TD Bank 2011 Annual Report Download - page 110

TD BANK GROUP ANNUAL REPORT 2011 FINANCIAL RESULTS108
discounted at the effective interest rate of the loan. Impairment that
occurs subsequent to the acquisition date is recognized through the
provision for the credit losses. As ACI loans are consistently evaluated
for credit losses by accounting for the loan based on present value of
expected cash flows both at acquisition and subsequent to acquisition,
they are not subject to general allowance provisioning as incurred
credit losses are specifically identified and reflected in the loan’s carry-
ing value net of any specific allowance.
Probable and significant increases in expected cash flows would first
reverse any previously taken impairment; any remaining increases are
recognized in income immediately as interest income. In addition, for
fixed-rate ACI loans the timing of expected cash flows may increase or
decrease which may result in adjustments through interest income to
the acquisition discount (both favourably and unfavourably) in order to
maintain the inception yield of the ACI loan.
If the timing and/or amounts of expected cash flows on ACI loans
were determined not to be reasonably estimable, no interest would
be recognized and the loans would be reported as non-performing;
however, since the timing and amounts of expected cash flows are
reasonably estimable, interest is being recognized and the loans are
reported as performing.
Covered Loans
Loans subject to loss sharing agreements with the FDIC are considered
FDIC covered loans and are a subset of the ACI portfolio. The amounts
expected to be reimbursed by the FDIC are considered separately as
indemnification assets and are initially measured at fair value. If losses
on the portfolio are greater than amounts expected as at the acquisi-
tion date, impairment is taken by establishing an allowance for credit
losses, which is determined gross, exclusive of any adjustments to the
indemnification assets.
The indemnification assets are subsequently adjusted for any changes
in estimates related to the overall collectability of the underlying loan
portfolio. Any additional impairment of the underlying loan portfolio
generally results in an increase of the indemnification asset and a
decrease in the provision for credit losses. Alternatively, decreases in
the expectation of losses of the underlying loan portfolio generally
results in a decrease of the indemnification asset through net interest
income (or through the provision for credit losses if impairment was
previously taken.) The indemnification asset is drawn down as payments
are received from the FDIC pertaining to the loss share agreements.
As at October 31, 2011 and 2010, the balances of FDIC covered
loans were $1.3 billion and $1.6 billion, respectively and were recorded
in “Loans” on the Consolidated Balance Sheet. As at October 31, 2011
and 2010, the balances of the indemnification assets were $86 million
and $167 million, respectively and were recorded in “Other assets” on
the Consolidated Balance Sheet.
At the end of each loss share period, the Bank may be required to
make a payment to the FDIC if the actual losses incurred are less than
the intrinsic loss estimate as defined in the loss share agreements. The
payment is determined as 20% of the excess between the intrinsic loss
estimate and actual covered losses determined in accordance with the
loss sharing agreement, net of specified servicing costs. The fair value
of the estimated payment is included as part of the indemnification
asset at the date of acquisition. Subsequent changes to the estimated
payment are considered in determining the adjustment to the indemni-
fication asset as described above.
LOAN SECURITIZATIONS
NOTE 5
When loan receivables are transferred in a securitization to a special
purpose entity under terms that transfer control to third parties, and
consideration other than beneficial interest in the transferred assets is
received, the transaction is recognized as a sale and the related loan
assets are removed from the Consolidated Balance Sheet. For control
to have transferred, (1) the transferred loans must be isolated from
the seller, even in the event of bankruptcy or receivership of the seller,
(2) the purchaser must have the right to sell or pledge the transferred
loans or, if the purchaser is a Qualifying Special Purpose Entity (QSPE)
as defined in the CICA Accounting Guideline 12, Transfers of Receiv-
ables, the investors of the QSPE must have the right to sell or pledge
their ownership interest in the QSPE, and (3) the seller cannot retain
the right to repurchase the loans and receive more than trivial benefit.
The Bank may have an obligation to repurchase the securitized assets,
however this does not preclude sale treatment. Refer to Note 29 for
additional information.
As part of the securitization, certain financial assets are retained and
may consist of an interest-only strip, servicing rights and, in some cases,
a cash reserve account. A gain or loss on sale of the loan receivables is
recognized immediately in other income after the effects of hedges on
the assets sold, if applicable. The amount of the gain or loss recognized
depends on the previous carrying values of the receivables involved in
the transfer, allocated between the assets sold and the retained interests
based on their relative fair values at the date of transfer. To obtain fair
value, quoted market prices are used, where available. However, as
market prices are generally not available for retained interests, fair
value is determined by estimating the present value of future expected
cash flows using management’s best estimates of key assumptions –
credit losses, prepayment rates, forward yield curves and discount rates
– commensurate with the risks involved.
Where the Bank retains the servicing rights, the benefits of servicing
are assessed against market expectations. When the benefits of servicing
are more than adequate, a servicing asset is recognized. Servicing assets
are carried at amortized cost. When the benefits of servicing are less
than adequate, a servicing liability is recognized. Retained interests are
classified as trading securities and are subsequently carried at fair value
with the changes in fair value recorded in trading income.
The following table summarizes the Bank’s securitization activity.
In most cases, the Bank retained the responsibility for servicing the
assets securitized.