TD Bank 2006 Annual Report Download - page 52

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis
48
Net impaired loans after specific and general allowances were
$(906) million, compared with $(944) million for 2005 and
$(646) million for 2004. The overall impaired loans coverage
decreased by a nominal $38 million from the prior year.
(millions of Canadian dollars, Percentage of total
except percentage amounts) 2006 2005 2004 2006 2005 2004
Canada
Atlantic $ 3 $2$2 1.3% 1.0% .7%
Québec 87 3 3.3 3.6 1.1
Ontario 130 99 91 54.4 50.5 33.6
Prairies 933 36 3.8 16.8 13.3
British Columbia 10 6 7 4.2 3.1 2.6
Total Canada 160 147 139 67.0 75.0 51.3
United States 79 49 115 33.0 25.0 42.4
Other International – –17 –– 6.3
Total net impaired loans before general allowances 239 196 271 100.0% 100.0% 100.0%
Less: general allowances 1,145 1,140 917
sectoral allowances –– –
Total net impaired loans $ (906) $(944) $(646)
Net impaired loans as a % of net loans2(.5)% (.6)% (.5)%
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 27
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 are all 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 realizable 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 wholesale and commercial portfo-
lios are borrower specific and reviewed quarterly. For the retail
portfolio, allowances are calculated on an aggregated facility
basis, using a formula that takes recent loss experience into
account.
During 2006, specific allowances increased by $19 million
or 12%, resulting in a total specific allowance of $172 million.
Allowances for credit losses are more fully described in Note 3
to the Consolidated Financial Statements.
General Allowance
A general allowance is established 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. The level of general allowance reflects
exposures across all portfolios and categories. General allowance
is reviewed on a quarterly basis using credit risk models devel-
oped by the Bank. The level of allowances is based on the
probability of aborrower 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 wholesale 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's risk 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 charac-
teristics in each portfolio. Models are validated against historical
experience and are updated at least annually. The general
allowance methodology is annually approved by the Board of
Directors.
At October 31, 2006 our general allowance for loan losses
was $1,145 million, largely unchanged from $1,140 million at
October 31, 2005.
Previously,wherelosses were not adequately covered by the
general allowance, 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
2006, the Bank had no requirement for sectoral allowances.