TD Bank
Annual Report 2015

Plain-text annual report

T D B A N K G R O U P 2 0 1 5 A N N U A L R E P O R T 1 9 5 0 4 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. Building the Even Better Bank 2015 Annual Report 2015 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 Ten-Year Statistical Review Glossary Shareholder and Investor Information 1 2 4 5 6 10 112 120 201 207 209 For more information, see the interactive TD Annual Report online by visiting td.com/ annual-report/ar2015 For information on TD’s commitments to the community see the TD Corporate Responsibility Report online by visiting td.com/corporate-responsibility (2015 report available April 2016) 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 2015 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 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 30170 College Station, TX 77842-3170 or 211 Quality Circle, Suite 210 College Station, TX 77845 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 March 31, 2016 9:30 a.m. (Eastern) Fairmont The Queen Elizabeth Hotel Montréal, Québec 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 2015 SHAREHOLDER AND I NVESTO R I NFORM ATIO N 209 g n i t n i r P l a t n e n i t n o c s n a r T C 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 2015 Snapshot1 NET INCOME available to common shareholders (millions of Canadian dollars) Adjusted Reported DILUTED EARNINGS PER SHARE (Canadian dollars) Adjusted Reported RETURN ON RISK- WEIGHTED ASSETS 2 (percent) Adjusted Reported TOTAL ASSETS 3 (billions of Canadian dollars) $9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 $5 4 3 2 1 0 3.0% 2.5 2.0 1.5 1.0 0.5 0 $1,200 1,000 800 600 400 200 0 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 11 12 13 14 15 11.2% TD’s 5-year CAGR (adjusted) 9.8% TD’s 5-year CAGR (adjusted) 2.40% TD’s 2015 return on Common Equity Tier 1 Capital risk-weighted assets (adjusted) $1,104 billion of total assets as at October 31, 2015 DIVIDENDS PER SHARE (Canadian dollars) TOTAL SHAREHOLDER RETURN (5-year CAGR) TD’S PREMIUM RETAIL EARNINGS MIX4 $2.50 2.00 1.50 1.00 0.50 0 11.8% TD’s premium earnings mix is built on a North American retail focus – a lower-risk business with consistent earnings. 27% 64% 9% 11 12 13 14 15 10.4% TD’s 5-year CAGR 5.7% Canadian peers 5-year CAGR 9.2% Canadian peers 91% Retail 9% Wholesale Canadian Retail U.S. Retail Wholesale 1 Refer to the footnotes on page 2 and 3 for information on how these results are calculated. 2 Effective fiscal 2013, amounts are calculated in accordance with the Basel III regula- tory framework, and are presented on the “all-in” methodology. Prior to fiscal 2013, amounts were calculated in accordance with the Basel II regulatory framework. 3 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to page 2 for more information. 4 Based on adjusted results as defined in footnote 1 on page 2 and excludes Corporate segment. TD BANK GROUP ANNUAL REP O RT 20 1 5 2 015 SNAPSHOT 1 Year at a Glance1 Record TD Adjusted Earnings of $8.8 billion in 2015 TD announced record adjusted earnings for the seventh consecutive year driven by strong performance in our retail businesses and good results in the Wholesale segment. Strong Relative TD Total Shareholder Returns2 TD was one of only two Canadian banks to achieve positive Total Shareholder Returns (TSR) in fiscal 2015. In addition, TD produced the top TSR among Big 5 peers for both the medium and long term. The Power of One TD3 The Power of One TD is a key competitive advantage in TD’s strategy. By leveraging the organic growth opportunities which exist between all of our businesses, we are creating even more value. One of the most notable accomplishments includes $23 billion in referrals to Wealth from other TD businesses in Canada. TD Canada Trust continues to be Canadians’ choice for Banking4 40% of Canadians have a TD account. Further enhancing its offering, TD is now the only bank in Canada to offer customers the ability to pay U.S. bills from their Canadian bank accounts, with convenient options including online, tablet, and smartphone. TD also launched the Aboriginal Community Banking Program in 2015, using mobile technology that brings the bank to the community, enabling individuals to open up accounts and receive bank cards on site. TD Securities strengthened its franchise businesses both in Canada and the U.S.7 TD Securities expanded corporate lending and origination, grew product offerings to U.S. clients and maintained top-three dealer status in Canada. TD Securities also won a record four GlobalCapital Bonds Awards in the Sovereign, Supranational and Agency category, and nine StarMine Analyst Awards in equity research. TD continues to be a Direct Channels leader in Canada10 TD ranked first in Canadian mobile adoption and online unique visitors according to Comscore and has the highest ranked app in the Apple App Store amongst Canadian banks. The Bank was also recognized for its leadership in customer service excellence among the Big 5 Canadian Banks for automated teller machines (ATM), online and mobile according to Ipsos. TD Canada Trust remains the leader in Service & Convenience5 TD Canada Trust (TDCT) was named highest in Customer Satisfaction for the tenth year in a row by J.D. Power in the Canadian Retail Banking Study. In addition, Ipsos awarded TDCT its “Customer Service Excellence among Big 5 Retail Banks” award for the eleventh consecutive year. TD Wealth reaches Two Important Asset Milestones6 TD Mutual Funds reached $100 billion in assets under management on strong net sales. Our U.S. Wealth businesses achieved $100 billion in client assets with strong contributions from both advisory and asset management businesses. TD Bank, America’s Most Convenient Bank® reaches Store Milestone in New York City8 TD Bank achieved top three status with 138 stores in New York City despite many peers being in the market for more than a century. TD Lab Drives Innovation and Design Thinking In one year since establishing the TD Lab at Communitech in Kitchener-Waterloo, TD has built 25 proof-of-concepts and prototypes and engaged with over 50 startup companies. TD Insurance achieved a record $3.9 billion in total premiums in 20159 TD Insurance is the largest direct-to-consumer and affinity writer of personal home and auto insurance in Canada. TD Insurance is also one of the top three personal home and auto insurers in Canada. TD Insurance is ranked first in balance protection insurance on credit cards, and second in credit protection insurance among the Big 5 banks. TD Friends of the Environment Foundation celebrates 25th anniversary Over $76 million contributed by TD Friends of the Environment Foundation to more than 24,000 community environment initiatives across Canada since 1990. 1 The Toronto-Dominion Bank (the “Bank” or “TD”) prepares its Consolidated “Five-year CAGR” is the compound annual growth rate calculated from 2010 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 to assess each of its businesses and to measure overall Bank performance. To arrive at adjusted results, the Bank removes “items of note”, net of income taxes, from reported results. Refer to the “Financial Results Overview” in the accompanying 2015 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 calculation of growth rates include balances in accordance with Canadian GAAP for fiscal 2010 and balances in accordance with IFRS for fiscal 2011 to 2015. Certain comparative amounts have been restated as a result of the adoption of new and amended standards under IFRS which required retrospective application, effective in fiscal 2015 (2015 IFRS Standards and Amendments) and certain other comparative amounts have also been restated/reclassified to conform with the presentation adopted in the current period. to 2015 on an adjusted basis. Canadian peers include Royal Bank of Canada, Scotiabank, Bank of Montreal, and Canadian Imperial Bank of Commerce. TSR is calculated based on share price movement and dividends reinvested over the trailing five year period. Reference to retail earnings includes the total adjusted earnings of the Canadian Retail and U.S. Retail segments. 2 TSR is calculated based on share price movement and dividends reinvested over the trailing one-, five- and ten-year periods. 3 Wealth referral volume calculated as maximum of initial volumes or initial volumes plus benefits of Wealth asset consolidation over the following 24 months. 4 Based on Statistics Canada estimated population of Canadians over 18, as of July 1, 2015. 2 TD BANK GROU P AN NUAL REPO RT 20 15 YEAR A T A GLAN CE 5 TDCT received the highest numerical score among the big five retail banks in the 8 Active branch count in New York City’s five boroughs as of October 31, 2015 proprietary J.D. Power 2006-2015 Canadian Retail Banking Customer Satisfaction StudiesSM. The 2015 study is based on more than 14,000 total responses and measures opinions of consumers with their primary banking institution. Proprietary study results are based on experiences and perceptions of consumers surveyed April-May 2015. Your experiences may vary. Visit www.jdpower.com. TDCT was rated number 1 among Canada’s five major banks for “Overall quality of customer service” by independent market research firm Ipsos (formerly Synovate) from 2005 to 2015. Ipsos 2015 Best Banking Awards are based on ongoing quarterly Customer Service Index (CSI) survey results. Sample size for the total 2015 CSI program year ended with the August 2015 survey wave was 45,391 completed surveys yielding 65,991 financial institution ratings nationally. 6 Based on assets in Canadian dollars as of October 31, 2015. 7 Top 3 in equity block and equity options block trading, government and corporate debt underwriting, and syndications for nine-month period ended September 30, 2015. Equity block trading is based on IRESS Market Data and equity options block trading is sourced from the Montreal Exchange. Government and corporate debt underwriting and syndications are sourced from Bloomberg. GlobalCapital Bond Market Awards recognize the best borrowers, banks and bankers in the sovereign, supranational and agency (SSA), financial institution group (FIG), corporate, and emerging markets sectors for 2015. The awards are based on the results of a market poll, with banks voting for their preferred issuers and borrowers. Based on ranking first in select SSA categories. The Thomson Reuters StarMine Analyst Awards recognize the world’s top individual sell-side analysts and sell-side firms for 2015. They measure the performance of sell-side analysts based on the returns of their buy/sell recommendations relative to industry benchmarks, and the accuracy of their earnings estimates in 16 regions across the globe. Based on ranking top 3 in select Industry and Overall Analyst categories. Key Financial Metrics1 (millions of Canadian dollars, except where noted) Results of operations Total revenues – reported Total revenues – adjusted2 Net income – reported Net income – adjusted2 Financial positions at year-end (billions of Canadian dollars) Total assets Total deposits Total loans net of allowance for loan losses Per common share (Canadian dollars, except where noted) Diluted earnings – reported Diluted earnings – adjusted2 Dividend payout ratio – adjusted2 Total shareholder return (1 year)3 Closing market price (fiscal year end)4 Financial ratios Common Equity Tier 1 Capital ratio5,6 Tier 1 Capital ratio5,6 Total Capital ratio5,6 Efficiency ratio – reported Efficiency ratio – adjusted based on SNL Financial. 9 Gross Written Premiums for General Insurance business and Collected Premiums for Life and Health business. Ranks based on data available from Office of the Superintendent of Financial Institutions Canada (OSFI), Insurers, Insurance Bureau of Canada, and Provincial Regulators, as at December 31, 2014. Bank rankings based on Canadian Bankers Association (CBA) as of April 30, 2014. 10 Comscore reporting current as of June 2015. Apple App Store results current as of October 2015. TDCT achieved leadership in banking excellence in the following channels in the 2015 Ipsos Best Banking Awards: Automated Teller Machine, online, and mobile. Leadership is defined as either a statistically significant lead over the other Big 5 Canadian Banks (at a 95% confidence interval) or a statistically equal tie with one or more of the Big 5 Canadian Banks. Ipsos 2015 Best Banking Awards are based on ongoing quarterly CSI survey results. Sample size for the total 2015 CSI program year ended with the August 2015 survey wave was 45,391 completed surveys yielding 65,991 financial institution ratings nationally. 2015 2014 2013 $ 31,426 31,437 8,024 8,754 1,104.4 695.6 544.3 $ 29,961 29,681 7,883 8,127 960.5 600.7 478.9 4.21 4.61 43.3% 0.4% 4.14 4.27 43.0% 20.1% 53.68 55.47 $ 27,259 27,188 6,640 7,136 862.0 541.6 444.9 3.44 3.71 43.5% 22.3% 47.82 9.9% 9.4% 9.0% 11.3 14.0 57.5 54.3 10.9 13.4 55.1 53.4 11.0 14.2 55.3 52.9 1 Certain comparative amounts have been restated, where applicable, as a result 6 Effective the third quarter of 2014, each capital ratio has its own risk-weighted of the implementation of the 2015 IFRS Standards and Amendments. 2 Refer to footnote 1 on page 2. 3 TSR is calculated based on share price movement and dividends reinvested over a trailing one year period. 4 Toronto Stock Exchange (TSX) closing market price. 5 The 2015 IFRS Standards and Amendments were not incorporated into the regulatory capital disclosures presented prior to fiscal 2015. For more information on 2015 IFRS Standards and Amendments, refer to Note 4 of the 2015 Consolidated Financial Statements. assets (RWA) measure due to the OSFI prescribed scalar for inclusion of the Credit Valuation Adjustment (CVA). Effective the third quarter of 2014, the scalars for inclusion of CVA for Common Equity Tier 1 (CET1), Tier 1, and Total Capital RWA are 57%, 65%, and 77% respectively. For fiscal 2015, the scalars are 64%, 71%, and 77% respectively. TD BANK GROUP ANNUAL REP O RT 20 1 5 Y EAR AT A GLANCE 3 Performance Indicators1 Performance indicators focus effort, communicate our priorities, and benchmark TD’s performance as we strive to be the even Better Bank. The following table highlights our performance against these indicators. 2015 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 assets3 BUSINESS OPERATIONS • Grow revenue4 faster than expenses • Invest in core businesses to enhance customer experience CUSTOMER • Improve Legendary Experience Index (LEI)5 and Customer Experience Index (CEI)6 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 • 0.4% vs. Canadian peer average of (2.7%) • 8% EPS growth • 2.40% vs. Canadian peer average of 2.24%3 • Total revenue growth of 7.8% vs. total expense growth of 7.6% • Refer to “Business Segment Analysis” in the 2015 MD&A for details • LEI/CEI composite score 46.4% (target 48.7%) • Refer to “Business Segment Analysis” in the 2015 MD&A for details • Employee engagement score7 was 4.17 in 2015 vs. 4.20 in 2014 • Refer to TD’s 2015 Corporate Responsibility Report available April 2016 • 1.3%, or $62.9 million, in donations and community sponsorships (five-year average) to charitable and not-for-profit organizations in Canada vs. 1.3%, or $56.7 million, in 20148 • Make positive contributions by: – Supporting employees’ community involvement and • US$22.1 million in donations and community sponsorships in the U.S. vs. US$22.3 million in 2014 fundraising efforts • £31,910 in donations and community sponsorships in the U.K. vs. – 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 £60,244 in 2014 • $313,500 in domestic employee volunteer grants to 464 different organizations • $37.8 million, or 60%, of our community giving was directed – Protecting and preserving the environment to promote our areas of focus domestically 1 Performance indicators that include an earnings component are based on TD’s full-year adjusted results (except as noted) as explained in footnote 1 on page 2. For peers, earnings have been adjusted on a comparable basis to exclude identified non-underlying items. 2 TSR is calculated based on share price movement and dividends reinvested over a trailing one year period. 3 Return on CET1 RWA measured year-to-date as at October 31, 2015, for comparison purposes. Effective the third quarter of 2014, each capital ratio has its own RWA measure due to the OSFI prescribed scalar for inclusion of the CVA. For fiscal 2015, the scalars are 64%, 71%, and 77% respectively. 4 Revenue is net of insurance claims and related expenses. • $4.7 million distributed to 1,002 community environmental projects through TD Friends of the Environment Foundation; an additional $9.2 million from TD‘s community giving budget was used to support environmental projects 5 LEI is a new survey measurement program that tracks customers’ experience and their overall relationship with TD. LEI was launched for TDCT and TD Bank retail programs in fiscal 2015, replacing CEI. 6 CEI is a survey measurement program that tracks advocacy among TD Wealth and TD Insurance customers. TD Wealth and TD Insurance CEI programs will be transi- tioned to LEI programs in fiscal 2017. 7 Scale for employee engagement score is from one to five. 8 Calculated based on Canadian cash donations/five-year rolling average domestic net income before tax. 4 TD BANK GROU P AN NUAL REPO RT 20 15 PERF ORM ANCE INDIC ATORS Group President and CEO’s Message Winning organizations are more responsive to their customers, more agile than their competitors and more flexible in how they go to market. Once again, TD delivered on all counts. In doing so, we achieved our best results to date and extended our leadership position in areas of strategic importance. TD was one of only two Canadian banks to achieve positive Total Shareholder Return in fiscal 2015. Indeed, over the short, medium and long term, we outperformed our Canadian peer average in creating shareholder value. DIVERSE BUSINESS MIX DRIVES GROWTH Adjusted earnings of $8.8 billion mark our 7th consecutive year of record adjusted earnings, and underscore the power of our diverse business mix. The majority of those earnings, $5.9 billion, were generated by our flagship Canadian Retail businesses. Forty per cent of Canadians have a TD account with TD Canada Trust – the brand synonymous with legend- ary customer service. Our personal and commercial banking businesses again delivered strong loan volume growth. Record long-term mutual fund sales helped build momentum for TD Wealth. TD Mutual Funds reached $100 billion in assets under management on strong net sales. TD Insurance reached nearly $4 billion in premiums – a major milestone. We maintained the number one position in Canadian credit cards, and drove record auto loan originations in Canada. Our U.S. operations, including TD Bank, America’s Most Convenient Bank,® reached more than US$2 billion in adjusted earnings for the first time. In the markets where we compete, we outperformed our peers in loan growth and household acquisition and we expanded our strategic credit cards business, acquiring Nordstrom’s U.S. retail credit card portfolio. Our U.S. Wealth businesses achieved $100 billion in client assets with solid contributions across both advisory and asset management businesses. TD Securities delivered solid earnings of $873 million. Core revenue growth was robust across the board, with contributions from trading, corporate lending and debt underwriting both in Canada and the U.S., and we continued to expand product offerings to our U.S. clients. FUTURE-PROOFING THE TD FRANCHISE None of us are able to predict the future with great certainty. But we can make sure our Bank has the capacity to adapt to the future – no matter what it looks like. To this end, TD made a number of bold moves in 2015 that we believe will help us compete, win and grow in the coming years. This included taking decisive steps to optimize our operations and put in place a more streamlined, agile organizational structure. It has freed up resources to reinvest in our people, culture and brand promise. We also elevated our game in the digital space. TD established a technology innovation centre in Waterloo, Ontario, which is becoming a hotbed of ideas to make the customer experience better. We have grown our patent portfolio – applications and issued – 10 times in size in the past three years, with a heightened focus on digital advances. All told, more than nine million customers across North America bene- fit from our online and digital experiences, the most of any financial institution in Canada. But we won’t innovate for innovation’s sake. Banking is, and always will be, about people and relationships. And so our focus will remain on serving the real needs of our customers and clients: seamless inter- actions, personal advice and human experiences. BUILDING THE EVEN BETTER BANK Looking ahead, our operating environment will continue to be shaped by slow growth in the economy and rapid change in our industry. Against this backdrop, it’s especially important to adapt when neces- sary without abandoning the things that matter most to our customers and colleagues. Moving forward, you will see TD continue to grow organically – a proven capability of ours – with significant opportuni- ties in front of us. We will also find ways to be more productive with our resources, size and scale. At the same time, TD will look ahead to get ahead and will strive to evolve in ways that create real value for all our stakeholders. In all of this, our people are key. I have met many of our colleagues this year, across our entire footprint. I am inspired by their energy and enthusiasm – they want to compete and win – not just because they care about TD’s long-term success, but because they also care about the long-term success of our customers and clients. And so they are motivated to be better and do better. Their understanding of our busi- ness – what we do and how we win – combined with their passion to live up to our brand is why TD will continue to grow and deliver results. They are why TD can be the even Better Bank. Bharat Masrani Group President and Chief Executive Officer TD BANK GROUP ANNUAL REP O RT 20 1 5 GR OU P PR ESID EN T A ND CEO ’S MESSAG E 5 Chairman of the Board’s Message In 2015, TD Bank Group once again demonstrated its strength and resilience by delivering a strong financial performance in the face of subdued economic performance in Canada and the United States, while honouring TD`s commitment to our employees, customers and shareholders to be the even Better Bank. CEO SUCCESSION Bharat Masrani completed a very successful first year as TD’s Group President and CEO. The Bank delivered record adjusted earnings. Decisive steps were taken with a view to speeding up decision-making in the Bank; reallocating resources to growth businesses and channels; and adapting to a slower growth environment. Fortune magazine named TD one of the World’s Most Admired Companies for 2015. TD was also named one of the World’s Safest Banks by Global Finance in 2015 for the fifth year in a row, as well as the Safest Bank in Canada and the World’s Safest Commercial Bank. TD became the only Canadian bank to be recognized on the Dow Jones Sustainability World Index list, the benchmark for global leaders in economic, environmental and social responsibility. CORPORATE GOVERNANCE TD is committed to being a leader in corporate governance practices, and a key element of such practices is strategic Board renewal. This year we were pleased to welcome new directors to TD in anticipation of impending retirements in 2016. Brian Ferguson is President and Chief Executive Officer and a director of Cenovus Energy Inc. Claude Mongeau is President and Chief Executive Officer and a director of Canadian National Railway Company. Jean-René Halde was most recently President and Chief Executive Officer of the Business Development Bank of Canada. Each of these directors brings extensive executive and strategic leadership skills, business acumen and industry experience, and we look forward to their contribution to TD’s Board. LOOKING AHEAD While we expect continued challenges in the economic environment in 2016, we are confident that the changes under way across the Bank, including those focused on improving productivity and enhancing mobile and digital technology capability and offerings, will underpin continuing strong performance. On behalf of the Board, I would like to thank TD’s employees for their continued support and dedication. They go above and beyond for our customers and clients every day to provide legendary service and convenience – they make TD. And they do this while giving back to the communities in which they live and work, including generously sharing their time through the TD Volunteer Network. In closing, on behalf of the Board I would also like to thank our customers and clients for their ongoing patronage and our shareholders for their continuing support. Brian M. Levitt Chairman of the Board THE BOARD OF DIRECTORS AND ITS COMMITTEES The Board of Directors as at December 2, 2015, its committees and key committees’ responsi- bilities are listed below. Our Proxy Circular for the 2016 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 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 Brian C. Ferguson President & Chief Executive Officer, Cenovus Energy Inc., Calgary, Alberta Colleen A. Goggins Corporate Director and retired Worldwide Chairman, Consumer Group, Johnson & Johnson, Princeton, New Jersey Mary Jo Haddad Corporate Director and retired President and Chief Executive Officer, The Hospital for Sick Children Oakville, Ontario Jean-René Halde Corporate Director and retired President and Chief Executive Officer, Business Development Bank of Canada, Montréal, Québec David E. Kepler Corporate Director and retired Executive Vice President, The Dow Chemical Company, Sanford, Michigan Brian M. Levitt Chairman of the Board, The Toronto-Dominion Bank and Vice Chair, Osler, Hoskin & Harcourt LLP, Montréal, Québec Alan N. MacGibbon Vice Chair, Osler, Hoskin & Harcourt LLP, Toronto, Ontario 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 Bharat B. Masrani Group President and Chief Executive Officer, The Toronto-Dominion Bank, Toronto, Ontario Irene R. Miller Chief Executive Officer, Akim, Inc., New York, New York Nadir H. Mohamed Corporate Director and former President and Chief Executive Officer, Rogers Communications Inc., Toronto, Ontario Claude Mongeau President and Chief Executive Officer, Canadian National Railway Company, Montréal, Québec 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 6 TD BANK GROU P AN NUAL REPO RT 20 15 CHAIR MA N OF THE BOA RD ’S M ESS AGE COMMITTEE MEMBERS 1 KEY RESPONSIBILITIES 1 Corporate Governance Committee Brian M. Levitt (Chair) William E. Bennett Harold H. MacKay Karen E. Maidment Wilbur J. Prezzano Human Resources Committee Risk Committee Audit Committee Wilbur J. Prezzano (Chair) Amy W. Brinkley Mary Jo Haddad Brian M. Levitt Nadir H. Mohamed Helen K. Sinclair Karen E. Maidment (Chair) William E. Bennett Amy W. Brinkley Colleen A. Goggins David E. Kepler Harold H. MacKay Helen K. Sinclair William E. Bennett2 (Chair) John L. Bragg Brian C. Ferguson2 Jean-René Halde Alan N. MacGibbon2 Karen E. Maidment2 Irene R. Miller2 Claude Mongeau 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 nomi- nees for the next annual meeting of shareholders and recommend candidates to fill vacancies on the Board that occur between meetings of the 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; and • 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 Chief Executive Officer (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 and development process, including review and approval of the succession plans for the senior officer positions and heads of control functions; • Review candidates for CEO and recommend the succession plan for this position to the Board of Directors for approval; and • 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 (ERF) 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 monitor TD’s major risks as set out in the ERF; Review TD’s risk profile against Risk Appetite metrics; and 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 the effectiveness of internal controls including controls over financial reporting; 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; and Receive reports on and approve, if appropriate, certain transactions with related parties. • • • • 1 As at December 2, 2015 2 Designated Audit Committee Financial Expert Additional information relating to the responsibilities of the Audit Committee in respect of the appointment and oversight of the shareholder’s independent external auditor is included in the Bank’s 2015 Annual Information Form. TD BANK GROUP ANNUAL REP O RT 20 1 5 C H AIR MA N OF TH E BO ARD’S MESS AG E 7 ENHANCED DISCLOSURE TASK FORCE The Enhanced Disclosure Task Force (EDTF) was established by the Financial Stability Board in May 2012 to identify fundamental disclosure principles, recommendations and leading practices to enhance risk disclosures of banks. On October 29, 2012, the EDTF published its report, “Enhancing the Risk Disclosures of Banks”, which sets forth 7 fundamental disclosure principles and 32 recommendations around improving risk disclosures. Below is an index that includes the recommendations (as published by the EDTF) and lists the location of the related EDTF disclosures presented in the 2015 Annual Report or the 2015 fourth quarter Supplemental Financial Information. Information on TD’s website or any Supplemental Financial Information is not and should not be considered incorporated herein by reference into the 2015 Annual Report, Management’s Discussion and Analysis, or the Consolidated Financial Statements. EDTF Disclosure Recommendation Annual Report Supplemental Financial Information Page Present all related risk information together in any particular report. See below for location of disclosures Define the bank’s risk terminology and risk measures and present key parameter values used. 70-75, 80, 86, 88 Describe and discuss top and emerging risks. 66-69 Once the applicable rules are finalized, outline plans to meet each new key regulatory ratio. 62, 68, 92-93, 95 81 Topic General 1 2 3 4 Risk Governance and Risk Management Strategies / Business Model 5 6 7 8 Summarize prominently the bank’s risk management organization, processes and key functions. Provide a description of the bank’s risk culture, and how procedures and strategies are applied to support the culture. Describe the key risks that arise from the bank’s business models and activities, the bank’s risk appetite in the context of its business models and how the bank manages such risks. 71-74 70-71 61, 75-101 Describe the use of stress testing within the bank’s risk governance and capital frameworks. 59, 74, 82, 99 Capital Adequacy and Risk Weighted Assets 9 10 11 12 13 14 15 Provide minimum Pillar 1 capital requirements, including capital surcharges for global systemically important banks and the application of counter-cyclical and capital conservation buffers. Summarize information contained in the composition of capital templates adopted by the Basel Committee to provide an overview of the main components of capital, including capital instruments and regulatory adjustments. 56-58 77-78, 81 56 77-79 Present a flow statement of movements since the prior reporting date in regulatory capital. Qualitatively and quantitatively discuss capital planning within a more general discussion of management’s strategic planning. Provide granular information to explain how RWAs relate to business activities and related risks. 57-59, 99 59, 61 Present a table showing the capital requirements for each method used for calculating RWAs for credit risk, market risk, and operational risk, and disclose information about significant models used. 76-78, 79-80, 81, 82, 196-197 Tabulate credit risk in the banking book showing average probability of default (PD) and loss given default (LGD) as well as exposure at default (EAD), total RWAs and RWA density for Basel asset classes and major portfolios within the Basel asset classes at a suitable level of granularity based on internal ratings grades. For non-retail banking book credit portfolios, internal rating grades and PD bands should be mapped against external credit ratings and the number of PD bands presented should match the number of notch- specific ratings used by credit rating agencies. 80 5-8 76 53-71 16 Present a flow statement that reconciles movements in RWAs for the period for each RWA risk type. 60 17 Provide a narrative putting Basel Pillar 3 back-testing requirements into context. 78, 82, 87 73-74 Liquidity 18 Describe how the bank manages its potential liquidity needs and provide a quantitative analysis of the components of the liquidity reserve held to meet these needs. 88-89, 90, 91 8 TD BANK GROU P AN NUAL REPO RT 20 15 ENH ANCE D DIS CLOS URE TASK F ORC E EDTF Disclosure Recommendation Annual Report Supplemental Financial Information Page Summarize encumbered and unencumbered assets in a tabular format by balance sheet categories, including collateral received that can be re-hypothecated or otherwise redeployed. Tabulate consolidated total assets, liabilities and off-balance sheet commitments by remaining contractual maturity at the balance sheet date. 92, 187-188 96-98 Topic Funding 19 20 21 Discuss the bank’s funding strategy, including key sources and any funding concentrations. 94-95 Market Risk 22 23 24 Provide information that facilitates users’ understanding of the linkages between line items in the balance sheet and the income statement with positions included in the traded market risk disclosures (using the bank’s primary risk management measures such as Value at Risk) and non-traded market risk disclosures. 80 Provide further qualitative and quantitative breakdowns of significant trading and non- trading market risk factors that may be relevant to the bank’s portfolios beyond interest rates, foreign exchange, commodity and equity measures. 80, 82, 83-84, 85 Provide qualitative and quantitative disclosures that describe significant market risk measurement model limitations, assumptions, validation procedures, use of proxies, changes in risk measures and models through time and descriptions of the reasons for back-testing exceptions, and how these results are used to enhance the parameters of the model. 81, 82, 83-84, 85, 87 25 Provide a description of the primary risk management techniques employed by the bank to measure and assess the risk of loss beyond reported risk measures and parameters. 81, 82-85 Credit Risk 26 27 28 29 30 Provide information that facilitates users’ understanding of the bank’s credit risk profile, including any significant credit risk concentrations. Describe the policies for identifying impaired or non-performing loans, including how the bank defines impaired or non-performing, restructured and returned-to-performing (cured) loans as well as explanations of loan forbearance policies. 21-39, 43-74 40-55, 75-80, 149-152, 161, 162-163, 194-197 48-49, 123-124, 149 Provide a reconciliation of the opening and closing balances of non-performing or impaired loans in the period and the allowance for loan losses. 45, 150-151 25, 29 Provide a quantitative and qualitative analysis of the bank’s counterparty credit risk that arises from its derivative transactions. Provide qualitative information on credit risk mitigation, including collateral held for all sources of credit risk. 43-46 78, 133-134, 157-158, 161, 162-163 78-79, 127, 133-134 Other Risks 31 Describe ‘other risk’ types based on management’s classifications and discuss how each one is identified, governed, measured and managed. 86-88, 99-101 32 Discuss publicly known risk events related to other risks. 87 The Bank will continue to enhance its disclosures, as necessary. TD BANK GROUP ANNUAL REP O RT 20 1 5 EN H A NCE D D ISC LOS UR E TASK FOR CE 9 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, 2015, compared with the corresponding period in the prior years. This MD&A should be read in conjunction with the audited Consolidated Financial Statements and related Notes for the year ended October 31, 2015. This MD&A is dated December 2, 2015. 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 restated/reclassified to conform with the presentation adopted in the current year. FINANCIAL RESULTS OVERVIEW Net Income Revenue Provision for Credit Losses Expenses Taxes Quarterly Financial Information BUSINESS SEGMENT ANALYSIS Business Focus Canadian Retail U.S. Retail Wholesale Banking Corporate 2014 FINANCIAL RESULTS OVERVIEW Summary of 2014 Performance 2014 Financial Performance by Business Line 11 14 15 18 19 20 21 23 26 30 34 37 38 39 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 40 40 56 63 65 65 66 70 101 104 105 106 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 (as defined in this document) makes written and/or oral forward-looking statements, including in this document, in other filings with Canadian regulators or the United States (U.S.) Securities and Exchange Commission (SEC), 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, including in the Management’s Discussion and Analysis (“2015 MD&A”) under the heading “Economic Summary and Outlook”, for each business segment under headings “Business Outlook and Focus for 2016”, and in other statements regarding the Bank’s objectives and priorities for 2016 and beyond and strategies to achieve them, the regulatory environment in which the Bank operates, 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, individually or in the aggregate, such differences include: credit, market (including equity, commodity, foreign exchange, and interest rate), liquidity, operational (including technology and infrastructure), 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; the ability of the Bank to execute on key priorities, including to successfully complete acquisitions, business retention, and strategic plans and to attract, develop and retain key executives; disruptions in or attacks (including cyber-attacks) on the Bank’s information technology, internet, network access or other voice or data commu- nications systems or services; the evolution of various types of fraud or other criminal behaviour to which the Bank is exposed; the failure of third parties to comply with their obligations to the Bank or its affiliates, including relating to the care and control of information; the impact of new and changes to, or application of, current laws and regulations, including without limitation tax laws, risk-based capital guidelines and liquidity regulatory guidance; the overall difficult litigation envi- ronment, including in the U.S.; increased competition, including through internet and mobile banking and non-traditional competitors; changes to the Bank’s credit ratings; changes in currency and interest rates; increased funding costs and market volatility due to market illiquidity and competition for funding; critical accounting estimates and changes to accounting standards, policies, and methods used by the Bank; existing and potential international debt crises; and the occurrence of natural and unnatural catastrophic events and claims resulting from such events. The Bank cautions 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 refer to the “Risk Factors and Management” section of the 2015 MD&A, as may be updated in subsequently filed quarterly reports to shareholders and news releases (as applicable) related to any transactions or events 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 the Bank cautions 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 2015 MD&A under the headings “Economic Summary and Outlook”, and for each business segment, “Business Outlook and Focus for 2016”, 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. 10 TD BANK GROUP ANNUAL REPORT 2015 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 more than 24 million customers in three key businesses operating in a number of locations in financial centres around the globe: Canadian Retail, U.S. Retail, and Wholesale Banking. TD also ranks among the world’s leading online financial services firms, with approximately 10.2 million active online and mobile customers. TD had $1.1 trillion in assets as at October 31, 2015. 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 to arrive at “adjusted” results to assess each of its businesses 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 disclosed on Table 2. 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 Bank implemented new and amended standards under IFRS, which required retrospective application, effective in fiscal 2015 (2015 IFRS Standards and Amendments). As a result, certain compara- tive amounts have been restated where applicable. The 2015 IFRS Standards and Amendments were not incorporated into the regulatory capital disclosures presented prior to fiscal 2015. For more informa- tion, refer to Note 4 of the 2015 Consolidated Financial Statements. The following table provides the operating results on a reported basis for the Bank. T A B L E 1 OPERATING RESULTS – Reported (millions of Canadian dollars) Net interest income Non-interest income Total revenue Provision for credit losses Insurance claims and related expenses 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 2015 $ 18,724 12,702 31,426 1,683 2,500 18,073 9,170 1,523 377 8,024 99 $ 7,925 2014 $ 17,584 12,377 29,961 1,557 2,833 16,496 9,075 1,512 320 7,883 143 $ 7,740 2013 $ 16,074 11,185 27,259 1,631 3,056 15,069 7,503 1,135 272 6,640 185 $ 6,455 $ 112 7,813 $ 107 7,633 $ 105 6,350 11 TD BANK GROUP ANNUAL REPORT 2015 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) 2015 2014 2013 Operating results – adjusted Net interest income Non-interest income1 Total revenue Provision for credit losses2 Insurance claims and related expenses Non-interest expenses3 Income before income taxes and equity in net income of an investment in associate Provision for income taxes4 Equity in net income of an investment in associate, net of income taxes5 Net income – adjusted Preferred dividends Net income available to common shareholders and non-controlling interests in subsidiaries – adjusted Attributable to: Non-controlling interests in subsidiaries, net of income taxes Net income available to common shareholders – adjusted Adjustments for items of note, net of income taxes Amortization of intangibles6 Restructuring charges7 Charge related to the acquisition of Nordstrom Inc.’s (Nordstrom) credit card portfolio and related integration costs8 Litigation and litigation-related charge/reserve9 Fair value of derivatives hedging the reclassified available-for-sale securities portfolio10 Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada11 Set-up, conversion and other one-time costs related to affinity relationship with $ 18,724 12,713 31,437 1,683 2,500 17,076 10,178 1,862 438 8,754 99 8,655 112 8,543 (255) (471) (51) (8) 55 – $ 17,584 12,097 29,681 1,582 2,833 15,863 9,403 1,649 373 8,127 143 7,984 107 7,877 (246) – – – 43 (125) $ 16,074 11,114 27,188 1,606 3,056 14,390 8,136 1,326 326 7,136 185 6,951 105 6,846 (232) (90) – (100) 57 (92) – – – (730) $ 7,813 (131) 19 196 (244) $ 7,633 (20) (19) – (496) $ 6,350 Aimia and acquisition of Aeroplan Visa credit card accounts12 Impact of Alberta flood on the loan portfolio13 Gain on sale of TD Waterhouse Institutional Services14 Total adjustments for items of note Net income available to common shareholders – reported 1 Adjusted non-interest income excludes the following items of note: $62 million gain due to change in fair value of derivatives hedging the reclassified available- for-sale securities portfolio, as explained in footnote 10; $73 million difference of the transaction price over the fair value of the Nordstrom assets acquired, as explained in footnote 8; 2014 – $49 million gain due to change in fair value of derivatives hedging the reclassified available-for-sale securities portfolio; $231 million gain due to the sale of TD Waterhouse Institutional Services, as explained in footnote 14; 2013 – $71 million gain due to change in fair value of derivatives hedging the reclassified available-for-sale securities portfolio. 2 In 2014, adjusted provision for credit losses (PCL) excludes the following items of note: $25 million release of the provision for the impact of the Alberta flood on the loan portfolio, as explained in footnote 13; 2013 – $25 million due to the impact of the Alberta flood on the loan portfolio. 3 Adjusted non-interest expenses exclude the following items of note: $289 million amortization of intangibles, as explained in footnote 6; $686 million due to the initiatives to reduce costs, as explained in footnote 7; $9 million due to integration costs related to the Nordstrom transaction, as explained in footnote 8; $52 million of litigation charges, as explained in footnote 9; $39 million recovery of litigation losses, as explained in footnote 9; 2014 – $286 million amortization of intangibles; $169 million of integration charges relating to the acquisition of the credit card portfolio of MBNA Canada, as explained in footnote 11; $178 million of costs in relation to the affinity relationship with Aimia and acquisition of Aeroplan Visa credit card accounts, as explained in footnote 12; 2013 – $272 million amortization of intangibles; $125 million of integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada; $127 million of litigation and litigation-related charges; $129 million due to the initiatives to reduce costs; $27 million of set-up costs in preparation for the affinity relationship with Aimia Inc. with respect to Aeroplan Visa credit cards. 4 For a reconciliation between reported and adjusted provision for income taxes, refer to the “Non-GAAP Financial Measures – Reconciliation of Reported to Adjusted Provision for Income Taxes” table in the “Income Taxes” section of the MD&A. 5 Adjusted equity in net income of an investment in associate excludes the following items of note: $61 million amortization of intangibles, as explained in footnote 6; 2014 – $53 million amortization of intangibles; 2013 – $54 million amortization of intangibles. 6 Amortization of intangibles relate to intangibles acquired as a result of asset acquisitions and business combinations. Although the amortization of software and asset servicing rights are recorded in amortization of intangibles, they are not included for purposes of the items of note. 12 7 In fiscal 2015, the Bank recorded restructuring charges of $686 million ($471 million after tax) on a net basis. During 2015 the Bank commenced its restructuring review and in the second quarter of 2015 recorded $337 million ($228 million after tax) of restructuring charges and recorded an additional restructuring charge of $349 million ($243 million after tax) on a net basis in the fourth quarter of 2015. The restructuring charges incurred in fiscal 2015 were intended to reduce costs and manage expenses in a sustainable manner and to achieve greater operational efficiencies. These measures included process redesign and business restructuring, retail branch and real estate optimization, and organizational review. These restructuring charges have been recorded as an adjustment to net income within the Corporate segment. The Bank undertook certain measures commencing in the fourth quarter of 2013, which continued 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 charges related primarily to retail branch and real estate optimization initiatives. 8 On October 1, 2015, the Bank acquired substantially all of Nordstrom’s existing U.S. Visa and private label consumer credit card portfolio and became the primary issuer of Nordstrom credit cards in the U.S. The transaction was treated as an asset acquisition and the difference on the date of acquisition of the transaction price over the fair value of assets acquired has been recorded in Non-interest income. In addition, the Bank incurred set-up, conversion and other one-time costs related to integration of the acquired cards and related program agreement. These amounts are included as an item of note in the U.S. Retail segment. 9 As a result of developments and settlements reached in the U.S. in fiscal 2013, the Bank determined that litigation and litigation-related charges of $127 million ($100 million after tax) were required. As a result of an adverse judgment and eval- uation of certain other developments and exposures in the U.S. in 2015, the Bank took prudent steps to reassess its litigation provision. Having considered these factors, including related or analogous cases, the Bank determined, in accordance with applicable accounting standards, that an increase of $52 million ($32 million after tax) to the Bank’s litigation provision was required in the second quarter of 2015. During the third quarter of 2015, distributions of $39 million ($24 million after tax) were received by the Bank as a result of previous settlements reached on certain matters in the U.S., whereby the Bank was assigned the right to these distributions, if and when made available. The amount for fiscal 2015 reflects this recovery of previous settlements. TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS 10 The Bank changed its trading strategy with respect to certain trading debt securities and reclassified these securities from trading to the available-for-sale category effec- tive August 1, 2008. These debt securities are economically hedged, primarily with credit default swap and interest rate swap contracts which are recorded on a fair value basis with changes in fair value recorded in the period’s earnings. Manage- ment 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. 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. 11 As a result of the acquisition of the credit card portfolio of MBNA Canada, as well as certain other assets and liabilities, the Bank incurred integration charges. Integration charges consist of costs related to information technology, employee retention, external professional consulting charges, marketing (including customer communication and rebranding), integration-related travel, employee severance costs, consulting, and training. The Bank’s integration charges related to the MBNA acquisition were higher than what were anticipated when the transaction was first announced. The elevated spending was primarily due to additional costs incurred (other than the amounts capitalized) to build out technology platforms for the business. Integration charges related to this acquisition were incurred by the Canadian Retail segment. The fourth quarter of 2014 was the last quarter Canadian Retail included any further MBNA-related integration charges as an item of note. 12 On December 27, 2013, the Bank acquired approximately 50% of the existing Aeroplan credit card portfolio from the Canadian Imperial Bank of Commerce (CIBC) and on January 1, 2014, the Bank became the primary issuer of Aeroplan Visa credit cards. The Bank incurred program set-up, conversion, and other one-time costs related to the acquisition of the portfolio and related affinity agreement, consisting of information technology, external professional consulting, marketing, training, and program management, as well as a commercial subsidy payment of $127 million ($94 million after tax) payable to CIBC. These costs were included as an item of note in the Canadian Retail segment. The third quarter of 2014 was the last quarter Canadian Retail included any set-up, conversion, or other one-time costs related to the acquired Aeroplan credit card portfolio as an item of note. 13 In the third quarter of 2013, the Bank recorded PCL 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. In the third quarter of 2014, the Bank released the remaining provision of $25 million ($19 million after tax). The release of the remaining provision reflects low levels of delinquency and impairments to date, as well as a low likelihood of future material losses within the portfolio. 14 On November 12, 2013, TD Waterhouse Canada Inc., a subsidiary of the Bank, completed the sale of the Bank’s institutional services business, known as TD Waterhouse Institutional Services, to a subsidiary of National Bank of Canada. The transaction price was $250 million in cash, subject to certain price adjustment mechanisms which were settled in the third and fourth quarters of 2014. On the transaction date, a gain of $196 million after tax was recorded in the Corporate segment in other income. The gain is not considered to be in the normal course of business for the Bank. 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 2015 $ 4.22 0.40 $ 4.62 $ 4.21 0.40 $ 4.61 2014 $ 4.15 0.13 $ 4.28 $ 4.14 0.13 $ 4.27 2013 $ 3.46 0.26 $ 3.72 $ 3.44 0.27 $ 3.71 1 EPS is computed by dividing net income available to common shareholders by the 2 For explanations of items of note, refer to the “Non-GAAP Financial Measures – weighted-average number of shares outstanding during the period. 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) TD Bank, National Association (TD Bank, N.A.) TD Ameritrade Holding Corporation (TD Ameritrade)2 MBNA Canada Aeroplan Other Software and other Amortization of intangibles, net of income taxes 2015 $ 116 61 37 17 24 255 289 $ 544 2014 $ 115 53 37 14 27 246 236 $ 482 2013 $ 117 54 36 – 25 232 176 $ 408 1 Amortization of intangibles, with the exception of software and asset servicing rights, are included as items of note. For explanations of items of note, refer to the “Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results Overview” section of this document. 2 Included in equity in net income of an investment in associate. 13 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS 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. Beginning November 1, 2014, capital allocated to the business segments is based on 9% Common Equity Tier 1 (CET1) Capital. Adjusted return on common equity (ROE) is adjusted net income avail- able to common shareholders as a percentage of average common equity. Adjusted ROE is a non-GAAP financial measure as it is not a defined term 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 RETURN ON COMMON EQUITY (millions of Canadian dollars, except as noted) Average common equity Net income available to common shareholders – reported Items of note, net of income taxes1 Net income available to common shareholders – adjusted Return on common equity – adjusted 1 For explanations of items of note, refer to the “Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results Overview” section of this document. 2015 2014 $ 58,178 7,813 730 8,543 $ 49,495 7,633 244 7,877 2013 $ 44,791 6,350 496 6,846 14.7% 15.9% 15.3% SIGNIFICANT EVENTS IN 2015 Restructuring Charges In fiscal 2015, the Bank recorded restructuring charges of $686 million ($471 million after tax) on a net basis. During 2015, the Bank commenced its restructuring review and in the second quarter of 2015 recorded $337 million ($228 million after tax) of restructuring charges and recorded an additional restructuring charge of $349 million ($243 million after tax) on a net basis in the fourth quarter of 2015. The restructuring charges incurred in fiscal 2015 were intended to reduce costs and manage expenses in a sustainable manner and to achieve greater operational efficiencies. These measures included process redesign and business restructuring, retail branch and real estate optimization, and organizational review. Acquisition of Nordstrom Inc.’s U.S. Credit Card Portfolio On October 1, 2015, the Bank, through its subsidiary, TD Bank USA, National Association (TD Bank USA, N.A.), acquired substantially all of Nordstrom Inc.’s (Nordstrom) existing U.S. Visa and private label consumer credit card portfolio, with a gross outstanding balance of $2.9 billion (US$2.2 billion). In addition, the Bank and Nordstrom entered into a long-term agreement under which the Bank became the exclusive U.S. issuer of Nordstrom-branded Visa and private label consumer credit cards to Nordstrom customers. At the date of acquisition the Bank recorded the credit card receiv- ables at their fair value of $2.9 billion. The transaction was treated as an asset acquisition and the pre-tax difference of $73 million on the date of acquisition of the transaction price over the fair value of assets acquired has been recorded in Non-interest income. The gross amounts of revenue and credit losses have been recorded on the Consolidated Statement of Income in the U.S. Retail segment since that date. Nordstrom shares in a fixed percentage of the revenue and credit losses incurred. Nordstrom’s 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 Nordstrom are recorded in Other assets or Other liabilities, respectively, on the Consolidated Balance Sheet. FINANCIAL RESULTS OVERVIEW Net Income AT A GLANCE OVERVIEW • Reported net income was $8,024 million, an increase of $141 million, or 2%, compared with last year. • Adjusted net income was $8,754 million, an increase of $627 million, or 8%, compared with last year. Reported net income for the year was $8,024 million, an increase of $141 million, or 2%, compared with $7,883 million last year. Reported net income included a restructuring charge of $471 million after tax and other items of note. Adjusted net income for the year was $8,754 million, an increase of $627 million, or 8%, compared with $8,127 million last year. The increase in adjusted net income was due to higher earnings in the Canadian Retail, U.S. Retail, and Wholesale Banking segments, partially offset by a higher loss in the Corporate segment. Canadian Retail net income increased primarily due to good loan and deposit volume growth, good wealth asset growth, strong credit performance, and higher insurance earnings, partially offset by margin compression and expense growth. U.S. Retail net income increased primarily due to strong organic loan and deposit growth, lower provision for credit losses (PCL), good expense management, and the impact of foreign currency translation, partially offset by margin compression and lower gains on sales of securities. Wholesale Banking net income increased primarily due to higher revenue, partially offset by higher non-interest expenses and a higher effective tax rate. Corporate segment loss increased due to higher provisions for incurred but not identified credit losses related to the Canadian loan portfolio and certain non-recurring positives in the prior year including the gain on sale of TD Ameritrade shares and favourable impact of tax items in the prior year. Reported diluted earnings per share (EPS) for the year were $4.21, a 2% increase, compared with $4.14 last year. Adjusted diluted EPS for the year were $4.61, an 8% increase, compared with $4.27 last year. 14 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS Impact of Foreign Exchange Rate on U.S. Retail Translated Earnings U.S. Retail earnings, including the contribution from the Bank’s invest- ment in 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, 2015, compared with last year, as shown in the following table. T A B L E 6 IMPACT OF FOREIGN EXCHANGE RATE ON U.S. RETAIL TRANSLATED EARNINGS (millions of Canadian dollars, except as noted) U.S. Retail (including TD Ameritrade) 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 Increase in basic earnings per share – reported (dollars) Increase in basic earnings per share – adjusted (dollars) 2015 vs. 2014 2014 vs. 2013 $ 1,135 1,146 747 745 297 304 $ 570 570 370 370 143 143 $ 0.16 $ 0.08 0.16 0.08 A one cent increase/decrease in the U.S. dollar to Canadian dollar exchange rate will decrease/increase total Bank annual net income by approximately $32 million. FINANCIAL RESULTS OVERVIEW Revenue AT A GLANCE OVERVIEW • Reported revenue was $31,426 million, an increase of $1,465 million, or 5%, compared with last year. • Adjusted revenue was $31,437 million, an increase of $1,756 million, or 6%, compared with last year. • Net interest income increased by $1,140 million, or 6%, compared with last year. • Reported non-interest income increased by $325 million, or 3%, compared with last year. • Adjusted non-interest income increased by $617 million, or 5%, compared with last year. NET INTEREST INCOME Net interest income for the year on a reported and adjusted basis was $18,724 million, an increase of $1,140 million, or 6%, compared with last year. The increase in adjusted net interest income was primarily driven by increases in the U.S. Retail, Canadian Retail, and Wholesale Banking segments, partially offset by a decline in the Corporate segment. U.S. Retail net interest income increased primarily due to strong organic loan and deposit growth, higher fee revenue, the contribution from Nordstrom, and the impact of foreign currency translation, partially offset by net margin compression and lower accretion. Canadian Retail net interest income increased primarily due to good loan and deposit volume growth and the full year impact of Aeroplan, partially offset by lower margins. Wholesale Banking net interest income increased primarily due to higher trading-related revenue and strong corporate lending growth. Corporate segment net interest income decreased primarily due to lower revenue from treasury and balance sheet management activities. NET INTEREST MARGIN Net interest margin declined by 13 basis points (bps) during the year to 2.05%, compared with 2.18% last year. Lower margins in the Canadian and U.S. Retail segments were primarily due to core margin compression. NET INTEREST INCOME (millions of Canadian dollars) $20,000 16,000 12,000 8,000 4,000 0 13 14 15 Reported Adjusted 15 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 7 NET INTEREST INCOME ON AVERAGE EARNING BALANCES1,2,3 (millions of Canadian dollars, except as noted) 2015 Average balance Interest4 Average rate Average balance Interest4 2014 Average rate Average balance Interest4 2013 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 Residential mortgages5 Canada U.S. Consumer instalment and other personal Canada U.S. Credit card Canada U.S. Business and government5 Canada U.S. International Total interest-earning assets Interest-bearing liabilities Deposits Personal Canada U.S. Banks6 Canada U.S. Business and government6,7 Canada U.S. Subordinated notes and debentures Obligations related to securities sold short and under repurchase agreements Canada U.S. Securitization liabilities8 Other liabilities Canada U.S. International6 Total interest-bearing liabilities Total net interest income on average earning assets $ 4,738 $ 40,684 15 107 0.32% $ 0.26 3,692 $ 27,179 17 72 0.46% $ 4,552 $ 0.26 17,748 23 48 0.51% 0.27 50,234 23,790 31,639 90,552 1,297 454 479 1,525 39,384 36,074 249 78 188,048 26,336 93,943 35,609 18,096 8,778 4,924 984 4,600 1,144 2,235 1,450 2.58 1.91 1.51 1.68 0.63 0.22 2.62 3.74 4.90 3.21 55,383 18,424 1,367 333 23,169 76,245 377 1,370 2.47 1.81 1.63 1.80 54,390 16,781 1,398 321 20,554 66,675 336 1,384 33,691 35,512 288 62 0.85 0.17 24,207 31,422 230 94 178,128 22,677 5,212 858 90,512 29,272 4,499 1,058 2.93 3.78 4.97 3.61 167,061 20,010 5,049 764 91,729 26,206 4,718 1,016 2.57 1.91 1.63 2.08 0.95 0.30 3.02 3.82 5.14 3.88 12.35 16.52 17,984 7,200 2,245 1,287 12.48 17.88 14,582 4,697 1,828 834 12.54 17.76 62,879 85,553 77,467 1,759 2,730 800 $ 913,804 $ 24,830 1,808 2.80 2,308 3.19 1.03 767 2.72% $ 807,953 $ 23,928 55,048 64,343 69,494 1,584 52,820 3.28 2,270 55,186 3.59 1.10 718 62,180 2.96% $ 730,800 $ 22,615 3.00 4.11 1.15 3.09% $ 181,101 $ 1,158 218 178,287 0.64% $ 172,897 $ 1,394 197 147,025 0.12 0.81% $ 168,369 $ 1,660 211 130,378 0.13 0.99% 0.16 8,907 11,764 180,596 154,578 7,953 34 32 1,796 909 390 46,340 47,835 34,968 450 186 593 0.38 0.27 0.99 0.59 4.90 0.97 0.39 1.70 5,898 7,682 18 16 145,233 1,540 125,375 1,065 412 7,964 47,360 42,962 41,745 535 122 777 0.31 0.21 1.06 0.85 5.17 1.13 0.28 1.86 6,134 6,565 11 14 120,426 1,270 111,787 1,248 447 8,523 40,874 37,534 50,591 472 102 927 0.18 0.21 1.05 1.12 5.24 1.15 0.27 1.83 4,889 33 35,693 79 4 257 $ 892,944 $ 6,106 88 1.62 1 12.06 0.72 179 0.68% $ 782,495 $ 6,344 5,652 29 32,673 82 5,625 1.56 3 72 3.45 0.55 94 19,766 0.81% $ 706,644 $ 6,541 1.46 4.17 0.48 0.93% $ 913,804 $ 18,724 2.05% $ 807,953 $ 17,584 2.18% $ 730,800 $ 16,074 2.20% 1 Certain comparative amounts have been restated to conform with the presentation 6 Includes average trading deposits with a fair value of $71 billion adopted in the current period. (2014 – $58 billion, 2013 – $47 billion). 2 Net interest income includes dividends on securities. 3 Geographic classification of assets and liabilities is based on the domicile of the 7 Includes marketing fees incurred on the TD Ameritrade Insured Deposit Accounts (IDA) of $1,051 million (2014 – $895 million, 2013 – $821 million). booking point of assets and liabilities. 4 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. 5 Includes average trading loans of $10 billion (2014 – $10 billion, 2013 – $9 billion). 8 Includes average securitization liabilities at fair value of $11 billion (2014 – $16 billion, 2013 – $25 billion) and average securitization liabilities at amortized cost of $24 billion (2014 – $26 billion, 2013 – $26 billion). 16 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS The following table 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 INCOME1,2,3 (millions of Canadian dollars) 2015 vs. 2014 2014 vs. 2013 Increase (decrease) due to changes in Increase (decrease) due to changes 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 Residential mortgages Canada U.S. Consumer instalment and other personal Canada U.S. Credit card Canada U.S. Business and government Canada U.S. International Total interest income Interest-bearing liabilities Deposits Personal Canada U.S. Banks Canada U.S. Business and government Canada U.S. Subordinated notes and debentures Obligations related to securities sold short and under repurchase agreements Canada U.S. Securitization liabilities Other liabilities Canada U.S. International Total interest expense Net interest income $ 5 36 $ (127) 96 138 257 49 1 290 139 171 229 14 282 (7) (1) 57 25 (36) (102) (88) 15 (578) (13) (70) (143) (24) (119) $ (2) 35 $ (5) 25 $ (1) (1) $ (6) 24 (70) 121 102 155 (39) 16 (288) 126 101 86 (10) 163 26 32 43 199 90 12 334 102 (62) 119 426 444 (57) (20) (2) (213) (32) (44) (171) (9) (157) (77) (9) 9 (31) 12 41 (14) 58 (32) 163 93 (219) 42 417 453 257 761 75 $ 2,673 (306) (339) (42) $ (1,771) (49) 422 33 $ 902 67 377 96 $ 2,325 157 (338) (47) $ (1,012) 224 39 49 $ 1,313 $ (302) (21) $ (236) 21 $ $ (310) (41) $ (266) (14) $ 66 42 9 8 375 248 – (11) 14 (126) (12) – 25 $ 638 $ 2,035 7 8 (119) (404) (22) (74) 50 (58) 3 3 53 (876) (895) $ $ 44 27 – 3 262 152 (29) 75 15 (159) 16 16 256 (156) (22) (85) 64 (184) (9) 3 78 $ (238) $ 1,140 1 (2) 72 $ 461 $ 1,864 $ $ 7 (1) 8 (335) (6) (12) 5 9 5 – 13 (658) (354) 7 2 270 (183) (35) 63 20 (150) 6 (2) 85 (197) $ $ 1,510 1 Certain comparative amounts have been restated to conform with the presentation adopted in the current period. 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. 17 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS NON-INTEREST INCOME Non-interest income for the year on a reported basis was $12,702 million, an increase of $325 million, or 3%, compared with last year. Adjusted non interest income for the year was $12,713 million, an increase of $616 million, or 5%, compared with last year. The increase in adjusted non-interest income was primarily driven by increases in the U.S. Retail, Canadian Retail, and Wholesale Banking segments, partially offset by the Corporate segment. U.S. Retail non interest income increased primarily due to the contribution from Nordstrom and the impact of foreign currency translation, partially offset by lower gains on sales of securities. Canadian Retail non interest income increased primarily due to wealth asset growth, higher personal and business banking fee-based revenue, and insurance premiums, partially offset by the impact of a change in mix of reinsurance contracts. Wholesale Banking non-interest income increased primarily due to strong debt underwriting fees and corporate lending growth. Corporate segment non-interest income decreased primarily due to the gains on sales of TD Ameritrade shares in the prior year. T A B L E 9 NON-INTEREST INCOME (millions of Canadian dollars, except as noted) 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 (losses) Trading income (losses) Service charges Card services Insurance revenue Trust fees Other income (loss) Total 2015 2014 2013 % change 2015 vs. 2014 $ 430 760 443 481 1,569 3,683 925 79 (223) 2,376 1,766 3,758 150 188 $ 12,702 $ 412 684 482 413 1,355 3,346 845 173 (349) 2,152 1,552 3,883 150 625 $ 12,377 $ 406 596 365 326 1,141 2,834 785 304 (279) 1,966 1,220 3,734 148 473 $ 11,185 4% 11 (8) 16 16 10 9 (54) 36 10 14 (3) – (70) 3% 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 for the year was $1,152 million, an increase of $173 million, or 18%, compared with last year. For additional details, refer to Note 22 of the 2015 Consolidated Financial Statements. The increase in trading-related income over last year was primarily driven by broad-based performance from interest rate and credit trading, foreign exchange trading and equity trading that benefited from improved client activity in the year. Equity trading also benefited from increased volatility in the latter half of the year. 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. FINANCIAL RESULTS OVERVIEW Provision for Credit Losses AT A GLANCE OVERVIEW • Reported PCL was $1,683 million, an increase of $126 million, or 8%, compared with last year. • Adjusted PCL was $1,683 million, an increase of $101 million, or 6%, compared with last year. Reported PCL for the year was $1,683 million, an increase of $126 million, or 8%, compared with last year. Adjusted PCL for the year was $1,683 million, an increase of $101 million, or 6%, compared with last year. The increase was primarily driven by increases in the Corporate and U.S. Retail segments, partially offset by a decrease in the Canadian Retail segment. Corporate segment PCL increased primarily due to higher provisions for incurred but not identified credit losses related to the Canadian loan portfolio. U.S. Retail PCL increased primarily due to volume growth, provisions related to the flooding in South Carolina, and the impact of foreign currency translation partially offset by continued credit quality improvement across various portfo- lios. Canadian Retail PCL decreased primarily due to higher recoveries in business banking, the sale of charged-off accounts, and strong credit performance in personal banking. 18 PROVISION FOR CREDIT LOSSES (millions of Canadian dollars) $2,000 1,500 1,000 500 0 13 14 15 Reported Adjusted TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL RESULTS OVERVIEW Expenses AT A GLANCE OVERVIEW • Reported non-interest expenses were $18,073 million, an increase of $1,577 million, or 10%, compared with last year. • Adjusted non-interest expenses were $17,076 million, an increase of $1,213 million, or 8%, compared with last year. • Insurance claims and related expenses were $2,500 million, a decrease of $333 million, or 12%, compared with last year. • Reported efficiency ratio was 57.5%, compared with 55.1% last year. • Adjusted efficiency ratio was 54.3%, compared with 53.4% last year. NON-INTEREST EXPENSES Reported non-interest expenses for the year were $18,073 million, an increase of $1,577 million, or 10%, compared with last year. Reported non-interest expense included a restructuring charge of $686 million. Adjusted non-interest expenses were $17,076 million, an increase of $1,213 million, or 8%, compared with last year. The increase in adjusted non-interest expenses was driven by increases in the U.S. Retail, Canadian Retail, and Wholesale Banking segments. U.S. Retail non-interest expenses increased primarily due to investments to support business growth, the impact of foreign currency translation, and the Nordstrom acquisition, partially offset by productivity savings. Canadian Retail non-interest expenses increased primarily due to higher employee-related costs, including higher revenue-based variable expenses in the wealth business, business growth, and higher initiative spend, partially offset by productivity savings. Wholesale Banking non- interest expenses increased primarily due to the impact of foreign exchange translation and higher operating expenses. INSURANCE CLAIMS AND RELATED EXPENSES Insurance claims and related expenses were $2,500 million, a decrease of $333 million, or 12%, compared with last year, primarily due to a change in mix of reinsurance contracts, more favourable prior years’ development, less severe weather conditions, and lower current year claims costs. EFFICIENCY RATIO 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. The reported efficiency ratio was 57.5%, compared with 55.1% last year. The adjusted efficiency ratio was 54.3%, compared with 53.4% last year. The adjusted efficiency ratio, with insurance claims and related expenses offset against revenues, was 59.0% compared with 59.1% last year. NON-INTEREST EXPENSES (millions of Canadian dollars) EFFICIENCY RATIO (percent) $20,000 16,000 12,000 8,000 4,000 0 60% 50 40 30 20 10 0 13 14 15 13 14 15 Reported Adjusted Reported Adjusted 19 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 1 0 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 and impairment losses Other Total occupancy Equipment Rent Depreciation and impairment losses Other Total equipment Amortization of other intangibles Marketing and business development Restructuring charges 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 – reported Efficiency ratio – adjusted FINANCIAL RESULTS OVERVIEW Taxes 2015 2014 2013 % change 2015 vs. 2014 $ 5,452 2,057 1,534 9,043 $ 5,171 1,927 1,353 8,451 $ 4,751 1,634 1,266 7,651 887 376 456 1,719 172 212 508 892 662 728 686 324 1,032 273 800 324 425 1,549 147 209 454 810 598 756 29 321 991 283 755 330 371 1,456 216 188 443 847 521 685 129 317 1,009 281 139 222 175 2,178 2,714 $ 18,073 160 212 185 2,151 2,708 $ 16,496 147 201 186 1,639 2,173 $ 15,069 5 7 13 7 11 16 7 11 17 1 12 10 11 (4) 2,266 1 4 (4) (13) 5 (5) 1 – 10 57.5% 54.3 55.1% 53.4 55.3% 52.9 240bps 90 Reported total income and other taxes increased by $50 million, or 2%, compared with last year. Income tax expense, on a reported basis, was up $11 million, or 1%, compared with last year. Other taxes were up $39 million, or 3%, compared with last year. Adjusted total income and other taxes were up $252 million from last year. Total income tax expense, on an adjusted basis, was up $213 million, or 13%, from last year. The Bank’s effective income tax rate on a reported basis was 16.6% for 2015, compared with 16.7% last year. For a reconciliation of the Bank’s effective income tax rate with the Canadian statutory income tax rate, refer to Note 26 of the 2015 Consolidated Financial Statements. The Bank’s adjusted effective tax rate for the year was 18.3%, compared with 17.5% last year. The year-over-year increase was largely due to changes in business mix and the resolution of certain audit items in 2014. The Bank reports its investment in TD Ameritrade using the equity method of accounting. TD Ameritrade’s tax expense of $221 million in the year, compared with $198 million last year, was not part of the Bank’s effective tax rate. CANADIAN FEDERAL BUDGET As mentioned in the Bank’s second and third quarter 2015 Reports to Shareholders, the Government of Canada’s April budget included proposals that would negatively impact financial institutions. We expect that these proposals will be maintained by the recently elected Federal government and the Bank will continue to monitor any change to them. We note that, if effective, parts of the proposals are expected to affect our Insurance business starting in fiscal 2016, resulting in an increase in income taxes for that business of approximately $30 million to $35 million, as calculated on a quarterly basis. 20 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 1 1 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 Restructuring charges Charge related to the acquisition of Nordstrom’s credit card portfolio and related integration costs Litigation and litigation-related charge/reserve Fair value of derivatives hedging the reclassified available-for-sale securities portfolio Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada Set-up, conversion and other one-time costs related to affinity relationship with Aimia and acquisition of Aeroplan Visa credit card accounts Impact of Alberta flood on the loan portfolio Gain on sale of TD Waterhouse Institutional Services Total adjustments for items of note Provision for income taxes – adjusted Other taxes Payroll Capital and premium GST, HST, and provincial sales3 Municipal and business Total other taxes Total taxes – adjusted Effective income tax rate – adjusted4 2015 $ 1,523 2014 $ 1,512 2013 $ 1,135 95 215 31 5 (7) – – – – 339 1,862 485 135 428 181 1,229 $ 3,091 93 – – – (6) 44 47 (6) (35) 137 1,649 435 157 426 172 1,190 $ 2,839 94 39 – 26 (14) 33 7 6 – 191 1,326 404 140 380 169 1,093 $ 2,419 18.3% 17.5% 16.3% 1 For explanations of items of note, refer to the “Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results Overview” section of this document. 3 Goods and services tax (GST) and Harmonized sales tax (HST). 4 Adjusted effective income tax rate is the adjusted provision for income taxes before other taxes as a percentage of adjusted net income before taxes. 2 The tax effect for each item of note is calculated using the effective statutory income tax rate of the applicable legal entity. FINANCIAL RESULTS OVERVIEW Quarterly Financial Information FOURTH QUARTER 2015 PERFORMANCE SUMMARY Reported net income for the quarter was $1,839 million, an increase of $93 million, or 5%, compared with the fourth quarter last year. Reported net income included a restructuring charge of $243 million after tax and other items of note. Adjusted net income for the quarter was $2,177 million, an increase of $315 million, or 17%, compared with the fourth quarter last year. Reported diluted EPS for the quarter was $0.96, compared with $0.91 in the fourth quarter last year. Adjusted diluted EPS for the quarter was $1.14, compared with $0.98 in the fourth quarter last year. Reported revenue for the quarter was $8,047 million, an increase of $595 million, or 8%, compared with the fourth quarter last year. Adjusted revenue for the quarter was $8,096 million, an increase of $645 million, or 9%, compared with the fourth quarter last year. The increase in adjusted revenue was primarily driven by increases in the U.S. Retail, Canadian Retail, and Wholesale Banking segments. U.S. Retail revenue increased primarily due to strong loan and deposit growth, broad-based fee growth, the Nordstrom acquisition, and the impact of foreign currency translation, partially offset by lower margins. Canadian Retail revenue increased primarily due to good loan and deposit volume growth, higher fee-based revenue, good wealth asset growth, and insurance premium growth, partially offset by lower margins, a change in mix of reinsurance contracts, and the change in fair value of investments supporting insurance claims liabilities. Wholesale Banking revenue increased primarily due to higher trading- related revenue, and corporate lending growth both in Canada and the U.S., partially offset by lower equity underwriting. PCL for the quarter was $509 million, an increase of $138 million, or 37%, compared with the fourth quarter last year. The increase was primarily driven by increases in the U.S. Retail and Corporate segments partially offset by a decrease in the Canadian Retail segment. U.S. Retail PCL increased primarily due to higher provisions for commercial loans, provisions related to the South Carolina flooding, and the impact of foreign currency translation. Corporate segment PCL increased primarily due to higher provisions for incurred but not identified credit losses related to the Canadian loan portfolio. Canadian Retail PCL decreased primarily due to higher recoveries. Insurance claims and related expenses for the quarter were $637 million, a decrease of $83 million, or 12%, compared with the fourth quarter last year, primarily due to the change in mix of reinsurance contracts, more favourable prior years’ development and the change in fair value of investments supporting claims liabilities, partially offset by higher current year claims costs. Reported non-interest expenses for the quarter were $4,911 million, an increase of $580 million, or 13%, compared with the fourth quarter last year. Reported non-interest expense included a restructuring charge of $349 million. Adjusted non-interest expenses for the quarter were $4,480 million, an increase of $293 million, or 7%, compared with the fourth quarter last year. The increase in adjusted non interest expenses was primarily driven by an increase in the U.S. Retail segment partially offset by a decrease in the Corporate segment. Canadian Retail and Wholesale Banking non-interest expenses were relatively flat compared to the prior quarter. U.S. Retail non-interest expenses increased primarily due to the Nordstrom acquisition, investment to support business growth and the impact of foreign currency transla- tion, partially offset by ongoing productivity savings. The Bank’s reported effective tax rate was 13.0% for the quarter, compared with 18.2% in the same quarter last year. The decrease was largely due to the tax impact associated with the restructuring charges. The Bank’s adjusted effective tax rate was 16.9% for the quarter, compared with 18.9% in the same quarter last year. The decrease was largely due to higher tax-exempt dividend income from taxable Canadian corporations and business mix. 21 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS QUARTERLY TREND ANALYSIS The Bank has had solid underlying adjusted earnings growth over the past eight quarters. Canadian Retail earnings have been strong with good loan and deposit volume growth, higher fee-based revenue driven by wealth asset growth, and higher insurance earnings. U.S. Retail earnings have benefited from strong loan and deposit volume growth and continued investments to support business growth. Wholesale Banking earnings benefited from improved trading and investment banking results driven by strong client activity. The earnings contribution from the Bank’s investment in TD Ameritrade has increased over the past two years primarily due to higher base earnings in TD Ameritrade. The Bank’s earnings also benefited from the impact of foreign currency translation over the past eight quarters. T A B L E 1 2 QUARTERLY RESULTS1 (millions of Canadian dollars, except as noted) Net interest income Non-interest income Total revenue Provision for credit losses Insurance claims and related expenses 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 Restructuring charges Charge related to the acquisition of Nordstrom’s credit card portfolio and related integration costs Litigation and litigation-related charge/reserve Fair value of derivatives hedging the reclassified available-for-sale securities portfolio Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada Set-up, conversion and other one-time costs related to affinity relationship with Aimia and acquisition of Aeroplan Visa credit card accounts Impact of Alberta flood on the loan portfolio Gain on sale of TD Waterhouse Institutional Services 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, except as noted) 2015 For the three months ended 2014 Oct. 31 Jul. 31 Apr. 30 Jan. 31 Oct. 31 Jul. 31 Apr. 30 Jan. 31 $ 4,887 3,160 8,047 509 637 4,911 259 $ 4,697 3,309 8,006 437 600 4,292 502 $ 4,580 3,179 7,759 375 564 4,705 344 $ 4,560 3,054 7,614 362 699 4,165 418 $ 4,457 2,995 7,452 371 720 4,331 370 $ 4,435 3,074 7,509 338 771 4,040 330 $ 4,391 3,044 7,435 392 659 4,029 447 $ 4,301 3,264 7,565 456 683 4,096 365 108 1,839 91 2,266 88 1,859 90 2,060 86 1,746 77 2,107 80 1,988 77 2,042 65 243 51 – (21) – 62 – – (24) (19) – 65 228 – 32 (15) – 63 – – – – – 62 – – – – 54 60 – – – (24) 27 63 – – – – 23 61 – – – (19) 21 – – – 338 2,177 26 – – – 19 2,285 25 – – – 310 2,169 24 – – – 63 2,123 24 – – – 116 1,862 32 16 (19) – 60 2,167 25 – – – 86 2,074 40 115 – (196) (18) 2,024 46 2,151 2,260 2,145 2,099 1,830 2,142 2,034 1,978 29 $ 2,122 28 $ 2,232 28 $ 2,117 27 $ 2,072 27 $ 1,803 27 $ 2,115 26 $ 2,008 27 $ 1,951 $ 0.96 1.15 $ 1.20 1.21 $ 0.98 1.15 $ 1.09 1.12 $ 0.92 0.98 $ 1.12 1.15 $ 1.05 1.09 $ 1.07 1.06 0.96 1.14 11.4% 13.5 1.19 1.20 14.9% 15.0 0.97 1.14 12.8% 15.0 1.09 1.12 14.6% 15.1 0.91 0.98 13.1% 14.0 1.11 1.15 16.3% 16.8 1.04 1.09 15.9% 16.6 1.07 1.06 16.4% 16.2 Average earning assets Net interest margin as a percentage of average earning assets $ 958 $ 925 $ 906 $ 862 $ 832 $ 810 $ 798 $ 791 2.02% 2.01% 2.07% 2.10% 2.13% 2.17% 2.26% 2.16% 1 Certain comparative amounts have been restated, where applicable, as a result 2 For explanations of items of note, refer to the “Non-GAAP Financial Measures – of the implementation of the 2015 IFRS Standards and Amendments. Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results Overview” section of this document. 22 TD BANK GROUP ANNUAL REPORT 2015 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 Retail, U.S. Retail, and Wholesale Banking. Canadian Retail provides a full range of financial products and services to customers in the Canadian personal and commercial banking businesses, including credit cards, auto finance, wealth, and insurance businesses. Under the TD Canada Trust brand, personal and small business banking provides a full range of financial products and services to nearly 15 million customers through its network of 1,165 branches, 3,153 automated banking machines, telephone, internet and mobile banking. 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, international trade, and day- to-day banking needs. Auto Finance provides flexible financing options to customers at point of sale for automotive and recreational vehicle purchases through our auto dealer network. The credit card business provides an attractive line-up of credit cards including co-branded and affinity credit card programs. The wealth business offers a wide range of wealth products and services to a large and diverse set of retail and institutional clients in Canada and Europe through the direct investing, advice-based, and asset management businesses. The insurance busi- ness offers property and casualty insurance, as well as life and health insurance products in Canada. U.S. Retail comprises the Bank’s retail and commercial banking opera- tions operating under the brand TD Bank, America’s Most Convenient Bank,® auto financing services, and wealth management services in the U.S. The retail banking operations provide a full range of financial products and services to over 8 million customers through multiple delivery channels, including a network of 1,298 stores located along the east coast from Maine to Florida, mobile and internet banking, automated teller machines (ATM), and telephone. The commercial banking operations serves the needs of businesses, through a diversi- fied range of products and services to meet their financing, invest- ment, cash management, international trade, and day-to-day banking needs. Auto finance provides flexible financing options to customers at point of sale for automotive vehicle purchases. Wealth management offers a wide range of wealth products and services to retail and insti- tutional clients. U.S. Retail works with TD Ameritrade to refer mass affluent clients to TD Ameritrade for their direct investing needs. The results of the Bank’s equity investment in TD Ameritrade are included in U.S. Retail and reported as equity in net income of an investment inassociate, net of income taxes. Wholesale Banking provides a wide range of capital markets, invest- ment banking, and corporate 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, provisions for incurred but not identified credit losses, tax items at an enterprise level, the elimination of taxable equivalent and other intercompany adjustments, and residual unallocated revenue and expenses. Effective October 1, 2015, the results of the acquired Nordstrom U.S. Credit Card Portfolio are reported in the U.S. Retail segment. Effective December 27, 2013, and January 1, 2014, the results of the acquired Aeroplan credit card portfolio and the results of the related affinity relationship with Aimia Inc. (collectively, “Aeroplan”) are reported in the Canadian Retail segment. The results of the credit card portfolio of Target Corporation and the related program agreement (collectively “Target”), acquired on March 13, 2013, and the results of Epoch Investment Partners, Inc. (Epoch), acquired on March 27, 2013, are both reported in the U.S. Retail segment. 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, refer to the “Financial Results Overview” section of this document. For information concern- ing the Bank’s measure of adjusted ROE, which is a non-GAAP finan- cial measure, refer to the “Return on Common Equity” section. Segmented information also appears in Note 30 of the 2015 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 $417 million, compared with $428 million last year. As noted in Note 9 of the 2015 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. The “Business Outlook and Focus for 2016” 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 information, refer to the “Caution Regarding Forward- Looking Statements” section and the “Risk Factors That May Affect Future Results” section. 