half of its earnings in cash dividends, bank (A) will decrease its investment by $300,000.

Equity to Assets Ratio:
Total equity divided by total assets. This ratio provides information on the proportion of total assets provided by shareholders, owners, on any given date. A high equity ratio may indicate the existence of a protective buffer in the event the company suffers a loss.

Equity to Liabilities Ratio:
Total equity divided by total liabilities.

Escrow:
A written agreement under which funds transferred from one party to another are placed with a third person or entity, usually a depository institution, acting as custodian. The custodian completes the transfer to the second party only upon the fulfillment of certain specified conditions. For purposes of the calculation of deposit insurance premiums, escrows are included as deposits.

Eurobond:
A bond issued for release by a U.S. or other non-European company or government for sale in Western Europe. In that market, corporations and governments normally issue medium-term securities with maturities of 10 to 15 years.

Eurodollars:
Deposits denominated in U.S. dollars at banks and other financial institutions outside the United States. Although this name originated because of the large amounts of such deposits held at banks in Western Europe, similar deposits in other parts of the world are also called Eurodollars.

EWP:
Early withdrawal penalty. A penalty for withdrawing funds from a time savings account prior to a stated date.

Evaluated Receipts Settlement (ERS):
A payment method designed to eliminate the need for a supplier to provide an invoice to the customer.

Event of Default:
The breaching or violation of any term, covenant, or condition in a debt agreement by a borrower.

Excess Bank Balances:
Average collected balances in a company's bank account above the average required for bank compensation, or above the level a company has chosen to maintain at a bank.

Excess Loan Servicing:
(1) An asset established prior to FASB Statement No. 125 when loans were sold to yield a different rate than their contractual rate and the seller retained servicing. (2) The present value of the difference between the amount to be collected from the borrower and the amount to be paid to the purchaser of the loans. (The point spread differential less normal servicing costs represents the excess servicing amount that is recorded at the time of sale, increasing the gain or decreasing the loss on the sale.)

Exercise:
To execute the right granted under the terms of a contract. To exercise a call, holders exchange the call option position for a long futures position. To exercise a put, holders exchange the put option position for a short position in T-Bond futures.

Eximbank:
The Export-Import Bank of the U.S. is an independent agency of the U.S. government established to finance and guarantee payment for U.S. exports.

Expedited Funds Availability (1988):
A federal law that defined maximum funds availability time periods and established return procedures for checks and payable through drafts, etc.

Extranet:
A wide area network (WAN) in which two or more organizations share information using Internet protocols with access limited to the participants.

Expense:
The costs of resources used to create, or intended to create, revenues.

F

Face Value:
The sum of money denoted on the principal or “face” side of a financial instrument representing: (1) the amount of money the issuer promises to pay at maturity and (2) the amount on which interest is computed.

Factoring:
The sale or transfer of title of the accounts receivable to a third party (factor).

Factors:
Financial companies that purchase or manage other companies' receivables.

Fair Market Value:
The price at which property transfers from a willing seller to a willing buyer, each of whom has a reasonable knowledge of all pertinent facts concerning the property in question and similar properties on the market, and neither being under any compulsion to buy or sell.

Fannie Mae Pool:
Mortgage-backed security that represents a proportional undivided ownership interest in a pool of mortgage loans where the full and timely payment of principal and interest is guaranteed by Fannie Mae.

Farmers Home Administration:
A federal government agency that finances and insures loans to farmers and other qualified borrowers for rural housing and other purposes.

Federal Deposit Insurance Corporation (FDIC):
A government corporation that insures deposits in savings associations and commercial banks. The FDIC administers the Savings Association Insurance Fund, SAIF, providing deposit insurance to savings associations, and the Bank Insurance Fund, BIF, providing deposit insurance to commercial banks.

Federal Deposit Insurance Corporation Improvement Act (FDICIA) (1991):
A federal law that established standards for financial institution safety and soundness, mandated the FDIC to declare insolvent any bank or thrift that failed to maintain certain levels of capital adequacy, and required the FDIC to charge deposit insurance premiums on a risk-adjusted basis.

Federal Funds:
Overnight, unsecured loans of funds between banks. Generally considered as funds that are immediately available and invested only for one business day, they are typically treated as cash equivalents. Federal funds can be bought and sold for periods ranging from 10 to 90 days and thus referred to as term federal funds transactions.

Federal Housing Administration (FHA):
The FHA is a division of the Department of Housing and Urban Development whose activities include insuring residential mortgage loans under a nationwide system. This enables lenders to loan a higher percentage of the value of the underlying property. FHA loans generally require a down payment of not less than five percent of the original amount of the loan.

Federal Home Loan Banks (FHLBs):
Twelve regional banks of the Federal Home Loan Bank System that provide credit to banks.

Federal Home Loan Bank Board (FHLBB):
A former independent agency in the executive branch of the federal government that regulated and supervised the savings and loan industry, the Federal Home Loan Banks, the Federal Savings and Loan Insurance Corporation, and the Federal Home Loan Mortgage Corporation.

Federal Home Loan Bank System:
The group made up of the Federal Housing Finance Board, twelve regional Federal Home Loan Banks, and member savings associations. The fundamental purpose of the System is to serve as a central credit facility for member associations.

Federal Home Loan Mortgage Corporation (Freddie Mac):
A stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing. Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass through securities and debt instruments in the capital markets. Freddie Mac buy mortgages from commercial banks, thrift institutions, mortgage banks, and other primary lenders, and either hold these mortgages in their own portfolios or package them into mortgage-backed securities for resale to investors.

Federal Housing Finance Board (FHFB):
An independent agency in the executive branch of the federal government that replaced the FHLBB in its authority to govern the Federal Home Loan Bank System. 

Federal National Mortgage Association (Fannie Mae):
In 1938, the Federal Government established Fannie Mae to expand the flow of mortgage money by creating a secondary lending market. Fannie Mae is authorized to buy Federal Housing Administration (FHA)-insured mortgages, VA, and conventional loans and issuing mortgage-backed securities.

Federal Open Market Committee:
The 12-member committee that implements the Fed's monetary policy through open market operations.

Federal Reserve Board:
The seven governing members of the Federal Reserve System who are appointed by the President of the U.S. for 14-year terms. Board members play an important role in determining the country’s monetary policy, which, in turn, strongly influences economic activity.

Federal Reserve System:
The system of independent central banks that influences the United States’ money supply and credit through its control of bank reserves. Federal Reserve actions impact security prices. For example, restriction of bank reserves and lending ability in an attempt to restrain inflation tends to drive up interest rates and drive down security prices over the short run.

Federal Savings & Loan Insurance Corporation (FSLIC):
A government corporation the National Housing Act established in 1934 that insured deposit accounts in federal savings associations, federally chartered national savings banks, and state-chartered savings associations that were members of the Federal Home Loan Bank System. Under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, the Savings Association Insurance Fund, SAIF, replaced the FSLIC as an insurer. All assets and liabilities of FSLIC were transferred to the FSLIC Resolution Fund.

Fedwire:
The same-day value electronic funds transfer system operated in the U.S. by the Fed.

Fiduciary:
Someone who is entrusted with the care of another person's money, property or other items of value. Acting in a fiduciary capacity generally includes acting as a trustee, executor, administrator, registrar of stocks and bonds, transfer agent, assignee, receiver, guardian or conservator of the estate of a minor or incompetent, investment adviser, any capacity in which you possess investment discretion on behalf of another, or any other similar capacity.

Financial Electronic Data Interchange (FEDI):
A type of Electronic Data Interchange (EDI) in which financial information is transferred including electronic format for invoices, initiation of payments, lockbox deposit reports, and remittance information.

Financial Impact:
An operating expense that continues following an interruption or disaster, which as a result of the event cannot be offset by income and directly affects the financial position of the organization.

Finance Subsidiary:
A savings association’s subsidiary whose sole purpose is to issue securities, typically preferred stock or mortgage-backed securities, that the parent itself is authorized to issue directly - or, if the parent is a mutual association, is authorized to issue if it converted to the stock form - and to remit the net proceeds of such securities to its parent association.

Financial Accounting Standards Board (FASB):
An accounting organization established in 1973 that is responsible for establishing generally accepted account principles (GAAP). FASB is a self-regulated organization whose impact affects accounting firms and practitioners.

Financial Futures:
A futures contract based on financial instruments or indices.

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA):
An act of Congress to reform, recapitalize, and consolidate the federal deposit insurance system, and to enhance the regulatory and enforcement powers of federal financial institutions’ regulatory agencies. FIRREA established the Office of Thrift Supervision (OTS), the Federal Housing Finance Board, the FSLIC Resolution Fund, the Resolution Trust Corporation, and the Resolution Funding Corporation. FIRREA dissolved the Federal Home Loan Bank Board (FHLBB) and Federal Savings and Loan Insurance Corporation (FSLIC).

First Mortgage:
A mortgage that creates a lien against real property. A first mortgage has first priority against other claims in the event of foreclosure. Also called a senior or first lien.

Fiscal Year:
Any consecutive 12 months designated as the time frame for financial reporting and preparation of balance sheets, profit and loss statements, and other financial summations.

Fixed Assets:
Those tangible assets, such as office buildings, furniture, fixtures, and equipment, used in the operation of a business that are not intended to be sold in the normal process of the business.

Fixed-rate Mortgage:
A mortgage in which the interest rate and the amount of each interest and principal payment remain constant throughout the life of the loan.

Float:
Time interval, or delay, between the start and completion of a specific phase or process that occurs along the cash flow timeline. Certain types of float can be quantified and expressed in dollar mounts.

Floating-rate Securities:
A security whose interest rate varies or floats in relation to a specific index or benchmark, such as the rate on Treasury securities, LIBOR, etc.

Floating-rate Tranches:
CMO tranches that have rates that adjust in the same direction, and by the same amount, as an index such as LIBOR.

Floor Planning
Commercial loans that finance automobile or mobile home floor stock (dealer inventory).

Forbearance Agreement:
A verbal or written agreement providing that the savings association will delay exercising its rights in the case of a mortgage loan foreclosure as long as the borrower performs certain agreed-upon actions.

Foreclosure:
Legal process protecting the mortgagee should the mortgagor default on the mortgage, whereby the mortgagee obtains title to the collateral.

Foreign Exchange Rate:
The price of one currency denominated in another currency such as the value of British pounds expressed in U.S. dollars.

Foreign Tax Credits:
Tax credits U.S. companies can take against domestic taxes for those taxes paid to foreign governments.

Forward Commitment or Forward Commitment Contract:
Agreement between a buyer and seller to purchase or sell a specified amount of mortgages or securities at an agreed-upon price, and at a specified future date. Sometimes called a forward delivery contract or forward coverage.

Forward Delivery:
Delivery of loans or securities to be made at a future date.

Freddie Mac Participation Certificate (PC):
A mortgage-backed security, guaranteed by the Federal Home Loan Mortgage Corporation as to the timely payment of interest at the certificate rate and the ultimate collection of principal, which represents a proportional undivided ownership interest in a pool of mortgage loans. Generally, each PC group contains fixed-rate equal installment conventional residential mortgage loans with original terms to maturity of between 10 and 30 years.

FSLIC Resolution Fund:
A fund FIRREA established to assume all the assets and liabilities of FSLIC. The RTC managed the FSLIC Resolution Fund. The RTC was dissolved in December 1995, upon the satisfaction of all debt and liabilities and the sale of all assets assumed by it.

Funded Debt:
Debt that is usually long-term, for which certain assets have been set aside to satisfy the debt.

Futures Call Option:
An option contract that gives the buyer the right to assume a long T-Bond futures position at a fixed strike price any time prior to the contract’s expiration date. When assigned, a call option seller automatically assumes a short futures position.

Futures Contract:
An agreement to take (by the buyer) or make (by the seller) delivery of a specific commodity on a particular date. The commodities and contracts are standardized so that an active resale, secondary, market will exist. Futures contracts are available for a variety of items including grains, metals, and foreign currencies.

Futures Price:
The price of a contract for delivery of a specific dollar amount of a standardized financial instrument in a designated future month.

Futures Put Option:
An option contract that gives the buyer the right to assume a short T-Bond futures position, at a fixed strike price, any time prior to the contract’s expiration date. When assigned, a put option writer automatically assumes a long futures position.

G

Gap:
The imbalance between the maturities (or repricing) of assets and liabilities of a financial institution; a measure of that imbalance. Gap refers to a specific time interval, such as a 30-day gap, which is the degree to which assets repricing within 30 days exceed or fall short of liabilities repricing in 30 days.

Garn-St. Germain Depository Institutions Act (1982):
A federal law that established lending limits of banks, allowed the FDIC to arrange mergers of banks in different states, and allowed banks to offer accounts that would offer rates of interest comparable to money market mutual funds.

General Valuation Allowance:
A contra-asset established against receivables and investments based on the amount expected to be collected. General valuation allowances are established for the purpose of covering probable but not specifically identifiable credit losses.

Generally Accepted Accounting Principles (GAAP):
The basic principles of accounting promulgated either through authoritative sources such as the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA), or, if no written standards exist, through widespread common practices.

Government National Mortgage Association (Ginnie Mae):
A wholly owned U.S. government corporation, known as Ginnie Mae, which is part of the Department of Housing and Urban Development (HUD) with the purpose to serve low-to moderate-income homebuyers. Ginnie Mae guarantees the timely payment of principal and interest on mortgage-backed securities that represent an interest in a pool of mortgages insured by the VA or FHA, and are backed by the full faith and credit of the United States government.

Ginnie Mae Certificates:
Mortgage pass-through securities with the full and timely payment of principal and interest guaranteed by Ginnie Mae. A Ginnie Mae certificate represents a proportional, undivided ownership interest in a pool of fixed-rate mortgage loans. Also known as Ginnie Mae Pools.

Goodwill:
The premium exceeding fair value of net identifiable assets of an acquired association in a purchase business combination.

Government Sponsored Enterprise (GSE):
Privately owned corporations supervised by the U. S. Government. GSEs include Fannie Mae and Freddie Mac who are supervised by the Office of Federal Housing Enterprise Oversight (OFHEO), a part of HUD. Federal Home Loan Banks are also GSEs and are supervised by the Federal Housing Finance Board.

Guarantor:
A guarantor does not sign the loan note, and to become liable for the debt, a bank must exhaust all other means of collection from the original borrowers.

