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Glossary of Terminology

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The Math:

See the following article for a more-detailed explanation of terms and concepts used within PrecisionLender

 


The Terminology

Average Balance

Estimated annualized loan balance based on amortization and utilization (if applicable) over the Expected Life of the loan.

Average Equity

The amount of risk-based capital allocated to the loan.

Opportunity

In PrecisionLender an Opportunity represents a individual pricing opportunity.  An Opportunity contains all of the accounts/facilities that are currently being priced.  In other words, it is the the business that is "in front" of the lender to win right now.  Existing accounts are not part of the Opportunity in PrecisionLender.  They are part of the Relationship.  (More on Opportunities)

LGD / Loss Given Default

The amount of potential loss by the bank when a borrower defaults on a loan.  Is affected by the recovery rate and Loan-to-Value (LTV) assigned to the collateral types on the loan.  Also, for revolving exposures such as Lines of Credit or exposures with an un-drawn commitment such as Construction Loans, Usage Given Default (UGD) plays a big role in the Loss Given Default.  

Loan Loss Reserves or the Expected Loss (EL)

The Loan Loss Reserves represents the the annualized Net Income impact from the Expected Losses on a loan.  The Expected Loss or EL is simply the Probability of Default times the Loss Given Default or EL = PD * LGD.  In PrecisionLender, the Loan Loss Reserves for a loan are based upon the Risk Rating (capturing the PD), the Exposure at default ( EAD), the duration of the exposure and the amount and strength of credit risk mitigants such as Collateral and Guarantees (capturing the LGD). 

LTV

Loan to Value. A ratio of the face value of a loan (the Amount in PrecisionLender) and the current market value of the collateral securing the loan.(More on LTV and Collateral)

Margin Monitor

A Rate Sheet feature which can send an automated e-mail to a specified user when the chosen funding curve shifts in such a fashion as to cause the published rates to generate a Return on Equity below the predetermined target. (More on Margin Monitor)

Migration Matrix

A view of the migration of a credit portfolio by taking a snapshot of the risk ratings of each loan in the portfolio, and then at some point later (typically a year) later taking another snapshot.  That will reveal what % of each risk grade stayed the same or migrated up or down.  That information is then used to calculate what the loan loss provision and capital should be for each product in PrecisionLender by risk grade and duration.  So PrecisionLender uses the Migration Matrix to customize the solution for each bank.

 

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NI Delta or Net Income Delta

Difference between the projected Net Income and the Target Net Income based on the Target ROE.  This is the excess Net Income generated above the Target Return required on the allocated capital.  This is also known as NIACC or Net Income After Capital Charge.  It is often used as a part of lender compensation systems. 

Origination Channel

Origination Channel is a channel through which a loan is originated.  These can be actual channels or just reflect relative complexity.  PrecisionLender allocates Origination Expense based on the amount of the loan and the channel.  

Not all loans are originated directly by the bank.  Some come in via other channels such as a mortgage broker or a correspondent.  The origination expense for a loan may vary depending upon the Origination Channel.  Additionally, some banks may wish to make adjustments to the Target ROE based on the Origination Channel.

PrecisionLender allows for multiple Origination Channels to be defined, each with its own origination expenses and an adjustment to Target ROE.  By default, there are 3 Origination Channels (Simple, Average, and Complex), but these can be modified or deleted to suit your needs.

Origination Expense

The one time expense to originate the loan.

Participation

Used when the pricing institution wants to sell part of the deal to another institution.  This is referred to as participating a deal. (More on Participation Loans)

Regions

Smaller segments of the institution.  This could be based on geography (regions, states, counties, cities, etc.), and/or by branches or even lines of business.  Everything within PrecisionLender is configurable down to the regional level. (More on Regions)

Probability of Default (PD)

The likelihood that a specific loan will default over a specific time period.  If not specified, it is generally accepted that it is a one year PD.  This is usually based on the institution’s historical experience with loans bearing similar characteristics. 

Products

Products are the items that are priced.  Products contain all of the major assumptions related to pricing:  Target ROE, Capital Allocation, Risk Grades, Origination & Servicing Expenses, etc. (More on Products)

Rate Sheet

A collection of Rate Tables of minimum interest rates and points the institution is willing to accept based on loan amounts, credit scores and maturity. 

Relationship

In PrecisionLender, the relationship is the collection of existing loan, deposit and other accounts.  It also contains the history of opportunities related to that relationship including those that are currently being priced.  In PrecisionLender, you price Opportunities and you manage relationships.(More on Relationships)

Risk Rating

An assessment of the credit worthiness of a loan applicant.  It is based upon the history of borrowing and repayment, as well as the availability of assets and extent of liabilities.  Usually expressed using a preset matrix defined by the institution.(More on Risk Rating)

ROA

Return on Assets.  Net income / Average Assets (aka average balance or average outstanding).  

ROE

Return On Equity.  Net income / Average Equity.  

ROE Delta

The difference between the actual ROE generated and the Target ROE.

SBA 504 Loan

A product by the US Small Business Administration designed to provide financing for the purchase of fixed assets at below market prices.  The small business owner must put up at least 10% of the purchase amount.  The financial institution provides up to 50% of the funding and a Certified Development Company (CDC) provides the remaining portion, up to 40%.  Should the borrower default, the financial institution is paid first, thus reducing its risk. (More on SBA Loans)

Servicing Channels

Similar to Origination Channel, a Servicing Channel refers to the channel through which a loan will be serviced.  These may be actual channels or they might just reflect relative complexity of the servicing. The monthly servicing expense for a loan may vary depending upon the Servicing Channel and the Amount of the loan.

PrecisionLender allows for multiple Servicing Channels to be defined, each with its own monthly servicing expenses.  By default, there are 3 Origination Channels (Simple, Average, and Complex), but these can be modified or deleted to suit your needs. 

Snapshot/Scenarios

A snapshot is a method to take the scenario currently displayed and store it as a scenario within the opportunity.  You can adjust the structure or terms of an opportunity or add deposits or other fee based business and then click the snapshot button (the little camera icon).  This will store the current scenario. (More on Scenarios)

Social Associations

These allow you to track each relationship’s professional and personal connections to other relationships within PrecisionLender by tying accounts together under the Associations tab within a PrecisionLender Relationship.

Usage Given Default (UGD)

Usage Given Default is the percentage of the committed yet un-drawn balance that is assumed will be drawn in the case of a default.  This is also sometimes referred to as Loan Equivalent amount (or LEQ).  The UGD is only relevant for Payment Types that have committed yet un-drawn balances such as Lines of Credit (LOCs) or Scheduled Draws (as used for construction loans).  In PrecisionLender you can vary UGD by risk grade with a Loan Product's assumptions.  The most conservative setting is 100% - meaning that in the case of default, for the sake of determining the Exposure at Default (EAD), we should assume that 100% of the un-drawn balance will, in fact, be drawn.  In practice, this number is lower.  In fact, some studies show that UGD is higher for better credits and lower for weaker credits (some have shown ~75% of a "1" credit declining down to ~50% for a "5" credit).  This is empirical data and has been attributed to higher credits being more credit savvy or possibly having less frequent monitoring or weaker covenants.

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