Office of the Comptroller of the Currency 

Board of Governors of the Federal Reserve System 

Federal Deposit Insurance Corporation 

Uniform Agreement on the Classification and Appraisal of Securities Held by 

Depository Institutions (Agreement) 

October 29, 2013 

Page 1 of 8 

The Office of the Comptroller of the Currency (OCC), the Board of Governors of the 

Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC), 

(collectively, the agencies) are issuing this joint Agreement to depository institutions

1 [Footnote

- For the purposes of this guidance, "depository institutions" include: national banks, state-chartered banks, and 

state- and federally-chartered savings associations. End of Footnote 1.] 

to revise 

the 2004 Uniform Agreement on the Classification of Assets and Appraisal of Securities Held by 

Banks and Thrifts (2004 Agreement).

[Footnote 2 

- For the OCC, refer to Bulletin 2004-25, "Uniform Agreement on the Classification of Securities." For the Board, 

refer to SR letter 04-9, "Revised Uniform Agreement on the Classification of Assets and Appraisal of Securities 

Held by Banks and Thrifts." For the FDIC, refer to Financial Institution Letter FIL-70-2004, "Interagency Policy on 

Classification of Assets and Appraisal of Securities." End of Footnote 2.] 

These revisions replace references to credit ratings with 

alternative standards of creditworthiness consistent with sections 939 and 939A of the DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). 

Accordingly, this Agreement applies creditworthiness standards adopted in 2012 to the 

classification of securities and removes the reliance on credit ratings as a determinant of 

classification.

[Footnote 3 

- For the OCC's final rules, see 77 Fed. Reg. 35253 (June 13, 2012). For the OCC's guidance, see 77 Fed. Reg. 

35259 (June 13, 2012) and OCC Bulletin 2012-18 and OCC Bulletin 2012-26. For the Board, refer to SR letter 12-

15, "Investing in Securities without Reliance on Nationally Recognized Statistical Rating Organization Ratings." 

For the FDIC, see Permissible Investments for Federal and State Savings Associations: Corporate Debt Securities, 

77 Fed. Reg. 43151 (July 24, 2012) and Guidance on Due Diligence Requirements for Savings Associations in 

Determining Whether a Corporate Debt Security is Eligible for Investment, 77 Fed. Reg. 43155 (July 24, 2012). End of Footnote 3.] 

Specific examples are illustrated to demonstrate the appropriate application of 

these standards to the classification of securities. This Agreement should be used by depository 

institutions to assist and facilitate the classification of investment securities. 

I. The Classification of Assets in Depository Institutions 

The agencies' longstanding asset classification definitions have not changed and are 

provided in the Attachment to this Agreement. This Agreement clarifies how the unique 

characteristics exhibited by investment securities are to be interpreted within these classification 

categories. 
Page 2 of 8 

II. The Appraisal of Securities in Depository Institutions 

Fundamental credit analysis is central to understanding the risk associated with all assets 

and should be applied to investment securities as part of a pre-purchase and ongoing due 

diligence process, as discussed in regulatory guidance. Depository institutions are expected to 

perform an assessment of creditworthiness that is not solely reliant on external credit ratings 

provided by Nationally Recognized Statistical Rating Organizations (NRSRO). Such an 

assessment may include internal risk analyses and a risk rating framework, third-party research 

and analytics (which could include NRSRO credit ratings), default statistics, and other sources 

of data as appropriate for the particular security. The depth of analysis should be a function of 

the security's risk characteristics, including its size, nature, and complexity. Individual security 

analysis should form the basis of any classification determination. 

A. Investment grade debt securities 

A security is investment grade if the issuer of the security has an adequate capacity to 

meet financial commitments for the life of the asset.

[Footnote 4 

- To determine whether a security to be acquired for investment must be investment grade and the applicable 

definition of "investment grade," a bank or savings association should consult the regulations of its appropriate 

federal banking agency, e.g., national banks should look to the OCC's rules at 12 CFR part 1. For state-chartered 

financial institutions, the term "investment grade" may be defined differently across laws and regulations issued by 

each state, and therefore may be subject to restrictions on investments that are more stringent than those in 12 CFR 

part 1. In addition, for corporate investments, federal and state savings associations are required to determine if the 

security meets the investment permissibility standards under 12 CFR Part 362 of the FDIC Rules and Regulations. 

