TD Bank 2001 Annual Report Download - page 49

47
FINANCIAL RESULTS
over the commitment period when it is unlikely that the commit-
ment will be called upon; otherwise, they are deferred and
amortized to interest income over the term of the resulting loan.
Loan syndication fees are recognized in other income unless the
yield on any loans retained by the Bank is less than that of other
comparable lenders involved in the financing. In such cases
an appropriate portion of the fee is deferred and amortized to
interest income over the term of the loan.
(h) Allowance for credit losses
An allowance is maintained which is considered adequate to
absorb all credit-related losses in a portfolio of items which are
both on and off the consolidated balance sheet. Assets in the
portfolio which are included in the consolidated balance sheet
are deposits with banks, loans, mortgages, loan substitutes,
securities purchased under resale agreements, acceptances
and derivative financial instruments. Items not included in the
consolidated balance sheet and referred to as off-balance sheet
items include guarantees and letters of credit. The allowance is
deducted from the applicable asset in the consolidated balance
sheet except for acceptances and off-balance sheet items. The
allowance for acceptances and for off-balance sheet items is
included in other liabilities.
The allowance consists of specific and general allowances.
Specific allowances include all the accumulated provisions for
losses on particular assets required to reduce the book values to
estimated realizable amounts in the ordinary course of business.
Specific provisions are established on an individual facility basis
to recognize credit losses on business and government loans.
For personal loans, excluding credit cards, specific provisions are
calculated using a formula method taking into account recent
loss experience. No specific provisions for credit cards are record-
ed and balances are written off when payments are 180 days
in arrears.
General allowances include all the accumulated provisions for
losses which are prudential in nature and cannot be determined
on an item-by-item basis. The level of the general allowance
depends upon an assessment of business and economic condi-
tions, historical and expected loss experience, loan portfolio
composition and other relevant indicators. The resulting
allowance is considered adequate, when combined with the
specific allowances, to absorb all credit losses in the portfolio
of on and off-balance sheet items.
Actual write-offs, net of recoveries, are deducted from the
allowance for credit losses. The provision for credit losses, which
is charged to the consolidated statement of income, is added to
bring the allowance to a level which management considers
adequate to absorb probable credit-related losses in its portfolio
of on and off-balance sheet items.
(i) Loan securitizations
When loan receivables are sold in a securitization to a qualifying
special purpose entity under terms that transfer control to third
parties, the transaction is recognized as a sale and the related loan
assets are removed from the consolidated balance sheet. As part of
the securitization, certain financial assets are retained and consist
of one or more subordinated tranches, servicing rights, and in
some cases a cash reserve account. The retained interests are clas-
sified as investment account securities and are carried at cost or
amortized cost. With effect from July 1, 2001, a gain or loss on
sale of the loan receivables is recognized immediately in other
income. The amount of the gain or loss recognized depends in part
on the previous carrying amount of the receivables involved in the
transfer, allocated between the assets sold and the retained inter-
ests based on their relative fair values at the date of transfer. To
obtain fair values, quoted market prices are used if available.
However, quotes are generally not available for retained interests
and the Bank generally estimates fair value based on the present
value of future expected cash flows estimated using management’s
best estimates of key assumptions –credit losses, prepayment
speeds, forward yield curves, and discount rates commensurate
with the risks involved. Prior to July 1, 2001, gains arising on loan
securitizations were deferred and amortized to income whereas
losses were recognized immediately. Transactions entered into prior
to July 1, 2001 or completed subsequently pursuant to commit-
ments to sell made prior to July 1, 2001 have not been restated
and deferred gains will be amortized over the remaining terms.
Subsequent to the securitization, any retained interests that
cannot be contractually settled in such a way that the Bank can
recover substantially all of its recorded investment are adjusted
to fair value. The current fair value of retained interests is deter-
mined using the present value of future expected cash flows as
discussed above.
(j) Acceptances
The potential liability of the Bank under acceptances is
reported
as a liability in the consolidated balance sheet. The Bank’s
recourse against the customer in the event
of a call on any of
these commitments is reported as an
offsetting asset of the
same amount.
(k) Derivative financial instruments
Derivative financial instruments are financial contracts which
derive their value from changes in interest rates, foreign exchange
rates and other financial or commodity indices. Such instruments
include interest rate, foreign exchange, equity, commodity and
credit derivative contracts. These instruments are traded by the
Bank and are also used by the Bank for its own risk management
purposes. To be designated as a non-trading derivative contract
and receive hedge accounting treatment, the contract must
substantially offset the effects of price, interest rate or foreign
exchange rate exposures to the Bank, must be documented at
inception as a non-trading derivative contract, and must have
a high correlation at inception and throughout the contract period
between the derivative contract and the Bank’s exposure. If
these criteria are not met, the contract is designated as a
trading derivative.
Trading derivatives are entered into by the Bank to meet the
needs of its customers and to take trading positions. Derivative
trading portfolios are marked to market with the resulting realized
and unrealized gains or losses recognized immediately in other
income. The market value for over-the-counter trading derivatives
is determined net of valuation adjustments which recognize
the need to cover market, liquidity and credit risks, as well as
the cost of capital and administrative expenses over the life of
each contract.
Non-trading derivatives are entered into by the Bank in order
to meet the Bank’s funding, investing and credit portfolio man-
agement strategies. This is accomplished by modifying one or
more characteristics of the Bank’s risk related to on-balance
sheet financial instruments.
Unrealized gains and losses on non-trading derivatives are
accounted for on a basis consistent with the related on-balance
sheet financial instrument. Realized gains and losses resulting
from the early termination, sale, maturity or extinguishment of
such derivatives are generally deferred and amortized over the