TD Bank
Annual Report 2013

Plain-text annual report

Looking Forward 2013 Annual Report T R O P E R L A U N N A 3 1 0 2 P U O R G K N A B D T 4 0 5 9 1 FSC Logo ® The TD logo and other trade-marks are the property of The Toronto-Dominion Bank or a wholly-owned subsidiary, in Canada and/or other countries. 2013 Snapshot Year at a Glance Performance Indicators Group President and CEO’s Message Chairman of the Board’s Message MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS Consolidated Financial Statements Notes to Consolidated Financial Statements Principal Subsidiaries Ten-Year Statistical Review Glossary Shareholder and Investor Information 1 2 3 4 5 7 112 120 196 198 204 205 For more information, including a video message from Ed Clark, see the interactive TD Annual Report online by scanning the QR code below or visiting td.com/annual-report/ar2013 For information on TD’s commitments to the community see the TD Corporate Responsibility Report online by scanning the QR code below or visiting td.com/corporate-responsibility (2013 report available April 2014) Shareholder and Investor Information MARKET LISTINGS The common shares of The Toronto-Dominion Bank are listed for trading on the Toronto Stock Exchange and the New York Stock Exchange under the symbol “TD”. The Toronto-Dominion Bank preferred shares are listed on the Toronto Stock Exchange. Further information regarding the Bank’s listed securities, including ticker symbols and CUSIP numbers, is available on our website at www.td.com under Investor Relations/Share Information or by calling TD Shareholder Relations at 1-866-756-8936 or 416-944-6367 or by e-mailing tdshinfo@td.com. AUDITORS FOR FISCAL 2013 Ernst & Young LLP DIVIDENDS Direct dividend depositing: Shareholders may have their dividends deposited directly to any bank account in Canada or the U.S. For this service, please contact the Bank’s transfer agent at the address below. U.S. dollar dividends: Dividend payments sent to U.S. addresses or made directly to U.S. bank accounts will be made in U.S. funds unless a shareholder otherwise instructs the Bank’s transfer agent. Other shareholders can request dividend payments in U.S. funds by contacting the Bank’s transfer agent. Dividends will be exchanged into U.S. funds at the Bank of Canada noon rate on the fifth business day after the record date, or as otherwise advised by the Bank. Dividend information for 2013 is available at www.td.com under Investor Relations/Share Information. Dividends, including the amounts and dates, are subject to declaration by the Board of Directors of the Bank. DIVIDEND REINVESTMENT PLAN For information regarding the Bank’s dividend reinvestment plan, please contact our transfer agent or visit our website at www.td.com under Investor Relations/Share Information/Dividends. IF YOU AND YOUR INQUIRY RELATES TO PLEASE CONTACT Are a registered shareholder (your name appears on your TD share certificate) Missing dividends, lost share certificates, estate questions, address changes to the share register, dividend bank account changes, the dividend reinvestment plan, eliminating duplicate mailings of shareholder materials or stopping (and resuming) receiving annual and quarterly reports Hold your TD shares through the Direct Registration System in the United States Missing dividends, lost share certificates, estate questions, address changes to the share register, eliminating duplicate mailings of shareholder materials or stopping (and resuming) receiving annual and quarterly reports Transfer Agent: CST Trust Company P.O. Box 700, Station B Montréal, Québec H3B 3K3 1-800-387-0825 (Canada and US only) or 416-682-3860 Facsimile: 1-888-249-6189 inquiries@canstockta.com or www.canstockta.com Co-Transfer Agent and Registrar: Computershare P.O. Box 43006 Providence, Rhode Island, 02940-3006 or 250 Royall Street Canton, Massachusetts 02021 1-866-233-4836 TDD for hearing impaired: 1-800-231-5469 Shareholders outside of U.S.: 201-680-6578 TDD Shareholders outside of U.S.: 201-680-6610 www.computershare.com Beneficially own TD shares that are held in the name of an intermediary, such as a bank, a trust company, a securities broker or other nominee Your TD shares, including questions regarding the dividend reinvestment plan and mailings of shareholder materials Your intermediary TD SHAREHOLDER RELATIONS For all other shareholder inquiries, please contact TD Shareholder Relations at 416-944-6367 or 1-866-756-8936 or e-mail tdshinfo@td.com. Please note that by leaving us an e-mail or voicemail message you are providing your consent for us to forward your inquiry to the appropriate party for response. Shareholders may communicate directly with the independent directors through the Chairman of the Board, by writing to: Chairman of the Board The Toronto-Dominion Bank P.O. Box 1 Toronto-Dominion Centre Toronto, Ontario M5K 1A2 or you may send an e-mail c/o TD Shareholder Relations at tdshinfo@td.com. E-mails addressed to the Chairman received from shareholders and expressing an interest to communicate directly with the independent directors via the Chairman will be provided to Mr. Levitt. HEAD OFFICE The Toronto-Dominion Bank P.O. Box 1 Toronto-Dominion Centre King St. W. and Bay St. Toronto, Ontario M5K 1A2 Product and service information 24 hours a day, seven days a week: In Canada contact TD Canada Trust 1-866-567-8888 In the U.S. contact TD Bank, America’s Most Convenient Bank 1-888-751-9000 French: 1-866-233-2323 Cantonese/Mandarin: 1-800-328-3698 Telephone device for the hearing impaired: 1-800-361-1180 General information: Contact Corporate and Public Affairs 416-982-8578 Website: In Canada: www.td.com In the U.S.: www.tdbank.com E-mail: customer.service@td.com (Canada only; U.S. customers can e-mail customer service via www.tdbank.com) ANNUAL MEETING April 3, 2014 9:30 a.m. (Mountain) Hyatt Regency Calgary Calgary, Alberta SUBORDINATED NOTES SERVICES Trustee for subordinated notes: Computershare Trust Company of Canada Attention: Manager, Corporate Trust Services 100 University Avenue, 11th Floor Toronto, Ontario M5J 2Y1 Vous pouvez vous procurer des exemplaires en français du rapport annuel au service suivant : Affaires internes et publiques La Banque Toronto-Dominion P.O. Box 1, Toronto-Dominion Centre Toronto (Ontario) M5K 1A2 TD B ANK GRO UP ANNUAL REP ORT 2013 SHAREHOLDER AND I NVESTO R I NFORM ATIO N 205 M L P l a t n e n i t n o c s n a r T : g n i t n i r P , . c n i n g i s e d 0 3 q : n g i s e D 2013 Snapshot1 NET INCOME 2 available to common shareholders (millions of Canadian dollars) DILUTED EARNINGS PER SHARE 2 (Canadian dollars) RETURN ON RISK- WEIGHTED ASSETS 2 (per cent) Adjusted Reported Adjusted Reported Adjusted Reported TOTAL ASSETS 2 (billions of Canadian dollars) $7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 $8 7 6 5 4 3 2 1 0 3.0% 2.5 2.0 1.5 1.0 0.5 0 $900 800 700 600 500 400 300 200 100 0 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 09 10 11 12 13 12.8% TD’s 5-year CAGR (adjusted) 8.8% TD’s 5-year CAGR (adjusted) 2.50% TD’s 2013 return on risk-weighted assets (adjusted) $863 billion of total assets at Oct. 31, 2013 DIVIDENDS PER SHARE (Canadian dollars) TOTAL SHAREHOLDER RETURN (5-year CAGR) TD’S PREMIUM RETAIL EARNINGS MIX $3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 15.2% TD’s premium earnings mix is built on a North American retail focus – a lower-risk business with consistent earnings. 09 10 11 12 13 6.5% TD’s 5-year CAGR 3.0% Canadian peers 14.9% Canadian peers (0.6)% U.S. peers 91% Retail 9% Wholesale 5-year CAGR (22.2)% U.S. peers 5-year CAGR 1 Please see the footnotes on the next page for information on how these results are calculated. 2 Based on Canadian Generally Accepted Accounting Principles (Canadian GAAP) for 2009 – 2010 and International Financial Reporting Standards (IFRS) from 2011 – 2013. See next page for more information. 9% 26% 65% Canadian Retail U.S. Retail Wholesale TD BANK GROUP ANNUAL RE POR T 2 0 13 201 3 SNAPSHOT 1 Year at a Glance1 CEO succession to ensure leadership continuity TD maintained mobile banking leadership position in Canada TD increased its annual dividends paid 12% from the previous year TD board announced CEO succession following Ed Clark’s 2014 retirement; Bharat Masrani transitioned to Chief Operating Officer on July 1, 2013 and will become Group President & CEO November 1, 2014. Record retail adjusted earnings of $6.5 billion Record earnings contributions from Canadian P&C, US P&C and Wealth Management respectively.3 Ranking #1 for mobile subscribers accessing financial services via their mobile devices.2 Including two additional dividend increases paid in fiscal 2013. TD to become the primary credit card issuer for Aeroplan TD will become the primary credit card issuer for Aeroplan on January 1, 2014 and also expects to acquire about half of the existing CIBC Aeroplan credit card accounts.4 TD Bank, America’s Most Convenient Bank® reaches milestone in New York City TD opened its 100th store in NYC this year and ended the fiscal year with 108. TD Wealth reported record Client Assets TD Securities improved its top- three dealer rankings in Canada TD Canada Trust named highest in Customer Satisfaction As of October 31, 2013, has $293 billion in assets under administration and $257 billion in assets under management. Equity block trading remained #1, government underwriting moved up to #3 from #4, and corporate debt increased to #1 from #2 in the previous year.5 Among the Big Five Retail Banks for the eighth year in a row.6, 7 Key Financial Metrics (millions of Canadian dollars, except where noted) Results of operations Total revenues – reported 8 Total revenues – adjusted 8 Net income – reported Net income – adjusted Financial positions at year-end (billions) Total assets Total deposits Total loans net of allowance for loan losses Per common share (Canadian dollars) Diluted earnings – reported Diluted earnings – adjusted Dividend payout ratio – adjusted Total shareholder return (1 year) Closing market price (fiscal year end) Financial ratios Common Equity Tier 1 capital ratio 9 Tier 1 capital ratio 10 Total capital ratio 10 Efficiency ratio – reported 8 Efficiency ratio – adjusted 8 2013 2012 2011 $27,262 27,191 6,662 7,158 862.5 543.5 444.9 $25,546 25,677 6,471 7,075 811.1 487.8 408.8 6.91 7.45 43.3% 22.3% 6.76 7.42 38.7% 11.9% 95.64 81.23 9.0% 11.0% 14.2% 55.2% 52.8% n.a. 12.6% 15.7% 54.8% 51.3% $23,840 23,713 6,045 6,432 735.5 449.4 377.2 6.43 6.86 37.7% 5.7% 75.23 n.a. 13.0% 16.0% 54.7% 52.2% 1 Effective November 1, 2011, The Toronto-Dominion Bank (the “Bank” or “TD”) prepares its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), the current generally accepted accounting principles (GAAP), and refers to results prepared in accordance with IFRS as the ”reported” results. The Bank also utilizes non-GAAP financial measures to arrive at “adjusted” results (i.e. reported results excluding “items of note”, net of income taxes) to assess each of its businesses and measure overall Bank performance. See “How the Bank Reports” in the accompanying Management’s Discussion and Analysis (MD&A) for further explanation, a list of the items of note and a reconciliation of non-GAAP financial measures. The Bank’s financial results for fiscal 2011 have been presented in accordance with IFRS for comparative purposes in the Bank’s 2013 Annual Consolidated Financial Statements and MD&A (unless otherwise noted). Accordingly, the calculation of growth rates include balances in accordance with Canadian GAAP for the 2009 to 2010 financial years and balances in accordance with IFRS for 2011 to 2013. “Five-year CAGR” is the compound annual growth rate calculated from 2008 to 2013 on an adjusted basis. Canadian peers include Royal Bank of Canada, Scotiabank, Bank of Montreal and Canadian Imperial Bank of Commerce. 2 Comscore reporting current as of October 31, 2013 based on an audience of approximately 23 million Canadian mobile subscribers above the age of 13. 3 Reference to retail earnings include the total adjusted earnings of the Canadian Personal and Commercial Banking, Wealth and Insurance and US Personal and Commercial Banking segments. 4 On September 16th 2013, TD, Aimia Inc., and Canadian Imperial Bank of Commerce (CIBC) confirmed that they have signed agreements under which TD will become the primary issuer of Aeroplan Visa credit cards on January 1, 2014. TD has also entered into an agreement to acquire approximately 50% of the existing Aeroplan credit card portfolio from CIBC. The acquisition is expected to close in the first quarter of fiscal 2014, subject to customary closing conditions. 5 These rankings are based on the 9 months ending September 30, 2013. Equity Block Trading Rankings is based on IRESS Market Data. Corporate debt and government underwriting are sourced from Bloomberg. 6 TD Canada Trust received the highest numerical score among the big five retail banks in the proprietary J.D. Power and Associates 2013 Canadian Retail Banking Customer Satisfaction StudySM. Study based on 21,815 total responses. Proprietary study results are based on experiences and perceptions of consumers, and fielding was completed in May 2013. Your experiences may vary. Visit jdpower.com. U.S. peers include Citigroup, Bank of America, J.P. Morgan, Wells Fargo, PNC Financial and 7 Big 5 Retail banks includes Canadian peers: Royal Bank of Canada, Scotiabank, Bank of U.S. Bancorp. Montreal and CIBC plus TD. For purposes of comparison with U.S. peers, dividends per share five-year compound 8 See footnote 1 for more information on “adjusted results”. Effective 2013, Insurance revenue growth rate is calculated on a year-to-date basis from Q3 2008 to Q3 2013. Total Shareholder Return based on Bloomberg for the period ended Oct. 31, 2013 “TD’s Premium Retail Earnings Mix” is based on adjusted results. “Canadian Retail” earnings are the total adjusted earnings of the Canadian Personal and Commercial Banking and Wealth and Insurance segments excluding the TD Ameritrade Holding Corporation pickup. “U.S. Retail” earnings are the total adjusted earnings of U.S. Personal and Commercial Banking segment and TD Ameritrade Holding Corporation pickup. and Insurance claims and related expenses are presented on a gross basis. Comparative amounts, including certain ratios, have been recast to conform with the current presentation. 9 Effective 2013, the Bank implemented the Basel III regulatory framework. As a result, the Bank began reporting the Common Equity Tier 1 capital ratio in accordance with the “all-in” methodology. 10 Effective 2013, amounts are calculated in accordance with the Basel III regulatory framework, and are presented based on the “all-in” methodology. Prior to 2013, amounts were calculated in accordance with the Basel II regulatory framework. Prior to 2012, amounts were based on Canadian GAAP. 2 TD BANK GROU P AN NUAL REPO RT 20 13 YEAR A T A GLAN CE Performance Indicators Performance indicators focus effort, communicate our priorities and benchmark TD’s performance as we strive to be The Better Bank. The following table highlights our performance against these indicators. 2013 PERFORMANCE INDICATORS RESULTS 1 FINANCIAL • Deliver above-peer-average total shareholder return2 • Grow earnings per share (EPS) by 7 to 10 % • Deliver above-peer-average return on risk-weighted assets BUSINESS OPERATIONS • Grow revenue faster than expenses • Invest in core businesses to enhance customer experience CUSTOMER • Improve Customer Experience Index (CEI)5 scores • Invest in core businesses to enhance customer experience EMPLOYEE • Improve employee engagement score year-over-year • Enhance the employee experience by: – Listening to our employees – Building employment diversity – Providing a healthy, safe and flexible work environment – Providing competitive pay, benefits and performance- based compensation – Investing in training and development COMMUNITY • Donate minimum of 1% of domestic pre-tax profits • 22.3% vs. Canadian peer average of 24.2% • 0.4% EPS growth (growth of 6.5% excluding Q3/13 Insurance charges) • 2.50% (2.66% excluding Q3/13 insurance charges) vs. Canadian peer average of 2.40%3 • Total revenue growth of 5.9% vs. total expense growth of 9.1%4 • Refer to “Business Segment Analysis” in the 2013 MD&A for details • CEI score 32.0% (target 32.6%) • Refer to “Business Segment Analysis” in the 2013 MD&A for details • Employee engagement score6 was 4.17 in fall 2013 vs. 4.16 in fall 2012 • See TD’s 2013 Corporate Responsibility Report available April 2014 • 1.3%7 or $50.9 million, in donations and community sponsorships (five-year average) to charitable and not-for-profit organizations in Canada vs. 1.3% or $45.3 million, in 2012 • Make positive contributions by: – Supporting employees’ community involvement and • US$22.89 million in donations and community sponsorships in the U.S. vs. US$19.54 million in 2012 fundraising efforts • £54,929 in donations and community sponsorships in the U.K. – Supporting advancements in our areas of focus, which include education and financial literacy, creating opportunities for young people, creating opportunities for affordable housing and the environment vs. £64,023 in 2012 • $317,500 in domestic employee volunteer grants to 510 different organizations • $28.6 million, or 56.3% of our community giving, was directed – Protecting and preserving the environment to promote our areas of focus domestically • $4.4 million distributed to 937 community environmental projects through TD Friends of the Environment Foundation; an additional $7.4 million from TD‘s community giving budget was used to support environmental projects 1 Performance indicators that include an earnings component are based on TD’s full- year adjusted results (except as noted) as explained in “How the Bank Reports” in the Bank’s 2013 MD&A. For peers, earnings have been adjusted on a comparable basis to exclude identified non-underlying items. 2 Total shareholder return is measured on a one-year basis from November 1, 2012, to October 31, 2013. 4 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis. Comparative amounts have been restated to conform with the current presentation. 5 CEI is a measurement program that tracks TD customers’ loyalty and advocacy. 6 Scale for employee engagement score is from one to five. 7 Calculated based on Canadian cash donations/five-year rolling average domestic 3 Return on risk-weighted assets measured year-to-date as at October 31, 2013, net income before tax. for comparison purposes. TD’s return on risk-weighted assets for 2013 was 2.50% (2.66% excluding Q3/13 Insurance charges). TD BANK GROUP ANNUAL RE POR T 2 0 13 PERFORM ANCE INDICATORS 3 Group President and CEO’s Message TD continued to grow, sharpen its competitive edge, and extend its leadership position in 2013. Once again, our retail-focused business model delivered strong performances despite continued challenges in our operating environment. Our adjusted earnings of over $7.1 billion reflected record results in several businesses – accounting for 85 per cent of our total earnings – which helped offset other areas impacted by market volatility and extreme weather. We provided excellent value to our shareholders with two dividend increases in 2013, representing an increase of 12% in dividends paid since last year. The market rewarded our performance, as TD’s stock price closed the year at an all-time high. In December 2013, we announced a stock dividend, which has the same effect as a two-for-one split of our common shares. TD’s share price has increased 170% since the last stock split in 1999. THE BETTER BANK IN 2013 AND BEYOND TD’s diverse mix of revenue streams enabled us to weather a bumpy operating environment this year, and our business model enabled us to continue to invest for the future. Investments in the mobile and online space are now helping TD define what it means to be The Better Bank in the digital age. And we continue to stand out in the industry as the best in customer service, with a number of impressive recognitions on both sides of the border. We had bumps of our own in 2013: in the immediate aftermath of the Alberta floods, as well as with our auto insurance business in Ontario. As always, the key is in the recovery. Have we learned from these experiences? Can we get better at what we do, and how we do it? In all instances, we can – and we will. In 2013 we validated the competitive advantages we derive with our better business model: • Build our franchise around our customers’ wants and needs, deliver better experiences, and make banking convenient. • Stay true to the great traditions of banking, creating real value in the real economy. • Embrace values that foster a unique, inclusive performance culture that attracts the best, and makes our people the best. • Compete by managing risks better. And keep reinvesting in our businesses, with a primary focus on organic growth. HOW OUR BUSINESSES PERFORMED Our Canadian retail bank delivered record adjusted earnings of $3.8 billion for the year. We solidified our leadership position in credit cards following this year’s announcement that TD will be the primary issuer of Aeroplan Visa credit cards in 2014. TD Canada Trust earned its eighth consecutive J.D. Power Award in customer satisfaction. Our U.S. retail bank set a target of $1.6 billion in earnings by 2013. We delivered, and did so in a period of tough operating condi- tions for banks. Much of our success stems from a better organic busi- ness model, which has seen, for instance, TD become the fifth-largest bank in New York City. J.D. Power also recognized our leadership in retail banking customer satisfaction in Florida, and small business banking customer satisfaction in the Northeast. Our Wealth business, including TD Ameritrade, delivered record earnings of $937 million. We completed the acquisition of Epoch Holding Corporation, a successful asset management firm based in New York. This strengthened our U.S. business, and expanded our offering for our institutional and retail clients in Canada. For the fifth consecutive year, TD Ameritrade grew its net new client assets at a double-digit rate, faster than any of its publicly-traded peers. Our Insurance business had a challenging year, delivering earnings of $216 million. We faced charges resulting from a combination of severe weather-related impacts and increased general insurance claims. However the fundamentals of the business are strong, and we continue to see Insurance as a key part of our strategy. Our Wholesale business contributed $648 million this year, a weaker result than last year due to lower security gains, continued economic instability, which impacted corporate and investor activities. We remain confident in following a strategy based on adding value for our clients, integrated with TD’s brand and values, and growing aggressively within our risk appetite. LOOKING FORWARD As you know, this is my last letter to shareholders. I want to thank you for your continued confidence, and thank TD’s Board of Directors for their generous support. But mostly I want to thank our employees who have shown the world what it means to be TD. All transitions involve change, and change is necessary. Great transi- tions involve change with continuity of the things that matter, and I am confident we will see a continuity of what makes TD great. My successor, Bharat Masrani, has been my business partner almost since the day I arrived at TD. Both Bharat and I know that without our great leaders and fabulous team we would not have built The Better Bank. We are extremely excited about our journey ahead. Ed Clark Group President and Chief Executive Officer 4 TD BANK GROU P AN NUAL REPO RT 20 13 GROU P PR ESID ENT AND CE O’S M ESSA GE Chairman of the Board’s Message While 2013 presented a challenging environment, TD continued to deliver on its vision to be The Better Bank, thanks to strong leadership, a sound business model and a dedicated team of employees. TD reported strong results in Canadian retail banking and Wealth in 2013, and hit an important milestone in the U.S. personal and commercial bank, delivering adjusted earnings of US$1.6 billion in that business. Achieving this goal was particularly impressive given regulatory changes that significantly impacted our U.S. personal banking revenues in recent years. For the bank overall, results were flat to last year, mainly due to challenges faced by the Insurance business. Nonetheless, TD was able to maintain a strong capital position and raised the dividend on TD’s common shares twice in 2013. CONTINUITY OF LEADERSHIP In 2013, Ed Clark announced his decision to retire as Group President and CEO on November 1, 2014. Ed’s leadership has been the driving force behind the distinctive TD culture, focused on providing legendary customer service and creating a unique and inclusive workplace, while delivering value to shareholders. We are pleased that he will remain on the board until the 2015 AGM. Ed’s announcement came in the context of an ongoing succession planning process overseen by the board. In addition to announcing that Bharat Masrani would serve as Chief Operating Officer beginning July 1, 2013 and will become Group President and CEO on November 1, 2014, we also announced a series of appointments that defined the senior executive team who will lead the bank going forward. We are confident that Bharat, along with the leadership team, will provide continuity of our strategy, culture and values. BOARD COMPOSITION Former Chairman John Thompson retired from the board this year. We thank him for his significant contributions over his 24 years as director, including seven years as Chair. We are pleased to welcome David Kepler to TD’s board. We expect to benefit from David’s many years of experi- ence with large technology systems and operational risk management, along with his broad senior executive background. A PRIORITY ON CORPORATE GOVERNANCE By continuing to place a high priority on robust corporate governance practices, TD ensures our shareholders are well served through the board’s counsel on matters that include risk management, strategy and talent. TD continues to receive awards for corporate governance, including this year’s Corporate Reporting Award of Excellence in the Corporate Governance category from the Chartered Professional Accountants Canada. THE VIEW AHEAD While the first-order effects of the financial crisis are behind us, its consequences linger to create a challenging and highly competitive operating environment. The board has confidence that TD’s leadership, strategy and people will enable the bank to continue its high level of performance for all stakeholders. I’d like to recognize the efforts of TD’s employees across the enterprise, whose great work is a key contributor to the bank’s success. TD employees show remarkable commitment to our customers and communities, as demonstrated by their outstanding efforts to help the Alberta communities that experi- enced serious flooding in the summer of 2013. On behalf of the board, I thank our shareholders for their ongoing support. We look forward to continuing to earn your trust in 2014. THE BOARD OF DIRECTORS AND ITS COMMITTEES Our directors as at December 4, 2013 are listed below. Our Proxy Circular for the 2014 Annual Meeting will set out the director candidates proposed for election at the meeting and additional information about each candidate including education, other public board memberships held in the past five years, areas of expertise/experience, TD committee membership, stock ownership and attendance at Board and committee meetings. William E. Bennett Corporate Director and former President and Chief Executive Officer, Draper & Kramer, Inc., Chicago, Illinois Hugh J. Bolton Non-Executive Chair of the Board, EPCOR Utilities Inc., Edmonton, Alberta John L. Bragg Chairman, President and Co-Chief Executive Officer, Oxford Frozen Foods Limited, Oxford, Nova Scotia Amy W. Brinkley Consultant, AWB Consulting, LLC Charlotte, North Carolina W. Edmund Clark Group President and Chief Executive Officer, The Toronto-Dominion Bank, Toronto, Ontario Brian M. Levitt Chairman of the Board Colleen A. Goggins Former Worldwide Chairman, Consumer Group, Johnson & Johnson, Princeton, New Jersey David E. Kepler Executive Vice President, Business Services Chief Sustainability Officer and Chief Information Officer The Dow Chemical Company Midland, Michigan Henry H. Ketcham Executive Chairman, West Fraser Timber Co. Ltd., Vancouver, British Columbia Brian M. Levitt Chairman of the Board, The Toronto-Dominion Bank and Non-Executive Co-Chair, Osler, Hoskin & Harcourt LLP, Montreal, Quebec Harold H. MacKay Counsel, MacPherson Leslie & Tyerman LLP, Regina, Saskatchewan Karen E. Maidment Corporate Director and former Chief Financial and Administrative Officer, BMO Financial Group Cambridge, Ontario Irene R. Miller Chief Executive Officer, Akim, Inc., New York, New York Nadir H. Mohamed Former President and Chief Executive Officer, Rogers Communications Inc., Toronto, Ontario Wilbur J. Prezzano Corporate Director and Retired Vice Chairman, Eastman Kodak Company, Charleston, South Carolina Helen K. Sinclair Chief Executive Officer, BankWorks Trading Inc., Toronto, Ontario TD BANK GROUP ANNUAL REP O RT 20 1 3 C H AIR MA N OF TH E BOARD’ S MESSAGE 5 COMMITTEE MEMBERS* KEY RESPONSIBILITIES* Corporate Governance Committee Human Resources Committee Risk Committee Audit Committee Brian M. Levitt (Chair) William E. Bennett Harold H. MacKay Karen M. Maidment Wilbur J. Prezzano Wilbur J. Prezzano (Chair) Amy W. Brinkley Henry H. Ketcham Brian M. Levitt Nadir H. Mohamed Helen K. Sinclair Karen E. Maidment (Chair) William E. Bennett Hugh J. Bolton Amy W. Brinkley Colleen A. Goggins David E. Kepler Harold H. MacKay Helen K. Sinclair William E. Bennett** (Chair) Hugh J. Bolton** John L. Bragg Harold H. MacKay Karen E. Maidment** Irene R. Miller** * As at December 4, 2013 ** Designated Audit Committee Financial Expert Responsibility for corporate governance of TD: • Set the criteria for selecting new directors and the Board’s approach to director independence; • Identify individuals qualified to become Board members and recommend to the Board the director nominees for the next annual meeting of shareholders; Develop and, where appropriate, recommend to the Board a set of corporate governance principles, including a code of conduct and ethics, aimed at fostering a healthy governance culture at TD; • • Review and recommend the compensation of the non-management directors of TD; • Satisfy itself that TD communicates effectively with its shareholders, other interested parties and the public through a responsive communication policy; • Facilitate the evaluation of the Board and Committees; • Oversee an orientation program for new directors and continuing education for directors. Responsibility for management’s performance evaluation, compensation and succession planning: • Discharge, and assist the Board in discharging, the responsibility of the Board relating to leadership, • • • • • human resource planning and compensation as set out in this committee’s charter; Set performance objectives for the CEO which encourage TD’s long-term financial success and regularly measure the CEO’s performance against these objectives; Recommend compensation for the CEO to the Board for approval, and determine compensation for certain senior officers in consultation with independent advisors; Oversee a robust talent planning process that provides succession planning for the CEO role and other senior roles. Review candidates for CEO and recommend the best candidate to the Board as part of the succession planning process for the position of CEO and periodically review TD’s organization structure for alignment with business objectives and succession planning requirements; Oversee the selection, evaluation, development and compensation of other members of senior management; Produce a report on compensation for the benefit of shareholders, which is published in TD’s annual proxy circular, and review, as appropriate, any other related major public disclosures concerning compensation. Supervising the management of risk of TD: • Approve the Enterprise Risk Framework and related risk category frameworks and policies that establish the appropriate approval levels for decisions and other measures to manage risk to which TD is exposed; Review and recommend TD’s Risk Appetite Statement and related metrics for approval by the Board and monitoring TD’s major risks as set out in the Enterprise Risk Framework; Review TD’s risk profile against risk appetite metrics; Provide a forum for “big-picture” analysis of an enterprise view of risk including considering trends and emerging risks. • • • Supervising the quality and integrity of TD’s financial reporting: • • • Oversee reliable, accurate and clear financial reporting to shareholders; Oversee internal controls – the necessary checks and balances must be in place; Be directly responsible for the selection, compensation, retention and oversight of the work of the shareholders’ auditor – the shareholders’ auditor reports directly to this committee; Listen to the shareholders’ auditor, chief auditor, chief compliance officer and global anti-money laundering officer, and evaluate the effectiveness and independence of each; Oversee the establishment and maintenance of processes that ensure TD is in compliance with the laws and regulations that apply to it, as well as its own policies; Act as the Audit Committee and Conduct Review Committee for certain subsidiaries of TD that are federally-regulated financial institutions and insurance companies; Receive reports on and approve, if appropriate, certain transactions with related parties. • • • • 6 TD BANK GROU P AN NUAL REPO RT 20 13 CHAIR MA N OF THE BOA RD ’S M ESS AGE Management’s Discussion and Analysis This Management’s Discussion and Analysis (MD&A) is presented to enable readers to assess material changes in the financial condition and operating results of TD Bank Group (TD or the Bank) for the year ended October 31, 2013, compared with the corresponding period in the prior years. This MD&A should be read in conjunction with our audited Consolidated Financial Statements and related Notes for the year ended October 31, 2013. This MD&A is dated December 4, 2013. Unless otherwise indicated, all amounts are expressed in Canadian dollars and have been primarily derived from the Bank’s annual Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Note that certain comparative amounts have been reclassified to conform to the presentation adopted in the current year. FINANCIAL RESULTS OVERVIEW Net Income Revenue Expenses Taxes Quarterly Financial Information BUSINESS SEGMENT ANALYSIS Business Focus Canadian Personal and Commercial Banking Wealth and Insurance U.S. Personal and Commercial Banking Wholesale Banking Corporate 2012 FINANCIAL RESULTS OVERVIEW Summary of 2012 Performance 2012 Financial Performance by Business Line 8 12 13 17 19 20 22 25 28 32 35 38 39 40 GROUP FINANCIAL CONDITION Balance Sheet Review Credit Portfolio Quality Capital Position Securitization and Off-Balance Sheet Arrangements Related-Party Transactions Financial Instruments RISK FACTORS AND MANAGEMENT Risk Factors That May Affect Future Results Managing Risk ACCOUNTING STANDARDS AND POLICIES Critical Accounting Estimates Current and Future Changes in Accounting Policies Controls and Procedures ADDITIONAL FINANCIAL INFORMATION 42 43 57 64 66 66 67 70 102 104 105 106 Additional information relating to the Bank, including the Bank’s Annual Information Form, is available on the Bank’s website at http://www.td.com, on SEDAR at http://www.sedar.com, and on the U.S. Securities and Exchange Commission’s website at http://www.sec.gov (EDGAR filers section). Caution Regarding Forward-Looking Statements From time to time, the Bank makes written and/or oral forward-looking statements, including in this document, in other filings with Canadian regulators or the U.S. Securities and Exchange Commission, and in other communications. In addition, representatives of the Bank may make forward-looking statements orally to analysts, investors, the media and others. All such statements are made pursuant to the “safe harbour” provisions of, and are intended to be forward-looking statements under, applicable Canadian and U.S. securities legislation, including the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements made in this document, the Bank’s 2013 MD&A under the headings “Economic Summary and Outlook”, for each business segment “Business Outlook and Focus for 2014” and in other statements regarding the Bank’s objectives and priorities for 2014 and beyond and strategies to achieve them, and the Bank’s anticipated financial performance. Forward-looking statements are typically identified by words such as “will”, “should”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “plan”, “may”, and “could”. By their very nature, these forward-looking statements require the Bank to make assumptions and are subject to inherent risks and uncertainties, general and specific. Especially in light of the uncertainty related to the physical, financial, economic, political, and regulatory environments, such risks and uncertainties – many of which are beyond the Bank’s control and the effects of which can be difficult to predict – may cause actual results to differ materially from the expectations expressed in the forward-looking statements. Risk factors that could cause such differences include: credit, market (including equity, commodity, foreign exchange, and interest rate), liquidity, operational (including technology), reputational, insurance, strategic, regulatory, legal, environmental, capital adequacy, and other risks. Examples of such risk factors include the general business and economic conditions in the regions in which the Bank operates; disruptions in or attacks (including cyber attacks) on the Bank’s information technology, internet, network access or other voice or data communications systems or services; the evolution of various types of fraud to which the Bank is exposed; the failure of third parties to comply with their obligations to the Bank or its affiliates relating to the care and control of information; the impact of recent legislative and regulatory developments; the overall difficult litigation environment, including in the United States; changes to the Bank’s credit ratings; changes in currency and interest rates; increased funding costs for credit due to market illiquidity and competition for funding; and the occurrence of natural and unnatural catastrophic events and claims resulting from such events. We caution that the preceding list is not exhaustive of all possible risk factors and other factors could also adversely affect the Bank’s results. For more detailed information, please see the “Risk Factors and Management” section of the 2013 MD&A, as may be updated in subsequently filed quarterly reports to shareholders and news releases (as applicable) related to any transactions discussed under the heading “Significant Events” in the relevant MD&A, which applicable releases may be found on www.td.com. All such factors should be considered carefully, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements, when making decisions with respect to the Bank and we caution readers not to place undue reliance on the Bank’s forward-looking statements. Material economic assumptions underlying the forward-looking statements contained in this document are set out in the 2013 MD&A under the headings “Economic Summary and Outlook”, and for each business segment, “Business Outlook and Focus for 2014”, each as updated in subsequently filed quarterly reports to shareholders. Any forward-looking statements contained in this document represent the views of management only as of the date hereof and are presented for the purpose of assisting the Bank’s shareholders and analysts in understanding the Bank’s financial position, objectives and priorities and anticipated financial performance as at and for the periods ended on the dates presented, and may not be appropriate for other purposes. The Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on its behalf, except as required under applicable securities legislation. 7 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISFINANCIAL RESULTS OVERVIEW CORPORATE OVERVIEW The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Group. TD is the sixth largest bank in North America by branches and serves over 22 million customers in four key businesses operating in a number of locations in financial centres around the globe: Canadian Personal and Commercial Banking, Wealth and Insurance, U.S. Personal and Commercial Banking, and Wholesale Banking. TD also ranks among the world’s leading online financial services firms, with approximately 8 million active online and mobile customers. TD had $862.5 billion in assets on October 31, 2013. The Toronto-Dominion Bank trades under the symbol “TD” on the Toronto and New York Stock Exchanges. HOW THE BANK REPORTS The Bank prepares its Consolidated Financial Statements in accordance with IFRS, the current generally accepted accounting principles (GAAP), and refers to results prepared in accordance with IFRS as “reported” results. The Bank also utilizes non-GAAP financial measures referred to as “adjusted” results to assess each of its busi- nesses and to measure the overall Bank performance. To arrive at adjusted results, the Bank removes “items of note”, net of income taxes, from reported results. The items of note relate to items which management does not believe are indicative of underlying business performance. The Bank believes that adjusted results provide the reader with a better understanding of how management views the Bank’s performance. The items of note are listed in the table on the following page. As explained, adjusted results are different from reported results determined in accordance with IFRS. Adjusted results, items of note, and related terms used in this document are not defined terms under IFRS and, therefore, may not be comparable to similar terms used by other issuers. The following table provides the operating results – reported for the Bank. T A B L E 1 OPERATING RESULTS – Reported (millions of Canadian dollars) Net interest income Non-interest income1 Total revenue1 Provision for credit losses Insurance claims and related expenses1 Non-interest expenses Income before income taxes and equity in net income of an investment in associate Provision for income taxes Equity in net income of an investment in associate, net of income taxes Net income – reported Preferred dividends Net income available to common shareholders and non-controlling interests in subsidiaries Attributable to: Non-controlling interests Common shareholders 1 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts have been reclassified to conform with this presentation. 2013 $ 16,078 11,184 27,262 1,631 3,056 15,042 7,533 1,143 272 6,662 185 $ 6,477 2012 $ 15,026 10,520 25,546 1,795 2,424 13,998 7,329 1,092 234 6,471 196 $ 6,275 2011 $ 13,661 10,179 23,840 1,490 2,178 13,047 7,125 1,326 246 6,045 180 $ 5,865 $ 105 6,372 $ 104 6,171 $ 104 5,761 8 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 NON-GAAP FINANCIAL MEASURES – Reconciliation of Adjusted to Reported Net Income (millions of Canadian dollars) 2013 2012 2011 Operating results – adjusted Net interest income1 Non-interest income2, 3 Total revenue Provision for credit losses4 Insurance claims and related expenses3 Non-interest expenses5 Income before income taxes and equity in net income of an investment in associate Provision for income taxes6 Equity in net income of an investment in associate, net of income taxes7 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 intangibles8 Fair value of derivatives hedging the reclassified available-for-sale securities portfolio9 Integration charges and direct transaction costs relating to U.S. Personal and Commercial Banking acquisitions10 Fair value of credit default swaps hedging the corporate loan book, net of provision for credit losses11 Integration charges, direct transaction costs, and changes in fair value of contingent consideration relating to the Chrysler Financial acquisition12 Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada13 Litigation and litigation-related charge/reserve14 Reduction of allowance for incurred but not identified credit losses15 Positive impact due to changes in statutory income tax rates16 Impact of Alberta flood on the loan portfolio17 Impact of Superstorm Sandy18 Restructuring charges19 Set-up costs in preparation for the previously announced affinity relationship with Aimia with respect to Aeroplan Visa credit cards and the related acquisition of accounts20 Total adjustments for items of note Net income available to common shareholders – reported $ 16,078 11,113 27,191 1,606 3,056 14,363 8,166 1,334 326 7,158 185 6,973 105 6,868 (232) 57 – – – (92) (100) – – (19) – (90) $ 15,062 10,615 25,677 1,903 2,424 13,162 8,188 1,404 291 7,075 196 6,879 104 6,775 (238) (89) (9) – (17) (104) (248) 120 18 – (37) – $ 13,661 10,052 23,713 1,490 2,178 12,373 7,672 1,545 305 6,432 180 6,252 104 6,148 (391) 128 (82) 13 (55) – – – – – – – (20) (496) $ 6,372 – (604) $ 6,171 – (387) $ 5,761 1 Adjusted net interest income excludes the following items of note: 2012 – 7 Adjusted equity in net income of an investment in associate excludes the following $36 million ($27 million after tax) of certain charges against revenue related to promotional-rate card origination activities, as explained in footnote 13. 2 Adjusted non-interest income excludes the following items of note: $71 million gain due to change in fair value of derivatives hedging the reclassified available-for-sale (AFS) securities portfolio, as explained in footnote 9; 2012 – $2 million loss due to change in fair value of credit default swaps (CDS) hedging the corporate loan book, as explained in footnote 11; $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 12, $1 million loss due to the impact of Superstorm Sandy, as explained in footnote 18; 2011 – $19 million gain due to change in fair value of CDS hedging the corporate loan book; $158 million gain due to change in fair value of derivatives hedging the reclassified AFS securities portfolio; $50 million loss due to change in fair value of contingent consideration relating to Chrysler Financial. 3 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Compara- tive amounts have been reclassified to conform with this presentation. 4 Adjusted provision for credit losses (PCL) excludes the following items of note: 2013 – $25 million due to the impact of the Alberta flood on the loan portfolio, as explained in footnote 17; 2012 – $162 million in adjustments to allowance for incurred but not identified credit losses in Canadian Personal and Commercial Banking, as explained in footnote 15; $54 million due to the impact of Super- storm Sandy, as explained in footnote 18. 5 Adjusted non-interest expenses exclude the following items of note: 2013 – $272 million amortization of intangibles, as explained in footnote 8; $125 million of integration charges and direct transaction costs relating to the acquisition of the MBNA Canada credit card portfolio, as explained in footnote 13; $127 million of litigation and litigation-related charges, as explained in footnote 14; $129 million due to the initiatives to reduce costs, as explained in footnote 19; $27 million of set-up costs in preparation for the affinity relationship with Aimia Inc. with respect to Aeroplan credit cards, as explained in footnote 20; 2012 – $277 million amortization of intangibles; $11 million of integration charges related to U.S. Personal and Commercial Banking acquisitions, as explained in footnote 10; $24 million of integra- tion charges and direct transaction costs relating to the Chrysler Financial acquisition, as explained in footnote 12; $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 18; 2011 – $496 million amortization of intangibles; $141 million of integration charges related to U.S. Personal and Commercial Banking acquisitions; $37 million of integration charges and direct transaction costs relating to the Chrysler Financial acquisition. 6 For a reconciliation between reported and adjusted provision for income taxes, see the ‘Non-GAAP Financial Measures – Reconciliation of Reported to Adjusted Provision for Income Taxes’ table in the “Income Taxes” section of this document. items of note: 2013 – $54 million amortization of intangibles, as explained in footnote 8; 2012 – $57 million amortization of intangibles; 2011 – $59 million amortization of intangibles. 8 Amortization of intangibles primarily relates 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 acquisition 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, and the Epoch Investment Partners, Inc. acquisition in 2013. Amortization of software is recorded in amortization of other intangibles; however, amortization of software is not included for purposes of items of note, which only includes amortization of other intangibles acquired as a result of asset acquisitions and business combinations. 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 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. 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. 10 As a result of U.S. Personal and Commercial Banking acquisitions, the Bank incurred integration charges and direct transaction costs. Integration charges consist of costs related to information technology, employee retention, external professional consulting charges, marketing (including customer communication and rebranding), integration-related travel costs, employee severance costs, the costs of amending certain executive employment and award agreements, contract termination fees and the write-down of long-lived assets due to impairment. Direct transaction costs are expenses directly incurred in effecting a business combination and consist primarily of finders’ fees, advisory fees, and legal fees. The first quarter of 2012 was the last quarter U.S. Personal and Commercial Banking included any further integration charges or direct transaction costs as an item of note. 9 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS  11 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. 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 through the CDS is netted against this item of note. 12 As a result of the Chrysler Financial acquisition in Canada and the U.S., the Bank incurred integration charges and direct transaction costs. As well, the Bank expe- rienced volatility in earnings as a result of changes in fair value of contingent consideration. Integration charges consist of costs related to information technol- ogy, employee retention, external professional consulting charges, marketing (including customer communication and rebranding), integration-related travel costs, employee severance costs, the costs of amending certain executive employ- ment and award agreements, contract termination fees, and the write-down of long-lived assets due to impairment. Direct transaction costs are expenses directly incurred in effecting a business combination and consist primarily of finders’ fees, advisory fees, and legal fees. Contingent consideration is defined as part of the purchase agreement, whereby the Bank is required to pay additional cash consid- eration in the event that amounts realized on certain assets exceed a pre-estab- lished threshold. Contingent consideration is recorded at fair value on the date of acquisition. Changes in fair value subsequent to acquisition are recorded in the Consolidated Statement of Income. Adjusted earnings exclude the gains and losses on contingent consideration in excess of the acquisition date fair value. While integration charges and direct transaction costs related to this acquisition were incurred for both Canada and the U.S., the majority of these charges relate to integration initiatives undertaken for U.S. Personal and Commercial Banking. The fourth quarter of 2012 was the last quarter U.S. Personal and Commercial Banking included any further Chrysler Financial-related integration charges or direct transaction costs as an item of note. 13 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 and direct transaction costs. Integration charges consist of costs related to information technology, employee retention, external professional consulting charges, market- ing (including customer communication, rebranding and certain charges against revenue related to promotional-rate card origination activities), integration-related travel costs, employee severance costs, the cost of amending certain executive employment and award agreements, contract termination fees, and the write- down of long-lived assets due to impairment. Direct transaction costs are expenses directly incurred in effecting the business combination and consist primarily of finders’ fees, advisory fees and legal fees. Integration charges and direct transaction costs related to this acquisition are incurred by Canadian Personal and Commercial Banking. The integration charges to date are higher than what was anticipated when the transaction was announced. The elevated spending is primarily due to additional costs incurred (other than the amounts capitalized) to build out technology platforms for the business. 14 As a result of certain adverse judgments and settlements in the U.S. in 2012 and after continued evaluation of this portfolio of cases throughout that year, the Bank took prudent steps to determine, in accordance with applicable accounting standards, that the litigation provision of $413 million ($248 million after tax) was required. In 2013, the Bank further reassessed its litigation provisions and determined that additional litigation and litigation-related charges of $97 million ($70 million after tax) and $30 million ($30 million after tax) were required as a result of recent developments and settlements reached in the U.S. 15 Excluding the impact related to the credit card portfolio of MBNA Canada and other consumer loan portfolios (which is recorded in Canadian Personal and Commercial Banking), “Reduction of allowance for incurred but not identified credit losses”, formerly known as “General allowance increase (release) in Canadian Personal and Commercial Banking and Wholesale Banking” was $162 million ($120 million after tax) in fiscal 2012, all of which was attributable to the Whole- sale Banking and non-MBNA related Canadian Personal and Commercial Banking loan portfolios. Beginning in 2013, the change in the “allowance for incurred but not identified credit losses” in the normal course of business is included in Corporate segment net income and is no longer be recorded as an item of note. 16 This represents the impact of changes in the income tax statutory rate on net deferred income tax balances. 17 In the third quarter of 2013, the Bank recorded a provision for credit losses of $65 million ($48 million after tax) for residential loan losses from Alberta flooding. In the fourth quarter of 2013, a provision of $40 million ($29 million after tax) was released. The reduction in the provision reflects an updated estimate incorporating more current information regarding the extent of damage, actual delinquencies in impacted areas, and greater certainty regarding payments to be received under the Alberta Disaster Recovery Program and from property and default insurance. 18 The Bank provided $62 million ($37 million after tax) in fiscal 2012 for certain estimated losses resulting from Superstorm Sandy which primarily relate to an increase in provision for credit losses, fixed asset impairments and charges against revenue relating to fee reversals. 19 The Bank undertook certain measures commencing in the fourth quarter of 2013, which are expected to continue through fiscal year 2014, to reduce costs in a sustainable manner and achieve greater operational efficiencies. To implement these measures, the Bank recorded a provision of $129 million ($90 million after tax) for restructuring initiatives related primarily to retail branch and real estate optimization initiatives. 20 On September 16, 2013, the Bank (i) confirmed that it had entered into an agreement pursuant to which TD will become the primary issuer of Aeroplan Visa credit cards commencing on January 1, 2014 (the “affinity relationship”); and (ii) announced that the Bank will acquire approximately 50% of the existing Aeroplan credit card portfolio from CIBC. During the fourth quarter of 2013, in preparation for the affinity relationship with Aimia Inc. and the expected acquisition of part of the CIBC credit card portfolio, the Bank incurred program set-up costs related to information technology, external professional consulting, marketing, training, and program management. These costs are included as an item of note in the Canadian Personal and Commercial Banking segment. T A B L E 3 RECONCILIATION OF REPORTED TO ADJUSTED EARNINGS PER SHARE (EPS)1 (Canadian dollars) Basic earnings per share – reported Adjustments for items of note2 Basic earnings per share – adjusted Diluted earnings per share – reported Adjustments for items of note2 Diluted earnings per share – adjusted 2013 $ 6.93 0.54 $ 7.47 $ 6.91 0.54 $ 7.45 2012 $ 6.81 0.66 $ 7.47 $ 6.76 0.66 $ 7.42 2011 $ 6.50 0.44 $ 6.94 $ 6.43 0.43 $ 6.86 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 explanation 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. T A B L E 4 AMORTIZATION OF INTANGIBLES, NET OF INCOME TAXES1 (millions of Canadian dollars) Canada Trust TD Bank, N.A. TD Ameritrade (included in equity in net income of an investment in associate) MBNA Other Software Amortization of intangibles, net of income taxes 1 Amortization of intangibles, with the exception of software, are included as items of note. For explanation 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. 10 2013 $ – 117 54 36 25 $ 232 176 $ 408 2012 $ – 122 57 33 26 $ 238 141 $ 379 2011 $ 168 134 59 – 30 $ 391 116 $ 507 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS ECONOMIC PROFIT AND RETURN ON COMMON EQUITY The Bank’s methodology for allocating capital to its business segments is aligned with the common equity capital requirements under Basel III at a 7% Common Equity Tier 1 (CET1) ratio. The return measures for business segments reflect a return on common equity methodology. The Bank utilizes economic profit as a tool to measure shareholder value creation. Economic profit is adjusted net income available to common shareholders less a charge for average common equity. The rate used in the charge for average common equity is the equity cost of capital calculated using the capital asset pricing model. The charge represents an assumed minimum return required by common share- holders on the Bank’s common equity. The Bank’s goal is to achieve positive and growing economic profit. Adjusted return on common equity (ROE) is adjusted net income available to common shareholders as a percentage of average common equity. ROE is a percentage rate and is a variation of economic profit which is a dollar measure. When ROE exceeds the equity cost of capital, economic profit is positive. Economic profit and adjusted ROE are non-GAAP financial measures as these are not defined terms under IFRS. Readers are cautioned that earnings and other measures adjusted to a basis other than IFRS do not have standardized meanings under IFRS and, therefore, may not be comparable to similar terms used by other issuers. T A B L E 5 ECONOMIC PROFIT AND RETURN ON COMMON EQUITY (millions of Canadian dollars, except as noted) Average common equity Average cumulative goodwill and other intangibles amortized, net of income taxes Average common equity/Average invested capital Rate charged for average common equity/Average invested capital Charge for average common equity/Average invested capital Net income available to common shareholders – reported Items of note impacting income, net of income taxes2 Net income available to common shareholders – adjusted Economic profit3 Return on common equity – adjusted/Return on invested capital 2013 Return on common equity $ 45,676 n/a1 $ 45,676 2012 Return on common equity $ 41,535 n/a1 $ 41,535 2011 Return on invested capital $ 35,568 5,309 $ 40,877 9.0% 9.0% 9.0% $ 4,111 $ 6,372 496 $ 6,868 $ 2,757 $ 3,738 $ 6,171 604 $ 6,775 $ 3,037 $ 3,679 $ 5,761 387 $ 6,148 $ 2,469 15.0% 16.3% 15.0% 1 Not applicable. 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. 3 Economic profit is calculated based on average common equity. Prior to 2012, economic profit was calculated based on average invested capital. Had this change been done on a retroactive basis, economic profit for the Bank, calculated based on average common equity, would have been $2,947 million for 2011. SIGNIFICANT EVENTS IN 2013 Acquisition of Target Corporation’s U.S. Credit Card Portfolio On March 13, 2013, the Bank, through its subsidiary, TD Bank USA, N.A., acquired substantially all of Target Corporation’s existing U.S. Visa and private label credit card portfolios (Target), with a gross outstanding balance of $5.8 billion. TD Bank USA, N.A. also entered into a seven-year program agreement under which it will become the exclusive issuer of Target-branded Visa and private label consumer credit cards to Target Corporation’s U.S. customers. Under the terms of the program agreement, the Bank and Target Corporation share in the profits generated by the portfolios. Target Corporation is responsible for all elements of operations and customer service, and bears most of the operating costs to service the assets. The Bank controls risk management policies and regulatory compli- ance, and bears all costs relating to funding the receivables for existing Target Visa accounts and all existing and newly issued Target private label accounts in the U.S. The Bank accounted for the purchase as an asset acquisition. The results of the acquisition from the acquisition date to October 31, 2013 have been recorded in the U.S. Personal and Commercial Banking segment. At the date of acquisition the Bank recorded the credit card receiv- ables acquired at their fair value of $5.7 billion and intangible assets totalling $98 million. The gross amount of revenue and credit losses have been recorded on the Consolidated Statement of Income since that date. Target Corporation shares in a fixed percentage of the revenue and credit losses incurred. Target Corporation’s net share of revenue and credit losses is recorded in Non-interest expenses on the Consolidated Statement of Income and related receivables from, or payables to, Target Corporation are recorded in Other assets or Other liabilities, respectively, on the Consolidated Balance Sheet. Acquisition of Epoch Investment Partners, Inc. On March 27, 2013, the Bank acquired 100% of the outstanding equity of Epoch Holding Corporation including its wholly-owned subsidiary Epoch Investment Partners, Inc. (Epoch), a New York-based asset management firm. Epoch was acquired for cash consideration of $674 million. Epoch Holding Corporation shareholders received US$28 in cash per share. The acquisition was accounted for as a business combination under the purchase method. The results of the acquisition from the acquisition date have been consolidated with the Bank’s results and are reported in the Wealth and Insurance segment. As at March 27, 2013, the acquisition contributed $34 million of tangible assets, and $9 million of liabilities. The excess of consideration over the fair value of the acquired net assets of $649 million has been allocated to customer relationship intangibles of $149 million and goodwill of $500 million. Goodwill is not expected to be deductible for tax purposes. For the year ended October 31, 2013, the acquisition contributed $96 million to revenue and $2 million to net income. Sale of TD Waterhouse Institutional Services On November 12, 2013, TD Waterhouse Canada Inc., a subsidiary of the Bank, completed the sale of the Bank’s institutional services busi- ness, known as TD Waterhouse Institutional Services, to a subsidiary of National Bank of Canada. The transaction price was $250 million, subject to certain price adjustment mechanisms. The effects of the sale will be recorded in the first quarter of fiscal 2014. 11 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS Agreement with Aimia Inc. and Acquisition of certain CIBC Aeroplan Credit Card Accounts On August 12, 2013, the Bank and Aimia Inc. (Aimia) announced that the Bank will become the primary credit card issuer for Aeroplan, a loyalty program owned by Aimia, starting on January 1, 2014. On September 16, 2013, the Bank, Aimia, and the Canadian Imperial Bank of Commerce (CIBC) jointly announced agreements under which the Bank will also acquire approximately 50% of CIBC’s existing Aeroplan credit card portfolio, which will primarily include accounts held by customers who do not have an existing retail banking relationship with CIBC. The Bank expects to acquire approximately 550,000 cardholder accounts, representing approximately $3 billion in card balances and $20 billion in annual retail spend. The Bank will pay a purchase price of par plus $50 million for the CIBC Aeroplan accounts. In addition, the Bank will pay CIBC a further $112.5 million plus HST over three years under a commercial subsidy agreement. Depending on the migration of Aeroplan-branded credit card accounts between CIBC and TD over the next five years, TD, Aimia, and CIBC have agreed to make additional potential payments of up to $400 million. TD will be responsible for, or entitled to receive, up to $300 million of these potential payments. Additionally, TD will make a $100 million upfront payment to Aimia to assist in the development and maintenance of the new Distinction program. The minimum miles purchase commitment is a five-year volume commitment based on miles purchases by TD and CIBC. These payments by TD, in aggregate, would not exceed $95 million. Also, TD and Aimia will undertake a joint marketing spend of approximately $140 million in the first four years of the program to support the new Aeroplan Visa co-branded credit cards and program features. The CIBC portfolio acquisition is subject to customary closing conditions and is expected to close in the first quarter of fiscal 2014. FINANCIAL RESULTS OVERVIEW Net Income AT A GLANCE OVERVIEW • Reported net income was $6,662 million, an increase of $191 million, or 3%, compared with last year. • Adjusted net income was $7,158 million, an increase of $83 million, or 1%, compared with last year. Reported net income for the year was $6,662 million, an increase of $191 million, or 3%, compared with $6,471 million last year. Adjusted net income for the year was $7,158 million, an increase of $83 million, or 1%, compared with $7,075 million last year. The increase in adjusted net income was due to higher earnings in the Canadian Personal and Commercial Banking and U.S. Personal and Commercial Banking segments, partially offset by lower earnings in the Wealth and Insurance and Wholesale Banking segments. Canadian Personal and Commercial Banking net income increased primarily due to good volume growth, favourable credit performance, and effective expense management. U.S. Personal and Commercial Banking net income increased primarily due to strong loan and deposit volume growth, higher fee-based revenue, and gains on sales of securities and debt securities classified as loans, partially offset by lower margins and higher expenses to support business growth. Wealth and Insurance net income decreased due to increased claims and related expenses in the Insurance business, partially offset by higher fee-based revenue in the Wealth business and higher earnings in TD Ameritrade. Wholesale Banking net income decreased due to lower trading-related revenue and lower security gains in the investment portfolio. Reported diluted earnings per share for the year were $6.91 this year, a 2% increase, compared with $6.76 last year. Adjusted diluted earnings per share for the year were $7.45 compared with $7.42 last year. Impact of Foreign Exchange Rate on U.S. Personal and Commercial Banking and TD Ameritrade Translated Earnings U.S. Personal and Commercial Banking earnings and the Bank’s share of earnings from TD Ameritrade are impacted by fluctuations in the U.S. dollar to Canadian dollar exchange rate compared with last year. Depreciation of the Canadian dollar had a favourable impact on consolidated earnings for the year ended October 31, 2013, compared with last year, as shown in the table below. IMPACT OF FOREIGN EXCHANGE RATE ON U.S. PERSONAL AND COMMERCIAL BANKING AND TD AMERITRADE TRANSLATED EARNINGS T A B L E 6 (millions of Canadian dollars, except as noted) U.S. Personal and Commercial Banking Increased total revenue − reported Increased total revenue − adjusted Increased non-interest expenses − reported Increased non-interest expenses − adjusted Increased net income − reported, after tax Increased net income − adjusted, after tax TD Ameritrade Increase in share of earnings, after tax Increase in basic earnings per share – reported (dollars) Increase in basic earnings per share – adjusted (dollars) 2013 vs. 2012 2012 vs. 2011 $ 114 114 74 76 22 23 $ 108 108 77 65 19 25 $ 3 $ 5 $ 0.03 $ 0.02 $ 0.04 $ 0.03 12 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS OVERVIEW Revenue AT A GLANCE OVERVIEW • Reported revenue1 was $27,262 million, an increase of $1,716 million, or 7%, compared with last year. • Adjusted revenue1 was $27,191 million, an increase of $1,514 million, or 6%, compared with last year. • Reported net interest income increased by $1,052 million, or 7%, compared with last year. • Adjusted net interest income increased by $1,016 million, or 7%, compared with last year. • Reported non-interest income1 increased by $664 million, or 6%, compared with last year. • Adjusted non-interest income1 increased by $498 million, or 5%, compared with last year. NET INTEREST INCOME Net interest income for the year on a reported and adjusted basis was $16,078 million, an increase of $1,052 million, or 7%, on a reported basis, and an increase of $1,016 million, or 7%, on an adjusted basis. The increase in adjusted net interest income was driven primarily by increases in the U.S. Personal and Commercial Banking, Canadian Personal and Commercial Banking, and Wholesale Banking segments. U.S. Personal and Commercial Banking net interest income increased primarily due to the inclusion of revenue from Target and strong loan and deposit volume, partially offset by lower margin and loan accre- tion. Canadian Personal and Commercial Banking net interest income increased primarily due to good portfolio volume growth, partially offset by lower margin. Wholesale Banking net interest income increased primarily due to higher trading-related net interest income. NET INTEREST INCOME (millions of Canadian dollars) $18,000 15,000 12,000 9,000 6,000 3,000 0 11 12 13 Reported Adjusted NET INTEREST MARGIN Net interest margin declined by 3 basis points (bps) in the year to 2.20% from 2.23% last year. Lower margin in Canadian Personal and Commercial Banking was partially offset by the higher margin in U.S. Personal and Commercial Banking. The U.S. Personal and Commercial Banking margin rose due to the impact of Target, partially offset by core margin compression. 1 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts have been reclassified to conform with the current period presentation. 13 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 7 NET INTEREST INCOME ON AVERAGE EARNING BALANCES1, 2 (millions of Canadian dollars, except as noted) Average balance Interest3 2013 Average rate Average balance Interest3 2012 Average rate Average balance Interest3 2011 Average rate Interest-earning assets Interest-bearing deposits with Banks Canada U.S. Securities Trading Canada U.S. Non-trading Canada U.S. Securities purchased under reverse repurchase agreements Canada U.S. Loans Mortgages4 Canada U.S. Consumer instalment and other personal Canada U.S. Credit card Canada U.S. Business and government4 Canada U.S. International Total interest-earning assets Interest-bearing liabilities Deposits Personal Canada U.S. Banks Canada U.S. Business and government5, 6 Canada U.S. Subordinated notes and debentures Obligations related to securities sold short and under repurchase agreements Canada U.S. Liabilities for preferred shares and capital trust securities Securitization liabilities7 Other liabilities8 Canada International Total interest-bearing liabilities Total net interest income on average earning assets 2.78 1.65 1.31 2.11 0.87 0.32 3.47 4.63 5.71 5.00 $ 4,552 $ 17,748 23 32 0.51% $ 8,950 $ 0.18 13,580 41 42 0.46% $ 5,580 $ 0.31 13,438 52 316 0.93% 2.35 54,384 16,781 1,398 321 20,551 66,675 336 1,384 2.57 1.91 1.63 2.08 48,342 13,201 18,855 66,089 1,332 231 288 1,671 2.76 1.75 1.53 2.53 40,561 8,948 1,129 148 16,157 61,497 212 1,299 24,207 31,422 230 94 0.95 0.30 25,944 27,025 249 90 0.96 0.33 22,145 24,016 193 77 176,856 41,744 5,390 1,710 91,729 26,206 4,718 1,016 3.05 4.10 5.14 3.88 163,016 36,910 93,622 22,568 14,582 4,697 1,828 834 12.54 17.76 14,128 1,043 5,141 1,671 5,270 1,018 1,699 124 3.15 4.53 5.63 4.51 12.03 11.89 145,052 32,947 5,040 1,524 93,667 17,288 5,348 864 8,139 855 965 109 11.86 12.75 1,243 43,025 1,340 33,452 62,402 719 $ 731,013 $ 22,616 32,287 29,451 59,101 1,111 2.89 1,362 4.01 1.15 898 3.09% $ 674,112 $ 22,238 26,412 25,295 51,144 1,045 3.44 1,525 4.62 1.52 1,063 3.30% $ 593,141 $ 20,909 3.96 6.03 2.08 3.53% $ 168,369 $ 1,660 211 130,378 0.99% $ 160,947 $ 1,819 264 0.16 119,605 1.13% $ 150,802 $ 1,886 254 0.22 102,345 1.25% 0.25 6,134 6,565 11 14 118,671 111,787 8,523 1,119 1,248 447 40,874 37,534 1,879 50,591 472 102 154 927 0.18 0.21 0.94 1.12 5.24 1.15 0.27 8.20 1.83 4,984 5,278 113,066 88,962 11,509 28 10 1,303 1,226 612 37,875 30,161 432 96 2,253 53,032 174 1,026 0.56 0.19 1.15 1.38 5.32 1.14 0.32 7.72 1.93 3,983 5,622 27 12 89,675 78,879 12,403 1,046 1,150 663 26,333 23,797 367 71 2,811 52,823 208 1,235 0.68 0.21 1.17 1.46 5.35 1.39 0.30 7.40 2.34 79 5,563 19,966 94 $ 706,834 $ 6,538 5,523 17,964 78 1.42 0.47 144 0.92% $ 651,159 $ 7,212 6,185 17,848 89 1.41 0.80 240 1.11% $ 573,506 $ 7,248 1.44 1.34 1.26% $ 731,013 $ 16,078 2.20% $ 674,112 $ 15,026 2.23% $ 593,141 $ 13,661 2.30% 1 Net interest income includes dividends on securities. 2 Geographic classification of assets and liabilities is based on the domicile of the booking point of assets and liabilities. 3 Interest income includes loan fees earned by the Bank, which are recognized in net interest income over the life of the loan through the effective interest rate method. 4 Includes trading loans that the Bank intends to sell immediately or in the near term with a fair value of $24 million (2012 – $25 million, 2011 – $259 million) and amortized cost of $24 million (2012 – $25 million, 2011 – $253 million), and loans designated at fair value through profit or loss of $9 million (2012 – $13 million, 2011 – $14 million) and amortized cost of nil (2012 – nil, 2011 – $5 million). 5 Includes trading deposits with a fair value of $47,593 million (2012 – $38,774 million, 2011 – $29,613 million). 6 Includes marketing fees incurred on the TD Ameritrade Insured Deposit Accounts of $821 million (2012 – $834 million, 2011 – $762 million). 7 Includes securitization liabilities designated at fair value through profit or loss of $21,960 million (2012 – $25,324 million, 2011 – $27,725 million) and related amor- tized cost of $21,757 million (2012 – $24,600 million, 2011 – $26,578 million). Also includes securitization liabilities at amortized cost of $25,144 million (2012 – $25,224 million, 2011 – $25,133 million). 8 Other liabilities includes asset-backed commercial paper and term notes with an amortized cost of $5.1 billion (2012 – $4.6 billion, 2011 – $5.1 billion). 14 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS The table below presents an analysis of the change in net interest income of volume and interest rate changes. In this analysis, changes due to volume/interest rate variance have been allocated to average interest rate. T A B L E 8 ANALYSIS OF CHANGE IN NET INTEREST INCOME1, 2 (millions of Canadian dollars) 2013 vs. 2012 2012 vs. 2011 Favourable (unfavourable) due to change in Favourable (unfavourable) due to change in Average volume Average rate Net change Average volume Average rate Net change Interest-earning assets Interest-bearing deposits with banks Canada U.S. Securities Trading Canada U.S. Non-trading Canada U.S. Securities purchased under reverse repurchase agreements Canada U.S. Loans Mortgages3 Canada U.S. Consumer instalment and other personal Canada U.S. Credit card Canada U.S. Business and government3 Canada U.S. International Total interest-earning assets Interest-bearing liabilities Deposits Personal Canada U.S. Banks Canada U.S. Business and government4, 5 Canada U.S. Subordinated notes and debentures Obligations related to securities sold short and under repurchase agreements Canada U.S. Liabilities for preferred shares and capital trust securities Securitization liabilities6 Other liabilities7 Canada International Total interest-bearing liabilities Total net interest income on average earning assets $ (20) 13 $ 2 (23) $ (18) (10) $ 32 3 $ (43) (277) $ (11) (274) 166 62 26 14 (16) 14 436 219 (106) 164 55 435 (100) 28 22 (301) (3) (10) (187) (180) (446) (166) 74 275 370 185 65 $ 2,082 (238) (207) (244) $ (1,704) 66 90 48 (287) (19) 4 249 39 (552) (2) 129 710 132 (22) (179) $ 378 216 70 36 97 33 10 624 183 (2) 264 710 24 (13) 13 40 275 23 3 (523) (36) (76) (110) 24 (9) 203 83 76 372 56 13 101 147 (78) 154 734 15 233 251 91 $ 2,875 (167) (414) (256) $ (1,546) 66 (163) (165) $ 1,329 $ (85) (24) $ 244 77 $ 159 53 $ (127) (43) $ 194 33 $ 67 (10) (6) (2) (65) (315) 159 (34) (24) 25 32 23 (2) 249 293 6 (6) 18 (5) 67 (1) (27) $ (367) $ 1,715 – 77 $ 1,041 (663) $ 17 (4) 184 (22) 165 (40) (6) 20 99 (1) 50 $ 674 $ 1,052 (6) 1 (274) (147) 48 (161) (19) 41 (5) 10 4 $ (678) $ 2,197 $ $ 5 1 17 71 3 96 (6) (7) 214 1 92 714 (832) (1) 2 (257) (76) 51 (65) (25) 34 209 11 96 36 $ $ 1,365 1 Geographic classification of assets and liabilities is based on the domicile of the 5 Includes marketing fees incurred on the TD Ameritrade Insured Deposit Accounts booking point of assets and liabilities. 2 Interest income includes loan fees earned by the Bank, which are recognized in net interest income over the life of the loan through the effective interest rate method. 3 Includes trading loans that the Bank intends to sell immediately or in the near term with a fair value of $24 million (2012 – $25 million, 2011 – $259 million) and amortized cost of $24 million (2012 – $25 million, 2011 – $253 million), and loans designated at fair value through profit or loss of $9 million (2012 – $13 million, 2011 – $14 million) and amortized cost of nil (2012 – nil, 2011 – $5 million). 4 Includes trading deposits with a fair value of $47,593 million (2012 – $38,774 million, 2011 – $29,613 million). of $821 million (2012 – $834 million, 2011 – $762 million). 6 Includes securitization liabilities designated at fair value through profit or loss of $21,960 million (2012 – $25,324 million, 2011 – $27,725 million) and related amor- tized cost of $21,757 million (2012 – $24,600 million, 2011 – $26,578 million). Also includes securitization liabilities at amortized cost of $25,144 million (2012 – $25,224 million, 2011 – $25,133 million). 7 Other liabilities includes asset-backed commercial paper and term notes with an amortized cost of $5.1 billion (2012 – $4.6 billion, 2011 – $5.1 billion). 15 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS NON-INTEREST INCOME 1 Non-interest income for the year on a reported basis was $11,184 million, an increase of $664 million, or 6%, compared with last year. Adjusted non-interest income for the year was $11,113 million, an increase of $498 million, or 5%, compared with last year. The increase in adjusted non-interest income was primarily driven by increases in the Wealth and Insurance and U.S. Personal and Commercial Banking segments, partially offset by declines in the Wholesale Banking and Corporate segments. Wealth and Insurance non-interest income increased primarily due to higher fee-based revenue from asset growth and the addition of Epoch in the Wealth business and premium growth in the Insurance business, partially offset by the sale of the U.S. Insurance business. U.S. Personal and Commercial Banking non-interest income increased primarily due to higher fee-based revenue and gains on sales securities and debt securities classified as loans. Wholesale Banking non-interest income decreased primarily due to lower security gains in the investment portfolio and lower mergers and acquisitions (M&A) and advisory fees. Corporate segment non-interest income decreased primarily due to lower gains from treasury and other hedging activities. T A B L E 9 NON-INTEREST INCOME (millions of Canadian dollars) Investment and securities services TD Waterhouse fees and commissions Full-service brokerage and other securities services Underwriting and advisory Investment management fees Mutual fund management Total investment and securities services Credit fees Net securities gains Trading income (loss) Service charges Card services Insurance revenue1 Trust fees Other income Total 2013 2012 2011 % change 2013 vs. 2012 $ 403 596 365 326 1,141 2,831 785 304 (281) 1,863 1,345 3,734 148 455 $ 11,184 $ 384 562 437 241 997 2,621 745 373 (41) 1,775 1,039 3,537 149 322 $ 10,520 $ 459 631 378 215 941 2,624 671 393 (127) 1,602 959 3,345 154 558 $ 10,179 5% 6 (16) 35 14 8 5 (18) (585) 5 29 6 (1) 41 6% 1 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts have been reclassified to conform with the current period presentation. TRADING-RELATED INCOME Trading-related income is the total of net interest income on trading positions, trading income (loss), and income from financial instruments designated at fair value through profit or loss that are managed within a trading portfolio. Trading-related income decreased by $76 million, or 7% from 2012. The decrease was primarily in equity and other portfolios, partially offset by an increase in interest rate and credit portfolios compared to the prior year. Equity and other portfolios decreased as the prior year included gains on trading positions that were previously considered impaired. Interest rate and credit trading improved on increased client activity in 2013. The mix of trading-related income between net interest income and trading income is largely dependent upon the level of interest rates, which drives the funding costs of the Bank’s trading portfolios. Generally, as interest rates rise, net interest income declines and trad- ing income reported in non-interest income increases. Management believes that the total trading-related income is the appropriate measure of trading performance. 2013 $ 1,230 (281) (6) $ 943 $ 554 368 27 (6) $ 943 2012 $ 1,050 (41) 10 $ 1,019 $ 534 374 101 10 $ 1,019 2011 $ 818 (127) 4 $ 695 $ 212 428 51 4 $ 695 T A B L E 1 0 TRADING-RELATED INCOME (millions of Canadian dollars) Net interest income Trading income (loss) Financial instruments designated at fair value through profit or loss1 Total trading-related income (loss) By product Interest rate and credit portfolios Foreign exchange portfolios Equity and other portfolios Financial instruments designated at fair value through profit or loss1 Total trading-related income (loss) 1 Excludes amounts related to securities designated at fair value through profit or loss that are not managed within a trading portfolio, but which have been combined with derivatives to form economic hedging relationships. 1 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts have been reclassified to conform with the current period presentation. 16 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS OVERVIEW Expenses AT A GLANCE OVERVIEW • Reported non-interest expenses were $15,042 million, an increase of $1,044 million, or 7%, compared with last year. • Adjusted non-interest expenses were $14,363 million, an EFFICIENCY RATIO 1 The efficiency ratio measures operating efficiency and is calculated by taking the non-interest expenses as a percentage of total revenue. A lower ratio indicates a more efficient business operation. increase of $1,201 million, or 9%, compared with last year. The reported efficiency ratio worsened to 55.2%, compared with • Reported efficiency ratio1 worsened to 55.2% compared with 54.8% last year. • Adjusted efficiency ratio1 worsened to 52.8% compared 54.8% last year. The adjusted efficiency ratio worsened to 52.8%, compared with 51.3% last year primarily due to lower revenue in Wholesale Banking. with 51.3% last year. NON-INTEREST EXPENSES Reported non-interest expenses for the year were $15,042 million, an increase of $1,044 million, or 7%, compared with last year. Adjusted non- interest expenses were $14,363 million, an increase of $1,201 million, or 9%, compared with last year. The increase in adjusted non-interest expenses was driven by increases in the U.S. Personal and Commercial Banking, Wealth and Insurance, Canadian Personal and Commercial Banking, and Corporate segments. U.S. Personal and Commercial Banking expenses increased primarily due to increased expenses related to Target, investments in new stores, and other planned initiatives, partially offset by productivity gains. Wealth and Insurance expenses increased primarily due to higher revenue-based variable expenses and the addition of Epoch in the Wealth business, partially offset by the sale of the U.S. Insurance business. Canadian Personal and Commercial Banking expenses increased primarily due to higher expenses from full year inclusion of MBNA, volume growth, merit increases and investment in initiatives to grow the business, partially offset by productivity gains. Corporate segment expenses increased primarily due to higher pension and strategic initiative costs. NON-INTEREST EXPENSES (millions of Canadian dollars) EFFICIENCY RATIO1 (percent) $16,000 12,000 8,000 4,000 0 60% 50 40 30 20 10 0 11 12 13 11 12 13 Reported Adjusted Reported Adjusted 1 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts, including certain ratios, have been recast to conform with the current period presentation. 17 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 1 1 NON-INTEREST EXPENSES AND EFFICIENCY RATIO (millions of Canadian dollars, except as noted) Salaries and employee benefits Salaries Incentive compensation Pension and other employee benefits Total salaries and employee benefits Occupancy Rent Depreciation Property tax Other Total occupancy Equipment Rent Depreciation Other Total equipment Amortization of other intangibles Marketing and business development Restructuring costs Brokerage-related fees Professional and advisory services Communications Other expenses Capital and business taxes Postage Travel and relocation Other Total other expenses Total expenses Efficiency ratio – reported1 Efficiency ratio – adjusted1 1 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts, including certain ratios, have been recast to conform with the current period presentation. 2013 2012 2011 % change 2013 vs. 2012 $ 4,752 1,634 1,236 7,622 $ 4,647 1,561 1,033 7,241 $ 4,319 1,448 962 6,729 2% 5 20 5 755 330 65 306 1,456 216 188 443 847 521 685 129 317 1,010 281 704 324 57 289 1,374 210 184 431 825 477 668 – 296 925 282 659 306 56 264 1,285 218 161 422 801 657 593 – 320 944 271 147 201 186 1,640 2,174 $ 15,042 149 196 175 1,390 1,910 $ 13,998 154 177 172 944 1,447 $ 13,047 55.2% 52.8 54.8% 51.3 54.7% 52.2 7 2 14 6 6 3 2 3 3 9 3 100 7 9 – (1) 3 6 18 14 7% 40bps 150 18 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS OVERVIEW Taxes Reported total income and other taxes increased by $112 million, or 5%, from 2012. Income tax expense, on a reported basis, was up $51 million, or 5%, from 2012. Other taxes were up $61 million, or 6%, from 2012. Adjusted total income and other taxes were down $9 million from 2012. Total income tax expense, on an adjusted basis, was down $70 million, or 5%, from 2012. The Bank’s effective income tax rate on a reported basis was 15.2% for 2013, compared with 14.9% in 2012. The Bank reports its investment in TD Ameritrade using the equity method of accounting. TD Ameritrade’s tax expense of $168 million in the year, compared to $131 million in 2012, was not part of the Bank’s tax rate. T A B L E 1 2 INCOME TAXES (millions of Canadian dollars, except as noted) Income taxes at Canadian statutory income tax rate Increase (decrease) resulting from: Dividends received Rate differentials on international operations Tax rate changes Other Provision for income taxes and effective income tax rate – reported 2013 2012 $ 1,978 26.3% $ 1,938 26.4% $ 2,005 (253) (488) – (94) (3.4) (6.5) – (1.2) (262) (481) (18) (85) (3.6) (6.6) (0.2) (1.1) (214) (468) – 3 2011 28.1% (3.0) (6.6) – 0.1 $ 1,143 15.2% $ 1,092 14.9% $ 1,326 18.6% The Bank’s adjusted effective tax rate was 16.3% for 2013, compared with 17.1% in 2012. The year-over-year decrease was largely due to a relative size and nature of items of note. T A B L E 1 3 NON-GAAP FINANCIAL MEASURES – Reconciliation of Reported to Adjusted Provision for Income Taxes (millions of Canadian dollars, except as noted) Provision for income taxes – reported Adjustments for items of note: Recovery of (provision for) incomes taxes1, 2 Amortization of intangibles Fair value of derivatives hedging the reclassified available-for-sale securities portfolio Integration charges and direct transaction costs relating to U.S. Personal and Commercial Banking acquisitions Fair value of credit default swaps hedging the corporate loan book, net of provision for credit losses Integration charges, direct transaction costs, and changes in fair value of contingent consideration relating to the Chrysler Financial acquisition Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada Litigation and litigation-related charge/reserve Reduction of allowance for incurred but not identified credit losses Positive impact due to changes in statutory income tax rates Impact of Alberta flood on the loan portfolio Impact of Superstorm Sandy Restructuring charges Set-up costs in preparation for the previously announced affinity relationship with Aimia with respect to Aeroplan Visa credit cards and the related acquisition of accounts Total adjustments for items of note Provision for income taxes – adjusted Other taxes Payroll Capital and premium GST, HST and provincial sales Municipal and business Total other taxes Total taxes – adjusted Effective income tax rate – adjusted3 2013 $ 1,143 2012 $ 1,092 2011 $ 1,326 94 (14) – – – 33 26 – – 6 – 39 7 191 1,334 404 140 380 169 1,093 $ 2,427 96 – 2 2 10 36 165 (42) 18 – 25 – – 312 1,404 383 141 352 156 1,032 $ 2,436 164 (30) 59 (6) 32 – – – – – – – – 219 1,545 367 147 339 149 1,002 $ 2,547 16.3% 17.1% 20.1% 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 Adjusted effective income tax rate is the adjusted provision for income taxes before other taxes as a percentage of adjusted net income before taxes. 19 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS OVERVIEW Quarterly Financial Information FOURTH QUARTER 2013 PERFORMANCE SUMMARY Reported net income for the quarter was $1,622 million, an increase of $25 million, or 2%, compared with the fourth quarter last year. Adjusted net income for the quarter was $1,821 million, an increase of $64 million, or 4%, compared with the fourth quarter last year. Reported diluted earnings per share for the quarter were $1.68, compared with $1.66 in the fourth quarter last year. Adjusted diluted earnings per share for the quarter were $1.90, compared with $1.83 in the fourth quarter last year. Revenue for the quarter was $7,001 million, an increase of $424 million, or 6%, on a reported basis, and $7,018 million on an adjusted basis, an increase of $403 million, or 6%, compared with the fourth quarter last year. The increase in adjusted revenue was driven by increases in the U.S. Personal and Commercial Banking and Wealth and Insurance segments, partially offset by decreases in the Wholesale Banking and Corporate segments. U.S. Personal and Commercial Banking revenue increased primarily due to the inclusion of revenue from Target, strong organic loan and deposit growth, partially offset by lower margins. Wealth and Insurance revenue increased primarily due to fee-based asset growth and the addition of Epoch in the Wealth business and premium growth in the Insurance business, partially offset by the sale of the U.S. Insurance business. Wholesale Banking revenue decreased due to lower security gains in the investment portfolio partially offset by higher trading-related revenue. Corporate segment revenue decreased primarily due to lower gains from treasury and other hedging activities. Provision for credit losses for the quarter was $352 million, a decrease of $213 million, or 38%, on a reported basis, and $392 million on an adjusted basis, a decrease of $119 million, or 23%, compared with the fourth quarter last year. The decrease was primarily driven by decreases in the Canadian Personal and Commercial Banking and U.S. Personal and Commercial Banking segments. Canadian Personal and Commercial Banking PCL decreased primarily due to favourable credit performance, lower bankruptcies, and elevated PCL in the fourth quarter last year due to an adjustment related to past due accounts. U.S. Personal and Commercial Banking PCL decreased primarily due to impact of the new regulatory guidance recorded in the fourth quarter last year and improved credit quality of commercial loans, partially offset by provisions for credit card loans acquired from Target and increased provisions in auto loans. Non-interest expenses for the quarter were $4,157 million, an increase of $551 million, or 15%, on a reported basis, and $3,883 million on an adjusted basis, an increase of $390 million, or 11%, compared with the fourth quarter last year. The increase in adjusted non-interest expenses was primarily driven by an increase in U.S. Personal and Commercial Banking due to increased expenses related to Target, investments in new stores, and other growth initiatives, partially offset by productivity gains. The Bank’s reported effective tax rate was 13.5% for the quarter, compared with 10.4% in the same quarter last year. The year-over-year increase was largely due to a decrease in earnings reported by our subsidiaries operating in jurisdictions with lower tax rates. The Bank’s adjusted effective tax rate was 15.0% for the quarter, compared with 12.3% in the same quarter last year. The year-over-year increase was largely due to a decrease in earnings reported by our subsidiaries operating in jurisdictions with lower tax rates. QUARTERLY TREND ANALYSIS The Bank has had solid underlying adjusted earnings growth over the past eight quarters. Canadian Personal and Commercial Banking earn- ings have been solid with good loan and deposit volume growth, the acquisition of the credit card portfolio of MBNA Canada, and better credit performance, partially offset by lower margins. U.S. Personal and Commercial Banking earnings have benefited from strong organic loan and deposit volume growth, elevated security gains, and Target, partially offset by lower margins and higher expenses to support busi- ness growth. Wealth and Insurance earnings have been negatively impacted by unfavourable prior years’ claims development related to the Ontario auto insurance market and higher claims from weather- related events in the Insurance business, offset by higher fee-based revenue in the Wealth business. The earnings contribution from the Bank’s reported investment in TD Ameritrade has increased over the past two years primarily due to higher base earnings in TD Ameritrade. After a relatively strong 2012, Wholesale Banking earnings have been trending downwards in 2013 primarily due to reduced security gains and capital market activity. The Bank’s earnings have seasonal impacts, principally the second quarter being affected by fewer business days. The Bank’s earnings are also impacted by market-driven events and changes in foreign exchange rates. 20 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 1 4 QUARTERLY RESULTS (millions of Canadian dollars, except as noted) Net interest income Non-interest income1 Total revenue Provision for credit losses Insurance claims and related expenses1 Non-interest expenses Provision for (recovery of) income taxes Equity in net income of an investment in associate, net of income taxes Net income – reported Adjustments for items of note, net of income taxes2 Amortization of intangibles Fair value of derivatives hedging the reclassified available-for-sale securities portfolio Integration charges and direct transaction costs relating to U.S. Personal and Commercial Banking acquisitions Fair value of credit default swaps hedging the corporate loan book, net of provision for credit losses Integration charges, direct transaction costs, and changes in fair value of contingent consideration relating to the Chrysler Financial acquisition Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada Litigation and litigation-related charge/reserve Reduction of allowance for incurred but not identified credit losses Positive impact due to changes in statutory income tax rates Impact of Alberta flood on the loan portfolio Impact of Superstorm Sandy Restructuring charges Set-up costs in preparation for the previously announced affinity relationship with Aimia with respect to Aeroplan Visa credit cards and the related acquisition of accounts Total adjustments for items of note Net income – adjusted Preferred dividends Net income available to common shareholders and non-controlling interests in subsidiaries – adjusted Attributable to: Non-controlling interests – adjusted Common shareholders – adjusted (Canadian dollars, except as noted) Basic earnings per share Reported Adjusted Diluted earnings per share Reported Adjusted Return on common equity – reported Return on common equity – adjusted (billions of Canadian dollars) 2013 For the three months ended 2012 Oct. 31 July 31 Apr. 30 Jan. 31 Oct. 31 July 31 Apr. 30 Jan. 31 $ 4,184 2,817 7,001 352 711 4,157 240 $ 4,146 2,939 7,085 477 1,140 3,764 252 $ 3,902 2,707 6,609 417 609 3,626 291 $ 3,846 2,721 6,567 385 596 3,495 360 $ 3,842 2,735 6,577 565 688 3,606 178 $ 3,817 2,669 6,486 438 645 3,471 291 $ 3,680 2,582 6,262 388 512 3,372 351 $ 3,687 2,534 6,221 404 579 3,549 272 81 1,622 75 1,527 57 1,723 59 1,790 57 1,597 62 1,703 54 1,693 61 1,478 59 15 – – – 14 30 – – (29) – 90 59 (70) – – – 24 – – – 48 – – 58 22 – – – 30 – – – – – – 56 (24) – – – 24 70 – – – – – 60 35 – – 3 25 – – – – 37 – 59 59 – – (2) 6 25 77 (30) (18) – – – 9 – 1 3 30 – (59) – – – – 60 45 9 1 5 24 171 (31) – – – – 20 199 1,821 49 – 61 1,588 38 – 110 1,833 49 – 126 1,916 49 – 160 1,757 49 – 117 1,820 49 – 43 1,736 49 – 284 1,762 49 1,772 1,550 1,784 1,867 1,708 1,771 1,687 1,713 27 $ 1,745 26 $ 1,524 26 $ 1,758 26 $ 1,841 26 $ 1,682 26 $ 1,745 26 $ 1,661 26 $ 1,687 $ 1.69 1.90 $ 1.59 1.65 $ 1.79 1.91 $ 1.87 2.01 $ 1.67 1.84 $ 1.79 1.92 $ 1.79 1.84 $ 1.56 1.87 1.68 1.90 13.3% 15.0% 1.58 1.65 12.5% 13.0% 1.78 1.90 14.8% 15.8% 1.86 2.00 15.3% 16.4% 1.66 1.83 14.0% 15.5% 1.78 1.91 15.3% 16.4% 1.78 1.82 16.2% 16.6% 1.55 1.86 14.0% 16.8% Average earning assets Net interest margin as a percentage of average earning assets $ 748 $ 742 $ 723 $ 710 $ 689 $ 681 $ 667 $ 660 2.22% 2.22% 2.21% 2.15% 2.22% 2.23% 2.25% 2.22% 1 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts have been reclassified to conform with the current period presentation. 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. 21 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS SEGMENT ANALYSIS Business Focus For management reporting purposes, the Bank’s operations and activities are organized around the following operating business segments: Canadian Personal and Commercial Banking, Wealth and Insurance, U.S. Personal and Commercial Banking, and Wholesale Banking. Canadian Personal and Commercial Banking comprises Canadian personal and business banking, TD Auto Finance Canada, as well as the Canadian credit card business. Under the TD Canada Trust brand, personal banking provides a full range of financial products and services to nearly 14 million customers through its network of 1,179 branches and 2,845 automated banking machines and tele- phone, internet and mobile banking. TD Commercial Banking serves the needs of medium and large Canadian businesses by offering a broad range of customized products and services to help business owners meet their financing, investment, cash management, interna- tional trade, and day-to-day banking needs. TD Auto Finance provides flexible financing options to customers at point-of-sale for automotive and recreational vehicle purchases through our auto dealer network. TD Credit Card businesses, which includes Visa and the credit card portfolio of MBNA Canada, provides an attractive line-up of credit cards including co-branded and affinity credit card programs. Wealth and Insurance comprises the Bank’s Wealth Management and Insurance businesses globally, including operations in Canada, the U.S. and Europe. TD Wealth offers a wide range of wealth products and services to a large and diverse set of retail and institutional clients in Canada, the U.S. and Europe. TD Wealth consists of Direct Investing, Advice-based, and Asset Management businesses. Each of these businesses is focused on providing an exceptional client experience aligned with the TD brand. In the global Direct Investing business, TD has a leading market share, providing a full set of offerings to retail clients in Canada and the U.K. In the U.S., TD has an investment in TD Ameritrade, which is the industry-leader in direct investing as measured by average trades per day. TD’s North American Advice-based business includes financial planning, full service brokerage, private banking and private invest- ment counsel. In each case, TD’s Advice-based business is focused on delivering a value proposition that is matched to our clients’ needs and delivered in an integrated fashion. TD Asset Management (TDAM) is a leading North American investment manager comprising both retail (for example, mutual funds) and institutional capabilities. Our institu- tional clients include leading pension funds, corporations, endowments and foundations both in Canada and the U.S. TD Insurance manufactures and distributes property and casualty insur- ance and life and health insurance products in Canada. The property and casualty business offers personal lines home and auto insurance through direct distribution channels and is the number one direct writer, number one affinity writer, number one bank insurer and number two personal lines writer of property and casualty insurance in Canada. The life and health insurance business offers authorized credit protection and travel insurance products primarily through TD Canada Trust branches. It also offers other simple life and health products such as term life, critical illness, accident and sickness, and credit card balance protection products through direct distribution channels. U.S. Personal and Commercial Banking comprises the Bank’s retail and commercial banking operations in the U.S. operating under the brand TD Bank, America’s Most Convenient Bank. The retail operations provide a full range of financial products and services through multiple delivery channels, including a network of 1,317 stores located along the east coast from Maine to Florida, telephone, mobile and internet bank- ing and automated banking machines, allowing customers to have bank- ing access virtually anywhere and anytime. U.S. Personal and Commercial Banking also serves the needs of businesses, customizing a broad range 22 of products and services to meet their financing, investment, cash management, international trade, and day-to-day banking needs. Wholesale Banking provides a wide range of capital markets and investment banking products and services including underwriting and distribution of new debt and equity issues, providing advice on strategic acquisitions and divestitures, and meeting the daily trading, funding and investment needs of our clients. Operating under the TD Securities brand, our clients include highly-rated companies, governments, and institutions in key financial markets around the world. Wholesale Banking is an integrated part of TD’s strategy, providing market access to TD’s wealth and retail operations and providing wholesale banking solutions to our partners and their customers. The Bank’s other business activities are not considered reportable segments and are, therefore, grouped in the Corporate segment. The Corporate segment includes the impact of treasury and balance sheet management activities, general provision for credit losses, tax items at an enterprise level, the elimination of taxable equivalent and other inter- company adjustments, and residual unallocated revenue and expenses. Effective December 1, 2011, results of the acquisition of the credit card portfolio of MBNA Canada (MBNA) are reported primarily in the Canadian Personal and Commercial Banking and Wealth and Insurance segments. Integration charges and direct transaction costs relating to the acquisition of MBNA are reported in Canadian Personal and Commercial Banking. The results of TD Auto Finance Canada are reported in Canadian Personal and Commercial Banking. The results of TD Auto Finance U.S. are reported in U.S. Personal and Commercial Banking. Integration charges, direct transaction costs, and changes in fair value of contingent consideration related to the Chrysler Financial acquisition were reported in the Corporate segment. Effective March 13, 2013, results of Target are reported in U.S. Personal and Commercial Banking. Effective March 27, 2013, the results of Epoch are reported in Wealth and Insurance. Results of each business segment reflect revenue, expenses, assets, and liabilities generated by the businesses in that segment. The Bank measures and evaluates the performance of each segment based on adjusted results where applicable, and for those segments the Bank notes that the measure is adjusted. Net income for the operating busi- ness segments is presented before any items of note not attributed to the operating segments. For further details, see the “How the Bank Reports” section in the MD&A. For information concerning the Bank’s measures of economic profit and adjusted return on common equity, which are non-GAAP financial measures, see the “Economic Profit and Return on Common Equity” section. Segmented information also appears in Note 31 to the 2013 Consolidated Financial Statements. 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 increase to net interest income and provision for income taxes reflected in Wholesale Banking results is reversed in the Corporate segment. The TEB adjustment for the year was $332 million, compared with $327 million last year. As noted in Note 8 to the 2013 Consolidated Financial Statements, the Bank continues to securitize retail loans and receivables, however under IFRS, the majority of these loans and receivables remain on-balance sheet. TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISThe “Business Outlook and Focus for 2014” section for each segment, provided on the following pages, is based on the Bank’s views and the assumptions set out in the “Economic Summary and Outlook” section and the actual outcome may be materially different. For more infor- mation, see the “Caution Regarding Forward-Looking Statements” section and the “Risk Factors That May Affect Future Results” section. T A B L E 1 5 RESULTS BY SEGMENT (millions of Canadian dollars) Canadian Personal and Commercial Banking Wealth and Insurance U.S. Personal and Commercial Banking Wholesale Banking Corporate 2013 2012 2013 2012 2013 2012 2013 2012 $ 8,345 $ 8,023 $ 579 6,358 2,629 2,695 $ 583 5,860 $ 5,172 $ 4,663 1,468 1,957 $ 1,982 425 $ 1,805 849 $ 2013 – (251) 2012 2013 $ (48) $ 16,078 $ 15,026 10,520 (286) 11,184 Total 2012 Net interest income (loss) Non-interest income (loss)1 Provision for (reversal of) credit losses Insurance claims and related expenses1 Non-interest expenses Income (loss) before provision for income taxes Provision for (recovery of) income taxes Equity in net income of an investment in associate, net of income taxes Net income (loss) – reported Adjustments for items of note, net of income taxes2 Amortization of intangibles Fair value of derivatives hedging the reclassified available-for-sale securities portfolio Integration charges and direct transaction costs relating to U.S. Personal and Commercial Banking acquisitions Integration charges, direct transaction costs, and changes in fair value of contingent consideration relating to the Chrysler Financial acquisition Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada Litigation and litigation-related charge/reserve Reduction of the allowance for incurred but not identified credit losses Positive impact due to changes in statutory income tax rates Impact of Alberta flood on the loan portfolio Impact of Superstorm Sandy Restructuring charges Set-up costs in preparation for the previously announced affinity relationship with Aimia with respect to Aeroplan Visa credit cards and the related acquisition of accounts Total adjustments for items of note Net income (loss) – adjusted (billions of Canadian dollars) Average common equity Risk-weighted assets 929 1,151 – – 779 779 26 47 (103) (182) 1,631 1,795 – 5,136 – 4,988 3,056 2,821 2,424 2,600 – 4,550 – 4,125 – 1,541 – 1,570 – 994 – 715 3,056 15,042 2,424 13,998 4,975 4,513 1,060 1,419 1,800 1,227 840 1,037 (1,142) (867) 7,533 7,329 1,321 1,209 153 261 273 99 192 157 (796) (634) 1,143 1,092 – 3,654 – 3,304 246 1,153 209 1,367 – 1,527 – 1,128 – 648 – 880 26 (320) 25 272 (208) 6,662 234 6,471 – – – – – – – – 92 104 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 9 – – 100 248 – – – – – – – – 37 – – – – – – – – – – – – – – – – – – – – – – – 232 238 232 238 (57) 89 (57) 89 – – – – – – – – 9 17 – 17 – – 92 100 (120) (18) 19 – 90 – – – – – 19 – 90 104 248 (120) (18) – 37 – 20 – – – – – – – – – 20 – 112 – $ 3,766 $ 3,408 $ 1,153 104 – $ 1,367 100 294 $ 1,627 $ 1,422 – $ 648 – $ 880 284 (36) $ 206 $ 604 496 (2) $ 7,158 $ 7,075 $ 7.8 $ 82 7.7 $ 78 6.1 17 $ 6.6 9 $ 18.9 $ 17.6 111 132 $ 4.2 47 $ 4.1 43 $ 8.7 8 $ 5.5 $ 45.7 $ 41.5 246 286 5 1 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts, including certain ratios, have been reclassified to conform with the current period presentation. 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. 23 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS ECONOMIC SUMMARY AND OUTLOOK The Canadian economy is currently entrenched in a modest growth, low inflation environment. After weak 1% growth in the second half of 2012, the Canadian economy strengthened in the first half of 2013, recording real GDP advances of 2.5% and 1.7% in the January-March and April-June periods, respectively. Looking ahead, the Canadian economy is expected to improve, but with moderate economic growth. Specifically, domestic demand is likely to remain modest as both consumers and governments restrain spending to focus on balancing their finances. Consumers have already made progress slowing their pace of debt accumulation as household credit growth has slowed to its lowest pace in over a decade. A generally more subdued housing sector will also contribute to modest growth in the domestic economy. The Canadian housing market had shown renewed strength in 2013 after tighter mortgage restrictions slowed the market last year. However, an erosion in affordability is expected to limit growth in sales activity and prices for the foreseeable future. Residential construction activity overall has slowed relative to last year, and that trend is likely to continue over the next two years. Inflation in Canada has been low, reflecting muted growth in 2012 combined with heightened competitive pressures in the retail market. With excess capacity expected to persist over the coming quarters, inflation pressures are expected to build very gradually. In this environ- ment, the Bank of Canada is expected to keep short-term interest rates at current levels until mid-2015, at which time a gradual increase is likely to occur. After a challenging 2012, the Canadian export sector has been improving. A more notable increase is expected next year alongside stronger growth in the United States and a depreciating Canadian dollar. Once the export trend is more established, Canadian businesses are also expected to expand their investment activity. Slumping profits have held back capital expenditures recently, but profit growth is forecast to resume over the near term. The United States economy continues to make progress, as the private sector gains momentum alongside its housing sector. However, overall U.S. economic growth has been held back by tax increases and government spending cuts. Despite these fiscal headwinds, job growth has remained relatively strong and the unemployment rate is expected to decline further over the next two years. Against this backdrop of improving economic fundamentals, the U.S. Federal Reserve is expected to reduce its extraordinary asset purchase program beginning early in 2014. Inflation has been subdued, and is expected to increase gradually over the coming quarters. This is consistent with the expectation that the U.S. Federal Reserve Board (U.S. Federal Reserve) is likely to leave interest rates unchanged until the second half of 2015. Economic growth in the United States is expected to continue to outpace growth in Canada over the next several years. NET INCOME – REPORTED BY BUSINESS SEGMENT (as a percentage of total net income) 60% 50 40 30 20 10 0 11 12 13 11 12 13 11 12 13 11 12 13 NET INCOME – ADJUSTED BY BUSINESS SEGMENT (as a percentage of total net income) 60% 50 40 30 20 10 0 11 12 13 11 12 13 11 12 13 11 12 13 Canadian Personal and Commercial Banking Wealth and Insurance U.S. Personal and Commercial Banking Wholesale Banking 24 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISBUSINESS SEGMENT ANALYSIS Canadian Personal and Commercial Banking Canadian Personal and Commercial Banking comprises the Bank’s personal and business banking businesses in Canada, TD Auto Finance Canada and Canadian credit cards. Canadian Personal and Commercial Banking provides a full range of financial products and services to nearly 14 million customers. $3,654 Reported $3,766 Adjusted NET INCOME (millions of Canadian dollars) 46.5% Reported 45.1% Adjusted EFFICIENCY RATIO (percent) $4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 50% 40 30 20 10 0 11 12 13 11 12 13 Reported Adjusted Reported Adjusted T A B L E 1 6 REVENUE (millions of Canadian dollars) Consumer lending Real estate secured lending Personal deposits Business banking Other1 Total 1 Other revenue includes internal commissions on sales of mutual funds and other Wealth and Insurance products, and other branch services. 2013 $ 3,686 2,006 2,826 2,232 290 $ 11,040 2012 $ 3,594 1,901 2,809 2,170 178 $ 10,652 2011 $ 2,627 1,946 2,753 2,060 146 $ 9,532 25 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS HIGHLIGHTS • Posted record adjusted earnings of $3,766 million, an increase of 11% from 2012, and record adjusted efficiency ratio of 45.1%, in a challenging operating environment. CHALLENGES IN 2013 • Low interest rate environment led to margin compression. • Fierce competition for new customers from the major Canadian banks and non-bank competitors. • TD will become the primary issuer of Aeroplan Visa credit • Slowing retail loan growth due to weak economic growth and cards on January 1, 2014, and has agreed to acquire approxi- mately 50% of the existing Aeroplan credit card portfolio from CIBC. • Strong chequing and savings deposit volume growth due to a focus on acquiring and retaining core customer accounts. • Retained the #1 position in personal deposit market share and the #2 position in personal loan market share. • Moved up to #1 position in Canadian credit card market share. • Business Banking generated strong loan volume growth of 13% and held the #2 positions in deposit and loan market share. • Continued to focus on customer service and convenience by investing in mobile and online banking, and opening 19 new branches in 2013. • TD is the most visited banking website in Canada. TD holds the #1 position in the number of online banking and mobile customers. • Achieved external recognition as an industry leader in customer service excellence with distinctions that included the following: – Ranked highest in customer satisfaction among the five major Canadian banks for the eighth consecutive year by J.D. Power and Associates, a global marketing information services firm. The 2013 Canadian Retail Banking Customer Satisfaction Study included responses from over 20,000 customers. – TD Canada Trust earned the #1 spot in “Customer Service Excellence” among the five major Canadian banks for the ninth consecutive year according to global market research firm Ipsos. T A B L E 1 7 CANADIAN PERSONAL AND COMMERCIAL BANKING (millions of Canadian dollars, except as noted) Net interest income Non-interest income Total revenue – reported Total revenue – adjusted Provision for credit losses Non-interest expenses – reported Non-interest expenses – adjusted Net income – reported Adjustments for items of note, net of income taxes1 Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada Set-up costs in preparation for the previously announced affinity relationship with Aimia with respect to Aeroplan Visa credit cards and the related acquisition of accounts Net income – adjusted Selected volumes and ratios Return on common equity – reported2 Return on common equity – adjusted2 Margin on average earning assets (including securitized assets) – reported Margin on average earning assets (including securitized assets) – adjusted Efficiency ratio – reported Efficiency ratio – adjusted Number of Canadian retail stores Average number of full-time equivalent staff 1 For explanations of items of note, see the “Non-GAAP Financial Measures − Reconciliation of Adjusted to Reported Net Income” table in the “How We Performed” section of this document. rising consumer debt levels. INDUSTRY PROFILE The personal and business banking environment in Canada is very competitive among the major banks as well as some strong regional players. The increased competition makes it difficult to sustain market share gains and distinctive competitive advantage over the long term. Continued success depends upon delivering outstanding customer service and convenience, disciplined risk management practices, and good expense management. OVERALL BUSINESS STRATEGY The strategy for Canadian Personal and Commercial Banking is to: • Consistently deliver a legendary customer experience in everything we do. • Be recognized as an extraordinary place to work. • Build on the momentum of higher growth businesses. • Make the customer and employee experience simple, fast and easy in order to drive efficiency. • Invest in the future to deliver top tier earnings performance consistently. 2013 $ 8,345 2,695 11,040 11,040 929 5,136 4,984 $ 3,654 2012 $ 8,023 2,629 10,652 10,688 1,151 4,988 4,884 $ 3,304 2011 $ 7,190 2,342 9,532 9,532 824 4,433 4,433 $ 3,051 92 104 – 20 $ 3,766 – $ 3,408 – $ 3,051 46.8% 48.3% 2.81% 2.81% 46.5% 45.1% 42.9% 44.2% 2.82% 2.84% 46.8% 45.7% 36.9% 36.9% 2.76% 2.76% 46.5% 46.5% 1,179 28,301 1,168 30,354 1,150 29,815 2 Effective 2012, the Bank revised its methodology for allocating capital to its business segments to align with the common equity capital requirements under Basel III at a 7% Common Equity Tier 1 ratio. The return measures for business segments will now be return on common equity rather than return on invested capital. These changes have been applied prospectively. Return on invested capital, which was used as the return measure in prior periods, has not been restated to return on common equity. 26 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS REVIEW OF FINANCIAL PERFORMANCE Canadian Personal and Commercial Banking reported net income for the year was a record $3,654 million, an increase of $350 million, or 11%, compared with last year. Adjusted net income for the year was a record $3,766 million, an increase of $358 million, or 11%, compared with last year. The increase in adjusted earnings was driven by good volume growth, lower credit losses, and effective expense management. The reported return on common equity for the year was 46.8%, while the adjusted return on common equity was 48.3%, compared with 42.9% and 44.2%, respectively, last year. Reported revenue for the year was $11,040 million, an increase of $388 million, or 4%, compared with last year. Adjusted revenue for the year was $11,040 million, an increase of $352 million, or 3%, compared with last year. Net interest income growth was driven by good portfolio volume growth, higher mortgage refinancing revenue, and an additional month of MBNA, partially offset by lower margin on average earning assets and the inclusion of the MBNA credit mark releases last year. Personal lending volume growth slowed throughout the year impacted by lower growth in the housing market, moderation in household borrowing, and regulatory changes in the Canadian market which tightened mortgage eligibility criteria. Business lending growth was strong and market share increased. Compared with last year, average real estate secured lending volume increased $8.9 billion, or 4%. Auto lending average volume increased $0.3 billion, or 2%, while all other personal lending average volumes were relatively flat. Business loans and acceptances average volumes increased $5.2 billion, or 13%. Average personal deposit volumes increased $6.3 billion, or 4%, due to strong growth in core chequing and savings volume, partially offset by lower term deposit volume. Average business deposit volumes increased $5.2 billion, or 8%. Reported margin on average earning assets decreased 1 bp to 2.81%, while the adjusted margin on average earning assets decreased 3 bps to 2.81%, due to a decline in deposit margins from the low rate environment. Non-interest income growth of 3% was driven by volume-related fee growth and the inclu- sion of an additional month of MBNA. PCL for the year was $929 million, a decrease of $222 million, or 19%, compared with last year. Personal banking PCL was $882 million for the year, a decrease of $206 million, or 19%, compared with last year due primarily to better credit performance, enhanced collection strate- gies, and lower bankruptcies. Business banking PCL was $47 million, a decrease of $16 million, due to higher recoveries. Annualized PCL as a percentage of credit volume was 0.30%, a decrease of 9 bps, compared with last year. Net impaired loans were $882 million, a decrease of $118 million, or 12%, compared with last year. Reported non-interest expenses for the year were $5,136 million, an increase of $148 million, or 3%, compared with last year. Adjusted non-interest expenses for the year were $4,984 million, an increase of $100 million, or 2%, compared with last year. Excluding the additional month of MBNA, expenses increased $72 million, or 1%, compared with last year, as volume growth, merit increases, and investment in initiatives to grow the business were largely offset by productivity gains. The average full-time equivalent (FTE) staffing levels decreased by 2,053, or 7%, compared with last year, primarily due to a transfer of FTEs to the Corporate segment. Operating FTE declined by 2% due to volume-related reductions and productivity gains. The reported efficiency ratio was 46.5%, relatively flat compared with 46.8% in the same period last year, while the adjusted efficiency ratio improved to 45.1%, compared with 45.7% in the same period last year. KEY PRODUCT GROUPS Personal Banking • Personal Deposits – TD delivered strong volume growth and main- tained its market share position due to a focus on acquiring and retaining core customer accounts. Market share in term deposits declined as the business reduced growth from higher cost, non- proprietary channels and fulfilled customer preference for other investment products. The business was able to largely offset the impact of the lower interest rate environment through pricing and investment strategies. • Consumer Lending – Volumes continued to grow but at a slower pace than recent years. TD maintained its leadership position in market share for real estate secured lending products, with a focus on increasing customer retention rates. • Credit Cards and Merchant Service – Growth in earnings continued in 2013 led by improved credit quality and volume growth. Management focus was on continued growth, the MBNA integration, and the newly announced Aeroplan agreement. • TD Auto Finance Canada – The business was able to grow its portfolio in a competitive market by producing financial solutions for dealerships, developing flexible vehicle financing options, and continuing its focus on service. Business Banking • Commercial Banking – Continued investments in customer-facing resources in strategic markets resulted in new customer acquisition that drove strong volume growth and market share gains. Higher loan and deposit volume growth was partially offset by lower margins. Credit losses decreased and are at the low end of normalized levels. • Small Business Banking – Continued investments in both deposit and credit infrastructure to improve speed to market and customer experience. Volume growth in the year was largely offset by declining margins. Credit losses remained relatively stable. BUSINESS OUTLOOK AND FOCUS FOR 2014 We will continue to focus on our legendary customer service and convenience position across all channels. Our commitment to invest across businesses positions us well for growth over the long term. We expect earnings growth to moderate in 2014 as credit loss rates stabilize. We expect the retail loan growth rate to generally be in line with current year levels. Business lending is expected to remain strong as we continue to focus on winning market share. Over the next year we expect modest downward pressure on margins, with quarterly margins bumping around depending on product mix, seasonal factors or rate moves. Credit loss rates should remain relatively stable; however, recent low personal bankruptcy trends will likely normalize next year. We plan to mitigate the impact of these pressures by focusing on productivity and tightly managing expense growth. We will continue the momentum in the credit cards business, including executing on the new Aeroplan relationship. Our key priorities for 2014 are as follows: • Provide a legendary customer experience across all distribution channels. • Continue the growth momentum in our businesses, building on platforms where we have made strategic investments. • Deliver integrated service and advice in local markets, across businesses and channels. • Keep our focus on productivity to enhance customer experience, employee satisfaction and shareholder value. • Continue to increase employee engagement and be recognized as an extraordinary place to work. 27 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISBUSINESS SEGMENT ANALYSIS Wealth and Insurance Wealth and Insurance comprises the Bank’s Wealth Management and Insurance businesses globally. Through our Direct Investing, Advice-based, and Asset Management businesses, TD Wealth helps individual and institutional clients protect, grow and successfully transition their wealth. TD Insurance provides advice and insurance solutions to protect Canadians through home and auto, credit protection, travel, credit card balance protection and other simple life and health products. $1,153 NET INCOME (millions of Canadian dollars) $257 Assets under Management $293 Assets under Administration ASSETS UNDER MANAGEMENT AND ASSETS UNDER ADMINISTRATION1,2 (billions of Canadian dollars) $3,772 GROSS ORIGINATED INSURANCE PREMIUMS (millions of Canadian dollars) $1,600 1,200 800 400 0 $300 250 200 150 100 50 0 $4,000 3,000 2,000 1,000 0 11 12 13 11 12 13 11 12 13 11 12 13 Assets under management Assets under administration T A B L E 1 8 REVENUE 3, 4 (millions of Canadian dollars) Direct investing Advice-based Asset management Insurance5 Total Wealth and Insurance5 2013 $ 818 1,223 1,071 3,825 $ 6,937 2012 $ 793 1,101 876 3,673 $ 6,443 2011 $ 893 1,056 830 3,439 $ 6,218 1 Assets under management: Assets owned by clients, but managed by the Bank where the Bank makes investment selections on behalf of the client (in accordance with an investment policy). In addition to the TD family of mutual funds, the Bank manages assets on behalf of individuals, pension funds, corporations, institutions, endowments and foundations. 