23 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 1 3 RESULTS BY SEGMENT (millions of Canadian dollars) Net interest income (loss) Non-interest income (loss) Provision for (recovery of) credit losses Insurance claims and related expenses 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 taxes1 Amortization of intangibles Charge related to the acquisition of Nordstrom’s credit card portfolio and related integration costs Restructuring charges Litigation and litigation-related charge/reserve Fair value of derivatives hedging the reclassified available-for-sale securities portfolio Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada Set-up, conversion and other one-time costs related to affinity relationship with Aimia and acquisition of Aeroplan Visa credit card accounts Impact of Alberta flood on the loan portfolio Gain on sale of TD Waterhouse Institutional Services Total adjustments for items of note Net income (loss) – adjusted (billions of Canadian dollars) Average common equity2 CET1 Capital risk-weighted assets3,4 Canadian Retail U.S. Retail Wholesale Banking Corporate 2015 2014 2015 2014 2015 2014 2015 2014 2015 Total 2014 $ 9,781 9,904 887 2,500 8,407 7,891 1,953 $ 9,538 9,623 946 2,833 8,438 6,944 1,710 $ 7,011 2,414 749 – 6,170 2,506 394 $ 6,000 2,245 676 – 5,352 2,217 412 $ 2,295 631 18 – 1,701 1,207 334 $ 2,210 470 11 – 1,589 1,080 267 $ (363) $ (247) 29 – 1,795 (2,434) (1,158) (164) $ 18,724 $ 17,584 12,377 1,557 2,833 16,496 9,075 1,512 12,702 1,683 2,500 18,073 9,170 1,523 39 (76) – 1,117 (1,166) (877) – 5,938 – 5,234 376 2,488 305 2,110 – 873 – 813 1 (1,275) 15 (274) 377 8,024 320 7,883 – – – – – – – – – – – – – 125 131 – – 51 – 8 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – $ 5,938 – 256 $ 5,490 – 59 $ 2,547 – – $ 2,110 – – $ 873 – – $ 813 $ 13.9 106 $ 12.6 100 $ 31.1 200 $ 25.1 158 $ $ 5.8 65 4.7 61 255 246 255 246 – 471 – – – – 51 471 8 – – – (55) (43) (55) (43) – – – – – (19) – – – 125 131 (19) – 671 (604) $ (196) (12) (196) – 244 730 (286) $ 8,754 $ 8,127 $ 7.4 11 7.1 $ 9 58.2 $ 382 49.5 328 $ $ 1 For explanations of items of note, refer to the “Non-GAAP Financial Measures − 4 Effective the third quarter of 2014, each capital ratio has its own risk-weighted Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results Overview” section of this document. 2 Certain comparative amounts have been restated to conform with the presentation adopted in the current period. 3 Prior to 2015, amounts have not been adjusted to reflect the impact of the 2015 IFRS Standards and Amendments. assets (RWA) measure due to the Office of the Superintendent of Financial Institu- tion (OSFI) prescribed scalar for inclusion of the Credit Valuation Adjustment (CVA). Effective the third quarter of 2014, the scalars for inclusion of CVA for CET1, Tier 1, and Total Capital RWA are 57%, 65%, and 77% respectively. For fiscal 2015, the scalars are 64%, 71%, and 77%, respectively. 24 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS ECONOMIC SUMMARY AND OUTLOOK The first half of calendar 2015 saw a marked downturn in the Canadian economy, as real gross domestic product (GDP) contracted in both the first and second quarters. It is estimated that economic growth resumed in the July to September period, helped in part by a rebound in exports to the U.S. and some one-time factors, including the resumption of production at a major automotive plant. Looking ahead to the next four to five quarters, real GDP is expected to average a moderate 2% on a quarterly annualized basis. In contrast, the U.S. economy has continued to expand steadily, growing an average of 2% per quarter between January and September 2015. Economic growth in the U.S. is expected to pick up to about 2.5% in subsequent quarters. Beyond the North American borders, economic conditions are mixed. Signs of improvement can be seen in the main European economies and in the United Kingdom, but economies remain highly reliant on extraordinary monetary accommodation. Growth remains stubbornly weak in emerging markets. This emerging market weakness in many ways reflects concerns about the Chinese economy, which has entered a lower-growth phase. At the same time, global commodity prices, notably metals, have trended lower. This has resulted in a weaker growth outlook for economies with exposure to both commodity production and/or China exports, such as Australia. While low commodity prices are proving a headwind for many economies, the converse is true in the U.S., where low commodity prices (particularly within the energy sector) are helping to support consumer spending. Indeed, while activity expanded only 1.5% in the June to September period, this reflected a drawdown in inventories and headwinds on exports from a strong U.S. dollar. Consumer spending far outpaced that of overall growth, rising a robust 3.2% in the same period reflecting solid pent-up demand and relatively low unemployment. Increased spending by households and domestic-oriented businesses is expected to yield above-trend economic growth in calendar 2016. Consistent with an economy that has less and less slack remaining, the U.S. Federal Reserve appears likely to raise rates in December 2015, with further gradual increases likely thereafter. The outlook for the main sectors of the Canadian economy varies. Household consumption will likely be constrained by record-high debt levels, although debt service payments remain affordable helped by the low interest rate environment. The net effect will be an ongoing expansion of household spending, but at a slower pace than seen in the past. Non-residential investment is expected to continue contract- ing into the first half of calendar 2016, as persistently low oil prices continue to impact investment planning decisions in the important oil and gas sector. Residential investment has continued to be a key driver of the Canadian economy so far in calendar 2015. The effect of past interest rate cuts, which have been supportive of this sector, are expected to fade by mid-2016, and housing investment is expected to decline as further supply comes on market. Overall, a small pause in the sector is likely, helping rebalance the market after a prolonged period of expansion. Canadian exporters are expected to be a key source of growth over the second half of calendar 2015 and throughout 2016, fuelled by rising U.S. demand and a favourable exchange rate against the U.S. dollar. Strong growth in this sector will likely lead to some invest- ment spending, particularly on machinery and equipment, which is forecast to partially offset expected weakness in the oil and gas sector. Additional investment support is likely to come from the federal government, which has pledged further infrastructure spending. While details are not yet available, this spending may boost GDP growth in calendar years 2016 and 2017 by as much as 0.1 and 0.3 percentage points, respectively. With growth expected to settle in at a moderate 2% in the coming quarters, there does not appear to be any significant fundamental inflationary pressures in Canada, and as a result, core inflation is expected to remain near 2% for the foreseeable future, in line with the Bank of Canada’s target. Oil price movements have resulted in a significant deviation of overall inflation from the core rate, averaging just 1.1% year-on-year growth in the June to September period of 2015. 1 Amounts exclude Corporate Segment. With oil prices expected to remain persistently low, it is likely that inflation will remain well below the 2% target throughout both fiscal and calendar 2016. Prospects for relatively low inflation and the moderate growth profile provide little impetus for Bank of Canada to change interest rates. The policy interest rate is expected to remain at 0.50% until mid-2017, at which point the Bank of Canada is expected to begin increasing interest rates, albeit at a more gradual pace than seen in past tightening cycles. We consider the forecast outlined above to be the most likely scenario. However, forecasts are by definition uncertain, and risks to the outlook exist. Significant uncertainty remains around the outlook for growth in China. A sharper slow-down of growth than anticipated would place sizeable downward pressure on commodity prices, reduc- ing the value of Canadian exports and relative investment. Canadian exports themselves present a risk to the outlook, accounting for more than a quarter of expected growth in calendar 2016; should foreign demand fail to evolve in line with expectations, economic growth may disappoint. It is also possible that the Canadian economy may outper- form our expectations. In particular, the resiliency of Canadian housing demand has been underestimated in the past, and this may continue to be the case given low interest rates and continued income gains. NET INCOME – REPORTED BY BUSINESS SEGMENT (as a percentage of total net income) 1 70% 60 50 40 30 20 10 0 13 14 15 13 14 15 13 14 15 NET INCOME – ADJUSTED BY BUSINESS SEGMENT (as a percentage of total net income) 1 70% 60 50 40 30 20 10 0 13 14 15 13 14 15 13 14 15 Canadian Retail U.S. Retail Wholesale Banking 25 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISBUSINESS SEGMENT ANALYSIS Canadian Retail Canadian Retail provides a full range of financial products and services to nearly 15 million customers in the Canadian personal and commercial banking businesses, including credit cards, auto finance, wealth, and insurance businesses. NET INCOME (millions of Canadian dollars) EFFICIENCY RATIO (percent) $6,000 5,000 4,000 3,000 2,000 1,000 0 50% 40 30 20 10 0 13 14 15 13 14 15 Reported Adjusted Reported Adjusted T A B L E 1 4 REVENUE – Reported (millions of Canadian dollars) Personal banking Business banking Wealth Insurance Total 2015 $ 9,993 2,323 3,436 3,933 $ 19,685 2014 $ 9,600 2,284 3,226 4,051 $ 19,161 2013 $ 8,808 2,232 2,917 3,825 $ 17,782 26 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS CHALLENGES IN 2015 • Continued low interest rate environment, including two Bank of Canada rate cuts, contributed to further deposit margin compression. • Fierce competition for new and existing customers from the major Canadian banks and non-bank competitors. • Challenging retail lending environment due to weak economic growth and elevated 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 and non bank competitors. The strong 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 prudent expense management. Business growth in the fiercely competitive wealth management industry lies in the ability to differentiate on client experience by providing the right products, services, tools, and solutions to serve our clients’ needs. 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, whereas the life and health insurance industry is made up of several larger competitors. OVERALL BUSINESS STRATEGY The strategy for Canadian Retail is to: • Consistently deliver a legendary customer experience in everything we do. • Be recognized as an extraordinary place to work. • Make the customer and employee experience simple, fast, and easy in order to drive efficiency. • Strengthen our local market presence in our communities. • Invest in the future to consistently deliver top tier earnings performance. BUSINESS HIGHLIGHTS • Achieved record adjusted earnings of $5,938 million, and an adjusted efficiency ratio of 42.7%. • Recognized as an industry leader in customer service excellence with distinctions that included the following: – TD Canada Trust ranked “Highest in Customer Satisfaction Among the Big Five Retail Banks”2 for the tenth consecutive year by J.D. Power, a global marketing information company. The 2015 Canadian Retail Banking Customer Satisfaction Study included responses from over 14,000 customers who use a primary financial institution for personal banking. – TD Canada Trust retained the #1 spot in “Customer Service Excellence”3 among the Big Five Retail Banks for the eleventh consecutive year according to Ipsos, a global market research firm. – TD Canada Trust has won the “Online Banking Excellence”4 award among the Big Five Retail Banks for the eleventh consecutive year according to Ipsos, a global market research firm. – TD Canada Trust has won the “Mobile Banking Excellence”5 award among the Big Five Retail Banks in every single year of the award’s existence according to Ipsos, a global market research firm. – TD Wealth Private Investment Advice received the second- highest numerical score for overall customer satisfaction in the proprietary J.D. Power 2015 Canadian Full Service Investor Satisfaction StudySM6. • Continued to focus on customer service and convenience by optimizing our branch network, and investing in our digital channel experience, including mobile and online banking. • Recorded strong chequing and savings deposit volume growth due to a focus on acquiring and retaining core customer accounts. • TD Auto Finance Canada had record originations in Canada during the year ended October 31, 2015. • Business banking continued to generate strong loan volume growth of 9%. • TD Insurance achieved a record $3.9 billion in total premiums in 2015.7 • TD Asset Management (TDAM), the manager of TD Mutual Funds, had record long-term fund sales and record assets under management. • TD has maintained strong Canadian market share8 in key products: – #1 in real estate secured lending, personal deposit, and credit card market share. – #2 in personal loan market share. – #2 in Business Banking deposit and loan market share. – #1 in Direct Investing by asset, trade, and revenue market share. 2 Received the highest numerical score among the big five retail banks in the proprietary J.D. Power 2006-2015 Canadian Retail Banking Customer Satisfaction StudiesSM. 2015 study based on over 14,000 total responses and measures opinions of consumers with their primary banking institution. Proprietary study results are based on experiences and perceptions of consumers surveyed April-May 2015. Your experiences may vary. Visit www.jdpower.com. 5 TD Canada Trust has won the award among the big five retail banks in the proprietary Ipsos 2013-2015 Best Banking StudiesSM. The Mobile Banking Excellence award was introduced in 2013. Ipsos 2015 Best Banking Awards are based on ongoing quarterly CSI survey results. Sample size for the total 2015 CSI program year ended with the August 2015 survey wave was 45,391 completed surveys yielding 65,991 financial institution ratings nationally. 3 Ipsos 2015 Best Banking Awards are based on ongoing quarterly Customer Service Index (CSI) survey results. Sample size for the total 2015 CSI program year ended with the August 2015 survey wave was 45,391 completed surveys yielding 65,991 financial institution ratings nationally. 6 Proprietary study results are based on responses from 4,827 investors who use advice- based investment services from financial institutions in Canada. The study was fielded in May and June 2015. Your experiences may vary. Visit www.jdpower.com. 7 Gross Written Premiums for General Insurance business and Collected Premiums 4 TD Canada Trust has won the Online Banking Excellence award among the big five retail banks in the proprietary Ipsos 2006-2015 Best Banking StudiesSM. Ipsos 2015 Best Banking Awards are based on ongoing quarterly CSI survey results. Sample size for the total 2015 CSI program year ended with the August 2015 survey wave was 45,391 completed surveys yielding 65,991 financial institution ratings nationally. for Life and Health business. 8 Market share ranking is based on most current data available from the Canadian Bankers Association for Real Estate Secured Lending as at July 2015, from the Canadian Bankers Association for Business Deposits and Loans as at June 2015, from public financial disclosures for average credit card balances as at July 2015, from OSFI for Personal Deposits and Loans as at August 2015, and from Investor Economics for asset, trade, and revenue metrics as at September 2015. 27 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 1 5 CANADIAN RETAIL (millions of Canadian dollars, except as noted) Net interest income Non-interest income Total revenue Provision for credit losses Insurance claims and related expenses 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, conversion and other one-time costs related to affinity relationship with Aimia and acquisition of Aeroplan Visa credit card 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 and adjusted Efficiency ratio – reported Efficiency ratio – adjusted Number of Canadian retail branches Average number of full-time equivalent staff3 2015 $ 9,781 9,904 19,685 887 2,500 8,407 8,407 5,938 2014 $ 9,538 9,623 19,161 946 2,833 8,438 8,091 5,234 2013 $ 8,922 8,860 17,782 929 3,056 7,754 7,602 4,569 – 125 92 – $ 5,938 131 $ 5,490 20 $ 4,681 42.8% 42.8 2.87 42.7 42.7 1,165 39,218 41.7% 43.7 2.95 44.0 42.2 1,165 39,389 42.3% 43.3 2.92 43.6 42.7 1,179 39,535 1 For explanations of items of note, refer to the “Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results Overview” section of this document. 2 Effective fiscal 2015, capital allocated to the business segments is based on 9% 3 In fiscal 2014, the Bank conformed to a standardized definition of full-time equiva- lent staff across all segments. The definition includes, among other things, hours for overtime and contractors as part of its calculations. Results for fiscal 2013 have not been restated. CET1 Capital. These changes have been applied prospectively. REVIEW OF FINANCIAL PERFORMANCE Canadian Retail net income for the year on a reported basis was $5,938 million, an increase of $704 million, or 13%, compared with last year. Adjusted net income for the year was $5,938 million, an increase of $448 million, or 8%, compared with last year. The increase in adjusted earnings was primarily due to good loan and deposit volume growth, good wealth asset growth, strong credit performance, and higher insurance earnings, partially offset by margin compression and expense growth. The reported and adjusted annualized ROE for the year was 42.8%, compared with 41.7% and 43.7%, respectively, last year. Canadian Retail revenue is derived from the Canadian personal and commercial banking businesses, including credit cards, auto finance, wealth and insurance businesses. Revenue for the year was $19,685 million, an increase of $524 million, or 3%, compared with last year. Net interest income increased $243 million, or 3%, driven primarily by good loan and deposit volume growth and the full year impact of Aeroplan, partially offset by lower margins. Non-interest income increased $281 million, or 3%, largely driven by wealth asset growth, higher personal and business banking fee-based revenue, and insurance premium growth, partially offset by a change in mix of reinsurance contracts. Margin on average earning assets was 2.87%, a decrease of 8 bps, primarily due to the low rate environment and competitive pricing. The personal banking business generated good average lending volume growth of $12.8 billion, or 5%. Average real estate secured lending volume increased $9.5 billion, or 4%. Auto lending average volume increased $2.4 billion, or 16%, while all other personal lending average volumes increased $0.9 billion, or 3%. Business loans and acceptances average volume increased $4.5 billion, or 9%. Average personal deposit volumes increased $7.0 billion, or 5%, due to strong growth in core chequing and savings volumes, partially offset by lower term deposit volume. Average business deposit volumes increased $5.1 billion, or 7%. Assets under administration (AUA) were $310 billion as at October 31, 2015, an increase of $17 billion, or 6%, and assets under management (AUM) were $245 billion at October 31, 2015, an increase of $18 billion, or 8%, compared with last year, driven by strong new asset growth. PCL for the year was $887 million, a decrease of $59 million, or 6% compared with last year. Personal banking PCL was $855 million, a decrease of $20 million, or 2%, due primarily to the sale of charged- off accounts and strong credit performance, partially offset by higher provisions in the auto lending portfolio. Business banking PCL was $32 million, a decrease of $39 million, primarily due to higher recoveries in the current year. Annualized PCL as a percentage of credit volume was 0.26%, a decrease of 3 bps, compared with last year. Net impaired loans were $715 million, a decrease of $119 million, or 14%, compared with last year. Insurance claims and related expenses were $2,500 million, a decrease of $333 million, or 12%, compared with last year, primarily due to a change in mix of reinsurance contracts, more favourable prior years’ claims development, less severe weather conditions, and lower current year claims costs. Reported non-interest expenses for the year were $8,407 million, a decrease of $31 million, compared to last year. Adjusted non-interest expenses for the year were $8,407 million, an increase of $316 million, or 4%, compared with last year. The increase was driven primarily by higher employee-related costs, including higher revenue-based variable expenses in the wealth business, business growth, and higher initiative spend, partially offset by productivity savings. The reported and adjusted efficiency ratio was 42.7%, compared with 44.0% and 42.2%, respectively, last year. 28 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS KEY PRODUCT GROUPS Personal Banking • Personal Deposits – offers a full suite of chequing, savings, and investment products to retail clients across Canada. In 2015, TD achieved strong volume growth in Personal Deposits, and grew its market share leadership by focusing on acquiring and retaining core customer accounts. Growth in non-term deposits offset run-off in lower margin term deposits primarily in agent channels. The business was able to largely offset the impact of lower interest rates through volume growth, margin management, and growth in other income. • Consumer Lending – offers a diverse range of financing products to suit the needs of retail clients across Canada. In 2015, lending volumes continued to grow at a moderate pace. TD maintained its leadership position in market share for real estate secured lending, focusing on new product offerings and increasing customer retention. • Credit Cards and Merchant Services – offers a range of credit card products including co branded and affinity credit card programs. In April 2015, TD enacted reductions to interchange rates along with the rest of the industry. The business maintained the number one position in credit card market share.9 • Auto Finance – offers retail automotive and recreational vehicle financing through an extensive network of dealers across Canada. In 2015, TD delivered record portfolio growth in a highly competi- tive market by producing financial solutions for automotive and recreational product dealerships, developing flexible vehicle financ- ing options, and continuing its focus on service. TD also took steps to enhance the productivity and efficiency of its operational and adjudication functions by automating key processes. Business Banking • Commercial Banking – serves the needs of Canadian businesses across a wide range of industries. In 2015, the business continued to invest in customer-facing resources in strategic markets to drive strong volume growth and market share gains. • Small Business Banking – offers a wide range of financial products and services to small businesses across Canada. In 2015, the busi- ness continued to make investments in technology and credit processes to improve speed to market and customer experience. Wealth • Direct Investing – offers a comprehensive product and service offer- ing to self-directed retail investors. TD maintained its leadership position in AUA and trade volume in 2015. In Europe, TD Direct Investing provides a broad range of products available for trading and investing, including trading in U.K. and international equities, with direct access to 17 markets. • Advice-based business – offers financial planning, full service broker- age, and private client services, across different portfolio sizes and levels of product complexity, to help clients protect, grow and tran- sition their wealth. The advice-based wealth business is integrated with the Canadian personal and commercial banking businesses. New asset acquisition drove asset growth in 2015. • Asset Management – TDAM is a leading investment manager with deep retail and institutional capabilities. TD Mutual Funds is a lead- ing mutual fund business, providing a broadly diversified range of mutual funds and professionally managed portfolios. TDAM’s insti- tutional investment business has a leading market share in Canada and includes clients of some of the largest pension funds, endow- ments, and corporations in Canada. All asset management units work in close partnership with other TD businesses, including the advice-based wealth business and retail banking, to align products and services to ensure a legendary client experience. TDAM had another record year for AUM and long-term fund sales. 9 Market share ranking is based on the most current data available from public financial disclosures for average credit card balances as at July 2015. 10 Based on Gross Written Premiums for General Insurance business. Ranks based on data available from OSFI, Insurers, Insurance Bureau of Canada, and Provincial Regulators, as at December 31, 2014. Insurance • Property and Casualty – TD is the largest direct distribution insurer10 and the third largest personal insurer10 in Canada. It is also the national leader in the affinity market offering home and auto insur- ance to members of affinity groups such as professional associations, universities and employer groups, and other customers, through direct channels. • Life and Health – offers credit protection and travel insurance products mostly distributed through TD Canada Trust branches. Other simple life and health insurance products, and credit card balance protection are distributed through direct channels. BUSINESS OUTLOOK AND FOCUS FOR 2016 We will continue to focus on our legendary customer service and convenience across all channels. Our commitment to continually invest in our businesses positions us well for future growth. We expect earnings growth to moderate in 2016 due to a challenging operating environment. Over the next year, we expect continued pressure on margins due to the impact of the sustained low interest rate environment, and competitive pricing in the market. We expect the personal loan growth rate to be in line with current year levels. Business lending is forecasted to remain strong as we maintain our focus on winning market share. Wealth asset acquisi- tion is expected to be strong; however, benefits from market appreciation next year are subject to capital markets performance. Insurance results will depend upon, among other things, the frequency and severity of weather-related events, as well as any future potential regulatory and legislative changes. The tax rate on insurance earnings is expected to increase starting in 2016 if recent legislative proposals become effective. We expect an increase in credit losses for 2016 driven by normalizing credit conditions and volume growth. We will maintain our focus on productivity initiatives. Our key priorities for 2016 are as follows: • Continue to deliver a legendary customer experience across all businesses and distribution channels. • Invest in and deliver on organic growth opportunities across our businesses. • Retain and grow our market leadership in Credit Cards. • Accelerate our growth in the Wealth Advice channels, enrich the client offering in the Direct Investing business, and innovate for leadership in Asset Management. • Continue to invest in our insurance product offerings ensuring that they are competitive, easy to understand and provide the protection our clients need. • Keep our focus on productivity to enhance the customer experience, employee satisfaction, and shareholder value. • Continue to be an extraordinary place to work. 29 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISBUSINESS SEGMENT ANALYSIS U.S. Retail Operating under the brand name, TD Bank, America’s Most Convenient Bank,® U.S. Retail offers a full range of financial products and services to more than 8 million customers in the Bank’s U.S. personal and commercial banking businesses, including U.S. credit cards, auto finance, and wealth management. NET INCOME (millions of Canadian dollars) EFFICIENCY RATIO (percent) $3,000 2,500 2,000 1,500 1,000 500 0 80% 60 40 20 0 13 14 15 13 14 15 Reported Adjusted Reported Adjusted T A B L E 1 6 REVENUE – Reported (millions of dollars) Personal Banking Business Banking Wealth Other1 Total 1 Other revenue consists primarily of revenue from investing activities. 2015 $ 5,496 2,729 411 789 $ 9,425 Canadian dollars 2014 $ 4,685 2,353 330 877 $ 8,245 2013 $ 3,778 2,094 202 1,248 $ 7,322 2015 $ 4,415 2,192 330 637 $ 7,574 2014 $ 4,297 2,158 303 805 $ 7,563 U.S. dollars 2013 $ 3,701 2,051 198 1,223 $ 7,173 30 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS HIGHLIGHTS • Record adjusted earnings of US$2,053 million, up 6% compared with last year. • Continued to provide legendary customer service and convenience: – Named “Best Big Bank in America” by Money Magazine for the third year in a row. – Won the 2015 J.D. Power U.S. Small Business Banking Award for the Northeast.11 – Named to DiversityInc.’s Top 50 Companies in the U.S. for diversity for the third year in a row. • Outperformed our peers in loan growth and household acquisition. • Deepened share of wallet for new and existing customers. • Continued to invest in digital and in our omni-channel experience. • Expanded our credit cards business and closed the Nordstrom transaction. CHALLENGES IN 2015 • The sustained low interest rate environment and a competitive lending landscape contributed to further margin compression. • Slow economic growth created a challenging environment for retail lending. • We faced fierce competition for new and existing customers from U.S. banks and non-bank competitors. • We managed the impacts of the regulatory and legislative environment. INDUSTRY PROFILE The U.S. consumer and commercial banking industry is highly competitive and includes several very large financial institutions as well as regional banks, small community and savings banks, finance companies, credit unions, and other providers of financial services. The wealth management industry is also competitive and includes national and regional banks, insurance companies, independent mutual fund companies, brokers, and independent asset management companies. The keys to profitability are attracting and retaining customer relationships with legendary service and convenience, offering competitively priced products that meet customers’ evolving needs, managing expenses, and disciplined risk management. OVERALL BUSINESS STRATEGY Our goal is to outgrow and outperform our peers in the U.S. Where we Compete: • Retail and Commercial Banking along the Eastern seaboard • Profitable customer segments in growth markets where we have a competitive advantage • Out-of-footprint opportunities within our risk appetite How we Win: • Deliver legendary service and convenience • Grow and deepen customer relationships • Leverage our differentiated brand as the “human” bank • Deliver productivity initiatives that enhance both the employee and customer experience • Maintain our conservative risk appetite • Build upon our unique employee culture 11 TD Bank, N.A. received the highest numerical score in the northeast in the proprietary J.D. Power 2015 Small Business Banking Satisfaction StudySM. Study based on 8,086 total responses, measuring 8 financial institutions in the northeast (Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont) and measures opinions of small business customers with annual revenues from $100,000 to $10 million. Proprietary study results are based on experiences and perceptions of customers surveyed in July-August 2015. Your results may vary. Visit www.jdpower.com. 31 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 1 7 U.S. RETAIL1,2 (millions of dollars, except as noted) Net interest income Non-interest income Total revenue – reported Total revenue – adjusted Provision for credit losses – loans3 Provision for (recovery of) credit losses – debt securities classified as loans Provision for credit losses Non-interest expenses – reported Non-interest expenses – adjusted U.S. Retail Bank net income – reported4 Adjustments for items of note, net of income taxes5 Charge related to the acquisition of Nordstrom’s credit card portfolio and related integration costs Litigation and litigation-related charge/reserve U.S. Retail Bank net income – adjusted4 Equity in net income of an investment in associate, net of income taxes Net income – adjusted Net income – reported Selected volumes and ratios Return on common equity – reported6 Return on common equity – adjusted6 Margin on average earning assets (TEB)7 Efficiency ratio – reported Efficiency ratio – adjusted Number of U.S. retail stores Average number of full-time equivalent staff8 2015 $ 7,011 2,414 9,425 9,498 787 (38) 749 6,170 6,148 2,112 51 8 2,171 376 $ 2,547 2,488 Canadian dollars U.S. dollars 2014 $ 6,000 2,245 8,245 8,245 692 (16) 676 5,352 5,352 1,805 – – 1,805 305 $ 2,110 2,110 2013 $ 5,173 2,149 7,322 7,322 811 (32) 779 4,768 4,642 1,506 – 100 1,606 246 $ 1,852 1,752 2015 $ 5,632 1,942 7,574 7,630 632 (29) 603 4,952 4,933 1,701 39 7 1,747 306 $ 2,053 2,007 2014 $ 5,503 2,060 7,563 7,563 635 (14) 621 4,907 4,907 1,657 – – 1,657 281 $ 1,938 1,938 2013 $ 5,070 2,103 7,173 7,173 795 (31) 764 4,671 4,545 1,474 – 100 1,574 241 $ 1,815 1,715 8.0% 8.2 3.61 65.5 64.7 1,298 25,647 8.4% 8.4 3.75 64.9 64.9 1,318 26,074 8.0% 8.4 3.66 65.1 63.4 1,317 25,247 8.0% 8.2 3.61 65.5 64.7 1,298 25,647 8.4% 8.4 3.75 64.9 64.9 1,318 26,074 8.0% 8.4 3.66 65.1 63.4 1,317 25,247 1 Certain comparative amounts have been reclassified to conform with the presentation 6 Effective fiscal 2015, capital allocated to the business segments is based on 9% adopted in the current period. CET1 Capital. These changes have been applied prospectively. 2 Revenue, PCL, and expenses related to Target and Nordstrom are reported 7 The margin on average earning assets excludes the impact related to the TD Ameritrade on a gross basis in the Consolidated Statement of Income. 3 Includes provisions for credit losses on acquired credit-impaired (ACI) loans including all Federal Deposit Insurance Corporation (FDIC) covered loans. 4 Results exclude the impact related to the equity in net income of the investment in TD Ameritrade. insured deposit accounts (IDA). On a prospective basis, beginning in the second quarter of 2015, the margin on average earning assets (a) excludes the impact of cash collateral deposited by affiliates with the U.S. banks, which have been eliminated at the U.S. Retail segment level and (b) the allocation of investments to the IDA has been changed to reflect the Basel III liquidity rules. 5 For explanations of items of note, refer to the “Non-GAAP Financial Measures − 8 In fiscal 2014, the Bank conformed to a standardized definition of full-time Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results Overview” section of this document. equivalent staff across all segments. The definition includes, among other things, hours for overtime and contractors as part of its calculations. Results for fiscal 2013 have not been restated. REVIEW OF FINANCIAL PERFORMANCE U.S. Retail net income for the year on a reported basis was $2,488 million (US$2,007 million). U.S. Retail adjusted net income for the year was $2,547 million (US$2,053 million), which included net income of $2,171 million (US$1,747 million) from the U.S. Retail Bank and $376 million (US$306 million) from TD’s investment in TD Ameritrade. Canadian dollar earnings benefited from a strengthening of the U.S. dollar during the year. The reported and adjusted annualized ROE for the year was 8.0% and 8.2% respectively, compared with 8.4% last year. U.S. Retail Bank reported net income for the year was US$1,701 million, an increase of US$44 million, or 3%, compared with last year. U.S. Retail Bank adjusted earnings of US$1,747 million increased US$90 million, or 5%, compared with last year, primarily due to strong organic growth, lower PCL, good expense management, and a lower effective tax rate, partially offset by lower loan margins and lower gains on sales of securities. The contribution from TD Ameritrade of US$306 million was up 9% compared with last year, primarily due to strong asset growth and higher transaction revenue, partially offset by higher operating expenses and lower investment gains. Reported revenue for the year was US$7,574 million, an increase of US$11 million, relatively flat compared with last year. Adjusted revenue was US$7,630 million, an increase of US$67 million, or 1%, compared with last year, primarily due to strong organic loan and deposit growth, higher fee revenue, and the contribution from Nordstrom, partially offset by net margin compression, as well as, lower accretion, and lower gains on sales of securities. Margin on average earning assets was 3.61%, a 14 bps decrease compared with last year primarily due to lower loan margins. Average loan volumes increased US$11 billion, or 10%, compared with last year, driven by a 17% increase in business loans and a 4% increase in personal loans. Average deposit volumes increased US$11 billion, or 5%, compared with last year driven by 7% growth in personal deposits, 5% growth in business deposits, and 4% growth in TD Ameritrade deposits. AUA were US$9.6 billion at October 31, 2015, an increase of US$430 million, or 5%, compared with the last year, primarily due to market appreciation. AUM were US$76.9 billion at October 31, 2015, an increase of US$17.6 billion, or 30%, compared with last year, mainly driven by net new asset growth. 32 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS PCL for the year was US$603 million, a decrease of US$18 million, or 3%, compared with last year, primarily due to continued credit quality improvement across various portfolios, partially offset by volume growth and provisions related to South Carolina flooding. Personal banking PCL was US$538 million, a decrease of US$92 million, or 15%, compared with last year, reflecting good credit quality and favourable loss rates across various products, partially offset by the South Carolina flooding provision. Business banking PCL was US$93 million, an increase of US$90 million compared to last year primarily due to normalizing credit conditions and volume growth. Annualized PCL as a percentage of credit volume for loans, excluding debt securities classified as loans, was 0.48%, a decrease of 7 bps compared with last year. Net impaired loans, excluding acquired credit- impaired (ACI) loans and debt securities classified as loans, were US$1.5 billion, an increase of US$209 million, or 17%, compared with last year, driven primarily by inclusion of certain performing home equity loans that have been reported as impaired, because borrowers may not qualify under current underwriting guidelines. Net impaired loans as a percentage of total loans were 1.1% as at October 31, 2015, flat compared with last year. Net impaired debt securities classi- fied as loans were US$797 million at October 31, 2015, compared with US$919 million at October 31, 2014. Reported non-interest expenses for the year were US$4,952 million, an increase of US$45 million, or 1%, compared with last year. On an adjusted basis, non-interest expenses were US$4,933 million, an increase of US$26 million, or 1%, compared with last year, primarily due to the impact of Nordstrom and investments to support business growth, partially offset by productivity savings. The reported and adjusted efficiency ratio for the year was 65.5% and 64.7% respec- tively, compared with 64.9% last year. KEY PRODUCT GROUPS Personal Banking • Personal Deposits – offers a full suite of chequing and savings products to retail customers through multiple delivery channels. • Consumer Lending – offers a diverse range of financing products to suit the needs of retail customers. • Credit Cards Services – offers TD branded credit cards for retail and small business franchise customers. TD also offers private label and co-brand credit cards through partnerships with retail programs nationwide to provide credit card products to their U.S. customers. This portfolio includes Target and Nordstrom. • Auto Finance – offers automotive financing through a network of auto dealers throughout the U.S. Business Banking • Commercial Banking – serves the needs of U.S. businesses and governments across a wide range of industries. • Small Business Banking – offers a range of financial products and services to small businesses. Wealth • Advice-based Business – provides private banking, investment advisory, and trust services to retail and institutional clients, to help clients protect, grow, and transition their wealth. The advice-based business is integrated with the U.S. personal and commercial banking businesses. • Asset Management – the U.S. asset management business is comprised of the U.S. arm of TDAM’s institutional investment business and Epoch Investment Partners Inc. Both asset management units work in close partnership with other TD businesses, including the advice-based business and personal and commercial banking, to align products and services to ensure a legendary client experience. BUSINESS OUTLOOK AND FOCUS FOR 2016 The U.S. Retail business will remain focused on delivering legendary customer service and convenience and deepening client relationships. We anticipate modest economic growth, ongoing regulatory pressures, and a fiercely competitive oper- ating environment in 2016. We expect to post strong loan and deposit growth, although competition for loans and deposits will remain intense. In the absence of interest rate increases, net interest margin is expected to remain under pressure. We are forecasting an increase in credit losses for 2016 driven by volume growth and normalizing credit conditions. We will continue to maintain a disciplined expense management approach as the benefits from restructuring activities and continued focus on productivity initiatives are expected to partially fund strategic business investments. Overall, in the absence of interest rate increases, we expect modest growth in adjusted earnings. Our key priorities for 2016 are as follows: • Outgrow our competitors by acquiring more customers and deepening share of wallet. • Advance our omni-channel strategy, including making key strategic investments in digital capabilities. • Enhance the customer and employee experience as measured by internal and external surveys. • Continue to meet heightened regulatory expectations. • Drive productivity initiatives across the Bank. TD AMERITRADE HOLDING CORPORATION Refer to Note 12 of the 2015 Consolidated Financial Statements for further information on TD Ameritrade. 33 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISBUSINESS SEGMENT ANALYSIS Wholesale Banking Operating under the brand name TD Securities, Wholesale Banking provides a wide range of capital markets, investment banking, and corporate banking products and services to corporate, government, and institutional clients in key global financial centres. NET INCOME (millions of Canadian dollars) TOTAL REVENUE (millions of Canadian dollars) $1,000 800 600 400 200 0 $3,000 2,500 2,000 1,500 1,000 500 0 13 14 15 13 14 15 T A B L E 1 8 REVENUE – Reported 1 (millions of Canadian dollars) Investment banking and capital markets Corporate banking Total 1 Certain comparative amounts have been reclassified to conform with the presentation adopted in the current period. 2015 $ 2,334 592 $ 2,926 2014 $ 2,170 510 $ 2,680 2013 $ 1,931 479 $ 2,410 34 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS BUSINESS HIGHLIGHTS • Achieved earnings of $873 million and an ROE of 15.2%. • Delivered strong core revenue growth. • Robust performance in trading, corporate lending and debt underwriting both in Canada and the U.S. • Expanded product offerings to our U.S. clients. • Won a record four GlobalCapital Bond Awards in the Sovereign, Supranational and Agency category.12 • Awarded nine StarMine Analyst Awards in equity research.13 • Maintained top-three dealer status in Canada (for the nine-month period ended September 30, 2015):14 – #1 in equity options block trading – #2 in equity block trading – #2 in government debt underwriting – #3 in corporate debt underwriting – #3 in syndications (on rolling twelve-month basis) CHALLENGES IN 2015 • The sustained low interest rate environment and concerns over the timing of rate increases, combined with a challenging global environment, contributed to investor uncertainty. • Weakening in the resource/energy sector impacted 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. The trading environment was favourable in 2015, with strong client activity despite challenging markets that were impacted by global uncertainty and volatile energy prices. Fixed income issuance and lending volumes were strong, as clients continued to take advantage of the low interest rate environment. However, regulatory requirements and concerns over the timing of interest rate increases in the U.S. continued to have an impact on investor confidence and client activity. Overall, wholesale banks have continued to shift their focus to client-driven trading revenue and fee income to reduce risk and preserve capital. Competition is expected to remain intense for transactions with high quality counterparties, as securities firms focus on prudent risk and capital management. Longer term, wholesale banks that have a diversified client-focused business model, offer a wide range of products and services, and exhibit effective cost and capital management will be well positioned to achieve attractive returns for shareholders. OVERALL BUSINESS STRATEGY • Extend our client-centric franchise model through superior advice client activities. and execution. • Regulatory changes had an impact on TD Securities’ businesses. • Strengthen our position as a top investment dealer in Canada. • Grow our U.S. franchise in partnership with U.S. Retail. • Maintain a prudent risk profile by focusing on high quality clients, counterparties, and products. • Adapt to rapid industry and regulatory changes. • Be an extraordinary and inclusive place to work by attracting, developing, and retaining top talent. T A B L E 1 9 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 revenue1 Gross drawn (billions of dollars)2 Return on common equity3 Efficiency ratio Average number of full-time equivalent staff4 2015 $ 2,295 631 2,926 18 1,701 $ 873 2014 $ 2,210 470 2,680 11 1,589 $ 813 2013 $ 1,982 428 2,410 26 1,542 $ 650 $ 1,545 16 15.2% 58.1 3,748 $ 1,394 12 17.5% 59.3 3,654 $ 1,273 9 15.6% 64.0 3,536 1 In the fourth quarter of 2014, the Bank implemented a funding valuation adjust- 3 Effective fiscal 2015, capital allocated to the business segments is based on 9% ment (FVA) in response to growing evidence that market implied funding costs and benefits are now considered in the pricing and fair valuation of uncollateralized derivatives. Refer to Note 5 of the 2015 Consolidated Financial Statements for further information on FVA. 2 Includes gross loans and bankers’ acceptances, excluding letters of credit and before any cash collateral, credit default swaps (CDS), reserves, etc., for the corporate lending business. CET1 Capital. These changes have been applied prospectively. 4 In fiscal 2014, the Bank conformed to a standardized definition of full-time equivalent staff across all segments. The definition includes, among other things, hours for overtime and contractors as part of its calculations. Results for fiscal 2013 have not been restated. 12 GlobalCapital Bond Market Awards recognize the best borrowers, banks and bankers in the sovereign, supranational and agency (SSA), financial institution group (FIG), corporate, and emerging markets sectors for 2015. The awards are based on the results of a market poll, with banks voting for their preferred issuers and borrowers. Based on ranking 1st in select SSA categories. of sell-side analysts based on the returns of their buy/sell recommendations relative to industry benchmarks, and the accuracy of their earnings estimates in 16 regions across the globe. Based on ranking top 3 in select Industry and Overall Analyst categories. 14 Equity block trading is based on IRESS Market Data and equity options block 13 The Thomson Reuters StarMine Analyst Awards recognize the world’s top individual sell-side analysts and sell-side firms for 2015. They measure the performance trading is sourced from the Montreal Exchange. Government and corporate debt underwriting and syndications are sourced from Bloomberg. 35 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS REVIEW OF FINANCIAL PERFORMANCE Wholesale Banking net income for the year was $873 million, an increase of $60 million, or 7%, compared with last year. The increase in earnings was due to higher revenue, partially offset by higher non- interest expenses and a higher effective tax rate. The ROE for the year was 15.2%, compared with 17.5% in the prior year. Revenue for the year was $2,926 million, an increase of $246 million, or 9%, compared with the prior year. Revenue increased mainly due to higher trading-related revenue, while our continued focus on originations both in Canada and the U.S. resulted in robust debt underwriting fees and strong corporate lending growth. The increase in debt underwriting fees was largely driven by improved client activity, and corporate lending revenue increased on strong loan volume growth. The revenue increase also included the positive impact of foreign exchange translation. This was partially offset by lower merg- ers and acquisition (M&A) and equity underwriting fees. Trading-related revenue increased due to improved foreign exchange and fixed income trading that benefited from strong client activity in the year despite a challenging global environment, and higher equity trading on improved client volumes and increased volatility in the latter half of the year. PCL is comprised of specific provisions 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 $18 million, an increase of $7 million compared with last year, and consisted of the accrual cost of credit protection and a specific credit provision in the corporate lending portfolio. PCL in the prior year consisted primarily of the accrual cost of credit protection. Non-interest expenses for the year were $1,701 million, an increase of $112 million, or 7%, compared with last year. Non-interest expenses increased primarily due to the impact of foreign exchange translation and higher operating expenses. ROE for the year was 15.2%, compared with 17.5% in the prior year, decreasing primarily due to a higher capital allocation to the segment and higher CET1 risk-weighted assets (RWA). CET1 RWA increased due to higher corporate loan volumes and the impact of foreign exchange translation. KEY PRODUCT GROUPS Investment Banking and Capital Markets • Includes advisory, underwriting, trading, facilitation, and execution services. Revenue increased over last year, primarily due to higher trading-related revenue on improved capital markets client activity and strong debt underwriting fees. Corporate Banking • Includes corporate lending, trade finance and cash management services. Revenue increased over last year driven by higher fee revenue and strong loan volumes. BUSINESS OUTLOOK AND FOCUS FOR 2016 Overall, the global economy is showing modest growth and we expect to see gradual improvements in capital markets in 2016. We remain committed to expanding our client-focused franchise dealer in North America, partnering with the rest of the Bank and positioning our business for growth. However, the combination of evolving capital and regulatory requirements, uncertainty over the outlook for interest rates, volatile energy markets and increased competition will continue to impact our business. While these factors will likely affect corporate and investor sentiment in the near term, we believe our diversified, integrated business model will deliver solid results and grow our franchise. In 2016, we remain focused on growing and deepening client relationships, being a valued counterparty, as well as managing our risks, capital, and productivity. Our key priorities for 2016 are as follows: • Continue to grow organically by broadening and deepening client relationships. • Be a top ranked investment dealer in Canada by increasing our origination footprint and competitive advantage with Canadian clients. • Expand the U.S. franchise by growing our service offerings to our North American clients. • Further strengthen alignment with our enterprise partners and their clients. • Continue to invest in an agile and effective infrastructure to adapt to industry and regulatory changes. • Maintain our focus on productivity to enhance client experience, employee satisfaction, and shareholder value. 36 TD BANK GROUP ANNUAL REPORT 2015 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, provisions for incurred but not identified losses related to the Canadian loan portfolio, 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 0 CORPORATE (millions of Canadian dollars) Net income (loss) – reported Adjustments for items of note, net of income taxes1 Amortization of intangibles Restructuring charges Fair value of derivatives hedging the reclassified available-for-sale securities portfolio Impact of Alberta flood on the loan portfolio Gain on sale of TD Waterhouse Institutional Services Total adjustments for items of note Net income (loss) – adjusted Decomposition of items included in net income (loss) – adjusted Net corporate expenses Other Non-controlling interests Net income (loss) – adjusted 1 For explanations of items of note, refer to the “Non-GAAP Financial Measures – Reconciliation of Adjusted to Reported Net Income” table in the “Financial Results Overview” section of this document. 2015 $ (1,275) 255 471 (55) – – 671 (604) (734) 18 112 (604) $ $ $ 2014 $ (274) 246 – (43) (19) (196) (12) $ (286) $ (727) 334 107 $ (286) 2013 $ (331) 232 90 (57) 19 – 284 (47) $ $ (516) 364 105 (47) $ The Corporate segment reported net loss for the year was $1,275 million, compared with a reported net loss of $274 million last year. Current year reported net loss includes restructuring charges of $686 million ($471 million after-tax) on a net basis. For further details, refer to the “Significant Events in 2015” in the “Financial Results Overview” section of this document. The adjusted net loss for the year was $604 million, compared with an adjusted net loss of $286 million last year. The year-over-year increase in the adjusted net loss was attributable to Other items. Other items were lower due to the gain on sale of TD Ameritrade shares ($85 million after-tax) and favourable impact of tax items in the prior year, lower revenue from treasury and balance sheet management activities and higher provisions for incurred but not iden- tified credit losses due to volume growth and refinements in allowance methodology in 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 functional 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 digital, phone, and 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 businesses. Ensuring that the Bank stays abreast of emerging trends and devel- opments is vital to maintaining stakeholder confidence in the Bank and addressing the dynamic complexities and challenges from changing demands and expectations of our customers, shareholders, employees, governments, regulators, and the community at large. BUSINESS OUTLOOK AND FOCUS FOR 2016 We expect Corporate segment adjusted net loss to be relatively consistent with this year’s adjusted net loss. 37 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS 2014 FINANCIAL RESULTS OVERVIEW Summary of 2014 Performance T A B L E 2 1 REVIEW OF 2014 FINANCIAL PERFORMANCE (millions of Canadian dollars) Net interest income (loss) Non-interest income (loss) Total revenue Provision for (recovery of) credit losses Insurance claims and related expenses 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 NET INTEREST INCOME Net interest income for the year on a reported and adjusted basis was $17,584 million, an increase of $1,510 million, or 9%, compared with last year. The increase in adjusted net interest income was primarily driven by increases in the U.S. Retail, Canadian Retail, and Wholesale Banking segments. U.S. Retail net interest income increased primarily due to strong loan and deposit volume growth, the full year inclusion of Target, and the impact of foreign currency translation. Canadian Retail net interest income increased primarily due to good loan and deposit volume growth and the inclusion of Aeroplan. Wholesale Banking net interest income increased primarily due to higher trading- related net interest income. NON-INTEREST INCOME Non-interest income for the year on a reported basis was $12,377 million, an increase of $1,192 million, or 11%, compared with last year. Adjusted non-interest income for the year was $12,097 million, an increase of $983 million, or 9%, compared with last year. The increase in adjusted non-interest income was primarily driven by increases in the Canadian Retail, U.S. Retail, and Corporate segments. Canadian Retail non-interest income increased primarily due to wealth asset growth, higher volume-related fee growth, the inclusion of Aeroplan, and higher insurance revenue. U.S. Retail non-interest income increased primarily due to the full year inclusions of Target and Epoch, and the impact of foreign currency translation, partially offset by lower gains on sales of securities and debt securities classified as loans. Corporate segment non-interest income increased primarily due to the gains on sales of TD Ameritrade shares in the current year. NON-INTEREST EXPENSES Reported non-interest expenses for the year were $16,496 million, an increase of $1,427 million, or 9%, compared with last year. Adjusted non-interest expenses were $15,863 million, an increase of $1,473 million, or 10%, compared with last year. The increase in adjusted non-interest expenses was driven by increases in the U.S. Retail, Canadian Retail, and Corporate segments. U.S. Retail non-interest expenses increased primarily due to the full year inclusion of Target, investments to support business growth, and the impact of foreign currency translation, partially offset by productivity gains. Canadian Retail non-interest expenses increased primarily due to higher employee-related costs including higher revenue-based variable expenses in the wealth business, the inclusion of Aeroplan, investments to support business growth, and volume growth, partially offset by productivity gains. Corporate segment non-interest expenses increased primarily due to ongoing investment in enterprise and regulatory projects, and productivity initiatives. 38 Canadian Retail $ 9,538 9,623 19,161 946 2,833 8,438 6,944 1,710 – 5,234 256 $ 5,490 U.S. Retail $ 6,000 2,245 8,245 676 – 5,352 2,217 412 305 2,110 – $ 2,110 Wholesale Banking Corporate $ 2,210 470 2,680 11 – 1,589 1,080 267 – 813 – $ 813 $ (164) 39 (125) (76) – 1,117 (1,166) (877) 15 (274) (12) (286) $ Total $ 17,584 12,377 29,961 1,557 2,833 16,496 9,075 1,512 320 7,883 244 $ 8,127 INCOME TAX EXPENSE Reported total income and other taxes increased by $474 million, or 21%, compared with last year. Income tax expense, on a reported basis, was up $377 million, or 33%, compared with last year. Other taxes were up $97 million, or 9%, compared with last year. Adjusted total income and other taxes were up $420 million from last year. Total income tax expense, on an adjusted basis, was up $323 million, or 24%, from last year. The Bank’s effective income tax rate on a reported basis was 16.7% for 2014, compared with 15.1% last year. The year-over-year increase was largely due to business mix, offset by the resolution of certain audit issues. The Bank reports its investment in TD Ameritrade using the equity method of accounting. TD Ameritrade’s tax expense of $198 million in the year, compared to $168 million last year, was not part of the Bank’s tax rate. BALANCE SHEET Factors Affecting Assets and Liabilities Total assets were $961 billion as at October 31, 2014, an increase of $98 billion, or 11%, from October 31, 2013. The impact of foreign currency translation added $19 billion, or 2%, to growth in total assets. The net increase was primarily due to a $34 billion increase in loans (net of allowance for loan losses), an $18 billion increase in securities purchased under reverse repurchase agreements, a $15 billion increase in interest-bearing deposits with banks, and a $5 billion increase in held-to-maturity securities (net of reclassification of $22 billion from available-for-sale securities). Total liabilities were $904 billion as at October 31, 2014, an increase of $94 billion, or 12%, from October 31, 2013. The impact of foreign currency translation added $19 billion, or 2%, to growth in total liabili- ties. The net increase was primarily due to a $59 billion increase in deposits, a $19 billion increase in obligations related to securities sold under repurchase agreements, and an $8 billion increase in trading deposits, partially offset by an $11 billion decrease in securitization liabilities at fair value. Equity was $56 billion as at October 31, 2014, an increase of $5 billion, or 9%, from October 31, 2013. The increase was primarily due to higher retained earnings and an increase in accumulated other comprehensive income driven by higher cumulative translation adjustment gains as a result of foreign currency translation, partially offset by redemption of preferred shares. TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS 2014 FINANCIAL RESULTS OVERVIEW 2014 Financial Performance by Business Line Wholesale Banking net income for the year was $813 million, an increase of $163 million, or 25%, compared with last year. Revenue for the year was $2,680 million, an increase of $270 million, or 11%, compared with last year. Capital markets revenue increased mainly due to improved trading-related revenue, robust equity and debt underwriting, and stronger M&A activity. Trading-related revenue increased primarily due to improved fixed income and equity trading that benefited from strong client activity. Advisory and underwriting fees increased largely driven by strong debt and equity markets, and our continued focus on originations and client focused strategies. In the fourth quarter of 2014, the Bank implemented a funding valuation adjustment (FVA) in response to growing evidence that market implied funding costs and benefits are now considered in the pricing and fair valuation of uncollateralized derivatives. The implementation of FVA resulted in a pre-tax additional charge of $65 million recorded in the Wholesale segment. Non-interest expenses for the year were $1,589 million, an increase of $47 million, or 3%, compared with last year. Non-interest expenses increased primarily due to higher variable compensation commensurate with revenue and the impact of foreign exchange translation, partially offset by lower operating expenses. Corporate segment reported net loss for the year was $274 million, compared with a reported net loss of $331 million last year. The adjusted net loss for the year was $286 million, compared with an adjusted net loss of $47 million last year. The year-over-year change in the adjusted net loss was primarily attributable to an increase in net corporate expenses as a result of ongoing investment in enterprise and regulatory projects and productivity initiatives. Other items were slightly unfavourable due to lower gains from treasury and other hedging activities and the reduction of the allowance for incurred but not identified credit losses relating to the Canadian loan portfolio, largely offset by the gain on sale of TD Ameritrade shares and favour- able impact of tax items. Canadian Retail net income for the year on a reported basis was $5,234 million, an increase of $665 million, or 15%, compared with last year. Adjusted net income for the year was $5,490 million, an increase of $809 million, or 17%, compared with last year. The increase in adjusted earnings was primarily due to loan and deposit volume growth, the addition of Aeroplan, strong growth in assets under management, a rebound in insurance earnings due to additional losses last year as a result of strengthened reserves for general insurance automobile claims and claims resulting from severe weather-related events, partially offset by expense growth. Revenue for the year was $19,161 million, an increase of $1,379 million, or 8%, compared with last year. Net interest income increased $616 million, or 7%, driven primarily by good loan and deposit volume growth, and the addition of Aeroplan. Non-interest income increased $763 million, or 9%, largely driven by wealth asset growth, higher volume-related fee growth, the addition of Aeroplan, and higher insurance revenues. Reported non-interest expenses for the year were $8,438 million, an increase of $684 million, or 9%, compared with last year. Adjusted non-interest expenses for the year were $8,091 million, an increase of $489 million, or 6%, compared with last year. The increase was driven by higher employee related costs including higher revenue-based vari- able compensation in the wealth business, the addition of Aeroplan, investments to grow the business, and volume growth, partially offset by initiatives to increase productivity. U.S. Retail net income for the year on a reported basis was $2,110 million (US$1,938 million), which included net income of $1,805 million (US$1,657 million) from the U.S. Retail Bank and $305 million (US$281 million) from TD’s investment in TD Ameritrade. U.S. Retail earnings of US$1,938 million on a reported basis were up 13% compared with last year. U.S. Retail Bank adjusted earnings of US$1,657 million increased 5% compared with last year. The contribu- tion from TD Ameritrade of US$281 million was up 17% compared with last year. Canadian dollar earnings growth benefited from a strengthening of the U.S. dollar during the year. Revenue for the year was US$7,563 million, an increase of US$390 million, or 5%, compared with last year, primarily due to increased loan and deposit volumes and the full-year impact of Target and Epoch, partially offset by lower gains on sales of securities and debt securities classified as loans. Reported non-interest expenses for the year were US$4,907 million, an increase of US$236 million, or 5%, compared with last year. On an adjusted basis, non-interest expenses were US$4,907 million, an increase of US$362 million, or 8%, compared with last year, primarily due to increased expenses related to the full year impact of acquisitions, and investments to support business growth, partially offset by productivity improvements. 39 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISGROUP FINANCIAL CONDITION Balance Sheet Review AT A GLANCE OVERVIEW Total assets were $1,104 billion as at October 31, 2015, an increase of $144 billion, or 15%, compared with October 31, 2014. T A B L E 2 2 SELECTED CONSOLIDATED BALANCE SHEET ITEMS (millions of Canadian dollars) Assets Loans (net of allowance for loan losses) Available-for-sale securities Securities purchased under reverse repurchase agreements Held-to-maturity securities Liabilities Deposits Trading deposits Obligations related to securities sold under repurchase agreements As at October 31 October 31 2014 2015 $ 544,341 $ 478,909 63,008 88,782 97,364 74,450 82,556 56,977 695,576 600,716 59,334 74,759 67,156 53,112 FACTORS AFFECTING ASSETS AND LIABILITIES Total assets were $1,104 billion as at October 31, 2015, an increase of $144 billion, or 15%, from October 31, 2014. The net increase was primarily due to a $65 billion increase in loans (net of allowance for loan losses), a $26 billion increase in available-for-sale securities, a $15 billion increase in securities purchased under reverse repurchase agreements, $17 billion increase in held-to-maturity securities, and a $14 billion increase in derivatives. The impact of foreign currency translation added $42 billion, or 4%, to growth in total assets. Loans (net of allowance for loan losses) increased $65 billion primarily driven by increases in the U.S. Retail segments and Canadian Retail segments. The increase in the U.S. Retail segment was primarily due to growth in business and government loans and the impact of foreign currency translation. The increase in the Canadian Retail segment was primarily due to growth in residential mortgages and business and government loans. GROUP FINANCIAL CONDITION Credit Portfolio Quality Available-for-sale securities increased $26 billion due to new investments and the impact of foreign currency translation. Securities purchased under reverse repurchase agreements increased $15 billion primarily due to an increase in trade volumes and foreign currency translation in Wholesale Banking. Held-to-maturity securities increased $17 billion primarily due to new investments and the impact of foreign currency translation. Total liabilities were $1,037 billion as at October 31, 2015, an increase of $133 billion, or 15%, from October 31, 2014. The net increase was primarily due to a $95 billion increase in deposits, a $15 billion increase in trading deposits, and a $14 billion increase in obligations related to securities sold under repurchase agreements. The impact of foreign currency translation added $41 billion, or 4%, to growth in total liabilities. Deposits increased $95 billion primarily due to increases in personal non-term, business, and government deposits in both the U.S. Retail and Canadian Retail segments, and the impact of foreign currency translation. Trading deposits increased $15 billion primarily due to higher issuance of certificates and commercial paper in Wholesale Banking. Obligations related to securities sold under repurchase agreements increased $14 billion primarily due to an increase in trade volumes and foreign currency translation in Wholesale Banking. Equity was $67 billion as at October 31, 2015, an increase of $11 billion, or 19%, from October 31, 2014. The increase was primarily due to higher retained earnings and an increase in accumulated other comprehensive income due to foreign currency translation. AT A GLANCE OVERVIEW • Loans and acceptances net of allowance for loan losses were $561 billion, an increase of $69 billion compared with last year. • Impaired loans net of counterparty-specific and individually insignificant allowances were $2,660 million, an increase of $416 million compared with last year. LOAN PORTFOLIO Overall in 2015, the Bank’s credit quality remained stable despite uncertain economic conditions. During 2015, the Bank increased its credit portfolio by $69 billion, or 14%, from the prior year, largely due to volume growth in the Canadian and U.S. Retail segments and the impact of foreign exchange. • Provision for credit losses was $1,683 million, compared with While the majority of the credit risk exposure is related to loans $1,557 million last year. • Total allowance for loan losses increased by $406 million to $3,434 million. 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 32 of the 2015 Consolidated Financial Statements. 40 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 67% of total loans net of counterparty-specific and individually insignificant allowances, down from 70% in 2014. During the year, these portfolios increased by $30 billion, or 9%, and totalled $377 billion at year end. Residential mortgages represented 38% of the portfolio in 2015, down from 40% in 2014. Consumer instalment and other personal loans, and credit cards were 29% of total loans net of counterparty-specific and individ- ually insignificant allowances in 2015, down from 30% in 2014. The Bank’s business and government credit exposure was 33% of total loans net of counterparty-specific and individually insignificant allowances, up from 29% in 2014. The largest business and govern- ment sector concentrations in Canada were the real estate and financial sectors, which comprised 5% and 2%, respectively. Real estate was the leading U.S. sector of concentration and represented 4% of net loans, up marginally from 2014. Geographically, the credit portfolio remained concentrated in Canada. In 2015, the percentage of loans held in Canada was 68%, down from 72% in 2014. The largest Canadian exposure was in Ontario, which represented 40% of total loans net of counterparty- specific and individually insignificant allowance for loan losses for 2015, down from 41% in 2014. The balance of the credit portfolio was predominantly in the U.S., which represented 31% of the portfolio, up from 27% in 2014 primarily due to the impact of foreign exchange and volume growth in business and government loans, consumer indirect auto and credit cards. Exposures to debt securities classified as loans, ACI loans, and other geographic regions were relatively small. The largest U.S. expo- sures by state were in New England and New Jersey which represented 7% and 6% of total loans net of counterparty-specific and individually insignificant allowances, respectively, consistent with 2014. During fiscal 2015, West Texas Intermediate crude oil prices fell from approximately US$80 per barrel to US$47 as at October 31 2015. Within the non-retail credit portfolio, TD had $3.8 billion of drawn exposure to oil and gas production and servicing borrowers as at October 31, 2015, representing less than 1% of the Bank’s total loans and acceptances outstanding. The portfolio of oil and gas exposure is broadly diversified and consistent with TD’s North American strategy. For certain borrowers, a borrowing base re-determination is performed on a semi-annual basis, the results of which are used to determine exposure levels and credit terms. Within the retail credit portfolios, TD had $52.5 billion of consumer lending drawn exposure in Alberta as at October 31, 2015, the region most impacted by lower oil prices. The Bank regularly conducts stress testing on its credit portfolios in light of the current market conditions. The Bank’s portfolios continue to perform within expectations given the current level and near term outlook for commodity prices in this sector. T A B L E 2 3 LOANS AND ACCEPTANCES, NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES BY INDUSTRY SECTOR1 (millions of Canadian dollars, except as noted) As at Percentage of total October 31 2015 October 31 2014 October 31 2013 October 31 2015 October 31 2014 October 31 2013 Counterparty- specific and individually insignificant allowances Gross loans Net loans Net loans Net loans $ 185,009 $ 17 $ 184,992 $ 175,112 $ 164,375 32.8% 35.4% 36.3% 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 61,317 19,038 16,075 17,941 299,380 14,862 11,330 26,192 5,411 4,049 10,590 1,463 492 5,853 4,928 2,141 1,252 3,409 1,549 3,734 2,225 2,303 2,427 1,388 4,749 84,155 $ 383,535 14 30 33 108 202 7 3 10 2 1 – 11 – 2 2 61,303 19,008 16,042 17,833 299,178 14,855 11,327 26,182 5,409 4,048 10,590 1,452 492 59,549 16,453 16,073 17,822 285,009 14,592 9,766 24,358 4,586 3,288 7,616 1,641 379 61,561 14,641 15,141 15,173 270,891 13,673 8,151 21,824 3,914 2,325 8,811 1,248 423 5,851 4,926 4,492 4,298 4,469 3,685 20 – 25 – 8 10 3 – 2 2 98 $ 300 2,121 1,252 3,384 1,549 3,726 2,215 2,300 2,427 1,386 4,747 84,057 $ 383,235 1,888 1,146 2,690 1,594 3,471 2,201 1,811 945 1,070 4,258 71,732 $ 356,741 1,594 866 2,187 1,506 2,669 2,118 1,816 1,028 770 2,938 64,191 $ 335,082 10.9 3.4 2.8 3.2 53.1 2.6 2.0 4.6 1.0 0.7 1.9 0.3 0.1 1.0 0.9 0.4 0.2 0.6 0.3 0.7 0.4 0.4 0.4 0.2 0.8 14.9 68.0% 12.0 3.3 3.3 3.6 57.6 3.0 2.0 5.0 0.9 0.7 1.5 0.3 0.1 0.9 0.9 0.4 0.2 0.5 0.3 0.7 0.5 0.4 0.2 0.2 0.9 14.6 72.2% 1 Primarily based on the geographic location of the customer’s address. 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% 41 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 3 LOANS AND ACCEPTANCES, NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES BY INDUSTRY SECTOR (continued) 1 (millions of Canadian dollars, except as noted) As at Percentage of total October 31 2015 October 31 2014 October 31 2013 October 31 2015 October 31 2014 October 31 2013 Counterparty- specific and individually insignificant allowances Gross loans Net loans Net loans Net loans $ 26,922 $ 30 $ 26,892 $ 23,326 $ 20,937 4.8% 4.7% 4.6% 49 7 3 109 198 11 14 25 – 2 4 2 1 1 3 6 2 – – 11 12 12 1 2 2 86 284 – – – 584 207 83 290 $ 874 2.3 4.4 0.1 2.2 13.8 1.0 3.3 4.3 0.1 0.5 1.0 0.4 0.1 1.6 1.7 0.3 0.2 0.3 0.3 1.5 0.7 1.3 0.7 2.0 0.2 17.2 31.0 – 0.4 0.4 99.4 2.4 3.8 0.1 1.5 12.5 0.9 2.8 3.7 0.1 0.5 0.7 0.4 0.2 1.2 1.5 0.3 0.2 0.2 0.3 1.2 0.6 0.9 0.4 1.3 0.3 14.0 26.5 – 0.5 0.5 99.2 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 0.4 0.2 0.6 100.0% 0.5 0.3 0.8 100.0% 0.8 0.5 1.3 100.0% 13,285 24,855 690 12,165 77,887 5,680 18,303 23,983 467 3,025 5,877 2,534 562 9,088 9,716 1,491 1,160 1,485 1,797 8,663 4,207 7,002 4,068 11,115 891 97,131 175,018 5 1,978 1,983 560,236 1,980 1,331 3,311 $ 563,547 2,503 57 2,560 $ 560,987 11,646 18,777 613 7,543 61,905 4,288 14,023 18,311 363 2,529 3,342 2,085 469 6,422 7,371 1,300 1,075 940 1,269 6,403 3,150 4,257 1,985 7,164 908 69,343 131,248 9 2,124 2,133 490,122 2,482 1,616 4,098 $ 494,220 2,172 59 2,231 $ 491,989 10,591 16,319 532 6,887 55,266 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 2,240 2,250 447,498 3,571 2,368 5,939 $ 453,437 2,018 98 2,116 $ 451,321 14.0% 9.0% 8.5% 14.0 9.0 8.5 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 13,334 24,862 693 12,274 78,085 5,691 18,317 24,008 467 3,027 5,881 2,536 563 9,089 9,719 1,497 1,162 1,485 1,797 8,674 4,219 7,014 4,069 11,117 893 97,217 175,302 5 1,978 1,983 560,820 2,187 1,414 3,601 $ 564,421 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 loans2 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 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 Includes all FDIC covered loans and other ACI loans. 42 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 4 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 2015 October 31 2014 October 31 2013 October 31 2015 October 31 2014 October 31 2013 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 Counterparty- specific and individually insignificant allowances Gross loans $ 10,717 52,008 224,706 66,140 29,964 383,535 8,569 12,353 39,053 33,543 27,712 14,346 39,726 175,302 196 1,787 1,983 560,820 3,601 $ 564,421 $ 8 22 205 44 21 300 14 20 91 65 47 24 23 284 – – – 584 290 $ 874 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 Net loans Net loans Net loans $ 10,709 51,986 224,501 66,096 29,943 383,235 8,555 12,333 38,962 33,478 27,665 14,322 39,703 175,018 196 1,787 1,983 560,236 3,311 $ 563,547 2,560 $ 560,987 $ 10,353 50,148 202,696 64,164 29,380 356,741 6,542 9,005 32,373 24,551 24,455 8,712 25,610 131,248 369 1,764 2,133 490,122 4,098 $ 494,220 2,231 $ 491,989 $ 9,694 48,868 188,375 60,367 27,778 335,082 5,314 6,802 29,477 20,253 20,761 8,207 19,352 110,166 752 1,498 2,250 447,498 5,939 $ 453,437 2,116 $ 451,321 2015 7.4% 33.3 (7.0) (19.2) 14.0% 2014 6.5% 19.1 (5.2) (31.0) 9.0% 2013 5.6% 23.0 (15.5) (29.9) 8.5% 1.9% 9.2 39.9 11.7 5.3 68.0 1.5 2.2 7.0 5.9 4.9 2.5 7.0 31.0 – 0.4 0.4 99.4 0.6 100.0% 2.1% 2.1% 10.2 41.0 13.0 5.9 72.2 1.3 1.8 6.5 5.0 4.9 1.8 5.2 26.5 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 0.1 0.4 0.5 99.2 0.8 100.0% 0.2 0.3 0.5 98.7 1.3 100.0% 1 Certain comparative amounts have been restated/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. 2 Primarily based on the geographic location of the customer’s address. 4 The states included in New England are as follows: Connecticut, Maine, Massachusetts, New Hampshire, and Vermont. REAL ESTATE SECURED LENDING Retail real estate secured lending includes mortgages and lines of credit to North American consumers to satisfy financing needs including home purchases and refinancing. 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. In Canada, credit policies 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 approved private mortgage insurers. In the U.S., for residential mortgage originations, mortgage insurance is usually obtained from either government-backed entities or approved private mortgage insurers when the loan-to-value exceeds 80% of the collateral value at origination. 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 vulnerable 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 exam- ined during the exercise to determine whether specific vulnerabilities exist. Based on the Bank’s most recent reviews, potential losses on all real estate secured lending exposures are considered manageable. 43 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 5 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, 2015 Canada Atlantic provinces British Columbia4 Ontario4 Prairies4 Québec Total Canada United States Total Canada Atlantic provinces British Columbia4 Ontario4 Prairies4 Québec Total Canada United States Total $ 4,086 19,364 10.5 53,592 29.0 27,890 15.1 6.7 12,435 2.2% $ 1,675 14,099 34,447 11,477 5,944 117,367 63.5% 67,642 26,413 $ 94,055 951 $ 118,318 0.9% $ 7.6 18.6 6.2 3.2 580 3,173 10,603 4,607 1,816 36.5% 20,779 10 $ 20,789 0.9% $ 5.2 17.4 7.5 3.0 965 7,798 21,411 7,596 2,768 34.0% 40,538 13,439 $ 53,977 12.7 34.8 12.4 4.5 1.6% $ 4,666 22,537 64,195 32,497 14,251 66.0% 138,146 961 $ 139,107 1.9% $ 2,640 21,897 9.1 55,858 26.1 19,073 13.2 8,712 5.8 56.1% 108,180 39,852 $ 148,032 1.1% 8.9 22.7 7.7 3.5 43.9% October 31, 2014 $ 4,110 20,660 56,967 27,658 12,442 2.3% $ 1,398 11,408 26,371 9,067 5,044 11.8 32.5 15.8 7.1 0.8% $ 6.5 15.1 5.2 2.9 649 3,720 12,226 5,267 2,035 1.1% $ 6.2 20.6 8.8 3.4 822 7,278 18,394 6,873 2,304 1.4% $ 12.2 30.9 11.5 3.9 4,759 24,380 69,193 32,925 14,477 2.0% $ 10.4 29.5 14.0 6.2 2,220 18,686 44,765 15,940 7,348 0.9% 8.0 19.1 6.8 3.1 121,837 69.5% 53,288 30.5% 23,897 40.1% 35,671 59.9% 145,734 62.1% 88,959 37.9% 753 $ 122,590 23,034 $ 76,322 9 $ 23,906 11,791 $ 47,462 762 $ 146,496 34,825 $ 123,784 1 Geographic location is based on the address of the property mortgaged. 2 Excludes loans classified as trading as the Bank intends to sell the loans immedi- ately 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 govern- ment-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 the 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 2 6 RESIDENTIAL MORTGAGES BY REMAINING AMORTIZATION1,2,3 Canada United States Total Canada United States Total <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 1.2% 2.6 1.4% 4.4% 2.9 4.3% 7.9% 16.1 8.9% 14.3% 4.1 13.0% 37.5% 12.3 34.3% 31.8% 61.2 35.4% 2.9% 0.6 2.6% –% 100.0% 100.0 0.2 0.1% 100.0% October 31, 2015 1.3% 2.3 1.4% 4.5% 1.9 4.2% 8.2% 18.8 9.4% 12.8% 2.9 11.6% 32.8% 10.4 30.2% 30.9% 63.0 34.7% 9.5% 0.6 8.4% –% 100.0% 100.0 0.1 0.1% 100.0% October 31, 2014 1 Certain comparative amounts have been restated to conform with the presentation adopted in the current period. 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 Percentage based on outstanding balance. 44 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 7 UNINSURED AVERAGE LOAN-TO-VALUE – Newly Originated and Newly Acquired1,2,3 Canada Atlantic provinces British Columbia5 Ontario5 Prairies5 Québec Total Canada United States Total October 31, 2015 October 31, 2014 Residential Home equity mortgages lines of credit4,6 Total Residential mortgages Home equity lines of credit4 Total 73% 68 69 73 72 70 69 70% 68% 62 65 68 70 65 62 65% 71% 66 67 71 71 68 66 68% 73% 68 69 72 71 70 70 70% 62% 59 61 63 62 61 65 62% 71% 65 67 70 70 68 68 68% 1 Geographic location is based on the address of the property mortgaged. 2 Excludes loans classified as trading as the Bank intends to sell the loans 4 Home equity lines of credit loan-to-value includes first position collateral mortgage if applicable. immediately or in the near term, and loans designated at fair value through profit or loss for which no allowance is recorded. 5 The territories are included as follows: Yukon is included in British Columbia; Nunavut is included in Ontario; and the Northwest Territories is included in the Prairies region. 3 Based on house price at origination. 6 Home equity lines of credit fixed rate advantage option is included in loan-to- value calculation. 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 classified as loans, Federal Deposit Insurance Corporation (FDIC) covered loans, and other ACI loans, gross impaired loans increased $513 million, or 19%, compared with the prior year, primarily due to U.S. home equity line of credit new formations and the impact of foreign exchange. Gross impaired loan formations increased year over year by $223 million. In Canada, net impaired loans decreased by $87 million, or 10% in 2015 due to continued credit quality improvement in the retail banking portfolios. Residential mortgages, consumer instalment and other personal loans, and credit cards, generated impaired loans net of counterparty-specific and individually insignificant allowances of $625 million, a decrease of $154 million, or 20%, compared to with the prior year, due to improved portfolio credit quality. Business and government loans generated $121 million in net impaired loans, an increase of $67 million, or 124%, compared with the prior year, primarily due to new formations in the pipeline, oil and gas industry. In the U.S., net impaired loans increased by $503 million, or 36% in 2015. Residential mortgages, consumer instalment and other personal loans, and credit cards, generated net impaired loans of $1,345 million, an increase of $556 million, or 70%, compared with the prior year, due primarily to U.S. home equity line of credit new formations and the impact of foreign exchange. The majority of the increase attributable to U.S. home equity line of credit results from regulatory guidance that requires the borrowers which are due for renewal but do not qualify under current underwriting standards be classified as impaired. Business and government loans generated $569 million in net impaired loans, a decrease of $53 million, or 9%, compared with the prior year due to good credit quality across the portfolio. Business and government impaired loans were concentrated in the real estate sector, as real estate is the largest sector of U.S. business loans. Geographically, 28% of total impaired loans net of counterparty- specific and individually insignificant allowances were generated by Canada and 72% by the U.S. net impaired loans in Canada were concentrated in Ontario, which represented 13% of total net impaired loans, down from 15% in the prior year. U.S. net impaired loans were concentrated in New England and New Jersey, representing 20% and 15% respectively of net impaired loans, consistent with 2014. T A B L E 2 8 CHANGES IN GROSS IMPAIRED LOANS AND ACCEPTANCES (millions of Canadian dollars) Personal, Business and Government Loans1,2 Impaired loans as at beginning of period Classified as impaired during the period Transferred to not impaired during the period Net repayments Disposals of loans Amounts written off Recoveries of loans and advances previously written off Exchange and other movements Impaired loans as at end of year 2015 2014 2013 $ 2,731 4,836 (1,179) (1,257) (8) (2,141) – 262 $ 3,244 $ 2,692 4,613 (1,352) (1,157) (7) (2,178) – 120 $ 2,731 $ 2,518 4,546 (1,431) (1,080) (5) (1,914) – 58 $ 2,692 1 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 8 of the 2015 Consolidated Financial Statements. 2 Excludes FDIC covered loans and other ACI loans. For additional information refer to the “Exposure to Acquired Credit-Impaired Loans” discussion and table in this section of the document and Note 8 of the 2015 Consolidated Financial Statements. 45 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 9 IMPAIRED LOANS NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES BY INDUSTRY SECTOR1,2,3 (millions of Canadian dollars, except as noted) Oct. 31 2015 Oct. 31 2014 Oct. 31 2013 Oct. 31 2012 Oct. 31 Oct. 31 2015 2011 Oct. 31 2014 Oct. 31 2013 Oct. 31 2012 Oct. 31 2011 As at Percentage of total Counterparty- specific and individually insignificant allowances Gross impaired loans Net impaired loans Net impaired loans Net impaired loans Net impaired loans Net impaired loans 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 $ 395 $ 17 $ 378 $ 427 $ 434 $ 465 $ 596 14.2% 19.0% 19.3% 22.1% 28.9% 180 47 52 153 827 14 30 33 108 202 166 17 19 45 625 249 17 20 66 779 301 16 21 43 815 306 14 30 95 910 180 16 26 18 836 6.2 0.7 0.7 1.7 23.5 11.1 0.8 0.9 2.9 34.7 13.4 0.7 0.9 2.0 36.3 14.6 0.7 1.4 4.5 43.3 8.6 0.8 1.3 0.9 40.5 13 10 23 5 2 1 12 – 3 5 22 6 93 – 12 19 5 2 4 5 7 3 10 2 1 – 11 – 2 2 20 – 25 – 8 10 3 – 2 2 6 7 13 3 1 1 1 – 1 3 2 6 68 – 4 9 2 2 2 3 10 4 14 5 1 1 – 2 3 5 1 1 1 – 4 7 2 1 1 5 13 5 18 5 – 1 3 1 4 2 6 9 20 – 3 18 7 – 1 2 15 1 16 4 2 21 2 4 2 17 6 1 1 – 4 22 8 19 – 3 13 6 19 5 1 1 1 – 3 1 7 3 2 – 3 21 14 1 1 5 0.2 0.3 0.5 0.1 – – – – – 0.1 0.1 0.2 2.6 – 0.2 0.3 0.1 0.1 0.1 0.1 0.4 0.2 0.6 0.3 – – – 0.1 0.1 0.3 – – – – 0.2 0.4 0.1 – – 0.3 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 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 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 0.2 219 $ 1,046 98 $ 300 121 $ 746 54 $ 833 100 132 $ 915 $ 1,042 88 $ 924 4.5 28.0% 2.4 37.1% 4.5 40.8% 6.3 49.6% 4.3 44.8% 1 Primarily based on the geographic location of the customer’s address. 