Bank of Montreal 2004 Annual Report Download - page 99

BMO Financial Group Annual Report 2004 95
Notes
Periodically, we securitize loans for capital management purposes
or to obtain alternate sources of funding. Securitization involves
selling loans to off-balance sheet entities or trusts (securitization
vehicles), which buy the loans and then issue interest bearing
investor certificates.
Contracts with the securitization vehicles provide for the pay-
ment to us over time of the excess of the sum of interest and fees
collected from customers, in connection with the loans that were
sold, over the yield paid to investors in the securitization vehicle,
less credit losses and other costs (the “deferred purchase price”).
When the loans are considered sold for accounting purposes,
we remove them from our Consolidated Balance Sheet.
We account for transfers to securitization vehicles as sales when
control over the loans is given up. We recognize securitization
revenues at the time of the sale, based on our best estimate of the
net present value of expected future cash flows, primarily the
deferred purchase price, net of our estimate of the fair value of
any servicing obligations undertaken. The deferred purchase price
is recorded in our Consolidated Balance Sheet in other assets.
A servicing liability is recognized only for securitizations where
we do not receive compensation for servicing the transferred loans.
It is recorded in our Consolidated Balance Sheet in other liabilities.
A servicing liability is recorded in securitization revenues over the
term of the transferred loan.
For some of our securitizations, we are required to purchase
subordinated interests or maintain cash amounts deposited with
the securitization vehicle. This provides the securitization vehicle
with a source of funds in the event that the sum of interest and
fees collected on the loans is not sufficient to pay the interest
owed to investors. We record these amounts in other assets in our
Consolidated Balance Sheet. These interests, together with our
deferred purchase price, represent our exposure with respect to
these securitizations. Investors have no further recourse against
us in the event that cash flows from the transferred loans are inade-
quate to service the interest related to the investor certificates.
On a quarterly basis, we compare the carrying value of assets
on our Consolidated Balance Sheet arising from our securitizations
to their fair value, determined based on discounted cash flows.
When we identify a decline in value, the affected carrying amount
is written down to its fair value. Any write-down is recorded in
our Consolidated Statement of Income as a reduction in securitiza-
tion revenues.
During the year ended October 31, 2004, we securitized
residential mortgages totalling $1,390 million for total cash proceeds
of $1,382 million. The key weighted average assumptions used
to value the deferred purchase price for these securitizations
were an average term of 4.7 years, a prepayment rate of 11.26%,
an interest rate of 4.29% and a discount rate of 5.79%. There are
no expected credit losses as the mortgages are guaranteed by third
parties. We retained responsibility for servicing these mortgages.
We recorded $17 million of gains in our Consolidated Statement
of Income and $49 million of deferred purchase price and
$11 million of servicing liability in our Consolidated Balance
Sheet related to the securitization of these loans.
Note 7 Asset Securitization
The impact of securitizations on our Consolidated Statement of Income for the years ended October 31 is as follows:
Consumer instalment Business and
(Canadian $ in millions) Residential mortgages and other personal loans Credit card loans government loans Total
2004 2003 2002 2004 2003 2002 2004 2003 2002 2004 2003 2002 2004 2003 2002
Gain on sales of loans
from new securitizations $ 17 $
– $ – $ – $ – $ 14 $ – $ – $ – $ – $ – $ – $ 17 $ – $ 14
Gain on sales of loans sold to
revolving securitization vehicles 37 39 37 1 1
– 72 117 117 – –– 110 157 154
Other securitization revenue 8 14 37 (2) 20 10 28 43 70
– – 39 34 77 156
Amortization of servicing liability 16 10 5 – ––– ––– –– 16 10 5
Total $ 78 $ 63 $ 79 $ (1) $ 21 $ 24 $ 100 $ 160 $ 187 $ – $ – $ 39 $ 177 $ 244 $ 329
Cash flows received from securitization vehicles for the years ended October 31 are as follows:
Consumer instalment
(Canadian $ in millions) Residential mortgages and other personal loans Credit card loans Total
2004 2003 2002 2004 2003 2002 2004 2003 2002 2004 2003 2002
Proceeds from new securitizations $ 1,382 $ – $ – $ – $ – $ 519 $ – $ – $ – $ 1,382 $ – $ 519
Proceeds from loans sold to
revolving securitization vehicles 2,667 2,662 2,737 54 59
– 4,941 7,351 10,795 7,662 10,072 13,532
Servicing fees collected 4 93
––– 21 32 47 25 41 50
Receipt of deferred purchase price 78 80 92 5 18 10 85 138 134 168 236 236
The impact of securitizations on our Consolidated Balance Sheet as at October 31 is as follows:
Consumer
Residential instalment and
(Canadian $ in millions) mortgages other personal loans Credit card loans Total
2004 2003 2004 2003 2004 2003 2004 2003
Retained interests
Investment in securitization vehicles $
– $ – $ 27 $ 45 $ – $ – $ 27 $45
Deferred purchase price 134 102
– 59 14 143 121
Cash deposits with securitization vehicles 12 12
– –– – 12 12
Servicing liability 34 21 – –– – 34 21