Bank of Montreal 2013 Annual Report Download - page 127

Notes
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We amortize deferred loan origination costs that are directly
attributable and incremental to the origination of a loan using the
effective interest method. We record the amortization as a reduction in
interest, dividend and fee income, loans, over the term of the resulting
loan. Under the effective interest method, the amount recognized in
interest, dividend and fee income, loans, varies over the term of the
loan based on the principal outstanding.
Securities Borrowed or Purchased Under Resale
Agreements
Securities borrowed or 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
if they were loans.
Lending Fees
The accounting treatment for lending fees varies depending on the
transaction. Some loan origination, restructuring and renegotiation fees
are recorded as interest income over the term of the loan, while other
lending fees, to a certain threshold are taken into income at the time of
loan origination. 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 recorded as 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, which we guarantee for a fee. We have
offsetting claims, equal to the amount of the acceptances, against our
customers in the event of a call on these commitments. The amount due
under acceptances is recorded in other liabilities and our corresponding
claim is recorded as a loan in our Consolidated Balance Sheet.
Fees earned are recorded in lending fees in our Consolidated
Statement of Income over the term of the acceptance.
Impaired Loans
Generally consumer loans in both Canada and the U.S. are classified as
impaired when payment is contractually 90 days past due, or one year
past due for residential mortgages if guaranteed by the Government of
Canada. Credit card loans are immediately written off when principal or
interest payments are 180 days past due, and are not reported as
impaired. In Canada, consumer installment loans, other personal loans
and some small business loans are normally written off when they are
one year past due. In the US, all consumer loans are written off when
they are 180 days past due, except for non-real estate term loans which
are written off at 120 days. For the purpose of measuring the amount to
be written off, the determination of the recoverable amount includes an
estimate of future recoveries.
Corporate and commercial loans are classified as impaired when we
determine there is no longer reasonable assurance that principal or
interest will be collected in its entirety on a timely basis. Generally,
corporate and commercial loans are considered impaired when
payments are 90 days past due, or for fully secured loans, when
payments are 180 days past due. Corporate and commercial loans are
written off following a review on an individual loan basis that confirms
all recovery attempts have been exhausted.
Our average gross impaired loans and acceptances were $2,800
million for the year ended October 31, 2013 ($2,812 million in 2012).
Our average impaired loans, net of the specific allowance, were $2,354
million for the year ended October 31, 2013 ($2,296 million in 2012).
During the year ended October 31, 2013, we recorded a net gain of
$46 million (net gain of $4 million in 2012) on the sale of impaired loans.
Once a loan is identified as impaired, we continue to recognize
interest income based on the original effective interest rate of the loan.
Interest income on impaired loans of $133 million was recognized
for the year ended October 31, 2013 ($159 million in 2012).
A loan will be reclassified back to performing status when we
determine 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 classification of
the loan as impaired continue to apply.
Allowance for Credit Losses
The allowance for credit losses recorded in our Consolidated Balance
Sheet is maintained at a level that we consider adequate to absorb
credit-related losses on our loans, customers’ liability under acceptances
and other credit instruments. The portion related to other credit
instruments is recorded in other liabilities in our Consolidated Balance
Sheet. As at October 31, 2013, there was $305 million in allowance for
credit losses related to other credit instruments included in other
liabilities ($230 million in 2012).
The allowance is comprised of a specific allowance and a collective
allowance.
Specific Allowance
These allowances are recorded for individually identified impaired loans
to reduce their carrying value to the expected recoverable amount. We
review our loans and acceptances on an ongoing basis to assess
whether any loans should be classified as impaired and whether an
allowance or write-off should be recorded (other than credit card loans,
which are classified as impaired and written off when principal or
interest payments are 180 days past due, as discussed under impaired
loans). The review of problem loans is conducted at least quarterly by
the account managers, each of whom assesses the ultimate
collectability and estimated recoveries for a specific loan based on all
events and conditions that are relevant to the loan. This assessment is
then approved by an independent credit officer.
Individually Significant Impaired Loans
To determine the amount we expect to recover from an individually
significant impaired loan, we use the value of the estimated future cash
flows discounted at the loan’s original effective interest rate. The
determination of estimated future cash flows of a collateralized loan
reflects the expected realization of the underlying security net of
expected costs and any amounts legally required to be paid to the
borrower. Security can vary by type of loan and may include cash,
securities, real properties, accounts receivable, guarantees, inventory or
other capital assets.
Individually Insignificant Impaired Loans
Residential mortgages, consumer instalment and other personal loans
are individually insignificant and thus are collectively assessed for
impairment, taking into account historical loss experience. In the periods
following the recognition of impairment, adjustments to the allowance
for these loans reflecting the time value of money are recognized and
presented as interest income.
Collective Allowance
We maintain a collective allowance in order to cover any impairment in
the existing portfolio for loans that have not yet been individually
identified as impaired. Our approach to establishing and maintaining the
collective allowance is based on the guideline issued by OSFI and is
reviewed by management on a quarterly basis.
The collective allowance methodology incorporates both
quantitative and qualitative factors to determine an appropriate level for
the collective allowance. For the purpose of calculating the collective
allowance, we group loans on the basis of similarities in credit risk
characteristics. The loss factors for groups of loans are determined based
on a minimum of five years of historical data and a one-year loss
emergence period except for credit cards, where a seven-month loss
emergence period is used. The loss factors are back-tested and
calibrated on a regular basis to ensure that they continue to reflect our
138 BMO Financial Group 196th Annual Report 2013