2 Assets under administration: Assets owned by clients where the Bank provides services of an administrative nature, such as the collection of investment income and the placing of trades on behalf of the clients (where the client has made their own investment selection). 3 Excludes the Bank’s investment in TD Ameritrade. 4 Certain revenue lines are presented net of internal transfers. 5 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts have been reclassified to conform with this presentation. 28 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS HIGHLIGHTS • Wealth had record earnings in 2013 with net income of $691 million and Insurance had earnings in 2013 of $216 million. • The Canadian Direct Investing business sustained a market leading position in both share of assets and trades and continued to invest for the future with the launch of an enhanced active trading platform. In the fourth quarter of 2013, TD announced the sale of the Canadian Institutional Services business and closed the sale of the U.K. Institutional Services business on November 13, 2013. • Our Advice-based businesses in Canada achieved record Client Experience Index (CEI) ratings and continued to gain market share as measured by assets. • TDAM, the manager of TD Mutual Funds, had record assets under management of $257 billion. Several TD funds were recognized by Lipper as the top fund in their respective category over a three, five and ten-year time period. • TD completed the acquisition of Epoch Investment Partners, Inc., which had $38 billion in assets under management as at October 31, 2013, up from $28 billion on close, inclusive of $5 billion of assets previously managed by TDAM and external sub-advisors. The addition of Epoch significantly expanded TD’s North American investment management footprint while strengthening Epoch’s existing franchise and competitive advantage. • TD Insurance gross originated insurance premiums grew 6%. TD’s property and casualty Insurance business grew affinity market premiums by 10% and retained the #1 direct writer position in home and auto and the #2 in personal lines position. • Ongoing focus on client experience in 2013 resulted in increase in CEI ratings for TD Insurance. • TD Insurance processed over 292,000 claims across Canada, helping clients and their families in their times of need. CHALLENGES IN 2013 • In our Wealth business, Direct Investing trading volumes improved, but continued to be below historical norms, which impacted the growth rate of Direct Investing revenue. • Persistently low interest rate environment continued to limit our ability to grow revenue on deposits. • The property and casualty Insurance business experienced unfavourable prior years’ claims development related primar- ily to Ontario auto insurance, as well as higher claims costs due to severe weather-related events, including the flood in Southern Alberta and the Greater Toronto Area in the third quarter of 2013. As a result, Insurance earnings declined significantly year over year. • Slowing lending volume growth in TD Canada Trust resulted in reduced demand for authorized credit protection products in the life and health insurance business. INDUSTRY PROFILE TD Wealth’s business operates in three geographic regions: Canada, the U.S., and Europe. In Canada, the industry is extremely competitive consisting of major banks, large insurance companies, and monoline wealth management organizations (including mutual fund companies and private wealth managers, asset managers and financial planners). Given the level of competition in Canada, TD’s success lies in our abil- ity to differentiate on client experience across all of our businesses and channels by providing the right products, services, tools and solutions to serve our clients’ needs. In the U.S., the wealth management industry is large but competi- tion is more fragmented, consisting of banks, insurance companies, independent mutual fund companies, discount brokers, full service brokers, and independent asset management companies. In our Maine-to-Florida footprint, the Bank competes against both national and regional banks and non-bank wealth organizations. TD Ameritrade, in which TD has a substantial investment, competes most directly with other direct investment firms. TD Ameritrade remains a leader in this market by continuing to deliver world-class direct investing capabilities to clients, including investor tools, services and education. In Europe, the industry is led by strong regional players with little pan-European presence or brand. In the U.K., TD competes most directly with other direct investment firms and institutional services firms. In Europe, TD competes by providing focused multi-currency and multi-exchange online direct investing services for retail investors. TD Insurance operates in both the Canadian property and casualty insurance, and the life and health insurance industries. The property and casualty industry in Canada is a fragmented and competitive market, consisting of both personal and commercial lines writers. However, TD Insurance only offers personal lines (home and auto) insurance products to clients. The personal lines property and casualty industry uses both independent intermediaries and direct channels to distribute products. TD Insurance only distributes products through direct channels. In recent years, there has been a growing trend by consumers to purchase home and auto insurance through direct channels. TD Insurance partners with affinity groups such as professional associations, universities and employer groups to market personal lines insurance products, and is the largest affinity writer in Canada. The life and health insurance industry in Canada, and the reinsur- ance market internationally, while more consolidated, is made up of several larger competitors. TD Insurance competes as a Direct Life and Health insurance provider offering a range of affordable and simple insurance solutions, and through TD Canada Trust branches, offers bank authorized credit protection products as part of the lending process, and travel insurance. OVERALL BUSINESS STRATEGY Wealth • Global Direct Investing builds on existing market leadership positions by offering best-in-class capabilities, tools, service and investor education, and by extending our comfort and convenience brand with continued investment in intuitive functionality. • The North American Advice-based business continues to grow by enhancing the overall client experience and by providing comprehen- sive investment and wealth planning services and solutions to help retirees and pre-retirees protect, grow and transition their wealth. • The Asset Management business continues to grow by creating targeted product solutions that serve our institutional and retail clients’ needs, and that align well with our distribution channels and capabilities. Insurance The strategy for TD Insurance is to: • Be the preferred insurer for TD Bank and affinity partner clients, and the #1 direct writer in Canada. • Deliver legendary sales, service and claims client experiences that align to the TD brand. • Offer simple insurance products that are easy to understand and access. • Continue to invest in well-run and efficient operations and technology infrastructure. 29 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 1 9 WEALTH AND INSURANCE (millions of Canadian dollars, except as noted) Net interest income Insurance revenue1 Income from financial instruments designated at fair value through profit or loss Non-interest income – other Total revenue1 Insurance claims and related expenses1 Non-interest expenses Net income Wealth Insurance TD Ameritrade Total Wealth and Insurance Selected volumes and ratio Assets under administration – Wealth (billions of Canadian dollars) Assets under management – Wealth (billions of Canadian dollars)2 Gross originated insurance premiums Return on common equity3 Efficiency ratio1 Average number of full-time equivalent staff 2013 $ 579 3,734 (18) 2,642 6,937 3,056 2,821 907 691 216 246 $ 1,153 2012 $ 583 3,537 5 2,318 6,443 2,424 2,600 1,158 601 557 209 $ 1,367 2011 $ 542 3,345 (2) 2,333 6,218 2,178 2,616 1,107 566 541 207 $ 1,314 $ 293 257 3,772 18.9% 40.7% $ 258 207 3,572 20.7% 40.4% $ 237 189 3,326 25.3% 42.1% 11,610 11,930 11,984 1 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts, including certain ratios, have been recast to conform with the current period presentation. 2 As at October 31, 2013, the Wealth assets under management includes $38 billion related to Epoch. 3 Effective 2012, the Bank revised its methodology for allocating capital to its business segments to align with the common equity capital requirements under Basel III at a 7% Common Equity Tier 1 ratio. The return measures for business segments will now be return on common equity rather than return on invested capital. These changes have been applied prospectively. Return on invested capital, which was used as the return measure in prior periods, has not been restated to return on common equity. REVIEW OF FINANCIAL PERFORMANCE Wealth and Insurance net income for the year was $1,153 million, a decrease of $214 million, or 16%, compared with last year, reflecting lower earnings in the Insurance business, partially offset by higher earnings in Wealth and TD Ameritrade. Wealth and Insurance net income excluding TD Ameritrade was $907 million, a decrease of $251 million, or 22%, compared with last year. The Bank’s reported investment in TD Ameritrade generated net income for the year of $246 million, an increase of $37 million, or 18%, compared with last year, mainly driven by higher TD Ameritrade earnings. For its fiscal year ended September 30, 2013, TD Ameritrade reported net income was US$675 million, an increase of US$89 million, or 15%, compared with last year, primarily driven by higher trading and fee-based revenue, and increased investment gains. The return on common equity for the year was 18.9% compared with 20.7% last year. Revenue for the year was $6,937 million, an increase of $494 million, or 8%, compared with last year. In the Wealth business, revenue increased mainly from higher fee-based revenue from asset growth and equity market appreciation, and the addition of Epoch. In the Insurance business, revenue increased mainly from premium volume growth, partially offset by the sale of the U.S. Insurance business. Insurance claims and related expenses for the year were $3,056 million, an increase of $632 million, or 26%, compared with the last year, primarily due to unfavourable prior years’ claims development related to the Ontario auto insurance market, and higher claims associated with volume growth and weather-related events. Non-interest expenses for the year were $2,821 million, an increase of $221 million, or 9%, compared with last year. The increase was primarily due to higher revenue-based variable expenses in the Wealth business, the addition of Epoch, and increased costs to support busi- ness growth in Wealth and Insurance, partially offset by decreased expenses resulting from the sale of the U.S. Insurance business. Assets under administration of $293 billion as at October 31, 2013 increased $35 billion, or 14%, compared with October 31, 2012. Assets under management of $257 billion as at October 31, 2013 increased $50 billion, or 24%, compared with October 31, 2012. These increases were driven by market appreciation of the assets, the addition of Epoch assets under management, and growth in new client assets. Gross originated insurance premiums were $3,772 million, an increase of $200 million, or 6%, compared with last year. The increase was primarily due to organic business growth. The average FTE staffing levels for the year decreased by 320, or 3%, compared with last year primarily due to the sale of the U.S. Insurance business. The efficiency ratio for the year was 40.7%, relatively flat compared with last year. TD AMERITRADE HOLDING CORPORATION Refer to Note 11 of the Consolidated Financial Statements for further information on TD Ameritrade. 30 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS KEY PRODUCT GROUPS Global Direct Investing • TD Waterhouse Direct Investing offers a comprehensive product and service offering to self-directed retail investors. In Canada, TD Waterhouse Direct Investing is the largest direct investing business by assets under administration and also by trade volume. In Europe, TD Direct Investing provides a broad range of products available for trading and investing, including trading on U.K. and international equities, with direct access to 17 markets. North American Advice-based Business • The Advice-based business is comprised of financial planning, full service brokerage and private client services and is integrated with our Canadian and U.S. Retail and Commercial Banking businesses. The business provides investment solutions and advice, across differ- ent client asset levels and product complexity, to meet our clients’ goals in protecting, growing and transitioning their wealth. Asset Management • TDAM is a leading investment manager, with deep retail and institu- tional capabilities. In Canada, TD Mutual Funds is a leading mutual fund business, providing a broadly diversified range of mutual funds and professionally managed portfolios. TDAM’s institutional invest- ment business has a leading market share in Canada and includes clients of some of the largest pension funds, endowments and corpo- rations in Canada. Epoch Investment Partners Inc., acquired in 2013, manages $38 billion of assets as at October 31, 2013 for institutional and high net worth clients primarily in the U.S. and Canada. All asset management units work in close partnership with other TD businesses, including the Advice-based business and Retail Banking, to align products and services to ensure a legendary client experience. Insurance • TD’s property and casualty Insurance business is the largest direct distribution insurer, and the second largest personal insurer in Canada and the national leader in the affinity market offering home and auto insurance to members of affinity groups such as professional associations, universities and employer groups, and other clients, through direct channels. • TD’s life and health Insurance business offers credit protection and travel insurance products mostly distributed through TD Canada Trust branches. Other simple life and health insurance products such as term life, critical illness, accident and sickness, and credit card balance protection are distributed through direct channels. BUSINESS OUTLOOK AND FOCUS FOR 2014 Building upon our market leading positions in the Wealth busi- nesses, we plan to grow client assets, improve client experience and expand our range of products, services and solutions, while managing expenses prudently and investing in key capabilities and processes. While general economic challenges may persist in the short term, we believe that the Wealth businesses can achieve solid earnings in the year ahead, and are well positioned to benefit from long term demographic shifts. While regulatory developments are creating uncertainties in the Ontario auto insurance market, and severe weather-related events in recent years will negatively impact the cost and availability of reinsurance, we believe, despite these challenges, the Insurance business has good long-term growth prospects. We plan to continue to improve client experience, invest in capabilities and improve efficiencies in our core operations. Our key priorities for 2014 are as follows: Wealth: • Build on our leadership in the Global Direct Investing busi- ness by introducing new client solutions and improving the client experience. • Grow share in our North American Advice-based business by deepening our referral partnership with TD’s U.S. and Canadian Personal and Commercial Banking segments, creating solutions to address our clients’ individual investing needs, and enhanc- ing the overall client experience. • Leverage our premier asset management capabilities to grow both our mutual funds and our institutional Asset Management business. Insurance: • Review and enhance insurance products to ensure that they are competitive, provide the protection our clients need, and are easy to understand. • Invest in robust systems and processes that are more client- centric and operationally efficient, and that have a prudent risk profile. • Develop innovative and convenient ways for our clients to access insurance products by phone, on-line, mobile and tablet. • Work collaboratively with governments, regulators and industry bodies to ensure the availability of affordable home and auto insurance to Canadians. 31 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISBUSINESS SEGMENT ANALYSIS U.S. Personal and Commercial Banking Operating under the brand name, TD Bank, America’s Most Convenient Bank, U.S. Personal and Commercial Banking offers a full range of banking services to nearly 8 million customers including individuals, businesses, and governments. $1,527 Reported $1,627 Adjusted NET INCOME (millions of Canadian dollars) 63.8% Reported 62.1% Adjusted EFFICIENCY RATIO (percent) $1,800 1,500 1,200 900 600 300 0 80% 60 40 20 0 11 12 13 11 12 13 Reported Adjusted Reported Adjusted T A B L E 2 0 ASSETS1 (millions of dollars) Consumer loans Business and government loans Debt securities classified as loans Investment securities Other assets Total 1 Excluding all goodwill and other intangibles. Canadian dollars October 31 2013 $ 56,238 53,996 2,459 33,065 4,662 $ 150,420 October 31 2012 $ 43,721 47,546 2,898 37,354 2,242 $ 133,761 October 31 2011 $ 35,004 43,057 3,804 43,562 2,695 $ 128,122 October 31 2013 $ 53,935 51,785 2,359 31,711 4,471 $ 144,261 October 31 2012 $ 43,765 47,594 2,901 37,391 2,244 $ 133,895 U.S. dollars October 31 2011 $ 35,120 43,200 3,817 43,706 2,703 $ 128,546 32 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS HIGHLIGHTS • Achieved record adjusted earnings of US$1,595 million, an increase of 13%, in a challenging operating environment. • Gained profitable market share in both loans and deposits while maintaining strong credit quality. • Grew loans organically by US$9 billion, or 10%, and deposits by US$17 billion, or 10%, during a slow economic recovery. • Continued to lead in customer service and convenience with more store hours than competitors in our Maine-to- Florida footprint. • Continued to invest in growing the franchise. • Asset quality has improved for the overall portfolio. • Named the 2013 “Best Big Bank in America” by Money Magazine. • Acquired Target Corporation’s U.S. credit card portfolio in March 2013. CHALLENGES IN 2013 • Regulatory and legislative changes have impacted the operat- ing environment, TD Bank’s product offerings and earnings. • Low interest rate environment and heightened competition led to continued pressure on margins. INDUSTRY PROFILE The U.S. banking industry has experienced a significant amount of consolidation over the past few years. The personal and business banking environment in the U.S. is very competitive in all areas of the business. U.S. banks are subject to vigorous competition from other banks and financial institutions, including savings banks, finance companies, credit unions, and other providers of financial services. The keys to profitability are attracting and retaining customer relationships over the long term with innovative conve- nience and service brands within our operating footprint, effective risk management, rational product pricing, use of technology to deliver products and services for customers anytime and anywhere, optimizing fee-based businesses, and effective control of operating expenses. In the U.S., the wealth management industry is large but competition is more fragmented, consisting of banks, insurance companies, independent mutual fund companies, discount brokers, full service brokers, and independent asset management companies. In our Maine-to-Florida footprint, the Bank competes against both national and regional banks and non-bank wealth organizations. OVERALL BUSINESS STRATEGY The strategy for U.S. Personal and Commercial Banking is to: • Focus on retail and commercial banking in higher growth markets along the U.S. Eastern Seaboard. • Out-grow competitors through legendary service and convenience and by delivering integrated banking services to the customer. • Make customers proud to be associated with TD Bank. • Be an extraordinary and inclusive place to work – attract, develop, and retain top talent. • Operate with excellence. • Take only risks we understand and can manage and deploy capital prudently within a well-defined risk appetite. T A B L E 2 1 U.S. PERSONAL AND COMMERCIAL BANKING (millions of dollars, except as noted) Canadian dollars U.S. dollars Net interest income Non-interest income Total revenue – reported Total revenue – adjusted Provision for credit losses – loans Provision for credit losses – debt securities classified as loans Provision for credit losses – acquired credit-impaired loans1 Provision for credit losses – reported Provision for credit losses – adjusted Non-interest expenses – reported Non-interest expenses – adjusted Net income – reported Adjustments for items of note2 Integration charges and direct transaction costs relating to U.S. Personal and Commercial Banking acquisitions Litigation and litigation-related charge/reserve Impact of Superstorm Sandy Net income – adjusted Selected volumes and ratios Return on common equity – reported3 Return on common equity – adjusted3 Margin on average earning assets (TEB)4 Efficiency ratio – reported Efficiency ratio – adjusted Number of U.S. retail stores Average number of full-time equivalent staff 2013 $ 5,172 1,957 7,129 7,129 762 (32) 49 779 779 4,550 4,424 $ 1,527 – 100 – $ 1,627 2012 $ 4,663 1,468 6,131 6,132 652 12 115 779 725 4,125 3,694 $ 1,128 9 248 37 $ 1,422 2011 $ 4,392 1,342 5,734 5,734 534 75 78 687 687 3,593 3,451 $ 1,188 82 – – $ 1,270 2013 $ 5,068 1,916 6,984 6,984 746 (31) 49 764 764 4,457 4,331 $ 1,495 – 100 – $ 1,595 2012 $ 4,643 1,463 6,106 6,107 651 12 115 778 723 4,107 3,678 $ 1,123 9 247 37 $ 1,416 2011 $ 4,455 1,363 5,818 5,818 541 75 82 698 698 3,643 3,497 $ 1,205 84 – – $ 1,289 8.1% 8.6% 3.66% 63.8% 62.1% 6.4% 8.1% 3.60% 67.3% 60.2% 7.3% 7.8% 3.73% 62.7% 60.2% 8.1% 8.6% 3.66% 63.8% 62.1% 6.4% 8.1% 3.60% 67.3% 60.2% 7.3% 7.8% 3.73% 62.7% 60.2% 1,317 24,871 1,315 25,027 1,281 24,193 1,317 24,871 1,315 25,027 1,281 24,193 1 Includes all Federal Deposit Insurance Corporation (FDIC) covered loans and other acquired credit-impaired loans. 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. 3 Effective 2012, the Bank revised its methodology for allocating capital to its business segments to align with the common equity capital requirements under Basel III at a 7% Common Equity Tier 1 ratio. The return measures for business segments will now be return on common equity rather than return on invested capital. These changes have been applied prospectively. Return on invested capital, which was used as the return measure in prior periods, has not been restated to return on common equity. 4 Margin on average earning assets exclude the impact related to the TD Ameritrade insured deposit accounts (IDA). 33 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS REVIEW OF FINANCIAL PERFORMANCE U.S. Personal and Commercial Banking reported net income, in Canadian dollar terms, for the year was $1,527 million, an increase of $399 million, or 35%, compared with last year. Adjusted net income for the year was $1,627 million, an increase of $205 million, or 14%, compared with last year. In U.S. dollar terms, reported net income for the year was US$1,495 million, an increase of US$372 million, or 33%, compared with last year and adjusted net income was US$1,595 million, an increase of US$179 million, or 13%. Results include activity related to the credit card program agreement with Target Corporation subsequent to the acquisition of approximately US$6 billion of credit card receivables on March 13, 2013. Revenue and expenses related to Target are reported on a gross basis on the Consolidated Statement of Income and non- interest expenses include the Bank’s expenses related to the business, and amounts due to Target Corporation under the credit card program agreement. The increase in adjusted earnings was primarily due to strong loan and deposit volume and higher fee-based revenue, and increased gains on sales of securities and debt securities classified as loans, partially offset by higher expenses to support growth and lower margins. The reported return on common equity for the year was 8.1%, while the adjusted return on common equity was 8.6%, compared with 6.4% and 8.1%, respectively, last year. In U.S. dollar terms, adjusted revenue for the year was US$6,984 million, an increase of US$877 million, or 14%, compared with last year driven by the inclusion of revenue from Target, increased loan and deposit volume, higher fee-based revenue, and gains on sales of securities and debt securities classified as loans, partially offset by lower margins and loan accretion. Excluding Target, average loans increased by US$11 billion, or 13%, compared with last year with an increase of US$7 billion, or 19%, in average personal loans and an increase of US$4 billion, or 8%, in average business loans. In the current year, US$6 billion in credit cards outstanding were added due to Target. Average deposits increased US$17 billion, or 10%, compared with prior year, including a US$9 billion increase in average deposits of TD Ameritrade. Excluding the impact of TD Ameritrade IDAs, average deposit volume increased by US$8 billion, or 7%. Margin on average earning assets for the year was 3.66%, a 6 bps increase compared with last year primarily due to the impact of Target, partially offset by core margin compression. Reported PCL for the year was US$764 million, a decrease of US$14 million, or 2%, compared with last year. Adjusted PCL for the year was US$764 million, an increase of US$41 million, or 6%, compared with last year. Personal banking PCL was US$638 million, an increase of US$247 million, or 63%, from the prior year due primarily to Target and increased provisions in auto loans. Business banking PCL was US$155 million, a decrease of US$165 million, or 52%, compared with prior year reflecting improved credit quality in commercial loans. PCL as a percentage of credit volume for loans excluding debt securities classified as loans was 0.75%, a decrease of 3 bps, compared with last year. Net impaired loans, excluding acquired credit-impaired loans and debt securities classified as loans, as a percentage of total loans were 1.3% as at October 31, 2013, compared with 1.2% as at October 31, 2012. Acquired credit-impaired loans were US$2.3 billion as at October 31, 2013 compared with US$3.8 billion as at October 31, 2012, while net impaired debt securities classified as loans were US$0.9 billion as at October 31, 2013 compared with US$1.3 billion as at October 31, 2012. Reported non-interest expenses for the year were US$4,457 million, an increase of US$350 million, or 9%, compared with last year. On an adjusted basis, non-interest expenses were US$4,331 million, an increase of US$653 million, or 18%, compared with last year due primarily to increased expenses related to Target, investments in new stores and other planned initiatives, partially offset by productivity gains. The average FTE staffing levels for the year decreased by 156, or 1%, reflecting efficiencies in store network operations including optimization of store locations and planned declines in TD Auto Finance U.S. The reported efficiency ratio for the year improved to 63.8%, compared with 67.3% last year, while the adjusted efficiency ratio for the year worsened to 62.1%, compared with 60.2% last year. 34 KEY PRODUCT GROUPS Personal Banking • Personal Deposits – Our product offerings include a large variety of chequing and savings products, along with money markets and certificates of deposits. We continued to build on our reputation as America’s Most Convenient Bank by opening 24 new stores in fiscal 2013. We delivered strong year-over-year growth driven by maturing stores and a competitive product offering. • Consumer Lending – Our principal product offerings of home equity loans and lines of credit, credit cards, and auto loans offered through a network of auto dealers continued to grow organically and through strategic acquisitions. Loan loss rates have improved over the prior year and remain in line with the industry. • Residential Real Estate Secured Lending – We offer various mortgage products, including fixed and variable rate loans, through our resi- dential lending unit. We grew profitable market share and franchise customers through higher originations, with strong credit quality, during a tough economic environment. Store-based originations are a key focus to leverage cross-selling opportunities. • Small Business Banking and Merchant Services – We offer specialized products designed for the small business including an array of deposit products and loan products, including long term business mortgages, lines of credit, credit cards, and small business loans. The Small Business Banking group continues to be among the top ranked small business lenders in most of our markets. Merchant Services offer point-of-sale settlement solutions for debit and credit card transac- tions, supporting over 17,000 business locations in our footprint. Commercial Banking • Commercial Banking – Commercial Banking provides commercial customers with a comprehensive array of lending products and ancillary services. We handle the financial needs of a wide range of commercial customers including those with special borrowing needs in discrete loan producing business units such as healthcare, corporate real estate, asset based lending, equipment finance and dealer commercial services. Commercial and industrial loan demand increased significantly while commercial real estate demand remained relatively low resulting in strong overall loan growth at competitive spreads. Commercial loan volume growth significantly outperformed peers. Loan losses continue to improve throughout the portfolio and our overall asset quality remains better than the industry. BUSINESS OUTLOOK AND FOCUS FOR 2014 For 2014, our assumption is for continued modest but variable economic growth, and continued low short term interest rates, while longer term rates will likely stay historically low, but with some volatility. We expect competition for loans will remain intense, credit will remain benign, and regulatory developments will pose challenges. Earnings should be characterized by a higher net interest margin as a result of the full year effect of Target and reinvestment of assets at higher rates, offset by lower levels of security gains and higher levels of provision for credit losses. We should continue to outgrow our competition, but loan growth will likely slow, largely due to lower levels of mortgage refinancing. Moderating expense growth, while we continue to invest in growth and regulatory compliance, will remain a focus. Given these assumptions, we expect a challeng- ing 2014 with modest growth in adjusted earnings. Our key priorities for 2014 are as follows: • Continue broad-based organic growth of loans and deposits, while adhering to a conservative risk appetite. • Continue to deliver convenient banking solutions and services that exceed customer expectations. • Continue business expansion by opening new stores in larger markets such as New York, Florida, and Boston. • Improve efficiency and productivity to counter the challenging operating environment and drive long-term competitiveness. • Broaden and deepen customer relationships through cross- selling initiatives. • Continue to optimize the balance sheet including possible asset acquisitions. TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISBUSINESS SEGMENT ANALYSIS Wholesale Banking Wholesale Banking serves a diverse base of corporate, government, and institutional clients in key global financial centres. $648 NET INCOME (millions of Canadian dollars) $2,407 TOTAL REVENUE (millions of Canadian dollars) $47 RISK-WEIGHTED ASSETS (billions of Canadian dollars) $1,000 800 600 400 200 0 $3,000 2,500 2,000 1,500 1,000 500 0 $50 40 30 20 10 0 11 12 13 11 12 13 11 12 13 T A B L E 2 2 REVENUE (millions of Canadian dollars) Investment banking and capital markets Corporate banking Equity investments Total 2013 $ 1,854 479 74 $ 2,407 2012 $ 1,987 448 219 $ 2,654 2011 $ 1,724 453 319 $ 2,496 35 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS HIGHLIGHTS • Return on common equity of 15.6%. • Solid performance across core businesses despite challenging capital markets environment. • Higher government and corporate fixed income underwriting primarily due to improved new issue volumes. • Simplifying the infrastructure model to be more efficient and agile. • Maintained top-three dealer status in Canada (for the nine- month period ended September 30, 2013): – #1 in equity block trading – #1 in corporate debt underwriting – #3 in government debt underwriting – #3 in syndications (on rolling 12 month basis) – #3 in equity underwriting (full credit-to-book runner) CHALLENGES IN 2013 • Low interest rates and subdued markets led to reduced trading opportunities. a negative impact on investor confidence and affected the industry. Low rates and volatility driven by market uncertainty and liquidity concerns added downward pressure to asset prices, trading volumes and investor activities causing wholesale banks to continue to focus on client driven businesses and risk management. However, fixed income government and corporate issuances were strong throughout the year. Looking at the long term, wholesale businesses that have a diversified client-focused business model, offer a wide range of products and services, and exhibit effective cost management will be well positioned as investor confidence returns and markets improve. OVERALL BUSINESS STRATEGY • Our goal is to enhance our client-centric franchise model and main- tain a prudent risk profile by providing wholesale banking products and services to high quality clients and counterparties in liquid and transparent financial markets. • We focus on meeting client needs by providing superior advice and execution of client-driven transactions. • In Canada, the strategic objective is to strengthen our position • Global fiscal challenges caused investor uncertainty and as a top investment dealer. reduced volumes. • Regulatory reform continued to apply pressure on business activities. INDUSTRY PROFILE The wholesale banking sector in Canada is a mature market with competition primarily coming from the Canadian banks, large global investment firms, and independent niche dealers. Despite early signs of gradual improvement in the markets in the first half of the year driven by positive economic data and central banks stimulus, the trading environment remained challenging in 2013. Headwinds such as the uncertainty over the U.S. Federal Reserve’s tapering of asset purchases, fiscal retrenchment and political uncertainty all had • In the U.S., our objective is to extend the goals of the Canadian franchise and leverage our network of U.S. businesses. We will also continue to grow government fixed income, currency, commodities, and origination businesses. • Globally, we seek to extend the goals of our North American fran- chise, including trading in liquid currencies, as well as underwriting, distributing, and trading high quality fixed income products of highly rated issuers. • We support and enhance TD’s brand working in partnership with other TD segments to offer premium products and services for our collective client base. T A B L E 2 3 WHOLESALE BANKING (millions of Canadian dollars, except as noted) Net interest income (TEB) Non-interest income Total revenue Provision for credit losses Non-interest expenses Net income Selected volumes and ratios Trading-related revenue Risk-weighted assets (billions of Canadian dollars) 1, 2 Return on common equity 3 Efficiency ratio Average number of full-time equivalent staff 2013 $ 1,982 425 2,407 26 1,541 $ 648 2012 $ 1,805 849 2,654 47 1,570 $ 880 2011 $ 1,659 837 2,496 22 1,468 $ 815 $ 1,270 47 15.6% 64.0% 3,536 $ 1,334 43 21.2% 59.2% 3,553 $ 1,069 35 24.3% 58.8% 3,517 1 Prior to 2012, the amounts were calculated based on Canadian GAAP. 2 Effective 2013, amounts are calculated in accordance with the Basel III regulatory framework, excluding Credit Valuation Adjustment (CVA) capital in accordance with Office of the Superintendent of Financial Institutions Canada (OSFI) guidance, and are presented based on the “all-in” methodology. In 2012, amounts were calculated in accordance with the Basel II regulatory framework inclusive of Market Risk Amendments. Prior to 2012, amounts were calculated in accordance with the Basel II regulatory framework. 3 Effective 2012, the Bank revised its methodology for allocating capital to its business segments to align with the common equity capital requirements under Basel III inclusive of CVA capital at a 7% Common Equity Tier 1 rate. Prior to 2012, return on invested capital was used as the return measure. 36 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS REVIEW OF FINANCIAL PERFORMANCE Wholesale Banking net income for the year was $648 million, a decrease of $232 million, or 26%, compared with last year. The decrease in earnings was due to lower revenue and a higher effective tax rate, partially offset by lower non-interest expenses. The return on common equity for the year was 15.6%, compared with 21.2% last year. Revenue for the year was $2,407 million, a decrease of $247 million, or 9%, compared with last year. Revenue declined primarily due to significantly lower security gains in the investment portfolio, lower trad- ing-related revenue and M&A and advisory fees. This was partially offset by higher debt underwriting and loan fees. Trading-related revenue was lower as the prior year included trading gains that were previously considered impaired and M&A fees decreased on lower industry wide volumes. This was partially offset by increased debt underwriting fees on improved client activity while capturing a higher market share. Loan fees improved due to higher credit originations and volume growth. PCL comprises specific provision for credit losses and accrual costs for credit protection. The change in market value of the credit protection, in excess of the accrual cost, is reported in the Corporate segment. PCL for the year was $26 million, a decrease of $21 million, or 45%, compared with last year. The decrease in PCL was primarily due to a loss on a single name in the corporate lending portfolio in the prior year. PCL in the current year primarily comprised the accrual cost of credit protection. Non-interest expenses for the year were $1,541 million, a decrease of $29 million, or 2%, compared with last year primarily due to lower variable compensation commensurate with revenue. Risk-weighted assets were $47 billion as at October 31, 2013, an increase of $4 billion, or 9%, compared with October 31, 2012. The increase was due to the implementation of the Basel III regu- latory framework. The average FTE staffing levels decreased by 17 compared with last year. KEY PRODUCT GROUPS Investment Banking and Capital Markets • Investment banking and capital markets revenue, which includes advisory, underwriting, trading, facilitation, and execution services, decreased over last year. The decrease was primarily due to reduced M&A fees on lower industry-wide volumes and lower trading-related revenue as the prior year included trading gains that were previously considered impaired. Corporate Banking • Corporate banking revenue which includes corporate lending, trade finance and cash management services increased over last year driven by higher fee revenue and solid loan volumes. Equity Investments • The equity investment portfolio, which we are in the process of exiting, consists primarily of private equity investments. Equity investment gains were significantly lower than the prior year. BUSINESS OUTLOOK AND FOCUS FOR 2014 We are encouraged by the gradual improvement in capital markets and the economy, but a combination of fiscal chal- lenges in Europe and the U.S., slower commodity markets and the impact of regulatory reform will affect trading conditions in the medium term. The uncertainty over the U.S. Federal Reserve’s tapering of asset purchases has created volatility in the global markets. The instability in the macro-economic envi- ronment impacts overall corporate and investor sentiment; however, we expect that our strong franchise businesses will continue to deliver solid results. We continue to stay focused on serving our clients, being a valued counterparty, growing our franchise, managing our risks and reducing expenses. Our key priorities for 2014 are as follows: • Continue to grow the franchise by broadening and deepening client relationships. • Be the top ranked investment dealer in Canada by increasing our origination footprint and competitive advantage with Canadian clients. • Extend the goals of the Canadian franchise to the U.S. • Be totally aligned to enterprise partners and their clients. • Continue to invest in an efficient, effective and robust infrastructure to adapt to industry and regulatory changes. 37 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISBUSINESS SEGMENT ANALYSIS Corporate Corporate segment provides centralized advice and counsel to key businesses and comprises the impact of treasury and balance sheet management, general provisions for credit losses, tax items at an enterprise level, the elimination of taxable equivalent and other intercompany adjustments, and residual unallocated revenue and expenses. T A B L E 2 4 CORPORATE (millions of Canadian dollars) Net income (loss) – reported Adjustments for items of note: Decrease (increase) in net income1 Amortization of intangibles Fair value of derivatives hedging the reclassified available-for-sale securities portfolio Fair value of credit default swaps hedging the corporate loan book, net of provision for credit losses Integration charges, direct transaction costs, and changes in fair value of contingent consideration relating to the Chrysler Financial acquisition Reduction of allowance for incurred but not identified credit losses2 Positive impact due to changes in statutory income tax rates Impact of Alberta flood on the loan portfolio Restructuring charges Total adjustments for items of note Net income (loss) – adjusted Decomposition of items included in net gain (loss) – adjusted Net corporate expenses Other Non-controlling interests Net income (loss) – adjusted 2013 $ (320) 232 (57) – – – – 19 90 284 $ (36) (508) 367 105 $ (36) 2012 $ (208) 238 89 – 17 (120) (18) – – 206 (2) $ (433) 327 104 (2) $ 2011 $ (323) 391 (128) (13) 55 – – – – 305 (18) $ (367) 245 104 (18) $ 1 For explanation 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 Beginning in 2013, the change in the “reduction of allowance for incurred but not identified credit losses” in the normal course of business relating to Canadian Personal and Commercial Banking and Wholesale Banking is included in Corporate segment adjusted net income and is no longer be recorded as an item of note. The Corporate segment reported net loss for the year was $320 million, compared with a reported net loss of $208 million last year. The adjusted net loss for the year was $36 million, compared with an adjusted net loss of $2 million last year. The year-over-year change in the adjusted net loss was primarily attributable to the increase in net corporate expenses, lower gains from treasury and other hedging activities, partially offset by the favourable impact of tax items and the reduction of the allowance for incurred but not identified credit losses relating to the Canadian loan portfolio. CORPORATE MANAGEMENT The Corporate segment’s mandate is to provide centralized advice and counsel to our key businesses and to those who serve our global customers directly. This includes support from a wide range of func- tional groups, as well as the design, development, and implementation of processes, systems, and technologies to ensure that the Bank’s key businesses operate efficiently, reliably, and in compliance with all applicable regulatory requirements. The corporate management function of the Bank includes audit, legal, anti-money laundering, compliance, corporate and public affairs, regulatory relationships and government affairs, economics, enterprise technology solutions, finance, treasury and balance sheet management, people strategies, marketing, Office of the Ombudsman, enterprise real estate management, risk management, global physical security, strategic sourcing, global strategy, enterprise project management, corporate environment initiatives, and corporate development. The enterprise Direct Channels and Distribution Strategy group is part of Corporate operations and is responsible for the online, phone, and ABM/ATM channels, delivering a best-in-class experience across TD’s North American businesses. The vision of the group is to create an even more integrated, seamless, effortless, and legendary customer experience for TD Bank, America’s Most Convenient Bank, TD Canada Trust, and TD Wealth and Insurance. Ensuring that the Bank stays abreast of emerging trends and developments is vital to maintaining stakeholder confidence in the Bank and to addressing the dynamic complexities and challenges from changing demands and expectations of our customers, shareholders and employees, governments, regulators, and the community at large. 38 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS 2012 FINANCIAL RESULTS OVERVIEW Summary of 2012 Performance T A B L E 2 5 REVIEW OF 2012 FINANCIAL PERFORMANCE (millions of Canadian dollars) Net interest income (loss) Non-interest income (loss)1 Total revenue1 Provision for (reversal of) credit losses Insurance claims and related expenses1 Non-interest expenses Net income (loss) before provision for income taxes Provision for (recovery of) income taxes Equity in net income of an investment in associate, net of income taxes Net income (loss) – reported Adjustments for items of note, net of income taxes Net income (loss) – adjusted Canadian Personal and Commercial Banking Wealth and Insurance U.S. Personal and Commercial Banking Wholesale Banking Corporate $ 8,023 2,629 10,652 1,151 – 4,988 4,513 1,209 – $ 3,304 104 $ 3,408 $ 583 5,860 6,443 – 2,424 2,600 1,419 261 209 $ 1,367 – $ 1,367 $ 4,663 1,468 6,131 779 – 4,125 1,227 99 – $ 1,128 294 $ 1,422 $ 1,805 849 2,654 47 – 1,570 1,037 157 – $ 880 – $ 880 $ (48) (286) (334) (182) – 715 (867) (634) 25 $ (208) 206 (2) $ Total $ 15,026 10,520 25,546 1,795 2,424 13,998 7,329 1,092 234 $ 6,471 604 $ 7,075 1 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts have been reclassified to conform with this presentation. NET INTEREST INCOME Net interest income for the year on a reported basis was $15,026 million, an increase of $1,365 million, or 10%, compared with last year. On an adjusted basis, net interest income was $15,062 million, an increase of $1,401 million, or 10%, compared with last year. The increase in adjusted net interest income was driven primarily by increases in the Canadian Personal and Commercial Banking, U.S. Personal and Commercial Banking and Wholesale Banking segments. Canadian Personal and Commercial Banking net interest income increased primarily due to the inclusion of MBNA, organic volume growth and an additional calendar day, partially offset by lower margin on average earning assets. U.S. Personal and Commercial Banking net interest income increased mainly due to strong loan and deposit volume growth, partially offset by lower margin on average earning assets. Wholesale Banking net interest income increased largely due to higher trading-related revenue. NON-INTEREST INCOME Non-interest income for the year on a reported basis was $10,520 million, an increase of $341 million, or 3%, compared with last year. Adjusted non-interest income for the year was $10,615 million, an increase of $563 million, or 6%, compared with last year. The increase in adjusted non-interest income was primarily driven by increases in the Canadian Personal and Commercial Banking, Wealth and Insurance, and U.S. Personal and Commercial Banking segments. Canadian Personal and Commercial Banking non-interest income increased primarily due to higher transaction volumes, the contribution from MBNA and fee repricing. Wealth and Insurance non-interest income increased primar- ily due to strong premium growth and the inclusion of MBNA in the Insurance business and higher fee-based revenue from higher client assets, partially offset by lower trading revenue in the Wealth business. U.S. Personal and Commercial Banking non-interest income increased due to higher fee-based revenue and gains on sales of securities, partially offset by the impact of the Durbin Amendment and the anticipated run-off in legacy Chrysler Financial revenue. NON-INTEREST EXPENSES Reported non-interest expenses for the year were $13,998 million, an increase of $951 million, or 7%, compared with last year. Adjusted non-interest expenses were $13,162 million, an increase of $789 million, or 6%, compared with last year. The increase in adjusted non-interest expenses was driven by increases in the Canadian Personal and Commercial Banking, U.S. Personal and Commercial Banking and Wholesale Banking segments. Canadian Personal and Commercial Banking expenses increased primarily due to the acquisition of the credit card portfolio of MBNA Canada, higher employee-related costs, business initiatives and volume growth. U.S. Personal and Commercial Banking expenses increased due to investments in new stores and infrastructure, and the Chrysler Financial acquisition. Wholesale Banking expenses increased primarily due to legal provisions in the current year and higher variable compensation commensurate with improved revenue. INCOME TAX EXPENSE Reported total income and other taxes decreased by $204 million, or 9%, from 2011. Income tax expense, on a reported basis, was down $234 million, or 18%, from 2011. Other taxes were up $30 million, or 3%, from 2011. Adjusted total income and other taxes were down $111 million, or 4%, from 2011. Total income tax expense, on an adjusted basis, was down $141 million, or 9%, from 2011. The Bank’s effective income tax rate on a reported basis was 14.9% for 2012, compared with 18.6% in 2011. The year-over-year decrease was largely due to the reduction in the Canadian statutory corporate tax rate and higher tax exempt dividend income from taxable Canadian corporations. The Bank reports its investment in TD Ameritrade using the equity method of accounting. TD Ameritrade’s tax expense of $131 million in the year, compared to $148 million in 2011, was not part of the Bank’s tax rate reconciliation. BALANCE SHEET Factors Affecting Assets and Liabilities Total assets were $811 billion as at October 31, 2012, an increase of $76 billion, or 10%, from October 31, 2011. The net increase was primarily due to a $32 billion increase in loans (net of allowance for loan losses), a $29 billion increase in financial assets at fair value and a $12 billion increase in securities purchased under reverse repurchase agreements. Financial assets at fair value increased $29 billion largely due to an increase in trading securities in Wholesale Banking. Securities purchased under reverse repurchase agreements increased $12 billion driven by an increase in trade volumes in Wholesale Banking. 39 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS Loans (net of allowance for loan losses) increased by $32 billion primarily driven by increases in Canadian Personal and Commercial Banking and U.S. Personal and Commercial Banking. The increase in Canadian Personal and Commercial Banking was due to growth in residential mortgages, the acquisition of the credit card portfolio of MBNA Canada, and growth in business and government loans. U.S. Personal and Commercial Banking loans increased primarily due to growth in residential mortgages, business and government loans and indirect auto loans. Total liabilities were $762 billion as at October 31, 2012, an increase of $71 billion, or 10%, from October 31, 2011. The net increase was primarily due to a $38 billion increase in deposits, a $23 billion increase in other liabilities and a $10 billion increase in financial liabilities at fair value. Financial liabilities at fair value increased $10 billion largely due to an increase in trading deposits in Wholesale Banking. Deposits increased $38 billion primarily due to an increase in personal non-term deposits in Canadian Personal and Commercial Banking and U.S. Personal and Commercial Banking and an increase in business and government deposits across several segments. Other liabilities increased $23 billion largely due to an increase in obligations related to securities sold under repurchase agreements and obligations related to securities sold short in Wholesale Banking. Equity was $49 billion as at October 31, 2012, an increase of $5 billion, or 11%, from October 31, 2011 primarily due to retained earnings growth and higher common share capital due to additional common share issuances through the dividend reinvestment plan and the exer- cise of stock options. 2012 FINANCIAL RESULTS OVERVIEW 2012 Financial Performance by Business Line Canadian Personal and Commercial Banking reported net income for the year of $3,304 million, an increase of $253 million, or 8%, compared with last year. Adjusted net income for the year was $3,408 million, an increase of $357 million, or 12%, compared with last year. The increase in adjusted earnings was driven by good volume growth, the acquisition of MBNA, higher fee income, a lower tax rate, and an extra calendar day. The reported return on common equity for the year was 42.9%, while the adjusted annualized return on common equity was 44.2%. Reported revenue for the year was $10,652 million, an increase of $1,120 million, or 12%, compared with last year. Adjusted revenue for the year was $10,688 million, an increase of $1,156 million, or 12%, compared with last year. The addition of MBNA contributed 9 percent- age points to both reported and adjusted year-over-year revenue growth. Net interest income growth was driven by the inclusion of MBNA, organic volume growth and an additional calendar day, partially offset by lower margin on average earning assets. The net interest income contribution from MBNA was elevated due to a one- time benefit from better credit performance on acquired loans. Personal lending volume growth slowed throughout the year impacted by a slowing housing market and weaker consumer loan demand. Business lending growth was strong leading to market share gains. Compared with last year, average real estate secured lending volume increased $12.5 billion, or 6%. Auto lending average volume increased $1.2 billion, or 10%, while all other personal lending average volumes, excluding MBNA, were relatively flat. Business loans and acceptances average volumes increased $5 billion, or 14%. Average personal deposit volumes increased $9.4 billion, or 7%, with a strong contribu- tion from the new Investment Savings account. Average business deposit volumes increased $6.3 billion, or 10%. Reported margin on average earning assets increased 6 bps to 2.82%, while the adjusted margin on average earning assets increased 8 bps to 2.84%, compared with 2.76% last year due to the addition of MBNA. Excluding the impact of MBNA, the margin on average earning assets decreased 12 bps to 2.64%, due to the impact of a low interest rate environ- ment, portfolio mix, and competitive pricing. Non-interest income growth of 12% was driven by higher transaction volumes, MBNA, and repricing. PCL for the year was $1,151 million, an increase of $327 million, or 40%, compared with last year. The increase in PCL was due primarily to the addition of MBNA. Personal banking PCL was $1,088 million for the year, an increase of $302 million, or 38%, compared with last year. Excluding MBNA, personal banking PCL decreased $53 million, reflecting strong credit quality and enhanced collection strategies. Business banking PCL was $63 million, an increase of $26 million, returning to a more normalized level, as the prior year had higher recoveries. Annualized PCL as a percentage of credit volume excluding MBNA was 0.28%, a decrease of 3 bps, compared with last year. Net impaired loans were $1,000 million, an increase of $108 million, or 12%, compared with last year. Reported non-interest expenses for the year were $4,988 million, an increase of $555 million, or 13%, compared with last year. Adjusted non-interest expenses for the year were $4,884 million, an increase of $451 million, or 10%, compared with last year. Excluding MBNA, expenses increased $141 million, or 3%, compared with last year, driven by higher employee-related costs, business initiatives, volume growth, and one extra calendar day. The average FTE staffing levels increased by 539, or 2%, compared with last year driven by the addition of MBNA. Excluding MBNA, FTE decreased by 855, or 3%, largely due to the transfer of FTEs to the Corporate segment and volume-related productivity gains. The reported efficiency ratio for the year worsened to 46.8%, while the adjusted efficiency ratio improved to 45.7%, compared with 46.5%, on both a reported and adjusted basis last year. Wealth and Insurance net income for the year was $1,367 million, an increase of $53 million, or 4%, compared with last year. The increase in earnings was mainly due to growth in premiums and client assets, the inclusion of MBNA and lower expenses, partially offset by unfavourable prior years claims development and lower trading volumes. Wealth and Insurance net income excluding TD Ameritrade was $1,158 million, an increase of $51 million, or 5%, compared with last year. The Bank’s reported investment in TD Ameritrade generated net income for the year of $209 million, an increase of $2 million, or 1%, compared with last year, mainly driven by changes in the capital allocation methodology resulting in lower net charges, largely offset by lower TD Ameritrade earnings. For its fiscal year ended September 30, 2012, TD Ameritrade reported net income was US$586 million, a decrease of US$52 million, or 8%, compared with last year, primarily driven by lower trading revenue. The return on common equity for the year was 20.7%. Revenue for the year was $6,443 million, an increase of $225 million, or 4%, compared with last year. In the Wealth business, a decrease in trading revenue in the direct investing business was largely offset by higher fee-based revenue driven by increased client assets in the advice- based and asset management businesses. In the Insurance business, revenue increased from strong premium growth and the inclusion of MBNA. Net interest income increased driven primarily by higher margins and client balances in the Wealth business. 40 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISInsurance claims and related expenses for the year were $2,424 million, an increase of $246 million, or 11%, compared with last year. The increase was primarily due to unfavourable prior years’ claims develop- ment regarding the Ontario auto market and weather-related events. During the latter part of 2012, the business experienced an increase in prior years’ claims development in the Ontario auto insurance market primarily related to pre-2011 accident years. Frequency and severity of claims related to these accident years were worse than anticipated for certain insurance coverage, translating into higher claims costs. Non-interest expenses for the year were $2,600 million, a decrease of $16 million, or 1%, compared with last year. The decrease was primarily due to higher project expenses in 2011, prudent expense management, and lower volumes in the Wealth business, partially offset by increased expenses supporting business growth in both the Wealth and Insurance businesses. Assets under administration of $258 billion as at October 31, 2012 increased by $21 billion, or 9%, compared with October 31, 2011. Assets under management of $207 billion as at October 31, 2012 increased by $18 billion, or 10%, compared with October 31, 2011. These increases were primarily driven by net new client assets. Gross originated insurance premiums were $3,572 million, an increase of $246 million, or 7%, compared with last year. The increase was primarily due to organic business growth. The average FTE staffing levels and efficiency ratio for the year remained relatively flat compared with last year. U.S. Personal and Commercial Banking reported net income, in Canadian dollar terms, for the year was $1,128 million, a decrease of $60 million, or 5%, compared with last year. Adjusted net income for the year was $1,422 million, an increase of $152 million, or 12%, compared with last year. In U.S. dollar terms, reported net income for the year was US$1,123 million, a decrease of US$82 million, or 7%, compared with last year and adjusted net income was US$1,416 million, an increase of US$127 million, or 10%. The increase in adjusted earn- ings was primarily due to strong loan and deposit volume and higher fee-based revenue, partially offset by higher expenses to support growth, and the impact of the Durbin Amendment. Adjusted net income for the current and prior year excluded integration and restructuring charges relating to acquisitions, litigation reserves and Superstorm Sandy. The reported return on common equity for the year was 6.4%, while the adjusted return on common equity was 8.1%. excluding debt securities classified as loans as a percentage of credit volume was 0.84%, a decrease of 2 bps, compared with last year. Net impaired loans, excluding acquired credit-impaired loans and debt securities classified as loans, were US$1,059 million, a decrease of US$84 million, or 7%, compared with last year due to continued improvement in credit quality. Acquired credit-impaired loans were US$3.8 billion as at October 31, 2012 compared with US$5.6 billion as at October 31, 2011, while net impaired debt securities classified as loans were US$1.3 billion compared with US$1.4 billion as at October 31, 2011. Reported non-interest expenses for the year were US$4,107 million, an increase of US$464 million, or 13%, compared with last year. On an adjusted basis, non-interest expenses were US$3,678 million, an increase of US$181 million, or 5%, compared with last year due to investments in new stores and infrastructure, and the Chrysler Financial acquisition. The average FTE staffing levels for the year increased by 834, or 3%, compared with last year due to the Chrysler Financial acquisition and new stores, partially offset by store closures and consolidations. The reported efficiency ratio for the year worsened to 67.3%, compared with 62.7% last year, while the adjusted efficiency ratio for the year remained flat at 60.2%, compared with last year. Wholesale Banking net income for the year was $880 million, an increase of $65 million, or 8%, compared with last year. The increase in earnings was due to stronger results in our core businesses, partially offset by reduced securities gains in the investment portfolio. The return on common equity for the year was 21.2%. Wholesale Banking revenue is derived primarily from capital markets services and corporate lending. Revenue for the year was $2,654 million, an increase of $158 million, or 6%, compared with last year. Capital markets revenue increased primarily due to improved fixed income and credit trading, strong debt underwriting, and robust M&A revenue. Fixed income and credit trading revenue increased due to increased liquidity, tightening credit spreads and periods of elevated volatility in the market. Debt underwriting fees remained strong throughout the year. M&A revenue was higher aided by low interest rates, robust banking markets and ongoing opportunities for consolidation. Partially offsetting these improvements were lower security gains from the investment portfolio and weaker equity trading and underwriting on low industry-wide volumes and volatility. In U.S. dollar terms, adjusted revenue for the year was PCL comprises specific provision for credit losses and accrual costs US$6,107 million, an increase of US$289 million, or 5%, compared with last year driven by increased loan and deposit volume, higher fee- based revenue, and gains on sales of securities, partially offset by the impact of the Durbin Amendment and the anticipated run-off in legacy Chrysler Financial revenue. Average loans increased by US$12 billion, or 17%, compared with last year with an increase of US$9 billion, or 31% in average personal loans and an increase of US$3 billion, or 8% in aver- age business loans. Average deposits increased US$17 billion, or 11%, compared with prior year, including a US$10 billion increase in average deposits of TD Ameritrade. Excluding the impact of TD Ameritrade IDAs, average deposit volume increased by US$7 billion, or 7%. The margin on average earning assets for the year decreased by 13 bps to 3.60% compared with last year primarily due to the low interest rate environ- ment and timing of cash flows on acquired portfolios. Reported PCL for the year was US$778 million, an increase of US$80 million, or 11%, compared with last year. Adjusted PCL for the year was US$723 million, an increase of US$25 million, or 4%, compared with last year due primarily to organic loan growth, the acquired credit-impaired loan portfolios and the impact of new regula- tory guidance on loans discharged in bankruptcies, partially offset by improved asset quality. Personal banking PCL, excluding debt securities classified as loans was US$391 million, an increase of US$131 million, or 50%, from the prior year. Business banking PCL, excluding debt securities classified as loans was US$320 million, a decrease of US$43 million, or 12%, compared with prior year. PCL for loans for credit protection. The change in market value of the credit protection, in excess of the accrual cost, is reported in the Corporate segment. PCL for the year was $47 million, an increase of $25 million, compared with last year. The increase in PCL was primarily due to a loss on a single name in the corporate lending portfolio. PCL in the prior year primarily comprised the accrual cost of credit protection. Non-interest expenses for the year were $1,570 million, an increase of $102 million, or 7%, compared with last year primarily due to legal provisions in the current year and higher variable compensation commensurate with improved revenue. Risk-weighted assets were $43 billion as at October 31, 2012, an increase of $8 billion, or 23%, compared with October 31, 2011. The increase was due to the implementation of the revised Basel II market risk framework. The average FTE staffing levels increased by 36, or 1%, compared with last year. Corporate segment reported net loss for the year was $208 million, compared with a reported net loss of $323 million last year. The adjusted net loss for the year was $2 million, compared with an adjusted net loss of $18 million last year. The year-over-year change in the adjusted net loss was due to higher net corporate expenses, partially offset by the impact of favourable tax items, treasury and other hedging activities and other items. 41 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISGROUP FINANCIAL CONDITION Balance Sheet Review AT A GLANCE OVERVIEW • Total assets were $863 billion as at October 31, 2013, an increase of $52 billion, or 6%, compared with October 31, 2012. Financial assets at fair value decreased $23 billion largely due to a reclassification from available-for-sale securities to held-to-maturity securities and a decrease in derivative assets in Wholesale Banking. T A B L E 2 6 SELECTED CONSOLIDATED BALANCE SHEET ITEMS (millions of Canadian dollars) Interest-bearing deposits with banks Available-for-sale securities Held-to-maturity securities Loans (net of allowance for loan losses) Trading deposits Deposits As at October 31 October 31 2012 2013 $ 28,855 $ 21,692 98,576 79,541 29,961 – 444,922 408,848 47,593 38,774 543,476 487,754 FACTORS AFFECTING ASSETS AND LIABILITIES Total assets were $863 billion as at October 31, 2013, an increase of $52 billion, or 6%, from October 31, 2012. The net increase was primarily due to a $36 billion increase in loans (net of allowance for loan losses), a $30 billion increase in held-to-maturity securities, and a $7 billion increase in interest-bearing deposits with banks, partially offset by a $23 billion decrease in financial assets at fair value. Interest-bearing deposits with banks increased $7 billion primarily due to an increase in Wholesale Banking driven by higher U.S. Federal Reserve deposits. Held-to-maturity securities increased $30 billion due to a reclassifi- cation from available-for-sale securities and an increase in securities in the U.S. Personal and Commercial Banking segment. Loans (net of allowance for loan losses) increased $36 billion primarily driven by increases in the U.S. Personal and Commercial Banking and Canadian Personal and Commercial Banking segments. The increase in the U.S. Personal and Commercial Banking segment was due to growth in credit card and business and government loans. Target added $6 billion to total loans. The Canadian Personal and Commercial Banking segment loans increased primarily due to growth in residential mortgages and business and government loans. Total liabilities were $811 billion as at October 31, 2013, an increase of $49 billion, or 6%, from October 31, 2012. The net increase was primarily due to a $56 billion increase in deposits, partially offset by a $10 billion decrease in financial liabilities at fair value. Financial liabilities at fair value decreased $10 billion largely due to a decrease in derivative liabilities, partially offset by an increase in trading deposits in Wholesale Banking. Deposits increased $56 billion primarily due to an increase in personal non-term and business and government deposits in the U.S. Personal and Commercial Banking and Canadian Personal and Commercial Banking segments and bank deposits in Wholesale Banking, partially offset by a decrease in personal term deposits in Canadian Personal and Commercial Banking. Equity was $52 billion as at October 31, 2013, an increase of $3 billion, or 6%, from October 31, 2012 primarily due to higher retained earnings. 42 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS GROUP FINANCIAL CONDITION Credit Portfolio Quality AT A GLANCE OVERVIEW • Loans and acceptances net of allowance for loan losses was $451 billion, an increase of $35 billion compared with last year. • Impaired loans net of counterparty-specific and individually insignificant allowances was $2,243 million, an increase of $143 million compared with last year. • Provision for credit losses was $1,631 million, compared with $1,795 million in the prior year. • Total allowance for loan losses increased by $211 million to $2,855 million in 2013. LOAN PORTFOLIO Overall in 2013, the Bank’s credit quality remained stable despite uncertain economic conditions. During 2013, the Bank increased its credit portfolio by $35 billion, or 8%, from the prior year, largely due to volume growth in the Canadian and U.S. Personal and Commercial Banking segments and Target. While the majority of the credit risk exposure is related to loans and acceptances, the Bank also engaged in activities that have off-balance sheet credit risk. These include credit instruments and derivative financial instruments, as explained in Note 33 to the Consolidated Financial Statements. CONCENTRATION OF CREDIT RISK The Bank’s loan portfolio continued to be dominated by Canadian and U.S. residential mortgages, consumer instalment and other personal loans, and credit cards, representing 72% of total loans net of coun- terparty-specific and individually insignificant allowances, down from 73% in 2012. During the year, these portfolios increased by $22 billion, or 7%, and totalled $326 billion at year end. Residential mortgages represented 41% of the portfolio in 2013, consistent with 2012. Consumer instalment and other personal loans, and credit cards were 31% of total loans net of counterparty-specific and individually insig- nificant allowances in 2013, down from 32% in 2012. The Bank’s business and government credit exposure was 27% of total loans net of counterparty-specific and individually insignificant allowances, up from 25% in 2012. The largest business and govern- ment sector concentrations in Canada were the real estate and finan- cial sectors, which comprised 5% and 2%, respectively. Real estate was the leading U.S. sector of concentration and represented 3% of net loans, consistent with 2012. Geographically, the credit portfolio remained concentrated in Canada. In 2013, the percentage of loans held in Canada was 74%, down from 76% in 2012. The largest Canadian exposure was in Ontario, which represented 42% of total loans net of counterparty- specific and individually insignificant allowance for loan losses for 2013, down from 43% in 2012. The balance of the credit portfolio was predominantly in the U.S., which represented 24% of the portfolio, up from 22% in 2012 primar- ily due to volume growth in residential mortgages, consumer indirect auto, business and government loans and Target. Exposures to debt securities classified as loans, acquired credit-impaired loans, and other geographic regions were limited. The largest U.S. exposures by state were in New England and New York which represented 7% and 5% of total loans net of counterparty-specific and individually insignificant allowances, respectively, up from 6% and 4% in 2012. 43 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 2 7 LOANS AND ACCEPTANCES, NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES BY INDUSTRY SECTOR1, 2 (millions of Canadian dollars, except as noted) As at Percentage of total Canada Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Agriculture Automotive Financial Food, beverage, and tobacco Forestry Government, public sector entities, and education Health and social services Industrial construction and trade contractors Metals and mining Pipelines, oil, and gas Power and utilities Professional and other services Retail sector Sundry manufacturing and wholesale Telecommunications, cable, and media Transportation Other Total business and government Total Canada United States Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Agriculture Automotive Financial Food, beverage, and tobacco Forestry Government, public sector entities, and education Health and social services Industrial construction and trade contractors Metals and mining Pipelines, oil, and gas Power and utilities Professional and other services Retail sector Sundry manufacturing and wholesale Telecommunications, cable, and media Transportation Other Total business and government Total United States International Personal Business and government Total international Total excluding other loans Other loans Debt securities classified as loans Acquired credit-impaired loans 3 Total other loans Total Incurred but not identified allowance Personal, business and government Debt securities classified as loans Total incurred but not identified allowance Total, net of allowance October 31 October 31 October 31 October 31 October 31 October 31 2011 2011 2012 2013 2012 2013 Counterparty- specific and individually Gross insignificant loans allowances Net loans Net loans Net loans $ 164,389 $ 14 $ 164,375 $ 154,233 $ 142,282 36.3% 36.9% 36.8% 61,581 14,666 15,193 15,288 271,117 13,685 8,153 21,838 3,914 2,326 8,812 1,250 423 4,471 3,686 1,600 871 2,194 1,506 2,674 2,144 1,821 1,029 771 2,942 64,272 335,389 20,945 10,607 16,323 533 6,900 55,308 3,470 12,084 15,554 289 1,850 2,006 1,654 531 4,466 5,785 1,222 1,056 521 1,155 5,353 2,578 3,717 1,663 4,886 714 55,000 110,308 10 2,240 2,250 447,947 3,744 2,485 6,229 $ 454,176 20 25 52 115 226 61,561 14,641 15,141 15,173 270,891 64,732 13,942 14,525 14,165 261,597 65,518 13,581 15,333 8,042 244,756 12 2 14 – 1 1 2 – 2 1 6 5 7 – 5 26 5 1 1 4 81 307 13,673 8,151 21,824 3,914 2,325 8,811 1,248 423 4,469 3,685 1,594 866 2,187 1,506 2,669 2,118 1,816 1,028 770 2,938 64,191 335,082 12,462 7,250 19,712 3,237 1,444 6,416 1,073 378 4,784 3,327 1,489 770 2,235 1,184 2,403 1,959 1,644 1,004 715 1,934 55,708 317,305 10,730 5,898 16,628 2,749 1,249 8,232 1,043 388 4,210 2,960 1,332 634 1,849 1,082 1,824 2,024 1,491 908 537 2,511 51,651 296,407 20,937 17,349 12,478 8 16 4 1 13 42 10,591 16,319 532 6,887 55,266 12 20 32 – 2 1 1 1 3 12 8 1 – – 14 11 3 7 4 – 100 142 3,458 12,064 15,522 289 1,848 2,005 1,653 530 4,463 5,773 1,214 1,055 521 1,155 5,339 2,567 3,714 1,656 4,882 714 54,900 110,166 10,101 13,463 489 1,085 42,487 2,997 10,797 13,794 275 1,538 1,953 1,321 410 3,276 4,941 1,086 999 829 1,116 4,379 2,294 3,055 1,175 3,559 1,080 47,080 89,567 9,630 9,739 447 880 33,174 3,064 9,404 12,468 229 1,271 2,725 1,227 316 2,389 4,269 1,097 893 801 968 2,868 2,311 2,626 1,049 2,838 1,357 41,702 74,876 – – – 449 10 2,240 2,250 447,498 11 2,653 2,664 409,536 12 3,520 3,532 374,815 6,332 173 5,500 117 290 11,832 $ 739 $ 453,437 $ 418,014 $ 386,647 4,809 3,669 8,478 3,571 2,368 5,939 2,018 98 2,116 1,496 149 1,645 $ 451,321 $ 416,071 $ 385,002 1,788 155 1,943 13.6 3.2 3.3 3.3 59.7 3.0 1.8 4.8 0.9 0.5 1.9 0.3 0.1 1.0 0.8 0.4 0.2 0.5 0.3 0.6 0.5 0.4 0.2 0.2 0.6 14.2 73.9 4.6 2.3 3.6 0.2 1.5 12.2 0.8 2.7 3.5 0.1 0.4 0.4 0.4 0.1 0.9 1.3 0.3 0.2 0.1 0.3 1.1 0.6 0.8 0.4 1.0 0.2 12.1 24.3 – 0.5 0.5 98.7 15.5 3.3 3.5 3.4 62.6 3.0 1.7 4.7 0.8 0.3 1.5 0.3 0.1 1.1 0.8 0.4 0.2 0.5 0.3 0.5 0.5 0.4 0.2 0.2 0.5 13.3 75.9 4.2 2.4 3.2 0.1 0.3 10.2 0.7 2.6 3.3 0.1 0.4 0.5 0.3 0.1 0.8 1.2 0.3 0.2 0.2 0.3 1.0 0.5 0.7 0.3 0.8 0.3 11.3 21.5 – 0.6 0.6 98.0 16.9 3.5 4.0 2.1 63.3 2.8 1.5 4.3 0.7 0.3 2.1 0.3 0.1 1.1 0.8 0.3 0.2 0.5 0.3 0.5 0.5 0.4 0.2 0.1 0.7 13.4 76.7 3.3 2.5 2.5 0.1 0.2 8.6 0.8 2.4 3.2 0.1 0.3 0.7 0.3 0.1 0.6 1.1 0.3 0.2 0.2 0.3 0.7 0.6 0.7 0.3 0.7 0.4 10.8 19.4 – 0.9 0.9 97.0 0.8 0.5 1.3 100.0% 1.1 0.9 2.0 100.0% 1.6 1.4 3.0 100.0% Percentage change over previous year – loans and acceptances, net of counterparty-specific and individually insignificant allowances Percentage change over previous year – loans and acceptances, net of allowance 1 Primarily based on the geographic location of the customer’s address. 2 Certain comparative amounts have been reclassified to conform with the presentation adopted in the current period. 8.5% 8.5% 8.1% 8.1% 10.4% 10.4% 3 Includes all FDIC covered loans and other acquired credit-impaired loans. 44 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 8 LOANS AND ACCEPTANCES, NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES BY GEOGRAPHY1, 2 (millions of Canadian dollars, except as noted) As at Percentage of total October 31 October 31 October 31 October 31 October 31 October 31 2011 2012 2011 2013 2012 2013 Counterparty- specific and individually Gross insignificant loans allowances Net loans Net loans Net loans $ 9,702 48,894 188,601 60,394 27,798 335,389 5,318 6,809 29,526 20,290 20,777 8,222 19,366 110,308 752 1,498 2,250 447,947 6,229 $ 454,176 Canada Atlantic provinces British Columbia3 Ontario3 Prairies3 Québec Total Canada United States Carolinas (North and South) Florida New England4 New Jersey New York Pennsylvania Other Total United States International Europe Other Total international Total excluding other loans Other loans Total Incurred but not identified allowance Total, net of allowance Percentage change over previous year – loans and acceptances, net of counterparty-specific and individually insignificant allowances for loan losses Canada United States International Other loans Total $ 7 $ 23 48,871 9,695 $ 9,179 $ 8,542 47,564 46,197 235 188,366 177,947 164,732 56,453 53,687 26,162 23,249 307 335,082 317,305 296,407 60,370 27,780 24 18 4 7 49 37 16 15 14 5,314 6,802 29,477 20,253 20,761 8,207 19,352 142 110,166 3,259 4,567 1,686 2,635 25,891 23,201 15,026 12,034 15,646 12,119 5,776 18,438 17,425 89,567 74,876 6,740 – – – 752 1,498 2,250 1,239 1,425 2,664 1,582 1,950 3,532 449 447,498 409,536 374,815 290 8,478 11,832 $ 739 $ 453,437 $ 418,014 $ 386,647 5,939 2,116 1,645 $ 451,321 $ 416,071 $ 385,002 1,943 2013 2012 5.6% 7.1% 23.0 (15.5) (29.9) 19.6 (24.6) (28.3) 8.5% 8.1% 2011 9.3% 22.2 7.9 (18.3) 10.4% 2.1% 2.2% 2.2% 10.9 41.5 13.3 6.1 73.9 1.2 1.5 6.5 4.4 4.6 1.8 4.3 24.3 0.2 0.3 0.5 98.7 1.3 100.0% 11.4 42.6 13.5 6.2 75.9 0.8 1.1 6.2 3.6 3.8 1.6 4.4 21.5 0.3 0.3 0.6 98.0 2.0 12.0 42.6 13.9 6.0 76.7 0.4 0.7 6.0 3.1 3.1 1.5 4.6 19.4 0.4 0.5 0.9 97.0 3.0 100.0% 100.0% 1 Primarily based on the geographic location of the customer’s address. 2 Certain comparative amounts have been reclassified to conform with the presentation adopted in the current period. 3 The territories are included as follows: Yukon is included in British Columbia; Nunavut is included in Ontario; and Northwest Territories is included in the Prairies region. 4 The states included in New England are as follows: Connecticut, Maine, Massachusetts, New Hampshire, and Vermont. Loans authorized and amounts outstanding to Canadian and U.S. small and mid-sized business customers are provided below. T A B L E 2 9 LOANS TO SMALL AND MID-SIZED BUSINESS CUSTOMERS (millions of Canadian dollars, except as noted) Loan amount (dollars) $0 – $24,999 $25,000 – $49,999 $50,000 – $99,999 $100,000 – $249,999 $250,000 – $499,999 $500,000 – $999,999 $1,000,000 – $4,999,999 Total1 1 Personal loans used for business purposes are not included in these totals. Loans authorized Amount outstanding 2013 2012 2011 2013 2012 2011 $ 995 $ 1,095 $ 425 956 $ 624 990 1,258 1,952 3,951 5,537 5,046 7,167 5,792 9,355 31,212 16,074 $ 57,169 $ 54,044 $ 52,905 $ 36,409 $ 34,265 $ 33,170 365 $ 493 1,035 3,596 5,109 6,377 19,434 387 $ 539 1,140 3,738 5,070 5,982 17,409 1,104 2,129 5,723 7,145 8,810 28,138 1,359 2,340 5,980 7,092 8,455 26,584 45 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS Real Estate Secured Lending Retail real estate secured lending includes mortgages and lines of credit to North American consumers to satisfy financing needs ranging from home purchases to refinancing. Credit policies and strategies are aligned with the Bank’s risk appetite and meet all regulatory require- ments. While the Bank retains first lien on the majority of properties held as security, there is a small portion of loans with second liens, but most of these are behind a TD mortgage that is in first position. Credit policies in Canada ensure that the combined exposure of all uninsured facilities on one property does not exceed 80% of the collateral value at origination. Lending at a higher loan-to-value ratio is permitted by legislation but requires default insurance. This insurance is contractual coverage for the life of eligible facilities and protects the Bank’s real estate secured lending portfolio against potential losses caused by borrower default. The Bank also purchases default insurance on lower loan-to-value ratio loans. The insurance is provided by either government- backed entities or other approved private mortgage insurers. The Bank regularly performs stress tests on its real estate lending portfolio as part of its overall stress testing program. This is done with a view to determine the extent to which the portfolio would be vulner- able to a severe downturn in economic conditions. The effect of severe changes in house prices, interest rates and unemployment levels are among the factors considered when assessing the impact on credit losses and the Bank’s overall profitability. A variety of portfolio segments including dwelling type and geographical regions are examined during the exercise to determine whether specific vulnerabilities exist. Based on our most recent reviews, potential losses on all real estate secured lending exposures are considered manageable. T A B L E 3 0 REAL ESTATE SECURED LENDING1, 2 (millions of Canadian dollars, except as noted) Residential mortgages Insured3 Uninsured Home equity lines of credit Insured3 Uninsured As at Total Insured3 Uninsured October 31, 2013 Canada Atlantic provinces British Columbia4 Ontario4 Prairies4 Quebec Total Canada United States Total Canada Atlantic provinces British Columbia4 Ontario4 Prairies4 Quebec Total Canada United States Total $ 4,077 21,166 57,942 26,645 12,066 2.5% $ 1,076 9,896 20,940 6,628 3,953 12.9 35.3 16.2 7.3 0.7% $ 6.0 12.7 4.0 2.4 698 4,209 13,697 5,821 2,300 1.1% $ 6.8 22.2 9.5 3.7 774 7,454 17,635 6,768 2,225 1.3% $ 12.1 28.7 11.0 3.6 4,775 25,375 71,639 32,466 14,366 2.1% $ 11.2 31.7 14.4 6.4 1,850 17,350 38,575 13,396 6,178 0.8% 7.7 17.1 5.9 2.7 $ 121,896 74.2% $ 42,493 25.8% $ 26,725 43.3% $ 34,856 56.7% $ 148,621 65.8% $ 77,349 34.2% 603 $ 122,499 20,828 $ 63,321 9 $ 26,734 10,757 $ 45,613 612 31,585 $ 149,233 $ 108,934 2.3% $ $ 3,515 19,946 62,977 23,144 10,490 12.9 40.9 15.0 6.8 682 6,833 20,008 4,030 2,622 0.4% $ 4.4 13.0 2.6 1.7 780 4,912 15,085 6,985 2,479 1.2% $ 7.6 23.3 10.8 3.8 771 7,420 17,278 6,828 2,215 1.2% $ 11.5 26.7 10.5 3.4 4,295 24,858 78,062 30,129 12,969 2.0% $ 1,453 14,253 37,286 10,858 4,837 11.4 35.5 13.8 5.9 0.7% 6.5 17.0 5.0 2.2 October 31, 2012 $ 120,072 77.9% $ 34,175 22.1% $ 30,241 46.7% $ 34,512 53.3% $ 150,313 68.6% $ 68,687 31.4% 497 $ 120,569 17,428 $ 51,603 10 $ 30,251 10,302 $ 44,814 507 $ 150,820 27,730 $ 96,417 1 Geographic location based on the address of the property mortgaged. 2 Excludes loans classified as trading as the Bank intends to sell the loans immediately or in the near term, and loans designated at fair value through profit or loss for which no allowance is recorded. 3 Default insurance is contractual coverage for the life of eligible facilities whereby the Bank’s exposure to real estate secured lending, all or in part, is protected against potential losses caused by borrower default. It is provided by either government-backed entities or other approved private mortgage insurers. 4 The territories are included as follows: Yukon is included in British Columbia; Nunavut is included in Ontario; and Northwest Territories is included in the Prairies region. The following table provides a summary of the Bank’s residential mortgages by remaining amortization period. All figures are calculated based on current customer payment behaviour in order to properly reflect the propensity to prepay by borrowers. The current customer payment basis accounts for any accelerated payments made to date and projects remaining amortization based on existing balance outstanding and current payment terms. T A B L E 3 1 RESIDENTIAL MORTGAGES BY REMAINING AMORTIZATION1, 2 <5 years 5– <10 years 10– <15 years 15– <20 years 20– <25 years 25– <30 years 30– <35 years >=35 years As at Total Canada United States Total Canada United States Total 10.8% 2.6 9.9% 9.8% 1.6 9.0% 4.3% 1.3 4.0% 8.2% 11.7% 24.6% 21.6 2.0 8.3 9.8% 10.6% 22.6% 8.9% 13.1% 18.5% 4.6% 1.9 4.3% 10.7% 11.9% 17.6% 25.9 2.2 9.9 October 31, 2013 26.0% 14.3% 63.1 30.2% 12.8% 1.1 0.1% 100.0% – 100.0 0.1% 100.0% October 31, 2012 25.9% 17.7% 56.2 29.0% 16.1% 2.3 1.5% 100.0% – 100.0 1.4% 100.0% 1 Excludes loans classified as trading as the Bank intends to sell the loans immediately or in the near term, and loans designated at fair value through profit or loss for which no allowance is recorded. 2 Percentage based on outstanding balance. 46 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 2 UNINSURED AVERAGE LOAN-TO-VALUE: NEWLY ORIGINATED AND NEWLY ACQUIRED1, 2, 3 Canada Atlantic provinces British Columbia5 Ontario5 Prairies5 Quebec Total Canada United States Total Canada Atlantic provinces British Columbia5 Ontario5 Prairies5 Quebec Total Canada United States Total Residential Home equity lines of credit4 mortgages Total October 31, 2013 72% 67 68 71 71 69% 67% 69% 72% 66 68 70 70 68% 65% 67% 62% 58 61 63 63 61% 66% 62% 70% 65 66 69 70 67% 67% 67% October 31, 2012 69% 63 67 69 69 67% 65% 66% 71% 65 68 70 69 68% 65% 67% 1 Geographic location based on the address of the property mortgaged. 2 Excludes loans classified as trading as the Bank intends to sell the loans immediately or in the near term, and loans designated at fair value through profit or loss for which no allowance is recorded. 3 Based on house price at origination. 4 Home equity lines of credit loan-to-value includes first position collateral mortgage if applicable. 5 The territories are included as follows: Yukon is included in British Columbia; Nunavut is included in Ontario; and Northwest Territories is included in the Prairies region. IMPAIRED LOANS A loan is considered impaired when there is objective evidence that there has been a deterioration of credit quality to the extent that the Bank no longer has reasonable assurance as to the timely collection of the full amount of principal and interest. Excluding debt securities clas- sified as loans, FDIC covered loans and other acquired credit-impaired loans, gross impaired loans increased $174 million, or 7% over 2012. Gross impaired loan formations increased year over year by $283 million, primarily driven by Target. In Canada, net impaired loans decreased by $127 million, or 12% in 2013 due to continued credit quality improvement in the personal and commercial banking portfolios. Residential mortgages, consumer instal- ment and other personal loans, and credit cards, generated impaired loans net of counterparty-specific and individually insignificant allow- ances of $815 million, a decrease of $95 million, or 10%, over 2012. Business and government loans generated $100 million in net impaired loans, a decrease of $32 million, or 24%, over 2012. Business and government impaired loans were distributed across industry sectors. In the U.S., net impaired loans increased by $270 million, or 26% in 2013. Residential mortgages, consumer instalment and other personal loans, and credit cards, generated net impaired loans of $629 million, an increase of $234 million, or 59%, over 2012, due primarily to volume growth in real estate secured lending, indirect auto and Target. Business and government loans generated $699 million in net impaired loans, an increase of $36 million, or 5%, over 2012 due primarily to volume growth. Business and government impaired loans were concen- trated in the real estate sector as real estate is the largest sector of US business loans. Geographically, 41% of total impaired loans net of counterparty-specific and individually insignificant allowances were generated in Canada and 59% in the U.S. Net impaired loans in Canada were concentrated in Ontario, which represented 18% of total net impaired loans, down from 24% in 2012. U.S. net impaired loans were concentrated in New England and New Jersey, representing 19% and 13%, respectively, of net impaired loans, compared with 18% and 12%, respectively, in 2012. T A B L E 3 3 CHANGES IN GROSS IMPAIRED LOANS AND ACCEPTANCES (millions of Canadian dollars) Personal, business and government loans1, 2 Balance at beginning of year Additions Return to performing status, repaid or sold Write-offs Foreign exchange and other adjustments Balance at end of year 2013 2012 2011 $ 2,518 4,539 (2,509) (1,914) 58 $ 2,692 $ 2,493 4,256 (2,261) (1,969) (1) $ 2,518 $ 2,535 3,610 (2,015) (1,629) (8) $ 2,493 1 Excludes FDIC covered loans and other acquired credit-impaired loans. For additional information refer to the “Exposure to Acquired Credit-Impaired Loans” discussion and table in this section of the document and Note 7 to the 2013 Consolidated Financial Statements. 2 Excludes debt securities classified as loans. For additional information refer to the “Exposure to Non-Agency Collateralized Mortgage Obligations” section of this document and Note 7 to the 2013 Consolidated Financial Statements. 47 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 4 IMPAIRED LOANS NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES BY INDUSTRY SECTOR1, 2, 3, 4 (millions of Canadian dollars, except as noted) As at Percentage of total Canada Residential mortgages5 Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Agriculture Automotive Financial Food, beverage, and tobacco Forestry Government, public sector entities, and education Health and social services Industrial construction and trade contractors Metals and mining Pipelines, oil, and gas Power and utilities Professional and other services Retail sector Sundry manufacturing and wholesale Telecommunications, cable, and media Transportation Other Total business and government Total Canada United States Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Agriculture Automotive Financial Food, beverage, and tobacco Forestry Government, public sector entities, and education Health and social services Industrial construction and trade contractors Metals and mining Pipelines, oil, and gas Power and utilities Professional and other services Retail sector Sundry manufacturing and wholesale Telecommunications, cable, and media Transportation Other Total business and government Total United States International Business and government Total international Total 2, 3 October 31 October 31 October 31 October 31 October 31 October 31 2011 2011 2012 2013 2012 2013 Counterparty- specific and individually impaired insignificant loans allowances Gross Net impaired loans Net impaired loans Net impaired loans $ 448 $ 14 $ 434 $ 465 $ 596 19.3% 22.1% 28.9% 321 41 73 158 1,041 20 25 52 115 226 25 7 32 5 1 2 5 1 6 3 12 14 27 – 8 44 12 1 2 6 181 12 2 14 – 1 1 2 – 2 1 6 5 7 – 5 26 5 1 1 4 81 1,222 307 8 16 4 1 13 42 12 20 32 – 2 1 1 1 3 12 8 1 – – 14 11 3 7 4 – 258 220 80 2 111 671 110 225 335 1 14 9 11 2 22 35 54 19 – – 82 110 31 19 43 12 799 1,470 301 16 21 43 815 13 5 18 5 – 1 3 1 4 2 6 9 20 – 3 18 7 – 1 2 100 915 250 204 76 1 98 629 98 205 303 1 12 8 10 1 19 23 46 18 – – 68 99 28 12 39 12 306 14 30 95 910 15 1 16 4 2 21 2 4 2 17 6 1 1 – 4 22 8 19 – 3 132 180 16 26 18 836 13.4 0.7 0.9 2.0 36.3 13 6 19 5 1 1 1 – 3 1 7 3 2 – 3 21 14 1 1 5 88 0.6 0.2 0.8 0.2 – 0.1 0.1 0.1 0.2 0.1 0.2 0.4 0.9 – 0.1 0.8 0.3 – 0.1 0.1 4.5 14.6 0.7 1.4 4.5 43.3 0.7 0.1 0.8 0.2 0.1 1.0 0.1 0.2 0.1 0.8 0.3 0.1 0.1 – 0.2 1.0 0.3 0.9 – 0.1 6.3 8.6 0.8 1.3 0.9 40.5 0.6 0.3 0.9 0.2 0.1 0.1 0.1 – 0.1 0.1 0.3 0.1 0.1 – 0.1 1.0 0.7 0.1 0.1 0.2 4.3 1,042 924 40.8 49.6 44.8 187 179 24 2 3 395 133 191 324 2 15 6 7 1 7 18 40 26 4 – 41 70 46 10 32 14 161 11.1 73 6 – 3 9.1 3.4 0.1 4.3 8.9 8.5 1.2 0.1 0.1 7.8 3.6 0.3 – 0.1 243 28.0 18.8 11.8 250 282 532 4.4 9.1 13.5 6.3 9.1 15.4 0.1 0.7 0.3 0.3 0.1 0.3 0.8 1.9 1.2 0.2 – 2.0 3.4 2.2 0.5 1.5 0.7 31.6 50.4 – – 12.1 13.7 25.8 0.2 1.0 0.8 0.3 0.1 0.3 2.4 1.6 0.5 – 0.3 1.9 4.3 1.1 0.3 2.2 0.3 43.4 55.2 – – 4 20 16 6 1 7 50 34 10 – 6 39 90 22 6 46 7 0.1 0.5 0.4 0.4 0.1 0.8 1.0 2.1 0.8 – – 3.0 4.4 1.3 0.5 1.8 0.5 31.2 59.2 – – 100 142 699 663 896 1,328 1,058 1,139 – – – – – – – – – – $ 2,692 $ 449 $ 2,243 $ 2,100 $ 2,063 100.0% 100.0% 100.0% Net impaired loans as a % of common equity 4.77% 4.76% 5.27% 1 Primarily based on the geographic location of the customer’s address. 2 Excludes FDIC covered loans and other acquired credit-impaired loans. For addi- tional information refer to the “Exposure to Acquired Credit-Impaired Loans” discussion and table in this section of the document and Note 7 to the 2013 Consolidated Financial Statements. 3 Excludes debt securities classified as loans. For additional information refer to the “Exposure to Non-Agency Collateralized Mortgage Obligations” section of this document and Note 7 to the 2013 Consolidated Financial Statements. 4 Certain comparative amounts have been reclassified to conform with the presenta- tion adopted in the current year. 5 Does not include trading loans with a fair value of $10,219 million as at October 31, 2013 (October 31, 2012 – $8,271 million) and amortized cost of $9,891 million as at October 31, 2013 (October 31, 2012 – $7,918 million), and loans designated at fair value through profit or loss of $9 million as at October 31, 2013 (October 31, 2012 – $13 million). No allowance is recorded for trading loans or loans designated at fair value through profit or loss. 48 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 5 IMPAIRED LOANS NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES FOR LOAN LOSSES BY GEOGRAPHY1, 2, 3 (millions of Canadian dollars, except as noted) As at Percentage of total October 31 October 31 October 31 October 31 October 31 October 31 2011 2012 2011 2012 2013 2013 Canada Atlantic provinces British Columbia4 Ontario4 Prairies4 Québec Total Canada5 United States Carolinas (North and South) Florida New England6 New Jersey New York Pennsylvania Other Total United States5 Total2 Counterparty- specific and individually impaired insignificant loans allowances Gross $ 41 233 641 193 114 1,222 53 82 479 338 200 155 163 1,470 $ 2,692 $ 7 23 235 24 18 307 4 7 49 37 16 15 14 142 $ 449 Net impaired loans Net impaired loans Net impaired loans $ 34 210 406 169 96 915 49 75 430 301 184 140 149 1,328 $ 2,243 $ 26 202 509 185 120 1,042 23 38 369 252 137 91 148 1,058 $ 2,100 $ 23 159 412 219 111 924 8 45 386 250 134 167 149 1,139 $ 2,063 1.5% 9.4 18.1 7.5 4.3 40.8 1.3% 9.6 24.2 8.8 5.7 49.6 2.2 3.4 19.2 13.4 8.2 6.2 6.6 59.2 1.1 1.8 17.6 12.0 6.5 4.4 7.0 50.4 100.0% 100.0% 1.1% 7.7 20.0 10.6 5.4 44.8 0.4 2.2 18.7 12.1 6.5 8.1 7.2 55.2 100.0% Net impaired loans as a % of net loans7 0.50% 0.52% 0.56% 1 Primarily based on the geographic location of the customer’s address. 2 Excludes FDIC covered loans and other acquired credit-impaired loans. For additional information refer to the “Exposure to Acquired Credit-Impaired Loans” discussion and table in this section of the document and Note 7 to the 2013 Consolidated Financial Statements. 3 Excludes debt securities classified as loans. For additional information refer to the “Exposure to Non-Agency Collateralized Mortgage Obligations” section of this document and Note 7 to the 2013 Consolidated Financial Statements. 4 The territories are included as follows: Yukon is included in British Columbia; Nunavut is included in Ontario; and Northwest Territories is included in the Prairies region. 5 Does not include trading loans with a fair value of $10,219 million as at October 31, 2013 (October 31, 2012 – $8,271 million) and amortized cost of $9,891 million as at October 31, 2013 (October 31, 2012 – $7,918 million), and loans designated at fair value through profit or loss of $9 million as at October 31, 2013 (October 31, 2012 – $13 million). No allowance is recorded for trading loans or loans designated at fair value through profit or loss. 6 The states included in New England are as follows: Connecticut, Maine, Massachu- setts, New Hampshire, and Vermont. 7 Includes customers’ liability under acceptances. ALLOWANCE FOR CREDIT LOSSES Total allowance for credit losses consists of counterparty-specific and collectively assessed allowances. The allowance is increased by the provision for credit losses, and decreased by write-offs net of recoveries. The Bank maintains the allowance at levels that management believes is adequate to absorb incurred credit-related losses in the lending portfolio. Individual problem accounts, general economic conditions, loss experience, as well as the sector and geographic mix of the lending portfolio are all considered by management in assessing the appropriate allowance levels. Counterparty-specific allowance The Bank establishes counterparty-specific allowances for impaired loans when the estimated realizable value of the loan is less than its recorded value, based on the discounting of expected future cash flows. Counterparty-specific allowances for credit losses are established to reduce the book value of loans to their estimated realizable amounts. During 2013, counterparty-specific allowances decreased by $38 million, or 10%, resulting in a total counterparty-specific allowance of $348 million. Excluding debt securities classified as loans, FDIC covered loans and other acquired credit-impaired loans, counterparty-specific allowances decreased by $19 million, or 11% from the prior year. Collectively assessed allowance for individually insignificant impaired loans Individually insignificant loans, such as the Bank’s personal and small busi- ness banking loans and credit cards, are collectively assessed for impair- ment. Allowances are calculated using a formula that incorporates recent loss experience, historical default rates, and the type of collateral pledged. During 2013, the collectively assessed allowance for individually insignificant impaired loans increased by $74 million, or 23%, resulting in a total of $391 million. Excluding FDIC covered loans and other acquired credit-impaired loans, the collectively assessed allowance for individually insignificant impaired loans increased by $48 million, or 19% from the prior year due primarily to the full year impact of the acquisition of the MBNA Canada credit card portfolio in 2012. Collectively assessed allowance for incurred but not identified credit losses The collectively assessed allowance for incurred but not identified credit losses is established to recognize losses that management esti- mates to have occurred in the portfolio at the balance sheet date for loans not yet specifically identified as impaired. The level of collectively assessed allowance for incurred but not identified losses reflects expo- sures across all portfolios and categories. The collectively assessed allowance for incurred but not identified credit losses is reviewed on a quarterly basis using credit risk models and management’s judgment. The allowance level is calculated using the probability of default (PD), the loss given default (LGD) and the exposure at default (EAD) of the related portfolios. The PD is the likelihood that a borrower will not be able to meet its scheduled repayments. The LGD is the amount of the loss the Bank would likely incur when a borrower defaults on a loan, which is expressed as a percentage of exposure at default. EAD is the total amount the Bank expects to be exposed to at the time of default. 49 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS For the non-retail portfolio, allowances are estimated using borrower specific information. The LGD is based on the security and structure of the facility; EAD is a function of the current usage, the borrower’s risk rating, and the committed amount of the facility. For the retail portfolio, the collectively assessed allowance for incurred but not identified credit losses is calculated on a pooled portfolio level with each pool comprising exposures with similar characteristics segmented, for example by product type and PD estimate. Recovery data models are used in the determination of the LGD for each pool. EAD is a func- tion of the current usage and historical exposure experience at default. As at October 31, 2013 the collectively assessed allowance for incurred but not identified credit losses was $2,328 million, up from $2,152 million as at October 31, 2012. Excluding debt securities classified as loans, the collectively assessed allowance for incurred but not identified credit losses increased by $233 million, or 12% from the prior year primarily due to Target. The Bank periodically reviews the methodology for calculating the allowance for incurred but not identified credit losses. As part of this review, certain revisions may be made to reflect updates in statistically derived loss estimates for the Bank’s recent loss experience of its credit portfolios, which may cause the Bank to provide or release amounts from the allowance for incurred but not identified losses. Allowance for credit losses are more fully described in Note 7 to the Consolidated Financial Statements. PROVISION FOR CREDIT LOSSES The provision for credit losses is the amount charged to income to bring the total allowance for credit losses, including both counter- party-specific and collectively assessed allowances, to a level that management considers adequate to absorb incurred credit-related losses in the Bank’s loan portfolio. Provisions in the year are reduced by any recoveries in the year. The Bank recorded a total provision for credit losses of $1,631 million in 2013, compared with a total provision of $1,795 million in 2012. This amount comprised $1,481 million of counterparty-specific and individually insignificant provisions and $150 million in collectively assessed incurred but not identified provisions. The total provision for credit losses as a percentage of net average loans and acceptances decreased to 0.38% from 0.45% in 2012 largely due to improved credit quality in the Canadian and U.S. commercial portfolios. In Canada, residential mortgages, consumer instalment and other personal loans, and credit cards, required counterparty-specific and individually insignificant provisions of $865 million, an increase of $134 million, or 18%, over 2012 due primarily to the full year impact of MBNA in 2012. Business and government loans required counterparty- specific and individually insignificant provisions of $74 million, a decrease of $31 million, or 30%, over 2012 due primarily to improved credit quality. Business and government counterparty-specific and individually insignificant provisions were distributed across all industry sectors. In the U.S., residential mortgages, consumer instalment and other personal loans, and credit cards, required counterparty-specific and individually insignificant provisions of $336 million, an increase of $17 million, or 5%, over 2012. Business and government loans required counterparty-specific and individually insignificant provisions of $144 million, a decrease of $156 million, or 52%, over 2012 primarily due to the improved credit performance in the real estate and financial sectors. Similar to impaired loans, the largest business and government counterparty-specific and individually insignificant provisions occurred in the real estate sector. Geographically, 63% of counterparty-specific and individually insig- nificant provisions were attributed to Canada and 32% to the U.S. in 2013. Canadian counterparty-specific and individually insignificant provisions were concentrated in Ontario, which represented 50% of total counterparty-specific and individually insignificant provisions, up from 39% in 2012. U.S. counterparty-specific and individually insignifi- cant provisions were concentrated in New England and New Jersey, representing 8% and 5% of total counterparty-specific and individually insignificant provisions, down from 13% and 6% respectively in 2012. Table 36 provides a summary of provisions charged to the Consolidated Statement of Income. T A B L E 3 6 PROVISION FOR CREDIT LOSSES (millions of Canadian dollars) Provision for credit losses – counterparty-specific and individually insignificant Provision for credit losses – counterparty-specific Provision for credit losses – individually insignificant Recoveries Total provision for credit losses for counterparty-specific and individually insignificant Provision for credit losses – incurred but not identified Canadian Personal and Commercial Banking and Wholesale Banking U.S. Personal and Commercial Banking Other Total provision for credit losses – incurred but not identified Provision for credit losses 2013 2012 2011 $ 231 1,644 (394) 1,481 (53) 203 – 150 $ 1,631 $ 447 1,415 (287) 1,575 183 37 – 220 $ 1,795 $ 421 1,298 (264) 1,455 – 32 3 35 $ 1,490 50 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 7 PROVISION FOR CREDIT LOSSES BY INDUSTRY SECTOR1, 2 (millions of Canadian dollars, except as noted) Percentage of total October 31 2013 October 31 2012 October 31 2011 October 31 2013 October 31 2012 October 31 2011 Provision for credit losses – counterparty-specific and individually insignificant Canada Residential mortgages3 Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Agriculture Automotive Financial Food, beverage, and tobacco Forestry Government, public sector entities, and education Health and social services Industrial construction and trade contractors Metals and mining Pipelines, oil, and gas Professional and other services Retail sector Sundry manufacturing and wholesale Telecommunications, cable, and media Transportation Other Total business and government Total Canada United States Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Agriculture Automotive Financial Food, beverage, and tobacco Forestry Government, public sector entities, and education Health and social services Industrial construction and trade contractors Metals and mining Pipelines, oil, and gas Power and utilities Professional and other services Retail sector Sundry manufacturing and wholesale Telecommunications, cable, and media Transportation Other Total business and government3 Total United States Total excluding other loans Other loans Debt securities classified as loans Acquired credit-impaired loans4 Total other loans Total provision for credit losses – counterparty-specific and individually insignificant Provision for credit losses – incurred but not identified Personal, business and government Debt securities classified as loans Total provision for credit losses – incurred but not identified Total provision for credit losses $ 16 $ 10 $ 11 1.1% 0.6% 0.8% 15 128 221 485 865 (4) 1 (3) 3 2 – 4 – 1 (1) 14 – 10 3 33 5 (4) 4 3 74 939 11 54 166 54 51 336 – 35 35 (1) 2 1 1 1 12 10 6 6 (2) (1) 24 24 13 3 (5) 15 144 480 1,419 13 49 62 21 131 261 308 731 12 2 14 2 4 6 1 1 – 1 13 6 – 9 16 8 19 3 2 105 836 22 93 111 48 45 319 72 66 138 1 3 22 5 – 7 7 19 3 1 2 7 26 21 8 18 12 300 619 1,455 6 114 120 13 136 283 322 765 (6) 2 (4) – 2 1 5 – 2 – 13 (1) (3) 12 24 – (2) 7 2 58 823 17 59 41 49 48 214 70 60 130 – 1 8 1 – 1 4 22 9 (18) 3 25 20 7 4 9 26 252 466 1,289 85 81 166 1.0 8.6 14.9 32.8 58.4 (0.3) 0.1 (0.2) 0.2 0.1 – 0.3 – 0.1 (0.1) 1.0 – 0.7 0.2 2.2 0.3 (0.3) 0.3 0.2 5.0 63.4 0.7 3.7 11.2 3.7 3.4 22.7 – 2.4 2.4 (0.1) 0.1 0.1 0.1 0.1 0.7 0.7 0.4 0.4 (0.1) (0.1) 1.6 1.6 0.9 0.2 (0.3) 1.0 9.7 32.4 95.8 0.9 3.3 4.2 1.3 8.3 16.6 19.6 46.4 0.8 0.1 0.9 0.1 0.2 0.4 0.1 0.1 – 0.1 0.8 0.4 – 0.6 1.0 0.5 1.2 0.2 0.1 6.7 53.1 1.4 5.9 7.1 3.0 2.9 20.3 4.6 4.2 8.8 0.1 0.2 1.4 0.3 – 0.4 0.4 1.2 0.2 0.1 0.1 0.4 1.7 1.3 0.5 1.1 0.8 19.0 39.3 92.4 0.4 7.2 7.6 0.9 9.3 19.5 22.1 52.6 (0.4) 0.1 (0.3) – 0.1 0.1 0.4 – 0.1 – 0.9 (0.1) (0.2) 0.9 1.6 – (0.1) 0.5 0.1 4.0 56.6 1.2 4.0 2.8 3.4 3.3 14.7 4.8 4.1 8.9 – 0.1 0.5 0.1 – 0.1 0.3 1.5 0.6 (1.3) 0.2 1.7 1.4 0.5 0.3 0.6 1.8 17.3 32.0 88.6 5.8 5.6 11.4 $ 1,481 $ 1,575 $ 1,455 100.0% 100.0% 100.0% 195 (45) 150 214 6 220 $ 1,631 $ 1,795 45 (10) 35 $ 1,490 1 Primarily based on the geographic location of the customer’s address. 2 Certain comparative amounts have been reclassified to conform with the presentation adopted in the current year. 3 Does not include trading loans with a fair value of $10,219 million as at October 31, 2013 (October 31, 2012 – $8,271 million) and amortized cost of $9,891 million as at October 31, 2013 (October 31, 2012 – $7,918 million), and loans designated at fair value through profit or loss of $9 million as at October 31, 2013 (October 31, 2012 – $13 million). No allowance is recorded for trading loans or loans designated at fair value through profit or loss. 4 Includes all FDIC covered loans and other ACI loans. 51 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 8 PROVISION FOR CREDIT LOSSES BY GEOGRAPHY1 (millions of Canadian dollars, except as noted) Percentage of total October 31 2013 October 31 2012 October 31 2011 October 31 2013 October 31 2012 October 31 2011 Canada Atlantic provinces British Columbia2 Ontario2 Prairies2 Québec Total Canada3 United States Carolinas (North and South) Florida New England4 New Jersey New York Pennsylvania Other Total United States3 International Other Total international Total excluding other loans Other loans Total counterparty-specific and individually insignificant provision Incurred but not identified provision Total provision for credit losses $ 24 56 739 72 48 939 17 28 120 74 61 22 158 480 – – 1,419 62 1,481 150 $ 1,631 $ 23 55 616 72 70 836 12 17 208 92 75 73 142 619 – – 1,455 120 1,575 220 $ 1,795 $ 23 53 631 66 50 823 11 31 147 111 65 52 49 466 – – 1,289 166 1,455 35 $ 1,490 1.5% 3.4 45.3 4.4 3.0 57.6 1.0 1.7 7.4 4.5 3.7 1.4 9.7 29.4 – – 87.0 3.8 90.8 9.2 100.0% 1.3% 3.0 34.3 4.0 3.9 46.5 0.7 0.9 11.6 5.1 4.2 4.1 7.9 34.5 – – 81.0 6.7 87.7 12.3 100.0% 1.5% 3.6 42.3 4.4 3.4 55.2 0.7 2.1 9.9 7.4 4.4 3.5 3.3 31.3 – – 86.5 11.2 97.7 2.3 100.0% Provision for credit losses as a % of average net loans and acceptances5 October 31 2013 October 31 2012 October 31 2011 Canada Residential mortgages Credit card, consumer instalment and other personal Business and government Total Canada United States Residential mortgages Credit card, consumer instalment and other personal Business and government Total United States International Total excluding other loans Other loans Total counterparty-specific and individually insignificant provision Incurred but not identified provision Total provision for credit losses as a % of average 0.01% 0.80 0.12 0.29 0.06 1.07 0.28 0.48 – 0.33 0.85 0.34 0.03 0.01% 0.67 0.21 0.27 0.15 1.30 0.67 0.75 – 0.37 1.18 0.39 0.06 0.01% 0.74 0.13 0.30 0.16 1.16 0.66 0.71 – 0.37 1.34 0.41 0.01 net loans and acceptances 0.38% 0.45% 0.42% 4 The states included in New England are as follows: Connecticut, Maine, Massachusetts, New Hampshire, and Vermont. 5 Includes customers’ liability under acceptances. 1 Primarily based on the geographic location of the customer’s address. 2 The territories are included as follows: Yukon is included in British Columbia; Nunavut is included in Ontario; and Northwest Territories is included in the Prairies region. 3 Does not include trading loans with a fair value of $10,219 million as at October 31, 2013 (October 31, 2012 – $8,271 million) and amortized cost of $9,891 million as at October 31, 2013 (October 31, 2012 – $7,918 million), and loans designated at fair value through profit or loss of $9 million as at October 31, 2013 (October 31, 2012 – $13 million). No allowance is recorded for trading loans or loans designated at fair value through profit or loss. NON-PRIME LOANS As at October 31, 2013 the Bank had approximately $2.4 billion (October 31, 2012 – $2.3 billion), gross exposure to non-prime loans, which primarily consists of automotive loans originated in Canada. The credit loss rate, which is an indicator of credit quality and is defined as the annual PCL divided by the average month-end loan balance, was approximately 3.38% on an annual basis (October 31, 2012 – 3.57%). The portfolio continues to perform as expected. These loans are recorded at amortized cost. 52 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS SOVEREIGN RISK The following table provides a summary of the Bank’s credit exposure to certain European countries, including Greece, Italy, Ireland, Portugal and Spain (GIIPS). T A B L E 3 9 EXPOSURE TO EUROPE – Total Net Exposure by Country and Counterparty (millions of Canadian dollars) As at Loans and Commitments1 Derivatives, Repos and Securities Lending2 Trading and Investment Portfolio3,4 Country Corporate Sovereign Financial Total Corporate Sovereign Financial Total Corporate Sovereign Financial Total Total Exposure5 GIIPS Greece Italy Ireland Portugal Spain Total GIIPS Rest of Europe France Germany Netherlands Sweden Switzerland United Kingdom Other6 Rest of Europe Total Europe GIIPS Greece Italy Ireland Portugal Spain Total GIIPS Rest of Europe France Germany Netherlands Sweden Switzerland United Kingdom Other6 Rest of Europe Total Europe $ – $ – – – 116 – 121 – – – $ 116 $ 121 $ – $ 2 – – 47 $ 49 $ – $ 123 – – 163 286 $ – $ – – – 5 5 $ – $ – – – – – $ – $ 3 12 3 13 31 $ – 3 12 3 18 36 $ – $ 11 – – 8 $ 19 $ – $ – $ 1 – – – 1 $ 226 $ 12 1 – 213 October 31, 2013 – $ 24 1 – 221 246 $ – 150 13 3 402 568 435 923 417 – 787 1,240 110 – 327 158 44 – 7,590 155 $ 3,912 $ 8,274 $ 4,028 $ 8,395 49 50 404 80 86 238 40 484 1,300 979 124 873 9,068 305 1,338 2,903 696 45 707 3,344 566 $ 947 $ 13,133 $ 1,148 $ 2,496 $ 5,955 $ 9,599 $ 996 $ 13,419 $ 1,153 $ 2,496 $ 5,986 $ 9,635 1,141 722 257 22 707 2,784 322 137 1,931 148 23 – 107 150 60 250 291 – – 453 94 2,112 5,148 5,943 1,184 264 82 188 56 3 27 144 79 1,878 4,895 5,041 707 – 490 1,579 152 65 846 474 237 4,748 151 3,934 9,351 7,618 1,353 1,844 5,382 17,794 2,680 1,809 $ 579 $ 14,590 $ 6,673 $ 21,842 $ 44,574 $ 598 $ 14,591 $ 6,899 $ 22,088 $ 45,142 $ $ – $ – – – 70 70 – 97 – – – $ 97 $ – $ – – – 48 – $ 97 – – 118 $ 48 $ 215 $ – $ – – – 14 14 $ – $ – – – – – $ 4 4 $ 3 3 66 66 3 3 19 33 95 $ 109 $ – $ 17 – – 11 $ 28 $ – $ – $ 2 – – 1 3 $ 223 $ 19 1 – 203 October 31, 2012 – $ 38 1 – 215 254 $ 4 138 67 3 366 578 393 659 369 – 529 1,439 15 $ 3,404 $ 3,474 – 185 – – – 483 59 $ 727 $ 824 24 80 260 4 76 216 25 417 924 629 4 605 2,138 99 1,260 2,245 768 80 969 3,015 544 $ 685 $ 4,816 $ 1,168 $ 1,820 $ 5,893 $ 8,881 $ 733 $ 5,031 $ 1,182 $ 1,820 $ 5,988 $ 8,990 779 816 460 80 969 2,466 323 366 1,167 25 – – 73 189 115 262 283 – – 476 32 1,907 4,103 6,068 782 328 54 124 53 1 31 101 13 1,690 3,929 4,721 380 – 64 2,002 3,584 7,272 7,465 866 1,902 4,891 10,044 2,823 2,180 $ 377 $ 12,786 $ 7,096 $ 20,259 $ 33,956 $ 405 $ 12,789 $ 7,319 $ 20,513 $ 34,534 163 50 1,294 401 297 4,726 165 1 Exposures include interest-bearing deposits with banks and are presented net of impairment charges where applicable. There were no impairment charges for European exposures as at October 31, 2013 or October 31, 2012. 2 Exposures are calculated on a fair value basis and are net of collateral. Total market value of pledged collateral is $1.4 billion for GIIPS (October 31, 2012 – $0.9 billion) and $28.2 billion for the rest of Europe (October 31, 2012 – $31.6 billion). Derivatives are presented as net exposures where there is an ISDA master netting agreement. 3 Trading Portfolio exposures are net of eligible short positions. Deposits of $2.3 billion (October 31, 2012 – $2.6 billion) are included in the Trading and Investment Portfolio. 4 The fair values of the GIIPS exposures in Level 3 in the Trading and Investment Portfolio were not significant as at October 31, 2013 and October 31, 2012. 5 The reported exposures do not include $0.3 billion of protection the Bank purchased through credit default swaps (October 31, 2012 – $0.3 billion). 6 Other European exposure is distributed across 13 countries (October 31, 2012 – 11 countries), each of which has a net exposure below $1.0 billion as at October 31, 2013 and October 31, 2012. 53 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 4 0 EXPOSURE TO EUROPE – Gross European Lending Exposure by Country (millions of Canadian dollars) Country GIIPS Greece Italy Ireland Portugal Spain Total GIIPS Rest of Europe France Germany Netherlands Sweden Switzerland United Kingdom Other Rest of Europe Total Europe GIIPS Greece Italy Ireland Portugal Spain Total GIIPS Rest of Europe France Germany Netherlands Sweden Switzerland United Kingdom Other Rest of Europe Total Europe As at Loans and Commitments Indirect2 Total October 31, 2013 $ – 1 – – 100 $ 101 461 895 584 4 603 1,365 116 $ 4,028 $ 4,129 $ $ – 123 – – 163 286 484 1,300 979 124 873 9,068 305 $ 13,133 $ 13,419 October 31, 2012 $ $ – – – – 92 92 375 578 597 4 486 1,497 27 $ 3,564 $ 3,656 $ $ – 97 – – 118 215 417 924 629 4 605 2,138 99 $ 4,816 $ 5,031 Direct1 $ – 122 – – 63 $ 185 23 405 395 120 270 7,703 189 $ 9,105 $ 9,290 $ – 97 – – 26 $ 123 42 346 32 – 119 641 72 $ 1,252 $ 1,375 1 Includes interest-bearing deposits with banks, funded loans and banker’s acceptances. 2 Includes undrawn commitments and letters of credit. Of the Bank’s European exposure, approximately 98% (October 31, 2012 – 97%) is to counterparties in countries rated AAA/AA+ by either Moody’s Investor Services (Moody’s) or Standard & Poor’s (S&P), with the majority of this exposure to the sovereigns themselves and to well rated, systemically important banks in these countries. Derivatives and securities repurchase transactions are completed on a collateralized basis. The vast majority of derivatives exposure is offset by cash collat- eral while the repurchase transactions are backed largely by govern- ment securities rated AA- or better by either Moody’s or S&P, and cash. The Bank also takes a limited amount of exposure to well rated corporate issuers in Europe where the Bank also does business with their related entities in North America. In addition to the European exposure identified above, the Bank also has $4.9 billion (October 31, 2012 – $3.6 billion) of direct expo- sure to supranational entities with European sponsorship, and indirect exposure including $791 million (October 31, 2012 – $493 million) of European collateral from non-European counterparties related to repurchase and securities lending transactions that are margined daily, and $7 million (October 31, 2012 – $20 million) invested in European diversified investment funds. As part of the Bank’s usual credit risk and exposure monitoring processes, all exposures are reviewed on a regular basis. European exposures are reviewed monthly or more frequently as circumstances dictate and are periodically stress tested to identify and understand any potential vulnerabilities. Based on the most recent reviews, all European exposures are considered manageable. 