Grace Period:
Permits repayment of principal beginning at some specified future date. For example, an eight-year loan with a two-year grace period would mean that principal payments would not commence until the third year of the loan.

Graduated-payment Adjustable Mortgage Loan (GPAML):
A graduated payment mortgage that has a variable interest rate. The initial scheduled payment is insufficient to pay all the interest due. The unpaid interest increases the principal of the loan and the scheduled payments increase over the term of the loan so the loan will fully amortize at maturity.

Graduated-payment Mortgage (GPM):
A graduated payment mortgage with a fixed interest rate. The initial payment is lower than that on a standard fixed-rate mortgage and is insufficient to pay all the interest due. The unpaid interest increases the principal of the loan and the scheduled payments increase over the term of the loan so the loan will fully amortize at maturity.

Grandfather Clause:
Any condition that ties existing rights or privileges to previous or remote conditions or acts. More popularly used when a new regulation goes into effect, to exempt associations already engaged in the activity being regulated.

Gross:
The total amount before any deductions.

Gross Income:
Total income before deducting expenses.

Guaranteed Student Loans:
Education loans primarily made by banks, savings and loan associations, and credit unions, and some colleges, payment of which is guaranteed by the federal or state government.

H

Hazard Identification:
The process of identifying situations or conditions that have the potential of causing injury to people, damage to property, or damage to the environment.

Hedging:
The matching of assets to liabilities of a similar nature; the assumption of one risk calculated to offset another. The buying or selling of offsetting positions to protect against an adverse change in price or interest rates. In mortgage banking, the purchase or sale of mortgage futures contracts to offset cash market transactions to be made at a later date.

High Dollar Group Sort (HDGS):
A program of the Federal Reserve to expedite the processing of high-dollar checks through the system.

Holding Company:
A corporation or other entity that owns a majority of voting stock or securities of another corporation, thus obtaining control of the other corporation.

Home Equity Loan:
Revolving, open-end loans secured by a one- to four-family property and extended under lines of credit. Although residential property secures home equity loans, in some cases they may not have an appraisal meeting OTS standards, or may not have a sufficient loan-to-value level and, thus, are classified as a non-mortgage loan.

Home Improvement Loan:
A loan usually not secured by a recorded lien on the property and usually short-term, made to a property owner for such improvements as maintenance and repair, additions and alterations, or replacement of equipment or structural elements.

Home Loan:
A residential mortgage loan secured by a one- to four-family property.

Home Mortgage Disclosure Act (HMDA):
A law that requires the annual disclosure of mortgage loan data by depository institutions, service corporations, and mortgage banking subsidiaries located in metropolitan statistical areas. Institutions subject to the Act are required to disclose data on all mortgage loans and home improvement loans that they originate and purchase each year.

Homeowners Insurance:
Also called property insurance, homeowners insurance protects the homeowner from weather-related damage, as well as potential liability from events that occur on the property. Lenders require homeowners insurance coverage to protect the collateral that secures their loan. Some homeowners insurance policies do not cover catastrophic events such as tornadoes, hurricanes or floods. These kinds of events generally require a separate insurance policy.

Housing Ratio:
Lenders use housing ratio to approve loan applicants. Housing ratio equals combined monthly mortgage payment divided by gross monthly income. For example, a combined monthly mortgage payment of $1,500 divided by gross monthly income of $4,500 equals a housing ratio of 33%.

Hot-site:
A data center facility with sufficient hardware, communications interfaces and environmentally controlled space capable of providing relatively immediate backup data processing support.

Hybrid Lockbox:
A collection system that has characteristics of both retail and wholesale lockboxes and can process both consumer and company-to-company mail receipts. Sometimes referred to as a whole-tail lockbox.

Hypothecated Deposit:
Deposits accumulated until the sum of the payments equals the entire amount of principal and interest on the contract, at which time the loan is considered paid in full. Typically state law determines the handling of hypothecated deposits. In reporting Schedule SC, you should net hypothecated deposits against the related loans.

I

Impact Analysis:
A pre-incident study to estimate the effect that specific incidents can have on an entity’s operations or activities.

Incident Command System (ICS):
The combination of facilities, equipment, personnel, procedures, and communications operating within a common organizational structure with responsibility for the management of assigned resources to effectively accomplish stated objectives pertaining to incident as described in the document, Incident Command System.

Income:
Money or its equivalent, earned or accrued, arising from the sale of goods or services.

Income Tax:
A tax on annual earnings and profits of a person, corporation, or organization. Traditionally, there are federal, state, and city taxes, although not all states and not all cities tax income.

Index:
A price indicator such as LIBOR or T-Bill rates. The repricing of the interest rate on an adjustable rate mortgage is typically governed by an index rate. Rate movements of the mortgage are adjusted to correspond to movements in the index. The index rate generally is a published interest-rate series that is readily verifiable by the borrower and not under the control of the lender.

Individual Retirement Account (IRA):
Special accounts where you can save and invest, where the taxes generally are deferred until money is withdrawn. These plans are defined by statute and are subject to frequent changes by Congress. Withdrawals of tax-deferred contributions are generally taxed as income, including the capital gains from such accounts. Withdrawal prior to a specified retirement age or for purposes other than those specified by law may be subject to a tax penalty. Types of IRAs include Keogh Plans, Roth IRAs, and Education IRAs.

Initial Interest Rate:
The starting interest rate on an adjustable-rate mortgage loan, which is often below market ARM rates. The intent of a low initial rate is to assist homebuyers that may not otherwise qualify for a mortgage loan.

Initial Margin:
The amount of deposit a broker initially requires to purchase securities on behalf of an investor.

Insolvent:
(1) A condition in which the value of liabilities exceeds the value of assets according to some accounting standard such as generally accepted accounting principles (GAAP). That is, net worth, or capital, is negative. (2) The state of being unable to pay debts when demanded by creditors at maturity.

Installment:
The regular, periodic payment to repay a debt that a borrower agrees to pay.

In-substance Foreclosure:
A situation in which the lender considers the collateral underlying a loan repossessed in substance by the lender and accounts for it at its fair value, consistent with generally accepted accounting principles (GAAP). In-substance foreclosure occurs when the debtor formally or effectively abandons control of the collateral to the creditor.

Interest:
A fee paid for using money that belongs to another, usually expressed as an annual percentage of the amount used. A financial institution makes periodic payments of interest to savers for the use of their deposited funds. A borrower pays interest on a loan to the financial institution for the use of its funds.

Interest Rate Cap:
A limit on the amount the interest rate can increase. A periodic cap limits how much the rate can increase at each adjustment period. A lifetime cap limits how much the rate can increase during the term of the loan.

Initial Interest Rate:
The starting interest rate on an adjustable-rate mortgage loan, which is often below market ARM rates. The intent of a low initial rate is to assist homebuyers that may not otherwise qualify for a mortgage loan.

Interest-only (I/O) Strip:
The interest portion of a security (debt security or mortgage security). The owner of an IO strip receives only the interest payments of the security. The owner of an IO strip of a mortgage pool security receives only the interest payments on the cash flow of the underlying mortgages.

Interest Rate Floor:
Minimum interest rates for a loan or variable-rate security.

Interest-rate Collar:
(1) A contractual agreement that limits the interest paid or received if the interest rates increase or decrease by a predetermined number of percentage points. (2) A two-sided cap.

Interest-rate Swaps:
A transaction that involves two parties exchanging their interest payment obligations - no principal is exchanged - on two different kinds of debt instruments, one bearing a fixed interest rate and the other a floating interest rate. If a savings association has fixed-rate assets and floating-rate liabilities, it typically will swap its floating rate payment for a fixed-rate payment to match liability repricing to asset repricing.

Internal Rate of Return:
A calculation of the return of a project or capital investment found by setting the net present value (NPV) of cash inflows equal to zero.

Internet:
A Wide Area Network (WAN) to which anyone with the appropriate hardware, software, and communication links has access.

In-the-Money:
An option with a favorable price opportunity. The strike price is less than market for a call and above the market for a put.

Intranet:
A Local Area Network (LAN) or Wide Area Network (WAN), typically belonging to one company, that uses the open standards of the Internet rather than proprietary software for communication among computers.

Intrinsic Value:
The amount by which an option is in-the-money. For call options, it is the current T-Bond futures price minus the strike price if the difference is a positive number. For put options, it is the strike price minus the current price of T-Bond futures if the difference is a positive number.

Inverse Floater:
An asset that adjusts in the opposite direction of the movement of interest rates. Generally the inverse floater adjusts by a multiple of an interest-rate index. It is usually repriced based on a formula containing a multiple of the LIBOR rate. For example, if an inverse floater adjusts at an inverse of 1.25 times LIBOR, a decrease of two basis points in LIBOR would result in an increase in the rate of the inverse floater of 2.5 (2 x 1.25) basis points.

Inverse-floating Rate Tranches:
CMO tranches that have adjustable rates that adjusts in the opposite direction as an index such as LIBOR. Frequently, the rate adjusts by a multiple of the change in the index.

Investment:
The use of capital to create more money, either through income-producing vehicles or through more risk oriented ventures designed to result in longer term capital gains.

Investment Accounts:
Accounts that range from short-term, highly liquid securities, such as U.S. Treasury Bills, to long-term railroad equipment trust certificates that are not always liquid. In between, there are debentures, floaters, notes, put bonds, and cushion bonds, along with a broad array of short-term money market instruments. Investment accounts may be trading accounts, available-for-sale, or held-to-maturity.

I/O Strip:
Interest-only strip. The interest portion of a security (debt security or mortgage security).

J

Joint Venture:
Any joint undertaking between two or more parties in such legal form as joint tenancy, tenancy in common, partnership, or a corporation.

Judgment:
A formal decision given by a court. A judgment against a property is generally a lien against the property.

Junior Lien:
A lien that is subordinate to the claims of prior lien(s) or mortgage(s).

Junk Bonds:
Bonds issued by companies without long track records of sales and earnings. These bonds are more volatile and pay higher yields than investment-grade bonds.

K

Kiting:
Check kiting may occur in a variety of ways and involve numerous financial institutions. The underlying premise for check kiting is a customer’s ability to gain access to deposited funds before they are collected from the financial institution in which they are drawn. However, drawing against uncollected funds in and of itself does not necessarily indicate kiting. Kiting only occurs when the aggregate amount of drawings exceeds the sum of the collected balances in all accounts. To combat check kiting, financial institutions need to ensure that the effectiveness of internal controls and reports used to identify suspicious check activity are periodically monitored and/or audited.

L

Land Loan:
Loan for unimproved land, developed building lots, and the acquisition and development of land.

Ledger Balance:
Balance in a bank account that reflects all items that have been deposited or cleared through the account.

Letter of Credit:
A document issued by a financial institution on behalf of its customer authorizing a third party, or in some cases the customer, to draw drafts on the institution up to a stipulated amount and with specified terms and conditions. The letter of credit is a conditional commitment, except when prepaid by the customer, on the part of the institution to provide payment on drafts drawn in accordance with the terms of the document.

Liabilities:
Debts incurred but not paid. For savings associations, liabilities consist of deposits, borrowings including long-term debentures, and other liabilities.

LIBOR:
London Interbank Offered Rate. An international interest-rate index, similar to the federal funds rate of banks in the United States. It is commonly used as a repricing index for various financial instruments such as ARMs, CMO tranches, and interest-rate swaps.

Lien:
A claim by one person or entity on the specific property of another and that serves as security for a debt. The security interest in real estate created by a mortgage. A lien is typically recorded in the legal jurisdiction (county) in which the property is located.

Line of Credit:
A pre-established loan authorization with a specified borrowing limit extended by a lending institution to an individual or business. Most lines of credit are unsecured; however, certain lines of credit, such as home equity loans, are secured by the borrower’s equity in property. A line of credit allows borrowers to obtain a number of loans without re-applying each time as long as the total of borrowed funds does not exceed the pre-established credit limit.

Liquidation:
Closing a savings association by paying the claims of insured depositors and other secured creditors. Liquidation may be a voluntary decision made by the board of directors, or may be mandated and executed by the FDIC.

Liquidity:
The amount an entity holds in cash and other assets quickly convertible into cash without significant loss.

Loan:
Money advanced by one entity to another to be repaid within a specified time, typically with a specified rate of interest, as set forth in a note or other evidence of indebtedness. Loans may be unsecured or secured by real or personal property but do not represent an equity interest in the underlying security for the lender.

Loan Loss Reserve:
A contra-asset set up to compensate for anticipated losses from loans.

Loan Origination:
The steps a lending institution takes to obtain a borrower and underwrite a loan up to the time a loan is booked, including soliciting, processing applications, appraising, and closing.

Loan Origination Fee:
The initial service charge that a lending institution imposes on a borrower for underwriting a loan.

Loan Participation:
(1) The purchase of portions of outstanding loans by investors, who then participate on a pro rata basis in interest and principal payments; (2) a loan or package of loans in which two or more lenders share ownership.

Loan Portfolio:
The total loans held by a financial institution or other lender, at a given time.

Loans-in-process:
Loans that an association closed, but the full principal of which has yet to be disbursed. Generally, these are construction loans that are typically disbursed in stages as construction is completed. The full amount of a loan is recorded on the savings association’s books at closing, with the undisbursed portion recorded in the contra-asset account called loans-in-process. Report loans on the TFR net of loans-in-process.

Loan to Facilitate:
A mortgage loan in which the lender provides a borrower with funds at a high loan-to-value ratio and/or below-market interest rates to facilitate the borrower’s acquisition of a piece of property owned by the lender.

Loan Syndication:
The process whereby a group of financial institutions extends a credit facility to a borrower.

Lockbox:
A collection system in which a bank or a third party receives, processes, and deposits a company's mail receipts. Also known as a lockbox processor.

Lockbox Networks:
Collection systems that offer multiple locations to receive customer remittances through one organization.

Long:
(1) As a noun, one who has bought futures contracts and has not yet offset that position. (2) As an adverb -going long - the action of taking a position in which one has bought futures contracts without taking the offsetting action. The long protects against declining rates of interest.

Long-term, Fixed-rate Tranches:
CMO tranches that have fixed rates and are expected to mature in five years or more.

Long-Term Liabilities:
Obligations that are expected to be settled beyond one year or a normal accounting cycle.

Long-term Planned Amortization Classes (PACs):
CMO tranches that have fixed rates, a prioritized repayment schedule within certain prepayment speeds, and expected maturity of more than five years. Targeted Amortization Classes (TACs) are considered to be substantially similar to PACs for reporting purposes.

