Bank of Montreal 2007 Annual Report Download - page 137

Following our disclosures of mark-to-market losses in our
commodities trading businesses on April 27, 2007 and May 17, 2007
aggregating $680 million (pre-tax) as of April 30, 2007, the Bank
has received inquiries, requests for documents or subpoenas pertaining
to those trading losses from securities, commodities, banking and
law enforcement authorities. The Bank is cooperating with all of these
authorities.
The Bank and its subsidiaries are party to other legal proceedings,
including regulatory investigations, in the ordinary course of their
businesses. While there is inherent difficulty in predicting the outcome
of these proceedings, 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 consolidated 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 summarize
our pledged assets, to whom they are pledged and in relation to
what activity:
(Canadian $ in millions) 2007 2006
Cash resources $65$ 9
Securities
Issued or guaranteed by Canada 8,758 5,999
Issued or guaranteed by a Canadian province,
municipality or school corporation 3,648 2,234
Other securities 17,441 17,724
Securities borrowed or purchased
under resale agreements and other 25,475 25,436
Total assets pledged $ 55,387 $ 51,402
Excludes restricted cash resources disclosed in Note 2.
(Canadian $ in millions) 2007 2006
Assets pledged to: (1)
Clearing systems, payment systems and depositories $ 1,371 $ 1,351
Bank of Canada 1,768 1,734
Foreign governments and central banks 1,381 3,247
Assets pledged in relation to:
Obligations related to securities lent
or sold under repurchase agreements 24,837 28,477
Securities borrowing and lending 19,435 11,709
Derivatives transactions 3,959 2,010
Other 2,636 2,874
Total $ 55,387 $ 51,402
Certain comparative figures have been reclassified to conform with the current
year’s presentation.
Excludes cash pledged with central banks disclosed as restricted cash in Note 2.
(1) Includes assets pledged in order to participate in clearing and payment systems and
depositories or to have access to the facilities of central banks in foreign jurisdictions.
BMO Financial Group 190th Annual Report 2007 133
Notes
Note 29: Fair Value of Financial Instruments
We record trading assets and liabilities, derivatives, available-for-sale
securities and securities sold but not yet purchased at market values and
other 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 represents our estimate of the amounts for
which we could exchange the financial instruments with willing 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 taking into account
only changes in interest rates and credit risk that have occurred since
we acquired them or entered into the underlying contract. These
calculations represent management’s best estimates based on a range
of methodologies and assumptions; since they involve uncertainties,
the fair values 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.
Items that are not financial instruments, such as premises and
equipment, goodwill and intangible assets, have been excluded from
our estimate of fair value. The assets excluded totalled $3,244 million
as at October 31, 2007 ($3,297 million in 2006).
Financial Instruments Whose Book Value
Approximates Fair Value
Fair value is assumed to equal book value for acceptance-related assets
and liabilities and securities lent or 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, certain other
assets and certain other liabilities.
Loans
In determining the fair value of our loans, we incorporate the following
assumptions:
•
For fixed rate performing loans, we discount the remaining contractual
cash flows, adjusted for estimated prepayment, at market interest
rates currently offered for loans with similar terms.
•For floating rate performing loans, changes in interest rates have
minimal impact on fair value since loans reprice to market frequently.
On that basis, fair value is assumed to equal carrying value.
The value of our loan balances determined using the above assumptions
is further reduced by the allowance for credit losses to determine the
fair value of our loan portfolio.
Securities
The fair value of our securities, both trading and available-for-sale,
by instrument type and the methods used to determine fair value are
provided in Note 3.
Derivative Instruments
The methods used to determine the fair value of derivative instruments
are provided in Note 9.
Deposits
In determining the fair value of our deposits, we incorporate the
following assumptions:
•For fixed rate, fixed maturity deposits, we discount the remaining
contractual cash flows for these deposits, adjusted for expected
redemptions, at market interest rates currently offered for deposits
with similar terms and risks.
•For floating rate, fixed maturity deposits, changes in interest rates
have minimal impact on fair value since deposits reprice to market
frequently. On that basis, fair value is assumed to equal book value.
•For deposits with no defined maturities, we consider fair value
to equal book value based on book value being equivalent to the
amount payable on the reporting date.