Bank of Montreal 2003 Annual Report Download - page 101

BMO Financial Group 186th Annual Report 2003 97
Our business necessitates the management of several categories of
risk, including credit, market, liquidity and operational risks. Certain
information about our exposure to these risks is set out in Notes 3, 4,
annual retainer and other fees in this form. Deferred share units
allocated under the plan are adjusted to reflect dividends and
changes in the market value of our common shares. The value of
these deferred share units will be paid when the director resigns from
the Bank’s Board of Directors. Expenses related to these deferred share
units were $2 million, $2 million and $1 million for the years ended
October 31, 2003, 2002 and 2001, respectively, and were included in
other expenses in our Consolidated Statement of Income.
9 and 26. A summary of our interest rate gap position and effective
interest rates on our financial instrument assets and liabilities is set
out on page 64 of our Management’s Discussion and Analysis.
Note 24 Risk Management
(a) Legal Proceedings
During the year, claims were made against the Bank in relation
to the termination of certain derivative positions. Based upon
information presently available, counsel for Bank of Montreal is
not in a position to express an opinion as to the likely outcome of
any of these actions. Management is of the view that the Bank has
strong defences to these claims, including offsetting counterclaims.
BMO Nesbitt Burns Inc., an indirect subsidiary of Bank of
Montreal, has been named as a defendant in several class and indi-
vidual actions in Canada and a class action in the United States
brought on behalf of shareholders of Bre-X Minerals Ltd. (“Bre-X”).
Other defendants named in one or more of these actions include
Bre-X, officers and directors of Bre-X, a mining consulting firm
retained by Bre-X, Bre-X’s financial advisor, brokerage firms which
sold Bre-X common stock, and a major gold production company.
These actions are largely based on allegations of negligence,
negligent or fraudulent misrepresentation and a breach of the U.S.
Securities Exchange Act of 1934 (United States only), in connection
with the sale of Bre-X securities. Two of the proposed class actions
in Canada have been dismissed as to BMO Nesbitt Burns Inc. All of
the other actions are at a preliminary stage. Based upon information
presently available, counsel for BMO Nesbitt Burns Inc. is not in a
position to express an opinion as to the likely outcome of any of these
actions. Management is of the view that BMO Nesbitt Burns Inc. has
strong defences and will vigorously defend against all such actions.
In the bankruptcy of Adelphia Communications Corporation
(“Adelphia”), the Official Committees of Unsecured Creditors and
Equity Holders have applied for leave to file Complaints against the
Bank, Harris Nesbitt Corp., and approximately 380 financial insti-
tutions. The Complaints allege various causes of action arising out
of the relationship between the Bank and its subsidiary, Adelphia
and various of its subsidiaries, and the Rigas family and certain
entities owned or controlled by that family. Proceedings relating
to these Complaints are in the initial stages and counsel is not in a
position to express an opinion on the possible outcome. Management
is of the view that the Bank and Harris Nesbitt Corp. have strong
defences to these Complaints.
The Bank and its subsidiaries are party to other legal proceedings
in the ordinary course of their businesses. Management does not
expect the outcome of any of these other proceedings, individually
or in the aggregate, to have a material adverse effect on the consoli-
dated financial position or results of the Bank’s operations.
(b) Pledged Assets
In the normal course of our business, we pledge assets as security
for various liabilities that we incur. The following tables summa-
rize our pledged assets, to whom they are pledged and in relation to
what activity:
(Canadian $ in millions) 2003 2002
Cash resources $ 10 $78
Securities
Issued or guaranteed by Canada 4,799 5,606
Issued or guaranteed by a Canadian province,
municipality or school corporation 1,457 886
Other securities 12,055 12,032
Other assets 18,204 18,816
Total assets pledged $ 36,525 $ 37,418
Excludes restricted cash resources disclosed in Note 2.
(Canadian $ in millions) 2003 2002
Assets pledged to:
Clearing systems, payment systems and depositories $ 1,096 $ 1,509
Assets pledged in relation to:
Obligations related to securities sold
under repurchase agreements 23,748 24,324
Securities borrowing and lending 8,997 8,810
Derivatives transactions 1,052 695
Other 1,632 2,080
Total $ 36,525 $ 37,418
Excludes cash pledged with central banks disclosed as restricted cash in Note 2.
Note 25 Contingent Liabilities
As a financial institution, we record trading assets at market values
and non-trading assets and liabilities at their original amortized
cost less allowances or write-downs for impairment. Fair value is
subjective in nature, requiring a variety of valuation techniques and
assumptions. The values are based upon the estimated amounts for
individual assets and liabilities and do not include an estimate of
the fair value of any of the legal entities or underlying operations
that comprise our business.
Fair value amounts disclosed represent point-in-time estimates
that may change in subsequent reporting periods due to market
conditions or other factors. Fair value generally represents our
estimate of the amounts we could exchange the financial instru-
ments for with third parties who were interested in acquiring the
instruments. In most cases, however, the financial instruments are
not typically exchangeable or exchanged and therefore it is difficult
to determine their fair value. In those cases, we have estimated fair
value assuming that we will not sell the assets or liabilities, taking
into account only changes in interest rates and credit risk that
have occurred since we acquired them or entered into a contract.
These calculations represent management’s best estimates based
on a range of methodologies and assumptions; since they involve
uncertainties, the results may not be realized in an actual sale or
immediate settlement of the instruments.
Interest rate changes are the main cause of changes in the fair
value of our financial instruments.
Premises and equipment, goodwill and intangible assets are not
financial instruments and have been excluded from our estimate
of fair value. The net amounts excluded totalled $3,968 million as
at October 31, 2003 and $4,360 million as at October 31, 2002.
Determination of Fair Value
Fair value is assumed to equal book value for acceptance assets and
liabilities, securities sold but not yet purchased and securities sold
under repurchase agreements due to the short-term nature of these
assets and liabilities. Fair value is also assumed to equal book value
for our cash resources, other assets and other liabilities.
Note 26 Fair Value of Financial Instruments