Long-term PAC Support Tranches:
CMO tranches that have fixed rates, expected maturity of more than five years, and are part of a CMO structure that contains a PAC or TAC tranche(s).

Loss:
(1) The amount of all expenses exceeding revenues for a period or for a transaction. (2) A classification of assets under OTS regulations where recovery is unlikely.

Lower-of-Cost-or-Market (LOCOM):
An accounting method used to establish the amount at which certain assets are recorded. The amount established is the lower of the cost of the asset or the current market value. Under this method, assets must be written down if the market value falls below amortized cost but the asset may never be written up to a market value above amortized cost.

Loan-to-value (LTV) Ratio:
Homes: Loan-to-value ratio is a key factor in determining how much of a home you can qualify for. To calculate, divide the mortgage loan amount by the fair market of the home value. A recent appraisal is generally required to determine fair market value. If you have existing mortgage debt or are adding debt, divide the combined mortgage balance by the home value. For example, a mortgage loan of $150,000 on a home that is appraised at $200,000 has an LTV of 75%. As a general rule, mortgage loans that exceed an LTV of 80% require private mortgage insurance.


M

Magnetic Ink Character Recognition (MICR) Line:
The lower part of a check, deposit ticket, or other item, that contains the special character information necessary to read the item by electronic scanning.

Maintenance Margin:
Additional assets required by a broker on a margin account due to decreases in the market value of the securities that guarantee the margin account. 

Majority Stockholders:
Stockholders whose share of voting stock is so large those they can exercise control over the corporation. Generally, an ownership of 20% or more is deemed to constitute control.

Majority-owned Subsidiary:
A subsidiary whose parent company, or parent’s majority-owned subsidiaries, owns more than 50 percent of the outstanding voting capital stock.

Mandatory Convertible Securities:
Subordinated debt instruments that are eventually transformed into common or perpetual preferred stock within a specified period of time. Generally, there are two types: (1) equity contract notes - securities that oblige the holder to take common or perpetual preferred stock of the issuer in lieu of cash for repayment of principal; and (2) equity commitment notes - securities that are redeemable only with the proceeds from the sale of common or preferred stock.

Mandatory Delivery:
A lender’s commitment to deliver loans or securities or pay a penalty.

Margin:
(1) The amount of deposit money that a securities broker requires from an investor to purchase securities on credit. (2) An amount of money or securities deposited by buyers and sellers of futures contracts and short options to ensure performance of the contract terms, such as, the commitment to make or take delivery of the commodity or the cancellation of the position by a subsequent offsetting trade at such price as can be attained. Margin in commodities is not a payment of equity or down payment on the commodity itself, but rather is in the nature of a performance bond or security deposit.

Market Makers:
Individuals or firms who will quote both a bid (buying) and an offered price (selling) for a financial instrument or other type of asset.

Mark-to-Market:
An accounting procedure by which assets are recorded at current market value, which may be higher or lower than their purchase price or book value. Examples of the use of mark-to-market accounting are: purchase accounting, pushdown accounting, and accounting for certain securities.

Market Value:
(1) The price established in a competitive market where buyers and sellers meet to buy and sell similar products. (2) A price determined by supply and demand factors rather than by management. (3) The price at which an owner is prepared to sell and an unrelated buyer is willing to buy.

Marketable Title:
Title to property that is free from a claim, lien, charge or defect and that will not be subject to legal objection. Also known as perfect title, clear title, and good title.

Maturity:
The date on which the principal balance of a debt becomes due and payable. The date when a debt is paid in full.

Maturity Mix:
The variety of assets found in an investment portfolio that vary in terms of length, such as 90-day Treasury bills, 20-year corporate bonds, etc.

Master Note:
A type of promissory note used for loans with multiple advance features such as lines of credit and revolvers.

Memo Posting:
Posting an ACH credit or debit early in the day when the actual credit or debit will not be posted until later in the day.

Merger:
The combining of two or more entities either through one purchasing the assets and liabilities of the other(s) or the pooling or combining of two or more entities into one new entity.

Minority Interest:
The portion of net worth of a subsidiary relating to shares not owned by the controlling company or other members of the combined group. Example 1: A parent owns 75% of the controlling interest in Company B; therefore, there is a 25% minority interest in Company B. Example 2: A parent owns 50% of the voting stock of Company B and 100% of Company C; Company C owns 25% of Company B. Therefore, the parent effectively controls 75% of Company B and there is a 25% minority interest in Company B.

Mitigation:
Activities taken to eliminate or reduce the degree of risk to life and property from hazards, either prior to or following a disaster.

Mobile Home:
A movable, portable dwelling without permanent foundation, designed for year-round living.

Mobile Home Certificates:
Variations of the Ginnie Mae certificate. Fully guaranteed, pass-through securities that are collateralized by mobile home loans.

Mobile Home Loan:
A loan to finance the purchase of a mobile home, secured by the lender’s claim on the mobile home. The loan may include funds for associated costs such as transportation of the mobile home and setup on a new site.

Mobilization:
The activation of the recovery organization in response to an emergency or disaster declaration.

Monetary Policy:
Federal Reserve Board policy that pertains to the control of credit availability, and thus interest rate levels.

Money Market Deposit Accounts (MMDA):
A savings account offered by Federal savings associations in accordance with 12 U.S.C. §1464(b)(1) and by state-chartered savings associations in accordance with applicable state law on which market rates of interest may be paid if issued subject to certain limitations. Limitations include: (1) Minimum of seven days' notice required prior to withdrawal or transfer. (2) Transfers limited to no more than six per calendar month.

Money Market Fund:
The combined money of many individuals jointly invested in high yield financial instruments such as U.S. government securities, certificates of deposits, and commercial paper. A money market fund is a mutual fund that strives to make a profit by buying and selling various forms of money rather than buying and selling shares of ownership in corporations.

Money Order:
A pre-paid paper instrument issued by a party such as a company, a bank, or the post office to transfer value to a specified payee.

Mortgage-Backed Security (MBS):
A security backed by a participation of a pool of mortgages, the owners of which participate in receiving payments of principal and interest.

Mortgage Derivative:
Any variety of mortgage-backed securities of complex structures whose payments to investors are derived from the cash flows of mortgages, but in which the cash flows from the mortgages are not passed through proportionately to the holders of the securities.

Mortgage Loan:
An advance of funds from a lender, the mortgagee, to a borrower, the mortgagor, secured by real property and evidenced by a document called a mortgage. The mortgage sets forth the conditions of the loan, the manner and duration of repayment, and the rights of the mortgagee to repossess the pledged property if the mortgagor defaults.

Mortgage Participation:
The division of a mortgage or pool of mortgages into units owned by one or more investors, who participate in receiving payments of principal and interest.

Mortgage Points:
Mortgage points are also called discount points, points, loan discount points, loan origination fees or maximum loan charges. A point is equal to 1 percent of the loan amount. For example, 1 point on a loan of $150,000 equals $1,500. Lenders consider mortgage points as interest that you pay in advance. As a result, the more points you pay when you close the loan, the lower your interest rate. If you qualify, you may be able to deduct mortgage points in the year you close the loan for tax purposes. Otherwise, you will have to amortize the points paid over the term of the loan.

Mortgage Pool Security:
A number of mortgages combined and issued as a single security. Repayments from the mortgages in the pool are passed through to the investor(s) proportionate to ownership interest and with the same timing with which they are received. The security provides each investor with a proportional ownership interest in the underlying collateral.

Mortgage Portfolio:
All mortgage loans or obligations held as assets by a financial institution or other lender.

Mortgage-backed Bonds:
Bonds secured by mortgages. Unlike mortgage-backed pass-through securities, mortgage-backed bonds do not convey ownership of any portion of the underlying pool mortgages. However, mortgage-backed bonds do offer a more predictable maturity and thus offer a form of call protection.

Mortgagee:
The financial institution, group, or individual that lends money secured by real estate.

Mortgagor:
Real estate owner who pledges real estate as security for a loan. The borrower.

Multi-bank Reporting:
An arrangement in which a financial institution or third-party reporting service gathers, consolidates, and reports account balances and transactions from various financial institutions with which the company maintains accounts.

Multifamily Residential Property:
Property containing five or more dwelling units. An apartment building, a residence hall for students or employees, a retirement complex, etc.

Multiple Drawee Checks:
Checks that can be presented for payment at a bank other than the drawee bank; both bank names appear on the check. Also called payable-if-desired (PID) checks.

Municipal Bond:
A tax exempt debt obligation issued by a state or local government agency to raise funds for the public good, such as for building low-income housing, improving streets, or building bridges. The bonds are redeemed with interest and are backed by the government’s taxing authority. Municipal bonds are generally exempt from Federal income taxes.

Municipal Deposits:
Deposits of state and local government funds, which, under the laws of certain jurisdictions, are secured by the pledge of acceptable securities or by a surety contract (depository bond) to directly protect these funds.

Mutual Aid Agreement:
A pre-arranged agreement developed between two or more entities to render assistance to the parties of the agreement.

Mutual Association:
A savings association that issues no capital stock, but is owned and controlled solely by its savings depositors, who are called members. Members do not share in profits, but they exercise other ownership rights such as electing the board of directors.

Mutual Fund:
A mutual fund pools the funds of many investors and provides professional management in investing those funds. Also called an open-end investment company.

N
National Automated Clearing House Association (NACHA):
A membership association that provides market and education assistance and establishes rules, standards, and procedures for Automated Clearing House (ACH) payments.

National Bank:
A commercial bank organized with the consent and approval of the Office of the Comptroller of the Currency and operated under the supervision of the Federal government. National banks are required to be members of the Federal Reserve System and must purchase stock in the Federal Reserve Bank in their district.

Needs Assessment:
The identification of resources needed to restore vital functions.

Negative Amortization:
Any increase in the loan balance arising from a mortgage payment being too small to pay all the interest due that month. The lender effectively makes the borrower an additional loan at the mortgage rate for the amount of unpaid interest. This additional loan must be repaid over the remaining term of the mortgage.

Negotiable Order of Withdrawal (NOW) Account:
A savings account with characteristics of a checking account. An account holder can withdraw funds by writing a negotiable order of withdrawal payable to a third party. NOW accounts may earn interest.

Negotiating Bank:
In an international transaction involving an L/C, the bank that examines the documents presented by the beneficiary of the credit, receives payment from the issuing bank, and pays the beneficiary. (The advising and negotiating bank are often the same.)

Nellie Mae:
Nellie Mae was in 1988 the to provide educational financing for undergraduate and graduate students and families for Federal program such as Stafford, PLUS, and Consolidation Loans, as well as private loans.

Net:
That which remains after making certain designated deductions from the gross amount.

Netting:
A system designed to reduce the number of cross-border payments among international affiliates of a company through the elimination or consolidation of funds flows typical denominated in different currencies.

Net Assets:
The assets of an individual or entity remaining after all obligations have been met. Assets minus liabilities. The owners’ equity.

Net Income:
Gross income less expenses, including taxes, but before dividends.

Net Interest Margin:
Interest income less interest expense, before the inclusion of noninterest income and deduction of noninterest expense. This is the gross margin for financial institutions.

Net Loss:
The excess of expenses and losses over revenues and gains during a specified period of time. A negative net income.

Net Operating Income:
Net interest margin less provision for losses and operating expenses plus noninterest income.

Net Operating Loss (NOL):
A loss for tax purposes that can be applied against net income from prior periods (NOL carry-back) or subsequent periods (NOL carry-forward) to reduce the tax liability of those periods.

Net Portfolio Value Model:
A model used by the OTS to measure each association’s exposure to interest rate risk by estimating how a change in interest rates affects the market value of its assets, liabilities, and off-balance-sheet.

Net Present Value:
Sum of the future cash flows (positives and negatives) discounted to present value under the theory that money received today is worth more than the same amount received in the future.

Net Realizable Value (NRV):
The estimated sales price from a property, reduced by the sum of:

(1) Direct selling expenses such as sales commissions, cost of title policy, etc.

(2) Costs of completion or improvement necessary for sale.

(3) Direct holding costs, net of rental or other income, including taxes, maintenance, insurance, and cost of all capital, debt and equity, during the period held for sale.

Net Worth:
The owner’s equity. Assets less liabilities, deferred income, redeemable preferred stock, and minority interest. Also called net assets, equity, stockholders’ equity, and equity capital.

Nominal Interest Rate:
The stated or contractual interest rate in a loan agreement, bond, or other security, which may differ from the effective interest rate.

Nonconforming Loans:
A real estate mortgage loan is nonconforming if the unpaid principal balance or unexpired term exceeds lending limits set by purchasers or guarantors of mortgages in the secondary market - Freddie Mac, Fannie Mae, etc.

Non-performing Assets:
Assets that do not earn income, including those originally acquired to earn income (delinquent loans) and those not intended to earn income (fixed assets). Typically assets originally acquired to earn income are deemed non-performing when (1) full payment of interest or principal is no longer anticipated, (2) principal or interest is 90 days or more delinquent even if the asset is still in accrual status, or (3) the maturity date passes and payment in full has not been made. Non-performing loans that are restructured continue to be considered non-performing until a cash payment from the borrower brings the loan current under its restructured terms; for instance, a loan cannot be taken out of the non-performing category simply by restructuring the loan.

Nonresidential Mortgage Loan:
A mortgage loan secured by nonresidential property such as an office building, store, factory, church, or vacant land.

Note:
An instrument that bears the recognized legal evidence of debt. A note is signed by the maker (borrower) and promises to pay a specified sum of money to the lender at a certain future date and place.

Notional Principal:
The amount of principal underlying an interest rate swap transaction, and upon which the swap payment calculation is based.

North American Free Trade Agreement (NAFTA):
An agreement between the U.S., Canada, and Mexico that reduces and eliminates tariffs, thereby helping to unite their economies.

NSF (Non Sufficient Funds):
A check that is presented against an account and does not have sufficient funds to cover/pay when the check is presented for payment, and for that reason is dishonored by the bank.

O

Oakar:
An "Oakar" savings association is a savings association (OTS-regulated institution) that belongs to one insurance fund, generally the Savings Association Insurance Fund (SAIF), and has acquired deposits insured by a secondary insurance fund, generally the Bank Insurance Fund (BIF), by means of a so-called "Oakar transaction." The most common Oakar transaction occurs when a SAIF-member acquires deposits from a BIF-member, either by means of a whole-institution acquisition or through a branch acquisition. The reverse, namely, the acquisition of SAIF-insured deposits by an OTS-regulated, BIF member (“BIF HOLA” savings association), is also considered an “Oakar transaction.”

