Banker's Glossary


Acronym for National Association of Credit Managers.

The position of an option holder who does not also own an offsetting position in the underlying. For example, an investor who sells a call option but who does not own the underlying instrument that can be called has a naked call option or a naked call position. Also called uncovered. The opposite of covered.

Acronym for the National Asset and Liability Management Association.

National Association of Securities Dealers (NASD)
An association of broker/dealers. The association supervises and regulates the trading and the conduct of its member organizations and the licensed brokers who work for those member organizations. The NASD was created under the Securities and Exchange Act of 1934. Even though it is not a government organization, it works closely with state and federal securities regulators.

National Council on Government Accounting (NCGA)
Prior to 1984, this group and its predecessor organization were responsible for setting generally accepted accounting principals for state and local governments.

National Flood Insurance Reform Act
A Federal law that establishes requirements for flood insurance. Under the National Flood Insurance Reform Act of 1994, lenders taking an interest in real property are required to complete a standard flood hazard determination form developed by the Federal Emergency Management Agency (FEMA). Flood hazard forms must be retained in the lender’s records. If the form indicates that the property is in a designated flood hazard zone, the lender is required to have flood insurance protection. Lenders may also have notice requirement obligations for collateral located in flood hazard zones.

Natural hedges
Balance sheet hedge activity done by altering asset and/or liability repricing characteristics or volumes to reduce the entity's interest rate risk exposure without purchasing derivative hedge instruments such as interest rate swaps or futures. The opposite of natural hedging is capital markets or derivatives hedging. Note that some bankers use the term "natural hedges" more narrowly than others. As narrowly defined, a natural hedge is one in which the rate risk in one piece of customer business is offset by the rate risk in another piece of customer business. Thus a hedge involving the investment portfolio is not a natural hedge under the most narrow definition of the term.

See National Council on Government Accounting.

Negative amortization
The increase in a loan balance resulting from a situation in which the payments due from the borrower are not sufficient to cover the full amount of the interest due. The amount of interest due that is not covered by the amount of the payment is added to the unpaid principal balance of the loan. Negative amortization typically occurs during periods of high interest rates for loans with floating interest rates but fixed monthly payments.

Negative convexity
A phrase use to describe a particular type of instability in the duration of an instrument. Negative convexity means that as yields rise, duration rises and as yields fall, duration falls. Graphically, this is seen as a price/yield curve for which the price at very low and very high yields is less than the price indicated by a straight, tangent line. For an instrument with negative convexity, duration understates the interest rate sensitivity. If convexity is low, that is, if the price/yield relationship is close to a straight line, duration is stable. If convexity is high, duration is unstable. The greater an instrument's convexity, the less accurate duration will be. Callable bonds, loans, and mortgage-backed bonds typically have negative convexity.

Negative correlation
See correlation.

Negative covenant
A provision in the lender's documents that prohibits the borrower from doing something in the future. For example, a provision prohibiting the borrower from acquiring additional debt during the term of the loan.

Negative duration
(1) The name for a particular relationship between changes in the price of a debt security and changes in prevailing interest rates. When a security has negative duration, its price decreases in response to a decrease in prevailing market rates. Very few securities have negative duration. Note that the term "duration," as used in this definition, refers to modified duration. See convexity, duration and positive duration.

(2) For a financial institution, a situation in which the total duration of its assets is shorter than the total duration of its liabilities. In such cases, the duration of equity is negative. In other words, an entity with short-term assets funded by long-term liabilities will have a negative duration of equity. A financial institution that has a negative duration of equity may also be described as having a positive gap or as being asset sensitive. The theoretical equity value, but not necessarily the stock price, of a financial institution with a negative duration of equity will decrease if rates decline and increase if rates rise. Note that the term "duration," as used in this definition, refers to modified duration. See convexity, effective duration, Macaulay duration and modified duration.

Negative gap
A term referring to a liability-sensitive condition. A mismatch in which interest-sensitive liabilities exceed interest-sensitive assets.

