TD Bank 2010 Annual Report Download - page 141

TD BANK GROUP ANNUAL REPORT 2010 FINANCIAL RESULTS 139
Net interest income within Wholesale Banking is calculated on a
taxable equivalent basis (TEB), which means that the value of non-
taxable or tax-exempt income, including dividends, is adjusted to its
equivalent before-tax value. Using TEB allows the Bank to measure
income from all securities and loans consistently and makes for a more
meaningful comparison of net interest income with similar institutions.
The TEB adjustment reflected in Wholesale Banking is reversed in the
Corporate segment.
As noted in Note 5, the Bank securitizes retail loans and receivables
held by Canadian Personal and Commercial Banking in transactions
that are accounted for as sales. For the purpose of segmented report-
ing, Canadian Personal and Commercial Banking accounts for the
transactions as though they are financing arrangements. Accordingly,
the interest income earned on the assets sold net of the funding costs
incurred by the purchaser trusts is recorded in net interest income and
impairment related to these assets is charged to provision for (reversal
of) credit losses. This accounting is reversed in the Corporate segment
and the gain recognized on sale which is in compliance with GAAP
together with income earned on the retained interests net of credit
losses incurred are included in other income.
The Bank purchases credit default swaps (CDS) to hedge the credit
risk in Wholesale Banking’s corporate lending portfolio. These CDS do
not qualify for hedge accounting treatment and are measured at fair
value with changes in fair value recognized in current period’s earnings.
The related loans are accounted for at amortized cost. Management
believes that this asymmetry in the accounting treatment between CDS
and loans would result in volatility in earnings from period to period
which is not indicative of the economics of the corporate loan portfolio
or the underlying business performance in Wholesale Banking. As a
result, the CDS are accounted for on an accrual basis in Wholesale
Banking and the gains and losses on the CDS, in excess of the accrued
cost, are reported in the Corporate segment.
As discussed in Note 2, the Bank reclassified certain debt securities
from trading to available-for-sale category effective August 1, 2008.
As part of the Bank’s trading strategy, these debt securities are
economically hedged, primarily with CDS and interest rate swap
contracts. These derivatives are not eligible for reclassification and
are recorded on a fair value basis with changes in fair value recorded
in the period’s earnings. Management believes that this asymmetry
in the accounting treatment between derivatives and the reclassified
debt securities results in volatility in earnings from period to period
that is not indicative of the economics of the underlying business
performance in Wholesale Banking. As a result, the derivatives are
accounted for on an accrual basis in Wholesale Banking and the gains
and losses related to the derivatives, in excess of the accrued costs,
are reported in the Corporate segment.
For management reporting purposes, the Bank’s operations and
activities are organized around four key business segments: Canadian
Personal and Commercial Banking, Wealth Management, including
TD Ameritrade, U.S. Personal and Commercial Banking, operating
under the brand name, TD Bank, America’s Most Convenient Bank,
and Wholesale Banking.
Canadian Personal and Commercial Banking comprises the Bank’s
personal and business banking in Canada as well as the Bank’s global
insurance operations and provides financial products and services
to personal, small business, insurance, and commercial customers.
Wealth Management provides investment products and services
to institutional and retail investors and includes the Bank’s equity
investment in TD Ameritrade. U.S. Personal and Commercial Banking
provides commercial banking, insurance agency, wealth management,
mortgage banking and other financial services in the U.S., primarily in
the Northeast and Mid-Atlantic regions and Florida. Wholesale Banking
provides financial products and services to corporate, government,
and institutional customers. Effective the third quarter of 2008, U.S.
insurance and credit card businesses were transferred to Canadian
Personal and Commercial Banking, and the U.S. wealth management
businesses to Wealth Management for management reporting
purposes to align with how these businesses are now being managed
on a North American basis. Prior periods have not been reclassified as
the impact was not material.
The Bank’s other activities are grouped into the Corporate segment.
The Corporate segment includes the effects of asset securitization
programs, treasury management, general provision for credit losses in
Canadian Personal and Commercial Banking and Wholesale Banking,
elimination of taxable equivalent adjustments and other management
reclassifications, corporate level tax benefits, and residual unallocated
revenue and expenses.
Results of each business segment reflect revenue, expenses, and
assets generated by the businesses in that segment. Due to the
complexity of the Bank, its management reporting model uses various
estimates, assumptions, allocations and risk-based methodologies for
funds transfer pricing, inter-segment revenue, income tax rates, capital,
indirect expenses and cost transfers to measure business segment
results. Transfer pricing of funds is generally applied at market rates.
Inter-segment revenue is negotiated between each business segment
and approximate the fair value of the services provided. Income tax
provision or recovery is generally applied to each segment based on a
statutory tax rate and may be adjusted for items and activities unique
to each segment. Amortization of intangible expense is included in the
Corporate segment. Accordingly, net income for business segments is
presented before amortization of intangibles.
SEGMENTED INFORMATION
NOTE 33
Results by Business Segment
(millions of Canadian dollars) Canadian U.S.
Personal and Personal and
Commercial Wealth Commercial Wholesale
Banking Management Banking1,2 Banking Corporate Total
2010
Net interest income $ 7,134 $ 336 $ 3,579 $ 1,815 $ (1,321) $ 11,543
Non-interest income 3,237 2,121 1,180 1,059 425 8,022
Provision for (reversal of) credit losses 1,046 – 646 25 (92) 1,625
Non-interest expenses 4,934 1,813 2,910 1,395 1,111 12,163
Income (loss) before income taxes 4,391 644 1,203 1,454 (1,915) 5,777
Provision for (recovery of) income taxes 1,296 197 230 588 (1,049) 1,262
Non-controlling interests in subsidiaries, net of income taxes – – – – 106 106
Equity in net income of an associated company,
net of income taxes – 194 – – 41 235
Net income (loss) $ 3,095 $ 641 $ 973 $ 866 $ (931) $ 4,644
Total assets
Balance sheet $ 198,058 $ 20,836 $ 179,604 $ 188,824 $ 32,223 $ 619,545
Securitized3 65,615 – – 4,023 (19,027) 50,611