TD Bank 2009 Annual Report Download - page 145

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 FINANCIAL RESULTS 141
For management reporting purposes, the Bank’s operations and activi-
ties
are organized around four key business segments: Canadian
Personal and Commercial Banking, Wealth Management, including
TD Ameritrade, U.S. Personal and Commercial Banking including
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 invest-
ment 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, govern-
ment, 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 activities from the effects of asset
securitization programs, treasury management, general provision for
credit losses, elimination of taxable equivalent adjustments and other
management reclassifications, corporate level tax benefits, and resid-
ual unallocated revenue and expenses.
Results of each business segment reflect revenue, expenses, and
assets and liabilities 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 methodolo-
gies 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 operating business
segments is presented before amortization of intangibles.
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 appropri-
ate accounting standards together with income earned on the retained
interests net of credit losses incurred are included in other income.
The Bank purchases CDS to hedge the credit risk in Wholesale Bank-
ing’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 asym-
metry
in the accounting treatment between CDS and loans would
result in periodic profit and loss volatility 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 Corpo-
rate 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 perform-
ance 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 amounts are reported
in the Corporate segment.
SEGMENTED INFORMATION
NOTE 34