12 CFR Part 362 requires that the issuer has adequate capacity to meet all financial commitments under the security 

for the projected life of the investment. This standard is consistent with the one adopted by the OCC for national 

banks defined in 12 CFR part 1, which was revised to replace the previous definition of "investment grade." State 

and federal savings associations had to comply with the FDIC's final rule on January 1, 2013. See 77 Fed. Reg. 

43151 (July 24, 2012). Under the Federal Reserve Act (12 USC 335) and the Federal Reserve's Regulation H (12 

CFR 208.21), state member banks are subject to the same limitations and conditions with respect to the purchasing, 

selling, underwriting, and holding of investment securities and stock as national banks under the National Banking 

Act (12 USC 24 (Seventh)) and may only invest in securities to the extent permitted under applicable state law. End of Footnote 4.] 

An issuer has adequate capacity to meet 

its financial commitments if the risk of default is low, and the full and timely repayment of 

principal and interest is expected.

[Footnote 5 

- See, e.g., 12 CFR 1.2(d). Generally, assets that defer payments, even if allowed for in the instrument's contracts, 

do not meet the "full and timely" repayment standard for investment grade and typically should be classified. End of Footnote 5.] 

A "pass" rating may be supported by an appropriate credit 

analysis that documents the quality of an investment grade security, as well as ongoing analyses 

that demonstrate the obligor's continued repayment capacity. Therefore, investment grade 

securities will generally not be classified. However, examiners may use discretion to classify a 

security when justified by available credit risk information. 

B. Sub-investment grade debt securities 

Securities that do not meet the investment grade standard, as defined in applicable 

regulations, and for which the timely repayment of principal and interest is not certain, have 

investment characteristics that are distinctly or predominantly speculative and are generally 
Page 3 of 8 

subject to classification. For investment securities, the classification should be based on the 

instrument's worth as an earning asset assuming it is held to maturity. Therefore, the phrase 

"liquidation of the debt" in the classification definitions is synonymous with "payment of the 

obligation in full." Accordingly, if payment of the obligation in full is in question, it is no longer 

investment grade and management should classify the security. 

A Doubtful classification is appropriate when an asset has experienced significant credit 

deterioration and decline in fair value, but estimation of impairment involves significant 

uncertainty because of various pending factors. These factors could include uncertain financial 

data that may not permit the accurate forecasting of future cash flows or estimating recovery 

value. The use of the Doubtful classification is an interim measure until information becomes 

available to substantiate a more appropriate treatment. 

C. Classification and assessment of other types of debt securities 

Some securities with equity-like risk and return profiles can have highly speculative 

performance characteristics. When determining classification examiners should evaluate such 

holdings based upon an assessment of each instrument's facts and circumstances. This 

Agreement does not apply to securities held in trading accounts that are measured at fair value 

with changes in fair value recognized in current earnings and regulatory capital. [Footnote 6 

- For more information, please refer to the Glossary section of the FFIEC Instructions for Preparation of 

Consolidated Reports of Condition and Income, which can be found at the following URL address: 

http://www.fdic.gov/regulations/resources/call/.End of Footnote 6.] 

D. Classification of securities with credit deterioration 

Depository institutions should continually assess whether securities meet the investment 

grade standard. Throughout the term of an investment security, its credit risk profile can decline 

and improve as credit conditions change. Similarly, an institution's analysis should consider 

how potential adverse economic conditions can negatively affect an individual security. An 

institution's management expertise and the sophistication of its risk management and due 

diligence processes should be commensurate with the complexity of its investment portfolio 

holdings. 

For securities already owned: 

Depository institutions should classify a security to accurately reflect its credit risk 

profile. For example, a security may meet the criteria for an investment grade rating at 

purchase and, therefore, be considered a "pass" security. However, as credit conditions 

deteriorate and ongoing analysis confirms a weakened repayment capacity, the security 

should be downgraded to Substandard or Doubtful. In situations where the credit 

condition subsequently improves, the facts and circumstances supported by current 

analysis may warrant an upgrade to "pass." An upgrade is only appropriate following a 
Page 4 of 8 

period of sustained performance. If the security incurs credit losses,

[Footnote 7 

- Credit losses can occur throughout various stages of a security's existence and will depend on a variety of factors, 

that is, the type of instrument, the ability of the underlying payment source (for example, issuer, underlying asset, 

and obligors), and the existence of guarantees or credit enhancements. For corporate and municipal obligations, 

credit losses may represent payment defaults that the issuer does not have the financial capacity to cure. In the case 

of structured finance products, if a particular class of securities or tranches is no longer fully supported by cash 

flows from underlying assets, credit losses represent the deficiencies between remaining available cash flow and the 

principal and interest requirements. End of Footnote 7.] 

