TD Bank 2006 Annual Report Download - page 84

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Financial Results
80
Net Investment Securities Gains
(millions of Canadian dollars) 2006 2005 2004
Realized gains $406 $293 $268
Realized losses (18) (15) (29)
Write-downs (83) (36) (47)
Total $305 $242 $192
LOANS AND IMPAIRED LOANS
Loans are recorded at cost, net of an allowance for credit losses
and net of unearned income, which includes prepaid interest and
loan origination fees, commitment fees and loan syndication
fees, and unamortized discounts.
Loan origination fees are considered to be adjustments to loan
yield and are deferred and amortized to interest income over the
term of the loan. Commitment fees are amortized to other
income over the commitment period when it is unlikely that the
commitment will be called upon; otherwise, they are deferred
and amortized to interest income over the term of the resulting
loan. Loan syndication fees are recognized in other income upon
completion of the financing placement unless the yield on any
loan retained by the Bank is less than that of other comparable
lenders involved in the financing syndicate. In such cases, an
appropriate portion of the fee is recognized as a yield adjustment
to interest income over the term of the loan.
Interest income is recorded on the accrual basis until such time
as the loan is classified as impaired. When a loan is identified as
impaired, the accrual of interest is discontinued.
An impaired loan is any loan where, in management’s opinion,
therehas been adeterioration of credit quality to the extent that
the Bank no longer has reasonable assurance as to the timely
collection of the full amount of the principal and interest. In
addition, any loan where a payment is contractually past due
90 days is classified as impaired, other than a deposit with a
bank, or a loan that is guaranteed or insured by the Government
of Canada, the provincial governments in Canada or an agency
controlled by anyone of these governments.
A deposit with a bank is considered impaired when a payment
is contractually past due 21 days. A Government of Canada
guaranteed loan is classified as impaired at 365 days in arrears.
Interest on impaired loans subsequently received is recorded
initially to recover collection costs, principal balances written off
and then as interest income. A loan will be reclassified back to
performing status when it has been determined that there is
reasonable assurance of full and timely repayment of interest
and principal in accordance with the original or restructured
contractual conditions of the loan and all criteria for the impaired
classification have been rectified.
ACCEPTANCES
Acceptances represent a form of negotiable short-term debt
issued by customers, which the Bank guarantees for a fee.
Revenue is recognized on an accrual basis.
The potential liability of the Bank under acceptances is
reported as a liability in the Consolidated Balance Sheet. The
Bank’s recourse against the customer in the event of a call on
any of these commitments is reported as an offsetting asset of
the same amount.
ALLOWANCE FOR CREDIT LOSSES
The Bank maintains an allowance which it considers adequate to
absorb all credit-related losses in a portfolio of instruments which
are both on and off the Consolidated Balance Sheet. Assets in
the portfolio which are included on the Consolidated Balance
Sheet are deposits with banks, loans, mortgages and acceptanc-
es. Items which are not recorded on the Consolidated Balance
Sheet include guarantees and letters of credit. The allowance,
including the allowance for acceptances and off-balance sheet
items, is deducted from loans in the Consolidated Balance Sheet.
The allowance consists of specific and general allowances.
Specific allowances consist of provisions for losses on identifiable
assets for which book values are higher than estimated realizable
values. Specific provisions are established on an individual facility
basis to recognize credit losses on large and medium-sized busi-
ness and government loans. In these instances, the estimated
realizable amount is generally measured by discounting the
expected future cash flows at the effective interest rate inherent
in the loan immediately prior to impairment. For personal and
small business loans and credit card loans, specific provisions are
calculated using a formula taking into account recent loss experi-
ence. Specific provisions for credit card loans are recorded when
account balances are90 days in arrears. Credit card loans with
payments 180 days in arrears are entirely written off.
General allowances include the accumulated provisions for
losses which are considered to have occurred but cannot be
determined on an item-by-item or group basis. The level of the
general allowance depends upon an assessment of business and
economic conditions, historical and expected loss experience,
loan portfolio composition and other relevant indicators. General
allowances are computed using credit risk models developed by
the Bank. The models consider probability of default (loss fre-
quency), loss given default (loss severity) and expected exposure
at default. This allowance, reviewed quarterly, reflects model and
estimation risks in addition to management judgment.
LOANS, IMPAIRED LOANS AND ALLOWANCE FOR CREDIT LOSSES
NOTE 3