TD Bank 2005 Annual Report Download - page 52

TD BANK FINANCIAL GROUP ANNUAL REPORT 2005 Management’s Discussion and Analysis
48
(millions of Canadian dollars, Percentage of total
except percentage amounts) 2005 2004 2003 2002 2005 2004 2003 2002
Canada
Atlantic $ 2 $2$4$5 1.0% .7% .5% .4%
Québec 739183.6 1.1 1.0 1.2
Ontario 99 91 223 345 50.5 33.6 25.2 23.8
Prairies 33 36 62 60 16.8 13.3 7.0 4.1
British Columbia 67 17 21 3.1 2.6 1.9 1.5
Total Canada 147 139 315 449 75.0 51.3 35.6 31.0
United States 49 115 485 929 25.0 42.4 54.9 64.0
Other International – 17 84 73 –6.3 9.5 5.0
Total net impaired loans before general
and sectoral allowances 196 271 884 1,451 100.0% 100.0% 100.0% 100.0%
Less: general allowances 1,140 917 984 1,141
sectoral allowances ––541 1,285
Total net impaired loans $ (944) $(646) $(641) $ (975)
Net impaired loans as a % of net loans2(.6)% (.5)% (.5)% (.7)%
1Based on geographic location of unit responsible for recording revenue.
2Includes customers' liability under acceptances.
IMPAIRED LOANS LESS ALLOWANCE FOR CREDIT LOSSES BY LOCATION1
TABLE 25
ALLOWANCE FOR CREDIT LOSSES
Total allowance for credit losses consists of specific and general
allowances carried on the Consolidated Balance Sheet. The
allowance is increased by the provision for credit losses, and
decreased by write-offs net of recoveries. The Bank maintains
the allowance at levels that management believes is adequate
to absorb losses in the lending portfolio. Individual problem
accounts, general economic conditions as well as the sector and
geographic mix of the lending portfolio areall considered by
management in assessing the appropriate allowance levels.
Specific Allowance
The Bank establishes specific allowances for impaired loans when
aloss is likely or when the estimated value of the loan is less
than its recorded value, based on discounting expected future
cash flows. Allowances for personal credit portfolios are based
on delinquency and type of security.
Specific allowances for credit losses are established to reduce
the book value of loans to estimated realizable amounts in the
normal course of business. Specific allowances for the corporate
and commercial portfolios are established by borrower and
reviewed quarterly. For the retail portfolio, allowances are calcu-
lated on an aggregated facility basis, using a formula that takes
recent loss experience into account.
During 2005, specific allowances decreased by $113 million or
42%, resulting in a total allowance of $153 million. The change
was mainly due to write-offs of $487 million, recoveries of $245
million, new provisions throughout the year of $107 million and
$27 million from the acquisition of TD Banknorth. Allowances for
credit losses are more fully described in Note 3 on page 79.
General Allowance
To recognize losses that management estimates to have
occurred in the portfolio at the balance sheet date for loans
or credits not yet specifically identified as impaired, we
establish general allowances for credit risk. The level of general
allowances reflects exposures across all portfolios and categories.
General allowances arereviewed quarterly using credit risk
models developed by the Bank. The level of allowances is based
on the probability of a borrower defaulting on a loan obligation
(loss frequency), the loss if default occurs (loss severity) and
the expected exposure at the time of default.
For the corporate and commercial portfolios, allowances are
computed at the borrower level. The loss if default occurs is
based on the security of the facility. Exposure at default is a
function of current usage, the borrower’srisk rating and the
committed amount. For the retail portfolio, the general
allowance is calculated on a portfolio-level and is based on a
statistical estimate of loss using historical loss and recovery data
models and forecast balances. Ultimately, the general allowance
is established on the basis of expected losses and is directly
related to the variance of losses and the inherent product
characteristics in each portfolio. Models are validated against
historical experience and areupdated at least annually.The gen-
eral allowance methodology is annually approved by the Board.
At October 31, 2005 our general allowance for loan losses
was $1,140 million, compared with $917 million last year.The
increase of $223 million in general allowances resulted primarily
from the acquisition of TD Banknorth.
Previously, where losses were not adequately covered by the
general allowances, sectoral allowances for credit losses were
established by the Bank. These allowances were for industry
sectors and geographical regions that have experienced adverse
events or changes in economic conditions, even though the
loans comprising each group are not classified as impaired.
In 2005 the Bank had no requirement for sectoral allowances.