Occupancy Rate:
The percentage of space or units that are leased or occupied. The inverse of the vacancy rate.

Off-balance-sheet:
An asset or obligation that in accordance with GAAP you do not report on the balance sheet. Such as commitments to originate loans, undisbursed loan balances, unused letters of credit, etc.

Offer:
An expression of willingness to sell something at a given price; opposite of bid.

Offering:
An issue of securities or bonds presented for sale. An offering may be public (open to anyone wishing to buy) or private (predetermined buyers or market).

Offset:
The process used to close an open futures option; for instance, to sell after having previously purchased, or to buy after having previously sold.

On-Us Check:
A check that is deposited in an account held at the same bank on which it is drawn.

Open Position:
An outstanding position in a futures contract, which has not been offset. If not covered prior to maturity, the trader is liable for taking or delivering the underlying commodities.

Open Repo:
A repo with no definite term that can be terminated by either party. The rate paid is typically higher than that paid on overnight repos and is subject to adjustment on a day-to-day basis.

Open-end Credit:
An unsecured line of credit that may be used repeatedly up to an established overall limit. Commonly known as revolving credit or a line of credit, in which the customer may pay in full or in installments. A finance charge is assessed on the unpaid balance. The term does not include negotiated advances under an open-end real estate mortgage or a letter of credit.

Open-end Mortgage:
A mortgage that by mutual agreement may have the balance or maturity extended to provide additional funds to the mortgagor.

Operational Impact:
An impact which is not quantifiable in financial terms but its effects may be among the most severe in determining the survival of a organization following disaster.

Operating Assets:
Those assets that contribute to the regular income from business operations, such as loans and investments; the opposite of which are nonoperating assets, such as real estate held for future use and non-income-producing intangibles such as goodwill. Nonperforming assets that were acquired with the intent to produce operating income are included in operating assets.

Operating Capital:
Funds available for use in financing daily business activities.

Operating Expense:
Any expense incurred in the normal operation of a business. This is distinguished from capital expenditures, which are disbursements that are capitalized and depreciated over a period of years.

Operating Income:
Income generated in the ordinary course of business. For savings associations, income generated by the customary lending and deposit-taking business.

Operating Losses:
Losses incurred in the normal operation of a business.

Option:
A right to buy or sell specific securities or properties at a specified price within a specified time. (1) Call option: The right but not the obligation to purchase a specific amount of a specific commodity or security at a specified price before a specified date. The seller (writer) grants such right to the buyer of the call. (2) Put option: The right to sell a specific amount of a commodity or security to the writer of the put at a specific price on or before a specific date. The buyer of a call or put pays to the seller (writer) a “premium” for being granted the right. There are options on actual securities or commodities as well as options on futures contracts.

Option buyer (Holder):
A person who holds the rights granted by the option contract.

Option Seller (Writer):
A person who, in exchange for receiving the premium, agrees to assume the opposite side of an option contract at a fixed price any time prior to the contract’s expiration date.

Originate a Loan:
To make or issue a loan; the process whereby a lender qualifies a borrower, appraises the collateral, processes all documents, advances funds, and places the loan on its books.

Originating Depository Financial Institution (ODFI):
The institution that receives an ACH transaction instruction from its customer and forwards the transaction to the ACH operator.

Origination Fee:
A lender may charge an origination fee that is additional to any mortgage points you pay. Origination fees are the lender's charge for funding your mortgage with a mortgage broker. The process of funding your loan is called origination.

Outage:
The interruption of automated processing systems, support services or essential business operations which may result in the company’s inability to provide services for some period of time.

Out-of-The-Money:
An option where the strike price exceeds market for a call and is less than market for a put.

Outsourcing:
The practice of having an outside entity perform all or part of a business operation previously handled in-house.

Over-Collateralization:
Providing collateral in excess of what is needed to support the principal amount of secured debt. It is viewed as using two separate loan pools. One pool provides sufficient cash flow to support the debt; the other pool subsidizes cash flow shortfalls for loans with losses or delinquencies.

Overdraft:
A draft or check written for an amount that exceeds the funds in the account on which the check is drawn. An overdraft, if not covered immediately by the writer of the check, essentially becomes a borrowing.

Overnight Money:
(1) Any money that is replaced daily. (2) Funds loaned by one financial institution to another overnight, including but not limited to the federal funds market. A means for firms to earn interest on undrawn funds in their operating account at the end of the business day.

Over-the-Counter/Field Deposit:
Collection system in which funds are received and deposited by local operating units in the field in the form of cash, checks, or credit card vouchers.

P

P & I:
Abbreviation for principal and interest. This is customarily used to describe the regular monthly checks that the servicer pays to the registered owner of the mortgage-backed securities.

Paid-In-Capital:
The amount of capital in excess of the par value of common stock contributed to a corporation by its owners.

Paper Gain Or Loss:
An expression for unrealized gains or losses on securities in a portfolio, based on comparison of current market quotations and the original costs.

Par Value:
(1) The value assigned to a share of stock by the issuer at the time the stock is first offered for sale. The par value may be more or less than the market value. (2) The value of a bond or note at maturity. (3) The face value of a security.

Partially Amortizing Loan:
A loan in which the periodic payments cover all of the interest charges but only part of the principal, therefore an unpaid balance is left when the loan matures.

Participation:
(1) Ownership by two or more lenders or investors of all or a portion of a single mortgage or a package of mortgages. (2) The cooperative origination by two or more lenders of a single, usually large, mortgage loan.

Participation Certificate (PC):
A document that describes a package of loans and the portion that is being bought or sold.

Participation Loan:
(1) A loan made by one lender, known as the lead lender, in which one or more other lenders, known as participants, own a part interest. (2) A loan originated by two or more lenders. (3) A loan having two or more banks as creditors.

Pass-through:
This term, as used for mortgage-backed securities, signifies that the interest and principal payments due and/or paid on the underlying mortgages are passed through to the holders of the securities on a pro rata basis.

Pass-through Securities:
Securities that convey ownership of a fraction of each mortgage in a pool of mortgages backing the security. Each security owner shares proportionally the interest and principal payments generated by the underlying pool of mortgages.

Passbook Account:
A savings account that normally requires no minimum balance, or a nominal minimum balance of perhaps $50 to $100, no minimum term, no specified frequency of deposits, and no notice or penalty for withdrawals. A periodic statement mailed to the depositor has generally replaced the actual passbook, in which transactions are recorded.

Passbook Loan:
A loan secured by funds in a savings account on deposit with the same association originating the loan. The pledged funds may not be withdrawn during the life of the loan.

Past Due:
An account on which payment has not been made according to the terms of the loan document.

Payables:
A bookkeeping term for any accounts or notes payable.

Payable Through Draft (PTD):
A payment instrument resembling a check that is drawn against the payor, not the bank, for which the payor has a period of time in which to honor or refuse payment.

Payee:
The party to which a check is made payable.

Payment Cap:
A limit on the amount that the monthly payment can increase. A periodic cap limits the amount of the increase at each adjustment period. A lifetime cap limits the amount that the monthly payment can increase during the term of the loan. A potential peril of payment caps is negative amortization. In the case of an adjustable-rate mortgage with a payment cap, rising interest rates may cause the loan payment to be insufficient to cover even the interest portion of the scheduled payment. In this case, the unpaid interest may be added to the mortgage loan principal, if the loan agreement permits.

Periodic Rate Cap:
The periodic interest rate cap is the maximum amount the loan rate can change on an adjustable-rate mortgage loan on the anniversary date. ARM loan rates are often reset once a year after an initial period. A lifetime cap often exists. A lifetime cap limits the maximum loan rate that can be charged.

Payoff:
The complete repayment of loan principal, interest, and any other sums due. Payoffs result from either installment payments over the full term of the loan or lump sum payments, including payments made on the sale of the underlying collateral.

Payor:
The party that issues a check.

Pension Fund:
A fund set up to collect regular premiums from employees and/or their employers, invest those premiums safely and profitably, and pay out a monthly income to employees who retire after reaching a specific age and length of service.

Permanent Mortgage Loan:
A mortgage that is not a construction loan. Typically permanent mortgage loans are fully amortized for a period of 20 years or more. However, this classification also includes balloon mortgages and short-term mortgage loans that are not construction loans.

Personal Check:
A check drawn on a depository institution by an individual against the individual’s own funds, as opposed to a check drawn against a business account.

Personal Identification Number (PIN):
A sequence of alphanumeric characters that identifies someone accessing an electronic information system.

Planned Amortization Class (PAC):
The PAC feature of a security creates a reserve or sinking fund that attempts to ensure the planned maturity for the bond or CMO tranche. Therefore, the payments on a PAC security are virtually insulated from prepayment risk.

Pledged Assets:
Assets pledged as collateral security against liabilities.

Pledged Deposits:
Deposits to which a security interest has been attached or perfected by a creditor. Also called loans on deposits and share loans.

Pool:
A large group of mortgages which back a mortgage security.

Pooling-of-Interest Method:
A method of accounting for a merger of two or more similar business entities. The criteria for using the pooling method are discussed in APB Opinion No. 16. In the pooling-of-interest method, assets, liabilities, and capital of the combining associations are added together on a line-by-line basis without any adjustments for current market value. The current carrying value (typically, historical costs adjusted for amortization of premiums and depreciation and accretion of discounts) of each asset, liability, and capital account of the disappearing association is added to the corresponding account of the surviving association. In the reporting period in which the merger occurs, income and expense is reported as though the entities had been combined for the entire period.

Portfolio:
Holdings of securities by an individual or entity. A portfolio may contain any marketable or potentially marketable investment such as bonds, mortgages, debt securities, equity securities, etc.

Position:
Having a position in a futures contract means to have bought or sold a contract that has not been offset.

Positive Gap:
An excess of assets repricing during a period of time over liabilities repricing during the same period; an asset sensitive position.

Positive Pay:
Also known as match pay, a service used to combat check fraud. The bank pays only those checks with specific serial numbers and dollar amounts. When using Positive Pay service, you tell the bank what checks you issued; as those checks are presented for payment, if the checks match, the bank pays the items. If a check is presented for payment that does not match the dollar amount of the check you issued, that item becomes an exception. You then have the opportunity to review the exceptions and make a final pay or not pay decision.

With Reverse Positive Pay, the bank provides you with a file of checks presented for payment on a daily basis. This file is generally available through the Internet and/or by fax. You then use this file to match against checks that have been issued, you then determine if any checks should be returned.

Prearranged Payments or Deposits (PPD):
An Automated Clearing House (ACH) format companies use to effect a transfer of funds to or from a consumer account.

Pre-Authorized Debit:
A payment method in which the payor approves in advance the transfer of funds from the payor's bank account to the payee's bank account. he payee initiates the transaction.

Pre-Authorized Draft/Check:
A transaction in which the payor authorizes the payee to draw a draft/check against the payor's account.

Pre-Encoding:
The encoding of the dollar amount on the MICR line prior to depositing.

Preferred Deposits:
Deposits of states and political subdivisions in the U.S. that are secured or collateralized as required under state law.

Preferred Stock:
Capital stock with preferences or special rights attached. For example, a stockholder may have a preferred position to receive dividends and/or proceeds in liquidation. Preferred stock typically yields a stated rate of interest, dividends, that may be cumulative or noncumulative. Preferred stock may be redeemable by the holder or nonredeemable.

Premium:
(1) The amount, often stated as a percentage, paid in addition to the face value of a note or bond to adjust the yield to market. (2) A fee charged for the granting of a loan - points. (3) The price paid for an insurance contract. (4) A product given free or sold at discount, offered as an inducement to the public to open or add to a savings account, or to purchase other specified products or services. (5) The price paid by the buyer of an option contract.

Prenotifications (Prenotes):
Optional zero-dollar entries that are sent to the Automated Clearing House (ACH) system to verify instructions prior to sending live entries.

Prepayment:
A payment made before its due date. For example, a 30-year mortgage may be prepaid after ten years if the mortgagor sells the property and the purchaser does not assume the mortgage. Borrowers typically prepay loans when interest rates fall and they can obtain cheaper financing.

Prepayment Clause:
A provision in a promissory note stating the amount a borrower may repay ahead of schedule without incurring a penalty.

Prepayment Penalty:
A fee assessed by a lender on a borrower who repays all or part of the loan principal before it is due. The prepayment penalty compensates the lender for the loss of interest that would have been earned had the loan remained in effect for its full term.

Presentment:
The delivery of a check to the payor's bank.

Present Value:
The discounted value of a certain sum to be paid in the future, based on the theory that cash received today is worth more than the same amount of cash received in the future.

Prepaid Interest:
Prepaid interest is the interest that you pay the lender in advance, often when you close on a loan. If you close a loan before the end of the month, the lender will require you to pay interest for the number of days until the end of the month. This is one form of prepaid interest. Analyzers that calculate prepaid interest assume the loan closing date is the midpoint of a 30-day month. As a result, prepaid interest is calculated for 15 days. The IRS recognizes points that you pay at loan closing as prepaid interest. One point equals 1% of the loan amount. If you meet a checklist of requirements, the IRS allows you to deduct these points in the first year of your mortgage loan.

Preparedness:
Activities, programs, and systems developed prior to a disaster that are used to support and enhance mitigation of, response to, and recovery from disasters.

Pre-positioned Resource:
Material (i.e. equipment, forms and supplies) stored at an off-site location(s) to be used in business resumption and recovery operations.

Prevention:
The process of planning for and/or implementing controls to prevent incidents and manage risks by decreasing the potential for incidents or the affects thereof which may threaten the assets of the organization

Price:
The amount of money a seller receives for goods or services sold. Price is the amount of money actually received by the seller, not necessarily the amount originally asked for or the face value. In the buying and selling of bonds and mortgages, price is stated as a percentage of the face value of that instrument. For example, if sold at par, the price is 100 percent of the face value; a premium price could be 105 percent; and a discount price could be 95 percent of face value.

Prime Rate:
The interest rate charged by leading banks to there most secure customers. The prime rate tends to be a yardstick for general trends in interest rates. The interest on adjustable rate loans is sometimes stated in terms of the prime rate. For example, the rate of an adjustable rate loan may be stated as fifty basis points (0.5%) over prime.

Principal:
(1) The amount of funds borrowed. (2) At closing, the face amount of a loan. (3) The amount of debt, exclusive of accrued interest, remaining on a loan.

