TD Bank 2014 Annual Report Download - page 206

TD BANK GROUP ANNUAL REPORT 2014 FINANCIAL RESULTS204
SEGMENTED INFORMATION
NOTE 31
Effective November 1, 2013, the Bank revised its reportable segments,
and for management reporting purposes, reports its results under
three key business segments: Canadian Retail, which includes the
results of the Canadian personal and commercial banking businesses,
Canadian credit cards, TD Auto Finance Canada and Canadian wealth
and insurance businesses; U.S. Retail, which includes the results of the
U.S. personal and commercial banking businesses, U.S. credit cards,
TD Auto Finance U.S., U.S. wealth business and the Bank’s investment
in TD Ameritrade; and Wholesale Banking. The Bank’s other activities
are grouped into the Corporate segment. Certain goodwill pertaining
to the former Wealth and Insurance segment was allocated on a rela-
tive fair value basis to the Canadian Retail and U.S. Retail segments
when the segments were realigned. The segmented results for periods
prior to the segment realignment have been restated accordingly.
The results of the Aeroplan credit card portfolio, acquired on
December 27, 2013, are reported in the Canadian Retail segment.
The results of Epoch Investment Partners, Inc., acquired on March 27,
2013, and the results of the U.S. credit card portfolio of Target Corpo-
ration, acquired on March 13, 2013, are reported in the U.S. Retail
segment. The results of the credit card portfolio of MBNA Canada,
acquired on December 1, 2011, as well as the integration charges
related to the acquisition, are reported in the Canadian Retail segment.
Canadian Retail is comprised of Canadian personal and commercial
banking, which provides financial products and services to personal,
small business, and commercial customers, TD Auto Finance Canada,
the Canadian credit card business, the Canadian wealth business,
which provides investment products and services to institutional and
retail investors, and the insurance business. U.S. Retail is comprised of
the personal and commercial banking operations in the U.S. operating
under the brand TD Bank, America’s Most Convenient Bank, primarily
in the Northeast and Mid-Atlantic regions and Florida, and the U.S.
wealth business, including Epoch and the Bank’s equity investment
in TD Ameritrade. 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, collective provision for credit losses
in Canadian Retail and Wholesale Banking, elimination of taxable
equivalent adjustments and other management reclassifications, corpo-
rate level tax items, and residual unallocated revenue and expenses.
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 approximates 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 intangibles
acquired as a result of business combinations is included in the
Corporate segment. Accordingly, net income for business segments
is presented before amortization of these 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.
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 earn-
ings. The related loans are accounted for at amortized cost. Manage-
ment believes that this asymmetry in the accounting treatment
between CDS and loans would result in periodic profit and loss volatil-
ity which is not indicative of the economics of the corporate loan
portfolio or the underlying business performance in Wholesale Banking.
As a result, these CDS are accounted for on an accrual basis in Whole-
sale Banking and the gains and losses on these CDS, in excess of the
accrued cost, are reported in the Corporate segment.
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 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. 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.