but subsequent 

analysis shows that all future contractual payments will be received, the security may 

warrant an upgrade to "pass." Notwithstanding this possibility, securities with realized 

credit losses do not conform to the investment grade standard and may be subject to 

restrictions under the agencies' permissible investment regulations or rules governing 

transfers to affiliates. In situations where credit losses are incurred and analysis does not 

support the full payment of future contractual amounts, the security cannot be upgraded 

to "pass." 

For potential purchases: 

Depository institutions may not purchase investment securities that fail to meet the 

investment grade standard as defined by applicable regulations. If pre-purchase analysis 

reveals previous credit losses in a security under consideration, regardless of its current 

performance or projected payment analysis, the security does not, and cannot, meet the 

investment grade standard.

[Footnote8 

- One exception to this rule is a security that has undergone a court-supervised legally binding restructure, which has 

performed for a sustained period following the restructure. This scenario is discussed further in the examples table. End of Footnote 8.] 

In contrast, if a security experienced credit deterioration and 

downgrades in the past, but did not sustain actual credit losses, the security's current and 

projected payment performance may indicate that the security could meet the investment 

grade criteria once more. If it is offered for sale at this point and has a history of 

sustained performance, this security would be considered eligible for purchase by a 

depository institution. 

III. Classification Approach Examples 

The table that follows outlines examples of how the agencies would apply the uniform 

classification approach to specific situations. Examiners may use discretion to assess credit risk 

and assign a classification based on current information, independent of any assigned credit 

rating. 
Pag e 5 o f 8 

Descriptio n o f Scenario : 

• Credi t deterioratio n cause d 

concern s abou t potentia l los s tha t 

l e d t o a Substandar d 

classification . 

• Credi t deterioratio n i s 

considere d temporary . 

• Subsequently , th e credi t conditio n 

improve d an d prio r concern s n o 

longe r exist . 

• N o actua l credi t losse s wer e 

sustained . 

• Securit y ha s performe d a s agree d 

t o dat e an d i s expecte d t o perfor m 

t o maturity . 

Currentl y Owned : 

Upgrad e t o "pass. " 

Potentia l Purchas e [Footnote 9 

- Depositor y institution s contemplatin g a n investmen t purchas e ar e no t expecte d t o b e knowledgeabl e o f th e 

classificatio n an d impairmen t accountin g treatmen t b y th e seller . However , al l salien t informatio n leadin g t o 

investmen t grad e determinatio n shoul d b e gathere d an d analyze d befor e a purchas e is consummated . End of Footnote 9.]: 

Eligibl e fo r purchas e a s 

investmen t grade . 

Description of Scenario: 

• Credi t deterioratio n cause d 

concern s abou t potentia l los s tha t 

l e d t o a Substandar d 

classification . 

• A n other-than-temporar y 

impairmen t (OTTI ) charg e i s 

recognize d i n earnings ; 

however , al l contractua l 

payment s wer e received . 

• Subsequen t t o advers e 

classificatio n / OTT I 

determination , th e credi t conditio n 

improve d an d prio r concern s n o 

longe r exist . 

• Curren t analysi s show s tha t al l 

futur e contractua l payment s wil l 

b e received . 

Currently Owned: 

Upgrad e t o "pass. " Potential Purchase: Eligibl e fo r purchas e a s 

investmen t grade . 
Pag e 6 o f 8 

Descriptio n o f Scenario : 

• Credi t deterioratio n cause d 

concern s abou t potentia l los s tha t 

l e d t o a Substandar d 

classification . 

• A n OTT I charg e i s recognize d 

i n earnings ; however , 

contractua l payment s ar e 

receive d afte r recognitio n o f th e 

OTT I charge . 

• Subsequently , credi t condition s 

remai n wea k an d analysi s show s 

tha t no t al l contractua l payment s 

a r e expecte d t o b e received . 

