Bank of Montreal 2008 Annual Report Download - page 158

154 | BMO Financial Group 191st Annual Report 2008
Glossary of Financial Terms
Allowance for Credit Losses represents
an amount deemed adequate by
management to absorb credit-related
losses on loans and acceptances and
other credit instruments. Allowances
for credit losses can be specific or
general and are recorded on the
balance sheet as a deduction from
loans and acceptances or, as they
relate to credit instruments, as
other liabilities.
Assets under Administration and
under Management refers to assets
administered or managed by a financial
institution that are beneficially owned
by clients and therefore not reported
on the balance sheet of the administer-
ing or managing financial institution.
Asset-Backed Commercial Paper is a
short-term investment with a maturity
that is typically less than 180 days.
The commercial paper is backed by phy -
sical assets such as trade receivables,
and is generally used for short-term
financing needs.
Assets-to-Capital Multiple is defined
as assets plus guarantees and letters
of credit, net of specified deductions
(or adjusted assets), divided by
total capital.
Average Earning Assets represents
the daily or monthly average balance
of deposits with other banks and loans
and securities, over a one-year period.
Bankers’ Acceptances (BAs) are bills
of exchange or negotiable instruments
drawn by a borrower for payment
at maturity and accepted by a bank.
BAs constitute a guarantee of payment
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 percentage point.
Derivatives are contracts whose value
is “derived” from movements in interest
or foreign exchange rates, or equity
or commodity prices. Derivatives allow
for the transfer, modification or reduc-
tion of current or expected risks from
changes in rates and prices.
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Earnings Per Share (EPS) is calculated
by dividing net income, after deduction
of preferred dividends, by the average
number of common shares outstanding.
Diluted EPS, which is our basis for
measuring performance, adjusts for
possible conversions of financial instru-
ments into common shares if those
conversions would reduce EPS.
Forwards and Futures are contractual
agreements to either buy or sell
a specified amount of a currency,
commodity, interest-rate-sensitive
financial instrument or security at
a specific price and date in the future.
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.
General Allowance is maintained
to absorb impairment in the existing
credit portfolio that cannot yet be
associated with specific credit assets.
It is assessed on a quarterly basis.
We maintain a general allowance
in order to cover any impairment in
the existing portfolio that cannot
yet be associated with specific loans.
Our approach to establishing and
maintaining the general allowance is
based on the guideline issued by our
regulator, OSFI. The general allowance
is reviewed on a quarterly basis and
a number of factors are considered
when determining its appropriate level.
We employ a general allowance
model that applies historical expected
and unexpected loss rates, based on
probabilities of default and loss given
default factors, to current balances.
Hedging is a risk management
technique used to neutralize
or manage interest rate, foreign
currency, equity, commodity or
credit exposures arising from normal
banking activities.
Impaired Loans are loans for
which there is no longer reasonable
assurance of the timely collection
of principal or interest.
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Innovative Tier 1 Capital: OSFI allows
banks to issue instruments that qualify
as “Innovative” Tier 1 capital. In order
to qualify, these instruments have
to be issued indirectly through a special
purpose vehicle, be permanent in
nature and receive acceptable account-
ing treatment. Innovative Tier 1 capital
cannot comprise more than 20%
of net Tier 1 capital, at time of issue,
with 15% qualifying as Tier 1 capital
and the remaining 5% included in
total capital.
Mark-to-Market represents the
valuation of securities and derivatives
at market rates as of the balance
sheet date, where required by account-
ing rules.
Net Economic Profit (NEP) represents
cash net income available to common
shareholders, less a charge for
capital. NEP is an effective measure
of economic value added. NEP is
a non-GAAP measure.
Net Interest Income is comprised
of earnings on assets, such as loans
and securities, including interest
and dividend income and BMO’s
share of income from investments
accounted for using the equity
method of accounting, less interest
expense paid on liabilities, such
as deposits.
Net Interest Margin is the ratio of
net interest income to earning assets,
expressed as a percentage or in basis
points. Net interest margin is some-
times computed using total assets.
Notional Amount refers to 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 the case of cross-currency swaps.
Operating Leverage is the difference
between revenue and expense growth
rates. Cash operating leverage is the
difference between revenue and cash-
based expense growth rates.
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Options are contractual agreements
that convey to the buyer the right but
not the obligation to either buy or
sell a specified amount of a currency,
commodity, interest-rate-sensitive
financial instrument or security at
a fixed future date or at any time
within a fixed future period.
Productivity Ratio (or Expense-to-
Revenue Ratio) is our key measure
of productivity. It is calculated as
non-interest expense divided by total
revenues, expressed as a percentage.
The cash productivity ratio is calculated
in the same manner, after removing
the amortization of intangible assets
from non-interest expenses.
Provision for Credit Losses is a charge
to income that represents an amount
deemed adequate by management to
fully provide for impairment in loans
and acceptances and other credit
instruments, given the composition
of the portfolios, the probability of
default, the economic environment
and the allowance for credit losses
already established.
Return on Equity or Return on
Common Shareholders’ Equity (ROE)
is calculated as net income, less
preferred dividends, as a percentage of
average common shareholders’ equity.
Common shareholders’ equity is
comprised of common share capital,
contributed surplus, accumulated
other comprehensive income (loss)
and retained earnings.
Securities Borrowed or Purchased
under Resale Agreements are
low-cost, low-risk loans, often
supported by the pledge of cash
collateral, which arise from trans-
actions that involve the borrowing
or purchasing of securities.
Securities Lent or Sold under
Repurchase Agreements are low-cost,
low-risk liabilities, often supported
by cash collateral, which arise from
transactions that involve the lending
or selling of securities.
Specific Allowances reduce the
carrying value of specific credit assets
to the amount we expect to recover
if there is evidence of deterioration in
credit quality.
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GLOSSARY