54 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS EXPOSURE TO ACQUIRED CREDIT-IMPAIRED LOANS Acquired credit-impaired (ACI) loans are generally loans with evidence of credit quality deterioration since origination for which it is probable at the purchase date that the Bank will be unable to collect all contractually required principal and interest payments. Evidence of credit quality dete- rioration as of the acquisition date may include statistics such as past due status and credit scores. ACI loans are recorded at fair value upon acquisition and the applicable accounting guidance prohibits carrying over or recording allowance for loan losses in the initial accounting. ACI loans were acquired through the acquisitions of FDIC-assisted transactions, which include FDIC covered loans subject to loss sharing agreements with the FDIC, South Financial, Chrysler Financial, and the acquisitions of the credit card portfolios of MBNA Canada and Target. The following table presents the unpaid principal balance, carrying value, counterparty-specific allowance, allowance for individually insignificant impaired loans and the net carrying value as a percentage of the unpaid principal balance for ACI loans as at October 31, 2013 and October 31, 2012. T A B L E 4 1 ACQUIRED CREDIT-IMPAIRED LOAN PORTFOLIO (millions of Canadian dollars, except as noted) FDIC-assisted acquisitions South Financial Other2 Total ACI loan portfolio FDIC-assisted acquisitions South Financial Other2 Total ACI loan portfolio Unpaid principal balance1 $ 836 1,700 105 $ 2,641 $ 1,070 2,719 283 $ 4,072 Carrying value $ 787 1,619 79 $ 2,485 $ 1,002 2,519 246 $ 3,767 Counterparty- specific allowance Allowance for individually insignificant impaired loans $ 5 19 – $ 24 $ 5 26 – $ 31 $ 55 38 – $ 93 $ 54 12 1 $ 67 As at Carrying Percentage of value net of unpaid principal balance allowances October 31, 2013 $ 727 1,562 79 $ 2,368 87.0% 91.9 75.2 89.7% October 31, 2012 $ 943 2,481 245 $ 3,669 88.1% 91.2 86.6 90.1% 1 Represents contractual amount owed net of charge-offs since acquisition of the loan. 2 Other includes the ACI loan portfolios of Chrysler Financial and the credit card portfolios of MBNA Canada and Target. During the year ended October 31, 2013, the Bank recorded $49 million of provision for credit losses on ACI loans (2012 – $114 million, 2011 – $81 million). The following table provides key credit statistics by past due contractual status and geographic concentrations based on ACI loans unpaid principal balance. T A B L E 4 2 ACQUIRED CREDIT-IMPAIRED LOANS – Key Credit Statistics (millions of Canadian dollars, except as noted) Past due contractual status Current and less than 30 days past due 30-89 days past due 90 or more days past due Total ACI loans Geographic region Florida South Carolina North Carolina Other U.S./Canada Total ACI loans October 31, 2013 October 31, 2012 Unpaid principal balance1 Unpaid principal balance1 As at $ 2,239 78 324 $ 2,641 $ 1,505 772 241 123 $ 2,641 84.8% 2.9 12.3 100.0% 57.0% 29.2 9.1 4.7 100.0% $ 3,346 182 544 $ 4,072 $ 2,079 1,278 427 288 $ 4,072 82.2% 4.5 13.3 100.0% 51.0% 31.4 10.5 7.1 100.0% 1 Represents contractual amount owed net of charge-offs since acquisition of the loan. EXPOSURE TO NON-AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS As a result of the acquisition of Commerce Bancorp Inc., the Bank has exposure to non-agency Collateralized Mortgage Obligations (CMOs) collateralized primarily by Alt-A and Prime Jumbo mortgages, most of which are pre-payable fixed-rate mortgages without rate reset features. At the time of acquisition, the portfolio was recorded at fair value, which became the new cost basis for this portfolio. These debt securities are classified as loans and carried at amortized cost using the effective interest rate method, and are evaluated for loan losses on a quarterly basis using the incurred credit loss model. The impairment assessment follows the loan loss accounting model, where there are two types of allowances for credit losses, counterparty- specific and collectively assessed. Counterparty-specific allowances represent individually significant loans, such as the Bank’s business and government loans and debt securities classified as loans, which are assessed for whether impairment exists at the counterparty-specific level. Collectively assessed allowances consist of loans for which no impairment is identified on a counterparty-specific level and are grouped into portfolios of exposures with similar credit risk characteris- tics to collectively assess if impairment exists at the portfolio level. The allowance for losses that are incurred but not identified as at October 31, 2013 was US$94 million (October 31, 2012 – US$156 million). The total provision for credit losses recognized in 2013 was a decrease of US$30 million (2012 – US$12 million, 2011 – US$51 million). 55 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS The following table presents the par value, carrying value, allowance for loan losses, and the net carrying value as a percentage of the par value for the non-agency CMO portfolio as at October 31, 2013 and October 31, 2012. As at October 31, 2013 the balance of the remain- ing acquisition-related incurred loss was US$226 million (October 31, 2012 – US$315 million); this amount is reflected below as a compo- nent of the discount from par to carrying value. T A B L E 4 3 NON-AGENCY CMO LOANS PORTFOLIO (millions of U.S. dollars, except as noted) Non-Agency CMOs Non-Agency CMOs Par value Carrying value Allowance for loan losses Carrying value net of allowance As at Percentage of par value $ 2,075 $ 1,770 $ 260 $ 1,510 72.8% October 31, 2013 $ 3,357 $ 2,830 $ 340 $ 2,490 74.2% October 31, 2012 During the year ended October 31, 2013, the Bank sold US$520 million of non-agency CMOs, which resulted in a net gain on sale of US$106 million reported in Other income on the Bank’s Consolidated Statement of Income. During the second quarter of 2009, the Bank re-securitized a portion of the non-agency CMO portfolio. As part of the on-balance sheet re-securitization, new credit ratings were obtained for the re-securitized securities that better reflect the discount on acquisition and the Bank’s risk inherent on the entire portfolio. As a result, 13% of the non-agency CMO portfolio is now rated AAA for regulatory capital reporting (October 31, 2012 – 14%). The net capital benefit of the re-securitization transaction is reflected in the changes in RWA. For accounting purposes, the Bank retained a majority of the beneficial interests in the re-securitized securities resulting in no financial statement impact. The Bank’s assessment of impairment for these reclassified securities is not impacted by a change in the credit ratings. T A B L E 4 4 NON-AGENCY ALT-A AND PRIME JUMBO CMO PORTFOLIO BY VINTAGE YEAR Prime Jumbo Amortized cost Fair value Amortized cost As at Total Fair value October 31, 2013 Amortized cost $ 81 96 358 255 364 Alt-A Fair value $ 90 107 415 285 416 $ 85 30 30 134 171 $ 93 33 33 150 184 $ 1,154 $ 1,313 $ 450 $ 493 $ 142 295 538 313 478 $ 160 324 582 321 515 $ 148 99 170 233 230 $ 152 111 178 232 242 $ 1,766 $ 1,902 $ 880 $ 915 $ 183 140 448 435 600 $ 1,806 $ 166 126 388 389 535 $ 1,604 94 $ 1,510 October 31, 2012 $ 312 435 760 553 757 $ 2,817 $ 290 394 708 546 708 $ 2,646 156 $ 2,490 (millions of U.S. dollars) 2003 2004 2005 2006 2007 Total portfolio net of counterparty-specific and individually insignificant credit losses Less: allowance for incurred but not identified credit losses Total 2003 2004 2005 2006 2007 Total portfolio net of counterparty-specific and individually insignificant credit losses Less: allowance for incurred but not identified credit losses Total 56 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS GROUP FINANCIAL CONDITION Capital Position T A B L E 4 5 CAPITAL STRUCTURE AND RATIOS – Basel III 1 (millions of Canadian dollars, except as noted) Common Equity Tier 1 Capital (CET1) Common shares plus related contributed surplus Retained earnings Accumulated other comprehensive income Common Equity Tier 1 Capital before regulatory adjustments Common Equity Tier 1 capital regulatory adjustments Goodwill (net of related tax liability) Intangibles (net of related tax liability) Deferred tax assets excluding those arising from temporary differences Cash flow hedge reserve Shortfall of provisions to expected losses Gains and losses due to changes in own credit risk on fair valued liabilities Defined benefit pension fund net assets (net of related tax liability) Investment in own shares Significant investments in the common stock of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) Total regulatory adjustments to Common Equity Tier 1 Common Equity Tier 1 Capital Additional Tier 1 capital instruments Directly issued capital instruments subject to phase out from Additional Tier 1 Additional Tier 1 instruments issued by subsidiaries and held by third parties subject to phase out Additional Tier 1 capital instruments before regulatory adjustments Additional Tier 1 capital instruments regulatory adjustments Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions Total regulatory adjustments to Additional Tier 1 Capital Additional Tier 1 capital Tier 1 capital Tier 2 capital instruments and provisions Directly issued capital instruments subject to phase out from Tier 2 Tier 2 instruments issued by subsidiaries and held by third parties subject to phase out Collective allowances Tier 2 capital before regulatory adjustments Tier 2 regulatory adjustments Investment in own Tier 2 instruments Significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions Total regulatory adjustments to Tier 2 capital Tier 2 capital Total capital Total risk-weighted assets Capital Ratios2 Common Equity Tier 1 capital (as percentage of risk-weighted assets) Tier 1 (as percentage of risk-weighted assets) Total capital (as percentage of risk-weighted assets) 1 Capital position calculated using the ‘All-in’ methodology. 2 The “all-in” basis of regulatory reporting includes all of the regulatory adjustments that will be required by 2019. 2013 Basel III $ 19,341 24,565 3,166 47,072 (13,280) (2,097) (519) (1,005) (116) (89) (389) (183) (3,572) (21,250) 25,822 5,524 552 6,076 (352) (352) 5,724 31,546 7,564 297 1,472 9,333 (19) (170) (189) 9,144 40,690 $ 286,355 9.0% 11.0 14.2 57 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 4 5 CAPITAL STRUCTURE AND RATIOS – Basel II 1 (cont’d) (millions of Canadian dollars, except as noted) Tier 1 Capital Common shares Contributed surplus Retained earnings Fair value (gain) loss arising from changes in the institution’s own credit risk Net unrealized foreign currency translation gains (losses) on investment in subsidiaries, net of hedging activities Preferred shares2 Innovative instruments2 Adjustments for transition to measurement under IFRS Net impact of eliminating one month reporting lag of U.S. entities3 Gross Tier 1 Capital Goodwill and intangibles in excess of 5% limit Net Tier 1 Capital Securitization – gain on sales of mortgages – other 50% shortfall in allowance4 50% substantial investments Investment in insurance subsidiaries5 Net impact of eliminating one month reporting lag of U.S. entities3 Adjusted Net Tier 1 Capital Tier 2 Capital Innovative instruments Subordinated notes and debentures (net of amortization and ineligible) Eligible collective allowance (re-standardized approach) Accumulated net after-tax unrealized gain on AFS equity securities in OCI Securitization – other 50% shortfall in allowance4 50% substantial investments Investment in insurance subsidiaries5 Net impact of eliminating one month reporting lag of U.S. entities3 Total Tier 2 Capital Total Regulatory Capital Regulatory Capital Ratios3 Tier 1 capital ratio6 Total capital ratio6 Assets-to-capital multiple 1 Prior to 2012, the amounts are calculated based on Canadian GAAP. 2 Effective 2012, in accordance with IAS 32, Financial Instruments: Presentation, the Bank is required to classify certain classes of preferred shares and innovative Tier 1 capital investments as liabilities on the balance sheet. Prior to 2012, in accordance with the CICA Handbook Section 3860, the Bank was required to classify certain classes of preferred shares and innovative Tier 1 capital investments as liabilities on the balance sheet. For regulatory capital purposes, these capital instruments have been grandfathered by OSFI and continue to be included in Tier 1 capital. 3 As at November 2011, the one month lag for financial reporting has been elimi- nated. In previous months, for accounting purposes, the Bank’s investment in TD Ameritrade was translated using the month-end rate of TD Ameritrade’s reporting period, which was on a one month lag. For regulatory purposes only, the Bank’s investment in TD Ameritrade was translated using the period-end foreign exchange rate of the Bank. THE BANK’S CAPITAL MANAGEMENT OBJECTIVES: The Bank’s capital management objectives are: • To be an appropriately capitalized financial institution as determined by: – The Bank’s Risk Appetite Statement; – Capital requirements defined by relevant regulatory authorities; and, – The Bank’s internal assessment of capital requirements consistent with the Bank’s risk profile and risk tolerance levels. • To have the most economically achievable weighted average cost of capital (after tax), consistent with preserving the appropriate mix of capital elements to meet targeted capitalization levels. • To ensure ready access to sources of appropriate capital, at reason- able cost, in order to: – Insulate the Bank from unexpected events; and – Support and facilitate business growth and/or acquisitions consis- tent with the Bank’s strategy and risk appetite. • To support strong external debt ratings, in order to manage the Bank’s overall cost of funds and to maintain accessibility to required funding. These objectives are applied in a manner consistent with the Bank’s over- all objective of providing a satisfactory return on shareholders’ equity. 58 2012 Basel II 2011 Basel II $ 18,525 196 21,763 (2) (426) 3,394 3,700 387 – 47,537 (12,311) 35,226 – (650) (103) (2,731) (753) – 30,989 26 11,198 1,142 99 (1,272) (103) (2,731) (753) – 7,606 $ 38,595 $ 18,301 281 24,339 – (3,199) 3,395 3,705 – (266) 46,556 (14,376) 32,180 (86) (735) (180) (2,805) (4) 133 28,503 26 11,253 940 35 (1,484) (180) (2,805) (1,443) 133 6,475 $ 34,978 12.6% 15.7% 18.0 13.0% 16.0% 17.2 4 When expected loss as calculated within the Internal Risk Based (IRB) approach exceeds total allowance for credit losses, the difference is deducted 50% from Tier 1 capital and 50% from Tier 2 capital. When expected loss as calculated within the IRB approach is less than the total allowance for credit losses, the difference is added to Tier 2 capital. 5 Based on OSFI advisory letter dated February 20, 2007, 100% of investments in insurance subsidiaries held prior to January 1, 2007 are deducted from Tier 2 capital. The 50% from Tier 1 capital and 50% from Tier 2 capital deduction was deferred until 2012. 6 OSFI’s target Tier 1 and Total capital ratios for Canadian banks are 7% and 10%, respectively. CAPITAL SOURCES The Bank’s capital is primarily derived from common shareholders and retained earnings. Other sources of capital include the Bank’s preferred shareholders, holders of innovative capital instruments, and holders of the Bank’s subordinated debt. CAPITAL MANAGEMENT The Enterprise Capital Management department manages capital for the Bank and is responsible for acquiring, maintaining, and retiring capital. The Board of Directors oversees capital adequacy and management. The Bank continues to hold sufficient capital levels to ensure that flexibility is maintained to grow operations, both organically and through strategic acquisitions. The strong capital ratios are the result of the Bank’s internal capital generation, management of the balance sheet, and periodic issuance of capital securities. TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS ECONOMIC CAPITAL The Bank’s internal measure of required capital is called economic capital or invested capital. Economic capital is comprised of both risk- based capital required to fund losses that could occur under extremely adverse economic or operational conditions and investment capital that has been used to fund acquisitions or investments in fixed assets to support future earnings growth. The Bank uses internal models to determine how much risk-based capital is required to support the enterprise’s risk and business expo- sures. Characteristics of these models are described in the ‘Managing Risk’ section. Within the Bank’s measurement framework, our objec- tive is to hold risk-based capital to cover unexpected losses to a high level of confidence and ratings standards. The Bank’s chosen internal capital targets are well founded and consistent with our overall risk profile and current operating environment. Since November 1, 2007, the Bank has been operating its capital regime under the Basel Capital Framework. Consequently, in addition to addressing Pillar I risks covering credit risk, market risk and opera- tional risk, the Bank’s economic capital framework captures other material Pillar II risks including non-trading market risk for the retail portfolio (interest rate risk in the banking book), additional credit risk due to concentration (commercial and wholesale portfolios), and risks classified as “Other”, namely business risk, insurance risk, and the Bank’s investment in TD Ameritrade. Please refer to the Risk-Weighted Assets section below for a break- down of the Bank’s economic capital by business segment, and Pillar I and Pillar II risks. REGULATORY CAPITAL Basel III Capital Framework Changes in capital requirements approved by the Basel Committee on Banking and Supervision (BCBS) are commonly referred to as Basel III. These changes are intended to strengthen global capital rules with the goal of promoting a more resilient global banking sector. Under Basel III, total capital consists of three components, namely CET1, Additional Tier 1 and Tier 2 capital. The sum of the first two components is defined as Tier 1 capital. CET1 capital is mainly comprised of common shares, retained earnings and accumulated other compre- hensive income, and is the highest quality capital and the predominant form of Tier 1 capital. CET1 capital includes regulatory adjustments and deductions for items such as goodwill, other intangibles, amounts by which capital items (that is, significant investments in CET1 capital of financial institutions, mortgage servicing rights and deferred tax assets from temporary differences) exceed allowable thresholds. Tier 2 capital is mainly comprised of subordinated debt, certain loan loss allowances and minority interests in subsidiaries’ Tier 2 instruments. Under Basel III, risk-weighted assets are higher, primarily as a result of the 250% risk-weighted threshold items not deducted from CET1 capital, securitization exposures being risk weighted (previously deducted from capital) and a new capital charge for credit risk related to asset value correlation for financial institutions. Regulatory capital ratios are calculated by dividing CET1, Tier 1 and Total capital by RWA. OSFI’s Regulatory Target Ratios under Basel III on an “All-In” Basis OSFI’s Capital Requirements under Basel III In December 2012, OSFI released the final version of its Capital Adequacy Requirements (CAR) Guideline. The guideline details how the Basel III rules should apply to Canadian banks. The final CAR Guideline postponed the CVA capital add-on charge until January 1, 2014. OSFI has indicated there will be delays in the implementation of Basel III standards in the U.S. and European Union countries. The bilateral over-the-counter (OTC) derivative market is a global market and given the significant impact of the CVA capital add-on charge, OSFI believes a coordinated start with the two most significant jurisdictions in the global derivatives market is warranted. As a result, OSFI issued a letter on August 21, 2013 advising the CVA capital charge will be phased in over a five year period beginning 2014 and will be based on two available options. Option 1 allows for a scalar phase-in for the CVA capital add-on charge of 57% in 2014 for the CET1 capital ratio calculation. This percentage would increase to 64% for 2015 and 2016, 72% in 2017, 80% in 2018 and 100% in 2019. A different set of scalar phase-in percentages would also apply for the Tier 1 and Total capital ratios calculations. Option 2 allows for a scalar phase-in for all the capital ratios based on the Total Capital ratio phase- in percentages. OSFI also clarified that, although market risk hedges of CVA are not recognized in the CVA capital charge, market risk hedges of CVA used for the purposes of mitigating CVA risk, and managed as such, are exempt from market risk capital requirements. The CAR Guideline contains two methodologies for capital ratio calculation: (i) the “transitional” method; and (ii) the “all-in” method. Under the “transitional” method, changes in capital treatment for certain items, as well as minimum capital ratio requirements, will be phased in over the period from 2013 to 2019. Under the “all-in” method, capital is defined to include all of the regulatory adjustments that will be required by 2019, while retaining the phase-out rules for non-qualifying capital instruments. The minimum CET1, Tier 1 and Total capital ratios based on the “all-in” method are 4.5%, 6.0% and 8.0%, respectively. OSFI expected Canadian banks to include an addi- tional capital conservation buffer of 2.5% in the first quarter of 2013, effectively raising the CET1 minimum requirement to 7.0%. With the capital conservation buffer, Canadian banks are required to maintain a minimum Tier 1 capital ratio of 8.5% and a Total capital ratio of 10.5%, starting in the first quarter of 2014. At the discretion of OSFI, a countercyclical common equity capital buffer (CCB) within a range of 0-2.5% could be imposed. No CCB is currently in effect. In November 2011, the BCBS published the final rules on global systemically important banks (G-SIBs). None of the Canadian banks have been designated as a G-SIB. In March 2013, OSFI designated six of the major Canadian banks as domestic systemically important banks (D-SIBs), for which a 1% common equity capital surcharge will be in effect from January 1, 2016. As a result, the six Canadian banks designated as D-SIBs, including TD, will be required to meet an “all-in” Pillar 1 target CET1 ratio of 8% commencing January 1, 2016. Basel III Capital Ratios Common Equity Tier 1 ratio Tier 1 Capital ratio Total Capital ratio BCBS minimum 4.5% 6.0% 8.0% Capital OSFI Regulatory Targets without D-SIB surcharge Conservation buffer 2.5% 2.5% 2.5% 7.0% 8.5% 10.5% Effective Date January 1, 2013 January 1, 2014 January 1, 2014 D-SIB surcharge OSFI Regulatory Targets with D-SIB surcharge 1.0% 1.0% 1.0% 8.0% 9.5% 11.5% Effective Date January 1, 2016 January 1, 2016 January 1, 2016 With BCBS’s leverage ratio requirement pending Pillar 1 treatment on January 1, 2018, OSFI continues to require Canadian banks to meet its asset-to-capital (ACM) multiple test on a continuous basis. The multiple is calculated on a Basel III “transitional basis”, by dividing total assets, including specified off-balance sheet items, by total capital. 59 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS Capital Position and Capital Ratios The Basel framework allows qualifying banks to determine capital levels consistent with the way they measure, manage and mitigate risks. It specifies methodologies for the measurement of credit, market, and operational risks. The Bank uses the advanced approaches for the majority of its portfolios which results in regulatory and economic capital being more closely aligned than was the case under Basel I. Since the U.S. banking subsidiaries (TD Bank, N.A. including South Financial and Chrysler Financial) were not originally required by their main regulators to convert to Basel II prior to being acquired by the Bank, the advanced approaches are not yet being utilized for the majority of assets in TD Bank, N.A. For accounting purposes, IFRS is followed for consolidation of subsid- iaries and joint ventures. For regulatory capital purposes, insurance subsidiaries are deconsolidated and reported as a deduction from capital. Insurance subsidiaries are subject to their own capital adequacy reporting such as OSFI’s Minimum Continuing Capital Surplus Requirements and Minimum Capital Test. Currently, for regulatory capital purposes, all the entities of the Bank are either consolidated or deducted from capital and there are no entities from which surplus capital is recognized. Some of the Bank’s subsidiaries are individually regulated by either OSFI or other regulators. Many of these entities have minimum capital requirements which they must maintain and which may limit the Bank’s ability to extract capital or funds for other uses. Common Equity Tier 1 Capital CET1 capital was $25,822 million as at October 31, 2013. Strong earnings contributed to the majority of CET1 capital growth in the year. Capital management funding activities during the year included the common share issuance of $0.8 billion under the dividend rein- vestment plan and stock option exercises. The growth in CET1 capital is partially offset by the share buybacks in the year. Tier 1 and Tier 2 Capital Under Basel III, all of TD’s outstanding non-common Tier 1 and Tier 2 capital instruments are considered non-qualifying as regulatory capital, subject to a 10 year phase-out period beginning in January 2013. TD announced on February 7, 2011 that, based on OSFI’s February 4, 2011 advisory which outlined OSFI’s expectations regarding the use of redemption rights triggered by regulatory event clauses in non- qualifying capital instruments, it expects to exercise a regulatory event redemption right only in 2022 in respect of the TD Capital Trust IV Notes – Series 2 outstanding at that time. As of October 31, 2013, there was $450 million in principal amount of TD Capital Trust IV Notes – Series 2 issued and outstanding. In November 2012 and in June 2013, the Bank redeemed $2.5 billion and $900 million, respectively, of subordinated debentures which qualified as Tier 2 regulatory capital. See Note 34 to the Bank’s Consolidated Financial Statements for more details. INTERNAL CAPITAL ADEQUACY ASSESSMENT PROCESS The Bank’s Internal Capital Adequacy Assessment Process (ICAAP) is an integrated enterprise-wide process that encompasses the governance, management, and control of risk and capital functions within the Bank. It provides a framework for relating risks to capital requirements through the Bank’s economic capital modeling and stress testing practices which help inform the Bank’s overall capital adequacy requirements. The ICAAP is facilitated by Risk Management and is supported by numerous functional areas who together help determine the Bank’s internal capital adequacy assessment. This assessment ultimately represents the capacity to bear risk in congruence with the risk profile and stated risk appetite of the Bank. Risk Management leads the ICAAP and assesses whether the Bank’s internal view of required capital is appropriate for the Bank’s risks. Enterprise Capital Management monitors the overall adequacy of the Bank’s available capital in relation to both internal and regulatory capital requirements. DIVIDENDS The Bank’s dividend policy is approved by the Board of Directors. At October 31, 2013, the quarterly dividend was $0.85 per share, consistent with the Bank’s current target payout range of 40-50% of adjusted earnings. Cash dividends declared and paid during 2013 totalled $3.24 per share (2012 – $2.89). For cash dividends payable on the Bank’s preferred shares, see Notes 19, 21 and 37 to the Consolidated Financial Statements. As at October 31, 2013, 917.5 million common shares were outstanding (2012 – 916.1 million). The Bank’s ability to pay dividends is subject to the Bank Act (Canada) and the requirements of OSFI. See Note 21 to the Consolidated Financial Statements for further details on dividend restrictions. CAPITAL RATIOS Capital ratios are measures of financial strength and flexibility. The Bank’s capital ratios are calculated using OSFI’s guidelines which are based on the capital adequacy rules included in Basel III. At the consolidated level, the top corporate entity to which Basel III applies is The Toronto-Dominion Bank. OSFI measures the capital adequacy of Canadian banks according to its instructions for determining risk-adjusted capital, RWA and off- balance sheet exposures. OSFI defines three primary ratios to measure capital adequacy, the CET1 capital ratio, the Tier 1 capital ratio and the Total capital ratio. OSFI sets target levels for Canadian banks as follows: • The CET1 capital ratio is defined as CET1 regulatory capital divided by RWA. OSFI has established a target CET1 capital ratio of 7%. • The Tier 1 capital ratio is defined as Tier 1 regulatory capital divided by RWA. OSFI has established a target Tier 1 capital ratio of 8.5%. • The Total capital ratio is defined as total regulatory capital divided by RWA. OSFI has established a target Total capital ratio of 10.5%. As at October 31, 2013, the Bank’s CET1, Tier 1 and Total capital ratios were 9.0%, 11.0% and 14.2%, respectively. Compared with the Bank’s pro forma CET1 ratio of 8.2% as at October 31, 2012, the October 31, 2013 CET1 ratio increased primarily as a result of strong retained earnings growth, common share issuance through participation in the Bank’s dividend reinvestment plan and exercise of stock options, and reduction of RWA due to the exclusion of the CVA capital add-on charge (refer to the “OSFI’s Capital Requirements under Basel III” discussion). The CVA capital add-on charge represents approximately 31 bps, of which 57% (or 18bps) would be included in the 2014 CET1 ratio, per OSFI’s determined scalar phase-in. During the year, the Bank generated approximately $4.2 billion of excess CET1 capital through organic growth and balance sheet optimization activities. In 2013, the Bank was able to fund acquisitions, support business growth, and improve the Bank’s capital position largely without raising additional capital. As at October 31, 2013, the Bank had an excess over OSFI’s all-in regulatory minimum CET1 capital ratio of approximately $5.0 billion. NORMAL COURSE ISSUER BID On June 19, 2013, the Bank announced that the Toronto Stock Exchange (TSX) and OSFI approved the Bank’s normal course issuer bid to repurchase for cancellation up to 12 million of our common shares. Purchases under the bid commenced on June 21, 2013 and will end on June 20, 2014, such earlier date as the Bank may determine or such earlier date as the Bank may complete its purchases pursuant to the notice of intention filed with the TSX. As of October 31, 2013, the Bank repurchased 9.0 million common shares under this bid at an average price of $86.50 for a total amount of $780.2 million. The Bank did not have a normal course issuer bid outstanding during fiscal 2012. 60 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISRISK-WEIGHTED ASSETS Based on Basel III, RWA are calculated for each of credit risk, market risk, and operational risk. Operational risk represents the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The Bank’s RWA were as follows: T A B L E 4 6 RISK-WEIGHTED ASSETS1 (millions of Canadian dollars) Credit risk Retail Residential secured Qualifying revolving retail Other retail Non-retail Corporate Sovereign Bank Securitization exposures Equity exposures Exposures subject to standardized or IRB approaches Adjustment to IRB RWA for scaling factor Other assets not included in standardized or IRB approaches Total credit risk Market risk Trading book Operational risk Standardized approach Total Basel III 2013 Basel II 2012 $ 23,895 12,588 47,504 $ 22,220 12,816 38,175 99,608 3,340 12,198 10,894 885 89,222 2,827 9,969 7,302 1,148 210,912 5,463 183,679 5,012 23,177 239,552 12,589 201,280 11,734 12,033 35,069 $ 286,355 32,562 $ 245,875 1 Effective 2013, amounts are calculated in accordance with the Basel III regulatory framework, and are presented based on the “all-in” methodology. Prior to 2013, amounts were calculated in accordance with the Basel II regulatory framework. Counterparty credit risk comprises exposures arising from OTC deriva- tives. Non-counterparty credit risk includes loans and advances to retail customers (individuals and small business), corporate entities (whole- sale and commercial customers), banks and governments, as well as holdings of debt, equity securities and other assets (including prepaid expenses, deferred and current income taxes, land, building, equip- ment and other depreciable property). The Book size category consists of organic changes in book size and composition (including new business and maturing loans) and, for the fourth quarter of 2013, is mainly due to growth in derivatives and corporate and commercial loans in our Wholesale and Business Banking segments. The Book quality category includes quality of book changes caused by experience such as underlying customer behaviour or demographics, including changes through model calibrations/realignments and, for the fourth quarter of 2013, is mainly due to the update of non-retail risk parameters and improvements in retail book quality. The Model updates category relates to model implementation, changes in model scope or any change to address model malfunctions. The Methodology and policy category impacts are methodology changes to the calculations driven by regulatory policy changes, such as new regulations. Foreign exchange movements are mainly due to a change in the U.S. dollar foreign exchange rate on the U.S. portfolios in our U.S. Personal and Commercial segment. The Other category includes items not described in the above cate- gories including changes in exposures not included under advance or standardized methodologies (including prepaid expenses, current and deferred income taxes, land, building, equipment and other deprecia- ble property and other assets). FLOW STATEMENT FOR RISK-WEIGHTED ASSETS – Disclosure for market risk – Risk-weighted assets movement by key driver T A B L E 4 8 During the year, RWA increased $40.5 billion, primarily due to higher RWA requirements with transition to Basel III and organic growth in the retail and commercial businesses in both Canada and the U.S. The new rules require securitization exposures to be risk weighted as opposed to being deducted from capital, portion of threshold items (for example, insurance investments, investment in TD Ameritrade and deferred tax assets related to temporary difference) not deducted from capital to be risk weighted at 250%, and a new capital charge for credit risk related to asset value correlation for financial institutions to be added, all of which increased RWA from Basel II. (billions of Canadian dollars) RWA, balance as at July 31, 2013 Movement in risk levels Model updates Methodology and policy Acquisitions and disposals Foreign exchange movements and other Total RWA movement RWA, balance as at October 31, 2013 1 Not meaningful. $ 11.1 0.6 – – – n/m1 0.6 $ 11.7 FLOW STATEMENT FOR RISK-WEIGHTED ASSETS – Disclosure for non-counterparty credit risk and counterparty credit risk – Risk-weighted assets movement by key driver T A B L E 4 7 (billions of Canadian dollars) Non-counterparty credit risk Counterparty credit risk RWA, balance as at July 31, 2013 Book size Book quality Model updates Methodology and policy Acquisitions and disposals Foreign exchange movements Other Total RWA movement RWA, balance as at October 31, 2013 $ 229.7 1.4 (2.1) (0.1) – – 1.9 0.2 1.3 $ 231.0 $ 8.2 0.7 (0.4) – – – 0.1 – 0.4 $ 8.6 The Movement in risk levels category reflects changes in risk due to position changes and market movements. An increasing contribution to RWA was observed over the period which was primarily driven by increases in treasury and agency bond positions in our U.S. portfolio, and increases in energy and industrial bonds in our Canadian books. The Model updates category reflects updates to the model to reflect recent experience and changes in model scope. The Methodology and policy category reflects methodology changes to the calculations driven by regulatory policy changes. Foreign exchange movements and other are deemed not meaningful since RWA exposure measures are calculated in Canadian dollars. Therefore, no foreign exchange translation is required. 61 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS The following chart provides a breakdown of the Bank’s regulatory capital and economic capital. Regulatory Capital reflects the RWA required for Pillar I risks only, namely credit, trading market risk and operational risk. Economic capital reflects the Bank’s internal view of capital required for risks captured under the regulatory framework and includes those risks identified as Basel II Pillar II risks which are not captured within the assessment of RWA. The Basel II Pillar II risks include non-trading market risk for the retail portfolio (Interest Rate Risk in the Banking Book), additional credit risk due to concentration (commercial and wholesale portfolios), and risks classified as “Other,” namely business risk, insurance risk, and the Bank’s investment in TD Ameritrade. Economic capital is also assessed at a higher confidence level which is consistent with the Bank’s overall target debt rating. The differences between economic capital and regulatory capital in the figure below are predominately due to the additional Pillar II risks captured under economic capital and the variance in confidence level. For additional information on the risks highlighted below, refer to the “Managing Risk” section of this document. TD Bank Group Credit Risk Market Risk Operational Risk Other Risks Credit Risk Market Risk Operational Risk Other Risks 65% 5% 12% 18% 64% 10% 4% 22% $ 239,552 Credit Risk Market Risk $ 11,734 Operational Risk $ 35,069 $ 7,977 Credit Risk – Market Risk $ 392 Operational Risk $ Corporate Canadian Personal and Commercial Banking Wealth and Insurance U.S. Personal and Commercial Banking Wholesale Banking Credit Risk Market Risk Operational Risk Other Risks 79% 3% 16% 2% Credit Risk Market Risk Operational Risk Other Risks 5% 1% 12% 82% Credit Risk Market Risk Operational Risk Other Risks 81% 6% 9% 4% Credit Risk Market Risk Operational Risk Other Risks 71% 13% 9% 7% $ 66,263 Credit Risk Market Risk – $ Operational Risk $ 16,071 $ 12,466 Credit Risk Market Risk – $ Operational Risk $ 4,326 $ 121,650 Credit Risk Market Risk – $ Operational Risk $ 10,052 $ 31,196 Credit Risk Market Risk $ 11,734 Operational Risk $ 4,228 Notes: 1) Wealth includes TD Ameritrade in Other Risks 2) RWA figures are in CDN $ millions Economic Capital (%) RWA (CDN$MM) 62 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISFUTURE CHANGES IN BASEL Future Basel III Developments In December 2012, BCBS published a consultative document proposing a revised securitization framework. The proposal aims to enhance current methodologies of calculating securitization RWA by making them more risk sensitive and limiting over reliance on rating agencies. The proposal would generally increase the risk weights of investments in securitization exposures. In June 2013, the BCBS issued an update to the Basel III leverage ratio framework and related disclosure requirements. The leverage ratio was initially announced in the Basel III framework in December 2010. The leverage ratio is intended to serve as a supplementary measure to the risk-based capital requirements, with the objective of constraining the build-up of excess leverage in the banking sector. Implementation of the Basel III leverage ratio requirement has begun with bank-level reporting to OSFI and its components from January 1, 2013, and will proceed with public disclosure starting January 1, 2015. Any final adjustments to the definition and calibration of the Basel III leverage ratio will be made by 2017, with a view to migrating to a Pillar 1 treat- ment on January 1, 2018 based on appropriate review and calibration. In July 2013, the BCBS issued an update to the final rules on G-SIBs, originally published in November 2011. The update provides clarity on the public disclosure requirements of the 12 indicators used in the assessment methodology. As noted earlier, the six Canadian banks that have been designated as D-SIBs are required by OSFI to publish, at a minimum, the 12 indicators used in the G-SIB indicator-based assessment framework by February 28, 2014. In July 2013, the U.S. Federal Reserve, FDIC and the Office of the Comptroller of the Currency (OCC) approved the adoption of the final rule on the Basel III Capital framework to take effect January 1, 2014 for U.S. banking organizations that are required to follow the advanced approaches, which includes the Bank’s U.S. bank subsidiaries. T A B L E 4 9 OUTSTANDING EQUITY AND SECURITIES EXCHANGEABLE/CONVERTIBLE INTO EQUITY1 (millions of shares/units, except as noted) Common shares outstanding Treasury shares – common Total common shares Stock options Vested Non-vested Series O Series P Series Q Series R Series S2 Series T2 Series Y3 Series Z3 Series AA Series AC Series AE Series AG Series AI Series AK Total preferred shares – equity Treasury shares – preferred Total preferred shares Capital Trust Securities (thousands of shares) Trust units issued by TD Capital Trust II: TD Capital Trust II Securities – Series 2012-14 Trust units issued by TD Capital Trust III: TD Capital Trust III Securities – Series 2008 Debt issued by TD Capital Trust IV: TD Capital Trust IV Notes – Series 1 TD Capital Trust IV Notes – Series 2 TD Capital Trust IV Notes – Series 3 As at October 31 October 31 2012 2013 Number of Number of shares/units shares/units 919.4 (1.9) 917.5 4.4 6.6 17.0 10.0 8.0 10.0 5.4 4.6 5.5 4.5 10.0 8.8 12.0 15.0 11.0 14.0 135.8 (0.1) 135.7 918.2 (2.1) 916.1 7.9 5.8 17.0 10.0 8.0 10.0 10.0 – 10.0 – 10.0 8.8 12.0 15.0 11.0 14.0 135.8 – 135.8 – 350.0 1,000.0 1,000.0 550.0 450.0 750.0 550.0 450.0 750.0 1 For further details, including the principal amount, conversion and exchange features, and distributions, see Notes 19, 20, and 21 to the Consolidated Financial Statements. 2 On July 31, 2013, the Bank converted 4.6 million of its 10 million non-cumulative 5-year Rate Reset Preferred Shares, Series S, on a one-for-one basis, into non- cumulative Floating Rate Preferred Shares, Series T of the Bank. 3 On October 31, 2013, the Bank converted 4.5 million of its 10 million non- cumulative 5-year Rate Reset Preferred Shares, Series Y, on a one-for-one basis, into non-cumulative Floating Rate Preferred Shares, Series Z of the Bank. 4 On December 31, 2012, TD Capital Trust II redeemed all of its outstanding securities at a redemption price of $1,000. 63 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS GROUP FINANCIAL CONDITION Securitization and Off-Balance Sheet Arrangements In the normal course of operations, the Bank engages in a variety of financial transactions that, under IFRS, are either not recorded on the Consolidated Balance Sheet or are recorded in amounts that differ from the full contract or notional amounts. These off-balance sheet arrangements involve, among other risks, varying elements of market, credit, and liquidity risks which are discussed in the “Managing Risk” section of this MD&A. Off-balance sheet arrangements are generally undertaken for risk management, capital management, and funding management purposes and include securitizations, contractual obliga- tions, and certain commitments and guarantees. SPECIAL PURPOSE ENTITIES The Bank carries out certain business activities through arrangements with special purpose entities (SPEs). We use SPEs to raise capital, obtain sources of liquidity by securitizing certain of the Bank’s financial assets, to assist our clients in securitizing their financial assets, and to create investment products for our clients. Securitizations are an important part of the financial markets, providing liquidity by facilitating investor access to specific portfolios of assets and risks. See Note 2 to the Consolidated Financial Statements for further information regarding the accounting for SPEs. Securitization of Bank-Originated Assets The Bank securitizes residential mortgages, business and government loans, personal loans, automobile loans, and credit card loans to enhance its liquidity position, to diversify sources of funding and to optimize the management of the balance sheet. The Bank securitizes residential mortgages under the National Housing Act Mortgage-Backed Securities (NHA MBS) program spon- sored by the Canada Mortgage and Housing Corporation (CMHC). The securitization of the residential mortgages with the CHMC does not qualify for derecognition and remain on the Bank’s Consolidated Balance Sheet. Additionally, the Bank securitizes personal loans, auto- mobile loans, and credit card loans by selling them to Bank-sponsored SPEs that are consolidated by the Bank. The Bank also securitizes U.S. residential mortgages with U.S. government agencies which qualify for derecognition and are removed from the Bank’s Consolidated Balance Sheet. Certain automobile loans acquired by the Bank as part of the acquisition of Chrysler Financial were originated in the U.S. and sold to U.S. securitization structures. All other products securitized by the Bank were originated in Canada and sold to Canadian securitization structures. See Note 8 and Note 9 to the Consolidated Financial Statements for further information. T A B L E 5 0 EXPOSURES SECURITIZED BY THE BANK AS ORIGINATOR1 (millions of Canadian dollars) Residential mortgage loans Consumer instalment and other personal loans 2, 3 Credit card loans 3 Business and government loans Total exposure Residential mortgage loans Consumer instalment and other personal loans 2, 3 Credit card loans 3 Business and government loans Total exposure 1 Includes all assets securitized by the Bank, irrespective of whether they are on- or off-balance sheet for accounting purposes, including those that did not qualify for derecognition except for securitizations through U.S. government-sponsored entities where we do not hold any resultant mortgage-backed securities. 2 Included in personal loans as at October 31, 2013 are nil of automobile loans acquired as part of the Bank’s acquisition of Chrysler Financial (October 31, 2012 – $361 million). Significant unconsolidated SPEs Significant consolidated SPEs As at Non-SPE third-parties Securitized assets Carrying value of retained interests Securitized assets Securitized assets Carrying value of retained interests $ 23,157 – – 35 $ 23,192 $ 21,176 – – 79 $ 21,255 $ – – – – $ – $ – – – – $ – $ – 6,141 300 – $ 6,441 $ – 5,461 1,251 – $ 6,712 October 31, 2013 $ 16,229 – – 2,322 $ 18,551 $ – – – 52 $ 52 October 31, 2012 $ 23,446 – – 2,387 $ 25,833 $ – – – 53 $ 53 3 In securitization transactions that the Bank has undertaken for its own assets, it has acted as an originating bank and retained securitization exposure from a capital perspective. Residential Mortgage Loans The Bank securitizes residential mortgage loans through significant unconsolidated SPEs and Canadian non-SPE third-parties. Residential mortgage loans securitized by the Bank may give rise to full or partial derecognition of the financial assets depending on the individual arrangement of each transaction. In instances where the Bank either fully or partially derecognizes residential mortgage loans, the Bank may be exposed to the risks of transferred loans through retained interests. As at October 31, 2013, the Bank has not recognized any retained interests due to the securitization of residential mortgage loans on its Consolidated Balance Sheet. Consumer Instalment and Other Personal Loans The Bank securitizes consumer instalment and other personal loans through consolidated SPEs. The Bank consolidates the SPEs as they serve as financing vehicles for the Bank’s assets, and the Bank is exposed to the majority of the residual risks of the SPEs. As at October 31, 2013, the SPEs issued $5.1 billion of issued commercial paper outstanding (October 31, 2012 – $5.1 billion) and $1.0 billion of issued notes outstanding (October 31, 2012 – $0.3 billion). As at October 31, 2013, the Bank’s maximum potential exposure to loss for these conduits was $6.1 billion (October 31, 2012 – $5.5 billion) of which $1.1 billion of underlying consumer instalment and other personal loans was government insured (October 31, 2012 – $1.1 billion). 64 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS Credit Card Loans The Bank securitizes credit card loans through a consolidated SPE. On December 1, 2011, the Bank acquired substantially all of the credit card portfolio of MBNA Canada. As a result of the acquisition, the Bank has consolidated the SPE as it serves as a financing vehicle for the Bank’s assets, and the Bank is exposed to the majority of the residual risks of the SPE. As at October 31, 2013, the consolidated SPE had $0.6 billion of issued notes outstanding (October 31, 2012 – $1.3 billion). As at October 31, 2013, the Bank’s maximum potential exposure to loss for this SPE was $0.6 billion (October 31, 2012 – $1.3 billion). Business and Government Loans The Bank securitizes business and government loans through significant unconsolidated SPEs and Canadian non-SPE third parties. Business and government loans securitized by the Bank may be derecognized from the Bank’s balance sheet depending on the individual arrangement of each transaction. In instances where the Bank fully derecognizes business and government loans, the Bank may be exposed to the risks of transferred loans through retained interests. There are no expected credit losses on the retained interests of the securitized business and government loans as the mortgages are all government insured. Securitization of Third Party-Originated Assets Significant Consolidated SPE The Bank has a securitization exposure to certain third party originated assets through a consolidated SPE. The Bank consolidates the SPE since it is wholly-funded by the Bank, and the Bank is exposed to the major- ity of the risks of the SPE. As at October 31, 2013, the consolidated SPE had $312 million (October 31, 2012 – nil) of assets secured by underlying trade receivables, originated in the U.S. The weighted- average life of these assets is 3.4 years. The Bank’s maximum potential exposure to loss due to its funding of the SPE as at October 31, 2013 was $312 million (October 31, 2012 – nil). As at October 31, 2013, the funding is provided primarily through a senior facility that has a AAA rating from the credit rating agency. Further, as at October 31, 2013, the Bank had committed to provide an additional $53 million in funding to the SPE. Significant Non-Consolidated Special Purpose Entities Multi-Seller Conduits The Bank administers multi-seller conduits and provides liquidity facilities as well as securities distribution services; it may also provide credit enhancements. Third party-originated assets are securitized through Bank-sponsored SPEs, which are not consolidated by the Bank. The Bank’s maximum potential exposure to loss due to its ownership interest in commercial paper and through the provision of liquidity facilities for multi-seller conduits was $9.6 billion as at October 31, 2013 (October 31, 2012 – $7.5 billion). Further, as at October 31, 2013, the Bank had committed to provide an additional $2.0 billion in liquidity facilities that can be used to support future asset-backed commercial paper (ABCP) in the purchase of deal-specific assets (October 31, 2012 – $2.2 billion). All third-party assets securitized by the Bank’s non-consolidated multi-seller conduits were originated in Canada and sold to Canadian securitization structures. Details of the Bank-administered multi-seller, ABCP conduits are as follows: T A B L E 5 1 EXPOSURE TO THIRD PARTY-ORIGINATED ASSETS SECURITIZED BY BANK-SPONSORED CONDUITS (millions of Canadian dollars, except as noted) Residential mortgage loans Credit card loans Automobile loans and leases Equipment loans and leases Trade receivables Total exposure October 31, 2013 October 31, 2012 As at Exposure and ratings profile of unconsolidated SPEs AAA1 $ 5,590 – 2,164 – 1,850 $ 9,604 Expected weighted- average life (years)2 2.9 – 1.3 – 2.3 2.4 Exposure and ratings profile of unconsolidated SPEs AAA1 $ 4,613 – 1,657 19 1,221 $ 7,510 Expected weighted- average life (years)2 2.8 – 1.3 0.4 1.7 2.3 1 The Bank’s total liquidity facility exposure only relates to ‘AAA’ rated assets. 2 Expected weighted-average life for each asset type is based upon each of the conduit’s remaining purchase commitment for revolving pools and the expected weighted-average life of the assets for amortizing pools. As at October 31, 2013, the Bank held $1,717 million of ABCP issued by Bank-sponsored multi-seller conduits within the Available-for-sale securities and Trading loans, securities, and other categories on its Consolidated Balance Sheet (October 31, 2012 – $128 million). control processes in place to mitigate these risks. Certain commitments still remain off-balance sheet. Note 29 to the Consolidated Financial Statements provides detailed information about the maximum amount of additional credit the Bank could be obligated to extend. EXPOSURE TO THIRD PARTY SPONSORED CONDUITS The Bank has exposure to U.S. third party-sponsored conduits arising from providing liquidity facilities of $521 million as at October 31, 2013 (October 31, 2012 – $500 million) of which nil has been drawn (October 31, 2012 – nil). The assets within these conduits are comprised of individual notes backed by automotive loan receivables. As at October 31, 2013, these assets have maintained ratings from various credit rating agencies, ranging from AAA to AA. The Bank no longer has any exposure to Canadian third party- sponsored conduits in the form of margin funding facilities as at October 31, 2013 (October 31, 2012 – not significant). COMMITMENTS The Bank enters into various commitments to meet the financing needs of the Bank’s clients and to earn fee income. Significant commitments of the Bank include financial and performance standby letters of credit, documentary and commercial letters of credit and commitments to extend credit. These products may expose the Bank to liquidity, credit and reputational risks. There are adequate risk management and Leveraged Finance Credit Commitments Also included in ‘Commitments to extend credit’ in Note 29 to the Consolidated Financial Statements are leveraged finance credit commitments. Leveraged finance credit commitments are agreements that provide funding to a wholesale borrower with higher levels of debt, measured by the ratio of debt capital to equity capital of the borrower, relative to the industry in which it operates. The Bank’s exposure to leveraged finance credit commitments as at October 31, 2013 was not significant (October 31, 2012 – not significant). GUARANTEES In the normal course of business, the Bank enters into various guaran- tee contracts to support its clients. The Bank’s significant types of guarantee products are financial and performance standby letters of credit, assets sold with recourse, credit enhancements, written options, and indemnification agreements. Certain guarantees remain off-balance sheet. See Note 29 to the Consolidated Financial Statements for further information regarding the accounting for guarantees. 65 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS GROUP FINANCIAL CONDITION Related-Party Transactions TRANSACTIONS WITH OFFICERS AND DIRECTORS AND THEIR AFFILIATES The Bank makes loans to its officers and directors and their affiliates. Loans to directors and officers are on market terms and conditions unless, in the case of banking products and services for officers, other- wise stipulated under approved policy guidelines that govern all employees. The amounts outstanding are as follows: LOANS TO KEY MANAGEMENT PERSONNEL, THEIR CLOSE FAMILY MEMBERS AND THEIR RELATED ENTITIES T A B L E 5 2 (millions of Canadian dollars) Personal loans, including mortgages Business loans Total As at October 31 October 31 2012 2013 $ 3 181 $ 184 $ 6 201 $ 207 In addition, the Bank offers deferred share and other plans to non- employee directors, executives, and certain other key employees. See Note 25 to the Consolidated Financial Statements for more details. In the ordinary course of business, the Bank also provides various banking services to associated and other related corporations on terms similar to those offered to non-related parties. TRANSACTIONS WITH EQUITY-ACCOUNTED INVESTEES TD AMERITRADE Pursuant to the Stockholders Agreement in relation to the Bank’s equity investment in TD Ameritrade, the Bank designated five of 12 members of TD Ameritrade’s Board of Directors including the Bank’s Group President and Chief Executive Officer, its Executive Vice President of Retail Banking, Products and Service, two independent directors of TD, and a former independent director of TD. A descrip- tion of significant transactions of the Bank and its affiliates with TD Ameritrade is set forth below. GROUP FINANCIAL CONDITION Financial Instruments Insured Deposit Account (formerly known as Money Market Deposit Account) Agreement The Bank is party to an IDA agreement with TD Ameritrade, pursuant to which the Bank makes available to clients of TD Ameritrade, IDAs as designated sweep vehicles. TD Ameritrade provides marketing and support services with respect to the IDA. The Bank paid fees of $821 million in 2013 (2012 – $834 million; 2011 – $762 million) to TD Ameritrade for the deposit accounts. The fee paid by the Bank is based on the average insured deposit balance of $70.4 billion in 2013 (2012 – $60.3 billion; 2011 – $49.3 billion) with a portion of the fee tied to the actual yield earned by the Bank on the investments, less the actual interest paid to clients of TD Ameritrade, with the balance based on an agreed rate of return. The Bank earns a servicing fee of 25 basis points on the aggregate average daily balance in the sweep accounts (subject to an adjustment, based on a specified formula). As at October 31, 2013, amounts receivable from TD Ameritrade were $54 million (October 31, 2012 – $129 million). As at October 31, 2013, amounts payable to TD Ameritrade were $103 million (October 31, 2012 – $87 million). TRANSACTIONS WITH SYMCOR The Bank has a one-third ownership in Symcor Inc. (Symcor), a Canadian provider of business process outsourcing services offering a diverse portfolio of integrated solutions in item processing, statement process- ing and production, and cash management services. The Bank accounts for Symcor’s results using the equity method of accounting. During fiscal 2013, the Bank paid $128 million (2012 – $128 million; 2011 – $139 million) for these services. As at October 31, 2013, the amount payable to Symcor was $10 million (October 31, 2012 – $10 million). The Bank and two other shareholder banks have also provided a $100 million unsecured loan facility to Symcor which was undrawn as at October 31, 2013 and October 31, 2012. As a financial institution, the Bank’s assets and liabilities are substantially composed of financial instruments. Financial assets of the Bank include, but are not limited to, cash, interest-bearing deposits, securities, loans and derivative instruments, while financial liabilities include, but are not limited to, deposits, obligations related to securities sold short, securiti- zation liabilities, obligations related to securities sold under repurchase agreements, derivative instruments and subordinated debt. The Bank uses financial instruments for both trading and non-trad- ing activities. The Bank typically engages in trading activities by the purchase and sale of securities to provide liquidity and meet the needs of clients and, less frequently, by taking trading positions with the objective of earning a profit. Trading financial instruments include, but are not limited to, trading securities, trading deposits, and trading derivatives. Non-trading financial instruments include the majority of the Bank’s lending portfolio, non-trading securities, hedging deriva- tives and financial liabilities. In accordance with accounting standards related to financial instruments, financial assets or liabilities classified as trading, loans and securities designated at fair value through profit or loss, securities classified as available-for-sale and all derivatives are measured at fair value in the Bank’s Consolidated Financial Statements, with the exception of certain available-for-sale securities recorded at cost. Financial instruments classified as held-to-maturity, loans and receivables, and other liabilities are carried at amortized cost using the effective interest rate method. For details on how fair values of finan- cial instruments are determined, refer to the “Critical Accounting Estimates” – Determination of Fair Value section of this MD&A. The use of financial instruments allows the Bank to earn profits in trading, interest and fee income. Financial instruments also create a variety of risks which the Bank manages with its extensive risk management poli- cies and procedures. The key risks include interest rate, credit, liquidity, market, and foreign exchange risks. For a more detailed description on how the Bank manages its risk, refer to the “Managing Risk” section of this MD&A. 66 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS RISK FACTORS AND MANAGEMENT Risk Factors That May Affect Future Results In addition to the risks described in the Managing Risk section, there are numerous other risk factors, many of which are beyond the Bank’s control and the effects of which can be difficult to predict, that could cause our results to differ significantly from our plans, objectives and estimates. All forward-looking statements, including those in this MD&A, are, by their very nature, subject to inherent risks and uncer- tainties, general and specific, which may cause the Bank’s actual results to differ materially from the expectations expressed in the forward-looking statements. Some of these factors are discussed below and others are noted in the “Caution Regarding Forward- Looking Statements” section of this MD&A. TOP AND EMERGING RISKS THAT MAY AFFECT THE BANK AND FUTURE RESULTS TD considers it critical to regularly assess its operating environment and highlight top and emerging risks. These are risks with a potential to have a material effect on the Bank and where the attention of senior leaders is focused due to the potential magnitude or immediacy of their impact. Many of the risks are beyond the Bank’s control and their effects, which can be difficult to predict, could cause our results to differ significantly from our plans, objectives and estimates or could impact the Bank’s reputation or sustainability of its business model. Risks are identified, discussed, and actioned by senior risk leaders and reported quarterly to the Risk Committee of the Board. Specific plans to mitigate top and emerging risks are prepared, monitored and adjusted as required. General Business and Economic Conditions The Bank, and customers of the Bank operate in Canada, the U.S., and other countries. As a result, the Bank’s earnings are significantly affected by the general business and economic conditions in these regions. These conditions include short-term and long-term interest rates, inflation, fluc- tuations in the debt and capital markets, real estate prices, employment levels, consumer spending and debt levels, business investment, govern- ment spending, exchange rates, sovereign debt risks, the strength of the economy, threats of terrorism, civil unrest, the effects of public health emergencies, the effects of disruptions to public infrastructure, natural disasters and the level of business conducted in a specific region. For example, in an economic downturn, corporate earnings, business invest- ment and consumer spending, the demand for the Bank’s loan and other products could be adversely affected and the provision for credit losses could result in lower earnings. By conducting regular stress tests on its portfolios, the Bank is better able to understand the likely impact of many of these negative scenarios and better manage the risks. Technology and Information Security Risk Technology and information security risks for large financial institu- tions like the Bank have increased in recent years. This is due, in part, to the proliferation, sophistication and constant evolution of new technologies and attack methodologies used by socio-political, nation state, organized criminals, hackers and other external parties. The increased risks are also a factor of our size and scale of operations, our geographic footprint and our use of innovative technologies such as our continued development of mobile and internet banking. Our technologies, systems and networks, and those of our customers and the third parties providing services to us, may be subject to attacks, breaches or other compromises. These may include cyber attacks, computer viruses, malicious software, phishing attacks or information security breaches. Such incidents could result in, among other things, financial loss, a loss of customer or business opportunities, disruption to operations, misappropriation or unauthorized release of confidential or personal information, litigation, regulatory penalties or intervention, remediation or restoration cost, and reputational damage. The Bank actively monitors, manages and continues to enhance the ability to mitigate these technology and information security risks through enterprise-wide programs, industry best practices, and robust threat and vulnerability assessments and responses. Evolution of Fraud The Bank is routinely exposed to various types of fraud. The sophisti- cation, complexity and materiality of these crimes is evolving quickly. In deciding whether to extend credit or enter into other transactions with customers or counterparties, the Bank may rely on information furnished by or on behalf of such other parties including financial statements and financial information. The Bank may also rely on the representations of customers and counterparties as to the accuracy and completeness of such information. In addition to the risk of mate- rial loss that could result in the event of a financial crime, client and market confidence in the Bank could be potentially impacted. TD has invested in a coordinated approach to strengthen the Bank’s fraud defenses and build upon existing practices in Canada and the U.S. The Bank continues to introduce new capabilities and defenses that will help achieve an enhanced position to combat more complex fraud against the Bank. Business Infrastructure and Third Party Service Providers Third parties provide key services and components for the Bank’s busi- ness infrastructure and operations. These include data communica- tions, network access, payment processing, and financial instrument settlements. Given the high volume of transactions the Bank processes on a daily basis, it is reliant on such third party provided services as well as its own information technology systems to successfully deliver its products and services. The Bank’s information technology, internet, network access or other systems and services could be subject to failures or disruptions as a result of natural disasters or phenomena, power or telecommunications disruptions, acts of terrorism or war, physical or electronic break-ins, or similar events or disruptions. In addition, each of the institutions providing these services or infrastruc- ture components may be exposed to certain risks which could also result in the failures or disruptions described above, and in turn adversely affect the Bank’s operations. Such failure of or disruption to one of TD’s major service providers could result in temporary operational and liquidity concerns. They could also adversely affect the Bank’s ability to deliver products and services to customers, damage the Bank’s reputation, and otherwise adversely affect the Bank’s ability to conduct business. The Bank has policies and procedures in place governing third party relationships, including the systematic review of significant third parties at the inception of a relationship as well as subsequent periodic assessments. The Bank also manages service provider and infrastructure disruptions risks through a robust business continuity management (BCM) plan, its technology risk management program and other contingency and resiliency plans. 67 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISIntroduction of New and Changes to Current Laws and Regulations The introduction of new, and changes to current laws and regula- tions, as well as the fiscal, economic and monetary policies of various regulatory agencies in Canada and the U.S. and other countries inter- nationally, and changes in their interpretation or implementation, could adversely affect the Bank’s operations and profitability. Such adverse effects may result from new or modified laws, regulations or policies, and heightened expectations, limiting the products or services the Bank can provide, impacting pricing or delivery and increasing the ability of competitors to compete with its products and services (including, in jurisdictions outside Canada, the favouring of certain domestic institutions). In particular, the most recent financial crisis resulted in, and could further result in, unprecedented and considerable change to laws and regulations applicable to financial institutions and the financial industry. The Bank’s failure to comply with applicable laws and regulations could result in sanctions and financial penalties that could adversely impact its earnings and its operations and damage its reputation. Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), was signed into law on July 21, 2010. It is a United States federal law which creates significant structural reforms to the financial services industry. The Dodd-Frank Act ultimately affects every financial institution operating in the U.S., including the Bank, and due to certain extraterritorial aspects of the Dodd-Frank Act, impacts the Bank’s operations outside the U.S., including in Canada. The Dodd- Frank Act mandates statutory changes and instructs U.S. federal bank- ing and other regulatory agencies to conduct rule-making. Pursuant to certain currently proposed rules, including the Volcker Rule, certain of the Bank’s businesses could be negatively affected when the rules are finalized. These effects under the Volcker Rule could include increased costs associated with operational and market compliance and reduced revenues. Other effects of the Volcker Rule may include loss of exemp- tions for foreign registered funds and reduced competitive advantage vis-a-vis non-bank affiliated funds which would not be subject to simi- lar rules under the Dodd-Frank Act. The Durbin Amendment contained in the Dodd-Frank Act authorizes the Federal Reserve Board to issue regulations that set interchange fees which are “reasonable and proportional” to the costs of processing such transactions. In June 2011, the FRB issued final rules limiting debit card interchange fees with a required implementation date of October 1, 2011 and capped the fee at US21 cents per transaction plus small amounts to cover fraud related expenses. On July 31, 2013, the U.S. District Court for the District of Columbia ruled, among other things, that the approach used by the FRB in setting the maximum allowable interchange fee impermissibly included costs that were specifically excluded by the Durbin Amendment. The decision has since been stayed pending the outcome of its appeal and the current provi- sions of the Durbin Amendment remain in place. Oral arguments have been scheduled to be heard by the court in January 2014. Where possible, the Bank has developed conformance plans, but due to the size, scope, complexity of implementation and the lack of regulatory certainty in a number of key sections of the Dodd-Frank Act, the overall impact to the Bank and its businesses, including to their financial performance and operations, currently remains unclear and will not be known until the implementing regulations are fully released and finalized. The Bank continues to closely monitor and analyze the potential impact associated with the Dodd-Frank Act. FATCA The Foreign Account Tax Compliance Act (FATCA) is U.S. tax legisla- tion which requires all non-US financial institutions to identify US taxpayer-owned accounts and report information about those clients to the Internal Revenue Service. Virtually all TD businesses and their customers will be impacted from an operational perspective. Changes to policies and procedures may be required which may impact how we conduct business in certain segments and negatively impact our cost of doing business. The government of Canada is currently negotiating an intergovernmental agreement (IGA) with the government of the United States respecting the implementation of FATCA in Canada. Due to the current uncertainty regarding this agreement and the ultimate timing and form of FATCA implementation, the overall impact to the Bank remains unclear. The Bank has project teams in place and is in the process of implementing compliance plans based on the U.S. FATCA regulations published in 2013 as well as existing expectations of the content of a U.S.-Canada IGA. Basel III The Basel III Liquidity standards require banks to meet the Liquidity Coverage Ratio (LCR) starting in January 2015 and the Net Stable Funding Ratio (NSFR) starting in January 2018. The Bank has been managing its liquidity risk under a prudent framework and expects to make modest adjustments in order to be compliant with the LCR requirements in 2015. Additional costs may be incurred to achieve compliance with the liquidity reforms, which has the potential to affect the Bank’s funding costs. The Bank continues to monitor the develop- ment of liquidity requirements from the national regulators globally and ensures that its liquidity management and monitoring practices evolve with the changing regulatory landscape. In addition, the Basel III Leverage Ratio is a non-risk based ratio that acts as a supplementary measure to the risk-based capital requirements, with the objective of constraining the build-up of excess leverage in the banking sector. The Leverage Ratio requirement is effective January 2018, with the public disclosure beginning January 2015. Any final adjustments to the defini- tion and calibration of the ratio requirement will be completed by 2017. The Bank continues to monitor and manage its capital and asset levels to ensure compliance. Principles for Effective Risk Data Aggregation In January 2013, the Basel Committee on Banking Supervision (BCBS) finalized their ‘Principles for Effective Risk Data Aggregation and Reporting’. The principles provide guidelines for areas such as: governance of risk data, architecture and infrastructure, accuracy, completeness, timeliness, and adaptability of reporting. As a result, the bank faces increased complexity with respect to operational compliance and may incur increased compliance and operating costs. The Bank has assessed itself against each of the principles at enterprise and risk specific levels. Programs are in place to manage the enhance- ment of Risk Data Aggregation. Legal Proceedings The Bank or its subsidiaries are from time to time named as defendants or are otherwise involved in various class actions and other litigations or disputes with third parties, including regulatory enforcement proceedings, related to its businesses and operations. The Bank manages and mitigates the risks associated with these proceedings through a robust litigation management function. The Bank’s material litigation and regulatory enforcement proceedings are disclosed in its Consolidated Financial Statements. There is no assurance that the volume of claims and the amount of damages and penalties claimed in litigation, arbitration and regulatory proceedings will not increase in the future. Actions currently pending against the Bank may result in judgments, settlements, fines, penalties, disgorgements, injunctions, business improvement orders or other results adverse to the Bank, which could materially adversely affect the Bank’s business, financial 68 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIScondition, results of operations, cash flows and capital; require mate- rial changes in the Bank’s operations; or cause serious reputational harm to the Bank. Moreover, some claims asserted against the Bank may be highly complex, and include novel or untested legal theories. The outcome of such proceedings may be difficult to predict or esti- mate until late in the proceedings, which may last several years. In addition, settlement or other resolution of certain types of matters are subject to external approval, which may or may not be granted. Although the Bank establishes accruals for these matters according to accounting requirements, the amount of loss ultimately incurred in relation to those matters may substantially differ from the amounts accrued. As a participant in the financial services industry, the Bank will likely continue to experience the possibility of significant litigation and regulatory enforcement proceedings related to its businesses and operations. For additional information relating to the Bank’s material legal proceedings see Note 29 to the Consolidated Financial Statements. OTHER RISK FACTORS THAT MAY AFFECT FUTURE RESULTS Adequacy of the Bank’s Risk Management Framework The Bank’s risk management framework is made up of various processes and strategies for managing risk exposure and includes an Enterprise Risk Appetite Framework. Types of risk to which the Bank is subject include credit, market (including equity, commodity, foreign exchange, and interest rate), liquidity, operational (including technol- ogy), reputational, insurance, strategic, legal and regulatory compli- ance, and capital adequacy risks. While there can be no assurance that the Bank’s framework to manage risk, including such framework’s underlying assumptions and models, will be effective under all conditions and circumstances, the Bank has established governance processes for the Senior Executive Team (SET) and the Risk Committee of the Board to review and update the framework annually. Acquisitions and Strategic Plans The Bank regularly explores opportunities to acquire other companies, or parts of their businesses directly or indirectly through the acquisition strategies of its subsidiaries. There is no assurance that the Bank will achieve its financial or strategic objectives, including anticipated cost savings, or revenue synergies following acquisitions and integration efforts. The Bank’s, or a subsidiary’s, ability to successfully complete an acquisition is often subject to regulatory and other approvals, and the Bank cannot be certain when or if, or on what terms and condi- tions, any required approvals will be granted. The Bank’s financial performance is also influenced by its ability to execute strategic plans developed by management. If these strategic plans do not meet with success or there is a change in strategic plans, there would be an impact on the Bank’s financial performance and the Bank’s earnings could grow more slowly or decline. The Bank undertakes thorough due diligence before completing an acquisition and closely monitors integration activities and performance post acquisition. Ability to Attract, Develop and Retain Key Executives The Bank’s future performance depends to a large extent on the avail- ability of qualified people and the Bank’s ability to attract, develop and retain key executives. There is intense competition for the best people in the financial services sector. Although it is the goal of the Bank’s management resource policies and practices to attract, develop, and retain key executives employed by the Bank or an entity acquired by the Bank, there is no assurance that the Bank will be able to do so. The Bank undergoes an annual human resource planning process that facilitates the assessment of internal leadership capabilities and potential talent needs. The Bank actively invests in the development of employees in order to better meet future talent requirements. Changes to Our Credit Ratings There can be no assurance that the Bank’s credit ratings and rating outlooks from rating agencies such as Moody’s Investors Service, S&P, or DBRS will not be lowered or that these ratings agencies will not issue adverse commentaries about the Bank. Such changes could potentially result in higher financing costs and reduce access to capital markets. A lowering of credit ratings may also affect the Bank’s ability to enter into normal course derivative or hedging transactions and impact the costs associated with such transactions. The Bank maintains regular contact with each of the listed rating agencies. Currency and Interest Rates Currency and interest rate movements in Canada, the U.S., and other jurisdictions in which the Bank does business impact the Bank’s finan- cial position (as a result of foreign currency translation adjustments) and its future earnings. For example, if the value of the Canadian dollar rises against the U.S. dollar, the Bank’s investments and earnings in the U.S. may be negatively affected, and vice versa. Changes in the value of the Canadian dollar relative to the U.S. dollar may also affect the earnings of the Bank’s small business, commercial, and corporate clients in Canada. A change in the level of interest rates, or a prolonged low interest rate environment, affects the interest spread between the Bank’s deposits and loans and as a result impacts the Bank’s net interest income. The Bank manages non-trading currency and interest rate risk exposures in accordance with policies established by the Risk Committee of the Board through its Asset Liability Management framework, which is further discussed in the Managing Risk section of this document. Accounting Policies and Methods Used by the Bank The accounting policies and methods the Bank utilizes determine how the Bank reports its financial condition and results of operations, and they may require management to make estimates or rely on assump- tions about matters that are inherently uncertain. Such estimates and assumptions may require revisions, and these changes may materially adversely affect the Bank’s results of operations and financial condi- tion. Significant accounting policies are described in Note 2 to our Consolidated Financial Statements. The Bank monitors accounting developments; it also identifies and implements new accounting stan- dards, interpretations and guidance issued by accounting standard setters and regulatory bodies, as appropriate. Level of Competition The Bank currently operates in a highly competitive industry and its performance is impacted by the level of competition. Customer retention and attraction of new customers can be influenced by many factors, such as the factors, pricing and distribution of prod- ucts or services. Deterioration in these factors or a loss of market share could adversely affect the Bank’s earnings. The Bank operates in a global environment and laws and regulations that apply to it may not universally apply to competitors in various jurisdictions creating an uneven playing field that may favour certain domestic institutions. In addition, other types of financial institutions, such as insurance companies, as well as non-financial institutions are increasingly offering products and services traditionally offered by banks and through other distribution methods including internet and mobile banking. This type of competition could adversely impact the Bank’s earnings by reducing fee revenue and net interest income. Each of the business segments of the Bank monitors the competitive environment including reviewing and amending customer acquisition and management strategies as appropriate. The Bank has been investing in enhanced capabilities for our customers to transact across all of our channels seamlessly, with a particular emphasis on mobile banking capabilities for anytime, anywhere convenience. 69 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISRISK FACTORS AND MANAGEMENT Managing Risk EXECUTIVE SUMMARY Growing profitability in financial services involves selectively taking and managing risks within TD’s risk appetite. Our goal is to earn a stable and sustainable rate of return for every dollar of risk we take, while putting significant emphasis on investing in our businesses to ensure we can meet our future growth objectives. TD’s Enterprise Risk Framework (ERF) reinforces TD’s risk culture, which emphasizes transparency and accountability, and provides stake- holders with a common understanding of how we manage risk. The ERF addresses: 1) the nature of the risks to TD’s business strategy and operations, 2) how TD defines the types of risk it is exposed to, 3) risk management governance and organization, and 4) how TD manages risk through processes that identify, measure, assess, control and monitor risk. TD’s risk management resources and processes are designed to both challenge and enable all our businesses to understand the risks they face and to manage them within TD’s risk appetite. RISKS INVOLVED IN OUR BUSINESSES TD’s Risk Inventory describes the major risk categories and related subcategories to which our businesses and operations could be exposed. The Risk Inventory facilitates consistent risk identification and is the starting point in developing risk management strategies and processes. TD’s major risk categories are: Strategic Risk, Credit Risk, Market Risk, Operational Risk, Insurance Risk, Liquidity Risk, Capital Adequacy Risk, Legal and Regulatory Compliance Risk and Reputational Risk. Major Risk Categories Strategic Risk Credit Risk Market Risk Operational Risk Insurance Risk Liquidity Risk Capital Adequacy Risk Legal and Regulatory Compliance Risk Reputational Risk RISK APPETITE TD’s Risk Appetite Statement is the primary means used to communi- cate how TD defines risk and determines the risks it is willing to take. TD takes into account its governing objectives, as well as TD’s risk philosophy and capacity to bear risk in defining its risk appetite. TD’s Risk Appetite Statement is summarized as follows: We take risks required to build our business, but only if those risks: 1. Fit our business strategy, and can be understood and managed. 2. Do not expose the enterprise to any significant single loss events; we don’t ‘bet the Bank’ on any single acquisition, business, or product. 3. Do not risk harming the TD brand. In applying its risk appetite, TD considers both current conditions in which it operates and the impact that emerging risks will have on TD’s strategy and risk profile. Adherence to enterprise risk appetite is managed and monitored across TD and is based on a broad collection of principles, policies, processes and tools, including risk appetite statements and related metrics for major risk categories and the business segments. Risk Management is responsible for establishing practices and processes to formulate, report, monitor, and review the application of TD’s risk appetite and related metrics. The function also monitors and evaluates the effectiveness of these practices and metrics. Key metrics are reported regularly to senior management, the Board and the Risk Committee of the Board (Risk Committee). Other metrics are tracked on an ongoing basis by management, and escalated to senior manage- ment and at the Board level, as required. TD measures management’s performance against its risk appetite metrics; which is a key input into the compensation decision process. RISK CULTURE TD’s risk culture is consistent with the Bank’s Risk Appetite Statement, which embodies the tone at the top set by the Chief Executive Officer (CEO) and Senior Executive Team and informs our mission, vision, guiding principles and leadership profile. These governing objectives describe the behaviours that TD seeks to foster in building a risk culture where the only risks taken are those that can be understood and managed. The Risk Appetite Statement helps us to be informed risk takers and guides our decision making, allowing us to take appro- priate risks. TD’s risk culture encourages open communication and transparency on all aspects of the Risk Appetite Statement. Our employees are empowered to challenge and escalate when they believe we are operating outside of our risk appetite. Risk culture is at the centre of the Bank’s ERF, as its implementation is integral to establishing a risk and control environment that fosters risk behavior aligned with TD’s risk appetite. The ERF provides a common understanding of how TD manages risk by addressing four components relating to 1) defining risk; 2) risk appetite, 3) risk governance, and 4) risk management processes. All of these components are integral to successful risk management. TD’s desired risk culture is reinforced by linking compensation to management’s performance against the Bank’s risk appetite. In addition, Risk Management’s independence from the line of business provides objective oversight and challenge to promote and support the desired behaviours that drive TD’s strong risk culture. Lastly, education and communication on TD’s Risk Appetite Statement and the ERF take place across the organization through enterprise risk communication programs, employee orientation and training, and participation in internal risk management conferences. These activities further strengthen the risk culture by increasing awareness and knowledge of TD’s expectations for risk taking. 70 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISWHO MANAGES RISK Our risk governance structure emphasizes and balances strong central oversight and control of risk with clear accountability for, and owner- ship of, risk within each business unit. Under TD’s approach to risk governance, the line of business owns the risk that it generates and is responsible for assessing the risk, as well as designing and implement- ing mitigating controls. The line of business also monitors and reports on the ongoing effectiveness of its controls to safeguard TD from exceeding its risk appetite. TD’s risk governance model includes a senior management committee structure designed to support transparent risk reporting and discussion with overall risk and control oversight provided by the Board and its committees (primarily the Audit and Risk Committees). The CEO and SET determine TD’s long-term direction within the Bank’s risk appetite and apply it to the businesses. Risk Management, headed by the Group Head and Chief Risk Officer (CRO), sets enterprise risk strategy and policy and provides independent oversight to support a comprehensive and proactive risk management approach for TD. The CRO, who is also a member of the SET, has direct access to the Risk Committee. TD also employs a “three lines of defence” model to describe the role of business segments (first line), governance, risk and oversight functions, such as Risk Management, Anti-Money Laundering (AML) and Compliance functions (second line), and Internal Audit (third line) in managing risk across TD. The following section provides an overview of the key roles and responsibilities involved in risk management and are depicted in the diagram below. Board of Directors Audit Committee Risk Committee Chief Executive Officer Senior Executive Team CRO Executive Committees Enterprise Risk Management Committee (ERMC) Asset/Liability & Capital Committee (ALCO) Operational Risk Oversight Committee (OROC) Disclosure Committee Reputational Risk Committee (RRC) Governance, Risk and Oversight Function Business Segments Internal Audit Canadian Personal and Commercial Banking Wealth and Insurance U.S. Personal and Commercial Banking Wholesale Banking Internal Audit The Board The Board oversees TD’s strategic direction and the implementation of an effective risk management culture and internal control framework across the enterprise. It accomplishes its risk management mandate both directly and through its committees, including the Risk Committee of the Board and the Audit Committee. On an annual basis, the Board reviews and approves TD’s Risk Appetite Statement and related metrics to ensure ongoing relevance and alignment with TD’s strategy. The Risk Committee The Risk Committee is responsible for reviewing and challenging TD’s Risk Appetite Statement prior to recommending for approval by the Board annually. The Risk Committee oversees the management of TD’s risk profile and performance against its risk appetite. In support of this oversight, the Committee reviews, challenges, and approves enterprise risk management policies that support compliance with TD’s risk appetite, and monitors the management of risks and risk trends. The Audit Committee The Audit Committee, in addition to overseeing financial reporting, assesses the adequacy and effectiveness of internal controls, including controls over relevant enterprise risk management processes and the activities of the Bank’s Global AML and Compliance groups. Chief Executive Officer and Senior Executive Team The CEO and the SET develop TD’s long-term strategic plan and direction and also develop and recommend for Board approval TD’s risk appetite. The SET manage enterprise risk in accordance with TD’s risk appetite and consider the impact of emerging risks on TD’s strategy and risk profile. This accountability includes identifying and reporting significant risks to the Risk Committee. 71 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISExecutive Committees The CEO, in consultation with the CRO, designates TD’s Executive Committees, which are chaired by SET members. The committees meet regularly to oversee governance, risk, and oversight activities and to review and monitor risk strategies and related risk activities and practices. The ERMC, chaired by the CEO, oversees the management of major enterprise governance, risk and control activities at TD and promotes an integrated and effective risk culture. The following Executive Committees have been established to manage specific major risks based on the nature of the risk and related business activity: • ALCO – chaired by the Group Head, Insurance, Credit Cards, and Enterprise Strategy, oversees directly and through its standing subcommittees the Risk Capital Committee, Global Liquidity Forum and Enterprise Investment Committee, the management of TD’s non-trading market risk and each of its consolidated liquidity, funding, investments, and capital positions. • OROC – chaired by the CRO, oversees the strategic assessment of TD’s governance, control and operational risk structure. • Disclosure Committee – chaired by the Group Head, Finance, Sourcing, Corporate Communications and Chief Financial Officer, ensures that appropriate controls and procedures are in place and operating to permit timely, accurate, balanced and compliant disclosure to regulators, shareholders and the market. • RRC – chaired by the CRO, oversees that corporate or business initiatives with significant reputational risk profiles have received adequate review for reputational risk implications prior to imple- mentation as well as matters escalated to the RRC under the enterprise Reputational Risk policy. Risk Management The Risk Management function, headed by the CRO, provides indepen- dent oversight of enterprise risk management, risk governance and control, and is responsible for establishing risk management strategy, policies and practices. Risk Management’s primary objective is to support a comprehensive and proactive approach to risk management that promotes a strong risk management culture. Risk Management works with the business segments and other corporate oversight groups to establish policies, standards, and limits that align with TD’s risk appetite, and monitors and reports on existing and emerging risks and compliance with TD’s risk appetite. There is an established frame- work in place for the identification and assessment of top and emerg- ing risks and there are clear procedures for when and how risk events and issues are brought to the attention of senior management and the Risk Committee. Business Segments Each business segment has a dedicated risk management function that reports directly to a senior risk executive who in turn reports to the CRO. This structure supports an appropriate level of central oversight while emphasizing ownership and accountability for risk within the business segment. Business management is responsible for recommending the business-level risk appetite and metrics, which are reviewed and chal- lenged as necessary by Risk Management and endorsed by the ERMC and approved by the CEO, to align with TD’s risk appetite and manage risk within approved risk limits as set out in TD policies. Internal Audit TD’s internal audit function provides independent assurance to the Board of the effectiveness of risk management, control and governance processes employed to ensure compliance with TD’s risk appetite. Internal Audit reports on its evaluation to management and the Board. Compliance The mandate of TD’s Compliance Department is to manage compliance risk across TD to align with the policies established and approved by the Audit and Risk Committees. The Compliance Department is respon- sible for establishing risk-based programs and standards to proactively manage known and emerging compliance risk across TD by providing independent oversight and delivering operational control processes to comply with the applicable legislation and regulatory requirements. Anti-Money Laundering The Global AML group establishes a risk-based program and standards to proactively manage known and emerging AML compliance risk across the Bank. The AML group provides independent oversight and delivers operational control processes to comply with the applicable legislation and regulatory requirements. The line of business owns AML Risk and is responsible for assessing the risk, as well as designing and implementing mitigating controls. Treasury and Balance Sheet Management The Treasury and Balance Sheet Management (TBSM) group manages, directs and reports on TD’s capital and investment positions, interest rate risk, and liquidity and funding risk and the market risks of TD’s non-trading bank activities. The Risk Management function oversees TBSM’s capital and investment activities. Three Lines of Defence In order to further the understanding of responsibilities for risk management, TD employs a “three lines of defence” model that describes the role of the businesses, governance, risk and oversight groups, and Internal Audit in managing risk across TD. The chart below describes the respective accountabilities of each line of defence at TD. THREE LINES OF DEFENCE First Line Identify and Control Business Segment Accountabilities • Manages and identifies risk in day-to-day activities owned by the line of business. • Ensures activities are within TD’s risk appetite and risk management policies. • Designs, implements and maintains effective internal controls within the line of business. • Implements risk based approval processes for all new products, activities, processes and systems. • Delivers training, tools and advice to support its accountabilities. • Monitors and reports on risk profile. Second Line Governance, Risk & Oversight Functions Accountabilities Set Standards and Challenge • Establishes enterprise governance, risk and control strategies and practices. • Provides oversight and independent challenge to the first line through review, inquiry and discussion. • Develops and communicates governance, risk and control policies. • Provides training, tools and advice to support the first line of defence in carrying out its accountabilities. • Monitors and reports on compliance with risk appetite and policies. Third Line Internal Audit Accountabilities Independent Assurance • Verifies independently that TD’s ERF is operating effectively. • Validates the effectiveness of the first and second lines of defence in fulfilling their mandates and managing risk. 72 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISIn support of a strong risk culture, TD applies the following principles to how it manages risks: • Enterprise-wide in Scope – Risk Management will span all areas of TD, including third-party alliances and joint venture undertakings, and all boundaries, both geographic and regulatory. • Transparent and Effective Communication – Matters relating to risk will be communicated and escalated in a timely, accurate, and forthright manner. • Enhanced Accountability – Risks will be explicitly owned, understood, and actively managed by business management and all employees, individually and collectively. • Independent Oversight – Risk policies, monitoring, and reporting will be established independently and objectively. • Integrated Risk and Control Culture – Risk management disci- plines will be integrated into TD’s daily routines, decision-making, and strategy. • Strategic Balance – Risk will be managed to an acceptable level of exposure, recognizing the need to protect and grow shareholder value. APPROACH TO RISK MANAGEMENT PROCESSES TD’s approach to the risk management process is comprised of four basic components: identification and assessment, measurement, control, and monitoring and reporting. Risk Identification and Assessment Risk identification and assessment is focused on recognizing and understanding existing risks, risks that may arise from new or evolving business initiatives and emerging risks from the changing environment. TD’s objective is to establish and maintain integrated risk identification and assessment processes that enhance the understanding of risk interdependencies, consider how risk types intersect, and support the identification of emerging risk. To that end, TD’s Enterprise-Wide Stress Testing (EWST) program enables senior management, the Board, and its committees, to identify and assess enterprise-wide risks and understand potential vulnerabilities for the Bank. Risk Measurement The ability to quantify risks is a key component of TD’s risk manage- ment process. TD’s risk measurement process aligns with regulatory requirements such as capital adequacy, leverage ratios, liquidity measures, stress testing and maximum credit exposure guidelines established by its regulators. Additionally, TD has a process in place to quantify risks to provide accurate and timely measurements of the risks it assumes. In quantifying risk, TD uses various risk measurement methodologies, including Value-at-Risk (VaR) analysis, scenario analysis, stress testing, and limits. Other examples of risk measurements include credit exposures, provision for credit losses, peer comparisons, trending analysis, liquidity coverage, and capital adequacy metrics. TD also requires significant business segments and corporate oversight functions to assess their own key risks and internal controls annually through a structured strategic Risk and Control Self-Assessment (RCSA) program and an ongoing process RCSA program. Internal and external risk events are monitored to assess whether TD’s internal controls are effective. This allows TD to identify, escalate, and monitor significant risk issues as needed. Risk Control TD’s risk control processes are established and communicated through Risk Committee and Management approved policies, and associated management approved procedures, control limits and delegated authorities which reflect TD’s risk appetite and risk tolerances. TD’s approach to risk control also includes risk and capital assess- ments to appropriately capture key risks in TD’s measurement and management of capital adequacy. This involves the review, challenge, and endorsement by senior management committees of the Internal Capital Adequacy Assessment Process (ICAAP) and related economic capital practices. At TD, performance is measured based on the allocation of risk-based capital to businesses and the cost charged against that capital. Risk Monitoring and Reporting TD monitors and reports on risk levels on a regular basis against TD’s risk appetite and reports on risk monitoring activities to senior management, the Board and its Committees, and appropriate execu- tive and management committees. The ERMC, the Risk Committee, and the Board also receive annual and periodic reporting on enter- prise-wide stress testing and an annual update on TD’s ICAAP. Complementing regular risk monitoring and reporting, ad hoc risk reporting is provided to senior management, the Risk Committee, and the Board as appropriate for new and emerging risk or any significant changes to the Bank’s risk profile. Enterprise-Wide Stress Testing Enterprise-wide stress testing at TD is part of the long-term strategic, financial, and capital planning exercise that helps validate the risk appe- tite. TD’s EWST program involves the development, application, and assessment of severe but plausible stress scenarios on earnings, capital, and liquidity. It enables management to identify and articulate enter- prise-wide risks and understand potential vulnerabilities that are relevant to TD’s risk profile. Stress testing engages senior management in each business segment, Finance, TBSM, Economics, and Risk Management. As part of its 2013 program, TD evaluated two internally generated macroeconomic stress scenarios covering a range of severities and duration (details described below). The scenarios were constructed to cover a wide variety of risk factors meaningful to TD’s risk profile and covering both the North American and global economies. Stressed macroeconomic variables such as unemployment, GDP, resale home prices, and interest rates were forecasted over the stress horizon which drives the assessment of impacts. In both scenarios evaluated in the 2013 program, TD’s businesses performed within acceptable levels and the Bank remained adequately capitalized with management actions. Results of the scenarios are reviewed by senior executives, incorpo- rated in TD’s planning process and presented to the Risk Committee and the Board. Separate from the EWST program, the Bank also employs reverse stress testing as part of a comprehensive Crisis Management Recovery Planning program to assess potential mitigating actions and contingency planning strategies. The scenario contemplates significantly stressful events that would result in the Bank reaching the point of non-viability in order to consider meaningful remedial actions for replenishing the Bank’s capital and liquidity position. ENTERPRISE-WIDE STRESS SCENARIOS Extreme Scenario Severe Scenario • The scenario emanates from a European banking crisis resulting in a run on deposits and implementation of capital control in select European countries. Wholesale funding markets around the world experience massive disruptions, as confidence in the banking system rapidly deteriorates. • The severe scenario is modeled from historical recessions that have taken place in the United States and Canada. The recessions extend four consecutive quarters followed by a modest recovery. • Deterioration in key macroeconomic variables such as home prices and unemployment align with historically observed recessions. • External shocks to the Canadian economy would be consequential for the household sector as home prices pull back from the current levels. 73 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISThe following pages describe the key risks we face and how they are managed. Strategic Risk Strategic risk is the potential for financial loss or reputational damage arising from ineffective business strategies, improper implementation of business strategies, or a lack of responsiveness to changes in the business environment. Business strategies include merger and acquisition activities. WHO MANAGES STRATEGIC RISK The CEO manages strategic risk supported by the members of the SET and the ERMC. The CEO, together with the SET, defines the overall strategy, in consultation with and subject to approval by the Board. The Enterprise Strategy group, under the leadership of the Group Head, Insurance, Credit Cards and Enterprise Strategy is charged with developing TD’s overall long-term and short-term strategy with input and support from senior executives across TD. In addition, each member of the SET is responsible for establishing and managing long- term and short-term strategies for their business areas (organic and through acquisitions) and for ensuring such strategies are aligned with the overall enterprise strategy and risk appetite. Each SET member is also accountable to the CEO for monitoring, assessing, managing, and reporting on the effectiveness and risks of their business strategies. The ERMC oversees the identification and monitoring of significant and emerging risks related to TD’s strategies and ensures that mitigat- ing actions are taken where appropriate. The CEO reports to the Board on the implementation of TD’s strategies, identifying the risks within those strategies and explaining how they are managed. HOW WE MANAGE STRATEGIC RISK The strategies and operating performance of significant business units and corporate functions are assessed regularly by the CEO and the rele- vant members of the SET through an integrated financial and strategic planning process, management meetings, operating/financial reviews, and strategic business reviews. Our annual planning process considers individual segment long-term and short-term strategies and associated key initiatives and ensures alignment between segment-level and enter- prise-level strategies and risk appetite. Once the strategy is set, regular strategic business reviews conducted throughout the year ensure that alignment is maintained in its implementation. The reviews include an evaluation of the strategy of each business, the overall operating environ- ment including competitive position, performance assessment, initiatives for strategy execution, and key business risks. The frequency of strategic business reviews depends on the risk profile and size of the business or function. The overall state of Strategic Risk and adherence to TD’s risk appetite is reviewed by the ERMC in the normal course. Additionally, each material acquisition is assessed for its fit with our strategy and risk appetite in accordance with our Due Diligence Policy. This assessment is reviewed by the SET and Board as part of the decision process. The shaded areas of this MD&A represent a discussion on risk manage- ment policies and procedures relating to credit, market, and liquidity risks as required under IFRS 7, which permits these specific disclosures to be included in the MD&A. Therefore, the shaded areas which include Credit Risk, Market Risk, and Liquidity Risk, form an integral part of the audited Consolidated Financial Statements for the years ended October 31, 2013 and 2012. Credit Risk Credit risk is the risk of loss if a borrower or counterparty in a transaction fails to meet its agreed payment obligations. Credit risk is one of the most significant and pervasive risks in bank- ing. Every loan, extension of credit or transaction that involves the transfer of payments between the Bank and other parties or financial institutions exposes the Bank to some degree of credit risk. Our primary objective is to be methodical in our credit risk assessment so that we can better understand, select, and manage our exposures to reduce significant fluctuations in earnings. Our strategy is to ensure central oversight of credit risk in each business, reinforcing a culture of transparency, accountability, independence, and balance. WHO MANAGES CREDIT RISK The responsibility for credit risk management is enterprise-wide. To reinforce ownership of credit risk, credit risk control functions are integrated into each business but report to Risk Management to ensure objectivity and accountability. Each business segment’s credit risk control unit is primarily respon- sible for credit decisions and must comply with established policies, exposure guidelines and credit approval limits, and policy/limit excep- tion procedures. It must also adhere to established standards of credit assessment and obtain Risk Management’s approval for material credit decisions. Risk Management provides independent oversight of credit risk by developing centralized policies that govern and control portfolio risks and product-specific policies as required. The Risk Committee oversees the management of credit risk and annually approves major credit risk policies. HOW WE MANAGE CREDIT RISK The Bank’s Credit Risk Management Framework outlines the internal risk and control structure to manage credit risk and includes risk appe- tite, policies, processes as well as limits and governance. The Credit Risk Management Framework is maintained by Risk Management and supports alignment with the Bank’s risk appetite for credit risk. Risk Management centrally approves all credit risk policies and credit decisioning strategies, including policy and limit exception management guidelines, as well as the discretionary limits of officers throughout the Bank for extending lines of credit. All significant credit decisions are escalated to Risk Management for approval or recommendation to the Risk Committee of the Board. Limits are established to monitor and control country risk, industry risk, product, geographic and group exposure risks in the portfolios in accordance with enterprise-wide policies. In our Retail businesses, we use approved scoring techniques and standards in extending, monitoring and reporting personal credit. Credit scores and decision strategies are used in the origination and ongoing management of new and existing retail credit exposures. Scoring models and decision strategies utilize a combination of borrower attributes, including employment status, existing loan expo- sure and performance, size of total bank relationship as well as exter- nal data such as credit bureau scores, to determine the amount of credit we are prepared to extend retail customers and estimate future credit performance. Established policies and procedures are in place to govern the use and ongoing monitoring and assessment of the perfor- mance of scoring models and decision strategies to ensure alignment with expected performance results. Retail credit exposures approved within the regional credit centres are subject to ongoing Retail Risk Management review to assess the effectiveness of credit decisions and risk controls as well as identify emerging or systemic issues and trends. Material policy exceptions are tracked and reported to monitor portfo- lio trends and identify potential weaknesses in underwriting guidelines and strategies. Where unfavourable trends are identified, remedial actions are taken to address those weaknesses. 74 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISOur Commercial Banking and Wholesale Banking businesses use credit risk models and policies to establish borrower and facility risk ratings, quantify and monitor the level of risk, and facilitate its management. The businesses also use risk ratings to determine the amount of credit exposure we are willing to extend to a particular borrower. Management processes are used to monitor country, industry, and borrower or coun- terparty risk ratings, which include daily, monthly, quarterly and annual review requirements for credit exposures. The key parameters used in our credit risk models are monitored on an ongoing basis. Unanticipated economic or political changes in a foreign country could affect cross-border payments for goods and services, loans, divi- dends, trade-related finance, as well as repatriation of the Bank’s capi- tal in that country. The Bank currently has credit exposure in a number of countries, with the majority of the exposure in North America. We measure country risk using approved risk rating models and qualitative factors that are also used to establish country exposure guidelines covering all aspects of credit exposure across all businesses. Country risk ratings are managed on an ongoing basis and are subject to a detailed review at least annually. As part of our credit risk strategy, we set limits on the amount of credit we are prepared to extend to specific industry sectors. We monitor our concentration to any given industry to ensure that our loan portfolio is diversified. We manage our risk using limits based on an internal risk rating score that combines our industry risk rating model and detailed industry analysis and we regularly review industry risk ratings to ensure that those ratings properly reflect the risk of the industry. We assign a maximum exposure limit or a concentration limit to each major industry segment which is a percentage of our total wholesale and commercial exposure. We also set limits on the amount of credit we are prepared to extend to a particular entity or group of entities (also referred to as “entity risk”). All entity risk is approved by the appropriate decision-making authority using limits based on the entity’s borrower risk rating and for certain portfolios, the risk rating of the industry in which the entity operates. This exposure is monitored on a regular basis. From time-to-time, we may use credit derivatives to mitigate industry concentration and borrower-specific exposure as part of our portfolio risk management techniques. The Basel Framework The objective of the Basel Framework is to improve the consistency of capital requirements internationally and make required regulatory capital more risk-sensitive. Basel sets out several options which repre- sent increasingly more risk-sensitive approaches to calculating credit, market and operational risk and RWA. Credit Risk and the Basel Framework We received approval from OSFI to use the Basel Advanced Internal Ratings Based (AIRB) Approach for credit risk, effective November 1, 2007. We use the AIRB Approach for all material portfolios, except in the following areas: • We have approved exemptions to use the Standardized Approach for some small credit exposures in North America. Risk Management reconfirms annually that this approach remains appropriate. • We have received temporary waivers to use the Standardized Approach for some small credit portfolios and the majority of our U.S. credit port- folios. We are currently in the process of transitioning these portfolios to the AIRB Approach. To continue to qualify to use the AIRB Approach for credit risk, the Bank must meet the ongoing conditions and requirements established by OSFI and the Basel Framework. We regularly assess our compliance with the Basel requirements. Credit Risk Exposures subject to the AIRB Approach The AIRB Approach to credit risk is used for all material portfolios except in the areas noted in the “Credit Risk and the Basel Framework” section. Banks that adopt the AIRB Approach to credit risk must report credit risk exposures by counterparty type, each having different underlying risk characteristics. These counterparty types may differ from the presentation in the Bank’s Consolidated Financial Statements. The Bank’s credit risk exposures are divided into two main portfolios, retail and non-retail. Risk Parameters Under the AIRB Approach, credit risk is measured using the following risk parameters: Probability of Default (PD) – the likelihood that the borrower will not be able to meet its scheduled repayments within a one year time horizon; Loss Given Default (LGD) – the amount of the loss the Bank would likely incur when a borrower defaults on a loan, which is expressed as a percentage of Exposure At Default (EAD) – the total amount we are exposed to at the time of default. By applying these risk parameters, we can measure and monitor our credit risk to ensure it remains within pre-determined thresholds. Retail Exposures In the retail portfolio (individuals and small businesses), we manage exposures on a pooled basis, using predictive credit scoring techniques. There are three sub-types of retail exposures: residential secured (for example, individual mortgages, home equity lines of credit), qualifying revolving retail (for example, individual credit cards, unsecured lines of credit and overdraft protection products), and other retail (for exam- ple, personal loans including secured automobile loans, student lines of credit, and small business banking credit products). The Bank calculates RWA for its Canadian Retail exposures using the AIRB approach. RWA for U.S. Retail exposures are currently reported under the Standardized Approach. All Canadian Retail parameter models (PD, EAD, and LGD) are based exclusively on the internal default and loss performance history for each of the three retail expo- sure sub-types. For each Canadian Retail portfolio, the Bank retains performance history on a monthly basis at an individual account level beginning in 2000; all available history, which includes the 2001 and 2008-2009 recessions in Canada, is used to ensure that the models’ output reflect an entire economic cycle. Account-level PD, EAD, and LGD parameter models are built for each product portfolio, and calibrated based on the observed account- level default and loss performance for the portfolio. Consistent with the Basel framework, the Bank defines default for Canadian exposures as 90+ day delinquency/charge-off for all retail credit portfolios. LGD estimates used in the RWA calculations reflect economic losses, and as such, include direct and indirect costs as well as any appropriate discount to account for time between default and ultimate recovery. EAD estimates reflect the historically observed utili- zation of undrawn credit limit prior to default. PD, EAD and LGD models are calibrated using logistic and linear regression techniques. Predictive attributes in the models may include account attributes (loan size, interest rate, collateral where applicable); account’s previous history and current status; an account’s age on books; customer’s credit bureau attributes, and customer’s other holdings with the Bank. For secured products such as residential mortgages, property charac- teristics, loan-to-value ratios, and customer’s equity in the property play a significant role in PD as well as in LGD models. All risk parameter estimates are updated on a quarterly basis based on the refreshed model inputs. Parameter estimation is fully automated based on approved formulas and is not subject to manual overrides. 