TD Bank 2011 Annual Report Download - page 106

TD BANK GROUP ANNUAL REPORT 2011 FINANCIAL RESULTS104
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 asset of the same amount.
IMPAIRED LOANS
An impaired loan is any loan when there is objective evidence that
there has been a deterioration of credit quality subsequent to the
initial recognition of the loan 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, loans where a payment is
contractually past due for 90 days are generally classified as impaired.
Acquired credit-impaired (ACI) loans are reported separately from
impaired loans as they exhibited impairment at the date of acquisition
and are accounted for based on the present value of expected cash
flows on the date of acquisition and subsequent to acquisition.
As at October 31, 2011, impaired loans excludes $1.6 billion (2010 –
$1.2 billion) of gross impaired debt securities classified as loans as
subsequent to any recorded impairment, interest income continues
to be recognized using the effective interest rate which was used
to discount the future cash flows for the purpose of measuring the
credit loss.
For loans other than ACI loans and debt securities classified as loans,
interest on impaired loans subsequently received is recorded initially to
recover principal, any previous write-offs or provisions, and collection
costs. Any amounts remaining are then recorded 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 revised contractual conditions of the loan and all criteria for the
impaired classification have been rectified.
The impact on net interest income due to impaired loans is as follows:
Impact on Net Interest Income due to Impaired Loans
(millions of Canadian dollars) 2011 2010 2009
Net interest income recognized on
impaired debt securities classified as loans $ (205) $ (53) $ (2)
Reduction in net interest income due
to impaired loans 98 106 96
Recoveries (11) (4) (3)
Total $ (118) $ 49 $ 91
ALLOWANCE FOR CREDIT LOSSES
The Bank maintains an allowance, consisting of general and specific
allowances, which it considers adequate to absorb all credit-related
losses in a portfolio of instruments that are both on and off the
Consolidated Balance Sheet. The allowance for loan losses, which
includes allowance for residential mortgages, consumer instalment
and other personal, credit card, business and government loans, and
debt securities classified as loans, is deducted from the loans on the
Consolidated Balance Sheet. The allowance for credit losses for off-
balance sheet instruments, which relates to certain guarantees, letters
of credit and undrawn lines of credit, is recorded in “Other liabilities”
on the Consolidated Balance Sheet. The allowance for credit losses for
loans and for off-balance sheet exposures are calculated using the
same methodology.
The Bank establishes specific allowances for impaired loans when
the estimated realizable value of a loan is less than its recorded value.
Credit losses on impaired loans continue to be recognized by means
of a specific allowance until a loan is written off. Loans are written off
once there is no realistic prospect of further recovery.
For debt securities classified as loans and large and medium-sized
business and government loans, specific allowances are established on
an individual loan basis to reduce the carrying value of the loan to its
estimated realizable value. The estimated realizable value is measured
by discounting expected future cash flows at the original effective
interest rate inherent in the loan. For all secured loans, expected future
cash flows include consideration of amounts to be received through
the realization of collateral based on an assessment of the value of the
collateral completed when the loan is determined to be impaired.
Management considers the nature of the collateral, seniority ranking
of the debt, and loan structure in assessing the value of the collateral.
These estimated cash flows are reviewed at least annually, or more
frequently when new information indicates a change in the timing or
amount expected to be received. For personal and small business loans
and credit card loans, specific allowances are calculated using a
formula that incorporates recent loss experience, historical default
rates, and the type of collateral pledged.
A general allowance is established to recognize losses that manage-
ment estimates to have occurred in the portfolio at the balance sheet
date for loans not yet specifically identified as impaired. The loans are
grouped according to similar credit risk characteristics and the level
of the general allowance for each group 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 that
consider probability of default (loss frequency), loss given default (loss
severity), and exposure at default. The general allowance, reviewed
quarterly, reflects management’s judgment of model and estimation
risks as well as economic and credit market conditions.