Bank of Montreal 2013 Annual Report Download - page 129

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Specific provisions for credit losses, by geographic region are as follows:
(Canadian $ in millions) Residential mortgages
Credit card, consumer
instalment and other
personal loans Business and government loans (2) Total
For the year ended October 31
By geographic region (1):
Canada
United States
Other countries
Total
2013
4
125
–
129
2012
14
118
–
132
2013
433
187
–
620
2012
476
267
–
743
2013
133
(281)
(2)
(150)
2012
124
(234)
(3)
(113)
2013
570
31
(2)
599
2012
614
151
(3)
762
(1) Geographic region is based upon the country of ultimate risk.
(2) Includes provisions relating to customers’ liability under acceptances in the amount of $nil and $nil as at October 31, 2013 and 2012, respectively.
Foreclosed Assets
Property or other assets that we have received from borrowers to satisfy
their loan commitments are classified as either held for use or held for
sale according to management’s intention and are recorded at the lower
of carrying amount or fair value (less costs to sell). Fair value is
determined based on market prices where available. Otherwise, fair
value is determined using other methods, such as analysis of discounted
cash flows or market prices for similar assets.
During the year ended October 31, 2013, we foreclosed on impaired
loans and received $301 million of real estate properties that we
classified as held for sale ($438 million in 2012).
As at October 31, 2013, real estate properties held for sale totalled
$278 million ($425 million in 2012). These properties are disposed of
when considered appropriate. During the year ended October 31, 2013,
we recorded an impairment loss of $36 million on real estate properties
classified as held for sale ($36 million in 2012).
Renegotiated Loans
From time to time we modify the contractual terms of loans due to the
poor financial condition of the borrower. We assess renegotiated loans
for impairment consistent with our existing policies for impairment.
When renegotiation leads to significant concessionary modifications to
the contractual terms of the loan and the concessions are for economic
or legal reasons related to the borrower’s financial difficulty that we
would not otherwise consider, the loan is classified as impaired. We
consider one or a combination of the following to be significant
concessions: (1) a reduction of the stated interest rate, (2) an extension
of the maturity date or dates at a stated interest rate lower than the
current market rate for a new loan with a similar term, or
(3) forgiveness of principal or accrued interest.
Renegotiated loans are permitted to remain in performing status if
the modifications are not considered to be significant concessions or are
returned to performing status when none of the criteria for classification
as impaired continue to apply.
The carrying value of our renegotiated loans was $388 million as at
October 31, 2013 ($367 million in 2012). Renegotiated loans of
$155 million were classified as performing during the year ended
October 31, 2013 ($91 million in 2012). Renegotiated loans of
$59 million and $73 million were written off in the years ended
October 31, 2013 and 2012, respectively.
Insured Mortgages
Included in the residential mortgages balance are Canadian government
and corporate-insured mortgages of $52 billion as at October 31, 2013
($49 billion in 2012). Included in the consumer instalment and other
personal loans balance are Canadian government-insured real estate
personal loans of $nil as at October 31, 2013 ($nil in 2012).
Purchased Loans
We record all loans that we purchase at fair value on the day that we
acquire the loans. The fair value of the acquired loan portfolio includes an
estimate of the interest rate premium or discount on the loans calculated
as the difference between the contractual rate of interest on the loans
and prevailing interest rates (the “interest rate mark”). Also included in
fair value is an estimate of expected credit losses (the “credit mark”) as
of the acquisition date. The credit mark consists of two components: an
estimate of the amount of losses that exist in the acquired loan portfolio
on the acquisition date but that haven’t been specifically identified on
that date (the “incurred credit mark”) and an amount that represents
future expected losses (the “future credit mark”). Because we record the
loans at fair value, no allowance for credit losses is recorded in our
Consolidated Balance Sheet on the day we acquire the loans. Fair value is
determined by estimating the principal and interest cash flows expected
to be collected on the loans and discounting those cash flows at a market
rate of interest. We estimate cash flows expected to be collected based
on specific loan reviews for commercial loans. For retail loans, we use
models that incorporate management’s best estimate of current key
assumptions such as default rates, loss severity and the timing of
prepayments, as well as collateral.
Acquired loans are classified into the following categories: those
that on the acquisition date continued to make timely principal and
interest payments (the “purchased performing loans”) and those for
which on the acquisition date the timely collection of interest and
principal was no longer reasonably assured (the “purchased credit
impaired loans” or “PCI loans”). Because purchased credit impaired loans
are recorded at fair value at acquisition based on the amount expected
to be collected, none of the purchased credit impaired loans are
considered to be impaired at acquisition.
Subsequent to the acquisition date, we account for each type of
loan as follows:
Purchased Performing Loans
For performing loans with fixed terms, the future credit mark is fully
amortized to net interest income over the expected life of the loan using
the effective interest method. The impact on net interest income for the
year ended October 31, 2013 was $48 million ($97 million in 2012 and
$52 million in 2011). The incurred credit losses are re-measured at each
reporting period, with any increases recorded as an increase in the
collective allowance and the provision for credit losses. Decreases in
incurred credit losses are recorded as a decrease in the collective
allowance and in the provision for credit losses until the accumulated
collective allowance related to these loans is exhausted. Any additional
decrease is recorded in net interest income.
The impact of the re-measurement of incurred credit losses for
performing loans with fixed terms for the year ended October 31,
2013 was $nil in the provision for credit losses and $143 million in net
interest income ($nil and $104 million, respectively, in 2012 and
$14 million and $nil, respectively, in 2011).
Notes
140 BMO Financial Group 196th Annual Report 2013