Bank of Montreal 2013 Annual Report Download - page 130

For performing loans with revolving terms, the incurred and future
credit marks are amortized into net interest income on a straight-line
basis over the contractual terms of the loans. The impact on net interest
income of such amortization for the year ended October 31, 2013 was
$123 million ($179 million in 2012 and $81 million in 2011).
As performing loans are repaid, the related unamortized credit mark
remaining is recorded as net interest income during the period in which
the cash is received. The impact on net interest income of such
repayments for the year ended October 31, 2013 was $241 million
($301 million in 2012 and $110 million in 2011).
Actual specific provisions for credit losses related to these
performing loans will be recorded as they arise in a manner that is
consistent with our accounting policy for loans we originate. The total
specific provision for credit losses for purchased performing loans for the
year ended October 31, 2013 was $240 million ($291 million in 2012
and $19 million in 2011).
As at October 31, 2013, the amount of purchased performing loans
remaining on the balance sheet was $16.6 billion ($21.1 billion in 2012).
As at October 31, 2013, the credit mark remaining on performing term
loans, revolving loans and other performing loans was $425 million,
$156 million and $6 million, respectively ($849 million, $301 million and
$23 million, respectively, in 2012). Of the total credit mark for
performing loans of $587 million, $329 million represents the credit
mark that will be amortized over the remaining life of the portfolio. The
remaining $258 million represents the incurred credit mark and will be
re-measured each reporting period.
Purchased Credit Impaired Loans
Subsequent to the acquisition date, we regularly re-evaluate what we
expect to collect on the purchased credit impaired loans. Increases in
expected cash flows will result in a recovery in the specific provision for
credit losses and either a reduction in any previously recorded allowance
for credit losses or, if no allowance exists, an increase in the current
carrying value of the purchased credit impaired loans. Decreases in
expected cash flows will result in a charge to the specific provision for
credit losses and an increase in the allowance for credit losses. The
impact of these evaluations for the year ended October 31, 2013 was a
$410 million recovery in the specific provision for credit losses ($509
million recovery in 2012 and $nil in 2011).
As at October 31, 2013, the amount of purchased credit impaired
loans remaining on the balance sheet was $0.7 billion ($1.2 billion
in 2012). As at October 31, 2013, the credit mark remaining related
to purchased credit impaired loans was $128 million ($445 million
in 2012).
Unfunded Commitments and Letters of Credit Acquired
As part of our acquisition of M&I, we recorded a liability related to
unfunded commitments and letters of credit. The total credit mark and
interest rate mark associated with unfunded commitments and letters of
credit are amortized into net interest income on a straight-line basis
over the contractual term of the acquired liabilities. As the credit mark is
amortized, an appropriate collective allowance is recorded, consistent
with our methodology for the collective allowance.
As at October 31, 2013, the credit mark remaining on unfunded
commitments and letters of credit acquired was $15 million ($99 million
in 2012).
FDIC Covered Loans
Certain acquired loans are subject to a loss share agreement with the
Federal Deposit Insurance Corporation (“FDIC”). Under this agreement,
the FDIC reimburses us for 80% of the net losses we incur on the
covered loans.
We recorded net recoveries of $15 million for the year ended
October 31, 2013 ($27 million in 2012). These amounts are net of the
amounts expected to be reimbursed by the FDIC.
Note 5: Other Credit Instruments
We use off-balance sheet credit instruments as a method of meeting the
financial needs of our customers. Summarized below are the types of
instruments that we use:
‰ Standby letters of credit and guarantees represent our obligation to
make payments to third parties on behalf of another party if that
party is unable to make the required payments or meet other
contractual requirements. Standby letters of credit and guarantees
include our guarantee of a subsidiary’s debt to a third party;
‰ Securities lending represents our credit exposure when we lend our
securities, or our customers’ securities, to third parties should a
securities borrower default on its redelivery obligation;
‰ Documentary and commercial letters of credit represent our
agreement to honour drafts presented by a third party upon
completion of specific activities; and
‰ Commitments to extend credit represent our commitment to our
customers to grant them credit in the form of loans or other
financings for specific amounts and maturities, subject to their
meeting certain conditions.
The contractual amount of our other credit instruments represents the
maximum undiscounted potential credit risk if the counterparty does not
perform according to the terms of the contract, before possible
recoveries under recourse and collateral provisions. Collateral
requirements for these instruments are consistent with collateral
requirements for loans.
A large majority of these commitments expire without being drawn
upon. As a result, the total contractual amounts may not be
representative of the funding likely to be required for these
commitments.
We strive to limit credit risk by dealing only with counterparties that
we believe are creditworthy, and we manage our credit risk for other
credit instruments using the same credit risk process that is applied to
loans and other credit assets.
Summarized information related to various commitments is as
follows:
(Canadian $ in millions) 2013 2012
Contractual Contractual
amount amount
Credit Instruments
Standby letters of credit and guarantees 13,470 11,851
Securities lending 3,772 1,531
Documentary and commercial letters of credit 1,205 999
Commitments to extend credit (1)
– Original maturity of one year and under 13,107 15,429
– Original maturity of over one year 58,428 44,556
Total 89,982 74,366
(1) Commitments to extend credit exclude personal lines of credit and credit card lines of credit
that are unconditionally cancellable at our discretion.
Certain comparative figures have been reclassified to conform with the current year’s
presentation.
Notes
BMO Financial Group 196th Annual Report 2013 141