2 Excludes FDIC covered loans and other ACI loans. For additional information refer to the “Exposure to Acquired Credit-Impaired Loans” discussion and table in this section of the document and Note 8 of the 2015 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 8 of the 2015 Consolidated Financial Statements. 46 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 2 9 IMPAIRED LOANS NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES BY INDUSTRY SECTOR (continued) 1,2,3 (millions of Canadian dollars, except as noted) Oct. 31 2015 Oct. 31 2014 Oct. 31 2013 Oct. 31 2012 Oct. 31 Oct. 31 2015 2011 Oct. 31 2014 Oct. 31 2013 Oct. 31 2012 Oct. 31 2011 As at Percentage of total Counterparty- specific and individually insignificant allowances Gross impaired loans Net impaired loans Net impaired loans Net impaired loans Net impaired loans Net impaired loans $ 391 $ 30 $ 361 $ 303 $ 250 $ 187 $ 161 13.6% 13.5% 11.1% 8.9% 7.8% 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 Net impaired loans as a % of common equity 79 147 226 1 13 30 9 1 9 41 36 15 6 – 85 77 52 14 33 7 655 2,198 – – $ 3,244 829 162 8 153 1,543 49 7 3 109 198 780 155 5 44 1,345 325 128 4 29 789 79 154 233 1 14 25 9 1 16 49 26 9 – – 84 80 39 204 76 1 98 629 98 205 303 1 12 8 10 1 19 23 46 18 – – 68 99 28 179 24 2 3 395 133 191 324 2 15 6 7 1 7 18 40 26 4 – 41 70 46 73 6 – 3 243 250 282 532 4 20 16 6 1 7 50 34 10 – 6 39 90 22 11 14 25 – 2 4 2 1 1 3 6 2 – – 11 12 12 68 133 201 1 11 26 7 – 8 38 30 13 6 – 74 65 40 1 2 2 86 284 13 31 5 569 1,914 16 15 5 622 1,411 12 39 12 699 1,328 10 32 14 663 1,058 6 46 7 896 1,139 – – – – $ 584 $ 2,660 $ 2,244 $ 2,243 $ 2,100 $ 2,063 – – – – – – – – 4.24% 4.28% 4.83% 4.86% 5.27% 29.3 5.8 0.2 1.7 50.6 2.6 5.0 7.6 – 0.4 1.0 0.3 – 0.3 1.4 1.1 0.5 0.2 – 2.8 2.4 1.5 0.5 1.2 0.2 21.4 72.0 – – 14.5 5.7 0.2 1.3 35.2 3.5 6.9 10.4 – 0.6 1.1 0.4 – 0.7 2.2 1.2 0.4 – – 3.7 3.6 1.7 0.7 0.7 0.3 27.7 62.9 – – 9.1 3.4 0.1 4.3 28.0 4.4 9.1 13.5 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 – – 8.5 1.2 0.1 0.1 18.8 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 – – 3.6 0.3 – 0.1 11.8 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 – – 100.0% 100.0% 100.0% 100.0% 100.0% 1 Primarily based on the geographic location of the customer’s address. 2 Excludes FDIC covered loans and other ACI loans. For additional information refer to the “Exposure to Acquired Credit-Impaired Loans” discussion and table in this section of the document and Note 8 of the 2015 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 8 of the 2015 Consolidated Financial Statements. 47 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 0 IMPAIRED LOANS NET OF COUNTERPARTY-SPECIFIC AND INDIVIDUALLY INSIGNIFICANT ALLOWANCES FOR LOAN LOSSES BY GEOGRAPHY1,2,3,4 (millions of Canadian dollars, except as noted) As at Percentage of total October 31 2015 October 31 2014 October 31 2013 October 31 2015 October 31 2014 October 31 2013 Canada Atlantic provinces British Columbia5 Ontario5 Prairies5 Québec Total Canada United States Carolinas (North and South) Florida New England6 New Jersey New York Pennsylvania Other Total United States Total Counterparty- specific and individually insignificant allowances Gross impaired loans Net impaired loans Net impaired loans $ 40 126 549 185 146 1,046 126 184 624 460 370 196 238 2,198 $ 3,244 $ 8 22 205 44 21 300 14 20 91 65 47 24 23 284 $ 584 $ 32 104 344 141 125 746 112 164 533 395 323 172 215 1,914 $ 2,660 $ 36 182 346 144 125 833 68 96 426 328 205 147 141 1,411 $ 2,244 Net impaired loans $ 34 210 404 171 96 915 49 75 430 301 184 140 149 1,328 $ 2,243 1.2% 3.9 12.9 5.3 4.7 28.0 4.2 6.2 20.0 14.9 12.1 6.5 8.1 72.0 100.0% 1.6% 8.1 15.4 6.4 5.6 37.1 3.0 4.3 19.0 14.6 9.1 6.6 6.3 62.9 100.0% 1.5% 9.4 18.0 7.6 4.3 40.8 2.2 3.4 19.2 13.4 8.2 6.2 6.6 59.2 100.0% Net impaired loans as a % of net loans7 0.48% 0.46% 0.50% 1 Certain comparative amounts have been restated to conform with the presentation adopted in the current period. 2 Primarily based on the geographic location of the customer’s address. 3 Excludes FDIC covered loans and other ACI loans. For additional information refer to the “Exposure to Acquired Credit-Impaired Loans” discussion and table in this section of the document and Note 8 of the 2015 Consolidated Financial Statements. 4 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 8 of the 2015 Consolidated Financial Statements. ALLOWANCE FOR CREDIT LOSSES Total allowance for credit losses consists of counterparty-specific and collectively assessed allowances. The allowance is increased by the PCL, and decreased by write-offs net of recoveries and disposals. 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 individually significant 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. During 2015, counterparty-specific allowances increased by $14 million, or 4%, resulting in a total counterparty-specific allowance of $369 million. Excluding debt securities classified as loans, FDIC covered loans and other ACI loans, counterparty-specific allowances increased by $22 million, or 16% from the prior year, primarily due to the impact of foreign exchange. 5 The territories are included as follows: Yukon is included in British Columbia; Nunavut is included in Ontario; and the Northwest Territories is included in the Prairies region. 6 The states included in New England are as follows: Connecticut, Maine, Massachusetts, New Hampshire, and Vermont. 7 Includes customers’ liability under acceptances. Collectively assessed allowance for individually insignificant impaired loans Individually insignificant loans, such as the Bank’s personal and small business banking loans and credit cards, are collectively assessed for impairment. Allowances are calculated using a formula that incorpo- rates recent loss experience, historical default rates, and the type of collateral pledged. During 2015, the collectively assessed allowance for individually insignificant impaired loans increased by $63 million, or 14%, resulting in a total of $505 million. Excluding FDIC covered loans and other ACI loans, the collectively assessed allowance for individually insignificant impaired loans increased by $75 million, or 21% from the prior year, primarily due to the impact of foreign exchange. 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 estimates 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 exposures 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 allow- ance 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 EAD. EAD is the total amount the Bank expects to be exposed to at the time of default. 48 TD BANK GROUP ANNUAL REPORT 2015 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 credit risk 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 function of the current usage and historical exposure experience at default. As at October 31, 2015, the collectively assessed allowance for incurred but not identified credit losses was $2,873 million, up from $2,505 million as at October 31, 2014. Excluding debt securities classi- fied as loans, the collectively assessed allowance for incurred but not identified credit losses increased by $370 million, or 15% from the prior year, primarily due to the impact of foreign exchange and volume growth in the U.S. retail portfolio. 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. During the year ended October 31, 2015, certain refinements were made to the methodology, the cumulative effect of which was not material. Allowance for credit losses are further described in Note 8 of the 2015 Consolidated Financial Statements. PROVISION FOR CREDIT LOSSES The PCL is the amount charged to income to bring the total allowance for credit losses, including both counterparty-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 PCL of $1,683 million in 2015, compared with a total provision of $1,557 million in 2014. This amount comprised $1,537 million of counterparty-specific and individually insignificant provisions and $146 million in collectively assessed incurred but not identified provisions. The total PCL as a percentage of net average loans and acceptances decreased to 0.32% from 0.33%. In Canada, residential mortgages, consumer instalment and other personal loans, and credit cards, required counterparty-specific and individually insignificant provisions of $828 million, an increase of $39 million, or 5%, compared to 2014. Business and government loans required counterparty-specific and individually insignificant provisions of $62 million, a decrease of $22 million, or 26%, compared to 2014 due to improved credit performance in the professional and other service sector. Business and government counterparty-specific and individually insignificant provisions were distributed across most 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 $630 million, an increase of $68 million, or 12%, compared to 2014, primarily due to increases in provisions for the home equity line of credit and credit card portfolios. Business and government loans required counterparty-specific and individually insignificant provisions of $80 million, an increase of $60 million, compared to 2014 primarily due to increases in the real estate and financial sectors and the impact of foreign exchange. Geographically, 58% of counterparty-specific and individually insignificant provisions were attributed to Canada and 46% to the U.S. Canadian counterparty-specific and individually insignificant provisions were concentrated in Ontario, which represented 37% of total counterparty-specific and individually insignificant provisions, down from 41% in 2014. U.S. counterparty-specific and individually insignificant provisions were concentrated in New England and New Jersey, representing 13% and 9%, respectively, of total counterparty- specific and individually insignificant provisions, up from 10% and 7%, respectively, in the prior year. The following table provides a summary of provisions charged to the Consolidated Statement of Income. T A B L E 3 1 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 Retail and Wholesale Banking U.S. Retail Other Total provision for credit losses – incurred but not identified Provision for credit losses 2015 2014 2013 $ 76 2,062 (601) 1,537 44 102 – 146 $ 1,683 $ 168 1,849 (533) 1,484 8 65 – 73 $ 1,557 $ 231 1,644 (394) 1,481 (53) 203 – 150 $ 1,631 49 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 2 PROVISION FOR CREDIT LOSSES BY INDUSTRY SECTOR1 (millions of Canadian dollars, except as noted) For the years ended Percentage of total October 31 2015 October 31 2014 October 31 2013 October 31 2015 October 31 2014 October 31 2013 Provision for credit losses – counterparty-specific and individually insignificant 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 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 Total excluding other loans Other loans Debt securities classified as loans Acquired credit-impaired loans2 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 1 Primarily based on the geographic location of the customer’s address. 2 Includes all FDIC covered loans and other ACI loans. 50 $ 25 $ 15 $ 16 1.6% 1.0% 1.1% 7 153 148 495 828 (3) 3 – 2 2 – 11 – – – 21 (1) 21 (18) 9 – – 4 11 62 890 24 69 123 77 337 630 – 15 15 – 4 1 4 – 2 2 9 – – – 8 11 18 2 – 4 80 710 1,600 (27) (36) (63) 8 137 167 462 789 (1) 3 2 1 2 1 – – – 2 9 2 (2) 31 19 9 1 6 1 84 873 8 38 148 59 309 562 (7) (4) (11) – 2 (13) (1) – (1) 8 6 – – – 7 3 9 – (2) 13 20 582 1,455 31 (2) 29 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 0.4 10.0 9.6 32.2 53.8 (0.2) 0.2 – 0.1 0.1 – 0.7 – – – 1.4 (0.1) 1.4 (1.1) 0.6 – – 0.3 0.7 4.1 57.9 1.6 4.5 8.0 5.0 21.9 41.0 – 1.0 1.0 – 0.3 0.1 0.3 – 0.1 0.1 0.6 – – – 0.5 0.7 1.1 0.1 – 0.3 5.2 46.2 104.1 (1.8) (2.3) (4.1) 0.6 9.2 11.3 31.1 53.2 (0.1) 0.2 0.1 0.1 0.1 0.1 – – – 0.1 0.6 0.1 (0.1) 2.1 1.2 0.6 0.1 0.4 0.1 5.6 58.8 0.6 2.5 10.0 4.0 20.8 37.9 (0.5) (0.3) (0.8) – 0.1 (0.9) (0.1) – (0.1) 0.6 0.4 – – – 0.5 0.2 0.6 – (0.1) 0.9 1.3 39.2 98.0 2.1 (0.1) 2.0 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 $ 1,537 $ 1,484 $ 1,481 100.0% 100.0% 100.0% 157 (11) 146 $ 1,683 120 (47) 73 $ 1,557 195 (45) 150 $ 1,631 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 3 PROVISION FOR CREDIT LOSSES BY GEOGRAPHY1,2 (millions of Canadian dollars, except as noted) For the years ended Percentage of total October 31 2015 October 31 2014 October 31 2013 October 31 2015 October 31 2014 October 31 2013 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 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 $ 38 79 567 128 78 890 33 51 194 134 120 50 128 710 $ 34 74 602 95 68 873 36 43 147 98 89 42 127 582 – – 1,600 (63) 1,537 146 $ 1,683 – – 1,455 29 1,484 73 $ 1,557 $ 32 86 651 98 72 939 17 28 120 74 61 22 158 480 – – 1,419 62 1,481 150 $ 1,631 2.3% 4.7 33.7 7.6 4.6 52.9 2.0 3.0 11.5 8.0 7.1 3.0 7.6 42.2 – – 95.1 (3.8) 91.3 8.7 100.0% 2.1% 4.7 38.7 6.1 4.4 56.0 2.3 2.8 9.4 6.3 5.7 2.7 8.2 37.4 – – 93.4 1.9 95.3 4.7 100.0% 2.0% 5.3 39.9 6.0 4.4 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% Provision for credit losses as a % of average net loans and acceptances5 October 31 2015 October 31 2014 October 31 2013 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% 0.72 0.08 0.24 0.09 1.38 0.10 0.46 – 0.31 (1.69) 0.29 0.03 0.01% 0.72 0.13 0.25 0.04 1.54 0.03 0.49 – 0.31 0.59 0.32 0.02 0.01% 0.80 0.12 0.29 0.06 1.07 0.28 0.48 – 0.33 0.85 0.34 0.03 net loans and acceptances 0.32% 0.33% 0.38% 1 Certain comparative amounts have been restated to conform with the presentation 4 The states included in New England are as follows: Connecticut, Maine, adopted in the current period. 2 Primarily based on the geographic location of the customer’s address. 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. Massachusetts, New Hampshire, and Vermont. 5 Includes customers’ liability under acceptances. NON-PRIME LOANS As at October 31, 2015, the Bank had approximately $2.5 billion (October 31, 2014 – $2.4 billion), gross exposure to non-prime loans, which primarily consist 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 3.84% on an annual basis (October 31, 2014 – 3.70%). The portfolio continues to perform as expected. These loans are recorded at amortized cost. 51 TD BANK GROUP ANNUAL REPORT 2015 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 4 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 Belgium Finland France Germany Netherlands Sweden Switzerland United Kingdom Other6 Total Rest of Europe Total Europe GIIPS Greece Italy Ireland Portugal Spain Total GIIPS Rest of Europe France Germany Netherlands Sweden Switzerland United Kingdom Other6 Total Rest of Europe Total Europe $ – $ – – – – – – $ 203 – – 63 266 – $ 4 – – 47 51 – $ 207 – – 110 317 – $ – – – – – – $ – – – – – – $ 3 375 – 37 415 – 3 375 – 37 415 $ – $ 1 – – 7 8 – $ 25 – – – 25 – $ 2 – – – 2 – $ 28 – – 7 35 – 238 375 – 154 767 October 31, 2015 131 4,794 87 7 1,892 469 1,999 1,451 1,194 457 89 – 729 1,103 5,496 2,161 532 118 10,560 7,311 12,149 $ 10,560 $ 4,380 $ 1,445 $ 16,385 $ 2,178 $ 2,660 $ 7,726 $ 12,564 4,834 85 674 2,645 1,269 197 1,500 4,723 141 1,394 16,068 1 64 1,178 738 223 62 707 3,982 356 – 65 – 1,094 295 30 181 2,434 15 4,114 98 – 97 507 641 – 22 750 63 2,178 32 23 617 754 330 27 – 764 113 2,660 40 13 205 100 517 167 216 128 8 6 – 29 88 14 28 11 114 9 – – 176 127 464 441 211 4,002 137 6 – 4,971 952 952 1,124 3,544 3,339 6,110 9,657 14,301 9,442 4,667 4,189 7,130 927 458 1,213 222 – 2,451 4,664 14,883 548 2,054 1,381 1,235 299 20,163 5,558 26,020 54,237 $ 307 $ 20,188 $ 5,560 $ 26,055 $ 55,004 $ – $ – – – 35 35 – $ 232 – – 6 238 – $ 5 – – 65 70 – $ 237 – – 106 343 – $ – 14 – – 14 – $ – – – – – – $ 3 417 – 32 452 – 3 431 – 32 466 $ – $ 9 – – 11 20 – $ 12 – – 3 15 – $ 9 – – 1 10 – $ 30 – – 15 45 – 270 431 – 153 854 October 31, 2014 481 954 416 – 854 1,568 107 4,380 1,275 1,473 813 60 630 4,435 712 9,398 $ 4,415 $ 2,882 $ 1,268 $ 8,565 $ 1,577 $ 1,545 $ 6,742 $ 9,864 974 480 224 30 611 3,641 330 6,290 88 159 427 101 198 156 69 1,198 40 474 145 76 – 1,772 137 2,644 133 320 362 – 19 567 162 1,563 168 673 227 30 – 227 220 1,545 609 1,587 988 177 1,052 3,496 313 8,222 2,003 6,451 3,574 1,164 142 93 220 36 4 68 197 33 118 137 606 539 74 4,241 75 3,887 1,792 6,094 9,511 5,375 2,932 621 1,401 1,824 – 5,142 13,073 704 2,867 1,842 1,734 5,790 20,318 37,938 651 13,877 $ 671 $ 13,892 $ 5,800 $ 20,363 $ 38,792 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, 2015, or October 31, 2014. 4 The fair values of the GIIPS exposures in Level 3 in the Trading and Investment Portfolio were not significant as at October 31, 2015, and October 31, 2014. 5 The reported exposures do not include $0.4 billion of protection the Bank 2 Exposures are calculated on a fair value basis and are net of collateral. Total market value of pledged collateral is $5.6 billion for GIIPS (October 31, 2014 – $5.6 billion) and $41.9 billion for the rest of Europe (October 31, 2014 – $34.4 billion). Derivatives are presented as net exposures where there is an International Swaps and Derivatives Association (ISDA) master netting agreement. 3 Trading Portfolio exposures are net of eligible short positions. Deposits of $1.5 billion (October 31, 2014 – $1.3 billion) are included in the Trading and Investment Portfolio. purchased through CDS (October 31, 2014 – $0.2 billion). 6 Other European exposure is distributed across 10 countries (October 31, 2014 – 12 countries), each of which has a net exposure including loans and commitments, derivatives, repos and securities lending, and trading and investment portfolio below $1 billion as at October 31, 2015, and October 31, 2014. 52 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 5 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 Belgium Finland France Germany Netherlands Sweden Switzerland United Kingdom Other3 Total Rest of Europe Total Europe October 31, 2015 Loans and Commitments Indirect2 Total As at October 31, 2014 Direct1 Loans and Commitments Indirect2 Total $ – 3 – – 47 50 4,834 24 495 915 525 4 838 2,142 6 9,783 $ 9,833 $ – 207 – – 110 317 4,834 85 674 2,645 1,269 197 1,500 4,723 141 16,068 $ 16,385 $ – 233 – – 18 251 – 82 190 672 506 173 353 1,872 76 3,924 $ 4,175 $ – 4 – – 88 92 135 18 419 915 482 4 699 1,624 2 4,298 $ 4,390 $ – 237 – – 106 343 135 100 609 1,587 988 177 1,052 3,496 78 8,222 $ 8,565 Direct1 $ – 204 – – 63 267 – 61 179 1,730 744 193 662 2,581 135 6,285 $ 6,552 1 Includes interest-bearing deposits with banks, funded loans, and banker’s acceptances. 2 Includes undrawn commitments and letters of credit. 3 Other European exposure is distributed across 10 countries (October 31, 2014 – 12 countries), each of which has a net exposure including loans and commitments, derivatives, repos and securities lending, and trading and investment portfolio below $1 billion as at October 31, 2015, and October 31, 2014. EXPOSURE TO ACQUIRED CREDIT-IMPAIRED LOANS ACI loans are generally loans with evidence of incurred credit loss where 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 deterioration as of the acquisition date may include statistics such as past due status and credit scores. ACI loans are initially recorded at fair value and, as a result, no allowance for credit losses is recorded on the date of acquisition. 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, Target, Aeroplan, and Nordstrom. The following table presents the unpaid prin- cipal 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. Of the Bank’s European exposure, approximately 99% (October 31, 2014 – 98%) is to counterparties in countries rated AA or better 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 collateral while the repurchase transactions are backed largely by government securities rated AA- or better by either Moody’s or S&P, and cash. Additionally, the Bank has 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 $8.8 billion (October 31, 2014 – $5.2 billion) of direct expo- sure to supranational entities with European sponsorship and indirect exposure including $1.6 billion (October 31, 2014 – $1.9 billion) of European collateral from non-European counterparties related to repurchase and securities lending transactions that are margined daily. 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. 53 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 3 6 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 $ 636 853 40 $ 1,529 $ 699 1,090 36 $ 1,825 Carrying value $ 601 813 – $ 1,414 $ 660 1,046 7 $ 1,713 Counterparty- specific allowance Allowance for individually insignificant impaired loans $ 1 5 – $ 6 $ 2 6 – $ 8 $ 45 32 – $ 77 $ 49 40 – $ 89 As at Carrying Percentage of value net of unpaid principal balance allowances October 31, 2015 $ 555 776 – $ 1,331 87.3% 91.0 – 87.1% October 31, 2014 $ 609 1,000 7 $ 1,616 87.1% 91.7 19.4 88.5% 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, Target, Aeroplan, and Nordstrom. During the year ended October 31, 2015, the Bank recorded a recov- ery of $36 million in PCL on ACI loans (2014 – recovery of credit losses of $2 million, 2013 – PCL of $49 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 3 7 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. and Canada Total ACI loans October 31, 2015 October 31, 2014 Unpaid principal balance1 Unpaid principal balance1 As at $ 1,314 42 173 $ 1,529 $ 933 443 110 43 $ 1,529 85.9% 2.8 11.3 100.0% 61.0% 29.0 7.2 2.8 100.0% $ 1,540 60 225 $ 1,825 $ 1,101 535 143 46 $ 1,825 84.4% 3.3 12.3 100.0% 60.3% 29.3 7.9 2.5 100.0% 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, including the Bank’s 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 characteristics to collectively assess if impairment exists at the portfolio level. The allowance for losses that are incurred but not identified as at October 31, 2015, was US$43 million (October 31, 2014 – US$52 million). During the year ended October 31, 2015, the Bank recorded a net release of allowances for credit losses of US$29 million in PCL (net release of allowance for credit losses of US$14 million in 2014 and of US$30 million in 2013). 54 TD BANK GROUP ANNUAL REPORT 2015 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, 2015, and October 31, 2014. As at October 31, 2015, the balance of the remain- ing acquisition-related incurred loss was US$158 million (October 31, 2014 – US$187 million). This amount is reflected in the following table as a component of the discount from par to carrying value. T A B L E 3 8 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 $ 1,431 $ 1,268 $ 202 $ 1,066 74.5% October 31, 2015 $ 1,748 $ 1,523 $ 241 $ 1,282 73.3% October 31, 2014 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, 4% of the non-agency CMO portfolio is rated AAA for regulatory capital reporting as at October 31, 2015 (October 31, 2014 – 13%). 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 3 9 NON-AGENCY ALT-A AND PRIME JUMBO CMO PORTFOLIO BY VINTAGE YEAR (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 Prime Jumbo Amortized cost Fair value Amortized cost As at Total Fair value October 31, 2015 Amortized cost $ 36 62 256 201 274 Alt-A Fair value $ 41 69 297 220 314 $ 41 19 18 90 112 $ 44 21 20 101 120 $ 829 $ 941 $ 280 $ 306 $ 58 79 300 226 310 $ 65 89 361 257 371 $ 64 24 23 113 137 $ 68 27 26 126 152 $ 973 $ 1,143 $ 361 $ 399 $ 85 90 317 321 434 $ 1,247 $ 77 81 274 291 386 $ 1,109 43 $ 1,066 October 31, 2014 $ 133 116 387 383 523 $ 1,542 $ 122 103 323 339 447 $ 1,334 52 $ 1,282 55 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS GROUP FINANCIAL CONDITION Capital Position T A B L E 4 0 CAPITAL STRUCTURE AND RATIOS – BASEL III1 (millions of Canadian dollars, except as noted) Common Equity Tier 1 Capital 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 Capital Common Equity Tier 1 Capital Additional Tier 1 Capital instruments Directly issued qualifying Additional Tier 1 instruments plus stock surplus 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 Investment in own Additional Tier 1 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 Additional Tier 1 Capital Additional Tier 1 Capital Tier 1 Capital Tier 2 Capital instruments and provisions Directly issued qualifying Tier 2 instruments plus related stock surplus 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 Significant investments in the capital of banking, financial, and insurance entities that are outside consolidation, net of eligible short positions Total regulatory adjustments to Tier 2 Capital Tier 2 Capital Total Capital Risk-weighted assets2 Common Equity Tier 1 Capital Tier 1 Capital Total Capital Capital Ratios and Multiples Common Equity Tier 1 Capital (as percentage of CET1 Capital risk-weighted assets) Tier 1 Capital (as percentage of Tier 1 Capital risk-weighted assets) Total Capital (as percentage of Total Capital risk-weighted assets) Leverage ratio3 Asset-to-capital multiple 1 Capital position has been calculated using the “all-in” basis. 2 Effective the third quarter of 2014, each capital ratio has its own RWA measure due to the OSFI prescribed scalar for inclusion of the CVA. For the third and fourth quarters of 2014, the scalars for inclusion of CVA for CET1, Tier 1, and Total Capital RWA are 57%, 65%, and 77% respectively. For fiscal 2015, the scalars are 64%, 71%, and 77%, respectively. 56 2015 2014 $ 20,457 32,053 10,209 62,719 $ 19,961 27,585 4,936 52,482 (19,143) (2,192) (367) (1,498) (140) (188) (104) (4) (1,125) (24,761) 37,958 2,202 3,211 399 5,812 (16,709) (2,355) (485) (711) (91) (98) (15) (7) (1,046) (21,517) 30,965 1,001 3,941 444 5,386 (2) – (352) (354) 5,458 43,416 2,489 5,927 207 1,731 10,354 (170) (170) 10,184 53,600 (352) (352) 5,034 35,999 – 6,773 237 1,416 8,426 (170) (170) 8,256 44,255 $ 382,360 383,301 384,108 $ 328,393 329,268 330,581 9.9% 11.3 14.0 3.7 n/a4 9.4% 10.9 13.4 n/a4 19.1 3 The leverage ratio is calculated as Tier 1 Capital divided by leverage exposure, as defined. 4 Not applicable. TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 (RAS); – 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, consistent with preserving the appropriate mix of capital elements to meet targeted capitalization levels. • To ensure ready access to sources of appropriate capital, at reasonable cost, in order to: – insulate the Bank from unexpected events; and – support and facilitate business growth and/or acquisitions consistent 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 overall objective of providing a satisfactory return on shareholders’ equity. 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 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 (the “Board”) oversees capital adequacy risk 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. 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 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 of this document. Within the Bank’s measurement frame- work, its objective 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 its 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 “Economic Capital and Risk-Weighted Assets by Segment” section for a business segment breakdown of the Bank’s economic capital by Pillar I and Pillar II risks. REGULATORY CAPITAL Basel III Capital Framework Capital requirements of the Basel Committee on Banking and Supervision (BCBS) are commonly referred to as Basel III. Under Basel III, Total Capital consists of three components, namely CET1, Additional Tier 1, and Tier 2 Capital. The sum of the first two compo- nents is defined as Tier 1 Capital. CET1 Capital is mainly comprised of common shares, retained earnings, and accumulated other compre- hensive income. CET1 capital is the highest quality capital and the predominant form of Tier 1 Capital. It also includes regulatory adjust- ments and deductions for items such as goodwill, intangible assets, and 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. Additional Tier 1 Capital primarily consists of preferred shares. Tier 2 Capital is mainly comprised of subordinated debt and certain loan loss allowances. Regulatory capital ratios are calculated by dividing CET1, Tier 1, and Total Capital by their respective RWAs.15 OSFI’s Capital Requirements under Basel III The Office of the Superintendent of Financial Institutions Canada’s (OSFI) Capital Adequacy Requirements (CAR) guideline details how the Basel III capital rules apply to Canadian banks. Effective January 1, 2014, the Credit Valuation Adjustment (CVA) capital charge is to be phased in over a five year period based on a scalar approach whereby 57% of the CVA capital charge was applied in 2014 for the CET1 calculation. This percentage increased to 64% for 2015 and 2016, and increases to 72% in 2017, 80% in 2018, and 100% in 2019. A similar set of scalar phase-in percentages would also apply for the Tier 1 and Total Capital ratio calculations. Effective January 1, 2013, all newly issued non-common Tier 1 and Tier 2 capital instruments must include non-viability contingent capital (NVCC) provisions to qualify as regulatory capital. NVCC provisions require the conversion of non-common capital instruments into a variable number of common shares of the Bank if OSFI determines that the Bank is, or is about to become, non-viable and that after conversion of the non-common capital instruments, the viability of the Bank is expected to be restored, or if the Bank has accepted or agreed to accept a capital injection or equivalent support from a federal or provincial government without which the Bank would have been determined by OSFI to be non-viable. Existing non-common Tier 1 and Tier 2 capital instruments which do not include NVCC provisions are non qualifying capital instruments and are subject to a phase-out period which began in 2013 and ends in 2022. 15 Effective the third quarter of 2014, each capital ratio has its own RWA measure due to the OSFI-prescribed scalar for inclusion of the CVA. Effective the third quarter of 2014, the scalars for inclusion of CVA for CET1, Tier 1, and Total Capital RWA were 57%, 65%, and 77%, respectively. For fiscal 2015, the scalars are 64%, 71%, and 77%, respectively. 57 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISThe CAR guideline contains two methodologies for capital ratio calculation: (1) the “transitional” method; and (2) the “all-in” method. Under the “transitional” method, changes in capital treatment for certain items, as well as minimum capital ratio requirements, are being 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%, and 8%, respectively. OSFI expects Canadian banks to include an additional capital conservation buffer of 2.5%, effectively raising the CET1 mini- mum requirement to 7%. Including 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%. OSFI’s Regulatory Target Ratios under Basel III on an “All-In” Basis At the discretion of OSFI, a countercyclical common equity capital buffer (CCB) within a range of 0% to 2.5% could be imposed. No CCB is currently in effect. In July 2013, the BCBS published the updated final rules on global systemically important banks (G-SIB). None of the Canadian banks have been designated as a G-SIB. In March 2013, OSFI designated the six major Canadian banks as domestic systemically important banks (D-SIB), 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%. Basel III Capital and Leverage Ratios Common Equity Tier 1 Capital ratio Tier 1 Capital ratio Total Capital ratio Leverage ratio OSFI Regulatory Targets Capital BCBS Conservation without D-SIB surcharge buffer minimum Effective date surcharge16 D-SIB 4.5% 6.0 8.0 3.0 2.5% 2.5 2.5 n/a 7.0% January 1, 2013 January 1, 2014 8.5 January 1, 2014 10.5 January 1, 2015 3.0 1.0% 1.0 1.0 n/a OSFI Regulatory Targets with D-SIB surcharge16 8.0% 9.5 11.5 3.0 Basel III introduced a non-risk sensitive leverage ratio to act as a supple- mentary measure to the risk-based capital requirements. The objective of the leverage ratio is to constrain the build-up of excessive leverage in the banking sector. The leverage ratio replaced OSFI’s assets to capital multiple (ACM) measure effective January 1, 2015. The lever- age ratio is calculated as per OSFI’s Leverage Requirements guideline. The key components in the calculation of the ratio include, but are not limited to, Tier 1 Capital, on balance sheet assets with adjustments made to derivative and securities financing transaction exposures, and credit equivalent amounts of off balance sheet exposures. OSFI required Canadian banks to meet the ACM requirement until October 31, 2014, when it was replaced by the Basel III leverage ratio. The ACM is calculated on a Basel III “transitional basis”, by dividing total assets, including specified off-balance sheet items, by Total Capital. 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 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 U.S. Retail Bank. 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 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. As at October 31, 2015, the Bank’s CET1, Tier 1, and Total Capital ratios were 9.9%, 11.3%, and 14.0%, respectively. During the year, the Bank generated approximately $4.1 billion of CET1 Capital through organic growth (net earnings less dividends) sufficient to fund acquisitions, support business growth and improve the Bank’s capital position largely without issuing additional common share capital. The CVA capital charge represents approximately 35 bps, of which 64% (or 22 bps) is included in the 2015 CET1 Capital ratio, per OSFI’s determined scalar phase-in. As at October 31, 2015, CET1, Tier 1, and Total Capital RWA include 64%, 71%, and 77%, of the CVA charge, respectively. Common Equity Tier 1 Capital CET1 Capital was $38 billion as at October 31, 2015. Strong earnings growth contributed the majority of CET1 Capital growth in the year. Capital management funding activities during the year included the common share issuance of $483 million under the dividend reinvest- ment plan and from stock option exercises. 16 The D-SIB surcharge will be applicable to risk-based capital requirements effective January 1, 2016. 58 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS Tier 1 and Tier 2 Capital Tier 1 Capital was $43 billion as at October 31, 2015, consisting of CET1 Capital and Additional Tier 1 Capital of $38 billion and $5 billion, respectively. Tier 1 Capital management activities during the year consisted of the issuance of $500 million Non-cumulative 5-Year Rate Reset Preferred Shares, Series 5, $350 million Non-cumulative 5-Year Rate Reset Preferred Shares, Series 7, $200 million Non-cumulative 5-Year Rate Reset Preferred Shares Series 9, and $150 million Non-cumulative Fixed Rate Preferred Shares, Series 11, all of which included NVCC Provisions to ensure loss absorbency at the point of non-viability; and the redemption of Class A First Preferred Shares, Series P, Series Q and Series R, totalling $716 million. Tier 2 Capital was $10 billion as at October 31, 2015. Tier 2 Capital management activities during the year consisted of the issuance of $1.5 billion 2.692% subordinated debentures due June 24, 2025, and $1 billion 2.982% subordinated debentures due September 30, 2025, both of which included NVCC Provisions to ensure loss absorbency at the point of non-viability, and the redemption of $875 million 5.48% subordinated debentures due April 2, 2020, and $800 million 4.97% subordinated debentures due October 30, 2104. On September 15, 2015, the Bank announced its intention to redeem $1 billion 3.367% subordinated debentures due November 2, 2020, on November 2, 2015. 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 capital modeling and stress testing practices which help inform the Bank’s overall CAR. The ICAAP is led by Risk Management and is supported by numerous functional areas who together help assess the Bank’s internal capital adequacy. This assessment ultimately represents the capacity to bear risk in congruence with the Bank’s risk profile and RAS. Risk Management alongside Enterprise Capital Management assesses and monitors the overall adequacy of the Bank’s available capital in relation to both internal and regulatory capital requirements under normal and stressed conditions. DIVIDENDS At October 31, 2015, the quarterly dividend was $0.51 per share, consistent with the Bank’s current target payout range of 40% to 50% of adjusted earnings. Cash dividends declared and paid during the year totalled $2.00 per share (2014 – $1.84). For cash dividends payable on the Bank’s preferred shares, refer to Note 21 of the 2015 Consolidated Financial Statements. As at October 31, 2015, 1,855 million common shares were outstanding (2014 – 1,845 million). The Bank’s ability to pay dividends is subject to the Bank Act and the requirements of OSFI. Refer to Note 21 of the 2015 Consolidated Financial Statements for further information on dividend restrictions. NORMAL COURSE ISSUER BID On June 19, 2013, the Bank announced that the Toronto Stock Exchange (TSX) approved the Bank’s normal course issuer bid to repurchase, for cancellation, up to 24 million of the Bank’s common shares. The bid commenced on June 21, 2013, and expired in accordance with its terms in June 2014. During the year ended October 31, 2014, the Bank repurchased 4 million common shares under this bid at an average price of $54.15 for a total amount of $220 million. During the year ended October 31, 2013, the Bank repurchased 18 million common shares under this bid at an average price of $43.25 for a total amount of $780 million. As approved by the Board on December 2, 2015, the Bank announced its intention to initiate a normal course issuer bid for up to 9.5 million of its common shares, commencing as early as December, 2015, subject to the approval of OSFI and the TSX. The timing and amount of any purchases under the program are subject to regulatory approvals and to management discretion based on factors such as market conditions and capital adequacy. RISK-WEIGHTED ASSETS Based on Basel III, RWA are calculated for each of credit risk, market risk, and operational risk. Details of the Bank’s RWA is included in the following table. T A B L E 4 1 COMMON EQUITY TIER 1 CAPITAL RISK-WEIGHTED ASSETS1,2 (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 As at October 31 October 31 2014 2015 $ 28,726 $ 25,910 12,016 52,018 12,586 60,976 150,497 118,571 3,999 11,949 12,014 926 4,071 11,412 13,074 866 282,208 237,403 5,842 6,347 40,032 32,680 328,587 275,925 12,655 14,376 41,118 38,092 $ 382,360 $ 328,393 1 Effective the third quarter of 2014, each capital ratio has its own RWA measure due to the OSFI prescribed scalar for inclusion of the CVA. Effective the third quar- ter of 2014, the scalars for inclusion of CVA for CET1, Tier 1, and Total Capital RWA are 57%, 65%, and 77% respectively. For fiscal 2015, the scalars are 64%, 71%, and 77%, respectively. 2 Prior to 2015, the amounts have not been adjusted to reflect the impact of the 2015 IFRS Standards and Amendments. 59 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 4 2 FLOW STATEMENT FOR RISK-WEIGHTED ASSETS – Disclosure for Non-Counterparty Credit Risk and Counterparty Credit Risk – Risk-Weighted Assets Movement by Key Driver1 October 31, 2015 October 31, 2014 For the three months ended Non-counterparty credit risk Counterparty Non-counterparty credit risk credit risk Counterparty credit risk $ 258.0 21.3 (0.5) (0.9) – 2.2 26.2 1.8 50.1 $ 308.1 $ 17.9 0.7 (0.4) – 0.7 – 1.6 – 2.6 $ 20.5 $ 229.3 17.0 – (2.4) – 1.8 11.5 0.8 28.7 $ 258.0 $ 10.3 1.0 – – 6.2 – 0.4 – 7.6 $ 17.9 The Movement in risk levels category reflects changes in risk due to position changes and market movements. 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. Methodology changes related to precious metals exposure drove the decrease in RWA. 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. FLOW STATEMENT FOR RISK-WEIGHTED ASSETS – Disclosure for Operational Risk – Risk-Weighted Assets Movement by Key Driver1 T A B L E 4 4 (billions of Canadian dollars) RWA, balance at beginning of period Revenue generation RWA, balance at end of period For the years ended October 31 October 31 2014 2015 $ 38.1 3.0 $ 41.1 $ 35.1 3.0 $ 38.1 1 Prior to 2015, the amounts have not been adjusted to reflect the impact of the 2015 IFRS Standards and Amendments. The movement in the Revenue generation category is mainly due to an increase in gross income related to the U.S. Retail and Canadian Retail segments. (billions of Canadian dollars) Common Equity Tier 1 Capital RWA, balance at beginning of period Book size Book quality Model updates Methodology and policy Acquisitions and disposals Foreign exchange movements Other Total RWA movement Common Equity Tier 1 Capital RWA, balance at end of period 1 Prior to 2015, the amounts have not been adjusted to reflect the impact of the 2015 IFRS Standards and Amendments. Counterparty credit risk is comprised of over-the-counter derivatives, repo-style transactions, trades cleared through central counterparties, and CVA RWA which was phased in at 64% for fiscal 2015 (2014 – 57%). Non-counterparty credit risk includes loans and advances to retail customers (individuals and small business), corporate entities (wholesale and commercial customers), banks and governments, as well as holdings of debt, equity securities, and other assets (including prepaid expenses, current and deferred income taxes, land, building, equipment, 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 fiscal 2015, is mainly due to growth in corporate and commercial loans in the Wholesale and U.S. Retail segments and across various portfolios in the Canadian Retail segment. The Book quality category includes quality of book changes caused by experience such as underlying customer behaviour or demograph- ics, including changes through model calibrations/realignments. The Model updates category relates to model implementation, changes in model scope, or any changes 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 fluctuations in the U.S. dollar to Canadian dollar exchange rate on the U.S. portfolios in the U.S. Retail segment. The Other category consists of items not described in the above categories including changes in exposures not included under advanced or standardized methodologies such as prepaid expenses, current and deferred income taxes, land, building, equipment and other depreciable property, and other assets. FLOW STATEMENT FOR RISK-WEIGHTED ASSETS – Disclosure for Market Risk – Risk-Weighted Assets Movement by Key Driver1 T A B L E 4 3 (billions of Canadian dollars) RWA, balance at beginning of period Movement in risk levels Model updates Methodology and policy Acquisitions and disposals Foreign exchange movements and other Total RWA movement RWA, balance at end of period For the years ended October 31 October 31 2014 2015 $ 14.4 – – (1.7) – n/m2 (1.7) $ 12.7 $ 11.7 (0.4) 2.8 0.3 – n/m2 2.7 $ 14.4 1 Prior to 2015, the amounts have not been adjusted to reflect the impact of the 2015 IFRS Standards and Amendments. 2 Not meaningful. 60 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS ECONOMIC CAPITAL AND RISK-WEIGHTED ASSETS BY SEGMENT The following chart provides a breakdown of the Bank’s regulatory capital and economic capital as at October 31, 2015. 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 and are described in the “Economic Capital” section of this document. 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 RWA in the following figure are predominately due to the additional Pillar II risks captured under economic capital and the differences in confidence level. For additional information on the risks highlighted below, refer to the “Managing Risk” section of this document. Economic Capital (%) Credit Risk Market Risk Operational Risk Other Risks 69% 5% 10% 16% TD Bank Group CET1 RWA2 $ 328,587 Credit Risk $ 12,655 Market Risk Operational Risk $ 41,118 Corporate Canadian Retail U.S. Retail1 Wholesale Banking • Investment Banking and Capital Markets • Corporate Banking • Treasury and Balance Sheet Management • Other Control Functions • Personal Deposits • Consumer Lending • Credit Cards and Merchant Services • Auto Finance • Commercial Banking • Small Business Banking • Direct investing • Advice-based Wealth Business • Asset Management • Insurance • Personal Deposits • Consumer Lending • Credit Cards Services • Auto Finance • Commercial Banking • Small Business Banking • Advice-based Wealth Business • Asset Management • TD Ameritrade Economic Capital (%) Credit Risk Market Risk Operational Risk Other Risks 69% 1% 19% 11% Credit Risk Market Risk Operational Risk Other Risks1 66% 4% 6% 24% Credit Risk Market Risk Operational Risk Other Risks 77% 15% 7% 1% Credit Risk Market Risk Operational Risk Other Risks 47% 6% 22% 25% CET1 RWA2 $ 83,503 Credit Risk – $ Market Risk Operational Risk $ 22,889 $ 186,941 Credit Risk – $ Market Risk Operational Risk $ 13,126 $ 47,571 Credit Risk $ 12,655 Market Risk Operational Risk $ 4,724 Credit Risk Market Risk Operational Risk $ 10,572 $ – $ 379 1 U.S. Retail includes TD Ameritrade in Other Risks 2 Amounts are in millions of Canadian dollars 61 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 4 5 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 P2 Series Q3 Series R4 Series S Series T Series Y Series Z Series 15 Series 36 Series 57 Series 78 Series 99 Series 1110 Total preferred shares – equity Treasury shares – preferred Total preferred shares Capital Trust Securities (thousands of shares) 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 2014 2015 Number of Number of shares/units shares/units 1,856.2 1,846.2 (1.6) 1,855.1 1,844.6 (1.1) 7.0 11.4 – – – 5.4 4.6 5.5 4.5 20.0 20.0 20.0 14.0 8.0 6.0 108.0 (0.1) 107.9 7.1 12.3 10.0 8.0 10.0 5.4 4.6 5.5 4.5 20.0 20.0 – – – – 88.0 – 88.0 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, refer to Note 21 of the Consolidated Financial Statements. 2 On March 2, 2015, the Bank redeemed all of its 10 million outstanding Class A First Preferred Shares, Series P (“Series P Shares”), at the cash redemption price of $25.607877 per Series P Share, for total redemption proceeds of approximately $256 million. 3 On March 2, 2015, the Bank redeemed all of its 8 million outstanding Class A First Preferred Shares, Series Q (“Series Q Shares”), at the cash redemption price of $25.615068 per Series Q Share, for total redemption proceeds of approximately $205 million. 4 On May 1, 2015, the Bank redeemed all of its 10 million outstanding Class A First Preferred Shares, Series R (“Series R Shares”), at the cash redemption price of $25.503836 per Series R Share, for total redemption proceeds of approximately $255 million. 5 On June 4, 2014, the Bank issued 20 million non-cumulative 5-Year Rate Reset Preferred Shares, Series 1 (“Series 1 shares”) for gross cash consideration of $500 million, which included NVCC Provisions to ensure loss absorbency at the point of non-viability. If the NVCC Provisions were to be triggered, the maximum number of common shares that could be issued based on the formula for conver- sion applicable to the Series 1 shares, and assuming there are no declared and unpaid dividends on the Series 1 shares or Series 2 shares, as applicable, would be 100 million. 6 On July 31, 2014, the Bank issued 20 million non-cumulative 5-Year Rate Reset Preferred Shares, Series 3 (“Series 3 shares”) for gross cash consideration of $500 million, which included NVCC Provisions to ensure loss absorbency at the point of non-viability. If the NVCC Provisions were to be triggered, the maximum number of common shares that could be issued based on the formula for conver- sion applicable to the Series 3 shares, and assuming there are no declared and unpaid dividends on the Series 3 shares or Series 4 shares, as applicable, would be 100 million. 7 On December 16, 2014, the Bank issued 20 million non-cumulative 5-Year Rate Reset Preferred Shares, Series 5 (“Series 5 shares”) for gross cash consideration of $500 million, which included NVCC Provisions to ensure loss absorbency at the point of non-viability. If the NVCC Provisions were to be triggered, the maximum number of common shares that could be issued based on the formula for conver- sion applicable to the Series 5 shares, and assuming there are no declared and unpaid dividends on the Series 5 shares or Series 6 shares, as applicable, would be 100 million. 8 On March 10, 2015, the Bank issued 14 million non-cumulative 5-Year Rate Reset Preferred Shares, Series 7 (“Series 7 shares”) for gross cash consideration of $350 million, which included NVCC Provisions to ensure loss absorbency at the point of non-viability. If the NVCC Provisions were to be triggered, the maximum number of common shares that could be issued based on the formula for conver- sion applicable to the Series 7 shares, and assuming there are no declared and unpaid dividends on the Series 7 shares or Series 8 shares, as applicable, would be 70 million. 9 On April 24, 2015, the Bank issued 8 million non-cumulative 5-Year Rate Reset Preferred Shares, Series 9 (“Series 9 shares”) for gross cash consideration of $200 million, which included NVCC Provisions to ensure loss absorbency at the point of non-viability. If the NVCC Provisions were to be triggered, the maximum number of common shares that could be issued based on the formula for conver- sion applicable to the Series 9 shares, and assuming there are no declared and unpaid dividends on the Series 9 shares or Series 10 shares, as applicable, would be 40 million. 10 On July 21, 2015, the Bank issued 6 million non-cumulative Fixed Rate Preferred Shares, Series 11 (“Series 11 shares”) for gross cash consideration of $150 million, which included NVCC Provisions to ensure loss absorbency at the point of non- viability. If the NVCC Provisions were to be triggered, the maximum number of common shares that could be issued based on the formula for conversion applicable to the Series 11 shares, and assuming there are no declared and unpaid dividends on the Series 11 shares would be 30 million. FUTURE CHANGES IN BASEL Future Regulatory Capital Developments In December 2014, BCBS published the final standards on the revised securitization framework. The final framework, effective January 2018, enhanced the current methodologies for calculating securitization RWA by making them more risk sensitive and limiting over-reliance on rating agencies. The final standards yield capital requirements that are higher than those under the current framework. On August 1, 2014, the Department of Finance released a public consultation paper (the “Bail-in Consultation”) regarding a proposed Taxpayer Protection and Bank Recapitalization regime (commonly referred to as “bail-in”) which outlines their intent to implement a comprehensive risk management framework for Canada’s D-SIBs. Refer to the section on “Regulatory Developments Concerning Liquidity and Funding” in this document for more details. In February 2014, the U.S. Federal Reserve Board released final rules on Enhanced Prudential Standards for large Foreign Bank Organizations and U.S. Bank Holding Companies (BHCs). As a result of these rules, TD will be required to consolidate 90% of its U.S. legal entity ownership interests under a single top tier U.S. Intermediate Holding Company (IHC) by July 1, 2016, and consolidate 100% of its U.S. legal entity ownership interests by July 1, 2017. The IHC will be subject to the same extensive capital, liquidity, and risk management requirements as large BHCs. In December 2014, BCBS released a consultative document intro- ducing a capital floor framework based on Basel II/III standardized approaches to calculate RWA. This framework will replace the current transitional floor, which is based on the Basel I standard. The objec- tives of a capital floor are to ensure minimum levels of banking system capital, mitigate internal approaches model risk, and enhance compa- rability of capital ratios across banks. The calibration of the floor is outside the scope of this consultation. The impact on the Bank will be dependent on the final calibration of the capital floor and on the revised credit, market, and operational risk standardized approaches which are currently all under review and consultation. In July 2015, BCBS released a consultative document on a revision of the CVA framework set out in the current Basel III capital standards for the treatment of counterparty credit risk. The revised framework proposes to better align the capital standard with the fair value measurement of CVA employed under various accounting regimes and the proposed revisions to the market risk framework under the Fundamental Review of the Trading Book. The estimated timing for implementation is early 2018 to align with the implementation of the revised market risk framework. 62 TD BANK GROUP ANNUAL REPORT 2015 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 Bank’s 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 document. Off-balance sheet arrangements are generally undertaken for risk management, capital management, and funding management purposes and include securitizations, contractual obligations, and certain commitments and guarantees. STRUCTURED ENTITIES TD carries out certain business activities through arrangements with structured entities, including special purpose entities (SPEs). The Bank uses SPEs to raise capital, obtain sources of liquidity by securitizing certain of the Bank’s financial assets, to assist TD’s clients in securitiz- ing their financial assets, and to create investment products for the Bank’s clients. Securitizations are an important part of the financial markets, providing liquidity by facilitating investor access to specific portfolios of assets and risks. Refer to Note 2 of the 2015 Consolidated Financial Statements for further information regarding the Bank’s involvement with SPEs. Securitization of Bank-Originated Assets The Bank securitizes residential mortgages, business and government loans, personal 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 CMHC does not qualify for derecognition and remain on the Bank’s Consolidated Balance Sheet. Additionally, the Bank securitizes personal 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-sponsored entities which qualify for derecognition and are removed from the Bank’s Consolidated Balance Sheet. All other products securitized by the Bank were originated in Canada and sold to Canadian securitization structures. Refer to Notes 9 and 10 of the 2015 Consolidated Financial Statements for further information. T A B L E 4 6 EXPOSURES SECURITIZED BY THE BANK AS ORIGINATOR1 (millions of Canadian dollars) Significant unconsolidated SPEs Significant consolidated SPEs As at Non-SPE third-parties Residential mortgage loans Consumer instalment and other personal loans2 Business and government loans Total exposure Residential mortgage loans Consumer instalment and other personal loans2 Business and government loans Total exposure Securitized assets $ 23,452 – – $ 23,452 $ 23,796 – 2 $ 23,798 Carrying value of retained interests $ – – – $ – $ – – – $ – Securitized assets Securitized assets Carrying value of retained interests $ – 3,642 – $ 3,642 – $ 6,081 – $ 6,081 October 31, 2015 $ 6,759 – 1,828 $ 8,587 $ – – 38 $ 38 October 31, 2014 $ 9,765 – 2,031 $ 11,796 $ – – 44 $ 44 1 Includes all assets securitized by the Bank, irrespective of whether they are on-balance or off-balance sheet for accounting purposes, except for securitizations through U.S. government sponsored entities. 2 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 derecogni- tion of the financial assets depending on the individual arrangement of each transaction. In instances where the Bank fully derecognizes residential mortgage loans, the Bank may be exposed to the risks of transferred loans through retained interests. As at October 31, 2015, the Bank has not recognized any retained interests due to the securiti- zation 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, the Bank has power over the key economic decisions of the SPE, and the Bank is exposed to the majority of the residual risks of the SPEs. As at October 31, 2015, the SPEs had nil issued commercial paper outstanding (October 31, 2014 – $4 billion) and $4 billion of issued notes outstanding (October 31, 2014 – $2 billion). As at October 31, 2015, the Bank’s maximum potential exposure to loss for these conduits was $4 billion (October 31, 2014 – $6 billion) of which no underlying consumer instalment and other personal loans was government insured (October 31, 2014 – $1 billion). 63 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 busi- ness 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 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. TD’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 $10.6 billion as at October 31, 2015 (October 31, 2014 – $9.9 billion). Further, as at October 31, 2015, the Bank had committed to provide an additional $1.7 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, 2014 – $1.4 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 included in the following table. T A B L E 4 7 EXPOSURE TO THIRD PARTY-ORIGINATED ASSETS SECURITIZED BY BANK-SPONSORED NON-CONSOLIDATED CONDUITS October 31, 2015 October 31, 2014 As at Exposure and ratings profile of unconsolidated SPEs AAA1 $ 6,962 – 1,847 – 1,792 $ 10,601 Expected weighted- average life (years)2 3.2 – 1.6 – 2.2 2.7 Exposure and ratings profile of unconsolidated SPEs AAA1 $ 6,395 – 1,777 – 1,753 $ 9,925 Expected weighted- average life (years)2 3.3 – 1.3 – 1.7 2.7 Leveraged Finance Credit Commitments Also included in “Commitments to extend credit” in Note 28 of the 2015 Consolidated Financial Statements are leveraged finance credit commitments. Leveraged finance credit commitments are agreements that provide funding to a borrower with higher leverage ratio, relative to the industry in which it operates, and for the purposes of acquisi- tions, buyouts or capital distributions. During the year, we refined our definition and it may be subject to further refinement moving forward. As at October 31, 2015, the Bank’s exposure to leveraged finance credit commitments, including funded and unfunded amounts, was $11.2 billion (October 31, 2014 – $5.4 billion). 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 guar- antee 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. Refer to Note 28 of the 2015 Consolidated Financial Statements for further information regarding the accounting for guarantees. (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 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, 2015, the Bank held $1.1 billion 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, 2014 – $1.3 billion). OFF-BALANCE SHEET EXPOSURE TO THIRD PARTY-SPONSORED CONDUITS The Bank has off-balance sheet exposure to third party-sponsored conduits arising from providing liquidity facilities and funding commit- ments of $1,268 million as at October 31, 2015 (October 31, 2014 – $659 million). The assets within these conduits are comprised of individual notes backed by automotive loan receivables, credit card receivables and trade receivables. As at October 31, 2015, these assets have maintained ratings from various credit rating agencies, with a minimum rating of A. On-balance sheet exposure to third party- sponsored conduits have been included in the financial statements. 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 control processes in place to mitigate these risks. Certain commitments still remain off-balance sheet. Note 28 of the 2015 Consolidated Financial Statements provides detailed information about the maximum amount of additional credit the Bank could be obligated to extend. 64 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS GROUP FINANCIAL CONDITION Related-Party Transactions 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 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 manage- ment personnel, which are subject to approved policy guidelines that govern all employees. In addition, the Bank offers deferred share and other plans to non-employee directors, executives, and certain other key employees. Refer to Note 24 of the 2015 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 (1) TD AMERITRADE HOLDING CORPORATION The Bank has significant influence over TD Ameritrade and accounts for its investment in TD Ameritrade using the equity method. Pursuant to the Stockholders Agreement in relation to the Bank’s equity invest- ment in TD Ameritrade, the Bank has the right to designate five of twelve members of TD Ameritrade’s Board of Directors. The Bank’s designated directors include the Bank’s Group President and Chief Executive Officer, two independent directors of TD, and a former independent director of TD. The following is a description of significant transactions between the Bank and TD Ameritrade. 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 $1,051 million in 2015 (2014 – $895 million; 2013 – $821 million) to TD Ameritrade for the deposit accounts. The fee paid by the Bank is based on the average insured deposit balance of $95 billion in 2015 (2014 – $80 billion; 2013 – $70 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 bps on the aggregate average daily balance in the sweep accounts (subject to adjustment based on a specified formula). As at October 31, 2015, amounts receivable from TD Ameritrade were $79 million (October 31, 2014 – $103 million). As at October 31, 2015, amounts payable to TD Ameritrade were $140 million (October 31, 2014 – $104 million). (2) 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 the year ended October 31, 2015, the Bank paid $124 million (October 31, 2014 – $122 million; October 31, 2013 – $128 million) for these services. As at October 31, 2015, the amount payable to Symcor was $10 million (October 31, 2014 – $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, 2015, and October 31, 2014. GROUP FINANCIAL CONDITION Financial Instruments 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-trading 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 derivatives, and financial liabilities. In accordance with accounting standards related to financial instruments, financial assets or liabilities classified as trading loans and securities, and financial instruments 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 financial instruments are determined, refer to the “Accounting Judgements, Estimates, and Assumptions” – “Fair Value Measurement” section of this document. The use of financial instru- ments 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 policies and proce- dures. 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 document. 65 TD BANK GROUP ANNUAL REPORT 2015 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 uncertainties, 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 TD and its customers 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, fluctuations in the debt, commodity and capital markets and related market liquid- ity, real estate prices, employment levels, consumer spending and debt levels, business investment, government spending, exchange rates, sovereign debt risks, the strength of the economy, threats of terrorism, civil unrest, geopolitical risk associated with political unrest, the effects of public health emergencies, the effects of disruptions to public infra- structure, natural disasters and the level of business conducted in a specific region. Management maintains an ongoing awareness of the macroeconomic environment in which it operates and incorporates potential material changes into its business plans and strategies; it also incorporates potential material changes into the portfolio stress tests that are conducted. As a result, the Bank is better able to understand the likely impact of many of these negative scenarios and better manage the potential risks. Executing on Key Priorities and Strategies The Bank has a number of priorities and strategies, including those detailed in each segment’s “Business Segment Analysis” section of this document, which may include large scale initiatives that are at various stages of development or implementation. Examples include organic growth strategies, new acquisitions, integration of recently acquired businesses, projects to meet new regulatory requirements or enhance- ment to existing technology. Risk can be elevated due to the size, scope, and complexity of projects, the limited timeframes to complete the projects and competing priorities for limited, specialized resources. In respect of acquisitions, the Bank undertakes due diligence before completing an acquisition and closely monitors integration activities and performance post acquisition. However, there is no assurance that TD will achieve its objectives, including anticipated cost savings, or revenue synergies following acquisitions and integration. In general, while significant management attention is in place on the governance, oversight, methodology, tools, and resources needed to manage our priorities and strategies, our ability to execute on them is dependent on a number of assumptions and factors. These include those set out in the “Business Outlook” and “Risk Management” sections of this document, as well as disciplined resource and expense management and our ability to implement (and the costs associated with the imple- mentation of) enterprise-wide programs to comply with new or enhanced regulations or regulator demands, all of which may not be in the Bank’s control and are difficult to predict. If any of the Bank’s acquisition, strategic plans or priorities do not meet with success, there could be an impact on the Bank’s operations and financial performance and the Bank’s earnings could grow more slowly or decline. Technology and Information Security Risk Technology and information security risks for large financial institutions like the Bank have increased in recent years. This is due, in part, to the proliferation, sophistication and constant evolution of new technolo- gies and attack methodologies used by socio political entities, orga- nized criminals, hackers and other external parties. The increased risks are also a factor of our size and scale of operations, our geographic footprint, the complexity of our technology infrastructure, and our use of internet and telecommunications technologies to conduct financial transactions, such as our continued development of mobile and inter- net banking platforms. The Bank’s 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 such as targeted attacks on banking systems and applications, malicious software, denial of service attacks, phishing attacks and theft of data, and may involve attempts to fraudulently induce employees, customers, third party service providers or other users of the Bank’s systems to disclose sensitive information in order to gain access to the Bank’s data or that of its customers. The Bank actively monitors, manages and continues to enhance its ability to mitigate these technology and information security risks through enterprise-wide programs, industry best practices, and robust threat and vulnerability assessments and responses. The Bank also invests in projects to continually review and enhance its information technology infrastructure. It is possible that the Bank, or those with whom the Bank does business, may not anticipate or implement effective measures against all such information and technology related risks, particularly because the techniques used change frequently and risks can originate from a wide variety of sources that have also become increasingly sophisticated. As such, with any attack, breach or compro- mise of technology or information systems, hardware or related 66 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISprocesses, or any significant issues caused by weakness in information technology infrastructure, the Bank may experience, among other things, financial loss; a loss of customers or business opportunities; disruption to operations; misappropriation or unauthorized release of confidential, financial or personal information; damage to computers or systems of the Bank and those of its customers and counterparties; violations of applicable privacy and other laws; litigation; regulatory penalties or intervention, remediation, investigation or restoration cost; increased costs to maintain and update our operational and security systems and infrastructure; and reputational damage. Evolution of Fraud and Criminal Behaviour The Bank is routinely exposed to various types of fraud and other finan- cial crime. The sophistication, 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 accu- racy and completeness of such information. In addition to the risk of material 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 defences and build upon existing practices in Canada and the U.S. The Bank continues to introduce new capabilities and defences that will help achieve an enhanced position to combat more complex fraud. Third Party Service Providers The Bank recognizes the value of using third parties to support its business, as they provide access to leading processes and solutions, specialized expertise, innovation, economies of scale and operational efficiencies. However, they also create a reliance upon the continuity, reliability and security of these relationships and their associated processes, people and facilities. As the financial services industry and its supply chains become more complex, the need for robust, sophisti- cated controls and ongoing oversight also grows. Just as the Bank’s own services, information technology, facilities and processes could be subject to failures or disruptions as a result of human error, natural disasters, utility disruptions, and criminal or terrorist acts (such as cyber-attacks) each of its suppliers may be exposed to similar risks which could in turn impact the Bank’s operations. Such adverse effects could limit TD’s ability to deliver products and services to customers, and/or damage the Bank’s reputation, which in turn could lead to disruptions to our businesses and financial loss. Consequently, the Bank has established expertise and resources dedicated to third party supplier risk management, and policies and procedures governing third party relationships from the point of selection through the life cycle of both the relationship and the good or service. The Bank develops and tests robust business continuity management plans which contemplate customer, employee, and operational implications, including technol- ogy and other infrastructure contingencies. Introduction of New and Changes to Current Laws and Regulations The introduction of new, and changes to current laws and regulations, changes in interpretation or application of existing laws and regulations, judicial decisions, as well as the fiscal, economic and monetary policies of various regulatory agencies and governments in Canada, the U.S. and other countries, and changes in their interpretation or implementation, could adversely affect TD’s operations, profitability and reputation. Such adverse effects may include incurring additional costs and resources to address initial and ongoing compliance; limiting the types or nature of products and services the Bank can provide and fees it can charge; unfa- vourably impacting the pricing and delivery of products and services the Bank provides; increasing the ability of new and existing competitors to compete with their pricing, products and services (including, in jurisdic- tions outside Canada, the favouring of certain domestic institutions); and increasing risks associated with potential non-compliance. In partic- ular, 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 global privacy landscape continues to experience regulatory change, with significant new legislation anticipated to come into force in the jurisdictions in which we do business in the short- and medium-term. In addition to the adverse impacts described above, 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 (Dodd-Frank), a U.S. federal law, was signed into law on July 21, 2010. It requires significant structural reform to the U.S. financial services industry and affects every banking organization operating in the U.S., including the Bank. Due to certain aspects with extraterritorial effect, Dodd-Frank also impacts the Bank’s operations outside the U.S., including in Canada. Many parts of Dodd-Frank are in effect and others are in the implementation stage. Certain of the rules that impact the Bank include: • The Volcker Rule – In December 2013, the U.S. Board of Governors of the Federal Reserve System (the “Federal Reserve”) and other U.S. federal regulatory agencies issued final regulations implementing the Volcker Rule provisions of Dodd-Frank, which restrict banking entities from engaging, as principal, in proprietary trading and from sponsor- ing or holding ownership interests in or having certain relationships with certain hedge funds and private equity funds, subject to certain exceptions and exclusions. Under the final regulations, banking enti- ties were required to conform their covered trading activities and covered fund investments and sponsorship activities to the Volcker Rule by July 21, 2015, absent an applicable extension. The Volcker Rule also requires banking entities to establish comprehensive compliance programs that are reasonably designed to document, describe, monitor and limit covered trading and fund activities. The Bank has established compliance programs under the Volcker Rule where applicable. However, given the complexity of the Volcker Rule’s application, and the lack of regulatory guidance on certain matters, it is possible that future regulatory guidance or review could result in additional limitations on the Bank’s trading and fund activi- ties. The Volcker Rule will likely continue to increase our operational and compliance costs. • Debit Interchange Fees – In October 2011, the Federal Reserve’s regulations implementing the so-called “Durbin Amendment” to Dodd-Frank, which limits debit card interchange transaction fees to those “reasonable” and “proportional” to the cost of the transac- tion, became effective. In July 2013, the U.S. District Court for the District of Columbia vacated certain portions of these regulations. In March 2014, the U.S. Court of Appeals for the District of Columbia Circuit overturned the District Court’s decision and largely upheld the Federal Reserve’s rules governing debit card interchange fees, but directed the Federal Reserve to provide further explanation regarding its treatment of the costs of monitoring transactions. In August 2014, a group of trade associations and merchants filed a petition for writ of certiorari with the U.S. Supreme Court. In January 2015, the petition was denied. 67 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS• Capital Planning and Stress Testing – Pursuant to the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) process, we must submit our capital plan and stress test results for our top-tier U.S. bank holding company (which will be the Bank’s U.S. IHC beginning in July 2016 as described below), on a consolidated basis, to the Federal Reserve on an annual and semi-annual basis respectively, beginning in 2016. Given new submission dates included in the Capital Plan Rule, our top-tier U.S. bank holding company will submit its inaugural annual capital plan and stress test results on April 5, 2016 and mid-cycle test results on October 5, 2016. Our top-tier U.S. bank holding company will also be subject to the Federal Reserve’s supervisory stress test on an annual basis, beginning in 2016. The Federal Reserve defines stress test scenarios for both the company-run and supervisory stress tests by bank holding companies. In addition, TD Bank, N.A. and TD Bank USA, N.A. are required to conduct stress testing pursuant to the requirements of the U.S. Office of the Comptroller of the Currency (OCC), which defines stress test scenarios for stress testing by national banks. Any issues arising from U.S. regulators’ review of such capital plan and stress testing may negatively impact the Bank’s operations and/or reputation and lead to increased costs. • Intermediate Holding Company Establishment – In February 2014, the Federal Reserve adopted a final rule that imposes “enhanced prudential standards” on certain non-U.S. banking organizations (“FBOs”) having a U.S. presence and global consolidated assets of US$10 billion or more. Such standards include enhanced capital and liquidity requirements, stress testing obligations and risk manage- ment standards with additional requirements and expectations for FBOs with at least US$50 billion in combined U.S. assets. In addition, FBOs with U.S. non-branch assets of US$50 billion or more, such as the Bank, are required to establish, by July 1, 2016, a separately capitalized top-tier U.S. IHC. The IHC is required to hold the FBO’s ownership interests in all of its U.S. subsidiaries (with certain limited exceptions) but not the assets of the FBO’s U.S. branches and agen- cies. TD will implement the IHC requirements in phases, the first of which was concluded in July 2015, at which time TD Group US Holdings LLC was established as the top-tier bank holding company in the U.S. 90% percent of the FBO’s U.S. non-branch assets must be transferred to the IHC by July 1, 2016, with the remaining ownership interests in U.S. subsidiaries to be transferred to the IHC by July 1, 2017. It is anticipated that the foregoing actions will require TD to incur operational, capital, liquidity and compliance costs and may impact its businesses, operations and results in the U.S. and overall. The Bank has instituted an enterprise-wide regulatory reform delivery program to analyze and implement applicable requirements under Dodd-Frank and its implementing regulations in an integrated and comprehensive manner. In general, in connection with Dodd-Frank and its implementing regulations and actions by regulators, the Bank could be negatively impacted by loss of revenue, limitations on the products or services it offers, and additional operational and compliance costs. Basel III OSFI’s guideline on Liquidity Adequacy Requirements (LAR) will incorporate the finalized Basel Committee on Banking Supervision Net Stable Funding Ratio (NSFR) rules in the near future. We expect that OSFI will require banks to meet the 100% NSFR ratio no later than 2018. The Bank will continue to evaluate the impact of imple- menting the NSFR and determine adjustments required to liquidity and funding management strategies. Regulatory Oversight and Compliance Risk Our businesses are subject to extensive regulation and oversight. Regulatory change is occurring in all of the geographies where we operate, with some of the most significant changes arising in the U.S. Such change includes the establishment in the past few years of new regulators with examination and enforcement authority, such as the Consumer Financial Protection Bureau. Regulators have demonstrated a trend towards establishing new standards and best practice expecta- tions via enforcement actions and an increased use of public enforce- ment with substantial fines and penalties when compliance breaches occur. TD continually monitors and evaluates the potential impact of rules, proposals, consent orders and regulatory guidance relevant to its consumer businesses. In addition, TD has a Fair & Responsible Banking Compliance group which provides oversight, monitoring and analysis of fair lending and unfair, deceptive or abusive acts or practices risks. However, while we devote substantial compliance, legal and opera- tional business resources to facilitate compliance with these rules by their respective effective dates and consideration of regulator expecta- tions set out in enforcement actions, it is possible that we may not be able to accurately predict the impact of final versions of rules or the interpretation or enforcement actions taken by regulators. This could require the Bank to take further actions or incur more costs than expected. In addition, we believe that regulators may continue to take formal enforcement action, rather than taking informal/ supervisory actions, more frequently than they have done historically. As a result, despite its prudence and management efforts, the Bank’s operations, business strategies and product and service offerings may be adversely impacted, therefore impacting financial results. Also, it may be deter- mined that the Bank has not successfully addressed new rules, orders or enforcement actions to which it is subject. As such, the Bank may continue to face a greater number or wider scope of investigations, enforcement actions and litigation. The Bank may incur greater than expected costs associated with enhancing its compliance, or may incur fines, penalties or judgments not in its favour associated with non- compliance, all of which could also lead to negative impacts on the Bank’s financial performance and its reputation. Principles for Effective Risk Data Aggregation In January 2013, the Basel Committee on Banking Supervision (BCBS) finalized its “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 enhancement of risk data aggregation and reporting. 68 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISLevel of Competition and Disruptive Technology The Bank operates in a highly competitive industry and its performance is impacted by the level of competition. Customer retention and attrac- tion of new customers can be influenced by many factors, including the quality, pricing and variety of products and services offered, as well as an institution’s reputation and ability to innovate. Ongoing or increased competition may impact the Bank’s pricing of products and services and may cause us to lose market share. Increased competition also may require us to make additional short and long-term investments in order to remain competitive, which may increase expenses. In addi- tion, the Bank operates in environments where laws and regulations that apply to it may not universally apply to its current competitors, which include domestic institutions in jurisdictions outside of Canada or non-traditional providers of financial products and services. Non-depository or non-financial institutions are often able to offer products and services that were traditionally banking products and to compete with banks in the provision of electronic and Internet-based financial solutions, without facing the same regulatory requirements or oversight. These evolving distribution methods by such competitors can also increase fraud and privacy risks for customers and financial institutions in general. The nature of disruption is such that it can be difficult to anticipate and/or respond to adequately or quickly, repre- senting inherent risks to certain Bank businesses, including payments. As such, this type of competition could also adversely impact the Bank’s earnings by reducing revenue. 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 technologies. OTHER RISK FACTORS THAT MAY AFFECT FUTURE RESULTS 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 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 reserves 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 oper- ations. For additional information relating to the Bank’s material legal proceedings, refer to Note 28 of the Consolidated Financial Statements. 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 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 a human resource planning process, at least annually, 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. 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. 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 environ- ment, 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 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 Bank’s accounting policies and estimates are essential to under- standing 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 and changes to accounting standards and poli- cies could have a materially adverse impact on the Bank’s Consolidated Financial Statements, and therefore its reputation. The Bank has established procedures to ensure that accounting policies are applied consistently and that the processes for changing methodologies for determining estimates and adopting new accounting standards are well controlled and occur in an appropriate and systematic manner. Significant accounting policies as well as new and amended standards under IFRS are described in Note 2 and Note 4, respectively, of our Consolidated Financial Statements. 69 TD BANK GROUP ANNUAL REPORT 2015 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. The Bank’s goal is to earn a stable and sustainable rate of return for every dollar of risk it takes, while putting significant emphasis on investing in TD’s businesses to ensure it can meet its future strategic objectives. The Bank’s Enterprise Risk Framework (ERF) reinforces TD’s risk culture, which emphasizes transparency and accountability, and supports a common understanding among stakeholders of how the Bank manages risk. The ERF addresses: (1) the nature of risks to the Bank’s strategy and operations; (2) how the Bank defines the types of risk it is exposed to; (3) risk management governance and organization; and (4) how the Bank manages risk through processes that identify and assess, measure, control, and monitor and report risk. The Bank’s risk management resources and processes are designed to both challenge and enable all its businesses to understand the risks they face and to manage them within TD’s risk appetite. RISKS INVOLVED IN TD’S BUSINESSES TD’s Risk Inventory describes the major risk categories and related subcategories to which the Bank’s 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 RAS is the primary means used to communicate how TD views risk and determines the type and amount of risk it is willing to take to deliver on the Bank’s strategy and enhance shareholder value. In defin- ing its risk appetite, the Bank takes into account its vision, mission, strategy, guiding principles, risk philosophy, and capacity to bear risk. The guiding principles for TD’s RAS are as follows: The Bank takes risks required to build its business, but only if those risks: 1. Fit the business strategy, and can be understood and managed. 2. Do not expose the enterprise to any significant single loss events; TD does not ‘bet the Bank’ on any single acquisition, business, or product. 3. Do not risk harming the TD brand. TD considers current operating conditions and the impact of emerging risks in developing and applying its risk appetite. Adherence to enter- prise risk appetite is managed and monitored across the Bank and is informed by the RAS and a broad collection of principles, policies, processes, and tools. TD’s RAS describes, by major risk category, the Bank’s risk principles and establishes both qualitative and quantitative measures with key indicators, thresholds, and limits, as appropriate. RAS measures consider both normal and stress scenarios and include those that can be aggregated at the enterprise level and disaggregated at the business segment level. Risk Management is responsible for establishing practices and processes to formulate, monitor, and report on TD’s RAS measures. The function also monitors and evaluates the effectiveness of these practices and measures. RAS measures are reported regularly to senior manage- ment, the Board, and the Risk Committee; other RAS measures are tracked on an ongoing basis by management, and escalated to senior management and the Board, as required. Risk Management regularly assesses management’s performance against TD’s RAS measures. RISK CULTURE The Bank’s risk culture embodies the “tone at the top” set by the Board, Chief Executive Officer (CEO), and Senior Executive Team (SET), which informs TD’s vision, mission, guiding principles, and leadership profile. These governing objectives describe the attitudes and behav- iours that the Bank seeks to foster, among its employees, in building a culture where the only risks taken are those that can be understood and managed. TD’s risk culture promotes accountability, learning from past experiences, and encourages open communication and transparency on all aspects of risk taking. TD employees are encouraged to challenge and escalate when they believe the Bank is operating outside of its risk appetite. Ethical behaviour is a key component of TD’s risk culture. TD’s Code of Conduct and Ethics guides employees and Directors to make decisions that meet the highest standards of integrity, professionalism, and ethical behaviour. Every TD employee and Director is expected and required to assess business decisions and actions on behalf of the organization in light of whether it is right, legal, and fair. TD’s desired risk culture is reinforced by linking compensation to management’s performance against the Bank’s risk appetite. Performance against risk appetite is a key consideration in determining compensation for executives, including adjustments to incentive awards both at the time of award and again at maturity for deferred compensation. An annual consolidated assessment of management’s performance against the RAS prepared by Risk Management and reviewed by the Risk Committee is used by the Human Resources Committee as a key input into compensation decisions. All executives are individually assessed against objectives that include consideration of risk and control behaviours. This comprehensive approach allows the Bank to consider whether the actions of executive management resulted in risk and control events within their area of responsibility. 