TD Bank 2003 Annual Report Download - page 66

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TD BANK FINANCIAL GROUP ANNUAL REPORT 2003 • Financial Results64
During the year, the Bank securitized government guaranteed
residential mortgage loans through the creation of mortgage-
backed securities of $7,305 million (2002 – $3,735 million). The
Bank retained the rights to future excess interest on the residen-
tial mortgages valued at $157 million (2002 – $159 million) and
received cash flows on interests retained of $91 million (2002 –
$24 million). The gain on sale, net of transaction fees and
expenses and before the effects of hedges on the assets sold,
was $77 million (2002 – $114 million). The Bank retained the
responsibility for servicing the mortgages. The key assumptions
used to value the sold and retained interests included a prepay-
ment rate of 20.0% (2002 – 7.0%), an excess spread of .8%
(2002 – 1.3%) and a discount rate of 6.7% (2002 – 4.2%).
There are no expected credit losses as the mortgages are
government guaranteed.
During the year, the Bank also securitized $3,000 million in
credit card receivables and retained the rights to future excess
interest on the receivables valued at $53 million. The gain on
sale, net of transaction fees and expenses was $43 million. The
Bank retained the responsibility for servicing the credit card
receivables. The key assumptions used to value the sold and
retained interests included a monthly payment rate of 39.4%,
a discount rate of 4.4% and expected credit losses of 3.2%.
In addition, during the year, the Bank securitized commercial
mortgages of $879 million (2002 – $89 million). The Bank
retained the rights to future excess interest, subordinated tranch-
es and a cash reserve account on $341 million of the commercial
mortgages securitized valued at $11 million (2002 – nil). The key
assumptions used to value these retained interests included a
prepayment rate of 5.0%, a discount rate of 4.6% and expected
credit losses of .06%. The Bank retained the responsibility for
servicing the $341 million of commercial mortgages securitized
to which it holds a retained interest. The gain on sale related to
all commercial mortgages securitized, net of transaction fees and
expenses and before the effect of hedges on the assets sold was
$28 million (2002 – $3 million).
During the year, there were maturities of previously securitized
loans and receivables of $3,580 million (2002 – $3,307 million).
As a result, the net proceeds from loan securitizations were
$7,604 million (2002 – $517 million).
The following table presents key economic assumptions and
the sensitivity of the current fair value of retained interests to
two adverse changes in each key assumption as at October 31.
The sensitivity analysis is hypothetical and should be used
with caution.
NOTE 4Loan securitizations
Allowance for credit losses
(millions of dollars) 2003 2002 2001
Specific General Sectoral Specific General Sectoral
allowance allowance allowance Total allowance allowance allowance Total Total1
Balance at beginning of year $1,074 $1,141 $1,285 $3,500 $ 179 $1,141 $ – $1,320 $1,148
Provision for credit losses
charged to the Consolidated
Statement of Operations 423 (157) (80) 186 1,455 – 1,470 2,925 920
Transfer from sectoral to specific 577 – (577) – 205 – (205) – –
Write-offs2(1,601) – – (1,601) (893) – – (893) (844)
Recoveries 120 – 57 177 127 – – 127 90
Other, including foreign
exchange rate changes (106) – (144) (250) 1 – 20 21 6
Allowance for credit losses
at end of year $ 487 $ 984 $ 541 $2,012 $1,074 $1,141 $1,285 $3,500 $1,320
(millions of dollars)
Residential Personal Credit card Commercial
2003 mortgage loans loans loans mortgage loans
Fair value of retained interests $ 268 $ 8 $ 27 $ 10
Discount rate 5.2% 6.7% 4.4% 4.1%
+10% $ (2) $ – $ (1) $ –
+20% (4) – (2) –
Prepayment rate 20.0% 5.8% 39.4% 5.0%
+10% $ (10) $ (1) $ (2) $ –
+20% (19) (1) (4) –
Expected credit losses –% –% 3.2% .1%
+10% $ – $– $ (1) $–
+20% – – (2) –
2002
Fair value of retained interests $ 184 $ 11
Discount rate 3.5% 3.4%
+10% $ (1) $ –
+20% (3) –
Prepayment rate 7.0% 5.5%
+10% $ (2) $ (1)
+20% (5) (2)
Expected credit losses –% –%
+10% $ – $ –
+20% ––
1There was no sectoral allowance for the year ended October 31, 2001. 2For the year ended October 31, 2003, $39 million (2002 – $57 million;
2001 – nil) of write-offs related to restructured loans.