TD Bank 2011 Annual Report Download - page 102

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TD BANK GROUP ANNUAL REPORT 2011 FINANCIAL RESULTS100
SECURITIES PURCHASED UNDER REVERSE REPURCHASE AGREE-
MENTS, SECURITIES SOLD UNDER REPURCHASE AGREEMENTS,
SECURITY BORROWING AND LENDING
Securities purchased under reverse repurchase agreements involve the
purchase of securities by the Bank under agreements to resell the secu-
rities at a future date. These agreements are treated as collateralized
lending transactions whereby the Bank takes possession of the
purchased securities, monitors its market value relative to the amounts
due under the reverse repurchase agreements, and when necessary,
requires transfer of additional collateral. In the event of counterparty
default, the financing agreement provides the Bank with the right to
liquidate collateral held and offset the proceeds against the amount
owing from the counterparty.
Obligations related to securities sold under repurchase agreements
involve the sale of securities by the Bank to counterparties under
agreements to repurchase the securities at a future date. These agree-
ments are treated as collateralized borrowing transactions.
Securities purchased under reverse repurchase agreements and obli-
gations related to securities sold under repurchase agreements are
carried at amortized cost and recorded on the Consolidated Balance
Sheet at the respective prices at which the securities were originally
acquired or sold, plus accrued interest. Interest earned on reverse
repurchase agreements, and interest incurred on repurchase agree-
ments is determined using the effective interest rate method and is
included in interest income and interest expense, respectively, on the
Consolidated Statement of Income.
In security lending transactions the Bank lends securities to a coun-
terparty and receives collateral in the form of cash or securities. If cash
collateral is received, the Bank records the cash along with an obliga-
tion to return the cash on the Consolidated Balance Sheet as an obli-
gation related to securities sold under repurchase agreements. If
securities are received as collateral, the Bank does not record the
collateral on the Consolidated Balance Sheet.
In securities borrowing transactions the Bank borrows securities
from a counterparty and pledges either cash or securities as collateral.
If cash is pledged as collateral, the Bank records the transaction as
securities purchased under reverse repurchase agreements on the
Consolidated Balance Sheet. Securities pledged as collateral remain on
the Bank’s Consolidated Balance Sheet. Where securities are pledged
as collateral, security lending income and security borrowing fees are
recorded in non-interest income in the Consolidated Statement of
Income. Where cash is pledged as collateral, interest incurred or
received is determined using the effective interest rate method and is
included in interest income and interest expense, respectively, in the
Consolidated Statement of Income.
IMPAIRMENT OF AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities are written down to fair value through
net securities gains (losses) in non-interest income whenever it is
necessary to reflect other-than-temporary impairment. In the case of
debt securities classified as available-for-sale, a subsequent increase
in the fair value that can be objectively related to an event that occurred
after the impairment was recognized will result in a reversal of the
impairment loss.
IMPAIRMENT OF HELD-TO-MATURITY SECURITIES
For held-to-maturity securities, an impairment loss is recognized when
there is objective evidence that there has been a deterioration of credit
quality subsequent to the initial recognition of the security 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. The
impairment loss is measured as the difference between the asset’s
carrying amount and the present value of estimated future cash flows
discounted at the asset’s original effective interest rate.
2008 RECLASSIFICATION OF CERTAIN DEBT SECURITIES
During 2008, the Bank changed its trading strategy with respect to
certain trading debt securities as a result of deterioration in markets
and severe dislocation in the credit market. These debt securities were
previously recorded at fair value with changes in fair value, as well as
any gains or losses realized on disposal, recognized in trading income.
Since the Bank no longer intended to actively trade in these debt secu-
rities, the Bank reclassified these debt securities from trading to the
available-for-sale category effective August 1, 2008.
On August 1, 2008, the fair value of debt securities reclassified from
trading to available-for-sale was $6,979 million. In addition, on the
date of reclassification, these debt securities had a weighted-average
effective interest rate of 6.99% with expected recoverable cash flows,
on an undiscounted basis, of $9,732 million. The fair value of the
reclassified debt securities was $1,986 million as at October 31, 2011
(October 31, 2010 – $4,228 million). During the year ended October 31,
2011, net interest income of $183 million after tax (2010 – $262 mil lion
after tax; 2009 –$378 million after tax) was recorded relating to the
reclassified debt securities. The decrease in fair value of these securities
during the year ended October 31, 2011 of $229 million after tax
(October 31, 2010 – increase of $108 million after tax) was recorded in
other comprehensive income. Had the Bank not reclassified these debt
securities, the change in the fair value of these debt securities would
have been included as part of trading income, the impact of which
would have resulted in an decrease in net income of $229 million after
tax in the year ended October 31, 2011 (2010 – increase of $108 mil lion
after tax; 2009 – increase of $687 million after tax). During the year
ended October 31, 2011, reclassified debt securities with a fair value
of $2,162 million (2010 – $1,594 million) were sold or matured, and
$69 million after tax (2010 – $22 million after tax; 2009 – ($72) million
after tax) was recorded in securities gains (losses) during the corre-
sponding period.