TD Bank 2011 Annual Report Download - page 12

TD BANK GROUP ANNUAL REPORT 2011 MANAGEMENT’S DISCUSSION AND ANALYSIS10
(millions of Canadian dollars) 2011 2010 2009
Operating results – adjusted
Net interest income $ 12,831 $ 11,543 $ 11,326
Non-interest income1 8,587 8,020 7,294
Total revenue 21,418 19,563 18,620
Provision for credit losses2 1,465 1,685 2,225
Non-interest expenses3 12,395 11,464 11,016
Income before provision for income taxes, non-controlling interests in subsidiaries,
and equity in net income of associated company 7,558 6,414 5,379
Provision for income taxes4 1,508 1,387 923
Non-controlling interests in subsidiaries, net of income taxes 104 106 111
Equity in net income of an associated company, net of income taxes5 305 307 371
Net income – adjusted 6,251 5,228 4,716
Preferred dividends 180 194 167
Net income available to common shareholders – adjusted 6,071 5,034 4,549
Adjustments for items of note, net of income taxes
Amortization of intangibles6 (426) (467) (492)
Increase (decrease) in fair value of derivatives hedging the reclassified
available-for-sale debt securities portfolio7 134 5 (450)
Integration and restructuring charges relating to U.S. Personal and Commercial Banking acquisitions8 (69) (69) (276)
Increase (decrease) in fair value of credit default swaps hedging the corporate loan book,
net of provision for credit losses9 13 (4) (126)
Recovery of (provision for) income taxes due to changes in statutory income tax rates10 – 11 –
Release (provision) for insurance claims11 – 17 –
General allowance release (increase) in Canadian Personal and Commercial Banking and Wholesale Banking12 – 44 (178)
Settlement of TD Banknorth shareholder litigation13 – – (39)
FDIC special assessment charge14 – – (35)
Agreement with Canada Revenue Agency15 – (121) –
Integration charges relating to the Chrysler Financial acquisition16 (14) – –
Total adjustments for items of note (362) (584) (1,596)
Net income available to common shareholders – reported $ 5,709 $ 4,450 $ 2,953
NON-GAAP FINANCIAL MEASURES − RECONCILIATION OF ADJUSTED TO REPORTED NET INCOME
TABLE 2
1 Adjusted non-interest income excludes the following items of note: 2011 –
$19 million pre-tax gain due to change in fair value of CDS hedging the corporate
loan book , as explained in footnote 9; $157 million gain due to change in fair value
of derivatives hedging the reclassified available-for-sale debt securities portfolio, as
explained in footnote 7; 2010 – $9 million pre-tax loss due to change in fair value
of credit default swaps (CDS) hedging the corporate loan book; $14 million pre-tax
gain due to change in fair value of derivatives hedging the reclassified available-for-
sale debt securities portfolio; $25 million recovery of insurance claims, as explained
in footnote 11; 2009 – $196 million pre-tax loss due to change in fair value of CDS
hedging the corporate loan book; $564 million pre-tax loss due to change in fair
value of derivatives hedging the reclassified available-for-sale debt securities portfolio.
2 Adjusted provisions for credit losses exclude the following items of note: 2010 –
$59 million release in general allowance for credit losses in Canadian Personal and
Commercial Banking and Wholesale Banking, as explained in footnote 12; 2009 –
$255 million increase in general allowance for credit losses in Canadian Personal
and Commercial Banking and Wholesale Banking.
3 Adjusted non-interest expenses exclude the following items of note: 2011 –
$613 million amortization of intangibles, as explained in footnote 6; $113 million
in integration and restructuring charges relating to U.S. Personal and Commercial
Banking acquisitions, as explained in footnote 8; $21 million of integration charges
related to the Chrysler Financial acquisition, as explained in footnote 16; 2010 –
$592 million amortization of intangibles; $108 million in integration and restruc-
turing charges relating to U.S. Personal and Commercial Banking acquisitions;
2009 – $653 million amortization of intangibles; $429 million integration and
restructuring charges relating to the Commerce acquisition; settlement of TD
Banknorth shareholder litigation of $58 million, as explained in footnote 13;
$55 million Federal Deposit Insurance Corporation (FDIC) special assessment
charge, as explained in footnote 14.
4 For reconciliation between reported and adjusted provision for income taxes,
see the ‘Non-GAAP Financial Measures – Reconciliation of Reported to Adjusted
Provision for Income Taxes’ table in the “Taxes” section.
5 Adjusted equity in net income of associated company excludes the following items
of note: 2011 –$59 million amortization of intangibles , as explained in footnote 6;
2010 – $72 million amortization of intangibles; 2009 – $68 million amortization
of intangibles.
6 Amortization 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. Effective 2011, amortization of software is recorded in amortiza-
tion of intangibles; however, amortization of software is not included for purposes
of items of note, which only includes amortization of intangibles acquired as
a result of business combinations.
7 During 2008, as a result of deterioration in markets and severe dislocation in the
credit market, the Bank changed its trading strategy with respect to certain trading
debt securities. Since the Bank no longer intended 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. 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 asym-
metry 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.
Commencing in the second quarter of 2011, the Bank may from time to time
replace securities within the portfolio to best utilize the initial, matched fixed term
funding. 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.
8 As a result of U.S. Personal and Commercial Banking acquisitions and related inte-
gration and restructuring initiatives undertaken, the Bank may incur integration
and restructuring charges. Restructuring charges consisted of employee severance
costs, the costs of amending certain executive employment and award agreements,
contract termination fees and the write-down of long-lived assets due to impair-
ment. Integration charges consisted of costs related to information technology,
employee retention, external professional consulting charges, marketing (including
customer communication and rebranding), and integration-related travel costs.
Beginning in Q2 2010, U.S Personal and Commercial Banking elected not to
include any further Commerce related integration and restructuring charges in this
item of note as the efforts in these areas has wound down and in light of the fact
that the integration and restructuring was substantially complete. Similarily, begin-
ning in Q2 2012, U.S. Personal and Commercial Banking is not expected to include
any further FDIC-assisted and South Financial related integration and restructuring
charges. For the twelve months ended October 31, 2011, the integration charges
were driven by the FDIC-assisted and South Financial acquisitions. There were no
restructuring charges recorded.
9 The Bank purchases 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 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 Corporate segment. Adjusted earnings exclude the gains
and losses on the CDS in excess of the accrued cost. When a credit event occurs in
the corporate loan book that has an associated CDS hedge, the PCL related to the
portion that was hedged via the CDS is netted against this item of note.