70 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISIn addition, governance, risk, and oversight functions operate inde- pendently from business segments supported by an organizational structure that provides independent oversight and objective challenge. Governance, risk, and oversight function heads, including the Chief Risk Officer (CRO), have unfettered access to respective Board Committees to raise risk, compliance, and other issues. Lastly, aware- ness and communication of TD’s RAS 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 TD’s risk culture by increasing the knowledge and understanding of the Bank’s expectations for risk taking. 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 business segments. Risk Management, headed by the Group Head and CRO, recommends enterprise risk strategy and policy and provides independent oversight to support a comprehensive and proactive risk management approach. The CRO, who is also a member of the SET, has unfettered access to the Risk Committee. The Bank also employs a “three lines of defence” model to describe the role of business segments (First Line), gover- nance, risk, and oversight functions, such as Risk Management and Legal and Regulatory Compliance functions (Second Line), and Internal Audit (Third Line) in managing risk across TD. WHO MANAGES RISK TD’s risk governance structure emphasizes and balances strong independent oversight with clear ownership for risk control within each business segment. Under the Bank’s approach to risk gover- nance, business segments are accountable for risks arising in their business and are responsible for identifying, assessing, and measuring the risks, as well as designing and implementing mitigating controls. Business segments also monitor and report on the ongoing effective- ness of their controls to safeguard TD from exceeding its risk appetite. The Bank’s risk governance model includes a senior management committee structure that is designed to support transparent risk report- ing and discussions. TD’s overall risk and control oversight is provided The Bank has a robust subsidiary governance framework to support its overall risk governance structure, including boards of directors, and committees for various subsidiary entities where appropriate. Within the U.S. Retail business segment, risk and control oversight is provided by a separate and distinct Board of Directors which includes a fully independent Board Risk Committee and Board Audit Committee. The U.S. Chief Risk Officer (U.S. CRO) has unfettered access to the Board Risk Committee. The following section provides an overview of the key roles and responsibilities involved in risk management. The Bank’s risk governance structure is illustrated in the following figure. RISK GOVERNANCE STRUCTURE 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 Functions Internal Audit Canadian Retail U.S. Retail Wholesale Banking Business Segments Internal Audit 71 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISThe Board of Directors The Board oversees the Bank’s strategic direction, the implementation of an effective risk management culture, and the internal control framework across the enterprise. It accomplishes its risk management mandate both directly and indirectly through its four committees, primarily the Risk Committee and the Audit Committee, as well as the Human Resources and Corporate Governance Committees. On an annual basis, the Board reviews and approves TD’s RAS and related measures to ensure ongoing relevance and alignment with TD’s strategy. The Risk Committee The Risk Committee is responsible for reviewing and recommending TD’s RAS for approval by the Board annually. The Risk Committee over- sees the management of TD’s risk profile and performance against its risk appetite. In support of this oversight, the Committee reviews and approves certain enterprise-wide risk management frameworks and 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 internal controls over financial reporting and the activities of the Bank’s Global Anti-Money Laundering (AML) group, Compliance group and Internal Audit. The Committee monitors compliance with policies in respect of ethical personal and business conduct, including the Bank’s Code of Conduct and Ethics and the Whistleblower Policy. The Human Resources Committee The Human Resources Committee, in addition to its other responsibilities, satisfies itself that Human Resources risks are appropriately identified, assessed, and managed in a manner consistent with the risk programs within the Bank, and with the sustainable achievement of the Bank’s business objectives. The Corporate Governance Committee The Corporate Governance Committee, in addition to its other respon- sibilities, develops and where appropriate recommends 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. Chief Executive Officer and Senior Executive Team The CEO and the SET develop and recommend to the Board the Bank’s long-term strategic plan and direction and also develop and recommend for Board approval TD’s risk appetite. The SET manages risk in accor- dance with TD’s risk appetite and considers the impact of emerging risks on the Bank’s strategy and risk profile. This accountability includes identifying and reporting significant risks to the Risk Committee. Executive Committees The CEO, in consultation with the CRO determines TD’s Executive Committees, which are chaired by SET members. The committees meet regularly to oversee governance, risk, and control activities and to review and monitor risk strategies and associated risk activities and practices. The ERMC, chaired by the CEO, oversees the management of major enterprise governance, risk, and control activities and promotes an integrated and effective risk management 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, the ALCO oversees directly and through its standing subcommittees (the Risk Capital Committee, Global Liquidity Forum (GLF), and Enterprise Investment Committee) the manage- ment of TD’s consolidated non-trading market risk and each of its consolidated liquidity, funding, investments, and capital positions. • OROC – chaired by the CRO, the OROC oversees the identification, monitoring, and control of key risks within TD’s operational risk profile. • Disclosure Committee – chaired by the Group Head, Finance, Sourcing, Corporate Communications and Chief Financial Officer, the Disclosure Committee oversees 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, the RRC oversees the management of reputational risk within the Bank’s risk appetite. Risk Management The Risk Management function, headed by the CRO, provides independent oversight of enterprise risk management, risk governance, and control and is responsible for establishing risk management strategy, frameworks, 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 functions 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. The CRO is supported by a dedicated team of risk management professionals organized to oversee risks arising from each of the Bank’s major risk categories. There is an established process in place for the identification and assessment of top and emerging risks. In addition, the Bank has clear procedures governing 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 accountability for risk within the business segment. Business management is responsible for recommending the business- level risk appetite and measures, which are reviewed and challenged by Risk Management, endorsed by the ERMC and approved by the CEO, to align with TD’s risk appetite and manage risk within approved risk limits. Internal Audit TD’s internal audit function provides independent assurance to the Board regarding 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 the Bank to align with the policies established and approved by the Audit and Risk Committees. The Compliance Department is responsible for establishing risk-based programs and standards to proactively manage known and emerging compliance risk across TD. The Compliance Department provides independent oversight and deliv- ers operational control processes to comply with applicable legislation and regulatory requirements. Anti-Money Laundering The Global AML group establishes a risk-based program with 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. Business segments are accountable for AML risk and are responsible for identifying and assessing the risk, measuring, designing, and implementing mitigating controls, as well as monitoring the risk. 72 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISTreasury and Balance Sheet Management The Treasury and Balance Sheet Management (TBSM) group manages, directs, and reports on the Bank’s capital and investment positions, interest rate risk, liquidity and funding risk, and the market risks of TD’s non-trading banking 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, the Bank employs a “three lines of defence” model that describes the roles and responsibilities of the business segments, governance, risk and oversight functions, and Internal Audit in managing risk across the Bank. The following chart describes the respective accountabilities of each line of defence at TD. THREE LINES OF DEFENCE First Line Identify and Control Business Segment Accountabilities • Manage and identify risk in day-to-day activities. • Ensure activities are within TD’s risk appetite and risk management policies. • Design, implement, and maintain effective internal controls. • Implement risk based approval processes for all new products, activities, processes, and systems. • Deliver training, tools, and advice to support its accountabilities. • Monitor and report on risk profile. Second Line Governance, Risk, and Oversight Function Accountabilities Set Standards and Challenge • Establish and communicate enterprise governance, risk, and control strategies and policies. • Provide oversight and independent challenge to the First Line through review, inquiry, and discussion. • Provide training, tools, and advice to support the First Line in carrying out its accountabilities. • Monitor and report on compliance with risk appetite and policies. Third Line Internal Audit Accountabilities Independent Assurance • Verify independently that TD’s ERF is operating effectively. • Validate the effectiveness of the First and Second Lines in fulfilling their mandates and managing risk. In support of a strong risk culture, TD applies the following principles in governing how it manages risks: • Enterprise-Wide in Scope – Risk Management will span all areas of TD, including third-party alliances and joint venture undertakings to the extent they may impact TD, 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 and conducted independently and objectively. • Integrated Risk and Control Culture – Risk management disciplines 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 comprehensive and proactive approach to risk management is comprised of four basic processes: risk 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, aggregate risks, and emerging risks from the changing environment. The Bank’s objective is to establish and main- tain 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 articulate enterprise-wide risks and understand potential vulnera- bilities for the Bank. Risk Measurement The ability to quantify risks is a key component of the Bank’s risk management process. TD’s risk measurement process aligns with regulatory requirements such as capital adequacy, leverage ratios, liquidity measures, stress testing, and maximum credit exposure guide- lines established by its regulators. Additionally, the Bank has a process in place to quantify risks to provide accurate and timely measurements of the risks it assumes. In quantifying risk, the Bank uses various risk measurement method- ologies, including Value-at-Risk (VaR) analysis, scenario analysis, stress testing, and limits. Other examples of risk measurements include credit exposures, PCL, peer comparisons, trending analysis, liquidity cover- age, leverage ratios, capital adequacy metrics, and operational risk event notification metrics. The Bank also requires significant business segments and corporate oversight functions to assess their own key risks and internal controls annually through a structured Risk and Control Self-Assessment (RCSA) program. Internal and external risk events are monitored to assess whether the Bank’s internal controls are effective. This allows the Bank to identify, escalate, and monitor significant risk issues as needed. 73 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS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. The Bank’s approach to risk control also includes risk and capital assessments to appropriately capture key risks in TD’s measurement and management of capital adequacy. This involves the review, chal- lenge, and endorsement by senior management committees of the 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 The Bank monitors and reports on risk levels on a regular basis against TD’s risk appetite and Risk Management reports on its risk monitoring activities to senior management, the Board and its Committees, and appropriate executive and management committees. The ERMC, the Risk Committee, and the Board also receive annual and periodic reporting on EWST and an annual update on the Bank’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 risks or any significant changes to the Bank’s risk profile. Enterprise-Wide Stress Testing EWST at TD is part of the long-term strategic, financial, and capital planning exercise that is a key component of the ICAAP framework and helps validate the risk appetite of the Bank. 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 enterprise-wide risks and under- stand potential vulnerabilities that are relevant to TD’s risk profile. Stress scenarios are developed considering the key macroeconomic and idiosyncratic risks facing the Bank. A combination of approaches incorporating both quantitative modelling and qualitative analysis are utilized to assess the impact on the Bank’s performance in stress envi- ronments. Stress testing engages senior management in each business segment, Finance, TBSM, Economics, and Risk Management. The Risk Capital Committee, which is a subcommittee of the ALCO, provides oversight of the processes and practices governing the EWST program. As part of its 2015 program, the Bank evaluated two internally generated macroeconomic stress scenarios covering a range of severi- ties and duration, as described below. The scenarios were constructed to cover a wide variety of risk factors meaningful to TD’s risk profile in both the North American and global economies. Stressed macroeco- nomic 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 2015 program, the Bank remained adequately capitalized with management actions. Results of the scenarios were reviewed by senior executives, incorporated in the Bank’s planning process, and presented to the Risk Committee and the Board. ENTERPRISE-WIDE STRESS SCENARIOS Extreme Scenario Severe Scenario • The scenario emanates from a European financial crisis where solvency concerns in some countries lead to widespread capital flight. The resulting wave of corporate sector defaults at European financial institutions spills over to North American banks. • External shocks to the Canadian economy trigger an unwinding of household imbalances. Unemployment rises sharply as home prices deteriorate significantly. Extremely low oil prices lead to a disproportionate impact on the Canadian economy. • The severe scenario is modeled from historical recessions that have taken place in the U.S. and Canada. The recession extends four consecutive quarters followed by a modest recovery. • Deterioration in key macroeconomic variables such as GDP, home prices, and unemployment align with historically observed recessions. Separate from the EWST program, the Bank’s U.S.-based subsidiaries complete their own capital planning and regulatory stress testing exercises. These include OCC Dodd-Frank Act Stress Testing require- ments for operating banks, and the Federal Reserve Board’s capital plan rule and related CCAR requirements beginning in 2016 for the holding company. TD 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 TD reaching the point of non viability in order to consider meaningful remedial actions for replenishing the Bank’s capital and liquidity position. 74 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISStrategic Risk Strategic risk is the potential for financial loss or reputational damage arising from the choice of sub-optimal or ineffective strategies, the improper implementation of chose strategies, choosing not to pursue certain strategies, or a lack of responsiveness to changes in the busi- ness environment. 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 the Bank’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 identifying and assessing, measuring, controlling, and monitoring 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 strate- gies and ensures that mitigating actions are taken where appropriate. The CEO, SET members, and other senior executives report to the Board on the implementation of the Bank’s strategies, identifying the risks within those strategies, and explaining how they are managed. HOW TD MANAGES STRATEGIC RISK The strategies and operating performance of significant business units and corporate functions are assessed regularly by the CEO and the relevant members of the SET through an integrated financial and stra- tegic planning process, management meetings, operating/financial reviews, and strategic business reviews. The Bank’s annual planning process considers enterprise and individual segment long-term and short-term strategies and associated key initiatives while also establish- ing enterprise asset concentration limits. The process evaluates align- ment between segment-level and enterprise-level strategies and risk appetite. Once the strategy is set, regular strategic business reviews conducted throughout the year ensure that alignment is maintained. The reviews include an evaluation of the strategy of each business, the overall operating environment 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, as well as by the Board. Additionally, each material acquisition is assessed for its fit with the Bank’s strategy and risk appetite in accordance with its Due Diligence Policy. This assess- ment 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, Financial Instruments: Disclosures, 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, 2015 and 2014. 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 banking. 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. The Bank’s primary objective is to be methodical in its credit risk assessment so that the Bank can better understand, select, and manage its exposures to reduce significant fluctuations in earnings. The Bank’s strategy is to ensure central oversight of credit risk in each business, and reinforce 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 inte- grated into each business, but each credit risk control unit separately reports to Risk Management to ensure objectivity and accountability. Each business segment’s credit risk control unit is responsible for its credit decisions and must comply with established policies, exposure guidelines, credit approval limits, and policy/limit exception procedures. It must also adhere to established enterprise-wide standards of credit assessment and obtain Risk Management’s approval for credit decisions beyond their discretionary authority. Risk Management provides independent oversight of credit risk by developing 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 TD MANAGES CREDIT RISK The Bank’s Credit Risk Management Framework outlines the internal risk and control structure to manage credit risk and includes risk appetite, policies, processes, 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 decision-making strategies, including policy and limit exception management guidelines, as well as the discretionary limits of officers throughout the Bank for extending lines of credit. Limits are established to monitor and control country, industry, product, geographic, and group exposure risks in the portfolios in accordance with enterprise-wide policies. In TD’s Retail businesses, the Bank uses established underwriting guidelines (which include collateral and loan-to-value constraints) along with 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 exposure and performance, and size of total bank relationship, as well as external data such as credit bureau information, to determine the amount of credit the Bank is prepared to extend to retail customers and to 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. Larger dollar exposures and material exceptions to policy are escalated to Retail Risk Management. Material policy exceptions are tracked and reported to monitor portfolio trends and identify potential weaknesses in underwriting guidelines and strategies. Where unfavourable trends are identified, remedial actions are taken to address those weaknesses. 75 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISThe Bank’s 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 it is willing to extend to a particular borrower. Management processes are used to monitor country, industry, and borrower or counterparty risk ratings, which include daily, monthly, quarterly, and annual review requirements for credit exposures. The key parameters used in the Bank’s 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, dividends, and trade related finance, as well as repatriation of the Bank’s capital in that country. The Bank currently has credit exposure in a number of countries, with the majority of the exposure in North America. The Bank measures country risk using approved risk rating models and qualitative factors that are also used to establish country exposure limits covering all aspects of credit exposure across all busi- nesses. Country risk ratings are managed on an ongoing basis and are subject to a detailed review at least annually. As part of the Bank’s credit risk strategy, the Bank sets limits on the amount of credit it is prepared to extend to specific industry sectors. The Bank monitors its concentration to any given industry to ensure that the loan portfolio is diversified. The Bank manages its risk using limits based on an internal risk rating score that combines TD’s indus- try risk rating model and detailed industry analysis, and regularly reviews industry risk ratings to ensure that those ratings properly reflect the risk of the industry. The Bank assigns a maximum exposure limit or a concentration limit to each major industry segment which is a percentage of its total wholesale and commercial exposure. The Bank may also set limits on the amount of credit it is 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 (BRR) and, for certain portfolios, the risk rating of the industry in which the entity operates. This exposure is monitored on a regular basis. The Bank may also use credit derivatives to mitigate industry concentration and borrower-specific exposure as part of its 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. The Basel Framework sets out several options which represent increasingly more risk-sensitive approaches to calculating credit, market, and operational RWA. Credit Risk and the Basel Framework The Bank received approval from OSFI to use the Basel Advanced Internal Ratings Based (AIRB) Approach for credit risk, effective November 1, 2007. The Bank uses the AIRB Approach for all material portfolios, except in the following areas: • TD has approved exemptions to use the Standardized Approach for some small credit exposures in North America. Risk Management reconfirms annually that this approach remains appropriate. • TD has received temporary waivers to use the Standardized Approach for the majority of its U.S. credit portfolios and for some small credit portfolios. The Bank expects to transition the U.S. credit portfolios to the AIRB Approach in 2016 subject to regulatory approval. To continue to qualify using the AIRB Approach for credit risk, the Bank must meet the ongoing conditions and requirements established by OSFI and the Basel Framework. The Bank regularly assesses its compliance with these 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: PD – the likelihood that the borrower will not be able to meet its scheduled repayments within a one year time horizon; LGD – the amount of loss the Bank would likely incur when a borrower defaults on a loan, which is expressed as a percentage of EAD – the total amount the Bank is exposed to at the time of default. By applying these risk parameters, TD can measure and monitor its credit risk to ensure it remains within pre-determined thresholds. Retail Exposures In the retail portfolio, including individuals and small businesses, the Bank manages exposures on a pooled basis, using predictive credit scoring techniques. There are three sub-types of retail exposures: residential secured (for example, individual mortgages and home equity lines of credit), qualifying revolving retail (for example, individ- ual credit cards, unsecured lines of credit, and overdraft protection products), and other retail (for example, 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 exposure sub-types. For each Canadian retail portfolio, the Bank has retained 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 reflects 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 AIRB Approach, the Bank defines default for Canadian exposures as delinquency of 90 days or more 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, such as loan size, interest rate, and collateral, where applicable; an account’s previous history and current status; an account’s age on books; a customer’s credit bureau attributes; and a customer’s other holdings with the Bank. For secured products such as residential mortgages, property characteristics, loan to value ratios, and a 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. Exposures are then assigned to one of nine pre-defined PD segments based on their estimated long-run average one-year PD. The risk discriminative and predictive power of the Bank’s retail credit models is assessed against the most recently available one-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. 76 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS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 to 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. The following table maps PD ranges to risk levels: Risk Assessment Low Risk Normal Risk Medium Risk High Risk Default PD Segment PD Range 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 7.59 7.60 to 18.20 18.21 to 99.99 100.00 Non-Retail Exposures In the non-retail portfolio, the Bank manages exposures on an individual borrower basis, using industry and sector-specific credit risk models, and expert judgment. The Bank has categorized non-retail credit risk exposures according to the following Basel counterparty types: corporate, including wholesale and commercial customers, sovereign, and bank. Under the AIRB Approach, CMHC-insured mortgages are considered sovereign risk and are therefore classified as non-retail. The Bank evaluates credit risk for non-retail exposures by using both a BRR and facility risk rating (FRR). The Bank uses this system for all corporate, sovereign, and bank exposures. The Bank determines the risk ratings using industry and sector-specific credit risk models that are based on internal historical data for the years of 1994-2014, 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 capi- tal, economic capital, and incurred but not identified allowance for credit losses. Consistent with the AIRB Approach to measure capital adequacy at a one-year risk horizon, the parameters are estimated to a twelve-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, the Bank reviews the borrower’s competitive position, financial performance, economic and industry trends, management quality, and access to funds. Under the AIRB 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 rele- vant and material information must be taken into account and the information being used must be current. Quantitative rating models are used to rank 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. TD’s 21-point BRR scale broadly aligns to external ratings as follows: Description Investment grade Non-investment grade Watch and classified Impaired/default Rating Category Standard & Poor’s Moody’s Investor Services 0 to 1C 2A to 2C 3A to 3C 4A to 4C 5A to 5C 6 to 8 9A to 9B AAA to AA- A+ to A- BBB+ to BBB- BB+ to BB- B+ to B- CCC+ to CC and below Default Aaa to Aa3 A1 to A3 Baa1 to Baa3 Ba1 to Ba3 B1 to B3 Caa1 to Ca and below Default 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 coverage, 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 AIRB 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 Committed 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 one-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 downturn 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. 77 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS Credit Risk Exposures Subject to the Standardized Approach Currently the Standardized Approach to credit risk is used primarily for assets in the U.S. credit portfolio. The Bank is 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 counterparty type, product type, and the nature/extent of credit risk mitigation. TD uses external credit ratings, including Moody’s and S&P to determine the appropriate risk weight for its exposures to sovereigns (governments, central banks, and certain public sector entities) and banks (regulated deposit-taking institutions, securities firms, and certain public sector entities). The Bank applies 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%. 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 exposures) or 150% (all other exposures). 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 TD. The Bank uses 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 Control group within Capital Markets Risk Management is responsible for estimating and managing counterparty credit risk in accordance with credit policies established by Risk Management. 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. The Bank establishes various limits, including gross notional limits, to manage business volumes and concentrations. TD regularly assesses market conditions and the valuation of underlying financial instruments. Counterparty credit risk may increase during periods of receding market liquidity for certain instruments. Capital Markets Risk Management meets regularly with Market and Credit Risk Management and Trading businesses to discuss how evolving market conditions may impact the Bank’s 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. The Bank also executes 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 the Bank uses for managing other transactions that create credit risk exposure. These standards include evaluating the creditworthiness of counter- parties, 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, namely general and specific. General wrong-way risk arises when the PD 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 PD of the counter- party due to the nature of the transactions entered into with that counterparty. These exposures require specific approval within the credit approval process. The Bank measures and manages specific wrong-way risk exposures in the same manner as direct loan obliga- tions and controls 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 resulting from derivative financial instruments to higher risk counterparties. As at October 31, 2015, after taking into account risk mitigation strategies, TD does not have material derivative exposure to any coun- terparty 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 vali- dated on a regular basis 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 the Bank’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 the Bank’s credit risk rating system. Stress Testing To determine the potential loss that could be incurred under a range of adverse scenarios, the Bank subjects its 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 the Bank uses 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, automobiles, and other business assets, such as accounts receivable, inventory, and fixed assets. In the Wholesale Banking business, a large portion of loans is to invest- ment 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. 78 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISThe Bank also uses 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, safekeeping, and release of pledged securities. In all but exceptional situations, the Bank secures collateral by taking possession and controlling it in a jurisdiction where it can legally enforce its collateral rights. In exceptional situations and when demanded by TD’s counterparty, the Bank holds or pledges collateral with an acceptable third-party custodian. The Bank documents all such third party arrangements with industry standard agreements. Occasionally, the Bank may take guarantees to reduce the risk in credit exposures. For credit risk exposures subject to AIRB, the Bank only recognizes 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. The Bank’s 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 the Bank uses for all counterparties for which it has 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 residential real property 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. The Bank has specific risk management guidelines addressing the circumstances when they may be used, and processes to periodically validate AVMs including obtaining third party appraisals. Gross Credit Risk Exposure Gross credit risk exposure, also referred to as EAD, is the total amount the Bank is 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 balance sheet 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 exposures for the two approaches the Bank uses to measure credit risk are included in the following table. T A B L E 4 8 GROSS CREDIT RISK EXPOSURES – Standardized and Advanced Internal Ratings Based Approaches1,2 (millions of Canadian dollars) Retail Residential secured Qualifying revolving retail Other retail Total retail Non-retail Corporate Sovereign Bank Total non-retail Gross credit risk exposures October 31, 2015 As at October 31, 2014 Standardized AIRB Total Standardized AIRB Total $ 32,897 – 59,655 92,552 114,698 55,934 13,542 184,174 $ 276,726 $ 276,526 63,169 38,952 378,647 $ 309,423 63,169 98,607 471,199 225,263 128,496 111,602 465,361 $ 844,008 339,961 184,430 125,144 649,535 $ 1,120,734 $ 28,599 – 48,093 76,692 85,948 35,788 9,794 131,530 $ 208,222 $ 261,063 59,316 36,680 357,059 177,826 96,948 98,736 373,510 $ 730,569 $ 289,662 59,316 84,773 433,751 263,774 132,736 108,530 505,040 $ 938,791 1 Gross credit risk exposures represent EAD and are before the effects of credit risk mitigation. This table excludes securitization, equity, and other credit RWA. 2 Prior to 2015, amounts have not been adjusted to reflect the impact of the 2015 IFRS Standards and Amendments. Other Credit Risk Exposures Non-trading Equity Exposures TD’s non-trading equity exposures are at a level that represents less than 5% of the Bank’s combined Tier 1 and Tier 2 Capital. As a result, the Bank uses OSFI prescribed risk weights to calculate RWA on non- trading equity exposures. Securitization Exposures For externally rated securitization exposures, the Bank uses both the Standardized Approach and the Ratings Based Approach (RBA). Both approaches assign risk weights to exposures using external ratings. The Bank uses ratings assigned by one or more external rating agen- cies, including Moody’s and S&P. 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. The Bank uses the Internal Assessment Approach (IAA) to manage the credit risk of its exposures relating to ABCP securitizations that are not externally rated. Under the IAA, the Bank considers all relevant risk factors in assess- ing the credit quality of these exposures, including those published by the Moody’s and S&P rating agencies. The Bank also uses loss coverage models and policies to quantify and monitor the level of risk, and facili- tate its management. The Bank’s IAA process includes an assessment of the extent by which the enhancement available for loss protection provides coverage of expected losses. The levels of stressed coverage the Bank requires for each internal risk rating are consistent with the rating agencies’ published stressed factor requirements for equivalent external ratings by asset class. All exposures are assigned an internal risk rating based on the Bank’s assessment, which must be reviewed at least annually. The Bank’s ratings reflect its assessment of risk of loss, consisting of the combined PD and LGD for each exposure. The ratings scale TD uses corresponds to the long-term ratings scales used by the rating agencies. 79 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS The Bank’s IAA process is subject to all of the key elements and principles of the Bank’s risk governance structure, and is managed in the same way as outlined in this Credit Risk section. The Bank uses the results of the IAA in all aspects of its credit risk management, including performance tracking, control mechanisms, 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 on 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, or 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. The Bank is exposed to market risk in its trading and investment portfolios, as well as through its non-trading activities. In the Bank’s trading and investment portfolios, it is an active participant in the market, seeking to realize returns for TD through careful management of its positions and inventories. In the Bank’s non trading activities, it is exposed to market risk through the everyday banking transactions that the Bank’s customers execute with TD. The Bank complied with the Basel III market risk requirements as at October 31, 2015, using the Internal Model Approach. MARKET RISK LINKAGE TO THE BALANCE SHEET The following table 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 4 9 MARKET RISK LINKAGE TO THE BALANCE SHEET1 (millions of Canadian dollars) October 31, 2015 As at October 31, 2014 Assets subject to market risk Interest-bearing deposits with banks Trading loans, securities, and other 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 Customers’ liability under acceptances Investment in TD Ameritrade Other assets2 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 Other liabilities2 Liabilities and Equity not exposed Balance Trading Non-trading sheet market risk market risk Balance Trading Non-trading sheet market risk market risk Non-trading market risk – primary risk sensitivity $ 42,483 95,157 69,438 $ 219 89,372 58,144 $ 42,264 5,785 11,294 $ 43,773 101,173 55,796 $ 377 99,274 49,164 $ 43,396 Interest rate Interest rate 1,899 6,632 Equity, foreign exchange, interest rate 4,378 88,782 74,450 – – – 4,378 88,782 74,450 4,745 63,008 56,977 – – – 4,745 63,008 56,977 Interest rate Foreign exchange, interest rate Foreign exchange, interest rate 97,364 547,775 16,646 6,683 1,545 59,672 1,104,373 13,201 – – – – – 160,936 84,163 547,775 16,646 6,683 1,545 – 883,765 82,556 481,937 13,080 5,569 1,434 50,463 960,511 8,154 – – – – – 156,969 74,402 481,937 13,080 5,569 1,434 – 753,079 Interest rate Interest rate Interest rate Equity Interest rate 74,759 57,218 10,986 1,415 695,576 16,646 38,803 67,156 22,743 8,637 11,866 2,231 52,752 10,986 1,402 – – 33,594 12,376 – – – 72,528 4,466 – 59,334 51,209 11,198 1,793 47,483 10,190 57,541 3,726 1,008 Interest rate Foreign exchange, interest rate Interest rate 13 695,576 16,646 5,209 3,250 600,716 13,080 39,465 3,242 – – 37,247 8 600,716 13,080 2,218 54,780 22,743 8,637 11,866 53,112 24,960 7,785 13,525 8,242 – – – 44,870 24,960 7,785 13,525 Interest rate Equity, interest rate Interest rate Interest rate Interest rate Interest rate Interest rate Interest rate to market risk Total Liabilities and Equity 98,568 $ 1,104,373 – $ 113,341 – $ 892,464 82,877 $ 960,511 – $ 108,197 – $ 769,437 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. 2 Relates to retirement benefits, insurance, and structured entity liabilities. 80 TD BANK GROUP ANNUAL REPORT 2015 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 on risk in order to provide effective service in markets where its clients trade. In particular, the Bank needs to hold inventory, act as principal to facilitate client transactions, and under- write 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 Control Committee meets regularly to conduct a review of the market risk profile, trading results of the Bank’s trading businesses as well as changes to market risk policies. 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 the year ended October 31, 2015. HOW TD MANAGES MARKET RISK IN TRADING ACTIVITIES Market risk plays a key part in the assessment of any trading business strategy. The Bank launches new trading initiatives or expands existing ones only if the risk has been thoroughly assessed, and is judged to be within the Bank’s 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 The Bank sets trading limits that are consistent with the approved business strategy for each business and its tolerance for the associated market risk, aligned to its market risk appetite. In setting limits, the Bank takes into account market volatility, market liquidity, organiza- tional 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, credit spread, yield curve shift, price, and volatility limits. Another primary measure of trading limits is VaR, which the Bank uses 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 TD 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. The Bank values the current portfolio using the market price and rate changes of the most recent 259 trading days for equity, interest rate, foreign exchange, credit, and commodity products. 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 one-day holding period is used for GMR calculation, which is scaled up to ten days for regulatory 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 five-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 ten-day holding period. The following graph discloses daily one-day VaR usage and trading- related revenue within Wholesale Banking. Trading-related revenue is the total of trading income reported in non-interest income and the net interest income on trading positions reported in net interest income, and is reported on a TEB. For the year ending October 31, 2015, there were 23 days of trading losses and trading-related revenue was positive for 91% of the trading days, reflecting normal trading activity. 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) 4 1 0 2 , 3 v o N 4 1 0 2 , 0 1 v o N 4 1 0 2 , 7 1 v o N 4 1 0 2 , 4 2 v o N 4 1 0 2 , 1 c e D 4 1 0 2 , 8 c e D 4 1 0 2 , 5 1 c e D 4 1 0 2 , 2 2 c e D 4 1 0 2 , 9 2 c e D 5 1 0 2 , 5 n a J 5 1 0 2 , 2 1 n a J 5 1 0 2 , 9 1 n a J 5 1 0 2 , 6 2 n a J 5 1 0 2 , 2 b e F 5 1 0 2 , 9 b e F 5 1 0 2 , 6 1 b e F 5 1 0 2 , 3 2 b e F 5 1 0 2 , 2 r a M 5 1 0 2 , 9 r a M 5 1 0 2 , 6 1 r a M 5 1 0 2 , 3 2 r a M 5 1 0 2 , 0 3 r a M 5 1 0 2 , 6 r p A 5 1 0 2 , 3 1 r p A 5 1 0 2 , 0 2 r p A 5 1 0 2 , 7 2 r p A 5 1 0 2 , 4 y a M 5 1 0 2 , 1 1 y a M 5 1 0 2 , 8 1 y a M 5 1 0 2 , 5 2 y a M 5 1 0 2 , 1 n u J 5 1 0 2 , 8 n u J 5 1 0 2 , 5 1 n u J 5 1 0 2 , 2 2 n u J 5 1 0 2 , 9 2 n u J 5 1 0 2 , 6 l u J 5 1 0 2 , 3 1 l u J 5 1 0 2 , 0 2 l u J 5 1 0 2 , 7 2 l u J 5 1 0 2 , 3 g u A 5 1 0 2 , 0 1 g u A 5 1 0 2 , 7 1 g u A 5 1 0 2 , 4 2 g u A 5 1 0 2 , 1 3 g u A 5 1 0 2 , 7 p e S 5 1 0 2 , 4 1 p e S 5 1 0 2 , 1 2 p e S 5 1 0 2 , 8 2 p e S 5 1 0 2 , 5 t c O 5 1 0 2 , 2 1 t c O 5 1 0 2 , 9 1 t c O 5 1 0 2 , 6 2 t c O 81 TD BANK GROUP ANNUAL REPORT 2015 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. The Bank continuously improves its VaR methodologies and incorpo- rates new risk measures in line with market conventions, industry best practices, and regulatory requirements. To mitigate some of the shortcomings of VaR, the Bank uses addi- tional metrics designed for risk management and capital purposes. These include Stressed VaR, IRC, Stress Testing Framework, as well as limits based on the sensitivity to various market risk factors. Calculating Stressed VaR In addition to VaR, the Bank 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 fourth quarter of fiscal 2015, Stressed VaR was calculated using the one-year period that began on February 1, 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 IRC is applied to all instruments in the trading book subject to migration and default risk. Migration risk represents 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 5 0 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 (one-day) Stressed Value-at-Risk (one-day) Incremental Risk Capital Charge (one-year) As at Average High $ 8.4 7.9 9.8 4.9 1.5 12.9 (26.5) $ 18.9 18.3 255.4 $ 8.0 7.8 9.0 3.8 1.5 15.9 (25.3) $ 20.7 28.8 246.4 $ 14.9 11.8 13.5 9 3.3 22.5 n/m2 26 35.1 319.6 $ $ 2015 Low 3.8 4.6 4 1.1 0.8 12.6 n/m2 $ 15.3 18.3 164.5 As at Average High $ 5.3 4.9 5.1 1.6 0.9 13.6 (16.1) $ 15.3 29.3 275.6 $ 5.8 6.3 3.7 2.7 1.4 15.8 (17.8) $ 17.9 27.8 313.6 $ 12.8 8.8 9.6 5.5 4 20.5 n/m2 $ 22.1 36.1 428.7 2014 Low $ 3.3 3.9 1.5 0.7 0.6 12.1 n/m2 $ 14.2 21.1 222.0 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 were relatively unchanged compared with the last quarter. Increases in equity positions drove the increase in average equity VaR year over year. Average IRC decreased by $102 million over the past year primarily due to an IRC model enhancement to improve risk measurement of own debt. Validation of VaR Model The Bank uses a back-testing process to compare the actual and theo- retical 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 The Bank’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 the Bank has 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 Control Committee. 82 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS MARKET RISK IN OTHER WHOLESALE BANKING ACTIVITIES The Bank is also exposed to market risk arising from a legacy portfolio of bonds and preferred shares held in TD Securities and in its remain- ing merchant banking investments. Risk Management reviews and approves policies and procedures, which are established to monitor, measure, and mitigate these risks. The Bank is exposed to market risk when it enters into non-trading banking transactions with its 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 TD’s traditional banking activities. Such market risks primarily include interest rate risk and foreign exchange risk. WHO IS RESPONSIBLE FOR ASSET/LIABILITY MANAGEMENT TBSM measures and manages the market risks of the Bank’s 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 Market Risk Control function provides independent oversight, governance, and control over these market risks. The Risk Committee periodically reviews and approves key asset/liability management and non-trading market risk policies and receives reports on compliance with approved risk limits. HOW TD MANAGES ITS ASSET AND LIABILITY POSITIONS Non-trading interest rate risk is viewed as a non-productive risk as it has the potential to increase earnings volatility and incur loss without providing long run expected value. As a result, TBSM’s mandate is to structure the asset and liability positions of the balance sheet in order to achieve a target profile that controls the impact of changes in interest rates on the Bank’s net interest income and economic value that is consistent with the Bank’s RAS. Managing Interest Rate Risk Interest rate risk is the impact that changes in interest rates could have on the Bank’s margins, earnings, and economic value. The objective of interest rate risk management is to ensure that earnings are stable and predictable over time. The Bank has adopted a disciplined hedging approach to manage the net interest income contribution from its asset and liability positions, including an assigned target-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 strate- gies 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; and • developing and implementing strategies to stabilize net interest income from all retail banking products. The Bank is exposed to interest rate risk when asset and liability princi- pal and interest cash flows have different interest 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. TD’s 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 embedded options, such as prepaying a loan or redeeming a deposit 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 for Net Interest Income Sensitivity (NIIS) and Economic Value at Risk (EVaR). NIIS is defined as the change in net interest income over the next twelve months for an immediate and sustained 100 bps unfavourable interest rate shock. NIIS measures the extent to which the maturing and repricing asset and liability cash flows are matched over the next twelve-month period and reflects how the Bank’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 the Bank’s asset portfolio and the change in the present value of the Bank’s liability portfolio, including off-balance sheet instruments and assumed profiles for non-rate sensi- tive products, 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 net 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 NIIS 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 NIIS and EVaR captures the impact of changes to assumed customer behaviours, such as interest rate sensitive 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 NIIS which are linked to capital and net interest income, respectively. These Board limits are consistent with the Bank’s enterprise risk appetite and are periodically reviewed and approved by the Risk Committee. 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. 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 NIIS 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. The Bank regularly performs valuations of all asset and liability positions, as well as off-balance sheet exposures. TD’s objective is to stabilize net interest income over time through disciplined asset/liability matching and hedging. 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. The Bank projects future cash flows by looking at the impact of: • a target interest sensitivity profile for its core deposit portfolio; • a target investment profile on its net equity position; and • liquidation assumptions on mortgages other than from embedded pre-payment options. 83 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS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 TD to a significant financial risk. • Rate Commitments: The Bank models its exposure from freestand- ing 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: The Bank models its exposure to written options embedded in other products, such as the right to prepay residential mortgage loans, based on analysis of customer behav- iour. Econometric models are used to model prepayments and the effects of prepayment 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 parameters are also assessed to determine a core liquidation speed which is independent of market incentives. • Non-Maturity Liabilities: The Bank models its exposure to non- maturity liabilities, such as core deposits, by assessing interest rate elasticity and balance permanence using historical data and business judgement. 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 the Bank purchases options or uses a dynamic hedging process designed to replicate the payoff of a purchased option. The Bank also models the margin compression that would be caused by declining interest rates on certain interest rate sensitive demand deposit accounts. Other market risks monitored on a regular basis include: • Basis Risk: The Bank is exposed to risks related to the difference in various market indices. • Equity Risk: The Bank is exposed to equity risk through its equity-linked guaranteed investment certificate product offering. The exposure is managed by purchasing options to replicate the equity payoff. Interest Rate Risk The following graph shows the Bank’s 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, 2015 and October 31, 2014 (millions of Canadian dollars) October 31, 2014: $(68) October 31, 2015: $(143) ) 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 $200 100 0 (100) (200) (300) (400) (500) (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, funding instruments, other capital market alternatives, and, less frequently, product pricing strategies to manage interest rate risk. As at October 31, 2015, an immediate and sustained 100 bps increase in interest rates would have decreased the economic value of share- holders’ equity by $143 million (October 31, 2014 – $68 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 $27 million (October 31, 2014 – $56 million) after tax. The interest risk exposure, or EVaR, in the insurance business is not included in the above graph. Interest rate risk is managed using defined exposure limits and processes, as set and governed by the insurance Board of Directors. 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 5 1 SENSITIVITY OF AFTER-TAX ECONOMIC VALUE AT RISK BY CURRENCY (millions of Canadian dollars) Currency Canadian dollar U.S. dollar October 31, 2015 October 31, 2014 100 bps increase $ (5) (138) $ (143) 100 bps decrease $ (15)1 (12)2 $ (27) 100 bps increase $ 7 (75) $ (68) 100 bps decrease $ (47) (9)2 $ (56) 1 EVaR sensitivity has been measured using a 50 bps rate decline for Canadian interest rates, corresponding to an interest rate environment that is floored at 0%. 2 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 0%. 84 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS For the NIIS measure (not shown on the graph), a 100 bps increase in interest rates on October 31, 2015, would have increased pre-tax net interest income by $345 million (October 31, 2014 – $438 million increase) in the next twelve months. A 100 bps decrease in interest rates on October 31, 2015, would have decreased pre-tax net interest income by $272 million (October 31, 2014 – $385 million decrease) in the next twelve months. Over the last year, the reported NIIS exposures have decreased due to a decreasing portion of permanent non-rate sensitive deposits being invested in a longer term maturity profile. This is consistent with net interest income management strategies overseen by ALCO. Reported NIIS remains consistent with the Bank’s risk appe- tite and within established Board limits. The following table shows the sensitivity of net interest income (pre-tax) by currency for those currencies where the Bank has material exposure. T A B L E 5 2 SENSITIVITY OF PRE-TAX NET INTEREST INCOME SENSITIVITY BY CURRENCY (millions of Canadian dollars) Currency Canadian dollar U.S. dollar 1 NIIS sensitivity has been measured using a 75 bps rate decline for Canadian interest rates, corresponding to an interest rate environment that is floored at 0%. 2 NIIS 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 0%. 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 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 its liabilities in that currency, they create a foreign currency open position. An adverse change in foreign exchange rates can impact the Bank’s reported net interest income and shareholders’ equity, and also its capital ratios. 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 denominated in a foreign currency. If the Canadian dollar weakens, the Canadian dollar equivalent of the Bank’s RWA in a foreign currency increases, thereby increasing the Bank’s capital requirement. 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 appropri- ate to the attainment of the following goals: (1) to generate a targeted credit of funds to deposits in excess of lending; (2) to provide a suffi- cient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (3) to provide eligible securities to meet collateral requirements and cash manage- ment operations; and (4) 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 the Bank’s own portfolio. October 31, 2015 October 31, 2014 100 bps increase $ 235 110 $ 345 100 bps decrease $ (234)1 (38)2 $ (272) 100 bps increase $ 354 84 $ 438 100 bps decrease $ (354) (31)2 $ (385) WHY MARGINS ON AVERAGE EARNING ASSETS FLUCTUATE OVER TIME As previously noted, the objective of the Bank’s approach to asset/ liability management is to ensure that earnings are stable and predict- able over time, regardless of cash flow mismatches and the exercise of embedded options. This approach also creates margin certainty on fixed rate loans and deposits as they are booked. Despite this approach however, the margin on average earning 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; and/or • changes in the prime Bankers’ Acceptance or prime London Interbank Offered Rate 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 the Bank gener- ates on its modeled maturity profile for core deposits and the invest- ment profile for its 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. The Bank’s approach tends to moderate the impact of these factors over time, resulting in a more stable and predictable earnings stream. The Bank uses 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. 85 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 the Bank’s 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 of the Bank’s business activities, including the practices for managing other risks such as credit, market, and liquidity risk. The Bank must mitigate and manage operational risk so that it can create and sustain shareholder value, successfully execute the Bank’s business strategies, operate efficiently, and provide reliable, secure, and convenient access to financial services. The Bank maintains a formal enterprise-wide operational risk management framework that emphasizes a strong risk management and internal control culture throughout TD. Under Basel, the Bank currently uses the Standardized Approach to calculate operational risk regulatory capital. The Bank has submitted its application to OSFI to use the Basel II Advanced Measurement Approach (AMA). The AMA will more directly reflect the Bank’s operational risk environment, and operational risk regulatory capital will be measured through the use of a loss distribution approach model which incorpo- rates internal loss events, external loss events, scenario analysis, and other adjustments. WHO MANAGES OPERATIONAL RISK Operational Risk Management is an independent function that designs and maintains the Bank’s overall operational risk management framework. This framework sets out the enterprise-wide governance processes, policies, and practices to identify and assess, measure, control, monitor, escalate, and report operational risk. Risk Management ensures that there is appropriate monitoring and reporting of the Bank’s operational risk profile and exposures to senior management through the OROC, the ERMC, and the Risk Committee. The Bank also maintains program groups who oversee specific enterprise wide operational risk policies. These policies govern the activities of the corporate functions responsible for the management and appropriate oversight of business continuity and crisis/incident management, supplier risk management, financial crime risk manage- ment, project change management, technology risk management, and information management. The senior management of individual business units is responsible for the day-to-day management of operational risk following the Bank’s established operational risk management policies and three lines of defence model. An independent risk management function supports each business segment and corporate area, and monitors and challenges the implementation and use of the operational risk management framework programs according to the nature and scope of the operational risks inherent 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 the Bank. HOW TD MANAGES OPERATIONAL RISK The Operational Risk Management Framework outlines the internal risk and control structure to manage operational risk and includes risk appetite for operational risk, limits, governance, policies, and processes. The Operational Risk Management Framework is maintained by Risk Management and supports alignment with TD’s ERF and risk appetite. The framework incorporates sound industry practices and meets regulatory requirements. Key components of the framework include: 86 Governance and Policy Management reporting and organizational structures emphasize accountability, ownership, and effective oversight of each business unit and each corporate area’s operational risk exposures. In addition, the expectations of the Risk Committee and senior management for manag- ing operational risk are set out by enterprise-wide policies and practices. Risk and Control Self-Assessment Internal control is one of the primary methods of safeguarding the Bank’s employees, customers, assets, and information, and in prevent- ing 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 the Bank’s policies. Operational Risk Event Monitoring In order to reduce the Bank’s exposure to future loss, it is critical that the Bank remains aware of and responds to its own and industry opera- tional risks. The Bank’s policies and processes require that operational risk events be identified, tracked, and reported to the appropriate level of management to ensure that the Bank analyzes and manages such risks appropriately and takes suitable corrective and preventative action. The Bank also reviews, analyzes, and benchmarks TD against operational risk losses that have occurred at other financial institutions using information acquired through recognized industry data providers. Scenario Analysis Scenario Analysis is a systematic and repeatable process to assess the likelihood and loss impact of low frequency, high impact operational risk events (tail risk). The Bank applies this practice to meet risk measurement and risk management objectives. The process includes use of relevant external operational loss event data that is assessed considering the Bank’s operational risk profile and control structure. The program raises awareness and educates business owners regarding existing and emerging risks, which may result in the identification and implementation of risk mitigation action plans to minimize tail risk. Risk Reporting Risk Management, in partnership with senior management, regularly monitors risk-related measures and the risk profile throughout the Bank to report to senior business management and the Risk Committee. Operational risk measures are systematically tracked, assessed, and reported to ensure management accountability and attention are maintained over current and emerging issues. Insurance Operational Risk Management includes oversight of the effective use of insurance aligned with the Bank’s risk management strategy and risk appetite. To provide additional protection from loss, the Bank manages a comprehensive portfolio of insurance and other risk miti- gating arrangements. The insurance terms and provisions, including types and amounts of coverage in the portfolio, are continually assessed to ensure that both the Bank’s tolerance for risk and, where applicable, statutory requirements are satisfied. The management process includes conducting regular in-depth risk and financial analysis and identifying opportunities to transfer elements of TD’s risk to third parties where appropriate. The Bank transacts with external insurers that satisfy TD’s minimum financial rating requirements. Technology, Information and Cyber Security Virtually all aspects of the Bank’s business and operations use technol- ogy and information to create and support new markets, competitive products and delivery channels, and other business developments. The Bank needs to manage risks associated with inadequacies, improper operation, or unauthorized access of the Bank’s technology, infrastruc- ture, systems, information, or data. To achieve this, the Bank actively monitors, manages, and continues to enhance its ability to mitigate technology and information security risks through enterprise-wide programs using industry best practices and the Bank’s operational risk management framework. These programs include robust threat and vulnerability assessments and responses, enhanced resiliency planning and testing, as well as disciplined change management practices. TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISBusiness Continuity and Crisis/Incident Management During incidents that could disrupt the Bank’s 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. The Bank’s robust enterprise-wide business continuity management program leverages a multi-tiered, global crisis/incident management governance structure to ensure effective oversight, ownership, and management of crises and incidents affecting the Bank. All areas of the Bank 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 that supplies a particular product or service to or on behalf of the Bank. The benefits of leverag- ing third parties include access to leading technology, specialized expertise, economies of scale, and operational efficiencies. While these relationships bring benefits to the Bank’s businesses and customers, the Bank also needs to manage and minimize any risks related to the activity. The Bank does this through an enterprise-level third-party risk management program that guides third-party activities throughout the life cycles of the arrangements and ensures the level of risk manage- ment and senior management oversight is appropriate to the size, risk, and importance of the third-party arrangement. Project Management The Bank has established a disciplined approach to project manage- ment across the enterprise coordinated by the Bank’s Enterprise Project Management Office. This approach involves senior manage- ment governance and oversight of the Bank’s project portfolio and leverages leading industry practices to guide TD’s use of standardized project management methodology, defined project management accountabilities and capabilities, and project portfolio reporting and management tools to support successful project delivery. Financial Crime and Fraud Management Detecting fraud and other forms of financial crime is very important to the Bank. To do this, TD’s Financial Crime and Fraud Management Group leads the development and implementation of enterprise-wide financial crime and fraud management strategies, policies, and prac- tices. TD employs advanced fraud analytics capabilities to strengthen the Bank’s defences and enhance governance, oversight, and collabo- ration across the enterprise to protect customers, shareholders, and employees from increasingly sophisticated financial crimes and fraud. Excluding those events involving litigation, the Bank did not experience any material single operational risk loss event in 2015. Refer to Note 28 of the 2015 Consolidated Financial Statements for further informa- tion on material legal or regulatory actions. Model Risk Management TD defines Model Risk as the potential for adverse consequences arising from decisions based on incorrect or misused models and their outputs, either from individual models, or in aggregate. This may lead to finan- cial loss, incorrect business and strategic decisions, or reputational risk. The Bank manages this risk in accordance with management approved model risk policies and supervisory guidance which encom- pass the life cycle of a model, including proof of concept, development, validation, implementation, usage, and ongoing model performance monitoring. The Bank’s model risk management framework captures key processes that may be partially or wholly qualitative, or based on expert judgment. Business segments identify the need for a new model or process and are responsible for model development and documentation according to the Bank’s policies and standards. During model development, controls with respect to code generation, acceptance testing, and usage are established and documented to a level of detail and compre- hensiveness 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. In cases where a model is deemed obsolete or unsuitable for its originally intended purposes, it is decommissioned in accordance with the Bank’s policies. Model Risk Management and Model Validation provide oversight, maintain a centralized inventory of all models as defined in the Bank’s model risk policy, validate and approve new and existing models on a pre-determined schedule depending on regulatory requirements and materiality, and monitor model performance. The validation process varies in rigour, depending on the model type and use, but at a minimum contains a detailed determination of: • the conceptual soundness of model methodologies and underlying quantitative and qualitative assumptions; • the risk associated with a model based on complexity and materiality; • the sensitivity of a model to model assumptions and changes in data inputs including stress testing; and • the limitations of a model and the compensating risk mitigation mechanisms in place to address the limitations. When appropriate, 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 to validate the appropriate- ness of the model’s methodology and its use. At the conclusion of the validation process, a model will either be approved for use or will be rejected and require redevelopment or other courses of action. Models or processes identified as obsolete or no longer appropriate for use through changes in industry practice, the business environment, or Bank strategies are subject to decommissioning. 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, driven by non-life premium risk, non-life reserving risk, catastrophic risk, mortality risk, morbidity risk, and longevity risk), policyholder behaviour, or associated expenses. Insurance contracts provide financial protection by transferring insured risks to the issuer in exchange for premiums. The Bank is engaged in insurance businesses relating to property and casualty insurance and, life and health insurance and reinsurance, through various subsidiaries; it is through these businesses that the Bank is exposed to insurance risk. WHO MANAGES INSURANCE RISK Senior management within the insurance business units has primary responsibility for managing insurance risk with oversight by the CRO 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 who provide additional risk management oversight. HOW TD MANAGES 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 and monitors compliance with insurance risk policies. The Bank’s Insurance Risk Management Framework and Insurance Risk Policy collectively outline the internal risk and control structure to manage insurance risk and include risk appetite, policies, processes, as well as limits and gover- nance. These documents are maintained by Risk Management and support alignment with the Bank’s risk appetite for insurance risk. The assessment of reserves for claim liabilities is central to the insurance operation. The Bank establishes 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 antici- pated. Claim liabilities are governed by the Bank’s general insurance reserving policy. 87 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS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 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. Liquidity Risk The risk of having insufficient cash or collateral to meet financial obli- gations without, in a timely manner, raising funding at unfavourable rates or selling assets at distressed prices. Financial obligations can arise from deposit withdrawals, debt maturities, commitments to provide credit or liquidity support, or the need to pledge additional collateral. TD’S LIQUIDITY RISK APPETITE The Bank maintains a prudent and disciplined approach to managing its potential exposure to liquidity risk. The Bank targets a 90-day survival horizon under a combined Bank-specific and market-wide stress scenario, and a minimum buffer over regulatory requirements prescribed by the OSFI Liquidity Adequacy Requirements (LAR) guide- lines that took effect in January 2015. Under the LAR guidelines, Canadian banks were required to comply fully with the 100% Liquidity Coverage Ratio (LCR) limit beginning in January 2015. The Bank oper- ates under a prudent funding paradigm with an emphasis on maximiz- ing deposits as a core source of funding, and having a ready access to wholesale funding markets across diversified terms, channels, and currencies so as to ensure low exposure to a sudden contraction of wholesale funding capacity and to minimize structural liquidity gaps. The Bank also maintains a comprehensive contingency funding plan to enhance preparedness for recovery from potential liquidity stress events. The resultant management strategies and actions comprise an integrated liquidity risk management program that best ensures low exposure to identified sources of liquidity risk and compliance with regulatory requirements. LIQUIDITY RISK MANAGEMENT RESPONSIBILITY The Bank’s ALCO oversees the Bank’s liquidity risk management program. It ensures there are effective management structures and policies 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, Wholesale Banking, and representatives from foreign operations, identifies and monitors TD’s liquidity risks. The management of liquidity risk is the responsibility of the Head of TBSM, while oversight and challenge is provided by the ALCO and independently by Risk Management. The Risk Committee of the Board frequently reviews reporting of the Bank’s liquidity position and approves the Bank’s Liquidity Risk Management Framework and Policies annually. The following treasury areas are responsible for measuring, monitoring, and managing liquidity risks for major business segments: • Liquidity and Funding Management (LFM) in TBSM is responsible for maintaining the liquidity risk management policy and asset pledging policy, along with associated limits, standards, and processes to ensure that consistent and efficient liquidity management approaches are applied across all of the Bank’s operations. TBSM LFM also manages and reports the combined Canadian Retail (including domestic wealth businesses), Corporate segment, and Wholesale Banking liquidity positions. There is also exposure to geographic concentration risk associated with personal property coverage. Exposure to insurance risk concentra- tion is managed through established underwriting guidelines, limits, and authorization levels that govern the acceptance of risk. Concentration of insurance risk is also mitigated through the purchase of reinsurance. The insurance business’ reinsurance programs are governed by catastrophe and reinsurance risk management policies. Strategies are in place to manage the risk to the Bank’s reinsurance business. Underwriting risk on business assumed is managed through a policy that limits exposure to certain types of business and countries. The vast majority of reinsurance treaties are annually renewable, which minimizes long term risk. Pandemic exposure is reviewed and estimated annually. • U.S. TBSM is responsible for managing the liquidity position for U.S. Retail operations. • Other regional treasury-related operations, including those within TD’s insurance, foreign branches, and/or subsidiaries are responsible for managing their liquidity risk and positions in compliance with their own policies, local regulatory requirements and, as applicable, consistent with the enterprise policy. HOW TD MANAGES LIQUIDITY RISK The Bank’s overall liquidity requirement is defined as the amount of liquid assets the Bank needs to hold to be able to cover expected future cash flow requirements, plus a prudent reserve against potential cash outflows in the event of a capital markets disruption or other events that could affect TD’s access to funding. The Bank does not rely on short-term wholesale funding for purposes other than funding market- able securities or short-term assets. To define the amount of liquidity that must be held for a rolling 90-day period, the Bank has developed an internal view for managing liquidity that uses an assumed “Severe Combined Stress” scenario. The Severe Combined Stress scenario models potential liquidity requirements and asset marketability during a crisis that has been triggered in the markets, specifically with respect to a lack of confi- dence in TD’s ability to meet obligations as they come due. The Bank also assumes loss of access to all forms of external unsecured funding during the 90-day period. In addition to this Bank-specific event, the Severe Combined Stress scenario also incorporates the impact of a stressed market-wide liquid- ity event that results in a significant reduction in the availability of funding for all institutions, a significant increase in the Bank’s cost of funds, and a significant decrease in the marketability of assets. The Bank also calculates “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 retail 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 the bankers’ acceptances the Bank issues on behalf of clients and short-term revolving ABCP. The Bank also manages its liquidity to comply with the regulatory liquidity metrics in the OSFI LAR (LCR and the Net Cumulative Cash Flow (NCCF) monitoring tool). The LCR requires that banks maintain a minimum liquidity coverage of 100% over a 30-day stress period. TD’s liquidity policy stipulates that the Bank must maintain sufficient “available liquidity” to cover “required liquidity” at all times through- out the Severe Combined Stress scenario subject to buffers over the regulatory minimums. As a result, the Bank’s liquidity is managed to the higher of TD’s 90-day surplus requirement and the target buffers over the regulatory minimums. 88 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISThe Funds Transfer Pricing process in TBSM considers liquidity risk as a key determinant of the cost or credit of funds provided to loans and deposits, respectively. Liquidity costs applied to loans are determined based on the appropriate term funding profile, while deposits are assessed based on the required liquidity reserves and balance stability. Additional liquidity costs are also applied to other contingent commit- ments like undrawn lines of credit provided to customers. The unencumbered liquid assets TD includes as available liquidity in the 90-day measurement period under its internal framework must be currently marketable, of sufficient credit quality, and readily convertible into cash through sale or pledging. Unencumbered liquid assets are represented in a cumulative liquidity gap framework with adjustments made for estimated market or trading depths, settlement timing, and/or other identified impediments to potential sale or pledging. Overall, the Bank expects the reduction in current market value of its liquid asset portfolio to be low given the underlying high credit quality and demonstrated liquidity. TD has access to the Bank of Canada’s Emergency Lending Assistance Program, the Federal Reserve Bank Discount Window in the U.S., and the European Central Bank standby facilities. TD does not consider borrowing capacity at central banks as a source of available liquidity when assessing liquidity positions. Liquid assets that TD considers when determining the Bank’s available liquidity are summarized in the following table, which does not include assets held within the Bank’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 5 3 SUMMARY OF LIQUID ASSETS BY TYPE AND CURRENCY1 (billions of Canadian dollars, except as noted) As at 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, 2015 $ 2.9 17.6 38.5 9.3 5.3 15.3 3.5 92.4 36.8 13.0 31.3 43.0 55.5 5.9 6.6 192.1 $ 284.5 $ 0.1 10.0 39.4 6.9 8.3 22.7 2.4 89.8 39.8 – 31.2 23.3 54.5 9.7 4.2 162.7 $ 252.5 $ – 29.0 0.5 6.8 4.1 3.5 1.2 45.1 – 28.7 5.8 35.5 0.9 3.1 14.2 88.2 $ 2.9 46.6 39.0 16.1 9.4 18.8 4.7 137.5 36.8 41.7 37.1 78.5 56.4 9.0 20.8 280.3 1% $ 11 9 4 2 5 1 33 9 10 9 19 13 2 5 67 0.2 19.6 3.3 7.0 1.5 7.2 0.7 39.5 1.2 28.7 14.4 21.8 4.3 1.3 12.4 84.1 $ 133.3 $ 417.8 100% $ 123.6 $ 2.7 27.0 35.7 9.1 7.9 11.6 4.0 98.0 35.6 13.0 22.7 56.7 52.1 7.7 8.4 196.2 $ 294.2 October 31, 2014 $ – 27.2 1.0 5.2 3.4 3.8 0.9 41.5 – 24.8 5.6 28.7 10.8 2.6 0.1 72.6 $ 0.1 37.2 40.4 12.1 11.7 26.5 3.3 131.3 39.8 24.8 36.8 52.0 65.3 12.3 4.3 235.3 –% $ 10 11 4 3 7 1 36 11 7 10 14 18 3 1 64 – 21.0 2.1 6.7 0.2 6.2 0.8 37.0 1.1 23.6 13.1 10.5 13.8 1.7 – 63.8 $ 114.1 $ 366.6 100% $ 100.8 $ 0.1 16.2 38.3 5.4 11.5 20.3 2.5 94.3 38.7 1.2 23.7 41.5 51.5 10.6 4.3 171.5 $ 265.8 Cash and due from banks 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 Cash and due from banks 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 1 Positions stated include gross asset values pertaining to secured borrowing/lending and reverse-repurchase/repurchase businesses. 2 Liquid assets include collateral received that can be rehypothecated or otherwise redeployed. 89 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS Liquid assets are held in The Toronto-Dominion Bank and multiple domestic and foreign subsidiaries and branches and are summarized in the following table. The increase of $28.4 billion in total unencum- bered liquid assets from the previous year was mainly due to the impact of foreign currency translation and growth in deposits. T A B L E 5 4 SUMMARY OF UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES (billions of Canadian dollars) The Toronto-Dominion Bank (Parent) Bank subsidiaries Foreign branches Total The Bank’s monthly average liquid assets for the years ended October 31 are summarized in the following table. October 31 2015 $ 91.4 175.2 27.6 $ 294.2 As at October 31 2014 $ 89.4 150.2 26.2 $ 265.8 T A B L E 5 5 SUMMARY OF AVERAGE LIQUID ASSETS BY TYPE AND CURRENCY1 (billions of Canadian dollars, except as noted) Average for the years ended 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, 2015 $ – 32.2 0.5 7.6 4.2 3.2 1.0 48.7 – 29.0 7.9 37.9 9.4 3.0 5.4 92.6 $ 2.7 50.8 38.6 16.4 12.0 19.2 5.0 144.7 38.3 42.6 40.1 81.8 66.0 9.1 10.8 288.7 1% $ 12 9 4 3 4 1 34 9 10 9 19 15 2 2 66 0.4 20.1 3.5 7.5 1.7 6.5 0.6 40.3 1.2 30.2 15.9 21.9 11.7 1.0 4.2 86.1 $ 141.3 $ 433.4 100% $ 126.4 $ 2.3 30.7 35.1 8.9 10.3 12.7 4.4 104.4 37.1 12.4 24.2 59.9 54.3 8.1 6.6 202.6 $ 307.0 October 31, 2014 –% $ $ – 30.0 0.7 5.5 3.4 3.8 1.0 44.4 – 30.5 5.0 23.8 4.7 2.8 3.6 70.4 $ 114.8 $ 0.3 40.2 40.7 10.9 13.0 27.1 3.1 135.3 33.8 31.5 33.8 48.3 54.2 11.6 9.0 222.2 $ 357.5 11 11 3 4 8 1 38 9 9 9 14 15 3 3 62 100% – 23.3 4.7 6.0 0.7 5.0 0.9 40.6 0.8 30.5 10.0 6.6 8.5 1.8 3.2 61.4 $ 102.0 $ 0.3 16.9 36.0 4.9 12.3 22.1 2.2 94.7 33.0 1.0 23.8 41.7 45.7 9.8 5.8 160.8 $ 255.5 $ 2.7 18.6 38.1 8.8 7.8 16.0 4.0 96.0 38.3 13.6 32.2 43.9 56.6 6.1 5.4 196.1 $ 292.1 $ 0.3 10.2 40.0 5.4 9.6 23.3 2.1 90.9 33.8 1.0 28.8 24.5 49.5 8.8 5.4 151.8 $ 242.7 Cash and due from banks 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 Cash and due from banks 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 1 Positions stated include gross asset values pertaining to secured borrowing/lending and reverse-repurchase/repurchase businesses. 2 Liquid assets include collateral received that can be rehypothecated or otherwise redeployed. 90 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS Average liquid assets held in The Toronto-Dominion Bank and multiple domestic and foreign subsidiaries and branches are summarized in the following table. T A B L E 5 6 SUMMARY OF AVERAGE UNENCUMBERED LIQUID ASSETS BY BANK, SUBSIDIARIES, AND BRANCHES (billions of Canadian dollars) The Toronto-Dominion Bank (Parent) Bank subsidiaries Foreign branches Total The Bank does not consolidate the surplus liquidity of U.S. Retail with the positions of other entities due to investment restrictions imposed by the U.S. Federal Reserve Board on funds generated from deposit taking activities by member financial institutions. Surplus liquidity domiciled in insurance business subsidiaries are also excluded in the enterprise liquidity position calculation due to regulatory investment restrictions. In addition to the “Severe Combined Stress” scenario, TD also performs stress testing on multiple alternate scenarios. These scenarios are a mix of TD-specific events, global macroeconomic stress events, and/or regional/subsidiary specific events designed to test the impact from unique drivers. Liquidity assessments are also part of the Bank’s enterprise-wide stress testing program. Results from these stress event scenarios are used to inform the establishment of or make enhance- ments to policy limits and contingency funding plan actions. The Bank has liquidity contingency funding plans in place at the enterprise level (“Enterprise CFP”) and for subsidiaries operating in both domestic and foreign jurisdictions (“Regional CFP”). The Enterprise CFP provides a documented framework for managing unexpected liquidity situations and thus is an integral component of the Bank’s overall liquid- ity risk management program. It outlines different contingency stages based on the severity and duration of the liquidity situation, and identifies recovery actions appropriate to each stage. For each recovery action, it provides key operational steps required to execute the action. Regional CFP recovery actions are aligned to support the Enterprise CFP as well as any identified local liquidity needs during stress. The actions and governance structure proposed in the Enterprise CFP are aligned with the Bank’s Crisis Management Recovery Plan. Credit ratings are important to TD’s borrowing costs and ability to raise funds. Rating downgrades could potentially result in higher financ- ing costs, reduce access to capital markets, and could also affect the Bank’s 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 the Bank’s financial strength, competitive position, and liquidity, as well as factors not entirely within the Bank’s control, including the methodologies used by rating agencies and conditions affecting the overall financial services industry. Average for the years ended October 31 2015 October 31 2014 $ 100.8 180.6 25.6 $ 307.0 $ 71.1 149.5 34.9 $ 255.5 As at October 31, 2015 Senior Short-term long-term debt rating debt rating Outlook P-1 A-1+ R-1 (high) Aa1 Negative AA- Negative AA Negative T A B L E 5 7 CREDIT RATINGS1 Rating agency Moody’s S&P DBRS 1 The above ratings are for The Toronto-Dominion Bank legal entity. A more extensive 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. The Bank regularly reviews the level of increased collateral its trading counterparties would require in the event of a downgrade of TD’s credit rating. The Bank holds liquid assets to ensure TD is able to provide additional collateral required by trading counterparties in the event of a one-notch downgrade in the Bank’s senior long-term credit ratings. Severe downgrades could have an impact on liquidity requirements by necessitating the Bank to post additional collateral for the benefit of the Bank’s trading counterparties. The following table presents the additional collateral that could have been called at the reporting date in the event of one, two, and three-notch downgrades of the Bank’s credit ratings. T A B L E 5 8 ADDITIONAL COLLATERAL REQUIREMENTS FOR RATING DOWNGRADES (billions of Canadian dollars) One-notch downgrade Two-notch downgrade Three-notch downgrade Average for the years ended October 31 October 31 2014 2015 $ 0.2 0.3 0.4 $ 0.3 0.3 0.6 91 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS As at October 31, 2015 Encumbered Total assets as a % assets of total assets $ 3.2 42.5 262.8 69.4 97.4 544.3 16.6 6.7 16.3 2.7 5.3 1.9 35.3 $ 1,104.4 –% 0.5 6.4 – – 6.0 – – – – – – – 12.9% 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 in the following table. T A B L E 5 9 ENCUMBERED AND UNENCUMBERED ASSETS1 (billions of Canadian dollars, except as noted) Encumbered2 Unencumbered Cash and due from banks Interest-bearing deposits with banks Securities, trading loans, and other7 Derivatives Securities purchased under reverse repurchase agreements8 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 Deferred tax assets Other assets9 Total on-balance sheet assets Off-balance sheet items10 Securities purchased under reverse repurchase agreements Securities borrowing and collateral received Margin loans and other client activity Total off-balance sheet items Total Total on-balance sheet assets Total off-balance sheet items Total $ Pledged as collateral3 – 2.3 60.8 – – 20.4 – – – – – – – $ 83.5 78.9 18.3 1.9 99.1 $ 182.6 $ 72.7 84.4 $ 157.1 Other4 – $ 2.7 10.5 – – 46.2 – – – – – – – $ 59.4 – – – – $ 59.4 $ 60.5 – $ 60.5 $ Available as collateral5 – 29.5 168.9 – – 81.6 – – – – – – – $ 280.0 29.5 7.5 14.0 51.0 $ 331.0 $ Other6 3.2 8.0 22.6 69.4 97.4 396.1 16.6 6.7 16.3 2.7 5.3 1.9 35.3 $ 681.5 (97.4) 0.5 (7.9) (104.8) $ 576.7 $ 257.9 47.1 $ 305.0 $ 569.4 (89.4) $ 480.0 October 31, 2014 $ 960.5 13.9% 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Certain other comparative amounts have also been restated to conform with the presentation adopted in the current period. 