TD Bank 2005 Annual Report Download - page 104

TD BANK FINANCIAL GROUP ANNUAL REPORT 2005 Financial Results
100
Credit Instruments
(millions of Canadian dollars) 2005 2004
Financial and performance standby letters
of credit $ 6,077 $ 5,429
Documentary and commercial letters of credit 695 691
Commitments to extend credit:
Original term to maturity of one year or less 32,004 29,900
Original term to maturity of more than
one year 18,652 11,232
Total $57,428 $47,252
Other Commitments
In 2004, the Bank entered into an agreement with an external
partywhereby the external party will operate the Bank’s
Automated Banking Machines (ABMs) network for seven years at
atotal projected cost of $451 million. Future minimum capital
lease commitments for ABMs will be $66 million for 2006,
$65 million for 2007, $59 million for 2008, $57 million for 2009,
$55 million for 2010 and $69 million for 2011.
During fiscal 2003, the Bank entered into an agreement with
an external party whereby the external party will provide network
and computer desktop support services for seven years. During
2005, the Bank incurred $138 million of costs and due to addi-
tional services purchased, the remaining obligation is projected
to be $141 million for 2006, $135 million for 2007, $131 million
for 2008, $127 million for 2009 and $123 million for 2010.
In addition, the Bank is committed to fund $514 million of
merchant banking investments.
Long-term Commitments or Leases
The Bank has obligations under long-term non-cancellable leases
for premises and equipment. Futureminimum operating lease
commitments for premises and for equipment, where the annual
rental is in excess of $100 thousand, is estimated at $319 million
for 2006; $280 million for 2007; $254 million for 2008; $218
million for 2009; $178 million for 2010; $580 million for 2011
and thereafter.
The premises and equipment net rental expense charged to net
income for the year ended October 31, 2005 was $579 million
(2004 – $539 million).
Securities Lending
In the ordinary course of business, securities and other assets are
pledged against liabilities. As at October 31, 2005 securities and
other assets with a carrying value of $35 billion (2004 – $26 bil-
lion) were pledged in respect of securities sold short or under
repurchase agreements. In addition, as at October 31, 2005,
assets with a carrying value of $10 billion (2004 – $4 billion)
were deposited for the purposes of participation in clearing
and payment systems and depositories or to have access to the
facilities of central banks in foreign jurisdictions, or as security
for contract settlements with derivative exchanges or other
derivative counterparties.
In the ordinary course of business, the Bank agrees to lend
unpaid customer securities, or its own securities, to borrowers on
afully collateralized basis. Securities lent at October 31, 2005
amounted to $6 billion (2004 – $5 billion).
GUARANTEES
Aguarantee is defined to be a contract that contingently requires
the Bank to make payments to a third party based on (i) changes in
an underlying interest rate, foreign exchange rate, equity or com-
modity instrument, index or other variable, that is related to an
asset, a liability or an equity security of the counterparty,(ii) failure
of another party to perform under an obligating agreement, or
(iii) failure of another third party to pay its indebtedness when due.
Significant guarantees that the Bank has provided to third
parties include the following:
Assets Sold with Recourse
In connection with certain asset sales, the Bank typically makes
representations about the underlying assets in which the Bank
may have an obligation to repurchase the assets or indemnify
the purchaser against any loss. Generally,the term of these
guarantees does not exceed two years.
Credit Enhancements
The Bank guarantees payments to counterparties in the event
that thirdparty credit enhancements supporting asset pools
are insufficient. The term of these credit facilities do not exceed
20 years.
Written Options
Written options are agreements under which the Bank grants
the buyer the future right, but not the obligation, to sell or
buy at or by a specified date, a specific amount of a financial
instrument at a price agreed when the option is arranged and
which can be physically or cash settled.
Written options can be used by the counterparty to hedge
foreign exchange, equity,credit, commodity and interest rate
risks. The Bank does not track, for accounting purposes, whether
its clients enter into these derivative contracts for trading or
hedging purposes and has not determined if the guaranteed
party has the asset or liability related to the underlying.
Accordingly, the Bank cannot ascertain which contracts are
guarantees under the definition contained in the accounting
guideline. The Bank employs a risk framework to define risk
tolerances and establishes limits designed to ensure that losses
do not exceed acceptable, predefined limits. Due to the nature
of these contracts, the Bank cannot make a reasonable estimate
of the potential maximum amount payable to the counterparties.
The total notional principal amount of the written options as at
October 31, 2005 is $191 billion (2004 – $139 billion).
Indemnification Agreements
In the normal course of operations, the Bank provides indem-
nification agreements to various counterparties in transactions
such as service agreements, leasing transactions, and agree-
ments relating to acquisitions and dispositions. The Bank also
indemnifies directors and officers, to the extent permitted by law,
against certain claims that may be made against them as a result
of their services to the Bank. Under these agreements, the Bank
is required to compensate counterparties for costs incurred as a
result of various contingencies such as changes in laws and regu-
lations and litigation claims. The nature of the indemnification
COMMITMENTS
Credit Related Arrangements
In the normal course of business, the Bank enters into
various off-balance sheet commitments and contingent liability
contracts. The primary purpose of these contracts is to make
funds available for the financing needs of customers. The Bank’s
policy for requiring collateral security with respect to these
contracts and the types of collateral security held is generally
the same as for loans made by the Bank.
Financial and performance standby letters of credit represent
irrevocable assurances that the Bank will make payments in
the event that a customer cannot meet its obligations to third
parties and they carry the same credit risk, recourse and collateral
security requirements as loans extended to customers.
Documentary and commercial letters of credit are instruments
issued on behalf of a customer authorizing a third party to draw
drafts on the Bank up to a certain amount subject to specific
terms and conditions. The Bank is at risk for any drafts drawn
that are not ultimately settled by the customer, and the amounts
are collateralized by the assets to which they relate.
Commitments to extend credit represent unutilized portions
of authorizations to extend credit in the form of loans and
customers’ liability under acceptances.
The values of credit instruments reported below represent
the maximum amount of additional credit that the Bank could
be obligated to extend should contracts be fully utilized.