Bank of Montreal 2003 Annual Report Download - page 80

BMO Financial Group 186th Annual Report 200376
Notes to Consolidated Financial Statements
(Canadian $ in millions) 2003 2002 2001
Reported in:
Interest, Dividend and Fee Income
Investment securities $ 858 $ 1,156 $ 1,610
Trading securities 743 460 809
$ 1,601 $ 1,616 $ 2,419
Non-Interest Revenue
Investment securities
Gross realized gains (1) $ 142 $ 232 $ 480
Gross realized losses (30) (56) (73)
Write-downs (2) (153) (322) (284)
Investment securities gains (losses) $ (41) $ (146) $ 123
Trading securities, net realized and unrealized gains $ 65 $ 10 $ 139
Unrealized Gains and Losses
(Canadian $ in millions) 2003 2002
Gross Gross Gross Gross
Book unrealized unrealized Fair Book unrealized unrealized Fair
value gains losses value value gains losses value
Investment Securities
Issued or guaranteed by:
Canadian federal government $ 1,826 $ 2 $ 1 $ 1,827 $ 1,145 $
– $ 2 $ 1,143
Canadian provincial and municipal governments
–––– 2 –– 2
U.S. federal government 5,627 83
– 5,710 5,707 143 1 5,849
U.S. states, municipalities and agencies 5,470 52 1 5,521 7,665 107
– 7,772
Other governments 352 2
– 354 83 2 – 85
Mortgage-backed securities and collateralized mortgage obligations 1,568 16 1 1,583 1,059 29
– 1,088
Corporate debt 3,055 101 12 3,144 3,391 119 57 3,453
Corporate equity 1,762 80 9 1,833 2,219 48 67 2,200
Total $ 19,660 $ 336 $ 24 $ 19,972 $ 21,271 $ 448 $ 127 $ 21,592
Loans
Loans are recorded at cost net of unearned income and unamortized
discounts. Unearned income includes interest and deferred loan fees.
Interest income is recorded on an accrual basis, except for impaired
loans, the treatment of which is described below.
Securities 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 sellers, on
a specified date at a specified price. We account for these instru-
ments as loans.
Loan Fees
The accounting treatment for loan fees varies depending on the
transaction. Loan syndication fees are included in lending fees when
they are earned. Loan origination, restructuring and renegotiation
fees are recorded as interest income over the term of the loan.
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.
Customers’ Liability under Acceptances
Acceptances are short-term negotiable instruments issued by our
customers to third parties, which we guarantee in exchange for a
fee. Our potential liability to pay a third party on our customers’
behalf is recorded as a liability in our Consolidated Balance Sheet.
Fees earned are recorded in our Consolidated Statement of Income
as lending fees over the term of the acceptance.
Income from securities is included in our Consolidated Statement of Income as follows:
Impaired Loans
We classify loans, except credit card loans and consumer instalment
loans, as impaired when any of the following criteria are met:
▪we are no longer reasonably assured principal or interest will be
collected on a timely basis;
▪ principal or interest payments become 90 days past due (unless we
are actively trying to collect the loan and it is fully secured); or
▪fully secured loans become 180 days past due.
Credit card loans are classified as impaired and immediately
written off when principal or interest payments become 180 days
past due. Consumer instalment loans are immediately classified
as impaired when the principal or interest payments are 90 days
past due, and are written off when they are past due by one year,
or earlier if warranted.
We do not recognize interest income on loans classified as
impaired, and any interest income that is accrued is reversed
against interest income.
Payments received on loans that have been classified as impaired
are recorded first to recover collection costs and any previous
write-offs or allowances, and then as interest income. Payments
received on impaired consumer instalment loans are applied first
to outstanding interest and then to the remaining principal.
A loan will be reclassified back to performing status when it is
determined 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.
From time to time we will restructure a loan due to the poor finan-
cial condition of the borrower. If no longer considered impaired,
interest on these restructured loans is recorded on an accrual basis.
Note 4 Loans, Customers’ Liability under Acceptances and Allowance for Credit Losses
(1) During the year ended October 31, 2001 we sold our investment in Grupo Financiero BBVA Bancomer
and realized a gain of $321 million ($272 million after tax). The gain was net of unrealized translation
losses of $99 million.
(2) Included in write-downs for the years ended October 31, 2003, 2002 and 2001 were nil, $103 million
and $225 million, respectively, related to our equity investments in collateralized bond obligations.