6 Assets 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). 2 Asset encumbrance has been analyzed on an individual asset basis. Where a partic- ular 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. 3 Represents assets 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 Federal Home Loan Bank (FHLB) activity. 4 Assets supporting TD’s funding activities, assets pledged against securitization liabilities, and assets held by consolidated securitization vehicles or in pools for covered bond issuance. 5 Assets 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 collat- eral purposes however not regularly utilized in practice. 7 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. 8 Assets reported in Securities purchased under reverse repurchase agreements represent the value of these transactions and not the value of the collateral received. 9 Other assets include amounts receivable from brokers, dealers, and clients. 10 Off-balance sheet items include the collateral value from the securities received under reverse repurchase agreements, securities borrowing, margin loans, and other client activity. The loan value from the reverse repurchase transactions and margin loans/client activity is deducted from the on-balance sheet Unencumbered – Other category. LIQUIDITY COVERAGE RATIO The Bank must maintain the LCR above 100% under normal operating conditions in accordance with the OSFI LAR requirement. The LCR is calculated as the ratio of the stock of unencumbered high quality liquid assets (HQLA) over the net cash outflow requirements in the next 30 days under a hypothetical liquidity stress event. The stress event incorporates a number of idiosyncratic and market-wide shocks, including deposit run-offs, partial loss of wholesale funding, additional collateral requirements due to credit rating downgrades and market volatility, sudden increases in the drawdown of unused lines provided to the Bank’s clients, and other obligations the Bank expects to honour during stress to mitigate reputational risk. HQLA eligible for the LCR calculation under the OSFI LAR are primarily central bank reserves, sovereign issued or guaranteed securities, and high quality securities issued by non-financial entities. In calculating the LCR, HQLA haircuts, deposit run-off rates, and other outflow and inflow rates are prescribed by the OSFI LAR guideline. 92 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS The following table summarizes the Bank’s regulatory average monthly LCR position for the fourth quarter of 2015, calculated in accordance with OSFI’s LAR guideline. T A B L E 6 0 AVERAGE BASEL III LIQUIDITY COVERAGE RATIO1 (billions of Canadian dollars, except as noted) High-quality liquid assets Total high-quality liquid assets Cash outflows Retail deposits and deposits from small business customers, of which: Stable deposits4 Less stable deposits Unsecured wholesale funding, of which: Operational deposits (all counterparties) and deposits in networks of cooperative banks5 Non-operational deposits (all counterparties) Unsecured debt Secured wholesale funding Additional requirements, of which: Outflows related to derivative exposures and other collateral requirements Outflows related to loss of funding on debt products Credit and liquidity facilities Other contractual funding obligations Other contingent funding obligations6 Total cash outflows Cash inflows Secured lending Inflows from fully performing exposures Other cash inflows Total cash inflows Total high-quality liquid assets7 Total net cash outflows8 Liquidity coverage ratio9 Average for the three months ended October 31, 2015 Total unweighted value (average)2 Total weighted value (average)3 $ n/a $ 179.1 $ 367.1 157.9 209.2 195.9 85.4 77.4 33.1 n/a 136.5 20.8 6.8 108.9 11.7 487.5 n/a $ $ 97.7 10.8 8.8 $ 117.3 $ 25.6 4.7 20.9 93.6 19.8 40.7 33.1 5.9 32.6 5.9 6.8 19.9 7.4 6.8 $ 171.9 $ 14.9 6.1 8.8 $ 29.8 Average for the three months ended October 31 2015 July 31 2015 Total adjusted value Total adjusted value $ 179.1 142.1 $ 166.1 134.8 126% 123% 1 The average is comprised of the three month ends that are in the fiscal quarter. 2 Unweighted inflow and outflow values are outstanding balances maturing or callable within 30 days. 3 Weighted values are calculated after the application of respective HQLA haircuts or inflow and outflow rates, as prescribed by the OSFI LAR guidelines. 4 As defined by OSFI LAR, stable deposits from retail and small medium-sized enterprise (SME) customers are deposits that are insured, and are either held in transactional accounts, or the depositors have an established relationship with the Bank that make deposit withdrawal highly unlikely. 5 Operational deposits from non-SME business customers are deposits kept with the Bank in order to facilitate their access and ability to conduct payment and settlement activities. These activities include clearing, custody, or cash management services. 6 Includes uncommitted credit and liquidity facilities, stable value money market mutual funds, outstanding debt securities with remaining maturity greater than 30 days, and other contractual cash outflows. TD has no contractual obligation to buyback these outstanding TD debt securities, and as a result, a 0% outflow rate is applied under the OSFI LAR guideline. 7 Adjusted HQLA includes both asset haircut and applicable caps, as prescribed by the OSFI LAR (HQLA assets after haircuts are capped at 40% for Level 2 and 15% for Level 2B). 8 Adjusted Net Cash Outflows include both inflow and outflow rates and applicable caps, as prescribed by the OSFI LAR (inflows are capped at 75% of outflows). 9 The LCR percentage is calculated as the simple average of the three month-end LCR percentages. The Bank’s average LCR of 126% for quarter ended October 31, 2015, continues to meet the regulatory requirement. The 3% increase over prior quarter LCR was mainly due to the impact of pre-funding activity, favourable change in HQLA asset mix, and deposit growth. The Bank holds a variety of liquid assets commensurate with liquidity needs in the organization. Many of these assets qualify as HQLA under the OSFI LAR guidelines. The average HQLA of the Bank for the quarter ended October 31, 2015, was $179.1 billion (July 31, 2015 – 166.1 billion), with level 1 assets representing 80%. The Bank’s reported HQLA excludes excess HQLA from the U.S. Retail operations, as required by the OSFI LAR, to reflect liquidity transfer considerations between U.S. Retail and its affiliates in the Bank as a result of U.S. Federal Reserve Board’s regulations. By excluding excess HQLA, the U.S. Retail LCR is effectively capped at 100% prior to total Bank consolidation. We manage our LCR position with a target minimum that reflects management’s liquidity risk tolerances. As described in the section “How TD Manages Liquidity Risk”, we manage our HQLA and other liquidity buffers to the higher of TD’s 90-day surplus requirement and the target buffers over regulatory requirements through LCR and NCCF. As a result, the total stock of HQLA is subject to ongoing rebalancing against the projected liquidity requirements. Therefore, changes to the amount of HQLA TD holds should be considered as part of TD’s normal business activities instead of any indication of change in the Bank’s risk appetite, unless otherwise stated. 93 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS FUNDING The Bank has access to a variety of unsecured and secured funding sources. The Bank’s funding activities are conducted in accordance with the liquidity management policy that requires, among other things, assets be funded to the appropriate term or stressed trading market depth. The Bank’s primary approach to managing funding activities is to maximize the use of deposits raised through personal and commercial banking channels. 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 excluding securitization. The increase of $57.5 billion in deposits raised through personal and commercial banking channels in U.S. Retail from October 31, 2014, to October 31, 2015, was largely due to the impact of foreign exchange translation. T A B L E 6 1 SUMMARY OF DEPOSIT FUNDING (billions of Canadian dollars) P&C deposits – Canadian Retail P&C deposits – U.S. Retail Other deposits Total As at October 31 October 31 2014 2015 $ 293.3 284.7 1.6 $ 579.6 $ 273.2 227.1 1.1 $ 501.4 The Bank actively maintains various external wholesale term (greater than 1 year) funding programs to provide access to diversified funding sources, including asset securitization, covered bonds, and unsecured wholesale debt. The Bank’s wholesale funding is diversified by geography, by currency, and by funding channel. The Bank also utilizes certificates of deposit and commercial paper as short term (1 year and less) funding. The following table summarizes by geography the term programs, with the related program size. Canada United States Europe/Australia Capital Securities Program ($10 billion) U.S. SEC (F-10) Registered Capital Securities Program (US$5 billion) United Kingdom Listing Authority (UKLA) Registered Legislative Covered Bond Program ($40 billion) Genesis Trust II Asset-Backed Securities Program ($7 billion) U.S. SEC (F-10) Registered Senior Medium Term Notes Program (US$20 billion) UKLA Registered European Medium Term Note Program (US$20 billion) Senior Medium Term Linked Notes Program ($2 billion) U.S. SEC (F-3) Registered Linked Notes Program (US$2 billion) Australian Debt Issuance Programme (A$5 billion) TD continuously evaluates opportunities to diversify its funding into new markets and potential investor segments against relative issuance costs. Through this diversification, the Bank aims to maximize funding flexibility and minimize funding concentrations and dependency. As presented in the following charts, TD’s long-term debt profile is well diversified by currency as well as by type of long-term funding product. BY CURRENCY BY TYPE AUD, 2% GBP, 4% EUR, 10% USD, 43% Term ABS, 4% Mortgage Securitization, 22% Senior Unsecured Medium Term Notes, 51% CAD, 41% Covered Bonds, 23% The Bank maintains depositor concentration limits against short-term wholesale deposits so that it does not 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 an effort to mitigate exposures to refinancing risk during a stress event. 94 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS The Bank continues to explore all opportunities to access lower-cost funding on a sustainable basis. The following table represents the various sources of funding obtained as at October 31, 2015, and October 31, 2014. T A B L E 6 2 WHOLESALE FUNDING (millions of Canadian dollars) 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 2014 2015 Over 2 years Total Total Deposits from banks1 Bearer deposit note Certificates of deposit Commercial paper Asset backed commercial paper2 Covered bonds Mortgage securitization Senior unsecured medium term notes Subordinated notes and debentures3 Term asset backed securitization Other4 Total Of which: Secured Unsecured Total $ 5,984 $ 1,846 $ 1,701 $ 9,902 $ 10,491 716 1,678 66,046 69,381 8,144 15,304 3,099 – 23,719 16,511 33,729 36,158 53,656 41,268 7,785 1,953 3,720 $ 23,203 $ 24,524 $ 34,763 $ 38,499 $ 19,800 $ 76,895 $ 217,684 $ 199,226 371 $ 365 15,021 2,109 – 3,930 3,803 12,676 – – 224 – $ – 95 – – 15,870 21,018 28,756 8,637 2,500 19 – $ – 342 – – 3,919 6,037 8,601 – 900 1 88 14,562 5,628 – – 1,454 199 – – 747 83 26,115 4,143 – – 1,393 1,278 – – 50 1,142 9,911 3,424 – – 24 2,146 – – 572 8,637 3,400 1,613 24 $ 1,455 $ 1,393 $ 7,735 $ 10,857 $ 39,407 $ 60,871 $ 57,721 $ 23,179 37,488 156,813 141,505 $ 23,203 $ 24,524 $ 34,763 $ 38,499 $ 19,800 $ 76,895 $ 217,684 $ 199,226 33,370 23,069 30,764 8,943 1 Includes fixed-term deposits with banks. 2 Represents ABCP issued by consolidated bank-sponsored structured entities. 3 Subordinated notes and debentures are not considered wholesale funding as they may be raised primarily for capital management purposes. 4 Includes fixed-term deposits from non-bank institutions (unsecured). Excluding the Wholesale Banking mortgage aggregation business, the Bank’s total 2015 mortgage-backed securities issuance was $2.1 billion (2014 – $3.8 billion), and other real-estate secured issuance using asset-backed securities was $1.6 billion (2014 – $1 billion). The Bank also issued $14.8 billion of unsecured medium-term notes (2014 – $17.4 billion) and $6.5 billion of covered bonds (2014 – $8.6 billion), in various currencies and markets during the year ended October 31, 2015. This includes unsecured medium-term notes and covered bonds issued but settling subsequent to year end. REGULATORY DEVELOPMENTS CONCERNING LIQUIDITY AND FUNDING On August 1, 2014, the Department of Finance released a public consultation paper (the “Bail-in Consultation”) regarding a proposed Taxpayer Protection and Bank Recapitalization regime (commonly referred to as “bail-in”) which outlines their intent to implement a comprehensive risk management framework for Canada’s D SIBs, which includes TD. The regime is aimed at reducing the likelihood of failure of systemically important banks and providing authorities with the means to restore a bank to viability in the unlikely event that a bank should fail, without disrupting the financial system or economy and without using taxpayer funds. When the regime is in place, it will allow for the expedient conversion of certain bank liabilities into regu- latory capital when OSFI has determined that a bank has become or is about to become non-viable. It is proposed in the Bail-in Consultation that the conversion power only apply to long-term senior debt that is issued, originated, or renegotiated after an implementation date determined by the Government of Canada (GoC). The GoC has also proposed that in order to have sufficient loss absorbing capacity that D-SIBs be subject to a higher loss absorbency requirement of between 17% to 23% of RWA, which can be met through the sum of regula- tory capital (for example, common equity and NVCC instruments) and long-term senior debt. On April 21, 2015, in its 2015 federal budget, the Canadian Federal Government confirmed its intention to implement the bail-in regime. The summary of the proposed bail-in legislation was in line with the proposals in the Bail-in Consultation paper and no implementation timeline has been provided. In June 2015, the BCBS released the final requirements for the “Net Stable Funding Ratio Disclosure Standards”. The standard defines a common public disclosure framework for the NSFR calculated in accordance to the guidelines published by BCBS in October 2014. The NSFR is designed to reduce structural funding risk by requiring banks to have sufficient stable sources of funding and lower reliance on funding maturing in one year to support their businesses. The NSFR and its public disclosure requirement are expected to become minimum standards by January 2018. On September 30, 2015, the Bank of Canada finalized changes to its framework for financial market operations and emergency lending policies with immediate effective date. The reforms are designed to lower the risk profile of core financial institutions (FI) and increase the resilience of funding and market liquidity in times of market stress. With its financial market operations, the central bank refined its opera- tional parameters for overnight repo (including reverse-repo) programs and securities lending program, reduced its purchases at primary auctions of nominal GoC bonds, and introduced a regular program of term repo operations as well as a Contingent Term Repo Facility that will be activated at its discretion under severe market-wide liquid- ity stress. In addition, the Bank of Canada made changes to the manner in which it addresses liquidity issues at individual institutions by expanding the role of Emergency Lending Assistance (ELA) in effective recovery and resolution of FIs provided the FI satisfies the requirement of a credible recovery and resolution framework be in place. An updated ELA policy statement reflecting these changes will be published later this year. On November 9, 2015, the Financial Stability Board issued the final Total Loss-Absorbing Capacity (TLAC) standard for G SIBs. The TLAC standard defines a minimum requirement for the instruments and liabilities that should be readily available for bail-in within resolution at G SIBs. Separately and on the same day, the Basel Committee on Banking Supervision released a consultative document on TLAC holdings, setting out its proposed prudential treatment of banks’ investments in TLAC. It is applicable to all banks subject to the Basel Committee’s standards, including both G-SIBs and non G-SIBs. Comments on the consultative document are due by February 12, 2016. 95 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS MATURITY ANALYSIS OF ASSETS, LIABILITIES, AND OFF-BALANCE SHEET COMMITMENTS The following table summarizes on-balance sheet 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 obliga- tions and other liabilities. The values of credit instruments reported in the following table 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 commit- ments 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 the Bank’s short-term and long-term liquidity and capital resource needs. The maturity analysis presented does not depict the Bank’s asset/ liability matching or exposure to interest rate and liquidity risk. The Bank ensures that assets are appropriately funded to protect against borrowing cost volatility and potential reductions to funding market availability. The Bank 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. The Bank also funds the stable balance of revolving lines of credit with long term funding sources. The Bank conducts long-term funding activities based on the projected net growth for non-trading assets after consid- ering such items as new business volumes, renewals of both term loans and term deposits, and how customers exercise options to prepay loans and pre-redeem deposits. The Bank also raises shorter-term unsecured wholesale deposits to fund trading assets based on its internal estimates of liquidity of these assets under stressed market conditions. 96 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIST A B L E 6 3 REMAINING CONTRACTUAL MATURITY (millions of Canadian dollars) 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 Deferred tax assets Amounts receivable from brokers, dealers, and clients 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 Amounts payable to brokers, dealers, and clients Insurance-related liabilities Other liabilities5 Subordinated notes and debentures 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 liquidity6,7 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 5 years $ $ 3,154 21,471 1,955 2,845 195 268 170 – 420 3,957 4,661 488 1,763 966 $ – 529 3,327 2,906 535 1,899 1,779 $ – 154 3,524 3,443 205 1,299 1,930 $ – 53 4,587 3,315 285 1,249 1,896 $ – $ – 9,410 10,102 – $ – 15,426 22,291 – $ – 17,958 19,875 552 4,556 6,952 770 33,196 35,744 1,171 42,580 25,013 As at October 31, 2015 No specific maturity Total – $ 19,856 35,013 – 177 1,972 – 3,154 42,483 95,157 69,438 4,378 88,782 74,450 57,371 21,490 14,315 3,002 1,083 95 8 – – 97,364 1,301 970 – 18,755 1 21,027 – 21,027 13,889 – – – – – 2,418 2,127 – 4,682 5 9,232 – 9,232 2,380 – – – – – 12,045 4,263 – 7,030 94 23,432 – 23,432 337 – – – 11,703 3,529 – 6,699 43 21,974 – 21,974 40 – – – 11,579 3,702 – 4,132 – 19,413 – 19,413 – – – – 30,751 7,450 – 11,578 120 49,899 – 49,899 – – – – 111,105 32,885 – 49,473 243 193,706 – 193,706 – – – – 31,471 18,732 – 52,845 1,681 104,729 – 104,729 – – – – – 61,813 30,215 12,335 – 104,363 (3,434) 100,929 – 6,683 16,337 2,671 212,373 135,471 30,215 167,529 2,187 547,775 (3,434) 544,341 16,646 6,683 16,337 2,671 – – – – – – – – – – – – 5,314 1,931 5,314 1,931 21,996 2,356 $ 146,697 – 539 $ 45,896 – 1,468 $ 50,527 – 85 $ 35,656 – 120 $ 32,001 – 93 21,996 13,248 $ 81,659 $ 301,281 $ 211,408 $ 199,248 $ 1,104,373 – 8,365 – 140 – 82 $ 12,654 2,629 – $ 16,457 4,462 471 $ 27,238 2,599 27 $ 11,751 2,720 285 $ 4,308 2,343 – $ 360 $ 1,202 $ 789 $ 7,520 1,933 17,294 5,033 17,651 3,237 – $ – – 74,759 57,218 10,986 190 204 284 337 224 176 – – – 1,415 4,580 6,118 15,815 26,513 13,889 942 54,621 24 6,736 2,782 10,600 20,118 2,380 1,631 7,075 774 6,622 14,471 337 2,017 5,252 173 5,813 11,238 40 1,917 4,896 211 13,950 19,057 – 417 9,333 1 13,265 22,599 – 3,113 7,884 983 2,499 1,366 1,427 1,547 424 1,971 225 4,104 12,353 6 37,896 50,255 – 9,583 76 10,013 190 13 10,266 10,469 – 10,904 345,403 7,002 168,451 520,856 – 8,279 – 2,735 – – 395,818 17,080 282,678 695,576 16,646 38,803 67,156 22,743 22,664 127 1,356 – – – $ 135,609 – 170 2,243 – – – $ 57,003 – 257 682 – – – $ 51,777 – 352 286 – – – $ 31,900 – 330 170 – – – $ 29,244 – 829 1,261 – – – 22,664 6,519 14,223 8,637 – 67,028 $ 42,120 $ 98,399 $ 55,577 $ 602,744 $ 1,104,373 – 1,672 4,909 – – 67,028 – 1,728 3,215 – – – – 1,054 101 8,637 – – $ $ 77 2 9 3 12 $ 155 3 19 5 71 $ 231 5 28 8 36 228 5 29 8 38 $ 227 – 30 8 27 $ 874 $ – 21 32 2,183 $ – 35 29 4,091 $ – – – 112 74 7 868 1,406 2,415 2,917 1,586 3,183 8,479 53 50 97 64 12 35 19 192 – – $ – – – – – – 8,066 15 171 93 377 21,046 330 12,541 14,457 9,654 5,665 8,509 11,579 63,334 3,660 1,881 131,280 Non-consolidated structured entity commitments Commitments to liquidity facilities for ABCP – 151 148 138 138 464 707 – – 1,746 1 Amount has been recorded according to the remaining contractual maturity of the 5 Includes $106 million of capital lease commitments with remaining contractual 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 $24 billion of covered bonds with remaining contractual maturities of $4 billion in ‘9 months to 1 Year’, $4 billion in ‘over 1 to 2 years’, $13 billion in ‘over 2 to 5 years’, and $3 billion in ‘over 5 years’. maturities of $3 million in ‘less than 1 month’, $7 million in ‘1 month to 3 months’, $8 million in ‘3 months to 6 months’, $7 million in ‘6 months to 9 months’, $6 million in ‘9 months to 1 year’, $24 million in ‘over 1 to 2 years’, $29 million in ‘over 2 to 5 years’, and $22 million in ‘over 5 years’. 6 Includes $133 million in commitments to extend credit to private equity investments. 7 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. 97 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 6 3 REMAINING CONTRACTUAL MATURITY (continued) 1 (millions of Canadian dollars) Assets Cash and due from banks Interest-bearing deposits with banks Trading loans, securities, and other2 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 Goodwill3 Other intangibles3 Land, buildings, equipment, and other depreciable assets3 Deferred tax assets Amounts receivable from brokers, dealers, and clients Other assets Total assets Liabilities Trading deposits Derivatives Securitization liabilities at fair value Other financial liabilities designated at fair value through profit or loss Deposits4,5 Personal Banks Business and government Total deposits Acceptances Obligations related to securities sold short2 Obligations related to securities sold under repurchase agreements Securitization liabilities at amortized cost Amounts payable to brokers, dealers, and clients Insurance-related liabilities Other liabilities6 Subordinated notes and debentures 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 liquidity7,8 Non-consolidated structured entity commitments Commitments to liquidity facilities for ABCP 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 5 years $ $ 2,769 28,693 1,827 5,845 172 482 98 12 358 2,347 4,945 1,411 1,350 1,353 $ – 355 3,281 2,932 662 1,851 485 $ – 45 2,225 2,951 469 1,719 966 $ – $ 145 2,620 1,696 419 393 573 – $ – 5,219 7,168 – $ – 17,831 14,544 – $ – 14,887 15,715 274 5,316 5,807 348 24,877 20,478 814 25,089 27,217 As at October 31, 2014 No specific maturity Total – $ 2,781 43,773 101,173 55,796 4,745 63,008 56,977 14,177 50,936 – 176 1,931 – 40,978 18,321 13,563 3,413 6,037 205 39 – – 82,556 1,174 991 – 15,766 12 17,943 – 17,943 11,256 – – – – – 1,735 1,352 – 3,883 12 6,982 – 6,982 1,796 – – – – – 5,052 2,446 – 3,606 34 11,138 – 11,138 22 – – – 8,669 2,498 – 6,384 254 17,805 – 17,805 6 – – – 8,566 3,270 – 3,487 – 15,323 – 15,323 – – – – 52,314 14,097 – 9,451 147 76,009 – 76,009 – – – – 94,362 24,505 – 36,813 499 156,179 – 156,179 – – – – 27,040 12,786 – 41,330 1,737 82,893 – 82,893 – – – – – 61,466 25,570 10,629 – 97,665 (3,028) 94,637 – 5,569 14,233 2,680 198,912 123,411 25,570 131,349 2,695 481,937 (3,028) 478,909 13,080 5,569 14,233 2,680 – – – – – – – – – – – – 4,930 2,008 4,930 2,008 17,130 2,364 $ 129,557 – 390 $ 39,265 – 1,158 $ 35,447 – 77 $ 29,676 – 166 17,130 11,163 $ 27,372 $ 100,109 $ 234,426 $ 166,656 $ 198,003 $ 960,511 – 6,726 – 111 – 130 – 41 $ 10,785 4,904 – $ 14,876 4,661 290 $ 11,242 2,558 1,284 $ 9,587 2,707 356 $ 11,165 $ 1,453 – 171 $ 975 $ 533 $ 6,391 797 12,973 5,527 15,562 2,944 – $ 59,334 51,209 – 11,198 – 231 281 447 528 370 1,218 175 – – 3,250 5,136 6,316 16,711 28,163 11,256 2,817 42,928 19 6,616 4,071 11,213 21,900 1,796 2,861 6,616 1,239 3,905 11,760 22 691 5,753 76 13,163 18,992 6 518 5,278 800 4,196 10,274 – 425 6,093 389 1,908 1,580 838 715 1,108 519 9,431 3 17,332 26,766 – 3,812 129 6,860 13,260 6 26,326 39,592 – 7,152 108 11,934 170 11 6,704 6,885 – 9,440 – 2,944 290,980 3,249 142,155 436,384 – 11,749 343,240 15,771 241,705 600,716 13,080 39,465 – – 53,112 24,960 18,192 151 2,697 – – – $ 122,143 – 236 3,554 – – – $ 56,937 – 314 903 – – – $ 32,709 – – 339 – – – $ 34,586 – 531 285 – – – 18,195 6,079 15,897 7,785 – 56,231 $ 26,130 $ 47,318 $ 82,440 $ 47,146 $ 511,102 $ 960,511 3 1,651 5,084 – – 56,231 – 1,468 2,536 – – – – 954 99 7,785 – – – 774 400 – – – $ 69 2 20 2 6 $ 137 $ 207 $ 205 $ 3 34 5 68 5 53 7 17 5 41 7 26 205 $ 5 28 7 786 $ 20 42 29 1,942 $ – 47 54 3,183 $ – – – 9 132 64 – 647 1,295 2,378 2,605 1,637 2,633 6,316 884 24 59 43 21 9 21 20 10 – $ – – – – – – 6,734 40 265 111 322 18,395 207 12,616 12,366 5,779 4,195 4,161 11,416 45,269 3,061 1,505 100,368 – 272 189 66 66 381 408 – – 1,382 1 Certain comparative amounts have been restated, where applicable, as a result of 6 Includes $119 million of capital lease commitments with remaining contractual the implementation of the 2015 IFRS Standards and Amendments. 2 Amount has been recorded according to the remaining contractual maturity of the underlying security. 3 For the purposes of this table, non-financial assets have been recorded as having ‘no specific maturity’. 4 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’. 5 Includes $17 billion of covered bonds with remaining contractual maturities of $2 billion in ‘6 months to 9 months’, $4 billion in ‘over 1 to 2 years’, $10 billion in ‘over 2 to 5 years’, and $1 billion in ‘over 5 years’. 98 maturities of $3 million in ‘less than 1 month’, $6 million in ‘1 month to 3 months’, $8 million in ‘3 months to 6 months’, $8 million in ‘6 months to 9 months’, $8 million in ‘9 months to 1 year’, $28 million in ‘over 1 to 2 years’, $34 million in ‘over 2 to 5 years’, and $24 million in ‘over 5 years’. 7 Includes $76 million in commitments to extend credit to private equity investments. 8 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. TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS Capital Adequacy Risk Capital adequacy risk is the risk of insufficient capital being 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. Managing capital levels of a financial institution requires that TD holds sufficient capital under all conditions to avoid the risk of breaching minimum capital levels prescribed by regulators. WHO MANAGES CAPITAL ADEQUACY RISK The Board has the ultimate responsibility for overseeing adequacy of capital and capital management. The Board reviews the adherence to capital targets and reviews and approves the annual capital plan and the Global Capital Management Policy. The Risk Committee reviews and approves the Capital Adequacy Risk Management Framework and oversees management’s actions to maintain an appropriate ICAAP frame- work, commensurate with the Bank’s risk profile. The CRO ensures the Bank’s ICAAP is effective in meeting capital adequacy requirements. The ALCO recommends and maintains the Capital Adequacy Risk Management Framework and 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 alloca- tion of capital limits for business segments and reviews adherence to capital targets. Enterprise Capital Management within Treasury and Balance Sheet Management is responsible for forecasting and monitoring compliance with capital 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 EWST processes. Business segments are responsible for managing to allocated capital limits. Additionally, regulated subsidiaries, including, insurance, U.S., and other jurisdictions of the Bank manage their capital adequacy risk in accordance with applicable regulatory requirements. However, capital management policies and procedures of these subsidiaries conform with those of the Bank. U.S.-regulated subsidiaries of the Bank are required to follow the U.S. Federal Reserve Board’s final rules on Enhanced Prudential Standards for large Foreign Bank Organizations and U.S. Bank Holding Companies. Refer to the sections on “Future Regulatory Capital Developments”, “EWST” and “Top and Emerging Risks That May Affect the Bank and Future Results” for further details. HOW TD MANAGES 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 approves capital targets that provide a sufficient buffer under stress conditions so that the Bank exceeds minimum capital requirements. The purpose of these capital targets is to reduce the risk of a breach of minimum capital requirements, due to an unexpected stress event, allowing management the opportunity to react to declin- ing capital levels before minimum capital requirements are breached. Capital 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 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 fore- cast and are considered in the determination of capital targets. Legal and Regulatory Compliance Risk Legal and regulatory compliance (LRC) 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 failure to identify, communicate and comply with current and changing laws, regu- lations, rules, regulatory guidance, self-regulatory organization standards and codes of conduct, including AML regulations (“LRC requirements”). It also includes the risks associated with the failure to meet material contractual obligations or similarly binding legal commitments, by either the Bank or other parties contracting with the Bank. Potential conse- quences of failing to mitigate LRC risk include financial loss, regulatory sanctions and loss of reputation, which could be material to the Bank. Financial Services is one of the most closely regulated industries, and the management of a financial services business is expected to meet high standards in all business dealings and transactions. As a result, we are exposed to LRC 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, reputational damage and other costs associated with legal proceedings, and unfavourable judicial or regulatory judgments or actions may also adversely affect TD’s business, results of operations and financial condition. LRC risk differs from other banking risks, such as credit risk or market risk, in that it is typically not a risk actively or delib- erately assumed by management in expectation of a return. This risk can occur as part of the normal course of operating TD’s businesses. WHO MANAGES LEGAL AND REGULATORY COMPLIANCE RISK The proactive and effective management of this risk is complex given the breadth and pervasiveness of exposure. Effective management of LRC risk is a result of enterprise-wide collaboration between businesses and the Legal, Compliance and AML departments and is set out under a Legal and Regulatory Compliance Risk Management framework. Each of the Bank’s businesses is responsible for compliance with LRC requirements applicable to their jurisdiction and specific business requirements. Under TD’s approach to risk governance, businesses have ownership and overall responsibility for adhering to LRC require- ments in their business operations, including for setting the appropri- ate tone for legal and regulatory compliance. Compliance, Legal and AML, together with the Regulatory Risk (including Regulatory Relationships and Government Affairs) group, provide advice and oversight with respect to managing LRC risk. Representatives of these groups participate, as required, in senior operating committees of the Bank’s businesses. Also, the senior management of Compliance, Legal and AML have established regular meetings with and reporting to the Audit Committee, which oversees the establishment and maintenance of processes and policies that ensure the Bank is in compliance with the laws and regulations that apply to it (as well as its own policies). HOW TD MANAGES LEGAL AND REGULATORY COMPLIANCE RISK While each of TD’s businesses is responsible for assessing its LRC risk, designing and implementing controls, and monitoring and reporting on its risk profile, effective management of LRC risk is a result of enterprise-wide collaboration between businesses and the Legal, Compliance and AML departments through (a) independent and objective identification and assessment of LRC risk, (b) objective guidance and advisory services to identify, assess, control and monitor LRC risk, and (c) an approved set of frameworks, policies, procedures, guidelines and practices. Legal, Compliance and AML are structured and organize their activities in order to support the independent and effective oversight of LRC Risks 99 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISacross the enterprise, promote a culture of integrity, and provide trusted objective guidance. In particular, Compliance and AML depart- ments aim to build and run strong, resilient and sustainable depart- ments that effectively manage LRC risk globally by: • Independently monitoring and assessing, on a risk-based approach, the adequacy of, adherence to and effectiveness of LRC risk management programs and controls in the Businesses; • Delivering objective guidance and independent challenge; • Proactively managing regulatory change; and • Providing trusted and reliable reporting, advice and opinion to senior leadership and the Audit Committee of the Board on the state of LRC risks, controls and outcomes. The Legal department undertakes certain centralized functions and provides teams to support TD to identify and manage LRC risk, includ- ing with respect to disclosure and governance matters and litigation management to manage financial, reputational and regulatory risk to the Bank. In addition, the Compliance and AML departments have developed methodologies and processes to measure and aggregate LRC risks on an ongoing basis as a critical baseline to assess whether TD’s internal controls are effective in adequately mitigating LRC risk. The Legal department has developed methodologies for measuring litigation risk for adherence to risk appetite. Finally, the Bank’s 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 the Bank. 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 TD’s value, brand, liquidity or customer base, or require costly measures to address. A company’s reputation is a valuable business asset that is essential to optimizing shareholder value and therefore, is constantly at risk. Reputational risk can arise as a consequence of negative impressions about TD’s business practices and may involve any aspect of the Bank’s operations, but usually involves concerns about business ethics and integrity, competence, or the quality or suitability of products and services. As such, reputational risk is not managed in isolation from TD’s other major risk categories, as all risk categories can have an impact on reputation, which in turn can impact TD’s brand, earnings, and capital. WHO MANAGES REPUTATIONAL RISK Responsibility for managing risks to the Bank’s reputation ultimately lies with the SET and the executive committees that examine reputa- tional risk as part of their regular mandate. The RRC is the most senior executive committee for the review of reputational risk matters at TD. The mandate of the RRC is to oversee the management of reputational risk within the Bank’s risk appetite. Its main accountability is to review and assess business and corporate initiatives and activities across TD where significant reputational risk profiles have been identified and escalated. The RRC ensures that escalated initiatives and activities have received adequate senior management and subject matter expert review for reputational risk implications prior to implementation. At the same time, every employee and representative of the Bank has a responsibility to contribute in a positive way to the Bank’s repu- tation. This means following ethical practices at all times, complying with applicable policies, legislation, and regulations and supporting positive interactions with the Bank’s stakeholders. Reputational risk is most effectively managed when everyone at the Bank works continuously to protect and enhance TD’s reputation. HOW TD MANAGES REPUTATIONAL RISK TD’s approach to the management of reputational risk combines the experience and knowledge of individual business segments, and gover- nance, risk and oversight functions. It is based on enabling TD’s busi- nesses to understand their risks and developing the policies, processes, and controls required to manage these risks appropriately in line with the Bank’s strategy and reputational risk appetite. TD’s Reputational Risk Management Framework provides a comprehensive overview of 100 the Bank’s approach to the management of this risk. Amongst other significant policies, TD’s enterprise Reputational Risk Management Policy is approved by the Risk Committee. This Policy sets out the requirements under which business segments and corporate shared services are required to manage reputational risk. These include imple- menting procedures and designating a business-level committee to review reputational risk issues and escalating as appropriate to the RRC. The Bank also has an enterprise-wide New Business and Product Approval Policy that is approved by the Risk Committee and establishes standard practices to be used across TD to support consistent processes for approving new businesses and products. The policy is supported by business segment specific processes, which involve independent review from oversight functions, and includes consideration of all aspects of a new product, including reputational risk. Environmental Risk Environmental risk is the possibility of loss of strategic, financial, operational or reputational value resulting from the impact of environmental issues or concerns and related social risk 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 the Bank’s business, which include management and operation of company-owned or managed real estate, fleet, business operations, and associated services; (2) indirect risks associated with the environmental performance or environmental events, such as changing climate patterns that may impact the Bank’s retail customers and clients to whom TD provides financing or in which TD invests; (3) identification and management of new or emerging environmental regulatory issues; and (4) failure to understand and appropriately leverage environment-related trends to meet customer and consumer demands for products and services. 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 TD MANAGES ENVIRONMENTAL RISK TD manages environmental risks within the Environmental Management System (EMS) which consist of three components: an Environmental Policy, an Environmental Management Framework, and Environmental Procedures and Processes. The Bank’s EMS is consistent with the ISO 14001 international standard, which represents industry best practice. The Bank’s Environmental Policy reflects the global scope of its environmental activities. Within the Bank’s Environmental Management Framework, it has identified a number of priority areas and has made voluntary commit- ments relating to these. The Bank’s environmental metrics, targets, and performance are publicly reported within its annual Corporate Responsibility Report. Performance is reported according to the Global Reporting Initiative (GRI) and is independently assured. TD applies its Environmental and Social Credit Risk Management Procedures to credit and lending in the wholesale, commercial, and retail businesses. These procedures include assessment of TD’s clients’ policies, procedures, and performance on material environmental and related social issues, such as climate risk, biodiversity, water risk, stakeholder engagement, and free prior and informed consent (FPIC) of Aboriginal peoples. Within Wholesale Banking, sector-specific TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISguidelines have been developed for environmentally-sensitive sectors. The Bank has been a signatory to the Equator Principles since 2007 and reports on Equator Principle projects within its 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. In 2015 TD Insurance became a signatory to the United Nations Environment Program Finance Initiative Principles for Sustainable Insurance (UNEP FI-PSI) which provides a global framework for managing environmental, social and governance risks within the insurance industry. The Bank proactively monitors and assesses policy and legislative developments, and maintains an ‘open door’ approach with environ- mental and community organizations, industry associations, and responsible investment organizations. For more information on TD’s environmental policy, management and performance, please refer to the Corporate Responsibility Report, which is available at the Bank’s website: http://www.td.com/ corporateresponsibility/. 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, particu- larly through the latter’s Risk and Audit Committees. TD monitors the risk management process at TD Ameritrade through management governance and protocols and also participates in TD Ameritrade’s Board. The terms of the Stockholders Agreement provide for certain information sharing rights in favour of TD to the extent the Bank 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 the Bank and TD Ameritrade to coordinate necessary intercompany information flow. The Bank has designated the Group Head, Insurance, Credit Cards and Enterprise Strategy to have respon- sibility for the TD Ameritrade investment, including regular meetings with the TD Ameritrade Chief Executive Officer. 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. In addition, certain functions including Internal Audit, Treasury, Finance, and Compliance have relationship protocols that allow for access to and the sharing of information on risk and control issues. TD has established a compliance committee, pursuant to a U.S. federal supervisory letter, which provides a holistic overview of key compliance issues and developments across all of the Bank’s businesses in the U.S. including, to the extent applicable, TD Ameritrade. As with other material risk issues, where required, material risk issues associated with TD Ameritrade are reported up to TD’s Board or an appropriate Board committee. Pursuant to the Stockholders Agreement in relation to the Bank’s equity investment in TD Ameritrade, the Bank has the right to desig- nate five of twelve members of TD Ameritrade’s Board of Directors. The Bank’s designated directors include the Bank’s Group President and Chief Executive Officer, 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 ownership in TD Ameritrade and certain other limited exceptions. Currently, the directors the Bank designates participate in a number of TD Ameritrade Board committees, including chairing the Audit Committee and the Human Resources and Compensation Committee, as well as partici- pating in the Risk Committee and Corporate Governance Committee. 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 of the 2015 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 2015 Consolidated Financial Statements. The Bank has estab- lished procedures to ensure that accounting 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 accounting policies that require management’s judgment and estimates include account- ing 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 structured entities. ACCOUNTING POLICIES AND ESTIMATES The Bank’s 2015 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, refer to Notes 2 and 3 of the Bank’s 2015 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 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. 101 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS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 and the loss event(s) results in a decrease in the estimated cash flows of the instrument. The Bank reviews these securities at least quarterly for impairment at the coun- terparty-specific level. If there is no objective evidence of impairment at the counterparty-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 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 impairment individually for loans that are individually significant, and collectively for loans that are not individually significant. The allowance for credit losses repre- sents 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 expe- rience, 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 credit losses and may result in a change in the incurred but not identified 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 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, correlations, spreads, discount rates, pre-payment rates, and prices of underlying instruments. Any imprecision in these estimates can affect the resulting fair value. 102 The inherent nature of private equity investing is that the Bank’s valuation may change over time 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 value of financial instruments and further details as to how they are measured are provided in Note 5 of the Bank’s 2015 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 have been retained or transferred and the extent to which the risks and rewards of ownership of the financial asset have 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 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. 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 cash generating unit (CGU) is determined from internally developed 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 support- able. 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. TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS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 discount rates, compensation increases, health care cost trend rates, and mortality rates are management’s best estimates 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 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 actuarial gains and losses which are recognized in other comprehensive income during the year and also impact expenses in future periods. 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 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 provisions 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. 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 infor- mation 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 qualitative 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 taking account of all the uncertainties involved. 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 combination of its own experience and industry experi- ence. 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. 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 bene- fits, 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. CONSOLIDATION OF STRUCTURED ENTITIES Management judgment is required when assessing whether the Bank should consolidate an entity, particularly complex entities. For instance, it may not be feasible to determine if the Bank controls an entity solely through an assessment of voting rights for certain structured entities. In this case, judgment is required to establish whether the Bank has decision-making power over the key relevant activities of the entity and whether the Bank has the ability to use that power to absorb significant variable returns from the entity. If it is determined that the Bank has both decision-making power and significant variable returns from the entity, judgment is also used to determine whether any such power is exercised by the Bank as principal, on its own behalf, or as agent, on behalf of another counterparty. Assessing whether the Bank has decision-making power includes understanding the purpose and design of the entity in order to determine its key economic activities. In this context, an entity’s key economic activ- ities are those which predominantly impact the economic performance of the entity. When the Bank has the current ability to direct the entity’s key economic activities, it is considered to have decision-making power over the entity. The Bank also evaluates its exposure to the variable returns of a structured entity in order to determine if it absorbs a significant proportion of the variable returns the entity is designed to create. As part of this evaluation, the Bank considers the purpose and design of the entity in order to determine whether it absorbs variable returns from the structured entity through its contractual holdings, which may take the form of securities issued by the entity, derivatives with the entity, or other arrangements such as guarantees, liquidity facilities, or lending commitments. 103 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISIf the Bank has decision-making power over and absorbs significant variable returns from the entity it then determines if it is acting as prin- cipal or agent when exercising its decision-making power. Key factors considered include the scope of its decision-making powers; the rights of other parties involved with the entity, including any rights to remove the Bank as decision-maker or rights to participate in key decisions; whether the rights of other parties are exercisable in practice; and the variable returns absorbed by the Bank and by other parties involved with the entity. When assessing consolidation, a presumption exists that the Bank exercises decision-making power as principal if it is also exposed to significant variable returns, unless an analysis of the factors above indicates otherwise. The decisions above are made with reference to the specific facts and circumstances relevant for the structured entity and related transaction(s) under consideration. ACCOUNTING STANDARDS AND POLICIES Current and Future Changes in Accounting Policies CURRENT CHANGES IN ACCOUNTING POLICY The following new and amended standards have been adopted by the Bank. Presentation – Offsetting Financial Assets and Financial Liabilities In December 2011, the IASB issued amendments to IAS 32, Financial Instruments: Presentation (the “IAS 32 amendments”), which clarified the existing requirements for offsetting financial assets and financial liabilities. These amendments are effective for annual periods begin- ning on or after January 1, 2014, which was November 1, 2014, for the Bank. The transition date for the Bank was November 1, 2013. As a result of adopting the IAS 32 amendments, certain bilateral transactions related to reverse repurchase and repurchase agreements, and amounts receivable from or payable to brokers, dealers, and clients no longer qualified for offsetting under the new guidance. As at October 31, 2014, the IAS 32 amendments resulted in an increase in derivative assets and liabilities of $0.4 billion (November 1, 2013 – $0.5 billion), an increase in reverse repurchase and repurchase agreements of $7.5 billion (November 1, 2013 – $5.2 billion), and an increase in amounts receivable from or payable to brokers, dealers, and clients of $7.8 billion (November 1, 2013 – $5.3 billion). Levies In May 2013, the IFRS Interpretations Committee (IFRIC), with the approval of 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, which 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 was November 1, 2014, for the Bank. IFRIC 21 changed the pattern and timing of recognition of certain levies paid by the Bank, in that it requires the obligation for these levies to be recognized at specific points in time in accordance with their applicable legislation. This change in timing of recognition did not have a material impact on the financial position, cash flows, or earnings of the Bank on an annual basis. Novation of Derivatives and Continuation of Hedge Accounting In June 2013, the IASB issued amendments to IAS 39, Financial Instruments: Recognition and Measurement (IAS 39), which provides relief from discontinuing hedge accounting when novation of a deriva- tive designated as a hedge accounting instrument meets certain crite- ria. The IAS 39 amendments are effective for annual periods beginning on or after January 1, 2014, which was November 1, 2014, for the Bank, and have been applied retrospectively. The IAS 39 amendments did not have a material impact on the financial position, cash flows, or earnings of the Bank and have been retained in the final version of IFRS 9, Financial Instruments (IFRS 9). 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. 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. Financial Instruments In July 2014, the IASB issued the final version of IFRS 9, which replaces the guidance in IAS 39. This final version includes require- ments on: (1) Classification and measurement of financial assets and liabilities; (2) Impairment of financial assets; and (3) General hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018 and is to be applied retrospectively with certain exceptions. IFRS 9 does not require restatement of comparative period financial statements except in limited circumstances related to aspects of hedge accounting. Entities are permitted to restate comparatives as long as hindsight is not applied. In January 2015, OSFI issued the final version of the Advisory titled “Early adoption of IFRS 9 Financial Instruments for Domestic Systemically Important Banks”. All D-SIBs, including the Bank, are required to early adopt IFRS 9 for the annual period beginning on November 1, 2017. The adoption of IFRS 9 is a significant initiative for the Bank supported by a formal governance framework and a robust implementation plan. An Executive Steering Committee has been formed with joint leadership from Finance and Risk and with representation from Technology, Internal Audit, and project management teams. A communication plan including progress reporting protocols has been established with regular updates provided to the Executive Steering Committee on key decisions. IFRS 9 overview sessions have been held at various levels within the Bank, including the Audit and Risk Committees. The Bank’s implementation plan includes the following phases: (a) Initiation and Planning; (b) Detailed Assessment; (c) Design and Solution Development; and (d) Implementation, with work streams focused on each of the three required sections of IFRS 9 noted above as well as Reporting and Disclosures. The Bank is on track with its project timelines. The Initiation and Planning phase is near completion and the Detailed Assessment and Design and Solution Development phases are in progress. The following is a summary of the new accounting concepts and project status under IFRS 9: Classification and Measurement Financial assets will be classified based on the Bank’s business model for managing its financial assets and the contractual cash flow charac- teristics of the financial asset. Financial assets are classified into one of the following three categories, which determine how it is measured subsequent to initial recognition: amortized cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss. An election may be made to hold certain equity securities at FVOCI, with no subsequent recycling of gains and losses into net income. In addition to the classification tests described above, IFRS 9 also includes an option to irrevocably designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces an accounting mismatch. 104 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSISThe classification and measurement of financial liabilities remain largely unchanged under IFRS 9, except for financial liabilities measured at fair value through profit or loss when classified as held for trading or designated using the fair value option. When the fair value option is elected, the Bank will be required to recognize the change in the fair value of the financial liability arising from changes in the Bank’s own credit risk in other comprehensive income. The Bank has defined its significant business models and is in the process of assessing the cash flow characteristics for all financial assets under the scope of IFRS 9. Impairment IFRS 9 introduces a new impairment model based on expected credit losses (ECLs) which will replace the existing incurred loss model under IAS 39. Currently, impairment losses are recognized when there is objective evidence of credit quality deterioration to the extent that the Bank no longer has reasonable assurance as to the timely collection of the full amount of principal and interest. If there is no objective evidence of impairment for an individual loan, the loan is included in a group of assets with similar credit risk characteristics and collectively assessed for impairment losses incurred but not identified. Under IFRS 9, ECLs will be recognized in profit or loss before a loss event has occurred, which could result in earlier recognition of credit losses compared to the current model. The expected credit loss model requires the recognition of impairment at an amount equal to 12-month ECLs or lifetime ECLs depending on whether there has been a significant increase in credit risk since initial recognition of the financial instrument. If a significant increase in credit risk has occurred since initial recognition, then impairment is measured as lifetime ECLs otherwise 12-month ECLs are measured. If credit quality improves in a subsequent period such that the increase in credit risk since initial recognition is no longer considered significant, the loss allowance will revert back to being measured based on 12-month ECLs. ECLs will be measured as the probability-weighted present value of expected cash shortfalls over the remaining expected life of the financial instrument and will consider reasonable and supportable information about past events, current conditions and forecasts of future events and economic conditions that impact our credit risk assessment. 12-month ECLs represent the portion of lifetime ECLs that are expected to occur based on default events that are possible within 12 months after the reporting date. The IFRS 9 model breaks down into three stages: Stage 1 – 12-month ECLs for performing instruments, Stage 2 – Lifetime ECLs for performing instruments that have experienced a significant increase in credit risk, and Stage 3 – Lifetime ECLs for non-performing financial assets. The new impairment model will apply to all financial assets measured at amortized cost or fair value through other comprehensive income with the most significant impact expected to be on loan assets. The model will also apply to loan commitments and financial guaran- tees that are not measured at fair value through profit or loss. The Bank is currently assessing the technology requirements for tracking credit migration under the new ECL model as well as the impact to risk parameters and credit risk modelling processes. General Hedge Accounting IFRS 9 introduces a new general hedge accounting model which better aligns accounting with risk management activities. The new standard permits a wider range of qualifying hedged items and hedged risks as well as types of hedging instruments. Effectiveness testing will have an increased focus on establishing an economic relationship, achieving a target hedge ratio and monitoring credit risk exposures. Voluntary discontinuation of hedging relationships is no longer permitted except in limited circumstances based on the risk management objectives of hedge strategies. The Bank has an accounting policy choice to adopt the new general hedge accounting model under IFRS 9 or continue to apply the hedge accounting requirements under IAS 39. The Bank continues to evaluate this accounting policy choice in accordance with the project plan. Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which clarifies the principles for recognizing revenue and cash flows arising from contracts with customers. In July 2015, the IASB confirmed a one-year deferral of the effective date to annual periods beginning on or after January 1, 2018, which will be November 1, 2018 for the Bank, and is to be applied retrospectively. The Bank is currently assessing the impact of adopting this standard. ACCOUNTING STANDARDS AND POLICIES Controls and Procedures DISCLOSURE CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the partici- pation 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, 2015. Based on that evalua- tion, 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, 2015. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Bank’s management is responsible for establishing and maintain- ing 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 assurance 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 accor- dance with authorizations of the Bank’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized 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 the 2013 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, 2015, 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, 2015. 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, 2015. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the year and quarter ended October 31, 2015, 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 2015 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 IFRS as issued by the IASB. T A B L E 6 4 INVESTMENT PORTFOLIO – Securities Maturity Schedule1,2 (millions of Canadian dollars) As at 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 Remaining terms to maturities3 Total Total Available-for-sale securities Government and government-related securities Canadian government debt Federal Fair value Amortized cost Yield Provinces Fair value Amortized cost Yield U.S. federal government debt Fair value Amortized cost Yield U.S. states, municipalities and agencies Fair value Amortized cost Yield Other OECD government-guaranteed debt Fair value Amortized cost Yield Canadian mortgage-backed securities Fair value Amortized cost Yield Other debt securities Asset-backed securities Fair value Amortized cost Yield Non-agency CMO Fair value Amortized cost Yield Corporate and other debt Fair value Amortized cost Yield Equity securities Common shares Fair value Amortized cost Yield Preferred shares Fair value Amortized cost Yield Debt securities reclassified from trading Fair value Amortized cost Yield Total available-for-sale securities Fair value Amortized cost Yield October 31 October 31 October 31 2013 2015 2014 – $ – –% – $ 14,431 $ 8,404 $ 9,329 – 14,450 9,301 –% 8,355 1.82% 1.48% 0.69% $ 161 $ 3,928 $ 7,653 $ 2,689 $ 3,922 7,671 2,697 1.67% 1.41% 1.41% 160 1.64% 454 454 1.16% 145 145 0.04% 402 399 2.52% 1,935 1,926 1,911 1,912 2,876 2,933 1.83% 1.83% 2.28% 9 8 4.44% – 7,185 – 7,233 –% 1.98% 4,545 4,518 2.08% 2,588 2,569 1.16% – – –% 10,491 10,566 – – –% 1.83% – – –% – 10,636 – 10,711 –% 1.81% 152 152 0.12% 141 141 0.14% 1,051 1,042 2,153 2,090 1,847 1,816 6,496 6,468 1.86% 1.50% 2.32% 1.56% – 11,949 – 11,815 –% 1.73% 11,978 15,035 11,798 14,830 1.81% 1.85% 1,866 1,865 0.44% 1,224 1,223 4,145 4,159 4,420 4,466 0.53% 1.43% 1.64% 456 454 2.11% 1,540 1,507 2,064 2,060 2.32% 1.76% – – –% – – –% – – –% – 11,655 – 11,713 –% 1.26% 3,322 3,313 1.67% 7,994 7,978 1.25% – 4,060 – 4,021 –% 2.01% 3,306 3,256 2.24% 2,810 2,791 2.26% 1,688 1,687 1.18% 1,103 1,104 1,975 1,976 6,113 6,136 5,883 6,018 1.04% 1.05% 1.67% 1.04% – 16,762 – 16,921 –% 1.28% 18,903 29,320 18,831 29,252 1.06% 1.01% – – –% – – –% – – –% – – –% 916 921 2.13% – – –% 916 921 2.13% 1,722 1,713 2.77% 963 948 1.75% 1,221 1,216 3.08% 4,513 4,521 2,456 2,461 2.91% 2.75% 433 433 3.52% 142 139 5.38% – 8,765 – 8,770 –% 2.96% 8,099 8,008 2.91% 8,653 8,471 3.12% – – –% – – –% – – –% – – –% – – –% – – –% – – –% – – –% – – –% 1,858 1,858 1,770 1,770 5.42% 5.42% 1,760 1,642 4.74% 1,640 1,560 3.69% – – –% 114 112 4.33% 114 112 4.33% 171 153 1.26% 166 152 3.70% 85 83 8.77% 78 75 23 19 8.32% 8.25% 208 185 5.87% 57 58 4.84% – – –% 451 420 6.84% 646 596 4.61% 905 835 7.46% $ 6,478 $ 15,372 $ 22,380 $ 29,077 $ 13,503 $ 1,972 $ 88,782 $ 63,008 $ 79,544 62,335 78,828 1.89% 1.56% 1,882 88,857 1.99% 1.60% 6,463 15,320 13,612 29,232 22,348 5.35% 1.82% 1.40% 1.44% 1.89% 1 Yields represent the weighted-average yield of each security owned at the end of the period. The effective yield includes the contractual interest or stated dividend rate and is adjusted for the amortization of premiums and discounts; the effect of related hedging activities is excluded. 2 As at October 31, 2015, includes securities issued by Government of Japan of $8.9 billion and Federal Republic of Germany of $8.6 billion, where the book value was greater than 10% of the shareholders’ equity. There were no securities owned greater than 10% in the prior years. 3 Represents contractual maturities. Actual maturities may differ due to prepayment privileges in the applicable contract. 106 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 6 4 INVESTMENT PORTFOLIO – Securities Maturity Schedule (continued)1,2 (millions of Canadian dollars) As at 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 Remaining terms to maturities3 Total Total October 31 October 31 October 31 2013 2015 2014 Held-to-maturity securities Government and government-related securities Canadian government debt Federal Fair value Amortized cost Yield U.S. federal government and agencies debt Fair value Amortized cost Yield U.S. states, municipalities and agencies Fair value Amortized cost Yield Other OECD government-guaranteed debt Fair value Amortized cost Yield Other debt securities Other issuers Fair value Amortized cost Yield Total held-to-maturity schedules Fair value Amortized cost Yield – – –% – – –% $ 60 $ 59 0.42% – $ – –% 1.87% 923 $ 915 – – –% – – –% – $ – –% – – –% – – –% – – –% $ – $ – –% 983 $ 974 1.78% – $ – –% 259 259 0.99% – – –% – – –% – – –% – – –% 2,582 2,567 6,608 6,575 6,391 6,243 3,266 3,263 1.58% 1.85% 2.29% 2.24% – 18,847 – 18,648 –% 2.03% 18,879 18,792 2.04% 12,513 12,551 2.09% 5,811 5,804 1.09% 8,812 8,696 8,695 8,610 0.58% 0.23% 947 935 0.33% – – –% 872 878 2.94% 3,507 3,491 11,849 2,612 11,842 2,616 11,807 11,956 1.84% 0.84% 1.26% 2.00% $ 6,743 $ 14,901 $ 28,075 $ 9,950 $ 15,073 15,219 27,942 6,741 14,754 9,794 1.32% 1.05% 0.92% 1.83% 2.05% – 24,265 – 24,045 –% 0.57% 15,492 15,327 1.00% 13,103 13,080 1.31% – 30,647 – 30,783 –% 1.50% 22,955 22,858 4,075 4,071 1.08% 2.22% $ – $ 74,742 $ 57,326 $ 29,950 56,977 29,961 1.38% – 74,450 –% 1.33% 1.76% 1 Yields represent the weighted-average yield of each security owned at the end of the period. The effective yield includes the contractual interest or stated dividend rate and is adjusted for the amortization of premiums and discounts; the effect of related hedging activities is excluded. 2 As at October 31, 2015, includes securities issued by Government of Japan of $8.9 billion and Federal Republic of Germany of $8.6 billion, where the book value was greater than 10% of the shareholders’ equity. There were no securities owned greater than 10% in the prior years. 3 Represents contractual maturities. Actual maturities may differ due to prepayment privileges in the applicable contract. 107 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 6 5 LOAN PORTFOLIO – Maturity Schedule (millions of Canadian dollars) Remaining terms to maturities Under 1 year 1 to 5 years Over 5 years Total As at Total October 31 October 31 October 31 October 31 October 31 2011 2015 2013 2014 2012 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 $ 38,764 $ 141,728 $ 4,517 $ 185,009 $ 175,125 $ 164,389 $ 154,247 $ 142,297 44,270 17,040 8,838 392 214 14,624 17,941 – 115,991 167,820 7 61,317 59,568 61,581 64,753 65,531 9,808 19,038 16,475 14,666 13,965 13,607 1,237 16,075 16,116 15,193 14,574 15,380 8,094 – 17,941 17,927 15,288 14,236 15,569 299,380 285,211 271,117 261,775 244,909 5,212 7,516 12,728 5,160 2,311 7,471 4,490 14,862 14,604 13,685 12,477 10,738 1,503 11,330 5,899 5,993 26,192 24,372 21,838 19,729 16,637 8,153 7,252 9,768 53,961 20,508 169,952 188,328 9,686 84,155 71,814 64,272 55,797 51,720 25,255 383,535 357,025 335,389 317,572 296,629 283 112 26,527 26,922 23,335 20,945 17,362 12,495 10,791 206 6,048 17,664 436 203 12,274 – 29,599 18,418 2,446 1,143 1,620 9,416 2,763 11,862 2,337 13,334 11,665 10,607 10,122 1,150 24,862 18,782 16,323 13,466 490 1,097 9,654 9,741 449 892 30,068 78,085 62,034 55,308 42,537 33,231 693 – 12,274 533 6,900 615 7,637 54 5,691 3,101 3,015 2,102 7,281 18,317 14,037 12,084 10,831 9,443 9,383 24,008 18,331 15,554 13,846 12,544 3,470 4,294 14,682 41,127 44,281 59,545 41,408 97,217 69,417 55,000 47,181 41,853 71,476 175,302 131,451 110,308 89,718 75,084 4 1,760 1,764 1 218 219 – – – 5 1,978 1,983 9 2,124 2,133 10 2,240 2,250 11 2,653 2,664 12 3,520 3,532 143 145 288 364 523 887 1,680 746 2,426 2,187 1,414 3,601 2,695 1,713 4,408 3,744 2,485 6,229 6,511 4,994 3,767 5,560 8,761 12,071 $ 216,285 $ 248,979 $ 99,157 $ 564,421 $ 495,017 $ 454,176 $ 418,715 $ 387,316 T A B L E 6 6 LOAN PORTFOLIO – Rate Sensitivity (millions of Canadian dollars) As at October 31, 2015 October 31, 2014 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 1 to 5 years Over 5 years 1 to 5 years Over 5 years $ 176,316 $ 66,949 $ 155,614 $ 59,555 $ 158,435 $ 45,395 $ 133,730 $ 37,781 $ 90,753 $ 28,301 16,764 $ 248,979 $ 99,157 $ 229,286 $ 84,546 $ 218,836 $ 68,460 $ 191,929 $ 58,648 $ 147,657 $ 45,065 20,867 56,904 23,065 58,199 24,991 60,401 32,208 73,672 72,663 Fixed rate Variable rate Total 108 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS The change in the Bank’s allowance for credit losses for the years ended October 31 are shown in the following table. T A B L E 6 7 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, refer to the “FDIC Covered Loans” section in Note 8 of the Bank’s 2015 Consolidated Financial Statements. 2015 $ 3,028 1,683 2014 $ 2,855 1,557 2013 $ 2,644 1,631 2012 $ 2,314 1,795 23 21 20 13 224 218 638 1,116 4 3 7 74 1,190 13 207 234 582 1,057 1 3 4 109 1,166 18 160 274 543 1,015 2 3 5 104 1,119 16 47 206 101 454 824 5 22 27 124 948 – – – 17 43 232 79 288 659 12 18 30 117 776 – – – 33 65 231 74 56 459 16 59 75 191 650 – – – 18 16 155 310 335 834 3 4 7 108 942 42 101 145 67 50 405 91 84 175 385 790 – – – 13 6 19 2,157 5 20 25 1,967 11 38 49 1,818 – 112 112 1,844 1 2 78 58 124 263 1 1 2 33 $ 296 $ 5 5 138 60 109 317 1 2 3 29 346 3 2 35 55 101 196 1 1 2 28 $ 224 4 3 20 51 46 124 1 1 2 25 $ 149 2011 $ 2,309 1,490 11 12 155 329 365 872 3 3 6 102 974 30 74 55 69 54 282 113 60 173 373 655 – – – 48 39 87 1,716 4 1 20 48 43 116 – 1 1 27 $ 143 109 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 6 7 ALLOWANCE FOR CREDIT LOSSES (continued) (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 2015 2014 2013 2012 2011 $ 11 $ 10 $ 17 $ 15 $ 9 5 83 23 113 235 9 9 18 50 285 – 1 1 5 12 20 60 107 14 15 29 73 180 – – – – 19 19 601 (1,556) (3) 321 3,473 39 $ 3,434 – 7 7 533 (1,434) – 112 3,090 62 $ 3,028 4 64 22 5 112 8 10 18 49 161 – – – – 9 9 394 (1,424) (41) 46 2,856 1 $ 2,855 6 35 19 5 80 8 13 21 57 137 – – – – 1 1 287 (1,557) – 20 2,572 (72) $ 2,644 0.30% 0.31% 0.33% 0.39% 3 14 20 4 50 9 8 17 71 121 – – – – – – 264 (1,452) – (28) 2,319 5 $ 2,314 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, refer to the “FDIC Covered Loans” section in Note 8 of the Bank’s 2015 Consolidated Financial Statements. 3 The allowance for credit losses for off-balance sheet instruments is recorded in Other Liabilities on the Consolidated Balance Sheet. T A B L E 6 8 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 October 31, 2015 October 31, 2014 Average balance Total interest expense Average rate paid Average balance Total interest expense Average rate paid Average balance For the year ended October 31, 2013 Total interest expense Average rate paid 6,685 $ $ 45,081 172,124 146,714 370,604 – 570 306 2,112 2,988 –% $ 5,405 $ 1.26 0.18 1.44 0.81 38,443 159,687 120,493 324,028 – 597 421 1,934 2,952 –% $ 4,050 $ 35,768 144,463 110,648 294,929 – 443 459 2,039 2,941 1.55 0.26 1.61 0.91 8,723 2,812 239,078 94,016 344,629 – 4 842 313 1,159 55 1,874 2 17,042 18,973 – 5 – 90 95 – 0.14 0.35 0.33 0.34 – 0.27 – 0.53 0.50 6,961 1,387 196,735 74,999 280,082 – 3 1,059 216 1,278 20 1,803 27 17,951 19,801 – 2 – 81 83 – 0.22 0.54 0.29 0.46 – 0.11 – 0.45 0.42 7,544 897 170,255 70,034 248,730 – 3 1,222 248 1,473 10 2,557 28 9,435 12,030 – 6 – 41 47 –% 1.24 0.32 1.84 1.00 – 0.33 0.72 0.35 0.59 – 0.23 – 0.43 0.39 Total average deposits $ 734,206 $ 4,242 0.58% $ 623,911 $ 4,313 0.69% $ 555,689 $ 4,461 0.80% 1 As at October 31, 2015, deposits by foreign depositors in TD’s Canadian bank offices amounted to $13 billion (October 31, 2014 – $8 billion, October 31, 2013 – $7 billion). 110 TD BANK GROUP ANNUAL REPORT 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS T A B L E 6 9 DEPOSITS – Denominations of $100,000 or greater1 (millions of Canadian dollars) Canada United States Other international Total Canada United States Other international Total Canada United States Other international Total 1 Deposits in Canada, U.S., and Other international include wholesale and retail deposits. T A B L E 7 0 SHORT-TERM BORROWINGS1 (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 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Within 3 months 3 months to 6 months 6 months to 12 months Over 12 months Remaining term to maturity As at Total $ 31,147 28,018 10,222 $ 69,387 $ 4,234 27,687 4,976 $ 36,897 $ 20,715 14,672 4,168 $ 39,555 $ 23,860 32,950 12,131 $ 68,941 $ 3,411 13,359 1,985 $ 18,755 $ 13,461 28,012 1,446 $ 42,919 $ 25,229 41,595 11,141 $ 77,965 $ 5,196 15,634 4,504 $ 25,334 $ 8,695 7,974 77 $ 16,746 October 31, 2015 $ 64,989 2,545 – $ 67,534 $ 121,085 72,922 19,366 $ 213,373 October 31, 2014 $ 54,743 2,380 – $ 57,123 $ 95,475 76,701 15,562 $ 187,738 October 31, 2013 $ 36,036 1,684 18 $ 37,738 $ 75,156 66,887 15,740 $ 157,783 October 31 2015 October 31 2014 As at October 31 2013 $ 67,156 $ 53,112 75,082 74,669 0.25% 0.37 62,025 55,944 0.39% 0.38 $ 34,414 46,234 42,726 0.43% 0.45 111 TD BANK GROUP ANNUAL REPORT 2015 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) and related regulations 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 reason- able assurance that financial records are complete and accurate and that assets are safeguarded 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 communication 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, 2015, using the framework found in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 Framework. Based upon this assessment, manage- ment has concluded that as at October 31, 2015, 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 manage- ment’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 finan- cial 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 profes- sional 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 necessary 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 shareholders of the Bank, have audited the effectiveness of the Bank’s internal control over financial reporting as at October 31, 2015, in addition to auditing 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. Colleen M. Johnston Chief Financial Officer Bharat B. Masrani Group President and Chief Executive Officer Toronto, Canada December 2, 2015 112 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS INDEPENDENT AUDITORS’ REPORT 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, 2015 and 2014, 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, 2015, 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 assess ment 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 exam- ining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating 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, 2015 and 2014, and its financial performance and its cash flows for each of the years in the three-year period ended October 31, 2015, in accordance with International Financial Reporting Standards as issued by the International 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, 2015, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated December 2, 2015, expressed an unqualified opinion on The Toronto-Dominion Bank’s internal control over financial reporting. Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada December 2, 2015 113 TD BANK GROUP ANNUAL REPORT 2015 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, 2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). The Toronto-Dominion Bank’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accom- panying Management’s Report on Internal Control over Financial Reporting contained in the accompanying Management’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 reason- able assurance about whether effective internal control over financial reporting was maintained 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 evaluat- ing the design and operating effectiveness 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 Report- ing 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 main- tenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions 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 acquisition, 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 reporting 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, 2015, 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, 2015 and 2014, 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, 2015, of The Toronto-Dominion Bank and our report dated December 2, 2015, expressed an unqualified opinion thereon. Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants Toronto, Canada December 2, 2015 114 TD BANK GROUP ANNUAL REPORT 2015 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, 7) Derivatives (Notes 5, 11) Financial assets designated at fair value through profit or loss (Note 5) Available-for-sale securities (Notes 5, 7) Held-to-maturity securities (Note 7) Securities purchased under reverse repurchase agreements Loans (Note 8) Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Allowance for loan losses (Note 8) Loans, net of allowance for loan losses Other Customers’ liability under acceptances Investment in TD Ameritrade (Note 12) Goodwill (Note 14) Other intangibles (Note 14) Land, buildings, equipment, and other depreciable assets (Note 15) Deferred tax assets (Note 26) Amounts receivable from brokers, dealers, and clients Other assets (Note 16) Total assets LIABILITIES Trading deposits (Notes 5, 17) Derivatives (Notes 5, 11) Securitization liabilities at fair value (Notes 5, 9) Other financial liabilities designated at fair value through profit or loss (Note 5) Deposits (Note 17) 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 9) Amounts payable to brokers, dealers, and clients Insurance-related liabilities Other liabilities (Note 18) Subordinated notes and debentures (Note 19) Total liabilities EQUITY Common shares (millions of shares issued and outstanding: Oct. 31, 2015 – 1,856.2, Oct. 31, 2014 – 1,846.2) (Note 21) Preferred shares (millions of shares issued and outstanding: Oct. 31, 2015 – 108.0, Oct. 31, 2014 – 88.0) (Note 21) Treasury shares – common (millions of shares held: Oct. 31, 2015 – (1.1), Oct. 31, 2014 – (1.6)) (Note 21) Treasury shares – preferred (millions of shares held: Oct. 31, 2015 – (0.1), Oct. 31, 2014 – (0.04)) (Note 21) Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests in subsidiaries (Note 21) Total equity Total liabilities and equity Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. The accompanying Notes are an integral part of these Consolidated Financial Statements. October 31 2015 $ 3,154 42,483 45,637 95,157 69,438 4,378 88,782 257,755 74,450 97,364 212,373 135,471 30,215 167,529 2,187 547,775 (3,434) 544,341 16,646 6,683 16,337 2,671 5,314 1,931 21,996 13,248 84,826 $ 1,104,373 As at October 31 2014 $ 2,781 43,773 46,554 101,173 55,796 4,745 63,008 224,722 56,977 82,556 198,912 123,411 25,570 131,349 2,695 481,937 (3,028) 478,909 13,080 5,569 14,233 2,680 4,930 2,008 17,130 11,163 70,793 $ 960,511 $ 74,759 57,218 10,986 1,415 144,378 $ 59,334 51,209 11,198 3,250 124,991 395,818 17,080 282,678 695,576 16,646 38,803 67,156 22,743 22,664 6,519 14,223 188,754 8,637 1,037,345 20,294 2,700 (49) (3) 214 32,053 10,209 65,418 1,610 67,028 $ 1,104,373 343,240 15,771 241,705 600,716 13,080 39,465 53,112 24,960 18,195 6,079 15,897 170,788 7,785 904,280 19,811 2,200 (54) (1) 205 27,585 4,936 54,682 1,549 56,231 $ 960,511 Bharat B. Masrani Group President and Chief Executive Officer William E. Bennett Chair, Audit Committee 115 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Consolidated Statement of Income (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 Other Net interest income Non-interest income Investment and securities services Credit fees Net securities gain (loss) (Note 7) Trading income (loss) (Note 22) Service charges Card services Insurance revenue (Note 23) Trust fees Other income (loss) Total revenue Provision for credit losses (Note 8) Insurance claims and related expenses (Note 23) Non-interest expenses Salaries and employee benefits (Note 25) Occupancy, including depreciation Equipment, including depreciation Amortization of other intangibles Marketing and business development Restructuring charges Brokerage-related fees Professional and advisory services Communications Other Income before income taxes and equity in net income of an investment in associate Provision for (recovery of) income taxes (Note 26) Equity in net income of an investment in associate, net of income taxes (Note 12) 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 27) Basic Diluted Earnings per share (dollars) (Note 27) Basic Diluted Dividends per share (dollars) Certain comparative amounts have been reclassified to conform with the presentation adopted in the current period. The accompanying Notes are an integral part of these Consolidated Financial Statements. For the years ended October 31 2015 2014 2013 $ 20,319 $ 19,716 $ 18,498 3,155 1,214 142 24,830 4,242 593 390 881 6,106 18,724 3,683 925 79 (223) 2,376 1,766 3,758 150 188 12,702 31,426 1,683 2,500 9,043 1,719 892 662 728 686 324 1,032 273 2,714 18,073 9,170 1,523 377 8,024 99 $ 7,925 2,913 1,173 126 23,928 4,313 777 412 842 6,344 17,584 3,346 845 173 (349) 2,152 1,552 3,883 150 625 12,377 29,961 1,557 2,833 8,451 1,549 810 598 756 29 321 991 283 2,708 16,496 9,075 1,512 320 7,883 143 $ 7,740 $ 112 7,813 $ 107 7,633 1,849.2 1,854.1 $ 4.22 4.21 2.00 1,839.1 1,845.3 $ 4.15 4.14 1.84 2,965 1,048 104 22,615 4,461 927 447 706 6,541 16,074 2,834 785 304 (279) 1,966 1,220 3,734 148 473 11,185 27,259 1,631 3,056 7,651 1,456 847 521 685 129 317 1,009 281 2,173 15,069 7,503 1,135 272 6,640 185 $ 6,455 $ 105 6,350 1,837.9 1,845.1 $ 3.46 3.44 1.62 116 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Consolidated Statement of Comprehensive Income For the years ended October 31 2015 $ 8,024 2014 $ 7,883 2013 $ 6,640 (464) (93) 8,090 – (2,764) – 4,805 (4,301) 400 5,673 $ 13,697 99 $ 13,486 112 69 (163) 3,697 (13) (1,390) 13 2,439 (2,875) (458) 1,319 $ 9,202 $ 143 8,952 107 (472) (271) 1,885 4 (737) (4) (86) (805) 339 (147) $ 6,493 $ 185 6,203 105 (millions of Canadian dollars) Net income Other comprehensive income (loss) (OCI), net of income taxes Items that will be subsequently reclassified to net income 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 Net foreign currency translation gains (losses) from hedging activities4 Reclassification to earnings of net losses (gains) on hedges of investments in foreign operations5 Change in net gains (losses) on derivatives designated as cash flow hedges6 Reclassification to earnings of net losses (gains) on cash flow hedges7 Items that will not be subsequently reclassified to net income Actuarial gains (losses) on employee benefit plans8 Comprehensive income (loss) for the year Attributable to: Preferred shareholders Common shareholders Non-controlling interests in subsidiaries 1 Net of income tax recovery in 2015 of $210 million (2014 – income tax provision of $67 million; 2013 – income tax recovery of $285 million). 2 Net of income tax provision in 2015 of $78 million (2014 – income tax provision of $81 million; 2013 – income tax provision of $136 million). 3 Net of income tax provision in 2015 of nil (2014 – income tax provision of nil; 2013 – income tax provision of nil). 4 Net of income tax recovery in 2015 of $985 million (2014 – income tax recovery of $488 million; 2013 – income tax recovery of $264 million). 5 Net of income tax provision in 2015 of nil (2014 – income tax recovery of $4 million; 2013 – income tax provision of $1 million). 6 Net of income tax provision in 2015 of $2,926 million (2014 – income tax provision of $1,394 million; 2013 – income tax provision of $140 million). 7 Net of income tax provision in 2015 of $2,744 million (2014 – income tax provision of $1,617 million; 2013 – income tax provision of $587 million). 8 Net of income tax provision in 2015 of $147 million (2014 – income tax recovery of $210 million; 2013 – income tax provision of $172 million). 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. 117 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Consolidated Statement of Changes in Equity (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 Balance at end of year Preferred shares (Note 21) Balance at beginning of year Issue of shares Redemption of shares 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 24) Other Balance at end of year Retained earnings Balance at beginning of year Net income attributable to shareholders Common dividends Preferred dividends Share issue expenses and others Net premium on repurchase of common shares and redemption of preferred shares Actuarial gains (losses) on employee benefit plans 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 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. For the years ended October 31 2015 2014 2013 $ 19,811 128 355 – 20,294 $ 19,316 199 339 (43) 19,811 $ 18,691 297 515 (187) 19,316 2,200 1,200 (700) 2,700 (54) (5,269) 5,274 (49) (1) (244) 242 (3) 205 25 – (16) 214 27,585 7,912 (3,700) (99) (28) (17) 400 32,053 638 (557) 81 3,029 5,326 8,355 1,269 504 1,773 10,209 3,395 1,000 (2,195) 2,200 (145) (4,197) 4,288 (54) (2) (154) 155 (1) 170 48 (5) (8) 205 23,982 7,776 (3,384) (143) (11) (177) (458) 27,585 732 (94) 638 722 2,307 3,029 1,705 (436) 1,269 4,936 3,395 – – 3,395 (166) (3,552) 3,573 (145) (1) (86) 85 (2) 196 (3) (25) 2 170 20,863 6,535 (2,977) (185) – (593) 339 23,982 1,475 (743) 732 (426) 1,148 722 2,596 (891) 1,705 3,159 1,549 112 (51) 1,610 $ 67,028 1,508 107 (66) 1,549 $ 56,231 1,477 105 (74) 1,508 $ 51,383 118 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Consolidated Statement of Cash Flows (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 8) Depreciation (Note 15) Amortization of other intangibles Net securities losses (gains) (Note 7) Equity in net income of an investment in associate (Note 12) Deferred taxes (Note 26) Changes in operating assets and liabilities Interest receivable and payable (Notes 16, 18) 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 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 19) Redemption of subordinated notes and debentures (Note 19) Common shares issued (Note 21) Preferred shares issued (Note 21) Repurchase of common shares (Note 21) Redemption of preferred 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 7) Purchases Proceeds from maturities Proceeds from sales Activities in held-to-maturity securities (Note 7) Purchases Proceeds from maturities Activities in debt securities classified as loans Purchases Proceeds from maturities Proceeds from sales Net purchases of land, buildings, equipment, and other depreciable assets Changes in securities purchased under reverse repurchase agreements Net cash acquired from (paid for) divestitures, acquisitions, and the sale of TD Ameritrade shares (Notes 12, 13) 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 income taxes paid (refunded) during the year 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 restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. The accompanying Notes are an integral part of these Consolidated Financial Statements. For the years ended October 31 2015 2014 2013 $ 9,547 $ 9,395 $ 7,775 1,683 588 662 (79) (377) (352) (294) (662) 6,016 (63,947) 108,446 (7,633) 371 (2,429) (16,267) 35,273 14,044 2,500 (1,675) 108 1,184 – (717) 5,541 (5,513) (3,444) (112) 11,916 1,557 533 598 (173) (320) 31 (204) (2,364) 767 (33,717) 72,059 (4,597) 1,783 (11,394) (8,041) 25,913 13,494 – (150) 168 989 (220) (2,195) 4,491 (4,351) (3,188) (107) 8,931 1,631 518 521 (304) (272) (370) (425) 8,391 (7,409) (33,820) 64,449 (4,068) (364) (3,962) (5,007) 27,284 (4,402) – (3,400) 247 – (780) – 3,655 (3,638) (2,647) (105) (11,070) 1,290 (15,190) (7,075) (58,775) 27,055 6,631 (15,120) 9,688 (23) 875 – (972) (14,808) (2,918) (47,077) 261 373 2,781 $ 3,154 $ 554 6,167 23,483 1,216 (38,887) 30,032 6,403 (9,258) 6,542 (37) 1,263 10 (828) (13,069) (2,768) (35,787) 143 (800) 3,581 $ 2,781 $ 1,241 6,478 22,685 1,179 (58,102) 39,468 18,189 (11,352) 2,873 (489) 1,399 1,030 (751) 4,915 (6,211) (16,106) 37 145 3,436 $ 3,581 $ 869 6,931 21,532 1,018 119 TD BANK GROUP ANNUAL REPORT 2015 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, 129 Estimates and Assumptions Current and Future Changes in Accounting Policies 132 132 Fair Value Measurements Offsetting Financial Assets and Financial Liabilities 144 Securities 145 Loans, Impaired Loans, and Allowance for Credit Losses 149 Transfers of Financial Assets 152 153 Structured Entities Derivatives 157 164 Investment in Associates and Joint Ventures Significant Acquisitions and Disposals 165 Goodwill and Other Intangibles 166 Land, Buildings, Equipment, and Other Depreciable Assets 168 168 Other Assets 169 Deposits 170 Other Liabilities 170 Subordinated Notes and Debentures 171 Capital Trust Securities 171 Equity 173 Trading-Related Income 174 Insurance 177 Share-Based Compensation 178 Employee Benefits 183 Income Taxes Earnings Per Share 185 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 Event 185 189 190 192 194 198 199 199 200 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 36 120 TD BANK GROUP ANNUAL REPORT 2015 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 three business segments operating in a number of locations in key financial centres around the globe: Canadian Retail, U.S. Retail, 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 Finan- cial Institutions Canada (OSFI). The Consolidated Financial Statements are presented in Canadian dollars, unless otherwise indicated. These Consolidated Financial Statements were prepared using the accounting policies as described in Note 2, as well as the new and amended standards under IFRS (2015 IFRS Standards and Amendments) adopted retrospectively by the Bank as discussed in Note 4. Certain other comparative amounts have also been restated/reclassified to conform with the presentation adopted in the current period. 