TD Bank 2014 Annual Report Download - page 12

TD BANK GROUP ANNUAL REPORT 2014 MANAGEMENT’S DISCUSSION AND ANALYSIS10
NON-GAAP FINANCIAL MEASURES – Reconciliation of Adjusted to Reported Net Income
TABLE 2
(millions of Canadian dollars) 2014 2013 2012
Operating results – adjusted
Net interest income1 $ 17,584 $ 16,074 $ 15,062
Non-interest income2 12,097 11,114 10,615
Total revenue 29,681 27,188 25,677
Provision for credit losses3 1,582 1,606 1,903
Insurance claims and related expenses 2,833 3,056 2,424
Non-interest expenses4 15,863 14,390 13,180
Income before income taxes and equity in net income of an investment in associate 9,403 8,136 8,170
Provision for income taxes5 1,649 1,326 1,397
Equity in net income of an investment in associate, net of income taxes6 373 326 291
Net income – adjusted 8,127 7,136 7,064
Preferred dividends 143 185 196
Net income available to common shareholders and non-controlling interests in subsidiaries – adjusted 7,984 6,951 6,868
Attributable to:
Non-controlling interests in subsidiaries, net of income taxes 107 105 104
Net income available to common shareholders – adjusted 7,877 6,846 6,764
Adjustments for items of note, net of income taxes
Amortization of intangibles7 (246) (232) (238)
Integration charges and direct transaction costs relating to the acquisition of the credit card
portfolio of MBNA Canada8 (125) (92) (104)
Fair value of derivatives hedging the reclassified available-for-sale securities portfolio9 43 57 (89)
Set-up, conversion and other one-time costs related to affinity relationship with Aimia and acquisition
of Aeroplan Visa credit card accounts10 (131) (20) –
Impact of Alberta flood on the loan portfolio11 19 (19) –
Gain on sale of TD Waterhouse Institutional Services12 196 – –
Litigation and litigation-related charge/reserve13 – (100) (248)
Restructuring charges14 – (90) –
Impact of Superstorm Sandy15 – – (37)
Integration charges, direct transaction costs, and changes in fair value of contingent consideration
relating to the Chrysler Financial acquisition16 – – (17)
Reduction of allowance for incurred but not identified credit losses17 – – 120
Positive impact due to changes in statutory income tax rates18 – – 18
Fair value of credit default swaps hedging the corporate loan book, net of provision for credit losses19 – – –
Integration charges and direct transaction costs relating to U.S. Retail acquisitions20 – – (9)
Total adjustments for items of note (244) (496) (604)
Net income available to common shareholders – reported $ 7,633 $ 6,350 $ 6,160
1 Adjusted net interest income excludes the following item of note: 2012 –
$36 million ($27 million after tax) of certain charges against revenue related to
promotional-rate card origination activities, as explained in footnote 8.
2 Adjusted non-interest income excludes the following items of note: $49 million gain
due to change in fair value of derivatives hedging the reclassified available-for-sale
(AFS) securities portfolio, as explained in footnote 9; $231 million gain due to the
sale of TD Waterhouse Institutional Services, as explained in footnote 12; 2013 –
$71 million gain due to change in fair value of derivatives hedging the reclassified
AFS securities portfolio; 2012 – $2 million loss due to change in fair value of credit
default swaps (CDS) hedging the corporate loan book, as explained in footnote 19;
$89 million loss due to change in fair value of derivatives hedging the reclassified
AFS securities portfolio; $3 million loss due to change in fair value of contingent
consideration relating to Chrysler Financial, as explained in footnote 16, $1 million
loss due to the impact of Superstorm Sandy, as explained in footnote 15.
3 Adjusted provision for credit losses (PCL) excludes the following items of note:
$25 million release of the provision for the impact of the Alberta flood on the loan
portfolio, as explained in footnote 11; 2013 – $25 million due to the impact of the
Alberta flood on the loan portfolio; 2012 – $162 million in adjustments to allow-
ance for incurred but not identified credit losses in Canadian Retail, as explained
in footnote 17; $54 million due to the impact of Superstorm Sandy, as explained
in footnote 15.
4 Adjusted non-interest expenses exclude the following items of note: $286 million
amortization of intangibles, as explained in footnote 7; $169 million of integration
charges relating to the acquisition of the credit card portfolio of MBNA Canada, as
explained in footnote 8; $178 million of costs in relation to the affinity relationship
with Aimia and acquisition of Aeroplan credit card accounts, as explained in foot-
note 10; 2013 – $272 million amortization of intangibles; $125 million of integra-
tion charges and direct transaction costs relating to the acquisition of the MBNA
Canada credit card portfolio; $127 million of litigation and litigation-related
charges, as explained in footnote 13; $129 million due to the initiatives to reduce
costs, as explained in footnote 14; $27 million of set-up costs in preparation for
the affinity relationship with Aimia Inc. with respect to Aeroplan credit cards;
2012 – $277 million amortization of intangibles; $11 million of integration
charges related to U.S. Retail acquisitions, as explained in footnote 20; $24 million
of integration charges and direct transaction costs relating to the Chrysler Financial
acquisition, as explained in footnote 16; $104 million of integration charges and
direct transaction costs relating to the acquisition of the MBNA Canada credit card
portfolio; $413 million of litigation and litigation related charges; $7 million due
to the impact of Superstorm Sandy, as explained in footnote 15.
5 For a reconciliation between reported and adjusted provision for income taxes, see
the ‘Non-GAAP Financial Measures – Reconciliation of Reported to Adjusted Provi-
sion for Income Taxes’ table in the “Income Taxes” section of this document.
6 Adjusted equity in net income of an investment in associate excludes the following
items of note: $53 million amortization of intangibles, as explained in footnote 7;
2013 – $54 million amortization of intangibles; 2012 – $57 million amortization
of intangibles.
7 Amortization of intangibles relate primarily to the TD Banknorth acquisition in 2005
and its privatization in 2007, the acquisitions by TD Banknorth of Hudson United
Bancorp in 2006 and Interchange Financial Services in 2007, the Commerce acqui-
sition in 2008, the amortization of intangibles included in equity in net income of
TD Ameritrade, the acquisition of the credit card portfolio of MBNA Canada in
2012, the acquisition of Target Corporation’s U.S. credit card portfolio in 2013, the
Epoch Investment Partners, Inc. acquisition in 2013, and to the acquired Aeroplan
credit card portfolio in 2014. Amortization of software is recorded in amortization
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 asset acquisitions and business combinations.
8 As a result of the acquisition of the credit card portfolio of MBNA Canada, as well
as certain other assets and liabilities, the Bank incurred integration charges. Inte-
gration charges consist of costs related to information technology, employee reten-
tion, external professional consulting charges, marketing (including customer
communication and rebranding), integration related travel, employee severance
costs, consulting, and training. The Bank’s integration charges related to the MBNA
acquisition were higher than what were anticipated when the transaction was first
announced. The elevated spending was primarily due to additional costs incurred
(other than the amounts capitalized) to build out technology platforms for the busi-
ness. Integration charges related to this acquisition were incurred by the Canadian
Retail segment. The fourth quarter of 2014 is the last quarter Canadian Retail
included any further MBNA-related integration charges as an item of note.
9
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 cate-
gory 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. 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.