75 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISExposures are then assigned to one of nine pre-defined PD segments based on their estimated long-run average one-year PD. The following tables map PD ranges to risk levels for all Retail AIRB exposures. T A B L E 5 3 RETAIL ADVANCED IRB EXPOSURES – By Obligor Grade – Residential Secured (millions of Canadian dollars, except as noted) PD range Exposure at Default Average PD Average LGD RWAs As at Average risk weighting Low Risk Normal Risk Medium Risk High Risk Default Total Low Risk Normal Risk Medium Risk High Risk Default Total 1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9 0.00 to 0.15% 0.16 to 0.41 0.42 to 1.10 1.11 to 2.93 2.94 to 4.74 4.75 to 7.99 8.00 to 18.20 18.21 to 99.99 100.00 0.00 to 0.15% 0.16 to 0.41 0.42 to 1.10 1.11 to 2.93 2.94 to 4.74 4.75 to 7.99 8.00 to 18.20 18.21 to 99.99 100.00 $ 61,021 21,733 14,937 5,643 1,271 825 945 551 267 $ 107,193 $ 33,263 19,419 14,679 14,385 2,315 1,710 1,582 1,007 292 $ 88,652 0.05% 0.26 0.65 1.72 3.70 6.00 11.66 35.14 100.00 0.88% 0.06% 0.25 0.68 1.80 3.74 5.94 11.42 39.62 100.00 1.68% 22.89% 24.43 24.62 24.73 24.57 24.15 21.44 18.28 20.73 23.53% 17.13% 15.93 16.47 15.31 16.62 17.59 17.52 16.93 16.35 16.46% October 31, 2013 $ 1,894 2,544 3,407 2,463 876 719 960 544 533 $ 13,940 3.10% 11.71 22.81 43.65 68.92 87.15 101.59 98.73 199.63 13.00% October 31, 2012 $ 860 1,477 2,311 4,000 1,083 1,082 1,311 854 350 $ 13,328 2.59% 7.61 15.74 27.81 46.78 63.27 82.87 84.81 119.86 15.03% T A B L E 5 4 RETAIL ADVANCED IRB EXPOSURES – By Obligor Grade – Qualifying Revolving Retail (millions of Canadian dollars, except as noted) PD range Exposure at Default Average PD Average LGD RWAs As at Average risk weighting 1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9 0.00 to 0.15% 0.16 to 0.41 0.42 to 1.10 1.11 to 2.93 2.94 to 4.74 4.75 to 7.99 8.00 to 18.20 18.21 to 99.99 100.00 0.00 to 0.15% 0.16 to 0.41 0.42 to 1.10 1.11 to 2.93 2.94 to 4.74 4.75 to 7.99 8.00 to 18.20 18.21 to 99.99 100.00 $ 18,119 7,471 7,023 5,568 2,366 1,561 1,241 388 125 $ 43,862 $ 17,566 7,322 6,863 5,500 2,413 1,626 1,315 427 141 $ 43,173 0.05% 0.26 0.69 1.84 3.70 5.92 11.09 28.72 100.00 1.67% 0.05% 0.26 0.69 1.84 3.71 5.92 11.10 28.80 100.00 1.79% 83.82% 84.20 85.41 85.89 86.04 85.30 82.68 74.29 74.23 84.43% 84.00% 84.17 85.35 85.78 86.02 85.39 82.95 74.64 74.17 84.48% October 31, 2013 $ 525 820 1,714 2,865 2,025 1,809 2,002 820 8 $ 12,588 2.90% 10.98 24.41 51.45 85.59 115.89 161.32 211.34 6.40 28.70% October 31, 2012 $ 511 803 1,676 2,831 2,065 1,883 2,130 908 9 $ 12,816 2.91% 10.97 24.42 51.47 85.58 115.81 161.98 212.65 6.38 29.69% Low Risk Normal Risk Medium Risk High Risk Default Total Low Risk Normal Risk Medium Risk High Risk Default Total 76 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 5 5 RETAIL ADVANCED IRB EXPOSURES – By Obligor Grade – Other Retail (millions of Canadian dollars, except as noted) PD range Exposure at Default Average PD Average LGD RWAs As at Average risk weighting Low Risk Normal Risk Medium Risk High Risk Default Total Low Risk Normal Risk Medium Risk High Risk Default Total 1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9 0.00 to 0.15% 0.16 to 0.41 0.42 to 1.10 1.11 to 2.93 2.94 to 4.74 4.75 to 7.99 8.00 to 18.20 18.21 to 99.99 100.00 0.00 to 0.15% 0.16 to 0.41 0.42 to 1.10 1.11 to 2.93 2.94 to 4.74 4.75 to 7.99 8.00 to 18.20 18.21 to 99.99 100.00 $ 7,174 5,470 10,527 5,379 2,212 1,728 1,487 320 168 $ 34,465 $ 7,247 5,364 7,059 5,235 2,209 1,668 1,464 315 146 $ 30,707 0.07% 0.26 0.81 1.87 3.74 5.95 10.88 28.98 100.00 2.36% 0.07% 0.26 0.72 1.86 3.74 5.97 10.82 28.27 100.00 2.42% 53.58% 53.64 60.19 52.80 53.14 51.78 53.50 54.95 50.11 55.36% 53.82% 53.86 53.80 52.28 52.90 52.66 52.17 54.85 48.93 53.34% October 31, 2013 $ 715 1,399 5,836 3,552 1,686 1,345 1,387 417 156 $ 16,493 9.97% 25.58 55.44 66.03 76.22 77.84 93.28 130.31 92.86 47.85% October 31, 2012 $ 722 1,376 3,271 3,417 1,677 1,322 1,331 408 145 $ 13,669 9.96% 25.65 46.34 65.27 75.92 79.26 90.92 129.52 99.32 44.51% The risk discriminative and predictive power of the Bank’s retail credit models is assessed against the most recently available 1-year default and loss performance on a quarterly basis. All models are also subject to a comprehensive independent validation prior to implementation and on an annual basis as outlined in the Model Risk Management section of this disclosure. Long-run PD estimates are generated by including key economic indicators, such as interest rates and unemployment rates and using their long-run average over the credit cycle to estimate PD. LGD estimates are required to reflect a downturn scenario. Downturn LGD estimates are generated by using macroeconomic inputs, such as changes in housing prices and unemployment rates expected in an appropriately severe downturn scenario. For unsecured products, downturn LGD estimates reflect the observed lower recoveries for exposures defaulted during the recent 2008 – 2009 recession. For products secured by residential real estate (such as mortgages and home equity lines of credit), downturn LGD reflects the potential impact of a severe housing downturn. EAD estimates similarly reflect a downturn scenario. Non-retail Exposures In the non-retail portfolio, we manage exposures on an individual borrower basis, using industry and sector-specific credit risk models, and expert judgment. We have categorized non-retail credit risk expo- sures according to the following Basel II counterparty types: corporate (wholesale and commercial customers), sovereign and bank. Under the AIRB approach, CMHC-insured mortgages are considered sovereign risk and therefore classified as non-retail. The Bank evaluates credit risk for non-retail exposures by using both a borrower risk rating (BRR) and facility risk rating (FRR). We use this system for all corporate, sovereign and bank exposures. We determine the risk ratings using industry and sector-specific credit risk models that are based on internal historical data for the years of 1994 – 2012, covering both Wholesale and Commercial lending experience. All borrowers and facilities are assigned an internal risk rating that must be reviewed at least once each year. External data such as rating agency default rates or loss databases are used to validate the parameters. Internal risk ratings (BRR and FRR) are key to portfolio monitoring and management and are used to set exposure limits and loan pricing. Internal risk ratings are also used in the calculation of regulatory capital, economic capital, and incurred but not identified allowance for credit losses. Consistent with the IRB approach to measure capital adequacy at a 1-year risk horizon, the parameters are estimated to a 12-month forward time horizon. Borrower Risk Rating and PD Each borrower is assigned a BRR that reflects the PD of the borrower using proprietary models and expert judgment. In assessing borrower risk, we review the borrower’s competitive position, financial perfor- mance, economic and industry trends, management quality and access to funds. Under the IRB approach, borrowers are grouped into BRR grades that have similar PD. Use of projections for model implied risk ratings is not permitted and BRRs may not incorporate a projected reversal, stabilization of negative trends, or the acceleration of existing positive trends. Historic financial results can however be sensitized to account for events that have occurred, or are about to occur such as additional debt incurred by a borrower since the date of the last set of financial statements. In conducting an assessment of the BRR, all relevant and material information must be taken into account and the information being used must be current. Quantitative rating models are used to rank order the expected through-the-cycle PD, and these models are segmented into categories based on industry and borrower size. The quantitative model output can be modified in some cases by expert judgement, as prescribed within the Bank’s credit policies. To calibrate PDs for each BRR band, the Bank computes yearly transition matrices based on annual cohorts and then estimates the average annual PD for each BRR. The PD is set at the average estimation level plus an appropriate adjustment to cover statistical and model uncertainty. The calibration process for PD is a through-the-cycle approach. 77 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS Facility Risk Rating and LGD The FRR maps to LGD and takes into account facility-specific character- istics such as collateral, seniority ranking of debt, and loan structure. Different FRR models are used based on industry and obligor size. Where an appropriate level of historical defaults is available per model, this data is used in the LGD estimation process. Data considered in the calibration of the LGD model includes variables such as collateral cover- age, debt structure, and borrower enterprise value. Average LGD and the statistical uncertainty of LGD are estimated for each FRR grade. In some FRR models, lack of historical data requires the model to output a rank-ordering which is then mapped through expert judgement to the quantitative LGD scale. The IRB approach stipulates the use of downturn LGD, where the downturn period, as determined by internal and/or external experi- ence, suggests higher than average loss rates or lower than average recovery, such as during an economic recession. To reflect this, aver- age calibrated LGDs take into account both the statistical estimation uncertainty and the higher than average LGDs experienced during downturn periods. Exposure At Default The Bank calculates non-retail EAD by first measuring the drawn amount of a facility, and then adding a potential increased utilization at default, from the undrawn portion, if any. Usage Given Default (UGD) is measured as the percentage of Committed Undrawn exposure that would be expected to be drawn by a borrower defaulting in the next year, in addition to the amount that already has been drawn by the borrower. In the absence of credit mitigation effects or other details, the EAD is set at the Drawn amount plus (UGD x Undrawn), where UGD is a percentage between 0% and 100%. Given that UGD is largely driven by PD, UGD data is consolidated by BRR up to 1 year prior to default. An average UGD is then calculated for each BRR along with the statistical uncertainty of the estimates. Historical UGD experience is studied for any downturn impacts, similar to the LGD downturn analysis. The Bank has not found down- turn UGD to be significantly different than average UGD, therefore, the UGDs are set at the average calibrated level, per BRR grade, plus an appropriate adjustment for statistical and model uncertainty. Advanced IRB exposures are displayed in the following tables mapping the Bank’s 20-point borrower risk rating scale to external ratings. T A B L E 5 6 NON-RETAIL ADVANCED IRB EXPOSURES – By Obligor Grade – Corporate Internal ratings grade (BRR) PD range Exposure at Default Average PD Average LGD RWAs Average risk External rating equivalent weighting As at 0 1A 1B 1C 2A 2B 2C 3A 3B 3C 4A 4B 4C 5A 5B 5C 6 7 8 9 0 1A 1B 1C 2A 2B 2C 3A 3B 3C 4A 4B 4C 5A 5B 5C 6 7 8 9 0.00 to 0.01% 0.02 to 0.03 0.04 to 0.04 0.05 to 0.05 0.06 to 0.06 0.07 to 0.08 0.09 to 0.12 0.13 to 0.17 0.18 to 0.22 0.23 to 0.29 0.30 to 0.38 0.39 to 0.58 0.59 to 0.90 0.91 to 1.38 1.39 to 2.81 2.82 to 11.67 11.68 to 22.21 22.22 to 49.99 50.00 to 99.99 100.00 0.00 to 0.01% 0.02 to 0.03 0.04 to 0.04 0.05 to 0.05 0.06 to 0.07 0.08 to 0.10 0.11 to 0.14 0.15 to 0.20 0.21 to 0.26 0.27 to 0.33 0.34 to 0.42 0.43 to 0.64 0.65 to 0.96 0.97 to 1.45 1.46 to 2.88 2.89 to 11.30 11.31 to 23.27 23.28 to 55.12 55.13 to 99.99 100.00 $ 10,163 7,563 4,296 14,798 6,885 8,052 11,591 7,466 8,585 10,866 9,730 9,991 8,465 5,636 3,915 16,674 520 331 66 125 $ 145,718 $ 9,881 6,673 8,211 16,333 5,091 7,592 13,778 8,000 8,840 10,143 5,826 5,843 7,903 4,503 3,527 12,603 516 342 74 177 $ 135,856 0.00% 0.03 0.04 0.05 0.06 0.07 0.09 0.13 0.18 0.23 0.30 0.39 0.59 0.91 1.39 2.82 11.68 22.22 50.00 100.00 0.73% 0.00% 0.03 0.04 0.05 0.06 0.08 0.11 0.15 0.21 0.27 0.34 0.43 0.65 0.97 1.46 2.89 11.31 23.28 55.13 100.00 0.74% 64.36% 1.90 13.17 9.65 16.90 26.43 29.33 34.80 31.07 32.66 20.19 21.97 21.59 19.77 28.54 10.65 25.04 38.06 27.24 57.88 23.69% 61.38% 2.51 6.36 6.51 19.37 21.33 27.40 28.57 22.64 32.53 30.54 29.21 22.09 20.86 27.75 11.96 23.92 30.67 18.58 57.51 22.66% $ 18 66 213 662 668 1,370 2,573 2,136 2,768 4,198 2,458 3,060 3,029 2,128 2,515 4,788 578 658 85 318 $ 34,289 $ 14 40 163 389 505 942 2,893 2,098 2,212 4,170 2,480 2,408 3,061 1,835 2,148 4,024 534 554 60 535 $ 31,065 October 31, 2013 0.18% AAA/Aaa AA+/Aa1 0.87 4.96 AA/Aa2 AA-/Aa3 4.47 A+/A1 9.70 A/A2 17.01 22.20 A-/A3 BBB+/Baa1 28.61 BBB/Baa2 32.24 BBB-/Baa3 38.63 BB+/Ba1 25.26 BB/Ba2 30.63 BB-/Ba3 35.78 B+/B1 37.76 B/B2 64.24 B-/B3 28.72 CCC+/Caa1 111.15 198.79 to CC/Ca 128.79 254.40 D 23.53% October 31, 2012 0.14% 0.60 1.99 2.38 9.92 12.41 21.00 26.23 25.02 41.11 42.57 41.21 38.73 40.75 60.90 31.93 103.49 161.99 81.08 302.26 22.87% AAA/Aaa AA+/Aa1 AA/Aa2 AA-/Aa3 A+/A1 A/A2 A-/A3 BBB+/Baa1 BBB/Baa2 BBB-/Baa3 BB+/Ba1 BB/Ba2 BB-/Ba3 B+/B1 B/B2 B-/B3 CCC+/Caa1 to CC/Ca D (millions of Canadian dollars, except as noted) Investment Grade Non Investment Grade Watch and Classified Impaired/Default Total Investment Grade Non Investment Grade Watch and Classified Impaired/Default Total 78 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 5 7 NON-RETAIL ADVANCED IRB EXPOSURES – By Obligor Grade – Sovereign (millions of Canadian dollars, except as noted) Investment Grade Non Investment Grade Watch and Classified Impaired/Default Total Investment Grade Non Investment Grade Watch and Classified Impaired/Default Total Internal ratings grade (BRR) PD range Exposure at Default Average PD Average LGD RWAs Average risk External rating equivalent weighting As at 0 1A 1B 1C 2A 2B 2C 3A 3B 3C 4A 4B 4C 5A 5B 5C 6 7 8 9 0 1A 1B 1C 2A 2B 2C 3A 3B 3C 4A 4B 4C 5A 5B 5C 6 7 8 9 0.00 to 0.01% 0.02 to 0.03 0.04 to 0.04 0.05 to 0.05 0.06 to 0.06 0.07 to 0.08 0.09 to 0.12 0.13 to 0.17 0.18 to 0.22 0.23 to 0.29 0.30 to 0.38 0.39 to 0.58 0.59 to 0.90 0.91 to 1.38 1.39 to 2.81 2.82 to 11.67 11.68 to 22.21 22.22 to 49.99 50.00 to 99.99 100.00 0.00 to 0.01% 0.02 to 0.03 0.04 to 0.04 0.05 to 0.05 0.06 to 0.07 0.08 to 0.10 0.11 to 0.14 0.15 to 0.20 0.21 to 0.26 0.27 to 0.33 0.34 to 0.42 0.43 to 0.64 0.65 to 0.96 0.97 to 1.45 1.46 to 2.88 2.89 to 11.30 11.31 to 23.27 23.28 to 55.12 55.13 to 99.99 100.00 $ 187,017 19,116 2,251 7,372 1,399 7,218 1,494 – 106 20 2 12 – – – 98 – – – – $ 226,105 $ 191,106 16,881 3,169 6,685 547 4,166 1,151 124 93 8 1 2 20 – – 94 – – – – $ 224,047 0.00% 0.02 0.04 0.05 0.06 0.07 0.09 – 0.18 0.23 0.30 0.39 – – – 2.82 – – – – 0.01% 0.00% 0.02 0.04 0.05 0.06 0.08 0.11 0.15 0.21 0.27 0.34 0.43 0.65 – – 2.89 – – – – 0.01% 18.13% 4.11 4.18 2.46 2.76 2.35 8.96 – 8.63 7.93 57.32 13.65 – – – 0.30 – – – – 15.62% 11.90% 4.69 4.80 2.00 4.61 2.45 12.37 0.17 10.60 21.81 55.98 55.98 – – – 0.02 – – – – 10.76% $ 77 127 24 73 20 60 98 – 6 2 1 2 – – – 1 – – – – $ 491 $ 111 141 20 48 15 44 96 – 8 1 1 1 – – – – – – – – $ 486 October 31, 2013 0.04% AAA/Aaa AA+/Aa1 0.66 AA/Aa2 1.07 AA-/Aa3 0.99 A+/A1 1.43 A/A2 0.83 6.56 A-/A3 BBB+/Baa1 – BBB/Baa2 5.66 BBB-/Baa3 10.00 BB+/Ba1 50.00 BB/Ba2 16.67 BB-/Ba3 – B+/B1 – B/B2 – B-/B3 1.02 CCC+/Caa1 – – to CC/Ca – – 0.22% D October 31, 2012 AAA/Aaa AA+/Aa1 AA/Aa2 AA-/Aa3 A+/A1 A/A2 A-/A3 BBB+/Baa1 BBB/Baa2 BBB-/Baa3 BB+/Ba1 BB/Ba2 BB-/Ba3 B+/B1 B/B2 B-/B3 CCC+/Caa1 to CC/Ca 0.06% 0.84 0.63 0.72 2.74 1.06 8.34 – 8.60 12.50 100.00 50.00 – – – – – – – – 0.22% D 79 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 5 8 NON-RETAIL ADVANCED IRB EXPOSURES – By Obligor Grade – Bank (millions of Canadian dollars, except as noted) Investment Grade Non Investment Grade Watch and Classified Impaired/Default Total Investment Grade Non Investment Grade Watch and Classified Impaired/Default Total Internal ratings grade (BRR) PD range Exposure at Default Average PD Average LGD RWAs Average risk External rating equivalent weighting October 31, 2013 As at 0 1A 1B 1C 2A 2B 2C 3A 3B 3C 4A 4B 4C 5A 5B 5C 6 7 8 9 0 1A 1B 1C 2A 2B 2C 3A 3B 3C 4A 4B 4C 5A 5B 5C 6 7 8 9 0.00 to 0.01% 0.02 to 0.03 0.04 to 0.04 0.05 to 0.05 0.06 to 0.06 0.07 to 0.08 0.09 to 0.12 0.13 to 0.17 0.18 to 0.22 0.23 to 0.29 0.30 to 0.38 0.39 to 0.58 0.59 to 0.90 0.91 to 1.38 1.39 to 2.81 2.82 to 11.67 11.68 to 22.21 22.22 to 49.99 50.00 to 99.99 100.00 0.00 to 0.02% 0.03 to 0.03 0.04 to 0.04 0.05 to 0.05 0.06 to 0.07 0.08 to 0.10 0.11 to 0.14 0.15 to 0.20 0.21 to 0.26 0.27 to 0.33 0.34 to 0.42 0.43 to 0.64 0.65 to 0.96 0.97 to 1.45 1.46 to 2.88 2.89 to 11.30 11.31 to 23.27 23.28 to 55.12 55.13 to 99.99 100.00 $ 1,814 730 980 12,732 21,147 23,303 19,464 8,161 4,100 1,591 821 330 69 2 42 9 – – – – $ 95,295 $ 2,930 1,748 572 33,488 20,550 32,068 13,621 14,957 2,417 2,118 2,158 129 273 1 1 200 – – 37 – $ 127,268 0.01% 0.03 0.04 0.05 0.06 0.07 0.09 0.13 0.18 0.23 0.30 0.39 0.59 0.91 1.39 2.82 – – – – 0.08% 0.01% 0.03 0.04 0.05 0.06 0.08 0.11 0.15 0.21 0.27 0.34 0.43 0.65 0.97 1.46 2.89 – – 55.13 – 0.11% 57.29% 57.32 56.01 30.81 18.69 14.68 17.52 17.04 7.49 23.22 4.52 12.70 7.72 24.45 57.32 34.99 – – – – 19.82% 65.28% 49.83 55.60 12.11 20.01 11.15 21.05 8.92 11.13 18.67 6.13 30.05 13.82 9.43 40.89 14.94 – – 9.19 – 15.68% $ 47 121 170 1,589 1,850 1,936 2,474 1,119 259 328 43 47 11 1 63 8 – – – – $ 10,066 $ 92 114 136 1,321 1,549 1,554 1,590 974 220 370 123 43 52 – 1 91 – – 16 – $ 8,246 2.59% AAA/Aaa AA+/Aa1 AA/Aa2 AA-/Aa3 A+/A1 A/A2 A-/A3 BBB+/Baa1 BBB/Baa2 BBB-/Baa3 BB+/Ba1 BB/Ba2 BB-/Ba3 B+/B1 B/B2 B-/B3 CCC+/Caa1 to CC/Ca 16.58 17.35 12.48 8.75 8.31 12.71 13.71 6.32 20.62 5.24 14.24 15.94 50.00 150.00 88.89 – – – – D 10.56% October 31, 2012 3.14% 6.52 23.78 3.94 7.54 4.85 11.67 6.51 9.10 17.47 5.70 33.33 19.05 – 100.00 45.50 – – 43.24 – 6.48% AAA/Aaa AA+/Aa1 AA/Aa2 AA-/Aa3 A+/A1 A/A2 A-/A3 BBB+/Baa1 BBB/Baa2 BBB-/Baa3 BB+/Ba1 BB/Ba2 BB-/Ba3 B+/B1 B/B2 B-/B3 CCC+/Caa1 to CC/Ca D Lower risk weights apply where approved credit risk mitigants exist. Loans that are more than 90 days past due receive a risk weight of either 100% (residential secured) or 150% (all other). For off-balance sheet exposures, specified credit conversion factors are used to convert the notional amount of the exposure into a credit equivalent amount. Derivative Exposures Credit risk on derivative financial instruments, also known as counter- party credit risk, is the risk of a financial loss occurring as a result of the failure of a counterparty to meet its obligation to the Bank. We use the Current Exposure Method to calculate the credit equivalent amount, which is defined by OSFI as the replacement cost plus an amount for potential future exposure, to estimate the risk and determine regulatory capital requirements for derivative exposures. The Global Counterparty Credit group within Capital Markets Risk Management is responsible for estimating and managing counterparty credit risk in accordance with credit policies established by Risk Management. Credit Risk Exposures subject to the Standardized Approach Currently the Standardized Approach to credit risk is used primarily for assets in the U.S. Personal and Commercial Banking portfolio. We are currently in the process of transitioning this portfolio to the AIRB Approach. Under the Standardized Approach, the assets are multiplied by risk weights prescribed by OSFI to determine RWA. These risk weights are assigned according to certain factors including counter- party type, product type, and the nature/extent of credit risk mitiga- tion. We use external credit ratings assigned by one or more of Moody’s, S&P, and Fitch to determine the appropriate risk weight for our exposures to Sovereigns (governments, central banks and certain public sector entities) and Banks (regulated deposit-taking institutions, securities firms and certain public sector entities). We apply the following risk weights to on-balance sheet exposures under the Standardized Approach: Sovereign Bank Residential secured Other retail (including small business entities) Corporate 0%1 20%1 35% or 75%2 75% 100% 1 The risk weight may vary according to the external risk rating. 2 35% applied when loan to value <=80%, 75% when loan-to-value >80%. 80 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS The Bank uses various qualitative and quantitative methods to measure and manage counterparty credit risk. These include statistical methods to measure the current and future potential risk, as well as conduct stress tests to identify and quantify exposure to extreme events. We establish various limits including gross notional limits to manage business volumes and concentrations. We regularly assess market condi- tions and the valuation of underlying financial instruments. Counterparty credit risk may increase during periods of receding market liquidity for certain instruments. Capital Market Risk Management meets regularly with Market and Credit Risk Management and Trading businesses to discuss how evolving market conditions may impact our market risk and counterparty credit risk. The Bank actively engages in risk mitigation strategies through the use of multi-product derivative master netting agreements, collateral and other credit risk mitigation techniques. We may also execute certain derivatives through a central clearing house which reduces counterparty credit risk due to the ability to net offsetting positions amongst counterparty participants that settle within clearing houses. Derivative-related credit risks are subject to the same credit approval, limit, monitoring, and exposure guideline standards that we use for managing other transactions that create credit risk exposure. These standards include evaluating the creditworthiness of counterparties, measuring and monitoring exposures, including wrong-way risk exposures, and managing the size, diversification, and maturity structure of the portfolios. There are two types of wrong-way risk exposures: general and specific. General wrong-way risk arises when the probability of default of the counterparties moves in the same direction as a given market risk factor. Specific wrong-way risk arises when the exposure to a particular counterparty moves in the same direction as the probability of default of the counterparty due to the nature of the transactions entered into with that counterparty. These exposures require specific approval within the credit approval process. We measure and manage specific wrong-way risk exposures in the same manner as direct loan obligations and control them by way of approved credit facility limits. As part of the credit risk monitoring process, management meets on a periodic basis to review all exposures, including exposures result- ing from derivative financial instruments to higher risk counterparties. As at October 31, 2013, after taking into account risk mitigation strategies, the Bank does not have material derivative exposure to any counterparty considered higher risk as defined by the Bank’s credit policies. In addition, the Bank does not have a material credit risk valuation adjustment to any specific counterparty. Validation of the Credit Risk Rating System Credit risk rating systems and methodologies are independently validated to verify that they remain accurate predictors of risk. The validation process includes the following considerations: • Risk parameter estimates – PDs, EADs, and LGDs are reviewed and updated against actual loss experience to ensure estimates continue to be reasonable predictors of potential loss. • Model performance – Estimates continue to be discriminatory, stable, and predictive. • Data quality – Data used in the risk rating system is accurate, appropriate, and sufficient. • Assumptions – Key assumptions underlying the development of the model remain valid for the current portfolio and environment. Risk Management ensures that the credit risk rating system complies with TD’s Model Risk Policy. At least annually, the Risk Committee is informed of the performance of the credit risk rating system. The Risk Committee must approve any material changes to TD’s credit risk rating system. Stress Testing To determine the potential loss that could be incurred under a range of adverse scenarios, we subject our credit portfolios to stress tests. Stress tests assess vulnerability of the portfolios to the effects of severe but plausible situations, such as an economic downturn or a material market disruption. Credit Risk Mitigation The techniques we use to reduce or mitigate credit risk include written policies and procedures to value and manage financial and non-financial security (collateral) and to review and negotiate netting agreements. The amount and type of collateral and other credit risk mitigation techniques required are based on the Bank’s own assessment of the borrower’s or counterparty’s credit quality and capacity to pay. In the Retail and Commercial Banking businesses, security for loans is primarily non-financial and includes residential real estate, real estate under development, commercial real estate and business assets, such as accounts receivable, inventory, fixed assets and automobiles. In the Wholesale Banking business, a large portion of loans is to investment grade borrowers where no security is pledged. Non-investment grade borrowers typically pledge business assets in the same manner as commercial borrowers. Common standards across the Bank are used to value collateral, determine frequency of recalculation and to document, register, perfect and monitor collateral. We also use collateral and master netting agreements to mitigate derivative counterparty exposure. Security for derivative exposures is primarily financial and includes cash and negotiable securities issued by highly rated governments and investment grade issuers. This approach includes pre-defined discounts and procedures for the receipt, safe- keeping, and release of pledged securities. In all but exceptional situations, we secure collateral by taking possession and controlling it in a jurisdiction where we can legally enforce our collateral rights. Exceptionally, and when demanded by our counterparty, we hold or pledge collateral with a third-party custodian. We document third-party arrangements with a Custody and Control Agreement. From time-to-time, we may take guarantees to reduce the risk in credit exposures. For credit risk exposures subject to AIRB, we only recognize irrevocable guarantees for Commercial and Wholesale Banking credit exposures that are provided by entities with a better risk rating than that of the borrower or counterparty to the transaction. The Bank makes use of credit derivatives to mitigate credit risk. The credit, legal, and other risks associated with these transactions are controlled through well-established procedures. Our policy is to enter into these transactions with investment grade financial institutions and transact on a collateralized basis. Credit risk to these counterparties is managed through the same approval, limit and monitoring processes we use for all counterparties for which we have credit exposure. The Bank uses appraisals and automated valuation models (AVMs) to support property values when adjudicating loans collateralized by residential real property. These are computer-based tools used to esti- mate or validate the market value of homes using market comparables and price trends for local market areas. The primary risk associated with the use of these tools is that the value of an individual property may vary significantly from the average for the market area. We have specific risk management guidelines addressing the circumstances when they may be used and processes to periodically validate AVMs including obtaining third party appraisals. 81 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISGross Credit Risk Exposure Gross credit risk exposure, also referred to as EAD, is the total amount we are exposed to at the time of default of a loan and is measured before counterparty-specific provisions or write-offs. Gross credit risk exposure does not reflect the effects of credit risk mitigation and includes both on- and off-balance sheet exposures. On-balance sheet exposures consist primarily of outstanding loans, acceptances, non- trading securities, derivatives, and certain other repo-style transactions. Off-balance sheet exposures consist primarily of undrawn commitments, guarantees, and certain other repo-style transactions. Gross credit risk exposure for the two approaches we use to measure credit risk is given in the following table: T A B L E 5 9 GROSS CREDIT RISK EXPOSURE – Standardized and AIRB Approaches 1 (millions of Canadian dollars) Retail Residential secured Qualifying revolving retail Other retail Total retail Non-retail2 Corporate Sovereign Bank Total non-retail Gross credit risk exposures October 31, 2013 As at October 31, 2012 Standardized AIRB Total Standardized AIRB Total $ 25,671 – 41,225 66,896 69,411 24,783 16,827 111,021 $ 177,917 $ 251,809 43,862 34,465 330,136 145,718 81,489 95,295 322,502 $ 652,638 $ 277,480 43,862 75,690 397,032 215,129 106,272 112,122 433,523 $ 830,555 $ 22,463 – 32,921 55,384 61,052 20,470 16,461 97,983 $ 153,367 $ 234,240 43,173 30,707 308,120 135,856 78,459 127,268 341,583 $ 649,703 $ 256,703 43,173 63,628 363,504 196,908 98,929 143,729 439,566 $ 803,070 1 Gross credit risk exposures represent EAD and are before the effects of credit risk mitigation. This table excludes securitization, equity and other credit risk- weighted assets. 2 Effective 2013, non-retail exposures do not include OSFI “deemed” Qualifying Central Counterparty (QCCP) exposures as these are instead included with “other credit risk-weighted assets”, in accordance with the Basel III regulatory framework. Prior to 2013, non-retail exposures included QCCP exposures, in accordance with the Basel II regulatory framework. Other Credit Risk Exposures Non-trading Equity Exposures Our non-trading equity exposures are at a level that represents less than 5% of our combined Tier 1 and Tier 2 capital. As a result, we use OSFI-prescribed risk weights to calculate our RWA on non-trading equity exposures. Securitization Exposures For externally rated securitization exposures, we use both the Standardized Approach and the Ratings Based Approach (RBA). Both approaches assign risk weights to exposures using external ratings. We use ratings assigned by one or more of Moody’s, S&P, Fitch and DBRS. The RBA also takes into account additional factors including the time horizon of the rating (long-term or short-term), the amount of detail available on the underlying asset pool and the seniority of the position. We use the Internal Assessment Approach (IAA) to manage the credit risk of our exposures relating to ABCP securitizations that are not externally rated. Under the IAA, we consider all relevant risk factors in assessing the credit quality of these exposures, including those published by the Moody’s, S&P, Fitch and DBRS rating agencies. We also use expected loss models and policies to quantify and monitor the level of risk, and facilitate its management. Our IAA process includes our assessment of the extent by which the enhancement available for loss protection provides coverage of expected losses. The levels of stressed coverage we require for each internal risk rating are consistent with the rating agencies’ published stressed factor requirements for equivalent exter- nal ratings by asset class. All exposures are assigned an internal risk rating based on our assessment, which must be reviewed at least once per year. Our ratings reflect our assessment of risk of loss, consisting of the combined PD and LGD for each exposure. The ratings scale we use corresponds to the long term ratings scales used by the rating agencies. Our IAA process is subject to all the key elements and principles of our risk governance structure, and is managed in the same way as outlined in this Credit Risk section. We use the results of the IAA in all aspects of our credit risk management including performance tracking, control mechanisms and management reporting, and the calculation of capital. Under the IAA, exposures are multiplied by OSFI-prescribed risk weights to calculate RWA for capital purposes. Market Risk Trading Market Risk is the risk of loss in financial instruments or the balance sheet due to adverse movements in market factors such as interest and exchange rates, prices, credit spreads, volatilities, and correlations from trading activities. Non-Trading Market Risk is the risk of loss in financial instruments, the balance sheet or in earnings, or the risk of volatility in earnings from non-trading activities such as asset-liability management or investments, predominantly from interest rate, foreign exchange and equity risks. We are exposed to market risk in our trading and investment portfo- lios, as well as through our non-trading activities. In our trading and investment portfolios, we are active participants in the market, seeking to realize returns for TD through careful management of our positions and inventories. In our non-trading activities, we are exposed to market risk through the everyday banking transactions that our customers execute with us. We comply with the Basel III market risk requirements as at October 31, 2013 using the Internal Model Method. 82 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS MARKET RISK LINKAGE TO THE BALANCE SHEET The table below provides a breakdown of the Bank’s balance sheet into assets and liabilities exposed to trading and non-trading market risks. Market risk of assets and liabilities included in the calculation of VaR and other metrics used for regulatory market risk capital purposes is classified as Trading Market Risk. T A B L E 6 0 MARKET RISK LINKAGE TO THE BALANCE SHEET (millions of Canadian dollars) Balance Non-Trading Trading Sheet Market Risk Market Risk Assets subject to market risk Interest-bearing deposits with banks Trading loans, securities, and other Derivatives Financial assets designated at fair value Available-for-sale securities Held-to-maturity securities Securities purchased under reverse repurchase agreements Loans Customers’ liability under acceptances Investment in TD Ameritrade Other assets1 Assets not exposed to market risk Total Assets Liabilities subject to market risk Trading deposits Derivatives Securitization liabilities at fair value Other financial liabilities designated at fair value through profit or loss Deposits Acceptances Obligations related to securities sold short Obligations related to securities sold under repurchase agreements Securitization liabilities at amortized cost Subordinated notes and debentures Liability for preferred shares Liability for capital trust securities Other liabilities1 Liabilities and Equity not exposed to market risk Total Liabilities and equity Assets subject to market risk Interest-bearing deposits with banks Trading loans, securities, and other Derivatives Financial assets designated at fair value Available-for-sale securities Held-to-maturity securities Securities purchased under reverse repurchase agreements Loans Customers’ liability under acceptances Investment in TD Ameritrade Other assets1 Assets not exposed to market risk Total Assets Liabilities subject to market risk Trading deposits Derivatives Securitization liabilities at fair value Other financial liabilities designated at fair value through profit or loss Deposits Acceptances Obligations related to securities sold short Obligations related to securities sold under repurchase agreements Securitization liabilities at amortized cost Subordinated notes and debentures Liability for preferred shares Liability for capital trust securities Other liabilities1 Liabilities and Equity not exposed to market risk Total Liabilities and equity $ 28,855 101,928 49,461 6,532 79,541 29,961 64,283 447,777 6,399 5,300 1,915 40,580 862,532 47,593 49,471 21,960 12 543,476 6,399 41,829 34,414 25,592 7,982 27 1,740 12,698 69,339 $ 862,532 $ 21,692 94,531 60,919 6,173 98,576 – 69,198 411,492 7,223 5,344 1,843 34,115 811,106 38,774 64,997 25,324 17 487,754 7,223 33,435 38,816 26,190 11,318 26 2,224 11,828 63,180 $ 811,106 1 Other assets and liabilities related to retirement benefits, insurance and special purpose entity liabilities. $ 285 98,682 44,077 – – – 5,331 – – – – – 148,375 1,531 45,655 10,216 – – – 39,479 5,825 – – – – – – $ 102,706 $ 199 86,759 54,983 – – – 9,340 – – – – – 151,281 1,500 60,494 9,355 – – – 31,079 10,232 – – – – – – $ 112,660 $ 28,570 3,246 5,384 6,532 79,541 29,961 58,952 447,777 6,399 5,300 1,915 – 673,577 46,062 3,816 11,744 12 543,476 6,399 2,350 28,589 25,592 7,982 27 1,740 12,698 – $ 690,487 $ 21,493 7,772 5,936 6,173 98,576 – 59,858 411,492 7,223 5,344 1,843 – 625,710 37,274 4,503 15,969 17 487,754 7,223 2,356 28,584 26,190 11,318 26 2,224 11,828 – $ 635,266 As at October 31, 2013 Non-Trading Market Risk – primary risk sensitivity Interest rate Interest rate Equity, foreign exchange, interest rate Interest rate Foreign exchange, interest rate Foreign exchange, interest rate Interest rate Interest rate Interest rate Equity Interest rate Interest rate Foreign exchange, interest rate Interest rate Interest rate Equity, interest rate Interest rate Interest rate Interest rate Interest rate Interest rate Interest rate Interest rate Interest rate October 31, 2012 Interest rate Interest rate Equity, foreign exchange, interest rate Interest rate Foreign exchange, interest rate Foreign exchange, interest rate Interest rate Interest rate Interest rate Equity Interest rate Interest rate Foreign exchange, interest rate Interest rate Interest rate Equity, interest rate Interest rate Interest rate Interest rate Interest rate Interest rate Interest rate Interest rate Interest rate 83 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS MARKET RISK IN TRADING ACTIVITIES The overall objective of TD’s trading businesses is to provide wholesale banking services, including facilitation and liquidity, to clients of the Bank. TD must take risk in order to provide effective service in markets where our clients trade. In particular, TD needs to hold inventory, act as principal to facilitate client transactions, and underwrite new issues. The Bank also trades in order to have in-depth knowledge of market conditions to provide the most efficient and effective pricing and service to clients while balancing the risks inherent in its dealing activities. WHO MANAGES MARKET RISK IN TRADING ACTIVITIES Primary responsibility for managing market risk in trading activities lies with Wholesale Banking with oversight from Market Risk Control within Risk Management. The Market Risk and Capital Committee meets regularly to conduct a review of the market risk profile and trading results of our trading businesses, recommends changes to risk policies, reviews underwriting inventories, and the usage of capital and assets in Wholesale Banking. The committee is chaired by the Senior Vice President, Market Risk and Model Development, and includes Wholesale Banking senior management. There were no significant reclassifications between trading and non-trading books during fiscal 2013. HOW WE MANAGE MARKET RISK IN TRADING ACTIVITIES Market risk plays a key part in the assessment of any trading business strategy. We launch new trading initiatives or expand existing ones only if the risk has been thoroughly assessed and is judged to be within our risk appetite and business expertise, and if the appropriate infrastructure is in place to monitor, control, and manage the risk. The Trading Market Risk Framework outlines the management of trading market risk and incorporates risk appetite, risk governance structure, risk identification, measurement, and control. The Trading Market Risk Framework is maintained by Risk Management and supports alignment with TD’s Risk Appetite for trading market risk. Trading Limits We set trading limits that are consistent with the approved business strategy for each business and our tolerance for the associated market risk, aligned to TD’s market risk appetite. In setting limits, we take into account market volatility, market liquidity, organizational experience and business strategy. Limits are prescribed at the Wholesale Banking level in aggregate, as well as at more granular levels. The core market risk limits are based on the key risk drivers in the business and includes notional limits, credit spread limits, yield curve shift limits, price, and volatility limits. Another primary measure of trading limits is VaR, which we use to monitor and control overall risk levels and to calculate the regulatory capital required for market risk in trading activities. VaR measures the adverse impact that potential changes in market rates and prices could have on the value of a portfolio over a specified period of time. At the end of each day, risk positions are compared with risk limits, and any excesses are reported in accordance with established market risk policies and procedures. Calculating VaR The Bank computes total VaR on a daily basis by combining the General Market Risk (GMR) and Idiosyncratic Debt Specific Risk (IDSR) associated with the Bank’s trading positions. GMR is determined by creating a distribution of potential changes in the market value of the current portfolio using historical simulation. TD values the current portfolio using the market price and rate changes (for equity, interest rate, foreign exchange, credit, and commodity products) of the most recent 259 trading days. GMR is computed as the threshold level that portfolio losses are not expected to exceed more than one out of every 100 trading days. A 1 day holding period is used for GMR calculation, which is scaled up to ten days for regula- tory capital calculation purposes. IDSR measures idiosyncratic (single-name) credit spread risk for credit exposures in the trading portfolio, using Monte Carlo simulation. The IDSR model is based on the historical behaviour of 5-year idiosyncratic credit spreads. Similar to GMR, IDSR is computed as the threshold level that portfolio losses are not expected to exceed more than one out of every 100 trading days. IDSR is measured for a 10 day holding period. The graph below discloses daily one-day VaR usage and trading- related revenue (TEB) within Wholesale Banking. Trading-related revenue is the total of trading revenue reported in other income and the net interest income on trading positions reported in net interest income, and is reported on a taxable equivalent basis. For the year ending October 31, 2013, there were 21 days of trading losses and trading-related income was positive for 92% of the trading days. Losses in the year did not exceed VaR on any trading day. TOTAL VALUE-AT-RISK AND TRADING-RELATED REVENUE (millions of Canadian dollars) Trading-related Revenue Total Value-at-Risk $30 20 10 0 (10) (20) (30) 84 2 1 0 2 , 1 v o N 2 1 0 2 , 8 v o N 2 1 0 2 , 5 1 v o N 2 1 0 2 , 2 2 v o N 2 1 0 2 , 9 2 v o N 2 1 0 2 , 6 c e D 2 1 0 2 , 3 1 c e D 2 1 0 2 , 0 2 c e D 2 1 0 2 , 7 2 c e D 3 1 0 2 , 3 n a J 3 1 0 2 , 0 1 n a J 3 1 0 2 , 7 1 n a J 3 1 0 2 , 4 2 n a J 3 1 0 2 , 1 3 n a J 3 1 0 2 , 7 b e F 3 1 0 2 , 4 1 b e F 3 1 0 2 , 1 2 b e F 3 1 0 2 , 8 2 b e F 3 1 0 2 , 7 r a M 3 1 0 2 , 4 1 r a M 3 1 0 2 , 1 2 r a M 3 1 0 2 , 8 2 r a M 3 1 0 2 , 4 r p A 3 1 0 2 , 1 1 r p A 3 1 0 2 , 8 1 r p A 3 1 0 2 , 5 2 r p A 3 1 0 2 , 2 y a M 3 1 0 2 , 9 y a M 3 1 0 2 , 6 1 y a M 3 1 0 2 , 3 2 y a M 3 1 0 2 , 0 3 y a M 3 1 0 2 , 6 n u J 3 1 0 2 , 3 1 n u J 3 1 0 2 , 0 2 n u J 3 1 0 2 , 7 2 n u J 3 1 0 2 , 4 l u J 3 1 0 2 , 1 1 l u J 3 1 0 2 , 8 1 l u J 3 1 0 2 , 5 2 l u J 3 1 0 2 , 1 g u A 3 1 0 2 , 8 g u A 3 1 0 2 , 5 1 g u A 3 1 0 2 , 2 2 g u A 3 1 0 2 , 9 2 g u A 3 1 0 2 , 5 p e S 3 1 0 2 , 2 1 p e S 3 1 0 2 , 9 1 p e S 3 1 0 2 , 6 2 p e S 3 1 0 2 , 3 t c O 3 1 0 2 , 0 1 t c O 3 1 0 2 , 7 1 t c O 3 1 0 2 , 4 2 t c O 3 1 0 2 , 1 3 t c O TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS VaR is a valuable risk measure but it should be used in the context of its limitations, for example: • VaR uses historical data to estimate future events, which limits its forecasting abilities; • it does not provide information on losses beyond the selected confidence level; and • it assumes that all positions can be liquidated during the holding period used for VaR calculation. We continuously improve our VaR methodologies and incorporate new risk measures in line with market conventions, industry best practices and regulatory requirements. To mitigate some of the shortcomings of VaR we use additional metrics designed for risk management and capital purposes. These include Stressed VaR, Incremental Risk Charge, Stress testing framework, as well as limits based on the sensitivity to various market risk factors. Calculating Stressed VaR In addition to VaR, TD also calculates Stressed VaR, which includes Stressed GMR and Stressed IDSR. Stressed VaR is designed to measure the adverse impact that potential changes in market rates and prices could have on the value of a portfolio over a specified period of stressed market conditions. Stressed VaR is determined using similar techniques and assumptions in GMR and IDSR VaR. However, instead of using the most recent 259 trading days (one year), the Bank uses a selected year of stressed market conditions. In the last quarter of fiscal 2013, Stressed VaR was calculated using the one-year period that began on February 1st, 2008. The appropriate historical one-year period to use for Stressed VaR is determined on a quarterly basis. Stressed VaR is a part of regulatory capital requirements. Calculating the Incremental Risk Charge The incremental risk charge (IRC) is applied to all instruments in the trading book subject to migration and default risk. Migration risk repre- sents the risk of changes in the credit ratings of the Bank’s exposures. TD applies a Monte Carlo simulation with a one-year horizon and a 99.9% confidence level to determine IRC, which is consistent with regulatory requirements. IRC is based on a “constant level of risk” assumption, which requires banks to assign a liquidity horizon to positions that are subject to IRC. IRC is a part of regulatory capital requirements. T A B L E 6 1 PORTFOLIO MARKET RISK MEASURES (millions of Canadian dollars) Interest rate risk Credit spread risk Equity risk Foreign exchange risk Commodity risk Idiosyncratic debt specific risk Diversification effect1 Total Value-at-Risk Stressed Value-at-Risk (one day) Incremental Risk Capital Charge (one year) As at Average High $ 3.2 6.0 2.5 1.7 0.5 14.2 (12.8) $ 15.3 $ 27.6 $ 185.6 $ 9.7 6.0 3.6 1.4 0.9 16.5 (18.8) $ 19.3 $ 32.0 $ 267.9 $ 19.2 10.9 8.8 5.8 2.3 23.6 n/m2 $ 26.9 $ 44.3 $ 369.6 2013 Low As at Average High $ 2.9 2.4 1.8 0.3 0.4 11.3 n/m2 $ 13.7 $ 22.4 $ 177.6 $ 8.5 2.5 3.2 1.1 1.6 15.2 (15.5) $ 16.6 $ 28.4 $ 247.8 $ 8.6 7.4 3.5 2.3 1.0 23.7 (20.4) $ 26.1 $ 47.7 $ 273.3 $ 18.5 14.7 6.2 7.4 2.4 39.4 n/m2 $ 41.1 $ 77.6 $ 387.6 2012 Low $ 5.3 2.2 1.6 0.4 0.5 13.9 n/m2 $ 14.8 $ 26.0 $ 178.3 1 The aggregate VaR is less than the sum of the VaR of the different risk types due 2 Not meaningful. It is not meaningful to compute a diversification effect because to risk offsets resulting from portfolio diversification. the high and low may occur on different days for different risk types. Average VaR and Stressed VaR decreased compared with the prior year by $6.8 million and $15.7 million, respectively, with the largest contributor being a decrease in idiosyncratic debt specific risk, which was primarily driven by improvements in the quality of data underlying the model. Average IRC was relatively flat compared with the prior year, but has fluctuated during the year due to position changes. Validation of VaR Model TD uses a back-testing process to compare the actual and theoretical profit and losses to VaR to ensure that they are consistent with the statistical results of the VaR model. The theoretical profit or loss is generated using the daily price movements on the assumption that there is no change in the composition of the portfolio. Validation of the IRC model must follow a different approach since the one-year horizon and 99.9% confidence level preclude standard back-testing techniques. Instead, key parameters of the IRC model such as transi- tion and correlation matrices are subject to independent validation by benchmarking against external study results or through analysis using internal or external data. Stress Testing TD’s trading business is subject to an overall global stress test limit. In addition, global businesses have stress test limits, and each broad risk class has an overall stress test threshold. Stress scenarios are designed to model extreme economic events, replicate worst-case historical experiences, or introduce severe but plausible hypothetical changes in key market risk factors. The stress testing program includes scenarios developed using actual historical market data during periods of market disruption, in addition to hypothetical scenarios developed by Risk Management. The events we have modeled include the 1987 equity market crash, the 1998 Russian debt default crisis, the aftermath of September 11, 2001, the 2007 ABCP crisis, and the credit crisis of fall 2008. Stress tests are produced and reviewed regularly with the Market Risk and Capital Committee. 85 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS MARKET RISK IN OTHER WHOLESALE BANKING ACTIVITIES We are also exposed to market risk arising from a legacy portfolio of bonds and preferred shares held in TD Securities and in our remaining merchant banking investments. Risk Management reviews and approves policies and procedures, which are established to monitor, measure, and mitigate these risks. We are exposed to market risk when we enter into non-trading banking transactions with our customers. These transactions primarily include deposit taking and lending, which are also referred to as “asset and liability” positions. Asset/Liability Management Asset/liability management deals with managing the market risks of our traditional banking activities. Such market risks primarily include interest rate risk and foreign exchange risk. WHO IS RESPONSIBLE FOR ASSET/LIABILITY MANAGEMENT The Treasury and Balance Sheet Management Department measures and manages the market risks of our non-trading banking activities, with oversight from the Asset/Liability and Capital Committee, which is chaired by the Group Head Insurance, Credit Cards and Enterprise Strategy, and includes other senior executives. The Risk Committee of the Board periodically reviews and approves key asset/liability manage- ment and non-trading market risk policies and receives reports on compliance with approved risk limits. HOW WE MANAGE OUR ASSET AND LIABILITY POSITIONS When TD products are issued, risks are measured using a fully hedged option-adjusted transfer-pricing framework that allows us to measure and manage product risk within a target risk profile. The framework also ensures that business segments engage in risk-taking activities only if they are productive. Managing Interest Rate Risk Interest rate risk is the impact that changes in interest rates could have on our margins, earnings and economic value. The objective of interest rate risk management is to ensure that earnings are stable and predictable over time. To this end, we have adopted a disciplined hedging approach to managing the net interest income contribution from our asset and liability positions, including a modeled maturity profile for non-rate sensitive assets, liabilities and equity. Key aspects of this approach are: • Evaluating and managing the impact of rising or falling interest rates on net interest income and economic value and developing strategies to manage overall sensitivity to rates across varying interest rate scenarios. • Measuring the contribution of each TD product on a risk-adjusted, fully-hedged basis, including the impact of financial options such as mortgage commitments that are granted to customers. • Developing and implementing strategies to stabilize net interest income from all personal and commercial banking products. We are exposed to interest rate risk when asset and liability principal and interest cash flows have different payment or maturity dates. These are called “mismatched positions.” An interest-sensitive asset or liability is repriced when interest rates change, when there is cash flow from final maturity, normal amortization, or when customers exercise prepayment, conversion or redemption options offered for the specific product. Our exposure to interest rate risk depends on the size and direction of interest rate changes, and on the size and maturity of the mismatched positions. It is also affected by new business volumes, renewals of loans or deposits, and how actively customers exercise options, such as prepaying a loan before its maturity date. Interest rate risk exposure, after economic hedging activities, is measured using various interest rate “shock” scenarios to estimate the impact of changes in interest rates on the Bank. Two measures that are used are Earnings at Risk (EaR) and Economic Value at Risk (EVaR). EaR is defined as the change in net interest income over the next 12 months for an immediate and sustained 100 bps unfavourable interest rate shock. EaR measures the extent to which the maturing and repric- ing asset and liability cash flows are matched over the next 12-month period and reflects how TD’s net interest income will change over that period as a result of the interest rate shock. EVaR is defined as the difference between the change in the present value of our asset port- folio and the change in the present value of our liability portfolio, including off-balance sheet instruments, resulting from an immediate and sustained 100 bps unfavourable interest rate shock. EVaR measures the relative sensitivity of asset and liability cash flow mismatches to changes in long term interest rates. Closely matching asset and liability cash flows reduces EVaR and mitigates the risk of volatility in future interest income. To the extent that interest rates are sufficiently low and it is not feasible to measure the impact of a 100 bps decline in interest rates, EVaR and EaR exposures will be calculated by measuring the impact of a decline in interest rates where the resultant rate does not become negative. The model used to calculate EaR and EVaR captures the impact of changes to assumed customer behaviours, such as interest rate sensi- tive mortgage prepayments, but does not assume any balance sheet growth, change in business mix, product pricing philosophy or management actions in response to changes in market conditions. TD’s policy sets overall limits on EVaR and EaR which are linked to capital and net interest income, respectively. These Board limits are set consistent with TD’s enterprise risk appetite and are periodically reviewed and approved by the Risk Committee of the Board. Exposures against Board limits are routinely monitored and reported, and breaches of these Board limits (if any) are escalated to both the ALCO and the Risk Committee of the Board. In addition to Board policy limits, book-level risk limits are set for TBSM’s management of non-trading interest rate risk by Risk Management. These book-level risk limits are set at a more granular level than Board policy limits for EaR and EVaR, and developed to be consistent with the overall Board Market Risk policy. Breaches of these book-level risk limits (if any) are escalated to the ALCO in a timely manner. We regularly perform valuations of all asset and liability positions, as well as off-balance sheet exposures. Our objective is to stabilize interest income over time through disciplined asset/liability matching. 86 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISThe interest rate risk exposures from products with closed (non- optioned) fixed-rate cash flows are measured and managed separately from products that offer customers prepayment options. We project future cash flows by looking at the impact of: • A target interest sensitivity profile for our core deposit portfolio. • Our targeted investment profile on our net equity position. • Liquidation assumptions on mortgages other than from embedded pre-payment options. The objective of portfolio management within the closed book is to eliminate cash flow mismatches to the extent practically possible, so that net interest income becomes more predictable. Product options, whether they are freestanding options such as mortgage rate commit- ments or embedded in loans and deposits, expose us to a significant financial risk. • Rate Commitments: We model our exposure from freestanding mortgage rate commitment options using an expected funding profile based on historical experience. Customers’ propensity to fund and their preference for fixed or floating rate mortgage products is influenced by factors such as market mortgage rates, house prices and seasonality. • Asset Prepayment: We model our exposure to written options embedded in other products, such as the rights to prepay residential mortgage loans, based on analysis of customer behaviour. Econometric models are used to model prepayments and the effects of prepay- ment behaviour to the Bank. In general mortgage prepayments are also affected by non-market incentives such as mortgage age, house prices and GDP growth. The combined impacts from these parame- ters are also assessed to determine a core liquidation speed which is independent of market incentives. • Non Maturity Liabilities: We model our exposure to non-maturity liabilities such as core deposits by assessing interest rate elasticity and balance permanence using historical data and business judge- ment. Fluctuations of non-maturity deposits can occur because of factors such as interest rate movements, equity market movements and changes to customer liquidity preferences. To manage product option exposures we purchase options or use a dynamic hedging process designed to replicate the payoff of a purchased option. We also model the margin compression that would be caused by declining interest rates on certain rate sensitive demand deposit accounts. Other market risks monitored on a regular basis include: • Basis Risk: The Bank is exposed to risks related to various market indices. • Equity Risk: The Bank is exposed to equity risk through its equity- linked GIC product offering. The exposure is managed by purchasing options to replicate the equity payoff. The following graph shows our interest rate risk exposure (as measured by EVaR) on all non-trading assets, liabilities, and derivative instruments used for interest rate risk management. ALL INSTRUMENTS PORTFOLIO Economic Value at Risk After-tax – October 31, 2013 and October 31, 2012 (millions of Canadian dollars) Q4 2013: $(31.0) million Q4 2012: $(161.8) million ) s n o i l l i m ( e u l a v t n e s e r p n i e g n a h C $150 50 (50) (150) (250) (350) (450) (550) (2.0) (1.5) (1.0) (0.5) 0 0.5 1.0 1.5 2.0 Parallel interest rate shock (percentage) The Bank uses derivative financial instruments, wholesale investments and funding instruments and other capital market alternatives and, less frequently, product pricing strategies to manage interest rate risk. As at October 31, 2013, an immediate and sustained 100 basis point increase in interest rates would have decreased the economic value of shareholders’ equity by $31 million (October 31, 2012 – $161.8 million) after tax. An immediate and sustained 100 bps decrease in Canadian interest rates and a 25 bps decrease in U.S. interest rates would have reduced the economic value of shareholders’ equity by $9.4 million (October 31, 2012 – $ 80.5 million) after tax. The following table shows the sensitivity of the economic value of shareholders’ equity (after tax) by currency for those currencies where TD has material exposure. T A B L E 6 2 SENSITIVITY OF AFTER-TAX ECONOMIC VALUE AT RISK BY CURRENCY (millions of Canadian dollars) October 31, 2013 October 31, 2012 Currency Canadian dollar U.S. dollar1 100 bps increase 100 bps decrease 100 bps increase 100 bps decrease $ 9.5 (40.5) $ (31.0) $ (1.3) $ (8.1) (14.5) (147.3) $ (9.4) $ (161.8) $ (70.1) (10.4) $ (80.5) 1 EVaR sensitivity has been measured using a 25 bps rate decline for U.S. interest rates, corresponding to an interest rate environment that is floored at zero percent. 87 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS For the EaR measure (not shown on the graph), a 100 basis point increase in interest rates on October 31, 2013 would have increased pre-tax net interest income by $562.0 million (October 31, 2012 – $225.1 million increase) in the next 12 months. A 100 basis point decrease in interest rates on October 31, 2013 would have decreased pre-tax net interest income by $372.5 million (October 31, 2012 – $187.9 million decrease) in the next 12 months. Over the last year, the reported EaR exposures have grown due to an increasing portion of permanent non-rate sensitive deposits being invested in a shorter term maturity profile. This is consistent with net interest income manage- ment strategies overseen by ALCO. Reported EaR remains consistent with the Bank’s risk appetite and within established Board limits. The following table shows the sensitivity of net interest income (pre-tax) by currency for those currencies where TD has material exposure. T A B L E 6 3 SENSITIVITY OF PRE-TAX EARNINGS AT RISK BY CURRENCY (millions of Canadian dollars) October 31, 2013 October 31, 2012 Currency Canadian dollar U.S. dollar1 100 bps increase 100 bps decrease 100 bps increase $ 309.1 252.9 $ 562.0 $ (309.1) $ 171.8 53.3 $ (372.5) $ 225.1 (63.4) 100 bps decrease $ (171.8) (16.1) $ (187.9) 1 EaR sensitivity has been measured using a 25 bps rate decline for U.S. interest rates, corresponding to an interest rate environment that is floored at zero percent. Managing Non-trading Foreign Exchange Risk Foreign exchange risk refers to losses that could result from changes in foreign-currency exchange rates. Assets and liabilities that are denomi- nated in foreign currencies have foreign exchange risk. We are exposed to non-trading foreign exchange risk from our investments in foreign operations. When our foreign currency assets are greater or less than our liabilities in that currency, they create a foreign currency open position. An adverse change in foreign exchange rates can impact our reported net interest income and shareholders’ equity, and also our capital ratios. Our objective is to minimize these impacts. Minimizing the impact of an adverse foreign exchange rate change on reported equity will cause some variability in capital ratios, due to the amount of RWA that are denominated in a foreign currency. If the Canadian dollar weakens, the Canadian-dollar equivalent of our RWA in a foreign currency increases, thereby increasing our capital require- ment. For this reason, the foreign exchange risk arising from the Bank’s net investments in foreign operations is hedged to the point where capital ratios change by no more than an acceptable amount for a given change in foreign exchange rates. Managing Investment Portfolios The Bank manages a securities portfolio that is integrated into the overall asset and liability management process. The securities portfolio is managed using high quality low risk securities in a manner appropriate to the attainment of the following goals: (i) to generate a targeted credit of funds to deposits in excess of lending; (ii) to provide a suffi- cient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (iii) to provide eligible securities to meet collateral requirements and cash management operations; and (iv) to manage the target interest rate risk profile of the balance sheet. Strategies for the investment portfolio are managed based on the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Bank. The Risk Committee reviews and approves the Enterprise Investment Policy that sets out limits for TD’s own portfolio. WHY MARGINS ON AVERAGE EARNING ASSETS FLUCTUATE OVER TIME As explained above, the objective of our approach to asset/liability management is to lock in margins on fixed-rate loans and deposits as they are booked. It also offsets the impact of an instantaneous inter- est-rate shock on the amount of net interest income to be earned over time as a result of cash flow mismatches and the exercise of embedded options. Despite this approach, however, the margin on average earn- ing assets is subject to change over time for the following reasons: • Margins earned on new and renewing fixed-rate products relative to the margin previously earned on matured products will affect the existing portfolio margin. • The weighted-average margin on average earning assets will shift as the mix of business changes. • Changes in the prime Bankers’ Acceptances (BA) basis and the lag in changing product prices in response to changes in wholesale rates may have an impact on margins earned. The general level of interest rates will affect the return we generate on our modeled maturity profile for core deposits and the investment profile for our net equity position as it evolves over time. The general level of interest rates is also a key driver of some modeled option exposures, and will affect the cost of hedging such exposures. Our approach tends to moderate the impact of these factors over time, resulting in a more stable and predictable earnings stream. We use simulation modeling of net interest income to assess the level and changes in net interest income to be earned over time under various interest rate scenarios. The model also includes the impact of projected product volume growth, new margin and product mix assumptions. Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes or systems or from human activities or from external events. Operating a complex financial institution exposes our businesses to a broad range of operational risks, including failed transaction processing and documentation errors, fiduciary and information breaches, technology failures, business disruption, theft and fraud, workplace injury and damage to physical assets as a result of internal or outsourced business activities. The impact can result in significant financial loss, reputational harm or regulatory censure and penalties. Operational risk is embedded in all our business activities including the practices for managing other risks such as credit, market and liquidity risk. We must mitigate and manage operational risk so that we can create and sustain shareholder value, successfully execute our business strategies, operate efficiently and provide reliable, secure and convenient access to financial services. We maintain a formal enter- prise-wide operational risk management framework that emphasizes a strong risk management and internal control culture throughout TD. Under Basel, we use the Standardized Approach to operational risk regulatory capital. Work is underway to build upon TD’s operational risk management framework to meet the requirements of the Advanced Measurement Approach for operational risk, and to proceed towards implementation. 88 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS WHO MANAGES OPERATIONAL RISK Operational Risk Management is an independent function that designs and maintains TD’s overall operational risk management framework. This framework sets out the enterprise-wide governance processes, policies and practices to identify, assess, report, mitigate and control operational risk. Risk Management ensures that there is appropriate monitoring and reporting of our operational risk exposures to senior management through the Operational Risk Oversight Committee, the ERMC and the Risk Committee of the Board. We also maintain program groups who oversee specific enterprise wide operational risk policies that require dedicated mitigation and control activities. These policies govern the activities of the Corporate functions responsible for the management and appropriate oversight over business continuity, supplier risk management, financial crime risk management, project change management, technology risk manage- ment, and information security. The senior management of individual business units is responsible for the day-to-day management of operational risk following our established operational risk management policies. Within each busi- ness segment and corporate area, an independent risk management function uses the elements of the operational risk management frame- work according to the nature and scope of the operational risks inher- ent in the area. The senior executives in each business unit participate in a Risk Management Committee that oversees operational risk management issues and initiatives. Ultimately, every employee has a role to play in managing opera- tional risk. In addition to policies and procedures guiding employee activities, training is available to all staff regarding specific types of operational risks and their role in helping to protect the interests and assets of TD. HOW WE MANAGE OPERATIONAL RISK The Operational Risk Management Framework outlines the internal risk and control structure to manage operational risk and includes risk appe- tite, policies, processes as well as limits and governance. The Operational Risk Management Framework is maintained by Risk Management and supports alignment with TD’s risk appetite for operational risk. The framework incorporates sound industry practices and meets regulatory requirements. Key components of the framework include: Governance and Policy Management reporting and organizational structures emphasize accountability, ownership and effective oversight of each business unit’s and each corporate area’s operational risk exposures. In addi- tion, the expectations of the Risk Committee of the Board and senior management for managing operational risk are set out by enterprise- wide policies and practices. Risk and Control Self-Assessment Internal control is one of the primary lines of defence in safeguarding our employees, customers, assets and information, and in preventing and detecting errors and fraud. Annually, management undertakes comprehensive assessments of key risk exposures and the internal controls in place to reduce or offset these risks. Senior management reviews the results of these evaluations to ensure that risk manage- ment and internal controls are effective, appropriate and compliant with our policies. Operational Risk Event Monitoring In order to reduce our exposure to future loss, it is critical that we remain aware of and respond to our own and industry operational risks. Our policies and processes require that operational risk events be iden- tified, tracked and reported to the appropriate level of management to ensure that we analyze and manage such risks appropriately and take suitable corrective and preventative action. We also review, analyze and benchmark TD against industry operational risk losses that have occurred at other financial institutions using information acquired through recognized industry data providers. Risk Reporting Risk Management, in partnership with senior management, regularly monitors risk-related measures and the status of risk throughout the Bank to report to the senior business management and the Risk Committee of the Board. Operational risk measures are systematically tracked, assessed and reported to ensure management accountability and attention are maintained over current and emerging issues. Insurance To provide the Bank with additional protection from loss, Risk Management actively manages a comprehensive portfolio of business insurance and other risk mitigating arrangements. The type and level of insurance coverage is continually assessed to ensure that both our tolerance for risk and statutory requirements are met. This includes conducting regular in-depth risk and financial analysis and identifying opportunities to transfer our risk to third parties where appropriate. In transferring risk through insurance, the Bank transacts with external insurers that satisfy the Bank’s minimum financial rating requirements. Technology and Information Virtually all aspects of our business and operations use technology and information to create and support new markets, competitive products and delivery channels, and other business developments. The key risks are associated with the operational availability, integrity, confidentiality, and security of our information, systems and infrastructure. These risks are actively managed through enterprise-wide technology risk and information security management programs using industry best practices and our operational risk management framework. These programs include robust threat and vulnerability assessments, as well as security and disciplined change management practices. Business Continuity Management During incidents that could disrupt our business and operations, Business Continuity Management supports the ability of senior management to continue to manage and operate their businesses, and provide customers access to products and services. Our robust enterprise-wide business continuity management program includes formal crisis management protocols and continuity strategies. All areas of TD are required to maintain and regularly test business continuity plans designed to respond to a broad range of potential scenarios. Supplier Management A third party supplier/vendor is an entity whose business is to supply a particular service or commodity. The benefits of leveraging third parties include access to leading technology, specialized expertise, economies of scale and operational efficiencies. While these relationships bring benefits to our businesses and customers, we also need to manage and minimize any risks related to the activity. We do this through an enterprise-level third-party risk management program that guides third-party activities and ensures the level of risk management and senior management oversight is appropriate to the size, risk and importance of the third-party arrangement. Project Management We have established a disciplined approach to project management across the enterprise coordinated by our Enterprise Project Management Office (EPMO). This approach involves senior management governance and oversight of TD’s project portfolio and leverages leading industry practices to guide TD’s use of standardized project management meth- odology, defined project management accountabilities and capabilities, and project portfolio reporting and management tools to support successful project delivery. 89 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISFinancial Crime Detecting fraud and other forms of financial crime are very important to the Bank. To do this we maintain extensive security systems, protocols and practices to detect and mitigate financial crimes against the Bank. Model Risk Management The Bank views Model Risk as the risk of the misspecification or misuse of models for pricing, risk management, credit scoring and for deter- mining economic and regulatory capital resulting in adverse conse- quences such as financial loss or incorrect business and strategic decisions. The Bank manages this risk in accordance with management approved model risk policies and supervisory guidance which captures the entire life cycle of a model starting from proof of concept, devel- opment, initial and ongoing validation, model implementation, usage and ongoing performance monitoring. In cases where a model is deemed obsolete or unsuitable for its originally intended purposes, it is decommissioned in accordance with the Bank’s model risk policy. Business segments identify the need for a new model and are respon- sible for developing and documenting that model according to Bank policy and regulatory standards. During model development all controls with respect to code generation, acceptance testing, and usage are established and documented to a level of detail and comprehensiveness matching the materiality and complexity of the model. Once models are implemented, business owners are responsible for ongoing performance monitoring and usage in accordance with the Bank’s model risk policy and to ensure there is no inappropriate practices/use. Risk Management owns and maintains a centralized model inventory and provides oversight of all models defined in the Bank’s model risk policy and is responsible for formal model validation and approval of new models before implementation and existing models on a pre-determined schedule depending on regulatory requirements and materiality. The validation process varies in rigour, depending on the model type and use but generally includes: • Assessment of the conceptual soundness of model methodologies and underlying assumptions; • Assessment of model risk associated with a model based on complexity and materiality; • Assessment of model sensitivity to model assumptions and changes in data inputs including stress testing; • Identification of limitations, proposal of model risk mitigation mechanisms, and in the case of ongoing validation, assurance that model performance and limitations are adequately monitored; and • Regular oversight and periodic model reviews. When appropriate, initial validation includes a benchmarking exercise which may include the building of an independent model based on a similar or alternative validation approach. The results of the benchmark model are compared to the model being assessed. Comparable performance further confirms the appropriateness of the model’s methodology and its implementation. At the conclusion of the validation process, a model will either be approved for use, or should a model fail validation, require redevelop- ment or other courses of action. Models identified as obsolete, or no longer appropriate for use through changes in industry practices, the business environment, or Bank strategies are subject to decommission- ing. Model decommissioning responsibilities are shared between busi- ness owners and Risk Management. To effectively mitigate model risk in this phase, implementation of Risk Management approved interim risk mitigation mechanisms is required before the model can be decommissioned or replaced. Insurance Risk Insurance risk is the risk of financial loss due to actual experience emerging differently from expectations in insurance product pricing or reserving. Unfavourable experience could emerge due to adverse fluctuations in timing, actual size and/or frequency of claims (for example, catastrophic risk), mortality, morbidity, longevity, policyholder behaviour, or associated expenses. Insurance contracts provide financial protection by transferring insured risks to the issuer in exchange for premiums. We are exposed to insurance risk in our property and casualty insurance business, life and health insurance business and reinsurance business. WHO MANAGES INSURANCE RISK Senior management within the insurance business units has primary responsibility for managing insurance risk with oversight by the Chief Risk Officer for Insurance who reports into Risk Management. The Audit Committee of the Board acts as the Audit and Conduct Review Committee for the Canadian Insurance company subsidiaries. The Insurance company subsidiaries also have their own Boards of Directors, as well as independent external appointed actuaries who provide additional risk management oversight. HOW WE MANAGE INSURANCE RISK The Bank’s risk governance practices ensure strong independent oversight and control of risk within the Insurance business. The Risk Committee for the Insurance business provides critical oversight of the risk management activities within the business. The Insurance Risk Management Framework outlines the internal risk and control struc- ture to manage insurance risk and includes risk appetite, policies, processes as well as limits and governance. The Insurance Risk Management Framework is maintained by Risk Management and supports alignment with TD’s risk appetite for insurance risk. The assessment of reserves for claim liabilities is central to the insur- ance operation. TD engages in establishing reserves to cover estimated future payments (including loss adjustment expenses) on all claims arising from insurance contracts underwritten. The reserves cannot be established with complete certainty, and represent management’s best estimate for future claim payments. As such, TD regularly monitors liability estimates against claims experience and adjusts reserves as appropriate if experience emerges differently than anticipated. Sound product design is an essential element of managing risk. TD’s exposure to insurance risk is generally short term in nature as the principal underwriting risk relates to automobile and home insurance for individuals. Insurance market cycles as well as changes in automobile insurance legislation, the judicial environment, trends in court awards, climate patterns and the economic environment may impact the performance of the insurance business. Consistent pricing policies and underwriting standards are maintained and compliance with such policies is moni- tored by the Risk Committee for the Insurance business. Automobile insurance is provincially legislated and as such, policy- holder benefits may differ between provinces. There is also exposure to geographic concentration risk associated with personal property coverage. Exposure to insurance risk concentrations is managed through established underwriting guidelines, limits, and authorization levels that govern the acceptance of risk. Concentration risk is also mitigated through the purchase of reinsurance. Strategies are in place to manage the risk to our reinsurance busi- ness. Underwriting risk on business assumed is managed through a policy that limits exposure to certain types of business and countries. The vast majority of treaties are annually renewable, which minimizes long term risk. Pandemic exposure is reviewed and estimated annually. 90 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISLiquidity Risk Liquidity risk is the risk that TD will be unable to meet a demand for cash, or fund its obligations, as they come due. Demand for cash can arise from deposit withdrawals, debt maturities, utilization of commit- ments to provide credit or liquidity support and/or the need to pledge additional collateral. As a financial organization, we must ensure that we have continued access to sufficient and appropriate funding to cover our financial obligations as they come due, and to sustain and grow our businesses under normal and stress conditions. In the event of a funding disruption, we need to be able to continue operating without the requirement to sell non-marketable assets and/or significantly altering our business strategy. The process that ensures adequate access to funding, avail- ability of liquid assets and/or collateral under both normal and stress conditions is known as liquidity risk management. HOW WE MANAGE LIQUIDITY RISK Our overall liquidity requirement is defined as the amount of liquid assets we need to hold to cover expected future cash flow requirements, and prudent reserve against potential cash outflows in the event of a capital markets disruption or other event that could affect our access to funding. We do not rely on short-term wholesale funding for purposes other than funding marketable securities or short-term assets. To define the amount of liquidity that must be held at all times for a specified minimum 90-day period, we use a conservative “Severe Combined Stress” scenario that models potential liquidity requirements and asset marketability during a crisis that has been triggered in the markets specifically with respect to a lack of confidence in our ability to meet obligations as they come due. We also assume loss of access to all forms of external unsecured funding during the 90-day survival period. In addition to this bank-specific event, the “Severe Combined Stress” scenario also incorporates the impact of a stressed market-wide liquidity event that results in a significant reduction in the availability of both short- and long-term funding for all institutions, a significant increase in our cost of funds and a significant decrease in the market- ability of assets. We also calculate “required liquidity” for this scenario related to the following conditions: • 100% of all maturing unsecured wholesale and secured funding coming due; • Accelerated attrition or “run-off” of personal and commercial deposit balances; • Increased utilization of available credit facilities to personal, commercial and corporate lending customers; • Increased collateral requirements associated with downgrades in TD’s credit rating and adverse movement in reference rates for all derivative contracts; and • Coverage of maturities related to Bank-sponsored funding programs, such as the bankers’ acceptances we issue on behalf of clients and short-term revolving asset-backed commercial paper (ABCP) channels. TD’S LIQUIDITY RISK APPETITE Liquidity risk has the potential to place TD in a highly vulnerable position because, in the event that we cannot (or are perceived as not being able to) meet our funding commitments and/or require- ments, we would cease to operate as a going concern. Accordingly, TD maintains a sound and prudent approach to managing our potential exposure to liquidity risk, including targeting a 90-day survival horizon under a combined bank-specific and market-wide stress scenario, and a 365-day survival horizon under a pro-longed bank-specific stress scenario that impacts the Bank’s access to unse- cured wholesale funding. The resultant management strategies and actions comprise an integrated liquidity risk management program that ensures low exposure to identified sources of liquidity risk. LIQUIDITY RISK MANAGEMENT RESPONSIBILITY ALCO oversee our liquidity risk management program. It ensures there is an effective management structure in place to properly measure and manage liquidity risk. The Global Liquidity Forum (GLF), a subcommittee of the ALCO, comprised of senior management from TBSM, Risk Management, Finance, and Wholesale Banking, identifies and monitors our liquidity risks. The GLF recommends actions to the ALCO to maintain our liquidity positions within limits under normal and stress conditions. The following treasury areas are responsible for measuring, monitoring and managing liquidity risks for major business segments: • TBSM is responsible for maintaining the Global Liquidity and Asset Pledging Policy (GLAP) and associated limits, standards and processes to ensure that consistent and efficient liquidity management approaches are applied across all of our operations. TBSM also manages and reports the combined Canadian Personal and Commercial Banking (including domestic Wealth businesses); Corporate segment and Wholesale Banking liquidity positions. • U.S. TBSM is responsible for managing the liquidity position for U.S. Personal and Commercial Banking operations. • Other regional treasury-related operations, including those within our insurance, foreign branches and/or subsidiaries are responsible for managing their liquidity risk and positions. • Management overseeing liquidity at the regional level policies and liquidity risk management programs that are consistent with the GLAP and are necessary to address local business conditions and/or regulatory requirements. • GLAP and regional policies are subject to review by the GLF and approval by the ALCO. • The Risk Committee of the Board frequently reviews reporting of our enterprise liquidity position and approves Liquidity Risk Management Framework and Board Policies annually. 91 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISTD’s liquidity policy stipulates that we must maintain sufficient “available liquidity” to cover “required liquidity” at all times throughout the “Severe Combined Stress” scenario. The liquid assets we include as “available liquidity” must be currently marketable, of sufficient credit quality and available-for-sale and/or pledging to be considered readily convertible into cash over the 90-day survival horizon. Liquid assets that we consider when determining the Bank’s “available liquidity” are summarized in the following table, which does not include assets held within TD’s insurance businesses as these assets are dedicated to cover insurance liabilities and are not considered available to meet the Bank’s general liquidity requirements: T A B L E 6 4 SUMMARY OF LIQUID ASSETS BY TYPE AND CURRENCY1, 2 (billions of Canadian dollars, except as noted) As at Canadian government obligations NHA MBS Provincial government obligations Corporate issuer obligations Equities Other marketable securities and/or loans Total Canadian dollar-denominated Cash and due from Banks U.S. government obligations U.S. federal agency obligations, including U.S. federal agency mortgage-backed obligations Other sovereign obligations Corporate issuer obligations Equities Other marketable securities and/or loans Total non-Canadian dollar-denominated Total Canadian government obligations NHA MBS Provincial government obligations Corporate issuer obligations Equities Other marketable securities and/or loans Total Canadian dollar-denominated Cash and due from Banks U.S. government obligations U.S. federal agency obligations, including U.S. federal agency mortgage-backed obligations Other sovereign obligations Corporate issuer obligations Equities Other marketable securities and/or loans Total non-Canadian dollar-denominated Total Securities received as collateral from securities financing and derivative transactions Bank-owned liquid assets Total liquid assets Encumbered Unencumbered liquid assets liquid assets October 31, 2013 $ 16.7 42.6 4.3 6.5 20.1 2.8 $ 93.0 20.6 1.7 26.0 27.4 41.7 8.0 6.0 $ 131.4 $ 224.4 $ 17.9 31.3 3.8 5.2 21.7 2.8 $ 82.7 11.4 4.3 30.4 24.7 32.8 3.7 8.1 $ 115.4 $ 198.1 $ 27.3 0.6 5.4 4.0 3.0 0.2 $ 40.5 – 28.6 4.9 23.8 2.6 1.7 5.5 $ 67.1 $ 107.6 $ 25.1 1.3 4.0 3.1 4.1 0.1 $ 37.7 – 24.2 2.7 24.8 2.6 1.8 9.3 $ 65.4 $ 103.1 $ 44.0 43.2 9.7 10.5 23.1 3.0 $ 133.5 20.6 30.3 30.9 51.2 44.3 9.7 11.5 $ 198.5 $ 332.0 $ 43.0 32.6 7.8 8.3 25.8 2.9 $ 120.4 11.4 28.5 33.1 49.5 35.4 5.5 17.4 $ 180.8 $ 301.2 13% 13 3 3 7 1 40% 6 9 9 16 13 3 4 60% 100% 14% 11 3 3 9 1 41% 3 9 11 16 12 2 6 59% 100% $ 25.3 7.9 5.9 0.6 4.8 0.3 $ 44.8 0.5 28.6 7.7 3.1 5.1 0.8 5.8 $ 51.6 $ 96.4 $ 18.7 35.3 3.8 9.9 18.3 2.7 $ 88.7 20.1 1.7 23.2 48.1 39.2 8.9 5.7 $ 146.9 $ 235.6 October 31, 2012 $ 23.9 6.3 4.1 0.8 4.3 – $ 39.4 – 26.3 7.1 1.8 2.9 1.1 10.3 $ 49.5 $ 88.9 $ 19.1 26.3 3.7 7.5 21.5 2.9 $ 81.0 11.4 2.2 26.0 47.7 32.5 4.4 7.1 $ 131.3 $ 212.3 1 Positions stated include gross asset values pertaining to secured borrowing/lending 2 Liquid assets include collateral received that can be rehypothecated and reverse-repurchase/repurchase transactions. or otherwise redeployed. Liquid assets are held in The Toronto-Dominion Bank and multiple domestic and foreign subsidiaries and branches and are summarized in the table below: T A B L E 6 5 SUMMARY OF UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES (billions of Canadian dollars) The Toronto-Dominion Bank (Parent) Major bank subsidiaries Bank foreign branches Other subsidiaries Total 92 October 31 2013 $ 57.7 142.9 34.6 0.4 $ 235.6 As at October 31 2012 $ 56.9 120.2 34.8 0.4 $ 212.3 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS TD’s monthly average liquid assets for the year ended October 31, 2013 are summarized in the table below: T A B L E 6 6 SUMMARY OF AVERAGE LIQUID ASSETS BY TYPE AND CURRENCY1 (billions of Canadian dollars, except as noted) Average for the year ended Canadian government obligations NHA MBS Provincial government obligations Corporate issuer obligations Equities Other marketable securities and/or loans Total Canadian dollar-denominated Cash and due from Banks U.S. government obligations U.S. federal agency obligations, including U.S. federal agency mortgage-backed obligations Other sovereign obligations Corporate issuer obligations Equities Other marketable securities and/or loans Total non-Canadian dollar-denominated Total Securities received as collateral from securities financing and derivative transactions2 Bank-owned liquid assets Total liquid assets Encumbered Unencumbered liquid assets2 liquid assets October 31, 2013 $ 15.0 39.8 4.0 6.6 21.4 1.6 $ 88.4 19.0 3.0 25.7 25.2 37.0 5.3 7.5 $ 122.7 $ 211.1 $ 28.8 0.5 5.6 3.5 4.0 0.2 $ 42.6 – 28.6 5.2 20.9 2.4 1.8 8.0 $ 66.9 $ 109.5 $ 43.8 40.3 9.6 10.1 25.4 1.8 $ 131.0 19.0 31.6 30.9 46.1 39.4 7.1 15.5 $ 189.6 $ 320.6 14% 12 3 3 8 1 41% 6 10 10 14 12 2 5 59% 100% $ 23.8 7.8 5.4 0.6 5.3 0.3 $ 43.2 0.1 29.9 7.8 2.5 4.9 1.1 8.2 $ 54.5 $ 97.7 $ 20.0 32.5 4.2 9.5 20.1 1.5 $ 87.8 18.9 1.7 23.1 43.6 34.5 6.0 7.3 $ 135.1 $ 222.9 1 Positions stated include gross asset values pertaining to secured borrowing/lending 2 Liquid assets include collateral received that can be rehypothecated and reverse-repurchase/repurchase transactions. or otherwise redeployed. Average liquid assets held in The Toronto-Dominion Bank and multiple domestic and foreign subsidiaries and branches are summarized in following table: T A B L E 6 7 SUMMARY OF AVERAGE UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES (billions of Canadian dollars) The Toronto-Dominion Bank (Parent) Major bank subsidiaries Bank foreign branches Other subsidiaries Total Average for the year ended October 31, 2013 $ 60.0 131.0 31.5 0.4 $ 222.9 93 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS Unencumbered liquid assets are represented in a cumulative liquidity gap framework with adjustments made for estimated market or trading depth for each asset class, settlement timing and/or other identified impediments to potential sale or pledging. In addition, the fair market value of securities will fluctuate based on changes in prevailing interest rates, credit spreads and/or market demand. Where appropriate, we apply a downward adjustment to current market value reflective of expected market conditions and investor requirements during the “Severe Combined Stress” scenario. Overall, we expect the reduction in current market value to be relatively low given the underlying high credit quality and demonstrated liquidity of our liquid asset portfolio. “Available liquidity” also includes our estimated borrowing capacity through the Federal Home Loan Bank (FHLB) System in the U.S. TD has access to the Bank of Canada’s emergency lending assistance program, Federal Reserve Bank discount window in the U.S. and European Central Bank standby liquidity facilities. TD does not consider borrowing capacity at central banks as a source of available liquidity when assessing liquidity positions. T A B L E 6 8 CREDIT RATINGS Ratings agency Moody’s S&P Fitch DBRS Short-term debt rating P–1 A–1+ F1+ R–1 (high) October 31, 20131 Senior long-term debt rating and outlook Aa1 AA– AA– AA Stable Stable Stable Stable 1 The above ratings are for The Toronto-Dominion Bank legal entity. A more exten- sive listing, including subsidiaries’ ratings, is available on the Bank’s website at http://www.td.com/investor/credit.jsp. Credit ratings are not recommendations to purchase, sell or hold a financial obligation inasmuch as they do not comment on market price or suitability for a particular investor. Ratings are subject to revision or withdrawal at any time by the rating organization. We regularly review the level of increased collateral our trading coun- terparties would require in the event of a downgrade of TD’s credit rating. We routinely hold liquid assets to ensure we are able to provide additional collateral required by trading counterparties in the event of a one-notch downgrade in our senior long-term credit ratings. Severe downgrades could have an impact on “required liquidity” by requiring the Bank to post additional collateral for the benefit of our trading counterparties. The table below presents the additional collateral payments that could have been called at the reporting date in the event of one, two and three-notch downgrades of our credit ratings. T A B L E 6 9 ADDITIONAL COLLATERAL REQUIREMENTS FOR RATING DOWNGRADES 1 (billions of Canadian dollars) Average for the year ended One-notch downgrade Two-notch downgrade Three-notch downgrade October 31 October 31 2012 2013 $ 0.4 0.7 0.9 $ 0.6 1.5 1.7 1 Comparative amounts have been restated to conform with the presentation adopted in the current year. Our surplus liquid-asset position for each business segment is calculated by deducting “required liquidity” from “available liquidity”. TD does not consolidate the surplus liquidity of U.S. Personal and Commercial Banking with the positions of other segments due to investment restrictions imposed by the U.S. Federal Reserve of funds generated from deposit taking activities by member financial institutions. Surplus liquidity domiciled in certain Wealth and Insurance subsidiaries are not included in the liquidity position calculation for Canadian Personal and Commercial Banking due to regulatory investment restrictions. TD also maintains foreign branches in key global centres such as New York, London and Singapore to support Wholesale Banking activities. The Parent company routinely provides a guarantee of liquidity support to all of its foreign branches and consolidated subsidiaries. The ongoing measurement of business segment liquidity in accordance with stress scenario related limits ensures there will be sufficient sources of cash in a liquidity stress event. Additional stress scenarios are also used to evaluate the potential range of “required liquidity” levels that the Bank could encounter. We have liquidity contingency funding plans (CFP) in place for each major business segment and local juris- diction to document liquidity management actions and governance in relation to stress events. CFP documentation is an integral component of the Bank’s overall liquidity risk management program. Credit ratings are important to our borrowing costs and ability to raise funds. Rating downgrades could potentially result in higher financ- ing costs and reduce access to capital markets, and could also affect our ability to enter into routine derivative or hedging transactions. Credit ratings and outlooks provided by rating agencies reflect their views and are subject to change from time-to-time, based on a number of factors including our financial strength, competitive position and liquidity as well as factors not entirely within our control, including the methodologies used by rating agencies and conditions affecting the overall financial services industry. 94 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS In the course of the Bank’s day-to-day operations, securities and other assets are pledged to obtain funding and participate in clearing and/or settlement systems. A summary of encumbered and unencumbered assets is presented below as they are represented on the Bank’s Consolidated Balance Sheet: T A B L E 7 0 ON BALANCE SHEET ENCUMBERED AND UNENCUMBERED ASSETS (billions of Canadian dollars) Cash and due from banks Interest-bearing deposits with banks Securities, trading loans, and other6 Derivatives Securities purchased under reverse repurchase agreements Loans, net of allowance for loan losses Customers’ liability under acceptances Investment in TD Ameritrade Goodwill Other intangibles Land, buildings, equipment, and other depreciable assets Current income tax receivable Deferred tax assets Other assets Total Encumbered1 Unencumbered $ Pledged as Collateral2 – 2.0 39.7 – – 15.1 – – – – – – – – $ 56.8 Other3 – $ 1.5 25.6 – – 55.1 – – – – – – – – $ 82.2 $ Available as Collateral4 – 21.6 139.2 – – 67.0 – – – – – – – – $ 227.8 $ Other5 3.6 3.8 13.3 49.5 64.3 307.7 6.4 5.3 13.3 2.5 4.6 0.6 1.6 19.2 $ 495.7 As at October 31, 2013 Encumbered Total Assets as a % Assets of Total Assets $ 3.6 28.9 217.8 49.5 64.3 444.9 6.4 5.3 13.3 2.5 4.6 0.6 1.6 19.2 $ 862.5 –% 0.4 7.6 – – 8.1 – – – – – – – – 16.1% 1 Asset encumbrance has been analysed on an individual asset basis. Where a particular asset has been encumbered and TD has holdings of the asset both on-balance sheet and off-balance sheet, it is assumed for the purpose of this disclosure that the on-balance sheet holding is encumbered ahead of the off-balance sheet holding. 2 Represents assets on the Bank’s Consolidated Balance Sheet that have been posted externally to support the Bank’s liabilities and day-to-day operations including securities related to repurchase agreements, securities lending, clearing and payment systems and assets pledged for derivative transactions. Also includes assets that have been pledged supporting FHLB activity. 3 Assets on the Bank’s Consolidated Balance Sheet supporting TD Bank funding activities, assets pledged against securitization liabilities, assets held by consoli- dated securitization vehicles or in pools for covered bond issuance, and assets covering short sales. Refer to Note 29 of the Consolidated Financial Statements “Pledged Assets and Collateral” discussion for details on financial assets accepted as collateral that the Bank is permitted to sell or repledge in the absence of default. FUNDING TD has access to a wide variety of short- and long-term unsecured and secured funding sources including securitization channels that it uses to meet operational requirements. TD’s funding activities are conducted in accordance with the GLAP Policy that requires, among other things, assets be funded to the appropriate term. Our primary approach to managing funding activities is to maximize the use of deposits raised through retail and business banking chan- nels. The following table illustrates the Bank’s large base of personal and commercial, domestic Wealth and TD Ameritrade sweep deposits (collectively P&C deposits) that make up over 70% of total funding. Over 60%of these deposits are insured under various insurance deposit regimes, including the Canada Deposit Insurance Corporation (CDIC) and the Federal Deposit Insurance Corporation. The amount of stable long-term funding provided by demand or non-specific maturity P&C deposits is determined based on demonstrated balance permanence under the “Severe Combined Stress” scenario. 4 Assets on the Bank’s Consolidated Balance Sheet that are considered readily available in their current legal form to generate funding or support collateral needs. This category includes reported FHLB assets that remain unutilized and held-to-maturity securities that are available for collateral purposes however not regularly utilized in practice. 5 Assets on the Bank’s Consolidated Balance Sheet that cannot be used to support funding or collateral requirements in their current form. This category includes those assets that are potentially eligible as funding program collateral (for example, CMHC insured mortgages that can be securitized into NHA MBS). 6 Securities include trading loans, securities, and other, financial assets designated at fair value through profit or loss, available-for-sale securities and held-to-maturity securities. T A B L E 7 1 SUMMARY OF DEPOSIT FUNDING1 (billions of Canadian dollars) 2013 2012 P&C deposits – Canadian P&C (including domestic Wealth businesses) P&C deposits – U.S. P&C Other deposits Total $ 260.5 200.0 2.2 $ 462.7 $ 247.9 172.4 2.6 $ 422.9 1 Comparative amounts have been restated to conform with the presentation adopted in the current year. 95 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS The Bank maintains an active external funding program to provide access to diversified funding sources, including asset securitization, covered bonds and unsecured wholesale debt. Our wholesale funding is diversified geographically, by currency and by distribution network. The Bank maintains depositor concentration limits against short-term wholesale deposits in effort not to excessively depend on one or small groups of depositors for funding. The Bank further limits short-term wholesale funding that can mature in a given time period in effort to mitigate exposures to refinancing risk and asset liquidity risk during a stress event. Responsibility for our funding activities is as follows: • TBSM is responsible for meeting all TD long-term funding needs related to mortgage or loan growth, corporate investments and subsidiary capital requirements. • Wholesale Banking is responsible for meeting short-term funding and liquidity requirements relating to Wholesale Banking activities. • ALCO reviews new external funding programs and strategies in conjunction with its regular review of TD’s funding plan. The Bank continues to explore all opportunities to access lower-cost funding on a sustainable basis. Some liabilities are not considered wholesale funding as they may be raised primarily for capital manage- ment purposes (for example, subordinated debt) or to facilitate client business (for example, deposits with the Bank). The following table represents the various sources of funding obtained as at October 31, 2013 and October 31, 2012, respectively: T A B L E 7 2 WHOLESALE FUNDING (millions of Canadian dollars) Certificates of Deposit Commercial Paper Bearer Deposit Note Senior Unsecured Medium Term Notes Covered Bonds NHA MBS Term Asset Backed Securities Total Of which: Secured Unsecured Total Less than 1 month months months 3 to 6 6 months Over 1 to 2 years to 1 year 1 to 3 As at October 31 October 31 2012 2013 Over 2 years Total Total 52 $ $ 14,940 $ 16,182 $ 18,248 $ 6,717 $ – $ 56,139 $ 42,616 5,289 – 2,494 – 23,290 17,832 14,588 10,442 10,012 6,273 47,552 51,214 25,985 1,535 1,000 $ 23,075 $ 21,967 $ 24,092 $ 19,241 $ 13,683 $ 47,846 $ 149,904 $ 130,992 – – 6,103 2,084 5,444 – 291 614 1,296 2,085 7,936 302 2,829 54 – – 2,902 – 4,147 388 1,303 – 1,937 360 925 1,571 – – 3,348 – 8,192 2,627 1,662 $ 2,297 $ 2,902 $ 3,348 $ 10,323 $ 7,528 $ 33,258 $ 59,656 $ 62,761 20,778 90,248 68,231 $ 23,075 $ 21,967 $ 24,092 $ 19,241 $ 13,683 $ 47,846 $ 149,904 $ 130,992 14,588 20,744 19,065 8,918 6,155 We use residential real estate-secured securitization programs as a primary source of funding. Excluding Wholesale Banking mortgage aggregation business, our total 2013 mortgage-backed securities issuance was $6.3 billion (2012 – $6.7 billion), and other real-estate secured issuance using asset-backed securities was $1.0 billion (2012 – nil). We continued to expand our long-term funding base by issuing $13.4 billion of unsecured medium-term notes (2012 – $2.0 billion) in various currencies and markets however did not issue covered bonds during the year ended October 31, 2013 (2012 – $3.0 billion). REGULATORY DEVELOPMENTS CONCERNING LIQUIDITY In December 2010, the Basel Committee on Banking Supervision (BCBS) issued a final framework document outlining two new liquidity standards in addition to supplemental reporting metrics applicable to all internationally active banks. The document prescribes the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) as minimum regulatory standards effective January 1, 2015 and January 1, 2018 respectively. In January 2013, the BCBS released its final rules for the LCR. BCBS continues to assess NSFR guidelines, with planned imple- mentation effective 2018. TD continues to evaluate the implications of these requirements and develop strategies to align its liquidity risk management framework with the regulatory standards. MATURITY ANALYSIS OF ASSETS, LIABILITIES AND OFF-BALANCE SHEET COMMITMENTS Table 73 summarizes on- and off-balance sheet categories by remaining contractual maturity. Off-balance sheet commitments include contractual obligations to make future payments on operating and capital lease commitments, certain purchase obligations and other liabilities. The values of credit instruments reported below represent the maximum amount of additional credit that the Bank could be obligated to extend should contracts be fully utilized. Since a significant portion of guarantees and commitments are expected to expire without being drawn upon, the total of the contractual amounts is not representative of future liquidity requirements. These contractual obligations have an impact on TD’s short-term and long-term liquidity and capital resource needs. The maturity analysis presented does not depict TD’s asset/liability matching or exposure to interest rate risk. The maturity analysis also differs from how the Bank evaluates the exposure it may have to liquidity risk and its associated funding needs. TD ensures that assets are appropriately funded to protect against borrowing cost volatility and potential reductions to funding market availability (that is, we do not fund illiquid long-term assets with short-term maturity borrowings). TD utilizes stable P&C non-specific maturity deposits (chequing and savings accounts) and P&C term deposits as the primary source of long-term funding for the Bank’s non-trading assets. TD also funds the stable balance of non-specific maturity revolving line of credit balances with long-term funding sources. We conduct long-term funding activi- ties based on the projected net growth for non-trading assets after considering such items as new business volumes, renewals of both term loans and term deposits, and how customers exercise options to prepay and pre-redeem. TD targets terms-to-maturity for new funding to match as closely as possible the resultant expected maturity profile of its balance sheet. We also raise shorter-term unsecured wholesale deposits to fund trading assets based on our internal estimates of liquidity of these assets under stressed market conditions. 96 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 7 3 REMAINING CONTRACTUAL MATURITY (millions of Canadian dollars) As at October 31, 2013 Less than 1 month 1 to 3 months 3 to 6 months 6 to 9 months 9 months to 1 year Over 1 to Over 2 to 5 years 2 years Over No Specific 5 years Maturity Total Assets Cash and due from banks Interest-bearing deposits with banks Trading loans, securities, and other1 Derivatives Financial assets designated at fair value through profit or loss Available-for-sale securities Held-to-maturity securities Securities purchased under reverse repurchase agreements Loans Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Total loans Allowance for loan losses Loans, net of allowance for loan losses Customers’ liability under acceptances Investment in TD Ameritrade Goodwill2 Other intangibles2 Land, buildings, equipment, and other depreciable assets2 Current income tax receivable Deferred tax assets Other assets Total assets Liabilities Trading deposits Derivatives Securitization liabilities at fair value Other financial liabilities designated at fair value through profit or loss Deposits3, 4 Personal Banks Business and government Total deposits Acceptances Obligations related to securities sold short1 Obligations related to securities sold under repurchase agreements Securitization liabilities at amortized cost Provisions Current income tax payable Deferred tax liabilities Other liabilities Subordinated notes and debentures Liability for preferred shares Liability for capital trust securities Equity Total liabilities and equity Off-balance sheet commitments Purchase obligations Operating lease commitments Network service agreements Automated teller machines Contact center technology Software licensing and equipment maintenance Credit and liquidity commitments Financial and performance standby letters of credit $ 3,581 $ – $ – $ – $ – $ 22,811 2,087 5,658 180 3,470 293 402 4,113 2,588 636 4,284 831 350 2,844 1,887 539 4,373 862 214 2,919 1,543 138 3,185 1,379 – $ – 7,089 6,801 – $ – – $ – 18,528 12,016 14,832 14,773 – $ 4,940 3,581 28,855 49,147 101,928 49,461 – 911 1,097 548 739 1,851 412 2,132 5,873 2,825 527 693 22,725 34,033 11,804 12,386 175 1,835 – 6,532 79,541 29,961 33,159 16,337 7,290 5,171 2,013 260 53 – – 64,283 1,194 1,014 – 17,832 – 20,040 – 20,040 4,927 – – – 1,842 1,376 – 3,886 – 7,104 – 7,104 1,381 – – – 4,552 2,147 – 3,340 635 10,674 – 10,674 91 – – – 7,725 2,375 – 4,382 41 14,523 – 14,523 – – – – 6,219 2,700 – 3,090 – 12,009 – 12,009 – – – – 893 28,099 – 31,175 108,098 25,015 8,895 10,460 – – 31,745 32,682 8,059 1,868 307 50,001 168,835 68,460 – 50,001 168,835 68,460 – – – – – – – – – – – – – – – – 185,820 62,126 119,192 22,222 22,222 11,783 116,799 3,744 96,131 447,777 (2,855) (2,855) 93,276 444,922 6,399 5,300 13,297 2,493 – 5,300 13,297 2,493 – – – 10,836 4,635 583 1,588 19,173 $ 107,042 $ 37,976 $ 29,033 $ 27,035 $ 22,499 $ 75,397 $ 238,404 $ 143,483 $ 181,663 $ 862,532 – – – 1,100 – – – 1,122 4,635 – 1,588 4,977 – – – 416 – 583 – 190 – – – 300 – – – 123 – – – 109 $ 9,991 $ 14,000 $ 15,056 $ 5,562 $ 1,609 $ 5,430 1,896 1,627 2,401 1,938 3,529 2,425 2,619 2,719 2,385 156 $ 807 $ 412 $ 6,868 1,962 13,648 14,816 2,506 4,662 – $ 47,593 49,471 – 21,960 – 2 4 1 1 1 3 – – – 12 5,288 9,412 22,931 37,631 4,927 689 8,461 3,056 13,167 24,684 1,381 605 9,116 3,729 4,058 16,903 91 1,481 6,778 255 2,825 9,858 – 156 6,366 37 3,181 9,584 – 777 9,180 14 8,824 18,018 – 2,603 12,666 25 21,844 34,535 – 9,649 27 150 261,744 319,749 20,523 3,968 105 126,269 203,204 282 391,981 543,476 6,399 41,829 – 17,343 – 8,526 27,990 40 6 – – 13,079 – – – – 682 34,414 1,428 25,592 41 696 134 134 – 321 993 28,913 149 7,982 – 27 – 1,740 51,973 – $ 101,681 $ 54,065 $ 41,311 $ 22,844 $ 19,426 $ 34,221 $ 81,986 $ 40,095 $ 466,903 $ 862,532 14 15,794 3 – – 2,874 – – – – – – 563 – 321 4,722 – – – 51,973 – 3,023 29 – – 901 7,833 27 1,740 – 73 3,482 3 – – 1,053 – – – – 4,201 517 23 – – 3,546 – – – – 775 730 21 – – 1,209 – – – – 679 578 7 – – 536 – – – – $ 64 $ 2 9 – 6 129 $ 4 20 – 193 $ 7 28 – 192 $ 7 45 – 190 $ 7 46 – 732 $ – 78 – 69 6 24 7 32 1,838 $ 2,918 $ – 44 – 19 – – – – – $ – – – 6,256 27 270 – – 163 Documentary and commercial letters of credit Commitments to extend credit and liquidity5, 6 Non-consolidated SPE commitments Commitments to liquidity facilities for ABCP Pension commitments Unrecognized net loss from past experience, different from that assumed, and effects of changes in assumptions7 $ 180 41 11,675 1,007 66 10,806 2,022 36 6,379 2,497 14 3,676 1,485 24 4,056 3,788 3 8,414 5,022 15 40,395 502 1 2,655 – – 1,410 16,503 200 89,466 – 561 226 237 187 4 765 – – 1,980 – $ – $ – $ – $ – $ – $ – $ – $ 726 $ 726 1 Amount has been recorded according to the remaining contractual maturity of the underlying security. 2 For the purposes of this table, non-financial assets have been recorded as having ‘no specific maturity’. 3 As the timing of demand deposits and notice deposits is non-specific and callable by the depositor, obligations have been included as having ‘no specific maturity’. 4 Includes $10 billion of covered bonds with remaining contractual maturities of $2 billion in ‘9 months to 1 year’, $2 billion in ‘over 1 to 2 years’ and $6 billion in ‘over 2 to 5 years’. 5 Includes $82 million in commitments to extend credit to private equity investments. 6 Commitments to extend credit exclude personal lines of credit and credit card lines, which are unconditionally cancellable at the Bank’s discretion at any time. 7 Includes unrecognized unvested plan amendment costs (credits). 97 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 7 3 REMAINING CONTRACTUAL MATURITY (cont’d) (millions of Canadian dollars) As at October 31, 2012 Less than 1 month 1 to 3 months 3 to 6 months 6 to 9 months 9 months to 1 year Over 1 to 2 years Over 2 to 5 years Over No Specific Maturity 5 years Total Assets Cash and due from banks Interest-bearing deposits with banks Trading loans, securities, and other1 Derivatives Financial assets designated at fair value through profit or loss Available-for-sale securities Securities purchased under reverse repurchase agreements Loans Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Total loans Allowance for loan losses Loans, net of allowance for loan losses Customers’ liability under acceptances Investment in TD Ameritrade Goodwill2 Other intangibles2 Land, buildings, equipment, and other depreciable assets2 Current income tax receivable Deferred tax assets Other assets Total assets Liabilities Trading deposits Derivatives Securitization liabilities at fair value Other financial liabilities designated at fair value through profit or loss Deposits3, 4 Personal Banks Business and government Total deposits Acceptances Obligations related to securities sold short1 Obligations related to securities sold under repurchase agreements Securitization liabilities at amortized cost Provisions Current income tax payable Deferred tax liabilities Other liabilities Subordinated notes and debentures Liability for preferred shares Liability for capital trust securities Equity Total liabilities and equity Off-balance sheet commitments Purchase obligations Operating lease commitments Network service agreements Automated teller machines Contact center technology Software licensing and equipment maintenance Credit and liquidity commitments Financial and performance standby letters of credit Documentary and commercial letters of credit Commitments to extend credit and liquidity5, 6 Non-consolidated SPE commitments Commitments to liquidity facilities for ABCP Pension commitments Unrecognized net loss from past experience, different from that assumed, and effects of changes in assumptions – $ – $ – $ 1 $ $ 3,435 $ 12,808 1,942 4,682 1,290 3,147 2,364 41 3,905 772 7,576 284 3,782 2,468 304 2,792 159 5,353 1,744 39 2,444 34 3,915 1,170 – $ – 8,114 5,438 – $ – 16,049 18,280 24,773 – $ 3,436 7,108 21,692 8,239 43,990 94,531 – 60,919 – $ 9 207 2,032 1,945 12,376 2,329 485 23,534 42,020 51 6,173 1,897 98,576 25,181 23,964 7,683 4,080 3,898 1 1,998 – 2,393 69,198 4,752 1,320 – 12,932 70 19,074 – 19,074 4,670 – – – 2,442 1,026 – 4,384 292 8,144 – 8,144 2,500 – – – 5,180 2,021 – 3,753 69 11,023 – 11,023 52 – – – 7,371 1,909 – 3,655 50 12,985 – 12,985 1 – – – 5,948 2,448 – 3,509 41 11,946 – 11,946 – – – – 517 2,868 24,487 9,253 – 7,385 1,087 98,727 23,265 25,619 – – 172,172 7,360 66,971 117,927 – 15,358 15,358 24,854 25,155 15,414 101,041 4,994 42,212 149,717 58,648 97,743 411,492 (2,644) 42,212 149,717 58,648 95,099 408,848 7,223 – – 5,344 – 12,311 12,311 2,217 – – 5,344 – – – – – – – – (2,644) 2,217 – – – – – – – 7,117 4,402 439 883 6,028 14,914 $ 82,855 $ 50,171 $ 28,602 $ 26,958 $ 23,812 $ 70,337 $ 212,337 $ 134,311 $ 181,723 $ 811,106 – – – 430 – – – 137 4,402 – 883 – – – 251 – 439 – 170 – – – 414 – – – 214 – – – 153 $ 1,558 $ 12,326 $ 11,846 $ 5,457 $ 6,230 $ 2,819 – 2,822 1,215 1,242 3,180 2,184 1,766 5,098 – 6,617 12,997 226 $ 610 $ 521 $ 19,071 25,144 1,525 4,641 – $ 38,774 – 64,997 – 25,324 6 5 2 1 1 2 – – – 17 4,732 7,423 17,031 29,186 4,670 676 9,139 3,291 20,688 33,118 2,500 1,042 10,930 71 2,757 13,758 52 490 7,794 30 3,858 11,682 1 453 7,858 31 1,238 9,127 – 1,203 14,512 15 5,831 20,358 – 2,928 12,189 21 16,396 28,606 – 7,874 16 148 224,457 291,759 4,059 14,957 3 113,236 181,038 167 341,752 487,754 7,223 6,255 12,514 33,435 – – 30,884 98 2 – – 9,239 – – – – 1,142 38,816 – 26,190 656 167 327 4,230 24,858 – 11,318 26 – 350 2,224 – 49,000 49,000 $ 81,417 $ 63,263 $ 32,197 $ 24,972 $ 24,071 $ 48,410 $ 76,788 $ 50,123 $ 409,865 $ 811,106 – 2,736 27 – – 680 – 11,168 – 26 – 1,874 – 4,202 1,570 7 – – 4,456 – – – – 48 3,576 26 – – 1,482 150 – – – 1,443 491 12 – – 1,284 – – – – 683 2,112 15 – – 618 – – – – 414 1,368 14 167 – 1,125 – – – – – 14,239 3 – – 1,744 550 – 327 $ 61 $ 2 11 3 58 120 $ 3 22 6 175 $ 7 33 8 169 $ 7 27 8 162 $ 7 32 3 681 $ 26 147 – – 123 – 1,703 $ 2,665 $ 18 12 9 24 94 – – – – – – $ 5,736 52 – 395 – 28 – – 215 106 68 14,165 1,027 96 10,074 1,828 53 5,238 2,095 38 3,972 1,836 7 3,159 2,575 3 7,757 5,240 14 33,229 1,095 – 2,722 – 15,802 279 – 1,544 81,860 – 566 526 271 270 612 – – – 2,245 $ – $ – $ – $ – $ – $ – $ – $ – $ 1,197 $ 1,197 1 Amount has been recorded according to the remaining contractual maturity of the 4 Includes $10 billion of covered bonds with remaining contractual maturities of $2 billion underlying security. 2 For the purposes of this table, non-financial assets have been recorded as having ‘no specific maturity’. 3 As the timing of demand deposits and notice deposits is non-specific and callable by the depositor, obligations have been included as having ‘no specific maturity’. in ‘over 1 to 2 years’ and $8 billion in ‘over 2 to 5 years’. 5 Includes $247 million in commitments to extend credit to private equity investments. 6 Commitments to extend credit exclude personal lines of credit and credit card lines, which are unconditionally cancellable at the Bank’s discretion at any time. 98 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS Capital Adequacy Risk Capital adequacy risk is the risk of insufficient capital available in relation to the amount of capital required to carry out the Bank’s strategy and/or satisfy regulatory and internal capital adequacy requirements. Capital is held to protect the viability of the Bank in the event of unexpected financial losses. Capital represents the loss-absorbing funding required to provide a cushion to protect depositors and other creditors from unexpected losses. Regulators prescribe minimum levels of capital that are referred to as limits. Managing the capital levels of a financial institution exposes our Bank to the risk of breaching regulatory capital limits. WHO MANAGES CAPITAL ADEQUACY RISK The Board of Directors have the ultimate responsibility for overseeing adequacy of capital and capital management. The Board of Directors reviews the adherence to capital limits and targets; reviews and approves the annual capital plan and the Global Capital Management Policy. The Risk Committee of the Board oversees management’s actions to maintain an appropriate ICAAP framework, commensurate with the Bank’s risk profile. The Chief Risk Officer ensures the Bank’s ICAAP is effective in meeting capital adequacy requirements. The ALCO establishes and maintains the Global Capital Management Policy for effective and prudent management of the Bank’s capital position and supports maintenance of adequate capital. It oversees the allocation of capital limits for business segments and reviews adherence to capital limits and targets. Enterprise Capital Management is responsible for forecasting and monitoring compliance with capital limits and targets, on a consolidated basis. Enterprise Capital Management updates the capital forecast and makes recommendations to the ALCO regarding capital issuance, repurchase and redemption. Risk Capital Assessment, within Risk Management, leads the ICAAP and Enterprise-Wide Stress Testing (EWST) processes. Business segments are responsible for managing to allocated capital limits. HOW WE MANAGE CAPITAL ADEQUACY RISK Capital resources are managed to ensure the Bank’s capital position can support business strategies under both current and future business operating environments. The Bank manages its operations within the capital constraints defined by both internal and regulatory capital requirements, ensuring that it meets the higher of these requirements. Regulatory capital requirements represent minimum capital levels. The Board of Directors determines capital targets in excess of capital limits. The purpose of capital targets is to reduce the risk of a breach of capital limits, due to an unexpected stress event, allowing manage- ment the opportunity to react to declining capital levels before capital limits are breached. The ALCO manages the Bank’s capital level above the Board Capital Target, taking into account normal capital volatility and strategic requirements. Capital limits and targets are defined in the Global Capital Management Policy. The Bank also determines its internal capital requirements through the ICAAP process using models to measure the risk-based capital required based on its own tolerance for the risk of unexpected losses. This risk tolerance is calibrated to the required confidence level so that the Bank will be able to meet its obligations, even after absorbing worst case unexpected losses over a one year period, associated with management’s target debt rating. In addition, the Bank has a Capital Contingency Plan that is designed to prepare management to ensure capital adequacy through periods of Bank specific or systemic market stress. The Capital Contingency Plan determines the governance and procedures to be followed if the Bank’s consolidated capital levels are forecast to fall below capital limits or targets. It outlines potential management actions that may be taken to prevent such a breach from occurring. A comprehensive periodic monitoring process is undertaken to plan and forecast capital requirements. As part of the annual planning process, business segments are allocated individual capital limits. Capital usage is monitored and reported to the ALCO. The Bank assesses the sensitivity of its forecast capital requirements and new capital formations to various economic conditions through its EWST process. The impacts of the EWST are applied to the capital forecast and are considered in the determination of capital targets. Legal and Regulatory Compliance Risk Legal and Regulatory Compliance Risk is the risk associated with the failure to meet the Bank’s legal obligations from legislative, regulatory or contractual perspectives. This includes risks associated with the fail- ure to identify, communicate and comply with current and changing, laws, regulations, rules, self-regulatory organization standards and codes of conduct. Financial services is one of the most closely regulated industries, and the management of a financial services business such as ours is expected to meet high standards in all business dealings and transac- tions. As a result, we are exposed to legal and regulatory compliance risk in virtually all of our activities. Failure to meet regulatory and legal requirements not only poses a risk of censure or penalty, and may lead to litigation, but also puts our reputation at risk. Financial penalties, and other costs associated with legal proceedings, and unfavourable judicial or regulatory judgments may also adversely affect TD’s business, results of operations and financial condition. Regulatory compliance and legal risk differs from other banking risks, such as credit risk or market risk, in that it is typically not a risk actively or deliberately assumed by management in expectation of a return. It occurs as part of the normal course of operating our businesses. WHO MANAGES LEGAL AND REGULATORY COMPLIANCE RISK Business segments and corporate areas are responsible for managing day-to-day legal and regulatory compliance risk, while the Legal, Compliance, Global Anti-Money Laundering and Regulatory Risk (including Regulatory Relationships and Government Affairs) groups assist them by providing advice and oversight. The Compliance, Global Anti-Money Laundering and Regulatory Risk groups establish risk-based programs and standards to proactively manage known and emerging compliance risk. They also provide inde- pendent oversight and deliver operational control processes to comply with applicable legislation and regulatory requirements. In addition, our Regulatory Risk groups also create and facilitate communication with elected officials and regulators, monitor legisla- tion and regulations, support business relationships with governments, coordinate regulatory examinations, facilitate regulatory approvals of new products, and advance the public policy objectives of TD. Internal and external Legal counsel also work closely with the busi- ness segments and corporate functions to identify areas of potential legal and regulatory compliance risk, and actively manage them to reduce TD’s exposure. 