1. TITLE
2.3 LEGAL FRAMEWORK
(millions of Canadian dollars) 2011 2010
Net interest income $ 12,831 $ 11,543
Non-interest income 8,763 8,022
Total revenue 21,594 19,565
Provision for credit losses 1,465 1,625
Non-interest expenses 13,083 12,163
Income before income taxes, non-controlling interests in subsidiaries, and equity in
net income of associated company 7,046 5,777 Provision for income taxes 1,299 1,262 Non-controlling interests in subsidiaries,
net of income taxes 104 106
Equity in net income of an associated company,
net of income taxes 246 235
Net income – reported 5,889 4,644
Preferred dividends 180 194
Net income available to common
shareholders – reported $ 5,709 $ 4,450 The following section provides selected annual information pursuant to
National Instrument 51-102F1 in relation to the Bank’s 2011 and 2010 financial years. Following the Bank’s transition to IFRS, for purposes of enabling period to period comparison between 2010 and 2011, the financial information in this section has been presented under Canadian GAAP. In addition, for the purposes of this section, the 2011 and 2010 results of the Insurance business have been presented with the Canadian Personal and Commercial Banking segment and consis- tent with the presentation under Canadian GAAP. Finally, this section includes discussion of the factors impacting variation between 2010 and 2011 and such discussion has also been provided with reference to Canadian GAAP presentation of 2010 and 2011 results.
OPERATINg RESULTS UNDER CANADIAN gAAP – REPORTED T A B L E 2 5
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 T A B L E 2 7
(Canadian dollars) 2011 2010 Basic earnings per share − reported $ 6.45 $ 5.13 Adjustments for items of note2 0.40 0.68 Basic earnings per share − adjusted $ 6.85 $ 5.81 Diluted earnings per share − reported 6.41 5.10 Adjustments for items of note2 0.41 0.67 Diluted earnings per share − adjusted $ 6.82 $ 5.77 1 EPS is computed by dividing net income available to common shareholders
by the weighted-average number of shares outstanding during the period. 2 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.
NET INTEREST INCOmE
Net interest income for the year was $12,831 million, an increase of $1,288 million, or 11%, compared with last year. Higher net interest income was driven by increases in all retail segments, partially offset by a decline in Wholesale Banking. U.S. Personal and Commercial Banking net interest income increased due to the impact of acquisitions and strong organic volume growth, partially offset by the translation effect of a stronger Canadian dollar. Canadian Personal and Commercial Banking net interest income increased largely due to strong volume growth in loans and deposits, partially offset by a lower margin on average earning assets. Wealth Management net interest income increased due to improved net interest margin and higher client deposits and margin loans. Wholesale Banking net interest income decreased due to lower trading and non-trading-related net interest income.
NON-INTEREST INCOmE
Non-interest income for the year was $8,763 million, an increase of $741 million, or 9%, on a reported basis, and $8,587 million on an adjusted basis, an increase of $567 million, or 7%, compared with last year. The increase in adjusted non-interest income was driven by increases in all retail segments, partially offset by a decline in Wholesale Banking. Canadian Personal and Commercial Banking non- interest income increased due to strong fee income growth and strong growth in insurance revenue. Wealth Management non-interest income increased primarily due to higher fee-based revenue from higher client assets. U.S. Personal and Commercial Banking non-interest income increased due to higher fee-based revenue and the impact of acquisi- tions, partially offset by lower overdraft fees due to Regulation E and the translation effect of a stronger Canadian dollar. Wholesale Banking non-interest income decreased mainly due to lower trading-related revenue, partially offset by higher security gains.
NON-INTEREST EXPENSES
Reported non-interest expenses for the year were $13,083 million, an increase of $920 million, or 8% compared with last year. Adjusted non- interest expenses were $12,395 million, an increase of $931 million, or 8% compared with last year. The increase in adjusted non-interest expenses was driven by increases in all segments. U.S. Personal and Commercial Banking expenses increased due to acquisitions, investments in new stores and infrastructure, partially offset by the translation effect of a stronger Canadian dollar. Wealth Management expenses increased due to higher employee compensation costs largely driven by increased revenue, higher infrastructure investment to support business growth and project costs. Canadian Personal and Commercial Banking expenses increased primarily due to continued investment in the business. Wholesale Banking expenses increased primarily due to higher employee costs and investment in risk and control infrastructure, partially offset by lower variable compensation related to lower revenue.
INCOmE TAX EXPENSE
Reported total income and other taxes increased by $161 million, or 8%, from 2010. Income tax expense, on a reported basis, was up $37 million, or 3%, from 2010. Other taxes were up $124 million, or 14%, from 2010. Adjusted total income and other taxes were up $245 million, or 11%, from 2010. Total income tax expense, on an adjusted basis, was up $121 million, or 9%, from 2010.
The Bank’s effective income tax rate, on a reported basis, was 18.4% for 2011, compared with 21.8% in 2010. The year-over-year decrease was largely due to the reduction in the Canadian statutory corporate tax rate in the current year and a $121 million charge related to an agreement with the Canada Revenue Agency last year. TD reports its investment in TD Ameritrade using the equity method of accounting. TD Ameritrade’s tax expense of $148 million in the year, compared to $132 million in 2010, is not part of the Bank’s tax rate reconciliation. DIVIDENDS
The Bank’s dividend policy is approved by the Board of Directors. At October 31, 2011, the quarterly dividend was $0.68 per share, consistent with the Bank’s current target payout range of 35 – 45% of adjusted earnings. Cash dividends declared and paid during 2011 totalled $2.61 per share (2010 – $2.44). For cash dividends payable on the Bank’s preferred shares, see Notes 15 and 18 to the 2011 Consolidated Financial Statements. As at October 31, 2011, 901.0 million common shares were outstanding (2010 – 878.5 million). The Bank’s ability to pay dividends is subject to the Bank Act and the requirements of OSFI. See Note 18 to the 2011 Consolidated Financial Statements for further details.
BALANCE SHEET
Factors Affecting Assets and Liabilities
Total assets were $686 billion as at October 31, 2011, an increase of $67 billion, or 11%, compared with October 31, 2010. The net increase was primarily due to a $21 billion increase in securities, a $34 billion increase in loans (net of allowance for loan losses) and a $7 billion increase in other assets. The value of total assets in U.S. Personal and Commercial Banking decreased by $5 billion due to the translation effect of a stronger Canadian dollar.
Securities increased by $21 billion largely due to an increase in available-for-sale securities primarily in U.S. Personal and Commercial Banking and trading securities in Wholesale Banking. The value of securities in U.S. Personal and Commercial Banking decreased by $2 billion due to the translation effect of a stronger Canadian dollar. Loans (net of allowance for loan losses) increased $34 billion primarily driven by volume growth in Canadian Personal and Commercial Banking and U.S. Personal and Commercial Banking. The increase in Canadian Personal and Commercial Banking loans was largely due to increases in residential mortgages and business and government loans. U.S. Personal and Commercial Banking loans increased primarily due to personal and consumer instalment loans, residential mortgages and business and government loans. The Chrysler Financial acquisition added $8 billion to total loans. The value of loans (net of allowance for loan losses) in U.S. Personal and Commercial Banking decreased by $2 billion due to the translation effect of a stronger Canadian dollar. Other assets increased by $7 billion primarily due to an increase in the market value of derivatives in Wholesale Banking.
RECONCILIATION OF CANADIAN gAAP REPORTED TO ADJUSTED EARNINgS PER SHARE (EPS)1 T A B L E 2 8
SELECTED CONSOLIDATED BALANCE SHEET ITEmS T A B L E 2 9
gROUP FINANCIAL CONDITION