TD Bank 2007 Annual Report Download - page 132

128 TD BANK FINANCIAL GROUP ANNUAL REPORT 2007 Glossary
GLOSSARY
Financial and Banking Terms
Acceptances: Bills of exchange or negotiable instruments drawn by the bor-
rower for payment at maturity and accepted by a bank. Acceptances consti-
tute a guarantee of payment by a bank.
Adjusted Return on Common Equity: Adjusted net income available to
common shareholders divided by average common equity.
Amortized Cost: The original cost of an investment purchased at a discount
or premium plus or minus the portion of the discount or premium subsequent-
ly taken into income over the period to maturity.
Average Earning Assets: The average carrying value of deposits with banks,
loans and securities based on daily balances for the period ending October 31
in each fiscal year.
Average Invested Capital: Average invested capital is equal to average com-
mon equity plus the average cumulative after-tax amounts of goodwill and
intangible assets amortized as of the reporting date.
Basis Point: A measurement unit defined as one hundredth of one percent.
Capital Asset Pricing Model: A model that describes the relationship between
risk and expected return for securities. The model states that the expected
return of a security or portfolio equals the rate on a risk-free security plus a
risk premium related to the volatility of the security relative to a representative
market portfolio.
Carrying Value: The value at which an asset or liability is carried at on the
Consolidated Balance Sheet.
Commitments to Extend Credit: Represent unutilized portions of authoriza-
tions to extend credit in the form of loans, customers’ liability under accep-
tances, guarantees and letters of credit.
Current Replacement Cost: The estimated amount that would be paid or
received by the Bank if the rights and obligations under contract were
assigned to another counterparty.
Derivative: A derivative is a financial instrument that requires no initial net
investment, is settled in the future and has a value that changes in response to
changes in some specified rate, price or index. Such instruments include inter-
est rate, foreign exchange, equity, commodity and credit derivative contracts.
Dividend Yield: Dividends paid during the year divided by average of high
and low common share prices for the year.
Documentary and Commercial Letters of Credit: Instruments issued on
behalf of a customer authorizing a third party to draw drafts on the Bank up
to a certain amount subject to specific terms and conditions.
Earnings per Share, Basic: Net income less preferred share dividends divided
by the average number of common shares outstanding.
Earnings per Share, Diluted: Net income less preferred share dividends
divided by the average number of common shares outstanding adjusted for
the dilutive effects of stock options and other common stock equivalents.
Economic Profit: Economic profit is a tool to measure shareholder value cre-
ation. Economic profit is the Bank’s adjusted net income less preferred divi-
dends and a charge for average invested capital.
Efficiency Ratio: Non-interest expenses as a percentage of total revenue. The
efficiency ratio measures the efficiency of the Bank’s operations.
Effective Interest Rate: The effective interest rate is the rate that exactly dis-
counts estimated future cash payments or receipts over the expected life of
the financial instrument or, when appropriate, a shorter period, to the net car-
rying amount of the financial asset or financial liability.
Fair Value: The amount of consideration that would be agreed upon in an
arm’s length transaction between knowledgeable, willing parties who are
under no compulsion to act.
Forward Contracts: Contracts which oblige one party to the contract to buy
and the other party to sell an asset for a fixed price at a future date.
Forward Rate Agreements: Contracts fixing an interest rate to be paid or
received on a notional principal of specified maturity commencing on a speci-
fied future date.
Futures: Contracts to buy or sell a security at a predetermined price on a
specified future date. Each contract is between the Bank and the organized
exchange on which the contract is traded.
Guarantees and Standby Letters of Credit: Irrevocable assurances that the
Bank will make payments in the event that a customer cannot meet its obliga-
tions to third parties and they carry the same credit risk, recourse and collater-
al security requirements as loans extended to customers.
Hedging: A risk management technique intended to mitigate the Bank’s expo-
sure to fluctuations in interest rates, foreign currency exchange rates, or other
market factors. The elimination or reduction of such exposure is accomplished
by engaging in capital markets activities to establish offsetting positions.
Impaired Loans: Loans where, in management’s opinion, there has been a
deterioration of credit quality to the extent that the Bank no longer has rea-
sonable assurance as to the timely collection of the full amount of principal
and interest.
Location of Ultimate Risk: The location of residence of the customer or, if
guaranteed, the guarantor. However, where the customer or guarantor is a
branch office, the location of residence of the head office is used, and where
most of the customer’s or guarantor’s assets or the security for the asset are
situated in a different country, that country is deemed to be the location of
ultimate risk. Foreign currency assets are not necessarily utilized in or repaid
from the geographic areas in which they are included.
Mark-to-Market: A valuation that reflects current market rates as at the bal-
ance sheet date for financial instruments that are carried at fair value.
Master Netting Agreements: Legal agreements between two parties that
have multiple derivative contracts with each other that provide for the net set-
tlement of all contracts through a single payment, in a single currency, in the
event of default on or termination of any one contract.
Net Interest Income: The difference between the interest and dividends
earned from loans and securities, and the interest paid on deposits and other
liabilities.
Net Interest Rate Margin: Net interest income as a percentage of average
earning assets.
Notional: A reference amount on which payments for derivative financial
instruments are based. Generally, the notional amount is not exchanged under
the terms of the derivative contract.
Options: Contracts in which the writer of the option grants the buyer the
future right, but not the obligation, to buy or to sell, a security, exchange rate,
interest rate, or other financial instrument or commodity at a predetermined
price, at or by a specified future date.
Provision for Credit Losses: Amount added to the allowance for credit losses
to bring it to a level that management considers adequate to absorb all credit
related losses in its portfolio.
Return on Common Shareholders’ Equity: Net income available to common
shareholders as a percentage of average common shareholders’ equity. A
broad measurement of a bank’s effectiveness in employing shareholders’
funds.
Return on Invested Capital (ROIC): ROIC is a measure of shareholder value
calculated as adjusted net income less preferred dividends, divided by average
invested capital.
Return on Tangible Common Equity: Adjusted net income available to com-
mon shareholders divided by average common equity less average goodwill
and intangibles.
Risk-weighted Assets (RWA): Assets calculated by applying a regulatory pre-
determined risk-weight factor to the face amount of each asset. The face
amount of off-balance sheet instruments are converted to balance sheet (or
credit) equivalents, using specified conversion factors, before the appropriate
risk-weights are applied. The risk-weight factors are established by the
Superintendent of Financial Institutions Canada to convert assets and off-bal-
ance sheet exposures to a comparable risk level.
Securities Purchased under Reverse Repurchase Agreements: The pur-
chase of a security, normally a government bond, with the commitment by the
buyer to resell the security to the original seller at a specified price.
Securities Sold under Repurchase Agreements: The sale of a security with
the commitment by the seller to repurchase the security at a specified price.
Securitization: The process by which financial assets, mainly loans, are trans-
ferred to a trust, which normally issues a series of asset-backed securities to
investors to fund the purchase of loans.
Swaps: Contracts that involve the exchange of fixed and floating interest rate
payment obligations and currencies on a notional principal for a specified peri-
od of time.
Total Market Return: The change in market price plus dividends paid during
the year as a percentage of the prior year’s closing market price per common
share.
Variable Interest Entities (VIEs): VIEs are entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without addi-
tional subordinate financial support from other parties.