99 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISHOW WE MANAGE LEGAL AND REGULATORY COMPLIANCE RISK Our Code of Conduct and Ethics helps set the “tone at the top” for a culture of integrity within our organization. The Code stipulates that every business decision and action on TD’s behalf must be assessed in light of what is right, legal and fair. The Code is supported by a number of other policies, training programs and tools, and new employee or director orientation materials, covering a variety of relevant topics, such as anti-money laundering, privacy and anti-corruption practices. All directors, officers and employees are required to attest annually that they understand the Code and have complied with its provisions. Business segments and corporate areas manage day-to-day legal and regulatory compliance risk primarily by implementing appropriate policies, procedures and controls. The Legal, Compliance, and Global Anti-Money Laundering groups collectively assist them by: • Communicating and advising on regulatory and legal requirements and emerging compliance risks to each business unit as required, including reviewing and approving new products that raise poten- tially significant legal or regulatory compliance risks. • Implementing or assisting with policies, procedures and training. • Assessing regulatory and legislative requirements and compliance- related risks using an independent risk-based approach. • Independently monitoring and testing for adherence to certain regulatory and legal requirements, as well as the effectiveness of associated key internal controls. • Tracking, escalating and reporting significant issues and findings to senior management and the Board of Directors. • Liaising with regulators, as appropriate, regarding new or revised legislation, or regulatory guidance or regulatory examinations. Our policies and processes also provide for the timely escalation of potential or actual significant legal or regulatory issues to enable senior management and the Board of Directors to effectively perform their management and oversight responsibilities. While it is not possible to completely eliminate legal risk, the Legal Department also works closely with business segments and other corporate areas to identify and manage risk associated with contractual obligations and plays a gatekeeper function for unacceptable legal risk. The Legal Department also manages litigation risk within the TD Risk Appetite Statement. Reputational Risk Reputational risk is the potential that stakeholder impressions, whether true or not, regarding the Bank’s business practices, actions or inactions, will or may cause a decline in the institution’s value, brand, liquidity or customer base. A company’s reputation is a valuable business asset in its own right, essential to optimizing shareholder value and, as such, is constantly at risk. Reputational risk can arise as a consequence of any of the organi- zation’s activities and cannot be managed in isolation from other forms of risk. All risk categories can have an impact on reputation, which in turn can impact the brand, earnings and capital. WHO MANAGES REPUTATIONAL RISK Ultimate responsibility for managing risks to TD’s reputation lies with the SET and the executive committees that examine reputational risk as part of their regular mandate. The enterprise Reputational Risk Committee is the executive committee with enterprise-wide responsi- bility for making decisions on reputational risks. The Committee’s purpose is to ensure that new and existing business activities, transac- tions, products or sales practices that are referred to it are reviewed at a sufficiently broad and senior level so that the associated reputational risk issues are fully considered. In addition, every employee and representative of our organization has a responsibility to contribute in a positive way to our reputation. This means following ethical practices at all times, complying with applicable policies, legislation and regulations and ensuring our stake- holder interactions are positive. Reputational risk is most effectively managed when every individual works continuously to protect and enhance our reputation. HOW WE MANAGE REPUTATIONAL RISK Our enterprise-wide Reputational Risk Management Policy is approved by the Risk Committee of the Board. This policy sets out the framework under which each business unit is required to implement a reputational risk policy and procedures. These include designating a business-level committee to review reputational risk issues and to identify issues to be brought to the enterprise Reputational Risk Committee. We also have an enterprise-wide New Business and Product Approval Policy with defined and documented processes to approve new products and new business. This includes structured transactions in our Wholesale business. These processes involve committees with representation from the businesses and control functions, and include consideration of all aspects of a new product, including reputational risk. Environmental Risk Environmental risk is the possibility of loss of strategic, financial, opera- tional or reputational value resulting from the impact of environmental issues or concerns within the scope of short-term and long-term cycles. Management of environmental risk is an enterprise-wide priority. Key environmental risks include: 1) direct risks associated with the ownership and operation of our business, which includes management and operation of company-owned or managed real estate, fleet, busi- ness operations and associated services; 2) indirect risks associated with the environmental performance or environmental events such as changing climate patterns that may impact our retail customers and of clients to whom TD provides financing or in which TD invests; 3) identification and management of emerging environmental regula- tory issues; and 4) failure to understand and appropriately leverage environment-related trends to meet customer and consumer demands for products and services. 100 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISTD Ameritrade HOW RISK IS MANAGED AT TD AMERITRADE TD Ameritrade’s management is primarily responsible for managing risk at TD Ameritrade under the oversight of TD Ameritrade’s Board, particularly through its Risk Committee and Audit Committee of the Board. TD monitors the risk management process at TD Ameritrade through its participation in TD Ameritrade’s board and management governance and protocols. Pursuant to the Stockholders Agreement in relation to the Bank’s equity investment in TD Ameritrade, the Bank designated five of 12 members of TD Ameritrade’s Board of Directors including the Bank’s Group President and Chief Executive Officer, its Executive Vice President of Retail Banking, Products and Services, two independent directors of TD and a former independent director of TD. TD Ameritrade’s bylaws, which state that the Chief Executive Officer’s appointment requires approval of two-thirds of the Board, ensure the selection of TD Ameritrade’s Chief Executive Officer attains the broad support of the TD Ameritrade Board which currently would require the approval of at least one director designated by TD. The Stockholders Agreement stipulates that the Board committees of TD Ameritrade must include at least two TD designated directors, subject to TD’s percentage owner- ship in TD Ameritrade and certain other limited exceptions. Currently, the directors we designate participate in a number of TD Ameritrade Board committees, including chairing the Audit Committee and the HR and Compensation Committee and participating in the Risk Committee and Corporate Governance Committee. The terms of the Stockholders Agreement provide for certain infor- mation sharing rights in favour of TD to the extent TD requires such information from TD Ameritrade to appropriately manage and evaluate its investment and to comply with its legal and regulatory obligations. Accordingly, management processes and protocols are aligned between TD and TD Ameritrade to coordinate necessary intercompany information flow. In addition to regular communication at the Chief Executive Officer level, regular operating reviews with TD Ameritrade permit TD to examine and discuss TD Ameritrade’s operating results and key risks. As well, certain functions such as Internal Audit, Finance and Compliance, have relationship protocols that allow for the sharing of information on risk and control issues. TD has established a compli- ance committee, pursuant to a U.S. federal supervisory letter, which provides a holistic overview of key compliance issues and develop- ments across all TD businesses in the U.S. including TD Ameritrade. Risk issues are reported up to TD’s Risk Committee as required. WHO MANAGES ENVIRONMENTAL RISK The Executive Vice President Community, Environment and Chief Marketing Officer holds senior executive accountability for environ- mental management. The Executive Vice President is supported by the Chief Environment Officer who leads the Corporate Environmental Affairs team. The Corporate Environmental Affairs team is responsible for developing environmental strategy, setting environmental perfor- mance standards and targets, and reporting on performance. There is also an enterprise-wide Environmental Steering Committee (ESC) composed of senior executives from TD’s main business segments and corporate functions. The ESC is responsible for approving environmen- tal strategy and performance standards, and communicating these throughout the business. TD’s business segments are responsible for implementing the environmental strategy and managing associated risks within their units. HOW WE MANAGE ENVIRONMENTAL RISK We manage environmental risks within the Environmental Management System (EMS) which consists of three components: an Environmental Policy, an Environmental Management Framework and Environmental Procedures and Processes. Our EMS is consistent with the ISO 14001 international standard, which represents industry best practice. Our Environmental Policy reflects the global scope of TD’s environmental activities. Within our Environmental Management Framework, we have identi- fied a number of priority areas and have made voluntary commitments relating to these. Our environmental performance is publicly reported within our annual Corporate Responsibility Report. Performance is reported according to the Global Reporting Initiative (GRI) and is independently assured. TD’s global operations maintained carbon neutral status in 2013. We continued to make progress in meeting our voluntary environmental commitments to 1) reduce our carbon emissions by 1 tonne/employee by 2015; and 2) reduce our North American paper usage by 20% by 2015 (relative to a 2010 baseline). During 2013, TD applied our Environmental and Social Credit Risk Management Procedures to credit and lending in the wholesale, commercial and retail businesses. These procedures include assessment of our clients’ policies, procedures and performance on material envi- ronmental and related social issues, such as climate risk, biodiversity, water risk, stakeholder engagement and free, prior and informed consent of Aboriginal peoples. Within Wholesale Banking, sector- specific guidelines have been developed for environmentally-sensitive sectors. TD has been a signatory to the Equator Principles since 2007 and reports on Equator Principle projects within our annual Corporate Responsibility Report. TDAM is a signatory to the United Nations Principles for Responsible Investment (UNPRI). Under the UNPRI, investors commit to incorporate environmental and social issues into investment analysis and decision- making. TDAM applies its Sustainable Investing Policy across its opera- tions. The Policy provides information on how TDAM is implementing the UNPRI. We proactively monitor and assess policy and legislative developments, and maintain an ‘open door’ approach with environmental and community organizations, industry associations and responsible investment organizations. For more information on our environmental policy, management and performance, please refer to our Corporate Responsibility Report, which is available at our website: http://www.td.com/corporateresponsibility/. 101 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISACCOUNTING STANDARDS AND POLICIES Critical Accounting Estimates The Bank’s accounting policies are essential to understanding its results of operations and financial condition. A summary of the Bank’s significant accounting policies and estimates are presented in the Notes to the Consolidated Financial Statements. Some of the Bank’s policies require subjective, complex judgments and estimates as they relate to matters that are inherently uncertain. Changes in these judgments or estimates could have a significant impact on the Bank’s Consolidated Financial Statements. The Bank has established procedures to ensure that account- ing policies are applied consistently and that the processes for changing methodologies are well controlled and occur in an appropriate and systematic manner. In addition, the Bank’s critical accounting policies are reviewed with the Audit Committee on a periodic basis. Critical account- ing policies that require management’s judgment and estimates include accounting for impairments of financial assets, the determination of fair value of financial instruments, accounting for derecognition, the valuation of goodwill and other intangibles, accounting for employee benefits, accounting for income taxes, accounting for provisions, accounting for insurance, and the consolidation of special purpose entities. ACCOUNTING POLICIES AND ESTIMATES The Bank’s Consolidated Financial Statements have been prepared in accordance with IFRS. For details of the Bank’s accounting policies and significant judgments, estimates and assumptions under IFRS, see Notes 2 and 3 to the Bank’s Consolidated Financial Statements. Accounting Judgments, Estimates and Assumptions The estimates used in the Bank’s accounting policies are essential to understanding its results of operations and financial condition. Some of the Bank’s policies require subjective, complex judgments and estimates as they relate to matters that are inherently uncertain. Changes in these judgments or estimates could have a significant impact on the Bank’s Consolidated Financial Statements. The Bank has established procedures to ensure that accounting policies are applied consistently and that the processes for changing methodologies for determining estimates are well controlled and occur in an appropriate and systematic manner. IMPAIRMENT OF FINANCIAL ASSETS Available-for-Sale Securities Impairment losses are recognized on available-for-sale securities, if there is objective evidence of impairment as a result of one or more events that have occurred after initial recognition (a ‘loss event’) and the loss event(s) results in a decrease in the estimated cash flows of the instrument. The Bank individually reviews these securities at least quar- terly for the presence of these conditions. For available-for-sale equity securities, a significant or prolonged decline in fair value below cost is considered objective evidence of impairment. For available-for-sale debt securities, a deterioration of credit quality is considered objective evidence of impairment. Other factors considered in the impairment assessment include financial position and key financial indicators of the issuer of the instrument, significant past and continued losses of the issuer, as well as breaches of contract, including default or delinquency in interest payments and loan covenant violations. Held-to-Maturity Securities Impairment losses are recognized on held-to-maturity securities if there is objective evidence of impairment as a result of one or more events that have occurred after initial recognition (a ‘loss event’) and the loss event(s) results in a decrease in the estimated cash flows of the instru- ment. The Bank reviews these securities at least quarterly for impair- ment at the counter-party specific level. If there is no objective evidence of impairment at the counter-party specific level then the security is grouped with other held-to-maturity securities with similar credit risk characteristics and collectively assessed for impairment, which considers losses incurred but not identified. A deterioration of credit quality is considered objective evidence of impairment. Other factors considered in the impairment assessment include the financial position and key financial indicators of the issuer, significant past and continued losses of the issuer, as well as breaches of contract, including default or delinquency in interest payments and loan covenant violations. Loans A loan (including a debt security classified as a loan) is considered impaired when there is objective evidence that there has been a deteri- oration of credit quality subsequent to the initial recognition of the loan (a ‘loss event’) to the extent the Bank no longer has reasonable assurance as to the timely collection of the full amount of principal and interest. The Bank assesses loans for objective evidence of impair- ment individually for loans that are individually significant, and collec- tively for loans that are not individually significant. The allowance for credit losses represents management’s best estimate of impairment incurred in the lending portfolios, including any off-balance sheet exposures, at the balance sheet date. Management exercises judgment as to the timing of designating a loan as impaired, the amount of the allowance required, and the amount that will be recovered once the borrower defaults. Changes in the amount that management expects to recover would have a direct impact on the provision for credit losses and may result in a change in the allowance for credit losses. If there is no objective evidence of impairment for an individual loan, whether significant or not, the loan is included in a group of assets with similar credit risk characteristics and collectively assessed for impairment for losses incurred but not identified. In calculating the probable range of allowance for incurred but not identified credit losses, the Bank employs internally developed models that utilize parameters for probability of default, loss given default and exposure at default. Management’s judgment is used to determine the point within the range that is the best estimate of losses, based on an assessment of business and economic conditions, historical loss experience, loan portfolio composition, and other relevant indicators that are not fully incorporated into the model calculation. Changes in these assumptions would have a direct impact on the provision for incurred but not identified credit losses and may result in a change in the related allowance for credit losses. 102 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISDETERMINATION OF FAIR VALUE The fair value of financial instruments traded in active markets at the balance sheet date is based on their quoted market prices. For all other financial instruments not traded in an active market, fair value may be based on other observable current market transactions involving the same instrument, without modification or repackaging, or is based on a valuation technique which maximizes the use of observable market inputs. Observable market inputs may include interest rate yield curves, foreign exchange rates, and option volatilities. Valuation techniques include comparisons with similar instruments where observable market prices exist, discounted cash flow analysis, option pricing models, and other valuation techniques commonly used by market participants. For certain complex or illiquid financial instruments, fair value is determined using valuation techniques in which current market trans- actions or observable market inputs are not available. Determining which valuation technique to apply requires judgment. The valuation techniques themselves also involve some level of estimation and judg- ment. The judgments include liquidity considerations and model inputs such as volatilities, correlation, spreads, discount rates, pre-payment rates, and prices of underlying instruments. Any imprecision in these estimates can affect the resulting fair value. The inherent nature of private equity investing is that the Bank’s valuation will change over time as the underlying investment matures and an exit strategy is developed and realized. Estimates of fair value may also fluctuate due to developments in the business underlying the investment. Such fluctuations may be significant depending on the nature of the factors going into the valuation methodology and the extent of change in those factors. Judgment is also used in recording fair value adjustments to model valuations to account for measurement uncertainty when valuing complex and less actively traded financial instruments. If the market for a complex financial instrument develops, the pricing for this instrument may become more transparent, resulting in refinement of valuation models. An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 5 to the Bank’s Consolidated Financial Statements. DERECOGNITION Certain assets transferred may qualify for derecognition from the Bank’s Consolidated Balance Sheet. To qualify for derecognition, certain key determinations must be made. A decision must be made as to whether the rights to receive cash flows from the financial assets has been retained or transferred and the extent to which the risks and rewards of ownership of the financial asset has been retained or transferred. If the Bank neither transfers nor retains substantially all of the risks and rewards of ownership of the financial asset, a decision must be made as to whether the Bank has retained control of the financial asset. Upon derecognition, the Bank will record a gain or loss on sale of those assets which is calculated as the difference between the carry- ing amount of the asset transferred and the sum of any cash proceeds received, including any financial asset received or financial liability assumed, and any cumulative gain or loss allocated to the transferred asset that had been recognized in other comprehensive income. In determining the fair value of any financial asset received, the Bank estimates future cash flows by relying on estimates of the amount of interest that will be collected on the securitized assets, the yield to be paid to investors, the portion of the securitized assets that will be prepaid before their scheduled maturity, expected credit losses, the cost of servicing the assets and the rate at which to discount these expected future cash flows. Actual cash flows may differ significantly from those estimated by the Bank. Retained interests are classified as trading securities and are initially recognized at relative fair value on the Bank’s Consolidated Balance Sheet. Subsequently, the fair value of retained interests recognized by the Bank is determined by estimating the present value of future expected cash flows using management’s best estimates of key assumptions including credit losses, prepayment rates, forward yield curves and discount rates, and commensurate with the risks involved. Differences between the actual cash flows and the Bank’s estimate of future cash flows are recognized in income. These assumptions are subject to periodic review and may change due to significant changes in the economic environment. GOODWILL AND OTHER INTANGIBLES The fair value of the Bank’s cash-generating units (CGUs) is determined from internally developed valuation models that consider various factors and assumptions such as forecasted earnings, growth rates, price earn- ings multiples, discount rates and terminal multiples. Management is required to use judgment in estimating the fair value of CGUs and the use of different assumptions and estimates in the fair value calcula- tions could influence the determination of the existence of impairment and the valuation of goodwill. Management believes that the assump- tions and estimates used are reasonable and supportable. Where possi- ble, fair values generated internally are compared to relevant market information. The carrying amounts of the Bank’s CGUs are determined by management using risk based capital models to adjust net assets and liabilities by CGU. These models consider various factors including market risk, credit risk and operational risk, including investment capital (comprised of goodwill and other intangibles). Any unallocated capital not directly attributable to the CGUs is held within the Corporate segment. The Bank’s capital oversight committees provide oversight to the Bank’s capital allocation methodologies. EMPLOYEE BENEFITS The projected benefit obligation and expense related to the Bank’s pension and non-pension post-retirement benefit plans are determined using multiple assumptions that may significantly influence the value of these amounts. Actuarial assumptions including expected long-term return on plan assets, compensation increases, health care cost trend rate, mortality rate, and discount rate are management’s best esti- mates and are reviewed annually with the Bank’s actuaries. The Bank develops each assumption using relevant historical experience of the Bank in conjunction with market-related data and considers if the market-related data indicates there is any prolonged or significant impact on the assumptions. The discount rate used to measure plan obligations is based on long-term high quality corporate bond yields as at October 31. The expected long-term return on plan assets is based on historical returns and future expectations for returns for each asset class, as well as the target asset allocation of the fund. The other assumptions are also long-term estimates. All assumptions are subject to a degree of uncertainty. Differences between actual experience and the assumptions, as well as changes in the assumptions resulting from changes in future expectations, result in increases or decreases in the pension and non-pension post-retirement benefit plans obligations and expenses in future years. 103 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISINCOME TAXES The Bank is subject to taxation in numerous jurisdictions. There are many transactions and calculations in the ordinary course of business for which the ultimate tax determination is uncertain. The Bank main- tains provisions for uncertain tax positions that it believes appropriately reflect the risk of tax positions under discussion, audit, dispute, or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions are made using the Bank’s best estimate of the amount expected to be paid based on an assessment of all relevant factors, which are reviewed at the end of each reporting period. However, it is possible that at some future date, an additional liability could result from audits by the relevant taxing authorities. Deferred tax assets are recognized only when it is probable that sufficient taxable profit will be available in future periods against which deductible temporary differences may be utilized. The amount of the deferred tax asset recognized and considered realizable could, however, be reduced if projected income is not achieved due to vari- ous factors, such as unfavourable business conditions. If projected income is not expected to be achieved, the Bank would decrease its deferred tax assets to the amount that it believes can be realized. The magnitude of the decrease is significantly influenced by the Bank’s forecast of future profit generation, which determines the extent to which it will be able to utilize the deferred tax assets. PROVISIONS Provisions arise when there is some uncertainty in the timing or amount of a loss in the future. Provisions are based on the Bank’s best estimate of all expenditures required to settle its present obligations, considering all relevant risks and uncertainties, as well as, when mate- rial, the effect of the time value of money. Many of the Bank’s provisions relate to various legal actions that the Bank is involved in during the ordinary course of business. Legal provi- sions require the involvement of both the Bank’s management and legal counsel when assessing the probability of a loss and estimating any monetary impact. Throughout the life of a provision, the Bank’s management or legal counsel may learn of additional information that may impact its assessments about the probability of loss or about the estimates of amounts involved. Changes in these assessments may lead to changes in the amount recorded for provisions. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts recognized. The Bank reviews its legal provi- sions on a case-by-case basis after considering, among other factors, the progress of each case, the Bank’s experience, the experience of others in similar cases, and the opinions and views of legal counsel. Certain of the Bank’s provisions relate to restructuring initiatives initiated by the Bank to reduce costs in a sustainable manner and achieve greater operational efficiencies. Restructuring provisions require management’s best estimate, including forecasts of economic conditions. Throughout the life of a provision, the Bank may become aware of additional information that may impact the assessment of amounts to be incurred. Changes in these assessments may lead to changes in the amount recorded for provisions. INSURANCE The assumptions used in establishing the Bank’s insurance claims and policy benefit liabilities are based on best estimates of possible outcomes. For property and casualty insurance, the ultimate cost of claims liabilities is estimated using a range of standard actuarial claims projection techniques in accordance with Canadian accepted actuarial practices. The main assumption underlying these techniques is that a company’s past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Additional quali- tative judgment is used to assess the extent to which past trends may or may not apply in the future, in order to arrive at the estimated ulti- mate claims cost that present the most likely outcome. For life and health insurance, actuarial liabilities consider all future policy cash flows, including premiums, claims, and expenses required to administer the policies. The Bank’s mortality assumptions have been derived from a combi- nation of its own experience and industry experience. Policyholders may allow their policies to lapse by choosing not to continue to pay premiums. The Bank bases its estimates of future lapse rates on previ- ous experience when available, or industry experience. Estimates of future policy administration expenses are based on the Bank’s previous and expected future experience. CONSOLIDATION OF SPECIAL PURPOSE ENTITIES Management judgment is required when assessing whether the Bank should consolidate an entity, particularly complex entities. An example of such judgment is to determine whether an entity meets the definition of an SPE, and if so, whether all the relevant facts and circumstances, when considered together, would indicate that the Bank controls such an SPE, including an analysis of the Bank’s exposure to the risks and rewards of the SPE. These judgments are discussed further in Note 2 to the Bank’s Consolidated Financial Statements. ACCOUNTING STANDARDS AND POLICIES Current and Future Changes in Accounting Policies CURRENT CHANGE IN ACCOUNTING POLICIES The following amendment has been adopted by the Bank. Presentation of Other Comprehensive Income Effective November 1, 2012, the Bank adopted the amendments to IAS 1, Presentation of Financial Statements (IAS 1), issued in June 2011, which require entities to group items presented in other comprehensive income on the basis of whether they might be reclassified to the Consolidated Statement of Income in subsequent periods and items that will not be reclassified to the Consolidated Statement of Income. The amendments did not address which items are presented in other comprehensive income and did not change the option to present items net of tax. The amend- ments to IAS 1 were applied retrospectively and did not have a material impact on the financial position, cash flows or earnings of the Bank. FUTURE CHANGES IN ACCOUNTING POLICIES The IASB continues to make changes to IFRS to improve the overall quality of financial reporting. The Bank is actively monitoring all of the IASB’s projects that are relevant to the Bank’s financial reporting and accounting policies. Issued standards which are effective for the Bank in the future are discussed in Note 4 to the Bank’s Consolidated Financial Statements. 104 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISACCOUNTING STANDARDS AND POLICIES Controls and Procedures DISCLOSURE CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of the Bank’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Bank’s disclosure controls and procedures, as defined in the rules of the SEC and Canadian Securities Administrators, as of October 31, 2013. Based on that evaluation, the Bank’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Bank’s disclosure controls and procedures were effective as of October 31, 2013. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Bank’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Bank. The Bank’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Bank; (2) provide reasonable assur- ance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Bank are being made only in accordance with authorizations of the Bank’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unau- thorized acquisition, use or disposition of the Bank’s assets that could have a material effect on the financial statements. The Bank’s management has used the criteria established in 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission to assess, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Bank’s internal control over financial reporting. Based on this assessment management has concluded that as at October 31, 2013, the Bank’s internal control over financial reporting was effective based on the applicable criteria. The effective- ness of the Bank’s internal control over financial reporting has been audited by the independent auditors, Ernst & Young LLP, a registered public accounting firm that has also audited the Consolidated Financial Statements of the Bank as of and for the year ended October 31, 2013. Their Report on Internal Controls under Standards of the Public Company Accounting Oversight Board (United States), included in the Consolidated Financial Statements, expresses an unqualified opinion on the effectiveness of the Bank’s internal control over financial reporting as of October 31, 2013. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the year and quarter ended October 31, 2013, there have been no changes in the Bank’s policies and procedures and other processes that comprise its internal control over financial reporting, that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting. 105 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSISADDITIONAL FINANCIAL INFORMATION Unless otherwise indicated, all amounts are expressed in Canadian dollars and have been primarily derived from the Bank’s annual Consolidated Financial Statements, prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Note that certain comparative amounts have been reclassified to conform to the presentation adopted in the current year. T A B L E 7 4 LOAN PORTFOLIO – Loans Maturity (millions of Canadian dollars) Canada Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Total business and government (including real estate) Total loans – Canada United States Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Total business and government (including real estate) Total loans – United States Other International Personal Business and government Total loans – Other international Other loans Debt securities classified as loans Acquired credit-impaired loans Total other loans Total loans Under 1 year 1 to 5 years Over 5 years Total Remaining term to maturity October 31, 2013 As at $ 21,286 $ 139,175 $ 3,928 $ 164,389 46,630 509 12,933 15,288 96,646 5,021 4,962 9,983 40,694 137,340 14,949 9,307 1,507 – 164,938 4,799 1,780 6,579 13,997 178,935 2 4,850 753 – 9,533 3,865 1,411 5,276 9,581 19,114 61,581 14,666 15,193 15,288 271,117 13,685 8,153 21,838 64,272 335,389 246 98 20,601 20,945 7,974 3,368 138 6,900 18,626 833 1,433 2,266 7,830 26,456 1 1,746 1,747 164 12,248 313 – 12,823 1,400 5,884 7,284 24,511 37,334 9 491 500 2,469 707 82 – 23,859 1,237 4,767 6,004 22,659 46,518 – 3 3 10,607 16,323 533 6,900 55,308 3,470 12,084 15,554 55,000 110,308 10 2,240 2,250 676 661 1,337 $ 166,880 1,200 867 2,067 $ 218,836 1,868 957 2,825 $ 68,460 3,744 2,485 6,229 $ 454,176 106 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 7 4 LOAN PORTFOLIO – Loans Maturity (cont’d) (millions of Canadian dollars) Canada Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Total business and government (including real estate) Total loans – Canada United States Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Total business and government (including real estate) Total loans – United States Other International Personal Business and government Total loans – Other international Other loans Debt securities classified as loans Acquired credit-impaired loans Total other loans Total loans Under 1 year 1 to 5 years Over 5 years Remaining term to maturity As at Total October 31, 2012 $ 25,530 $ 123,174 $ 5,543 $ 154,247 50,606 2,244 12,239 14,236 104,855 3,840 3,988 7,828 34,759 139,614 13,588 8,683 2,210 – 147,655 5,700 1,965 7,665 14,146 161,801 559 3,038 125 – 9,265 2,937 1,299 4,236 6,892 16,157 64,753 13,965 14,574 14,236 261,775 12,477 7,252 19,729 55,797 317,572 117 35 17,210 17,362 7,304 2,918 81 1,097 11,517 950 2,475 3,425 13,297 24,814 1 2,208 2,209 215 9,747 305 – 10,302 1,106 4,192 5,298 16,047 26,349 10 431 441 2,603 801 104 – 20,718 959 4,164 5,123 17,837 38,555 – 14 14 10,122 13,466 490 1,097 42,537 3,015 10,831 13,846 47,181 89,718 11 2,653 2,664 522 979 1,501 $ 168,138 1,604 1,734 3,338 $ 191,929 2,868 1,054 3,922 $ 58,648 4,994 3,767 8,761 $ 418,715 107 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 7 4 LOAN PORTFOLIO – Loans Maturity (cont’d) (millions of Canadian dollars) Canada Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Total business and government (including real estate) Total loans – Canada United States Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Total business and government (including real estate) Total loans – United States Other International Personal Business and government Total loans – Other international Other loans Debt securities classified as loans Acquired credit-impaired loans Total other loans Total loans Under 1 year 1 to 5 years Over 5 years Remaining term to maturity As at Total October 31, 2011 $ 51,358 $ 90,289 $ 650 $ 142,297 56,758 2,032 12,524 8,094 130,766 4,607 3,349 7,956 35,360 166,126 8,770 8,311 2,031 – 109,401 4,254 1,384 5,638 10,795 120,196 3 3,264 825 – 4,742 1,877 1,166 3,043 5,565 10,307 65,531 13,607 15,380 8,094 244,909 10,738 5,899 16,637 51,720 296,629 83 32 12,380 12,495 6,473 2,897 115 892 10,460 1,363 1,551 2,914 12,115 22,575 2 2,703 2,705 270 6,477 221 – 7,000 1,090 4,440 5,530 15,846 22,846 10 801 811 2,911 367 113 – 15,771 648 3,452 4,100 13,892 29,663 – 16 16 9,654 9,741 449 892 33,231 3,101 9,443 12,544 41,853 75,084 12 3,520 3,532 1,297 1,891 3,188 $ 194,594 1,443 2,361 3,804 $ 147,657 3,771 1,308 5,079 $ 45,065 6,511 5,560 12,071 $ 387,316 T A B L E 7 5 LOAN PORTFOLIO – Rate Sensitivity (millions of Canadian dollars) Fixed Rate Variable Rate Total October 31, 2013 October 31, 2012 October 31, 2011 1 to 5 years Over 5 years 1 to 5 years Over 5 years 1 to 5 years Over 5 years $ 158,435 60,401 $ 218,836 $ 45,395 23,065 $ 68,460 $ 133,730 58,199 $ 191,929 $ 37,781 20,867 $ 58,648 $ 90,753 56,904 $ 147,657 $ 28,301 16,764 $ 45,065 As at 108 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS The change in the Bank’s allowance for credit losses for the years ended October 31, 2013, October 31, 2012 and October 31, 2011 are shown in the following tables. T A B L E 7 6 ALLOWANCE FOR CREDIT LOSSES (millions of Canadian dollars, except as noted) Allowance for loan losses – Balance at beginning of year Provision for credit losses Write-offs Canada Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Total business and government (including real estate) Total Canada United States Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Total business and government (including real estate) Total United States Other International Personal Business and government Total other international Other loans Debt securities classified as loans Acquired credit-impaired loans1, 2 Total other loans Total write-offs against portfolio Recoveries Canada Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Total business and government (including real estate) Total Canada 1 Includes all FDIC covered loans and other ACI loans. 2 Other adjustments are required as a result of the accounting for FDIC covered loans. For additional information, see “FDIC Covered Loans” section in Note 7 of the Bank’s Consolidated Financial Statements. 2013 $ 2,644 1,631 20 18 160 274 543 1,015 2 3 5 104 1,119 33 65 231 74 56 459 16 59 75 191 650 – – – 2012 $ 2,314 1,795 2011 $ 2,309 1,490 18 16 155 310 335 834 3 4 7 108 942 42 101 145 67 50 405 91 84 175 385 790 – – – 11 12 155 329 365 872 3 3 6 102 974 30 74 55 69 54 282 113 60 173 373 655 – – – 11 38 49 1,818 – 112 112 1,844 48 39 87 1,716 3 2 35 55 101 196 1 1 2 28 $ 224 4 3 20 51 46 124 1 1 2 25 $ 149 4 1 20 48 43 116 – 1 1 27 $ 143 109 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 7 6 ALLOWANCE FOR CREDIT LOSSES (cont’d) (millions of Canadian dollars, except as noted) United States Residential mortgages Consumer instalment and other personal HELOC Indirect Auto Other Credit card Total personal Real estate Residential Non-residential Total real estate Total business and government (including real estate) Total United States Other International Personal Business and government Total other international Other loans Debt securities classified as loans Acquired credit-impaired loans1, 2 Total other loans Total recoveries on portfolio Net write-offs Disposals Foreign exchange and other adjustments Total allowance for credit losses Less: Allowance for off-balance sheet positions3 Allowance for loan losses – Balance at end of year Ratio of net write-offs in the period to average loans outstanding 2013 2012 2011 $ 17 $ 15 $ 9 4 64 22 5 112 8 10 18 49 161 – – – 6 35 19 5 80 8 13 21 57 137 – – – 3 14 20 4 50 9 8 17 71 121 – – – – 9 9 394 (1,424) (41) 46 2,856 1 $ 2,855 – 1 1 287 (1,557) – 20 2,572 (72) $ 2,644 – – – 264 (1,452) – (28) 2,319 5 $ 2,314 0.33% 0.39% 0.40% 1 Includes all FDIC covered loans and other ACI loans. 2 Other adjustments are required as a result of the accounting for FDIC covered loans. For additional information, see “FDIC Covered Loans” section in Note 7 of the Bank’s Consolidated Financial Statements. 3 The allowance for credit losses for off-balance sheet instruments is recorded in Provisions on the Consolidated Balance Sheet. T A B L E 7 7 AVERAGE DEPOSITS (millions of Canadian dollars, except as noted) Deposits booked in Canada1 Non-interest bearing demand deposits Interest bearing demand deposits Notice deposits Term deposits Total deposits booked in Canada Deposits booked in the United States Non-interest bearing demand deposits Interest bearing demand deposits Notice deposits Term deposits Total deposits booked in the United States Deposits booked in the other international Non-interest bearing demand deposits Interest bearing demand deposits Notice deposits Term deposits Total deposits booked in other international Total average deposits October 31, 2013 October 31, 2012 Average balance Total interest expense Average rate paid Average balance Total interest expense Average rate paid Average balance For the year ended October 31, 2011 Total interest expense Average rate paid $ 4,050 35,768 144,463 108,893 293,174 $ – 443 459 1,888 2,790 –% $ 4,218 34,699 127,564 112,516 278,997 1.24 0.32 1.73 0.95 $ – 251 528 2,371 3,150 –% $ 3,622 29,725 113,982 97,131 244,460 0.72 0.41 2.11 1.13 $ – 136 482 2,341 2,959 7,544 897 170,255 70,034 248,730 – 3 1,222 248 1,473 – 0.33 0.72 0.35 0.59 5,742 504 149,300 58,299 213,845 – 1 1,243 256 1,500 – 0.20 0.83 0.44 0.70 3,923 59 130,038 52,826 186,846 – – 1,180 236 1,416 10 2,757 28 9,435 12,230 $ 554,134 – 6 – 41 47 $ 4,310 – – 2,802 0.22 26 – 7,912 0.43 0.38 10,740 0.78% $ 503,582 – 12 – 8 20 $ 4,670 – – 2,310 0.43 31 – 8,847 0.10 0.19 11,188 0.93% $ 442,494 – 7 – 84 91 $ 4,466 –% 0.46 0.42 2.41 1.21 – – 0.91 0.45 0.76 – 0.30 – 0.95 0.81 1.01% 1 As at October 31, 2013, deposits by foreign depositors in our Canadian bank offices amounted to $7 billion (October 31, 2012 – $7 billion, October 31, 2011 – $3 billion). 110 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 7 8 DEPOSITS – Denominations of $100,000 or greater 1 (millions of Canadian dollars) Canada United States Other international Total Canada United States Other international Total Canada United States Other international Total Within 3 months 3 months to 6 months 6 months to 12 months Over 12 months Remaining term to maturity As at Total $ 25,229 41,589 11,141 $ 77,959 $ 32,421 27,605 8,907 $ 68,933 $ 19,970 33,264 5,321 $ 58,555 $ 5,196 15,634 4,504 $ 25,334 $ 4,885 13,537 127 $ 18,549 $ 5,339 7,998 371 $ 13,708 $ 8,695 7,974 77 $ 16,746 $ 8,524 12,876 17 $ 21,417 $ 7,989 6,524 17 $ 14,530 October 31, 2013 $ 34,281 1,684 18 $ 35,983 $ 73,401 66,881 15,740 $ 156,022 October 31, 2012 $ 26,869 1,741 – $ 28,610 $ 72,699 55,759 9,051 $ 137,509 October 31, 2011 $ 28,737 2,028 33 $ 30,798 $ 62,035 49,814 5,742 $ 117,591 1 Deposits in Canada, U.S. and Other international include wholesale and retail deposits. T A B L E 7 9 SHORT-TERM BORROWINGS (millions of Canadian dollars, except as noted) Obligations related to securities sold under repurchase agreements Balance at year-end Average balance during the year Maximum month-end balance Weighted-average rate at October 31 Weighted-average rate during the year October 31 2013 October 31 2012 $ 34,414 46,234 $ 42,726 $ 38,816 42,578 $ 40,349 As at October 31 2011 $ 25,991 32,603 $ 30,037 0.43% 0.45% 0.42% 0.58% 0.47% 0.57% 111 TD BANK GROUP ANNUAL REPORT 2013 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS Consolidated Financial Statements MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL INFORMATION The management of The Toronto-Dominion Bank and its subsidiaries (the “Bank”) is responsible for the integrity, consistency, objectivity and reliability of the Consolidated Financial Statements of the Bank and related financial information as presented. International Financial Reporting Standards as issued by the International Accounting Standards Board, as well as the requirements of the Bank Act (Canada) (“Bank Act”) and related regula- tions have been applied and management has exercised its judgment and made best estimates where appropriate. The Bank’s accounting system and related internal controls are designed, and supporting procedures maintained, to provide reasonable assurance that financial records are complete and accurate and that assets are safe- guarded against loss from unauthorized use or disposition. These supporting procedures include the careful selection and training of qualified staff, the establishment of organizational structures providing a well-defined division of responsibilities and accountability for performance, and the communica- tion of policies and guidelines of business conduct throughout the Bank. Management has assessed the effectiveness of the Bank’s internal control over financial reporting as at October 31, 2013 using the framework found in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 1992 Framework. Based upon this assessment, management has concluded that as at October 31, 2013, the Bank’s internal control over financial reporting is effective. The Bank’s Board of Directors, acting through the Audit Committee which is composed entirely of independent directors, oversees management’s responsibilities for financial reporting. The Audit Committee reviews the Consolidated Financial Statements and recommends them to the Board for approval. Other responsibilities of the Audit Committee include monitoring the Bank’s system of internal control over the financial reporting process and making recommendations to the Board and shareholders regarding the appointment of the external auditor. The Bank’s Chief Auditor, who has full and free access to the Audit Committee, conducts an extensive program of audits. This program supports the system of internal control and is carried out by a professional staff of auditors. The Office of the Superintendent of Financial Institutions, Canada, makes such examination and enquiry into the affairs of the Bank as deemed neces- sary to ensure that the provisions of the Bank Act, having reference to the safety of the depositors, are being duly observed and that the Bank is in sound financial condition. Ernst & Young LLP, the independent auditors appointed by the share- holders of the Bank, have audited the effectiveness of the Bank’s internal control over financial reporting as at October 31, 2013 in addition to audit- ing the Bank’s Consolidated Financial Statements as of the same date. Their reports, which expressed an unqualified opinion, can be found on the following pages of the Consolidated Financial Statements. Ernst & Young LLP have full and free access to, and meet periodically with, the Audit Committee to discuss their audit and matters arising there from, such as, comments they may have on the fairness of financial reporting and the adequacy of internal controls. W. Edmund Clark Group President and Chief Executive Officer Toronto, Canada December 4, 2013 Colleen M. Johnston Group Head Finance, Sourcing and Corporate Communications and Chief Financial Officer 112 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS INDEPENDENT AUDITORS’ REPORTS OF REGISTERED PUBLIC ACCOUNTING FIRM TO SHAREHOLDERS Report on Financial Statements We have audited the accompanying consolidated financial statements of The Toronto-Dominion Bank, which comprise the Consolidated Balance Sheet as at October 31, 2013 and 2012, and the Consolidated Statements of Income, Comprehensive Income, Changes in Equity, and Cash Flows for the years ended October 31, 2013, 2012, and 2011, and a summary of significant accounting policies and other explanatory information. Management’s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluat- ing the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of The Toronto-Dominion Bank as at October 31, 2013 and 2012, and its financial performance and its cash flows for the years ended October 31, 2013, 2012 and 2011, in accordance with International Financial Reporting Standards as issued by the Interna- tional Accounting Standards Board. Other matter We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Toronto-Dominion Bank’s internal control over financial reporting as of October 31, 2013, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commis- sion 1992 Framework and our report dated December 4, 2013 expressed an unqualified opinion on The Toronto-Dominion Bank’s internal control over financial reporting. Ernst & Young LLP Chartered Accountants Licensed Public Accountants Toronto, Canada December 4, 2013 113 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSINDEPENDENT AUDITORS’ REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM TO SHAREHOLDERS Report on Internal Control under Standards of the Public Company Accounting Oversight Board (United States) We have audited The Toronto-Dominion Bank’s internal control over financial reporting as of October 31, 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 1992 Framework (the COSO criteria). The Toronto-Dominion Bank’s management is respon- sible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting contained in the accompanying Manage- ment’s Discussion and Analysis. Our responsibility is to express an opinion on The Toronto-Dominion Bank’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was main- tained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effective- ness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposi- tions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisi- tion, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial report- ing may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, The Toronto-Dominion Bank maintained, in all material respects, effective internal control over financial reporting as of October 31, 2013, based on the COSO criteria. We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheet of The Toronto-Dominion Bank as at October 31, 2013 and 2012, and the Consolidated Statements of Income, Comprehensive Income, Changes in Equity, and Cash Flows for each of the years in the three-year period ended October 31, 2013 of The Toronto-Dominion Bank and our report dated December 4, 2013 expressed an unqualified opinion thereon. Ernst & Young LLP Chartered Accountants Licensed Public Accountants Toronto, Canada December 4, 2013 114 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSConsolidated Balance Sheet (millions of Canadian dollars, except as noted) ASSETS Cash and due from banks Interest-bearing deposits with banks Trading loans, securities, and other (Notes 5, 6) Derivatives (Notes 5, 10) Financial assets designated at fair value through profit or loss (Note 5) Available-for-sale securities (Notes 5, 6) Held-to-maturity securities (Note 6) Securities purchased under reverse repurchase agreements (Note 5) Loans (Note 7) Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Allowance for loan losses (Note 7) Loans, net of allowance for loan losses Other Customers’ liability under acceptances Investment in TD Ameritrade (Note 11) Goodwill (Note 13) Other intangibles (Note 13) Land, buildings, equipment, and other depreciable assets (Note 14) Current income tax receivable Deferred tax assets (Note 27) Other assets (Note 15) Total assets LIABILITIES Trading deposits (Notes 5, 16) Derivatives (Notes 5, 10) Securitization liabilities at fair value (Notes 5, 8) Other financial liabilities designated at fair value through profit or loss (Note 5) Deposits (Note 16) Personal Banks Business and government Other Acceptances Obligations related to securities sold short (Note 5) Obligations related to securities sold under repurchase agreements (Note 5) Securitization liabilities at amortized cost (Note 8) Provisions (Note 29) Current income tax payable Deferred tax liabilities (Note 27) Other liabilities (Note 17) Subordinated notes and debentures (Note 18) Liability for preferred shares (Note 19) Liability for capital trust securities (Note 20) Total liabilities EQUITY Common shares (millions of shares issued and outstanding: Oct. 31, 2013 – 919.4, Oct. 31, 2012 – 918.2) (Note 21) Preferred shares (millions of shares issued and outstanding: Oct. 31, 2013 – 135.8, Oct. 31, 2012 – 135.8) (Note 21) Treasury shares – common (millions of shares held: Oct. 31, 2013 – (1.9), Oct. 31, 2012 – (2.1)) (Note 21) Treasury shares – preferred (millions of shares held: Oct. 31, 2013 – (0.1), Oct. 31, 2012 – nil) (Note 21) Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests in subsidiaries (Note 22) Total equity Total liabilities and equity The accompanying Notes are an integral part of these Consolidated Financial Statements. October 31 2013 As at October 31 2012 $ 3,581 28,855 32,436 101,928 49,461 6,532 79,541 237,462 29,961 64,283 185,820 119,192 22,222 116,799 3,744 447,777 (2,855) 444,922 6,399 5,300 13,297 2,493 4,635 583 1,588 19,173 53,468 $ 862,532 $ 47,593 49,471 21,960 12 119,036 319,749 20,523 203,204 543,476 6,399 41,829 34,414 25,592 696 134 321 28,913 138,298 7,982 27 1,740 810,559 19,316 3,395 (145) (2) 170 24,565 3,166 50,465 1,508 51,973 $ 862,532 $ 3,436 21,692 25,128 94,531 60,919 6,173 98,576 260,199 – 69,198 172,172 117,927 15,358 101,041 4,994 411,492 (2,644) 408,848 7,223 5,344 12,311 2,217 4,402 439 883 14,914 47,733 $ 811,106 $ 38,774 64,997 25,324 17 129,112 291,759 14,957 181,038 487,754 7,223 33,435 38,816 26,190 656 167 327 24,858 131,672 11,318 26 2,224 762,106 18,691 3,395 (166) (1) 196 21,763 3,645 47,523 1,477 49,000 $ 811,106 W. Edmund Clark Group President and Chief Executive Officer William E. Bennett Chair, Audit Committee 115 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Consolidated Statement of Income For the years ended October 31 (millions of Canadian dollars, except as noted) Interest income Loans Securities Interest Dividends Deposits with banks Interest expense Deposits Securitization liabilities Subordinated notes and debentures Preferred shares and capital trust securities (Notes 19, 20) Other Net interest income Non-interest income Investment and securities services Credit fees Net securities gains (losses) (Note 6) Trading income (losses) (Note 23) Service charges Card services Insurance revenue (Note 24) Trust fees Other income (loss) Total revenue Provision for credit losses (Note 7) Insurance claims and related expenses (Note 24) Non-interest expenses Salaries and employee benefits (Note 26) Occupancy, including depreciation Equipment, including depreciation Amortization of other intangibles (Note 13) Marketing and business development Brokerage-related fees Professional and advisory services Communications Restructuring (Note 29) Other Income before income taxes and equity in net income of an investment in associate Provision for (recovery of) income taxes (Note 27) Equity in net income of an investment in associate, net of income taxes (Note 11) Net income Preferred dividends Net income available to common shareholders and non-controlling interests in subsidiaries Attributable to: Non-controlling interests in subsidiaries Common shareholders Weighted-average number of common shares outstanding (millions) (Note 28) Basic Diluted Earnings per share (dollars) (Note 28) Basic Diluted Dividends per share (dollars) Certain comparative amounts have been reclassified to conform with the presentation adopted in the current year. The accompanying Notes are an integral part of these Consolidated Financial Statements. 2013 2012 2011 $ 18,514 $ 17,951 $ 17,010 2,965 1,048 89 22,616 4,310 927 447 154 700 6,538 16,078 2,831 785 304 (281) 1,863 1,345 3,734 148 455 11,184 27,262 1,631 3,056 7,622 1,456 847 521 685 317 1,010 281 129 2,174 15,042 7,533 1,143 272 6,662 185 3,259 940 88 22,238 4,670 1,026 612 174 730 7,212 15,026 2,621 745 373 (41) 1,775 1,039 3,537 149 322 10,520 25,546 1,795 2,424 7,241 1,374 825 477 668 296 925 282 – 1,910 13,998 7,329 1,092 234 6,471 196 $ 6,477 $ 6,275 2,720 810 369 20,909 4,466 1,235 663 208 676 7,248 13,661 2,624 671 393 (127) 1,602 959 3,345 154 558 10,179 23,840 1,490 2,178 6,729 1,285 801 657 593 320 944 271 – 1,447 13,047 7,125 1,326 246 6,045 180 $ 5,865 $ 105 6,372 $ 104 6,171 $ 104 5,761 918.9 922.5 906.6 914.9 $ 6.93 6.91 3.24 $ 6.81 6.76 2.89 885.7 902.9 $ 6.50 6.43 2.61 116 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Consolidated Statement of Comprehensive Income 2013 $ 6,662 (493) (250) 1,892 4 (4) (737) 668 (1,559) (479) $ 6,183 $ 185 5,893 105 2012 $ 6,471 689 (163) 92 – – (54) 834 (1,079) 319 $ 6,790 $ 196 6,490 104 2011 $ 6,045 (246) (122) (796) – – 332 640 (738) (930) $ 5,115 $ 180 4,831 104 For the years ended October 31 (millions of Canadian dollars) Net income Other comprehensive income (loss), net of income taxes Change in unrealized gains (losses) on available-for-sale securities1 Reclassification to earnings of net losses (gains) in respect of available-for-sale securities2 Net change in unrealized foreign currency translation gains (losses) on investments in foreign operations Reclassification to earnings of net losses (gains) on investments in foreign operations3 Reclassification to earnings of net losses (gains) on hedges of investments in foreign operations4 Net foreign currency translation gains (losses) from hedging activities5 Change in net gains (losses) on derivatives designated as cash flow hedges6 Reclassification to earnings of net losses (gains) on cash flow hedges7 Comprehensive income (loss) for the year Attributable to: Preferred shareholders Common shareholders Non-controlling interests in subsidiaries 1 Net of income tax recovery in 2013 of $264 million (2012 – income tax provision of $302 million; 2011 – income tax recovery of $35 million). 2 Net of income tax provision in 2013 of $157 million (2012 – income tax provision of $74 million; 2011 – income tax provision of $31 million). 3 Net of income tax provision in 2013 of nil (2012 – income tax provision of nil; 2011 – income tax provision of nil). 4 Net of income tax provision in 2013 of $1 million (2012 – income tax provision of nil; 2011 – income tax provision of nil). 5 Net of income tax recovery in 2013 of $264 million (2012 – income tax recovery of $22 million; 2011 – income tax provision of $118 million). 6 Net of income tax provision in 2013 of $383 million (2012 – income tax provision of $381 million; 2011 – income tax provision of $322 million). 7 Net of income tax provision in 2013 of $830 million (2012 – income tax provision of $485 million; 2011 – income tax provision of $304 million). All items presented in other comprehensive income will be reclassified to the Consolidated Statement of Income in subsequent periods. The accompanying Notes are an integral part of these Consolidated Financial Statements. 117 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Consolidated Statement of Changes in Equity For the years ended October 31 (millions of Canadian dollars) Common shares (Note 21) Balance at beginning of year Proceeds from shares issued on exercise of stock options Shares issued as a result of dividend reinvestment plan Purchase of shares for cancellation Proceeds from issuance of new shares Balance at end of year Preferred shares (Note 21) Balance at beginning of year Balance at end of year Treasury shares – common (Note 21) Balance at beginning of year Purchase of shares Sale of shares Balance at end of year Treasury shares – preferred (Note 21) Balance at beginning of year Purchase of shares Sale of shares Balance at end of year Contributed surplus Balance at beginning of year Net premium (discount) on sale of treasury shares Stock options (Note 25) Other Balance at end of year Retained earnings Balance at beginning of year Net income attributable to shareholders Common dividends Preferred dividends Net premium on repurchase of common shares Share issue expenses Balance at end of year Accumulated other comprehensive income (loss) Net unrealized gain (loss) on available-for-sale securities: Balance at beginning of year Other comprehensive income (loss) Balance at end of year Net unrealized foreign currency translation gain (loss) on investments in foreign operations, net of hedging activities: Balance at beginning of year Other comprehensive income (loss) Balance at end of year Net gain (loss) on derivatives designated as cash flow hedges: Balance at beginning of year Other comprehensive income (loss) Balance at end of year Total Non-controlling interests in subsidiaries Balance at beginning of year Net income attributable to non-controlling interests in subsidiaries Other Balance at end of year Total equity The accompanying Notes are an integral part of these Consolidated Financial Statements. 2013 2012 2011 $ 18,691 $ 17,491 297 515 (187) – 19,316 3,395 3,395 (166) (3,552) 3,573 (145) (1) (86) 85 (2) 196 (3) (25) 2 170 21,763 6,557 (2,977) (185) (593) – 24,565 1,475 (743) 732 (426) 1,155 729 2,596 (891) 1,705 3,166 1,477 105 (74) 1,508 253 947 – – 18,691 3,395 3,395 (116) (3,175) 3,125 (166) – (77) 76 (1) 212 10 (25) (1) 196 18,213 6,367 (2,621) (196) – – 21,763 949 526 1,475 (464) 38 (426) 2,841 (245) 2,596 3,645 1,483 104 (110) 1,477 $ 51,973 $ 49,000 $ 15,804 322 661 – 704 17,491 3,395 3,395 (91) (2,164) 2,139 (116) (1) (59) 60 – 235 11 (34) – 212 14,781 5,941 (2,316) (180) – (13) 18,213 1,317 (368) 949 – (464) (464) 2,939 (98) 2,841 3,326 1,493 104 (114) 1,483 $ 44,004 118 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Consolidated Statement of Cash Flows For the years ended October 31 (millions of Canadian dollars) Cash flows from (used in) operating activities Net income before income taxes Adjustments to determine net cash flows from (used in) operating activities Provision for credit losses (Note 7) Depreciation (Note 14) Amortization of other intangibles (Note 13) Net securities losses (gains) (Note 6) Equity in net income of an investment in associate (Note 11) Deferred taxes (Note 27) Changes in operating assets and liabilities Interest receivable and payable (Notes 15, 17) Securities sold short Trading loans and securities Loans net of securitization and sales Deposits Derivatives Financial assets and liabilities designated at fair value through profit or loss Securitization liabilities Other Income taxes paid Net cash from (used in) operating activities Cash flows from (used in) financing activities Change in securities sold under repurchase agreements Issue of subordinated notes and debentures (Note 18) Repayment of subordinated notes and debentures (Note 18) Repayment or redemption of liability for preferred shares and capital trust securities (Notes 19, 20) Translation adjustment on subordinated notes and debentures issued in a foreign currency and other Common shares issued (Note 21) Repurchase of common shares (Note 21) Sale of treasury shares (Note 21) Purchase of treasury shares (Note 21) Dividends paid Distributions to non-controlling interests in subsidiaries Net cash from (used in) financing activities Cash flows from (used in) investing activities Interest-bearing deposits with banks Activities in available-for-sale securities (Note 6) Purchases Proceeds from maturities Proceeds from sales Activities in held-to-maturity securities (Note 6) Purchases Proceeds from maturities Activities in debt securities classified as loans Purchases Proceeds from maturities Proceeds from sales Net purchases of premises, equipment, and other depreciable assets Securities purchased (sold) under reverse repurchase agreements Net cash acquired from (paid for) acquisitions (Note 12) Net cash from (used in) investing activities Effect of exchange rate changes on cash and due from banks Net increase (decrease) in cash and due from banks Cash and due from banks at beginning of year Cash and due from banks at end of year Supplementary disclosure of cash flow information Amount of interest paid during the year Amount of interest received during the year Amount of dividends received during the year Certain comparative amounts have been reclassified to conform with the presentation adopted in the current year. The accompanying Notes are an integral part of these Consolidated Financial Statements. 2013 2012 2011 $ 7,805 $ 7,563 $ 7,371 1,631 518 521 (304) (272) (362) (425) 8,394 (7,397) (33,820) 64,541 (4,068) (364) (3,962) 128 (869) 31,695 (4,402) – (3,400) (483) 64 247 (780) 3,655 (3,638) (2,647) (105) (11,489) 1,795 508 477 (373) (234) 112 (236) 9,818 (21,178) (27,836) 47,487 2,208 (1,952) (2,265) (2,069) (1,296) 12,529 12,825 – (201) (11) (24) 206 – 3,211 (3,252) (1,870) (104) 10,780 1,490 467 657 (393) (246) (147) (143) (74) (9,658) (31,293) 51,177 788 (2,085) 3,445 (2,647) (2,076) 16,633 3,800 1,000 (1,694) (665) (12) 951 – 2,210 (2,223) (1,835) (104) 1,428 (7,163) (676) (1,880) (60,958) 39,468 18,189 (11,836) 2,873 (721) 1,399 1,030 (751) 4,915 (6,543) (20,098) 37 145 3,436 (64,861) 40,223 20,707 – – (213) 1,568 162 (827) (12,217) (6,839) (22,973) 4 340 3,096 $ 3,581 $ 3,436 $ 6,928 21,533 1,018 $ 7,368 21,218 925 (63,658) 25,810 30,997 – – (291) 1,235 136 (301) (6,323) (3,226) (17,501) (38) 522 2,574 $ 3,096 $ 7,397 20,093 806 119 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Notes to Consolidated Financial Statements To facilitate a better understanding of the Bank’s Consolidated Financial Statements, significant accounting policies, and related disclosures, a listing of all the notes is provided below. NOTE TOPIC 1 2 3 PAGE 121 121 Nature of Operations Summary of Significant Accounting Policies Significant Accounting Judgments, 130 Estimates and Assumptions 132 Current and Future Changes in Accounting Policies 134 Fair Value of Financial Instruments 142 Securities 146 Loans, Impaired Loans and Allowance for Credit Losses 149 Transfers of Financial Assets 151 Special Purpose Entities 152 Derivatives 159 Investment in TD Ameritrade Holding Corporation 160 Significant Acquisitions 161 Goodwill and Other Intangibles Land, Buildings, Equipment and Other Depreciable Assets 163 163 Other Assets 164 Deposits 165 Other Liabilities 165 Subordinated Notes and Debentures 166 Liability for Preferred Shares 166 Capital Trust Securities 167 Share Capital 170 Non-controlling Interests in Subsidiaries 171 Trading-Related Income 171 Insurance 174 Share-Based Compensation 175 Employee Benefits 179 Income Taxes 181 Earnings Per Share Provisions, Contingent Liabilities, Commitments, Guarantees, Pledged Assets, and Collateral Related-Party Transactions Segmented Information Interest Rate Risk Credit Risk Regulatory Capital Risk Management Information on Subsidiaries Subsequent Events 181 184 185 187 189 193 194 194 195 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 120 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 1 NATURE OF OPERATIONS CORPORATE INFORMATION The Toronto-Dominion Bank is a bank chartered under the Bank Act. The shareholders of a bank are not, as shareholders, liable for any liability, act or default of the bank except as otherwise provided under the Bank Act. The Toronto-Dominion Bank and its subsidiaries are collectively known as TD Bank Group (“TD” or the “Bank”). The Bank was formed through the amalgamation on February 1, 1955 of The Bank of Toronto (chartered in 1855) and The Dominion Bank (chartered in 1869). The Bank is incorporated and domiciled in Canada with its registered and principal business offices located at 66 Wellington Street West, Toronto, Ontario. TD serves customers in four key segments operating in a number of locations in key financial centres around the globe: Canadian Personal and Commercial Banking, Wealth and Insur- ance, U.S. Personal and Commercial Banking, and Wholesale Banking. BASIS OF PREPARATION The accompanying Consolidated Financial Statements and accounting principles followed by the Bank have been prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), including the accounting requirements of the Office of the Superintendent of Financial Institutions Canada (OSFI). The preparation of financial statements requires that management make estimates, assumptions and judgments regarding the reported amount of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities, as further described in Note 3. Accordingly, actual results may differ from estimated amounts as future confirming events occur. The Consolidated Financial Statements of the Bank for the year ended October 31, 2013 were approved and authorized for issue by the Bank’s Board of Directors, in accordance with the recommendation of the Audit Committee, on December 4, 2013. The Bank’s Consolidated Financial Statements were previously prepared in accordance with Canadian generally accepted accounting principles (GAAP). The comparative figures for 2011 were restated to reflect transitional adjustments to comply with IFRS. Certain disclosures are included in the shaded sections of the “Managing Risk” section of the MD&A in this report, as permitted by IFRS, and form an integral part of the Consolidated Financial Statements. Certain comparative amounts have been reclassified to conform with the presentation adopted in the current year. The Consolidated Financial Statements were prepared under a historical cost basis, except for certain items carried at fair value as discussed below. N O T E 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION The Consolidated Financial Statements include the assets, liabilities, results of operations, and cash flows of the Bank and its subsidiaries including certain special purpose entities (SPEs) which it controls. The Bank controls entities when it has the power to govern the financial and operating policies of the entity, generally when the Bank owns, directly or indirectly, more than half of the voting power of the entity. The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing whether the Bank controls an entity. The Bank’s Consolidated Financial Statements have been prepared using uniform accounting policies for like transactions and events in similar circumstances. All intercompany transactions, balances and unrealized gains and losses on transactions are elimi- nated on consolidation. Subsidiaries Subsidiaries are corporations or other legal entities controlled by the Bank, generally through directly holding more than half of the voting power of the entity. The existence and effect of potential voting rights that are currently exercisable or convertible are considered in assessing whether the Bank controls an entity. Subsidiaries are consolidated from the date the Bank obtains control and continue to be consoli- dated until the date when control ceases to exist. Special Purpose Entities SPEs are entities that are created to accomplish a narrow and well- defined objective. SPEs may take the form of a corporation, trust, partnership or unincorporated entity. SPEs often are created with legal arrangements that impose limits on the decision-making powers of their governing board, trustee or management over the operations of the SPE. Typically, SPEs may not be controlled directly through holding more than half of the voting power of the entity. As a result, SPEs are consolidated when the substance of the relationship between the Bank and the SPE indicates that the SPE is controlled by the Bank. When assessing whether the Bank has to consolidate an SPE, the Bank evalu- ates a range of factors, including whether, in substance: • The activities of the SPE are being conducted on the Bank’s behalf according to its specific business needs so that the Bank obtains the benefits from the SPE’s operations; • The Bank has the decision-making powers to obtain the majority of the benefits of the activities of the SPE; • The Bank has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks arising from the activities of the SPE; or • The Bank retains the majority of the residual or ownership risk related to the SPE or its assets in order to obtain the benefits from its activities. Consolidation conclusions need to be reassessed at the end of each financial reporting period. The Bank’s policy is to consider the impact on consolidation of all significant changes in circumstances, focusing on the following: • Substantive changes in ownership, such as the purchase of more than an insignificant additional interest, or disposal of more than an insignificant interest in an entity; • Changes in contractual or governance arrangements of an entity; • Additional activities undertaken, such as providing a liquidity facility beyond the terms established originally, or entering into a transac- tion that was not originally contemplated; or • Changes in the financing structure of an entity. 121 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSInvestments in Associates and Jointly Controlled Entities Entities over which the Bank has significant influence are associates and are accounted for using the equity method of accounting. Signifi- cant influence is the power to participate in the financial and operating policy decisions of an investee, but is not control or joint control over these entities. Investments in associates are carried on the Consoli- dated Balance Sheet initially at cost and increased or decreased to recognize the Bank’s share of the profit or loss of the associate, capital transactions, including the receipt of any dividends, and write-downs to reflect impairment in the value of such entities. These increases or decreases, together with any gains and losses realized on disposition, are reported on the Consolidated Statement of Income. The Bank’s equity share in TD Ameritrade’s earnings is reported on a one month lag basis. The Bank takes into account changes in the subsequent period that would significantly affect the results. The proportionate consolidation method is used to account for investments in which the Bank exercises joint control. Only the Bank’s pro-rata share of assets, liabilities, revenue, and expenses is consolidated. At each balance sheet date, the Bank assesses whether there is any objective evidence that the investment in an associate or jointly controlled entity is impaired. The Bank calculates the amount of impairment as the difference between the higher of fair value or value-in-use and its carrying value. Non-controlling Interests When the Bank does not own all of the equity of the subsidiary, the minority shareholders’ interest is presented on the Consolidated Balance Sheet as non-controlling interests in subsidiaries as a compo- nent of total equity, separate from the equity of the Bank’s share- holders. The income attributable to the minority interest holders, net of tax, is presented as a separate line item on the Consolidated Statement of Income. CASH AND DUE FROM BANKS Cash and due from banks consist of cash and amounts due from banks which are issued by investment grade financial institutions. These amounts are due on demand or have an original maturity of three months or less. REVENUE RECOGNITION Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. Revenue associated with the rendering of services is recog- nized by reference to the stage of completion of the transaction at the end of the reporting period. Investment and securities services income include asset management fees, administration and commission fees, and investment banking fees. Asset management fees and administration and commission fees include income from investment management and related services, custody and institutional trust services and brokerage services, which are recognized as income over the period in which the related service is rendered. Investment banking fees, including advisory fees, are recognized as income when earned, and underwriting fees, are recog- nized as income when the Bank has rendered all services to the issuer and is entitled to collect the fee. Credit fees include commissions, liquidity fees, restructuring fees, and loan syndication fees and are recognized as earned. Interest from interest-bearing assets and liabilities is recognized as interest income using the effective interest rate (EIR). EIR is the rate that discounts expected future cash flows for the expected life of the financial instrument to its carrying value. The calculation takes into account the contractual interest rate, along with any fees or incremen- tal costs that are directly attributable to the instrument and all other premiums or discounts. Card services income including interchange income from credit and debit cards and annual fees, is recognized as earned, except for annual fees, which are recognized over a 12-month period. Service charges and trust fee income are recognized as earned. Revenue recognition policies related to financial instruments and insurance are described in the accounting policies below. FINANCIAL INSTRUMENTS OTHER THAN DERIVATIVES Trading Assets and Trading Liabilities Financial instruments are included within the trading portfolio if they have been originated, acquired or incurred principally for the purpose of selling or repurchasing in the near term, or they form part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short- term profit-taking. Included within the trading portfolio are trading securities, trading loans, trading deposits, securitization liabilities at fair value, obligations related to securities sold short, and physical commodities, as well as certain financing-type commodities transactions that are recorded on the Consolidated Balance Sheet as Securities purchased under reverse repurchase agreements and Obligations related to securities sold under repurchase agreements, respectively. Trading portfolio assets and liabilities are recognized on a trade date basis and are accounted for at fair value, with changes in fair value as well as any gains or losses realized on disposal recognized in trading income. Physical commodities are measured at fair value less costs to sell. Transaction costs are expensed as incurred. Dividends are recognized on the ex-dividend date and interest is recognized on an accrual basis using the effective interest rate method (EIRM). Both dividends and interest are included in interest income or interest expense. Designated at Fair Value through Profit or Loss Certain financial assets and liabilities that do not meet the definition of trading may be designated at fair value through profit or loss. To be designated at fair value through profit or loss, financial assets or liabilities must meet one of the following criteria: (1) the designation eliminates or significantly reduces a measurement or recognition inconsistency; (2) a group of financial assets or liabilities, or both, is managed and its performance is evaluated on a fair value basis in accordance with a documented risk management or investment strat- egy; or (3) the instrument contains one or more embedded derivatives unless: (a) the embedded derivative does not significantly modify the cash flows that otherwise would be required by the contract; or (b) it is clear with little or no analysis that separation of the embedded deriva- tive from the financial instrument is prohibited. In addition, the fair value through profit or loss designation is available only for those financial instruments for which a reliable estimate of fair value can be obtained. Once financial assets and liabilities are designated at fair value through profit or loss, the designation is irrevocable. Assets and liabilities designated at fair value through profit or loss are carried at fair value on the Consolidated Balance Sheet, with changes in fair value as well as any gains or losses realized on disposal recognized in other income. Interest is recognized on an accrual basis using the EIRM and is included in interest income or interest expense. Available-for-Sale Securities Financial instruments not classified as trading, designated at fair value through profit or loss, held-to-maturity or loans, are classified as available-for-sale and include equity securities and debt securities. Available-for-sale securities are recognized on a trade date basis and are carried at fair value on the Consolidated Balance Sheet with changes in fair value recognized in other comprehensive income. Gains and losses realized on disposal of instruments classified as available-for-sale are calculated on an average cost basis and are recognized in net securities gains (losses) in non-interest income. Dividends are recognized on the ex-dividend date and interest income is recognized on an accrual basis using the EIRM. Both dividends and interest are included in interest income. 122 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSImpairment losses are recognized if there is objective evidence of impairment as a result of one or more events that have occurred (a ‘loss event’) and the loss event(s) results in a decrease in the esti- mated future cash flows of the instrument. A significant or prolonged decline in fair value below cost is considered objective evidence of impairment for available-for-sale equity securities. A deterioration in credit quality is considered objective evidence of impairment for avail- able-for-sale debt securities. Qualitative factors are also considered when assessing impairment for available-for-sale securities. When impairment is identified, the cumulative net loss previously recognized in other comprehensive income, less any impairment loss previously recognized on the Consolidated Statement of Income, is removed from other comprehensive income and recognized in net securities gains (losses) in non-interest income. If the fair value of a previously impaired equity security subsequently increases, the impairment loss is not reversed through the Consolidated Statement of Income. Subsequent increases in fair value are recog- nized in other comprehensive income. If the fair value of a previously impaired debt security subsequently increases and the increase can be objectively related to an event occurring after the impairment was recognized on the Consolidated Statement of Income, then the impair- ment loss is reversed through the Consolidated Statement of Income. An increase in fair value in excess of impairment recognized previously on the Consolidated Statement of Income is recognized in other comprehensive income. Held-to-Maturity Securities Debt securities with fixed or determinable payments and fixed maturity dates, that do not meet the definition of loans and receivables, and that the Bank intends and has the ability to hold to maturity are classi- fied as held-to-maturity and are carried at amortized cost, net of impairment losses. Securities classified as held-to-maturity are assessed for objective evidence of impairment at the counterparty-specific level. If there is no objective evidence of impairment at the counter-party specific level then the security is grouped with other held-to-maturity securities with similar credit risk characteristics and collectively assessed for impairment, which considers losses incurred but not identified. Interest income is recognized using the EIRM and is included in Interest income on the Consolidated Statement of Income. Loans and Allowance for Loan Losses Loans Loans are non-derivative financial assets with fixed or determinable payments that the Bank does not intend to sell immediately or in the near term and that are not quoted in an active market. Loans are carried at amortized cost on the Consolidated Balance Sheet, net of an allowance for loan losses, write-offs and unearned income, which includes prepaid interest, loan origination fees and costs, commitment fees, loan syndication fees, and unamortized discounts or premiums. Interest income is recognized using the EIRM. The EIR is the rate that exactly discounts estimated future cash flows over the expected life of the loan. Loan origination fees and costs are considered to be adjustments to the loan yield and are recognized in interest income over the term of the loan. Commitment fees are recognized in credit fees over the commit- ment period when it is unlikely that the commitment will be called upon; otherwise, they are recognized in interest income over the term of the resulting loan. Loan syndication fees are recognized in credit fees upon completion of the financing placement unless the yield on any loan retained by the Bank is less than that of other comparable lenders involved in the financing syndicate. In such cases, an appropri- ate portion of the fee is recognized as a yield adjustment to interest income over the term of the loan. Loan Impairment and the Allowance for Credit Losses, Excluding Acquired Credit-Impaired Loans A loan (including a debt security classified as a loan) is considered impaired when there is objective evidence that there has been a deterioration of credit quality subsequent to the initial recognition of the loan (a ‘loss event’) to the extent the Bank no longer has reasonable assurance as to the timely collection of the full amount of principal and interest. Indicators of impairment could include, but are not limited to, one or more of the following: • Significant financial difficulty of the issuer or obligor; • A breach of contract, such as a default or delinquency in interest or principal payments; • Increased probability that the borrower will enter bankruptcy or other financial reorganization; or • The disappearance of an active market for that financial asset. A loan will be reclassified back to performing status when it has been determined that there is reasonable assurance of full and timely repayment of interest and principal in accordance with the original or revised contractual conditions of the loan and all criteria for the impaired classification have been remedied. In cases where a borrower experiences financial difficulties the Bank may grant certain conces- sionary modifications to terms and conditions of a loan. Modifications may include extension of amortization periods, rate reductions, principal forgiveness, forbearance and other modifications intended to minimize the economic loss and to avoid foreclosure or repossession of collateral. If the modified loan’s estimated realizable value, discounted at the original loan’s EIR has decreased as a result of the modification, addi- tional impairment is recorded. Once modified, if management expects full collection of payments under the revised loan terms, the loan is no longer considered impaired. The allowance for credit losses represents management’s best esti- mate of impairment incurred in the lending portfolios, including any off-balance sheet exposures, at the balance sheet date. The allowance for loan losses, which includes credit-related allowances for residential mortgages, consumer instalment and other personal, credit card, busi- ness and government loans, and debt securities classified as loans, is deducted from Loans on the Consolidated Balance Sheet. The allowance for credit losses for off-balance sheet instruments, which relates to certain guarantees, letters of credit and undrawn lines of credit, is recognized in Provisions on the Consolidated Balance Sheet. Allowances for lending portfolios reported on the balance sheet and off-balance sheet exposures are calculated using the same methodology. The allowance is increased by the provision for credit losses, and decreased by write-offs net of recoveries and disposals. The Bank maintains both counterparty-specific and collectively assessed allowances. Each quarter, allowances are reassessed and adjusted based on any changes in management’s estimate of the future cash flows estimated to be recovered. Credit losses on impaired loans continue to be recognized by means of an allowance for credit losses until a loan is written off. A loan is written off against the related allowance for credit losses when there is no realistic prospect of recovery. Non-retail loans are generally written off when all reasonable collection efforts have been exhausted, such as when a loan is sold, when all security has been realized or when all security has been resolved with the receiver or bankruptcy court. Non-real estate secured retail loans are generally written off when contractual payments are 180 days past due, or when a loan is sold. Real-estate secured retail loans are generally written off when the security is realized. 123 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSCounterparty-Specific Allowance Individually significant loans, such as the Bank’s medium-sized business and government loans and debt securities classified as loans, are assessed for impairment at the counterparty-specific level. The impair- ment assessment is based on the counterparty’s credit ratings, overall financial condition, and where applicable, the realizable value of the collateral. Collateral is reviewed at least annually and when conditions arise indicating an earlier review is necessary. An allowance, if applica- ble, is measured as the difference between the carrying amount of the loan and the estimated recoverable amount. The estimated recoverable amount is the present value of the estimated future cash flows, discounted using the loan’s original EIR. Collectively Assessed Allowance for Individually Insignificant Impaired Loans Individually insignificant impaired loans, such as the Bank’s personal and small business loans and credit cards, are collectively assessed for impairment. Allowances are calculated using a formula that incorporates recent loss experience, historical default rates which are delinquency levels in interest or principal payments that indicate impairment, other applicable currently observable data, and the type of collateral pledged. Collectively Assessed Allowance for Incurred but Not Identified Credit Losses If there is no objective evidence of impairment for an individual loan, whether significant or not, the loan is included in a group of assets with similar credit risk characteristics and collectively assessed for impairment for losses incurred but not identified. This allowance is referred to as the allowance for incurred but not identified credit losses. The level of the allowance for each group depends upon an assessment of business and economic conditions, historical loss experi- ence, loan portfolio composition, and other relevant indicators. Histori- cal loss experience is adjusted based on current observable data to reflect the effects of current conditions. The allowance for incurred but not identified credit losses is calculated using credit risk models that consider probability of default (loss frequency), loss given credit default (loss severity), and exposure at default. For purposes of measuring the collectively assessed allowance for incurred but not identified credit losses, default is defined as delinquency levels in interest or principal payments that would indicate impairment. Acquired Loans Acquired loans are initially measured at fair value which considers incurred and expected future credit losses estimated at the acquisition date and also reflects adjustments based on the acquired loan’s interest rate in comparison to the current market rates. As a result, no allowance for credit losses is recorded on the date of acquisition. When loans are acquired with evidence of incurred credit loss where it is probable at the purchase date that the Bank will be unable to collect all contrac- tually required principal and interest payments, they are generally considered to be acquired credit-impaired (ACI) loans. Acquired performing loans are subsequently accounted for at amor- tized cost based on their contractual cash flows and any acquisition related discount or premium is considered to be an adjustment to the loan yield and is recognized in interest income using the EIRM over the term of the loan, or the expected life of the loan for acquired loans with revolving terms. Credit related discounts relating to incurred losses for acquired loans are not accreted. Acquired loans are subject to impairment assessments under the Bank’s credit loss framework similar to the Bank’s originated loan portfolio. Acquired Credit-Impaired Loans ACI loans are identified as impaired at acquisition based on specific risk characteristics of the loans, including past due status, performance history and recent borrower credit scores. ACI loans are accounted for based on the present value of expected cash flows as opposed to their contractual cash flows. The Bank deter- mines the fair value of these loans at the acquisition date by discounting expected cash flows at a discount rate that reflects factors a market participant would use when determining fair value including manage- ment assumptions relating to default rates, loss severities, the amount and timing of prepayments, and other factors that are reflective of current market conditions. With respect to certain individually significant ACI loans, accounting is applied individually at the loan level. The remaining ACI loans are aggregated provided that they are acquired in the same fiscal quarter and have common risk characteristics. Aggregated loans are accounted for as a single asset with aggregated cash flows and a single composite interest rate. Subsequent to acquisition, the Bank regularly reassesses and updates its cash flow estimates for changes to assumptions relating to default rates, loss severities, the amount and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected cash flows trigger the recognition of additional impairment, which is measured based on the present value of the revised expected cash flows discounted at the loan’s EIR as compared to the carrying value of the loan. Impairment is recorded through the provision for credit losses. Probable and significant increases in expected cash flows would first reverse any previously taken impairment with any remaining increase recognized in income immediately as interest income. In addition, for fixed-rate ACI loans the timing of expected cash flows may increase or decrease which may result in adjustments through interest income to the carrying value in order to maintain the inception yield of the ACI loan. If the timing and/or amounts of expected cash flows on ACI loans were determined not to be reasonably estimable, no interest is recognized. Federal Deposit Insurance Corporation Covered Loans Loans subject to loss share agreements with the Federal Deposit Insurance Corporation (FDIC) are considered FDIC covered loans. The amounts expected to be reimbursed by the FDIC are considered separately as indemnification assets and are initially measured at fair value. If losses on the portfolio are greater than amounts expected at the acquisition date, an impairment loss is taken by establishing an allowance for credit losses, which is determined gross, exclusive of any adjustments to the indemnification assets. Indemnification assets are subsequently adjusted for any changes in estimates related to the overall collectability of the underlying loan portfolio. Any additional impairment of the underlying loan portfolio generally results in an increase of the indemnification asset through the provision for credit losses. Alternatively, decreases in the expecta- tion of losses of the underlying loan portfolio generally results in a decrease of the indemnification asset through net interest income (or through the provision for credit losses if impairment was previously taken). The indemnification asset is drawn down as payments are received from the FDIC pertaining to the loss share agreements. FDIC covered loans are recorded in Loans on the Consolidated Balance Sheet. The indemnification assets are recorded in Other assets on the Consolidated Balance Sheet. At the end of each loss share period, the Bank may be required to make a payment to the FDIC if actual losses incurred are less than the intrinsic loss estimate as defined in the loss share agreements. The payment is determined as 20% of the excess between the intrinsic loss estimate and actual covered losses determined in accordance with the loss sharing agreement, net of specified servicing costs. The fair value of the estimated payment is included in part of the indemnification asset at the date of acquisition. Subsequent changes to the estimated payment are considered in determining the adjustment to the indemni- fication asset as described above. 124 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSCustomers’ Liability under Acceptances Acceptances represent a form of negotiable short-term debt issued by customers, which the Bank guarantees for a fee. Revenue is recognized on an accrual basis. The potential obligation of the Bank under accep- tances is reported as a liability on the Consolidated Balance Sheet. The Bank’s recourse against the customer in the event of a call on any of these commitments is reported as an asset of the same amount. Financial Liabilities Carried at Amortized Cost Deposits Deposits, other than deposits included in a trading portfolio, are accounted for at amortized cost. Accrued interest on deposits, calculated using the EIRM, is included in Other liabilities on the Consolidated Balance Sheet. Subordinated Notes and Debentures Subordinated notes and debentures are accounted for at amortized cost. Interest expense is recognized on an accrual basis using the EIRM. Liability for Preferred Shares and Capital Trust Securities The Bank classifies issued instruments in accordance with the substance of the contractual arrangement. Issued instruments that are mandatorily redeemable or convertible into a variable number of the Bank’s common shares at the holder’s option are classified as liabilities on the Consolidated Balance Sheet. Dividend or interest payments on these instruments are recognized in interest expense. Preferred shares that are not mandatorily redeemable or that are not convertible into a variable number of the Bank’s common shares at the holder’s option are classified and presented in Share Capital. Guarantees The Bank issues guarantee contracts that require payments to be made to guaranteed parties based on: (i) changes in the underlying economic characteristics relating to an asset or liability of the guaranteed party; (ii) failure of another party to perform under an obligating agreement; or (iii) failure of another third party to pay its indebtedness when due. Financial standby letters of credit are financial guarantees that repre- sent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties and they carry the same credit risk, recourse and collateral security require- ments as loans extended to customers. Performance standby letters of credit are considered non-financial guarantees as payment does not depend on the occurrence of a credit event and is generally related to a non-financial trigger event. Financial and performance standby letters of credit are initially measured and recorded at their fair value. A guarantee liability is recorded on initial recognition at fair value which is normally equal to the present value of the guarantee fees received over the life of contract. The Bank’s release from risk is recog- nized over the term of the guarantee using a systematic and rational amortization method. If a guarantee meets the definition of a derivative, it is carried at fair value on the Consolidated Balance Sheet and reported as a derivative asset or derivative liability at fair value. Guarantees that are considered derivatives are a type of credit derivative which are over-the-counter (OTC) contracts designed to transfer the credit risk in an underlying financial instrument from one counterparty to another. DERIVATIVES Derivatives are instruments that derive their value from changes in underlying interest rates, foreign exchange rates, credit spreads, commodity prices, equities, or other financial or non-financial measures. Such instruments include interest rate, foreign exchange, equity, commodity and credit derivative contracts. The Bank uses these instruments for trading and non-trading purposes to manage the risks associated with its funding and investment strategies. Derivatives are carried at their fair value on the Consolidated Balance Sheet. The notional amounts of derivatives are not recorded as assets or liabilities as they represent the face amount of the contract to which a rate or price is applied to determine the amount of cash flows to be exchanged in accordance with the contract. Notional amounts do not represent the potential gain or loss associated with market risk and are not indicative of the credit risk associated with derivatives. Derivatives Held for Trading Purposes The Bank enters into trading derivative contracts to meet the needs of its customers, to enter into trading positions primarily to provide liquidity and market-making related activities, and in certain cases, to manage risks related to its trading portfolio. The realized and unreal- ized gains or losses on trading derivatives are recognized immediately in trading income (losses). Derivatives Held for Non-trading Purposes When derivatives are held for non-trading purposes and when the transactions meet the hedge accounting requirements of IAS 39, Financial Instruments: Recognition and Measurement (IAS 39), they are classified by the Bank as non-trading derivatives and receive hedge accounting treatment, as appropriate. Certain derivative instruments that are held for economic hedging purposes, and do not meet the hedge accounting requirements of IAS 39, are also classified as non- trading derivatives with the change in fair value of these derivatives recognized in non-interest income. Hedging Relationships Hedge Accounting At the inception of a hedging relationship, the Bank documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. The Bank also requires a documented assessment, both at hedge inception and on an ongoing basis, of whether or not the derivatives that are used in hedging relationships are highly effective in offsetting the changes attributable to the hedged risks in the fair values or cash flows of the hedged items. In order to be considered effective, the hedging instrument and the hedged item must be highly and inversely correlated such that the changes in the fair value of the hedging instrument will substantially offset the effects of the hedged exposure to the Bank throughout the term of the hedging relationship. If a hedging relationship becomes ineffective, it no longer qualifies for hedge accounting and any subsequent change in the fair value of the hedging instrument is recognized in Non-interest income on the Consolidated Statement of Income. Changes in fair value relating to the derivative component excluded from the assessment of hedge effectiveness, is recognized immediately in Non-interest income on the Consolidated Statement of Income. When derivatives are designated as hedges, the Bank classifies them either as: (i) hedges of the changes in fair value of recognized assets or liabilities or firm commitments (fair value hedges); (ii) hedges of the variability in highly probable future cash flows attributable to a recognized asset or liability, or a forecasted transaction (cash flow hedges); or (iii) hedges of net investments in a foreign operation (net investment hedges). Fair Value Hedges The Bank’s fair value hedges principally consist of interest rate swaps that are used to protect against changes in the fair value of fixed-rate long-term financial instruments due to movements in market interest rates. Changes in the fair value of derivatives that are designated and qualify as fair value hedging instruments are recognized in Non-interest income on the Consolidated Statement of Income, along with changes in the fair value of the assets, liabilities or group thereof that are attributable to the hedged risk. Any change in fair value relating to the ineffective portion of the hedging relationship is recognized immedi- ately in non-interest income. 125 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSThe cumulative adjustment to the carrying amount of the hedged item (the basis adjustment) is amortized to the Consolidated Statement of Income in net interest income based on a recalculated EIR over the remaining expected life of the hedged item, with amortization beginning no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the hedged risk. Where the hedged item has been derecognized, the basis adjustment is immedi- ately released to Net interest income on the Consolidated Statement of Income. Cash Flow Hedges The Bank is exposed to variability in future cash flows that are denomi- nated in foreign currencies, as well as the variability in future cash flows on non-trading assets and liabilities that bear interest at variable rates, or are expected to be reinvested in the future. The amounts and timing of future cash flows are projected for each hedged exposure on the basis of their contractual terms and other relevant factors, includ- ing estimates of prepayments and defaults. The effective portion of the change in the fair value of the derivative that is designated and qualifies as a cash flow hedge is recognized in other comprehensive income. The change in fair value of the derivative relating to the ineffective portion is recognized immediately in non- interest income. Amounts accumulated in other comprehensive income are reclassi- fied to Net interest income on the Consolidated Statement of Income in the period in which the hedged item affects income. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in other comprehensive income until the forecasted transaction impacts the Consolidated Statement of Income. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately reclassified to Net interest income on the Consolidated Statement of Income. Net Investment Hedges Hedges of net investments in foreign operations are accounted for similar to cash flow hedges. The change in fair value on the hedging instrument relating to the effective portion is recognized in other comprehensive income. The change in fair value of the hedging instru- ment relating to the ineffective portion is recognized immediately on the Consolidated Statement of Income. Gains and losses accumulated in other comprehensive income are reclassified to the Consolidated Statement of Income upon the disposal or partial disposal of the investment in the foreign operation. Embedded Derivatives Derivatives may be embedded in other financial instruments (the host instrument). Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host instrument, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and the combined contract is not held for trading or desig- nated at fair value through profit or loss. These embedded derivatives, which are bifurcated from the host contract, are recognized on the Consolidated Balance Sheet as Derivatives and measured at fair value with subsequent changes recognized in Non-interest income on the Consolidated Statement of Income. TRANSLATION OF FOREIGN CURRENCIES The Bank’s Consolidated Financial Statements are presented in Cana- dian dollars, which is the presentation currency of the Bank. Items included in the financial statements of each of the Bank’s entities are measured using their functional currency, which is the currency of the primary economic environment in which they operate. Monetary assets and liabilities denominated in a currency that differs from an entity’s functional currency are translated into the functional currency of the entity at exchange rates prevailing at the balance sheet date. Non-monetary assets and liabilities are translated at historical exchange rates. Income and expenses are translated into an entity’s functional currency at average exchange rates prevailing throughout the year. Translation gains and losses are included in non-interest income except for available-for-sale equity securities where unrealized translation gains and losses are recorded in other comprehensive income until the asset is sold or becomes impaired. Foreign-currency denominated subsidiaries are those with a func- tional currency other than Canadian dollars. For the purpose of translation into the Bank’s functional currency, all assets and liabilities are translated at exchange rates in effect at the balance sheet date and all income and expenses are translated at average exchange rates for the period. Unrealized translation gains and losses relating to these operations, net of gains or losses arising from net investment hedges of these positions and applicable income taxes, are included in other comprehensive income. Translation gains and losses accumulated in other comprehensive income are recognized on the Consolidated Statement of Income upon the disposal or partial disposal of the investment in the foreign operation. The investment balance of foreign entities accounted for by the equity method, including TD Ameritrade, is translated into Canadian dollars using the closing rate at the end of the period with exchange gains or losses recognized in other comprehensive income. OFFSETTING OF FINANCIAL INSTRUMENTS Financial assets and liabilities are offset, with the net amount presented on the Consolidated Balance Sheet, only if the Bank currently has a legally enforceable right to set off the recognized amounts, and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. In all other situations, assets and liabilities are presented on a gross basis. DETERMINATION OF FAIR VALUE The fair value of a financial instrument on initial recognition is normally the transaction price, such as, the fair value of the consideration given or received. The best evidence of fair value is quoted prices in active markets, and is based on bid prices for financial assets, and offered prices for financial liabilities. When financial assets and liabilities have offsetting market risks, the Bank uses mid-market prices as a basis for establishing fair values for the offsetting risk positions and applies the bid or offered price to the net open position, as appropriate. When there is no active market for the instrument, the fair value may be based on other observable current market transactions involving the same or similar instrument, without modification or repackaging, or is based on a valuation technique which maximizes the use of observable market inputs. The Bank recognizes various types of valuation adjustments to account for factors that market participants would use in determining fair value which are not included in valuation techniques due to system limitations or measurement uncertainty. Valuation adjustments reflect the Bank’s assessment of factors that market participants would use in pricing the asset or liability. These include, but are not limited to, the unobservability of inputs used in the pricing model, or assumptions about risk, such as creditworthiness of each counterparty and risk premiums that market participants would require given the inherent risk in the pricing model. If there is a difference between the initial transaction price and the value based on a valuation technique which includes observable market inputs, the difference is referred to as inception profit or loss. Inception profit or loss is recognized into income upon initial recogni- tion of the instrument. When an instrument is measured using a valua- tion technique that utilizes non-observable inputs, it is initially valued 126 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSat the transaction price, which is considered the best estimate of fair value. Subsequent to initial recognition, any difference between the transaction price and the value determined by the valuation technique at initial recognition is recognized into income as non-observable inputs become observable. If the fair value of a financial asset measured at fair value becomes negative, it is recognized as a financial liability until either its fair value becomes positive, at which time it is recognized as a financial asset, or until it is extinguished. DERECOGNITION OF FINANCIAL INSTRUMENTS Financial Assets The Bank derecognizes a financial asset when the contractual rights to that asset have expired. Derecognition may also be appropriate where the contractual right to receive future cash flows from the asset have been transferred, or where the Bank retains the rights to future cash flows from the asset, but assumes an obligation to pay those cash flows to a third party subject to certain criteria. When the Bank transfers a financial asset, it is necessary to assess the extent to which the Bank has retained the risks and rewards of ownership of the transferred asset. If substantially all the risks and rewards of ownership of the financial asset have been retained, the Bank continues to recognize the financial asset and also recognizes a financial liability for the consideration received. Certain transaction costs incurred are also capitalized and amortized using EIRM. If substantially all the risks and rewards of ownership of the financial asset have been transferred, the Bank will derecognize the financial asset and recognize separately as assets or liabilities any rights and obligations created or retained in the transfer. The Bank determines whether substantially all the risk and rewards have been transferred by quantitatively comparing the variability in cash flows before and after the transfer. If the variability in cash flows does not change significantly as a result of the transfer, the Bank has retained substan- tially all of the risks and rewards of ownership. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, the Bank derecognizes the financial asset where it has relinquished control of the financial asset. The Bank is considered to have relinquished control of the financial asset where the transferee has the practical ability to sell the transferred financial asset. Where the Bank has retained control of the financial asset, it continues to recognize the financial asset to the extent of its continuing involvement in the financial asset. Under these circumstances, the Bank usually retains the rights to future cash flows relating to the asset through a residual interest and is exposed to some degree of risk associated with the financial asset. The derecognition criteria are also applied to the transfer of part of an asset, rather than the asset as a whole, or to a group of similar financial assets in their entirety, when applicable. If transferring a part of an asset, it must be a specifically identified cash flow, a fully propor- tionate share of the asset, or a fully proportionate share of a specifically identified cash flow. Securitization Securitization is the process by which financial assets are transformed into securities. The Bank securitizes financial assets by transferring those financial assets to a third party and as part of the securitization, certain financial assets may be retained and may consist of an interest- only strip and, in some cases, a cash reserve account (collectively referred to as ‘retained interests’). If the transfer qualifies for derecog- nition, a gain or loss is recognized immediately in other income after the effects of hedges on the assets sold, if applicable. The amount of the gain or loss is calculated as the difference between the carrying amount of the asset transferred and the sum of any cash proceeds received, including any financial asset received or financial liability assumed, and any cumulative gain or loss allocated to the transferred asset that had been recognized in other comprehensive income. To determine the value of the retained interest initially recorded, the previous carrying value of the transferred asset is allocated between the amount derecognized from the balance sheet and the retained interest recorded, in proportion to their relative fair values on the date of transfer. Subsequent to initial recognition, as market prices are generally not available for retained interests, fair value is determined by estimating the present value of future expected cash flows using management’s best estimates of key assumptions that market parti- cipants would use in determining fair value. Refer to Note 3 for assumptions used by management in determining the fair value of retained interests. Retained interest is classified as trading securities with subsequent changes in fair value recorded in trading income. Where the Bank retains the servicing rights, the benefits of servicing are assessed against market expectations. When the benefits of servicing are more than adequate, a servicing asset is recognized. Servicing assets are carried at amortized cost. When the benefits of servicing are less than adequate, a servicing liability is recognized. Financial Liabilities The Bank derecognizes a financial liability when the obligation under the liability is discharged, cancelled or expires. If an existing financial liability is replaced by another financial liability from the same lender on substantially different terms or where the terms of the existing liability are substantially modified, the original liability is derecognized and a new liability is recognized with the difference in the respective carrying amounts recognized on the Consolidated Statement of Income. Securities Purchased Under Reverse Repurchase Agreements, Securities Sold Under Repurchase Agreements, and Securities Borrowing and Lending Securities purchased under reverse repurchase agreements involve the purchase of securities by the Bank under agreements to resell the securities at a future date. These agreements are treated as collateral- ized lending transactions whereby the Bank takes possession of the purchased securities, but does not acquire the risks and rewards of ownership. The Bank monitors the market value of the purchased securities relative to the amounts due under the reverse repurchase agreements, and when necessary, requires transfer of additional collateral. In the event of counterparty default, the agreements provide the Bank with the right to liquidate the collateral held and offset the proceeds against the amount owing from the counterparty. Obligations related to securities sold under repurchase agreements involve the sale of securities by the Bank to counterparties under agreements to repurchase the securities at a future date. These agree- ments do not result in the risks and rewards of ownership being relinquished and are treated as collateralized borrowing transactions. The Bank monitors the market value of the securities sold relative to the amounts due under the repurchase agreements, and when neces- sary, transfers additional collateral and may require counterparties to return collateral pledged. Certain transactions that do not meet derecognition criteria under IFRS are also included in obligations related to securities sold under repurchase agreements. Refer to Note 8 for further details. Securities purchased under reverse repurchase agreements and obligations related to securities sold under repurchase agreements are initially recorded on the Consolidated Balance Sheet at the respective prices at which the securities were originally acquired or sold, plus accrued interest. Subsequently, the agreements are measured at amor- tized cost on the Consolidated Balance Sheet, plus accrued interest. Interest earned on reverse repurchase agreements and interest incurred on repurchase agreements is determined using the EIRM and is included in Interest income and Interest expense, respectively, on the Consolidated Statement of Income. 127 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSIn security lending transactions, the Bank lends securities to a counter- party and receives collateral in the form of cash or securities. If cash collateral is received, the Bank records the cash along with an obliga- tion to return the cash as an obligation related to securities sold under repurchase agreements on the Consolidated Balance Sheet. Where securities are received as collateral, the Bank does not record the collateral on the Consolidated Balance Sheet. In securities borrowing transactions, the Bank borrows securities from a counterparty and pledges either cash or securities as collateral. If cash is pledged as collateral, the Bank records the transaction as securities purchased under reverse repurchase agreements on the Consolidated Balance Sheet. Securities pledged as collateral remain on the Bank’s Consolidated Balance Sheet. Where securities are pledged or received as collateral, security borrowing fees and security lending income are recorded in Non-interest expenses and Non-interest income, respectively, on the Consolidated Statement of Income over the term of the transaction. Where cash is pledged or received as collateral, interest received or incurred is deter- mined using the EIRM and is included in Interest income and Interest expense, respectively, on the Consolidated Statement of Income. Commodities purchased or sold with an agreement to sell or repur- chase the commodities at a later date at a fixed price, are also included in securities purchased under reverse repurchase agreements and obligations related to securities sold under repurchase agreements, respectively, if the derecognition criteria under IFRS are not met. These instruments are measured at fair value. GOODWILL Goodwill represents the excess purchase price paid over the net fair value of identifiable assets and liabilities acquired in a business combination. Goodwill is carried at its initial cost less accumulated impairment losses. Goodwill is allocated to a cash generating unit (CGU) or a group of CGUs that is expected to benefit from the synergies of the business combination, regardless of whether any assets acquired and liabilities assumed are assigned to the CGU or group of CGUs. A CGU is the smallest identifiable group of assets that generate cash flows largely independent of the cash inflows from other assets or groups of assets. Each CGU or group of CGUs, to which the goodwill is allocated, represents the lowest level within the Bank at which the goodwill is monitored for internal management purposes and is not larger than an operating segment. Goodwill is assessed for impairment at least annually and when an event or change in circumstances indicates that the carrying amount may be impaired. When impairment indicators are present, the recoverable amount of the CGU or group of CGUs, which is the higher of its estimated fair value less costs to sell and its value-in-use, is determined. If the carrying amount of the CGU or group of CGUs is higher than its recoverable amount, an impairment loss exists. The impairment loss is recognized on the Consolidated Statement of Income and is applied to the goodwill balance. An impairment loss cannot be reversed in future periods. INTANGIBLE ASSETS The Bank’s intangible assets consist primarily of core deposit intangibles, credit card related intangibles and software intangibles. Intangible assets are initially recognized at fair value and are amortized over their estimated useful lives (3 to 20 years) proportionate to their expected economic benefits, except for software which is amortized over its estimated useful life (3 to 7 years) on a straight-line basis. The Bank assesses its intangible assets for impairment on a quarterly basis. When impairment indicators are present, the recoverable amount of the asset, which is the higher of its estimated fair value less costs to sell and its value-in-use, is determined. If the carrying amount of the asset is higher than its recoverable amount, the asset is written down to its recoverable amount. An impairment loss is recognized on the Consolidated Statement of Income in the period in which the impairment is identified. Impairment losses recognized previously are assessed and reversed if the circumstances leading to the impairment are no longer present. Reversal of any impairment loss will not exceed the carrying amount of the intangible asset that would have been determined had no impairment loss been recognized for the asset in prior periods. LAND, BUILDINGS, EQUIPMENT, AND OTHER DEPRECIABLE ASSETS Land is recognized at cost. Buildings, computer equipment, furniture and fixtures, other equipment and leasehold improvements are recognized at cost less accumulated depreciation and provisions for impairment, if any. Gains and losses on disposal are included in Non-interest income on the Consolidated Statement of Income. Properties or other assets leased under a finance lease are capital- ized as assets and depreciated on a straight-line basis over the lesser of the lease term and the estimated useful life of the asset. The Bank records the obligation associated with the retirement of a long-lived asset at fair value in the period in which it is incurred and can be reasonably estimated, and records a corresponding increase to the carrying amount of the asset. The asset is depreciated on a straight-line basis over its remaining useful life while the liability is accreted to reflect the passage of time until the eventual settlement of the obligation. Depreciation is recognized on a straight-line basis over the useful lives of the assets estimated by asset category, as follows: Asset Useful Life Buildings Computer equipment Furniture and fixtures Other equipment Leasehold improvements 15 to 40 years 3 to 7 years 3 to 15 years 5 to 8 years Lesser of lease term plus one renewal and 15 years The Bank assesses its depreciable assets for impairment on a quarterly basis. When impairment indicators are present, the recoverable amount of the asset, which is the higher of its estimated fair value less costs to sell and its value-in-use, is determined. If the carrying value of the asset is higher than its recoverable amount, the asset is written down to its recoverable amount. An impairment loss is recognized on the Consolidated Statement of Income in the period in which the impairment is identified. Impairment losses recognized previously are assessed and reversed if the circumstances leading to their impairment are no longer present. Reversal of any impairment loss will not exceed the carrying amount of the depreciable asset that would have been determined had no impairment loss been recognized for the asset in prior periods. NON-CURRENT ASSETS HELD FOR SALE Individual non-current assets (and disposal groups) are classified as held for sale if they are available for immediate sale in their present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups), and their sale must be highly probable to occur within one year. For a sale to be highly probable, management must be committed to a sales plan and initiate an active program to market for the sale of the non-current assets (and disposal groups). Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell on the Consolidated Balance Sheet. Subsequent to its initial classification as held for sale, a non-current asset (and disposal group) is no longer depreciated or amortized, and any subsequent write-downs in fair value less costs to sell or such increases not in excess of cumulative write-downs, are recognized on the Consolidated Statement of Income. 128 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS SHARE-BASED COMPENSATION The Bank grants share options to certain employees as compensation for services provided to the Bank. The Bank uses a binomial tree-based valuation option pricing model to estimate fair value for all share- based compensation awards. The cost of the share options is based on the fair value estimated at the grant date and is recognized as compensation expense and contributed surplus over the service period required for employees to become fully entitled to the awards. This period is generally equal to the vesting period and includes a period prior to the grant date. For the Bank’s share options, this period is generally equal to five years. When options are exercised, the amount initially recognized in the contributed surplus balance is reduced, with a corresponding increase in common shares. The Bank has various other share-based compensation plans where certain employees are awarded cash payments equivalent to units of the Bank’s common shares as compensation for services provided to the Bank. The obligation related to share units is included in other liabilities. Compensation expense is recognized based on the fair value of the share units at the grant date adjusted for changes in fair value between the grant date and the vesting date, net of the effects of hedges, over the service period required for employees to become fully entitled to the awards. This period is generally equal to the vesting period and includes a period prior to the grant date. For the Bank’s share units, this period is generally equal to four years. EMPLOYEE BENEFITS Defined Benefit Plans Actuarial valuations are prepared at least every three years to deter- mine the present value of the projected benefit obligation related to the Bank’s principal pension and non-pension post-retirement benefit plans. In periods between actuarial valuations, an extrapolation is performed based on the most recent valuation completed. Pension and non-pension post-retirement benefit expenses are determined based upon separate actuarial valuations using the projected benefit method pro-rated on service and management’s best estimates of expected long-term return on plan assets, compensation increases, health care cost trend rate, mortality rate, and discount rate, which are reviewed annually with the Bank’s actuaries. The expense recognized includes the cost of benefits for employee service provided in the current year, interest expense on obligations, expected return on plan assets, the cost of vested plan amendments, the amortization of the cost of unvested plan amendments, and amortization of actuarial gains or losses. The fair value of plan assets and the present value of the projected benefit obligation are measured as at October 31. The net defined benefit asset or liability represents the difference between the cumulative expenses and recognized cumulative contributions and is reported in other assets or other liabilities. The cost of plan amendments are recognized in income immediately if they relate to vested benefits. Otherwise, the cost of plan amend- ments are deferred and amortized into income on a straight-line basis over the vesting period, which is the period until the plan member becomes unconditionally entitled to the benefits for the principal pension plans and the expected average remaining period to full eligibility for the principal non-pension post-retirement benefit plan. The excess, if any, of the accumulated net actuarial gain or loss over 10% of the greater of the projected benefit obligation and the fair value of plan assets for the Bank’s principal pension plans is recog- nized in income on a straight-line basis over the expected average remaining working lives of the active plan members. This is commonly referred to as the corridor approach. Prepaid pension assets recognized by the Bank are subject to a ceiling which limits the asset recognized on the Consolidated Balance Sheet to the amount that is recoverable through refunds of contribu- tions or future contribution holidays. In addition, where a regulatory funding deficit exists related to a defined benefit plan, the Bank is required to record a liability equal to the present value of all future cash payments required to eliminate that deficit. Curtailment and settlement gains and losses are recognized in income by the Bank when the curtailment or settlement occurs. A curtailment occurs when the Bank is demonstrably committed to materially reducing the number of employees covered by the plan, or amending the terms of a defined benefit plan so that a significant element of future service by current employees will no longer qualify for benefits, or will qualify only for reduced benefits. A settlement occurs when the Bank enters into a transaction that eliminates all further legal or constructive obligation for part or all of the benefits provided under a defined benefit plan. Defined Contribution Plans For defined contribution plans, annual pension expense is equal to the Bank’s contributions to those plans. INSURANCE Premiums for short-duration insurance contracts, net of reinsurance, primarily property and casualty, are deferred as unearned premiums and reported in non-interest income on a pro rata basis over the terms of the policies, except for contracts where the period of risk differs significantly from the contract period. Unearned premiums are reported in other liabilities, gross of premiums attributable to reinsurers. The reinsurers’ share is recognized as an asset in other assets. Premiums from life and health insurance policies are recognized as income when due from the policyholder. For property and casualty insurance, insurance claims and policy benefit liabilities represent current claims and estimates for future insurance policy claims, as determined by the appointed actuary in accordance with accepted actuarial practices and are reported as other liabilities. Expected claims and policy benefit liabilities are determined on a case-by-case basis and consider such variables as past loss experi- ence, current claims trends and changes in the prevailing social, economic and legal environment. These liabilities are continually reviewed and, as experience develops and new information becomes known, the liabilities are adjusted as necessary. In addition to reported claims information, the liabilities recognized by the Bank include a provision to account for the future development of insurance claims, including insurance claims incurred but not reported by policyholders (IBNR). IBNR liabilities are evaluated based on historical development trends and actuarial methodologies for groups of claims with similar attributes. To recognize the uncertainty in establishing these best estimates, to allow for possible deterioration in experience and to provide greater comfort that the actuarial liabilities are sufficient to pay future benefits, actuaries are required to include margins in some assumptions. A range of allowable margins is prescribed by the Canadian Institute of Actuaries relating to claims development, reinsurance recoveries and investment income variables. The impact of the margins is referred to as the provision for adverse deviation. Expected claims and policy benefit liabilities are discounted using a discount rate that reflects the current market assessments of the time value of money and the risks specific to the obligation, as required by Canadian accepted actuarial practices, and makes explicit provision for adverse deviation. For life and health insurance, actuarial liabilities represent the present values of future policy cash flows as determined using standard actuarial valuation practices. Changes in actuarial liabilities are reported in insurance claims and related expenses. 129 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSPROVISIONS Provisions are recognized when the Bank has a present obligation (legal or constructive) as a result of a past event, the amount of which can be reliably estimated, and it is probable that an outflow of resources will be required to settle the obligation. Provisions are measured based on management’s best estimate of the consideration required to settle the obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. If the effect of the time value of money is material, provisions are measured at the present value of the expendi- ture expected to be required to settle the obligation, using a discount rate that reflects the current market assessments of the time value of money and the risks specific to the obligation. The increase in provi- sions due to the passage of time is recognized as interest expense. INCOME TAXES Income tax is comprised of current and deferred tax. Income tax is recognized on the Consolidated Statement of Income except to the extent that it relates to items recognized in other comprehensive income or directly in equity, in which case the related taxes are also recognized in other comprehensive income or directly in equity, respectively. Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities on the Consolidated Balance Sheet and the amounts attributed to such assets and liabilities for tax purposes. Deferred tax assets and liabilities are determined based on the tax rates that are expected to apply when the assets or liabilities are reported for tax purposes. Deferred tax assets are recognized only when it is probable that sufficient taxable profit will be available in future periods against which deductible temporary differences may be utilized. Deferred tax liabilities are not recognized on temporary differences arising on investments in subsidiaries, branches and associ- ates, and interests in joint ventures if the Bank controls the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The Bank records a provision for uncertain tax positions if it is prob- able that the Bank will have to make a payment to tax authorities upon their examination of a tax position. This provision is measured at the Bank’s best estimate of the amount expected to be paid. Provisions are reversed to income in the period in which management determines they are no longer required or as determined by statute. N O T E 3 SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The estimates used in the Bank’s accounting policies are essential to understanding its results of operations and financial condition. Some of the Bank’s policies require subjective, complex judgments and estimates as they relate to matters that are inherently uncertain. Changes in these judgments or estimates could have a significant impact on the Bank’s Consolidated Financial Statements. The Bank has established procedures to ensure that accounting policies are applied consistently and that the processes for changing methodolo- gies for determining estimates are well controlled and occur in an appropriate and systematic manner. IMPAIRMENT OF FINANCIAL ASSETS Available-for-Sale Securities Impairment losses are recognized on available-for-sale securities if there is objective evidence of impairment as a result of one or more events that have occurred after initial recognition (a ‘loss event’) and the loss event(s) results in a decrease in the estimated cash flows of the instrument. The Bank individually reviews these securities at least quarterly for the presence of these conditions. For available-for-sale equity securities, a significant or prolonged decline in fair value below cost is considered objective evidence of impairment. For available- for-sale debt securities, a deterioration of credit quality is considered objective evidence of impairment. Other factors considered in the impairment assessment include financial position and key financial indicators of the issuer of the instrument, significant past and continued losses of the issuer, as well as breaches of contract, including default or delinquency in interest payments and loan covenant violations. Held-to-Maturity Securities Impairment losses are recognized on held-to-maturity securities if there is objective evidence of impairment as a result of one or more events that have occurred after initial recognition (a ‘loss event’) and the loss event(s) results in a decrease in the estimated cash flows of the instru- ment. The Bank reviews these securities at least quarterly for impairment at the counter-party specific level. If there is no objective evidence of impairment at the counter-party specific level then the security is grouped with other held-to-maturity securities with similar credit risk characteristics and collectively assessed for impairment, which consid- ers losses incurred but not identified. A deterioration of credit quality is considered objective evidence of impairment. Other factors consid- ered in the impairment assessment include the financial position and key financial indicators of the issuer, significant past and continued losses of the issuer, as well as breaches of contract, including default or delinquency in interest payments and loan covenant violations. Loans A loan (including a debt security classified as a loan) is considered impaired when there is objective evidence that there has been a dete- rioration of credit quality subsequent to the initial recognition of the loan (a ‘loss event’) to the extent the Bank no longer has reasonable assurance as to the timely collection of the full amount of principal and interest. The Bank assesses loans for objective evidence of impair- ment individually for loans that are individually significant, and collec- tively for loans that are not individually significant. The allowance for credit losses represents management’s best estimate of impairment incurred in the lending portfolios, including any off-balance sheet exposures, at the balance sheet date. Management exercises judgment as to the timing of designating a loan as impaired, the amount of the allowance required, and the amount that will be recovered once the borrower defaults. Changes in the amount that management expects to recover would have a direct impact on the provision for credit losses and may result in a change in the allowance for credit losses. If there is no objective evidence of impairment for an individual loan, whether significant or not, the loan is included in a group of assets with similar credit risk characteristics and collectively assessed for impair- ment for losses incurred but not identified. In calculating the probable range of allowance for incurred but not identified credit losses, the Bank employs internally developed models that utilize parameters for probability of default, loss given default and exposure at default. Management’s judgment is used to determine the point within the range that is the best estimate of losses, based on an assessment of business and economic conditions, historical loss experience, 130 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSloan portfolio composition, and other relevant indicators that are not fully incorporated into the model calculation. Changes in these assumptions would have a direct impact on the provision for incurred but not identified credit losses and may result in a change in the related allowance for credit losses. FAIR VALUE MEASUREMENT The fair value of financial instruments traded in active markets at the balance sheet date is based on their quoted market prices. For all other financial instruments not traded in an active market, fair value may be based on other observable current market transactions involving the same or similar instrument, without modification or repackaging, or is based on a valuation technique which maximizes the use of observable market inputs. Observable market inputs may include inter- est rate yield curves, foreign exchange rates, and option volatilities. Valuation techniques include comparisons with similar instruments where observable market prices exist, discounted cash flow analysis, option pricing models, and other valuation techniques commonly used by market participants. For certain complex or illiquid financial instruments, fair value is determined using valuation techniques in which current market trans- actions or observable market inputs are not available. Determining which valuation technique to apply requires judgment. The valuation techniques themselves also involve some level of estimation and judg- ment. The judgments include liquidity considerations and model inputs such as volatilities, correlations, spreads, discount rates, pre-payment rates, and prices of underlying instruments. Any imprecision in these estimates can affect the resulting fair value. The inherent nature of private equity investing is that the Bank’s valuation will change over time as the underlying investment matures and an exit strategy is developed and realized. Estimates of fair value may also fluctuate due to developments in the business underlying the investment. Such fluctuations may be significant depending on the nature of the factors going into the valuation methodology and the extent of change in those factors. For certain types of equity instruments fair value is assumed to approximate carrying value where the range of reasonable valuation techniques is significant and the probabilities of such valuation tech- niques cannot be reasonably assessed. In such instances fair value may not be reliably measured due to the equity instruments unique charac- teristics, including trading restrictions or that quoted market prices for similar securities are not available. Judgment is also used in recording fair value adjustments to model valuations to account for measurement uncertainty when valuing complex and less actively traded financial instruments. If the market for a complex financial instrument develops, the pricing for this instrument may become more transparent, resulting in refinement of valuation models. An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 5. DERECOGNITION Certain assets transferred may qualify for derecognition from the Bank’s Consolidated Balance Sheet. To qualify for derecognition certain key determinations must be made. A decision must be made as to whether the rights to receive cash flows from the financial assets has been retained or transferred and the extent to which the risks and rewards of ownership of the financial asset has been retained or trans- ferred. If the Bank neither transfers nor retains substantially all of the risks and rewards of ownership of the financial asset, a decision must be made as to whether the Bank has retained control of the financial asset. Upon derecognition, the Bank will record a gain or loss on sale of those assets which is calculated as the difference between the carry- ing amount of the asset transferred and the sum of any cash proceeds received, including any financial asset received or financial liability assumed, and any cumulative gain or loss allocated to the transferred asset that had been recognized in other comprehensive income. In determining the fair value of any financial asset received, the Bank estimates future cash flows by relying on estimates of the amount of interest that will be collected on the securitized assets, the yield to be paid to investors, the portion of the securitized assets that will be prepaid before their scheduled maturity, expected credit losses, the cost of servicing the assets and the rate at which to discount these expected future cash flows. Actual cash flows may differ significantly from those estimated by the Bank. Retained interests are classified as trading securities and are initially recognized at relative fair value on the Bank’s Consolidated Balance Sheet. Subsequently, the fair value of retained interests recognized by the Bank is determined by estimating the present value of future expected cash flows using management’s best estimates of key assumptions including credit losses, prepayment rates, forward yield curves and discount rates, that are commensurate with the risks involved. Differences between the actual cash flows and the Bank’s estimate of future cash flows are recognized in income. These assumptions are subject to periodic review and may change due to significant changes in the economic environment. GOODWILL AND OTHER INTANGIBLES The fair value of the Bank’s CGUs is determined from internally devel- oped valuation models that consider various factors and assumptions such as forecasted earnings, growth rates, price earnings multiples, discount rates and terminal multiples. Management is required to use judgment in estimating the fair value of CGUs and the use of different assumptions and estimates in the fair value calculations could influence the determination of the existence of impairment and the valuation of goodwill. Management believes that the assumptions and estimates used are reasonable and supportable. Where possible, fair values generated internally are compared to relevant market information. The carrying amounts of the Bank’s CGUs are determined by management using risk based capital models to adjust net assets and liabilities by CGU. These models consider various factors including market risk, credit risk and operational risk, including investment capital (comprised of goodwill and other intangibles). Any unallocated capital not directly attributable to the CGUs is held within the Corporate segment. The Bank’s capital oversight committees provide oversight to the Bank’s capital allocation methodologies. EMPLOYEE BENEFITS The projected benefit obligation and expense related to the Bank’s pension and non-pension post-retirement benefit plans are determined using multiple assumptions that may significantly influence the value of these amounts. Actuarial assumptions including expected long-term return on plan assets, compensation increases, health care cost trend rate, mortality rate, and discount rate are management’s best esti- mates and are reviewed annually with the Bank’s actuaries. The Bank develops each assumption using relevant historical experience of the Bank in conjunction with market-related data and considers if the market-related data indicates there is any prolonged or significant impact on the assumptions. The discount rate used to measure plan obligations is based on long-term high quality corporate bond yields as at October 31. The expected long-term return on plan assets is based on historical returns and future expectations for returns for each asset class, as well as the target asset allocation of the fund. The other assumptions are also long-term estimates. All assumptions are subject to a degree of uncertainty. Differences between actual experiences and the assumptions, as well as changes in the assumptions resulting from changes in future expectations, result in increases or decreases in the pension and non-pension post-retirement benefit plan obligations and expenses in future years. 131 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSINCOME TAXES The Bank is subject to taxation in numerous jurisdictions. There are many transactions and calculations in the ordinary course of business for which the ultimate tax determination is uncertain. The Bank main- tains provisions for uncertain tax positions that it believes appropriately reflect the risk of tax positions under discussion, audit, dispute, or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions are made using the Bank’s best estimate of the amount expected to be paid based on an assessment of all relevant factors, which are reviewed at the end of each reporting period. However, it is possible that at some future date, an additional liability could result from audits by the relevant taxing authorities. Deferred tax assets are recognized only when it is probable that sufficient taxable profit will be available in future periods against which deductible temporary differences may be utilized. The amount of the deferred tax asset recognized and considered realizable could, however, be reduced if projected income is not achieved due to various factors, such as unfavourable business conditions. If projected income is not expected to be achieved, the Bank would decrease its deferred tax assets to the amount that it believes can be realized. The magni- tude of the decrease is significantly influenced by the Bank’s forecast of future profit generation, which determines the extent to which it will be able to utilize the deferred tax assets. PROVISIONS Provisions arise when there is some uncertainty in the timing or amount of a loss in the future. Provisions are based on the Bank’s best estimate of all expenditures required to settle its present obligations, considering all relevant risks and uncertainties, as well as, when material, the effect of the time value of money. Many of the Bank’s provisions relate to various legal actions that the Bank is involved in during the ordinary course of business. Legal provi- sions require the involvement of both the Bank’s management and legal counsel when assessing the probability of a loss and estimating any monetary impact. Throughout the life of a provision, the Bank’s management or legal counsel may learn of additional information that may impact its assessments about the probability of loss or about the estimates of amounts involved. Changes in these assessments may lead to changes in the amount recorded for provisions. In addition, the actual costs of resolving these claims may be substantially higher or lower than the amounts recognized. The Bank reviews its legal provi- sions on a case-by-case basis after considering, among other factors, the progress of each case, the Bank’s experience, the experience of others in similar cases, and the opinions and views of legal counsel. Certain of the Bank’s provisions relate to restructuring initiatives initiated by the Bank to reduce costs in a sustainable manner and achieve greater operational efficiencies. Restructuring provisions require management’s best estimate, including forecasts of economic conditions. Throughout the life of a provision, the Bank may become aware of additional information that may impact the assessment of amounts to be incurred. Changes in these assessments may lead to changes in the amount recorded for provisions. INSURANCE The assumptions used in establishing the Bank’s insurance claims and policy benefit liabilities are based on best estimates of possible outcomes. For property and casualty insurance, the ultimate cost of claims liabil- ities is estimated using a range of standard actuarial claims projection techniques in accordance with Canadian accepted actuarial practices. The main assumption underlying these techniques is that a company’s past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios. Additional quali- tative judgment is used to assess the extent to which past trends may or may not apply in the future, in order to arrive at the estimated ultimate claims cost that present the most likely outcome. For life and health insurance, actuarial liabilities consider all future policy cash flows, including premiums, claims, and expenses required to administer the policies. The Bank’s mortality assumptions have been derived from a combi- nation of its own experience and industry experience. Policyholders may allow their policies to lapse by choosing not to continue to pay premiums. The Bank bases its estimates of future lapse rates on previous experience when available, or industry experience. Estimates of future policy administration expenses are based on the Bank’s previous and expected future experience. CONSOLIDATION OF SPECIAL PURPOSE ENTITIES Management judgment is required when assessing whether the Bank should consolidate an entity, particularly complex entities. For instance, given that SPEs may not be controlled directly through holding the majority of voting rights, management judgment is required to assess whether all the relevant facts and circumstances, when considered together, would indicate that the Bank controls such an SPE, including an analysis of the Bank’s exposure to the risks and rewards of the SPE. These judgments are discussed further in Note 2. N O T E 4 CURRENT AND FUTURE CHANGES IN ACCOUNTING POLICIES CURRENT CHANGE IN ACCOUNTING POLICY The following amendment has been adopted by the Bank. Presentation of Other Comprehensive Income Effective November 1, 2012, the Bank adopted the amendments to IAS 1, Presentation of Financial Statements (IAS 1), issued in June 2011, which require entities to group items presented in other comprehensive income on the basis of whether they might be reclas- sified to the Consolidated Statement of Income in subsequent periods and items that will not be reclassified to the Consolidated Statement of Income. The amendments did not address which items are presented in other comprehensive income and did not change the option to present items net of tax. The amendments to IAS 1 were applied retrospectively and did not have a material impact on the financial position, cash flows or earnings of the Bank. FUTURE CHANGES IN ACCOUNTING POLICIES The following standards have been issued, but are not yet effective on the date of issuance of the Bank’s Consolidated Financial Statements. The Bank is currently assessing the impact of the application of these standards on the Consolidated Financial Statements and will adopt these standards when they become effective. Consolidation The following new and amended guidance relates to consolidated financial statements: • IFRS 10, Consolidated Financial Statements (IFRS 10), which replaces IAS 27, Consolidated and Separate Financial Statements (IAS 27), and SIC-12, Consolidation – Special-Purpose Entities (SIC-12); • IFRS 11, Joint Arrangements (IFRS 11); • IFRS 12, Disclosure of Interests in Other Entities (IFRS 12); 132 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS• IFRS 10, 11, 12 (amendments), Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance; • IFRS 10, 11, 12 (amendments), Investment Entities; and • IAS 27 (Revised 2011), Separate Financial Statements (IAS 27R), which has been amended for conforming changes on the basis of the issuance of IFRS 10 and IFRS 11. The standards and amendments will result in a revised definition of control that applies to all entities. Each of the above standards is effective for annual periods beginning on or after January 1, 2013, which will be November 1, 2013 for the Bank, and is to be applied retrospectively, allowing for certain practical exceptions and transition relief. The adoption of the above standards will require the Bank to re-assess its consolidation analyses for all of its investees, including but not limited to, its subsidiaries, associates, joint ventures, special purpose entities (SPEs) and its involvement with other third party entities. Additional detail on the implementation of these standards is noted below. Consolidated Financial Statements The Bank’s adoption of IFRS 10 will result in the deconsolidation of TD Capital Trust IV (Trust IV) which was previously consolidated by the Bank. Upon deconsolidation of Trust IV, the TD Capital Trust IV Notes (TD CaTS IV Notes) issued by Trust IV will be removed from the Bank’s Consolidated Balance Sheet. This will result in a decrease to Liability for capital trust securities of $1.75 billion which will be replaced with an equivalent amount of deposit note liabilities issued by the Bank to Trust IV, resulting in an increase to deposit note liabilities of $1.75 billion. The impact to the Bank’s opening equity will be a decrease of approximately $11 million due to the interest rate differential between the TD CaTS IV Notes and the deposit notes. Other than the deconsoli- dation of Trust IV, IFRS 10 is not expected to have a material impact on the financial position, cash flows, or earnings of the Bank. Joint Arrangements IFRS 11 replaces guidance previously provided in IAS 31 Interests in Joint Ventures (IAS 31) and SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers. The new standard outlines the principles relating to the accounting for joint arrangements which are arrangements where two or more parties have joint control. It also requires use of the equity method of accounting when accounting for joint ventures as compared to proportionate consolidation which is the current accounting policy choice adopted by the Bank under IAS 31. The adoption of IFRS 11 is not expected to have a material impact on the financial position, cash flows or earnings of the Bank. Disclosure of Interests in Other Entities IFRS 12 requires enhanced disclosures about both consolidated entities and unconsolidated entities in which an entity has involvement. The objective of IFRS 12 is to present information so that financial state- ment users may evaluate the basis of control, any restrictions on consolidated assets and liabilities; risk exposures arising from involve- ment with unconsolidated structured entities; non-controlling interest holders’ involvement in the activities of consolidated entities; and the Bank’s exposure to associates and joint ventures. The adoption of IFRS 12 is not expected to have a material impact on the consolidated financial statements of the Bank; however the standard will result in additional disclosures. Fair Value Measurement IFRS 13, Fair Value Measurement (IFRS 13), provides a single frame- work for fair value measurement and applies when other IFRS’s require or permit fair measurements or disclosures. The standard provides guidance on measuring fair value using the assumptions that market participants would use when pricing the asset or liability under current market conditions. IFRS 13 is effective for annual periods beginning on or after January 1, 2013, which will be November 1, 2013 for the Bank, and is to be applied prospectively. This new standard is not expected to have a material impact on the financial position, cash flows or earnings of the Bank; however the standard will result in additional fair value disclosures. Employee Benefits The amendments to IAS 19, Employee Benefits, issued in June 2011, eliminate the corridor approach for actuarial gains and losses, requir- ing the Bank to recognize immediately all actuarial gains and losses in other comprehensive income. Net interest expense or income is calcu- lated by applying the discount rate to the net defined benefit asset or liability, and will be recorded in the Consolidated Statement of Income, along with present and past service costs for the period. Plan amend- ment costs will be recognized in the period of a plan amendment, irrespective of its vested status. Furthermore, a termination benefit obligation will be recognized when the Bank can no longer withdraw the offer of the termination benefit, or when it recognizes related restructuring costs. The amendments to IAS 19 are effective for annual periods begin- ning on or after January 1, 2013, which will be November 1, 2013 for the Bank, and are to be applied retrospectively. On November 1, 2011, the transition date, the amendments are expected to result in a decrease in retained earnings of approximately $136 million, resulting from the recognition of actuarial losses. Once the Bank adopts the amendments to IAS 19, the following approximate impacts are expected: (millions of Canadian dollars) Increase (decrease) in deferred tax assets Increase (decrease) in defined benefit asset Increase (decrease) in deferred tax liabilities Increase (decrease) in defined benefit liability Increase (decrease) in retained earnings1 Increase (decrease) in accumulated other comprehensive income (loss)2 As at October 31 October 31 2012 2013 $ 212 (450) – 346 (578) $ 372 (425) – 842 (895) (6) – For the years ended October 31 October 31 2012 2013 Increase (decrease) in net income after tax $ (22) $ (11) 1 As at October 31, 2013, retained earnings includes the following: (a) $(136) million (October 31, 2012 – $(136) million) adjustment on transition as at November 1, 2011; (b) $(409) million (October 31, 2012 – $(748) million) of unrecognized actuarial gains (losses) which were elected to be reclassified from accumulated other comprehensive income; (c) $(22) million (October 31, 2012 – $(11) million) adjustment relating to net income after tax. 2 Includes cumulative translation adjustments. Presentation and Disclosures – Offsetting Financial Assets and Financial Liabilities In December 2011, the IASB issued the following amendments related to the offsetting of financial instruments: • IFRS 7, Financial Instruments: Disclosures (IFRS 7), which provides common disclosure requirements intended to help investors and other users to better assess the effect or potential effect of offsetting arrangements on a company’s financial position; and • IAS 32, Financial Instruments: Presentation (IAS 32), which clarifies the existing requirements for offsetting financial assets and financial liabilities. 133 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS The IFRS 7 amendments are effective for annual periods beginning on or after January 1, 2013, which will be November 1, 2013 for the Bank. The IAS 32 amendments are effective for annual periods begin- ning on or after January 1, 2014, which will be November 1, 2014 for the Bank. Both amendments are to be applied retrospectively. The IFRS 7 amendments are not expected to have a material impact on the consolidated financial statements of the Bank; however the standard will result in additional disclosures. The IAS 32 amendments are not expected to have a material impact on the financial position, cash flows or earnings of the Bank. Levies In May 2013, the IFRS Interpretations Committee (IFRIC), with the approval by the IASB, issued IFRIC 21, Levies (IFRIC 21). IFRIC 21 provides guidance on when to recognize a liability to pay a levy imposed by government that is accounted for in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 is effective for annual periods beginning on or after January 1, 2014, which will be November 1, 2014 for the Bank, and is to be applied retrospectively. The Bank is currently assessing the impact of adopting this interpretation. N O T E 5 FAIR VALUE OF FINANCIAL INSTRUMENTS Certain financial instruments are carried on the balance sheet at their fair value. These financial instruments include trading loans and securi- ties, assets and liabilities designated at fair value through profit or loss, instruments classified as available-for-sale, derivatives, certain securities purchased under reverse repurchase agreements, certain deposits classified as trading, securitization liabilities at fair value, obligations related to securities sold short, and certain obligations related to secu- rities sold under repurchase agreements. All other financial assets are carried at amortized cost and the fair value is disclosed below. METHODS AND ASSUMPTIONS The Bank calculates fair values based on the following methods of valuation and assumptions: Government and Government-Related Securities The fair value of Canadian government debt securities is primarily based on quoted prices in active markets, where available. Where quoted prices are not available, valuation techniques such as discounted cash flow models may be used, which maximize the use of observable inputs such as government yield curves. The fair value of U.S. federal and state government, as well as agency debt securities, is determined by reference to recent transac- tion prices, broker quotes, or third-party vendor prices. Brokers or third-party vendors may use a pool-specific valuation model to value these securities. Observable market inputs to the model include To Be Announced (TBA) market prices, the applicable indices, and metrics such as the coupon, maturity, and weighted average maturity of the pool. Market inputs used in the valuation model include, but are not limited to, indexed yield curves and trading spreads. Financial Instruments IFRS 9, Financial Instruments (IFRS 9), reflects the IASB’s work on the replacement of IAS 39, Financial Instruments: Recognition and Measurement (IAS 39) and will be completed and implemented in three separate phases: 1) Classification and measurement of financial assets and liabilities; 2) Impairment methodology; and 3) Hedge accounting. General hedge accounting requirements will be added as part of phase 3 of the IFRS 9 project, while accounting for macro hedging has been decoupled from IFRS 9 and will now be considered and issued as a separate standard. The IASB decided in November 2013 to delay the mandatory effective date of IFRS 9 and to leave open the mandatory effective date pending the finalization of the impairment requirements. The Bank is currently monitoring the impact of adopting IFRS 9, as well as any potential future amendments thereto, including the proposed accounting for macro hedging. Novation of Derivatives and Continuation of Hedge Accounting In June 2013, the IASB issued amendments to IAS 39, Financial Instruments: Recognition and Measurement which provides relief from discontinuing hedge accounting when novation of a derivative designated as a hedge accounting instrument meets certain criteria. The IAS 39 amendments are effective for annual periods beginning on or after January 1, 2014, which will be November 1, 2014 for the Bank, and is to be applied retrospectively. The IAS 39 amendments are not expected to have a material impact on the financial position, cash flows or earnings of the Bank. The fair value of residential mortgage-backed securities is primarily determined using valuation techniques, such as the use of option- adjusted spread (OAS) models which include inputs such as prepay- ment rate assumptions related to the underlying collateral. Observable inputs include, but are not limited to, indexed yield curves, and bid-ask spreads. Other inputs may include volatility assumptions derived using Monte Carlo simulations and take into account factors such as coun- terparty credit quality, liquidity, and concentration. Other Debt Securities The fair value of corporate and other debt securities, including debt securities reclassified from trading, is primarily based on broker quotes, third-party vendor prices, or other valuation techniques, such as discounted cash flow techniques. Market inputs used in the valuation techniques or underlying third-party vendor prices or broker quotes include benchmark and government yield curves, credit spreads, and trade execution data. Asset-backed securities are primarily fair valued using third-party vendor prices. The third-party vendor employs a valuation model which maximizes the use of observable inputs such as benchmark yield curves and bid-ask spreads. The model also takes into account relevant data about the underlying collateral, such as weighted average terms to maturity and prepayment rate assumptions. Equity Securities The fair value of equity securities is based on quoted prices in active markets, where available. Where quoted prices in active markets are not readily available, such as for private equity securities, or there is a wide bid-offer spread, fair value is determined based on quoted market prices for similar securities or through valuation techniques, including discounted cash flow analysis, and multiples of earnings before taxes, depreciation, and amortization, and other relevant valuation techniques. 134 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSIf there are trading restrictions on the equity security held, a valua- A credit risk valuation adjustment (CRVA) is recognized against the tion adjustment is recognized against available prices to reflect the nature of the restriction. However, restrictions that are not part of the security held and represent a separate contractual arrangement that has been entered into by the Bank and a third party should not impact the fair value of the original instrument. Retained Interests The methods and assumptions used to determine fair value of retained interests are described in Note 3. Loans The estimated fair value of loans carried at amortized cost, other than debt securities classified as loans, reflects changes in market price that have occurred since the loans were originated or purchased. For fixed-rate performing loans, estimated fair value is determined by discounting the expected future cash flows related to these loans at current market interest rates for loans with similar credit risks. For floating rate performing loans, changes in interest rates have minimal impact on fair value since loans reprice to market frequently. On that basis, fair value is assumed to approximate carrying value. The fair value of loans is not adjusted for the value of any credit protection the Bank has purchased to mitigate credit risk. At initial recognition, debt securities classified as loans do not include securities with quoted prices in active markets. When quoted market prices are not readily available, fair value is based on quoted market prices of similar securities, other third-party evidence or by using a valuation technique that maximizes the use of observable market inputs. If quoted prices in active markets subsequently become available, these are used to determine fair value for debt securities classified as loans. The fair value of loans carried at fair value through profit or loss, which includes trading loans and loans designated at fair value through profit or loss, is determined using observable market prices, where available. Where the Bank is a market maker for loans traded in the secondary market, fair value is determined using executed prices, or prices for comparable trades. For those loans where the Bank is not a market maker, the Bank obtains broker quotes from other reputable dealers, and corroborates this information using valuation techniques or obtaining consensus or composite prices from pricing services. Commodities The fair value of physical commodities is based on quoted prices in active markets, where available. The Bank also transacts in commodity derivative contracts which can be traded on an exchange or in OTC markets. The fair value determination of derivative financial instru- ments is described below. Derivative Financial Instruments The fair value of exchange-traded derivative financial instruments is based on quoted market prices. The fair value of OTC derivative financial instruments is estimated using well established valuation techniques, such as discounted cash flow techniques, the Black-Scholes model, and Monte Carlo simulation. The valuation models incorporate prevailing market rates and prices of underlying instruments with similar maturities and characteristics. Prices derived by using models are recognized net of valuation adjustments. The inputs used in the valuation models depend on the type of derivative and the nature of the underlying instrument and are specific to the instrument being valued. Inputs can include, but are not limited to, interest rate yield curves, foreign exchange rates, dividend yield projections, commodity spot and forward prices, recovery rates, volatilities, spot prices, and correlation. model value of OTC derivatives to account for the uncertainty that either counterparty in a derivative transaction may not be able to fulfill its obligations under the transaction. In determining CRVA, the Bank takes into account master netting agreements and collateral, and considers the creditworthiness of the counterparty and the Bank itself, in assessing potential future amounts owed to, or by the Bank. In the case of defaulted counterparties, a specific provision is estab- lished to recognize the estimated realizable value, net of collateral held, based on market pricing in effect at the time the default is recog- nized. In these instances, the estimated realizable value is measured by discounting the expected future cash flows at an appropriate effective interest rate immediately prior to impairment, after adjusting for the value of collateral. The fair value of non-trading derivatives is deter- mined on the same basis as for trading derivatives. Deposits The estimated fair value of term deposits is determined by discounting the contractual cash flows using interest rates currently offered for deposits with similar terms. For deposits with no defined maturities, the Bank considers fair value to equal carrying value, which is equivalent to the amount payable on the balance sheet date. For trading deposits, fair value is determined using discounted cash flow valuation techniques which maximize the use of observable market inputs such as benchmark yield curves and foreign exchange rates. The Bank considers the impact of its own creditworthiness in the valuation of these deposits by reference to observable market inputs. Securitization Liabilities The fair value of securitization liabilities is based on quoted market prices or quoted market prices for similar financial instruments, where available. Where quoted prices are not available, fair value is determined using valuation techniques, which maximize the use of observable inputs, such as Canada Mortgage Bond prices. Obligations Related to Securities Sold Short The fair value of these obligations is based on the fair value of the underlying securities, which can include equity or debt securities. As these obligations are fully collateralized, the method used to determine fair value would be the same as that of the relevant underlying equity or debt securities. Securities Purchased Under Reverse Repurchase Agreements and Obligations Related to Securities Sold under Repurchase Agreements Commodities purchased or sold with an agreement to sell or repurchase them at a later date at a fixed price are carried at fair value on the Consolidated Balance Sheet. The fair value of these agreements is based on valuation techniques such as discounted cash flow models which maximize the use of observable market inputs such as interest rate swap curves and commodity forward prices. Subordinated Notes and Debentures The fair value of subordinated notes and debentures are based on quoted market prices for similar issues or current rates offered to the Bank for debt of equivalent credit quality and remaining maturity. Liabilities for Preferred Shares and Capital Trust Securities The fair value for preferred share liabilities and capital trust securities are based on quoted market prices of the same or similar financial instruments. Carrying Value and Fair Value of Financial Instruments The fair values in the following table exclude the value of assets that are not financial instruments, such as land, buildings and equipment, as well as goodwill and other intangible assets, including customer relationships, which are of significant value to the Bank. 135 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSFinancial Assets and Liabilities (millions of Canadian dollars) FINANCIAL ASSETS Cash and due from banks Interest-bearing deposits with banks Trading loans, securities, and other Government and government-related securities Other debt securities Equity securities Trading loans Commodities Retained interests Total trading loans, securities, and other Derivatives Financial assets designated at fair value through profit or loss Available-for-sale securities Government and government-related securities Other debt securities Equity securities1 Debt securities reclassified from trading Total available-for-sale securities Held-to-maturity securities2 Government and government-related securities Other debt securities Total held-to-maturity securities Securities purchased under reverse repurchase agreements Loans Customers’ liability under acceptances Other assets FINANCIAL LIABILITIES Trading deposits Derivatives Securitization liabilities at fair value Other financial liabilities designated at fair value through profit or loss Deposits Acceptances Obligations related to securities sold short Obligations related to securities sold under repurchase agreements Securitization liabilities at amortized cost Other liabilities Subordinated notes and debentures Liability for preferred shares and capital trust securities October 31, 2013 October 31, 2012 Carrying value Fair value Carrying value Fair value As at $ 3,581 28,855 $ 3,581 28,855 $ 3,436 21,692 $ 3,436 21,692 $ 32,861 9,616 45,751 10,219 3,414 67 $ 101,928 49,461 6,532 $ 32,861 9,616 45,751 10,219 3,414 67 $ 101,928 49,461 6,532 $ 37,897 38,936 1,803 905 $ 79,541 $ 37,897 38,936 1,803 905 $ 79,541 $ 25,890 4,071 $ 29,961 $ 64,283 444,922 6,399 12,680 $ 25,875 4,075 $ 29,950 $ 64,283 445,935 6,399 12,680 $ 47,593 49,471 21,960 12 543,476 6,399 41,829 34,414 25,592 21,727 7,982 1,767 $ 47,593 49,471 21,960 12 544,951 6,399 41,829 34,414 25,864 21,727 8,678 2,277 $ 34,563 7,887 37,691 8,271 6,034 85 $ 94,531 60,919 6,173 $ 61,365 33,864 2,083 1,264 $ 98,576 $ – – $ – $ 69,198 408,848 7,223 10,320 $ 38,774 64,997 25,324 17 487,754 7,223 33,435 38,816 26,190 18,489 11,318 2,250 $ 34,563 7,887 37,691 8,271 6,034 85 $ 94,531 60,919 6,173 $ 61,365 33,864 2,083 1,264 $ 98,576 $ – – $ – $ 69,198 412,409 7,223 10,320 $ 38,774 64,997 25,324 17 490,071 7,223 33,435 38,816 26,581 18,489 12,265 2,874 1 As at October 31, 2013, the carrying values of certain available-for-sale equity securities of $6 million (October 31, 2012 – $5 million) are assumed to approximate fair value in the absence of quoted market prices in an active market. 2 Includes debt securities reclassified from available-for-sale to held-to-maturity. Refer to Note 6, Securities for carrying value and fair value of the reclassified debt securities. Fair Value Hierarchy IFRS requires disclosure of a three-level hierarchy for fair value measurements based upon transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: Level 1: Fair value is based on quoted market prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain Canadian and U.S. Treasury bills and other Canadian and U.S. Government and agency mortgage-backed securities, and certain securitization liabili- ties, that are highly liquid and are actively traded in OTC markets. Level 2: Fair value is based on observable inputs other than Level 1 prices, such as quoted market prices for similar (but not identical) assets or liabilities in active markets, quoted market prices for identical assets or liabilities in markets that are not active, and other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using valuation techniques with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes Canadian and U.S. Government securities, Canadian and U.S. agency mortgage-backed debt securities, corporate debt securities, certain derivative contracts, certain securitization liabilities, and certain trading deposits. Level 3: Fair value is based on non-observable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Financial instruments classified within Level 3 of the fair value hierarchy are initially fair valued at their transaction price, which is considered the best estimate of fair value. After initial measurement, the fair value of Level 3 assets and liabilities is determined using valuation models, discounted cash flow methodol- ogies, or similar techniques. This category generally includes retained interests in certain loan securitizations and certain derivative contracts. The following table presents the levels within the fair value hierarchy for each of the financial assets and liabilities measured at fair value as at October 31, 2013 and October 31, 2012. 136 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Fair Value Hierarchy for Financial Assets and Liabilities Measured at Fair Value (millions of Canadian dollars) October 31, 2013 As at October 31, 2012 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total FINANCIAL ASSETS Trading loans, securities, and other Government and government-related securities Canadian government debt Federal Provinces U.S. federal, state, municipal governments, and agencies debt Other OECD government guaranteed debt Mortgage-backed securities Other debt securities Canadian issuers Other issuers Equity securities Common shares Preferred shares Trading loans Commodities Retained interests Derivatives Interest rate contracts Foreign exchange contracts Credit contracts Equity contracts Commodity contracts Financial assets designated at fair value through profit or loss Securities Loans Available-for-sale securities Government and government-related securities Canadian government debt Federal Provinces U.S. federal, state, municipal governments, and agencies debt Other OECD government guaranteed debt Mortgage-backed securities Other debt securities Asset-backed securities Non-agency collateralized mortgage obligation portfolio Corporate and other debt Equity securities Common shares1,2 Preferred shares Debt securities reclassified from trading Securities purchased under reverse repurchase agreements FINANCIAL LIABILITIES Trading deposits Derivatives Interest rate contracts Foreign exchange contracts Credit contracts Equity contracts Commodity contracts Securitization liabilities at fair value Other financial liabilities designated at fair value through profit or loss Obligations related to securities sold short Obligations related to securities sold under repurchase agreements $ 304 $ 12,908 4,518 1 $ – $ 13,212 $ 3,556 $ 11,649 3,731 – 4,519 – $ – $ 15,205 3,731 – 105 – – 11,250 2,685 1,090 – 11,355 2,685 – 1,090 – 1,932 – – 8,889 3,510 1,296 – – – 10,821 3,510 1,296 – – 2,931 6,596 5 84 2,936 6,680 – – 2,223 5,590 17 57 2,240 5,647 38,020 64 – 3,414 – 7,652 – 10,219 – – $ 41,908 $ 59,849 15 45,687 – 64 – 10,219 3,414 – 67 67 5,850 – 8,271 – – $ 171 $ 101,928 $ 43,286 $ 51,009 31,740 24 – 6,034 – 77 – – – 85 37,667 24 8,271 6,034 85 $ 236 $ 94,531 $ $ $ $ $ $ $ $ $ $ $ 168 – – 60 1 $ 25,690 14,106 60 8,131 263 229 $ 48,250 $ – $ 25,691 $ 13 14,287 63 9,089 331 3 958 8 $ 982 $ 49,461 $ 7 $ 38,605 13,116 140 37 – 7,755 – 131 379 278 $ 59,892 $ 16 12 691 23 7 $ 38,619 13,272 49 8,446 533 $ 749 $ 60,919 670 $ 5,853 – 670 $ 5,853 – – $ 9,329 2,588 – – – – – – – 15,176 7,986 2,810 29,320 963 8,634 197 30 – 222 – 677 227 $ 77,705 $ $ $ – $ 6,523 $ 9 9 $ 6,532 $ 9 603 $ 5,557 – 603 $ 5,557 – – $ 9,329 $ 6,533 $ 4,322 2,503 – 2,588 – – 15,176 7,994 8 2,810 – 125 – – 29,530 17,208 1,142 $ $ $ – $ 6,160 13 13 13 $ 6,173 – $ 10,855 2,503 – – 2 – 29,655 17,210 1,142 – 29,320 963 – 8,653 19 – – – 25,045 961 7,801 – – 57 25,045 961 7,858 1,212 136 228 206 69 1,099 $ 1,603 $ 79,535 $ 6,855 $ 89,886 1,631 166 905 197 – – 1,846 1,443 232 163 165 1,264 $ 1,830 $ 98,571 – $ 5,331 $ – $ 5,331 $ – $ 9,340 $ – $ 9,340 – $ 46,197 $ 1,396 $ 47,593 $ – $ 37,674 $ 1,100 $ 38,774 149 – – 56 1 $ 22,789 15,535 355 8,892 266 206 $ 47,837 – $ 21,960 $ 58 $ 22,848 $ 12 15,696 358 1,350 10,242 327 3 5 $ 1,428 $ 49,471 $ – $ 21,960 $ $ 8 $ 33,084 21,547 105 236 – 8,268 – 103 495 216 $ 63,630 – $ 25,324 14 11 1,011 11 $ 104 $ 33,196 21,666 247 9,279 609 $ 1,151 $ 64,997 – $ 25,324 $ $ – – $ $ 17,698 $ 24,124 $ $ 12 $ – 7 $ 41,829 $ 15,125 $ 18,289 12 $ – $ $ $ 17 $ 17 21 $ 33,435 $ – $ 5,825 $ – $ 5,825 $ – $ 10,232 $ – $ 10,232 1 As at October 31, 2013, the carrying values of certain available-for-sale equity securities of $6 million (October 31, 2012 – $5 million) are assumed to approximate fair value in the absence of quoted market prices in an active market. 2 As at October 31, 2013, common shares include the fair value of Federal Reserve Stock and Federal Home Loan Bank stock of $930 million (October 31, 2012 – $956 million) which are redeemable by the issuer at cost for which cost approximates fair value. These securities cannot be traded in the market, hence these securities have not been subject to sensitivity analysis of Level 3 financial assets and liabilities. 137 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS As at October 31, 2013, the Bank transferred $4 billion off-the run treasury securities classified as trading and $4.2 billion classified as available for sale from Level 1 to Level 2. In addition the Bank trans- ferred $2.3 billion off-the-run treasury securities sold short from level 1 to level 2. There were no significant transfers between level 1 and level 2 during the year ended October 31, 2012. The following tables reconcile changes in fair value of all assets and liabilities measured at fair value using significant Level 3 non-observable inputs for the year ended October 31, 2013 and October 31, 2012. Reconciliation of Changes in Fair Value for Level 3 Financial Assets and Liabilities (millions of Canadian dollars) Total realized and unrealized gains (losses) Movements Transfers Fair value as at Nov. 1, 2012 Included in income1 Included in OCI Purchases Issuances Other2 Into Level 3 Out of Level 3 Fair value as at Change in unrealized gains (losses) on Oct. 31, instruments still held3 2013 FINANCIAL ASSETS Trading loans, securities, and other Government and government- related securities Canadian government debt Provinces Other debt securities Canadian issuers Other issuers Equity securities Common shares Preferred shares Retained interests Financial assets designated at fair value through profit or loss Loans Available-for-sale securities Government and government- related securities Other OECD government guaranteed debt Other debt securities Corporate and other debt Equity securities Common shares Preferred shares Debt securities reclassified from trading $ – $ 17 57 – 2 2 77 – 85 $ 236 – – 6 $ 10 $ – $ 182 $ – $ (182) $ – $ – $ – $ – – – – – – – 79 339 134 88 – $ 822 $ – – (111) (369) – – 10 $ 10 (196) (88) (34) $ (980) 22 67 – – – $ 89 (4) (12) 5 84 – – – 15 – 67 $ (16) $ 171 – (2) – – (13) $ (15) $ $ 13 13 $ $ 4 4 $ $ – – $ $ – – $ $ – – $ $ (8) (8) $ $ – – $ $ – – $ $ 9 9 $ 1 $ 1 $ – $ 8 $ – $ (2) $ – $ – $ 8 $ – $ 2 $ 57 – 1 (3) – 1,443 163 27 (1) (7) (21) 111 – 165 $ 1,830 11 $ 38 7 $ (24) – $ 119 $ – – – – – (36) – (421) (5) (2) $ (466) 59 – 54 $ 113 19 (4) – – – 1,212 136 37 7 20 $ 60 (7) 228 $ (7) $ 1,603 Total realized and unrealized losses (gains) Movements Transfers Fair value as at Nov. 1, 2012 Included in income1 Included in OCI Purchases Issuances Other2 Into Level 3 Out of Level 3 Fair value as at Change in unrealized losses (gains) on Oct. 31, instruments still held3 2013 FINANCIAL LIABILITIES Trading deposits Derivatives4 Interest rate contracts Foreign exchange contracts Credit contracts Equity contracts Commodity contracts Other financial liabilities designated at fair value through profit or loss Obligations related to securities sold short $ 1,100 $ (24) $ – $ – $ 375 $ (384) $ 336 $ (7) $ 1,396 $ 46 $ 97 (2) (1) 320 (12) $ 402 $ (32) (1) 1 143 7 $ 118 $ – – – – – $ – $ – – – (125) – $ (125) $ – – – 180 – $ 180 $ (7) 3 – (125) 2 $ (127) $ – (1) – (1) – $ (2) $ $ – – – – – – $ 58 (1) – 392 (3) $ 446 $ (33) 1 2 141 (1) $ 110 $ $ 17 $ 14 $ – $ – $ 178 $ (197) $ – $ – $ 12 $ 1 21 $ – $ – $ (47) $ – $ 33 $ – $ – $ 7 $ – 1 Gains (losses) on financial assets and liabilities are recognized in Net securities gains 4 As at October 31, 2013, consists of derivative assets of $982 million (November 1, (losses), Trading income (losses), and Other income (loss) on the Consolidated Statement of Income. 2 Consists of sales and settlements. 3 Changes in unrealized gains (losses) on available-for-sale securities are recognized in accumulated other comprehensive income. 2012 – $749 million) and derivative liabilities of $1,428 million (November 1, 2012 – $1,151 million), which have been netted on this table for presentation purposes only. 138 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Reconciliation of Changes in Fair Value for Level 3 Financial Assets and Liabilities (millions of Canadian dollars) Total realized and unrealized gains (losses) Movements Transfers Fair value as at Nov. 1, 2011 Included in income1 Included in OCI Purchases Issuances Other2 Into Level 3 Out of Level 3 Change in unrealized gains (losses) on instruments still held3 Fair value as at Oct. 31, 2012 FINANCIAL ASSETS Trading loans, securities, and other Government and government- related securities Canadian government debt Federal Provinces Other debt securities Canadian issuers Other issuers Equity securities Common shares Trading loans Retained interests Financial assets designated at fair value through profit or loss Loans Available-for-sale securities Government and government- related securities Other OECD government guaranteed debt Other debt securities Corporate and other debt Equity securities Common shares Preferred shares Debt securities reclassified from trading FINANCIAL LIABILITIES Trading deposits Derivatives4 Interest rate contracts Foreign exchange contracts Credit contracts Equity contracts Commodity contracts Other financial liabilities designated at fair value through profit or loss Obligations related to securities sold short $ – 5 30 79 $ – – 4 8 – 3 52 $ 169 – – 17 $ 29 $ – – – – – – – $ – $ 1 3 29 276 89 2 28 $ 428 $ – – – – – – 9 $ 9 $ – (10) (52) (272) (12) (8) (21) $ (375) $ – 5 29 50 – 3 – $ 87 $ (1) $ (3) (23) (84) – – 17 57 – – – 77 – 85 $ (111) $ 236 $ – – 2 (4) – – 10 $ 8 $ $ 8 8 $ 14 $ 14 $ – $ – $ $ – – $ $ – – $ $ (9) (9) $ – $ – $ $ – – $ $ 13 13 $ 5 $ 5 $ – $ – $ – $ 2 $ – $ – $ – $ – $ 2 $ – 24 1 1 1,524 190 114 (21) 158 $ 1,896 12 $ 106 (33) 47 13 $ 28 14 66 1 – $ 83 $ – – – – – (2) 45 (26) 57 1 (228) (54) (9) $ (293) – – – – 1,443 163 (11) 39 22 $ 67 165 (31) (57) $ 1,830 $ 8 $ 37 Total realized and unrealized (gains) losses Movements Transfers Fair value as at Nov. 1, 2011 Included in income1 Included in OCI Purchases Issuances Other2 Into Level 3 Out of Level 3 Change in unrealized (gains) losses on instruments still held3 Fair value as at Oct. 31, 2012 $ 1,080 $ 16 $ – $ – $ 395 $ (392) $ 1 $ 81 (2) 10 343 1 $ 433 $ 10 – (14) (18) (13) $ (35) $ – – – – – $ – $ 5 – – (134) – $ (129) $ – – – 187 – $ 187 $ $ – – 3 (59) (1) (57) $ 1 – (2) 1 – $ – $ $ $ – – – 2 – 1 3 $ 1,100 $ 26 $ 97 (2) (1) 320 (12) $ 402 $ 15 – (3) (13) (11) $ (12) $ $ 27 $ (65) $ – $ – $ 188 $ (135) $ 2 $ – $ 17 $ (65) 2 $ – $ – $ (6) $ – $ 37 $ 2 $ (14) $ 21 $ 5 1 Gains (losses) on financial assets and liabilities are recognized in Net securities 4 As at October 31, 2012, consists of derivative assets of $749 million (November 1, gains (losses), Trading income (loss), and Other income (loss) on the Consolidated Statement of Income. 2 Consists of sales and settlements. 3 Changes in unrealized gains (losses) on available-for-sale securities are recognized in accumulated other comprehensive income. 2011 – $685 million) and derivative liabilities of $1,151 million (November 1, 2011 – $1,118 million), which have been netted on this table for presentation purposes only. 139 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Significant transfers into and out of Level 3 reflected in the table above, occur mainly due to the following reasons: • Transfers from Level 3 to Level 2 occur when techniques used for valuing the instrument incorporate significant observable market inputs or broker-dealer quotes which were previously not observable. • Transfers from Level 2 to Level 3 occur when an instrument’s fair value, which was previously determined using valuation techniques with significant observable market inputs, is now determined using valuation techniques with significant non-observable inputs. Due to the unobservable nature of the inputs used to value Level 3 financial instruments there may be uncertainty about the valuation of these instruments. The fair value of level 3 instruments may be drawn from a range of reasonably possible alternatives. In determining the appropriate levels for these unobservable inputs, parameters are chosen so that they are consistent with prevailing market evidence and management judgement. Sensitivity Analysis of Level 3 Financial Assets and Liabilities (millions of Canadian dollars) FINANCIAL ASSETS Trading loans, securities, and other Equity securities Common shares Preferred shares Retained interests Derivatives Interest rate contracts Foreign exchange contracts Equity contracts Available-for-sale securities Government and government related securities Other OECD government guaranteed debt Other debt securities Corporate and other debt Equity securities Common shares Preferred shares Debt securities reclassified from trading FINANCIAL LIABILITIES Trading deposits Derivatives Interest rate contracts Equity contracts Other financial liabilities designated at fair value through profit or loss Total The following table summarizes the potential effect of using reason- ably possible alternative assumptions for financial assets and financial liabilities held, as at October 31, 2013 and October 31, 2012, that are classified in Level 3 of the fair value hierarchy. For interest rate derivatives, the Bank performed a sensitivity analysis on the unobserv- able implied volatility. For credit derivatives, sensitivity was calculated on unobservable credit spreads using assumptions derived from the underlying bond position credit spreads. For equity derivatives, the sensitivity is calculated by using reasonably possible alternative assumptions by shocking dividends by 5%, correlation by 10%, or the price of the underlying equity instrument by 10% and volatility from (13)% to 33%. For trading deposits the sensitivity is calculated by varying unobservable inputs which may include volatility, credit spreads, and correlation. October 31, 2013 Impact to net assets As at October 31, 2012 Impact to net assets Decrease in fair value Increase in fair value Decrease in fair value Increase in fair value $ 1 – 5 6 – – 30 30 1 2 45 7 4 59 $ 1 – 2 3 – – 35 35 1 – 18 7 4 30 $ 4 – 7 11 2 – 36 38 – 2 97 8 4 111 $ 4 – 3 7 2 – 47 49 – 2 24 8 4 38 5 9 3 6 23 49 72 2 $ 174 17 42 59 2 $ 138 36 66 102 3 $ 268 26 50 76 3 $ 179 140 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS The best evidence of a financial instrument’s fair value at initial recog- nition is its transaction price unless the fair value of the instrument is evidenced by comparison with other observable current market transactions in the same instrument (that is, without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. Consequently, the differ- ence between the fair value using other observable current market transactions or a valuation technique and the transaction price results in an unrealized gain or loss at initial recognition. The difference between the transaction price at initial recognition and the value determined at that date using a valuation technique is not recognized in income until the non-observable inputs in the valuation technique used to value the instruments become observable. The following table summarizes the aggregate difference yet to be recognized in net income due to the difference between the transac- tion price and the amount determined using valuation techniques with non-observable market inputs at initial recognition. (millions of Canadian dollars) Balance as at beginning of year New transactions Recognized in the Consolidated Statement of Income during the year Balance as at end of year 2013 $ 48 32 (39) $ 41 2012 $ 35 34 (21) $ 48 FINANCIAL ASSETS AND LIABILITIES DESIGNATED AT FAIR VALUE Loans Designated at Fair Value through Profit or Loss Certain business and government loans held within a trading portfolio or economically hedged with derivatives are designated at fair value through profit or loss if the relevant criteria are met. The fair value of loans designated at fair value through profit or loss was $9 million as at October 31, 2013 (October 31, 2012 – $13 million), which represents their maximum credit exposure. These loans are managed within risk limits that have been approved by the Bank’s risk management group and are hedged for credit risk with credit derivatives. Securities Designated at Fair Value through Profit or Loss Certain securities that support insurance reserves within certain of the Bank’s insurance subsidiaries have been designated at fair value through profit or loss. The actuarial valuation of the insurance reserve is measured using a discount factor which is based on the yield of the supporting invested assets, with changes in the discount factor being recognized in the Consolidated Statement of Income. By designating the securities at fair value through profit or loss, the unrealized gain or loss on the securities is recognized in the Consolidated Statement of Income in the same period as a portion of the income or loss resulting from changes to the discount rate used to value the insurance liabilities. In addition, certain government and government-insured securities have been combined with derivatives to form economic hedging relationships. These securities are being held as part of the Bank’s overall interest rate risk management strategy and have been designated at fair value through profit or loss. The derivatives are carried at fair value, with the change in fair value recognized in non-interest income. Securitization Liabilities at Fair Value Securitization liabilities at fair value include securitization liabilities classified as trading and those designated at fair value through profit or loss. The fair value of a financial liability incorporates the credit risk of that financial liability. The holders of the securitization liabilities are not exposed to credit risk of the Bank and accordingly, changes in the Bank’s own credit do not impact the determination of fair value. The amount that the Bank would be contractually required to pay at maturity for all securitization liabilities designated at fair value through profit or loss was $123 million less than the carrying amount as at October 31, 2013 (October 31, 2012 – $445 million less than the carrying amount). Other Liabilities Designated at Fair Value through Profit or Loss The Bank issues certain loan commitments to customers to provide a mortgage at a fixed rate. These commitments are economically hedged with derivatives and other financial instruments where the changes in fair value are recognized in non-interest income. The desig- nation of these loan commitments at fair value through profit or loss eliminates an accounting mismatch that would otherwise arise. Due to the short term nature of these loan commitments, changes in the Bank’s own credit do not have a significant impact on the determina- tion of fair value. Income (Loss) from Changes in Fair Value of Financial Assets and Liabilities Designated at Fair Value through Profit or Loss During the year ended October 31, 2013 the income (loss) repre- senting net changes in the fair value of financial assets and liabilities designated at fair value through profit or loss was $(129) million (2012 – $(5) million). 141 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 6 SECURITIES RECLASSIFICATION OF CERTAIN DEBT SECURITIES – TRADING TO AVAILABLE-FOR-SALE During 2008, the Bank changed its trading strategy with respect to certain debt securities as a result of deterioration in markets and severe dislocation in the credit market. These debt securities were initially recorded as trading securities measured at fair value with any changes in fair value as well as any gains or losses realized on disposal recognized in Trading income. Since the Bank no longer intended to actively trade in these debt securities, the Bank reclassified these debt securities from trading to available-for-sale effective August 1, 2008. The fair value of the reclassified debt securities was $905 million as at October 31, 2013 (October 31, 2012 – $1,264 million). For the year ended October 31, 2013, net interest income of $62 million after tax (year ended October 31, 2012 – $90 million after tax) was recorded relating to the reclassified debt securities. The decrease in fair value of these securities during the year ended October 31, 2013 of $25 million after tax (October 31, 2012 – increase of $26 million after tax) was recorded in other comprehensive income. Had the Bank not reclassified these debt securities, the change in the fair value of these debt securities would have been included as part of trading income, the impact of which would have resulted in a decrease in net income for the year ended October 31, 2013 of $25 million after tax (October 31, 2012 – increase of $26 million after tax). During the year ended October 31, 2013, reclassified debt securities with a fair value of $420 million (October 31, 2012 – $789 million) were sold or matured, and $28 million after tax (October 31, 2012 – $23 million after tax) was recorded in net securities gains during the year ended October 31, 2013. RECLASSIFICATIONS OF CERTAIN SECURITIES FROM AVAILABLE-FOR-SALE TO HELD-TO-MATURITY a) On March 1, 2013, the Bank reclassified certain debt securities total- ling $11.1 billion from available-for-sale to held-to-maturity. For these debt securities, the Bank’s strategy is to earn the yield to maturity to aid in prudent capital management under Basel III. These debt secu- rities were previously recorded at fair value, with changes in fair value recognized in other comprehensive income. The reclassification is a non-cash transaction that is excluded from the Consolidated Statement of Cash Flows. The fair value and carrying value of the reclassified debt securities was $9.4 billion and $9.4 billion, respectively, as at October 31, 2013. The decrease in fair value of these securities recorded in other comprehensive income from November 1, 2012 to February 28, 2013 was $20 million after tax (year ended October 31, 2012 – increase in fair value of $106 million after tax). On the date of reclassification, these debt securities had a weighted-average effec- tive interest rate of 1.8% with expected recoverable cash flows, on an undiscounted basis, of $11.3 billion. Subsequent to the date of reclassification, the net unrealized gain recognized in other compre- hensive income is amortized to interest income over the remaining life of the reclassified debt securities using the EIRM. Had the Bank not reclassified these debt securities, the change in the fair value recognized in other comprehensive income for these debt securities would have been a decrease of $81 million for the period March 1, 2013 to October 31, 2013. After the reclassification, the debt secu- rities contributed the following amounts to net income. (millions of Canadian dollars) Net interest income1 Net income before income taxes Provision for (recovery of) income taxes Net income For the period March 1, 2013 to October 31, 2013 $ 119 119 30 $ 89 1 Includes amortization of the net unrealized gains associated with these reclassi- fied held-to-maturity securities and was included in other comprehensive income on the date of reclassification. b) On September 23, 2013, the Bank reclassified certain debt securities totalling $9.9 billion from available-for-sale to held-to-maturity. For these debt securities, the Bank’s strategy is to earn the yield to maturity to aid in prudent capital management under Basel III. These debt securities were previously recorded at fair value, with changes in fair value recognized in other comprehensive income. The reclas- sification is a non-cash transaction that is excluded from the Consol- idated Statement of Cash Flows. The fair value and carrying value of the reclassified debt securities was $10.0 billion and $9.9 billion, respectively, as at October 31, 2013. The decrease in fair value of these securities recorded in other comprehensive income from November 1, 2012 to September 22, 2013 was $158 million after tax (year ended October 31, 2012 – increase in fair value of $59 million after tax). On the date of reclas- sification, these debt securities had a weighted-average effective interest rate of 1.9% with expected recoverable cash flows, on an undiscounted basis, of $10.7 billion. Subsequent to the date of reclassification, the net unrealized gain recognized in other compre- hensive income is amortized to interest income over the remaining life of the reclassified debt securities using the EIRM. Had the Bank not reclassified these debt securities, the change in the fair value recognized in other comprehensive income for these debt securities would have been an increase of $37 million for the period Septem- ber 23, 2013 to October 31, 2013. After the reclassification, the debt securities contributed the following amounts to net income. (millions of Canadian dollars) Net interest income1 Net income before income taxes Provision for (recovery of) income taxes Net income For the period September 23, 2013 to October 31, 2013 $ 19 19 7 $ 12 1 Includes amortization of the net unrealized gains associated with these reclassi- fied held-to-maturity securities and was included in other comprehensive income on the date of reclassification. 142 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS The remaining terms to contractual maturities of the securities held by the Bank are as follows: Securities Maturity Schedule (millions of Canadian dollars) As at October 31 October 31 2012 2013 Within 1 year Over 1 year to 3 years Over 3 years to 5 years Over 5 years to 10 years Over 10 With no specific years maturity Total Total Remaining terms to maturities1 Trading securities2 Government and government-related securities Canadian government debt Federal Provinces U.S. federal, state, municipal governments, and agencies debt Other OECD government-guaranteed debt Mortgage-backed securities Residential Commercial Other debt securities Canadian issuers Other issuers Equity securities Common shares Preferred shares Retained interests Total trading securities Available-for-sale securities Government and government-related securities Canadian government debt Federal Provinces U.S. federal, state, municipal governments, and agencies debt Other OECD government-guaranteed debt Mortgage-backed securities Other debt securities Asset-backed securities Non-agency CMO Corporate and other debt Equity securities Common shares Preferred shares Debt securities reclassified from trading Total available-for-sale securities Held-to-maturity securities Government and government-related securities Canadian government debt Federal U.S. federal, state, municipal governments, and agencies debt Other OECD government guaranteed debt Other debt securities Asset-backed securities Other issuers Total held-to-maturity securities Total securities $ 4,664 $ 2,711 $ 2,072 $ 2,071 $ 1,694 $ 549 1,666 175 1,063 685 14 1,707 2,242 1,803 723 1,330 192 477 5,432 501 4,519 – $ 13,212 $ 15,205 – 3,731 11,355 10,821 – 3,510 – 2,685 239 3 10,658 709 41 9,871 62 5 4,529 12 19 4,347 – – 3,456 598 3,122 3,720 861 1,777 2,638 430 1,158 1,588 747 436 1,183 300 187 487 – – – – – – 1,022 68 1,296 – 32,861 34,563 2,936 6,680 9,616 2,240 5,647 7,887 – – – 4 45,687 37,667 24 45,751 37,691 85 $ 14,382 $ 12,523 $ 6,123 $ 5,548 $ 3,968 $ 45,751 $ 88,295 $ 80,226 – 45,687 – 64 – 45,751 – – – – 14 – – – 18 – – – 6 64 67 25 $ 5,041 $ 175 177 5,568 22 10,983 206 $ 2,979 $ 1,043 $ 540 1,769 1,933 922 5,370 1,417 2,117 371 1,866 8,750 448 5,545 122 – 7,158 60 $ 8 5,568 – – 5,636 2,588 – $ 9,329 $ 10,855 – 2,503 – 15,176 29,655 7,994 17,210 – – 1,142 2,810 – 37,897 61,365 1,813 – 2,161 3,974 3,229 – 3,819 7,048 9,038 10,464 4,776 963 – – 2,127 152 394 6,903 10,858 10,153 – 29,320 25,045 961 963 – – 7,858 8,653 – 38,936 33,864 – – – 118 1,851 232 2,083 1,264 $ 15,075 $ 12,771 $ 15,827 $ 18,187 $ 15,846 $ 1,835 $ 79,541 $ 98,576 1,637 166 1,803 905 – – – 353 – – – 171 – – – 174 166 1,803 32 – – – 57 1,637 $ 259 $ – 1,914 2,173 – $ – 7,002 7,002 – $ – $ – $ 1,334 4,093 5,427 7,447 71 7,518 3,770 – 3,770 259 $ – $ – 12,551 – 13,080 – 25,890 – – – – – 773 773 2,946 – – – – $ 32,403 $ 33,045 $ 28,828 $ 32,351 $ 23,584 $ 47,586 $ 197,797 $ 178,802 1,239 – 2,832 – – 4,071 – 29,961 1,098 – 1,098 8,616 141 1,310 1,451 6,878 – 749 749 7,751 – – – 3,770 1 Represents contractual maturities. Actual maturities may differ due to prepayment privileges in the applicable contract. 2 Includes securities designated as fair value through profit or loss. 143 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Unrealized Gains and Losses on Available-for-Sale Securities The following tables summarize the unrealized gains and losses as at October 31, 2013 and October 31, 2012. Unrealized Securities Gains (Losses) (millions of Canadian dollars) October 31, 2013 As at October 31, 2012 Costs/ Gross amortized unrealized unrealized (losses) Gross gains cost1 Costs/ Gross Fair amortized unrealized unrealized (losses) Gross gains cost1 value Fair value Available-for-sale securities Government and government-related securities Canadian government debt Federal Provinces U.S. federal, state, municipal governments, and agencies debt Other OECD government guaranteed debt Mortgage-backed securities Other debt securities Asset-backed securities Non-agency collateralized mortgage obligation portfolio Corporate and other debt Equity securities Common shares Preferred shares Debt securities reclassified from trading2 Total available-for-sale securities Held-to-maturity securities Government and government-related securities Canadian government debt Federal U.S. federal, state, municipal governments, and agencies debt Other OECD government guaranteed debt Other debt securities Asset-backed securities Other issuers Total held-to-maturity securities Total securities $ 9,301 2,569 14,971 7,978 2,791 37,610 29,252 948 8,471 38,671 1,557 152 1,709 835 $ 78,825 $ 32 21 269 23 22 367 136 15 206 357 108 15 123 86 $ 933 $ (4) $ 9,329 $ 10,818 2,485 (2) 28,821 16,856 1,134 60,114 2,588 (64) 15,176 7,994 2,810 (80) 37,897 (7) (3) (68) 29,320 963 – (24) 8,653 (92) 38,936 24,868 939 7,587 33,394 (28) (1) (29) (16) 1,749 194 1,943 1,165 $ (217) $ 79,541 $ 96,616 1,637 166 1,803 905 $ 38 18 865 360 8 1,289 222 22 294 538 117 38 155 130 $ 2,112 $ (1) $ 10,855 2,503 – 29,655 (31) 17,210 (6) 1,142 – 61,365 (38) (45) – (23) (68) 25,045 961 7,858 33,864 (15) – (15) (31) 1,851 232 2,083 1,264 $ (152) $ 98,576 $ 259 12,551 13,080 25,890 1,239 2,832 4,071 29,961 $ 108,786 $ – 44 29 73 8 9 17 90 $ 1,023 $ – $ 259 $ (82) 12,513 (6) 13,103 (88) 25,875 $ – – – – – – – – $ – $ – – – – – – – – (13) (13) 1,247 – 2,828 – 4,075 (101) 29,950 – $ (318) $ 109,491 $ 96,616 – – – $ 2,112 – – – – – – $ (152) $ 98,576 1 Includes the foreign exchange translation of amortized cost balances at the period-end spot rate. 2 Includes the fair value of corporate and other debt securities, as at October 31, 2013 of $905 million (October 31, 2012 – $1,264 million). 144 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS In the following table, unrealized losses for available-for-sale securities are categorized as “12 months or longer” if for each of the consecutive 12 months preceding October 31, 2013 and October 31, 2012, the fair value of the securities was less than the amortized cost. If not, they have been categorized as “Less than 12 months”. Unrealized Loss Positions for Available-for-Sale Securities (millions of Canadian dollars) Available-for-sale securities Government and government-related securities Canadian government debt Federal Province U.S. federal, state and municipal governments, and agencies debt Other OECD government-guaranteed debt Mortgage-backed securities Residential Other debt securities Asset-backed securities Corporate and other debt Equity securities Common shares Preferred shares Debt securities reclassified from trading Total Available-for-sale securities Government and government-related securities Canadian government debt – federal U.S. federal, state and municipal governments, and agencies debt Other OECD government-guaranteed debt Other debt securities Asset-backed securities Corporate and other debt Equity securities Common shares Preferred shares Debt securities reclassified from trading Total Net Securities Gains (Losses) (millions of Canadian dollars) Net realized gains (losses) Available-for-sale securities Impairment losses Available-for-sale securities1 Total 1 None of the write-downs for the year ended October 31, 2013, (2012 – nil) related to debt securities in the reclassified portfolio as described in “Reclassification of Certain Debt Securities – Trading to Available-for-Sale” above. As at October 31, 2013 Less than 12 months 12 months or longer Total Gross Fair unrealized losses value Gross Fair unrealized losses value Gross Fair unrealized losses value $ – – 2,978 1,332 875 5,185 $ – – 50 6 $ 1,552 325 706 602 $ 4 $ 1,552 325 2 3,684 14 1,934 1 3 59 – 3,185 – 21 875 8,370 8,465 1,363 9,828 44 11 55 648 605 1,253 24 13 37 9,113 1,968 11,081 59 115 174 – $ 15,187 14 1 15 – $ 129 22 – 22 85 $ 4,545 81 14 115 – 196 14 16 85 $ 88 $ 19,732 $ 4 2 64 7 3 80 68 24 92 28 1 29 16 $ 217 October 31, 2012 $ 4,027 2,656 2,849 9,532 $ 1 17 6 24 $ – 869 – 869 $ – $ 4,027 3,525 14 2,849 – 10,401 14 295 421 716 10 15 25 2,201 395 2,596 35 8 43 2,496 816 3,312 18 – 18 – $ 10,266 13 – 13 – $ 62 40 – 40 179 $ 3,684 58 2 – – 58 2 31 179 $ 90 $ 13,950 $ 1 31 6 38 45 23 68 15 – 15 31 $ 152 For the years ended October 31 2013 2012 2011 $ 312 $ 423 $ 416 (8) $ 304 (50) $ 373 (23) $ 393 145 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 7 LOANS, IMPAIRED LOANS AND ALLOWANCE FOR CREDIT LOSSES The following table presents the Bank’s loans, impaired loans and related allowances for credit losses. Loans, Impaired Loans and Allowance for Credit Losses (millions of Canadian dollars) Neither past due nor impaired Past due but not impaired $ 182,169 $ 2,459 5,648 112,528 1,299 20,620 112,779 1,354 $ 428,096 $ 10,760 $ 168,575 $ 2,355 5,645 111,063 922 14,230 1,530 95,893 $ 389,761 $ 10,452 Residential mortgages2,3,4 Consumer instalment and other personal5 Credit card Business and government2,3,4 Debt securities classified as loans Acquired credit-impaired loans Total Residential mortgages2,3,4 Consumer instalment and other personal5 Credit card Business and government2,3,4 Debt securities classified as loans Acquired credit-impaired loans Total Gross Loans Allowance for loan losses1 As at October 31, 2013 Individually Counter- insignificant impaired Incurred Total but not allowance for loan losses identified loans credit losses party specific Net loans Impaired Total $ 706 $ 185,334 737 118,913 269 22,188 980 115,113 $ 2,692 $ 441,548 3,744 2,485 $ 447,777 $ 679 $ 171,609 673 117,381 181 15,333 985 98,408 $ 2,518 $ 402,731 4,994 3,767 $ 411,492 $ – – – 151 $ 151 173 24 $ 348 $ – – – 168 $ 168 185 31 $ 384 $ 22 118 128 30 $ 298 – 93 $ 391 $ 27 118 83 22 $ 250 – 67 $ 317 $ 65 541 714 698 $ 2,018 98 – $ 2,116 $ 50 430 605 703 $ 1,788 155 – $ 1,943 $ 87 $ 185,247 659 118,254 842 21,346 879 114,234 $ 2,467 $ 439,081 3,473 2,368 $ 2,855 $ 444,922 271 117 October 31, 2012 $ 77 $ 171,532 548 116,833 14,645 688 97,515 893 $ 2,206 $ 400,525 4,654 3,669 $ 2,644 $ 408,848 340 98 1 Excludes allowance for off-balance sheet positions. 2 Excludes trading loans with a fair value of $10,219 million as at October 31, 2013 (October 31, 2012 – $8,271 million) and amortized cost of $9,891 million as at October 31, 2013 (October 31, 2012 – $7,918 million), and loans designated at fair value through profit or loss of $9 million as at October 31, 2013 (October 31, 2012 – $13 million). No allowance is recorded for trading loans or loans designated at fair value through profit or loss. 3 Includes insured mortgages of $129,805 million as at October 31, 2013 (October 31, 2012 – $126,951 million). 4 As at October 31, 2013, impaired loans with a balance of $497 million did not have a related allowance for loan losses (October 31, 2012 – $456 million). An allowance was not required for these loans as the balance relates to loans that are insured or loans where the realizable value of the collateral exceeded the loan amount. 5 Includes Canadian government-insured real estate personal loans of $26,725 million as at October 31, 2013 (October 31, 2012 – $30,241 million). Foreclosed assets are repossessed non-financial assets where the Bank gains title, ownership or possession of individual properties, such as real estate properties, which are managed for sale in an orderly manner with the proceeds used to reduce or repay any outstanding debt. The Bank does not generally occupy foreclosed properties for its business use. In order to determine the carrying value of foreclosed assets, the Bank predominantly relies on third-party appraisals. Foreclosed assets held for sale were $233 million as at October 31, 2013 (October 31, 2012 – $254 million) and was recorded in Other assets on the Consoli- dated Balance Sheet. The following table presents information related to the Bank’s impaired loans. Impaired Loans1 (millions of Canadian dollars) Residential mortgages Consumer instalment and other personal Credit card Business and government Total Residential mortgages Consumer instalment and other personal Credit card Business and government Total 1 Excludes acquired credit-impaired loans and debt securities classified as loans. 2 Represents contractual amount of principal owed. 146 Unpaid principal balance2 $ 759 834 269 1,179 $ 3,041 $ 722 744 181 1,639 $ 3,286 Carrying value $ 706 737 269 980 $ 2,692 $ 679 673 181 985 $ 2,518 As at October 31, 2013 Related allowance for credit losses $ 22 118 128 181 $ 449 Average gross impaired loans $ 697 709 228 968 $ 2,602 October 31, 2012 $ 27 118 83 190 $ 418 $ 722 457 157 1,092 $ 2,428 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS The change in the Bank’s allowance for credit losses for the years ended October 31, 2013 and October 31, 2012 are shown in the following tables. Allowance for Credit Losses (millions of Canadian dollars) Balance as at November 1 2012 Provision for credit losses Write-offs Recoveries Disposals Foreign exchange and other adjustments Balance as at October 31 2013 Counterparty-specific allowance Business and government Debt securities classified as loans Total counterparty-specific allowance excluding acquired credit-impaired loans Acquired credit-impaired loans1,2 Total counterparty-specific allowance Collectively assessed allowance for individually insignificant impaired loans Residential mortgages Consumer instalment and other personal Credit card Business and government Total collectively assessed allowance for individually insignificant impaired loans excluding acquired credit-impaired loans Acquired credit-impaired loans1,2 Total collectively assessed allowance for individually insignificant impaired loans Collectively assessed allowance for incurred but not identified credit losses Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Total collectively assessed allowance for incurred but not identified credit losses Allowance for credit losses Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Total allowance for credit losses excluding acquired credit-impaired loans Acquired credit-impaired loans1,2 Total allowance for credit losses Less: Allowance for off-balance sheet positions3 Allowance for loan losses $ 170 185 $ 159 13 $ (208) (11) $ 41 – $ – (22) $ (11) 8 $ 151 173 355 31 386 27 118 83 22 172 13 185 27 638 536 59 (219) (14) (233) (53) (822) (599) (87) 250 67 1,260 36 (1,561) (24) 41 5 46 20 182 106 36 344 4 317 1,296 (1,585) 348 50 452 671 824 155 2,152 77 570 754 1,016 340 2,757 98 2,855 211 $ 2,644 14 106 91 (16) (45) 150 41 744 627 202 (32) – – – – – – (53) (822) (599) (295) (11) 1,582 49 1,631 (2) $ 1,633 (1,780) (38) (1,818) – $ (1,818) – – – – – – 20 182 106 77 – 385 9 394 – $ 394 (22) – (22) (3) (11) (14) – – – – – – – – – – – (19) 1 2 2 – 5 10 15 1 7 5 25 7 324 24 348 22 118 128 30 298 93 391 65 565 767 833 98 (19) 45 2,328 – – – – (41) (41) – (41) – $ (41) 2 9 7 14 15 47 (1) 46 3 $ 43 87 683 895 1,014 271 2,950 117 3,067 212 $ 2,855 1 Includes all FDIC covered loans and other ACI loans. 2 Other adjustments are required as a result of the accounting for FDIC covered loans. For additional information, see the “FDIC Covered Loans” section in this Note. 3 The allowance for credit losses for off-balance sheet positions is recorded in Provisions on the Consolidated Balance Sheet. 147 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Allowance for Credit Losses (millions of Canadian dollars) Balance as at November 1 2011 Provision for credit losses Write-offs Recoveries Disposals Foreign exchange and other adjustments Balance as at October 31 2012 $ 188 179 $ 337 6 $ (377) – $ 46 – $ – – $ (24) – $ 170 185 Counterparty-specific allowance Business and government Debt securities classified as loans Total counterparty-specific allowance excluding acquired credit-impaired loans Acquired credit-impaired loans1,2 Total counterparty-specific allowance Collectively assessed allowance for individually insignificant impaired loans Residential mortgages Consumer instalment and other personal Credit card Business and government Total collectively assessed allowance for individually insignificant impaired loans excluding acquired credit-impaired loans Acquired credit-impaired loans1,2 Total collectively assessed allowance for individually 367 30 397 32 114 64 34 343 58 401 32 665 353 68 (377) (60) (437) (60) (794) (385) (116) 244 30 1,118 56 (1,355) (52) 46 – 46 19 134 51 36 240 1 insignificant impaired loans 274 1,174 (1,407) 241 Collectively assessed allowance for incurred but not identified credit losses Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Total collectively assessed allowance for incurred but not identified credit losses Allowance for credit losses Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Total allowance for credit losses excluding acquired credit-impaired loans Acquired credit-impaired loans1,2 Total allowance for credit losses Less: Allowance for off-balance sheet positions3 Allowance for loan losses 30 405 312 1,030 149 1,926 62 519 376 1,252 328 2,537 60 2,597 283 $ 2,314 23 48 359 (216) 6 220 55 713 712 189 12 – – – – – – (60) (794) (385) (493) – 1,681 114 1,795 (74) $ 1,869 (1,732) (112) (1,844) – $ (1,844) – – – – – – 19 134 51 82 – 286 1 287 – $ 287 – – – – – – – – – – – – – – – – – – – – – – – – – $ – (24) 3 (21) 4 (1) – – 3 32 35 (3) (1) – 10 – 355 31 386 27 118 83 22 250 67 317 50 452 671 824 155 6 2,152 1 (2) – (14) – (15) 35 20 2 $ 18 77 570 754 1,016 340 2,757 98 2,855 211 $ 2,644 1 Includes all FDIC covered loans and other ACI loans. 2 Other adjustments are required as a result of the accounting for FDIC covered loans. For additional information, see the “FDIC Covered Loans” section in this Note. 3 The allowance for credit losses for off-balance sheet positions is recorded in Provisions on the Consolidated Balance Sheet. LOANS PAST DUE BUT NOT IMPAIRED A loan is classified as past due when a borrower has failed to make a payment by the contractual due date, taking into account the grace period, if applicable. The grace period represents the additional time period beyond the contractual due date during which a borrower may make the payment without the loan being classified as past due. The grace period varies depending on the product type and the borrower. The following table summarizes loans that are contractually past due but not impaired as at October 31, 2013 and October 31, 2012. U.S. Personal and Commercial Banking may grant a grace period of up to 15 days. There were $2.0 billion as at October 31, 2013 (October 31, 2012 – $1.9 billion) of U.S. Personal and Commercial Banking loans that were past due up to 15 days that are included in the 1-30 days category in the following tables. Loans Past Due but not Impaired1 (millions of Canadian dollars) Residential mortgages Consumer instalment and other personal Credit card Business and government Total Residential mortgages Consumer instalment and other personal Credit card Business and government Total 1 Excludes all ACI loans and debt securities classified as loans. 148 1-30 days $ 1,560 4,770 956 974 $ 8,260 $ 1,370 4,752 695 1,186 $ 8,003 31-60 days $ 785 695 216 325 $ 2,021 $ 821 705 144 289 $ 1,959 As at October 31, 2013 61-89 days $ 114 183 127 55 $ 479 Total $ 2,459 5,648 1,299 1,354 $ 10,760 October 31, 2012 $ 164 188 83 55 $ 490 $ 2,355 5,645 922 1,530 $ 10,452 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Collateral As at October 31, 2013, the fair value of financial collateral held against loans that were past due but not impaired was $172 million (October 31, 2012 – $167 million). In addition, the Bank also holds non-financial collateral as security for loans. The fair value of non- financial collateral is determined at the origination date of the loan. A revaluation of non-financial collateral is performed if there has been a significant change in the terms and conditions of the loan and/or the loan is considered impaired. Management considers the nature of the collateral, seniority ranking of the debt, and loan structure in assessing the value of collateral. These estimated cash flows are reviewed at least annually, or more frequently when new information indicates a change in the timing or amount expected to be received. Gross Impaired Debt Securities Classified as Loans As at October 31, 2013, impaired loans excludes $1.2 billion (October 31, 2012 – $1.5 billion) of gross impaired debt securities classified as loans. Subsequent to any recorded impairment, interest income continues to be recognized using the EIR which was used to discount the future cash flows for the purpose of measuring the credit loss. ACQUIRED CREDIT-IMPAIRED LOANS ACI loans are comprised of commercial, retail and FDIC covered loans, from the acquisitions of South Financial, FDIC-assisted, Chrysler Finan- cial, and the acquisitions of the credit card portfolios of MBNA Canada (MBNA) and Target Corporation (Target), with outstanding unpaid principal balances of $6.3 billion, $2.1 billion, $874 million, $334 million, and $143 million, respectively, and fair values of $5.6 billion, $1.9 billion, $794 million, $136 million, and $85 million, respectively at the acquisition dates. Acquired Credit-Impaired Loans (millions of Canadian dollars) As at October 31 October 31 2012 2013 FDIC-assisted acquisitions Unpaid principal balance1 Credit related fair value adjustments2 Interest rate and other related premium/(discount) Carrying value Counterparty-specific allowance3 Allowance for individually insignificant impaired loans3 Carrying value net of related allowance – $ 836 (27) (22) 787 (5) (55) $ 1,070 (42) (26) 1,002 (5) (54) FDIC-assisted acquisitions4 727 943 South Financial Unpaid principal balance1 Credit related fair value adjustments2 Interest rate and other related premium/(discount) Carrying value Counterparty-specific allowance3 Allowance for individually insignificant impaired loans3 Carrying value net of related allowance – South Financial Other5 Unpaid principal balance1 Credit related fair value adjustments2 Interest rate and other related premium/(discount) Carrying value Allowance for individually insignificant impaired loans3 Carrying value net of related allowance – Other Total carrying value net of related allowance – 1,700 (33) (48) 1,619 (19) (38) 1,562 105 (26) – 79 – 79 2,719 (89) (111) 2,519 (26) (12) 2,481 283 (39) 2 246 (1) 245 Acquired credit-impaired loans $ 2,368 $ 3,669 1 Represents contractual amount owed net of charge-offs since acquisition of the loan. 2 Credit related fair value adjustments include incurred credit losses on acquisition and are not accreted to interest income. 3 Management concluded as part of the Bank’s assessment of the ACI loans that it was probable that higher than estimated principal credit losses would result in a decrease in expected cash flows subsequent to acquisition. As a result, counter- party-specific and individually insignificant allowances have been recognized. 4 Carrying value does not include the effect of the FDIC loss sharing agreement. 5 Includes Chrysler Financial, MBNA, and Target. FDIC COVERED LOANS As at October 31, 2013, the balance of FDIC covered loans was $787 million (October 31, 2012 – $1,002 million) and was recorded in Loans on the Consolidated Balance Sheet. As at October 31, 2013, the balance of indemnification assets was $81 million (October 31, 2012 – $90 million) and was recorded in Other assets on the Consolidated Balance Sheet. N O T E 8 TRANSFERS OF FINANCIAL ASSETS LOAN SECURITIZATIONS The Bank securitizes loans to SPEs or non-SPE third parties. Most loan securitizations do not qualify for derecognition since in certain circum- stances, the Bank continues to be exposed to substantially all of the prepayment, interest rate, and/or credit risk associated with the securi- tized financial assets and has not transferred substantially all of the risk and rewards of ownership of the securitized assets. Where loans do not qualify for derecognition, the loan is not derecognized from the balance sheet, retained interests are not recognized, and a securitization liability is recognized for the cash proceeds received. Certain transaction costs incurred are also capitalized and amortized using EIRM. The Bank securitizes insured residential mortgages under the National Housing Act Mortgage-Backed Securities (NHA MBS) program sponsored by the Canada Mortgage and Housing Corporation (CMHC). The MBS that are created through the NHA MBS program are sold to the Canada Housing Trust as part of the Canada Mortgage Bond (CMB) program and to third-party investors. The securitization of these residential mortgages do not qualify for derecognition as the Bank continues to be exposed to substantially all of the risks of the residential mortgages. The Bank securitizes U.S. originated and purchased residential mort- gages with U.S. government agencies which qualify for derecognition from the Bank’s Consolidated Balance Sheet. As part of the securitiza- tion, the Bank retains the right to service the transferred mortgage loans. The MBS that are created through the securitization are typically sold to third-party investors. The Bank also securitizes personal loans and business and govern- ment loans to SPEs or non-SPEs. These securitizations may give rise to full or partial derecognition of the financial assets depending on the individual arrangement of each transaction. In addition, the Bank transfers financial assets to certain consolidated special purposes entities. See Note 9 for further details. 149 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS The following table summarizes the securitized asset types that did not qualify for derecognition, along with their associated securitization liabilities. Financial Assets Not Qualifying for Derecognition Treatment as Part of the Bank’s Securitization Programs ((millions of Canadian dollars) As at Nature of transaction Securitization of residential mortgage loans Securitization of consumer instalment and other personal loans Securitization of business and government loans Other financial assets transferred related to securitization1 Total Associated liabilities2 October 31, 2013 October 31, 2012 Fair value Carrying amount Fair value Carrying amount $ 39,227 – 21 6,911 $ 46,159 $ (47,370) $ 38,936 – 21 6,832 $ 45,789 $ (47,104) $ 44,305 361 33 4,961 $ 49,660 $ (50,666) $ 43,746 361 32 4,960 $ 49,099 $ (50,548) 1 Includes asset-backed securities, asset-backed commercial paper, cash, repurchase 2 Includes securitization liabilities carried at amortized cost of $25,144 million agreements, and Government of Canada securities used to fulfill funding requirements of the Bank’s securitization structures after the initial securitization of mortgage loans. as at October 31, 2013 (October 31, 2012 – $25,224 million) and securitization liabilities carried at fair value of $21,960 million as at October 31, 2013 (October 31, 2012 – $25,324 million). The following table summarizes the residential mortgage loans subject to continuing involvement accounting. Securitized Residential Mortgage Loans Subject to Continuing Involvement Accounting (millions of Canadian dollars) As at Original assets securitized Assets which continue to be recognized Associated liabilities October 31, 2013 October 31, 2012 Fair value $ 458 458 (453) Carrying amount $ 450 450 (448) Fair value $ 892 892 (968) Carrying amount $ 876 876 (966) Other Financial Assets Not Qualifying for Derecognition The Bank enters into certain transactions where it transfers previously recognized financial assets, such as debt and equity securities, but retains substantially all of the risks and rewards of those assets. These transferred financial assets are not derecognized and the transfers are accounted for as financing transactions. The most common transac- tions of this nature are repurchase agreements and securities lending agreements, in which the Bank retains substantially all of the associated credit, price, interest rate, and foreign exchange risks and rewards associated with the assets. The following table summarizes the carrying amount of financial assets and the associated transactions that did not qualify for derecognition, as well as their associated financial liabilities. Other Financial Assets Not Qualifying for Derecognition (millions of Canadian dollars) As at October 31, 2013 October 31, 2012 Carrying amount of assets Nature of transaction: Repurchase agreements Securities lending agreements Total Carrying amount of associated liabilities1 $ 16,658 12,827 $ 29,485 $ 16,884 13,047 $ 29,931 $ 16,775 $ 17,062 1 Associated liabilities are all related to repurchase agreements. Transferred financial assets that are derecognized in their entirety but where the Bank has a continuing involvement Continuing involvement may also arise if the Bank retains any contrac- tual rights or obligations subsequent to the transfer of financial assets. Certain business and government loans securitized by the Bank are derecognized from the Bank’s Consolidated Balance Sheet. In instances where the Bank fully derecognizes business and government loans, the Bank may be exposed to the risks of transferred loans through a retained interest. As at October 31, 2013, the fair value of retained interests was $52 million (October 31, 2012 – $53 million). There are no expected credit losses on the retained interests of the securitized business and government loans as the mortgages are all government insured. A gain or loss on sale of the loans is recognized immediately in other income after considering the effect of hedge accounting on the assets sold, if applicable. The amount of the gain or loss recognized depends on the previous carrying values of the loans involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair values at the date of transfer. The gain on sale of the loans for the year ended October 31, 2013 was $2 million (October 31, 2012 – $1 million). For the year ended October 31, 2013, the trading income recognized on the retained interest was $2 million (October 31, 2012 – $2 million). Certain portfolios of U.S. residential mortgages originated by the Bank are sold and derecognized from the Bank’s Consolidated Balance Sheet. In instances where the Bank fully derecognizes these U.S. residential mortgages, the Bank has a continuing involvement to service those loans. As at October 31, 2013, the carrying value of these servicing rights was $17 million (October 31, 2012 – $3 million) and the fair value was $22 million (October 31, 2012 – $4 million). A gain or loss on sale of the loans is recognized immediately in other income. The gain on sale of the loans for the year ended October 31, 2013 was $41 million (October 31, 2012 – $1 million). TRANSFER OF DEBT SECURITIES CLASSIFIED AS LOANS The Bank sold $539 million of its non-agency collateralized mortgage obligation securities with no continuing involvement resulting in a gain on sale of $108 million for the year ended October 31, 2013. The gain was recorded in Other income on the Consolidated Statement of Income. 150 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 9 SPECIAL PURPOSE ENTITIES SIGNIFICANT CONSOLIDATED SPECIAL PURPOSE ENTITIES A SPE is an entity that is created to accomplish a narrow and well- defined objective. SPEs are consolidated when the substance of the relationship between the Bank and the SPE indicates that the SPE is controlled by the Bank. The Bank’s interests in consolidated SPEs are discussed as follows: Personal Loans The Bank securitizes personal loans through consolidated SPEs to enhance its liquidity position, to diversify its sources of funding and to optimize management of its balance sheet. Where the SPEs are created primarily for the Bank’s benefit and the Bank is exposed to the majority of the residual risks of the SPEs, consolidation is required. The Bank is restricted from accessing the SPE’s assets under the rele- vant arrangements. Credit Cards The Bank securitizes credit card loans through an SPE. The Bank acquired substantially all of the credit card portfolio of MBNA Canada on December 1, 2011. As a result, the Bank has consolidated the SPE as it serves as a financing vehicle for the Bank’s assets and the Bank is exposed to the majority of the residual risks of the SPE. The Bank is restricted from accessing the SPE’s assets under the rele- vant arrangements. Other Significant Consolidated SPEs The Bank consolidates two other significant SPEs as they were created primarily for the Bank’s benefit and the Bank is exposed to the majority of the residual risks of the SPEs. One of the SPEs is funded by the Bank and purchases senior tranches of securitized assets from the Bank’s existing customers. Further, as at October 31, 2013, the Bank has currently committed to provide an additional $53 million in funding to the SPE. The second SPE was created to guarantee principal and interest payments in respect of covered bonds issued by the Bank. The Bank sold assets to the SPE and provided a loan to the SPE to facilitate the purchase. The Bank is restricted from accessing the SPE’s assets under the relevant arrangements. The following table presents information related to the Bank’s significant consolidated SPEs. Significant Consolidated SPEs (millions of Canadian dollars) Assets reported as loans1,2 Associated liabilities Maximum exposure to loss Assets reported as loans1,2 Associated liabilities Maximum exposure to loss Personal loans Credit cards Fair value $ 6,141 6,142 $ 5,461 5,404 Carrying amount $ 6,141 6,141 $ 6,141 $ 5,461 5,461 $ 5,461 Fair value $ 649 656 $ 1,251 1,276 Carrying amount $ 649 649 $ 649 $ 1,251 1,251 $ 1,251 As at October 31, 2013 Fair value $ 11,588 10,621 Other Carrying amount $ 11,603 10,443 $ 11,007 October 31, 2012 $ 12,766 10,287 $ 11,683 10,012 $ 10,544 1 The SPEs assets are comprised of loans which include cash and cash equivalents. 2 $1.1 billion of the underlying personal loans was government insured (October 31, 2012 – $1.1 billion). SIGNIFICANT NON-CONSOLIDATED SPECIAL PURPOSE ENTITIES The Bank holds interests in certain significant non-consolidated SPEs where the Bank is not exposed to the majority of the residual risks of the SPEs. The Bank’s interests in these non-consolidated SPEs are as follows: Multi-Seller Conduits Multi-seller conduits (also referred to as customer securitization vehi- cles) provide customers with alternate sources of financing through the securitization of their assets. The customers sell their receivables to the conduit and the conduit funds its purchase of the receivables through issuance of short-term commercial paper to outside investors. Each seller continues to service its assets and absorb first losses. The Bank has no rights to the assets as they are owned by the conduit. The Bank administers the conduits and provides liquidity facilities as well as secu- rities distribution services; it may also provide credit enhancements. The liquidity agreements are structured as loan facilities between the Bank, as the sole liquidity lender, and the Bank-sponsored trusts. If a trust experiences difficulty rolling over asset-backed commercial paper (ABCP), the trust may draw on the loan facility, and use the proceeds to pay maturing ABCP. The liquidity facilities cannot be drawn if a trust is insolvent or bankrupt, preconditions that must be satisfied preceding each advance (that is, draw-down on the facility). These preconditions are in place so that the Bank does not provide credit enhancement through the loan facilities to the trust. From time to time, the Bank in its capacity as distribution agent may hold commercial paper issued by the conduits. During the years ended October 31, 2013 and 2012, no amounts of ABCP were purchased pursuant to liquidity agreements. The Bank maintained inventory positions of ABCP issued by multi-seller conduits as part of its market-making and investment activities in ABCP. As at October 31, 2013, the Bank held $1,717 million (October 31, 2012 – $128 million) of ABCP inventory, respectively, out of $9.6 billion (October 31, 2012 – $7.5 billion) total outstanding ABCP issued by the conduits. The commercial paper held is classified as Trading or Available-for- sale securities on the Consolidated Balance Sheet. The Bank earns fees from the conduits which are recognized when earned. The Bank monitors its ABCP inventory positions as part of the on-going consoli- dation assessment process. The Bank’s maximum potential exposure to loss due to its ownership interest in commercial paper and through the provision of liquidity facilities for multi-seller conduits was $9.6 billion as at October 31, 2013 (October 31, 2012 – $7.5 billion). Further, the Bank has committed to an additional $2.0 billion (October 31, 2012 – $2.2 billion) in liquidity facilities for ABCP that could potentially be issued by the conduits. 151 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 1 0 DERIVATIVES DERIVATIVE PRODUCT TYPES AND RISK EXPOSURES The majority of the Bank’s derivative contracts are OTC transactions that are privately negotiated between the Bank and the counterparty to the contract. The remainder are exchange-traded contracts transacted through organized and regulated exchanges and consist primarily of options and futures. Interest Rate Derivatives The Bank uses interest rate derivatives, such as interest rate futures and forwards, swaps, and options in managing interest rate risks. Interest rate risk is the impact that changes in interest rates could have on the Bank’s margins, earnings, and economic value. Changes in interest rate can impact the market value of fixed rate assets and liabilities. Further, certain assets and liabilities repayment rates vary depending on interest rates. Forward rate agreements are OTC contracts that effectively fix a future interest rate for a period of time. A typical forward rate agree- ment provides that at a pre-determined future date, a cash settlement will be made between the counterparties based upon the difference between a contracted rate and a market rate to be determined in the future, calculated on a specified notional amount. No exchange of principal amount takes place. Interest rate swaps are OTC contracts in which two counterparties agree to exchange cash flows over a period of time based on rates applied to a specified notional amount. A typical interest rate swap would require one counterparty to pay a fixed market interest rate in exchange for a variable market interest rate determined from time to time, with both calculated on a specified notional amount. No exchange of principal amount takes place. Certain interest rate swaps are transacted and settled through a clearing house which acts as a central counterparty. Interest rate options are contracts in which one party (the purchaser of an option) acquires from another party (the writer of an option), in exchange for a premium, the right, but not the obligation, either to buy or sell, on a specified future date or series of future dates or within a specified time, a specified financial instrument at a contracted price. The underlying financial instrument will have a market price which varies in response to changes in interest rates. In managing the Bank’s interest rate exposure, the Bank acts as both a writer and purchaser of these options. Options are transacted both OTC and through exchanges. Interest rate futures are standardized contracts transacted on an exchange. They are based upon an agreement to buy or sell a specified quantity of a financial instrument on a specified future date, at a contracted price. These contracts differ from forward rate agreements in that they are in standard amounts with standard settlement dates and are transacted on an exchange. Foreign Exchange Derivatives The Bank uses foreign exchange derivatives, such as futures, forwards and swaps in managing foreign exchange risks. Foreign exchange risk refers to losses that could result from changes in foreign currency exchange rates. Assets and liabilities that are denominated in foreign currencies have foreign exchange risk. The Bank is exposed to non- trading foreign exchange risk from its investments in foreign operations when the Bank’s foreign currency assets are greater or less than the liabilities in that currency; they create foreign currency open positions. Foreign exchange forwards are OTC contracts in which one counter- party contracts with another to exchange a specified amount of one currency for a specified amount of a second currency, at a future date or range of dates. Swap contracts comprise foreign exchange swaps and cross-currency interest rate swaps. Foreign exchange swaps are transactions in which a foreign currency is simultaneously purchased in the spot market and sold in the forward market, or vice-versa. Cross-currency interest rate swaps are transactions in which counterparties exchange principal and interest cash flows in different currencies over a period of time. These contracts are used to manage currency and/or interest rate exposures. Foreign exchange futures contracts are similar to foreign exchange forward contracts but differ in that they are in standard currency amounts with standard settlement dates and are transacted on an exchange. Credit Derivatives The Bank uses credit derivatives such as credit default swaps (CDS) and total return swaps in managing risks of the Bank’s corporate loan portfolio and other cash instruments. Credit risk is the risk of loss if a borrower or counterparty in a transaction fails to meet its agreed payment obligations. The Bank uses credit derivatives to mitigate industry concentration and borrower-specific exposure as part of the Bank’s portfolio risk management techniques. The credit, legal, and other risks associated with these transactions are controlled through well established procedures. The Bank’s policy is to enter into these transactions with investment grade financial institutions. Credit risk to these counterparties is managed through the same approval, limit and monitoring processes that is used for all counterparties to which the Bank has credit exposure. Credit derivatives are OTC contracts designed to transfer the credit risk in an underlying financial instrument (usually termed as a reference asset) from one counterparty to another. The most common credit derivatives are CDS (referred to as option contracts) and total return swaps (referred to as swap contracts). In option contracts, an option purchaser acquires credit protection on a reference asset or group of assets from an option writer in exchange for a premium. The option purchaser may pay the agreed premium at inception or over a period of time. The credit protection compensates the option purchaser for any deterioration in value of the reference asset or group of assets upon the occurrence of certain credit events such as bankruptcy or failure to pay. Settlement may be cash based or physical, requiring the delivery of the reference asset to the option writer. In swap contracts, one counterparty agrees to pay or receive from the other cash amounts based on changes in the value of a reference asset or group of assets, including any returns such as interest earned on these assets in exchange for amounts that are based on prevailing market funding rates. These cash settlements are made regardless of whether there is a credit event. Other Derivatives The Bank also transacts in equity and commodity derivatives in both the exchange and OTC markets. Equity swaps are OTC contracts in which one counterparty agrees to pay, or receive from the other, cash amounts based on changes in the value of a stock index, a basket of stocks or a single stock. These contracts sometimes include a payment in respect of dividends. Equity options give the purchaser of the option, for a premium, the right, but not the obligation, to buy from or sell to the writer of an option, an underlying stock index, basket of stocks or single stock at a contracted price. Options are transacted both OTC and through exchanges. 