Negative pledge
A document or a provision in a document in which a borrower agrees not to give any creditor a security interest in identified property owned by the borrower.

Negative response verification
A form of auditing account balances in which the account debtor is only requested to respond if the balance owed is not the same as the amount shown on the confirmation letter. One of two forms of direct verification.

Negative sloping yield curve
See yield curve slope.


Negotiable Order of Withdrawal (NOW)
The name of an interest-bearing checking account that banks are permitted by regulation to offer to certain customers.

Net asset value (NAV)
A mutual fund’s share value. It is calculated by subtracting total liabilities from total assets to determine net worth or equity. The equity value is then divided by the number of outstanding shares. The NAV is calculated once each day at the close of business.

Net economic value
Term favored by the Federal Banking regulators in lieu of market value of portfolio equity. The difference between the sum of the present values of all cash flows from assets and the sum of the present values of all cash flows from liabilities. This is a proxy or estimated value used for capital when the sensitivity of capital to changes in prevailing interest rates is calculated. See market value of portfolio equity and value at risk (VAR).

Net interest margin
The amount of interest income minus interest expense, usually expressed as a percentage. The net interest margin percentage is calculated by dividing interest income less interest expense by average earning assets. If interest income includes tax-free income, that income should be "grossed up" to its taxable equivalent before calculating the percentage. (To gross up tax-free income to its taxable equivalent, divide the income by one minus the marginal income tax rate.) The net interest margin expressed as a percentage of earning assets is often confused with the net spread. The spread is the difference between the average rate earned on assets minus the average rate paid on liabilities. That spread would only equal the net interest margin percentage if the dollar amount of earning assets equaled the dollar amount of interest-bearing liabilities.

Net lease
Leases that require the lessee to pay expenses. For real estate leases, see triple net. For personal property leases, a net lease is a lease that requires the customer/lessee to pay for the insurance, maintenance, and all taxes, if any, levied on the equipment.

Net margin
See margin.

Net noninterest expense
Total noninterest expense minus total noninterest income. A measure used by financial institutions to monitor the extent to which fees and other sources of noninterest income offset noninterest expenses. For a financial institution, expenses other than interest expense are almost always much larger than income other than interest income. Also called net overhead. Often expressed as a percentage of average earning assets. See noninterest income and noninterest expense.

Net overhead
See net noninterest expense.

Net portfolio value
A term used by the Office of Thrift Supervision to refer to a proxy value for an institution’s capital when the rate sensitivity of capital is measured. See market value of portfolio equity and net economic value.

Net sales
Term used to describe a firm's revenue after the amount of returns, allowances, and discounts is deducted from gross revenue from the firm's principal operations.

Net settlement
(1) For groups of financial transactions between the same counterparties, the settlement of a group of monetary transactions by delivery of only the net amount due.

(2) For derivatives, a type of arrangement between two counterparties to a financial transaction in which the parties exchange value without the delivery of the full value or an asset. FAS 133 defines net settlement to be the case in which neither party is required to deliver an asset that is associated with the underlying. This is the case in which a net amount of interest is exchanged between the parties based upon some notional amount that is not exchanged. See notional amount and underlying.

See net economic value.

Next-day settlement
The agreement of a buyer and seller to exchange the security and the payment on the first business day after the trade date. See settlement.

Acronym for net income after income taxes.

Acronym for net income before income taxes.

An informal name for 5 basis points.

An expression used to describe a mutual fund that does not impose any sales charges on investors. The term "no-load" fund is sometimes used to describe a fund without either a front-end charge or a deferred sales charge but which may nevertheless have a 12b-1 charge. However, a true no-load fund is one without any sales charges at all - front-end, deferred or 12b-1. See 12b-1 fee, back-end load and front-end load.

No-lien contract
In real estate construction, this is a contract in which the subcontractors agree to give up their rights to file mechanic’s or materialman's liens.

