Bank of Montreal 2010 Annual Report Download - page 128

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes
126 BMO Financial Group 193rd Annual Report 2010
Note 8: Asset Securitization
Periodically, we securitize loans 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 either
interest bearing or discounted investor certificates.
Contracts with the securitization vehicles provide for the payment
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”).
We account for transfers to securitization vehicles as sales when
control over the loans is given up and consideration other than notes
issued by the securitization vehicle has been received. For control to have
transferred, (1) the transferred loans must be isolated from the seller, even
in the event of bankruptcy or receivership of the seller, (2) the purchaser
must have the right to sell or pledge the transferred loans or, if the
purchaser is a Qualifying Special Purpose Entity (“QSPE”) as defined in
CICA Accounting Guideline 12, “Transfers of Receivables”, the investors
in the QSPE must have the right to sell or pledge their ownership interest
in the QSPE, and (3) the seller cannot retain the right to repurchase
the loans and receive more than an insignificant benefit. When the loans
are considered sold for accounting purposes, we remove them from our
Consolidated Balance Sheet. We recognize gains in securitization revenues
at the time of the sale. These gains are determined 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 available-for-sale securities.
A servicing liability is recognized only for securitizations where we
do not receive adequate compensation for servicing the transferred loans.
It is initially measured at fair value and is recorded in our Consolidated
Balance Sheet in other liabilities. A servicing liability is amortized to
securitization revenues over the term of the transferred loans.
For some of our securitizations, we are required to purchase sub -
ordinated interests or to maintain cash amounts deposited with the
securitization vehicle that are considered retained interests in the
securitized assets. 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 retained interests at their fair value in available-for-sale securities
in our Consolidated Balance Sheet. These interests, together with the
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 inadequate to service
the interest related to the investor certificates.
The following table summarizes our securitization activity related to our assets and its impact on our Consolidated Statement of Income for the years
ended October 31, 2010, 2009 and 2008:
(Canadian $ in mil lions) Residential mortgages Credit card loans Total
2010 2009 2008 2010 2009 2008 2010 2009 2008
Net cash proceeds (1) 4,234 6,761 8,330 – – 3,024 4,234 6,761 11,354
Investment in securitization vehicles (2) – – – – – 190 – – 190
Deferred purchase price 173 189 331 – – 73 173 189 404
Servicing liability (29) (29) (55) – – (14) (29) (29) (69)
4,378 6,921 8,606 – – 3,273 4,378 6,921 11,879
Loans sold 4,310 6,823 8,524 – – 3,219 4,310 6,823 11,743
Gain on sale of loans from new securitizations 68 98 82 – – 54 68 98 136
Gain on sale of loans sold to revolving
securitization vehicles 56 146 72 372 456 212 428 602 284
Other securitization revenue (54) (16) (28) 94 98 41 40 82 13
Amortization of servicing liability 55 57 41 87 90 39 142 147 80
Total 125 285 167 553 644 346 678 929 513
(1) Net cash proceeds represent cash proceeds less issuance costs. (2) Includes credit card securities retained on-balance sheet.
The key weighted-average assumptions used to value the deferred
purchase price for all securitizations were as follows:
Residential mortgages Credit card loans
2010 2009 2010 2009
Weighted-average life (years) 4.47 3.45 1.00 0.99
Prepayment rate 17.26% 20.59% 35.70% 36.41%
Interest rate 4.01% 4.41% 21.32% 21.65%
Expected credit losses (1) – – 3.54% 4.43%
Discount rate 2.55% 3.87% 9.33% 9.69%
(1) As the residential mortgages are fully insured, there are no expected credit losses.