152 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSEquity index futures are standardized contracts transacted on an exchange. They are based on an agreement to pay or receive a cash amount based on the difference between the contracted price level of an underlying stock index and its corresponding market price level at a specified future date. There is no actual delivery of stocks that comprise the underlying index. These contracts are in standard amounts with standard settlement dates. Commodity contracts include commodity forwards, futures, swaps and options, such as precious metals and energy-related products in both OTC and exchange markets. NOTIONAL AMOUNTS The notional amounts are not recorded as assets or liabilities as they represent the face amount of the contract to which a rate or price is applied to determine the amount of cash flows to be exchanged. Notional amounts do not represent the potential gain or loss associated with market risk and are not indicative of the credit risk associated with derivative financial instruments. Fair Value of Derivatives (millions of Canadian dollars) Derivatives held or issued for trading purposes Interest rate contracts Futures Forward rate agreements Swaps Options written Options purchased Total interest rate contracts Foreign exchange contracts Futures Forward contracts Swaps Cross-currency interest rate swaps Options written Options purchased Total foreign exchange contracts Credit derivatives Credit default swaps – protection purchased Credit default swaps – protection sold Total credit derivative contracts Other contracts Equity contracts Commodity contracts Total other contracts Fair value – trading Derivatives held or issued for non-trading purposes Interest rate contracts Forward rate agreements Swaps Options written Options purchased Total interest rate contracts Foreign exchange contracts Forward contracts Swaps Cross-currency interest rate swaps Total foreign exchange contracts Credit derivatives Credit default swaps – protection purchased Total credit derivative contracts Other contracts Equity contracts Total other contracts Fair value – non-trading Total fair value Average fair value for the year1 October 31, 2013 Fair value as at balance sheet date October 31, 2012 Fair value as at balance sheet date Positive Negative Positive Negative Positive Negative $ 2 20 25,788 – 704 26,514 – 4,775 1 8,213 – 208 13,197 8 23 31 7,917 429 8,346 48,088 – 4,152 – 19 4,171 946 – 1,449 2,395 $ – 19 23,842 697 – 24,558 – 3,994 1 14,051 241 – 18,287 61 14 75 9,002 412 9,414 52,334 – 2,255 8 – 2,263 451 – 1,229 1,680 6 6 223 223 $ 2 26 21,663 – 586 22,277 – 3,125 – 8,631 – 190 11,946 3 57 60 7,302 331 7,633 41,916 – 3,397 – 17 3,414 648 – 1,693 2,341 3 3 1,452 1,452 8,024 $ 56,112 1,128 1,128 5,294 $ 57,628 1,787 1,787 7,545 $ 49,461 $ – 28 20,188 617 – 20,833 – 3,004 – 10,699 200 – 13,903 92 4 96 8,946 327 9,273 44,105 – 2,011 4 – 2,015 616 – 1,177 1,793 262 262 1,296 1,296 5,366 $ 49,471 $ 4 25 32,058 – 850 32,937 – 3,259 179 7,293 – 186 10,917 17 16 33 7,168 533 7,701 51,588 – 5,657 7 18 5,682 1,304 – 1,051 2,355 16 16 1,278 1,278 9,331 $ 60,919 1 The average fair value of trading derivatives for the year ended October 31, 2012 was: positive $52,596 million and negative $59,272 million. Averages are calculated on a monthly basis. $ – 22 29,473 797 – 30,292 – 2,935 63 16,473 209 – 19,680 49 25 74 8,309 609 8,918 58,964 1 2,891 4 8 2,904 382 7 1,597 1,986 173 173 970 970 6,033 $ 64,997 153 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS The following table distinguishes the derivatives held or issued for non-trading purposes between those that have been designated in qualifying hedge accounting relationships and those which have not been designated in qualifying hedge accounting relationships as at October 31, 2013 and October 31, 2012. Fair Value of Non-Trading Derivatives (millions of Canadian dollars) Derivative Assets Derivatives in qualifying hedging relationships Fair Value Cash Flow Net Investment Derivatives not in qualifying hedging relationships Derivatives in qualifying hedging relationships Total Fair Value Cash Flow Net Investment As at October 31, 2013 Derivative Liabilities Derivatives not in qualifying hedging relationships Total – $ $ 1,607 4 – 1,611 – 2,011 4 – 2,015 20 – 519 539 616 – 1,177 1,793 262 262 262 262 1,296 1,296 1,296 1,296 $ 3,708 $ 5,366 October 31, 2012 1 $ $ 2,498 4 8 2,511 1 2,891 4 8 2,904 26 – 410 436 382 7 1,597 1,986 173 173 173 173 962 962 970 970 $ 4,082 $ 6,033 – $ $ 2,533 – 17 2,550 – 3,397 – 17 3,414 $ – $ 130 – – 130 – 274 – – 274 26 – 700 726 648 – 1,693 2,341 566 – – – – 658 – 1,224 3 3 3 3 – – – – 1,787 1,305 1,305 1,787 $ 4,584 $ 7,545 – – – – $ 130 $ 1,498 – $ $ 2,626 7 18 2,651 – 5,657 7 18 5,682 – $ – $ 150 243 – – 150 243 – – 62 – 716 778 1,304 – 1,051 2,355 – 331 – 7 – 1,187 – 1,525 16 16 16 16 – – – – 964 964 1,278 1,278 $ 4,409 $ 9,331 – – 8 8 $ 150 $ 1,776 $ – – – – – 30 – – 30 – – – – $ 30 $ – – – – – 25 – – 25 – – – – $ 25 $ – – – – – – – – – – – – – $ – $ – – – – – – – – – – – – – $ – Derivatives held or issued for non-trading purposes Interest rate contracts Forward rate agreements Swaps Options written Options purchased Total interest rate contracts Foreign exchange contracts Forward contracts Swaps Cross-currency interest rate swaps Total foreign exchange contracts Credit derivatives Credit default swaps – protection purchased Total credit derivatives Other contracts Equity contracts Total other contracts Fair value – non-trading $ – $ 228 – – 228 – 636 – – 636 622 – – – – 993 – 1,615 – – – – – – 482 482 $ 228 $ 2,733 – $ – $ 138 2,893 – – 138 2,893 – – – 1,242 – – – 335 – 1,577 – – – – – – 314 314 $ 138 $ 4,784 Derivatives held or issued for non-trading purposes Interest rate contracts Forward rate agreements Swaps Options written Options purchased Total interest rate contracts Foreign exchange contracts Forward contracts Swaps Cross-currency interest rate swaps Total foreign exchange contracts Credit derivatives Credit default swaps – protection purchased Total credit derivatives Other contracts Equity contracts Total other contracts Fair value – non-trading 154 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS The following tables disclose the impact of derivatives and non- derivative instruments designated in hedge accounting relationships and the related hedged items, where appropriate, in the Consolidated Statement of Income and in other comprehensive income (OCI) for the years ended October 31, 2013, October 31, 2012 and October 31, 2011. Fair Value Hedges (millions of Canadian dollars) Fair value hedges Interest rate contracts Other contracts2 Total income (loss) Fair value hedges Interest rate contracts2 Total income (loss) Fair value hedges Interest rate contracts2 Total (loss) Amounts recognized in income on derivatives1 Amounts recognized in income on hedged items1 Amounts excluded from the Hedge assessment of hedge effectiveness1 ineffectiveness1 For the years ended October 31 2013 $ $ 277 13 290 $ (248) (14) $ (262) $ $ 129 129 $ $ (127) (127) $ $ 102 102 $ $ (107) (107) $ 29 (1) $ 28 $ 2 $ 2 $ (5) $ (5) $ (8) – $ (8) 2012 $ (1) $ (1) 2011 $ 30 $ 30 1 Amounts are recorded in non-interest income. 2 Includes non-derivative instruments designated as hedging instruments in qualifying foreign exchange fair value hedge accounting relationships (for example, foreign denominated liabilities). During the years ended October 31, 2013, October 31, 2012 and October 31, 2011, the Bank did not recognize any net gain or loss in earnings as a result of hedged firm commitments that no longer qualified as fair value hedges. Cash Flow and Net Investment Hedges (millions of Canadian dollars) Amounts recognized in OCI on derivatives1 Amounts reclassified from OCI into income1,2 For the years ended October 31 2013 Amounts excluded from the Hedge assessment of hedge effectiveness3 ineffectiveness3 Cash flow hedges Interest rate contracts Foreign exchange contracts4 Other contracts Total income (loss) Net investment hedges Foreign exchange contracts4 Cash flow hedges Interest rate contracts Foreign exchange contracts4 Other contracts Total income (loss) Net investment hedges Foreign exchange contracts4 Cash flow hedges Interest rate contracts Foreign exchange contracts4 Other contracts Total income (loss) Net investment hedges Foreign exchange contracts4 1 OCI is presented on a pre-tax basis. 2 Amounts are recorded in net interest income. 3 Amounts are recorded in non-interest income. 4 Includes non-derivative instruments designated as hedging instruments in qualifying hedge accounting relationships (such as, foreign denominated liabilities). $ (197) 962 305 $ 1,070 $ 1,167 944 287 $ 2,398 $ (1,001) $ (5) $ 1,263 (28) 108 $ 1,343 $ 1,611 (17) 102 $ 1,696 $ (76) $ – $ 1,902 129 38 $ 2,069 $ 1,670 132 61 $ 1,863 $ 449 $ – $ (3) – – $ (3) $ – $ – – – $ – $ – $ – – – $ – $ – $ – – – $ – $ – 2012 $ – – – $ – $ 4 2011 $ – – – $ – $ 70 155 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS The following table indicates the periods when hedged cash flows in designated cash flow hedge accounting relationships are expected to occur as at October 31, 2013 and October 31, 2012. Hedged Cash Flows (millions of Canadian dollars) Cash flow hedges Cash inflows Cash outflows Net cash flows Cash flow hedges Cash inflows Cash outflows Net cash flows As at October 31, 2013 Within 1 year Over 1 year Over 3 years to 5 years to 3 years Over 5 years to 10 years Over 10 years Total $ 18,235 (1,485) $ 16,750 $ 21,582 (7,276) $ 14,306 $ 8,480 (6,731) $ 1,749 $ 1,063 (389) $ 674 $ 294 – $ 294 $ 49,654 (15,881) $ 33,773 October 31, 2012 $ 12,242 (2,128) $ 10,114 $ 15,187 (5,214) $ 9,973 $ 6,941 (4,743) $ 2,198 $ 396 – $ 396 $ 248 – $ 248 $ 35,014 (12,085) $ 22,929 Income related to interest cash flows is recognized using the effective interest rate method over the life of the underlying instrument. Foreign currency translation gains and losses related to future cash flows on hedged items are recognized as incurred. During the years ended October 31, 2013 and October 31, 2012, there were no significant instances where forecasted hedged transac- tions failed to occur. The following table presents gains (losses) on non-trading derivatives that have not been designated in qualifying hedge accounting relation- ships for the years ended October 31, 2013, October 31, 2012 and October 31, 2011. These gains (losses) are partially offset by gains (losses) recorded on the Consolidated Statement of Income and on the Consolidated Statement of Other Comprehensive Income on related non-derivative instruments. Gains (Losses) on Non-Trading Derivatives not Designated in Qualifying Hedge Accounting Relationships1 (millions of Canadian dollars) For the years ended October 31 Interest rate contracts Foreign exchange contracts Credit derivatives Equity Total 1 Amounts are recorded in non-interest income. 2013 2012 $ 69 (47) (187) 4 $ (161) $ (111) (14) (67) 3 $ (189) 2011 $ 140 (8) 41 (1) $ 172 The following table discloses the notional principal amount of over- the-counter and exchange-traded derivatives. Over-the-Counter and Exchange-Traded Derivatives (billions of Canadian dollars) As at October 31 October 31 2012 2013 Over-the-Counter1 Non Trading Clearing house2 Clearing Exchange- traded house Total Non- trading Total Total Notional Interest rate contracts Futures Forward rate agreements Swaps Options written Options purchased Total interest rate contracts Foreign exchange contracts Futures Forward contracts Swaps Cross-currency interest rate swaps Options written Options purchased Total foreign exchange contracts Credit derivatives Credit default swaps – protection purchased Credit default swaps – protection sold Total credit derivative contracts Other contracts Equity contracts Commodity contracts Total other contracts Total $ – $ – 61.4 110.7 904.2 1,777.9 30.4 – 29.6 – 1,888.6 1,025.6 $ $ 301.1 $ 301.1 – 172.1 – 2,682.1 42.1 11.7 10.1 39.7 322.9 3,237.1 1.1 – $ 301.1 $ 285.0 87.9 173.2 404.3 3,086.4 2,311.9 57.2 49.9 408.7 3,645.8 2,791.9 42.4 42.7 0.3 3.0 – – – – – – – – – – – 378.4 – 411.8 12.8 11.9 814.9 4.2 3.8 8.0 38.4 – – – – – 38.4 38.4 378.4 – 411.8 12.8 11.9 853.3 – – – 4.2 3.8 8.0 – 47.8 – 33.9 – – 81.7 5.0 – 5.0 38.4 426.2 – 445.7 12.8 11.9 935.0 9.2 3.8 13.0 28.7 411.8 1.3 416.9 13.6 12.8 885.1 7.0 1.7 8.7 35.2 – 7.4 – 42.6 – $ 1,888.6 $ 1,891.1 18.4 23.9 42.3 53.6 31.3 84.9 $ 403.6 $ 4,183.3 33.3 – 33.3 86.3 19.3 105.6 $ 528.7 $ 4,712.0 $ 3,791.3 86.9 31.3 118.2 1 Collateral held under a Credit Support Annex (CSA) to help reduce counterparty credit risk is in the form of high quality and liquid assets such as cash and high quality government securities. Acceptable collateral is governed by the Collateralized Trading Policy. 2 Derivatives executed through a central clearing house reduces settlement risk due to the ability to net settle offsetting positions. The Bank also receives preferential capital treatment relative to those settled with non-central clearing house counterparties. 156 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS The following table discloses the notional principal amount of over the counter derivatives and exchange traded derivatives based on their contractual terms to maturity. Derivatives by Term to Maturity (billions of Canadian dollars) As at October 31 October 31 2012 2013 Remaining term to maturity Notional Principal Interest rate contracts Futures Forward rate agreements Swaps Options written Options purchased Total interest rate contracts Foreign exchange contracts Futures Forward contracts Swaps Cross-currency interest rate swaps Options written Options purchased Total foreign exchange contracts Credit derivatives Credit default swaps – protection purchased Credit default swaps – protection sold Total credit derivative contracts Other contracts Equity contracts Commodity contracts Total other contracts Total Over Over Within 1 year to 3 years to 5 years to 10 years 1 year 3 years 5 years Over Over 10 years Total Total $ 242.5 $ 58.6 13.5 921.7 12.8 12.6 1,215.2 1,019.2 159.7 763.6 24.9 24.5 $ – – 792.5 2.3 1.2 796.0 $ – – 515.6 1.4 2.8 519.8 $ – $ 301.1 $ 285.0 87.9 – 173.2 93.0 3,086.4 2,311.9 57.2 42.4 49.9 42.7 95.6 3,645.8 2,791.9 1.0 1.6 15.4 378.6 – 97.4 10.3 9.8 511.5 22.9 34.7 – 144.8 2.5 2.1 207.0 0.1 12.7 – 100.1 – – 112.9 1.3 0.2 1.5 3.3 0.5 3.8 3.6 2.2 5.8 – 0.1 – 85.4 – – 85.5 1.0 0.9 1.9 – 0.1 – 18.0 – – 18.1 38.4 426.2 – 445.7 12.8 11.9 935.0 – – – 9.2 3.8 13.0 28.7 411.8 1.3 416.9 13.6 12.8 885.1 7.0 1.7 8.7 55.1 19.9 75.0 21.1 10.1 31.2 $ 1,803.2 $ 1,261.2 10.5 1.1 11.6 $ 926.3 0.2 0.2 0.4 $ 607.6 – – – 86.3 19.3 105.6 $ 113.7 $ 4,712.0 $ 3,791.3 86.9 31.3 118.2 DERIVATIVE-RELATED RISKS Market Risk Derivatives, in the absence of any compensating upfront cash payments, generally have no market value at inception. They obtain value, positive or negative, as relevant interest rates, foreign exchange rates, equity, commodity or credit prices or indices change, such that the previously contracted terms of the derivative transactions have become more or less favourable than what can be negotiated under current market conditions for contracts with the same terms and the same remaining period to expiry. The potential for derivatives to increase or decrease in value as a result of the foregoing factors is generally referred to as market risk. This market risk is managed by senior officers responsible for the Bank’s trading business and is monitored independently by the Bank’s Risk Management. Credit Risk Credit risk on derivatives, also known as counterparty credit risk, is the risk of a financial loss occurring as a result of the failure of a counterparty to meet its obligation to the Bank. The Treasury Credit area within Wholesale Banking is responsible for implementing and ensuring compliance with credit policies established by the Bank for the management of derivative credit exposures. Derivative-related credit risks are subject to the same credit approval, limit and monitoring standards that are used for managing other transactions that create credit exposure. This includes evaluating the creditworthiness of counterparties, and managing the size, diversi- fication and maturity structure of the portfolios. The Bank actively engages in risk mitigation strategies through the use of multi-product derivative master netting agreements, collateral and other risk mitiga- tion techniques. Master netting agreements reduce risk to the Bank by allowing the Bank to close out and net transactions with counterpar- ties subject to such agreements upon the occurrence of certain events. The effect of these master netting agreements is shown in the table below entitled ‘Credit Exposure of Derivatives’. Also shown in the table entitled ‘Credit Exposure of Derivatives’, is the current replacement cost, which is the positive fair value of all outstanding derivatives, and represents the Bank’s maximum derivative credit exposure. The credit equivalent amount is the sum of the current replacement cost and the potential future exposure, which is calcu- lated by applying factors supplied by OSFI to the notional principal amount of the derivatives. The risk-weighted amount is determined by applying standard measures of counterparty credit risk to the credit equivalent amount. 157 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Credit Exposure of Derivatives (millions of Canadian dollars) Interest rate contracts Forward rate agreements Swaps Options purchased Total interest rate contracts Foreign exchange contracts Forward contracts Swaps Cross-currency interest rate swaps Options purchased Total foreign exchange contracts Other contracts Credit derivatives Equity contracts Commodity contracts Total other contracts Total derivatives Less: impact of master netting agreements Total derivatives after netting Less: impact of collateral Net derivatives Qualifying Central Counterparty (QCCP) Contracts2 Total October 31, 2013 As at October 31, 2012 Current replacement cost1 Credit equivalent amount Risk- weighted amount Current replacement cost1 Credit equivalent amount $ 26 24,460 604 25,090 $ 14 31,331 746 32,091 $ 3 16,773 440 17,216 $ 26 37,714 866 38,606 $ 43 60,209 980 61,232 3,656 – 10,321 190 14,167 60 8,721 271 9,052 48,309 37,918 10,391 4,998 5,393 37 $ 5,430 9,303 – 31,288 395 40,986 479 12,269 927 13,675 86,752 56,795 29,957 5,592 24,365 4,966 $ 29,331 2,174 – 11,955 126 14,255 277 1,168 280 1,725 33,196 21,562 11,634 3,523 8,111 866 $ 8,977 4,523 179 8,344 186 13,232 18 8,217 402 8,637 60,475 48,084 12,391 6,020 6,371 – $ 6,371 10,021 298 28,408 447 39,174 290 11,904 1,048 13,242 113,648 78,727 34,921 6,191 28,730 – $ 28,730 Risk- weighted amount $ 7 20,500 403 20,910 1,846 28 9,584 135 11,593 117 904 294 1,315 33,818 24,295 9,523 2,165 7,358 – $ 7,358 1 Prior to 2013, exchange-traded instruments and non-trading credit derivatives, which are given financial guarantee treatment for credit risk capital purposes, were excluded in accordance with OSFI’s guidelines. The total positive fair value of the excluded contracts as at October 31, 2012 was $444 million. 2 Effective the first quarter of 2013, risk-weighted assets (RWA) for OSFI “deemed” QCCP derivative exposures are calculated in accordance with the Basel III regulatory framework, which takes into account both trade exposures and default fund expo- sures related to derivatives, and are presented based on the “all-in” methodology. The amounts calculated are net of master netting agreements and collateral. Current Replacement Cost of Derivatives (millions of Canadian dollars, except as noted) By sector Financial Government Other Current replacement cost Less: impact of master netting agreements and collateral Total current replacement cost October 31 2013 $ 22,329 4,653 986 $ 27,968 By location of risk2 Canada United States Other international United Kingdom Europe – other Other Total Other international Total current replacement cost Canada1 October 31 2012 $ 25,670 5,852 1,544 $ 33,066 United States1 Other International1 October 31 2013 October 31 2012 October 31 2013 October 31 2012 October 31 2013 $ 12,476 1,217 1,063 $ 14,756 $ 7,263 6,223 1,165 $ 14,651 $ 5,482 9 94 $ 5,585 $ 11,868 591 299 $ 12,758 $ 40,287 5,879 2,143 $ 48,309 As at Total October 31 2012 $ 44,801 12,666 3,008 $ 60,475 42,916 $ 5,393 54,104 $ 6,371 October 31 2013 % mix October 31 2012 % mix 50.0% 25.3 8.8 11.2 4.7 24.7 100.0% 42.4% 29.6 12.9 7.5 7.6 28.0 100.0% October 31 2013 $ 2,694 1,367 473 603 256 1,332 $ 5,393 October 31 2012 $ 2,706 1,883 820 479 483 1,782 $ 6,371 1 Based on geographic location of unit responsible for recording revenue. 2 After impact of master netting agreements and collateral. Certain of the Bank’s derivative contracts are governed by master derivative agreements having provisions that may permit the Bank’s counterparties to require, upon the occurrence of a certain contingent event: (i) the posting of collateral or other acceptable remedy such as assignment of the affected contracts to an acceptable counterparty; or (ii) settlement of outstanding derivative contracts. Most often, these contingent events are in the form of a downgrade of the senior debt ratings of the Bank, either as counterparty or as guarantor of one of the Bank’s subsidiaries. At October 31, 2013, the aggregate net liability position of those contracts would require: (i) the posting of collateral or other acceptable remedy totalling $51 million (October 31, 2012 – $45 million) in the event of a one-notch or two-notch downgrade in the Bank’s senior debt ratings; and (ii) funding totalling $4 million (October 31, 2012 – $6 million) following the termination and settle- ment of outstanding derivative contracts in the event of a one-notch or two notch downgrade in the Bank’s senior debt ratings. 158 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Certain of the Bank’s derivative contracts are governed by master derivative agreements having credit support provisions that permit the Bank’s counterparties to call for collateral depending on the net mark-to-market exposure position of all derivative contracts governed by that master derivative agreement. Some of these agreements may permit the Bank’s counterparties to require, upon the downgrade of the senior debt ratings of the Bank, to post additional collateral. As at October 31, 2013 the fair value of all derivative instruments with credit risk related contingent features in a net liability position was $7.9 billion (October 31, 2012 – $14.3 billion). The Bank has posted $6.3 billion (October 31, 2012 – $11.8 billion) of collateral for this exposure in the normal course of business. As at October 31, 2013, the impact of a one-notch downgrade in the Bank’s senior debt ratings would require the Bank to post an additional $0.3 billion (October 31, 2012 – $0.6 billion) of collateral to that posted in the normal course of business. A two-notch down grade in the Bank’s senior debt ratings would require the Bank to post an additional $0.3 billion (October 31, 2012 – $1.4 billion) of collateral to that posted in the normal course of business. N O T E 1 1 INVESTMENT IN TD AMERITRADE HOLDING CORPORATION The Bank has significant influence over TD Ameritrade and accounts for its investment in TD Ameritrade using the equity method. As at October 31, 2013, the Bank’s reported investment in TD Ameritrade was 42.22% (October 31, 2012 – 45.37%) of the outstanding shares of TD Ameritrade with a fair value of $6,606 million (October 31, 2012 – $3,878 million) based on the closing price of US$27.26 (October 31, 2012 – US$15.69) on the New York Stock Exchange. On May 14, 2013, the Bank completed a private sale of 15 million shares of its investment in TD Ameritrade. The shares were sold at a price of US$21.72, a 4.5% discount to the closing market price of US$22.74. The Bank realized a gain on the sale of these shares on the Consolidated Statement of Income. During the year ended October 31, 2013, TD Ameritrade did not repurchase any shares (year ended October 31, 2012 – 7.4 million shares). On August 6, 2010 and October 31, 2011, the Stockholders Agreement was amended such that if the Bank’s ownership increases above 45%: (i) the Bank has until January 24, 2014 to reduce its ownership in TD Ameritrade to 45%; (ii) the Bank is required to commence reduction of its ownership in TD Ameritrade and continue its reduction as long as it can be executed at a price per share equal to or greater than the Bank’s then-applicable average carrying value per share of TD Ameritrade; and (iii) in connection with stock repur- chases by TD Ameritrade, the Bank’s ownership interest in TD Ameri- trade will not exceed 48%. Pursuant to the Stockholders Agreement in relation to the Bank’s equity investment in TD Ameritrade, the Bank designated five of 12 members of TD Ameritrade’s Board of Directors including the Bank’s Group President and Chief Executive Officer, its Executive Vice President of Retail Banking, Products and Services, two independent directors of TD, and a former independent director of TD. TD Ameritrade has no significant contingent liabilities to which the Bank is exposed. During the year ended October 31, 2013 and October 31, 2012, TD Ameritrade did not experience any significant restrictions to transfer funds in the form of cash dividends, or repayment of loans or advances. The condensed financial statements of TD Ameritrade, based on its Consolidated Financial Statements, are provided as follows: Condensed Consolidated Balance Sheets1 (millions of Canadian dollars) Assets Receivables from brokers, dealers, and clearing organizations Receivables from clients, net Other assets Total assets Liabilities Payable to brokers, dealers, and clearing organizations Payable to clients Other liabilities Total liabilities Stockholders’ equity2 Total liabilities and stockholders’ equity 1 Customers’ securities are reported on a settlement date basis whereas the Bank reports customers’ securities on a trade date basis. 2 The difference between the carrying value of the Bank’s investment in TD Ameritrade and the Bank’s share of TD Ameritrade’s stockholders’ equity is comprised of goodwill, other intangibles and the cumulative translation adjustment. September 30 2013 September 30 2012 As at $ 1,406 9,368 11,994 $ 22,768 $ 2,057 13,746 2,089 17,892 4,876 $ 22,768 $ 1,109 8,638 9,746 $ 19,493 $ 1,990 10,717 2,366 15,073 4,420 $ 19,493 159 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Condensed Consolidated Statements of Income (millions of Canadian dollars, except as noted) Revenues Net interest revenue Fee-based and other revenues Total revenues Operating expenses Employee compensation and benefits Other Total operating expenses Other expense (income) Pre-tax income Provision for income taxes Net income1 Earnings per share – basic (dollars) Earning per share – diluted (dollars) 1 The Bank’s equity share of net income of TD Ameritrade is subject to adjustments relating to amortization of intangibles, which are not included in the table above. N O T E 1 2 SIGNIFICANT ACQUISITIONS For the years ended September 30 2013 2012 2011 $ 477 2,332 2,809 704 1,031 1,735 (34) 1,108 421 $ 687 $ 1.25 $ 1.24 $ 452 2,209 2,661 695 1,025 1,720 28 913 322 $ 591 $ 1.08 $ 1.07 $ 485 2,240 2,725 667 1,024 1,691 31 1,003 373 $ 630 $ 1.11 $ 1.09 Acquisition of Epoch Investment Partners, Inc. On March 27, 2013, the Bank acquired 100% of the outstanding equity of Epoch Holding Corporation including its wholly-owned subsidiary Epoch Investment Partners, Inc. (Epoch), a New York-based asset management firm. Epoch was acquired for cash consideration of $674 million. Epoch Holding Corporation shareholders received US$28 in cash per share. The acquisition was accounted for as a business combination under the purchase method. The results of the acquisition from the acquisition date have been consolidated with the Bank’s results and are reported in the Wealth and Insurance segment. As at March 27, 2013, the acquisition contributed $34 million of tangible assets, and $9 million of liabilities. The excess of consideration over the fair value of the acquired net assets of $649 million has been allocated to customer relationship intangibles of $149 million and goodwill of $500million. Goodwill is not expected to be deductible for tax purposes. For the year ended October 31, 2013, the acquisition contributed $96 million to revenue and $2 million to net income. Acquisition of Target Corporation’s U.S. Credit Card Portfolio On March 13, 2013, the Bank, through its subsidiary, TD Bank USA N.A., acquired substantially all of Target Corporation’s existing U.S. Visa and private label credit card portfolio, with a gross outstanding balance of $5.8 billion. TD Bank USA N.A. also entered into a seven- year program agreement under which it became the exclusive issuer of Target-branded Visa and private label consumer credit cards to Target Corporation’s U.S. customers. Under the terms of the program agreement, the Bank and Target Corporation share in the profits generated by the portfolios. Target Corporation is responsible for all elements of operations and customer service, and bears most of the operating costs to service the assets. The Bank controls risk management policies and regulatory compliance and bears all costs relating to funding the receivables for existing Target Visa accounts and all existing and newly issued Target private label accounts in the U.S. The Bank accounted for the purchase as an asset acquisition. The results of the acquisition from the acquisition date have been recorded in the U.S. Personal and Commercial Banking segment. At the date of acquisition the Bank recorded the credit card receiv- ables acquired at their fair value of $5.7 billion and intangible assets totalling $98 million. The gross amount of revenue and credit losses have been recorded on the Consolidated Statement of Income since that date. Target Corporation shares in a fixed percentage of the reve- nue and credit losses incurred. Target Corporation’s share of revenue and credit losses is recorded in Non-interest expenses on the Consoli- dated Statement of Income and related receivables from, or payables to Target Corporation are recorded in Other assets or Other liabilities, respectively, on the Consolidated Balance Sheet. Acquisition of Credit Card Portfolio of MBNA Canada On December 1, 2011, the Bank acquired substantially all of the credit card portfolio of MBNA Canada, a wholly-owned subsidiary of Bank of America Corporation, as well as certain other assets and liabilities for cash consideration of $6,839 million. The acquisition was accounted for as a business combination under the purchase method. The results of the acquisition from the acquisi- tion date have been consolidated with the Bank’s results and are primarily reported in the Canadian Personal and Commercial Banking and Wealth and Insurance segments. The total amount of goodwill that is expected to be deductible for tax purposes is nil. Subsequent to acquisition date, goodwill decreased by $27 million to $93 million due to the refinement of various fair value marks during the measurement period. For the year ended October 31, 2012, the acquisition contributed $811 million to revenue and $(15) million to net income. The following table presents the estimated fair values of the assets and liabilities acquired as of the date of acquisition. Fair Value of Identifiable Net Assets Acquired (millions of Canadian dollars) Assets acquired Loans1,2 Other assets Intangible assets Less: Liabilities assumed Fair value of identifiable net assets acquired Goodwill Total purchase consideration Amount $ 7,361 275 458 8,094 1,348 6,746 93 $ 6,839 1 The acquisition included both acquired performing and acquired credit-impaired loans. The estimated fair value of acquired performing loans reflects incurred and future expected credit losses and the estimated fair value of acquired credit- impaired loans reflects incurred credit losses at the acquisition date. 2 Gross contractual receivables amount to $7,820 million. Acquisition of Chrysler Financial On April 1, 2011, the Bank acquired 100% of the outstanding equity of Chrysler Financial in Canada and the U.S. for cash consideration of approximately $6,307 million, including contingent consideration. The acquisition was accounted for as a business combination under the purchase method. As part of the purchase agreement, the Bank is required to pay additional cash consideration in the event that amounts realized on certain assets exceed a pre-established threshold. Contingent consideration is recognized immediately in the purchase price equation at fair value and marked to market as amounts on the assets are realized in the Consolidated Statement of Income. 160 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Contingent consideration of $52 million was recognized as of the acquisition date. Subsequent to the acquisition, the amounts realized on these assets exceeded the threshold and the Bank was required to pay additional cash consideration of $53 million, which was included in the Consolidated Statement of Income. The results of Chrysler Financial from the acquisition date have been consolidated with the Bank’s results. The results of Chrysler Financial in the U.S. are reported in the U.S. Personal and Commercial Banking segment. The results of Chrysler Financial in Canada are reported in the Canadian Personal and Commercial Banking segment. Subsequent to the acquisition date, goodwill increased by $45 million to $197 million, primarily due to the finalization of the fair values in the purchase price equation. The total amount of goodwill that is expected to be deductible for tax purposes is $275 million. For the year ended October 31, 2011, the acquisition contributed $273 million to revenue and $13 million to net income. The following table presents the estimated fair values of the assets and liabilities of Chrysler Financial as of the date of acquisition. Fair Value of Identifiable Net Assets Acquired (millions of Canadian dollars) Assets acquired Cash and cash equivalents Loans1,2 Other assets Less: Liabilities assumed Fair value of identifiable net assets acquired Goodwill Total purchase consideration Amount $ 3,081 7,322 2,207 12,610 6,500 6,110 197 $ 6,307 1 The acquisition included both acquired performing and acquired credit-impaired loans. The estimated fair value of acquired performing loans reflects incurred and future expected credit losses and the estimated fair value of acquired credit- impaired loans reflects incurred credit losses at the acquisition date. 2 Gross contractual receivables amount to $7,361 million. N O T E 1 3 GOODWILL AND OTHER INTANGIBLES The fair value of the Bank’s CGUs is determined from internally devel- oped valuation models that consider various factors and assumptions such as forecasted earnings, growth rates, price earnings multiples, discount rates and terminal multiples. Management is required to use judgment in estimating the fair value of CGUs and the use of different assumptions and estimates in the fair value calculations could influence the determination of the existence of impairment and the valuation of goodwill. Management believes that the assumptions and estimates used are reasonable and supportable. Where possible, fair values generated internally are compared to relevant market information. The carrying amounts of the Bank’s CGUs are determined by management using risk based capital models to adjust net assets and liabilities by CGU. These models consider various factors including market risk, credit risk and operational risk, including investment capital (comprised of goodwill and other intangibles). Any unallocated capital not directly attributable to the CGUs is held within the Corporate segment. As at the date of the last impairment test, the amount of unallocated capital was $8.3 billion and primarily related to available-for-sale securities and interest rate swaps managed within the Corporate segment. The Bank’s capital oversight committees provide oversight to the Bank’s capital allocation methodologies. Key Assumptions The recoverable amount of each group of CGUs has been determined based on its value-in-use. In assessing value-in-use, the estimated future cash flows based on the Bank’s internal forecast are discounted using an appropriate pre-tax discount rate. The following were the key assumptions applied in the goodwill impairment testing: Discount Rate The pre-tax discount rates used reflect current market assessment of the risks specific to each group of CGUs and are dependent on the risk profile and capital requirements of each group of CGUs. Terminal Multiple The earnings included in the goodwill impairment testing for each operating segment were based on the Bank’s internal forecast, which projects expected cash flows over the next five years. The pre-tax terminal multiple for the period after the Bank’s internal forecast was derived from the observable terminal multiples of comparable financial institutions and ranged from 9 times to 14 times. In considering the sensitivity of the key assumptions discussed above, management determined that there is no reasonable possible change in any of the above that would result in the recoverable amount of any of the groups of CGUs to be less than its carrying amount. Goodwill by Segment (millions of Canadian dollars) Canadian Personal and Commercial Banking Wealth and Insurance U.S. Personal and Commercial Banking Wholesale Banking Corporate Carrying amount of goodwill as at November 1, 2011 Additions1 Disposals2 Foreign currency translation adjustments and other Carrying amount of goodwill as at October 31, 2012 Gross amount of goodwill Accumulated impairment losses Carrying amount of goodwill as at November 1, 2012 Additions3 Disposals Foreign currency translation adjustments and other Carrying amount of goodwill as at October 31, 2013 Accumulated impairment losses $ 726 46 – – $ 772 $ 772 – $ $ 772 – – 2 $ 774 – $ $ 1,051 46 (68) – $ 1,029 $ 1,029 – $ $ 1,029 500 – 27 $ 1,556 – $ $ 10,330 – – 30 $ 10,360 $ 10,360 – $ $ 10,360 – – 457 $ 10,817 – $ $ 150 – – – $ 150 $ 150 – $ $ 150 – – – $ 150 – $ $ – – – – $ – $ – $ – $ – – – – $ – $ – 1 Primarily relates to goodwill arising from the acquisition of the credit card portfolio of MBNA Canada. 2 Relates to the divestiture of the U.S. Insurance business. 3 Relates to goodwill arising from the acquisition of Epoch. See Note 12 for further details. Total $ 12,257 92 (68) 30 $ 12,311 $ 12,311 – $ $ 12,311 500 – 486 $ 13,297 – $ 161 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS October 31 2013 Carrying amount of goodwill 2013 Discount rate1 October 31 2012 Carrying amount of goodwill 2012 Discount rate1 $ 774 10.9% $ 772 10.9% 1,090 466 11.3–12.4 10.7 566 463 11.7–15.0 11.1 150 13.8 150 15.9 10,817 $ 13,297 10.8% 10,360 $ 12,311 11.1% Core deposit intangibles Credit card related intangibles Software intangibles Other intangibles $ 1,949 – – – – $ 1,949 $ – – – – $ 1,949 $ 900 – – 193 (3) $ 1,090 $ – – 175 (34) $ 1,231 $ 16 456 – – – $ 472 $ 98 – – 14 $ 584 $ 5 – – 42 – $ 47 $ – – 55 (2) $ 100 $ 812 395 11 – (76) $ 1,120 $ 516 9 12 (89) $ 1,526 $ $ $ $ 242 17 – 198 (71) 352 4 5 234 (76) 511 $ 391 2 16 – – $ 377 $ 149 5 – 5 $ 526 $ 177 7 – 42 – $ 212 $ 4 – 42 – $ 250 Total $ 3,168 853 27 – (76) $ 3,918 $ 763 14 12 (70) $ 4,585 $ 1,324 24 – 475 (74) $ 1,701 $ 8 5 506 (112) $ 2,092 $ 859 $ 718 $ 425 $ 484 $ 768 $ 1,015 $ 165 $ 276 $ 2,217 $ 2,493 The following table summarizes the groups of CGUs to which goodwill has been allocated and its discount rate for impairment testing purposes: Group of CGUs (millions of Canadian dollars) Canadian Personal and Commercial Banking Canadian Banking Wealth and Insurance Wealth Global Insurance Wholesale TD Securities U.S. Personal and Commercial Banking U.S. Personal and Commercial Banking Total 1 Discount rates have been updated to reflect pre-tax amounts. OTHER INTANGIBLES The following table presents details of the Bank’s other intangibles as at October 31, 2013 and October 31, 2012. Other Intangibles (millions of Canadian dollars) Cost At November 1, 2011 Additions Disposals Impairment Foreign currency translation adjustments and other At October 31, 2012 Additions Disposals Impairment Foreign currency translation adjustments and other At October 31, 2013 Amortization and impairment At November 1, 2011 Disposals Impairment Amortization charge for the year Foreign currency translation adjustments and other At October 31, 2012 Disposals Impairment Amortization charge for the year Foreign currency translation adjustments and other At October 31, 2013 Net Book Value: As at October 31, 2012 As at October 31, 2013 162 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 1 4 LAND, BUILDINGS, EQUIPMENT AND OTHER DEPRECIABLE ASSETS The following table presents details of the Bank’s land, buildings, equipment, and other depreciable assets as at October 31, 2013 and October 31, 2012. Land, Buildings, Equipment and Other Depreciable Assets (millions of Canadian dollars) Cost As at November 1, 2011 Additions Reclassification of leased vehicles1 Acquisitions through business combinations Disposals Impairment losses Foreign currency translation adjustments and other As at October 31, 2012 Additions Reclassification of leased vehicles1 Acquisitions through business combinations Disposals Impairment losses Foreign currency translation adjustments and other As at October 31, 2013 Accumulated depreciation and impairment/losses As at November 1, 2011 Reclassification of leased vehicles1 Depreciation charge for the year Disposals Impairment losses Foreign currency translation adjustments and other As at October 31, 2012 Reclassification of leased vehicles1 Depreciation charge for the year Disposals Impairment losses Foreign currency translation adjustments and other As at October 31, 2013 Net Book Value: As at October 31, 2012 As at October 31, 2013 Land Buildings Computer equipment Furniture, fixtures and other depreciable Leasehold assets1 improvements Total $ 834 9 – 14 2 1 6 $ 860 $ 5 – – – – (7) $ 858 $ $ $ $ – – – – – – – – – – – – – $ 2,179 189 – 78 4 10 – $ 2,432 $ 148 – – – – 88 $ 2,668 $ 678 – 92 3 2 (74) $ 691 $ – 102 1 (6) (11) $ 787 $ 608 147 – 3 1 12 (76) $ 669 $ 320 – – 45 – (158) $ 786 $ 250 – 143 – 11 (97) $ 285 $ – 165 44 – (64) $ 342 $ 1,460 316 (27) 7 2 36 (306) $ 1,412 $ 125 – 2 66 – (105) $ 1,368 $ 750 (7) 162 2 17 (132) $ 754 $ 7 146 45 (2) (150) $ 714 $ 1,174 115 – – – 4 (14) $ 1,271 $ 112 – 5 19 2 10 $ 1,377 $ 494 – 97 – 19 (60) $ 512 $ – 99 13 (5) (24) $ 579 $ 6,255 776 (27) 102 9 63 (390) $ 6,644 $ 710 – 7 130 2 (172) $ 7,057 $ 2,172 (7) 494 5 49 (363) $ 2,242 $ 7 512 103 (13) (249) $ 2,422 $ 860 $ 858 $ 1,741 $ 1,881 $ 384 $ 444 $ 658 $ 654 $ 759 $ 798 $ 4,402 $ 4,635 1 Relates to returned or repossessed vehicles under the operating lease portfolio that are reclassified from land, buildings, equipment and other depreciable assets to other assets. Once in other assets these vehicles are typically sold through auction houses within 30 days. N O T E 1 5 OTHER ASSETS Other Assets (millions of Canadian dollars) Amounts receivable from brokers, dealers and clients Accounts receivable, prepaid expenses and other items1 Prepaid pension expense Insurance-related assets, excluding investments Accrued interest Total 1 Includes foreclosed assets as at October 31, 2013 of $233 million (October 31, 2012 – $254 million) and FDIC indemnification assets as at October 31, 2013 of $81 million (October 31, 2012 – $90 million). October 31 2013 $ 9,183 6,815 506 1,409 1,260 $ 19,173 As at October 31 2012 $ 5,756 6,090 426 1,417 1,225 $ 14,914 163 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 1 6 DEPOSITS Demand deposits are those for which the Bank does not have the right to require notice prior to withdrawal. These deposits are in general chequing accounts. Notice deposits are those for which the Bank can legally require notice The deposits are generally term deposits, guaranteed investment certif- icates and similar instruments. The aggregate amount of term deposits in denominations of $100,000 or more as at October 31, 2013 was $156 billion (October 31, 2012 – $138 billion). prior to withdrawal. These deposits are in general savings accounts. Term deposits are those payable on a fixed date of maturity purchased by customers to earn interest over a fixed period. The terms are from one day to 10 years. Accrued interest on deposits, calculated using the EIRM, is included in Other liabilities on the Consolidated Balance Sheet. Certain deposit liabilities are classified as Trading deposits on the Consolidated Balance Sheet and accounted for at fair value with the change in fair value recognized in the Consolidated Statement of Income. Deposits by Type (millions of Canadian dollars) Personal Banks1 Business and government2 Trading1 Total Non-interest-bearing deposits included above In domestic offices In foreign offices Interest-bearing deposits included above In domestic offices In foreign offices U.S. federal funds deposited1 Total2,3 October 31 2013 As at October 31 2012 Demand $ 12,540 3,958 44,218 – $ 60,716 Notice Term Total Total $ 249,204 10 82,051 – $ 331,265 $ 58,005 16,555 76,935 47,593 $ 199,088 $ 319,749 20,523 203,204 47,593 $ 591,069 $ 291,759 14,957 181,038 38,774 $ 526,528 $ 4,738 31,558 $ 3,798 27,064 304,876 248,139 1,758 $ 591,069 287,516 207,383 767 $ 526,528 1 Includes deposits with the Federal Home Loan Bank. 2 As at October 31, 2013, includes $10 billion in deposits on the Consolidated Balance Sheet relating to covered bondholders (October 31, 2012 – $10 billion). 3 As at October 31, 2013, includes deposits of $320 billion (October 31, 2012 – $271 billion) denominated in U.S. dollars and $17 billion (October 31, 2012 – $13 billion) denominated in other foreign currencies. Deposits by Country (millions of Canadian dollars) Personal Banks Business and government Trading Total Term Deposits (millions of Canadian dollars) Personal Banks Business and government Trading Total Term Deposits due within a Year (millions of Canadian dollars) Personal Banks Business and government Trading Total 164 October 31 2013 As at October 31 2012 Canada United States International Total Total $ 172,885 6,855 126,549 3,325 $ 309,614 $ 144,541 3,882 72,680 41,636 $ 262,739 $ 2,323 9,786 3,975 2,632 $ 18,716 $ 319,749 20,523 203,204 47,593 $ 591,069 $ 291,759 14,957 181,038 38,774 $ 526,528 Over Over Over Within 1 year to 2 years to 3 years to 4 years to 5 years 3 years 1 year 2 years 4 years Over As at October 31 October 31 2012 2013 Over 5 years Total Total $ 36,009 $ 9,180 $ 6,815 15 8,824 11,920 204 $ 144,878 $ 18,174 $ 18,954 16,489 46,162 46,218 156 14 $ 2,977 5 4,746 202 $ 7,930 $ 2,874 5 5,178 401 $ 8,458 $ 150 $ 58,005 $ 67,302 27 16,555 10,898 105 76,935 67,802 412 47,593 38,774 $ 694 $ 199,088 $ 184,776 October 31 2013 As at October 31 2012 Within 3 months $ 13,749 12,468 36,098 23,991 $ 86,306 Over 3 months to 6 months Over 6 months to 12 months Total Total $ 9,116 3,729 4,058 15,056 $ 31,959 $ 13,144 292 6,006 7,171 $ 26,613 $ 36,009 16,489 46,162 46,218 $ 144,878 $ 40,453 10,846 45,572 37,417 $ 134,288 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 1 7 OTHER LIABILITIES Other Liabilities (millions of Canadian dollars) Amounts payable to brokers, dealers and clients Accounts payable, accrued expenses and other items Special purpose entity liabilities Insurance-related liabilities Accrued interest Accrued salaries and employee benefits Accrued benefit liability Cheques and other items in transit Total October 31 2013 $ 8,908 2,863 5,743 5,586 1,076 2,286 1,369 1,082 $ 28,913 As at October 31 2012 $ 5,952 2,705 5,696 4,824 1,466 2,030 1,308 877 $ 24,858 N O T E 1 8 SUBORDINATED NOTES AND DEBENTURES Subordinated notes and debentures are direct unsecured obligations of the Bank or its subsidiaries and are subordinated in right of payment to the claims of depositors and certain other creditors. Redemptions, cancellations, exchanges and modifications of subordinated deben- tures qualifying as regulatory capital are subject to the consent and approval of OSFI. Under Basel III and OSFI’s revised Capital Adequacy Requirements (CAR) Guideline, instruments that do not meet the Basel III require- ments are considered non-qualifying as regulatory capital and are subject to a 10-year phase-out period commencing January 1, 2013. All of the Bank’s current subordinated debentures are non-qualifying capital instruments and are subject to the phase-out period. Subordinated Notes and Debentures (millions of Canadian dollars, except as noted) Maturity date August 2014 November 2017 June 2018 April 2020 November 2020 September 20225 July 2023 May 2025 October 2104 December 2105 December 2106 Total Interest rate (%) 10.05 5.38 5.69 5.483 3.374 4.646 5.837 9.15 4.978 4.789 5.7610 Earliest par redemption date – November 20121 June 20132 April 2015 November 2015 September 2017 July 2018 – October 2015 December 2016 December 2017 As at October 31 2013 October 31 2012 $ 149 – – 871 1,000 270 650 199 796 2,247 1,800 $ 7,982 $ 150 2,444 898 875 998 270 650 199 784 2,250 1,800 $ 11,318 1 On November 1, 2012, the Bank redeemed all of its outstanding medium term 7 For the period to but excluding the earliest par redemption date and thereafter notes at 100 per cent of the principal amount. at a rate of 3-month Bankers’ Acceptance rate plus 2.55%. 2 On June 3, 2013, the Bank redeemed all of its outstanding medium term notes 8 For the period to but excluding the earliest par redemption date and thereafter at 100 per cent of the principal amount. resets every 5 years at a rate of 5-year Government of Canada yield plus 1.77%. 3 For the period to but excluding the earliest par redemption date and thereafter at 9 For the period to but excluding the earliest par redemption date and thereafter a rate of 3-month Bankers’ Acceptance rate plus 2.00%. 4 For the period to but excluding the earliest par redemption date and thereafter at a rate of 3-month Bankers’ Acceptance rate plus 1.25%. 5 Obligation of a subsidiary. 6 For the period to but excluding the earliest par redemption date and thereafter at a rate of 3-month Bankers’ Acceptance rate plus 1.00%. REPAYMENT SCHEDULE The aggregate remaining maturities of the Bank’s subordinated notes and debentures are as follows: resets every 5 years at a rate of 5-year Government of Canada yield plus 1.74%. 10 For the period to but excluding the earliest par redemption date and thereafter resets every 5 years at a rate of 5-year Government of Canada yield plus 1.99%. Maturities (millions of Canadian dollars) Within 1 year Over 1 year to 3 years Over 3 years to 4 years Over 4 years to 5 years Over 5 years Total October 31 2013 $ 149 – – – 7,833 $ 7,982 As at October 31 2012 $ – 150 – – 11,168 $ 11,318 165 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 1 9 LIABILITY FOR PREFERRED SHARES The Bank classifies preferred shares that are mandatorily redeemable or convertible into a variable number of the Bank’s common shares at the holder’s option, as liabilities for reporting purposes. Dividend payments on these preferred shares are recorded in interest expense. Preferred shares that are not mandatorily redeemable or that are not convertible into a variable number of the Bank’s common shares at the holder’s option, are not classified as liabilities and are presented in Note 21, Share Capital. REIT PREFERRED STOCK REIT Preferred Stock, Series 2000A Cumulative Fixed Rate Preferred Shares A real estate investment trust, Carolina First Mortgage Loan Trust (Carolina First REIT), a subsidiary of TD Bank, N.A., issued the Series 2000A Cumulative Fixed Rate Preferred Shares (Series 2000A shares). The Series 2000A shares are entitled to quarterly cumulative cash divi- dends, if declared, at a per annum rate of 11.125% per Series 2000A share. The Series 2000A shares are unsecured and mandatorily redeemable by Carolina First REIT on January 31, 2031, subject to receipt of any necessary regulatory consents. Each Series 2000A share may be automatically exchanged, without the consent of the holders, into a newly issued share of Series 2000A Cumulative Fixed Rate Preferred Stock of TD Bank, N.A. on the occurrence of certain events. The Series 2000A shares qualified as Tier 2 capital of the Bank under Basel II. Under Basel III, the Series 2000A shares are considered non- qualifying capital instruments subject to phase-out over 10 years commencing January 2013. As at October 31, 2013, 263 shares (October 31, 2012 – 263 shares), for $27 million (October 31, 2012 – $26 million), were issued and outstanding. REIT Preferred Stock, Series 2002C Cumulative Variable Rate Preferred Shares On May 31, 2012, Carolina First REIT redeemed all of its outstanding Series 2002C Cumulative Variable Rate Preferred Shares at par. N O T E 2 0 CAPITAL TRUST SECURITIES The Bank issues innovative capital securities through SPEs. The Bank consolidates these SPEs and their securities are reported on the Consolidated Balance Sheet as either Liability for capital trust securities or Non-controlling interests in subsidiaries. The securities all qualified as Tier 1 capital of the Bank under Basel II.Under Basel III, all the Bank’s capital trust securities are considered non-qualifying capital instruments subject to phase-out over 10 years commencing January 2013. On February 7, 2011, the Bank announced its expectation to exercise a regulatory event redemption right in 2022 in respect of the TD Capital Trust IV Notes–Series 2 outstanding at that time. On September 17, 2008 TD Capital Trust III (Trust III), a closed-end trust, issued TD Capital Trust III Securities – Series 2008 (TD CaTS III). The proceeds from the issuance were invested in trust assets purchased from the Bank. Each TD CaTS III may be automatically exchanged, without the consent of the holders, into 40 non-cumulative Class A First Preferred Shares, Series A9 of the Bank on the occurrence of certain events. On January 26, 2009, TD Capital Trust IV (Trust IV) issued TD Capital Trust IV Notes – Series 1 due June 30, 2108 (TD CaTS IV-1) and TD Capital Trust IV Notes – Series 2 due June 30, 2108 (TD CaTS IV-2) and on September 15, 2009, issued TD Capital Trust IV Notes – Series 3 due June 30, 2108 (TD CaTS IV-3, and collectively TD CaTS IV Notes). The proceeds from the issuances were invested in Bank deposit notes. Each TD CaTS IV-1 and TD CaTS IV-2 may be automatically exchanged into non-cumulative Class A First Preferred Shares, Series A10 of the Bank and each TD CaTS IV-3 may be automatically exchanged into non-cumulative Class A First Preferred Shares, Series A11 of the Bank, in each case, without the consent of the holders, on the occurrence of certain events. On each interest payment date in respect of which certain events have occurred, holders of TD CaTS IV Notes will be required to invest interest paid on such TD CaTS IV Notes in a new series of non-cumulative Class A First Preferred Shares of the Bank. 166 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSCapital Trust Securities (millions of Canadian dollars, except as noted) Included in non-controlling interests in subsidiaries on the Consolidated Balance Sheet TD Capital Trust III Securities – Series 2008 Included in Liability for Capital Trust Securities on the Consolidated Balance Sheet TD Capital Trust II Securities – Series 2012-1 TD Capital Trust IV Notes – Series 1 TD Capital Trust IV Notes – Series 2 TD Capital Trust IV Notes – Series 3 South Financial Capital Trust 2007-I Capital Securities South Financial Preferred Trust 2007-II Preferred Securities South Financial Capital Trust 2007-III Capital Securities Thousands of units Distribution/Interest payment dates Annual yield At the option At the option October 31 October 31 2012 of the holder of the issuer 2013 Redemption date Conversion date As at 1,000 June 30, Dec. 31 7.243%1 Dec. 31, 20132 $ 989 $ 981 350 550 450 750 75 17 30 2,222 June 30, Dec. 31 June 30, Dec. 31 June 30, Dec. 31 June 30, Dec. 31 Mar. 1, June 1, Sep. 1, Dec. 1 Jan. 30, Apr. 30, July 30, Oct. 30 Mar. 15, June 15, Sep. 15, Dec. 15 6.792% Dec. 31, 20073 9.523%4 Jun. 30, 20145 10.000%6 Jun. 30, 20145 6.631%7 Dec. 31, 20145 Float Sep. 1, 20128 Float Oct. 30, 20129 Float Sep. 15, 201210 At any time $ – 550 450 740 – – $ 350 550 450 752 75 17 – $ 1,740 30 $ 2,224 1 For the period to but excluding December 31, 2018, and thereafter at a rate of one half of the sum of 6-month Bankers’ Acceptance rate plus 4.30%. 2 On the redemption date and on any distribution date thereafter, Trust III may, with regulatory approval, redeem TD CaTS III in whole without the consent of the holders. 3 On December 31, 2012, TD Capital Trust II redeemed all of its outstanding securi- ties at a redemption price of $1,000. 4 For the period to but excluding June 30, 2019 and thereafter resets every 5 years at a rate of 5-year Government of Canada yield plus 10.125%. 5 On or after the redemption date, Trust IV may, with regulatory approval, redeem the TD CaTS IV-1, TD CaTS IV-2 or TD CaTS IV-3, respectively, in whole or in part, without the consent of the holders. 6 For the period to but excluding June 30, 2039 and thereafter resets every 5 years at a rate of 5-year Government of Canada yield plus 9.735%. 7 For the period to but excluding June 30, 2021 and thereafter resets every 5 years at a rate of 5-year Government of Canada yield plus 4.00%. 8 On March 1, 2013, South Financial Capital Trust 2007-I redeemed all of its outstanding securities at a redemption price of US$1,000. 9 On April 30, 2013, South Financial Capital Trust 2007-II redeemed all of its outstanding securities at a redemption price of US$1,000. 10 On March 15, 2013, South Financial Capital Trust 2007-III redeemed all of its outstanding securities at a redemption price of US$1,000. N O T E 2 1 SHARE CAPITAL COMMON SHARES The Bank is authorized by its shareholders to issue an unlimited number of common shares, without par value, for unlimited consider- ation. The common shares are not redeemable or convertible. Dividends are typically declared by the Board of Directors of the Bank on a quarterly basis and the amount may vary from quarter to quarter. PREFERRED SHARES The Bank is authorized by its shareholders to issue, in one or more series, an unlimited number of Class A First Preferred Shares, without nominal or par value. Under Basel III, all the Bank’s current preferred shares are considered non-qualifying capital instruments subject to phase-out over 10 years commencing January 2013. 167 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS The following table summarizes the shares issued and outstanding as at October 31, 2013 and October 31, 2012. Common and Preferred Shares Issued and Outstanding and Treasury Shares Held (millions of shares and millions of Canadian dollars) October 31, 2013 October 31, 2012 Common Shares Balance as at beginning of year Proceeds from shares issued on exercise of stock options Shares issued as a result of dividend reinvestment plan Purchase of shares for cancellation Proceeds from issuance of new shares Balance as at end of year – common shares Preferred Shares – Class A Series O Series P Series Q Series R Series S1 Series T1 Series Y2 Series Z2 Series AA Series AC Series AE Series AG Series AI Series AK Balance as at end of year – preferred shares Treasury shares – common3 Balance as at beginning of year Purchase of shares Sale of shares Balance as at end of year – treasury shares – common Treasury shares – preferred3 Balance as at beginning of year Purchase of shares Sale of shares Balance as at end of year – treasury shares – preferred Number of shares 918.2 4.2 6.0 (9.0) – 919.4 17.0 10.0 8.0 10.0 5.4 4.6 5.5 4.5 10.0 8.8 12.0 15.0 11.0 14.0 135.8 (2.1) (41.7) 41.9 (1.9) – (3.4) 3.3 (0.1) Amount $ 18,691 297 515 (187) – $ 19,316 $ 425 250 200 250 135 115 137 113 250 220 300 375 275 350 $ 3,395 $ $ $ $ (166) (3,552) 3,573 (145) (1) (86) 85 (2) Number of shares 902.4 3.9 11.9 – – 918.2 17.0 10.0 8.0 10.0 10.0 – 10.0 – 10.0 8.8 12.0 15.0 11.0 14.0 135.8 (1.4) (40.3) 39.6 (2.1) – (2.9) 2.9 – Amount $ 17,491 253 947 – – $ 18,691 $ 425 250 200 250 250 – 250 – 250 220 300 375 275 350 $ 3,395 $ $ $ $ (116) (3,175) 3,125 (166) – (77) 76 (1) 1 On July 31, 2013, the Bank converted 4.6 million of its 10 million non-cumulative 5-year Rate Reset Preferred Shares, Series S, on a one-for-one basis, into non- cumulative Floating Rate Preferred Shares, Series T of the Bank. 2 On October 31, 2013, the Bank converted 4.5 million of its 10 million non- cumulative 5-year Rate Reset Preferred Shares, Series Y, on a one-for-one basis, into non-cumulative Floating Rate Preferred Shares, Series Z of the Bank. 3 When the Bank purchases its own shares as a part of its trading business, they are classified as treasury shares and the cost of these shares is recorded as a reduction in equity. Class A First Preferred Shares, Series O On November 1, 2005, the Bank issued 17 million Class A First Preferred Shares, Series O for gross cash consideration of $425 million. Quarterly non-cumulative cash dividends, if declared, will be paid at a per annum rate of 4.85% per Series O share. The Series O shares are redeemable by the Bank, subject to regulatory consent, by payment in cash of $26.00 per share if redeemed on or after November 1, 2010 and decreasing by $0.25 each 12-month period thereafter to $25.00 per share if redeemed on or after October 31, 2014. Class A First Preferred Shares, Series R On March 12, 2008, the Bank issued 10 million Class A First Preferred Shares, Series R for gross cash consideration of $250 million. Quarterly non-cumulative cash dividends, if declared, will be paid at a per annum rate of 5.60% per Series R share. The Series R shares are redeemable by the Bank, subject to regulatory consent, by payment in cash of $26.00 per share if redeemed on or after April 30, 2013 and decreasing by $0.25 each 12-month period thereafter to $25.00 per share if redeemed on or after April 30, 2017. Class A First Preferred Shares, Series P On November 1, 2007, the Bank issued 10 million Class A First Preferred Shares, Series P for gross cash consideration of $250 million. Quarterly non-cumulative cash dividends, if declared, will be paid at a per annum rate of 5.25% per Series P share. The Series P shares are redeemable by the Bank, subject to regulatory consent, by payment in cash of $26.00 per share if redeemed on or after November 1, 2012 and decreasing by $0.25 each 12-month period thereafter to $25.00 per share if redeemed on or after October 31, 2016. Class A First Preferred Shares, Series Q On January 31, 2008, the Bank issued 8 million Class A First Preferred Shares, Series Q for gross cash consideration of $200 million. Quarterly non-cumulative cash dividends, if declared, will be paid at a per annum rate of 5.60% per Series Q share. The Series Q shares are redeemable by the Bank, subject to regulatory consent, by payment in cash of $26.00 per share if redeemed on or after January 31, 2013 and decreasing by $0.25 each 12-month period thereafter to $25.00 per share if redeemed on or after January 31, 2017. 168 5-Year Rate Reset Preferred Shares, Series S On June 11, 2008, the Bank issued 10 million non-cumulative 5-Year Rate Reset Preferred Shares, Series S for gross cash consideration of $250 million. Quarterly non-cumulative cash dividends, if declared, will be paid at a per annum rate of 5.00% for the initial period from and including June 11, 2008 to but excluding July 31, 2013. Thereafter, the dividend rate will reset every five years to equal the then five-year Government of Canada bond yield plus 1.60%. Holders of the Series S shares will have the right to convert all or any part of their shares into non-cumulative Floating Rate Preferred Shares, Series T, subject to certain conditions, on July 31, 2013, and on July 31 every five years thereafter and vice versa. The Series S shares are redeemable by the Bank for cash, subject to regulatory consent, at $25.00 per share on July 31, 2013 and on July 31 every five years thereafter. On July 31, 2013, the Bank converted 4.6 million of its 10 million non-cumulative 5-Year Rate Reset Preferred Shares, Series S, on a one-for-one basis, into non-cumulative Floating Rate Preferred Shares, Series T. TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Floating Rate Preferred Shares, Series T On July 31, 2013, the Bank issued 4.6 million non-cumulative Floating Rate Preferred Shares, Series T in a gross amount of $115 million through a one-for-one conversion of some of its non-cumulative 5-Year Rate Reset Preferred Shares, Series S. Floating rate non-cumula- tive cash dividends, if declared, will be payable quarterly for the period from and including July 31, 2013 to but excluding July 31, 2018. The dividend rate for a quarterly period will be equal to the 90-day Govern- ment of Canada Treasury Bill yield plus 1.60%. Holders of the Series T shares will have the right to convert all or any part of their shares into non-cumulative 5-Year Rate Reset Preferred Shares, Series S, subject to certain conditions, on July 31, 2018, and on July 31 every five years thereafter and vice versa. The Series T shares are redeemable by the Bank for cash, subject to regulatory consent, at (i) $25.00 per share on July 31, 2018 and on July 31 every five years thereafter, or (ii) $25.50 in the case of redemptions on any other date on or after July 31, 2013. 5-Year Rate Reset Preferred Shares, Series Y On July 16, 2008, the Bank issued 10 million non-cumulative 5-Year Rate Reset Preferred Shares, Series Y for gross cash consideration of $250 million. Quarterly non-cumulative cash dividends, if declared, will be paid at a per annum rate of 5.10% for the initial period from and including July 16, 2008 to but excluding October 31, 2013. Thereafter, the dividend rate will reset every five years to equal the then five-year Government of Canada bond yield plus 1.68%. Holders of the Series Y shares will have the right to convert their shares into non-cumulative Floating Rate Preferred Shares, Series Z, subject to certain conditions, on October 31, 2013, and on October 31 every five years thereafter and vice versa. The Series Y shares are redeemable by the Bank for cash, subject to regulatory consent, at $25.00 per share on October 31, 2013 and on October 31 every five years thereafter. On October 31, 2013, the Bank converted 4.5 million of its 10 million non-cumulative 5-Year Rate Reset Preferred Shares, Series Y, on a one-for-one basis, into non-cumulative Floating Rate Preferred Shares, Series Z. Floating Rate Preferred Shares, Series Z On October 31, 2013, the Bank issued 4.5 million non-cumulative Floating Rate Preferred Shares, Series Z in a gross amount of $113 million through a one-for-one conversion of some of its non-cumula- tive 5-Year Rate Reset Preferred Shares, Series Y. Floating rate non- cumulative cash dividends, if declared, will be payable quarterly for the period from and including October 31, 2013 to but excluding October 31, 2018. The dividend rate for a quarterly period will be equal to the 90-day Government of Canada Treasury Bill yield plus 1.68%. Holders of the Series Z shares will have the right to convert all or any part of their shares into non-cumulative 5-Year Rate Reset Preferred Shares, Series Y, subject to certain conditions, on October 31, 2018, and on October 31 every five years thereafter and vice versa. The Series Z shares are redeemable by the Bank for cash, subject to regulatory consent, at (i) $25.00 per share on October 31, 2018 and on October 31 every five years thereafter, or (ii) $25.50 in the case of redemptions on any other date on or after October 31, 2013. 5-Year Rate Reset Preferred Shares, Series AA On September 12, 2008, the Bank issued 10 million non-cumulative 5-Year Rate Reset Preferred Shares, Series AA for gross cash consider- ation of $250 million. Quarterly non-cumulative cash dividends, if declared, will be paid at a per annum rate of 5.00% for the initial period from and including September 12, 2008 to but excluding January 31, 2014. Thereafter, the dividend rate will reset every five years to equal the then five-year Government of Canada bond yield plus 1.96%. Holders of the Series AA shares will have the right to convert their shares into non-cumulative Floating Rate Preferred Shares, Series AB, subject to certain conditions, on January 31, 2014, and on January 31 every five years thereafter and vice versa. The Series AA shares are redeemable by the Bank for cash, subject to regulatory consent, at $25.00 per share on January 31, 2014 and on January 31 every five years thereafter. 5-Year Rate Reset Preferred Shares, Series AC On November 5, 2008, the Bank issued 8.8 million non-cumulative 5-Year Rate Reset Preferred Shares, Series AC for gross cash consider- ation of $220 million. Quarterly non-cumulative cash dividends, if declared, will be paid at a per annum rate of 5.60% for the initial period from and including November 5, 2008 to but excluding January 31, 2014. Thereafter, the dividend rate will reset every five years to equal the then five year Government of Canada bond yield plus 2.74%. Holders of the Series AC shares will have the right to convert their shares into non-cumulative Floating Rate Preferred Shares, Series AD, subject to certain conditions, on January 31, 2014, and on January 31 every five years thereafter and vice versa. The Series AC shares are redeemable by the Bank for cash, subject to regulatory consent, at $25.00 per share on January 31, 2014 and on January 31 every five years thereafter. 5-Year Rate Reset Preferred Shares, Series AE On January 14, 2009, the Bank issued 12 million non-cumulative 5-Year Rate Reset Preferred Shares, Series AE for gross cash consideration of $300 million. Quarterly non-cumulative cash dividends, if declared, will be paid at a per annum rate of 6.25% for the initial period from and including January 14, 2009 to but excluding April 30, 2014. Thereafter, the dividend rate will reset every five years to equal the then five year Government of Canada bond yield plus 4.37%. Holders of the Series AE shares will have the right to convert their shares into non-cumula- tive Floating Rate Class A Preferred Shares, Series AF, subject to certain conditions, on April 30, 2014, and on April 30 every five years thereaf- ter and vice versa. The Series AE shares are redeemable by the Bank for cash, subject to regulatory consent, at $25.00 per share on April 30, 2014 and on April 30 every five years thereafter. 5-Year Rate Reset Preferred Shares, Series AG On January 30, 2009, the Bank issued 15 million non-cumulative 5-Year Rate Reset Preferred Shares, Series AG for gross cash consideration of $375 million. Quarterly non-cumulative cash dividends, if declared, will be paid at a per annum rate of 6.25% for the initial period from and including January 30, 2009 to but excluding April 30, 2014. Thereafter, the dividend rate will reset every five years to equal the then five year Government of Canada bond yield plus 4.38%. Holders of the Series AG shares will have the right to convert their shares into non-cumula- tive Floating Rate Class A Preferred Shares, Series AH, subject to certain conditions, on April 30, 2014, and on April 30 every five years thereaf- ter and vice versa. The Series AG shares are redeemable by the Bank for cash, subject to regulatory consent, at $25.00 per share on April 30, 2014 and on April 30 every five years thereafter. 5-Year Rate Reset Preferred Shares, Series AI On March 6, 2009, the Bank issued 11 million non-cumulative 5-Year Rate Reset Preferred Shares, Series AI for gross cash consideration of $275 million. Quarterly non-cumulative cash dividends, if declared, will be paid at a per annum rate of 6.25% for the initial period from and including March 6, 2009 to but excluding July 31, 2014. Thereafter, the dividend rate will reset every five years to equal the then five year Government of Canada bond yield plus 4.15%. Holders of the Series AI shares will have the right to convert their shares into non-cumulative Floating Rate Class A Preferred Shares, Series AJ, subject to certain conditions, on July 31, 2014, and on July 31 every five years thereafter and vice versa. The Series AI shares are redeemable by the Bank for cash, subject to regulatory consent, at $25.00 per share on July 31, 2014 and on July 31 every five years thereafter. 5-Year Rate Reset Preferred Shares, Series AK On April 3, 2009, the Bank issued 14 million non-cumulative 5-Year Rate Reset Preferred Shares, Series AK for gross cash consideration of $350 million. Quarterly non-cumulative cash dividends, if declared, will be paid at a per annum rate of 6.25% for the initial period from and including April 3, 2009 to but excluding July 31, 2014. Thereafter, the dividend rate will reset every five years to equal the then five year 169 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSGovernment of Canada bond yield plus 4.33%. Holders of the Series AK shares will have the right to convert their shares into non- cumulative Floating Rate Class A Preferred Shares, Series AL, subject to certain conditions, on July 31, 2014, and on July 31 every five years thereafter and vice versa. The Series AK shares are redeemable by the Bank for cash, subject to regulatory consent, at $25.00 per share on July 31, 2014 and on July 31 every five years thereafter. based on the last five trading days before the date of the dividend payment, with a discount of between 0% to 5% at the Bank’s discre- tion, or from the open market at market price. During the year, a total of 3.3 million common shares were issued from the Bank’s treasury at a discount of 1% and 2.7 million common shares were issued from the Bank’s treasury at a discount of 0% (2012 – 11.9 million shares at a discount of 1%) under the dividend reinvestment plan. NORMAL COURSE ISSUER BID On June 19, 2013, the Bank announced that the Toronto Stock Exchange (TSX) and OSFI approved the Bank’s normal course issuer bid to repurchase for cancellation up to 12 million common shares. Purchases under the bid commenced on June 21, 2013 and will end on June 20, 2014, such earlier date as the Bank may determine or such earlier date as the Bank may complete its purchases pursuant to the notice of intention filed with the TSX. As of October 31, 2013, the Bank repurchased 9.0 million common shares under this bid at an aver- age price of $86.50 for a total amount of $780.2 million. The Bank did not have a normal course issuer bid outstanding during fiscal 2012. DIVIDEND REINVESTMENT PLAN The Bank offers a dividend reinvestment plan for its common share- holders. Participation in the plan is optional and under the terms of the plan, cash dividends on common shares are used to purchase addi- tional common shares. At the option of the Bank, the common shares may be issued from the Bank’s treasury at an average market price DIVIDEND RESTRICTIONS The Bank is prohibited by the Bank Act from declaring dividends on its preferred or common shares if there are reasonable grounds for believing that the Bank is, or the payment would cause the Bank to be, in contravention of the capital adequacy and liquidity regulations of the Bank Act or directions of OSFI. The Bank does not anticipate that this condition will restrict it from paying dividends in the normal course of business. The Bank is also restricted from paying dividends in the event that either Trust III or Trust IV fails to pay semi-annual distributions or inter- est in full to holders of their respective trust securities, TD CaTS III and TD CaTS IV Notes. In addition, the ability to pay dividends on common shares without the approval of the holders of the outstanding preferred shares is restricted unless all dividends on the preferred shares have been declared and paid or set apart for payment. Currently, these limitations do not restrict the payment of dividends on common shares or preferred shares. N O T E 2 2 NON-CONTROLLING INTERESTS IN SUBSIDIARIES Non-Controlling Interests in Subsidiaries (millions of Canadian dollars) REIT preferred stock, Series A TD Capital Trust III Securities – Series 20081 Other Total 1 Refer to Note 20 for a description of the TD Capital Trust III securities. October 31 2013 $ 513 989 6 $ 1,508 As at October 31 2012 $ 491 981 5 $ 1,477 REIT PREFERRED STOCK, FIXED-TO-FLOATING RATE EXCHANGEABLE NON-CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES A A real estate investment trust, Northgroup Preferred Capital Corporation (Northgroup REIT), a subsidiary of TD Bank, N.A., issued 500,000 shares of Fixed-to-Floating Rate Exchangeable Non-Cumulative Perpetual Preferred Stock, Series A (Series A shares). Each Series A share is entitled to semi-annual non-cumulative cash dividends, if declared, at a per annum rate of 6.378% until October 17, 2017 and at a per annum rate of three-month LIBOR plus 1.1725% payable quarterly thereafter. The Series A shares are redeemable by Northgroup REIT, subject to regulatory consent, at a price of US$1,000 plus a make-whole amount at any time after October 15, 2012 and prior to October 15, 2017, and at a price of US$1,000 per Series A share on October 15, 2017 and every five years thereafter. The Series A shares qualified as Tier 1 capital of the Bank under Basel II. Under Basel III, the Series A shares are considered non-qualifying capital instruments subject to phase-out over 10 years commencing January 2013. Each Series A share may be automatically exchanged, without the consent of the holders, into a newly issued share of preferred stock of TD Bank, N.A. on the occur- rence of certain events. 170 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 2 3 TRADING-RELATED INCOME Trading assets and liabilities, including trading derivatives, certain secu- rities and loans held within a trading portfolio that are designated at fair value through profit or loss, trading loans and trading deposits, are measured at fair value, with gains and losses recognized on the Consolidated Statement of Income. Trading-related income comprises Net interest income, Trading income (losses), and income from financial instruments designated at fair value through profit or loss that are managed within a trading portfolio, all recorded on the Consolidated Statement of Income. Net interest income arises from interest and dividends related to trading assets and liabilities, and is reported net of interest expense and income associated with funding these assets and liabilities in the table below. Trading income (loss) includes realized and unrealized gains and losses on trading assets and liabilities. Realized and unrealized gains and losses on financial instruments designated at fair value through profit or loss are included in Non-interest income on the Consolidated Statement of Income. Trading-related income excludes underwriting fees and commissions on securities transactions, which are shown separately on the Consoli- dated Statement of Income. Trading-related income by product line depicts trading income for each major trading category. Trading-Related Income (millions of Canadian dollars) Net interest income (loss) Trading income (loss) Financial instruments designated at fair value through profit or loss1 Total By product Interest rate and credit portfolios Foreign exchange portfolios Equity and other portfolios Financial instruments designated at fair value through profit or loss1 Total 1 Excludes amounts related to securities designated at fair value through profit or loss that are not managed within a trading portfolio, but which have been combined with derivatives to form economic hedging relationships. N O T E 2 4 INSURANCE For the years ended October 31 2013 $ 1,230 (281) (6) $ 943 $ 554 368 27 (6) $ 943 2012 $ 1,050 (41) 10 $ 1,019 $ 534 374 101 10 $ 1,019 2011 $ 818 (127) 4 $ 695 $ 212 428 51 4 $ 695 INSURANCE RISK Insurance risk is the risk of financial loss due to actual experience emerging differently from expectations in insurance product pricing or reserving. Unfavourable experience could emerge due to adverse fluctuations in timing, actual size and/or frequency of claims (for example, catastrophic risk), mortality, morbidity, longevity, policy- holder behaviour, or associated expenses. Insurance contracts provide financial protection by transferring insured risks to the issuer in exchange for premiums. The Bank is exposed to insurance risk through its property and casualty insurance business, life and health insurance business and reinsurance business. Senior management within the insurance business units has primary responsibility for managing insurance risk with oversight by the Chief Risk Officer for Insurance who reports into Risk Management. The Audit Committee of the Board acts as the Audit and Conduct Review Committee for the Canadian Insurance company subsidiaries. The Insurance company subsidiaries also have their own Boards of Directors, as well as independent external appointed actuaries who provide addi- tional risk management oversight. The Bank’s risk governance practices ensure strong independent oversight and control of risk within the Insurance business. The Risk Committee for the Insurance business provides critical oversight of the risk management activities within the business. The Insurance Risk Management Framework outlines the internal risk and control structure to manage insurance risk and includes risk appetite, policies, processes as well as limits and governance. The Insurance Risk Management Framework is maintained by Risk Management and supports alignment with the Bank’s risk appetite for insurance risk. The assessment of reserves for claims liabilities is central to the insurance operation. The Bank engages in establishing reserves to cover estimated future payments (including loss adjustment expenses) on all claims arising from insurance contracts underwritten. The reserves cannot be established with complete certainty, and represent management’s best estimate for future claim payments. As such, the Bank regularly monitors liability estimates against claims experience and adjusts reserves as appropriate if experience emerges differently than anticipated. Claims liabilities are calculated in accordance with the Bank’s insurance accounting policy. See Note 2 to the Bank’s Consolidated Financial Statements for further details. Sound product design is an essential element of managing risk. The Bank’s exposure to insurance risk is generally short term in nature as the principal underwriting risk relates to automobile and home insur- ance for individuals. Insurance market cycles as well as changes in automobile insurance legislation, the judicial environment, trends in court awards, climate patterns and the economic environment may impact the performance of the Insurance business. Consistent pricing policies and underwriting standards are maintained and compliance with such policies is moni- tored by the Risk Committee for the Insurance business. Automobile insurance is provincially legislated and as such, policy- holder benefits may differ between provinces. There is also exposure to geographic concentration risk associated with personal property cover- age. Exposure to insurance risk concentrations is managed through established underwriting guidelines, limits, and authorization levels that govern the acceptance of risk. Concentration risk is also mitigated through the purchase of reinsurance. Strategies are in place to manage the risk to our reinsurance busi- ness. Underwriting risk on business assumed is managed through a policy that limits exposure to certain types of business and countries. The vast majority of treaties are annually renewable, which minimizes long term risk. Pandemic exposure is reviewed and estimated annually. 171 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS OTHER RELATED RISKS Credit risk is managed through a counterparty credit policy. To mini- mize interest rate and liquidity risks, investments supporting the net provision for unpaid claims are matched in interest rate exposure. INSURANCE REVENUE AND EXPENSES The Bank is engaged in insurance businesses relating to property and casualty insurance, life and health insurance, and reinsurance. Insur- ance revenue is presented on the Consolidated Statement of Income under Insurance revenue and expenses are presented under Insurance claims and related expenses, including the impacts of claims and reinsurance on the Consolidated Statement of Income. Insurance Revenue and Insurance Claims and Related Expenses (millions of Canadian dollars) Earned Premiums Gross Reinsurance ceded Net earned premiums Fee income and other revenue Insurance Revenue Insurance Claims and Related Expenses Gross Reinsurance ceded Insurance claims and related expenses For the years ended October 31 2013 2012 2011 $ 4,253 836 $ 3,417 317 $ 3,734 $ 3,990 834 $ 3,156 381 $ 3,537 $ 3,273 217 $ 3,056 $ 2,771 347 $ 2,424 $ 3,722 753 $ 2,969 376 $ 3,345 $ 2,427 249 $ 2,178 INSURANCE LIABILITIES Total insurance liabilities of $5,586 million are reported as at October 31, 2013 (October 31, 2012 – $ 4,824 million) as part of other liabilities included in Note 17. RECONCILIATION OF CHANGES IN LIABILITIES FOR PROPERTY AND CASUALTY INSURANCE For property and casualty insurance, the recognized liabilities are comprised of a provision for unpaid claims (see section (a) below) and unearned premiums (see section (b) below). The provision for unpaid claims is established to reflect the estimate of the full amount of all liabilities associated with the insurance premiums earned at the balance sheet date, including insurance claims incurred but not recorded. The ultimate amount of these liabilities will vary from the best estimate made for a variety of reasons, including additional infor- mation with respect to the facts and circumstances of the insurance claims incurred. The unearned premiums represent the portion of net written premiums that pertain to the unexpired term of the policies in force. (a) Movement in Provision for Unpaid Claims: The following table presents movements in the property and casualty insurance net provision for unpaid claims during the year. Movement in Provision for Unpaid Claims (millions of Canadian dollars) Balance as at beginning of year Claims costs for current accident year Prior accident years claims development (favourable) unfavourable Increase (decrease) due to changes in assumptions: Discount rate Provision for adverse deviation Claims and related expenses Claims paid during the year for: Current accident year Prior accident years Increase (decrease) other recoverables Balance as at end of year October 31, 2013 October 31, 2012 Gross Reinsurance Net Gross Reinsurance $ 3,276 2,332 $ 275 87 $ 3,001 2,245 $ 2,796 2,012 $ 189 182 346 (65) 411 227 (80) 70 2,668 (1,011) (985) (1,996) (9) $ 3,939 1 – 23 (47) (85) (132) (9) $ 157 (81) 70 2,645 (964) (900) (1,864) – $ 3,782 (17) 37 2,259 (830) (949) (1,779) – $ 3,276 (26) 1 (1) 156 (7) (63) (70) – $ 275 Net $ 2,607 1,830 253 (18) 38 2,103 (823) (886) (1,709) – $ 3,001 (b) Movement in Provision for Unearned Premiums: The following table presents movements in the property and casualty insurance net unearned premiums during the year. Movement in Provision for Unearned Premiums (millions of Canadian dollars) Balance as at beginning of year Written premiums Earned premiums Balance as at end of year October 31, 2013 October 31, 2012 Gross Reinsurance Net Gross Reinsurance $ 1,397 2,909 (2,800) $ 1,506 $ $ – 70 (70) – $ 1,397 2,839 (2,730) $ 1,506 $ 1,314 2,707 (2,624) $ 1,397 $ $ – 61 (61) – Net $ 1,314 2,646 (2,563) $ 1,397 172 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS (c) Other Movements in Insurance Liabilities: Other movements in insurance liabilities consists of changes in life and health insurance policy benefit liabilities and other insurance payables that were caused primarily by the aging of in force business and changes in actuarial assumptions. PROPERTY AND CASUALTY CLAIMS DEVELOPMENT The following table shows the estimates of cumulative incurred claims for the five most recent accident years, with subsequent developments during the periods and together with cumulative payments to date. The original reserve estimates are evaluated monthly for redundancy or deficiency. The evaluation is based on actual payments in full or partial settlement of claims and current estimates of claims liabilities for claims still open or claims still unreported. Incurred Claims by Accident Year (millions of Canadian dollars) Net ultimate claims cost at end of accident year Revised estimates One year later Two years later Three years later Four years later Five years later Current estimates of cumulative claims Cumulative payments to date Net undiscounted provision for unpaid claims Effect of discount Provision for adverse deviation Net provision for unpaid claims 2008 and prior 2009 2010 2011 2012 2013 Total Accident year $ 3,335 $ 1,598 $ 1,742 $ 1,724 $ 1,830 $ 2,245 3,366 3,359 3,422 3,527 3,630 $ 3,630 $ (3,168) 462 1,627 1,663 1,720 1,763 1,764 1,851 1,921 1,728 1,823 1,930 $ 1,763 $ (1,526) 237 $ 1,921 $ (1,519) 402 $ 1,823 $ (1,271) 552 $ 1,930 $ (1,159) 771 $ 2,245 $ (964) 1,281 $ 3,705 (250) 327 $ 3,782 SENSITIVITY TO INSURANCE RISK A variety of assumptions are made related to future level of claims, policyholder behaviour, expenses and sales levels when products are designed and priced as well as the determination of actuarial liabilities. Such assumptions require a significant amount of professional judgment. The insurance claims provision is sensitive to certain assumptions. It has not been possible to quantify the sensitivity of certain assumptions such as legislative changes or uncertainty in the estimation process. Actual experience may differ from the assumptions made by the Bank. For property and casualty insurance, the main assumption underlying the claims liability estimates is that the Bank’s future claims development will follow a similar pattern to past claims development experience. Claims liabilities estimates are also based on various quantitative and qualitative factors, including discount rate, margin for adverse deviation, reinsurance, average claims costs including claims handling costs, aver- age claims by accident year, and trends in claims severity and frequency and other factors such as inflation, expected or in force government pricing and coverage reforms and the level of insurance fraud. Qualitative and other unforeseen factors could negatively impact the Bank’s ability to accurately assess the risk of the insurance policies that the Bank underwrites. In addition, there may be significant lags between the occurrence of an insured event and the time it is actually reported to the Bank and additional lags between the time of reporting and final settlements of claims. The following table outlines the sensitivity of the Bank’s claims liabilities. The analysis is performed for reasonably possible movements in the discount rate and in the margin for adverse deviation with all other assumptions held constant, showing the impact on the consoli- dated net income before income taxes, and the impact on equity in the property and casualty insurance business. Movements in the assump- tions may be non-linear. Sensitivity of Critical Assumptions – Property and Casualty Insurance Contract Liabilities (millions of Canadian dollars) As at Impact of an absolute change of 1% in key assumptions Discount rate assumption used Increase in assumption Decrease in assumption Margin for adverse deviation assumption used Increase in assumption Decrease in assumption October 31, 2013 October 31, 2012 Impact on net income (loss) before income tax Impact on equity Impact on net income (loss) before income tax Impact on equity $ 102 (110) (31) 31 $ 75 (81) (23) 23 $ 76 (81) (25) 25 $ 56 (59) (18) 18 A 5% increase in the frequency of claims as at October 31, 2013 will decrease net income before tax and equity by $33 million and $24 million, respectively. A 5% decrease in the frequency of claims will increase income before tax and equity by the same amounts. A 5% increase in the severity of claims as at October 31, 2013 will decrease net income before tax and equity by $180 million and $133 million, respectively. A 5% decrease in the severity of claims will increase income before tax and equity by the same amounts. For life and health Insurance, critical assumptions used in the measure- ment of insurance contract liabilities are determined by the appointed actuary. The processes used to determine critical assumptions are as follows: • Mortality, morbidity and lapse assumptions are based on industry and historical company data. • Expense assumptions are based on an annually updated expense study that is used to determine expected expenses for future years. • Asset reinvestment rates are based on projected earned rates, and liabilities are calculated using the Canadian Asset Liability Method (CALM). A sensitivity analysis for possible movements in the life and health insurance business assumptions was performed and the impact is not significant to the Bank’s Consolidated Financial Statements. 173 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS CONCENTRATION OF INSURANCE RISK Concentration risk is the risk resulting from large exposure to similar risks that are positively correlated. Risk associated with automobile, residential and other products may vary in relation to the geographical area of the risk insured. Exposure to concentrations of insurance risk, in terms of type of risk is mitigated by ceding these risks through reinsurance contracts, as well as careful selection and implementation of underwriting strategies, which is in turn largely achieved through diversification by line of business and geographical areas. For automobile insurance, legislation is in place at a provincial level and this creates differences in the benefits provided among the provinces. As at October 31, 2013, for the property and casualty insurance business, 71.9% of net written premiums were derived from automo- bile policies (October 31, 2012 – 73.2%) followed by residential with 27.8% (October 31, 2012 – 26.5%). The distribution by provinces show that business is mostly concentrated in Ontario with 61.6% of net written premiums (October 31, 2012 – 62.1%). The Western prov- inces represented 26.6% (October 31, 2012 – 25.4%) followed by Quebec, 6.6% (October 31, 2012 – 7.5%) and the Atlantic provinces with 5.2% (October 31, 2012 – 5.0%). Concentration risk is not a major concern for the life and health insurance business as it does not have a material level of regional specific characteristics like those exhibited in the property and casualty insurance business. Reinsurance is used to limit the liability on a single claim. While the maximum claim could be $3.0 million (October 31, 2012 – $1.2 million), the majority of claims are less than $250 thou- sand (October 31, 2012 – $250 thousand). Concentration risk is further limited by diversification across uncorrelated risks. This limits the impact of a regional pandemic and other concentration risks. To improve understanding of exposure to this risk, a pandemic scenario is tested annually. N O T E 2 5 SHARE-BASED COMPENSATION The Bank operates various share-based compensation plans. The Bank uses the fair value method of accounting for all stock option awards. Under the fair value method, the Bank recognizes compensation expense based on the fair value of the options, which is determined by using an option pricing model. The fair value of the options is recognized as compensation expense and contributed surplus over the service period required for employees to become fully entitled to the award. The contributed surplus balance is reduced as the options are exercised and the amount initially recorded for the options in contributed surplus is credited to capital stock. STOCK OPTION PLAN The Bank maintains a stock option program for certain key employees and non-employee directors. Non-employee directors have not been granted stock options since December 2001. Options on common shares are periodically granted to eligible employees of the Bank under the plan for terms of seven or ten years and vest over a four- year period. These options provide holders with the right to purchase common shares of the Bank at a fixed price equal to the closing market price of the shares on the day prior to the date the options were issued. Under this plan, 14.1 million common shares have been reserved for future issuance (October 31, 2012 – 15.6 million). The outstanding options expire on various dates to December 13, 2022. A summary of the Bank’s stock option activity and related information for the years ended October 31 is as follows: Stock Option Activity (millions of shares and Canadian dollars) Number outstanding, beginning of year Granted Exercised Forfeited/cancelled Number outstanding, end of year Exercisable, end of year 2013 Weighted- average of shares exercise price Number 13.7 1.7 (4.2) (0.2) 11.0 $ 62.00 81.08 55.20 73.29 $ 67.79 2012 Weighted- average exercise price $ 58.05 73.27 51.08 67.78 $ 62.00 Number of shares 15.9 1.9 (3.9) (0.2) 13.7 4.4 $ 59.34 7.9 $ 58.07 2011 Weighted- average exercise price $ 57.68 73.25 49.14 57.79 $ 58.05 $ 56.32 Number of shares 19.2 1.7 (4.9) (0.1) 15.9 10.3 The weighted average share price for the options exercised in 2013 was $86.52 (2012 – $80.22; 2011 – $78.61). The following table summarizes information relating to stock options outstanding and exercisable as at October 31, 2013. Range of Exercise Prices (millions of shares and Canadian dollars) $39.80 – $46.15 $50.76 – $59.83 $61.08 – $65.98 $66.21 – $70.57 $72.27 – $81.08 174 Options outstanding Options exercisable Number of shares outstanding Weighted- average remaining contractual life (years) 1.4 0.5 2.1 0.8 6.2 2.0 1.5 5.5 4.1 6.7 Weighted- average exercise price $ 42.50 57.01 65.21 69.16 75.18 Number of shares Weighted- average exercisable exercise price 1.4 0.5 0.5 0.8 1.2 $ 42.50 57.01 62.23 69.16 72.66 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS For fiscal 2013, the Bank recognized compensation expense for stock option awards of $24.8 million (2012 – $22.1 million; 2011 – $28.3 million). During 2013, 1.7 million (2012 – 1.9 million; 2011 – 1.7 million) options were granted by the Bank at a weighted- average fair value of $15.65 per option (2012 – $14.52 per option; 2011 – $15.47 per option). The following table summarizes the assumptions used for estimating the fair value of options for the twelve months ended October 31, 2013, October 31, 2012 and October 31, 2011. Assumptions Used for Estimating Fair Value of Options (in Canadian dollars, except as noted) 2013 2012 Risk-free interest rate Expected option life (years) Expected volatility1 Expected dividend yield Exercise price/Share price 2011 2.73% 1.43% 1.50% 6.3 years 6.3 years 6.2 years 27.23% 3.51% $ 81.08 27.40% 3.40% $ 73.27 26.60% 3.30% $ 73.25 1 Expected volatility is calculated based on the average daily volatility measured over a historical period corresponding to the expected option life. OTHER SHARE-BASED COMPENSATION PLANS The Bank operates restricted share unit and performance share unit plans which are offered to certain employees of the Bank. Under these plans, participants are awarded share units equivalent to the Bank’s common shares that generally vest over three years. A liability is accrued by the Bank related to such share units awarded and an incen- tive compensation expense is recognized on the Consolidated State- ment of Income over the service period required for employees to become fully entitled to the award. At the maturity date, the partici- pant receives cash representing the value of the share units. The final number of performance share units will vary from 80% to 120% of the initial number awarded based on the Bank’s total shareholder return relative to the average of the North American peer group. Dividend equivalents accrue and will be re-invested in additional units that will be paid at maturity. The number of such share units outstanding under these plans as at October 31, 2013 was 14 million (2012 – 14 million). The Bank also offers deferred share unit plans to eligible employees and non-employee directors. Under these plans, a portion of the participant’s annual incentive award and/or maturing share units may N O T E 2 6 EMPLOYEE BENEFITS be deferred as share units equivalent to the Bank’s common shares. The deferred share units are not redeemable by the participant until termination of employment or directorship. Once these conditions are met, the deferred share unit must be redeemed for cash no later than the end of the next calendar year. Dividend equivalents accrue to the participants in the form of additional units. As at October 31, 2013, 3.6 million deferred share units were outstanding (October 31, 2012 – 3.4 million). Compensation expense for these plans is recorded in the year the incentive award is earned by the plan participant. Changes in the value of these plans are recorded, net of the effects of related hedges, on the Consolidated Statement of Income. For the year ended October 31, 2013, the Bank recognized compensation expense, net of the effects of hedges, for these plans of $336 million (2012 – $326 million; 2011 – $293 million). The compensation expense recognized before the effects of hedges was $621 million (2012 – $429 million; 2011 – $353 million). The carrying amount of the liability relating to these plans, based on the closing share price, was $1.5 billion at October 31, 2013 (October 31, 2012 – $1.3 billion) and is reported in Other liabilities on the Consolidated Balance Sheet. EMPLOYEE OWNERSHIP PLAN The Bank also operates a share purchase plan available to employees. Employees can contribute any amount of their eligible earnings (net of source deductions) to the Employee Ownership Plan. The Bank matches 100% of the first $250 of employee contributions each year and the remainder of employee contributions at 50% to an overall maximum of 3.5% of the employee’s eligible earnings or $2,250, whichever comes first. The Bank’s contributions vest once an employee has completed two years of continuous service with the Bank. For the year ended October 31, 2013, the Bank’s contributions totalled $63 million (2012 – $61 million; 2011 – $59 million) and were expensed as salaries and employee benefits. As at October 31, 2013, an aggregate of 9.8 million common shares were held under the Employee Ownership Plan (October 31, 2012 – 9.5 million). The shares in the Employee Ownership Plan are purchased in the open market and are considered outstanding for computing the Bank’s basic and diluted earnings per share. Dividends earned on Bank common shares held by the Employee Ownership Plan are used to purchase additional common shares for the Employee Ownership Plan in the open market. DEFINED BENEFIT PENSION AND OTHER POST-EMPLOYMENT BENEFIT (OPEB) PLANS The Bank’s principal pension plans, consisting of The Pension Fund Society of The Toronto-Dominion Bank (the “Society”) and the TD Pension Plan (Canada) (the “TDPP”), are defined benefit plans. In addition, the Bank maintains other partially funded and non-funded pension plans for eligible employees. The Society was closed to new members on January 30, 2009 and the TDPP commenced on March 1, 2009. Benefits under the principal pension plans are determined based upon the period of plan participation and the average salary of the member in the best consecutive five years in the last 10 years of combined plan membership. Funding for the Bank’s principal pension plans is provided by contri- butions from the Bank and members of the plans as applicable. In accordance with legislation, the Bank contributes amounts determined on an actuarial basis to the plans and has the ultimate responsibility for ensuring that the liabilities of the plan are adequately funded over time. The Bank’s contributions to the principal pension plans during 2013 were $340 million (2012 – $293 million). The 2013 contributions were made in accordance with the actuarial valuation reports for fund- ing purposes as at October 31, 2012 and October 31, 2011 for the Society and TDPP, respectively. The 2012 contributions were made in accordance with the actuarial valuation reports for funding purposes as at October 31, 2011 for both of the principal pension plans. The next valuation date for funding purposes is as at October 31, 2013 and October 31, 2014 for the Society and the TDPP, respectively. The Bank also provides certain post-retirement benefits and post- employment benefits (non-pension employee benefits), which are generally non-funded. Non-pension employee benefit plans, where offered, generally include health care and dental benefits. Employees must meet certain age and service requirements to be eligible for post- retirement benefits and are generally required to pay a portion of the cost of the benefits. Employees eligible for post-employment benefits are those on disability and child-care leave. For the principal pension plans and the principal non-pension post- retirement benefit plan, actuarial valuations are prepared at least every three years to determine the present value of the accrued benefits. Pension and non-pension post-retirement benefit expenses are deter- mined based upon separate actuarial valuations using the projected benefit method pro-rated on service and management’s best estimates of expected long-term return on plan assets, compensation increases, health care cost trend rate and discount rate, which are reviewed annually by the Bank’s actuaries. The discount rate used to value liabili- ties is based on long-term corporate AA bond yields as of the measure- ment date. The expense includes the cost of benefits for the current year’s service, interest expense on obligations, expected income on plan assets based on fair values and the amortization of benefit plan amendments, actuarial gains or losses and any curtailments. Plan amendments are amortized on a straight-line basis over the average vesting period of the benefits granted (4 years for the principal non- pension post-retirement benefit plan). If the benefits granted vest immediately (Society and TDPP), the full plan amendment is recognized 175 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS immediately. The excess, if any, of the net actuarial gain or loss over 10% of the greater of the projected benefit obligation and the fair value of plan assets is amortized over the expected average remaining service life of the active members (12 years for the Society, 11 years for the TDPP, and 14 years for the principal non-pension post-retire- ment benefit plan). The cumulative difference between expense and contributions is reported in other assets or other liabilities. INVESTMENT STRATEGY AND ASSET ALLOCATION The primary objective of the Society and the TDPP is to achieve an annualized real rate of return of 1.50% and 1.75%, respectively, over rolling 10-year periods. The investment policies for the principal pension plans are detailed below and exclude Pension Enhancement Account (PEA) assets which are invested at the member’s discretion in certain mutual funds. The investment policies and asset allocations as at October 31 by asset category for the principal pension plans (exclud- ing PEA assets) are as follows: Investment Policy and Asset Allocation Security Debt Equity Alternative investments Cash equivalents Total 1 Not applicable (n/a) October 31, 2013 Acceptable Range October 31, 2013 Asset Allocation As at October 31, 2012 Asset Allocation Society 58-72% 24-34.5 0-12.5 0-4 TDPP 44-56% 44-56 n/a1 n/a1 Society TDPP Society 58% 34 6 2 100% 49% 51 n/a1 n/a1 100% 60% 31 6 3 100% TDPP 50% 50 n/a1 n/a1 100% The objective of the investment policy of the Society is a balanced portfolio. The acceptable range has changed since 2011 with the strategy to reduce the allocation to equity instruments under the investment policy over time. Debt instruments generally must meet or exceed a credit rating of BBB at the time of purchase and during the holding period. There are no limitations on the maximum amount allocated to each credit rating above BBB within the total debt portfolio. Within the debt portfolio, the bond mandate managed to the DEX Universe Bond Index, representing 10% to 29% of the total fund, may be invested in bonds with a credit rating below BBB-. Debt instruments that are rated BBB+ or lower, and debt instruments that are rated below BBB-, must not exceed 25% and 10% of this mandate, respec- tively. Also, debt instruments of non-government entities and debt instruments of non-Canadian government entities must not exceed 80% and 20% of this mandate, respectively. Debt instruments of a single non-government or non-Canadian government entity must not exceed 10% of this mandate. Asset-backed securities must have a minimum credit rating of AAA and must not exceed 25% of this mandate. The remainder of the debt portfolio is not permitted to invest in debt instruments of non-government entities. The equity portfolio is broadly diversified primarily across medium to large capitalization quality companies and income trusts with no individual holding exceeding 10% of the equity portfolio or 10% of the outstanding securities of any one company at any time. Foreign equities and American Depository Receipts of similar high quality are also included to further diversify the portfolio. Alternative investments include hedge funds and private equities. Derivatives can be utilized provided they do not create financial leverage for the Society. The Society can invest in hedge funds, which normally will employ leverage when executing their investment strategy. Substantially all assets must have readily determinable fair values. The Society was in compliance with its investment policy throughout the year. As at October 31, 2013, the Society’s net assets included private equity investments in the Bank and its affiliates which had a fair value of $1 million (2012 – $1 million). The objective of the invest- ment policy of the TDPP is a balanced portfolio. The TDPP is not permitted to invest in debt instruments of non- government entities. Debt instruments generally must meet or exceed a credit rating of BBB at the time of purchase and during the holding period. There are no limitations on the maximum amount allocated to each credit rating above BBB within the total debt portfolio. The equity portfolio is broadly diversified primarily across medium to large capitalization quality companies and income trusts with no individual holding exceeding 10% of the equity portfolio or 10% of the outstanding securities of any one company at any time. Foreign equities and American Depository Receipts of similar high quality are also included to further diversify the portfolio. 176 Derivatives can be used provided they do not create financial lever- age for the TDPP. Substantially all assets must have readily determinable fair values. The TDPP was in compliance with its investment policy throughout the year. RISK MANAGEMENT PRACTICES The principal pension plans’ investments include financial instruments which are exposed to various risks. These risks include market risk (including foreign currency risk, interest rate risk, and price risk), credit risk, and liquidity risk. The principal pension plans manage these finan- cial risks in accordance with the Pension Benefits Standards Act, 1985, applicable regulations, and the principal pension plans’ Statement of Investment Policies and Procedures. The following are some specific risk management practices employed by the principal pension plans: • Monitoring credit exposure of counterparties • Monitoring adherence to asset allocation guidelines • Monitoring asset class performance against benchmarks OTHER PENSION AND RETIREMENT PLANS CT Pension Plan As a result of the acquisition of CT Financial Services Inc. (CT), the Bank sponsors a pension plan consisting of a defined benefit portion and a defined contribution portion. The defined benefit portion was closed to new members after May 31, 1987, and newly eligible employees joined the defined contribution portion of the plan. Effective August 18, 2002, the defined contribution portion of the plan was closed to new contributions from the Bank or active employees, except for employees on salary continuance and long-term disability, and employees eligible for that plan became eligible to join the Society or the TDPP for future service. Funding for the defined benefit portion is provided by contributions from the Bank and members of the plan. The Bank received regulatory approval to wind-up the defined contribution portion of the plan effective April 1, 2011. After that date, the Bank’s contributions to the defined contribution portion of the plan ceased. The wind-up was completed on May 31, 2012. TD Bank, N.A. Retirement Plans TD Bank, N.A. and its subsidiaries maintain a defined contribution 401(k) plan covering all employees. Effective January 1, 2009 the plan was amended to include annual core contributions from TD Bank, N.A. for all employees and a transition contribution for certain employees. The core and transition contributions to the plan for fiscal 2013 were $42 million (2012 – $41 million; 2011 – $34 million). In addition, on an ongoing basis, TD Bank, N.A., makes matching contributions to the 401(k) plan. The amount of the matching contribution for fiscal 2013 was $39 million (2012 – $37 million; 2011 – $29 million). Annual expense is equal to the Bank’s contributions to the plan. In addition, TD Bank, N.A. has a closed non-contributory defined benefit retirement plan covering certain legacy TD Banknorth employees. TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Supplemental retirement plans covering certain key officers and limited post-retirement benefit programs provide medical coverage and life insurance benefits to a closed group of employees and directors who meet minimum age and service requirements. Effective December 31, 2008, benefits under the retirement and supplemental retirement plans were frozen. employee’s average salary during the consecutive five years in which the employee’s salary was highest in the 15 years preceding retirement. These defined benefit retirement plans were frozen as of April 1, 2012. In addition, TD Auto Finance provides limited post-retirement benefit programs, including medical coverage and life insurance benefits to certain employees who meet minimum age and service requirements. TD Auto Finance (legacy Chrysler Financial) Retirement Plans TD Auto Finance has both contributory and non-contributory defined benefit retirement plans covering certain permanent employees. The non-contributory pension plan provides benefits based on a fixed rate for each year of service. The contributory plan provides benefits to sala- ried employees based on the employee’s cumulative contributions, years of service during which employee contributions were made, and the Supplemental Employee Retirement Plans Supplemental employee retirement plans are partially funded by the Bank for eligible employees. The following table presents the financial position of the Bank’s princi- pal pension plans, the principal non-pension post-retirement benefit plan, and the Bank’s significant other pension and retirement plans. Employee Benefit Plans’ Obligations, Assets and Funded Status (millions of Canadian dollars, except as noted) Principal Pension Plans Principal Non-Pension Post-Retirement Benefit Plan1 Other Pension and Retirement Plans2 Change in projected benefit obligation Projected benefit obligation at beginning of year Obligations assumed upon acquisition of Chrysler Financial Service cost – benefits earned Interest cost on projected benefit obligation Members’ contributions Benefits paid Change in foreign currency exchange rate Change in actuarial assumptions Actuarial (gains) losses Plan amendments Curtailment3 Projected benefit obligation as at October 31 Change in plan assets Plan assets at fair value at beginning of year Assets acquired upon acquisition of Chrysler Financial Expected return on plan assets4 Actuarial gains (losses) Members’ contributions Employer’s contributions Change in foreign currency exchange rate Benefits paid General and administrative expenses Plan assets at fair value as at October 31 Excess (deficit) of plan assets over projected benefit obligation Unrecognized net loss from past experience, different from that assumed, and effects of changes in assumptions Unrecognized unvested plan amendment costs (credits) Prepaid pension asset (accrued benefit liability) Annual expense Net employee benefits expense includes the following: Service cost – benefits earned Interest cost on projected benefit obligation Expected return on plan assets4 Actuarial (gains) losses recognized in expense Plan amendment costs (credits) recognized in expense Curtailment (gains) losses3 Total expense Actuarial assumptions used to determine the annual expense (percentage) Weighted-average discount rate for projected benefit obligation Weighted-average rate of compensation increase Weighted-average expected long-term rate of return on plan assets Actuarial assumptions used to determine the projected benefit obligation as at October 31 (percentage) Weighted-average discount rate for projected 2013 2012 2011 2013 2012 2011 2013 2012 2011 $ 4,143 $ 3,141 $ 2,856 $ 526 $ 426 $ 419 $ 2,325 $ 2,055 $ 1,182 – 263 199 65 (193) – (136) (3) – – – 166 190 61 (180) – 758 1 6 – $ 4,338 $ 4,143 $ 3,743 $ 3,300 – 194 79 61 293 – (180) (4) $ 4,177 $ 3,743 – 215 11 65 340 – (193) (4) – 153 171 49 (137) – 49 – – – $ 3,141 $ 3,038 – 196 (33) 49 189 – (137) (2) $ 3,300 – 17 24 – (10) – 1 (7) – – $ 551 $ $ – – – – – 10 – (10) – – – 13 24 – (10) – 78 (5) – – $ 526 $ $ – – – – – 10 – (10) – – – 12 23 – (10) – (14) (4) – – $ 426 $ $ – – – – – 10 – (10) – – – 12 92 – (100) 61 (204) 10 – – $ 2,196 $ 1,462 – 91 51 – 26 49 (100) (4) $ 1,575 – 17 101 – (100) 2 283 7 (9) (31) $ 2,325 $ 1,374 – 90 61 – 38 1 (100) (2) $ 1,462 673 18 85 1 (77) 25 148 – – – $ 2,055 $ 769 579 72 (11) 1 21 21 (77) (1) $ 1,374 $ (161) $ (400) $ 159 $ (551) $ (526) $ (426) $ (621) $ (863) $ (681) 583 – 763 – $ 422 $ 363 82 – $ 241 49 (17) $ (519) 55 (22) $ (493) (18) (28) 119 (7) $ (472) $ (509) $ 379 (9) (493) $ 267 $ 170 190 (194) – 6 – $ 281 $ 172 199 (215) 30 – – $ 155 171 (196) – – – $ 130 $ 17 24 – – (5) – $ 36 $ 13 24 – – (5) – $ 32 $ 12 23 – – (5) – $ 30 $ $ 16 92 (91) 22 (2) – 37 $ $ 19 101 (90) 10 – (31) 9 159 – (522) 19 85 (72) – – – 32 $ $ $ 4.53% 2.82 5.72% 3.50 5.71% 3.50 4.50% 3.80 5.50% 3.50 5.60% 3.50 4.01% 1.37 4.99% 1.98 5.50% 2.14 5.56 5.71 6.39 n/a n/a n/a 6.33 6.67 6.73 benefit obligation Weighted-average rate of compensation increase 4.82% 2.83 4.53% 2.82 5.72% 3.50 4.80% 3.50 4.50% 3.50 5.50% 3.50 4.75% 1.43 4.08% 1.86 4.99% 2.02 1 The rate of increase for health care costs for the next year used to measure the expected cost of benefits covered for the principal non-pension post-retirement benefit plan is 5.90%. The rate is assumed to decrease gradually to 3.70% by the year 2028 and remain at that level thereafter. 2 Includes CT defined benefit pension plan, TD Banknorth defined benefit pension earned after that date. Certain TD Auto Finance defined benefit pension plans were frozen as of April 1, 2012 and no service credits can be earned after March 31, 2012. 3 Certain TD Auto Finance retirement plans were curtailed during 2012. 