TD Bank 2012 Annual Report Download - page 40

TD BANK GROUP ANNUAL REPORT 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS38
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 AFS
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 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. 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 agree-
ments, contract termination fees and the write-down of long-lived assets due to
impairment. Integration charges consisted of costs related to information technol-
ogy, 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. Similarly, 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.
10 This represents the impact of scheduled changes in the income tax statutory rate
on net future income tax balances.
11 The Bank accrued an additional actuarial liability in its insurance subsidiary opera-
tions for potential losses in the first quarter of 2008 related to a court decision
in Alberta. The Alberta government’s legislation effectively capping minor injury
insurance claims was challenged and held to be unconstitutional. In Q3 2009, the
government of Alberta won its appeal of the decision. The plaintiffs sought leave
to appeal the decision to the Supreme Court of Canada and in Q1 2010, the
Supreme Court of Canada denied the plaintiffs’ application to seek leave to
appeal. As a result of this favourable outcome, the Bank released its provision
related to the minor injury cap litigation in Alberta.
12 Effective November 1, 2009, the “General allowance release (increase) in Canadian
Personal and Commercial Banking and Wholesale Banking” includes the TD Financing
Services (formerly VFC Inc.) portfolio. Prior to this, the impact of the TD Financing
Services portfolio was excluded from this item of note.
13 The Bank resolved several outstanding tax matters related to Wholesale Banking
strategies that have been previously reassessed by the Canada Revenue Agency
(CRA) and that were awaiting resolution by the CRA appeals division or the courts.
The Bank no longer enters into these types of strategies.
14 The Bank incurred integration charges as a result of the Chrysler Financial
acquisition in Canada and the U.S. and related integration initiatives undertaken.
Integration charges include costs related to information technology, employee
retention, external professional consulting charges, marketing (including
customer communication and rebranding), and integration-related travel costs.
While integration charges related to this acquisition were incurred for both
Canada and the U.S., the majority of the charges relate to integration initiatives
undertaken for U.S. Personal and Commercial Banking.
(millions of Canadian dollars, except as noted) 2011 2010
Provision for income taxes – reported $ 1,299 $ 1,262
Adjustments for items of note: Recovery of (provision for) income taxes2
Amortization of intangibles3 187 197
Fair value of derivatives hedging the reclassified available-for-sale debt securities portfolio (23) 19
Integration and restructuring charges relating to U.S. Personal and Commercial Banking acquisitions 44 38
Fair value of credit default swaps hedging the corporate loan book, net of provision for credit losses (6) 5
Income taxes due to changes in statutory income tax rates – 11
Insurance claims – (8)
General allowance increase (release) in Canadian Personal and Commercial Banking and Wholesale Banking – (16)
Agreement with Canada Revenue Agency – (121)
Integration charges relating to Chrysler Financial acquisition 7 –
Total adjustments for items of note 209 125
Provision for income taxes – adjusted 1,508 1,387
Other taxes
Payroll 367 316
Capital and premium 147 207
GST, HST and provincial sales 339 222
Municipal and business 149 133
Total other taxes 1,002 878
Total taxes – adjusted $ 2,510 $ 2,265
Effective income tax rate – adjusted4 20.0% 21.6%
1 For explanations of items of note, see the “Non-GAAP Financial Measures −
Reconciliation of Adjusted to Reported Net Income” table in the “Financial
Results overview” section of this document.
2 The tax effect for each item of note is calculated using the effective statutory
income tax rate of the applicable legal entity.
3 Effective 2011, amortization of software is recorded in amortization of intangibles.
For the purpose of the items of note only, the income tax impact of software
amortization is excluded from the amortization of intangibles.
4 Adjusted effective income tax rate is the adjusted provision for income taxes before
other taxes as a percentage of adjusted net income before taxes.
NON-GAAP FINANCIAL MEASURES – RECONCILIATION OF CANADIAN GAAP REPORTED TO ADJUSTED INCOME TAXES1
TABLE 27