Bank of Montreal 2002 Annual Report Download - page 100

Allowance for Credit Losses
Represents an amount deemed
adequate by management to
fully provide for impairment
in the existing loan portfolios.
Allowances for credit losses can
be specific or general and are
recorded on the balance sheet
as a deduction from loans.
Assets under Administration
and under Management
Assets administered or managed
by a financial institution that are
beneficially owned by clients
and therefore not reported on
the balance sheet of the admin-
istering or managing financial
institution.
Average Earning Assets
Represents the daily or monthly
average balance of deposits with
other banks and loans and secu-
rities, over a one-year period.
Bankers’ Acceptances (BAs)
Bills of exchange or negotiable
instruments drawn by a bor-
rower for payment at maturity
and accepted by a bank. BAs
constitute a guarantee of pay-
ment by the bank and can be
traded in the money market. The
bank earns a “stamping fee” for
providing this guarantee.
Basis Point
One one-hundredth of a percent-
age point.
Derivatives
Contracts whose value is “de-
rived” from interest or foreign
exchange rates, or equity or
commodity prices. Use of deriv-
atives allows for the transfer,
modification or reduction of
current or expected risks from
changes in rates and prices.
Forwards and Futures
Contractualagreementstoei-
ther buy or sell a specified
currency, commodity, equity or
financial instrument on a spec-
ified future date at a specified
price. Forwards are customized
contracts transacted in the
over-the-counter market. Futures
are transacted in standardized
amounts on regulated exchanges
and are subject to daily cash
margining.
Hedging
A risk management technique
used to neutralize or manage
interest rate, foreign currency,
equity or credit exposures.
Impaired Loans
Loans for which there is no
longer reasonable assurance of
the timely collection of princi-
pal or interest.
Innovative Tier 1 Capital
OSFI allows banks to issue
instruments that qualify as “In-
novative” Tier 1 capital. In order
to qualify, these instruments
have to be issued indirectly
through a special-purpose entity,
be permanent in nature and free
of any fixed charges. The bank
has to absorb any losses aris-
ing on these Innovative Tier 1
instruments and account for
them as non-controlling inter-
ests. Innovative Tier 1 capital
cannot comprise more than 15%
of net Tier 1 capital and the sum
of innovative Tier 1 capital and
perpetual preferred shares can-
not exceed 25% of net Tier 1
capital.
Mark-to-Market
Represents val uation at market
rates, as of the balance sheet
date, of securities and deriva-
tives held for trading purposes.
Notional Amount
The principal used to calculate
interest and other payments
under derivative contracts. The
principal amount does not
change hands under the terms of
a derivative contract, except in
thecaseofcross-currencyswaps.
Off-Balance Sheet
Financial Instruments
Assets or liabilities that are not
recorded on the balance sheet
but have the potential to pro-
duce positive or negative cash
flows in the future. A variety of
products offered to clients can
be classified as off-balance sheet
and they fall into two broad
categories: (i) credit-related
arrangements, which provide
clients with liquidity protection,
and (ii) derivatives for hedging.
Options
Contractual agreements that
give the holder the right, but
not the obligation, to either buy
or sell a specific amount of a
currency, commodity, equity or
financial instrument at a fixed
price, either at a fixed future
dateoratanytimewithinafixed
future period.
Provision for Credit Losses
A charge to income that rep-
resents an amount deemed
adequate by management to
fully provide for impairment
in the existing loan portfolios,
given the composition of the
loan portfolios, the probability
of default on the loans, the
economic environment and the
allowance for credit losses al-
ready established.
Regulatory Capital Ratios
The percentage of risk-weighted
assets supported by capital,
as defined by OSFI under the
framework of risk-based capital
standards developed by the Bank
for International Settlements.
These ratios are labelled Tier 1
and Tier 2. Tier 1 capital is
considered to be more perma-
nent, consisting of common
shares together with any qualify-
ing non-cumulative preferred
shares, less unamortized good-
will. Tier 2 capital consists of
other preferred shares, sub-
ordinated debentures and the
general allowance, within pre-
scribed limits. The assets-to-
capital multiple is adjusted
assets divided by total capital.
Securities Purchased under
Resale Agreements
Result from transactions that
involve the purchase of a secu-
rity, normally a government
bond, with the commitment by
the buyer to resell the security to
the original seller at a specified
price on a specified date in the
future. They represent low-cost,
low-risk loans.
Securities Sold under
Repurchase Agreements
Result from transactions in
which a security is sold with
the commitment by the seller
to repurchase the security at a
specified price on a specified
date in the future. They provide
low-cost funding.
Swaps
Contractual agreements between
two parties to exchange a series
of cash flows. For interest rate
swaps, counterparties generally
exchange fixed and floating
rate interest payments based on
a notional amount in a single
currency. For cross-currency
interest rate swaps, principal
amounts and fixed and floating
rate interest payments are ex-
changed in different currencies.
96 BMO FINANCIAL GROUP ANNUAL REPORT 2002
GLOSSARY OF FINANCIAL TERMS
Other Definitions
in the MD&A Page
Cash Measures 16
Earnings per
Share (EPS) 16
Expense-to-
Revenue Ratio 22
Net Economic
Profit (NEP) 17
Net Interest Income 20
Net Interest Margin 20
Return on Equity (ROE) 17
Securitization 25
Spread See net
interest margin
Taxable Equivalent
Basis (teb) 19
Tier 1 Capital Ratio 35
Total Shareholder
Return (TSR) 15
Trading Revenue 21
Risk-Related Definitions
in the MD&A
Capital at Risk (CaR) 28
Credit Risk 28
Earnings Volatility (EV) 30
Liquidity and
Funding Risk 32
Market Risk 30
Market Value
Exposure (MVE) 30
Operational Risk 34
Strategic Risk 28
Value at Risk (VaR) 30