4 The actual return on plan assets for the principal pension plans was $226 million plan, certain TD Auto Finance retirement plans, and supplemental employee retire- ment plans. Other plans operated by the Bank and certain of its subsidiaries are not considered material for disclosure purposes. The TD Banknorth defined benefit pension plan was frozen as of December 31, 2008 and no service credits can be for the year ended October 31, 2013 (October 31, 2012 – $273 million; October 31, 2011 – $163 million). The Bank selected the expected long-term rate of return on plan assets assumption of 5.50% net of fees and expenses (2012 – 5.75%; 2011 – 6.50%) for the Society and 6.20% (2012 – 5.25%; 2011 – 4.00%) for the TDPP. 177 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS In fiscal 2014, the Bank expects to contribute $376 million to its principal pension plans, $18 million to its principal non-pension post-retirement benefit plan, and $32 million to its other pension and retirement plans. Future contribution amounts may change upon the Bank’s review of its contribution levels during the fiscal year. Assumptions relating to future mortality to determine the defined benefit obligation and net benefit cost for the principal defined benefit pension plans are as follows: Assumed Life Expectancy at Age 65 (number of years) Male aged 65 at measurement date Female aged 65 at measurement date Male aged 40 at measurement date Female aged 40 at measurement date 2013 22.0 23.2 23.2 24.1 2012 21.0 22.1 22.8 23.1 2011 20.9 22.1 22.7 23.1 The following table provides the sensitivity of the projected benefit obligation and the pension expense for the Bank’s principal pension plans to the discount rate, the expected long-term return on plan assets and the rates of compensation, as well as the sensitivity of the Bank’s principal non-pension post-retirement benefit plan to the health care cost initial trend rate assumption. For each sensitivity test, the impact of a reasonably possible change in a single factor is shown with other assumptions left unchanged. As at For the years ended October 31 2013 October 31 2012 October 31 2013 October 31 2012 Obligation Obligation Expense Expense October 31 2011 Expense 4.82% $ 949 (715) n/a n/a n/a 2.83% $ (225) 240 5.90% $ (84) 107 4.53% $ 920 (689) n/a n/a n/a 2.82% $ (234) 250 6.10% (75) 95 $ 4.53% $ 175 (107) 5.56% $ 39 (39) 2.82% $ (58) 61 6.10% (6) 16 $ 5.72% $ 94 (57) 5.71% $ 34 (34) 3.50% $ (29) 30 6.30% (8) $ 8 5.71% $ 54 (47) 6.39% $ 31 (31) 3.50% $ 27 (26) 6.50% $ (6) 8 October 31 2013 As at October 31 2012 $ 422 $ 363 15 69 – 506 519 70 144 440 196 1,369 $ (863) 9 53 1 426 493 65 136 418 196 1,308 $ (882) Sensitivity of Key Assumptions (millions of Canadian dollars, except as noted) Impact of an absolute change of 1.0% in key assumptions Discount rate assumption used Decrease in assumption Increase in assumption Expected long-term return on assets assumption used Decrease in assumption Increase in assumption Rates of compensation increase assumption used Decrease in assumption Increase in assumption Health care cost initial trend rate assumption used1 Decrease in assumption Increase in assumption 1 As at October 31, 2013 and October 31, 2012, and for the years ended October 31, 2013, October 31, 2012 and October 31, 2011, trending to 3.70% in 2028. The Bank recognized the following amounts on the Consolidated Balance Sheet as at October 31, 2013 and October 31, 2012. Amounts Recognized in the Consolidated Balance Sheet (millions of Canadian dollars) Other assets Principal pension plans Other pension and retirement plans CT defined benefit pension plan TD Auto Finance retirement plans Other employee benefits – net Prepaid pension expense Other liabilities Principal non-pension post-retirement benefit plan Other pension and retirement plans TD Banknorth defined benefit retirement plans TD Auto Finance retirement plans Supplemental employee retirement plans Other employee future benefits – net Accrued benefit liability Net amount recognized 178 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 2 7 INCOME TAXES The provision for (recovery of) income taxes is comprised of the following: Provision for (Recovery of) Income Taxes (millions of Canadian dollars) Provision for income taxes – Consolidated Statement of Income Current income taxes Provision for (recovery of) income taxes for the current period Adjustments in respect of prior years and other Total current income taxes Deferred income taxes Provision for (recovery of) deferred income taxes related to the origination and reversal of temporary differences Effect of changes in tax rates Recovery of income taxes due to recognition of previously unrecognized deductible temporary differences and unrecognized tax losses of a prior period Adjustments in respect of prior years and other Total deferred income taxes Total provision for income taxes – Consolidated Statement of Income Provision for income taxes – Statement of Other Comprehensive Income Current income taxes Deferred income taxes Income taxes – other non-income related items including business combinations and other adjustments Current income taxes Deferred income taxes Total provision for (recovery of) income taxes Current income taxes Federal Provincial Foreign Deferred income taxes Federal Provincial Foreign Total provision for (recovery of) income taxes Reconciliation to Statutory Income Tax Rate (millions of Canadian dollars, except as noted) Income taxes at Canadian statutory income tax rate Increase (decrease) resulting from: Dividends received Rate differentials on international operations Tax rate changes Other – net Provision for income taxes and effective income tax rate For the years ended October 31 2013 2012 2011 $ 1,619 (114) 1,505 $ 999 (19) 980 $ 1,526 (53) 1,473 (390) 8 (2) 22 (362) 1,143 (699) (392) (1,091) (17) 43 26 78 $ $ 353 245 191 789 (37) (26) (648) (711) 78 $ 161 (14) (1) (34) 112 1,092 172 (67) 105 6 21 27 $ 1,224 $ 604 412 142 1,158 (100) (68) 234 66 $ 1,224 (152) 13 – (8) (147) 1,326 202 (132) 70 (61) (69) (130) $ 1,266 $ 718 463 433 1,614 (50) (28) (270) (348) $ 1,266 $ 1,978 (253) (488) – (94) $ 1,143 2013 26.3% (3.4) (6.5) – (1.2) 15.2% $ 1,938 (262) (481) (18) (85) $ 1,092 2012 26.4% (3.6) (6.6) (0.2) (1.1) 14.9% $ 2,005 (214) (468) – 3 $ 1,326 2011 28.1% (3.0) (6.6) – 0.1 18.6% 179 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Deferred tax assets and liabilities are comprised of: Deferred Tax Assets and Liabilities (millions of Canadian dollars) Deferred tax assets Allowance for credit losses Land, buildings, equipment, and other depreciable assets Deferred (income) expense Trading loans Derecognition of financial assets and liabilities Goodwill Employee benefits Losses available for carry forward Tax credits Other Total deferred tax assets1 Deferred tax liabilities Securities Intangible assets Goodwill Land, buildings, equipment, and other depreciable assets Pensions Total deferred tax liabilities Net deferred tax assets Reflected on the Consolidated Balance Sheet as follows: Deferred tax assets Deferred tax liabilities Net deferred tax assets 1 The amount of temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognized on the Consolidated Balance Sheet was $37 million as at October 31, 2013 (October 31, 2012 – nil), of which $5 million is scheduled to expire within 5 years. The movement in the net deferred tax asset for the years ended October 31, 2013 and October 31, 2012 was as follows: Deferred Income Tax Expense (Recovery) (millions of Canadian dollars) Consolidated Other Statement of Comprehensive Income Income Business Combinations and Other October 31 2013 Consolidated Balance Sheet As at October 31 2012 Consolidated Balance Sheet $ 555 – 165 131 168 – 659 313 360 294 $ 2,645 $ 855 389 6 10 118 $ 1,378 $ 1,267 $ 1,588 321 $ 1,267 $ 530 7 199 192 187 7 671 285 184 265 $ 2,527 $ 1,457 419 – – 95 $ 1,971 $ 556 $ 883 327 $ 556 2013 Total Consolidated Statement of Income Other Comprehensive Income Business Combinations and Other 2012 Total Deferred income tax expense (recovery) Allowance for credit losses Land, buildings, equipment, and other depreciable assets Deferred (income) expense Trading loans Derecognition of financial assets and liabilities Goodwill Employee benefits Losses available for carry forward Tax credits Other deferred tax assets Securities Intangible assets Pensions Total deferred income tax expense (recovery) $ (25) $ – $ – $ (25) $ (22) $ – $ – $ (22) 17 34 61 74 13 12 (28) (176) (11) (265) (91) 23 – – – (55) – – – – – (337) – – – – – – – – – – (18) – 61 – 17 34 61 19 13 12 (28) (176) (29) (602) (30) 23 (31) (73) 74 4 33 (11) (167) (104) (189) 553 (8) 53 – – – 86 – – – – – (153) – – 50 – – – – – – – (29) – – – 19 (73) 74 90 33 (11) (167) (104) (218) 400 (8) 53 $ (362) $ (392) $ 43 $ (711) $ 112 $ (67) $ 21 $ 66 Certain taxable temporary differences associated with the Bank’s investments in subsidiaries, branches and associates, and interests in joint ventures did not result in the recognition of deferred tax liabilities as at October 31, 2013. The total amount of these temporary differences was $30 billion as at October 31, 2013 (October 31, 2012 – $26 billion). 180 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 2 8 EARNINGS PER SHARE Basic earnings per share is calculated by dividing net income attribut- able to common shareholders by the weighted-average number of common shares outstanding for the period. net income attributable to common shareholders and the weighted- average number of shares outstanding for the effects of all dilutive potential common shares that are assumed to be issued by the Bank. Diluted earnings per share is calculated using the same method as basic earnings per share except that certain adjustments are made to The following table presents the Bank’s basic and diluted earnings per share. Basic and Diluted Earnings Per Share (millions of Canadian dollars, except as noted) Basic earnings per share Net income attributable to common shareholders Weighted-average number of common shares outstanding (millions) Basic earnings per share (dollars) Diluted earnings per share Net income attributable to common shareholders Effect of dilutive securities Capital Trust II Securities – Series 2012-1 Preferred Shares – Series M and N Net income available to common shareholders including impact of dilutive securities Weighted-average number of common shares outstanding (millions) Effect of dilutive securities Stock options potentially exercisable (millions)1 TD Capital Trust II Securities – Series 2012-1 (millions) Preferred Shares – Series M and N (millions) Weighted-average number of common shares outstanding – diluted (millions) Diluted earnings per share (dollars)1 1 For the years ended October 31, 2013, October 31, 2012 and October 31, 2011, the computation of diluted earnings per share did not exclude any weighted-average options where the option price was greater than the average market price of the Bank’s common shares. For the years ended October 31 2013 2012 2011 $ 6,372 918.9 $ 6.93 $ 6,171 906.6 $ 6.81 $ 5,761 885.7 $ 6.50 $ 6,372 $ 6,171 $ 5,761 3 – $ 6,375 918.9 2.9 0.7 – 922.5 $ 6.91 17 – $ 6,188 906.6 3.3 5.0 – 914.9 $ 6.76 17 25 $ 5,803 885.7 4.5 4.9 7.8 902.9 $ 6.43 N O T E 2 9 PROVISIONS, CONTINGENT LIABILITIES, COMMITMENTS, GUARANTEES, PLEDGED ASSETS, AND COLLATERAL PROVISIONS The following table summarizes the Bank’s provisions as at October 31, 2013. Provisions (millions of Canadian dollars) Balance as of November 1, 2011 Additions Amounts used Unused amounts reversed Foreign currency translation adjustments and other Balance as of October 31, 2012, before allowance for credit losses for off-balance sheet instruments Add: allowance for credit losses for off-balance sheet instruments1 Balance as of October 31, 2012 Balance as of November 1, 2012 Additions Amounts used Unused amounts reversed Foreign currency translation adjustments and other Balance as of October 31, 2013, before allowance for credit losses for off-balance sheet instruments Add: allowance for credit losses for off-balance sheet instruments1 Balance as of October 31, 2013 1 Please refer to Note 7, Loans, Impaired Loans and Allowance for Credit Losses for further details. Litigation Restructuring $ 123 549 (377) (6) (3) $ 5 – (1) – – Asset Retirement Obligations $ 67 7 (9) – 1 Other $ 58 132 (96) (4) (1) $ 286 $ 4 $ 66 $ 89 $ 286 251 (279) (23) 9 $ 4 129 (28) – – $ 66 7 – (4) – $ 89 102 (105) (22) 2 $ 244 $ 105 $ 69 $ 66 Total $ 253 688 (483) (10) (3) $ 445 211 $ 656 $ 445 489 (412) (49) 11 $ 484 212 $ 696 181 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS LITIGATION In the ordinary course of business, the Bank and its subsidiaries are involved in various legal and regulatory actions, including class actions and other litigation or disputes with third parties. Legal provisions are established when it becomes probable that the Bank will incur an expense and the amount can be reliably estimated. The Bank may incur losses in addition to the amounts recorded when the loss is greater than estimated by management, or for matters when an unfavourable outcome is reasonably possible. The Bank considers losses to be reasonably possible when they are neither probable nor remote. The Bank believes the estimate of the aggregate range of reasonably possi- ble losses, in excess of provisions, for its legal proceedings where it is possible to make such an estimate, is from zero to approximately $336 million as at October 31, 2013. This estimated aggregate range of reasonably possible losses is based upon currently available informa- tion for those proceedings in which the Bank is involved, taking into account the Bank’s best estimate of such losses for those cases which an estimate can be made. The Bank’s estimate involves significant judgment, given the varying stages of the proceedings and the existence of multiple defendants in many of such proceedings whose share of liability has yet to be determined. The matters underlying the estimated range will change from time to time, and actual losses may vary signifi- cantly from the current estimate. For certain cases, the Bank does not believe that an estimate can currently be made as many of them are in preliminary stages and certain cases have no specific amount claimed. Consequently, these cases are not included in the range. In management’s opinion, based on its current knowledge and after consultation with counsel, the Bank believes that the ultimate disposi- tion of these actions, individually or in the aggregate, will not have a material adverse effect on the consolidated financial condition or the consolidated cash flows of the Bank. However, there are a number of uncertainties involved in such proceedings, some of which are beyond the Bank’s control, including, for example, the risk that the requisite external approvals of a particular settlement may not be granted. As such, there is a possibility that the ultimate resolution of those legal or regulatory actions may be material to the Bank’s consolidated results of operations for any particular reporting period. The following is a description of the Bank’s material legal or regulatory actions. Rothstein Litigation TD Bank, N.A. was named as a defendant in multiple lawsuits in state and federal court in Florida related to an alleged US$1.2 billion Ponzi scheme perpetrated by, among others, Scott Rothstein, a partner of the Fort Lauderdale, Florida based law firm, Rothstein, Rosenfeldt and Adler (“RRA”). On July 11, 2013, the United States Bankruptcy Court for the South- ern District of Florida confirmed a liquidation plan for the RRA bank- ruptcy estate that includes a litigation bar order in favor of TD Bank, N.A. (the “Bar Order”). TD Bank, N.A. and/or the Bank are or may be the subject of other litigation or regulatory proceedings related to the Rothstein fraud, although further civil litigation may be enjoined by the Bar Order. The outcome of any such proceedings is difficult to predict and could result in judgments, settlements, injunctions or other results adverse to TD Bank, N.A. or the Bank. Two pending civil matters are specifically exempted from the Bar Order. First, TD Bank’s appeal of the verdict entered against it in the lawsuit captioned Coquina Investments v. TD Bank, N.A. et al. will continue. The jury in the Coquina lawsuit returned a verdict against TD Bank, N.A. on January 18, 2012 in the amount of US$67 million, comprised of US$32 million of compensatory damages and US$35million of punitive damages. On August 3, 2012, the trial court entered an order sanctioning TD Bank, N.A. and its former outside counsel, Greenberg Traurig, for alleged discovery misconduct. The sanctions order established certain facts relating to TD Bank, N.A.’s knowledge of the Rothstein fraud and the unreasonableness of TD Bank, N.A.’s monitoring and alert systems, and ordered TD Bank, N.A. and Greenberg Traurig to pay the costs incurred by the plaintiff in bringing the sanc- tions motions. The judgment and sanctions order have been appealed to the United States Court of Appeals for the Eleventh Circuit. Second, the Bar Order does not apply to a motion seeking sanctions against TD Bank, N.A. filed by the plaintiffs in the matter captioned Razorback Funding, LLC, et al. v. TD Bank, N.A., et al., which was dismissed pursuant to a settlement agreement entered into between the plaintiffs and TD Bank, N.A. in April 2012. TD Bank, N.A. has opposed the motion for sanctions and denies the purported basis for the motion. Overdraft Litigation TD Bank, N.A. was originally named as a defendant in six putative nationwide class actions challenging the manner in which it calculates and collects overdraft fees: Dwyer v. TD Bank, N.A (D. Mass.); Hughes v. TD Bank, N.A. (D. N.J.); Mascaro v. TD Bank, N.A. (D. D.C.); Mazzadra, et al. v. TD Bank, N.A. (S.D. Fla.); Kimenker v. TD Bank, N.A. (D. N.J.); and Mosser v. TD Bank, N.A. (D. Pa.). These actions were transferred to the United States District Court for the Southern District of Florida and have now been dismissed or settled. Settlement payments were made to class members in June 2013; the Court retains jurisdiction over recipients and distributions. On August 21 2013, TD Bank, N.A. was named as a defendant in King, et al. v. Carolina First Bank n/k/a TD Bank, N.A. (D.S.C.), a puta- tive nationwide class action filed in federal court in South Carolina challenging overdraft practices at Carolina First Bank prior to its merger into TD Bank, N.A. in September 2010, as well as the overdraft practices at TD Bank, N.A. from August 16, 2010 to the present. On October 25, 2013, TD Bank, N.A. filed a motion to dismiss in part plaintiff’s complaint. This case is in its preliminary stages, and plaintiffs have not claimed a specific damages amount. Glitnir Litigation In January 2013, The Toronto-Dominion Bank (the Bank) was named as a defendant in Glitnir HF v. The Toronto-Dominion Bank, an English High Court proceeding issued by Glitnir HF, a former Icelandic bank. The claim arises out of the Bank’s termination of derivatives transac- tions following Glitnir’s bankruptcy during the Icelandic banking crisis in October 2008. In particular, the claim concerns the appropriateness of the foreign currency exchange rates, interest rates, and basis spreads used by the Bank in its close-out calculation in respect of Glitnir. The claim is scheduled to be heard in October 2014. RESTRUCTURING The Bank undertook certain measures commencing in the fourth quarter of 2013, which are expected to continue through fiscal year 2014, to reduce costs in a sustainable manner and achieve greater operational efficiencies. To implement these measures, the Bank recorded a provi- sion of $129 million for restructuring initiatives related primarily to retail branch and real estate optimization initiatives. COMMITMENTS Credit-related Arrangements In the normal course of business, the Bank enters into various commit- ments and contingent liability contracts. The primary purpose of these contracts is to make funds available for the financing needs of custom- ers. The Bank’s policy for requiring collateral security with respect to these contracts and the types of collateral security held is generally the same as for loans made by the Bank. Financial and performance standby letters of credit represent irrevo- cable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties and they carry the same credit risk, recourse and collateral security requirements as loans extended to customers. See the Guarantees section below for further details. 182 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSDocumentary and commercial letters of credit are instruments issued on behalf of a customer authorizing a third party to draw drafts on the Bank up to a certain amount subject to specific terms and conditions. The Bank is at risk for any drafts drawn that are not ultimately settled by the customer, and the amounts are collateralized by the assets to which they relate. Commitments to extend credit represent unutilized portions of authorizations to extend credit in the form of loans and customers’ liability under acceptances. A discussion on the types of liquidity facilities the Bank provides to its securitization conduits is included in Note 9. The values of credit instruments reported below represent the maxi- mum amount of additional credit that the Bank could be obligated to extend should contracts be fully utilized. Credit Instruments (millions of Canadian dollars) Financial and performance standby letters of credit Documentary and commercial letters of credit Commitments to extend credit1 Original term to maturity of one year or less Original term to maturity of more than one year Total As at October 31 October 31 2012 2013 $ 16,503 $ 15,802 279 200 31,845 32,593 56,873 50,016 $ 106,169 $ 97,942 1 Commitments to extend credit exclude personal lines of credit and credit card lines, which are unconditionally cancellable at the Bank’s discretion at any time. In addition, the Bank is committed to fund $82 million (October 31, 2012 – $249 million) of private equity investments. Long-term Commitments or Leases The Bank has obligations under long-term non-cancellable leases for premises and equipment. Future minimum operating lease commitments for premises and for equipment, where the annual rental is in excess of $100 thousand, is estimated at $768 million for 2014; $732 million for 2015; $683 million for 2016; $617 million for 2017, $538 million for 2018, and $2,918 million for 2019 and thereafter. Future minimum finance lease commitments where the annual payment is in excess of $100 thousand, is estimated at $32 million for 2014; $18 million for 2015; $12 million for 2016; $7 million for 2017; $6 million for 2018; and $28 million for 2019 and thereafter. The premises and equipment net rental expense, included under Non-interest expenses in the Consolidated Statement of Income, was $971 million for the year ended October 31, 2013 (2012 – $914 million; 2011 – $877 million). Pledged Assets and Collateral In the ordinary course of business, securities and other assets are pledged against liabilities or contingent liabilities, including repurchase agreements, securitization liabilities, capital trust securities, and securi- ties borrowing transactions. Assets are also deposited for the purposes of participation in clearing and payment systems and depositories or to have access to the facilities of central banks in foreign jurisdictions, or as security for contract settlements with derivative exchanges or other derivative counterparties. As at October 31, 2013, securities and other assets with a carrying value of $133.9 billion (October 31, 2012 – $144.1 billion) were pledged as collateral in respect of these transac- tions. See Note 8, Transfer of Financial Assets, for further details. Certain consumer instalment and other personal loan assets with a carrying value of $11.6 billion (October 31, 2012 – $11.7 billion) were also pledged with respect to covered bonds issued by the Bank. Assets transferred by the Bank where the transferee has the right to sell or repledge are as follows: Assets that can be Repledged or Sold (millions of Canadian dollars) Trading loans, securities, and other Other assets Total As at October 31 October 31 2012 2013 $ 29,484 $ 29,929 120 $ 29,604 $ 30,049 120 In addition, the Bank may accept financial assets as collateral that the Bank is permitted to sell or repledge in the absence of default. These transactions are conducted under terms that are usual and customary to standard lending, and security borrowing and lending activities. As at October 31, 2013, the fair value of financial assets accepted as collateral that the Bank is permitted to sell or repledge in the absence of default was $19.8 billion (October 31, 2012 – $18.0 billion). The fair value of financial assets accepted as collateral that has been sold or repledged (excluding cash collateral) was $3.3 billion as at October 31, 2013 (October 31, 2012 – $4.1 billion). Assets Sold with Recourse In connection with its securitization activities, the Bank typically makes customary representations and warranties about the underlying assets which may result in an obligation to repurchase the assets. These representations and warranties attest that the Bank, as the seller, has executed the sale of assets in good faith, and in compliance with relevant laws and contractual requirements. In the event that they do not meet these criteria, the loans may be required to be repurchased by the Bank. GUARANTEES The following types of transactions represent the principal guarantees that the Bank has entered into. Assets Sold with Contingent Repurchase Obligations The Bank sells mortgage loans to the TD Mortgage Fund (the ‘Fund’), a mutual fund managed by the Bank. The mortgage loans are fully collateralized by residential properties. The Bank continues to service the mortgages. As part of its servicing responsibilities, the Bank has an obligation to repurchase mortgage loans when they default for an amount equal to their carrying amount. Losses on the repurchased defaulted mortgages are recovered through realization of the security on the loan and the government guarantee, where applicable. In addi- tion, if the Fund experiences a liquidity event such that it does not have sufficient cash to honour unit-holder redemptions, it has the option to sell the mortgage loans back to the Bank at their fair value. Generally, the term of these agreements do not exceed five years. Credit Enhancements The Bank guarantees payments to counterparties in the event that third party credit enhancements supporting asset pools are insufficient. Written Options Written options are agreements under which the Bank grants the buyer the future right, but not the obligation, to sell or buy at or by a specified date, a specific amount of a financial instrument at a price agreed when the option is arranged and which can be physically or cash settled. Written options can be used by the counterparty to hedge foreign exchange, equity, credit, commodity and interest rate risks. The Bank does not track, for accounting purposes, whether its clients enter into these derivative contracts for trading or hedging purposes and has not determined if the guaranteed party has the asset or liability related to the underlying. Accordingly, the Bank cannot ascertain which contracts are guarantees under the definition contained in the accounting guide- line for disclosure of guarantees. The Bank employs a risk framework to define risk tolerances and establishes limits designed to ensure that losses do not exceed acceptable, pre-defined limits. Due to the nature of these contracts, the Bank cannot make a reasonable estimate of the potential maximum amount payable to the counterparties. The total notional principal amount of the written options as at October 31, 2013 was $82 billion (October 31, 2012 – $94 billion). 183 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Indemnification Agreements In the normal course of operations, the Bank provides indemnification agreements to various counterparties in transactions such as service agreements, leasing transactions, and agreements relating to acquisi- tions and dispositions. Under these agreements, the Bank is required to compensate counterparties for costs incurred as a result of various contingencies such as changes in laws and regulations and litigation claims. The nature of certain indemnification agreements prevents the Bank from making a reasonable estimate of the maximum potential amount that the Bank would be required to pay such counterparties. The Bank also indemnifies directors, officers and other persons, to the extent permitted by law, against certain claims that may be made against them as a result of their services to the Bank or, at the Bank’s request, to another entity. The table below summarizes as at October 31, the maximum potential amount of future payments that could be made under guarantees without consideration of possible recoveries under recourse provisions or from collateral held or pledged. Maximum Potential Amount of Future Payments (millions of Canadian dollars) As at Financial and performance standby letters of credit Assets sold with contingent repurchase obligations Total October 31 October 31 2012 2013 $ 16,503 $ 15,802 581 $ 16,844 $ 16,383 341 N O T E 3 0 RELATED PARTY TRANSACTIONS Parties are considered to be related if one party has the ability to directly or indirectly control the other party or exercise significant influence over the other party in making financial or operational decisions. The Bank’s related parties include key management person- nel, their close family members and their related entities, subsidiaries, associates, joint ventures, and post-employment benefit plans for the Bank’s employees. TRANSACTIONS WITH KEY MANAGEMENT PERSONNEL, THEIR CLOSE FAMILY MEMBERS AND THEIR RELATED ENTITIES Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly. The Bank considers certain of its officers and directors and their affiliates to be key management personnel. The Bank makes loans to its key management personnel, their close family members and their related entities on market terms and conditions with the exception of banking products and services for key management personnel, which are subject to approved policy guidelines that govern all employees. Loans to Key Management Personnel, their Close Family Members and their Related Entities (millions of Canadian dollars) As at Personal loans, including mortgages Business loans Total October 31 October 31 2012 2013 $ 3 181 $ 184 $ 6 201 $ 207 COMPENSATION The remuneration of key management personnel was as follows: Compensation (millions of Canadian dollars) Short-term employee benefits Post-employment benefits Share-based payments Total For the years ended October 31 2013 $ 25 2 32 $ 59 2012 $ 23 1 32 $ 56 2011 $ 23 2 33 $ 58 In addition, the Bank offers deferred share and other plans to non- employee directors, executives and certain other key employees. See Note 25 for more details. In the ordinary course of business, the Bank also provides various banking services to associated and other related corporations on terms similar to those offered to non-related parties. TRANSACTIONS WITH SUBSIDIARIES, TD AMERITRADE AND SYMCOR INC. Transactions between the Bank and its subsidiaries meet the definition of related party transactions. If these transactions are eliminated on consolidation, they are not disclosed as related party transactions. Transactions between the Bank, TD Ameritrade and Symcor also qualify as related party transactions. Other than as described below, during fiscal 2013, there were no significant transactions between the Bank, TD Ameritrade and Symcor. Other Transactions with TD Ameritrade and Symcor Inc. i) TD AMERITRADE HOLDING CORPORATION A description of significant transactions of the Bank and its affiliates with TD Ameritrade is set forth below. Insured Deposit Account (formerly known as Money Market Deposit Account) Agreement The Bank is party to an insured deposit account (IDA) agreement with TD Ameritrade, pursuant to which the Bank makes available to clients of TD Ameritrade, IDAs as designated sweep vehicles. TD Ameritrade provides marketing and support services with respect to the IDA. The Bank paid fees of $821 million in 2013 (2012 – $834 million; 2011 – $762 million) to TD Ameritrade for the deposit accounts. The fee paid by the Bank is based on the average insured deposit balance of $70.4 billion in 2013 (2012 – $60.3 billion; 2011 – $49.3 billion) with a portion of the fee tied to the actual yield earned by the Bank on the investments, less the actual interest paid to clients of TD Ameri- trade, with the balance based on an agreed rate of return. The Bank earns a servicing fee of 25 basis points on the aggregate average daily balance in the sweep accounts (subject to adjustment based on a specified formula). As at October 31, 2013, amounts receivable from TD Ameritrade were $54 million (October 31, 2012 – $129 million). As at October 31, 2013, amounts payable to TD Ameritrade were $103 million (October 31, 2012 – $87 million). ii) TRANSACTIONS WITH SYMCOR INC. The Bank has one-third ownership in Symcor Inc. (Symcor), a Canadian provider of business process outsourcing services offering a diverse portfolio of integrated solutions in item processing, statement processing and production, and cash management services. The Bank accounts for Symcor’s results using the equity method of accounting. During fiscal 2013, the Bank paid $128 million (2012 – $128 million; 2011 – $139 million) for these services. As at October 31, 2013, the amount payable to Symcor was $10 million (October 31, 2012 – $10 million). The Bank and two other shareholder banks have also provided a $100 million unsecured loan facility to Symcor which was undrawn as at October 31, 2013 and October 31, 2012. 184 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 3 1 SEGMENTED INFORMATION For management reporting purposes, the Bank’s operations and activi- ties are organized around four key business segments: Canadian Personal and Commercial Banking (CAD P&C), Wealth and Insurance, U.S. Personal and Commercial Banking (U.S. P&C), and Wholesale Banking. The Bank’s other activities are grouped into the Corporate segment. The results of TD Auto Finance Canada are reported in CAD P&C. The results of TD Auto Finance U.S. are reported in U.S. P&C. Integration charges, direct transaction costs, and changes in fair value of contingent consideration relating to the Chrysler Financial acquisi- tion are reported in the Corporate segment. Effective December 1, 2011, the results of the credit card portfolio of MBNA Canada are reported primarily in the CAD P&C and Wealth and Insurance segments. Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada are reported in the CAD P&C segment. Effective March 13, 2013, the results of the U.S. credit card portfolio of Target are reported in the U.S. P&C segment and effective March 27, 2013, the results of Epoch are reported in the Wealth and Insurance segment. Executive responsibilities for the TD Insurance business were moved from Group Head, Canadian Banking, Auto Finance, and Credit Cards, to the Group Head, Wealth and Insurance and Corporate Shared Services. Accordingly, effective November 1, 2011, the results of the TD Insurance business were transferred from CAD P&C to Wealth and Insurance. The prior period results have been restated retroactively to 2011. Effective July 1, 2013, the Group Head, U.S. Personal and Commer- cial Banking became Chief Operating Officer, TD, and subsequently, on November 1, 2014, is expected to become the Bank’s Group President and Chief Executive Officer. Also effective July 1, 2013, the Group Head, Wealth Management, Insurance and Corporate Shared Services became Group Head, U.S. Personal and Commercial Banking. Executive responsibilities for the Wealth Management business will be moved to the Group Head, Canadian Banking and Auto Finance, TD, and the Credit Cards and Insurance businesses will be moved to the Group Head, Corporate Development, Enterprise Strategy and Treasury, TD. The Bank is currently finalizing its future reporting format and will update these results for segment reporting purposes effective the first quarter of fiscal 2014. These changes will be applied retroactively in all periods presented. CAD P&C comprises the Bank’s personal and business banking in Canada and provides financial products and services to personal, small business, and commercial customers. Wealth and Insurance provides insurance, investment products and services to institutional and retail investors, and includes the Bank’s equity investment in TD Ameritrade. U.S. P&C provides commercial banking, mortgage banking and other financial services in the U.S., primarily in the Northeast and Mid-Atlan- tic regions and Florida. 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 CAD P&C and Wholesale Banking, elimination of taxable equivalent adjustments and other management reclassifications, corporate 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, capi- tal, 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 CDS to hedge the credit risk in Wholesale Bank- ing’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 busi- ness 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. As discussed in Note 6, 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 perfor- mance 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. 185 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTSThe following table summarizes the segment results for the years ended October 31, 2013, October 31, 2012, and October 31, 2011. Results by Business Segment (millions of Canadian dollars) Net interest income (loss) Non-interest income (loss)1 Provision for (reversal of) credit losses Insurance claims and related expenses1 Non-interest expenses Income (loss) before income taxes Provision for (recovery of) income taxes Equity in net income of an investment in associate, net of income taxes Net income (loss) Total assets as at October 31 (billions of Canadian dollars) Net interest income (loss) Non-interest income (loss)1 Provision for (reversal of) credit losses Insurance claims and related expenses1 Non-interest expenses Income (loss) before income taxes Provision for (recovery of) income taxes Equity in net income of an investment in associate, net of income taxes Net income (loss) Total assets as at October 31 (billions of Canadian dollars) Net interest income (loss) Non-interest income (loss)1 Provision for (reversal of) credit losses Insurance claims and related expenses1 Non-interest expenses Income (loss) before income taxes Provision for (recovery of) income taxes Equity in net income of an investment in associate, net of income taxes Net income (loss) Total assets as at October 31 (billions of Canadian dollars) For the years ended October 31 2013 Canadian Personal and Commercial Banking U.S. Personal and Commercial Banking Wealth and Insurance Wholesale Banking Corporate $ 8,345 2,695 929 – 5,136 4,975 1,321 – $ 3,654 $ 579 6,358 – 3,056 2,821 1,060 153 246 $ 1,153 $ 5,172 1,957 779 – 4,550 1,800 273 – $ 1,527 $ 1,982 425 26 – 1,541 840 192 – $ 648 $ – (251) (103) – 994 (1,142) (796) 26 (320) $ Total $ 16,078 11,184 1,631 3,056 15,042 7,533 1,143 272 $ 6,662 $ 290.3 $ 27.5 $ 239.1 $ 269.3 $ 36.3 $ 862.5 $ 8,023 2,629 1,151 – 4,988 4,513 1,209 – $ 3,304 $ 583 5,860 – 2,424 2,600 1,419 261 209 $ 1,367 $ 4,663 1,468 779 – 4,125 1,227 99 – $ 1,128 $ 1,805 849 47 – 1,570 1,037 157 – $ 880 $ (48) (286) (182) – 715 (867) (634) 25 (208) $ 2012 $ 15,026 10,520 1,795 2,424 13,998 7,329 1,092 234 $ 6,471 $ 282.6 $ 26.4 $ 209.1 $ 260.7 $ 32.3 $ 811.1 $ 7,190 2,342 824 – 4,433 4,275 1,224 – $ 3,051 $ 542 5,676 – 2,178 2,616 1,424 317 207 $ 1,314 $ 4,392 1,342 687 – 3,593 1,454 266 – $ 1,188 $ 1,659 837 22 – 1,468 1,006 191 – $ 815 $ (122) (18) (43) – 937 (1,034) (672) 39 (323) $ 2011 $ 13,661 10,179 1,490 2,178 13,047 7,125 1,326 246 $ 6,045 $ 258.5 $ 26.7 $ 198.7 $ 220.3 $ 31.3 $ 735.5 1 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts have been reclassified to conform with the current period presentation. 186 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS RESULTS BY GEOGRAPHY For reporting of geographic results, segments are grouped into Canada, United States and Other international. Transactions are primarily recorded in the location responsible for recording the revenue or assets. This loca- tion frequently corresponds with the location of the legal entity through which the business is conducted and the location of the customer. (millions of Canadian dollars) Canada United States Other international Total Canada United States Other international Total Canada United States Other international Total For the years ended October 31 As at October 31 2013 2013 Total revenue1 Income before income taxes Net income Goodwill Total assets $ 18,013 7,205 2,044 $ 27,262 $ 17,314 6,101 2,131 $ 25,546 $ 15,701 5,708 2,431 $ 23,840 $ 5,233 1,040 1,260 $ 7,533 $ 5,358 474 1,497 $ 7,329 $ 4,510 796 1,819 $ 7,125 $ 4,243 877 1,542 $ 6,662 2012 $ 4,294 472 1,705 $ 6,471 2011 $ 3,428 631 1,986 $ 6,045 $ 1,554 11,694 49 $ 13,297 $ 1,549 10,713 49 $ 12,311 $ 1,455 10,753 49 $ 12,257 $ 518,412 262,682 81,438 $ 862,532 2012 $ 498,449 241,996 70,661 $ 811,106 2011 $ 452,334 221,576 61,583 $ 735,493 1 Effective Q4 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts have been reclassified to conform with the current period presentation. N O T E 3 2 INTEREST RATE RISK The Bank earns and pays interest on certain assets and liabilities. To the extent that the assets, liabilities and financial instruments mature or reprice at different points in time, the Bank is exposed to interest rate risk. The following table details the balances of interest-rate sensitive instruments by the earlier of the maturity or repricing date. Contractual repricing dates may be adjusted according to management’s estimates for prepayments or early redemptions that are independent of changes in interest rates. Certain assets and liabilities are shown as non-rate sensitive although the profile assumed for actual management may be different. Derivatives are presented in the floating rate category. The Bank’s risk management policies and procedures relating to credit, market, and liquidity risks as required under IFRS 7 are outlined in the shaded sections of the “Managing Risk” section of the MD&A in this report. 187 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Interest Rate Risk (billions of Canadian dollars, except as noted) Assets Cash resources and other Effective yield Trading loans, securities, and other Effective yield Financial assets designated at fair value through profit or loss Effective yield Available-for-sale Effective yield Held-to-maturity Effective yield Securities purchased under reverse repurchase agreements Effective yield Loans Effective yield Other Total assets Liabilities and equity Trading deposits Effective yield Other deposits Effective yield Securitization liabilities at fair value Effective yield Obligations related to securities sold short Obligations related to securities sold under repurchase agreements Effective yield Securitization liabilities at amortized cost Effective yield Subordinated notes and debentures Effective yield Other Equity Total liabilities and equity Net position Assets Cash resources and other Effective yield Trading loans, securities, and other Effective yield Financial assets designated at fair value through profit or loss Effective yield Available-for-sale Effective yield Securities purchased under reverse repurchase agreements Effective yield Loans Effective yield Other Total assets Liabilities and equity Trading deposits Effective yield Other deposits Effective yield Securitization liabilities at fair value Effective yield Obligations related to securities sold short Obligations related to securities sold under repurchase agreements Effective yield Securitization liabilities at amortized cost Effective yield Subordinated notes and debentures Effective yield Other Equity Total liabilities and equity Net position 188 Floating Within 3 3 months to 1 year rate months Total within 1 year Over 1 year to 5 years Over 5 years Non- interest sensitive Total As at October 31, 2013 $ $ – –% – $ –% 0.3 $ 32.4 $ 25.3 $ 11.8 $ 49.7 $ 101.9 $ 10.5 $ 20.8 $ $ $ $ $ 0.1 0.7 0.4 – $ $ $ $ 0.3% 6.0 1.6% 0.6 4.8% 7.4 0.3% 1.1 2.3% 2.2 $ 46.4 0.4% $ $ $ 0.8 $ 32.1 0.6% 9.0 $ 15.1 1.1% 2.0 $ 2.9% 3.3 $ 2.0% 2.6 3.6% $ 39.5 $ 47.3 $ 21.2 $ $ 0.9% 2.0 $ 1.6% 7.2 0.2% 2.1% 3.1 $ 17.6 $ 1.4% 2.1 1.9% $ 55.8 2.9% $ 0.5 $ 3.0% $ 10.4 $ 2.2% $ 9.3 $ 2.1% – –% $ $ 0.1 $ 6.5 0.6 $ 79.5 – $ 30.0 6.4 $ 64.3 $ 15.3 $ 190.5 $ 47.4 $ 253.2 $ 157.5 $ 23.7 $ 10.5 $ 444.9 $ 55.9 $ 85.1 1.8% $ – $ 272.8 3.7% $ – $ 55.9 $ 107.9 $ 465.8 3.6% $ – $ 226.3 3.9% $ – $ 47.1 $ 55.7 $ 114.7 $ 103.0 $ 862.5 $ – $ 25.6 $ 19.8 $ 45.4 $ 0.2% 0.4% 0.7 0.6% $ 0.4 $ 2.1% 1.1 $ 47.6 $ 196.2 $ 53.9 $ 49.3 $ 299.4 $ 54.8 $ 1.6 $ 187.7 $ 543.5 $ – $ 41.8 0.8 $ $ 0.8% 4.4 0.9% $ – $ 27.7 $ $ $ $ – – 0.4% 8.1 1.9% – –% – $ $ 55.9 $ 1.5 $ – $ 121.2 $ 294.7 $ (209.6) $ 151.6 0.9% 8.5 $ 12.9 1.0% – $ 41.8 0.1 $ 28.6 0.4% 2.6 $ 10.7 1.5% 0.2 $ 0.2 $ $ $ $ $ 10.1% 1.0 $ 56.9 $ $ 3.2 1.7 $ $ 83.2 $ 499.1 $ (33.3) $ 24.7 $ $ $ 1.7% 6.6 1.7% – – –% $ 12.0 $ 1.9% 7.6 5.0% 0.7 $ $ 1.2 $ 83.6 $ 142.7 2.1% $ 2.5 $ 2.6% $ $ – $ – $ –% $ 2.9 $ 2.9% $ 0.2 $ 9.2% – $ 22.0 – 5.8 $ 41.8 $ 34.4 – $ 25.6 – $ 8.0 – $ 30.0 $ $ – $ 47.6 $ 7.6 $ 272.2 $ 48.1 $ (157.5) $ $ 87.6 $ 52.0 $ 862.5 – October 31, 2012 0.4 $ 24.9 1.3% $ $ – –% – $ –% 0.2 $ 25.1 $ 13.1 $ 17.8 $ 24.2 $ 8.2 $ 44.3 $ 94.5 5.7 $ 18.8 $ 0.2 0.5 $ $ 0.3% 4.5 1.4% 0.5 0.6% 3.4 $ 46.3 1.0% 3.2 $ 45.8 0.4% $ $ $ $ $ $ $ $ $ 1.4 1.0% 0.4 $ 1.8% 7.8 $ 57.5 2.0% 7.9 $ 56.9 0.3% $ 2.0% 4.0 2.7% $ 26.0 $ 2.5% 2.0 1.9% 8.2 $ 200.8 $ 40.0 $ 249.0 $ 134.3 $ 68.1 $ 89.3 1.7% – $ $ 316.7 2.4% – $ 68.1 $ $ 69.6 $ 475.6 2.7% – $ $ 190.5 2.6% $ 0.5 $ 3.2% $ 14.2 $ 2.6% 0.3 $ 6.2 0.9 $ 98.6 $ – $ 10.3 –% $ 69.2 $ 20.1 $ 3.7% 5.4 $ 408.8 – $ 40.6 $ $ 43.0 $ 102.0 $ 108.7 $ 811.1 $ – $ 18.0 $ 19.4 $ 37.4 $ 0.4% 0.4% 0.1 1.0% $ 0.3 $ 2.0% 1.0 $ 38.8 $ 193.4 $ 62.3 $ 36.6 $ 292.3 $ 49.6 $ 0.2 $ 145.7 $ 487.8 1.8% 6.0 $ 17.4 $ – $ 33.4 1.2 $ $ 1.1% 1.2 3.0% $ – $ 25.4 0.5% $ $ – $ 10.8 – $ 1.4% – –% $ $ $ $ $ 1.6% 4.8 $ 1.5% – $ 33.4 2.0 $ 28.6 0.2% 1.5 $ 12.3 1.1% 3.4 $ 5.5% 3.4 $ 72.2 $ – $ 300.2 $ (210.9) 0.4 $ $ 0.5 $ 118.6 $ 198.1 0.8 $ – $ 72.6 $ $ 1.3 $ 68.5 $ 487.3 1.1 $ (11.7) $ 2.0% $ 1.5 $ 1.6% 0.4 $ 25.3 $ $ – $ – – $ 10.2 –% $ 33.4 $ 38.8 $ 2.6 $ 1.9% $ 2.8 $ 6.0% – $ 26.2 – $ 11.3 $ 1.8 $ 26.1 $ – $ 45.5 $ 9.2 $ 228.9 $ 33.8 $ (126.9) $ 100.5 $ 49.0 $ 811.1 – $ $ $ 1.7% – – –% $ 11.3 $ 1.4% 5.1 4.8% – $ $ 2.2 $ 85.7 $ 104.8 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Interest Rate Risk by Category (billions of Canadian dollars) Canadian currency Foreign currency Net position Canadian currency Foreign currency Net position N O T E 3 3 CREDIT RISK Within 3 months 3 months to 1 year Floating rate $ (177.4) (32.2) $ (209.6) $ 110.7 40.9 $ 151.6 $ (133.3) (77.6) $ (210.9) $ 122.5 75.6 $ 198.1 Total within 1 year $ (55.9) 22.6 $ (33.3) $ (5.8) (5.9) $ (11.7) Over 1 year to 5 years $ 94.5 48.2 $ 142.7 $ 62.8 42.0 $ 104.8 Over 5 years $ 12.1 36.0 $ 48.1 $ 4.8 29.0 $ 33.8 As at October 31, 2013 Non- interest sensitive $ (40.1) (117.4) $ (157.5) Total $ 10.6 (10.6) – $ October 31, 2012 $ 5.7 (5.7) – $ $ (56.1) (70.8) $ (126.9) $ 10.8 13.9 $ 24.7 $ 5.0 (3.9) $ 1.1 Concentration of credit risk exists where a number of borrowers or counterparties are engaged in similar activities, are located in the same geographic area or have comparable economic characteristics. Their ability to meet contractual obligations may be similarly affected by changing economic, political or other conditions. The Bank’s portfolio could be sensitive to changing conditions in particular geographic regions. Concentration of Credit Risk (millions of Canadian dollars, except as noted) Canada United States6 United Kingdom Europe – other International Total Loans and customers’ liability under acceptances1 Credit instruments2,3 As at Derivative financial instruments4,5 October 31 2013 October 31 2012 October 31 2013 October 31 2012 October 31 2013 October 31 2012 74% 25 – – 1 100% 76% 23 – – 1 100% 50% 46 1 2 1 100% 52% 44 1 2 1 100% 39% 19 15 20 7 100% 32% 21 26 15 6 100% $ 451,321 $ 416,071 $ 106,169 $ 97,942 $ 48,309 $ 60,475 1 Of the total loans and customers’ liability under acceptances, the only industry 4 As at October 31, 2013, the current replacement cost of derivative financial segment which equalled or exceeded 5% of the total concentration as at October 31, 2013 was: Real estate 8% (October 31, 2012 – 8%). 2 As at October 31, 2013, the Bank had commitments and contingent liability contracts in the amount of $106,169 million (October 31, 2012 – $97,942 million). Included are commitments to extend credit totalling $89,466 million (October 31, 2012 – $81,861 million), of which the credit risk is dispersed as detailed in the table above. 3 Of the commitments to extend credit, industry segments which equalled or exceeded 5% of the total concentration were as follows as at October 31, 2013: Financial institutions 17% (October 31, 2012 – 16%); pipelines, oil and gas 10% (October 31, 2012 – 11%); power and utilities 8% (October 31, 2012 – 8%); government, public sector entities and education 7% (October 31, 2012 – 10%); sundry manufacturing and wholesale 7% (October 31, 2012 – 5%); telecom- munications, cable and media 7% (October 31, 2012 – 6%); automotive 7% (October 31, 2012 – 5%). instruments amounted to $48,309 million (October 31, 2012 – $60,475 million). Based on the location of the ultimate counterparty, the credit risk was allocated as detailed in the table above. The table excludes the fair value of exchange traded derivatives. 5 The largest concentration by counterparty type was with financial institutions (including non-banking financial institutions), which accounted for 83% of the total as at October 31, 2013 (October 31, 2012 – 74%). The second largest concentration was with governments, which accounted for 12% of the total as at October 31, 2013 (October 31, 2012 – 21%). No other industry segment exceeded 5% of the total. 6 Debt securities classified as loans were 1% as at October 31, 2013 (October 31, 2012 – 1%) of the total loans and customers’ liability under acceptances. 189 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS The following table presents the maximum exposure to credit risk of financial instruments, before taking account of any collateral held or other credit enhancements. Gross Maximum Credit Risk Exposure (millions of Canadian dollars) Cash and due from banks Interest-bearing deposits with banks Securities1 Trading Government and government-insured securities Other debt securities Retained interest Available-for-sale Government and government-insured securities Other debt securities Held-to-maturity Government and government-insured securities Other debt securities Securities purchased under reverse purchase agreements Derivatives2 Loans Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Customers’ liability under acceptances Other assets Total assets Credit instruments3 Unconditionally cancellable commitments to extend credit relating to personal lines of credit and credit card lines Total credit exposure October 31 2013 As at October 31 2012 $ 2,455 28,855 $ 2,361 21,692 32,861 9,616 67 37,897 38,936 25,890 4,071 64,283 86,752 185,709 118,523 21,380 115,837 3,473 6,399 12,635 795,639 106,169 34,563 7,887 85 61,365 33,864 – – 69,198 113,648 172,075 117,369 14,670 100,080 4,654 7,223 10,278 771,012 97,942 177,755 $ 1,079,563 149,975 $ 1,018,929 1 Excludes equity securities. 2 The gross maximum credit exposure for derivatives is based on the credit equivalent amount. The amounts exclude exchange traded derivatives and non-trading credit derivatives. See Note 10. 3 The balance represents the maximum amount of additional funds that the Bank could be obligated to extend should the contracts be fully utilized. The actual maximum exposure may differ from the amount reported above. See Note 29. Credit Quality of Financial Assets The following table provides the on and off-balance sheet exposures by risk-weight for certain financial assets that are subject to the stan- dardized approach to credit risk. Under the standardized approach, assets receive an OSFI-prescribed risk-weight based on factors including counterparty type, product type, collateral, and external credit assess- ments. These assets relate primarily to the Bank’s U.S. Personal and Commercial Banking portfolio. Refer to the Managing Risk – Credit Risk section of the MD&A for a discussion on the risk rating for the standardized approach. 190 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS Financial Assets Subject to the Standardized Approach by Risk-Weights (millions of Canadian dollars) As at October 31, 2013 0% 20% 35% 50% 75% 100% 150% Total Loans Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Total loans Held-to-maturity Securities purchased under reverse repurchase agreements Customers’ liability under acceptances Other assets1 Total assets Off-balance sheet credit instruments Total Loans Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Total loans Held-to-maturity Securities purchased under reverse repurchase agreements Customers’ liability under acceptances Other assets1 Total assets Off-balance sheet credit instruments Total $ 146 $ – – 4,456 – 4,602 273 $ 19,080 3,858 100 – – – 1,832 – 571 2,776 22,938 – – 11,440 213 $ – $ 1,649 $ 60 – 24,095 – – 13,987 2,797 44,505 – 9 – – – 42,528 44,787 – – – $ 3 $ 21,364 152 28,265 119 14,106 1,094 54,684 580 1,368 118,999 – 11,440 – – 2,085 – – – – – 622 3,585 8,187 16,923 22,938 – 2,079 $ 8,187 $ 19,002 $ 22,938 – – – – – – 1 32 – 1 1 42,528 44,820 279 16,643 – $ 1 $ 42,807 $ 61,463 – – – 2,085 1 4,240 1,368 136,765 – 19,001 $ 1,368 $ 155,766 October 31, 2012 $ 160 $ – – 3,010 – 3,170 – 176 $ 15,901 3,462 338 – – – 1,797 – 15 2,326 19,363 – – $ 176 $ – $ 1,452 $ 77 – 23,566 7,419 – – – 2,602 39,703 11 – – – 35,039 39,967 – – – 14 2 $ 17,867 154 27,597 7,433 1,225 48,337 26 1,395 101,260 – – – 1,998 – 712 – – 4,016 7,186 15 – – – 5,036 19,363 – 1,942 $ 7,201 $ 6,978 $ 19,363 1 Other assets include amounts due from banks and interest-bearing deposits with banks. – – – 2 – – 1 – – 1 35,039 39,969 709 14,087 – $ 1 $ 35,748 $ 54,056 – – – 1,998 2 4,729 1,395 107,989 – 16,753 $ 1,395 $ 124,742 191 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS The following tables provide the on and off-balance sheet exposures by risk rating for certain non-retail and retail financial assets that are subject to the Advanced Internal Rating Based (AIRB) approach to credit risk in the Basel III Capital Accord. Under the AIRB approach, assets receive a risk rating based on internal models of the Bank’s historical loss experience (by counterparty type) and on other key risk assumptions. Refer to the Managing Risk – Credit Risk section of the MD&A for a discussion on the credit risk rating for non-retail and retail exposures subject to the AIRB approach. Non-Retail Financial Assets Subject to the AIRB Approach by Risk Rating (millions of Canadian dollars) As at October 31, 2013 Investment grade Non- investment grade Watch and classified Impaired/ defaulted Loans Residential mortgages1 Consumer instalment and other personal1 Business and government Debt securities classified as loans Total loans Held-to-maturity Securities purchased under reverse repurchase agreements Customers’ liability under acceptances Other assets2 Total assets Off-balance sheet credit instruments Total Loans Residential mortgages1 Consumer instalment and other personal1 Business and government Debt securities classified as loans Total loans Held-to-maturity Securities purchased under reverse repurchase agreements Customers’ liability under acceptances Other assets2 Total assets Off-balance sheet credit instruments Total $ 107,232 26,728 27,167 2,504 163,631 18,521 52,711 3,191 25,930 263,984 58,886 $ 322,870 $ 107,374 30,221 23,590 3,829 165,014 – 64,026 3,584 18,148 250,772 52,388 $ 303,160 $ – 32 27,340 158 27,530 – 9,487 3,187 32 40,236 7,151 $ 47,387 $ – 35 21,979 433 22,447 – 3,174 3,576 39 29,236 6,247 $ 35,483 $ – – 617 120 737 – – 20 – 757 276 $ 1,033 $ – – 679 318 997 – – 51 – 1,048 201 $ 1,249 Total $ 107,232 26,760 55,257 2,955 192,204 18,521 62,198 6,398 25,962 305,283 66,323 $ 371,606 $ – – 133 173 306 – – – – 306 10 $ 316 October 31, 2012 $ – – 162 183 345 – – 10 – 355 6 $ 361 $ 107,374 30,256 46,410 4,763 188,803 – 67,200 7,221 18,187 281,411 58,842 $ 340,253 1 Includes Canada Mortgage and Housing Corporation (CMHC) insured exposures classified as sovereign exposure under Basel III and therefore included in the non-retail category under the AIRB approach. 2 Other assets include amounts due from banks and interest-bearing deposits with banks. Retail Financial Assets Subject to the AIRB Approach by Risk Rating1 (millions of Canadian dollars) As at October 31, 2013 Loans Residential mortgages2 Consumer instalment and other personal2 Credit card Business and government3 Total loans Held-to-maturity Off-balance sheet credit instruments Total Loans Residential mortgages2 Consumer instalment and other personal2 Credit card Business and government3 Total loans Held-to-maturity Off-balance sheet credit instruments Total Low risk Normal risk Medium risk High risk Default Total $ 27,357 24,509 1,073 403 53,342 – 35,589 $ 88,931 $ 25,770 11,510 970 334 38,584 – 20,597 $ 59,181 $ 23,310 26,538 2,420 2,967 55,235 – 13,747 $ 68,982 $ 15,508 25,177 2,282 2,349 45,316 – 17,191 $ 62,507 $ 4,736 9,020 2,919 2,255 18,930 – 3,936 $ 22,866 $ 3,946 17,401 2,894 2,349 26,590 – 6,299 $ 32,889 $ 1,661 3,813 1,651 1,153 8,278 – 921 $ 9,199 $ 1,541 5,693 1,720 1,187 10,141 – 1,218 $ 11,359 $ 160 287 53 80 580 – 4 $ 584 $ 57,224 64,167 8,116 6,858 136,365 – 54,197 $ 190,562 October 31, 2012 $ 166 293 59 75 593 – 4 $ 597 $ 46,931 60,074 7,925 6,294 121,224 – 45,309 $ 166,533 1 Credit exposures relating to the Bank’s insurance subsidiaries have been excluded. The financial instruments held by the insurance subsidiaries are mainly comprised of available-for-sale securities and securities designated at fair value through profit or loss, which are carried at fair value on the Consolidated Balance Sheet. 2 Excludes CMHC insured exposures classified as sovereign exposure under Basel III and therefore included in the non-retail category under the AIRB approach. 3 Business and government loans in the retail portfolio include small business loans. 192 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 3 4 REGULATORY CAPITAL The Bank manages its capital under guidelines established by OSFI. The regulatory capital guidelines measure capital in relation to credit, market and operational risks. The Bank has various capital policies, procedures and controls which it utilizes to achieve its goals and objectives. The Bank’s capital management objectives are: • To be an appropriately capitalized financial institution as determined by: – The Bank’s Risk Appetite Statement; – Capital requirements defined by relevant regulatory authorities; and, – The Bank’s internal assessment of capital requirements consistent with the Bank’s risk profile and risk tolerance levels. • To have the most economically achievable weighted average cost of capital (after tax), consistent with preserving the appropriate mix of capital elements to meet targeted capitalization levels. • To ensure ready access to sources of appropriate capital, at reason- able cost, in order to: – Insulate the Bank from unexpected events; or – Support and facilitate business growth and/or acquisitions consis- tent with the Bank’s strategy and risk appetite. For accounting purposes, IFRS is followed for consolidation of subsidiaries and joint ventures. For regulatory capital purposes, insur- ance subsidiaries are deconsolidated and reported as a deduction from capital. Insurance subsidiaries are subject to their own capital adequacy reporting such as OSFI’s Minimum Continuing Capital Surplus Require- ments and Minimum Capital Test. Currently, for regulatory capital purposes, all the entities of the Bank are either consolidated or deducted from capital and there are no entities from which surplus capital is recognized. Some of the Bank’s subsidiaries are individually regulated by either OSFI or other regulators. Many of these entities have minimum capital requirements which they must maintain and which may limit the Bank’s ability to extract capital or funds for other uses. During the year ended October 31, 2013, the Bank complied with the OSFI guideline related to capital ratios and the assets-to-capital multiple (ACM). This guideline is based on “A global regulatory framework for more resilient banks and banking systems” (Basel III) issued by the Basel Committee on Banking Supervision (BCBS). Up until October 31, 2012, the guideline was based on the Basel II regulatory framework. OSFI’s target CET1, Tier 1 and Total capital ratios for Canadian banks are 7%, 8.5% and 10.5%, respectively. • To support strong external debt ratings, in order to manage the The Bank’s regulatory capital position as at October 31 was Bank’s overall cost of funds and to maintain accessibility to required funding. as follows: These objectives are applied in a manner consistent with the Bank’s over- all objective of providing a satisfactory return on shareholders’ equity. Regulatory Capital Position (millions of Canadian dollars, except as noted) Basel III Capital Framework Changes in capital requirements approved by the Basel Committee on Banking and Supervision (BCBS) are commonly referred to as Basel III. These changes are intended to strengthen global capital rules with the goal of promoting a more resilient global banking sector. Under Basel III, total capital consists of three components, namely Common Equity Tier 1 (CET1), Additional Tier 1 and Tier 2 capital. The sum of the first two components is defined as Tier 1 capital. CET1 capital is mainly comprised of common shares, retained earnings and accumulated other comprehensive income, is the highest quality capi- tal and the predominant form of Tier 1 capital. CET1 capital includes regulatory adjustments and deductions for items such as goodwill, other intangibles, amounts by which capital items (such as, significant investments in CET1 capital of financial institutions, mortgage servicing rights and deferred tax assets from temporary differences) exceed allowable thresholds. Tier 2 capital is mainly comprised of subordinated debt, certain loan loss allowances and minority interests in subsidiaries’ Tier 2 instruments. Under Basel III, risk-weighted assets are higher, primarily as a result of the 250% risk-weighted threshold items not deducted from CET1 capital, securitization exposures being risk weighted (previously deducted from capital) and a new capital charge for credit risk related to asset value correlation for financial institutions. Regulatory capital ratios are calculated by dividing CET1, Tier 1 and Total capital by RWA. The BCBS is finalizing a leverage ratio requirement with planned implementation in 2018, intended to serve as a supplementary measure to the risk-based capital requirements, with the objective of constraining excessive leverage. Capital Position and Capital Ratios The Basel framework allows qualifying banks to determine capital levels consistent with the way they measure, manage and mitigate risks. It specifies methodologies for the measurement of credit, market, and operational risks. The Bank uses the advanced approaches for the majority of its portfolios which results in regulatory and economic capital being more closely aligned than was the case under Basel I. Since the U.S. banking subsidiaries (TD Bank, N.A. including South Financial and Chrysler Financial) were not originally required by their main regulators to convert to Basel II prior to being acquired by the Bank, the advanced approaches are not yet being utilized for the majority of assets in TD Bank, N.A. Common Equity Tier 11 Common Equity Tier 1 capital ratio1,2 Tier 1 capital3 Tier 1 capital ratio2,3,4 Total capital3,5 Total capital ratio2,3,6 Assets-to-capital multiple7,8 As at October 31 October 31 2012 2013 $ 25,822 n/a n/a 9.0% $ 31,546 $ 30,989 11.0% $ 40,690 $ 38,595 14.2% 18.2 15.7% 18.0 12.6% 1 Effective 2013, the Bank implemented the Basel III regulatory framework. As a result, the Bank began reporting the measures, CET1 and CET1 capital ratio, in accordance with the “all-in” methodology. 2 The final CAR Guideline postponed the Credit Valuation Adjustment (CVA) capital add-on charge until January 1, 2014. 3 Effective 2013, amounts are calculated in accordance with the Basel III regulatory framework, and are presented based on the “all-in” methodology. Prior to 2013, amounts were calculated in accordance with the Basel II regulatory framework. 4 Tier 1 capital ratio is calculated as Tier 1 capital divided by risk-weighted assets (RWA). 5 Total capital includes CET1, Tier 1 and Tier 2 capital. 6 Total capital ratio is calculated as Total capital divided by RWA. 7 The ACM is calculated as total assets plus off-balance sheet credit instruments, such as certain letters of credit and guarantees, less investments in associated corporations, goodwill and net intangibles, divided by Total capital. 8 Effective 2013, amounts are calculated in accordance with the Basel III regulatory framework, and are presented based on the “transitional” methodology. Prior to 2013, amounts were calculated in accordance with the Basel II regulatory framework. OSFI’s relief provision permits phase-in of the impact of IFRS in the calculation of regulatory capital on a straight-line basis over five quar- ters from November 1, 2011 to January 31, 2013. The IFRS transition adjustment for regulatory capital is the difference between adjusted net Tier 1 capital under Canadian GAAP and IFRS at October 31, 2011 and the impact has been fully phased in as at January 31, 2013. OSFI has also provided IFRS transitional provisions for the ACM, which allows for the exclusion of assets securitized and sold through CMHC- sponsored programs prior to March 31, 2010 from the calculation of ACM. 193 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS N O T E 3 5 RISK MANAGEMENT The risk management policies and procedures of the Bank are provided in the MD&A. The shaded sections of the “Managing Risk” section of the MD&A relating to credit, market and liquidity risks are an integral part of the 2013 Consolidated Financial Statements. N O T E 3 6 INFORMATION ON SUBSIDIARIES The following is a list of the directly or indirectly held significant subsidiaries of the Bank. Significant Subsidiaries1 North America CT Financial Assurance Company Meloche Monnex Inc. Security National Insurance Company Primmum Insurance Company TD Direct Insurance Inc. TD General Insurance Company TD Home and Auto Insurance Company TD Asset Management Inc. TD Waterhouse Private Investment Counsel Inc. TD Auto Finance (Canada) Inc. TD Auto Finance Services Inc. TD Equipment Finance Canada Inc. TD Financing Services Home Inc. TD Financing Services Inc. TD Investment Services Inc. TD Life Insurance Company TD Mortgage Corporation TD Pacific Mortgage Corporation The Canada Trust Company TD Securities Inc. TD US P & C Holdings ULC TD Bank US Holding Company Epoch Investment Partners, Inc.3 TD Bank USA, National Association TD Bank, National Association TD Auto Finance LLC TD Equipment Finance, Inc. TD Private Client Wealth LLC TD Wealth Management Services Inc. TD Vermillion Holdings ULC TD Financial International Ltd. Canada Trustco International Limited TD Reinsurance (Barbados) Inc. TD Reinsurance (Ireland) Limited Toronto Dominion International Inc. TD Waterhouse Canada Inc. TDAM USA Inc. Toronto Dominion Holdings (U.S.A.), Inc. TD Holdings II Inc. TD Securities (USA) LLC Toronto Dominion (Texas) LLC Toronto Dominion (New York) LLC Toronto Dominion Capital (U.S.A.), Inc. International TD Bank International S.A. TD Bank N.V. TD Ireland TD Global Finance TD Wealth Holdings (UK) Limited TD Direct Investing (Europe) Limited Toronto Dominion Australia Limited Toronto Dominion Investments B.V. TD Bank Europe Limited Toronto Dominion Holdings (U.K.) Limited TD Securities Limited Toronto Dominion (South East Asia) Limited Address of Head or Principal Office2 Toronto, Ontario Montreal, Quebec Montreal, Quebec Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Oakville, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Vancouver, British Columbia Toronto, Ontario Toronto, Ontario Calgary, Alberta Cherry Hill, New Jersey New York, New York Wilmington, Delaware Wilmington, Delaware Farmington Hills, Michigan Cherry Hill, New Jersey New York, New York Cherry Hill, New Jersey Calgary, Alberta Hamilton, Bermuda St. James, Barbados St. James, Barbados Dublin, Ireland St. James, Barbados Toronto, Ontario Wilmington, Delaware New York, New York New York, New York New York, New York New York, New York New York, New York New York, New York Luxembourg, Luxembourg Amsterdam, The Netherlands Dublin, Ireland Dublin, Ireland Leeds, England Leeds, England Sydney, Australia London, England London, England London, England London, England Singapore, Singapore Description Insurance Company Holding Company providing management services to subsidiaries Insurance Company Insurance Company Insurance Company Insurance Company Insurance Company Investment Counselling and Portfolio Management Investment Counselling and Portfolio Management Automotive Finance Entity Automotive Finance Entity Financial Leasing Entity Mortgage Lender Financial Services Entity Mutual Fund Dealer Insurance Company Loan Company Loan Company Trust Company Investment Dealer and Broker Holding Company Holding Company Investment Counselling and Portfolio Management U.S. National Bank U.S. National Bank Automotive Finance Entity Financial Leasing Entity Brokerage Service Entity Insurance Agency Holding Company Holding Company Intragroup Lending Company Reinsurance Company Reinsurance Company Intragroup Lending Company Investment Dealer Investment Counselling and Portfolio Management Holding Company Holding Company Securities Dealer Financial Services Entity Financial Services Entity Small Business Investment Company International Online Brokerage Services Dutch Bank Holding Company Securities Dealer Holding Company Discount Brokerage Securities Dealer Holding Company UK Bank Holding Company Securities Dealer Merchant Bank 1 As at October 31, 2013, the Bank, either directly or through its subsidiaries, owned 100% of the entity and/or 100% of any issued and outstanding voting securities and non-voting securities of all the entities listed above. 2 Each subsidiary is incorporated or organized in the country in which its head or principal office is located, with the exception of Toronto Dominion Investments B.V., a company incorporated in The Netherlands but with its principal office in the United Kingdom. 3 Reflects ownership structure as at November 1, 2013. 194 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS SUBSIDIARIES WHERE THE BANK OWNS 50 PERCENT OR LESS OF THE VOTING RIGHTS The Bank also consolidates certain subsidiaries where it owns 50 per cent or less of the voting rights. Most of those subsidiaries are SPEs that are sponsored by the Bank for a variety of purposes. These subsid- iaries are not included in the ‘Significant Subsidiaries’ table above. In the normal course of business, the Bank becomes involved with SPEs, primarily through the following types of transactions: asset secu- ritizations, structured finance, commercial paper programs, mutual funds, commercial real estate leasing and closed-end funds. The Bank’s involvement includes transferring assets to the entities, entering into derivative contracts with them, providing credit enhancement and liquidity facilities, providing investment management and administra- tive services, and holding ownership or other investment interests in the entities. Refer to Note 9, Special Purpose Entities. INVESTEES WHERE THE BANK OWNS MORE THAN HALF OF THE VOTING RIGHTS The Bank owns directly or indirectly more than half of the voting rights of investees but does not have control over these investees when: • Another investor has the power over more than half of the voting rights by virtue of an agreement with the Bank; or N O T E 3 7 SUBSEQUENT EVENTS Sale of TD Waterhouse Institutional Services On November 12, 2013, TD Waterhouse Canada Inc., a subsidiary of the Bank, completed the sale of the Bank’s institutional services busi- ness, known as TD Waterhouse Institutional Services, to a subsidiary of National Bank of Canada. The transaction price was $250 million, subject to certain price adjustment mechanisms. The effects of the sale will be recorded in the first quarter of fiscal 2014. • Another investor has the power to govern the financial and operating policies of the investee under a statute or an agreement; or • Another investor has the power to appoint or remove the majority of the members of the board of directors or equivalent governing body and the investee is controlled by that board or body, or when another investor has the power to cast the majority of votes at meetings of the board of directors or equivalent governing body and control of the entity is by that board or body. SUBSIDIARIES WITH RESTRICTIONS TO TRANSFER FUNDS Certain of the Bank’s subsidiaries have regulatory requirements to fulfill, in accordance with applicable law, in order to transfer funds, including paying dividends to, repaying loans to, or redeeming subordinated debentures issued to, the Bank. These customary requirements include, but are not limited to: • Local regulatory capital and/or surplus adequacy requirements; • Basel requirements under Pillar I and Pillar II; • Local regulatory approval requirements; and • Local corporate and/or securities laws. Stock Dividend The Bank’s Board of Directors has declared a stock dividend of one common share per each issued and outstanding common share, which has the same effect as a two-for-one split of the common share. Shareholders of record as at the close of business on January 23, 2014 are entitled to receive the stock dividend on the payment date of January 31, 2014. In future periods, the Bank will present earnings per share figures to give effect to the stock dividend. The following table presents the pro forma effect on the Bank’s basic and diluted earnings per share, as if the stock dividend was retroactively applied to all periods presented. Pro forma Basic and Diluted Earnings Per Share (millions of Canadian dollars, except as noted) Pro forma basic earnings per share Net income attributable to common shareholders Pro forma weighted-average number of common shares outstanding (millions) Pro forma basic earnings per share (dollars) Pro forma diluted earnings per share Net income attributable to common shareholders Pro forma effect of dilutive securities Capital Trust II Securities – Series 2012-1 Preferred Shares – Series M and N Pro forma net income available to common shareholders including impact of dilutive securities Pro forma weighted-average number of common shares outstanding (millions) Pro forma effect of dilutive securities Stock options potentially exercisable (millions)1 TD Capital Trust II Securities – Series 2012-1 (millions) Preferred Shares – Series M and N (millions) Pro forma weighted-average number of common shares outstanding – diluted (millions) Pro forma diluted earnings per share (dollars)1 1 For the years ended October 31, 2013, October 31, 2012 and October 31, 2011, the computation of diluted earnings per share did not exclude any weighted- average options where the option price was greater than the average market price of the Bank’s common shares. For the years ended October 31 2013 2012 2011 $ 6,372 1,837.9 3.47 $ 6,171 1,813.2 3.40 $ 5,761 1,771.4 3.25 6,372 6,171 5,761 3 – 6,375 1,837.9 5.7 1.5 – 1,845.1 3.46 $ 17 – 6,188 1,813.2 6.5 10.0 – 1,829.7 3.38 $ 17 25 5,803 1,771.4 9.1 9.9 15.5 1,805.9 3.21 $ 195 TD BANK GROUP ANNUAL REPORT 2013 FINANCIAL RESULTS PRINCIPAL SUBSIDIARIES1 North America (millions of Canadian dollars) North America CT Financial Assurance Company Meloche Monnex Inc. Security National Insurance Company Primmum Insurance Company TD Direct Insurance Inc. TD General Insurance Company TD Home and Auto Insurance Company TD Asset Management Inc. TD Waterhouse Private Investment Counsel Inc. TD Auto Finance (Canada) Inc. TD Auto Finance Services Inc. TD Equipment Finance Canada Inc. TD Financing Services Home Inc. TD Financing Services Inc. TD Investment Services Inc. TD Life Insurance Company TD Mortgage Corporation TD Pacific Mortgage Corporation The Canada Trust Company TD Securities Inc. TD US P & C Holdings ULC TD Bank US Holding Company Epoch Investment Partners, Inc.3 TD Bank USA, National Association TD Bank, National Association TD Auto Finance LLC TD Equipment Finance, Inc. TD Private Client Wealth LLC TD Wealth Management Services Inc. TD Vermillion Holdings ULC TD Financial International Ltd. Canada Trustco International Limited TD Reinsurance (Barbados) Inc. TD Reinsurance (Ireland) Limited Toronto Dominion International Inc. TD Waterhouse Canada Inc. TDAM USA Inc. Toronto Dominion Holdings (U.S.A.), Inc. TD Holdings II Inc. TD Securities (USA) LLC Toronto Dominion (Texas) LLC Toronto Dominion (New York) LLC Toronto Dominion Capital (U.S.A.), Inc. 1 Unless otherwise noted, The Toronto-Dominion Bank (the “Bank”), either directly or through its subsidiaries, owns 100% of the entity and/or 100% of any issued and outstanding voting securities and non-voting securities of the entities listed. 2 Each subsidiary is incorporated or organized in the country in which its head or principal office is located, with the exception of Toronto Dominion Investments B.V., a company incorporated in The Netherlands but with its principal office in the United Kingdom. 3 Reflects ownership structure as at November 1, 2013. As at October 31, 2013 Carrying value of shares owned by the Bank $ 127 1,589 703 1,193 1,302 2 34 93 54 52 10,753 1,520 28,069 18,262 2,139 11 1,845 Address of Head or Principal Office2 Toronto, Ontario Montreal, Quebec Montreal, Quebec Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Oakville, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Vancouver, British Columbia Toronto, Ontario Toronto, Ontario Calgary, Alberta Cherry Hill, New Jersey New York, New York Wilmington, Delaware Wilmington, Delaware Farmington Hills, Michigan Cherry Hill, New Jersey New York, New York Cherry Hill, New Jersey Calgary, Alberta Hamilton, Bermuda St. James, Barbados St. James, Barbados Dublin, Ireland St. James, Barbados Toronto, Ontario Wilmington, Delaware New York, New York New York, New York New York, New York New York, New York New York, New York New York, New York 196196 TD BANK GROU P AN NUAL REPO RT 20 13 PRIN CIPAL SU BSIDIARIES PRINCIPAL SUBSIDIARIES1 International (millions of Canadian dollars) International NatWest Personal Financial Management Limited (50%) NatWest Stockbrokers Limited (50%) TD Bank International S.A. TD Bank N.V. TD Ireland TD Global Finance TD Luxembourg International Holdings TD Ameritrade Holding Corporation (42.22%)3 TD Wealth Holdings (UK) Limited TD Direct Investing (Europe) Limited Toronto Dominion Australia Limited Toronto Dominion Investments B.V. TD Bank Europe Limited Toronto Dominion Holdings (U.K.) Limited TD Securities Limited Toronto Dominion (South East Asia) Limited 1 Unless otherwise noted, The Toronto-Dominion Bank (the “Bank”), either directly or through its subsidiaries, owns 100% of the entity and/or 100% of any issued and outstanding voting securities and non-voting securities of the entities listed. 2 Each subsidiary is incorporated or organized in the country in which its head or principal office is located, with the exception of Toronto Dominion Investments B.V., a company incorporated in The Netherlands but with its principal office in the United Kingdom. 3 TD Ameritrade Holding Corporation is not a subsidiary of the Bank as the Bank does not control it. TD Luxembourg International Holdings and its ownership of TD Ameritrade Holding Corporation is included given the significance of the Bank’s investment in TD Ameritrade Holding Corporation. Address of Head or Principal Office2 London, England London, England Luxembourg, Luxembourg Amsterdam, The Netherlands Dublin, Ireland Dublin, Ireland Luxembourg, Luxembourg Omaha, Nebraska Leeds, England Leeds, England Sydney, Australia London, England London, England London, England London, England Singapore, Singapore As at October 31, 2013 Carrying value of shares owned by the Bank 62 $ 51 280 1,014 5,300 83 219 1,019 798 TD BANK GROUP ANNUAL RE POR T 2 0 13 PRIN C IPAL SUBSIDI AR IES 197197 Ten-year Statistical Review – IFRS1 Condensed Consolidated Balance Sheet (millions of Canadian dollars) ASSETS Cash resources and other Trading loans, securities and other2 Derivatives Held-to-maturity securities Securities purchased under reverse repurchase agreements Loans, net of allowance for loan losses Other Total assets LIABILITIES Deposits Trading deposits Derivatives Other Subordinated notes and debentures Liabilities for preferred shares and capital trust securities Total liabilities EQUITY Common shares Preferred shares Treasury shares Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Non-controlling interest in subsidiaries Total equity Total liabilities and equity Condensed Consolidated Statement of Income – Reported (millions of Canadian dollars) Net interest income Non-interest income3 Total revenue3 Provision for credit losses Insurance claims and related expenses3 Non-interest expenses Income before income taxes and equity in net income of an investment in associate Provision for income taxes Equity in net income of an investment in associate, net of income taxes Net income Preferred dividends Net income available to common shareholders and non-controlling interests in subsidiaries Attributable to: Non-controlling interests in subsidiaries Common shareholders Condensed Consolidated Statement of Income – Adjusted (millions of Canadian dollars) Net interest income Non-interest income3 Total revenue3 Provision for credit losses Insurance claims and related expenses3 Non-interest expenses Income before income taxes and equity in net income of an investment in associate Provision for income taxes Equity in net income of an investment in associate, net of income taxes Net income Preferred dividends Net income available to common shareholders and non-controlling interests in subsidiaries Attributable to: Non-controlling interests in subsidiaries Common shareholders 2013 2012 2011 $ 32,436 188,001 49,461 29,961 64,283 444,922 53,468 862,532 543,476 47,593 49,471 160,270 7,982 1,767 810,559 19,316 3,395 (147) 170 24,565 3,166 50,465 1,508 51,973 $ 25,128 199,280 60,919 – 69,198 408,848 47,733 811,106 487,754 38,774 64,997 157,013 11,318 2,250 762,106 18,691 3,395 (167) 196 21,763 3,645 47,523 1,477 49,000 $ 24,112 171,109 59,845 – 56,981 377,187 46,259 735,493 449,428 29,613 61,715 136,929 11,543 2,261 691,489 17,491 3,395 (116) 212 18,213 3,326 42,521 1,483 44,004 $ 862,532 $ 811,106 $ 735,493 2013 $ 16,078 11,184 27,262 1,631 3,056 15,042 7,533 1,143 272 6,662 185 2012 $ 15,026 10,520 25,546 1,795 2,424 13,998 7,329 1,092 234 6,471 196 2011 $ 13,661 10,179 23,840 1,490 2,178 13,047 7,125 1,326 246 6,045 180 $ 6,477 $ 6,275 $ 5,865 $ 105 6,372 $ 104 6,171 $ 104 5,761 2013 2012 $ 16,078 $ 15,062 11,113 27,191 1,606 3,056 14,363 8,166 1,334 326 7,158 185 10,615 25,677 1,903 2,424 13,162 8,188 1,404 291 7,075 196 2011 $ 13,661 10,052 23,713 1,490 2,178 12,373 7,672 1,545 305 6,432 180 $ 6,973 $ 6,879 $ 6,252 $ 105 6,868 $ 104 6,775 $ 104 6,148 1 Results prepared in accordance with GAAP are referred to as “reported”. Adjusted results (excluding “items of note”, net of income taxes, from reported results) and related terms are not defined terms under GAAP and therefore, may not be comparable to similar terms used by other issuers. For further explanation, see “How the Bank Reports” in the accompanying Management’s Discussion and Analysis (MD&A). 2 Includes available-for-sale securities and financial assets designated at fair value through profit or loss. 3 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Compara- tive amounts have been restated to conform with the current period presentation. 198198 TD BANK GROU P AN NUAL REPO RT 20 13 TEN- YEAR S TATIS TICAL RE VIEW Ten-year Statistical Review – IFRS1 Reconciliation of Non-GAAP Financial Measures (millions of Canadian dollars) Net income available to common shareholders – reported Adjustments for items of note, net of income taxes Amortization of intangibles Fair value of derivatives hedging the reclassified available-for-sale securities portfolio Integration charges and direct transaction costs relating to U.S. P&C Banking acquisitions Fair value of credit default swaps hedging the corporate loan book, net of provision for credit losses Integration charges, direct transaction costs, and changes in fair value of contingent consideration relating to the Chrysler Financial acquisition Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada Litigation and litigation-related charge/reserve Reduction of allowance for incurred but not identified credit losses Positive impact due to changes in statutory income tax rates Impact of Superstorm Sandy Impact of Alberta flood on the loan portfolio Restructuring charges Set-up costs in preparation for the previously announced affinity relationship with Aimia with respect to Aeroplan Visa credit cards and the related acquisition of accounts 2013 2012 2011 $ 6,372 $ 6,171 $ 5,761 232 (57) – – – 92 100 – – – 19 90 20 238 89 9 – 17 104 248 (120) (18) 37 – – – 604 391 (128) 82 (13) 55 – – – – – – – – 387 $ 6,775 $ 6,148 Total adjustments for items of note Net income available to common shareholders – adjusted 496 $ 6,868 Condensed Consolidated Statement of Changes in Equity (millions of Canadian dollars) Common shares Preferred shares Treasury shares Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests in subsidiaries Total equity Other Statistics – Reported Per common share Performance ratios Asset quality Capital ratios Other 1 Basic earnings 2 Diluted earnings 3 Dividends 4 Book value 5 Closing market price 6 Closing market price to book value 7 Closing market price appreciation 8 Total shareholder return on common shareholders’ investment2 9 Return on total common equity 10 Return on risk-weighted assets3,4 11 Efficiency ratio5 12 Net interest margin 13 Common dividend payout ratio 14 Dividend yield6 15 Price earnings ratio7 16 Impaired loans net of counterparty-specific and individually insignificant allowances as a % of net loans8,9 17 Net impaired loans as a % of common equity9 18 Provision for credit losses as a % of net average loans8,9 19 Common Equity Tier 1 capital ratio10 20 Tier 1 capital ratio3,4 21 Total capital ratio3,4 22 Common equity to total assets 23 Number of common shares outstanding (thousands) 24 Market capitalization (millions of Canadian dollars) 25 Average number of employees11 26 Number of retail outlets12 27 Number of retail brokerage offices 28 Number of automated banking machines Other Statistics – Adjusted Per common share Performance ratios 1 Basic earnings 2 Diluted earnings 3 Return on total common equity 4 Return on risk-weighted assets3,4 5 Efficiency ratio5 6 Common dividend payout ratio 7 Price earnings ratio7 2013 2012 $ 19,316 $ 18,691 3,395 (147) 170 24,565 3,166 3,395 (167) 196 21,763 3,645 $ 50,465 $ 47,523 1,508 $ 51,973 1,477 $ 49,000 $ 2013 6.93 6.91 3.24 51.31 95.64 1.86 17.7% 22.3 14.0% 2.43 55.2 2.20 46.7 3.7 13.9 0.50% 4.77 0.38 9.0% 11.0% 14.2 5.5 917,478 $ 87,748 78,748 2,547 110 4,734 $ 2013 7.47 7.45 15.0% 2.50 52.8 43.3 12.8 $ 2012 6.81 6.76 2.89 48.17 81.23 1.69 8.0% 11.9 14.9% 2.70 60.5 2.23 42.5 3.8 12.0 0.52% 4.76 0.43 n/a 12.6% 15.7 5.4 916,130 $ 74,417 78,397 2,535 112 4,739 $ 2012 7.47 7.42 16.3% 2.83 51.3 38.7 10.9 2011 $ 17,491 3,395 (116) 212 18,213 3,326 $ 42,521 1,483 $ 44,004 $ 2011 6.50 6.43 2.61 43.43 75.23 1.73 2.4% 5.7 16.2% 2.86 60.2 2.30 40.2 3.4 11.7 0.56% 5.27 0.39 n/a 13.0% 16.0 5.3 900,998 $ 67,782 75,631 2,483 108 4,650 $ 2011 6.94 6.86 17.3% 2.95 52.2 37.7 11.0 1 Results prepared in accordance with GAAP are referred to as “reported”. Adjusted results (excluding “items of note”, net of income taxes, from reported results) and related terms are not defined terms under GAAP and therefore, may not be comparable to similar terms used by other issuers. For further explanation, see “How the Bank Reports” in the accompanying MD&A. 2 Return is calculated based on share price movement and dividends reinvested over the trailing twelve month period. 3 Effective 2013, amounts are calculated in accordance with the Basel III regulatory framework, and are presented based on the “all-in” methodology. Prior to 2013, amounts were calculated in accordance with the Basel II regulatory framework. 4 Prior to 2012, amounts were calculated based on Canadian GAAP. 5 Effective 2013, Insurance revenue and Insurance claims and related expenses are presented on a gross basis on the Consolidated Statement of Income. Comparative amounts, including certain ratios, have been recast to conform with the current period presentation. 6 Dividends paid during the year divided by average of high and low common share prices for the year. 7 The price earnings ratio is computed using diluted net income per common share. 8 Includes customers’ liability under acceptances. 9 Excludes acquired credit-impaired loans and debt securities classified as loans. For additional information on acquired credit-impaired loans, see the “Credit Portfolio Quality” section of the 2013 MD&A. For additional information on debt securities classified as loans, see the “Exposure to Non-agency Collateralized Mortgage Obligations” discussion and tables in the “Credit Portfolio Quality” section of the 2013 MD&A. 10 Effective 2013, the Bank implemented the Basel III regulatory framework. As a result, the Bank began reporting the measure, CET1 capital ratio, in accordance with the “all-in” methodology. 11 Reflects the number of employees on an average full-time equivalent basis. 12 Includes retail bank outlets, private client centre branches, and estate and trust branches. TD BANK GROUP ANNUAL REP O RT 20 1 3 TEN -YEA R S TATISTI CAL REV IEW 199199 Ten-year Statistical Review – Canadian GAAP1 Condensed Consolidated Balance Sheet (millions of Canadian dollars) ASSETS Cash resources and other Securities Securities purchased under reverse repurchase agreements Loans (net of allowance for loan losses) Other Total assets LIABILITIES Deposits Other Subordinated notes and debentures Liabilities for preferred shares and capital trust securities Non-controlling interest in subsidiaries EQUITY Common shares Preferred shares Treasury shares2 Contributed surplus Retained earnings Accumulated other comprehensive income (loss) 2011 2010 2009 2008 2007 2006 2005 2004 $ 24,111 192,538 53,599 303,495 112,617 686,360 481,114 145,209 11,670 32 1,483 639,508 18,417 3,395 (116) 281 24,339 536 46,852 $ 21,710 171,612 50,658 269,853 105,712 619,545 429,971 132,691 12,506 582 1,493 577,243 16,730 3,395 (92) 305 20,959 1,005 42,302 Total liabilities and equity $ 686,360 $ 619,545 $ 365,210 $ 311,027 Condensed Consolidated Statement of Income – Reported (millions of Canadian dollars) Net interest income Non-interest income Total revenue Dilution gain on investment, net of cost Provision for (reversal of) credit losses Non-interest expenses Income (loss) before income taxes, non-controlling interests in subsidiaries and equity in net income of an associated company Provision for (recovery of) income taxes Non-controlling interests in subsidiaries, net of income taxes Equity in net income of an associated company, net of income taxes Net income Preferred dividends 2011 $ 12,831 8,763 21,594 – 1,465 13,083 7,046 1,299 104 246 5,889 180 2010 $ 11,543 8,022 19,565 – 1,625 12,163 5,777 1,262 106 235 4,644 194 Net income available to common shareholders $ 5,709 $ 4,450 $ 2,953 $ 3,774 $ 3,977 $ 4,581 $ 2,229 $ 2,232 Condensed Consolidated Statement of Income – Adjusted (millions of Canadian dollars) Net interest income Non-interest income Total revenue Dilution gain on investment, net of cost Provision for credit losses Non-interest expenses Income before income taxes, non-controlling interests in subsidiaries and equity in net income of an associated company Provision for income taxes Non-controlling interests in subsidiaries, net of income taxes Equity in net income of an associated company, net of income taxes Net income Preferred dividends 2011 $ 12,831 8,587 21,418 – 1,465 12,395 7,558 1,508 104 305 6,251 180 2010 $ 11,543 8,020 19,563 – 1,685 11,464 6,414 1,387 106 307 5,228 194 Net income available to common shareholders $ 6,071 $ 5,034 $ 4,549 $ 3,754 $ 4,169 $ 3,354 $ 2,861 $ 2,485 531,540 400,720 373,282 $ 21,517 148,823 32,948 253,128 100,803 557,219 391,034 112,078 12,383 1,445 1,559 518,499 15,357 3,395 (15) 336 18,632 1,015 38,720 $ 557,219 2009 $ 11,326 6,534 17,860 – 2,480 12,211 3,169 241 111 303 3,120 167 2009 $ 11,326 7,294 18,620 – 2,225 11,016 5,379 923 111 371 4,716 167 $ 17,946 144,125 42,425 219,624 139,094 563,214 375,694 140,406 12,436 1,444 1,560 13,278 1,875 (79) 392 17,857 (1,649) 31,674 $ 563,214 2008 8,532 6,137 – 1,063 9,502 4,104 537 43 309 3,833 59 2008 8,532 5,840 – 1,046 9,291 4,035 554 43 375 3,813 59 $ 16,536 123,036 27,648 175,915 78,989 422,124 276,393 112,905 9,449 1,449 524 6,577 425 – 119 15,954 (1,671) 21,404 $ 422,124 2007 6,924 7,357 14,281 – 645 8,975 4,661 853 95 284 3,997 20 2007 6,924 7,148 14,072 – 705 8,390 4,977 1,000 119 331 4,189 20 $ 10,782 124,458 30,961 160,608 66,105 392,914 260,907 101,242 6,900 1,794 2,439 6,334 425 – 66 13,725 (918) 19,632 $ 392,914 2006 6,371 6,821 1,559 409 8,815 5,527 874 184 134 4,603 22 2006 6,371 6,862 – 441 8,260 4,532 1,107 211 162 3,376 22 $ 13,418 $ 9,038 108,096 26,375 152,243 65,078 365,210 246,981 93,722 5,138 1,795 1,708 349,344 5,872 – – 40 10,650 (696) 15,866 2005 6,008 5,951 11,959 – 55 8,844 3,060 699 132 2,229 – – 2005 6,021 6,077 12,098 – 319 7,887 3,892 899 132 2,861 – – 98,280 21,888 123,924 57,897 311,027 206,893 83,262 5,644 2,560 – 298,359 3,373 – – 20 9,540 (265) 12,668 2004 5,773 4,928 10,701 – (386) 8,052 3,035 803 2,232 – – – 2004 5,773 5,006 10,779 – 336 7,126 3,317 832 – – – 2,485 $ $ $ $ $ 14,372 13,233 $ $ $ $ $ 14,669 13,192 200200 TD BANK GROU P AN NUAL REPO RT 20 13 TEN- YEAR S TATIS TICAL RE VIEW Condensed Consolidated Balance Sheet (millions of Canadian dollars) ASSETS Securities Cash resources and other Securities purchased under reverse repurchase agreements Loans (net of allowance for loan losses) Subordinated notes and debentures Liabilities for preferred shares and capital trust securities Non-controlling interest in subsidiaries Other Total assets LIABILITIES Deposits Other EQUITY Common shares Preferred shares Treasury shares2 Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Total liabilities and equity $ 686,360 $ 619,545 Condensed Consolidated Statement of Income – Reported (millions of Canadian dollars) $ 12,831 $ 11,543 Net interest income Non-interest income Total revenue Dilution gain on investment, net of cost Provision for (reversal of) credit losses Non-interest expenses Income (loss) before income taxes, non-controlling interests in subsidiaries and equity in net income of an associated company Provision for (recovery of) income taxes Non-controlling interests in subsidiaries, net of income taxes Equity in net income of an associated company, net of income taxes Net income Preferred dividends Net interest income Non-interest income Total revenue Dilution gain on investment, net of cost Provision for credit losses Non-interest expenses Income before income taxes, non-controlling interests in subsidiaries and equity in net income of an associated company Provision for income taxes Non-controlling interests in subsidiaries, net of income taxes Equity in net income of an associated company, net of income taxes Net income Preferred dividends Condensed Consolidated Statement of Income – Adjusted (millions of Canadian dollars) $ 12,831 $ 11,543 $ 24,111 192,538 53,599 303,495 112,617 686,360 481,114 145,209 11,670 32 1,483 $ 21,710 171,612 50,658 269,853 105,712 619,545 429,971 132,691 12,506 582 1,493 639,508 577,243 18,417 3,395 (116) 281 24,339 536 46,852 2011 8,763 21,594 – 1,465 13,083 7,046 1,299 104 246 5,889 180 2011 8,587 21,418 – 1,465 12,395 7,558 1,508 104 305 6,251 180 16,730 3,395 (92) 305 20,959 1,005 42,302 2010 8,022 19,565 – 1,625 12,163 5,777 1,262 106 235 4,644 194 2010 8,020 19,563 – 1,685 11,464 6,414 1,387 106 307 5,228 194 2011 2010 2009 2008 2007 2006 2005 2004 $ 21,517 148,823 32,948 253,128 100,803 557,219 391,034 112,078 12,383 1,445 1,559 518,499 15,357 3,395 (15) 336 18,632 1,015 38,720 $ 557,219 2009 $ 11,326 6,534 17,860 – 2,480 12,211 3,169 241 111 303 3,120 167 $ 17,946 144,125 42,425 219,624 139,094 563,214 375,694 140,406 12,436 1,444 1,560 531,540 13,278 1,875 (79) 392 17,857 (1,649) 31,674 $ 563,214 $ 2008 8,532 6,137 14,669 – 1,063 9,502 4,104 537 43 309 3,833 59 $ 16,536 123,036 27,648 175,915 78,989 422,124 276,393 112,905 9,449 1,449 524 400,720 6,577 425 – 119 15,954 (1,671) 21,404 $ 10,782 124,458 30,961 160,608 66,105 392,914 260,907 101,242 6,900 1,794 2,439 373,282 6,334 425 – 66 13,725 (918) 19,632 $ 13,418 108,096 26,375 152,243 65,078 365,210 246,981 93,722 5,138 1,795 1,708 349,344 5,872 – – 40 10,650 (696) 15,866 $ 422,124 $ 392,914 $ 365,210 $ 2007 6,924 7,357 14,281 – 645 8,975 4,661 853 95 284 3,997 20 $ 2006 6,371 6,821 13,192 1,559 409 8,815 5,527 874 184 134 4,603 22 $ 2005 6,008 5,951 11,959 – 55 8,844 3,060 699 132 – 2,229 – $ 9,038 98,280 21,888 123,924 57,897 311,027 206,893 83,262 5,644 2,560 – 298,359 3,373 – – 20 9,540 (265) 12,668 $ 311,027 $ 2004 5,773 4,928 10,701 – (386) 8,052 3,035 803 – – 2,232 – Net income available to common shareholders $ 5,709 $ 4,450 $ 2,953 $ 3,774 $ 3,977 $ 4,581 $ 2,229 $ 2,232 Net income available to common shareholders $ 6,071 $ 5,034 $ 4,549 $ 3,754 $ 4,169 $ 3,354 $ 2,861 $ 2,485 2009 $ 11,326 7,294 18,620 – 2,225 11,016 5,379 923 111 371 4,716 167 $ 2008 8,532 5,840 14,372 – 1,046 9,291 4,035 554 43 375 3,813 59 $ 2007 6,924 7,148 14,072 – 705 8,390 4,977 1,000 119 331 4,189 20 $ 2006 6,371 6,862 13,233 – 441 8,260 4,532 1,107 211 162 3,376 22 $ 2005 6,021 6,077 12,098 – 319 7,887 3,892 899 132 – 2,861 – $ 2004 5,773 5,006 10,779 – 336 7,126 3,317 832 – – 2,485 – 1 Results prepared in accordance with GAAP are referred to as “reported”. Adjusted results (excluding “items of note”, net of income taxes, from reported results) and related terms are not defined terms under GAAP and therefore, may not be comparable to similar terms used by other issuers. For further explanation, see “How the Bank Reports” in the accompanying MD&A. Adjusted results are presented from 2004 to allow for sufficient years for historical comparison. Adjusted results shown for years prior to 2006 reflect adjustments for amortization of intangibles and certain identified items as previously disclosed by the Bank for the applicable period, except as noted. See the following page for a reconciliation with reported results. 2 Effective 2008, treasury shares have been reclassified from common and preferred shares and are shown sepa- rately. Prior to 2008, the amounts for treasury shares were not reasonably determinable. TD BANK GROUP ANNUAL REP O RT 20 1 3 TEN -YEA R S TATISTI CAL REV IEW 201201 Ten-year Statistical Review – Canadian GAAP Reconciliation of Non-GAAP Financial Measures (millions of Canadian dollars) Net income available to common shareholders – reported Adjustments for items of note, net of income taxes Amortization of intangibles Reversal of Enron litigation reserve Decrease/(Increase) in fair value of derivatives hedging the reclassified available-for-sale debt securities portfolio Gain relating to restructuring of VISA TD Banknorth restructuring, privatization and merger-related charges Integration and restructuring charges relating to U.S. P&C Banking acquisitions Decrease/(Increase) in fair value of credit default swaps hedging the corporate loan book Other tax items1 Provision for (release of) insurance claims General allowance increase (release) in Canadian Personal and Commercial Banking and Wholesale Banking Settlement of TD Banknorth shareholder litigation FDIC special assessment charge Dilution gain on Ameritrade transaction, net of costs Dilution loss on the acquisition of Hudson by TD Banknorth Balance sheet restructuring charge in TD Banknorth Wholesale Banking restructuring charge Non-core portfolio loan loss recoveries (sectoral related) Loss on structured derivative portfolios Tax charge related to reorganizations Preferred share redemption Initial set up of specific allowance for credit card and overdraft loans Litigation and litigation-related charge/reserve Agreement with Canada Revenue Agency Integration charges related to the Chrysler Financial acquisition Total adjustments for items of note 2011 2010 $ 5,709 $ 4,450 2009 2008 2007 2006 2005 $ 2,953 $ 3,774 $ 3,977 $ 4,581 $ 2,229 426 – (134) – – 69 (13) – – – – – – – – – – – – – – – – 14 362 467 – (5) – – 69 4 (11) (17) (44) – – – – – – – – – – – – 121 – 584 Net income available to common shareholders – adjusted $ 6,071 $ 5,034 $ 4,549 $ 3,754 $ 4,169 $ 2,861 $ 2,485 Condensed Consolidated Statement of Changes in Shareholders’ Equity (millions of Canadian dollars) Common shares Preferred shares Treasury shares2 Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity Other Statistics – Reported Per common share 1 Basic earnings 2 Diluted earnings 3 Dividends 4 Book value 5 Closing market price 6 Closing market price to book value 7 Closing market price appreciation 8 Total shareholder return on common shareholders investment3 Performance ratios 9 Return on total common equity 10 Return on risk-weighted assets 11 Efficiency ratio4 12 Net interest margin 13 Common dividend payout ratio 14 Dividend yield5 15 Price earnings ratio6 Asset quality Capital ratios Other Impaired loans net of specific allowance as a % of net loans7,8 16 17 Net impaired loans as a % of common equity8 18 Provision for credit losses as a % of net average loans7,8 19 Tier 1 capital ratio 20 Total capital ratio 21 Common equity to total assets 22 Number of common shares outstanding (thousands) 23 Market capitalization (millions of Canadian dollars) 24 Average number of employees9 25 Number of retail outlets10 26 Number of retail brokerage offices 27 Number of Automated Banking Machines Other Statistics – Adjusted Per common share 1 Basic earnings 2 Diluted earnings Performance ratios 3 Return on total common equity 4 Return on risk-weighted assets 5 Efficiency ratio4 6 Common dividend payout ratio 7 Price earnings ratio6 202202 TD BANK GROU P AN NUAL REPO RT 20 13 TEN- YEAR S TATIS TICAL RE VIEW 2011 $ 18,417 3,395 (116) 281 24,339 536 $ 46,852 2010 $ 16,730 3,395 (92) 305 20,959 1,005 $ 42,302 $ 2011 6.45 6.41 2.61 48.23 75.23 1.56 2.4% 5.7 14.5% 2.86 60.6 2.37 40.6 3.4 11.7 0.59% 4.07 0.48 13.0% 16.0 6.3 900,998 $ 67,782 75,631 2,483 108 4,650 $ 2011 6.85 6.82 15.4% 2.95 57.9 38.1 11.0 $ 2010 5.13 5.10 2.44 44.29 73.45 1.66 19.1% 23.4 12.1% 2.43 62.2 2.35 47.6 3.5 14.4 0.65% 4.41 0.63 12.2% 15.5 6.3 878,497 $ 64,526 68,725 2,449 105 4,550 $ 2010 5.81 5.77 13.7% 2.63 58.6 42.1 12.7 1,596 (20) 192 $ 15,357 $ 13,278 $ $ 6,334 $ 5,872 $ 3,373 $ 38,720 $ 31,674 $ 21,404 $ 15,866 $ 12,668 $ $ $ $ $ $ 492 – 450 – – 276 126 – – 178 39 35 – – – – – – – – – – – – 2009 3,395 (15) 336 18,632 1,015 2009 3.49 3.47 2.44 41.13 61.68 1.50 8.4% 13.6 8.4% 1.56 68.4 2.54 70.3 4.8 17.8 0.62% 4.41 0.92 11.3% 14.9 6.3 2009 5.37 5.35 12.9% 2.27 59.2 45.6 11.6 404 (323) (118) – – 70 (107) 34 20 – – – – – – – – – – – – – – – 2008 1,875 (79) 392 17,857 (1,649) 2008 4.90 4.87 2.36 36.78 56.92 1.55 (20.2)% (17.1) 14.4% 2.22 64.8 2.22 49.0 3.8 11.7 0.35% 2.70 0.50 9.8% 12.0 5.3 2008 4.92 4.88 14.3% 2.18 64.6 49.3 11.6 353 – – (135) 43 – (30) (39) – – – – – – – – – – – – – – – – 2007 6,577 425 – 119 15,954 (1,671) 2007 5.53 5.48 2.11 29.23 71.35 2.44 9.6% 13.0 19.3% 2.69 62.8 2.06 38.1 3.0 13.0 0.20% 1.74 0.37 10.3% 13.0 5.0 2007 5.80 5.75 20.3% 2.80 59.6 36.4 12.4 316 – – – – – (7) 24 – (39) – – 72 19 35 – – – – 18 – – – (1,665) (1,227) $ 3,354 2006 425 – 66 13,725 (918) $ 19,632 2006 6.39 6.34 1.78 26.77 65.10 2.43 16.9% 20.3 25.5% 3.37 59.8 2.02 27.9 2.9 10.3 0.16% 1.41 0.25 12.0% 13.1 4.9 717,416 $ 46,704 51,147 1,705 208 3,256 $ 2006 4.70 4.66 18.7% 2.46 62.4 38.1 14.0 354 – – – – – (17) (98) – (23) – – – – – 29 (127) 100 163 13 – 238 – – 632 2005 – – 40 10,650 (696) 2005 3.22 3.20 1.58 22.29 55.70 2.50 13.7% 17.2 15.3% 1.88 74.0 2.09 49.3 3.0 17.4 0.14% 1.37 0.04 10.1% 13.2 4.3 711,812 $ 39,648 50,991 1,499 329 2,969 $ 2005 4.17 4.14 19.6% 2.42 65.2 38.4 13.5 858,822 $ 52,972 65,930 2,205 190 4,197 810,121 $ 46,112 58,792 2,238 249 4,147 717,814 $ 51,216 51,163 1,733 211 3,344 $ $ $ 2004 $ 2,232 477 50 (43) – – – – – – – – – – – – – – – – – – – (426) 195 253 2004 – – 20 9,540 (265) 2004 3.41 3.39 1.36 19.31 48.98 2.54 11.7% 15.1 18.5% 2.22 75.2 2.26 39.9 3.0 14.5 0.21% 2.14 (0.30) 12.6% 16.9 4.1 655,902 $ 32,126 42,843 1,034 256 2,407 $ 2004 3.80 3.77 20.6% 2.39 66.1 35.8 13.0 Net income available to common shareholders – reported Adjustments for items of note, net of income taxes Amortization of intangibles Reversal of Enron litigation reserve Decrease/(Increase) in fair value of derivatives hedging the reclassified available-for-sale debt securities portfolio Gain relating to restructuring of VISA TD Banknorth restructuring, privatization and merger-related charges Integration and restructuring charges relating to U.S. P&C Banking acquisitions Decrease/(Increase) in fair value of credit default swaps hedging the corporate loan book Other tax items1 Provision for (release of) insurance claims General allowance increase (release) in Canadian Personal and Commercial Banking and Wholesale Banking Settlement of TD Banknorth shareholder litigation FDIC special assessment charge Dilution gain on Ameritrade transaction, net of costs Dilution loss on the acquisition of Hudson by TD Banknorth Balance sheet restructuring charge in TD Banknorth Wholesale Banking restructuring charge Non-core portfolio loan loss recoveries (sectoral related) Loss on structured derivative portfolios Tax charge related to reorganizations Preferred share redemption Initial set up of specific allowance for credit card and overdraft loans Litigation and litigation-related charge/reserve Agreement with Canada Revenue Agency Integration charges related to the Chrysler Financial acquisition Total adjustments for items of note Condensed Consolidated Statement of Changes in Shareholders’ Equity (millions of Canadian dollars) Common shares Preferred shares Treasury shares2 Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity Other Statistics – Reported Per common share Performance ratios 8 Total shareholder return on common shareholders investment3 1 Basic earnings 2 Diluted earnings 3 Dividends 4 Book value 5 Closing market price 6 Closing market price to book value 7 Closing market price appreciation 9 Return on total common equity 10 Return on risk-weighted assets 11 Efficiency ratio4 12 Net interest margin 13 Common dividend payout ratio 14 Dividend yield5 15 Price earnings ratio6 Asset quality 16 Impaired loans net of specific allowance as a % of net loans7,8 17 Net impaired loans as a % of common equity8 18 Provision for credit losses as a % of net average loans7,8 Capital ratios 19 Tier 1 capital ratio 20 Total capital ratio Other 21 Common equity to total assets 22 Number of common shares outstanding (thousands) 23 Market capitalization (millions of Canadian dollars) 24 Average number of employees9 25 Number of retail outlets10 26 Number of retail brokerage offices 27 Number of Automated Banking Machines Other Statistics – Adjusted Per common share 1 Basic earnings 2 Diluted earnings Performance ratios 3 Return on total common equity 4 Return on risk-weighted assets 5 Efficiency ratio4 6 Common dividend payout ratio 7 Price earnings ratio6 426 – (134) 69 (13) – – – – – – – – – – – – – – – – – – 14 362 2011 6.45 6.41 2.61 48.23 75.23 1.56 2.4% 5.7 14.5% 2.86 60.6 2.37 40.6 3.4 11.7 0.59% 4.07 0.48 13.0% 16.0 6.3 2011 6.85 6.82 15.4% 2.95 57.9 38.1 11.0 2011 2010 $ 18,417 $ 16,730 3,395 (116) 281 24,339 536 3,395 (92) 305 20,959 1,005 $ 46,852 $ 42,302 $ $ 900,998 $ 67,782 75,631 2,483 108 4,650 878,497 $ 64,526 68,725 2,449 105 4,550 $ $ 467 – (5) – – 69 4 (11) (17) (44) – – – – – – – – – – – – – 121 584 2010 5.13 5.10 2.44 44.29 73.45 1.66 19.1% 23.4 12.1% 2.43 62.2 2.35 47.6 3.5 14.4 0.65% 4.41 0.63 12.2% 15.5 6.3 2010 5.81 5.77 13.7% 2.63 58.6 42.1 12.7 Reconciliation of Non-GAAP Financial Measures (millions of Canadian dollars) 2011 2010 $ 5,709 $ 4,450 2009 2008 2007 2006 2005 $ 2,953 $ 3,774 $ 3,977 $ 4,581 $ 2,229 2004 $ 2,232 492 – 450 – – 276 126 – – 178 39 35 – – – – – – – – – – – – 404 (323) (118) – – 70 (107) 34 20 – – – – – – – – – – – – – – – 1,596 (20) 353 – – (135) 43 – (30) – – (39) – – – – – – – – – – – – – – 192 316 – – – – – (7) 24 – (39) – – (1,665) 72 19 35 – – – – 18 – – – (1,227) 354 – – – – – (17) (98) – (23) – – – – – 29 (127) 100 163 13 – 238 – – 632 477 – – – – – 50 – – (43) – – – – – – (426) – – – – 195 – – 253 Net income available to common shareholders – adjusted $ 6,071 $ 5,034 $ 4,549 $ 3,754 $ 4,169 $ 3,354 $ 2,861 $ 2,485 2009 $ 15,357 3,395 (15) 336 18,632 1,015 $ 38,720 $ 2009 3.49 3.47 2.44 41.13 61.68 1.50 8.4% 13.6 8.4% 1.56 68.4 2.54 70.3 4.8 17.8 0.62% 4.41 0.92 11.3% 14.9 6.3 858,822 $ 52,972 65,930 2,205 190 4,197 $ 2009 5.37 5.35 12.9% 2.27 59.2 45.6 11.6 2008 $ 13,278 1,875 (79) 392 17,857 (1,649) $ 31,674 $ 2008 4.90 4.87 2.36 36.78 56.92 1.55 (20.2)% (17.1) 14.4% 2.22 64.8 2.22 49.0 3.8 11.7 0.35% 2.70 0.50 9.8% 12.0 5.3 810,121 $ 46,112 58,792 2,238 249 4,147 $ 2008 4.92 4.88 14.3% 2.18 64.6 49.3 11.6 $ 2007 6,577 425 – 119 15,954 (1,671) $ 21,404 $ 2007 5.53 5.48 2.11 29.23 71.35 2.44 9.6% 13.0 19.3% 2.69 62.8 2.06 38.1 3.0 13.0 0.20% 1.74 0.37 10.3% 13.0 5.0 717,814 $ 51,216 51,163 1,733 211 3,344 $ 2007 5.80 5.75 20.3% 2.80 59.6 36.4 12.4 2006 $ 6,334 425 – 66 13,725 (918) $ 19,632 $ 2006 6.39 6.34 1.78 26.77 65.10 2.43 16.9% 20.3 25.5% 3.37 59.8 2.02 27.9 2.9 10.3 0.16% 1.41 0.25 12.0% 13.1 4.9 717,416 $ 46,704 51,147 1,705 208 3,256 $ 2006 4.70 4.66 18.7% 2.46 62.4 38.1 14.0 $ 2005 5,872 – – 40 10,650 (696) $ 2004 3,373 – – 20 9,540 (265) $ 15,866 $ 12,668 $ 2005 3.22 3.20 1.58 22.29 55.70 2.50 13.7% 17.2 15.3% 1.88 74.0 2.09 49.3 3.0 17.4 0.14% 1.37 0.04 10.1% 13.2 4.3 711,812 $ 39,648 50,991 1,499 329 2,969 $ 2005 4.17 4.14 19.6% 2.42 65.2 38.4 13.5 $ 2004 3.41 3.39 1.36 19.31 48.98 2.54 11.7% 15.1 18.5% 2.22 75.2 2.26 39.9 3.0 14.5 0.21% 2.14 (0.30) 12.6% 16.9 4.1 655,902 $ 32,126 42,843 1,034 256 2,407 $ 2004 3.80 3.77 20.6% 2.39 66.1 35.8 13.0 1 For 2004, does not include the impact of future tax increase of $17 million reported in the report to shareholders for the quarter ended January 31, 2004. For 2006, the impact of future tax decreases of $24 million on adjusted earnings is included in other tax items. 2 Effective 2008, treasury shares have been reclassified from common and preferred shares and are shown separately. Prior to 2008, the amounts for treasury shares were not reasonably determinable. 3 Return is calculated based on share price movement and reinvested dividends over the trailing twelve-month period. 4 The efficiency ratios under Canadian GAAP for the years 2011 and before are based on the presentation of Insurance revenues being reported net of claims and expenses. 5 Dividends paid during the year divided by average of high and low common share prices for the year. 6 The price earnings ratio is computed using diluted net income per common share. 7 Includes customers’ liability under acceptances. 8 Excludes acquired credit-impaired loans and debt securities classified as loans. For additional information on acquired credit-impaired loans, see the “Credit Portfolio Quality” section of the 2013 MD&A. For additional information on debt securities classified as loans, see the “Exposure to Non-agency Collateralized Mortgage Obligations” discussion and tables in the “Credit Portfolio Quality” section of the 2013 MD&A. 9 Reflects the number of employees on an average full-time equivalent basis. 10 Includes retail bank outlets, private client centre branches, and estate and trust branches. TD BANK GROUP ANNUAL REP O RT 20 1 3 TEN -YEA R S TATISTI CAL REV IEW 203203 GLOSSARY Financial and Banking Terms Adjusted Results: A non-GAAP financial measure used to assess each of the Bank’s businesses and to measure the Bank’s overall performance. Futures: Contracts to buy or sell a security at a predetermined price on a specified future date. Allowance for Credit Losses: Total allowance for credit losses consists of counter- party-specific, collectively assessed allowance for individually insignificant impaired loans, and collectively assessed allowance for incurred but not identified credit losses. The allowance is increased by the provision for credit losses, and decreased by write- offs net of recoveries. The Bank maintains the allowance at levels that management believes are adequate to absorb credit-related losses in the lending portfolio. Alt-A Mortgages: A classification of mortgages where borrowers have a clean credit history consistent with prime lending criteria. However, characteristics about the mortgage such as loan to value (LTV), loan documentation, occupancy status or property type, etc., may cause the mortgage not to qualify under standard under- writing programs. Amortized Cost: The original cost of an investment purchased at a discount or premium plus or minus the portion of the discount or premium subsequently taken into income over the period to maturity. Assets under Administration: Assets that are beneficially owned by customers where the Bank provides services of an administrative nature, such as the collection of investment income and the placing of trades on behalf of the clients (where the client has made his or her own investment selection). These assets are not reported on the Bank’s Consolidated Balance Sheet. Assets under Management: Assets that are beneficially owned by customers, managed by the Bank, where the Bank makes investment selections on behalf of the client (in accordance with an investment policy). In addition to the TD family of mutual funds, the Bank manages assets on behalf of individuals, pension funds, corporations, institutions, endowments and foundations. These assets are not reported on the Bank’s Consolidated Balance Sheet. Asset-backed Securities (ABS): A security whose value and income payments are derived from and collateralized (or “backed”) by a specified pool of underlying assets. Average Common Equity: Average common equity is the equity cost of capital calculated using the capital asset pricing model. Average Earnings Assets: The average carrying value of deposits with banks, loans and securities based on daily balances for the period ending October 31 in each fiscal year. Average Invested Capital: Average invested capital is equal to average common equity plus the average cumulative after-tax amounts of goodwill and intangible assets amortized as of the reporting date. Carrying Value: The value at which an asset or liability is carried at on the Consoli- dated Balance Sheet. Collateralized Debt Obligation (CDO): Collateralized securities with multiple tranches that are issued by special purpose entities (SPEs). Each tranche offers a varying degree of risk and return to meet investor demand. In the event of a default, interest and principal payments are made in order of seniority. Common Equity Tier 1 (CET1): This is a primary Basel III capital measure comprised mainly of common equity, retained earnings and qualifying non-controlling interest in subsidiaries. Regulatory deductions made to arrive at the CET1 capital include goodwill and intangibles, unconsolidated investments in banking, financial, and insurance entities, deferred tax assets, defined benefit pension fund assets and shortfalls in allowances. CET1 Ratio: CET1 ratio represents the predominant measure of capital adequacy under Basel III and equals CET1 capital divided by RWA. Credit Valuation Adjustment (CVA): CVA represents an add-on capital charge that measures credit risk due to default of derivative counterparties. This add-on charge requires banks to capitalize for the potential changes in counterparty credit spread for the derivative portfolios. As per OSFI’s Final Capital Adequacy Require- ments (CAR) guideline, CVA capital add-on charge will be effective January 1, 2014. Dividend Yield: Dividends paid during the year divided by average of high and low common share prices for the year. Economic Profit: A tool to measure shareholder value creation. Economic profit is the Bank’s adjusted net income less preferred dividends and a charge for average invested capital. Efficiency Ratio: Non-interest expenses as a percentage of total revenue, the efficiency ratio measures the efficiency of the Bank’s operations. Effective Interest Rate: Discount rate applied to estimated future cash payments or receipts over the expected life of the financial instrument (or, when appropriate), a shorter period, to arrive at the net carrying amount of the financial asset or liability. Fair Value: The amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. Forward Contracts: Contracts that oblige one party to the contract to buy and the other party to sell an asset for a fixed price at a future date. 204 TD BANK GROU P AN NUAL REPO RT 20 13 GLOSSA RY Hedging: A risk management technique intended to mitigate the Bank’s exposure to fluctuations in interest rates, foreign currency exchange rates, or other market factors. The elimination or reduction of such exposure is accomplished by engaging in capital markets activities to establish offsetting positions. Impaired Loans: Loans where, in management’s opinion, there has been a deterio- ration of credit quality to the extent that the Bank no longer has reasonable assurance as to the timely collection of the full amount of principal and interest. Mark-to-Market: A valuation that reflects current market rates as at the balance sheet date for financial instruments that are carried at fair value. Master Netting Agreements: Legal agreements between two parties that have multiple derivative contracts with each other that provide for the net settlement of all contracts through a single payment, in a single currency, in the event of default or termination of any one contract. Net Interest Margin: Net interest income as a percentage of average earning assets. Notional: A reference amount on which payments for derivative financial instruments are based. Office of the Superintendent of Financial Institutions Canada (OSFI): The regulator of Canadian federally chartered financial institutions and federally admin- istered pension plans. Options: Contracts in which the writer of the option grants the buyer the future right, but not the obligation, to buy or to sell a security, exchange rate, interest rate, or other financial instrument or commodity at a predetermined price at or by a specified future date. Prime Jumbo Mortgages: A classification of mortgages where borrowers have a clean credit history consistent with prime lending criteria and standard mortgage characteristics. However, the size of the mortgage exceeds the maximum size allowed under government sponsored mortgage entity programs. Provision for Credit Losses (PCL): Amount added to the allowance for credit losses to bring it to a level that management considers adequate to absorb all credit related losses in its portfolio. Return on Common Shareholders’ Equity: Net income available to common shareholders as a percentage of average common shareholders’ equity. A broad measurement of a bank’s effectiveness in employing shareholders’ funds. Return on Invested Capital (ROIC): A measure of shareholder value calculated as adjusted net income less preferred dividends, divided by average invested capital. Risk-weighted Assets (RWA): Assets calculated by applying a regulatory prede- termined risk-weight factor to on and off-balance sheet exposures. The risk-weight factors are established by the OSFI to convert on and off-balance sheet exposures to a comparable risk level. Securitization: The process by which financial assets, mainly loans, are transferred to a trust, which normally issues a series of asset-backed securities to investors to fund the purchase of loans. Special Purpose Entities (SPEs): Entities that are created to accomplish a narrow and well-defined objective. SPEs may take the form of a corporation, trust, partner- ship, or unincorporated entity. SPEs are often created with legal arrangements that impose limits on the decision-making powers of their governing board, trustees or management over the operations of the SPE. Swaps: Contracts that involve the exchange of fixed and floating interest rate payment obligations and currencies on a notional principal for a specified period of time. Taxable Equivalent Basis (TEB): A non-GAAP financial measure that increases revenues and the provision for income taxes by an amount that would increase reve- nues on certain tax-exempt securities to an equivalent before-tax basis to facilitate comparison of net interest income from both taxable and tax-exempt sources. Tier 1 Capital Ratio: Tier 1 capital represents the more permanent forms of capital, consisting primarily of common shareholders’ equity, retained earnings, preferred shares and innovative instruments. Tier 1 capital ratio is calculated as Tier 1 capital divided by RWA. Total Capital Ratio: Total capital is defined as the total of net Tier 1 and Tier 2 capital. Total capital ratio is calculated as total capital divided by RWA. Total Shareholder Return (TSR): The change in market price plus dividends paid during the year as a percentage of the prior year’s closing market price per common share. Value-at-Risk (VaR): A metric used to monitor and control overall risk levels and to calculate the regulatory capital required for market risk in trading activities. VaR measures the adverse impact that potential changes in market rates and prices could have on the value of a portfolio over a specified period of time. 2013 Snapshot Year at a Glance Performance Indicators Group President and CEO’s Message Chairman of the Board’s Message MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS Consolidated Financial Statements Notes to Consolidated Financial Statements Principal Subsidiaries Ten-Year Statistical Review Glossary Shareholder and Investor Information 1 2 3 4 5 7 112 120 196 198 204 205 For more information, including a video message from Ed Clark, see the interactive TD Annual Report online by scanning the QR code below or visiting td.com/annual-report/ar2013 For information on TD’s commitments to the community see the TD Corporate Responsibility Report online by scanning the QR code below or visiting td.com/corporate-responsibility (2013 report available April 2014) Shareholder and Investor Information MARKET LISTINGS The common shares of The Toronto-Dominion Bank are listed for trading on the Toronto Stock Exchange and the New York Stock Exchange under the symbol “TD”. The Toronto-Dominion Bank preferred shares are listed on the Toronto Stock Exchange. Further information regarding the Bank’s listed securities, including ticker symbols and CUSIP numbers, is available on our website at www.td.com under Investor Relations/Share Information or by calling TD Shareholder Relations at 1-866-756-8936 or 416-944-6367 or by e-mailing tdshinfo@td.com. AUDITORS FOR FISCAL 2013 Ernst & Young LLP DIVIDENDS Direct dividend depositing: Shareholders may have their dividends deposited directly to any bank account in Canada or the U.S. For this service, please contact the Bank’s transfer agent at the address below. U.S. dollar dividends: Dividend payments sent to U.S. addresses or made directly to U.S. bank accounts will be made in U.S. funds unless a shareholder otherwise instructs the Bank’s transfer agent. Other shareholders can request dividend payments in U.S. funds by contacting the Bank’s transfer agent. Dividends will be exchanged into U.S. funds at the Bank of Canada noon rate on the fifth business day after the record date, or as otherwise advised by the Bank. Dividend information for 2013 is available at www.td.com under Investor Relations/Share Information. Dividends, including the amounts and dates, are subject to declaration by the Board of Directors of the Bank. DIVIDEND REINVESTMENT PLAN For information regarding the Bank’s dividend reinvestment plan, please contact our transfer agent or visit our website at www.td.com under Investor Relations/Share Information/Dividends. IF YOU AND YOUR INQUIRY RELATES TO PLEASE CONTACT Are a registered shareholder (your name appears on your TD share certificate) Missing dividends, lost share certificates, estate questions, address changes to the share register, dividend bank account changes, the dividend reinvestment plan, eliminating duplicate mailings of shareholder materials or stopping (and resuming) receiving annual and quarterly reports Hold your TD shares through the Direct Registration System in the United States Missing dividends, lost share certificates, estate questions, address changes to the share register, eliminating duplicate mailings of shareholder materials or stopping (and resuming) receiving annual and quarterly reports Transfer Agent: CST Trust Company P.O. Box 700, Station B Montréal, Québec H3B 3K3 1-800-387-0825 (Canada and US only) or 416-682-3860 Facsimile: 1-888-249-6189 inquiries@canstockta.com or www.canstockta.com Co-Transfer Agent and Registrar: Computershare P.O. Box 43006 Providence, Rhode Island, 02940-3006 or 250 Royall Street Canton, Massachusetts 02021 1-866-233-4836 TDD for hearing impaired: 1-800-231-5469 Shareholders outside of U.S.: 201-680-6578 TDD Shareholders outside of U.S.: 201-680-6610 www.computershare.com Beneficially own TD shares that are held in the name of an intermediary, such as a bank, a trust company, a securities broker or other nominee Your TD shares, including questions regarding the dividend reinvestment plan and mailings of shareholder materials Your intermediary TD SHAREHOLDER RELATIONS For all other shareholder inquiries, please contact TD Shareholder Relations at 416-944-6367 or 1-866-756-8936 or e-mail tdshinfo@td.com. Please note that by leaving us an e-mail or voicemail message you are providing your consent for us to forward your inquiry to the appropriate party for response. Shareholders may communicate directly with the independent directors through the Chairman of the Board, by writing to: Chairman of the Board The Toronto-Dominion Bank P.O. Box 1 Toronto-Dominion Centre Toronto, Ontario M5K 1A2 or you may send an e-mail c/o TD Shareholder Relations at tdshinfo@td.com. E-mails addressed to the Chairman received from shareholders and expressing an interest to communicate directly with the independent directors via the Chairman will be provided to Mr. Levitt. HEAD OFFICE The Toronto-Dominion Bank P.O. Box 1 Toronto-Dominion Centre King St. W. and Bay St. Toronto, Ontario M5K 1A2 Product and service information 24 hours a day, seven days a week: In Canada contact TD Canada Trust 1-866-567-8888 In the U.S. contact TD Bank, America’s Most Convenient Bank 1-888-751-9000 French: 1-866-233-2323 Cantonese/Mandarin: 1-800-328-3698 Telephone device for the hearing impaired: 1-800-361-1180 General information: Contact Corporate and Public Affairs 416-982-8578 Website: In Canada: www.td.com In the U.S.: www.tdbank.com E-mail: customer.service@td.com (Canada only; U.S. customers can e-mail customer service via www.tdbank.com) ANNUAL MEETING April 3, 2014 9:30 a.m. (Mountain) Hyatt Regency Calgary Calgary, Alberta SUBORDINATED NOTES SERVICES Trustee for subordinated notes: Computershare Trust Company of Canada Attention: Manager, Corporate Trust Services 100 University Avenue, 11th Floor Toronto, Ontario M5J 2Y1 Vous pouvez vous procurer des exemplaires en français du rapport annuel au service suivant : Affaires internes et publiques La Banque Toronto-Dominion P.O. Box 1, Toronto-Dominion Centre Toronto (Ontario) M5K 1A2 TD B ANK GRO UP ANNUAL REP ORT 2013 SHAREHOLDER AND I NVESTO R I NFORM ATIO N 205 M L P l a t n e n i t n o c s n a r T : g n i t n i r P , . c n i n g i s e d 0 3 q : n g i s e D Looking Forward 2013 Annual Report T R O P E R L A U N N A 3 1 0 2 P U O R G K N A B D T 4 0 5 9 1 FSC Logo ® The TD logo and other trade-marks are the property of The Toronto-Dominion Bank or a wholly-owned subsidiary, in Canada and/or other countries. 

Continue reading text version or see original annual report in PDF format above