Principal-Only:
An account that does not charge interest on the remaining balance, so that payments are credited to principal only.

Principal-Only Strip (P/O):
A security from which the interest coupons have been separated. The owner of a P/O strip of a mortgage pool receives only the principal payments on the cash flow of the underlying mortgages.

Private Mortgage Insurance (PMI):
Private mortgage insurance is an insurance policy that a residential mortgage lender requires of the borrower if the loan-to-value (LTV) ratio of the home is greater than 80%. Mortgage insurance protects the lender from the risk that the borrower may default on the loan. Federal law requires lenders to notify borrowers when the loan-to-value ratio drops below 80%. Mortgage insurance premiums vary, but generally range from $1,000 to $5,000 a year for an average priced home.

Cancellation at 80% LTV
Under HPA, consumers have the right to request cancellation of PMI when they pay down their mortgage to the point that it equals 80 percent of the original purchase price or appraised value of their home at the time the loan was obtained, whichever is less. Consumers need a good payment history, meaning that they have not been 30 days late with your mortgage payment within a year of your request, or 60 days late within two years. Financial institutions may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.

Automatic Termination at 78% & 77%
Under HPA, Financial institutions or servicers must automatically cancel PMI coverage on most loans, once a consumer pays down their mortgage to 78 percent of the value if consumers are current on their loan. If the loan is delinquent on the date of automatic termination, financial institutions must terminate the coverage as soon thereafter as the loan becomes current. Financial institutions must terminate the coverage within 30 days of cancellation or the automatic termination date, and are not permitted to require PMI premiums after this date. Any unearned premiums must be returned to you within 45 days of the cancellation or termination date.

For high risk loans, financial institutions or servicers are required to automatically cancel PMI coverage once the mortgage is paid down to 77 percent of the original value of the property, provided consumers are current on your loan.

Final Termination at 50%
Under HPA, if PMI has not been canceled or otherwise terminated, coverage must be removed when the loan reaches the midpoint of the amortization period. On a 30-year loan with 360 monthly payments, for example, the chronological midpoint would occur after 180 payments. This provision also requires that the borrower must be current on the payments required by the terms of the mortgage. Final termination must occur within 30 days of this date.

Processing Float:
The delay between the time the payee or processing site receives a check and the time the check is deposited.

Profit and Loss Statement:
A summary listing a firm’s total revenues and expenses within a specified period of time. Also called a statement of operations or an income statement.

Proof of Deposit (POD):
A bank procedure for assigning availability to a check based on time of deposit and endpoints. Also called item-by-item, this is the method most banks use to assign availability.

Promissory Note:
A written promise to pay a specific sum of money to a specified party under conditions mutually agreed upon. Also called a note, promise, or bond.

Proprietary Mutual Funds:
Those funds where the savings association, its affiliates, or its subsidiaries act as investment advisor to the fund.

Prospectus:
A written offer to sell property or a security that provides a detailed description of what is being sold, including its characteristics and quality.

Prospectus Supplement:
A document supplementing the Prospectus, disclosing pertinent information relating to the specific series of securities that are being issued. It includes stated maturities, repayment periods under different scenarios, specific financial assumptions as to the composition of the underlying collateral, the capitalizations of the issuer, and other terms relevant to the series.

Provisional Credit:
The granting of credit to a payee when a check is deposited subject to final settlement of the item.

Provision for Loan Losses:
A charge to expense for loan losses.

Purchase Method:
A method of accounting for a business combination as the acquisition of one enterprise by another. The criteria for using the purchase method are discussed in APB Opinion No. 16. In an acquisition accounted for under the purchase method, the assets and liabilities of the disappearing association must be recorded on the books of the surviving entity at fair value. The fair value of an asset is generally its market or appraised value. The fair value of liabilities is generally their present value using an appropriate discount rate. The carrying values of the capital accounts of the disappearing association are not carried forward onto the books of the surviving association. To the extent possible, the cost of the acquisition must be allocated to each identifiable asset or liability being acquired. Identifiable assets can be tangible (such as securities or mortgage loans) or intangible (such as core deposit base). Any excess of the cost of the acquisition over the fair value of the identifiable assets and liabilities is recorded as goodwill.

The adjustments to record purchased assets at fair value due to interest rate fluctuations are reported as a direct adjustment to assets. Adjustments to purchased deposits are reported on SC715, Unamortized Yield Adjustments on Deposits; adjustments to any other liability are reported as a direct adjustment to the liability.

Purchase-money Mortgage:
A mortgage where the purpose of the loan is to purchase the property securing the loan.

Purchased Credit Card Relationships:
The premium paid to acquire established credit card accounts from a financial institution. Buyers pay a premium over the dollar value of the credit card accounts themselves in order to acquire the customer loyalty in an established line of business.

Push-down Accounting:
A method of accounting used when an entity changes ownership. The purchase cost to the new owner is pushed down to the entity, thereby marking all assets and liabilities to market. This is also known as new basis accounting. At the date of acquisition, the purchased entity is given a new basis, which is valued at market.

Put Option:
A buyer acquires the right to sell a specific security, at a specified strike price, at any time before the expiration of the option.

Q

Qualified Thrift Lender (QTL):
A savings institution that qualifies for low cost advances from its Federal Home Loan Bank by virtue of having at least a certain percentage of its assets in housing-related investments. Institutions may use the HOLA QTL test or the Internal Revenue Service tax code Domestic Building and Loan Association (DBLA) test.

R

Rate of Return:
The measure of income from or profitability of an investment.

Rate-Sensitive Asset:
An asset that will experience a change in its market value over some specific time period due to changing interest rates in the market.

Rate-Sensitive Liability:
A liability that will experience a change in its market value over some specific time period due to changing interest rates in the market.

RCPC Items:
Checks drawn on banks served by Federal Reserve Regional Check Processing Centers (RCPCs).

Receiving Depository Financial Institution (RDFI):
The financial institution that receives an Automated Clearing House (ACH) transaction for one of its customers.

Recovery Window:
A period of time in which time sensitive business operations must be resumed.

Recovery:
The process of planning for and/or implementing recovery of less time sensitive business operations and processes after critical business functions have resumed.

Real Estate:
Land and all physical property attached to the land. Includes all physical substances below, upon, or attached to land; thus houses, trees, and fences are classified as real estate. All else is personal property.

Real Estate Investment Trust (REIT):
An organization, usually corporate, established for the accumulation of funds for investing in real estate holdings, or the extension of credit to others engaged in real estate construction. These funds are usually accumulated by the sale of shares of ownership in the trust.

Real Estate Loan:
A loan fully secured by real estate, regardless of how the proceeds will be used.

Real Estate Mortgage Investment Conduit (REMIC):
A mortgage securities vehicle authorized by The Tax Reform Act of 1986. The REMIC rules authorize a new entity (a REMIC) to hold commercial or residential mortgages and issue securities representing interests in those mortgages. The REMIC itself generally is exempt from Federal income tax, and the income from the mortgages held by the REMIC is taxed to the holders of the REMIC regular and residual interests.

Real Estate Owned (REO):
A term frequently used by lending institutions to describe ownership of real property, generally acquired as a result of foreclosure.

Receivables:
Accounts receivable owned by a business. These may be pledged as collateral for a loan secured from a bank or other financial institution, known as factored receivables, and classified as a secured commercial loan.

Receiver/Receivership:
A party appointed by a court or the FDIC to manage property subject to litigation, or the property and affairs of a bankrupt financial institution. The receiver maintains and manages the property in the interest of lenders or creditors until a final disposition of the property is made. A receivership ends the corporate existence of an institution; it removes the institution from its owners, who lose their equity interest.

Recorded Investment in a Loan:
The principal balance of the loan less direct write-downs, adjusted for related discounts or premiums and other yield adjustments. Carrying value before deducting valuation allowances.

Recourse:
The rights of a holder in due course of a negotiable instrument to force prior endorsers to meet their legal obligations by making good the payment of the instrument if dishonored by the maker or acceptor. The holder in due course must meet the legal requirements of presenting and delivering the instrument to the maker of a note or acceptor of a draft, and must find that this legal entity is in default.

Recovery:
The collection of money on a loan that you previously charged-off.

Refinancing:
Refinancing is a means of replacing high-interest debt with a loan that has a lower interest rate. But it can also be done in order to switch from a fixed to variable rate, or vice versa, or to eliminate a balloon payment. A cash-out refinancing is one that involves you paying off your loan and borrowing an additional amount. The entire loan amount is secured by a mortgage lien on your home.

Regulation CC:
A U.S. Federal Reserve Bank regulation that covers procedures regarding collecting, depositing, granting availability, and returning checks and payable through drafts.

Regulation D:
A Federal Reserve Bank regulation that imposes uniform reserve requirements on all depository institutions with different levels of reserves for different types of deposits.

Regulation E:
A U.S. Federal Reserve Bank regulation that establishes the rights, liabilities, and responsibilities of parties to consumer-related electronic funds transfers (EFT) and protects consumers involved in Automated Teller Machine (ATM), Automated Clearing House (ACH), and credit card transactions.

Regulation FD (Fair Disclosure):
A new disclosure rule, deals with the problem of issuers making selective disclosure of material nonpublic information to analysts, institutional investors, or others, but not to the public at large. Although analysts play an important role in gathering and analyzing information, and disseminating their analysis to investors, we do not believe that allowing issuers to disclose material information selectively to analysts is in the best interests of investors or the securities markets generally. Instead, to the maximum extent practicable, we believe that all investors should have access to an issuer's material disclosures at the same time. Regulation FD, therefore, would require that: (1) when an issuer intentionally discloses material information, it do so through public disclosure, not through selective disclosure; and (2) whenever an issuer learns that it has made a non-intentional material selective disclosure, the issuer make prompt public disclosure of that information.

Regulation J:
A U.S. Federal Reserve Bank regulation that establishes the procedures, duties, and responsibilities for check collection and settlement through the Federal Reserve system.

Regulation Q:
A U.S. Federal Reserve Bank regulation that prohibits depository institutions from paying interest on corporate demand deposit accounts.

Regulation X:
Extends to borrowers the provisions of regulations governing the extension of credit by brokers and dealers (Regulation T) and by banks and other lenders (Regulation U) for the purpose of purchasing or carrying securities. 

Registration Statement:
A document containing a prospectus and other information required by the SEC in transactions involving public offerings, such as the issuance of CMOs. The registration statement enables a series or, in the case of a shelf registration, several series of securities to be offered.

Reject Items:
Checks that are rejected by a bank's automated processing equipment.

Release:
(1) The discharge of property from a mortgage lien. (2) A written statement that an obligation has been satisfied.

Repetitive Transfers:
Repeated Fedwire transfers in which the debit and credit parties and transaction description remain the same and only the amount and date of the transfer changes.

Reporting Period:
The period for reporting the statement of operations and activity of an entity. This may be any number of days or months, normally one, three, six, or twelve months. The reporting period for the TFR is three months. The reporting period for Cost of Funds is one month.

Repossession:
The reclaiming or taking back of items purchased on an installment sales contract on which the buyer has fallen behind in payments and consequently defaulted.

Repriced at Maturity:
An asset or liability that carries a fixed interest rate during its term and, therefore, cannot reprice until maturity.

Repricing:
A feature of some specific assets and liabilities, where the interest rates (and possibly other associated features) change, based on predetermined terms and schedules. This feature may occur periodically or only once.

Repurchase Agreement (REPO):
A financial transaction in which an organization borrows money by selling securities and simultaneously agreeing to buy them back later at a higher price, generally less than 30 days. Repurchase agreements are commonly called “repos”, and they function similarly to a secured loan with the securities serving as collateral. In a resale agreement, the organization, in effect, loans money by buying securities and agreeing to sell them back to the borrower later at a higher price. In either case, the difference between the bought and sold price of the securities constitutes the yield on the transaction.

Request for Information (RFI):
A formal request that a company uses to confirm that use of a service provided is justified or to solicit ideas on how to solve a particular business or operational problem.

Request for Proposal (RFP):
An official request or format used to facilitate selection of a service or goods provider.

Resale Agreement:
A financial transaction in which an organization lends short-term money by buying securities and simultaneously agreeing to sell them back later at a higher price.

Reserve:
(1) A valuation allowance. (2) A portion of retained earnings that has been set aside for the purpose of assuming liabilities. (3) Cash set aside to absorb losses or contingencies that have not yet occurred but are foreseen.

Reserve Requirements:
The portion of deposits in transaction accounts that member banks are required to maintain with a Federal Reserve Bank.

Residual:
(1) Defined in 12 CFR Part 567.1 as any balance sheet asset that represents an interest, including a beneficial interest, created by a transfer of financial assets that qualifies as a sale under GAAP and that exposes the institution to a credit risk that exceeds a pro rata share of the institution’s claim on the transferred assets. The transfer of assets may be through securitization or otherwise; the credit risk may be directly or indirectly associated with the transferred assets; and the exposure to credit risk may be through either subordination provisions or other credit enhancement techniques.

Response:
The reaction to an incident or emergency in order to assess the level of containment and control activity required.

Restoration:
The process of planning for and implementing full-scale business operations which allow the organization to return to a normal service level.

Restructured Debt:
Debt that has been restructured by adding to the outstanding principal balance or by modifying the terms of the debt. Restructured debt involves debt of borrowers who may or may not be experiencing financial difficulty.

Resumption:
The process of planning for and/or implementing the recovery of critical business operations immediately following an interruption or disaster.

Retail Lockbox:
Lockboxes characterized by a large number of relatively small-dollar remittances, usually from consumers.

Retained Earnings:
An equity capital account comprised of accumulated unallocated profits from the current and all prior reporting periods. Retained earnings are the profits that are neither paid out in cash dividends to stockholders nor used to increase other equity accounts.

Return on Assets:
A financial measurement of how efficient a business is in using its assets. Return on assets is the ratio of net income divided by average total assets.

Return on Equity:
A measure of how effective a business has been in investing its net worth. Return on equity is expressed as a ratio, calculated by dividing net income by average equity.

Return Item:
A check which the drawee bank rejects and returns to the depository bank.

Return On Investment:
The rate, usually expressed on a bond equivalent basis, needed to equate the present value of future cash flows with a given purchase price for that issue. It assumes that periodic cash distributions can be reinvested at the same rate.

Revenue:
All earnings received from selling a firm’s product or service during a given period.

