TD Bank 2006 Annual Report Download - page 107

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Financial Results 103
Other Commitments
In 2004, the Bank entered into an agreement with an external
party whereby 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 $68 million for 2007, $62
million for 2008, $60 million for 2009, $58 million for 2010 and
$55 million for 2011.
During 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
2006, the Bank incurred $168 million and the remaining obliga-
tion is projected to be $154 million for 2007, $154 million for
2008, $154 million for 2009 and $154 million for 2010.
In 2006, the Bank reached a seven-year agreement with an
external party to provide the Bank’s contact centre technology
infrastructure. The Bank’s obligation under the agreement is
projected to be $15 million for 2007, $33 million for 2008,
$28 million for 2009, $28 million for 2010 and $55 million for
2011 and thereafter.
The Bank has a number of multi-year software licensing
agreements, as well as equipment maintenance agreements with
external parties. The Bank’s cumulative obligation under these
agreements is projected to be $81 million for 2007, $36 million
for 2008 and $18 million for 2009.
In addition, the Bank is committed to fund $349 million of
merchant banking investments.
Long-term Commitments or Leases
The Bank has obligations under long-term non-cancellable leases
for premises and equipment. Future minimum operating lease
commitments for premises and for equipment, where the annual
rental is in excess of $100 thousand, is estimated at $309 million
for 2007; $286 million for 2008; $265 million for 2009; $203
million for 2010; $170 million for 2011 and $561 million for
2012 and thereafter.
The premises and equipment net rental expense charged to net
income for the year ended October 31, 2006 was $578 million
(2005 – $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, 2006, securities
and other assets with a carrying value of $43 billion (2005 – $35
billion) were pledged in respect of securities sold short or under
repurchase agreements. In addition, as at October 31, 2006,
assets with a carrying value of $6 billion (2005 – $10 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 a fully collateralized basis. Securities lent at October 31, 2006
amounted to $8 billion (2005 – $6 billion).
GUARANTEES
Aguarantee is defined to be a contract that contingently requires
the Bank to make payments to a thirdparty based on (i) changes
in an underlying interest rate, foreign exchange rate, equity or
commodity instrument, index or other variable, that is related
to an asset, a liability or an equity security of the counterparty,
(ii) failureof another party to perform under an obligating agree-
ment, 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 five years.
Credit Enhancements
The Bank guarantees payments to counterparties in the event
that third party credit enhancements supporting asset pools
are insufficient. The term of these credit facilities do not exceed
19 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 for disclosure of guarantees. 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 maxi-
mum amount payable to the counterparties. The total notional
principal amount of the written options as at October 31, 2006
is $251 billion (2005 – $191 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
agreements prevents the Bank from making a reasonable esti-
mate of the maximum potential amount that the Bank would be
required to pay such counterparties.
The table below summarizes at October 31, the maximum
potential amount of future payments that could be made
under the indemnification agreements without consideration of
possible recoveries under recourse provisions or from collateral
held or pledged.
Maximum Potential Amount of FuturePayments
(millions of Canadian dollars) 2006 2005
Financial and performance standby letters of credit $7,206 $6,077
Assets sold with recourse 822 1,174
Credit enhancements 197 117
Total $8,225 $7,368