Bank of Montreal 2004 Annual Report Download - page 95

BMO Financial Group Annual Report 2004 91
Notes
Allowance for Credit Losses
The allowance for credit losses recorded in our Consolidated
Balance Sheet is maintained at a level which we consider adequate
to absorb credit-related losses on our loans, customers’ liability
under acceptances and other credit instruments (as discussed in
Note 5). The portion related to other credit instruments is recorded
in other liabilities in our Consolidated Balance Sheet.
The allowance comprises the following two components:
Specific Allowances
These allowances are recorded for specific loans to reduce their
book value to the amount we expect to recover. We review our
loans and acceptances, other than consumer instalment and credit
card loans (which are written off when certain conditions exist,
as discussed under impaired loans), on an ongoing basis to assess
whether any loans should be classified as impaired and whether
an allowance or write-off should be recorded. Our review of problem
loans is conducted at least quarterly 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 assess-
ment is then reviewed and concurred with by an independent
credit officer.
To determine the amount we expect to recover from an impaired
loan, we use the value of the estimated future cash flows discounted
at the effective rate inherent in the loan. When the amounts and
timing of future cash flows cannot be estimated with reasonable
reliability, the expected recovery amount is estimated using either
the fair value of any security underlying the loan, net of expected
costs of realization and any amounts legally required to be paid
to the borrower, or an observable market price for the loan. Security
can vary by type of loan and may include cash, securities, real
property, accounts receivable, guarantees, inventory or other
capital assets.
General Allowance
We maintain a general allowance in order to cover any impair-
ment in the existing portfolio that cannot yet be associated with
specific loans. Our approach to establishing and maintaining
the general allowance is based on the guideline issued by our
regulator, the Superintendent of Financial Institutions Canada.
The general allowance is reviewed on a quarterly basis.
A number of factors are considered when determining the appro-
priate level of the general allowance. A statistical analysis of
past performance is undertaken to derive the mean (Expected
Loss) and volatility (Unexpected Loss) of loss experience.
This analysis calculates historical average losses for each
homogeneous portfolio segment (e.g., mortgages), while other
models estimate losses for portfolios of corporate loans that
can be referenced to market data. In addition, the level of allow-
ance already in place and management’s professional judgment
regarding portfolio quality, business mix and economic as well
as credit market conditions are also considered.
Provision for Credit Losses
Changes in the value of our loan portfolio due to credit-related
losses or recoveries of amounts previously provided for/written-off
are included in the provision for credit losses in our Consolidated
Statement of Income.
Note 4 Loans, Customers’ Liability under Acceptances and Allowance for Credit Losses
Loans
Loans are recorded at cost net of unearned income and unamortized
discounts. Unearned income includes interest and deferred
loan fees. Interest income is recorded on an accrual basis, except
for impaired loans, the treatment of which is described below.
Securities purchased under resale agreements represent the
amounts we will receive as a result of our commitment to resell
securities that we have purchased back to the original seller,
on a specified date at a specified price. We account for these
instruments as loans.
Loan Fees
The accounting treatment for loan fees varies depending on
the transaction. Loan origination, restructuring and renegotiation
fees are recorded as interest income over the term of the loan.
Commitment fees are recorded as interest income over the term
of the loan, unless we believe the loan commitment will not be
used. In the latter case, commitment fees are recorded as lending
fees over the commitment period. Loan syndication fees are
included in lending fees as the syndication is completed, unless the
yield on any loans we retain is less than that of other comparable
lenders involved in the financing. In the latter case, an appropriate
portion of the syndication fee is deferred and amortized to interest
income over the term of the loan.
Customers’ Liability under Acceptances
Acceptances represent a form of negotiable short-term debt that is
issued by our customers and which we guarantee for a fee. We have
offsetting claims, equal to the amount of the acceptances, against
our customers when the instruments mature. The amount due
under acceptances is recorded as a liability and our corresponding
claim is recorded as a loan in our Consolidated Balance Sheet.
Impaired Loans
We classify loans, except credit card loans and consumer instalment
loans, as impaired when any of the following criteria are met:
●we are no longer reasonably assured principal or interest will
be collected on a timely basis;
●
principal or interest payments become 90 days past due (unless
we are actively trying to collect the loan and it is fully secured); or
●fully secured loans become 180 days past due.
Credit card loans are classified as impaired and immediately written
off when principal or interest payments become 180 days past due.
Consumer instalment loans are immediately classified as impaired
when the principal or interest payments are 90 days past due,
and are written off when they are past due by one year, or earlier
if warranted.
We do not recognize interest income on loans classified as
impaired, and any interest income that is accrued and unpaid is
reversed against interest income.
Payments received on loans that have been classified as
impaired are recorded first to recover collection costs, principal
and any previous write-offs or allowances, and then as interest
income. Payments received on impaired consumer instalment
loans are applied first to outstanding interest and then to the
remaining principal.
A loan will be reclassified back to performing status when it
is determined that there is reasonable assurance of full and timely
repayment of interest and principal in accordance with the terms
and conditions of the loan, and that none of the criteria for classifi-
cation of the loan as impaired continue to apply.
From time to time we will restructure a loan due to the poor
financial condition of the borrower. If no longer considered
impaired, interest on these restructured loans is recorded on
an accrual basis.