Revenue Bonds:
Issued by state and local governments whereby the revenues from a project, such as a toll bridge, repay the borrowing. In contrast to a general obligation bond backed by the taxing power of an issuer.

Reverse Positive Pay:
A service that transmits to the issuing company a file of checks presented for payment that the company matches to its register data for check fraud control. The company contacts the financial institution if any items are to be returned.

Reverse Repurchase Agreement (Reverse Repo):
A borrowing arrangement between a customer who owns securities and a securities dealer in which the borrower/investor sells the securities to a dealer with an agreement o buy back for a specific price at a specific time.

Revolving Credit:
A line of credit extended to customers to use as often as desired up to a certain dollar limit. The line of credit may be paid in full upon receipt of a monthly statement or paid off in several installments, in which case an interest charge is added.

Risk-Controlled Arbitrage:
A method used to fund long-term assets with short-term liabilities, using a hedge to reduce interest-rate risk. For example, using repurchase agreements (short-term) to purchase mortgage-backed securities (long-term) and using a futures contract to hedge against rising interest rates.

Rollover:
The practice of reinvesting capital and interest of one investment into a substantially identical new investment.

Routing Transit Number (RTN):
The number that is part of the MICRO line of a check or payable through draft that allows the depository bank to route the check back to the drawee bank.

Rule of 78:
The Rule of 78 is a method of allocating pre-computed interest to time periods. The total interest on a loan is pre-computed. This total interest is considered earned in proportion to the periodic time balances. The Rule of 78 provides a straight-line approximation of compound interest. This approximation is close where the term is short and the interest rates are low, but becomes increasingly biased in favor of early recognition of income as the interest rate and/or the term of the loan increases. The largest difference occurs about 1/3 of the way through a loan. The Rule of 78 was designed solely for loans that are paid off with a series of equal payments equally spaced. For a loan payable in 12 equal installments, interest is allocated as follows: 12/78 of the interest is considered earned in the first month, 11/78 in the second, 10/78 in the third, and so on.

S

Safety Factor:
The difference between net income from collateral and the payment of interest on a funded debt.

Sale and Servicing Agreement:
In secondary market transactions, a contract under which the seller/servicer agrees to supply, and the buyer to purchase, loans from time to time. The contract sets forth the conditions for the transactions and the rights and responsibilities of both parties.

Sale-leaseback:
The sale of property that is then leased back to the seller.

Sales Draft:
An instrument that arises from using a bankcard that obligates the cardholder to pay money to the card issuer.

Sallie Mae:
Student Loan Marketing Association (Sallie Mae) in 1973 the Federal Government established Sallie Mae to provide federally guaranteed student loans originated under the Federal Family Education Loan Program (FFELP)

Salvage:
An attempt to recover some portion of a loan that has been written off the bank’s books.

Same-Day Settlement:
Fed rule designed to improve competition in check collection services. It requires a drawee bank to settle in same-day funds by the close of Fedwire on checks presented by 8 a.m. local time.

Sasser:
A SAIF-insured institution that has a bank charter and, therefore, that we do not regulate.

Satisfaction of Judgment:
The legal procedure followed when a debtor pays the amount due as determined by the court in a judgment.

Savings Account:
Money that is deposited in a depository institution, normally not subject to withdrawal by check. Savings accounts usually bear interest.

Savings Association Insurance Fund (SAIF):
A fund, administered by the FDIC, insuring deposits of member savings associations up to $100,000 per depositor. SAIF was established by FIRREA to replace the FSLIC as the insurer of savings associations.

Savings Certificate:
Evidence of the ownership of a savings account typically representing a fixed amount of funds deposited for a fixed term at a specified rate of interest.

Savings Liability:
The aggregate amount of an association’s deposits, including earnings credited to such accounts, less redemptions or withdrawals.

Seasoned Loan:
A loan that has been on the association’s books long enough to demonstrate that the borrower’s credit is sound.

Second Lien:
A lien subordinate to the first. 

Second Mortgage:
A mortgage that has rights subordinate to the first mortgage (the proceeds from a foreclosure sale must pay the first mortgage before any funds can go to repay the second).

Secondary Market:
The market for reselling outstanding securities, opposite of primary market in which newly created securities are sold.

Secured Creditor:
A creditor whose obligation is backed by collateral.

Secured Debt:
Any debt for which some form of acceptable collateral has been pledged.

Securities:
Any documents that identify legal ownership of a physical commodity or legal claims to another’s wealth.

Securitize:
To put in the form of a security. For example, Freddie Mac securitizes a savings association’s loans when they pool the loans into a participation certificate.

Securitization:
A financing technique in which a company issues securities backed by selected financial assets.

Security:
(1) The collateral given, deposited, or pledged to secure the fulfillment obligation or payment of a debt. (2) An instrument that provides evidence of debt or of rights to share in earnings or distribution of property.

Security Ratings:
Ratings placed on securities according to the degree of investment risk incurred by the purchaser.

Segregated Account:
Funds set aside to meet specific obligations. Usually applies to cash set aside to meet drafts drawn under a letter of credit issued by the savings association; may also apply to funds set aside to honor checks certified by the savings association.

Self-Liquidating:
Describes an asset that can be converted into cash or subject to the total recovery of invested money over a period of time.

Sensitivity Analysis:
Another term for gap analysis, an evaluation of an association’s make-up, revealing the areas in which it is exposed to the risk of changing interest rates. 

Serial Bond Issue:
Bonds of a single issue that mature on staggered dates rather than all at once. The purpose of a serial bond issue is to help the issuer retire the bonds in small quantities over a long period.

Service Charges:
The explicit fees or prices charged for services that financial institutions provide.

Servicing Assets:
Benefits recognized by an entity undertaking a contract to service loans and other financial assets. Servicing includes collecting principal, interest, and escrow payments from the borrowers; paying taxes and insurance from escrowed funds; monitoring delinquencies; executing foreclosure, if necessary; temporarily investing funds pending distribution; remitting fees to guarantors, trustees, and others providing services; and accounting for and remitting principal and interest payments to the holders of beneficial interests in the financial assets.

Settlement Dates:
Dates of ACH transactions that determine the availability of funds.

SFAC:
Statement of Financial Accounting Concepts issued by the Financial Accounting Standards Board.

SFAS:
Statement of Financial Accounting Standards issued by the Financial Accounting Standards Board. Also called FASB Statements. 

Share Loan:
A loan secured by funds on deposit at a financial institution. One purpose of a share loan is to preserve interest due on deposits by not withdrawing the funds until the date on which the interest payment is due or the account matures.

Shared-Appreciation Mortgage (SAM):
A home-financing technique where the borrower receives a mortgage rate that is lower than the prevailing rates. The borrower must agree to give the lender a share of the profits from the eventual sale of the property. A SAM has payments that are based on a normal (typically 30- year) amortization schedule, but the loan becomes due and payable at an earlier date (typically not later than at the end of 10 years). A SAM has an interest rate below that on a conventional mortgage and a contingent interest feature, where at either the sale or transfer of the property or the refinancing or maturity of the loan, the borrower must pay the lender a share of the appreciation of the property securing the loan.

Shareholder:
The owner of shares of equity in an organization. The owners of a corporation.

Shelf Registration:
A type of Registration Statement, pursuant to Rule 415 of the SEC, that authorizes a certain principal amount of securities to be issued, in whole or in parts, in the future, thereby spreading the issuance dates over a period of time.

Short:
(1) The sale of a futures contract. (2) A trader who has a short position in a commodity.

Short Hedge:
A hedge transaction in which futures contracts are sold and then purchased; a short hedge protects the hedger against interest rate increases, the major risk faced by financial institutions.

Short-Term Debt:
An obligation that is usually due within one year.

Short-Term Fixed-rate Tranches:
CMO tranches that have fixed rates and expected maturity of five years or less.

Short-Term Planned Amortization Classes (PACs):
CMO tranches that have fixed rates, a prioritized repayment schedule within certain prepayment speeds, and expected maturity of five years or less. Targeted Amortization Classes (TACs) are considered to be substantially similar to PACs for reporting purposes.

Short-Term PAC Support Tranches:
CMO tranches that have fixed rates, expected maturity of five years or less, and are part of a CMO structure that contains a PAC or TAC tranche(s).

Sight Draft:
An instrument payable on demand that is usually presented in combination with other documents in a letter of credit or documentary collection transaction.

Signature Cards:
The cards or electronic representations on file at a financial institution that contain the signatures of authorized check and document signers.

Simple interest:
Simple Interest is an interest computation in which interest is equal to the principal balance times the interest rate per period times the number of periods. Under simple interest, interest is not charged on interest.

Single-family Dwelling:
A housing unit designed for occupancy by one individual or family.

Sinking Fund:
The obligation to retire debt instruments according to a predetermined schedule.

Smart Cards:
Stored value cards. Plastic cards with embedded integrated computer chips capable of storing data, including monetary value, that can be electronically replenished.

Society for Worldwide Interbank Financial Telecommunications (S.W.I.F.T.):
The major international financial telecommunications network that transmits international payment instructions as well as other international financial instruments or messages.

Special Redemption:
Special redemptions are designed to allow the issuer to retire a security earlier than scheduled, precluding interest from accruing during the remaining period. The amount of principal redeemed is limited to the amount that would have been retired at the next scheduled payment date.

Specific Valuation Allowance:
A valuation allowance representing an amount classified as a loss on specific assets.

Spread:
(1) The difference between interest income and interest expense. (2) The simultaneous purchase of one futures contract and sale of another, either different contract months or underlying instruments. One does this to try to profit from differing rates of change in different contract months or contracts, often due to changing market factors, such as, rising or falling rates, shifts in yield curve.

Standard Prepayment Assumption:
A commonly used prepayment model based on an assumed monthly rate of prepayment of the then current principal balance of a pool of new mortgage loans.

Standby Letter of Credit (L/C):
A type of letter of credit issued to ensure the financial performance of a bank's customer to a third-party beneficiary and is drawn upon only in the event of non-performance.

Stop Payment:
An instruction by a payor to the drawee bank to not pay a check when presented.

Strike Price:
The price at which the holder of the call or put may exercise his right to purchase or sell the underlying futures contract. Synonymous with exercise price.

Strip:
A hedge transaction which involves selling or buying the same futures contract across several delivery months, such as, selling T-Bills for June, September, and December at the same time. The objective is to lengthen the effective hedging period.

Strip Certificate:
A certificate showing ownership of a fractional share of stock that can be converted into a full share when presented in amounts equal to a full share.

Strip Hedge:
The selling of a series of futures contracts with different maturities. The purpose is to lock in interest costs that vary based on the contract settlement date.

Structured Securities:
Debt securities with derivative-like characteristics that are issued by corporations and government sponsored enterprises (GSEs), including Freddie Mac, Fannie Mae, and the Federal Home Loan Banks. Structured notes take various forms and often contain complex rate-adjustment formulas and embedded options, such as, calls, caps, and collars.

Student Loan Marketing Association (Sallie Mae):
A government-sponsored private corporation created to increase the flow of funds into loans by facilitating the purchase of student loans in the secondary market.

Subordinate Organization:
Any corporation, partnership, business trust, association, joint venture, pool, syndicate, or other similar business organization in which a savings association has a direct or indirect ownership interest. There is an exception when that ownership interest qualifies as a pass-through investment pursuant to 12 C.F.R. § 560.32 and the savings association designates it as such.

Subordinated Debt:
Obligations whose liquidation preference is inferior to that of other debt.

Subprime Lending:
Credit extended to borrowers exhibiting higher (frequently much higher) risk of default characteristics than traditional bank lending customers. Risk of default may be measured by traditional credit risk measures (credit/repayment history, debt-to-income levels, etc.) or by alternative measures such as credit scores. Subprime borrowers represent a broad spectrum of debtors ranging from those who have exhibited repayment problems due to an adverse event, such as job loss or medical emergency, to those who persistently mismanage their finances and debt obligations. Subprime lending does not include loans to borrowers who have had minor, temporary credit difficulties but are now current.

Subsidiary:
Any organization controlled by another organization. Subsidiary and Equity Investment Rule defines subsidiary as a consolidated subsidiary and refers generically to organizations under the control of a parent organization as subordinate organizations.

Substandard:
Describing conditions making a risk less desirable than normal for its class.

Super-floater:
An asset that has a variable rate that adjusts by a multiple of a change in an interest-rate index. Thus if the super-floater adjusts at 1.25 times the change in LIBOR, a decrease of two basis points in LIBOR would cause a decrease of 2.5 (2 x 1.25) basis points in the super-floater. Super-floater is most commonly used to describe CMO tranches that reprice based on a formula containing a multiple of the three-month LIBOR rate.

Super Floating Rate Tranches:
CMO tranches that have rates adjusting at some multiple of, and in the same direction as, an index such as LIBOR.

Super Principal Only (P/O) Tranche:
A long-term zero coupon, deep discount PAC that is the only support tranche of a PAC or TAC CMO.

Supervisory Authority:
The official or officials authorized by law to ensure that associations comply with the governing charter, statutes, and by-laws.

Supervisory Merger:
The takeover of one savings association - typically an insolvent association - by another with our oversight.

Suspense Account:
A general ledger account used to hold over unposted items so the business day can balance at closing.

Swap:
An agreement between two parties to exchange a series of cash flows, one representing a fixed rate and the other a floating rate. In a currency swap, two parties contract to exchange the cash flows - of equal net present value of specific assets or liabilities that are expressed in different currencies. In the classic - widely known as plain vanilla - interest-rate swap, two parties contract to exchange interest service payments, and sometimes principal service payments, on the same amount of indebtedness of the same maturity with the same payment dates - one providing fixed interest-rate payments in return for variable-rate payments from the other and vice versa. Basis swaps - floating rate swaps based on different indices, such as prime against LIBOR - and combined interest rate and currency swaps, circus swaps, are also common. There are numerous variations involving many counterparts that result in highly complex swap transactions.

Sweep Account:
A bank account that automatically transfers excess balances into an overnight interest-earning investment with the same bank.

T

Tangible Capital:
Our capital regulations define tangible capital as equity in accordance with GAAP, adjusted for unrealized gains and losses on certain available-for-sale securities, less investments in nonincludable subsidiaries, less goodwill and other intangible assets, less certain nonqualifying equity instruments, plus minority interest in includable consolidated subsidiaries, plus non-withdrawable deposits of mutual associations. Our capital rule requires savings associations to hold a ratio of 1.5% tangible capital to tangible assets.

