TD Bank 2010 Annual Report Download - page 102

TD BANK GROUP ANNUAL REPORT 2010 FINANCIAL RESULTS100
2008 – $(137) million). Income (loss) from financial instruments
designated as trading under the fair value option is included in other
income. This income (loss) is primarily offset by the changes in the fair
value of derivatives used to economically hedge these assets and is
recorded in other income (loss).
INCOME (LOSS) FROM FINANCIAL INSTRUMENTS DESIGNATED
AS TRADING UNDER THE FAIR VALUE OPTION
During the year ended October 31, 2010, income (loss) representing
net changes in the fair value of financial assets designated as trading
under the fair value option was $37 million (2009 – $256 million;
Securitization Activity
(millions of Canadian dollars) 2010 2009 2008
Residential Commercial Residential Commercial
mortgage Personal mortgage mortgage Personal mortgage
loans loans loans Total loans loans loans Total Total
Gross proceeds $ 15,875 $ 4,211 $ 113 $ 20,199 $ 28,624 $ 3,429 $ 4 $ 32,057 $ 19,271
Retained interests recognized 586 94 2 682 1,100 20 – 1,120 368
Cash flows received on retained interests 790 68 – 858 519 72 2 593 356
Securitization Gain (Loss) and Income on Retained Interests
(millions of Canadian dollars) 2010 2009 2008
Residential Commercial Residential Commercial
mortgage Personal mortgage mortgage Personal mortgage
loans loans loans Total loans loans loans Total Total
Gain (loss) on sale $ 224 $ 94 $ (1) $ 317 $ 301 $ 20 $ – $ 321 $ 41
Income on retained interests1 157 13 2 172 126 21 – 147 190
Total $ 381 $ 107 $ 1 $ 489 $ 427 $ 41 $ – $ 468 $ 231
Key Assumptions
2010 2009 2008
Residential Commercial Residential Commercial Residential Commercial
mortgage Personal mortgage mortgage Personal mortgage mortgage Personal mortgage
loans loans loans loans loans loans loans loans loans
Prepayment rate1 18.9% 5.1% –% 18.8% 5.0% 5.2% 18.4% 5.9% 5.2%
Discount rate 3.6 3.7 4.5 3.2 3.4 5.8 4.7 5.6 8.1
Expected credit losses2 – – – – – 0.1 – – 0.1
LOAN SECURITIZATIONS
NOTE 5
When loan receivables are transferred in a securitization to a special
purpose entity under terms that transfer control to third parties, and
consideration other than beneficial interest in the transferred assets is
received, the transaction is recognized as a sale and the related loan
assets are removed from the Consolidated Balance Sheet. For control
to have transferred, (1) the transferred loans must be isolated from the
seller, even in the event of bankruptcy or receivership of the seller,
(2) the purchaser must have the right to sell or pledge the transferred
loans or, if the purchaser is a Qualifying Special Purpose Entity (QSPE)
as defined in the CICA Accounting Guideline 12, Transfers of Receiv-
ables, the investors of the QSPE must have the right to sell or pledge
their ownership interest in the QSPE, and (3) the seller cannot retain
the right to repurchase the loans and receive more than trivial benefit.
As part of the securitization, certain financial assets are retained
and may consist of an interest-only strip, servicing rights and, in some
cases, a cash reserve account.
A gain or loss on sale of the loan receivables is recognized immedi-
ately in other income after the effects of hedges on the assets sold, if
applicable. The amount of the gain or loss recognized depends on the
The following table summarizes the impact of securitizations on the
Bank’s Consolidated Statement of Income.
The key assumptions used to value the retained interests at the date
of the securitization activities are as follows:
previous carrying values of the receivables involved in the transfer,
allocated between the assets sold and the retained interests based on
their relative fair values at the date of transfer. To obtain fair value,
quoted market prices are used, where available. However, as market
prices are generally not available for retained interests, fair value is
determined by estimating the present value of future expected cash
flows using management’s best estimates of key assumptions –
credit losses, prepayment rates, forward yield curves and discount
rates – commensurate with the risks involved.
Where the Bank retains the servicing rights, the benefits of servicing
are assessed against market expectations. When the benefits of
servicing are more than adequate, a servicing asset is recognized.
When the benefits of servicing are less than adequate, a servicing
liability is recognized. Retained interests are classified as trading
securities and are subsequently carried at fair value with the changes
in fair value recorded in trading income.
In most cases, the Bank retained the responsibility for servicing
the assets securitized. The following table summarizes the Bank’s
securitization activity.
1
Income on retained interests excludes income arising from changes in fair values.
Unrealized gains and losses on retained interests arising from changes in fair value
are recorded in trading income.
1
Represents monthly payment rate for secured personal and credit card loans.
2
There are no expected credit losses for residential mortgage loans as the loans
are government guaranteed.