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 accompanying Consolidated Financial Statements of the Bank were approved and authorized for issue by the Bank’s Board of Directors, in accordance with a recommendation of the Audit Committee, on December 2, 2015. Certain disclosures are included in the shaded sections of the “Managing Risk” section of the accompanying 2015 Management’s Discussion and Analysis (MD&A), as permitted by IFRS, and form an integral part of the Consolidated Financial Statements. The Consoli- dated Financial Statements were prepared under a historical cost basis, except for certain items carried at fair value as discussed in Note 2. 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 structured entities which it controls. The Bank controls an entity when (1) it has the power to direct the activities of the entity which have the most significant impact on the entity’s risks and/or returns; (2) it is exposed to significant risks and/or returns arising from the entity; and (3) it is able to use its power to affect the risks and/or returns to which it is exposed. 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 eliminated 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. Control of subsidiaries is determined based on the power exercisable through ownership of voting rights and is generally aligned with the risks and/or returns (collectively referred to as “vari- able returns”) absorbed from subsidiaries through those voting rights. As a result, the Bank controls and consolidates subsidiaries when it holds the majority of the voting rights of the subsidiary, unless there is evidence that another investor has control over the subsidiary. The existence and effect of potential voting rights that are currently exer- cisable 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 consolidated until the date when control ceases to exist. The Bank may consolidate certain subsidiaries where it owns 50% or less of the voting rights. Most of those subsidiaries are structured enti- ties as described in the following section. Structured Entities Structured entities, including special purpose entities (SPEs), are entities that are created to accomplish a narrow and well-defined objective. Structured entities may take the form of a corporation, trust, partner- ship, or unincorporated entity. They are often created with legal arrangements that impose limits on the decision making powers of their governing board, trustee, or management over the operations of the entity. Typically, structured entities may not be controlled directly through holding more than half of the voting power of the entity as the ownership of voting rights may not be aligned with the variable returns absorbed from the entity. As a result, structured entities are consolidated when the substance of the relationship between the Bank and the structured entity indicates that the entity is controlled by the Bank. When assessing whether the Bank has to consolidate a structured entity, the Bank evaluates three primary criteria in order to conclude whether, in substance: • The Bank has the power to direct the activities of the structured entity that have the most significant impact on the entity’s risks and/or returns; • The Bank is exposed to significant variable returns arising from the entity; and • The Bank has the ability to use its power to affect the risks and/or returns to which it is exposed. Consolidation conclusions are 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 or disposal of more than an insignificant additional interest in an entity; • Changes in contractual or governance arrangements of an entity; • Additional activities undertaken, such as providing a liquidity facility beyond the original terms or entering into a transaction not originally contemplated; or • Changes in the financing structure of an entity. Investments in Associates and Joint Ventures Entities over which the Bank has significant influence are associates and entities over which the Bank has joint control are joint ventures. Significant 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. Associates and joint ventures are accounted for using the equity method of accounting. Investments in associates and joint ventures are carried on the Consolidated Balance Sheet initially at cost and increased or decreased to recognize the Bank’s share of the profit or loss of the associate or joint venture, capital transactions, including the receipt of any dividends, and write-downs 121 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTSto reflect any impairment in the value of such entities. These increases or decreases, together with any gains and losses realized on disposi- tion, are reported on the Consolidated Statement of Income. At each balance sheet date, the Bank assesses whether there is any objective evidence that the investment in an associate or joint venture 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 a consolidated entity, the minority shareholders’ interest is presented on the Consolidated Balance Sheet as Non-controlling interests in subsidiaries as a component of total equity, separate from the equity of the Bank’s shareholders. 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 recognized by reference to the stage of completion of the transaction at the end of the reporting period. 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. 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 management fees are primarily calculated based on average daily or point in time assets under management (AUM) or by assets under administration (AUA) by investment mandate. Administration fees earned may either be a fixed amount per client account, or calculated based on a percentage of daily, monthly, or annual AUM for institutional accounts. Investment banking fees, including advisory fees, are recognized as income when earned, and underwriting fees are recognized 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. 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 twelve-month period. Service charges, trust, and other fee income is recognized as earned. Revenue recognition policies related to financial instruments and insurance are described in the following accounting policies. 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 122 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 recog- nized 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 designa- tion 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 strategy; or (3) the instrument contains one or more embedded deriva- tives 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 derivative 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 assets 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 financial assets classified as available-for-sale are calculated on a weighted-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 on the Consolidated Statement of Income. 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 available-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 on the Consolidated Statement of 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 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS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 classified 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 counterparty-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. 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, 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. For gross impaired debt securities classified as loans, subsequent to any recorded impairment, interest income continues to be recognized using the EIRM which was used to discount the future cash flows for the purpose of measuring the credit loss. Renegotiated Loans In cases where a borrower experiences financial difficulties the Bank may grant certain concessionary modifications to the terms and condi- tions of a loan. Modifications may include payment deferrals, extension of amortization periods, rate reductions, principal forgiveness, debt consolidation, forbearance and other modifications intended to mini- mize the economic loss and to avoid foreclosure or repossession of collateral. The Bank has policies in place to determine the appropriate remediation strategy based on the individual borrower. Once modified, additional impairment is recorded where the Bank identifies a decrease in the modified loan’s estimated realizable value as a result of the modification. Modified loans are assessed for impairment, consistent with the Bank’s existing policies for impairment. Allowance for Credit Losses, Excluding Acquired Credit-Impaired Loans 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. The allowance for loan losses, which includes credit-related allowances for residential mortgages, consumer instalment and other personal, credit card, business and government loans, and debt securities classified as loans, is deducted from Loans on the Consolidated Balance Sheet. The allow- ance for credit losses for off-balance sheet instruments, which relates to certain guarantees, letters of credit, and undrawn lines of credit, is recognized in Other liabilities on the Consolidated Balance Sheet. Allowances for lending portfolios reported on the balance sheet and off-balance sheet exposures are calculated using the same meth- odology. 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 allow- ances. 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. 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 impairment 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 applicable, is measured as the difference between the carrying amount of the loan and the estimated recoverable amount. The estimated recov- erable 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 experience, loan portfolio composition, and other relevant indicators. Historical loss experience is adjusted based on current observable 123 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS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 contractu- ally required principal and interest payments, they are generally consid- ered 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 determines 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 management 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 individ- ually 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 on a gross basis, exclusive of any adjustments to the indemnification assets. 124 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. 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 is reported as a liability under Acceptances 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 initially recognized at fair value and subsequently accounted for at amortized cost. Interest expense, including capitalized transaction costs, is recognized on an accrual basis using the EIRM. Guarantees The Bank issues guarantee contracts that require payments to be made to guaranteed parties based on: (1) changes in the underlying economic characteristics relating to an asset or liability of the guaranteed party; (2) failure of another party to perform under an obligating agreement; or (3) 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. Guarantees, including financial and performance standby letters of credit, are initially measured and recorded at their fair value. The fair value of a guarantee liability at initial recognition is normally equal to the present value of the guaran- tee fees received over the life of contract. The Bank’s release from risk is recognized 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. TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTSSHARE CAPITAL The Bank classifies financial instruments that it issues as either financial liabilities, equity instruments, or compound instruments. 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 in the Consolidated Statement of Income. Issued instruments are classified as equity when there is no contrac- tual obligation to transfer cash or other financial assets. Further, issued instruments 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 as equity and presented in share capital. Incremental costs directly attributable to the issue of equity instruments are included in equity as a deduction from the proceeds, net of tax. Dividend payments on these instruments are recognized as a reduction in equity. Compound instruments are comprised of both liability and equity components in accordance with the substance of the contractual arrangement. At inception, the fair value of the liability component is initially measured with any residual amount assigned to the equity component. Transaction costs are allocated proportionately to the liability and equity components. Common or preferred shares held by the Bank are classified as treasury shares in equity, and the cost of these shares is recorded as a reduction in equity. Upon the sale of treasury shares, the difference between the sale proceeds and the cost of the shares is recorded in or against contributed surplus. 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. Derivatives are carried at their fair value on the Consolidated Balance Sheet. 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 unrealized gains or losses on trading derivatives are recognized immediately in trading income (losses). Derivatives Held for Non-trading Purposes Non-trading derivatives are primarily used to manage interest rate, foreign exchange, and other market risks of the Bank’s traditional banking activities. 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: (1) hedges of the changes in fair value of recognized assets or liabilities or firm commitments (fair value hedges); (2) 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 (3) 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-inter- est 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 immediately in non-interest income. 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 immediately 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 denominated 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, including 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 or Non-interest income, as applicable, on the Consolidated Statement of Income in the period in which the hedged item affects income, and are reported in the same income statement line as the hedged item. 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 or Non-interest income, as applicable, 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 125 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS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. The Bank designates derivatives and non-derivatives (such as foreign currency deposit liabilities) as hedging instruments in net investment hedges. 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 Canadian 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 functional 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. When financial assets and liabilities have offsetting market risks or credit risks, the Bank applies the portfolio exception, as described in Note 5, and uses mid-market prices as a basis for estab- lishing fair values for the offsetting risk positions and applies the most representative price within the bid-ask spread 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 126 transactions involving the same or similar instrument, without modifi- cation 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 in income upon initial recognition of the instrument. When an instrument is measured using a valuation technique that utilizes significant non-observable inputs, it is initially valued 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 tech- nique at initial recognition is recognized in 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 signif- icantly as a result of the transfer, the Bank has retained substantially 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 proportionate share of the asset, or a fully proportionate share of a specifically identified cash flow. TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS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 derecognition, 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 derec- ognized from the balance sheet and the retained interest recorded, in proportion to their relative fair values on the date of transfer. Subse- quent 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 participants 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. Similarly, when the benefits of servicing are less than adequate, a servicing liability is recognized. Servicing assets and servicing liabilities are initially recog- nized at fair value and subsequently carried at amortized cost. 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 9 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 amortized 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. 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 Intangible assets represent identifiable non-monetary assets and are acquired either separately or through a business combination, or inter- nally generated software. The Bank’s intangible assets consist primarily of core deposit intangibles, credit card related intangibles, and soft- ware 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. 127 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS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 impair- ment 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. Assets leased under a finance lease are capitalized 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 Buildings Computer equipment Furniture and fixtures Other equipment Leasehold improvements Useful Life 15 to 40 years 3 to 8 years 3 to 15 years 5 to 15 years Lesser of the remaining lease term and the remaining useful life of the asset 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 impair- ment is identified. Impairment losses previously recognized 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 the sale of the non-current assets (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 in Other income on the Consolidated Statement of Income. 128 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 option 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 in addition to 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 share units equivalent to 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, in addition to 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. All actuarial gains and losses are recognized immediately in other comprehensive income, with cumulative gains and losses reclassified to retained earnings. 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 discount rate, compensation increases, health care cost trend rate, and mortality rates, which are reviewed annually with the Bank’s actuaries. The discount rate used to value liabilities is based on long-term corporate AA bond yields as of the measurement date. The expense recognized includes the cost of benefits for employee service provided in the current year, net interest expense or income on the net defined benefit liability or asset, past service costs related to plan amendments, curtailments or settlements, and administrative costs. Plan amendment costs are recognized in the period of a plan amend- ment, irrespective of its vested status. Curtailments and settlements are recognized by the Bank when the curtailment or settlement occurs. A curtailment occurs when there is a significant reduction in the number of employees covered by the plan. 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. 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 cumula- tive actuarial gains and losses, expenses, and recognized contributions and is reported in other assets or other liabilities. Net defined benefit 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. Defined Contribution Plans For defined contribution plans, annual pension expense is equal to the Bank’s contributions to those plans. TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS 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 earned. For property and casualty insurance, insurance claims and policy benefit liabilities represent current claims and estimates for future insur- ance policy claims related to insurable events occurring at or before the balance sheet date. These are 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 experience, 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. 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. 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 assessment 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 differ- ences arising on investments in subsidiaries, branches and associates, and interests in joint ventures if the Bank controls the timing of the reversal of the temporary difference and it is probable that the tempo- rary 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 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 and the loss event(s) results in a decrease in the estimated cash flows of the instrument. The Bank reviews these securities at least quarterly for impairment at the coun- terparty-specific level. If there is no objective evidence of impairment at the counterparty-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 deterioration of credit quality subsequent to the initial recognition of the loan 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 impairment individu- ally for loans that are individually significant, and collectively for loans that are not individually significant. The allowance for credit losses represents management’s best estimate of impairment incurred in the 129 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS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 experi- ence, 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 credit losses and may result in a change in the incurred but not identified 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 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, 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 may change over time 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. 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 have been retained or transferred and the extent to which the risks and rewards of ownership of the financial asset have 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 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. 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 cash generating unit (CGU) is determined from internally developed 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 support- able. 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 discount rates, compensation increases, health care cost trend rates, and mortality rates are management’s best estimates 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 other assumptions are also long-term estimates. All assumptions are subject to a degree of uncertainty. Differences between actual experiences and the assump- tions, as well as changes in the assumptions resulting from changes in future expectations, result in actuarial gains and losses which are recognized in other comprehensive income during the year and also impact expenses in future periods. 130 TD BANK GROUP ANNUAL REPORT 2015 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 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 provisions 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. 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 infor- mation 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 qualitative 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 taking account of all the uncertainties involved. 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 combination of its own experience and industry experi- ence. 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. 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 provi- sion 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. CONSOLIDATION OF STRUCTURED ENTITIES Management judgment is required when assessing whether the Bank should consolidate an entity, particularly complex entities. For instance, it may not be feasible to determine if the Bank controls an entity solely through an assessment of voting rights for certain structured entities. In this case, judgment is required to establish whether the Bank has decision-making power over the key relevant activities of the entity and whether the Bank has the ability to use that power to absorb significant variable returns from the entity. If it is determined that the Bank has both decision-making power and significant variable returns from the entity, judgment is also used to determine whether any such power is exercised by the Bank as principal, on its own behalf, or as agent, on behalf of another counterparty. Assessing whether the Bank has decision-making power includes understanding the purpose and design of the entity in order to deter- mine its key economic activities. In this context, an entity’s key economic activities are those which predominantly impact the economic performance of the entity. When the Bank has the current ability to direct the entity’s key economic activities, it is considered to have decision-making power over the entity. The Bank also evaluates its exposure to the variable returns of a structured entity in order to determine if it absorbs a significant proportion of the variable returns the entity is designed to create. As part of this evaluation, the Bank considers the purpose and design of the entity in order to determine whether it absorbs variable returns from the structured entity through its contractual holdings, which may take the form of securities issued by the entity, derivatives with the entity, or other arrangements such as guarantees, liquidity facilities, or lending commitments. If the Bank has decision-making power over and absorbs significant variable returns from the entity it then determines if it is acting as prin- cipal or agent when exercising its decision-making power. Key factors considered include the scope of its decision-making powers; the rights of other parties involved with the entity, including any rights to remove the Bank as decision-maker or rights to participate in key decisions; whether the rights of other parties are exercisable in practice; and the variable returns absorbed by the Bank and by other parties involved with the entity. When assessing consolidation, a presumption exists that the Bank exercises decision-making power as principal if it is also exposed to significant variable returns, unless an analysis of the factors above indicates otherwise. The decisions above are made with reference to the specific facts and circumstances relevant for the structured entity and related transaction(s) under consideration. 131 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTSN O T E 4 CURRENT AND FUTURE CHANGES IN ACCOUNTING POLICIES CURRENT CHANGES IN ACCOUNTING POLICY The following new and amended standards have been adopted by the Bank. have a material impact on the financial position, cash flows, or earnings of the Bank and have been retained in the final version of IFRS 9, Financial Instruments (IFRS 9). Presentation – Offsetting Financial Assets and Financial Liabilities In December 2011, the IASB issued amendments to IAS 32, Financial Instruments: Presentation (the “IAS 32 amendments”), which clarified the existing requirements for offsetting financial assets and financial liabilities. These amendments are effective for annual periods begin- ning on or after January 1, 2014, which was November 1, 2014, for the Bank. The transition date for the Bank was November 1, 2013. As a result of adopting the IAS 32 amendments, certain bilateral transactions related to reverse repurchase and repurchase agreements, and amounts receivable from or payable to brokers, dealers, and clients no longer qualified for offsetting under the new guidance. As at October 31, 2014, the IAS 32 amendments resulted in an increase in derivative assets and liabilities of $0.4 billion (November 1, 2013 – $0.5 billion), an increase in reverse repurchase and repurchase agree- ments of $7.5 billion (November 1, 2013 – $5.2 billion), and an increase in amounts receivable from or payable to brokers, dealers, and clients of $7.8 billion (November 1, 2013 – $5.3 billion). Levies In May 2013, the IFRS Interpretations Committee (IFRIC), with the approval of 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, which 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 was November 1, 2014, for the Bank. IFRIC 21 changed the pattern and timing of recognition of certain levies paid by the Bank, in that it requires the obligation for these levies to be recognized at specific points in time in accordance with their applicable legislation. This change in timing of recognition did not have a material impact on the financial position, cash flows, or earnings of the Bank on an annual basis. Novation of Derivatives and Continuation of Hedge Accounting In June 2013, the IASB issued amendments to IAS 39, Financial Instru- ments: Recognition and Measurement (IAS 39), 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 was November 1, 2014, for the Bank, and have been applied retrospectively. The IAS 39 amendments did not 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. 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. Financial Instruments In July 2014, the IASB issued the final version of IFRS 9, which replaces the guidance in IAS 39. This final version includes requirements on: (1) Classification and measurement of financial assets and liabilities; (2) Impairment of financial assets; and (3) General hedge accounting. Accounting for macro hedging has been decoupled from IFRS 9. The Bank has an accounting policy choice to apply the hedge accounting requirements of IFRS 9 or IAS 39. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, and is to be applied retrospectively with certain exceptions. IFRS 9 does not require restatement of comparative period financial statements except in limited circumstances related to aspects of hedge accounting. Entities are permitted to restate comparatives as long as hindsight is not applied. In January 2015, OSFI issued the final version of the Advisory titled “Early adoption of IFRS 9 Financial Instruments for Domestic Systemically Important Banks”. All domestic systemically important banks (D-SIBs), including the Bank, are required to early adopt IFRS 9 for the annual period beginning on November 1, 2017. The adoption of IFRS 9 is a significant initiative for the Bank supported by a formal governance framework and a robust implementation plan. Revenue from Contracts with Customers In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, which clarifies the principles for recognizing revenue and cash flows arising from contracts with customers. In July 2015, the IASB confirmed a one-year deferral of the effective date to annual periods beginning on or after January 1, 2018, which will be November 1, 2018 for the Bank, and is to be applied retrospectively. The Bank is currently assessing the impact of adopting this standard. N O T E 5 FAIR VALUE MEASUREMENTS Certain assets and liabilities, primarily financial instruments, are carried on the balance sheet at their fair value on a recurring basis. These financial instruments include trading loans and securities, 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 securities sold under repurchase agreements. All other financial assets and financial liabilities are carried at amortized cost. VALUATION GOVERNANCE Valuation processes are guided by policies and procedures that are approved by senior management and subject matter experts. Senior Executive oversight over the valuation process is provided through vari- ous valuation-related committees. Further, the Bank has a number of additional controls in place, including an independent price verification process to ensure the accuracy of fair value measurements reported in the financial statements. The sources used for independent pricing comply with the standards set out in the approved valuation-related policies, which includes consideration of the reliability, relevancy, and timeliness of data. 132 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTSMETHODS AND ASSUMPTIONS The Bank calculates fair values for measurement and disclosure purposes based on the following methods of valuation and assumptions: Government and Government-Related Securities The fair value of Canadian government debt securities is 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 bond 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. The fair value of residential mortgage-backed securities is primarily based on broker quotes, third-party vendor prices, or other valuation techniques, such as the use of option-adjusted spread (OAS) models which include inputs such as prepayment 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 counterparty credit quality and liquidity. Other Debt Securities The fair value of corporate and other debt securities, including debt securities reclassified from trading to available-for-sale, 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 bond 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 where 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. If there are trading restrictions on the equity security held, a valua- 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 do not impact the fair value of the original instrument. Retained Interests Retained interests are classified as trading securities and are initially recognized at relative fair value. 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. 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 discount- ing 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 by 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. Derivative Financial Instruments The fair value of exchange-traded derivative financial instruments is based on quoted market prices. The fair value of OTC derivative finan- cial 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 inputs that are observable in the market or can be derived from observable market data. 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. A credit risk valuation adjustment (CRVA) is recognized against the 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 recognized. In these instances, the estimated realizable value is measured by discounting the expected future cash flows at an appropriate EIR immediately prior to impairment, after adjusting for the value of collateral. The fair value of non-trading derivatives is determined on the same basis as for trading derivatives. 133 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTSThe fair value of a derivative is partly a function of collateralization. The Bank uses the relevant overnight index swap curve to discount the cash flows for collateralized derivatives as most collateral is posted in cash and can be funded at the overnight rate. In the fourth quarter of 2014, the Bank implemented funding valua- tion adjustment (FVA) in response to growing evidence that market implied funding costs and benefits are now considered in the pricing and fair valuation of uncollateralized derivatives. Some of the key drivers of FVA include the market implied cost of funding spread over the London Interbank Offered Rate (LIBOR) and the expected average exposure by counterparty. FVA is further adjusted to account for the extent to which the funding cost is incorporated into observed traded levels and to calibrate to the expected term of the trade. The FVA applies to both assets and liabilities, but largely relates to uncollateralized derivative assets given the impact of the Bank’s own credit risk, which is a significant component of the funding costs, is already incorporated in the valuation of uncollateralized derivative liabilities through the application of debit valuation adjustments. The Bank will continue to monitor industry practice, and may refine the methodology and the products to which FVA applies to as market practices evolve. 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 (CMB) curves. 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 repur- chase them at a later date at a fixed price are carried at fair value. 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. Other Financial Liabilities Designated at Fair Value For deposits designated at fair value through profit or loss, fair value is determined using discounted cash flow valuation techniques which maximize the use of observable market inputs such as benchmark yield curves. The Bank considers the impact of its own creditworthiness in the valuation of these deposits by reference to observable market inputs. The Bank currently issues mortgage loan commitments to its customers which allow them to lock in a fixed mortgage rate prior to their expected funding date. The Bank values loan commitments through the use of an option pricing model and with adjustments calculated using an expected funding ratio to arrive at the most repre- sentative fair value. The expected funding ratio represents the Bank’s best estimate, based on historical analysis, as to the amount of loan commitments that will actually fund. If commitment extensions are exercised by the borrower, the Bank will remeasure the written option at fair value. Portfolio Exception IFRS 13 provides a measurement exception that allows an entity to determine the fair value of a group of financial assets and liabilities with offsetting risks based on the sale or transfer of its net exposure to a particular risk or risks. The Bank manages certain financial assets and financial liabilities, such as derivative assets and derivative liabilities on the basis of net exposure and applies the portfolio exception when determining the fair value of these financial assets and financial liabilities. Fair Value of Assets and Liabilities not measured at Fair Value The fair value of assets and liabilities subsequently not measured at fair value include loans, deposits, certain securitization liabilities, certain securities purchased under reverse repurchase agreements, obligations relating to securities sold under repurchase agreements, and subordi- nated notes and debentures. For these instruments, fair values are calculated for disclosure purposes only, and the valuation techniques are disclosed above. In addition, the Bank has determined that the carrying value approximates the fair value for the following assets and liabilities as they are usually liquid floating rate financial instruments and are generally short term in nature: cash and due from banks, interest-bearing deposits with banks, customers’ liability under accep- tances, and acceptances. 134 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTSCarrying Value and Fair Value of Financial Instruments not carried at Fair Value 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. Financial Assets and Liabilities not carried at Fair Value1 (millions of Canadian dollars) FINANCIAL ASSETS Cash and due from banks Interest-bearing deposits with banks Held-to-maturity securities2 Government and government-related securities Other debt securities Total held-to-maturity securities Securities purchased under reverse repurchase agreements Loans Debt securities classified as loans Total Loans Other Customers’ liability under acceptances Amounts receivable from brokers, dealers and clients Other assets Total assets not carried at fair value FINANCIAL LIABILITIES Deposits Acceptances Obligations related to securities sold under repurchase agreements Securitization liabilities at amortized cost Amounts payable to brokers, dealers and clients Other liabilities Subordinated notes and debentures Total liabilities not carried at fair value October 31, 2015 October 31, 2014 Carrying value Fair value Carrying value Fair value As at $ 3,154 42,483 $ 3,154 42,483 $ 2,781 43,773 $ 2,781 43,773 43,667 30,783 74,450 97,364 542,418 1,923 544,341 44,095 30,647 74,742 97,364 544,862 2,166 547,028 34,119 22,858 56,977 82,556 476,486 2,423 478,909 34,371 22,955 57,326 82,556 480,314 2,730 483,044 16,646 21,996 4,247 $ 804,681 16,646 21,996 4,247 $ 807,660 13,080 17,130 3,590 $ 698,796 13,080 17,130 3,590 $ 703,280 $ 695,576 16,646 67,156 22,743 22,664 7,788 8,637 $ 841,210 $ 697,376 16,646 67,156 23,156 22,664 7,826 8,992 $ 843,816 $ 600,716 13,080 53,112 24,960 18,195 9,926 7,785 $ 727,774 $ 601,705 13,080 53,112 25,271 18,195 9,958 8,358 $ 729,679 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. 2 Includes debt securities reclassified from available-for-sale to held-to-maturity. Refer to Note 7 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 Government bonds 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 assets and liabilities measured at fair value on a recur- ring basis as at October 31. 135 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Fair Value Hierarchy for Assets and Liabilities Measured at Fair Value on a Recurring Basis1 (millions of Canadian dollars) Level 1 Level 2 Level 3 Total2 Level 1 Level 2 October 31, 2015 As at October 31, 2014 Total2 Level 3 FINANCIAL ASSETS AND COMMODITIES 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 shares3,4 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 $ 493 $ 11,560 6,121 – $ – $ 12,053 $ 6,145 24 302 $ 12,229 5,454 – $ – $ 12,531 5,454 – 1 – – 15,719 4,194 1,019 – 15,720 4,199 5 1,019 – – – 2,558 7,359 57 191 2,615 7,550 – – – – – 8,698 3,427 789 2,805 6,128 – – – 8,698 3,427 789 20 66 2,825 6,194 28,933 33 – 5,410 – 34,870 447 – 10,650 154 – 59,781 5 38 – 10,650 – 38 186 29,566 40,695 40 – 5,564 5,154 – 506 95,157 46,191 38 5,172 – 10,142 – – 54,844 4 – – – 48 138 45,871 40 10,142 5,154 48 101,173 2 45 – – 32 79 27,968 38,692 59 1,376 691 68,786 – 27,970 6 38,743 63 4 1,936 560 726 3 573 69,438 2 56 – – 94 152 23,420 24,852 18 5,962 341 54,593 – 16 – 1,033 2 1,051 23,422 24,924 18 6,995 437 55,796 106 – 106 4,272 – 4,272 – – – 4,378 – 4,378 202 – 202 4,538 – 4,538 – 5 5 4,740 5 4,745 – – 14,431 7,185 – – – – – – 22,585 11,648 4,060 16,261 916 8,618 – 14,431 7,185 – 199 – 8,205 4,494 – 51 8,404 4,545 – 22,585 7 11,655 4,060 – 501 16,762 916 8,765 – 147 – – – – – – 12,130 3,317 3,306 18,903 1,722 8,080 – 5 – 12,130 3,322 3,306 – – 19 18,903 1,722 8,099 177 20 – 197 100 – 169 85,973 1,575 94 282 1,852 114 451 2,606 88,776 210 29 – 438 242 1 337 60,737 1,303 141 309 1,828 1,755 171 646 63,003 – 13,201 – 13,201 – 8,154 – 8,154 $ – $ 72,879 $ 1,880 $ 74,759 $ – $ 57,703 $ 1,631 $ 59,334 34 25 – 2 49 110 – 22,959 30,588 290 1,316 899 56,052 10,986 88 23,081 5 30,618 290 – 2,275 957 954 6 1,056 57,218 – 10,986 2 43 – – 93 138 – 20,033 22,975 325 5,660 440 49,433 11,198 81 14 – 1,537 6 1,638 – 20,116 23,032 325 7,197 539 51,209 11,198 – 8,783 1,402 29,961 13 – 1,415 59 38,803 14,305 3,242 25,126 8 34 3,250 39,465 – 12,376 – 12,376 – 8,242 – 8,242 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. 2 Fair value is the same as carrying value. 3 As at October 31, 2015, the carrying values of certain available-for-sale equity securities of $6 million (October 31, 2014 – $5 million) are assumed to approximate fair value in the absence of quoted market prices in an active market. 4 As at October 31, 2015, common shares include the fair value of Federal Reserve Stock and Federal Home Loan Bank stock of $1.3 billion (October 31, 2014 – $1.0 billion) which are redeemable by the issuer at cost for which cost approxi- mates 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. 136 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS 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 judgment. The Bank’s policy is to record transfers of assets and liabilities between the different levels of the fair value hierarchy using the fair values as at the end of each reporting period. Assets are transferred between Level 1 and Level 2 depending on if there is sufficient frequency and volume in an active market. There were no significant transfers between Level 1 and Level 2 during the years ended October 31, 2015, and October 31, 2014. Movements of Level 3 instruments Significant transfers into and out of Level 3 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. 137 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS $ – $ – $ $ – $ (9) $ 33 $ – $ 24 $ – 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 years ended October 31. Reconciliation of Changes in Fair Value for Level 3 Assets and Liabilities (millions of Canadian dollars) Total realized and unrealized gains (losses) Movements Transfers 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 2015 FINANCIAL ASSETS Trading loans, securities, and other Government and government- related securities Canadian government debt Provinces Other OECD government guaranteed debt 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 Canadian government debt Provinces 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 Fair value as at Nov. 1, 2014 $ – – 20 66 4 – 48 138 5 5 51 5 – 19 – – (10) – – 3 (7) 1 1 1 – – 3 – – – – – – – – – – – (44) 5 – – 63 61 276 31 – 431 – – – – – – 1,303 141 91 (34) 2 (12) 404 – 309 $ 1,828 29 $ 90 28 $ (21) – $ 404 $ – – – – – – – – – – – – – – – – – – 5 – 5 (96) (168) (94) (26) (13) (406) 72 267 – – – 377 (6) (6) – 2 – – – – (2) (25) – – – (27) – – (52) – 57 191 186 5 38 506 – – – 7 – (1) – – – 2 1 2 2 1 – 43 (3) 502 242 – (119) 501 147 (225) (1) – – – – 1,575 94 (68) $ (252) 38 $ 782 (54) 282 $ (225) $ 2,606 (44) 5 40 (12) 28 $ 18 Total realized and unrealized losses (gains) Movements Transfers Fair value as at Nov. 1, 2014 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 2015 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 $ 1,631 $ 6 $ – $ – $ 834 $ (591) $ – $ – $ 1,880 $ (13) 81 (2) – 504 4 587 2 (2) (4) (63) 26 (41) 8 (40) – – – – – – – – – – (96) – (96) – – – 194 – 194 5 – – (124) (25) (144) – (3) – – (2) (5) – 6 – (18) – (12) 88 (1) (4) 397 3 483 4 1 (4) (66) 7 (58) – 90 (45) – – 13 (46) $ 34 $ – $ – $ (78) $ – $ 105 $ – $ (2) $ 59 $ – 1 Gains (losses) on financial assets and liabilities are recognized in Net securities 3 Changes in unrealized gains (losses) on available-for-sale securities are recognized gains (losses), Trading income (loss), and Other income (loss) on the Consolidated Statement of Income. 2 Consists of sales, settlements, and foreign exchange. in accumulated other comprehensive income. 4 As at October 31, 2015, consists of derivative assets of $0.6 billion (November 1, 2014 – $1.1 billion) and derivative liabilities of $1.1 billion (November 1, 2014 – $1.6 billion), which have been netted on this table for presentation purposes only. 138 TD BANK GROUP ANNUAL REPORT 2015 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, 2013 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, 2014 FINANCIAL ASSETS Trading loans, securities, and other 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 Canadian government debt Provinces 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 84 $ 15 – 67 171 9 9 – 8 19 1,215 136 – 3 – – 5 8 1 1 1 – 1 7 (6) $ $ – – – – – – $ 10 145 159 54 – 368 – – – – – – – 31 4 – 3 – 97 6 228 $ 1,606 30 $ 33 20 $ 55 – $ 106 $ – – – – – – – – – – – – – – – $ (68) (195) (170) (54) (24) (511) $ 73 37 – 2 – 112 $ – (8) $ 20 66 $ – (2) – (2) – (10) 4 – 48 138 (5) (5) – – – – 5 5 – 187 (137) (6) – – – 40 (41) 51 5 19 (48) 1 1 – – – 1,303 141 (14) (67) $ 46 $ 274 (1) $ (179) 309 $ 1,828 – – (7) (9) (4) (4) 1 – 1 30 4 20 $ 56 Total realized and unrealized losses (gains) Movements Transfers Fair value as at Nov. 1, 2013 Included in income1 Included in OCI Purchases Issuances Other2 Into Level 3 Out of Level 3 Change in unrealized losses (gains) on instruments still held3 Fair value as at Oct. 31, 2014 $ 1,396 $ 65 $ – $ – $ 687 $ (494) $ 1 $ (24) $ 1,631 $ 50 58 (1) – 392 (3) 446 21 – 1 166 – 188 – – – – – – – – – (119) – (119) – – – 221 – 221 1 (2) (1) (161) 8 (155) – 1 – 5 (1) 5 1 – – – – 1 81 (2) – 504 4 587 23 – – 164 4 191 12 (49) – – 84 (39) – – 8 (52) $ 7 $ – $ – $ (26) $ – $ 52 $ 1 $ – $ 34 $ – 1 Gains (losses) on financial assets and liabilities are recognized in Net securities 4 As at October 31, 2014, consists of derivative assets of $1.1 billion gains (losses), Trading income (loss), and Other income (loss) on the Consolidated Statement of Income. 2 Consists of sales, settlements, and foreign exchange. 3 Changes in unrealized gains (losses) on available-for-sale securities are recognized in accumulated other comprehensive income. (November 1, 2013 – $982 million) and derivative liabilities of $1.6 billion (November 1, 2013 – $1.4 billion), which have been netted on this table for presentation purposes only. 139 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS VALUATION OF ASSETS AND LIABILITIES CLASSIFIED AS LEVEL 3 Significant unobservable inputs in Level 3 positions The following section discusses the significant unobservable inputs for Level 3 positions and assesses the potential effect that a change in each observable input may have on the fair value measurement. Price Equivalent Certain financial instruments, mainly debt and equity securities, are valued using price equivalents when market prices are not available, with fair value measured by comparison with observable pricing data from instruments with similar characteristics. For debt securities, the price equivalent is expressed in ‘points’, and represents a percentage of the par amount, and prices at the lower end of the range are generally a result of securities that are written down. For equity securi- ties, the price equivalent is based on a percentage of a proxy price. There may be wide ranges depending on the liquidity of the securities. New issuances of debt and equity securities are priced at 100% of the issue price. Credit Spread Credit spread is a significant input used in the valuation of many derivatives. It is the primary reflection of the creditworthiness of a counterparty and represents the premium or yield return above the benchmark reference that a bond holder would require in order to allow for the credit quality difference between the entity and the reference benchmark. An increase/(decrease) in credit spread will (decrease)/increase the value of financial instrument. Credit spread may be negative where the counterparty is more credit worthy than the benchmark against which the spread is calculated. A wider credit spread represents decreasing creditworthiness. Prepayment Rate and Liquidation Rate Expected future prepayment and liquidation rates are significant inputs for retained interests and represent the amount of unscheduled principal repayment. The prepayment rate and liquidation rate will be obtained from prepayment forecasts which are based on a number of factors such as historical prepayment rates for similar pool loans and the future economic outlook, considering factors including, but not limited to, future interest rates. Correlation The movements of inputs are not necessarily independent from other inputs. Such relationships, where material to the fair value of a given instrument, are captured via correlation inputs into the pricing models. The Bank includes correlation between the asset class, as well as across asset classes. For example, price correlation is the relationship between prices of equity securities in equity basket derivatives, and quanto correlation is the relationship between instruments which settle in one currency and the underlying securities which are denominated in another currency. Implied Volatility Implied volatility is the value of the volatility of the underlying instrument which, when input in an option pricing model, such as Black-Scholes, will return a theoretical value equal to the current market price of the option. Implied volatility is a forward-looking and subjective measure, and differs from historical volatility because the latter is calculated from known past returns of a security. Funding ratio The funding ratio is a significant unobservable input required to value mortgage commitments issued by the Bank. The funding ratio represents an estimate of percentage of commitments that are ultimately funded by the Bank. The funding ratio is based on a number of factors such as observed historical funding percentages within the various lending channels and the future economic outlook, considering factors including, but not limited to, competitive pricing and fixed/variable mortgage rate gap. An increase/(decrease) in funding ratio will increase/(decrease) the value of the lending commitment in relationship to prevailing interest rates. Earnings Multiple, Discount Rate, and Liquidity Discount Earnings multiple, discount rate, and liquidity discount are significant inputs used when valuing certain equity securities and certain retained interests. Earnings multiples are selected based on comparable entities and a higher multiple will result in a higher fair value. Discount rates are applied to cash flow forecasts to reflect time value of money and the risks associated with the cash flows. A higher discount rate will result in a lower fair value. Liquidity discounts may be applied as a result of the difference in liquidity between the comparable entity and the equity securities being valued. Currency Specific Swap Curve The fair value of foreign exchange contracts is determined using inputs such as foreign exchange spot rates and swap curves. Generally swap curves are observable, but there may be certain durations or currency specific foreign exchange spot and currency specific swap curves that are not observable. Dividend Yield Dividend yield is a key input for valuing equity contracts and is generally expressed as a percentage of the current price of the stock. Dividend yields can be derived from the repo or forward price of the actual stock being fair valued. Spot dividend yields can also be obtained from pricing sources, if it can be demonstrated that spot yields are a good indication of future dividends. Inflation Rate Swap Curve The fair value of inflation rate swap contracts is a swap between the interest rate curve and the inflation Index. The inflation rate swap spread is not observable and is determined using proxy inputs such as inflation index rates and Consumer Price Index (CPI) bond yields. Generally swap curves are observable; however, there may be instances where certain specific swap curves are not observable. 140 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTSValuation techniques and inputs used in the fair value measurement of Level 3 assets and liabilities The following tables present the Bank’s assets and liabilities recognized at fair value and classified as Level 3, together with the valuation techniques used to measure fair value, the significant inputs used in the valuation technique that are considered unobservable, and a range of values for those unobservable inputs. The range of values represents the highest and lowest inputs used in calculating the fair value. Valuation Techniques and Inputs Used in the Fair Value Measurement of Level 3 Assets and Liabilities Valuation technique Significant unobservable inputs (Level 3) October 31, 2015 October 31, 2014 As at Lower range Upper range Lower range Upper range Unit Government and government- related securities Market comparable Bond price equivalent 55 136 100 101 points Other debt securities Market comparable Bond price equivalent – 128 – 132 points Equity securities1 Market comparable Discounted cash flow EBITDA multiple Market comparable Retained interests Discounted cash flow New issue price Discount rate Earnings multiple Price equivalent Prepayment and liquidation rates Discount rates 100 8 4.6 52 100 20 22 117 – 280 – 360 100 1 5.3 78 – 326 100 23 25 118 10 427 % % times % % bps2 Market comparable Bond price equivalent n/a3 n/a3 105 105 points Other financial assets designated at fair value through profit or loss Derivatives Interest rate contracts Swaption model Discounted cash flow Currency specific volatility Inflation rate swap curve Foreign exchange contracts Option model Currency specific volatility Credit contracts Discounted cash flow Credit spread Equity contracts Option model Commodity contracts Option model Trading deposits Option model Swaption model Price correlation Quanto correlation Dividend yield Equity volatility Quanto correlation Swaption correlation Price correlation Quanto correlation Dividend yield Equity volatility Currency specific volatility 17 1 8 7 10 (38) – 6 (45) 24 (23) (38) – 6 17 292 2 12 55 90 17 12 94 (25) 36 98 17 14 116 292 8 1 6 5 14 (40) – 11 (45) 34 – (45) – 10 8 188 2 18 % % % 103 bps2 85 17 11 80 (25) 46 98 18 11 68 188 Other financial liabilities designated at fair value through profit or loss Obligations related to securities sold short Option model Funding ratio 1 72 3 72 Market comparable New issue price 100 100 100 100 1 As at October 31, 2015, common shares exclude the fair value of Federal Reserve stock and Federal Home Loan Bank stock of $1.3 billion (October 31, 2014 – $1.0 billion) which are redeemable by the issuer at cost which approximates fair value. These securities cannot be traded in the market, hence, these securities have not been subjected to the sensitivity analysis. 2 Basis points. 3 Not applicable. % % % % % % % % % % % % % 141 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS The following table summarizes the potential effect of using reason- ably possible alternative assumptions for financial assets and financial liabilities held, that are classified in Level 3 of the fair value hierarchy as at October 31. For interest rate derivatives, the Bank performed a sensitivity analysis on the unobservable 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 was calculated by using reasonably possible alternative assumptions by shocking dividends by 5%, correlation by 10%, or the price of the underlying equity instru- ment by 10% and volatility from (13)% to 33%. For trading deposits, the sensitivity was calculated by varying unobservable inputs which may include volatility, credit spreads, and correlation. Sensitivity Analysis of Level 3 Financial Assets and Liabilities (millions of Canadian dollars) FINANCIAL ASSETS Trading loans, securities, and other Equity securities Common shares Retained interests Derivatives Equity contracts Available-for-sale securities 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 Obligations related to securities sold short Total 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 significant non-observable inputs in the valuation technique used to value the instruments become observable. The following table summarizes the aggregate difference yet to be recog- nized in net income due to the difference between the transaction price and the amount determined using valuation techniques with significant non-observable market inputs at initial recognition. 142 October 31, 2015 Impact to net assets As at October 31, 2014 Impact to net assets Decrease in fair value Increase in fair value Decrease in fair value Increase in fair value $ 6 2 8 24 24 $ 6 – 6 33 33 $ – 3 3 21 21 $ – – – 22 22 3 3 2 – 52 5 4 64 16 5 4 28 54 8 4 68 20 8 4 32 13 17 6 10 29 54 83 2 1 $ 195 14 40 54 2 1 $ 141 20 32 52 1 – $ 151 16 31 47 1 – $ 112 (millions of Canadian dollars) For the years ended October 31 Balance as at beginning of year New transactions Recognized in the Consolidated Statement of Income during the year Balance as at end of year 2015 $ 33 57 (60) $ 30 2014 $ 41 44 (52) $ 33 FINANCIAL ASSETS AND LIABILITIES DESIGNATED AT FAIR VALUE 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 rela- tionships. 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. TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS 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. As at October 31, 2015, the Bank had no outstanding securitization liabilities designated at fair value through profit or loss as the remaining securitization liabilities matured during the year. As at October 31, 2014, 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 $8 million less than the carrying amount. Other Liabilities Designated at Fair Value through Profit or Loss Certain deposits and loan commitments issued to customers to provide a mortgage at a fixed rate have been designated at fair value through profit or loss. These deposits and commitments are economically hedged with derivatives and other financial instruments where the changes in fair value are recognized in non-interest income. The designation of these deposits and loan commitments at fair value through profit or loss eliminates an accounting mismatch that would otherwise arise. The contractual maturity amounts for the deposits designated at fair value through profit or loss were $4 million less than the carrying amount as at October 31, 2015 (October 31, 2014 – $5 million less than the carrying amount). As at October 31, 2015, the fair value of deposits designated at fair value through profit or loss includes $1 million of the Bank’s own credit risk (October 31, 2014 – $5 million). Due to the short-term nature of the loan commitments, changes in the Bank’s own credit do not have a significant impact on the determination 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, 2015, the income (loss) representing net changes in the fair value of financial assets and liabilities designated at fair value through profit or loss was $(16) million (2014 – $55 million). Fair Value Hierarchy for Assets and Liabilities not carried at Fair Value The following table presents the levels within the fair value hierarchy for each of the assets and liabilities not carried at fair value as at October 31, but for which fair value is disclosed. Fair Value Hierarchy for Assets and Liabilities not carried at Fair Value1 (millions of Canadian dollars) October 31, 2015 As at October 31, 2014 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total ASSETS Cash and due from banks Interest-bearing deposits with banks Held-to-maturity securities Government and government-related securities Other debt securities Total held-to-maturity securities Securities purchased under reverse repurchase agreements Loans Debt securities classified as loans Total Loans Other Customers’ liability under acceptances Amounts receivables from brokers, dealers, and clients Other assets Total assets with fair value disclosures LIABILITIES Deposits Acceptances Obligations related to securities sold under repurchase agreements Securitization liabilities at amortized cost Amounts payable to brokers, dealers, and clients Other liabilities Subordinated notes and debentures Total liabilities with fair value disclosures – $ 2,781 – 43,773 – 34,371 – 22,955 – 57,326 $ 3,154 $ – $ – 42,483 – $ 3,154 – 42,483 $ 2,781 $ – $ – 43,773 – 44,095 – 30,647 – 74,742 – 44,095 – 30,647 – 74,742 – 84,163 – 84,163 – 197,568 347,294 544,862 – 2,166 – 198,096 348,932 547,028 1,638 528 – – – – – – – 34,371 22,955 57,326 74,402 189,331 984 190,315 – 74,402 290,983 480,314 2,730 292,729 483,044 1,746 – 16,646 – 21,996 4,010 – – 16,646 – 21,996 4,247 $ 3,154 $ 442,136 $ 349,169 $ 794,459 237 – – – – 13,080 – 17,130 3,590 $ 2,781 $ 399,147 $ 293,198 $ 695,126 13,080 17,130 3,121 469 $ – $ 697,376 $ – 16,646 – $ 697,376 – 16,646 $ – $ 601,705 $ 13,080 – – $ 601,705 – 13,080 – 54,780 – 23,156 – 22,664 7,001 – – 8,992 – $ 830,615 $ – 54,780 – 23,156 – 22,664 7,826 8,992 825 $ 831,440 825 – $ 44,870 25,271 18,195 9,204 8,358 – – – – – – $ 720,683 $ – 44,870 – 25,271 – 18,195 9,958 8,358 754 $ 721,437 754 – $ 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. 143 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 6 OFFSETTING FINANCIAL ASSETS AND FINANCIAL LIABILITIES The Bank enters into netting agreements with counterparties (such as clearing houses) to manage the credit risks associated primarily with repurchase and reverse repurchase transactions, securities borrowing and lending, and OTC and exchange-traded derivatives. These netting agreements and similar arrangements generally allow the counterparties to set-off liabilities against available assets received. The right to set-off is a legal right to settle or otherwise eliminate all or a portion of an amount due by applying against that amount an amount receivable from the other party. These agreements effectively reduce the Bank’s credit exposure by what it would have been if those same counter parties were liable for the gross exposure on the same underlying contracts. Netting arrangements are typically constituted by a master netting agreement which specifies the general terms of the agreement between the counterparties, including information on the basis of the netting calculation, types of collateral, and the definition of default and other termination events for transactions executed under the agreement. The master netting agreements contain the terms and conditions by which all (or as many as possible) relevant transactions between the counterparties are governed. Multiple individual transac- tions are subsumed under this general master netting agreement, forming a single legal contract under which the counterparties conduct their relevant mutual business. In addition to the mitigation of credit risk, placing individual transactions under a single master netting agreement that provides for netting of transactions in scope also helps to mitigate settlement risks associated with transacting in multiple jurisdictions or across multiple contracts. These arrangements include clearing agreements, global master repurchase agreements, and global master securities lending agreements. In the normal course of business, the Bank enters into numerous contracts to buy and sell goods and services from various suppliers. Some of these contracts may have netting provisions that allow for the offset of various trade payables and receivables in the event of default of one of the parties. While these are not disclosed in the following table, the gross amount of all payables and receivables to and from the Bank’s vendors is disclosed in the Other assets note in accounts receivable and other items and in the Other liabilities note in accounts payable, accrued expenses, and other items. The Bank also enters into regular way purchases and sales of stocks and bonds. Some of these transactions may have netting provisions that allow for the offset of broker payables and broker receivables related to these purchases and sales. While these are not disclosed in the following table, the amount of receivables are disclosed in Amounts receivable from brokers, dealers, and clients and payables are disclosed in Amounts payable to brokers, dealers, and clients. The following table provides a summary of the financial assets and liabilities which are subject to enforceable master netting agreements and similar arrangements, including amounts not otherwise set off in the balance sheet, as well as financial collateral received to mitigate credit exposures for these financial assets and liabilities. The gross financial assets and liabilities are reconciled to the net amounts presented within the associated balance sheet line, after giving effect to transactions with the same counterparties that have been offset in the balance sheet. Related amounts and collateral received that are not offset on the balance sheet, but are otherwise subject to the same enforceable netting agreements and similar arrangements, are then presented to arrive at a net amount. Offsetting Financial Assets and Financial Liabilities1 (millions of Canadian dollars) As at October 31, 2015 Amounts subject to an enforceable master netting arrangement or similar agreement that are not set-off in the Consolidated Balance Sheet2,3 Gross amounts of recognized financial instruments before balance sheet netting Gross amounts of recognized financial instruments set-off in the Consolidated Balance Sheet Net amount of financial instruments presented in the Consolidated Balance Sheet Amounts subject to an enforceable master netting agreement FINANCIAL ASSETS Derivatives Securities purchased under reverse repurchase agreements Total Financial Liabilities Derivatives Obligations related to securities sold under repurchase agreements Total $ 96,632 $ 27,194 $ 69,438 113,007 209,639 15,643 42,837 97,364 166,802 84,412 27,194 57,218 82,799 $ 167,211 15,643 $ 42,837 67,156 $ 124,374 FINANCIAL ASSETS Derivatives Securities purchased under reverse repurchase agreements Total Financial Liabilities Derivatives Obligations related to securities sold under repurchase agreements Total $ 69,921 $ 14,125 $ 55,796 94,877 164,798 12,321 26,446 82,556 138,352 65,334 14,125 51,209 65,433 $ 130,767 12,321 $ 26,446 53,112 $ 104,321 $ 39,962 6,705 46,667 39,962 6,705 $ 46,667 $ 39,783 14,021 53,804 39,783 14,021 $ 53,804 Collateral Net Amount $ 18,602 $ 10,874 90,538 109,140 121 10,995 11,966 5,290 60,445 $ 72,411 6 $ 5,296 October 31, 2014 $ 8,278 $ 7,735 68,457 76,735 78 7,813 6,353 5,073 39,088 $ 45,441 3 $ 5,076 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. 2 Excess collateral as a result of overcollateralization has not been reflected in the table. 3 Includes amounts where the contractual set-off rights are subject to uncertainty under the laws of the relevant jurisdiction. 144 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 7 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 $451 million as at October 31, 2015 (October 31, 2014 – $646 million). For the year ended October 31, 2015, net interest income of $27 million after tax (October 31, 2014 – $41 million after tax) was recorded relating to the reclassified debt securities. The decrease in fair value of these secu- rities during the year ended October 31, 2015, of $4 million after tax (October 31, 2014 – decrease of $18 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, 2015, of $4 million after tax (October 31, 2014 – decrease of $18 million after tax). During the year ended October 31, 2015, reclassified debt securities with a fair value of $312 million (October 31, 2014 – $331 million) were sold or matured, and $13 million after tax (October 31, 2014 – $17 million after tax) was recorded in net securities gains during the year ended October 31, 2015. RECLASSIFICATIONS OF CERTAIN DEBT SECURITIES – AVAILABLE-FOR-SALE TO HELD-TO-MATURITY The Bank has reclassified certain debt securities 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. Subsequent to the date of reclassification, the net unrealized gain or loss recognized in accumulated other comprehensive income is amor- tized to interest income over the remaining life of the reclassified debt securities using the EIRM. The reclassifications are non-cash transactions that are excluded from the Consolidated Statement of Cash Flows. The Bank has completed the following reclassifications. Reclassifications from Available-for-Sale to Held-to-Maturity Securities (millions of Canadian dollars, except as noted) October 31, 2015 October 31, 2014 As at the reclassification date Reclassification Date March 1, 2013 September 23, 2013 November 1, 2013 Other reclassifications1 Amount reclassified $ 11,084 9,854 21,597 5,044 Fair value $ 4,248 8,995 22,532 5,085 Carrying value $ 4,219 8,916 22,637 5,121 Fair value $ 6,845 9,790 21,949 – Carrying value $ 6,805 9,728 21,863 – Weighted-average effective interest rate Undiscounted recoverable cash flows 1.8% 1.9 1.1 3.0 $ 11,341 10,742 24,519 5,859 1 Represents reclassifications completed during the year ended October 31, 2015. The change in fair value of these securities recorded in other comprehensive income for the year ended October 31, 2015, was a decrease of $4.3 million (October 31, 2014 – $8.0 million increase). 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 $275 million during the year ended October 31, 2015 (October 31, 2014 – an increase of $53 million). 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 years ended October 31 October 31 2014 2015 $ 540 540 199 $ 341 $ 541 541 192 $ 349 1 Includes amortization of net unrealized gains of $46 million during the year ended October 31, 2015 (October 31, 2014 – $86 million), associated with these reclassi- fied held-to-maturity securities that is presented as Reclassification to earnings of net gains in respect of available-for-sale securities on the Consolidated Statement of Comprehensive Income. The impact of this amortization on net interest income is offset by the amortization of the corresponding net reclassification premium on these debt securities. 145 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Remaining Terms to Maturities of Securities The remaining terms to contractual maturities of the securities held by the Bank are shown on the following table. Securities Maturity Schedule (millions of Canadian dollars) Trading 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 Residential Commercial Other debt securities Canadian issuers Other issuers Equity securities Common shares Preferred shares Retained interests Total trading securities Within 1 year Over 1 year to 3 years Over 3 years to 5 years Remaining terms to maturities1 With no Over 5 specific years maturity years to Over 10 10 years Total Total As at October 31 October 31 2014 2015 $ 4,591 $ 2,954 $ 2,006 622 717 $ 2,932 $ 390 1,299 1,828 859 $ – $ 12,053 $ 12,531 5,454 – 6,145 3,983 2,162 2,403 1,306 1,844 388 5,664 258 1,826 85 – 15,720 – 4,199 8,698 3,427 81 25 12,848 265 15 7,565 553 15 3,907 – 61 10,214 – 4 4,602 899 120 – – – 39,136 713 76 30,899 487 3,293 3,780 564 2,661 3,225 607 864 1,471 699 696 1,395 258 36 294 2,615 – – 7,550 – 10,165 2,825 6,194 9,019 – – – – 45,871 40 45,911 48 $ 16,628 $ 10,793 $ 5,379 $ 11,635 $ 4,904 $ 29,604 $ 78,943 $ 85,877 29,566 29,566 38 29,604 29,604 38 – – – – 26 – – – 8 – – – 3 – – – 1 38 Securities designated at fair value through profit or loss (FVO securities) Government and government-related securities Canadian government debt Federal Provinces Other OECD government-guaranteed debt $ 836 $ – 611 1,447 12 $ 26 258 296 – $ 5 71 76 Other debt securities Canadian issuers Other issuers Equity securities Common shares 38 223 261 – – Total FVO securities $ 1,708 $ 111 459 570 198 182 380 – $ 36 $ 212 – 212 552 – 552 326 – 362 45 – 45 – $ – – – 884 $ 2,498 552 569 609 940 3,659 2,393 – – – 944 864 1,808 428 471 899 – – 866 $ – – 456 $ – – 764 $ – – 407 $ 182 177 177 177 182 177 177 $ 4,378 $ 4,740 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 trading Total available-for-sale securities $ 161 $ 3,928 $ 7,653 $ 2,689 $ 454 1,935 1,911 2,876 – $ 9 – $ 14,431 $ 8,404 4,545 – 7,185 547 1,866 456 3,484 1,051 1,224 1,540 9,678 2,153 4,145 2,064 17,926 12,338 4,420 – 22,323 6,496 – – 6,505 1,688 – 1,221 2,909 1,103 – 4,513 5,616 1,975 – 2,456 4,431 6,113 – 433 6,546 5,883 916 142 6,941 – 22,585 – 11,655 – 4,060 – 59,916 12,130 3,322 3,306 31,707 – 16,762 916 – – 8,765 – 26,443 18,903 1,722 8,099 28,724 – – – 85 1,760 171 1,931 646 $ 6,478 $ 15,372 $ 22,380 $ 29,077 $ 13,503 $ 1,972 $ 88,782 $ 63,008 1,858 1,858 114 1,972 451 114 1,972 – – – – 208 – – – 78 – – – 57 – – – 23 1 Represents contractual maturities. Actual maturities may differ due to prepayment privileges in the applicable contract. 146 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Securities Maturity Schedule (continued) (millions of Canadian dollars) 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 Non-agency collateralized mortgage obligation portfolio Other issuers Total held-to-maturity securities Total securities Within 1 year Over 1 year to 3 years Over 3 years to 5 years Remaining terms to maturities1 With no Over 5 specific years maturity years to Over 10 10 years Total Total As at October 31 October 31 2014 2015 $ 59 $ – $ 915 $ – $ – $ – $ 974 $ – 6,575 2,567 – 8,610 8,696 5,804 5,863 11,263 16,100 6,243 935 7,178 3,263 – 3,263 – 18,648 18,792 – 24,045 15,327 – 43,667 34,119 – – 878 878 10,082 866 – – 2,625 1,760 3,491 11,842 6,741 14,754 27,942 – 19,014 17,933 610 – – 4,315 – 30,783 22,858 – 74,450 56,977 $ 31,555 $ 41,785 $ 56,157 $ 51,270 $ 34,033 $ 31,753 $ 246,553 $ 210,602 5,798 6,158 – 2,616 11,956 9,794 15,219 2,268 – 348 6,158 5,611 1 Represents contractual maturities. Actual maturities may differ due to prepayment privileges in the applicable contract. Unrealized Securities Gains (Losses) The following table summarizes the unrealized gains and losses as at October 31. Unrealized Securities Gains (Losses) for Available-for-Sale Securities (millions of Canadian dollars) October 31, 2015 As at October 31, 2014 Cost/ Gross amortized unrealized unrealized (losses) Gross cost1 gains Cost/ Gross Fair amortized unrealized unrealized (losses) cost1 Gross gains 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 trading Total available-for-sale securities $ 14,450 7,233 $ 42 19 $ (61) $ 14,431 $ 8,355 7,185 4,518 (67) $ 50 29 $ (1) $ 8,404 (2) 4,545 22,526 11,713 4,021 59,943 169 4 49 283 (110) 22,585 11,950 (62) 11,655 3,313 4,060 3,256 (10) (310) 59,916 31,392 16,921 921 8,770 26,612 1,770 112 1,882 420 $ 88,857 15 2 75 92 (174) 16,762 18,831 916 1,713 8,765 8,008 (261) 26,443 28,552 (7) (80) 118 6 124 33 $ 532 114 (30) (4) (34) (2) 1,858 1,642 153 1,972 1,795 596 $ (607) $ 88,782 $ 62,335 451 208 11 50 348 84 9 117 210 131 18 149 55 $ 762 (28) 12,130 (2) 3,322 – 3,306 (33) 31,707 (12) 18,903 – 1,722 (26) 8,099 (38) 28,724 – (13) 1,760 171 (13) 1,931 646 $ (89) $ 63,008 (5) 1 Includes the foreign exchange translation of amortized cost balances at the period-end spot rate. 147 TD BANK GROUP ANNUAL REPORT 2015 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 consecu- tive twelve months preceding October 31, 2015, and October 31, 2014, 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 Provinces 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 Provinces 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 Securities Gains (Losses) The following table summarizes the net securities gains and losses as at October 31. 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 impairment losses for the years ended October 31, 2015, and October 31, 2014, related to debt securities in the reclassified portfolio as described in the “Reclassification of Certain Debt Securities – Trading to Available-for-Sale” section of this Note. 148 As at October 31, 2015 Less than 12 months 12 months or longer Total Gross Fair unrealized losses value Gross Fair unrealized losses value Gross Fair unrealized losses value $ 13,618 6,800 $ 61 67 $ 131 – $ – $ 13,749 6,800 – $ 61 67 12,848 8,973 95 62 1,056 – 15 13,904 8,973 – 110 62 1,348 43,587 10 295 – 1,187 – 15 1,348 44,774 11,038 4,497 15,535 130 57 187 2,165 659 2,824 51 13,203 5,156 18,359 23 74 171 21 192 74 $ 59,388 30 4 34 2 $ 518 – – – – $ 4,011 171 – 21 – 192 – – 74 $ 89 $ 63,399 10 310 181 80 261 30 4 34 2 $ 607 October 31, 2014 $ 954 1,166 $ 1 2 $ – – $ – $ – 954 1,166 $ 1 2 1,932 – 11 – 1,033 135 17 2 2,965 135 28 2 – 4,052 – 14 – 1,168 – 19 – 5,220 3,616 2,316 5,932 6 14 20 698 153 851 6 12 18 4,314 2,469 6,783 32 – 32 – $ 10,016 13 – 13 – $ 47 – – – 59 $ 2,078 32 – – – 32 – 5 59 $ 42 $ 12,094 – 33 12 26 38 13 – 13 5 $ 89 For the years ended October 31 2015 2014 2013 $ 124 $ 183 $ 312 (45) $ 79 (10) $ 173 (8) $ 304 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 8 LOANS, IMPAIRED LOANS, AND ALLOWANCE FOR CREDIT LOSSES The following table presents the Bank’s loans, impaired loans, and related allowance for loan losses as at October 31. Loans, Impaired Loans, and Allowance for Loan Losses (millions of Canadian dollars) Gross Loans Neither past due nor impaired Past due but not impaired Impaired2 Individually Counter- insignificant impaired loans party specific Allowance for loan losses1 Incurred Total but not allowance for loan losses identified loan losses Total Net loans As at October 31, 2015 Residential mortgages3,4,5 Consumer instalment and other personal6 Credit card Business and government3,4,5 Debt securities classified as loans Acquired credit-impaired loans Total 5,923 1,761 1,990 $ 208,802 $ 2,343 $ 786 $ 211,931 1,278 135,324 128,123 306 30,215 28,148 163,840 874 166,704 $ 528,913 $ 12,017 $ 3,244 $ 544,174 2,187 1,414 $ 547,775 Residential mortgages3,4,5 Consumer instalment and other personal6 Credit card Business and government3,4,5 Debt securities classified as loans Acquired credit-impaired loans Total 5,406 1,694 1,201 $ 195,466 $ 2,242 $ 752 $ 198,460 853 123,230 116,971 294 25,564 23,576 128,242 832 130,275 $ 464,255 $ 10,543 $ 2,731 $ 477,529 2,695 1,713 $ 481,937 $ – – – 156 $ 156 207 6 $ 369 $ – – – 134 $ 134 213 8 $ 355 $ 47 136 217 28 $ 428 – 77 $ 505 $ 22 110 199 22 $ 353 – 89 $ 442 $ 632 897 916 58 $ 105 $ 211,826 768 134,556 1,114 29,101 1,100 165,604 $ 2,503 $ 3,087 $ 541,087 1,923 1,331 $ 2,560 $ 3,434 $ 544,341 264 83 57 – $ 48 577 801 746 $ 2,172 59 – $ 2,231 October 31, 2014 $ 70 $ 198,390 687 122,543 1,000 24,564 902 129,373 $ 2,659 $ 474,870 2,423 1,616 $ 3,028 $ 478,909 272 97 1 Excludes allowance for off-balance sheet positions. 2 As at October 31, 2015, impaired loans exclude $1.2 billion (October 31, 2014 – $1.2 billion) of gross impaired debt securities classified as loans. 3 Excludes trading loans with a fair value of $11 billion as at October 31, 2015 (October 31, 2014 – $10 billion), and amortized cost of $10 billion as at October 31, 2015 (October 31, 2014 – $10 billion), and loans designated at fair value through profit or loss of nil as at October 31, 2015 (October 31, 2014 – $5 million). No allowance is recorded for trading loans or loans designated at fair value through profit or loss. 4 Includes insured mortgages of $126 billion as at October 31, 2015 (October 31, 2014 – $131 billion). 5 As at October 31, 2015, impaired loans with a balance of $419 million did not have a related allowance for loan losses (October 31, 2014 – $435 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. 6 Includes Canadian government-insured real estate personal loans of $21 billion as at October 31, 2015 (October 31, 2014 – $24 billion). FORECLOSED ASSETS 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. The Bank predominantly relies on third-party appraisals to determine the carrying value of foreclosed assets. Foreclosed assets held for sale were $134 million as at October 31, 2015 (October 31, 2014 – $180 million), and were recorded in Other assets on the Consolidated 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 Unpaid principal balance2 $ 844 1,437 306 978 $ 3,565 Carrying value $ 786 1,278 306 874 $ 3,244 October 31, 2015 Related allowance for credit losses Average gross impaired loans $ 47 $ 790 136 217 184 $ 584 1,045 294 866 $ 2,995 Unpaid principal balance2 $ 807 977 294 978 $ 3,056 Carrying value $ 752 853 294 832 $ 2,731 As at October 31, 2014 Related allowance for credit losses $ 22 110 199 156 $ 487 Average gross impaired loans $ 740 796 292 910 $ 2,738 1 Excludes ACI loans and debt securities classified as loans. 2 Represents contractual amount of principal owed. 149 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS The changes to the Bank’s allowance for credit losses, as at and for the years ended October 31, are shown in the following tables. Allowance for Credit Losses (millions of Canadian dollars) 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 Balance as at November 1 2014 Provision for credit losses Write-offs Recoveries Disposals Foreign exchange and other adjustments Balance as at October 31 2015 $ 134 213 $ 57 (27) $ 347 8 355 22 110 199 22 30 (6) 24 49 577 832 85 (73) (13) (86) (1) (87) (39) (809) (1,092) (125) $ 42 – 42 10 52 12 249 237 42 353 89 1,543 (30) (2,065) (5) 540 9 442 1,513 (2,070) 549 48 602 924 872 59 2,505 70 712 1,123 1,028 272 3,205 97 3,302 274 $ 3,028 4 3 40 110 (11) 146 53 580 872 252 (38) 1,719 (36) 1,683 19 $ 1,664 – – – – – – (39) (809) (1,092) (198) (13) (2,151) (6) (2,157) – $ (2,157) – – – – – – 12 249 237 84 – 582 19 601 – $ 601 $ (3) – (3) – (3) – – – – – – – – – – – – – – – – (3) – (3) – (3) – $ (3) (1) $ 34 33 (5) 28 3 9 41 4 57 14 71 6 52 65 90 9 $ 156 207 363 6 369 47 136 217 28 428 77 505 58 657 1,029 1,072 57 222 2,873 9 61 106 93 43 312 9 321 20 $ 301 105 793 1,246 1,256 264 3,664 83 3,747 313 $ 3,434 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 Other liabilities on the Consolidated Balance Sheet. 150 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Allowance for Credit Losses (millions of Canadian dollars) 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 Balance as at November 1 2013 Provision for credit losses $ 151 173 $ 324 24 348 22 118 128 30 68 31 99 (7) 92 23 557 771 36 Write-offs Recoveries Disposals $ (144) (5) $ 72 – $ – – (149) (3) (152) (38) (808) (870) (82) 72 4 76 15 240 169 30 298 93 1,387 5 (1,798) (17) 454 3 391 1,392 (1,815) 457 65 565 767 833 98 2,328 87 683 895 1,014 271 2,950 117 3,067 212 $ 2,855 (19) 14 138 (13) (47) 73 4 571 909 91 (16) – – – – – – (38) (808) (870) (226) (5) 1,559 (2) 1,557 54 $ 1,503 (1,947) (20) (1,967) – $ (1,967) – – – – – – 15 240 169 102 – 526 7 533 – $ 533 Foreign exchange and other adjustments Balance as at October 31 2014 $ (13) 14 1 (10) (9) – 3 1 8 12 5 17 2 23 19 52 8 $ 134 213 347 8 355 22 110 199 22 353 89 442 48 602 924 872 59 104 2,505 2 26 20 47 22 117 (5) 112 8 $ 104 70 712 1,123 1,028 272 3,205 97 3,302 274 $ 3,028 – – – – – – – – – – – – – – – – – – – – – – – – – $ – 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 Other liabilities 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. The following table summarizes loans that are contractually past due but not impaired as at October 31. U.S. Retail may grant a grace period of up to 15 days. As at October 31, 2015, there were $3 billion (October 31, 2014 – $2 billion) of U.S. Retail loans that were up to 15 days past due and are included in the 1-30 days category in the following table. Loans Past Due but not Impaired1 (millions of Canadian dollars) Residential mortgages Consumer instalment and other personal Credit card Business and government Total 1 Excludes all ACI loans and debt securities classified as loans. 