Nonappropriation clause
A provision in some municipal leases. The clause provides that the lease terminates without penalty to the lessee in the event that the municipal lessee fails to appropriate sufficient funds to make required lease payments during the ensuing annual or biannual budget period. Usually, this clause is only used in states where legal restrictions apply to the quantity of or to the approval process required for municipal debt. The nonappropriation clause is intended to avoid characterization of the lease as debt subject to such restrictions. This clause is almost always used in conjunction with a nonsubstitution clause.

Nonconsumer deposit account
A demand, time, savings, passbook, or similar deposit account maintained with a bank, credit union, or other financial institution that is used primarily for business purposes. A category of personal property collateral defined by the 2001 revisions to Article 9 of the Uniform Commercial Code.

Nondisturbance agreement
An agreement used in some commercial mortgage loans that are secured by interests in real estate leased to tenants. In a nondisturbance agreement, the lender promises the tenant that in the event of foreclosure, the lender will not cancel the tenant’s lease. Often, lenders have to give nondisturbance agreements to tenants in order to induce the tenants to provide the lender with subordination and attornment agreements and/or tenant estoppel letters.

Fifteen-year FHLMC MBS pools that are issued under the FHLMC 15 year-Guarantor Program. See gnome.

Noninterest expense
For a financial institution, operating expense from sources other than interest expense. The main components of noninterest expense are usually personnel, occupancy, equipment, and professional services.

Noninterest income
For a financial institution, operating income from sources other than interest income. The main components of noninterest income are fees such as deposit service charges, funds transfer fees, trust fees, brokerage fees, etc.

Receivable lending in which the borrower's account debtors are not notified of the bank's lien. (The bank may use non-notification lending but still have a provision in the loan document that allows the bank to switch to notification-based financing in the event of a default.) Under non-notification financing arrangements, payments may be sent directly to the bank by the account debtors.

Nonpossessory agricultural lien
An interest other than a security interest in farm products that secures payment or performance of an obligation for goods or services furnished in connection with a debtor’s farming operation. Arises primarily through the furnishing of goods and services or leased property that are connected with a debtor’s farming operation.

Nonsubstitution clause
A provision in some municipal leases. This lease provision stipulates that if the municipal lessee terminates the lease under a nonappropriation clause, the lessee will not use any other property performing a similar function to that performed by the property covered by the lease for the period of time covered by the lease. The nonsubstitution clause is intended to be a deterrent to termination of the lease contract under a nonappropriation clause.

Notice of adverse action
In many cases, lenders are required by law to provide applicants with timely notice of adverse action, such as denial of credit applications. This requirement applies to some loans covered by the Equal Credit Opportunity Act and to some loans covered by the Women’s Business Ownership Act.

Receivable lending with the requirement that the borrower's account debtors must be notified of the bank's lien. The payments on the accounts are then usually sent directly to the lender by the account debtors. Sometimes called notification plan.

Notional amount
The principal amount or face value of a derivative. Defined by the Financial Accounting Standards Board (FASB) in FAS 133 as the number of currency units, shares, bushels, pounds or other units specified in a derivatives contract. The notional amount is used to calculate the payments that are exchanged by the counterparties in the transaction. Market participants refer to notional principal because, unlike bonds or other conventional credit instruments, these types of derivatives do not involve an exchange of principal. Rather, the parties state the principal amount only as a basis for calculating the sizes of the interest related payments that they exchange. In this application, principal is only a reference point or idea - hence the term. Also called the notional principal balance.

Notional principal
See notional amount.

(1) The substitution of an existing debt with a newer debt.

(2) An agreement to substitute an existing party to a contract with a new party. All of the original parties to the contract must agree to the substitution.

now account
See Negotiable Order of Withdrawal.

Acronym used by the Securities Exchange Commission (SEC) and by banking and securities regulators to refer to nationally recognized statistical rating organizations. The most well known NRSROs are Standard & Poor’s and Moody’s.