Target Balance:
Average collected balance that must be maintained to compensate a bank for all the services provided to the company. Targets are often set monthly and monitored daily.

Tax Payment Format (TXP):
An Automated Clearing House (ACH) format that is a modified version of the CCD+ format designed for the electronic payment of taxes to state and federal governments.

Tax Shield:
Tax shield is the amount of taxes you may save from a tax deduction or tax credit that you would otherwise pay without the deduction or credit. To calculate tax savings from a deduction, multiply the amount of the deduction by your marginal income tax rate. At a marginal income tax rate of 27%, a $2,000 qualified contribution to a company retirement plan may save you $560 in taxes. And if you paid $10,000 in home mortgage interest, you may save up to $2,700 in income taxes if you are in the same tax bracket. Your deduction for interest expense on mortgage and home equity debt may be limited. You may wish to consult a financial or tax adviser. For businesses, tax savings are realized on such deductible expenses as lease payments, interest on loan payments, and depreciation expense.

TBA:
Abbreviation for future pools to be announced which are bought and sold for future settlement. To be announced refers to interest rates and due dates which are determined at a later date. Trading in these securities is done on a yield basis.

Teaser Rate:
The initial below-market interest rate offered on an adjustable-rate mortgage in return for the borrower sharing the risk of rising rates during the course of the loan.

The Federal Financial Institution Examination Council (FFIEC):
The U.S. government entity that coordinates the activities of the Fed, the Officer of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS) to ensure consistency in the implementation of regulatory policy.

The Federal Reserve Act:
The federal law that set up the Federal Reserve Bank and directs it to conduct monetary policy in such a way as to maximize employment, promote price stability, and maintain moderate long-term interest rates.

The Glass-Steagall Act (also known as the Banking Act of 1933):
The federal law that prohibits financial institutions engaged in deposit taking and lending from underwriting, and vice versa.

The Interstate Banking and Branching Efficiency Act (1994):
A federal law that phased out prohibition of barriers against multi-state branching established by the McFadden Act.

The McFadden Act (1927):
A federal law that established state boundaries as the primary limits for bank expansion, prohibiting banks from accepting deposits, and engaging in branching across state lines without state government approval.

The Office of the Comptroller of the Currency (OCC):
The federal government office that grants charters to, regulates, supervises, and examines national banks.

The Office of Thrift Supervision (OTS):
The federal government office that oversees thrifts and savings and loans in the same way the Office of the Comptroller of the Currency (OCC) oversees national banks.

The Securities and Exchange Commission (SEC):
The U.S. government regulatory entity empowered to regulate the selling of securities.

Threshold Concentration:
Depository balance levels are allowed to build up to a predetermined level. Then most or all funds are transferred to the concentration account.

Threshold Rate:
Represents the rate established by management policy for a fixed-rate asset category above which new assets may be added and below which lower yielding assets will be sold. Should be tied to policies related to dollar volume and maturity limits.

Thrift Institutions Advisory Council:
A council that advises the Fed Board of Governors in matters pertaining to savings and loan associations, mutual savings banks, and credit unions.

Tick:
Refers to a change in price, either up or down. Synonymous with minimum fluctuation.

Time Deposit Accounts:
A type of interest-bearing account in which the depositor cannot withdraw funds in advance of an agreed upon time without incurring a penalty.

Time Draft:
An instrument that is similar to a sight draft but is not payable until a specified future date.

Time-Share Loan:
A loan that enables a buyer to take part in a form of real property ownership that grants each of several owners the exclusive right to occupy a housing unit during a specified time period each year. These loans are reported as nonmortgage loans on the TFR.

Time Value:
A portion of an option premium unrelated to buying and selling at a more favorable price.

Trade:
A term that indicates the consummation of a security transaction, either a purchase or a sale.

Trade Date:
The date a security transaction is actually executed.

Trading Account:
Securities that you intend to hold principally for the purpose of selling them in the near term. Trading activity includes frequent buying and selling of securities for the purpose of generating profits from price fluctuations. Securities in a trading account must be listed on financial reports at market value.

Tranche:
Also called a class. CMOs generally have several bond classes; each bond is considered a separate tranche or class, each with different maturities and/or interest rates and accrual structures.

Transaction Exposure:
The vulnerability of a company's earnings accounts including receivables or payables to changes in exchange rates from the time a transaction is recorded until it is completed.

Treasury Bills (T-Bills):
Short-term discount debt instruments issued by the U.S. Treasury in maturities of 13, 26, and 52 weeks. Prices for T-bills are stated as a discount to the par value. For example, a T-bill with a price of 99.65 is selling for 99.65% of its par value. T-bills are auctioned weekly and used to pay operations of the federal government. T-bills are considered to be among the safest and most liquid investments.

Treasury Bonds (T-Bonds):
Coupon securities issued by the U.S. Treasury with interest paid semi-annually in original maturities of ten to 30 years.

Treasury Management Information System (TMIS):
Configurations of hardware, software, and information sources designed to assist in the collection and formatting of information and routine calculations.

Treasury Notes (T-Notes):
Interest-bearing securities issued by the U.S. Treasury with original maturities of two to ten years.

Treasury Securities:
"Full faith and credit" obligations of the U.S. Government issued by sale at periodic auctions, and delivered and cleared electronically.

Troubled Debt Restructuring:
A troubled debt restructuring occurs when the financial institution provides the borrower certain concessions that it would not normally consider. The concessions must be in light of the borrower’s financial difficulty, and the objective must be to maximize recovery of the institution’s investment. Troubled debt restructures are often, but not always, the result of legal proceedings or negotiations between the parties.

Treasury Bill:
A U.S. government short-term security sold to the public each week at a discount, maturing in 91 to 182 days.

Treasury Note:
A U.S. government long-term security, sold to the public, maturing in one to five years.

Treasury Stock:
Stock reacquired by the same company that issued it with the intention of subsequent resale or transfer, such as an Employee Stock Option Plan.

U

Underwriting:
Underwriting means different things to different financial-services industries. For mortgage lenders, it is the process of evaluating a loan prospect to see if they have the financial capacity to repay the loan. For investment bankers, it is the process of arranging a sale of stocks or bonds to investors. For insurance companies, it is the process of calculating a premium for a specific pool of insurees with certain risk characteristics such as age or health.

Unlimited Mortgage:
An open-end mortgage; a mortgage not limited to a fixed amount.

Unrealized Gain or Loss:
A loss that you have not yet realized because the related asset has not yet been sold or disposed of.

U.S. Rule (simple interest - no compounding):
Where negative amortization occurs, the U.S. Rule method can be used in place of the actuarial method to avoid charging interest on interest. The U.S. Rule approach, in effect, establishes an account for interest accrued but not paid. No interest is charged on the balance of this account. Payments are applied first to interest. If the payment is greater than the interest due, principal is reduced. If not, the interest account is increased.

Payment schedules on such loans are designed so that the balance in this account is fully paid off over the term of the loan. In cases where there is negative amortization, this payment will be lower than with the actuarial method. If there is no negative amortization, U.S. Rule and the actuarial method will produce identical results. The term simple interest is often used interchangeably with U.S. Rule. With U.S. Rule, payments are usually applied first to interest, then principal.

V

Valuation Allowance:
A contra-asset established against receivables and investments based on the amount expected to be collected. Valuation allowances are established for covering probable and estimably credit losses.

Variable Rate:
An interest rate on an asset or liability that can be repriced periodically when market interest rates change, without regard to maturity. Also called “floating rate”. 

Voting Stock:
Stock for which the holder has the right to vote in the election of directors, the appointment of auditors, and other matters brought up at the annual stockholders’ meeting. Most common stock is voting stock; most preferred stock is nonvoting stock.

W

Warehouse Loan:
A short-term line of credit used by mortgage bankers to fund loans prior to sale. Financial institutions that hold loans as collateral until collateral is delivered to the investor usually provide this type of credit.

Warm-site:
A data center or office facility which is partially equipped with hardware, communications interfaces, electricity and environmental conditioning capable of providing backup operating support.

Weighted Average Coupon (WAC):
The WAC is calculated as a weighted-average of the underlying mortgage interest rates as of the issue date, using the balance of each mortgage as the weighting factor. A WAC is needed only when the underlying mortgages have varying interest rates.

Weighted Average Maturity (WAM):
The weighted average is the remaining term to maturity of the underlying mortgages at the issue date, using the balance of each mortgage as the weighting factor.

Weighted Average Remaining Term:
The remaining term to maturity over time as the security ages. This number can be calculated at any point in time. Sometimes weighted average remaining term is mistaken for the weighted average maturity, which is the remaining term at the issue date. The weighted average remaining term must be recalculated each month and is impacted by prepayments.

Whole Loans:
Mortgages that are not divided into participation units or pooled to back securities or participation certificates.

Whole Pools:
A mortgage certificate where ownership is represented by an entire pool of mortgage loans, as opposed to a fractional interest in a pool.

With Recourse:
An agreement where the seller assumes a stated level of risk for the performance of the asset sold; the purchaser has the right to endorse a claim against the seller for sustained damages in the case of nonperformance.

Without Recourse:
An agreement where the purchaser accepts all risks in the transaction, and gives up rights to any recourse.

Wraparound Mortgages:
A second mortgage that wraps around, or exists in addition to, a first or other mortgage(s). The lender assumes the existing mortgage(s) thus continues to pay the monthly installments at the original lower interest rate(s), and also loans the purchaser additional money to meet the higher purchase price specified in the contract. The rate charged to the purchaser on the total mortgage amounts is higher than the original rate. This type of mortgage allows the terms of the original mortgage to be satisfied, compensates the seller for the sale of his or her investment, and allows the buyer to purchase a home. The wraparound lender benefits from the below-market rates of the existing mortgage that the lender has assumed while charging the purchaser a higher rate on the full loan. Wraparound mortgages are also used as a method of obtaining refinancing when an owner wants to increase the amount of mortgage outstanding. In this case the lender assumes the existing mortgage and the borrower enters into a loan in an amount covering both the old mortgage and the additional funds disbursed.

Write-off:
An asset or portion of an asset charged off as a loss because it is determined to be uncollectable.

Write-up:
Increasing an asset’s book value by adjusting the value of an asset to correspond to an appraisal or market value. Unrealized gains.

X

Regulation X:
Extends to borrowers the provisions of regulations governing the extension of credit by brokers and dealers (Regulation T) and by banks and other lenders (Regulation U) for the purpose of purchasing or carrying securities. 

Y

Year-end Adjustment:
A ledger account modification entered at the close of a fiscal period. The modification might be the result of an accrual, prepayment, physical inventory, reclassification, policy change, audit adjustment, or other entry.

Yield:
Yield is used to measure the investment performance of a security. For mutual funds, yield is generally measured as dividends as a percentage of the price of a fund share. For bonds, yield is often calculated in one or more of three major ways: current yield, yield-to-maturity and yield-to-call. Current yield is the bond coupon rate divided by current price. It is an expedient but incomplete method for calculating yield. Yield-to-maturity (YTM) is the expected yield an investor earns for holding a bond to maturity. YTM includes coupon income and any premium or discount the investor pays. Yield-to-call is the expected yield an investor earns if the bond is held until its first call date, when it is assumed to be called by the company that issued the bonds. Difference in bond yields is called the yield spread or credit spread. Yield spread measures the extra yield a bond must pay to compensate for additional risk over a risk-free bond. For example, if a 10-year corporate bond earns a yield of 6.25% and a 10-year U.S. Treasury bond yields 5.75%, the yield spread is 50 basis points.

Yield Adjustment:
A portion of the purchase price of an asset that is an adjustment to interest over a specified period, typically over the life of the asset. A yield adjustment is set up in a separate account from the asset and is accreted to income at a rate similar to interest. Examples: Discounts and premiums, loan fees, prepaid interest, etc.

Yield to Maturity:
The rate of return earned by a debt instrument held to maturity. The rate of return calculates interest payments reinvested at the coupon rate, and factors in capital gains or losses.

YTD:
Year-to-date. Generally designates that income figures are for the year up to a given date, rather than for a shorter period such as a month or a quarter.

Z

Zero Balance Account (ZBA):
A disbursement bank account on which checks are written even though the balances in the accounts are maintained at zero. Debits are covered by a transfer of funds from a master account at the same bank.

Zero-Coupon Bonds:
Debt instruments that are issued at a deep discount to face value, pay no interest and accrete to par as they approach maturity.

Zero Rate:
A type of asset or liability that bears no interest. Examples: Commercial checking accounts and vault cash.

IRS

401(k) Plan:
A retirement savings plan that allows employees of for-profit corporations and non-profit organizations to reserve money for retirement on a pre-tax basis through a plan sponsored by their employer. The Federal government has created special tax advantages for contributions made into 401(k) plans, including, but not limited to, allowing contributions deducted directly from employee pay before taxes are calculated and allowing the earnings on funds in the employee's 401(k) account to grow tax-deferred until withdrawn at retirement.

403(b) Plan:
A tax-deferred retirement plan offered by nonprofit organizations, public schools, and municipal agencies. Generally, 403(b) plans follow 401(k) rules for contributions, rollovers, and withdrawals. Employees contribute to the plan via payroll deduction. Income taxes are deferred on the contributions and any plan earnings until the employee withdraws the funds. Withdrawals may begin without penalty at age 59 ½, however become mandatory after age 70 ½. Investment choices in 403(b) plans are typically more limited than 401(k) plans.

457(b) Plan:
The 457(b) plan is a non-qualified deferred compensation plan for states, counties, cities, agencies, and their political subdivisions or agencies. Deferred compensation is a contractual agreement between an organization and an employee wherein the organization makes an unsecured promise to defer the compensation of the employee to some future date for services currently performed by the employee. Annual contributions are made through salary deduction up to $8,500 or 33 1/3% of salary, whichever is less. Distributions are made upon retirement, termination of employment, extreme financial hardship or at death to the named beneficiaries.

12(b) 1. Fees:
Fees collected by mutual funds for the sale and promotion or other activity connected with the distribution of their shares. Typically 12(b)1 fees are between ½% to 1% of net assets managed, up to a maximum of 8.5% of the offering price per share.
Return to Top of Page

ADP/ACP Test:
In accordance with IRS regulations, the IRS requires that a 401(k) plan must pass Actual Deferral Percentage/Actual Contribution Percentage (ADP/ACP) Tests each year. Generally, the Actual Contribution Percentage (ACP) Test is the same as the Actual Deferral Percentage (ADP) Test, except employer matching and after-tax employee contributions are tested instead of deferral contributions. -- Based on three different, yet specific circumstances, the ADP of the Highly Compensated Employees generally may not exceed either 2%, or 2 times or 125% of the Average ADP of the non-Highly Compensated Employee.

