The credit granting process is well established and effective, as evidenced by BMO’s historic loan loss experience, which com- pares favourably to the Canadian peer group average. The process involves the use of skilled and qualified professional lenders, clear delegation of decision-making authority, personal account- ability and individual borrower limits, as well as individual account monitoring and dynamic portfolio management. Credit decisions are made on a case-by-case basis at a management level appropriate to the size and risk level of the transaction and are based on the client’s creditworthiness, the available collateral and the transaction’s consistency with BMO’s strategic objective.  Operating practices include regular monitoring of credit risk exposures, regular review on an account and portfolio basis, and reporting to the Counterparty Risk Council and to the Risk Review Committee of the Board of Directors. Corporate Audit regularly reviews management processes to ensure that estab- lished credit policies are followed. The Credit Review Unit of the Risk Management Group undertakes reviews of significant and higher-risk lending transactions. BMO’s provisioning approach embodies disciplined loan loss management and evaluation. The prompt identification of prob- lem loans is a key risk management objective, and all material cases are transferred to a group of professionals experienced in managing these accounts. All problem accounts are subject to quarterly or more frequent reviews. The provision for credit losses for 2002 was $820 million or 0.56% of average net loans and acceptances, compared with $880 million or 0.60% in 2001 (excluding non-recurring items). Our disciplined approach to portfolio diversification continues to ensure there are no undue sector or industry concentrations. BMO’s regular, comprehensive quarterly review of lending port- folios ensures consistency and adequacy in our provisioning despite volatile economic conditions. Table 17 on page 61 details specific provisions for credit losses by product and industry sector. Provisions for losses in the trou- bled communications sector rose $270 million to $399 million. More than half of the increase related to Teleglobe Inc.’s parent discontinuing financial support. Despite problems in the telecom sector, loss provisions on commercial loans declined $114 million from a year ago. BMO is targeting to maintain its 2003 provision for credit losses at or below the level of its 2002 provision. Table 14 on page 59 details the changes in gross impaired loans and in allowances for credit losses. Gross impaired loans totalled $2,337 million at the end of the year, up from $2,014 million a BMO maintains its general allowance for credit losses in order to cover any impairment in the existing portfolio that cannot  yet be associated with specific loans. At all times throughout  the economic cycle, the sum of specific and general allowances must be sufficient to reduce the book value of loans to their  reasonably estimated realizable values. The net loans exposure to cable and telecom companies  was approximately $2.0 billion or 1.4% of total net loans and acceptances at the end of the year. We have recorded specific allowances for credit losses of $116 million on the $545 million of communications industry loans classified as impaired. The net loans exposure to power and power generation companies was approximately $1.1 billion or 0.8% of total net loans and acceptances at the end of the year. We have recorded specific allowances for credit losses of $86 million on the $211 million  of power and power generation industry loans classified as impaired. Exposures to the more economically troubled regions of the world remain limited. Outstanding loan exposures to  borrowers in Argentina totalled $33 million at the end of 2002, down from $159 million a year ago. Impairedloans,afterdeductionofspecificallowancesforcredit losses, totalled $1,568 million, compared with $1,245 million at the end of last year. Impaired loans, after deduction of specific allowances and the general allowance for credit losses, totalled $388 million, compared with $65 million at the end of last year. The increase was largely attributable to communications sector loans, including the Adelphia Group loans that are considered adequately secured, and loans to the manufacturing sector. year ago. Gross impaired loans as a percentage of equity and allowances for credit losses rose marginally this year to 15.16% from 14.17% a year ago. New impaired loan formations totalled $1,945 million in the current year, down from $2,041 million in 2001 and in line with expectations at this stage of the economic cycle. Formations in 2002 included $312 million of loans to operating companies of the Adelphia Group and $211 million  of loans to U.K. and U.S. entities in the power and power genera- tion sector. BMO sold $397 million of troubled loans for proceeds of $265 million during the year, while write-offs totalled  $884 million, up from $698 million in 2001. Specific allowances for credit losses were unchanged at $769 million, as write-offs equalled provisions. The general allowance for credit losses totalled $1,180 million and was unchanged from the prior year. It represents 90 basis points of risk-weighted assets, up from  87 basis points a year ago.  Measurement BMO employs two primary credit risk measures: b Gross impaired loans and acceptances as a percentage of equity and allowances for credit losses is used to measure the financial condition of the portfolio by comparing the level of impaired loans to the level of capital and reserves available  to absorb loan losses; and b Provision for credit losses as a percentage of average net loans and acceptances (including securities purchased under resale agreements) represents the level of provisions that were nec- essary to cover losses in the lending portfolios. It is a measure of credit quality experience. BMO FINANCIAL GROUP ANNUAL REPORT 2002 29 Gross Impaired Loans GLYPH<CR> as a % of Equity and GLYPH<CR> Allowances for Credit Losses 2002 2001 2000 1999 1998 15.16 14.17 10.51 8.53 6.66 Provision for Credit Losses GLYPH<CR> as a % of Average Net Loans GLYPH<CR> and Acceptances GLYPH<CR> (excluding non-recurring items) 2002 2001 2000 1999 1998 0.56 0.60 0.28 0.22 0.09