Bank of Montreal 2004 Annual Report Download - page 123

BMO Financial Group Annual Report 2004 119
Notes
As these matters are all in the early stages, we are unable to
determine the eventual outcome of these matters but management
believes that the Bank and Harris Nesbitt Corp. have strong
defences to these claims.
The Bank and its subsidiaries are party to other legal proceedings
in the ordinary course of their businesses. Management does not
expect the outcome of any of these other proceedings, individually
or in the aggregate, to have a material adverse effect on the con-
solidated financial position or results of the Bank’s operations.
(b) Pledged Assets
In the normal course of our business, we pledge assets as security
for various liabilities that we incur. The following tables summarize
our pledged assets, to whom they are pledged and in relation to
what activity:
(Canadian $ in millions) 2004 2003
Cash resources $2$ 10
Securities
Issued or guaranteed by Canada 5,227 4,799
Issued or guaranteed by a Canadian province,
municipality or school corporation 1,668 1,457
Other securities 11,421 12,055
Other assets 21,559 23,850
Total assets pledged $ 39,877 $ 42,171
Excludes restricted cash resources disclosed in Note 2.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
(Canadian $ in millions) 2004 2003
Assets pledged to:
Clearing systems, payment systems and depositories $ 1,253 $ 1,096
Assets pledged in relation to:
Obligations related to securities sold
under repurchase agreements 20,865 23,748
Securities borrowing and lending 11,229 8,997
Derivatives transactions 1,121 1,052
Other 5,409 7,278
Total $ 39,877 $ 42,171
Excludes cash pledged with central banks disclosed as restricted cash in Note 2.
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Note 26 Fair Value of Financial Instruments
We record trading assets and liabilities at market values and
non-trading assets and liabilities at their original amortized cost
less allowances or write-downs for impairment. Fair value is
subjective in nature, requiring a variety of valuation techniques and
assumptions. The values are based upon the estimated amounts for
individual assets and liabilities and do not include an estimate of
the fair value of any of the legal entities or underlying operations
that comprise our business.
Fair value amounts disclosed represent point-in-time estimates
that may change in subsequent reporting periods due to market
conditions or other factors. Fair value generally represents our
estimate of the amounts for which we could exchange the financial
instruments with willing third parties who were interested in
acquiring the instruments. In most cases, however, the financial
instruments are not typically exchangeable or exchanged and
therefore it is difficult to determine their fair value. In those cases,
we have estimated fair value assuming that we will not sell the
assets or liabilities, taking into account only changes in interest
rates and credit risk that have occurred since we acquired them or
entered into the underlying contract. These calculations represent
management’s best estimates based on a range of methodologies
and assumptions; since they involve uncertainties, the fair values
may not be realized in an actual sale or immediate settlement of
the instruments.
Interest rate changes are the main cause of changes in the fair
value of our financial instruments.
Premises and equipment, goodwill and intangible assets,
employee future benefits-related amounts and future income
taxes are not financial instruments and have been excluded
from our estimate of fair value. The net amounts excluded totalled
$4,007 million as at October 31, 2004 ($3,968 million in 2003).
Financial Instruments whose Book Value Approximates Fair Value
Fair value is assumed to equal book value for acceptance-related
assets and liabilities, securities sold but not yet purchased and
securities sold under repurchase agreements, due to the short-term
nature of these assets and liabilities. Fair value is also assumed to
equal book value for our cash resources, certain other assets and
certain other liabilities.
Loans
In determining the fair value of our loans, we incorporate the
following assumptions:
●For fixed rate performing loans, we discount the remaining
contractual cash flows, adjusted for prepayment, at market
interest rates currently offered for loans with similar terms
and risks.
●For floating rate performing loans, changes in interest rates
have minimal impact on fair value since loans reprice to
market frequently. On that basis, fair value is assumed to
equal carrying value.
The value of our loan balances determined based on the above
assumptions is further reduced by the allowance for credit losses
to determine the fair value of our loan portfolio.
Securities
The fair value of our securities, both trading and investment, by
instrument type and the methods used to determine fair value are
provided in Note 3.
Deposits
In determining the fair value of our deposits, we incorporate the
following assumptions:
●
For fixed rate, fixed maturity deposits, we discount the remaining
contractual cash flows for these deposits, adjusted for expected
redemptions, at market interest rates currently offered for
deposits with similar terms and risks.
●For floating rate, fixed maturity deposits, changes in interest
rates have minimal impact on fair value since deposits reprice
to market frequently. On that basis, fair value is assumed to
equal book value.
●For fixed maturity deposits, adjustments to fair value are made
for early redemptions based on client behaviour history.
●For deposits with no defined maturities, we consider fair value
to equal book value based on book value being equivalent to the
amount payable on the reporting date.