1-30 days $ 1,511 5,023 1,317 1,829 $ 9,680 31-60 days $ 729 702 287 123 $ 1,841 October 31, 2015 61-89 days Total 1-30 days $ 103 $ 2,343 $ 1,406 4,577 198 1,254 157 38 1,041 $ 496 $ 12,017 $ 8,278 5,923 1,761 1,990 31-60 days $ 724 666 279 107 $ 1,776 As at October 31, 2014 61-89 days Total $ 112 $ 2,242 5,406 163 1,694 161 53 1,201 $ 489 $ 10,543 151 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS COLLATERAL As at October 31, 2015, the fair value of financial collateral held against loans that were past due but not impaired was $279 million (October 31, 2014 – $155 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. ACQUIRED CREDIT-IMPAIRED LOANS ACI loans are comprised of commercial, retail, and FDIC covered loans, from the acquisitions of South Financial, FDIC-assisted, Chrysler Financial, and the credit card portfolios of MBNA Canada (MBNA), Target Corpo- ration (Target), Aeroplan, and Nordstrom Inc. (Nordstrom) and had outstanding unpaid principal balances of $6.3 billion, $2.1 billion, $874 million, $327 million, $143 million, $32 million, and $41 million, respectively, and fair values of $5.6 billion, $1.9 billion, $794 million, $129 million, $85 million, $10 million, and nil, respectively, at the acquisition dates. Acquired Credit-Impaired Loans (millions of Canadian dollars) As at October 31 October 31 2014 2015 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 – FDIC-assisted acquisitions4 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 Carrying value Allowance for individually insignificant impaired loans3 Carrying value net of related allowance – Other Total carrying value net of related allowance – $ 636 (12) (23) 601 (1) (45) $ 699 (18) (21) 660 (2) (49) 555 609 853 (18) (22) 813 (5) (32) 776 40 (40) – – – 1,090 (19) (25) 1,046 (6) (40) 1,000 36 (29) 7 – 7 Acquired credit-impaired loans $ 1,331 $ 1,616 1 Represents contractual amount owed net of charge-offs since the 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, Target, Aeroplan, and Nordstrom. FDIC COVERED LOANS As at October 31, 2015, the balance of FDIC covered loans was $601 million (October 31, 2014 – $660 million) and was recorded in Loans on the Consolidated Balance Sheet. As at October 31, 2015, the balance of indemnification assets was $39 million (October 31, 2014 – $60 million) and was recorded in Other assets on the Consolidated Balance Sheet. N O T E 9 TRANSFERS OF FINANCIAL ASSETS LOAN SECURITIZATIONS The Bank securitizes loans through structured entity or non-structured entity third parties. Most loan securitizations do not qualify for derecog- nition since in certain circumstances, the Bank continues to be exposed to substantially all of the prepayment, interest rate, and/or credit risk associated with the securitized 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 recog- nized, and a securitization liability is recognized for the cash proceeds received. Certain transaction costs incurred are also capitalized and amortized using the 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 (CHT) as part of the CMB program, sold to third-party investors, or are held by the Bank. The CHT issues CMB to third-party investors and uses resulting proceeds to purchase NHA MBS from the Bank and other mortgage issuers in the Canadian market. Assets purchased by the CHT are comingled in a single trust from which CMB are issued. The Bank continues to be exposed to substantially all of the risks of the underlying mortgages, through the retention of a seller swap which transfers principal and interest payment risk on the NHA MBS back to the Bank in return for coupon paid on the CMB issuance and as such, the sales do not qualify for derecognition. The Bank securitizes U.S. originated and purchased residential mortgages with U.S. government agencies which qualify for derecog- nition from the Bank’s Consolidated Balance Sheet. As part of the securitization, 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 government loans to entities which may be structured entities. These securitizations may give rise to derecognition of the financial assets depending on the individual arrangement of each transaction. In addition, the Bank transfers financial assets to certain consoli- dated structured entities. Refer to Note 10 for further details. 152 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS The following table summarizes the securitized asset types that did not qualify for derecognition, along with their associated securitization liabilities as at October 31. 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 business and government loans Other financial assets transferred related to securitization1 Total Associated liabilities2 October 31, 2015 October 31, 2014 Fair value Carrying amount Fair value Carrying amount $ 30,355 – 3,173 33,528 $ (34,142) $ 30,211 – 3,170 33,381 $ (33,729) $ 33,792 2 2,321 36,115 $ (36,469) $ 33,561 2 2,321 35,884 $ (36,158) 1 Includes asset-backed securities, asset-backed commercial paper, cash, repurchase agreements, and Government of Canada securities used to fulfill funding require- ments of the Bank’s securitization structures after the initial securitization of mortgage loans. 2 Includes securitization liabilities carried at amortized cost of $23 billion as at October 31, 2015 (October 31, 2014 – $25 billion), and securitization liabilities carried at fair value of $11 billion as at October 31, 2015 (October 31, 2014 – $11 billion). Other Financial Assets Not Qualifying for Derecognition The Bank enters into certain transactions where it transfers previously recognized commodities and financial assets, such as, debt and equity securities, but retains substantially all of the risks and rewards of those assets. These transferred assets are not derecognized and the transfers are accounted for as financing transactions. The most common trans- actions 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 as at October 31. Other Financial Assets Not Qualifying for Derecognition (millions of Canadian dollars) As at Carrying amount of assets Nature of transaction Repurchase agreements1,2 Securities lending agreements Total Carrying amount of associated liabilities2 October 31 October 31 2015 2014 $ 24,708 $ 19,924 10,718 30,642 14,239 38,947 $ 24,656 $ 19,939 1 Includes $4.9 billion, as at October 31, 2015, of assets related to precious metals repurchase agreements (October 31, 2014 – $3.8 billion). 2 Associated liabilities are all related to repurchase agreements. TRANSFERS OF FINANCIAL ASSETS QUALIFYING FOR DERECOGNITION Transferred financial assets that are derecognized in their entirety where the Bank has a continuing involvement Continuing involvement may arise if the Bank retains any contractual 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, 2015, the fair value of retained interests was $38 million (October 31, 2014 – $44 million). There are no expected credit losses on the retained interests of the securitized business and government loans as the underlying 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. For the year ended October 31, 2015, the trading income recognized on the retained interest was $3 million (October 31, 2014 – $3 million). Certain portfolios of U.S. residential mortgages originated by the Bank are sold and derecognized from the Bank’s Consolidated Balance Sheet. In certain instances, the Bank has a continuing involvement to service those loans. As at October 31, 2015, the carrying value of these servicing rights was $20 million (October 31, 2014 – $16 million) and the fair value was $26 million (October 31, 2014 – $22 million). A gain or loss on sale of the loans is recognized immediately in other income. The gain (loss) on sale of the loans for the year ended October 31, 2015, was $12 million (October 31, 2014 – $7 million). 153 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 1 0 STRUCTURED ENTITIES The Bank uses structured entities for a variety of purposes including: (1) to facilitate the transfer of specified risks to clients; (2) as financing vehicles for itself or for clients; or (3) to segregate assets on behalf of investors. The Bank is typically restricted from accessing the assets of the structured entity under the relevant arrangements. The Bank is involved with structured entities that it sponsors, as well as entities sponsored by third-parties. Factors assessed when determining if the Bank is the sponsor of a structured entity include whether the Bank is the predominant user of the entity; whether the entity’s branding or marketing identity is linked with the Bank; and whether the Bank provides an implicit or explicit guarantee of the entity’s performance to investors or other third parties. The Bank is not considered to be the sponsor of a structured entity if it only provides arm’s-length services to the entity, for example, by acting as administrator, distributor, custodian, or loan servicer. Sponsorship of a structured entity may indicate that the Bank had power over the entity at inception; however, this is not sufficient to determine if the Bank consolidates the entity. Regardless of whether or not the Bank sponsors an entity, consolidation is determined on a case-by-case basis. SPONSORED STRUCTURED ENTITIES The following section outlines the Bank’s involvement with key spon- sored structured entities. Securitizations The Bank securitizes its own assets and facilitates the securitization of client assets through structured entities, such as conduits, which issue asset-backed commercial paper (ABCP) or other securitization entities which issue longer-dated term securities. Securitizations are an impor- tant source of liquidity for the Bank, allowing it to diversify its funding sources and to optimize its balance sheet management approach. The Bank has no rights to the assets as they are owned by the securitiza- tion entity. The Bank sponsors both single-seller and multi-seller securitization conduits. Depending on the specifics of the entity, the variable returns absorbed through ABCP may be significantly mitigated by variable returns retained by the sellers. The Bank provides liquidity facilities to certain single-seller and multi-seller conduits for the benefit of ABCP investors which are structured as loan facilities between the Bank, as the sole liquidity lender, and the Bank-sponsored trusts. If a trust expe- riences difficulty issuing ABCP due to illiquidity in the commercial market, the trust may draw on the loan facility, and use the proceeds to pay maturing ABCP. The liquidity facilities can only be drawn if preconditions are met ensuring that the Bank does not provide credit enhancement through the loan facilities to the conduit. The Bank’s exposure to the variable returns of these conduits from its provision of liquidity facilities and any related commitments is mitigated by the sellers’ continued exposure to variable returns, as described below. The Bank provides administration and securities distribution services to its sponsored securitization conduits, which may result in it holding an investment in the ABCP issued by these entities. In some cases, the Bank may also provide credit enhancements or may transact derivatives with securitization conduits. The Bank earns fees from the conduits which are recognized when earned. The Bank sells assets to single-seller conduits which it controls and consolidates. Control results from the Bank’s power over the entity’s key economic decisions, predominantly, the mix of assets sold into the conduit and exposure to the variable returns of the transferred assets, usually through a derivative or the provision of credit mitigation in the form of cash reserves, over-collateralization, or guarantees over the performance of the entity’s portfolio of assets. Multi-seller conduits provide customers with alternate sources of financing through the securitization of their assets. These conduits are similar to single-seller conduits except that assets are received from more than one seller and comingled into a single portfolio of assets. The Bank is typically deemed to have power over the entity’s key economic decisions, namely, the selection of sellers and related assets sold as well as other decisions related to the management of risk in the vehicle. Sellers of assets in multi-seller conduits typically continue to be exposed to the variable returns of their portion of transferred assets, through derivatives or the provision of credit mitigation. The Bank’s exposure to the variable returns of multi seller conduits from its provision of liquidity facilities and any related commitments is mitigated by the sellers’ continued exposure to variable returns from the entity. While the Bank may have power over multi-seller conduits, it is not exposed to significant variable returns and does not consoli- date such entities. Investment Funds and Other Asset Management Entities As part of its asset management business, the Bank creates investment funds and trusts (including mutual funds), enabling it to provide its clients with a broad range of diversified exposure to different risk profiles, in accordance with the client’s risk appetite. Such entities may be actively managed or may be passively directed, for example, through the tracking of a specified index, depending on the entity’s investment strategy. Financing for these entities is obtained through the issuance of securities to investors, typically in the form of fund units. Based on each entity’s specific strategy and risk profile, the proceeds from this issuance are used by the entity to purchase a port- folio of assets. An entity’s portfolio may contain investments in securities, derivatives, or other assets, including cash. At the inception of a new investment fund or trust, the Bank will typically invest an amount of seed capital in the entity, allowing it to establish a performance history in the market. Over time, the Bank sells its seed capital holdings to third-party investors, as the entity’s AUM increases. As a result, the Bank’s holding of seed capital investment in its own sponsored invest- ment funds and trusts is typically not significant to the Consolidated Financial Statements. Aside from any seed capital investments, the Bank’s interest in these entities is generally limited to fees earned for the provision of asset management services. The Bank does not typically provide guarantees over the performance of these funds. The Bank also sponsors the TD Mortgage Fund (the “Fund”), which is a mutual fund containing a portfolio of Canadian residential mort- gages sold by the Bank into the Fund. The Bank has a put option with the Fund under which it is required to repurchase defaulted mortgage loans at their carrying amount from the Fund. The Bank’s exposure under this put option is mitigated as the mortgages in the Fund are collateralized and government guaranteed. In addition to the put option, the Bank provides a liquidity facility to the Fund for the benefit of fund unit investors. Under the liquidity facility, the Bank is obligated to repurchase mortgages at their fair value to enable the Fund to honour unit-holder redemptions in the event that the Fund experiences a liquidity event. During the year ended October 31, 2015, the fair value of the mortgages repurchased as a result of a liquidity event was $29 million (2014 – $84 million). Generally, the term of these agreements do not exceed five years. While the Bank has power over the Fund, it does not absorb a significant proportion of variable returns from the Fund, as the variability in the fund relates primarily to the credit risk of the underlying mortgages which are government guaran- teed. As a result, the Bank does not consolidate the Fund. The Bank is typically considered to have power over the key economic decisions of sponsored asset management entities; however, it does not consolidate an entity unless it is also exposed to significant variable returns of the entity. This determination is made on a case-by- case basis, in accordance with the Bank’s consolidation policy. 154 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTSFinancing Vehicles The Bank may use structured entities to provide a cost-effective means of financing its operations, including raising capital or obtaining fund- ing. These structured entities include: (1) TD Capital Trust III and TD Capital Trust IV (together the “CaTS Entities”); and (2) TD Covered Bond Guarantor Limited Partnership and TD Covered Bond (Legislative) Guarantor Limited Partnership (together the “Covered Bond Entities”). The CaTS Entities issued innovative capital securities which currently count as Tier 1 Capital of the Bank, but, under Basel III, are considered non-qualifying capital instruments and are subject to the Basel III phase-out rules. The proceeds from these issuances were invested in assets purchased from the Bank which generate income for distribu- tion to investors. The Bank is considered to have decision-making power over the key economic activities of the CaTS Entities; however, it does not consolidate an entity unless it is also exposed to significant variable returns of the entity. The Bank is exposed to the risks and returns from certain CaTS Entities as it holds the residual risks in those entities, typically through retaining all the voting securities of the entity. Where the entity’s portfolio of assets are exposed to risks which are not related to the Bank’s own credit risk, the Bank is considered to be exposed to significant variable returns of the entity and consolidates the entity. However, certain CaTS Entities hold assets which are only exposed to the Bank’s own credit risk. In this case, the Bank does not absorb significant variable returns of the entity as it is ultimately exposed only to its own credit risk, and does not consolidate. Refer to Note 20 for further details. The Bank issues, or has issued, debt under its covered bond programs where the principal and interest payments of the notes are guaranteed by a covered bond entity, with such guarantee secured by a portfolio of assets held by the entity. Investors in the Bank’s covered bonds may have recourse to the Bank should the assets of the covered bond entity be insufficient to satisfy the covered bond liabilities. The Bank consoli- dates the Covered Bond Entities as it has power over the key economic activities and retains all the variable returns in these entities. THIRD-PARTY SPONSORED STRUCTURED ENTITIES In addition to structured entities sponsored by the Bank, the Bank is also involved with structured entities sponsored by third parties. Key involvement with third party sponsored structured entities is described in the following section. Third-party Sponsored Securitization Programs The Bank participates in the securitization program of government- sponsored structured entities, including the CMHC, a Crown corporation of the Government of Canada, and similar U.S. government-sponsored entities. The CMHC guarantees CMB issued through the CHT. The Bank is exposed to the variable returns in the CHT, through its retention of seller swaps resulting from its participation in the CHT program. The Bank does not have power over the CHT as its key economic activities are controlled by the Government of Canada. The Bank’s exposure to the CHT is included in the balance of residential mortgage loans as noted in Note 9, and is not disclosed in the table accompanying this Note. The Bank participates in the securitization programs sponsored by U.S. government agencies. The Bank is not exposed to significant vari- able returns from these agencies and does not have power over the key economic activities of the agencies, which are controlled by the U.S. government. Investment Holdings and Derivatives The Bank may hold interests in third-party structured entities, predomi- nantly in the form of direct investments in securities or partnership interests issued by those structured entities, or through derivatives transacted with counterparties which are structured entities. Investments in, and derivatives with, structured entities are recognized on the Bank’s Consolidated Balance Sheet. The Bank does not typically consolidate third-party structured entities where its involvement is limited to investment holdings and/or derivatives as the Bank would not generally have power over the key economic decisions of these entities. Financing Transactions In the normal course of business, the Bank may enter into financing transactions with third-party structured entities including commercial loans, reverse repurchase agreements, prime brokerage margin lending, and similar collateralized lending transactions. While such transactions expose the Bank to the structured entities counterparty credit risk, this exposure is mitigated by the collateral related to these transactions. The Bank typically has neither power nor significant variable returns due to financing transactions with structured entities and would not generally consolidate such entities. Financing transactions with third party-sponsored structured entities are included on the Bank’s Consoli- dated Financial Statements and have not been included in the table accompanying this Note. Arm’s-length Servicing Relationships In addition to the involvement outlined above, the Bank may also provide services to structured entities on an arm’s-length basis, for example as sub-advisor to an investment fund or asset servicer. Similarly, the Bank’s asset management services provided to institutional investors may include transactions with structured entities. As a consequence of providing these services, the Bank may be exposed to variable returns from these structured entities, for example, through the receipt of fees or short-term exposure to the structured entity’s securities. Any such exposure is typically mitigated by collateral or some other contractual arrangement with the structured entity or its sponsor. The Bank generally has neither power nor significant variable returns from the provision of arm’s-length services to a structured entity and, consequently does not consolidate such entities. Fees and other exposures through servicing relationships are included on the Bank’s Consolidated Financial Statements and have not been included in the table accompanying this Note. INVOLVEMENT WITH CONSOLIDATED STRUCTURED ENTITIES Securitizations The Bank securitizes consumer instalment, and other personal loans through securitization entities, predominantly single-seller conduits. These conduits are consolidated by the Bank based on the factors described above. Aside from the exposure resulting from its involve- ment as seller and sponsor of consolidated securitization conduits described above, including the liquidity facilities provided, the Bank has no contractual or non-contractual arrangements to provide financial support to consolidated securitization conduits. The Bank’s interests in securitization conduits generally rank senior to interests held by other parties, in accordance with the Bank’s investment and risk policies. As a result, the Bank has no significant obligations to absorb losses before other holders of securitization issuances. Other Structured Consolidated Structured Entities Depending on the specific facts and circumstances of the Bank’s involvement with structured entities, the Bank may consolidate asset management entities, financing vehicles, or third party-sponsored structured entities, based on the factors described above. Aside from its exposure resulting from its involvement as sponsor or investor in the structured entities as previously discussed, the Bank does not typically have other contractual or non-contractual arrangements to provide financial support to these consolidated structured entities. INVOLVEMENT WITH UNCONSOLIDATED STRUCTURED ENTITIES The following table presents information related to the Bank’s uncon- solidated structured entities. Unconsolidated structured entities include both TD and third-party sponsored entities. Securitizations include holdings in TD-sponsored multi-seller conduits, as well as third-party sponsored mortgage and asset-backed securitizations, including government-sponsored agency securities such as CMBs, and U.S. government agency issuances. Investment Funds and Trusts include holdings in third party funds and trusts, as well as holdings in TD-sponsored asset management funds and trusts. Amounts in Other are predominantly related to investments in community-based U.S. tax-advantage entities described in Note 12. These holdings do not result in the consolidation of these entities as TD does not have power over these entities. 155 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTSCarrying Amount and Maximum Exposure to Unconsolidated Structured Entities (millions of Canadian dollars) Securitizations Investment funds and trusts Other Total Securitizations October 31, 2015 Investment funds and trusts As at October 31, 2014 Other Total FINANCIAL ASSETS Trading loans, securities, and other Derivatives1 Financial assets designated at fair value through profit or loss Available-for-sale securities Held-to-maturity securities Loans Other Total assets FINANCIAL LIABILITIES Derivatives1 Obligations related to securities sold short Total liabilities Off-balance sheet exposure2 Maximum exposure to loss from involvement with unconsolidated structured entities Size of sponsored unconsolidated structured entities3 $ 6,148 – $ 1,167 156 $ – – $ 7,315 156 $ 3,450 – $ 5,913 335 $ – – $ 9,363 335 12 42,415 43,820 3,081 7 95,483 – 3,023 3,023 11,869 64 388 – – – 1,775 195 181 376 353 39 122 – – 2,717 2,878 115 42,925 43,820 3,081 2,724 100,136 35 41,426 37,335 2,553 6 84,805 – – – 195 3,204 3,399 – 1,432 1,432 1,832 14,054 10,584 34 584 – – – 6,866 187 163 350 356 41 120 – – 2,101 2,262 110 42,130 37,335 2,553 2,107 93,933 – – – 187 1,595 1,782 986 11,926 104,329 1,752 4,710 110,791 93,957 6,872 3,248 104,077 $ 10,404 $ 12,541 $ 1,750 $ 24,695 $ 9,756 $ 58,561 $ 1,750 $ 70,067 1 Derivatives primarily subject to vanilla interest rate or foreign exchange risk are not included in these amounts as those derivatives are designed to align the structured entity’s cash flows with risks absorbed by investors and are not predominantly designed to expose the Bank to variable returns created by the entity. 2 For the purposes of this disclosure, off balance-sheet exposure represents the notional value of liquidity facilities, guarantees, or other off-balance sheet commit- ments without considering the effect of collateral or other credit enhancements. 3 The size of sponsored unconsolidated structured entities is provided based on the most appropriate measure of size for the type of entity: (1) The par value of notes issued by securitization conduits and similar liability issuers; (2) the total AUM of investment funds and trusts; and (3) the total fair value of partnership or equity shares in issue for partnerships and similar equity issuers. Sponsored Unconsolidated Structured Entities in which the Bank has no Significant Investment at the End of the Period Sponsored unconsolidated structured entities in which the Bank has no significant investment at the end of the period are predominantly investment funds and trusts created for the asset management business. The Bank would not typically hold investments, with the exception of seed capital, in these structured entities. However, the Bank continues to earn fees from asset management services provided to these enti- ties, some of which could be based on the performance of the fund. Fees payable are generally senior in the entity’s priority of payment and would also be backed by collateral, limiting the Bank’s exposure to loss from these entities. The Bank’s non-interest income received from its involvement with these asset management entities was $1.6 billion (October 31, 2014 − $1.4 billion) for the year ended October 31, 2015. The total AUM in these entities was $178.9 billion (October 31, 2014 − $161.3 billion) at the end of the period. Any assets transferred by the Bank during the period are co-mingled with assets obtained from third parties in the market. Except as previously disclosed, the Bank has no contractual or non-contractual arrange- ments to provide financial support to unconsolidated structured entities. 156 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 1 1 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 deterioration in value of the reference asset or group of assets upon the occurrence of certain credit events such as bankruptcy, or changes in specified credit ratings or credit index. 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. 157 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS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. 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. Fair Value of Derivatives1 (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 year2 Negative Positive October 31, 2015 Fair value as at balance sheet date October 31, 2014 Fair value as at balance sheet date Positive Negative Positive Negative $ – 24 23,706 – 729 24,459 – 11,892 – 18,245 – 612 30,749 2 6 8 701 690 1,391 56,607 – 3,732 – 36 3,768 3,628 – 6,175 9,803 $ 36 33 20,485 665 – 21,219 – 10,801 – 20,373 630 – 31,804 79 5 84 $ – 3 23,520 – 609 24,132 – 8,783 – 19,630 – 404 28,817 9 11 20 1,327 931 2,258 55,365 890 726 1,616 54,585 – 2,577 2 – 2,579 468 – 2,208 2,676 – 3,806 – 32 3,838 3,408 – 6,518 9,926 $ 32 26 19,983 495 – 20,536 – 9,724 – 18,224 427 – 28,375 55 8 63 1,317 954 2,271 51,245 – 2,543 2 – 2,545 455 – 1,788 2,243 $ 1 31 20,127 – 594 20,753 – 8,030 – 11,936 – 346 20,312 1 12 13 5,311 437 5,748 46,826 – 2,648 – 21 2,669 1,612 – 3,000 4,612 17 17 262 262 43 43 227 227 5 5 1,502 1,502 15,090 $ 71,697 1,138 1,138 6,655 $ 62,020 1,046 1,046 14,853 $ 69,438 958 958 5,973 $ 57,218 1,684 1,684 8,970 $ 55,796 $ – 22 17,940 592 – 18,554 – 6,525 – 14,487 351 – 21,363 37 2 39 5,742 539 6,281 46,237 – 1,559 3 – 1,562 398 – 1,271 1,669 286 286 1,455 1,455 4,972 $ 51,209 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. Certain other comparative amounts have also been restated/ reclassified to conform with the presentation adopted in the current period. 2 The average fair value of trading derivatives over a 12-month period had a positive fair value and a negative fair value of $44 billion and $44 billion, respectively, for the year ended October 31, 2014. 158 TD BANK GROUP ANNUAL REPORT 2015 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. Fair Value of Non-Trading Derivatives1 (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 $ 448 $ – – – 596 9,881 – 410 $ 448 $ 10,887 $ – 13 – – $ 13 $ 2,794 $ 3,838 9,926 43 1,046 $ 3,505 $ 14,853 32 43 636 $ 837 – – – $ 837 $ 403 1,650 – – $ 2,053 $ 51 537 – – $ 588 As at October 31, 2015 Derivative Liabilities Derivatives not in qualifying hedging relationships Total $ 1,254 56 227 958 $ 2,495 $ 2,545 2,243 227 958 $ 5,973 October 31, 2014 $ 20 $ – – – 744 3,817 – 650 $ 20 $ 5,211 $ – 9 – – $ 9 $ 1,905 $ 2,669 4,612 786 5 5 1,034 1,684 $ 3,730 $ 8,970 $ 224 – – – $ 224 $ 297 1,013 – – $ 1,310 $ – 117 – – $ 117 $ 1,041 539 286 1,455 $ 3,321 $ 1,562 1,669 286 1,455 $ 4,972 1 Certain other comparative amounts have also been restated to conform with the presentation adopted in the current period. The following table discloses 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 OCI for the years ended October 31. Results of Hedge Activities Recorded in Net Income and Other Comprehensive Income (millions of Canadian dollars) Derivatives held or issued for non-trading purposes Interest rate contracts Foreign exchange contracts Credit derivatives Other contracts Fair value – non-trading Derivatives held or issued for non-trading purposes Interest rate contracts Foreign exchange contracts Credit derivatives Other contracts Fair value – non-trading Fair value hedges Gains (losses) recognized in income on derivatives1,2 Gains (losses) recognized in income on hedged items attributable to the hedged risk2 Hedge ineffectiveness2 Cash flow hedges Gains (losses) recognized in OCI on derivatives3 Gains (losses) reclassified from OCI into income4 Hedge ineffectiveness2 Net investment hedges Gains (losses) recognized in OCI on derivatives1,3 Gains (losses) reclassified from OCI into income hedges4 Hedge ineffectiveness2 1 Includes non-derivative financial instruments such as foreign currency deposit liabilities. The fair value attributable to the foreign exchange risk of these non-derivative financial instruments was $22.2 billion as at October 31, 2015, (October 31, 2014 – $21.6 billion). For the years ended October 31 2015 2014 2013 $ (773) 776 3 $ (142) 113 (29) $ 290 (262) 28 7,725 7,047 (4) (3,732) – – 3,849 4,494 1 (1,878) 17 – 55 1,382 (3) (1,001) (5) – 2 Amounts are recorded in non-interest income. 3 OCI is presented on a pre-tax basis. 4 Amounts are recorded in net interest income or non-interest income, as applicable. 159 TD BANK GROUP ANNUAL REPORT 2015 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. 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, 2015 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 $ 18,125 (10,055) $ 8,070 $ 19,630 (23,030) $ (3,400) $ 12,223 (14,754) $ (2,531) $ 3,061 (8,994) $ (5,933) $ 517 – $ 517 $ 53,556 (56,833) $ (3,277) October 31, 2014 $ 16,877 (4,530) $ 12,347 $ 23,155 (9,745) $ 13,410 $ 10,107 (8,847) $ 1,260 $ 721 (2,673) $ (1,952) $ 275 – $ 275 $ 51,135 (25,795) $ 25,340 Income related to interest cash flows is recognized using the EIRM 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, 2015, and October 31, 2014, there were no significant instances where forecasted hedged trans- actions failed to occur. The following table presents gains (losses) on non-trading derivatives that have not been designated in qualifying hedge accounting relationships. 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 Other contracts Total 1 Amounts are recorded in non-interest income. 2015 2014 $ (108) (23) (35) 2 – $ (164) $ (66) 13 (100) 10 – $ (143) 2013 $ 69 (47) (187) 4 – $ (161) 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 associ- ated with the market risk nor indicative of the credit risk associated with derivative financial instruments. 160 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS The following table discloses the notional amount of over-the-counter and exchange-traded derivatives. Over-the-Counter and Exchange-Traded Derivatives 1 (billions of Canadian dollars) 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 As at October 31 October 31 2014 2015 Over-the-Counter2 Non Trading Clearing house3 clearing Exchange- traded house Total Non- trading4 Total Total $ $ – 329 2,939 – – 3,268 – 44 581 20 17 662 $ 261 – – 9 15 285 $ 261 373 3,520 29 32 4,215 $ – – 1,116 – 2 1,118 $ 261 373 4,636 29 34 5,333 $ 263 283 4,256 37 42 4,881 – – – – – – – 1 – 1 – 665 – 472 24 23 1,184 2 1 3 – – – – – – – – – – – 665 – 472 24 23 1,184 3 1 4 – 49 – 77 – – 126 6 – 6 – 714 – 549 24 23 1,310 9 1 10 – 549 1 495 19 19 1,083 7 1 8 – – – 34 9 43 $ 3,269 $ 1,892 43 16 59 $ 344 77 25 102 $ 5,505 36 – 36 113 25 138 $ 1,286 $ 6,791 108 30 138 $ 6,110 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for more details. Certain other comparative amounts have also been restated to conform with the presentation adopted in the current period. 3 Derivatives executed through a central clearing house reduces settlement risk due to the ability to net settle offsetting positions for capital purposes and therefore receive preferential capital treatment compared to those settled with non-central clearing house counterparties. 2 Collateral held under a Credit Support Annex 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. 4 Includes $912 billion of over-the-counter derivatives that are transacted with clearing houses (October 31, 2014 – $476 billion) and $374 billion of over-the- counter derivatives that are transacted with non-clearing houses (October 31, 2014 – $359 billion) as at October 31, 2015. There were no exchange-traded derivatives both as at October 31, 2015 and October 31, 2014. 161 TD BANK GROUP ANNUAL REPORT 2015 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 Maturity1 (billions of Canadian dollars) 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 As at October 31 October 31 2014 2015 Remaining term to maturity Over Within 1 year to 5 years 1 year Over 5 years $ $ 214 347 1,229 21 25 1,836 $ 47 26 2,463 6 5 2,547 – 655 – 111 23 22 811 2 – 2 – 57 – 317 1 1 376 6 1 7 – – 944 2 4 950 – 2 – 121 – – 123 1 – 1 Total Total $ 261 373 4,636 29 34 5,333 $ 263 283 4,256 37 42 4,881 – 714 – 549 24 23 1,310 9 1 10 – 549 1 495 19 19 1,083 7 1 8 52 16 68 $ 2,717 57 8 65 $ 2,995 4 1 5 $ 1,079 113 25 138 $ 6,791 108 30 138 $ 6,110 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. Certain other comparative amounts have also been restated to conform with the presentation adopted in the current period. 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 group. 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 counter- party to meet its obligation to the Bank. The Capital Markets Risk Management area within Wholesale Banking is responsible for imple- menting 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 trans- actions that create credit exposure. This includes evaluating the credit- worthiness of counterparties, and managing the size, diversification 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 mitigation techniques. Master netting agreements reduce risk to the Bank by allowing the Bank to close out and net transactions with counterparties subject to such agreements upon the occurrence of certain events. The effect of these master netting agreements is shown in the following table. Also shown in this table, 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 calculated 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. 162 TD BANK GROUP ANNUAL REPORT 2015 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 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) Contracts Total 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 2015 $ 35,352 9,107 2,111 $ 46,570 By location of risk2 Canada United States Other international United Kingdom Europe – other Other Total Other international Total current replacement cost October 31, 2015 As at October 31, 2014 Current replacement cost Credit equivalent amount Risk- weighted amount Current replacement cost Credit equivalent amount $ 26 $ $ 22 $ 21,908 638 22,572 11,976 26,148 404 38,528 17 1,079 582 1,678 62,778 39,962 22,816 11,820 10,996 1,937 $ 12,933 67 26,915 727 27,709 20,750 52,070 688 73,508 287 4,185 1,431 5,903 107,120 58,659 48,461 12,173 36,288 14,735 $ 51,023 $ 21 13,869 359 14,249 4,866 16,645 166 21,677 118 954 365 1,437 37,363 24,957 12,406 3,649 8,757 2,070 $ 10,827 20,919 614 21,555 9,492 14,936 346 24,774 13 6,156 343 6,512 52,841 39,783 13,058 5,678 7,380 998 $ 8,378 74 26,737 707 27,518 16,556 37,891 558 55,005 184 9,949 1,207 11,340 93,863 58,632 35,231 6,002 29,229 11,700 $ 40,929 Canada1 October 31 2014 $ 29,486 4,286 1,112 $ 34,884 October 31 2015 $ 4,373 38 837 $ 5,248 United States1 October 31 2014 Other International1 October 31 2014 October 31 2015 $ 10,418 1,308 1,298 $ 13,024 $ 6,405 2,830 1,725 $ 10,960 $ 4,762 16 155 $ 4,933 October 31 2015 $ 46,130 11,975 4,673 $ 62,778 Risk- weighted amount $ 25 14,571 363 14,959 3,778 14,397 145 18,320 106 1,275 368 1,749 35,028 23,988 11,040 2,135 8,905 1,659 $ 10,564 As at Total October 31 2014 $ 44,666 5,610 2,565 $ 52,841 51,782 $ 10,996 45,461 $ 7,380 October 31 2015 % mix October 31 2014 % mix 38.8% 39.8 2.3 13.6 5.5 21.4 100.0% 38.1% 32.2 8.5 11.3 9.9 29.7 100.0% October 31 2015 $ 4,268 4,379 256 1,496 597 2,349 $ 10,996 October 31 2014 $ 2,811 2,375 632 832 730 2,194 $ 7,380 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, 2015, the fair value of all derivative instruments with credit risk related contingent features in a net liability position was $14 billion (October 31, 2014 – $9 billion). The Bank has posted $16 billion (October 31, 2014 – $7 billion) of collateral for this exposure in the normal course of business. As at October 31, 2015, the impact of a one-notch downgrade in the Bank’s senior debt ratings would require the Bank to post an additional $194 million (October 31, 2014 – $293 million) 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 $228 million (October 31, 2014 – $327 million) of collateral to that posted in the normal course of business. 163 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: (1) the posting of collateral or other acceptable remedy such as assignment of the affected contracts to an acceptable counterparty; or (2) 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 30, 2015, the aggregate net liability position of those contracts would require: (1) the posting of collateral or other acceptable remedy totalling $97 million (October 31, 2014 – $77 million) in the event of a one-notch or two-notch downgrade in the Bank’s senior debt ratings; and (2) funding totalling nil (October 31, 2014 – $1 million) following the termination and settlement of outstanding derivative contracts in the event of a one-notch or two- notch downgrade in the Bank’s senior debt ratings. TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 1 2 INVESTMENT IN ASSOCIATES AND JOINT VENTURES INVESTMENT IN TD AMERITRADE HOLDING CORPORATION The Bank has significant influence over TD Ameritrade Holding Corpo- ration (TD Ameritrade) and accounts for its investment in TD Ameritrade using the equity method. The Bank’s equity share in TD Ameritrade’s earnings, excluding dividends, is reported on a one-month lag basis. The Bank takes into account changes in the subsequent period that would significantly affect the results. As at October 31, 2015, the Bank’s reported investment in TD Ameritrade was 41.54% (October 31, 2014 – 40.97%) of the outstanding shares of TD Ameritrade with a fair value of $10 billion (October 31, 2014 – $8 billion) based on the closing price of US$34.47 (October 31, 2014 – US$33.74) on the New York Stock Exchange. During the year ended October 31, 2015, TD Ameritrade repur- chased 8.4 million shares (for the year ended October 31, 2014 – 8.5 million shares). On December 5, 2013, the Stockholders Agreement was extended by five years to January 24, 2021, and amended such that beginning January 24, 2016, if stock repurchases by TD Ameritrade cause the Bank’s ownership percentage to exceed 45%, the Bank is required to use reasonable efforts to sell or dispose of such excess stock, subject to the Bank’s commercial judgment as to the optimal timing, amount, Condensed Consolidated Balance Sheets1,2 (millions of Canadian dollars) Assets Receivables from brokers, dealers, and clearing organizations Receivables from clients, net Other assets, net Total assets Liabilities Payable to brokers, dealers, and clearing organizations Payable to clients Other liabilities Total liabilities Stockholders’ equity3 Total liabilities and stockholders’ equity and method of sales with a view to maximizing proceeds from such sales. However, beginning January 24, 2016, in the event that stock repurchases by TD Ameritrade cause the Bank’s ownership percentage to exceed 45%: (1) the Bank has no absolute obligation to reduce its ownership percentage to 45% by the termination of the Stockholders Agreement; and (2) stock repurchases cannot result in the Bank’s ownership percentage exceeding 47%. Pursuant to the Stockholders Agreement in relation to the Bank’s equity investment in TD Ameritrade, the Bank has the right to designate five of twelve members of TD Ameritrade’s Board of Directors. The Bank’s designated directors include the Bank’s Group President and Chief Executive Officer, 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 years ended October 31, 2015, and October 31, 2014, TD Ameritrade did not experience any significant restrictions to transfer funds in the form of cash dividends, or repay- ment of loans or advances. The condensed financial statements of TD Ameritrade, based on its consolidated financial statements, are included in the following tables. September 30 2015 September 30 2014 As at $ 1,127 16,697 16,661 $ 34,485 $ 3,539 20,966 3,570 28,075 6,410 $ 34,485 $ 1,249 13,118 12,491 $ 26,858 $ 2,729 16,340 2,438 21,507 5,351 $ 26,858 1 Certain comparative amounts have been restated to conform with the presentation adopted in the current period. 2 Customers’ securities are reported on a settlement date basis whereas the Bank reports customers’ securities on a trade date basis. 3 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 good- will, other intangibles, and the cumulative translation adjustment. 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. 164 For the years ended September 30 2015 2014 2013 $ 764 3,227 3,991 991 1,370 2,361 45 1,585 585 $ 1,000 $ 1.84 1.83 $ 629 2,756 3,385 823 1,168 1,991 17 1,377 524 $ 853 $ 1.55 1.54 $ 477 2,332 2,809 704 1,031 1,735 (34) 1,108 421 $ 687 $ 1.25 1.24 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS INVESTMENT IN IMMATERIAL ASSOCIATES OR JOINT VENTURES Except for TD Ameritrade as disclosed above, no associate or joint venture was individually material to the Bank as of October 31, 2015, or October 31, 2014. The carrying amount of the Bank’s investment in individually immaterial associates and joint ventures during the period was $2.8 billion (October 31, 2014 – $2.2 billion). Individually immaterial associates and joint ventures consisted predominantly of investments in private funds or partnerships that make equity investments, provide debt financing or support commu- nity-based tax-advantaged investments. The investments in these entities generate a return primarily through the realization of U.S. federal and state income tax credits, including Low Income Housing Tax Credits, New Markets Tax Credits and Historic Tax Credits. N O T E 1 3 SIGNIFICANT ACQUISITIONS AND DISPOSALS Acquisition of Nordstrom Inc.’s U.S. Credit Card Portfolio On October 1, 2015, the Bank, through its subsidiary, TD Bank USA, National Association (TD Bank USA, N.A.), acquired substantially all of Nordstrom Inc.’s (Nordstrom) existing U.S. Visa and private label consumer credit card portfolio, with a gross outstanding balance of $2.9 billion (US$2.2 billion). In addition, the Bank and Nordstrom entered into a long-term agreement under which the Bank became the exclusive U.S. issuer of Nordstrom-branded Visa and private label consumer credit cards to Nordstrom customers. At the date of acquisition the Bank recorded the credit card receiv- ables at their fair value of $2.9 billion. The transaction was treated as an asset acquisition and the pre-tax difference of $73 million on the date of acquisition of the transaction price over the fair value of assets acquired has been recorded in Non-interest income. The gross amounts of revenue and credit losses have been recorded on the Consolidated Statement of Income in the U.S. Retail segment since that date. Nordstrom shares in a fixed percentage of the revenue and credit losses incurred. Nordstrom’s 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 Nordstrom are recorded in Other assets or Other liabilities, respectively, on the Consolidated Balance Sheet. Acquisition of certain CIBC Aeroplan Credit Card Accounts On December 27, 2013, the Bank, Aimia Inc. (Aimia), and the Canadian Imperial Bank of Commerce (CIBC) closed a transaction under which the Bank acquired approximately 50% of CIBC’s existing Aeroplan credit card portfolio, which primarily included accounts held by customers who did not have an existing retail banking relationship with CIBC. The Bank accounted for the purchase as an asset acquisition. The results of the acquisition have been recorded in the Canadian Retail segment. The Bank acquired approximately 540,000 cardholder accounts with an outstanding balance of $3.3 billion at a price of par plus $50 million less certain adjustments for total cash consideration of $3.3 billion. At the date of acquisition, the fair value of credit card receivables acquired was $3.2 billion and the fair value of an intangible asset for the purchased credit card relationships was $146 million. In connection with the purchase agreement, the Bank agreed to pay CIBC a further $127 million under a commercial subsidy agree- ment. This payment was recognized as a non-interest expense in 2014. Disposal 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 in cash, subject to certain price adjustment mechanisms. A pre-tax gain of $231 million was recorded in the Corporate segment in other income in the first quarter of 2014. An additional pre-tax gain of $13 million was recorded in the Corporate segment subsequently, upon the settlement of price adjustment mechanisms. 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 U.S. Retail 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 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 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 have been recorded in the U.S. Retail 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. 165 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTSN O T E 1 4 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 manage- ment 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 approximately $8 billion and primarily related to treasury assets managed within the Corporate segment. The Bank’s capital oversight committees provide oversight to the Bank’s capital allocation methodologies. Goodwill by Segment (millions of Canadian dollars) Carrying amount of goodwill as at November 1, 2013 Additions Disposals Foreign currency translation adjustments and other Carrying amount of goodwill as at October 31, 20142 Carrying amount of goodwill as at November 1, 2014 Foreign currency translation adjustments and other Carrying amount of goodwill as at October 31, 20152 Pre-tax discount rates 2014 2015 1 Goodwill predominantly relates to U.S. personal and commercial banking. 2 Accumulated impairment as at October 31, 2015, and October 31, 2014 was nil. 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 assessments 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 10 times to 14 times. In considering the sensitivity of the key assumptions discussed above, management determined that a reasonable change in any of the above would not result in the recoverable amount of any of the groups of CGUs to be less than its carrying amount. Canadian Retail $ 2,200 5 (13) 57 2,249 2,249 120 $ 2,369 U.S. Retail1 $ 10,943 – – 891 11,834 11,834 1,984 $ 13,818 Wholesale Banking $ 150 – – – 150 150 – $ 150 Total $ 13,293 5 (13) 948 14,233 14,233 2,104 $ 16,337 10.3–12.4% 9.1–12.4 10.7–12.0% 9.7–10.5 13.8% 12.4 166 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS OTHER INTANGIBLES The following table presents details of other intangibles as at October 31. Other Intangibles (millions of Canadian dollars) Cost As at November 1, 2013 Additions Disposals Impairment losses Fully amortized intangibles Foreign currency translation adjustments and other As at October 31, 2014 Additions Disposals Fully amortized intangibles Foreign currency translation adjustments and other At October 31, 2015 Amortization and impairment As at November 1, 2013 Disposals Impairment losses Amortization charge for the year Fully amortized intangibles Foreign currency translation adjustments and other As at October 31, 2014 Disposals Impairment losses Amortization charge for the year Fully amortized intangibles Foreign currency translation adjustments and other As at October 31, 2015 Net Book Value: As at October 31, 2014 As at October 31, 2015 Core deposit intangibles Credit card related intangibles Internally generated software Other software Other intangibles $ 2,039 – – – – 165 2,204 – – – 353 $ 2,557 $ 1,323 – – 165 – 110 1,598 – – 162 – 264 $ 2,024 $ 583 146 – – – 9 738 – – – 20 $ 758 $ 102 – – 76 – 3 181 – – 83 – 6 $ 270 $ 1,369 468 (34) – (154) 28 1,677 394 (31) (178) 76 $ 1,938 $ 429 (1) – 227 (154) 29 530 (16) 5 295 (178) 47 $ 683 $ 157 63 – – (4) 11 227 74 (3) (12) 15 $ 301 $ 82 – – 50 (4) 2 130 (1) – 63 (12) 7 $ 187 $ 528 21 – – – 23 572 6 – – 82 $ 660 $ 247 – – 45 – 7 299 – – 50 – 30 $ 379 Total $ 4,676 698 (34) – (158) 236 5,418 474 (34) (190) 546 $ 6,214 $ 2,183 (1) – 563 (158) 151 2,738 (17) 5 653 (190) 354 $ 3,543 $ 606 533 $ 557 488 $ 1,147 1,255 $ 97 114 $ 273 281 $ 2,680 2,671 167 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 1 5 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. Land, Buildings, Equipment, and Other Depreciable Assets1 (millions of Canadian dollars) Land Buildings Computer equipment Furniture, fixtures, and other depreciable Leasehold assets improvements Total $ 858 5 (6) – 52 909 – (2) – 111 $ 1,018 $ $ – – – – – – – – – – – – – $ 2,668 141 (21) (130) 239 2,897 174 (21) (62) 268 $ 3,256 $ 787 125 (4) – (130) 162 940 134 (18) – (62) 141 $ 1,135 $ 786 195 (51) (86) 30 874 113 (111) (116) 30 $ 790 $ 342 182 (38) – (86) 9 409 183 (73) – (116) 16 $ 419 $ 1,368 155 (29) (81) (130) 1,283 211 (23) (104) 76 $ 1,443 $ 714 126 (22) 1 (81) (106) 632 137 (22) – (104) 38 $ 681 $ 1,377 183 (24) (65) 90 1,561 134 (19) (66) 144 $ 1,754 $ 579 99 (20) – (65) 20 613 134 (19) – (66) 50 $ 712 $ 7,057 679 (131) (362) 281 7,524 632 (176) (348) 629 $ 8,261 $ 2,422 532 (84) 1 (362) 85 2,594 588 (132) – (348) 245 $ 2,947 $ 909 1,018 $ 1,957 2,121 $ 465 371 $ 651 762 $ 948 1,042 $ 4,930 5,314 October 31 2015 $ 7,810 1,563 1,245 104 1,441 869 216 $ 13,248 As at October 31 2014 $ 6,540 1,330 1,030 15 1,419 829 – $ 11,163 Cost As at November 1, 2013 Additions Disposals Fully depreciated assets Foreign currency translation adjustments and other As at October 31, 2014 Additions Disposals Fully depreciated assets Foreign currency translation adjustments and other As at October 31, 2015 Accumulated depreciation and impairment/losses As at November 1, 2013 Depreciation charge for the year Disposals Impairment losses Fully depreciated assets Foreign currency translation adjustments and other As at October 31, 2014 Depreciation charge for the year Disposals Impairment losses Fully depreciated assets Foreign currency translation adjustments and other As at October 31, 2015 Net Book Value: As at October 31, 2014 As at October 31, 2015 1 Certain comparative amounts have been reclassified to conform with the presentation adopted in the current period. N O T E 1 6 OTHER ASSETS Other Assets (millions of Canadian dollars) Accounts receivable and other items Accrued interest Current income tax receivable Defined benefit asset Insurance-related assets, excluding investments Prepaid expenses Cheques and other items in transit Total 168 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 1 7 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 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 ten years. The deposits are generally term deposits, guaranteed investment certificates, senior debt, and similar instruments. The aggre- gate amount of term deposits in denominations of $100,000 or more as at October 31, 2015, was $213 billion (October 31, 2014 – $188 billion). 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 on the Consolidated Statement of Income. Deposits (millions of Canadian dollars) Personal Banks1 Business and government2 Designated at fair value through profit or loss3 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 Total2,4 By Type By Country October 31 2015 October 31 2014 As at Demand Notice Term Canada United States International Total Total $ 13,183 $ 332,220 $ 50,415 $ 189,120 10,856 6,880 192,166 64,670 122 103,781 10,078 114,227 – – 1,402 3,739 $ 84,733 $ 436,123 $ 250,881 $ 397,283 1,402 74,759 – – $ 205,071 1,618 87,067 – 58,926 $ 352,682 $ 1,627 $ 395,818 $ 343,240 15,771 17,080 4,606 241,705 282,678 3,445 3,242 – 12,094 59,334 $ 21,772 $ 771,737 $ 663,292 1,402 74,759 $ 6,195 $ 47,485 5,739 36,962 391,088 326,885 84 340,993 278,121 1,477 $ 771,737 $ 663,292 1 Includes deposits and advances with the Federal Home Loan Bank. 2 As at October 31, 2015, includes $24 billion in Deposits on the Consolidated Balance Sheet relating to covered bondholders (October 31, 2014 – $17 billion) and $2 billion (October 31, 2014 – $2 billion) due to TD Capital Trust IV. 3 Included in Other financial liabilities designated at fair value through profit or loss on the Consolidated Balance Sheet. 4 As at October 31, 2015, includes deposits of $438 billion (October 31, 2014 – $370 billion) denominated in U.S. dollars and $36 billion (October 31, 2014 – $21 billion) denominated in other foreign currencies. Term Deposits (millions of Canadian dollars) Personal Banks Business and government Designated at fair value through profit or loss1 Trading Total 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 2014 2015 Over 5 years Total Total 190 $ 50,415 $ 52,260 $ 28,539 $ 9,333 $ 6,130 $ 3,602 $ 2,621 $ 13 10,078 12,522 10,058 10,266 114,227 99,550 52,800 3,242 1,402 1,226 72,408 789 74,759 59,334 $ 165,031 $ 23,135 $ 22,562 $ 13,431 $ 15,464 $ 11,258 $ 250,881 $ 226,908 3 16,061 – 368 1 13,265 176 360 – 12,388 – 455 3 9,447 – 379 – 1 Included in Other financial liabilities designated at fair value through profit or loss on the Consolidated Balance Sheet. Term Deposits due within a Year (millions of Canadian dollars) Personal Banks Business and government Designated at fair value through profit or loss1 Trading Total 1 Included in Other financial liabilities designated at fair value through profit or loss on the Consolidated Balance Sheet. October 31 2015 As at October 31 2014 Within 3 months $ 11,316 8,900 26,415 383 29,111 $ 76,125 Over 3 months to 6 months Over 6 months to 12 months Total Total $ 7,075 774 6,622 282 27,238 $ 41,991 $ 10,148 384 19,763 561 16,059 $ 46,915 $ 28,539 10,058 52,800 1,226 72,408 $ 165,031 $ 29,399 12,502 49,188 1,849 57,655 $ 150,593 169 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 1 8 OTHER LIABILITIES Other Liabilities (millions of Canadian dollars) Accounts payable, accrued expenses, and other items Accrued interest Accrued salaries and employee benefits Cheques and other items in transit Current income tax payable Deferred tax liabilities Defined benefit liability Liabilities related to structured entities Provisions Total October 31 2015 $ 3,901 882 2,601 – 69 323 1,947 3,400 1,100 $ 14,223 As at October 31 2014 $ 3,666 943 2,653 237 34 287 2,393 5,053 631 $ 15,897 N O T E 1 9 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. Subordinated Notes and Debentures (millions of Canadian dollars, except as noted) Maturity date April 2, 20201 November 2, 20203 September 20, 20224 July 9, 2023 May 26, 2025 June 24, 20256 September 30, 20256 October 30, 21048 December 14, 2105 December 18, 2106 Total 1 On April 2, 2015 (“Redemption Date”), the Bank redeemed all of its outstanding $875 million 5.48% subordinated debentures due April 2, 2020, at a redemption price of 100% of the principal amount. Interest on the debentures ceased to accrue on and after the Redemption Date. 2 Interest rate is for the period to but excluding the earliest par redemption date, and thereafter, it will be reset at a rate of 3-month Bankers’ Acceptance rate plus the reset spread noted. 3 On September 15, 2015, the Bank announced its intention to redeem all of its outstanding $1 billion 3.367% subordinated debentures due November 2, 2020 on November 2, 2015, at a redemption price of 100% of the principal amount. 4 Obligation of a subsidiary. 5 Not applicable. REPAYMENT SCHEDULE The aggregate remaining maturities of the Bank’s subordinated notes and debentures are as follows: Interest rate (%) Reset spread (%) Earliest par redemption date October 31 2015 October 31 2014 As at 5.482 3.372 4.642 5.832 9.15 2.692 2.982 4.977 4.787 5.767 2.002 April 2, 2015 1.252 November 2, 2015 1.002 September 20, 2017 2.552 July 9, 2018 n/a5 – 1.212 June 24, 2020 1.832 September 30, 2020 1.777 October 30, 2015 1.747 December 14, 2016 1.997 December 18, 2017 $ – 998 267 650 199 1,489 1,000 – 2,235 1,799 $ 8,637 $ 869 997 268 650 199 – – 796 2,211 1,795 $ 7,785 6 Non-viability contingent capital (NVCC). The subordinated notes and debentures qualify as regulatory capital under OSFI’s CAR guideline. If a NVCC conversion were to occur in accordance with the NVCC Provisions, the maximum number of common shares that could be issued based on the formula for conversion set out in the respective prospectus supplements, assuming there are no declared and unpaid interest on the respective subordinated notes, as applicable, would be $450 million for the 2.692% subordinated debentures due June 24, 2025, and $300 million for the 2.982% subordinated debentures due September 30, 2025. 7 Interest rate is for the period to but excluding the earliest par redemption date, and thereafter, it will be reset every 5 years at a rate of 5-year Government of Canada yield plus the reset spread noted. 8 On October 30, 2015 (the “Redemption Date”), the Bank redeemed all of its outstanding $800 million 4.97% subordinated debentures due October 30, 2104, at a redemption price of 100% of the principal amount. Interest on the debentures ceased to accrue on and after the Redemption Date. 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 170 October 31 2015 $ 998 – – – 7,639 $ 8,637 As at October 31 2014 $ – – – – 7,785 $ 7,785 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 2 0 CAPITAL TRUST SECURITIES The Bank issued innovative capital securities through two structured entities: TD Capital Trust III (Trust III) and TD Capital Trust IV (Trust IV). TD CAPITAL TRUST III SECURITIES – SERIES 2008 On September 17, 2008, 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. TD CaTS III are reported on the Consolidated Balance Sheet as Non-controlling interests in subsidiaries because the Bank consolidates Trust III. TD CAPITAL TRUST IV NOTES – SERIES 1 TO 3 On January 26, 2009, 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-cumula- tive 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. The Bank does not consolidate Trust IV because it does not absorb significant returns of Trust IV as it is ultimately exposed only to its own credit risk. Therefore, TD CaTS IV Notes are not reported on the Bank’s Consolidated Balance Sheet but the deposit notes issued to Trust IV are reported in Deposits on the Consolidated Balance Sheet. Refer to Notes 10 and 17 for further details. 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, 2015, there was $450 million in principal amount of TD Capital Trust IV Notes – Series 2 issued and outstanding. 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 TD CaTS IV Notes issued by Trust IV TD Capital Trust IV Notes – Series 1 TD Capital Trust IV Notes – Series 2 TD Capital Trust IV Notes – Series 3 Thousands of units Distribution/Interest payment dates Annual At the option October 31 October 31 2014 of the issuer yield 2015 Redemption date As at 1,000 June 30, Dec. 31 7.243%1 Dec. 31, 20132 $ 964 $ 993 550 450 750 1,750 June 30, Dec. 31 June 30, Dec. 31 June 30, Dec. 31 9.523%3 June 30, 20144 10.000%5 June 30, 20144 6.631%6 Dec. 31, 20144 550 450 750 $ 1,750 550 450 750 $ 1,750 1 From and including September 17, 2008, 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. 4 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. Due to the phase-out of non-qualifying instruments under OSFI’s CAR guideline, the Bank expects to exercise a regulatory event redemption right in 2022 in respect of the TD CaTS IV – 2 outstanding at that time. 3 From and including January 26, 2009, to but excluding June 30, 2019. Starting on June 30, 2019, and on every fifth anniversary thereafter, the interest rate will reset to equal the then 5-year Government of Canada yield plus 10.125%. 5 From and including January 26, 2009, to but excluding June 30, 2039. Starting on June 30, 2039, and on every fifth anniversary thereafter, the interest rate will reset to equal the then 5-year Government of Canada yield plus 9.735%. 6 From and including September 15, 2009, to but excluding June 30, 2021. Starting on June 30, 2021, and on every fifth anniversary thereafter, the interest rate will reset to equal the then 5-year Government of Canada yield plus 4.0%. N O T E 2 1 EQUITY 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. Non-cumulative preferential dividends are payable quarterly, as and when declared by the Board of Directors of the Bank. Preferred shares issued after January 1, 2013, include NVCC Provisions, necessary for the preferred shares to qualify as regu- latory capital under OSFI’s CAR guideline. NVCC Provisions require the conversion of the preferred shares into a variable number of common shares of the Bank if OSFI determines that the Bank is, or is about to become, non-viable and that after conversion of all non-common capital instruments, the viability of the Bank is expected to be restored, or if the Bank has accepted or agreed to accept a capital injection or equivalent support from a federal or provincial government without which the Bank would have been determined by OSFI to be non-viable. 171 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS The following table summarizes the shares issued and outstanding and treasury shares held as at October 31. Common and Preferred Shares Issued and Outstanding and Treasury Shares Held (millions of shares and millions of Canadian dollars) October 31, 2015 October 31, 2014 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 Balance as at end of year – common shares Preferred Shares – Class A Series P1 Series Q2 Series R3 Series S Series T Series Y Series Z Series 14 Series 34 Series 54 Series 74 Series 94 Series 114 Balance as at end of year – preferred shares Treasury shares – common5 Balance as at beginning of year Purchase of shares Sale of shares Balance as at end of year – treasury shares – common Treasury shares – preferred5 Balance as at beginning of year Purchase of shares Sale of shares Balance as at end of year – treasury shares – preferred Number of shares 1,846.2 3.3 6.7 – 1,856.2 – – – 5.4 4.6 5.5 4.5 20.0 20.0 20.0 14.0 8.0 6.0 108.0 (1.6) (98.2) 98.7 (1.1) – (9.9) 9.8 (0.1) Amount $ 19,811 128 355 – $ 20,294 $ – – – 135 115 137 113 500 500 500 350 200 150 $ 2,700 $ $ $ $ (54) (5,269) 5,274 (49) (1) (244) 242 (3) Number of shares 1,838.9 5.0 6.4 (4.1) 1,846.2 10.0 8.0 10.0 5.4 4.6 5.5 4.5 20.0 20.0 – – – – 88.0 (3.9) (80.7) 83.0 (1.6) (0.1) (6.1) 6.2 – Amount $ 19,316 199 339 (43) $ 19,811 $ 250 200 250 135 115 137 113 500 500 – – – – $ 2,200 $ $ $ $ (145) (4,197) 4,288 (54) (2) (154) 155 (1) 1 On March 2, 2015, the Bank redeemed all of its 10 million outstanding Class A 4 Non-viability contingent capital. Series 1, 3, 5, 7, 9, and 11 Preferred Shares qualify First Preferred Shares, Series P (“Series P Shares”), at the cash redemption price of $25.607877 per Series P Share, for total redemption costs of approximately $256 million. 2 On March 2, 2015, the Bank redeemed all of its 8 million outstanding Class A First Preferred Shares, Series Q (“Series Q Shares”), at the cash redemption price of $25.615068 per Series Q Share, for total redemption costs of approximately $205 million. 3 On May 1, 2015, the Bank redeemed all of its 10 million outstanding Class A First Preferred Shares, Series R (“Series R Shares”), at the cash redemption price of $25.503836 per Series R Share, for total redemption costs of approximately $255 million. as regulatory capital under OSFI’s CAR guideline. If a NVCC conversion were to occur in accordance with the NVCC Provisions, the maximum number of common shares that could be issued based on the formula for conversion set out in the respective terms and conditions applicable to each Series of shares, assuming there are no declared and unpaid dividends on the respective Series of shares at the time of conversion, as applicable, would be 100 million, 100 million, 100 million, 70 million, 40 million, and 30 million, respectively. 5 When the Bank purchases its own shares as part of its trading business, they are classified as treasury shares and the cost of these shares is recorded as a reduction in equity. Preferred Shares Terms and Conditions Fixed Rate Preferred Shares Series 112 Rate Reset Preferred Shares4 Series S Series Y Series 12 Series 32 Series 52 Series 72 Series 92 Floating Rate Preferred Shares4,5 Series T Series Z Issue date Annual yield (%)1 Reset Next redemption/ Convertible into1 conversion date1 spread (%)1 July 21, 2015 4.9 n/a October 31, 20203 n/a June 11, 2008 July 16, 2008 June 4, 2014 July 31, 2014 December 16, 2014 March 10, 2015 April 24, 2015 July 31, 2013 October 31, 2013 3.371 3.5595 3.9 3.8 3.75 3.6 3.7 n/a n/a 1.60 July 31, 2018 1.68 October 31, 2018 2.24 October 31, 2019 2.27 July 31, 2019 January 31, 2020 2.25 2.79 July 31, 2020 2.87 October 31, 2020 Series T Series Z Series 2 Series 4 Series 6 Series 8 Series 10 July 31, 2018 1.60 1.68 October 31, 2018 Series S Series Y 1 Non-cumulative preferred dividends for each Series are payable quarterly, as and 3 Subject to regulatory consent, redeemable on or after October 31, 2020 at when declared by the Board of Directors. The dividend rate of the Rate Reset Preferred Shares will reset on the next redemption/conversion date and every five years thereafter to equal the then five-year Government of Canada bond yield plus the reset spread noted. Rate Reset Preferred Shares are convertible to the corre- sponding Series of Floating Rate Preferred Shares, and vice versa. If converted into a Series of Floating Rate Preferred Shares, the dividend rate for the quarterly period will be equal to the then 90-day Government of Canada Treasury bill yield plus the reset spread noted. 2 Non-viability contingent capital. a redemption price of $26.00, and thereafter, at a declining redemption price. 4 Subject to regulatory consent, redeemable on the redemption date noted and every five years thereafter, at $25 per share. Convertible on the conversion date noted and every five years thereafter if not redeemed. If converted, the holders have the option to convert back to the original Series of preferred shares every five years. 5 Subject to a redemption price of $25.50 per share if redeemed prior to July 31, 2018 for Series T and October 31, 2018 for Series Z. 172 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS STOCK DIVIDEND On January 31, 2014, the Bank paid 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 shares. NORMAL COURSE ISSUER BID On June 19, 2013, the Bank announced that the Toronto Stock Exchange (TSX) approved the Bank’s normal course issuer bid to repurchase, for cancellation, up to 24 million of the Bank’s common shares. The bid commenced on June 21, 2013, and expired in accordance with its terms in June 2014. During the year ended October 31, 2014, the Bank repurchased 4 million common shares under this bid at an average price of $54.15 for a total amount of $220 million. During the year ended October 31, 2013, the Bank repurchased 18 million common shares under this bid at an average price of $43.25 for a total amount of $780 million. 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 additional common shares. At the option of the Bank, the common shares may be issued from the Bank’s treasury at an average market price based on the last five trading days before the date of the divi- dend payment, with a discount of between 0% to 5% at the Bank’s discretion, or from the open market at market price. During the year, 6.7 million common shares at a discount of 0% were issued from the Bank’s treasury (2014 – 6.4 million common shares at a discount of 0%) under the dividend reinvestment plan. 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 interest 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. NON-CONTROLLING INTERESTS IN SUBSIDIARIES The following are included in non-controlling interests in subsidiaries of the Bank. (millions of Canadian dollars) REIT preferred stock, Series A TD Capital Trust III Securities – Series 20081 Total As at October 31 October 31 2014 2015 $ 646 964 $ 1,610 $ 556 993 $ 1,549 1 Refer to Note 20 for a description of the TD Capital Trust III securities. REIT Preferred Stock, Fixed-to-Floating Rate Exchangeable Non-Cumulative Perpetual Preferred Stock, Series A A real estate investment trust, Northgroup Preferred Capital Corpora- tion (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. Each Series A share may be automati- cally exchanged, without the consent of the holders, into a newly issued share of preferred stock of TD Bank, N.A. on the occurrence of certain events. N O T E 2 2 TRADING-RELATED INCOME Trading assets and liabilities, including trading derivatives, certain securities 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 following table. Trading income (loss) includes realized and unrealized gains and losses on trading assets and liabilities. Realized and unreal- ized 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. 173 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS For the years ended October 31 2015 $ 1,380 (223) (5) 1,152 636 467 54 (5) $ 1,152 2014 $ 1,337 (349) (9) 979 601 385 2 (9) $ 979 2013 $ 1,231 (279) (6) 946 557 368 27 (6) $ 946 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 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. There is also exposure to geographic concentration risk associated with personal property coverage. Exposure to insurance risk concentra- tion is managed through established underwriting guidelines, limits, and authorization levels that govern the acceptance of risk. Concentration of insurance risk is also mitigated through the purchase of reinsurance. The insurance business’ reinsurance programs are governed by catas- trophe and reinsurance risk management policies. Strategies are in place to manage the risk to the Bank’s reinsurance business. Underwriting risk on business assumed is managed through a policy that limits exposure to certain types of business and countries. The vast majority of reinsurance treaties are annually renewable, which minimizes long-term risk. Pandemic exposure is reviewed and estimated annually. OTHER RELATED RISKS The Bank’s mitigation of insurance risk through the purchase of reinsurance gives rise to counterparty credit risk exposure. This coun- terparty credit risk is managed through catastrophe and reinsurance risk management policies. To properly manage interest rate risk and liquidity risk, the Bank maintains a system to match a portion of its investments to the net provision for unpaid claims. Therefore, most of the change in the value of the assets held for matching purposes will be offset by a corresponding change in the net provision for unpaid claims’ discounted values. Interest rate risk and liquidity risk are managed through investment policies. INSURANCE REVENUE AND EXPENSES Insurance revenue is presented on the Consolidated Statement of Income under Insurance revenue and claims-related expenses are presented under Insurance claims and related expenses, including the impacts of claims and reinsurance on the Consolidated Statement of Income. 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 3 INSURANCE INSURANCE RISK The Bank is engaged in insurance businesses relating to property and casualty insurance, life and health insurance, and reinsurance through various subsidiaries; it is through these businesses that the Bank is exposed to 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 fluc- tuations in timing, actual size and/or frequency of claims (for example, driven by non-life premium risk, non-life reserving risk, catastrophic risk, mortality risk, morbidity risk, and longevity risk), policyholder behaviour, or associated expenses. Insurance contracts provide financial protection by transferring insured risks to the issuer in exchange for premiums. 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 who provide additional risk management oversight. The Bank’s risk governance practises 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 and monitors compliance with insurance risk policies. The Bank’s Insurance Risk Management Framework and Insurance Risk Policy collectively outline the internal risk and control structure to manage insurance risk and include risk appetite, policies, processes as well as limits and governance. These documents are maintained by Risk Management and support alignment with the Bank’s risk appetite for insurance risk. The Bank establishes reserves to cover estimated future payments (including loss adjustment expenses) on all claims arising from insur- ance 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. Claim liabilities are governed by the Bank’s general insurance reserving policy. 174 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Insurance Revenue and Insurance Claims and Related Expenses (millions of Canadian dollars) Insurance Revenue Earned Premiums Gross Reinsurance ceded Net earned premiums Fee income and other revenue1 Insurance Revenue Insurance Claims and Related Expenses Gross Reinsurance ceded Insurance Claims and Related Expenses 1 Ceding commissions received and paid are included within fee income and other revenue. Ceding commissions paid and netted against fee income in 2015 were $177 million (2014 – $182 million; 2013 – $182 million). 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 the following section (a)) and unearned premiums (see the following section (b)). For the years ended October 31 2015 2014 2013 $ 4,220 891 3,329 429 3,758 2,734 234 $ 2,500 $ 4,423 856 3,567 316 3,883 3,041 208 $ 2,833 $ 4,253 836 3,417 317 3,734 3,273 217 $ 3,056 (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) in other recoverables Balance as at end of year October 31, 2015 October 31, 2014 Reinsurance/ Other recoverable $ 148 6 Gross $ 4,371 2,415 Net $ 4,223 2,409 Gross1 $ 3,962 2,504 Reinsurance/ Other recoverable1 $ 180 39 Net $ 3,782 2,465 (163) 18 41 2,311 (1,003) (929) (1,932) 7 $ 4,757 11 – – 17 – (34) (34) 7 $ 138 (174) (132) (39) (93) 18 41 2,294 (1,003) (895) (1,898) – $ 4,619 (17) 44 2,399 (1,064) (934) (1,998) 8 $ 4,371 1 (1) – (3) (37) (40) 8 $ 148 (18) 45 2,399 (1,061) (897) (1,958) – $ 4,223 1 Certain comparative amounts have been restated to conform with the presentation adopted in the current year. (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, 2015 October 31, 2014 Gross Reinsurance Net Gross Reinsurance $ 1,559 3,074 (3,043) $ 1,590 – $ 87 (87) – $ $ 1,559 2,987 (2,956) $ 1,590 $ 1,506 3,006 (2,953) $ 1,559 – $ 91 (91) – $ Net $ 1,506 2,915 (2,862) $ 1,559 (c) Other Movements in Insurance Liabilities Other movements of $310 million in insurance liabilities (October 31, 2014 – $297 million) 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 eight 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. 175 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Incurred Claims by Accident Year (millions of Canadian dollars) Net ultimate claims cost at end 2008 and prior 2009 2010 2011 2012 2013 2014 2015 Total Accident year of accident year Revised estimates One year later Two years later Three years later Four years later Five years later Six years later Seven years later Current estimates of cumulative claims Cumulative payments to date Net undiscounted provision for unpaid claims Effect of discounting Provision for adverse deviation Net provision for unpaid claims $ 3,335 $ 1,598 $ 1,742 $ 1,724 $ 1,830 $ 2,245 $ 2,465 $ 2,409 3,366 3,359 3,422 3,527 3,630 3,612 3,646 1,627 1,663 1,720 1,763 1,753 1,756 – 1,764 1,851 1,921 1,926 1,931 – – 1,728 1,823 1,779 1,768 – – – 1,930 1,922 1,884 – – – – 2,227 2,191 – – – – – 2,334 – – – – – – – – – – – – – 3,646 (3,376) 1,756 (1,633) 1,931 (1,711) 1,768 (1,481) 1,884 (1,404) 2,191 (1,473) 2,334 (1,383) 2,409 (1,003) 270 123 220 287 480 718 951 1,406 $ 4,455 (249) 413 $ 4,619 SENSITIVITY TO INSURANCE RISK A variety of assumptions are made related to the 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 based on various quantitative and qualitative factors including the discount rate, the margin for adverse deviation, reinsurance, trends in claims severity and frequency, and other external drivers. 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 report- ing and final settlements of claims. The following table outlines the sensitivity of the Bank’s property and casualty insurance claims liabilities to reasonably possible move- ments in the discount rate, the margin for adverse deviation, and the frequency and severity of claims, with all other assumptions held constant. Movements in the assumptions 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 Impact of an absolute change of 5% in key assumptions Frequency of claims Increase in assumption Decrease in assumption Severity of claims Increase in assumption Decrease in assumption October 31, 2015 October 31, 2014 Impact on net income (loss) before income taxes Impact on equity Impact on net income (loss) before income taxes Impact on equity $ 127 (136) (45) 45 (32) 32 (219) 219 $ 94 (100) (33) 33 (24) 24 (161) 161 $ 118 (126) (41) 41 (31) 31 (200) 200 $ 87 (93) (30) 30 (23) 23 (147) 147 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. 176 TD BANK GROUP ANNUAL REPORT 2015 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, by 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, 2015, for the property and casualty insurance business, 68.9% of net written premiums were derived from auto- mobile policies (October 31, 2014 – 70.3%) followed by residential with 30.6% (October 31, 2014 – 29.4%). The distribution by provinces show that business is mostly concentrated in Ontario with 59.0% of net written premiums (October 31, 2014 – 60.6%). The Western provinces represented 28.8% (October 31, 2014 – 27.7%) followed by the Atlantic provinces with 6.3% (October 31, 2014 – 5.6%) and Québec, 5.9% (October 31, 2014 – 6.1%). 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 $1.2 million (October 31, 2014 – $3.1 million), the majority of claims are less than $250 thousand (October 31, 2014 – $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 under- standing of exposure to this risk, a pandemic scenario is tested annually. N O T E 2 4 SHARE-BASED COMPENSATION STOCK OPTION PLAN The Bank maintains a stock option program for certain key employees. 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, 23.6 million common shares have been reserved for future issuance (October 31, 2014 – 25.9 million). The outstanding options expire on various dates to December 11, 2024. The following table summarizes the Bank’s stock option activity and related information, adjusted to reflect the impact of the stock dividend as discussed in Note 21 on a retrospective basis, for the years ended October 31. 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 2015 Weighted- average of shares exercise price Number 19.4 2.6 (3.3) (0.3) 18.4 $ 36.72 52.46 30.31 44.25 $ 40.65 2014 Weighted- average exercise price $ 33.89 47.59 31.32 39.60 $ 36.72 Number of shares 22.0 2.6 (5.0) (0.2) 19.4 7.0 $ 35.90 7.1 $ 31.18 2013 Weighted- average exercise price $ 31.00 40.54 27.60 36.64 $ 33.89 $ 29.67 Number of shares 27.5 3.3 (8.4) (0.4) 22.0 8.8 The weighted average share price for the options exercised in 2015 was $53.98 (2014 – $52.15; 2013 – $43.26). The following table summarizes information relating to stock options outstanding and exercisable as at October 31, 2015. Range of Exercise Prices (millions of shares and Canadian dollars) $21.25 – $32.99 $36.03 – $36.64 $39.21 – $40.54 $43.06 – $44.25 $45.31 – $52.46 For the year ended October 31, 2015, the Bank recognized compensation expense for stock option awards of $19.8 million (October 31, 2014 – $25.6 million; October 31, 2013 – $24.8 million). For the year ended October 31, 2015, 2.6 million (October 31, 2014 – 2.6 million; October 31, 2013 – 3.3 million) options were granted by the Bank at a weighted-average fair value of $9.06 per option (2014 – $9.29 per option; 2013 – $7.83 per option). The following table summarizes the assumptions used for estimating the fair value of options for the twelve months ended October 31. Options outstanding Options exercisable Number of shares outstanding Weighted- average remaining contractual Weighted- average life (years) exercise price 2.7 6.0 3.6 1.1 5.0 3.4 5.6 6.3 2.3 8.4 $ 31.28 36.63 40.35 43.42 50.01 Number of shares Weighted- average exercisable exercise price 2.7 2.6 0.5 1.1 0.1 $ 31.28 36.62 39.21 43.42 45.31 Assumptions Used for Estimating Fair Value of Options (in Canadian dollars, except as noted) 2015 2014 2013 Risk-free interest rate Expected option life (years) Expected volatility1 Expected dividend yield Exercise price/share price 1.44% 1.90% 1.43% 6.3 years 25.06% 3.65% 6.2 years 27.09% 3.66% 6.3 years 27.23% 3.51% $ 52.46 $ 47.59 $ 40.54 1 Expected volatility is calculated based on the average daily volatility measured over a historical period corresponding to the expected option life. 177 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS 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. During the vesting period, dividend equivalents accrue to the participants in the form of additional share units. At the maturity date, the participant receives cash representing the value of the share units. The final number of performance share units will vary from 80% to 120% of the number of units outstanding at maturity (consisting of initial units awarded plus additional units in lieu of dividends) based on the Bank’s total share- holder return relative to the average of a peer group of large financial institutions. The number of such share units outstanding under these plans as at October 31, 2015, was 26 million (2014 – 26 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 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 units 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, 2015, 6.5 million deferred share units were outstanding (October 31, 2014 – 7.6 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, 2015, the Bank recognized compensation expense, net of the effects of hedges, for these plans of $441 million (2014 – $415 million; 2013 – $336 million). The compensation expense recognized before the effects of hedges was $471 million (2014 – $718 million; 2013 – $621 million). The carrying amount of the liability relating to these plans, based on the closing share price, was $1.6 billion at October 31, 2015 (October 31, 2014 – $1.8 billion), and is reported in Other liabilities on the Consoli- dated Balance Sheet. EMPLOYEE OWNERSHIP PLAN The Bank also operates a share purchase plan available to Canadian employees. Employees can contribute any amount of their eligible earnings (net of source deductions), subject to an annual cap of 10% of salary effective January 1, 2014, 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, 2015, the Bank’s contributions totalled $67 million (2014 – $65 million; 2013 – $63 million) and were expensed as salaries and employee benefits. As at October 31, 2015, an aggregate of 20 million common shares were held under the Employee Ownership Plan (October 31, 2014 – 20 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 the Bank’s common shares held by the Employee Ownership Plan are used to purchase additional common shares for the Employee Ownership Plan in the open market. N O T E 2 5 EMPLOYEE BENEFITS 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) (TDPP), are defined benefit plans for Canadian Bank 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 ten years of combined plan membership. Funding for the Bank’s principal pension plans is provided by contributions from the Bank and members of the plans, as applicable. In accordance with legislation, the Bank contributes amounts, as 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 2015 were $357 million (2014 – $302 million). The 2015 contributions were made in accordance with the actuarial valuation reports for funding purposes as at October 31, 2014, for both of the principal pension plans. The 2014 contributions were made in accor- dance with the actuarial valuation reports for funding purposes as at October 31, 2013, and October 31, 2011, for the Society and the TDPP, respectively. The next valuation date for funding purposes is as at October 31, 2015, for both of the principal pension plans. The Bank also provides certain post-retirement benefits, which are generally non-funded. Post-retirement 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. 178 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 ten-year periods. The investments of the Society and the TDPP are managed with the primary objective of providing reasonable and stable rates of return, consistent with available market opportunities, prudent portfolio management, and levels of risk commensurate with the return expectations and asset mix policy as set out by the risk budget of 8% and 15% surplus volatility, respectively. The investment policies for the principal pension plans exclude Pension Enhancement Account (PEA) assets which are invested at the member’s discretion in certain mutual funds. Public debt instruments of both the Society and the TDPP 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+ for the total public debt portfolio. With respect to the Society’s public debt portfolio, up to 15% of the total fund can be invested in a bond mandate subject to the following constraints: debt instruments rated BBB+ to BBB- must not exceed 25%; asset-backed securities must have a minimum credit rating of AAA and not exceed 25% of the mandate; debt instruments of non-government entities must not exceed 80%; debt instruments of non-Canadian government entities must not exceed 20%; debt instru- ments of a single non-government or non-Canadian government entity must not exceed 10%; and debt instruments issued by the Govern- ment of Canada, provinces of Canada, or municipalities must not exceed 100%, 75%, or 10%, respectively. Also with respect to the Society’s public debt portfolio, up to 14% of the total fund can be invested in a bond mandate subject to the following constraints: debt instruments rated BBB+ to BBB- must not exceed 25%; asset-backed securities must have a minimum credit rating of AAA and not exceed 25% of the mandate; and there is a limitation of 10% for any one issuer. The remainder of the public debt portfolio is not permitted to invest in debt instruments of non-government entities. TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTSThe TDPP is not permitted to invest in debt instruments of non- government entities. The equity portfolios of both the Society and the TDPP are 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 are permitted to be included to further diversify the portfolio. A maximum of 10% of a total fund may be invested in emerging market equities. For both the Society and the TDPP, derivatives can be utilized provided they are not used to create financial leverage, but rather for risk management purposes. The Society is also permitted to invest in other alternative investments, such as private equities. The asset allocations by asset category for the principal pension plans (excluding PEA assets) are as follows: Plan Asset Allocation (millions of Canadian dollars, except as noted) As at October 31, 2015 Debt Equity Alternative investments1 Other2 Total As at October 31, 2014 Debt Equity Cash equivalents Alternative investments1 Other2 Total As at October 31, 2013 Debt Equity Cash equivalents Alternative investments1 Other2 Total Acceptable range 58-76% 24-42 0-10 n/a 58-72% 24-34.5 0-4 0-12.5 n/a 58-72% 24-34.5 0-4 0-12.5 n/a % of total 64% 30 6 n/a 100% 60% 32 2 6 n/a 100% 58% 34 2 6 n/a 100% Society1 Fair value Quoted Unquoted $ – 1,015 37 – $ 1,052 $ – 1,228 – 40 – $ 1,268 – $ 1,086 – 37 – $ 1,123 $ 2,852 346 227 74 $ 3,499 $ 2,489 84 93 188 101 $ 2,955 $ 2,094 138 79 162 157 $ 2,630 Acceptable range 44-56% 44-56 n/a n/a 44-56% 44-56 n/a n/a n/a 44-56% 44-56 n/a n/a n/a % of total 50% 50 n/a n/a 100% 50% 50 n/a n/a n/a 100% 49% 51 n/a n/a n/a 100% TDPP1 Fair value Quoted Unquoted $ – – n/a – – $ $ – – n/a n/a – – $ $ – – n/a n/a – – $ $ 369 374 n/a 33 $ 776 $ 277 280 n/a n/a 25 $ 582 $ 199 208 n/a n/a 17 $ 424 1 The Society’s alternative investments primarily include private equity funds, of which a fair value of nil as at October 31, 2015 (October 31, 2014 – nil; October 31, 2013 – $1 million) is invested in the Bank and its affiliates. The principal pension plans also invest in investment vehicles which may hold shares or debt issued by the Bank. 2 Consists mainly of PEA assets, interest and dividends receivable, and amounts due to and due from brokers for securities traded but not yet settled. 