TD Bank 2006 Annual Report Download - page 124

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Glossary
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GLOSSARY
Financial and Banking Terms
Acceptances: Bills of exchange or negotiable instruments drawn by the
borrower for payment at maturity and accepted by a bank. Acceptances
constitute a guarantee of payment by the 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
subsequently 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
common equity plus the average cumulative after-tax amounts of goodwill
and intangible assets amortized as of the reporting date.
Basis Point: Ameasurement unit defined as one hundredth of one percent.
Capital Asset Pricing Model: Amodel 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 accept-
ances, 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 Financial Instruments: Financial contracts that derive their
value from changes in interest rates, foreign exchange rates, credits spreads,
commodity prices, equities and other financial measures. Such instruments
include interest rate, foreign exchange, equity, commodity and credit
derivative contracts.
Dividend Yield: Dividends paid during the year divided by average of high
and low common shareprices 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
creation. Economic profit is the Bank’sadjusted 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.
Fair Value: The amount of consideration that would be agreed upon in an
arm’slength transaction between knowledgeable, willing parties who are
under no compulsion to act.
Foreign Exchange Forwards: Contracts to buy or sell foreign currencies
on a specified future date at a predetermined fixed rate.
Forward Rate Agreements: Contracts fixing an interest rate to be paid
or received on a notional principal of specified maturity commencing on a
specified futuredate.
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
obligations to third parties and they carry the same credit risk, recourse and
collateral security requirements as loans extended to customers.
Hedging: Arisk management technique intended to mitigate the Bank’s
exposure 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
adeterioration of credit quality to the extent that the Bank no longer has
reasonable 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: The valuation at market rates, as at the balance sheet date,
of securities and derivatives held for trading purposes.
Master Netting Agreements: Legal agreements between two parties that
have multiple derivative contracts with each other that provide for the net
settlement 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 predeter-
mined 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
common shareholders divided by average common equity less average good-
will and intangibles.
Risk-weighted Assets (RWA): Assets calculated by applying a regulatory
predetermined 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 areapplied. The riskweight factors areestablished by the
Superintendent of Financial Institutions Canada to convert assets and
off-balance sheet exposures to a comparable risk level.
Securities Purchased under Reverse Repurchase Agreements: The
purchase 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
transferred 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/or currencies on a notional principal for a specified
period of time.
Total Market Return: The change in market price plus dividends paid
during the year as a percentage of the prior year’sclosing 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
additional subordinate financial support from other parties.