Bank of Montreal 2003 Annual Report Download - page 79

BMO Financial Group 186th Annual Report 2003 75
Securities are divided into three types, each with a different purpose
and accounting treatment. The three types of securities we hold are
as follows:
Investment securities are comprised of equity and debt securitie s
that we purchase with the intention of holding until maturity or
until market conditions, such as a change in interest rates, provide
us with a better investment opportunity. Equity securities are
recorded at cost and debt securities at amortized cost. Gains and
losses on disposal are calculated using the carrying amount of the
securities sold.
Interest income earned, the amortization of premiums and
discounts on debt securities and dividends received are recorded
in our Consolidated Statement of Income in interest, dividend and
fee income.
Our investments in equity securities where we exert significant
influence, but not control, over a corporation are recorded at
cost. This amount is adjusted for our proportionate share of the
corporation’s net income or loss from the date of acquisition, and
is recorded in our Consolidated Statement of Income in interest,
dividend and fee income.
Investment securities are reviewed at each quarter end to deter-
mine whether the fair value is below the current recorded value.
For actively traded securities, quoted market value is considered
to be fair value. For privately held securities and for thinly traded
securities where market quotes are not available, we use estimation
techniques to determine fair value. Estimation techniques used
include discounted cash flows, multiples of earnings or comparisons
with other securities that are substantially the same.
When the fair value of any of our investment securities has
declined below its current recorded value, we assess whether the
decline is other than temporary. If the decline is considered to be
other than temporary, write-downs are recorded in our Consolidated
Statement of Income in investment securities gains (losses).
Trading securities are securities that we purchase for resale over a
short period of time. We report these securities at their market value
and record the mark-to-market adjustments and any gains and
losses on the sale of these securities in our Consolidated Statement
of Income in trading revenues.
Loan substitute securities are customer financings, such as dis-
tressed preferred shares, that we structure as after-tax investments
to provide our customers with an interest rate advantage over what
would be applicable on a conventional loan. These securities are
accounted for in accordance with our accounting policy for loans,
which is described in Note 4.
We did not own any securities issued by a single non-government
entity where the book value, as at October 31, 2003 or 2002, was
greater than 10% of our shareholders’ equity.
The term to maturity included in the table above is based on the contractual maturity date of the
security. Securities with no maturity date are included in the over 10 years category.
Yields in the table above are calculated using the book value of the security and the contractual
interest or stated dividend rates associated with each security adjusted for any amortization of
premiums and discounts. Tax effects are not taken into consideration.
Note 3 Securities
(Canadian $ in millions, except as noted) Term to maturity 2003 2002
Within 1 to 3 3 to 5 5 to 10 Over 10 Total book Total book
1 year years years years years value value
Investment Securities Yield Yield Yield Yield Yield Yield
Issued or guaranteed by: %%%%%%
Canadian federal government $ 1,622 3.26 $ –– $ 203 3.51 $ –– $ 1 5.10 $ 1,826 3.29 $ 1,145
Canadian provincial and
municipal governments
–– –– –– –– –– –– 2
U.S. federal government 2,411 1.85 1,386 1.42 1,252 3.68 578 4.14
–– 5,627 2.39 5,707
U.S. states, municipalities
and agencies 2,355 2.28 2,610 2.31 308 6.03 143 6.54 54 7.23 5,470 2.67 7,665
Other governments 58 4.09 269 2.67 7 4.95 18 5.31
–– 352 3.08 83
Mortgage-backed securities and
collateralized mortgage obligations
–– 1,136 2.37 –– –– 432 5.05 1,568 3.11 1,059
Corporate debt 1,090 2.49 724 5.21 748 6.93 292 3.77 201 4.45 3,055 4.47 3,391
Corporate equity 98 5.11 333 5.86 261 5.43 114 5.32 956 2.00 1,762 3.63 2,219
Total investment securities 7,634 2.43 6,458 2.65 2,779 4.97 1,145 4.48 1,644 3.27 19,660 3.05 21,271
Trading Securities
Issued or guaranteed by:
Canadian federal government 3,522 1,074 630 306 824 6,356 5,608
Canadian provincial and
municipal governments 213 212 146 484 607 1,662 1,401
U.S. federal government 171 51 67 7 10 306 609
U.S. states, municipalities
and agencies
–––– 30 30 –
Other governments – 12421 5 51 19
Corporate debt 1,792 644 937 1,902 2,495 7,770 4,939
Corporate equity –––– 18,944 18,944 9,851
Total trading securities 5,698 1,982 1,804 2,720 22,915 35,119 22,427
Loan Substitute Securities 11 –––– 11 17
Total securities $ 13,343 $ 8,440 $ 4,583 $ 3,865 $ 24,559 $ 54,790 $ 43,715
Included in corporate equity are investments where we exert sig-
nificant influence, but not control, of $124 million and $149 million
as at October 31, 2003 and 2002, respectively.