TD Bank 2009 Annual Report Download - page 49

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS 45
2008 FINANCIAL RESULTS OVERVIEW
Summary of 2008 Performance
2008 SIGNIFICANT EVENTS
Acquisition of Commerce Bancorp, Inc.
On March 31, 2008, the Bank acquired 100% of the outstanding shares
of Commerce for purchase consideration of $8.5 billion, paid in cash
and common shares. As a result, $57.1 billion of assets (including
additional goodwill of approximately $6.3 billion and intangible assets
of $1.5 billion) and $48.6 billion of liabilities were included in the
Bank’s Consolidated Balance Sheet on the date of acquisition. For
details, see Note 7 to the 2009 Consolidated Financial Statements.
Enron
The Bank is a party to certain legal actions regarding Enron, principally
the securities class action. As at July 31, 2008, the Bank’s total contin-
gent litigation reserve for Enron-related claims was approximately
$497 million (US$413 million). The Bank re-evaluated the reserve 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 an after-tax positive adjustment of $323 million, reflect-
ing the substantial reversal of the reserve. Given the uncertainties of
the timing and outcome of securities litigation, the Bank continues to
assess evolving case law as it relates to the Bank’s Enron reserve to
determine whether the reserve should be further reduced. The Bank
will continue to defend itself vigorously in these cases and work to
resolve them in the best interest of its shareholders.
Deterioration in Markets and Severe Dislocation in Credit Market
During the fourth quarter of 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 securi-
ties. These debt securities were previously recorded at fair value
with changes in fair value, as well as any gains or losses realized on
disposal, recognized in trading income. Since the Bank no longer
intends to actively trade in these debt securities, the Bank reclassified
these debt securities from trading to the available-for-sale category
effective August 1, 2008 in accordance with the amendments to
CICA Handbook Section 3855, Financial Instruments – Recognition
and Measurement.
The change in fair value of $561 million after tax for these securities
was recorded in other comprehensive income. Had the Bank not
reclassified these debt securities on August 1, 2008, the change in the
fair value of these debt securities would have been included as part
of trading income, the impact of which would have resulted in a
reduction of reported net income of $561 million in the fourth quarter
of 2008, and a reduction in adjusted net income of $443 million
after taking into account the change in the fair value of derivatives
hedging the reclassified debt securities portfolio. For details, see
Note 2 to the 2009 Consolidated Financial Statements.
(millions of Canadian dollars) Canadian U.S.
Personal and Personal and
Commercial Wealth Commercial Wholesale
Banking Management Banking Banking Corporate Total
Net interest income $ 5,790 $ 347 $ 2,144 $ 1,318 $ (1,067) $ 8,532
Non-interest income 3,036 1,981 853 (68) 335 6,137
Total revenue 8,826 2,328 2,997 1,250 (732) 14,669
Provision for (reversal of) credit losses 766 – 226 106 (35) 1,063
Non-interest expenses 4,522 1,615 1,791 1,199 375 9,502
Income (loss) before provision for income taxes 3,538 713 980 (55) (1,072) 4,104
Provision for (recovery of) income taxes 1,114 233 258 (120) (948) 537
Non-controlling interests in subsidiaries, net of income taxes – – – – 43 43
Equity in net income of an associated company, net of income taxes – 289 – – 20 309
Net income (loss) – reported 2,424 769 722 65 (147) 3,833
Items of note, net of income taxes – – 84 – (104) (20)
Net income (loss) – adjusted $ 2,424 $ 769 $ 806 $ 65 $ (251) $ 3,813
REVIEW OF 2008 FINANCIAL PERFORMANCE
TABLE 21
NET INTEREST INCOME
Reported net interest income was $8,532 million in 2008, an increase
of $1,608 million or 23%. The increase was driven by increases in
most segments. Canadian Personal and Commercial Banking net
interest income increased $389 million, largely due to higher product
volumes in personal loans, real-estate secured lending and deposits.
U.S. Personal and Commercial Banking net interest income increased
$779 million, largely due to the Commerce acquisition. Wholesale
Banking net interest income increased $443 million due to higher
trading-related net interest income.
NON-INTEREST INCOME
Reported non-interest income was $6,137 million in 2008, a decrease
of $1,220 million, or 17%, from 2007. Adjusted non-interest income
was $5,840 million, a decrease of $1,308 million, or 18%, from 2007.
The decrease in adjusted non-interest income was driven by a decline
in Wholesale Banking, partially offset by increases in both U.S. and
Canadian Personal and Commercial Banking. Wholesale Banking non-
interest income declined $1,687 million due to weak trading income,
lower syndication revenue, and merger and acquisition fees. U.S.
Personal and Commercial Banking non-interest income increased
$270 million, largely due to the inclusion of Commerce. Canadian
Personal and Commercial Banking non-interest income increased
$188 million, due to growth in fee income and card services revenue.
NON-INTEREST EXPENSES
Non-interest expenses for 2008 were $9,502 million, compared with
$8,975 million in 2007, an increase of $527 million or 6%. The
increase in expenses was driven by growth in all operating segments
other than Wholesale Banking. This growth was partially offset by
lower other expenses due to the impact of the $477 million positive
adjustment resulting from the substantial reversal of the Enron
litigation reserve. U.S. Personal and Commercial Banking expenses
increased $570 million due largely to the acquisition of Commerce.
Canadian Personal and Commercial Banking expenses increased
$266 million due to higher employee compensation expense and
investments in new business initiatives including longer hours and
new branches.
INCOME TAX EXPENSE
Reported total income and other taxes decreased by $236 million, or
16%, from 2007. Income tax expense, on a reported basis, was down
$316 million, or 37%, from 2007. Other taxes were up $80 million, or
12%, from 2007. Adjusted total income and other taxes were down
$366 million, or 22%, from 2007. Current income tax expense, on an
adjusted basis, was down $446 million, or 45%, from 2007.