After-Tax Contributions:
Although many plans do not offer this option, this is an amount or percentage of pay an employee elects to contribute from pay, after taxes are calculated and withheld. Also known as "voluntary" contributions.

Age Weighted Plans:
Age weighted plans are profit sharing plans in which plan contributions are allocated in proportion to some multiple of compensation and age or years of service. The result is that a lesser amount is contributed to young employees and larger contributions are made to older employees with higher salaries (presumably including the owner).

Aggressive Growth Funds:
A type of mutual fund that focuses more on increasing the value of the original investment than on the price stability or income. Many aggressive growth funds invest in smaller, less established companies that have the potential for long-term growth, but that are potentially more susceptible to changing market conditions, than larger more stable companies. Aggressive Growth Funds involve more investment risk than more conservative investments.

Annual Compensation:
The amount defined in a retirement plan that usually includes salary, commissions, bonuses, and overtime paid to the plan participant during the plan year. For the self employed, annual compensation means earned income as defined by the plan in the plan's Basic Plan Document.

Annuity:
A contract that guarantees fixed or variable payments over time. Some investors buy annuities to provide them with a stream of income in the future.

Balanced Funds:
Balanced funds strive to keep the proportions of stocks and bonds in their portfolios stable, or at least predictable, in different market climates. Because of the general appeal of these funds as core holdings, many balance funds also restrict themselves to conventional sorts of investment instruments. Most of the stock holdings resemble the S&P 500 index, while the bond holdings often track broad indexes of investment-grade bonds.

Capital Appreciation:
The increasing value of a stock or other investment. In a mutual fund for example, as the value of the underlying securities in the fund increases, the fund's share price increases, and the value of the investment appreciates.

Capital Gains & Capital Losses:
When shares are sold at a higher price than what was paid for them, a profit, or capital gain is experienced. When shares are sold at a lower price than what was paid for them, a loss, or capital loss is experienced. Taxes are treated differently in a retirement account. In a retirement account capital gains are treated as ordinary income when distributed.

Contribution Period:
The period for which matching employer contributions and non-elective employer contributions are calculated.

Company Match:
An employer contribution made to a qualified retirement plan that is given to participants who make an employee contribution. Generally, although the type and amount of company contributions vary, a company may match $0.50 for every $1.00 the employee contributions.

Defined Contribution Plans:
Retirement plans that may require specific rates of contribution, but that do not guarantee a specific retirement benefit.

Dividend:
In a mutual fund, a distribution of investment income earned by the fund.

Diversified Emerging Markets Stock Fund:
Diversified Emerging Market Stock Funds invest in the stocks of companies located in developing countries. A diversified emerging markets fund is generally one that spreads its investments all over the world, and does not concentrate its investments in any one region. Developing countries with active stock markets are found in Asia, Latin America, Europe, the Middle East and Africa.

Dollar Cost Averaging:
A system of investing a regular amount of money, usually in stocks or mutual funds, at fixed intervals, regardless of the price of the investment at the time. The goal of dollar cost averaging is to buy more shares at lower, as opposed to higher, prices, although there is no guarantee that this, and not the opposite, will occur.

Eligible Employees:
Employees who have met the criteria for participation in the 401(k) plan. Eligibility criteria can include attainment age 21, tenure and/or hours worked during a specific year.

Equity Income (Value) Funds:
Typically a conservative stock fund that seeks to achieve reasonable income by investing primarily in income-producing stocks and bonds. Generally, the primary objective of an equity income fund is dividend income and growth of income with capital appreciation as a secondary objective. Sensitive to the domestic economic cycle, equity income funds have traditionally performed well during periods of steady economic expansion and not so well during periods when economic growth is stagnant.

ERISA:
The Employee Retirement Income Security Act of 1974, as amended.

Expense Ratio:
The percentage of the fund's average net assets that is paid out in expenses. Such expenses include 12b-1 fees, management and administration fees and all the fees associated with the fund's daily operations, except brokerage costs. Federal law requires that the investment returns of mutual funds be reported net of these expenses.

Fixed Income Funds:
A type of mutual fund that seeks to achieve consistent income with reduced risk over time by investing in corporate and municipal bonds and U.S. government obligations, such as Treasuries.

Forfeitures:
Sometimes there is money that is left in a retirement plan when an employee terminates his or her employment before being fully vested [a forfeiture]. Such forfeitures may be used by the plan to defray plan expenses or reallocated among the remaining participants in the retirement plan, depending on the plan provisions.

Global Funds:
Global funds are mutual funds that invest in stocks of companies all over the world, including the United States.

Government Bond Funds:
Government bond (general) funds hold most of their assets in Treasury Bonds and/or agencies of the U.S. government. Government bond (treasury) funds hold most of their assets in debt issued by the U.S. Treasury.

Growth Funds:
Growth Funds are mutual funds that invest primarily in stocks that have shown or are expected to show quick earnings and revenue growth. They typically do not declare very sizeable dividend payments and may be more risky investments than most other stocks.

Growth & Income Funds:
Growth & Income Funds generally split the difference between growth funds and equity income funds. This type of mutual fund invests for both long-term capital appreciation from stocks as well as regular dividend income from stocks and bonds. Depending on their specific objectives, some of these funds are weighted more heavily toward growth, others toward income.

Hardship Withdrawal:
If allowed by the plan, participants may request a withdrawal from their retirement plan account, their elective deferral contributions and/or their employer's match contributions, to address a "hardship". For a withdrawal to qualify as a "hardship", it must satisfy a two-part test: #1- the withdrawal must be requested due to the participant's immediate and heavy financial need; and #2- the withdrawal must be necessary to satisfy such need.

Reasons for hardship withdrawals can include: (i) - coverage of uninsured medical expenses for the participant, a spouse or eligible dependents; (ii) - purchase of a primary residence; (iii) - payment of post-secondary tuition costs for the participant, a spouse or eligible dependents; (iv) - payments necessary to avoid foreclosure or eviction from the participant's principal residence. The plan sponsor is responsible for determining whether a certain situation constitutes an emergency.

Highly Compensated Employee:
Employees who during the "determination" (current) year or the "look-back" (preceding) plan year, owned more than 5 percent of their company; and/or during the "look-back" year, earned more than $85,000 (as indexed).

Income Fund:
A mutual fund that invests in securities that produce dividend income.

Inflation Risk:
The chance that the value of investments won't keep up with inflation. If the rate of return is lower than inflation, prices will rise faster than the value of the savings.

Index Fund:
A mutual fund that invests in stocks or bonds that make up a widely used market index, such as the S&P 500 Index. The goal of an index fund is to mirror market performance.

Individual Retirement Account (IRA):
A tax-deferred plan that permits individuals with earned income (and their spouses), to put aside contributions for retirement. For normal IRA's, there is no tax on the earnings until they are distributed, and the contributions are deductible within certain limits.

International Funds:
A mutual fund that invests primarily in securities issued by non U.S. companies.

IRS Form 5500:
A form used to report information concerning employee benefit plans, including 401(k) retirement plans, to the Internal Revenue Service, Department Of Labor and the Social Security Administration. This form must be completed and filed annually.

Lifestyle Funds:
Lifestyle funds were designed for investors who do not wish to actively manage their portfolios. They are funds that seek a specific overall investment goal by adjusting their assets among stocks, bonds and money market instruments or by investing in different kinds of mutual funds. These funds might include asset allocation funds, which regularly shift money between asset classes to achieve consistent performance in varying market conditions.

Lump Sum Distribution:
A single distribution that represents the total amount due to an individual from their retirement plan.

Load:
A sales charge added to the price of a mutual fund share. Mutual funds that don't have sales charges are called no-load funds.

Large Company Growth Funds:
Large company growth funds generally invest in large companies that have higher than average earnings, growth rates, price/earning ratios, and price/book ratios.

Large Company Value Funds:
Large company value funds generally invest in large companies that have lower than average earnings, growth rates, price/earning ratios, and price/book ratios.

Money Purchase Plans:
A money purchase plan is a defined contribution plan in which the employer commits to contribute a fixed percentage of payroll on behalf of eligible employees each year. Common percentages are between 10% and 15%. Because contributions to a money purchase plan are so regular, an employee can make a rough projection of a retirement benefit. This is more difficult to do with other types of defined contribution plans because the amounts of contributions in other plans are more variable. The contribution obligation in a money purchase plan is inflexible. Because of this, money purchase plans are generally considered to be "rich" plans and inappropriate for a business that lacks stable profits. Other types of plans are better suited to allow a business to make large contributions in good years and small contributions in bad years.

Mutual Fund:
The most common type of investment used in retirement plans. A professionally managed pool of stocks, bonds and other securities, which are owned "mutually" by the funds investors in proportion to their investment in the fund. The amount of risk varies among the different investments in the fund. In this way, your investment is diversified. There are four primary and basic types of mutual funds: growth, income, growth & income, and money market.

Net Asset Value (NAV):
The price or market value at which an individual share of a security or mutual fund could be sold. In the case of a mutual fund, the net asset value is calculated daily and is determined by adding up the value of all the securities and cash in a fund's portfolio, subtracting liabilities, if there are any, and dividing that number by the number of shares the fund has issued. Except for money market funds, the share value will usually change daily.

No-Load:
A mutual fund that does not charge a sales fee for mutual fund transactions, such as buying and selling shares, is called a "no-load" fund.

Non-Discrimination Testing:
A series of tests designed to ensure that participation in a plan represents employees at all levels of income within an organization. The purpose of these tests is to prevent a disproportionate amount of contributions from being given to Highly Compensated Employees.

Normal Retirement Age (NRA):
The age at which a plan participant can take a retirement distribution from their retirement plan. The NRA can vary from plan to plan, but is normally age 65.

Pre-Tax Contribution:
An amount or percentage of pay an employee elects to direct from pay, before taxes are calculated and withheld, and contribute to his or her retirement plan account.

Profit Sharing Plan:
A profit-sharing plan is a defined contribution plan whereby the employer contribution made into the plan is a discretionary decision made by the employer each year. This may be accomplished as follows: (1) The plan may indicate that contributions will be a percentage of the net profits of the business. (2) The plan may allow the employer to declare a contribution every year. (3) The plan may set performance goals for the business, providing for a contribution only if the goal is met. Once the contribution is determined it is divided among all the employee accounts, usually in proportion to compensation. Profit-sharing plans are attractive because first, the business is not obligated to make contributions, second, employees have an incentive to improve their performance because good performance of the business may translate into a contribution to their retirement.

Prospectus:
A thorough, written description of a security, including mutual funds, as well as the legal selling document. It describes the fund's history and investment objective. It also provides information on the background of the fund managers, a financial statement and an explanation of fees required in the sale or management of the fund or security.

Profit Sharing Contribution:
An annual discretionary contribution made by the employer after an employee satisfies the plan's eligibility requirements. The profit sharing amount is determined at plan year-end. Profit sharing contributions will be allocated generally in the ratio that a participant's eligible compensation bears to the total compensation paid to all eligible participants for the plan year.

Qualified Match (QMAC):
Matching contributions that are 100% vested at all times and are subject to the same restrictions on distributions as salary deferral contributions. These contributions are considered qualified because they can be used to help pass the ADP/ACP tests.

Qualified Retirement Plan:
A retirement plan that may (1) permit contributions by both employees and/or the employer and allows some kind of tax benefits (such as deferring payment of taxes on some contributions and earnings); (2) restrict distribution of the money so it is used in retirement, except under certain circumstances. Both defined benefit plans (such as a pension plan) and defined contribution plans (such as a 401(k) plan) may be qualified retirement plans.

Real Estate Fund:
A mutual fund that primarily invests in securities related to real estate, such as Real Estate Investment Trusts ("REITS") and the stocks of companies in the real estate business.

Rollover:
Moving money from one tax-qualified plan to another qualified or individual retirement account in order to prevent immediate tax liability.

Safe Harbor (401k) Plan:
A variation of the conventional 401(k) Plan that allows plan sponsors to fundamentally "buy" their way out of the Actual Deferred Percentage (ADP) and Actual Contribution Percentage (ACP) tests describes the Safe Harbor 401(k) Plan. In certain cases, a "Safe Harbor" contribution also satisfies the minimum contribution requirement for plans that are or might be expected to become "top-heavy"(True for all in 2002).

Salary Deferral:
Contributions deducted from an employee's compensation on a pre-tax basis and invested in a qualified retirement plan.

Small Company Growth Funds:
Small company growth funds generally invest in relatively unknown small companies that have higher than average earnings, growth rates, price/earning ratios, and price/book ratios.

Small Company Value Funds:
Small company value funds generally invest in relatively unknown small companies that have lower than average earnings, growth rates, price/earning ratios, and price/book ratios.

Stable Value Fund:
The Stable Value Mutual Fund is the "Bank CD" of mutual funds. Instead of a CD from a bank, however, money is invested primarily in Guaranteed Investment Contracts (GICs) from insurance companies. This concept results in the most conservative option available to retirement plans. Stable Value Funds are not available outside of qualified retirement plans.

Stock Plans:
An employer may adopt a retirement plan that holds stock of the employer. One main purpose of a stock plan is to allow employees to share in the potential growth in company stock. This gives employees an incentive to exert their best efforts, similar to a profit-sharing plan. But unlike a profit-sharing plan, a stock plan gives employees a stake in the performance of the business even after the contribution is made.

Tax-Deferred:
Term describing an investment whose accumulated earnings are not subject to taxation until the investor takes possession of them.

Top Heavy Plan:
A plan in which the key employees own more than 60 percent of the assets in the plan. A top-heavy plan is required to provide minimum contributions equal to the highest contribution percentage of any key employee up to a maximum of 3% of compensation to all non-key employees. A top-heavy plan has a minimal vesting schedule.

Vesting:
Depending on the provisions of the plan, employees, after having been with an employer for a specified period of time, are "vested" in that fund or plan.

Vested Account Balance:
Amount of funds held in a qualified retirement plan that a participant can receive as a distribution when he or she terminates employment with the employer who sponsors the plan. A participant is always fully vested in his or her salary deferrals and the earnings on those contributions. The vesting for employer contributions and earnings on employer contributions is based on the years of service a participant works for the employer.