TD Bank 2009 Annual Report Download - page 23

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS 19
1
Certain comparative amounts have been restated to conform with the presentation
adopted in the current year.
2Adjusted non-interest income excludes the following items of note: 2009 –
$196 million pre-tax loss due to change in fair value of credit default swaps (CDS)
hedging the corporate loan book, as explained in footnote 14; $564 million
pre-tax loss due to change in fair value of derivatives hedging the reclassified
available-for-sale debt securities portfolio, as explained in footnote 10; 2008 –
$186 million pre-tax gain due to change in fair value of CDS hedging the corporate
loan book; $141 million pre-tax gain due to change in fair value of derivatives
hedging the reclassified available-for-sale debt securities portfolio; $30 million
pre-tax loss due to provision for insurance claims, as explained in footnote 16;
2007 – $163 million pre-tax gain relating to restructuring of Visa, as explained
in footnote 11; $46 million pre-tax gain due to change in fair value of CDS
hedging the corporate loan book.
3Adjusted provisions for credit losses exclude the following items of note: 2009 –
$255 million increase in general allowance for credit losses in Canadian Personal
and Commercial Banking (excluding VFC) and Wholesale Banking; 2008 –
$17 million due to change in fair value of CDS hedging the corporate loan book,
as explained in footnote 14; 2007 – $60 million general allowance release based
on revised loss rate factors, utilizing internal experience in alignment with Basel II
methodology.
4Adjuste
d non-interest expenses exclude the following items of note: 2009 –
$653 million amortization of intangibles, as explained in footnote 8; $429 million
restructuring and integration charges relating to the Commerce acquisition, as
explained in footnote 13; settlement of TD Banknorth shareholder litigation of
$58 million, as explained in footnote 17; $55 million Federal Deposit Insurance
Corporation (FDIC) special assessment charge, as explained in footnote 18;
2008 – $577 million amortization of intangibles; $111 million restructuring and
integration charges relating to the Commerce acquisition; $477 million positive
adjustment related to the reversal of Enron litigation reserve, as explained
in footnote 9; 2007 – $499 million amortization of intangibles; $86 million
TD Banknorth restructuring, privatization, and merger-related charges, as
explained in footnote 12.
5For reconciliation between reported and adjusted provisions for income taxes,
see Table 11.
6Adjusted non-controlling interests exclude the following items of note: 2007 –
$9 million amortization of intangibles, as explained in footnote 8; $15 million
from TD Banknorth restructuring, privatization, and merger-related charges,
as explained in footnote 12.
7Equity in net income of an associated company excludes the following items of
note: 2009 – $68 million amortization of intangibles, as explained in footnote 8;
2008 – $66 million amortization of intangibles; 2007 – $47 million amortization
of intangibles.
8Amortization of intangibles primarily relates to the Canada Trust acquisition in
2000, the TD Banknorth acquisition in 2005 and its privatization in 2007, the
Commerce acquisition in 2008, the acquisitions by TD Banknorth of Hudson
United Bancorp (Hudson) in 2006 and Interchange Financial Services (Interchange)
in 2007, and the amortization of intangibles included in equity in net income
of TD Ameritrade.
9The Enron contingent liability for which the Bank established a reserve was
re-evaluated in light of the favourable evolution of case law in similar securities
class actions following the U.S. Supreme Court’s ruling in Stoneridge Partners,
LLC v. Scientific-Atlanta, Inc. During the fourth quarter of 2008, the Bank
recorded a positive adjustment of $323 million after tax, reflecting the sub-
stantial reversal of the reserve.
10 Effective August 1, 2008, as a result of recent deterioration in markets and
severe dislocation in the credit market, the Bank changed its trading strategy
with respect to certain trading debt securities. The Bank no longer intends to
actively trade in these debt securities. Accordingly, the Bank reclassified certain
debt securities from trading to the available-for-sale category in accordance
with the Amendments to the Canadian Institute of Chartered Accountants (CICA)
Handbook Section 3855, Financial Instruments – Recognition and Measurement.
As part of the Bank’s trading strategy, these debt securities are economically
hedged, primarily with CDS and interest rate swap contracts. This includes
foreign exchange translation exposure related to the debt securities portfolio and
the derivatives hedging it. 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 the Wholesale Banking segment. 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. Adjusted results of the Bank
exclude the gains and losses of the derivatives in excess of the accrued amount.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES1
TABLE 2
Adjusted Net Income to Reported Net Income
Operating results – adjusted
(millions of Canadian dollars) 2009 2008 2007
Net interest income $ 11,326 $ 8,532 $ 6,924
Non-interest income27,294 5,840 7,148
Total revenue 18,620 14,372 14,072
Provision for credit losses32,225 1,046 705
Non-interest expenses411,016 9,291 8,390
Income before provision for income taxes, non-controlling interests in subsidiaries, and
equity in net income of an associated company 5,379 4,035 4,977
Provision for income taxes5923 554 1,000
Non-controlling interests in subsidiaries, net of income taxes6111 43 119
Equity in net income of an associated company, net of income taxes7371 375 331
Net income – adjusted 4,716 3,813 4,189
Preferred dividends 167 59 20
Net income available to common shareholders – adjusted 4,549 3,754 4,169
Adjustments for items of note, net of income taxes
Amortization of intangibles8(492) (404) (353)
Reversal of Enron litigation reserve9–323 –
Increase (decrease) in fair value of derivatives hedging the reclassified
available-for-sale debt securities portfolio10 (450) 118 –
Gain relating to restructuring of Visa11 –– 135
TD Banknorth restructuring, privatization, and merger-related charges12 –– (43)
Restructuring and integration charges relating to the Commerce acquisition13 (276) (70) –
Increase (decrease) in fair value of credit default swaps hedging the corporate loan book,
net of provision for credit losses14 (126) 107 30
Other tax items15 –(34) –
Provision for insurance claims16 –(20) –
General allowance (increase) release Canadian Personal and Commercial Banking
(excluding VFC) and Wholesale Banking (178) –39
Settlement of TD Banknorth shareholder litigation17 (39) ––
FDIC special assessment charge18 (35) ––
Total adjustments for items of note (1,596) 20 (192)
Net income available to common shareholders – reported $ 2,953 $ 3,774 $ 3,977
Reconciliation of reported earnings per share (EPS) to adjusted EPS19
(Canadian dollars) 2009 2008 2007
Diluted – reported $ 3.47 $ 4.87 $ 5.48
Items of note affecting income (as above) 1.88 (0.03) 0.27
Items of note affecting EPS only20 –0.04 –
Diluted – adjusted $ 5.35 $ 4.88 $ 5.75
Basic – reported $ 3.49 $ 4.90 $ 5.53