Bank of Montreal 2003 Annual Report Download - page 81

BMO Financial Group 186th Annual Report 2003 77
Loans, including customers’ liability under acceptances and allowance for credit losses by category, are as follows:
Gross Specific General Net
(Canadian $ in millions) amount (1) allowance allowance amount
2003 2002 2003 2002 2003 2002 2003 2002
Residential mortgages $ 52,095 $ 47,569 $ 5 $ 5 $ 11 $ 13 $ 52,079 $ 47,551
Credit card, consumer instalment and other personal loans 25,070 23,448 24329 294 24,739 23,150
Business and government loans 51,889 57,963 598 760 800 823 50,491 56,380
Securities purchased under resale agreements 13,276 15,664 –––– 13,276 15,664
Subtotal 142,330 144,644 605 769 1,140 1,130 140,585 142,745
Customers’ liability under acceptances 5,611 6,901 –– 40 50 5,571 6,851
Total $ 147,941 $ 151,545 $ 605 $ 769 $ 1,180 $ 1,180 $ 146,156 $ 149,596
Allowance for Credit Losses
The allowance for credit losses recorded in our Consolidated Balance
Sheet is maintained at a level which we consider to be adequate to
absorb credit-related losses on our loans, customers’ liability under
acceptances and other credit instruments (as discussed in Note 5).
The portion related to other credit instruments and guarantees is
recorded in other liabilities.
The allowance comprises the following two components:
Specific Allowances
These allowances are recorded for specific loans to reduce their book
value to the amount we expect to recover. We review our loans and
acceptances, other than consumer instalment and credit card loans
(which are written off when certain conditions exist, as discussed
under impaired loans), on an ongoing basis to assess whether any
loans should be classified as impaired and whether an allowance
or write-off should be recorded. Our review of problem loans is
conducted at least quarterly by our account managers, who assess
the ultimate collectibility and estimated recoveries on a specific
loan based on all events and conditions that the manager believes
are relevant to the condition of the loan. This assessment is then
reviewed and concurred with by an independent credit officer.
To determine the amount we expect to recover from an impaired
loan, we use the value of the estimated future cash flows discounted
at the effective rate inherent in the loan. When the amounts and
timing of future cash flows cannot be estimated with reasonable
reliability, the expected recovery amount is estimated using either
the fair value of any security underlying the loan, net of expected
costs of realization and any amounts legally required to be paid to
the borrower, or an observable market price for the loan. Security can
vary by type of loan and may include cash, securities, real property,
accounts receivable, guarantees, inventory or other capital assets.
General Allowance
We maintain a general allowance in order to cover any impairment
in the existing portfolio that cannot yet be associated with specific
loans. Our approach to establishing and maintaining the general
allowance is based on the guideline issued by our regulator, the
Superintendent of Financial Institutions Canada.
The general allowance is reviewed on a quarterly basis. A number
of factors are considered when determining the appropriate level
of the general allowance. A statistical analysis of past performance
is undertaken to derive the mean (Expected Loss) and volatility
(Unexpected Loss) of loss experience. This analysis calculates
historical average losses for each homogeneous portfolio segment
(e.g., mortgages), while other models estimate losses for portfolios
of corporate loans and investments that can be referenced to mar-
ket data. In addition, the level of allowance already in place and
management’s professional judgment regarding portfolio quality,
business mix and economic as well as credit market conditions
are also considered.
Changes in the value of our loan portfolio due to credit-related
losses are included in the provision for credit losses in our Consol-
idated Statement of Income.
Change in Accounting Policy
Effective May 1, 2003, property or other assets that we have received
from borrowers to satisfy their loan commitments are recorded at
fair value and are classified as either held for use or held for sale
according to management’s intention. Prior to May 1, 2003, property
or other assets that we received from borrowers to satisfy their loan
commitments were classified as impaired loans and recorded at the
lower of the amount we expected to recover and the outstanding
balance of the loan at the time of the transfer. The impact of this
change in accounting was not significant.
During the years ended October 31, 2003, 2002 and 2001, we would
have recorded interest income of $78 million, $172 million and
$126 million, respectively, if we had not classified any loans as
impaired. Cash interest income on impaired loans of $8 million,
$2 million and $2 million was recognized during the years ended
October 31, 2003, 2002 and 2001, respectively.
Impaired loans, including customers’ liability under acceptances and the related allowances, are as follows:
Gross impaired Specific Net of specific
(Canadian $ in millions) amount allowance allowance
2003 2002 2003 2002 2003 2002
Residential mortgages $ 142 $ 124 $ 5 $ 5 $ 137 $ 119
Consumer instalment and other personal loans 46 53 2444 49
Business and government loans 1,730 2,160 598 760 1,132 1,400
Total $ 1,918 $ 2,337 $ 605 $ 769 $ 1,313 $ 1,568
Certain comparative figures have been reclassified to conform with the current year’s presentation.
Restructured loans of $14 million were classified as performing during the year ended October 31, 2003
($38 million in 2002). No restructured loans were written off in the year ended October 31, 2003 or
in the year ended October 31, 2002. Included in loans as at October 31, 2003 are $46,220 million
($53,981 million in 2002) of loans denominated in U.S. dollars and $337 million ($598 million in 2002)
of loans denominated in other foreign currencies.
(1) Loans are presented net of unearned income of $56 million and $81 million as at October 31, 2003
and
2002, respectively.
Fully secured loans with past due amounts between 90 and 180 days that we have not classified as
impaired totalled $50 million as at October 31, 2003 ($49 million in 2002).
Our average gross impaired loans and acceptances were $2,202 million for the year ended Octo-
ber 31, 2003 ($2,150 million in 2002). Our average impaired loans, net of the specific allowance, were
$1,442 mil lion for the year ended October 31, 2003 ($1,351 million in 2002).