Currentl y Owned : 

Substandar d 

classificatio n remain s 

unti l issue r demonstrate s 

adequat e capacit y t o 

repay . 

Potential Purchase: 

N o t eligibl e fo r purchas e a s 

lon g a s curren t credi t 

condition s remain . 

Description of Scenario: 

• Credi t deterioratio n cause d 

concern s abou t potentia l los s tha t 

l e d t o a Substandar d 

classification . 

• Credi t losse s actuall y incurred . 

• A cour t supervise d a legall y 

bindin g restructur e o f th e 

obligation . 

• Th e issue r demonstrate d 

performance , afte r th e restructure , 

i n accordanc e wit h th e cour t 

approve d pla n ove r a n appropriat e 

tim e period . Curren t analysi s 

show s tha t al l futur e contractua l 

payment s wil l b e received . 

Currently Owned: 

Upgrad e t o "pass " afte r a 

perio d o f satisfactor y 

performance . 

Potential Purchase: 

Eligibl e fo r purchas e a s 

investmen t grad e subsequen t 

t o th e restructure . 

Description of Scenario: 

• Credi t deterioratio n cause d 

concern s abou t potentia l los s tha t 

l e d t o a Substandar d 

classification . 

• Credi t losse s actuall y incurred . 

• Subsequently , th e credi t conditio n 

improve d an d prio r concern s n o 

longe r exist . 

• Subsequen t analysi s show s tha t 

a l l futur e contractua l payment s 

wil l b e received . 

• Previousl y incurre d credi t losse s 

m a y o r ma y no t b e recovered . 

Currently Owned: 

Substandar d 

classificatio n remain s 

unti l issue r demonstrate s 

adequat e capacit y t o 

repa y base d o n sustaine d 

perio d o f performance . 

M a y b e upgrade d t o 

"pass " bu t i s no t 

investmen t grade ; 

considere d a 

nonconformin g 

investment . 

Potential Purchase: 

N o t eligibl e fo r purchase ; doe s 

n o t mee t th e criteri a fo r 

investmen t grad e du e t o credi t 

losses . 
Pag e 7 o f 8 

Descriptio n o f Scenario : 

• Credi t deterioratio n cause d 

concern s abou t potentia l los s tha t 

l e d t o a Substandar d 

classification . 

• Credi t losse s actuall y incurred . 

• Subsequently , credi t conditio n 

stabilizatio n may , o r ma y not , b e 

evident . 

• Subsequen t analysi s show s tha t 

n o t al l futur e contractua l 

payment s wil l b e received ; o r 

analysi s doe s no t clearl y sho w n o 

futur e ris k o f loss . 

Currentl y Owned : 

Classificatio n remain s a s 

lon g a s credi t analysi s 

indicate s futur e potentia l 

losses . Determin e 

appropriat e classificatio n 

base d o n credi t analysis . 

Potential Purchase : 

N o t eligibl e fo r purchase ; doe s 

n o t mee t th e criteri a fo r 

investmen t grad e du e t o credi t 

losses . 

Note : An y upgrad e i n classificatio n shoul d follo w a sustaine d perio d o f performanc e an d b e 

base d o n improvemen t i n credi t conditio n an d analysi s tha t support s al l futur e contractua l 

payment s wil l b e received . Generally , th e performanc e perio d shoul d cove r multipl e payment s 

a s determine d b y th e security' s paymen t structure : monthly , quarterly , annually . 
Page 8 of 8 

Attachment 1 

Classification Definitions 

The following definitions apply to assets adversely classified for supervisory purposes: 

• A Substandard asset is inadequately protected by the current sound worth and paying 

capacity of the obligor or of the collateral pledged, if any. Assets so classified must have 

a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They 

are characterized by the distinct possibility that the institution will sustain some loss if 

the deficiencies are not corrected. 

• An asset classified Doubtful has all the weaknesses inherent in one classified 

Substandard with the added characteristic that the weaknesses make collection or 

liquidation in full, on the basis of currently existing facts, conditions, and values, highly 

questionable and improbable. 

• Assets classified Loss are considered uncollectible and of such little value that their 

continuance as bankable assets is not warranted. This classification does not mean that 

the asset has absolutely no recovery or salvage value, but rather it is not practical or 

desirable to defer writing off this basically worthless asset even though partial recovery 

may be effected in the future. Amounts classified Loss should be promptly charged off.