GLOSSARY OF FINANCIAL T ERMS Impaired Loans Innovative Tier 1 Capital Allowance for Credit Losses Assets under Administration and under Management Regulatory Capital Ratios Provision for Credit Losses Average Earning Assets BankersGLYPH<213> Acceptances (BAs) Mark-to-Market Notional Amount Basis Point Securities Purchased under Resale Agreements Derivatives Off-Balance Sheet  Financial Instruments Securities Sold under  Repurchase Agreements Forwards and Futures  Options Hedging 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.  Loans for which there is no longer reasonable assurance of the timely collection of princi- pal or interest.  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 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.  Represents the daily or monthly average balance of deposits with other banks and loans and secu- rities, over a one-year period.  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. Represents valuation at market rates, as of the balance sheet date, of securities and deriva- tives held for trading purposes.  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.  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. Oneone-hundredth of a percent- age point.  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.  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.  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.  A risk management technique used to neutralize or manage interest rate, foreign currency, equity or credit exposures.  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.  S waps 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 Resu lt 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. 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, l ow-risk loans. 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. 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