TD Bank 2011 Annual Report Download - page 139

TD BANK GROUP ANNUAL REPORT 2011 FINANCIAL RESULTS 137
SEGMENTED INFORMATION
NOTE 27
For management reporting purposes, the Bank’s operations and
activities are organized around four key business segments: Canadian
Personal and Commercial Banking (CAD P&C) including TD Canada
Trust, TD Insurance and TD Auto Finance Canada; Wealth Manage-
ment, including TD Waterhouse and an investment in TD Ameritrade;
U.S. Personal and Commercial Banking (U.S. P&C), including TD Bank,
America’s Most Convenient Bank and TD Auto Finance U.S.; and
Wholesale Banking, including TD Securities. Integration charges related
to the acquisition of Chrysler Financial and the Bank’s other activities
are reported in the Corporate segment.
CAD P&C comprises the Bank’s personal and business banking in
Canada 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 investment in TD Ameritrade.
U.S. P&C provides commercial banking, 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, government, and institutional customers.
The Bank’s other activities are grouped into the Corporate segment.
The Corporate segment includes the effects of asset securitization
programs, treasury management, general provision for credit losses in
CAD P&C and Wholesale Banking, elimination of taxable equivalent
adjustments and other management reclassifications, corporate level
tax benefits, and residual unallocated revenue and expenses.
Effective November 1, 2010, operating results and associated loans for
the U.S. credit cards business were transferred from CAD P&C to U.S.
P&C for segment reporting purposes. In addition, the Bank has imple-
mented a change in its allocation methodologies whereby certain items
previously reported in the Corporate segment are now being allocated to
other segments. Prior period results were not reclassified. Effective July 4,
2011, executive responsibilities for the TD Insurance business were
moved from Group Head, Canadian Banking, Auto Finance, and Credit
Cards, TD to the Group Head, Wealth Management, Insurance and
Corporate Shared Services, TD. The Bank is currently finalizing its future
reporting format and will update its segmented information effective
November 1, 2011. These changes will be applied retroactively to 2011.
The results of each business segment reflect revenue, expenses,
and assets 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 methodologies 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 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 CAD P&C in transactions that are accounted for as sales. For
the purpose of segmented reporting, CAD P&C accounts for the trans-
actions 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 GAAP
together with income earned on the retained interests net of credit
losses incurred are included in other income.
The Bank purchases credit default swaps (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 volatility in earnings from period to period
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.
As discussed in Note 3, the Bank reclassified certain 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. These derivatives are not eligible for reclassifi cation 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 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 costs, are reported
in the Corporate segment.
Results by Business Segment
(millions of Canadian dollars) Canadian U.S.
Personal and Personal and
Commercial Wealth Commercial Wholesale
Banking Management Banking Banking Corporate Total
2011
Net interest income $ 7,320 $ 423 $ 4,286 $ 1,603 $ (801) $ 12,831
Non-interest income 3,490 2,356 1,402 899 616 8,763
Provision for (reversal of) credit losses 820 – 666 22 (43) 1,465
Non-interest expenses 5,052 1,989 3,446 1,468 1,128 13,083
Income (loss) before income taxes 4,938 790 1,576 1,012 (1,270) 7,046
Provision for (recovery of) income taxes 1,327 221 320 199 (768) 1,299
Non-controlling interests in subsidiaries,
net of income taxes – – – – 104 104
Equity in net income of an associated company,
net of income taxes – 207 – – 39 246
Net income (loss) $ 3,611 $ 776 $ 1,256 $ 813 $ (567) $ 5,889
Total assets
Balance sheet $ 218,746 $ 21,766 $ 201,262 $ 212,765 $ 31,821 $ 686,360
Securitized1 67,740 – – 3,989 (21,407) 50,322
1 Securitized assets continue to be reported under the segments the original loans
originated from.