T ABLE 2
NON-GAAP FINANCIAL MEASURES – Reconciliation of Adjusted to Reported Net Income (millions of Canadian dollars)
Operating results – adjusted Net interest income Non-interest income1
Total revenue Provision for credit losses2
Insurance claims and related expenses Non-interest expenses3
Income before income taxes and equity in net income of an investment in TD Ameritrade Provision for income taxes4
Equity in net income of an investment in TD Ameritrade5 Net income – adjusted
Preferred dividends
Net income available to common shareholders and non-controlling interests in subsidiaries – adjusted
Attributable to: Non-controlling interests in subsidiaries, net of income taxes
Net income available to common shareholders – adjusted
Adjustments for items of note, net of income taxes Amortization of intangibles6
Fair value of derivatives hedging the reclassified available-for-sale securities portfolio7 Impairment of goodwill, non-financial assets, and other charges8 Restructuring charges9
Charge related to the acquisition in U.S. strategic cards portfolio and related integration costs10 Litigation and litigation-related charge(s)/reserve(s)11
Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada12
Set-up, conversion and other one-time costs related to affinity relationship with Aimia and acquisition of Aeroplan Visa credit card accounts13 Impact of Alberta flood on the loan portfolio14 Gain on sale of TD Waterhouse Institutional Services15
Total adjustments for items of note
Net income available to common shareholders – reported 1
Adjusted non-interest income excludes the following items of note: $7 million gain due to change in fair value of derivatives hedging the reclassified available-for-sale securities portfolio, as explained in footnote 7; 2015 – $62 million gain due to change in fair value of derivatives hedging the reclassified available-for-sale securities portfolio; $73 million difference of the transaction price over the fair value of the Nordstrom assets acquired, as explained in footnote 10; 2014 – $49 million gain due to change in fair value of derivatives hedging the reclassified available-for-sale securities portfolio; $231 million gain due to the sale of TD Waterhouse Institutional Services, as explained in footnote 15.
2
In 2014, 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 14.
3
Adjusted non-interest expenses exclude the following items of note: $270 million amortization of intangibles, as explained in footnote 6; 2015 – $289 million amortization of intangibles; $686 million due to the initiatives to reduce costs, as explained in footnote 9; $9 million due to integration costs related to the Nordstrom transaction, as explained in footnote 10; $52 million of litigation charges; $39 million recovery of litigation losses, as explained in footnote 11; 2014 – $286 million amortization of intangibles; $169 million of integration charges relating to the acquisition of the credit card portfolio of MBNA Canada, as explained in footnote 12; $178 million of costs in relation to the affinity relationship with Aimia and acquisition of Aeroplan Visa credit card accounts, as explained in footnote 13.
4
For a reconciliation between reported and adjusted provision for income taxes, refer to the “Non-GAAP Financial Measures – Reconciliation of Reported to Adjusted Provision for Income Taxes” table in the “Income Taxes” section of the MD&A.
5
Adjusted equity in net income of an investment in TD Ameritrade excludes the following items of note: $65 million amortization of intangibles (2015 – $61 million; 2014 – $53 million), as explained in footnote 6. These amounts were reported in the Corporate segment.
6
Amortization of intangibles relate to intangibles acquired as a result of asset acquisitions and business combinations. Although the amortization of software and asset servicing rights are recorded in amortization of intangibles, they are not included for purposes of the items of note.
7
The Bank changed its trading strategy with respect to certain trading debt securities and reclassified these securities from trading to the available-for-sale category effective August 1, 2008. These debt securities are economically hedged, primarily with credit default swap and interest rate swap contracts which 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.
12 8 2016
$ 19,923 14,385
34,308 2,330 2,462
18,496 11,020
2,226 498
9,292 141
9,151 115 9,036
(246) 6
(116) – – –
– –
– –
(356) $ 8,680 2015
$ 18,724 12,713
31,437 1,683 2,500
17,076 10,178
1,862 438
8,754 99
8,655 112 8,543
(255) 55 –
(471) (51) (8)
– –
– –
(730) $ 7,813
In the second quarter of 2016, the Bank recorded impairment losses on goodwill, certain intangibles, other non-financial assets and deferred tax assets, as well as other charges relating to the Direct Investing business in Europe that has been experiencing continued losses. These amounts are reported in the Corporate segment.
9
In fiscal 2015, the Bank recorded restructuring charges of $686 million ($471 million after tax) on a net basis. During 2015, the Bank commenced its restructuring review and in the second quarter of 2015 recorded $337 million ($228 million after tax) of restructuring charges and recorded an additional restructuring charge of $349 million ($243 million after tax) on a net basis in the fourth quarter of 2015. The restructuring initiatives were intended to reduce costs and manage expenses in a sustainable manner and to achieve greater operational efficiencies. These measures included process redesign and business restructuring, retail branch and real estate optimization, and organizational review. The restructuring charges have been recorded as an adjustment to net income within the Corporate segment.
10
On October 1, 2015, the Bank acquired substantially all of Nordstrom’s existing U.S. Visa and private label consumer credit card portfolio and became the primary issuer of Nordstrom credit cards in the U.S. The transaction was treated as an asset acquisition and the difference on the date of acquisition of the transaction price over the fair value of assets acquired has been recorded in non-interest income. In addition, the Bank incurred set-up, conversion and other one-time costs related to integration of the acquired cards and related program agreement. These amounts are included as an item of note in the U.S. Retail segment.
11
As a result of an adverse judgment and evaluation of certain other developments and exposures in the U.S. in 2015, the Bank took prudent steps to reassess its litigation provision. Having considered these factors, including related or analogous cases, the Bank determined, in accordance with applicable accounting standards, that an increase of $52 million ($32 million after tax) to the Bank’s litigation provision was required in the second quarter of 2015. During the third quarter of 2015, distributions of $39 million ($24 million after tax) were received by the Bank as a result of previous settlements reached on certain matters in the U.S., whereby the Bank was assigned the right to these distributions, if and when made available. The amount for fiscal 2015 reflects this recovery of previous settlements.
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. Integration charges consist of costs related to information technology, employee retention, 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 business. Integration charges related to this acquisition were incurred by the Canadian Retail segment. The fourth quarter of 2014 was the last quarter Canadian Retail included any further MBNA-related integration charges as an item of note.
TD BANK GROUP ANNUAL REPORT 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS 13 2014
$ 17,584 12,097
29,681 1,582 2,833
15,863 9,403
1,649 373
8,127 143
7,984 107 7,877
(246) 43 – – – –
(125) (131) 196
19 (244) $ 7,633
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