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, interest rate, inflation, and price risks), credit risk, longevity risk and liquidity risk. Key material risks faced by all plans are a decline in interest rates or credit spreads, which could increase the defined benefit obligation by more than the change in the value of plan assets, or from longevity risk (that is, lower mortality rates). Asset-liability matching strategies are focused on obtaining an appropriate balance between earning an adequate return and having changes in liability values being hedged by changes in asset values. The principal pension plans manage these financial 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 The Bank’s principal pension plans are overseen by a single retirement governance structure established by the Human Resources Committee of the Bank’s Board of Directors. The governance structure utilizes retirement governance committees who have responsibility to oversee plan operations and investments, acting in a fiduciary capacity. Where required, approvals will also be sought from the applicable local body to comply with local regulatory requirements. Strategic, material plan changes require the approval of the Bank’s Board of Directors. 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. The Bank received regulatory approval to wind-up the defined contribution portion of the plan effective April 1, 2011. The wind-up was completed on May 31, 2012. Funding for the defined benefit portion is provided by contributions from the Bank and members of the plan. TD Bank, N.A. Retirement Plans TD Bank, N.A. and its subsidiaries maintain a defined contribution 401(k) plan covering all employees. The contributions to the plan for the year ended October 31, 2015 were $103 million (October 31, 2014 – $92 million; October 31, 2013 – $81 million), which included core and matching contributions. Annual expense is equal to the Bank’s contributions to the plan. 179 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS TD Bank, N.A. also has frozen defined benefit retirement plans covering certain legacy TD Banknorth and TD Auto Finance (legacy Chrysler Financial) employees. TD Bank, N.A. also has closed post-retirement benefit plans, which include limited medical coverage and life insurance benefits, covering certain TD Auto Finance (legacy Chrysler Financial) employees. 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 principal 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) Change in projected benefit obligation Projected benefit obligation at beginning of year Obligations included due to TD Auto Finance plan merger3 Service cost – benefits earned Interest cost on projected benefit obligation Remeasurement (gain) loss – financial Remeasurement (gain) loss – demographic Remeasurement (gain) loss – experience Members’ contributions Benefits paid Change in foreign currency exchange rate Past service cost (credit)4 Projected benefit obligation as at October 31 Change in plan assets Plan assets at fair value at beginning of year Assets included due to TD Auto Finance plan merger3 Interest income on plan assets Remeasurement gain (loss) – return on plan assets less interest income Members’ contributions Employer’s contributions Benefits paid Change in foreign currency exchange rate Defined benefit administrative expenses Plan assets at fair value as at October 31 Net defined benefit asset (liability) Annual expense Net employee benefits expense includes the following: Service cost – benefits earned Net interest cost (income) on net defined benefit liability (asset) Past service cost (credit)4 Defined benefit administrative expenses 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 Actuarial assumptions used to determine the projected benefit obligation as at October 31 (percentage) Weighted-average discount rate for projected benefit obligation Weighted-average rate of compensation increase Principal pension plans 2015 2014 2013 $ 5,321 $ 4,338 – 282 205 591 44 (1) 66 (204) – – 5,321 – 359 219 (279) 18 (71) 69 (259) – – 5,377 $ 4,143 – 278 184 (234) 98 (3) 65 (193) – – 4,338 4,805 – 205 4,177 – 208 3,743 – 175 158 69 357 (259) – (8) 5,327 (50) 264 66 302 (204) – (8) 4,805 (516) 54 65 340 (193) – (7) 4,177 (161) Principal non-pension post-retirement benefit plan1 2013 2014 2015 Other pension and retirement plans2 2013 2014 2015 $ 557 – 20 23 (12) – (21) – (14) – – 553 – – – – – 14 (14) – – – (553) $ 551 – 18 26 50 (82) 6 – (12) – – 557 – – – – – 12 (12) – – – (557) $ 526 $ 2,644 19 13 113 (35) (11) 17 – (251) 264 (30) 2,743 – 17 24 (29) 30 (7) – (10) – – 551 $ 2,196 – 10 106 188 129 17 – (114) 106 6 2,644 $ 2,325 – 12 92 (223) 19 10 – (100) 61 – 2,196 – – – 1,734 18 76 1,575 – 77 1,462 – 56 – – 10 (10) – – – (551) (31) – 153 (251) 216 (5) 1,910 (833) 72 – 35 (114) 98 (9) 1,734 (910) 86 – 26 (100) 49 (4) 1,575 (621) 359 282 278 20 18 17 14 – 8 (3) – 7 $ 381 $ 286 9 – 7 $ 294 23 – – $ 43 26 – – $ 44 24 – – $ 41 $ 13 37 (30) 8 28 $ 10 29 6 5 50 $ 12 36 – 4 52 4.21% 2.86 4.42% 2.63 4.82% 2.83 4.53% 2.82 4.21% 2.86 4.82% 2.83 4.30% 3.50 4.80% 3.50 4.40% 3.25 4.30% 3.50 4.50% 3.50 4.27% 4.75% 1.29 1.43 4.01% 1.37 4.80% 3.50 4.39% 4.27% 1.20 1.30 4.75% 1.43 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 5.35%. The rate is assumed to decrease gradually to 3.60% by the year 2028 and remain at that level thereafter. 2 Includes CT defined benefit pension plan, TD Banknorth defined benefit pension plan, TD Auto Finance retirement plans, and supplemental employee retirement plans. Other employee benefit plans operated by the Bank and certain of its subsidiaries are not considered material for disclosure purposes. 3 Effective December 31, 2014, certain TD Auto Finance retirement plans were merged and certain previously undisclosed obligations and assets are now included for the current year. The opening balances of these obligations and assets for the year ended October 31, 2015, were $19 million and $18 million, respectively (October 31, 2014 – $14 million and $16 million; October 31, 2013 – $16 million and $15 million, respectively). 4 Includes a settlement gain of $35 million related to a portion of the TD Banknorth defined benefit pension plan that was settled during the period. 180 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS During the year ended October 31, 2016, the Bank expects to contribute $335 million to its principal pension plans, $16 million to its principal non-pension post-retirement benefit plan, and $40 million to its other pension and retirement plans. Future contribution amounts may change upon the Bank’s review of its contribution levels during the year. Assumptions related to future mortality which have been used to determine the defined benefit obligation and net benefit cost are as follows: Assumed Life Expectancy at Age 65 (number of years) Principal pension plans Principal non-pension post-retirement benefit plan Male aged 65 at measurement date Female aged 65 at measurement date Male aged 40 at measurement date Female aged 40 at measurement date 2015 22.1 23.9 23.3 25.1 2014 21.9 23.8 23.2 25.0 2013 22.0 23.2 23.2 24.1 2015 2014 2013 22.1 23.9 23.3 25.1 21.9 23.8 23.2 25.0 22.0 23.2 23.2 24.1 2015 22.0 24.0 22.5 25.0 Other pension and retirement plans As at October 31 2014 22.0 23.3 23.1 25.6 2013 20.2 21.9 20.7 22.2 The weighted-average duration of the defined benefit obligation for the Bank’s principal pension plans, principal non-pension post-retire- ment benefit plan and other pension and retirement plans at the end of the reporting period are 16 years (2014 – 16 years, 2013 – 15 years), 17 years (2014 – 18 years, 2013 – 17 years), and 13 years (2014 – 13 years, 2013 – 13 years), respectively. The following table provides the sensitivity of the projected benefit obligation and expenses for the Bank’s principal pension plans, the principal non-pension post-retirement benefit plan, and the Bank’s significant other pension and retirement plans to actuarial assumptions considered significant by the Bank. These include discount rate, life expectancy, rates of compensation increase, and health care cost initial trend rates, as applicable. For each sensitivity test, the impact of a reasonably possible change in a single factor is shown with other assumptions left unchanged. Sensitivity of Significant Actuarial Assumptions (millions of Canadian dollars, except as noted) Impact of an absolute change in significant actuarial assumptions Discount rate 1% decrease in assumption 1% increase in assumption Rates of compensation increase 1% decrease in assumption 1% increase in assumption Life expectancy 1 year decrease in assumption 1 year increase in assumption Health care cost initial trend rate 1% decrease in assumption 1% increase in assumption 1 An absolute change in this assumption is immaterial. As at October 31, 2015 For the year ended October 31, 2015 Principal non-pension post- retirement benefit plan Principal pension plans Obligation Other pension and retirement plans Principal non-pension post- retirement benefit plan Principal pension plans Expense Other pension and retirement plans $ 907 (705) (275) 298 (103) 102 n/a n/a $ 103 (80) n/a1 n/a1 (18) 18 (82) 105 $ 404 (324) (1) 1 (75) 76 (4) 5 $ 109 (96) (53) 58 (16) 16 n/a n/a $ 4 (3) n/a1 n/a1 (2) 2 (8) 11 $ 8 (12) n/a1 n/a1 (3) 3 n/a1 n/a1 181 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS The Bank recognized the following amounts on the Consolidated Balance Sheet as at October 31. Amounts Recognized in the Consolidated Balance Sheet (millions of Canadian dollars) Other assets Principal pension plans Other pension and retirement plans1 Other employee benefit plans2 Total other assets Other liabilities Principal pension plans Principal non-pension post-retirement benefit plan Other pension and retirement plans1 Other employee benefit plans2 Total other liabilities Net amount recognized October 31 2015 October 31 2014 $ 95 – 9 104 145 553 833 416 1,947 $ (1,843) $ – 9 6 15 516 557 919 401 2,393 $ (2,378) As at October 31 2013 $ – 52 4 56 161 551 673 330 1,715 $ (1,659) 1 Effective December 31, 2014, certain TD Auto Finance retirement plans were merged. For the current year, these assets and liabilities have been included in Other pension and retirement plans. Previously, these assets or liabilities were included in Other employee benefit plans. 2 Consists of other defined benefit pension and other post-employment benefit plans operated by the Bank and its subsidiaries that are not considered material for disclosure purposes. The Bank recognized the following amounts in the Consolidated Statement of Other Comprehensive Income. Amounts Recognized in the Consolidated Statement of Other Comprehensive Income1 (millions of Canadian dollars) For the years ended October 31 2015 October 31 2014 October 31 2013 $ 490 33 1 23 $ 547 $ (371) 26 (266) (57) $ (668) $ 193 6 280 32 $ 511 3 Consists of other defined benefit pension and other post-employment benefit plans operated by the Bank and its subsidiaries that are not considered material for disclosure purposes. Actuarial gains (losses) recognized in Other Comprehensive Income Principal pension plans Principal non-pension post-retirement benefit plan Other pension and retirement plans2 Other employee benefit plans3 Total actuarial gains (losses) recognized in Other Comprehensive Income 1 Amounts are presented on pre-tax basis. 2 Effective December 31, 2014, certain TD Auto Finance retirement plans were merged. For the current year, these actuarial gains or losses have been included in Other pension and retirement plans. Previously, these actuarial gains or losses were included in Other employee benefit plans. 182 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 2 6 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 (recovery of) 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 Other – net Provision for income taxes and effective income tax rate For the years ended October 31 2015 2014 2013 $ 1,881 (6) 1,875 $ 1,450 31 1,481 $ 1,619 (114) 1,505 (372) (1) 8 13 (352) 1,523 (1,279) 414 (865) 14 51 65 723 53 61 496 610 37 1 (11) 4 31 1,512 (623) (269) (892) (9) (4) (13) 607 413 284 152 849 220 134 (241) 113 $ 723 (72) (44) (126) (242) $ 607 (398) 8 (2) 22 (370) 1,135 (699) (221) (920) (17) 40 23 238 353 245 191 789 (4) (5) (542) (551) $ 238 2013 26.3% (3.4) (6.5) (1.3) 15.1% 183 2015 2014 $ 2,409 26.3% $ 2,385 26.3% $ 1,970 (319) (556) (11) $ 1,523 (3.5) (6.1) (0.1) 16.6% (321) (489) (63) $ 1,512 (3.5) (5.4) (0.7) 16.7% (253) (487) (95) $ 1,135 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Deferred tax assets and liabilities are comprised of the following. Deferred Tax Assets and Liabilities1 (millions of Canadian dollars) Deferred tax assets Allowance for credit losses Land, buildings, equipment, and other depreciable assets Deferred (income) expense Trading loans Employee benefits Pensions Losses available for carry forward Tax credits Other Total deferred tax assets2 Deferred tax liabilities Securities Intangibles Goodwill Total deferred tax liabilities Net deferred tax assets Reflected on the Consolidated Balance Sheet as follows: Deferred tax assets Deferred tax liabilities3 Net deferred tax assets October 31 2015 As at October 31 2014 $ 737 19 65 124 714 114 260 399 322 2,754 664 404 78 1,146 1,608 1,931 323 $ 1,608 $ 582 7 30 124 695 367 256 357 123 2,541 524 287 9 820 1,721 2,008 287 $ 1,721 1 Certain comparative amounts have been reclassified to conform with the presenta- 3 Included in Other liabilities on the Consolidated Balance Sheet. tion adopted in the current period. 2 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 $21 million as at October 31, 2015 (October 31, 2014 – $18 million), of which $11 million (October 31, 2014 – $8 million) is scheduled to expire within five years. The movement in the net deferred tax asset for the years ended October 31 was as follows: Deferred Income Tax Expense (Recovery) (millions of Canadian dollars) Consolidated statement of income Other comprehensive income Business combinations and other 2015 Total Consolidated statement of income Other comprehensive income Business combinations and other 20141 Total Deferred income tax expense (recovery) Allowance for credit losses Land, buildings, equipment, and other depreciable assets Deferred (income) expense Trading loans Goodwill Employee benefits Losses available for carry forward Tax credits Other deferred tax assets Securities Intangible assets Pensions Total deferred income tax $ (155) $ – $ – $ (155) $ (25) $ – $ – $ (25) (12) (35) – 12 (27) (4) (42) (193) (124) 117 111 – – – – 8 – – – 264 – 142 – – – 57 – – – (6) – – – (12) (35) – 69 (19) (4) (42) (199) 140 117 253 (16) 13 7 2 (5) 57 3 202 (13) (95) (99) – – – – (2) – – – (76) – (191) – – – – – – – (4) – – – (16) 13 7 2 (7) 57 3 198 (89) (95) (290) expense (recovery) $ (352) $ 414 $ 51 $ 113 $ 31 $ (269) $ (4) $ (242) 1 Certain comparative amounts have been reclassified to conform with the presentation adopted in the current year. 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, 2015. The total amount of these temporary differences was $48 billion as at October 31, 2015 (October 31, 2014 – $37 billion). 184 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 2 7 EARNINGS PER SHARE Basic earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is calculated using the same method as basic earnings per share except that certain adjustments are made to 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. 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 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) Weighted-average number of common shares outstanding – diluted (millions) Diluted earnings per share (dollars)1 1 For the years ended October 31, 2015, October 31, 2014, and October 31, 2013, the computation of diluted earnings per share did not include any weighted- average options where the option price was greater than the average market price of the Bank’s common shares. The following table presents the Bank’s basic and diluted earnings per share for the years ended October 31, and reflects the impact of the stock dividend, as discussed in Note 21, on the Bank’s basic and diluted earnings per share, as if it was retrospectively applied to all periods presented. For the years ended October 31 2015 2014 2013 $ 7,813 1,849.2 4.22 $ 7,633 1,839.1 4.15 $ 6,350 1,837.9 3.46 7,813 7,633 6,350 – $ 7,813 1,849.2 4.9 – 1,854.1 4.21 $ – $ 7,633 1,839.1 6.2 – 1,845.3 4.14 $ 3 $ 6,353 1,837.9 5.7 1.5 1,845.1 3.44 $ N O T E 2 8 PROVISIONS, CONTINGENT LIABILITIES, COMMITMENTS, GUARANTEES, PLEDGED ASSETS, AND COLLATERAL PROVISIONS The following table summarizes the Bank’s provisions. Provisions (millions of Canadian dollars) Balance as at November 1, 2014 Additions Amounts used Release of unused amounts Foreign currency translation adjustments and other Balance as of October 31, 2015, before allowance for credit losses for off-balance sheet instruments Add: allowance for credit losses for off-balance sheet instruments2 Balance as of October 31, 2015 1 Includes provisions for onerous lease contracts. 2 Refer to Note 8 for further details. Litigation Restructuring1 $ 168 172 (179) (11) 16 $ 55 733 (261) (47) 6 Asset retirement obligations $ 68 – – (1) 3 Other $ 66 96 (79) (22) 4 $ 166 $ 486 $ 70 $ 65 Total $ 357 1,001 (519) (81) 29 $ 787 313 $ 1,100 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, although it is possi- ble the Bank may incur additional losses and actual losses may vary significantly from the current estimate. The Bank believes the estimate of the aggregate range of reasonably possible losses (i.e. those which are neither probable nor remote), in excess of provisions, for its legal proceedings where it is possible to make such an estimate, is from zero to approximately $389 million as at October 31, 2015. This represents the Bank’s best estimate based upon currently available information for actions for which an estimate can be made. Actions for which the Bank cannot currently make an estimate, such as those which are in a preliminary stage or for which no specific amount is claimed, have not been included. The Bank’s estimate involves significant judgment, given the varying stages of the proceedings, the existence of multiple defendants in many of such proceedings whose share of liability has yet to be determined and the fact that the underlying matters will change from time to time. 185 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS In management’s opinion, based on its current knowledge and after consultation with counsel, the ultimate disposition 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 opera- tions 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 Southern District of Florida confirmed a liquidation plan for the RRA bankruptcy estate that includes a litigation bar order in favor of TD Bank, N.A. (the “Bar Order”). Two civil matters, Coquina Invest- ments v. TD Bank, N.A. et al. and Razorback Funding, LLC, et al. v. TD Bank, N.A., et al., were exempted from the Bar Order, but both matters are now concluded. 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. 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, and a second distribution to eligible class members of residual settlement funds was made in October 2014. The Court retains jurisdiction over class members and distributions. TD Bank, N.A. was subsequently named as a defendant in eleven putative nationwide class actions challenging the overdraft practices of TD Bank, N.A. from August 16, 2010 to the present: King, et al. v. TD Bank, N.A f/k/a Carolina First Bank (D.S.C.); Padilla, et al. v. TD Bank, N.A. (E.D. Pa.); Hurel v. TD Bank, N.A. and The Toronto- Dominion Bank (D.N.J.); Koshgarian v. TD Bank, N.A. and The Toronto-Dominion Bank (S.D.N.Y.); Goodall v. The Toronto-Dominion Bank and TD Bank, N.A. (M.D. FL.); Klein et al. v. TD Bank, N.A. (D.N.J.); Ucciferri v. TD Bank, N.A. (D.N.J.); and Austin v. TD Bank, N.A. (D. Conn.); Robinson v. TD Bank, N.A. (S.D. Fla.) (“Robinson Case No. 60469”); Robinson v. TD Bank, N.A. (S.D. Fla.) (“Robinson Case No. 60476”); and Mingrone v. TD Bank, N.A. (E.D.N.Y.). The King action further challenges the overdraft practices of Carolina First Bank prior to its merger into TD Bank, N.A. in September 2010. The Toronto-Dominion Bank was also named as a defendant in the Hurel, Koshgarian, and Goodall actions, but was subsequently dismissed without prejudice in Hurel. All of the actions have been consolidated for pretrial proceedings as MDL 2613 in the United States District Court for the District of South Carolina. The plaintiffs filed a consolidated amended class action complaint on June 19, 2015, which governs all of the consolidated cases other than Mingrone and Robinson Case No. 15-60476. On July 21, 2015, the Mingrone class action complaint was dismissed without prejudice. The Toronto- Dominion Bank was not named as a defendant in the consolidated amended class action complaint. TD Bank, N.A. has moved to dismiss the consolidated amended class action complaint in part. Gevaerts Litigation TD Bank, N.A. was named as a defendant in Gevaerts, et al. v. TD Bank, et al., a purported class action lawsuit in the United States District Court for the Southern District of Florida related to an alleged $223 million fraud scheme orchestrated by Ms. Deborah Peck, a former customer of TD Bank, N.A., among others. On November 5, 2015, the court approved a settlement between TD Bank, N.A. and the plaintiffs. The claims against TD Bank, N.A. will be dismissed with prejudice under the terms of the settlement. Interchange Fee Class Actions Between 2011 and 2013, seven proposed class actions were commenced in British Columbia, Alberta, Saskatchewan, Ontario and Québec: Coburn and Watson’s Metropolitan Home v. Bank of America Corporation, et al.; 1023916 Alberta Ltd. v. Bank of America Corpora- tion, et al.; Macaronies Hair Club v. BOFA Canada Bank, et al.; The Crown & Hand Pub Ltd. v. Bank of America Corporation, et al.; Hello Baby Equipment Inc. v. BOFA Canada Bank, et al.; Bancroft-Snell, et al. v. Visa Canada Corporation, et al.; and 9085-4886 Quebec Inc. v. Visa Canada Corporation, et al. The defendants in each action are Visa Canada Corporation (Visa) and MasterCard International Incorpo- rated (MasterCard) (collectively, the “Networks”), along with TD and several other financial institutions. The plaintiff class members are Canadian merchants who accept payment for products and services by Visa and/or MasterCard. While there is some variance, in most of the actions it is alleged that, from March 2001 to the present, the Networks conspired with their issuing banks and acquirers to fix exces- sive fees and that certain rules (Honour All Cards, No Discrimination and No Surcharge) have the effect of increasing the merchant fees. The actions include claims of civil conspiracy, breach of the Competi- tion Act, interference with economic relations and unjust enrichment. Unspecified general and punitive damages are sought on behalf of the merchant class members. In the lead case proceeding in British Columbia, the decision to partially certify the action as a class proceeding was released on March 27, 2014. The certification decision was appealed by both plaintiff class representatives and defendants. The appeal hearing took place in December 2014 and the decision was released on August 19, 2015. Both the plaintiffs and defendants succeeded in part on their respective appeals. Stanford Litigation The Toronto-Dominion Bank was named as a defendant in Rotstain v. Trustmark National Bank, et al., a putative class action lawsuit in the United States District Court for the Northern District of Texas related to a US$7.2 billion Ponzi scheme perpetrated by R. Allen Stanford, the owner of Stanford International Bank, Limited (“SIBL”), an offshore bank based in Antigua. Plaintiffs purport to represent a class of investors in SIBL-issued certificates of deposit. The Bank provided certain correspondent banking services to SIBL. Plaintiffs allege that the Bank and four other banks aided and abetted or conspired with Mr. Stanford to commit fraud and that the bank defendants received fraudulent transfers from SIBL by collecting fees for providing certain services. 186 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS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 10. The values of credit instruments reported as follows represent the maximum 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 2014 2015 $ 21,046 $ 18,395 207 330 32,456 40,477 90,803 67,913 $ 152,656 $ 118,971 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, as at October 31, 2015, the Bank is committed to fund $133 million (October 31, 2014 – $76 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 commit- ments for premises and for equipment, where the annual rental is in excess of $100 thousand, is estimated at $917 million for 2016; $874 million for 2017; $801 million for 2018, $718 million for 2019, and $4,756 million for 2020 and thereafter. Future minimum finance lease commitments where the annual payment is in excess of $100 thousand, is estimated at $31 million for 2016; $24 million for 2017; $12 million for 2018, $10 million for 2019, and $29 million for 2020 and thereafter. The premises and equipment net rental expense, included under Non-interest expenses in the Consolidated Statement of Income, was $1.1 billion for the year ended October 31, 2015 (October 31, 2014 – $0.9 billion; October 31, 2013 – $1.0 billion). 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, covered bonds, obligations related to securities sold short, and securities 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. The Official Stanford Investors Committee, a court-approved committee representing investors, received permission to intervene in the lawsuit and has brought similar claims against all the bank defendants. The court denied in part and granted in part The Toronto-Dominion Bank’s motion to dismiss the lawsuit on April 21, 2015. The court also entered a class certification scheduling order, requiring the parties to conduct discovery and submit briefing regarding class certification. The class certification motion was fully submitted on October 26, 2015. Plaintiffs filed an amended complaint asserting certain additional state law claims against the Bank on June 23, 2015. The Bank’s motion to dismiss the newly amended complaint in its entirety was fully submitted on August 18, 2015. The Toronto-Dominion Bank is also a defendant in two cases filed in the Ontario Superior Court of Justice: (1) Wide & Dickson v. The Toronto-Dominion Bank, an action filed by the Joint Liquidators of SIBL appointed by the Eastern Caribbean Supreme Court, and (2) Dynasty Furniture Manufacturing Ltd., et al. v. The Toronto-Dominion Bank, an action filed by five investors in certificates of deposits sold by Stanford. The suits assert that the Bank acted negligently and provided knowing assistance to SIBL’s fraud. The court denied the Bank’s motion for summary judgement in the Joint Liquidators case to dismiss the action based on the applicable statute of limitations on November 9, 2015 and designated the limitations issues to be addressed as part of a future trial on the merits. The parties intend to schedule a status conference to set a timetable for proceeding with the Joint Liquidators’ case and dealing with the Dynasty case. RESTRUCTURING In fiscal 2015 the Bank recorded restructuring charges of $686 million ($471 million after tax) on a net basis. During 2015 the Bank commenced its restructuring review and in the second quarter of 2015 recorded $337 million ($228 million after tax) of restructuring charges and recorded an additional restructuring charge of $349 million ($243 million after tax) on a net basis in the fourth quarter of 2015. The restructuring charges incurred in fiscal 2015 were intended to reduce costs and manage expenses in a sustainable manner and to achieve greater operational efficiencies. These measures included process redesign and business restructuring, retail branch and real estate optimization, and organizational review and primarily related to asset impairments, exiting of lease agreements, employee severance and other personnel-related costs. COMMITMENTS Credit-related Arrangements In the normal course of business, the Bank enters into various commitments and contingent liability contracts. The primary purpose of these contracts is to make funds available for the financing needs of customers. 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. Refer to the Guarantees section in this Note for further details. 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. 187 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS 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, 2015, was $101 billion (October 31, 2014 – $95 billion). 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 prevent 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 following table summarizes as at October 31, the maximum poten- tial 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 2014 2015 $ 21,046 $ 18,395 267 $ 21,253 $ 18,662 207 Details of assets pledged against liabilities and collateral assets held or re-pledged are shown in the following table: (millions of Canadian dollars) Sources of pledged assets and collateral Bank assets Interest-bearing deposits with banks Loans Securities As at October 31 October 31 2014 2015 $ 4,997 $ 4,594 66,602 63,293 71,228 65,318 142,827 133,205 Third-party assets1 Collateral received and available for sale or re-pledging 150,120 131,600 (47,101) Less: Collateral not re-pledged 99,108 84,499 241,935 217,704 (51,012) Uses of pledged assets and collateral2 Derivatives Obligations related to securities sold under repurchase agreements Securities borrowing and lending Obligations related to securities sold short Securitization Covered bond Clearing systems, payment systems, and depositories Foreign governments and central banks Other Total 3,005 2,871 70,011 56,857 32,511 23,987 36,303 40,899 33,169 39,581 22,071 16,355 3,925 4,137 8,462 6,273 32,266 26,956 $ 241,935 $ 217,704 1 Includes collateral received from reverse repurchase agreements, securities borrowing, margin loans, and other client activity. 2 Includes $34.1 billion of on-balance sheet assets that the Bank has pledged and that the counterparty can subsequently repledge as at October 31, 2015 (October 31, 2014 – $26.8 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, which it continues to service, to the TD Mortgage Fund (the “Fund”), a mutual fund managed by the Bank. As part of its responsibilities, the Bank has an obligation to repurchase mortgage loans when they default or if the Fund experi- ences a liquidity event such that it does not have sufficient cash to honor unit holder redemptions. During the year ended October 31, 2015, the fair value of mortgages repurchased as a result of the liquidity event was $29 million (October 31, 2014 – $84 million). For further details on the Bank’s involvement with the Fund, refer to Note 10. 188 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 2 9 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 deci- sions. The Bank’s related parties include key management personnel, 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 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 manage- ment personnel, which are subject to approved policy guidelines that govern all employees. As at October 31, 2015, $340 million of loans were made to key management personnel, their close family members and their related entities (October 31, 2014 – $266 million). 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 2015 $ 22 3 31 $ 56 2014 $ 27 1 37 $ 65 2013 $ 25 2 32 $ 59 In addition, the Bank offers deferred share and other plans to non-employee directors, executives, and certain other key employees. Refer to Note 24 for further 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 Inc. (Symcor) also qualify as related party transactions. There were no significant transactions between the Bank, TD Ameritrade and Symcor during the year ended October 31, 2015, other than as described in the following sections. Other Transactions with TD Ameritrade and Symcor (1) TRANSACTIONS WITH TD AMERITRADE HOLDING CORPORATION 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 $1.1 billion during the year ended October 31, 2015 (October 31, 2014 – $0.9 billion; October 31, 2013 – $0.8 billion) to TD Ameritrade for the deposit accounts. The fee paid by the Bank is based on the average insured deposit balance of $95 billion for the year ended October 31, 2015 (October 31, 2014 – $80 billion; October 31, 2013 – $70 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, and the balance tied to an agreed rate of return. The Bank earns a servicing fee of 25 basis points (bps) on the aggregate average daily balance in the sweep accounts (subject to adjustment based on a specified formula). As at October 31, 2015, amounts receivable from TD Ameritrade were $79 million (October 31, 2014 – $103 million). As at October 31, 2015, amounts payable to TD Ameritrade were $140 million (October 31, 2014 – $104 million). (2) TRANSACTIONS WITH SYMCOR The Bank has one-third ownership in 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 the year ended October 31, 2015, the Bank paid $124 million (October 31, 2014 – $122 million; October 31, 2013 – $128 million) for these services. As at October 31, 2015, the amount payable to Symcor was $10 million (October 31, 2014 – $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, 2015, and October 31, 2014. 189 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 3 0 SEGMENTED INFORMATION Effective November 1, 2013, the Bank revised its reportable segments, and for management reporting purposes, reports its results under three key business segments: Canadian Retail, which includes the results of the Canadian personal and commercial banking businesses, Canadian credit cards, TD Auto Finance Canada and Canadian wealth and insurance businesses; U.S. Retail, which includes the results of the U.S. personal and commercial banking businesses, U.S. credit cards, TD Auto Finance U.S., U.S. wealth business and the Bank’s investment in TD Ameritrade; and Wholesale Banking. The Bank’s other activities are grouped into the Corporate segment. Certain goodwill pertaining to the former Wealth and Insurance segment was allocated on a rela- tive fair value basis to the Canadian Retail and U.S. Retail segments when the segments were realigned. The segmented results for periods prior to the segment realignment have been restated accordingly. Canadian Retail is comprised of Canadian personal and commercial banking, which provides financial products and services to personal, small business, and commercial customers, TD Auto Finance Canada, the Canadian credit card business, the Canadian wealth business, which provides investment products and services to institutional and retail investors, and the insurance business. U.S. Retail is comprised of the personal and commercial banking operations in the U.S. operating under the brand TD Bank, America’s Most Convenient Bank®, primarily in the Northeast and Mid-Atlantic regions and Florida, and the U.S. wealth business, including Epoch and the Bank’s equity investment in TD Ameritrade. Wholesale banking provides a wide range of capital markets, investment banking, and corporate 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. The Bank’s other activities are grouped into the Corporate segment. The Corporate segment includes the effects of certain asset securitization programs, treasury management, the collectively assessed allowance for incurred but not identified credit losses in Canadian Retail and Wholesale Banking, elimination of taxable equiva- lent 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. Accord- ingly, net income for business segments is presented before amortiza- tion 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 asym- metry 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, these CDS are accounted for on an accrual basis in Wholesale Banking and the gains and losses on these CDS, in excess of the accrued cost, are reported in the Corporate segment. The Bank reclassified certain debt securities from trading to the available-for-sale category effective August 1, 2008. As part of the Bank’s trading strategy, these debt securities are economically hedged, primarily with CDS and interest rate swap contracts. These derivatives are not eligible for reclassification and are recorded on a fair value basis with changes in fair value recorded in the period’s earnings. Management believes that this asymmetry in the accounting treatment between derivatives and the reclassified debt securities results in vola- tility in earnings from period to period that is not indicative of the economics of the underlying business performance in Wholesale Bank- ing. 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. 190 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTSThe following table summarizes the segment results for the years ended October 31. Results by Business Segment (millions of Canadian dollars, except as noted) Net interest income (loss) Non-interest income (loss) Provision for (reversal of) credit losses Insurance claims and related expenses 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) Provision for (reversal of) credit losses Insurance claims and related expenses 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 311 (billions of Canadian dollars) Net interest income (loss) Non-interest income (loss) Provision for (reversal of) credit losses Insurance claims and related expenses 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) 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. For the years ended October 31 Canadian Retail U.S. Retail Wholesale Banking Corporate $ 9,781 9,904 887 2,500 8,407 7,891 1,953 – $ 5,938 $ 7,011 2,414 749 – 6,170 2,506 394 376 $ 2,488 $ 2,295 631 18 – 1,701 1,207 334 – $ 873 $ (363) (247) 29 – 1,795 (2,434) (1,158) 1 $ (1,275) 2015 Total $ 18,724 12,702 1,683 2,500 18,073 9,170 1,523 377 $ 8,024 $ 360.1 $ 347.3 $ 343.5 $ 53.5 $ 1,104.4 $ 9,538 9,623 946 2,833 8,438 6,944 1,710 – $ 5,234 $ 6,000 2,245 676 – 5,352 2,217 412 305 $ 2,110 $ 2,210 470 11 – 1,589 1,080 267 – $ 813 $ (164) 39 (76) – 1,117 (1,166) (877) 15 (274) $ 2014 $ 17,584 12,377 1,557 2,833 16,496 9,075 1,512 320 $ 7,883 $ 334.6 $ 277.1 $ 317.6 $ 31.2 $ 960.5 $ 8,922 8,860 929 3,056 7,754 6,043 1,474 – $ 4,569 $ 5,173 2,149 779 – 4,768 1,775 269 246 $ 1,752 $ 1,982 428 26 – 1,542 842 192 – $ 650 $ (3) (252) (103) – 1,005 (1,157) (800) 26 (331) $ 2013 $ 16,074 11,185 1,631 3,056 15,069 7,503 1,135 272 $ 6,640 $ 312.1 $ 244.5 $ 269.3 $ 36.1 $ 862.0 191 TD BANK GROUP ANNUAL REPORT 2015 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 location 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) For the years ended October 31 As at October 31 Canada United States Other international Total Canada United States Other international Total Canada United States Other international Total Total revenue 2015 Income before income taxes $ 20,224 10,140 1,062 $ 31,426 $ 19,642 8,363 1,956 $ 29,961 $ 18,013 7,205 2,041 $ 27,259 $ 6,625 2,040 505 $ 9,170 2014 $ 6,314 1,579 1,182 $ 9,075 2013 $ 5,220 1,023 1,260 $ 7,503 2015 Net income $ 5,361 1,802 861 $ 8,024 Total assets1 $ 623,061 417,186 64,126 $ 1,104,373 2014 $ 5,106 1,284 1,493 $ 7,883 $ 554,036 324,865 81,610 $ 960,511 2013 $ 4,234 864 1,542 $ 6,640 $ 518,247 262,679 81,095 $ 862,021 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. N O T E 3 1 INTEREST RATE RISK The Bank earns and pays interest on certain assets and liabilities. To the extent that the assets and liabilities 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 assets and liabilities 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. 192 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Interest Rate Risk1 (billions of Canadian dollars, except as noted) 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, 2015 Assets Cash resources and other Trading loans, securities, and other Financial assets designated at fair value through profit or loss Available-for-sale Held-to-maturity Securities purchased under reverse repurchase agreements Loans Other Total assets Liabilities and equity Trading deposits Other financial liabilities designated at fair value through profit or loss Other deposits Securitization liabilities at fair value Obligations related to securities sold short Obligations related to securities sold under repurchase agreements Securitization liabilities at amortized cost Subordinated notes and debentures Other Equity Total liabilities and equity Net position $ 16.5 0.8 1.0 1.4 – 5.5 21.9 86.0 133.1 $ 28.1 5.6 0.2 6.4 1.2 63.5 227.5 – 332.5 $ 0.7 $ 45.3 15.1 8.7 1.9 0.7 11.3 3.5 8.3 7.1 84.2 15.2 312.7 63.3 86.0 – 564.8 99.2 29.0 – 0.2 0.6 76.0 237.8 0.5 – – 38.8 53.9 0.6 8.8 – 1.0 – – 73.9 – – 169.4 351.7 $ (218.6) $ 163.1 43.2 0.6 44.3 0.3 – 0.3 2.9 – – – 91.6 $ 72.2 1.4 358.1 0.8 38.8 54.8 11.7 1.0 73.9 – 612.7 7.6 $ (47.9) $ – 24.3 1.2 45.7 53.0 – 184.0 – 308.2 0.5 – 104.8 7.0 – – 8.5 7.4 – 2.0 130.2 $ 178.0 – $ 0.3 $ $ 16.6 1.2 31.3 13.2 – 33.7 – 96.0 39.2 0.1 0.5 – 13.2 13.9 68.2 135.4 45.6 95.2 4.4 88.8 74.5 97.4 544.3 154.2 1,104.4 1.6 – 200.2 – – 12.4 – – 43.4 64.3 321.9 0.5 – 32.5 3.2 – – 2.5 0.2 – 0.7 39.6 $ 56.4 $ (186.5) $ 74.8 1.4 695.6 11.0 38.8 67.2 22.7 8.6 117.3 67.0 1,104.4 – Total assets Total liabilities and equity Net position $ 123.9 311.3 $ (187.4) $ 278.4 142.4 $ 136.0 $ 113.4 $ 515.7 519.7 66.0 (4.0) $ 47.4 $ $ 249.3 121.1 $ 128.2 $ 70.2 $ 125.3 285.5 34.2 $ 36.0 $ (160.2) $ 960.5 960.5 – $ October 31, 2014 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. Interest Rate Risk by Category (billions of Canadian dollars) Canadian currency Foreign currency Net position Canadian currency Foreign currency Net position Floating rate $ (172.3) (46.3) $ (218.6) Within 3 months $ 118.9 44.2 $ 163.1 3 months to 1 year $ 34.6 (27.0) $ 7.6 $ (186.1) (1.3) $ (187.4) $ 109.7 26.3 $ 136.0 $ 25.5 21.9 $ 47.4 Total within 1 year $ (18.8) (29.1) $ (47.9) $ (50.9) 46.9 (4.0) $ Over 1 year to 5 years $ 113.0 65.0 $ 178.0 $ 103.2 25.0 $ 128.2 Over 5 years $ 11.3 45.1 $ 56.4 $ 9.9 26.1 $ 36.0 As at October 31, 2015 Non- interest sensitive $ (110.6) (75.9) $ (186.5) Total $ (5.1) 5.1 – $ October 31, 2014 $ 12.7 (12.7) – $ $ (49.5) (110.7) $ (160.2) 193 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 3 2 CREDIT RISK 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 (billions of Canadian dollars, except as noted) Canada United States6 United Kingdom Europe – other Other international Total Loans and customers’ liability under acceptances1 October 31 2014 October 31 2015 Credit instruments2,3 October 31 2014 October 31 2015 68% 31 – – 1 100% 72% 27 – – 1 100% 40% 55 1 3 1 100% 48% 48 1 2 1 100% $ 561 $ 492 $ 153 $ 119 As at Derivative financial instruments4,5 October 31 2014 October 31 2015 35% 25 16 18 6 100% $ 63 34% 23 18 18 7 100% $ 53 1 Of the total loans and customers’ liability under acceptances, the only industry 4 As at October 31, 2015, the current replacement cost of derivative financial instru- segment which equalled or exceeded 5% of the total concentration as at October 31, 2015, was: real estate 9% (October 31, 2014 – 9%). 2 As at October 31, 2015, the Bank had commitments and contingent liability contracts in the amount of $153 billion (October 31, 2014 – $119 billion). Included are commitments to extend credit totalling $131 billion (October 31, 2014 – $100 billion), 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, 2015: financial institutions 17% (October 31, 2014 – 17%); pipelines, oil and gas 10% (October 31, 2014 – 9%); power and utilities 9% (October 31, 2014 – 9%); food, beverage and tobacco 7% (October 31, 2014 – 3%); sundry manufacturing and wholesale 7% (October 31, 2014 – 7%); government, public sector entities, and education 6% (October 31, 2014 – 8%); automotive 6% (October 31, 2014 – 6%); professional and other services 6% (October 31, 2014 – 5%). ments amounted to $63 billion (October 31, 2014 – $53 billion). 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 74% of the total as at October 31, 2015 (October 31, 2014 – 85%). The second largest concentration was with governments, which accounted for 19% of the total as at October 31, 2015 (October 31, 2014 – 11%). No other industry segment exceeded 5% of the total. 6 Debt securities classified as loans were less than 1% as at October 31, 2015 (October 31, 2014 – 1%), of the total loans and customers’ liability under acceptances. 194 TD BANK GROUP ANNUAL REPORT 2015 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 Exposure1 (millions of Canadian dollars) Cash and due from banks Interest-bearing deposits with banks Securities2 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 Derivatives3 Loans Residential mortgages Consumer instalment and other personal Credit card Business and government Debt securities classified as loans Customers’ liability under acceptances Amounts receivable from brokers, dealers and clients Other assets Total assets Credit instruments4 Unconditionally cancellable commitments to extend credit relating to personal lines of credit and credit card lines Total credit exposure October 31 2015 As at October 31 2014 $ 1,776 42,483 $ 1,639 43,773 39,136 10,165 38 59,916 26,443 43,667 30,783 97,364 107,120 212,245 134,693 29,101 166,379 1,923 16,646 21,996 4,199 1,046,073 152,656 30,899 9,019 48 31,707 28,724 34,119 22,858 82,556 93,863 198,815 122,714 24,570 130,387 2,423 13,080 17,130 3,542 891,866 118,971 239,839 $ 1,438,568 197,829 $ 1,208,666 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. 2 Excludes equity securities. 3 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. Refer to Note 11 for further details. 4 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. Refer to Note 28 for further details. 195 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS 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. Retail portfolio. Refer to the Managing Risk – Credit Risk section of the MD&A for a discussion on the risk rating for the Standardized Approach and on the Bank’s risk ratings. Financial Assets Subject to the Standardized Approach by Risk-Weights (millions of Canadian dollars) As at October 31, 2015 0% 20% 35% 50% 75%2 100%3 150% 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 $ – $ 847 – 11,279 – 12,126 317 – 5,190 134 – $ 24,010 5,154 – – – 5,641 29,164 – 1,646 41,994 – – 527 – – – – 12,710 – 26,482 48,162 29,164 – $ 26,864 $ 50,678 $ 29,164 2,516 382 $ – $ 244 – 6,689 – 6,933 336 – 2,164 307 – $ 21,374 4,187 – – – 2,807 25,561 – – 34,872 – – 490 – – 9,063 – – – 15,996 38,169 25,561 – $ 15,996 $ 39,880 $ 25,561 1,711 – $ – $ 2,901 $ – 32,302 – 21,258 – – – – 60,352 – – 386 $ 79 – 3,891 73,087 7 73,559 – 4 $ 27,301 294 38,993 180 21,438 717 94,164 141 1,195 182,037 – 43,640 – – – – – 1 – 1 60,352 461 – – – – 2 – 13,238 1,195 238,917 – 29,135 $ 1 $ 60,813 $ 99,337 $ 1,195 $ 268,052 – 2 – 73,561 25,776 October 31, 2014 255 $ – $ 2,090 $ 73 – 26,597 – – 17,041 3,444 54,286 – – 7 – – 49,172 54,621 – – – $ 3 $ 23,722 262 31,699 127 17,168 838 67,421 314 1,230 140,324 – 34,872 – – – – – 1 – 1 49,172 301 – – 2 9,554 1,230 184,752 – 22,398 $ 1 $ 49,473 $ 75,009 $ 1,230 $ 207,150 – 2 – 54,623 20,386 – – – 1 Other assets include amounts due from banks and interest-bearing deposits with banks. 2 Based on the Bank’s internal risk ratings, 70% of retail exposures are rated ‘low risk’ or ‘normal risk’ and 30% are rated ‘high risk’ or ‘default’ as at October 31, 2015 (October 31, 2014 – 68% and 32%, respectively). 3 Based on the Bank’s internal risk ratings, 38% of non-retail exposures are rated ‘investment grade’ and 62% are rated ‘non-investment grade’ as at October 31, 2015 (October 31, 2014 – 33% and 67%, respectively). 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. The non-retail and retail asset risk rating classifications subject to the AIRB Approach reflect whether the exposure is subject to a guarantee, which would result in the exposure being classified based on the internal risk rating of the guarantor. The following risk ratings may not directly correlate with the ‘Neither past due nor impaired’, ‘Past due but not impaired’ and ‘Impaired’ status disclosed in Note 8 – Loans, Impaired Loans and Allowance for Credit Losses, because of the aforementioned risk transference guarantees, and certain loan exposures that remain subject to the Standardized Approach. 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. 196 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Non-Retail Financial Assets Subject to the AIRB Approach by Risk Rating1 (millions of Canadian dollars) As at October 31, 2015 Investment grade Non- investment grade Watch and classified Impaired/ defaulted Loans Residential mortgages2 Consumer instalment and other personal2 Business and government Debt securities classified as loans Total loans Held-to-maturity Securities purchased under reverse repurchase agreements Customers’ liability under acceptances Other assets3 Total assets Off-balance sheet credit instruments Total Loans Residential mortgages2 Consumer instalment and other personal2 Business and government Debt securities classified as loans Total loans Held-to-maturity Securities purchased under reverse repurchase agreements Customers’ liability under acceptances Other assets3 Total assets Off-balance sheet credit instruments Total $ 98,583 21,392 32,933 1,356 154,264 30,810 86,801 9,039 29,617 310,531 71,725 $ 382,256 $ 108,027 22,888 27,973 1,686 160,574 22,105 73,730 6,911 34,698 298,018 59,661 $ 357,679 $ – 30 32,194 163 32,387 – 10,563 7,326 160 50,436 10,300 $ 60,736 $ – 31 28,288 148 28,467 – 8,826 6,067 50 43,410 8,047 $ 51,457 $ – – 1,054 113 1,167 – – 273 – 1,440 340 $ 1,780 $ – – 664 112 776 – – 100 – 876 97 $ 973 Total $ 98,583 21,422 66,342 1,839 188,186 30,810 97,364 16,644 29,777 362,781 82,384 $ 445,165 $ – – 161 207 368 – – 6 – 374 19 $ 393 October 31, 2014 $ – – 162 213 375 – – – – 375 7 $ 382 $ 108,027 22,919 57,087 2,159 190,192 22,105 82,556 13,078 34,748 342,679 67,812 $ 410,491 1 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments. Refer to Note 4 for further details. 2 Includes CMHC insured exposures classified as sovereign exposure under Basel III and therefore included in the non-retail category under the AIRB Approach. 3 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, 2015 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 $ 43,920 31,290 2,564 545 78,319 – 58,822 $ 137,141 $ 36,169 28,953 2,398 3,193 70,713 – 12,571 $ 83,284 $ 33,083 27,768 2,417 487 63,755 – 54,143 $ 117,898 $ 27,519 26,496 2,238 3,023 59,276 – 11,836 $ 71,112 $ 4,684 10,322 2,354 2,232 19,592 – 3,379 $ 22,971 $ 4,876 10,254 2,286 2,179 19,595 – 3,088 $ 22,683 $ 1,572 4,223 1,407 999 8,201 – 916 $ 9,117 $ 1,518 4,006 1,411 1,085 8,020 – 835 $ 8,855 $ 144 268 54 54 520 – 4 $ 524 $ 86,489 75,056 8,777 7,023 177,345 – 75,692 $ 253,037 October 31, 2014 $ 167 269 50 67 553 – 4 $ 557 $ 67,163 68,793 8,402 6,841 151,199 – 69,906 $ 221,105 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. 197 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 3 3 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, consistent with preserving the appropriate mix of capital elements to meet targeted capitalization levels. • To ensure ready access to sources of appropriate capital, at reasonable cost, in order to: – insulate the Bank from unexpected events; or – support and facilitate business growth and/or acquisitions consistent 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 overall objective of providing a satisfactory return on share- holders’ equity. Basel III Capital Framework Capital requirements of the Basel Committee on Banking and Supervi- sion (BCBS) are commonly referred to as Basel III. 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. CET1 Capital is the highest quality capital and the predominant form of Tier 1 Capital. It also includes regulatory adjustments and deductions for items such as goodwill, other intangibles, and amounts by which capital items (that is, signifi- cant investments in CET1 Capital of financial institutions, mortgage servicing rights, and deferred tax assets from temporary differences) exceed allowable thresholds. Additional Tier 1 Capital primarily consists of preferred shares. Tier 2 Capital is mainly comprised of subordinated debt and certain loan loss allowances. Regulatory capital ratios are calculated by dividing CET1, Tier 1, and Total Capital by risk-weighted assets (RWA). Basel III introduced a non-risk sensitive leverage ratio to act as a supplementary measure to the risk-based capital requirements. The objective of the leverage ratio is to constrain the build-up of excessive leverage in the banking sector. The leverage ratio replaced OSFI’s asset to capital multiple (ACM) effective January 1, 2015. The leverage ratio is calculated as per OSFI’s Leverage Requirements guideline. The key components in the calculation of the ratio include, but are not limited to, Tier 1 Capital, on-balance sheet assets with adjustments made to derivative and securities financing transaction exposures, and credit equivalent amounts of off-balance sheet exposures. 198 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 capi- tal being more closely aligned than was the case under Basel I. Since the U.S. banking subsidiaries 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 U.S. Retail Bank. 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, 2015, the Bank complied with the OSFI guideline related to capital ratios and the leverage ratio. This guideline is based on “A global regulatory framework for more resilient banks and banking systems” (Basel III) issued by the BCBS. OSFI’s target CET1, Tier 1 and Total Capital ratios for Canadian banks are 7%, 8.5% and 10.5%, respectively. For the year ended October 31, 2015, the scalars are 64%, 71%, and 77% respectively. The following table summarizes the Bank’s regulatory capital position as at October 31: Regulatory Capital Position (millions of Canadian dollars, except as noted) As at Common Equity Tier 1 Capital Common Equity Tier 1 Capital ratio2 Tier 1 Capital Tier 1 Capital ratio2,3 Total Capital4 Total Capital ratio2,5 Leverage ratio6 Assets-to-capital multiple7 2015 October 31 October 31 20141 $ 37,958 $ 30,965 9.9% 9.4% $ 43,416 $ 35,999 10.9% 11.3% $ 53,600 $ 44,255 14.0% 3.7 n/a 13.4% n/a 19.1 1 The amounts have not been adjusted to reflect the impact of the 2015 IFRS Standards and Amendments. 2 The final CAR guideline postponed the Credit Valuation Adjustment (CVA) capital charge until January 1, 2014, and is being phased in until the first quarter of 2019. Effective the third quarter of 2014, each capital ratio has its own RWA measure due to the OSFI prescribed scalar for inclusion of the CVA. For the third and fourth quarter of 2014, the scalars for inclusion of CVA for CET1, Tier 1, and Total Capital RWA are 57%, 65%, and 77% respectively. For the year ended October 31, 2015, the scalars are 64%, 71%, and 77% respectively. 3 Tier 1 Capital ratio is calculated as Tier 1 Capital divided by Tier 1 Capital RWA. 4 Total Capital includes CET1, Tier 1, and Tier 2 Capital. 5 Total Capital ratio is calculated as Total Capital divided by Total Capital RWA. 6 The leverage ratio is calculated as Tier 1 Capital divided by leverage exposure, as defined. 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. OSFI has provided IFRS transitional provisions for the leverage ratio (as previously with the ACM), which allows for the exclusion of assets securitized and sold through CMHC-sponsored programs prior to March 31, 2010 from the calculation. TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS N O T E 3 4 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 market and liquidity risks are an integral part of the 2015 Consolidated Financial Statements. N O T E 3 5 INFORMATION ON SUBSIDIARIES The following is a list of the directly or indirectly held significant subsidiaries. Significant Subsidiaries1 (millions of Canadian dollars) North America 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 Group US Holdings LLC TD Bank US Holding Company Epoch Investment Partners, Inc. 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 Investment Services Inc. TD Life Insurance Company TD Mortgage Corporation TD Pacific Mortgage Corporation The Canada Trust Company TD Securities Inc. TD Vermillion Holdings ULC TD Financial International Ltd. TD Reinsurance (Barbados) Inc. 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. Address of Head or Principal Office2 Montréal, Québec Montréal, Québec Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Toronto, Ontario Oakville, Ontario Toronto, Ontario Toronto, Ontario Wilmington, Delaware 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 Toronto, Ontario Toronto, Ontario Toronto, Ontario Vancouver, British Columbia Toronto, Ontario Toronto, Ontario Calgary, Alberta Hamilton, Bermuda St. James, Barbados 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 As at October 31, 2015 Description Holding Company providing management Carrying value of shares owned by the Bank services to subsidiaries $ 1,628 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 Services Mortgage Lender Financial Services Entity Holding Company Holding Company Investment Counselling and Portfolio Management U.S. National Bank U.S. National Bank Automotive Finance Entity Financial Services Broker-dealer and Registered Investment Advisor Insurance Agency Mutual Fund Dealer Insurance Company Loans and Deposits Entity Deposit Taking Entity Trust, Loans and Deposits Entity Investment Dealer and Broker Holding Company Holding 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 595 1,757 1,321 8 45 145 40,310 25 59 11,632 1,728 19,696 2,056 12 2,408 1 Unless otherwise noted, The Toronto-Dominion 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. 199 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Significant Subsidiaries (continued)1 (millions of Canadian dollars) International TD Bank International S.A. TD Bank N.V. TD Ireland TD Global Finance TD Luxembourg International Holdings TD Ameritrade Holding Corporation3 TD Wealth Holdings (UK) Limited TD Direct Investing (Europe) Limited Thirdco II Limited TD Asset Administration UK 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 Luxembourg, Luxembourg Amsterdam, The Netherlands Dublin, Ireland Dublin, Ireland Luxembourg, Luxembourg Omaha, Nebraska Leeds, England Leeds, England Leeds, England Leeds, England Sydney, Australia London, England London, England London, England London, England Singapore, Singapore Description International Direct Brokerage Dutch Bank Holding Company Securities Dealer Holding Company Securities Dealer Holding Company Direct Broker Investment Holding Company Foreign Securities Dealer Securities Dealer Holding Company UK Bank Holding Company Securities Dealer Merchant Bank As at October 31, 2015 Carrying value of shares owned by the Bank 49 $ 678 1,051 6,683 219 133 215 1,242 1,170 1 Unless otherwise noted, The Toronto-Dominion 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 As at October 31, 2015, the Bank’s reported indirect investment in TD Ameritrade Holding Corporation was 41.54% (October 31, 2014 – 40.97%) of the outstanding shares of TD Ameritrade Holding Corporation. 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. 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 subor- dinated 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. As at October 31, 2015, the net assets of subsidiaries subject to regu- latory or capital adequacy requirements was $66.2 billion (October 31, 2014 – $48.5 billion), before intercompany eliminations. In addition to regulatory requirements outlined above, the Bank may be subject to significant restrictions on its ability to use the assets or settle the liabilities of members of its group. Key contractual restric- tions may arise from the provision of collateral to third parties in the normal course of business, for example through secured financing transactions; assets securitized which are not subsequently available for transfer by the Bank; and assets transferred into other consolidated and unconsolidated structured entities. The impact of these restrictions has been disclosed in Note 9 and Note 28. Aside from non-controlling interests disclosed in Note 21, there were no significant restrictions on the ability of the Bank to access or use the assets or settle the liabilities of subsidiaries within the group as a result of protective rights of non-controlling interests. N O T E 3 6 SUBSEQUENT EVENT Normal Course Issuer Bid As approved by the Board on December 2, 2015, the Bank announced its intention to initiate a normal course issuer bid for up to 9.5 million of its common shares, commencing as early as December, 2015, subject to the approval of OSFI and the Toronto Stock Exchange (TSX). The timing and amount of any purchases under the program are subject to regulatory approvals and to management discretion based on factors such as market conditions and capital adequacy. 200 TD BANK GROUP ANNUAL REPORT 2015 FINANCIAL RESULTS Ten-year Statistical Review – IFRS1,2 Condensed Consolidated Balance Sheet (millions of Canadian dollars) ASSETS Cash resources and other Trading loans, securities, and other3 Derivatives Held-to-maturity securities Securities purchased under reverse repurchase agreements Loans, net of allowance for loan losses Other Total assets LIABILITIES Trading deposits Derivatives Deposits Other Subordinated notes and debentures Total liabilities EQUITY Common shares Preferred shares Treasury shares Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests in subsidiaries Total equity Total liabilities and equity Condensed Consolidated Statement of Income – Reported (millions of Canadian dollars) Net interest income Non-interest income Total revenue Provision for credit losses Insurance claims and related expenses Non-interest expenses Income before income taxes and equity in net income of an investment in associate Provision for (recovery of) 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 income Total revenue Provision for credit losses Insurance claims and related expenses Non-interest expenses Income before income taxes and equity in net income of an investment in associate Provision for (recovery of) 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 $ 45,637 188,317 69,438 74,450 97,364 544,341 84,826 1,104,373 74,759 57,218 695,576 201,155 8,637 1,037,345 20,294 2,700 (52) 214 32,053 10,209 65,418 1,610 67,028 $ 1,104,373 2015 18,724 12,702 31,426 1,683 2,500 18,073 9,170 1,523 377 8,024 99 $ 2015 18,724 12,713 31,437 1,683 2,500 17,076 10,178 1,862 438 8,754 99 2015 2014 2013 2012 2011 $ 46,554 168,926 55,796 56,977 82,556 478,909 70,793 960,511 59,334 51,209 600,716 185,236 7,785 904,280 19,811 2,200 (55) 205 27,585 4,936 54,682 1,549 56,231 $ 960,511 2014 $ 17,584 12,377 29,961 1,557 2,833 16,496 9,075 1,512 320 7,883 143 $ 32,164 188,016 49,461 29,961 64,283 444,922 53,214 862,021 50,967 49,471 541,605 160,613 7,982 810,638 19,316 3,395 (147) 170 23,982 3,159 49,875 1,508 51,383 $ 25,128 199,280 60,919 – 69,198 408,848 47,680 811,053 38,774 64,997 487,754 160,105 11,318 762,948 18,691 3,395 (167) 196 20,868 3,645 46,628 1,477 48,105 $ 24,112 171,109 59,845 – 56,981 377,187 46,259 735,493 29,613 61,715 449,428 139,190 11,543 691,489 17,491 3,395 (116) 212 18,213 3,326 42,521 1,483 44,004 $ 862,021 $ 811,053 $ 735,493 2013 2012 $ 16,074 11,185 27,259 1,631 3,056 15,069 $ 15,026 10,520 25,546 1,795 2,424 14,016 7,503 1,135 272 6,640 185 7,311 1,085 234 6,460 196 2011 $ 13,661 10,179 23,840 1,490 2,178 13,047 7,125 1,326 246 6,045 180 7,925 $ 7,740 $ 6,455 $ 6,264 $ 5,865 112 7,813 $ 107 7,633 $ 105 6,350 $ 104 6,160 $ 104 5,761 2014 $ 17,584 12,097 29,681 1,582 2,833 15,863 9,403 1,649 373 8,127 143 2013 2012 $ 16,074 11,114 27,188 1,606 3,056 14,390 $ 15,062 10,615 25,677 1,903 2,424 13,180 8,136 1,326 326 7,136 185 8,170 1,397 291 7,064 196 2011 $ 13,661 10,052 23,713 1,490 2,178 12,373 7,672 1,545 305 6,432 180 $ $ 8,655 $ 7,984 $ 6,951 $ 6,868 $ 6,252 112 8,543 $ 107 7,877 $ 105 6,846 $ 104 6,764 $ 104 6,148 1 The Bank prepares its Consolidated Financial Statements in accordance with IFRS, as issued by the IASB, the current GAAP, and refers to results prepared in accordance with IFRS as “reported” results. 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, please refer to the “How the Bank Reports” in the 2015 MD&A. 2 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments, and the impact of the January 31, 2014 stock dividend, as discussed in Note 4 and Note 21, respectively, of the 2015 Consolidated Financial Statements, and restatements to conform with the presentation adopted in the current period. 3 Includes available-for-sale securities and financial assets designated at fair value through profit or loss. TD BANK GROUP ANNUAL REP O RT 20 1 5 TEN -YEA R S TATISTI CAL REV IEW 201 Ten-year Statistical Review – IFRS1,2 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 Restructuring charges Charge related to the acquisition of Nordstrom’s credit card portfolio and related integration costs Litigation and litigation-related charge/reserve Fair value of derivatives hedging the reclassified available-for-sale securities portfolio Integration charges and direct transaction costs relating to the acquisition of the credit card portfolio of MBNA Canada Set-up, conversion and other one-time costs related to affinity relationship with Aimia and acquisition of Aeroplan Visa credit card accounts Impact of Alberta flood on the loan portfolio Gain on sale of TD Waterhouse Institutional Services Impact of Superstorm Sandy 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 losses Positive impact due to changes in statutory income tax rates Integration charges and direct transaction costs relating to U.S. Retail acquisitions Fair value of credit default swaps hedging the corporate loan book, net of provision for credit losses 2015 2014 2013 2012 2011 $ 7,813 $ 7,633 $ 6,350 $ 6,160 $ 5,761 255 471 51 8 (55) – – – – – – – – – – 246 – – – (43) 125 131 (19) (196) – – – – – – 232 90 – 100 (57) 92 20 19 – – – – – – – 496 238 – – 248 89 104 – – – 37 17 (120) (18) 9 – 604 391 – – – (128) – – – – – 55 – – 82 (13) 387 Total adjustments for items of note 730 244 Net income available to common shareholders – adjusted $ 8,543 $ 7,877 $ 6,846 $ 6,764 $ 6,148 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) Total Non-controlling interests in subsidiaries 2015 $ 20,294 2,700 (52) 214 32,053 10,209 $ 65,418 1,610 2014 $ 19,811 2,200 (55) 205 27,585 4,936 $ 54,682 1,549 2013 $ 19,316 3,395 (147) 170 23,982 2012 $ 18,691 3,395 (167) 196 20,868 3,159 3,645 $ 49,875 $ 46,628 1,508 1,477 2011 $ 17,491 3,395 (116) 212 18,213 3,326 $ 42,521 1,483 Total equity $ 67,028 $ 56,231 $ 51,383 $ 48,105 $ 44,004 1 The Bank prepares its Consolidated Financial Statements in accordance with IFRS, as issued by the IASB, the current GAAP, and refers to results prepared in accordance with IFRS as “reported” results. 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, please refer to the “How the Bank Reports” in the 2015 MD&A. 2 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments, and the impact of the January 31, 2014 stock dividend, as discussed in Note 4 and Note 21, respectively, of the 2015 Consolidated Financial Statements, and restatements to conform with the presentation adopted in the current period. 202 TD BANK GROU P AN NUAL REPO RT 20 15 TEN- YEAR S TATIS TICAL RE VIEW Ten-year Statistical Review – IFRS1,2 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 common equity 10 Return on Common Equity Tier 1 Capital risk-weighted assets4,5 11 Efficiency ratio 12 Net interest margin as a % of average earning assets2 13 Common dividend payout ratio 14 Dividend yield6 15 Price earnings ratio7 Asset quality 16 Impaired loans net of counterparty-specific and individually Capital ratios Other insignificant allowances as a % of net loans8,9 17 Net impaired loans as a % of common equity8,9 18 Provision for credit losses as a % of net average loans8,9 19 Common Equity Tier 1 capital ratio5,10 20 Tier 1 capital ratio4,5 21 Total capital ratio4,5 22 Common equity to total assets2 23 Number of common shares outstanding (millions) 24 Market capitalization (millions of Canadian dollars) 25 Average number of full-time equivalent staff11 26 Number of retail outlets12 27 Number of retail brokerage offices 28 Number of automated banking machines Other Statistics – Adjusted Per common share 1 Basic earnings 2 Diluted earnings Performance ratios 3 Return on common equity 4 Return on Common Equity Tier 1 Capital risk-weighted assets4,5 5 Efficiency ratio 6 Common dividend payout ratio 7 Price-earnings ratio7 $ 2015 4.22 4.21 2.00 33.81 53.68 1.59 (3.2)% 0.4 13.4% 2.20 57.5 2.05 47.4 3.8 12.8 0.48% 4.24 0.34 9.9% 11.3 14.0 2014 4.15 4.14 1.84 28.45 55.47 1.95 16.0% 20.1 15.4% 2.45 55.1 2.18 44.3 3.5 13.4 0.46% 4.28 0.34 9.4% 10.9 13.4 2013 $ 3.46 3.44 1.62 25.33 47.82 1.89 17.7% 22.3 14.2% 2.32 55.3 2.20 46.9 3.7 13.9 0.50% 4.83 0.38 9.0% 11.0 14.2 $ 2012 3.40 3.38 1.45 23.60 40.62 1.72 2011 $ 3.25 3.21 1.31 21.72 37.62 1.73 8.0% 11.9 15.0% 2.58 54.9 2.23 42.5 3.8 12.0 0.52% 4.86 0.43 n/a% 12.6 15.7 2.4% 5.7 16.2% 2.78 60.2 2.30 40.2 3.4 11.7 0.56% 5.27 0.39 n/a% 13.0 16.0 5.7 1,855.1 $ 99,584 81,483 2,514 108 5,171 5.5 1,844.6 $ 102,322 81,137 2,534 111 4,833 5.4 1,835.0 $ 87,748 78,748 2,547 110 4,734 5.3 1,832.3 $ 74,417 78,397 2,535 112 4,739 5.3 1,802.0 $ 67,782 75,631 2,483 108 4,650 $ $ 2015 4.62 4.61 14.7% 2.40 54.3 43.3 11.7 2014 4.28 4.27 15.9% 2.53 53.4 43.0 13.0 $ 2013 3.72 3.71 $ 2012 3.73 3.71 $ 2011 3.47 3.43 15.3% 2.50 52.9 43.5 12.9 16.5% 2.83 51.3 38.7 11.0 17.3% 2.95 52.2 37.7 11.0 1 The Bank prepares its Consolidated Financial Statements in accordance with IFRS, as issued by the IASB, the current GAAP, and refers to results prepared in accor- dance with IFRS as “reported” results. 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 2015 MD&A. 2 Certain comparative amounts have been restated, where applicable, as a result of the implementation of the 2015 IFRS Standards and Amendments, and the impact of the January 31, 2014 stock dividend, as discussed in Note 4 and Note 21, respectively, of the 2015 Consolidated Financial Statements, and restatements to conform with the presentation adopted in the current period. 3 Return is calculated based on share price movement and dividends reinvested over the trailing twelve month period. 4 Effective fiscal 2013, amounts are calculated in accordance with the Basel III regu- latory framework, and are presented based on the “all-in” methodology. Prior to fiscal 2013, amounts were calculated in accordance with the Basel II regulatory framework. Prior to 2012, amounts were calculated based on Canadian GAAP. 5 Effective fiscal 2014, the CVA is being implemented based on a phase-in approach until the first quarter of 2019. Effective the third quarter of 2014, the scalars for inclusion of CVA for CET1, Tier 1 and Total Capital RWA are 57%, 65% and 77% respectively. For fiscal 2015, the scalars are 64%, 71%, and 77% respectively. 6 Yield is calculated as 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 over the trailing 4 quarters. 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 2015 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 2015 MD&A. 10 Effective fiscal 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. Accordingly, amounts for periods prior to fiscal 2013 are not applicable (n/a). 11 In fiscal 2014, the Bank conformed to a standardized definition of full-time equiv- alent staff across all segments. The definition includes, among other things, hours for overtime and contractors as part of its calculations. Comparatives for periods prior to fiscal 2014 have not been restated. 12 Includes retail bank outlets, private client centre branches, and estate and trust branches. TD BANK GROUP ANNUAL REP O RT 20 1 5 TEN -YEA R S TATISTI CAL REV IEW 203 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 interests in subsidiaries EQUITY Common shares Preferred shares Treasury shares2 Contributed surplus Retained earnings Accumulated other comprehensive income (loss) 2011 2010 2009 2008 2007 2006 $ 24,111 192,538 53,599 303,495 112,617 $ 21,710 171,612 50,658 269,853 105,712 $ 21,517 148,823 32,948 253,128 100,803 $ 17,946 144,125 42,425 219,624 139,094 $ 16,536 123,036 27,648 175,915 78,989 $ 10,782 124,458 30,961 160,608 66,105 686,360 619,545 557,219 563,214 422,124 392,914 481,114 145,209 11,670 32 1,483 429,971 132,691 12,506 582 1,493 391,034 112,078 12,383 1,445 1,559 375,694 140,406 12,436 1,444 1,560 276,393 112,905 9,449 1,449 524 260,907 101,242 6,900 1,794 2,439 639,508 577,243 518,499 531,540 400,720 373,282 18,417 3,395 (116) 281 24,339 536 46,852 16,730 3,395 (92) 305 20,959 1,005 42,302 15,357 3,395 (15) 336 18,632 1,015 38,720 13,278 1,875 (79) 392 17,857 (1,649) 31,674 6,577 425 – 119 15,954 (1,671) 6,334 425 – 66 13,725 (918) 21,404 19,632 Total liabilities and shareholders’ equity $ 686,360 $ 619,545 $ 557,219 $ 563,214 $ 422,124 $ 392,914 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 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 (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 2010 2009 2008 2007 2006 $ 12,831 8,763 $ 11,543 8,022 $ 11,326 6,534 $ 8,532 6,137 $ 6,924 7,357 21,594 – 1,465 13,083 7,046 1,299 104 246 5,889 180 19,565 – 1,625 12,163 17,860 – 2,480 12,211 5,777 1,262 106 235 4,644 194 3,169 241 111 303 3,120 167 14,669 – 1,063 9,502 4,104 537 43 309 3,833 59 14,281 – 645 8,975 4,661 853 95 284 3,997 20 $ 6,371 6,821 13,192 1,559 409 8,815 5,527 874 184 134 4,603 22 Net income available to common shareholders $ 5,709 $ 4,450 $ 2,953 $ 3,774 $ 3,977 $ 4,581 Condensed Consolidated Statement of Income – Adjusted (millions of Canadian dollars) Net interest income Non-interest income Total revenue Provision for credit losses Non-interest expenses 2011 2010 2009 2008 $ 12,831 8,587 $ 11,543 8,020 $ 11,326 7,294 $ 8,532 5,840 $ 21,418 1,465 12,395 19,563 1,685 11,464 18,620 2,225 11,016 14,372 1,046 9,291 Income 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 7,558 1,508 104 305 6,251 180 6,414 1,387 106 307 5,228 194 5,379 923 111 371 4,716 167 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 Net income available to common shareholders $ 6,071 $ 5,034 $ 4,549 $ 3,754 $ 4,169 $ 3,354 1 Results prepared in accordance with Canadian GAAP were referred to as 2 Effective fiscal 2008, treasury shares have been reclassified from common and “reported”. Adjusted results (excluding “items of note”, net of income taxes, from reported results) and related terms were not defined terms under Canadian GAAP and therefore, may not be comparable to similar terms used by other issuers. For further explanation, refer to the “How the Bank Reports” section of the 2015 MD&A. Adjusted results are presented from fiscal 2006 to allow for sufficient years for historical comparison. See the following page for a reconcilia- tion with reported results. preferred shares and are shown separately. Prior to fiscal 2008, the amounts for treasury shares were not reasonably determinable. 204204 TD BANK GROU P AN NUAL REPO RT 20 15 TEN- YEAR S TATIS TICAL RE VIEW 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. Retail acquisitions Decrease / (Increase) in fair value of credit default swaps hedging the corporate loan book, net of provision for credit loss Integration charges related to the Chrysler Financial acquisition Other tax items1 Provision for (release of) insurance claims General allowance increase (release) in Canadian Retail and Wholesale Banking Agreement with Canada Revenue Agency 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 Initial set up of specific allowance for credit card and overdraft loans Total adjustments for items of note 2011 2010 2009 2008 2007 2006 $ 5,709 $ 4,450 $ 2,953 $ 3,774 $ 3,977 $ 4,581 426 – (134) – – 69 (13) 14 – – – – – – – – – – – 362 467 – (5) – – 69 4 – (11) (17) (44) 121 – – – – – – – 584 492 – 450 – – 276 126 – – – 178 – 39 35 – – – – – 1,596 404 (323) (118) – – 70 (107) – 34 20 – – – – – – – – – (20) 353 – – (135) 43 – (30) – – – (39) – – – – – – – – 192 316 – – – – – (7) – 24 – (39) – – – (1,665) 72 19 35 18 (1,227) $ 3,354 Net income available to common shareholders – adjusted $ 6,071 $ 5,034 $ 4,549 $ 3,754 $ 4,169 Condensed Consolidated Statement of Changes in Shareholders’ Equity (millions of Canadian dollars) 2011 2010 2009 2008 2007 2006 Common shares Preferred shares Treasury shares2 Contributed surplus Retained earnings Accumulated other comprehensive income (loss) $ 18,417 3,395 (116) 281 24,339 536 $ 16,730 3,395 (92) 305 20,959 1,005 $ 15,357 3,395 (15) 336 18,632 1,015 $ 13,278 1,875 (79) 392 17,857 (1,649) $ 6,577 425 – 119 15,954 (1,671) $ 6,334 425 – 66 13,725 (918) Total shareholders’ equity $ 46,852 $ 42,302 $ 38,720 $ 31,674 $ 21,404 $ 19,632 1 For fiscal 2006, the impact of future tax decreases of $24 million on adjusted 2 Effective fiscal 2008, treasury shares have been reclassified from common and earnings is included in other tax items. preferred shares and are shown separately. Prior to fiscal 2008, the amounts for treasury shares were not reasonably determinable. TD BANK GROUP ANNUAL REP O RT 20 1 5 TEN -YEA R S TATISTI CAL REV IEW 205205 Ten-year Statistical Review – Canadian GAAP 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’ investment1 Performance ratios 9 Return on common equity 10 Return risk-weighted assets 11 Efficiency ratio2 12 Net interest margin 13 Common dividend payout ratio 14 Dividend yield3 15 Price earnings ratio4 Asset quality 16 Impaired loans net of specific allowance as a % of net loans5,6 17 Net impaired loans as a % of common equity5,6 18 Provision for credit losses as a % of net average loans5,6 Capital ratios 19 Tier 1 Capital ratio 20 Total Capital ratio Other 21 Common equity to total assets 22 Number of common shares outstanding (millions) 23 Market capitalization (millions of Canadian dollars) 24 Average number of full-time equivalent staff7 25 Number of retail outlets8 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 common equity 4 Return on risk-weighted assets 5 Efficiency ratio2 6 Common dividend payout ratio 7 Price-earnings ratio4 $ $ 2011 3.23 3.21 1.31 24.12 37.62 1.56 2.4% 5.7 14.5% 2.78 60.6 2.37 40.6 3.4 11.7 2010 2.57 2.55 1.22 22.15 36.73 1.66 19.1% 23.4 12.1% 2.33 62.2 2.35 47.6 3.5 14.4 $ 2009 1.75 1.74 1.22 20.57 30.84 1.50 8.4% 13.6 8.4% 1.47 68.4 2.54 70.3 4.8 17.8 $ 2008 2.45 2.44 1.18 18.39 28.46 1.55 (20.2)% (17.1) 14.4% 2.19 64.8 2.22 49.0 3.8 11.7 $ 2007 2.77 2.74 1.06 14.62 35.68 2.44 9.6% 13.0 19.3% 2.67 62.8 2.06 38.1 3.0 13.0 2006 $ 3.20 3.17 0.89 13.39 32.55 2.43 16.9 % 20.3 25.5% 3.36 59.8 2.02 27.9 2.9 10.3 0.59% 0.65% 0.62% 0.35% 0.20% 0.16% 4.07 4.41 4.41 2.70 1.74 1.41 0.48 13.0% 16.0 6.3 0.63 12.2% 15.5 6.3 0.92 11.3% 14.9 6.3 0.50 9.8% 12.0 5.3 0.37 10.3% 13.0 5.0 0.25 12.0% 13.1 4.9 1,802.0 1,757.0 1,717.6 1,620.2 1,435.6 1,434.8 $ 67,782 75,631 2,483 108 4,650 $ 64,526 68,725 2,449 105 4,550 $ 52,972 65,930 2,205 190 4,197 $ 46,112 58,792 2,238 249 4,147 $ 51,216 51,163 1,733 211 3,344 $ 2011 3.43 3.41 15.4% 2.95 57.9 38.1 11.0 $ 2010 2.91 2.89 13.7% 2.63 58.6 42.1 12.7 $ 2009 2.69 2.68 12.9% 2.27 59.2 45.6 11.6 $ 2008 2.46 2.44 14.3% 2.18 64.6 49.3 11.6 $ 2007 2.90 2.88 20.3% 2.80 59.6 36.4 12.4 $ 46,704 51,147 1,705 208 3,256 $ 2006 2.35 2.33 18.7% 2.46 62.4 38.1 14.0 1 Return is calculated based on share price movement and reinvested dividends over the trailing twelve-month period. 2 The efficiency ratios under Canadian GAAP for the fiscal years 2011 and prior are based on the presentation of Insurance revenues being reported net of claims and expenses. 3 Yield is calculated as dividends paid during the year divided by average of high and low common share prices for the year. 4 The price earnings ratio is computed using diluted net income per common share. 5 Includes customers’ liability under acceptances. 6 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 2015 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 2015 MD&A. 7 Reflects the number of employees on an average full-time equivalent basis. 8 Includes retail bank outlets, private client centre branches, and estate and trust branches. 206206 TD BANK GROU P AN NUAL REPO RT 20 15 TEN- YEAR S TATIS TICAL RE VIEW 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. Allowance for Credit Losses: Total allowance for credit losses consists of counterparty-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 underwriting 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 (AUA): Assets that are beneficially owned by customers where the Bank provides services of an adminis- trative 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 (AUM): 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, corpora- tions, institutions, endowments and foundations. These assets are not reported on the Bank’s Consolidated Balance Sheet. Asset-backed Commercial Paper (ABCP): A form of commercial paper that is collateralized by other financial assets. Institutional inves- tors usually purchase such instruments in order to diversify their assets and generate short-term gains. Asset-backed Securities (ABS): A security whose value and income payments are derived from and collateralized (or “backed”) by a speci- fied 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. Basis Points (bps): A unit equal to 1/100 of 1%. Thus, a 1% change is equal to 100 basis points. Carrying Value: The value at which an asset or liability is carried at on the Consolidated Balance Sheet. Collateralized Mortgage Obligation (CMO): They are collateralized debt obligations consisting of mortgage-backed securities that are separated and issued as different classes of mortgage pass-through securities with different terms, interest rates, and risks. CMOs by private issuers are collectively referred to as non-agency CMOs. Common Equity Tier 1 (CET1) Capital: This is a primary Basel III capital measure comprised mainly of common equity, retained earn- ings 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. Common Equity Tier 1 (CET1) Capital Ratio: CET1 Capital ratio represents the predominant measure of capital adequacy under Basel III and equals CET1 Capital divided by RWA. Compound Annual Growth Rate (CAGR): A measure of growth over multiple time periods from the initial investment value to the ending investment value assuming that the investment has been compounding over the time period. 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 port- folios. As per OSFI’s Capital Adequacy Requirements (CAR) guideline, CVA capital add-on charge was effective January 1, 2014. Dividend Yield: Dividends paid during the year divided by average of high and low common share prices for the year. Effective Interest Rate (EIR): 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 incremental costs that are directly attributable to the instrument and all other premiums or discounts. Effective Interest Rate Method (EIRM): A technique for calculating the actual interest rate in a period based on the amount of a financial instrument’s book value at the beginning of the accounting period. Under EIRM, the effective interest rate, which is a key component of the calculation, discounts the expected future cash inflows and outflows expected over the life of a financial instrument. Efficiency Ratio: Non-interest expenses as a percentage of total revenue; the efficiency ratio measures the efficiency of the Bank’s operations. Enhanced Disclosure Task Force (EDTF): Established by the Financial Stability Board in May 2012 with the goal of improving the risk disclo- sures of the banks and other financial institutions. Exposure at Default (EAD): It is the total amount the Bank expects to be exposed to at the time of default. Fair Value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, under current market conditions. Federal Deposit Insurance Corporation (FDIC): A U.S. government corporation which provides deposit insurance guaranteeing the safety of a depositor’s accounts in member banks. The FDIC also examines and supervises certain financial institutions for safety and soundness, performs certain consumer-protection functions, and manages banks in receiverships (failed banks). Forward Contracts: Over-the-counter contracts between two parties 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. Futures: Exchange-traded contracts to buy or sell a security at a predetermined price on a specified future date. 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 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. TD BANK GROUP ANNUAL RE POR T 2 015 GLOSSAR Y 207207 GLOSSARY (continued) Loss Given Default (LGD): It 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. Return on Common Equity Tier 1 (CET1) Capital Risk-weighted Assets: Net income available to common shareholders as a percentage of average CET1 Capital risk-weighted assets. Mark-to-Market (MTM): 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. Non-Viability Contingent Capital (NVCC): Instruments (preferred shares and subordinated debt) that contain a feature or a provision that allows the financial institution to either permanently convert these instruments into common shares or fully write-down the instrument, in the event that the institution is no longer viable. Notional: A reference amount on which payments for derivative finan- cial instruments are based. Office of the Superintendent of Financial Institutions Canada (OSFI): The regulator of Canadian federally chartered financial institu- tions and federally administered 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. Probability of Default (PD): It is the likelihood that a borrower will not be able to meet its scheduled repayments. 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 Equity (ROE): 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. Risk-Weighted Assets (RWA): Assets calculated by applying a regulatory 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 accom- plish a narrow and well-defined objective. SPEs may take the form of a corporation, trust, partnership, 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 revenues 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 port- folio over a specified period of time. 208 TD BANK GROU P AN NUAL REPO RT 20 15 GLOSSA RY 2015 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 Ten-Year Statistical Review Glossary Shareholder and Investor Information 1 2 4 5 6 10 112 120 201 207 209 web page image to come web page image to come For more information, including a video message from Bharat Masrani, see the interactive TD Annual Report online by visiting td.com/annual-report/ar2015 For information on TD’s commitments to the community see the TD Corporate Responsibility Report online by visiting td.com/corporate-responsibility (2015 report available April 2016) 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 2015 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 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 30170 College Station, TX 77842-3170 or 211 Quality Circle, Suite 210 College Station, TX 77845 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 March 31, 2016 9:30 a.m. (Eastern) Fairmont The Queen Elizabeth Hotel Montréal, Québec 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 2015 SHAREHOLDER AND I NVESTO R I NFORM ATIO N 209 g n i t n i r P l a t n e n i t n o c s n a r T C 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 T D B A N K G R O U P 2 0 1 5 A N N U A L R E P O R T 1 9 5 0 4 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. Building the Even Better Bank 2015 Annual Report 

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