Regulatory classification of credits drives reserves, capital, reporting and, in practice, the workout strategy.
Pass. Performing, with no identified weakness.
Special mention. Potential weaknesses deserving management’s close attention, which if uncorrected may result in deterioration. Not adversely classified, but a signal.
Substandard. Inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral, with a well-defined weakness jeopardising liquidation of the debt.
Doubtful. Collection in full is highly questionable and improbable, though pending factors may strengthen the credit.
Loss. Uncollectible and of such little value that continuance as an asset is not warranted. Charged off.
Nonaccrual. Interest recognition ceases where payment is ninety days past due unless well secured and in the process of collection, or where full payment of principal and interest is not expected.
Documentation. Current financial information, an updated collateral valuation, a global cash flow analysis including guarantors, and a written action plan with dates. Classification disagreements with examiners are won or lost on that file.