TD Bank 2005 Annual Report Download - page 44

TD BANK FINANCIAL GROUP ANNUAL REPORT 2005 Management’s Discussion and Analysis
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During fiscal 2005, the Corporate segment reported a net loss of
$131 million. There was a tax charge of $163 million related to
the TD Waterhouse reorganization which precedes the transac-
tion with Ameritrade. The gain on this transaction is expected to
be recognized in the first quarter of 2006. During the year, the
Bank increased its contingent litigation reserves by $365 million.
Other expenses included a preferred share redemption premium
resulting in a charge of $13 million as well as costs associated
with net treasury activities and net unallocated revenues, expens-
es and taxes. These losses were offset by gains realized of $229
million related to specific non-core portfolio loan loss recoveries
from prior year sectoral provisions and a general allowance
release of $35 million. Corporate also recorded gains of $27 mil-
lion as a result of the impact of hedging relationships accounting
guideline (AcG-13), which requires the mark-to-market the value
of credit protection on the corporate lending portfolio amongst
other things. Favourable tax items during the year were $98 mil-
lion including the benefit of a court decision and a $30 million
tax benefit as a result of a higher tax rate now being applied on
prior year sectoral provisions.
The negative net interest income in Corporate segment is
substantially due to the reversal of taxable equivalent basis
adjustments. Primarily within Wholesale Banking, the value of
non-taxable or tax-exempt income such as dividends is increased
to its equivalent before tax value. Corporate segment records a
matching decrease such that, in aggregate, the Bank’s Net
Interest Income excludes TEB adjustments.
(millions of Canadian dollars) 2005 2004 2003
Net interest loss $(659) $(454) $(370)
Reversal of credit losses (374) (800) (289)
Other income 115 104 47
Non-interest expenses 506 395 206
Income (loss) before benefit of income taxes (676) 55 (240)
Benefit of income taxes (545) (264) (323)
Net income (loss) $(131) $ 319 $83
CORPORATE MANAGEMENT
The corporate management function of the Bank comprised
audit, compliance, corporate and public affairs, economics,
enterprise technology solutions (information technology),
finance, human resources, legal, marketing, office of the
ombudsman, real estate, risk management and security.
Banking is an increasingly complex and challenging business.
The demands and expectations of our stakeholders – customers,
shareholders, employees, regulators, governments and the
community at large – are constantly changing. Ensuring the
Bank stays abreast of emerging trends and developments is
vital to maintaining stakeholders’ confidence in the Bank.
Those who serve our more than 14 million global customers
most directly in our four key businesses need strong and effec-
tive support from a wide range of functional groups, so that they
can remain focused on the key priority of exceeding customer
expectations. Corporate management’smandate is toprovide
centralized advice and counsel and to design, establish and
implement processes, systems and technologies to ensure that
the Bank’s key businesses operate efficiently, reliably and in
compliance with all applicable regulations. To accomplish this,
corporate management endeavors to have the best people,
processes and tools to support our businesses, customers,
employees and shareholders.
PROPOSED TRANSACTIONS
TD Waterhouse U.S.A. and Ameritrade
On June 22, 2005 the Bank announced its intention to sell its
U.S. brokerage business, TD Waterhouse U.S.A. to Ameritrade
Holding Corporation in exchange for approximately a 32% own-
ership in the combined legal entity. As part of the transaction,
promptly after closing the Bank has agreed to tender for an
additional 7.9% of the shares which, if successful, would bring
the Bank’stotal holdings to 39.9%. The new entity will operate
under the name TD Ameritrade. The transaction is currently
expected to result in a net gain on sale of approximately
U.S.$900 million after-tax subject to the value of Ameritrade’s
share price at closing. The Bank intends to account for its invest-
ment in TD Ameritrade using the equity method of accounting.
Also on June 22, 2005, the Bank announced its intention to
purchase 100% of Ameritrade’s Canadian brokerage operations
for U.S.$60 million cash consideration. Both transactions are
expected to close early in calendar 2006 subject to Canadian and
U.S. regulatory approvals and Ameritrade shareholder approval.
Hudson United Bancorp
On July 12, 2005, TD Banknorth announced an agreement to
acquire Hudson United Bancorp (“Hudson”) for total considera-
tion of approximately U.S.$1.9 billion, consisting of cash
consideration of approximately U.S.$950 million and the remain-
der in TD Banknorth common shares. The cash consideration is
to be funded by the sale of TD Banknorth common shares to the
Bank. The transaction is expected to close early in calendar 2006
and is subject to approvals by shareholders of Hudson and
TD Banknorth as well as regulatory approvals. TD Banknorth will
consolidate the financial results of Hudson. On a proforma basis,
based on the number of TD Banknorth shares outstanding on
June 30, 2005, the Bank’s proportionate ownership interest in
TD Banknorth will decrease slightly after giving effect to the
transaction which will result in an approximate after-tax $80 mil-
lion dilution loss. The Bank also announced its intention to at
least maintain its ownership of TD Banknorth at the level prior
to the acquisition of Hudson through TD Banknorth share
repurchases or open market purchases, in each case subject to
regulatory requirements, or to potentially increase its position
as market conditions warrant.
BUSINESS SEGMENT ANALYSIS
Corporate
The Corporate segment includes activities from the non-core lending portfolio, effects of asset
securitization programs, treasury management, general provisions for credit losses, elimination of taxable equivalent
adjustments, corporate level tax benefits, and residual unallocated revenues, expenses, and taxes.
CORPORATE
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