Bank of Montreal 2002 Annual Report Download - page 81

BMO FINANCIAL GROUP ANNUAL REPORT 2002 77
Our credit exposure to securitized assets as at October 31, 2002 was
limited to our deferred purchase price of $149 ($146 in 2001), certain
cash deposits of $93 ($120 in 2001) and investments in securitization
vehicles of $56 ($32 in 2001).
The adjoining table outlines the key economic assumptions used in
measuring the deferred purchase price and the sensitivity of the cur -
rent value of the deferred purchase price as at October 31, 2002 to
immediate 10% and 20% adverse changes in those assumptions. The
sensitivity analysis should be used with caution as it is hypothetical
and changes in each key assumption may not be linear. The sensi-
tivities in each key variable have been calculated independently of
changes in the other key variables. Actual experience may result in
changes in a number of key assumptions simultaneously. Changes
in one factor may result in changes in another, which could amplify
or reduce certain sensitivities.
For additional information concerning our off-balance sheet
special-purpose entities refer to Note 7.
Off-balance sheet special-purpose entities (“SPEs”) are either cor-
porate entities or trusts whose activities are set out in the legal
agreements that govern them. We have ongoing relationships with
two types of SPEs: asset securitization SPEs and asset manage-
ment SPEs.
We securitize our loans either for capital management purposes
or to provide alternative sources of funding. Our securitizations
are more fully described in Note 6.
We assist our customers with the securitization of their assets to
provide them with alternative sources of funding. In exchange for
providing this service we earn fees for providing structuring advice
related to the securitizations as well as administrative fees for sup-
porting the ongoing operations of the customer securitization SPEs.
We conduct asset management activities through SPEs that pro-
videinvestorswithcustomized,diversifieddebtportfoliosinavariety
of asset and rating classes. We earn investment management fees
for managing these portfolios. We have two types of asset manage-
ment SPEs: our High Yield Collateralized Bond Obligation SPEs and
our High Grade Structured Investment SPEs. Our investments to
sponsor these off-balance sheet SPEs were $109 at October 31, 2002
($187 at October 31, 2001).
We record all premises and equipment at cost. Buildings, computer and other
equipment and leasehold improvements are amortized on a straight-line basis
over their estimated useful lives. The maximum estimated useful lives we use to
amortize our assets are:
▪Buildings 40 years
▪Computer and other equipment 10 years
▪Leasehold improvements 15 years
Gains and losses on disposal are included in non-interest revenue in our Consoli-
dated Statement of Income.
2002 2001
Land $ 269 $ 292
Buildings 1,309 1,387
Computer and other equipment 2,737 2,483
Leasehold improvements 529 491
4,844 4,653
Accumulated amortization (2,685) (2,483)
Total $ 2,159 $ 2,170
Amortization expense for the years ended October 31, 2002, 2001 and
2000 amounted to $396, $406 and $402, respectively. Included in
Consumer
instalment
and other
Residential personal Credit card
mortgages loans loans
Deferred purchase price $ 117 $ 7 $ 25
Weighted average life (in years) 2.68 2.19 0.17
Prepayment rate (%) 12.75
– 13.19 5.0 – 8.0 33.0
Impact of: 10% adverse change $1.0
– $1.1 $0.1 $0.1
20% adverse change $1.9 – $2.2 $0.2 $0.2
Interest rate (%) 0.98 – 2.49 1.81 – 3.17 8.68
Impact of: 10% adverse change $6.7
– $7.8 $0.8 $2.5
20% adverse change $13.3 – $15.6 $1.7 $5.1
Expected credit losses (%) – 1.25 – 1.50 1.95
Impact of: 10% adverse change $
– $1.1 $0.6
20% adverse change $ – $2.3 $1.2
Discount rate (%) 5.95 – 13.30 13.30 – 13.73 13.30
Impact of: 10% adverse change $0.5
– $0.9 $0.1 $0.1
20% adverse change $0.9 – $1.7 $0.3 $0.2
We provide liquidity support for the securities issued by some
off-balance sheet SPEs. We also enter into derivative transactions
to assist them in hedging their interest rate exposure. The terms
and conditions for these transactions are the same as for those with
third-party customers.
The majority of the funding issued by these off-balance sheet
SPEs is rated by one or more rating agencies that review the terms
of the SPE to ensure that investors are appropriately protected.
The following table summarizes the financial position of our SPEs
as at October 31, 2002:
High Yield
Collateralized High Grade
Customer Bond Structured
Securitization Obligation Investment
SPEs SPEs SPEs
Assets $ 28,092 $ 3,397 $ 16,539
Liabilities $ 27,228 $ 3,546 $ 15,222
Included in customer securitization SPEs is $6,700 of loans securitized by the Bank.
Future Change in Accounting Policy
The Canadian Institute of Chartered Accountants has issued a draft guideline on
the consolidation of SPEs. We are currently reviewing the draft guideline to deter-
mine whether it will require us to consolidate any of our off-balance sheet SPEs.
land and buildings are the costs of Bank-owned branches, of which
we owned 457 as at October 31, 2002 and 460 as at October 31, 2001,
and other properties, located in Canada, the United States and
other countries.
On September 12, 2002, we sold our 25% undivided interest in the
land located at King and Bay Streets in Toronto for cash proceeds
of $122. The gain on sale of $112 ($87 after tax) was deferred and
will be recorded as a reduction in rental expense over the term of
our leases in the building, which expire between 2013 and 2023.
Lease Commitments
We have entered into a number of non-cancellable leases for prem-
ises and equipment. Our total contractual rental commitments
outstanding as at October 31, 2002 are $1,096. The commitments for
each of the next five years are $195 for 2003, $163 for 2004, $136 for
2005, $99 for 2006 and $82 for 2007 and $421 thereafter. Included
in these amounts are the commitments related to 677 leased Bank
branch locations as at October 31, 2002. Net rent expense for
premises and equipment reported in our Consolidated Statement
of Income was $223, $175 and $165 for the years ended October 31,
2002, 2001 and 2000, respectively.
NOTE 7 Off-Balance Sheet Special-Purpose Entities
NOTE 8 Premises and Equipment