Bank of Montreal 1999 Annual Report Download - page 88

Notes to Consolidated Financial Statements
82 Bank of Montreal Group of Companies 1999 Annual Report
Summarized below is the contractual and risk-weighted equivalent value of our various commitments, which are based on the rules
for capital adequacy of the Superintendent of Financial Institutions Canada. The risk-weighted equivalent value is used in the ongoing
assessment of our capital adequacy ratios.
The provision for credit losses is recorded in our Consolidated Statement
of Income. It is based on statistical analysis and management judgement
and represents the appropriate expense given the composition of our
credit portfolios, their probability of default, the economic environment
and the allowance for credit losses already established.
The allowance for credit losses recorded in our Consolidated Balance
Sheet is maintained at a level which we consider to be adequate to absorb
potential credit losses in our on- and off-balance sheet portfolios.
We maintain the following allowances:
Specific Allowances
These allowances are recorded for specific loans to reduce their book
value to the amount we expect to recover from the loans. We review
our loans and acceptances, other than consumer instalment and credit
card loans, at least quarterly, to assess whether the loan should be clas-
sified as impaired and an allowance or write-off recorded. Our review
of problem loans is conducted by our account managers who assess the
ultimate collectibility and estimated recoveries on a specific loan based
on all events and conditions that the manager believes are relevant to
the condition of the loan. This assessment is then reviewed and approved
by an independent credit officer. Significant specific allowances and the
aggregate allowance for credit losses are reviewed by officers in the
Risk Management Group.
We use a variety of methods to determine the amount we expect to
recover from impaired loans including the discounted value of estimated
future cash flows, observable market values or the fair value of the
underlying security discounted to reflect when we expect to sell the
security. The value of any collateral is also considered in establishing
1999 1998
Contract Risk-weighted Contract Risk-weighted
amount equivalent amount equivalent
Credit Instruments
Guarantees and standby letters of credit $ 13,218 $ 8,515 $ 14,006 $ 9,385
Securities lending 9,818 977 12,757 567
Documentary and commercial letters of credit 731 115 812 120
Commitments to extend credit:
Original maturity of one year and under 70,073
– 59,972 –
Original maturity of over one year 32,534 15,677 34,890 16,737
Note issuance and revolving underwriting facilities –– 63 6
Total $ 126,374 $ 25,284 $ 122,500 $ 26,815
Commitments to extend credit in respect of consumer instalment and credit card loans are
excluded as the lines are revocable at our discretion.
The following table sets out the allocation of our allowance for credit losses:
Specific allowances General allowance Country risk allowance Total
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
Residential mortgages $ 4 $ 4 $ 9 $
– $ – $
–
$ – $ – $
–
$ 4 $ 4 $ 9
Consumer instalment and
other personal loans 8911
–––––– 8911
Loans to businesses and governments 360 262 345
––– 665366 268 350
Securities purchased
under resale agreements
––––––––––––
Unallocated ––– 970 885 775 ––– 970 885 775
372 275 365 970 885 775 6651,348 1,166 1,145
Securities of designated countries
–––––– 79 98 93 79 98 93
Loan substitute securities
––––––––––––
Acceptances ––––––––––––
372 275 365 970 885 775 85 104 98 1,427 1,264 1,238
Off-balance sheet items – 81 ––––––– 81
Total $ 372 $ 283 $ 366 $ 970 $ 885 $ 775 $ 85 $ 104 $ 98 $ 1,427 $ 1,272 $ 1,239
Note 5 Allowance for Credit Losses
an allowance. Collateral can vary by type of loan and may include cash,
securities, real property, accounts receivable, guarantees, inventory or
other capital assets.
General Allowance
This allowance is established to absorb credit losses in a portfolio of on-
and off-balance sheet exposure, including those of associated corpora-
tions, joint ventures and securitization vehicles, recognizing that not all
of the impairment in the loan portfolio can be specifically identified
on a loan by loan basis. The general allowance is based upon statistical
analysis of past performance, the level of allowance already in place
and management’s judgement. The general allowance would normally
increase in a strong business/economic cycle and would be drawn down
during a weak business/economic cycle when specific allowances would
normally increase in relation to our exposures.
The value of loans covered by the general allowance totalled
$147,123 as at October 31, 1999 and $149,710 as at October 31, 1998.
Country Risk Allowance
This allowance is recorded for loans to and securities of countries identi-
fied by the Superintendent of Financial Institutions Canada that have
restructured or experienced difficulties in servicing all or part of their
external debt to commercial banks. These loans and securities are
reviewed regularly by management within the Risk Management Group
to assess the adequacy of the allowance based on the current and
expected political and economic conditions in the respective countries.